Focusrite plc

Good morning and welcome to the Focusrite PLC Interim Results Investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and they can be submitted at any time using the Q&A tab situated on the right hand corner of your screen. Simply tap in your questions 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 is appropriate to do so. Before we begin, I would like to submit the following poll and I would now like to hand you over to CEO Tim Carroll. Good morning to you.

Hello and good morning, everyone. Thank you for joining us. Sally and I are delighted to have you with us today to go over our half-year results through February of 25. So to start off with, just to get some color, so I know we have a mixed crowd in the room. There's some people that know us well, some people that maybe have just started following us. We thought we'd start off with just a little bit of an introduction in terms of what it is that the Focusrite group does on here. If you've heard this before, bear with me, I'll make it short and as un-painful as possible on there. But basically the best way to think of the group really is we have two basic divisions. One is really all about the creation of audio, primarily for music. but for other applications as well. It could be podcasting, it could be the sound design or the dialogue or the soundtrack for a TV show or a piece of media you write. But really it's all about software and hardware primarily that is really involved in the creation process. The other part of our business is the audio reproduction business. This really is all about the reproduction and broadcast of audio. This could be at a festival, it could be at an opera house, a theater, this type of thing. This slide basically is to give you just a bit of color in terms of how the group breaks down. You could see primarily the group started off in the content creation business. That was our origin, if you will. But over time through organic processes and also through M&A, we've acquired other brands and got to a point here where we have these brands focused on these areas, roughly 73% for the first half of our business and content creation, about 27% in audio reproduction. So let's kind of go through some of the highlights and then we're gonna go and do a bit of a deep dive on a lot of this, but just the overarching picture. The basic theory is we're very pleased to be saying that we had growth in the first half of last year after a very difficult year last year on there. And this growth came primarily from our content creation business, which if you followed us, you know that during the pandemic and the lockdowns, that business was off the charts, did incredibly well. The demand was sky high for this. Came down to a level and then a lot of things kind of came into play in terms of component crisis, economic issues, and things that led to a lot of industry-wide destocking, not just our group, but pretty much across the board. And that has been a real, real work in progress for us over the past year and a half or two. And we're very pleased to say that we've unwound a lot of that. The brands have actually performed well during that entire period on there. Our sales rankings have remained their top tier places where they are. And we've got to a place where we're back into growth on content creation. So we're very, very excited and happy to be there. A lot of hard work getting us there. On the audio reproduction business, if you've been following us, you know that we talked about, you know, there was a sort of a delayed reaction from what happened during the pandemic on that. That business was effectively shut, really, for the majority of 21 and 22. Really started to come back in 23. You yourself maybe started to go back out and see live events in the second half of 22. But the industry had no cash available. And, you know, at that point in time. And so really it was twenty three and twenty four where we saw a huge boon back where the industry had cash. Festivals were going on. People were going out to see concerts, going to nightclubs, this type of thing. And so there was a real big boon. But we we were very clear in saying that we knew that this was going to be something that was. in terms of that level of growth was going to be short lived and that we would expect the business to start to normalize over the course of this year. And that's exactly what has happened. The business has normalized. So coming off a very big high, the audio reproduction business is down for the first half, but still quite strong. And the pipeline is incredibly strong. And we'll talk about that in a little bit. So strategically, you know, a lot of updates to augment all the different products that we introduced last year, many at the very end of the last of the half of last year that got announced to the public inside this year, all doing quite well. And we'll talk about that. And a lot going on recently in terms of tariffs that we're going to take some time and talk about as well. And speaking of which, this is a slide that normally I think we would have probably around number 35 or 36 in our deck, but it's on everybody's mind and it's really important to the business. So we put it up front. So let's talk a little bit about what's going on with tariffs. So the first thing, just to level set everybody, because there seems to be a preconception that an overwhelming amount of our products are in sales in the US or China dependent. I mean, it is material to us, but when you put it at a group level, you can see here 12% of the group sales relate to sales in the US of Chinese made products. So not immaterial, but not gargantuan. But there's a lot that we've been doing to fix this. So, as you know, it's been a very volatile environment, a lot of ups and downs, a lot of, you know, putting things in place and then pulling back on them, which has been a lot of busy work for us. What we decided to do at the end of last year was, even though we made a lot of progress in destocking our US channel, we made the decision to actually put some more stock of the Chinese products in there to give us a buffer, if you will, to allow us time to understand the lay of the land and the impact on that and to give us some runway to make some decisions. And that has been well served for us. So we put the equivalent of about three months of extra stock, mostly Chinese products, into the US when we started to see these things with tariffs starting to happen. And that has really served us well on here. So along with that, It's important to know that we all already, some of our big products like Scarlett on the Focusrite line, those are made in Malaysia and they have been for quite some time. So we have a bit of a natural hedge there. As you may have been following in the news, The tariffs skyrocketed up to 145%. And then there was an exemption that came in place for some of the products. A number of ours fell into this category. And so we've been taking advantage of that to try to get products into the U.S. to avoid the 145%. In addition to that, we've done a number of price increases that are going into effect May 1st. Now, they do not cover us for 145% tariffs, but they do cover us for the current things. Our current thinking is that this will kind of come back down to some level below that. But right now, this seemed like the right thing to do to get the pricing intact with that. And we'll be watching this. And if we need to do further price increases, we obviously will. But that's not the only thing we've been doing. In the background, there's been a lot of actions in terms of how do we actually de-risk the manufacturing that we have in China. And so along with what we've already done in Malaysia, we've made some moves. And some of this has just come to fruition in the past two weeks, where a number of our Atom Audio products that are made in China, specifically the T-Series and the D-Series speakers, which are the most high volume speakers we have, we're moving to Indonesia and Vietnam. And those lines will be coming on in a relatively short amount of time. And we'll be able to start shipping product to the US from those locations sometime in the summer, but before the end of our next reporting period on here. So a lot going on in this, obviously a very volatile situation, but between the inventory that we've moved, the price increases we've done, and the actions that we've taken already in terms of moving manufacturing out of China, and there's more in the works on there, we feel like we've got a pretty good cover on this for the short term and ready to manage anything that comes at us next. Okay. So with that, I am going to hand it over to Sally. I'm going to let her take you through the financial review. Sally.

Thank you, Tim. So I'll start off by giving you a quick summary of the financials. So revenue has grown in the period, and that's mainly driven by content creation, as Tim referred to earlier. And Tim will go through that in a lot more detail later on, so I'm not going to cover that in a lot of depth. Gross margin has declined, and a reported level by 1.9 percentage points. I'm going to go into that in a bit more detail later on. And that decline in gross margin, together with Some planned increases we had in costs, mainly the reset of our variable remuneration, has meant that EBITDA has decreased compared to this time last year. And as a result, that has flowed through. You see slightly lower EPS coming through both at a reported adjusted level. Net debt has reduced significantly since this time last year. It's slightly higher than at the year end, but that is to be expected. We tend to see a bit of an outflow in the first half of the year. But we have maintained our interim dividend at the same level as last year, which I think speaks to the confidence we have for cash flow returning later in the year. So what I'm going to do now is go through each of the primary financial statements. We start off with the income statement. As we've talked about, we are seeing reported top line growth. And that's 5.2% at a reported level. It's higher at an organic constant currency level. because of the weakening of the dollar compared to last year. Now, we have brought some sales forward into this year to help mitigate from tariffs, as Tim referred to. However, we have continued with our destocking programme in the US and those two have largely offset. Gross profit, I'm going to come on to the next slide and overheads. You can see the increase there, a bit of inflation, annualisation of acquisitions and that reset we referred to. for variable remuneration, otherwise costs underlying are flat. Adjusting items this year are relatively clean. It's only the acquired amortisation on intangibles. And you can see also the financing charge reducing, partly due to the lower drawdown in debt, but also lower interest rates. The tax charge is also lower this year, which reflects the benefits of patent box claims. And that's a new patent box claim for Focusrite in this year. And we've carried it back to some prior year adjustments. We're able to take it back to the profits over the last two years, which has reduced the rate to 13% effective in this half year. OK, now I'm going to talk about gross margin. So we've got a 1.9 percentage point decline this half year to the first half last year. But just to remind you, in the last half year, FY24, we had a provision for about a million pounds relating to Vocaster, which we talked about in depth there. where we decided to sell off some excess stock to a distributor, and we took a provision in the first half of the year. So if you adjust for that, actually we've got a slightly bigger underlying decline, and that's made up of a few things, quite a few combinations. The biggest factor is audio reproduction, and you can see from those blue bar charts underneath, it's the audio reproduction margin by half year. Actually, what they've done is returned to their historic levels. And in the first half of last year, they had a particularly strong margin because they had very high sales in Asia and particularly in China. I think as we've referred to in the past, for audio reproduction products made in China, sold into China, the majority of those are sold on a royalty basis. So we get a very high margin for those. And basically, the sales into Asia have returned to a more normal level. As a result, margins have returned to a normal level. The chart to the left of that in red shows the underlying content creation margins, and I've stripped out any impact of Vocaster changes in those. So you can see the underlying content creation margin is actually up on the second half of last year, although down on the first half, and that's primarily due to product mix. Generally, that doesn't have a huge impact for us, but this half year, with a strong growth in Novation and a slightly lower growth in Pro products, which are a very high margin, we've seen a slight dilution due to product mix. In addition, there's been some more costs. Freight has remained at an elevated level for the half year, although it has decreased significantly in the last couple of months. And we had some one-off rework costs to do with some new products in the early part of the half year, which we don't expect to repeat. So as a result of freight improving, an expectation that some of our more higher margin products will return to growth in the second half of the year, and a non-repeat of those costs, we would expect margins to improve in the second half of the year outside of the U.S., For the US, it really does depend on what happens with tariffs. As Tim has talked about, we think we've done enough to give us a cushion for the second half of the year, but it will depend on how things change there. If we now go on and look at the balance sheet, there's not really a huge amount of change there. We have a nice stable balance sheet. I would draw your attention to the lines right at the bottom, the working capital and working capital as a percentage of sales. A significant decrease since this time last year, but slightly up. on the year end. So we've seen stock decrease consistently throughout those periods and is in fact at a lower level than at the year end and that's despite us putting two million pounds of extra stock in the US to help mitigate from tariffs for audio reproduction. In audio reproduction we hold the stock, for content creation we will sell stock into our distributor for the US. The increase largely this year and this half year is due to debtors. And again, that relates to selling quite a lot into the US right at the end of the half year to help manage tariff impacts. So we would expect that working capital to continue to unwind and improve further with an inflow for cash in the second half of the year, leading to a small net inflow for the year as a whole. One other thing I'll just draw your attention to on this, although we're showing net debt on one line, in the detailed statement, our bank facilities, our bank loan has now been reclassified to long-term creditors. We haven't renegotiated anything. Our facility remains unchanged. It's purely a change in the accounting guidance. whereby if we have the right to defer payment, which we do for more than 12 months, we can now reclassify that as long-term debt. So we've done that and we've applied that retrospectively, as the guidance suggests, to the other accounting periods. So finally, our cash flow, as we've talked about there, a small outflow in the half year, 2.3 million at a free cash flow level, mainly driven by working capital. As you can see there, our spend on investment down on the half year last year, which again, we're talking about that big technology investment we completed last year. And we expect to stay roughly at that level going forward. It is largely our capitalised R&D as we continue to invest in our product roadmap. though that cash flow is somewhat offset by the RDEC tax benefits we get for R&D. So we do get some cash flow benefits from that. And as we talk about, we've maintained our interim dividend. It's not covered by the cash flow, but it's covered 2.1 times by EPS, which we're comfortable with as a board. Hopefully that will be covered by cash flow as we go into the full year. OK, so thank you for that. On that basis now, I'm going to hand back to Tim to talk through the operational review.