Focusrite (LSE:TUNE) — Final Results

0:00 Good morning, and welcome to the FOCUSRITE PLC final results investor presentation. Throughout the quarter presentation, investors will be in listen only mode. Questions can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just simply type in your question and press send. Company may not be in a position to answer every question received during the meeting itself. I'll review your questions submitted today and publish response where appropriate to do so. Now I'd like to submit the following poll. And before we begin, we're gonna run a short video. This is a shakedown. Order up that beat just like a takeout.

0:48 Show me you got soul inside those new shoes. And you can rock and roll

1:19 Just let the beat kick. Everywhere you go, you bring a roof down. Everybody knows you got your own sound. So good, so fresh, and just

2:10 Show me you got so. I'd now like to hand you over to Tim Carroll, CEO.

2:36 Hi. Good morning, everyone, and thank you for joining us. My name is Tim Carroll. I'm the CEO of the FOCUSRITE group. Joining me today is Sally McCone, our c CFO, and we're coming to you from our new headquarters for FOCUSRITE PLC here in lovely High Wickham to talk to you about our annual results, add a little bit of color about how the business is going, and just talk to you in general about what is happening in all the world of audio here. So to kinda talk tee off on here, I want I wanted to to take this first slide here and talk about just how we break our business down. And if you've been following us for a while, you know that we we have kinda come as as the group has grown to talk about our business in these kinda two very broad divisions, content creation and audio reproduction.

3:26 And, you know, to give a little bit of color on this, you can see on this slide, you know, the the breakdown of the different brands that we either have organically had or grown and expanded or, through M and A have acquired as well. To give you just a little, background on on what these are, they're they're pretty self explanatory titles, but, content creation essentially is all of our brands, our products, and solutions that are really dedicated, to the the purpose of creating great audio. Now that is primarily music, but it also covers things like podcasting, you know, any type of online social media streaming, also, you know, dialogue, sound effects, soundtracks for TV, movies, this type of thing as well. So you can see this is pretty much the the the genesis of the company, where our origin was, and you can see that it's still a big chunk of our overall revenue.

4:19 A little bit newer to the party is our audio reproduction division, where we had dabbled in this up until 2019. But, really, at the end of 2019 is when we actually had a what we would call a a real kinda moment in in terms of investing in this, and this is when we acquired Martin Audio. Audio reproduction is basically all about broadcasting audio for any kind of event. It can be for the music that you hear in a nightclub or at your gymnasium, in a restaurant. It can be what you hear at a theater, at an opera house, a house of worship, and then all the way to the biggest festivals. If any of you, had the chance to attend either Hyde Park or Glashonbury, this past year or in previous years, those giant speakers that you saw hooked up that hopefully were not making your ears bleed, those were ours. So you can either thank us or hate us for it, but I hope you had a great experience on that. And so this is a a branch of our business that, you know, started off really with Martin, and we have expanded this both organically with Optimal Audio, which really addresses more of the the the lower end part of the installation market, and Linear Research, which came on board, which actually supplies all the amplification and a bit of the secret sauce in, what we do, and I'll talk about that in a minute.

5:36 So there's sort of a broad overlay on what was going on. Going into our next slide, this is really just a an overall review of the year. And one of the the things about why we talk about our business in these two big divisions is because even though it's all audio related, they are fundamentally very different. It's a very different set of customers, a very different channel. Everything about the business transacts differently. And as well, as we as we look

6:02 at the journey that we've been on with these two divisions this past year and really for the past three to four years, they've been materially different. And I think the way we look at this is that, you know, it was great to have this diversification in a very uncertain world where we've seen, you know, ups and downs across things. So before Sally kinda does a deep dive into the to the finances, here's sort of an overview. Very challenging year for you, especially in the the the content creation part of the business. We saw the business really start to soften up at the beginning of the year. We talked about this at the half year, about the holiday season was soft. It was about the time when we started to see things like inflation, cost of living really kick in. And, unfortunately, that was sort of predicated, predicated by the fact that there was a a huge glut of inventory in our channel that happened due to, the component crisis starting to unwind right about when our reseller channel across all different products, not just ours, but drums, flutes, oboes, you know, drum kits, whatever, was really started to explode.

7:09 So we talked a lot about how we, spent a lot of time unwinding that inventory and how we were gonna continue to do that during the second half to really get our inventory and our channel in a better position to to to regulate that, but also to get back to a a point where we needed to be for a major product transition. I think we've executed well on that, which and and and from all the industries that we can see that we've actually performed materially better than most folks in in our industry and categories on there. So a very difficult year for content creation, but as you're gonna see a little later on, our brands look like they've not only maintained, share in the in the winds where we have a very mature high market share. We've also gained some market share in a soft market. On the flip side of this was audio reproduction.

7:57 You know, we talked about at the beginning of this past year, you know, that, we were seeing the early signs that live sound was coming back. There was a great two summers ago sort of festival resurgence of events. You know, for for us, that was a good indicator. Most of the people supplying this kit had been shut for two or three years, so there was no cash really in the industry. But, you know, that summer and everything that kind of ensued from there really, inspired people to go out to events and put, you know, the the industry back in, and we really reap the rewards of that over the course of this year. Live Sound had a really strong year, a really good pipeline of of things not only for the the full year and going in on there. And this is across pretty much all the different parts we'll talk about, including installation, the big festivals, and the big tours.

8:49 We did a lot this year in terms of r and d. We introduced 32 new products during the year that we're quite proud of On there, we did a lot in terms of our routes to market, which I'll talk a little bit later in terms of just continuing to reshape and mature our structure to be scalable as we grow both organically and think about future acquisition. And we had another acquisition this year, one of our first big software IP company, Sonix, which came on board in December '22. So I'm gonna pause for a moment, and I'm gonna let Sally take you through the financials, and I'll be back to talk a little bit about the strategy and the the market. Sally. Thank you, Tim.

9:30 Thank you. And right. Good morning, everybody. So if we start off, I think if we're going to look now at the income statement to start off with, I'll take you through some of the highlights here before we step back and look at some of other financial highlights. So revenue for the year was down 2.9% at organic constant currency, so it's adjusting for exchange rates and acquisitions. It was down about 9%. And Tim's going to come on and talk about that in a lot more detail later explaining how that was impacted by various brands and across our regions. So a slight shortfall in revenue. Gross margin pleasingly, though, was up in the year, and I'm going come on and talk about some of the factors impacting that in one of the later slides. Overheads were up, and there's quite a lot going on there. So, again, I'm gonna come to that in a bit more detail to explain about that. So the combination of lower sales, the higher margin, but the higher cost as well, I mean, our EBITDA was down about 7% across the year. Now that's actually flowed through to about a 20%, decline in our EPS.

10:27 And the result of that is, the fact that's impacting that, we had quite a big FX gain, a one off, just to do with the retranslation of some intercompany balances in '22, which has not repeated. So in our finance income line, you'll see that that's moved from a positive to a cost this year, and that's just the cost of servicing our drawdowns on our loan this year. The tax rate has also increased this year, as you'll be aware. The UK tax rate, which most of our profits are taxed on, has gone up from 19% to 25% in April. So that's meant our effective tax rate has increased about 19 to about nearly 22 this year and will go up further next year. So I think that's a good summary of the income statement. If we now go on to the next slide and look overall. So quite a lot of points there we've addressed. We've talked about the movement there. I think also just to draw out another positive for the year, our net debt, It was net debt of point three last year end, net debt of 1.3.

11:20 So a slight increase in net debt, but our operating cash flow was positive in the year and was used to fund the acquisition of SunOx, which Tim referenced earlier. So if we now go on and look at some of the other statements, so as gross margin we talked about. So that positive movement of 2.2 percentage points in gross margin was actually a benefit of about four points to do with freight. So our freight in and out is also included in our gross margin. I think we can all remember the issues back in '22, particularly around Christmas, of trying to get products into Europe, particularly out of China, as everyone was rushing to get stuff back after COVID. So freight rates almost doubled during that year, and now they've returned back to normal. So our freight has gone back to being about three to 4% of sales rather than the sort of five to seven we were seeing before.

12:06 And that's given us a four point benefit. However, because of, as Tim talked about, this glut of inventory in the channel, together with the cost of living impacts we've seen during the year, we've had to do much more promotions than we would have done historically. We've promoted for longer, and we've promoted deeper. And that's eaten into our product margin by about two percentage points, which gives us that net benefit of two when you take it with the freight benefits we've had. Now if we look forward, we wouldn't expect to do so much promotions as we did this year, but we will undoubtedly still need to do some due to the inflation impacts that are still carrying on. And added to which our new product, particularly the new Scarlet range, is slightly dilutive margin just because we haven't had the production efficiencies we've seen with the old generation of three. So we would expect our gross margin to be roughly stable as we move into FY '24.

12:55 We now move on and we look at some of those factors impacting overheads. So, of course, it's quite a busy slide. There's quite a lot going on here, but we've had quite a lot going on with our cost base. So I think there's the things we would understand. As Tim talked about 32 new products, that's impacted our amortization and depreciation as we bought new products on stream and the development of those has started to amortize. Also, we've had refurbishments in three of our main sites, Adam Martin and FOCUSRITE, to encourage people as part of our return to work program. As Tim mentioned, we're in a new facility here in High Wycombe, so that's impacted depreciation. Inflation has also caused an increase about 1,400,000. And most of our inflationary impacts is to do with people costs, and we've tried to target our salary increases as best we can to help those we think are most impacted.

13:43 And people costs are at 60% of our overhead, so that's had quite a big impact. Adding to which acquisitions with linear annualizing and Sonnox joining, that's also added to our cost base. And we've also invested for growth too. That's particularly in audio reproduction, particularly in linear, which had an absolutely outstanding year doubling production. We've invested to support that both in production and in the sales teams in audio reproduction. We're now a bigger, more complex group, and that's inevitably meant some spend during the year to look at things, you know, increase cybersecurity, sort of provisions for things like tax advice, and also just to make sure we've got a robust infrastructure and can just talk to each other on the same platforms. There's a bit as well-to-do with share based payments and bonuses. So our share based payments costs are normally about 1,000,000 a year, but this year, we've reassessed some of the assumptions about how much we'll invest, and that's resulted in a credit of 300,000 to the p and l. So that's a swing of about 1.6 compared to the prior year. That hasn't been offset this year by the bonus, which was, very low last year and has normalized this year to sort of a non target level.

14:48 So those two have offset. But next year, we would not expect to see that big positive, the big credit from the share based payments as we look forward to our overhead base. So if we now move on and look at the balance sheet, I think the main thing to note here is how relatively stable it is. There's not a huge amount of changes from the prior year. And the prior year, we saw quite a lot of changes. Our stock normalized following the component shortages and demand surges of COVID. There's a bit of increase in tangible assets, which is both investment in new products, but also the acquisition of Sonox and the result of goodwill and intangible assets that that's bought on board too. Other than that, our inventories increased a little bit. So our working capital overall is now 24% of sales. And historically, it's been about 20%. So it's a little bit higher, and that's to do with this transition from Scarlet gen three to gen four. We're holding stock of both ranges at the moment, but as Tim alluded to, as we sell, the gen three would expect that to wind down.

15:44 Other than that, debtors and creditors are both relatively stable, going to pay our creditors on time, and we have very few issues with credit collection.

15:52 So I think the other thing I'll draw your attention to is most of our cash flow on net debt, although very low. We have a drawdown on our credit facility, we renewed in September. So we have a revolving credit facility with HSBC in NatWest. It was 40,000,000. We renewed in September to be 50,000,000, and we also have an uncommitted according facility for a further 50,000,000 should we need it for some of our m and a activity. We now move forward and just look at cash flow. And I think they're pleasingly the overall result, the free cash flow and outflow last year as we rebuilt the balance sheet after COVID is now a positive. So free cash flow of 10,500,000, which is just under 7% of sales. Historically, that's been about 10 to 12% of sales, and we would expect to return to those sort of levels going forward.

16:39 The other thing I think I'll draw your attention to investing, 14,400,000. That is a little bit higher than we would expect normally because we've invested in the refurbishments in our offices I mentioned earlier, and that's had an impact of about 2,200,000. Other than that, we would expect CapEx to carry on at that kind of level as we continue to invest in our product road map as we go forward. And we've talked a bit about net debt, we've talked about the cash flow. So I think now I'm gonna hand back to Tim who's going to talk to you a bit more. Oh, no. I'm not. I'm gonna carry on talking about environment social governance. Sorry. Just to draw the attention to that, there's more slides in the appendix about, our social governance activities in particular, but I did want to draw your attention to environment. It is a fundamental part of our strategy right from the beginning of designing of all our new products. We look at the sustainability impact and how we can make our products more environmental.

17:32 We've talked in the past about how our Vogue caster is made from recycled plastic. Scarlet is made from recycled aluminium. We have included a lot more in our annual report and complied fully with TCFD. It's first year for us to do it on a mandatory basis. We have a separate standalone report looking at environment and climate change. It's available on our website, our new FOCUSRITE PLC website, which I would recommend that you go and have a look at, and it'll provide a lot more detail on that. On that basis, I know definitely I'm gonna hand back to Tim to talk about the professional review. Thank you, Sally. I thought you were just gonna test me to see how well I knew that slide, which I do. I know it well. You do. Great. Alright. Okay. So now we're gonna kinda move into more of the operational, review. And as I I talked about at the at the top of this, really, when we look at our business and think about these two divisions, they're the businesses are so differentiated.

18:23 And, really, the journey they've been on, not just this year, but really for the past three, four years, has been so completely different that it's almost imperative to talk about the business in in these two different contexts and separate them. So that's what I'm gonna do here. So we're gonna start here with our our content creation business again and talk about the journey we've been on. So a little backdrop on here. If you remember, the when the pandemic started and, you know, the the the year that ensued on that, you know, we saw a huge surge for demand in these products as a lot of a lot of home based technology did on there. And, you know, as things began to subside, you know, there were a couple aftermath things that happened with this. One of the biggest was really on what was happening with components, not just in our world, but across everything.

19:10 They became quite scarce, and then they became quite expensive. We talked about in a couple of our previous annual reports about the price increases that we did to offset that, watching the market, making sure that we didn't think we were pricing ourselves out of the market. You know, one of the things that was helping us in this is that this wasn't just a FOCUSRITE problem. Every brand across everything, and we saw category wide price increases on there. But as I mentioned earlier, when we got to the holiday season last year, we were just coming out of that. I think the whole world was. Suddenly, components were starting to free up, and our channel specifically, who had really been through about the past year and a half absolutely hand to mouth, hardly anything on their shelves because everybody was just trying to keep up with demand and supply from the component things. Suddenly, everybody caught up. And, you know, the channel our channel gladly took product a lot of product for the upcoming holiday season.

20:05 And this is, again, not just us. We're talking about guitars, drums, keyboards, everything out there. And this was about when things started to really get soft, and we started hearing a lot about cost of living inflation and things. And so, you know, the impact on that is something that we saw early on and, and and took to heart. And so as as we went into that last year's holiday season, we realized that we were gonna need to do, more promotional activity than we had, and we did and, to some success on there. You know? But, kinda going forward, you know, the things have not gotten any easier in in the content creation market. You know, we've seen for pretty much the first time that oversupply issues, with another categories, has had an impact with us. So it's it would be fair to say that we've seen from our efforts, our inventory wind down with a lot of resellers and distributors where they should have been ordering more, and they simply were not because they were so glutted on all the other products on there, and that has had some impact.

21:06 So when we look at the, the content creation growth by brand, you can see sort of the breakdown on how the brands have kinda fared here. FOCUSRITE, as we talked about, you know, we did the unwinding on that through last holiday season, and we carried on to that throughout most of the second half of this past year, getting ready for our product launch. Now if you've ever followed us, the way we typically like to do a product launch is the day we announce to the public. We want the product in stock with the resellers, and we want the resellers to be pretty much on the last legs of their previous generation on there. Now that that's in a perfect world. We're not in a perfect world by any stretch of imagination, and so we did have more inventory than we were expecting to have on the older generation. So even with the unwinding we did so what we've done is we actually placed chunks of what we had left with a couple of our more strategic partners that we knew actually had the ability and the scale to not only help promote the the older generation, but also help us launch the the fourth gen as well. So you can see all that destocking those efforts had a big hit on the FOCUSRITE business in the first half, but it did come back to growth in the second half, which is a good sign on there. Novation, which is more about all of our electronic music products, very much a a big part of this portfolio is really aimed at a younger audience who happen to be the ones that have really been impacted most by cost of living.

22:32 And, again, not just a Novation prob problem, a category problem on here. But, you know, one of the recurring themes you're gonna see throughout this presentation is from all the data that we get, which is, you know, from the the category information we get from our bigger resellers, a lot of The US industry data, and then our own kind of sell through and extrapolation, we are quite confident that we have fared much better throughout this whole period than the majority of our competitors on here. Adam Audio actually sort of broke broke the mold. They had some growth year over year. There was a couple things that that attributed to that. First off, they came off of a relatively low compare. Last year, during this whole component crisis, of all of our brands, Adam was probably the most negatively impacted. It it, it really jarred the, introduction of one of their, prime product lines, the a series, which is sort of their mid range studio monitors, where we didn't have any availability of those for almost two full quarters, last year. We obviously solved that and got this into the channel. So that was partially, part of the the low compare. The second thing is is I'll talk about this in a bit. We've done a lot in terms of our routes to market. And with our acquired brands, one of the things we're very proud of is that we've been able to bring them into the group and actually leverage all the back end infrastructure we have in terms of finance, IT, logistics, purchasing, but also putting the portfolio into our global sales and demand gen teams, and that has done quite well. So Adam had a good

24:03 year. Sequential and Oberheim, again, a very tough compare last year because we bought the Oberheim brand and come out came out with a flagship synth for them. So it had very strong numbers year before. But this was from all the industry data we had, one area that was most negatively impacted. They, the industry is citing this part of the category has been down 25%. Now, again, as I said, you see that we weren't down nearly that much. I think that speaks to the strength of the brand and and the fact that, you know, we were able to take their portfolio again, put it into the the global sales team and actually expand the visibility across there. And then, again, Sonix that I talked about, which was our, acquisition on December, in line meeting expectations. And, one great thing about this team is they're we're already working with their development team on on actually incorporating some of their skill knowledge and IP into future hardware products.

24:59 If we look at this regionally, the story basically, when we look at North American EMEA, again, in a soft market, you know, relatively down year over year, I think the big story here, the one that was probably the most painful for us was Asia. Now if you look at our results from the year before, Asia was up about 34%, and now they're they they were down roughly about the same. Why is that? Well, we think it's for a couple reasons. Number one, primarily China, which was the biggest part of our business, was in an extended lockdowns almost nine to ten months longer than anybody else. And so when that finally released, what we saw, not just us, I think it was reported pretty much everywhere, was just an absolute just knife edge transition from people spending money on things related to their home or home technology to suddenly travel, cars, holidays, that type of thing.

25:55 This is still a work in progress. We think China is still gonna take a lot of time to wind back and get on there, but definitely a struggle in Asia, also partially due to the fact that Japan and Korea, which are relatively big markets for us, cost of living inflation and and currency and effects seem to really drag them down as well. Now we do have a a very, structured team in place with APAC. And, again, from all the indicators we have, we are actually in a in a in very challenging market. We are actually, performing well, on there. So and we we do believe that this market will come back. We're starting to see early signs of that happening on there. Just a little backup in talking about us maintaining our market leading position. There's a lot of different data sources that we do. Couple of the easiest ones is some of the largest continental players that we we have as resellers. So Thomann here in Europe, Sweetwater, one of the biggest ones in The US, and then Amazon, which is a bit of a a a consolidation between what we do with them in The US and also here in, Europe.

26:57 But as you can see, Thomann and Sweetwater, they consistently publish what their top most popular and best best sellers on there. And, we're very proud of the fact that our products are typically heavily populated in the top five, of these categories on there in terms of the top sellers, not only in our our specific categories, but, usually, one or two of our products are usually in their top 10 across everything they sold, and that's been quite consistent. The other thing that we're, that we spend a lot of time and effort is our, our trust pilot and our NPS scores. So you can see we put a couple examples here, but we know and and can prove that, you know, as our these scores go up, our revenue improves as well. So this is very important for us, and we continue to maintain very high, regards in terms of NPS and Trustpilot, materially better than most of our competitors on there. And that's another reason that, you know, we are we, feel very strongly about our market leading position on here.

27:57 A little bit about Scarlet Gen four. Again, the probably the biggest category of products for the company, a major transition that we just transacted on at the end of this last fiscal year. I've put up a couple of the reviews on here. As you can see, the industry has accepted this product with wide open arms. I don't I don't think we could ask for better reviews than we've got on this. And the the feedback we're getting from our end customers as these make their way into their workflows and they're starting to use it, It's clear that we have done a good job of taking what is a incredibly successful product and coming out with the next true next generation with more features, values, and benefits for our customers. We talked about innovation. So in the content creation space, 15 new products across this year, across a lot of the brands, and a lot of product updates.

28:51 And we kinda give these equal weighting. New products are fantastic just to interject more energy and things, but product updates are something our customers love when we actually actually do updates to give more features and value to existing products, and that is something that plays heavily into our NPS scores. And then lastly, just talking a little bit about Sonix again. Again, acquired in December, setting in well. We're we're very happy with the performance they've had. They had a major product release called VOCA, which is a really great vocal processing tool in the in the second half of this year that has also had some great reviews and done quite well in terms of a a customer update. I'm gonna shift gears now and talk a little bit about audio reproduction.

29:38 So in audio reproduction, if we you rewind to when the pandemic hit, as soon as that became a thing, this business essentially shut worldwide everywhere. As a matter of fact, most of Martin's competitors shut their doors completely and didn't open for an extended period of time. We opted not to do that because, our feeling was is not even really knowing how long this was gonna last. We wanted to be prepared when things did reopen because we assumed there would be such a big surge of it. If you look across any region, across in anywhere in the world, culturally, music live events are such a big part of the culture that we knew this was something that if people were missing for a while, it would come back in a big way, and it most certainly has. So, at the beginning of this past year, we talked about how we were seeing all the early kinda rumblings that this business was definitely about to surge, and it definitely surged this year. As coming off the two years ago summer hop you know, festival and tour season being successful, The rental companies, the system integrators starting to get cash in. People were coming back, wanting to experience live events. That all drove a lot of retooling, new infrastructure as well. And we were very happy that we because we had kept Martin open and and we're working on production of new products and also just manufacturing, we were ready. And so you can see the growth over here year over year, really great. Part of that was that strategy.

31:01 Another part of this, as Sally talked about, was was Linea. You know, we acquired them. They are the amplification that Martin uses. Very integral part of the whole workflow and the whole kind of secret special sauce that we bring to this industry on there, bringing them in house, and then, you know, the group actually being able to actually come in and help them with purchasing, actually give them the the capital to invest in more people, and we've been able to double the production on there. That played well. And then optimal audio, which is really sort of more for the low end installation, the gyms, the nightclubs, small restaurants, that really started to come into its own this year as well as we saw a lot of new places and a lot of retooling happened with that. When you look at the regional performance, again, a a very different story than content creation, very significant growth across all the regions. And I'll call out, if you look at that rest of world Asia number there, they grew 26%.

31:57 That pretty much backs up what I was saying is that we saw as soon as people could get out, the clubs, the the live venues, everything, everybody started retooling for that, and so really good growth as well on there. A little bit just about, you know, this past summer, which was a really good indicator. I think this is what people were looking at because it's just so front of mind, so visible, a really successful festival season. So Martin Audio, you know, hosts many of the stages at Glastonbury and Hyde Park. A big part of why we we're we do that is because of our IP and the way that our speakers and our amplification amplification work together. We're able to fill a space no matter how what kinda crazy size it is, outdoors or indoors, but we're also able to especially for Hyde Park, once you cross over that street from the festival and go into a neighborhood re area, our DSP and our amplification speakers can actually lower the sound dramatically on there so that we hit all the city ordinances on noise. So that's a major factor and a big differentiator for us.

33:06 So, again, the, the localized tours, the festivals, everything really came back in a big way on that and, which is a really great sign for the industry.

33:18 And, talking a little bit just about, you know, where we are in terms of the portfolio for audio reproduction. One of the easiest ways to think about this business is in what we call sound throw. So how much, you know, does a solution actually fill a room? So we look at that as sort of zero to 15 meters for a small place, fifteen thirty for a medium sized place, and 30 plus for a bigger place. So you can see sort of what, you know, in green, what the market data tells us in terms of the split between this and where Martin's portfolio is on here. So you can see we're heavily weighted in the the the smaller area. We have a good play in the in the 30 plus, but the mid region is one area that we we had a bit of a gap on. And if you look at the next slide, you can kinda see how the portfolio works on that. In in 2021, we really didn't have a viable solution for this kind of very important 15 to 30 meter throw.

34:14 We do now. Taurus was definitely one of the byproducts of keeping Martin open during the pandemic and allowing the r and d teams to devise this so that we were ready to go on this. There's been a lot of innovation in all these areas, but filling that up on there and also reef refurbishing and and the flex point and for our new products in that space has really paid off and and and a lot of benefit for us this year.

34:39 A little bit about, a strategic update. If, if you go to the next slide, here, if if you've ever looked at our presentations, our growth strategy essentially has not fundamentally changed since I joined in '17. These are the four things that we think are important for us to run the business. They've served us well, making a great place to work. You know? The our people are the lifeblood of this company. We have so many musicians, engineers, DJs, you know, podcasters that work for us. And, you know, their real world experience and what they bring in is fantastic. And same thing on the live sound side. We have a lot of people at Martin that go out, and they mix gigs and play live. So they know how our products work. We wanna make sure that we continue to actually have a great place for these folks to work and and to for them to stay and to attract new talent as well.

35:28 Growing our customer base is really important as

35:31 well. You know, a lot of what we invest in r and d, the the outcome of that, all the new products and the product updates are really important. But not only doing refreshes, but also looking for new products to extend our, our portfolio. And there's an active activity on on in pretty much every one of our brands going on in that as well. New markets, you know, looking at, you know, markets that we think are opportunistic that maybe we've just been using, standard distribution, getting closer to the customer. Also, also looking at m and a and how that opens up new markets for us as well. And then I've mentioned it several times talking about how crucial things like, NPS, trust pilot scores, word-of-mouth reviews are for our our customers.

36:16 You know, that's all really the the the the, you know, the tip of the arrow on that is is really the customer support and the onboarding journey that we've invested so much time, energy, and bandwidth in to make sure is absolutely, you know, industry wide the best that that can we can be. I think it's important just when you when you look at the the the trajectory that the the group has been on. You know, our strategy has worked. We have delivered growth over a number of years. There's a couple bullet points on this from you know, since we listed, you know, we've had a 17.8% CAGR. You're gonna see in a minute that is abundantly higher than the the market average

36:53 in our in our group. And even when you factor out the in, all the acquisitions, 10.2 organic on there. So pretty amazing, and we're quite proud of that. And, really, when you when you look at the, the acquisitions we've done, they've all bedded in well. They have all been accretive. They've all added value and added an extra £74,000,000 of revenue, to us, since '19, which we're very happy about. And then, again, going back to our core business, FOCUSRITE, you know, with everything that's going on with m and a and all the trials and tribulations we've had across the pandemic along with the opportunities we had, we're quite proud that, you know, we have we've,

37:32 grown that business. You know, it's 28 higher, in f y twenty three than it was in f y nineteen. So that that's a pretty good stat that we're that we're proud of. Again, sort of backing up, how, you know, how we've grown compared to the market. This is, US data, that we, that we use on here, but you can see what is telling us that the categories, especially for FOCUSRITE and Ovation, have traditionally grown at, and you can see that we have performed materially better than this. And this is why, you know, when when we talk about our outlook, what we've come to recognize and really want to drive home is that with the number of brands we have, we have some brands that are quite mature, like FOCUSRITE and Ovation, with really good penetration. And we have others that are, you know, not nearly as far on that journey where we think there's there's more, for them to actually gain, both regionally and through just the fact that they're part of a bigger group on here.

38:25 And so, again, just another way to kinda back up and talk about this. This is some, again, some market size data in terms of what we see across content creation and audio reproduction. And you can see that, you know, The US is the largest market in both of these divisions. However, when you look at our business, what you'll see on the bottom part of that is only for FOCUSRITE innovation, which is our most mature brand, are we is is that the largest part of our business? Every one of our other businesses is typically either in

38:55 Europe. You can see sequential. It's about even on there. But even with audio reproduction, the the bigger part of their business is in The is in your in Europe and, actually, primarily The UK, which were sort of the home team players. So a lot of room, we think, for expansion on there as time goes on. I mentioned routes to market. This is something that we're consistently looking at and and and and changing over time to fit our business. If you rewound about five years ago, especially for content creation, most all of our business transacted through a distributor in a region, and the distributor handled everything. We have made a huge shift from that.

39:37 Even the the the places where we're still using distribution, that is usually coupled with a a local team that is helping to do all the demand generation, having the relationships with the resellers and the end users as well. Latin America is a great example of that, and that has made a marked difference to our business there.

39:57 We in some markets where we think that they're of a size and our we have enough scale, we've actually removed the distributor entirely and gone direct to resellers. So in The UK, Germany, and Australia, we're using that methodology, and that has actually proven quite successful as well. And then lastly, we also it's a small part of our business, but it is growing at a at a good healthy rate is the amount of business we transact directly with end users on here. So, to give you an idea on that, that part of our business, it actually grew 29%, over last year. A lot of that was predicated on we've been doing over the past two or three years a lot of investment, getting our websites ready to do this type of business. Now our direct to customer business, when you look at all of our largest revenue regions, if you look at The Americas and you look at Europe, our D To C is our fourth largest revenue region now and growing. So, again, it's a small part of the business overall, but it's one of the fastest growing ones, and it's one that we are definitely keen to see continue to grow.

41:04 We talked about acquisitions. I've said this a few times, but just to back it up, you know, the acquisitions we've done, we're quite proud of them. We they've all done quite well. They've been all accretive to the business in a very, very short amount of time. They've strengthened the group, and the group itself has been able to bring a lot of skill and leverage to them as well. So, acquisitions, m and a is definitely part of our ongoing strategy. We are proactive about this. And as you can imagine, in a in a very difficult environment, we're seeing more and more things come our way, for us to take a look at as well. So I would certainly say that we're not done here, and watch this space. And, really, the the way we've designed the group, all the systems and things we put in place, we've kinda we've we've landed on this structure, which we're quite happy with, which, really kind of talks about the two divisions.

41:55 Everything that we're doing in terms of the brands are really innovation centers, working on the products, and doing what they know how to do, all complemented by, you know, great sales team and all the back end, you know, support that they have across finance, HR, digital, legal, handling things like logistics, purchasing, and that has worked out really well for us. So we think that this is a great structure for us to have, not only to grow organically what we have, but also as we add more brands through, you know, through acquisition in the future, they should be able to slot right into this.

42:29 You know, in in terms of just where we are in terms of our guidance, I think we you you would we would say that we're being cautious with everything we've learned over the past, you know, I think, three years. I think our our basic vibe is we're not sure what's coming next. There's early signs that the content creation business is coming back. Scarlet fourth gen has been really good accepted. We did just get some really good data back from the Black Friday, Cyber Monday. Early results look like we had a really strong showing on that, which is really good. So there's all the internal and things we get from our channel. There's also a lot of other industry data that we look at. This slide is talking about just the growth expected and how much content creation is done on there. And you could see it's broke down between audio, and video and a few other things. And you see, you know, the the overall expectation is for this to grow. Now the audio part on the bottom doesn't look like it's growing tremendously, but it is growing.

43:25 But I'd remind you that that that top part of that is video. And for people who are making video, if you spend a lot of time making a great video and you don't have any audio on it, you've basically made surveillance video. So we we actually combine that with us and look at that as an opportunity as well. Also, another really interesting thing is that all these stats are showing that while The US is definitely the biggest market, the biggest growth areas are in other areas. And we're quite proud of that. And we think we actually have a hand in that because our technology, that's exactly what it allows people to do. It allows them at their home to actually create really great sounding content and share it with a global audience. Again, another reason, I think, for us to be optimistic about the future. Audio reproduction, very much the same. You could see the the huge dip that the whole industry took, but you can see how things have come back. And this is sort of a amalgamation of looking at things like future ticket sales, what's happening in terms of the pipeline because this business is very much a pipeline on here. And I think everybody would agree wholeheartedly this business is back. We're still in a bit of a of a of a of a, you know, of a back swing of this coming back from such a repressed thing, but we are gonna get back to the nominal growth rates that we see in this business.

44:43 And so, really, when you add all this up, you know, these are the things that we're really focused in, you know, across this year and next is continuing to make a great place to work. We talked about how we're in a new facility here for FOCUSRITE. We've done a lot of retooling, and we've really embraced the whole sort of hybrid working, working from home thing and making our our offices more of a hub, you know, for product people and engineering and r and d people to collaborate together. Continuing to grow our customer base, you know, across all the brands. And, again, you know, as you saw, there's there's big opportunities not only for us to continue to hold on to the high shares that we have and refine that routes to market so we can maximize the margin dollars, but also grow the other brands, as this same journey that we saw with FOCUSRITE.

45:32 Ongoing investment in r and d. 31 products last year, we're not done. There's a lot of really cool stuff happening this year as well and into the future. New markets. You know, again, what we've done in terms of our routes to market and also, you know, the constant hunt for acquisitions. And then lifetime value. You know, we're really proud, especially on the content creation side. We're one of the few companies that have twenty four seven follow the sun, technical support. You can talk to a live human being no matter where you are anytime on that. That is a big differentiator, and that's something that we are very proud of. That along with the onboarding journey, especially for new users on that, and that's something we'll continue to refine. So as we go forward, you know, I think this is this slide sorta sums up. You know, we're still in a difficult period for content creation.

46:19 Early signs are looking promising on here. And, you know, as as you saw from the the our our statement, we're holding through our guidance this year. And there, we do expect, you know, to see, the content creation be business be relatively flat across this year on here, getting back to sort of low single digit growth on there. And the audio reproduction business having a banner year last year, we're starting to see that sort of balance out and get back to its normal, thing as well. So, when you add it all together, you can kinda see that, you know, we're talking about mid to high single digit group for the growth over the medium term, lower again this year, but stronger growth in audio reproduction and the newer content creation brands, and, again, always potential for more acquisitions. So, Sally, I'm gonna hand it over to you and let you do the summary and outlook. Okay. Thank you.

47:11 So thanks. So after looking at the slightly longer term expectations we've got, we're now just gonna tie it back and give us a bit of summary of the guidance for the next year in particular. So as Tim mentioned, you know, we still see difficult conditions in content creation. You know, just already referenced, some of the issues we're seeing in Asia with the ongoing impact still of the release from COVID and inflation. So we do think underlying demand is still strong. We're seeing our registrations, but we're expecting to see maybe a slight growth to flat market for content creation. But audio reproduction is still very strong this year, although growth will be slowing as we see it begin to normalize. If we then move on gross margins, as I mentioned earlier, we're expecting to see flat on this year with some of the benefits from lower promotions offset by the dilutive effect of new products.

47:58 On overheads, we wouldn't expect to see the same sort of increase we've seen this year, but there will undoubtedly still be some impact from inflation, and we won't see that big credit from share based payments that we had this year. And cash flow, as I mentioned, we expect to return to our historic levels of around 10 to 12% of sales. And so overall, we're not expecting from this announcement to see our profit expectations unchanged from what's already out there. And finally, I'm gonna hand back to Tim for a final summary slide. Yeah. So just to kinda wrap it up before we go into q and a. So, again, a difficult year, but we're very, very proud of the performance we had, all things considering on there. We think we are in a really good position not only in terms of how we fared through that, but really setting ourselves up for the future on here. Really good strong delivery in all products across all the different categories, including one of our big flagship transitions on there.

48:50 Really great story in terms of the integration on all of our acquisitions, especially the story around linear research and over time. And so far today, early days, but things are going quite well with Sonic's on there. A lot of investment in our people, both that's in infrastructure and, you know, in systems on there. We now we've sort of completed the circle on actually setting up our content creations teams worldwide in each of the regions. We now have teams that have the entirety of that portfolio on there, leveraging our scale, working with the channel partners and the end users in that way. And, again, our strategy, you know, no matter what is being thrown at us us next, I think our our our play, what has always worked for us, is try to stay as heads down as we can, execute on that, and that has worked well for us. And that is what we're gonna continue to do.

49:42 So with that, I'm gonna say thank you for joining us, and I think we're going to, jump into any q and a that we have. Fantastic. Tim, Sally, thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your question just using that q and a tab on the right hand side of the screen. But just while the team take a few moments to review those questions already submitted today, I'd like to remind you a recording of the presentation along with a copy of the slides and the published q and a can be accessed via your dashboard. As you can both see, we've received a number of questions throughout today's presentation. Thank you to all the investors for submitting those. May I just ask you to start at the top, read out the question where appropriate to do so and give your response, and I'll pick up from you at the end. Okay. Right. Thank you. So I think if we start off, if I just go through the questions, think the first one, is about inventory. So our inventory turnover days appear to be quite high at the moment.

50:32 And given the current trading environment, are we confident there won't be any inventory write downs? So I think as we mentioned in the presentation, inventory is quite high at the moment because of the transition of Scarlet Gen three to Gen four, which was planned transition for us to have both products in the channel, and it really is function of having that inventory in the market so we can supply both at different product levels and potentially take market share at a lower price level. Added to which, there have been component issues in the past. And as we move more to, a direct channel rather than through distribution, we hold the stock that maybe distributors would have held. So we are comfortable that we have the right levels of stock to continue to guarantee supply. Question there about will you look to accelerate m and a or is the strategy to expand organically? Which I think you Yeah. So I I think the the strategy is to do both. There's a lot of plan in terms of to expand into new categories with several of our brands, which should be organic.

51:28 But m and a is something that we are proactive on. We have a full time person in biz dev who knows the type of things that we're looking at, who's out there sort of, you know, you know, kicking the tires, if you will. And he's also the one that's fielding all the incoming things on there. So, again, I think when it comes to the the type of thing we're looking for in terms of an acquisition, I think we're still following a pretty rigorous, you know, kinda criteria, which is it has to be something that we think fits our business and complementary that we understand and know. We want a well run business. We're not have we don't have any desire to clean up a mess. And I can tell you that, especially recently, there's been a number of those that have come our way, and we just can't make any sense of even thinking about trying to take something on that could be a drag on the business for a few years.

52:14 We want a good management team, and we want to be able to to look at where they are in their journey and understand and actually put a value on what we think the group can actually benefit. That's been our criteria for everything we've bought, and that has worked for us. And I think we'll carry on that way. K. Next question, I think, How are Scarlet Gen four sales performing? Are they in line with expectation? Yeah. So Scarlet fourth Gen sales, they are ramping up every week. As you know, we have in our onboarding journey when somebody buys one of these, They go through an onboarding journey, and if they complete that and we look at the serial number and we haven't seen it, we register and tick that up as a new sale. The Scarlet fourth gen sales are increasing week over week. You know, the right now, there if we had done a knife edge transition and I had the gen three on there, we probably would see them higher. We hadn't planned that, though, because we knew we had the gen threes in the channel, and those are the ones that we heavily promoted on the during the Black Friday and Cyber Monday thing. So we saw a huge spike in the gen three. But interesting enough, the gen four sales increased as well.

53:18 So they're both moving in the right direction, so we're we're quite optimistic about that. K. And there's a question about working capital as a percentage of sales. Where do we expect it to be in FY '24 longer term? I think as I mentioned, it's a 24% at the moment is a little bit higher than we like. Historically, it's been around 20%, and we would expect to return to those levels or move towards it next year and then move towards it over the medium term. For you, I think, Tim, advancing on the m and a side, should we expect a bolt on or a bigger target, content reproduction, or new vertical multiples have gone down? Yep. Yeah. It's a good question. So I think that our our proactive hunt is sort of equal on both the content creation and the reproduction side. I mean, you saw the split in our revenue. It's about $75.25.

54:08 There's no KPI to get that imbalance, but I would I would like to actually see the audio reproduction business actually get a bit more on equal footing because that diversification has worked really well for us. In terms of the size of what we're looking for, you know, I think Sally talked a little bit about the credit facility we have on there. You know, I think in a in a in a perfect world, our preference would be to continue to bolt on things that we have done. Those have been really, I think, you know, probably easier to do than something bigger Mhmm. On there, and, you know, we've been able to see the benefit directly on that. However, we're not opposed to looking at something bigger, but I think it needs to be, you know, something that would actually fit inside in our workings and in our criteria.

54:56 K. We've got a question about buybacks. Would we consider those as a way of returning cash to shareholders? So I think if we look at our capital allocation, we've always considered, you know, best return for shareholders is to deliver that overall growth, capital growth. And for us, it's very much about investing in our new products, and it's about m and a. So we, absolutely, as a board, would consider this as an option, but I think looking at basically, we'll be taking down debt at the moment to buy back shares doesn't necessarily feel like the best way we could add value, but we would never say never. And I think as a board, we should definitely consider all options, but that would be how we would look at it when we consider our capital allocation, I think. Next question is about AI and how do we think about it for our business. So when we think about, you know, not any of the back end stuff, which I think there's value in terms of data analysis, but when we talk about just how it fits into the workflow of of how people use stuff, you know, it's it's it's kind of interesting because our our industry has been here several times before.

56:03 When samplers first came out, everybody said, ugh. That's the end of, you know, traditional musicians. When drum machines came out, ugh. No drummer will ever be employed again. None of that stuff actually materialized. As a matter of fact, all it did is it actually made what they did actually, more credible and, and more desired, if you will. So we look at AI. I mean, we actually have some, some software plug ins called Fast that actually, use AI to help people who don't really know the nomenclature or how recording technology works to help them get a sound. And we see that as a tool. We think it's gonna be something of benefit, for people. And if it's actually used to help people, you know, create, you know, their first idea for a song and that's what sparks them to want more, and to learn more, that's fantastic.

56:48 We see that as a big benefit. The next question is about interface competition. It's increased over the last couple of years. Yes. It certainly has. You know, I think the success we had in being a public company, has been recognized by many. We saw no less than four or five major competitors come at us, especially for our Scarlet business over these past three years. What I can tell you from what we can tell from talking to the resell sellers looking at the category, we can't piece that any of them have really taken any considerable share from us at all. Let's see. Can you tell us more about the strategy re regarding acquisitions? What do you why have you been So active lately that we've talked a lot about M and A, haven't we? Oh, yeah. Well, no. I think it's something that we're comfortable with, and we actually do see it as a viable part of our growth strategy on there.

57:42 We you know, 74,000,000 extra pounds of revenue since we started doing acquisitions that have all been accretive and added value. It's it's it's it's a good play for us. So, again, we're being choosy on these type of things as if you will. So, you know, I I don't think anything's really fundamentally changed there. On product life cycle, are they shortening? Actually, no. I think if anything, maybe they're increasing a little bit because, you know, components, people coming back and working hybrid, that type of thing is is taking a little bit longer. But, I mean, we would there there's no kind of rule here, a rule of thumb, but we kinda look at the market. And a lot of it is sort of driven not only, by us and when we think we've got a backlog of new features. It's also driven by how people are creating audio. And that whole workflow, both at the home studio and the professional level, is it continues to evolve. And we need to make sure that we're on top of that. So that's that's one of the things that we, you know, we we we focus on on there just to, you know, to to ensure that yeah.

58:53 That's fantastic. I think you've covered off all the questions we've had come through. And, of course, any further questions, you'll be able to review those, and we publish responses where appropriate to do so on the Investor Me company platform. Tim, perhaps just before redirecting investors to provide you with their feedback, which is particularly important to you and the team, could just ask you just for a few final closing comments. Sure. Sorry, I've been sitting in this chair too long. First off, thank you for for staying with us for a long period of time. We know that this this presentation has a lot of information, and it's it's a lot of data heavy stuff. And, hopefully, I know we talk fast because we really want to share a lot with you, but it has been a really fascinating, interesting journey we've been on for the past well, since I started, but really for the past three or four years. And the stories and the narratives around how audio product, reproduction and content creation is going is has been so different that we think it was part important to parse those out to really give you the full picture on there.

59:44 I think if you take away anything, I hope you understand that, you know, we are we're very heads down in terms of innovation, r and d. We see opportunity in in our in our both of our divisions. And, you know, we we we are, again, I think, being a bit cautious just from everything that we have seen over the past couple years. But the long term, we're quite optimistic about, you know, the future. We're in we're in a really fun killer set of of of verticals, and we have a lot of fun deploying and and making products on there. And since thank you for your time. That's fantastic, Tim. Certainly, thank you very much indeed for updating investors' day. Can please ask investors not to close the session? It should be automatically redirected to provide your feedback, and all the team can better understand your views and expectations.

1:00:31 Only take a few moments to complete, and that's greatly valued by the company. On behalf of the management team of FOCUSRITE PLC, I'd like to thank you for attending today's presentation, and good afternoon to you all.