Knowles Corporation · NYSE:KN
Knowles — Investor Day (February 2014)
67 slides from Knowles's investor day presentation, Feb 19, 2014
Slide 1: Knowles: The Acoustics Pioneer
Knowles: The Acoustics Pioneer February 2014
Slide 2: Cautionary Statements
Cautionary Statements A number of forward-looking statements are included in this presentation, including 1Q14 projections and mid-term targets. Forward-looking statements are any statements that are not historical facts. The words “believe,” “project,” “plan,” “potential,” “will,” “target,” and sim
Slide 3: Non-GAAP Disclaimer
Non-GAAP Disclaimer In addition to the GAAP financial measures included in this presentation, Knowles has presented certain non-GAAP financial measures. Knowles uses non-GAAP measures as supplements to its GAAP results of operations in evaluating certain aspects of its business, and its Board of Dir
Slide 4: Introduction of Presenters
Introduction of Presenters Jeffrey Niew John Anderson President & Senior Vice President & Chief Executive Officer Chief Financial Officer Mobile Consumer Electronics Specialty Components Michael Adell Christian Scherp Gordon Walker David Wightman Co-President, Co-President, Speakers Co-President, Co
Slide 5: Discussion Agenda
Discussion Agenda I. Knowles Highlights II. Specialty Components (SC) III. Mobile Consumer Electronics (MCE) IV. Financial Overview V. Conclusion / Q&A VI. Lunch / Demos 5 5
Slide 6: Knowles: Who We Are
Knowles: Who We Are TOP TIER CUSTOMER ENGAGEMENT units patents CULTURE OF INNOVATION GLOBAL SCALE 6
Slide 7: Knowles: What We Do
Knowles: What We Do Mobile Consumer Electronics Specialty Components Provides the acoustic backbone to Includes acoustic solutions for hearing aids, smartphones, tablets, headsets, laptops and and oscillators and capacitors used in a other electronic products broad range of electronic equipment 2013
Slide 8: Knowles: Why We Win
Knowles: Why We Win DIFFERENTIATED PRODUCTS PROPRIETARY MANUFACTURING PROCESSES ENTRENCHED CUSTOMER RELATIONSHIPS PIONEERING ACOUSTICS EXPERTISE CULTURE OF INNOVATION 8
Slide 9: Key Investment Highlights
Key Investment Highlights Market-Leading Acoustic Supplier with Strong 1 Engineering Relationships 2 Attractive End-Markets Innovative Technology Drives Differentiated 3 Solutions Proprietary Operational Capabilities with Margin 4 Expansion Potential Experienced Management with Proven Track 5 Record
Slide 10: Market Leading Acoustics Supplier, Strong Engineering Relationships
1 Market Leading Acoustics Supplier, Strong Engineering Relationships MARKET LEADERSHIP Product Development Hearing Aid Leadership and #1 Global Supplier Solutions Operational Excellence Strong Financial Microphones #1 Global Supplier Performance Speakers / Acoustic Content Top 3 Supplier Receivers
Slide 11: Attractive Markets
2 Attractive Markets GROWTH STABILE GROWTH STABLE Handset Other Medical Telecomm Military / Industrial Consumer Technology Infrastructure Aerospace Markets % of Total Sales 64% 19% 9% 4% 4% Note: % of total sales based 2013 information. 11
Slide 12: Innovative Technology Drives Differentiated Solutions
3 Innovative Technology Drives Differentiated Solutions Audio $ Content Knowles’ technology stems Sensing Speech Recognition from 500+ patents Embedded Software + Hardware Modules Multi-Media Pace of acoustic features growing exponentially in recent years Integration Voice Knowles Acoustic High Perf
Slide 13: Global Operational Capabilities with Margin Expansion Potential
4 Global Operational Capabilities with Margin Expansion Potential TODAY MID TERM 18 11 More efficient manufacturing footprint Lower cost geographies Focus on productivity and low cost sourcing Targeting $40mm - $50mm of Annualized Cost Savings1 1: Exclusive of costs associated with restructuring. Re
Slide 14: Experienced and Successful Team
5 Experienced and Successful Team Name Position Jeffrey Niew* President & CEO 15+ yrs John Anderson SVP & CFO Average Years of Raymond SVP, Human Resources & Chief Industry Cabrera* Administrative Officer Experience Michael Adell* Co-President, MCE - Microphones Christian Scherp Co-President, MCE -
Slide 15: Knowles: Investment Thesis
Knowles: Investment Thesis STRONG AND PROFITABLE REVENUE GROWTH INVESTMENT HIGHLIGHTS Revenue EBITDA Margin (in $mm) $1,200 Profitable revenue growth 26 % 23 % 23 % Well positioned in high 22 % 22 % $900 21 % growth mobile consumer electronics business $600 $1,215 Stable revenues and cash $1,118 $98
Slide 16: Knowles Specialty Components (SC)
Knowles Specialty Components (SC) Gordon Walker Co-President, Acoustics & Hearing Health 16
Slide 17: Specialty Components Snapshot
Specialty Components Snapshot KEY PRODUCTS TOTAL REVENUE ($MM) AND % CHANGE ACOUSTIC PRODUCTS PRECISION DEVICES $473 Microphones / Capacitors / $500 $448 $437 Receivers Oscillators $400 $248 $215 $215 $300 $200 $100 $225 $233 $222 $0 2011 2012 2013 Acoustics Precision Devices BUSINESS DYNAMICS ADJ.
Slide 18: Acoustic Products: What We Do
Acoustic Products: What We Do HEARING HEALTH PREMIUM AUDIO Hearing Aid Microphones “In Ear Monitors” for musicians and Hearing Aid Receiver enthusiasts Typically >$100 retail (up to $1,000) Receiver content: 1 - 8 receivers per ear Source: Knowles Management 18
Slide 19: Acoustic Products: Key Themes
Acoustic Products: Key Themes 1 Leader in Stable, Resilient Market with Favorable Macro Trends 2 Trusted Partner and Technology Leader 3 Strong Margin Expansion Opportunities 19
Slide 20: Market Overview – Hearing Health Acoustics
Market Overview – Hearing Health Acoustics ATTRACTIVE MARKET DYNAMICS STABILITY OF HEARING MARKET Worldwide Hearing Units Sold (Millions of units) Stable market 11.4 11.9 11.1 10.3 10.6 9.8 Limited Competition 9.4 Market Leader Strong market position with all hearing-aid manufacturers (OEMs) '07 '08
Slide 21: Mega Trends: Hearing Health
Mega Trends: Hearing Health NORTH AMERICA AGING POPULATION EMERGING MARKETS Aged +60 (mm of people in North America) 119 Rapidly aging population 96 Longer life expectancy 51 Increasingly affluent Improved distribution infrastructure 2000 2025E 2050E Population of Adults Aged 60+ Expected to Increas
Slide 22: Acoustic Products: Why We Win
Acoustic Products: Why We Win 1 Leading Product Portfolio 2 Critical Role in Customers’ Products 3 Collaborative Engineering and Development Relationships 4 Most Reliable Partner in the Industry 22
Slide 23: Where We Are Going
Where We Are Going Present Future RECEIVER-IN-CANAL INSTRUMENTS MEMS MICROPHONES Partnered with lead customer in 2004 Product-Technology leadership, MEMs solves two problems for OEMs: Became principal supplier to RIC segment from inception 1. Hearing Instruments require greater stability, consistenc
Slide 24: Low-Cost Manufacturing, Expanding Margins
Low-Cost Manufacturing, Expanding Margins CONTINUED INFLATION … LED TO RELOCATION OF AND FX PRESSURE IN CHINA… SPEAKER & RECEIVER MANUFACTURING Cebu, Suzhou, China Philippines Announced August 2013 First Tranche January 2014 To Be Completed Mid-2015 Estimated ~$10mm in Savings per Year 24
Slide 25: Acoustic Products: Key Takeaways
Acoustic Products: Key Takeaways 1 Profitable Leader in a Range of Attractive End Markets 2 Product and Technology Leader with Close Customer Relationship 3 Significant Margin Expansion Opportunity 25
Slide 26: Knowles Specialty Components (SC)
Knowles Specialty Components (SC) David Wightman Co-President Precision Devices 26
Slide 27: Precision Devices Snapshot
Precision Devices Snapshot KEY PRODUCTS Crystal Oscillators Single Layer Capacitors SAW Filters Multi-Layer Capacitors Thin Film Filters High Reliability Capacitors Precision Devices – Chosen by Engineers 27
Slide 28: Precision Devices: Key Themes
Precision Devices: Key Themes 1 Why We Win 2 Attractive Dynamics in Our Chosen Markets 3 Selected Market Segments 4 Innovation to Solve Customer Problems 5 Margin Expansion Opportunity 28
Slide 29: Precision Devices: Why We Win
Precision Devices: Why We Win Market Segment Customer Focus Intimacy Operational Product Excellence Innovation 29
Slide 30: Attractive Dynamics in Our Chosen Markets
Attractive Dynamics in Our Chosen Markets Small Cell deployments supporting Data Traffic Telecoms Cloud Computing supporting large data centers Smart Phone Technology advancements pushes global Military and Space military communications Medical equipment for an aging population Medical Increasing st
Slide 31: Focused on Specific, Mission-Critical Market Segments
Focused on Specific, Mission-Critical Market Segments Medical Military and Aerospace Opportunity for Telecom Portfolio Expansion via Low Cost Industrial Manufacturing Consumer Electronics Knowles Focuses on Mission Critical Segments where Competitive Differentiation Leads to Strong Margins 31
Slide 32: Knowles Recipe for Success – Capacitor Innovation
Knowles Recipe for Success – Capacitor Innovation MRI Case Study IDENTIFY THE PROBLEM ACHIEVE A BENEFICIAL OUTCOME Requires high-energy, non-magnetic Primary source for the full range of capacitors capable of withstanding non-magnetic capacitors as Knowles high energy pulses Capacitors can now provi
Slide 33: Margin Expansion Opportunity
Margin Expansion Opportunity Operational Reduction in Direct Labor Excellence / Footprint Savings SG&A Transition from four Relocating UK Overhead and SG&A capacitor units into manufacturing to reduction one global operation Suzhou, China opportunities Positioned for $9mm of Annualized Savings 33
Slide 34: Precision Devices: Key Takeaways
Precision Devices: Key Takeaways Profitable Leader in a Diversity of Carefully 1 Selected End Markets Positioned to Build-On Knowles Attributes: 2 Customer Intimacy, Product Leadership, Relationship with Engineering Communities 3 Significant Margin Expansion Opportunity 34
Slide 35: Mobile Consumer Electronics (MCE)
Mobile Consumer Electronics (MCE) Michael Adell Christian Scherp Co-President, Co-President, Microphones Speakers & Receivers 35
Slide 36: Mobile Consumer Electronics Snapshot
Mobile Consumer Electronics Snapshot KEY PRODUCTS STRONG FINANCIAL PROFILE TOTAL REVENUE ($MM)¹ AND % GROWTH $1,000 $778 $750 $670 Speakers / Receivers Microphones $510 $500 $250 $0 2011 2012 2013 ADJ. EBITDA ($MM)² AND % MARGIN $300 $246 $200 $185 $155 30% 28% 32% $100 $0 2011 2012 2013 Profitable
Slide 37: Typical Smartphone Acoustics Applications
Typical Smartphone Acoustics Applications Microphones Speakers / Receivers Noise Cancelling Voice Call Receiver Reduces background Clear sounds noise High Definition Improves Video Loud Speaker Sound Recording High Definition Media Playback Main Microphone Calls / Voice Recognition Hands-Free Ear-Bu
Slide 38: MCE: Key Themes
MCE: Key Themes 1 Attractive Growth Markets 2 Market Leadership 3 Commitment to Innovation 4 Acoustic Content Growth 5 Transition to Integrated Audio Solutions 38
Slide 39: Attractive End-Markets
1 Attractive End-Markets SMARTPHONES AND TABLETS VOLUME HIGHLIGHTS Overall “total” market 2,400 growing at ~6% CAGR Smartphone market 2,000 slowing to low double Volume (M units) digit growth 1,600 Notebook declines offset by Tablet 1,200 Knowles is well positioned in growth 800 markets 400 0 2013E
Slide 40: Attractive Growth Markets – Evolving Market Demands
1 Attractive Growth Markets – Evolving Market Demands Machine Awareness Augmented Listening Sensing Human to Audio Value Machine Speech recognition Speech Multi-Media Recording Music, movies and games Audio Human Communication Traditional Communication Voice Time Market Demands Driving Growth 40
Slide 41: Market Leadership
2 Market Leadership #1 global supplier of microphones Market leader Top 3 supplier of speakers and receivers Key supplier / partner to all major OEMs Standalone Components System Solution Complete systems Shift towards Integrated solutions capabilities Solutions Key Acoustic Inventions Recognized •
Slide 42: Competitive Landscape
2 Competitive Landscape LEADING LEADING ACOUSTIC SEMICONDUCTOR COMPANY COMPANY Applications Understanding Acoustic Innovation MEMs & ASIC Design Proprietary Manufacturing Techniques Mechanical/Industrial Design Product Portfolio Knowles’ unique combination of application knowledge, silicon design, a
Slide 43: Commitment to Innovation
3 Commitment to Innovation KEY HIGHLIGHTS World-class, in-house capabilities Technology Innovation Combination of acoustic understanding and silicon design capabilities Product Strong pipeline of new products Innovation Rapid box development, N’Bass technology, intelligent solutions Manufacturing Pr
Slide 44: Commitment to Innovation – Microphones
3 Commitment to Innovation – Microphones TREND TOWARD HIGHER PERFORMANCE MICS KNOWLES COMMITMENT TO INNOVATION 1 MEMs mic pioneer with >5B shipped to date High Performance Analog 2 Leader in high performance / digital microphones <15% Platform for next generation audio solutions 2011 Digital First m
Slide 45: Commitment to Innovation – Speakers and Receivers
3 Commitment to Innovation – Speakers and Receivers The best “acoustic brain” in the industry with strong pre-development capabilities Unique competence for ultra-thin future speaker solutions Pushing beyond acoustics to include software, silicon, sensors and more Over 6.6 billion pieces sold World’
Slide 46: Acoustic Content Growth
4 Acoustic Content Growth 2008 2012 FUTURE Receiver Receiver Receiver Single Mic Dual Mics Multi Mics Speaker Speaker Integrated Speaker Box/Antenna Addressable Content $1 - 2 $2 - 3 $3 - 5 Opportunities to Increase Content in Each Successive Generation Source: Knowles Management 46
Slide 47: Acoustic Content Growth: Selling Price Rises
4 Acoustic Content Growth WITH EACH NEW PRODUCT, STRONG AND INNOVATIVE SELLING PRICE RISES INFRASTRUCTURE New Microphones ASP by Introduction Year 2013 NPI 2012 Patented microphone technology Avg. Selling Price NPI 2011 NPI In-house ASIC, MEMs, and packaging Robust product pipeline driven by new use
Slide 48: Integrated Solutions Model – Future Trends
5 Integrated Solutions Model – Future Trends Components Integrated Audio Intelligent Audio Intelligent Audio Speaker/Receiver Speaker Smart Speaker Modules Integrated Modules Mic/Spkr/Box/Flex/Antenna Microphone (Multi) Mic on Flex Intelligent Audio Smart Mic $ $$ $$$ Capturing Value through Audio I
Slide 49: Integrated Solutions Model – Future Trends
5 Integrated Solutions Model – Future Trends AudioZoom Stereo Capture/Playback 5.1 Surround Sound Capture / Playback Active Noise Playback Intelligent Cancellation Optimization Solutions 2mic Noise Wind Noise Reduction Reduction Hardware / Software System Concert Future Knowles Products Gesture Reco
Slide 50: MCE: Key Takeaways
MCE: Key Takeaways 1 Attractive Growth Markets 2 Market Leadership 3 Commitment to Innovation 4 Acoustic Content Growth 5 Transition to Integrated Audio Solutions 50
Slide 51: Financial Overview
Financial Overview John Anderson Senior Vice President & Chief Financial Officer 51
Slide 52: Financial Highlights
Financial Highlights Significant Margin Stable market and Strong track expansion revenue and Disciplined content record of opportunity cash flow approach to growth in cash flow to drive from capital Mobile generation earnings Specialty allocation Consumer growth Components Earnings Growth Through Ro
Slide 53: Track Record of Consistent Revenue Growth
Track Record of Consistent Revenue Growth REVENUE ($MM) KEY GROWTH DRIVERS Strong position in growing $ 1,215 $ 1,118 smartphone and tablet market $ 983 Content growth through multi-mic adoption and integrated acoustic systems Hearing aid penetration in aging populations and developing markets 2011
Slide 54: Strong Margins and Cash Flow Generation
Strong Margins and Cash Flow Generation ADJ. EBITDA (AND % MARGIN)¹ $mm $307 KEY DRIVERS $246 $261 Higher volumes and scale efficiencies 25.0% 23.4% 25.3% 2013 Adj. EBITDA margin expansion 2011 2012 2013 due to increased ASP on new products and improved operating leverage FREE CASH FLOW (AND % OF RE
Slide 55: Margin Expansion Strategy
Margin Expansion Strategy TODAY MID TERM Footprint 18 11 Consolidation Movement to Suzhou Cebu Lower-Cost Regions UK Suzhou Low cost materials sourcing Operational Lean focus / productivity enhancements Excellence Further back office streamlining Improved operating leverage Expect to Drive $40mm - $
Slide 56: Efficient Capital Structure and Capital Allocation
Efficient Capital Structure and Capital Allocation STRONG BALANCE SHEET AT SPIN CAPITAL ALLOCATION PRIORITIES (US$ in millions) At Spin Organic growth investments Cash $40 Continued funding of research and development Total Debt $400 Productivity improvements Net Debt $360 Expanding manufacturing fo
Slide 57: 2013 Historical Data and Projections for Q1'14
2013 Historical Data and Projections for Q1’14 (non-GAAP) Q1’13 Q2’13 Q3’13 Q4’13 Q1’14E Revenue ($M) $276 $297 $312 $330 $260-265 Gross Profit ($M) $97 $106 $122 $125 $88-91 Gross Profit Margin (%) 35.2% 35.7% 39.2% 37.9% 34.0-35.0% Operating Profit ($M) $39 $50 $69 $66 $31-33 Operating Margin (%)
Slide 58: Mid Term Financial Model Targets
Mid Term Financial Model Targets Where We Are Where We Are Going Long-standing acoustic solutions market leader Increased market share in high growth, high margin businesses Highly diversified products Expansion into adjacent markets Global footprint Additional customer penetration and content Exper
Slide 59: Conclusion + Q&A
Knowles Conclusion + Q&A
Slide 60: Key Investment Highlights
Key Investment Highlights Market-Leading Acoustic Supplier with Strong 1 Engineering Relationships 2 Attractive End-Markets Innovative Technology Drives Differentiated 3 Solutions Proprietary Operational Capabilities with Margin 4 Expansion Potential Experienced Management with Proven Track 5 Record
Slide 61: Appendices
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Slide 62: GAAP Financial Measures and Non-GAAP Financial Measures
KNOWLES CORPORATION GAAP FINANCIAL MEASURES AND NON-GAAP FINANCIAL MEASURES (1) (unaudited, dollars in millions) 2013 2012 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Revenue $ 276.2 $ 296.7 $ 311.6 $ 330.3 $ 1,214.8 $ 261.1 $ 260.7 $ 299.6 $ 296.6 $ 1,118.0 Non-GAAP Gross profit 97.3 105.8 122.0 125.1 450.
Slide 63: Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
KNOWLES CORPORATION RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (unaudited, dollars in millions) 2013 2012 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total GAAP Gross Profit $ 94.9 $ 100.1 $ 117.9 $ 118.6 $ 431.5 $ 88.6 $ 92.9 $ 111.5 $ 114.0 $ 407.0 Asset Impairment and Related Inve
Slide 64: Reconciliation of Segment Non-GAAP Financial Measures to GAAP
KNOWLES CORPORATION RECONCILIATION OF SEGMENT NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES (unaudited, dollars in millions) 2013 Mobile Consumer Electronics Adjusted EBITDA (1) $ 245.7 Asset Impairment and Related Inventory Charges (5.1) Restructuring Charges (7.3) Production Transfers Cos
Slide 65: Reconciliation of Segment Non-GAAP Financial Measures to GAAP
KNOWLES CORPORATION RECONCILIATION OF SEGMENT NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES (unaudited, dollars in millions) 2012 2011 Mobile Consumer Electronics Adjusted EBITDA (1) $ 184.7 $ 154.8 Asset Impairment and Related Inventory Charges (1.7) - Restructuring Charges (1.2) - Product
Slide 66: Reconciliation of Earnings Before Taxes to EBITDA
KNOWLES CORPORATION RECONCILIATION OF EARNINGS BEFORE TAXES TO EBITDA (unaudited, dollars in millions) 2013 Revenues $ 1,214.8 Earnings Before Taxes 103.2 Depreciation and Amortization Expense 130.9 Interest Expense, net 42.0 EBITDA (1) $ 276.1 EBITDA margin (2) 22.7% (1) EBITDA is defined as net ea
Slide 67: Reconciliation of Net Earnings to EBITDA
KNOWLES CORPORATION RECONCILIATION OF NET EARNINGS TO EBITDA (unaudited, dollars in millions) 2012 2011 2010 2009 2008 Revenues $ 1,118.0 $ 983.3 $ 730.4 $ 587.0 $ 630.4 Net Earnings 79.1 98.4 109.3 37.3 33.1 Depreciation and Amortization Expense 114.9 84.8 54.4 50.7 49.5 Interest Expense, net 56.5