Focusrite plc

Good morning and welcome to the Focusrite PLC interim results analyst meeting. Throughout this recorded presentation, analysts will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab situated in the right-hand corner of your screen. Just click Q&A, type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to run a short video.

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So we're going to take you through the presentation on here, and I'm going to take the first part of this, and Sally's going to take the second part, and hopefully give you a good narrative and understanding of how our first half has went on here. So if we go into the presentation here, the first thing I just want to set up and remind everybody is as we go forward with our business, we talk more about the group's overall strategy and revenue strategy. and everything really into two very broad categories we have our content creation uh part of our our group which is the the lion's share is 78 of the revenue and the audio reproduction uh part of the business which is about 22 of there um the audio reproduction is i guess you'd say more new and this is really kind of came to life when we acquired martin back in december of 19 on here with a whole thesis the idea that you know we saw a lot of opportunity on this part of the business Even though it works through a very different channel, we have some familiarity with it. And it felt like a really good way in terms of diversifying the business that we have. And I have to say, for this first half, that thesis of actually having the diversification has really proved well for us. And it's something that we're quite proud of with the journey that we've been on these past six months. So when we go to the highlights for the business on here, You can kind of see how we've done on here. Really, again, I think when we look at this diversification on here, it really kind of tells the story in terms of what we've seen over the first half. So the audio reproduction business, as we predicted, at the end of last year has really come back. And we're seeing growth over the first half over 50%. And this is just the natural culmination of live events coming back and the equipment and the rigs that we see that go out with that. In addition, the installation business, which is really all the permanent installations and things like theaters and nightclubs, cruise ships, houses of worship, has really come back in a big way on here. So lapping, you know, still somewhat anemic numbers from last year. But right now, audio reproduction is doing quite well and is back on a growth trajectory, back where we needed to be from pre-pandemic. So we're very happy about that. On the reverse side, the content creation part of the business, you know, coming off just an incredible two years, was down 16% on this. And so when you add that all up, the group from a year-over-year perspective was down a little over 7% versus half one in 22 on there. Gross margin, we've done some really good work around here. Obviously, freight costs coming down has been a really big component of this. Also, we've also been doing a lot in our routes to market, and that has proved out quite well. A lot of that was offset this first half from some more promotions that we did, and I'll talk about that in a little bit in terms of the play there that we've been doing in terms of the content creation business, the channel inventory, and some big transitions coming up. The net result is our EBITDA was 18.1%. for that part of the business. And when we talked at the beginning of the year, we also talked about some of the things that we were changing in terms of our channel, especially in the content creation part of the business. One of those was actually having a universe of treating of how we actually deal with EMEA. That has actually worked out quite well. And so when we talk about the regions, we'll talk about how that structure has really proved itself out. We're quite proud that over the course of this half a year, we've had 21 new products launched, and that's a good balance of things in both the content creation and the audio reproduction space. I'll talk a little bit more about those as we go into the different parts of the portfolio. And we had another acquisition in December of this year with Sonix, which was our first sort of software acquisition. Again, very exciting. important strategically to the business not only does their current portfolio really complimentary to a lot of our offerings but the DSP knowledge and expertise they bring is going to be quite beneficial as we go forward into a lot of new products that we want to do and then lastly one of the big topics that we couldn't talk enough about was component issues We're seeing that that has very much abated itself. We're back to sort of a normality on there where we're dealing with small issues, you know, that we might have a delay on one small part here or there for 30 or 60 days, but nothing that we can't really manage. So the timeline that we've seen in the visibility has improved dramatically on that, which has been very pleasing for us. So I'm gonna talk a little bit about the two different divisions of the business. I'm gonna start with the content creation part, which has been the most challenged across this year. So when we break this down and look at the brands, there's sort of two different stories here. First off, if we look at Atom and Sequential, they both had good, strong first halves. Somewhat abated by some of the softer demand we're seeing, but a number of things that really sort of helped them. Number one, Atom was coming off a very low compare. from last year. So they probably more than any of our other brands were the most impacted by the component supplies. A number of key products that we were really, really light on in the first half of last year. We've come back from that. The team has done a great job of procuring all the components and the production is back in full swing. And so they've had a really good first half getting back into swing. Sequential also, a number of new products that were introduced that very much helped. Also, a lot of the strategy that we had when we bought Sequential, which was bringing sort of to bear the sales and marketing arms that we have globally and putting those products in the portfolio of our quota-carrying salespeople, has definitely paid off as well. And again, Sonics just bought in December, but really performing at expectations. So really, the bigger thing I want to talk about is the Focusrite innovation business on here. Again, so there's two things that are important to keep in mind on here. First off was just that when we ended last year, we had come off a period where the amount of inventory that we had in the channel was very, very light. Where we typically keep more around four months of inventory, we were really struggling. At the end of last fiscal year, we really kind of came out the other side of that and were able to supply the channel with a product to get them back to where we want and actually a little bit more because we were kind of prepping up for the holiday season. Second thing is that obviously the macroeconomic issues that we're all quite well of and the challenges we've seen globally and even very much more in some specific regions like China, for example, have come to play on here. And then lastly, one thing that we really have more control on is the planned inventory issues. channel reduction so anytime that we do a major product release we're working on actually making sure we're minimizing the channel inventory on those products before we announce so that we've got a as much as we can control a clean channel on that so the mixture of those is sort of the the net result i did want to take a moment and actually just kind of go into the the stock levels into our channel because this is an area where the journey we've been on for the past couple of years has been very interesting. So I think the first thing to mention is that normal pre-pandemic times, we normally had around four months of inventory in our channel. That was what we pretty much set as a KPI because when products are coming out of China, both time to get there, having to go to a distributor's warehouse and then into their reseller channel, that's about what you need to ensure that there's a constant flow of goods so that you're not running out. So what Sally has tried to put together on this graph is sort of a sort of visual history of where we were on here. So when you can see when we went into the FY21, really in the height of the pandemic, when the demand just peaked, we suddenly went from four months to down to less than half a month. Half a month of inventory basically means we have huge pockets of channel partners and resellers across the globe that are stocking out on our product. And a lot of this was aggravated not only by the demand, but really what was going on with component issues. Now we worked this and obviously we started to improve, but you can see across half two and even into half one of FY22, we were still remarkably below our KPI of four months, really around a month and a half. It wasn't until the end of last year where we really started to catch up and we got a lot of inventory back into the channel. A bit more than we wanted, but the channel was willing to take it because it had been so hand to mouth. Now, interesting enough, this was not just a Focusrite issue. This was an entire MI channel thing. So about the time that we were catching up, everybody who manufactures guitars, drums, any type of music instrument was doing the same thing. And so what we saw was really going into the holiday season, the channel quite stuffed with inventory at that point in time. Now, we were aware of this, and this was about the time that we actually started to see a slowing down of demand in the channel from a lot of just global issues, consumer spending, this type of thing. And so we did go heavier into promotions over that. Because we knew we wanted to get ourselves back to around that four-month KPI. And in addition to that, we also knew that we had a major product transition coming in the second half. And we wanted to make some inroads into that. So you can kind of see where we finished the first half. We've got the inventory about to where we want to be in terms of our KPI, about four months. And we're quite pleased with that because all industry indicators tell us that we're quite ahead of the pack. in our different categories on that. So that's a good place for us to be on there. But it sort of just gives an idea of what's been going on there. And I think the net result of that on that second line is that as it started to reset in the first half of 23, the net result of that is it really resulted in about one month lower sell into the channel in terms of working those volumes back down. We talk a lot about the different tests that we use about the strength of our business and just the overall health of it. And especially for the Focusrite innovation products, the end user registrations is probably one of the best litmus tests we have. Our revenue is when we sell into a channel, but really the strength of the brands and how well we're doing is on any given day, week, month, whatever period you want to look at, how many humans across the globe are opting in for a Focusrite group product? And so this is showing sort of what's been going on with these global registrations on there. And you can see that compared to pre-pandemic, we're still way up, up 22% from where we were pre-pandemic, which is really good healthy growth when you look at that category. Compared to last year, we look to be about 7% down from where we were. And when all the data that we have from our different music industry trends, a lot of it very US-centric, but also just looking at different channel partners and distributors, it looks that the entire market is down somewhere in the 8.6% range. So we're definitely doing better on there. And again, we'll talk about this in a minute. APAC was definitely down even more than that. But What we can tell from the competitors we have, we're actually faring quite well on there. In the scheme of all this that's been going on, one thing that we're obviously very keen to keep an eye on is just how we're doing competitively. And over the past two or three years, especially in a number of our major product categories, we've seen a number of new competitors come into the space. From what we can tell, many of them driven by our success on here. So one thing we're always keen to watch on is in any market, whether it's soft or high demand, how are we doing in terms of our share and the pull that our brands have? And there's two big leading e-com sites. One, Tome in the space across EMEA, the largest music retailer really across EMEA. That is very, very open in terms of how products are doing. They not only monitor their top 10 overall, but in specific categories. And this is something that's updated every week. And you can see on here that in both the speaker and the interface category that we're occupying a number of the top spots, especially for Scarlett. Now, this is just a snapshot for one week. But if you go and look at this data, it's very easy to find. We just didn't pick Scarlett. what was a great week for this. This is very indicative of what we see pretty much every week on there, where we typically, in their top 10, we usually occupy anywhere between four and five spots. And that has been very consistent through this whole dynamic that we've seen in terms of the market. very much lines up with what we're hearing from our reseller channel as well, is in terms of our brand is still in a soft market, you know, one of the biggest pulls and the highest demand product on there. So we're quite pleased with that, with everything going on, with the pressure that, you know, not only the channel, but customers are, that we're actually seeing our products still fare so well in here. Along with that, we talked about the products that we introduced over this past year, 21 new products. And again, a broad spectrum across both the content creation and the live sound. Along with that, we've won a number of very prestigious awards on here. And I think that really speaks to the teams that when working on these products through the pandemic, most of the product development on these is two to three years on here. So a lot of these products that started as we work through working at home, the pandemic, And trying to fulfill, you know, this is a real good shout out to the R&T teams, the investment that we make on here. So a couple of these to point out. Sound on Sound, probably the biggest, most well-known trade magazine in our industry. They do a yearly award thing. We won a number of these. Best new synthesizer. Best new mic processor. best studio monitors, best keyboard controller on here, which is great. Optimal, which is doing really well, won Best New Product Manufacturer of the Year at the AV Awards. Very prestigious and very competitive thing. And we were very proud pleased in the U.S., the Music Retailer, which is the number one sort of magazine for the entire dealer network, they choose different manufacturers of the year. We won recording equipment of the year, which is actually really amazing because this was a year where we didn't really have much new NPI in that year. It was all about just how well our brands pulled people in. So it was great to get that sort of accreditation from our channel, if you will. So I'm gonna switch now and talk a little bit about the audio reproduction business on here. So again, gone really from what was almost a complete shutdown of the business back in the first half of 20, back to tremendous growth, a real swing back as we've seen live events and the people's desire to go and hear music or experience live events really coming back on here. So continued growth on here, a lot of new product introductions. I think this is one thing we're really proud about because, again, what we saw happen really in the first half of 20 is most of the competitors in Martin's space, they literally shut the doors and turned the lights off. We kept the business open. And a lot of that was to keep the R&D going because we knew that this would come to an end and we We wanted to make sure that we had a lot of the new products and the roadmap intact as much as we can. And we've really seen that happen over the course of this first half. A lot of major product introductions really timed right when the market's coming back. So very good on that. And again, optimal as well, which is really more on the commercial side. A big opportunity for us as we kind of flush out that. So really good growth on here. We're very, very pleased with how this is working. Again, it really talks to the diversification that we've had. Again, a couple just examples of just, you know, what we've seen sort of globally. You know, most of these live events, the big festivals, the majority of them that are happening kind of now into this upcoming summer, they're sold out. I mean, so there's a big proof point there about how much people miss live events and how important that is to pretty much every region's culture and DNA. So that's great to see. And then a couple of examples of a number of the facilities kind of across the board that have taken the time and really reinvested to upgrade their systems or move into immersive audio, this type of thing. So there's a couple of things. There's a gym on here. You can see a permanent installation and a church, a lot of this, which is sort of the bread and butter of this installation business. So really good to see that kind of coming back on here. We talked a little bit about our acquisition this year, Sonix. We talked a lot over the course of the past years about how a software company was something that we were putting our eyesights on. Sonix was a great company for us. Not only is their IP well aligned to our content creation customer base, so a lot of attach rate there, but also the skill and talent set that this team has is very much aligned with where our product direction is going over the next three to five years. So, having this kind of expertise in-house and, you know, with their DSP and their resources is going to be very advantageous to us. So, again, another really good acquisition for us, settling in well, you know, accretive to the business. And also, I think the extra bonus is, you know, is that the fact that, you know, these teams are really going to be able to work in tandem with companies a number of the other brands' engineering teams to bring some of their IP and expertise to bear. And then on the regional performance on here, so you can see a bit of red and a bit of green on here. I think the story is that across the board in every region, we saw our audio reproduction business grow. So you can see some pretty gigantic swings, like, for example, in North America, in EMEA, and that is a lot about those businesses coming back. You can see in Asia that it was only 2.7%. I think that speaks directly to what we're seeing sort of across both divisions in there is that, you know, with China kind of going through what it's gone through over this first half with China, The pandemic is still happening in lockdowns and coming out of there. Also, with a number of the, I guess, the more aggravated economic issues in terms of currency and things like that, you can see that even with the audio reproduction, which has come back, that growth has been quite muted across there. We are seeing signs that across the board where things are coming back, specifically in China, which has been a very challenging area for us. The content creation side, you can kind of get a sense of the numbers on here. So, again, North America really focused right in Novation, really down mostly to the channel stock. And also to the fact that, you know, we are prepping for this big product introduction coming in the second half on there. EMEA, not as much down on there. Again, I think we attribute that to the fact that how we restructured that team and working closer with the partners. That is a really good business model that's sort of proven itself that we plan on implementing other places. And I think, again, the biggest impact we've had across all the businesses, all the different regions has been in the content creation side for Asia. They're down significantly over last year. They were up significantly last year as well as we continue to see a boon. I think in general, Asia typically lags with what we see in leading indicators about six months. As things were starting to subside on the content creation side, they were still peaking, especially in areas like China on there. But with a lot of the problems that we've seen in that area, that business has definitely been suffering over the first half of this year. We have been working very closely with the channel partners on there and our distributors. Early signs are things are starting to unwind and get better. We're watching that very closely. So I'm going to hand it over to Sally now, and she's going to take you through a few more of the financial slides.