Earnings Call: Q2 2021

Jul 22, 2021

Good morning and welcome to CTT's Earnings Call for the Second Quarter. We take Page number 2. It's me, Torben Johansson that make the presentation. And on my side, I have our new CFO, Markus Berg. We take the next picture, Picture 3 and go straight on to Page 4. The highlights for the Q2 was that we had sales in line with our forecast. We met SEK 37,000,000 and that's in the center of the forecast. The best thing with the quarter was that the aftermarket sale did increase for the 3rd consecutive quarter. That is exactly to the plan. And the order intake also increased and that was for the Q4 in a row and now we have the highest backlog since the Q2 2020 when the pandemic started. We take the next page, Page number 5. The financials, in short, if we compare to the Q2 last year. The net sales was down. The last the quarter last year, we still had higher OEM sales because the OEM production rate was not taken down as quickly as the aftermarket. The EBIT margin was good and that's most thanks to a one time off in the OEM segment. But even without that one, we would have had take EBIT. The cash flow was also good, and that was also affected on this onetime off item. We take the next page, Page number 6. If you look at our sales mix, It's still we still have the situation that the OEM sales are historically low. We are down at 21% of our total sales and the aftermarket is very strong, 65%. The retrofit was 0 and VIP was a little bit less than normal. We take Page 7. If you look at the sales bridge, net sales bridge, here you clearly can see compared to last year that the OEM sales was down and also VIP retrofit was very weak also the last here. On the aftermarket, as I said, it has come back and the aftermarket was decreasing very quickly last year when the pandemic hit and the aftermarket was immediately very low. We take the next page, Page 8. Here we look at the EBIT profit bridge. First of all, we had an effect of the currency. The U. S. Dollar was very strong, the Q2 last year. I think the U. S. Dollar was about 16% higher that year than this year, Even though we had a positive effect over accounts receivables and our accounts payable, we still had a negative effect of the currency. The onetime effect gives us SEK 5,000,000 on the EBIT. On the operational performance, you can see that our cost saving program has we have reduced the cost with SEK4 1,000,000 compared to the last quarter the quarter last year. We take Page number 9. And now I take it a little bit slower, so you can get it in the right flow. If we look at the cash flow, that was also, of course, positive thanks to the one time effect. The EBITDA gave us SEK13 1,000,000 in contribution and but we, of course, have paid the dividend of SEK22 1,000,000. That means that we have a closing balance of SEK 24,000,000 now. Without the dividend, we would have had the positive cash flow of SEK 7,000,000. We take the next page and that is Page 10. Here you can see the order intake and the order backlog. And as I said in the beginning, We are constantly increasing the order intake, and it's mostly driven of consumable or aftermarket sales. And the total backlog now is the highest since the Q2 'twenty. So if we especially the aftermarket, we can say we have this bounce back as we have talked about and the aftermarket continues to grow and we see that on the order intake also. We take the next page and that is page 11 and we go straight into page number 12. If we look at the accumulated, the first half year of 2021, Of course, the comparison of compared to the year before is by the Q1 last year, which was the pre COVID quarter. So therefore, if we compare those two quarters with the last, We have lower net sales. And of course, we also have a lower EBIT. The cash flow is 0, and I think that is good because the last year, we had a negative cash flow because we invested in inventory at that time. We take the next page, and that is Page number 13. If we look at the sales mix, it is the same situation on the half year as on the quarter. The aftermarket is very strong, 65% of our sales, and the OEM is very weak. We take the next page, and that is Page number 14. If we look at this net sales bridge, here you clearly see that we have an effect of the lower production rates at both Airbus and Boeing. So the OEM sales on the half year is down SEK 43,000,000. You can also see that the VIP or the private jet segment was not so good this year. We are in the end of a couple of programs. Last year, the VIP was a strong two quarters. Retrofit is about the same. But the aftermarket is very positive. We compare here with 1 quarter without COVID and in last year, and now we have 2 quarters with COVID. And you see that we are almost at the same level as we had last year. So it's clear here. We have lower sales in OEM as expected, and the aftermarket has recovered very good. We take the next page, Page number 15. If we look at the cash flow over this half year, you can see Principally, we have a little bit more in cash by the end of the half year as in the beginning. The profit has given us some headwind, but principally, we have balanced the dividend payment with increasing our borrowings. We take the next page, and that is Page 16, and we go straight into 2017. Here we look immediately at the net sales bridge for the rolling 4 quarters. And here it's very clear again, We have lost in the OEM sales, but we have also lost still SEK 50,000,000 in the aftermarket. And there you can see where we have the potential because the aftermarket can grow quite a bit to be back to the pre COVID levels. We take the next page and that is page 18. And now we go into the outlook. We take the next page, Page number 19. If we look at the aviation industry in total. You can see on the left diagram, there you can see the number of flights per day. The red line is the flights during 2019. It means before the COVID. The blue line is during 2020. And there you see the steep decrease in April and then a good recovery during the fall or the summer, and then it has been relatively flat. The black line is the number of flights during 2021. And there you can see we were a little bit at 75,000 flights beginning of the year. Then we had the 2nd and the 3rd wave of the COVID and it dropped a little bit. But with vaccination, the number of flights has constantly increased again. If you look at the right diagram that is the number of travelers per day in the United States. And here, you can see that we had the very big drop In the beginning of the pandemic, you can see the recovery and then you have a little bit of a drop again with the second and the third wave. And since the people in U. S. Have been vaccinated, you see that we have recovered very good. And we are almost back in the United States, where we were before the pandemic. And I think this is a good illustration on how we think that it will also be in the long distance slides. Of course, when the vaccination will be covering more parts of the world, I'm very sure we will have a similar development on long distance travel, which is, of course, the most important part for CTT. We take the next page, Page number 20. As we have said, the aftermarket is in recovery at CTT. Here you can see in the left diagram the aftermarket sales, the last quarter since beginning of 2019. You see we had a big drop in aftermarket sales in the Q2 last year, and we bottomed out in the Q3. Since then, the sales has increased a lot and we are slowly coming up to the level we had before the pandemic. If you look at the right diagram, there you can see the aftermarket per year. And you can see 2020 was very low, was more than half of the less than half of the 2019 level. But already now, after half a year, we are coming close to the sales of 2020. And of course, we will try to come up to the sales of 2019, and we will continue to grow. So the aftermarket, as I see it, it develops exactly as we have planned. And the next step in the aftermarket sales by CTT will be pushed by the recovery of the long distance travel. We are lucky that 787 especially has been used on a lot of middle distance traffic and has kept our off the market relatively good. At the next step, we will really have when the long distance traffic starts. And we know many airlines are planning now to start to fly international again. They will open up the destinations again. And I think especially the traffic between Europe and United States will increase a lot the next coming quarters. To Asia, perhaps it will be the next step. But between Europe and U. S, I think we will have a totally different situation at Christmas than we have now. We take the next page, and that is Page 21. Here it's the same picture as we showed you a quarter ago, but I have put in a little bit of comments what has happened since then. So if we look at 787, where we, of course, are dependent on higher production rate to increase our sales. It's a little bit kicking now because Boeing has problem to deliver the 100 finished aircraft that they have. The FAA has found some problems in some of the aircrafts, so we have to rework them. And Boeing has put priority on getting those aircraft out, and I think they will stop production for a month, either now in the Q3 or beginning of 4th. So that could affect our deliveries on the OEM temporarily. We are talking about a month of deliveries. But unfortunately, I think because Boeing is not delivering those finished aircraft in the same pace, perhaps It will take a little bit longer before they increase the rate, but we I expect that the increase rate in 2022 because the 787 is generally a very popular and suitable aircraft for these times. This is a perfect aircraft to open up long distance travel again. If we look at A350, Airbus don't have that kind of production problem as Boeing has had. So they are indicating to the suppliers that we should be prepared to go up to 6 aircraft a month during the fall. But on this platform, we are more dependent on penetration than we are on rate increase. So therefore, we always will have some fluctuation in our deliveries from quarter to quarter. But it's positive that Airbus sees that they need to go up in production rate. 350 is also a very suitable and popular aircraft for long distance for the next coming years. If we look at 777X, Of course, you all know that Boeing delays this program. They have some problem with FIA, I would say. I think because of the MAX disaster. I think FAA is very, very critical, and they are very demanding in this certification process. Perhaps it's not that critical because the 777X is a big aircraft. And for the moment, it is not needed by the long distance airlines. But be sure, I am very positive on the 777X in the long run because the 777X will be needed when we have more passenger coming back on long distance travel. And you know that 777X will replace 3 types of aircraft. First of all, the 747 that we have 4 engines, you have the 380, 4 engines, big aircraft, and you have about 1500 57s that are old. So all those aircraft that is really needed when they need more capacity. It means when the tourist traffic internationally come back, the 777X is the aircraft. For the moment, it's better for the airline to fly 787 and A350. But believe me, in 3 to 5 years, the 777 will be very popular because that is a possibility for the airlines then grow capacity, especially in the tourist class, which I think tourists will come back perhaps quicker than the business traveler. So for the moment, it's a little bit delay in the program. It lowers our the sales in the OEM or we don't get the increase we perhaps had hoped to have because delivery rates will be low. But again, here we are really focused on getting as much penetration as possible. It means we are actively working very hard with customers for the 777, the extent they should select our options. The MC Suite 21, nothing special has happened. We have not got orders from that program, but I think it's coming closer to certification. And when they ramp up the production, we will increase our OEM sales. We take the next page, Page 22. Here we have our retrofit business. And again, it's about the same it's the same slide as for the quarter. What has happened here, we said that we were positive to have sales in the retrofit and this quarter, it has happened. We have got an order from Copira, which is the domestic part of Aeroflot in Russia. They have taken over 10 730seven-eight 100 aircraft from Aeroflot, and they will have 40 more coming in the next 2 years. And Cobira, as you know, they have our Sona Drying System in all the 737 aircrafts. So now we will deliver the 10 aircraft in the Q3, and we expect to get the orders for the extra SEK40 that will come to Pobeda during 2022 and 2023. This is an example, a clear example that we have the possibility to sell drying system in the retrofit market. We have more customers that have our drying system, so they are the most obvious one in this situation. But I strongly believe in the drying system for the future. If you look at humidification, Of course, we have not taken an order, but we have discussions with airlines to install cabin humidification in premium class. I think the biggest possibility we have here is with airlines that have selected the options for the new aircraft and they are retrofitting older aircraft, which they will keep, for example, for additionally 10 years. There we have a real chance to sell humidification into the cabin as a retrofit system. And we have started the activities to get the Boeing 737 MAX system certified. We have Sun stress in Turkey as a customer, they will install the system in one of the first MAX, and we will run the certification. So we can say that retrofit business is looking more promising than it did half a year ago, and Cobira is a good example on that it's possible to sell quantities even if we have some hard times. We take the next page, and that is Page number 23. And I think Perhaps this is the most promising or exciting part of our business for the moment. It's during the private jet. Again, it's the same slide as for a quarter, but I have marked in the pictures now what has happened since then. First of all, Airbus did launch the enhanced A320 corporate jet. They did it in June. It was a big conference with a lot of VIP owners and they presented our system very, very good. And they also informed us that they have the 1st customer that will take an advanced humidification system into 320. So there we are pretty sure that we will get an order. And this is a big step. I've been working very long time and I think it's 20 years since I try to convince Airbus that they have to have humidification in premium class, and the Airbus Corporate JetJet was not that interested at that time. But now, as you know, the CEO of the Airbus Corporate Jet, he says, an Airbus Corporate Jet is not a good aircraft without the humidification system. So it's a totally different attitude from Airbus to humidification for long distance VIP flying. If you look at the middle picture, that is the Global 7,500. You know we have worked very hard at short terms to make a system for this aircraft. We have looked into this segment of business yet for many years, and we got the opportunity. So that is the main development activities we have done during the pandemic. The system is now flying 1st July. It took off and it is flying test flights, and We are very happy. We have no issues with the system and the test flights will continue in the summer, and I hope they will deliver this aircraft early in the fall. So that is the first time CTT has a system flying on the business jet. And as you know, business jet is a much bigger market than the bigger VIP aircrafts. Bombardier will build 40 of these aircraft a year and Gulfstream has similar aircraft, then they will also build 40 per year. So I really I'm really excited to see what will happen now when Bombardier and also the business jet customers realize that they can get decent air during those long business yet flights. On the right picture, you have the AC J220, and that's the next one. You know that is a business yet aircraft or it's a passenger aircraft from the beginning that Airbus has taken over from Bombardier. Bombardier was not able to market and support that in the market, so they did sell it to Airbus. And Airbus decided then to make a business yet out of this. The main production is, of course, for passenger, but some of them will be sold as business units. And here again, Benoit, the CEO of Airbus Corporate Jet has said this aircraft should have humidification. We are in the selection process now. And of course, I'm very optimistic because we have the cooperation with Airbus Corporate Jet on the A320. And now we know what kind of a system they would like to put in. It will be a system with for humidifiers, but also a drying system, and I think we are in the perfect position to win this deal. So the private jet segment has not been suffering from the COVID. We have put our resources to develop system for this market. So I think after the pandemic, we are much, much stronger and we have a much better offering into the private jet than we had before the pandemic. We take the next page, and that is Page 24. If we look at the forecast for the 3rd quarter, we expect sales between €35,000,000 €40,000,000 We will have some increase in retrofit, but we will have a little bit decrease in the sales of the private jet. So it will be about the same sales as we had in the Q2. If we take the next page, that is Page 25. Here, we give we have normally we never give a forecast for the full year, but we said we make it this time. And we forecast the full year to be between SEK140,000,000 SEK160,000,000. We have a little bit of a risk on the downside with the OEM, especially the 787 production stop, which I think it will be. And we have a potential in the aftermarket. But on the diagrams, you can see how our net sales has developed in the different segments over the last quarters from beginning of 2019. And there you see the orange pieces, the OEM sales, and we have, of course, been suffering from that. But you can also see the blue part of the diagram. So there you can see the aftermarket was very, very good and it declined, but the aftermarket is coming back again. If we look at and I can say that on that diagram that now we are through the pandemic. We start to increase sales again. And I think for the next report. I hope we can see it also on the rolling 4 quarter. We have been going down for some time now. It will flatten out and then we will also increase sales for the rolling 4 quarters. That will be fueled by, First of all, the aftermarket that is more or less taken for granted. But I think we will have good development in both retrofit and VIPs in midterm. And the OEM, we will see some increase, I suppose, during 2022, but it will increase much more 2023, 2024. We take the next page, and that is Page 26. It's a little bit like we are writing in the report. I'm really optimistic now. We have had a tough time in Aerospace. It was really tough to reduce the sales. We have reduced it a lot and we have, so to say, spent our time to develop our VAT system to develop things for the OEM and so on. But now I think we have a real chance to have another development. And it's based on really the aftermarket will continue to grow. The last step we have to take is that the international either intercontinental traffic comes back. I think it will start now with traffic between the United States and Europe, and then it will be between EU to Asia. So I'm sure we will continue. If we look at the business jet segment, We are breaking into business yet. I think the VIP sales will also increase, thanks to the A320 enhanced system, but the business yet makes our market much bigger. And I really look forward to try to get into Gulfstream, perhaps we can get into Dassault. They also make new business yet. I think we will make some noise in the business jet segment with the Global Systems. So on mid term, I think the private jet or business jet or VIP will grow. On the OEM, we have said it's tough now, but the OEM will grow. It's only a question when. It will take some a year perhaps, but we will have a strong growth in 2023. And you should remember that our OEM products, they are mainly on 787, A350, 777X and also as a joker, the MC21. That is platforms that is very modern, that is the correct platforms for the future. They are less they consume less fuel. They will be big sellers when we are out of the pandemic. And there, our focus is to get more sales on each aircraft, especially on the 350 and the 777X. The retrofit sales, I think will rebound. We have a really good chance to sell drying system. The next discussion in aerospace will be the environmental footprint. The drying system says to you, this must be positive for the future. And if we look at the long haul traffic, The most important thing for the airlines now is to get the passenger to be confident to travel again. It means They have to make everything they can do to reduce the risk that you get infected during the flight or after the flight. I think the humidification system we have that is optional on many aircraft, but it could also be sold as a retrofit. So I'm very optimistic. We are through the COVID-nineteen. We start to increase our sales, and we have good possibilities to have a good development in all our segments. It's a little bit different pace in the different segments, but every one of them, I think, is on the way to increase sales. I think that was the last page. Page number 27 is question and answer. So now I'm ready to take some questions. 2. We have first question from Carl Vosku from ABG. Please go ahead. Thank you. Good morning. My first one has to do with the comment you made about The hopes of improving retrofit sales. I'm just a bit curious here if we should continue to be on the Look out for public press releases or in case you feel that you have a retrofit business that will progress even in the absence of sort of orders that you want to or are Forced to release due to more reasons. Yes. I think When we get retrofit orders, you know from historically, if we get low volumes 1 or 2 aircraft, perhaps we don't send out the press release. It has been the case with Jet 2, for example. But substantial orders in the retrofit market, of course, we will send out a press release and especially if we break some new ground to sell humidification as a retrofit that would be a big thing and you can be sure it will be a press release. So we are not shy to send out press releases now. No, understood. I was just curious about if there is any kind of underlying activity that we might not be able to follow. But on retrofit and also VIP, what is your assessment on Your own capacity here, is it still the case that you yourself feel that you have the ability also now that When you're a bit fewer people as a result of the temporary reduction program If we assume that VIP and retrofit might begin to improve. It's always 2 parts of resources when we take new orders. The first part is the engineering. If we have retrofit orders on Sona Drying system, for example, it's no engineering work more or less. It's systems we already have certified them. So that is only a matter of production. But if you look at, of course, we have downside our production capacity, but the retrofit order is not so intensive for our CTT workforce. It's a lot of board items and we have production of, for example, Sona drives. And if it goes good, of course, we have the possibility to hire back people that we had to lay off. And I would be very happy if we get that amount of orders that we can start to hire people back. I think most of the people that have been working at CTD and had to leave the company are very happy to come back. So I see no limitations on the retrofit. On the VIP, of course, it's a little bit different, there it's a little bit more engineering for each order, especially if we would get into Gulfstream or something, then it's a bigger effort. But as you know, we have been very careful. We have not reduced the resources very much on the engineering side and we are through, for example, a program like the 777X, so we have engineering capacity and we are happy to spend that on VAT and private jet orders. So I see no problem with capacity. We are eager to have something more to do at CTT. Understood. And on VIP, maybe you're not Maybe you're unable to specify this any particular customer or mobile. But in general, let's say that you are Officially selected for delivering commercial volumes for a business jet or private jet Program. How long is the cycle or the lead time for you from being Confirm selected. You have done your test flights. Now is the time for you to you've been officially confirmed to deliver actual sales. How long would it take for you before you can actually begin to deliver to aircraft and CVOs being installed and for you to start booking revenues? I think the private jet segment is both VAP and the business yet now we have the Global 7,500. In the first step with the growth, I think it's not a big issue. The Airbus Corporate Jet, They now market our system for the A320 family. And I think that Airbus has the mindset that every aircraft that goes out without our humidification system is a mistake. So they will I think they will really try to get us on board on every A320 corporate jet aircraft. And that by itself would give us significantly increased sales in the VIP. That's the most obvious increase that we have. And that is from now. I expect an order soon, but that is from now. I think Airbus will push that very hard. Then if we look into the A220, that there we would have to make development of the system, but it will be, so to say, a semi OEM program because they take a part of the aircraft they produce and send them to completion center. So that would be a business that would be a little bit between our standard VIP business and in the OEM business. We would deliver the same system, but it will not be at the same, so to say, qualification requirement as if you work to put it in on the production line. And that situation we also have on the Global 7,500. We can deliver the system, we have delivered now to many aircraft that goes out of production and that could be on short term. If we would integrate us more together with Bombardier and get the system on the production line. That would perhaps take 2 years, but that would be then additional sales. It would then be because the business yet, if you look at that compared to the VIP, the business yet, They don't have any market for passenger aircraft. So if you get in there, you would have the system on the production line. That will never happen on the big aircraft. So there we have another situation, some business we can make very quickly, but on the long term, the best thing is if we get into the production line on both Bombardier and Gulfstream, and then we're talking about 2 or 3 years perhaps. And a follow-up on that. Let's say that things Go well and that you, to a large extent, are able to deliver these solutions into the production lines. One more kind of reporting aspect of it. Will we still be booked in your VIP sales Segment and the follow-up. Just I think previously, you've mentioned that the profitability potential for a system might be a bit I was just wondering if that's also the case for this VIP Business Private solutions that you're now highlighting. I don't exactly know how we will book it. The first thing is to get contract with Bombardier and the GuardStream. Then we can decide if we book it as an OEM sale or a private jet sale. If you would ask me today, I would rather like to have it as a private jet sale. But we will have to come back to that. Regarding prices between OEM and private jet. Of course, we will be very careful that we don't sell our humidification system into business yet on the production line with too low margin. We have a totally different kind of pricing when we talk private jet compared to a commercial aircraft. Understood. I have a few more, but I'll get back in line first. Thanks. 2. Ladies and gentlemen, we don't have any more questions for the moment. If you have another question by phone, you have to press 1 On your telephone keypad, we have a new question from Karl Boxvid from ABG. Once again, please go ahead. Yes. Thank you. So if we look a bit on the aftermarket side, you mentioned that the key driver now will be a return in flight hours for the long haul segment. But I'm just a bit curious in understanding the The aspect of the installed base as well because this has continued to grow throughout the pandemic on the Humidifier side and been fairly stable on the dryer side. So shouldn't we also see a bit of a Support from the fact that the installed base has continued to grow. Yes, of course. The first goal we have is to reach the aftermarket sales we had during 2019. But as soon as we have reached that, we will continue to grow. That is in that is for granted and our business model, the aftermarket sales is in correlation to the complete installed base. And as you are correct, the installed base did grow during 2020, not to the same extent as before, but it did grow. So as soon as we pass the 2019 levels, we will continue to increase the aftermarket sales, that's for sure. So yes, so we have a growing installed base. And then just has there been any changes to Pricing lately in either the OEM or aftermarket channel, one part of that being kind of your Regular ongoing pricing discussions, if there's been any form of change there. But also the second part, if there's been What you've been able to do now given the fact that we've seen quite a lot of rising raw material costs and also rising freight and transportation costs? I think we the pricing situation, there is one pricing life, so to say, to the OEM where you normally have very long term agreements with the OEM. The aftermarket, we follow the price increase that Airbus Boeing put into the aftermarket. The whole aerospace industry is living on the aftermarket. And Normally, Airbus and Boeing, depending on the indices and so on, they decide what kind of increase in price we are allowed to give in the aftermarket. So it has happened that we have a 0 year. It has happened that we have had a 6% increase in the aftermarket, but I think normally it's something between 2% 3% that we increase the sales every year or the price every year. And if you take the question raw material and so on, we are an industry that is very lucky. The raw material part of our cost is relatively low. We have a very big value adding in our industry. So raw material is less sensitive for us in the aerospace. All right. And then is there I might have missed it in case you commented on it Early in the call, but the one off item you take this quarter, positive So income effect of plus 9% and then an impairment of minus 4%. First of all, is there any kind of granularity you can give on that? And the second one is this really will this be a one off occurrence? Or will we see anything more related to this Events going forward. No, a one off, it's a one off, that's for sure. And this is a special one off. So it's a one off. And I cannot give you any more comments on this one off. It's related to OEM, and it's normally sensitive to discuss those things. So I cannot tell you anything more about this one off, but this is for sure a one off. Understood. And then finally, just I want to say Welcome to your new colleague, Markus Dijk. 1st quarter as new CFO, I was just A bit curious to hear your first impressions as new CFO and your view on what You would like to see happening in the future? Thank you, Carl. My suggestion is that we book a meeting call and talk about My first impression, is it okay to do that? Yes, sure. Okay then. That's all for me. Thank you, Tidofofof. Karl, I can say that Markus did start to work at CTT 1st July, and he is sitting next to me and he has worked very much with his report and everything. I think he has made a very, very good start at CTT. I'm impressed how quickly he has captured our business. So I think you will have a nice talk to Richard together. 2. 2. Seems we don't have any more questions. Back to you for the conclusion. Yes. Thank you very much for listening to us. Now we take a little bit of a break. The summer is very nice. But I really look forward to talk to you by the end of October for our next earnings calls. And I'm very confident that we our development to rebound will continue. So I look forward to talk to you again end of October. Have a nice summer.