Good day everyone, welcome to Saab's first quarter financial results presentation. My name is Merton Kaplan. I'm here in the studio at our headquarters in Stockholm. With me here today, I have our CEO, Micael Johansson, and CFO, Magnus Örnberg. We'll start the presentation with an overview of the business, then followed by a financial overview, then we will, as usual, go into a Q&A session and open up the floor for questions from our telephone conference audience, also questions from the online on our website. Don't forget that you can send us your questions during the presentation. That, I'd like to give the word back to Micael.
Thank you, Merton, and thank you all for joining us this morning. It is unusual and challenging times, I will, of course, come back to how Saab is performing in the context of COVID-19, and the mitigation actions we are taking. Of course, I will start with some highlights and a summary of the first quarter. It is a strong quarter, I think. We have increased our order intake compared to the first quarter last year with more than eight percent, and we have especially seen a further development of the smaller orders growing, which is extremely good for our foundation going forward. It has been the second-best first quarter ever for Saab and on the sales and revenue level. We have been able to perform many important milestones during this quarter, especially within the defense-related business in all our programs.
This is also a quarter that, in the context of our overall strategy, is an important piece. We still have a strong backlog supporting our revenue over this year. The substantial part of the revenue this year will come from our order backlog. We see a continuous growth going forward. The earnings have developed fine and is also one of the best first quarters we've had ever on the profitability level. That is also, of course, connected to all the performed milestones and the work in all the projects that we have. We have had some effects and implemented actions in the non-defense related business. I will come back to that. Looking at some of the important milestones, I think we look at the Gripen program. We have done tremendous progress on the two-seater program for Brazil and also in the Gripen E for Sweden.
The GlobalEye airborne early warning platform is now approaching delivery, all the milestones on that side has been performed according to plan. We have also seen good progress in the transformation from development into production on the submarine side. Now the T-7 aircraft, which is the training aircraft together with Boeing that we have a program, have been progressing extremely good also in Linköping, Sweden. One really interesting thing, which we're really proud of, is that this is the first time we have flown our full AESA radar on the fighter side, the active electronic scanned antenna array radar. Now we have a fully new radar that we have test flown in the Gripen D aircraft during this quarter with excellent results, that test program is going to continue going forward now.
Going into the second quarter, we have great confidence and a strong backlog, and we are continuing to perform excellent, I would say. Looking at the COVID-19, of course, there is great uncertainty, and that is also the reasons why we have decided not to reconfirm our guidance. It is impossible to understand the scope and the duration of this crisis, of course, and how it exactly would affect the world economy. Far, we have seen very limited impact on the Saab business because, I mean, the defense-related business, which is more than 80% of our revenue over a year, is progressing really good according to plan. We've seen some impact on the civilian side, especially the civilian aircraft business. As you know, the airlines have more or less stopped flying, that affects, of course, the civilian aircraft business.
We are a tier 2 supplier to them, and we have to adapt them to the production rates that they are providing us with. We have implemented furlough and short-term leaves in that area. We see some effects also on the traffic management side and the Saab Consulting business. Overall, I would say that the impact has been very limited on the Saab business overall, and especially the defense business is performing excellent. We have done measures, of course, listening to the authorities' recommendations and also the government directions, directives. Of course, the well-being of our employees is the most important thing.
We have implemented ways of keeping social distance in the workplaces, of course, and some people are working from home, even though our type of operation is a little bit different since we have lots of production, but also classified environments, which is absolutely not possible to work from home doing that. It's a little bit different. We don't have a great portion of our workforce working from home as we speak. Much of the operation is actually up and running as planned. I think we have done an important thing as well in strengthening our flexibility, making sure that we have credit facilities and liquidity, and we go into the second quarter with great financial strength, I would say. On the market side, we haven't seen any sort of signals in terms of that programs have been discontinued or deferred in any substantial way.
We, of course, have limitations by not being able to travel, but it's really good to have now an international organization with people in many countries keeping up the dialogue with all our customers, and we are in negotiations on several large contracts as we speak, even though we must do that in different ways than earlier, since we can't travel outside Sweden. In the commercial market, we have seen, as I said, a sharp decline, but that has not been seen in the defense-related business at all. When it comes to the marketplace, we did excellent in the evaluation test with the Gripen E and the GlobalEye earlier in the year, connected to the Finnish procurement of fighters and potentially airborne early warning aircraft. We have contracts on the training and simulation side in the U.K., important with the British Army.
The U.S. is progressing well with good contracts within the framework contracts that we have in these countries. Some contracts also from Sweden preparing for the next generation of the corvettes. We have definition contracts for that. We are still involved in all the campaigns when it comes to the fighter side, the Canada campaign, the Finnish campaign, and also a couple of others. The market activity is still high. We have to find different ways to keep the dialogue with the customers open, of course, since many are in lockdown and working from home. We find our ways forward. Looking at the financial highlights, as I said, the order bookings have increased, which is really good to see, with eight percent. Also, the revenue is really a good one, on par almost with last year, but actually the second-best quarter ever, as I said.
Good profitability level as well. Operating income, also one of the best first quarters ever we've seen. The cash flow is completely according to plan. This is a combination of working capital increases in our big programs, of course, and the amount of milestones that we had in the first quarter. The result is this minus SEK 1.5 billion, roughly, in cash flow. That is absolutely how the quarter was planned. Already in the second quarter, we see milestones that we can pass that will improve the cash flow. We have said that we still have the ambition to generate a positive cash flow over the year. The trend, as I pointed out, has been good on the revenue level, on the sales level, and this is according to our strategy to grow the company, of course, and it's a strong first quarter in that respect.
It's an important piece of our strategy going forward. The same thing is true for the operating income. We are on our journey towards our long-term financial targets, which we are still very much committed to, and we haven't abandoned our strategy. We continue according to that, and I will come back to that shortly. We have, in summary, had not great impact from the COVID-19. Very limited, actually, as I told you, and mainly in the civilian side of the business. Again, the uncertainty, the duration of this, and I don't have the crystal ball either on how long this will continue and how long certain countries will be in lockdown, how it will affect, eventually, our supply chain. We do have a strong backlog. We do have long-term programs.
We have reasonable stock from our suppliers in-house, so we will continue to execute in a good way. Again, the uncertainty and the visibility into this crisis is a problem. We can generate scenarios, but we do not know what scenario is correct, so that's the reason why we have decided not to reconfirm our former guidance at this point in time. Finally, from my side, I want to point out that there is no deviation from our strategy. We continue to work diligently in all four perspectives, portfolio, market, performance, and innovation. Many important steps have been taken in this quarter. We have implemented a new market organization, and we have our local people in the marketplace. We are focusing on a few strategic countries going forward, being U.S., U.K., and Australia.
They have defined our type of business as sort of an important part of critical infrastructure and an important part of society at this point in time during the crisis. Those countries have operations up and running, even though many are working from home and other parts of the country are in lockdown. We continue our work with our portfolio, optimizing that, and we have gone through several assessments during the quarter and taken decisions on that side. We have implemented our innovation labs now, prioritizing certain technology areas because technology pace is so quick nowadays, so we put a lot of effort in that, and we are continuing our R&D efforts. Performance is essential to us, and we're doing well, but we still have measures to do to take us even further when it comes to being more profitable and efficient in our big programs.
The quarter is an excellent piece of our continuing long-term strategy, and we will diligently continue to work with that going forward. That is a summary of the first quarter from me. I'm very proud of the quarter. I'm very satisfied, and Magnus will now go into a few details when it comes to the financials. I will hand over to him.
Thank you very much, Micael. Let me run through the financials. I will start with a super summary as I normally do. With the turmoil now in the world, we are delivering a solid Q1 performance. We have also managed to keep the COVID-19 impact low. Thanks to everyone who has contributed in the company with that this quarter, fantastic work. We have an increased order intake, eight percent. That's good. Sales is high. We are delivering well on our project. The earnings are stable. For the group level, I will dig into the detail for BA. That is very much due to the performance in the projects this quarter. Yes, we have an uncertainty and low visibility going forward. That's why we have decided to withdraw the outlook as we stated it.
We are going in the second quarter with a very strong backlog, and I come back on that. Cash flow in Q1, very much according to plan. Here I will also point out some of the reasons why it looks the way it does in Q1 and what we believe going forward. We have a strong financial position, and we have also secured a good liquidity situation going forward. Backlog, one of our most important KPIs. We went in the year with something like SEK 29 billion to be executed in this year. Now when we estimate after Q1, we have around SEK 22.5 billion more to execute throughout the year. That is good. It is more than it was one year earlier and supports our very large portion of our volume throughout the year.
Also if we lift our eyes a little bit and look a little bit further in the future, we can also see that we have a good backlog for 2021. Already now we have some SEK 23.5 billion to be executed next year, and that is a couple of billions actually more than it was one year ago. That is a good support going forward. If we look at the order bookings per business area, we can see that several increases. We also see the small orders continue to grow, and here it's good to see that we are managing to do that, plus four percent. This is probably the area where we have the least visibility going forward. So far we have managed to grow those.
When it comes to the backlog, it is solid, and it's also supporting the continuity in the operations and for future growth. That's good. Sales, overall stable development in operations, and we are relatively fully loaded. The Gripen programs are proceeding according to plan. We're slightly lower on sales, and this is mainly due to the revenue recognition between the quarters. Very much according to plan. Dynamics, also lower, and even though we have full production in Dynamics, and this is mainly a timing of delivery. Last year we had a big delivery in Q1, and this year the deliveries are more towards the quarters going forward. That will in itself be managed going forward. For the rest, we are roughly in line with previous year.
When it comes to the operating income, obviously, volume is important, and we can see here that in Aeronautics we are a little bit lower. This is mainly driven by volume and very much related to the timing of the planned execution and the work in the program. The same goes with Dynamics. That will also change over time. Very good improvement in Surveillance margins and operating income. Last year we had a tough first quarter. This year we have better than average quarter, I would say, due to good project execution. Well done there. Support and service, a little bit of a mix. We have relatively good volume, but the project mix is giving us this quarter a little bit lower margin. I believe this will correct itself when we see the mix shifting back.
We have also some impact also from the slowdown in the aviation market. Where we have the biggest impact so far is in IPS, where we are impacted by the sharp downturn in the civil and commercial aviation business. Here is also where we have taken most of the actions to mitigate that downturn. This is where the market is impacting us the most. Coming back to cash flow. We all have a quarter where we are generating cash from operations, we have an increase in working capital, and this is mainly due to that we have no planned major milestone in Q1. We have several major milestones throughout the year, and that is why we are reiterating our cash ambition.
We are working in a good way in our large programs. That's why we are building up the contract assets and liabilities, above SEK 2 billion. Of course, this should then turn into cash going forward. Also the inventory buildup in Q1 is also to prepare for deliveries, I would say, mainly in Dynamics, where we see growth going forward. We have a good collection in the quarter. We have continued investment on the same level, I would say, as previous year, both in fixed assets and capitalized R&D. We have several deliveries from now on planned for 2020 and with corresponding cash impact. That's why we are reiterating our cash ambition for the year and, as Micael said, even in the near term. This is according to plan, what we now see. The financial position.
We had some SEK 7 billion in net debt going into the year. We have now SEK 8.5 billion. This is, of course, due to the cash flow change in the quarter, and also very much according to the plan. What we have been doing in Q1 is to further secure our financial flexibility. We have signed a new revolving credit facility in the first quarter. We have also handled the maturity of bonds in Q1, and I can say now that we have no more maturity of any bonds for this year. We have handled all of that already in Q1, and at the same time, we have a good cash buffer. We have a liquidity of around SEK 6 billion and committed unutilized credit facilities of more than SEK 8 billion.
That was, of course, the reason why we did this RCF to create this buffer to prepare for uncertainty and the lower visibility going forward. A good equity to asset ratio, as earlier. The focus going forward, of course, safety and wellbeing of our employees, top priority. That we, of course, number one. Executing our delivery of projects, very important, and we have so many things to be delivered throughout the year now. To secure, of course, targeted orders. Of course, the backlog also needs to improve. All of this should be supported with a strong financial position to manage the liquidity going forward. With that, I would like to open up for the Q&A.
Thank you very much, Magnus, and a good walkthrough of the quarter. Now it's time for the Q&A. We're going to start taking questions from the teleconference, but also I can already see we have some good questions from the audience online. Before I hand down the questions to the moderator, I would like to just inform everybody who's asking questions, please take a question at a time so everybody gets the chance to ask questions, and then we'll get back to you if you're on the line again. With that, moderator, please open up the Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. If you change your mind or decide to withdraw your question, simply key zero two. The first question we have is from the line of Douglas Lindahl from Kepler Cheuvreux. Please go ahead.
Hello, gentlemen. Hopefully, you can hear me. I'll limit myself to one question in that case. I wanted to understand the main components that you find more difficult forecasting the full year. I guess with regards to your withdrawn outlook statement, this was mainly referring to the infra orders that needed to be up year-over-year to around SEK 5.8 billion in order for your top line to grow in line with the previously communicated five percent. My assumption is now that the COVID-19 obviously make this more difficult. In this context, was Q1 order intake in line with your internal order intake expectations? Would it be fair to assume that group margin for the full year still expands year-over-year as Aeronautics moves into that delivery phase and Dynamics also continues to grow order intake here in Q1? Maybe that was two questions.
That was one question. Well, I can start. When it comes to the full year and us not confirming now, again, the guidance that we gave earlier. The first thing I think of is how to interpret where the supply chain is going. How quickly will the different parts of a global supply chain in different countries actually get up and running again?
It looks completely different in different countries. In the U.S. and Australia, for example, we do have some priority to these type of companies, but they're not completely up and running. Some countries are completely locked down. It's difficult in India, it's difficult in South Africa, which is also under complete lockdown. It is our visibility to understand, even though we look at this on a daily basis, we have mitigating action going to create redundancy and second sources and help our supply chain, to some extent, to get going. It is not possible in this context of COVID-19, to forecast exactly how things will evolve, even though we have a strong backlog supporting a majority of our revenue this year.
You can look at different scenarios, and we can do our estimates, of course, based on that, but we cannot say for certainty that we understand which scenario is correct from a supply chain perspective. On top of that, of course, I cannot judge will we have more absence and sick leave within the different sites, going forward, both in Sweden and elsewhere. All in all, I don't have the crystal ball. For this point in time, we cannot confirm our guidance. We work it diligently, of course, every day.
I can complement a bit on your question as well. You asked about order intake, very much in line with our plan for the first quarter. As we have said, we go in now in the second quarter with a very strong backlog and very clear deliveries in the quarters to come. If we can just get the supply chain as we have planned and the people working, then we look positive towards that. You also asked about the Aeronautics margin, I think we have commented a bit on that before, that this year is roughly similar to previous year, I would say. As we are in a buildup on the production phase, we will deliver and get the first serial-produced aircraft in the air towards the end of this year. We are still in that buildup phase.
Okay. Thank you very much, gentlemen. I go back in the queue.
Thank you.
The next question we have is from the line of Mikael Laséen from Carnegie. Please go ahead.
Mikael Laséen here. Good morning. Hope you can hear me. Yeah, I would like to know more how you see the civilian aerospace side, that's, I think, six percent of group sales. What is the situation right now? Can you update also, please, on the exposure you have in this area?
Okay. I can start again. Again, it's a limited part of our business, as you mentioned. We are adapting, of course, to our customers' rates, based on that. There are no clear messages or it's changing all the time. How quickly will our customers on the civilian aircraft side get up in substantial rates again? Will that take years, or will it take a year, or will it take months? I don't know. We all know that airlines have stopped flying. They do have a backlog, but will that change? I don't know. I cannot judge that. We talk to them all the time. We get more information, of course. The exposure is that we just have to adapt the workforce. We follow them when it comes to the rates. We do that on a monthly basis, more or less.
We have a follow of roughly 500 people now working short time, weeks. If we need to do more, we will do that immediately, to adapt to their rates. This is a continuous dialogue, and I don't have even on that side, a really sharp forecast from them.
Okay. Just a quick follow-up. Are you continuing to deliver in Q2? The visibility for Q2 should be relatively okay?
You mean on the civilian side?
Yeah.
Yeah. Absolutely. Production in all aspects are up and running. This is adaptation. We lower the rates, but operations is up and running. We are in production, and we are delivering. It's just the pace of things that has changed. That goes for everything. All our production sites are up and running. Operations as a whole is up and running, and we go into second quarter with great confidence and with what we see now, and we have reasonable stock from our supply chain to continue. Absolutely. It's more what happens in the slightly longer term that we cannot judge based on the COVID-19.
Okay. Got it. Thanks.
Thank you. The next question we have is from Erik Golrang from SEB. Please go ahead.
Thanks. I have six questions. I'll do one then. I want to ask on factoring, you turned to factoring again in the quarter, sold some receivables. Yet you talk about the expected milestone payments in the second quarter. What was the reason for turning to factoring again in Q1?
Yeah. As you know, we have that program that we can utilize on/off. We do it when it makes sense from a cash flow perspective and a timing. For example, just to how we think about that, in Q3, we utilized it last year, in light of the big collections and milestone payments in Q4, we reversed that. I think it's more of a cash planning and liquidity planning activity than anything else. We did around SEK half a billion in Q1.
Should we expect a similar situation as in Q3, Q4, that this is reversed in Q2?
I think that at least has been our strategy for how to utilize that program. I think it makes sense also to balance it with the large milestone payment. That's my view.
Thanks. I'll get back in line.
Thank you very much.
The next question we have is from Manushka Velia from Monday. Please go ahead.
Thank you. I also have a couple of questions, but I will limit myself to just one. You say that the COVID-19 impact mainly affects your civil business. Yet when we look at the kind of sales development in the quarter, we see quite negative impact in the Dynamics and also Aeronautics, whereas IPS is actually holding quite okay. Can you just help us to understand this trend and what should we expect going forward? Thanks.
Yeah, well, I must say that when you look at Aeronautics and Dynamics, it's absolutely sort of the profile of their programs. Dynamics is a timing thing. They are really up and running when it comes to production, full speed ahead. It's the deliveries will define when the revenue will be recognized. That's the way it is. Those deliveries are planned over the year in a certain way. Aeronautics has its profile in the programs depending on certain sort of activities in the different programs like the Gripen E and the Gripen Brazilian program. That's also the profile of the Aeronautics business. It's not exactly the same every quarter, depending on what type of things go through the organization in terms of recognition of revenue. That's completely according to plan.
I would say IPS would probably have been even higher if we hadn't had the effect of this. We see some limitation in revenue, even though it has increased, but it should have been even higher if we hadn't had the effects. As a consequence of that, we see some under absorption instead, which then affects the margin.
That's my comment.
Yeah, I.
You can go into detail.
I can now say the correct answer. I will give the feedback similar. In those two business areas, we are basically running full speed. Aeronautics, the timing difference there on is mainly on when certain material flows through the P&L or the exact number of hours booked on the program. This is more of a timing issue, and I have no other comments on that. Dynamics, one way to look at it is you can also look at the cash flow in Dynamics in the first quarter, which is negative large extent. This is very big buildup of working capital. We are producing at high speed and fully loaded, and which should come out later on. That's why we are saying that those are really not affected by that.
Okay, you expect much better sales momentum from these two businesses?
Correct.
In the coming quarters? Yeah. Okay. Thank you.
Thank you. At this time, I'd like to hand back to the speaker for any web questions. Thank you.
Thank you very much, operator. We have a couple of questions here from our viewers online. I would like to start with Pavan Daswani from Citigroup in London. He's asking, how do you think about the Gripen deliveries to Sweden and Brazil this year? Is everything going according to plan?
Yes, it is. The programs are going exactly according to plan, and all the milestones have been passed in Q1. Yeah. I'm confident in that.
We have another question here from a person asking, will the GlobalEye to UAE be delivered in the next quarters as stated previously?
Yes, it will. It's a short answer on that one.
Yeah. Thank you. Another question here from online audience. One person is asking here, what's the plan exactly to overcome potential supply chain issues?
Well, it's a complicated question. The question is not complicated, but it's a global supply chain. As I said, it looks a bit different in different countries. If you look at the supply chain, some parts of the supply chain are complicated subsystems where we've had a long-term relationship, which is not so easy to create redundancy on. There we make sure that we work with the companies to overcome any hurdles on.
On lockdowns or how quickly they can come up and running again. Other parts, it's, of course, possible to create second sources and mitigating delivery problems because we can find other suppliers. It looks completely different based on the product structure as such, but also, it looks different in different countries. It's not one easy answer to that, but I can assure you that we work with all these mitigation actions on a weekly and daily basis, and I get reports every week, which is comprehensive in terms of mitigating actions towards our supply chain.
Also to keep close contacts, I think, with the suppliers, and I think we are and have never been as much in contact with them and planning and forecast and what can be done and all that. I think it's also hard work.
Very good. Thank you. I will have one more question from the web here that I received, and I'll pass it on to the moderator after this. We have a person here asking about the T-X program or the T-7A, in the U.S. together with our partner, Boeing. What's the status there, and what can you tell us more about that order that they have received? How you comment on how that's going?
The T-7 program, as it's called now, it's really performing well. This has been an important quarter for our so-called EMD phase, which is more or less the industrialization phase of our part of the aircraft in Linköping. We have started now production of the five entities that we will produce in Sweden before the production is then transferred to West Lafayette, Indiana. The buildup of that facility in West Lafayette has started, and already later part of next year, we will see tooling and things come into place, and early 2022, we'll start seeing outputs from that factory.
We are under contract for the so-called EMD phase, and then the frame contract is almost 400 aircraft for the U.S. Air Force.
Nothing has changed, apart from the market interest, of course, that is substantial.
We work with Boeing in the marketplace as well. Several countries are interested in this platform. I have continuous dialogues with the Boeing defense leadership on the progress of the program, and together we can just conclude it's going really well.
Mm-hmm. Good. Very good. We go back to the line on the telephone, moderator, and take some few questions.
Thank you. The next question is the follow-up question from Erik, from SEB. Please go ahead.
Thanks. I'll do two questions this time. There was a step up in CapEx in the quarter, both tangible and intangible, after a period of that actually flattening out and starting to decline. Is that a trend break?
No. My view is that this is roughly in the same level as previous year. It can vary a bit between quarters, of course. This is when the CapEx comes into the books is, of course, when you're done with the investment. It's more of a timing issue, and so similar level as we, I think, also commented after Q4 also. It should be similar levels. Otherwise, it's a timing issue.
Okay. Then a follow-up on the delivery question to the UAE on GlobalEye. What about the order that is yet to be signed? What's the status on that one?
We're still in, as planned, in negotiations. It's a comprehensive contract, as you understand, in all aspects. Now we keep the dialogue going and negotiation going locally, even if we are in this COVID-19 situation. Nothing has changed. It will just take the time it needs, and we are pursuing that as planned. We will, of course, inform you when we have finalized.
Yeah.
That's comforting.
Thank you. The next follow-up question is from Peter from Carnegie. Please go ahead.
Hi, Mikael here again. Couple of questions also from me. First one is on the company you have in the U.S. together with Maxar, Vricon. Can you say something about the performance in 2019? It's part of the annual report. It looks like a very impressive performance. What is driving this? What is the outlook for the company?
Well, Vricon as a company, which is then more or less 50/50 owned between ourselves and Maxar, then, it is performing really well, and I think it's taken off now.
I think many customers have started to realize what this really accurate, high accurate, and high-resolution 3D imagery can give you in many applications in terms of guidance, navigation, and what have you. We're really pleased to see that the company eventually took off. I see a great future for that company, absolutely.
A quick follow-up just on the margin. Was there any one of positive things in 2019? The margin was 45%, if I remember correctly.
Are you still at Vricon now or?
Yeah.
Yeah. No, it's more of a volume thing. I think the margin improved significantly with the volume there, and the volume increased significantly throughout the year. Yep.
They got a few large contracts.
For them, large contracts, and of course, this is crunching data and software associated activities. The margins will be good.
Okay. Good. Just one more, if I may, on the number of employees. It increased a bit now in Q1, and primarily for Dynamics.
Yes, this is because the success on the training contract that we had last year in the fourth quarter. We're taking over the management of the army training in Germany, the GÜZ contract, as it's called, and that added a number of employees in Germany, slightly more than 200 employees. That's the jump.
That came in, I think, first of March or something like that.
Yeah.
First of March, I think.
Okay.
Employees.
Employees. Yeah.
Thank you. The final follow-up question is from Anushka from Monday. Please go ahead.
Okay, perfect. I have two follow-ups. The first one is on the performance at Surveillance, which had quite a good margin in the quarter. How sustainable is this profitability improvement, and what was driving that? Thanks.
Like I said, probably last year we had too low margin, I would say, because we had some project issues that we resolved, and this year is probably, on the other side, a little bit maybe better than we might have seen in the beginning. We have always said that Surveillance should be above group average margin. Of course, nothing is exactly the same every quarter. I would say a good quarter. That's how I would stress that one. I don't know if you want to, it's all linked to project execution in the large contracts.
No, I don't really have anything to add. It is, as you say, a business that should be above average margin for Saab, and they have improved the performance on project execution, and that's the whole reason, and especially in some projects. The trend is really good within Surveillance.
Okay, perfect. Then my last question is on the cash flow progression that you expect in 2020. You expect positive cash flow for the year. You also say that you will get some milestone payments in Q2 already. Can you give us a bit more color about the cadence of that cash flows? Maybe you could comment on the total milestone payments that you expect right now for the year, what will happen to contract assets and so on. Also, should we then expect positive cash flow already in Q2? Is there any kind of postponement risk to this milestone payment and so forth? If you could be more granular when it comes to cash flow outlook. Thank you.
I don't think I will be so detailed so that you will be satisfied completely with the answer. I can say that we have deliveries from programs running in our backlog over the year that then constitutes a big portion of our revenue, but those also have deliveries, actual deliveries, that are associated with substantial milestone payments. I would definitely expect a good improvement in the second quarter already. As far as that, I can go. Even though, as you know, our deliveries can be digital and large payments at certain points in time, in a sensitivity analysis overall, I'm confident that we will be able to generate a positive cash flow during 2020, and I think that's all I can say right now.
Yeah, and it's difficult to comment on the specific milestone, but it's all connected to these bigger deliveries, I would put it. You're commenting on the contract assets. Of course, this is very much linked to that, and the contract asset basically is building up work that we have not just invoiced and cashed. When we do a big delivery, the corresponding decrease in contract assets will happen, and we will invoice, and the cash comes in. That's how that mechanics works.
Today you have almost SEK 14 billion in contract assets on your balance sheet, and just two years ago it was SEK 10 billion.
Any kind of idea how these can develop during the year?
This linked to what we just said, has to go down in light of the deliveries. This is mainly connected to air surveillance and Gripen programs. This is absolute majority of that.
Okay, thank you.
Thank you. At this time, I'd like to hand back to the speaker.
Thank you very much. We have some time to take three more questions that we have received here. I have an investor here who would like to know your thoughts about the Swedish government's planned increase in the defense budget. Is this still something that you look into and expect?
Well, of course, I follow the negotiations as far as I can through media and so forth. They are ongoing. That's as far as I know it, and I know the scope of the negotiations, and I hope as much as possible can be fitted within the scope of the budget. There has not been any signals that will be reduced. I think they're working with the amount they agreed.
the SEK 85 billion. I don't know what will happen on the civilian side of the defense. I expect, going forward, that there will be requests for investments on that side. All in all, I think they are diligently negotiating the content of the defense bill as we speak. I don't know exactly what will fit in it.
We, of course, will try to be as relevant as possible to what's in it when they have decided, and continuing being an embedded part of the Swedish defense.
Good. Thank you. We have a bit more, maybe difficult or different sort of question here from David Barker in London from Bank of America. He's wondering about, given the build rates for the civil aircraft cuts, especially customers like Airbus and Boeing, are you planning to take any actions to restructure your civil business?
As I said, we continue to follow their expectations of production rates from us.
If we need to take further actions to adopt the workforce or how we perform that operation, we will do that.
to follow them.
Yep.
What is going to happen and what their predictions are, that's more difficult to know.
Good. A final question from a private investor. He is interested in Saab's cloud service, Egira, and he is wondering, is everything running according to plan? What is your main customers there?
No, absolutely running according to plan. There is a product now that we can offer in secure cloud environments. I would expect tactical clouds in the defense environments and govnet authority type of clouds is, of course, the market that we approach.
That is starting to happen now, and I'm really positive on the way forward there.
When are you expecting to launch it?
Well, it's possible to discuss with customers today.
Yeah.
It's an existing product.
Yeah.
That's happening already.
Okay. Perfect. Thank you. I think we are at the end of the Q&A session, and I'll give the word back to you, Mikael.
Two things before we end this conference. I want to say to our employees as well that you are performing a tremendous effort to keep our business going under these circumstances. I really appreciate that. I've been visiting many of our sites lately, and it's great to see what kind of mindset our employees have to keep this going. I want to say that I really appreciate that. That's important to us. Second thing, as you know, we announced earlier that Magnus will actually leave as CFO for Saab, this was your last, at least in this company.
Correct
the presentation of a quarterly result. I want to say that to you, Magnus, a big thank you for, I know you have been instrumental to us in growing this company, making it more efficient, working diligently with our capital and our finances. Officially, I want to thank you for all these years, and I wish you all the best now going forward. To show this online as well, I want to give you some flowers. Thank you so much, Magnus.
Thank you very much. Thank you.
That's the first handshake I've had in four weeks.
I think we can do it. Yeah, thank you, everyone, and I've been super happy to be part of this company for these years, and a fantastic journey. Thanks to my team and also to my colleagues and all employees. I wish you and everyone good luck in the future.
Thank you.
I will be watching.
I'm sure you will.
Thank you very much.