Saab AB (publ)

Ann-Sofi Jönsson - Head of Investor Relations Håkan Buskhe - Chief Executive Officer, President and Director Magnus Örnberg - Executive Vice President and Chief Financial Officer

Björn Enarson - Danske Bank Erik Golrang - SEB, Stockholm Agneteszka Vilela - Nordea, Stockholm Mikael Laséen - Carnegie Sandy Morris - Jefferies

Good morning and welcome to the presentation of Saab's first Nine Months Result 2018. I'm Ann-Sofi Jönsson, Head of Investor Relations.

Welcome to you in the room and welcome to those of you who are viewing on the Web or listening in on the conference call. We will run through a presentation and after the presentation, you will have possibility to ask questions.

For those of you how are viewing in on the webcast, you can place your questions throughout the presentation. And with me here today I have our CEO, Håkan Buskhe; and our CFO, Magnus Örnberg.

So now I hand over to your Håkan.

Ann-Sofi, thank you so much and to all of you welcome and also viewing us on the Web. I will take you through a couple of things, of course the highlights for the quarter that I believe it's a new step in the direction of Saab and of course the right issues and TX.

So that will hopefully give you the insight that is needed for some more questions during the day. Of course the announcement of the TX award and done into October when we know that the complaint period was over, extremely satisfied and I will come back more in detail.

Good growth when it comes to small and middle size orders. As we informed you already in quarter one but also quarter two, due to our rapid growth the last two years, we have some inefficiency that we mentioned that we will take care of during quarter three.

And the measurement and activities going forward, we have started that and I'll come back to that more in detail. And that of course have the impact on the non-recurring cost of SEK 298 million.

I would like to underline that in the different activities that I will present later on. We don't foresee any more of those type of the non-recurring items connected to our efficiency efforts.

I'm also extremely happy to say that our major products are according to plan. We have tremendous good progress when it comes to Gripen E and F and with Brazil good progress when it comes to our submarine programs and GlobalEye and of course TX.

So very interesting situation for a growing Saab. TX is interesting so many speculations, what does that mean and how will that effect solve going forward.

2010 I had my first contact with Boeing, already before I started as the CEO of Saab spending my vacation being the CEO E.ON Nordic together with Saab at Fornebu. And there were huge interest how Sweden Saab could develop so efficient aircraft to such affordable price and that's how it started with view of an idea all together winning the TX competition that was upcoming.

December 2013, we agreed on yarn to sign agreement and we flew the first time 2016. And I think that also proves that Saab and Boeing have extremely good skills to shorten lead times and cost.

That meant also that we were able to supply all test data according to the plan for the acquisition. So the signed trainer aircraft for the job of being a trainer, no compromises of other things.

And we are now in a situation where we are in the forest scope because the order and the procurement pattern in United States is different compared to other countries that where you receive a frame order what we have done now of 251 aircraft but then it will be different slots that we will receive over the time. And we have been asked and we have tried to figure out what is the total value then for us and this is not the program or anything.

But if you try to calculate the full envelope of the full scope of the TX possibilities in the conflagration that we have today, because what we are entering into right now is an industrialization face where there could be changes for different configurations that means that you will have a change in scope but if I take the scope as we are discussing the right now, it's around 25 billion plus in order or possible order size. Good profitability for Saab, it will help us to grow and reach our profitability target, growth target of course.

We will ending up in a having a situation that we haven't had since the 50s and the 60s where we are producing one our part of it at least and together with Boeing delivering more than one aircraft a week in three, four, five years ahead. And that means also for our part of the program that we will have a total different relationship to our suppliers than we have had before building between 8 to 12 aircrafts a year, because most of the suppliers in our part of the aircraft are the same suppliers as we have in the Gripen.

And that's of course something that that's extremely positive. Another thing that is extremely positive and I have sometimes, even though we are valued as extremely good fighter, but there are different thing when you - if you think about that all the U.S.

fighter pilots in the future will be trained in a Saab Boeing trainer aircraft. That say something about Saab and Boeing of course skills that we have.

And give us a total different, I will say brand in this perspective. We will also increase our presence in United States, building the aircraft in United States going forward.

We haven't decided yet where or how the setup will be, we will try to do that as cash efficient as possible. Our aim is not on lot of bricks, so we will do with as cash efficient as we can.

And another thing, we can see of course that this is the first batch or first set of frame order. And the need in U.S.

is much higher than this. And there are speculations and I can join those speculations that's probably a 1,000 copies that are needed.

And we also believe it's about the same amount around the world, because we will of course try and be successful to sell this aircraft to other nations than United States with the help of U.S. government.

And many of already today U.S. customers would like to be in the same trainer concept as the U.S.

Air Force. So we see a huge potential there.

And we're now entering into a very interesting phase, the industrialization phase and I will again like to underline that what you see here is not test aircrafts in that perspective that there are not serial like, there are extremists serial like us we do with the Gripen, we are not building test aircrafts any more but building serial like aircraft that we are testing is a huge difference that's why we also are able to reduce lead times. So we're really looking for what, we have an excellent cooperation with the Boeing Company and this is also something.

If you take a step back and maybe you think this is a little bit too much, but there are two projects ongoing in the western world new fighter or trainer aircraft built today and that's the Gripen E and the TX and we are board for both of them. That also create another perspective when it comes to Saab our skills.

We know how to build fighter aircrafts and trainer world-class and affordable. And that open up also for other corporations with other nations and companies going forward.

As I said, we when it counts toward a bookings, we didn't have the first six months a major big mega orders, but underlying the volume of small and meter size are very good. Our order backlog still very strong and bear in mind, we have not been able or it was not settled until October.

But due to it's a frame order, you've not see those, if I say those 25 in those numbers, because according to the accounting principles when it comes to order backlog, we has to take the one that are firm so to say. Operating income, SEK 298 million in one-time cost for both, our efficiency programs that will come back to, but also some of those connected to our portfolio.

Cash negative in the quarter and negative the first nine months minus 5 billion a little bit more. But we are looking forward to a positive, to a strong positive cash flow in quarter four.

So this is very much in line with the seasonality I would like to say in connection with our projects. Still good growth and again we have been growing the last three to four years nearly 50% when it comes to sales and nearly more than three double our order backlog.

And I can't see less opportunities, it's rather opposite going forward and especially when we increasing our brand and the strong brand of Saab and our capability to be avoided with TX. So, I hope some of you have in mind that I already in quarter one and lit bit more specific in quarter two, said that our potential of efficiency within Saab due to that you create inefficiency when you're growing so rapidly and you will have to stick to a certain time schedule and knock down milestones.

So we have measurement and I will come back a little bit more into numbers. Both when it comes to resizing, our own employees but also hired consultants, but we are also now in the step of reducing our product portfolio.

We have a fairly long tail in our product portfolio. We have around defined ten parameters for each and every product and we will downsize our product portfolio and create more even more focus on the main areas that we believe in going forward.

Another thing is market efficiency. How could we increase that?

You know we have established ourselves in 35 countries the two things to increase our market presence, we will keep that in some way but also when it comes to be able to trace and how we do business. There are possibility there.

And then we have looked into some of our processes internally. There are great potential of digitalization of those processes.

So I can say we have, some of these are connected to non-recurring items in dynamics surveillance and support and services already that we started. So we have looked through all the business areas and very much connected to the big programs and we have had big growth.

So we are now and have defined 300 own employees and 515 consultants that we are in the process of taking out. That is an efficiency gain going forward.

That will happen - it happen as we speak. And we have, the aim is during next year finalize that.

As I said, we don't foresee any more non-recurring cost for that program. And as you can see, the big portion is mainly external consultants.

And you can figure out the amount for that. I will not give us you some, but you can probably calculate.

Reduced product portfolio and integration of internal and close down and divestments that hopefully will bring us some more money both in long term, focus on the right thing, but hopefully some income selling some of those products. And that could be units but it's also could be some of the products that they are looking into.

And that will also gain efficiency of focus on fuel products. We will still be a broad company with our main activities in aeronautics, in sensors like surveillance, ground combat weapon, torpedoes, missiles, supporting service under water of course, but today we have 580 products and 250 systems.

And with the things that have happened now and especially with TX, we can see that there are the time not to really create the focus going forward. So that also have an impact on our market focus where should we have our own presence, how should we work with our bids and so on.

And also higher degree of digitalization of simplification of functions and processes. You can probably figure out the resizing potential and if I say that the from a cost perspective, the resizing excluding one-time income of selling products or whatever, but the cost is probably the same amount in savings going forward.

And that will continue the next two years from now to make that happen. Each and every quarter, we have at least the last years reported about our product execution, because it's nice to have a big order backlog, but it's also good if you do the project execution, see on some money on it and we do.

We have an excellent progress on Gripen E to Sweden but also to Brazil, GlobalEye to test flights now in Spain going extremely well. And we have a good progress from a zero level, I will say when we took over Kockums and we are now for example with the mid-time upgrade all of HMS Gotland and we have had our first trials.

And A26 are going, the progress is good. And the TX I have already talked about, we are very confident.

So turning an order backlog into sales and profit, that's the name of the game and it works very well. The right issues and according with the board, supported by the main owners and we were grateful for that, showing the trust in what we're doing.

And especially this is a progress thing and we see huge opportunities and possibilities even in the future, to continue to grow the business, continue to do more megadeals, continue to also to do corporations with other companies and nations and especially utilizing the possibility that we - and also the momentum that we have in our business today when it comes for example to fighters and other programs that we have put efforts into. So that's a thing to support Saab's growth journey going forward.

And according to the strong demand for our products and shareholders representing 52.3% are supportive. And in AGM, we will have that authorized the board for the next step.

So the outlook, we are keeping the outlook for the year, as we started with for the beginning of the year, so the sales growth in line with those 5% in operating margin excluding material non-recurring items expecting to improve compared to 2017 and bringing Saab closer to the 10% target. So with that, I'll give the floor to Magnus.

I take my glass of water.

Please do. Thank you, Håkan.

And let me run through some of the financials. I will first comment on the Q3 result obviously then I will also highlight the right issue from my perspective and how we are thinking there going forward and also I will comment on the charges that we have been taken in Q3, and then open up for the Q&A.

We have a strong medium sized order intake in the quarter as we've heard about and also the small orders are very much in line with previous year. This is important for us, we've talked about it before, as these are normally orders that quicker generate sales.

And we are also up on orders in the quarter compared to last year. Sales growing 2% organically, 3% in total and we are gearing up for a strong Q4 in that.

Our margin 3.8%, and that is after we have taken the charges that we've just talked about and 5.2% otherwise and that is very much in line with the plan that we have for the year. Cash flow impacted by the timing differences in milestone payments.

We all as have heard now full speed ahead on execution, so we are doing a lot of action in our large project right now building up working capital and obviously then you have a timing when you receive your payment. And I come back to that a little bit later when we look at the cash flow.

Financial net, we commented on that in Q2 as well and we have seen changes in the market values on the derivatives. In Q3, basically no impact or not big impact but this is still the effect of what happened in the first half.

I would also like to highlight that we are commenting this time on the cash flow for Q4 where we see a positive to strongly positive cash flow in the quarter and that has to do with exactly what I've talked about before the timing of the milestone payments. I also want to reiterate the outlook, reconfirming the outlook for the year and thus expecting a strong Q4 in several parameters.

With that, I go straight into the rights issue and my comments on this, I want to continue on what Håkan said. We have grown 40% to 50% already in our sales that is an important factor when we consider this.

We have an order backlog which has tripled in the past 4, 5 years, obviously both of those parameters are impacting our need for working capital. The board now proposes a rights issue and with aim to support further growth, that is the main message from us today and increase the possibility to take new orders.

Obviously, we have many opportunities right now and all of these orders are large in comparison to our annual business, meaning you need financial flexibility. And rights issue will of course strengthen our balance sheet and enhance the financial capacity to take on new business.

It's a long term action and it is a fundamental piece for us to execute on our strategy. And when you take on these launch orders, it's not only working capital and handling the everyday business, you also need to be prepared for issuing guarantees, handling currency derivatives et cetera.

So the strong balance is a fundamental piece for us going forward. So long term action and we are ready to take on the next step in our company.

The backlog, we're normally commenting on that and we have a strong backlog as you know and we have a duration that is supporting our growth going forward, roughly SEK 9 billion to be executed for the rest of the year. And already now, we have some SEK 24.6 billion we're estimating here for execution next year and obviously that will improve during this quarter when we are booking new orders as well.

So we expect to have the backlog with us when it comes to growth going forward. Order size, yeah, we are starting to describe not only small and large but also medium, so this is maybe one news here.

And we think that is important because they have a little bit of different characteristics as well. But so far this year mainly the small to medium-sized orders are being booked.

So how does it look per BA, we have good order intake in our surveillance business so far this year picking up and that is good. Otherwise, I would say that the main message from my side here is that we have a strong backlog in all business areas and that is important when you drive productivity going forward.

Yes, we also received some very interesting orders for example the ground combat orders are starting to improve but also we're looking forward to Australia for instance as one market where we want to do even more business. Sales in the end, we need to convert the orders into sales and we have now good growth in several business areas.

It's very clear that in Aeronautics now, we are executing full speed ahead, we are up some 10%. Kockums is also very clear that we are now gearing up for preparation of execution and into the execution phase.

Surveillance as well improved. Where we see some challenges now is Dynamics and we have talked about that before during the year, where we have some timing differences in our delivery, we know that we normally have a very strong Q4 for Dynamics, and we have also talked about that this year is even though we have a very good backlog for Dynamics, we - it is a little bit of a timing challenge for us in this.

But its full speed ahead in execution and production, so they will be taking off as well. In Support and Services, it's minus here but that is more of a timing issue that we last year had a sort of a one-off and positive impact from a launch order that they booked early in the year.

So it's full speed ahead in all areas basically. Result wise, yes with this extra execution in Aeronautics and Kockums, we see now improvement in both absolute result and margin.

Obviously Dynamics is very, very sensitive to the volume. And when we have the big volume going out, we have a very good impact on the result there.

So we foresee and significantly improved results in Q4 there. In Surveillance, we have had some challenges.

We talked about it already in Q1 and Q2 that we have taken some cost for some execution in medium sized orders and that is impacting the result there. Also these numbers all also affected by one-off charge that we now two in Q3.

Highlighting the non-recurring item or the one-off charges, we have taken SEK 298 million and this is we should see this as throughout the company and this is should be seen also as a way to accelerate the productivity improvements that we are working on. And for example we have some specific actions done in Dynamic, Surveillance, and Support and Service and then we have charged SEK 2 million on corporate but that is for the total company and we will now execute that very, very quickly.

And the estimate is that we will have a payback or getting this money back within one to two years. So we're taking actions that will pay off very, very, very quickly.

Cash flow, of course we are now in a process where we are executing and utilizing cash, utilizing the advancers that we have received before. The timing of milestone payments is sensitive on how each quarter will turn out.

And we are right now in the timing challenge with milestone payments. Last year and year before, we had basically a very strong cash flow.

In 2016 and 2018, we had roughly 100% conversion or even higher. So that was very good.

This year so for, we are in the other swing and - but at the same time, we are now communicating that we will have a strong positive or strongly positive cash flow in Q4 and it's mainly the contracts working capital that swings. We will continue to invest because we are in that phase where we are investing and preparation for the production phase which will basically in a bigger scale start next year.

We will continue to do that but what swings between the quarters and sometimes years is of course the contract working capital swings between quarters on quarters. Financial position, we have some 29% equity to asset ratio.

We have a target of 30% as you know. So we are roughly in line with that a little bit shy.

We are of course having an impact here on the investment some SEK 2 billion. We have deviations on the timing in our contracts and of course also the pension liability in financing.

And with the positive cash flow that we expect in Q4, we will see improvement in the net debt over the year. And going forward, we have our targets.

We are a long term thinking company. We have of course execution of larger projects which is key for us.

We have talked about this throughout the day here and previous quarters that's going to be very much a focus also going forward for us. Efficiency that is of course even improved - increased and importance now and we have really kicked off with the actions that we now are taking in Q3.

And that is of course to support us to reach our targets of 10% as we have planned. And also to continue to build backlog even though, it's a big backlog, we always need to fill it up and especially in some areas really to add in there.

So we can keep the machine going and really execute full speed in all areas. Okay, with that I would like to open up for the Q&A.

Thank you. We start to see if there are any questions in the room.

Björn Enarson, Danske Bank down here. Nice.

On the rights issue, you are talking a lot about the funding as well, is this a combination of funding need or is it more to seek your possibility of being a partner for potential new clients?

I would like to see more into the last one because we can see - we see great opportunities to continue with also cooperation with other possible customers and to take the extra step and also have the flexibility to do more thing than last one. So for me it's a very progressive way and creating flexibility for us going forward and be active on the market in different perspective corporations doing megadeals.

Just bear in mind, I mean we have a discussion that is known when we took the Brazilian deal, they said we're three batches of 36 each and now we are discussing the batches to come. So that's also a big, big expectation on those orders going forward.

There are concrete opportunities out there that - yeah.

Has that chasing in a way the prospects that you to trigger this decision or is it more in funding?

I think the prospect in sell off but to believe in the success rate have increased.

And why not - if you're going to explain I think we had talked about this many years ago, but if you can explain why don't you just take on more depth instead of equity, more expensive, so?

It's also, I mean I spent last eight years out there discussing with governments and customers and strong balance sheet is of course important from a long term perspective and also when it comes to well, taking care of guarantees and other things. But there are so many things happen on the market as well, so if you look yourself into your balance sheet, yes towards the guarantees, you don't have flexibility on for example acquisitions or other things that will probably be something that those activities will increase in Europe going forward and also corporations.

So that there are different reasons.

I would say, my comment is, it's very natural step for us. I mean we have seen the growth.

We have a big backlog obviously this has driven working capital increase. We are different company today I would say also if you just go back 5, 6 years.

And also with you know internationalization that we are in the process of doing, trying to you know increase the footprint on other markets, I think it's very natural to strengthen the company. Yes, we can work on the debt side which we have been doing in the last years.

We have a program in place which in a very good way I think where we are rolling debt forward. We just bought back some debt in Q3 and issued new ones.

And so we have a good program there to support the financial flexibility. But I guess you need a balance and I think we are in a little bit of a step change situation.

Is it now, we could have done maybe one year ago, or maybe later, it's more of a timing issue. And I think one of the truth points that we're trying to also hanging here is of course the TX order coming in where you can also see that okay, there are opportunities and here is one sort of and you are - and that will now going forward drive more work and also build-up of working capital in that project of course as well.

So I think a very natural step for us now after what 20 years of being listed as a company and last time we sort of looked into the sort of equity need of the company.

And timing wise, can you give us some color on cash flow profile for TX?

Well, we have the EMD phase continuous as you have seen with the first order from Boeing. Then in the industrialization phase according also to our accounting principles, we will book some cost or money on the balance sheet.

But that is not a big thing. That is not the trigger I would like to say itself for more cash.

I understand that from the discussion and different media and markets are from the capital markets that it's believe oh, it's so costly, we will drain SEK 6 billion for TX, that's not the case. But the there are some money but not significant money going forward on the TX product that we will capitalize.

So that is not the main user of the money so to say, it's a small portion.

I think this should be seen more as an example of the large opportunities that we have out.

Exactly.

This is how it should be seen, yeah.

And just one more question not on the rights issue, but if you can say something about earnings profile for TX?

Yeah, we have the EMD phase now and you have seen the first order for us coming in, than we should start to deliver 2023 on the - start to produce. And in a couple of years after that according to the mine schedule and again this is a frame contract and they will utilize that within the frame and the batches continuously.

But we according to the mine time schedule in a couple of years after 2023 in a continuously ramp up, we will deliver 6th aircraft a year. So this will be of course one of the largest products within the company.

And if I'm right, that I think I will be in the end, we will see more orders coming in when it comes to TX.

Thank you.

You welcome.

Thank you. Then we take the next question here in the room.

Thank you. Erik Golrang, SEB.

Continuing on the topic of the rights issue and I need some more help understanding it, because you said a number of different aspects here, you're talking about the order backlog development but I mean that reach the current levels quite some time ago, so that's not news. And then it's more of a forward-looking statement we needed to secure additional big orders.

But I mean a strong balance sheet is a prerequisite to secure bigger orders which makes it a defensive move then because you're not in that position currently. So to what extent is this not a reflection of a weak cash flow over for an extended period of time and it being an actual mean for you to further strengthen your backlog going forward?

I can't really square that?

If I may start on and I mean if you just look at the cash flow that are inbuilt in our order backlog today, as we have mentioned now for many years, so the last two three years that the cash flow is not so really good during then in nearing phase. When you start to deliver, as we will start to do starting end of 2019 especially on E continue to 2025, there we have the really good cash flow.

Yes, so if you just take that then it's a good balance. But we can also see a huge interest from different partners in building up capabilities around the world.

We just turned in our answer to India of 118 aircraft. We have deep discussion and we hope to see some kind of down selection in the Netherlands for submarines.

We see possibility to work together with the Swedish government, the U.K. government and industry in U.K.

building there next fighter and so on and so on. So it's forward gleaning view on things, where we see it, I mean we have built something that have increased with 50% total different product portfolio, we're the world leading in fighter and trainers today.

And we are not going to utilize the break. We see a huge opportunities to continue to build the company over the years to come.

And you should see it from that perspective.

Now the ambition is of course like Håkan say is to move even further and take on more orders. And you also need to do this in time.

You need to prepare your balance sheet as well. I mean it takes time to - you don't want to be in some sort of panic and you cannot take on opportunity, you have to prepare that.

And I think for me, it's a very natural step to boost your balance sheet. And now we have seen that we didn't go up on order backlog and then suddenly down, which might have been some view that people could have had.

We have actually been able to continue order intake at the same phase increasing the executions. So I think for me is very natural to beef up the balance sheet and continue to grow.

Okay. Thank you.

Second question is on the capitalization of R&D costs. It's around - you capitalized around SEK 1 billion more than you amortized over the last 12 months, which equals 50% of the 12 month's EBIT, quite a significant number.

What will that - how that develop going forward? And have you within these efficiency measures you've outlined now, does that take into account a reversal of that gap over the next, I don't know 12, 24, 36 months?

Well, it's so that, when we are in the industrialization phase of something and we can see that we have more customers than one possible and we already have gained one customers. We capitalize things according to the accounting principles.

There are activities that we see that are business oriented with new orders that will give us some more of that. At the same time, one way of mitigating these things are reducing also our broad product portfolio, because the majority of those activities that we are doing related to putting things on the balance sheet are very much focused our prime projects and where we see that we have great success in and the big order backlog.

At the same time, we of course understand that if you have a write-off or depreciation that are larger than the year before that you're doing of course that will increase and have a pressure on your P&L. And that's also one reason we see those or have initiated those savings, the potential savings that where show with those 850 people as a total and the other portion with reshaping as we call it with the same amount of possible saving money.

We - just to add on that, we have policies is not to capitalize R&D that in general, then we have made a few decisions and then we make them all the way up to the board. One, we have done for GlobalEye, which we have talked about one and a half year ago, there we are almost sort of towards the end of that.

We announced in - after Q1, we announced that we are also capitalizing the industrialization portion of the export version of Gripen E. And there we are earlier in the phase, so in that respect that will continue for a while longer, but like all done, we will amortize that over year.

So that needs to be met by new orders and it needs to be met by efficiency gains. So yeah, that's the plan.

Then one final question for me. 2% organic growth year-to-date, you said you do around 5% for the full-year that puts massive pressure on the fourth quarter.

In what areas we see growth in Q4 taking the full-year to 5%?

Dynamics, Aeronautics, you will see some more in Surveillance of course. I can tell you one of the biggest, the most time we spend on is how to guide the market.

And we don't take this easy. So we have of course calculated that with the current order backlog that should be executed during the quarter and…

Including booking.

Yeah. So that's how we see it then, that's the outlook that we have.

And we have full, I mean we have full speed ahead in - I mean you could almost mention all business areas, I mean there will be a big Q4 sort of in.

Thank you.

You welcome.

Do we have any more? Yes, I guess.

Hi, Agneteszka Vilela, Nordea Vilela. One question about the TX project.

The U.S. Air Force sounded quite happy about the price they paid for the planes and they also mentioned that it was just a half of what they expected to pay.

So my question is how could you can develop this affordable planes, couldn't you price it higher? And how sure can you be that this project would be profitable for you?

And when you say profitable, do you mean that it would be in line of your margin target long time?

Yeah, so that - I think one important - because this is one of the most important questions, how do you meet the cost that the customers are prepared to pay because the market is totally changing. Lower cost, better efficiency on the products and shorter lead times.

That is the new name of the game. And before I answer that question, if you take the Eurofighter for example, if we have had the same development cost of the grip and the Swedish national debt have probably increased with 70%, then you're out of business.

So for us it's utilizing new technology being very specific on how you work with your internal processes but also how you design. I will say building an aircraft, they are the first 14 days you design to design in the cost and capabilities in the specification.

I see it opposite. Now we have shown the U.S.

government, the U.S. Air Force that you can do the best product in the world to an affordable cost and we still are earning money.

And that increased appetite of course to order more of this excellent system and also create other competitive I will say interface towards other segments that normally is not yet driven for example. So I think that this for me one of the most important thing that we have achieved excluding having the best product that we have been able to do this so affordable and still earn money on it.

And there are very clear regulations in the acquisition process in United States that you can't underprice it.

Okay. Do we have any further questions in the room?

No. Then we have a few questions from the Web.

So I start with a question from Martin Larsson [ph] and he has two questions. And one is if the negative Q3 cash flow is in line with what you foresaw at the end Q2 and if the negative cash flow in the Q3 impact the size of the right issue?

I can take that. If you look at Q3 and Q4 together, I think is very much in line with our plan.

We always see timing differences between the quarters. And those you have followed us in the past, you've seen plus SEK 2 billion SEK 3 billion minus SEK 1 billion SEK 2 billion in the quarters and that can - that has purely in effect of the timing of the milestone payment.

So I would say that if you combine Q3 in our estimation for Q4 then it's very much in line with our plan. Now, Q3 cash flow has not impacted any decision on the rights issue, we are talking about the long term plan.

Okay. The next question comes from Stefan Siebert [ph].

In what year do you expect the TX project will contribution positive to your P&L and what year it will have a positive impact on cash flow?

Yeah, I mean we're starting the EMD phase, the industrialization phase now, so that will continue to create a positive impact on our P&L going forward but the big volumes will come 2023 and onwards and create tremendous platform for Saab and Aeronautics volume wise that we haven't had since the 50's. And that will also change as I said again the possibilities of having a totally different relationship to our main suppliers.

So the really big it really kicks off after 2023 are around that time.

Okay. He has the second question and that is also related to the TX order.

And it is, is the TX order a fixed price contract and have you already secured future dollar flows from expected orders to come, so further orders within the TX program?

Well, it's so that fixed in that perspective that you have different parameters that will adjust cost and price of the time and compensate for different types of inflation according to the regulations that the U.S. Air Force have when they do acquisitions.

And then of course after the EMD phase when the final - if there are some other aspects or some announcements that the Air Force would like to have and upgrades or whatever then we will settle that going forward. But again the profitability as I said will help us going towards our targets.

And when it comes to the dollar impact, basically that is also important piece of reasoning why we are also building up the production in the U.S. It's important to match, these are long term programs and difficult to hedge basically especially when you don't have the orders they will come in batches and so it's very important to match the flows in the currency.

Okay. Then the next question is from Stephen Irvin with DAM [ph].

Most of the defense companies are able to fund growth through contract prepayment. What is it about the structure of contracts in Saab which doesn't enable it to fund growth in this way?

I would like to say that we do basically all the time and if you see it on the next five years. The question for us growing the company in the last years for nearly 50% and doesn't see anything that really should stop us if we go a period going forward with the tremendous good growth.

You need funding in another perspective. Especially in the business that we are in with guarantee some other things than having that flexibility in our balance sheet is extremely important.

If we were just happy with the things that we have done and continues to work on the order backlog and deliver that and have a nice day here at the office then we probably don't need the money. But we don't really see the way forward.

We would like to create value and utilize the position we have now with the strong portfolio, especially when it comes to both aircraft, Gripen and the TX, submarines and our radar portfolio to move ahead.

And also I think it's a timing issue. I mean if the world would be so perfect that it would get one order every - large order every second quarter and exactly the same sort of cash profile advances and execution, a milestone payments and everything just fits.

Yeah, maybe that could work but as you know in our case also now we have we got quite a lot of order in onetime and I think that has also impacted a bit how the profile of our cash is turning out

Okay. Thank you.

The next question is from [indiscernible] Capital. With the right issue in mind, have you in anyway changed your previously optimistic view on profitability and return on investment in the period from 2019 to 2021?

No. No, still intact the plan.

I think it also shown here today, some more activities for profitability during our presentation, so no way I'm changing that.

Very good. Clear answer.

So the next question is from Paul Bradley at Citi. He actually has a couple of questions.

Okay. Go ahead.

So, I start with the ones relation to TX. Did you say your total orders might be SEK 25 billion, so if he calculated correctly then it would be around 30% of the total contract and is this based on the 351 aircraft or the full potential 475 aircrafts?

I say it depends on how - that's why I was very clear this is not a prognosis, it's just some kind of a guidance how to interpret this contract. And I don't like really to go deeper into it how we have come to that conclusion but that's a figure that we see its potential of the time.

There are of course up side that that's why I said it plus, but it could also depending on the scope going forward be less than that as well. So I think I leave it there.

I see this is a start of something the first 351 and with a good profitability and a good start and then we will continue to capture more than the same amount of aircraft going forward.

Okay. Then he has a couple of questions related to cash flow.

The first one we have touched upon already, why rights issue rather than debt? And this one we have also touched upon why now the backlog has been high for a long time?

And the next one, should we be concerned about your future cash generation and what impact does the TX have on group cash flow? And then he also would to know what does positive - strongly positive cash flow mean in Q4?

And also what do you expect for cash flow for full-year 2018 and what you expect for 2019? And what - should we be concerned about your future cash generation and what impact does TX have on cash flow?

If I and then you can continue, Magnus. I mean as we have said enough for so many years, we have more activities within Saab when it comes to mega projects than we had during the peak during the cold war.

Just have that in mind. By building a new fighter, new trainer, new submarine, upgrading the growth line class, it's basically a new submarine out sailing as we speak and the GlobalEye.

During those engineering part of it, you don't have the same income when it comes to cash as you have when you start to deliver your products. And we are exactly start becoming mostly on there that phase in the years to come.

So, yes, flat again delivering on those projects doesn't have a huge expectation to grow, no that's not the question. But we would like to utilize the momentum that we have in Saab today, where we have some step ahead that's we believe compared to our competitors, we are at least the only one in Europe building a new fighter.

I would to claim, we probably are the only one with the full knowledge. And that we would like to utilize and be involved in the corporation and other activities around the world.

So we would like to grow this business even further, that's how we see it.

Yeah, and we - like Håkan said, we will start to see a better cash flow from the projects towards the end of 2019 and forward and very much in line with when we are physically delivering products. So when we are entering that phase that will have a positive impact.

And if we would just be like Håkansaidhappy with that then we could just get that money back and then we are done. But now we are also preparing for new orders and we want to take the next steps in growth.

I think that's how we should see this.

And what impact does TX have on Group cash flow?

I'd like to say it's not the big thing over the next five years compared to our operation. So I understand again that this is a question that will connect, you need so much cash too.

But that is just a trigger to show that we're all in very interesting phase of the company from a market perspective but it's not the big consumer of cash.

And what does positive to strongly positive cash flow meaning in the fourth quarter?

Yeah, that's a good question. But I mean it will be - if we will put it like that of course it will be a relatively significantly if I put it like that I mean that - that's…

We don't normally guide on cash flow but I think at this time we thought we could…

Yeah, we in connection with the Q3 swings, I think it's right to do that and that's what we have done now, yeah.

Okay. And what kind of cash flow do you expect for the full-year 2018 and 2019?

We don't guide on that.

No, we don't guide on that, but I mean that you have to calculate then.

And also then on margins, do you still believe that you can achieve 10% operating margin and what timescale should we be thinking about?

That's the same answer, we haven't changed that since the previous estimate.

If anything, think we have strengthened it and now with the actions we take, I mean we're giving ourselves a better possibility to take those steps. And we have said that we should take a number of steps towards the 10% and that has not changed and we will take one this year, we'll take the next one next year and so on.

And we are closing up.

Yeah, we should close the gap.

Okay. So the next question is from Oliver Collins [ph] from Invesco.

And it's on the balance sheet. Leverage appears to have spiked now in the Q3, if you look at the free cash flow.

And looking at 2019, you will have here a ratio of two times net debt to EBITDA is estimating?

Okay. Good.

And rights issue appears unrelated to the current mix. What do you target at - what kind of target you have for return on capital employed for the Group on midterm?

Again, I mean we foresee it that we could grow this business continue and take care of big orders utilizing the momentum that we have and that's the main issue to the right issues. So if you just - and that - if you just look at that from an order backlog perspective and we continue like that the maybe book-to-bill other than you have a different story, but that's maybe something we have another view on we see a huge possibilities to push the pedal and go ahead.

But it's correct - this unrelated that he's right in that interpretation, the swings in the cash flow quarter-on-quarter is unrelated to our now rights issue at the moment. So this is no connection in that sense.

Why that swings between the years positive in 2016, 2017? Now utilizing the cash is purely for the speed of our execution and the timing of the milestones.

And just to remember everyone who's followed us for sometimes knows this of course, those milestones were set a long time ago. We are talking about the 3, 4 years ago and the timing then exactly has to play out exactly how the execution is done.

So it's - this is within sort of the planning of the - that's the result of that.

I think if someone worried, you should be worried if we don't deliver on the big progress, that's what we are underlining that we have a very good progress.

And so and then his next question is related - also related to the rights issue and what it's supposed to fund and then we have also gotten another question from Martin Larsson, who is also asking this, how did you come up with the 6 billion number and can you break it down into the individual pieces? And is it fair to assume that further rights issues can be necessary even with modest among upcoming big projects and tenders?

Well, I haven't been sure that's a process in a listed company before, so it's very interesting how you come back and forth and then you in an iterative process and doing a lot of calculations with our assumptions for the market and with guarantees for a lot of other things and we adopt together with the board of suggesting those 6 billion. There are of course sensitiveness calculations, there are opportunities and there are a lot of different parameters that we've utilized on its really specific things that you can point that.

We have a very good view over the potential business for the next five years around the world for our bidding and going to bid on what we have already bid on and what that means to us going forward. So I think that's how we come up with the figure.

Agree. It's very much an iterative process that we've gone through and analyzed.

We looked at the sensitivity of timing in our execution obviously. We have looked at on net debt levels, what is it what can it be.

We looked at gross loan amounts. We've looked at future growth rates.

And so it's a mix of I think points of view and also amounting itself. I think it's place of factoring it as well.

So I think that's how we came up with that.

And on the question, do we foresee even more? No, we don't.

And if we're for some reason doesn't need to utilize the money, it's in the company and the owner could decide whatever they would like to do with it.

Okay. The next question.

We have and another question from Stefan Siebert that is, do you see further business opportunities together with Boeing outside fighter trainers?

We haven't defined anything like that, but I are extremely encouraged of the cooperation with the Boeing Company. I think they are extremely professional, many cases they are very hard competitors.

We are also hard competitor to them. I think we - I mean we have done something that is extreme usually in three years.

We build the best trainer in the world that conducted all the test shortages and we won. So of course, I think we have a very matching culture, so let's see.

Then we have two more questions here from the Web. The next question is from Hanna Hoikkala on Bloomberg News.

What is your take on options in Saudi Arabia after recent events here regarding, yeah?

But I mean first of all to work in the defense industry whatever country you are in is already are you have in all countries a legal framework that you have to stick to. And I think Sweden also have a very good set of regulations that the parliament and the government and then regulatory unit are taken care of and they are making their judgments and of course we are following that.

I mean as you a person you of course following with interest what is happening and the things in Turkey and the comments from Saudi.

The next question is from [indiscernible]. When do you expect the next TX order to emerge?

Will it happen as late as 2022, 2023 or could you get it already in 2019? And has anything changed in your cash flow plans for 2019 timing of larger projects or deliveries?

Well, now so that when the TX, if he mean for U.S. perspective or for other countries, but it's a very well lined up process now with the different batches should be taking into considerations.

So that of course are in connection with the progress in the EMD phase and bear in mind again we are flying a serial like aircraft. So I think that will continue with very good progress.

Then of course, we will be prepared in I would say in the year to come to start discussion with others as well. But we have been very careful of doing that in depth due to the process for the U.S.

Air Force.

Okay. With that, I would like to open up for those of you who are listening into the conference call to see if we have any questions on the conference call at this time.

Yes, hi. Thanks.

Just one more question if I may.

You may.

Yeah. Thanks.

Can you say something about 2019 in terms of sales growth and EBIT margins already know, I mean given this SEK 6 billion rights issue, I mean take the opportunity to comment on that? Thanks.

That would be one of the tractions on our Capital Market Day. But we - as Magnus have already mentioned, we see continuing journey when it comes both to growth and increase or profitability.

And one thing that I haven't mentioned maybe I should have done that but the slipped out my head, we have had an impact on because of all the development cost of the TX over the last 5, 6 years, we have had an impact between 0.4% to 1% on our or EBIT margin in the past. And I would not say exactly how much this year but of course that also have an impact going forward on our profitability.

And then we calculate of course on the shaping of our business as I mentioned during my presentation. So feel we strong commitment to what we promised a couple of years ago on the Capital Market Day and the all-time here.

Okay.

Yeah. Good morning.

I think I'm nearly dying on my feet here. But on the rights issue, I suppose all are eagerly trying to divine is how much is backward looking and how much is forward?

And I am trying to phrase this as a question, because we've discussed the use of medium term notes from the business that is becoming more and more long term. So basically, can I assume stepping back potentially from this medium term note frequent issuance?

I can start. Let's see, I was going to say.

I mean I think it depends on the whole how we now move forward, but it's very much a forward looking activity that's we're doing. We are preparing ourselves for further growth and taking on new orders.

What will happen on a daily basis on our MTM programs, will I think depend very much on our cash situation. I think is more of a liquidity discussion than anything.

But I think the program that we have now in place is good. I think we have worked up a good way to use the bonds and how to prepare the flexibility.

But obviously we have to manage cash also going forward.

No, I mean the assumption if we are just happy with the current situation, utilize our order backlog having a book-to-bill over the time that is close to one. I will say there are no holes in the balance sheet that needs to be covered by the right issue.

That is not the case, but we would like to increase our speed, utilizing the momentum that we are in and be more active and also we able to increase corporations with some companies and governments. So they are not big or any of some legacy I may - if I may say so that we need to utilize these cash for it's forward-looking and we would like to be have the flexibility and yeah, move the company forward.

And we have the same ambition that we have had the last year and now we are going to gear up.

Cool, well look, I can take a hint, but can I just ask one final a little detail question.

Of course.

When we do business with the United States, is there any sort of guarantee and bonding issues there?

Not really. And in this case, our main customer are the Boeing Company.

So they are the lead in this particularly set up with the U.S. Air Force.

So I think we have a good settlement.

Okay. Well, it sounds like a case of go and get them, gentlemen.

Yes. We should.

Thank you, Sandy.

Thank you.

Okay. Then I would like to finalize this with one more question from the web and that is from [indiscernible] Lazard Asset Management.

You're taking steps to make the portfolio more focus then will have more programs with scale in the medium term. What this - and was this anticipated when you set your 10% margin target?

And can you offer any comment on how the changing portfolio makes will impact the long term margin potential of the Group?

I mean very wise question, because you can make your calculations if you roughly know what it's costing and I said the same. Well this will bring us towards those 10%.

Then we have received those questions what is happening after those 10% and if you find more possibilities of course then we will reconsider our targets when we have reached that. You can see in different types of our business we do better.

And yeah I think it's - let's come back on that, but we also need probably to do some investment in everything from artificial intelligence to quantum computing and things like that. But of course to find these rather big potential of savings that we have now presented today encouraged us of course when it comes to the speed of reaching our target and so on.

But let's come back when we have reached the 10%.

I think we are giving ourselves an opportunity to move faster. We are going to take the steps that we want to do.

We're going to deliver in our plan and target. And then when we get sort of touching on that we will be very happy to come back.

And we're not hindering ourselves to earn more obviously.

Thank you very much for that.

Thank you.

With that, I would like to thank you in the room that came here and also for those of you have been viewing on the Web. We will release our - and listening to the conference call of course.

We will report our fourth quarter 2018 in February, so you are welcome back then. We will also host Capital Markets Day on the 15th of November, which will be live webcasted throughout the day.

So, thank you.

Thank you.

Thank you.