Good afternoon. And welcome to the Knowles Corporation First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. With that said, here with opening remarks is Knowles Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks, Anita. And welcome to our Q1 2021 earnings call. I am Mike Knapp and presenting with me on the call today are Jeff Niew, our President and Chief Executive Officer; and John Anderson, our Senior Vice President and Chief Financial Officer. Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the 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 company’s 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, 2020, periodic reports filed from time-to-time 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, pursuant to Reg G, any non-GAAP financial measures referenced during today’s call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC, including reconciliation to the most directly comparable GAAP measures. All references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also, we have made selected financial information available in webcast slides, which can be found in the IR section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results. Jeff?

Thanks, Mike. Thanks to all of you for joining us here today. For Q1, we reported revenue of $201 million, above the midpoint of our guidance and up 23% from the year ago period on strong MEMS microphone demand in multiple end markets and improving trends in Hearing Health. Precision Device revenues were in line with our expectation. Gross margins improved 330 basis points to 39% and our earnings per share was above the high end of our guidance range at $0.29. Overall, another solid quarter highlighting our operating leverage as demand improves across a broad range of our end markets coupled with our focus on high value products to improve gross margins. Let me now provide some details on the trends we are seeing by end market. In Audio, sales were up 36% from the year ago quarter, better than our expectations going into the quarter. We saw broad-based improvement year-over-year in the MEMS microphone sales across non-mobile and mobile end markets. Sales to non-mobile applications were driven by work-from-home and remote schooling, as well as the ongoing trend towards applications requiring high performance Audio solutions. We expect these favorable trends to continue throughout 2021 and in the years to come. Since our last call we have made two new product announcements, which support our focus on non-mobile applications. First, we announced AI Sonic Bluetooth Standard Solutions, our new complete development solution that enables fast and easy voice integration into Bluetooth devices. The development kit includes a Knowles CSP coupled with multiple microphones to enable OEMs to build voice-activated calling, control and Farfield’s speech recognition capabilities into Bluetooth devices. We also announced earlier this month the availability of two new MEMS microphones for automotive applications. The new microphones are engineered to a higher standard of quality to support the increasing demands of the automotive market for hands-free calling, advanced voice assistance and in-cabin noise cancellation. In Mobile, stronger sales to Chinese OEMs and North American OEMs drove the majority of the year-over-year increase. Trends in Q1 were better than normal given the timing of product launches last year and improved demand from Chinese OEMs. In Q2, we expect demand in Mobile to decrease sequentially due to product cycle timing from last year’s launches. While we expect sequential improvement in Mobile for Q3, third-party data on handset expectations for the second half of 2021 indicate that the year-over-year rate of growth will moderate and be more aligned with what we have seen over the last few years. This validates our focus on faster growing non-mobile applications which reduces our reliance on growth from the Mobile market. For Hearing Health, shipments were slightly higher than expectations for the quarter. March data showed improved momentum in the VA Hearing Aid channel indicating continued gradual improvement in the hearing aid market as vaccinations roll out and private practice audiologists remain open. While demand for the audio file portion of the market remained soft versus pre-pandemic levels, we have seen some improvement and are optimistic we will see demand accelerate in the second half of the year. In Precision Devices, Q1 sales were down about 12% as expected, as COVID continued to impact our medtech and defense end markets. At the same time, we saw record bookings in PD during the quarter, driven by improved demand in our defense and medtech end markets and sustained strength in demand from electric vehicles and industrial customers. This gives me increased confidence that we can grow Precision Devices revenue again this year as the medtech and defense end markets recover throughout 2021. We are off to a great start in 2021 and I believe our leadership positions across the markets we serve and our strategy to deliver high value differentiated solutions to a diverse set of growing end markets positions us well for future growth. With that, I will turn it over to John to expand on our financial results and provide the guidance for the second quarter, John?

Thanks, Jeff. We reported first quarter revenues of $201 million, up 23% from the year ago period, driven by increased shipments in the Audio segment. Audio revenues of $163 million were up 36% due to increased shipments of MEMS microphones across multiple end markets and a recovery in the Hearing Health market to pre-pandemic levels. The Precision Device segment delivered revenues of $38 million in line with our expectations and down 12% from Q1 2020 levels, as shipments into the medtech and defense markets were negatively impacted by COVID-19. First quarter gross profit margins were 39% at the high end of our guidance range and up 330 basis points versus the same period a year ago. Audio segment gross margins improved 470 basis points, driven by favorable product and customer mix, higher factory capacity utilization and lower factory spending. In the Precision Devices segment, gross margins were 150 basis points below the prior year due to unfavorable mix and lower factory capacity utilization. R&D expense in the quarter was $20 million, in line with expectations and down $2 million from the year ago period on reduced spending in intelligent audio, partially offset by higher incentive compensation costs and increased spending in MEMS microphones. SG&A expenses were $25 million, in line with our guidance and down almost $9 million from prior year, driven by a $4 million reduction of legal expenses, reduced spending in intelligent audio and the impacts of restructuring actions taken in the second quarter of 2020. For the quarter, adjusted EBIT margin was 17% at the high end of our guidance range and up more than 13 percentage points from the same period a year ago, driven by increased shipment volume, higher gross margins and operating expense reductions. EPS was $0.29 in Q1, above our guidance range and up $0.26 from the prior year. Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today’s press release and can also be found on our website at knowles.com. Now, I will turn to our balance sheet and cash flow. Cash and cash equivalents totaled $182 million at the end of Q1. Cash generated by operations in the quarter was $40 million, well above the high end of our guidance due to higher EBITDA and lower than expected net working capital. Capital spending was $5 million in the quarter. Given our existing cash position and our expectations that we will continue to generate free cash flow in the future, the company intends to settle the principal amount of its convertible notes which mature in Q4 this year in cash. Moving to the second quarter of 2021. We expect total company revenue to be between $185 million and $205 million, up 28% at the midpoint versus the same period a year ago. Revenue from the Audio segment is expected to be up approximately 41% from Q2 2020 due to increased shipments into non-mobile and Hearing Health applications. Precision Device revenue is expected to be flat versus prior year levels, but up more than 20% sequentially as defense and medtech demand improves. We estimate total company gross margins for the second quarter to be 39% to 41%, up 770 basis points from the year ago period, driven by improved capacity utilization, favorable mix within the MEMS microphone business and continued recovery in the Hearing Health market. Our Q2 gross margin guidance reflects favorable mix and we have increasing confidence that total company gross profit margins will approach 40% for full year 2021. R&D expense is expected to be between $20 million and $22 million, up $1 million from prior year levels due to higher incentive compensation and increases in MEMS microphone and Precision Device spending, partially offset by a reduction in spending related to intelligent audio. We are projecting selling and administrative expense to be between $25 million to $27 million, down $1 million from the year ago period. The reduction due to a decrease in legal expense and the impact of restructuring actions taken in the second quarter of 2020, partially offset by higher incentive compensation costs and merit increases. We are projecting adjusted EBIT margin for the quarter to be in the range of 14% to 18% and expect EPS to be within the range of $0.23 per share to $0.29 per share. This assumes weighted average shares outstanding during the quarter of $96.5 million on a fully diluted basis. We are forecasting an effective tax rate of 13% to 17% for the quarter. For the quarter, we expect cash generated by operations to between $10 million and $20 million and capital spending to be approximately $10 million. Please refer to our press release and to our Form 8-K filed today with the SEC for a GAAP to non-GAAP reconciliation. I will now turn the call back over to Jeff for closing remarks and then we will move to the Q&A portion of the call. Jeff?

Thanks, John. Before we move to the Q&A, there are three points I would like to highlight from our Q1 results and our Q2 guidance. First the diversity of our revenue across a range of growing end markets is a significant benefit. In addition to participating in a number of compelling growth opportunities in markets that demand high value solutions, we have reduced our risk of being exposed to any one specific market and are lowering volatility in our business. Second, our Q1 results demonstrate that we are off to a good start, but there is more improvement to come, as we expect a recovery of demand in PD from the medtech and defense end markets. Third, we have increased our focus on gross margin expansion across the company. You have seen this gross margin improvement in Q1 results and the guidance for Q2, and this focus will continue to be a priority for us as we move forward. In closing, our strategy to deliver high value differentiated solutions to a diverse set of end markets is paying off and I am confident we can drive shareholder value by delivering strong earnings growth and cash flow in 2021 and beyond. Operator, we could now take questions.

And your first question comes from Harsh Kumar with Piper Sandler.

Congratulations on the strong performance and results, Jeff, John, and the team. I have a quick question. Jeff, you mentioned that you expect the growth rate in mobile audio to moderate for the rest of the year. Could you clarify your expectations for the remainder of the year? I'm not looking for exact numbers, but any insights based on what you've observed so far would be appreciated. I also have a follow-up question.

Yeah. So, I think, if we look at our non-mobile applications. I will talk a bit that way. I still think we expect the non-mobile applications to be pretty strong throughout the year Harsh. And I think, whether it be, you look at the laptop/PC market we think that’s going to continue to be strong. Our IoT business continues to be very strong. There are a number of new products that are launching in the ear market that should help us. So I think from our perspective the non-mobile portion of this business is pretty good. I think we are just kind of looking at in terms of Mobile is that, that, is this third-party data. We had a very strong Q1 in mobile, but Q2 based on the timing of product launches from last year is weaker in mobile in Q2. And I wouldn’t say, we are pessimistic about mobile in the back half. I just think the rate of growth, obviously, will moderate as the back half of the year for mobile was pretty good. So that’s kind of more I would say. We are little bit more cautious about mobile. But overall, for the MEMS microphone business we still feel very good for the full year as a whole business.

Got it. Hey. Very helpful, Jeff. And then maybe I will link these two questions together. I was sort of surprised, I think, John mentioned the $10 million CapEx. I believe that might have been for the second quarter?

Right.

And maybe with that you could also give us the update for the line for VA. I suppose that’s related, if I am not mistaken maybe?

Well, I will let John talk about the $10 million in a second, but let me briefly address the VA line. Generally speaking, we still see a promising opportunity. However, I must mention that we are experiencing additional delays related to COVID. From our perspective here in the U.S., about 20% to 25% of the population has been vaccinated, and we hope to reach 50%. In the locations where we are installing this equipment, mobile issues continue to cause ongoing challenges. We initially anticipated installations in Q2, but we are now pushing that to Q3 due to COVID-related delays. It’s certainly a tough situation, but I remain optimistic that we will get there. The machine is installed, powered up, and running some functions, but we have encountered other COVID-related issues that have slowed down the installation process.

Harsh, with respect to the $10 million CapEx estimate for Q2, I mean, there is a small portion of that relates to the automated VA line, but the majority of it relates to our MEMS microphone business and really new products and 8-inch conversion.

All right. Got you. Thank you, guys. Congratulations. Again, solid results.

Thanks Harsh.

Thanks.

And your next question comes from Bob Labick with CJS Securities.

Good afternoon. Congratulations as well.

Thanks, Bob.

Thanks, Bob.

I wanted to ask a year plus into the pandemic and getting closer to kind of new normal. And you talked a fair bit, so once you are kind of tied into the non-mobile market that you are selling into. How of the sizes of the various end markets for MEMS mics changed post-pandemic if at all and what’s the next growth area for MEMS mics for you?

That's a good question. To be honest, I still see significant opportunities in the markets we've discussed, particularly in ear, IoT, and increasingly in notebooks and tablets. On the ear segment, we anticipate a growing number of customers engaging with us, indicating a strong growth potential in the latter half of this year and moving into next year. In IoT, we are experiencing two key developments. First, the upgrade to higher performance microphones has positively impacted our revenue through increased average selling prices. Additionally, we are beginning to notice a long tail effect where, although the numbers are small now, we expect growth in this area, which is appealing due to its strong gross margins. This involves selling solutions that help enable voice in this segment. Lastly, regarding the notebook market, we have reiterated in the past two quarters that trends like working from home and homeschooling are here to stay for many people. Three to four years ago, microphones on laptops and tablets saw minimal use, but now they are utilized daily. This trend is likely to continue, potentially leading to an increase in high-performance microphones and a greater quantity of microphones per device in the coming years. Overall, the outlook is positive. As for the automotive sector, it’s still uncertain, but we are paying more attention to it, as new applications continue to emerge that will require microphones.

Got it. Got it. That’s great. And then switching gears a little bit, congratulations on the net cash position that you are in now and I appreciate that you are going to settle the convert with cash. So kind of two questions there, can you talk about what’s the right capital structure for the long-term for you? And then also are you looking at any M&A and if so, what’s the market like out there right now?

I would definitely say that we are looking at some bolt-on M&A opportunities within our Product Development area. This is an area of focus for us. Between 2017 and early 2020, we completed four deals that were all quickly accretive after the acquisition. We are looking for similar acquisitions that provide immediate benefits. We paused this process due to the pandemic last year, but we are moving it forward and actively seeking opportunities in that space. As for the capital structure, I will let John address that.

Our intention is to maintain credit metrics similar to investment grade. We are considering a maximum leverage of 2.75 if we find an acquisition opportunity. However, we will be disciplined in our approach to ensure we keep leverage at that level or below.

Got it. Great. Thank you so much.

Thanks.

And your next question comes from Suji Desilva with ROTH Capital.

Hi, Jeff, Hi, John. So, you spoke about gross margin drivers and mix opportunity, can you be more specific as what some of the elements there are in the gross margin expansion opportunity specifically?

I will let John start this and then I will put some color on it at the end.

We are very pleased with the overall trajectory in our gross margins, which were 39% in Q1. We guided to 40% at the midpoint for Q2. The primary drivers include growth at a higher proportion of revenues and an increase in business from non-mobile applications and MEMS microphones. Additionally, we are consistently operating at over 90% capacity utilization across most of our businesses, and we expect this to continue at least through 2021. These are the key drivers, along with the introduction of new products in the second half that typically come with above-average gross margins. It's a combination of new products and capacity utilization that contributes to this growth.

Yeah. And I’d just make one other comment about this is that, if you think about where we have been, where we have come to and where we are going. Mobile’s a very important market to us. We are not going to say it’s not important market. But the reality is this, mobile as an end market is not growing at the rate it was say, five years, six years ago in terms of the number of units that are available. Some of these other markets we talked about ear, IoT, the tablet market, the defense market and PD, EV. There’s still the VA opportunity out there. They are growing much faster and so the extents that this becomes a larger portion of our business that’s the mix kind of helps us drive gross margin.

Okay. And maybe related to somewhat a follow-up question on the AI Sonic Bluetooth Solution, I am sure I understand if this is sort of an approach or something that you have had for years with different solutions? And if so, what’s the revenue end market penetration impact with something like that and are there more solutions like AI Sonic coming down the pipeline?

Excuse me, this is the conference operator, I apologize that there will be a slight delay in today’s conference. Please hold in the confidence, we will resume shortly. Thank you for your patience. I apologize that there will be a slight delay in today’s conference. Please hold…

Okay. Anita?

… the conference will resume shortly. Yes.

Anita, we are back.

Hi, Mike. It’s Suji. Can you hear me?

Yeah.

Yeah.

Okay. So let me repeat my follow-up question then. So on the following through the gross margin question, the AI Sonic Bluetooth Solution that you announced, I am curious if that’s sort of a new type of product or something you guys have always been doing? And I what’s the revenue model impact or end market penetration impact or content impact, something like that is, I know there are additional sort of reference design AI or solutions like this coming similar to AI Sonic in the future?

I would say this is really focused on the long tail of customers, and we have several reference designs currently in development. Our goal is to create one solution that can serve multiple end customers rather than developing a custom solution for each individual customer. It's too early to determine the full implications of this initiative, as it is aimed at a long tail. We will discuss it further in the upcoming quarters. The key point to highlight is that we have a line of DSPs that we intend to market to the long tail, providing them with a solution. Additionally, we are collaborating with third-party DSPs to offer solutions that will enhance microphone sales. We're starting to see progress in various areas, but it's still early to predict the scale of this. The IoT market clearly holds potential in the long tail, and similarly, there is a long tail in the true wireless ear market. Furthermore, we are currently developing an entire headset reference design, which will allow us to present customers with a complete solution, including microphones, software algorithms, and third-party components, to support smaller companies in the true wireless space. We previously did not have the capability to assemble something like this.

Okay. Very helpful. Thanks guys.

Thanks Suji.

Thanks Suji.

And your next question comes from Anthony Stoss with Craig-Hallum.

Thanks. Jeff, I wanted to follow up on your comments about the global fund business. Can you share your thoughts on the current state of content, specifically regarding the number of microphones per phone? Is it stable, or do you expect it to decline year-over-year for each device? Additionally, for the ear side of the business, while you are waiting to launch the automated lines, what does the content look like in terms of microphones? Thanks.

Yeah. So let me take the ear question first. I just would sit there and say is, the general trend right now is the new move toward more microphones. I would sit there and say that there’s a number of different applications that are driving that, but we are starting to see larger and larger portion of what people are doing, thinking about three microphones per ear versus a couple of years of it was a one to two per ear. So I think the content story on ears is pretty strong over the next year or two. Coupled with again, obviously, the ear has been dominated by a small group of customers. We are starting to see that diversify more into more customers. And I kind of tune it to the some of the other markets that have been developed or are pioneered by certain customers and then it usually kind of stands out into new customers. So the ear opportunity, I still think the next couple of years, still looks pretty good for us. I think it looks very positive, both from content and still from growth in the market. As far as the mobile side, I would sit there and say the number of mics has probably, I would say, modulated in terms of increases. We are seeing some increase obviously with mix as more 5G phones are being sold. I think the next big lag up, still that’s out there is the move from analog to digital in terms of the mobile market. I would say, it’s a relatively small percentage of the market has moved towards digital microphone. But I think over time, if you look at the other markets, whether it would be the tablet market, the IoT market, the ear market, all these markets are eventually moving towards digital microphones and I think mobile will come along with that as well.

Then as a follow up to your comments about record bookings from PD in the quarter, I presume that, the remainder of this year and is there any way of gauging whether or not you think some of this is tied up to component shortages, double ordering or you think you have got a visibility on designs?

I believe we have good visibility on designs. It's quite broad-based, and the area that has seen the most significant improvement in bookings from last year to this year is the medical sector, particularly with implantable devices. MRI and new applications in implantables have been designed into the offerings. I don't interpret this as double ordering. In the defense market, they faced several supply chain challenges in the latter half of this year and into the first quarter. I don't view that as double ordering either, since these products are mostly custom and very specific to their needs, not off-the-shelf items. If we were to identify potential double ordering, it would typically be within the distribution business. We might see more double ordering in product development, and while that portion of the business has seen an increase in the first half, that's not where the main growth is coming from in the distributor business, so we don't see much evidence of double ordering. Additionally, product development tends to have long lead times based on some products, giving us a reasonable level of confidence in our revenue numbers for the quarter, especially since we are typically fully booked for what we plan to ship during that time.

And Tony, you heard in my script and we are projecting at the midpoint, 20% sequential growth in the PD business from Q1 to Q2.

Got it. Thanks for the detail. Nice quarter guys.

Thanks, Tony.

And your next question comes from Chris Rolland with SIG Susquehanna.

Sorry about that. I tried the mute button. And if you guys could actually talk about the supply situation for you guys right now, are there any constraints there, have you guys seen your lead times go up? And then just maybe talk about that ratio of bookings, what sort of coming in right now to billings and what you can fulfill?

I don’t believe we have any constraints that would affect the PD or Hearing Health business at the moment. Overall, things look good in that area. Regarding the MEMS microphone business, as I mentioned last quarter, the lead times for wafers have increased. For MEMS microphones, we have both the MEMS die and the accompanying ASIC. We are not facing any constraints on the MEMS die; we maintain a solid relationship with our supplier and have dedicated capacity. However, the lead times for the ASIC have been longer, but this hasn’t interfered with our shipping schedules. We have experienced some price increases in wafers due to rising demand, but we have managed to pass those increases to the market. At this point, we expect the second half of the year to remain aligned with our goals. If there is a significant surge in demand for MEMS mics, we may need to reevaluate our situation, but for now, we are in a reasonably good position concerning supply and demand alignment.

Thanks, Jeff. And just as a follow up, you had mentioned pricing and pushing along some price increases there, previously you have talked about kind of high single-digit on the microphone side going to mid. Is there any chance that we can get to the low single-digit ASP declines or even flat for the Audio side of your business just considering how tight things are kind of across the industry, does that give you some extra pricing power? Thanks.

Yeah. And so interesting question and I think it’s worth mentioning that, I think, if you go back, let’s just forget about 2020. 2020 was kind of this pandemic year, a lot of crazy stuff going on. But in 2019, we had talked about slightly less than 4% price erosion on mature products. I think, we are seeing now for 2020, it’s going to be less 2021, 2021, sorry, it’s going to be less than 4% for sure. And so, I think, you are absolutely right. I would also say that one other piece, obviously, it will be dependent on the back half of the year. But that ASPs overall is not including mature products. I believe you are going to be roughly flat with last year. So, I think, this is all leading to the point that you are right, we are kind of in the market here where demand is high and I think I talked about this in the last call, the intent is not to add capacity at this point in the MEMS microphone business. So, we are highly focused on, I would say, the high value portions of the market and the new products that are coming in out associated with it and so we feel pretty good about where ASPs are relative to where they were, say, 2016, 2017, 2019 was a pretty good year for us and we think there is the opportunity even that in 2021.

Thanks, Jeff.

Thanks.

Okay. And there are no further questions. I will now turn the conference back over to you for closing remarks.

Great. Well, thanks very much for joining us today. As always, we appreciate your interest in Knowles and we look forward to speaking with you on our next earnings call. Thanks and good-bye.

This concludes today’s conference call. You may now disconnect.