Profoto Holding AB (publ) (PRFO) Earnings Call Transcript & Summary

Hi, and welcome to Profoto's year-end report for 2022. My name is Amanda Astrom, and I am the acting CFO and Head of Investor Relations here at Profoto. Today, I have with me our CEO, Anders Hedebark, who will start off by giving you some highlights for the quarter.

Good morning. Welcome, everyone. So we are happy to present the Q4 and the full year results for 2022. So our net sales increased by 6% for the quarter. However, the organic growth was minus 13%. And depending on the currency exchange rate changes as well as the acquisition of StyleShoots, which took place in the beginning of April last year. So profitability is rather good. EBITA totaled SEK 95 million and with an EBITA margin of 41%. And it's the same thing with the EBIT, which showed a good profitability for the quarter with SEK 80 million and 35% EBIT margin. We see a continued good demand for our products and especially for the products used in studio photography. However, we have a concern about the world economy and our customers see this also, and we think that had a negative effect on the demand for other products. We, the company, are proposing a dividend of SEK 4 per share. So let me talk about the fourth quarter last year. We had a rather profitable quarter with an EBIT of SEK 80 million, and an increase of 1%. And the margin, as I said, was 35%. And the net sales for the quarter which was an increase of 6% showed SEK 230 million. As you can see to the graph right, our full year sales was SEK 848 million. So talking about the full year figures, we had a good profitable year with EBIT increasing 17% to SEK 249 million. The margin was 29%, which is within our financial targets between 25% and 30%. The net sales, as I said, will grow to SEK 848 million, showing an increase of 16%. So who are we? For those of you who are new to Profoto, I will talk a little bit of what we do and who we are. Profoto is a premium position global niche leader in a rather small niche but worldwide niche. And we enjoy a very strong brand equity, and we are used by the very best photographers and image creators all around the world. We were founded many years ago, 1968. So we have a very long history doing the same thing, developing excellent light shaping products for the world's best photographers. We have a very clear customer focus, and we are delivering quality products and developing quality products and launching quality products to grow our sales. Internally, we have a very entrepreneurial spirit and drive. So change is the key factor for us how to actually develop the customer offering, the product offering to customers. So as I said, we are the world leader and in the niche of lighting products for studios and professional photographers in the growing image and content creation market. We have the premium position in photography lighting solution, which is a segment within this market. The products that we are offering the market are easy-to-use flashes and light shaping system for all those customers. And as I said, and this is the key factor in the brand that we are used -- really used by the world's leading studios and photographers. Hence, we sell everywhere where photography is made, and one could say that our home market is really the United States, which is the leader in photography. And a big part of that is actually on Manhattan in New York. We enjoy organic growth and high margins. This means that we're investing heavily in product development and in new products and innovation. This is combined with that we are very nerd in terms of operational efficiency. We only do things that is really necessary and that creates value for the customers. For example, it means that we have outsourced all production since we have very good partners in electronic specialized manufacturing. This also means that we have -- we are in a need of the best staff, the best personnel, and we have a very thorough system of hiring the very best people into Profoto. So as I said, we are part of the attractive fast-changing image and content creation market. This market to left on this image. It's the large gray circle here. Part of this is lighting solution market. It is a rather small niche with sales of around USD 1 billion. And in this whole market, in the gray part, the content is key, and this is driven by the need for content for all different kinds of brand building. And our specialized part of the market is very much dependent on number of images posted on the Internet. And the graph to the right shows that this is growing exponentially. Our strategy is based on developing the offer -- product offer to the customers. And we've done this since very long. And we have developed new segments within this very small niche over the years. So 10 years ago around, we entered the own location market, which is basically for wedding imported photographers all around the world. In '16, we came into commercial accounts. We -- in '17, we developed products to ensure that natural light shooters, people that are only using the sun for setting the light or having an easier way of actually setting light in a better way, independent on the lighting solutions. We are the only company in the world having -- for professional lighting system that you're able to use your smartphone in order to create great images. And last year, we entered automated solutions for e-com companies through the acquisition of StyleShoots in the beginning of April in 2022. And we aim to continue to do the same thing by investing heavily in new products. So around 10% of our total sales is invested back into R&D. And around half of staff are working with launching, developing new products. And we have different kinds of people doing that, but we are covering the whole chain from idea to actually design products that are manufactured by our manufacturing partners. Obviously, we are also protecting our development with an active patent strategy that we are doing for all key markets. So as I said, we are increasing heavily in R&D spend. And of course, this is based on that we want to deliver new products, a new offering to different types of photography all around the world. And we do this in order to increase for future growth of sales. So as you can see, last year, we increased heavily our expenditure into R&D, and we were 10%, so once you see this 10% as an average over time, and we intend to keep on investing in new product development. And we do this in different parts of [indiscernible], and for the future, we intend to keep on investing in the core segment of our customers, which is professional still photographers. And we have and we will continue to do that into the future. We are also, through the acquisition of StyleShoots, intending to keep on investing heavy last year, and we intend to keep on doing that, invest in new products for e-com workflow solutions. And we do this by organic growing the product offering, but also obviously, we are looking into acquisition of new products, new software, et cetera, into the area of e-commerce. And the third area then that we're also investigating the possibilities of doing more. And we are very much in the pre-study phase in this area. It's light shaping for moving images for cinema, for video. So we intend to try to find ways of getting into that market. But I must say that we have no real products for this area yet. We have products that are working in both area of light shaping for still photographers, but that also ability to use the same kind of products for video solutions. However, for large cinema productions, we do not have any offering at the moment. In this area, we look into the possibility of growing through own product development, but also we look into different kind of platform acquisition possibilities. And we are constantly working with both long list and shortlist in all areas to see how we could actually speed forward our growth through acquiring other products, and StyleShoots last year was an example of this. But we are very nerd, I'll say, in this area. So last year, we developed a lot of new products and launched a lot of new products for professional photographers, especially what is really important for photographers or different kinds of light shaping tools so that you could create unique light and create unique images. We also launched a very small studio flash called the A2, and we launched systems for actually controlling light in different ways. In addition to this, we are working and investing heavily in helping photographer developing their light shaping skills in different ways. So please have a look on Profoto Academy on profoto.com, and you will find out much more how we'll do -- how -- in the way that we're doing to train photographers and, in that way, developing the market. In addition to this, through the acquisition, I said, of StyleShoots, we now have a broad offering of workflow solutions for e-com studios, both automated solutions and 4 different kinds of hardware combined with software, so that to simplify and increase the speed and increase the productivity for brand-building e-com studios, to create great imagery. In addition to this, we have our classical modular solution where you need a photographer shooting the images. We are also, actually next week, launching a new product exactly in between on EuroShop in Düsseldorf where we are showing the possibilities of further increase the creativity and the quality of images for e-com companies but also gaining at the same time the better productivity to actually speed up time to market for e-com companies when I mean productivity and time to market from the time when the company receives the apparel, the shirt, the skirt, et cetera, until they are able to sell that on the Internet with great content to great imagery. So a lot of things are happening, and we intend, as you've seen, our investments in product development continues, and we hope that, that will benefit further future sales. So thank you very much. That was all for me, and I will leave the word to Amanda that will bring you through the financials for fourth quarter and the full year 2022. Thank you very much.

Thank you. So let me summarize the investment case. We have a leading position in a global niche of the fast-growing image and content creation market, which is estimated to grow at 3% to 5% per year. Our market share is about twice as large as our closest competitor. We have a global market strategy with a well-established distribution channels where we have over 240 dealers and a presence in 58 countries. This gives us a strong market position and high entry barrier. We have an asset-light business model, and we continuously focus on operations and innovation to drive profitable growth and expand addressable market. Our long-term organic growth, combined with operational excellence have given us a sales growth of 11.11% year-over-year for over -- for the past 21 years and an EBIT margin growth of 5.5%. And as I said, we have had a long track record of organic and profitable growth. 11% CAGR from 2001 to 2022. For the first years, we had an EBIT margin ranging from 10% to 15%. But for the last years, we have had it ranging from 25% to 30%. Looking for the sales for the quarter, it was SEK 230 million. This can be compared to last year's SEK 218 million. For the full year, we had SEK 848 million. Looking at the different regions. The Americas, we saw a slight decrease in demand due to general market concern. For APAC, we saw that Japan had a continued good demand in the region, while China was affected by the close-downs related to the pandemic. In EMEA, we saw a strong sales growth, but this was supported by acquisition and the currency effect. But after having a slower Q3 in the region, we saw a slight increase in demand for the quarter. Looking at the quarter then and the profitability, it was high profitability, 35% in EBIT margin. And EBIT for the quarter was 80%, and this can be compared to last year's 79%. The high profitability for the quarter was mainly due to having high product margins and also high operational efficiency, resulting in lower costs. So our financial targets for the year. We were well within our profitability targets and delivered a 30% EBIT margin, which is well within the range of 25% to 30%. Looking at organic sales growth, it was lower than our target. We had minus 1%, and this was due to the general market uncertainty. Our dividend policy is a dividend of at least 50% of the net profit. The Board of Directors are proposing a dividend of SEK 4 per share, which equals 83% of the net profit in 2022. We will now open up for questions.

[Operator Instructions] Our first question comes from Karri Rinta with SHB.

Karri from Handelsbanken. A few questions from me. In the fourth quarter, it seems that employee costs were clearly lower than what I had expected. Is this -- was there anything specific there, maybe lower bonuses? And then can you confirm that you reduced head count slightly in the fourth quarter compared to the third quarter levels? That's my first question.

Yes. If you are referring to lower personnel costs, is it compared to last year?

Yes, compared to last year. No, no. The -- because I know now you have StyleShoots. So that adds, but the -- we saw an increase in the second quarter and third quarter, and then we saw a smaller increase in the fourth quarter. That's what I'm referring to.

Yes. It is both related to having a lower head count than we had in the previous quarter. But also, as you said, due to partly being a bonus accruals due to having lower growth in the fourth quarter.

All right. Okay. So -- but slightly lower head count?

Yes.

And maybe related to that, these investments in innovation and relatively high R&D, so what's your outlook for 2023, both in terms of R&D investment and will these investments in innovation also involve recruiting? Or are you pretty happy with the head count that you have right now?

We are looking for to keep on investing heavily in product development. And the product launches are very profitable, if they're successful and in our niche. So -- but it is hard to grow rapidly with quality. So we are taking it -- we are focusing on quality in product development to ensure that we do the right things in the right way. So we -- as you know, we do not give forecast of cost. But as you can also see in one of the slides that I showed is that the product investments is very important, and they will continue to be the main thing that we do since half of our staff are involved in new product development. And we also think -- and yes, we -- you can also see that on our web page that we are constantly looking for product developers, both here to Sundbyberg in Stockholm and also to our office in Haarlem in Holland. So yes, we are looking to increase the head count slightly, but it is on a demand basis step by step to ensure that we recruit the right people and that we're able to manage the product development. And that is, I must say, the key factor. Management of product development is really what matters, and we are constantly developing our skills in this area.

Right. And then a related question to that. So on that slide where you showed R&D investments, they were a bit lower in '20 and 2021 and then maybe 2022 was a bit slower year in terms of product launches, at least from my perspective. You might have another opinion, but the -- maybe the lead time from these investments that you took last year. So does that mean that we should see a more active year in product launches already in 2023? Or is the lead time from increased R&D longer than that?

So we have projects that could be from 4 quarters but they could also be 12 quarters. So it differs depending on what we do. It also depends on the success in product development. Product development is partly actually getting things done, but it's also passing tech hurdles -- technology hurdles. So actually to -- actually succeed with solving specific technical issues. So I cannot -- first, I cannot give you a forecast on exactly what we're launching. But we're launching something next week that we have spent the last actually 4 quarters in developing. So have a look on that on our web page next week. But -- and yes, we will launch other products this year, obviously. But the investment -- that increased investment that you see now, it will materialize. Some projects will launch earlier, so within 4 quarters and some will launch later within 12 quarters. So it's very hard to say, Karri, exactly when a certain investment -- portion of this investment will actually come out as new sales. It is also so that some of the products or product development projects that we're running, they are sort of replacing already existing products, and some of the development like the thing that we're doing will launch in next week are actually new solutions for partly new markets, new subsegments in our already tiny segments. And that is how we try to grow, so by really segmenting the market in a new way or a different way than our competitors are doing to find specific solutions and great products for a very small niche. So once again, it's hard to say exactly how this will fall out, but we will keep on investing. We've never been as good in product development as we are now. I would say the SEK 85 million that we're investing this year are more worse than the previous years krona for krona or dollar for dollar. So I think that we're getting more out of it. And it's -- depending on that we're developing our skills in product development management, especially.

No, that was very helpful, actually. So -- and then did you do your typical price increase from the 1st of January this year?

No. We do with 1st of February.

1st of February? But you did it, and it was of a [ typical ] magnitude.

We dit it. It's already done. it's already implemented. But last year, we also had some other price increases, as you know, that we answered. I think that was in September, August, September, some time. So over the years, we have increased prices last year, and we increased prices slightly this year also in this month.

Right. And finally, if we look at the different segments that you serve, you have studio, you have professional photographer and you have e-commerce. And it sounds like studio is still doing maybe the best. So maybe a few more words about why studio is doing so well. And is it the professional photographer that is maybe the weakest at the moment, given the cyclicality of that customer segment and e-commerce falls somewhere in between, is that a reasonable assessment of the current market conditions?

I would say, you're correct about professional photographers, which are individuals that are slightly hesitant not dramatically, I would say, but slightly, it is not growing. They're slightly hesitant in buying. Concerning studio and e-com, we consider them to be the same nowadays. So what happens in an e-com studio could be -- it's more or less the same. And that part, they either they're using automated solutions or they're using a real studio that you see behind me at the moment. So they have light and the camera separately. So those regard as the same. And we see a continued good demand from e-com studios and/or studios in general. And the reason for this is that e-com studios are really now treating that part of their operations as very important. And in order to actually speed up the productivity so that the time to market and they get more done. Secondly, it's also they are investing in the creativity in order to actually create attraction for their website and for their products so that they sell more and actually increase conversion. And this, even though we obviously also are noting that slightly tougher times that e-com company has had the last 2, 3 quarters in order to actually increase their sales. However, the investments in their operations, they try to continue, but because it's a long-term game, to increase the competence, increase their capacity in order to create great imagery for their web pages so that they convert more customers to sales. That is why we see them weak, and I think that e-com companies are looking at their business as long term. And I believe that this part of the market will continue to grow good in the future.

[Operator Instructions] We have a next question from Amar Galijasevic with Carnegie Investment Bank.

Amar here. Just a question on demand. Is there anything that makes you more hopeful for, I mean, H1 '23 or the full year '23 compared to how 2022 ended in terms of demand and outlook?

If we can look into the different areas. As I said, we are -- we believe that the long-term growth of the need for e-com companies will continue. So exactly how that will play out. I think that we are active in a small niche, and we are a small company. It depends on what we do and what we launch and what we do. And we have some interesting launches next week. So we think that, that could play out well. In the other areas, we see -- in the different geographical markets, we see -- U.S. and EU, we see that they continue in the same pace. And we can't see any -- we don't see downside, but we do not see a major upside either. However, saving that for the APAC region, we hope for China, that China demand will continue to grow now after the opening and the whole thing when they let COVID loose in the Chinese market. And hopefully, that will blow through the market and now that we hope that all different kinds of activities will increase and drive higher sales in the future this year.

That's very helpful. Just a follow-up question on price increases. So you mentioned the price increase now in February. That's kind of a part of these annual standard price increase you do. But for 2022, so you said you increased in February and in September, how much did you increase prices? Do you know that exactly?

We don't have an exact number that we can give.

We have increased different product groups, different amounts, but the average, both -- of the both price increases were between 5% to 10% added together.

I'm sorry, 5% to 10%?

5% to 10% added together.

Okay. And just another question on resellers lowering their stock in Q4. Could you give us any color on that going forward? Is that a thing that you expect to persist in 2023 as well? Or just how should we think about that?

No, I don't think that will persist. I think that, that was -- that is part of the sentiment that the whole financial or the whole economy had last year that people were very careful. However, the dealers, they need stock in order to sell. Otherwise, if they don't have stock, they will lose the sale. And they are very much aware of that. So -- but last year was a special case, I think.

Okay. Perfect. And just a follow-up question on Karri's question on personnel expenses here. What do you expect in terms of salary inflation for 2023? Could you give us any color on that?

Yes. I mean we [ solve ]. We are part of Teknikföretagen. And we follow the [ Teknikföretagen ]. So the best thing would be -- and we are very much stringent in the way that we raise our salaries in that respect. So we intend to follow for the Swedish employees that kind of price increase. So we do not expect any dramatically change in that, and we intend to follow that.

I would like to turn the conference back over to the speakers for the e-mail questions. Please go ahead.

Yes. Let me check if we have any questions through e-mail. We have a question here. What percentage of sales are from sophisticated amateurs who might be more likely to pull back on spending when economic conditions deteriorate than pro photographers? Could you make a general comment on what has been happening to price?

In terms of advanced amateurs, we do not follow that specifically. However, good amateurs are normally also very good photographers even if they do not charge for their images. They produce images for other purposes. And very small part of our sales is to amateurs, and we do not believe either them to be very sensitive. It's other parts of the amateur market that are sensitive. But for professional flash units, that is really for professionals. So that has no effect, I would say, on sales, the amateur side. And there was a question about -- comments on price. I think that we commented on that, that last year price increase were between 5% and 10% in total.

Yes. No other questions through e-mail. Then we would like to thank you for joining us today. And I would like to give a gentle reminder about our next report, which will be published on the 4th of May. Thank you for listening in.

Thank you.