CTT Systems AB

STO:CTT

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to CTT Systems Audiocast for Teleconference Q4 2021. [Operator Instructions] Today, I am pleased to present CEO, Torbjorn Johansson; and CFO, Markus Berg. Speakers, please begin.

[Torbjorn Johansson, Chief Executive Officer]

Good morning to you all, and welcome to the Q4 earnings call by CTT. We go straight into picture on Page #2. It is me, Torbjorn Johansson, that make the presentation. At my side, I have our CFO, Markus Berg. We take the next page, Page #3. And we go straight into Page #4. For the fourth quarter, the highlights also, of course, we met, as usual, our forecast. Net sales came in at SEK 42 million. We have got relatively big retrofit order from Pobeda, over 20 aircraft. And we have got 3 private jet awards, which means that we have had a good order intake, and the backlog is the best since the pandemic started. We also had a strong operating cash flow SEK 20 million, so I'm really glad that we are back where we should be on the cash flow. We take the next page, Page #5, financials. Net sales increased compared to last year with 21% up to SEK 42 million. The EBIT came in at SEK 8 million, and we had a margin of 19%. We had a very strong operating cash flow of SEK 20 million. We take the next page, Page #6, the sales mix. As you can see, when you compare this quarter with the last quarter of '20, that the OEM has decreased a lot. And that is, of course, based on Boeing's delivery problem or production problems. The retrofit has recovered. Private jet is a little bit lower than last year. And the aftermarket has grown significantly compared to '20. We take the next page, Page #7. Here, you see the net sales bridge in more or less you see the same again. OEM has decreased from relatively low levels even more. During this quarter, retrofit has recovered. We are a little bit weaker on private jet than we were '20, but you see the big difference is really in the aftermarket. And that together gave us sales of SEK 42 million. We take next page, Page #8. If we look at the profit bridge, the EBIT increased with SEK 9 million, and that is mainly driven by improvement in our business and exactly the higher aftermarket sales. We also have an impact of the stronger U.S. dollar. The U.S. dollar was increasing during the quarter, and that gives us some EBIT. We had higher costs, and that is mainly driven by higher sales. We paid commission and royalties and also some variable remuneration. We also capitalized less of our engineering hours this quarter compared to the quarter '20. We take the next page, Page #9. If we look at the cash flow, we had a strong EBITDA, and we also had a good improvement in the working capital. We have received payment that were a little bit late from a further quarter, but now we are back on track. So totally, the cash has grown from SEK 32 million to SEK 49 million. We take the next page, Page #10. Here, we look at the order intake and backlog. The order intake was more than the double the year before, SEK 46 million. The backlog has also increased 89% compared to Q4 '20. So we actually now have the highest backlog since the pandemic really started. We take the next page, Page #11, and we are looking now at the total year '21, and we go straight over to Page #12. Even though the last 3 quarters in '21 was better than the last 3 quarter '20. We had a decrease in sales because the first quarter '20 was not affected by the pandemic, so it was compared to pandemic quarters very, very strong. We have an EBIT of SEK 27 million compared to SEK 38 million '20. And the same, the explanation is that the first quarter '20 was really strong. The EBIT margin is healthy. It's -- if we adjust for the onetime -- one-off effect from an OEM program, it was still 15%. Earnings per share is SEK 1.13, and the cash flow is back where it should be. It's SEK 30 million compared to weak cash flow during '20. The Board of Directors proposed that we pay a dividend of SEK 0.79 per share exactly to our -- what we call it, to our...

[Markus Berg, Chief Financial Officer]

Policy.

[Torbjorn Johansson, Chief Executive Officer]

To our policy. Thank you, Markus. We take the next page, Page 13. If we look at the sales mix over the '21 compared to '20, you see the same effect. OEM is down very low now. Retrofit has recovered a little bit. '20 was a bad year for retrofit. Private jet is a little bit lower than '20. But the big thing is that the aftermarket has recovered. We are up to 65% of our sales during '21 was in the aftermarket, which is very strong. We take the next page, and that is Page 14. Here you see it again on the net sales bridge, we have lost compared to '20, which had a good first quarter. We have lost SEK 59 million on the OEM sales. And that is, of course, driven -- mainly driven by the lower production rate on the 787 aircraft. Also the Airbus A320 has also gone down but not as dramatic as the 787. Retrofit is about the same. Private jet was -- '21 was not a very good year for private jet. '20 was a strong year, but this is, I think, not so much related to the COVID. It's more normal fluctuation in the VIP business to compared to '20. As you can see, the aftermarket has partly recovered. It's up SEK 27 million compared to '20.We take the next page, Page #15. If we look at the cash flow, '20 was a tough year for the cash flow, but '21 is now normal again compared to our profit. We have a strong EBITDA. We have increased our liquidity with a loan in the beginning of the year. And we have paid dividends. So the closing balance is SEK 49 million compared to the opening balance. We take the next page, and that is Page 16. Let's see. Something happened with my computer. Let's see what -- now we have the Page #16. Here, we talk about the dividend. We have proposed to pay exactly to our policy, 70% of our earnings per share. So that will be SEK 0.79. We have a strong financial position. Cash plus available credit is more than SEK 100 million, and we have solidity of 65%. Our net debt is SEK 23 million. So we are in a good position financially, and therefore, we pay the dividend to our policy. We take the next page, and that is Page 17. And now we come perhaps to the more interesting part of the presentation, the outlook. We go directly into Page 18. Now if we look at the business environment for CTT, I'm glad to see that the recovery in the aerospace is relatively strong in North America and Europe. It means short distance and middle distance have recovered a lot. It is weaker with the improvement of the international flight. It means the flight between one continent to the other, that is still low. If you look at the graph, the lower graph there, you can see the dark blue. You see the recovery of short distance and medium distance, but the recovery of international travel is lagging. But it's still going in the right direction. And I think now when the Omicron will be decreased, and I think the international travel will really start to increase during this year. When we come to the spring to the summer, I think we will have a big difference in international travel. We take the next page, and that is Page 19. We give a forecast for the first quarter of '22 between SEK 42 million and SEK 47 million. We know that our sales in the private jet, thanks to the late orders, will increase significantly but will be partly offset by a decrease -- a small temporary decrease in retrofit. The aftermarket, we think, will be a little bit flat because of the COVID or the Omicron that we had over the new year. I think and I hope that it will recover quicker now when the countries are opening up again. But the first quarter we think we will have aftermarket will be relatively flat. The OEM will remain on a very low delivery rate mainly due to the problem on the 787. But you can clearly see, I would say, we are through the pandemic. It will start to increase. We have increased the sales for 3 quarters in a row, and we will increase sales for the next quarter and the coming quarters, I'm pretty sure. We take the next page, and that is Page 20. As I said we are sure that we will start to grow now. And the most reliable growth factor we have is really in the aftermarket. Perhaps it will not grow as much in the first quarter, but I'm sure that the rest of the year it will grow. There is more products flying totally on the 350 and 787. If we compare it off with levels before the pandemic, Airbus and Boeing have still delivered aircrafts, so the total fleet is bigger now. Boeing 787, they claim, Boeing, that the fleet is restored to 99%. It means all the aircraft out there are ready to fly. The growth -- we will then have a growth when Boeing starts to deliver 787 again. The A350 fleet is higher now, and we have a growth in '22, but the fleet and the products we have out and also the sales we have for the A350 program is now higher than we had in 2019. What we need for growth is that the intercontinental flight starts up again. And I'm pretty sure more flight hours on the long-range aircraft we are on will give us more consumable sales. Then it will kick in with a substantial growth on the 787 when Boeing starts to deliver 787 again. And Airbus still build 5 aircraft per month, so that fleet is also growing. So we can be very sure that the aftermarket continues to recover during '22. We take the next page, and that is Page 21. It looks a little bit tougher on the OEM side. Boeing is, for the moment, building about 1 to 2 aircraft per month. That should be compared to the levels we had before the pandemic when Boeing was up to 13 aircraft a month. So Boeing 787 will be at a very low rate during '22 mainly because they have about 110 aircraft sitting on the ground for delivery. So Boeing will put priority on delivering already built aircraft. And then they will slowly increase the build rate again. And over time, they will at least come up to 5 aircraft a month. But I don't think that will happen during '22. Airbus, they are targeting now to increase the build rate to 6 aircraft a month in '23. Airbus 350 deliveries was never down below 5, so they have managed the situation better than Boeing. Boeing expects to deliver the first 777X end of this year, so -- end of '23. So it means that the 777X production will ramp up during '23. This means that we will not have any contribution to growth from the 777X program in '22, but it will sure come during '23. I was very glad to see that the MC-21 was certified in Russia in December '21. They target to enter into service in the third quarter '22. And we have production orders for this aircraft starting deliveries in the second quarter this year. It will be in the beginning at relatively low rate, but the aim of the Russian producer is to come up to perhaps 100 aircraft a year. So over the next years, we will have the growth in the MC-21 program. So it means OEM, it will not contribute to growth for '22, but it will definitely contribute to growth significantly over the years behind '22. 787 will come back. A350, we have the good trend here that more airlines are selecting our products especially regarding cockpit and crew humidifiers. Boeing, we already have on the 777X. We have large customers. We have Emirates. We know we have ANA. And we have most probably more customers that will take humidifiers, and that program will kick in '23 for us. And the MC-21, we have the flight humidifier on every aircraft. So it's only depending on the production rate from the program in Russia. So, again, '22 is a flat year, but then I'm sure we will start to grow OEM again. And there is a lot of potential because we have so low sales for the moment. We take the next page, and that is Page 22. If we start with the Zonal Drying part of that business, we have made progress. Of course, the sustainability efforts by all airlines and governments to make the flying more green give us tailwinds for selling drying system. We also have 7 years high of fuel prices. So I think on the 320 program, 737 programs, we have a good opportunity. We will also most probably manage to get an STC for the 737 MAX during this year. We are working together with SunExpress in Turkey on that one. And that is important for our further growth of drying system into the 737 market. On the customer side, we have 2 very loyal customers. We know about Pobeda. We had already in the order of 10 aircraft. We got one more order of 20 just before Christmas. And they have decided to convert 20 more 737s. So I think we have a really good chance to get that one order also, and that will be production during '23 for us. Yet 2 perhaps is the most loyal customer we have. They have put the drying system principally on all the aircraft they have taken over the years from the used market normally by 737, 757s that they can buy cheap. But now they have -- and in all those aircraft, they have installed our drying system. Now they have ordered 51 A321 aircraft directly from Airbus. And they have informed us that they will install the drying system normally in those aircraft also. So we think that we could start deliveries for that program '23, and it will probably go over a couple of years then. So on the retrofit side for Zonal Drying, I think it is -- we are in a very good position. We have some old loyal customers. We have a lot of interest from other airlines, also bigger airlines. And it's especially the fuel prices and the sustainability discussion that help us in those discussions. So I think we have never been in a better position to sell Zonal Drying System in the retrofit market. If we take the other side of the page, there we are talking about cabin humidification in long-range aircraft. And of course, the discussions about air quality on long range, the very dry humidity levels in the cabin is not good for the passenger and so on. So the biggest opportunity we really have here is the 1,000 787 aircrafts out there. Most of those aircraft has our humidifiers in cockpit and crew rest. And we have the drying system in 950 of these. So we have a very attractive offering. It is -- we only have to install one cabin humidifier, and we could humidify the complete business class cabin. Of course, it's not so easy to sell it just at the moment because the intercontinental traffic is down. But as soon as they start to fly more again and we get more 350, 777X, I think we have a really good opportunity for retrofit sales especially to the 787 aircraft but also to classic 777. It will take perhaps a little bit more time, but this is really promising. So on the retrofit side, I think we will grow significantly in the coming years. I have saved the best page to the end. It's private jet. So now you have to go to Page #23. As you know, we have over the years, I think it is 20 years since we made our first VIP humidification system. That was in the ACJ, the VIP version of 737. That was a success. And since then, we have made VIP system to all aircraft types we have except for the A380. But all other aircraft I think we have our CTT VIP system. We also celebrated the 100th order just before Christmas. So we have our system on 100 big VIP aircrafts. What is new now and where we have invested a lot during the pandemic is to, first of all, improve our system for the A320 family. That was really on initiative from Airbus Corporate Jets, who are selling those VIP aircraft. They wanted us to make the -- our very good humidification. They wanted us to make it perfect. So we have a more significant humidification of the aircraft, so we did that development together with Airbus, and Airbus promised that they should market the system. They have done that very well. We have now orders on 3 ACJ, and we have more in the pipeline. The 3 is the first 3 aircraft they have tried to sell it. So since Airbus really started to market and sell our system, we have taken all the ACJ320. So that is remarkable, and we are really pleased with the cooperation we have with Airbus. One advantage here is also that because we have developed the system together with Airbus, we have made it more like a kit. It means that in every aircraft ACJ320 will have the exact same system installed for CTT. It is much less engineering hours. We don't have to adapt from one project to another. We always deliver the same kit. It means that our total margins for this business will increase because we have a lot less engineering hours. So on the A320 family, we have taken a big step. I hope now when the MAX is coming more and more into the air, we have got additional orders on the 737 MAX, as you see. Hopefully, we can convince Boeing to make something similar, that they also promote really our system, then we could grow also into the important 737 family. But the most promising or the most interesting for me is that we have taken during the pandemic a big step into the business jet market. Business jets are smaller than the VIPs, but they are flying the same long distance. Some of the business jets can fly 15 hours. I have dreamed about having our system on the Gulfstream since I started at CTT. We have not managed that, but we have it at least now on the competitor to the Gulfstream, the Global 7500. We installed the system. The aircraft is delivered. It is a system with 4 humidifiers and 1 dryer. The owner or the customer of this aircraft is very happy with the performance. I think we have made a huge step there. What we are trying now for the 7500 is to get Bombardier even more involved. They supported us during the development of the system for this retrofit installation, but we really hope that they can -- will stand behind the system and, eventually, we will have it perhaps on the production line. That is our goal. So on the Global 7500, we have shown the world it is possible to humidify in a decent way a business jet without any condensation issues. The third project where we are working with now is really to try to convince Airbus that we should be selected also to the ACJ TwoTwenty aircraft. That is also originally a Bombardier aircraft that Airbus took over. It's a passenger aircraft. The Global 7500 is only business aircraft, but the A220 was originally built for passenger aircraft. Airbus Corporate Jets are making a business jet version of that, and this aircraft could not fly 15 hours but it could fly 10 plus hours. So here, it's a big interest, and Airbus really promoted as a business jet. We are in discussions. We hope that we get selected and that we could have the same good cooperation with Airbus on this program as we have on A320. If we manage with those 3 programs as we have done with the ACJ320, we will increase our possible sales market significantly for private jet. It is much higher volumes on the business jet, that it is on the big VIP aircraft. So during the pandemic, this has been the most interesting part of the CTT business. I think that was all the page I have. We go over to Page 24, and now we have questions and answers.

[Operator]

[Operator Instructions] Our first question comes from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

My first question is just in previous quarterly reports, you had chart displaying the growth in the installed base. I realized you -- I noticed you didn't have that in the report today. So my first question is just could you shed some light on the growth in the installed base of humidifiers and dryers.

[Torbjorn Johansson, Chief Executive Officer]

I think if we take the dryer side, it is not significantly a growth. As you know, we don't deliver it to 787 anymore. We deliver some dryers to VIP and a couple of retrofit. So that is a small growth. On the humidifier side, I know that we, over the pandemic, have had the growth of installed base of about 1%, so I think this quarter was about the same.

[Karl Bokvist, Analyst]

All right. And then you say the -- on the comment on investments that you say that the projects are entering the final stage. So just the first one is which investments you are referring to that are nearing final stage and how one should think about final stage in relation to a ramp-up in sales.

[Torbjorn Johansson, Chief Executive Officer]

Yes. The biggest investments we have made over the past years is to the 777X development. And the 777X is a little bit delayed. And I think it will be certified during 2023. But Boeing has informed us. We have humidifiers there, and the humidifier and the hardware that we have developed this, as Boeing say, black label. They could be certified. So there is no changes and we don't invest any more on the mechanical side. But we also have software in the controller, and the software is certified together with the aircraft. So perhaps we have a little bit more to invest on the software side depending on perhaps small changes. But principally, the 777X program for us is finished more or less, and we are only waiting on the certification of the aircraft because everything that goes to the aircraft is certified at the same time. So that is also the biggest investment we have made. We have also -- we are also working with an improved Zonal dryer. That was what we started for the XLR program. We need a Zonal dryer for retrofit and VIP that will be software controlled. So that developing is -- development is proceeding. But also there, we have gone through a big part of it. So there we will have less investments. And we also have a similar program where we invest in control systems. But the big thing is 777X, and that is coming to a closure soon.

[Karl Bokvist, Analyst]

Understood. And now when given the perhaps slightly changed dynamics of lead times and everything, if we think about the MC-21 and the 777X, that they enter into service as expected, how far ahead in time will you start usually delivering your products to these production lines?

[Torbjorn Johansson, Chief Executive Officer]

If we take the MC-21 first, we have delivered some to production aircraft. I don't know exactly how many. But now we have more normal serial production orders. They are starting in the second quarter. And we see orders coming into beginning of '23. So this is a clear indication that MC-21 goes into serial production. And of course, the rate in the beginning of such a program is perhaps one aircraft a month, and then they go up. But the aim of Irkut is to build 100 aircraft a year. And that would be in a rate of 7, perhaps 8 humidifiers per month. And that could happen in 2 or 3 years, we could be up there. So that would be a significant part of our humidification. The 777X, I think it will -- they will deliver '23. So it means we will start our production deliveries beginning of '23. And then Boeing will ramp up. And the old 777 program, they were up to 7 or 8 aircrafts as maximum in production, 7 or 8 aircraft a month. So that will be a substantial growth for us. We will most probably have perhaps 2, 3 humidifier in an average on the aircraft. So that will be a big program for CTT. But it's -- for us, it starts '23.

[Karl Bokvist, Analyst]

All right. And just a follow-up on that to how to think about this perhaps more in general terms, but let's say that if things normalize in terms of order -- the OEMs, how they place orders and everything. So let's say they want to produce a certain aircraft in a given month. How many months before that do you actually deliver the products to a production line? Or is it are we talking about just weeks in a kind of pre-pandemic world?

[Torbjorn Johansson, Chief Executive Officer]

No. Normally, I think it is normal that we deliver perhaps 6 to 12 months before the aircraft is delivered. Airbus, we could even have longer times before they deliver the aircraft. They are building the A350 in a different way perhaps than Boeing. So if Boeing, so to say, start to deliver, we can take 777X as a good example, they aim to start the delivery end of '23, and we start to deliver to the production line beginning of '23. So you have 9 to 12 months. If you look at MC-21, we have delivered some units. They start to deliver aircraft middle of this year, and we delivered our parts perhaps in the second quarter there. Perhaps, we are down to 6 months before delivery of aircraft. It is a little bit different how the manufacturer place it and also what kind of inventory there.

[Karl Bokvist, Analyst]

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

[Operator]

[Operator Instructions] We currently have no further registered questions. I'll hand back to the speakers for any further remarks and if anyone else joins the line.

[Torbjorn Johansson, Chief Executive Officer]

Karl, did you have more questions?

[Karl Bokvist, Analyst]

Can you hear me?

[Torbjorn Johansson, Chief Executive Officer]

Yes, I hear you.

[Karl Bokvist, Analyst]

Okay. Perfect. Good. So my follow-up question is on the retrofit side, where you mentioned the jets to Airbus potential. And we received the monetary value on the orders you booked with Pobeda, for example. I was just curious, are there any differences that we should keep in mind when you sell a retrofit system to the A321 compared to the ones that Pobeda order recently?

[Torbjorn Johansson, Chief Executive Officer]

No. The system in an A320 family aircraft and or in a 737 family aircraft is pretty much the same. It is one Zonal dryer, ducting and installation things. So the pricing of those systems is similar.

[Karl Bokvist, Analyst]

All right. Good. And just we haven't discussed it too much before but just wanted to see if you encountered any significant increases in any particular type of costs that you've experienced any form of lag in adjusting for. Historically, you've been good at raising prices, but just wanted to hear your thoughts on supply chain constraints and any possible risks there.

[Torbjorn Johansson, Chief Executive Officer]

I would say that the supply chain for us, we were in a lucky situation when we started the pandemic, we ordered a lot of parts. So during '21, we have had no problems in the supply chain. We have had good inventory of sheet metal and other things we need for the system. Of course, we will -- we have price increases when we are buying material now. But compared to the sales price of our system, even a significant increase in raw material for us is not decreasing our margins too much. The raw material part of our total cost is relatively small. We are more dependent on more complex part for our cost of the product. So I don't foresee any big issues we have in the retrofit VIP. And in the aftermarket, we have possibilities, and we can adjust our prices. On the OEM side, we are more binded to long-term contracts. But in a big part of our business, we can adjust the prices to the customer. to cover the increase we have in raw material costs.

[Karl Bokvist, Analyst]

Understood. And my final one is just on a more personal note. We -- you are retiring in a few months. So to begin with, thank you for the interactions in all these years during your tenure. My first question is just what you're most proud about. And the second one is a bit what would you be most happy about in seeing CTT achieving in 3 to 5 years.

[Torbjorn Johansson, Chief Executive Officer]

Yes. I think during my 25 years with CTT, there is 2 absolute highlights. The first one was when Peter Landquist and I in around year 2000 decided we should develop a humidifier. That was a very smart decision, and we -- together with the team, we made the world's best aircraft humidifier. Without any question, we have a total dominant position. That's I'm very proud of. The second is when we achieved to be a first-tier supplier to the 787 program. That was in 2005. So that is the biggest milestone for me, and I think it's the biggest milestone for CTT. But I'm also -- and this is my last earnings call, as I retire, as you said, 1st of April. But I'm also very glad that I could handle CTT during this pandemic. We have gone through tough times in a stable way. And I'm really glad to hand over CTT to Henrik Hojer. CTT has never been in a better position to start to grow again. From '22 and on, it will be a steady growth, and it will be a profitable growth. So that I'm proud of also.

[Operator]

Thank you. We currently have no further questions. I will hand back to the speakers for any final remarks.

[Torbjorn Johansson, Chief Executive Officer]

Okay. Thank you very much. This was, as I said, my last earnings call, but you can be sure I will look after CTT from the sideline. I will read the reports, and I will listen to the next earnings calls. But remember, I will be responsible for the sales also for the first quarter. I will not have the opportunity to present it, but the first quarter is also my quarter. Thank you very much.