Focusrite plc

I would now like to hand you over to CEO Tim Carroll. Good morning to you.

Good morning. Thank you, everybody, for joining us today. Sally and I are pleased to be with all of you. to talk about the journey we've been on for our FY24. If you've seen the remarks that we've put out today, I think I categorized FY24 as a very challenging year with challenges and opportunities. And boy, did we actually see that. I have to say that in my 10 years, this is my eighth year doing this, I think we had more up against us in terms of just challenging the group and really testing the metal of our structure, our routes to market, our products, and our brands than we ever have in my career. And I'd like to maybe just kind of start off by talking through a few of those things. Again, the challenges, very well known to the world on here, continued cost of living concerns that we've seen, continued heightened components, manufacturing, logistics costs. A real slow burn on the destocking that the entire music industry channel has gone through. A lot of our competitors slashing prices to move inventory and bring in more cash. And a number of our large, well-established resellers in some of our primary markets that closed their doors for good. So not a great recipe for success, if you could say on there. But reflecting on that, I think what I have come to realize is that those type of issues, they really are an opportunity to test the overall structure of your group, the power of your individual brands, the robustness of your routes to market structure, and your ability to innovate and bring great products to market even when times are tough on there, and also your capability to manage things effectively like logistics and operations. And when I look back at this past year, I really feel like the group has done a very admirable job in addressing all those heads on. And it hasn't been a year of this all bad stuff. We've had some really good stuff happening, too. I think the highlight probably is that it's clear. that people's desire to go out and experience live music, see live events, that continues to thrive. And all the investments that the group has made to really shore up our audio reproduction portfolio and all the capabilities of our systems to the acquisitions we've had has really made a big difference in this year as well. Having both of our divisions in play has actually been really advantageous for us. And so as much from financially as I'm glad to see kind of FY24 in our rear view mirror, I have to say that I am incredibly proud of the way that our group has actually reacted and responded and performed during this time. So we're going to take you through a lot of this. And I'm going to start off on this slide here, which basically, for those of you who are not familiar with the business, is just a bit of an overview of who we are on here. And very simply, the easiest way to think about the Focusrite group is in two broad divisions. We have a division that's focused on creating content, primarily music, but anything to do with audio. And we have a division that's focused on really the reproduction or the broadcast of that and the sort of live sound thing. So in the content creation space, our products, they really serve a huge multitude of different customer personas, people that are actually just hobbyists having fun, maybe recording for the first time, all the way through professionals that do this for a living, the recording studios where the music that you listen to every day is produced, and also the movies and the TV shows that you see are produced. On the live sound side, we have an amazing amount of solutions now that run the gamut from the audio that you might hear in your gym or a restaurant all the way up through the sound for something on the scale of Glastonbury or Hyde Park and everything in between in terms of theaters, houses of worship, all this. So it's a very, very complex set of brands to service very two different markets. But as we'll go through and talk about, this has really served us well. And when we look at the underlying market data for both these divisions, the outlook, is good, to be perfectly honest with you. The number of people creating music and creating audio continues to grow, is predicted to grow. The number of people going out and experiencing live events, their desire to want to do so, continues to grow as well. And there's no shortage of new events and things that are happening on there. So I think that actually gives us confidence that the strategy You know, the way we have our brands operate, the way we put things in place has really tested well through a very difficult time for us this year. And we'll talk about how the products and the brands and stuff have shored up during that. So I'm going to start off here just by giving a little bit of context in terms of the numbers that we introduced. And again, it's been very much sort of, as I describe, a tale of two cities, if you will. The content creation business has still been very, very challenged on here. A lot of this having to do with the entire global channel sort of just getting back into balance, a lot of destocking on products going on. And things like cost of living, inflation, these have actually come to bear really big, especially on the more home studio hobbyist part of the business as well on here. The audio reproduction business has had another really good year as we've seen the sort of the bounce back from the pandemic. And just give a little bit of a color there. If you remember when things opened up after the pandemic, this was an industry that basically was completely cash poor. They'd been completely closed. So the first year that events and stuff came back, all of the system integrators, the rental houses, they got by with the gear that they had. we were very proud that we actually helped a lot of them actually get back on their feet again, knowing that if they had a really good successful first year, the next couple of years would actually, um, pay off for us. And that has absolutely happened with the audio reproduction business growing on there, that along with the culmination of the fact that the, uh, The portfolio, the investments we've made, we have really rounded out our portfolio. We've added some acquisitions we'll talk about this year that have really upped our game in the world of immersive audio. That all has really paid off incredibly well for us. And then strategically, I think, again, one thing I'm really proud of is even as crazy as the world has been, We continue to deliver on our strategy. 35 new products we introduced this year across all the different brands on here. Our employee engagement continues to improve and really great numbers on there. And we continue to transform our route to market on here. So what we've done, we've done some more refinements in the US and in Japan that I'll talk about as well. So when we get into this, we'll start talking a little bit about the content creation business to begin with here. So, again, a very challenging market for us in this particular year. But, you know, a little bit of a mixed bag here. Focusrite obviously, you know, was very problematic for us this year in terms of just the year over year compared numbers. Part of this was we were coming off a year where we had had a big introduction of our fourth gen Scarlets, which that make the comps pretty high. But when we introduced that product, one of the things we talked about at the half year was that because things had slowed down in this part of the market, when we introduced the fourth gen, the channel still had a lot of the third gen stock. And one of our challenges that we set for ourselves was to move through a lot of that effectively across the course of this year. And I'm very proud to say that we've done a really good job of that. And I'll show you some numbers in a minute to show you how that business is kind of stabilizing on there. So a difficult time for Focusrite in terms of new sell-in. But as you'll see, the underlying demand for the product and our share has actually held quite well. Novation, which is really all about electronic music products on there, sales a little bit slower in terms of decline than what the market averaged. A lot of that buoyed by the fact that we had a major product release right at the end of this past year with the launch KeyMark 4, which has really set a new bar and a new standard for MIDI controllers. Adam Audio actually has been one of our shining stars this year. And if you recall in past talks, we've talked about how one of the kind of main agenda points in our routes to market thing was to take all of our different brands inside these different divisions and wrap them around a global sales team and really align our distribution, our channel, our whole kind of routes to market on there. That takes time. Doesn't happen overnight. But one of the things that happened over the past of this past year with Adam is that we really had that in place. We had moved them effectively to better distribution across the world. And one of the net results of that was is that their product focus, their awareness in these different markets definitely increased, especially for the low end range, the T-Series, which saw huge growth over the year. Additionally, one of the things we're very proud about at the end of this year is we launched two new products for Adam, a new foray into studio headphones and also some new desktop speakers, which really fit a great niche for many people that are challenged in terms of the amount of space they have to actually create their content. Moving on, Sequential and Oberheim, probably one of the most impacted in terms of the categories on there, mostly for us because most of the products in the Sequential and Oberheim camp, very high priced, really cater to high-end audience. And while we have many professional musicians using this, this is very much an elective purchase for a lot of people with just extra money to spend who are synth fanatics or keyboard players. And that's where we saw, not for us, but the entire industry come down. I think the one thing that gives us a lot of confidence going forward about sequential is we've had some new product introductions towards the end of the year, really more in a lower price point that introduces the sequential and Oberheim products to a whole new genre of customers. And those have actually settled in quite well on there. So we're very optimistic about that. And then Sonix, the software company that we bought a while ago that makes plugins that support all of these different workflows are in line with expectations. They've done well. And we have been, as we said we would, we've been developing, we've had their development teams involved in a lot of the new hardware projects. One of the first proof points on that is they built the plugin that actually runs the Atom headphones that allows you to actually do things with the headphones to actually get to kind of different listening experiences when you're doing discerning mixing on there. OK, moving forward on here, let's talk a little bit about regionally what was going on. You know, the again, North America, rest of the world, both very challenged on here. North America, very much a soft market with a lot of destocking that was happening throughout the reseller channel on that. And that's something that we took hands on, have done a really good job of driving home. We feel like we're in a much, much better place than we were at the start of the year. Rest of the world, really, the story here continues to be about China. The entire industry is seeing softness there, although we are seeing signs of stabilization and things are starting to improve there, which is good. EMEA, we're actually quite proud of the result we had there. We had a restructured team with a sort of a new routes to market agenda going on there. We were able to mitigate a lot of the higher declines that we saw from other key resellers online. One of the other shining stars that it's really positive to talk about in the content creation space was our direct customer channel. This is something that we've been developing, working on for a number of years. And the websites and the infrastructure and everything behind this is quite robust now. And so we think this is a really important strategic pillar for us to have. Not only does it bring us closer to our end customers, but also as we see consolidation in the channel, it gives us another very strong route to market to go and sell directly to customers. This business has continued to grow. Along with what we've done organically, we've also redeveloped two new sites. The new Atom Audio live site is now live as of November 12th. And we have a new Sonic site that's happened as well. So, again, very, very pleased with the result that we've had in our e-commerce business. And this is an area where we see continued growth and opportunities to take us along. Just talking a little about the market in general, if you followed us in the past, you know that the data we get from our industry is not stellar. As a matter of fact, much of the data comes from the US. And this is some of the US data just to kind of drive the fact that it's been difficult for many, many different segments on here where we've seen decline over the past couple of years as the whole MI industry and content creation space has gone through this sort of rebalancing post-COVID on here. I mentioned earlier that, you know, one of the, you know, the things that we were very, very happy about and gave us confidence was our underlying demand. So our revenue obviously is what we sell into the channel. That's what we recognize as revenue. And we do have strong relationships and we get strong reporting from our channel so we can see how things are going. But on top of that, we do a very good job of getting our customers to register their products through different incentives. That gives us a real pulse on the health of the business, the overall demand of what people are actually buying and what we see in any different region, regardless of what's happening with the channel at any different point. And you can see from this chart here that our underlying demand has remained quite strong on here. Even with the weakness in the destocking the channel, the amount of people that are registering the product has stayed very, very steady throughout this whole time, which is very, very gratifying for us and very different from what we've heard from other manufacturers in this space. I'm going to pause for a moment here and just for some of you, you talk a little bit about audio interfaces. Still a big component of our business, especially in the content creation space. But you can think of the audio interface as sort of the epicenter of what somebody uses when they're actually creating audio. It's where you connect your instruments, your microphones, and do your actual recording into your computer system with whatever software you're using. You know, these products have been out for a very long time now, and there's lots of different choices out there. So, you know, people ask us, well, you know, if it looks like it's a pretty commoditized product group, why does Scarlett win? Well, we tried to list a couple of the reasons that we think Scarlet wins. Part of that is the heritage. People that are looking to create music or any kind of content, they want to partner with somebody that actually this is what they specialize in. And when you look at our heritage and where we started, that's actually a big point for many of them, knowing that this is something, this is the main area of focus for this brand on here. We talk a lot about our superior audio quality. Every generation of this product, we up the game on this. And that makes a big difference for people as well. Another thing is that we have kept up with what our customers expect. An audio interface many years ago was just a simple kind of pass-through box. You plug things into it and it recorded right in there. Our boxes now, our interfaces, have a lot of smarts inside of them. As a matter of fact, you could think of sort of the world used to be, it was hardware and software that actually allowed you to actually kind of customize, tailor, and really make your audio sound great. We actually do a lot of that inside the box now. And that has come at an expense, but we think it was a necessary thing to differentiate ourselves. So things like setting the right recording level, making sure that you can't clip your audio. These are really important things. The ease of use is another big one, especially for beginners. We're quite aware that people just don't have time to muck through a bunch of different manuals. Their expectation is they open the box, they plug it in, they start sounding like a rock star instantly. I can't guarantee they're going to sound like a rock star, but what we can guarantee you is that, you know, you're going to be able to get up and running very quickly to understand exactly how you do sound on there. Highly reliable. You know, we have amazing tech support, followed by Sun support. And then lastly, something that has really resonated with a lot of our customers is we've made a big marked effort on sustained materials on here. using recycled, and I'm sorry, I say it aluminum. If you're from the US, I can't even say it the other way. A lot of the packaging can be recycled as well on that. And that's something that we've put a huge effort into as we've gone through these products on here. And so when you look at the evolution of a Scarlett over time, you can kind of see what's happened here is that the features, what it's capable of doing has really changed and morphed a lot over these different years. And on the right-hand side, as we've gone through this product transition between the Gen 3 and Gen 4, we wanted to kind of show what that has looked like. Because again, it was a very challenging time for us at the beginning of last year, actually helping the channel clear out their stock of the Gen 3 products and our own, what was left over from the market kind of softening on there. And you can see the progress we've made from when we introduced these Gen 4 products back in August of 23 to where we are now. The blue line is really the products that are phasing out. One of the decisions we made was that we felt it was very important for us to continue to have a product at that kind of strategic $99 US price point. And so we've continued to make the third gen solo product on there. And we've seen that that's not cannibalized our fourth gen sales, but it has pulled a lot of market share from a lot of other brands that sell at prices in that sub $100 space. So we will continue to do that. But we're very pleased with the progress we've made, especially considering the challenge we had with our starting position on this. I talked a bit in the beginning about how we've seen throughout all these challenges we've had, we've seen that our products have maintained their leading position. And here's kind of proof positive of this. Two of our biggest resellers, Toman and Sweetwater, they actively published all their top selling products per category. This is one snapshot of this, but as you can see, this is indicative of what you'll see pretty much any time you go there. We usually kind of occupy at least half, if not more, of the top 10 spaces in these different categories. Something we're very proud of, something that we watch very carefully, but it really speaks in a time where, you know, cost of living is really put people under pressure. Our products are a premium price product. But to have this much kind of, you know, winning in our sales ranking is really, really important to us. And I think it's a proof positive of how well the brands have actually performed during this time. OK, I'm going to pause for a second there, and I'm going to switch over to audio reproduction, which has been on a very different journey for the past couple of years on here. So again, thinking about this part of the business, it's really about installed sound. If you go to a theater and you're seeing a show where the infrastructure is built into the facility all the way through, you know, like live events where you go to Hyde Park and watch a thing. It's all set up and then it's all torn down. 20 new products across this past year for them. Very proud of that. A lot of this is the culmination of a lot of investment into this group, knowing that this business was gonna come back and knowing that when it did, we wanted to have a portfolio much wider than what we had when we acquired Martin Audio back in December of 2019. And on top of that, one of the things that we've seen as people have come back in flocks to go and experience live events is that theaters, concerts, all these different places, they're looking for ways to differentiate the experience over and beyond what you can get in your home. The theaters are actually pretty compelling right now. And one of the main reasons they're doing this, ways they're doing this is through immersive audio. Immersive audio, you can think of as when you go to experience an event, no matter where your seat is, you're getting an experience on par with anybody else in the auditorium. And also the audio moves with the actors and moves with the events. So it feels like you're being surrounded by this. Really makes a huge difference on this. This was something, an area where our products worked with it, but we didn't really have a play in the immersive audio in terms of anything in our own brands. With the acquisitions we did this past year with Sheriff Technology and Pan Lab, we are now very footed into that. And that has really opened up a lot of new opportunities for us as well. Looking at the regional performance on here, overall, a really good performance. Again, the one area that we see that was a bit challenged was in the US, very much like the content creation business. A lot of this having to do with inflation, cost of living. A bit also about just our ability to get products in there in the quantities that we wanted to on time. So that's something that we've remedied on our own. That's one thing that we can actually help with on there. And so we've really increased the amount of stock that we carry in the US so that our sales teams can say yes and have quick delivery dates and everything. But over and beyond that, the rest of the world continues to do really well. China is the exact opposite story than what we've seen with a content creation business. People are still going out in droves to experience live events, festivals, concerts, this type of thing. And EMEA, same thing, has done really well on here. I talked a little bit about these acquisitions on here just to kind of just drive the point home a little bit more. You know, the idea here was, you know, as always has been with our M&A thing is to look for brands that are in adjacent markets where they're complementary. to what we do, these two just, they checked all the boxes. They were perfect for us in terms of bringing it into the fold on here and having this IP and stuff in our collectives that we can actually embed more into our products and also to have a story about, you know, how we are actually invested in immersive audio, not just a product that can work with it, but something that we're actually and actively developing. And so that has gone a long way. Many of the trade shows that we've been doing over the past year, we're seeing many new opportunities come up because we actually have this in our camp. I painted a picture where it's been all roses and everything for the live sound business. I think the experience that we've had with content creation, it's important for us to note that we have been in a period where the industry has bounced back on that. And so one of the things that we're acutely aware of is that that will not continue forever. And we're sort of at a place where we're also starting to see that cost of living and stuff is having an impact on the live sound business. We're seeing some festivals being canceled on here, something we're aware of. I think, though, for us, when we kind of balance that against the size and the shape of our portfolio and the fact that there's basically no opportunity really in the live or installed sound space that we cannot go in and actively have a solution for now. I think we see those as balancing each other out over the course of this year and over the next year on here. So all the investment we've made there, I think as we see that business normalize, we are expecting to continue to gain more share in the space. So I'm going to take a pause and I'm going to hand it over to Sally now and let her go through all the numbers.

OK, great. Thank you. OK, so we'll start off now. If we have a look at a sort of summary of the financials, we're going to come on to a lot of these in a lot more depth. But sometimes Tim's talked a lot about revenue, which is obviously down in the year, as was margin resulting in that reduced EBITDA, the cash flow. You know, story of two halves, which I'll come on to. I think keeping to take away that we're maintaining the dividend at the level of last year, despite the fact lower profit and also the lower cash flow, which is a testament to our confidence in the future of the group. Let's go through and we'll look at some of the primary financial statements now. So if we look at the income statement again, I'm not going to talk about revenue because Tim's, I think, talked about that. It's a good outline of that. And gross margin is going to come on to a bit more depth. So just a few things to pull out here that maybe stand out a bit. Adjusting items is quite heavy this year. That includes a 5.4 million impairment for our sequential asset. So it's non-cash. It's very much accounting calculations of a point in time. The sequential brand is still profitable and we still think it's got great potential, particularly with its product roadmap for some more lower price, higher volume products. But at the moment, it's been particularly hit hard. selling very high end $3,000 to $5,000 since over the last couple of years. And you can see from the numbers Tim shared earlier, particularly 33% decline this year. So we've taken the decision to take an impairment this year, which has bumped up our adjusting items, which other than that is really just amortization acquired intangibles. Just a couple of things to pull out as well there. Financing costs, a bit of an increase in the year, given the level of debt and the increased interest rates, I think is to be as expected. And tax, though, is a very small credit. And that's it's a combination of a lot of factors and adjustments as we trued up our tax over this year. But just to point out, we take our debt credits, which don't impact the tax rate, but do impact our tax payable and patent box reliefs, which we take across both the Martin and the Focus Right plans. which has helped mitigate that tax rate during the year. So we're gonna come on now, and as promised, we're going to talk about gross margin in a bit more depth. So quite a lot going on in gross margin. As we talked about at the half year, we made the decision to reduce the inventories in our Vocaster product, which had been introduced quite challenging times. And that's had a 1.3 percentage point impact on the gross margin, which is a combination of a million stock provision, but also we sold it out to a channel partner and effectively nil gross margin. So that's had a sort of dilutive impact. So if we strip that out, the actual gross margin we can see for the year is about 45.8. And that's largely been impacted by the increase in freight costs, which has been fairly well communicated. Freight costs as a percentage of sales have increased across the year by two percentage points of sales. And that's come through about 1.7 overall. Added to which, if you go into the detail in some of the financial notes around our segment margins, you'll see the audio reproductions increase quite a lot and content creation decrease, but they've largely offset due to the mix of products. And that's basically and they've had a very strong audio production, particularly in APAC. And in APAC, they get much higher margins due to the way they go to market there. And in content creation, I think as we're all aware, it's been a very tough market. The bit of destocking and particularly discounting for some of our competitors, we've just increased that promotional activity a bit. So overall, we would expect both audio reproduction and content creation to normalise, but freight to stay at these elevated levels, particularly with some of the challenges we're going to see about the holiday season, potentially impacts from tariffs. So we're assuming the margin will continue at that underlying pre-vocaster rate for the next year. So if we then move on now and we have a look at the balance sheet again, I'm going to come on and talk about working capital a bit more depth. So I won't talk about that here. Other than that, it's a fairly stable balance sheet. I think if you look across most of the activities, I'll talk about that when we get onto the cash flow. Probably one thing just to draw out the longer term liabilities, you know, a bit more significant. But actually, most of that, about 11 million of that is deferred tax. So it's not that we've got a lot of debt sitting there in longer term at all. The debt that we do have there is mainly to pay off one of the acquisitions, the Oberheim brand, which we're paying in stage payments. And are these liabilities, as you would expect? OK, so coming on now and looking at cash flow, I think just two things to comment on here. So investing at 14.2, investing a little bit complicated. It's mainly capitalized R&D. And the number you'll see in the cash flow and the number of fixed assets is slightly different because we also capitalize R&D. are debt credits we get which reduce the cash impact but that comes through in tax apologies that's a bit confusing but just to clarify so but we would expect that level of eight to nine million or so of capitalized r d to continue as we continue to invest in our product and innovation roadmaps it was a bit higher this year because we had a final stage payment for a bit of platform technology we're looking to develop to use for future generations of some of our products but we wouldn't expect that to continue And then just to note, part of our net debt, 12.5, but we have a 50 million bank facility across HSBC and NatWest, which we renewed last September for four years. And this September, we've extended for a further year. So that's in place now until 2028. And we've got a further 50 million uncommitted accordion to go with that. So we'll now look at, as I promised, looking at cash flow movements, which largely this year has been a story all about working capital. We talked a lot in the first half of the year about this big outflow of 26 million, which is due with elevated stock levels and also to do with debtors. So we paid our creditors, as you would expect, in the first half of the year. As we talked about at the half year, we have a relationship with our U.S. distributor, where if stock levels get to a certain level, they can hold back payment, which was the case as of February. We've done a lot of work with them, as Tim talked about, about destocking, particularly in the U.S. in the second half of the year. So we've seen a big cash inflow. We've still got a bit of work to do in the U.S. market, probably about 5 million or so still to correct. But a big correction in the second half of this year. Inventories also have corrected. And that's as we've talked about. The third gen stock that we plan to hold on to to sell through our channels is reducing. The Martin stock, as Tim talked about, which was also quite high in the half year. Actually, we've kept that at a slightly higher level. But the mix has changed from raw to finished goods as we've put more finished goods in the U.S., to support growth in that market. And current liabilities have ticked up, as you would expect, as we're buying more product in to go into the busy holiday period across the various markets we're in. Okay? At which point now, I'm going to hand back to Tim, who's going to talk to you about some of our strategic updates.