CTT Systems AB

Good morning. Welcome to CTT's quarterly earnings call. I'm Henrik Høyer and with me is Marcus Berg. We will present our financials for Q3 and then look at our outlook going forward. Before going into financials, I would like to mention three business highlights in the quarter. First, we continue to make progress in VIP. We received the first order for an ACJ 330 NEO kit system. CTT started the development together with Airbus Corporate Jets and PMV in October. Second, we are moving forward on business yet. We signed an MOU with Liber Aerospace and we are now finalizing the joint offering of CTT's humidification system to Bombardier for their global 7,500-8,000. Third, we see a resurgence in anti-condensation business. Our market activities in anti-condensation is starting to pay off. CTT sent out responses to RFQs in Q3 and Q4 with a total potential of retrofit order for more than 500 aircraft. This is the highest levels in year. If looking at the numbers, sales dropped in Q3 sharply due to pushed orders and transitory destocking primarily in the aftermarket. Net sales decreased 22% year on year to 57 million compared with 74 last year. Operating profit, EBIT, decreased 51% to 15 million year on year. The EBIT margin was 26%. CTT generated operating cash flow of 8 million. Earnings per share decreased 52% to 0.98 Swedish crowns. OEM sales increased 5 million, despite no deliveries to Boeing in September. In the aftermarket, Sales dropped 13 million and another 7 million in private jet. CTT's distributors in the aftermarket were affected by a general trend in 24, where airlines reduced their inventories of the aftermarket products, deriving from safety stock policies in 22 and 23. De-stocking impact is transitory since underlying demand in the aftermarket remains consistent and tracks population size, utilization and age. In private jet, the decline is 87%, mainly explained by a strong comparable quarter last year, and that the project start together with Airbus Corporate Jets for the development of the kit solution for the ACJ330 shifted into Q4. In total, net sales decreased 16 million compared with the same quarter last year. Aftermarket sales accounted for 76% of the turnover. CTT booked orders for 69 million versus 101 in Q3 23. Backlog decreased 32 million to 47. This is a low level. But with 75 to 80% of our sales from the aftermarket, we have a 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 it over to Marcus for more detailed financials.

Thanks, Hendrik, and good morning all. I will start with the EBIT bridge. In Q3, EBIT amounted to 15 million, a decrease with 15 million from 30 million in Q3 last year. We had 10 million negative EBIT impact from lower sales volume and 6 million equally spread over sales mix and margins, currency effect, and cost increases. Let's move on and look at the cash flow. Operating cash flow amounted to 8 million compared to 28 million last year, driven by financial performance EBITDA adding 17 million. Minor changes in working capital in the quarter. Cash increased 5 million to 54 million. Let's continue by looking at the net debt. Net debt amounted to minus 13 million compared to minus 44 million in Q3 last year. Cash closed at 54 million. In addition, CTT has 54 million in available credit facilities. Equity ratio at 73%, same level as Q3 last year. All in all, CTT has a strong financial position with net cash. Let's move on to the year-to-date numbers. Net sales for January to September decreased 4% to 218 million compared to 228, mainly affected by temporarily lower private jet sales. EBIT decreased 9% to 79 million with an EBIT margin of 35%. Cash flow amounted to 50 million compared to 86 last year. And earning per share amounted to CX 4.84 compared to 5.33 last year. If we continue by looking at the net sales for the last four quarters, they increased 1% to 299 million compared to 195. driven by off-the-market sales and OEM. EBIT increased with 3% to 111 million from 108. And finally, earnings per share increased with 3% to SEK 7.08 from 6.85. I will now hand back to Henrik to give you the outlook.

Thanks, Markus. Before presenting our business outlook and market drivers, I will start with a short-term outlook and guidance. Q4 is expected to rebound from a weak Q3. Q4 net sales guidance is 80 to 90 million, driven by a recovery in the off-the-market sales and higher revenues in private jet. OM sales are expected to be unchanged compared to the previous quarter, driven by higher A350 deliveries, but offset by fewer deliveries to Boeing. This is due to destocking at Boeing during September to December to align the entire supply chain with a lower than planned 787 production rate. CTT sales in Q4 will be approximately $1 million below actual chipset content value. We have had similar cutbacks in our OEM deliveries to Airbus in the first half of 24. The good thing is this is scheduled to be through in Q4. The net sales guidance for July to December 24 is adjusted to between 137 and 147 million, compared with the guidance provided in the interim report for the second quarter of 24, where net sales were estimated to be between 160 and 180 million. I will now go through the business outlook for each of our markets. CTT's aftermarket boomed in 22 and 23, driven by airline pent-up demand and safety stock policies. In Q3, we could see an impact from destocking. CTT's aftermarket distributors had high inventory levels, deriving from a general trend when airlines reduced general safety stock of aftermarket products built up in 22 and 23. Destocking impact is transitory. since underlying demand in the aftermarket tracks population size, utilization, and age. Demand for consumables is consistent, but demand for spare is more sluggish. We see a gradual shift in buying behaviors towards fewer but larger orders, driven by one, changes in airline procurement that favor bulk ordering, or two, channelizing the distributors that aggregate volumes for many airlines, either with total component supply agreements or pooling consignment stock arrangements. Over time, total order value will be the same, but this shift in behavior can create volatility from quarter to quarter. We are working with our aftermarket distributors to adapt and improve customer value, as well as feasibility and measures to reduce order volatility between quarters. To summarize, we predict a rebound in Q4. The outlook for CTT's OEM business is strong, but growth in 24 faded due to temporary drawbacks, mainly related to failed attempts from Airbus and Boeing to ramp up build rates due to supply issues, particularly with fire furnished equipment seating. From a CTT perspective, 24 is a transition year with growth not only put on hold due to scaling issues at the OEMs, but also due to destocking at the OEMs. CTT OEM sales will jump in Q125 when correlation is restored between our deliveries and aircraft build rates. Over time, CTT's growth pace primarily depends on Airbus and Boeing's ability to scale production and deliver wide-body aircraft. Both Airbus and Boeing target double wide-body production rates back to target pre-pandemic levels or higher. Boeing's target to ramp up 787 build rate to 10 by 26 versus 4 today. Airbus targets 12 A350s in 2028 versus 6 today. I would like to point out that the 787 production is unaffected by the strike and Boeing is now focusing their efforts on the 787 program to compensate the strike hitting the deliveries of 737. More new built aircraft will drive CTT's OEM sales. In addition, CTT aims for even higher growth rates by improving ships at content. CTT will already in 2025 start to recognize sales impact from higher A350 selection rates. In addition to line fitting the flight deck humidifier, A350 operators to a greater degree now select humidifiers for crew rest and business class. This will gradually result in higher average chipset value on new-built A350s. 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. The private jet market has its own cyclical behavior with low correlation to normal economical cycles. CTT's VIP project pipeline is at record high. But Q3 revenues remained as expected at a low level. CTT is well positioned to win VIP orders when the market picks up, mainly driven by Airbus corporate jets. When we receive these orders, we'll be a function of another thing's VIP aircraft availabilities. If looking at the private jet numbers, TriLink 12 months sales have been ranging between 10 and 30 million and is currently at 8. A top priority for CTT is the large cabin business jet market. As stated before, we need to endorse and include offerings by the OEMs. As you can see in this picture, we target Boeing business jets, Bombardier Global, Dassault Falcon and Gulfstream. CTT continues to address large but binary opportunities that require endorsement from those OEMs. We are not there yet, but I'm pleased to conclude step by step progress. currently finalizing our offering together with Liber to Bombardier for the global 7,500 and 8,000 program. Being down for count, the anti-condensation retrofit business is finally showing signs of resurgence. We answered requests for proposals in Q3 and Q4 with an order potential of more than 500 aircraft. Perhaps it's still opportunistic, but anti-condensation retrofit can have an impact on growth if materializing into orders. We have a clear strategy, and I'm convinced that we will see a revival. But as stated before, long term, the key enabler is OEM availability. Our strategy focuses on retrofit customers that drive and put pressure on Airbus and Boeing. As part of this effort, we have a field trial with a major low-cost carrier on six A321s, We also try to convince our largest customers, Jet2 and Transovia, to moisture protect their new 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 line fitted as BFE on 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 a green tech system in new aircraft before delivery, either as line fit of the system or provisioning for post-delivery modification. 2024, it's a transition year, but the company's outlook has not changed. Our main drivers remain and our outlook position has strengthened further during the year. The main reason for putting growth on hold in 2024 is related production rates, which led to destocking and reduction of deliveries below actual demand. We expect to see a sharp sales jump in Q125, when our OEM deliveries normalize and mirror actual ship set of new built aircraft. The most important driver going forward is why body production increases. Demand for new aircraft is strong and the order backlogs are at record high. Both Airbus and Boeing targeting the doubling of build rates in the upcoming years. CTT is depending on these successes to ramp up. If summarizing, CTT's OEM deliveries are geared to benefit from one, increased aircraft build rates gradually in 25 and 26, and two, higher average chipset content per delivered A350 aircraft, incremental from 25. In addition, PrivateJet is heading for a strong sales revival. Finally, I'm convinced that opportunities within large cabin business yet and within retrofit shall materialize and support our growth in the future. And with that said, I now hand it over for you and questions and answers.