Knowles Corporation

Good afternoon and welcome to the Knowles Corporation second quarter 2022 financial results conference call. My name is Donyell and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. With that said, here with opening remarks is Sloan Bowen, Investor Relations.

Thank you. Welcome to our Q2 earnings call. I'm Sloan Boland and presenting with me on the call today are Jeffrey New, our President and CEO, and John Anderson, our Senior Vice President and TFO. 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've 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 the company's 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 included, but not limited to, the annual report on Form 10-K for the fiscal year ended December 31st, 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 null if this claims 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 NOLS.com and in our current report on Form 8K filed today with the SEC for reconciliation to the most direct comparable GAAP measures. With that, let me turn the call over to Jeff, who will provide some details on our results. Jeff.

Thanks, Sloan, and thank you to everyone for joining us today. Knowles performed well in the second quarter despite an acceleration of the headwinds we experienced beginning in the first quarter. Our revenues were pressured by weaker than expected global consumer electronics demand, lockdowns in China, and excess channel inventory. Even with that backdrop, Knowles still drove gross margins, adjusted EBIT and EPS at or above the midpoint of our guided ranges, and free cash flow at the upper end of our expectations. We are proud of these results, both for our execution in the quarter, but more importantly, because they continue to validate our strategy to prioritize higher margin products and markets. I will detail our segment results in a moment, but let me first share the latest update to our strategy. As you saw in our press release, Knowles is accelerating the focus of our business to further de-emphasize our exposure to commodity products. As discussed over the last few years and presented on our investor call in November of 21, This strategy was in place before the decline of consumer electronics demand we've encountered so far in 22. Our MEMS microphone restructuring is expected to yield annual life savings of $25 to $30 million across factory overhead and operating expenses with an anticipated one-year payback. This program will begin in Q3 with full implementation by the end of Q4. John will provide details, but let me summarize the key benefits to our shareholders. The program expedites our timeframe to achieve our medium-term financial targets. These targets include adjusted EBIT margins in the range of 22% to 24% driven by higher gross margins from higher capacity utilization with better mix and higher ASPs, free cash flow margins of 15% to 17% from operating leverage and lower CapEx. Lastly, we believe our exposure to the smartphone market will be in the mid-teens in 2023 compared to more than 20% of revenue in 2021. In sum, we are very pleased with how Knowles is strategically positioned. Our proactive strategy to focus on the most attractive end markets with above average corporate margins and long-term growth trends is tightly aligned with value creation for our shareholders. I am incredibly pleased with the speed with which our teams have reacted to current market conditions. This strong execution helps propel the company forward towards achieving our mid-term adjusted EBIT and free cash flow margin targets. With that, let me highlight our Q2 results. Revenue of $188 million was below expectation due to continued weakness in consumer electronics and COVID lockdowns I spoke about earlier. Across our segments, we continue to see strength in precision devices. Precision devices revenue grew 19% over last year, and demand was broad-based across all end markets, especially in defense and medical applications. In audio, hearing health also grew 19% year-over-year, as NOLS continues to increase market share, which was further aided by new product introductions. In contrast, the men's microphone business was negatively impacted by the headwinds I've already mentioned. We are taking advantage of this weaker demand environment to right-size our factory capacity in this business and drive the company towards the financial goals I've summarized. As inventory in the channel is reduced and demand in consumer electronics returns, our men's microphone business will be well-positioned for improved profit margins and cash flows. Turning to our overall profitability, again, we are very pleased to hit our guidance for gross margins despite a very challenging backdrop for revenue growth. Our adjusted EBIT margins of 20% in Q2 was above the high end of our guidance, and EPS of 33 cents was above the midpoint of our expectation. Lastly, our free cash flow exceeded our expectation, and we remain committed to our goal to return at least 50% of our free cash flow to shareholders. I continue to believe our strategic focus on higher margin products and markets positions those well to continue to create value for shareholders for the years to come. With that, let me turn the call over to John to review our Q2 financials and our Q3 guidance. John? Thanks, Jeff.