Focusrite plc

Good morning and welcome to the Focusrite PLC investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab situated on the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives 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, I'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 Sally and I here to go over our results for the last 12 month period. We're gonna take you through the journey that we've been on for the past 12 months on here. We're gonna talk about just some of the highlights. Sally's gonna take you through a bit of a deep dive on the financial review. We're going to talk about all the things operationally that we've been through, a little update on our strategic update in terms of how we're progressing on that, and a little on summary and outlook, and then hopefully we can take any of your questions that you have. So let's just kind of dive right in on here and talk about the overall business. So the first thing, just to set the stage, In case there's any of you on the call here that are not really familiar with our business, the easiest way to think of the Focusrite Group's business is in two broad divisions. One is called content creation, and that is really products and brands that are focused on creating audio, primarily music, but it could be audio for a host of different things, you know, a podcast, the soundtrack for a TV show, this type of thing. uh and then on the other side we have the audio reproduction business now this is really the best thing way to think of this is live sound so anywhere you go and you actually hear audio or music so it could be a festival that you go to it could be your local coffee shop when you hear music in the background it could be what you hear at a stadium when you go to a sports event opera theater this type of thing And so you can see the sort of split of the business here. Focusrite, the group, started out really solely in the content creation business. And it's really starting in December of 19 when we acquired Martin Audio is when we made sort of a stake in the ground to do this other division. And one thing we'll talk about, the narrative that we've been through not only this past 12 months, but really over the past four or five years, is the journeys that both these divisions have been on, which have been quite different. And we'll talk about having this diversification, these two businesses that have some overlap, but really very different channels and customers has been very advantageous to us. So let's kind of just dive in. I'm going to give you sort of a broad overview and then Sally is going to take you through some of the more details on here. So overall, we were quite pleased with the result this year. You know, this past 12 months, both divisions, the market has been tough still, you know, coupled with a lot of just macroeconomic issues that we've been dealing with, you know, continuously and some new ones like tariffs in the U.S. on here. But pleasingly, we were very happy to see that our content creation business has come back to growth on here, which was really nice. And if you followed us in the past, you know that one of the things we talked about across really 23 and 24 was the overstock that our entire industry had just coming out of the pandemic. and the battle that we had to fight there. And I'm very pleased to say that really coming into this last 12-month period, we kind of wrestled through and we're done with that on the content creation side for both Europe and APAC. And with the demand staying high for our products and some new product launches, that has resulted in some really good growth numbers coming off low compares, but good growth for those two areas. The U.S. also had a good year. The growth was lower. Some different hurdles to go over there about tariffs, and we'll talk about that as well. But overall, very happy with the return to growth for the content creation business. The gross margin has been really good and held, even with everything we've had to deal with with tariffs on there. On the audio reproduction side, if you followed us before, you know that the story there is that the past year and a half had been a pretty big return, a boon to that business. Coming off, you know, really a few years after the pandemic where there was very little cash in the industry because it had been dormant really for almost two years. And, you know, we we reaped a lot of that on there. But we signaled at the beginning of this 12 month period that we were starting to come on to the other side of that. And, you know, that that growth that we had seen across twenty three and twenty four was not going to continue. And that's exactly what's happened. Although, as we'll talk about, you know, the industry is reporting, you know, declines year over year. bigger than what we saw on here. And we think that's the net result of a lot of really great new products and just a lot more focus on our sales teams carrying the entire portfolio of what we have grown both organically and through M&A. And then coupled with that, a lot of new products this past year, 37 new products, a lot of upgrades to existing products, you know, just to keep those front and center with people. More reviews on our organizational structure. We'll talk about some of the things we've done in terms of routes to market. And again, you know, one of the things that's a hot topic right now is just, you know, the tariffs in the US. And we'll talk about how we've managed that going forward. So I'm going to turn it over to Sally right now, and she's going to take you through some of the finds.

Okay, great. Thank you, Tim. OK, so first thing to do is draw your attention to that graphic at the bottom of the slide. So, yes, this is our 12 month results and this normally would be our year end. But this is an interim and it's unaudited because about this time last year, we changed our year end from August to February. And that was basically to respond to not having a year end in a quite a big, busy trading period for us. and allowing us then to report a full year results with our busiest training period in the immediate review mirror and provide a bit more clarity and transparency, I think on our results and better information flows. So we've adjusted our year end. So our next reporting is going to be an 18 month period to February 26, and that will be audited. So this is a second interim period for the year, but you'll see it's 12 months to 12 months in all the reporting. And when we do report in 18 months, the 18 month period, we will ensure that there are some extra memorandum information that gives you 12 months to February compared to 12 months to February there is some information in the appendices to this presentation that gives you a start on that and helps you restate some of the history if that's helpful and then after that we're going to be back to reporting on a 12 month cycle again but with the year end of February so I have a half one ending in August okay so anyway going back to the financial summaries Tim's talked about very pleasing to see growth across the group and we're going to go into that in a lot more depth with Tim later on when we look at it by division and by region. Gross margin broadly flat, but with quite a lot going on. And I'm going to talk a bit about that in a couple of slides. And that's actually dropped through to sort of flat EBITDA and therefore EPS roughly flat as well across the years. Although at a reported level, it is up slightly. We'll come into that when we look at the income statement. But pleasingly, net debt reducing as we've seen a cash inflow as we start to return to historic cash generation. So if we now go on and we look at the income statement in a bit more depth. So we've talked about revenue growth, again, margin. We're going to come on to the next slide. You'll see administrative expenses has increased quite significantly. We did flag this last year. Actually, the 24 number is quite low because I think we remember in a difficult year last year, there was no variable remuneration there for anyone across the group. So that deflated it by about 2 million. We've also had inflation and we've done a bit of pay benchmarking to help with our employee retention engagement, ensure we've got the right people in the right places across the group. And we've also invested in some sales teams across the group and their e-commerce sites, which we're going to come on to and look at later, showing very strong growth. So cost as we go forward, we do realise, you know, given the performance, it's unusual to see costs increase at this level. And we have taken some action to adjust these, had a small restructuring in the group at the end of this year. which has caused half a million of restructuring costs in adjusting items, but will generate at least a million of annualised savings going forward, which will help us ensure that costs remain flat as we go forward for at least the next 12 months. If we look a bit further down the income statement, you see depreciation and amortisation ticking up as some of those new products and investments go live. And adjusting items, largely acquired amortisation, which is about five and a half million, And then in this year's numbers, we have that half a million of restructuring costs. Last year, we had 5.4 million of an impairment for our sequential brands, which we talked about length last year. And financing costs coming down as our debt reduces and interest rates improve. And tax returning to a charge, but still lower than the UK corporate tax rate. because we get a lot of benefits to our R&D investment, particularly patent box benefits, which means that profits on products that have a patent attached to them are only taxed at 10%. So as a result, our underlying rate is about 23%. It's a bit lower this year because we've had some multiple year benefits as we take the first year of a patent. So we're just at EBITDA of 14.6% as a percentage of sales, a bit lower than last year. But again, if you look at those appendices by the half year, you'll see that it's very much dependent on having that sales drop through and was actually just over 16% for the second half of the year. And obviously we're very focused as we grow sales on making that increase. Okay. As we talked about gross margin, so 44.5 to 44.4, ostensibly a story of quite flat across the year. In fact, as you can see from that bridge, quite a lot going on. So last year, you may remember we had a provision for the sellout of our podcasting product, Focaster, which, because of the component crisis, we released a bit late, missed a bit of the bubble, had some excess stock, and we sold it off last year. So that depressed our margins by about 1.3 percentage points. So really last year was 45.8 underlying. Offsetting that, though, this year, you'll see from those charts below, particularly those blue bar charts, our audio reproduction division gross margin has declined since March. the first half of last year actually it's returned to historic levels and again that 24 with hindsight that was a bit of an anomaly and reflected a very high mix of china sales um in the margins there so for products that are china made and sold in china for audio reproduction we don't see a sale and cost to say it's on a royalty basis that does inflate the margin a bit as that's reduced in the mix we've now gone back to a more normalized level So really, if you look at it, those two sort of one offs and they've offset each other. The big thing that we've been managing all year is have a lot of companies is the impact of tariffs. And you'll see that we think our pricing actions have anything more than offset the tariff impact in the year. Based in the US, we saw tariffs increase in February and we put prices up on the 1st of May. We also bought some stock in in the first half of the year. to try and mitigate that impact so basically we've been kind of selling pre-tariff stock or post-tariff prices which has given us a little bit of a benefit though obviously we've been shipping in during the year there's a few other things and some of the variable costs impacting margin as that's gone up have also increased this year as sales have improved but broadly margin flat and we expect that to continue with pricing adjustments we make going forward to mitigate tariffs and to offset that, although we know there's a lot of volatility and uncertainty still in the US with things still to be decided. And we'll come on to that and look at tariffs in a bit more depth on the next slide. But I'll just leave you, let's not lose sight of that red chart there for content creation where we're seeing margins increase for the last two half years consecutively. Okay, so a little bit more data on tariffs. We talked a bit about this at the half year. So what this is showing, I'll focus on the graphic on the left-hand side here. So what we've got is how much we sell into the US and where it's manufactured. So the US is about a third of group sales. And you can see that where the share of the revenue is. So of that third, just over a third of that is made in China. So that's where we talked about the 12% of the half year, a third of a third roughly. Then another third is manufactured in other East Asian nations, Indonesia, Vietnam, Malaysia. And then we've got some manufacturing EU, UK. We actually manufacture in the US too for our sequential brand. So while it's easy to get fixated on the very high level of tariffs for China, across all those geographies, tariffs have gone up. Even where we manufacture in the US, those raw materials are generally imported from China and will have tariffs on them. So very broadly, we've had about a 20% cost increase on all our products going into the US this year. And as a result, we put prices up by about an average of 15% across content creation on the 1st of May. to try and mitigate that. Since then, tariffs have gone up, particularly on the East Asian nations, which were about 10% before, and they're now about 19% to 24%. So we have not yet adjusted prices for that. We're going to wait and see, go through our holiday season and just see how the market plays out in demand. But if needed, we will take further pricing action in the next six months to try and address that. Okay, so that gives you a bit of an idea of where we are. We think we've mitigated it well over this half year, but it is definitely not finished. It is still a moving feast, not less the Supreme Court case that is due to be heard in November, deciding on the legality of the tariffs in total. OK, so let's look at the balance sheet. Not a lot to see here. It's relatively stable. I think what would draw your attention to is the inventories. So despite the fact we've seen sales growth, inventories reduced from 49.3 to 41.9. That is both The Focusrite brand burning through some of the Generation 3 Scarlet stock that we've had, which we'd always planned to be selling for a couple of years through our own e-commerce websites, and that is where we want it to be. But also the audio reproduction division have done a fantastic job this year of responding to that lower market and managing their stock really well and driving efficiencies through that. So we've seen inventors return to a sort of more normalised level. Our stock turns currently around two. There's a bit of room for improvement there, but that's where they have been historically. And then this has led to net debt reducing 12.5 at last year end. It was 17.9 at the half year down to 10.8. So a cash inflow. So we're seeing our working capital as percentage of sales reduce. Debtors are a bit high at the year end. That's just because we had a very strong fourth quarter, particularly in August. So we'd expect that to reverse a bit as we go into the next six months. But seasonally, the next six months are quite working capital intensive for us. And we tend to see a bit of an outflow before that returns to a more cash generative position for 12 months. And again, just to reinforce that point, here's the cash flow. And you can see that free cash flow line, an outflow of 4.6 million in the 12 months to August 24, now an inflow of 5.8. The investing line, 14.7, still consistent with the prior year. And that does reflect our ongoing investment into new products. And particularly as they get closer to being released, we tend to have a bit of extra spend on things like tooling, prototypes to get them ready and that's been the case with quite a few products particularly some of our bigger products in audio reproduction which has just meant that's ticked up a little bit this year but we're going to be giving you a lot more colour around that after the February results and just to reinforce the point there the second interim dividend of 2.1p that'll be coming through that'll be paid in the next six months. Okay now I'm going to hand you back to Tim and he'll give you a bit more colour on the activities under those numbers.