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.

Great. Thanks, Sally. All right. So we're going to do a little bit of a deep dive on the two different divisions and what's been going on there the past 12 months. So let's start with content creation. So, again, very pleasing results for the different brands, all of them in growth, which is really nice to see. year over year on here. As we've talked about in the past, all these brands, they have different sort of places or statures where they are in terms of market share. So Focusrite, our most established brand with market share, especially in some strategic areas, much more mature than other ones on here. You know, very pleasing to see the growth on here, especially in a market where, you know, there's been a lot of promotional activity as, you know, our competitors have tried to wound down their inventory, but also in the US specifically with what's been going on with tariffs. So, you know, and I'll talk a little bit more about that in a bit. But just in general, you know, Sally mentioned on tariffs, you kind of got a lay of the land on here. But we we raised our prices in the U.S. on in May on there and and watched. And, you know, the demand for the products took a small hit for just about a couple of weeks as I think it was just a shell shock that we've raised prices. But they started to come right back up. And then we saw some of our competitors change pricing on as well. And the demand and the share kind of carried on on there. Novation, again, another really good year for them as they've released a number of refreshes on products on here. Atom Audio, a really good story here in terms of this regular run rate on the speakers they've had for a while, but also a new lower-priced desktop speaker that has actually done quite well on here. And Sequential and Oberheim, again, one of our businesses that probably over really 23 and 24 had a really tough go just because so many of their products were at a very, very high price point really for the professional or aspiring professional. And when belts tightened and people were looking to save money, that's one of the first places they did. However, the team did a fantastic job of pivoting and it wasn't really a reactionary thing. It was part of the strategy all along was to actually introduce some lower price products, which a number of those came to fruition. uh this past year and those have done well so it was great to see sequential um back to growth and then sonix um you know is our um software company that you know um makes plugins for a lot of the most popular workstations and a lot of our customers They had a really good year as well on here. A lot of that from us leaning in and doing a lot of cross-selling and cross-promotion that gave them a much larger audience on that. And that's something that we will continue to do and work on as we go forward. This next slide is a bit of an eye chart, but what we're trying to do is just to try to show you the story of what happened with sales and content creation and with channel stock. So if you go back to even before what's on the left hand side of this, our normal KPI was to have about three months worth of inventory in our channel. And when lockdowns happened, that suddenly went to zero very quickly and it was very much hand to mouth. And we found ourselves, like many technology companies, in a component crisis where, you know, finding the same components every other manufacturer was looking for became very tough. Lead times were long. We had to put in non-cancellable orders, sometimes out for a year and a half or longer on here. And as you can see, things plotted along, but a lot of that inventory kind of came just rushing back in to us and to our channel. Right about times when you could suddenly go outside, experience live events again, when cost of living was becoming an issue. And it wasn't just a Focusrite problem. This was true pretty much in every category in our industry. So guitars, drums. woodwinds, everything. There was a huge glut of inventory. And so, you know, that first half of 24, we signaled that we had some work to do here in terms of, you know, clearing that stock down. And you can see what we've done over time is that, you know, we have got that back down to a manageable level. And again, as I mentioned at the top, we've got EMEA and APAC pretty much back to their normal KPI. A little work to do still in the US, but for the right reasons. It was really just to mitigate and kind of give us more inventory to understand what was happening with the US on here. So we think that was the right move to do. Regionally, this is sort of a breakdown on here. So, again, you can see that strong year-over-year growth in EMEA and specifically APAC. APAC is an interesting one because the whole channel kind of came back. But the real, I think, success story here was China. If you remember, China actually was in an elongated lockdown. for almost a year past when many other places were. And so when suddenly people could go outside, there was literally a knife-edge transition from people doing things inside to wanting to go experience live events. And so the amount of stock in China took a long time for us to get through. But again, a lot of really good work from the teams and us working through that inventory over months you know the uh the year before resulted in us kind of having a kind of a clear pathway and back to that kpi for there so really good to see um that return on there uh so overall very pleased with that and even though you know 2.6 growth in the americas is nothing to shout and have a party about considering what's been going on there with in terms of you know consumer confidence inflation especially with tariffs we're quite pleased that we were actually to get those numbers out One of the big shining stars that we've had, you know, really for the past couple of years is our direct to customer channel, something that we have been investing in and growing and getting more aggressive as time goes by. So you can see another really good solid year of growth on here. You know, this is something that we're doing with our Focusrite, our Novation, our Atom and our Sonix brands now on here. And, you know, as we've seen, there's just a growing number of our customers that, you know, all things considered prefer to actually deal with the actual vendor. And the logistics and the backbone that we put into this, we can offer them an experience that's on par with other places that they can buy the gear. The other thing that we've done over this past year is we've we've actually joined in. And when we do promotions, so if there's a Black Friday sale or a Prime Day in the past, we would keep our pricing at whatever our normal retail or map pricing in the U.S. is. When we do these promotions with our channel, our e-store now follows, and we see an uplift in that as well. So again, something that we're very pleased with, and we see this as another great growth driver and a way to improve our margin profile too. Just to set a little context backdrop in terms of the content creation business, we don't really have stellar industry data that kind of spans globally, but there is some good information in the US that we can show. And this is one of the reports that comes out from a company called Music Trades. And it's just to give you a little color on just, you know, kind of what a rough road it's been in terms of what the industry's been reporting over the past couple of years. As a matter of fact, this first period is the first one time they've actually reported growth coming back in, which is really nice to see on here. And, you know, and I think, you know, we're pleased that we're sort of right in line with that. And in some cases, on some parts of the portfolio, we're actually exceeding what they're stating on here. This next slide is our registrations. So if you followed us before, you know that with many of our products, especially our Focusrite and Novation products, we track and we are able to actually see end user registration in real time. And for us, this is really one of the purest kind of, you know, instruments that we can use to actually see engage the health of the business on here. So what this basically is showing is when a customer somewhere in the world buys one of our products, the first time they connect it to their computer to use it, it shows up like a mass storage device. They click on that thing. It goes to our onboarding journey where we kind of hold their hand and take them through all the software and get them everything. But if when they finish that process, if this is a serial number that we have never seen before, then we chalk that up that day as an end user cell. And what this is showing you is that end user registration over time. You can see how amazingly consistent it has been. Now, if you kind of look at what we were talking about a little earlier with terrorists, if you look at May, you'll see that there was a little bit of a dip on there. That's when we changed our prices in the U.S. on there. And But very shortly after that, it came back up. And as other competitors raised their prices as well, you can see that we actually had a lift over the year before. I think part of that was just actually coming out of that period, but also the fact that there was a number of new products on there, especially with the Scarlett, the high channel counts were really getting to the channel and getting good reviews. And so that provided that lift on there. We also have a number of our biggest continental players that publish their active top selling products. Now, obviously this is just a moment in time, but it's quite indicative of what you would see if you go to either Toman or Sweetwater's website and choose their top seller or most popular offering. It's not unusual for us to have four out of the five in the top audio interfaces for toman um a number of you know two to three in the studio monitor catalog and then for sweetwater you know roughly about the same so something that we track it's just another gauge of you know the fact that our brands you know through tough times and good times they really resonate with customers and we can we've maintained those kind of top pole positions All right, I'm going to switch gears and talk a little bit about the audio reproduction business again. So again, you know, very different channel, very different customers and a very different journey over the past four or five years. I talked at the beginning about how we went through this kind of resurgence of business from, you know, just a total darkening, if you will, of the business for a number of years, where there is in many areas, especially Europe and America, there wasn't much cash. So that came booming back. We did again signal at the beginning of the year that that bubble was coming on the other side and we were expecting the business to end up lower than the year before. And that's exactly what happened. But one thing about this business is that we do have good industry insight at a global level. And we can tell you that what the industry for the products and the sectors that we're in has been reporting you know, larger year over year decline on there. So we're pleased that we've been able to buck the trend on that. The reason for that is we feel is because of all the product introductions that we've done that have not only refreshed some of the legacy lines we've had, but they've actually filled in the gaps in a number of areas or opportunities where we just did not really have a great offering. So that was done both organically And also through acquisitions, especially what we did with Timex to get our foot in the door onto immersive workflows and those type of things. So a little color on the regional performance here. So you can see, again, EMEA and APAC both down year over year. What we were very surprised and not surprised, we're very happy with actually here was the fact that we in Americas, we were able to grow the business a little bit, even though the industry is reporting the Americas down. What we've talked about in the past, if you followed us, is Americas is our biggest opportunity. In EMEA, especially the UK, Martin is one of the leading products on there and parts of APAC the same. But Americas is definitely the biggest part of the business on here. And we have definitely, you know, we are coming in as the underdog, if you will, on here against some much bigger brands. And it's good to see that the new portfolio and the ones that we've refreshed and our story and the investment that we've made is paying off where we're actually taking share. And the Americans were able to eke out a little bit of growth there. So very encouraging to see that. And again, as I talked about, the product range. Now, if you go back and you look at where we were about four or five years ago, if you look at the entirety of all the opportunities in live sound, and that runs from everything like to the sound in a small coffee shop or a gym, all the way up to the biggest stadium or auditorium. The group's offerings could probably actually go after maybe about 60, 65% of that. With everything that we've developed in-house and also through M&A over these past years, we pretty much can go after 100% of the opportunities on there. So we see that as a great thing to balance the softness we're seeing in the market and to stand us up on there. So, you know, we're very happy about that. And, you know, it's an area that we see, especially in the U.S., you know, with early signs from there that we're taking some share. It's a big opportunity. OK, Sally, back over to you for the strategic update.

Yeah, thank you. So, again, if you've been following us for a while, this will be a very familiar slide for you. And we make no apologies about that. This has worked well for us in the past. And we continue to focus on these areas, which, as you can see, are very much focused on sales growth and growth. driving a good experience for our customers. But key to it all at the top is making it a great place to work and focusing on our employees. So we have regular engagement feedbacks from our employees. And as you can see, we've invested a lot in making sure we got a greater retention rate than we have in prior years and just basically making this a place we want people to work. Having said that, looking across the areas where we've been looking to grow our revenue, R&D, so launching the new products is very key. We're going to come on to that in a bit more depth there. In new markets, it's about expanding the range of markets we can get into, as we talked about with Timex for Martin Nord-Erie Productions, Sonox in content creation. Also geographically, we've invested in Japan to basically have our own distributor there, which we're working through. We made great progress on that. We should be going live in the next six months. And then lifetime value for customers that continuing is not just about having a great hardware software product. It's about the experience, making it easy to use and the support. And that's been an ongoing focus for us. So going back, particularly this one around investing in new products and the new product launches, you know, we talked a bit about this in the cash flow. We've continued to invest in this. And it's been pretty consistent, as you can see, going back half year by half year across the last three years. And that's because we do a lot of this in-house. This isn't outsourced. We don't go out and have lots of consultancy spend. We have teams that have huge in-depth knowledge of our products. And we do everything from packaging design to the industrial design, software, firmware, upgrades. It's all in-house, and we have that shared with each brand, retaining their own IP and keeping it in-house, which means we can then use this to scale and deliver platforms and roadmaps across multiple years. And as you can see, consistently, therefore, delivering multiple product launches each year, which I'm going to let Tim talk to in a bit more depth.

Yeah. So you can see, I mean, 37 products again the year before 35. And I think, you know, also very important is all the upgrade dates that we did. You know, there's always something the team is adding in terms of new functionality to existing products just to, you know, keep that, you know, that those products in the spotlight and that continuing run rate. And that's a big part. of why our Trustpilot and our customer NPS scores continue to be industry leading is because it's not just the quality and what the customer gets at first go, is we're always offering some new features and functionality for them to do. So, and this next slide is just to give you a little color on a lot of the different things that I know across both divisions that came out this past year. So, you know, A pretty wide swath across, you know, the Sonic Soften plugin, some Novation synthesizers, the new Launch Control XL. I mentioned earlier about Sequential. You can see the TAO, the Forum, and the new modules down there, all products that were sort of under the $2,000 range, which is really a very different offering for them. So overall, very, very pleased with what the teams were able to deliver this year across there. And again, as always, as Sally said, we continue to invest in R&D, so there's more exciting stuff coming. Okay. We wanted to take a moment because we get asked this a lot about AI. And so I kind of break this down into a couple of different areas. The first is, yes, we of course are using AI technology to help mine our data and understand our customers better. And as we get more into cross-selling and cross-promoting, it's obvious a great tool to use to actually just dissect your data and really use it to the best you can. Also on the R&D side, we have a number of our R&D teams that are actually using AI to augment tools they're doing, especially like an automated testing or to run different scenarios and things that certainly would take people a long time to do. We don't see it as a replacement for R&D teams, but we see it as something to actually augment and a lot of the more mundane tasks and things like to accelerate to help on there. But I think the biggest question we get asked all the time about AI is, do we see it as a threat to the industry or something that actually is an opportunity? And I think we are much more on the opportunity side. Yes, like any technology out there and other technologies and disruptive things we've had in our industry, there will be people that abuse it. There always are. However, I think the way we look at this is that if it sparks more people to actually to create music, or even if they're doing it using AI tools, It will help grow our base. And, you know, what typically happens no matter where you come in from, whether it's an electronic musician, if you're a DJ or somebody that works with loops or if you're a guitar player or whatever, at some point in your journey, if this is something you stick on with and becomes either a serious hobby, you start collaborating with others and you need more gear and kit. And so we see that as an opportunity. Yeah. And then I think the other part about this is that even though it's not quite to the scale, it feels like we've seen this before. Back when drum machines first came out, it was going to be the ruin of anybody that played drum or percussion. And it was going to kill drummers. And it was going to make everything sound robotic and nothing like that happened. As a matter of fact, what drum machines and actually samplers, which was another one, did is it opened up and enabled some creative people to come out with entirely new genres of music and use them in ways that were never even thought about when they were created. which was a big boon to the industry. So we kind of look at AIs that way. And even the tools that are available now, we're already seeing a number of people that are serious hobbyists and even professionals figure out how to actually add this into their workflow, not to replace people or, you know, or to not, you know, just to make their life easier and to make them more creative. Future growth expectations. Yeah.

OK, so this is a slightly different format to a slide that we have used in the past. So we wanted to give you a bit more clarity around how we look at growth and how we expect to get growth in the future. Now, we are going to talk about this in a lot more depth when we come out with the final results for this period, the 18 month period. When we have those results, probably in late April, May. But I thought it'd be helpful just to do this because we get asked this question a lot. So the first thing we have is market growth. So we're operating the market and we believe that has structural growth. It's going to be tricky over the next 12 months. There's a lot of volatility and consolidation going on both in the US and EMEA. And as we've talked about, all deer reproduction. It's going through a bit of a difficult time following some super growth in the last couple of years. But broadly, you know, the market is growing. It's not, you know, tick tock, double digit, very exciting. You know, it's GDP plus. And that's what we think it's been in the past. If you look at the kind of market we're in, the sort of serious hobbyist professionals. But it is definitely growing across both our divisions. And then added to that, you know, we have the opportunity to increase our market share in a lot of our markets now. For Focusrite, that was absolutely the trajectory of growth they had pre-COVID when we had consistent double-digit growth of going out and taking share in all our regions. And for Focusrite now, given the penetration of the share they have, it's more about maintaining that dominant market share. Going back to that slide that Tim was talking to earlier, when you're four out of five of the top sellers, there's not a lot of place to go to increase that. But for our other brands, the newer brands, and I include Novation in that. So Novation, Adam Martin, it is absolutely about taking market share, particularly in the US to increase the growth for that. So we've got opportunities there to it. you know, go ahead of just the market growth. And then the biggest driver we think for us is incremental new products and ends the spend on R&D. And so this isn't just a new Scarlett. This is a new range of products that could complement alongside a Scarlett. And all our brands have plans to extend their ranges of products with incremental new developments. And there'll be a lot more of that to come. as Tim was talking about. And then finally, we always have the opportunity for acquisitions. It's been something that's been important to us in the past and will be again. Though at the moment, our focus is very much on returning to a net cash position. So it'd have to be a very compelling acquisition for us to look at it at the moment. And in fact, what we're trying to do is have more collaborative partnerships with third parties rather than just look straight as an acquisition opportunity. But absolutely, that is still in there. So we think over the medium term, looking at that, that should deliver medium to high single digit organic growth for the group. But it is going to be trickier than that over the next 12 months, given some of the things we've talked about. And again, we're going to give you a lot more colour on that and talk a bit about platform development when we come back to you with the February results. And now as we go forward, so we're nearing the end now. Just to give you a bit of a review, you know, what's been happening since the year end in August. Well, we're still seeing very strong end user demand for our products. And particularly as Tim was talking about in content creation, where we're seeing a much more normalised ordering pattern, we're really seeing that demand coming through to us in our sales. Still a lot of uncertainty in the US. We don't know where tariffs are going to land yet or what that's going to do to their inflationary impact. So We're not out of the woods there yet. And again, audio reproduction, although the growth rates mitigated across the year from 5.9 in the first half, 3.2 in the second half, 2.9 in the second half, you know, the market is still not in growth yet. So it's going to be tricky 12 months going forward. But, you know, we have got an expanded portfolio to help. So we do see looking forward an ongoing challenging market in both of our divisions in the immediate term. And gross margins, you know, we will always do our best to maximise them. But we're thinking, given where we know tariffs are going to go, any mitigations we can do outside of the US will be offset by that. So broadly flat on the prior year. And again, overheads, we have taken cost reduction actions to keep that stable across the next 12 months. And although we do tend to see a small seasonal outflow in the period through to February, that's quite working capital intensive for us. It's a bit of an outflow to February, but that should normalize and get back to cash generation for the 12 months to August. And then final slide for Tim to summarize.

Yeah, so thank you for sticking with us. This has been a lot to take in and absorb. I hope it's been helpful on here. I think that the things to go across is that through thick and thin, what we've seen is that our brands have really just maintained and either held their share or grown their share. in both high demand times and very tough times on there. So we continue to leverage the group's portfolio and do everything we can in what is a normalizing market here. Routes to market is driving growth on here. We talked about our D2C business on here and what we're doing in Japan on there. Additionally, and I didn't mention this earlier, but on the audio reproduction side, we have unified our sales team. So instead of having like point people for linear amplifiers or Martin Audio or Timex, we've now got a consolidated team for Europe and US and APAC that can go after holistically all of those things very much like we have for content creation. Sally mentioned that we have done some cost reductions, you know, just looking at, you know, the state of crazy in the world and knowing what we've been through and just thinking about, you know, what ifs on there. We felt like we did need to do some things to our cost base just to help give us a bit more insurance as we kind of come in that inflection point and move forward. And then the investment in innovation. Again, a lot of new products this year. all have actually vetted in very well a lot are are you know getting really great industry accolades on there um and more to come and you know more that we're looking forward to sharing with you um when we get to uh the the full results for the 18-month period so i think with that we're actually gonna scoot over here and um see if we've got any questions on here so And there are some on here. So we'll start with Errol here. Very encouraging to see the gross margins have held up well against the challenges of the past year, but operating expenses appear somewhat high relative to current levels of trading activity, notably staff costs. As the wider industry slowly starts to recover, does the company believe it will eventually return to historic pre-pandemic mid-teen operating margins, or are there new structural reasons as to why future operating margins may not return back to those levels?

Yeah. And that, I mean, that's a great question and definitely a key point when you look at our performance compared to pre-pandemic. I think the one thing I would say, we are a very different group to what we were pre-pandemic and we operate in a very different environment. So pre-pandemic, it was basically a UK company with a US sales team. So a very, very simple organisation. And now we are a small international group. And if you think about how, for example, cyber risk, how ESG reporting has changed, over those last six years, that's put a lot more requirements on us. You know, I'll give you an example. Our audit fee was, I think, 180K in FY19. It's going to be closer to 850 in this year. Now, that is a bit of an extreme example, but I think it does reflect the regulatory burdens and the complexity of the group and our requirements now. So what does that mean for operating margins? Absolutely, we're looking to increase it, but the focus is very much, we've got a stable cost base now getting sales through that can drive that up and get back to certainly higher than we are now. And maybe not quite the levels we were at before, but we're going to talk a lot more about that and give you a clear review, as Tim said, in February.

Andrew's got a question about what is our investment on gross margin percentages over the next three to five years split into the two divisions?

OK, so as we said, strategically, we always try and maximise margin where we can. But broadly to keep the gross margin within the 45 to 47 percent, which is where it's kind of been sort of since pandemic. I mean, it's easy to get carried away with the numbers we saw in 21. But I would point out at that point, we had a one off benefit of some tariff rebates, weirdly enough, in 21. And we were doing no discounting because there was no stock anywhere. So that was a bit of an anomaly. Our ambition is very much to have stable gross margins, which where we can take the opportunity, we will. But in that 45 to 47 percent range for the group as a whole.

Another question, Meryl, has the recent decline in M&A activity been caused by fewer available attractive acquisition candidates that meet the company's strict criteria? Or has it been partly due to desire to preserve liquidity and tough market conditions or perhaps a bit of both? It's definitely been a bit of both. on there. If you looked at our requirements for considering something to bring on the board, the products need to actually be complementary to what we do. They need to be in a market or an adjacent category that we basically or broadly understand. The culture of that team has to be sound. We need to like the management team and think they'll fit into our environment. And they need to be a sound company. They need to actually be profitable. You know, I mean, you know, everything we bought, you know, we've looked at it being creative to the business almost instantly on there. That's a tough laundry list, and especially recently. I think most of the things that come to us and we've seen have not fared as well as we have over the past couple of years. So most things have got troubles, and we're not cleanup specialists. And I think that goes into the second part of there is that we would like, I think – Instead of taking on a challenge like that, you know, which would be rolling the dice a little bit, we feel like the best thing is to focus on what we have and, you know, and try to, you know, drive down our balance on what we owe and get back to a cash positive situation. Let's see what we have here. Do you expect R&D expenditure will increase above year levels in FY26?

Yes, I think, you know, as you can see from that chart that's in there, it's been broadly flat across the last few years and we would expect it to be pretty much around that as well. So there was a bit of an uptick at this, particularly this half year, because we've had a bit more spend on tooling associated products before we bring something to market. So nothing significant as we go forward.

Yeah. What is the weakest brand needing the most focus attention? Will there be any benefits of tightening up the brand portfolio? You know, I think they've all got their challenges and their opportunities on there. I think the one that's probably had the toughest go again, as I mentioned earlier, has probably been sequential just simply because they had always been known for very expensive, the best, you know, kind of analog high end synthesizers you can buy. But, you know, Again, what's come out of that in the past couple of years has not been just a reaction to just the market being soft. It was part of the strategy when we bought them about bringing more products down market on there to address a different audience. So I think we're well underway on doing that. So yeah, it'd be tough to say. I don't think we have a weak brand. I think it's the best way to answer that on there. Let's see. Are there any gaps in your product portfolio? And if so, can you close the gap by organic growth or do you only see that happening through M&A? So, you know, there's when you look across, you know, there's been a lot of organic development across a number of the brands. So like with Adam this past year, the desktop speakers was, you know, a whole different category for us. And, you know, that was something the way we brought we did that. It was more of a hybrid Berlin and China experience. venture on there that actually worked quite well. And I think that's given the confidence for the team to do more things like that. I'd say across every brand there is in the three year roadmap, there are organically, there are things to expand, not only refresh the existing categories, but to actually go into other categories. But that does leave some gaps and things that we would love to find. We've talked endlessly for many years about we'd love to find a microphone business. The problem with those is they're either very tiny, a couple guys in a garage that there's no way to really scale it, or they're huge, bigger than us. The sweet spot is something in the middle, and there's very few of those, but we still are proactively looking for those type of things.

then the last one here from richard what are the three most important financial kpis each brand reports back to you on okay um great well to be honest i think the way i always look at kpis it's important to think of them almost like a tree you can look at one but then you look at what feeds into those so our two key ones are ebitda and free cash flow um they're the ones we look at you know are we generating the profit we're converting it to cash If I look at EBITDA, we break that down basically. We're delivering the sales at the right margin on the right cost base. So cost as a percentage of sales, gross margin and sales growth feeds into the EBITDA one. And with free cash flow, it's about, oh, you're delivering the profit, you're managing your working capital and what's the capex on investment. So we've got two sort of very big broad brush ones that everyone's measured on all the brands and they both break down into three each and they're the three. So that's technically eight, but it's two with three each. So they're the ones we look at.

Cool. All right. I think that's the end of the questions. Thank you very much for that. And I think we're going to wrap now.

Tim, Sally, thank you for answering all those questions you carry from investors. And of course, the company can review all questions submitted today and will publish those responses on the InvestorMeet company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to yourself and the company, Tim, could I please just ask you for a few closing comments?

Yeah, I just I just want to say thank you for sticking with us through this, and I hope that the information we presented was useful to you. It's been a very interesting not only 12 months, but really just the past three or four years. And I think, again, when you look at what we've been through, some of the hurdles that have been thrown at us, I feel like we've done a really good job of dealing and mitigating all of them on there. And it really is a testament to the brands. I mean, through the thick and thin on this, you know, as I said before, that's the one thing that really has been quite consistent is that, you know, our brands draw a lot of customer attention and they are highly valued out there. And that is something that we hold dear and we'll continue to work on. All right. Thank you very much.

Tim, Sally, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team 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 afternoon to you all.