Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Knowles Corporation First Quarter 2018 Financial Results 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. With that said, here with opening remarks is Knowles' Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks, Connor, and welcome to our Q1 2018 Earnings Call. I'm 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 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, 2017, 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, including a 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've made select financial information available on webcast slides, which can be found on the IR section of our website. With that, let me the 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 $179 million, gross margins of 37%, and earnings per share of $0.11, within the guidance range we provided on last quarter's call. In our Audio segment, revenue was up 2% from the year-ago period, slightly below the midpoint of our guidance. Sales of MEMS microphones were higher than the year-ago period, driven by strength in IoT and ear, as well as growth at key North American and Korean customers. However, the growth we experienced in our largest customer was lower than we've previously anticipated as shipments dropped significantly during the quarter. Sales into the hearing health market were also up slightly from a year-ago period, highlighting the stabilization in this business. Overall, revenue from Audio comprised 82% of total sales in the first quarter. In the Precision Device segment, sales hit record levels due to strong demand for capacitors across all end markets and the acquisition completed earlier in the quarter. Precision Devices represented about 18% of company revenue in Q1. I mentioned that Q1 MEMS microphone revenue was up from the year-ago period. This was despite expected declines in shipments to Chinese OEMs. I believe sale to these customers has bottomed in Q1 as we have seen broad-based improvement in demand from these customers. Based on current bookings, we expect revenue from China OEMs to more than double on a sequential basis in the current quarter. This improvement is being driven by share gains, demand for higher-performance microphones, as well as continued multi-mic adoption across China. In addition, we expect shipments of new intelligent audio solutions to Tier 1 China handset customers to begin this quarter, which I'll talk more about in just a moment. At our largest customer, microphone shipments…

Thanks, Jeff. As Jeff mentioned, we reported first quarter revenues of $179 million, slightly below the midpoint of our projected range, and up 6% from the year-ago period driven by higher demand in both the Audio and Precision Device segments. Audio revenues of $146 million were down 22% sequentially due to typical seasonality, and up 2% from the year ago period. MEMS microphone shipments to our largest North American customer increased year-over-year but were well below our expectations going into the quarter. This shortfall was partially offset by higher-than-expected mic shipments into the IoT market and higher sales to hearing health customers. Microphone shipments to Chinese OEMs were down more than 40% from year-ago levels, in line with our expectations. Precision Device revenues of $32 million were up 33% year-over-year as a result of both an acquisition completed earlier this quarter and 23% organic growth, which was driven by strong demand in defense, automotive, and industrial end markets. First quarter gross margins were 37.4%, at the lower end of our guidance, due to unfavorable customer mix and lower-than-expected capacity utilization in our microphone business as we reduced production levels in the current quarter for our largest customer. Precision Device gross margins were better than expected and 420 basis points better than prior year, driven by productivity improvements and an adjustment to inventory reserves. Operating expenses in the quarter were $52 million, in line with expectations and up $3 million from the year-ago period due to the impact of the acquisition made earlier this year and increases in compensation expense. For the quarter, adjusted EBIT margin was 8.2%, slightly below our guidance range. Non-GAAP diluted EPS was $0.11, within our guidance range. Further information including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's…

Thanks, John. We remain on track to deliver 8% growth in the first half of the year and anticipate this growth to continue in the second half. Our microphone business continues to benefit from a robust demand in the ear and IoT markets, and we also expect content increases in mobile in the second half of the year. I expect continued strength in Precision Device sales and for our hearing health business to remain stable throughout 2018. In addition, I expect accelerating adoption of our intelligent audio products to drive growth this year and set up 2019 to be a breakout year for this business. I'm more excited than ever about the opportunities in front of us and continue to believe that our core capabilities in acoustics, digital signal processing and algorithms are unmatched and we are ideally positioned to enable voice technology across our end markets. Operator, we will now take calls.

[Operation Instructions] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Bill Peterson with JPMorgan. Your line is open.

My first question is on intelligent audio. I was hoping that you can help size the business as we move through the year, starting with the current quarter. I assume it's a small ramp, but in light of you already talking about improved demand in China, improved demand at your largest customer, I presume there's other – maybe your Korean customers falling off, but trying to get a feel for the size of the market and how we should expect growth this year.

Yeah. So, for the intelligent audio business, I guess, what I would just say I kind of hesitate to give a number for this year. We have three customers that will start production in Q2, albeit at small volumes in Q2, and should ramp throughout the year, but we're pretty dependent, Bill, on those three end customers' products, how well they do. And so I would say, as we think about this year, I think we're being a little bit conservative in what we think about for this year based on – it's really based on only three products' success. There will be some other products that will come to production later in the year, but there's very little time left in the year for shipments. I guess what I would just add is, when we think about 2019, we're starting to think about the idea here that this could add somewhere in the neighborhood of 2% to 4% growth in – over the core growth just for intelligent audio based on the design activity we have, on what's designed in, that's the kind of number we're thinking about for 2019.

Okay, that's helpful color. Maybe just coming back to smartphones, you discussed China doubling and improved demand. I guess, I realize you may not have as much visibility, but when you think about planning purposes for smartphones, I just kind of want to get a feel for sustainability especially in the China channel, how much of this is restocking versus maybe real demand that you're planning for in the second half, and if you can kind of break it out from China, your largest customer, and Korean customer, and how your expectations are for the full year in terms of demand profile.

Sure. Sure. So let me start with China. First of all, I would say is China came in in Q1 pretty much as expected. It was weak and it was expected to be weak, and I think we were like very, very close to what the number was that we projected at the beginning of the quarter. As we went through the quarter, and I'm not here to call a bottom to the China handset market, what I'm saying it's a bottom for us. And I think there's a few things that are driving this, Bill. First of all, share gains. We do see that our share is increasing in China. I think on previous calls, we've kind of talked about the competitive environment. I think it's starting to play through in terms of share gains. The second thing is, if you look at majority of the Chinese manufacturers now on mid-range phones are now having multiple mics and even some of them that are considering multiple mics on low-end phones now. So we're seeing definitely multi-mic adoption in China continuing to go. But the third thing that we really haven't quantified as much is that we are seeing a big push within the China market towards higher-performance microphones which – well, it doesn't increase the number of mics, it does increase the value per mic. So we're seeing that. And then lastly, well, I wouldn't say there's a huge impact on Q2, the intelligent audio wins increasingly as we go through the year will have an impact. And it's worthwhile just describing this for one minute, Bill, that, first, yes, we get a smart mic at a significantly higher rate of pay. But it also makes them move to multi mics in some cases and more mics and potentially…

Okay. Maybe just if I can just add one more, just a question on gross margins.

Sure.

I think you explained the year-on-year differences within Audio. Precision Devices actually had a pretty big step up from a year-on-year view as well sequentially. I guess, if you look at your gross margin results but then look at Q2, it's 17 basis points higher in Q2 at pretty similar revenue levels. What's driving the increase? Is it more better utilization? And then what – if you can speak to Precision Devices on what's driving that upside in gross margins, I'd appreciate it. Thank you.

Yeah, Bill. This is John. With respect to gross margins, I think you're going to see sequentially, again, based on the guide, pretty similar gross margins in Q1 and Q2. Let me start out, versus our expectations going into the quarter, a couple of things. Our capacity utilization was a little lower given that our largest customer demand dropped, so we cut back production. That impacted factory capacity utilization unfavorably. In addition, we had some impact from FX rates, the dollar weakening versus the renminbi and the Malaysia ringgit. We are seeing those two factors will probably continue into Q2. What we really see in the back half of the year, where we expect margins to increase significantly in our Audio segment, is really it's a higher mix of new products with both our largest customer as well as other customers. We also see substantial improvement in back half of the year capacity utilization. Those are the two big factors that we see benefiting the back half of the year that weren't there in the first half of the year.

Okay. Thanks, guys.

With respect to Precision Devices, yeah, big increase year-over-year. That was impacted by – they went on a pretty significant lean journey within their existing manufacturing facilities. In addition, they were benefited by higher margin on the acquired business. So those two factors. So we're seeing, for the full year, some pretty significant year-over-year improvements in margin in that. (24:40)

Terrific. Thanks for the color, guys, appreciate it.

Sure.

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

Hi, Jeff. Hi, John. First question's on the intelligent mic wins you have. I'm hoping to get some color on the smartphone wins, whether the models you've won are kind of niche models or flagship. And then the non-smartphone, what kind of application is that and what are Knowles' advantages that are helping it win that?

Yeah. So generally speaking, I think there's a few things that – let me talk about what drives it first. I think that's probably where I'd rather start here. But think of it in terms of, first of all, edge processing, this is a really important topic. You're going to hear more and more about this as time goes on especially as it relates to audio. And there aren't really a lot of offerings out there that focus on audio edge processing. We are in a very unique position. It improves the user experience, the response times. There's better privacy. There's better accuracy. So that's number one. Number two is it's a way of driving improved audio performance. And what we see is, is that some of our competition – and we're still focused on this – are focused on improving acoustic performance, extremely important. But what we see is improving audio performance requires a combination both of the signal processing, the acoustics, and the algorithms together in order to really make leaps in terms of audio performance. And then the last thing that we're seeing across – this is across all our markets, is this idea of an open platform for innovation around audio. If you think about in the majority of the markets that we are in today like ear and mobile, a lot of our customers get their algorithms and their products or their processors from the same people. And they get the same access to the same features. We're actually allowing them to take another step and develop their own features or use third-party features in order to start differentiating their products. So we see that as a real advantage. Now, specifically to the three customers, the first customers in China are two Tier 1 guys that you'll – everyone will know the name of that are going to start using the smart mic in Q2, and it will be at the higher end of their platform. But from my perspective, what we see is, is if you think about other customers in the markets that have certain features that are extremely important on the audio side, it usually proliferates across the majority of their product categories. So we would expect over time that these customers would start to use the same feature across multiple products in their portfolio. As far as the one customer that will be using the multicore DSP, it is an IoT product. It will be introduced later this year, will begin shipping very, very soon. And until it's like closer to launch or it is launched, I'm not going to say too much about it, but we're very excited. I think the key theme here is that they're not the only ones. Everyone is seeing value in this multicore DSP specifically for machine learning and artificial intelligence audio algorithms.

Fair enough, Jeff. And then on the MEMS microphones, you talked about 20% being IoT, and ear, I guess, non-smartphone. Was that a comment on revenues I assumed or was it units?

Yeah. Roughly 20%.

And what's the ASP difference here to understand (28:15)?

Roughly 20%.

Yeah, roughly 20% in 2018. We're expecting maybe a little higher, but just over 20% of revenue would come from IoT and ear.

That's microphone revenue.

Microphone revenue, correct.

Microphone. And the ASP difference just to understand?

The what difference?

I'm sorry, the ASP difference for the products that fall into IoT and ear versus smartphone?

I guess, I don't always think about this in terms of ASP. I think of it more about margins. And the margins are quite similar across these markets. I would say that, for the most part, whether in mobile, IoT, or ear, you have stratified portions of the market where you have higher-end mics, mid-range mics, and more, I would say, basic mics. And I think you have that same thing going on around ear and IoT. So the margins are roughly the same.

Great. All right. Thanks, guys.

Your next question comes from the line of Charlie Anderson with Dougherty & Co. Your line is open. Charlie Lowell Anderson - Dougherty & Co. LLC: Yeah, thanks for taking my questions that relates to the growth you guys are seeing now and expect the rest of the year, just thinking about the core microphone franchise. What are you guys seeing in terms of the interplay between units and then ASP declines? I feel like the competitive environment has maybe gotten slightly more favorable so you're seeing better trends for you as far as ASP declines are concerned and then the outlook there, what you're seeing right now.

Yeah. So, if you remember – and this goes back maybe a year or so – we kind of started talking about ASP declines on mature products. And what we have said in the past was that it was in the 6% to 10% range. And what we said in 2016 was we were at the higher end of that range at 10%. In 2017, we were at the mid part of that range at about 8%, 7% to 8%, it got better towards the end of the year. And I think last call, and don't hold me to this, I had said it was going to be maybe in the 5% to 6% range in 2018. We actually kind of are seeing it's going to be lower than that. It's going to be probably in the 4% range in terms of ASP reduction year-over-year. The other thing I would just make the comment, which is a little bit different than measure in terms of ASP declines on mature products, our overall ASP in 2018 looks to be stable year-over-year. So there's really no overall change in ASP because of the new products. And what I would say that that does the not factor in a large amount of shipments of smart microphones yet. And so, in other words, it's the core that is stable even without the new ramping of the smart microphones. Charlie Lowell Anderson - Dougherty & Co. LLC: That's great. I appreciate that. And then, Jeff, I appreciate the color on IA. I wonder, as it relates to next year, and you sort of gave parameters there, is that going to be more smart mic weighted than the multicore DSP, and sort of any degree you could break that out? And as you think about the TAM, you mentioned $1 billion roughly split between those two products would be helpful to understand. Thanks.

Yeah. What I would say here, just (31:23) Charlie, is first of all, there's going to be more new products that are going to come out, right, that we haven't even announced yet. So that's going to drive some revenue in the 2019 timeframe, which we're not going to talk about today. What I would say is, is generally speaking is, if you want to talk on a volume basis, of course, smart mic at this point we would expect on a volume basis probably to be higher than the multicore DSP. But on the on the reverse side, the multicore DSP has a significantly higher ASP. And so I would say it's a little early to start like really beyond kind of giving a range that we can see in terms of revenue, how it's going to break down in terms of by product, because we have new products, we have the smart mic, we have the multicore DSP. But here's what I would just would say is, relative to design activity, we have great traction with Tier 1 guys across all three markets. And that's why I keep coming back to is, is when we go visit these customers, when I personally go visit these customers, what I'm hearing is we're offering a solution that gives them edge processing, allows them to innovate, and improves the performance of their overall device. So we feel really good about where we're headed. We've just got to continue to push forward, post the (32:39) design wins and 2019 will be a breakout year. Charlie Lowell Anderson - Dougherty & Co. LLC: Great. Thanks so much.

Your next question comes from the line of Harsh Kumar with Piper Jaffray. Your line is open. Matthew F. Farrell - Piper Jaffray & Co.: Hey, guys. This is Matt on for Harsh. First of all, congratulations on the quarter. My question was around CapEx trends. I believe you guys mentioned that 2018 could be slightly higher than typical 8% (33:00) range. Is that something you guys still see especially given the strong ramp that we're hearing about in the second half?

Yeah, was it Matt? Yeah. Matthew F. Farrell - Piper Jaffray & Co.: It's Matt .

Yeah, Matt. We had CapEx of roughly $24 million in Q1. Based on the guide, we expect a similar level of spend in Q2. And as I mentioned on the last call, we will likely spend more than 8% of our revenues on CapEx for full year 2018. I think it's important to note that that 2018 spending includes roughly $20 million to support wafer capacity expansion that really relates to 2019 and beyond growth. These are very long lead time investments we need to make. So I would say, once we get through 2018, we make these investments in wafer capacity, you can expect us to come back to a normalized CapEx level of more like 6% to 8% of revenues. But this year, again, as I mentioned on the last call, we will have a higher level of investment spending. Matthew F. Farrell - Piper Jaffray & Co.: Got you. Thanks for the clarity. And then as a follow-up, can you just speak to the use of cash? I know you guys had a big spike after the divestiture last quarter and kind of fell back down here, but how do you kind of look at the balance sheet in the terms of its flexibility moving forward?

Yeah, I'd say, clearly, we have more flexibility on our balance sheet now. I mean, we exited 2017 with leverage ratio below 1.5. I see that kind of similar level through the first half of 2018 as we invest in the business. But typically, most of our cash is generated in the back half of the year. I would expect our leverage ratio to go down as we use cash generated from the business to further pay down our revolver. But nothing has really changed on our capital allocation priorities. It's funding our internal growth initiatives. It's been paying down bank borrowings. As Jeff mentioned, we'll be opportunistic for looking at further accretive bolt-on acquisitions in Precision Devices. So really, again, no change in capital allocation. Matthew F. Farrell - Piper Jaffray & Co.: Awesome. Thanks for the color, congrats again.

Thanks, Matt.

Your next question comes from the line of Bob Labick with CJS securities. Your line is open.

Hi. Thanks. Just following up on the capacity build-out and the CapEx, in prior calls, you've talked about sometimes walking away from lower-end mic sales to free up capacity. How do you decide when to spend incremental CapEx to build out capacity as opposed to just walking away from the kind of lower-end mics and using existing capacity for the newer, higher-margin stuff?

Yeah. Here's what I would say, Bob, I think what we still see is that the market for mics over the next 24 to 36 months is going to grow at a pretty rapid rate. I think what we are debating a lot about, Bob, is about the timing of capacity adds as opposed to the absolutely should we do it. And so there's no doubt that we have seasonality in our business. There's no doubt. And let's look at Q1 as an example, right. We didn't have quite the capacity utilization that we would have liked to have had in Q1, but we had to make a commitment for the back half of the year in order to – and for 2019, quite frankly, as John kind of talked about, and so we're constantly watching this market. I think it's a balancing act here, right, because what we don't want to do is run out of capacity entirely where, like, it brings other competitors into this market. On the reverse side is, of course, we don't want to have too much capacity that we end up having to build capacity just to fill it. And so, I mean, this is a constant topic with myself, the management team, and we take the spending and the CapEx extremely seriously, and we look at it very closely on a continual basis. But I think that the big thing for us is we still see growth in the markets over the next 36 months, and we're going to add capacity and we're going to try and time it as close as we can to the demand.

Got it. Okay, thank you.

[Operation Instructions] Your next question comes from the line of Tristan Gerra with Baird. Your line is open. Tristan Gerra - Robert W. Baird & Co., Inc.: Hi. Good afternoon. Excluding the timing device sale and looking at the various pieces of the business this year, is it fair to assume that top line should still be up mid-single digit this year? And given the weakness earlier this this year in smartphone, do you still have a level of confidence that you can exceed 40% in gross margin in the second half on the basis of mix?

So, let me take the first question first on the revenue side. I think in the first half, based on our guide and our results for Q1, we're going to experience about 8% growth in the front half of 2018. I would say, Tristan, that's with the backdrop of a very difficult China market in Q1 and some, I would say, overbuild and challenges with our largest customer. So we still are achieving 8% growth. So what I would just say is, what we feel comfortable with, we can see that growth kind of continuing for the full year. And as we go into next year, as we go into 2019, we still see robust demand in these markets as we're saying for microphones driven by ear, IoT, and content gains in mobile. What I think – what the big wild card for us is how big could intelligent audio be. And we're trying to size that, though, what that is, but that's probably the real upside as we go into 2019. Tristan Gerra - Robert W. Baird & Co., Inc.: Okay. That's very useful . And then...

Tristan, yeah, with respect to gross margins, I think you had a question about the back half of the year. There will be, as I mentioned, there's three or four factors that will drive sequential improvement from the first half to the second half. I'm not going to give specific guidance, with respect to your question can we hit or exceed 40%, I think the back half of the year, that's a good target for us at 40%. Again, there's some factors, capacity utilization improvement, new product launches, those all are tailwinds to our gross margin as we go into the second half. So I think that it's a reasonable target. Tristan Gerra - Robert W. Baird & Co., Inc.: Okay. Great. And then looking at noise cancellation and intelligent audio, there is certainly just very few competitors out there. Is it too early, are you able to assess what that market share you might end up getting in that segment, let's say, one to two years out in the medium term? And do you think you can replicate the type of share that you have in your core microphone business in intelligent audio?

Yeah, I mean, I think it's a little early to say the exact share we could garner in this new space. I think it's a little early. But I mean, let's just start with the smart mic market. I would be disappointed if our market share on smart mics isn't higher than our share on microphones itself. I really would. Because we're in a very unique position here of putting the DSP inside the microphone with the algorithms, I would say I'd be very disappointed. On the multicore products that are not inside of a microphone, I think that's a little harder yet to kind of like assess yet. So you've got to give us a little more time to think about the share. But I guess I would say, I would be disappointed if we had something sub – at least 30% that we should have in the multicore DSP, that I would say, that would be my number right now. But hard to give an exact number. Tristan Gerra - Robert W. Baird & Co., Inc.: Okay. Very useful. And then finally, the gross margin profile potential in your emerging DSP audio business, is it fair to say assume we cannot say mid-40s potential gross margin?

Tristan, I would just say above our corporate average at this point. It very much depends again on utilization and volumes going through there, but clearly above the corporate average. Tristan Gerra - Robert W. Baird & Co., Inc.: Okay. Great. Thanks again.

There are no further questions at this time. I will turn the call back over to the presenters.

Great. Thanks, everybody, for joining us today. As always, we appreciate your interest in Knowles and 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.