Knowles Corp (KN) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Knowles Corporation Second Quarter 2021 Financial Results Conference Call. (Operator Instructions) After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Please be advised that today's conference is being recorded.

With that said, here with opening remarks is Knowles' Vice President of Investor Relations. Mike Knapp. Please go ahead.

Thanks, Blu, and welcome to our Q2 '21 earnings call. I'm Mike Knapp 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 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, 2020, periodic reports filed on 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 and in our current report on Form 8-K filed today with the SEC, 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 selected financial information available in webcast slides, which can be found in the IR section of our website.

With that, let me turn the call over to Jeff, who will provide some details on our results. Jeff?

Thanks, Mike, and thanks to all of you for joining us today. For Q2, we reported revenue of $200 million, above the midpoint of our guidance and up 31% from the year ago period, driven by strong demand across our audio and precision device segments. Gross margins improved to 42.4%, and our earnings per share were $0.31, both above the high end of our guidance range. In audio, revenue was up 43% from the year ago period as Hearing Health sales doubled, and we saw continued robust MEMS microphone demand in multiple end markets. Precision Devices delivered record revenues in Q2, up 5% from the year ago period, underscored by a recovery in the medtech market and an acquisition we completed in the quarter. Overall, a great quarter for the company that emphasized our leading position across a broad range of growing end markets, our focus on high-value products to improve gross margins, and our strong operating leverage.

Let me provide some detail on the trends we are seeing by end market. In audio, we saw broad-based improvement year-over-year in MEMS microphone sales across non-mobile end markets, particularly in ear, IoT and computing devices as work from anywhere and remote schooling trends continue. We anticipate non-mobile to represent more than 50% of microphone sales in 2021 as new true wireless and IoT devices are launched in the second half of the year. In addition, we are beginning to see emergence of new markets we can serve in the non-mobile category that may provide additional growth opportunities over the next several years.

First, we are seeing increased design activity around the virtual reality market. IDC forecasts VR headset shipments to grow to over 28 million units in 2025 with a 5-year CAGR of 41%. VR has the potential to revolutionize a number of industries and high-performance audio is a critical piece of this equation to enable the best user experience. The second is white goods, where we recently introduced a complete development platform consisting of microphones and a digital simple processor that enables fast and easy voice integration for smart appliances. This solution was selected by Samsung in its family hub portfolio of smart appliances and the first product launch -- product introduced was a smart refrigerant.

Finally, we see the automotive market becoming a potential opportunity for our MEMS microphone business as our customers focus on reducing unwanted engine noise in the cabin and enabling voice input to control the vehicle systems. We are seeing an accelerated transition from electric to MEMS microphones in automotive and have launched a new product portfolio for this market as customers are beginning to recognize the importance of higher quality and the supply assurance that Knowles offers.

In mobile, Q2 mic sales came in as expected, and we expect a strong seasonal uptick in sales in Q3 as multiple OEMs around the world launched new handsets. For Hearing Health, shipments have recovered to pre-COVID levels, and we see improved demand in the audio file segment as U.S. concerts resume. In addition, the White House issued an executive order earlier this month, which could help accelerate the issuance of over the counter hearing aid regulations and products in the U.S. While this is not new news for the sector, it does highlight there is a potential upside for us to benefit from the large addressable market of people suffering from mild hearing loss. Overall, we expect continued strength in traditional hearing aid channels with momentum building in the over-the-counter market. We also expect continued rapid growth in the TWS segment with premium devices offering advanced features like active noise cancellation and assisted listening functionality. All this represents positive trends for year 1 device acoustics over the next several years.

In Precision Devices, Q2 sales reached record levels, with significantly improved gross margins and demand in defense, medtech, industrial and electric vehicle markets drove strong sequential improvement. We also acquired Integrated Microwave Corporation, a leader in the design and manufacturing of custom high-performance RF filters for the aerospace, defense, and communications industries. By expanding our product portfolio, we grow our serviceable available market, while providing our customers a one-stop-shop for their high-performance RF solutions. John will discuss the financial impact from this transaction in just a moment.

For the second quarter, we also saw record bookings again in PD, giving me confidence that we can grow Precision Device revenue again this year. We had a strong first half, and I expect the momentum to continue in Q3. I believe our leadership positions across the markets we serve and our strategy to deliver high-value differentiated solutions to a diverse set of growing end markets positions us well for future growth.

With that, I'll turn it over to John to expand on our financial results and provide guidance for the third quarter. John?

Thanks, Jeff. We reported second quarter revenues of $200 million, up 31% from the year ago period, driven by increased shipments in both the audio and Precision Device segments. Audio revenues of $150 million were up 43% due to increased shipments of MEMS microphones across non-mobile end markets and the recovery of the hearing health market to pre-COVID-19 levels. Precision devices delivered record revenues of $50 million, up 5% year-over-year as a result of organic growth, driven by increased demand for high-performance capacitors in medtech, industrial and automotive markets and an acquisition completed in the second quarter of 2021. Second quarter gross profit margins were 42.4%, well above the high end of our guidance range and up more than 10 percentage points versus the same period a year ago. Audio segment gross margins improved more than 12 percentage points, driven by higher factory capacity utilization and favorable product and customer mix.

In the Precision Device segment, gross margins were 5 percentage points above prior year levels due to favorable product mix, productivity gains, a precious metal cost. R&D expense in the quarter was $22 million, in line with expectations and up $2 million from the year ago period as higher incentive compensation costs and increased spending in MEMS microphone, Hearing Health, and Precision Devices was partially offset by the impact of restructuring actions taken in the second quarter of 2020. SG&A expenses were $28 million, $1 million above our guidance range, driven by higher incentive compensation cost and increased legal expense related to the favorable ruling we received in the Belting lawsuit.

SG&A was up $1 million from the prior year due to higher incentive compensation cost, partially offset by the impact of restructuring actions taken in the second quarter of 2020. For the quarter, adjusted EBIT margin was approximately 18% at the high end of our guidance range and up more than 18 percentage points from the same period a year ago, driven by increased shipment volumes and higher gross margins. EPS was $0.31, above our guidance range and up $0.32 from the prior year. Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release and can also be found on our website at knowles.com.

Now I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $94 million at the end of Q2. Cash generated by operations in the quarter was $21 million, above the high end of our guidance due to higher EBITDA and lower-than-expected net working capital. Capital spending was $11 million in the quarter. During the quarter, we resumed buying under our share repurchase plan and acquired roughly 1 million shares. We also completed the acquisition of Integrated Microwave Corporation for $79 million net of cash acquired. In 2022, we expect the acquisition to deliver more than $20 million in revenues and above-average gross margins, and EPS of $0.04 to $0.06. Given our existing cash position and our expectations that we will continue to generate significant free cash flow, we intend to settle the principal amount of the convertible notes, which mature in Q4 of this year in cash.

Moving to the third quarter. We expect total company revenue to be between 227 and $237 million, up 13% at the midpoint versus the same period a year ago. Revenue from the audio segment is expected to be up approximately 6% from Q3, 2020 due to increased shipments into non-mobile and Hearing Health applications. Precision Device revenue is expected to be up more than 38% versus the prior year, driven primarily by organic growth in the defense, medtech, and EV markets and the acquisition completed last quarter. We estimate total company gross margins for the third quarter to be 40% to 42%, up 430 basis points from the year ago period, driven by both the audio and precision device segments on higher capacity utilization, favorable product, and customer mix, and the acquisition completed in Q2. Our gross margin expansion in the first half of 2021 demonstrates the execution of our strategy to deliver high-value, differentiated solutions to our end markets. We expect total company gross profit margins will exceed 40% for full year 2021.

R&D expense in Q3 is expected to be between 21 and $23 million, up $3 million from prior year levels due to higher incentive compensation costs and increases in MEMS microphone and Precision Device spending. We're projecting selling and administrative expense to be between 26 and $29 million, up $1 million from the year ago period, driven by higher incentive compensation costs and the impact of the acquisition completed in Q2, partially offset by lower legal expense. We're projecting adjusted EBIT margin for the quarter to be in the range of 19% to 21% and expect EPS to be within a range of $0.38 to $0.42 per share. This assumes weighted average shares outstanding during the quarter of 95.3 million on a fully diluted basis. We're forecasting an effective tax rate of 11% to 15% for the quarter. And we expect cash generated by operations in Q3 to be between $30 million and $40 million, with capital spending of approximately $15 million. Please refer to our press release and to our Form 8-K filed today with the SEC for a GAAP to non-GAAP reconciliation.

I'll now turn the call back over to Jeff for closing remarks, and then we'll move to the Q&A portion of the call. Jeff?

Thanks, John. Before we move to the Q&A, there are a few points I'd like to highlight from our Q2 results and our Q3 guidance. First, the diversity of our revenue across a range of growing end markets is a significant benefit. In addition to participating in a number of compelling growth opportunities in markets that demand high-value solutions, we are continuing to reduce risk of being exposed to any one specific market.

Second, our Q2 results cap off a very positive first half for revenue and gross margin, which, coupled with operating leverage, is driving increased EBIT margins. Lastly, our strategy to deliver high-value, differentiated solutions to a diverse set of end markets, producing strong cash flow that allows us to drive shareholder value through debt reduction, investment in high-growth margin products, accretive acquisitions, and stock buybacks. Operator, we can now take questions.

(Operator Instructions) Our first question comes from the line of Bob Labick from CJS Securities.

Congratulations on nice quarter. I wanted to start with the gross margins. They were obviously a fantastic above guidance above expectations, et cetera. What were the primary drivers for the gross margins? And I know you guided to above 40% for the year. What is it take to get or how long might it take to get to like a 42% annual number and what would be the drivers to get there?

Yes, Bob, let's start with Q2. And in the audio segment, gross margin improvement was really driven by favorable mix, specifically, a higher portion of MEMS microphones shipped into non-mobile applications like ear, IoT, and compute, which typically carry above-average margins. We also saw with the recovery of our Hearing Health business, a higher proportion of sales into that market, which, again, carry higher-than-average gross margins. And then lastly, we had very high factory capacity utilization in Q2, well north of 90%.

And I think just to put a little bit more color around that. I think that's the theme we've been talking about for a while that as we look at our investments and where we're developing products, where we're investing our Capex. We're moving it more in the direction of higher gross margin products that will allow us to continue this trend of moving the gross margin up over time.

Yes. And Bob, I can just add, if I talked about the specifics in audio. With respect to PD, a little different. I think, one, they've made some really significant factory productivity gains over the last couple of quarters and it really starting to hit in Q2. Also, the pricing trends are favorable there. We've been able to pass on either through surcharges or higher pricing, some of the palladium, increased palladium costs and so those are the drivers.

And lastly, again, a little favorable mix in that we're selling more into the higher-margin defense and medical markets, which have recovered in Q2. We really expect that to continue over the course of the remainder of 2021. And I mean, I think in your question with respect to what would it take to get to 42%, I think it's to keep delivering what we're doing and what you saw demonstrated in Q2. I don't think there's anything specific. The one thing I will say that we do look forward to in 2022 is introduction of some new products that are coming in at higher gross margins. So it's really keep doing what we're doing in Q2 and then adding and layering in some new products at higher margins. Jeff.

I think that's probably a good discussion. We're thinking about capital allocation, whether it be in the R&D or CapEx, and how we're spending that on higher gross margin products and markets. We'll continue that as well as we have a fair amount of new products that we think will have positive impact on gross margin in 2022.

Okay, super. And then just one more for me. Obviously, you made a nice and accretive acquisition that you just told us about. You still have -- I think you were net cash before this. So you'll still be -- you have a very strong balance sheet and strong free cash flow. How is the market looking out there for additional M&A? Are you still in the market looking for more tuck-ins? What areas would you be interested in? And is that an opportunity to grow margin from there as well?

Yes. Let me just make the comment first. We're really pleased with this acquisition that we were able to complete in Q2. It does a couple of things for us. Number one, it expands the range of frequencies where we can offer RF solutions, gives us more of a one-stop-shop with our defense and aerospace customers. And I did mention this in the prepared remarks, but there's also a cross-selling opportunity here. We have our customers, we can walk into, now with a new offering of products. So it's pretty positive. And this -- our expectation for this acquisition, as John said, it will be above 50% gross margin.

And so I think there are other opportunities for us like this is Bob. I think it's a matter of the timing of when they happen. But as I kind of alluded to the pad, it feels like in these markets, the PD markets, there is, at least, I would say, bolt-on size acquisitions. It's a pretty target-rich environment. It's a matter of time that stuff that's right for us and that fits with what we're trying to do. But I would anticipate we're going to continue to do these things in the future.

Your next question comes from the line of Anthony Stoss from Craig-Hallum.

My congrats as well, especially on the gross margins. Maybe you guys can comment about where you see them going midterm? Any thoughts related to that? And then Jeff, I love to hear your thoughts on growth in PD, record quarter. That's stellar. I'm curious where you think that goes. And lastly, maybe back to John, where is the bulk of your CapEx being spent right now?

Okay. First, on gross margin. I think that when we put out -- if you remember, we put a midterm model out here in 2019 of 42%, I think this is a very achievable number. I think there's an opportunity potentially to go higher than that with some of the things we're doing. And so I think we're still -- that's where we're running towards getting above the midterm model. Now how long it exactly takes -- depend on a few things. One is, again, and I want John to talk about this in a minute about Capex, what we're spending CapEx on today and maybe in contrast to maybe what it was 3 or 4 years ago. But I think it's really about this capital allocation and where we're spending our money, Tony.

And I'll give you a couple of examples. Just on the R&D side. If you go back 4 or 5 years ago, most of our R&D spend was targeted at mobile on MEMS mics. And now what we've done is, yes, we still have a fair amount. Mobile is an important business for us. But it's now -- we're developing products that are specific to the ear, specific to the compute, specific to the IoT market, which helps again shift to MEMS. We're spending more money in R&D with PD, right?

And so what you kind of see here is -- and then the last piece, I think I was excited I hear a bit about the Hearing Health market. The core market, the normal channels are obviously are recovering very well from COVID but in addition, we're getting a little bit more excited about the over-the-counter market, right? You're starting to see like the Eargo's of the world start to talk about selling over the Internet, and this is really targeted at a portion of the market only that doesn't really buy today is people with (technical difficulty). They're sitting without hearing aid. And so there's a good opportunity.

And then lastly, I don't want to discount this, but -- and I know you asked a lot about it usually, but the balanced armature speaker automated line, that's still scheduled to go into production late this quarter, late in Q3. And I think it may take us 9 months from where it's fully installed to get it up fully running, the full capacity. But I'm seeing more places where we can use that capacity, too. I think obviously, the true wireless market is interesting. But there may be some places in this over-the-counter market where using this automated line makes sense. And so I think overall, the hearing aid business also, again, shifting to all of our businesses that are above the corporate average through capital allocation and R&D spend. John, do you want to comment about Capex?

Yes. Sure. Tony, I mentioned we'll spend somewhere between 5% to 7% of revenues in 2021 on Capex, call it, roughly $50 million. About 60% of that is in our MEMS business, and it really focuses on projects like our 8-inch conversion, also some new product introductions that will be coming into the market next year and beyond. Outside of the MEMS area, we are -- we do still have some payments related to the BA automated line that we'll be making this year. And then in PD, some capacity and some cost improvement opportunities that have really quick paybacks and ROI, where you make the investment. So that's pretty much it.

And let me just make one more comment on things worth question. I mentioned this just briefly on the previous call is that as we start looking at our markets for MEMS mics, we're starting to think more about, I would call, the more commoditized portion of the MEMS microphone market. And we're starting to think -- I would say more sort of think, we're starting to actually sell die as opposed to finished microphones so that this commoditized portion of the market can get access to the Knowles technologies without having to actually us sell a lower gross margin product.

And that's another thing. I think they'll start having impact in 2022. I think you have one last question about the PD growth. Yes, I mean, what I would just say here is, if you remember last quarter, I talked about record bookings, and I said, usually, record bookings translate into record revenue. And that's what you're seeing in Q2. And the bookings continue to be very, very strong. And this is even without the acquisition. If I look at the numbers, even without the acquisition, it was a record shipment quarter for PD, even without the acquisition. So when you layer on the acquisition, you start seeing these numbers, you can see them are going north of $50 million per quarter of revenue, see from the Q2 results. And so I think we still expect more growth in these markets in 2022. And plus we have the acquisition, and I'm hopeful there may be a couple more acquisitions that we can do over the next 12 to 18 months.

Tony, if I can just add to that, either, Jeff, to Jeff's comments on the PD growth. I mentioned in my script that we expect PD to grow about 38% year-over-year. The bulk of that is actually organic growth. About 25% of that growth is organic, 13% is due to the acquisition.

I think that's good color.

If I could sneak in one -- just quickly last one here. Malaysia, the Philippines, COVID kind of reemerging, we're hearing from other covered companies that they've got to close their plans for a couple of days is, in fact, here and there. Are you seeing any impact over the last week or 2?

The last week or 2, no. I think we continue to monitor, but we've been pretty good about managing our factories. We're starting to actually see Tony a few of our factories are starting to get some amount of vaccinations. People are starting to get vaccinated. So we're hopeful that we've really done our operations team, and I would really commend them and give him a big shoutout. It really worked through this, and we really haven't had a lot of closures related to COVID through the whole thing. And so we'll obviously continue to monitor. But right now I think we're in decent shape right now but we've got to keep monitoring.

Your next question comes from the line of Tristan Gerra from Baird.

What patterns are you seeing from your larger smartphone customers, given the well-advertised shortages? Do you think there's going to be attempt to rebuild inventories in smartphones in the second half? Is that embedded in your guidance? How do you think you're going to be shipping relative to end demand in smartphones?

Yes. Yes. So maybe I'm not going to comment specifically to the largest customer, but let me give you maybe just a little general color, Tristan, on capacity and our capacity constraints. I would sit there and say, right now seasonally, we expect a pretty rise up strong. But I would say we factored into this guide that there is going to be some shortfalls, right, relative to what we possibly could really shift in the quarter. And so I think if we can work through some of these issues, and I'll describe that we're starting to see a little bit of this hedging on whether I need the product, whether we can get some of the supplies that we need in the MEMS microphone. I'd say it's relatively limited right today, but we did factor some of this into the guide that we've given that there's a possibility that things could slow or upside growth could be limited by something that happens to the market, whether it be COVID, availability of wafers or other silicon for us or our customers, we factored a little bit of that in.

Okay. That's useful. And then as a quick follow-up, if you could expand a little bit on the commentary in the Q&A that you're starting to sell microphone dies without actually lowering your gross margin. What percentage of value or even units, you think that could be by '20 to '23? And what are the ASPs on that? Is it half of the typical mic ASPs? How should I look at this from a revenue contribution?

Yes. I mean obviously, the ASPs are lower because of the fact we're just selling the die and potentially the ASIC that goes with it, the wafers as opposed to selling the whole microphone. But our target is that the gross margin should be above the corporate average by selling die. And what -- the market that we're targeting here, I would sit there and say is, let's use the example, the very low end of the mobile market, the low end of the IoT market, the very low end of the ear market, right? And I would sit there and say, for the most part, we're not highly participating in a lot of these portions of the market today. Where -- how big this could be? I would sit there and say, just from my perspective, and I wouldn't put a time on it, but if we're not thinking hundreds of millions of units, it's probably not worth pursuing. I mean that's kind of -- in my mind, it's not -- we're not talking about here trying to sell 10 million die or something like that. We're trying to sell hundreds of millions of die. And it was above the corporate average gross margin.

Your next question comes from the line of Chris Rolland from Susquehanna Financial.

Your handset market, in particular, mobile market, in particular, this year, how should we think about seasonality and any differences in the seasonality into December and maybe even into March, if you could?

Yes. I'm going to point in March, but I'll kind of give you kind of my thought process on Q3 and Q4, which is, if you do look at last year, our handset was much stronger in Q4 than it was in Q3. I would say that if you go back previous years, that's usually -- that's an anomaly, right, that Q4 in handsets is stronger than Q3. I would say we're going to return kind of more to a traditional where you're going to see Q3 be pretty large, relatively speaking. And then Q4 may be down a bit, right? Seasonal. But here's the one caveat, of course, I got to give, Chris, is, there's a lot of people introducing phones around the world from our largest customer to Korea, there's a lot of phones coming out in China. We've really got to see the sell-through on these to see like really what late Q4 into Q1, how that's going to develop.

Understood. And then just some housekeeping items on the acquisition. What did you guys pay for that? And if I heard you correctly, I think the annual run rate is $20 million there at 50% gross margin. And then when did it close in the quarter? How much was in this quarter's number?

Chris, we closed the acquisition on the first week of May, and so you have a couple of months' worth of activity in there.

Just to make a comment. But we knew going in, the revenue might be a little lighter in the first couple of months, but it started to up a little bit more in the next few quarters.

And the acquisition price, including real estate, we acquired was $79 million net of cash.

(Operator Instructions) Your next question comes from the line of Suji Desilva from ROTH Capital.

Congrats on the progress here. So looking at some of the different growth areas, you have, I think, headphones TWS, you have the balanced armature, incremental Hearing Health you were talking about on this call, and highlighting. Maybe you could talk, Jeff, about which of those you think are the better growth opportunities relatively in second half '21 or into '22, just so we can get some rank ordering in our understanding?

Yes. So let me -- this kind of what I'd say about this is, is more and more I see the diversification of our markets, I'm seeing the same. I think we've got a fair number of singles and doubles here. And so I mean, I think the balanced armature is a great opportunity, which is going to be expanding beyond, I would say, the true wireless, but also the over-the-counter market. I think those are markets that are developing that I think should provide growth for us in 2022. I think the ear market for microphones continues to still look positive for us, although it's going to be, I would say, more in the future, or at least there's going to be more customers in this success besides just a few. I'd say IoT continues to look very good for us.

In terms of -- it's always exploring. We're spending a lot of time developing programs around the long tail to pursue long-tail customers with reference designs, which should drive more volume. The compute market is interesting, right? I mean, it's been really on a nice run the last 1.5 years with work from home. I think there's a little bit of difference opinion what '22 looks like. I mean I guess what I would say is maybe it won't be as fast as growth as we've seen because of work from home over the last year, 1.5 years. But we think inventories are still low. And so we think that things look decent next year in compute. To Hearing Health and then Precision Devices. I would sit there and say, defense and medtech look to continue to be strong, defends with RF filtering, especially now with this acquisition, that gives us a broader range of products.

In medtech, we're just positioned in the right places. We're getting some new applications beyond some of the traditional implantable applications that we've had. And then lastly is the EV market. I think we're still assessing the total size of this market could be in 3 to 4 years. But we keep focusing on, I would call it, high voltage, high-temperature applications in the electric vehicle where we have a distinct advantage. And we're not selling jelly being capacitors. We're selling capacitors that have high value. And this year, I think it could approach roughly even $15 million in the EV market, which 3, 4 years ago, this was 0. So I don't want to say there's like -- there's no one home run here, but we've got -- we have so many great things going in a diversified set of markets. So I feel pretty good about all these markets.

Okay. I appreciate all that color, Jeff. And then I don't know if this is asked or you discussed, but the supply chain constraints that are around you guys and you're running tight yourselves, any impacts on your revenue and your ability to ship this quarter? And can you talk about sort of incrementally where those constraints are getting worse, stable or improving would be helpful?

Yes. I would say we are having some constraints on the MEMS microphone side. I'd say PD, we're not having any constraints. Hearing Health, I would say there's -- I wouldn't say constraints, I would say there's a lot of demand. And we're keeping up, but it's not really like we're having a constraint. It's just -- our capacity is pretty full. But in MEMS mic, I would say that we factored into this guide that there is some constraints across certain products. And so we're working through this really hard simply to try to solve these problems. And I'm hoping that we'll see some of this rectify itself late in the quarter in Q4.

In terms of trajectory, I haven't seen any major changes in the last…

No, no, that will be major changes. I think relative -- we've been anticipating this because I think what you have here is, just generally speaking, you have the seasonal market going up with tightness in supply, right? You already have that, right? And so we didn't have as much of that in the first half, right? And so the back half in Q3, specifically, we're kind of factoring a little bit into here already saying, well, we actually could ship more if we had more.

Okay. Encouraging your seasonality is strong.

Speakers, I'm seeing no further questions in the queue. Please continue.

Great. Well, thanks very much for joining us today. As always, we appreciate your interest Knowles, and we look forward to speaking with you on our next earnings call. Thanks, and goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating.