Knowles Corporation

Good afternoon and welcome to the Knowles Corporation second quarter 2020 financial results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. With that said, here with opening remarks is NOLS Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks, David, and welcome to our Q2 2020 earnings call. I'm Mike Knapp, and presenting with me on the call today are Jeffrey New, our President and Chief Executive Officer, and John Anderson, our Senior Vice President and Chief Financial Officer. Our call today will include remarks about future expectations, plans, and prospects for NOLS, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales and expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, included but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2019, periodic reports filed from time to time with the SEC, and risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and NOLS disclaims any duty to update such statements except as required by law. In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at nols.com, including a reconciliation to the most directly comparable GAAP measures. All financial references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also, we've made selected financial information available in webcast slides, which can be found in the IR section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results.

Jeff. Thanks, Mike, and thanks to all of you for joining us today. For Q2, we reported revenue of $152 million with better-than-expected sales of MEMS microphones and precision device solutions during the quarter. We also saw sales into the hearing health market improve throughout the quarter, which gives me confidence that Q2 marked the bottom for demand in this end market. Gross margins were 32.3%, and our loss per share was one cent. In audio, an inventory write-off associated with reduced investment in intelligent audio, as well as lower factory utilization and sales, weighed on margins. This was partially offset by sequential improvement in precision device margins. Let me begin with an update on customer demand across our end markets. In Hearing Health, revenue was down close to 50% from normal demand due to COVID-19, with sales increasing each month as we move through Q2. Earlier this month, one of our large customers announced that sales during the three months of Q2 were running significantly below prior year levels, but they saw stronger sales in the back half the quarter. In spite of mixed conditions in the U.S., I was pleased to see momentum in demand picking up in the second half of the quarter with improving market conditions in Europe and Asia markets. Based on our current backlog, we expect significant sequential sales growth in this end market in Q3. That said, I still believe it could take until 2021 to get back to 2019 revenue run rates. The mobile market represented less than 25% of total company sales in Q2. We saw shipments into the mobile market improve sequentially as stronger sales to Chinese and North American OEMs were partially offset by lower sales to a Korean OEM. Microphone sales into non-mobile end markets also increased sequentially, with much of the growth being driven by computing as work-from-home trends remain in place. Overall, microphone sales were up 4% sequentially in Q2 versus our expectations of them being flat. We are anticipating strong sequential growth in microphone sales in Q3, driven by continued strength in non-mobile applications and recovery in the mobile market. In precision devices, Q2 sales were up 11% sequentially, better than the 5% we expected going into the quarter, driven by continued demand for our differentiated products across the telecom and defense markets, partially offset by lower MedTech demand. Gross margins also increased from Q1 due to operational improvements and price recovery for increased palladium costs. In Q2 and early Q3, we have seen a slowdown in MedTech demand for high-performance capacitors as more states are reporting rising COVID cases and ICU availability has decreased. This has led hospitals to suspend or slow elective procedures for implantable devices. It has also delayed installations of new MRIs that use our product. We expect this slowdown in MedTech to be temporary in nature and remain confident in year-over-year growth for precision devices in 2020. Now let me discuss where we stand from an operations standpoint. For our manufacturer facilities around the globe, although we continue to operate below full capacity due to demand, we are now largely back to normal in terms of government restrictions. We remain diligent with the processes we put in place to keep our employees safe. One exception still impacting our operations is our ability to travel around the globe. Specifically, in the Philippines operations, COVID issues are delaying the timeline for installation of our new balanced armature automated line. The installation will be dependent on these issues being resolved, and this makes it difficult to set an exact timeline. In the interim, we plan to fill current demand for balanced armature receivers with manual production capacity. I mentioned last quarter we would take significant actions to manage working capital, reduce operating expenses, and control capital investments. In Q2, I was very pleased to see the team deliver $20 million in free cash flow as we focused on inventory and cash collections. In the quarter, we also announced an intelligent audio restructuring plan, which is part of a broader reallocation of resources that is expected to reduce our quarterly operating expenses to a run rate of $42 to $44 million by the end of this year, while increasing spend in areas where we see the highest returns. John will expand on this in just a moment. While there are still challenges with COVID-19, I'm pleased with the trajectory of the business. As we look to Q3, we anticipate strong sequential growth driven by hearing health and MEMS microphones. Our company remains uniquely positioned across the markets we serve, and I believe our strategy to deliver high-value, differentiated solutions to a diverse set of growing end markets will enable us to come out of the pandemic well-positioned to take advantage of future growth. With that, I'll turn it over to John to expand our financial results and provide guidance for the third quarter.