Good morning, and welcome to Profoto's year-end report for 2023. My name is Amanda Åström, 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 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 -10%. Also, you know, profitability is... Well, profitability in 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.
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 ... distribution in total. And the background for this proposal is, you know, that we have good confidence in prospects heading into 2024, which Anders will 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 2024, even with this distribution. Looking a little bit at the sequential development, then 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 [inaudible] . 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, you know, 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, and the only exception was Asia Pacific, where we grew 2%, primarily driven by China and a 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%-30%, at 26% for the last twelve 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%, you know, quite high. Significantly higher than the most recent two quarters. 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 the 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, you know, 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, you know, a big part of this, of course, is the decline in profit level. But we also got sort of full year effect of 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, you know, 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%-30%, with 25% in Q4. We did not reach our sales growth goal of 10%, clearly, as we were at -10%. But all in all, a decent finish to a challenging year. Maybe, Anders, you would like to summarize the year a little bit and take us through how we're managing this heading in 2024.
Yeah. Thank you, Carl. Very short about the full year, which you have seen in the report already. Despite a organic sales growth of -13%, we are managing to actually create quite good profitability on a-- with an EBIT margin of 26%, and for that, we are very proud and that is based on that we're really, really controlling our cost. 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 newcomers to listening in to our report.
As you know, we are premium positioned in a global niche, and there, there is a rather high barrier to entry into the niche relative to the size of the niche. 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 level, and we are offering quality products for growth. Internally, we have a very high and the drive to get things done, drive change. We are active in the large and growing content creation market, and our position is the premium photography lighting solutions. We have a which is innovative and easy to use, and they're based on flashes, software, and the light-shaping system that goes with it.
They're used by the best photographers and leading studios and leading brands all around the world. We have a global distribution, so 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 investment 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.
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. We're looking both for electronic and mechanical engineers, as well as project managers. 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. It's up because the 13% is up because of higher investment in kronor, but also because of that, the sales is dropping. That's why you see 13%.
This is important, because you could find that the long series of sales, you can see that the growth that we have historically created is based on launches of new products. We believe that this is also the future. When we launch, we believe that if the market is stable, we believe that we will sell more. We could also show that lower 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. 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. For both private use, like wedding and portrait, but also for professional use. We have two other growth areas. We have started to invest quite heavily, actually, in workflow solutions with the two 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 both still and video content. And the third area is, which we have talked about for a while, live film production. So that's all. Questions, please.
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 Fredrik Reuterhäll from Redeye. Please go ahead.
Good morning, and thank you for taking my, my questions. 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 past quarters, and I think this should boost demand towards online shopping and advertising, especially in the U.S. market. 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.
Oh, I don't have a specific East or West Coast. We have we've closed quite some deals, larger deals in on the West Coast, especially for e-commerce or studios that do content production in at 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 slower in the U.S. than especially 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 U.S., especially for the future.
Okay. Moving on, you talked about it in product development, and you spend SEK 29 million in the second quarter, and it's clear that you increased the pace last year.
Yes.
You write that you aim for two major product releases during 2024, but can we also expect a number of smaller product releases?
We upped our game substantially, and you can see that we see that we at least will do two major launches this year. I cannot talk about all the details, but around that, there will be light shaping 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 in 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, so we're—
Okay
... not giving any breakdowns on this, and, and it's actually much smaller.
Okay. Okay.
In terms of sales numbers, short-term sales numbers.
Yeah. 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%, I mean, compared to, it's been around 10% historically.
So what, what sales? Can you repeat that, Fredrik?
No, the level of R&D. I mean, you're up-
Aha, thirteen.
13% of sales now. Yeah.
Well, I mean, over time-
I'm thinking about 2025.
Yeah, I know over time, we try to be around 10%. I think speculating we will be in 2025 is very early. But I think we will rather be around 10 than 13 over time.
Okay.
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 a project if you believe that there is a value coming out of it in the end when you'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.
Mm.
But you should not expect any major ups and downs, that this is not short-term control. This is really a long-term investment that you need to keep stable.
Yeah.
Yeah, the projects are typically 2.5-3 years.
Yes.
We're not going to stop projects that we believe in just because revenue is a little short a quarter or a year.
True.
... Mm-hmm. Okay, 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.
Yeah. And then we did a campaign on A2-
Yeah
to attract new customers. That's one of the key entry products for us.
Basically, what we do is we place focus on the sales channels to ensure that the sales guys at the dealers they spend time talking about our products with their customers.
Mm-hmm. Okay. And my one last question here, and I will go back in the queue. Yeah, I was looking at the inventory levels as part of your sales. I'm looking at the rolling twelve 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 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.
Yeah. 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-round. This, I think, explains most of why it was high in the year-round. 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 product, 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 stock 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.
Okay. That was all for me. Thank you very much.
Thank you.
Thank you, Fredrik.
The next question comes from Karri Rinta from Handelsbanken. Please go ahead.
Yeah, thanks. Thanks for taking my question. First, a clarification and a follow-up to the last comment that Carl made, 'cause I lost you there for a while, but you were saying that the inventory increase in 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? Was 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 two 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, 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?
You know, we... Hey, hi, Karri, Anders here. So we don't really, as you know, really not, can't 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 two new products in 2024? Yeah, okay. I guess-
Yes, yes.
Good. And then you also mentioned that you are working with new products in all of these three categories-
Yes
... including film production.
Yes.
Is one of these two products meant for film production?
I cannot comment on exactly what they are, neither of those two, 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-
Mm
at one point in time.
Okay. All right. And then finally, Carl, you showed one graph where you typically have lower margins in the first quarter. And when I look at the, the operating expenditures levels in the fourth quarter, it seems that it will be difficult to retain 25% margins in early part of the year. And I, I mean, I know that there will be quarterly fluctuations, but maybe in this operating expenditures in the fourth quarter, is there are some extra, well, not extra items, but this campaigning 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 then not, not there going forward? Or are these operating expenditures that you had in the fourth quarter, good reflection of what we should expect going forward as well?
No, I think the fourth quarter is reasonably representative. The main drivers of differences across quarter in the coming year will be product introductions. 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 this, 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.
Okay. All right. Thank you. Those were my questions.
Thank you, Kari.
Thank you.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.
Good, and we have not received any questions through email, 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 14th. Thank you so much.