CTT Systems AB

STO:CTT

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to CTT Systems Q4 2023 Report Presentation. [Operator Instructions]Now I will hand the conference over to CEO, Henrik Hojer; and CFO, Markus Berg. Please go ahead.

[Henrik Hojer, executive]

Good morning, and thanks for joining us at the CTT Earnings Call Fourth Quarter '23. I'm here together with Markus Berg, our CFO and we will take us through our financials for the fourth quarter and full year 2023 and our outlook going forward.Before reviewing our financial performance, I would like to start with the business event. In December, Air India took delivery of its first A350-900. The aircraft is fitted with Humidifier Onboard business class. The aircraft was originally destinated for Aeroflot and 5 more from this batch is scheduled for deliveries to Air India through March 2024.Air India is investing in transformation to become a premium carrier. Air India's firm orders for 250 new aircraft from Airbus include additional 34 A350-900 and dash 1000. I will later in this presentation explain some of the dynamics and opportunities linked to this fact that Humidifier Onboard is in service or specified in aircraft to be delivered and built.But back to financials. CTT delivered another solid quarter. We increased our quarterly net sales with 20% year-on-year to SEK 81 million, which was in the forecasted range. CTT delivered an EBIT of SEK 32 million compared with SEK 21 million and an EBIT margin of 39%. Net result increased to SEK 27 million, the second highest so far in CTT's history and we also generated a strong operating cash flow of SEK 30 million.Earnings per share increased 54% to SEK 2.19. The net sales bridge shows an increase of SEK 30 million compared with the same quarter last year, driven by aftermarket demand pushing sales SEK 14 million higher to a quarterly all-time high of SEK 68 million versus previously SEK 57 million.OEM sales increased SEK 4 million due to higher product rates at Airbus and Boeing. Sales to private jet was as expected weak. The net sales mix shows that the aftermarket sales accounted for 84% of the turnover. CTT booked orders for SEK 87 million versus SEK 52 million in Q4 '22. Backlog increased with SEK 6 million to SEK 79 million, driven by OEM orders.During '24, we will see the gradual increase in the order backlog since the typical OEM order has longer lead time compared with those in the aftermarket.I now hand over to Markus for more in-depth comments on Q4 and the fiscal year '23. Over to you, Markus.

[Markus Berg, executive]

Thanks, Henrik, and good morning, all. EBIT in the fourth quarter amounted to SEK 32 million, an increase with SEK 11 million from SEK 21 million in the fourth quarter last year. We had a positive EBIT impact from higher sales volume, adding SEK 10 million compared to last year and positive sales mix, adding SEK 4 million due to higher aftermarket share, 84% compared to 80% last year.But this gain was offset by, one, negative currency effects that offset SEK 2 million; and two, increase in other costs, mainly due to growth in the number of employees from 73 to 80.Now we move on to the next slide and look at the cash flow. Operating cash flow was strong and amounted to SEK 30 million, driven by improved financial performance, EBITDA, adding SEK 34 million. In addition, working capital was reduced by SEK 6 million, mainly explained by account payables.Let's continue by looking at the net debt. Net debt amounted to minus SEK 76 million compared to minus SEK 15 million in the fourth quarter last year. Cash closed at SEK 118 million. In addition, CTT has SEK 53 million in available credit facilities. Equity ratio at 75% compared to 71% in the fourth quarter last year. All in all, CTT has a strong financial position with net cash.Let's move on to the full year numbers. Net sales for the full year 2023 increased with 28% to SEK 309 million compared SEK 241 million last year, driven by aftermarket sales that increased 30% to SEK 243 million from SEK 187 million. Full year net profit, its new record beats 2019. Net profit increased with 44% and reached a new high at SEK 95 million compared with SEK 93 million in 2019.Full year cash flow, operating cash flow amounted to SEK 117 million compared with SEK 61 million last year, driven by improved financial performance, EBITDA and reduced working capital, positive effects on inventory reduction and account receivables. Payment of tax debt regarding 2022 in Q1 increases tax this year compared to last year. And we paid a dividend of SEK 51 million to our shareholders in the second quarter.Let's move on and look at the dividend proposal. Strong finance enables CTT to continue to divest capital to its shareholders and at the same time invest to leverage our leading market position. The Board of Directors proposes an ordinary dividend of SEK 5.35 per share and an extra dividend of SEK 3.35 per share. In total, a proposed dividend of SEK 8.7 per share.I will now hand back to Henrik.

[Henrik Hojer, executive]

Thanks, Markus. I will now shift focus to some trends that drive our market and have impact on our short- and medium-term outlook.So let's look at the next slide. Starting with our forecast for the first quarter. Net sales are expected to be SEK 80 million to SEK 85 million on a year-on-year increase of 7% to 13%. This is flat or slightly higher sales compared with Q4, driven by OEM sales, offset or partly offset by a small decrease in aftermarket sales.Underlying growth trends remain intact for OEM and aftermarket, but we will always see variations quarter-to-quarter. As we had a strong aftermarket sales in Q4, we are now expecting a slower quarter. With this forecast, we will reach SEK 314 million to SEK 319 million in a trailing 12-month sales compared to pre-pandemic high of SEK 365 million.I would also like to point out that the margins are expected to contract due to the mix and currency. A weaker U.S. dollar SEK will have a negative impact on CTT profitability. The sales mix also affects profitability. In '23, the aftermarket accounted for 79% of the total sales. For '24, we used a lower figure in our planning due to an increased share of successful sales of systems.I will now go through our business outlook for each of our markets in the '24 and beyond. The aftermarket sales grew as forecasted quarter-to-quarter in Q4. Looking at the rolling 4 quarters, we are currently at a trailing 12 months run rate of SEK 243 million.Going forward, aftermarket growth rate will be slower than in '22 and '23 as underlying demand is normalized and again, track changes in the population size, driven by Airbus and Boeing aircraft that enter into service. We also, to a larger degree, benefit from our OEM business as demand for repair and spares grow.In '24, we will see a shift in growth driver from aftermarket to system sales that will benefit from several strong trends. Compared with 2019, aftermarket sales have increased 65% or SEK 96 million from SEK 147 million to SEK 243 million. Revenues from system deliveries to OEM, retrofit and private jet accounted to SEK 54 million in '23 compared with SEK 191 million in 2019. We have a SEK 137 million gap.The main driver will be OEM as Airbus and Boeing target production rates close to pre-pandemic highs and Boeing is also expected to commence deliveries of 777X. In addition, we have a strong position to increase retrofit sales as well as addressing a new market in large cabin business yet. I will in the next few slides go through these growth opportunities.We foresee significant higher OEM deliveries in '24 and onwards. Sales are in a recovery phase. Trailing 12-month sales are SEK 35 million compared to pandemic low of SEK 20 million and SEK 166 million pre-pandemic high. Outlook is strong. Demand for OEM humidifiers is growing, fueled by widebody aircraft production ramp-up that started in '23, continuing '24 and onwards.The main driver will be Boeing 787 program, currently at the build rate of 5 aircraft per month, targeting to reach 10 per month by '25/'26 time frame. Airbus is currently targeting A350 build rate of 6 aircraft per month and then increasing it to 10 in '26. In addition, we will benefit from Boeing 777X program with deliveries scheduled in late '25, CTT resuming our deliveries in '24/'25 time frame.To summarize, the OEM business will be a resilient driver that will continue to grow for years, driven by large widebody order backlog. The ramp-up of widebody build rates will take years to reach the peak level. 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 their premium passengers in first and business class.This is an emerging market that benefit from a large installed base with excellent performance and reliability and data. Today, we have 90% penetration flight deck on 787s and similar selection rates on new A350 operators. In total, we have a flight deck humidifiers installed in more than 1,000 aircraft in service at more than 50 airlines.If looking at the pictures on the slide, we see 3 airlines that operate A350 aircraft with humidification in business class. In addition to Air India, our newest operator, we have China Southern Airlines, operators since 2019 and Turkish Airlines since 2022. In addition, 4 airlines have specified A35-1000s or 777X aircraft with cabin humidification. These aircraft are scheduled to be delivered during '25 and '26.The fact that we are adding new airlines that operate aircraft with Humidifier Onboard and the fact that additional airlines have specified new aircraft with entry into service in '25, '26 creates unfavorable dynamics. Altogether, the cabin humidification retrofit opportunity looks better than ever before driven by harmonized demand and competition driving differentiation.In addition to new-built aircraft, many airlines will pursue large cabin interior retrofit projects. This will lead to opportunities to retrofit the cabin humidification system as airlines want to harmonize fleets to have the same cabin experience on all the different aircraft types. Under these strong conditions, I expect that we shall win airline awards. Even if it's hard to predict the lead times, we are in '24, close to '25, '26 when more airlines will start to operate aircraft equipped with humidification in premium class. In other words, cabin humidification projects must start soon to align airline fleets.The private jet market has its own cyclical behavior with low coloration to normal economical cycles. In this market, Airbus Corporate Jets leads the way by promoting humidification system together with and as part of the green aircraft. It is well received by end market and customers. It's a de facto standard as a comfort package for long range. This model has future. Our growth strategy in private jet aims to convince other manufacturers to follow suit and hereby unlock the market.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 forecast that we can deliver in the next few quarters will be lower than previously anticipated due to a few new projects, but we expect activity to pick up in Q2 and more opportunities in the second half of '24. But again, we must convince OEMs to endorse and include our system. Without OEMs, CTT will not scale. This is a top priority for CTT.'23 was our second consecutive year without any retrofit deliveries in the anti-condensation system. We have a clear strategy and I'm convinced that this will lead to fruitful results. But as stated before, the key enabler is OEM availability. This can only be accomplished via retrofit customers and large buyers of new aircraft. As part of this effort, we have an ongoing A321 trial with a major low-cost carrier.Another track involves our largest customers, Jet2 and Transavia. Both are in transition from all Boeing fleet to introduce new Airbus A320 family aircraft. Both airlines have previously bought our anti-condensation system as Buyer-Furnished-Equipment line fitted in their new Boeing 737 NGs. This is not yet possible at Airbus. Instead, our first retrofit window will be at the sea 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. We remain convinced that line fitting of CTT's anti-condensation system is a part of a sustainability efforts to reach aviation industry's commitments and goals.If summarizing, I repeat our positive view we are in the beginning of a multiyear growth period. Our business environment is strong and continues to improve as airline demand for long-haul capacity fuels widebody aircraft build rate increases and spurs cabin upgrades in older aircraft.During '24, we will shift growth driver from aftermarket to system sales, powered by significant higher OEM deliveries. The ramp-up of widebody build rates will be gradual and targeting '25, '26, a 100% increase from the current level of A350s and Boeing 787s. In parallel, airlines adapt fleet planning, which includes use of older aircraft and many will pursue large cabin interior refurbished projects. Under such strong conditions, I expect that we should close airline awards more frequently.Private jet is our biggest opportunity, but it's binary. We need to be endorsed and included in offerings by the OEMs. Airbus Corporate Jet leads the way by promoting our system together with and as part of their green aircraft. The growth strategy in private jet aims to convince other manufacturers to follow suit and hereby unlock the market. I'm cautiously optimistic that we shall close with additional manufacturers in '24.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 is on the -- one of the latter topics you mentioned there, Henrik, on private jet and business jet. What do you think has or have been the reasons behind this perhaps slower-than-anticipated roll up and the order activity in this segment?

[Henrik Hojer, executive]

Thanks for the question. I think there's 2 main drivers. One is actually that projects take longer than anticipated and it's been a little bit slower for completion centers and also BBJ and ACJ to sell aircraft. But maybe that's more normal. So the abnormal thing is the demand for aircraft and actually the lack of aircraft bodies that BBJ and ACJ get from the line because the airlines really want these aircraft and it's a priority for Boeing and Airbus where to send them. This is normalizing during this year. And hopefully, they will get quite a lot more aircraft in the upcoming years.

[Karl Bokvist, analyst]

Understood. And then now correct me here if I misinterpreted you here, but the potential to close another deal with another manufacturer, was that related to the private jet segment?

[Henrik Hojer, executive]

Yes. I mean, yes, that's correct. I mean, we work really hard now to spread the message of ACJ, where this is standard on their aircraft or more or less standard, they promote it. And this is what we're aiming to do during this year that we have one more or maybe even more, but at least one more during the year that sets up the same business model as ACJ.

[Karl Bokvist, analyst]

Understood. And then in some previous presentations, you have highlighted where you think that you could potentially grow and it includes the Falcon and the Embraer and Gulfstream and those kinds of platforms. Would those be the relevant targets, would you say? Or has anything changed in terms of the, well, platforms that you're targeting?

[Henrik Hojer, executive]

No, nothing's changed and they are relevant. I would say that obvious targets are -- if we have ACJ, BBJ should have the same concept. That's a clear target for us. And then we have clearly stated that the next step for us to scale our business is that we move into the large cabin business jets. And then we talk about Bombardier 7500-8000 now, but Falcon 10X and the larger Gulfstream, so G700 and G800 would be or would be -- they are targets for us.

[Karl Bokvist, analyst]

Understood. I'll ask a final one before getting back in the queue here. But the ramp-up in OEM sales that you are seeing or where you might have perhaps a little better visibility, just based on now when we enter '24 and the full year, do you think that this will be a kind of gradual ramp-up throughout every quarter or based on delivery schedules and so on, that this will be more tilted towards one half of a year or another?

[Henrik Hojer, executive]

No, it looks quite stable. And I mean, as I said, Boeing is on fire right now. They target 10 in '25/'26 time frame. They are a little bit cautious there. But -- and it will be gradual. So I mean we see their schedule and it's step-wise quarter-by-quarter ramping up and that, of course, will then affect our sales. Airbus is doing exactly the same. So it will be a quarter-by-quarter gradual ramp-up. It could vary quarter-to-quarter as well. So due to other effects, but we see it as a continuous growth, so to say.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Henrik Hojer, executive]

Thanks, and thanks for the questions. I'll just try to summarize before we head off to the rest of the day. So our OEM business will continue to grow for years driven by large order backlog for widebody aircraft. In '24, we will start to benefit from market dynamics when airplane operator aircraft with humidifiers in the passenger cabin, triggering harmonized considerations, differentiation initiatives and competition responses.In the private jet segment, we will continue our efforts to convince Boeing -- to convince business jet and OEMs to follow ACJ and promote the humidification system as part of the cabin climate system. The impact is binary and can be significant by adding a new OEM.All in all, CTT is in a strong position to deliver growth in '24 and beyond. Thanks for listening, and we are looking forward to talking to you again during '24. Thank you.