CTT Systems AB (publ)

Good morning. Welcome to CTT's quarterly earnings call. I'm Henrik Höger and with me today is Marcus Berg. We will present the Q4 financials and then present the outlook going forward. Starting with business highlights in general, we can report a solid quarter with stronger development in all three product areas. The OEM market is gearing up, driven by increased aircraft production rates. Boeing made progress on working through production recovery plans for heat exchangers and delivery delays associated with seat certifications. The 787 program ended the year at the production rate of five airplanes per month and announced plans to expand facilities. The private jet market is driven by the successful cooperation with Airbus Corporate Jets. We received the second ACJ330 NeoKit system order in Q4 and started development together with Airbus Corporate Jets and PMV in October. ACJ placed orders for one ACJ320 NeoKit, delivered in Q4. The anti-condensation retrofit continue to research. The momentum in Q4 continues. We have started 25 strong with leapfrogging OEM deliveries as Boeing resumed to take 787 deliveries at actual build rate pace. And further, we have won orders amounting to approximately 130 million in total. We have received orders for three enhanced in-flight humidification system kits for the ACJ320 Neo. Total order value of 8 million. As previously announced, in a separate press release in January, CTT received an order for 146 A321s with options for another nine from a leading European LCC. Total order value based on list price is approximately 120 million. This is CTT's largest single order ever. Let's move into the financial performance for the quarter. Net sales increased 1% to 82 million and operating profit EBIT increased 2 million to 34 million. The EBIT margin was 41% versus 39. CTT generated operating cashflow was 16 million. Earnings per share decreased 12% to 1.93 versus 2.19. Net sales increased 1 million. Private jet revenue increased 7 million driven by the project development of the first two ACJ330 Neo systems plus order and delivery of one ACJ320 Neo kit system. OEM sales increased 1 million despite only limited deliveries to Boeing, below actual build rate content due to the general inventory reduction at Boeing for the 787 program. Aftermarket decreased 7 million due to strong comparable quarter in 23. Breaking down total sales, aftermarket sales accounted for 75% of total turnover. I now hand over to Marcus for more in-depth finance.

Thanks, Henrik, and good morning. I will start with the EBIT bridge. In Q4, EBIT amounted to 34 million, an increase with 2 million from 32 million in Q4 last year. We had 8 million in positive EBIT impact from currency effect, offset mainly by 5 million in negative mix and price effects. Let's move on and look at the cash flow. Operating cash flow amounted to 16 million, compared 30 million last year, driven by financial performance, EBITDA adding 35 million. Cash flow is lower than last year, mainly due to negative working capital, minus 10 million, an effect of low sales in Q3 and late deliveries in Q4. Cash increased 15 million to 69 million. Let's continue by looking at the net debt. Net debt amounted to minus 25 million, compared minus 76 million in Q4 last year. Cash closed at 69 million. In addition, CTT has 53 million in available credit facilities. Equity ratio at 74% compared 75% in Q4 last year. Return on capital employed continues to be strong at 33%. All in all, CTT has a solid financial position with net cash. Let's move on to the full year numbers. Net sales for the full year of 2024 decreased 3% to 300 million, compared 309, mainly lower due to a tough comparative year for the aftermarket. EBIT decreased 5% to 113 million, with an EBIT margin of 38%, same level as 2023. Cash flow amounted to 66 million, compared 117 million last year. Earnings per share amounted to 66.82, compared 7.62 last year. Next slide, the proposed dividends. Strong finance enabled CTT to continue to divest capital to its shareholders, and at the same time invest to leverage our leading market position. The board of directors proposes an ordinary dividend of SEK 5.35 per share, same level as the ordinary dividend 2023. In total, 67 million or 78% of earnings per share. I will now hand back to Henry to give you the outlook.

Thanks Markus. Before presenting our business outlook and market drivers, I will start with the guidance. In Q1, we foresee a sharp but temporary sales drop to 50-60 million, based on the assumption that well-stocked distributors will lead to few orders to CTT. The underlying -of-market demand for consumable is growing as expected, but distributors can to a large degree supply airlines with consumables without placing new orders. CTT consumable deliveries will therefore be significantly below end-market demand. Sparse demand is more volatile and harder to predict, due to short lead times and lumpy orders. On the back of an unusually strong demand in 2023 and 2024, CTT had a -on-year decline in Q4, and we foresee that to continue into the first half of 2025. CTT's weak financials are transitory, and the rebound is expected to be swift. A positive development in Q1 is expected in the OEM business, driven by a jump, as Boeing has resumed to take deliveries from CTT that reflect aircraft build rate content. Private jet revenue is expected to remain at the same level as in Q4. Today, I will spend some time explaining our product areas more in depth. I start with the aftermarket. CTT's aftermarket constitutes total demand for consumables, spares, and repair. End customers are aircraft operators, such as airlines. The end-market demand, or the underlying demand, is aggregated volumes from all operators. CTT has close to 70 airlines as customers. CTT has an indirect model and sells only through distributors. Distributors have inventories and sell directly to the end-market. In other words, CTT's demand can from quarter to quarter see variations and deviate, due to inventory adjustments at the distributors. Over time, CTT's demand shall mirror end-user demand. If looking at the end-market for consumables, spares, and repair, Consumables demand is linked to total flight hours for entire product population in service. Airlines need to replace pads and consumables after 4,000 and 6,000 flight hours. By nature, demand for consumables is stable, with good visibility and predictability. In Q25, the growth rate is predicted to be single digit. Spares demand is more sluggish, driven by the first delivery to new airline, or when airlines grow fleet over certain hurdles. CTT is the sole supplier. Repair business has short lead times, but we have a large installed base, so although visibility is limited, we have a good predictability. When entering Q25, CTT's distributors are well stocked. CTT's demand will be temporarily lower in Q1 into Q2. The end-market demand for consumables is stable, and we will steadily reduce distributors' inventories to a balance that will restart generating orders to CTT in Q2 and Q3. In the spares business, we always have cyclical demand and expect to reach bottom in Q1 and gradually see an improvement back to normal demand in the second half of the year. In other words, CTT's weak aftermarket sales are trans-autority, and the rebound is expected to be swift. The reasons behind the aftermarket volatility between quarters are rippling effects that go back to buying patterns that have changed several times since the pandemic. CTT's aftermarket boomed in Q22 and Q23, driven by pent-up demand and safety stock policies. In Q3 last year, we could see impacts from de-stocking, deriving from a general trend when airlines reduced general safety stock of aftermarket products built up in Q22 and Q23. We can also see that some airlines have shifted buying behaviors towards fewer, but larger orders, driven by changes in airlines' procurement that favor bulk ordering, or generalization to distributors that aggregate volumes from many airlines, either via total component supply agreements or pooling consignment stock arrangements. 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. We should be able to better smooth out order flow from consumables. The past quarters are definitely not good, revealing that we have room to improve how we work closely and together with our distributors. To wrap it up, demand for consumables is predictable with stable growth. Spares demand will always be more volatile and harder to smooth out. That will always lead to some variations in sales between quarters. Finally, we expect that aftermarket sales in the second half of Q25 shall return to the same level or higher compared with Q24. The growth rate in Q25 based on increase of production service during Q24 is expected to be single digit. The best platform for growth is OEM contracts with high aircraft manufacturers such as Airbus and Boeing. CTT is the sole supplier of humidifiers for all three most modern widebody aircraft. Order backlog for widebodies are at record high. In total, 2013 A350s, 787s and 777Xs are on order compared to the 1,803 delivered so far. Total build rate for all three models is currently at 12 to 14 per month. In Q24, both Airbus and Boeing had issues with heat exchangers and seats. Boeing reported in Q4 earnings that it made progress on working through production recovery plans for heat exchangers and delivery delays associated with seat certifications. And Boeing is still challenged in getting through some certification on new types of seats on 787. Problems are on customer by customer basis. Boeing is ensuring the production system and the supply chain stability prior to making the next increase in rates sometime this year. Medium term, Boeing recently announced plans to expand their South Carolina operations, preparing for anticipated future need. Boeing targets to increase build rates from 5 to 7 in Q25 and elevate into 10 in Q26. Boeing is working towards 777X certification in Q26 with first delivery to Lufthansa. Airbus is at 6 A350s per month and targets 10 in 26 and 12 in 28. The outlook for CTT's OEM business is strong. CTT OEM sales will jump in Q125 when correlation is restored between our deliveries and aircraft build rates. The addressable market is expected to continue to grow in 25. CTT's growth pace primarily depends on Airbus and Boeing's ability to scale production and deliver wide body aircraft. More new built aircraft will drive CTT's OEM sales. In addition, CTT aims for an even higher growth rate by improving ships and content. CTT will already in 25 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 a higher average chipset value on new built A350s. The private jet business, VIP and large cabin business yet. In VIP, CTT has emerged as the sole supplier of humidification systems. CTT has delivered cabin humidification systems for 113 private jets. The private jet business is heading for a strong sales revival. VIP pipeline is at record high. Growth via higher penetration on narrow body VIPs and enter into large cabin business jets. Airbus corporate jets is front running by promoting humidification for ACG 320 family, the ACG 220 and the ACG 330. 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. As you can see on the picture, we continue to address Boeing business jet, Bombardier Global, Dassault Falcon and Galstream. We did not meet our target in 2024 to close a new OEM contract in private jet. We are not yet there, but I can conclude solid progress to whether we'd leave out towards Bombardier. Additionally, we are in contractual phase with another private jet OEM. We offer both cabin humidification and anti-condensation system for retrofit installation. We sell direct and together with Collins Aerospace. The anti-condensation retrofit business continues to improve in the quarter. In January, CTT received an order for 146 A321s with options for another nine from a leading European LCC. Total order value based on list price is approximately 120 million. In addition, CTT has outstanding quotations for total order potential of approximately 350 aircraft. We stick to our strategy and I'm more convinced than ever that we will see a revival. But as stated before, long term, the key enabler is OEM availability at Boeing MAX and Airbus Neo family. Our strategic focus is on retrofit customers to drive and put pressure on Airbus and Boeing. As part of the strategy, we managed to convince the first airline to Moisture Protect new aircraft from Airbus. JetTube.com and Transavia are in transition from all Boeing fleet to introduce new Airbus A320 family aircraft. Previously, they bought around the condensation system line fitted as BFE in their new Boeing 737NGs. This is not yet possible at Airbus. Instead, our first retrofit window will be at seat check. We will in parallel together with them and other airlines try to convince Airbus that it should be possible to install our green tech system in new aircraft before delivery. I just line fit or provisional for post delivery modification. As part of this effort, we have a field trial with a major low cost carrier in six A321s. We're in the beginning when we start to benefit from favorable market dynamics when airlines to a greater degree define aircraft with humidifier on board business class in new aircraft. The 787 program. CTT has a high penetration in flight tech and crew rest, but it's not possible to line fit business class. We expect airlines to demand same premium cabin climate performance in 787s as in A350s and Boeing 777Xs, where cabin humidification is available as an option. The market is approximately 1000 aircraft. The A350 program. Most of the A350s leaving factory from 25 and onwards to new operators will have humidification in flight tech and crew rests. And to a greater degree in business class. Early in the program, airline from various regions did not select the system. The first A350s are reaching nine years in service and cabin retrofits, which is now starting with rapidly gain 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 in aircraft that reach eight years of service. By 28, there will be around 400 A350s that will have reached this age. Retrofit of Boeing 787 and A350s require cooperation with Boeing and Airbus. We are approaching both. In 24, we have made progress with Airbus. We are part of the A350 retrofit catalog and Airbus is promoting humidification. To summarize, the sales drop in Q1 into Q2 is sharp, but transitory. The aftermarket is stable and growing at single-digit pace in 25. Distributors inventories will steadily be reduced to reach a balance that will start generating end market driven demand in Q2 and Q3. With the normal order flow to CTT. CTT's weak finances are consequently transitory and the rebound is expected to be swift. In parallel, we can see evident signs of stronger markets in all three product areas. In 25, we therefore expect significant growth in both OEM and private jet and we will deliver the first retrofit system in years. I'm also confident that we are during the year, shall be able to close agreements in private jet and to win additional retrofit deals. I now hand over for Q&A.

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 Kali. Please go ahead.

Thank you. Good morning. My first one is on the commentary here regarding the aftermarket sales. So the Q1 guidance, I hear that. And then when you talked about an expectation of single-digit growth for a full year, I understand that's a bit far out in time perhaps to talk about Q2, Q3, Q4. But based on the inventory destocking and so on, I mean to get to single digits, that would, if we just assume H2, that would mean quite a lot of sales above the 2024 levels. I'm just curious to hear how you think, how long this destocking process will remain.

Good morning, Carl. And thanks for the question. And as we said, the destocking, we gradually expect to disappear in Q1 and into Q2. So Q1 definitely and part of Q2, but not the full Q2. That's how we see the destocking effects. And then when it comes to the mark of the market growth and the single-digit growth, that's when we calculate the underlying demand on the market.

Understood.

That answers

your

question.

Great. So then, yes, yes it does. But then on the kind of, when you mention here on OEM, the leapfrog in deliveries and so on, just to understand how you view the lead times now in terms of system deliveries when they are stepping up production rates.

So when it comes to OEM and the programs, I mean, what we now, I mean, we had to recap 24. We had destocking effects on both the A350 program during the first half of 24. And then the second half Boeing did the same and did restocking. When we now enter into 25 and Q1, we see that we again mirror the build rates at Boeing and Airbus. And I think as an example in Q4, we mentioned that our sales to 787 was approximately 1 million below actually chips at value for the quarter. And that's the leapfrog that we see happening now that we get that million back. And then, as I said, Boeing is now at five. They will go to seven during the year and then 10 in 26. And Boeing, Airbus has previously said 10 in 26 and 12 in 28. So that's what we see as the growth potential there.

Understood. And then just to stay on the system sales here, now we talk a lot about deliveries. But have there been any changes in pricing of these chipsets? Either to combat inflation or currency is one thing, of course, but either annual price adjustments due to inflation or in preparation of tariffs or whatever it may be.

Just to keep the answer simple, I mean, on both the OEMs, Airbus and Boeing, we have very long-term contracts that run over a long period with fixed prices. So between 24 and 25, there is no price adjustments.

Understood. And then on the VIP private jets, yeah.

I think I just missed one thing when I took about the jump on the 787. I missed the currency effect. One million should be one million US dollars. So there's no misunderstanding on

it. Understood. Understood. But on the private jets side, yeah. On the delivery schedule on VIP private jets here, you expect it to be similar to Q4. And then you said also in the report that you booked orders in Q125. The kind of similar sales on private jets in Q1 compared to Q4, are those deliveries based on the order you received in Q1 as well? Or is that more towards the rest of the year, how we should think about sales to private jets?

All the orders will not be delivered in Q1, but some of them. And then we also will continue working on the orders that we received last year.

Good. I'll get back in the queue. I have a few more questions, but I'll lower my end. Thanks.

The next question comes from Carl Bockvist from ABG Sundal Kallier. Please go ahead.

All right. Hello again. So just on the other curiosity, I mean, based on the news we hear, it seems like Boeing has perhaps had more issues than Airbus. So just when we think about deliveries into 2025, would you say that, you know, does it make any difference, so to say, if Airbus has better momentum than Boeing or vice versa?

That's a good question, Carl. I mean, we've been historically very dependent on the 787 program, but with Airbus being very successful, and right now, I mean, they are on five to six per month. Boeing is on five. Ship set content is increasing on A350s. So for CTT, I would say both programs are equally important, and it's, as we said, very important for CTT that they manage the ramp up. And I'm kind of sharing for both to be successful.

Understood. And then a question to Markus on the financial side. Both, I mean, it looked like it was quite unusually a big effect from revaluations in currency, at least when I compare to effects fluctuations in previous quarters. So was there anything in particular that stood out this time around or something that you think could lead to bigger quarterly volatility in currency going forward,

too? Good morning, Carl. Actually, nothing unusual. I mean, the currency rate, US rate, was really strong in the fourth quarter. I mean, the closing balance was 11.0, actually. If you compare that with a year ago, the US dollar were at close to 10. So I mean, it's more or less a 10% difference. So I mean, this year we had, or the last quarter, we had about three million of positive currency effects from revaluation of accounts receivable. And last year it was minus three million. So the other way around. So I mean, if you compare that to a quarter a year ago, that will be a big difference. But currency is always difficult to forecast. So we will see what happens in 2025.

Understood. And then on the cash flow side, I mean, overall and over time, this hasn't been any kind of material concern. But the buildup in working capital, I think we had a similar situation about a year ago also, I think. So the buildup, is that, you know, payments you expect to receive already in the quarter we are now? Or is it something that will be recouped more perhaps in Q2 or Q3?

I mean, with weaker sales in the first quarter, we will have a weaker cash flow. But it will be, as you say, it will be much better in the second quarter and third and fourth quarter. So we will soon be back to better cash flow again.

Understood. And then finally, I know you, on the aftermarket side, you do flag the impact on the mix from that business. But if we go now into this year and we have a bit higher share of revenues stemming from the VIP private jet side, how would that part of the business impact group profitability?

Well, we will not comment our gross margin and profit from the different product areas. But of course, as you know and have seen before, the mix will affect a lot. And we will have a mix this year with more system sales. So that means that the margin will be a little bit lower, 25 compared to before. But that you already knew and that it's a part of our long term plan as well.

Understood. I think that's all for me here apart from just the final one being the commentary you made on the private jet side here about being in discussions or in a contractual phase, I believe was the word. Is it possible to say how long is a contractual phase typically? How long does it typically take before it either actually materializes into something or if the fortune is not in your favor that it doesn't?

Thanks for the question. And how long is a rope? I mean, as I said during the call, we actually missed our forecast that we should close at least one private jet contract in 2024. So that's a misjudgment from our part. And then nothing has changed. It just takes longer than we thought. And I'm not predicting anything more now, but I'm saying that we are in those contractual phases with two different private jet suppliers. And hopefully we can conclude them as quickly as possible. But it's not really in CTT's hand to push the timetable. We are fast on our side, but we are talking with big OEMs and they are usually a little bit slower than us and we have to adapt to their speed. Very vague answer, but that's the best I can give you.

Yeah, understood. But as a follow up to that one, maybe what I was actually after when I hear myself asking you the question, if you reach a contractual agreement, how fast can you begin deliveries to that customer?

That's also a difficult question since it's not only up to us and it depends a little bit on the setup. But I would say if we have a very successful program, I would say that we are within a 12 months plus minus timeframe, but it could also take a little bit longer, but then it's more on the OEM side. But in both of two cases that we are discussing, we are very well prepared on the technical side, I would say. And we have agreements on how the system should be developed. So it should be for me, it's not a big program. It's fairly straightforward. It's things we've done before. But certification processes are always hard to predict and that's going to be the time setter in the end. It's a lot easier for us to do this under supplementary type certificates than it is to do something new. So I'm not expecting huge problems, but it takes some time. So say plus 12 months, that's my best guess right now.

Understood. Then now just one more I realized, but that has to do with the retrofit opportunities. Just to clarify, the kind of I believe 300 plus that you mentioned, they are outside of the order that you have already received. Are we interpreting that correctly?

Yes, good question and thanks for that. And I mean, we talked about 500 aircraft last quarter that we had outstanding offers for and now 146 kicked in. So then it's 350 left.

Okay, that's great. Thank you.

Thank you, Carl.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you. And I would like to finish off and I would like to take the opportunity to point out that the growth conditions are unchanged and that underlying underlying that CTT successfully continues to deliver on the long term strategy that shall generate strong returns to shareholders driven by. OEM build rate ramp up fueled by massive order backlog of wide body aircraft and improving ships and content. A stronger sales revival in private jet driven by Airbus corporate jet to be followed by other private jet business jet OEMs. And finally, we will deliver the first anti condensation retrofit system in years, restarting the retrofit market. Thanks for listening and have a great day.