Knowles Corporation

Good afternoon and welcome to the Knowles Corporation first quarter 2022 financial results conference call. Today's call is being recorded and 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. And if you would like to ask a question during this time, please press star one on your telephone keypad. If you would like to withdraw your question, please press star one again. And with that said, here are the opening remarks with Sloan Fullman, investor relations.

Thank you, Savannah. Welcome to our Q1 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. Please be advised that today's conference call is being recorded. By now, you should have received a copy of our earnings release and webcast slides. If you do not or have not received both documents, they are available on the IR section of our website at Knowles.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, 2021, 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 on this quarter, As referenced on this call, we'll be 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 8K files with the SEC for reconciliation of the most directly comparable GAAP measures. With that, let me please turn the call over to Jeff, who will provide some comments on our results. Jeff.

Thanks, Sloan, and thanks to everyone for joining us today. We are very pleased with NOL's performance to begin 2022. As you saw in today's release, we reported another quarter with gross margins and EPS above the high end of our guided range. Best of all, we achieved these results despite stronger than expected headwinds from the re-emergence of COVID in mainland China, dampening demand and causing additional friction on an already stretched supply chain. I will touch on our near-term expectations for these headwinds in a moment, but before I do, I want to reiterate our conviction to the mid-term financial targets we detailed at our investor day last November. Our year-to-date results, particularly in our precision device segment, have only increased our confidence in the most significant opportunity to drive shareholder value through continued growth in higher margin and markets with highly attractive free cash flow dynamics. With that, let me give you a summary of our strong first quarter results. Revenue of $201 million was in line with our guidance driven by a mix of very strong demand in precision devices and continued market growth and share expansion in hearing health. Precision device segment revenues totaled $56 million in the first quarter, which was up 47% compared to a year ago, with the vast majority of that growth being organic. Additionally, the precision device segment delivered another record quarter for bookings. The demand for this segment was driven broadly across most of our end markets, and it's rewarding to see our strategy so well aligned with long-tailed secular drivers. Turning to audio, our hearing health business continued to show good growth as the end market for these products remains robust. We continue to have strong execution on new products and managing ongoing supply chain issues, which has allowed us to gain share. While the MEMS microphone business did not grow year over year for the quarter, it is performing in line with expectations as we focus on higher margin products and markets. Looking ahead, this year's new product pipeline from our customers is more weighted to the back half of the year, which is typical seasonality for this business. Next, I would like to give a little bit more detail on the macroeconomic headwinds impacting our business before I speak to our continued success on profitability. As you are hearing elsewhere in the industry, supply chain challenges remain very real and were for Knowles in the first quarter as well. While it is very difficult to predict what will happen next, it is impacting our business at this point. Beyond supply chain challenges, we have increasingly seen the latest COVID outbreaks in China and associated government lockdowns impacting consumer demand for smartphones and other consumer electronics. This is causing demand headwinds in our men's microphone business. While both challenges are fluid situations, we believe the impact on our business will persist the first half of the year. We'll provide more detail when discussing the Q2 guidance, but we do not expect to affect our ability to achieve our midterm financial targets. The issues in China highlight the benefit of our revenue diversification and reinforce our commitment to continue to shift to higher value products and markets, which are inherently less economically sensitive to consumer demand. With that, let me turn to our profitability. Knowles grew gross profit to $83 million, up about 7% compared to the year-ago period on essentially flat revenue. The major driver of the strength was precision device segment, where margins were up 920 basis points year-over-year on favorable mix, pricing power, and the IMC acquisition. It is worth noting our 2Q margins will face a more challenging year-over-year compare given the current lower factory capacity utilization in our MEMS microphone business. That said, I am very pleased with the progress we continue to make on margins, especially given the macroeconomic headwinds in the MEMS microphone business. Our strategy, strong execution, and expense management has allowed us to achieve adjusted EBIT margins of close to 20% for Q1, an increase of 250 basis points over last year. Similarly, we grew EPS to $0.35 per share, which is also above our guided range and represents over 20% growth from the year-ago period. Let me reiterate again, we are increasingly confident in our midterm financial targets and believe the strength and stability of our annual free cash flow is an underappreciated aspect of our business. Finally, on our last earnings call, we spoke about refining our capital allocation strategy this quarter. To that point, we are pleased to announce our board of directors recently approved a new $150 million share repurchase authorization. In addition, we are committing to pursuing bulk on acquisitions while planning to return 50% of our annual free cash flow to Knoll shareholders in the form of share repurchases. We believe capital return will be a more recognized part of Knoll's value proposition to existing and new shareholders in the future and also hope that this commitment serves as a strong sign of our confidence and our strategy and the bright future for our company. With that, let me turn it over to John to review our first quarter financials.