Knowles Corporation

Good afternoon, and welcome to the Q4 2021 Knowles Corporation earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. Sloan Bolton, Investor Relations, you may begin your conference.

Thank you. Welcome to our Q4 and full year 2021 earnings call. I'm Sloan Bolin and presenting with me on the call today are Jeffrey New, our President and CEO, and John Anderson, our Senior Vice President and CFO. By now you should have received a copy of our earnings release and webcast slides. If you have not received both documents, they are available on the IR section of our website at knolls.com. 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. Such forward-looking statements include comments about demand for company products, anticipated trends in company sales, expenses and profits, and future financial outlook, 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, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2020, periodic reports filed from time to time thereafter with the SEC, and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements except as required by law. In addition, we have provided both GAAP and non-GAAP financial measures this quarter. All references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Please see our earnings release and webcast slides available on our website at knolls.com and in our current report on Form 8-K filed today with the SEC for reconciliation of the most directly comparable GAAP measures. And with that, let me turn the call over to Jeff, who will provide the details of our results. Jeff.

Thanks, Sloan, and thank you to everyone for joining us today. For those of you who joined us on our investor update in November, we are very pleased to report another strong quarter that demonstrates our progression toward our midterm financial targets. As we commented during the update call, we have made significant strides in transforming the company to focus on the highest growth and markets with an eye towards improving adjusted EBIT margins and driving strong free cash flow. As we look back at 2021, and certainly our fourth quarter results, we feel confidence and validation in our strategy and look forward to continued progress and success in 2022. With that, let me begin with a summary of our Q4 results. We generated revenue of $234 million, which came in at the higher end of our guidance range, driven by strong market dynamics in hearing health and precision devices. This result was achieved even with the challenging supply chain backdrop we noted last quarter. What is most encouraging about our result was the continued execution on margin expansion. Specifically, our fourth quarter gross margin was over 43%, or 130 basis points above the high end of our guidance range. We also delivered adjusted EBIT margins of 22%, which we believe demonstrates the operating leverage the company has in our business model. In total, we produced fourth quarter earnings per share of 48 cents, also above our guided range. Lastly, we continue to drive impressive free cash flow, as John will detail in a minute. To summarize, another quarter where our strategy to focus on higher margin products and markets is yielding strong adjusted EBIT margins with exceptional free cash flow. For our full year 2021, results were strong as well, and now I'd like to take a minute to highlight our accomplishments. As we noted in our investor update, Knowles is positioned to create shareholder value through top-line growth, margin expansion, and free cash flow generation. We are proud to say that 2021 is the latest proof point of execution against our plan, and we believe there is significant runway for more of the same success ahead. Let's start with the shift we have made on product mix and how it's improved margins over the past few years. As we noted in our investor update, the clear byproduct of our strategy can be seen in the growing percentage of our revenues above 40% gross margin. From 2017 to year-end 2021, we've increased that percentage from 49% to 70%, an improvement of over 20 points. Now let me detail a few of the key drivers and actions that drove the improvement. First, as mentioned, we continue to optimize the mix of our business. In audio, we have a particular focus on growth in non-mobile ear IoT and computing applications, as well as our hearing health businesses. In precision devices, our high-performance capacitor and our filtering businesses both continue to expand margins. John will speak to the margin impact, but I note that our opportunity on the top line for these growing end markets is attractive, especially considering our leading market position. Second, Knowles continues to capitalize on favorable market dynamics, and we are gaining share within our hearing health market. In the fourth quarter and for 2021, Knowles fired on all cylinders in this market with share gains and new product introductions along with strong end market growth. Third, Precision Devices continues to be an outperformer. Investments in both high-performance capacitors as well as RF filters across a wide variety of markets are paying dividends in revenue growth, margin expansion, and free cash flow. As you can see from our financial results, execution against our strategy since 2017 has shown consistent progress as we have fundamentally transformed the company. Similar to our investor update, I'd like to highlight the margin-free cash flow and earnings growth we've generated despite revenue growth over the same period that was moderated by strategic exits from lower margin business. We have driven significant operating leverage over the past four years as well and have never been in a better position to drive shareholder value. We have grown our adjusted EBIT margins by more than 500 basis points over the past four years, which has translated into an APS CAGR of 15%. This was achieved with a revenue CAGR of just under 4%, which is impacted by global supply chain disruptions and our strategy to focus on higher value products. Equally important, our free cash flow margins have improved by nearly 10 percentage points, which we plan to deploy through future M&A and share repurchases. In total, we completed 2021 with exceptional adjusted EBIT margins and the highest free cash flow since we have been an independent company. This is certainly something we are proud of, but the exciting takeaway is what the operating leverage means for value creation in the quarters and the years to come. Now let me provide some additional detail on each of our product segments. Starting with precision devices, we continue to outperform with another quarter and full year of record sales for the segment. Total revenues for the year were just north of $201 million or 16% higher compared to 2020. In the fourth quarter, precision devices generated very strong results with revenue of nearly 40% compared to a year ago. On its own, the growth is impressive and illustrates our market-leading position across a number of attractive end markets. That said, we are just as proud of the results of our precision device segment posted on profitability. Specifically, segment gross margins were up 630 basis points compared to a year ago, and this is not happening in one product category or end market. It is very diverse across markets such as medical, defense, EV, and industrial. Now let me turn to our audio segment, which as I noted earlier, faced a tougher environment on the top line given broader supply chain issues and the timing of customer product launches. In our MEMS microphone business, revenue was pressured for the reasons mentioned, but gross margins were favorable as we continued to shift our mix away from lower margins products and markets. Additionally, we are well positioned with a number of technology initiatives and new product launches that we expect will augment our revenue growth in the years ahead. Our hearing health business continues to be strong as the global market recovered and our company took additional share. The hearing health business also benefited as we saw recovery in the audio file demand in the second half, and our recent product launches continue to ramp with our largest customers. Similar to our other businesses, hearing health also drove significant operating leverage, which we believe will continue in 2022. Overall, despite a tougher environment due to supply issues, I am pleased with the potential for profit expansion we have built into the business when supply chain issues and customer product timing turns more favorable. John will give you more detail on the Q1 outlook in a minute, but I'll conclude my prepared remarks with a review of our midterm expectations by highlighting a few things that we spoke about at the investor update. First, I have high conviction that the company can grow our top line in the mid to high single digits. Looking at 2021 in retrospect, clearly there are a range of macro factors that impact each of our two segments differently. We have visibility in the midterm demand dynamics across both segments, and we expect to drive growth opportunities to our market-leading position. Second, as I have highlighted throughout my remarks, we continue to execute and outperform on our profitability goals. We maintain our conviction to achieve gross margins above 43%. As I mentioned, our shift in mix has already contributed meaningfully to the progress, which we expect will continue to be positive in the years to come. With the background of revenue growth and gross margin expansion, we believe there is continued opportunity to leverage our existing footprint and infrastructure to drive adjusted EBIT margins. This gives us confidence we are on track to achieve our midterm model of 22% to 24% adjusted EBIT margins and 15% to 17% free cash flow margins. In summary, I'm very proud of the 2021 results delivered by the entire NOLS team, and I'm even more excited about the opportunity we have ahead of us to achieve continued progress and drive value for shareholders. With that, let me turn it over to John to review our financial results. John?