CTT Systems AB (publ)

Good morning. Welcome to CTT's quarterly earnings call. I'm Henrik Höjer and with me is Marcus Berg, our CFO. We will present our financials for the second quarter and then our outlook going forward. Next slide. First, I want to highlight some progress in our business. On the OEM side, we see continuous improvement in selection rates. At the Aircraft Interior Expo in Hamburg, three airlines confirmed humidifier selection for business class, crewrests and flight deck on their first A350 batch. And one airline confirmed maximum selection for its 777X fleet. In addition, we met several airlines that confirmed selection of humidification in flight deck and crewrest. On the private jet side, Airbag Corporate Jet extends its enhanced humidification kit system offering to also include the ACJ330 VIP aircraft, with large customers signed and project start in August. Private jet and business jet. In July, CTT and Liber Aerospace agreed to enter MOU to team up in an offering of CTT's humidification system to Bombardier for the global 7,500 and 8,000. Next slide. If looking at the numbers in short, net sales increased 4% year on year to 82 million, slightly below the forecasted 85 to 90 range, mainly due to 7 million in delayed spares and repair deliveries derived from a shortage of 787 dryer components from one part supplier. This problem is now solved and CTT will deliver these 787 spares and maintain units in Q3. Operating profit. EBIT decreased 3 million to 31 million year on year. The EBIT margin was 38 versus 43%. CTT generated operating cash flow of 16 million. Earnings per share decreased to 1.96 versus 1.98. Next slide. Net sales reported a 3 million year-on-year increase, with small changes in our business. Deliveries to 787 program increased significantly, but this increase was offset by two things. 1. Temporary lower shipments to A350 as Airbus aligned the supply chain. 2. As expected, no 777X deliveries this quarter, but the comparable quarter included such deliveries. CTT has not delivered anything to the 777X program since Q2 2023. awaiting aircraft certification and resumed production. Aftermarket sales accounted for 80% of the turnover. Next slide. CTT booked orders for 47 million versus 54. Backlog decreased 11 million to 38. This is a low level. With 80% of our sales from aftermarket, we have short lead time from order to delivery. We will see a gradual increase in the order backlog as OEM demand increases. Typically, OEM orders have longer lead time compared with those in the aftermarket. I now hand over to Marcus for more financials.

Thanks, Henrik, and good morning all. EBIT in the second quarter amounted to 31 million, a decrease with 2 million from 34 million in the second quarter last year. We had positive EBIT impact from higher sales volume, but offset by sales mix and margin, burden EBIT with 1 million. mainly due to lower aftermarket share 80% compared 83% last year. Currency effect offset EBIT with 1 million and cost increase of approximately 2 million by investing in increased sales, markets and delivery capacity, including increased headcount to 84 from 77 compared a year ago. Let's move on and look at the cash flow. Operating cash flow amounted to 16 million compared to 62 last year, driven by financial performance EBITDA adding 33 million. But offset by working capital increased by 10 million, mainly explained by temporarily higher inventory due to larger deliveries of input material from our suppliers. Paid dividend of 109 million in the quarter compared to 51 million last year. Let's continue by looking at the net debt. Net debt amounted to minus 5 million compared minus 16 million in the second quarter last year. Cash closed at 49 million. And in addition, CTT has 53 million in available credit facilities. Equity ratio at 70% compared to 71% in the second quarter last year. All in all, C2T has a strong financial position with net cash. Let's move on to the year-to-date numbers. Net sales for January to June increased 4% to 161 million compared to 154. mainly driven by aftermarket sales. EBIT increased 13% to 64 million with an EBIT margin of 40%. Cash flow amounted to 42 million compared 58 million last year. And earnings per share increased by 15% to 3.92 from 3.41. If you continue by looking at the net sales for the last four quarters, they increased with 10% to $315 million compared to $187 million driven by aftermarket sales and OM. EBIT increased with 14% to $126 million from $111 million. And finally earnings per share increased with 21% to seek 8.13 from 6.73. I now hand back to Henrik to give you the outlook.

Thanks Markus. I will now present our business outlook and market drivers. First, short-term outlook. Instead of quarterly forecast, we provide guidance for the second half of 24. to give a better perspective on total impact from the temporary adjustments in OEM related to Boeing's reduction of CTT's deliveries to align supply with actual build rate. Our guidance for net sales in the second half of 2024 is 160 to 100 million, a 3 to 16% increase compared to the same period in 2023. Sales growth in the second half of 2024 compared to the same period in 2023 expected to be driven by 1. Aftermarket sales are likely to grow at the same pace as first half of 2024 or slightly higher. We expect higher OEM sales driven by increases in deliveries to both Boeing and Airbus. Not as fast as previously predicted due to significantly reduced deliveries to Boeing 787 from September to December impacting Q3 and Q4. If putting this temporary pause in context, it's important to understand that this is not related to underlying demand. It's more of a timing issue. CTTs demand normally six to nine months ahead of actual aircraft delivery. But in current environment, with the slower than planned aircraft build rate increases and irregular deliveries to airlines, the OEMs can be forced to align inventories of all parts with actual aircraft output. This leads to a period with lower or passed demand from suppliers. CTT has already experienced such adjustments with very few A350 deliveries in the first half of 2024. In June, Boeing adjusted CTT's 787 production planning from September to December, significantly pushing down CTT's scheduled deliveries. This sales drop will partly be balanced by normalized A350 demand in the second half of 2024, Again, reflecting aircraft build rates and specific chipset content. In the first quarter 25, CTT's 787 deliveries shall, according to Boeing's delivery schedule, normalize and again mirror 787 aircraft build rates. I will now go through the business outlook for each of our markets. Next slide. Aftermarket. The aftermarket is an important part of our business model. We have demand for consumables, spares and repair. Looking at rolling four quarters, we are currently at a trailing 12 months run rate of 254 million. Going forward, I reiterate that the aftermarket sales no longer will benefit from pent-up demand due to shortages after pandemic. As a consequence, aftermarket growth will be significantly lower in 2024 compared with the 30% increase we reported in 2023. In the first half of 2024, aftermarket sales increased 9% compared to the same period in 2023. Next slide. The OEM business will be a strong growth contributor in the coming years, driven by wide body production rate increases targeting pre-pandemic levels or higher. The pace of growth primarily depends on Airbus and Boeing's ability to scale production and deliver aircraft. Wide body build rate increases in the first half of this year are lower than previous targets due to supply chain issues at both Airbus and Boeing. As a result, Airbus delivered only 21 A350s the first half of 2024, while Boeing handed over 22 787s to airlines, both below actual build rates and disclosed targets. Airbus started the year with a monthly A350 build rate of 5 to 6, targeting 10 in 2026 and 12 in 2028. Boeing raised the 787 production rate to 5, but deliveries are held back by supply chain shortages and delivery issues. In Q2, Boeing disclosed that it's slowing near-time production with plan to return to five per month later this year, still expecting to achieve gradual rate increases, including 10 per month by 26. Other contributors will be deliveries to 777X. Last week, Boeing started 777-9 certification flight testing with US aviation regulators on board. The first flight was on July 12 after receiving type inspection authorization. Entering the service is targeted to the second half of 2025. To summarize, the OEM business will be a resilient growth driver that will continue to grow for years, driven by massive wide-body aircraft order backlogs. Next slide. CTT is aiming for even faster sales growth by increasing shipset content by improving selection rates and expanding product availability at commercial and private jet OEMs. Today, we have 90% penetration in flight deck on Boeing 787s and similar selection rate on new A350 operators. In total, we have flight deck humidifiers installed in service in more than 1,000 aircraft and more than 50 airlines. We have good momentum, making significant progress to improve our A350 selection rates compared with the ones we had earlier in the program. In addition to line fitting the flight deck humidifier, A350 operators to a greater degree now select humidifiers for crew rests and business class. We will start to recognize such sales impact from 2025. Next slide. Part of our growth strategy is to convince airlines not only to secure healthier climate for pilots and crew, but also to offer humidity at wellness level for the premium passengers in first and business class. This is an emerging market that benefits from large installed base in flight deck and crew rest with excellent performance data and reliability. In this slide, it's a picture of Air India's A350-900 aircraft with humidification in business class. Air India is our newest operator with six A350-900s as part of their new flagship fleet. In addition, we have China Southern Airlines operators in 2019 and Turkish Airlines since 2022. Even more important, five airlines have confirmed specifying humidifier on board business in their first A350 batch and three airlines have configured it in premium cabins on 777-9s, all with first deliveries during 2025 and 2026. Next slide. We have started to experience favorable market dynamics when airlines to a greater degree define aircraft with humidifier onboard business class in new aircraft. As it's common practice to harmonize onboard experiences in new and existing aircraft, we will have more retrofit opportunities when airlines opt to offer the same carbon climate performance in existing aircraft fleet. We also see other retrofit supporting trends driven by differentiation and competition. On the 787 program, CTT has a high penetration in flight deck and crew rest, but it's not possible to line fit in business class. We expect airlines to demand same premium cabin climate performance in 787s, SN8350s and 777Xs, where cabin humidification is available as a catalog option. The market is approximately 1,000 aircraft. On the A350 program, most of the A350s leaving factory from 25 and onwards to new operators will have humidification in flight taking crew rests and to a greater degree in business class. Early in the program, airlines for various reasons did not select the system. The first A350s are reaching nine years in service and the wave of cabin retrofits which is now starting with rapidly gaining momentum over the next few years. Since 2014, more than 600 A350s have been delivered and Airbus is anticipating the first cabin retrofits, which typically occur on an aircraft that reach eight years of service. By 2028, there will be around 400 A350s that will have reached this age. A retrofit project is an opportunity for an airline to obtain a cabin climate performance at par with modern A350s. We predict retrofit demand for cabin humidification, but also for flight deck and crew rests. Retrofit on Boeing 787 and A350 require cooperation with Boeing, respectively Airbus. We are approaching both. Next slide. The private jet market has its own cyclical behavior. CTT's VIP project pipeline is at record high, but Q2 revenues remain as expected at low level but well positioned to win VIP orders when the market picks up, mainly driven by Airbus corporate jets. When we will receive these orders will be a function of, among other things, VIP aircraft availabilities. If looking at the private jet numbers, trailing 12 months sales have been ranging from 10 to 30 million and is currently at 15. Next slide. A top priority for CTT is the large cabin business jet market. As stated before, we need to be endorsed and included in the offerings by the OEMs. Airbus Corporate Jet leads the way by promoting our humidification system together with and as part of the green aircraft. This business model is well received by the market and customers. It is now a de facto standard on the ACJ comfort package for long range. Our future growth strategy in Private Jet aims to convince other manufacturers to follow and hereby unlock the market. As you can see in this picture, we target Boeing business jets, Bombardier Global, Dassault Falcon and Gulfstream. If we convince any of these OEMs, sales volumes will increase significantly. Lead time from OEM award to first revenue will be 12 to 24 months. At present, we have no business jet OEM award, but I'm still cautiously optimistic that we shall enter ACJ's similar partnership with at least one additional private jet OEM in 24. Next slide. The anti-colonization business is slowly recovering. We have a clear strategy and I'm convinced that we will see a revival. But as stated before, the key enabler is OEM availability at Boeing MAX and Airbus NEO family. Our strategy focuses on retrofit customers to drive and put pressure on Airbus and Boeing. As part of this effort, we have field trial with a major low-cost carrier in six A321s. We also try to convince our largest customers, Jet2 and Transavia, to moisture protect their newest aircraft from Airbus. Both are in transition from all Boeing fleet to introduce new Airbus A320 family aircraft. Previously, they bought our anti-condensation system BFE line fitted in their new Boeing 737 NGs. This is not yet possible at Airbus. Instead, our first retrofit window will be at SeaCheck. We will in parallel together with them and other airlines try to convince Airbus that it should be possible to install our GreenTech system and new aircraft before delivery. Either as line fit of the system or provisioning for post delivery modification. Next slide. If I try to summarize. Supported by Airbus and Boeing's massive order backlogs, CTT's market is poised to grow significantly following the ongoing production ramp-ups of Boeing 787s and A350s and soon Boeing 777Xs. We aim to grow sales even faster by increasing chipset content at commercial and private jet OEMs. A more opportunistic driver is retrofit, where we foresee emerging opportunities in the first wave of A350 cabin retrofits. We've also made progress in our efforts to win additional OEM customers in private jet. I admit that I'm somewhat frustrated about the external factors that temporarily hold back our OEM growth in the second half of 24. But I'm energized by CTT's step-by-step progress in leveraging our marketing position even further and encouraged by CTT's strong outlook for 25 to accelerate and obtain sustainable growth. I now hand it over for questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead.

Thank you. Good morning. My first one is on the outlook for the second half. I understand the reason why you shift to a full six months instead of three, but could you shed any light on whether or not you see differences in these adjustments, whether or not, do you think they will be more, have more of a negative impact in Q3 compared to Q4 if you expect this notable pickup in Q1 versus Q4 for example.

Good morning Carl and thanks for the question and of course we've been elaborating a lot on this topic and as we see it we think it's more, it gives a better picture to the market if we predict the full half year instead of dividing it up to Q3 and Q4. And the reason for that is the shift in the deliveries that Boeing has made. And also on top of that, the aftermarket, which is a very short cycle, and it's hard to predict if orders will come in in September or October. So I think with that and the special situation we are in right now, I think half a year is a good measurement to predict.

And then this discrepancy in deliveries versus build rates, could it also be that the opposite could happen in like a year or so once the supply chain recovers with bigger components to the aircraft, for example?

One thing that is clear is that our aftermarket business, if we look at spare parts and repairs, will grow with the age of the installed base. That's the nature of the equipment we deliver, that they will need spare parts and repairs. And when we destabilize the supply chain, we will continue to grow this market in the future. It should not leapfrog. either up or down but it should have a continuous growth and this little hiccup we had where we had a technical problem that we reported in Q1 the problem was solved in Q1 but I need to add that We a little bit misjudged the delivery times to set up the supply chain again and start delivering on the new technical solution. And that's what held us back in Q2 on this topic. We have now received the first batch of production units and we're up and running again.

Understood. And on that topic, this Dreamliner dryer, is this towards aftermarket deliveries?

Yes, this is repairs and spare parts that's been affected.

Understood, so when it comes to anti-condensation deliveries to the OEMs it's still on a very low level? Correct. But then on the... I'm sorry, but I didn't fully hear what you said about the update on penetration across the platforms. Can you just repeat that and potentially also add a little bit... I mean, the news you posted after the aircraft interior show seemed to point towards very good penetration rates also on the 350.

I think that's the new thing that we see that A350 is really picking up from being a disappointment in the beginning of the program. But right now we see really higher selection rates from especially new operators of the A350 which is quite a few. And they select flight deck I would say in the same range as it's done on 787s. But they also choose to humidify their crew rests and as we have reported, three operators flying with business class and a few more have announced that they have selected it for future deliveries in 2025 and 2026. So A350 is what we really, we are really enthusiastic that this is happening. We've talked a long time about improving our selection rates, but we actually see it's happening now.

Understood. And is there anything more to add on the 777X?

Again, we got one more operator that confirmed that they have selected all humidifiers on board. That makes three airlines that have configured their 777Xs with our humidifiers. And we are continuing to approach the rest of the customers to see if we can get them to select more humidifiers on board as well. Then I'm thrilled actually that Boeing announced that they started the flight testing with authorities on board again. There's been lots of rumors of delays on the program, but this is a clear step towards certification and with that deliveries and Boeing is withholding the 25, end of 25 timeline for that. So that's really good news.

Understood. Then just a quick question to Marcus. The working capital changes this quarter, would you say that it's more related to typical seasonality and a bit of delayed deliveries? And how should we expect a bit of a reversal in working capital during the second half?

Good morning, Carl. Yeah, it was a bit disappointing that the working capital was actually minus And it will look better in the third and the fourth quarter. So I think that we are, of course, working with inventory to try to reduce it and try to find the optimum level for the inventory. So it's temporary.

Understood. Then back to you, Henrik. The partnership here with Liber. Just curious, I mean, you have highlighted their name as a competitor within VIP for a couple of years, but what's the rationale behind this partnership and what do they bring to the table, so to say?

I mean, we have agreed to sign an MOU with Libera to approach, make a joint proposal on the global 7,500, 8,000 Bombardier. And the strength there with teaming up with Libera is that Libera is the supplier of the environmental control system to the global 7,500. And jointly approaching Bombardier gives strength to us. And we see it together as the best combination of our resources, both technology-wise and financial-wise. We're stronger together than alone. And we're quite sure that this joint proposal is welcomed by the market. And in this case, it's Bombardier that see this as a strong team, so to say.

Understood. But just could you give us an update here? Do they also, you know, have a portfolio of humidification systems, but they will now in this kind of MOU focus more on the just the environmental control system parts that do not include the humidifier?

So the first part of the question is yes they have a humidifier for smaller private jets that use some different technology. In this specific case we have agreed to use CTT's technology for the system on the Bombardier 7500. And the system contains then our humidifiers and our anti-condensation unit. And that will be integrated into the ECS system supplied by Liber.

Understood. All right. And when you But when you say then also that you're still hopeful that you will get another partnership during H2 here, if possible, what kind of scope are we talking about? You have disclosed the kind of potential annual aircraft volumes with the ACJ program, but what do you think we could expect here?

But if we use Bombardier Global 7500 as an example, they have a production rate of I think 35 to 45 aircraft per year. And that's what they've been delivering so far. I think they're somewhere just under 200 aircraft delivered totally. And if we can pursue this business opportunity together with Liebherr, we of course want to have this as a line fit option or a BFE option on new aircraft. But of course, we're also looking at the retrofit market of already delivered aircraft. Roughly 40 aircraft per year from Bombardier and then the retrofit opportunity on a little bit below 200 is that business case. And then, of course, as I've shown on those pictures, we are, of course, trying to do the same thing with Gulfstream. I think they are aiming at the same kind of production rates on the 700. Then, of course, we have ACJ's competitor, BBJ, that is one target of our campaigns. And a little bit more long-term, Dassault and their Falcons with maybe a little bit lower volumes, but still quite significant.

Understood. That's all from me. Thank you.

Thank you, Carl. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you. And before closing this earnings call, I would like to wish you all a nice summer. Thanks for listening and talk to you after the summer. Goodbye.