CTT Systems AB

STO:CTT

Earnings Call Transcript 2023-Q2

[Henrik Hojer, executive]

Good morning and thanks for joining us at the CTT Earnings Call Second Quarter '23.

Next slide. I'm Henrik Hojer, CEO of CTT; and I'm here together with our CFO, Markus Berg.

Next slide. The second quarter confirms the trend of gradual improvement in our business environment. In June, we had a successful expo in Hamburg, where we met several airlines, where we're planning next-generation business class interiors.

Several of those consider humidification as a part of such refurbishment. We also had a fruitful private jet exhibition in Geneva at EBACE, where we further strengthened our cooperation with Airbus corporate jets. And received confirmation in the industry that humidification is vital for cabin climate in private jets.

Next slide. Our financials show a solid second quarter with net sales growth into the upper part of forecasted range and a strong cash flow. EBIT continued to increase up to SEK 34 million, and our EBIT margin was 43%. The profit was SEK 25 million; and the profit margin, 39%. Earnings per share increased 64% to SEK 1.98. Operating cash flow improved to SEK 62 million.

Next slide. Let's take a closer look at the year-on-year sales bridge and mix. Net sales in the quarter increased year-on-year by 35% to SEK 79 million, primarily aftermarket-driven, reporting increased year-on-year revenues SEK 25 million or 62% to 65%. The aftermarket was fueled by increasing demand for consumables and large spare orders. OEM sales improved SEK 2 million to SEK 8 million and mainly due to increased deliveries to Boeing.

Private Jet had a temporarily weak quarter when the red ship kit system was deferred by the customer into Q3 due to a delay in the VIP cabin completion project. The sales mix showed a strong dominance from aftermarket activities increasing to above 80%.

Next slide. Our order intake was SEK 54 million, driven by aftermarket demand, where many of the orders often can be delivered in the same quarter. As a consequence, our backlog is not growing. When we start to benefit from wide-body build rate ramp-up, the temporary inventory at OEMs will decrease. And due to longer lead times from order to delivery, our backlog will increase. We entered the quarter with an order backlog of SEK 49 million compared to SEK 52 million a year ago.

I now hand over to Markus, who will comment on profitability and cash flow. Next slide.

[Markus Berg, executive]

Thank you, Henrik, and good morning, everyone.

EBIT in the second quarter was strong and amounted to SEK 34 million, an increase with SEK 10 million from SEK 23 million in the second quarter last year. The main reason is business-driven with SEK 9 million from higher sales volume and SEK 2 million from a higher aftermarket share in the revenue mix.

CTT is profiting from a stronger U.S. dollar compared to SEK with approximately SEK 4 million on sales, offset by SEK 3 million from accounts receivable, accounts payable valuation. Higher costs mainly due to higher sales and development activities compared to Q2 last year.

Let's move on to the cash flow. Operating cash flow was strong and amounted to SEK 62 million, driven by improved financial performance, EBITDA and positive working capital, including inventory reduction with SEK 2 million and late customer payments from Q1 received into this quarter, offset by paid variable remuneration of SEK 10 million and dividends of SEK 51 million paid to our shareholders in the quarter.

If we continue and look at the net debt amounting to minus SEK 16 million compared to SEK 30 million in the second quarter last year. Cash closed at SEK 62 million. And in addition, CTT has SEK 51 million in available credit facilities. Solidity at 71% compared to 70% in the second quarter last year. But all in all, CTT has a strong financial position.

If we continue and look at the accumulated numbers for Q1 to Q2, net sales amounted to SEK 154 million, an increase of 43% from SEK 108 million last year. Adjusted for currency effect, the increase was 31%, mainly driven by the growing aftermarket. January to June EBIT increased to SEK 56 million compared to SEK 38 million last year. And earnings per share increased with 73% to SEK 3.41 compared SEK 1.97 last year.

If we look at the cash flow. Operating cash flow January to June amounted to SEK 58 million compared SEK 13 million last year, driven by improved EBITDA and positive working capital. Positive effect on inventory reduction and account receivables, partly offset by payment of variable remuneration. Payment of tax debt regarding last year was made in Q1. And as I said, we paid a dividend of SEK 51 million to our shareholders in the quarter.

Finally, if we look at the rolling 4 quarters, net sales were SEK 287 million compared to SEK 190 million, up 51%. Operating profit increased 94% to SEK 111 million compared to SEK 57 million. EBIT margin was 39%, up from 30%. And earnings per share, SEK 6.73 compared to SEK 2.87, up 135%. And finally, a strong operating cash flow of SEK 107 million, up from SEK 43 million.

I now hand back to Henrik.

[Henrik Hojer, executive]

Thanks, Markus. I will now make a few comments on our outlook. So let's go to the next slide.

I'll start by looking at Q3. The net sales forecast is SEK 70 million to SEK 75 million. Private jet is expected to significantly increase sales quarter-on-quarter, but this gain will be offset to a greater degree by a negative impact from our aftermarket OEM and the currency. Aftermarket sales are expected to be lower due to normalized and decreased demand for spares after 2 very, very strong quarters.

OEM sales will decrease slightly due to: one, a pause in the 777X deliveries, as Boeing holds production until receiving certification; and two, larger-than-required humidifier inventories at the OEMs. This situation is temporary, and it will be adjusted during Q3 and Q4. OEM demand for humidifiers shall then again track aircraft production rates.

Another factor weighing on the downside in the forecast is a negative impact from currency quarter-on-quarter. With this forecast, we will reach SEK 292 million to SEK 297 million in trailing 12-month sales compared to a pre-pandemic high of SEK 365 million. I will now go through the outlook beyond Q3 and comment each of our businesses in more detail.

Next slide. I'll start with aftermarket. The aftermarket has proven its resilience, rebounded strongly from pandemic shock and resumed normalized growth in line with our predictions. In the second quarter, aftermarket sales reached a new all-time high, driven by increased demand for consumables and large spare orders.

Given the demand for spares are more stochastic than the consumables and given large spare orders in Q1 and Q2, I expect significantly lower spares demand in the second half of '23. Although the underlying aftermarket continues to grow, I do not expect a new quarterly all-time high for aftermarket sales in '23.

When I look at the rolling 4 quarters, we're currently at the trailing 12 months run rate of SEK 228 million compared to a pre-pandemic high of SEK 148 million and a low of SEK 62 million in Q1 '21. Going forward, aftermarket growth rate will be lower as underlying demand is normalized and again tracks the changes in population size, driven by the new systems delivered to Airbus and Boeing.

And in addition, short term from already built 787s that enter into service with CTT products already fitted. We also had -- we also, to a large degree, benefit from growing demand of repair and spares from our population out of warranty. With this in mind, it must compensate slower aftermarket growth by increasing sales of our systems.

Next slide. If I then look at our OEM business, we're in a turnaround situation. Trailing 12-month sales are SEK 28 million compared to a pandemic low of SEK 20 million and SEK 166 million at the pre-pandemic high. Demand outlook for OEM humidifiers is robust in growing with the wide-body aircraft production ramp-up in '23. This will generate significantly higher OEM sales this year, and it will continue to increase in upcoming years.

The main driver will be from the Boeing 787 program, currently at the build rate of 4 aircraft per month, forecast to reach 5 by the end of '23. And this is compared to 1 to 2 aircraft at the end of '22. Boeing is targeting a build rate of 10 787s per month in '25/'26. This ramp-up is in steps. Another important driver is the A350. Airbus is currently targeting a build rate of 6 aircraft per month and they're increasing it to 9 by the end of '25.

In addition, we will benefit from Boeing 777X program with the first delivery scheduled in late '25.

And to summarize, the OEM business will not only drive sales many years ahead, but also generate opportunities for retrofit sales, driven by the demand to harmonize airline fleets. This is a really important paradigm and a pillar in our growth strategy that finally is about to happen.

Next slide. Our anti-condensation business continues to underperform. Although we did not expect any sales in Q2, it's frustrating to present another quarter without orders. The retrofit market has to continue to improve, and we have new leads and quotations for fleet installations and trials. Our strategy is unchanged. We need to obtain OEM availability. We can only accomplish this with retrofit customers and large buyers of new aircraft.

In lighter, I want to comment on the situation regarding 2 of our largest customers, Jet2 and Transavia. Both airlines are in transition from all Boeing fleet to introduce new Boeing Airbus A320 family aircraft. Both airlines have previously bought our anti-condensation systems linefitted in their new Boeing aircraft. This is not yet possible at Airbus. Instead, we will have to convince them to retrofit at first C-check. We will, in parallel, together with them and other airlines, trying to convince Airbus that it should be possible to install our green tech system in new aircraft before delivery. We remain convinced that Airbus and Boeing shall enable linefit of CTT anti-condensation system.

Next slide. We're still fighting to get our first retrofit win for cabin humidification. This is a huge opportunity. We have our flight deck humidifier in servicing close to 1,000 787s. All these aircraft are operating long-haul routes. Those airlines have selected flight humidification for the pilots. At a similar cost, they can now equip their business-class cabin and elevate passenger experience at true premium. Although we have not closed any project yet, I'm more optimistic as we experienced a positive shift in business environment driven by the next-generation business-class interiors.

After a successful expo in Hamburg in June, we can conclude that several airlines consider humidification as a part of refurbishment or an upgrade in between large interior projects. I expect that this positive momentum will generate some sales prospects in the fall. The retrofit market for humidification as well as anti-condensation look more promising, but it's very hard to predict the lead times.

Next slide. Another growth opportunity is the private jet market. CTT has a strong market position in the VIP segment, particularly in the wide-body market where we have high selection rates, but it is low volume market that is not growing and it's cyclical. We still have some growth potential on our narrow-bodies where we can improve penetration rate.

As a first step, we have a successful partnership with Airbus Corporate Jets. Based on our VIP success, we also aim to grow into the large cabin business jet segment. If looking at the private jet numbers, trailing 12-month sales have been ranging from SEK 10 million to SEK 30 million and is currently at SEK 18 million. We believe that we are in the beginning of period better order intake, short term driven by VIP aircraft and sporadic orders for business jets.

But more importantly, we start to see that positive industry impact driven by ACJ endorsement of humidification. As stated before, we need to support the OEMs to obtain high market penetration. This is a top priority for CTT.

Next slide. The market for large cabin long-range business jet is 50 to 100 aircraft per year compared to 10 to 20 VIP aircraft. These models are designed to optimize comfort for flights up to 17 hours. But without humidification, cabin air humidity is close to 0. This is a counterproductive to all the premium efforts. Since large cabin business jets are close to in size to small VIP aircraft, humidification system must be efficient to make the cabin climate comfortable. And at the same time, the system must moist to protect the aircraft.

Many OEMs have been hesitant to introduce humidification due to previous experience with other systems in smaller aircraft with bad performance and severe condensation issues. We have a large fleet of systems in service, and our technology is proven on more than 100 VIP aircraft. With industry best performance and higher reliability, CTT is the only vendor with anti-condensation system that moist to protect the business jet.

We have proven our capabilities further with successful system in service on Bombardier Global 7500, and the second aircraft has recently entered into service. We have a strong reference in the ACJ220 program. Airbus corporate jets is front running the market while promoting and endorsing our humidification system to obtain a healthy climate for long-haul flights. We must enter into similar agreements with other manufacturers such as Bombardier and Gulfstream. We made progress, and I'm very optimistic that we will get there, but it's very hard to estimate when.

Next slide. If I then summarize, Q3 sales will be weak compared to previous quarter, but it's due to temporary factors. The market environment is strong, and the underlying demand is growing. We have commenced the period for many years where system sales will support our growth year-on-year. And last but not least, I'm convinced that we are about to enter an era, where relentless and systematic efforts in our industry shall result in winning both new OEM awards and strategic airlines orders for linefit and retrofit.

Next slide. With that said, I hand it over to you all for questions.

[Operator]

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

[Karl Bokvist, analyst]

My first one, just a bit on the -- well, a couple of them, but let's start with the kind of sales gap that you mentioned compared to 2019 levels. Just wanted to kind of for clarification, if that excludes the dehumidifier OEM business, given that, that is no longer a part of your operations in that manner.

[Henrik Hojer, executive]

Karl, the sales gap and the figures we show, that's including the total OEM business. So in the 2019 figures, anti-condensation is still part of it.

[Karl Bokvist, analyst]

Okay. All right. So then implicitly, that could mean that you are perhaps even more optimistic than on the humidification side.

[Henrik Hojer, executive]

As I said, I mean, we have -- we back then had the 787 program running at full speed, but Airbus A350 was just in the beginning. And also, we forecast then that the 777X will contribute to the OEM growth. So we have a larger base of modern aircraft that will be in production. So yes, we are more optimistic on humidification.

[Karl Bokvist, analyst]

All right. And then within the VIP and retrofit side, if we bunch them all together, how -- you mentioned a bit of higher quotation activity and so on. In general or on average, how long could it normally take from asking for a quotation until an order materializes for you?

[Henrik Hojer, executive]

I don't think I can even answer that question. It's so many of the factors that varies. And I think it's from airline to airline. Some will be quicker and some will take more time. And it's also pending to the situation on workload that they have. We talked about that the last quarter that they are extremely busy producing flight hours. So I think that maybe slows it down a little bit more than I expected. But I mean, otherwise, it should be quite fast to go from inquiry to an order. And that's why, as I said, I expect that we will see some movement in the second half of this year.

[Karl Bokvist, analyst]

Understood. And on the retrofit examples or a potential you mentioned, for example, within the A320 and the customers you have there, is that still a possibility for you to do in a fairly, let's say, easy manner given the partnership with Airbus that was seized during the pandemic?

[Henrik Hojer, executive]

No. I guess, you referred to our -- tries to get the system as a linefit option in some way at Airbus and...

[Karl Bokvist, analyst]

Exactly.

[Henrik Hojer, executive]

I don't think it's at all connected to the 321XLR project. This is more a question of them having extreme high demand for the 320 family, widely exceeding what they can produce right now, and they're very hesitant to add any work. But I think we're in a situation now with the 2 examples I gave, Jet2 and Transavia, and maybe we can bring 1 or 2 more customers that can push Airbus to realize that it's quite easy to do a BFE, a bio-furnace installation, just like we did with Boeing before the pandemic with these 2 customers.

It's something we have started and I think we're moving in the right way. Then how fast we can convince Airbus or maybe it's actually the airlines that need to convince them, that's a trickier question. But we've started that journey, and I think, we have moved from a very, very reluctant Airbus to at least more in the listening mode Airbus, and I think we can move them even further.

[Karl Bokvist, analyst]

Understood. I have a couple more questions, but I'll get back in line first.

[Operator]

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

[Karl Bokvist, analyst]

So just to follow up also on something which I found interesting, maybe I missed it before, but I believe when you previously talked about the business jet potential, there has been a number around kind of SEK 100 million to SEK 200 million in annual sales potential. And now you say SEK 250 million to SEK 300 million. So that's, of course, very encouraging. But I'm just curious to understand what has driven the increase in the sales potential.

[Henrik Hojer, executive]

Can you repeat the question, Karl?

[Karl Bokvist, analyst]

Yes, sorry, maybe I've misunderstood before, but I believe in the -- in your initial comment in this report, you say you're addressing a large cabin business jet market with SEK 250 million to SEK 300 million in annual revenue potential. And I might have been mistaken, but I think before, in a couple of quarters back, at least in your presentations, you talked about perhaps SEK 100 million to SEK 200 million market. So it seems to have been -- you seem to have reassessed the market into a much more positive market potential.

[Henrik Hojer, executive]

Okay. No, yes, that's correct. I mean, we -- I mean, the market is, to start, is hard -- to really realize how many aircraft it is, but we talk about 50 to 100 aircraft. And if we are in the upper part of that level and we have a very good penetration, we would reach those numbers. And yes, we are a little bit more optimistic that with the movements and the endorsement from ACJ that we can -- we should be able to aim a little bit higher. That's correct.

[Karl Bokvist, analyst]

Sorry, my line was a bit there. How many aircraft per annum did you foresee at the moment?

[Henrik Hojer, executive]

I mean, we foresee 50 to 100. And if we are in the upper part of that level, then the market estimation is in the upper part of what you just mentioned. And we are with the endorsements from ACJ maybe a little bit more optimistic than we were before that we can get to the upper part where we before maybe thought we were on the lower part. But that's how we come to that number.

[Karl Bokvist, analyst]

All right. Understood. Then on -- if possible, could you give an update on competition, which you started the year saying that you saw some red here and there from the copycat, just curious to see what's the latest there?

[Henrik Hojer, executive]

Sure. No, I think we have a very strong position this granted copy, it's not really a copy even and it's a different product with bad performance and reliability issues. It's based on this commodity material and not at all done in the way that we have to reach the OEM requirements. And we're relentlessly working towards the market, and I think we're continuing to be successful protecting our market share. So I think we are in a very strong position.

[Karl Bokvist, analyst]

All right. Great. And then 2 more financial ones. The cash flow in this quarter, maybe directed to you, Markus, but it saw the impact from what you mentioned in Q1 that you got the cash inflow now in Q2 instead. But for the remainder of the year, how should we think about working capital development or cash flow as a whole? Will it be a more kind of a neutral effect? Or could we still see like, one, Q3 a bit more negative in working capital and then you get a release in Q4?

[Markus Berg, executive]

I think, the third and the fourth quarter will be more normal if you compare to historical numbers. It will mirror the EBIT or the EBITDA we have, for instance, no more late customers' payments coming in. So it will be on the level that you can expect with the result levels we have.

[Karl Bokvist, analyst]

Understood. And my final question, just historically, there is a seasonal effect on profitability and margins in the third quarter, and just wanted to see if that is the same, if you expect the same to happen this quarter regardless of all mix shifts between OEM and aftermarket and so on.

[Markus Berg, executive]

Yes, we would still -- in the third quarter, we will still have the effect of the vacation salary, which is more like SEK 4 million or SEK 5 million positive. So that will be at the same level as previous years.

[Operator]

There are no more questions at this time. So I hand the telco back to the speakers for any questions online or closing comments.

[Markus Berg, executive]

We have no questions online.

[Henrik Hojer, executive]

So then, I round off, and thank you all for joining us at the CTT Q2 Earnings Call. I really look forward to the second half of this year, and we're finally entering a period with improved business environment for us at CTT to win both new OEM awards and strategic airline orders for linefit and retrofit.

And with that said, thank you again to all of you. Have a great summer. See you again in August.