CTT Systems (Stockholm:CTT) Q3 2026 Earnings Call

0:00 A premium aircraft cabin is an extremely dry place. Spending more than a couple of hours in it will cause discomfort and rapid dehydration. It's even drier than the Sahara Desert and the North Pole. It's fact that temperature and air humidity are key ambient factors that heavily impact human well-being and are vital for maintaining a strong immune system. CTT is the market leader in humidity control products designed for in-cabin use on aircraft. We have dedicated the last 20 years to developing and improving our humidifier. The result is a highly appreciated climate enhancer with top performance and outstanding reliability. The significant increase in humidity is striking, providing increased well-being and wellness during and after flight.

0:48 In-flight and at arrival productivity among passengers is also increased as a result of a more natural and comfortable environment without dryness induced fatigue. In a humidified premium cabin, both passengers and cabin crew feel more refreshed and less dehydrated, more balanced and at ease. The humidifier onboard increases the humidity levels to selected areas of the aircraft, typically in business class, flight deck and crew areas, from around 5% to 22% relative humidity. The significantly higher humidity levels prevent degeneration of our immune system, inevitable in standard equipped aircraft with their extreme dry cabin climate. And further, our humidifiers increase passenger and crew well-being and heighten sensory input, such as feeling and taste.

1:40 The CTTHQ premises house both R&D and manufacturing, located in Nyköping, Sweden. This is an area with a long-standing tradition and history in aviation, right in the heartland of Swedish aerospace industry. Our dedicated and experienced staff are proud to be sole OEM suppliers to both Airbus and Boeing, providing humidification systems for line fit on Boeing 787, Boeing 777X, Airbus 380, and Airbus 350XWB. CTT is also the market leading provider of humidity control systems to large VIP aircraft, where humidification systems are fast becoming a de facto standard and VIP customer requirement.

2:26 Our humidification systems are also available to boost cabin climate performance in large cabin, long range business jets. Humidity is key and a vital part of air quality to keep your immune system intact and well prepared to protect you from colds and virus infections.

2:44 At Airbus Corporate Jets, we focus on bringing our passengers the ultimate in comfort, productivity, and rest. An ACJ-220 aircraft fitted with CTT humidification on board elevate the flight experience to the premium level you expect. These humidifiers enhance the well-being on board, including smell and taste, maximize rest, and prevent you from the inconvenience of dry skin and respiratory system. A dehydrated respiratory system suffers increased risk of infectious diseases. The humidification system is in balance with an anti-condensation system, protecting the aircraft from corrosion. When you arrive at your destination in an ACJ aircraft with a CTT humidification onboard system, you will be well rested and ready to take on the world.

3:40 Welcome to the CTT Systems Q3 2026 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the speakers, CEO Henrik Hoyer and CFO Markus Berg. Please go ahead.

4:08 Thank you and good morning. Welcome to CTT's quarterly earnings call. Markus and I will present CTT's financial result for the third quarter and outlook going forward. Starting with the highlights in the third quarter, we had another robust quarter in the aftermarket business. Demand in general was resilient and we had another quarter with strong demand for spares. We continue to see momentum in the OEM business with stable and gradual volume growth. During the quarter, we at CTT had to delay some Q3 deliveries into Q4, with 6 million negative impact in Q3, whilst having positive impact in Q4, on top of normal demand underpinning a strong Q4.

4:54 Finally, we want to highlight A350 selection, as airlines continue to select more humidifiers per A350 aircraft, driving chipset value going forward. Looking at the financial performance in short, comparing the same quarter last year, net sales were in line with our currency adjusted outlook. Reported net sales increased 2 million to 76 million. EBIT increased to 23 million compared with 19. The EBIT margin was 30% versus 25%. Earnings per share increased to 1.38 versus 1.15 SEC. Net sales bridge from comparable quarter last year shows 2 million growth, driven 11 million by the aftermarket, offset 7 million in private jet and 2 million in retrofit.

5:48 If adding some perspectives on the numbers, in OEM, we do not report a net sales increase, although we had the reality had a 6 million increase. But we had to push some deliveries from Q3 to Q4, amounting to 6 million. with negative impact in Q3 and positive impact in Q4. In private jet, we reported a 7 million net sales decrease, mainly due to strong comparable quarter. A reported increase in aftermarket sales was driven by robust demand in general with another strong spare parts quarter. A breakdown of reported sales shows that aftermarket sales accounted for 72% and 24 came from system sales. I now hand over to Marcus for more detailed financials.

6:36 Thanks, Henrik, and good morning. Starting with the EBIT bridge. Compared with Q3 last year, strong EBIT increase of 5 million to 23 million. Positively impacted by 2 million in FX, plus one from higher exchange rate on sales, and plus one from account receivables, accounts payable valuation. Positive sales volume increased EBIT with 1 million, and sales mix resulted in an EBIT increase of 2 million. Higher costs, mainly sales related, decreased EBIT with 1 million. EBIT margin in Q3 was strong and increased to 30% compared to 25% last year. The third quarter is typically seasonally stronger.

7:26 Expected volume growth and cost control will gradually drive the result and margin upwards. Let's move on and look at the cash flow. Operating cash flow amounted to 20 million compared to 33 million Q3 last year. Solid cash conversion operating cash flow in relation to EBITDA of 78% in the quarter. Working capital minus 2 million. Inventory was reduced by 3 million but offset by increased account receivables due to higher sales. During the quarter, CTT invested 3 million in the expansion of the facility in Nybro. Let's continue and look at the net debt.

8:14 Net debt amounted to 20 million compared to 2 million in Q3 last year. Cash closed at 27 million. In addition, CTT has 48 million in available credit facilities. Equity ratio at 72% compared to 73% in Q3 last year. Return on capital employed rolling four quarters at 18% compared to 24% last year. Let's move on and look at the year to date numbers. Year to date, net sales increased 5% to 218 million compared to 208. Currency adjusted plus 9%, mainly due to the increase in the OEM. EBIT increased 16% to 47 million compared 41, given an EBIT margin of 22% compared 20. Operating cash flow amounted to 35 million compared 41.

9:22 And now I'm back to Henrik for the outlook.

9:26 Thanks, Markus. Let's move to the updated outlook for Q4 and full year 2026. For the fourth quarter, we expect revenue in US dollar to exceed Q3, primarily driven by OEM, including deliveries rescheduled from Q3. Private jet revenue is expected to be limited and no revenue from retrofit. The full year outlook is raised following stronger than expected aftermarket performance. In OEM, revenue growth from full year 2026 is expected at 45 to 50% compared with the previous outlook of 45 to 60%. Revenue in the second half is expected to be in line with or marginally below the first half. In the aftermarket, the full-year revenue growth outlook is raised to 20-25%, from 5% to 15%, primarily driven by spare parts demand.

10:27 In private jet, the 2026 outlook is reiterated, stating that 2026 will be the weakest in several years due to VIP project delays. Retrofit. Full-year revenue in USD is expected to remain in line with 2025, with no deliveries in Q4. The next deliveries are scheduled for Q2 and Q4 2027. Aftermarket. In Q3, spare parts demand continued to be strong. Important to bear in mind that the 20 to 25% growth rate in 2026 is not sustainable and mainly reflects weak comparatives following distributor inventory reductions and weak spare parts demand in 2025.

11:15 Looking beyond 26, we expect a growing installed base to continue to support demand for consumables and to some extent spare parts as well as a repair shop. The entry into service of the Boeing 777X is expected to create new aftermarket opportunities. Historically, revenue from IP and spare parts increases during the first years of new aircraft program as the fleet enters into operation and the airlines take first delivery. We expect the 777X to follow a similar pattern. On this slide, we present the OEM performance. I repeat, in Q3 CTT had to push deliveries into Q4 amounting to approximately 6 million, weakening Q3 but strengthening Q4.

12:05 Important to underline that OEM demand growth is steady, driven by higher aircraft production rates. Boeing is currently working to stabilize its supply chain to increase monthly 787 production from 8 to 10 aircraft, while Airbus targets 12 A350 aircraft per month during 2028. CTT has operated at levels corresponding to monthly production rates of 9 to 10 Boeing 787s and 7 to 8 A350s. The A350 program is expected to be the main growth driver of CTT's delivery volumes over the next six to nine months as humidifier content per A350 aircraft is expected to drive volume growth above the aircraft production rate.

12:54 We have mentioned higher selection rates on the A350 for some time and this trend has become increasingly evident in 2026. We have already started to see some initial positive impact on sales and expect the benefit to increase as more aircraft enter production with higher humidifier content per aircraft. We see three main drivers. One, airlines operating 787 fleets continue to mirror their 787 specifications on the A350 by selecting humidifiers for flight deck and crew rest. Some airlines are increasing content relative to earlier A350s, by adding humidifiers in crew rest. And three, while still in the early stages, a number of aircraft have selected humidifiers for premium cabins, adding two to three humidifiers on top of those installed in the flight deck and crew rest.

13:49 As a result, the average humidifier content by A350 aircraft is increasing, creating a growth opportunity that is expected to outpace aircraft production over time. In private jet, 2026 will be the weakest in years due to VIP project delays. The sales pipeline is strong and we expect the recovery next year as both Airbus corporate jets and Boeing business jets include CTT system in several VIP aircraft scheduled for next year. The first of these projects are one BBJ 737 MAX system for delivery in Q1 and one ACJ320 kit for delivery in Q2 2027.

14:38 I want to point out some milestone events recently that once again highlights and provide some perspectives why OEM remains a sustainable long-term growth driver for CTT. In Q3, it was exactly 15 years since the first Boeing 787 was delivered to ANA. Since then, more than 1,300 787s and over 700 A350s have been delivered. The combined backlog remains substantial at more than 2,000 aircraft, supporting continued production growth over several years. We are also seeing progress on the next generation of long-haul program as the Boeing 777-9 has entered into ETOPS certification testing, while the first customer aircraft have commenced flight testing ahead of delivery.

15:27 In parallel, Airbus has started flight testing of the A350 freighter version and is targeting first delivery in second half of 2027. These developments broaden CTT's presence across modern long-haul platforms, Higher production rates and additional aircraft programs will expand the installed base and support long term growth in both OEM and off the market. For most airlines, humidification of the flight deck and crew rest is today part of their standard selection and considered a state of the art system on new long haul aircraft. The next step is broader introduction of humidification in premium passenger cabins. This is a development we have anticipated for some time.

16:12 Aircraft production delays have affected the timing, but several customer aircraft are now progressing towards delivery. Qantas Project Sunrise is an important example. Qantas has ordered 12 A350-1000 ultra long range aircraft, each specified with six humidifiers, including humidification of the premium cabins. Certification flight testing is underway with the first delivery scheduled for April 27. In parallel, the first A350-1000 aircraft equipped with cabin humidification are expected to enter into service with additional airlines beginning towards the end of 26 and continuing into 27. We also have customers on the 777-9 with cabin humidification specified in first and business class.

17:04 As these aircraft enter into service, more airlines and passengers will gain operational experience of cabin humidification. This will expand the installed base and support the broader adaption over time. I now hand over for questions and answers. 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 Albin Barnevik from ABG Sundahl Collier. Please go ahead.

17:44 Good morning, Henrik and Markus. Start with the guidance here. The full year OEM guide went from 45% to 60% to 45% to 50% here. Can you perhaps talk a bit about what drove this cut to begin with?

18:02 Yes, and it's actually, I mean, we are reflecting the production rates of Boeing and Airbus. And as I said in the presentation, Boeing is trying to stabilize their production on 8 to move up to 10. And they have a delay in that ramp up and that this was what has made us change this forecast that we will end up in the lower half. or the lower end of a prediction due to Boeing not being able to ramp up fully.

18:34 All right yeah that's clear and in Q3 we also saw 12 deliveries of the A350 which was the weakest quarter of the year to date. So can you perhaps, have you experienced any delays here from Airbus following this or still shipping in line with Airbus production rates despite the slow deliveries?

19:02 From a CTT perspective, the important is the production rate. As I said, we are delivering somewhere between seven to eight per month shipsets to Airbus. They struggle delivering the aircraft to the customer mainly due to certification of their seats. But it doesn't affect our production. So Airbus, I think we see stable deliveries. And then, of course, it can vary quarter to quarter since we have very different content, depending on which airlines is produced during that quarter. But the main or the underlying production rate is seven to eight, which we deliver towards.

19:50 Can you perhaps talk a bit about what is driving the higher humidifier content for aircraft here with Airbus? How large is the step up perhaps compared to today you see going ahead?

20:08 To put it in some perspective, we had a slow start on the A350, where in the beginning Airbus was actually not selling any options, including ours, which meant that we missed a lot of aircraft in the beginning. After that, we've been seeing a positive trend where most airlines select flight tech and also changing their earlier specification from no humidifiers to flight tech. And that means that we've been on little bit below one humidifier per A350. What we now see is that airlines actually select both light deck and the two crew rests and we have an increasing amount of airlines selecting cabin humidification.

20:55 So we see that from end of 26 and beginning of 27 we should be on two or above per aircraft.

21:03 All right, yeah, that's helpful. And on aftermarket and the sustainability of growth here, you call the 20-25% unsustainable. What would you say is a normalized level for 2027, given the growth in the installed base as well?

21:21 I mean, in the end, the growth of the aftermarket is connected to the numbers of aircraft delivered, and then we see short-term Our installed base will grow with high single digit to low double digit numbers. If we talk more midterm, when production rates at Airbus are on 12 and Boeing on 10 per month, and also the 777X is scaling, Our installed base will grow with more than 20% per year. But then I talk about installed base and not about the market growth because that's harder to predict since we have sluggish demand on spare parts.

22:08 consumables are more stable and then we have a repair shop adding to that so installed base short term grows high single digit low double digit and mid term when production rates are up the installed base will grow with more than 20 percent.

22:26 Thank you and would you say that the distributor inventories are at normalized levels now in regards to spare parts?

22:34 Yes, we monitor this very closely, and I would say that they are on the right levels. You can have shorts up and downs, but during this year, we've seen a stable demand from the airlines supported by the levels of inventory at our distributor, and we can fill up from us, more or less mirroring the airline demand.

23:05 Moving on to private jets, beyond the BBJ for Q1-27 and the ACJ for Q2, how full is the pipeline, the VIP pipeline for 27?

23:17 I mean VIP is always hard to be super strong on knowing how things will be. There is always a tendency on delays which we have seen hitting us really heavy in 26. And I would say that we now see 27 as a normal or even better year. But it's always hard to say. If I just try to give some color on the VIP market, I think that a normal market for BBJ and ACJ is around five narrow bodies each. That can go up and down, of course, but somewhere between.

24:02 up to 10 aircraft totally, but could also be like they are on three, four to 10. And then adding on that, usually we have one to three wide bodies. And I think if we hit the upper range, then we are above our best years. If we hit the lower rate on that, maybe we're just a little bit below a normal year. And I think we said last year that 2025 was a a year where we established a new level. We didn't keep it in 26 but I think for 27 we should see that we're coming back to that kind of numbers.

24:44 Thank you for the color. And a final one perhaps on the order backlog which increased quite a lot here. Perhaps split the backlog by segment and perhaps also how much of it is scheduled for delivery in 27?

25:04 No, we will not break it up like that. We will publish the total backlog. Of course, our backlog is increasing with higher production rates at Airbus and Boeing. But we also have very short lead times to both Airbus and Boeing, meaning that even when the production rates are increasing, our backlog is not going with it. And then off the market sales are usually inside the quarter, not really building backlog. So a lot of our backlog is still the big retrofit order that we got from jet2.com.

25:49 All right. Thanks. That's it for me. There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

26:05 Thank you. We have a few written questions which Marcus will read and let's see who answers them.

26:11 Yes, I will start with, do you expect a similar product mix in Q4 compared to Q3? If not, what is the difference? Okay, I can take that one. There will be some differences. I mean, we talked about OEM with some pushed deliveries from Q3 to Q4. So OEM will definitely have a bigger part of the product mix in the fourth quarter. That's the biggest difference. And then PrivateJet will be a little bit weaker in the fourth quarter. So that's the main differences.

26:58 And then the next question is about SG&A in Q3 seems to have declined significantly compared to Q2. Is this mainly due to seasonality or due to something else? Should one expect normal seasonal uptick in SG&A in Q4 versus Q3? I mean, you have to compare Q3 with Q3 last year. If you do that, then you don't see a big difference. What happens in the third quarter that are seasonally is that we have a positive change in our vacation debt. with about four to five million. So that is probably the effect you see in the SG&A in Q3.

27:59 So you have to come and then if you look at Q4, you have to compare Q4 with 2025 and then it will be more or less on the same level. And then the next question is in your outlook, you say the full year revenue outlook is to raise to 20 to 25% from five to 15. This growth race is not sustainable and mainly reflects weak comparatives following distributed inventory reduction and weak spare part demand in 2025. But which growth rate is? not sustainable 20 to 25 percent or implied Q4 growth of more than 70 percent.

28:56 What is the reasonable growth rate for aftermarket in 2027?

29:02 And then I will more or less try to repeat what I answered on Albin's question. I mean, this year we are comparing ourselves to a very weak 2025. And that's why we state that 20 to 25% is not sustainable. And then aftermarket growth will mirror the growth of our installed base. And there our installed base will short term grow with the high single digit, low double digit, And mid-term, when we see 12 to Airbus A350 per month and 10 787s and also 777X is scaling up, we talk about our installed base growing with more than 20%.

29:55 How much the aftermarket grows out of these numbers, that's something we don't really can put a firm number on.

30:11 We continue to the next question. It's about the revenue from the aftermarket. How big is the largest customer? What is the revenue from the five largest customers?

30:27 We don't disclose the customer data like that. We have our system installed on more than 80 airlines and I think we have some color to it in our annual report, but that's as far as we go on reporting on numbers that's specified.

30:46 Okay, I will continue. A lot of questions today. How large is a normal order in private jet? How many orders is your estimate in 2027?

31:02 Again, a very detailed question, but I mean, we have talked about kit deliveries being somewhere in the ballpark for a narrow body on 300 to 400 K. And then, of course, a wide body VIP aircraft would be a double the size aircraft, so double the size of the value of our kit. and then with the numbers I gave before that we can see narrow bodies being somewhere I would say normally being between three and ten per year and then adding one to three wide bodies that's the size of the market.

31:49 Okay I will take one final question now. If content per aircraft increases ahead why should aftermarket not outgrow the installed base?

32:04 Because the aftermarket is for CTT is three components. It's the consumables that should track the installed base, but it also spare parts. which is a very fluctuating market where spare parts sales are growing in the beginning of an aircraft's introduction into service and then more sluggish, which means that it's not growing compared to the production rates. It's growing compared to the number of airlines operating a specific aircraft type. And then the third one is that we have our repair shop, which is also growing with the installed base, but we have very long warranty periods and the repair needs comes in well after the aircraft are delivered, which means that that is a long delay on the growth compared to the number of systems flying.

33:09 So it's not linear. pending and it's also varying.

33:22 Thank you. That was all questions today.

33:27 And thanks for all the questions. Always very interesting to try to give some more color on it. I will just finish off and before we close summarizing some key points in the query. So Q3 was in line with our outlook, supported by strong aftermarket performance, while OEM deliveries and approximately 6 million shifted into Q4. Despite this timing effect, EBIT increased by 24% year on year. We expect Q4 revenue in US dollars to exceed Q3. We have also raised our full year aftermarket growth outlook to 20 to 25%, while OEM growth is expected at 45 to 50%. Looking ahead, higher aircraft production rates, increased humidifier content on the A350, more aircraft in service with humidifier on board, as well as progress on the Boeing 777-9 and A350 freighter will broaden our addressable market further and strengthen the long-term potential in OEM, retrofit and aftermarket.

34:31 Thanks for listening.