CTT Systems AB

STO:CTT

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to CTT Systems Q4 Report 2022. [Operator Instructions]

I will hand the conference over to the speakers CEO, Henrik Hojer; and CFO, Markus Berg. Please go ahead.

[Henrik Hojer, executive]

Good morning, everyone, and welcome to CTT's Earnings Call Fourth quarter '22. I'm Henrik Hojer, CEO of CTT, and I'm here together with our CFO, Markus Berg, and we will present the results of the fourth quarter. Business highlights for the fourth quarter was that the aftermarket stayed on a very high well, close to the all-time high of Q3. CTT received the product ACJ320 to deliver one more kit of our enhanced humidification system, the fourth in total.

Looking at our financial numbers. Our sales met the forecast closing of SEK 68 million, and we recorded growth for the seventh consecutive quarter, driven by high sales in the OEM and Private Jet that more than compensated for a small decline in aftermarket sales down from the Q3 all-time high. EBIT increased to SEK 21 million, and we reported an EBIT margin of 31%.

Earnings per share increased to SEK 1.42, and we had an operating capital cash flow of SEK 18 million. If comparing with the same quarter last year, net sales increased SEK 26 million, driven by a SEK 28 million increase in the aftermarket revenues, plus SEK 3 million in Private Jet, which was offset by weaker sales in the OEM and Retrofit segment.

Looking at the sales mix. We see dominance from aftermarket activities and 80% is a very high level. We had an order intake of SEK 52 million, driven by the recovery and growth of the aftermarket. Aftermarket-driven sales is dominating our business, and many of these orders have short lead time from order to delivery, where order and delivery can be in the same quarter and not growing our backlog. As I previously said in the business highlights, we won one new Private Jet order during the quarter. We ended the fourth quarter with an order backlog of SEK 73 million.

Now I hand over to Markus and the next slide.

[Markus Berg, executive]

Thank you, Henrik. EBIT in the fourth quarter amounted to SEK 21 million, an increase with SEK 13 million from SEK 8 million in the fourth quarter last year. The main reason is business-driven, with SEK 12 million from higher sales volume, mainly from the aftermarket. . CTT is profiting a lot from a stronger U.S. dollar compared to SEK with approximately SEK 8 million on sales, but offset by SEK 6 million from accounts receivable/accounts payable valuation. That to the third quarter, it's offset SEK 8 million, higher costs due to higher sales and increased EBIT, which increases allocation to variable remuneration. And remember, if you compared the third quarter, that we have a large difference in vacation salary change of approximately SEK 4 million.

Operating cash flow amounted to SEK 18 million, driven by improved financial performance, negative working capital change due to higher accounts receivable and inventory, partly offset by accounts payable increase. Given this, cash in bank increased to SEK 60 million in the end of the fourth quarter.

Net debt amounting to minus SEK 15 million compared to plus SEK 23 million in the fourth quarter last year, back to pre-pandemic levels. In addition, CTT has SEK 51 million in available credit facility. Solidity at 71% compared to 65% in the first -- in the fourth quarter last year. All in all, CTT has a strong financial position.

Then we move into the full year numbers. On the next slide, we have full year net sales amounting to SEK 241 million, an increase of 59% from SEK 151 million last year, adjusted for [indiscernible], an increase of 36%, mainly driven by the recovery and the growing aftermarket. Full year EBIT increased to SEK 92 million compared to SEK 27 million last year. Earnings per share increased to SEK 5.29 from SEK 1.13 last year.

If we continue and look at the EBIT. For the full year, it was strong and amounted to SEK 92 million, an increase from SEK 27 million last year. The main reason is business driven, with SEK 45 million from higher sales volume and SEK 9 million from mix and price, primarily from a higher aftermarket share. CTT is again profiting a lot from the U.S. dollar compared to SEK, with approximately SEK 23 million for the full year. Higher cost due to higher sales and better EBIT increases allocation to variable remuneration.

If we continue and look at the cash flow. The operating cash flow amounted to SEK 61 million compared to SEK 30 million last year, driven by improved financial performance, EBITDA, but partly offset by negative working capital. Increased inventory and account receivables from higher sales affecting working capital negatively. During the year, we have reduced debt with repayment of U.S. dollar loan of SEK 33 million in the first quarter, and paid dividends of SEK 10 million to our shareholders in the second quarter.

If we continue and look at the dividend proposal, CTT as I said, has a strong financial position and cash flow that enabled both a good return to our shareholders and investments for growth. The Board of Directors proposes an ordinary dividend of SEK 4.05 per share, back to same level as 2018 and 2019. The dividend is according to our policy, amounting to 77% of earnings per share.

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

[Henrik Hojer, executive]

Thank you, Markus. The forecast for the first quarter is SEK 68 million to SEK 73 million in net sales, calculated with higher revenues driven by quarter-to-quarter increase in OEM sales and Private Jet projects. The increase will be offset by a significant decrease in the aftermarket due to high inventory levels at distributors and airlines, driven by the buildup in Q3 and Q4. The aftermarket in the fourth quarter leveled out on a historically high levels, slightly below the all-time high in Q3. We saw a large demand when distributors placed orders to restore inventory to support higher fleet utilization in the upcoming quarters. In the graph, we also see that on a rolling fourth quarter comparison, our aftermarket sales are well above the 2019 numbers.

In most regions, utilization of our products is back to normal, but it remains low in Asia and China. During 2023, the pandemic rebound effects gradually will fade away and demand in aftermarket will then again [indiscernible]. The drivers of installed base will be new system deliveries and when ready-built Boeing 787s entry into service, and those 787s representing an approximately 10% population growth for CTT.

This means that the underlying demand in the aftermarket will grow at a slower pace compared to [indiscernible]. Our actual sales and the aftermarket needs some quarter to consolidate supply and demand as we entered the year with high inventory levels at distributors and airlines.

We now finally see a dawn in the OEM market, and we expect the market to rebound in 2023. The [indiscernible] we have seen in '22 gives us confidence that our growth expectations in both sales and orders in '23. And we will benefit from an increasing production rates at Boeing 787 and Airbus A350.

The gradually improved condition can be exemplified with United Airlines ordering 100 787s in 2022. Boeing 787s has a very low build rate, and they've been including a shorter production stop end of last year, but it will gradually increase from 1 to 2 aircraft today to 5 by the end of '23. Boeing is forecasting to be at 10 aircraft per month in the 2026 time frame.

Airbus is currently targeting A350 build rate to increase from 5 to 6 aircraft per month, and the first Boeing 777X airplane is expected to be delivered in 2025. But CTT has deliveries to [ Boeing in the first ] half of this year. We then foresee a gradual ramp-up starting in 2024.

2022 was the first year in more than 20 years with no zonal dryer retrofit deliveries, but the outlook is not as bad as it seems. The post-pandemic [ situation ] in '22 gives us confidence, and we expect that the better business environment will start to generate retrofit orders again during this year.

Sustainability is a key driver and airlines can save 20% of fuel and emissions when they introduce new [ single aircraft ]. After taking the bigger [indiscernible] sustainability rate continues and every saving comes on their new and old aircraft. This is where CTT comes in with our anti-condensation system, contributing to sustainability and being a very good investment saving on fuel costs.

The cabin humidification retrofit opportunity has been an emerging opportunity for some years now. We now expect that the better business environment will start to generate opportunities again as the intercontinental travel come back to normal levels and airlines start to generate profits. But I remind you that the market is very differentiated, with some [indiscernible], while others are very bullish about the future.

In a post-pandemic environment, we see that there is a growing airline interest in cabin air quality and humidity for passengers and for the crews' wellness. There are some very large upgrade projects at some airlines, but we also see opportunities in the intermediate upgrade project that makes a difference to the cabin experience. There's also possibilities when airlines wish to harmonize their fleet. Together with our partner, Collins Aerospace, we are strengthening our effort to get the first cabin humidification retrofit order this year. The market is promising, but it's hard to predict the speed.

As part of our strategy, we continue to invest to reach new opportunities. We particularly focus to extend and improve our offering in the Private Jet. Today, we are dominating the wide-body VIP segment, and we aim to grow in the large cabin business jet segment. Private Jet will contribute to our growth in the coming quarters and a key contributor to reach our long-term targets. We are confident that our prospects in the Private Jet segment can endure a normal recession.

The cooperation with Airbus Corporate Jet is a success in the marketplace. [indiscernible] shift when we optimized humidification system is offered and promoted by Airbus for the ACJ320neo VIP family. It's already a successful partnership with another kit order in Q4, making it the fourth kit and achieving a 100% hit rate so far. We are proving that the bolt-on delivery is more scalable versus VIP projects together with the completion centers.

I also want to announce that we now have initiated similar discussions with other OEMs in the VIP market. The picture on this slide is from our first system [ in stock ] aircraft orders so far. Our second Airbus partnership is for the ACJ TwoTwenty business jet. The first order was received in July, and the aircraft will enter into service in 2023 after the installation of our bolt-on kit.

We actually have just delivered the system to the completion center. This is a project that creates awareness and sets the standard for the climate on board on large cabin business jet. We are very proud that our partner, ACJ, see the humidification as key value of their customers' experience when they fly an ACJ jet.

The large-cabin biz jet market is growing, and the long-range market segment is 50 to 100 jets per year. The business jets are developed and designed for flights up to 16, 17 hours, with cabins equipped for best comfort. But cabin air humidity is close to 0. This is an extremely dehydrating environment. CTT is now migrating our humidification technology from VIP aircraft to large cabin business jets, and this is an important business opportunity for us to capture.

We have strong references with the ACJ220 program, and our first system is installed on a Bombardier Global 7500 and the second system is on its way. ACJ is in front running the market when promoting and endorsing the humidification system to obtain a healthy climate for long-haul flights. First on the market of this type of aircraft was Bombardier Global 7500, which is now further developed to 8000, and this is an even faster and it has even longer range.

Bombardier is closely followed by Gulfstream with our G700 and G800, and Dassault is coming there with Falcon 10X. For CTT, it's key to have OEM availability to get the volumes, and we have intensified our discussions with all parties on the market. All parties on the market, that is operators, completion centers and the OEMs, and that is to get into the right position.

CTT has a strong financial position and cash flow that enabled both good return to our shareholders and investments for growth. As international air traffic rebounds conditions gradually improve for all our businesses, and the positive momentum we have generated in '22 gives us confidence in our growth expectation in '23. '23 will be a year when we turn around and start growing our system sales again.

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

[Operator]

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

[Karl Bokvist, analyst]

My first one is just on the general demand outlook we've heard from a couple of airliners, both here in Europe and in the U.S., that air travel continues to recover at a good pace and it seems like bookings are looking good into the summer. So I understand the comments you made about kind of aftermarket and flight utilization now perhaps being fairly close to normalized. But how do you foresee perhaps more positive air travel statistics than what we might have expected like 3 or 6 months ago?

[Henrik Hojer, executive]

Thank you, Karl. And good question and it's, again, interesting to watch and listen to all the airlines reporting Q4. And as I said in the call, some are bullish, they say record high bookings. And I think that's a trend that continues where Europe and U.S. has been leading that recovery. And I think it's kind of peaking. They will report on how they struggle to meet the demand actually.

What we foresee now going forward, too, is that Asia and China catches up. I think we have underestimated how far behind they are on the recovery. And it's probably going to take a little bit longer than we think, but it's really coming now. And when we talk with our distributors, we see that they really urge the airlines to store up, to be ready when the demand comes back into that part of the world again. Hopefully, that elaborates a little bit more on your question there, Karl.

[Karl Bokvist, analyst]

And on the OEM side, you did provide some comments here on production rates and similar. But for you as a subsupplier, what are the indications from the industry when it comes to supply constraints, if fees have improved and therefore, we could see, well, the visibility of a production rate guidance or if there even is upside if you get access to more components than what they might have feared?

[Henrik Hojer, executive]

Karl, I think the answer is in the last part of your question. And there, I think the tone is better both from Airbus and Boeing in Q4 than it was in Q3. They are looking more confident on the supply chains. We at CTT has worked really, really hard to never be late, never be out of what we should deliver, and we're keeping that. But others are struggling. And if the supply chains can be better than it's been in the last year, the production [indiscernible], that's for sure and that can be an upside. The demand is definitely there. And if they just could, they should go higher on the volumes than they are forecasting and predicting.

[Karl Bokvist, analyst]

And then finally on the OEM side, what's the latest when it comes to selection rates? I realize the Dreamliner is close to max when it comes to penetration for you, but have you seen or heard anything when it comes to selection rates at Airbus from the OEM line?

[Henrik Hojer, executive]

Quite right on the Dreamliner, we're very, very high, and Boeing is really marketing our system and really selling it for us. So maybe we can top it up just a little bit more. But as I said, we're above 90% on flight deck and almost [indiscernible] on crew rest, so that's extremely high. Airbus has been a little bit lower on the A350. It's been improving, but it's one area where we will focus this year to even increase it even more. So that's a clear focus for us and a very important focus for this year.

[Karl Bokvist, analyst]

Okay. And then on -- just on market dynamics, historically, you've claimed that you essentially held a monopolistic position in most of your segments. But has anything changed when it comes to market dynamics, either on the aftermarket side or Private Jet? .

[Henrik Hojer, executive]

So let's take Private Jet first, where we don't see anything changing. We are dominating the large segment. We've always known and we always discussed that we have competition on the very small jets where our system is not actually [indiscernible]. And the change is really that we are moving down now into the business jet. But that's nothing new, that's what we've been talking about last year. And other than that, we don't see any change, and we actually see that we are more cooperating with the competition to be [indiscernible] together. On the aftermarket, I've always gotten questions about competition. And as we have reported and mentioned, there is competition out there. New last year, which we commented in our in our Q4 report, is that we have taken actions to handle competition there from the cockpit. And I think we are more confident now than we were in the beginning to see that this is, of course, a threat, but it's something that we can handle.

We see that this product that we have is a complex product. We at CTT, together with our partner, Munters, spent years to develop the specific material for our humidifiers, and that is to meet the specification on all points from Airbus, from Boeing and the involved authorities. And this is something that we have a real strong confidence that we can keep competition away.

[Karl Bokvist, analyst]

I see. I have a couple of more, but I'll get back in the queue first.

[Operator]

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

[Karl Bokvist, analyst]

The question now, you mentioned it too, the United order. But to my understanding, both United and the rumored orders from India, for example, they are very large in terms of number of aircraft that's spread out over a long period of time. So just my first one is, if when it comes to selection rates for these types of orders, how you can progress in the selection rates over time? Or do they make a firm decision at the very beginning for the entire order?

[Henrik Hojer, executive]

So we can progress over time. And of course, the long delivery times are linked to the capacity of Airbus and Boeing. Some of the orders are maybe a little bit quicker than others, so -- but it's different batches and it's different types of aircraft that [ is ordered ]. And I think this large order gives us actually opportunity to see that, together with our partners, together with Boeing, we can increase selection rates and maybe even come into other cabins as well on the long term. So everybody is confident and it gives us time to work on so that it's not fixed for one shot, it actually takes quite a long time.

[Karl Bokvist, analyst]

Understood. And then just on -- a bit more on the financials and the cost side. The aftermarket share of revenues is still a very, very high portion of this quarter. I understand the comments you make about sustainable margins going forward. But still, the aftermarket share is high this quarter, and yet I would imagine that perhaps the aftermarket contribution to CTT profitability would have been even higher. But is it mainly related to these adverse currency effects? Or are there any other cost items that might have held back margins a bit this particular quarter?

[Markus Berg, executive]

Hello. Yes, you are correct, Karl. It's -- the main reason is currency effect reevaluation of [ accounts receivable ] and accounts payable. The effect is more or less SEK 4 million in the quarter. And if you look at the third quarter, it was positive with SEK 4 million. So quarter-to-quarter, actually SEK 8 million in difference from the third quarter to the fourth quarter. It's the main reason. Other than that, very small deviations to our own forecasts.

[Karl Bokvist, analyst]

Understood. I was thinking about, for example, the seasonal and FX-adjusted margin there at 36% this quarter compared to 45% in Q3. And yes, a vacation quarter, so it is a seasonally high quarter for you. But in case there were anything else that would be worth keeping in mind for the year on the cost side.

[Markus Berg, executive]

No. As you mentioned, the vacation, salary change effect is more [indiscernible] and if you compared to -- the third quarter compared to the fourth quarter. Other than that, no big changes or deviations that is something that we [ are ] commenting. So that's the main reason.

[Karl Bokvist, analyst]

Understood. And just the final one. When it comes to the dehumidification selections on at the OEM production line, has there been any orders here? Now when you have a quite sizable fleet flying without these systems, when do you think that you could make actual validated claims or, I guess, this is about the benefits between one another?

[Henrik Hojer, executive]

Karl, was the question when we're getting as a line [indiscernible] item for -- and the conversation?

[Karl Bokvist, analyst]

No. Sorry for being unclear. It's been a couple of years since the dehumidification system was removed from Boeing at the OEM line. So I mean, you have a couple of years now with an increasing fleet of -- that does not have the system installed. So I guess a 2-parter. Number one, if you -- if it's still like shows to 0 in sales towards the OEM line on dehumidification. And then number two, if you heard or received feedback or if you can go to Boeing now and argue for the benefits when you compare these 2 different fleets, one with the dryers and someone without.

[Henrik Hojer, executive]

Thanks for clarifying. No, it has not changed -- Boeing has not changed its mind. But we also have to remember that this decision was taken end of 2019. The first aircraft without zonal dryer was produced in 2020, and these aircraft are amongst the 120 that was not delivered. So they're just entering into the market. I think maybe 1 or 2 got there before, but they have not flown that much due to the pandemic.

So actually, right now, this is a question that we are trying to get to meet some of the airlines that we know have both aircraft with our system and without, and try to see if they notice any difference. So it's going to be a very interesting first half year when we will really try to find out is this a game changer, do we have a market to Retrofits on drying, do we have the arguments to go back to Boeing and try to get back on to the line again. But it's a little bit too early, but we're really trying to get the answer to your question.

[Operator]

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

[Markus Berg, executive]

Okay. Then we have received a few questions from the web. First question is did reevaluation of accounts receivable/accounts payable affected the third quarter margin positively? And how often do you conduct these reevaluations?

I think I mentioned this already. The reevaluation had a positive effect in the third quarter with about SEK 4 million, and now in the fourth quarter it was negative by SEK 4 million. So quarter-to-quarter effect is actually SEK 8 million. And we conduct these on a quarterly basis for each quarter. And the second question is regarding the third part, the products that we mentioned in the CEO comments. And the question is, what are your customers' view on this product? How do you know how much it differ in pricing compared to your current offer? And has it affected your pricing strategy up until today?

[Henrik Hojer, executive]

Thanks for that question. If you look at this market where it's actually copies of originals that are then, of course, approved by the [ awareness ] authorities. And this is something that can be done in the U.S., so it's FAA. There's 3 reasons for doing this from airlines. One is, of course, obvious, it's the lower cost. The other 2 is availability. And the third could be also quality on the OEM product.

Quality on the OEM product is not a problem for CTT [indiscernible]. Availability of our products are extremely good with the cooperation that we have for distribution with Sutter and Boeing. So it's, in our case, a pure price competition question. And usually, the pricing is roughly 30% below. We are not entering into to a price war. I don't think we can win it. So we will fight this battle in a different way. We will fight it with quality. We will fight it with a premium product. That is, as I said during the questions before, a lot specific material.

This material, we spent together with Munters years to develop. And this is a material which we only have access to. So any copy needs to use a commodity material that is not intended for aviation use, that do not [indiscernible] occasions of Boeing and Airbus and has several other drawbacks, which we are then now informing the concerned airlines about.

And I'm pretty sure that when they see how much difference there is in these products, they will -- it will not meant to risk a product with less quality for just saving a little bit. So I'm pretty confident that we can keep our market share, fight this off and show any doubters that the OEM product is something completely different from what is now offered as a poor copy.

[Markus Berg, executive]

And then the final question from the web is also concerning the third-party products. The question is, [indiscernible] something new or has it existed in the market for some time?

[Henrik Hojer, executive]

No, this is -- for CTT, this is, on part of our inventory, new. It has existed before. We have seen it on simpler products, like filters. The market is actually quite -- it's established. There's processes around this. There's a big lobby in the U.S. So this is nothing new. I've been commenting it -- on it before as well. But it's a little bit new for us that it came into '22, that somebody was trying to copy part of our aftermarket, and that's why we want to comment to it and inform the market that this is something that is actually happening.

But again, as I said, this is not the filter, this is a qualified product. CTT and Munters, we spent years to develop this specific [indiscernible], and that is to meet the specification of the airline industry from Boeing, from Airbus; from other authorities, FAA, European awareness authorization. But even the Food and Drug Administration in U.S. has been involved to make sure that this product is safe for the crew and for the passengers. So we're quite confident that we can fight this off and show that the CTT product is something completely different.

So I think that was the end of the questions. I would like to thank you for participating into the CTT Q4 earnings call. I really look forward to 2023, converting the positive momentum that we have generated into sales and orders. This is the year when we start growing our system sales again, and the gradually improved market condition gives us confidence in all our growth expectations.

Thank you again for listening to CTT and our Q4 report.