KNOWLES CORPORATION 17th Annual Midwest IDEAS Conference

Sure. Hold on. Okay, we'll go ahead and get started with the next presentation. First off, wanted to say thank you everyone for joining us today here in person, as well as those of you who are joining via the webcast. My name is Joe Noyons. I am with Three Part Advisors. Up next, we have one of our investor relations clients, Knowles Corporation. They are a specialty electronic component manufacturer traded on the New York Stock Exchange under the symbol KN. Over the last several years, management has taken several strategic actions to position the company to benefit from long-term trends within the MedTech, defense, as well as the industrial markets, and expect that to deliver nice top line growth, margin expansion, as well as strong cash flow generation. Presenting on behalf of the company today, we have the company's CEO, Jeff Niew.

Thank you. I would just like to tell a little bit about the story of Knowles, kind of, I would say, where we have been, where we are today, and where we are headed from here. First, for those of you who do not know, our 2025 revenue, a little under $600 million. We have about 5,000 people globally, a lot of engineering and engineering talent, an important part of what we do. We separate out into two segments. We have our Precision Device segment, which is primarily focused around MedTech, defense, and industrial end markets, selling RF filters, ceramic capacitors, and film and electrolytic and mica capacitors, across all these different applications. I will go into a little bit more detail about this, but it has been a very good business for us, growing at a very rapid rate. Margins have been expanding within this category.

Our second segment is the MedTech & Specialty Audio business, primarily around selling microphones and speakers, very small ones, into the hearing health market. For those of you who are not familiar with that market, it has good trends for the longer term in terms of aging middle-class population in Western countries. An acknowledgment that hearing loss is problematic in terms of causes things like dementia if you do not have it taken care of and is driving growth within this business. Overall, what I would sit there and say, we have a nice portfolio of products, which I will go into more detail about, in some great markets that have great secular growth trends, across all our end markets, and it is kind of showing up in our results. I think it is important first to state, why do we win?

What is the secret sauce of why we are growing at the rate we are growing and expanding margins? A lot of people think of the, use the example of capacitors, as a commodity market. We are not in that portion of the market. We do not participate in the commodity portion of that market at all. We start all of our products and our businesses, start with high-performance technology, unique capability that very few people in the world have. We then couple that with a strong customer and application intimacy. What that means is, if you look at our customer base, I do not know if we have this, we do not have that slide in here, Sarah, right? Oh, no, we do not. But it is in our investor deck of all the people we do business with, and it is a who is who of technology businesses of who we sell to.

So give you an example of some of our customers, the Abbotts, the Medtronics. In the hearing health market, you may not recognize the names, but they are the leaders within the business they are in. In the defense markets, it is the Raytheons, it is the L3s. But we have been doing business with these, for the most part, for better parts of decades, we have been doing business with. If they come to us and say, "I need a capacitor" and, "What do you got in your catalog?" We tend to say to them, "There are people out there who will sell you those type of capacitors." We come to them and say, "I have a problem that needs to be solved," and we will go and design something custom for them. That goes across, again, all our businesses.

Then we have designed a manufacturing process that allows us to take these high-mix, customized products into production at a very rapid rate. That is kind of the themes of why we win. It has really been a winning combination for us. So let me just describe that. Now, what has this resulted in? I think for a long time, Knowles was misunderstood. For those of you who are not kind of familiar with the Knowles story, it was about three years ago, we sold the CMM business, which was selling to the Samsungs, the Apples of the world for cell phones and earbuds. It was a very low gross margin business. It was commoditized. We sold that business. Before we sold that business, you really could not see the power of the rest of the portfolio.

So at our investor day, which we did a year ago May, we showed this is what the remaining businesses have done over that period of time. Now, you can kind of see, in this slide, we have grown at a compounded annual growth rate over a cycle through COVID, through a lot of things that happened from 2017 through 2025 at 8%, on a revenue basis. We have grown EBITDA at 11%. Now, what we sit there and say is, "This is what we have looked at in the past, done pretty well." We can see, and I have been very clear about this, we see our growth rate. This was a combination, this 8%, of both organic and inorganic growth. Our organic growth in this was about 4%-5%. The rest came from acquisitions.

We are now organically growing at a rate that is exceeding the 8% over the last two years, three years, we have been growing at a faster rate. Our EBITDA We have a lot of great things going on here in terms of the idea that we have a lot of leverage on our overhead, both in manufacturing and our operating expenses. It is allowing us not only to grow EBITDA, but also expand the EBITDA margins over time. Okay. Just a little bit more also about this business. We generate a lot of cash. We are a very profitable business. We generate a lot of cash. If you think about our capital expenditures over that period, 2022-2025, we have been spending about 3% of revenue over the period on capital expenditures. That has been trending up.

This year, we'll be closer to the 5% range, which we've kind of said our range is 3%-5%, but that's because the demand has been so strong in our businesses, so we're expanding capacity in a number of different areas. The cash that we've generated, we've bought back a lot of shares over the last few years. We continue to make the commitment to the street that we will buy back at least stock-based comp. That's a minimum. We've been buying far in excess of that, of stock-based comp every single year. We've been paying down debt. Our net leverage ratio was about half a turn at the end of Q2. If you look at historically what we've done, we'll probably be close to zero net debt sometime late this year or early next year.

We used $263 million of the cash we generated to actually buy Cornell Dubilier, which is one of our capacitor businesses, which quite frankly, I think for you who know the story, has been a home run. It really is a story of one plus one equals three. It's our fastest growing product portfolio. The gross margins have expanded dramatically since we've bought the business. We're doing very well with that business. So, a very good story on generating a lot of cash, but also what we do with the cash. If you look at the future, again, you see the past here on the left-hand side, 8% CAGR, including acquisitions, 11% in EBITDA growth. Again, that was including acquisitions. What you see going forward, what we kind of talked about at Investor Day is 8%-10%, including acquisitions.

If you look at over the last few quarters, last almost a year, we've actually been exceeding the 10% on an organic basis only. We have not done an acquisition since the Cornell acquisition. Our EBITDA growth of 10%-14%, we've actually been exceeding that as well pretty significantly, and our cash from operations has been trending towards the high end of the range that we laid out at our Investor Day. So, a lot of what we've kind of said, we wanted to do, we've done, and I'm actually very excited about the future of what the product portfolio, how it's going to perform. So if you break it out now a little different way on the revenue growth, our precision device business is growing at 6%-8%. That's what we said our target.

This year, it's going to grow north of 15% this year, based on the information we provided. Our hearing health business grows at 2%-4%. Those of you not familiar with it's still going to be in that 2%-4% range through COVID, through the 2008-2009 crisis, through the 2001 dot-com bubble. I have a long enough experience with this business. It always grows at 2%-4% at phenomenal margins. The business gets more than 50% gross margins, more than 40% EBITDA margins, so very good grower. We expect to have 4% from acquisitions. We have not done one acquisition now in almost three years. I would say we are being super disciplined in what we do in terms of an acquisition.

If I cannot articulate one plus one equals three and demonstrate that I can deliver on that and feel comfortable, I am not going to do an acquisition. I am not going to spend the shareholders' money on something that is not going to pay back, especially since we have such a great organic plan. On the EBITDA, again, we said 10%-14%. I think we are going to be close to 20% EBITDA growth this year based on the numbers that we have provided through our earnings calls. How do we get it? I would say one comment that we have been pretty clear about, this year we will probably end up in the 24% EBITDA margins range, but we will probably exit the year north of 25%. We have been articulating a path now we see clearly over the next 36 months to 30% EBITDA margins. It is a combination of EBITDA drop through.

It is going to be very strong. Margin expansion through a combination of price with higher value products, factory productivity, and capacity utilization. We have a lot of leverage on our SG&A. I think it is very clear to us now that with what we are doing in the markets we are in, and I would make this comment, med, defense, industrial, we are not like an AI play, for sure. We may have some peripheral second-level AI business, but it is not a significant portion of our business. We are growing in markets that are generally not as cyclical. Let us use the medical market. I talked about the hearing aid market, but we sell a lot, example, pacemakers and implantables. If the market turns south overall, people still need pacemakers, right? If market turns south, we sell a lot in imaging, or cancer treatments we sell a fair amount.