Saab AB (publ) (SAABB) Earnings Call Transcript

Hello, and welcome, everyone, to Saab's Q4 and Full Year Results Presentation. I'm Merton Kaplan, Head of Investor Relations. With me here today in Stockholm, I have our CEO, Micael Johansson; and our CFO, Magnus Örnberg. We'll start with the presentation and then follow on with a Q&A session, where we will take questions from the telecom conference and then we will take questions from the web from our audience online. And please don't forget to post questions under the video section on the website. With that, I'll leave the word to you, Micael.

Thank you, Merton, and thanks for joining in, listening or watching us today. This is my first report as the CEO, and I look forward to -- I assume all the questions I will have. But first of all, let me give you a short flavor of 2019 and Q4. I think we had an excellent year, 2019. We are following our plan. We had so many important milestones that we met during 2019 in terms of execution of our programs. We have been growing now continuously for the last 5 years, so we are on the right track in our growth journey. We see continuous improvements in the foundation of our business, the small orders. They have grown 10% during 2019. And also, we have continuously a great order backlog supporting our future growth. When it comes to earnings and profitability, this is probably the best year in absolute numbers in terms of profitability and EBIT. We grew 15% year-on-year when it comes to EBIT, and we reached 8.3%, which I'm really pleased with. We have had, during the year, a more even execution of our milestones and activity level, and delivered in several business areas according to plan supporting this growth and also the profitability and performance. And we have been working also with the efficiency in our organization, looking at our portfolio, being more sharp in that one, reducing a bit in what we offer into the marketplace and taking away things that are sort of at the back tail of the life cycle. That's continuing. And also, we improved a lot when it comes to cash flow from last year, from 2018. And we had a tremendously strong quarter 4 when it comes to cash flow, more than SEK 3 billion in operational cash flow. As I said, milestones have been great in many programs. The Gripen E program has delivered many important milestones. As you've seen, we had deliveries towards Brazil and also Sweden in the later part of the year. We had an important announcement also in Q4 on the GlobalEye. We met milestones in that program, and we are approaching delivery of the GlobalEye. And it's also interesting to see that we have decided to acquire a couple more GlobalEyes, which was announced in November, and we are continuously working that contract to finalize it. Also, we've started the production of the T-X, which is now called T-7A, the trainer aircraft that we successfully won in the U.S. with Boeing. We started production in Linköping, Sweden, and we're building a facility then for the coming production in West Lafayette, Indiana. So it's been an intensive year with many important milestones, and I'm looking forward to 2020. Market-wise, we had a good year. We had a stable order intake. The more -- a few highlights here. I think Finland and the win on the Squadron 2020, which is the Finnish Navy's corvette program, is an important one with Baltic combat management system and also sensor technology and sensor products on that ship. Extremely important to us. We did win a number of framework contracts on our advanced weapon systems, the Carl-Gustaf and the AT4, both in the U.S. and Sweden. We have an important long-term program in the U.S. called G/ATOR, Ground/Air Task Oriented Radar. We go into production phase now, and this will go on for a decade, probably. So that's another sort of important production phase. We've done a number of Support contracts wins on the airborne early warning side. And we -- as I said, we decided to order another 2 aircrafts on the GlobalEye. In Germany, we had a really good thing happening in the later part of the year, winning a training and -- training contract for the German army, which will go on for many years. And also, that will mean that we will have more employees in Germany going forward. And not the least then, we were successfully then selected in -- on the submarine side in the Netherlands together with the German TKMS and also the Naval Group from France. So that will continue to be a competition, but we're part of that competition going forward and that's really pleasing to me. Looking at the financial highlights then, starting with the full year. The order bookings were on par with 2018 without any substantial megadeals. We're working a number of those in the market, of course, as we speak, but the sort of the smaller orders and the medium-sized orders are continuing to develop really well. We had good growth, 7% and 6% organically over the year. And we improved, as I said, the operating income to a very high level, the highest ever in absolute numbers. And we are on the right journey towards our long-term goal of 10%. And not the least important, improved our cash flow substantially. And as we've talked about before, we started now to show that, in Q4, we got more than SEK 3 billion operational cash flow. So we are really on the right track with the cash flow as well. And that, of course, comes down to the quarter then, where we had, I think, a very strong quarter 4. And I think you have to view it in light of the activity level over 2019, which has been more even. So our Q1 to Q3 2019 was sort of different from 2018. Better growth during those quarters, better profitability and still a strong Q4 this time in 2019, on par with 2018. So I'm really pleased with the quarter as well with the order bookings and also with the sales level, which is on par with last year. And also the operating income, more than 11% in the Q4. And especially then the cash flow side of it, where we managed to get to more than SEK 3 billion in operational cash flow. We have, as I said, been on a continuous growth journey, and it's shown on the slide, and we've grown more than 50%, actually over the last 5 years, and I see no reason to sort of abandon that growth journey. I think we have a great backlog supporting that and we have a high activity level in the marketplace. The sort of the market position, I think, is improving all the time, both on product level and on system level. So I think we have good opportunities now to continue our growth journey. So I just want to reconfirm our long-term targets. I think we will look at -- still, we remain to grow 5% per year over a business cycle. And we will continue our journey towards our long-term target of 10% over a business cycle. And our equity-asset ratio remains, target-wise, 30%. So we are reiterating our long-term targets as we speak. That leads to my view of the outlook for 2020. We -- as I've said, we will continue to grow and we will be in line with our long-term target on that side. We have a backlog supporting that and we have a great market activity. And I see that we will improve our operating margin compared to 2019 and still continuing our journey towards our 10% target as a long-term target. Finally, before I hand over to our CFO, I will give a few thoughts about sort of what's happening in the marketplace and what is our strategy going forward. I've said before, when I took this position that we have a firm strategy. Looking at the market drivers. As we speak, it's, as you know, geopolitical uncertainty in many areas. We have the Middle East, Iran, Iraq, Syria, U.S. connected to that. Also, instability a bit in the Asian side of the world. And in Europe, many things are happening, of course, when it comes to the European Union, the European Defense Fund being established. U.K. is -- the Brexit is now a fact. So this creates sort of a situation where I see that many countries are increasing their defense budgets. And of course, we try to be as relevant as we can, supporting the defense capabilities for many countries. Technology pace is an important factor of this. Many defense forces are embracing new technologies, using AIs in the decision support. Handling a vast amount of data is becoming more and more sort of a fact in the defense capabilities of many defense forces. So digitalization is an important trend, of course, which we are embracing as well. What we are doing now is to continue to be more efficient in the market, more selective. We will establish ourselves more and more, not at the expense of how we are in Sweden but creating more operational capabilities in a few selected countries. We talked about the U.S., U.K. and Australia. We have other sort of runner-ups on that as well. But there will be a few selected countries where we will try and fill gaps in certain countries' defense capabilities and growing a sort of complete operations in those countries. That's an important part of our strategy. In doing that, we look at the international partnerships, of course. Sometimes, we can do it on our own in a certain country. Sometimes we have to find partners to be successful, and that's also a very important part of our strategy. We have launched a new market organization with a CMO, Chief Marketing Officer, in the corporate management that is creating more efficiency in the market and more flexibility in where we sort of embrace prospects. We will grow as a company, definitely, but make no mistake, we will continue to invest in our core areas, those being Aeronautics, command and control systems, sensors, underwater systems and also the advanced weapon systems. But the content of those have to change continuously looking at the pace of technology. The digitalization on the sensor side, the artificial intelligence and algorithms, supporting the decision, support for the end user and things like that so we will grow. We will continue our journey on our profitability towards a 10% target, while we are continuously investing in new technology. So I'm really positive looking at the future. We have a great portfolio, fantastic engineers and employees and fantastic technology, and we are more and more sort of getting -- sort of more penetrating the market in an efficient way. So with those words, which is a brief summary, I like to hand over to our CFO, Magnus Örnberg.

Thank you very much, Micael. And let me dig into our financials. And I will reiterate a few statements here. We have a stable order intake for the year. And that, combined with the smaller-sized orders that grew again and with a strong backlog, we are now able to deliver a good growth. 7% reported, 6% organic, and that is very much in line with our outlook. We have good project execution and we are more efficient in our operation. And that, together with the volume growth, we now see strong earnings improvements. And like Micael said, this is probably the highest level on absolute numbers. And we are able to increase operating margin, also in line with our outlook. Having good execution and delivering on what we should do also gives us the opportunity to achieve the large milestone payments. And this is what we have seen now in quarter 4. And of course, some of those achievements that we did was maybe done in earlier quarters, but now came the large payments. And I have to say that we have also had good collection in the quarter. And also -- please note also that we have a receivables program that we sometimes use managing cash on a sort of quarterly basis. We have not utilized that at year-end. And the Board are proposing an increased dividend from SEK 4.5 to SEK 4.7 per share. Let's look into some of the other KPIs. And of course, the most important KPI for us is our order backlog. The size is good. We have some SEK 93 billion. But maybe even more important is the duration or the timing of the backlog. And as we can see now here, we have some SEK 29 billion that we are planning to execute this year. And that's the highest level that we have ever been to. And that will also support the growth going forward. We can also note that also for 2021, we have already a better backlog, again, than if we just went back 1 year ago. So that is good. Order size, we talked about it. We are creating a better base in the company now with more small to medium-size orders, and that continued all through 4 -- Q4. So how does it look for the various businesses? And first of all, I would like to state that the orders and the distribution of the orders are very much supporting the backlog in most of our businesses, which is very good. If you have a good backlog that is spread well over the company, it's easier to drive productivity improvements and efficiency. And I think we have that now. Of course, during the year, I think Surveillance contributed very well with more orders. This is both in radar and sensor, but also in command and control. I would like to highlight also something that is not included in the backlog, and that is the framework agreements, especially in Dynamics and highlight the big order that we got for the U.S. Army. Okay. Good order and order backlog. Let's see how that plays out then for the sales. And we have growth now basically throughout the company. And that is both demand-driven but also on, of course, of the project execution. The highest growth that we saw last year was basically in Dynamics. And of course, that is very much driven from demand and the volumes, and aid our ability to deliver. And we had high deliveries in -- towards the end of the year. And I would like to say also that recurring orders are really supporting Support and Services, and that is good to see that growth. And also in IPS, we see a demand that is supporting the volume. Volume is important, and this can be very clear here on this picture. Volume is, of course, a big driver for improvement. And several of our BAs are now showing improved operating result. And some, I think, volumes, but also efficiency is driving that to a large extent. In Dynamics, for sure, volume is supporting the big improvement. But we also had good deliveries and help from that towards the end. Surveillance, both sales, I would say, but also project execution contributed in a good way. And in Kockums, we have a challenge on the result here, which can be seen. This is a combination of sales going down somewhat, but also that we are in a transition from development to production with all those industrialization activities ongoing as we speak. Cash flow, very important for us. And we have good cash flow from operations. We are still investing both in working capital and in CapEx. But in Q4, we see what happens when we start to hit important milestones and/or to deliver. Then we have seen the working capital in quarter 4 reduced and cash starting to come in. And of course, our aim is to continue a journey of positive cash flow going forward. Financial position. Yes, with positive cash flow, we are now strengthening the balance sheet. We went from some SEK 10.5 billion in net debt in Q3 to now SEK 7 billion. So that's a significant improvement. And I would like to highlight that a large portion of that is, of course, the net pension obligation that we are still discounting at a very, very low rate. So that's mainly that reason. But also IFRS 16, a couple of billion. So what will we do now going forward, 2020? Of course, the market efficiency that we are looking at and targeting key countries now is important. Of course, that should drive order intake. Project execution, for sure, it's going to be important. Now we are getting very much closer to significant delivery milestones. We want to continue our work with our sharpened portfolio, and we have started that in a very good way. Now we're going to continue with that during this year. And of course, all efforts should drive earning improvements and cash generation. And with that, I would like to hand over to Merton to handle potential Q&As.

Thank you very much, Magnus. So we will now start the Q&A session, and we will ask the operator to take the first questions from the teleconference viewers, and then we will follow-on with the question that you have posted on the web through our audiences on the website. [Operator Instructions] So please, operator, go ahead.

[Operator Instructions] And our first question comes from the line of Douglas Lindahl of Kepler Cheuvreux.

A few questions from my side. Firstly, on just a clarification there on your new wording on the outlook, specifically on the margin side. Am I right in thinking that the new wording doesn't really change anything in terms of your own thinking? That's my first question.

No, I think we are on the right track. We are having a journey towards our 10% long-term target. So nothing has changed, no.

Okay. And on your second commentary on the operating cash flow for 2020, you say that you aim for positive operating cash flow. It could be sort of interpreted as somewhat of a weak message to some extent. I'm not sure if that's what you want to communicate, but maybe you can give some more color on this? And to what degree, visibility or certainty do you have for cash in 2020, is it at similar levels as the same period last year, would you say?

I've already said before that we have sort of a view that from Q4 last year and 12 months rolling, we've said that we would have a positive cash flow. Now going into a phase where we are having a better balance between development and production, we're in the middle of an industrialization phase, I would say, I think we have better predictability in terms of meeting milestones. And then being -- having a better ambition now and a more certain ambition to have a positive cash flow. So it's based on that, of course, that we are entering into a new phase.

And I agree. I think -- I mean, we have good visibility. I think we have shown that also last year or 2019. And for us, it's important also to show a shift from negative cash flow to positive. I think that's the message, how that should be read. At the same time, always have in mind that we have the volatility on cash between quarters in our company. I think that's also important.

And I guess, just coming back to that. If we look at cash throughout the year, should we have a similar pattern as we have seen historically, like Q4 will be a very strong cash-generating quarter? Or will this year change in any sense?

I think we will have -- I think it's difficult to compare patterns. I know that '18 and '19 was -- have had very similar patterns. I would say that -- I think and I believe that we will have a little bit more volatility this year. And it's not going to be exactly the same shape that sort of all negative and then all positive towards the end. I think we will have a little bit more volatility, as I see it now.

Okay. Very clear. And just switching topics on talking about Aeronautics, Q4 margin side. Slightly weak in my view, at least. But if we look on the full year, margins were actually down compared to '18. And I guess, marketing expenses is the big one there. But were there any -- was 2019 in line with your own expectations. Obviously, I realize that the longer-term contract is the bulk of profitability here. But can you maybe elaborate a little bit on that, how you explain -- how you expect to lift that going forward?

No, but I think you're right. I mean it is according to our plan definitely. There are a number of campaigns, of course, that we put a lot of effort into. And that is great, of course, doing that, but it's a long-term business that we want to win. And I mean the most obvious ones are Finland and Canada, but there are also a couple of other ones that comes in. So the expense on the marketing side is, of course, a reason why we are sort of almost flat on profitability. But we are absolutely following plan. And also, I see Aeronautics improving going forward.

I agree. We are following that. And -- but I think we could probably add also that 2019 was probably the biggest industrialization period for Aeronautics in many, many years. So we have basically taken a lot of effort in setting up also this production that we are now -- want to load during this year, 2020. So I think that's also good. Otherwise, marketing, of course, is the effort forward goal, yes.

And final question. Final question from my side is on Kockums. Can you talk a little bit how you aim to lift margins there? Obviously, we've seen that you have appointed a new business area head, but what efforts will you put forward to lift profitability? And I'm not talking about sort of winning export orders because I assume that would obviously lift profitability. But excluding that factor, can you talk a little bit about that, please?

Yes. I think one has to realize that building a shipyard, a modern one, from the point where we started in 2014 is a tremendous task. We have invested heavily in both infrastructure, create a sort of -- employing content resources into organization and processes and tools. And eventually, of course, that has to pay off. So they are through the investments that we have done for a very modern sort of facility and also new digitalization, using a digital model, the same way we do on the Gripen side, more or less, digital twins and all that. That takes some time to get sort of into the organization, being used in a correct way. And that needs to pay off. So that's one way, of course, to now lift profitability. Then again, I want to sort of say that we need also more contracts into the organization. And we are -- I have no other ambition than to make this extremely successful both revenue-wise and profitability-wise. That needs international contracts, but also Sweden has a responsibility to make sure that we have a long-term stability in what we do.

Are you happy with that, Douglas?

Okay. That's it for me.

Our next question comes from the line of Björn Enarson of Danske Bank.

I have a few questions. And first one are on the frame agreements. If you can give some more color on that and the growth driver near-term for that, if it is mainly Dynamics. And also, if you can give some kind of quantifications.

Well, if I may start. And I mean, yes, a couple of them are sort of connected to the weapons side and the ground combat weapons side, both in the U.S. and Sweden, and they are potentially substantial. I don't want to sort of specifically guide on it, but it's at least SEK 5 billion and things we haven't taken into account. Then you have to also look at the T-7A program, where we are in an industrialization phase, the EMD phase. And we haven't taken into account that, that program is sort of framed into sort of 350 aircrafts initially and the potential on that, of course, that's not in the book side. But those are 2 examples.

And on the order or the potential order from United Arab Emirates on the Surveillance side, do you have any comments there or what do you expect? Has there been any news since this was announced?

No. As you say, it was announced in November last year during Dubai Airshow. And it was a perfectly clear announcement that they are going to contract 2 more GlobalEyes. And we're working that as we speak. It's sort of the process with documentation and finalization of all documents and signatures, but it's going ahead as plan.

Great. And on your backlog duration and your sales growth target for 2020, can we get some comments on the different PAs, where you see will be the one that contributes a little bit more or a little bit less on your growth target.

Yes. Normally, we don't break it down. But I mean if you want to highlight something, I think we can see a little bit continuous trend from 2019. I think Dynamics, of course, we are fully loaded and delivering as much as we can. I think there, we have potential. And also in Surveillance, in light of, yes, especially the order that we just talked about. And I think that's maybe 2 or 3 areas where we will see a little bit, call it, above-average margin or growth then.

Our next question comes from the line of Peter Testa of One Investments.

Maybe just continuing on from that last topic about loading. You had a very good year on small orders and you're also in a period now where you're loading up on the Aeronautics side. I was wondering if you could give a sense on whether the small orders impact is something -- is unusually good and the impact was mostly in '19. Or would you expect that also to be in '20?

No, I think we have a very good opportunity to continue to grow the sort of smaller orders as well. It's actually based on an extremely good portfolio that we have created. And the need in the marketplace is growing. So I see that continuing, and it's very good for our company.

Okay. And then on the Aeronautics side, do you expect the loading to be very much at the end of the year, end of 2020? Or do you expect that to sort of develop up through the year, that we'd actually see that through the year?

Well, I think I talked about sort of the activity levels evening out a bit over the year. And that was the case 2019 compared to 2018, and I see that continuing. The quarter 4 will also be the strongest quarter. But it's good to see that we have a good activity level that is rising also in the 3 first quarter of the year, and I see that continuing, yes.

Okay. And then just on the milestones as they -- as far as they affect cash flow. I mean you've reached some very important milestones not just in the Gripen, but also in GlobalEye in terms of delivery and flying. Does that mean that the milestones that you achieved going forward are more cash flow-attached as well as opposed to, say, recognition or revenue-attached?

Well, I mean, the fact that we -- and going from sort of a very intensive development phase through an industrialization phase and, you can call it, low-rate initial production phase, when you get into production, of course, cash flow is connected to deliveries in a different way. So that makes it more predictable. That is what I can say. And we are entering into a healthy balance between, I think, development and production.

And then as we have commented earlier, it's -- of course, we're trying to push cash also in the development phase. But normally, you have a better chance to get paid when you actually deliver the physical products. So I agree totally, this is exactly how it's going to play out, that a bigger portion of cash for those kind of milestones where we actually deliver.

And last question, please, is just on your comments on forward development for the company and investing in your key areas. If you look at the level of R&D that's capitalized in '19, it was just under SEK 1.4 billion, would you expect that number to continue to rise then in '20 and '21? Or is this reflecting some of the earlier comments about development in products?

It is going to continue a bit forward, '20 and '21, yes. I don't know if you want to comment further on the details on that?

I can say that, I mean, normally we don't comment exactly on the volumes, but this year we will continue on a high level. Let's put it like that. Most likely, we will see some reduction in '21. And I think these 2 years would be relatively high. But this year will be high in line with last year, yes.

Okay. So we should see that as a reference level not as an increased rate, that's what you mean?

Correct. That's correct.

Our next question comes from the line of Mikael Laséen of Carnegie.

Great. Just one, also a question on Capex. You clarified the capitalized development side, but can you also comment on tangible investments?

We have seen an increase in CapEx in the last few years, and that is mainly connected to our, I would say, change in product line, for example, going from Gripen C, D into Gripen E. Basically, a new line. It has also connected to, what Micael described, the whole action that we have taken with Kockums, revamping the whole shipyard and also setting up the new processes. And I would foresee that CapEx level will be -- still be high in 2020 without going further here. But 2020, we will still see a high level on that one, yes.

So does that mean that it will be -- have a similar development? Is capitalized development is still high or stable in 2020 and decline in '21? Or...

I think it's a little bit too early to comment on '21, but I would say high in 2020, yes.

Okay. And your investment in the U.S., is that primarily in 2020? Or is it during a longer time period?