Focusrite (LSE:TUNE) — Interim Results

0:01 Good morning, and welcome to the FOCUSRITE PLC interim results investor presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and can be submitted any time via the q and a tab situated in the right hand corner of your screen. Just click q and a, type your question, 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 all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Tim Carroll, CEO. Good morning, sir. Good morning. Hello, everyone, and thank you for joining us today.

0:31 Sally and I are coming to you from our artisan FOCUSRITE headquarters here in High Wickham in one of our new recording studios designed as a testing lab and for our employees. If you ever come out and visit us, we'd love to show you around and show you some of the really cool stuff we have here. So today, we're here to take you through the details on the first half for 2024. A lot of detail here as the environment we found ourselves in continues to be complex with both a lot of challenges and opportunities as well. As we've discussed in in the previously, and if you've looked through the the deck or anything, you know, our company basically has two different divisions, content creation and audio reproduction. They have been on very differentiated journeys over the past three years, and we see many of the current challenges and opportunities encountered by our two divisions being heavily influenced by macroeconomic and global issues that have arisen over this time.

1:29 So our goal today is to take you through a narrative that explains the journey that we've been on with all the numbers and some underlying data so that all of you have a very clear picture of what has transpired and why we strongly believe that our growth strategy, our portfolio, and the market remain a solid investment opportunity. So let's just kinda dive in here if we can. Alright. So, again, two different divisions. We're now 13 different brands. If you rewind the clock about five years ago, we were four brands and most entirely based on content creation. You can see the split that we have now on here. Since that time, seven acquisitions, adding nine brands to the mix. Really, the acquisition of Martin in 2019, that really formulated the beginning of us establishing the second division, audio reproduction.

2:22 These two divisions, they've both grown quite dramatically, but very differentiated customers, very different routes to market, and very different journeys. And so as we go through the presentation, you'll see how this diversification has really served us well in some very challenging times. And to augment that, we're gonna be going through these with each division on here. So let's take a broad overview of of the business. So, again, as we talked about and you saw in the statement, was a very challenging half for us. Really, a very tale of two different cities here and what we've seen. Content creation, very tough macroeconomic headwinds. However, all the data and all of the industry data that we have supports that the fact that we are faring much better than our competition and many others in our industry.

3:09 Maintaining and growing share and our underlying registration data shows that we're well ahead of of end user registrations from pre COVID. We'll take you through that a little bit. R and D hasn't slowed down as well, so there's a number of new replacement and net new products that are scheduled for the second half. On the audio reproduction side of the business, you know, the rebound in live sound continues to to go. People are out to live events having experiences, you know, which is a great thing. And, you know, the we've had a very robust first half and a very strong pipeline for the second on here. Additionally, we had another acquisition in this first six months, a Sheriff Technology, which owned Outboard and Timex. A really integral part of the story for our audio reproduction ongoing strategy that gives us a lot of IP and a solid footing to really support immersive workflows in these type of environments. So we'll talk a little bit about that as we go forward as well.

4:07 So we're gonna take you through the each of the different divisions. So we're gonna start with the content creation business. So a very mixed story in terms of the the performance across the different brands. We're gonna start with FOCUSRITE, which is the biggest part of the the group's business still. And, really, the main story here is what has been happening with Scarlet, which is our audio interface business that really sells mostly to the home and enthusiasts and recording person that's working out of their home, this type of thing on here. So it's the group's largest product group. '23 really was a year for the entire industry in this space of a very much softer demand, Again, driven by a lot of macroeconomic issues and a bit of a natural rebalancing as people, you know, move from spending time in their home to a lot of our customer base to playing out live and going to gigs and things like that on there.

5:04 The interesting thing about twenty three was is, you know, when we came out of out of the pandemic, the whole industry was so hand to mouth in terms of just trying to supply all the demand for the products that as soon as the the the supply came back, and not just us, pretty much the entirety of the industry, that's guitars, drums, you name it, there was just a glut of inventory coming into the channel back in '23. Horrible timing and and and is when that was when things were starting to slow down due to cost of living issues and, again, this kind of rebalancing of people, you know, doing things and playing out live on there. For us, we really you know, the the big story here is that we had a big transition with our Scarlet products that happened at the beginning of this year with our fourth generation. We ended the year of '23 with more stock of the third gen than we wanted, so we needed to clear out a lot of that that was not only in our inventory but the channel's inventory.

5:58 So a lot of the first half has been really running that play, if you will. Over the holiday season, we sold a lot of the the remaining third gen stock, not only of ours, but our channels through there. And we introduced the fourth gen, something that our channel was very supportive of because there was a price differential. I think the net result of that was is that the we moved through a lot of the third gen stock that the channel had and a lot of our own inventory. We went into that a bit eyes wide open, knowing that there was gonna be some cannibalization on the fourth gen sell through, and that did materialize. And I would say it actually materialized more than we thought. You know, a couple different reasons. Again, I think cost of living pressure's on there, but also just our holiday period is typically when we see our most price sensitive customers, a lot of net new customers, parents buying something for their kid, this type of thing. So the net result was is we did a great job of moving through a lot of the third gen stock, but it did put a dent in the the initial sell through of the fourth gen and the reorders on on that, which is why, you know, we we had the FOCUSRITE results where they were.

7:05 NOVATION, again, primarily, you know, electronic music, very much in younger age groups. A pretty good showing here and unbalanced in terms of, you know, the the growth was down year over year, but against industry averages, very much in line with what they saw. In some categories, we we actually performed quite better than than the industry. Adam Audio, which is our monitor brand in Berlin, a very strong result. Why? Well, there was two things. Number one, I think it's just the culmination of us over the past couple years moving Adam to our our our sort of a level distributors in a lot of the regions that support FOCUSRITE, actually having a unified sales team supporting the sell through. And then we also moved Adam to our US distributor, which had a bit of a one off impact on there.

7:55 So very good result from Adam. Excuse me. Sequential and Oberheim, high end sense, very much impacted by the macroeconomic issues that we see. However, the lower priced synthesizers are actually doing quite well in the market. And the good news is is a lot of the new NPI that we have for Sequential and Oberheim is in that price range. And lastly, we have Sonix, which is the software company we bought that makes plug ins for for multiple digital audio workstations, very much in line with expectations. They're benefiting a lot from the group synergies that we have and a lot of cross collaboration going on with a lot of future products as well. Okay. When we take a look regionally,

8:40 sorry, I needed a sip of water there, you can see for content creation, you know, it was a very tough going across the board here. What oh. Needs to move up. Sorry. Okay. I got too many clickers on my hands. So here's the regional performance for content creation. Again, a tough market. You know, I think, globally, what we saw was that, you know, a lot of the slowdown and the softness the market, again, cost of living, macroeconomic pressures. But inside each one of the the regions, there were other some other specific drivers as well. North America, one of the issues, especially with student loan repayments coming back, that actually impacted a lot of our audience on there. Also, what we've been hearing about elevated, you know, credit balances and stuff seems to have had a big impact as well. EMEA, this this past half, we've seen a number of closures of of resellers that have just not been able to survive through this, specifically in The UK and Germany on here.

9:36 The distribution channel, is starting to normalize, and our larger kind of continental players, the Tomens and the Amazons and the Gear4Musics are doing well on here and picking it up, but there has been a rebalancing on there. And then rest of world, one of the things we've talked about here specifically is what's been going on in APAC and specifically China. China was growing incredibly well for us even after the lockdown ended for many, many regions. But if you remember, they were in an elongated lockdown for a long period of time. As soon as people were able to go out again, we saw an immediate transition from the business going from buying our home studio products to our live sound products. And to kinda back this up here, you can see on this graph here, here's sort of a breakdown of the business in China. If you look at this for content creation, it shows a fairly bleak picture. It shows that, you know, this first half has actually been lower than where we were in '19.

10:30 Now this is not just a FOCUSRITE problem. We spend a lot of time with our distributor that handles a lot of major lines. There's a lot of news coming out of other people that report their findings. Here's Yamaha and Roland citing this as well. This is a problem really at a at a industry wide level for China on here. If you look at this chart, though, you can kinda see how strong things were and then how it started to to come down as soon as we were coming out of this. And you can also see how how much the live sound business has grown to help partially offset this. China is a is a market that we're watching carefully. We still think there's some work to do to unwind the inventory and for this to get back and rebalance. The good news is all the data that we have, and I'll show you a little bit of this later on in terms of how much content is being created globally, you know, both at the home and and the professional level continues to rise. So we do believe that this will eventually get back on track.

11:26 Our ecom channel, our direct to customer channel has been growing, though. This is good news. We spent a lot of time over the past couple years working on an integrated brand and ecom site to support this very important routes to market for us. And as you can see, it has grown on here, which is very pleasing for us. I think a lot of this is just a lot more customers nowadays are more comfortable and want to transact and and and interact with the, you know, the manufacturer directly on there. And, you know, a lot of our branding and stuff, especially localized, now that we have integrated e comm sites, we see a lot of people that are just happy to click right through and and purchase directly from us on this. So we're very excited about this part of the business. You know, this is something that's a big investment for us, and we're expecting to see this kinda cross over the 10% threshold over the next couple of fiscal years.

12:20 Our data that we get in our industry, it's a bit spotty, to be honest with you. The the best sources of information we have are from The US, and this is one of the sources that you can find readily available. It's from music trades, and this is showing some of the information that they report on. They basically report on two different kind of categories, if they will. The sell through of The US channel to end users in different categories and the imports coming in to The US in different categories. That's a really good indicator of what's going on with the channel in terms of inventory and just overall kind of, you know, macro industry health on there because the majority of the products in our industry across any different product are typically manufactured elsewhere outside of The US and imported in.

13:05 So you can see the numbers here on here. So for the recording products, down 8.2% in '23. That's from a further decline in of 11.6 in '22. And for electronic music instruments, covers a lot of our Novation sequential products, down 5.8% in '23 and eight point one in in '22. You can also see the information they provide here in terms of just imports. So music instruments and audio gear fell 23.6% last year. Some categories were much worse than that. Guitars were over 60%.

13:42 I guess the good news is is that the last report we got from them on this for the first quarter shows that things are starting to improve. But I think one thing that gives us a bit of confidence in terms of how we're faring in the market and just how our brands are staring are standing up to this is taking this data we have here and overlaying it with our registration data. Now if you follow us, you know that a lot of times we talk our our kind of the health of our business in two different pieces. There's what we sell into our channel, but really the thing that we follow very, very closely is what is our registration data, how many people are buying one of our products anywhere in the world and registering it. And if that's a new serial number we've never seen, that's the the type of trending that we really pay very, very close attention to. So what this slide is trying to do is trying to show you the information I showed you on the previous slide, which is, you know, the what The US is reporting overlaid with our registration rates. So you can see versus 23, our registrations have been flat. Our our our people buying and registering our products has been flat. And I think more importantly, when you look at the the numbers that they've been reporting since '19 pre pandemic, they're saying that, you know, the category for computer music hardware only had 8.3% growth. Ours has been over 50 on there and been quite consistent as you can see on these different charts on here.

15:05 So that really gives us one kind of indication, one picture of how our brands are kinda holding up, you know, in the against some of the music industry data we have. Now here's another point as well. A number of our largest resellers actively publish their top sells top sellers in a different category here. So here's a snapshot. It's a moment in time, but it's very indicative of what you would see if you wouldn't pull this data at any point. Thomann, who's probably the largest, you know, European e comm continental player for music instruments, and Sweetwater, which is one of the biggest ones in The US here. So you can see here that, you know, in the audio interface category on the left, we've got the top two positions, and we have six of the top 10. That's pretty normal for what we see ongoing throughout this entire period on this.

15:52 It really hasn't changed. You can see how Adam is is faring next to that too in the in the studio monitor category, three of the top 10. And over at Sweetwater, you can see we have four of the top 10. Again, this is one moment in time, but you can go and pull this data. It's very easy to find on their websites, and you can see this. And it's very pleasing for us to see that with all what's been going on, especially competitively, a lot of our competitors doing very, very heavy promotions, that we that we are retaining these spaces. And it's very much in line with what we heard from all of our resellers across the world when we just went to our largest industry trade show back in January, which is, you know, look, it's a very, very tough market, but most of of of your competitors and most of our your of other people would would die for the, you know, the the type of share that you're getting on there. So this, you know, really helps us in in terms of just kinda gauging where we're sitting on this in a in a tough market on here. Amazon is another source. Now they don't really publish a top list. They do have best seller categories that we're always in.

16:55 But the thing that we really follow here is the reviews. And the the thing we're very pleased with is that majority of our products get four and five star reviews, something that we put a lot of effort and emphasis on because this has given us a really good, especially for the the novice, the first person getting in there, what was their out of box journey? What was their ease of use? Were they able to get up and running? Were they happy with this? And overwhelmingly, the people buying from Amazon are telling, yes, that they are. Okay. I mentioned earlier that, you know, at the beginning of this year, we had a big transition with our Scarlet products. And, you know, we had a lot of the third gen products that we needed to move through. And this chart is kind of breaking down to give you a little idea of the categories and the and the price points on here. But the chart to the right is just basically showed the progression that we've had. So you can see in August, when we introduced at the end of August, when we introduced the the fourth gen, predominantly, all the sales were third gen. Over the holiday period, you can see we were clearing out a lot of that, but you can see every single month, the fourth gen sales were getting stronger.

17:58 That's a combination of a lot of regions winding down and running out of the third gen and picking up on that. And since February, we've seen this trend continue. And, again, we're really happy with the the progress we've made in terms of unwinding our inventory here. A little bit more to do in in a couple different areas, but, you know, overall, it's it's the right trajectory that we're on. I'm gonna switch gears and talk a little bit about our audio reproduction business now. That has been on, again, a very different journey for the past three years and especially these past six months. So a very strong performance on here. The business is strong and a very strong pipeline going into the second half. People's desire to be out and experience events has driven a lot of new installations, a lot of tours, and a lot of upgrades to existing rooms to offer something that is differentiated from what people can get in their home, if you will, on here. Now for Martin, one of the things we have on here is that we have the best lineup of products, you know, across all different of of levels on here. And I wanna take a a moment just to explain when it says all levels of throw. What does that mean? Well, in the world of live sound, we typically categorize, you know, the the solution and the size of of the room by how much space does the the do we need to fill with the audio in here.

19:17 Typically, you know, it's broken down into three categories. There's zero to 15, which is really for smaller installations and vents. Martin's always had a really strong suite of products on here. That's about 38% of the market. The 15 to 30 meter range is really designed for midrange solutions. And up until recently, until we released Taurus, the group didn't have a real strong

19:41 portfolio in here. We do now. It's one of the things that we're really reaping the the advantages of. This is about 26% of the market. And then the 30 plus is really for the large scales installations and vents. They're the big Glastonbury's that we do, this type of thing. We've always been well known in this area. That's about 35% of the market, but we've been able with Linea and with some new products on there to really even reinforce that. So a lot of the r and d efforts that we did through the pandemic and through the acquisition of Linea, who is the power amplification company that that that supplies the power amps for all of Martin's products. We've been able to double their production, which has really helped us in terms of this really, you know, boost in demand on here and, you know, something that we've been able to take advantage of.

20:27 Regionally, you can see a bit of a different picture here. So EMEA and rest of world, very strong growth. You'll notice that America is a little down on here. That really has nothing to do with any issues with the market. It's really of us making a prioritization call about where we were fulfilling backlog. We're starting to catch up with The Americas, and I think we'll see that the second half on this that the numbers improve. But there's a couple different installations, all different sizes on here that just to give you an idea of the the breadth of the products that we have now across Martin for any type of event, whether it's a big tour, it's an amusement park, a house of worship, a theater, anything on there, all in between on there. So a lot of you know, it's it's great to have this portfolio and to see this business really be thriving on here.

21:13 I mentioned earlier that we had an acquisition in this first half of Sheriff Technologies. One of the things that many theaters, installations, everybody is is focused on is often an immersive experience, something that really, again, differentiates what you can from what you can get in your home, you know, theater environment type of thing. Sheriff was a company that was very well known. It was a small UK company. This was a great acquisition for us because it was, you know, a nice bolt on with a bunch of IP that we're able to integrate into our products and accelerate what we wanted to do into this market on here. So it's already been been earnings enhancements since we've had it on here. And, really, what it does is it actually just accelerates again what we were gonna have to develop organically so that we actually will have some really good viable solutions for people that wanna put in a full immersive workflow.

22:10 Okay. I'm gonna pause for a moment. I'm gonna hand it over to Sally who's gonna take you through the financial review. Okay. That's great. Thank you, Tim, and good morning to everyone. So as Tim said, I'm gonna take you through the finances. And Tim's talked a lot about the sales and particularly sales decline we've seen, and that's dropped through to more significant decline to profits. And there are a number of factors contributing to that. So one of which obviously is the sales volume, so sales down is gonna impact profits. We'll also have some one off factors in there, which I'm gonna come on to when we talk about the income statement. But as well, it demonstrates our operating model and the leverage we have, which unfortunately has impacted us on the downside. But when sales do go up, then we do see that drop through come through on the upside to profits as well. I'm also gonna talk about cash as net debt has increased quite a lot, and then we'll come on to the dividend as well. K? So if we move on now and we look at the income statement, Tim's talked a lot about the revenue decrease of 10.9.

23:06 Sorry. I'm just getting which ones to click. Okay. So we talked a bit about the revenue decrease. Our gross margin, although it has declined by 1.3 percentage points, the underlying margins are actually stable on the prior year, and I'll come on to that as a bridge on the next slide, as I think we just indicated. But there was a big one off impact that brought it down, which was to do with the provision for some VOCUSTR stock. So basically, VOCUSTR was a product that we launched in '22, and that was about twelve months late. So it was a product we've been in development for a while to take we thought we would cater to the podcasting market for customers that maybe didn't want to use a Scarlet. They wanted something that was more designed for podcasting and more intuitive to use.

23:55 That product was ready to go to market in '21, but unfortunately, we had to make a call during the components crisis. Do we make Scarlets or did we make Vocasters?

24:03 We made, I think rightly, the choice to focus on Scarlets. We launched the Vocasters about a year later, at which point we had upped our expectations given the way the podcast market was going. But it was at that point that the market started to turn, so we had inventory in excess of market demand. We made the call in the half year to reduce that, and we had a big one off sale to take the vast bulk of that stock to one of our distributors, but unfortunately less than cost. So that's why we've got a provision there. If we look at overheads, overheads, there's a slight increase there. That's largely the impact of annualization of our acquisitions. There is a significant increase through inflation as well because if we think back, you know, where inflation was last year when we were doing our pay increases, we're still around 10%.

24:48 But that's been offset largely by savings, both in reduced bonus and share option expectations, but also in operational savings through the restructuring we did last year.

24:58 Amortization has increased. And again, this is partly to do with VOCUSR, another one off. So we have accelerated the amortization of the intangible assets based into development of VOCUSRITE now, which is sold out stock. That's an 800 k impact in the half year. Actually, 500,000 of that would have gone through in h two anyway, so it's only gonna be point three incremental on the full year. And then our tax rate is slightly higher than the current UK corporate tax rate due to a prior year adjustment that we've made. It's all been recognized in the half year, which is just adjusting some claims around Patent Box. So we'd expect you to get back to The UK tax rate as we go forward. K? So we're now gonna move on and look at gross margin in a bit more depth. As we talked about, underlying margins you can see from this bridge are stable on the prior year. And that's as we talked about a bit at the year end, we were gonna do less promotions this half year than we did during the half year in the prior year. And was I think if you remember, we talked then about there was a lot of stock in the channel, not just us. And there's a lot of much longer discounts, much deeper discounts, and that was reduced in this year. We've seen an increase in our product margin, added to which some of the increased sales through our d two c channel is helping with that. However, as I think we're all aware, there's been increased freight costs, particularly with issues in the Red Sea. And recently, the Baltimore Bridge incident, which meant more a narrowing of channels that are available to us. So that's increased the product margin.

26:22 And there's bit of other with with increased stock holdings, well increased warehousing. But overall, broadly flat. That 1.3 percentage increase is due to the VOCUSRITE provision that we've taken in the half year, and that order will be placed in the second half with all the stock on. So if we now move on and look at the balance sheet, I think the big story here is around net debt moving, which I'll come on to because there's a bridge on that in the next slide. So if we just look at the remaining categories on the balance sheet here, you see intangible assets have moved, and that's the acquisition of Sheriff, our ongoing development of our new products. And there was a big one off purchase for some licenses, a final stage payment for a bit of platform technology we're developing. So the CapEx spend in the half one will be slightly heavier weighted than it will be in half two.

27:08 Tangible assets, stable since the moves last year, so that impact the decrease since year end is just due to depreciation.

27:17 Working capital, gonna come on to and talk about when we talk about the cash flow movements. And as you can see, noncurrent liability is reducing slightly, and that's just basically deferred tax and the tax and the payments due for the overhind brand, which we bought in '22. So let's look at net debt in a bit more depth there. So our net debt has increased significantly in the half year. If you look back to the prior half year, we also see debt increase, and that's because we have some seasonal factors in the first half.

27:46 Our balance sheet at the end of the year tends to have a lot of creditors on and a lot of debtors because we have our big sell in to the channel going on pre holiday season. And as you would expect, we pay our creditors, so we see the big creditors outflow. What we have not seen this year has been a big inflow from debtors or reduction stock, and there's a few reasons for that. So with debtors, they've increased by 5,000,000 and are quite high at the moment, and that's largely relating to one particular customer we have in The US, our distributor there. And we work very closely with them. There are no issues there with,

28:20 their ability to pay or the credit issues with them, and the vast bulk of that debt is credit insured anyway. This is purely part of the agreement with them. When they have a certain level of stock, they can withhold payment till it reduces, and that's the situation we're in at the moment. So why do they have too much stock? Okay. Tim has talked about the transition from Scarlet gen three to gen four. This when we were planning ahead for the holiday season, we knew we had a product with Scarlet that was four years old. It was quite old in the market, and we had an award winning replacement going in for it. So we expected a certain level of demand, and we also, as Tim's talked about, wanted to get rid of the gen three stocks. We thought that would take more share from some other lower priced competitors.

29:02 And I think what's impacted us has been the ongoing decline in the market and also more cannibalization expected from gen three, gen four, which basically left that distributor with more stock than we would have liked. So we are working with them to work that down over this half year. So there'll be reduced sell in, reduced orders from them during the second half, added to which we'll work with them to do some promotions to sell the stock that they have. So we would expect that debt to largely unwind in the period. Coming on to stock. Stock in content creation has reduced in the half year, but in audio, reproductions increased, leaving it flat overall for the group. Audio reproduction is growing. We've put stock in to support that growth. They have quite a broad set of products to sell a whole sound system. You need quite a few different products to do that.

29:48 They now have quite a lot of availability across that range, so we would expect that also to sell out during the second half of the year, added to which we're going to look at some of the purchasing processes we've got there to make sure that we don't automatically backfill. So we would expect some of that stock excess of about 5,000,000 to unwind in the second half too. So we're comfortable that we will have a big working capital inflow in the second half of the year, Maybe not get back to net cash. Obviously, we're targeting that as soon as we can. So I'd expect net debt to be more on the 5 to 10,000,000 level as we get to the end of the year. K. There was a couple of just also as mentioned, a couple of one offs in the first half, which won't repeat. Obviously, the purchase of

30:30 Sheriff and also the capital payment for the final stage payment that I mentioned earlier. So if we now look at the cash flow, I mean, we've talked sorry. That's right. We've talked a lot about the various movements on here because it is, I think, working capital is a big factor there, the number that stands out. If we look at investing, 7,900,000 that's gone out in the half year. Our capitalization of r and d is actually pretty stable across the last few periods. As I said, there was the stage payments increased it slightly in this half year. Our debt is financed with a 50,000,000 committed facility across NatWest and HSBC, which we renewed in September and is fixed for four years with an option to extend for one. We also have a further 50,000,000 of uncommitted facility that we could draw on with the bank should we need to. So I'm comfortable we've got facilities to support us, and we're expecting

31:25 cash inflow in the second half. And then as a final point, our interim dividend, we're keeping flat on the prior year. Given the results, you know, one could argue should we reduce it? We are committed to seeing that cash inflow, and we're confident for the prospects of the business. So we haven't increased it, but we have kept it flat on prior year despite the reduction in profits. K. So on that now, I'm gonna hand back to Tim, who's gonna talk to you a bit more about the strategy and the long term updates. Cool. Thanks, Sally. All right. So first off, just to start off with here, you've this is a slide that has really fundamentally not changed in

32:00 many years on here. Obviously, how we define and look at these changes, ebbs and flows. But, fundamentally, these four pillars of our growth strategy have served us well through very, very good times and through challenging times. And these are different these are still the four things that we are very much focused on. First off, just being a great place to work. I mean, you know, we are an r and d innovate innovative company. You know, we have to attract the right kind of talent. So having a new headquarters here, making sure that, you know, we have employees that, you know, are engaged and and have the ability to look at career progression is a really big thing for us. So, you know, we spend a lot of time looking at benchmarking these type of things to make sure that we are competitive in the market. Growing our customer base is another one. You know, you followed us and looked, you know, at any reporting period, you you see a tour of of of new products that have been introduced, 11 in this last half, mostly in the live sound market, to really flesh out what we talked about having all those different off offerings across those different throw opportunities, you know, from small, medium, and large size on there.

33:04 Continued investment in our d to c business. So, again, you saw that that is actually growing on there, something that's been a lot of work, but something that we're very committed to, we think is a really big pillar for us going forward. New markets. We look at that in sort of two broad areas. There's the refining our routes to market. We're constantly looking at every different region and how we go to market there and thinking about, is that the right strategy now? Are we of a size? Is the market changed? Is there anything we know from all of our experience in working in

33:32 this market that suggests that we should be doing something new? Australia is a great example, whereas last year, we looked at this the the the the amount of of products that we had in the content creation space and the opportunity there, decided to remove our distributor and go direct to reseller. That has worked quite well for us in the Australian market. We're looking to do similar things in other markets on here. Japan is very much on our focus to do this as well. But we also talk about, you know, expanding our markets through acquisitions. So, you know, if you look over time, all the acquisitions we've made, every one has been some you know, one that, you know, fits a certain criteria. You know, you know, a good fit for our business in terms of portfolio, well run, good brand, something that we feel like that if we bring into the group that we can expand what they're able to do. And I think we've done a really good job of that.

34:23 You know, more recently, we've also looked at acquisitions as not only brands that we should bring in, but tech and IP that can help us to actually organically develop things. So ShareF is a perfect example of that, of we're bringing that in and having their immersive workflows and all their IP is really gonna help us in the future for our audio reproduction systems. And then lifetime value for customers on here. You know, we're very proud of the fact, like, in our content creation, we have twenty four seven follow the sun support on here. Leveling up all those service, you know, capabilities across there, doing things also, like, as we go into regions, you know, making sure that everything is localized in the different languages and and working with the channel there has has all also been a big boon. And we find is in in every different region, the more that we get closer to the customers, you know, obviously, the more brand awareness we have and, you know, and the better performance we have overall.

35:17 Okay. Now we've taken you through a lot of data today to talk about, you know, so what we're seeing in terms of our trends, looking at our registration data, our our product placements, some of the biggest resellers. But what we haven't really shown you is any insight into what some different analysts are saying about the markets that we serve. So I want to take a few moments and show you a couple different snapshots of some of the the people that actually follow our industry. So we'll start with content creation. So you can see these. These are ones that are pretty much you know, how much content across everything from the home level through professional is is is being done, how is it categorized, and what is the expected trend on there. So you can see there's there's varied opinions on how much they're grow they're gonna grow, but they're all showing they're they're moving up into the right on here.

36:05 If you look on this one on the left, you'll if you'll see that the the bottom piece where it says audio, you would think, well, FOCUSRITE's regulated to that. Well, that is primarily music, and it doesn't look like it's got big growth on there. But when you look at the other categories, you know, audio is a big part of what happens in any video production, whether it's, you know, at a home level or professional level on there. Same thing for graphical. So we play in a lot of those different categories, which is really interesting. And then the one on the right is also interesting because it shows that, you know, for music creation that, you know, over and beyond musicians, you know, there is a a growing amount of people that are consumer creators that are doing things like TikTok and YouTube and things like that. And a big part of our portfolio is actually geared to them. So that also gives us comfort to know that, you know, the the industry, the market that we're serving, you know, looks like it's moving up into the right and that, you know, our product portfolio and where we have things dialed in is the right way to do it. When we look at audio reproduction on here, so the first thing you'll notice is that huge chasm in in 2021 when during the pandemic, but you can also see how things have bounced back.

37:13 And the the path that we've been on with our audio reproduction business has been very similar to this. Now this is really following things like, you know, what's happening in terms of events. So, you know, when you look at '22, that's when live events came back. But the amount of of actual commerce that was done was was pretty small then because a lot of the channel, the rental companies, the the, you know, the the different facilities and stuff were completely out of cash for for being out for two years. They needed that that that period to actually use the products that they have. And, really, it's '23 where we've seen our part of the business kinda come back. But it shows you that things are starting to normalize here, which is something that we've been watching very carefully. You know, growing 20 something percent in a business that typically grows somewhere, depending on what numbers you look at, between five and eleven or 12% it's not something that we think is sustainable forever.

38:06 So this is something that we're definitely keeping our eyes on. Another couple interesting points on here is if you look at that top right graph that shows the pie chart, it shows the composite of all the different kind of categories on here. Now, if you had looked at that three or four years ago and looked at our portfolio, we would probably only be able to serve three of those those markets. We can service them all now with the with the r and d and the portfolio we have. So we're well poised to take advantage of all of those. Okay. So on to our summary and outlook. Sally, back to you. Okay. Thank you, Tim. K. I'll just give you a brief update on our current trading and outlook, and then we'll hand back to Tim for a final review on the strategy. So current trading, as I think Tim's talked about, content creation remains difficult, and we're not we are not expecting that market to pick up in the second half of this year, the ongoing channel destocking.

39:00 But we do have new products planned to help support our expectations for the second half of the year. And those new products are across all brands. And audio reproduction, think, as Tim has mentioned, has a very strong pipeline and will continue, to perform well in the second half. So our outlook, we've given guidance, I think, particularly in the recent trading update on the March 18. Revenue to meet the current levels expectations, which we've guided to, less than 155,000,000 for the full year. With gross margins broadly flat at that underlying rate across the year with promotions still in place to help generate demand. Our overheads, again, relatively stable on the first half of the year with the actions we've taken in place to address costs. Hopefully, then we'll offset inflation. So our cash flows, I think, talked about at length. We are expecting a significant improvement in the second half of the year with working capital reducing and so net debt to reduce as well. So our overall profit expectations for the year remain unchanged, which point I'm going to hand back to Tim now, who's going to summarize.

40:01 Thanks, Sally. So just a bit of a wrap up here on here. So, you know, when you look over all of the different segments and customer personas that we do, when you add them all up, it's a £5,500,000,000 market on there. And this is, you know, what the the group directly addresses on here. The market data that we that we have, you know you know, will shows that basically both divisions that we have, you know, the the the the use of these products is and and the the content and live sound events and things like that will continue to grow on there. We've got 13 brands now that, you know, are very sophisticated in their routes to market structure that are well known globally on here. Many of these have been acquisitions, you know, that have been well integrated to the group on here.

40:48 You know, when you when you look holistically, you know, at at the group and then you actually look at what's been happening in the content creation brand and you and you marry that up against what the industry data is telling us, all of our brands, you know, in their own environment, current current conditions are actually doing faring quite well on here. Of course, we are looking very much for when the content creation business starts to turn around. The piece of that we own, our own channel destocking, unwinding that, you know, new products and stuff like that. We feel we're well underway in terms of seeing that happen and doing our part for the market stability on that. And the the macro data we have suggests that the rest of the industry is getting there as well. We continue to innovate. You know, there's some really exciting new products that are coming into the future, which we're very happy about.

41:33 And then lastly, I just wanna mention, if you haven't seen some of the information we've we've we've reported, we're very committed to sustainability. And so there's a lot of things that we have done. There's a thing up on LinkedIn that you can see what we've done recently for Fortune and how it varies greatly from what we had in the past on there. And we're signed up for the science based targets initiative as well, which we're very proud of on there. So with that, I'm gonna conclude the presentation. Thank you for listening in, and I think we're going to take a look at the q and a's now. I think we are. Very good. Fantastic. Tim Sally, thank you very much indeed for the presentation. Ladies and gentlemen, please do continue to submit your questions, just using that q and a tab just in the right hand corner of your screen. Just while the team take a few moments to review those questions 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 investor dashboard.

42:25 Tim, Sally, as you can see, we've had a number of questions both pre submitted throughout today's presentation. If I may just hand back over to you just to click on that Q and A tab and where appropriate to do so, just read out the question and give you a response, and I'll pick up from you at the end. Thank you. Yeah. We Go to Google Chrome. Uh-oh. Yeah. Sorry, folks. Give us just a moment. There we go. Alright. Very good. Okay. Okay. We'll just, take a look and go through these. Start start at the top on here, I guess. Yeah. Okay. We have got a lot of questions, so we'll try and answer as many as we can. But if not, we commit you know, we will try and write up answers so they'd be available on the website. So apologies if we don't actually get to yours. So we've have the first question is a question about share buybacks and should we do those? And this is a question we're getting quite a lot at the moment with the low share price, and we have discussed this as a board.

43:18 It's not something we would rule out, but as a board, given where our debt is at the moment, we wouldn't want to take out more debt to buy back shares and return cash to shareholders that way. So certainly, when we get to a cash position, we would absolutely look at it. And I think if that's a sensible way of returning cash to shareholders, we would look at that and do that, but not in the short term at the moment. Our focus at the moment is getting net debt down with our cash. Cool. K? There's another question about, are you developing an ecosystem like Apple Samsung around your products? Any of the products integrated? Are customers locked into the products? So, you know, we we looked at that. You know, there's there's a number of companies in our industry that sort of had this walled garden approach where you were sort of locked into their ecosystems.

44:04 All of them have actually moved away from that because the the natural way that people work in this in this business is very much a modular thing. People just expect different pieces of gear to work. And if you look at any of the the pictures we have up on socials, you'll see a mismatch of people's artist's gears when they're using stuff together. So for us, it's really about making sure that our products integrate with pretty much anything, which is why we spend so much time in terms of working with, like, Apple and Windows on the the drivers, the OS drivers. We spend a lot of time with all the recording software people to make sure that our hardware, you know, has has really great integration with them on there. You know, I think what we what we are doing more on the commercial side is now that we have these integrated sites and we get so much data, we're able to learn a lot about what our customers have and what they desire to do. And so, you know, for example, you know, if somebody tells us that, hey. I'm I'm recording, but I'm just using headphones, you can pretty much be assured that, you know, in a very short amount of time, they're gonna get some marketing material telling them why they should be buying a pair of Atom speakers. Or if they're a keyboard player, you know, reminding them of all the great things we have across innovation and sequential.

45:17 K. We've got a question on the auditors remuneration comparing it to the 83,000 in 2018 to just under 1,000,000 that it was, in, I think, 2022 2023. So, yeah, I agree. I mean, it is an absolutely shocking increase. I think we are not alone in seeing increases in auditors fees. I think there's a number of factors contributing to that. Mean, we have been through quite a heavy inflationary environment is the base. The company in 2018 is not the group that it now is in 2023. We're a small international group with a lot of intercompany trading, which has a lot of complexity to the group to function that. I think we all would recognize that the auditing profession has changed, And auditors now can they can be much pickier about their clients, and they can talk they can set their fees to a much higher rate. And they are, I recognize, subject to far more regulation than they were.

46:13 So there are a lot of factors in there. I don't think apple is apples to apples, though, to compare 2018 to our current one for various reasons. However, I think we've communicated in our audit committee report that we are going to do an audit tender, this year to look at the landscape and see what service we're getting. Obviously, we're committed to a quality audit, but I think it's important we go out to the market and test the price as well. Cool. You wanna take this next one on m and a transactions? Yes. M and a transactions have added value to business. What guardrails are in place to ensure we do not overpay for other companies? Minimum hurdle rates, IRR would be appreciated. Absolutely. Yes. So for all our m and a transactions, we basically have three criteria we look at for starters, and that's, is it in a product adjacency that makes sense for us? So can we leverage, our sales and marketing teams? We don't tend to go in to look for cost synergies because we tend to buy smaller bolt on companies.

47:08 But to be honest, you know, we have to add some overhead to make sure they can fit in with our our group structures and our compliance requirements. But what we can do is a lot of sales synergies by putting through the sales and marketing channels that we have. So product adjacency is important. A good management team is important. We tend to run quite lean here. We don't have spare people around who can take on brands. So we want a management team that's gonna add to our capability, and we want them to be immediately accretive. So a good, well run, profitable brand. How do we assess that? We always do a discounted cash flow. And in terms of IRR or hurdle rates, we will look at our weighted cost of capital, and we'll adjust for the risk, be it country, albeit, the size of the, entity that's there. So we'd be looking at IRRs or internal discount rates, high teens twenties to look at that sort of thing.

47:58 But, basically, we also look at payback and cash generation as well, and we want that cash that we're going to pay out for the company to be repaid in fairly short order as well. So they're the various criteria we look at. In terms of overpaying, so we do a DCF. We look at the cash. We will also look at multiples as well and check where they are in the market, which we feel at the moment is coming down maybe a turn or so. K? Cool. There's a question about do you expect to have significant levels of stock of old generation products for the new product launches? I can tell you absolutely no. The issue we had with the third gen in the lower price categories where there's a lot of quantities on that was a was a really one off problem. We we're we're very careful. Typically, our product transitions go quite smooth. This one just because it's softest in the channel really caught us and the whole industry off guard on this. But all the all the product transitions we have coming up, we've got a really good smooth transition on on there, so no issues like that going on.

48:55 K. We have another question also about the Gen four, which is around we mentioned the training had been delayed due to engineering resource constraints, and has that position changed? Can we give a bit more color about resource constraints engineering? That was for you, Tim. Yeah. So we're working through that. You know, there's the the fourth gen Scarlets, the lower ones, had a lot of new functionality and a lot more DSP and stuff under the hood, which was a great kind of basis to for us to learn and build for the the higher ones, which have a lot even more complexity to them. That work is going well on there, but, you know, it is it is a it's a very new set of challenges and stuff for what we're putting into our hardware now. And this will I think this was a, you know, our first kind of immersion into actually having something that has a lot more functionality and DSP under the hood in the hardware on that. The work is going well on that, but we did make the call, you know, when we were just looking at, you know, the the risk profile of of getting these things done before the end of the year, our physical year on there. But the work is progressing, and things are looking good. But right now, I think we're on track to have those out, you know, in the the first half of next year.

50:10 K. There's a question also about how do our margins compare when selling direct to customers compared when selling through retailers? So, yes, they are significantly improved. We can get, up to about a 20 advantage by going through that, so moving into the sort of seventies. However, we will take on extra costs, so more of the logistics costs, more of the marketing costs around that, as well as obviously the cost of running the website. But, yes, it is a significant improvement, one of the reasons we want to increase the level of sales going through that channel. There's a question about sequential that it is almost half from 8.7 to 4.5. Is it realistic to expect revenues to increase to historic levels anytime soon? I think the short answer on that is yes. The first thing was is they had a very tough compare last year with the first Oberheim product that was a huge success with a very expensive product on there. Now, you know, the initial demand on that has come down.

51:04 But what we've seen, and really, again, talking earlier, was the softness in that very high end market, which is sort of if you could think about it, it's in two different categories. There's professionals that need the products to to do movie scores, to play out in live gigs. But a large part of that business is electives, you know, sales for somebody who has disposable income, and that's where I think we've seen the most softness in this business. We are and over the past couple months, we have seen those products, a lot of the run rates start to return to normal levels. On top of that, you know, the the lower priced products that we have have actually been performing quite well. As a matter of fact, the Take five, which is one of the lower priced ones, we out of we were out of stock for a while that we've we corrected that. And I've hinted to there's some new products coming as well that are very much in those lower price realms. So between that kind of forward momentum we're seeing on the higher priced legacy products and having some more that are in, you know, the the sweet spot on on lower priced SKUs, you know, we're we're quite optimistic that sequential is on on a path for turning around.

52:07 Okay. We've got a question about excess stock and the level of high stock we've got at the moment, and would we not reduce it? I mean, obviously, as I've talked about, we are very focused on reducing it. We would see sort of three to four months as a a level we'd be aiming to get down to. We do have manufacturing both in Martin and in Adam, so we have to carry raw materials. So we're never gonna get down to sort of one or two months. And particularly with our supply chain being in China, we think carrying a certain amount of stock, we particularly learned during COVID, is quite healthy and helps us support the channel. So, you know, absolutely, we're looking to reduce it, but we see three to four months as more optimal. There's a question about the recent Avid acquisition and has that had any change in the competitive landscape.

52:56 Short answer is no. If you if you know who's bought that company, they're primarily a software IP company. From all indications we can tell, this is nothing but good news for us if they wanna focus on this Pro Tools and Media Composer and not build any hardware anymore. We have really good tight relationships with them. I think many of you know that I worked for Avid for almost nineteen years, the last four or five running their audio division. So I know those folks quite well, and we partner with them a lot on different things. So, you know, in terms of that, we see that as just opportunity. Have we noticed any changes in the competitive landscape recently? Not really. It's been pretty much the same players. I would say the only thing that we have seen over the course of this year is a lot more aggressive promotions.

53:42 Now we have done some promotions on our own, but not to the scale and degree that they've done. And you can see, you know, from the charts I showed you where we've still fared in terms of our registrations and our sales positioning with some of the biggest resellers. So we think, again, that's another kind of proof point that we're actually faring quite well. I think there's another one there for you, Tim. This question has come up quite a lot. Think it's a really interesting point around AI and what does that mean for the music industry. That's a good one. There's a there's a lot of discussion about this, and it's a sort of a mixed bag of people that think it's gonna be the the death of everything and other people that see as an opportunity. I I I kind of I'm more on the latter of those two because I've been in this business a long time, and and I've seen very similar things happen in in the past. When drum machines first came out, everybody panicked and thought there no one would ever play drums anymore, and it was the death of professional musicians. Same things when samplers came out.

54:37 And nothing could be farther from the truth. What we found is that a lot of new artists and things found very unique, ways to work with that in combination with traditional things, and all it did was just expand. When you look at AI, I mean, you know, it's, yes, you you know, anybody will be able to go online and say, create me a soundtrack with, you know, with this ton of tempo or whatever. You know, you you you could you could argue that you've been able to do that for a while using samples and things like that. We think of it as in in in the context for in our little industry is that it's just gonna be something that's really gonna help people that are getting started to have a better experience. That's how we're approaching it. And we think just like with all the different technology shifts and, you know, disruptions we've seen in our industry, professionals and and that that will figure out a way to use this in a in a clever and interesting way.

55:26 K. There's a question asking for a bit more detail on the big one off capital purchase that I referenced when we're talking about cash flow. Can we give a bit more detail on it? Short answer is no, because we talk about it when we're ready to come to market about it, but it is a bit of long term, development we're doing, across the platforms that we hope will bring a lot of advantage to quite a lot of our products in the content creation area. So they've been in development for a while, and, yeah, hopefully, we'll be able to give you some more news at a later presentation. So sorry about that. But, yeah, I thought I'd just answer that in case anyone was asking for it. Yeah. Okay. So I think that is the end. Yeah. Okay. So apologies if we missed yours, but we will go through in any, I think, we need I'll try and give you a written answer on the platform so it'll be there for you.

56:17 And, obviously, please feel free to send through any further ones. Should you get them, we'll be happy to answer. Great. Fantastic. Tim, Sally, thank you indeed for covering off so many questions. Of course, just as Sally said, do submit your questions. The team will be able to review those, and we'll publish responses on the investor me company platform. Before redirecting investors to provide you with their feedback, which is important to the company, Tim, if I could just ask you perhaps just for a few closing comments before we wrap up? Yeah. Absolutely. So, again, thank you everybody for sticking with us through, you know, through the questions and through the through the presentation. I hope this has helped sort of clarify and understand, you know, the very kind of complex, you know, environments we found ourselves in. And, again, it is very much very two different scenarios between the content creation and the and the the audio reproduction business. Something I think that we're getting comfortable with because if you wound back the clock to when the pandemic happened, those two businesses were in the up absolute opposite positions on there. But, know, we look forward to a place, you know, when we when we acquired the audio reproduction business. If you went back and looked historically, both these divisions were, you know, very consistent, you know, growth categories over time.

57:24 You know, and we're just we're we're very, very much excited about getting back to that, if you will, on there. You know, I think when we look at, you know, our strategy and what we've done, you know, through great times, you know, you can you can pat yourself on the back and say your strategy is is working in great. It's really in the difficult times when you it really tests that. And I think from all the different proof points that we've seen and have we got everything a 100% right? Absolutely not. We've made some mistakes and stuff like that as we've gone through. But at the end of the day, I think that the net result is is that, you know, our brands continue to outperform in a very tough market. Our registration numbers show that, you know, we're materially ahead of where we were pre pandemic and, you know, and and that we're bringing more people into the fold to create music and also to to play music and and audio out live on there.

58:15 So we're gonna stay heads down on our growth strategy. That's what we do, and we thank you for your time. Tim, Sally, thanks indeed for updating investors today. Can I please ask investors not to close the session? It's now automatically be redirected to provide your feedback in order the team that can better understand your views and expectations. This will only take a few minutes to complete, and that's 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. That concludes today's session, and good morning to you all.