Earnings Call: Q3 2022

Nov 8, 2022

Welcome to Profoto's Q3 Interim Report. My name is Amanda Osterholm, and I am Head of Investor Relations. Today, I have with me our CEO, Anders Schjeldebark and our CFO, Peter Sildgaard. I will now hand over to Anders, who will start off by giving you Good morning. So we are very happy to present the Q3 quarterly report. Our net sales increased by 24% for the quarter, And the organic growth was 7% adjusted for currencies and for acquisitions. We see a continued good demand for our products within the Studio segments. And also Strong demand and growth in the United States and Canada. There is, however, a general concern about the world economy And it had some negative effect on the demand. And this was especially notable in Europe And in Europe, especially in the German market. The postponed sales from last Quarter that we talked about was invoiced and delivered. So we do not see any more major Quality and delivery problems of components. So the quarter we noticed a 24% sales growth. And the net sales It was SEK 235,000,000 and last year, it was SEK 189. The EBIT margin was 28% in the quarter, which corresponds to SEK 66,000,000. And we could now see that we're up 836,000,000 in last 12 month sales. So And last 12 months, SEK 836,000,000, as said, which corresponds to 22% growth And a healthy EBIT margin of 30%, which is SEK 247,000,000, Which is also a growth figure. So a short recap on what we do and who we are. Profoto is the leader in a global niche and with high barriers to entry. Our brand is used by the very best photographers all around the world. We have a very long history. We were founded in 'sixty 8. We still, even if we have a long history, have a very entrepreneurial spirit and drive within the company. So we are the leader in the lighting products for professional photographers. That is part of the growing image And we do great products and easy to use flash system and light shaping system for professional photographers. It is really used by the world's best. We sell all around the world. Our focus is not on anything else Organic growth and high margins. This means that we need to invest heavily in innovation and new product launches. It also means that we need to focus. So operational efficiency is key for us. And That's why we have an outsourced production, which means that we have a very light balance sheet. This also means that a lot of us are working with management So we are only hiring the very best that we can find in the market. So as said, we are part of this larger image Content creation market. And we are the leader and the premium position in Lighting Solutions market. And the market is around $1,000,000,000 worldwide. And it is really driven by the number of images that are posted on the Internet, Which you can see on the graph to the right. So we invest heavily in innovation, around 10% Depending on year over year, but on average 10%, we invest back in product development so that we can launch new great products into the Market and to the customers. So half of the employees around are busy with bringing out new product and developing new product And we also work with a very active patent strategy where we have a number of patent families that we are protecting our innovation with. So at 1.5 or 5 quarters ago, We were quoted on the stock exchange here in Stockholm. And at that time, we communicated this image which shows where are we going. We are trying to Reach our financial targets within the black part of this image. In addition to this, and this is Lighting solution for professional still photographers. And here, we focus on the organic growth and on profitability. So in addition to this, We work in 3 areas. Number 1 is in the smartphone photography for professional use. And we have a great cooperation with, for instance, with Sony, Where we are bringing out, we are the only company in the world that are able to connect the smartphone camera With professional lighting equipment. That is area number 1. Area number 2 is continuous light For film, video and that kind of application. We already today have products For photographers that want to mix video production with still photography. But we see The potential for taking a bigger share of that market. Number 3, we are active in the industrial or more E com Content Solution Market. And that is why we 2 quarters ago, we acquired the company StyleShoots in Holland. So StyleShoots, they were they are manufacturing a workflow software, which supports The e com content production studios to produce better content in order for the e com companies to actually have high quality Images on their websites. This will lead to shorter time to market from when you actually receive The apparel, the shirt or the jacket that you want to sell on the Internet. So the productivity is very important. Everything here is to increase conversion. The key is to increase conversion and minimize return for those So, in the 26th October, which was after the quarter, we launched the first complete solution for e com Studios. When we merged the product lines of the acquired style shoots, which you see to the left in this image and with Profoto's Legacy product portfolio, which you see to the right. So today, we are the only company We're able to offer both automated solutions and modular solutions combined with a workflow software solution. So we are a one stop supplier for the ecom content production studios That is catering for basically all the needs that you have in that kind of studio. That was it for me and I will leave the word to Peter. Hello, everybody. I'm the CFO of Propoto. Let me first, for those that haven't followed Propoto much, Summarize the Prokutasa investment case. So we all have a leading position In a global niche, the market that grow 3% to 5%, I. E, the professional flash market. And within that niche, We are the premium brand. We are the biggest. We are about twice as big as our nearest competitor. We have a global network of about 2 70 dealers, and that is one of our most valuable assets in how we grow our sales. We have, for many years, at least 20, step by step grown our profitability, year on year, 6 0.6%. And we are operating with an asset light balance sheet, which means that could translate most of the profits into cash. We look at the long picture of Profoto, the last 20 years or so. We have continuously grown. We have a backlash during the pandemic when the ability to take photography as profession was heavily restricted. But The growth, except that year, has been unbroken for many, many years, exceeding 10% year on year. And we have increasingly Year on year increased the profit. So 20 years ago, so it was in the range less than 10%. The last 5, 6 years, we have had an EBIT in the range between 25% to 30%. And that is what our financial target is reflecting Now focusing on the quarter. We've grown in all regions, In most of the regions or in Asia and EMEA, it was mainly due to currency improvements And the additional sales from Stylchutes, the main volume growth was generated in Due to increased demand in the American region. And by that, we continue to trade with high profits, 28% in the quarter. And here is an adjusted Reported profitability, but we haven't made any adjustment in the quarter, so the adjustment equals the reported profit. And summarizing and comparing to our financial targets, we have a growth target Long term, 10% organic and EBIT range, we have a margin of 25% to 30%. We hit the EBIT margin with our 28% in this quarter. We don't really reach the organic growth We would like in this quarter, but we continue to believe in the financial targets long term. And we have a dividend policy that we should pay dividends of at least 50%. We are continuing to trade, So that should be fully possible with the way we operate. So that's all for me. Thank you. Thank And our first question comes from Kari Rinta from Handelsbanken. Please go ahead. Your line is now open. Yes. Thank you very much. Thanks for taking my question. I have 3. Firstly, this revenue that or this Invoicing that was delayed from Q2 to Q3, have you or can you quantify how much that roughly was That was delayed from Q2 to Q3 in terms of sales. As we described it in the last Report that it was more than normal. We have had delays in each quarter related to components and delays of components for the last year since we went public And we became shortage of supplies, but we haven't intentionally mentioned that because it haven't had any significant impact. This was the first time that We saw that was more clearly substantial. And So it is a difference from what it has been for the other quarters, but we chose not to disclose it in the last report And we don't do it now either. All right. Yes, I guess, we'll just have to look at the 9 month numbers. Then StyleShoots or the impact from acquisitions seems to have been quite a bit lower in Q3. Is there an element of seasonality that explains this Sequential decline or is this more related to the comments that you made about the e commerce players being more careful with their investments? I would say that it's a combination. It's clearly so that Q3 from a seasonal perspective is Historically, Starshift's weakest quarter. These are industrial decisions and At least 2 months of the 2 months in this quarter, the decision makers are typically on vacation. So it trades much, much lower normally. But we also had a more than expected negative impact of the delays in decision making In the ecom business overall. And that affects statutes both. So there are both of these combinations. All right. Thanks. That's helpful. And then the distributors, I guess, mainly in Europe, becoming more careful With their inventories, how did that develop during the quarter? Did they start the quarter with caution? Or did they become Sort of incrementally more cautious as the quarter advanced. And I guess that's probably something that is going to continue in the Q4 as well. Yes. I mean, we saw in the beginning of the quarter that they were more cautious. We couldn't see we do not measure the stock levels at the dealers' level. We're not able to do So but we the cautiousness continued. It did not increase over the quarter, though. If so, it might have been easing up, maybe, but I cannot surely Verify that. So we did not see an increase in cautiousness during the quarter anyway. We can also say about inventories Right that we don't continuously measure that we don't continue to have access to that data. What we do know is that if they Clearly, we have high excess inventories. We used to on a sample base, we used to know that. We don't on the other way around, we don't necessarily know But they have very high inventories. We don't hear that in their decision making. Okay. So there inventories are from what you can hear, they are normal. Yes, okay. Then finally, about A good development in sales both in North America and in Asia. So I guess in North America, I mean, the reopening effect must have played its course already during the previous quarter. So this is something else. So What is this something else that is driving the good demand in the U. S? And then how much scope do you see further sort of reopening Potential in the APAC region as China hopefully starts to emerge from the lockdowns. I think in U. S, we in all three regions, I would There is this underlying positive demand after the pandemic. It's not necessarily pent up effect, but Business started to trade again at normal level for the need you have and U. S. Has been Such market that hasn't so far been that negatively affected, but there has been a general increase in demand from photographers on all levels Invest. And then there is the other way around, the different circumstances in each region, how much does it prevent Stop sales now or hinder sales or going forward. And there you have had that As we see it, U. S. So far and up into at least up into the quarter, we haven't had that much Bad feedback or so from the market from a generally negative outlook of the economy. So that has been it hasn't Affected that much in the general perception in the market. And we have already talked about that in Asia and China, there has been the restriction that has been the major Restriction for further ability to deliver and that is seasoning up. In Europe, we will know that it's clearly so The fear for the future has the most negative impact. So I don't think it's anything you can compliment here on I don't think it's anything special that is driving each single region. It's rather how much is the general economy fears Yes. Maybe one final question about your sort of Products board map for 2023, do you have have you changed anything? Do you have any contingency plans In case the economy weakens more than you expect or do you still expect to launch new products next year as well? First of all, we read the papers and we are aware of the world economy And the discussion or the belief that we should go into recession, we can't see that right now, I should say, number 1. Number 2 is that We are working with our agile management system. This means that we're doing quarterly forecast and we revisit all costs Every quarter going 12 months ahead, which means that we are always prepared to adjust our cost level To the current market demand. So we are always prepared and we are obviously working with continuous plans For if the worst come to worst. Concerning product development investments, our ambition is to continue to In new products for the market because that is a major part of our strategy. So we aim to continue to do what we planned. And the reason for this is obviously also that product development is long term. It takes several quarters, several years to develop great products. So that is why we want we are viewing product development as a long term commitment. So there is no changes Other than normal changes in the product road map. If anything, we are working With new great offering to the market. All right. Thank you. Those were my questions. Thank you. Thank you. The next question comes from Amar Galayasiewicz from Canari. Please go ahead. Your line is now open. Good morning, guys. Thank you for taking Questions. So you've talked a bit about demand in different regions and for different customers. But could you give us some more color on how demand changed Through previous recessions and what might be different this time around for you guys? Yes, please. Thank you for your great question, Amari. It was a long time ago. So Last recession, the financial price. First, One situation picture there was that, we have the same kind of base of customers as today, But the split of customers were different. What we today call e commerce, if we simplify things, is today Perhaps roughly speaking here now like half of our business and the other freelance photographers like HEFA. But at that time, The e commerceindustrial was like 80% to 90% of our business. And it was over 10% That was the freelancers. There was a mix change there of customer base, that was different. It was also apparent then that when the demand was decreasing in 2000 and eight-two thousand and nine, the decision making for the industrial buyers, today e commerce, But slightly different in the ultimate decision making because that was most rental companies. At that time, They decided, okay, we rent out whatever we have and we don't buy anything more. So for half a year, they simply didn't buy anything. So we quite substantially lost 80%, 90% of our customers for half a year, the rental customers. And the freelancers, mainly driven by new products during that time, kept up the demand relatively good And we ended up with a 20%, 25% decline of sales in 2009. So today we have a different mix of customers. We are standing on more legs. We have Higher geographical reach, for instance, China and Asia wasn't at all as big at the time as it is today. We have a Similar pattern behavior we could expect. Freelancers mostly would I would assume to act something similar To be wary on demands or wait to but at the end of the day, they need something and the decision making easier is more my own money, do I have the money or not? While the industrial customers is we can expect some kind of similar behavior, postponing investment, But it's slightly more positive in the sense that they are buying for their own investment chase. They are building a studio, which they probably have a return calculation and our focus is to help them to improve And partly lower costs. So if they want it, if they need it, they probably will buy it. But the decision making may be a couple of months rather than a month Also, that's the way I would describe it. Yes. Does that put any color to your question? That was very helpful. Thank you for that. And on the demand standard demand situation for one second here, we talked about Asia and China. But in the past few weeks, there's been some talk about stricter restrictions again. Is this something that you see yet? Or has just Momentum just continued into Q4 as well. The momentum in We don't comment on the Q4. However, we do not We did not see due because of any lockdowns and a major effect. This always is a problem. But it's in China, it's shifting around. So lockdown in Shanghai is replacing lockdown somewhere else. So right now, we see more Would that help you, Amar? Yes, that was helpful. So a question on the cost base. Other external costs Increased quite a lot in Q3 compared to Q2. I was just thinking how we should go about that and think about that for the Sure. We have described in the report, a quite substantial part of the cost increase is related to More one time related costs, mainly related to the transfer of production from Russia to Poland. But for natural reasons, it happened in a quite unplanned way. So costs that were occurring identified Later in this process, during the summer. So it's not those costs are not planned to be part of the ongoing Business and we have planned to today, we manufacture like 90% in Poland and we plan to be fully Polish production Before the end of the autumn here. Okay, perfect. I think that was all for me. Thank you, guys. Thank you. Thank you. Thank you. There are no more questions at this time from the telephone conference. I hand over the word back to you, Anders and Petter. Yes. Great. And no more questions on our e mail. So I just want to thank you and highlight that we have a New date for our NDA report, which will be published on the 22nd February. Thank you for joining us today.