Profoto Holding AB (publ)
STO:PRFO
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Earnings Call Analysis
Summary
Q2-2024
Profoto reported an 8% organic sales growth in Q2, fueled by successful product launches like the Pro-D3 and new light shaping tools for photographers and studios. Despite market challenges, the company's strategic focus on innovation and R&D investments has been well-received, though margins remain pressured by ongoing investments. Revenue over the last 12 months was SEK 742 million, slightly down due to fewer product introductions. With a strong balance sheet and a commitment to higher R&D, Profoto targets a return to 10% growth and 25-30% EBIT margins in the future.
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Good morning, and welcome to Profoto's Q2 telephone conference. My name is Amanda Astrom, and I'm Head of Investor Relations.
Today, I have with me our CEO, Anders Hedebark; and our CFO, Carl Bandhold.
I will now hand over to Anders, who will start off by giving you some highlights for the quarter.
Good morning, everyone. I hope you're fine. Thank you for joining the call. So we are here to present the second quarter for our -- in our figures.
So the main topics here I would like to point out that the sales organically is 8%. And this is the one that we are launching new products and we are creating our own world and our own universe and creating sales. And this is also making the brand more attractive.
But it's a tough market and we don't think that the market is growing. We don't have any official figures, of course, as you know, but it is a gloomy market.
We are also taking costs for new products that are not activating -- product development activities that are not activated and also marketing costs to drive demand. This is driving down the EBIT, as you've seen in the report.
But we are very proud of showing growth. But we actually want more that we have -- than what is showing today. And yes, we are continuing to grow and to invest more in product launches. And you will see this in the future.
As you know, you've seen this slide before, most of you. So in our investment in product and marketing, we are focusing on these 3 areas: pro still photographers on the top, film production to the right and large studio solutions to the left. We are -- new products may be sold in -- to more than one of these customer segments. For example, Pro-D3 that we launched during the quarter is mainly positioned for large studios, but we also see that individual pro photographers are buying this kind of product. And we have specific growth plans for all 3 areas.
So we launched -- in May, we launched the Pro-D3, which was the main driver of growth in the second quarter. It is designed to be the very best in large studios, and it was well received by customers and dealers. And we also see, which is very [indiscernible] that over the time now we see that sell-through at the dealers is very good. Customers like the product and this has, as I said, been a positive effect for sales in the quarter.
Lighting tools are very important for our customers that they enable the customers to work with their creativity to take better image. We launched 2 new types of accessories or light shaping tools during the quarter and this actually affects the attractiveness of the brand.
We also launched the L1600D, and this is great news for us. We are entering the large and vibrant lights for film production and we're doing this with a great product. It has a lot of power and low weight. So the power-to-weight ratio is absolutely the best in the industry. And this also makes it fast to set up, and it's enabling the film production set to focus on what is really important, the light shaping.
And we're basing this on our own HydroCTech technology. It's a unique cooling technology that enables us to actually make the products as attractive as it is.
The product was well received by the market. I was myself at the trade show in Los Angeles and talked to customers, and most of them were very happy. But one of the things we do is that we show it now, but we're starting to ship and invoice in the fourth quarter.
It is our first product into this customer segment. And we are continuing to invest in more products to come, but that will take a while. Right now, we're focusing on really entering the film production market because we also know, as I said, that this product will be sold into all 3 customer segments that I just talked about.
Product launches have a very important effect on our business and our sales and they are now a bigger part, let me see, of our sales. The new product sales is growing, you can see this that we now have 43% of the sales is coming from product that was introduced the last 3 years, and I expect this trend to continue.
And we are also continuing to increase our investments in new products, as you see on this slide. We are slowly growing our technology department to the next level and we're doing this in a very efficient way. We have a great tech organization. Right now, the ratio is 16% of sales -- the investments are 16% of sales. This is actually a high figure and we expect the ratio to fall and this is because we expect higher sales, not lower investments.
Last 12 months, we had 1 major product launch that affected sales, that was the Pro-D3. Next 12 months I expect to be able to present a lot of -- more launches. The investments that we did in 2022 and 2023 should be materializing in new launches in the coming 12 months.
Over to -- we should also do this, yes, sorry. We see growth and it's very pleasing to see growth in APAC, Asia; and in Europe, EMEA. Approximately 15% growth. The growth was not there in Americas. The reason for this is that we based on very challenging last year figures and we had a couple of big orders that affect -- that we had a very good quarter in the U.S. last year.
Over to you, Carl.
Thank you, Anders. And as Anders mentioned, I think the highlight really for the quarter for us is that we returned to organic growth, almost to our target level of 10% organic growth despite continuing to be a bit of a challenging market. And as we have discussed before, we can see that generally our customers, both large studios and individual professional photographers, are a bit cautious with their spend. And as we also has said several times over the last quarters, our way to deal with this is to introduce new products to give people a reason to buy our products. And we are very happy that we see the positive response when we introduced the Pro-D3 and the new light shapers.
We can also see that our margins are a little bit depressed in the quarter, and this is primarily driven by continued investments in products as well as in market activities in conjunction with the current launches and preparing for future launches. So while we were very happy with the organic growth, the margin is not where we want it to be or expect it to be going forward.
If we look a little bit on the longer-term trends then, this will come as no news. But over the last 12 months, our revenue was SEK 742 million, which is low and lower than the previous 12 months and this is primarily, as we discussed before, related to a weak market, but also very few product introductions in the last 12 months. We just had 1 major introduction and that was at the beginning of May.
So in the rolling 12-month numbers, we can see it's affecting both the growth and the profitability. But at the same time, again, we were happy that we have shifted the trend and that the LTM is up compared to where we were a quarter ago.
Operating cash flow and operating cash conversion is an important KPI for us given that we are running a very capital-efficient business model. So cash conversion in the quarter was 67%, which is kind of a normal level. I think over time, we expect to be somewhere between 60% and 75%. But as you can see here from the history, there's quite a bit of fluctuation in this, not least relating to product introductions, but there are also other natural factors that make this change a bit quarter-to-quarter. But over time, I think we should be at around the level where we were in Q2.
Another important metric for us with our business model is return on operating capital. And over time, we have achieved a very high return on operating capital. In the last quarter, it has declined a little bit and there are 2 factors in this: operating capital has increased as we continued to invest in R&D and capitalized a big part of the R&D expenses, but more importantly, in the last 12 months our profit has been a little bit lower than -- sales have been a little bit lower in proportion to those R&D expenses that we expect over time.
So while still at the high level, we should see being stronger over time even.
And then finally, from the financial perspective, looking at the balance sheet, it's really important for us to have flexibility to continue to invest in product development to drive future growth and also to be efficient with our capital and our cash. So we are happy that we are -- have a strong balance sheet with a leverage of less than 1x net debt-to-EBITDA even though we were able to return quite significant capital to our shareholders in Q2 with the dividend of almost [ 1/4 ] of our net income for 2023 and while we are continuing to invest in R&D and increasing those investments, as Anders mentioned before.
Summarizing a little bit on our performance when compared to our financial targets. Our EBIT margin target is 25% to 30%. LTM, we're just over 20% so that's below our expectations. But again, a weak market and with few product introductions, I don't think that's too surprising. Organic sales growth also below our target looking at LTM, but quite close in the quarter.
So we think it's important to highlight that we remain committed to these targets even though there are 2 quarters since we were there. And with investments we are making in R&D and the market, we expect to return to these targets over time.
That's basically the end of our presentation today. So I hand it over to the person taking questions.
[Operator Instructions] The next question comes from Amar Galijasevic from Carnegie Investment Bank.
A couple of questions for me here. First of all, just on the geographical exposure. You mentioned tough comparisons in the Americas region, but just trying to figure out is there also some underlying weaker demand in that region compared to the other geographies? Or how should we think about that?
No, I wouldn't say so. The reason for me saying that -- commenting on harder figures is I feel confident for the future in the U.S. at the moment. It is not weaker than -- we don't see any weaker demand. In fact, the demand is -- underlying demand is not so bad in comparison with Europe especially for Europe is, as you all know, affected by the lower economy.
Okay. And just a follow-up then. Are there any other tough comparison in the quarter in your view kind of going forward here, Q3, Q4? Would you say those were tough as well or will be tough?
I cannot answer. Yes, please.
No. No, I don't think -- I mean, I'm trying to think back, but no, nothing really that comes to mind for the coming 2, 3 quarters.
Okay. And then in terms of releases, you had the Pro-D3 here and a couple of other products in the quarter. How big would you say this quarter was in terms of releases compared to what we have ahead of us for the rest of the year? So if you have 100% of releases per year, how big was Q2? And then kind of how much do you have left for Q3 and Q4?
That's a very good question, Amar, but we cannot give you now a really great forecast quarter-by-quarter. The reason is that product development is a little bit like sailing, depending on how the wind blows. So depending on if we're successful because, in the end, you really need to get the products out. And we ensure, first of all, that the quality is correct and it could shift between the quarters.
So I can't -- but looking on this slide again, I would just like to point out that, overall, what we see in investments that we did in 2022 and 2023 we could clearly see that we are upping our investments and they will materialize. But I cannot comment on quarter-by-quarter, but generally, they are going up.
Okay. So we shouldn't see this as kind of an unusual quarter in terms of new releases.
No. But one should also remember that the underlying demand is not very bright. It is a challenging environment that we are in. And we have -- right now it's the summer period, summer in the Nordic region. The market here in July, in August, a lot of -- not a lot of things are happening, as you know, and around the world, especially in Middle Europe and in the U.S. is kind of slow. Then we have September. And then we have the end of the year and we hope.
But we are striving for our targets of 10% growth and 25% to 30% profitability. And we are -- our focus is to come back to that on the forward-looking trend now. And we will have generally more launches than we've had historically. That's the only thing I could say around this. But exactly when they would fall out, I cannot promise you actually anything to that.
Okay. That's helpful. And I think this leads me on to the next question then in terms of capitalized development costs here. It was a bit of a step-up here in Q2 from the level over the past couple of quarters. Would you say this level of around SEK 30 million per quarter is kind of the new normal going forward for you guys?
Carl, could you handle that question, please?
Yes, sure. I mean, we see, definitely see, a higher level of activity in product development in our projects, which leads to higher capitalization. And you also saw Anders showing the slide with how much we've increased our overall spend in R&D.
So I mean, yes, the trend is clear that we are up.
So will you -- are you kind of happy with the level you're at now? Or are you looking to accelerate that further?
Overall R&D investments?
Yes.
You want to take that, Anders?
Yes. They will slightly increase from the level that we are generally, but I would say that we've had the period of increase for a while now. But in terms with when we see that the growth will come back and we increase our sales, we will also up our investments in technology. But a slow and controlled increase, I would say.
Okay. That's very helpful. Final two here. Sorry for a lot of questions. You mentioned in the report that you're going to launch a sales and marketing organization in L.A. Are we seeing any of that in the numbers right now? And if not, just roughly -- then roughly kind of how much does that cost? Are we talking SEK 10 million a quarter or SEK 5 million or SEK 15 million?
Much lower. It is -- we are moving existing -- Sara Strid who's based here in Stockholm, she's moving in the beginning of August and we have another person moving and then we are relocating 1 or 2 persons in -- already based in the United States to California and then we will take it from there.
So I would say the slightly higher cost because we are renting a small office in the office hotel. We are -- the costs for staff is slightly higher in California than it is in Stockholm, but it is way lower than the figures that you're talking about.
So we see this as an important thing to be local in the market. This also gives us confidence to invest more in the U.S., but we have not taken any decisions on very high investments like that. However, we will follow the sales -- hopefully, the sales growth that we will have, we will continue to invest more in sales and marketing.
The other thing is that we also when we are launching more products, we will have slightly higher, but it is not significant. It will follow sales or slightly below sales growth, actually, the cost growth for marketing. That's what we are planning for.
So there is no -- it is a slight increase, but not in the figures that you were talking about.
Okay. Very clear. Last question for me here. Just on the loan here, what was the reason behind taking out this new loan in the quarter? And just what are the terms on that?
So we didn't take up a new loan. We just used our revolving credit facility in conjunction with our dividend.
The next question comes from Marcela Klang from Handelsbanken.
Congratulations, guys, on the strong growth in a tough market. I actually had the opportunity to speak to a couple of professional photographers recently and definitely got my -- got the confirmation that Profoto is a given for anyone that wants to be involved in the business and they directly started looking up your new product.
Amar had many good questions, I have several more. Regarding the latest launches, have you been able to take out your typical price premium for a new product compared to older version? Or have you given any kind of preorder discount? What I'm looking at is that the gross margin was definitely strong, but still slightly lower than last year. So have you been able to realize your typical price premium?
No. We are never giving discounts in the beginning of any product launches. That's an absolutely a no. So that is not the reason for the lower gross, and the customers are happy to pay them for the price level that we are asking. And we are a premium brand and this is, by far, a premium product that we are charging, justified for.
But maybe you could comment on the gross margin if you want to do that, Carl.
Yes. Sure. No, on the new product, the Pro-D3, the price level is higher than the product in the same category, which was Pro-D2. So we did manage to raise the price and we have a good margin on this.
In the second quarter last year, we had a lot of sales of our generators [indiscernible] where we have a slightly higher gross margin than the average of our portfolio. So I think that's really the main reason for slightly lower gross margin. We also ran campaigns on a couple of our wedding season products, the A10 and the A2 and the B10X so -- with also a little bit of a mix in there as well.
And in the positive first reaction, was it the clients that have ordered this new product? Or was it a higher share of distributors filling up their inventories?
So in the beginning of all launches, we fill the stock at the dealer level. But normally, the stock is not very high. It's a couple of lights. It could be one to show, one to go for the smaller dealers and then some of the larger they fill up their stock. But in this kind of product, the stock fill is not monumental.
But what we see afterwards and towards the end of the quarter is that we also get replenishment orders from the dealers, which gives us the confidence that the customers love it. And going further now into a couple of days into this quarter, we see more replenishment orders.
It is sold to customers, used by customers and more customers are buying. So we feel confident about the success of -- that it's working in the market, like it should do.
However, one should say on this kind of product it goes to large studios. And large studios, they work more like a project sale. So normally, it takes longer time to make decisions as if you compare to individual professional photographers, which are buying directly when they want to have a product. But whereas large studios, they need to get the funds. They need to plan how to work with the products. And we know for a fact now that some of the biggest studios are looking into actually using this as their standard product for lights. But this will take some time before we get the really large orders because that will take a couple of months or even quarters actually.
Yes. And basically, the Pro-D3 launched as late as in May during the quarter and still you had this impressive organic growth. Was this affected by any kind of preorders? I know that we have already touched upon that. Or otherwise, if not, a bit both for a strong Q3 in my view.
No. But we started weeks before to send an invoice to dealers and build their stock prior to the official launch the 7th of May. So I would say order from the beginning of the quarter we started to ship the product and invoice the product. So it has affected the full quarter.
Okay. So almost the full effect of the...
Yes. I would say a full quarter.
Full quarter effect on the second quarter. Thank you so much. Sounds really exciting and promising. And I hope to see more in the coming quarters also from the other product launches.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you. And we have not received any written questions today. So I would like to thank you all for joining us this morning, and a gentle reminder of the Q3 report, which will be published on the 24th of October. Thank you.