Profoto Holding AB (publ)
STO:PRFO
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Earnings Call Analysis
Summary
Q4-2023
Profoto's fourth quarter saw a sales decline of 12% with organic growth down 10%, but EBIT margins reached the target of 25%. Despite a 13% drop in organic sales year-over-year, the company kept up a solid 26% EBIT margin. Throughout the year, operating cash conversion was high at 93%, and the ROI on operating capital stood at a robust 49%, factoring in the full-year effects of the StyleShoots acquisition. Investments continued in new products and acquisitions to spur growth, backed by a low-leverage, strong balance sheet. While global sales contracted, Asia Pacific grew by 2%. Two major product launches are expected in 2024, with a focus on professional lights and workflow solutions. The company remains committed to a long-term investment strategy in R&D, with the aim to return to around 10% R&D to sales ratio by 2025.
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Good morning, and welcome to Profoto's Year End Report for 2023. My name is Amanda Astrom, and I am Head of Investor Relations. Today, I have with me Anders Hedebark, our CEO; and our CFO, Carl Bandhold, which I will hand over to, to give you some highlights for the quarter and year.
Hi, everyone. Thanks for joining us today. I will take us through the numbers for the fourth quarter and some of the highlights from the years, and then Anders will go into a little bit more our strategies for managing the situation right now and as we're heading into 2024.
So fourth quarter, we're proud that we achieved our EBIT margin target of 25%. Even though sales declined 12%, organic growth was minus 10%. So, profitability is [Technical Difficulty] everything we do is one of our core values at Profoto. This means that we are very careful with using our own resources, and we focus a lot on creating shareholder value. So, it's important for us to return any excess funds we have to our shareholders if we don't see opportunities to invest them profitably in our core business. The Board has, therefore, recommended a dividend for the year [Technical Difficulty] distribution in total. And the background for this proposal is that we have good confidence with prospects heading into 2024, which I'll discuss a little bit more later on, as well as a very strong balance sheet that will still allow us to invest in all the growth opportunities we want to pursue throughout 20- [Technical Difficulty] even with this distribution.
Looking a little bit at the sequential development, I'm again happy that we achieved our EBIT target of 25% in the fourth quarter after being at 20% in the third quarter. Also, even though our sales declined 10% organically, the momentum makes [Technical Difficulty] so we were happy with that.
So, I guess, discussing a little bit why we're declining in sales, as we have discussed in the last few quarters, demand from our customers is a little bit weak and has been. And our customers, professional photographers and large studios and e-com studios, are a little bit careful to invest still we can see. We can see a little bit longer sales cycle on our larger studio products and automation products. And we also see, as we mentioned before, we really need to give customers a good reason to make a purchase today rather than postponing.
So, during the quarter, we worked really hard to continue to increase our market activity, both with our customers and with our dealers. We also ran a couple of campaigns to attract new customers to the Profoto systems, which was really successful. So, we have a lot of new customers going into the year, which we're very happy about. All that said, though, we declined across markets generally. The only exception was Asia Pacific, where we grew 2%, primarily driven by China and the pickup in demand heading into the Chinese New Year.
Looking at the longer-term trend, again, EBIT margin is still within our target range of 25% to 30% at 26% for the last 12 months. You can see clearly from the chart though that EBIT margin has decreased sequentially. And the main driver here, of course, is that revenue declined 13% organically for the year. All that said though, our first priority is profitability, and we're happy to be able to maintain a good profitability in these challenging market conditions.
Heading in a little bit to our cash flow and balance sheet, the cash -- operating cash conversion in the fourth quarter was 93%, so quite high, significantly higher than the most recent 2 quarters. And I think, more than anything, this is a reflection of the natural seasonality in our business and the fluctuation in working capital that is quite ordinary.
Of course, with a focus on being profitable and creating shareholder value, return on operating capital is an important metric for us. So, for the year, we were at 49%, which is a very high level by any standards other than our own history, I would say. So, we declined a little bit over the previous year, and a big part of this, of course, is the decline in profit level, but we also got sort of full year effects from the StyleShoots acquisition that we did in the second quarter of 2022, so the operating capital grew a little bit more.
And with the lower profit, of course, the returns came down a little bit. That said, we want to continue to invest in product development, and we want to continue to invest in acquisitions to drive growth, as we have been quite clear about in recent quarters, and Anders will discuss more in a few minutes.
We see that we drive growth with new products, which means investments. So, we're very happy that we have a strong balance sheet with a very low leverage, which will enable us to continue to invest in product development at the pace we want in 2024 and continue to pursue adjacent acquisitions as well as distribute SEK 150 million to our shareholders. We're very happy with the balance sheet.
Summarizing then, as I started with, we reached our EBIT margin target range of 25% to 30% with 25% in Q4. We did not reach our sales growth goal of 10%, clearly, as we were at minus 10%, but all in all, this finish to a challenging year.
Maybe, Anders, you would like to summarize the year a little bit and take us through our management [indiscernible].
Of course, yes. Thank you, Carl. Very short about the full year, which you have seen in the report already, despite organic sales growth of minus 13%, we are managing to actually create quite good profitability with an EBIT margin of 26%. And for that, we are very proud, and that is based on that we are really, really controlling our costs. But basically, all our action has a purpose, and we ensure that the purpose is valid and has a value for the customers, so a lot of our time is spent on developing new products.
But let me just take you short through who we are for the new-comers listening in to our report. As you know, we are premium positioned in a global niche, and there is a rather high barrier to entry into the niche relative to the size of the niche. And we are known for being used by the very best photographers all around the world. We have a long history, more than 50 years of experience doing -- catering for the best photographers, best fashion photographers. We have a high [Technical Difficulty] and we are offering quality products for growth.
[ Internally ], we have a very [Technical Difficulty] and a drive to get things done drive change. And we are active in the large growth creation market. And our position is the premium photography lighting solutions. And we have a [Technical Difficulty] which is innovative and easy to use, and they're based on flashes software and the light-shaping system that goes with it. We're used by the best photographers and leading studios and leading brands all around the world. We have a global distribution. We sell our products everywhere where quality photography is made.
Our focus is on organic growth mainly and doing this with high margins. This means that we need to have large investments in innovation. It also means that operational efficiency is key.
One of the things that we do is we outsource everything that we can outsource, so we do not own our own factory. Even our accounting is outsourced. This also has the effect that we need to hire only really high-quality employees that are willing to drive change and manage their part of the business, so only hiring the best. And at the moment, and you can check our website, we are hiring a lot of people that are going to continue to drive our technology development. So, we're looking both for electronic and mechanical engineers as well as project managers. So, high-quality engineers is a key factor for our future growth.
And during the last year, we continued to invest hard in R&D. And you can see here on the graph that we invested SEK 99 million, and that is 13% of the sales. So, it's up because -- the 13% is up because of a higher investment in krona, but also, because of that, the sales is dropping, so that's why you see 13%. And this is important because you can find the long series of sales -- you can see that the growth that we have historically created is based on launches of new products. And we believe that this is also the future. When we launch, we believe that we -- if the market is stable, we believe that we will sell more.
And we could also show that large share of sales consistently comes from new products. In the last 12 months, it has declined, and the reason is very simple. We have not launched any major new products during 2023.
And where are we investing? We are primarily investing in our core, in the black part here of the slide, in the core, which is for professional lights for professional photographers to create still images, both for private use, like wedding and portrait, but also for professional use.
We have 2 other growth areas. We have started to invest quite heavily actually in workflow solutions with the 2 acquisitions that we've done, but also with our own product development that is joining and actually integrating the whole system so that we have one system that we offer mainly for e-com and large content studios that create many, many both still and video content. And the third area is, which we have talked about for a while, light for film production.
So, that's all. Questions, please?
[Operator Instructions] The next question comes from Fredrik Reuterhall from Redeye.
I want to start off talking about the U.S. I mean, we have seen the U.S. growth and labor market coming out pretty strong in the fourth quarters. And I think this should boost demand towards online shopping and advertising, especially in the U.S. market. And can you talk about what you see in terms of demand, especially from East Coast photographers and studios at the moment?
East Coast? Did you say that?
Yes, sir.
I don't have a specific East or West Coast. We have -- we've closed quite some deals, larger deals, on the West Coast, especially for e-commerce or studios that do content production in that scale. So, that's where we see that.
We also see -- overall, as you know, we see a decline in sales, and the decline is lower in the U.S. than especially in Europe where we have a higher decline and driven mainly by the sales or the drop of sales in Germany. So, all in all, we believe that we should be able to do more in the U.S., especially for the future.
Okay. Moving on, you talked about product development. You spent SEK 29 million in the quarter, and it's clear that you increased the pace last year.
Yes.
And you write that you aim for 2 major product releases during 2024. But can we also expect a number of smaller product releases?
We upped our game substantially. And we can see that -- we see that we at least will do 2 major launches this year. I cannot talk about all the details. But around that, there will be light-shifting tools, and there will be also some software development that we also treat as launches that we will launch into the market. And what is good with this is that, when we launch one type of product, we see demand of other kinds of products also increasing, and that actually puts more focus on the brand, which is good. So, many launches is generally good.
Okay. You also said software development. Can you give us a breakdown? It's, like, 80% hardware and 20% software or...
No, it's -- we've just started with software. We are not giving any breakdowns on this, and it's actually much smaller in terms of sales numbers, short-term sales numbers.
Yes. And I'm thinking about looking into 2025. I mean, will you still be at this level of sales, you think? I mean, about 13% compared to it's been around 10% historically?
So what sales? Can you repeat that, Fredrik?
On the level of R&D, I mean you're...
Ah, 13%.
[indiscernible] sales now. Yes. [indiscernible] 2025.
Yes. No, over time, we try to be around 10%, I think, speculating, we will be in 2025. It's very early, but I think we will rather be around 10% than 13% over time.
So, the way that we control this is that we are loyal to our investments in R&D and in technology. And this is very important because these are long-term projects, and you do not just close the project if you believe that there is a value coming out of it in the end of -- when they're finished. So, this means that we will slightly continue to increase our investment, and it's based on efficiency so that we ensure that we do the right thing and that we're efficient in each project. It also means that if sales goes down like it did last year, the percentage goes up. But you should not expect any major ups and downs, that this is not short-term control. This is really a long-term investment. But you need to keep stable.
Yes. So, the projects are typically 2.5 years, 3 years. And we're not going to stop projects that we believe in just because revenue is a little shorter quarter or year.
True.
Okay. It makes sense. You wrote about your campaigns during the quarter. I'm just curious. What kind of product is it? And in what regions have you been pushing these campaigns?
Normally, when we do campaigns, we do them globally. So we pushed especially the Pro-11s to ensure the replacement of older products like Pro-8s and Pro-10 to Pro-11s. That is the most important campaign that we've done.
And then we did a campaign on A2 to attract new customers. That's one of the key entry products for us.
So, basically, what we do is we place -- with different actions, we place focus in the sales channels to ensure that the sales guys, at the dealers, they spend time talking about our products with their customers.
Okay. And my last question here, and I will go back in the queue. I was looking at the inventory levels as part of your sales. I'm looking at the rolling 12 months. And it's been quite stable for around [ 16%, 17% ]. But the last quarter, it looks like it's inching up a bit, and this quarter, it was almost 21%. And I wonder if you can talk about your first strategy regarding your inventory efficiency now and then after product launch and what we can expect going forward.
Yes, so talking about -- the increase in Q4 was primarily driven by us moving our warehouse, our main warehouse, in Europe from Sweden to Poland. And therefore, we sort of ran with double warehouses for a little while over the year-end. This, I think, explains most of why it was high in the year-end.
I mean, then the workflow through product introductions is definitely an interesting question. Of course, we build up a little bit of stock before we introduce the products so we will have enough stock, and we will enable our dealers to order enough to support the launch. So, that depends a little bit on when in the quarter a launch will happen. So, if a launch happens very early in the quarter, we may have high stocks the quarter before. But this is only a few weeks or months when the stock levels change in conjunction with product introduction. So, I think trying to forecast that externally is very challenging.
The next question comes from Karri Rinta from Handelsbanken.
First, a clarification and a follow-up to the last comment that Carl made because I lost you there for a while, but you were saying that the inventory increase in the fourth quarter was purely related to the moving of the warehouses. And then, when you are approaching new product launches, then you might build inventory, but you were not saying that the fourth quarter inventory buildup was related to that. Is that a correct understanding?
Yes. The increase in the fourth quarter was primarily driven by the warehouse move.
All right. All right. Okay. And then, about these 2 new products, the wording in the release suggests that at least one of these is coming towards the end of 2024. That's how I read it. So, will both of these be released in the second half of the year, or could we see one of these products released even earlier?
Karri, Anders here. We don't really -- as you know, we'll not disclose all the details exactly when they will arrive over the year.
Okay. All right. All right. But you feel confident that it will be 2 new products in 2024, yes? Okay. [indiscernible]
Yes. Yes.
Good. And then you also mentioned that you are working with new products in all of these 3 categories, including field production.
Yes.
So, is one of these new products meant for film production?
I cannot comment on exactly what they are, neither of those 2, because -- but we really communicated last quarter, I think, also that we are working on that. But rest assured that we will find a way to enter the film market at one point in time.
Okay. All right. And then finally, Carl, you showed a graph where you typically have lower margins in the first quarter. And when I look at the operating expenditures that was in the fourth quarter, it seems that it will be difficult to retain 25% margins in the early part of the year. And I mean, I know that there will be quarterly fluctuations. But maybe, in these operating expenditures in the fourth quarter, is there some extra -- well, not extra items, but these campaigns that you have done, promotions that you have done, something that would sort of be specific to the fourth quarter related to these campaigns that is not there going forward? Or are these operating expenditures that you had in the fourth quarter a good reflection of what we should expect going forward as well?
No, I think the fourth quarter is reasonably representative. And the main drivers of differences across quarters in the coming year will be product introductions. And I know that doesn't help you much since we don't communicate exactly when they will happen, but we are at a good level now, we feel, and the differentiation will be sort of discretionary spending in conjunction with product introductions.
Okay. Okay, so but is -- I mean, SEK [ 15 ] million in other external expenses, nothing to sort of point out there. It's just that sometimes these costs are higher and sometimes they are a bit lower and now they turned out to be a bit higher.
More or less, yes.
[Operator Instructions]
Good. And we have not received any questions through e-mail. So, I just want to thank you for joining us today and give you a gentle reminder about our quarterly report for the first quarter, which will be published on May 14. Thank you so much.