Knowles Corporation

Good afternoon, and welcome to the Knowles Corporation Third Quarter 2022 Financial Results Conference Call. My name is Harry Nobby, your operator today. To ask a question during the Q&A, please dial star 401 on your telephone keypad. With that said, here with opening remarks is Sloan Bolin, Investor Relations. Please go ahead.

Thank you, Harry. Welcome to our Q3 earnings call. I'm Sloan Bolin. 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 have not received both documents, they are available on the IR section of our website at NOLS.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 law. 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 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 NOLS 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. As referenced on this call, all references on this call will be non-GAAP on a continuing operations basis unless otherwise indicated. Please see our earnings release and webcast slides available at our website at knolls.com and in our most current report on Form 8K files with the SEC today for a reconciliation to the most directly comparable GAAP measures. And with that, let me turn the call over to Jeff, who will provide some details on our results. Jeff.

Thank you, Sloan, and thank you to everyone for joining us this afternoon. The third quarter was above our expectations, but clearly a difficult one for markets and industries around the world. Before I get into the results and market commentary, I'd like to highlight the aggressive stance we have taken in response to this backdrop. As announced on our last call, we are accelerating the strategic repositioning of our MEMS microphone business to further de-emphasize our exposure to commodity products. We have been very proactive and are already seeing the benefits of this strategy in our second half results. Now let me get into the financials for the quarter. Knowles generated $178 million consolidated revenue, which was down 24% versus the prior year, driven primarily by very challenging market conditions in the consumer electronics portion of our audio segment. In contrast, precision devices delivered record revenues of $64 million and grew 16% year-over-year as we continue to see robust demand across most end markets. While challenging, audio segment revenue finished largely in line with our expectations due to factors we cited last quarter, specifically a weak backdrop for consumer electronics demand, excess channel inventory across most markets, and persistent COVID-related shutdowns in China. On a consolidated basis, loans delivered against each of our guided performance metrics for the third quarter. Revenue, gross margins, and adjusted EBIT margins were all above the midpoint, and EPS was above the guided range. Cash generated by operations was near the low end of our range this quarter due to higher than expected inventories, and timing of collections. We anticipate strong sequential improvement in cash flow in the fourth quarter and remain confident in our previously stated view of a faster path to a medium-term free cash flow margin target of 15% to 17%. Now I'd like to provide perspective on the current dynamics in each of our end markets. We understand tracking demand of our products is challenging, especially given the diversity of our markets and the cross-currents such as inventory corrections and strategic mix decisions like the ones we have made in our MEMS microphone business. Today, I would like to provide additional color to help understand our business. First, in precision devices, we continue to see strong end market demand driven by secular trends across defense, med tech, and EV. We still see organic growth in the mid to high single digits going forward for an addressable market that is over $1 billion and growing. In addition to strong growth, this segment continues to show resilience in the face of market uncertainty, with bookings in the quarter continuing to exceed expectation. Both of our product categories, high-performance capacitors and RF filters, continue to demonstrate our superior technical capabilities, which provide a competitive advantage for Knowles in markets where we have strong tailwinds today and in the future. Now I'll turn to our audio segment. First, the hearing health market continues to be much less volatile in the face of weak consumer demand, similar to the pattern we have observed in previous downturns. In fact, we remain confident business will provide 3% to 5% annual growth over a cycle and are increasingly optimistic about the over-the-counter hearing aid demand based on recent customer announcements and partnerships. Given these market dynamics and our strong competitive offering for acoustic solutions, we will continue to invest in hearing health and believe it is an underappreciated asset in our portfolio. Now onto our MEMS microphone business. While we expect sequential revenue improvement in Q4, the growth is driven primarily by new product introductions by our customers, as opposed to positive changes in end market demand or sentiment. These headwinds are across most end markets and geographies, including PCs and smartphones. Additionally, inventory in the channel is still being worked through, which presents additional obstacles to resume year-over-year growth. We feel validated in our decision to move quickly to reposition the MEMS business for the future by further de-emphasizing the commodity portion of this business. I am pleased to see the impact of our strategy show up in our second half results, and I am confident the MEMS microphone business is well positioned to improve our revenue and profitability when the market recovers. On that point, let me speak to the drivers and considerations that went into our strategic repositioning and why we believe it will add significant value for shareholders in the quarters and years ahead. Over the last few years, we have taken the challenging global market conditions to accelerate our transformation. This transformation is already delivering results with more than 60% of our revenue coming from products with above average corporate gross margins. The strategy to focus on higher value products and markets has been coupled with strong execution and dedication from the NOLS team in the face of significant macro challenges caused by the pandemic and its unpredictable after effects. I want to thank everyone in the organization for their hard work and execution in the face of these challenges. Our strategy is working, which gives me strong conviction in our ability to achieve the midterm financial targets we introduced last November sooner than expected. With that, let me turn the call over to John to provide more detail on our quarter.