CTT Systems AB (publ) (CTT) Earnings Call Transcript & Summary

Welcome to the CTT Systems Q3 2022 presentation. Afterwards, there will be a question-and-answer session. Today, I'm pleased to present CEO, Henrik Hojer, and CFO, Markus Berg. Please begin your meeting.

Thank you, and good morning, and welcome, everyone, to CTT Earnings Call Third Quarter 2022. Next slide. I'm Henrik Hojer, I'm CEO of CTT, and I'm here together with our CFO, Markus Berg. We will present the results of the third quarter. Let's go directly into the report. Next Slide #3, please. The business highlights of the third quarter was that the aftermarket continued to grow more than we expected by increasing 40% quarter-to-quarter to all new-time high. We are also very pleased that -- to see the Boeing resumed the deliveries of the 787 in August. This means that Boeing started to deliver the newly produced aircraft as well as the 120 ready-built aircraft. CTT also received private jet orders for 1 VIP BBJ MAX aircraft, and as previously announced, we received our first kit order for the ACJ TwoTwenty. Next, Slide #4, please. Looking at our financial numbers. Third quarter net sales increased for the sixth consecutive quarter to SEK 65 million, beating our forecasted range, bolstered by a strong currency tailwind, leading to a profit margin all-time high. EBIT increased to SEK 33 million, and we reported an EBIT margin of 51%. Earnings per share increased to SEK 1.90 and we had a strong operating cash flow amounting to SEK 31 million. In the third quarter, we had the highest EBIT margin in CTT history, but this can be derived mainly to 2 things: currency effects and an extraordinary sales mix. CTT has all its revenues in U.S. dollars, and we benefited from a U.S. dollar versus Swedish krona at a record high. Further, in the third quarter, our aftermarket accounted for 86% of the net sales. Currency and sales mix are 2 extraordinary factors that in this quarter, coupled and drove our profit margin to record highs. Next Slide #5, please. It's comparing to the same quarter last year. Net sales increased SEK 25 million, driven by a SEK 28 million increase in the aftermarket revenues, partly offset by weaker sales in OEM and retrofit. We also saw an increase in private jet sales with SEK 3 million. If looking at the sales mix, we see the already mentioned dominance from the aftermarket activities. Next slide, #6. We had a strong order intake in the quarter of SEK 99 million driven by a recovery and growth of the aftermarket. As I previously said in the business highlights, we won 2 new private jet orders during the quarter, to be delivered during the first quarter in 2023. We ended the third quarter with order backlog of SEK 94 million, and that is the highest since 2019. I now hand over to Markus on the next Slide #7.

Thank you, Henrik. EBIT in the third quarter was strong and amounted to SEK 33 million, an increase from SEK 12 million in the third quarter last year. The main reason is, business driven with SEK 12 million from higher sales volume and SEK 4 million from mix and price, primarily from higher aftermarket share. CTT is profiting a lot from stronger U.S. dollar compared to SEK with approximately SEK 9 million. Higher cost due to higher sales and the better EBIT increases allocation to variable remuneration to our employees. Let's move along to the next slide, #8. Cash flow. Operating cash flow amounted to SEK 31 million, driven by improved financial performance, EBITDA positive working capital change due to account receivable, account payable but partly offset by inventory increases. Given this, cash in bank amounted to SEK 44 million in the end of the third quarter. Let's go on to the next slide, #9. Net debt amounting to SEK 5 million compared to SEK 39 million in the third quarter last year. Back to early 2020 levels, trending below 0. In addition, CTT has SEK 49 million in available credit facilities. Solidity at 71% compared to 65% in the third quarter last year. All in all, CTT has a strong financial position. Let's go to the next slide, #10, and then directly move to the accumulated numbers January to September. Accumulated net sales amounted to SEK 173 million, an increase of 58% from SEK 109 million last year. Adjusted for currency effect, an increase of 37%, mainly driven by the recovering and growing aftermarket. January to September EBIT increased to SEK 71 million compared to SEK 19 million last year. Earnings per share increased to SEK 3.87 from SEK 0.79 last year. Then let's continue to the next slide, #12. Accumulating operating cash flow amounted to SEK 43 million compared to SEK 10 million last year, driven by improved financial performance 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 the net -- the debt with repayment of U.S. loan of SEK 33 million in the first quarter. And in the second quarter, we have paid a dividend of SEK 10 million to our shareholders. Let's go on to the next slide, #13. We now move over to rolling 4 quarter and the next slide, #14. As mentioned before, OEM sales is late in recovery, private jet looks promising going forward and the aftermarket is driving the growth. So in number, net sales of SEK 250 million compared to SEK 144 million, up 49% in the period. Operating profit increased more than 300% to SEK 79 million compared to SEK 18 million. EBIT margin of 37%, up from 13%. Earnings per share is SEK 4.22 compared to SEK 0.94, an increase of 350%. And then a strong operating cash flow of SEK 64 million improved from SEK 9 million in last period. Next slide, #15. I now hand back to Henrik to give you the outlook. Next Slide, #16, please.

Thank you, Markus. It's been a few interesting weeks watching our industry reporting about the strong demand for travel, and that revenues and profit levels exceed the predictions from many of the major airlines. But these opportunities must be counterbalanced by a risk for recession, driven by higher interest rates and lower consumable spending that likely will have a negative effect on our business environment. We are prepared to adopt applying the flexibility we have in our different segments and put regional differences into play. In general, we calculate with an increased risk of some retrofit projects where a decision can be pushed forward in time or even project can be canceled. On the other hand, we still believe in the recovery of our OEM business, starting next year. We are also confident that our project -- prospects in the private jet segment can endure a normal recession. And finally, we do not foresee any major impact on the aftermarket. Next, Slide #17. Let's go into the forecast for the fourth quarter. Net sales are forecasted to be in the range of SEK 65 million to SEK 70 million, pointed to SEK 238 million to SEK 243 million for the fiscal year 2022 compared to SEK 150 million in 2021. I calculate with a heavier revenues from private jet projects compared to the third quarter, partly offset by the consolidation of our aftermarket to balance underlying growth and a strong inventory effect in Q3. Next slide, #18. The aftermarket in the third quarter was exceptionally strong, explained by large demand when distributor placed orders to restore inventory to support higher fleet utilization. The third quarter will clearly be a tough comparable quarter for some upcoming quarters as it included unusual large spare orders. In the graph, we also see that on our rolling fourth quarter's comparison, our aftermarket sales are above the 2019 numbers. Looking further ahead, we still have some pandemic-recovery potential remaining, and this is mainly due to Boeing 787 is back to delivery mode and the 120 ready-built aircraft is also being delivered, representing a 10% population growth for CTT. We also see some potential in Asia and Pacific due to the underutilized population right now. This rebound effect will, however, gradually fade away and aftermarket growth will then track the increase in the installed base. Let's go to the next slide, #19. Our OEM market is still at a record low, but CTT is in a strong position when the recovery starts next year. We are thrilled that Boeing finally resumed deliveries of the 787. The program is currently producing at a very low rate, 1 to 2 aircraft per month, but with short-term gradually return to 5 aircraft after month. Airbus is currently targeting A350 build-rate to increase from 5 to 6 aircraft per month in 2023. The first Boeing 777X airplane is expected to be delivered in 2025 and we foresee a gradual ramp-up starting in '24. I picked this picture to show you that for the first time, Lufthansa pilots can benefit from better climate in compete. In the background, you can see the first 787 to Lufthansa with humidification in both Flight Deck and Crew Rest. We're also very pleased that Airbus confirmed that an undisclosed airlines has selected humidification for A350, including first and business class, totaling 6 humidifiers per aircraft. Let's go to the next slide, #20. Our anti-condensation retrofit business is struggling. In fact, 2022 will be the first year in more than 20 years with no zonal drying retrofit deliveries. We still do not have any retrofit orders, but outlook is not as bad as it seems. I reiterate that we have several sales prospects, both from existing customers, such as Jet2 and Transavia and new airlines, mainly in Northern Europe. There is a risk that some retrofit prospects will be pushed forward in time due to the recession. But even so, this is an area where we make a lot more out of our performance. I'm convinced that we, as a first step, shall return to 30 to 50 aircraft per year. If we can convince some of our larger prospects, we should be able in a few years' time to establish even on a higher LIBOR level. Sustainability is a key driver and airlines can save 20% of fuel and emissions when introducing Airbus 320neo family and Boeing 737 MAX. But sustainability is a never-ending game. And after taking the big reductions, the race continues. And every saving counts also on their new aircraft. This is where CTT comes in with our anti-condensation system. And on top of contributing to sustainability, the return on investment is very good with today's fuel prices and emission right prices. We will continue our efforts to fight our way back into this market. Next, Slide #22. It's actually 21. So let's look at 21. The cabin humidification retrofit opportunities and emerging opportunity. It has been so for years. CTT experienced strong interest in 2019, but the pandemic stopped all projects. As intercontinental travel now starts to come back to normal levels and airlines start to generate profits, we noticed that projects to upgrade cabins has restarted. We see that there is a growth -- we see that there is a growing airline interest in air quality and humidity for passengers and the crew wellness. The benefit of humidified cabin versus cost of fitting in aircraft with our system is compelling. I believe that retrofit project for an upgraded business class probably has a good chance to survive a normal recession. I'm convinced that restoring humidity to wellness levels is more appealing than ever in a post dynamic environment. Together with our partner, Collins Aerospace, we have renewed and strengthened our efforts. In my book, we have the pieces in place to start delivering some results. Next slide, #22, please. Private jet. We have, together with Airbus corporate jet optimize the humidification system for ACJ320 family. This is now promoted and sold by Airbus, and bolt-on kit deliveries more scalable compared to DIP projects. ACJ has a solid business plan, and we foresee that business shall generate solid revenues and profit many years ahead. We believe that this concept also can be transferred to Boeing and their BBJ MAX. Next Slide #24. 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 '23, after the installation of our bolt-on kit in the completion center. The development, production and installation is in full speed at all involved partners. Next slide, 25. Large cabin business jet market represents a huge growth opportunity. With good references from the VIP market and the cooperation with ACJ on the TwoTwenty, we have put ourselves in a position to successfully migrate into large cabin business jet market. The large cabin long-range business jet market consists of 50 to 100 new aircraft per year, which would mean approximately SEK 30 million per year to CTT. Jets are equipped for best comfort and the humidification system is required for a matching climate on board. The first humidification system fitted to a Bombardier Global 7500 aircraft is now in service with a charter operator, and the second aircraft is ordered and planned to be delivered early next year. CTT has approached Bombardier together with our partners and intensifies our efforts to reach out to the OEMs such as Gulfstream and Dassault and their customers. Next slide, #26. Summarizing our performance of the 3 quarters and looking forward, we will have a few quarters with low or no currency adjusted growth in net sales, driven by initial rebound in system deliveries and partly offset by consolidation on the aftermarket revenues. I remain convinced that despite the near-time macro uncertainty, CTT will have the business model, the team and the market position to deliver accordingly with our long-term strategy. Now more than ever, CTT is in a strong position to grow sales in all our segments. Having that said, let's turn it back to the moderator and open up for your questions.

[Operator Instructions] Our first question comes from ABG.

This is [indiscernible]. My first question is, we have seen airlines as well as OEM flagging for high demand. But apart from the A350, already mentioned in the report, what do you see overall when it comes to penetration of your products? Has it also shown a positive trend?

Thanks for your question. I didn't really hear the end of it. It was about the penetration?

So we have seen airlines as well as OEM flagging for high demand, but apart from the A350 orders you mentioned in the report, what do you see overall when it comes to penetration of your products? Has this also shown a positive trend?

Okay. Thank you for the question. That's a really important question. And as we mentioned several times in different costs, system sales is a very important part of our strategy, and that is where we see the growth for the future. And then it comes down to being on the aircraft and being selected, and penetration rate is, therefore, extremely important to us. We know that on the 787, we have extremely high penetration rate on flight deck and crew rest and on the Airbus A350. We are improving, but we have still some potential to grow further and increase the selection rate. I hope that answered your question.

So for my next question, you flagged for higher private jet sales sequentially. Given that you also announced some orders that would be delivered in Q1 '23, should we also expect sequential higher sales going into 2023?