All right. Good afternoon. Thank you guys for joining us for the last presentation of the conference. Next up is Knowles Corporation. Knowles is a client of ours, and we are excited to have them join us today. Knowles is a specialized industrial technology company with the majority of their revenue coming from resilient markets like MedTech, defense, and industrials. Knowles is a NYSE-listed company under the symbol KN. Joining us today is Chief Executive Officer, Jeff Niew, Chief Financial Officer, John Anderson, and also with us is Vice President of Investor Relations, Sarah Cook. With that, we'll just pass it over to John. Jeff.
Great. Thank you so much. I'll take a few minutes here to try to go through a few of these slides that we have. John may step up here and say a few words on the financials. Let me talk a little bit first about Knowles, who we are. Last year, we were just under $600 million in revenue. Very profitable business. Make great margins, EBITDA margins, as well as cash flow margins. We'll talk a little bit more about that in a bit. I think the main thing that we would talk about is, we've undergone a significant transformation over the last five to seven years, where we've divested a number of assets, and acquired a few other ones. It's fundamentally changed the profile of the business from where we were. Today, we are set up in two segments.
Our Precision Devices segment, which is primarily capacitors, specialty capacitors, as well as specialty RF filters, and then our MedTech & Specialty Audio business, which primarily sells to the hearing health market, microphones and speakers, for people who are hearing impaired. If you look over to the right, our markets, about 45% of our business comes from MedTech, another 21% comes from defense. I would call those markets generally not cyclical. Obviously, the defense cycles are very long. MedTech, most of the markets that we're in, whether it be hearing health, and I'll talk about some of the other markets, tend to be, when I need a hearing aid, I need a hearing aid. When I need a pacemaker, I need a pacemaker. We have quite a bit of insulation, I would say, from the ups and downs of the general marketplace.
Just a little bit on what we make. Again, we make high-performance caps, and then RF microwave filters. Let me just spend a few seconds on that. We make ceramic caps, film caps, mica caps, electrolytic caps. We make all different types of capacitors. We make capacitors that are almost the human eye cannot see without a microscope, all the way up to boxes that are two feet by two feet and weigh, in some cases, over 1,000 pounds. They're all for different applications depending on what you need. I would generally say in our high-performance capacitor business, there are people who make commoditized capacitors. That is not our business. If a customer comes to us in our medical, defense, or industrial markets and says, "I need a capacitor. Show me your catalog.
I just need a capacitor," we will send them to the commoditized people who make billions of capacitors for fractions of a penny. If our customer comes to us and says, "I got a really hard problem that needs to be solved," whether it be things like high voltage, high pressure, high temperature, very tight tolerance capacitors, these are the type of things we do. This applies to all of our business. We also make RF microwave filters, mainly for the defense markets. Broad offering of different types of RF filters that we make. Mostly defense, as I said, and again, the hearing health solutions, microphones and speakers into the hearing health market. Just briefly how a hearing aid works. There's a microphone on the outside of the hearing aid that picks up the sound on the outside. It is then processed by a digital signal processor.
We don't make that portion. We make the microphone. It amplifies the sound in how much hearing loss you have or in the frequency band that you've lost hearing, and then plays it back on a speaker on the other side in your ear, which we do make. I would generally say we are serving now a very diverse set of very attractive markets with strong macro trends. Just briefly on defense, the macro trend on defense, I think everyone knows, I'm not going to spend a ton of time on this. I would say that our business in defense market is growing north of 10% right now per year. We see the opportunity in late 2027 and 2028 for an acceleration, based on, I think, three main factors.
One is, there's expected to be replacement of munitions at a higher rate than in the past because of the Ukraine war. Number two, the White House is proposing a very significant rise in the defense budget for the U.S. later this year, which really wouldn't start hitting us till late 2027 or 2028. Third, the U.S. allies are also starting to spend more of GDP on defense, which is not going to leave them a lot of options in the short term, but to buy from U.S. suppliers, which we supply to. MedTech, again, I said very non-cyclical. I think what you see is that whether we are in things like defibrillators, pacemakers, hearing health solutions, we're in a lot of applications. We have a fair amount of content in MRI machines. Very immune to the cycles of the economy.
Very attractive markets with strong macro trends. But I think people ask us why we win and how can we garner 45% gross margins in a capacitor in the hearing health business, in our filters with EBITDA margins of 25%. We start with almost everything we do is high-performance technology. I would say I find it very hard to find a product category we're in where we aren't making something that's very unique and very few people are capable of doing. The second thing is, if you look at our investor day presentation that we did about a year ago, it shows a list of our customers. We have a list of blue-chip customers who have been our customers for literally, when I say this, for decades. Not years, decades. I'll use the hearing health market as an example. There's five major hearing aid manufacturers globally.
Four of them are in Europe, one of them is in the U.S. We've literally been doing business with these guys for 50 years. We're a trusted partner with these companies. I would also say, we understand their applications. You take our high-performance technology, we have very intimate relationship with these customers and their applications, and when they come to us with a hard problem to solve, we're there to solve it for them. We are typically, in those applications, sole source, at least for, I would say, the first couple of years when something comes out. Maybe they find another source down the road. I think the last piece that really makes us differentiate, beyond having unique technology and understanding the application, is we've built manufacturing processes around customization.
If you think about the high-volume capacitor guys, they're focused on cost and having the lowest cost units. We are not focused on lowest cost. We're focused on ability to customize, and that allows us to go in for opportunities that are in the $5 million to $10 million range and do the customization, where the competitors are really not set up to do it that way. That's a real differentiator for us. At our investor day, we wanted to make sure, because we did do a big divestiture in 2023. We sold our Consumer MEMS Microphone business, which was primarily selling to the cell phone market and customers like Apple. When we sold that, we stripped that all out. We showed what the business has done over a cycle. This includes some M&A.
We grew the business at about 8%, or CAGR, from 2017 through 2025 and grew our EBITDA by 11% over that period. We think there's opportunities to grow this business faster over time. We'll talk about that in a minute, on why that is. Bottom line, I would sit there and say this business has a proven track record of producing consistent revenue growth as well as consistent EBITDA growth. Okay. You want to do this slide?
Sure.
Okay. Just come over here.
Our businesses have a very strong record of cash flow generation. You can see over the last four years, we've averaged 20% of revenue in terms of cash from ops. I expect similar levels of cash flow in 2026. In terms of capital deployment, since 2022, we've repurchased $210 million in shares at an average cost of $19, given that we're trading $30.38 and change now. Pretty good decision in terms of capital deployment. We average about 3%-5% of CapEx as a percent of revenue. I think this year and last year, a little higher, closer to the high end of 5%, given we're ramping up some capacity for specifically our Precision Devices segment. Other capital deployment is acquisitions. We spent $263 million in 2023 for the acquisition of Cornell Dubilier. With that, turn it back to Jeff.
Just one back thing, back to this slide. I think it's worth noting, the consensus that is out there right today for 2026 is about $640 million-$645 million. That'd be a little over 8% growth. The consensus for EBITDA right now for 2026 is $160 million, which I believe is about 14% growth in EBITDA this year we're prospective to produce. Just a commentary, I think I've said this on our earnings calls. We've had six successive quarters of book-to-bill in our Precision Devices segment of over one. I also said that our April bookings on the Q1 call, our April bookings were very strong as well. We're looking forward to, again, a very strong year this year. I would just say this, almost zero data center exposure.
People may view that as a negative, we're achieving these growth rates without the cyclicality, which I see of data centers. There may be some opportunities down the road for us in the data center that we'll detail in another forum. Right now, we're doing it with the macro of the markets we're in, coupled with the great product portfolio that we have in order to get these strong orders for the rest of the year. This, again, kind of talks about what we talked about at our Investor Day, and I think this is where we kind of have gotten our investors very excited about where we are. We produced 8% revenue growth from 2017 through 2025, and we're projecting 8%-10% growth over the next three to four years. This was with acquisitions.
Since we've gone public, I'm sorry. Since we've done our Investor Day, we've actually achieved these revenue CAGRs on a pure organic basis at this point. Everything we're talking about in terms of growth, we have not done an acquisition since 2023. We're already achieving the high end of this range, which we said there will be some acquisitions in there. We're also saying we had done in the past 11%, I believe, over the last six quarters or so, we've been averaging EBITDA growth at closer to 20% EBITDA growth on that roughly 10% CAGR on revenue. Cash from operations continues to be strong. I know John didn't mention it, I'm sure he'll mention it in a future slide that we have in here, we have very little debt.
Our leverage ratio is about 0.5, and with the cash we generate, assuming no acquisitions yet this year, our leverage ratio will be close to zero by the end of 2026. How do we build that up? I said 6%-8% for Precision Devices. Just for reference, the Precision Devices segment grew by 16%-17% last quarter, year-over-year. The MedTech & Specialty Audio business had a very strong Q1. They were up 14% year-over-year. We were very clear to say it's still going to be in the 2%-4% for the full year 2026. We had 4% for acquisitions, again, right now the consensus is to have us grow over 8% organically alone this year. Okay. You want to cover this slide?
Sure.
Okay.
As Jeff mentioned, we're targeting EBITDA growth of 10%-14% annually this year based on consensus. We're at the high end of that at 14%. What I also want to talk about is EBITDA margin expansion. Currently, if you take the consensus numbers, we're right at 25% EBITDA margin. We think over the next 3-4 years, there's a path to 30% EBITDA margins, it's really a combination of gross margin expansion through pricing, through better factory capacity utilization, as well as mix. We also get operating leverage, right? If we're going to grow the top line at 8%-10% organically, we don't need to grow our OPEX outside of R&D at that level. We target growing OPEX, SG&A at half the rate of our organic growth, so you get good operating leverage.
We feel pretty good about increasing that 400 basis point improvement, 400-500 basis points from 25%-30% over the next several years. 2/3 of it would come from gross margin expansion, the other third from operating leverage.
Okay. I think it's worth mentioning, all of our products that we sell today have very, very strong variable margins. A big portion of our costs are in the fixed overhead, in the manufacturing. To the extent that we can leverage our CapEx, we continue to expand margins along the way. I think it's worthwhile just spending a few seconds on this. We had done a number of acquisitions, four to be exact, from 2017 through 2025. I would say the other three were relatively small. The Cornell one was the big one. I'll spend a few seconds. It was the last one. We spent around $260 million for a business with about $120 million of revenue. We paid about 10x multiple on an trailing EBITDA basis. This was truly a story of one plus one equals three.
For the people who are familiar with our story, this has been a super successful acquisition. Just to give you a remember, it was about $120 million when we bought it on a trailing basis. At the end of 2023, this year, it'll be between $160 and $170 million of revenue, that acquisition. It'll also be expanding on gross margins. The cash flow margins expanded. When we bought the business, it was in the upper 20s in terms of gross margin. We're now approaching the mid-30s and see a path to get to the 40s in terms of gross margin. This has been a real win, and I think the stress I would say here is while our organic growth plan is very solid over the next 24 to 36 months, we do see with our balance sheet the opportunity to try to do another acquisition.
I want to make sure it's clear. Couple points. Number one, we're not going to do an acquisition that will put our balance sheet in harm's way. We've been in that position. When we came out of spin with Dover, we were given a fair amount of debt. I don't think we want to get into that position again, and been very explicit, we will not go over 2.75 leverage for an acquisition. Second, I want to make sure that we can speak to an acquisition and be very crystal clear on the reasons we did it, so we don't get a lot of head-scratching from our shareholders when we do something, and that we got to be able to demonstrate one plus one equals three with tangible numbers.
Cornell fit all those, and I think we've got now a track record of integrating a number of these acquisitions, and Cornell is, again, one of our fastest growing product segments. The areas we're looking would be consolidation. I would say consolidation is super exciting from a cost synergy standpoint. In other words, somebody who does the exact same thing as us, so we should have a fair amount of cost synergy. Probably not as exciting in terms of a TAM expansion, so it doesn't open up a larger market for us, but it does give us a lot more ability to bring cost out. The second one would be extensions. This is where Cornell would be in. In other words, they make capacitors, we make capacitors, but they made an entirely different type of capacitor servicing different applications within MedTech, defense, and industrial.
It was almost like an ideal acquisition for us. Lastly, would be adjacencies. We see, following the same business model, the specialty components that we do, capacitors, RF filters. We see things like inductors, resistors, magnetics. There's other areas that we think we can apply our business model as a possibility. That one would be dramatic increase in TAM, but we would probably have less on the cost synergy side, but we'll be looking at all these. I think the other point I would make, we did some divestitures. We had a commodity crystal oscillator business, and I mentioned the Consumer MEMS business. Here's what I'd say. We're done doing divestitures. We don't see anything in our product portfolio we don't like. We spent a fair amount of time over the last few years getting bigger and getting smaller, reshaping the portfolio.
We're done with the reshaping of the portfolio. I think that's what we would say on that. On capital allocation, our business is not super capital intensive. We've been very clear to say about 3%-5% of revenue is going to go towards CapEx. Last year, we were in the 5% range, but our growth rate was higher than expected. This year, we'll probably be in the 5% range. Our growth rate's higher than expected. If the growth rate trends back down to what we put in the model, our CapEx will trend down back to what was in the model. Generally, there's no big, huge capital expenses that we see coming over the next 24-36 months that would drive CapEx spending dramatically up from this 3%-5%.
We said our second priority will be M&A. I think we've been pretty successful. As I said, we talked about the 2.75 leverage ratio. We have plenty of liquidity. Our sweet spot would be find something in the $10 million-$30 million of EBITDA. That would be the real sweet spot for us. Not too small, where we spend a lot of time doing something that doesn't really add a lot, and not too big that it stresses the corporation as well as the balance sheet. I think that's kind of what we're looking for. We've been doing share repurchases. You can see we've bought back about $270 million worth of shares over the last four years or so, at an average price of $19. We feel pretty good about that, where the share price is.
What we've said going forward is we are fully committed to buy back stock-based comp, which averages between $25 million and $30 million per year. Beyond that, I think we have to think about what we're going to do. Like for instance, right now, we do have a little bit of debt left with a half of a turn of leverage. We probably are better off paying down that debt at this moment than buying back shares. Generally, it'll help EPS more. At the end of the year, we will have no debt if we do that. That's kind of the intent. We'll have to really think about next year, what we're going to do. I think we are getting prepared for doing more acquisitions. I know people think this is a big leap, but we would like people say, "Who are your peers?
Who do you want us to compare us to?" We would like to be considered like a mini Amphenol. That's who we would like to be considered. I think our margins, our growth rate, our cash flow is pretty comparable. I think what we haven't done, we haven't proven we're a serial acquirer of good businesses. I think we still have to prove that yet. If we can prove that, I think we should be considered a mini version of an Amphenol. Let's see what else I got here. Summary. Our transformation is complete. This took a lot of work to get rid of roughly 35% of our revenue and still while being a public company, and getting out of our low margin, low growth markets, and then focusing our management's time, our capital on the high growth markets that we're in with the great products.
I showed you the historical performance of this business. It's been very strong over a full cycle. We can show that. We expect actually better performance on the next cycle. The reason I can say this, first, management has more time to dedicate to these businesses as opposed to the commodity businesses. Second, PD, which is our faster growing segment, is becoming a larger and larger portion of our business, which means our growth rates are naturally going to trend up just by the mix of markets that we're in. I would sit there and say our markets, the macro trends in med, defense, and industrial look pretty positive over the next 36 months for us. Defense and med, even longer. Our differentiation is unique technologies, customer intimacy, and the willingness and ability to customize to make better gross margins to solve real hard problems for our customers.
We have a proven M&A track record, which we just got to find the right things to buy. When we find them, we understand what to do with them, where we're going to go, and our strong balance sheet and cash generation will be able to help us drive that part of that shareholder value. With that said, I think that's kind of the summary of the presentation. I'm open to answer any questions or whatever we want to do from here. Sure.
I think you guys had a large energy order.
Yep.
Can you talk a little bit more about that business and it sound like you didn't want to talk about data centers or maybe just like maybe a little mention.
Okay. Let me describe here what happened, just the historical. The question, just so in case this is recorded, I'll repeat it. There was a question about the energy order. In Q1 2025, about a little over a year ago, we received an energy order for north of $75 million. When I talked about those book-to-bill ratios being over 1 for the last 6 quarters, we didn't even count this order. If you count this order, our book-to-bill ratio is even higher. It's a crazy number. We didn't even count this. What we demanded out of this order was that we received a $20 million prepayment on this order.
We were going to have to expand capacity, and that was built into our 5% of CapEx, but realized we received a prepayment, in order to build out the capacity in order to deliver this order. We committed, at the time, that we'd start ramping that order in the first half of 2026 with full production in the back half of 2027, Q3 2027 to be specific. Sorry, 2026. 2026 to be specific. We are on target. We delivered about $1 million of product to this customer in Q1. We'll deliver probably in the neighborhood of 5 or so in Q2, and then we'll be at a run rate of about $10 million a quarter through sometime in early in the first half of 2028. This energy order, we have not disclosed the actual application yet. We are under NDA with this customer.
Our hope is that towards the end of this year, into next year, we would probably have an investor day maybe in the first half of next year that would go through the details of not just this, but we have 6 or 7 other of these things like this energy order that maybe people haven't heard as much about, but we did touch on at our investor day. There's the energy order. For sure, defense has changed since we did our investor day. The growth rate in defense has gone up. We talked about, for those who know our business, Micro Solutions Group, where we're taking the technology from our hearing health market and applying it to other medical applications. We did $1 million in business with that last year. We'll do two to three this year.
We're hoping to be north of five next year in that business. We're getting into ceramic inductors. People say, "Why do you have the right to play in ceramic inductors organically?" First, next to a ceramic capacitor on almost every printed circuit board in the applications we have, we see a ceramic inductor. We are experts in ceramic. I have ceramics expertise within our company to design high-performance ceramic inductors. Second, no one has consolidated the specialty market of inductors like we have the specialty market of capacitors. We think we have a right to play in that market, and that's another opportunity. We're doing more value-added within our businesses. In other words, whether it be in capacitors, RF, hearing health, we're being asked to provide a larger portion of the solution that can drive up our revenue growth by adding more content.
What I'm basically saying is energy's one of five to seven things we got going on right now that could accelerate our growth in the 2027, 2028 timeframe. Back to the energy order, I think it's a great opportunity. We'll deliver this order. We'll see how this all goes. Our expectation is there hopefully will be other customers who will be interested in our product. These are custom products, they won't be interested in an exact product, but we'll be doing something similar for them, and that we'll get repeat orders from this customer probably sometime in 2027. We'll get the repeat order for deliveries starting in 2028. That's kind of the answer. I don't know if that hopefully answers your question. Long-winded answer. Sorry. Sure.
Follow up on that. That's very interesting. You said there's five other potentials. What would maybe be the sequence of orders? Are there five different entities of similar type orders or?
Well, no. What I'm saying is there's five to seven total growth opportunities that are beyond our core.
Yeah.
One is energy. Another one, because I don't have these all written down. To be fair, one is we have a great opportunity in downhole applications. That's another one. We have the inductors. We have expanding our defense offering. We have five to seven of these.
They're a re all going on in parallel. These are all going on in parallel. If you think of, if we have an investor day in the first half of next year, we spent our last investor day talking about the core because this is our first coming out as the new company with no consumer products, right? We spent the vast majority talking about, and we just touched on these things that we're working on for growth. The next investor day will be the opposite. The core will be, "Let me give you some updates. Now let me go into detail on how we grow even faster." That, I think, that would be the goal. We'll go into great detail about the size of the TAMs, what kind of revenue we can expect over the next 24-36 months. What's the risks?
We'll go through all that at an investor day.
Ideally, we would like to update those targets that we-
Yeah. That's ideal. To be truthful, we're being asked by a lot of shareholders, "You're exceeding all your targets every single quarter already. So what does that mean for the future?" I think an investor day's going to have to answer that.
Is that on your website as a replay?
The-
Investor.
Yes. Yes.
Okay.
Yes. All these slides essentially are a subset of the investor day presentation. I think the investor day presentation was 70, 80 slides, Sarah? How many was it? Yeah. This is like 10 of those slides.
Sarah, I know the slides or the slide deck is out there. Is the transcript as well?
Yeah.
How long is the webinar?
It's about two hours almost.
Oh, wow.
It's almost two hours. It's not just me and John presenting. I have my business unit leaders presenting, talking about their businesses. Yep. Anything else? Yeah.
I guess AI is impacting, to my knowledge, like the hearing aid market.
Yeah
Sort of. Does that benefit you? Are there other form factors that AI?
Many of our customers on the hearing aid side have or are going to be introducing AI-enabled hearing aids. The challenge in hearing health is this: when a microphone picks up the sound, processes the voice you're trying to pick up, and then replays it into your ear for your hearing loss, this has to be done in real time. In other words, there can be literally 10 milliseconds of delay. Otherwise, it's like watching TV, where the screen and the audio are off. What AI is allowing is more advanced processing at high speed that wasn't being able to be done before with traditional digital processors, which means it's going to improve the experience for hearing aid users.
There are certain, and I'm not going to go into the details here, certain of our customers are ahead of others in terms of AI implementation, and we're doing very well with all of them. In other words, is we sell to every one of them. We aren't directly impacting AI directly. We do have some things we have to do, like in terms of the delay. Our microphone has to process the signal when it comes through from an acoustic signal to an electrical signal. We have to do that in two to five milliseconds. We have to process that to hand it off to the digital signal processor. We're doing things that help enable that, but we're not directly implementing the AI. We think it's a next phase of hearing health, where most hearing aids in the next five years will have AI processors in them.
Any other questions? Okay.
Maybe just one last little click on that one. Historical growth rate on hearing aids and kind of what we've been seeing recently.
The historical growth, I can sit there and say 2%-4% has been the historical. 2%-4% is what we see. Having been involved in this market for a long time, I can look at the data through 2000, 2001 dot-com bubble, 2%-4%. Through 2008, 2009 financial crisis, 2%-4%. Through COVID, 2%-4%. This business grows consistently over a cycle at 2%-4%. You may see one quarter here where it goes down, or like we saw last quarter, where it's way up one quarter, but it will grow by 2%-4%. There are some tailwinds in this market that could make it grow faster over time. One is aging Western population. People lose hearing as they get older. That is a fact. As people get older, there's going to be more usage of hearing aids.
Number two, third world countries having a larger middle class. Most of this is out-of-pocket, to the extent that places like China and India start buying more hearing aids, that will expand the TAM for the market. Lastly, just generally the stigma of wearing hearing aids. I think one of the things that's come out in the last four to five years is that people who go untreated for hearing loss have a much higher degree of likelihood of dementia. You tend to withdraw if you're not hearing. Everyone's had the experience of knowing somebody who goes into a room at a party or wherever it's at, and they go. You know they are not hearing what is said. That leads to withdrawal, which leads to, the belief is, to increasing dementia.
I think there's some tailwinds in this market that could drive the growth rates incrementally up. I'm not saying it's going to go from 2%-4% to 8%-10%, but at the margins that we make in this market, if it goes from 2%-4% to 3%-5%, that's a big deal for us in our EBITDA, potentially our share price.
Margin profile for that hearing health business is basically low 50s in gross margin, 40% EBITDA margin and 30% .
If you add on this Micro Solutions products, where we're taking the technologies to other markets in medical, we're hopeful that this business, over the midterm, we can grow faster than 2%-4%. I think that's the answer. Okay. All right. Thank you very much