CTT Systems AB

STO:CTT

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the CTT Systems Conference Call. [Operator Instructions] Please note, this event is being recorded.

Today on the call, we have with us Mr. Henrik Hojer, CEO; and Mr. Markus Berg, CFO. I would now like to turn the conference over to the CEO, Henrik Hojer. Please go ahead, sir.

[Henrik Hojer, executive]

Good morning, and welcome to CTT Earnings Call Quarter 2.

Next slide, please. I'm Henrik Hojer, and together with Markus Berg, we will present the results of the second quarter.

Let's go directly into our report and Slide #4, please. Business highlights of the past 3 months was that the aftermarket continued to grow more than we expected and now is restored to the 2019 levels.

CTT and Airbus Corporate Jets further developed our partnership, signing a business agreement for optional in-flight humidification for ACJ, and they promote humidification to obtain the best climate in their aircraft. The proposed system marketed by ACJ are the bolt-on kit we have developed together.

We also experienced that the business environment improved when we, for the first time in 3 years, visited aircraft interior exhibition in Hamburg. As usual, you don't sell anything at exhibitions, but we generated a long list of opportunities that we are now following up on and we try to convert into sales.

Next slide, #5, please. In quarter 2, we saw a strong growth of sales and profit. Our EBIT margin was the highest since quarter 3 in 2019. Net sales reached SEK 58 million, an increase of 56%. EBIT was SEK 23 million, giving an EBIT margin of 40%. Earnings per share was SEK 1.21. And we generated an operating cash flow of SEK 4 million.

Next slide, #6, please. The increase in net sales was driven by the aftermarket sales recovery and private jet growth. The aftermarket increased to SEK 16 million, and private jet rebounded as expected and was up SEK 6 million. Retrofit stayed on the same level as previous years. And OEM is now on a record low. As you can see on the market mix, this quarter was dominated by aftermarket sales, but with a good comeback in private jet.

Next slide, #7. Order intake and backlog decreased in the period. Gross order intake was SEK 44 million compared to SEK 52 million in the same period last year. This is mainly explained by a record low build rate by Boeing on the 787 program and aftermarket sales dominating our revenue with short lead times from order to delivery, meaning that order and delivery can be in the same quarter.

We, at CTT, can't see that the Russian market will return in the foreseeable future. And as a consequence of that, we have, this quarter, canceled all our orders from the Russian market booked at a value of SEK 14 million. And this leads to an order backlog of SEK 52 million.

I now hand over to Markus and the next slide, #8, please.

[Markus Berg, executive]

Thank you, Henrik. EBIT profit bridge. Adjusted for items affecting comparability, EBIT in the Q2 last year was SEK 2 million. The increased EBIT in the second quarter 2022 is driven by the following factors. The main reason for our increased EBIT is business-driven, with SEK 11 million from higher sales volume and SEK 3 million primarily from higher aftermarket share. CTT is profiting a lot from stronger U.S. dollar compared to SEK, with approximately SEK 9 million this quarter. Given this, EBIT increased to SEK 23 million in the quarter.

Let's move on to the next slide, #9. Cash flow. Operating cash flow amounted to SEK 4 million, driven by improved financial performance, EBITDA, but partly offset by negative working capital. Working capital is higher, mainly due to increased account receivables from higher sales and some large payments sliding into the third quarter.

Dividend of SEK 10 million or SEK 0.79 per share has been paid to shareholders in the second quarter. Given this, net debt now amounting to SEK 30 million compared to SEK 45 million in Q2 last year.

Let's go to the next slide, #10, and then directly move to Slide 11 for the accumulated numbers, January to June. Accumulated net sales amounted to SEK 108 million, an increase of 56% from SEK 69 million last year. Adjusted for currency effects, an increase of 39%, mainly driven by the recovering aftermarket.

January to June EBIT increased to SEK 38 million compared to SEK 7 million last year. Earnings per share increased to SEK 1.97 from SEK 0.23 last year.

Let's continue to the next slide, #12. Accumulated cash flow. Operating cash flow amounted to SEK 13 million compared to 0 last year, driven by improved financial performance, but partly offset by negative working capital, as mentioned before. Increased inventory, mainly in the first quarter, also affecting working capital negatively. But again, CTT accept customer payments to be settled in the third quarter, improving coming operative cash flow.

During this year, we have reduced debt with the repayment of U.S. dollar loan of SEK 33 million in the first quarter.

Let's move on to next slide, #13, and we now move over to rolling 4 quarters. So next Slide #14. As mentioned before, OEM sales is late in recovery, private jet looks promising going forward and the aftermarket is driving the net sales growth.

So in numbers, net sales of SEK 190 million compared to SEK 142 million, up 34%. Operating profit increased more than 300% to SEK 57 million compared to SEK 13 million last year. EBIT margin of 30%, up from 9%. Earnings per share, SEK 2.87 compared to SEK 0.78, an increase of more than 200%. And finally, operating cash flow of SEK 43 million improved from minus SEK 5 million last year.

Next slide, #15. I now hand back to Henrik to give you the outlook. So next slide, #16.

[Henrik Hojer, executive]

Thank you, Markus. Let's go into the outlook and the net sales forecast for the third quarter. We forecast net sales between SEK 58 million and SEK 63 million, and we expect the sales mix to mirror the one of the second quarter. This gives a rolling 4 quarters between SEK 203 million and SEK 208 million.

Next slide, #17, please. In the first half of the year, the aviation industry remained strong, but with airlines and airports struggling to scale capacity to meet the surging travel demand. In parallel, the macro outlook has further deteriorated in the second quarter.

We, at CTT, have the flexibility in our strategic plan to reaccelerate revenue growth in a challenging environment. Now, more than ever, CTT is in a strong position to grow sales in all our segments.

Private jet. The partnership with ACJ started the recovery and it puts us in a strong position for further growth and it's not impacted by normal cyclic variations.

OEM. Airbus is planning to increase production, and Boeing foresees deliveries to restart. This is long cycle and it makes the production planning robust.

Retrofit market for humidification and anti-condensation is positioned for growth, supported by the mega trends in favor for our products that make flying a little bit more sustainable and far more pleasurable. Humidification is usually linked to a cabin upgrade and airplane -- airline plans are long term. Anti-condensation is more sensitive to short cyclical changes.

The aftermarket, there is still some pandemic recovery potential left.

Next slide, #18, please. The aftermarket. We still foresee some pandemic recovery potentially of the aftermarket, from normalized aircraft utilization equaling more flight hours when intercontinental travel continues to resume.

We have also more products in service compared to 2019. The pandemic recovery effect will, however, gradually fade away and the underlying market -- aftermarket will instead then reflect changes in population, driven by chipset on delivered newbuild and retrofitted long-distance aircraft entering into service. As a result, we predict that the underlying growth rate in the aftermarket will be lower going forward compared to the past year.

Next slide, #19, please. Our OEM market is still lagging, and OEM will not contribute to growth in 2022. But CTT is in a strong position when the recovery predicts a restart next year.

On the 787, Boeing is communicating to be close to restarting deliveries. The program is producing at a very low rate and will continue to do so until the delivery is resumed, with an expected gradual return to 5 aircraft per month over time.

Airbus is currently targeting the A350 build rate to increase to 6 aircraft per month next year.

The first Boeing 777X airplane is now expected to be delivered in '25. To minimize inventory and the number of airplanes requiring change incorporation, the 777X production included a temporary pause in 2023.

In the background on this slide you see Norse Atlantic Airways, 1 out of 8 Boeing 787s fitted with CTT humidifiers on board. The aircraft was previously operated by Norwegian but is, from June, leased by Norse. This aircraft serves as another good example of a new CTT customer.

Let's go to Slide #20. There is a growing airline interest in cabin air quality, humidity and wellness confirmed by the selection of our systems in new aircraft. When the demand for travel now is rebounding, we, at CTT, start to get back into the position we were in 2019 on interest in retrofit programs. The benefit of humidified cabin versus the cost of fitting an aircraft with our system is compelling.

We noticed a growing airline interest. Projects will restart when the international travel comes back to normal levels and the airlines to normal profitability. This is an area where we now, together with our partner Collins Aerospace, renew and strengthen our efforts.

Next slide, #21, please. We are currently on a very low level in our anti-condensation retrofit segment. The anti-condensation market is currently driven by sustainability, topped with the higher oil price. CTT has a great offering for anti-condensation on Airbus 320 and Boeing 737.

We increased our efforts to obtain a supplementary-type certificate for Boeing 737 MAX. We focus on the European airlines where sustainability is a key target for all airlines. We have a strong prospect list that we continue to work on. Adding to that, our customers Jet2, ordered 57 new Airbus A321, and KLM Transavia, another 100 Airbus 320s. And that is great sales opportunities for CTT.

Next slide, #22. In quarter 2, we saw that sales in private jets came back as predicted. CTT is dominating the widebody VIP segment, and we now target to grow into large cabin business jet segment.

Next slide, 23, please. Our first opportunity is the Airbus ACJ320 family. Together with Airbus Corporate Jets, we offer optimized humidification. Our humidification system is promoted by Airbus, and we got our first orders in the fourth quarter 2021. The bolt-on kit delivery is more scalable compared to the VIP project, together with the completion centers that we have done in the past. Airbus has now sold the first handful of systems that will be delivered in '22.

Next slide, #24, please. Our second partnership is the partnership for ACJ TwoTwenty business jet. The first order was received in July, a couple of weeks ago. And after installation of our bolt-on kit in the completion center, this aircraft will be entered into services in '23. We expect this to be the first out of several orders from ACJ.

We see -- next slide, #25. We see a big opportunity in the large cabin business jet market. Here the OEMs hold the keys to the market. With good references from the VIP market and the cooperation with ACJ on the TwoTwenty, we have put ourselves in a position to successfully migrate into the large cabin business jet market.

The large-cabin, long-range business jet market consists of 51 to 100 new aircraft per year. The jets are equipped for best comfort and humidification system is required for matching climate on board.

The first humidification system fitted to a Bombardier Global 7500 is delivered to a charter operator and is now in service. CTT now has the needed references to approach other Global 7500 customers and, even more importantly, Bombardier. We will, in parallel, together with our partners, intense our efforts to reach out to the other OEMs, such as Gulfstream and Dassault and their customers.

Next slide, #26, please. Despite the effects from higher inflation and measures from central banks are likely to lower travel demand and put pressure on the airline margins, I want to underline that I remain confident in the long-term outlook of our business, supported by mega trends in favor for our products that make flying a little bit more sustainable and far more pleasurable. I'm convinced that the CTT team will be able to navigate the business landscape and generate solid growth despite coming challenges. Now, more than ever, CTT is in a strong position to grow sales in all of our segments.

Having that said, let's go to the last slide and hand it over to you for questions. Thank you.

[Operator]

[Operator Instructions] Our first question is from Karl Bokvist with ABG.

[Karl Bokvist, analyst]

The first one is more related to the quarter specifically. In the cash flow statements and the buildup on receivables, I seem to recall that in the first quarter you also said that certain milestones were postponed a quarter ahead. I'm just curious to find out if these are still kind of the same projects that you referred to that were postponed already in Q1 and now into Q3 or if it's some things that you booked in Q1 that you actually received money from in Q2, but then ones you were set to book in Q2 will now be in Q3.

[Markus Berg, executive]

I can answer that. Normally, when you have higher sales in one quarter, you get or CTT gets the payment in the quarter after. So we normally have about 60 days of credit time to our customers. So it's natural when you increase sales that the payments come the quarter after. But in this quarter, we had a lot of big payments in the end of the quarter. So we don't see that -- this is not a problem for us. We are confident that the customers will pay us in the third quarter.

[Karl Bokvist, analyst]

Understood. And then on the Q3 outlook and the sales forecast, with kind of a similar situation among the segments there. Just to understand the OEM ramp-up, would it be fair to assume that the OEM ramp-up will first start to materialize early 2023? Or do you think that we could see signs of increase in sales already in the fourth quarter?

[Henrik Hojer, executive]

We foresee that it will start next year. They need to ramp up, deliver the aircraft on ground and then come back into production.

[Karl Bokvist, analyst]

Understood. And then just a bit of a similar question, but on the private jet side, now that you have started actually establishing formal partnerships with Airbus in particular, but you also highlight Bombardier for example. How should we think about the potential sales progression in this segment?

[Henrik Hojer, executive]

It's an extremely good question, and I think a few things. It's important to point out that we have this proof of concept with a certified system and a satisfied customer in Bombardier 7500. And also, having quite a lot of buzz in the market from the ACJ cooperation on the TwoTwenty, we see an increased interest from all the OEMs now and we have started discussions with them. They're also quite afraid of condensation in the aircraft. That's the first question we get. And I think now with those 2 references, we can actually show them that we have systems in the air that gives a nice climate on board without any condensation problems.

So we have the system for Bombardier 7500 for retrofit ready to be delivered. Our goal is, as you know, to be on as a standard or a standard option with the OEMs, and that will take a little bit longer time. But it's picking up now, but it's extremely hard to predict when we can get firm contracts or deals with those OEMs.

But I think having this Bombardier up and flying and also now ACJ proving the TwoTwenty is equipped, it's really creating a buzz and an interest in the market.

[Karl Bokvist, analyst]

All right. And the final one just for me before getting back in the queue is on the aftermarket side. And would it be possible for you to give some kind of comments on how you believe that the installed base has developed during the first half of this year?

[Henrik Hojer, executive]

How the installed base has developed, I mean...

[Karl Bokvist, analyst]

Yes, just to understand the kind of -- you highlighted a strong recovery within the installed base, but you also say there is potential once you begin to deliver more systems again. And up until a few quarters ago, the base still grew. So just to understand if you still believe that the installed base or the population of systems out there continue to grow a bit or at least remained flat during the first half of the year.

[Henrik Hojer, executive]

Okay. So compared to the 2019 then, the installed base is more or less the same. A350 has continued to deliver, but it's 5 aircraft per month. And compared to the 787 fleet, it's quite not so much. So that is more or less constant since 2019. It's the flying hours that come back.

What's happening now is that as soon as Boeing starts to resume the deliveries, those 115, 120 aircraft parked on the ground will enter into service. And that, of course, will generate more flight hours and increase our aftermarket sales. With approximately this 4,000 flight hour delays or a little bit less than a year, those will come in and affect our aftermarket again. And then we will continue to deliver systems with the build rate that Boeing and Airbus has. And I really, really hope to put some retrofit deals into the play as well during next year.

[Operator]

Thank you. This concludes our question-and-answer session and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.