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.

Oh, okay. Cool. Am I going backwards?

Keep going. There you go. Oh, okay. All right.

Cool. All right. Sorry. Thanks, Sally. So, yes, I wanted to touch on this because, you know, when I came in in the CEO role back in 17, you know, in about six months' time working with the company, which was much smaller at this point in time, we came up with this basic strategy for our business, our growth strategy. And, you know, it's been really – interesting and quite gratifying to see that as we've grown and all these different challenges and stuff, we remain quite true to this. I mean, when you kind of go and you peel back each one of them, maybe some of the agenda items and the change, but fundamentally the things that we kind of set as ourselves, if we do these and, you know, and on this, we're going to be okay. You know you know, there, you know, there may be great times, there may be tough times, but if we stick to these four things, we think we're going to be okay. First place is, you know, making sure we're taking really good care of our employees and being a great place to work. And I think this is something that, you know, throughout the pandemic with lockdowns and working from home, and then people coming back in the office and just all the challenges with different costs of livings. I'm really proud of the job that we've done here. And, you know, one of the, the really gratifying things about this, this, this past year was we just finished our annual hive survey with all of the different brands, all the different people in our ENPS went from plus 21, which was already in good, very good up to point to 36, which is still in the very good column. But it really shows that what we're doing in terms of the opportunities that we're, uh, affording our employees to work across different brands. We've done a lot of promotions from within. We've tried best in tough times to make sure we're taking care of people in terms of cost of living and things like that. That seems to be resonating well. And so that's something that we feel is very important and we will continue to do. You know, our core customer base, you know, I talked about all the innovation we had this year. You know, it ebbs and flows every year. 35 new products in a year that we've just been through is a lot. And I think it was a really good testament, you know, to us staying heads down and delivering products. All of these products have resonated well with the communities and the industries and segments they're after. And, you know, and they're looking to bed in well and actually really add to the whole portfolio. And that's something that we continue to do. There's never any resting on there. As soon as the teams come off one thing, they're jumping right onto another one on there. So you will continue to see innovation. We think that's one of the key things for us in terms of even when times are tough, making sure that there's still something new to talk about. And we're thinking about our customers and the way music and audio is created and how live sound is done and new things like immersive and making sure we're staying on top of our game there. New markets. You know, this is sort of a And one part of this is carried on a lot of different meanings on here. At first, it was about just making sure we're getting into markets and adjacencies that we hadn't done. But really, it's really more about streamlining and thinking about how we refine our routes to market on there. I talked a little bit about the changes that we made with Adam Audio, not so much last year, but the year before in terms of distribution changes. And we're seeing the impact of that come through in this past year on here. You know, adding new things like immersive audio into the audio reproduction area. So to get us into those new markets as well and into those conversations has been really helpful. And then the last one is on lifetime value for customers. You know, one of the things that's really key across all of our different brands is we want to have industry class service support. We want to make sure we're thinking about the out-of-box experience. How do we get people up and running really quick? That actually goes and plays a lot into all of our product design and everything. And I think that we get graded on that with the NPS scores that we get back. And we're very, very happy that, you know, even during a tough time, you know, when consumers and people have lots to be to complain about, you know, our NPS is maintained at plus 70, which is in our industry is industry leading. And we're very excited about something that we want to continue to carry on with. And then I'm going to hand it back over to Sally to talk a little bit all about all the great work we've been doing really around environment and climate.

Yes, thank you, Tim. So on our website, not only will you see the presentation and the annual results, but our second and expanded environment and climate report. And I do appreciate, you know, for a lot of environment reports, a lot of it is about disclosing lots and lots of numbers and various things that you're required to do for various ESG questionnaires. But I have to shout out to Andy Land, who is our group global sustainability manager. You know, he's made this report as engaging and as accessible as possible. Yes, all the disclosures are in there, but it really does outline our strategy and our approach to this. And the way Andy gets involved from the design, you know, at the request of the product innovation teams, he gets involved at the beginning of the design of all our new products. And in particular, there's a great case study in there on the new Adam headphones. just showing how really from the start they thought about the materials going into it, the packaging, the design, everything they can do. And the things I would highlight for us, the things we need to do to look at our transition planning is our raw materials. Obviously, it was about 45 percent of our scope three, but also it's the power outage. So it's just the power that our products use when they're out in the market and how we can make them more efficient. That's what's really going to help us drive us down on our transition plan. So I would heartily recommend reading the report because it really does help flesh it all out and gives you a better understanding of our products too. So I'm going to hand back to Tim now to talk about something particularly relevant at the moment.

Okay. Many of you know I'm an American and we just had an election. I'll leave it with that. So let's talk a little bit about what's going on with tariffs in the US on here. So if you've seen or heard some of the saber rattling and noise coming out of the US, it looks like there's a high probability that there will be some increased tariffs coming to the U.S. So the first is just to give everybody a lay of the land in terms of, you know, for the different brands, where is most things made? If you kind of flesh this all out, about 50% of our products are made in China. However, when you think about the products that are directed to the U.S., the majority of our Focusrite products are made in Malaysia. So that number is actually materially less than 50% on here. But we've been through this once before, and so we are doing a lot of proactive planning on here. So a couple of the measures that we've taken. The first thing is that we've made the decision to bring in more inventory into the US. Now, that may sound counterintuitive to actually the destocking thing, but we've done this in a very measured approach. We brought in products that we were going to bring in across the course of this fiscal year, no more than that, just enough to give us some runway. So whatever the news that comes out in January, February, when it is, we have options and we have some time and runway to think about this. A couple of those options are obviously pricing actions. We've done them before. I think at the end of the day, what we will do as we've done before is to make sure that we protect our margin, our gross margin on the product. So if we find ourselves having to do price increases on there, We will. We're comfortable with that in the fact that we know all of our competitors and all these different brands and adjacencies where they're making their products. Almost everybody's in the exact same place that we are. Actually, we have a bit of advantage on some of the products on here. But we're also looking at, you know, the potential for manufacturing in other places. Sally brought up for Adam that, you know, we just made the decision to move the A-Series, which is their midline kind of bread and butter studio monitor line, move the production that's for Europe and America back to Berlin. We've done that for almost a net neutral cost on there. And it will give us a bit of a boon because we can actually say those are fully manufactured in Germany, which is an important thing on there. And for the other brands, we're looking across this as well. So I think it's a bit of a wait and see thing in terms of what actually transpires on there. But I think we're in a good position. for both the short term and to counter that with these different moves to make sure that they, at the end of the day, have as little impact as possible on the overall business. And that kind of brings us to our last slide, which is just sort of a closing one on here, just to kind of reiterate that it has been a tough year for the content creation business. It's been another good year for audio reproduction, although we're starting to see signs that that business is starting to get back into its more normal run rates on there. But between the actions we've taken on the content creation business, all the work we've done on the destocking, all the new products we've released on there, our sales rankings, our routes to market, all the work and heavy lifting we've done, we think we're in a good place that as the content creation business comes back, we will reap a lot of that upside from that. Same thing for the audio reproduction business. Even though we're expecting the business to kind of simmer down a bit, the portfolio is so much stronger that we think that'll work out. I think, you know, if we're looking at our guidance, it's cautious. If anything about the past three years has taught us, be cautious because you never know what the world is going to throw at us next. But we think this is really good guidance to set for the market right now. It's reasonable. We think we've got a very, very good shot of hitting it. And so far, as you've seen in our trading update for our first quarter quarter, We're where we need to be. Sales have been good and in line with expectations. So with that, I am going to hand it back over to close up the presentation and go into Q&A.

That's great, Tim. Sally, thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab situated in the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our dashboard. Tim, Sally, if I may now hand back to you and kindly ask you to read out the questions, or appropriate to do so, and I'll pick up from you both at the end. Thank you.

OK, we'll start at the top here with one from James. He's asking about the relationship with our partners. It was obviously very strong during COVID. Can you talk about your relationships with Channel R now? And is there anything different between the large ones like Amazon and the smaller ones? I'd say they're still as strong as they've ever been. I think one thing that the channel has learned when things are tough is that in our market anyway, lower priced products or vendors that actually just try to come out and do cheap products on there, don't really move the needle. The products like ours that are always available where the quality is there, where they know they're not gonna have returns or an anger customer has really resonated with them. So we've actually seen a number of our smaller resellers who have actually come back and wanted to invest more in us over this time on there. Want to answer the next one?

Yeah. So this is another question from James, which is about Great to see the accelerated direct to consumer growth. Margin profile is better, but obviously it does have extra cost with marketing, which is quite nascent. So how much marketing is going into it? Is there more going into it? And is there any more that can be done to accelerate that growth? That's a great question. It's a really interesting channel, I think, to look at in terms of financial returns. Now, one of the things we do, one of the things we do to support our channel, we do lots of brand marketing. So we have lots of stuff out there on socials because if you think about it, you know, the more stuff we can do to drive people to the brand, if it's on Amazon or our channel. it's still a sale for us. So we've already been doing lots of e-commerce marketing. So lots of our search engine marketing is all about helping people find Focusrite audio interfaces. So that doesn't always equate, you can't equate that cost to just our e-commerce channel. So we are actually spending quite a lot in it, to answer your question, James, but it will help other e-commerce channels. So one of the things we've got to, I think, do a bit more insight into is, you know, helping understand how much is driving to that channel. But absolutely, yes, we do realise what a great channel it is. You know, it gives, we think, customers a better experience, more experience of the brand. So we're doing all we can to focus our marketing efforts around that to try and, you know, we're already looking at e-commerce channels, but particularly to push it towards ours. So, yeah.

All right, the next one's from Roger about competitors on this. Are there some that, you know, are not well positioned for this upturn, you know, lack of investment or they've fallen away? You're right, our share and, you know, and the sales rankings have remained high. But, you know, which segment has competitors suffering most and what is long-term competitive landscape impact to this? So if you rewind the clock back to when and during the pandemic, one of the things that we witnessed, especially in the Focusrite business, is we saw a slew of new people come in trying to take share from us. Some of these were net new people. Some of these had been in the industry for a long time, but had a reputation for more upmarket products. I think what we can say categorically now is that when you mix all those together, we can't tell that any of them really had any impact on our share. And I think, again, that really speaks to the level of our brand. As things have gotten tougher, what have we witnessed from these folks? Well, we haven't really seen any of them go away particularly. We've seen a number of them divest from this category, but they haven't disappeared on there. And when I say divest, that means we haven't seen any new products come from them and we haven't really seen them actively marketing their products in the same way they did during the pandemic on there. So for us, I think it's just another testament for us that, you know, When we couldn't make enough of these products during the pandemic and people wanted an audio interface and they would take anything, we know that we performed much better than anybody else in the market. And when things have been tough and very cost-conscious customer base and all of our products are premium priced, we have done well in maintaining that thing. I think that really speaks to the fact that we feel that our brands and that competitive landscape We're not going to ignore it. We're always watching it. And we have, I think, the right level of anxiety, if you will, about them that's healthy on there. But I think for us, we're going to keep doing what we're doing. We don't think that we can just say, OK, the fourth gen is good enough. We never need to do anything else. There's already robust plans for what the next generation is of Focusrite interfaces, Atom monitors, and Novation stuff. I mean, one thing, this industry is fraught, full of examples where somebody has come in, captured a space, and basically just sat and rested on their hands, thinking that's all they needed to do. In four or five years, they were gone. That won't be us. What is the mix of growth, in terms of new room versus existing room scale? Um, for installation things, I'd say the, the majority of it has been, um, uh, repurposing, uh, uh, upgrading rooms on there. Uh, so, uh, a lot of places where they just, um, they wanted to add in immersive audio or, uh, you know, they needed to bring in something to actually just, uh, uh, uh, get people excited about coming in to, um, to see new things. Um, so the majority of it has been that, um, You know, there there have been some new places as well. But I would say that's probably if I was giving you just a really rough swag on the split, I would say it's probably 80 percent refurbs and 20 percent new.

And then a question, could we provide some information on the covenants of the 50 million revolving credit facility? Yes, certainly. So we have two covenants, one for EBITDA to net debt, which is at 2.5, and another one interest cover, which is the net interest and the EBITDA of four. So we're healthily well within our covenants at the moment.

The group is fairly well diversified, but what are the verticals the group is targeting next? I think, you know, we primarily proactively are looking for things that actually fit in, you know, are a good bolt-ons to our two divisions right now. We've looked at different things that are in different segments of the market, and we've passed on those primarily because it's in a whole different space that we don't really know. We feel like now's not the right time to gamble and do something like that. But the areas, just to give you an idea that we're looking into, I think more software companies very much like what Sonix is. That's been a great investment for us because they not only have a portfolio of software applications that they're really designed for our customer base, but the expertise that that team has has been immensely valuable into bringing into like the software plugin for the headphones. And we've got that team actively working on a number of our hardware products as we go forward on there, because again, our hardware has really transformed. If you go back five or six years, the Box had, in terms of what its capability is and what it does now and what we're envisioning to do, is materially different on there and we need that. So I think software is another one. And there are other hardware things inside the industry that we'd love to find. We've talked about this for a long time. We'd love to find a microphone company to bolt onto our business. That would be great because that's something you obviously need for creating audio. You also need it for playing audio back live.

On that product pipeline, Oliver, can you talk us through the product pipeline next 12 to 18 months, what we can talk about?

Yeah, we don't really divulge new products coming out that we haven't already released. But I can tell you that there's across all the different brands, there's a number of them. I couldn't I couldn't put my hand on my heart and tell you we'll have 35 this year. on that because a chunk of that was fleshing out a lot of the optimal audio speakers and things like that. So there were iterations on each other. But across content creation, there's a number of things coming from Focusrite, from Sequential, possibly Atom, although they really, the majority of the new products they had were the tail end of last year on there. There's something new from Sonix. And there are a couple of new things that are happening on the live sound side as well.

And a question from Russell, when we think about de-stocking, what's our working assumption? Should it be go back to pre-COVID levels or lower, given the higher cost of capital? And then similarly, what do we think about when we say protect gross margin? So taking those two. For de-stocking, I think actually one of the things we probably learned during pre-COVID is your supply chains are quite volatile and having a bit of buffer is no bad thing. And, you know, we try to work on the assumption with our channel partners that they have three to four months. And if it's being shipped from China, it may be two, three months in the warehouse, a month on the water. So I think we would generally look at that. And I think if anything, we would go back to COVID levels or. maybe even a little bit higher. I think it gives us that buffer. And as you're seeing at the moment, moving more stock in to give us time to react to any tariffs is no bad thing. In terms of cash gross profit or a gross margin percentage, I mean, we always set out with, can we protect the gross margin percentage and aim for that? But depending on the level of tariffs, If needs be, then we do have, you know, at least let's protect that cash gross profit. So we've got that as a, if you think of a range, the percentage is the top and the cash gross profit is the bottom. We'll aim to be as close to the top as we can get.

Yeah. On the tariff question from Matthew, you know, are there any specific brands or SKUs where you would need to protect your existing prices rather than move them up if tariffs needed, if we needed to? I don't believe so. I think in any of those cases, there's a combination of things that happen there, Matthew. First off, We're always working with our contract manufacturers to drive the production costs down. That's something that we just sort of naturally get after usually a year or two of a product being on there. So there'll be some natural cost of savings from that on there. There's already the hedge we have with the products that are made outside of China. But if there are tariffs that come in play on top of the ones that we have here, At the end of the day, we believe the strength of our brands and what we've been through and how robust we stayed in the sales rankings, we would put the prices up to protect the margin.

And then one here from Shinichi. which was, we mentioned FY25 sales are in line. Could we talk a bit about year-on-year sales growth, a bit of colour? What are we seeing with Black Friday sales and selling? We don't disclose year-on-year growth. We will be able to give a bit more colour about that and quarter one at the next trading update, which will be at the AGM at the end of January. So we can give you a bit more colour then, other than to say we're absolutely in line. What we would flag though is this time last year, we were selling in the high volume, low IO scarlet. So, you know, I mean, that then gives a bit of a problem with destocking later in the year. But at the time, we sold him for the holiday season. And so we've got quite strong comparators for the first half of the year. feel 24 when we go into 25 and then your second question around mid to high single digit organic growth or focus right as a difficult time what convinces you to achieve that growth well that um mid to high single digit is absolutely sort of what we see is our long-term aspiration through the cycle i think as we've flagged we do see next year as being quite challenging um however i think the things that give us confidence that we can outperform is um Our innovation, our product pipeline, we're always bringing in new products, be they refreshes, be they incrementals, we've demonstrated this year, added to which we have that premium position in the market. So when people can, they will always choose one of our products, we feel, because we offer the best service, the best customer support, the best onboarding experience for them. And as we've seen in audio reproduction, we've got the best offer out there at the moment that they've ever had in their history. And again, you know, double digit growth year on year. And then another question, I think we're probably going to get to the end of these soon, but another one from Seamus. There seems to be a trend in the plug-in industry of more brands moving towards a subscription-based model. Is that something that is front of mind when we look at those areas of business?

Yeah, actually... We do subscriptions through a third party where they allow them to pick and choose different plugins from different things. But there's actually quite a big pushback on that in our industry where the subscription business has actually declined quite heavily. I'm more in favor of doing promotions for people to buy perpetual licenses on that. So it's something we do participate in, but we don't see it as a big growth driver, honestly, for Sonics and our plugins.

That's great. Perfect. Tim, Sally, thank you for addressing all those questions from analysts today. And of course, the company can review all questions submitted today and we will publish those responses on the Investing Company platform. But Tim, before we redirect analysts to provide you with their feedback, which is particularly important to the company, could I please ask you for a few closing comments?

Yeah, just thank you for sticking with us for the full hour here and for the questions. It's really gratifying to see people ask us questions on what we've done. A very complex year, as I said, but I think if you take away anything, I hope you take away this. I think over the past four or five years through the pandemic and when the content creation business was booming and the live sound business was not, and then the reversal that we've seen on that, our products and our brands have held up through both of those curves down there. which I think is a real testament to the brands, to the strategy we have in place, to the people that work for us on there. And, you know, so I my personal feeling is if we can if we can fare those and weather those storms and those opportunities as we have on there. You know, we're prepared for whatever comes next on there. And we have total confidence in our brands and our strategy. We're going to stay heads down, keep making great products. And God willing, the world will get a little bit less crazy. And when they do, we expect the boon that comes from that, a lot of that to go our way. Thank you again for your time.

Yes, we will be prepared. Fantastic. Tim, Sally, thank you once again for updating analysts today. Could I please ask analysts not to close this session as you will now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be 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 and good morning to you all.