Focusrite plc (TUNE) Earnings Call Transcript & Summary

Good morning, and welcome to the Focusrite plc 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. 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 going to take you through the journey that we've been on for the past 12 months on here. We're going to talk about just some of the highlights. Sally is going to 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 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, a podcast, the soundtrack for a TV show, this type of thing. And then on the other side, we have the Audio Reproduction business. Now this is really the best 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 5 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. This past 12 months, both divisions, the market has been tough still, coupled with a lot of just macroeconomic issues that we've been dealing with 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 tariffs on there. On the Audio Reproduction side, if you followed us before, you know that the story there is that the past 1.5 years have been a pretty big return boom to that business, coming off really a few years after the pandemic where there was very little cash in the industry because it had been dormant really for almost 2 years. And 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 that growth that we have seen across '23 and '24 was not going to continue. And that's exactly what's happened. Although as we'll talk about, the industry is reporting 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, 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, one of the things that's a hot topic right now is just the tariffs in the U.S., 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 slides.

Okay. Great. Thank you, Tim. Okay. So first, to 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 quite a big, busy trading period for us and allowing us then to report a full year results with our busiest trading period in the immediate rearview 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 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 we have a half 1 ending in August, okay? So anyway going back to the financial summary, Tim has 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 with quite a lot going on, and I'm going to talk a bit about that in a couple of slides. And that start to drop 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, and 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 our historic cash generation. Okay. 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 you remember in a difficult year last year, there was no variable remuneration there for anyone across the group. So that deflated it by quite -- by about GBP 2 million. We've also had inflation, and we've done a bit of pay benchmarking to help with our employee retention engagement and 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 our e-commerce sites, which we're going to come on to look at later and are showing very strong growth. So costs as we go forward, we do realize, given the performance, it's unusual to see cost increase at this level. And we have taken some action to adjust these and a small restructuring in the group at the end of this year, which has caused GBP 0.5 million of restructuring costs in adjusting items, but will generate at least GBP 1 million of annualized 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 amortization ticking up as some of those new products and investments go live. And adjusting items, largely acquired amortization, which is about GBP 5.5 million. And then in this year's numbers, we have that GBP 0.5 million of restructuring costs. Last year, we had GBP 5.4 million of an impairment for our Sequential brands, which we talked about at length last year. Then financing costs coming down as our debt reduces and interest rates improve and tax returning to a charge, but still lower than the U.K. 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 adjusted EBITDA of 14.6% as a percent 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%, tends to be 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, Vocaster, 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 particular those blue bar charts, our Audio Reproduction division gross margin has declined since the first half of last year. Actually it has returned to historic levels. And again, that 24% with highest and that was a bit of an anomaly and reflected a very high mix of China sales 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 of sales on a royalty basis, so 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 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 as a lot of companies is the impact of tariffs. And you'll see there that we think our pricing actions have anything more than offset the tariff impact in the year. Basically in the U.S., we saw tariffs increase in February, and we put prices up on the 1st of May. We also bought some stock 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, 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 to offset that, although we know there's a lot of volatility and uncertainties in the U.S., I think still to be decided. And we'll come on to that and look at tariffs in a bit more depth on the next slide. I'll just give you -- let's not lose sight of that red chart there for Content Creation, where we're seeing margins increase for the last 2 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 shown, I'll focus on the graphic on the left-hand side here. So what we've got is the -- how much we sell into the U.S. and where it's manufactured. So the U.S. is about 1/3 of group sales. And you can see that where the share of the revenue is. So of that 1/3, just over 1/3 of that is made in China. So that's why we talked about the 12% at the half year, 1/3 of 1/3 roughly. Then about another 1/3 is manufactured in other East Asian nations, Indonesia, Vietnam, Malaysia. And then we've got some manufacturing in EU, U.K. We actually manufacture in the U.S., 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 U.S., 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 U.S. 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, prices -- 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 6 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, okay? 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 GBP 49.3 million to GBP 41.9 million. That is both, the Focusrite brand burning through some of the generation 3 Scarlett stock that we've had, which we'd always plan 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 has done a fantastic job this year responding to that lower market and managing their stock really well and driving efficiencies through that. So we've seen inventories return to a sort of more normalized level. Our stock turns currently around 2. 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 GBP 12.5 million at last year-end. It was GBP 17.9 million at the half year, down to GBP 10.8 million, so a cash inflow. So we're seeing our working capital as a 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 6 months. But seasonally, the next 6 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 GBP 4.6 million in the 12 months to August '24, now an inflow of GBP 5.8 million. The investing line of GBP 14.7 million, 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 color around that after the February results. And just to reinforce the point there, the second interim dividend of 2.1p that will be coming through that will be paid in the next 6 months. Okay. Now I'm going to hand you back to Tim, and he'll give you a bit more color 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 in 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 statuses where they are in terms of market share. So focus right, our most established brand with market share, especially in some strategic areas much more mature than other ones on here. Very pleasing to see the growth on here, especially in a market where there's been a lot of promotional activity as our competitors have tried to wound down their inventory, but also in the U.S. specifically with what's been going on with tariffs on here. So -- and I'll talk a little bit more about that in a bit. But just in general, Sally mentioned on tariffs, you kind of got a lay of the land on here, but we raised our prices in the U.S. in May on there and watched and 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 our -- 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. ADAM 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-priced products, which a number of those came to fruition this past year, and those have done well. So it was great to see sequential back to growth. And then Sonnox is our software company that makes plug-ins 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 3 months' worth of inventory in our channel. And when lockdowns happened, that suddenly went to 0 very quickly, and it was very much hand to mouth. And we found ourselves like many technology companies in a component crisis where finding the same components every other manufacturer was looking for became very tough. Lead times were long. We had to put in non-cancelable orders, sometimes out for 1.5 years or longer on here. And as you can see, things plotted along, but a lot of that inventory kind of came just rushing back into us into our channel right about times when you could suddenly go outside and experience live events again, when cost of living was becoming an issue. So -- 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 blood of inventory. And so that first half of '24, we signaled that we had some work to do here in terms of clearing that stock down. And you can see what we've done over time is that 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 U.S., 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 U.S. 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 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 that return on there. So overall, very pleased with that. And even though 2.6% growth in the Americas is nothing to shout and have a party about, considering what's been going on there in terms of 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 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. This is something that we're doing with our Focusrite, our Novation, our ADAM and our Sonnox brands now on here. And as we've seen, there's just a growing number of our customers that 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 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, a 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 U.S. 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 kind of what a rough road it's been in terms of what the industry has 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 I think we're pleased that we're sort of right in line with that. And in some cases, in 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 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 tariffs, 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 we're really getting into the channel and getting good reviews. And so that provided that lift on there. We also have a number of our biggest kind of 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 Thomann or Sweetwater's website and choose their top seller or most popular offering. It's not unusual for us to have 4 out of the 5 in the top audio interfaces for Thomann, a number of -- 2 to 3 in the studio monitor catalog. And then for Sweetwater, roughly about the same. So something that we track, and it's just another gauge of the fact that our brands through tough times and good times, they really resonate with customers, and 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, a very different channel, very different customers and a very different journey over the past 4 or 5 years. I talked at the beginning about how we went through this kind of resurgence of business from 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 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 TiMax to get our foot in the door on to 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 U.K., 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 -- we are coming in as the underdog, if you will, on here against the 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 in the Americas, we're 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 4 or 5 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, our -- 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 we're very happy about that, and it's an area that we see, especially in the U.S. with early signs on there that we're taking some share as a big opportunity. Okay. Sally, back over to you for the strategic update.

Yes. Great. 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 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, feedback 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, and 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 TiMax for Martin in Audio Reproduction, Sonnox 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, which should be going live in the next 6 months. And then lifetime value for customers, that continuing. It's not just about having a great hardware, software product. It's about the experience, making it easy to use and 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. 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 3 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 in-house, which means we can then use this to scale and deliver platforms and road maps 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.

Yes. So you can see, I mean, 37 products, again, the year before 35. And I think also very important is all the upgrade dates that we did. There's always something the team is adding in terms of new functionality to existing products just to keep 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 this next slide is just to give you a little color on a lot of the different things across both divisions that came out this past year. So a pretty wide swath across the Sonnox Soften plug-in, some Novation synthesizers, the new Launch Control XL. I mentioned earlier about Sequential. You can see the TEO, the Fourm 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, there's -- we continue to invest in R&D. So there's more exciting stuff coming. Okay. We want 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 in automated testing or to run different scenarios and things that certainly would take people a long time to do. We don't see this as a replacement for R&D teams, but we see it as something to actually augment in a lot of the more mundane tasks and things like to accelerate to help on there. But the -- 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 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 what typically happens no matter where you come in from, whether it's an electronic musician, if you're a DJ or somebody that just 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. 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 and music and use them in ways that -- the stuff 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 to not -- just to make their life easier and make them more creative. Future growth expectations.

Okay. 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 would be helpful just to do since we get asked this question a lot. So the first thing we have is market growth. So we're operating in 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 U.S. and EMEA. And as we talked about Audio Reproduction is going through a bit of a difficult time following some super growth in the last couple of years. But broadly, term, the market is growing. It's not TikTok, double digit, very exciting. 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, sort of serious hobbyist, professionals, but it is definitely growing across both our divisions. And then added to that, 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 sort of consistent double-digit growth of going out and taking share in all our regions. And for Focusrite now, given the penetration and 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 4 out of 5 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 U.S. to increase the growth of that. So we've got opportunities there to go ahead of just the market growth. And then the biggest driver, we think, for us is incremental new products and then to spend on R&D. And so this isn't just a new Scarlett. This is a new range of products that complement alongside of 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 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 has 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 color 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 view on 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 normalized ordering pattern, we're really seeing that demand coming through to us in our sales. Still a lot of uncertainty in the U.S. 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 yet. And again, Audio Reproduction, although the growth rates mitigated across the year from, I think, 5.9% in the first half, 3.2% in the second half -- 2.9% in the second half, the market is still not in growth, yes, it's going to be tricky 12 months going forward. But 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, we will always do our best to maximize them, but we're thinking given where we know tariffs are going to go, any mitigations we can do outside of the U.S. 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.

Yes. So thank you for sticking with us. I know there 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. The routes to market is growing -- 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 appoint people for Linea amplifiers or Martin Audio or TiMax, we've now got a consolidated team for Europe and U.S. and APAC that can go after holistically all of those things. It's very much like we have for Content Creation. Sally mentioned that we have done some cost reductions. Just looking at the state of crazy in the world and knowing what we've been through and just thinking about what is 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 at that inflection point and move forward. And then the investment in innovation. Again, a lot of new products this year, all have actually bedded in very well. A lot are getting really great industry accolades on there and more to come and more that we're looking forward to sharing with you when we get to the full results for the 18-month period. So I think with that, we're actually going to scoot over here and see if we've got any questions on here.

And there are some 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 slows -- slowly starts to recover, does the company believe it will eventually return to historic pre-pandemic mid-teen operating margins? Or are there any structural reasons as to why future operating margins may not return back to those levels?

Yes. No, I mean, I think 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 is 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 U.K. company with a U.S. sales team. So a very, very simple organization, 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 6 years, that's put a lot more requirements on us. I'll give you an example. Our audit fee was, I think, GBP 180,000 in FY '19. It's going to be closer to GBP 850,000 in this year. It's a bit of an extreme example, and -- 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 are 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 to the levels we were at before, but we're going to talk a lot more about that and give you a clearer view, as Tim said in February.