Hi and welcome to Profoto's Q1 Telco. My name is Amanda Åström, and I am Head of Investor Relations. Today I have with me our CEO Anders Hedebark and our CFO Carl Bandhold, who will start the presentation by presenting some highlights for the quarter.
Thank you, Amanda. So we're here today to present the first quarter of 2024 for Profoto. And some key points then to start us off: net sales decreased by 25% to SEK 171 million, representing an organic growth of -25%. EBIT for the quarter was SEK 34 million, corresponding to an EBIT margin of 20%. So despite quite significant decline in sales, we managed a healthy EBIT margin, which we are somewhat satisfied with. Also, return on operating capital at 39% is still high, even though not quite as high as we've had in the past. So all in all, a challenging quarter for us, clearly. On the more positive note then, at the beginning of May, we made our first major product launch in 24 months, basically, with the Pro-D3 product, which Anders will speak about a little bit more later on.
So zooming in a little bit on the quarter, I think looking back also, you can see that there is quite significant volatility across quarters for us. That's really how our business functions. So at a revenue of SEK 171 million, still reaching a 20% EBIT margin, I think was quite good for us. Then talking a little bit more about where the sales decline came from. In recent quarters, we had some differences in demand. I mean, demand has been weak generally in the market for the last two years for us, really. And over that time, there's been some differences across geographies. In the first quarter here, we can see quite even weak demand. And as we discussed before, also, product introductions are a really important tool for us to drive growth and get customers excited and get customers to make a decision, to make a purchase.
With another quarter without the product introductions, of course, that contributes to our revenue decline. Perhaps more relevant to talk about than the specific quarter, if we look at the trend rolling 12 months, revenue has declined also for that period by 17%. The EBIT margin has come down quite a bit, which is quite natural. Even though we have a sort of cost-flexible and asset-light business model, of course, we do have some fixed costs. It's hard to fully mitigate a 17% decline. But despite that, we still had an EBIT margin for the last 12 months of 23%. Below our target of 25%, but still at a decent level, clearly. Operating cash conversion then, again, a metric which is important for us with an asset-light model. We expect to have a high operating cash conversion, and generally we do.
There is quite significant variation here. In the quarter, operating cash conversion was just 26%. In the previous quarter, 93%. There is volatility. The primary driver here is that we had some natural fluctuations in working capital, one. Then two, we also continued to invest quite significantly in R&D. With a low profitability, that impacts cash flow a little bit more. Again, as I mentioned, we have an operating model that's asset-light, which typically returns a very high return on operating capital over time. For the quarter, or rolling 12 months to the quarter, 40%, which is still a very good number, but not quite as high as where we've been. Continuing, then, discussing the balance sheet, we have quite a strong balance sheet still with a positive cash position and a very low net debt to EBITDA.
So the benefit with a strong balance sheet, of course, is that we can continue to invest in R&D. And we can return capital to our shareholders, as we communicated after the fourth quarter. We will make a dividend, hopefully, if we get a decision on that at the AGM today. So summarizing then the financial perspective, we have ambitious financial targets: 10% organic sales growth, 25%-30% EBIT margin for the last 12 months, clearly below on the organic sales growth, but almost reaching the EBIT margin growth. And as we started with, a weak quarter, but we do see light at the end of the tunnel. So we still feel confident with these financial targets. And Anders will now talk a little bit more about our business and what we are doing to change things around. Thank you, everyone. And the word over to you, Anders.
Could you do the next slide, please? Good morning, everyone. Thank you for listening in today. Maybe we could change slide, Carl. As you know, if you've been following us, we are a premium position global niche leader. We sell our product to the very best photographers in the world. We have a very long history, a long line of profitable growth. What we focus on is the customer and to bring new products to the market. The whole organization is driven by entrepreneurial spirit. Next slide, please. To talk more about the market, we are the leader in lighting products for studios and professional photographers. We are active in the ever-growing image and content creation market. We have the premium position in what we call the segment photography lighting solution. What we do is a flash system, lighting system.
And they are used by leading studios, leading brands, and photographers all around the world. So we distribute globally. And we have feet on the ground in major countries here in Europe. We have offices in North America and in Japan and in China, mainly doing sales. We also have a development office in Haarlem, in Amsterdam, in Holland, outside Amsterdam, in Holland. So we focus on organic growth. We focus on high margins. This means that we need to invest a lot in innovation. It's also important for us to spend money on exactly what is important to the customer. So operational efficiency, it is our motto. So we really live after that. And this means that we outsource as much as possible, and especially, obviously, production. And this also means that we do not have a lot of operational staff.
Most of our staff are highly educated, and we strive to only hire the very best. Next slide, please. We have over 20 years of good growth. We could clearly see the years when we launched groundbreaking products; our sales have taken off. Here you can see in this slide, over the years, the Pro-11, A1, B1, and the D1. We can see how sales is changing over time when we do very active launches in this way. Next slide, please. We could also see that the large share of sales over time comes from newly launched products. We have a slight delay, sorry for that. A large share of sales comes from new products. In the last 12 months, 48% of the sales came from products that were newly introduced. Next slide, please. Obviously, we are investing heavily in launching new products.
So we have, and we have increased investments in research and development, in product development. And we do this in order to launch a lot of new products. Some are updated products. Some are groundbreaking technology-based products. But last 12 months, we invested SEK 105 million, corresponding to 14% of sales into new products. Over time, we believe that this should have a positive effect on the company, on the brand, and consequently also on the sales. Next slide. We are focusing our growth into three areas. First of all, the core, light for professional photographers. That is mainly for still photography. Secondly, we have, over the last 12 or 24 months, invested heavily in workflow solutions for e-commerce studios. And we are entering now the third area, light for film production, where we're launching, take the next slide, where we're launching groundbreaking, super powerful LED light.
We're doing this in Los Angeles at the trade show, Cine Gear. I'll come back to that. So anyway, after the period, now in the second quarter, in the beginning of May, we launched the Pro-D3. This is a proof of that our investments are paying off, that we're able to bring new products to the market. This is the first major product this year that we're launching. We have launched a couple of different light shaping tools already. And we will continue to do the same into the future. So the D3, let me cover that a little bit. This is positioned for high-end studios, demanding high-end studios, wanting to do a lot of content creation to increase the efficiency of the studio, so to lower the cost per image, but also the possibility to shoot excellent quality.
So the lighting quality is excellent on the Pro-D3, which means that the large studios can create great content that really converts and do this really fast. And so far, the selling is good. The product is well received, but it will take a while during the quarter before we see how good it really flies into the market. Next slide, please. So as I said, the 7th of June, we are exhibiting together with our dealer, Samy's, at Cine Gear at Warner Bros. Studios in Los Angeles. We will talk more about exactly about the product at the time of the launch. But what we can say at the moment is a super strong, super powerful LED that enables gaffers and directors of photography to light scenes in a new way. And we are focusing really on the easiness of use and the quality of light for this product.
So thank you very much. I will also add to this at the beginning, after the summer, change slide, please, we are setting up a new organization for growth in North America, which Sara Strid will take over as Vice President for North America and also for global marketing, not only America, but for the globe. And she will be based in Culver City, in Los Angeles, and build the department from there. This has not a significant effect on the cost, but it will have a major effect on that. We are very close to the customers, not only for film production, but also we see that California is really the center of the world of photography, moving slightly from New York to the West Coast in the U.S.
I'm very happy that Sara is taking on this role and taking the lead in driving our sales and our brand, not only in the U.S., but also all around the world. Thank you very much.
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 Amar Galijasevic from Carnegie Investment Bank. Please go ahead.
Good morning, guys. Just a couple of questions from my side here. Firstly, on the demand and kind of market dynamics, could you tell us anything about what you see so far in Q2 comparing it to Q1, any major changes on that part?
Yeah. Good morning, Amar. Thank you for your question. I understand that, the question, especially seeing the lower sales in the Q1. Please bear in mind that our sales fluctuate quarter by quarter. So as Carl said, we remain confident that we are reaching and we are targeting to reach our financial targets over time. So right now, we're focusing on the first quarter. And let us come back to the second quarter and the outcome of the second quarter in July when we are publishing the second quarter report.
Okay, fair enough. And then a question on the, call it, heavier focus on the U.S. market and also the launch of the light for film production. Should we expect kind of a substantial cost increase here over the coming quarters as a result of this?
Not substantial. It is part of the normal cost and part of our—it will be part of our financial targets to reach the 25%-30% EBIT margin. The cost will be kept in that level. I know that earlier, Amar, that I said that I would raise the flag if we were doing substantial investments. This is a major quality thing. Obviously, remunerations, if you're based in California, is higher than in Sundbyberg, and rest assured of that. But still, this is part of our total cost base. So there's no such thing that I could communicate at the moment. But we are still planning to enter—we're not entering the market with an LED light. We are entering the film production market, which means that over time, we are going to invest more in building the community in the film production area.
But if we see that we don't have any plans or major cost increases for that now, but we think that this will be part of normal cost increase when we increase the sales thanks to the LED sales into that market.
Okay, very clear. And then just the last question here on the gross margin in Q1. It was somewhat softer compared to, let's say, the previous year and a half. Could you explain this a bit more and give some color on how it may develop during the rest of the year?
I will leave that to Carl, please.
Yeah. Hi, Amar. Sure. I mean, there is, over time, some fluctuation around the 70%, ±1, sort of normally. It was a little bit lower now in Q1. The primary driver for that, I would say, is product mix. So as Anders mentioned, this is wedding season when we sell some of our lower-priced products. And we also ran some campaigns on that. So that had a bit of a, I would say, temporary negative impact on the gross margin. I think that's really the key thing.
Okay, very clear. Thank you, guys. Talk to me.
Thank you, Amar.
Thank you.
The next question comes from Fredrik Reuterhäll from Redeye. Please go ahead.
Good morning, Anders and Carl.
Morning. Morning, Fredrik.
Morning. So regarding the new profile and the LED light product, this means that you will go ahead, I mean, to have a lot of established producers of continuous light. I'm talking about ARRI, Aputure, and Litepanels. Is this correct, or is it?
Yeah. Obviously, we have competition wherever we go, but we will try to differentiate our product. We'll talk more about that product in June to do this in a different way. We are starting on the really high-end side of the spectrum of different kinds of LED lights.
Okay. So I guess that's going to be ARRI. And I'm just curious, how come you take this step now? I mean, LED has been around in the film industry since 2010. And I read somewhere that it took like 10 years for them to develop this. How come you move this now?
Because we have developed a groundbreaking, patent-pending technology in order to actually carry us into this market. And we will communicate more about that in June. And it has taken us a while. I've been studying this market for a much longer time than ARRI has spent on their time developing the SkyPanel. I don't think it took them 10 years. But maybe it did. I don't know about how long time. Normally, our projects take a couple of years. But so we are taking the first step into this area. We're trying to move up in the way that we do things and start from the top. And that's what we have done earlier. And we will do that the same way. We will do that both, especially the positioning. And we have clearly differentiating factors that we hope will satisfy a smaller segment of the market.
Okay. So what kind of customers are you primarily focusing on? It's going to be large studios, rental, or retail, or?
No, no. High-end film production.
Okay. So it doesn't really matter if it's film or commercial, so it's just high-end?
No.
Okay. And how big of a market share do you think you can go for within one to three years?
We have a new proposition to the market, which is a brand new proposition. We will see how that flies. We are not communicating any targets like that. The fact is that we don't know.
You talked about it a bit before. You think you're going to still be able to have the same margins on the new lights there compared to your flashes?
Yeah. Yes.
Okay. And I was also looking at the R&D part of the sales. I mean, historically, it's been like 10%, 11%. But you're wrapping up now. I think it was 14% now, rolling 12 months. So run rate, should that be around 11% or slightly higher? What do you think?
The fact is that the real target is that we do as high investments as we can. We need to do everything we do must be profitable. Everything we do must be based on something that we could bring to the market. And this is competence that is hard to get. It is hard to build R&D departments, especially if you do not want to have waste. And for us, we do not want to have waste. So that is the limiting factor. That is number one. And number two, the fact that we have 14% of sales is mainly because of that sales is down. And we hope to bring that up, of course, as we already communicated that we are going for our financial targets with 10% sales increase. And if we manage that, that will solve.
We will bring that will be driven down to lower around 10% or slightly above 10%, I guess. Since we have a very fast payback, normally on our product development projects, it's important for us to invest as much as we can.
Okay. Sounds good. So this establishing in Hollywood, will you need to recruit more people there? I mean, it sounds like you will drive costs too. How large of a team are you aiming for there?
No. We are a small company. This will be based on first of all, we also have a distributor team in the US. We already have a couple of people, 3, 4 people reporting to Sara in the United States. There will be 2 persons moving from Sundbyberg to Los Angeles, Sara and a colleague of her. And then we will add a couple of more people. So it is a limited investment, but we will increase quality and actually also quantity by doing this. So we believe a lot in this. The payback will be good. And the investment will not be significant, and it will not be visible in the profit and loss account, as I answered Amar also on the same question.
Okay. Thank you. So this is my last question. In the report, you mentioned you initiated activities to curb patent infringement from Chinese and the US companies there. Is this the first time you have defended your patent? And how long do you think this process will take?
So we have a patent portfolio. In all projects, we are innovating in every project that we do. Some of the innovations are patentable. And we clearly see that when we do this, we see a sales increase, as I earlier communicated in one of the first slides that I showed. So this is important that we do that. We have not had any patent infringements that we have defended. This is the first time we do that. And this will take. It could have an effect, but it could have a cost and could have a smaller effect. We do not know. That is why it is communicated this way. But we have a discussion. We have some of the competitors that have ceased. Some have not. And this is just I would say this is a normal course of business when you're investing in technology.
This is for your information, but we do not see a major financial effect due to this.
Okay. Thank you very much. That was all for me.
Thank you.
There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
I have received two questions here. Are we seeing any additional factors besides high interest rates and cautious spending that have contributed to the decline of sales, such as customer behavior or increased competitive pressures?
No, not really. Not one of the two suggested. We do see that we have not launched any major products, and we do not get the attention enough in the market then. I would say that is the major factor why sales have declined given the market conditions. As I communicated earlier today also on Dagens Industri TV, it is that we see growth in the use of images to sell products over e-com, but we also see even higher growth on video used for that purpose. Otherwise, we do not see any other change in behavior.
Regarding the Pro-D3 launch, could you provide more details on the expected timeline for this product to impact revenue? And what kind of sales growth do you anticipate from the launch in the coming quarters?
From the launch, I cannot communicate that. We expect to see an effect on every launch we do, even if it's accessories or light shaping tools or larger products like the Pro-D3, and to see an immediate effect in the quarter where this is happening. So we hope to see that in the Q2, but I can't give you any metrics on that.
Yeah. And specifically, how it works then is on May 7th, the product became orderable by the end customer. And we started shipping the product to our customers in April already. So we will see revenue from this product in Q2.
All in all, our metric is over time, 10% annual growth, sales growth for all kinds of products in the total portfolio of products.
Good. No more questions. Great. Then I just would like to give you a gentle reminder about our Q2 report, which is published on July 17th. Thank you for joining us today.