Good morning, and welcome to Saab's Q2 earnings presentation. I'm Merton Kaplan, Head of Investor Relations, and with me today I have our CEO, Micael Johansson, and our CFO, Christian Luiga. Without losing any time, we will start up with some slides and then follow on to a Q&A session, and you'll be able to participate in that through the telephone conference and through the website. Don't forget to do that. Without losing any time here, I give the word to you, Micael.
Thank you, Merton, and good morning, everyone. Thanks for joining us this beautiful summer morning in Stockholm. I will jump right into the summary of the second quarter, and I think we have a very strong quarter behind us. We have continued to do business in the marketplace. Europe has been a strong market to us this quarter and also the U.S., but also Sweden is on par with the second quarter last year. As you've seen, we have grown substantially, 15% in the quarter, and we, of course, then have really good execution of the backlog that is substantial within Saab. We succeeded with many things during this quarter in terms of different programs. The mix has been favorable to us.
Of course, that leads to fulfilling many commitments with our customers, meaning that we have many milestone payments of substance in this first half year but also in the quarter. The operational cash flow is substantially better than the corresponding quarter last year. We have sort of a different balance this year when it comes to milestone payments, so the first half year is stronger than the second half year will be in terms of milestone payments. All in all, we will still generate a positive cash flow this year, absolutely. We are continuing our journey to improve our margin. The EBIT is now sort of SEK 715 million, and included in that is a couple of non-recurring items that we have taken.
We have closed a factory in the U.S. on camouflage nets. We have also reduced our personnel a bit in South Africa. That is included in cost-wise in the SEK 715 million. In summary, a very good quarter to us. We are on the right track. Looking at market highlights, I would say that, as I said, the strong demand in Europe and the U.S. We see now that the European Defence Fund is launched. Calls for different programs is out. I think that will drive a sort of collaboration between industries and countries in Europe. It is going to be an interesting research and development phase. Quite substantial amount of money now being devoted to new research programs. We as a company is, of course, forward-leaning to be part of that going forward.
Also Sweden is a very important item to work with going forward, I think. We have many things happening in the marketplace. As you know, we delivered a very strong offer to Finland for the Gripen and GlobalEye in April. We are now in a silent period on that matter. We will see what the evaluation outcome is in later this year. Hopefully they are sticking to the time schedule that they have communicated. They will make some sort of a decision in the later part of this year. Also campaigns in Canada for the Gripen. We have several things going on also in other countries in Europe. In Germany, for example, we are part of a competition on combat management systems on the upgrade of frigates. High activity in the marketplace.
I have to mention also still that the civilian market, even though there have been signs from the larger aircraft manufacturers that there is some recovery, I think it will take time before we see sort of an implication of that in our business. We still see weak developments in terms of volumes on the aerostructure side for the larger aircraft manufacturers. We have done everything we can, of course, to reduce cost connected to our Aerostructures business. We are improving our profitability levels, but we don't see a volume increase. Rather the contrary, I would say. In the quarter, we have several good contracts. We have a couple of them in Sweden related to the Gripen C/D aircraft, the basic support and development contract, a rather large one, almost SEK 1 billion.
Also we have got another support contract for Helikopter 15, which now means that we have the support business for the majority of the helicopters that Sweden is using in the defense forces, which is excellent to us. Also internationally, of course, we have been successful with the important contracts on the training and simulation side, which is a growing business. I'm going to come back to that a bit later. Both in the Netherlands but also in the U.S., and there are several prospects that we're working on the training and simulation side. Dynamics also on the ground combat side have been successful in the U.S. with another contract within the framework contract that we have, framework agreement that we have with the U.S.
We have new also sensor contracts, both in the U.S. on the radar side, but also an electronic warfare contract to upgrade the German Tornado aircraft. It's been a really successful quarter in terms of business. Few snapshots from the different business areas. When it comes to Aeronautics, as I said, the Finland thing I want to highlight. It's a major campaign, and we're doing everything we can now to become successful in that campaign. Important delivery is, of course, the first aft fuselage of the T-7A training aircraft has been delivered to Boeing. That's now being integrated with Boeing's parts of that aircraft in St. Louis. We are transferring now our capability from Linköping to West Lafayette, Indiana, to start production late this year in West Lafayette. The factory is up and running, and we have recruited personnel.
That's a very positive development in that project. Margins on Aeronautics side have been affected by the adjustments we made due to the pandemic in Q3 2020. That is something that we, of course, are working with to improve, but I think we took the right actions to mitigate any effects of the pandemic going forward already in Q3 last year. On the Dynamics side, it's been a great quarter. I think it's a record high quarter in terms of sales volume, lots of activities in the marketplace, but also the output from Dynamics have been excellent. They have grown more than 50% compared to the same quarter last year. As I've mentioned, important contracts on the ground combat side, which is growing dramatically, and we need to boost production going forward to cope with everything we need to do.
I see a trend of improved training and simulation contracts in the marketplace, of course. In these numbers then also on the margin side, we have absorbed the cost associated with closing down the camouflage net factory in the U.S. in the Barracuda business unit. If we then move to Surveillance, as I said, important contracts in the marketplace, both in Germany and the U.S. We are growing in the U.S., a very successful market to us, going forward. I think we have seen extremely good performance in the GlobalEye program, which has led to then new payments during the quarter, generating excellent cash flow. Here we also have a margin effect from that we now start to amortize on the development effort that we made during the years, on the margin in Surveillance and Support and Services.
When it comes to Saab Kockums, we are improving step by step, our productivity and efficiency in the organization. The margin is improving every quarter now. I must say that we have one of the world's most modern shipyards in Karlskrona today, so it's a really high efficiency place in terms of doing contracts on both the surface and the submarine side, and it's going in the right direction. Of course, as I've said before, we need support from the Swedish government to continue this journey on this important area with submarines and surface vessels. Last but not least, support and services and IPS. Very important contract on the support of the Helikopter 15 because then we have synergy effects on what we do with other helicopter variants in Sweden. We also got an important contract on deployable maintenance capability for aircraft in Bulgaria.
We have good developments in support and services on the support side, definitely, and the EBITDA margin has improved compared to the same quarter last year. Also here we have, as I said, amortizations affecting the margin, connected to the GlobalEye. When it comes to industrial product and services, I think it's really good to see how Combitech is developing, growing 11% roughly quarter-over-quarter. If you look at Combitech and also having around 9% in margin and driving IPS, I would say. We still have a weak civil aviation market, and as I talked about in the beginning, I don't think that will change. It will take a few years before we see an improvement in that area. Meanwhile, of course, we consolidate and we reduce costs to stay in business. That's a few snapshots on all the business areas.
If I may then make a little bit of a case presentation on a certain area, I would like this time to talk a little bit more about training and simulation. We have a unique capability when it comes to training and simulation in a combination between live training, scalable training from an individual soldier to the brigade level of training. We have products and equipment which is really creating high realism in terms of simulation, so you get extremely good data to do analytics of your training. It's not just a laser type of training, which gives you a too opportunistic way of looking at how you performed. You actually take into account ballistic simulation and everything like that.
We can have several different types of setups in terms of complete training centers, many different types of weapons, but also using vehicles and larger equipment within the brigade to train the whole capability of the brigade. It's a growing business, definitely. We have today, I think, 22 sites where we train, and we have 700 people involved in this. We see more and more in need for training larger forces. I think we have been through a period in time where we have seen lots of international missions, smaller forces doing specific missions, anti-terrorism and things like that. Now many nations are back into having a defense forces training battalion level and brigade level, which means that this market is growing, especially in Europe. We are definitely a dominating player in Europe, and we have probably 25% of the market in the U.S.
To combine live training, which is really realistic, with virtual training, is the key going forward. Now also looking at AI technology and how you can work with analytics and all the data you collect from the training will also mean a lot to the different forces. We also work with interoperability. We have more than 40 customers. We have defined a standard so we can have international forces working together, training together. That is becoming the standard. 16 nations have joined our standard, so they can now work together in different type of trainings, and we can move our training capability around the world following the forces because we have a large installed base in many places in the world. This, of course, is not only an equipment market, it's a service market and a support market as well.
It's a lot of aftermarket opportunities when you have this in place. We're running a whole training camp in Germany with 300 of our own employees, and that is being the future of what we do. As I've said, recent large contracts is connected to the Netherlands. It's a 10-year commitment. It's a SEK 1.4 billion Swedish contract, including equipment and support. We have a US Marine Corps force-on-force contract with a potential of roughly the same level in Swedish crowns, where we're taking SEK 500 million roughly into the books right now. I see training and simulation growing substantially now, and they have grown almost 40% during this year. It's a very important area to solve going forward and is, of course, connected to lots of the equipments that we also supply to the different forces around in the world for the armies.
That was a little bit of a deep dive into training and simulation, a positive development to say the least. Looking at way forward, we have now launched July 1st, a new organization going from six business areas to four. We do that, of course, to improve productivity, efficiency. That removes internal interfaces. The business areas gets full responsibility for the different businesses from first idea to through the life cycle, through the support cycle, and they can optimize the business prospects accordingly, and also internally work more efficiently with less handovers in the organizations, and that will drive synergies, of course. It will also be clearer to the customer side because it will be clear connections between our core areas and the organization. The customer will see the same Saab independently where they are in life cycle.
We establish an operational excellence function as well on corporate level. Charlotta Björklund is now taking on the position in group management. That function will be the driving force to work with best practices across Saab, to work with alignments of things. I'm thinking specifically about supply chain procurements, IT spending, quality, but also development production. Of course, Saab is not the same all over the place. You don't develop a Carl-Gustaf the same way you develop a fighter aircraft. There are so many things that we can align and do in a more efficient way. This will be an important thing going forward now to increase the efficiency. We have a part of our strategy is, of course, to establish ourselves in key markets. That's going in the right direction.
I mentioned U.S. several times during this presentation, that is absolutely growing now. We have an excellent traction on the Future Combat Air System connected to the U.K., which will implicate that we will have people on the ground working in the U.K. within the Aeronautics area going forward. Australia is a country where we have established ourselves substantially on the combat management system side, but also are growing around that going forward. I think Germany will become a very important country going forward to us as well, since we have so many parts related to both electronic warfare, training, and also missile capability in Germany. Increased focus on sustainability. I must underline, sustainability is something that we've been working on for a long time. It's not a new thing that we've invented.
In this report now, we are moving into trying to describe what kind of initiatives we have in that area. I'm going to spend a minute on that as well before I hand over to our CFO. First of all, the foundation of Saab's sustainability commitment is, of course, connected to helping countries secure the safety of their society and people, and securing their borders. We provide, in a professional way, systems and solutions to help them do that. That is the foundation of sustainability and peace and safety to me. Of course, as a company, we also work, as any other company, we work with many other aspects of sustainability.
We have selected to work with mainly five goals of the UN Sustainable Development Goals, where we think we can contribute most to different societies, and also help reduce emissions going forward, for example, in the environmental area. When we talk about the environmental area, I think as an example, of course, that is about how we act as a company ourselves, how efficient we are in terms of greenhouse gas emissions in our own operations, which we of course do since in our facilities, we are using solar panels in South Africa, we are using renewable energies in different parts of the organization, we are looking a lot on how we travel and so forth. We have our targets set on those areas as well.
Just for your information, we set the target in late 2017, early 2018, to reduce our emissions with 33% up until 2030. Now when we look at that, we are roughly at + 40%. I know that is much related, of course, to the pandemic and reduced traveling and all that. I will continue during the coming quarters to show more specific KPIs on how we are developing in many of these selected areas that we're working with when it comes to gender initiatives, when it comes to anti-corruption, when it comes to education and research, and when it comes to environment. We will take this further going forward in our report so you see how we work with this. This is the first step to visualize that.
One interesting example I just want to mention as an example of a product that is also connected to helping societies and reducing emissions is this. It's called the Seaeye Sabertooth. It's an autonomous underwater vehicle that can do many things, data collection, surveillance, working with support of different underwater structures. It's completely zero emission since we use the waves to power and charge this vehicle. It can do missions for a long time. It's now doing tests in the U.S. to support different type of applications. The alternative to do all these things would be to have a number of surface vessels to go to these areas and to do the same type of missions, which would require a lot of fuel and emissions, of course, doing it in a different way.
Here you can put a product in place that will be self-charging using the sea itself and the waves to do what you have to do when it comes to data collections and research or surveillance in the defense applications area. This is only as an example, having this kind of system has a huge impact on how much you reduce your emissions on CO2 compared to doing the same things with other things. This is just one example of what we do in the area of helping customers to do things in a different way going forward in terms of what we do for our products. I can assure you that sustainability is an integral part of our operations and strategy every day going forward. That was a quick summary of the quarter and a couple of deep dives.
Now we'll get into the hard facts, and I will hand over to our CFO, Christian Luiga.
Thank you, Micael, and thank you for listening in today. I think we are delivering a strong report. A strong report also giving a strong confirmation of our journey and our strategy execution, meaning we are growing, we are a growth company. We are slowly stepping up our EBIT margin. That also includes more and more the efficiency and productivity gain, which will be part of our natural daily work. Finally, that we have a positive cash flow in the company, which will vary year- from- year, but will be a positive future. This is a confirmation of that that I think is really fun to present today. If we look at the order backlog, Micael mentioned a lot of good orders we have in this quarter, and we have a 7% increase in our order intake in the quarter and 12% on a half year.
It is a order backlog that increases also year-on-year. 70% of that backlog is outside Sweden, which shows that we are growing our foundation of this company outside Sweden. Meanwhile, we are also growing in Sweden. The current year backlog, which is a very important and interesting metric, is SEK 17.3 billion, up 11% last year. If you combine that with our 15% growth for the first half-year, it gives a good foundation for our increase in outlook that we have done from 5%-10% for the year. A quick glance of the quarter two and the summary of that, we see that we have a 15% sales growth that moves directly also into gross income. We grow our gross income equally to our sales. As always in a broad company like Saab, you have some plus and minuses.
One of the minuses is, in the quarter, the SEK 60 million cost that we had for closure of Barracuda in the U.S. Barracuda is still there and has its production in Sweden nowadays, but we felt that the U.S. prospects were too small to continue there with profitability, and therefore, we had to close that down. On the positive side, on the other hand, we had quite large negatives already in quarter two last year on the civil aircraft side. Through the work we did last year on the cost side, we have less impact of that in this year on the gross income. Those are two typical swings coming through in this quarter. On the EBIT side and the EBITDA side, we are growing. EBITDA is growing with 19% and EBIT with 10%.
As we have talked about already two quarters ago and last quarter, we have an increased amortization of the development cost we have had in GlobalEye for many years that we started to now amortize on this year, and it is SEK 129 million in this quarter, year-on-year comparison. On the net income, it doesn't come through, the 10% growth on EBIT to the net income, that is primarily on the currency side. We had quite big swings in currencies in quarter two last year. If you look at the financial net for the last four quarters, it's been around SEK -66 million , and it is SEK -66 million in this quarter. In quarter two last year, it was actually SEK 20+ million . That is the swing, and that is currency effects.
Those currency effects have already moved through the cash flow, so it's nothing to worry about on future cash flow from those items. If we then look at the half year instead, similar just perspective, we are also growing our organic sales with 15%. Gross income is a bit weaker. We have the same elements that we talked about on the previous slide. I just want to also emphasize what Micael said before, Aeronautics is down in margin, and it is based on the impact we have from the quarter three adjustment, the project estimate adjustment we did in quarter three, quite substantial, and also that we are in a ramp-up phase in the T-7 production. When both the Gripen and the T-7 is moving into higher production volumes, we will see improvement on the margin in Aeronautics. Still, EBITDA is growing 18% and EBIT 8%.
Here you can see that the currency effects are much smaller on the difference between EBIT and net income. It was really a Q2 2020 item. Sales is up 15%, really good and strong. It is high activities in many of our projects and in high delivery pace. Aeronautics has a high activity level in Gripen E/F, both to Sweden and Brazil. Dynamics is doing an all-time high. It's always fun to report something that is all-time high, and this time it's Dynamics, 52% growth. The growth in training and simulation is above 30% in the quarter and above is 37% in the half year. It's really also good. It's not only combat systems with the Carl-Gustaf and AT4s. It is a very good growth also in IPS, and it comes from Combitech and also Traffic Management that starts to move from lower levels.
They had a tough year last year, but they are moving positively now in this quarter, which is also giving some comfort for their journey going forward. On the trend over time, taking a quick glance at that, it is very good to look at one of these pictures once in a while, and this is from 2017. We can see that the rolling 12-month sales is growing with 3% compared to previous quarters. On a quarter-over-quarter basis, it's 3%. If we do the same math over a year, this quarter two-over-quarter two last year's rolling 12-month, we are growing 11%, in line with this year's forecast for the year. If we step back and look at the average growth since 2017, which this graph is showing from, we have a 6% growth, which is in line with our long-term target of around 5%.
We are a growth company, we are delivering on that growth in line with what we are saying. The other part of this is the EBITDA trend, which is the result without the depreciation and amortization. Here we can clearly see that we had a severe hit in quarter three. It was actually last year in 2020, it went down, we are now slowly moving up again, close to the 2019 level that we were at before the pandemic hit Saab and many other companies. We are slowly taking clear steps towards a better profitability. In this, of course, it is a lot of efficiency and productivity work, as Micael mentioned. We have a new OpEx function that is in place.
It's a new muscle, and that is there to support and drive the efficiency internally, better ways of working, and also making sure we have good execution. It will be in the areas of procurement, supply chain quality, IT, development, and production. It is to drive the cost efficiency, scale, and synergies, keeping the lights on the improvements, and making sure we measure our progress. It's going to be a very important part of group management's work going forward, and I feel very happy for that change in this company. Taking a brief look at the EBIT and the margins per business area. I've already mentioned Aeronautics, and it is the impact of the adjustment last year in the Gripen program and also the T-7 ramp-up. Dynamics is improving its result from volume.
We can see here that the margin per se is flat, 13.9%-14%, but the volume brings up the EBIT in absolute numbers. However, we should remember SEK 60 million is in here as a negative from the closure of our production plant in the U.S. for Barracuda. On Surveillance, it is flat. We did have an effect on Surveillance of SEK 25 million, pretty much from the South Africa measurements we did to right size the organization. The GlobalEye amortization is impacting both Surveillance and Support and Services. This is, of course, also positive to the group numbers and very positive to see to make sure we have a better balance to see the IPS changes. Combitech is growing. It is growing 11% in sales and have 8.7% in margin. Traffic Management has improved from a negative to a positive.
That said, also the civil aviation part that we have in IPS, like Aerostructures, have improved. Without Combitech, the rest of IPS would still be negative, but better than last year. We are taking measures. We took a lot of measures in previous year, and they are giving result. Cash flow is improving. We can see on the left side this year's first half-year, and on the right side last year comparison. We can see the big differences in the second bar. No, I'm sorry. I was thinking about another slide, so I correct myself. We see here the operational cash flow for this year on the left side, and let me stick to that. There we see an increase of SEK 1.8 billion.
That was last year, SEK -0.2 billion, which is that we have a swing in change in working capital of SEK 2 billion. That is really the large milestone payments on our bigger programs that has a difference from this year to last year and also has an impact that we have the majority of the large milestone payments coming in in the first half year, compared to the second half year. We reiterate our guidance for the year, which is a positive cash flow, but we did have a somewhat stronger first half year, meaning we will have a weaker to even maybe slightly negative second half of the cash flow for the year. All in all, a positive cash flow also in this year. We will not give a clearer guidance on cash flow at this point. We have a strong balance sheet.
We had a strong balance sheet already leaving 2020. We continue to have that. We have a net debt to EBITDA below 0.5x, and adjusted, it's 0.32x. We continue then to have a positive cash flow, going forward. That includes also pension liabilities that are fully covered by the pension fund. Finally, the outlook for 2021, we have upgraded our sales growth from being around a long-term target of 5% to be around 10%. We have an EBIT margin of 7.4% as a guidance, which is the same that was the adjusted EBIT margin for last year. This is including the effects we have of SEK 60 million and SEK 25 million of the right sizing. It's nothing we take out when we have this outlook, and we reiterate the positive cash flow.
Finally, I just want to give you the notice and remind you that this is the last time we present support and services in IPS. We will now report four business areas and Combitech on the side from next quarter. Merton and his team will send out the recalculated pro forma numbers before the next quarter results so you have them to put in your spreadsheets and make the analysis, and we'll make sure you have the full support to understand those before we get into that presentation. Thank you.
Thank you very much, Christian, and thank you, Micael, for explaining the quarter very clearly. Now we're going to open up for a Q&A session for our participants online on the teleconference, as well as a couple of questions that we received from the website. I'm going to hand over it to our moderator to open up the floor.
Thank you. If you do wish to ask a question via the teleconference platform, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question is from Douglas Lindahl of Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hello, gentlemen. Thanks for taking my questions. My first question is on the new sales outlook. Have you changed your view on sort of intra-orders within the year? Should they come in at similar levels that we've seen previously, or how should we think about that? That's my first question.
Maybe I'll pick that up, Micael. We started the year with giving an outlook for this year of 5% growth. It is, of course, based on quite stable projects and programs that we have, but they can also vary, and we can be faster sometimes with our customers and move faster. We moved a little bit faster on part of it, and then we also have had a very good order to sales equation into this year. We have upgraded from 5% to 10% based on that.
Okay, thanks. On Dynamics, obviously very impressive growth here in the quarter, and you highlight that some additional costs have been absorbed by Dynamics. I guess underlying margins were close to 16% rather than 14%. Is this sort of the margin level we should expect from this business over the short term, given what you know now in the backlog and given the order intake in the quarter?
Dynamics is a business area with a few sort of different parts in it, as you know. Ground combat and training and simulation should be high margin businesses. Exactly on what level, depending on the mix of contracts in different countries, of course, but by high margins. Then you have also other business units like the missiles who are in another phase of development. The mix between missiles and the other two, and then you have the Barracuda that is now consolidated into the Swedish operations, and that is also high margin business if you have lots of things to do in production. Generally speaking, we should always see high margins from Dynamics, and it is an export-oriented business, which also should bring in high margins.
I don't want to sort of guide on a certain margin, but definitely a sort of highly contributing margin to our long-term target.
Are you happy with that, Douglas?
I would always-
Yeah.
Yeah, I'm as happy as I can be, I guess.
If we could keep the questions to two or three, please, so we can move on to the next analyst.
Okay, maybe.
We'll get back to us.
Maybe just a final one then.
Yes, please.
My third. You talked quite a lot about the U.S. market potential. I'm just curious to understand what sort of growth you expect or what sort of portion of the sales and the order backlog do you think that the U.S. market could represent in, let's say, 5-10 years? Obviously, T-7A is important here, so maybe try and exclude that and look at the sort of underlying profitability for the U.S., if that's possible. Thanks.
Well, to say a sort of a growth number for the U.S. market is maybe not something we should go into. If you look at the long-term programs that we have on the sensor side, those will continue to grow based on lots that we get from sort of the different production lots, I mean, from G/ATOR, for example, is such a one that will continuously grow the business. There are definitely an ambitious growth sort of objective for the U.S. market. The T-7 will, with the franchise type of program that is for decades, be a sort of a driver for high volume in the U.S. It will represent a much higher volume consolidated going forward in the next 5 to 10 years than what we see today.
We have important crossroad programs that if we are successful, that would mean a lot to us. There are programs ongoing in the U.S., competitive programs of individual assault munitions, for example, that is now being competed. If we would be successful with that, with the ground combat systems we have, that could also add to that volume. We are continuously searching new niches. U.S. will become more and more important to us in terms of growing this company, definitely. Of course, we have internal objectives, and I can assure you that they are quite aggressive.
Okay. Thank you, Micael Johansson. Thank you, Christian Luiga. That's my questions.
Thank you.
Thank you. Our next question is from Agnieszka Vilela of Nordea. Please go ahead.
Okay. I will stick to two questions. Just could you remind us what's the rationale behind separating the Combitech business? Why do you put it aside?
Well, it's been put aside a bit earlier also, but I want to highlight the importance of the business by elevating it to corporate level, if we put it that way. It's a highly important business to us when it comes to competencies that we attract into Combitech, competencies working with other industries in Sweden mainly, and also into our own organization. It's a resource and competence flow in and out of the organization that makes Combitech really important to us. They are very much forward-leaning in the areas of cyber and digitalization and digital transformation.
I think that to separate them and to look upon them separately, to give them the best prerequisites to work on the same level as with other sort of consulting industries in Sweden is important, and to make sure that we don't embed it and overload them with things that are not related to Combitech. Make them as efficient as possible and give them the best prerequisites to work in the marketplace, and really use Combitech as being a forward-leaning competence body to us within SAAB. They're doing really well now.
Right.
That's generally speaking what we're talking about. It's actually to highlight how important they are to us.
All right. That will be a core for Saab in the future?
Yes, I see them absolutely as a core of Saab.
Okay. A general question. You raise your sales guidance for the year, but you stick to your EBIT margin guidance and flavor on that. Why don't you go for a higher margin guidance as well for this year?
I think one should have some respect. You know what we did in Q3 2020, in terms of doing a number of actions to mitigate the effects of the pandemic and the supply chain activities that we have been working with since then. They've been successful, but I still think we should be careful about saying that everything is over and there are no restrictions and everyone is back in play, so we're still working with that. I think we should be a bit careful. We still need to work with the supply chain, and to get back to that level that we were adjusted. The adjusted level 2020, I think is really reasonable. Of course, that level is also connected to some sort of non-recurring cost that we've mentioned in South Africa, retrenchments in South Africa, and closing down a factory in the U.S.
We have higher amortizations connected mainly to the GlobalEye this year. I think it's a reasonable level to work on. Of course, we are on a journey to improve our margins, but I think that's all in all with the project mix that we see and all the initiatives that we are taking to mitigate the effects of the pandemic, I think this is a really reasonable level to aim for.
Great. Thank you.
Thank you. Moderator, maybe I should break in here. We have a couple of questions from the web as well, so we might put them through. We have a question from Mikael Laséen at Carnegie. He's actually just to follow up on Agnieszka's question on amortization. He's wondering, when will you start to amortize capitalized development that we're currently working on Gripen? Can we explain what will trigger the amortization to start?
Well, in all these projects, it's when you're done and start to use it, and then have a confirmation with your customer if it is one of those projects. That is to come in the coming couple of years, I would say, on the Gripen side. It may be there's different parts of that development cost, and it may come in two different steps. I'm not going to be too clear on that because I don't want to go and talk about when we will finalize that phase with our customer, but it will be within the next couple of years.
Thank you. We also have a question from Benjamin from Bank of America, and he has a question on the long-term target. What he says here is, does this strong growth that we have achieved in 2021 and will achieve this year for the full-year performance, will that have any implications for the long-term margin, long-term organic sales growth target of 5%? Do we have a comment on that?
I think depending on how we manage the growth in these key markets that we've been talking about, our international strategy, and how quickly that's been done, when we see the effect of that, we will take another look at it, but we're not there yet, I would say. We still keep to the long-term target of growing 5% over a business cycle per year. Of course, we have growth ambitions within Saab, and that's going to be done through establishing ourselves in the key markets, U.S., U.K., Australia, Germany, and countries like that, having complete operations in this country and really attracting contracts and R&D money in these countries. When we take off, and we are on a good journey and on the right track, but we will take a look at it when we see the effects of that later on.
We look forward to that. Should we try the line again, Moderator?
Thank you. Our next question is from Sash Tusa of Agency Partners London. Please go ahead.
Thank you very much, indeed. Good morning. I've got a follow-up question about T-7, and just the degree to which your comments about there being very high ramp-up costs this quarter, whether that is going to persist, you think, through at least this year and into next year, given the overall delays to the program. There's a bit of an uncertain or lack of clarity as to the degree to which you actually share risk on T-7. It doesn't look as if you do from this quarter, but would it be reasonable to expect that the ramp-up costs will sustain for some time, simply because the program now may not move into higher rate production until the end of next year or even 2023?
I just want to underline that we are not looking at any new time schedule for the T-7 in the way we work together with Boeing on this. There's been discussions with the US Air Force, as you know, and we will aim for meeting this original schedule and actually meeting a potential Milestone C in late 2022 rather than what's being communicated later in 2023. We still run full speed ahead and haven't changed our direction at all in terms of what schedule we try to meet. I think exactly how the ramp-up costs should be looked at, whether that is stretched now in time, I don't see it that way based on the agreements we have. This is not a risk-sharing contract.
We have the responsibility and liability for our own parts delivered into being built in West Lafayette and then being integrated with Boeing parts in St. Louis. If we move forward and do our parts of that, and we together meet the schedule towards the US Air Force, there is no change to the program. I don't see a different view of when we ramp up things or not. We still have the ambition to start activity low rate of production very late this year and continuing next year. We are full speed ahead according to the original schedule. I don't have a new view of new costs associated with the program.
Thank you very much.
Just to add to Micael's comment, it's not just a quarter two item. I said it was a half-year impact, so it's actually something we've had for the first six months, which is during this EMD phase.
Yeah. Okay. Thank you.
Thank you. Our next question is from Björn Enarson of Danske Bank. Please go ahead.
Yep. Thank you. I had also a question on T-7.
I'm sorry, I can't hear you, actually.
If you could shed some light on when you expect it to get to a more?
Sorry, Björn Enarson. We hear you a bit bad. Could you rephrase the question?
Yeah.
Thank you. Better? Thank you.
Yes. I just had a question on T-7, and if we can get some indication on when in time you expect to reach some kind of a steady state in terms of revenues for that program.
Well, I think one should have the view that we move into what they call low rate initial production, more stable low rate in 2023, and then that in a couple years' time, we'll move into full rate production and increasing the volume then beyond that. Towards 2024, 2025, we should be up in the pace that is connected to the now existing framework contract of roughly 400 aircraft for the U.S. Air Force.
What would that level be, roughly?
I don't have that number in my head, unfortunately. Maybe I should, but I don't have that number in my head right now, what the yearly rate in terms of revenue will be when we are fully up and running. I have to come back to that.
Okay. Last question is on guidance. Have you changed your view on long-term EBIT profitability?
Related to?
The Gripen program, given that we are seeing EBIT being under pressure for a few reasons.
As you know, we made an adjustment in the third quarter 2020, that is now the margin that we're living with, of course, going forward, day by day, and every quarter and so forth. Of course, we have absolutely the ambition to increase that again, but until we have stability in that, we will have this margin that was the result of the adjustment that we did in quarter three. No changes since then, absolutely not.
You have these are for the programs, of course. For Aeronautics in total, you have the more volume you get, the more will you cover campaigns and other indirect costs that we have in that business area. The margin on the business area may increase faster than the program, or they will do it both.
Is it possible to reach long-term profitability target with Aeronautics, or Aeronautics running below group average?
We don't guide, as you know, on business area level or that. Of course, as Christian is saying, volume is incredibly important, so a high production rate will be really important, and we've seen that earlier on the Gripen C/D version of the aircraft, that where we are in production with reasonable production rates, we're generating good margins. It's all dependent on the volume in the organization of production of Gripen aircraft. Generically saying, if the volume is high, then yes, it will support the long-term margin that we have in the company. Absolutely. It's all dependent on volume, I would say.
Thank you. Thank you a lot.
Thank you. Just as a reminder, if you wish to ask a question, that's zero one on the audio line. There will be a brief pause while any questions are registered.
Thank you. We have another question here. I'll phrase it to you, Micael and Christian, from Ivan here, saying, "Good morning." We're reporting a growth in our orders and the backlog of 7%, and he's wondering how big portion of this percentage increase is allocated to foreign countries. Where does the growth in orders really come from?
I think it's roughly 50/50, I think.
54% of the orders are coming in from-
Outside
from outside Sweden, but that means also that we have a growth both in Sweden and outside Sweden in this quarter. Of course, it will vary, and this is not a representative number because if you look at our backlog, we have 70% of the backlog outside Sweden and 30% in Sweden. In a single quarter in a company like Saab, it can actually be quite distorting, so you need to look a little bit on the longer term. For the year, I would say that the outside Sweden orders will improve in percentage.
Yes, definitely. Also with the strategy that we have in the key markets that we've been discussing, of course, that will lead to a bigger portion of order intake coming from countries outside Sweden. Even though we're not doing that to the expense of Sweden, we still have a very important role to fill in terms of the defense build and the growth of the defense in Sweden, definitely. All in all, in that balance, still, Saab will be a company generating contracts to a large portion outside Sweden going forward.
Thank you. Moderator, if we don't have more questions on the line, I would like to thank everybody for listening in and asking questions. And thank you, Micael, and thank you, Christian. Looking forward to the next quarter.
Thank you so much.
Thank you.
We wish you all a wonderful summer. Thank you.
Thank you.