Earnings Call: Q4 2020

Feb 9, 2021

And welcome to the CTT Earnings Call for the Q4 2020. We take the next picture, picture number 2. It's me, Torbjorn Johansson, CEO of CTT, that present. And I have with me our CFO, Daniel Ektschand. We take the next picture, picture number 3, And we go straight into picture number 4. The highlights At the Q4 of 'twenty was that we met our forecast. We were just in the bottom of the forecast, but the aftermarket sales increased from the 3rd quarter, but we are still below our underlying demand. The most important thing is that we finished the development of the humidification system for the business aircraft Bombardier Global 7,500. We have delivered the first system now, and they are installing it in the aircraft. We take the next picture, picture number 5. The financials, in short, the net sales dropped with 58% compared to last year, but we still had positive earnings per share. The EBIT was slightly below 0. We take the next picture, picture number 6. Here, you can see the sales mix and what has happened in The Q4 and also almost the whole year 'twenty is that the OEM sales has gone down. The aftermarket sales are at the same portion as last year, but VIP has gone Retrofit was 0. We take the next picture, picture number 7. If we look at the net sales bridge, the losses in sales we have had, especially in the OEM, It's down with SEK 33,000,000. And a part of that is because we did not deliver any sooner drying system to the SEK 787 for the year 2020. That contributed with SEK 12,000,000. And we have also had less sales in the aftermarket with SEK 18,000,000. The IP has been strong. It has been SEK 5,000,000 more than this year. We take the next picture, picture 8. If we look at the EBIT profit bridge, The business related losses or decrease has been volume, price and mix and so on. It is SEK 25,000,000 less than last year. We have had our cost savings program that has contributed with SEK 6,000,000, but that has been offset by a currency impact. As you know, the U. S. Dollar weak especially at the end of the quarter. So the cost saving program was offset by the currency impact. So we had a slight negative EBIT margin. But of course, as you know, we have our loans in U. S. Dollars So what we lost in the currency at EBIT, we gained in the financial net. So we still have the positive earnings per share in the Q4. If we look at the cash flow, we are almost up to 0. The cash flow has improved over the quarters, But we still have a couple of VIP projects that has been big and is also late payments on. So therefore, we were not able to be above 0 this quarter, but I'm pretty sure that the next quarter, we will have a chance to go over 0. We take the next picture, picture 10. Here, we look at the order intake and the backlog. And as you can see, our backlog is decreasing, but the order intake from very low levels are increasing from quarter to quarter. And this is Logical because the relatively big backlog we have had historically was based on the OEM programs where we normally have a lead time of 6 to 12 months. But as the OEM orders goes down, the backlogs goes down. And you see the order intake is is more related to the aftermarket for the moment. But I hope that we can increase the order intake the next quarters, and we will also increase then the backlog. We take the next picture, Picture 11, and we go straight into picture 12, where we're looking at the full year. I think at the circumstances we have had in the Aerospace, I'm relatively Proud of the year 2020. We have lost 43% of our sales, but we have still an EBIT margin of 19%. First of all, it's a lot dependent The Q1 in the year was good. It was a normal quarter for CTT, but also that we have such a strong business case. Even if we have very low sales in the aftermarket, it contributes a lot to the EBIT. So I am proud of this year. And if you look at other peers in the aerospace industry, I think many companies would have been happy with our figures. We take the next picture, Picture 13. As of the quarter, we have lost sales in the OEM, of course. It is down. I think we have lost SEK 83,000,000. And we have also lost in the aftermarket, which is very natural. But VIP has been a very strong year, and retrofit has been a little bit less than normal. We take the next picture. It's picture number 14. Here, again, you can see the sales in the different segments or the portions. And here, you can clearly see VIP has been a Strong year relatively to the other segments. The OEM has gone down a little bit and aftermarket a little bit. We take the next picture, picture number 15. Here, we look at the cash flow. As you can see, our operating cash flow has been negative with about SEK 10,000,000 during 'twenty. This is explained by when we went into 'twenty, it was We had very strong sales during 2019, and our inventory was really at the limit. We were fighting to be able to deliver everything we should do in 2019. So we had a very low inventory when we went into 2020. Then when the COVID-nineteen came, our first reaction was that we have to be sure that we can deliver. And we have obligations, very important obligations to Boeing and Airbus. And of course, we were very keen on keeping the sales in the aftermarket. That meant that we increased our inventory to be safe. We increased the inventory a lot with raw material and expensive parts over the 1st 6 months in the COVID-nineteen situation. And that was, I think, correct because we have had no problem with deliveries. The problem we have had is that Boeing and Airbus cut down the production a little bit more than we expected in the beginning of the COVID-nineteen. So we had a situation where we left out of 2020 with the inventory that was a little bit too high, but it was on purpose. I think when we go into 2021 now, we have the possibility to reduce our inventory, not down to the levels of 2019, but because we have new projects like MC21 and 57X. But this is the explanation While the cash flow in 2020 was negative, it was a surprise for us to pay to secure deliveries over the year. We take the next picture, picture number 16. Here, you can see that the Board is proposing that we pay a dividend to our rules, we will pay 70% of our earnings per share. It means 1.74 We have a very strong financial position. So it is we will keep to our standard and pay out this. We take the next picture, number 17, and I think now we perhaps come into the more interesting part of the presentation. It's the outlook. And we look at the next picture, picture number 18. Of course, the aerospace industry has some problem now. And I thought that perhaps it should be a little bit better now, but with the second wave of COVID-nineteen. It's a lot of close downs, lockdowns all over, especially Europe and U. S. Perhaps. So the demand for our air travel is low. But anyhow, If you look at the booking of traffic, we still are only down 60%, 70%. And if you look at the right side of the picture, you can see that the domestic traffic has recovered during the fall. Now it is flat a little bit because of the 2nd wave and the international travel has recovered a little bit, But this is behind domestic travel. So if you look at the international travel that is most important for us, we have a drop from 2019 levels of about 80%. And with this perspective, I think we are doing relatively good overall. If we take the next picture, and that is a little bit more in detail regarding our programs. As you know, the A350 and the 787 7 are the most important aircraft for us. They are flying long haul, but in Asia, especially the The 787 is also flown domestically in China and so on. So if you look at the left picture, That is the amount of aircraft in the 787 fleet that is operating. So if we look at the levels we had in 'nineteen, we are back that about 90% of the aircrafts are back in the air. They are not flying the same amount of hours. If you look at the right picture, you can see the flight hours the total Boeing 787 fleet is flying. And we have increased the flight hours from the bottom with 150%. So now the flight hours for 787 is only 41% less than we had 18. So this is a clear indication. If you compare that with the overall international traffic, you can see that the 787 is used much more than the big old aircraft. That is good for us. And We have said that the whole time that 787 is a perfect aircraft for the next couple of years in long distance. And you can see on the second bullet point that Boeing is also thinking that they had some quality issues during 20? So they have built about 80 aircraft in 20 that they have not delivered. And they expect that they should deliver those 80 aircraft plus what they produce during 'twenty one. So Boeing will deliver around 120, 130 aircraft this year. And that is amazing because the international traffic is very low. So Boeing really believed that When international traffic comes back, the airlines will like to fly the 787, which is logical. It's long range aircraft, fuel efficient aircraft, and they can fly profitable with perhaps 200 to 250 aircrafts. So this is very important for CTT. We are on the right aircraft. We believe in the 787. Boeing believe in the 787. And even if we have a bad 2021, we will increase our installed base with perhaps 250 to 300 humidifiers only on the 787. We take the next picture, picture number 20. Anyhow, the Q1 of 2021 will be weak. We expect to have about a little bit less sales than we have in the 4th quarter. We expect that the aftermarket sales from CTT will continue to recover, but we know that the OEM sales will go down. Boeing cut the production rate. They will start to deliver, I think, in April or May, only 5 aircraft per month. So we already, in January, February, delivered lower than we did a year ago. And then we did also the 4th quarter. We in the A350 program, because we are a third tier supplier, we have an inventory adjustment in the type. So we will have very low sales the first half year on the A350. We take the next picture, Picture 21. Anyhow, with COVID-nineteen, we still have those drivers that, that will help us over time. For the humidifier market, We are thinking more and more about air quality and confidence of travel wellness. So you our humidifiers are right in time. The dehumidifiers is weak now. But after the pandemic, I'm sure that the sustainability discussion cash will increase, and it will be more pressure on the airlines to really invest in fuel saving activities. We take the next picture, Picture 22. We have announced already, I think, in the last quarter that we have a cooperation now with Camfield, the world leader of air quality products. Our intention or aim is to increase The benefits of our humidifier, we are developing filter technology that we will put into the humidifier pads. So we, for example, not only humidify the cabin air, but we will also be able to take away Ozone, which is a problem in especially at cruise condition. And we will also have a possibility to take away smells or what we call volatile organic compounds. So we have a really good cooperation, and we invest in making a humidification company, but also an air quality company. And as you saw last week, we signed the development agreement with Munters. And the aim of this agreement is that we should further improve the pad material that we use in our humidifier. I am the opinion that the pad material that Munter is produced is the best in the world, but we have to think about future, and we have to optimize the pad material further. Munter has a big research and development department. And with our knowledge from Aerospace, I think we can make a very good material. And it's especially important when we go in now in the business jet segment, where we have a requirement to build our humidifier smaller, it means more efficiency per volume. So it's a perfect fit that we now invest in the future in the pad material. But if we look now at our different segments in sales, and of course, the important thing is that we start to increase sales again. We are low down at lower. Okay. Now I did forget. We are down to Page number 24. I did forget to tell you to change page. But anyhow, We are at Page 24. And the most important thing for CTT to get back to increase our sales is, of course, that we sell more in the aftermarket again. And if you look at the left picture, There, we have plotted the flight tower in blue that the 787 fleet is flying. It means that is our underlying demand. And there, you have the different quarters in 'twenty. And as you can see, we had very good sales in the Q1. That was before the COVID-nineteen. There, we were selling more consumables than the underlying demand. Then COVID-nineteen came. And as you can see, the underlying demand went down very much in the second quarter, But then the underlying demand has increased over the quarters. So now we are up to about 57% of the demand we had during 2019. And as you know, 2019 was a very good year. But our pad deliveries that we delivered to Satel and to Boeing, we have not got the increase. We are much lower the underlying demand in 2nd quarter. 3rd quarter was a little bit better, but we have lower in Q4. So this means that Satair and Boeing has reduced their inventory, perhaps a little bit by the airlines, but we cannot see any big changes in the airlines' behavior. So we have a very good possibility to come back to the underlying demand, and that would mean a big increased sales in the aftermarket. For the Q4, if we would have sold to this underlying demand, we would have had EUR 10,000,000 more sales in the aftermarket. So that, I think, is the first thing that will happen. How much of that effect we will see in the Q1? I think we will see a lot of that, but especially in the second quarter. So I'm pretty sure we are bouncing back with the sales in the aftermarket. That's the second step for the aftermarket. The 787 fleet will fly more. So if you look at the right picture, There you can see that the total amount of flight hours have increased since April. Now it has flattened out a little bit because of the second wave. But with the vaccination, the vaccination goes on. I am very sure that the 787 will flight the total flight hour in the 787 fleet will pick up again. Perhaps it happens in the Q2, but it will definitely happened after the summer, where a big part of the population in the Western world have a vaccine. I'm pretty sure that long distance travel will really increase after the summer. Perhaps we see something already in the Q2. So that's for sure. If there is one thing I'm sure about, that is that the aftermarket will come back. We take the next picture, and that is regarding the OEM sales. Of course, That is difficult to turn around. The OEM sales was relatively good in the beginning of the pandemic, but now Boeing has gone down and they will deliver 5,787 per month. But remember, They have 80 more that they have already built. So the actual delivery from Boeing will be much more than 5. But For us, the production rate is the important thing, and we see that already in the Q1. I think we will have to wait until 2023 when we will see a production rate increase. Perhaps it can go quicker, but normally, we will see that 1st in 2023. Perhaps you have seen also that the 777X enter into service have been pushed to 'twenty three. This is unfortunate, but we Boeing is building the 777 with a pace of about 2 aircraft per month, and we have orders for this year for 2 aircraft per month. And I think we can be pretty sure that Boeing will not reduce production rate on 777X. That is the aircraft they are building now in Siete. Regarding the A350, we have the first Half year of 2021, we will have a negative impact on CTT because the supply chain is downsizing the inventory. We have very little orders in the first half year, but the forecast is that it's coming back in the second half of twenty twenty one. Then we have a joker, the MC-twenty 1, the Russian aircraft, where we have our flight deck humidifier on. They are indicated there that they are starting the production during 'twenty one. So I think in the Summer or in the second half, we will have a contribution from the MC21 production So but OEM sales will be weak in 2021 and especially in the first half year. If we look at our retrofit business, now we are to Page number 26. If we look at the retrofit business, You could perhaps think it's impossible to sell anything to the airlines, and that is correct for many airlines. But there is still airlines that are interested to invest in the fleet. We have had some RFQs for cabin humidification in premium class. So that is very Promising for us, you know that our system is offered as option on the 777X and on the 350 for premium class. And I think there is airlines that really think that premium cabin humidification is something for the future. We have no orders so far, but we are positive that it could happen. If we look at the drying system, We have also interest. Some airlines are very convinced of our system. And in some areas of the world, the narrow body fleet are flying relatively much. Europe is, of course, a weak The weak continent for the moment, but in Asia, Russia and so on, they are flying domestically almost at the same level as they had during So we have a good hope that we will increase the retrofit sales of SonaDry. And linked to that, As you know, the Boeing MAX, the new 737 that has been grounded due to the accident are getting back in the air. And we have an agreement with 1 airline that we should install our system in 1 MAX aircraft and achieve our STC. So I expect that we will have a 7 37 MAX STC by the end of this year or in the second half of this year. And that is very important because, as you know, we have sold a lot of Zona Drying System So the older 737 and the MAX is very similar to the older 780 7, when you talk about condensation issues. And we know that many of our customers that have the drying system on 737 Classic will go for 7 37 MAX in the future. So that is an important step for us to sell more in the We take the next picture, picture 27. And I have left The most hopeful picture to the lost, I think The private jet development is really going in our favor. As you know, we are working with Airbus to improve or optimize the humidification system we have on the A320 family. We have finished that development, and I expect we will deliver the first of these systems to an aircraft that we will have that delivery, I think, after the summer. And this is very promising because Airbus has Been working with us in this development. Airbus have decided that humidification is a really comfort during these kinds of aircraft, and they are already marketing the system and promoting the system. So I think we will have a chance to have a very high penetration rate on the A320 family of And of course, this would spill over on the 737 also because there, we will have more sales on the BBJ. The BBJ MAX will come back because now it's not banned anymore. In the middle, we have the Global 7,500. We have finished the development. We have delivered the first system. We will deliver the second system also. It is installed in the first aircraft. The installation works good, and I think that aircraft will fly with the system to the summer. That would be a big happening for us. It's the first time we will have a system into business yet. And you should know that Bombardier we'll build about 35 to 40 of these aircraft a year. So this is very high numbers for private jet for us. It looks very promising. And on the right side, you have Airbus new large business yet. It is based on the A220, which was originally designed by Bombardier also, that the project was sold to Airbus. There, Airbus has clearly said that humidification will be a part of this aircraft. Otherwise, you will not have a comfortable environment in the aircraft. We think they will select the supplier of this system during the spring. And I think there is No, I don't think we have a competition, and I would not at all be surprised if we will be still selected. But with this strong positioning of Airbus that humidification is something you need in the business yet or in an VIP aircraft. This is a big, big difference to what it was a year ago. Since a year, Boeing Airbus has Taking this position, you should have humidification if you fly VIP or business jet. So if you look all over this market with Large business year. So here, we have a market potential in private jet of about SEK 200,000,000. So If you compare that to our overall sales in 'twenty, that was low, but it was about CHF 200,000,000. Here, we have a real good chance for increased sales, and this can kick in, as I see it, in 2022. So that was the last picture. I think we go to the next. And here, you have a question and answering. And I would like to put the pressure on what we are saying up there. We have projects for growth. We have the 777X that will come. We have the VIP at the Airbus Corporate Jet. We have the MC21. We have the Global 7,500, And we have the strength to invest in those programs. So I think even if it looks a little bit bad now, we really have the future, and we are I think we are going for the turnaround now. So if you have any questions, please give me them. Thank you. Our first question comes from the line of Karl Bokvest. Please go ahead. Your line is open. Thank you, and good morning, Torbjorn and Daniel. So first one, if we start with the VIP opportunities there. You said up to SEK 100,000,000. Could you just please clarify the amount of aircraft you expect from Which aircraft platform? Yes. If we take the most obvious one is, of course, the Global 7,500, where we have We are in the delivery of the 2 FARS system. Bombardier is planning to build 30 to 40 of these aircrafts. Then you have the big competitor to Bombardier is, of course, Gulfstream. And they have the same type of aircraft. We don't have a contract with them now. But of course, if Bombardier For this, we have a good chance to get into Gulfstream. And they will build the aircraft in the same amount as Bombardier. And then you have, of course, the Airbus, which takes a step into the business yet market before they have only delivered A320 family and bigger aircraft. But now with the A220, they really go in and compete with Bombardier and Gulfstream. So I expect that the A220 corporate jet or business jet can sell in up to 20 aircraft a year. Okay. And so yes, so let's Just to understand the revenue potential here, you say, let's say, 100 aircraft, you see a potential of 200,000,000 Just simple math, around SEK 2,000,000 per aircraft. Are there any revenue differences between these platforms? That's one Might need to consider? No. I think it will be in the same range of price. We have sold already 2 systems to the 7,500, but without mention the Price per aircraft, it's absolutely in that range. And of course, we will have a price tag on those business units that is a little bit lower than we have on the, for example, the A320. But we will have the advantage When we sell to business, yes, it will be not like an OEM program, but it will be much closer to an OEM program. So if we have a system designed and developed, I think we have an advantage that our production costs And our overall costs for these programs will be lower than the normal VIP. So we can Even if we have a little bit lower price, it could be very profitable for CGT. And again, it will generate substantial aftermarket. Yes. About that aftermarket potential, so is this the combined KAR VIP system with both the humidifier and dehumidifier? Yes. In the Global 7,500, the first customer opted to have 4 humidifiers in it and 1 Sona dryer, of course. I think perhaps the optimum system in the aircraft like that would be to have 3 humidifiers. So I expect that we will have 2 or 3 humidifiers in fires in the business jet aircraft. And that is you can compare it on A320, where we have 2 humidifiers and the dryer. The humidifiers are bigger. But as you know, when we sell the pads, it's not a big difference in price between the sizes. So I think I'm really optimistic for the business yet. So I have been around for some time, as you know, and I have never seen such an opportunity for us to open up such an interesting segment. And you know business yet, I think they will have a boom, thanks to the COVID-nineteen. It will be more corporate People that fly business yet. And if we are successful here, we can get the push into the premium class as we have tried for a long time. That's interesting. And Two more questions from me. The first one, another on VIP. Will you be a Tier 1 supplier? Yes, we are a Tier 1 supplier to the ACG. It's we and Airbus that has designed it. If we look at Bombardier, 7,500, we have a completion center as a customer. But as we have said there, Bombardier has been very much involved. So we hope that we will have an agreement with Bombardier. It would be more That Bombardier sells the humidification system as a part of an aircraft and most of the completions are made by Bombardier themselves. And of course, for the A220, there is no reason why we should not be a 1st year when we work with Airbus. We have worked with them for a long time on the VIPs, and it would be very natural for the business yet. And then on the aftermarket business here, you mentioned your thoughts on Reaching a sort of run rate revenue of €150,000,000 towards the end of the year. Just to understand this, is this something you expect might be a run rate for Q4 specifically? Or could we reach those kinds of numbers already in Q3? And then my follow-up for the full year, If you are able to give any kind of flavor or comment on mix support on your margins, for example, given that we You might still have some capacity or you do have some capacity underutilization, so to say, From the OEM side? What will happen, if we take the first question, I believe that 2021 will be a little bit the opposite to 2020. 2020 ended very low and 'twenty one will start very low, but then the aftermarket will climb. So I expect that by the end of '21, we will have the same aftermarket as we had in the beginning of 'twenty, perhaps even more. If this happens in the Q3 or the Q4, it's totally dependent on the COVID-nineteen. If the vaccination now goes wrong, I think the long distance travel will increase a lot during the second half year. There are so many people in the world as real life to travel again, and 787 is the perfect aircraft. So every airline that has 787 will put them in traffic, and you can see that already and the flight hour will build. If you have 777 and 787 in the fleet, you would start with the 787. So I think our aftermarket can come back quicker than it looks for the moment. Understood. Was it more in the question? And Yes. About how you feel for 2020 now, you finished the year just around 20% margins with OEM, of course, negatively affected aftermarket as well. But just if we think about the recovering aftermarket, but the OEM still being very, Very low compared to both prior year and historical levels. Yes, of course. We as you know, we have Laid off, unfortunately, we had to lay off some people in January. So we have a little bit less costs in the company. But we of course, we have our competence. We have our core still there. But if the aftermarket picks up, we don't need to employ a lot of people because our aftermarket is very little labor on. So if we increase the sales, as I expect, very much in the second half in the aftermarket, our margins will go up because VIP aircraft, business jets aircraft, aftermarket and retrofit, they all have higher margins than the OEM sales. So normally, with the same sales by the end of 2021, we have we'll have better margins than we had in the beginning of 2020. Could you just repeat the last comment on your thoughts there? Yes. If we get the aftermarket back during the second half of 'twenty one, of course, the company has less overall costs end of 2021 than we had beginning of 2020. And we would sell more of our high margin products by the end of 2021 than we had in the beginning of 2020. In the beginning of 2020, we had a lot of OEM sales where we have good margins, but compared to the other segments, we have lower margins. So normally, With the same sales in the last quarter of 'twenty one, we will have better margins than we had in the Q1 of 'twenty. Understood. Thank you. Thank As there are now no further questions, I will hand back for closing comments. Okay. This was the Q4 of 'twenty, and now we go into 'twenty one. And I'm pretty sure that we will recover quicker than we expect, and the aftermarket will recover quicker than we expect for the moment. But everything, of course, depends on the COVID-nineteen and the pandemic. If that takes longer than we expect, of course, we will have it will take longer time. But generally, I am very optimistic, and what I think is very good is the future we have in the business yet. So I really look forward to talk to you again in the beginning of May. I hope that the vaccination then has progressed and that we can see really that the air traveling is slowly coming back. Thank you very much. Thank you. You may now disconnect your lines. Thank you.