Focusrite plc (TUNE) Earnings Call Transcript & Summary

Good morning, and welcome to the Focusrite plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses, which is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Tim Carroll. Good morning to you.

Hello, and good morning, everyone. Thank you for joining us. Sally and I are delighted to have you with us today to go over our half year results for -- through February of '25. So to start off with, just to give some color, so I know we have a mixed crowd in the room. There are some people that know us well, some people that maybe have just started following us. We thought we'd start off with just a little bit of an introduction in terms of what it is that the Focusrite Group does on here. So if you've heard this before, bear with me, I'll make it short and as unpainful as possible on there. But basically, the best way to think of the group really is we have 2 basic divisions. One is really all about the creation of audio, primarily for music, but for other applications as well. It could be podcasting, it could be the sound design or the dialogue or the soundtrack for a TV show or a piece of media you write. But really, it's all about software and hardware primarily that is really involved in the creation process. The other part of our business is the Audio Reproduction business, and this really is all about the reproduction and broadcast of audio. This could be at a festival, it could be at an opera house, a theater, this type of thing. So this slide basically is to give you just a bit of color in terms of how the group breaks down. You could see primarily the group started off in the Content Creation business. That was our origin, if you will. But over time, through organic processes and also through M&A, we've acquired other brands and got to a point here where we have these brands focused on these areas, roughly 73% for the first half of our business in Content Creation, about 27% in Audio Reproduction. Okay? So let's kind of go through some of the highlights, and then we're going to go and do a bit of a deep dive on a lot of this. But just the overarching picture, the basic theory is we're very pleased to be saying that we had growth in the first half of last year after a very difficult year last year on there. And this growth came primarily from our Content Creation business, which, if you followed us, you know that during the pandemic and the lockdowns, that business was off the charts, did incredibly well. The demand was sky high for this. It came down to a level and then a lot of things kind of came into play in terms of component crisis, economic issues and things that led to a lot of industry-wide destocking, not just our group, but pretty much across the board. And that has been a real work in progress for us over the past 1.5 years or 2. And we're very pleased to say that we've unwound a lot of that. The brands have actually performed well during that entire period on there. Our sales rankings have remained their top-tier places where they are. And we've got to a place where we're back into growth on Content Creation. So we're very, very excited and happy to be there. A lot of hard work getting us there. On the Audio Reproduction business, if you've been following us, you know that we talked about there was a sort of a delayed reaction from what happened during the pandemic on that. That business was effectively shut really for the majority of '21 and '22, really started to come back in '23. You yourself maybe started to go back out and see live events in the second half of '22, but the industry had no cash at that point in time. And so really, it was '23 and '24 where we saw a huge boom back where the industry had cash, festivals were going on, people were going out to see concerts, going to night clubs, this type of thing. And so there was a real big boom. But we were very clear in saying that we knew that this was going to be something that was, in terms of that level of growth, was going to be short-lived and that we would expect the business to start to normalize over the course of this year, and that's exactly what has happened. The business has normalized. So coming off a very big high, the Audio Reproduction business is down for the first half, but still quite strong and the pipeline is incredibly strong, and we'll talk about that in a little bit. Strategically, a lot of updates to augment all the different products that we introduced last year, many at the very end of the last -- the half of last year that got announced in the public inside this year, all doing quite well, and we'll talk about that. And a lot going on recently in terms of tariffs that we're going to take some time and talk about as well. And speaking of which, this is a slide that normally, I think, we would have probably around #35 or 36 in our deck, but it's on everybody's mind, and it's really important to the business, so we put it upfront. So let's talk a little bit about what's going on with tariffs. So the first thing, just to level set everybody because there seems to be a preconception that an overwhelming amount of our products are -- and the sales in the U.S. are China-dependent. I mean it is material to us. But when you put it at a group level, you can see here, 12% of the group sales relate to sales in the U.S. of Chinese-made products. So not immaterial, but not gargantuan. But there's a lot that we've been doing to fix this. So as you know, it's been a very volatile environment, a lot of ups and downs, a lot of putting things in place and then pulling back on them, which has been a lot of busy work for us. What we decided to do at the end of last year was even though we made a lot of progress in destocking our U.S. channel, we made the decision to actually put some more stock of the Chinese products in there to give us a buffer, if you will, to allow us time to understand the lay of the land and the impact on that and to give us some runway to make some decisions. And that has been well served for us. So we put the equivalent of about 3 months of extra stock, mostly Chinese products into the U.S. when we started to see these things with tariffs starting to happen, and that has really served us well on here. So along with that, it's important to know that we already -- for some of our big products like Scarlett on the Focusrite line, those are made in Malaysia, and they have been for quite some time. So we have a bit of a natural hedge there. As you may have been following in the news, the tariffs skyrocketed up to 145% and then there was an exemption that came in place for some of the products, a number of ours fell into this category. And so we've been taking advantage of that to try to get products into the U.S. to avoid the 145%. In addition to that, we've done a number of price increases that are going into effect May 1. Now they do not cover us for 145% tariffs, but they do cover us for the current things. Our current thinking is that this will kind of come back down to some level below that. But right now, this seem like the right thing to do to get the pricing intact with that, and we'll be watching this. And if we need to do further price increases, we obviously will. But that's not the only thing we've been doing. In the background, there's been a lot of actions in terms of how do we actually derisk the manufacturing that we have in China. And so along with what we've already done in Malaysia, we've made some moves. And some of this has just come to fruition in the past 2 weeks where a number of our ADAM Audio products that are made in China, specifically the T-Series and the D-Series speakers, which are the most high-volume speakers we have, we're moving to Indonesia and Vietnam. And those lines will be coming on in a relatively short amount of time, and we'll be able to start shipping product to the U.S. from those locations sometime in the summer, but before the end of our next reporting period on here. So a lot going on in this, obviously, a very volatile situation. But between the inventory that we've moved, the price increases we've done and the actions that we've taken already in terms of moving manufacturing out of China, and there's more in the works on there, we feel like we've got a pretty good cover on this for the short term and ready to manage anything that comes at us next. Okay? So with that, I'm going to hand it over to Sally. I'm going to let her take you through the financial review. Sally?

Okay. Thank you, Tim. So I'll start off by giving you a quick summary of the financials. So revenue has grown in the period, and that's mainly driven by Content Creation, as Tim referred to earlier. And Tim will go through that in a lot more detail later on, so I'm not going to cover that in a lot of depth. Gross margin has declined on a reported level by 1.9 percentage points, and I'm going to go into that in a bit more detail later on. And that decline in gross margin, together with some planned increases we had in costs, mainly the reset of our variable remuneration, has meant that EBITDA has decreased compared to this time last year. And as a result, that has flowed through, you see slightly lower EPS coming through both at reported and adjusted level. Net debt has reduced significantly since this time last year. It's slightly higher than at the year-end, but that is to be expected. We tend to see a bit of an outflow in the first half of the year. But we have maintained our interim dividend at the same level as last year, which I think speaks to the confidence we have for cash flow returning later in the year. So what I'm going to do now is go through each of the primary financial statements. If we start off with the income statement, as we've talked about, we are seeing reported top line growth, and that's 5.2% at a reported level. It's higher at an organic constant currency level because of the weakening of the dollar compared to last year. Now we have brought some sales forward into this year to help mitigate from tariffs, as Tim referred to. However, we have continued with our destocking program in the U.S., and those 2 have largely offset. Gross profit, I'm going to come on to the next slide. And overheads, you can see the increase there, a bit of inflation, annualization of acquisitions and that reset we referred to for variable remuneration, otherwise, costs underlying are flat. Adjusting items this year are relatively clean. It's only the acquired amortization on intangibles. And you can see also the financing charge reducing partly due to the lower drawdown of debt, but also lower interest rates. The tax charge is also lower this year, which reflects the benefits of patent box claims, and that's a new patent box claim for Focusrite in this year, and we've carried it back to some prior year adjustments. We have to take it back to the profits over the last 2 years, which has reduced the rate to 13% effective in this half year. Okay. Now I'm going to talk about gross margin. So we've got a 1.9 percentage point decline this half year to the first half last year. But just to remind you, in the last half year in FY '24, we had a provision for about GBP 1 million relating to Vocaster, which we talked about in depth there, where we decided to sell off some excess stock to a distributor, and we took a provision in the first half of the year. So if you adjust for that, actually, we've got a slightly bigger underlying decline, and that's made up of a few things, quite a few combinations. The biggest factor is Audio Reproduction. And you can see from those blue bar charts underneath, that's the Audio Reproduction margin by half year. Actually, what they've done is returned to their historic levels. And in the first half of last year, they had a particularly strong margin because they had very high sales in Asia and particularly in China. And I think as we've referred to in the past, for Audio Reproduction products made in China, sold into China, the majority of those are sold on a royalty basis, so we get a very high margin for those. And basically, the sales into Asia have returned to a more normal level and, as a result, margins returned to a normal level. The chart to the left of that in red shows the underlying Content Creation margins, and I've stripped out any impact of Vocaster changes in those. So you can see the underlying Content Creation margin is actually up on the second half of last year, although down on the first half, and that's primarily due to product mix. Generally, that doesn't have a huge impact for us. But this half year, with a strong growth in Novation and a slightly lower growth in Pro products, which are very high margin, we've seen a slight dilution due to product mix. In addition, there's been some more costs. Freight has remained at an elevated level for the half year, but it has decreased significantly in the last couple of months. And we had some one-off rework costs to do with some new products in the early part of the half year, which we don't expect to repeat. So as a result of freight improving, an expectation that some of our more higher-margin products will return to growth in the second half of the year and a non-repeat of those costs, we would expect margins to improve in the second half of the year outside of the U.S. For the U.S., it really does depend on what happens with tariffs. As Tim has talked about, we think we've done enough to give us a cushion for the second half of the year, but it will depend on how things change there. If we now go on and look at the balance sheet, there's not really a huge amount of change there. We have now a stable balance sheet. I would draw your attention to the lines right at the bottom, the working capital and working capital as a percentage of sales, a significant decrease since this time last year, but slightly up on the year-end. So we've seen stock decrease consistently throughout those periods and is, in fact, at a lower level than at the year-end, and that's despite us putting GBP 2 million of extra stock in the U.S. to help mitigate from tariffs for Audio Reproduction. In Audio Reproduction, we hold the stock. For Content Creation, we will sell stock into our distributor for the U.S. The increase largely at this year-end, this half year is due to debtors. And again, that relates to selling quite a lot into the U.S. right at the end of the half year to help manage tariff impacts. So we would expect that working capital to continue to unwind and improve further with an inflow for cash in the second half of the year, leading to a small net inflow for the year as a whole. One other thing I'll just draw your attention to on this, although we're showing net debt on one line, in the detailed statement, our bank facilities, our bank loan has now been reclassified to long-term creditors. We haven't renegotiated anything. Our facility remains unchanged. It's purely a change in the accounting guidance, whereby if we have the right to defer payment, which we do for more than 12 months, we can now reclassify that as long-term debt. So we've done that, and we've applied that retrospectively as the guidance suggests to the other accounting periods. So finally, our cash flows, we've talked about there, a small outflow in the half year, GBP 2.3 million at a free cash flow level, mainly driven by working capital. As you can see there, our spend on investment down on the half year last year, which again we're talking about that big technology investment we've completed last year. And we expect to stay roughly at that level going forward. It is largely our capitalized R&D as we continue to invest in our product road map that, that cash flow is somewhat offset by the RDEC tax benefits we get for R&D. So the cash -- we do get some cash flow benefits from that. And as we talk about, we've maintained our interim dividend, which is not covered by the cash flow, but is covered 2.1x by EPS, which we're comfortable with as a Board. And hopefully, that will be covered by cash flow as we go into the full year. Okay. So thank you for that. On that basis, now I'm going to hand back to Tim to talk through the operational review.

Thank you, Sally. All right. Great. So let's take a look and talk about what's kind of been happening with both the different divisions here. So we're going to start off with Content Creation here. As you know, if you've been following us, again, this has been a difficult road with this business with all the destocking the whole industry has been going through, cost-of-living issues and things like this. The one thing we're really pleased to report when you look at the numbers for this first half is that with the exception of Sonnox, every one of our brands actually had growth in this first half. And that's the culmination of new products really settling in and doing well. That's maintaining our top market share and sales rankings with most of our key critical products as well. And it's also the net result of a lot of unwinding of the stock, getting more regular recurring orders now back, especially in EMEA and APAC, which has been pretty much clear and back to the normal KPIs all through this first half on here and a lot of unwinding in Americas as well. So you can kind of see through the list here, for Focusrite, it's been great to actually get the rest of the Gen 4 Scarletts out into the market. The high-end ones, those have done well and a great market acceptance there. Novation, we're having great success with the new Launchkey Mark 4 range. It's really hitting all the ticks for a lot of creative people out there and artists on there. ADAM Audio has had a really great first half and a combination of really them getting embedded into our whole routes to market engine. That's been a heavy lifting, and it takes a while to move distribution and get them in there. We've done that. And that's been augmented with some really great new products, especially the new D3Vs, the desktop speakers that have come out, which are getting incredible reviews and a lot of pickup, not only in the creation market, but we're also seeing it starting to penetrate in some of the hi-fi markets as well, which is really nice. And with Sequential and Oberheim, again, had a really rough year last year because most of their product portfolio was very high-end synthesizers, which was probably one of the most dramatically impacted parts of the business in terms of just soft demand at that level on there. They've introduced a number of products at dramatically lower prices that have done quite well. So it's great to actually see Sequential and Oberheim come back into growth. Sonnox was our area where we had a bit of a problem this year. And this was a combination of some new product introductions a little bit late and also one particular partner that we have a royalty arrangement with whose business has been quite soft on there. So there's a lot of plans with Sonnox in terms of new product introductions and a lot of promotions this year to get them back on track. We're feeling pretty good about that. Let's take a look at this by -- so I think -- no, I didn't skip the brands. Sorry. Let's take a look at the inventory on this because this is something that we have chatted about a lot over the past 1.5 years is where the entire industry went through. This was not just a Focusrite problem. This was anybody that sells into this industry, the issues that we had with going through the pandemic, where all of everybody's inventory in the channel and their own inventory dried up pretty quickly, going hand to mouth for so long and then it all comes surging back at probably the worst possible time when a lot of the economic crises and things started to kick in and things. So this has been a lot of heavy lifting for us, and we're really quite proud of the actions and the progress we've made on this. So what this chart is basically showing you here is it's showing you the Content Creation brands, it's showing you their relative revenue on the left-hand scale. And the gray behind it is showing you the relative level of inventory that we would normally have in the channel. So if you go back to '19 and '20, you can see that we normally -- our KPI was around 3 months of inventory in the channel. That's what a normal channel partner would stock. That's what they would need to stock so that transport time and things like this, regular recurring orders and stuff that would -- they would not actually destock on the products. And you can see, we quickly went from that to 0 in the channel and shortly after that, 0 in our own coffers for a long period of time. And that's when components started to become scarce, they became more expensive. That's when we started having to put in orders that were 1 or 2 years out that were noncancelable. And all that stuff came rushing back in really at the end of FY '23, which is when we started to see a real big softening. And so for '24, you can see that was the peak of it. We knew we had a real problem with our channel stock. We talked about this in a lot of detail, and we said this was going to be a main emphasis for us for the year. And we've done, I think, a really great job on this on bringing this back down. We're back to a normalized stock level in EMEA and APAC, and we would be pretty much there on the U.S. if we hadn't had to load in some more products for tariffs, which we think is absolutely the right thing to do. But overall, a really good picture. And it really kind of speaks -- when you look at the regional performance here, which I think is our next slide here, if you look at EMEA and APAC, you can see really strong growth year-over-year. This is the result of really of all these dealers getting back to the normal KPI and giving us predictable monthly, weekly orders to restock as they sell through on the products on there. Americas, you can see this is the culmination of us continuing to destock. We knew we had more work to do on this, and this is what we communicated, slightly offset by the fact that we put some more in for tariffs on there. But we feel like this was the right move and got us into the right place on here. And we're very, very happy to see this, and we're much more confident about the future outlook of the business because the orders and what we're seeing from the channel is much more predictable, really the result of the work we've done and the fact that the brands, the products have continued to maintain their sales rankings on there, which is another point to talk about in a minute. Let's talk about the data we get. Now I think we've communicated to many of you in the past on here that the industry data we get from our industry is not very good. As a matter of fact, most of it is U.S.-focused, and we have to extrapolate it. But this is one example of what the industry for the U.S. has been reporting. You can see continued softness that the business being down on here. We're -- when we think about what we've done in the U.S. in terms of the destocking we've done, this is more of an end-user picture on here. And the fact that our products have maintained their same levels of registration means that we're bucking this curve. And I think that's really important to know, and that seems to have been the case all during these very difficult times and during times when we could not make products fast enough is that our products over-performed in pretty much every one of the sectors. And this slide here is really kind of talking to this. So as many of you know, there's lots of different ways that we kind of look at how we -- or the overall climate and the health of our business. Our revenue is what we sell into our channel. But to us, the real litmus test of how well the business is performing is our end-user registrations. In many of our products, we get this data in real time. When somebody opens a product, connects it to their computer for the first time and registers it, we are able to see that in real time, and we watch that very carefully because for us, that is really the closest thing to monitor the health of the business is how many human beings across the planet on any given day are registering our product and what does that trend look like. And you can see from '24 through '25, that trend has maintained its trend. It's been quite strong on there. So all during this destocking and during a period where we've seen many of our competitors do the same and a lot of heavy promotion going on, we're very pleased to see that our end-user registrations have held up. The graphs on the right are talking about Scarlett. And as many of you know, we had a big transition a year ago with the -- from the Gen 3 to Gen 4. And it probably couldn't have come at the worst time when we were dealing with destocking the channel and it's something, but we took it head on. And this has shown you the progress that we've made on here with the fact that we've moved through a lot of the Gen 3 products. We still have a bit left in the channel. That's the blue line you see there, but that is the higher-end products that we just debuted at the beginning of this year on here, and they will thin out. But the green line is the Gen 4. You can see how that has really settled in well. And the orange line is the Solo Gen 3 product, which is at a very strategic price point that we've decided to keep in the channel that is actually not cannibalizing our sales on our latest generation, but it's actually taking share for many others, and that's going to be part of our strategy going forward. Along with that, I've talked a lot about our brands remaining their kind of top leading spots in sales rankings. And here's proof positive of this. We have a couple of different of our big continental players, both in Europe and the U.S. that actively promote and show their top sales things. Now obviously, this is a moment in time, but it is quite indicative of what you would see if you went and pulled these charts yourself, which you can do, but it's by going to the top seller categories in Thomann or with Sweetwater, looking at most popular things on here and doing it by category. But it's not unusual for us to occupy the top 4 or 5 spots in the audio interface category and usually 2 to 3 in the top monitor category. So we're very pleased with that. Also, we track our NPS scores on all of our products. Those are holding up and doing really, really great. And we're very pleased to see like I put in the ADAM D3Vs, the new speakers down there, and some of the reviews we've got on these. These things are really hitting the mark with a lot of customers. So we're very excited about that. Okay. Let's turn the corner and talk about Audio Reproduction. And as I mentioned up on the top of here, and the graph shows this, is that you look at when we bought them in HY '20 and HY '21, the business was pretty dire at that time because except for some areas in Asia, it was effectively closed. 2022, when you probably started to go to live events again, was all about generating cash and putting cash back into that industry, and we reaped the benefits of that in '23 and '24. But those were big rebounds, and we knew that. But to offset that, one of the things that we've been doing in the background is we've been really fleshing out this portfolio. So if you go back to sort of '21 and you look holistically at all the opportunities across live and installed sound, you could probably -- we would say that probably our product portfolio could address maybe 70%, 75% of that. Well, now with all the work that we've done organically and through some of the acquisitions, it's 100%. And so when we look at the business, we said that we were going to see a normalized in this business. This is exactly what's happened on here. And we can look at this sort of regionally as well on here, especially the biggest area, and Sally talked about this, that was hardest hit was APAC. China came roaring back. It was a combination of not only the lift on the pandemic, but it was the fact that, that was offset by almost a year after everybody else on that. And when people could go outside and go to things, we saw a huge boom in that business. And since most of that is royalty-based, that is why there's been a larger drop on the gross margin for this business. But overall, the levels that we're at on this, they're bucking the trend on what we're seeing in the rest of the industry. Everybody else is normalizing on here. And I think one of the main reasons is because our pipeline is really remaining so strong. And this is the net result of all this that we've done on the R&D side in terms of fleshing out the portfolio, what we brought online by acquiring TiMax and panLab last year has really opened us up to a lot more of the immersive opportunities for a lot of the installed sound and some of the live sound installed things as well, which means our pipeline is still quite robust. So even though when you look at the numbers, it was down over the first half of last year, that was coming off a huge strong compare. And we're quite happy with the level of the business on here. And there's seasonality in this. So we believe the second half will be stronger as well. Okay. Let's talk a little bit about the strategy on here. If you've been following us for a period of time and looking at our annual reports, our basic growth strategy has remained the same for a number of years, and that's being a great place to work, make sure that we attract and maintain talent on this. We spent a lot on this. There's a lot that's been going on in development of our leadership team. We do take things like employee eNPS scores and surveys very seriously. We just completed one about 2 weeks ago, and I'm pleased to report that the number actually went up over what we reported last year, which was already a very, very good score. So we're very happy with that. Our core customer base, R&D is the lifeblood of this. Every one of our brands has their own R&D because they're very specialized. You cannot take our R&D teams and homogenize them and get the kind of quality of products that you have on them. If you look at ADAM Audio, the engineering team there are highly skilled people that know how to make the best studio monitors in the world. Same thing applies here at Focusrite, it's the best guys that know how to make audio interfaces in that. Those 2 worlds don't really overlap very much on there. So having these independent R&D teams is a very important part of this. And we're strengthening that because we know that hardware continues to evolve, people want more with it, which means more DSP, more type of things that you need on that. New markets are also a big part of this. So we -- what we've done with the acquisition of TiMax has really opened us up in the live sound. So we're really getting into a lot more opportunities in the immersive market on there. That's a really big part of our play as well. And then lifetime value for customers. If you saw on the opening slide, we had over 50 software updates to augment and add new features for users this year. That's a huge part of our success in our overall NPS and why our brands are so powerful. And that's something that we spend a lot of time doing. As well, we -- now that we've got really great structure and systems in place with our database and stuff, we're starting to get much more involved and much better at doing cross-selling across our platform as well. It's another thing that we're very happy about. And speaking about strategy and innovation, again, this is sort of when you look at our R&D and how much we spend and how much we capitalize, it's a -- the net result is the type of products that we get out. So full year last year, we had 35 new products, a lot of updates and a bunch of content releases. So in the first half, you can see it's 3 new products. But again, this is not something where it's a steady line on here. It kind of ebbs and flows across the year. And a number of these 35 we had last -- end of last year were products we started shipping to the channel at the very end of our business year, but weren't publicly introduced into this year on here. But the net result of this is that you can see NPI is a big part of what we do. Refreshing products coming out with net new products on this is really important, and there's more scheduled for the second half of this year that we are very excited about, the channel already knows about and that we're expecting to see have very strong performance. Okay. So with that, I'm going to hand it back over to Sally to give us a little summary.

Okay. Thank you. So what I'll do, I'll take you briefly through the outlook statements that we have. So where are we with current trading at the moment? Well, I think as we've talked about, with Content Creation, it is definitely normalizing at the moment outside of the U.S., whereas obviously a lot of uncertainty still remains, but we are happy that we are back to normal ordering patterns and normal stock levels certainly in EMEA and Asia. Audio Reproduction, as we've talked about, it's definitely a softening market. But with our new expanded product line, we're comfortable that this gives us the ability to reach out to far more projects than we were before. So we've got a consistent and stable project pipeline to help deliver revenue going forward. So for outlook, we're looking, as we've always said, a slight weighting towards the half 2, and that's partly due to seasonality in Audio Reproduction, the new product launches and also no further destocking in the U.S. So overall, we're expecting low single-digit growth. For gross margins, as I referenced on a slide earlier, some improvement in half 2 outside of the U.S. due to the non-repeat of the rework costs that we talked about as well as a lowering of freight going forward. Overheads, we've already talked about the factors impacting those. We don't expect any significant change in that. And cash flows, we've talked about, in half 2, a slight inflow, giving overall positive inflow in the year as a whole. So our expectations for the year remain unchanged in the statements we gave at August, but we do acknowledge there is a lot of tariff uncertainty and volatility in the U.S. So at that point, now I'm going to hand back to Tim, who's just going to conclude.

Great. Thanks, Sally. Okay. So before we jump into the conclusion, there's one last slide, and we thought this was important to share with everybody because we're obviously in a very volatile thing; everybody is. We talk to investors all the time and everybody -- there's a lot of uncertainty on there. But one of the things we wanted to do is go back and what did we communicate and talk about at the end of last year? And how well did we do on that? And this is sort of our scorecard on this. So the things that we communicated at the end of last year talking about go-forward statements, we said Content Creation, we said the market is stabilizing, but there is uncertainty with the tariffs. Home run on that one. I think we got that one completely right. Audio Reproduction, we said the market is normalizing; it most certainly has. But we said with the expanded product range we have, we think this will allow us to continue to take share. That has absolutely happened, that is the result of that is a very strong pipeline, and we know that we are actually faring on this curve better than a lot. We're seeing a much higher and starker normalization on the business. Cash flow. So Sally went through this on here, further reduction of the debt position on there. Didn't get this one quite right, but again, it has been a very volatile market, and we actually think we have eyes on this for it to improve over the second half. Revenue, we said it's a very challenging market still for Content Creation with the Audio Reproduction with it slowing down on here, overall single-digit growth. That's pretty much what we -- where we landed on here. And gross margins, we said those would be broadly flat over last year. We didn't quite get that one right on there, but it's something we're monitoring. There is some seasonality on there. And again, with the mix of NPI that we have coming for this year and some of the things that Sally talked you through in the bridge, we think we're on a good strength to actually get there. So again, overall profit expectations for the year remain unchanged, which brings me to our kind of final slide here. These are the big takeaways. Content Creation returns to growth on there. We're back to our normal KPIs in EMEA and APAC. We've done a little -- we've done some destocking -- a lot of destocking, and we put some more stock in for the tariffs on there, but it's a different product mix, and we're feeling good about that. We've got a very strong Audio Reproduction pipeline. Even though the business is normalizing, the pipeline remains strong. Improved working capital on here, so you can see that the inventory has reduced. So not only have we destocked our channel, but we've also moved through a lot of our overstock in our own inventory. And tariffs. Right now, drawing a line in the sand as to where we are and not knowing what's going to happen next, I think we've done a good job on this, and we put the right things in play. We'll watch this carefully as always on here, and we'll continue to react and do things. But I think between the price increases we've done, putting some stock in there to give us some more runway to make decisions and to see if the things that we hear coming out of the U.S. stick or they get changed again is a prudent thing to do, coupled with the fact that we've made some real great progress in terms of derisking our production in China. So with that, that formally concludes the presentation, and I think we're going to jump over to Q&A now.

Okay. So I think the first couple of questions are all about relocation of manufacturing, as in where are we moving to? Is it Malaysia? And how difficult would it be and how costly?

Yes. So I would say that it's typically not immaterial to do this. Thank you, Alex. Normally, when you're going to do a move, tooling costs are expensive, making sure the right talent is there, you're usually looking at something that's going to take a year plus to get it right. I think the fact that many of our contract manufacturers were their biggest client or one of their biggest clients, and at 145%, that's again essentially an embargo on the product. You can't ship anything to the U.S. The prices that we'd have to charge are ridiculous. So there's a, I'd say, a much higher level of flexibility and willingness to actually make this happen quicker. So to kind of put it in perspective, normally, if we were going to move something, we would be looking at tooling and start-up costs probably in the range of $50,000 to $100,000 to get it up and running. The moves that we're making to Indonesia are going to cost us less than $10,000 and something that would take us a year. They've promised to get production up and running so that we can start shipping to the U.S. before the end of this next fiscal reporting thing. So it's not easy on there, but I think there's a lot more teamwork and a lot more incentive with our CMs to actually make that happen.

So the next question is about the success of the direct-to-consumer channel, which is now around 9%. Are we planning to scale that further?

We absolutely are. So I don't want to make this come off that we don't like our reseller channel; we do. We've got really great partners out there. But we have to be realistic and understand that there's just a growing number of people that are happy, comfortable and would prefer to do business with the manufacturer. And so that is something we're definitely leaning into. So we spent a lot over the past 3 or 4 years retooling completely from the ground up all of our e-comm engines and stuff so we could have them integrated into the websites. We've done that with Focusrite and Novation. We've recently done that with ADAM, and we're getting Sonnox online as well. We see this as definitely a big part of our business going forward because, again, customers want it, and it's something that actually has a very attractive margin profile as well.

Okay. Now as a question, we talked about R&D. So how do we assess our R&D efforts? And what can we expect for new products in H2?

So every product that we make has to go through a pretty rigorous business case proposal thing. There's no lack of things to do, but you -- for every 10 great ideas, you can maybe able to do one. And so we do build very extensive business cases. And we go back and as these products go into market, we actually track that to see how they're doing that. Pleased to say, in most cases, we got it right. Every once in a while, we don't. We're not perfect, but we learn from that on there. So the -- that process works really well for us. And in terms of things that are coming in, in half 2, I'd say it's a combination of net new products and some product refreshes that are due. What I will say in addition to that is that we have non-disclosed most of our major dealers in all this, and they're quite excited about these products and are starting to put in orders to our projections for them.

Okay. And a question around Americas revenue, which declined slightly. Do we anticipate this reversing in half 2, considering all the mitigations? So I'll answer this one. It did decline slightly. But actually, on an organic level, it grew very slightly. I think any bets around the U.S. -- I mean anyone who wants to predict anything in the U.S. at the moment is a braver person than I. We have put all the mitigations in place that we can, and we expect to deliver our gross profit. I mean what that means for revenue in the end in terms of pricing and volumes remains to be seen. How have we calculated price increases? And will there be enough to compensate the current tariffs on a gross profit level?