Knowles Corporation (KN) Q4 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Knowles Corporation Fourth Quarter and Full Year 2022 Financial Results Conference Call. My name is Tamiya and I'll be your Operator for today. With that said, here with opening remarks is Knowles Vice President of Investor Relations, Patton Hofer. Please, go ahead.

Thank you, Tamiya, and welcome to our Q4 2022 earnings call. I'm Patton Hofer, Vice President of Investor Relations. And presenting with me on the call today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for 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 and 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, 2021, periodic reports filed from time-to-time with the SEC and the risks and uncertainties identified in today's earnings. 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 to pursuant Reg G, any non GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non GAAP continuing operation basis, unless otherwise indicated. Also, we've made selective financial information available in webcast slides, which can be found in the Investor Relations section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results. Jeff?

Thanks, Patton. And thanks to all of you for joining us today. Before we dive into the Q4 results, I wanted to refresh everyone on the new segmentation that we introduced during our investor update call in November, as this is how we will be discussing the company in the prepared remarks. We separate our audio into two -- in segments in two. The first segment is called MedTech & Specialty Audio, or MSA, which primarily includes acoustic solutions sold into the Hearing Health market. The second is our consumer MEMS Microphones segment, or CMM, which is focused on microphones sold into the ear, IoT, compute and smartphone markets. Knowles now operates and reports under their three segments, Precision Devices, MedTech & Specialty Audio and consumer MEMS Microphones. With that, let me begin with a summary of our Q4 results. We were pleased to report; we delivered results at or above the high end of our guided ranges for gross margins, adjusted EBIT margins and free cash flow, despite a challenging backdrop in consumer electronics market and the COVID related issues in China. In the quarter Knowles generated $197 million of revenue, which was down 16% versus the prior year, driven primarily by weak consumer electronics and market demand and customers inventory adjustments in consumer MEMS and MedTech & Specialty Audio. Consumer MEMS mics was down 31% versus prior year levels, and MedTech & Specialty Audio was down 13%. In contrast, Precision Devices delivered revenue growth of 9% versus prior year levels, as we continue to see robust demand in defense, medtech, EV and industrial end markets. We deliver gross margins of 40.4%, above the high end of our guided range; earnings per share of $0.33, in line with the guidance -- with our guidance; and we generate just shy of $40 million in free cash flow, which was at the high end of our expectation. I believe these results demonstrate that our focus on the markets and price where we have significant competitive advantages is paying dividends, particularly our profit margins and cash flow. For full year 2022, I would like to take a minute to highlight each segments performance individually and their current market dynamics. First in Precision Devices, we delivered record revenue, gross margins and adjusted EBIT margins. Revenue grew 21%, gross margins finished at 47%, an increased to 140 basis points versus prior year levels. Adjusted EBIT finished at $68 million and grew 29% versus the prior year. We continue to see strong organic growth in the mid to high-single-digits going forward driven by defense, medtech, and EV market. Both of our product categories, high performance capacitors, and our filters continue to demonstrate our superior technical capabilities, providing a competitive advantage for Knowles in markets we serve. Second, our MedTech & Specialty Audio delivered record gross margins and adjusted EBIT in the year. Revenue was flat with prior year levels and strong growth in Hearing Health market in the first half was offset by customer inventory adjustments and a softer end market demand in the second half. Gross margins finished at 50%, 270 basis points increase over prior levels. Adjusted EBIT finished at $88 million, a 10% increase versus 2021. Although market condition deteriorated slightly for the segment, we’re able to deliver double-digit earnings growth and flat revenues. In the near term, we continue to see customer inventory adjustments and software end market demand. We have confidence in the resilience of this market and day time bookings trends, we expect to see strong sequential growth for revenue and profitability in Q2 2023 as customers inventories normalized. Now onto our consumer MEMS microphone business. Revenue in this segment was down $144 million versus prior levels. 2022 was a difficult year for consumer electronics around the globe as end market demand, customer inventory adjustments, and the impact of COVID lockdowns in China severely impacted the segment top line. In August, we announced our restructuring actions to address current market conditions and dynamics to accelerate our strategy to diversify away from commodity microphones. Today, I'm pleased to confirm all the actions have been put in place delivering greater than $28 million of annualized savings. In Q1, we continue to see weak end market demand in inventory adjustments by our customers. These headwinds are across most end markets and geographies, including PCs and smartphones. Because of the weak demand, we will continue to operate in less than 50% capacity utilization in Q1, negatively impacting gross margins. Despite these near term headwinds, we expect sequential improvement in Q2 for revenues and profitability, and on the beginning of China market recovery and our customers' new products. In summary, for the company, Q1 is normally sequentially lowered due to seasonality, but it's been further impacted by weak consumer demand, inventory in the channel and COVID-related challenges in China as they reopen their economy. I'm proud of the execution by our employees, which has allowed us to continue to generate cash in the face of substantial headwinds. As we look beyond Q1 and Q2, we are anticipating 15% to 20% sequential revenue growth with all three segments contributing. Lastly, I would like to highlight we have secured an extension of our $4 million revolving credit facility until 2028. This reflects the strength of our balance sheet and the expectations to generate significant free cash flow. It also provides a substantial liquidity to supplement internal growth with acquisitions. With that, let me turn the call over to John to detail our quarter. John?

Thanks, Jeff. We reported fourth quarter revenues of $197 million, down 16% From the year ago period, driven by lower shipment volumes and consumer MEMS mics and medtech and specialty audio, partially offset by higher revenues and precision devices. The precision device segment delivered revenues of $63 million, up 9% from the prior year, driven by growth in medtech, EV, defence and industrial end markets. For the full year, PD revenues increased 21% including 18% organic growth and 3%. from an acquisition which was completed in 2021. Full year 2022 revenues were at record levels and driven by strong demand across all of our end markets. In medtech and specialty audio, fourth quarter segment revenue was $2 million, down 13% versus the prior year as our customers reduced inventory levels and we faced difficult year-over-year comparables as the second half of 2021 benefited from strong COVID recovery. For the full year, MSA revenue was flat with prior year levels. Consumer MEMS mic revenues of $72 million was down 31% versus the prior year, driven by weak global demand for consumer electronics, channel inventory adjustments and COVID related issues in China. For the full year, revenue was down 33%, driven by weak consumer demand and inventory adjustments in most end markets and geographies. Fourth quarter gross profit margins were 40.4%, a 190 basis points above the high end of our guidance range and down 290 basis points from the same period a year ago. Precision devices segment gross margins were 48.6%, down slightly from the prior year due to favorable inventory adjustments in Q4 2021 that did not repeat. For the full year, gross margins finished at a record high of 47.2% and up 250 basis points over prior year levels, driven by favorable product and customer mix, factory productivity improvements and the acquisition we completed in the first half of 2021. Medtech and specialty audio segment gross margins were 51.6%, up 120 basis points versus the prior year, driven by favorable product mix and foreign currency benefits. For the full year, MSA delivered record gross margins of 49.9%, up 270 basis points over prior year levels, driven by favorable product mix, productivity improvements and benefits related to foreign exchange. Consumer MEMS microphone gross margins for the fourth quarter were 23.9%, down more than 11 percentage points versus the prior year, driven by significantly lower factory capacity utilization, pricing and unfavorable mix, partially offset by benefits to the restructuring actions implemented in the second half of the year. For the full year, gross margins were 28.2%, down 960 basis points from the prior year, driven by unfavorable capacity utilization and product mix, partially offset by benefits of the restructuring actions announced in August. For full year 2022, total company gross margins were 40.6%, down 110 basis points from 2021 with record annual gross margins in both the PD and MSA segments, more than offset by significant year-over-year margin declines in the consumer MEMS mic segment. R&D expense in the quarter was $15 million, down more than $4 million from the prior year, with the reduction driven entirely by lower incentive compensation costs and the benefits of the restructuring actions taken in the consumer MEMS microphones. SG&A expenses were $27 million, $3 million lower than prior year levels, driven by lower incentive compensation cost. For the quarter, adjusted EBIT margin was 18.9%, 190 basis points above our expectations. For the full year, EBIT margins were 18.6%. EPS was $0.33 in the quarter at the midpoint of our guidance range. Now, I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $48 million at the end of the quarter. We generated cash from operations of $47 million, slightly above the midpoint of our guidance range. Capital spending was $7 million in the quarter. For full year 2022, free cash flow was $54 million, representing just over 7% of revenue. We repurchase 2.3 million shares at a total cost of 44 million and exited the year with cash net of debt of $3 million. This marks the first time since the spin off, we've ended the year in a net cash position. Moving to guidance for the first quarter of 2023. We expect total company revenue to be between $140 million and $155 million, down 27% versus the same period a year ago. With the decline in revenues driven by weak demand in consumer MEMS mic, inventory corrections and medtech and specialty audio, partially offset by year-over-year growth in precision devices. We estimate gross margins for the first quarter to be approximately 32% to 35%, down eight percentage points from the year ago period, driven by low factory capacity utilization and unfavourable mix in our consumer MEMS mic medtech and specialty audio segments. R&D expense is expected to be between $16 million and $18 million, down $3 million from prior year levels, driven primarily by prior year restructuring actions in the consumer MEMS mic segment. We're projecting selling and administrative expense to be between $25 million and $27 million, up $2 million from the year ago period, driven primarily by higher incentive compensation cost, partially offset by restructuring actions we've taken in the consumer MEMS microphone segment. We're projecting adjusted EBIT margin for the quarter to be in the range of 2% to 6% and expect EPS to be within a range of $0.01 to $0.07 per share. This assumes weighted average shares outstanding during the quarter of $94.8 million on a fully diluted basis. We're forecasting an effective tax rate of 16% to 18% for the quarter and full year '23 which reflects an expected change in jurisdictional income and the impact of the unmet conditions or tax holiday in Malaysia. For the quarter, we expect cash generated from operations to range between $15 milloin and $25 million, capital spending is expected to be approximately $5 million. Given the current macro headwinds and uncertainty in the market, we'd like to provide some select commentary as it relates to our expectations for the second quarter of '23. As Jeff mentioned, we're expecting sequential revenue growth of 15% to 20% with all three segments expected to drive the increase. We also expect gross margins in the second quarter will return to 40% or more, driven by improved capacity utilization and favorable mix. I'll now turn the call back over to Jeff, for closing remarks. Jeff?

Thanks, John. But there's no doubt, we are dealing with some significant challenges in the global markets. Our Q4 and 2022 results continue to demonstrate our strategy to focus on high value markets and products is allowing us to achieve strong EBIT margins and continuing to generate cash. Looking at 2023, we are expecting significant sequential improvement from Q1 to Q2 in both revenue and profitability and remain confident in our ability to achieve our midterm targets of 22% to 24% EBIT margins, and 15% to 17% free cash flow. With that, we can open up for questions.

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Labick with CJS securities. Please proceed.

Good afternoon. Thanks for taking our questions.

Hey, Bob.

So, I just wanted to kind of dig in a little more on what you just gave us in terms of guidance and a look at two into the first half in general, if I do the quick math on the sequential growth in Q2, it looks like you're still looking for about 10% revenue declines there. So, 25 and plus or minus in Q1, 10 in Q2. The question is, can you talk more about the first half end market demand versus inventory corrections, and really talking about the end market demand for that first buy segment if you because in a new segment, orientation that you've laid out for us?

Yes, Bob, happy to do that, provide some additional color on Q2, and also just like maybe first start with Q2, but then maybe delve in a little bit about what we see right now for full year. But let me start with the Q2, let me break this up by the business units. As I said in the prepared remarks, we expect about 15% to 20%, sequential revenue growth in Q2 over Q1. So, first in the MedTech, and Specialty Audio, what I'd say here is we're fully booked for Q1 already. And I think we're probably a little ahead of normal where we'd be at this time. So, we're feeling pretty good that -- what's included in our guidance for Q1 is very, very achievable. And the trend generally, is that as we move through the quarter, the bookings are getting better. Even in Q2, we're already seeing strong bookings in Q2. So, I think -- when we think about the sequential growth improvement in Q2, I think, we're pretty happy about where we are with that. In the PD space, I would say, it's kind of a similar story. The current bookings, which are even longer than out then where we would be in the MedTech and Specialty Audio are pretty good. And the expectations of pros and defense, EV, MedTech are quite good. So, I think we feel pretty good about that as well. And lastly, in the consumer MEMS market, I would say, I'm cautiously optimistic for modest improvements in Q2, and I think the majority of that will be in China improvements. Right now, if I were to sit there look at my forecasts or how I look at China, China's at a really low point in Q1 still. And we do see some pretty nice growth sequentially, not year-over-year yet, but sequentially. But there's still inventory clearly in some of these places. And I would point out specifically compute, we're not seeing a real recovery or move out of the inventory till probably the back half a year. So, overall, again, 15% to 20% sequential growth. Now, I'd like to just take make a comment -- few comments about 2023. I'll preface this, this is a very fluid situation. It's not guidance, it's more just kind of when I'm thinking about, and I'll go through it by segment again. So, first for Precision Devices, very strong defense markets we're expecting in 2023. I'd say steady growth in the MedTech portion of Precision Devices. And then the last piece in terms of growth is EV. And I would say since the last earnings call, our visibility into growth, to nice growth in this space for 2023 looks pretty good, the bookings have been strong, and we expect them to continue to be strong. And that's being driven by the kind of the abatement of the global shortage of chips. First, for automotive, but also more of our designs are now entering production and we have more confidence that rendering production that's going to drive growth. We are experiencing some softening in the industrial markets, with inventory starting to come a little bit more elevated than normal in a distribution channel. But overall, I would sit there and say, we still expect your mid single-digit growth for PD in 2023. In the medtech space for a full year, I would say, based on what's going to happen in the first quarter, which is there is this inventory correction. I would say we're expecting the full year to be flattish for the segments. All of our data points and discussions with our customers lead us to believe that we will return to growth in this business in the second half of the year. But with the top first quarter already being down versus prior year, it's probably going to get the top to get more than a flattish business for the full year. Now, lastly, probably you're still the one that I probably have the most, I would say wide variety of outcomes would be the consumer microphone business. I mean, there's a lot of people who are predicting, I would sit there and say, a big upswing in the back half. I mean, it could happen. But I'm not calling the bottom here. But right now it's good. Again, the first apps continue to be impacted by demand in China, inventory clearing, I would say we'll definitely see sequential improvement from the first half based on normal seasonality in the back half of 2023. And there's cautious optimism on return the growth in the second half for the segment driven by normal seasonality, inventory being out of China and a recovery in China. So I know it's a long answer. But all in all, I guess what I would say given the PDF mid single-digit, MSA relatively flat and given us first half challenges with CMM and I would say upside downside right here, kind of middle of the road, we see revenue being flat full year in 2023. I mean, I hope that kind of gives you some color on all the markets with a lot of markets. But I want to make sure we cover that.

Yeah. That's super helpful. And then it doesn't sound like this is the case at all. But I just want to clarify. In terms of some of the changes, is there any market share shifts of any node, doesn't sound like there's any major certainly like any major losses, despite, everything that's going on. But any market shifts potential wins or how are you viewing the competitive landscape in this difficult macro environment?

I would say, Precision Devices are getting really hard identify the real competition here. I don't think there's any shifts, I would sit there and say we're taking share in the defense portion of that market. And it's easy with the market. So I don't know how you sit there and start taking share. We're just capitalizing on a new market in terms of PD. In medtech and specialty audio, I would sit there and say, we kind of took some share last year, I think those share gains are sustained. I don't think we'd see a lot of changes in that either up or down in terms of share, we have relatively high share in that business. And then the consumer nodes business, I really can't point to and sit there and say we've lost this or we won this and changing shared significantly. I would say the consumer space we're probably taking more lower margin business in the short term. And we would want because we're trying to use it -- optimize our capacity utilization. But really to get the improvements that we're hoping for in the back half from this business, we're going to have to get the full capacity utilization or near it in the back half of 2023.

Got it. Okay, great color. And then last question for me, I promise I'll jump back in queue. But it just relates to what you just said in terms of -- you gave us the update on the restructuring, you said it's complete. I think you've planned the capacity drawdown so to speak back in August, or so before that probably the first half, middle of last year. Are you done with restructuring? Is there more given that the outlook now that you need to do to take out, or how are you going to -- how do you feel about the level of capacity that you have after this restructuring?

I mean, I feel pretty good about the level that we have right now.

There's a lot of background…

Hey, Bob, there's still a lot of background noise on your side.

Okay. Sorry, just one last question. So if you can just answer, I'll hit mute.

Yeah, yeah. I’ll answer it. So as far as the capacity utilization, our capacity we have, I think we feel pretty good about where we're at, we took out again, a fair amount of capacity last year. And I think when the market recovers, we feel comfortable that we can fill that capacity with reasonably good gross margin business. As far as restructuring, I think if there's one thing about it, you can say we're not shy about taking action when necessary. And, you know, we’ll forward with the restructuring if it becomes necessary in any of our business if it makes sense. So that's how I would answer that question.

Great. Thank you so much.

Thank you. Our next question goes to Christopher Rolland with Susquehanna. You may proceed.

Hey, guys, thanks for the question, and thanks for all that info. I don't know, if I followed all of it, but there was a lot there. I guess, maybe asking a different way for March. Can you talk about, I think I have you guys down roughly 25% sequential? Can you talk about the three segments and either force rank them, or how they kind of apply to that 25%? My next question will be about inventories. But I'm not quite sure how sell-in is affected here for each of these segments into March?

Yeah. So for the March quarter, I would sit there and say, in terms of Q4 to Q1, yeah, so I would just sit and say, in precision devices, we -- typically seasonally Q1 is down, we were expecting growth in this business, again, in Q1 year-over-year, but it is down sequentially. And just as fiber goes on here, we typically give our price increases at the end of the year, that does sometimes drive people to want to order more in the previous quarter, especially in our distribution channel, where they can get a lower price before the before the end of the year. Now, it's very difficult to control that. But that's driving some sequential decline in Q1, in the Hearing Health business, MSA, I would sit there and say, we had a very strong first half of 2022, it's definitely slowed down. If you look at some of our hearing aid customers, they're starting to report, they're basically pointing to 1% to 3%, 1% to 4% full year growth in Hearing Health market, weighted heavily towards the back half. So they're expecting the first half to be down. So we're dealing with the first half being down in that business, the end market, but also inventory in the channel. And so, but I would, as I said, what I kind of see in this business is we are already fully booked for Q1. So the numbers that we're thinking in our guidance, we're already fully booked, which is probably a little earlier we expect. If we go in Q2, we're already starting to see bookings that are stronger than kind of margins 15% to 20% sequential growth. So I think I feel pretty good about that business, going into Q2 and in the back half the year. I think the biggest wildcard is the microphone business. We're not seeing anything is recovering in Q1. Q1 is a very challenging quarter. We're running, sub-50% capacity utilization. We are expecting some sequential improvement in Q2. But I would say it's not a reduction or inventory coming down. It's just some recovery in China from what I would say, Q4 and Q1 being extremely low. And so, as I said, I'm cautiously optimistic, that this business can return to growth year-over-year in the back half of 2023.

Okay. I guess, first following up on that, I guess, maybe I don't totally understand if you're fully booked. I believe you're still implying a sequential drop into Q1 for MEDTECH. Why would that be the case, if you were fully booked out?

Well, it's fully booked out to that lower expectation. But I would say it's skewed toward the end of the quarter that the shipments are going to happen.

Okay, Okay. And then my second question is around inventories. I mean, if we have this very large increase in June, I guess there's two things there. First of all, I'd love to understand the full industry dynamic perhaps you can quantify even, how this inventory dynamic looks? Maybe revenue out there in terms of inventory that needs to be burned threw in March in order to get that strong seasonal June. I assume, that that's why June is so strong here because of this, this inventory dynamic overall. And then, just to add one more things to that, I apologize. But for your largest customers, I think they're still your largest customer. A lot of people are guiding for a weaker June than we would have expected. And do you anticipate that in your guidance, or is it now at the point where it's not meaningful?

So, I mean, there's so meaningful customer, but we're not going to make any comments about our shipment specifically to them. But here's what I'd say is, if you look at the sequential growth that we expect from Q1 to Q2, it is the vast majority is with between PD and MSA. So PD and the MEDTECH and specialty audio, I would say on an absolute basis, it's incremental that we're expecting sequential growth in Q2. So it's not a huge amount of sequential growth. Secondly, as far as inventory goes, I mean, we're following a lot of same things you're following in terms of mobile phone shipments, in terms of PCs. So let's give you one example. We just got the data for January sales on handsets in China, it was not good. I mean, it was not good. And so we're still not seeing the inventory come out of the channel that is there in terms of finished product. And I would sit there and say for PCs, we've talked to the customers. But we're also looking at what industry saying is, and most people are saying that the inventory won't be cleared out till the end of the second quarter.

Okay, great. Thank you very much. That's helpful, Jeff.

Thank you.

Thank you. Our next question comes from Anthony Stoss with Craig-Hallum. Your line is open.

Hi, guys. Jeff, let me start with you. I wanted to really focus in more of the PD side, which is still doing quite well, do you have view on the inventory in the channel, particularly just for the PD side? Where do you think it is?

I would sit there and say that, the majority of stuff we do is with the custom stuff, which is defense, medtech and EV. I would say that, there isn't a lot of inventory in the channel at all. I think they order for specific bills, we deliver their custom products, we're not seeing people say, oh, I got too much inventory in that portion of the market. So if you look at the PD business, I would say, the industrial/distribution business was somewhere in the neighborhood of $50 million, $60 million on an annualized basis. We are definitely we watched that inventory, it definitely, especially in the distribution, where we can see it, it has been starting to creep up some. So, we are expecting, a little bit of weakness here, in the short term. But, overall, we still expect mid single digit growth for this business in 2023. I mean – and driven by very strong defense growth, very strong EV growth and steady medtech growth.

Got it. And then it's just the nature of your competitors. And I know you guys have shied away from really the mobile market. But I'm curious, generally, what you're seeing on ASPs? And maybe I guess, I'm more interested on the PD side are your competitors acting fairly rational at this point?

I would say, in the PD space, again, most of our stuff is custom long-term contracts. And I would sit there and say, I haven't seen much of pricing on pressure at all in that portion. There’s been a little bit more discussion in that distribution/industrial side, on pricing. But it's not, big now I'll make a comment on the CMM business. I'll be honest, I mean, the pricing has been challenged, as we in Q4 and Q1. If you look at 2022 and 2021, 2020, we really limited price erosion in that microphone business for the last three, four years. We've done a pretty good job of keeping that sub for even sub 3%. But as you look at the end of this year as we started saying, okay, we got to fill some of this capacity, the price erosion has become more, and we're expecting that's the kind of persist in the first half of 2023. Because there's a lot of excess capacity, chasing less business and so we’re hopeful of new products, and things will happen towards the back half of next year and into 2024 that will reverse that trend again. But in the short term, it's kind of tough on pricing and that business. But I'm Hearing Health, I think, business or MSA business. I think we're the dynamics really haven't changed dramatically. I think we're seeing essentially flattish pricing.

Yeah, Anthony, just kind of just say add on – on PD, one of the big drivers of one of the drivers of gross margin expansion in 2022 was pricing, we increase gross margins, over 250 basis points. There's some mix. There's some productivity improvements. But we've also been really good at passing on our inflationary input cost to the customers through price increase.

That makes sense. And John, since I have you, I wondering kind of your view on the full year CapEx, I know you gave us for Q1. And on top of that, you guys have done a good job of free cash flow over the last 12 months, what are your thoughts now, given on the reduced expectations are 2023? Where your cash flow goes? And on the past year, we're hoping that nearly it doubled them? And I'm curious what your updated view is for free cash flow?

I thought you'd – you mean CapEx or through cash flow. From CapEx, and I think we're going to – yeah, we're going to be kind of in the 4% to 5% of revenue from a CapEx standpoint, with more of it skewed to the PD, and MSA segments, we clearly aren't going to put in more CapEx for capacity and CMM. So I would say two thirds of our CapEx in 2023, will go to PD, and MSA. A – John Anderson: And I think it's worth just mentioning on the CapEx side, Tony, one point, like 65% 70% of our CapEx used to go when we were at 7% 8%, towards the microphone business. Now, it's like 33%, of 4% to 5%. And so you can see how we're shifting where we spend our dollars. In terms of cash flow. I mean, despite some pretty tough macro conditions, we still delivered 7%, free cash flow, the percent of revenues in 2022. And we had a big headwind, Tony, with networking capital. Inventory increased our payables because we really started turning off the spigot, our payables were at a historic low as we exited 2023 -- 2022. So it's a $40 million to $50 million working capital, headwind in 2022. We don't expect that to recur in 2023. You know, that's one of the metrics that I feel pretty good about is, we have a very reasonable shot at getting back to that 15%. So kind of doubling the 2022 rate as a percent of revenue in 2023 and, again, not having the headwind being a little more disciplined on our CapEx, and then some operating expenses. A – Jeffrey Niew: So that kind of points to – you’re know, getting back to the free cash flow percent of sales back to where we were in 2021.

One last question if I can sneak it in and maybe I misheard. We talked about kind of second half growth. For Q3, the September quarter, are you calling for September 2023 to be larger than September 2022 same thing with December? A – Jeffrey Niew: Yes, I would say, – yes, I would say the answer does yes. You know, I think, you know, we just didn't break it down by segment. We're expecting growth, you know on precision devices in the back half over the back half of 2022 that we did all the dynamics we've talked about. In medtech, I think we started seeing as inventory correction in the back half of 2022. I think we have a lot easier paths. And again, the market is expecting, the end market, our customers, and there's a lot of data out there are expected to return back to growth in the back half of the year. So we're expecting some nice growth year-over-year. The wildcard is really around the microphone business. You know, I think, you know, right now, if I were to sit here and say, yes, I would expect year-over-year growth in the back half, but I'm being very cautious and calling that out. And I would sit there and say, if we really start seeing really nice growth in that business, and there's a recovery. You know, I kind of said in my – to Bob's question, we will end up flattish when we start seeing some strong growth in the microphone did to the back half, we’ll do better than flattish for the full year.

Got it. Thanks, guys. Appreciate it. Best of luck. A – Jeffrey Niew: Thanks.

Thank you. [Operator Instructions] Our next question comes from Suji Desilva with Roth Capital. You may proceed.

Hi, Jeff. Hi, John. Maybe hitting a sub-segment, you haven't talked about much yet. The EV auto market, can you talk about what the potential for that to ramp up is in terms of program visibility. I know it's longer visibility, and whether that can grow to be a material part of the revenues two or three years out? A – Jeffrey Niew: Yeah, I think we're kind of mentioned that, you know, so I think last year, we had some reasonable growth last year. And I think we set the expectation was going tot be around $15 million in sales at the EV business. It actually was slightly over that. So we exceeded that. I think we could have probably shipped more into that segment, if it wasn't for the chip shortages that a lot of our customers were experiencing. Right now, I would sit there and say for this year for 2023, we would expect another 30% to 40% growth in terms of revenue, so that it will be over -- probably over $20 million in revenue. But I think the other part about this, Suji, I just kind of would make a comment is, the bookings are becoming very strong. And so, I mean, I don't want to get into how the bookings exactly translate into when the revenue come. But I'm hearing from the team that we could have, like, in excess of, obviously, with more bookings in the back half, more than $30 million in bookings in this business. And that kind of starts to give you an indication of where that business could probably go in 2024. So, all that said, design wins are strong. It depends on who are the winners three, four years from now. But I think we had said, we hope this business can be like $50 million, $60 million in three to four years. I think that's achievable. If we win with the winners, we'll see who those are in terms of how much content we have, it could be even more than that. So it started to become material later this year in 2024.

Okay. And then other questions for John, perhaps, he talked about a lot of the elements looking ahead to in revenue and gross margin and free cash flow, intermediate term. But in terms of the costs, and you already did the restructuring, and had that question before in terms of more restructuring, is the revenue -- is the -- I’m sorry, is the costs OpEx in 1Q, way to think about a run rate going forward from here, John, is there more flow through with the restructuring benefit? And is that the right baseline to start with as we move forward?

Yes. If you look at Q4 and actually the numbers I gave in Q1, the benefits are fully of the restructuring, we announced last August are entirely baked into that, I've talked before about a $45 million run rate, which is about 180 million annualized, that's kind of what I would expect sitting here today that is up over 2022 levels, and it's really driven primarily by incentive comp. Bonuses were a very low in the consumer MEMS segment, as well as the corporate in 2022. So we're going to have a pretty decent uptick, because we're planning to get back to normalized levels in terms of incentive comp. We also are adding some headcount in the PD to support the growth there. And then we also have conversely benefits from the restructuring we took. So again, I think, kind of a $45 million run rate is appropriate.

Okay. Thanks, John.

Sure.

Thank you. Our next question comes from Christopher Rolland with Susquehanna. You may proceed.

Chris? Q – Christopher Rolland: Sorry about that. Mute button. This one is for John. And I might have heard this incorrectly. So I apologize. But did you guide Q2 to an EBIT margin of 22 to 24? I have gross margins -- well.

Yeah, Chris, I said gross margin, we have sequential – Jeff mentioned sequential growth of 15% to 20%. And I said with that gross margins we'll be back at 40% or above in the – in Q2. Q – Christopher Rolland: Yes. Okay, I thought I heard improved cap utilization and favorable mix 22 to 24 EBIT or -- I made that up.

Yeah, I didn't say that. But that gross margin, getting back to 40% is dependent on increased capacity utilization, but we do…

I mean there is going to be a significant improvement in EBIT margins in Q2, you know, but.. Q – Christopher Rolland: But not that level, yeah.

If gross margin in Q1 – Q2 look at the revenue, that's the most -- that's going go right to the bottom line..

It kind of gave you a pretty good trail. If you think of sequential growth, gross margins at 40 above and I just said the run rate on OpEx. So you can… Q – Christopher Rolland: Yeah, I must have had some bad notes. Apologize, guys. Thank you.

No worries. Thanks, Chris.

Thank you. There are no other questions waiting at this time. [Operator Instructions] There appear to be no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect your line.