Saab AB (publ)

I am Ann-Sofi Jönsson, Head of Investor Relations. And thank you to you that are here in the room, and also thank you to those who are listening in on the conference call and for those who are viewing us on the web.

We will go through the presentation, and after that we will have a Q&A session. And for those of you who are on the web, you can place your questions throughout the presentation, and we make sure to pick them up during the Q&A.

And we will open up for Q&As for the conference call after the presentation. I also have Håkan Buskhe, our CEO; and Magnus Örnberg, our CFO with me here today.

So, with that, I turn over to you Hakan.

Thank you so much, and thank you for attending this busy report day and we will take you through the report. I will start and then the normal way as you are used to Magnus will continue with some more figures, but if I start with the highlights January to March, so very strong first quarter for us.

One of the strongest quarter, I assume, since we reentered the stock exchange in the late 1990s and the strongest one at least since I started nine years ago. I think this is another proof point on what we said that, we're going to deliver on the Capital Market Day 2016 in the transformation of the company.

The transformation that we have done now for some years increased our investment in R&D nine years, 10 years ago and also increased our market presence. And now we can see that creating some results first when it comes to growth order intake and then growth and now also execution.

And we have an organic growth of 8% for the quarter and a strong Dynamics IPS as well Aeronautics growth. What I think is important to underline again is the execution and the progress in our large contracts or projects.

We have seen an extremely good development in the quarter, but also the last years when it comes to execution. And that's key of course with the large order backlog that we have that we can also show that we can convert order backlog to sales and results.

That's what we're showing now. We can also -- what I think is important to underline what we said late 2016 in the Capital Market Day in November that we will have a tough and a negative cash flow during 2018 and 2019.

So that was predicted and that's mainly the difference between milestones and the payment for those milestones according to the big contracts. We saw a fairly big gap of that the first three quarters last year.

We assume we will have a gap the first three quarters this year as well, but not in the same magnitude, and again, a positive Q4. And that should be the start of a more positive future when it comes to cash flow according to the programs and the contracts that we have.

And that's, of course also connected to the execution, because when we are fulfilling our milestones, as we do we create sales, we create a good EBIT margin, and we create the cash flow that have been predicted and we are following that plan. I will come back to cash flow, because I understand fully that this is a sensible question and also in related to our capital injection at the end of last year.

Market opportunities, we are now in a market environment that is I have to say, it's good for a company like Saab both when it comes to civil security, but also in defense of course. The last three years, four years discussions have been made around, especially in Europe and the United States, but also elsewhere to increase spending.

Now that starts to come into place after political processes. We have one of those, for example, also in Sweden where we are looking forward to see the result of that discussion and the governmental program for the next spending in Sweden.

But there are a lot of market opportunities, we just announced that we have been short-listed when it comes to combat systems for the Finnish Squadron 2020 program. We have also handed in proposal to Switzerland for options to 30 to 40 Gripen in the competition that is up running, same thing in Finland, that we're talking about 64 and it's an upcoming tender process for fighter aircraft in Canada.

And of course, you probably have read about the tender process to replace the Walrus submarines in the Netherlands where we have a joint venture with a Danish shipyard and going to -- we're trying to win that program for the future. So a lot of market activities.

These are the big ones, but as you can see high activity when it comes to small and medium-sized orders as well. Some figures.

Order bookings compared to last year's quarter one is less. What I would like to say is that we have come to a new high/low level.

That means that when we don't have big orders or medium big orders, we still have a huge growth when it comes to small orders and that's extremely important. As I just said, the opportunities for this year are extremely great.

Sales and organic growth of 8%, totaling 9%; and an increase of our operating margin from 5.8% to 7%, a significant step start of the year. And cash flow I comment -- I will comment a little bit more as -- in the next coming slides.

But this is a good development at least what we can see from a sales perspective, the last two to three years and we have a four-year here and also the development of operating income. Q1, 2007 is a little bit dope of a one-time effect when we received the third aircraft order of the GlobalEye to U.A.E., as a comparison.

So, we are going in the right direction and increase our confidence on the promises that we have delivered and we're going to keep those going forward. Cash flow again.

If we look at the cash flow from operations, we can see that 2016 and 2017 was positive. 2018 as we predicted negative, the first three quarters heavily negative and a very good cash flow in quarter four.

We see more or less the same pattern during this year, with a different lower negative magnitude. That's what we have tried to describe in those -- all those dots.

It's not something you -- but we have not tried to picture a shot from the Carl Gustaf, but you can maybe think that's the case, but to show you the magnitude of and the assumption that we have going forward. So another two negative quarters of cash flow and we foresee an extremely strong quarter four and then onwards when it comes to cash flow.

And I would also like to say that the money that was injected in the company those SEK6 billion was not planned to be used for this purpose -- have not been used for this purpose. Those money will be used for increase our organic growth more than those 5% and give the company a much better return over the time.

And there are a lot of opportunities that we can see. We have a unique situation when it comes to corporations and other business opportunities that we can capture with a much higher speed with those SEK6 billion compared to without those SEK6 billion.

That will increase the growth and increase the profit over the time in our company. In October, we also discussed a little bit deeper about the strategic focus areas and, of course, they are the same ones in 2019.

Market. Market strategy, it's really to capture the business out there, small medium sized mega orders and to continuously reshape the market efforts that we have around the world.

And we have seen a much better way of doing that in the past. Technology investments, of course, to create the stronger position.

Performance. Execution of major projects is key, all projects.

We are a very project-driven company and to have able to predict and also to shape and increase profitability over the time is key. And implementing the resizing and the reshaping that we discussed in the end of last quarter in quarter three is already taking place.

And, of course, innovation. And innovation, we have spent much more money on the research and development the last, well, 10 years.

We can now see great possibility with our products that we have brought forward that are module designed and can adopt to new way of technology, digitalization, AI technology that we already have in place in many of our products, but to utilize that to create even better products to meet the market demands. So the resizing and the reshaping direction, if I go back to that from a performance perspective regarding resizing plans and also when it comes to our product portfolio and the way how we work with the market, we have already started.

Of course, we started immediately after we announced that. We have done the employment reduction.

It's done and we can see effect of that already now. The portfolio analysis on how we should reshape our portfolio is also done.

And we have also made a review of our market approach, I would like to say. I don't see that the cost will go down so much on our market spending.

You should not foresee that, but we have created another way that will increase our possibility to have much more resources when it comes to big orders and big programs. And we also invested the last years and have now installed a new HR system for the whole of the company from a global perspective that gives us a much better view on efficiency.

So high speed and high pace on all these things. And I was asked today, so now when you have done a lot of these well reshaping or increased efficiency are you done?

We are never done. We are seeking each and every day for possibilities and we capture also those possibilities each and every day to increase our efficiency, and that's a normal way of running a business.

So going back to our outlook, it's the same as we presented in February and with an organic growth of 5% and a margin excluding material non-recurring items expect to improve compared to 2018 basically taking us another step towards an operating margin of 10%. So now over to Magnus.

Thank you. Thank you, Håkan.

Okay. Let's go through some of the details.

We had a strong quarter behind us and very happy to see that and is very much in line also with our plans. We have an order intake, which is consisting mainly on the small orders.

But as Håkan said, I think this is a very good way to build the base orders. And as we have talked about earlier also the smaller orders are normally quicker to convert into sales.

So it also supports us in the short to medium term to see the growth. And the sales is increasing 9%, organic 8% and that is across the board and I will show you that in a few minutes.

So that's a very good impact for the first quarter on that one. And that of course supports the performance also on the operating margin.

We are now at 7%, and up 1.2 percentage points in the quarter. And I will show you that also it's volume-driven, but it's also productivity-driven in some of these areas.

Cash flow, we talked about it. It's very much in line with our plan and it's very much driven by the Aeronautics business area where we are now in the preparation phase.

We're moving into the production and then in the delivery phase. And I will talk a little bit more about that.

We have also now as everyone else implemented IFRS 16, which is basically an accounting term for handling the lease future leases and you need now to discount those and put those in the balance sheet. And that has a direct impact now on us on roughly SEK2 billion.

So that's impacting our net debt. Order backlog and a very important KPI for us is roughly SEK100 billion.

It has been around that level for some years even though we are increasing sales and eating more from the backlog. And we can also see that the estimation now for execution of the backlog for this year is roughly SEK22 billion to – which is left to be executed.

And if we add what we have already done some SEK8 billion to SEK8.5 billion so we have some SEK30 billion, SEK31 billion and then we need another SEK4 billion or so to meet the outlook in book-to-bill and that is perfectly doable for us. So we have a good support from the backlog and for the year so that's good.

And now of course, we are focusing to building the backlog also for next year. We have a good base already.

Order size, we have talked about it. It's mainly the small orders and some of the medium-sized orders.

And – but it's very clear now that our sort of new low is really higher than previous. So SEK4 billion is a good level considering that there is no large order booked and we're of course focusing on that going forward.

So how does it look per business area? Yeah, the order size is – orders are fairly well spread among the business areas, which is of course important.

Highest level in surveillance, especially on the radar side, but also in the IPS has a good order intake for the quarter. The backlog supports growth in all areas.

We have done one adjustment, which I would like to highlight in the quarter on the backlog and that is in the light of the cancellation of the A380 program. So that is affecting the backlog in IPS in this quarter and it's roughly somewhere between SEK0.5 billion and SEK1 billion on that one.

So it's – but that's done now in the quarter. Sales growth good and especially driven by Dynamics in this quarter, with good deliveries and that drives also later performance, we'll see that one but that's good.

And also in IPS, we see more execution in those programs, so that's also positive. But then of course, the large programs is also driving growth both in Aeronautics and in Kockums.

Volume is important for us we know that in order to drive performance. And we can see here now some pretty big impacts in the quarter, especially Dynamics obviously doubling the margin and increasing significant operating income.

We see that also in IPS from a low level, but that is very good to bring that margin up. And then of course, Aeronautics now with the high activity level that we see now in Aeronautics that of course drives performance.

And then of course, we have also somewhat less spendings in T-X that supports that as well. Talking about cash flow, I wanted to again remind ourselves on where we are in the phase of our large projects.

And basically, this should illustrate a type of large projects that is very typical for the Gripen orders. You might have an advance early on in the program or an early milestones where you get paid.

And then you move into a phase and this phase can be of course several years where you do development work and where you normally get less paid than you're spending. And then in particular when you're moving to sort -- to close of the development phase and into the production phase and then delivery phase you have -- might even have more working capital buildup.

You build up inventories. You do the CapEx investment to be able to produce especially when you also change product line which we are doing now from Gripen C/D into E.

So we are exactly in this threshold place now where we are moving from this working capital buildup phase and into the delivery phase and of course there is production in between there as well. So that's very much where we are and this we talked about also in the Capital Markets Day.

If we then look at the quarter one, this is very much mirroring that discussion. We have a positive cash from operations obviously but, we are building up working capital in the quarter and also doing the investments.

So this is very much according to how the large projects are planned. Financial positions.

We have -- had a net debt of SEK1.5 billion last year. But of course you need now to correct that with the IFRS impact of SEK2.2 billion and we end up now with a net debt of around SEK5 billion.

And of course that's impact from the cash flow in the quarter and also the investments and we can see also a slight positive actually on the pension obligations this time due to good return in the pension fund. And I just wanted to add this because it's quite a big change in this accounting standard now, but the main impact, even if it's impacting many parameters the main impact is really the balance sheet and the net debt.

The focus going forward, very much order intake obviously, we are focusing on that. The market is with us and we have an updated product portfolio and we are ready to take on new orders.

Productivity improvement, we took a lot of actions towards the end of last year and we are now of course implementing that and getting the effect out of all of those actions. Project execution.

It's a year again with many milestones and very big milestones that we want to pass and need to pass. So that is full focus for us this year as well.

And of course this should generate -- start to generate cash when we move into those phases where we can start to get paid for all the work and the milestones that we have passed. So with that, I will open up for Q&A.

Thank you very much. So with that, we would like to open up for questions.

So first I ask if there is anyone in the room who has a question. Then I would like to open up the conference call for questions.

Hello. Good morning everyone.

A few questions from my side. First off, on the potential submarine order in the Netherlands.

Could you please give an update with regards to time frame and also the current competitive situation? Are there still four competitors in the process?

Or has that now been reduced down to only two players? Please start with that question.

Thank you. Well this -- the process is ongoing and the Netherlands government see a need of replacement of the Walrus submarines between 2025 and 2030.

That means in the year to come, there needs to be some type of selection. Well, I have no other information than that there are four competitors still involved and we are waiting for the next step from the Dutch government and to see what that will be.

I have a strong feeling that we -- and also a view of that we have a very good offer and an extremely good cooperation with our partners Damen that will fulfill the needs to the Navy in the Netherlands and also when it comes to the industrial cooperation. So let's see.

We are very hopeful and I think we have a strong offer.

Okay. All right.

Thank you. On the Gripen side, I wanted to move over to Switzerland if you have any news on that.

And also on T-X, do you have any other orders you're currently working with?

Thank you. Well the evaluation process will start when it comes to the procurement in Switzerland during this summer.

And there are of course some toll-gates that we need to pass. I mean we are the only one building a new fighter with the new capabilities, the new structure.

And from a product perspective, we have a strong belief that we have the right product to replace also the Hornets. That is now the case.

So that's very much in line with the next years. It seems like many Air Forces in Europe, but also for example in Canada will have a down selection process through 2021-2022 for a decision for delivery between 2025 to 2030.

T-X?

The main focus as we speak right now is to make sure that we deliver on the time schedule that we have agreed upon with Boeing and the U.S. Air Force.

And like that looks extremely well. We are now planning for our production facility in United States and we will announce in the months to come where that will be.

The interest for the T-X system is extremely high due to that many of the Air Forces around the world today need training for new pilots, but also flight hours for fighter pilots where it's too expensive to fly their aircraft that they have bought that is not Gripen E if I may say so then. So we see a big need and we have at least a handful of discussions as we speak.

Those deliveries will of course not be able to come before the supply to U.S. Air Force, but could come in a sequence not so very much after.

So it's a huge interest and -- well Boeing had an estimate of 2600 units. I have no well better guess, so let's see.

It looks very promising. I think we're exactly in the right time for that product and the whole system with simulators and other things for the future to take that market.

So just to be clear, you don't expect any additional T-X orders until the first deliveries so between 2018 to 2022 I guess for the T-X or...

I mean that could come. I believe that's very possible that that could come.

At the same time, we would like to make sure that we're keeping our promise to the U.S. defense forces and that we are not jeopardize that.

But I think most of the countries that have an interest to buy the T-X as we speak right now have a deep military cooperation with the United States of America. So I think that could be handled.

But I think first things comes first. I see a great likelihood that we can settle some orders before we give our first delivery.

But I think that will be also very much in cooperation of course with Boeing and the U.S. Air Force.

Okay. Thank you.

Maybe a question for Magnus then. So looking at the year and what you have in your execution pipeline I of course assume that Q4 will be as per usual the most -- strongest and most important quarter on earnings.

But how should we look at the operating margin development throughout 2019? Do you expect Q2 EBIT margin to increase compared to Q1?

That's a good question. But no but you're right on the first assumption that Q4 will still be the sort of strongest quarter even though we now have started the year very good.

So -- no but we are pushing every quarter to improve obviously. So I don't want to highlight that of course, but our outlook still stands.

We will have an improved margin in -- for the full year and so that still stands. And of course, the more we can do in the near quarters that of course supports and we can be more sure of course that we will also do that.

Okay. Thank you so much.

Thank you. I have three questions.

The first one is on investment in fixed asset. I think the first quarter it was the first time in quite some time where it actually fell compared to the year-ago quarter.

Have we reached a peak in fixed asset investments? And then where do you expect that to go from here?

No but I think you spotted a good thing. The level is a little bit lower.

And if this is sort of the peak also I cannot comment. But I mean there is -- we had significant investments last year.

That is clear. So -- but I mean we are still in the phase of -- I mean to describe it we're still in the phase of converting into new production facilities and upgrading for example the Kockums facilities.

So there are still things to do. And remember also that when it shows up in the accounting, it is when you sort of are done with that investment.

So some of those things we sort of initiated probably one, one-and-a-half years ago. So yes, you have one point.

We are probably reaching -- getting closer to that point.

Thank you.

Yes and I think what is important to know that we started the serial production for the Gripen E in Q1 in January this year and we are gearing up. Of course, extremely important to know that those investment have been done for a certain of time and will be booked.

So if you look at the bookkeeping and the cash flow it's -- but I think from a cash perspective I very much saw that we are flattened out and probably reached our peak.

It's going to be -- it's still a high investment year, CapEx year. That -- let's be clear about that, but yeah.

Okay. Second orders -- second question.

You talked about the strong underlying or the base order business. And I think it's on a 12-month basis we're at the almost five times where we were on base orders, doubled up where we're five years ago.

And is there a particular wider area where you would say that base orders have improved mostly now or in a clear positive trend? Or is it really broad and across the portfolio?

Anything standing out?

Well, I mean, if you looked at the -- especially Dynamics support weapons and ammunition doing tremendous well. We're doing everything to buy gunpowder for be able to supply, it's a shortage of that.

I think we have been extremely -- been awake for that problem. So we have a very good situation of supply for our perspective.

I think that's one of the support and service as well, of course. It's giving this type of orders our consultancy business that is growing.

But I think we are much better to seek and understand the need around the world now with our local presence where we can do very quick deliveries, other type of support and service than we did in the past. So, this is something we have been working with extremely hard to bring that, what you can call bread-and-butter business or whatever bring it forward and we have higher aims than this.

But we have a much higher lower level in our order intake today than we had a couple of years ago. Maybe you would like to add something?

No, I agree. We could also probably mention traffic management …

Yeah, of course.

… because there's a good order intake and those are normally that type of range of sizes actually. So, I agree, yeah.

Okay. Thanks.

Final question is on capitalization of R&D. Another step-up in Q1 here and quite a bit above where we've been the last few years.

For how long do you expect capitalization to accelerate faster than amortization of R&D?

Yeah. You have a good point there as well.

We are, of course, continuing those programs that we initiated a little bit more than a year ago, especially on the Gripen side where we do the ...

Industrialization.

Yeah, industrialization and the export version of Gripen. So that is -- that work is a continuation and it will continue for at least this next year in a relatively high level.

So for some time, still this will continue.

But I think it's important to underline that I mean, we have now or in a later phase of the development of the Gripen, for example, the GlobalEye our sensor platforms, the industrialization phase we can now start -- to really start to deliver. And that gives a different perspective on this question.

And that's something we have very much focus on when it comes to depreciation and amortization of development cost to -- well, be on a level that is not exceeding more than the depreciation going forward. So -- and I can't really see that we're ending up in a huge -- I mean, we have four enormous projects ongoing at the same time and maybe we are lucky if we will have that.

Again, if we look at 2022, 2023 but I can't really see that. That doesn't mean that we will not be involved hopefully in big programs going further, but maybe with a different characteristic of investment.

So, I think it's the way of how we build the company from not being a support and service company with no products to a project oriented company with the best technology and platforms that -- giving us the way forward that we have now with the growth and the underlying EBIT and the cash flow will come, but it's an extremely focus area.

Okay. Thank you.

Thank you.

Thank you. I have two questions.

The first question is on the gross margin development in the quarter. It was down by 60 basis points year-on-year, despite that you have quite good organic growth and good capacity utilization in the factories.

Can you explain what was driving the decline? Thank you.

I can start. Basically, we have seen this trend, and I mean, if you followed that for some time, obviously.

And I would say to a very, very large extent, this is a mix issue. And you have to look at the gross margin in view of how much of the execution volume is customer funded R&D type of business where you normally have a much lower gross margin and where do you have your own R&D spending and that has a big impact.

I would say that this is the majority of the explanation of it over time. Then a specific quarter it's, of course, difficult and it's very much a mix issue of what you are producing in that quarter.

But on the trend wise that explains that I would say.

Yes, and I can see. I mean, we measure of course the assumed gross margin from the business that we have won each and every month.

And there are no sign of that, the business-for-business if you compare the business areas that we are decreasing our gross margin. Then of course, when you have fewer delivery for example in Dynamics compared to Aeronautics, you will see a total change in gross margin, but like-for-like, I think the trend is well pointing in the right direction.

Then of course, it's the other equation it's of course not just price, it's also execution. And we are extremely cautious when we do our estimate of the future profit in each and every project.

And instead of having a big well gap in our negative gaps and coming up with big surprises, we try to be in the beginning extremely conservative. And having many of our big programs coming to a certain level and other programs, I think at least, my view is that the trend is in the right direction.

Okay. Perfect.

And the second question is on your restructuring program and in particular the headcount downsizing. You said that, you have done already the employee reduction and that consultant's reduction is ongoing.

However, when I look at your number of employees in the company the numbers still point to an increase quarter-on-quarter and some 4% increase year-on-year. Can you explain that?

Yes. Thank you for that question.

It's important, because we are growing our business with an increased productivity and the need of an increased number of employees. We have in the United States and Australia.

We also have that for production for example for Gripen E. At the same time, we have less need of engineers from a very high level and so on.

So we are measuring that you can say per business area and segment. The big reduction, we did in the program the first program that we did some accrual for was mainly due to people that didn't – was connected to a project where they could put their time on administration and other people.

So we are measuring our productivity, of course overall from a big holistic perspective, but also from each and every area. And there, we see a productivity increase and the increase of productivity in our administration is there.

One of course is the reason of the program that we have gone through and another thing is of course volume driven.

And then we have also a – there's also a timing effect, when you do these programs. We might have agreed with all the people that we have now agreed with to do something else but there is also a time lag of three months, six months on when you – when that is not anymore counted as an employee.

So that has also an impact on this one I think. So – but otherwise, it's exactly what Håkan said that we have also increases in our real production right now.

Yeah. Okay.

Thank you.

Hello. Good morning.

And I have a couple of questions and they are related to Sweden and the Gripen. And when I look at the development, it looks like Latin America is growing quite fast 34% growth in Q1.

And Sweden is declining a bit now in Q1 and it's been more flat. Is this related to revenue recognition for the Aeronautics area and Gripen?

Or is there anything else that explains this difference between Sweden and –

I think we – what we can see when it comes to order intake Sweden is rather weak. But I think also that's very much waiting for the investigation or the project ongoing for the next defense bill coming up on the 14th of May.

Overall, when it comes to the Gripen system, if we put them together the E and F and C and D from a Swedish perspective, it looks very promising. If the case now is that, Sweden will continue to fly the C/D much longer than 2025 2026 maybe to 2035, it's good for our system.

Because it's good we can share development it will be – the development on the C/D that we can utilize also for the E and F and the other way around. And the Swedish Air Force will then probably go up to 120 aircraft.

So I think it's a little bit waiting for the effect that we'll have as we speak in this quarter.

And also I think it's clear that the Gripen program for Latin America has a very big impact. So when we now execute that program you will see big increases.

So that is clear. In Sweden, though, we have many, many businesses in the other business areas as well.

And so it's less direct related to, of course, specifically this program, yeah I think that's.

Okay. Great.

And can you also give an update on Gripen E production preparation the timing of deliveries and milestones?

Yes. I mean, we started the serial production in January this year.

And the first two aircraft for Brazil and Sweden will be put to the use of the Brazilian Air Force and the Swedish Air Force during late this summer. And then we will start the final and the delivery will start mainly 2021 and onwards for Sweden and Brazil.

So it's no change in that time schedule. And we're coming closer and closer and that we have a good track record.

And of course, everything is challenging in these type of projects. Otherwise if it had been extremely easy, we probably have not made a good product.

But we are very confident now of the -- well, since 2013 with all the things that we have gone through and also that proven and that met our time schedules and also the capability will be extremely good in the aircraft or are already. So far so good.

And the authorities as we said, when we released the full year last year that we will load all the bases, as we say in the production area this year. So we are sort of in the one, first or second now and we're going to move towards the end of the year to have -- or the whole production loaded and then we should start to see…

Yes, I mean, there's the final -- that's important to understand that you'll probably do that. I mean, when you start serial production you do that with parts and other things, the final assembly is in the end.

So it takes some lead time, before you see your final aircraft coming out of the production line, but we have started the serial production to build up and I think that also proved the confidence that we have in our time schedule.

Okay. Excellent.

And my final question is regarding the cash flow outlook for the next quarters and for the full year. You said that it will still be negative, of course, but still better than in 2018.

What was -- what is the figure that we can compare it with? What you had in 2018 SEK3.3 billion negative or…

So we had operational cash flow of SEK2.4 billion, right, negative last year, yes.

So that's the figure.

So what's included in that SEK2.4 billion?

What is included?

Yes, Is it underlying CapEx and working capital?

Yes. I mean, do you mean the reason for last year's negative cash flow or…

No. It's -- the definition you mean.

Yes. I understand that but I mean trying to understand where you are going in the next three quarters, of course…

Yes, yes. You mean…

…because you have a lot of different cash flow in the cash flow lines.

No, no. We will, of course, continue to build up working capital in the next two quarters you can see, of course, also CapEx.

And then we will have good milestone payments and thus reversing working capital in towards the end of the year I think if I understood your question, right. Yes, that's how it will sort of pan out, yes.

I think what we tried to describe when it comes to cash flow and normally we don't guide on cash flow, but due to the discussion we have had with you and others, especially after the capital injection where the money going to. We still would like to go back to 2016 Capital Market Day, when we explained that we had the difference in the milestone payment.

And the milestones in the project will give us some negative or give us negative cash flow in 2018, 2019. We are following that plan basically and that's according to the execution.

And if you look at my fifth slide, with all those haggles, Scott, I don't know what that's really the shotgun shots. Of course, we do everything to capture as much cash as we can.

What we know it's going to be better than last year. And so -- and that's what we tried to explain, but we can't be more specific on that.

But as I also said from Q4 this year and rolling 12 forwards, we assume that we then are coming to that better cash situation and better cash conversion as we have shown and also Magnus shown in his slide going forward. So we have another two quarters that we can see forward.

And then on a rolling base, I will not say that we will not have a one quarter with negative, but from a yearly perspective, we will see much better cash conversion going forward.

Okay. Excellent.

Thank you.

Yes, thank you. I think questions was basically answered.

But on the serial production of Gripen that you now have initiated during Q1 and you're filling out your production slots, but how does that play out? I mean, are you -- is that one reason why you're building up a lot of working cap during the process as you are filling up those production slots?

And you will be ready by the build out of that during 2019? Is that what we should understand?

I would say that it's a combination of let's say, the Swedish program and like you say the facility buildup because of course most of that will be done in Sweden upfront. But it's also partly in our projects towards Brazil.

So it's both of it. But I think you are very much right in your assumption.

I mean, you have, of course, when you start something from zero as you do with producing the Gripen E, you will have a lot of production in work compared to the income for a short time or period before you start to deliver. But again, if you listen to our guiding when it comes to our cash flow, then you understand a little bit how that will materialize over the time.

So -- and, of course, there are many details, many parts, there's supply chain, a lot of other things that we need to have in place. And, of course, we try to be as lean as possible when it comes to working capital.

But you have compared to -- when you have a production line just ongoing, if you will just increase the rate of production compare if you start from zero, a little bit more build-up of capital for that period of time. But we have taken that in consideration when we have tried to describe the cash flow.

Yes.

Coming.

Perfect. And when we take to the risk.

I mean, now you have been developing and designing the Gripen for many years and now it's about to start producing the fighter. It, of course, also involves a lot of risk.

When will you be more eager to say, wow, this works and be a little bit more relaxed. I guess starting off production and also do it in an efficient way is something that you're really eager to solve delicately, of course.

But when is the next step? When will you believe that it's less risky for the entire project?

First of all, I don't think you'd like to see me relaxed. Then it's not a discussion.

No, joking. Well, of course, when it comes to development after this such long period of time, we are more confident in what type of product we have brought forward.

And there are no signs that we will not meet the requirement asked from our customer. And if you look at the official notes that the FMV did to the government and that the aircraft will be ready for being put in action in 2021, you can see a little bit of our confidence.

But still, of course, there are things that we need to do and need to meet and things like that. So we have full focus on that.

But today -- well, after this year we will have eight flying platforms. We will be much further on to the integration of sensors and our new avionics system.

And touchwood, it goes very well. So that's how we see it.

And I'm not a relaxed person. I always try to find things, so –

But of course we are --

…everything could be better.

Yes. We are meeting critical milestones throughout, obviously.

And I mean to get -- the first one was, of course, to get to the first test airplane in the air and so on. The second one is now up.

And so here we all -- we meet those critical ones, but I don't know when we will be super relaxed. Probably when we have up -- gotten the ramp-up up --

But I think this is not a business where you are relaxed.

No, probably not.

Because you should try -- you're so deep and bold in everything and then you have main focus on things that needs to be fixed. And when that's fixed, you find another area to stress.

Yes.

And I think that is the key to our success not taking anything for granted and trying to work all the time with our people, our really good people to bring things forward and bring problems up to the surface, so we can solve them. And I think that's rather unique for this type of company.

But, I mean, we have a much better situation now compared to a couple of years ago.

Yes.

If you would ask me. And we are confident that Grip be an extremely good fighter aircraft that we have now started to put into serial production.

Okay. Perfect.

And one last question on the upcoming Swedish defense bill, or the mid-May outcome. I read some pretty odd articles in the Swedish press that you have -- that the decision or the indication that there were -- the Swedish defense force will keep six C/D fighters going forward as well that -- and that there was some interpretation that you had missed out on new sales.

But correct me if I'm wrong, but, of course, never been any discussion that the Sweden will order more Gripen E fighters, maybe with the exception for the -- from the former Defense Minister speculating about 10 more E fighters many years ago. But, I mean, that has never really been on the agenda that the Swedish Air Force would go for more than six E fighters.

I think this is great news for us as a company, because there would be more flying Gripen aircraft, if it's C/D or E and F. Of course, it's over the time have a point, but if we take -- if now Sweden decides, but it looks very -- the likelihood of that is, it could have -- my opinion, without knowing what is written in this bill, very high that they will continue to fly the C/D maybe post 2030.

It's good for our existing customers around the world, Czech Republic, Hungary, Thailand and continue with that business as well, extremely good news. But our Chief of Air Force, Major General Helgesson, have been very clear he needs 60 aircraft, more than the 60 that we have ordered.

And he says, in the long run it has to be another 60 of Gripen E. So he have been extremely clear on that from his needs.

If now we can have -- I don't assume another 60 C/D still flying that means an enhancement or an increase of our Air Force rather significant and that is not at all negative for us.

And the fact that the Swedish Air Force are likely to continue to fly the C/Ds is that something that supports you also when trying to promote C/Ds for the export market?

I think it's an extremely important question due to sharing of the development and other type of costs related to the platform going forward. So if now that will materialize, if I will give a guess, I think that will happen then the likelihood of selling the C/D that still is one of the best fighter aircraft that you can fly today and operate we'll have a much higher likelihood also to increase numbers in present -- of present users, but also the new users.

Okay. Thank you, perfect.

Thank you.

Yes, good morning. It's Sash Tusha of Agency Partners.

I've just got two hopefully fairly brief questions. Firstly, I missed the quantification of the A380 adjustments to the industrial products backlog.

Just how big was that?

Depending how you calculate that with the currency and things like that between a half slightly under SEK 1 billion. Swedish crowns not pound sterling no.

Okay.

They might yet convert. Thank you.

And then the other question was on Dynamics. Given the -- just given the very strong first quarter I wondered whether there were any exceptional project-related issues that benefited you in Q1?

You've had other quarters where deliveries of missile components for export customers have had quite a significant effect on profitability. I wondered whether there was anything like that.

Or is this just your own Dynamics products being delivered at a very good pace and with good profit?

The last one. I think if we go back and see Dynamics of course, it's also a part of the transformation what we have done within Saab.

I mean, we were really knocked down in 2013 where we didn't have any order backlog and maybe not so updated products and we put a lot of efforts into a new Carl-Gustaf version a new 84 version and an enhancement of the RBS 70. And that is really paying off now.

And we start to have -- we now have an extremely good order backlog that really supports sales per quarter and year going forward. So it's a little bit a new situation and a positive situation.

And when countries would like to increase their defense capability in short terms Carl-Gustaf 84 and RBS 70 and also training is a very good way of increasing performance in your armed forces and that's what we can see.

Great. Thank you very much.

Thank you.

Okay. I think there were no more questions on the conference call.

We have received a few questions from those who are viewing us on the web. So I would like to start with a question or it's actually two questions from Sandy Morris at Jefferies.

And the first question is regarding GlobalEye. If you could give a progress update or any insights as to whether there are any campaigns underway right now?

If we go to the project, it goes knock on wood extremely well. We're doing our -- we did our first flight test one year ago.

We are now doing with the full integrated mission systems. We're flying many hours with good data.

And the first program or this program we will start to deliver it during next year according to plan. So it's a very good program for the customer and us.

And the capability of the system is mainly better than we believed. Yes, we are in discussion with some customers of the new orders that we hope could materialize in the year to come, but I can't promise that.

But there are huge interest for that as well.

Very good. The next question is related to working capital.

Should we expect contract assets to keep growing and contracts liabilities to keep coming down? Just a broad hint would be great.

Yes, I mean, we'll continue that at least for the next two quarters then. Yes, correct.

Good. Thank you.

And we have a question from Joakim Ruth [ph]. He is wondering if the Gripen E will be tested in the Swiss tender process that is ongoing for fighter aircraft?

That's our aim.

This year I think he means here. Yes?

Yes.

Okay. Very good.

And then we have two more questions that we have briefly touched upon, but I take them again from Harrell Hwan [ph] at Cairn Capital. And the first question is related to R&D as a percentage of sales which now was down and if we could provide some guidance for R&D as a percentage of sales during this year and possibly also next year whether it will fall to the level we see now?

And he also asked are you concerned that these levels are not sustainable given the high levels of some of your defense peers?

No, I mean if we look at our spending on defense compared to our revenue I think it's extremely high. It will stay on an absolute number on a high level.

I -- it could be a little bit different, I mean we are growing our sales. If you do that with 8%, you can't expect the increase of that in the short-term.

And we will not spend R&D money just for fun. Our main aim is to have a payback to our shareholders and make Saab's standing stronger in the international market with more hubs around the world.

It's not unlikely that we could see more customer-funded R&D coming up in the years to come. In the discussions that we have that will increase this figure as well.

But also the transition of technology that we see will create the need of fairly high spending on R&D going forward. At the same time, new tools of developing new products gives you a higher productivity to bring forward things.

So, I think it's important to understand when utilizing for example artificial intelligence or new simulation methods and technology; it's also changing where you can bring forward things with a higher pace with better performance in a new way. So, we are in a little bit of -- but innovation for us, the number of innovations and the importance of innovations and creating new product with higher performance, that's a key thing that's why we are existing the way we are existing today.

Very good. No more comments from you Magnus?

No more comments Ann.

Good. And the next question is related to gross margin which we touched upon before and that it has dropped now year-on-year this quarter and that it follows a margin compression trend going back to 2012.

And what are your thoughts on the gross margin trends going forward? I think you've touched upon this before.

I think at least if I see the business that we are acquiring had a good trend when it comes to gross margin and then it's got both -- two sides. One is price, but also our productivity that we can see.

The other thing is that we always have this mix where also the balance -- or the P&L will be for a different setup if you have a very much customer-funded R&D according to the agreement that shows less gross margin, but still have a fairly good operating margin. So, it's -- you have to look into it from each and every business area and maybe even business unit to understand the implication on the bottom-line.

Thank you very much.

With that we have no more questions from the web. So, is there no more questions here in the room?

Yes one question.

Is it on? Well, thank you very much for the briefing.

I have just one question and that was a bit relating to the former briefing. There have been reports on sales of advanced radar equipment to the U.S.

I think it was their Navy. Could you comment a bit on that if it's a breakthrough and the status?

Thank you. Well, I have to say we have an extreme breakthrough when it comes to our sensor activities, mainly connected to Syracuse and, of course, also to Sweden, where our Sea Giraffe if not that already have happened but will be in the process being happen then there's up to 100 surface vessels would utilize that radar just show our capability.

We are extremely pleased of the development of our activity in United States as we speak from an order perspective, but also from a productivity perspective. And I think also winning T-X; it starts to be consider us an extremely important partner for U.S.

defense forces and we are -- will be on a different place on the radar screen if I will utilize that for the big customer United States. And we have technology that make difference to the security of the Armed Forces and also the capability to strike back for U.S.

as well.

Thank you very much. So, with that, I would like to conclude this presentation.

Thank you very much for being here and thank you for listening in and viewing us on the web. We look forward to see you back in July when we present the second quarter results.

Thank you.

Thank you, Ann-Sofi.

Thank you.