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Edited Transcript of SAAB B.ST earnings conference call or presentation 22-Oct-19 8:00am GMT

Q3 2019 Saab AB Earnings Call

Stockholm Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Saab AB earnings conference call or presentation Tuesday, October 22, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Håkan Buskhe

Saab AB (publ) - Advisor

* Magnus Örnberg

Saab AB (publ) - Executive VP & CFO

* Merton Kaplan

Saab AB (publ) - Head of IR

* Micael Johansson

Saab AB (publ) - Deputy CEO & Senior EVP

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Douglas Lindahl

Kepler Cheuvreux, Research Division - Analyst

* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

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Presentation

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Merton Kaplan, Saab AB (publ) - Head of IR [1]

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Hello. Good day, and welcome everybody to Saab's Third Quarter and 9-Month Earnings Results. I'm

Merton Kaplan, the new Investor Relations at Saab.

Today, I have in this room with me our President and CEO, Håkan Buskhe; and my Chief Financial Officer, Magnus Örnberg. We will start this session with our presentation by Håkan, followed by Magnus, and then we will allow for a Q&A session, where the audience can ask questions straight. And we also have this sending live on the web and a telephone conference. And we will take questions from the conference and for those audience on the website as well.

So with that, I leave the word to Håkan.

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Håkan Buskhe, Saab AB (publ) - Advisor [2]

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Thank you so much, and welcome to you all. And as we normally do, I will take you through the main highlights. Magnus will go through facts and figures. I will also take some figures and some facts and -- during the Q&A session. And just before that, I will ask Micael also to join and give a small introduction or an introduction possibility for him.

So if I start with the highlights for the first 3 quarters, 9 months, we can see that we have had an increase of order bookings with around 11%. And that's, of course, fairly strong due to strong Q3 if you compare to the first half year. And we also announced that during the report of Q2 and the first half year that we will have a strong second half year. And we can see the underlying business and the underlying interest for our product is still extremely strong.

We could add to that frame contracts that are fairly -- well, compared to other years extremely big, especially in Dynamics area when it comes to support weapons. That is nearly up to SEK 6 billion this year. So that is also something we need to execute going forward, but we don't put that on our order backlog due to what we call they are underfunded because you don't get the full commitment. But normally, they don't, well, in this type of frame contracts.

Of course, main order for the year is the Squadron 2020. So of course, a big impact with nearly SEK 4.5 billion. But it also shows that we are technical relevant in an extremely important area when it comes to sensors, when it comes to weapon stations, when it comes to communication and others. And I will come back to that.

Something that we have worked with strongly in the last, I will say, 9 years, especially since being put our market organization into place in 2012 is to work with follow-up orders, small orders around the globe. And we can see an increase of those for nearly 19%.

Improved performance. It's good to have a great order backlog if it has a value and if you can convert it. And I have a good -- we have good examples on that we are increasing our capability on that through improved performance. And we are continuously focused on efficiency.

Extremely important milestone for the year is the delivery of the first aircraft in September to the Brazilian Air Force. That shows that we are on track with the Gripen E and F program, both for Sweden and Brazil. And that's very much linked also to our cash flow. We already announced in 2017, due to the milestone payments and the setup of the contract, that we will have fairly rather hard situation when it comes to cash flow '18 and '19. But we also said from quarter 4, according to our milestones and as long as we are able to deliver on our projects, we will start to have positive cash flow in the years to come. Now we are entering into the delivery phase.

And of course, GlobalEye, that is also another huge program. We will deliver the first aircraft, according to the contract, in time according to budget in the end of first quarter next year.

The market and the market situation, it's a positive market for Saab as I've said many times now, maybe not so positive for the rest of the world. But due to the change of, if I may say, behaviors between world leaders and nationalism and other things, change in trade discussions, the security investment have increased, especially in the western world. And NATO a couple of years ago took a decision to go to 2% of gross national product. 20% of those 2% should be investment in systems and hardware. That is a little bit higher. And Sweden, as you also know, have decided to go on that road as well. So we can see a stable, growing market.

On the other hand, of course, as I always have said, a world in turmoil and in extreme is not good for anyone. But most of our customers or all of the customer, at least that we are facing and selling to, they would like to defend their way of living and not start a war to increase and avoid -- increase security and avoid conflicts.

And to be able to meet that, you need to be technically relevant. No one is buying from a company or a company like Saab if you don't have technically relevant products. And during my 9 years, I can -- have seen a huge development of the -- of technology connected to defense, but also others. And due to that we have doubled our investment in R&D, we are now ready to deliver on the demands that our customer have.

So we have a unique portfolio. The demand is there. And you can see on the figures that are captured that. It doesn't mean that we are not facing competition, but not facing a hard market from a competitive perspective, but I see that we -- it's a huge interest to work together with us.

Some of the events during this year and this quarter, of course, the contract to the Finnish Navy, and I have a special slide on that, in surveillance, support and service and Dynamics, huge demand on our support weapons. And that's also something we have put lot of effort to build the next generation of those type of weapons.

U.S. is growing, not just the trainer program, but also our business in the United States and a big program like G/ATOR. It's a radar that we have been involved in for many years. Now it's full production phase on that. And also some support and service contract being signed and continuous high demand for Carl-Gustaf and AT4. And so that's a good base for the future.

Squadron 2020 shows that we are relevant when it comes to digitalization, when it comes to command and control and management system, weapon integration, sensors, be able to take care of the full integration of probably the best naval ship that come to be built in the years to come.

And it's the Finnish government and the Finnish Navy that have awarded these new frigates. And as you can see, there are sensors, there are command and control, there are communications or tactical. And earlier, we also won the light torpedo competition. And that proves that Saab have a good product and the next generation, the way of working, building and integration of sensors and fire control.

And it's not just in Sweden and for Finland we're doing that. We are also leading that work in Australia and around the world. So it's a network where we develop this type of products.

Some financials, and Magnus will go back to that. The quarter, extremely strong. Of course, you can always argue when a big order is coming or not. But in a way, we should not be ashamed of that, that it stands up in Q3, but also the underlying order value is good.

Sales. And sales for us is mainly the conversion of our order backlog and into sales. As you know, we are working with percentage of completion in many of our activities. The only exemption is mainly Dynamics. So it shows that we are meeting our milestones and also that we can convert the sales into profit. And that's in line what we have told the market already in 2016 on the journey towards those 10%. And again, I would like to underline that some of our business units should earn more than 10%. Some due to contractual issues and time will have a little bit less and -- but we will come to those 10% in due time.

As we had guided, our cash flow for the third quarter is low. But from the fourth quarter now and onwards, we see a positive trend and mainly due to good execution of our projects, mainly within aeronautics and surveillance. So the same picture. But accumulated for the full year then, we have growth and we have a stable underlying. And probably, it's much better to look the accumulated figures over 3 quarters, 11% up, 34% up on adjusted EBIT. And it's a good start and proof on what we have said that we're going to deliver upon.

And also, if we look at sales accumulated and compare that to a couple of years back, if we go to 2015 and compare that to 2019, it's close to 50% up. And that's good, shows that we are able to convert our order backlog into sales and also add on order intake. But it's also demanding to grow in this rapid speed and -- both when it comes to OpEx and other things. And last year, during quarter 3, we announced this huge efficiency program. That program is going according to schedule and it also shows in the figure that we are able to take out cost.

Cash flow, the reason why you do business in the end of the day. As I said, we guided already in 2017 that it will be 2 really hard years when it comes to cash flow. And that's the reason why we started also to give a little bit more of guidance. Before that, we haven't done that. And as you can see, according to the guidance that we gave also after Q1 this year, we are in line with what we have said. And if you look at in the range of Q4, we expect good cash conversion. And that should be the start of the coming years, connected to the setup of our contract and delivery to deliver good cash flow going forward.

Outlook. Not to shake the world, we have kept outlook as it is. But it also show that we are in line with what we have said in the past months. And especially also, I would like to remember you about the rights issue that we did 1 year ago. And that's mainly, again, to take the opportunity to be involved in growth. And we said during that time as well that we expect and our aim is to grow more than 5% going forward, to justify and deliver back on those SEK 6 billion that we brought into our accounts.

So with that, Magnus, please. Take those away.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [3]

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Thank you. Thank you, Håkan, and let's run through some of the financials, see what we have.

I'll start with my summary slide, where we're just confirming that we have continued growth in our small orders now on a record level. So that is really a trend that we have seen over some years now.

We have a strong sales increase and this is, as Håkan said, mainly driven by our execution in our large contracts, but also, of course, the higher level of the small orders, which are quickly turned into sales. And this improved volume is also supporting our operating income development and also the margin. And I'll come back to that a little bit more in detail. But it's -- for this quarter, it's mainly supported by surveillance business and also support and services. But of course, on a year-to-date basis, we have a good impact from Dynamics.

The operational cash flow is impacted mainly by very good execution, but, of course, very few milestones in this quarter. And this is mainly in our aeronautics business. And this is very much in line with our plan.

The backlog. Strong backlog, supporting our growth going forward. You can see here that we have roughly estimating some SEK 9 billion to be executed until the end of the year. And if you add that together with the sales that we have performed so far, that supports our outlook in a good way.

You can also note that already for next year, we have now estimated some SEK 26.6 billion to be executed next year, which is, of course, a very good level at this point of the year and higher than at the same time last year. So good support for continued growth.

And order size, we look at. Now we have specified in small, medium and large. And we have, of course, good continued level of the small to medium. But of course, also this quarter, we are now recognizing 1 large order or even the small mega order as we discussed earlier. So that is good to have now also in our backlog.

And if we look on the -- where have we seen these orders. Obviously, now surveillance got good improvement in this quarter. But we see also growth in Dynamics, support and service and IPS. And the backlog in the various BAs, which is also very important that we have good distribution that is supporting the growth going forward in each of these areas.

Sales. We can see that good execution in our projects in all BAs except for Kockums. We have now growth or even good growth. In aeronautics, of course, it's a full speed execution of the projects. Dynamics had very good deliveries, especially in Q1 and Q2. And that's very much a timing issue on those deliveries. And then in support and service and surveillance and IPS, we have solid growth so far. And Kockums, a little bit less, and that's more of a timing on how the project execution and also some spare parts and upgrades, and I'll come back on that.

Margin. Yes, of course, in light of these good volumes, we get support from the volume in many places, but also the execution of our projects are going according to plan in many places. Aeronautics, of course, volume is important. But here, we have good execution in the projects supporting it, Dynamics, good deliveries. Surveillance, also good execution and volume. And support and service, continuing on a good level.

IPS, we have improved year-on-year from a low level. But here, we want to take that step by stack up to higher margins. In Kockums, we see a little bit lower volume impacting the result. And as we discussed also after Q2, we see start-up costs or going from development into production, where we have some costs in the quarter. We have also taken some actions to lower some other costs. And you can see that the result now in Q3 is better than what we had in Q2. But we have -- we are working on moving that to better levels as well.

Cash flow. Good cash flow operations and -- but continued buildup of working capital. This is mainly in the large contracts. And we will see better milestone payments going in Q4. We are continuing to investing in our activities, mainly in -- both in R&D and intangible investments. And this, of course, should drive growth going forward. Slightly lower investments in tangible assets.

Our financial position. We have net debt, as we have described earlier, of roughly SEK 10.5 billion. To a very large extent, this is driven by accounting treatment of our pension liabilities, and we have specified that clearly here also. We are now discounting the liabilities with even lower discount rate. So roughly SEK 5 billion, we have an impact there.

On top of that, we have also the IFRS lease treatment of roughly SEK 2.5 billion. So net of that, we have a debt of roughly SEK 3 billion. Strong balance sheet, good equity-to-asset ratio of more than 33%.

And going forward, yes, our focus areas are, as we described last quarter, order intake is very important, going to continue with our efficiency program and productivity improvement. Project execution is key for us. And of course, in Q4, we're going to drive cash generation.

And with that, I ask...

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Håkan Buskhe, Saab AB (publ) - Advisor [4]

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Yes. Before we start the Q&A, I would like to introduce my successor, Micael Johansson. We have been working together for the last 9.5 year, extremely skilled guy, working hard and a good friend. And I'm extremely happy that he's the guy taking over and will take on the challenges that still are there. It's not a set table, to be honest. But a lot of opportunities and a lot of hard work remains.

So Micael, if you would like to do a short introduction of yourself.

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Micael Johansson, Saab AB (publ) - Deputy CEO & Senior EVP [5]

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Yes. Thank you, Håkan. That was a nice introduction, I must say. Yes, my background is long with the company. My background is actually mathematics and computer science. I came into Saab like in '85 as many others working as a systems engineer. And then after many years, I've had many different management positions. I was heading the business area of surveillance for 7 years. And in the last 3 years, I've been working as the Deputy COO to Håkan. It's been a fantastic relationship, I think, working with Håkan. And I think he's taken the company to a new level during the last 10 years. I think we have been a great team.

I really look forward now to -- and we are in alignment about the direction of the company, of course, as I look forward to taking the company further now. Focusing on what Magnus has been talking about executing our backlog is really, really important to us. And then, of course, continue our internationalization of the company is important. Working with our partnerships, both in Sweden and internationally, is important. And looking at the technology pace that we see today, I think, to continue to invest in R&D will be also really important to us going forward.

So I'm really excited and honored about the opportunity to lead such a fantastic company with great technology, great products and fantastically skilled employees. So I look forward to it. Thank you.

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Håkan Buskhe, Saab AB (publ) - Advisor [6]

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Thank you. Thank you, Micael. And with that, Mr. Kaplan, if you can try to coordinate our Q&A session.

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Merton Kaplan, Saab AB (publ) - Head of IR [7]

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Yes. So we're going to start the Q&A session, and we will start that in the audience and we'll go on then to the telephone conference, take questions there. And then we try to pick up the questions that we received from the web. So we can have the first question from Agnieszka.

Can a microphone go there, thanks.

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Questions and Answers

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [1]

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Agnieszka Vilela, Nordea. My first question is on your full year outlook. And I wonder if you can be a bit more specific when it comes to providing the outlook, because you still keep the same guidance that you had before of sales growth of 5%, for example. And year-to-date, you've been growing by 11% organically. So should we assume that the growth will decelerate now in Q4? Or is it just you're being a bit vague when it comes to outlook?

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Håkan Buskhe, Saab AB (publ) - Advisor [2]

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Well, I think it's a little bit of a combination of being vague or -- and also what type of closing effect you will have in the end of the year that could be in the first quarter or the end of the second quarter. The underlying growth is strong. Then, of course, it's an extremely exercise to do this type of outlook and each and every time we discuss that. But as I said earlier, we have, of course, a commitment to grow stronger than those 5% over time. So if we can end it there, I would be grateful.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [3]

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But then if you end it at 5% for this year, it would mean that your sales will go down in Q4.

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Håkan Buskhe, Saab AB (publ) - Advisor [4]

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We haven't said that. It depends on certain issues. But I mean, we haven't said that we will be lower than 5%. That is then. And we haven't guided either during this year on a quarterly basis. So we are not really trying to end up also to try to guide in all different accounts going forward and also quarterly and then monthly and things like that. So...

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [5]

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And I think also we had record high Q4 in sales last year. Not that we don't want to beat records all the time, but just acknowledge that as well.

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Håkan Buskhe, Saab AB (publ) - Advisor [6]

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You can see if you look at the outstanding or -- the order backlog are exactly the same. That should be converted in Q4 this year compared to last year. And then, of course, it's also how much do you turn around immediately. So we are a little bit cautious to not promise too much.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [7]

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Okay. And then, usually, your orders are back-end loaded. Now Q3 was quite strong. But do you expect strong orders even in Q4? And also, if you could help us with the pipeline when it comes to the large orders. What's next there? What are you approaching? How will 2020 look like when it comes to this big procurement decisions?

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Håkan Buskhe, Saab AB (publ) - Advisor [8]

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If I just take this. He can take 2020. But as I said already in Q4, we expected a stronger year on order intake than last year. So poor math is that you need to have. We will need to have very strong, strong quarter 4. Then you never know. We are always in big discussions when it comes to big orders that could materialize in the Q4 or beginning of next year, and that could change the picture to be even better. But we expect a strong Q4.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [9]

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And on 2020?

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Håkan Buskhe, Saab AB (publ) - Advisor [10]

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Thank you for that too. No, but obviously, we have a great interest on our larger systems in the marketplace. Absolutely. And that goes for the Gripen where we are involved in a few campaigns. It's really difficult to say exactly when they will be sort of finalized. We follow the processes, of course. A few on that side, a few on the globalized side that we're involved in. Also very difficult to say exactly when they could be finalized. And a couple also on the submarine side. So it's looking good also on the bigger platforms. But to say exactly when these contracts will be finalized, that's difficult.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [11]

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Perfect. And my last question is on the EBIT. So maybe to Magnus. I noticed that the group EBIT was supported by the corporate items. So if you could explain that? And then maybe also if you could dig into to what happened with Dynamics because profitability there was relatively low when it comes to this particular quarter?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [12]

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Well, we can start on the group level. Yes, it is so that we have a positive or a good lower level of, let's say, corporate costs in this quarter. That's correct. And that supports, of course, total growth. And we have -- part of it is, call it group consolidation entries that supported this quarter, but also in how we treat some of our large campaigns where we have different level of execution in the various BAs. And then we have sort of a residual positive or negative sometimes on the corporate. So we have a positive there on that one. And -- but that is just to make sure that the margin is correct, yes.

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Håkan Buskhe, Saab AB (publ) - Advisor [13]

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But also to add, I mean, the efficiency program that we launched last year was extremely heavy on head office and administration and things like that. So I would have been disappointed if it not start to go down.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [14]

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Yes.

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Håkan Buskhe, Saab AB (publ) - Advisor [15]

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So I think that's what we're expecting going forward.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [16]

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And then on Dynamics, we have -- it's very much driven by delivery. And we have -- actually, you can call it front-loaded, as you talked about, in Q1, Q2 for Dynamics and much better level than what we see -- saw last year. And in Q3, it's more roughly in the same level, you can say. And then, of course, we foresee, as normal, good delivery from Dynamics in Q4.

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Merton Kaplan, Saab AB (publ) - Head of IR [17]

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Do we have more questions from the audience, please?

Then we could go on to the telephone conference. And our moderator there could help us get those questions.

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Operator [18]

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(Operator Instructions) And the first question is from Douglas Lindahl from Kepler Cheuvreux.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [19]

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Douglas here. A few questions from my side as well. My first question is on aeronautics profitability, more specifically for the quarter. You're right in the report that operating margin for Aeronautics is up year-over-year as a result of high volumes, productivity improvements and also lower R&D spending from T-X, which all seems true year-to-date. But what about this quarter specifically? We saw sales growing by 20%, but margins were down 18 basis points. What's behind this negative effect in Q3, please? Start off there.

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Håkan Buskhe, Saab AB (publ) - Advisor [20]

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Well, I mean, mainly things that affect aeronautics and also other units that have large order backlog that they convert into sales and EBIT and cash are normal activities on the market or other things that are connected, it could be campaigns or a big delivery that is not of that size that didn't have an impact. But there are normal end market campaigns and other things that have that impact.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [21]

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Yes. I agree. Yes.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [22]

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So it's a timing issue, basically?

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Håkan Buskhe, Saab AB (publ) - Advisor [23]

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Yes.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [24]

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Yes, exactly, timing and spending on -- like Håkan said on the marketing activities. Those can vary across the various quarters. Yes.

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Håkan Buskhe, Saab AB (publ) - Advisor [25]

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Because it's also so that -- I mean, marketing, when it comes to us and especially Gripen and other huge system is not just making brochures and domiciles. It's lot of verification, testing and lot of other things that are rather cost-consuming and fine-tuning of systems that will be tested. So that is what we also call marketing activities.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [26]

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Okay. I realize that you were sort of not wanting to answer the big question from Agnieszka on orders, but I'll try and be more specific. On the submarines in Netherlands, I'm reading a local press, it seems as they were really approaching now decision shortly. I of course understand that political decisions take time, I think we previously talked about the decision last summer or this summer. But can you give us an update on where you see that order specifically?

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Håkan Buskhe, Saab AB (publ) - Advisor [27]

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It's a good thing for the deputies of the CEO.

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Micael Johansson, Saab AB (publ) - Deputy CEO & Senior EVP [28]

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Well, as you're saying, we're following the political process. I think we're waiting for them to take this decision to sort of the big milestone, which is up to the government of the Netherlands. And they have been pushing that by months now. And we hope that they will take a decision on where to go during this year, but we never know. We can only follow it.

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Håkan Buskhe, Saab AB (publ) - Advisor [29]

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But I think it's important to say that we have an extremely good product and a good partnership with the Damen Shipyard. And from there, we try to beat the competition and be relevant for the customer.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [30]

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Okay. And just on final questions from my side. On Gripen, in Finland and India more specifically, what are the latest news there, please?

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Håkan Buskhe, Saab AB (publ) - Advisor [31]

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Well, should you?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [32]

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I can take it. No. No. Finland is active as a process as we speak. And they go into proper sort of evaluation early next year, which we will participate in. And according to the process we know about, they will move into different phases of evaluation and then take this decision, I think, during 2021.

India is more sort of uncertain in terms of the exact process. We are waiting for the -- sort of the expression of interest request. And then hopefully, we will see how they will move into sort of a strategic partner type of process or exactly how they want to move this forward. They have been delaying that. And we now sort of think they will issue that expression of interest in the beginning of next year, but we're working that diligently as well, of course.

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Håkan Buskhe, Saab AB (publ) - Advisor [33]

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Can I underline that I think it's important also, not just for the existing contract that we deliver on time and the product have the right configuration and standard. So, of course, extremely important for campaigns that we show that we are in time, that we have the relevant product and also that the test and evaluation is going extremely well. We are building extremely good aircraft and also comparable -- to mention is, of course, the upgrade of the C/D that we did a couple of years ago, but meet your capability that we are basically lonely to have the only one to have today. And that shows the capability also in exercise. And I think we are in the process of building something that -- and we can now show that we are exceeding the expectations.

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Operator [34]

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And next question is from Erik Golrang from SEB.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [35]

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I have a couple of questions. The first one is on Brazil. And if you could tell us something about the -- what the delivery schedules look like there now after their changes to their budget procedure?

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Håkan Buskhe, Saab AB (publ) - Advisor [36]

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We have no changes towards our budget. We have had people down there. We have weekly discussions with the government, have had that since 2013. And I think we have shown through the delivery in September and also with the technology transfer program that we deliver on our milestones. And this is an extremely important project from Air Force in Brazil, but also from an industrial perspective. So this is the high priority for the Brazilian government to continue according to plan.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [37]

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Okay. Then I have a couple of questions on cash flow. The first one is on the sale of trade receivables in the quarter. I wanted to learn a bit more when you decided to do that and why you did it? And if we should expect more of that in the fourth quarter and next year?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [38]

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This is a tool or a program that we have had in place for many years. And on and off, we utilize that. And it's more of a timing issue or cutoff issue that we manage the cash in that way. And I can say that most of that is already now paid. So it's more of very much a timing issue on that one. So -- and we don't plan ahead of doing that because -- but we have it as a tool that we, of course, are utilizing. So I cannot say that we have that plan going forward or not. So -- yes, so it's more of a cash management issue.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [39]

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Is it -- if we look at the cash flow, the sort of your illustrated cash flow guidance for the fourth quarter, is it a part of that?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [40]

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No.

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Håkan Buskhe, Saab AB (publ) - Advisor [41]

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No.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [42]

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Have you assumed anything in that number?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [43]

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No.

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Håkan Buskhe, Saab AB (publ) - Advisor [44]

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No.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [45]

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So that's a clean number?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [46]

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No, we have not.

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Håkan Buskhe, Saab AB (publ) - Advisor [47]

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Yes.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [48]

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And then a follow-up on the -- that sort of illustrated cash flow range. Is it -- do I read it correctly as if you've slightly upped the Q4 range from previously? And is that a result of Q3 coming out rather low?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [49]

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Yes. That's correct. You read it right.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [50]

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And then the final question then on cash flow. Following up on your comments, Håkan, that you expected -- I believe you said positive for the years to come after Q4 then. Could it be a bit more tangible for next year, particularly? I mean, you've seen very, very big working capital build now for some time. Will we start to see some of that being released in 2020?

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Håkan Buskhe, Saab AB (publ) - Advisor [51]

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Yes. I mean, a lot of our working capital is connected to the [PUC], sometimes mistaken by journalists to be account receivables. That's not the case. It's working capital. And that is what's going to be released going forward. That's what we built up according to plan that's going to be invoiced and paid the years to come. So that is one of the base for invoicing going forward and cash flow.

So that's why it's so important to show that we are able to deliver on the programs, especially on the Gripen E for Sweden and Brazil, so -- but I will not stand here on my last day and give you an exact number. And I -- bear with Micael as well. But of course, we -- if you go back and do tracking what we have said in the last years, of course, we expect good cash flow going forward.

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Operator [52]

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And the next question is from Mikael Laséen from Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [53]

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A follow-up on the cash flow question here. And your contract assets here are on an all-time high, SEK 13.6 billion. And can you just explain how this will develop when you start to deliver and more -- well, physically deliver the large projects that you have? And also the contract liability side, how that is affected?

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Håkan Buskhe, Saab AB (publ) - Advisor [54]

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I mean, overall, as we have tried to explain in the last years, when you are in a development phase, you have fairly poor cash flow during that phase. You get it boarded when you have a product that you can start to deliver. So it's a rather big imbalance between development phase per hour and production per hour, if you may say so, or how you measure it.

And now we go into delivery phase of the Gripen E and the GlobalEye. So that gives -- and the delivery are in a certain pace until -- well, for the Gripen, mid-2020; and GlobalEye in the years to come. And maybe you would like to...

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [55]

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Yes. I can just -- so of course, in light of delivery of this, we would see big significant changes of these accounts, obviously. And I mean, contract asset is, of course, a buildup of, like Håkan said, working capital that we have not yet billed or invoiced. So that will, of course, start to happen. And that is, of course, why we are also indicating positive cash flow going forward. This is work that we have performed.

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Håkan Buskhe, Saab AB (publ) - Advisor [56]

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And I think that's why we -- altogether when we have had capital days and what have ever been so focused on delivery on the big programs, and especially on the Gripen E and GlobalEye because there you have this type of pattern when it comes to cash flow specifically. And for us, to create cash flow, the best way is to deliver on time and according to cost. And as I said, we deliver on time now to Brazil. The program is going in good speed. And -- so keep that. And that's what we have assumed when we're saying that the years to come now will have a good cash conversion.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [57]

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Okay. Excellent. And when it comes to capitalized development and tangible investments, it looks like those have peaked. Can you comment on the outlook for those 2 investments?

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Håkan Buskhe, Saab AB (publ) - Advisor [58]

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I think you're right according to the scope today. And you will see a little bit of -- you will -- slightly a little bit less the years -- next year and then it will go down. But of course, to grow the company maybe to 100% instead of 50%, I don't know. But sometimes when you are ending up in big activities, you maybe also need in today's environment to do some own efforts. So to say that this will be forever, that I at least would not say. And maybe you would like to comment on that.

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Micael Johansson, Saab AB (publ) - Deputy CEO & Senior EVP [59]

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No. Of course, and I mean, if you look at the things that we have sort of in the -- in our programs today, that is correct that Håkan is saying that it will go down. But then again, I mean, we have high objectives and it's not sort of unreasonable or unrealistic that we sort of enter new things that may require these things going forward. But I won't speculate on how much and exactly when.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [60]

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Okay. And final one, just a clarification. Did I understand it correctly that you have paid back the trade receivable program already now in Q4?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [61]

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Yes. That's correct. To a very large extent already, so it's very much a timing issue.

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Håkan Buskhe, Saab AB (publ) - Advisor [62]

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Yes.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [63]

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Okay. So including that, you expect cash flows to be in line with your guidance, right?

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [64]

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Correct.

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Håkan Buskhe, Saab AB (publ) - Advisor [65]

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Yes. And we moved this spotted or whatever you call (inaudible) in Swedish, I don't know, shotgun.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [66]

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Slightly up.

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Håkan Buskhe, Saab AB (publ) - Advisor [67]

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Slightly up.

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Operator [68]

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And there are currently no further questions registered on the telephone lines. So I hand the call back to the speakers. Please go ahead.

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Merton Kaplan, Saab AB (publ) - Head of IR [69]

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Thank you very much, moderator. So we have a bit of time left for a few more questions that we received from the web. I'm going to take one question here from Benjamin from Bank of America, asking, can we have an update on the T-X program? Is the development progressing as expected with Boeing? And have you started seeing international interest beyond in the initial U.S. orders?

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Håkan Buskhe, Saab AB (publ) - Advisor [70]

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T-7A Red Hawk is the new, yes. It goes according to plan. We -- I have had weekly meetings with the management -- top management team of Boeing. Micael will continue with that. The Chairman, Marcus Wallenberg, Micael and myself will start to dig the first -- well, take away some soil to open up for the building of our production site in West Lafayette. And at the same time, the engineering work are ongoing according to plan. So still extremely high focus and focus on teamwork, partnership, deliver according to time for U.S. Air Force.

At the same time, we are asked in many countries for more specifications, more details about the training system. And it looks very well. And due to the affordability of the aircraft and also the technical height and the latest technology where you can simulate different type of aircraft in that type of aircraft, you will also be able to fly many hours real time compared to not the Gripen E then or C/D, but others are rather expensive to fly. So -- and many countries that we are working together with and competing with Americans when it comes to fighters, they train their pilots in the United States. So it looks good. And we are in talks already with potential foreign outside U.S. customers, so...

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Merton Kaplan, Saab AB (publ) - Head of IR [71]

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That's interesting. So we have a question from Finland here from [Matt], and he's wondering -- he's saying that Finland has now adjusted their fighter program cost ceiling to EUR 10 billion. And he's wondering how this changes Saab's position in the market? Can we have some comments on Finland and that market?

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Håkan Buskhe, Saab AB (publ) - Advisor [72]

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Maybe it's my last comment on this, but I think -- they -- let's do the competition. Let's focus on the evaluation. And we are -- we have a strong product, strong system. Then the Finnish government will choose the right tool, whatever that will be, for their defense of their country. So that's how we view it. We don't speculate on different items and things like that. So we are focused on the competition.

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Merton Kaplan, Saab AB (publ) - Head of IR [73]

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Very good. So we have a question from Sandy Morris from Jefferies. And he wonders -- a bit of a detailed question here. Let's see. The capital employed has risen over the time both in Aeronautics and surveillance. Presumably, this is the Gripen and GlobalEye? Could you scale or even probably talk about how these 2 -- how Gripen and the GlobalEye bears on these divisions?

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Håkan Buskhe, Saab AB (publ) - Advisor [74]

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It's a little bit what we discussed earlier. And it's a timing issue. Most of that is [PUC] built up. And -- so maybe, you would like to...

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [75]

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No. I think this is exactly where we are in those programs now where we have done a lot part of the development. We have -- we're starting on the production and we are moving into delivery stage. And that's then when you see the capital employed, of course, on a high level. So that is, of course, one of those things that should now go down in light with the delivery.

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Merton Kaplan, Saab AB (publ) - Head of IR [76]

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Perfect. So we'd have one more question, I think, related to Gripen E. There's been a lot of news and speculation around that linked to the Canadian fighter replacement contest. And this person wonders whether Saab is continuing those talks with Canada. So a bit of an update on Canada.

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Håkan Buskhe, Saab AB (publ) - Advisor [77]

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It's a good question for you.

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Micael Johansson, Saab AB (publ) - Deputy CEO & Senior EVP [78]

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I think so. It's a good question. Of course, we are continuing our discussions with Canada, and we are looking at the request for proposal that we received, digesting that. It's very comprehensive. So we're working that, of course, with the Canadians and internally going forward. And we look forward to taking the next step in the process next year.

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Merton Kaplan, Saab AB (publ) - Head of IR [79]

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Good. And final question on Gripen E as well here on -- to the Swedish one. Any news from those 3 planes that's in production? Are they expected to fly this year? Do we have an update on that?

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Håkan Buskhe, Saab AB (publ) - Advisor [80]

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We are working according to plan with the Swedish government and the Brazilian government. We -- so according to the time schedule that we have, we will deliver. And the test and verification is going according to plan or even better as we speak. That doesn't mean that you can have a hiccup in some areas, but we have room for that as we speak right now. So it looks good. And again, it also proves together with the T-7A Red Hawk and also Gripen that we are able to work with short lead times and deliver according to time. And I think that's building confidence for us going forward.

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Merton Kaplan, Saab AB (publ) - Head of IR [81]

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Great. Thank you for that. And I think that was the last question from our participants on the web. So I would like to...

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Håkan Buskhe, Saab AB (publ) - Advisor [82]

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Yes. Before you close, thank you so much. It's my 37th quarterly report. I am there. It have been an honor to meet and also work with the capital market and all the questions, extremely skilled people I met, for me, even though my previous job at E.ON Sverige was small listed due to we have bonds -- publicly bonds, but this is close -- totally different thing. I learned a lot and a lot of good friends. So thank you so much for this time and also to all the journalists. Thank you.

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Magnus Örnberg, Saab AB (publ) - Executive VP & CFO [83]

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Thank you very much.

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Merton Kaplan, Saab AB (publ) - Head of IR [84]

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Thank you, Håkan.