Knowles Corporation

Good afternoon. Thank you for attending today's NOLS first quarter 2023 earnings 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'd like to queue for a question on today's call, you can do so by dialing star one. I'd now like to pass the conference over to your host, Patent Hofer, Vice President of Investor Relations with NOLS. Thank you. You may proceed.

Thank you, Joel, and welcome to our Q1 2023 earnings call. I'm Patton Hofer, Vice President of Investor Relations, and presenting with me on the call today are Jeffrey New, our President and CEO, and John Anderson, our Senior Vice President and CFO. 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. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, 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, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2022, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's arranged 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 and in our current report on Form 8-K filed today with SEC, including a reconciliation to the most directly comparable GAAP measures. All financial measures 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 form, which can be found in the investor relations section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results.

Jeff? Thanks, Patton, and thanks to all of you for joining us today. Our first quarter results were largely in line with our expectations. Revenue finished slightly below the midpoint of our guidance, but due to strong operational performance and the benefits of MIX, we were able to deliver gross margins, adjusted EBIT margins, EPS, and cash from operations all above the midpoint of the guided ranges. Looking at Q1 in more detail, NOLS generated $144 million of revenue slightly below the midpoint driven by weak consumer electronics demand in the market and excess customer and channel inventory across all three segments. In precision devices, revenue was down 4% from the prior year. EV, med tech, and defense all grew year over year while our industrial market faced inventory challenges, which are now expected to continue through Q2. In med tech and specialty audio, revenue was down 24% versus prior levels due to customer inventory adjustments and softer end market demand in the hearing health market. I would note MSA was better than expected as inventory moves faster than we anticipated, driving revenue higher in Q1. In consumer MEMS microphones, revenue was down 48% from Q1 of 2022 as all end markets were down versus prior year. Before I turn the call over to John, I'll spend some time discussing the current customer and market conditions for each segment with some insights into what we are seeing for Q2 and the rest of the year. For our precision device segments, we continue to have strong demand and growth in our three key end markets, defense, medtech, and EV. In defense, the demand for communications and electronic warfare systems continue to amplify the need for our RF filtering and high-performance capacitor products. Despite awards and shipments in this market being lumpy at times, we grew year over year again in Q1 for the seventh quarter in a row, and we are confident based on current bookings and the expected awards that will generate growth in 2023. For Medtech, our high performance and high reliability capacitor price grew again in Q1, and we continue to see demand growth throughout 2023. We believe this market continues to show resilience similar to our MSA segment in the face of macroeconomic challenges. In the EV market, we grew 50% year over year in the first quarter. NOLS continues to expand design wins in exciting market with a broad range of new customers. We expect continued growth throughout 2023 with the EV market being our fastest growing market for NOLS. In the industrial market, which currently makes up less than 15% of company revenue, we are seeing continued weakness as distribution and customer inventory levels remain elevated. We expect the inventory challenges market to continue in the second quarter, but we see signs that lead us to believe a recovery is coming in the second half. Overall for PD, we expect strong bookings in Q2 for our three key markets, and depending on the inventory consumption in our distributors, we can see a return to growth in the second half for this segment. In MedTech, especially audio, as we stated on the Q4 call, We started seeing signs early in Q1 that the inventory situation was improving, which gave us increasing confidence on strong sequential revenue improvement in Q2. Our guide reflects a more than 27% sequential improvement in MSA, driven by major hearing aid retailers around the globe starting to see a return to growth. This demonstrates the resilience of the Zen market and provides confidence in a return to growth starting in Q3 of this year. Lastly, our consumer MEMS microphone segment. Demand across all our end markets were down in Q1 versus prior year levels, but as we look ahead, we are starting to see recovery in some end markets. Specifically, non-mobile shipments are expected to be up over 30% sequentially as channel inventory has improved and replacement cycles are expected to start in Q3. These markets are still down from prior year levels, but definitely showing signs that the first quarter was the bottom. Finally, while the smartphone market has not degraded further, we are not yet seeing a recovery, and due to excess capacity in the market, we are seeing further pricing pressure. While our strategy has not changed, in the short term, we will continue to fill our capacity with smartphone business. For CMM, due to normal seasonality of this business and improving market conditions, we are expecting strong sequential improvement for revenue and earnings starting in Q2. We expect sequential improvement to continue for the remaining quarters in 2023. Overall for Knowlson, the outlook for improvement in revenue, margins, and earnings as the year progresses remains unchanged from our last call. The inventory situation in the hearing aid market has improved as forecasted, and we are increasingly confident of second-half growth. In precision devices, the defense, medtech, and EV markets remain robust while inventory challenges further dampen the industrial market in the near term. Lastly, for CMM, we are seeing improving trends in computing and ear and IoT, while smartphone demand shows a slower return to recovery. In summary, we are now expecting 2% to 3% reduction off of last year's full-year revenue. Now let me turn the call over to John to give us some quarterly details and our guidance.