Profoto Holding AB (publ)
STO:PRFO
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Earnings Call Analysis
Summary
Q3-2023
In Q3, Profoto saw a 29% organic sales drop to SEK 172 million amid tough macroeconomic conditions, with no major product launches in the past year. The EBIT margin fell short of the 25-30% goal, hitting 20%, though gross margin improved slightly to 70%. Over the past 12 months, sales went down by 3% to SEK 813 million, with a margin of 29%, keeping within targets. The net sales growth target remains at 10%, a mark the company is currently not achieving. To counter the downturn, Profoto is heightening product development efforts with plans to exceed the number of launches within the next 12-36 months. The company is actively engaging with customers and retailers to fuel investment interests and develop products tailored to the lively market for visual content creation.
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Good morning, and welcome to Profoto's Q3 telco presentation. My name is Amanda Åström, 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. Thank you for listening in. So our Q3 highlights is that we had a healthy profit margin with an EBIT of 35% but sales was down with 27% for this quarter. So this presentation, we will change the order a little bit and we will start with going through the figures, and I will hand over to Carl. Please, Carl.
Thank you, Anders. Yes, as Anders mentioned, sales declined organically by 29% to SEK 172 million. The drivers behind this, I think Anders will cover a little bit more later. But as many companies, we are facing challenging macroeconomic conditions, which is impacting the will of our customers to invest in the short term, and we can see this trend across regions.
Also at Profoto, we don't really like to blame the market. So another factor behind the weak sales is that we have not introduced any new products for the last year, whereas we normally introduce a couple of larger products every year. And we will discuss this a little bit later.
At this level of sales, per quarter, it is a little bit challenging for us to reach all the way up to our EBIT margin targets of 25% to 30%. So EBIT margin for the quarter was 20%, which, as Anders said, is still healthy, but not up to our targets. I think on a positive note, our gross margin is staying high and actually improved by 1 percentage point to 70%, which again, yes, a positive.
Looking at the last 12 months, sales declined 3% to SEK 813 million. And margin for the last 12 months came in at 29%. So we're still clearly within our target range when we look at 1 year's performance.
Going back to the quarter and looking at performance across our regions. It's clear that we're facing the same challenges across our region, both Americas, APAC and EMEA. We see that macroeconomic climate and the lack of product introductions is impacting the demand for our products.
Talking a little bit about our operating model. As I think many of you know, we have a capital-light operating model. And over time, our cash conversion -- operating cash conversion is quite high, between 50% and 100% and averaging somewhere around 70%, 75%. In the second quarter, we were down to 20% because of some timing issues on receivables and payables. Now in Q3, where we're back to a better level of 54%.
So continuing a little bit on the operating model and how you can see this now in our financials. In this quarter, we have added two metrics to our quarterly reports, return on operating capital and return on capital employed, to highlight that we have a capital-efficient operating model. And looking at performance of return on operating capital, over time, you can see that it's really, really high. Even in a weak quarter like this, we have 57% return on operating capital which, again, is very good.
Another aspect of our balance sheet is that we have rather negligible debt of SEK 88 million and very low leverage, which is really positive because this gives us the flexibility to continue to invest in product development and to continue pursuing M&A opportunities. So this gives me a lot of comfort in these uncertain times.
Summarizing the financial section of the presentation then. Our target for net sales growth organically is 10%. At the moment, we're quite far from that, unfortunately. And at the current sales level, as I mentioned, it is challenging, too, for us to reach all the way up to our EBIT margin targets. So we're not happy with where we are on our financial performance.
And I will now hand over to Anders to discuss how we are managing this situation. Thank you.
Thank you, Carl. So let me start with taking one step back and talk about Profoto. Since the IPO in the stock market, we communicated that -- what Profoto is, and Profoto is the leader in the global niche in content creation. And we are basing our sales on -- that the brand is used by the very best photographers in the world. We have a very long history of growth and profitability and more than 50 years of experience. We were founded in 1968.
Our focus is to bring out new products to the market and focus on what the customer are needing, follow the customer needs and the preference of the customers. We drive the company like entrepreneurs. We all have, and all employees have an entrepreneurial spirit and drive.
So we are the world leader in lighting products for studios and professional photographers. And we are active in the large imaging content creation market, where we are the leaders in one smaller segment, which is called photography lighting solution. We are making products, innovative products, that are flashes and light shaping system that are used by the very best photographer, studios and brands all around the world.
We sell everywhere where great photography is made. So we have a global distribution. We focus on high organic growth and high margins. This means that we need to invest heavily in innovation and new products. And we do this -- we focus on exactly this because everything else we try to outsource. And this is also driving our operational efficiency. This also means that we need to always hire the very best staff.
So for 20 years, we have had approximately 1 or 2 launches per year, and this has driven the organic growth which has resulted in a plus 10% growth over the years. And this is in a market where -- which has been growing 3% to 5%. And this graph shows clearly when we are launching new great products, we could see a hike in sales.
We can also see this -- that in the large share of sales is coming from new products. This graph is showing sales from products that were launched the last 3 years. And now we have had no major large product introductions the last 5 quarters. And you can see the result of this is the slight fall from 65% to 51% between 2022 and the last 12 months. And this is one of the reasons why we are seeing a lower or a decrease in sales this quarter.
What are we doing to actually counter this then? So we continue what we're doing. We continue to invest heavily in R&D. We continue to talk with customers and bring out -- start new product development projects. Because now, when I'm looking back, even if it was right at that time during the pandemic, 2020 and also 2021, to lower the investments and lower the cost in the whole company.
When looking back now, we can see that we have -- this has resulted in a hole in our launch pipeline. But already, 2021, we took the decision to actually increase the product developments, investments and -- with a higher efficiency that we had prior to the pandemic.
So now, for the future, our target is to exceed the number of launches in the time frame from 12 to 36 months looking ahead. And the reason for this time frame is that R&D project for us is approximately 3 years or up to 3 years.
We are investing in the three areas that we earlier communicated. And as you remember, our core is the black area in this image, it is light shaping for professional still photographers. And this is the core. This is what we've done since '68.
We have two growth areas that we are also investing in. We have communicated quite a lot and done quite a lot in the e-com workflow solutions area, where we are adding much more software to our product offering, software combined with hardware.
And the third area that we're looking into is continuous light or light shaping for moving images, that is everything for -- from smaller video productions, still and large film productions. We are investing and we're having projects and talking to potential acquisition targets in the three areas.
The other thing that we're doing, we are working hard with the customers. We are and all of us, and I am, on my own, also spending more time with customers. We are traveling more. We are visiting more retailers and large studios to discuss future investments and promote our product offering, which is now based on hardware and software combination.
This is a -- to the left, you could see an image from the trade show Bild in New York in Jacob Javits Center, which was held by our largest dealer, B&H. And it was really great, actually. I was somewhat hesitant for trade shows since a couple of years. But actually, this trade show is one of the best trade shows since the last 10 to 15 years that I visited.
I worked myself in the booth talking to customers and actually looking into their interest and discussing their interest in light shaping for content creation. And we could clearly see that we had a lot of interest for our products and for the industry as a whole. So we not only discussed product sales at the moment, but also, we gain a lot of input for new product development.
So the market for visual content creation is very vibrant. It is a lot of interest that we can see in this market at the moment.
And that is it. Thank you very much.
[Operator Instructions] The next question comes from Amar Galijasevic from Carnegie.
Maybe I missed it earlier, but could you provide us some more color on what you currently see in the market in terms of demand? And if anything has changed so far during the start of Q4 here compared to the tougher climate we saw in Q3?
We currently see is the same trend continuously. We see a demand. It's -- normally Q3 is -- Q4 is slightly higher demand coming into the end of the year season. But the market is the same as it has been during the year, I would say.
Okay. And just a question here, trying to understand how we should interpret your goal of reaching the historical rate of releases. Are you saying to reach 1, 2 releases per year in the coming 12 to 36 months, which is quite a wide time span? Could you provide us any more color on is that tilted towards the end of the time period? Or should we interpret that as you don't expect to have any major releases in the coming 12 months, if possible, to just get some more color on that?
The color is that we -- during the pandemic, we saved costs, and we restructured as the company in the way that we were -- became fewer people. And that's why we could see that investments in 2020 was lower than the one in 2019. And we see that -- and then we started slowly in 2021 to increase the investments in R&D, and we started a project.
Some of them, we launched a couple of quarters -- 4 quarters ago. The last major launch was end of Q2 last year -- last day of Q2 last year. And since then, we've had launches of accessory but not major lights, which is -- and this is important because when we launched major lights, we're also doing stock fill of the whole distribution chain. So we always see a good sales increase in the beginning of the launches -- slightly after launches or during launches.
And the projects are normally between 2.5 to 3.5 years. So that's why we should -- you should expect during next year to see more launches and that we, at least, would do 1 to 2 launches per year following that or more actually, since we are more efficient also nowadays in our product development that we were historically prior to the pandemic.
Okay. And then just to understand here, so when you launched the last major release here, Q2 last year, did you know that you wouldn't have any big releases in the coming 5 quarters? Or has there been any delays on the way?
I mean, product development is like this that you need to pass technological hurdles. And sometimes you do this much as you expect or faster and sometimes it takes longer time. So some projects -- we have several projects, obviously, going at the same time. So some projects has followed the time line and some projects has been delayed because of tech hurdles that we needed to pass.
And this is not only bad because it also means that it is not so easy to actually bring out that kind of product. But I'm very, very confident with the operations in R&D that we're having at the moment.
Okay. That's super helpful. Just a final one on the gross margin from here. So it's been around 71%, 72%, 70%. Has anything changed there in terms of input prices? Or what's the dynamic there? What should we expect going forward?
I mean, we don't really talk about what we expect going forward. But what we see in the gross margin in the quarter is a little bit higher input prices on some of the components, but less cost related to sort of disturbances in the supply chain, and that has netted out. So we're at a good level, we feel about 70%.
The next question comes from Karri Rinta from Handelsbanken.
Firstly, following up on the gross margins. You mentioned in the release that you have intensified your effort when it comes to sales and marketing, and you will probably continue to do that. So a, how exact -- what exactly have you done or plan to do? I know that you probably are not cutting prices, but are you sort of incentivizing retailers to become more aggressive on promotions, bundling or any of those types of measures? And do you expect those to have any impact on your gross margins? That's my first question.
First impact on gross margin, not really.
No. I mean, we have done -- we did some of that already in the spring. We have done that also in Q3. If you follow us online, you can see those kind of things. And that's already baked into the gross margins where we are at. So I wouldn't expect more impact than you've already seen.
No. So what we're doing is to continue what -- in this quarter, what we did last quarter. We had some price promotions where we had buy this and get an extra that. And that -- we will continue to do. And the reason for this is that we get the attention of the dealer staff when we do that. That is number one.
Number two that we do is that we have increased our efforts in doing qualitative events, especially in the U.S. market that we're now bringing out in all other markets. And for us, we change the way of doing marketing so that we're actually ensuring that all the activities that we do are profitable.
But at the same time, this is sometimes hard, but we have increased heavily the last 3 months, a number of that kind of activities. And this is like we have a photographer with the dealer gathering 10 to 20 customers and showing how our products are working. And this is -- it's always a -- nearly always very good for us. And we can measure that through product registrations on our web. So that is what we're trying to do all over the world at the moment.
All right. That's very helpful color. And then the other focus area now, investment in new product development. So again, the same question, so do you add your own headcount? Or do you hire more consultants and more sort of external work? So how exactly should we expect this to hit your operating expenditures in the next 12 months?
No, I think that we're on a healthy level on R&D headcount at the moment and the expenditure or the investments in R&D. We don't see a major increase because historically see the increase in the figures that we showed that we have increased the investment. And that -- I'm very confident that this will result in new launches in the future. But things take time.
Okay. And then the final question related to R&D and this slide where you show your core growth and to growth areas. So in the last 3 years, how have you allocated your R&D budget to core and to these growth areas? And we have been talking about light shaping for quite some time. So can you share a ballpark number of how much of your R&D budget have you put into light shaping since...
Not really -- one of the reason is that one of them is that when we invest in products, they could go into all 3 or 2 of the areas because the products that are selling to individual photographers, which is the core also is selling to e-com and vice versa.
And the same thing goes with -- we know that if we would launch products in -- LED products for film and video production, a lot of e-com as well as individual photographers will buy those. So that is one of the reasons.
The other reason is that we really don't want to communicate exactly how we allocate the resources for a lot of reasons. So -- but we are investing in all of those areas. But you can see that most of the money goes into our historically flash products.
Yes. Sorry, if I would say that because you have invested so much for LED products that are -- that you still haven't launched, that you haven't had the budget to keep up your core portfolio, then I would be wrong.
No, no. That's not case. That is not the case. So don't worry about that, Karri. So I've been in this industry now for more than -- between 25 and 30 years. Our legacy, and we see a lot of interest for film and flash products. We're developing our Xenon and flash capacitor charging technology in order to actually make this more efficient. We are not moving over to only to new areas like -- the new areas for us are software as well as LEDs. But we are -- for instance, we're adding LED light into the flash products.
All right. And then finally, a small detail. These trade fairs can sometimes be expensive, so was this New York trade fair in Q3? And was it expensive enough for you to attend that it had a, I don't know, a noticeable impact on Q3 profit?
No, no. It had did -- it did not. And we were -- so this is affordable. It is not -- and this is -- the reason is that it's not the trade show companies doing this. It is B&H, our large dealers. We have a great contact with B&H. They are our biggest customer, as you know, and they are also driving the industry in a very good way.
And it was very clear that the purpose of the event was to sell.
Yes. And it was to sell, and it is...
None for us.
Yes. Normally, we're not allowed to sell at trade show, historically. Now trade shows, that was one of the reasons why trade show disappeared in our industry. So this was good. We took -- we needed to fill their stock during the trade show during the first day because they didn't have enough of how much we sold. That could be an indication how good it was. It could also be an indication of that they didn't have enough stock.
So -- but in the end, we saw a lot of interest. We see some hesitance. As you know, we clearly communicated of customers taking the decision. But as I said, this is the best trade show I've been the last 15 years.
Yes. Okay. And then just finally, APAC, pretty -- the deviation to my expectations was the highest in APAC. So is it China? Is it Japan? Or is it the whole region that was weaker than expected?
I think we would mention this before as well, we were hoping for a pickup -- better pickup in China as I think with many companies, but we have not really seen China performing better than other geographies in terms of demand. So that may be a little bit below expectations, but it's consistent with what we saw in Q2.
All right. Then you're correct, not every company is saying the same about China.
Great. And I have also received a written question here. Could you please give a split of sales between customer groups, for example, how large part of sales comes from the e-commerce workflow solutions? And is there any significant difference in the band from an end market perspective?
First of all, we don't -- we communicate the whole of Profoto plus 1 business segment. So we don't share that. Secondly, it is not easy to do on the customer level since we're selling indirect. So we're not able to do that, unfortunately.
But talking about demand and our perception and discussions with e-com studios, professional photographers, the dynamics are very similar. So to Anders' point, we get a lot of interest. There's a lot of content being created, that is clear. But this economic environment and the higher interest rates makes our customers cautious to invest.
And I think one dynamic we see here, which Anders' mentioned as well, when we do like instead of carry, we do some bundling and activities, our customers come back and buy our products, but then we need to create some reason to buy now basically in this market environment. And this is also, again, why it's so important for us to introduce new products. And we and R&D team is working really hard on that, and we're quite hopeful about what we will be able to introduce over the next 12 to 36 months again.
So all in all sales is down. We have still -- for that, we have a healthy 20% profit margin, EBIT margin. Our return on investment capital is over 50%, and we feel confident for the future given the pipeline and investment that we're having in new product introductions. So thank you very much. Do you have any more questions, please?
No, we have not received any more questions. So thank you for joining us today. And a gentle reminder about our fourth quarter report, which will be published on February 6. Thank you.
Thank you.
Thank you.