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 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're here to present the Q2 for our figures. So the main topics here, I would like to point out that the sales organically is up 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 activated, 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 what we're showing today. 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 into 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.
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 in the Q2. 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, that they enable the customers to work with their creativity to take better image. 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 ratio is absolutely best in the industry. And this also makes it fast to set up, and it enables on the film production set to focus on what is really important, the light shaping. And we're basing this on our own HydroCTech technologies, 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 Q4. It is our first product into this customer segment, and we are continuing to invest and 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 segment 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 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 coming from product that was introduced the last two years, and I expect this trend to continue. 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. We're doing this in a very, 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 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 you. Yeah, we should also do this. Yeah, sorry. We see growth in. 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 base 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 it continuing to be a bit of a challenging market. And as we have discussed before, you know, 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 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 that the positive response when we introduced the Pro-D3 and the new light shapers.
You 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, because we just had one major introduction, and that was at the beginning of May. So in the rolling 12 months 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 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 normal level. I think over time, we expect to be somewhere between 60%-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 two factors in this.
Operating capital has increased as we continue to invest in R&D and capitalize a big part of the R&D expenses. But more importantly, in the last 12 months, our profit has been a little bit lower and sales has been a little bit lower in proportion to those R&D expenses than we expect over time. So while still at a 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 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, all of our net income for 2023. And while we are continuing to invest in R&D as, and increasing those investments, as Anders mentioned before.
Summarizing a little bit on our performance then compared to our financial targets, our EBIT margin target is 25%-30%. LTM, we're just over 20, so that's below our expectations. But again, in 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 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'll hand it over to the person taking questions.
If you wish to ask a question, please dial #key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial #key six on your telephone keypad. The next question comes from Amar Galijasevic from Carnegie Investment Bank. Please go ahead.
Good morning, guys. 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 U.S. 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, where Europe is, as you all know, affected by the lower economy.
Okay. And just a follow-up then, kind of, 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, or will be tough?
What? I cannot answer. No. Yeah, please. Yeah. No, I don't think... I'm trying to think back, but, no, nothing really that comes to mind for the coming two, three quarters.
Okay. And then in terms of releases, you had the Pro-D3 here,
Yeah
... 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 know, you have 100% of releases for a year, how big was Q2? And then kind of how much do you have left for Q3 and Q4?
Hmm. That's a very good question, Amar, but we cannot give, you know, 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, 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. 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, this summer in the Nordic region market here in July and 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%-30% profitability, and our focus is to come back to that on a forward-looking a trend now. But 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 there.
Okay. Well, 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 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?
Yeah, sure. We definitely see a higher level of activity in product development in our projects, which leads to higher capitalization. So, 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?
Yeah.
Do you wanna 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 of when we see that the growth will come back and we increase our sales, we will also up our investments in produc technology. So, a slow and controlled increase, I would say.
Mm-hmm. Okay, that's very helpful. Final two here. Sorry for a lot of questions. You mentioned in the report that you're gonna launch a sales and marketing organization in L.A. Are we seeing any of that in the numbers right now?
No.
And if not, just roughly, yeah, then roughly, kind of how much does that cost? You know, are we talking SEK 10 million a quarter or SEK 5 million or SEK 15 million?
No, much lower. It is-
Okay.
We are moving the 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 it's slightly higher cost 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, 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 US, but we have not taken any decisions on very high, higher investments like that. However, we will follow the sales, hopefully, the sales growth that we will have. We'll 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 in the figures that we're—you are talking about.
Okay. Very clear. Last question from me here. Just on the loan here, what was the reason behind taking up 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.
Ah, okay. Great, then that's all for me. Thank you, guys.
Thank you, Amar.
The next question comes from Marcela Klang, from Handelsbanken. 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 products. 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 pre-order discounts? What I'm looking at is that the gross margin was definitely strong, but still slightly lower than last year. Have you been able to realize your typical price premiums?
... 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. And the customers are happy to pay 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 justified for. So maybe you could comment on the costs more than if you want to do that, Carl.
Yeah, sure. No, 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 Q2 last year, we had a lot of sales of our generators, Pro-11, where we have a slightly higher gross margin than the average for 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.
Thank you. And in the positive first reaction, was it the clients that have ordered this, 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 on 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 customer love it.
And going further now into a couple of days into this quarter, we see that the 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.
Sounds good.
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, you know, 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 it, was this affected by any kind of pre-orders? I, I know that we have already touched up on that. Or otherwise, if not, that bodes for a, for a strong Q3 in my view.
No, but we started weeks before to sell and invoice to dealers and build their stock prior to the official launch, the seventh 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 of the-
Yeah, which I would say a full quarter.
Full quarter effect on the Q2. Thank you so much. Sounds really exciting and promising. 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. We have not received any written questions today, so I would like to thank you all for joining us this morning. A gentle reminder about our Q3 report, which will be published on the 24th of October. Thank you.