Focusrite (LSE:TUNE) — Final Results

0:01 Good morning, ladies and gentlemen, and welcome to the FOCUSRITE Investor Presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today, we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and I'm sure the company will be most grateful for your participation. We'd now like to play you a short video on behalf of the company.

2:37 I'd now like to hand over to the management team from FOCUSRITE. Tim, Sally, good morning. Thank you, Mark. Hello, everyone. Thank you for joining us today. Sally and I are very pleased to be with here you to hear today to talk about our journey we've been over the past twelve months and our our the lowlights and the and the highlights of of what we went through. I think, in general, it's it's very safe to say that, you know, it was a very, very, very difficult year for us. You know, very challenging, but not without opportunities as well. And I'd like to kinda just give you a little bit of an overview on that. But before we do, I think it may be important just for some of those who are joining us today that are not familiar with our business, just to give a very, very quick overview of what exactly it is that we do.

3:26 The easiest way to think about our business is we are basically there's two different divisions of the FOCUSRITE group. One, the primary group is focused on content creation. So, really, anything that has to do with creating music or any kind of audio for any kind of media, it could be the soundtrack for a TV show or a film. It could be a podcast, all these different things. And this runs the gamut from basically anybody doing it as a hobby in their home all the way up through, you know, professionals and facilities that make all the motion pictures and the music that you listen to every day. You can see the different brands on there, and we'll kinda talk through a bit of the narrative on each of these as we go through the presentation. On the other side is the audio reproduction business, which is a part of the business that has been growing dramatically over these past couple years.

4:19 This is really the easiest way to think about this is this is really about products and solutions that are for the the reproduction or the broadcast of of audio. So if you think about the music that you hear when you're at the gym or the audio that you would hear if you went to a theatrical production or the music that you would hear coming out of the large speakers if you went to a big festival like Glastonbury. So, basically, you know, between the two of these, this is a pretty widespread. The reason we divide the business in these two different sectors is they are very different products and solutions. They go through very different channels and very different routes to market. But one thing that you know, one of the reasons the group has invested in in both of these is that traditionally, if you take the craziness that we've had really over the past four or five years since the pandemic, traditionally, these businesses have been very, very, you know, kinda constant, very consistent growing businesses over time.

5:18 Underlying the data on both of these, you know, and I think one thing that gives us confidence going into the future is that when we look at all the data about, you know, the number of people that are creating music and creating content, the people that are you know, people's interest in going to live events and experiencing shows and things like that, Both of those are going up into the right. So, you know, there's no lack of interest in these as we go forward. But as we'll talk about, you know, these two different divisions have been on very different paths for the past couple years. Our content creation business has been very challenged since the pandemic. You know, during that period of time, the demand for these prior these products, they skyrocketed. We could not make products fast enough. But since then and all the things that kind of followed that time, component increases, cost of living increases, all these different things have really come into play hard and resulted in some really difficult backdrop for us over the course of this year.

6:19 The audio reproduction business has been on a very different journey. The pandemic happened. This business just literally shut. And, you know, when things started to open back up, people came out in droves for events. And so we've seen definitely the other side of that in in this past year where that part of the business has been on a bit of a rebound on there. And the two have sort of met in the middle, if you will, on here. So I'm gonna kinda go in and talk a little bit about the content creation business to start off here. Sally's gonna take you through more of the just the the overall finance and highlights on here. So let's talk about, you know, what happened in the content creation space. Very, very difficult backdrop. I mean, when I look at this, I you know, it feels like everything but the kitchen sink was thrown out at us this year in terms of headwinds. We had massive channel destocking, you know, that was happening across every sector in the industry. And why is that? Well, it's because if you if you roll back to when we had the pandemic happening, as soon as components started to dry up, the very first thing that happened is all the prices went up and the allocation got really tight to the point where everybody, no matter if you were building guitars, ukuleles, or music technology, everybody was having to sign up, you know, for uncancelable orders for really a two year period on that, which normally would have been okay except, you know, it came on the very start of the downturn in the business when we came out of the pandemic, and things started to really come into play

7:51 like all the macroeconomic issues. So that really set a difficult backdrop for us in terms of working through not only all the inventory we had, but the channel as well. So that was a big initiative for us to take on this year. Second, cost of living everywhere has really come into play on there, which has, you know, caused a lot of people to rethink purchases, especially on the more premium priced products, if you will. We saw a number of our competitors do lots of dramatic price reductions and promotions across the year as well. We had a number of our major resellers in The US actually go out of business. The second largest retail chain, Samash, which had been around since the early nineteen hundreds, closed their doors on there.

8:40 A number of mom and pop shops across Europe and a couple major players in the German market also as well. The cost to produce products, the components, the the manufacturing, everything is maintained at a very elevated level. So when you kind of mix that all into a pot, it's not a great recipe for success, if you will. I think when we look across our brands though, as difficult as it was, you know, our numbers were not where we wanted them to be. But there are some there are some rays of sunshine there, and as well, I'll talk through in a minute. I think the biggest one was is that with all that going on and considering that most of our products in this portfolio are premium priced solutions, we held our own. Our sales rankings remained the top positions in in the industry. Our market share did as well. And even our end user registrations are underlying, you know, shows the overall demand for the business. They held quite steady on here. So you can see the different brands on here. Very difficult time for FOCUSRITE, particularly because over and beyond the destocking we had to do, we had a major product release that happened at the beginning of last year, which the channel was welcoming with open arms. But because last year's holiday season was very soft, it left them and left us with a lot of the older generation of stock and kind of a stunted start with the fourth gen. I'm happy to say that we've worked through the lion's share of that this year, and we're kind of back

10:11 on track. You'll see that as we go through the numbers. Novation actually performed actually better than the market did. A lot of that was some products we introduced right at the end of the year that are actually doing quite well, particularly the Launchkey, the new MIDI controllers. ADAM Audio was actually one of our shining stars this past year. And the reason for that is is because in the past, we've talked about as we've acquired brands, one of the strategies is is to bring them into the whole routes to market machine that we have. And that's something that doesn't come quickly. We bought Adam in July '19. This started kind of getting them into the fold when the pandemic happened, and really the next two years were just everything got set aside. We were just building product as quick as we possibly could.

11:00 But coming out of that, we really started to move them to the higher tier distribution that that FOCUSRITE had, and more, I think, as importantly, putting them and consolidating our sales teams in this division so that we have in each of the regions a team that's combined looking after the entire portfolio. That really came into play for Adam this year as we had them in the in the better distribution around the world. We had them, you know, in our our regional sales teams and their quotas, you know, looking at that and leveraging the size of our brands. And that that result actually gave us a really good uplift, and it really shows that what we've built in terms of our structure routes to market, we can take a brand that maybe had some regional success, put them into that, and the result is actually really good.

11:49 Going forward on here, Sequential and Oberheim, very much very much probably the most one of the most impacted brands we had. When you think about this brand, most of the products, very expensive. And, you know, even though we've got, you know you know, most of the professional musicians, you know, the artists that you know using these products, the lion's share of the sales is for more of the aspirational people to do it, people with a disposable income that want these products. And that where is where we saw a lot of softness. Now, one glimmer of of sunshine here is that towards the end of the year, we've released a couple of products that are in the lower price tier market, and they have actually done incredibly well. So we're optimistic that, you know, Sequential and Oberheim will come out of this. The even the high end analog synthesizers that we have, they're not going anywhere. They're not being displaced by any technology. There's still a desire for them. But I think that along with the balance of the lower end products that we're they're coming out and future ones as well, will paint a very different picture than the performance we had. And then lastly, Sonix, you know, which is the the small plug in company that we bought. They're doing quite well.

12:58 It's a great it was a great acquisition for us. Their products are very much aligned with our customers. And and, basically, you know, the the development team that we inherited as well has helped us accelerate a number of of of hardware initiatives that we have going into the future. So when we look at this regionally, you know, again, one of the biggest areas that we that was impacted was North America on here. This is where we saw a lot of this destocking that had to happen. Rest of world as well was was impacted. Rest of world, honestly, is is mostly about China, which has continued to be a struggle for the entire industry. If you follow any of the other people in our industry that that put out their their numbers and talk to you, they'll they'll reference China as being particularly weak on there.

13:46 We're pretty happy though in terms of the fact that we've moved through a lot of the overstock that we've had in the in the the channel in China, and we're starting to see more regular orders. Same thing with North America. You know, we had a big hill to climb on that. We were able to, across this year, as difficult as as as it was, to knock that that destocking down by half. And, you know, we we feel pretty confident we'll get to the rest of it this year and get them back on track. And overall sell through in all these regions, by the way, since the end of the year is looking pretty good. As a matter of fact, we're about to wrap up our q one, and it's the first quarter we've had in a in quite a while, to be honest with you, where we've got all brands in all regions pretty much on their budget numbers, which is refreshing to say the least on here.

14:34 Another bit of a shining star we've had is our direct to customer channel. So this is something in the background, the infrastructure, the websites that we've been developing for quite a while, and we're really starting to lean into this. It's it's a small part of the group, but we really feel that this is probably our best hedge for any channel channel consolidation and to really get as close to the customer as we possibly can. You know, we're being a bit more aggressive about this than we had. Normally, we would just have our products up in any different region at retail pricing. Now we do promotions on here, the same ones that the channels do. We follow on that. Our websites are all integrated with an ecom engine. So people coming to us to see our brands, there's a direct link to actually buy right on all of our brands now, which we're very, very excited about.

15:21 Just one slide very quickly just to say that, you know, just to kinda show this, we don't have great information in in our industry. You know, one source is US, and it's just kind of a slide to say that all the industry data we get out of The US is is pointing to the same thing that, you know, we've had a number of years of decline in all the different categories that we're in. So we're not in this alone, if you will. I mentioned earlier, and I just wanted to show you this graph, that, you know, despite all those headwinds, our our end user registration for our key product system remained quite consistent. Now what is this? So if when you buy one of our products and you connect them to your computer the first for the first time, they show up as a mass storage device. You double click on that, takes you to our website.

16:08 We're able to see that serial number. We're able to understand if we've ever seen that serial number come in before to our website. And if the customer goes through the registration product process, we we chalk that up as a net new serial number, a sale that's happened somewhere around the globe. To us, really, for this part of the business, it's probably the the the the best test we have in terms of the overall health of the business. No matter what's happening with the channel, with destocking over the world, how many human beings on any given day are buying one of our products? And this is what this has shown. It's showing that, you know, this past year, as difficult as it was, the end user registrations were tracking very close to the year before on there. So I think when you when you when you kinda look at that all in, basically, what it's telling us is with all the the backdrops we had, all the headwinds that we were facing on there, the fact that our products pretty much in every category are a premium priced solution on there and was difficult as as, you know, as it is for people in terms of, you know, what they have to spend, Our our products have held up incredibly well on there, which I think gives us a lot of confidence going into the future.

17:19 We put a couple slides here together just in case, again, for those of you who have not ever followed us before, just to, you know especially to understand just, know, what do our products do? Well, an Honor audio interface is basically the sort of the heart of anything when you're recording audio, whether it's music, podcasting, or whatever. It's what you plug all your instruments, your voice, whatever into, and that's the thing that that gives you the conduit to get your your your music, your audio, whatever it is you're doing into the computer to be edited, mixed, arranged, this type of thing. So, you know, there's there's really the the primary things are, you know, the sound quality, the connectivity, and what kind of functionality they they give you. And people ask us all the time. You know, there's lots of different audio offerings in this space, some very much less expensive than you. Why does Scarlet win? Well, we win because there's a real heritage. There's a story there that people that that really they grasp onto. They wanna know that they're dealing with a company that, you know, goes back and know and was and part of what they're getting inside that little red box is part of what was in large studio consoles back in the day and was built by famous producers and engineers.

18:29 It's the audio quality that you get out of our product. It's the ease to use on there. One thing that we spend an inordinate amount of time on is making sure that if you're a beginner, we're giving you all the tools and everything necessary to plug in and have a really great first recording experience quickly. That instant gratification thing is really important. And along with that, our products are highly reliable. Our return rates are minimal. We we have really dialed in our manufacturing on this. And so we we the product that we sell, if you look at the reviews, we we really just don't have any issues, technical issues with our products. You know, our our failure rate is is minuscule compared to some of the others on there.

19:14 And another thing that's really resonating with a lot of our customers is we've spent a lot of time actually making sure our products

19:20 are sustainable. So recycled aluminum and the pack the packaging that we use on there, all these different things have really come into play and are actually considered as we develop the products from the ground up on there, and that is definitely resonating with our customers on here. And so when you think about the Scarlett product, you know, which is, you know, one of the core products in the FOCUSRITE range, you know, the evolution of this, you know, over time is like, well, you know, what has really changed? It still looks like a red box from the original one you did. But under the hood, a lot has changed. You know, these boxes as customers ask and demand more features as we try to solve that ease of use and things like that. There's a lot more IP and and DSP that's under the hood now on these to solve, you know, common problems that people have. The net result is they have a much more enjoyable experience.

20:09 Their audio quality sounds good, and that's really bedded in. To the right, you can see our registrations for Scarlett. And this is basically showing you sort of the journey we've been on. If you go back to the beginning of last year, we introduced the fourth gen Scarlets. But as you can see through the holiday period, we were still selling the products we were selling was the third gen. So moving through all that inventory as I mentioned. But you can see over time what's happened on there is the fourth gen is embedded in really well. The blue line is the one to pay attention. That's really the remaining parts of the third gen that we have. And primarily what that is, it's the higher end ones that we just actually introduced the fourth gen ones at the end of this this past year that are just now going on. So what you're gonna see over time is you're gonna see that blue line shrink to nothing.

21:00 You'll see the fourth gen take over. And one of the things that we've decided to do is we've decided to keep the entry point from the third gen, the solo, in at that strategic $99 price point because what we've seen there is because the price differential on that between that and the fourth gen, it's around $50 on there. What we're doing with that product is we're not cannibalizing ourselves, but what we are doing is we're taking a lot of share from competitors that have lower end offerings that we typically didn't compete in. So a lot of people who are gonna spend 69 or $79 on another brand are seeing that they can buy a FOCUSRITE product for 99, and they're buying up. And that that strategy is is is playing out and working well for us.

21:46 I mentioned earlier that, you know, in in in in the heat of all this, you know, that our our leading position in the market has not changed. I would point you to these to these vendors. Toman, if you're not familiar with them, the the largest continental, you know, provider of of music technology and most music stuff across Europe, and Sweetwater Sound in in The US. One very interesting and unique thing that both of these companies do, they actively publish their top 10 and top 50 list in every different category. This is an unblemished list. There's no marketing hype. It's a true reflection of what they're selling. And what you're seeing, even though it's a point in time, is very indicative of what you would you would see when we've seen throughout the year, which is for us in the interface category, we normally have five, sometimes six in the top 10. We typically have two to three in the top five in the monitor category, and the same thing for Sweetwater.

22:43 That hasn't fundamentally changed. And I have to say, we're quite proud of that when you think again that our products are our premium priced solution and all the headwinds we've had and all the discounting we've seen that our products have held up this really this well. I think it's a real testament to the strength of our brands. Okay. I'm gonna take a a quick breath here, and I'm gonna go into audio reproduction, which again is I've been on a very different journey on here. You can see coming off a very low base in f y twenty on here when things just really, you know, started to come out of the pandemic primarily in in in areas like China. We've been on a remarkable growth in in this, and a lot of this has been the fact that, you know, there's been a resurgence in people going out to live events, but a lot of it has to do with, you know, a absolutely fantastic product development team who's really in the background in flushing out all the the Martin products to a point now where we literally have a solution from from for pretty much any type of opportunity that comes our way, from the smallest coffee shop all the way up to the largest arena and everything in between.

23:51 We have we have offerings that actually fit that bill, and that has really served us well. You know? When the pandemic happened, most of our competitors shut their door. We kept Martin open. Their r and d labs stayed alive because we knew that they we we had a real play to actually boast up their their portfolio, and that's exactly what we've done. So we've not only organically have, you know, increased the portfolio, but we've also added some new products through acquisition. So when you go and you look at the regional performance on on here, you can see a very different picture. Now you'll notice that North America is has was a little off this year. That is because we have been building products so fast to keep up with the demand that most of it just went to in into The UK and to into Europe.

24:38 And for rest of world, our model there typically is is we actually it's a royalty based model. Our contract manufacturer builds the product. They sell it. We get a royalty on there. So, you know, to our own admission, we the North America was a little bit starved in terms of product. We have remedied that and and and rectified that, and, you know, we're we're seeing strong numbers come out of them. So nothing really out to do with the demand in in the in the regions, mostly about our choice about where we were gonna allocate the product. I mentioned there were two new acquisitions this year, both small but really, really strategic bolt ons, both in the immersive space. So immersive is something that we're seeing as becoming more of a requirement for anybody who's thinking about upgrading an existing, you know, theater or, you know, or live sound stage or building one from scratch.

25:32 This is a big differentiator for the the people that run these facilities versus what you can actually just get in your own home theater, if you will, or sitting at home watching a movie or an event. And it's something that really is resonating with with people, audience members. It does two basic things. Number one, it really solves the problem of no matter where you're sitting in the auditorium, you're gonna get a a high quality experience. And number two, for events where there's actors or there's things on stage, it really does pull you into the whole performance and make you feel like you're part of the whole thing. What that means for us with this technology is not only, you know, the the immersive part of it, but it requires more amps, more speakers. So for the whole industry, this is a really good thing on here.

26:21 You know? So, again, I I mentioned that, you know, we're we've been on this kinda upswing on this business. We are quite mindful that, you know, the growth rates that we've been on on live sound, they're not gonna hold, and the whole industry is quite aware on this. You know, we've seen some tours be canceled, some of this for, you know, due to just cost of living things and stuff, but we know we're coming back to more normality. Even our own numbers are are showing that,

26:48 you know, where I think we were the first half growing this business was still growing at at 20% more. It's down to 11% now. And we think, you know, when you look at where this business has typically been historically, it's been sort of in the, you know, the the mid to to high single digit numbers. That's where we're expecting to get back to. However, we think we do have an edge on that. Again, the fact that we've got a much more robust, much more full portfolio than we did when we acquired this this business back in '19. So we think that's gonna give us a bit of an edge, especially with the immersive stuff under our belt. That's actually opening us up to a lot of opportunities as well.

27:28 Okay? I'm gonna take a breather. I'm gonna let Sally take you through the finances now. K. Great. Thank you, Tim. So if we just look at so I'm not gonna talk about revenue because Tim's talked about that in quite a lot of depth. What we'll come on to in the next few slides, I think, principally, we've seen the big drop in profits this year. Yes. Gross margin is down. I'll come on and talk about that. There were some one offs impacting that. And our cost base is where we had a big impairment for sequential as a one off noncash impairment. I'll talk about that, which means overall, you're seeing our EPS down significantly, about 36%. But our net debt has reduced a lot in this from where it was in February. I'll come on and explain about that. And we've maintained our dividend on the prior year, still with dividend cover of, you know, over over two, and we're looking to see that as a measure of confidence as we go forward. So if we now have a look at the income statement, again, Tim has talked about the sales growth or the sales decline this year, about 10% organic.

28:27 I'm gonna come on and talk about gross margin in the next slide in a bit more depth. If we look at our overheads, as you would expect, given such a tough year, we've done our best to control overheads. They're down 900,000, and that includes an inflationary impact about 1.4 and the annualization, an increment from our acquisitions, which is about another point eight. Obviously, given the performance, there won't be bonuses paid this year, but some of that hopefully will reset next year as we go back on just to flag that if we're looking forward to the cost base next year. You'll see in adjusting costs, it's quite a bit higher at 10.9. That's basically made up of two items. There's the, amortization of acquired intangibles at 5,500,000, which is pretty consistent with the prior year. We'll expect ongoing.

29:13 But, also, we took an impairment for Sequential, the acquisition we bought back in 2021. Now this is very much, a judgment at a point in time. Sequentially is still profitable. It is a great brand, and we are still investing in it. It's just had a really hard couple of years, you know, being right at the premium end of the market selling synthesizers for 3,000 to $5,000. So, you know, after some discussions, we've been through a model that we decided to take an impairment and written down the goodwill and the assets on that. We are comfortable it will recover. It will continue to grow, and it will deliver value to the group. K? If we then move on, and I also said we'll talk about gross margin. So gross margin overall is down three percentage points.

29:59 1.3% percentage points of that is due to something we talked about at the half year, which was a write down and then sell out of the stock of the VOCUSRITE product, which, again, you may remember we talked about at the half year. It's a great product. It's won lots of awards. Unfortunately, due to the component crisis, which Tim had talked about a bit earlier when he was talking about, content creation, we couldn't get it to the market in time to take advantage of that podcasting bubble. So we had too much stock for the demand. It is still still selling very well, but we've got rid of the excess. So that was 1.3 percentage point, both the write down and the impact of selling stock out basically at zero margin in the second half of the year. So then overall, we've got 1.7 percentage point decline. That is basically freight. Freight costs have gone up, over the year by about two percentage points, and we're expecting them to stay at that quite elevated level as we go forward. We're going into holiday season, and, also, we're expecting to see quite a lot of people move stock into The US ahead of the start of the new administration there. And we're gonna come on and talk about the possible implications of that later on.

31:04 Having said that, audio reproduction and content creation both saw a bit of movement in their margins, which have offset. As Tim's talked about, audio reproduction gets a very good margin in Asia. Seen a lot of growth this year. Again, as China's coming off that sort of slightly delayed post pandemic demand for experiences. So audio reproduction's margin was up. Content creations was down slightly, and that's again to do with this destocking, a bit more promotions to help stock move through the channel. We would expect those both to normalize next year. So going forward, that 45.8 is something we would expect to see as we go forward.

31:39 The balance sheet is pretty stable. A bit of increase in intangible assets from the acquisitions and our r and d. Working capital is a big movement, and I'm gonna talk about that in a bit more depth when we talk about cash flow. Other than that, there's no significant movements. I would just highlight in the noncurrent liabilities, whilst it looks like it's, you know, relatively chunky at 17,000,000, most of that is deferred tax. So it's not a cash liability. It's going to be going out in the near future.

32:08 So, again, looking at cash flow overall for the year, we were at net cash outflow of about 4,500,000, which was a big swing first half to second half, which I'm going to come on to. I will just point out here, our debt is backed up by a 50,000,000 facility across HSBC and NatWest. As we talked about last year, we just renewed that for four years, and we've extended it

32:32 the last couple of months out for another year. So it now expires at, September 2028. And we've drawn about drawn down about 35,000,000 of that as at the year end. We've got a big cash balance. I mean, we've got some work to do with our treasury management to look and maximize those positions, which is something we're gonna focus on for next year. Anyway, going back to the working capital movements. So you may remember we talked about at half year, this big cash outflow, which in the first half of year, 26,000,000, which was to do with an agreement we have with our big distributor and third party logistics provider in The US, where they can hold back payment if there's, a bit too much stock in the channel in that region, which there was, you know, as we've talked about. We have worked with them to destock that. There's still a bit to go. We've taken about 5,000,000. There's about another 5,000,000 to go.

33:20 But we've definitely had improvements, and that's where you can see that big swing coming in in the second half of the year. And you can see there also our inventories have reduced by about 5,000,000, and that's very much as we burned through that third gen stock, in FOCUSRITE. Martin, which we talked a bit about about having some excess stock at the half year. Actually, their stock has remained flat, but it's sort of reprofiled. As Tim said, we've put some more stock into The US to help support sales there, which we believe will drive growth. Debtors, although it looks flat on the half year, actually, there's quite a change in that. And they said we've improved the debt position with our US distributor. We just had a very big sales month in August with a lot of new products coming out that we were keen to get into the channel, ready for that sell in for Black Friday, which is today.

34:07 So hence, the reason it was a big set is that's just phasing, and you can see that reflected in the higher creditors number as well. So overall, our working capital is just shy of 33% of sales. Historically, it should be about 25%. We will work down towards that. I don't expect that we'll get there by this time next year, but we will certainly make a big dent on that. K?

34:27 And now I'm gonna hand back to Tim who's gonna give you more of a picture on us some of our strategic changes this year. Thank you, Salon. Alright. So those of you who've been following us for for a while, you know, our our overall strategy is is is pretty much, you know, since I came in in '17, has has remained very, very much the same. I mean, inside each one of these, you know, obviously, there's been, you know, some some tweaks and things like this. But overall, these are the things that we've been focused on, and I think they served us well. You know, when when you go back and you look over the this, you know, period of time, what we can tell you is that, you know, looking through, you know, all the the the accounting that we've seen from our competitors, you know, that happened during the pandemic, we definitely got more than our fair share of that. I think we performed incredibly well when the demand was that high. And looking at where we are in terms of our sales rankings now coming out of a very difficult period, you know, to maintain those those levels and those kind of sales rankings, I think, really, again, speaks to the fact that our strategy is quite sound.

35:29 You know, couple that with the fact that everything that we've done in the audio reproduction thing to boost them up and really leverage the fact that that business is coming back and taking more advantage and more opportunities, I think I think we've got this quite dialed in. You know, a couple things just to to to focus on. I mean, obviously, one of the the most important things for us is making sure this is a great place to work. You know, we we need to attract the same kind of talent that many, you know, much larger tech companies do. You know, we typically you know, people that that look to us, a smaller company, typically are passionate about audio or music, but, you know, we wanna make sure we retain people. And I think one of the things we're very proud this year is that in a year where it's been very difficult for us and the entire industry, we just finished our latest e and p s survey for all the different brands globally, and our e and p s score increased from plus 21 to plus 33, which is a very good score.

36:27 We continue to look to how we, you know, we we grow our customer base. So a lot of that is in the r and d we do. You know, I think, you know, we talked in the past about every one of our brands has is is basically an innovation center. So, you know, the AtomAudio people know how to make the best studio monitors. The sequential people know how to make the best synthesizers. We don't try to homogenize that. That's what we wanna do. But what comes out of that is, you know, really great new products that are received by the market very well and something we're very proud about. We had 35 new products that come out this this year,

37:00 including, you know, some incremental ranges in new price points and in new categories for Adam and sequential, which is, you know, definitely helping and embedding in well. It's early days. We just started shipping those, but they're getting great attention in the market. We always look at new markets. You know? So I talked a little bit about aligning the alignment we did with Adam Audio and getting them into the folds of our whole content creation thing that has done very very well. And we continue to look at, you know, at ways that we're to improve. We went direct to our reseller channel in Australia about a year ago. That has proved well and it and it served us well. We have just turned the corner on doing the exact same thing in Japan where we've got our own team on the street. We're selling direct to the reseller channel now and using that extra margin to drive more awareness.

37:49 So, again, you know, on the on the routes to market side, a lot going on. And then, again, you know, through acquisitions, you know, we did not have a a a sort of a a play in the immersive part of the business, which is really important on the live sound to own that technology and be able to offer it. We do now, and and we're already seeing the benefits of that even with the early days. And then last thing is just the lifetime value for our customers. I mean, we really we we look very, very carefully, and our our leadership team is graded on NPS. It's something we take very, very seriously on there because we know it has a direct impact on our revenue and and how well the the the brands do. Our NPS score has been at plus 70, which is unprecedented in our in our industry. It's something we're quite proud of. A lot of it has to do with the quality of our products and the fact that we for many of our brands, we have twenty four hour follow the sun support, which we think is something that resonates very well.

38:47 So, you know, when we look at some of the other things that we've done that are very important, I mentioned earlier, talked about, you know, all the things in terms of sustainability that's been happening with our products that is really resonating with our customers. So, Sally, why don't you take a minute and talk about some of the things that have happened here? Yeah. Absolutely. Thanks, Tim. So not only have we published our annual report and results this week, but also our second environment and climate report. And I'd like to thank, Andy Landau, our group sustainability manager, because he's managed this. You know? It's such a difficult area, and it can be so dry with so much data. But I would hardly recommend you read through this report because he's made it really accessible with the help of Marni, our intern, over the summer to help with this. So it outlines our disclosures. It outlines our approach, our strategy, and has a fabulous case study on the impact it's had on those new ADAM headphones that Tim had talked about as new incremental products.

39:38 Because it's not just about the reporting and making sure we've got offsets and we're tracking our data. Andy gets involved at the request of our product teams right from the start of the design to do what we can to make sure the materials, the power usage, and the packaging all are sustainable as they possibly can because we know that's important for our customers. It's important for us and, obviously, for the planet too. Great. Wanted to take a moment because this is sort of front of mind with a lot of people and talk about what's going on with tariffs. If you don't know and you haven't figured it out yet, I I'm an American, and there's a new sheriff coming into town again. Or as Phil, our chairman, his favorite band, The Who, it's new boss same as the old boss. So we have been mindful that this was a risk for a while, not just from the election results before that because there was a bit of saber rattling going on from both sides of the party. And so we worked with our distributor there, and we decided to take action early. We have moved a lot of of Chinese made product into The US, so it's on a route right now.

40:45 We're trying to do this in a very fair and balanced way. We're not pulling in any more than we know that we can actually are consumed through our different channels for the balance of this year. But the the majority of the stuff should arrive before the inauguration takes place. And what that does is it gives us options to consider as when we finally find out exactly where this is gonna land. The slide you have is kinda giving you a snapshot of where how much for each of the brands is done through through China. Now the FOCUSRITE one, that is a little misleading on there because that is where the production's done. But the Scarlets, which is the mainstay of the FOCUSRITE brand, the ones destined for The US are already made in Malaysia, and they have been for some time. So we've got a bit of a hedge there.

41:33 Most of the innovation products and pretty much in in the entire category, all of our competitors, everything is made in China on here. Adam Audio, you can see is a bit of a mixed bag. The high end s products were always done in Berlin, and we made the decision earlier in the year to move production of the a series, which is the mid level range that's destined for Europe and The US back to Berlin. And that's already concluded on there. And Martin, as you may know, based here in the user in The UK and Linea, both have factories. So a high portion of their products are actually manufactured here in The UK and not China. And then sequential, the high end synthesizers are all done in The US. However, our new lower priced products are made in China.

42:18 That's that was important in order to get that scale and and on there. So you can kinda get a a a lay of the land of what's going on here on here. You know, I think at the end of the day, we are talking and trying to understand where could we move production. That is a very much a mixed picture. You know, I think anything that you move out of China from in our industry, you're looking at about 15 to 20% uplift in cost. And there's also a concern about the quality of the product you can get out of there. But I think at the end of the day, you know, we will do the right thing. You know, if if tariffs come into play and prices go up as we have before, we will increase our prices to protect our margin. That's some that's not something I say easily because, you know, we have done a number of price increases on our products, and we are premium priced products. But I think the one thing that gives us confidence about being able to state that is that we've had so much thrown at us this year. There's been so much pressure with cost of living and so many brands, other competitive brands selling things for a greater discount. And the fact that that's been happening in our brands, our sales rankings, and our market shares held, I think it gives us more confidence that actually we could, you know, we could weather that storm.

43:37 Okay. A little bit about future growth expectations on here. So, you know, when we look at these two different divisions, I've talked about the audio reproduction business and how we're we're coming off of this this bit of a rebalancing on there. We're expecting this business to get back, you know, into sort of that sort of medium to high single digit. I I haven't mentioned content creation, and I have to put my hand on the heart. I cannot tell you honestly that this business is getting any better right now. There's no real signs that we can say that, you know, it's it's coming out of it. What I can tell you is it's not getting worse. And and what we're seeing in terms of early signs, you know, of the new products we've introduced and, you know, and what's happened so far in this the very beginnings of this holiday season are looking positive. Our reseller channel is much I wouldn't say they're positive jumping for joy, but they're they certainly don't have the negativity that they had for the earlier part of the year. So it does feel like things are cautiously moving in the right direction.

44:39 We I think our guidance is taking all the lessons we've learned over this period of time and trying to set realistic expectations on here. So you can see our overall growth assumptions for the near term and the in the in the future in in terms of what we're seeing. And if you've looked at the revised estimates from the people that are that that write and and follow us in the consensus, I think those are in line with that. So quick to summary and overlook view. You know, we've talked a lot a lot today here. You know, content creation business, the market is stabilizing. There's still some uncertainty, especially with the the what's going on with The US, but we think that we've made the right moves, you you know, know, in terms of the tariffs and what could happen there. Audio reproduction normalizing. But, again, our expanded portfolio range, we think, is, you know, is gonna put us in a good position on there. So, you know, with the outlook on there, you've seen that the updated Outlook's on here. Sally's talked to you about the revenue and what's going on with gross margin.

45:35 Our overheads, you know, again, in impacted by inflation, but, you know, and some normalization on the remuneration things. But we are watching our expenses and our overheads very, very carefully. One question that we get asked here is, you know, the structure you have, is there any fat? You know, could you remove something? We've gone through and looked at this as you would expect us to do. And I can tell you categorically, no. There's nothing that, you know, that we could jettison that would move the needle without impacting, you know, the road map and what we we see as the future of the business. On the flip side of that, we've also been asked, well, what happens if this business comes barreling back and suddenly you're you're growing again, you know, leaps and bounds? How much more cost do you need to put in it? And our answer is we don't think we have to put much cost. We've got a structure that actually is set up for scale on there. So we think we're in a good position to to take that on.

46:26 Cash flow, we've kinda talked you through and showed you the the puts and takes there and the overall profit expectations as well. So, you know, again, a tough market. You know, we're we've done a lot to continue to refine our routes to market. We've expanded a lot, especially in our audio reproduction part of the market. You know, we continue to innovate 34 products last year, a number of new products this year. A number of those ones we least produced last year are just getting into the market and getting great accolades with the market as well on there. And we continue to make sure that, you know, through all this stuff that we've got a great place for people to work because at the end of the day, our employees are what make it happen. So with that, I'd say thank you for the presentation or listening to the presentation, and I think we're gonna move to the q and a section now. That's great, Tim. Sally, thank you very much indeed for updating investors. Ladies and gentlemen, please do continue to submit your questions.

47:20 Just using the Q and A tab on the right hand corner of your screen, that's why Tim and Sally take a few moments just to review your questions submitted already. I'd just like to remind you, recording this presentation along with copy of the slides and the published Q and A will be sent to you post today's call. Tim, Sally, you've a number of questions from investors. Thank you to everybody for your engagement this morning, if I may. Just hand back to you for you to read out the questions where it's appropriate to do so, and then I'll pick up from you at the end. Okay. Great. Thank you. Yes. So, we'll go through. We'll try and answer as many of these as we can. I'm conscious of time. So if we can't, we will try and answer them on the, website so there'll be a written answer. So the first one we've got is, are we considering any measures to address the ongoing decline in the stock price? Well, I think, I mean, fundamentally, as we're all aware, delivery is the best way of addressing that. And, certainly, I think with these results, we have seen the share price tick up slightly, but we have to carry on delivering.

48:11 I suspect the question might be thinking of buybacks, and are we going to do anything around that? I would point out because Phil, our founder and our chairman, is on the board and owns a significant chunk of the stock. If we were to do any buybacks, we would have to have takeover panel approval and incur a significant amount of fees to get that process done. So that does not feel like the best use of our capital to do something like that, and we are more focused on using cash to pay down that net debt and look for future growth opportunities, if that answers that question. Next question we've got is about noncapitalized r and d expense was 2.2 versus 4.9 in the year before. Can we explain the difference? Because it's always been up rather than down. So, basically, the way to think about that, our capitalized r and d, we have teams of r and d professionals, engineering professionals in all of our brands.

49:05 And each year, depending on what they're working on, a proportion of that cost will be capitalized. A proportion will be expensed. If it's more focused on immediate actions around products that we launched that year, it's will be expensed. It will be capitalized. Otherwise, it'll be expensed. And this year, you know, Tim's talked about 35 new products. We've just had a bit more put on there. And, actually, overall, our r and d expense was down a bit this year as we flagged, in the half year. We had some product delays just because we had a bit higher attrition, and we struggled to get in some of the skills. So, generally, overall lower costs and a bit more on the capitalized amount because they were more focused on products ready for launch. Cool. The next question we have is on our direct biz econ business and future growth. What role will that play in future growth, and how's it performed over the past year? Well, it's performed well. It was one of the few shining stars we had in the content creation business. It grew. It's approaching 7% of our overall content creation business.

50:04 A lot of that has been the investments we put on there. If you've visited our websites there, you know, the FOCUSRITE innovations ones were updated about a year ago. We just updated, excuse me, the ADAM audio one and the SONICS one on there that all have the same engine where you can a customer can go online and look at the products, look at all the the marketing stuff, and they can click and buy right there. We think this is probably one of the best things for us to do to hedge against, you know, the channel consolidation and what's going on in that market. And I think, additionally, I think what we've learned is as we get closer to customers in any market, even where we have good distribution and stuff, we see an uptick in the amount of business we do direct because there's just a growing number of people that wanna deal directly with the manufacturer. And we're at a point now also with just our logistics and where we've got things.

50:50 We can provide an experience on there. So this is something that we wanna see growing. I mean, not to to put a forecast out there, but my my goal is to have this, you know, in in the double digits percentage of our business in the in the near future. Any risk on companies' reliance on manufacturing partners in China and Malaysia? So I I hope I covered some of that when we talked about the tariffs. So, yes, there there are other places for us to manufacture, but they come at a greater expense. And we're kinda looking at that versus where, you know, the, you know, tariffs and things could go. And there's also a quality issue. But one of the things at the end of the day that we have to just be very mindful of is that we can move production, you know, to a a number of different places and, you know, look at the extra cost and things like that.

51:44 The problem that we have, not just in our industry, but this is sort of for a lot of people in tech, is you can move manufacturing someplace, but a lot of the raw components you're buying are still coming from China. So how much have you actually mitigated the risk on there on there? So it's just something that we have to be very mindful of when we look at the whole picture on this. How are the new acquisitions expect to impact the group's revenue and market share over the next three years? Well, we're talking specifically about the Timex and the and the Panlab on there. We expect them to have a a profound impact on the on the live sound business. As I talked about earlier, you know, we're not we're seeing very much for any new live sound infrastructure going up, whether it's a house of worship or a new theater or retool of something.

52:32 Immersive audio is something they want in the checklist. Even if they don't have the budget to put it in, they wanna know that what they're putting in can scale up to that. And, you know, our products always worked with immersive stuff, but we it was not something that we owned. And just because it wasn't part of our portfolio, we weren't really thought about or considered when somebody was thinking, yes, it has to be immersive. They were looking at arguably some of the much larger players in the market that have that sort of homegrown in their own portfolio. So even in the early days since we've acquired them, we still go to the same trade shows, but having that under our roof, we've we're having a lot of new opportunities come our way that we probably would not have known of, where that is first and foremost in their mind that they wanna make sure that, you know, what they're putting in in terms of infrastructure is immersive.

53:20 And because Timex especially is so well known, you know, in especially the theater market, you know, many of the Broadway productions in New York are using their stuff to follow the actors around and have the the sound movie with and also here in The UK in the theater market that we're naturally just getting a lot more exposure to that. K. I think the next question, what measures are being implemented to improve gross margins, particularly given increased freight costs and promotional activities? So we aim to keep margins pretty stable is our sort of overall long term goal. And around it's around that mid forties to high forties range around that. So we're probably at the bottom end, but within the range where we want to be. And they will be impacted by things like freight costs. We always look at cost prices and pass inflationary things on. But as but we do monitor where our competitors are because there is a trade off and there is elasticity involved, so it won't necessarily.

54:17 You can keep the gross margin percentage up. It doesn't necessarily mean we'll get more dollars to the bottom line. But we do monitor that, and we track all our promotions to make sure they are delivering those incremental gross profit, pounds, euros, and dollars, etcetera. Can you advise what figures your house brokers are forecasting for this year? Yes. I do appreciate that not everyone has access to the brokers' figures. But broadly, you know, as we think we've guided to here, we've said we're expecting the market to be flat. We've got some destocking to come through, but equally some new products. So slight growth in the top line. We've guided around gross margin. And overheads, we said, are gonna normalize. So I think we're looking at an EBITDA EPS level is slightly down on this year given that sort of overall guidance, and our brokers are pretty much in line with that.

55:06 The annual report alluded to some issues with the engineering team that delayed the launch of some high end Scarlet products. Are you able to provide further details on that? Yeah. So and and and have we is are we kinda through that? Is it still impacting product launches? So the the the answer to the last part is no. I think we've worked through that. What was the issue? The issue was is that the the new generation of Scarlett see, if you remember that slide I showed you about the evolution of the product and how there's a lot more software and IP and DSP under the hood, what for for the the higher end Scarlets, that that was even more accelerated than what we did for the entry level things. So there was a lot of new technology, a lot of new development, a new kinda just a new ground for our engineering team to really understand and get familiar with. And, you know, and and so that's what took us a little bit longer to do. I'm happy to say, though, that, you know, the team, what we finally delivered to the market is is is getting absolutely stellar reviews, and and the results so far are very positive as well. And I think we're through the the thick of that. That was a painful thing we had to go through with getting these guys used to actually having a lot more DSP in the firmware under the hood on the hardware, which was important for us because we we only see that increasing as we go in forward.

56:26 Do you see any opportunistic acquisitions being available in such a tough market? Yes. Just about every week, we're we're seeing something come to us where they're they're either in trouble or they've had enough. We've pretty much categorically we've taken a cursory look at most of these, and almost all of them we've passed on for two main reasons. Number one, there's a lot of overlap in the in the portfolio. We don't really feel like we need another audio interface brand or another, you know, synthesizer brand. And and and also just to be to be perfectly honest with you, most of these are, you know, are are turnaround jobs. We we're not in a position to be doing that right now. So, you know, things we are still proactively looking at acquisitions, but we're not really in a in a place where we feel like we should be taking on something that could be a drag to earnings in the environment that we're in.

57:21 And I think this is our final question. Will the change to an eighteen month period have an impact on the timing of our tax bill next year? Good question. So because we qualify as a big company, we pay quarterly payments for our corporation tax. So in essence, no. It won't. Just to give you a bit more color on why we changed our, accounting period end. The conversations we've having over the years with a lot of our investors, particularly when we flagged the issue in August, kind of, well, why do you have a year end in August if it's such a crucial period? And it can be quite volatile because we sort of talked about this year. Was a very big month for us. We're shipping a lot of stuff in for the holiday season. It makes sense to go out and report when that big holiday season is immediate in our rearview mirror. We can talk to you about how it is. We can do the budgets knowing how that's been going on. And so it just made sense for everybody to move that period across. And February is nice because it flips it. Everyone's used to those six month periods.

58:20 And to be honest, budgeting during the summer is fun for no one because everyone's away, be it our partners that we're trying to talk to about their forecasts or people here. So this just makes a lot more sense and should give people a lot more insight a lot quicker into our performance. I wanna go surfing in August. That's why we're doing it. Yeah. Okay. That was up too. Alright. A great time for me to jump in, I guess. Tim, Sally, thank you very much indeed, and thank you to everybody for your kind questions this morning. Tim, Sally, I know investor feedback is important to you. I'll shortly redirect those on the call to give you their thoughts and expectations, perhaps final words with you, Tim. Thank you for all for for hanging around. Thanks for the great questions. You know, again, it's been a very difficult and challenging year. I hope if you if you walked away with anything on this that you can understand that, you know, if you look at the five year journey we've been on, we've seen both of our brands face some incredible headwinds and tailwinds.

59:15 And I think through both of those, the one proof point that I can tell you is that through it all, our brands have come out on top. I think that's a really good testament for how we have run our business and the strength of our brand. So, you know, we're gonna stay heads down. We've got more innovation we're gonna do. We're watching our costs. You know, we're we're working on our routes to market. And, you know, with with with a little bit of this, you know, of of hope that the world gets a little bit less than crazy, I think we're in a good place that as things start to lift to come back to normality in the content creation world, we're poised to seize the the lion's share of that. That's great, Tim. Sally, thanks once again for updating investors. Could I please ask investors not to close these sessions? We'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations.

1:00:03 It'll take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of FOCUSRITE PLC, we'd like to thank you for attending today's presentation. Good afternoon to you all.