CTT Systems AB (publ)

Good morning. Welcome to CTT's quarterly earnings call. I'm Henrik Höger 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 Lieber Aerospace and we are now finalizing the joint offering of CTT's humidification system to Bombardier for their global -8,000. Third, we see a resurgence in the anti-condensation business. Our market activities in the 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% -on-year to 57 million compared with 74 last year. Operating profit, EBIT, decreased 51% to 15 million -on-year. The EBIT margin was 26%. CTT generated operating cash flow of 8 million. Earnings per share decreased 52% to 0.98 TWK. 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 2024 where airlines reduced their inventories of the aftermarket products, deriving from safety stock policies in 2022 and 2023. De-stocking impact isn't 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 Q323. 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, Andric. Good morning, all. I will start with 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 percent, same level as Q3 last year. All in all, CTT has a strong financial position with net debt. Let's move on to the -to-date numbers. Net sales for January to September decreased 4 percent to 218 million compared to 228, mainly affected by temporarily lower private jet sales. EBIT decreased 9 percent to 79 million with an EBIT margin of 35 percent. Cash flow amounted to 50 million compared 86 last year. And earnings per share amounted to CEQ 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 percent to 299 million compared to 195, driven by aftermarket sales and OEM. EBIT increased with 3 percent to 111 million from 108. And finally, earnings per share increased with 3 percent to CEQ 7.08 from 6.85. I will now hand back to Hendrik 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 aftermarket sales and higher revenues in private jet. OEM 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 de-stocking 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 Q4. 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 report for the second quarter of Q4, 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 Q2 and Q3, driven by airline pent-up demand and safety stock policies. In Q3, we could see an impact from de-stocking. 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 2022 and 2023. De-stocking 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 1. Changes in airline procurement that favor bulk ordering, or 2. Channelizing the distributors that aggravate 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 visibility 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 Q24 faded due to temporary drawbacks, mainly related to failed attempts from Airbus and Boeing to ramp up build rates due to supply and issues, particularly with prior furnished equipment seating. From a CTT perspective, Q24 is a transition year with growth not only put on hold due to scaling issues at the OEMs, but also due to de-stocking 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, while 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 shipset content. CTT will already in Q25 start to recognize sales impact from a 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 a higher average shipset 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 will receive these orders, we will be a function of a mother thinks VIP aircraft availability. If looking at the private jet numbers, trialing 12-month 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 the 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 the OEMs. We are not there yet, but I am pleased to conclude -by-step progress. Currently finalizing our offering together with Lieber to Bombardier for the Global 7500 and 8000 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 ordered potential of more than 500 aircraft. Perhaps it is still opportunistic, but anti-condensation retrofit can have an impact on growth if materializing into orders. We have a clear strategy and I am 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 to 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 tried to convince our largest customers, Jet2 and Transavia to moister protect their new aircraft from Airbus. Both are in transition from all Boeing fleet to introduce new Airbus A320 family aircraft. Previously they both are anti-condensation system line fitted as BFE on their new Boeing 737NGs. This is not yet possible at Airbus. Instead, our first retrofit window will be at Sea Check. 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 is 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 to Airbus and Boeing not increasing aircraft production rates. Which led to destocking and reduction of deliveries below actual demand. We accept 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 wide body production increases. Demand for new aircraft is strong and the order backlogs are at record high. Both Airbus and Boeing are targeting a 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 1. increased aircraft build rates gradually in 2025 and 2026. And 2. higher average ship set content per delivered A350 aircraft incremental from 2025. In addition, private jet 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.

This question comes from Carl Bockvist from ABG Sundal Kolia. Please go ahead.

Thank you. Good morning Henrik and Marcus. The first one is on the pause in production due to various reasons among Boeing and in particular. Just curious here, you flagged the kind of below usual ship set value in Q4. But when you talk about how you aim to kind of mirror production rates from Q1, is that so that your deliveries will also resume then in Q1? Or could it be because of lead times that there will either be a bit of advance or a lag because of inventories and so on?

Good morning Carl and thanks for the question. When it comes to Boeing 787, we don't see a lag. We will restart deliveries to Boeing in the first quarter and we already have those orders in the house. So starting January we will resume deliveries to the 787 program.

Understood. And on the Airbus side, I understand they have supply chain issues but not necessarily with strike issues and so on. What's the latest there in terms of matching build rates and so on?

So on the A350, we had this destocking effect during Q1 and Q2 where deliveries were at a very low level. And as reported, that ended end of Q2 and now in Q3 we had good deliveries to the A350 program and that continues into Q4 and Q1.

Okay, understood. And then on the dehumidifier side of anti-condensations, that was interesting to hear. I understand the slide you showed there and what needs to happen in order for it to really scale up. But what kind of customers are now really interested in the Q4 quotations?

So we were mentioning a few, we're yet to, and Transavia is old customers and they are now changing their fleet. They already said that they want our system but they didn't have time to put it in before they had to use the aircraft for flying passengers. And then now in accordance to what they said coming back, asking us for quotations for introducing our system on their first seat check of these aircraft. And then of course we have this other low-cost carrier that had done a trial for several years with six A321s and they're also now asking for a firm quote to go in and retrofit our aircraft if they decide to accept our quotation. So major European low-cost carriers I would say is the answer to your question.

Okay, great. Thank you. So then as you've talked about for a couple of quarters now, you've seen a good trend in penetration or selection rates on the A350. Has it become easier for you to get insights and visibility into the actual level of selection that the customers make now compared to say a couple of years ago?

I would say that we have moved forward our position and we are more active on the market, meeting more airlines directly. And that way we have a possibility to early effect their selections of our system when they come to the configuration definition freeze at Airbus. But I would say that last, especially during Q3, we have also improved our position and talked directly with Airbus in a much better way than we have done in the past. And I think that their interest for our system is actually growing and they're seeing that they have a competitive edge towards Boeing where they have availability of our system to humidify the business class. A section of the aircraft which the 787 don't have. And I think, so long answer, but saying yes, we have better visibility, we have better communication with the major airlines and we have a better dialogue with Airbus. And I would like to point out as well, not in your question, but anyway, this contact is leading us to that we are having a really good dialogue on the A350 program. And it creates new opportunities for retrofit. And I mean, that's a potential more than 600 delivered A350 so far. And Airbus is marketing the retrofit capability since the first aircrafts are getting up into this retrofit age window, so to say. And CTT products are now part of the Airbus retrofit catalog and we are very pleased with that as well.

Understood. And I'll just continue with a couple more here. But only aftermarket side, apart from the drivers that you mentioned, has there been any changes as a result of the competitive threats that you flagged earlier in the year?

No, we don't see any effect of that. I mean, we have competition on the market. We are continuing our efforts to win back the airlines that has switched to the competition. But that has nothing to do with the effect that we saw in Q3. That's totally dependent on the destocking effect on the airlines and our distribution chain.

Understood. And then finally on private jet, business jet VIP here. Correct me if I misinterpret you, but earlier in the year you talked about, apart from Bombardier, you may be securing one more contract or partnership. How is that progressing?

So on the private jet side and business jet, if you take business jet first, I mean, we are targeting the big ones. So Bombardier, Dassault and Galstream. And as I said, there we make step by step progress towards Bombardier. And we are in a very interesting phase now, finalizing our offer to Bombardier together with Libre. And that will make us take the next step in that business case. And then of course, we are also talking with other manufacturers on the private jet side and trying to copy the ACJ concept with kit solutions for the business. For larger VIPs. And that dialogue is also ongoing and in the final stage.

Understood. And then I understand if it might be difficult to convey a figure, but on the ACJ, where you say that they are guiding at least for a good couple of future years here. What kind of production rates are they targeting if it is possible to disclose?

Well, I mean, on ACJ side, I mean, they're always predicting to be between five to 10 ACJ A320 family aircraft. And the last couple of years, they've been very low below that and maybe one to two. But I mean, we're going into the lower section of that five to 10 gap in the next two or three years, next year and a few years onwards. So I think we will hit the lower end of that scale next year and then hopefully increasing a little bit more. As I've said before, on top of that, we're talking about two ACJ 330s, where one is already in our books. And then they're actually talking about a few more ACJ 350s as well. But that's a little bit more further out and not as firm as the other ones. I think that's the answer to your question.

Yeah, great. Those were all questions from my side. Thank you.

Thanks, Carl.

Good morning, Henrik. Lucas here from Alfa-Star. I have a question on the aftermarket. You said that you have competition and that one airline switched to one competitor. Can you elaborate a bit on the pricing that the competitor is offering? Is it much lower than what your distributors or what your systems are asking for?

Yes, thank you. Good morning, Lucas. I mean, yes, we have competition on the market and I wish it was one airline that you said, but there is a few airlines that have switched to this PMA. And we have seen this competition and we talked about it the last two years. And of course, it's there on the market. Why is there PMAs on the market or alternatives to the OEM equipment? I mean, there are three reasons. One might be availability. Two is quality and three is price. And I can promise you that the availability is not the problem in the CTT case. Quality is not the problem in the CTT case. So of course, price is the reason for airlines to looking at alternatives. And that is the case when it comes to the PMA competition towards our OEM products as well.

Do you expect a price fight then over these systems? Do you think that there will be a competition where you have to offer your customers or let you last to the competition a better price? Do you think that will be a spiral?

So when it comes to this PMA, our main strategy is to work with quality. And there is clear differences between these two products. And the biggest difference is the material that is used to put moisture into the air stream, where we have developed together with Munters and then together with Boeing and Airbus, FAA and FDA, approve this material. And this material is superior to what is used by the PMA competitor. And that's our main approach to win back airlines. And that's where we've been successful so far, to show the differences in these two products and thereby explain the price difference. So that's our main target to go out there and try to win back customers and keep the customers that we have. And we don't think that a price war is what we want to do. We want to fight this with quality. And so far, we've been quite successful.

Understood. When you say you were quite successful, does this mean you won back one of the airlines? Did they switch back?

We have been winning back more than one airline, yes.

OK, thank you. Thanks for the explanation.

Thanks for the question.

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. To finish off, I would like to thank my colleagues that despite some headwind in 24 have generated business momentum by remaining focused on the things that we can manage. And that has strengthened our leading position even further. Together with our partners, we execute on our strategy committed to arrive long term shareholder value. And in parallel, we will secure that 24 shall end as strong as possible. Thanks for listening and talk to you in the next year.