CTT Systems AB
STO:CTT
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
213.4388
385
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
CTT Systems AB
Earnings Call Analysis
Summary
Q2-2024
CTT Systems reported a 4% year-on-year increase in net sales, reaching SEK 82 million in Q2 2024, although slightly missing the forecast. Operating profit fell by SEK 3 million, with an EBIT margin of 38%. Delays in spares and repair deliveries impacted performance, but these issues are now resolved. Aftermarket sales drove 80% of turnover, while OEM demand is expected to rise in H2 2024. The guidance for H2 2024 net sales is SEK 160-180 million, a 3-16% increase year-on-year. The company remains optimistic about future growth, spurred by expected increases in deliveries to Boeing and Airbus.
You don't have any saved screeners yet
Welcome to the CTT Systems Q2 2024 Report Presentation. [Operator Instructions]
Now I will hand the conference over to the speakers CEO, Henrik Hojer; and CFO, Markus Berg. Please go ahead.
Good morning. Welcome to CTT's quarterly earnings call. I'm Henrik Hojer, and with me is Markus Berg, our CFO. We will present our financials for the second quarter and then our outlook going forward.
Next slide. First, I want to highlight some progress in our business. On the OEM side, we see continuous improvement in selection rates. At the Aircraft Interior Expo in Hamburg, 3 airlines confirmed humidifier selection for Business class, crew rests and flight deck on their first A350 batch and one airline confirmed maximum selection for its 777X fleet. In addition, we met several airlines that confirmed selection of humidification in flight deck and crew rests.
On the private jet side, Airbus Corporate Jets extends its enhanced humidification kit system offering to also include ACJ330 VIP aircraft with launch customer signed and project start in August. Private jet and Business jet. In July, CTT and Liebherr Aerospace agreed to enter an MOU to team up in an offering of CTT's humidification system to Bombardier for the Global 7500 and 8000.
Next slide. If looking at the numbers in short, net sales increased 4% year-on-year to SEK 82 million, slightly below the forecasted SEK 85 million to SEK 90 million range, mainly due to SEK 7 million in delayed spares and repair deliveries, derived from a shortage of 787 dryer components from one part supplier. This problem is now solved, and CTT will deliver these 787 spares and maintain units in Q3. Operating profit, EBIT decreased SEK 3 million to SEK 31 million year-on-year. The EBIT margin was 38% versus 43%. CTT generated operating cash flow of SEK 16 million. Earnings per share decreased to SEK 1.96 versus SEK 1.98.
Next slide. Net sales reported a SEK 3 million year-on-year increase with small changes in our business. Deliveries to 787 program increased significantly, but this increase was offset by 2 things: one, temporary lower shipments to A350 as Airbus aligned the supply chain; two, as expected, no 777X deliveries this quarter, but the comparable quarter included such deliveries. CTT has not delivered anything to the 777X program since Q2 '23, awaiting aircraft certification and resume production. Aftermarket sales accounted for 80% of the turnover.
Next slide. CTT booked orders were SEK 47 million versus SEK 54 million. Backlog decreased SEK 11 million to SEK 38 million. This is a low level. With 80% of our sales from aftermarket, we have short lead time from order to delivery. We will see a gradual increase in the order backlog as OEM demand increases. Typically, OEM orders have longer lead time compared with those in the aftermarket.
I now hand over to Markus for more financials.
Thanks, Henrik, and good morning all. EBIT in the second quarter amounted to SEK 31 million, a decrease with SEK 2 million (sic) [ SEK 3 million ] from SEK 34 million in the second quarter last year. We had a positive EBIT impact from higher sales volume, but offset by sales mix and margin burden EBIT with SEK 1 million, mainly due to lower Aftermarket share of 80% compared to 83% last year. Currency effect offset EBIT with SEK 1 million and cost increase of approximately SEK 2 million by investing in increased sales, markets and delivery capacity, including increased headcount to 84 from 77 compared a year ago.
Let's move on and look at the cash flow. Operating cash flow amounted to SEK 16 million compared to SEK 62 million last year, driven by financial performance, EBITDA, adding SEK 33 million, but offset by working capital increase by SEK 10 million, mainly explained by temporarily higher inventory due to larger deliveries of input material from our suppliers. Paid dividend of SEK 109 million in the quarter compared to SEK 51 million last year.
Let's continue by looking at the net debt Net debt amounted to minus SEK 5 million compared to minus SEK 16 million in the second quarter last year. Cash closed at SEK 49 million. And in addition, CTT has SEK 53 million in available credit facilities. Equity ratio at 70% compared to 71% in the second quarter last year. All in all, CTT has a strong financial position with net cash.
Let's move on to the year-to-date numbers. Net sales for January to June increased 4% to SEK 161 million compared to SEK 154 million, mainly driven by Aftermarket sales. EBIT increased 13% to SEK 64 million with an EBIT margin of 40%. Cash flow amounted to SEK 42 million compared to SEK 58 million last year, and earnings per share increased by 15% to SEK 3.92 from SEK 3.41.
If we continue by looking at the net sales for the last 4 quarters, they increased with 10% to SEK 315 million compared to SEK 287 million, driven by Aftermarket sales and OEM. EBIT increased with 14% to SEK 126 million from SEK 111 million. And finally, earnings per share increased with 21% to SEK 8.13 from SEK 6.73.
I now hand back to Henrik to give you the outlook.
Thanks, Markus. I will now present our business outlook and market drivers. First, short-term outlook. Instead of quarterly forecast, we provide guidance for the second half of '24. To give you a better perspective on total impact from the temporary adjustments in OEM related to Boeing's reduction of CTT's deliveries to align supply with actual build rate. Our guidance for net sales in the second half of '24 is SEK 160 million to SEK 100 million (sic) [ SEK 180 million ] a 3% to 16% increase compared to the same period in '23.
Sales growth in the second half of '24 compared to the same period in '23 is expected to be driven by: one, Aftermarket sales are likely to grow at the same pace as first half of '24 or slightly higher. We expect higher OEM sales, driven by increases in deliveries to both Boeing and Airbus, not as fast as previously predicted due to significantly reduced deliveries to Boeing 787 from September to December, impacting Q3 and Q4.
If putting this temporary pause in context, it's important to understand that this is not related to underlying demand. It's more of a timing issue. CTT's demand normally 6 to 9 months ahead of actual aircraft delivery. But in current environment with a slower-than-planned aircraft build rate increases and irregular deliveries to airlines, the OEMs can be forced to align inventories of all parts with actual aircraft output. This leads to a period with lower or paused demand from suppliers. CTT has already experienced such adjustments with very few A350 deliveries in the first half of '24.
In June, Boeing adjusted CTT's 787 production planning from September to December, significantly pushing down CTT scheduled deliveries. This sales drop will partly be balanced by normalized A350 demand in the second half of '24, again, reflecting aircraft build rates and specific shipset content. In the first quarter '25, CTT's 787 deliveries shall according to Boeing's delivery schedule normalize and again, mirror 787 aircraft build rates.
I will now go through the business outlook for each of our market. Next slide. Aftermarket. The Aftermarket is an important part of our business model. We have demand for consumables, spares and repair. Looking at rolling 4 quarters, we are currently at the trailing 12 months run rate of SEK 254 million. Going forward, I reiterate that the Aftermarket sales no longer will benefit from pent-up demand due to shortages after pandemic. As a consequence, Aftermarket growth will be significantly lower in '24 compared with a 30% increase we reported in '23. In the first half of '24, Aftermarket sales increased 9% compared to the same period '23.
Next slide. The OEM business will be a strong growth contributor in the coming years, driven by widebody production rate increases, targeting pre-pandemic levels or higher. The pace of growth primarily depends on Airbus and Boeing's ability to scale production and deliver aircraft. Widebody build rate increases in the first half of this year are lower than previous targets due to supply chain issues at both Airbus and Boeing. As a result, Airbus delivered only 21 A350s in the first half of '24, while Boeing handed over 22 787s to airlines, both below actual build rates and disclosed targets.
Airbus started the year with a monthly A350 build rate of 5 to 6, targeting 10 in '26 and 12 in '28. Boeing raised the 787 production rate to 5 but deliveries are held back by supply chain shortages and delivery issues. In Q2, Boeing disclosed that it's slowing near-time production with plan to return to 5 per month later this year, still expecting to achieve gradual rate increases, including 10 per month by '26. Other contributor will be deliveries to 777X. Last week, Boeing started 777-9 certification flight testing with U.S. aviation regulators on board. The first flight was on July 12 after receiving Type Inspection Authorization. Enter into service is targeted to second half of '25.
To summarize, the OEM business will be a resilient growth driver that will continue to grow for years driven by massive wide-body aircraft order backlog.
Next slide. CTT is aiming for even faster sales growth by increasing shipset content by improving selection rates and expanding product availability at commercial and private jet OEMs. Today, we have 90% penetration in flight deck on Boeing 787s and similar selection rate on new A350 operators. In total, we have flight deck humidifiers installed in service in more than 1,000 aircraft and more than 50 airlines. We have good momentum, making significant progress to improve our A350 selection rates compared with the ones we had early in the program.
In addition to line fitting the flight deck humidifier, A350 operators, to a greater degree, now select humidifiers for crew rests and business class. We will start to recognize such sales impact from '25.
Next slide. Part of our growth strategy is to convince airlines not only to secure healthier climate for pilots and crew, but also to offer humidity at wellness level for the premium passengers in first and business class. This is an emerging market that benefit from a large installed base in flight deck and crew rests with excellent performance data and reliability. In this slide, it's a picture of Air India's A350-900 aircraft, with humidification in business class. Air India is our newest upgraded with 6 A350-900s as part of the new flagship fleet. In addition, we have China Southern Airlines upgrades in 2019 and Turkish Airlines since 2022. Even more important, 5 airlines have confirmed specifying humidifier onboard business in their first A350 batch and 3 airlines have configured it in premium cabins on 777-9s, all with first deliveries during '25 and '26.
Next slide. We have started to experience favorable market dynamics when airlines to greater degree defined aircraft with humidifier onboard business class in new aircraft. As it's common practice to harmonize onboard experiences in new and existing aircraft, we will have more retrofit opportunities when airlines opt to offer the same cabin climate performance in existing aircraft fleet. We also see other retrofit supporting trends driven by differentiation and competition. On the 787 program, CTT has a high penetration in flight deck and crew rests, but it's not possible to line fit in business class. We expect airlines to demand same premium cabin climate performance in 787s, as in A350s and 777Xs, where cabin humidification is available as a catalog option. The market is approximately 1,000 aircraft.
On the A350 program, most of the A350s leaving factory from '25 and onwards to new operators, will have humidification in flight deck and crew rests and to a greater degree in business class. Early in the program, airlines for various reasons did not select the system. The first A350s are reaching 9 years in service and the wave of cabin retrofit, which is now starting with rapidly gaining momentum over the next few years. Since 2014, more than 600 A350s have been delivered, and Airbus is anticipating the first cabin retrofits, which typically occur on an aircraft that reach 8 years of service. By '28, there will be around 400 A350s that will have reached this age.
The retrofit project is an opportunity for an airline to obtain a cabin climate performance at par with modern A350s. We predict retrofit demand for cabin humidification but also for flight deck and crew rests. Retrofit on Boeing 787 and A350 require cooperation with Boeing, respectively, Airbus. We are approaching both.
Next slide. The private jet market has its own cyclical behavior. CTT's VIP project pipeline is at record high, but Q2 revenues remain as expected at low level, but well positioned to win VIP orders when the market picks up, mainly driven by Airbus corporate jets. When we will receive these orders, it will be a function of my other things, VIP aircraft availabilities. 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 15 million.
Next slide. A top priority for CTT is the large cabin business jet market. As stated before, we need to be endorsed and included in the offerings by the OEMs. Airbus corporate jet leads the way by promoting our humidification system together with and as part of the green aircraft. This business model is well received by the market and customers. It is now a de facto standard on the ACJ comfort package for long range. Our future growth strategy in private jet aims to convince other manufacturers to follow and hereby unlock the market.
As you can see in this picture, we target Boeing business jets, Bombardier Global, Dassault Falcon and Gulfstream. If we convince any of these OEMs, sales volumes will increase significantly. Lead time from OEM award to first revenue will be 12 to 24 months. At present, we have no business jet OEM award, but I'm still cautiously optimistic that we shall enter ACJ similar partnership with at least one additional private jet OEM in '24.
Next slide. The Anti-Condensation business is slowly recovering. We have a clear strategy, and I'm convinced that we will see a revival. But as stated before, the key enabler is OEM availability at Boeing MAX and Airbus Neo family. Our strategy focuses on retrofit customers to drive and put pressure on Airbus and Boeing. As part of this effort, we have field trial with a major low-cost carrier in 6 A321s. We also try to convince our largest customers, Jet2 and Transavia, the moisture protect their newest aircraft from Airbus. Both are in transition from all Boeing fleet to include -- to introduce new Airbus A320 family aircraft. Previously, the [indiscernible] Anti-Condensation system BFE line-fitted in their new Boeing 737NGs.
This is not yet possible at Airbus. Instead of first retrofit window will be at [ seat check ] We will, in parallel together with them and other airlines try to convince Airbus that it should be possible to install our green tech system in new aircraft before delivery, AIDA's line fit of the system or provisioning for post-delivery modification.
Next slide. If I try to summarize, supported by Airbus and Boeing's massive order backlogs. CTT's market is poised to grow significantly following the ongoing production ramp-ups of Boeing 787s and A350s and soon Boeing 777Xs. We aim to grow sales even faster by increasing shipset content at commercial and private jet OEMs, a more opportunistic driver is retrofit, where we foresee emerging opportunities in the first wave of A350 cabin retrofits. We've also made progress in our efforts to win additional OEM customers in private jet. I admit that I'm somewhat frustrated about the external factors that temporarily hold back our OEM growth in the second half of '24. But I'm energized by CTT's step-by-step progress in leveraging our marketing position even further and encouraged by CTT's strong outlook for '25 to accelerate and obtain sustainable growth.
I'll now hand it over for questions.
[Operator Instructions]
The next question comes from Karl Bokvist from ABG Sundal Collier.
My first one is on the outlook for the second half. I understand the reason why you shift to a full 6 months instead of 3. But could you shed any light on whether or not you see differences in these adjustments, whether or not do you think they will be more -- have more of a negative impact in Q3 compared to Q4 if you expect this notable pickup in Q1 versus Q4, for example?
Karl, and thanks for the question. And of course, we've been elaborating a lot on this topic. And as we see it, we think it's more -- it gives a better picture to the market if we predict the full half year instead of dividing it up to Q3 and Q4. And the reason for that is the shift in the deliveries that Boeing has made and also on top of that, the Aftermarket, which is very short cycle, and it's hard to predict if orders will come in, in September or October. So I think with that and the special situation we are in right now, we think half year is a good measurement to predict.
Understood. And then this discrepancy in deliveries versus build rates, could it also be that the opposite could happen in like a year or so once the supply chain recovers with bigger components to the aircraft, for example.
I mean one thing that is clear is that our Aftermarket business, if we look at spare parts and repairs will grow with the age of the installed base. That's the nature of the equipment we deliver that they will need spare parts and repairs. And with the stabilized supply chain, we will continue to grow this market in the future. It should not leapfrog. And this little hiccup we had where we had a technical problem that we reported in Q1. The problem was solved in Q1 but I need to add that we're a little bit misjudged the delivery times to set up the supply chain again and start delivering on the new technical solution, and that's what held us back in Q2 on this topic. We have now received the first batch of production units and we're up and running again.
Understood. And on that topic, this Dreamliner dryer, is this towards Aftermarket deliveries?
Yes. So, this is repairs and spare parts that's been affected.
Understood. So when it comes to anti-condensation deliveries to the OEMs, it's still on a very low level.
Correct.
Okay. But then on the -- I'm sorry, but I didn't fully hear what you said about the update on like penetration across the platforms. Can you just repeat that and potentially also add a little bit. I mean the news you posted of Aircraft Interior Show seem to point towards a very good penetration rates also on the 350?
Yes, I think that's the new thing that we see that A350 is really picking up from being a disappointment in the beginning of the program. But right now, we see really higher selection rates from especially new operators of the A350, which is quite a few. And they select flight deck, I would say, in the same range as it's done on 787s. But they also choose to humidify their crew rests. And as we have reported 3 operators flying with business class and a few more have announced that they have selected it for future deliveries in '25 and '26. So A350 is what we really -- we are really enthusiastic that this is happening. We've talked a long time about improving our selection rates, but we actually see it happening now.
Understood. And is there anything more to add on the 777X?
Again, we got one more operator that confirmed that they have selected all humidifiers on board that makes 3 airlines that have configured their 777Xs with our humidifiers. And we are continuing to approach the rest of the customers to see if we can get them to select more humidifiers on board as well. Then I'm thrilled actually that Boeing announced that they started the flight testing with authorities on board again. There's been lots of rumors of delays on the program, but this is a clear step towards certification and with that deliveries. And Boeing is withholding the '25 -- end of '25 time line for that. So that's really good news.
Understood. Then just a quick question to Markus. The working capital changes this quarter, would you say that it's more related to typical seasonality and a bit of a delayed deliveries? And how -- should we expect a bit of a reversal in working capital during the second half?
Yes, it's also a bit disappointing that the working capital was actually minus SEK 10 million in the quarter. But it's temporarily and it will look better in the third and the fourth quarter. So I think that we are, of course, working with inventory to try to reduce it and try to find the optimum level for the inventory. So we -- so it's temporarily.
Understood. Then back to you, Henrik. The partnership here with Liebherr. Just curious, I mean, you have highlighted their name as a competitor within VIP for a couple of years. But what's the rationale behind this partnership and what do they bring to the table, so to say?
I mean we have signed -- we have agreed to sign an MOU with Liebherr to approach, make a joint proposal on the Global 7500/8000 Bombardier. And the strength there we're teaming up with Liebherr is that Liebherr is the supplier of the environmental control system to the Global 7500. And jointly, approaching Bombardier gives strength to us. And we see it together as the best combination of our resources, both technology-wise and financial-wise. We are stronger together than alone. And we're quite sure that this joint proposal is welcomed by the market. And in this case, it's Bombardier that see this as a strong team, so to say.
Understood. But just could you give us an update here? Do they also have a portfolio of humidification systems, but they will now in this kind of MOU focus more on the -- just the environmental control system parts that do not include the Humidifier?
So the first part of the question is, yes, they have a humidifier for smaller private jets that use in different technology. In this specific case, we have agreed to use CTT's technology for the system on the Bombardier 7500, and the system contains then our humidifiers and our anti-condensation unit, and that will be integrated into the ECS system supplied by Liebherr.
Understood. All right. And when you say then also that you're still hopeful that you will get another partnership during H2 here. If possible, what kind of scope are we talking about? You have disclosed the kind of potential annual aircraft volumes with the ACJ program, but what do you think we could expect here.
But if we use Bombardier Global 7500 as an example, they have a production rate of, I think, 35 to 45 aircraft per year, and that's what they've been delivering so far. I think they're somewhere just under 200 aircraft delivered totally. And if we can pursue this business opportunity together with Liebherr, we, of course, want to have this as a line-fit option or a BFE option on new aircraft. But of course, we're also looking at the retrofit market of already delivered aircraft.
So roughly 40 aircraft per year from Bombardier and then the retrofit opportunity on a little bit below 200 is that business case. And then of course, as I've shown on those picture, we are, of course, trying to do the same thing with Gulfstream. I think they are aiming at the same kind of production rates on the 700. And then, of course, we have ACJ's competitor, BBJ, that is one target of our campaigns and a little bit more on long term [indiscernible] therefore comes with maybe a little bit lower volumes, but still quite significant.
Understood. That's all for me.
[Operator Instructions]
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you. And before closing this earnings call, I would like to wish you all a nice summer. Thanks for listening and talk to you after the summer. Goodbye.