Profoto Holding AB (publ)

Good morning and welcome to Profoto's Q2 telephone conference. My name is Amanda Åström and I'm head of investor relations. Today I have with me our CEO Anders Hedeblik and our CFO Karl Bandholt. 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're here to present the second quarter in our figures. So the main topics here, I would like to point out that the sales organically is 8%. And this is based on 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 the 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 than we're 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 three areas. Pro still photographers on the top, film production to the right, and large studio solutions to the left. 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 three areas so we launched in may we launched the pro d3 which was the main driver of growth growth in the 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 annoying, 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. Light shaping tools are very important for our customers. They enable customers to work with their creativity to take better images. We launched two 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 rate is absolutely best in the industry and this also makes it fast to set up. And it enabled us on the film production set to focus on what is really important, the light shaping. And we're basing this on our own Hydro C-Tech 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 an 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 three 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 here. of our sales, and they're growing. The new product sales is growing. You can see this on the, that we now have 43% of the sales is coming from product that was introduced the last three 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 one major product launch 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. We should also do this. Yeah, sorry. We see growth. It's very pleasing to see growth in APEC Asia and in Europe EMEA. Approximately 15% growth. The growth was not there in Americas. The reason for this is that we're based on very challenging last year figures and we had a couple of big orders that we had a very good quarter in the US last year.

Over to you Carl. Thank you Anders. As Anders mentioned, I think the highlight really for the quarter for us is that we return to organic growth. Almost our target level of 10% organic growth, despite it 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 have said several times over the last quarter, 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 that the positive response when we introduce the pro d3 and that and the new light shapers um you can also see that our margins are a little bit depressed in the quarter and this is primarily driven by continued 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, this will promise no news, but over 12 months, our revenue was 742 million SEK, 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. So we just had one major introduction, and that was at the beginning of May. So in the rolling 12-month numbers, we can see growth and the profitability. But at the same time, again, we were happy that we have shifted the trend and that LTM is up compared to where we were a quarter ago. Operating cash flow and operating cash conversion is an important API 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 it's expected 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 really 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 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 two factors in this. operating capital has increased as we continue to invest in R&D and capitalize a big part of R&D expenses. But more importantly, in the last 12 months, our profit has been a little bit lower than... Our sales have been a little bit lower in proportion to those R&D expenses than we expect over time. So while still at the high level, 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're happy that we have a strong balance sheet with a leverage of less than one net debt to EBITDA. Even though we were able to return quite significant capital to our shareholders in Q2 with a dividend of almost four 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 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, in a weak market and with few growth interactions, 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 a few 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 to the person taking questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from a from Carnegie Investment Bank. Please go ahead.

Good morning, guys. A couple of questions from 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 US at the moment. It is not weaker than... We don't see any weaker demand. In fact, the demand is... My underlying demand is not so bad in comparison with Europe especially. Europe is, as you all know, affected by

by the lower economy okay and just just a follow-up then are there any other tough comparisons quarter in your view kind of going forward here q3 q4 would you say those were tough as well um or will be tough i cannot no yeah yeah

No, no, I don't think I'm trying to think back, but no, nothing really that comes to mind for they're coming to three quarters. Okay.

And then in terms of releases, you had the pro D three here, 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 for a year, how big was Q2? And then how much do we have left for Q3 and Q4?

That's a very good question, Ammar. But we cannot give a really great forecast quarter by quarter. And the reason is that product development is a little bit like sailing, depending on how the wind blows, 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. But in looking on this slide again, I would 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, the summer in the Nordic region, the market here in in July, in August, not a lot of things are happening, as you know, around the world, especially in middle Europe and in the US it's 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 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 will fall out, I cannot promise you actually anything.

Okay, that's helpful. And I think this leads me on to the next question then in terms of capitalized development costs here was a bit of a step up here in Q2 from the level of the past couple of quarters. Would you say this level of around 30 million per quarter is kind of the new normal going forward for you guys?

Carl, could you handle that question, please?

Yeah, sure. We definitely see a higher level of activity in product development in our projects, which leads to higher capitalization. And you also saw on the showing the slide how much we've increased our overall spend in R&D. So, I mean, yes, the trend is clear that we are up.

So are you kind of happy with the level you're at now, or are you looking to accelerate that further? Overall R&D investments? Yeah.

Do you want to take that, Anders?

Yes, they would 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.

That's very helpful. Final two here. Sorry for a lot of questions. Um, you, you mentioned in the report that you're going to launch a sales and marketing organization in LA. Are we seeing any of that in the numbers right now? Um, and if not just roughly, yeah, then roughly kind of how much does that cost? You know, are we talking 10 million a quarter or five or 15?

So much lower with this. 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 one or two persons already based in the United States to California, and then we will take it from there. So I would say there's slightly higher costs because we are renting a small office in an office hotel. The cost for staff is slightly higher in California than it is in Stockholm. 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 US, but we have not taken any decisions on very high investments like that. 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's no it is a slight increase but not the not in the figures that were you were talking about okay very clear last question from here um just on the loan here what was the reason behind taking up this 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.

Okay. Great. Then that's all from me. Thank you, guys.

Thank you, Omar.

The next question comes from Mosella Clang from Handels Banken. Please go ahead.

Good morning and 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 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. Ammar 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 an older version or have you given any kind of pre-order discounts? What I'm looking at is that the growth 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 absolute no. So that is not the reason for the lower gross margin, and the customers are happy to pay them. uh for the price level that we are asking and we are a premium brand and this is a by far premium product that we are charging uh justified for so maybe you could comment on on the costs more than if you want to do that call yeah sure no uh on the on the new product 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, Pro 11, 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 there was a little bit of a mix in there as well.

Thank you. 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 that. dealers and on some of the larger they fill up their stock but in this kind of product the stock fill is 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 customer love it and we're going further now into a couple of days into the into this quarter we see that there will be more replenishment orders so it is sold and 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 safe. 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 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 pre-orders? I know that we have already touched up on that or otherwise, if not, that bodes for a strong Q3 in my view.

No, but we started weeks before to sell an invoice to dealers and build their stock prior to the official launch the 7th of May. So I would say already 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. I would say full quarter. 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. Thank you.

Thank you. Thank you.

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 about our Q3 report, which will be published on the 24th of October. Thank you.