Knowles Corp (KN) 2020 Q4 法說會逐字稿

Good afternoon and welcome to Knowles Corporation Fourth Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

Thanks, Elaine, and welcome to our earnings call. I'm Mike Knapp; and presenting with me on the call today are Jeffrey Niew, our President and Chief Executive Officer; and John Anderson, our Senior Vice President and Chief Financial Officer.

Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review the risks and uncertainties in the company's SEC filings, included, but not limited, to the annual report on Form 10-K for the fiscal year ended December 31, 2019, periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements, except as required by law.

In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted at our website at knowles.com and in our current report on Form 8-K filed with the SEC today, including a reconciliation to the most direct. 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. Thanks to all of you for joining us today.

For Q4, we reported revenue of $243 million, up 18% sequentially and up 4% from a year ago period. As we mentioned in our pre-announcement release, stronger-than-expected MEMS microphone demand in multiple end markets and improving trends in hearing health solutions drove the upside. Gross margins improved 130 basis points to 38%, and our earnings per share was above the high end of our guidance range at $0.41. Overall, a very solid quarter where we saw improving demand in audio in combination with solid operational execution across our businesses.

Now let me update you on current customer demand across our end markets. In audio, sales were up 22% from the prior quarter versus our expectations of more than 7%. In the second half of 2020, we saw broad-based sequential improvement in MEMS mics sales across mobile and nonmobile end markets. In mobile, stronger sales to North American and Chinese OEMs drove the majority of the increase as 5G phone shipments accelerated. Nonmobile applications also increased with sales in ear, IoT and computing markets driven by work from home and remote schooling trends. We expect these trends in nonmobile applications to continue to be favorable for MEMS microphones in the first half of 2021.

For hearing health, shipments were higher than expected going into the quarter, but remained lower than the year ago period as COVID challenges persist. Data from the hearing industry association shows that unit sales of hearing aids in the U.S. declined by 7.5% year-over-year in Q4 with only modest improvement in the VA channel during the quarter.

Under the umbrella of our hearing health business, we also sell high-performance microphones and speakers to premium audio companies as well as many smaller customers for a diverse set of niche applications unrelated to hearing health. One example is in-ear headset monitors used by musicians in live music performances. These type of customers have been severely impacted by COVID and account for the majority of the shortfall relative to pre-pandemic sales. We remain confident that the hearing health business will fully recover in the near future as the COVID vaccine becomes more widely available.

In precision devices, Q4 sales were flat sequentially, as expected, as COVID continued to impact our medtech and defense end markets. Shipments of high-performance capacitors into the medtech market continue to be negatively impacted by COVID-related delays in elective surgeries. We are confident this market will recover as the vaccine becomes more widely distributed.

In defense, COVID-related program delays were a drag on growth in 2020, but we are beginning to see a recovery as bookings in this market have improved in the last 2 months. These products have longer lead times, and we expect these shipments to begin to positively impact Q2.

Overall, I was pleased we were able to grow precision device revenue in 2020 despite headwinds from the pandemic with growth coming from electric vehicles, defense and industrial, partially offset by medtech. I anticipate we will return to more robust growth in PD as medtech and defense markets recover.

I'm very proud of our team's execution during these challenging times. We not only weathered an extremely difficult first half of 2020, we also took significant actions to improve our business. As our MEMS microphone business fully recovered in the second half of 2020, we saw the strong operating leverage and cash flow potential inherent in our business model even while COVID is still having a negative impact on a number of our end markets.

I believe the leadership position across the markets we serve and our strategy to deliver high-value, differentiated solutions to a diverse set of growing end markets will enable us to come out of this pandemic well positioned to take advantage of future growth. In addition, we have several opportunities to improve our gross margin that I expect will drive additional earnings in 2021 and beyond.

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

Thanks, Jeff.

We reported fourth quarter revenues of $243 million, up 18% sequentially and 4% from the year ago period driven by increased shipments in the Audio segment. Audio revenues of $202 million were up 22% sequentially due to increased shipments of MEMS microphones across multiple end markets and continued recovery in the hearing health market. The Precision Device segment delivered revenues of $41 million, flat sequentially and in line with our expectations.

Fourth quarter gross profit margins were 38%, at the high end of our guidance range and up 130 basis points sequentially. Audio segment gross margins improved 260 basis points driven by higher factory capacity utilization and lower cost as well as favorable product mix related to increased shipments into the hearing health market. In the Precision Devices segment, gross margins were lower sequentially due to lower factory capacity utilization and unfavorable product mix.

R&D expense in the quarter was $20 million, up $1 million sequentially as higher incentive compensation costs and a nonrecurring supplier payment was partially offset by reduced spending in Intelligent Audio. SG&A expense -- expenses were $27 million, flat sequentially and $2 million above our guidance due to higher incentive compensation costs.

For the quarter, adjusted EBIT margin was 18%, at the high end of our guidance range and up 430 basis points sequentially driven by increased shipment volumes, higher gross profit margins and improved operating leverage. EPS was $0.41, above our guidance range due to higher revenue and gross margins and a $0.03 discrete tax benefit partially offset by higher incentive compensation costs.

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 $148 million at the end of Q4. For the fourth quarter of 2020, cash generated by operations of $76 million was a record high and well above our guidance range due to higher EBITDA and lower-than-expected net working capital. Capital spending was $12 million in the quarter. For full year 2020, cash generated from operations was $128 million and free cash flow was $96 million, representing more than 12% of revenues. We exited the year with net debt of less than $25 million and repurchased 1.1 million shares in 2020.

Moving to the first quarter of 2021. We expect total company revenue to be between $190 million and $210 million, up 23% at the midpoint versus the same period a year ago. Revenue from the Audio segment is expected to be up approximately 35% from Q1 2020 due to increased MEMS microphone shipments into nonmobile applications as work from home and remote learning trends continue. In addition, we expect higher mobile microphone demand at both our largest customer and Chinese OEMs. Precision device revenue is expected to be down approximately 12% over prior year levels driven by defense project push-outs and the continued impacts of COVID-19 on elective medical procedures, specifically for implantable devices.

As Jeff noted, defense bookings have strengthened over the last 2 months, and we are optimistic about growth in this market in 2021. We estimate gross margins for the first quarter to be approximately 37% to 39%, up 230 basis points from the year ago period driven by increased audio demand and improved factory capacity utilization in our MEMS microphone business, partially offset by price erosion and unfavorable FX impacts.

R&D expense is expected to be between $19 million and $21 million, down $2 million from prior year levels due to a reduction in spending related to Intelligent Audio products, partially offset by increases in MEMS microphone and precision device spending.

We're projecting selling and administrative expense to be between $24 million and $26 million, down $9 million from the year ago period due to a $4 million reduction in legal expense and the impact of restructuring actions taken in the second quarter of 2020.

We're projecting adjusted EBIT margin for the quarter to be in the range of 13% to 17% and expect EPS to be within a range of $0.23 to $0.27 per share. This assumes weighted average shares outstanding during the quarter of 95.1 million on a fully diluted basis.

We're forecasting an effective tax rate of 14% to 18% for the quarter. Please refer to our press release and to our Form 8-K filed today with the SEC for a GAAP and non-GAAP reconciliation.

For the quarter, we expect cash generated by operations to be between $25 million and $35 million and capital spending to be approximately $10 million.

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.

Our company remains uniquely positioned across a diverse set of end markets poised to grow over the next several years. We remain the leader in hearing health solutions and expect recovery to 2019 levels in the next few months. In MEMS mics, we expect nonmobile applications to drive future growth and the mobile market to stabilize as more 5G phones are introduced. For precision devices, we expect revenue to grow in 2021 driven by continued momentum in defense and electric vehicles and recovery in the medtech market. As we look further into 2021 and our markets continue to recover, I believe we can drive shareholder value by delivering earnings and cash flow above pre-COVID levels.

Operator, we can now take questions.

(Operator Instructions) And your question comes from the line of Harsh Kumar with Piper Sandler.

First of all, let me just say congratulations. This has been a phenomenal turnaround that you guys have executed across all measures, controlling OpEx. And now I think you guys are really seeing the results of it. So I really appreciate what you guys are doing from the side of investors.

Jeff, I had a quick question. If I was to try and ask you, what do you think the handset growth is for the year, we're hearing 10%. But I want to hear you talk a little bit about what you're expecting in ear and IoT growth for the year or, call it, midterm. And then also, what do you think would be the PD growth rate? In other words, I'm trying to get an idea of your growth rate for the midterm, 2 to 3 years out.

Yes. So first -- let's talk about mobile first. I think we've talked about this for a while. And I think that overall, that, obviously, the last 3 years, when you talk about full year mobile, the unit sales have not been like great. We've kind of been thinking about that. Like we kind of looked at the numbers, Harsh, and I would sit there and say is, I went back to '17, about 36% of the company revenue came from mobile in '17. We're expecting in '21, it's going to be less than 25%.

And so our expectations for mobile are -- is that right now, people are saying it'll probably get back to pre-pandemic levels in 2022. And I think -- and but again, it's not that we're leaving the mobile market, but we have other places where we're growing much faster, and I think...

We can get better gross margins.

And I think can get better gross margins. And so I think this is an area that we'll continue to work in, but I don't think we have super high expectations for mobile. Now -- and if I go to the nonmobile applications, I would say, obviously, that's a little different. And if I look at the same numbers, about 19% of the company's total revenue in '17 came from nonmobile applications and MEMS mics. It will probably be close to 30% in 2021.

And so this is an area where we still see growth, right? We've talked about ear. We've talked about IOT. I think the other one that we're talking about more recently is computing. The whole work from home and the idea of school from home is driving a lot of demand in the laptop, PC market. And I would say, it may not sustain at this level indefinitely. But I think it's definitely going to be larger than it was in the '17, '18 time frame. And so I think we're still very bullish on the nonmobile applications.

Then I think the last question you had kind of on there like PD. I think this is -- again, we have 2 separate businesses here with a number of markets, and this is probably a lot to digest in a quick call here. But just generally speaking, the RF business, which has been primarily driven by defense, we still think that's going to grow going forward. We still had growth in that business in 2020, but it wasn't as great as we thought it was going to be based on the delays in defense. We think it's going to get stronger again in 2021, and we expect that is going to continue to grow.

As far as the high-performance capacitor business, EV starting from a small base, but we've had nice growth. We expect to have growth again in '21, '22 and beyond. And this will be a lot in the high-voltage portion of the all-electric vehicle markets, and we're specifically targeting like on-bar chargers and battery management. That's kind of where we're really focused in, in the EV market.

And then we're expecting a recovery in the medtech market in '21. And it's hard to say exactly when that comes, but elective surgeries start to come, and we've listened kind of a lot to our big customers in that market, like the Abbotts of the world, on what they're talking about. But longer term, we think medtech will be a growth business for us.

Jeff, I think you answered a lot of my other questions. The only other quick one that I have, and I'll jump back in line was timing of hearing health. Is there -- I mean I know it's a moving target with all the COVID stuff going on, but do you want to even try to guess when you might be back to kind of year ago or full levels as you might think about it?

Yes. I would say, as we look in Q1, hearing health getting -- hearing health as in the traditional hearing aid market is getting pretty close to normal. I think the one piece that we're missing, and I know we haven't talked a lot about this, but about 10% of the sales in this division go to these other applications. And when I talk about other applications, I'm not talking about the balanced armature for true wireless. I'm talking about like audio files, like performers on stage, they're wearing headsets. They have our speakers in them. We sell to the aviation market. We sell to other nonhearing health med markets. And it's about 10% of the market. That business is still significantly down.

We're hoping as the vaccine, obviously, gets out, performers are going to start coming, and there's going to be concerts again, this business is going to pick up. So I would say, again, hearing health is pretty close back to normal in Q1, very close with this kind of other category, which is about 10% of the business still being significantly impacted.

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

Jeff, in your prepared remarks, you talked about gross margins and that you have some more improvements to be made or some more programs to improve them. Just if you could offer a guess, maybe a range as to where you think you exit the December quarter this year, what you need to do to get there.

And then secondly, maybe more for John, are you done with all OpEx cuts? Are there still more to go? And then, Jeff, also last question. Are you seeing any component shortages, every chip company is talking about it, on wafers, et cetera? I'm just curious what you guys are seeing.

Yes. So let me answer that first -- last question first. In terms of wafer shortages, I would sit there and say, we have not had any wafer shortages. What we have had is lead times go out, right? So the risk here with lead times going out is, if we're trying to predict mix further out, right. And so that's the challenge so far we've seen. But as far as not having enough wafers, that has not been an issue for us. I think we've got a good group of partners that have done pretty well for us.

On the gross margin side -- I'm going to turn it over to John in a second. I'll just make a couple of comments. We started talking about gross margin at the end of '19 and wanting to improve it. And I would sit there and say, obviously, 2020 was obviously a tumultuous year, especially the first 2 quarters of the year. And I would say, a lot of the work that we've been doing, the good work we've been doing is being masked by 2 things. One is mix, right? Two of our highest gross margin businesses, our hearing health business coupled with the medtech business in PD, are down, right? So mix is not helping us even now. And then the second thing is obviously the absorption with all the factories that we have that weren't running full that had an impact as well.

Now I'll go turn it over to John. He'll talk a little bit about some of the things that we're doing and what that really -- how that translates and what it means for 2021.

Sure. Yes. Just to add, Tony, I guess, first of all, I would just say, I'm pleased with the trajectory in our gross margin, which was up more than 130 basis points sequentially. We had gross margins of about 36.7% in Q3, they were up to 38% in Q4. And then if you think about the potential to improve those margins Jeff talked about, selected portions of our business are still being impacted. The audio file business, PD, the medtech business and defense, all 3 of those end markets typically carry above-average gross margins. So when we recover -- to fully recover in those markets, I think there's clearly some tailwinds.

In addition, we did -- in fourth quarter despite delivering 38%, we had some workforce disruptions in our North American manufacturing facilities related to COVID. And so again, if those -- we don't expect those to continue. That will also be a tailwind for us moving forward.

So I think if you take all that together, I think based on current end market conditions, there's no reason we can't have full year 2021 gross margins above 2019 levels. We finished right around or just 39.1% I think in 2019. So hopefully, that gives some color.

Got it. If I could sneak in one more, Jeff. Any update on when you can get the automated VA equipment in and then up and running?

Yes. I'll give you a quick update on that. The line is shipped. It's actually on the ground in the Philippines in the facility. We have not yet been able to get the installation team there in order to install the machine. But we're hopeful with the distribution of the vaccine that we're not too far off from being able to send the team there and that any restrictions relative to travel to the Philippines will be fully cleared. Once we get it there, I'm anticipating it's about 8 to 10 weeks to get it fully installed.

And so we have a pretty good pipeline of opportunities for the back half of the year, which I hope we don't have to push out. I don't think we will. I think we're going to get this line up and going. But I think the pipeline for the back half of the year is looking pretty good. And so we got to get something installed, but I think it should happen sometime in late Q2.

Tony, did we address your OpEx question?

Not yet. That was...

No. I think, yes, I was going to save that for a follow-up call tonight, but go ahead. I would assume you're getting pretty close to being at the tail end.

Yes. I mean Q4, we incurred about $47 million of OpEx. A couple of items that I want to pull out is we had abnormally high incentive compensation costs, about $2 million higher than normal. We really finished strong and on a higher EBIT. We had higher incentive comp costs. We also had some engineering NRE, which is a little more than $1 million.

So if you take those out, call it a $44 million to $45 million run rate, I would say very modest increases from there. Going into 2021, there's nothing line of sight where we see this big opportunity to reduce further. But I think we can get great operating leverage if we can grow the top line and really just -- we shouldn't have much more than 2% to 3% increases in 2021 in OpEx.

And your next question comes from the line of Bob Labick from CJS.

And also, congratulations on some very strong results. I wanted to stick with the gross margin question. And obviously, you just spoke about the opportunity to have very strong gross margins this year.

Looking out further, could you talk a little bit about the opportunity to perhaps get above 40%? And what would be the drivers there? And maybe is your mix changing even within mobile? Or what are the current drivers right now of the improved gross margins despite having some of the higher-margin businesses being suffered? So I guess that's two questions there, sorry.

Yes. That's okay. Yes. So I would say, I think we talked a little bit about 2020 being kind of like a little bit more challenged in terms of pricing. We've made some decisions on pricing, I would say, in the February, March, April time frame for the back half of the year. But without -- it's hard to tell what the demand was going to be. But it's clear, Bob, that the pricing and the demand are much better aligned now and going even in -- as we're in 2021, they're much better aligned.

And so I think we talked about this before, which was, if you go back a few years, we were averaging on mature products like 7%, 8% price erosion on mature products. By the time we got to '19, it was less than 4%. And we kind of fell off the rail here with the demand, how it kind of came in, in Q1 and Q2, and we're making decision about pricing for the back half of the year. I don't see that being sustained.

So I think as we're introducing new products in MEMS mics, they're coming in at higher gross margins, and as also we have less mobile. I covered this kind of in the earlier question that the nonmobile applications continue to grow where the gross margin is higher. And so I think within MEMS mics, it's mixed. It's for sure mix is helping us in 2021.

As we look into the other businesses, I think about where we think our growth is going to come from. In hearing health, we talk about balanced armature receivers. I think that is going to be -- as that grows, that's going to be higher gross margin than our corporate average. There is still ongoing, within the hearing health market, a shift from the old style microphones to MEMS microphones. And while that doesn't add to our sales level, it changes the gross margin. And then, of course, in PD, defense and medtech are areas in EV where we're focused, where gross margin's higher.

So what you see is the R&D dollars for new products are being focused towards the markets that have higher gross margin, and you're going to start to see some of that come through in 2020 -- '21.

Okay. Great. And then I think you started to touch on this a little bit, too. But I was -- if you could talk about your thoughts on kind of the longer-term consequences of COVID. You had mentioned that in the computing market, work from home and remote school and stuff should increase that over pre-COVID levels. Are there any other like changes in your end markets or your thoughts about the future that have changed as a result of COVID?

No. I'll make a couple of comments on the hearing health market, which is kind of interesting, which is, if you go back when we were talking about this in February and March last year, we were saying that there were 2 things that had happened. One was people had to feel comfortable. We got to have a solution to COVID. And number two was people had to feel comfortable coming out. As I talk to the hearing health customers, if the audiologists are open, the consumers are coming. I -- we're not seeing people staying home, right?

And so I think the recovery, once the vaccine is out, should be pretty good for us in these markets. I do think there is -- especially on our PE side, medtech, it would appear to me that there's some pent-up demand in medtech. And I think the other thing I would say is -- and this is not COVID-related, but I think we're very well positioned in defense with PD. I think we've worked in the areas where investments being made relative to electronic warfare, right? We've got some very unique products there. And I think that's going to be a nice growth market. But I see that recovering again as COVID starts to dissipate.

And your next question comes from the line of Christopher Rolland from Susquehanna.

I guess my first question is a follow-up. Can you talk about -- and I didn't totally understand, Jeff, what you were talking about with pricing. Were you saying that pricing has improved from down 3% to 4% that you talked about? Could we even see pricing up in this kind of environment?

And then secondly, is capacity utilization nearly 100% for the full year here as lead times are stretched and you have visibility into perhaps some tightness in the back half? How hard are we going to be running this year?

Yes. So yes, that's I think the first question on pricing. Again, 2020 was kind of a difficult year having made some decisions on pricing when the market was very poor, right, about that -- about the back half. But as we go into 2021, pricing has stabilized. And what's happening is new products, of course, are being introduced like we normally do, which is resetting the numbers, and price erosion is coming in, but less than that 4%. It could be even less than 3%, quite frankly, for MEMS mics. So we're seeing a lot better pricing environment as we go into 2021. So I think that was the comment.

And then your second question relative to utilization. So...

Capacity utilization, yes.

So let me just make -- I'm going to let -- I'll let John talk about the utilization. But let me just make one quick comment, right? Right now, the demand, obviously, based on our guide, it's -- for Q1, it's quite strong in Q1. I think the areas that we're talking about for the back half of the year and getting prepared for is our largest customer, is it going to be another big year for mobile phones in the back half of the year? That's a question that we have to think about, right?

The second one is that in our -- within our nonmobile applications, PC and laptop and tablet have been extremely strong through the COVID. And the question is -- I do believe they'll be above 2019 levels. But the question is, will they sustain at this level all the way through the back half of the year? Yes. I think so, right? I think that's yet to be seen.

And then the last piece before we talk about CapEx utilization is -- I would just say is that kind of what we're saying -- how I see it is that even if some of these markets are a little bit weaker in the back half, say, 2020, we do have all these other stuff coming back, right? Medtech within PD, we have defense, we have this audio file/aviation/other medtech for HHT. So the stuff should be coming back. So I kind of view it as this is the value of a diversified business, right, that you have some things up, some things down. But overall, again, we feel pretty good about 2021 right now.

John, do you want to tell him about capacity...

Sure. Just, Chris, in terms of capacity utilization, I'm really talking about the MEMS business. But Q4, we ran close to -- very close to 100%. We actually -- in addition to that 100%, we actually sold and took down our inventory as well. I would say, as we look into Q1, it's higher than normal. We're actually going to work through Chinese New Year, and it would be higher than the normal first quarter is seasonally low.

Yes. And let me -- yes. Let me -- one comment is, I think normally, we expect that Q1, with some of the dynamics in the mobile market, is a seasonally low quarter. It could shift slightly into Q2 on mobile, right, because of the time line of when things were introduced. That's kind of where I was going.

Q1, we're going to have abnormally high or higher-than-normal utilization. Q2, we will, but it will be replenishing inventory in Q2. Q1, we're kind of all out to meet demand. And again, that's based on kind of the conditions that we see right now. No significant supply chain constraints today. Lead times for wafers have extended a little bit, but it's not a bottleneck for us to date.

Okay. Understood. Very helpful. And I guess my second question is around 5G handsets, the kind of China handset complex, in particular here. Can you talk about some trends that you're seeing there in terms of content for you guys, in terms of multi-mic adoption, in terms of better mics? Is this a driver for you guys as well? And then people have begun to talk about an inventory of handsets building in China as people aggressively attack the lost wallet share that's out there. Are you seeing that as well?

So we saw a very strong Q4 sequentially from Q3 in China. I'm looking at the numbers here. Yes. We saw a very strong -- and it was -- and so it's definitely going to be down sequentially from Q4 to Q1. We're already projecting that, but it is up significantly over Q1 of 2020. So I would say, just generally speaking, the Android market has been kind of a little bit of a mixed bag here and check. Obviously, China drives a lot of this. And my personal feeling right now is, I'm not feeling like there's a big inventory issue. If I look at kind of the forecast we're starting to see for Q2, China still will be up sequentially in Q2. So although, again, I always preface that with we got to wait until after Chinese New Year, right? So -- but right now, our forecast seems pretty good sequentially from Q1 to Q2.

And your next question comes from the line of Tristan Gerra from Baird.

Given your commentary that you were almost at 100% utilization rates in Q4 and you're going to be higher than normal in Q1, if we assume 10% growth in smartphone this year, would you have to build capacity for the second half of this year? And also, I wanted to go back to the commentary that you expect the Q1 shipments in smartphone to be higher than normal and in Q2, you expect that there's going to be some inventory replenishment.

Given that some investors have been concerned about other shipping in Q1, is that something that you believe could impact the second half of the year where there is, at some point, just excess inventories in the channel? I'm just trying to put all of this together and what it means for your utilization rates, gross margin and shipments relative to real end demand.

Yes. I mean right now, kind of how I feel, Tristan, about the full year is that we will be probably building full out through the full year with Q2 being more of building inventory, right? I mean I think we talked about this before, kind of our strategy here is because we have such diversity of customers and markets that we don't have to have capacity in place for the peak in the back half of the year because of -- we have enough customers and that we're very confident are going to buy and what part numbers that we can build those in the first half. So right now, I would sit there and say, I would think we're going to build pretty close to full out for the full year. That would be my guess.

As far as mobile, I think mobile is, for us, if I think about it, it's going to continue to decline as a percentage of our total company revenue. And I think one of the things that we are thinking more about just as we go into this year is that we've got a great product portfolio. We got a lot of great end markets. Yes, at the higher end of the market, we still sell microphones. We like those sales. But when we start thinking of the lower end of the market, there may be other methods for us besides selling the full microphone to sell into the lower portion of the mobile market.

And so when I think about this is -- over the long term is we are trying to start moving away from the lower end of the markets in mobile. And what's really sizing the interest is this. First of all, it's the gross margin, but it's also the absolute ASP that I'm filling my factory with. When we sit there and we see microphones in the low end being sold at $0.10 to $0.15 at a gross margin that is sub the corporate average versus we could sell that to ear, IoT, compute or higher-end mobile at a higher gross margin, it's both a revenue driver and it's a gross margin driver. And I think we're getting to the point where, again, when I see it, the demand for microphones continues to rise. And so we're able to kind of like not go as aggressively after the low end of the market.

Great. That's very useful. And then as a follow-up, so you've mentioned the new products that you're going to launch outside of smartphones that are presumably higher ASPs and driving mix. Is this going to be just a shift into higher ASPs, higher-margin products outside of smartphone? Or do you think those products can also help you gain share outside of smartphone? Or are you just reliant on those non-smartphone end markets to just grow faster year-over-year?

Well, I mean I don't know if we've done an analysis of results in share gains or -- what I would just say is the primary goal here is higher ASPs and higher gross margins. That's where we're focused. And in some of the cases, these will be dual sourced; in others, they won't be. I think what we feel, Tristan, is I think we've talked about this, it's really a 2-competitor situation here within the microphone market. And I don't think anything is really changing with that. So I think we'll get our fair share with the new products that we have in the markets that we're banking.

And your next question comes from the line of Suji Desilva from ROTH Capital.

Jeff and John, congratulations to you. The balanced commentary, you talked about the supply side. You guys are trying to get the equipment installed, and I understand travel is hard. But on the demand side, are there programs that would increase that capacity in second half? Are those programs waiting for your product? Have they been pushed out? Or I'm just trying to understand the demand aspect of the kind of topic.

I would say the way this is working is like I literally meet with the team about the demand side of this weekly. And we've been trying to supplement some of the lower-volume opportunities with manual production. We don't want to do a lot of this because it's not good for gross margins. So -- and we haven't done a lot of this. But what we keep talking about is, "Oh, we're not ready. Okay. How is the next one?" And so I wouldn't say it's waiting. But what I would sit there and say is that people want to use the product, but we haven't been ready to say we're going to give this in high volume.

And so I think we're getting much closer to being able to say that. And I think if you remember, this produces -- the line had produced about 1 million units a month. So if you think we can get this going by the end of Q2, I would say that there's probably somewhere depending on yields when we first run it full out somewhere in the neighborhood of 4 million to 6 million units in the back half of the year incrementally.

Okay. Great. And then on the hearing health business, just trying to actually understand why, how close you are to pre-pandemic levels and whether there's any reason for (inaudible) it shouldn't impact those levels or above then?

Yes. Again, what I would say is in Q1, we're pretty close back to pre-pandemic levels. The one piece that's still not come back is the other applications that we sell the same impact technology to, like the live musicians. We sell a fair amount of microphones in aviation. We sell a fair amount of what we call microphone into non-hearing health medical applications. And these businesses are still like not still down. And interesting to think about these are all smaller customers. So if you imagine, these are some of our highest gross margin customers as well that have not come back.

Okay. And if I could sneak one quick one in. Can you maybe comment about smartphones and the launches being kind of an irregular timing? I was curious if you can elaborate on that comment. But things from 2020 pulled -- pushed out to '21 or things pulled in from later '21? Or is it just that there was no pattern because of COVID we didn't know. So...

Well, we already saw that normally, our peak quarter in Q3, it got pushed to Q4, which is kind of leading us into the path that the low quarter in mobile, specifically, maybe Q1.

It's Q2.

It's Q2, right? And so that's one thing we're saying, is because of that delay that the mobile-specific portion will be probably less in Q2 than Q1.

And your next question comes from the line of Bill Peterson from JPMorgan.

Nice job in execution amid the pandemic here. My first question, and I know it's a smaller part of your business, but the Intelligent Audio refocused on IoT. Hoping if you can just give us an update what type of IoT markets are you focusing on from here? What does the competition look like? Where is your best chances for success? Any updated products beyond the dual core and quad core processors you have? And if you can just give us an update for this business.

Yes. So again, I think we talked about -- there's a fair amount of applications now that we're in that are relatively low volume. To give you some examples, we're in a number of now sound bars. I think we've won designs on some consumer brands you would recognize for Bluetooth speakers. I think the other area that we seem to be doing well is remote controls. We have a couple of ear applications, appliances. We've got a few design wins that are more referenced at the beginning, but smart TVS. So -- but they're all like lower-volume applications.

And I think there's a couple of points I would make about this, Bill. First, obviously, we're not spending anywhere near as much money as we were a year ago. And I think we're in a position now where this is not only driving sales of the DSP, but it's also driving sales of microphones to customers in this long tail that we really haven't dealt with in the past.

The third piece is that I would sit there and say, as I'm looking at the DSPs we're selling because of these small customers, the gross margins are in excess of 50%. And so I think when we look at this, and I think we're looking at this a little bit differently than, say, we did, obviously, a year ago, that IoT long tail could actually be with microphones and these DSPs could be a growth market for us.

Now I think my experience is with these long tails is it takes time to develop, right, because it's a lot of small customers. But I think the positive thing I've seen so far is we win a design with some of these customers. Sometimes it's with their own software. They're writing software to our DSP. They use the next generation and the next generation.

And so I think it -- and I don't see this being a $100 million business. But I do see that maybe being a $20 million, $30 million business, possibly, with microphone sales being driven towards more digital mics, towards more high-performance mics in order to get more content.

Okay. So $20 million, $30 million, probably more long-term plus mic, within that or...

Yes. I just think -- let me just -- let me comment. What I see is driving is new applications where microphones weren't used before. And I think that's like -- and the TV is a good example of that, right? If we're successful with TV, you have to be seen. Microphones aren't a big portion of TVS. And we've talked about this before from the fact that there's no reason your TV can't act like your Amazon Echo, which sits in your room, your TV can do the exact same function. And so these are the type of things, which, if we could start having every TV have 4 microphones, there's millions of TVs built every year, they don't have that today.

Understood. In terms of use of cash, hoping to get an update maybe on your CapEx plans for this year or maybe even above that. Any sort of idea on cash flow from operations and working capital constraints or things going on related to COVID? And then use of cash, debt paydown and things like that, if you can give us a feel for the priorities this year.

Yes. Sure, Bill. I was hoping somebody was going to ask about cash flow and liquidity. That's a metric I'm pretty proud of the team's execution on. But as we exit 2020, we've got about $550 million of liquidity, as I mentioned in the -- my script, $150 million of cash, and then we've got a revolver that's untapped for $400 million. We do have converts, $172 million of converts that will mature in -- this November. So we've got a lot of optionality with how we retire those converts, combination of either existing -- using existing cash on hand or borrowing from the revolver.

And in terms of CapEx for the year, I mean I will say 2020 was unusually low. We were right around $32 million in CapEx. I think as you look out into 2020, we'll be closer to 5% to 7% of revenue type of CapEx level primarily on new products.

And then I think your other question was capital allocation. I don't think there's a big change in priority. Our priorities will continue to be funding all the organic growth opportunities we have. We will kind of step up the pace of looking at accretive acquisitions in precision devices. And then lastly, we'll always look opportunistically at return of capital through share repurchases. We purchased -- we repurchased about a little over 1 million shares in 2020.

And I have no further questions in the queue.

Great. Well, thanks very much for joining us today. As always, we appreciate your interest in 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. Thank you for participating. You may now disconnect.