CTT Systems AB

STO:CTT

Earnings Call Transcript 2023-Q1

[Henrik Hojer, executive]

Good morning, everyone, and welcome, and thanks for joining us at the CTT Earnings Call First Quarter 2023. Today, I'm here, Henrik Hojer, CEO of CTT, and I'm here together with Markus Berg, who is the CFO.

Let's go directly into the report. The strong demand for air travel continued, and the airlines and the civil aviation sector rallied up to keep up. CTT business recorded the best OEM quarter since 2020 and the aftermarket sales came in better than we had anticipated with deliveries at the same level as previous quarter.

Looking at our financial numbers, CTT continues to grow. We closed the quarter with sales of SEK 75 million, beating our own forecast range and thereby, we recorded growth for the eighth consecutive quarter. EBIT increased 61% at SEK 23 million, and our EBIT margin was 30%. The profit was SEK 23 million and the profit margin 30%. Earnings per share increased 88% to SEK 1.43. We had an operating cash flow of negative SEK 4 million, which we will comment later in the presentation.

If comparing with the same quarter last year, net sales increased SEK 26 million, driven by a significant increase in OEM deliveries, adding SEK 6 million. Private jet contribute with an initial SEK 4 million, and then our aftermarket came in stronger than forecasted an increase with SEK 15 million. Looking at the sales mix.

We see the dominance from aftermarket activities decreasing from the record levels around 80%, down to 69%. We had an order intake of SEK 74 million, driven by aftermarket demand and strong rebound from OEM. Aftermarket-driven sales is dominating our business and many of these orders have a very short lead time from order to delivery, sometimes in the same quarter and not growing our backlog. We ended the first quarter with an order backlog of SEK 71 million.

I now hand over to Markus to comment on our profitability and our cash flow.

[Markus Berg, executive]

Thank you, Henrik. EBIT in the first quarter amounted to SEK 23 million, an increase with SEK 9 million from SEK 14 million in the first quarter last year.

The main reason is business driven with SEK 14 million from higher sales volume, partly offset by a lower aftermarket share in the revenue mix. CTT is profiting from a stronger U.S. dollar compared to SEK with approximately SEK 5 million on sales, but offset by SEK 1 million from account receivable accounts payable valuation, higher costs due to higher sales and increased EBIT increases allocation to variable remuneration.

Nonrecurring costs, mainly from inventory write-downs affect the EBIT negatively with SEK 3 million in the quarter. Let's move on to the cash flow.

Operating cash flow amounted to minus SEK 4 million, driven by improved financial performance, EBITDA but offset by tax payment regarding 2022 and a net effect of minus SEK 7 million and negative working capital change due to higher accounts receivable from late customer payments whereof SEK 22 million received in April and remaining SEK 21 million is expected in May.

Given this, cash in bank decreased to SEK 54 million in the end of the first quarter. Let's continue and look at the net debt amounting to minus SEK 10 million compared to SEK 18 million in the first quarter last year.

In addition, CTT has SEK 52 million in available credit facilities. Solidity at 71%, the same level as the first quarter last year. All in all, CTT has a strong financial position.

Let's look at the rolling fourth quarter numbers. Net sales of SEK 266 million compared to SEK 169 million, up 58% Operating profit increase of 150% to SEK 100 million compared to SEK 40 million. EBIT margin, 38%, up from 24%. Earnings per share, SEK 5.97 compared to SEK 2.15, an increase of 177%. And Operating cash flow of SEK 49 million improved from SEK 46 million.

I now hand back to Henrik to give you the outlook.

[Henrik Hojer, executive]

Thanks, Markus. And thanks for the good presentation and our first quarter. Looking at the forecast for Q2, the net sales forecast in the second quarter is between SEK 75 million and SEK 80 million. I calculate with Q2 sales growth to be quarter-to-quarter driven by the aftermarket sales, partly offset by decrease in OEM sales due to the high deliveries to the Boeing 777X program in Q1. CTT, we delivered some 777X units in Q2, but we do not expect any further deliveries in the second half of 2023.

Next slide. For the first quarter, aftermarket demand exceeded our expectations and currency adjusted sales were above the Q4 level. We successfully managed to compensate for decreased demand in parts with high inventory levels at distributors. In the graphs, we also see that on a rolling fourth quarter comparison, our aftermarket sales are well above the 2019 numbers. In most regions, utilization of our product is back to normal, but Asia and China is still below.

The rebound effect will gradually fade during 2023 and demand in the aftermarket will again track the size of the population. Installed base will grow with new system deliveries and when ready build 787 enter into service. We will continue to grow and the 787 reenter into service represent approximately 10% population growth for CTT. This means that the underlying demand in aftermarket will grow at a slower pace compared to past years.

Our sales in the aftermarket will slowly start growing again as demand eats down the high inventory levels at distributors and airlines that we entered the year with. Next slide. I must say, I really like this picture. I kept it from the last report. It says everything, I think. Because we finally see a new dawn in the OEM market. and we expect the market to strongly rebound in '23.

We remain confident in our growth expectations, benefiting from predicted production rate hikes of Boeing 787 and the Airbus A350. During the quarter, Boeing secured commitments from Air India were 20 787 and 10 777X. And from Riyadh Air and Saudi Arabian Airlines for up to 121 787 airplanes. Several airlines order smaller quantities and adding to a totally very bright future. Airbus also received orders from-- for A350 from Lufthansa, Air France, KLM and Air India.

I must say, big aircraft is a big business, and our systems are on all three latest generation platforms.

787, 777X and the A350. And they will set the standard for many years to come.

Commenting a little bit on where they are. Boeing 787 is on a very low build rate that would gradually increase from today's 3 per month, up to 5 by the end of this year. Boeing then forecast to be at 10 aircraft per month by 2025, 2026 time frame.

I also noticed when Boeing reported yesterday or the day before yesterday. That they are a little bit more offensive in their forecasting a change in how they communicate.

So I'm really positive about that. Airbus is currently targeting the A350 build rate of 6 aircraft per month, and they're also communicating that they will increase to 9 by the end of 2025. The first Boeing 777 airplane is expected to be delivered in '25, and we then forecast a gradual ramp-up of our 777X deliveries starting in 2024.

Next slide. During the first quarter, we continued to see interest in our anti-condensation system, driven by cost savings and sustainability. We have several RFQs trials on -- trials outh there and I'm quite positive about the outlook. The decision time on this is hard to predict. It is somewhat ironic, but airlines struggled to scale to meet the strong travel demand. This includes the aircraft, AirCruise, ground staff, MRO, et cetera.

And we see that this clearly is a limiting factor to the airlines, but we try to navigate around it to get decisions on these important orders.

Next slide. Looking at cabin humidification. We're still fighting to get our first win and the cabin humidification retrofit opportunity.

The business environment is improving. And we start to generate opportunities again as intercontinental travel come back to normal levels and the airlines generate profits. We see the coming airline interest in cabin air quality and humidity for crew and passenger wellness.

There are also very large upgrade projects at some airlines, but we also see opportunities in the intermediate upgrade projects that makes a difference to the cabin experience.

There is also possibilities when airlines wish to harmonize their fleet. Of course, the high demand and therefore, following pressure on the airlines to produce flight towers is pushing some decisions, prioritizing flights over upgrades.

Together with our partner, Collins Aerospace, we strengthen our efforts to get the first cabin humidification retrofit order. The retrofit market for humidification as well as anti-condensation is promising, but it's hard to predict the speed of the market.

Next slide. As part of our strategy, we continue to invest to reach new opportunities. We particularly focus to extend and improve our offering in private jet.

Humidification is a de facto standard in the wide body VIP segment, and we aim to increase our penetration rate for narrow-body VIP. Based on the VIP success, we aim to grow into the large cabin business jet segment. Private jet will contribute to our growth in the coming quarters and is a key contributor to reach our long-term targets.

Next slide. I'm really happy about the cooperation with Airbus corporate jets. It is a success in the marketplace and marks a shift when we optimized the humidification system and is offered and promoted by Airbus under ACJ320neo VIP family. We continue the project delivery. These kits today's ACJ320 family, and we have up-to-date delivered 3 kits for installation out of the 4 on order.

We have, together with ACJ, achieved a 100% hit rate so far. At CTT, we are intensifying our efforts to introduce the concept with other OEMs in the VIP market. The picture on the slide is from our first kit system installed on ACJ 319. If we then continue the partnership with Airbus yet also includes the brand-new design of a humidification bolt-on kit for the ACJ320 business yet. The first order was received in July last year.

And the aircraft will enter into service in 2023. After the ongoing installation of our bolt-on kit is finalized. The project sets the standard for the climate on board on the large cabin business yet, and it's creating awareness in the business. We are very proud of our partner, ACJ and that they see humidification as a key value of their customers' experience when they fly in ACJ business jet. And it is a differentiator compared with other aircrafts on the market.

ACJ is, therefore, intensifying their marketing, where humidification is a differentiation compared to the competition.

Next slide. The large cabin business jet market is growing, and the long-range market segment is 50 to 100 jets per year. A large cabin long-range business jet is designed for flights up to 16, 17 hours.

And without humidification, cabin air humidity is close to 0. CTT has proved that we can make our humidification technology work in a large cabin business yet. With the first successful installation on the Bombardier Global [ 7000 to 8500 ] and the second one will enter into service in Q2. We have added the strong references with ACJ 220 program soon to be delivered to the first customer.

ACJ is front running the market when promoting and endorsing our humidification system to obtain a healthy climate for long-haul flights. First, on the large cabin long-haul business jet market was Bombardier Global 7500, which is now further developed to the 8,000 being even faster and having even a longer range. Bombardier is closely followed by global by Gulfstream with their G700 and G800 and Dassault with their Falcon 10X.

For CTT, it's key to have OEM availability to get the volumes and we have intensified our discussions with operators, completion centers and OEMs.

Next slide. Aftermarket demand is robust and growing over time. I'm also confident that we in 2023, will significantly increase system sales. and are likely to commence a period of years where system sales will grow year-on-year. I'll summarize, I'm optimistic about the outlook for '23. We will increase sales and further improve our position in the market.

More importantly, we have compelling offering and a favorable market segment in aviation that should enable us to capture some of our strategic growth opportunities. Next slide.

And with that said, I hand it over to you for some questions.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier. Please go ahead.

[Karl Bokvist, analyst]

My first one, just to get it out of the way, the one-off in this quarter related to the inventory write-down. Just one thing, what was it related to?

And number two, what's the kind of -- you mentioned it as a onetime effect, but just to clarify, I mean, do you foresee any risk to remaining part of the inventory of further write-downs?

[Markus Berg, executive]

I can answer that. The inventory right down was mainly due to revised impairment policy. So it's mostly spare parts that we write down. So that's the main reason.

[Karl Bokvist, analyst]

Okay. And yes, based on your view on the spare part inventory at the moment there, you don't foresee any need for further impairments going forward?

[Markus Berg, executive]

Not at the level we had in the first quarter. We always do small write-downs, but not on this level.

[Karl Bokvist, analyst]

Understood. And then going back a bit or turning to you, Henrik.

Last quarter, you flagged that you could see inventory adjustments and a normalization in aftermarket sales compared to perhaps too strong level at the end of last year.

So just to kind of understand what is happening there. Are the distributors trimming down the inventories as you expect, but there are other sales channels that you benefit from? And how did you manage to do that?

[Henrik Hojer, executive]

Thanks for the question. And I think it's a good one. it's really nice to see the aftermarket, and I think we have moved our position in the aftermarket where we've been quite dependent on a few products.

The aftermarket is now stronger. It's also wider, meaning that we have more programs that are up and running, producing site times and by that also creates demand for our aftermarket products.

And compared to previously, we have several legs to stand and they are kicking in.

So I think I was quite right on the forecasting on parts of the aftermarket where there was a stock buildup in Q3 and Q4.

That part of the aftermarket really hit our forecast. But we did not anticipate that the other legs that we are standing on, like repair and spare parts really increased and -- and that is, of course, because the airlines are really producing flight towers, and they are really keen on making sure that they can meet their schedules and then the demand for spare parts increases.

[Karl Bokvist, analyst]

Understood. And a follow-up on that, is this also related to what I believe you have mentioned on a few occasions that larger part of your installed base is now going beyond the kind of warranty period?

[Henrik Hojer, executive]

Yes, that's exactly true. I mean we're moving away from warrant. Okay, we'll get new warranties, but a large part of the fleet is moving away from warranties and that is, of course, showing in our numbers, yes.

[Karl Bokvist, analyst]

All right. And then another topic that was a bit in focus last quarter, and I come through your report and I couldn't find any mention of it now. So what's the latest on the new competitor or copy cats that you saw among some customers in the U.S.

[Markus Berg, executive]

No, there's -- I mean, we continue the work that we lined out. And I mean, this was something new, and that's why we picked it up in the previous quarter report summarizing the year. We now continue to fight this battle and I'm quite optimistic. I was optimistic a quarter ago, and I'm even more optimistic right now. We see that this copy is it's not up to the standard.

It's using a commodity material compared to the especially developed material that we spent years to do together with Munters. And we're communicating with the airlines. And I think everybody that listens to us will understand that our product is superior. And so I really don't have any news. It's just continuing to do our job and make sure that the airlines use the OEM product, which is superior.

[Karl Bokvist, analyst]

Understood. I'll -- I have a few more questions, but I'll get back in the queue first.

[Henrik Hojer, executive]

Looking forward to them.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

So on just the OEM. side, also that Boeing was out recently reporting. I mean we've heard some that they have still had some continued production challenges, mainly in the narrow-body segment. But from what I understand is also a bit of a widebody -- and now you kind of reiterate their production rates ramp up. So just to understand this -- I mean, have you also heard anything that -- yes, there are challenges, but you still feel that we can meet those targets that they have set up?

[Markus Berg, executive]

I was quite worried in the beginning of the year about Boeing. They had some issues. They even reported a short production stop. And I'm only talking about widebody and 787 since that's where we're on. And since then, it's been quiet. Boeing is really pushing us. And I guess every supplier to outline our plans to be sure that we can meet their ramp-up. And that's their total focus of Boeing right now, ramp-up of production of the 787.

And that's why I was really pleased to hear the change in language when they reported on the 787. They didn't talk anything about problems. They just talked about ramp-up and they said they are currently on 3. We actually thought they were a little bit lower. So that was positive for us. and then again confirming the 5 by the end of the year. And even changing a little bit in the way they wrote about the 10 per month in '25, '26 time frame. They actually moved it a little bit to the left, if I get them right. So I'm really optimistic about the 787 program right now.

[Karl Bokvist, analyst]

All right. That's good to hear. And then I was just curious about the clarification when you talked a bit about guidance. You mentioned a bit on how -- which sales channel should be driven by which effects and also a bit on which platforms that we're supposed to drive growth. So could you just repeat what you said there between the 787, [ Airbus ] and 777X, et cetera?

[Markus Berg, executive]

Sure. So 787 is, as you all know, our main program, the most important program, and they are on a very low build rate that have been and now they're on 3 then and then going up to 5 by the end of the year. And then 10 aircraft per month in '25 to '26 time frame.

And as I said, they're a little bit more offensive in their forecasting.

Airbus is building 6 per month, and they're increasing to 9 by the end of '25.

And then the 777X, they've always said they had a production stop in '23, and then production will start and ramp up in '24.

[Karl Bokvist, analyst]

Understood. Yes, sorry. And on the next coming quarters, I believe you provided some comments there as well on...

[Henrik Hojer, executive]

So if we look at the next quarter, the Q2, then, our sales will continue to grow. We are forecasting SEK 75 million to SEK 80 million.

And that is driven by the aftermarket. And then when we look at the OEM sales, it will decrease a little bit, and that is due to the 777X program where we had quite a big delivery rate in Q1 to start off the program and our first serial production approved units.

We will continue to deliver in Q2 to the 777X, but not on the same level. A little bit lower. And then for the second half of this year, there will be no 777X deliveries at all, and then we will start again in '24.

[Karl Bokvist, analyst]

Understood. And my final one is just related to the VIP private jet channel as a whole. You talked mainly about it perhaps being a bit better in terms of orders towards the second half. How do you view the kind of delivery schedule and when we think about sales, both on -- well, mainly on those orders you have already booked, of course, given the lead times?

[Henrik Hojer, executive]

No, I think the year will continue. It started quite good. I think for Q2, it's more or less the same level. That's why I didn't say anything. And then Q3 and Q4 looks a little bit better. And on the private jet, I mean, I'm also very optimistic. ACJ is really intensifying our cooperation hopefully, I can come back with more news during the year on what we're doing. But just looking at the market, they will -- every market that gets even more offensive this year and humidification is really important for them to make them stand out. So that will drive the market. And it has driven the market. And I really hope that we can later on your announced cooperation with other OEMs making the same kind of deals that we have done with ACJ and so successfully.

And then I'm, of course, talking about Boeing and their BBJ. Of course, talking about Bombardier about Gulfstream and also later on, we'll try to go into Dassault as well and the Falcon.

[Karl Bokvist, analyst]

Okay. Understood. That's all for me. Thank you.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any questions from the web.

[Markus Berg, executive]

Okay. We have received two questions from the chat.

The first question is for the 787 and 777X and A350 are your system currently being sold as options or standard?

[Henrik Hojer, executive]

Okay. Thanks for that question. Unfortunately, you [ can't ] fly without the CTC humidification. We really don't understand how, but that's a fact. So we are always options on all 3 of these aircraft. It's an option that you can take when you specify your aircraft.

[Markus Berg, executive]

And the second question is, with the anti condensation retrofit opportunity, what is the approximately payback period, for an aircraft owner at current oil prices compared 2017, '18.

[Henrik Hojer, executive]

That's a tricky question. I'm not sure I'm going to be able to answer the last part of it, if I compare it to '17 and '18. But -- right now, when we calculate the payback is approximately 1 year. And of course, it will depend a little bit what kind of aircraft it is all it is how much it flies, where it flies and how the airline calculates. But when we calculate our standard payback right now with the current fuel prices is 1 year. And we see that this will change over time as well.

When fuel prices go up, we just had the EU deciding this week that the airlines will have to mix with sustainable fuel stuff starting in '25, very low, but still. And also, there might be changes in emission rights and how much they cost. So right now, 1 year, approximately, and we see that it will be more favorable in the future.

So I think that concludes the questions, then. And then just some final words from me then going to our last slide. And CTT, we are actually increasing our market efforts. And just in Q2, we will be present at some of the biggest events in our business and a few more.

We started in a few weeks with Air Cargo Europe exhibition conference in Munich, and we continue our efforts to break into the growing cargo segment. A few weeks later, we will address the private and business jet market at EBACE in Geneva.

And as [ pre-wins ] and summer begins, we once again will go to Hamburg with our partner call in aerospace for the aircraft interior exhibition spreading the message how we together can increase the passenger experience for our customers. The spring is also packed with events where we will meet our owners and future investors.

All these events are listed on our homepage. And I'll end off with thanking you for joining us at the Q1 earnings call, and I really hope that I, together with the CTT team will meet you and all our customers and all our investors in the next few months. Thank you for listening.