Knowles Corp (KN) FY 2021 Earnings Call Transcript

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Knowles Corp (KN -0.39%)
FY 2021 Earnings Call
Nov 30, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. My name is, Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the 2021 Knowles Corporation Investor Update Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

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

Mike Knapp -- Investor Relations

Great. Thanks Sheryl, and thanks everybody for joining us today. Welcome to our 2021 Investor Update Call. Before we get started, I'd like to refer you to the forward-looking statements disclaimer on the screen. The presentation 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 used during today's presentation 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and periodic reports filed from time to time with the SEC. All forward-looking statements are made as of the date of this presentation and Knowles disclaims any duty to update such statements except as required by law.

Please note that all financial references during today's presentation will be on a non-GAAP continuing operations basis unless otherwise indicated. Pursuant to Reg G, reconciliations of non-GAAP financial measures referenced during the call will be most directly comparable to GAAP measures that you can find in the appendix included in the slides. A copy of today's slides have also been posted to the Investor Relations section of our website at knowles.com.

I'd like to take a moment to reconfirm the revenue, non-GAAP gross margins and non-GAAP EPS guidance we provided on our Q4 earnings call, which can be found on Slide number 35. Please note that the 2021 full-year estimates throughout the presentation assumes the midpoint of this guidance and all GAAP to non-GAAP reconciliations can be found in the appendix of today's presentation.

Finally, we will hold a question-and-answer session at the end of the presentation. If you'd like to ask a question please dial it is 888-330-3292 or 646-960-0857 and use the conference ID 7928348.

With that let me turn the call over to Jeff to kick off the call, Jeff?

Jeffrey S. Niew -- President and Chief Executive Officer

Thanks, Mike. Thanks for joining us today at our 2021 Investor Update Call. For those of you who don't know me, I'm Jeff Niew, CEO of Knowles. It's been over two years since we hosted our 2019 Analyst Day. And I felt now was a compelling time to update you on the progress we've made and the bright future that lies ahead for Knowles. We'd like you to come away from the discussion today with a better understanding to the exciting transformation we executed the company to focus on attractive end markets, innovative and differentiated solutions, and how the combination of attractive end markets, and the right product portfolio is expected to continue to drive sales growth, EBIT margin expansion, EPS growth, and increased cash flow.

So let's dive in, I know a lot of you are familiar with Knowles, but for those of you aren't, we just celebrated our 75th year as a market leader in high-performance electronic components, developing micro acoustic audio solutions, high performance capacitors and RF filters for the world's leading technology companies. Over the last 20 years, we have gone through a number of ownership changes. We are owned by Knowles family, then by private equity, and then by an industrial conglomerate from 2005 to 2014, prior to becoming a public company. At every step with every change in ownership, Knowles adapted and developed innovative products for new markets.

One of our true differentiating characteristic has been our ability to successfully leverage our engineering talent and manufacturing capabilities to solve our customers' tough -- the toughest technical challenges. Once we became a public company, we reviewed our product -- portfolio of products and markets, exploring opportunities, looked at our strategic options and we laid out an ambitious plan to transform our company. Today, this transformation is taking hold, and results reflect this. And I believe there is much more to come. We have moved away from being a highly concentrated smartphone supplier of audio components toward a manufacturer of highly engineered electronic components to a diverse set of end markets.

I wanted to take some time to talk about the changes we have driven over the past several years and how is will continue to drive earnings growth over the years to come. Our journey started with the realization that we're under spending R&D and focusing [Indecipherable] markets where we are not a leader, or in categories with low gross margins. I mentioned that we made significant changes to our portfolio over the years and has taken some time to complete. These changes have resulted in an optimized product portfolio across a diverse set of growing end markets that is delivering revenue growth, gross margin expansion, improving earnings and driving better cash flow. We achieved this by focusing on market segments that value our differentiated solutions and those with the most favorable growth prospects like ear, IoT medtech, defense, and EV. We shifted our R&D of capex investments to support these high value growth areas, away from lower value commoditized markets.

We also expanded through M&A, delivering accretive returns and growth markets and at the same time, strengthened our balance sheet through debt reduction. Now that we paid off $172 million convertible debt, we have even more flexibility to continue to focus on organic initiatives and larger accretive acquisitions as well as continuing to return capital to shareholders through share buybacks.

Knowles has a strong core leadership team, most of whom have been in their key roles since we've been a public company. Additionally, we've added a number of new people in key positions throughout the company. This includes new leaders in MEMS Microphones, hearing health, and Precision Devices, and we have added new R&D leadership in our audio segment. Under this leadership team, we have accomplished a number of major milestones over the past several years, as we focus on maximizing shareholder value.

Since 2016, we undertake a plan to fundamentally change Knowles to focus on higher growth markets and reduce our exposure to commoditize products. In 2016, we added the speaker receiver product line. In this business, we were the Number 3 supplier in this low-margin product category. It was highly capital intensive, and the business was concentrated in a very small group of smartphone customers.

This divestiture significantly improved our corporate gross margin and cash flow, while reducing our exposure to the smartphone market. In 2017, we divested our crystal oscillator business. This was a business that was included as part of the spin. It didn't have a leadership position in the markets where it competed. It was also a business that had single-digit operating margins. We used the proceeds of this sale to pay down debt and improve our balance sheet. We were quick to realize the untapped potential we had in the Precision device segment. By running it as a single cohesive business, coupled with some targeted investment in a new leadership team, we recognized this could be a growth platform for the company. We first consolidated the manufacturing footprint by leveraging the Knowles infrastructure in Asia, which allow us to begin acquiring businesses. Between 2017 and today, we completed four tuck-in acquisitions in precision devices. All these acquisitions add to our scale in the markets we serve with significant synergies. These acquisitions expanded our high-performance capacitor and ceramic filtering capabilities and broadened our portfolio of products for defense and medtech customers. More importantly, each one of these acquisitions was accretive to the company's EPS.

In audio, we acquired MEMS microphone ASIC design business from ams in 2019, which included intellectual property, rights to source ASIC wafers from multiple foundry partners and the transfer of an ASIC design team. This transaction provide us with significant material savings, which continues to benefit our gross margin today. During this period, we also reallocated our R&D spend to prioritize high-value markets while de-emphasizing more commoditized products. All of this work has resulted in 70% of our current business being above 40% gross margins, up from less than 50% in 2017.

Finally, one of our core competencies has been our operating expense discipline across the organization, enabling enhanced operating leverage for the company. We continue to find additional ways to operate more efficiently in the post COVID world. All these actions we have taken over the past several years have led to significantly improved financial performance. The improvements have been driven by our strategy to invest both our dollars and human capital in products and markets that will yield the highest margin and best return on investment for our shareholders. From top line growth to gross and operating margin expansion to significantly improve free cash flow margins, the benefits of our actions we have taken are clear.

From 2017 to 2021, there are three metrics that are particularly proud of. First, we expect to deliver a 480 basis point improvement in EBIT margin. Second, we expect EPS growth from $0.88 to $1.50. Finally, we expect to double our free cash flow margin. I am confident these actions we have taken over the last several years to improve our financial results are sustainable and there's a clear path to increase margins, EPS and cash flow in the future. In fact, we now believe there's a path to deliver over $2.50 in EPS. To get there, it requires us to deliver on four key items. On revenue, we expect that growth will be primarily fueled organically through the markets we already serve. Specifically, we anticipate strong tailwinds in the true wireless market, IoT, hearing health, defense and EV markets, layer on top of more modest growth expectations in smartphones, compute and the industrial markets.

Next, we anticipate gross margin expansion will be driven by continued mix improvement to higher-value products and by new solutions we expect to introduce to the markets we serve. Because the products we sell into our fastest-growing markets typically have better margin profiles, we expect an uplift to our overall gross margin as sales markets -- end markets become a larger portion of our business. For operating expenses, it's more about maintaining the discipline we have already shown. We will continue to increase R&D spend in line with sales growth, while SG&A will increase at a lower rate. This should provide significant operating leverage. Finally, for capital allocation, we now have a strong balance sheet and expectations for significant cash flow over the years to come. We have a history of accretive M&A in precision devices and with our future cash flow and strong balance sheet, we expect to have significant capacity to continue to supplement our organic growth through M&A. Additionally, we will continue to buy back shares. This powerful combination provides the path to $2.5 or more in earnings within the next three years to four years, and John will go into a bit more detail later in his portion of the presentation.

Now turning to our markets. It's important to note that every one of our end markets is growing. That said, some of our end markets are growing faster than others, and we've increased our R&D, sales and marketing investment in some of the most attractive markets served by our audio and precision device segments. In this slide, we've highlighted in green those markets which are growing greater than 5%. Those highlighted in purple are growing less than 5%. We have a unique position in each one of these markets, and I'll provide a deeper dive into each shortly.

One of the most important goals our team has achieved is the successful transition of our business from a predominantly smartphone focused supplier to diversified electronic component provider. We have reduced our reliance on smartphones to 35% of revenue in 2017 to just over 20% by the end of this year. On an absolute basis, our smartphone business is lower due to the decision to focus on the faster-growing end markets. That said, we now expect this business to grow on an absolute basis in line with end market growth. At the same time, we increased our exposure to growing end markets where we have strong competitive positions and where our differentiated solutions are valued. This diversification resulted in a number of benefits, including reducing single customer exposure and improving gross margin.

Now turning to our products. Knowles has held a long-held reputation for delivering high performance products across the end markets we serve. We have decades of unique and value-added manufacturing experience -- expertise, and we are capable of creating innovative solutions to complex technical challenges that allow our customers to deliver product features and applications. Knowles designs, manufactures and delivers these products. This vertically integrated operating model allows us to quickly adapt to market trends and a changing demand of our customers. Our unique design capabilities and manufacturing processes also enables our customers to differentiate their new products and applications and leads some of the world's most respected companies to rely on our technology.

Across our product portfolio, we have shifted our focus to value and specialization. Redirecting our innovation and manufacturing capabilities to leverage our higher growth opportunities. We have reduced investments and commoditized products with lower gross margins as well as areas that did not deliver sufficient return on invested capital. Examples of this include deemphasizing both MEMS microphone for the smartphone market and rightsizing the investment in [Indecipherable] that did not deliver adequate returns. We also increased our investment levels to be priced with more favorable competitive dynamics and high demand. This focus on organic investment provides reliable earnings and cash flow. We continue to double down on our fastest-growing segment, precision devices for solutions that cater to attractive growth markets.

We operate across two segments and deliver industry-leading performance in every market we serve across both of these platforms. In Precision devices, our high-performance capacitor and RF filtering solutions enable some of the most demanding applications in defense, medtech, telecom and EV markets, and our innovation and creativity in manufacturing process allows us to continue to be a leader across the markets we serve. These precision device products serve a market opportunity that's greater than $1 billion.

In audio, we are best known for MEMS microphones. Knowles pioneered this product category over 15 years ago. And year after year, we continue to introduce new products with the smallest design, high signal noise ratio and lowest power. Our MEMS mics are ubiquitous for voice capture across consumer devices and have become even more important as voice has become a primary user interface. We are the only mic supplier that designed our own ASIC and MEMS wafers in addition to do our own packaging and testing product. Historically, we designed mics for smartphones and then draw the solutions to other end markets. Now we are designing microphones for specific end markets and optimizing them for the characteristics that are most important to our customers, like low power for ear wearing devices or high signal noise ratio for car being captured in IoT products. We also pioneered balanced armature speakers over 50 years ago and are known as a performance leader for audio output in hearing health market. These are the world's smallest speakers, delivering the greatest output at the lowest power. And finally, audio solutions. We are creating reference designs around new applications requiring more high-performance microphones. This enables us to pursue the long tail of IoT customers who typically are buying higher gross margin products. Altogether, for audio we see a $1.7 billion market that we can serve.

First off, our capacitor portfolio includes products with highly specialized requirements, including high voltage, high temperature and high reliability. The markets we serve include defense, medtech and EV. In the defense market, we are a leader in capacitor serving radar, space and airborne applications, and we are seeing rapid growth in the defense communication area. In medtech, we enjoy a very strong position for capacitors in both MRI and implantables and anticipate continued strong growth in demand for this segment. In the MRI space, we provide a full range of non-magnetic capacitor solutions. Our customers need [Indecipherable] markets, experience, high reliability, product range and testing capabilities for their demanding applications.

And in the EV market, our high-voltage capacitors are used in a host of onboard applications for battery management systems that require greater than 600 volt charging. One trend we see is driving increased content is manufacturers moving away from film capacitors to ceramic capacitors to support increased temperature requirements. We are enabling this transition with new products that will include proprietary ceramic formulations to increase the range of our products in differentiation. Overall, we see a $550 million SAM for capacitors growing at a compounded annual growth rate of 5% to 7% over the next few years.

We also deliver high-performance ceramic filter across a broad range of applications and frequency. In the defense market, our devices are used for narrowing the spectrum for improved target identification as well as filtering signals to detect and block enemy radar. We expect demand for our filters in radar and defense communications markets to continue to grow at high single-digit CAGR in concert with strong investor in U.S. and allied radar and jamming platforms. Eventually, 5G millimeter wave telecom infrastructure will deliver speed and capacity that will replace the cable in your home in the form of fixed wireless, feed factory automation, autonomous driving and a variety of other application. This infrastructure is a potential market for high-frequency filtering technology, but the exact time line of these rollouts remains uncertain. I see telecom as a potential upside to the high single-digit growth expectations for the defense market over the next several years. Overall, we see a $475 million SAM for RF growing at a compounded annual rate of 6% to 10%, with 5G millimeter wave infrastructure has a potential upside.

Now on to audio. Ear is one of the most exciting opportunities for Knowles over the next several years, where we have a track record of delivering innovative solutions at high-volume with high quality. We leverage a host of components to service this market such as microphones, balanced armature speakers and audio solutions to dapple customer challenges for space constrained ear worn devices that require power efficiency and performance. Unit growth for solutions like true wireless ear bud has been strong, and we expect that to continue in the future. We see a $475 million SAM for ear growing at a compounded annual growth rate of 10% to 20%.

Several years ago, the IoT market for voice [Phonetic] was primarily driven by the adoption of some our speakers. But over the last few years, we have seen the IoT category expands to include devices like security cameras, TVS, doorbells, white goods, and VR, AR headsets. I can't think of a device in the consumer space that has not embraced voice as a user interface. This has always been a key area of focus for our microphone business, leveraging our ability to capture sound from a distance and solve the challenges with the background noise. This has also been an area where our customers have been most interested in our solutions capabilities to deliver reference designs that enable best-in-class audio performance. We see a $275 million SAM for IoT growing at a compound annual rate of 10% to 15%.

The pandemic caused a number of challenges for Knowles, but also a number of opportunities. For example, the move to work from home and remote school reminded people around the world how important voice cancel actually was. As employees and students around the globe upgraded their devices, they began to expect more from their online communications. As the market leader for microphones in the compute segment, we benefited from these trends and expect continued growth in this market. We see $165 million SAM for compute, growing at a compounded annual rate of 2% to 5%.

Now on to our medtech business in audio. The Cochlear Center for Johns Hopkins estimates about 28 million Americans suffered for mild hearing loss, yet only 5% use to hearing aid. Another 12 million suffer from moderate hearing loss, but only 37% of this group uses a hearing aid. Important studies have also linked hearing loss to conditions such as cognitive decline in Alzheimer's disease, clinical depression and many more health issues. We have been helping leading hearing aid companies deliver devices that address these issues through our microphones balanced armature solutions. We are seeing an acceleration of MEMS microphone adoption in hearing aids, given the performance and the robustness advantages that our broad portfolio product places in an ideal position to facilitate this transition for our customers. More recently, proposed rules from the FDA on over-the-counter hearing aids, if adopted, will make it easier for teams to attract hearing loss. We anticipate a number of consumer over-the-counter brand coming to the market and to supplement the strength we are currently seeing in our traditional hearing aid channels. We see a $300 million SAM for medtech and hearing health growing at a compound annual rate of 3% to 6%.

Finally, smartphones still represent the important opportunity for us as we drive innovation and performance and features for lean smartphone OEMs. And while we are not pursuing the commoditized portion of this market, there are still opportunities for us. We see a $475 million sale for smartphones, growing at a compounded annual rate of 1% to 4%.

I want to take a moment to highlight our commitment to conducting business in an ethical, socially responsible, environmentally sustainable manner. This commitment is consistent with our corporate objectives. It is essential to our continued business success. We have recently issued our first ever sustainability report, where we share our strategy, statistics and long-term sustainability initiatives to be transparent and drive continuous improvement. I believe it's a significant importance to our employees, potential recruits, customers, investors and suppliers. You can see here some of the accomplishments that show how we do business with integrity, how we respect and value our employees and the environment and how our shared value is united as a company.

I will now turn it over to John Anderson, Knowles' Chief Financial Officer, to discuss how this strategy will drive our financial results over the years to come. John?

John Anderson -- Senior Vice President & Chief Financial Officer

Good morning. For those of you that don't know me or I haven't yet met, my name is John Anderson, and I'm the Senior Vice President and Chief Financial Officer at Knowles. I'm proud to be part of the management team that has been instrumental in reshaping the company over the last several years. As Jeff mentioned in his opening remarks, today's Knowles is in a much stronger financial position and has a sharpened focus on growth markets that can drive increased shareholder value. I'm excited to talk to you about our improved financial performance, capital allocation priorities, and the action plans we are implementing to achieve our updated midterm financial targets.

Over the past several years, we've implemented a strategy which shifts more investment dollars and engineering resources into market segments that yield the most attractive return on invested capital. In addition, we pruned spending in areas where market opportunities have not developed as expected. As a result, our financial performance has improved significantly with 2021 expected EBIT margins of nearly 20%, up 480 basis points over 2017 levels. We've delivered this improvement through a combination of gross profit margin expansion and operating expense leverage, resulting in an expected increase in EPS of 70% since 2017. It's worth noting that our expected EBIT margins for 2021 are already approaching the midterm target we communicated in the fall of 2019, which is earlier than expected, despite the challenges and headwinds associated with both COVID-19 and the global semiconductor chip shortage.

Now let's spend a few minutes walking through the primary drivers of our margin improvement, which along with a more disciplined approach to capital investment has resulted in a significant increase in free cash flow. Gross margins for 2021 are expected to increase by 80 basis points over 2017 levels. I'd like to point out that 2017 revenue and gross margins were positively impacted by the settlement of a royalty dispute. Excluding the impacts of the settlement, gross margins are expected to improve by 190 basis points over 2017 levels. This gross margin expansion has been driven primarily by organic growth in markets that value our technology, innovation, high reliability and manufacturing expertise. Our products and solutions for these markets typically have better-than-average gross margins, and as sales into these markets have increased, this has lifted total company gross margins. We've also made significant investments to improve factory process flow and productivity, and we've become more disciplined in pricing, including passing on surcharges when necessary to offset increases in commodity costs. Lastly, we've made several acquisitions, including Integrated Microwave Corp. and the ams MEMS microphone ASIC design center, both of which positively impacted gross profit margins.

Next, I'd like to highlight some of the actions we've taken to reduce operating expenses as a percent of revenues by 350 basis points since 2017. First, we focused our spending in markets where we have a high probability of success and prudent spending in areas where the market opportunities have not developed as planned. In addition, we established a low-cost shared service center in our existing Philippines facility to handle back office processing. We also migrated substantially all of our businesses to a single instance of Oracle and implemented lean practices to reduce waste across most functional areas. Lastly, we eliminated redundancies to achieve cost synergies related to bolt-on acquisitions in our Precision device segment.

Our actions to improve operating margins, along with a more disciplined approach to capital spending, has resulted in an increase in free cash flow generation from 5.5% of revenues in 2017 to a forecasted 13.7% for 2021. Most of the actions we've taken are structural changes to the business that will continue to benefit Knowles for years to come. In addition, we've put in place incentives within our compensation structure to drive future margin and cash flow improvement.

Our increased operating cash flow generation, combined with our significant reduction in debt has allowed us to refine our capital allocation priorities. In 2021, our capital deployment was heavily focused on debt reduction as we paid off our convertible notes earlier this quarter. We also supplemented organic growth with an accretive acquisition and return capital to shareholders through share repurchases. We expect to enter 2022 with little or no net debt and anticipate increased cash generation. As such, we expect to increase the amount of capital deployed for acquisitions and/or share repurchases, while continuing to fund internal initiatives for products and markets that will yield the highest return on investment for our shareholders.

Next slide. While I'm pleased with our improved financial performance, I'm even more excited about our opportunities to deliver future earnings growth. Now let's go into a bit more detail with respect to each of these drivers. From a revenue perspective, a significant portion of our existing business is exposed to end markets with strong tailwinds. Within the audio segment, this includes MEMS microphones for true wireless and IoT and balanced armature speakers and microphones for the hearing health OTC market. In precision devices, this includes RF filters and high-performance capacitors for defense and electric vehicle markets. These products are expected to grow organically at a rate of 8% or more annually based on market growth rates and increased content.

Over the last several years, we've diversified our portfolio and reduced the portion of the business attributable to smartphones, which today represents roughly 22% of revenues and is expected to grow 1% to 4% annually. As a result, we expect total company annual revenue growth in the mid- to high single digits. As I mentioned earlier, our gross margins have increased and are expected to finish at 41% in 2021. We now see a path for further gross margin expansion to 43% or more over the next three years to four years. This expansion will be driven by new product introductions, favorable mix and reduced product cost. We've made progress improving our operating leverage in the last several years through spend discipline. If you go back to 2017, operating expenses were 25% of revenues. This is expected to be reduced to approximately 22% of revenues in 2021. I'm confident that given the growth plans we've talked about this morning, we have an opportunity to reduce this to approximately 20% over the next three years to four years, which assumes maintaining our R&D spend at 9% to 11% of revenues.

Next slide. I've talked in a fair amount of detail about our financial priorities and the specific drivers of earnings growth over the next several years. Now, I'd like to recap our mid-term financial targets. As part of our transformation to a diversified electronics manufacturer, we evaluated the financial metrics that drive shareholder value and concluded that the two most important attributes were operating margins and free cash flow generation and have established the following mid-term financial targets. EBIT margin of 22% to 24%, and free cash flow as a percent of revenues of 15% to 17%. It's important to note that these financial targets exclude the impacts of future acquisitions.

In summary, it's a very exciting time for Knowles, and we believe we are uniquely positioned to drive strong earnings and cash flow for our shareholders over the next several years.

With that, I'll turn it back over to Jeff, and then we'll move to Q&A. Jeff?

Jeffrey S. Niew -- President and Chief Executive Officer

Thanks, John. Before we move to Q&A, I'd like to make a few final comments. I'm very pleased with what we've accomplished over the past few years, and we hope that you are as excited as we are about the future. The transformation we are in the middle of is, in some ways, going back to our heritage of delivering innovative and differentiated solutions for attractive and diverse end markets. You are already beginning to see the results in our EBIT margin expansion and dramatically improved free cash flow, which has allowed us to strengthen our balance sheet. Going forward, we have great differentiated products, serving a diverse set of blue chip customers in growing end markets. We will continue to be disciplined with our R&D investments and capex spending, focusing on maximizing EBIT margins and cash flow. Our strong balance sheet will allow us to continue to pursue accretive M&A in our precision device segment and opportunistically buy back shares. This all makes me very excited. And we now see a path to $2.50 or more of EPS over the next three years to four years.

We'll now open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Rob Labick of CJS Securities. Please go ahead your line is open.

Robert Labick -- CJS Securities -- Analyst

Good morning. Thanks for taking my questions. And thanks for a great presentation.

Jeffrey S. Niew -- President and Chief Executive Officer

Thank you.

John Anderson -- Senior Vice President & Chief Financial Officer

Thanks Bob.

Robert Labick -- CJS Securities -- Analyst

Jeff, you alluded to the, I guess, hearing health or your over-the-counter hearing aid market as an opportunity for growth. Maybe you could elaborate on that a little more and give us an update as to where the FDA stands on that, and what kind of an opportunity it could be for you over the next three years to four years?

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, so I think we're right in the middle of the FDA still soliciting final comments on the over-the-counter market and how they're going to manage it. So, we anticipate that's kind of probably be resolved early in Q1 next year. After that, I think we're anticipating that there will be brands, well-known brands that will come to market with over-the-counter products. Now, how I kind of view this, Bob, you kind of listen to what I said relative to what third-party today is saying about the number of people who have mild hearing loss, it's in the tens of millions. And so the question is, is what percentage of that population? It is very low penetrated today by the traditional hearing aid channels. What percentage of that could be penetrated? And I think we talked on the last earnings call and I would hope over the next few years that you'd be able to start seeing numbers, hopefully over-counter market, maybe 3 million to 4 million hearing aids per year. And so each one of those hearing aids would have one to two balanced armature receivers and most likely two microphones.

I just think the last comment, overall, while the hardware is different in terms of over-the-counter for mild hearing loss versus significant earning loss or profound hearing loss, the content itself is very similar. And so we're very comfortable with the idea here that this could be the thing that gets us to consistently GDP plus of the over-the-counter market. And I'll add one more piece into this, which I know I'll get a question at some point, but just back to the -- also our balanced armature, our automated line, we have this line, it's up and running and obviously, we're going to be pursuing the true wireless market, but we've also now started to see there's going to be opportunities potentially in the over-the-counter market for this automated line as well.

Robert Labick -- CJS Securities -- Analyst

Okay. Super. That's great and very helpful. And then just, as you mentioned, obviously, the balance sheet has improved materially, essentially net debt free or net debt free, close enough either way. Could you talk about the M&A environment right now? And over the next several years, your thoughts on your ability -- will more capital be redeployed for M&A or repurchase? Or how are you trying to balance that capital deployment going forward?

Jeffrey S. Niew -- President and Chief Executive Officer

Well, I think our priority is first organic investment, right, we kind of laid out what that means. Second priority is M&A. I think we've now had kind of a history of about four years of adding a number of accretive acquisitions. And so I think if you look at the numbers, I don't have the exact numbers in front of me, but it's over $0.20 that of EPS that we've added.

John Anderson -- Senior Vice President & Chief Financial Officer

$0.25.

Jeffrey S. Niew -- President and Chief Executive Officer

Yes, over the last four years through M&A. And I think with our balance sheet, there's a possibility that we should be able to repeat that kind of performance again on M&A. Now I'll make the comment, there is a pretty rich environment for our PD group, right, in terms of M&A, but the multiples are quite high. So, we just want to make sure we're very disciplined in what we're buying and why we're buying it in order to ensure that we want to buy things that are going to -- first of all, be accretive, of course, but also help us on operating margins and help us on cash flow. And so -- and then I think our third priority at this point would be buying back shares.

John Anderson -- Senior Vice President & Chief Financial Officer

Bob, just to give a little bit of granularity there, we have $100 million currently authorized under our stock buyback program. Through the third quarter of this year, we purchased roughly $35 million. So it's $65 million remaining. As Jeff said, organic growth and M&A is a priority, but we also do expect to buy back shares and really be opportunistic as well as attempt to offset dilution that relates from stock-based comp plans.

Robert Labick -- CJS Securities -- Analyst

Got it. Great. And then last one for me. If there are opportunities that are extremely attractive to you out there, what leverage ratio would you go up to? And what's your kind of targeted leverage ratio at the end of this medium-term period? Is it to just use the free cash as capital deployment? Or might you get up to a turn of leverage or 2 turns? Or how are you thinking about leverage over the next three years, four years?

Jeffrey S. Niew -- President and Chief Executive Officer

Yes, Bob. I mean, we're going to be fairly conservative here. As you mentioned and I mentioned, we're going to be very close to net debt free as we enter 2022. We want to keep a strong balance sheet, investment-grade like credit metrics. So I would say maximum of 2.5% to 2.75%, clearly below 3 times leverage.

Robert Labick -- CJS Securities -- Analyst

Super. I will jump back in queue. Thank you.

Operator

Your next question is from Christopher Rolland of Susquehanna. Please go ahead, your line is open.

Christopher Rolland -- Susquehanna -- Analyst

Thanks, guys, for the question and thanks for hosting today. I guess, first of all, to get to the 2015 [Phonetic] your time frame, maybe you can talk about the linearity of growth. Are you expecting faster growth earlier that then moderates? Just maybe any assumptions there? And if you could -- what does capacity utilization look over this time period and then assumptions on the pricing environment as well? Thank you.

Jeffrey S. Niew -- President and Chief Executive Officer

Sure. I think on the growth side, we're expecting this to be linear on the organic side, and it could be a little lumpier on the M&A. It's hard obviously, to predict when M&A is going to happen. But I would expect that to be a little bit lumpier, so more linear on the organic. I think that's one of the benefits of the diversified set of markets that we have, that we're not overly reliant on one specific market to grow. And what we kind of see here is even through COVID, some of markets were stronger like compute and some of the consumer stuff and some of our medtech was weaker. And now compute, obviously, people are getting concerned and maybe it's getting a little bit weaker, but our medtech has been doing quite well across both PD and our audio. So it's one of the few advantages of the stableness of the business because of the diversification. In terms of the pricing environment, I think this is a very broad question because we have a lot of different product portfolios. We have MEMS mics, but then we have -- even with in MEMS mics, we have different markets. I would sit there and say that over the last three years or four years, save the one COVID year, pricing environment has gotten more positive for us overall. And that goes across all our markets, right. And so I think that trend is going to continue. And again, more and more, we used to talk about, well, what's the ASP? It's always MEMS mics and smartphones, but this is becoming a less and lesser important portion of our business. And so it's a little harder to describe the pricing environment. But generally speaking, the non-commoditized portions of the market, the pricing is pretty positive as we see it going forward.

And then capacity utilization expectations, I think we've been pretty clear about the fact that we like to run our capacity overall as a company in that 80% to 90% range. That's kind of our goal. But I think there's kind of a little bit different flavor here about capacity utilization, is that in the past, we were very focused on like unit share, right. And now we're talking more about profit pool share and value share, which means, quite frankly, is that you're seeing this reflected in our capex spendings. And we've had a lot of lumpiness and some heavier years in terms of capex in '17, '18. But our capex as a percentage of sales has been trending down. And we anticipate that's going to be -- the continued basis is that we're only going to invest in capex for capacity, where there is a strong return on ROI, and we're not focused on, again, unit share. And the best example I give of that is commoditized microphones. We're just not going to be adding capacity in order to pursue that portion of the market.

Christopher Rolland -- Susquehanna -- Analyst

Thanks Jeff. That's probably a great lead into my next question here. And that is how you view your growth opportunities in audio, especially anything net new or anything at the margin? I think that balanced armature speakers are going to probably be a part of that. But if you can talk about those opportunities or perhaps there may be an opportunity in audio to do M&A and what does that look out -- look like out there as well?

Jeffrey S. Niew -- President and Chief Executive Officer

Well, I would say, first, on M&A audio, there may be some opportunities in audio, but I think it's going to be more opportunistic, rather being it delivered as we are in precision devices with M&A. We don't see the market being target-rich in audio in terms of M&A, but there may be opportunities to do some things like we did with the ams acquisition.

In terms of the growth, let me kind of segment this out, which we kind of did in the presentation. I think in the past, we have walked away, in our overall, on an absolute basis, our smartphone business is smaller than it was four years ago. But we feel like the majority of the commoditized portion of that market, we've kind of come to the rationalization that that's not where we're going to participate. And now we expect that, that business will grow more in line with the market growth for smartphones. Compute has been very good for us over the last two years, three years -- two years, for sure, with COVID. We're not expecting the growth rate to be like it's been over the last two years at 2% to 5%, and there'll be some opportunities for upgrades of mics, adding more microphones in these platforms and make them higher performance. But we're not going to see the end market growth like we do.

Now, on the other side of this, I think the areas that we're really excited about is first is ear and IoT. I think for a number of years, smart speakers were kind of the driver of growth. You're now starting to see more and more applications emerging that can drive growth. And none of them are, by themselves, are individually are 100 million or 200 million microphones. But when you start adding them all up and the solutions we're providing, they add up to a lot and we like the gross margin in this portion of the market. These smaller, new type of things like TVs or AR, VR headsets [Indecipherable] like an IoT. And then, of course, true wireless. We still think there's opportunity to run here. Probably more, what I would say, with -- as the market expands in terms of applications, adding things like ANC to more of the devices, which needs more microphones and higher performance. There's a lot of different applications coming that will drive microphone demand as well as, again, outside of the Apple platform, there's a lot of growth happening in this space. So we're pretty excited about that.

And then lastly, of course, is the hearing health market. I think if you go back four years, five years ago, we kept saying, it was a GDP business. And now if you take the way we look at this, in terms of the growth in the hearing health market, which is partially being driven by people being more comfortable with wearing things on their ear like because of true wireless. Also, more tech-savvy people getting older and getting hear aids and the over-the-counter market, this is now a GDP-plus business. And so I think we see that, organically, audio should grow at mid-single digits. That's what we see over the next three years to four years.

Christopher Rolland -- Susquehanna -- Analyst

Thanks guys.

Operator

Your next question is from Suji Desilva of Roth Capital. Please go ahead, your line is open.

Suji Desilva -- Roth Capital Partners -- Analyst

Hi Jeff, hi John. Thanks for the presentation this morning. So you mentioned in your growth and margins, new products, I guess, margin accretive, new product introductions planned. I'm wondering if you could specify on a relative basis, which areas you'd expect those new products to be coming from?

Jeffrey S. Niew -- President and Chief Executive Officer

Well, quite frankly, it's across the board. I mean, I think one of the things that we are really highly focused on, and I think John mentioned it in his prepared remarks is that if you go back in how we were compensated as a management team, it was on revenue growth and EBIT, right? And we shifted that to revenue growth and gross margin expansion. And so that really is changing kind of the culture of those in terms of where [Indecipherable] being our R&D dollars. And so I think if you look in our microphone business, if you look in hearing health, if you look in capacitors, you look at RF filtering, we have a significant amount of focus on new products that are going to drive gross margins higher. And this takes some time, right? I mean, it's partially cultural in terms of, again, if you think about pursuing EBIT dollars, it incentivizes you to fill that last bit of capacity or expand capacity in order to take share for incremental EBIT dollars. We're not looking for incremental EBIT dollars. We're looking for higher gross margin products and product categories that will drive our EPS in the future.

Suji Desilva -- Roth Capital Partners -- Analyst

Okay. That's very helpful, Jeff. And then you talked about a bunch of end markets. The auto electric vehicle market, 2% of revenues now. I'm wondering when that might be a more meaningful contribution and timing if that's factored into your growth forecast? And are there any milestones between here and there that we should be watching for?

Jeffrey S. Niew -- President and Chief Executive Officer

Well, I think there's a couple of things that -- again, and I've described this, I think, on earnings calls, but I'll describe this again. I think we've got a number of platforms that we've won that are driving a significant portion of the revenue that we have today, and it has pretty high content per vehicle, again, focused on higher voltage applications. I think we've got a lot of new design wins that are going to go to production over the next two years to three years. The hard part for me to gauge is who the winners and the losers are going to be in the end market and how much content we have with each one of those. Now, this business is a little under $15 million today. It was probably near zero three years, four years ago. I would say, conservatively, this should be a $30 million business in three years to four years. If we happen to have the right content on the right platforms with some of the winners, this number could be -- it could be double that. And I think it's a little early to say. But again, the great thing about being a diversified electronic components manufacturer, we're not reliant on one specific market to drive all our growth. And I think this is one of many growth opportunities that we have, but we are very excited about the EV opportunity.

Suji Desilva -- Roth Capital Partners -- Analyst

Okay. Great. And then last question for John, perhaps on the gross margin. A lot of color there. Appreciate all that. Historically, the seasonal variation has been fairly high, given the dependence on smartphone at all, maybe 300 bps difference between the first half and the second half. John, do you expect that to continue? Or will that seasonal difference flatten out in the new business model?

John Anderson -- Senior Vice President & Chief Financial Officer

Suji, I think that will flatten out a little bit. I would say the smartphone market, as well as some of the other consumer electronics, so if you think of true wireless, that is kind of seasonally heavier in the back half of the year. But again, as that smartphone business becomes smaller to the total portion of the business, the seasonality will flatten out a bit going forward.

Suji Desilva -- Roth Capital Partners -- Analyst

Okay, great. Thanks guys.

Operator

Your next question comes from Tristan Gerra of Baird. Please go ahead, your line is open.

Tristan Gerra -- Robert W. Baird & Co -- Analyst

Hi good morning. Just a follow-up question on your growth in margin that's going to be partially driven by mix. How should we look, again, at the balance? How much is speaker? What's the adoption rate for wireless headset right now? How much of an opportunity that part of category is in this scheme of your growth plans?

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, so again, I'll let John talk about relative to gross margins. But as far as the balanced armature, the automated line is up and running now. We're actually shipping some products off that now to customers. So -- and that's very positive. That gives us an incremental capacity about a million units per month. I think in our plans, when we look at over the next three years or so, right now, we're being conservative and we're anticipating probably adding one more line over that period of time. So, that would take us to 24 million units per year. And just to kind of give you a flavor, we make 25 million to 30 million manually per year. So it's essentially doubling the output of balanced armature over from today going forward to about 45 million to 50 million units per year.

John Anderson -- Senior Vice President & Chief Financial Officer

Tristan, in terms of gross margin, as I mentioned in my prepared remarks, we delivered about 200 basis points of improvement from 2019. If we stay on that trajectory, we'd expect to be at 43% plus in three years to four years. The future margin expansion is really going to be driven by, I would say, two-thirds is mix. So more higher growth in HHT, PD and MEMS, into the compute, ear, IoT. The other third will come from new products, which are typically introduced at higher-than-average gross margin.

Tristan Gerra -- Robert W. Baird & Co -- Analyst

Great. That's very useful. And then could you remind us in your hearing aids business, what's the average content? You mentioned two microphones and also, what would be a baseline unit assumption a few years out with over-the-counter retail ramp?

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, I think it's the same, whether it be in the over-the-market, the content versus the traditional hearing aid channels. How it is? There's definitely two microphones as the standard in hearing health. There are few applications with three, but mostly it's two microphones per ear, possibility of moving to three, if hearing manufacturers move to ANC, units having ANC is in the hearing aids. In terms of balanced armature, obviously, there's always at least one balanced armature per ear. But there are lot of applications in hearing health where they put two balanced armature speakers per ear. There's a fair number of those applications where they are trying to cancel out vibration by using two balanced armature speakers. And so I think you'll see the more premium portion of the market will have two balanced armatures and the more premium portion of long-term of hearing health will have two to three microphones. And that will be, again, whether you're over-the-counter or in the traditional hearing aid channels.

Tristan Gerra -- Robert W. Baird & Co -- Analyst

Great. Thank you very much.

Operator

Your next question is from Derek Soderberg of Colliers Securities. Please go ahead, your line is open.

Derek Soderberg -- Colliers Securities -- Analyst

Hey guys, thanks for taking my questions. So building off an earlier question in EVs that doubled for you guys since 2017. If you look at the market, I think it's maybe gone up five-fold in terms of the units. You got all these OEMs talking about going to a full EV lineup. What -- can that contribution that you guys see start to grow in line with the market? And then what's sort of the competitive landscape there? What's your competitive edge in EVs? Then I have a follow-up.

Jeffrey S. Niew -- President and Chief Executive Officer

Yeah, so first of all, you should remember, we're focused on the full EV portion of the market and high-voltage charging. So, we're not focused on hybrids. We're not focused on low-voltage charging. We're focused on high-voltage platforms. So, we're not participating in the whole market. So, I think you have to look a little bit differently. And these higher voltage platforms are just starting to be introduced. These are not like the majority of the market today. And so we're focused on a very specific portion of the market where we have a competitive advantage. And I think we've got a couple of competitive advantages. Number one is, we're used to dealing with high-temperature, high-reliability products with specialized ceramic formulations in order to deal with these type of applications. And so that is the advantage that we have in place. As I said, I think the one thing that is a challenge for us at this moment is we are getting more design wins, but depending on the platforms, there's different levels of content. We have some platforms where we have close to $20 worth of content. We have some other platforms worth closer to $5. And it's really hard for us to gauge at this moment who the winners and losers are going to be in the end market for this high-voltage platform. And so, again, there's a range of outcomes here. And again, we're just a little bit under $15 million right now.

I'd say, conservatively, I'd say, in the next three years or so, we should be at $30 million. That's a conservative estimate. If we win with the winners and we have the right content, we could -- this could be as high as $60 million. And so that's kind of the range. And I think we are going to let this play out. I don't want to overly focus on, again, just EV because we have a lot of other great stuff going on, but needless to say there is going to be growth. The question is how much it's going to grow. It would be dependent on how much content we have on the platforms that ends up being the winners in this high-voltage market.

Derek Soderberg -- Colliers Securities -- Analyst

Got it. That's helpful. So, I sort of have a two-part question here. You guys sound like you're going to be acquisitive still. Just curious if you can clue us in on to any operating metrics you're targeting, growth, operating margin, free cash flow? You guys have been very disciplined on gross margin. I mean, would you go out and buy revenues with the gross margin below 40%? And then as the sort of second part, is it correct that the executive compensation plan is primarily tied to operating margins and cash flow? Did I hear that correctly?

Jeffrey S. Niew -- President and Chief Executive Officer

So it's -- let me take the executive compensation first. It's revenue growth and gross margin expansion. We do have a cash flow component, but it's primarily, again, around revenue growth and gross margin expansion. That's where it's primarily on. And again, there's a cash flow component. Look, let me just make comments and you can add on that. On the operating metrics, I think it's an interesting question you're asking. Would we acquire a 40% gross margin business? I think if you want to look at it, I think the way we set this up in the call was, here's the drivers of our mid-term model, right? There's revenue, there's operating spend discipline, there is gross margin expansion. I think what we kind of see is as a diversified electronic component manufacturer, we are optimizing around operating margin expansion and free cash flow. And so to answer to your question, would we buy something that's 40% gross margin? I think we would consider something at 40% gross margin if it was accretive in terms of our cash flow margins and our operating margin expansion. Now there's always a risk here and we always got to look at this, right? We want to make sure that it's strategic, right? It's broadening our product portfolio. It's allowing us synergies. We want to be very disciplined in that thought process. But I mean, we're optimizing around operating margins and free cash flow. Any comments?

John Anderson -- Senior Vice President & Chief Financial Officer

No, I think you covered it.

Derek Soderberg -- Colliers Securities -- Analyst

Perfect. Thanks guys.

Operator

There are no further questions at this time. I will now turn the call over to the presenters for closing remarks.

Jeffrey S. Niew -- President and Chief Executive Officer

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 again soon. Thanks, and goodbye.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Mike Knapp -- Investor Relations

Jeffrey S. Niew -- President and Chief Executive Officer

John Anderson -- Senior Vice President & Chief Financial Officer

Robert Labick -- CJS Securities -- Analyst

Christopher Rolland -- Susquehanna -- Analyst

Suji Desilva -- Roth Capital Partners -- Analyst

Tristan Gerra -- Robert W. Baird & Co -- Analyst

Derek Soderberg -- Colliers Securities -- Analyst

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