Earnings Call: Q3 2020

Oct 23, 2020

Good morning to you, and welcome to our 3rd Quarter Earnings Call. We take picture number 2. It's me, 2 of the new ones on CEO that make the presentation. And I have with me our CFO, Daniel Ekstrand also. We take Page number 3. As you all know, we are working with humidity control in aircraft for a better climate in the aircraft, cabin and in the sky. Our products are the humidifier, you can see on the left side, and our dehumidifier. We take the next page, Page 4 and go directly to Page 5. The highlights of this quarter was that we met our forecast on the net sales. We had net sales of SEK 38,000,000. Of course, it's much lower than last year, but we have the COVID-nineteen situation. I'm very happy to still be profitable despite the COVID-nineteen. And the aftermarket was better than we thought 3 quarters ago 3 months ago. We have also entered an agreement with Camfield, which is air quality expert and located close to Nijshopping in Trusa. And we have agreed to develop applications for the aircraft. We are looking at integrating filter solution into our humidifier pads. We take the next picture, picture number 6. If we look at the financials, in short, the net sales was SEK 38,000,000, down from last year with 54%. The profit was SEK 6,000,000, which gives us an EBIT margin of 17%, and that means an earning per share of SEK 0.4. The cash flow was negative. I am not so happy about that, but we will come back to that later in the presentation. We take the next picture, picture number 7. If we look at the net sales bridge, we had a very strong quarter last year. I think it was a record quarter for quarter number 3. Compared to that quarter, we have lost SEK 21,000,000 in OEM sales and about half of that is due to the deletion of the drying system for the 787 and the rest is lower sales of humidifiers. What has been very strong this quarter and was low last quarter was the VIP sale last quarter the quarter last year, I mean. The VIP sales have been strong the whole year and that has not been affected by the COVID-nineteen. So there, we have a positive contribution of SEK 9,000,000. Of course, we have suffered in the aftermarket. We will come back to that. But the effect, if we compare to last year, is very big. We had a very good quarter last year regarding aftermarket sales. If we continue to the next picture, it's picture number 8. You see it on the sales mix also. The aftermarket is lower this quarter in percentage also compared to the same quarter last year. And you can see the strength of the VIP business this quarter compared to last year. OEM, the OEM portion of our business has decreased slightly, but not as much as the aftermarket business. We take the next picture, that is picture number 9, where we are looking at the EBIT profit bridge. We have talked about the net sales. Most of the decrease in net sales is, of course, due to COVID-nineteen. But we should not forget that we have lost the drying system if we compare to last year. If we look at the EBIT margin, we most of the losses, of course, are well lower business, lower volume and so on. But we also have some effect from the currency. We take the next picture, picture number 10, which is the cash flow. We are still negative in cash flow this year, mainly depends on the low sale, of course, which give us a weaker cash flow. We have also a couple of VIP projects that is the payment of that is in the end of the projects. Normally, a VIP project is cash positive during the length. But this is special project that has another construction. We have an inventory buildup. We have in the beginning of the COVID-nineteen crisis, we concentrated to have enough in the inventory to be able to adjust for any disruption in the supply chain. Now I think we have the supply chain absolutely under control and we have not had any disruptions. So now we can start to lower our inventory again. And that is focus for the next quarters. And we are very sure that we can get the reduction in inventory. We have also invested in our Brivo facility where we have the sheet metal production. The laser cutting and pinching machine was 15 years old. And during this quarter, we have introduced a new machine that will, of course, give us an efficiency increase. And if it's something good with the COVID-nineteen, it is that we could invest and introduce such a machine when we are not running at 100% power or production. So that is good. So there you can see the cash flow. I'm pretty sure that we will turn the cash flow the coming quarters. We take the next picture, picture number 11, and that is our order intake and backlog. Of course, the COVID-nineteen gives us an effect on the order intake. We have lower intake of aftermarket orders and also Airbus and Boeing has adjusted but I have a feeling now that it will start to turn. But I have a feeling now that it will start to turn. We take the next picture, picture 12 and look at the 1st 3 quarters of this year. So we go immediately to picture number 13. There you can see on the net sales side, we are down compared to last year with 39%. And of course, we have a bigger effect on the earnings. It's down about 60%. But we still have an earnings per share of around SEK 2.3. But again, the cash flow, I'm not too happy with, but we will turn around the cash flow now. We take the next picture. There you can see the sales mix. It's about the same as for the quarter. VIP has been strong during this crisis. The OEM has gone down a little bit and the aftermarket a little bit more. We take the next picture, picture number 15. If we look at the cash flow again over the 3 quarters, first of all, if you compare year to year, we had a big tax payment in 2020 that was related to 2019 2018. So that when you adjust for that, the cash flow is positive over those 9 months. We have discussed the VIP projects, and we have taxes during those three quarters, it's much more 'twenty than it was 'nineteen. So of course, we can get tax money back, and we are working on that issue now. If we take the next picture, picture number 16, there we are looking at rolling 4 quarters. And if we compare the last four quarters with the 4 quarters before, the net sales are down 30% or 32% and the earnings around 50%. There you can see the cash flow is positive if we look in this perspective over the last 4 quarters. We take the next picture, picture number 18. And now we come into the outlook part of the presentation, which perhaps is the most interesting part of this presentation. We look at the forecast, first of all, it's on the Page number 19. And this is the first time I'm a little bit unsure about the forecast. We have opened up the band. So we expect net sales between SEK 35,000,000 SEK 45,000,000. And of course, that's lower than last year. The reason why we have opened up is that we have an underlying demand in the offtake market. We know how much the aircraft are flying. So normally, the aftermarket sales will start to pick up, but I cannot see that in the order book yet. So therefore, we are a little bit wider here in the gap. If we look at the OEM side, there we have a clear picture. We will go down a little bit in the Q4. That is normal because Boeing is taking less deliveries by the end of the year and then they go up in the Q1 the year after. And this is the same this year. Therefore, the OEM will be slightly lower in the 4th quarter compared to Q3, but we will increase again in the Q1 next year. We take the next picture, picture number 20. And here, we come into the what we call, managing the COVID-nineteen impact. We go straight into picture number 21. And if we look in the aviation, commercial aviation world, it is 2 interesting graphs that we have here. If we look at the left lower picture, you can see the activity of flights in the world. If you look at 2019, it's the red line and 2020 is the blue line. There you can see that the traffic was down to about 30% of the traffic in 2019 or the traffic before COVID-nineteen. That was in April. And since then, it has recovered. It's recovered relatively quickly up to about 60% in July, August, and it has increased to grow, but at a slower pace. But now if we look all over, we are at about 60 percent of the traffic we had in 'nineteen. Of course, this is led by the short- and medium range aircraft. If you look at Europe, of course, we have more traffic inside of Europe than we have to the United States, for example, and that's absolutely normal. The long haul traffic will come a little bit later or increase a little bit later. But you should also know it's big differences between different parts of the world. I think here in Europe, we are a little bit sorry about the 2nd wave and that the traffic is not growing as we had hoped for the moment. But in areas like Russia, China, Asia, we have another situation. And if we look into the situation in the United States, you can see on the graph at the right upper corner that the traffic in U. S. Is actually back to almost half of the traffic during 2019. So the traffic in Europe or in U. S. Has recovered. It's very clear. So we can take the next picture. So what does that meaning for CTT? And as you know, CTT is most dependent of course, we are dependent on the OEM sales. That is the basis. But we are very dependent on the aftermarket also. And here you have 2 pictures. If we take the one up in the right corner, we have a picture of the utilization of the 787 fleet. And you can see in April, about 40% of the aircraft was parked, actually didn't fly anything. But now in the middle of October, we are up to about 70% that is in service. I said wrong, it was 60% that was parked in April and now we are up to that about 60% to 70% are in service. Of course, the aircraft that are in service are not flying the same amount of flight hours as they did during 2019. So if you look at the left side of the picture and you see that graph, you can see that the average flight hour on the 787 aircraft was down. It was down from before COVID-nineteen. They were flying about 300,000 hours in the fleet, and we went down to about 80,000 hours in the fleet. And that is, of course, very low. But since then, we have recovered and you can see it especially in July August, and we are waiting for the figures for September. Those flight hour figures we get from Boeing. But it's very clear that the 787 fleet that is most important are flying more than the overall widebody fleet. The overall widebody fleet in the world was before COVID-nineteen about 4,600 aircrafts. And the old aircraft means 747, 777, 767 and A380 also, they have been grounded immediately and they will continue to be grounded. And I think many of those aircrafts will be retired. The 1300 aircrafts we are most interested is 1000 about 787 and 300 A350. They are used more. So when we have the recovery now, those aircrafts where we have equipment on that creates our aftermarket will recover to 100% much quicker than the overall widebody fleet. That we should think about when we look a little bit forward for CTT. So I think if we summarize this, I think that the situation we have now is that our sales of consumables are lower than the underlying demand that we have. It means that the aircrafts are flying more than we can see in our sales, and that means that we have a decrease in inventory by the airlines, by our partner, Satya and Boeing. But we cannot over time live with lower inventories by the airlines. So sooner or later, they will have to start to buy again. So the question is only exactly when that comes. But we are very sure the number of flight hours that the aircrafts are making is higher than what we are selling now. So we really believe in the underlying demand, which show stronger aftermarket sales in the next quarters for CTT. We take the next picture, picture number 23. Okay, CTT has lower sales and lower aftermarket sales, but the development and the ongoing projects are looking very good from an engineering point of view. If we take the first project that is most important, perhaps for the moment is the 777X. Of course, Boeing delayed that program with about 6 months. I think it is mainly due to COVID-nineteen, but perhaps they had some issues also. But it's a good news. In a couple of weeks ago, the test aircraft number 4 were flying. And in that aircraft, we have our flight tech humidifier. So the 1st flight tech humidifier on the 777X has declined, and we have not heard any issues so far from Boeing. That's a good sign. And of course, the part of our growth in 2021 and forward on the OEM side will be the deliveries to the 777X project. The aircraft beside is an ACG Neo, ACG 320 Neo. And there, you know, we are working together with Airbus to improve our humidification system for that aircraft type. And Airbus is now really supporting us. They are supporting us from a marketing point of view. And I have been discussing with the VIP boss from Airbus. And he says, when you have a VIP aircraft, you should really have a humidification system because that is the ice of the cake of the Comfort. You feel much, much better when the cabin is humidified. And we have been working with VIP aircraft for many years. But when the person like that says that VIP aircraft should have humidification, that will give us a very strong position in the market. The project on the left lower side is the MC-twenty 1, and that is really unique in that respect that we have a flight accumidifier on a narrow body aircraft that is flying short to medium distances. They are also in the flight test program, and we have all humidifiers flying there. I think they are up and fly with 4 or 5 aircrafts. And that one will go into service. I think it's planned for 2022. It means that they are slowly starting the serial production during 2021. And because the humidifier is basic, it means humidifier in cockpit on every aircraft that will have that will increase our sales. And of course, humidifier also increase our aftermarket sales. And perhaps the most promising project is on the right lower side, that is Global 7,500 aircraft. It's a private jet business yet. We have started to deliver parts to this project, and we should deliver the whole system in the Q4. That is one of those VIP projects that is a little bit cash flow back driven. It's very exciting. It's the first time that CTT do a humidification system in the VIP aircraft. It's a system, it has 4 humidifiers and 1 dryer plus controls. And you as shareholder of CTT, I'm very happy that we have 4 humidifiers instead of 2. It means we will create more of the market. But first of all, this is an icebreaker into a segment which we have looked for, for many years. The Global 7,500 can fly 15, 16 hours and we will they will have a production volume of about 40 aircraft a year. So only this program can be substantially bigger than all the VIP sales we have done in the past. And you also know that Gulfstream is building the same type of aircraft. And of course, if Bombardier has a humidification system, we have a good chance to come into Gulfstream also. And then it's not official yet, but in the last week or 2, Airbus also announced that they will make the business yet out of the smallest Airbus aircraft, the A220. And there again, the VIP boss by Airbus said that these aircraft will have a humidification system. The A220 will be bigger. It will be a bigger cabin than the Global 7,500. It will not have the same long range. I think they aim to fly 10, 11 hours with that aircraft. But again, Airbus says it has to have a humidification system. Airbus has already 6 orders of this aircraft type, and the 2 first aircraft will go to Comlux Aviation, which is a shorter VIP charter company. And they have already on bigger VIP charter aircraft, our humidification system. And Comlux as a company is one of our biggest customer on the VIP side. So if we look at VIP business yet, it seems to be very strong, and it's logical because in this COVID-nineteen times, the rich people like to fly their own aircraft instead of take the risk to go with normal airlines. So that is the future projects we are working with. If we take the next picture, Picture 24, we look into the market drivers due to COVID-nineteen. If we look at the humidification market, of course, comfort and well-being has always been our sales argument. But the industry is looking more and more now into air quality, air quality generally. And of course, air quality, part of that is high humidity. And we really try now to be a stronger partner in air quality. We will try to put in or we will put in filters in our humidifiers to not only humidify, we can take away ozone, we can take very volatile organic compounds. We could actually do make our humidifier more attractive for the end customer. And of course, the whole industry is working with wellness confidence to travel. They work with the cabin. They try to make flying as safe as possible that the passenger comes back. So the humidification system with air quality aspects is more and more talked about in the industry. If we look at the dehumidifier market, of course, our sales pitch has always been cost saving, lower cost to operate and fuel savings. With all the subsidiaries and the government going in and helping airlines, the government really pushed for sustainability. So the airlines has all the pressure they could have to reduce the impact on the environment and save CO2, too. And there, our dehumidifier is absolutely right positioned. So we hope on that. We take the next picture, and I think that is the last picture, picture 25. We talked to that a little bit when we looked at the development projects we have. If we look at midterm growth opportunities, of course, 787 is our best opportunity overall. For every 787 we get out, the aftermarket is growing. But we are looking more and more into business class humidification on the 787. On the 787, you can have humidification in the cockpit and in the crude, but we still don't have cabin humidification. On the 350, which is came a little bit later and the 777X now, there the airline can select cabin humidification. So it is not unlogical that we would be able to sell humidification into business class on this type. And it would be very, very not cheap system, but a cost effective system to humidify the business losses could be enough with 1 humidifier or in some bigger business losses, 2. And as I said, we actually have an OEM opportunity there. So there, we could get growth. And the other big growth potential is, of course, business jet and what we do in the VIP market. The long range business yet, Global 7,500 and the Gulfstream, there is production volumes up to perhaps 100 aircraft a year. So there, we really have a chance to grow our business. And the main part of that business will be again, humidifiers, which in the end then will create an aftermarket. So that was what I wanted to present to you. I think we have picture number 26 is question and answer. So please come with your questions. Thank There are no questions. Dear speaker, the floor is yours. Okay. Thank you for listening. That was the 3rd quarter. So we will talk to each other again, I think, beginning of February, where we have our report for the total year 2020. Thank you very much for listening. Bye bye.