Knowles Corporation

the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Sarah Cook. Please go ahead.

Thank you, Audra, and welcome to our Q4 and full year 2023 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me 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 safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in companies' 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 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, 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 Knowles.com and in our current report on Form 8K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. We've made selected financial information available in webcast slides, which can be found in the investor relations section of our webcast. With that, please let me turn the call over to Jeff, who will provide details on our results. Jeff?

Thanks, Sarah, and thanks to all of you for joining us today. Before I get into the Q4 results and my remarks on the status of our markets and what we are seeing for Q1, I would like to start off with some highlights from the previous year. We again made significant progress in transforming our business to higher value products, which we believe will drive increased shareholder value in the years to come. In our MedTech and specialty audio business, after a large inventory correction in the first half, we delivered 17% sequential revenue growth in the second half of 2023 with strong operating margins. Our operational performance, coupled with the success of our new products, gives us great momentum as we enter 2024. In our precision device segment, we successfully completed the acquisition of Cornell Doublier, which significantly expands our total available market for capacitors in key markets and drives opportunities for future growth. Since closing in Q4, we now believe the synergies will be higher than our initial expectations. Lastly, the company closed out 2023 with another strong year of free cash flow of $106 million, or 15% of revenues. This has allowed us to continue to fund organic growth and look at additional acquisition opportunities in our target markets, all while continuing to buy back shares and keeping our debt at very manageable levels. We are very excited about the direction we are heading and believe we will continue to drive shareholder value in 2024 and beyond. Now onto our Q4 results. We delivered revenue of $215 million and EPS of $0.28 within our guidance range with cash from operations of $60 million, which was above the high end of our guided range. Turning to segment results, MedTech and specialty audio revenue was up 9% versus the same period a year ago. The hearing health market continues to perform well, and we are expecting strong year-over-year growth in the first half of 2024. The dynamics of aging populations in Western economies, expansion of the middle class globally, and increasing penetration of people with mild to moderate hearing loss all point to positive market dynamics in the mid to long term. Precision device revenue was up 10% year over year, including the acquisition of Cornell. While inventory in the channel remains high, specifically in industrial and distribution, and with a number of OEM customers, underlying demand appears to be stable, and design activity across our core markets remains high. With this backdrop, we expect increased earnings per PD in 2024 as we focus on cost controls and capacity utilization and optimization. Earnings growth will be driven by organic gross margin improvement and the Cornell acquisition and its associated synergies. Channel inventory normalization expected in the second half of 2024 will complement our expected earnings growth. Turning to the consumer VEMS microphone business, We continue to move forward with the exploration of strategic alternatives. In the quarter, revenue was up 8% from the same period a year ago. We have now seen three quarters of sequential growth driven by growing demand in non-mobile products, expanded mobile share, and the ongoing recovery in the PC market. We expect to see strong year-over-year revenue and earnings growth in the first quarter of 2024. To summarize, MSA continues to perform well, and the momentum shown in Q4 gives us confidence in 2024 revenue and earnings growth. In PD, we are expecting channel inventory to correct and demand recovery to begin in the back half of 2024. Synergies identified in association with the Cornell acquisition are projected to be higher than initially expected, beginning to materialize in the second half of 2024. For CMN, we expect to achieve modest full-year revenue growth in 2024. While 2023 was a challenging year, we performed well in the second half. Heading into 2024, I am optimistic we have growth across all three of our business units in revenue and total company earnings, along with continued robust cash flow. We continue to transform our company to higher-value products and markets and have confidence the strategic actions we've taken will drive long-term shareholder value. Before I turn it over to John, as a member, we will be providing revenue, EPS, and cash from operations guidance. As I said in Q3, we believe these metrics are the best measures for our business and are aligned to the company's focus. Now, let me turn the call over to John to detail our quarterly and annual results and guidance. John? Thanks, Jeff. We reported fourth quarter revenues of $215 million. in line with guidance and up 9% from the year-ago period driven by the acquisition of Cornell, which we completed on November 1st. EPS was $0.28 in the quarter within our guidance range and $0.05 below prior year levels. In the MedTech and specialty audio segment, revenue was $67 million, up 9% versus the fourth quarter of 2022 on increased demand in the hearing health market. Gross margins were 54.2%, up 260 basis points, versus the prior year, driven by factory productivity improvements, favorable product mix, and foreign currency impacts. The precision device segment delivered revenues of $70 million, up 10% from the prior year, driven by the acquisition of Cornell, partially offset by lower shipments into the distribution and industrial end markets, as we continue to see excess channel inventory. Gross margins were 35.4%, down 13 percentage points versus the prior year due to lower factory capacity utilization and the acquisition of Cornell. Consumer MEMS microphone revenues of $78 million were up 8% versus the prior year, driven by higher shipments into the mobile and compute markets. Although full year revenues were down 12% in 2023, driven by an extremely weak first quarter we delivered sequential revenue growth over the remainder of the year through a combination of market growth and share gains. Gross margins were 24.7%, 70 basis points above the same period a year ago on higher factory capacity utilization. On a total company basis, R&D expense in the quarter was 16 million, up slightly compared to the prior year. SG&A expenses were 31 million, 4 million higher than prior year levels, driven by the acquisition of Cornell and an increase in professional and legal fees associated with the exploration of strategic alternatives for CML. Now, I'll turn to our balance sheet and cash flow. We generated $60 million in cash from operating activities in the quarter, and capital spending was $5 million. We also repurchased approximately 1.2 million shares at a total cost of $20 million and ended the year with cash and cash equivalents of $87 million. On a full year basis, free cash flow was $106 million, or 15% of revenues, and we repurchased approximately 2.9 million shares at a cost of $48 million. We exited 2023 with $271 million of debt, which includes $160 million of borrowings under our revolving credit facility and a seller note, which was issued in connection with the Cornell acquisition. Lastly, our net leverage ratio was 1.3 times 2023 EBITDA. Now, moving to our guidance. For the first quarter of 2024, revenues are expected to be between 190 and 200 million, up 35% versus the year-ago period, driven by both organic growth and the acquisition of Cornell. R&D expenses are expected to be between $17 and $18 million, and selling and administrative expenses are expected to be within the range of $30 to $32 million, up from prior year due to the Cornell acquisition. We're projecting adjusted EBIT margin for the quarter to be within a range of 12 to 14%. We're forecasting interest expense in Q1 to be between $5 and $7 million, which includes approximately $2 million of non-cash imputed interest. For full year 2024, we expect interest expense of $22 million, and we expect an effective tax rate of 14% to 16% for both the quarter and full year 2024. We're projecting EPS to be within a range of $0.16 to $0.20 per share, up $0.13 from the year-ago period. This assumes weighted average shares outstanding during the quarter of $94 million on a fully diluted basis. Lastly, we're projecting cash from operations to be within a range of $0 to $10 million, and capital spending is expected to be $5 million. I'll now turn the call back over to the operator for the questions and answers portion of our call. Operator?