Saab AB

STO:SAAB B

Earnings Call Transcript 2021-Q1

[Merton Kaplan, Head of Investor Relations]

Good morning, and welcome to Saab's Q1 2021 presentation. I'm Merton Kaplan, Head of Investor Relations. And with me here today in the studio, I have our CEO, Micael Johansson; and our CFO, Christian Luiga. [Operator Instructions] So with those first remarks, I would like to give the word to you, Micael, to review the first quarter.

[Micael Johansson, President, CEO & Director]

Thank you so much, Merton, and welcome to this Q1 report, and good morning. Let's start with a quick look at the numbers. I think we're looking at a strong quarter. We grew our order intake compared to the same quarter last year with more than 20%, still high activity in the marketplace, in a combination between Sweden and in the international market. The growth was excellent, 13%, compared to the same quarter last year, and that is, of course, due to the high activity levels in our large programs, and especially the defense side is pulling this growth and compensating for still the weak situation on the civilian market.I think we see a stable margin also due to the -- in absolute numbers. That is increasing with 7% compared to last year's first quarter. And I think that also is due to the high activity level in the defense part of the business. Also here compensating for the decline in the civilian market.I'm really pleased with the operational cash flow, which is a lot better than the first quarter last year. And this is due to the good EBITDA and also customer payments, of course, during the quarter. And I think we will see less of a fluctuation now during this year. And we are actually -- we are, of course, reiterating a positive cash flow for the year.Looking at the market highlights. We still see high demand in the marketplace. Many countries are increasing the defense budgets, and we see demand in all our areas. We are involved in many tenders and campaigns, large ones, of course, as you know, and also good traction on our smaller orders and midsize orders in the marketplace. And the interest in the -- for the Surveillance part of the business and the Dynamics part of the business is great.We have a big campaign going, as you know, the Finnish campaign for the acquisition of the fighter aircraft in Finland, and we are handing in a best and final offer end of April. I think we have a very attractive offer, a combination of Gripen aircrafts and the GlobalEye aircrafts. We do see still a decline or less activity or low activity, I would say, in the civilian aviation market connected to our aerostructures part of the business, but also related to traffic management and what we do for the airports in terms of optimizing the flows outside the gates. The need for those systems and upgrades are less now due to the less lack of traffic at the airport, I would say.We saw a good order intake, as I said, and a couple of highlights is a reasonably large contract when it comes to the support of the Gripen C/D version to Sweden. And we continue to see, from the frame contracts that we have, order intake coming in when it comes to ground combat, both from the U.S. and in Estonia as well as orders from Australia.Another important one was the fire control system sites for the Hägglunds CV90 platforms, both for Switzerland and the Netherlands. So great activity in the marketplace.Looking at a few highlights in the different business areas. A high activity level in Aeronautics, driving growth, definitely. We have an intensive phase when it comes to the T-7, the training aircraft that we developed together with Boeing, where we now are approaching the final part of the EMD phase, the industrialization phase. And just late, a few days ago, we delivered the first aircraft section to Boeing in St. Louis, and the remaining parts will be delivered later this year.And as we said, we have an intensive campaign when it comes to Finland, of course. A lot of initiatives are taking place related to that.Dynamics is still seeing a high demand in the marketplace, and we have a transition now going from the M3 version of the Carl-Gustaf to M4 in many customers, which have an installed base. We'll go that direction, I think. And so we see a good sales development and margin improvement in Dynamics due to that. I think they are in a growth phase. So what we have to do is to drive production ramp-up so we can manage more and more contracts going forward.Surveillance has a good project activity. And one of the most important milestones during this quarter has been the delivery of the third GlobalEye to UAE. We have a good increase in sales. And the margin has been impacted by a few low utilization parts in foreign operations, both in South Africa and Germany. And we have a mix of projects, but I see the development is going in the right direction also for Surveillance, and they have a great order backlog and have good deliveries going forward.On the Saab Kockums side, we have market activities in terms of mega campaigns, as you know, both in Netherlands and Poland. And we are seeing a defense bill in Sweden that vouch for more contracts going forward, I would say. Now looking at that more in detail. And we're doing everything we can now to increase our productivity. And I see that slowly happening quarter-by-quarter going forward, and we're going in the right direction with Saab Kockums.Support and Services is now entering into the support phase for the large platforms, and that is driving sales and also margin, which is good, and continuous contracts on the smaller order side, but very slow in the aviation markets. Support and services are running the business in terms of regional aircraft, where we have low activity when it comes to the support and upgrades of the Saab 340 and the Saab 2000 aircraft. But apart from that, the defense side is going really well. And we are, of course, now building up the Gripen Support in Brazil connected to Support and Services.Industrial Products and Services are a little bit of both, I would say. Combitech is showing really good performance, both in terms of growth in single digit numbers and also in terms of profits. It's going absolutely in the right direction. And that is compensating then for the civilian part of IPS, which is still really low activity on, as I said, the aerostructures side and also on the traffic management side.Those are a few highlights from the business areas. Looking at a couple of things, which I'd like to put a little bit more attention to. And this time, it's Ground Combat. It's a fantastic development we see within dynamics on the ground combat side. I mean we've done this for decades now. And we have developed something that many, many customers have required over time. And we have a very modular design and a fantastic flexibility when it comes to the uniqueness of this portfolio Carl-Gustaf, AT4 and NLAW. And we have also supported our customers with a broad variety of ammunition, and it's really easy to use.And here, we see a market potential that is growing all the time in collaboration with the defense spending increase. And we have an installed base that makes it really positive in terms of now migrating to the new version of Carl-Gustaf, Mark 4, because many customers still have the Mark 3. And we're doing collaborations with the U.S. company, Raytheon, in developing new guided munition as well, which will also increase the need for ammunition going forward.Looking at this, business is actually quite fantastic. We have doubled the sales now in the last 5 years, and we have -- we see good growth going forward as well. And we have really stable profitability, above 10%, really supporting the Saab long-term targets. And here, it's all about creating the capacity to deliver more volume. And we see that we need to increase the production capacity in Sweden, which we're doing as we speak, but we're also looking at having more -- a couple of sites where we can do more when it comes to production in this area, which could be broadened, for example. And that is the strategy going forward. So I just wanted to highlight an area where we're really doing really well now.Another interesting topic is, of course, how we're doing on the training aircraft, T-7, that we are developing together with Boeing. And as I said now, we are in the end of the so-called EMD phase, the engineering, manufacturing and development phase. And we are delivering, during the remaining part of this year, all the aft fuselages or the aircraft sections that is involved in that phase to the U.S., to Boeing in St. Louis, to do final assembly of the full aircraft. And then we are transitioning into new contract phase, which we expect to happen in 2022. And we are then now ready.We have, as you see on this slide, even if the picture is a little bit small, we are ready with the factory in West Lafayette, Indiana, which is the most modern factory, I think, we will -- we have today in terms of how digitalized it is and how automated it is. And we have people now that we have recruited in the U.S. that -- or as we speak, in Sweden to do training, to go back to West Lafayette to start the production. Why I mentioned this is because this is going to be long-term, for many, many years, continuous manufacturing capability that we will have in the U.S. and also lead to more Aeronautics initiatives in the U.S. together with partners. So it's a very important part of Saab going forward.I have -- we have told the market also that we are going into a new organization, a restructuring of Saab. That will become live July 1 this year. What we do in essence is that we go from 6 business areas to 4 business areas. So we're merging the parts of IPS and Support and Services into the other business areas. And we create an independent position for Combitech, where Combitech will report directly to the CEO office, and we are going to put a lot of effort to grow Combitech going forward because they have, really, an interesting mix of business and competence as I see it in the marketplace, an important part of Saab going forward. We do this because we need to have a clear connection between our business areas and our core areas. And we have a number of internal interfaces that we will be more efficient if we sort of removed them in our business cycle, and there will be more clear interface from the customer perspective to our businesses.At the same time, we will establish an operational excellence function on a corporate level. That function will work with the areas of supply chain and sourcing and IT, and also aligning how we do project execution and work with quality management. This is important. We can't do everything the same way in all parts of Saab, of course, because we have a very diverse portfolio, but we can align better and we can do best practices in -- to a larger extent than we do today. And this function is going to drive that. And this is all about creating higher efficiency and improve our gross margins going forward. So this will really contribute to Saab's long-term goals going forward.So finally, from my side then, what's happening now? What's our way forward? Well, as you know, the part of our strategy is to become more international in terms of establishing ourselves with more complete operations in a selected few countries. That is a key initiatives that we're working, as we speak. We're talking about U.S., of course, U.K., Australia. We're talking about important countries like Germany and Finland. So we will have to go that direction, not to the expense of the Swedish market, of course, but to grow the company, this is going to be important, and we need to be an embedded part of other countries' defense capabilities.Then we have a huge backlog, which gives us lots of possibilities, of course. And it's so important to execute now on our large programs. They are going into a production phase, and we are in the middle of going from development to production. So that is going to be key to us. And as I spoke about, the productivity and efficiency improvements are important. We need to improve our gross margin, of course, to support our long-term targets when it comes to margins. So that implementation of the new organizational structure that we will do now midyear is really, really important.So finally, I'd like to reiterate our outlook for the year. We are still supporting our view that we will grow in line with our long-term target of 5%, and our EBIT margin will be in line with the adjusted EBIT margin that we saw last year of 7.4%. And we will definitely deliver an operational cash flow, and I see that it will be less structural during this year than we've seen before.So that was a quick review from my side. And by that, I would like to hand over to my CFO, Christian Luiga.

[Christian Luiga, CFO & Deputy CEO]

Thank you, Micael, and good morning, everyone. To summarize, again, what Micael said, this is a strong quarter. We continue to have a growth in orders and sales. EBITDA and EBIT is growing. Even though we have a small hit on the margin compared to last year, we increased our earnings. And cash flow will be more positive even this year and be positive for the full year. And we have a strong balance sheet. That's the short summary of where we are standing right now.And if we look then into the numbers a little bit and start with the order backlog. This is an order backlog that supports the growth that we are giving as an outlook. We have, in this quarter, primarily had large and medium-sized orders. The small orders are down 5%. Nothing we are worried about, but it is a very heavy Swedish order intake this quarter. The order backlog today is 70% outside Sweden still and something we'll see will increase even more over time.This year sales from order backlog is up 11%. So we have SEK 25 billion now in quarter 1, that is sales for this year. And with that 11% uplift and a growth in sales of 13%, we have a very solid position, a good foundation for 2021. And of course, this gives us stability to our operations, and it gives us comfort on our outlook for the year.The financial summary for the year -- for the quarter, sorry, I'm not there yet. We have 3 quarters to go. So in this first quarter, we have a 13% sales uplift. That is organic sales of 14%. The only difference in this quarter is currency effects. There's no M&A effects in this difference. We have a 17% uplift of EBITDA, and EBIT is up 7%. The main driver for this uplift is growth. And then on top of this, of course, between EBITDA and EBIT, we have SEK 115 million increase in amortization and depreciation. The main part of that is an amortization on the development costs we have had on GlobalEye. And this is something we also told you in quarter 4, specifically.And the growth in the earnings impact also then drives down to the bottom line, and EPS then continues to grow and is up 18% this quarter.If we look at the sales per business area, 4 out of 6 business area growth in this quarter. We have a high project activity and increased deliveries and that drives to sales growth. In Aeronautics, it's definitely primarily and only related to Gripen Echo programs. In the Dynamics side, it's very interesting to see. It's not only the Ground Combat, but also the underwater and training simulation that is growing in this quarter. In Surveillance, it's driven by the airborne early warning system, and that is also something that helps the Support and Services growth in this quarter.As Micael said, IPS is heavily impacted by the civil aviation decline, and that gives us a 19% decline, even though Combitech is growing with around 6% this quarter. And Kockums, we have had an adjustment on the sales, which does an impact on the EBIT, but that means that the operational sales is down 4%, which is the more correct or better reflects the change in the quarter, and that's important to state.If we look at the trend a little bit over time, just to remind ourselves of our development, we have been growing sales with around 10%, except for in 2020. And as you all know, and we discussed it a lot, we had a heavy impact, both from a market point of view, but also from a project revision point of view from the COVID-19 in 2020.And on the EBITDA side over these years, it has also been the same. We have been growing the EBITDA up to 2020, where we had to take a hit. Now in quarter 1, we are improving the EBITDA again. And just some simple math, from our side, all of us will say that if we stand for our outlook and we have a growth in revenue this year, and we have an EBIT that is flat, and we have increase in our amortization and depreciation, then the EBITDA will grow also in 2021 as a whole.So it's been a tough and challenging year in 2020 that puts some stress on our numbers, but we follow the original plan of improving our operations underlying.If we then go to the EBIT per business area, and we can see then that starting with Aeronautics. It is a decline in margin, even though the EBIT in itself is at the same level. The margin decline refers primarily to the adjustment we did in 2020 related to COVID-19 on the projects. We see that there is a clear potential for ramp-up of that margin as we are moving from the ramp-up phase for production in Gripen E into full production, but also, as Micael said, when T-7 moves into the next phase of production in the U.S.Dynamics has improved a lot quarter-over-quarter. But -- and that is very fun to see. And as I said, it's not only Ground Combat. It's also training and simulation and underwater. Quarter 1 in Dynamics is typically a little bit lower than the full year. And therefore, we remember that 2020 was a 12% margin in Dynamics, and we don't have a lower expectation for this year. So that is a good starting point for them.In Surveillance, we have a lower margin compared to last year, and it's primarily related to the increased amortization. That impacts around 2%. But we also have a mix shift in the programs that -- and the outside Sweden operations, where we had some lower utilization that impacts in this quarter.And if we just finally comment a little bit on IPS, we see the margin is improving, even though we have a 19% decline in revenue. And that tells us that we have worked very hard with cost management, adjusting our cost framework in those areas, but also that Combitech is improving year-on-year. So that is a very good and comfortable number. I'm very happy to see how we worked very hard to improve and counter the 90% decline.So to cash flow. Cash flow for the first quarter improved compared to negative SEK 1.6 billion in quarter 1 2020 to close to flat, SEK 0.2 billion, in this year. And the main change is the change in working capital and customer payments. That's the prime source for the difference between the year. However, we do also have an improved EBITDA and somewhat lower investments. And all money counts, as you know, when we are improving over time.And if we look at then the cash flow for the years we've had, we came out into quarter 4 2020 and said that we now have a positive cash flow, and we will continue to have a positive cash flow, and we still have that view. And quarter 1 is supporting that. And the other comment I will reiterate from quarter 4 is that the cash flow will be more even this year over the quarters than it was last year.We have a very strong balance sheet at this point. We have a net debt to EBITDA, counting on the adjusted numbers of 0.9 and net debt to SEK 4.1 billion. And if we then take out the pension fund, which has a -- the pension liability, sorry, and -- which is SEK 4.8 billion, we would have had a net cash position. And the pension liability is covered by a pension fund and more than the SEK 4.8 billion. But these are the true numbers, 0.9, and it is a solid position going forward.And on top of that, we have credit facilities of SEK 10 billion. So we have a strong preparedness if things would change for the company.Finally, we are reiterating our outlook. We have a very comfortable position from quarter 1 going in then to reiterating a long-term the 5% growth target, which is in line with our long-term target; an EBIT margin, that will be 7.4% for the year, is our latest estimate; and an operational cash flow that will be positive. And thank you for that. And leaving to you, Merton, to take this further.

[Merton Kaplan, Head of Investor Relations]

Thank you very much. So now we have the time to open up for a Q&A session here. And before we do that and before I invite the moderator, some few rules. [Operator Instructions] And we have also some questions from our viewers online, and I will try to bring them up during the course as well. So with that, I would leave the voice to the moderator.

[Operator]

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

[Douglas Lindahl, Analyst]

Congratulations to a strong report. My question is on your full year margin guidance. You managed to turn around the IPS business here quicker than I expected, at least. And in this context where, I guess, is now in positive territory already in Q1, and you continue to guide for EBIT margin in line with last year's levels where IPS was loss-making. What are we missing here? What in the group is expected to be more negative this year compared to last year? It looks like your margin guidance is on the conservative side. I, of course, also note that G&A is up year-over-year, but even including this, it looks conservative. You mentioned Surveillance. Is that the main delta on the negative side? Just any comments on what you think about this from a business area standpoint.

[Micael Johansson, President, CEO & Director]

Well, I can start. First, when it comes to IPS, I mean you need to see the mix of how well Combitech is performing and still sort of the rather difficult situation on the aerostructure side, primarily, but also the traffic management side. So you need to see both aspects of it. I'm really happy with the Combitech performance, as we said. I mean it's really supporting our long-term target now and it's growing 6%. So that sort of support, sort of the improvements in IPS, that's to say to start with.But then again, yes -- I mean the margin is -- we took a number of provisions last year to be more proactive when it comes to mitigating things happening still during the pandemic, and we're not out of that sort of territory yet in terms of working the supply chain and having effects on that. I feel more comfortable now than I did last year when it comes to the margin development, definitely. And we did the right things last year to work with it this year. But still, it's early days, I would say. So that's why we reiterate what we said now, supporting the adjusted margin that we saw last year.Now, of course, we see a margin now, which is not involving any, sort of, nonrecurring effects now. So I feel more comfortable. I will go as far as that. But we're still not out of the woods, so to say.

[Douglas Lindahl, Analyst]

Okay. If I can just follow-up on that, on the mix. Does that mean that IPS can turn back into negative territory throughout the year if Combitech does not have such a good quarter as it did now in Q1 based on your commentary?

[Micael Johansson, President, CEO & Director]

I would say we're doing everything we can to make sure that sort of the part related specifically to aerostructures is mitigated. And part of that is also now using the resources in integrated aerostructures in a more beneficial way into Aeronautics, which is part of our reorganization. Combitech is, of course, hopefully supporting our margin and going in this direction all over the year, so to say. But it's a combination of the 2. If we are successful with aerostructures, I hope we can sort of stick to seeing good improvements over the year. And that's the whole purpose of it. And Combitech, I don't see any sign or reason why they couldn't sort of stick to where they are today and do a great year. So it's sort of the mix of the 2.

[Douglas Lindahl, Analyst]

So no reason to expect negative earnings from IPS from the strategy.

[Operator]

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

[Mikael Laséen]

A question on Ground Combat. Is it possible to be a bit more specific about the market opportunity that you have, the addressable market for Carl-Gustaf launch at the market? And what is your share of the market?

[Micael Johansson, President, CEO & Director]

Well, I would go as far as saying that we have important frame contracts in the U.S., in Sweden and connected to a few other states that gives us room for quick order intake, so to say, which will grow the business definitely. And then there are initiatives in the marketplace, where we will be part of tendering phases and what you call testing during the year. U.S. is going to run something called Individual Assault Munition program, which is a big program. If we can win that, that will, of course, be a big thing. I don't want to mention the number, but it's SEK 1 billion-plus, at least.So there is potential, but I won't sort of frame the whole market saying. But the market is supporting growth. And we can continue to take market share, and we have a good position. The thing is that we need to improve production capacity in Sweden, and I think we have to do that elsewhere as well.

[Mikael Laséen]

Okay. Do you have any comment on the penetration? Do you have any sort of, call it, new comments made on that?

[Micael Johansson, President, CEO & Director]

Sorry, can you say that, again?

[Mikael Laséen]

How the system is used in your key clients, which are in the U.S. and in the other countries?

[Micael Johansson, President, CEO & Director]

How it's used?

[Mikael Laséen]

Yes, exactly.

[Micael Johansson, President, CEO & Director]

Yes. I mean I don't know exactly how they use it. But I mean we've started with special forces, and now we're getting traction into sort of the full fledge army, which is driving the market. And it's a flexible all-purpose type of Ground Combat weapon. So that's why they like it so much, that they can use it in a flexible way. It's not sort of a specific anti-tank weapon, you can use it for other threats as well, of course, which makes it really attractive. But we can dive into that at the Capital Markets Day or something going forward.

[Operator]

Our next question comes from the line of Sash Tusa from Agency Partners.

[Sash Tusa, Research Analyst]

My first question is about your tender for Finland, where, unlike any of the other tenders, you are offering an airborne radar system as well as the fighter. I just wondered whether there was any possibility within your current offer for you to end up supplying GlobalEye, even if you were not successful with Gripen? And whether you have talked about trying a GlobalEye offer into any order from the Swedish government as well?

[Micael Johansson, President, CEO & Director]

Well, first of all, I mean this acquisition in Finland is based on a capability that they need. And that's just the reason why we have combined the GlobalEye with the fighter aircraft, which -- where the GlobalEye is a force multiplier and really adds value in how you use your fighter capability in different scenarios. I don't know what would happen if we wouldn't be successful on the fighter side. I assume, there would have to be a retake if they still wanted the GlobalEye, but there's nothing that we'll discuss. We put all efforts now in this package, which gives them the -- I think, the capability that they need to fulfill the scenarios that they're working with in their threat environment. It's a very attractive offer. We will have to take the next step if we're not successfully on the fighter side. But I'm really hopeful that we have a great package.Sweden has said in their defense bill that they will replace the existing airborne early warning capability. And our Defense Minister has been clear that they are aligning their view on where Finland is going if Finland selects our offer. So I'm positive on the chances of seeing Sweden also going for GlobalEye going forward, but there's nothing sort of specific yet on that.

[Sash Tusa, Research Analyst]

Great. And if I could just follow-up on the previous question, and perhaps this is one for the Capital Markets Day. Just to understand the success of the Carl-Gustaf weapon system in particular. It would be very helpful to understand roughly how many customers you have for the M3 and previous variance of the system? And how many of those have so far converted to the M4?

[Micael Johansson, President, CEO & Director]

We have -- I think it would be a handful of customers right now that have converted to M4.

[Christian Luiga, CFO & Deputy CEO]

14, roughly.

[Micael Johansson, President, CEO & Director]

14. That many. Okay, that's good. The last time I looked -- but okay that's even better. 14 customers have converted. And we have roughly 40 customers now on that capabilities. So there is still room for additional orders, definitely. On the -- connected to the installed base, I mean.

[Operator]

We don't have any further questions on the teleconference platform so far.

[Merton Kaplan, Head of Investor Relations]

Okay. Great. If you have questions on the -- for those on the line, please, you can go back to the line. But meanwhile, I have some questions from our audience online. We have David Barker actually have a question here from Bank of America. And David is wondering -- has a question about the cash flow. So I think I'll direct that to you. So we had a strong cash flow in Q1, free cash flow performance. How much of this reflects underlying free cash flow improvement versus the phasing? And how much should we -- can we extrapolate for the rest of 2021? So it's a bit more flavor on the cash flow. And his follow-up to that is also, can you give -- when will you be able to give a better sense of the time line and the pathway to the midterm margin guidance that we have in the long-term targets?

[Christian Luiga, CFO & Deputy CEO]

So let me start with the cash flow, if that's fine, Micael. And so we have -- what I said was that quarter 1 has an impact from customer payments year-on-year. And of course, it's not only this quarter that is different. It could be also quarter 1 in 2020 that is different. But the main impact is from the customer payment, and then we have an increased EBITDA in a slightly lower investment situation. If we will have a more even pattern going forward on our cash flow, the answer is yes. But if it will be totally even, the answer is no, because we are still very dependent on larger milestone payments on our major projects.But as more we get, both Surveillance and Dynamics and others to have a portfolio that gives a running sales and a running flow of cash, it will be better for us. And we also work within our programs to make sure that the milestone payments are more even over time, where we can do so. But there will be an impact. The only thing we will say at this point, and I appreciate the question, David, is that it will be more even this year compared to last year, and it will be positive for this year. And maybe we will come back with more details when we have passed a few more quarters this year.And on the second question, well, we are working hard to cope with the impact we had last year, as I showed you the development on EBITDA, that we had a hit on 2020, and we are recovering from that now in a very solid and good way. Then we have a phasing, as Micael talked about, moving out from a more development phase into a more production phase that will be vital for the step change. And thirdly, we are working then now with our efficiency, both through changing the model, but also the hundreds of activities that are ongoing in the different business units, to improve ourselves as we go along. So those are the 3 elements. And so it's not going to be a quick change. It will be a moving change slowly over the coming periods.

[Merton Kaplan, Head of Investor Relations]

And we have another question actually from the audience here. Maybe it's for you, Micael. [ Matt Jansen ] from, I think, Finland is asking. Can you confirm or repeat the Gripen E deliveries that you expect to Sweden and Brazil this year? How does that schedule look like?

[Micael Johansson, President, CEO & Director]

Now, we have a schedule that we are committed to for this year. We expect to deliver another 4 aircrafts to Brazil this year, as we've said before, and also a few to Sweden. So that's the plan. Nothing has changed.

[Merton Kaplan, Head of Investor Relations]

We have 1 more question here from David Barker from Bank of America. And his question is about the T-7 trainer. So the first delivery -- the question is how big was this -- will this program be for Saab in Swedish krona terms? And in terms of the margins, are they in line with the rest of Aeronautics?

[Micael Johansson, President, CEO & Director]

Well, definitely, I mean the program supports the margin development. How big the program will be? I mean we've just taken into our books right now the EMD thing, with that phase. What happens in the U.S., as you know, is that you go into low-rate initial production phase, and then we go into full rate production phase after that. The contract or the frame contract that exists today is in the region of 350 aircrafts, but it could go up to 450. But then again, Boeing's expectations on the market side, both in the U.S. specifically and also internationally, has been in the range of a couple of thousand aircrafts over time. So that gives you a feeling for it, but it's not sort of definitive numbers yet, but there will be a few hundreds at least coming in from the U.S. in the next couple of phases.

[Merton Kaplan, Head of Investor Relations]

Right. I hope that answered your question. I have -- let me ask the moderator. Do we have any more questions from the telephone line?

[Operator]

Yes. We have a follow-up question coming from the line of Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Two, if I may. You mentioned there Dynamics doing really well, and there is some so need for additional capacity. Is it possible to put some sort of number on that? Will it be significant the investment to Dynamics? That's number one. And secondly, Christian, for you as well. On cash flow, I believe you mentioned previously that you were wanting to implement shorter payment periods more evenly spread out over time with customers in order to counteract volatile cash flow. Has this been sort of accepted by customers? And are your competitors moving in the same direction would you say?

[Christian Luiga, CFO & Deputy CEO]

If I start with the last question, I can't answer for the competitors, actually, but I can see what kind of dialogues we are in since I came to Saab. And in certain cases, it is predefined how the payment schedules will look like. And -- but in several cases, you have an opportunity to discuss that. And there's 2 things that, of course, is important. One is that we cover our cost and have a positive cash flow as much as possible over the project life cycle. And then secondly, that it's as even as possible. And I know in cases since I came here that we have changed in the negotiation to have more and smaller payments in an offer that has gone out. So it can actually -- we can actually change in the dialogue with the customers.

[Micael Johansson, President, CEO & Director]

Then again -- if I may answer that a bit as well. I think it depends a bit on who we are looking at. I mean the U.S. companies in the international market, if they supply sort of the larger platforms, that's normally under the foreign military sales perspective. So we have no, really, insight in what that really means to the industry when the contract is done between sort of the 2 governments. So that might -- I have a feeling that that gives them a better and more sort of stable cash flow situation than when you directly discuss that with your customer. So you have things like that. And then it depends whether you're sole-sourced in a country or not. And in the competition, when we are in open competition, it is exactly as Christian described it. Sometimes it's very well defined and sometimes it's negotiable. So it's not sort of a 100% clear picture. What we're seeing is less -- it's not a generic thing or generally speaking, now that you get large sort of advance payments when you look at all contracts. You have to work with milestones and performance milestones. That's obvious.

[Christian Luiga, CFO & Deputy CEO]

And on the investment in Ground Combat, it's too early to say anything right now. I mean there are different ways to step into a new production plant by doing just part of the product in that site and then sort of use 2 sites for a while or you go a little bit more full blown. And it depends also how we will see the order intake, how fast we'll grow, how fast we will do this? So there's no clear answer to that today, Douglas.

[Micael Johansson, President, CEO & Director]

If you extend your capability in Karlskoga, for example, of course, that will be investments in the normal course of operations, I would say. Nothing sort of that will stick out. If you want to establish yourself in another country, that could be an M&A, and then we have that as a sort of a target to do if you want to take sort of a shortcut to having a capability in another country. So it's difficult to say right now. We will, of course, come back and inform you when we're taking a step like that.

[Operator]

No further question at the moment.

[Merton Kaplan, Head of Investor Relations]

Okay. Perfect. We have some more time to do 2 more questions, perhaps. We have Sandy Morris from Jefferies in London, who obviously have read the report here, and he can see that sales in Brazil this quarter rose significantly. And he's wondering, are the sales still dependent on milestones in Brazil, meaning are the quarters going to be lumpy? Or do we have a reached delivery phase where it's going to be more consistent in Brazil? That's his question.

[Christian Luiga, CFO & Deputy CEO]

We are in the early phase of deliveries. So I wouldn't say it's completely sort of jumped from milestones to deliveries only yet. We -- as I said, we've delivered probably 5 -- not probably, we delivered 5 aircrafts after this year. So that gives you a feeling for sort of the initial production, but still also dependent in milestones, definitely. So in the in-between right now.

[Merton Kaplan, Head of Investor Relations]

Okay. Great. We have 1 more question here from a person, [ Pavel Ivan ], and he would like to -- he thanks for the very positive news today. He reflects on that we mentioned that orders are 70% from -- came from abroad. And obviously, we're growing the international business, and we emphasized that a lot. But his question is, how does this comply with the Swedish government's intention to increase the budget until 2025? And don't you expect an increase in orders from the Swedish government?

[Micael Johansson, President, CEO & Director]

Oh, yes, we do. Absolutely. There are many things in the Defense Bill that supports growth also in the Swedish market over this rather long time period. So I always say that to really long-term grow the company, we have to grow more internationally than we do in Sweden, but not to the expense of what we do in Sweden. That's the whole thing.I'm just saying that we are still quite dominated by what we do in Sweden. So if we want to grow the company substantially, which is the intention, we have to be an embedded part in a few selected countries around the world. And then we need complete operations there. So -- and we have selected some markets where we think it's beneficial for us to be. So yes, it's not the one or the other, definitely not. And I really look forward to more contracts from the Swedish side as well.

[Merton Kaplan, Head of Investor Relations]

Great. That's very clear. So do we have any more questions online?

[Operator]

No questions.

[Merton Kaplan, Head of Investor Relations]

Okay. Then I think the Q&A session is over. And I would like to thank you, Micael; and thank you, Christian, for your time.

[Christian Luiga, CFO & Deputy CEO]

Thanks very much.

[Micael Johansson, President, CEO & Director]

Thank you for listening in.

[Merton Kaplan, Head of Investor Relations]

Thank you very much.