Saab AB (publ) (SAABB) Earnings Call Transcript

Good afternoon, and welcome, everyone, to the Saab Sensor Seminar 2020. My name is Carl-Johan Bergholm. I'm the Deputy Head of the Business Area Surveillance, and CEO. And I'm replacing Anders Carp, our Head of the business area, as he can't participate during this meeting today. Welcome, everyone. This is the third sensor seminar we are performing. A little bit different circumstances this year than previous years, but I'm happy that we at least can have a seminar and share ideas and thoughts together. And during this day, we will be addressing the challenge our customers, the armed forces of the world face with an increasing complexity in the future battle space. And they are facing more and more complex scenarios and enemies and need to react and detect threats and act on them even faster and faster. And the purpose of the seminar today is to describe how Saab is addressing these challenges and how we see that we can contribute. So the agenda today, I will give a short introduction and update. After that, we have a guest from the Swedish Armed Forces, Colonel Rickard Stridh, who will talk about research and development for future defense needs. Then we will move over to the evolution of sensor combat air -- of future combat air sensors, Robert Humeur. And then we will end with a question why more of the same will not be enough with Heléne Bittmann. And in the end, we will have a short Q&A session, where we'll be able to address questions from you that arrives during this seminar. So if we look into the core of Saab surveillance, we deal with sensors, cybersecurity and command and control towards all different domains of markets, that's airborne, naval, land and also the security segment. We provide radar solutions and EW systems for self-protection, situation awareness and suppression for fighters. We provide the GlobalEye, airborne early warning systems. We do command and control systems, naval radars and EW systems for the naval environment. We provide ground-based signal intelligence and surveillance systems to detect both on tactical and strategic level, different types of emissions and threats. We have the Giraffe range of radars and other artillery localization radar, and we provide command and control and sensors for the submarine segment. So it's a rather wide footprint of different sensor technologies, addressing everything from the sensor as such to the integration with command and control, adding cybersecurity as a vital component, but also the integration into platforms, either by ourselves or with other partners within Saab or internationally. If we look at our journey over the last few years, we have had a good growth, good stable growth and a positive development when it comes to our profitability over the last few years. The first half of this year, we continued along that path. We slowed down a little bit in the third quarter, both because of the mix of the projects we're executing, but also that we also face some challenges related to COVID, a little bit different than many other industries. Our projects are long term. We are used with having challenges in securing supply chain for small volume production of complex things. But the ability to interact effectively with customers is affecting us to some extent, and we see a small slowdown on that side. If we look at the market we address and how we look at growth going forward, we don't see a virgin territory approach as our strategy for the market. It's more about consolidating and building stronger positions on the markets we're already at. We have a big footprint when it comes to installed base. And we have operations in many important countries. Our base operation is, of course, in Sweden, where we have the largest part of our operation, but already in the '80s, we established operation in Australia to support our C2 business on the Australian market. That has grown to some 350 people today. And we are doing local development and are part of the local armed forces needs and that infrastructure, we share a lot of technology, but we are operating as a research and development organization from Australia. We are establishing similar operations in Finland based on recent success in UAE. We have a substantial operation in South Africa, and a little bit less than 100 people in Germany. And as we talked about in -- I think it was last year's sensor seminar or the year before that, the operation in the U.S. is also an example of how we try to be relevant on the market and secure synergies between our different sites. And I will expand on that a little bit more on the next slide. If we look at the journey and the development, and you see the sales forecast for Saab's North African operation in the graph to the left, on the sensor side, we started out with a corporation, a little bit more than 10 years ago with Saab sensors around the seizure of radar targeting the Littoral Combat Ship program in the U.S. And we had a very successful cooperation, actually ended up acquiring our partner and integrating them into Saab, and we have continued this journey to build a stronger organization in the U.S. that can benefit from the product development we have done in Sweden, but also can generate and address local needs through R&D. We have, for example, for the seizure of family now established 3 different product baselines or 3 different programs. And we are now established on 7 different types of ships in the U.S. inventory. And we see a projection of producing more than 100 systems towards these programs. So that's an example of what has contributed in building Saab's growth in America, and how we have worked to become a part of the U.S. infrastructure and being relevant for the U.S. end user. I would like to comment a little bit on major programs that we are executing. And the most significant program that we are executing right now is the GlobalEye program, where we, now during this year, have completed delivery of the first 2 aircraft according to schedule. We have done the training and established support in order to secure that the customer has an initial operational capability. We are now in the process of finalizing the third aircraft that will be delivered in the beginning of next year according to schedule. It's challenging during these circumstances, but we are on track. Another program, we were awarded the Squadron 2020 Combat System Program from The Finnish Defense Forces in September last year. It's a substantial combat system contract, a little bit more than EUR 400 million that we now completing development milestones on schedule. We -- and this is a good illustration of how we can perform even under these circumstances. We have challenges in programs like this when it comes to installation work when we have to interact more closely with the customer. But our major programs, we managed to execute along the plans we had before and not seeing that many disturbances when it comes to our supply chain, as many other industries see. So with that as an update, sensors and command and control and cyber is at the center of Saab, that is at least how I view it. We provide sensors and combat and C2 systems to a wide range of our own system solutions that we deliver to customers or as part of Saab solutions. And we have the knowledge of both developing the sensors, doing the command and control integration and the platform integration. I think that is a few of the capabilities that are critical for Saab's success. Yes. Thanks.

Thank you so much, Carl-Johan, for that interesting introduction. Good afternoon, and welcome again to the Saab Sensor Seminar, coming to you live from our head office in Stockholm, Sweden. My name is Charlotte Nilsson. I'm a Media Relations Manager here at the Saab press center, and I will be your moderator for the coming hour. If you have any questions throughout the seminar for our speakers, please submit them in the box below the stream. And if you're watching on Facebook, you can write your question in the Facebook event or you can tweet the question to us, just use the hashtag sensor seminar, and we will find your question. We have already started to receive some questions. And I would like to start by asking you, Carl-Johan, a question on something that is affecting us all right now, and that is COVID-19. And I would like to ask how has COVID-19 affected the Saab sensor -- sorry, the Saab business area surveillance? And what risk can you see ahead?

Good questions. And I mean we have operations in different countries, and every country is approaching the pandemic in different ways. We have faced everything from office shutdowns to more stable situations like the situation we have had in Sweden up to now. So in some markets, we've been seeing direct effects of close down. But we have been able to execute our maiden programs through working from home or interacting at some level at least. We have a very complex product portfolio and are used to struggle to deliver advanced products in small quantities. And I think that has done -- made us prepared for the supply chain disturbances that we face now. We are used to have disturbances, and we see that a little bit more, but it's not dramatic. The main difference is our ability to effectively interact with customers. That's an installation work, working together with the customer during late phases of project deliveries is one challenge. But when we face these challenges together with the customer, for important projects, we tend to find solutions to drive things forward.

Great. You mentioned the product portfolio, and I would like to ask you about that. One of Saab's objectives is to reduce the product portfolio and to become more efficient, how is business area surveillance working to improve the portfolio?

I think the most important initiatives we have is to secure more synergies and common platforms between different products. So that we don't have to invent the same thing twice but can reuse. And well, one way of addressing one challenge rather than one for each product and one -- each challenge. So I think that is the foundation.

Thank you so much, Carl-Johan. Any more questions that you may have to Carl-Johan will be asked during the Q&A sessions. So continue to ask your questions, and we will get back to the market outlook at the end of the seminar.

Now we are very excited to welcome our next speaker, Colonel Rickard Stridh, Chief Scientist of the Swedish Armed Forces, and he will be speaking to us on the topic of research and development for future defense.

Good afternoon, everybody. My name is Rickard Stridh. I'm Chief Scientist of the Swedish Armed Forces. And as such, I'm responsible for finding the ways forward in the R&D area to meet our capability needs in the future. I'm very happy to be here. I have my background in the fighter radar field on the government side of defense since -- and I started there like 25 years ago. I'm going to start today with giving an overview of our global trends in this area. And then I'm going to come down to some of our challenges in the capability area. So the long-term trends. The Swedish Armed Forces supports the government with some military advice. And one part of that is the view of the future. And we are living in an uncertain world, and we have to adopt and see what's really happening. We are now seeing economical challenging through the world. The growing population makes it the younger -- the fewer younger have to pay for the more elderly people. We see increased migration in the world. We can see violent extremities coming through in some parts of the world. And we are seeing that the rule-based world we have been used to is now challenged. In addition to that, we can see some of the ecological challenges where the environment is changing, and that in the long perspective might change the order in the world. In our -- the areas close to Sweden, we have Russia, who has shown more than once that they are ready-to-use military force to reach their political goals, and they are now advancing in the area of the Baltic Sea. But we don't have to just to focus on the area around Sweden, new technology and new domains makes it possible to be a threat, even if you're on the other side of the planet. And one of the things that we have pointed out in our military advice is that the operational environment will be highly affected of the technical development. And some of the areas that we have pointed out are shown on the image. We have identified artificial intelligence, cyber technology and autonomy, among a lot of things. And I will come back to some of that. Sweden is now preparing for the new defense bill for the time from 2021 to 2030. And as we have been used to a level of financing of about SEK 40 billion per year since several years, we are now on the level of SEK 60 billion per year, which is a very high increase. And we are now in the proposal seeing the level of more than SEK 80 billion per year. And we have a large challenge to both reach the capability, which is proposed in the bill and to make the best of that funding. So what are the capability challenging -- challenges in the technology area that we see? And I'm just going to go through a couple of areas where we now have look at the challenges, and we use that to focus our R&D efforts. Well, I think everybody is aware of that unmanned and autonomous systems is taking steps into the operational environment. And we believe that they're going to have a large portion of the battle space when it comes to future battles. And we have to think of both sides, first, on our own side, what could we use these unmanned autonomous systems for? How are we going to control them? How are they going to work together with our manned systems? But we also have to see to the adversary side, and we can see that in conflicts in other areas. There are a lot of unmanned systems. And our challenge here is to sense them, to see them in good time and then to have an effect on them, so before they finish their task. Another area, which we have pointed out, is the cyber area. And I think it's -- for everybody to know that a really important area. And same as the last bullet, we need to see at both sides. We work to increase our capability in that area, but we also needed to see that not only our defense against cyber operations, but also to help the society get resilient towards cyber attacks. Another area, which is a new domain for us or not very new, is the space domain. We've used that for some time. It's getting more important. We've used it for satellite communication, for surveillance, for positioning and timing, and we are quite dependent on it. It's now with nanosatellites and other things getting easier to use that domain, and we are focusing to be better to use the domain. And we also need to be -- have good surveillance of what's happening in that domain to protect the services that we have there. Another area, which is very important for us, is the precision strike and the strike area. New technology makes missiles, not only traveling further away from places, further away, but they also get better precision. And we believe that there are coming hypersonic missiles within short. And we have then another challenge as the missiles are getting better and faster, we have shorter time to detect them and make the right decision. So we are really needing good sensors, good surveillance and good decision support to make the right decision in good time. One of our challenges are that we have platforms that we have used for a while, and we're going to keep them for a long time. And we need to use our legacy platforms, but to add new capability, new technology in them. And we also need to add different new technologies together to get new capability. And that's another field of challenge for us. And yes -- and I think that concludes a lot what we are thinking that the technology advances are affecting the operational environment quite a lot. And we are saying that we have a battle space temporary compression and a spatial expansion. And we need to find out how to put the right capability on the right place at the right time, doing the right thing. Thank you.

Thank you, Colonel, for this insight to the future of the Swedish Armed Forces, and I want to thank you especially for being here at the Saab Sensor Seminar today. It's a really transformative phase for the Swedish military coming up in the coming years, and we have received some questions for you. And I would like to start with a long-term perspective question. So since you're working with those -- with a long-term perspective, how can we know what the future threats will be?

Well, the easy question that -- the easy answer is that there is no answer. We have to keep a lot of alternatives open. And we are using scenarios and trend analysis to build up several different ways of development for the future. We are using technology forecasting horizon scanning for the research, putting that all together into scenarios. And then we are trying to find out concepts, how the adversity would work in those concepts and how we could answer to that.

And an important part of your work is identifying different trends. And I would like to know how you work to apply global trends to the Swedish context?

Well, first, we are -- the global trends are developed through -- in an international group of people, and we are working with quite a lot of colleagues through the world to find out the global trends. And then we come to a point where we try to project all those trends down to the Swedish perspective. And we have the special Swedish, well, perspective that we need to add to that. So that's about what we do.

That's what you do. Thank you so much.

Thank you.

We will be back with more questions for the Colonel, and I'm sure that you have many questions for him. So please post them, and we will get back to them during the Q&A session.

Our next speaker is Robert Humeur, as Henrik Ekerbring unfortunately can't be with us today. Robert works with business development for Saab's future sensor capabilities, and he will be speaking to us on the topic of evolution of the future combat air sensors.

Good afternoon. Thank you for that introduction, Caroline. My name is Robert Humeur. As Caroline just said, I'm with the business development and strategy with Saab Surveillance. I'm pleased to be here today to talk to you a bit about the overview of the future combat air sensors and how the future conflicts and the conflict spectrum drives the need for multifunctionality. As my friend, the Colonel, here just stated, we see a very complex future battle space with a congested electromagnetic spectrum, but also with much more intense battle tempo. This forces us to adopt a system of systems approach where all the systems are interconnected, and data is freely and instantly exchanged between the different parts of this network. It's visualized here with some aircraft positioned in a wider air system of system. As the Colonel mentioned, we are already seeing unmanned system. We will see both new unmanned, new man but also legacy systems on the battle space by 2030. Key here is interoperability. For future operations, from a sensor perspective, we need to move from a stove-pipe approach to a distributed one. The future combat air system features integrated multi-sensor systems. This means both onboard and offboard sensors fused to form a common air picture to create maximum operational advantage to the user. My good friend, Henrik, he compares the development in multifunctionality sensor fusion and software-defined functionality as being very similar to what we see in smartphone development today, where the functionality in your smartphone is not defined necessarily by the hardware itself but rather by software functionalities, operating on a generic hardware. This is also true for the future generation of multifunctional antennas that we're currently developing. They're capable of sensing, electronic warfare, communications-type operations, but their capabilities are defined by the software layers, providing the true edge to these systems. Key features here are distributed functionalities in a system of systems context as we see here, the manned-unmanned teaming features, where every platform is a sensor node. This gives our customers improved situational awareness with reduced signatures to remain undetected on the battlefield. Saab's legacy stems from a small nation. We've never had the benefit of outnumber the opponent. We've always been forced, together with our customer, to outsmart the threats. This has driven Saab to a system design with national requirements in mind to help our systems stay operational and relevant over a long life cycle. Our open architecture has unlocked rapid capability growth sustaining this and enabling our customers to stay ahead and maintain their operational edge. To win in the battle space where the temporal dimension is decreasing, we need to shorten the OODA loop, just as the Colonel mentioned previously. We need to become more agile in future operations. And the key to maintaining this edge is acting on time with the optimal use of resources. The future commander will be reliant on artificial intelligence. We already see huge amounts of data that are increasing. We see a shortening decision time, and it's going to get more intense. Data from all domains and all sources will be fused, and we see a move from federated to distributed cloud-based systems. Artificial intelligence and machine learning helps our users to access the relevant information in all this data to decrease workload, but most importantly, to increase mission efficiency. The future combat air sensor systems will provide situational awareness in all conditions, and rapid information sharing enables the rapid decision-making necessary. Thank you very much for your attention.

Thank you so much, Robert, for that comprehensive outlook on the future of combat air. I have a few questions for you as well. And I would like to start with something that you mentioned. You stated that sensors collect enormous amount of information. And how would a pilot or an operator be able to process that information? Is it at all possible to do it without artificial intelligence?

Simple answer is no, but let me elaborate a bit. We do need all these massive amounts of data to make the right decisions. But the artificial intelligence and the machine learning and all the automization going on in our systems is necessary to provide the correct information to the fighter pilot.

And how would you envision a sensor package for a future combat air system?

Pretty much, as I related to with the cell phone, it's not going to be dependent on necessarily the hardware itself. The hardware will facilitate a continuous development on the software side. So we see a strong shift to software-defined functionality.

Thank you, Robert, for providing us with some more insights to the future of sensors. If you have any more questions to Robert or any other of our speakers, please don't forget to ask them.

And our next speaker is Heléne Bittmann. She is a Vice President and Head of Market and Sales Business at the Unit Electronic Warfare System at Saab. She will be going into a bit more detail on future challenges ahead, explaining to us all why more of the same will not be enough.

The picture is clear. The characteristics of modern warfare is more complex than ever. On one hand, we see the return of a most capable and skilled opponent that invests in advanced weapon systems in the space domain. On other hand, gruesome operations are getting more common, where we see adversaries that does not play by the rules, using the cyber domain for espionage and spreading of desk information that also affects the civil society. And in addition, we see a willingness to make a statement and taking more risk in doing so. The Salisbury attack is an excellent example of this. The end state for the opponent to win without war, to divide and conquer at less cost. We are challenged to keep pace with adversaries who do not play by those rules, yet the trends are here, and they drive both tactics and technology. Capability-wise, we see that more of the same would not be enough to meet the complexity in the puzzle. We must think outside the box and make sure that we at Saab understand and support the new operational concepts from a relevant sensor perspective. The threat environment, of course, drives operational behavior with the constant growth for technology and capabilities and new ones, and space is a new true domain where we see that focus on space situational awareness and surveillance will change the ways that we operate sensors in all the other domains. Sharing of information is lifeblood. To stay in the decisive loop ahead of the opponent, information will need to flow much faster. Our customers will need to be thinking in all the main simultaneously, working in a nimble way with data, cloud computing and combination of sensors, nodes, networks and firing platforms across all the services and arenas. Information sharing and data fusion in between the domains means that cybersecurity is necessary everywhere and all the time. People, processes, products and practices must allow our customers to respond rapidly and decisively to the changing threats at all levels of warfare. Of course, artificial intelligence and autonomy will support these efforts. In the multi-domain perspective, every platform is a sensor and an enabler supporting the information loop in order to take the right decisions at the right time and to act with the right capability. Sensors, as we know them, will not only be the radar or an aircraft in the future, it will be everything from the soldier, his or her rifle to the drone and to the battleship and everything in between. We will see new form factors, products that can be scalable and adaptable for different wave forms or hardware structures. Passive and active sensors will complement each other, working more integrated. They will be networked to achieve fully operational output and survivability with man and unmanned platforms working together. And moreover, they will be fully cyber secured, protecting classified information at different secrecy level at the same time. I would like to state here also that the electronic warfare environment will be extremely demanding in the future. Electronic warfare and payload will, therefore, be crucial for survivability in such a congested electronic magnetic spectrum that we will see. Software-based updates and life cycle management is fundamental to work on the relevant updates that we will have to provide our customers with on time. We will need to be thinking outside the box. The complexity in the future threat environment and the operational concepts shows us that more of the same will not be enough. However, more of the same is part of the solution, of course, a baseline for future growth. So being flexible and responding to future threats is crucial. It is fair to ask what does Saab do to meet future needs in this broad context of multi-domain operation and sensors. But already now, our portfolio consists of highly capable electronic warfare systems, cyber solutions, radar and command and control systems and capabilities, and we are determined to stay relevant for years to come. We are proactively working close with our customers and selected partners in order to develop common core and open architecture to support new sensor capabilities. Through software-based life cycle management and iterative adoption, we are taking small steps, but the right steps at the right time. The modern threats drives the need of new integrated sensor capabilities simultaneously in all domains, and Saab Surveillance is there with the right solutions.

Thank you, Heléne, for that interesting presentation on a very current topic. The interest of space and cyber have been rapidly increasing in recent time, but many raised their eyebrows when the U.S. announced their new space force, now countries like France are following. Do you expect more to follow? And why do more countries need to have a space force?

Well, that's an interesting and good question. Thank you. Well, all the leading countries or countries who see themselves as leading, do have a space doctrine and have had that for many years. I would like to state that space has been important in the military battlefield since the second world war. And as we all see, it's getting more and more relevant with more and more satellites and communication possibilities, et cetera.

Why would you say it's important for a company like Saab to do research in your field?

Well, as I think we can all agree upon when we heard all the presentations, sensors, communication, electronic warfare, cybersecurity is where we need to be for being relevant for the future.

Thank you so much, Heléne. If you have any questions to Heléne, which I'm sure you do, or any other of our speakers, now is the time to ask them because we are moving into the questions-and-answer session. Welcome back, and welcome back to the questions-and-answer session. I'm going to -- and I would also like to welcome all of our speakers back on stage. I would like to start with a question from the U.K. This is directed to you, Carl-Johan. It's regarding our new FCAS center. Saab announced that you will open a FCAS center in the U.K. Can you give us an update on that?

Yes, we announced that a while back. We also announced our willingness to invest GBP 50 million over the next few years in developing local R&D. We are executing on those plans as we speak. We have started to recruit the first people that will build this. So we are on track and executing.

Thank you so much. So we have a question on cyberattacks. We've heard a lot about cyber being the new domain to be in. And the question is to you, Colonel. What are Sweden doing to prepare for cyberattacks? And who should be concerned about cyberattacks?

Well, thank you. Well, from our perspective, the cyber operations are going while we speak here. And we are living in that environment every day, every hour. So we are trying to protect our systems, but also helping others to protect their systems from being attacked or to be protected from cyber attacks. We have made several new projects in that area. We have projects for cybersecurity within our research institute, but we also have projects in the university world. And the last step or the next step we are doing right now is to educating cyber soldiers at our site at [indiscernible]. And they are going to be ready this summer. So then we're going to take another step forward.

Very interesting to hear. Heléne, how does Saab work with countering cyberattack?

Well, we make sure now, as we see this is a more and more important field and really to secure all the products that we are delivering to our customers. We are looking into how to cybersecure all the systems and products.

Thank you so much. Robert, this is question for you and Heléne, but I wanted you to start answering. We have a question from [ Ali Membuat ], and he's asking what is Saab's approach to counter UAV threats?

Well, from a current product portfolio perspective, what I talked about with software functionality, that's already present in our Giraffe radars, for example, where we're continuously developing detection algorithms for better tracking and extracting information on UAS systems in our vicinity. And that's something that we've already delivered to a few customers.

Heléne, is that something that you're working with as well?

Well, as Robert states, it's something that we are seeing more and more of, it's becoming more and more relevant for our customers, and we are, of course, there to deliver.

Thank you so much. We have a question from journalist, Lee Willett, and it's directed for you, Colonel. Can you give some examples of new technology you mentioned that can bring new capabilities? And is the role of unmanned systems to support manned operation or to be independent?

Well, I think I went through some of the technologies that we have. In addition to them, there are quite few other technologies. We are taking steps in production techniques in material science, which is giving us the opportunity to build things in a new way. Sorry, what was the continuation?