Good afternoon. And welcome to the Q4 2021, Knowles Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Sloane Bolun, Investor Relations, you may begin your conference.

Thank you. Welcome to our Q4 and full-year 2021 earnings call. I'm Sloane Bolun and presenting with me on the call today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. By now, you should have received a copy of our earnings release and webcast slides. If you have not received both documents they're available on the IR section of our website at knowles.com. 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. 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 31, 2020, 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 Knowles 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. 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 knowles.com, and in our current report on Form 8-K filed today with the SEC for some reconciliations to the most directly comparable GAAP measures. And with that, let me turn the call over to Jeff, who will provide the details of our results.

Thanks, Sloane. And thank you to everyone for joining us today. For those of you who joined us on our investor update in November, we are very pleased to report another strong quarter that demonstrates our progression toward our mid-term financial targets. As we come to the update call, we have made significant strides in transforming the company to focus on the highest growth markets, with an eye towards improving adjusted EBIT margins and driving strong free cash flow. As we look back at 2021, and certainly our fourth quarter results, we feel confidence and validation in our strategy and look forward to continued progress and success in '22. With that, let me begin with a summary of our Q4 results. We generated revenue of $234 million, which came in at the higher end of our guidance range, driven by strong market dynamics in hearing health and precision devices. This result was achieved even with the challenging supply chain backdrop we noted last quarter. What is most encouraging about our result was the continued execution on margin expansion. Specifically, our fourth-quarter gross margin was over 43% or 130 basis points above the high end of our guidance range. We also delivered adjusted EBIT margins of 22%, which we believe demonstrates the operating leverage the company has in our business model. In total, we produced fourth-quarter earnings per share of $0.48, also above our guided range. Lastly, we continue to drive impressive free cash flow as John will detail in a minute. To summarize, another quarter where our strategy to focus on higher-margin products and markets is yielding strong adjusted EBIT margins with exceptional free cash flow. For our full-year 2021, results were strong as well. And now I'd like to take a minute to highlight our accomplishments. As we noted at our investor update, Knowles is positioned to create shareholder value through top-line growth, margin expansion, and free cash flow generation. We're proud to say that 2021 is the latest proof-point of execution against our plan, and we believe there is significant runway for more of the same success ahead. Let's start with the shift we have made on product mix, and how it has improved margins over the past few years. As we noted at our investor update, the clear byproduct of our strategy can be seen in the growing percentage of our revenues above 40% gross margin. From 2017 to year-end 2021, we increased that percentage from 49% to 70%, an improvement of over 20 points. Now let me detail a few of the key drivers and the actions that drove the improvement. First, as mentioned, we continued to optimize the mix of our business. In audio, we have a particular focus on growth in non-mobile, IoT, and computing applications, as well as our hearing health business. In Precision Devices, our high-performance capacitors and RF filtering businesses both continued to expand margins. John will speak to the margin impact, but I'd note that our opportunity on the top-line for these growing end markets is attractive, especially considering our leading market position. Second, Knowles continues to capitalize on favorable market dynamics and we are gaining share within our hearing health market. In the fourth quarter and for 2021, Knowles fired on all cylinders in this market with share gains and new product introductions along with strong end market growth. Third, Precision Devices continues to be an out performer. Investments in both high performance capacitors, as well as RF filters across a wide variety of markets are paying dividends in revenue growth, margin expansion, and free cash flow. As you can see from our financial results, execution against our strategy since 2017 has shown consistent progress as we have fundamentally transformed the company. Similar to our investor update, I'd like to highlight the margin, free cash flow, and earnings growth we've generated despite revenue growth over the same period that was moderated by strategic exits from lower margin business. We have driven significant operating leverage over the past four years as well and have never been in a better position to drive shareholder value. We have grown our adjusted EBIT margins by more than 500 basis points over the past four years, which has translated into an APF CAGR of 15%. This was achieved with a revenue CAGR of just under 4%, which is impacted by global supply chain restrictions and our strategy to focus on higher-value products. Equally important, our free cash flow margins have improved by nearly 10 percentage points, which we plan to deploy through future M&A and share repurchases. In total, we completed 2021 with exceptional adjusted EBIT margins and the highest free cash flow since we have been an independent company. This is certainly something we are proud of, but the exciting takeaway is what the upper-ending leverage means for value creation in the quarters and the years to come. Now let me provide some additional detail on each of our product segments. Starting with precision devices, we continue to outperform with another quarter and full year of record sales for the segment. Total revenues for the year were just north of $201 million or 16% higher compared to 2020. In the fourth quarter, precision device generated strong results with revenue up nearly 40% compared to a year ago. On its own, the growth is impressive and illustrates our market-leading position across a number of attractive end markets. That said, we're just as proud of the results our precision device segments posted on profitability. Specifically, segment gross margins were up 630 basis points compared to a year ago, and this is not happening in one product category or end market. It is very diverse across markets such as medical, defense, EV, and industrial. Now let me turn to our audio segment, which as I noted earlier, faced a tougher environment on the top-line, given broader supply chain issues and the timing of customer product launches. In our MEMS microphone business, revenue was pressured for the reasons mentioned, but gross margins were favorable as we continued to shift our mix away from lower-margin products and markets. Additionally, we are well-positioned with a number of technology initiatives and new product launches that we expect will augment our revenue growth in the years ahead. Our hearing health business continues to be strong as the global market recovered and our company took additional share. The hearing health business also benefited as we saw recovery in the audio files demand in the second half, and our recent product launches continue to ramp with our largest customers. Similar to our other businesses, hearing health also drove significant operating leverage, which we believe will continue in 2022. Overall, despite a tougher environment due to supply issues, I am pleased with the potential for profit expansion we have built into the business when supply chain issues and customer product timing turns more favorable. John will give you more detail on the Q1 outlook in a minute, but I'll conclude my prepared remarks with a review of our mid-term expectation by highlighting a few things that we spoke about at the investor update. First, I have high conviction that the company can grow our top-line in the mid-to-high single digits. Looking at 2021 in retrospect, clearly there are a range of macro factors that impact each of our two segments differently. We have visibility in the mid-term demand dynamics across both segments, and we expect to drive growth opportunities through our market-leading position. Second, as I have highlighted throughout my remarks, we continue to execute and outperform on our profitability goals. We maintain our conviction to achieve gross margins above 43%. As I mentioned, our shift in mix has already contributed meaningfully to the progress as we expect will continue to be positive in the years to come. With the background of revenue growth and gross margin expansion, we believe there is continued opportunity to leverage our existing footprint and infrastructure to drive adjusted EBIT margins. This gives us confidence we are on track to achieve our midterm model of 22% to 24% adjusted EBIT margins and 15% to 17% free cash flow margins. In summary, I'm very proud of the 2021 results delivered by the entire Knowles team, and I'm even more excited about the opportunity we have ahead of us to achieve continued progress and drive value for shareholders. With that, let me turn the call over to John to review our financial results.

Thanks, Jeff. We reported fourth-quarter revenues of $234 million, down 4% from the year-ago period, driven by lower shipment volumes in audio, partially offset by higher revenues in precision devices. Audio revenues of $176 million were down 13% from the same period a year ago, driven by timing of new customer product launches, a challenging supply chain, and our focus on higher-value MEMS microphones in connection with our margin improvement initiatives. The decline in MEMS microphone revenues was partially offset by increased shipments into the hearing health market. The precision device segment delivered revenues of $58 million, up 40% from prior year, driven by strong organic growth in defense, medtech, and industrial end markets, and an acquisition completed in the first half of 2021. Fourth-quarter gross profit margins were 43.3%, 130 basis points above the high end of our guidance range and up 530 basis points from the same period a year ago. Audio segment gross margins improved 290 basis points over 2020 levels, driven by lower factory spending and favorable product mix, related to an increased percentage of shipments into the ear, IOT, and hearing health markets. Precision Devices segment gross margins were 49.2%, a record for this segment and up almost 13 percentage points from the prior year, driven by productivity gains, improved factory capacity utilization, and an acquisition completed in the first half of 2021, as well as favorable inventory reserve adjustments. Our gross margin expansion throughout 2021 demonstrates the impact of our strategy to deliver high-value differentiated solutions to a diverse set of end markets. Total company gross profit margins finished at 41.7% for full year 2021, 270 basis points above 2019 pre-COVID levels. R&D expense in the quarter was $20 million, down $1 million versus the prior year. SG&A expenses were $30 million, $3 million above prior year levels, driven by higher incentive compensation costs and the impact of the acquisition completed in the first half of 2021, partially offset by lower legal expense. For the quarter, adjusted EBIT margin was 22%, up 370 basis points from the prior year, driven by higher gross profit margins. EPS was $0.48, which was $0.03 above the high end of our guidance, due to higher gross profit margins and a lower effective tax rate, partially offset by higher incentive compensation costs. For full-year 2021, we delivered adjusted EBIT margins of 20.1% up 530 basis points from 2019 levels, driven by higher gross margins and improved operating leverage. Now, I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $69 million at the end of the quarter. We generated cash from operations of $66 million in the fourth quarter, $11 million above the high end of our guidance range due to higher EBITDA and lower than expected net working capital. Capital spending was $20 million in the quarter, and we repurchased 1.1 million shares at a total cost of $25 million. For full-year 2021, free cash flow was $134 million, representing more than 15% of revenues. We repurchased $2.1 million shares in 2021 at a total cost of $44.5 million, fully repaid our convertible notes, and we exited 2021 with essentially no net debt. Moving to our guidance for the first quarter of 2022. We expect total company revenue to be between $197 million and $203 million, down slightly at the midpoint versus the same period a year ago. Our revenue guidance reflects the potential negative impacts related to continued supply chain constraints and COVID-related absences in our North American manufacturing facilities. Revenue from the audio segment is expected to be down approximately 10% from Q1 2021, due to lower demand for MEMS microphones, as we continue to be negatively impacted by global supply chain shortages, partially offset by increased demand in the hearing health market. Precision device revenue is expected to be up more than 40% over prior year levels, driven by broad-based strength in defense, medtech, and industrial markets, and the acquisition completed in Q2, 2021. We estimate gross margins for the first quarter to be between 39% and 41%, up 100 basis points from the year-ago period, driven by favorable mix as we expect a higher proportion of shipments into non-mobile markets. R&D expense is expected to be between $18 million and $20 million, down $1 million from prior year levels due to a reduction in incentive compensation costs. We're projecting selling and administrative expense to be between $25 million and $27 million, up $1 million from the year-ago period, driven by the acquisition completed last year. We're projecting adjusted EBIT margin for the quarter to be in the range of 17% to 18% and expect EPS to be within a range of $0.29 to $0.31 per share. This assumes weighted average shares outstanding during the quarter of $96.8 million on a fully diluted basis. We're forecasting an effective tax rate of 13% to 17% for the quarter and full year 2022, which is lower than previous expectations, as we recently received an extension to our tax holiday in Malaysia through the end of 2026. For the quarter, we expect cash generated from operations to range between $0 and $10 million in line with normal seasonal patterns. Capital spending is expected to be approximately $10 million. I will now turn the call back to our Operator to open the line for questions.

We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Anthony Stoss with Craig-Hallum. Your line is open.

Hi guys. Nice execution of the December quarter. John, let me start with you. For the March quarter gross margin guide down a bit sequentially, even on higher PD and hearing health, can you maybe give me a little bit more detail on why that is. And then, also any thoughts you might have on gross margins for the remainder of the year, and then I have a follow-up for Jeff.

Sure. Yeah, Tony. In terms of the sequential decline in gross margin, it is really two factors: lower capacity utilization in our MEMS microphone business, and then we're actually seeing sequentially some unfavorable mix with lower compute and hearing health, which are both above-average gross margin. So it's those two factors.

And just a comment on the compute portion of this; the factor utilization is pretty straightforward. That's kind of a usual thing seasonally that we operate at a lower level in Q1 in terms of capacity utilization. But the computer market has been a little bit weaker for us in Q1, and right now what we see is that it is returning to, I would say, normal levels in Q2, with bookings indicating that there will be an increase back to those normalized levels.

Yeah, Tony, in terms of the second part of your question too, is what do we see looking out? We do see sequential improvement going into Q2 and over the remainder of the year. And keep in mind, even at the midpoint of our guidance for Q1, it is 100 basis points higher than the year-ago levels. So while we're really pleased with the gross margin we delivered in 2021, we do think there's room to progress further.

Got it. Thanks. And this is a follow-up for Jeff. Normally, you would comment about the millimeter wave division. I didn't hear anything in your prepared remarks. I'm just curious, your view on that for 5G infrastructure. And then also, love to hear your thoughts on true wireless earbuds and growth of that in your more IoT-type businesses.

Sure. First on the RF filter business. From 2020 to 2021 and 2022, we saw reasonable growth in 2021. We increased from about $35 million in 2020 to over $45 million in 2021. I believe we are set for a breakout year in RF filtering in 2022. Much of our growth in product development will come from filtering. While there is some contribution from telecommunications, the majority stems from defense. We've achieved several significant design wins, and our acquisition of IMC in the second quarter of last year is proving beneficial. We're very satisfied with this acquisition as it has expanded our product portfolio and helped us stock more for customers. We're beginning to notice increased sales synergies from this and anticipate considerable growth in the RF filtering sector. Regarding telecommunications, I want to reiterate what I’ve mentioned over the past couple of years—there are several design wins set to go into production this year. However, the challenge lies with secondary companies that are working on projects aimed at home or small cell applications. It’s difficult to assess the true rollout based on the ambitious figures they are providing. I have concerns based on our observations in the market regarding actual rollouts. This situation requires patience, but we do have some design wins that could lead to revenue in telecommunications between $5 to $10 million in 2022.

Okay, if I can squeeze in one more just on the supply chain issues that everybody is facing. I'm curious your thoughts on when it might ease? Does it keep easing each quarter? Does it last into 2023? Any thoughts would be helpful.

Yeah. Here's how I see it. The supply chain issue is impacting us in Q1 and Q2 for sure based on what we know we got coming in. I think as we go to the back half, there's a two-pronged approach here that we see. One is we think that the supply chain will get better in the back half and we will get more wafers. Now, that being said, we have multiple wafer suppliers, and as we can introduce new products, we're using different wafer suppliers to try to balance the load. So in some cases, we have enough, and in some suppliers, we do not. So I think you're going to start to see improvements as we go into the back half, even independent of the supply chain disruptions, as we have secured enough wafers in total, but we got to make sure the mix with new products comes in so we're maximizing the number of wafers we get.

Got it. Thanks for the detail, Jeff, I appreciate it.

Your next question comes from the line of Tristan Gerra with Baird; your line is open.

Hi, this is Tyler, for Tristan. Thanks for taking my questions. First, could you talk about the puts and takes of what you're seeing in the smartphone market, notably China, which I know is a market that you've de-emphasized in the past few years. How are inventories there? How do you see the trends developing in the China market for the rest of the year?

I believe the trends in the China market have shown improvement. The main challenge, however, has been the impact of COVID. Many Chinese suppliers are concentrating on emerging markets like India, Brazil, and Indonesia, while still facing various COVID-related issues. We are hopeful and optimistic that our business in China will perform better in the first half and into the second half of the year. However, I want to clarify that we are reducing our focus on the mobile market. In 2021, mobile accounted for just over 22% of our total company revenue, down significantly from over 30% a couple of years ago. This year, it’s likely around 20% or even lower. I want to highlight that in Q4, our gross margin reached 43%, which reflects our desired annual benchmark; the mix was ideal because we excluded many commoditized microphones and focused more on IoT, Precision Devices, and hearing health, greatly improving our gross margin. I see Q4 as an indication that we are aligning with our midterm model, and this is where we aim to be in the next two to three years as we continue to move away from commoditized products.

Great. As my follow-up, maybe you could talk about some of the biggest growth margin drivers you're seeing this year. Maybe it's in some types of products or mix or anything like that.

Yeah. John has a good point in terms of margins that we talked about. Think of our business like four quadrants. You've got mobile as one quadrant, you got ear, IoT, compute, and then there's microphones in another category. And then you've got the Precision Device quadrant, then you got the hearing health quadrant. A year ago, we'd say those were roughly the same size. Now, actually, mobile's probably the smallest at this moment of those four quadrants. And it's also, at this moment, the lowest gross margin. And so as we look at the other markets, and we've put this in the mid-term update we gave, we expect those other four quadrants to grow faster than mobile at above the corporate average gross margins. You can see this mix shift coming. It's very easy to talk about mobile growth from 0% to 2% over the three-year period. And then you can go through the list of growth rates for hearing health, what precision device goes at, what IoT goes at, that we can get to the 43% gross margin just through mix shift. And I’ll just add that mix shift is a significant driver.

Yeah, I would just add the other thing that we're really seeing is obviously we're seeing increases in input costs, whether it's wafers, whether it's labor, whether it's other materials. We've been reasonably effective at passing those costs on through higher pricing, especially in the high-value microphone area and in the PD and HHT businesses. So that's been another opportunity and action for increasing gross margin.

Thanks so much. I appreciate you taking the questions.

Your next question comes from the line of Bob Labick with CJS Securities; your line is open.

Good afternoon and congratulations on the strong execution. There's been a lot in the news lately, and we've talked about it on previous calls too, but just wanted the latest update on the OTC hearing aid market. Any thoughts on the timing of that market opening up? And maybe you can kind of put it back together with an update on the automated balance armature line. If those would be ready and we'd go into the OTC market or into a different market.

Yes. I'll start with an update on the balance armature line. The line is operational, although not yet at full capacity, but it is producing parts. We sold parts off the line in the fourth quarter and plan to continue selling them in the first quarter, ramping up production through the first half of the year, aiming to reach full capacity later this year. Regarding the over-the-counter market, we are pursuing opportunities in the true wireless market with the balance armature and are seeing success in design wins that are progressing toward production. There is also interest from the OTC market and hearing health customers in utilizing products from our automated line. This technology development is significant and is expected to yield strong returns in the future. It's taken longer than anticipated, but we believe it will be beneficial. Concerning the OTC market, I think it represents a great opportunity for us, and we are well positioned to capitalize on it. The content does not seem to be lesser; currently, the pricing to the end market is comparable to hearing aids, targeting individuals with mild hearing loss, which has low penetration. In fact, while there is high penetration for people with profound and moderate hearing loss, those with mild hearing loss represent only about 5% to 10%, leaving millions underserved. We are optimistic that the OTC market can attract these individuals who previously wouldn't consider hearing aids. Additionally, over time, as people age and their hearing declines, they may seek their first conventional hearing aid at an earlier age, leading to increased demand. This is why we project our hearing health business to grow at a rate above GDP. Determining the exact figures is challenging, but there is definitely potential for growth from our current position.

Okay. That's great. Very exciting. Thank you. And then I guess just for my other question, obviously, precision device acquisitions have been a great use of capital for you. So maybe if you could talk a little bit about that pipeline, if there's any expectations this year, and what's the ideal capital structure? Your net debt-free right now. Is it just using free cash to make acquisitions, what might you lever up, etc.

I think one challenge we face is that valuations in the marketplace are quite high. To be honest, we don't intend to overpay. The opportunities we are considering aren’t particularly significant in scale. However, we are starting to generate more cash from our core operations. The fourth quarter is a clear example of this—we paid off our convertible debt in cash and repurchased a substantial number of shares during the quarter. Looking ahead, we plan to discuss capital allocation in more detail on our next call. We're interested in pursuing acquisitions, and it’s possible to engage in both M&A and share buybacks or return capital to shareholders. Given the cash flow from our core business, we believe we can manage both effectively.

Yes. Just to summarize, we delivered very strong cash flow in 2021, $133 million or north of 15% of revenues, already close to the range at the low end of our mid-term financial target. We believe we can continue to deliver similar percentages in 2022 with expansion in the mid-term. And then in terms of capital deployment, think of 2021. We had three major activities. We repaid our convertible notes that Jeff mentioned. We also spent about $80 million on a key strategic acquisition in our PD business, and we repurchased $44 million worth of our stock. At the same time, we exited 2021 with no financial net debt. So basically, the debt repayment is behind us, so our priorities really after that are unchanged. We'll continue funding organic growth initiatives and we'll look for creative acquisitions primarily in the PD segment. It's a matter of return of capital through share repurchases. As Jeff said, we'll try to outline parameters around that return of capital on the next call.

I want to add that you've seen our strategy in the MEMS microphone business, which focuses on pursuing higher margin opportunities. We are currently experiencing a decline in capital expenditure towards the lower end of the ranges we've provided. A few years ago, we talked about 6% to 7% or 6% to 8%, and we even had a year where it reached 9%. Now, we are trending below that range and are in the 5% area. This reflects how we are investing our capital and managing it as we pay down debt while also returning capital to shareholders through share buybacks.

And Bob, the one question that I didn't answer you asked about, what is the ideal leverage? Obviously, it will depend on the acquisition opportunities, but we're going to be disciplined and we'll maintain an investment-grade-like balance sheet, so maximum leverage, 25 to 26 range.

Okay. Super. That was great detail. Thank you very much.

Your next question comes from the line of Chris Rolland with Susquehanna; your line is open.

Hey, guys, thanks for the question. Regarding shortages, I just wanted to drill down there a little bit more. You mentioned front-end, I was wondering what could your revenues have been, had you been able to get supply? Do you have enough front-end supply to meet everything for the second half when you typically have more volume running through there as well, and then lastly, do you have any back-end issues or are you running into customer kitting issues, and can you share some of those anecdotes with us?

Yeah. Sure. So let me just first cover Q1. I think we're dealing with two issues. One that's probably a little bit more temporary and one that's been around for a while. First, the one that's been around for a while and continuing to linger is the supply chain issues and getting enough front-end wafers. I would say, overall, we're getting enough wafers. I would say, where we have our products is not optimized for where our wafers are being produced today. We're going to continue to work on that. And as the year goes by, as I mentioned, we do expect some improvements, but on the reverse side, we also expect that we'll introduce new products that utilize front-end material that will have more capacity.

I think we're in a good position. This discussion is focused on our MEMS microphone business, which represents less than half of our projections for this year. In our PD and hearing health sectors, we're not experiencing major supply chain issues, as we are less dependent on third parties. For instance, we have our own stamping operation for metal parts. However, we are encountering a challenge in our PD business. They are seeing significant growth in the first quarter compared to last year, with most manufacturing occurring in North America. However, we have been facing between 5 and 15% absenteeism in our factories related to direct labor on a weekly basis, which is affecting our Q1 results. Overall, I see supply chain issues impacting our MEMS and the Omicron situation in North America. This could cost us between $5 million to $10 million in Q1. Regarding PD and hearing health, we are not facing many supply-related challenges. My main concern in North America is the absenteeism related to Omicron, but we anticipate that this will improve soon, and we expect it to be resolved by the end of Q1. For the latter half of the year, the focus will be on optimizing our product mix. This means utilizing our new product introductions effectively in our fabs where we have excess capacity, allowing us to balance our wafer supply more efficiently.

Thank you, Jeff, appreciate it. And then the next question is, just given these concerns, given that wafers seem a little tougher to get, given we have shortages, everyone's seeing this as well. Does this actually help your pricing dynamic? And then secondly, a quick one, accounts receivable up pretty substantially in December. Maybe just talk about that as just related to your largest customer.

Your comment is specific; why does the customer agree to that? However, John can provide some comments.

These are simply timing issues, Chris. We had a higher percentage of our sales in the last month of the quarter, which will get collected typically 45 to 60 days later. And so that's all it is.

If you look at the shape of Q4, we had a lot of sales in Q4 in the last month.

In the last month.

And so it's not been collected yet. I don't think we see that as a concern.

I don't see any credit risk there; it's just literally timing.

And then in ASPs, I think you brought up pricing, I might say, I think this follows that four-quadrant structure we talked about. You have commoditized mics, then you talked about mobile, ear IoT, you sit there and talk about PD and HHT. In three of the four quadrants, we seem to be reasonably well off ASPs, flat to up, right? And we're able to pass on some of the wage inflation, some of the wafer costs, but PD and HHT don't have a lot of wafer costs. This is more wage inflation that we're trying to pass on. So in the area where we have more commoditized products, I would sit there and say it's better than it was before. And I'll give you one indicator: If you remember, '16, '17, we were averaging 8% to 10% reduction in ASPs on mature products. Last year, it was around 3% on mature products. This year, we're thinking it's going to be sub-2 on mature products, so you can see this. And to the extent that we have less of this business, that obviously makes it easier for us to set our price. If you want to buy from us, this is the price.

Awesome. Thanks, guys. Yeah, I had assumed it was linear, but thanks, guys. Really appreciate it.

Your next question comes from the line of Suji Desilva with ROTH Capital; your line is open.

Hi Jeff. Hi John. Nice execution on the gross margin here. Maybe you could talk about the hearing health business. I know you talked about the over-the-counter, but the core business, you talked about share gain opportunity. What's driving that, and is that sustainable?

Yes, I believe it is. There are a few factors contributing to this. First, I want to acknowledge our operations team for their excellent work managing the challenges posed by COVID over the past two years. Our facilities in Asia have particularly excelled during this time. While some competitors have faced more difficulty, we have consistently been a reliable operational supplier in the hearing aid market. Additionally, one of our strategies is to focus on higher gross margin markets, and hearing health has margins that exceed our corporate average. I also want to recognize our hearing health R&D team for their outstanding execution on new products for our customers. This is happening against the backdrop of a gradual increase in the share of MEMS microphones in the hearing health market, where we hold a significant share. When you combine these three elements—successful product introductions, effective product execution, and strong operational performance—with the growing emphasis on MEMS microphones, it paints a positive picture. Furthermore, we've made substantial progress with our automated line; lessons learned from it are now being applied to our manual lines for balance armature in the hearing aid sector, enhancing our performance. As a result, our team is performing exceptionally well, which is leading to market share gains. We believe this trend is sustainable because, in the hearing health market, new products typically remain relevant for at least 24 months, often extending to 48 months. We have secured many of these platforms that began production in the last two years, and they will continue to be in production for the next two to three years.

Okay. Great, Jeff. That's very helpful color. And then, on the notebook market, I'm just curious what metric you think about for the growth opportunity there. Is it penetration of MEMS mics? Is it your share in the MEMS mics and the notebooks, the number of mics per notebook? What's the growth opportunity there? How should we frame it?

I would sit there and say, there’s some ability to increase the number of mics, but I would say probably more interesting over the mid-term, is higher performance. Again, I go back this takes a little time. Two years ago, pre-COVID nobody was using that microphone on that laptop. People used to put them in. They'd think, I got a microphone in case you ever want to use it. Now, everybody's using it. We're seeing customers come to us and talking about high-performance microphones for their business laptops first, but eventually it's going to be for consumer laptops. So I think, over the longer term, there are going to be some ups and downs in this market. Right now, we're going through, I would say, a little bit of a slowdown here in Q1, but we're expecting it to rebound in Q2. But the longer-term, I think it's about higher-performance mics. And again, we're very well-positioned to take advantage of that.

Great. Thanks, guys.

Hearing no further questions at this time, I'll turn the call back over to the company for any closing remarks.

Thank you all so much on behalf of Jeff and John. I appreciate everyone's time and follow-ups, please let us know, and Investor Relations and we look forward to seeing and talking to you all in the future. Thanks so much.

This concludes today's conference call. Thank you for joining. You may now disconnect.