Saab AB (OTCPK:SAABF) Q3 2022 Earnings Conference Call October 28, 2022 4:00 AM ET
Company Participants
Merton Kaplan – Head of Investor Relations
Micael Johansson – President and Chief Executive Officer
Christian Luiga – Chief Financial Officer
Conference Call Participants
Erik Golrang – SEB
Bjorn Enarson – Danske Bank
Virginia Montorsi – Bank of America
Sash Tusa – Agency Partners
Merton Kaplan
Good morning, and welcome to Saab’s Q3 Conference Call. I’m Merton Kaplan, Head of Investor Relations at Saab. And with me in this studio today, I have Saab’s CEO, Micael Johansson and Saab’s CFO, Christian Luiga.
So we’ll start the presentation with some slides to go our business highlights and important events in the quarter and we’ll deep dive into the figures. And after that, we’ll have a Q&A session and you’ll find the dial-in details to that on the press release from this morning. And with that information, we’re going to bring some questions from you online also to the Q&A.
And with that, I want to give the word to you Micael, to start the presentation.
Micael Johansson
Thank you, Merton, and thanks for joining us for this quarter three report, and I’m going to jump right into the numbers and walk you through, sort of, a brief highlights on that. We had a good and stable quarter, I would say, where we see still our base of small and medium order intake growing on a good level 30% on the small orders and also around 60% on the medium size orders. We continue to grow in all our business areas. We see a high interest in the marketplace and we have many customer dialogues in play as we speak.
And the important trend regarding our margins is also going in the right direction. So we are seeing an improvement in margins and going forward as well. And we have a positive operational cash flow, which is truly important to us and we’ve said that it’s going to continue. And also I’d like to mention that our balance sheet is very strong and when it comes to liquidity, and we now have a net liquidity position. So we are not in-depth, which is a very important step for us, of course.
Looking at business highlights and important things that happened during the quarter, as I said, we have a strong interest in our portfolio. I mean, many countries are spending more money on defense capabilities as we speak. You see, Europe spending more than 2% in most countries and even going beyond that. Sweden is also going towards 2% then we’re looking forward to see the Supreme Commander’s report coming out Tuesday next week to see how quickly he will be able to reach 2%, the new government states that you should be at around 26%, so it’s an increase, sort of, pace on how this spending is going to look like.
But the interest is wide we have in many countries, customer dialogues. I’d like to say that the processes are maybe not as quick as expected from, sort of, political decisions on spending to defense planning processes and acquisition authorities placing contract is still take some time. And of course, that could be a bit frustrating, but we have yet to work through that and be as efficient as possible on both sides, of course.
We are also doing quite a lot of invest when it comes to meeting the need in the marketplace in terms of capacity and infrastructure, but also when it comes to attracting new employees, and recruiting. And that is truly important to us. But when it comes to lead times and meeting volumes going forward, we have a back flow SEK112 billion in the company and we are growing — going forward and that will need more capacity and resources, we have employed more than 500 people year-to-date, then we are going to continue to recruit and then we need another 1,000, I would say, going forward, around the same pace as we’ve seen today. But it’s truly important also to have our own employees, which we have, the great employees we have in the company to stay in the company. So we put a lot of effort on that as well, of course.
So that is sort of an intensive, sort of, period for Saab and this quarter have been really intensive as well. When it comes to milestones, I’d like to highlight a couple of things on the Gripen program, we have now successfully launched to Meteor Beyond Visual Range, a missile from the new Gripen E in the Vidsel test range of North and that went perfectly well. So we now have sort of started to integrate weapons capability on the Gripen E. And as you know, we’ve just started to deliver the system to both Sweden and Brazil, sort of, a handful on both sides.
We have also demonstrated a new mobile short range air defense systems, which comprises our new G1X Radar in combination with the RBS 70 next generation system and that is mounted on vehicles. So we can actually move around very quickly and also then sort of create a great air defense systems in different, sort of, regions where we need it and this was viewed by model testing customers and we have this now operation available.
We also have gone live with the remote traffic — remote tower system in the NATO airbase in Geilenkirchen in Germany, which is a great breakthrough in terms of establish ourselves also on the military side with our air traffic controls, the digital air traffic control systems. And in Australia, we have taken the next step in supporting the Royal Australian Navy with our combat management systems, we already have sort of a decision in Australia on that we will be the supplier on all the Royal Australian Navy Ships when it comes to combat management systems. But this is now solidifying the agreement on how that is going to look like going forward, so a number of important events during this quarter.
When it comes to NATO and Sweden and what that means for Saab, I’d like to give a few comments on that. We already work like we are going to be within NATO, obviously. And so I’m not going to comment on how quickly that will happen, but we already have taken those steps, so to say. And I’d like to underline that for a long time, all of our systems have been made to compatible from products and systems to our platform, so that is not sort of a big thing to sort of integrate with NATO.
It’s more sort of within the lines now taking part in new programs and more sensitive programs, of course, on electronic warfare, sensor systems, command and control systems and accessing the acquisitions that are being made within NSPA, the acquisition authority within NATO, but also being part of the planning processes, so we will have more people in Brussels, in Norfolk, in the U.S. to integrate ourselves in the best way we can and do business development within that organization. And it’s going to open up, of course, for more collaboration opportunities with other NATO country, industries going forward. So it’s a strong opportunity, of course, to participate in this work going forward.
And we will be, as I see it, a more credible country and industry long-term, because we have a liability when we provide equipment, the systems and capabilities to NATO and that is, of course, much stronger now when we are within the alliance than before. And my perception is that NATO is also reorganizing itself a bit, putting more effort on regional defense going forward rather than, sort of, expeditionary forces, not sort of one or the undertaking priority, but regional defense will be important in Sweden and Finland joining NATO will of course give us a possibility to take responsibility from a country perspective with other Nordic countries in the region and also connected to the Arctic region up North. So it’s a very important step now that Sweden and Finland joins NATO and positive to Saab.
Looking at a few key orders in the quarter, we’ve had sort of continuous order intake on the support weapon side and especially from the U.S., now on 84 and a number of others. So we have roughly SEK1 billion euros in order intake on that side during the quarter. We have also started now and have a first contract on the fuselage aircraft systems, fuselage production in West Lafayette, Indiana. We have had support contract coming from South Africa on the Gripen side and we have had order intake on submarine life-time extension and support, and also our new equipments on the existing submarines in Sweden, which is a good contract.
And a very important breakthrough contracts we’ve seen in the U.S., when it comes to autonomous underwater vehicles. This is a training vehicle for training solar operators on the surface from helicopters or from submarines to practice and train and find submarines. And these are expendable, sort of, underwater vehicles, small ones that’s all built now from a technology perspective, upgrade and then manufacture for a long time. The framework contract is SEK1.8 billion and that will come in as order intake over time. So we haven’t taken much of that into the books for this quarter. But long-term, it will be extremely important and it’s a good addition to us when it comes to underwater and autonomous systems in the company.
Looking quickly at four business areas, a few comments. On the Aeronautics side, we are still affected by the ramp up production in West Lafayette and also on the Commercial Aviation side that is still affecting our results a bit negative. We have had a few important things happening in Aeronautics, when it comes to supplying the military type certificate to our authorities in Sweden and we wait the result of that imminently in a positive way, which means then that actually Sweden and Brazil can take the Gripen fighter aircraft into, sort of, proper operations in their respective countries, which is a very important step.
And we, of course, have a number of campaigns as usual ongoing on the Gripen Fighter side that we can come back to in the Q&As. Dynamics is really going ahead in the fantastic way and have had a growth of almost 30% quarter-to-quarter. Looking at Q3 and Q3 ’21, and we have interest in all areas of dynamics, of course, on the support weapon side, but also on the training side, but also on the Barracuda Camouflage Net side, it is a strong interest.
It is a strong interest. So we have had a very good sales growth in the quarter, but also very, very strong EBIT with a margin of over 16%, almost 17% in the quarter and also year-to-date extremely good EBIT margins. And it is within Dynamics we’ve had this contract connected to the underwater vehicles in the U.S. So it’s not strange that Dynamics is sort of first in line when it comes to replenishing stock in the countries that have donated support weapons to Ukraine. So order intake is really good because we have to help countries replenish their stock and continue to support Ukraine indirectly.
On the Surveillance side, we have had good contracts coming in the U.S. and both Combat Systems which is the command and control systems within the Surveillance business area under the electronic warfare area are really progressing well in business area Surveillance. They are really going in the right direction now when it comes to improving the margin. And Airborne Early Warning programs, we have couple of them, big ones. As you know, we had the success of having order intake on the Airborne Early Warning from Sweden in the second quarter, so that has now kicked off of course, and is going to be good program to us.
On the Saab Kockums side, also the margins are improving, and they had a good quarter when it comes to margin. And also they are growing in a good way. And that is combination of high intensity in the programs on the underwater side, on the submarine side, but also in the surface ship programs, which have had good progress during the quarter. So they are really going in the right direction as well, so good performance from all four business areas in the quarter.
I normally have sort of a little bit of a focus area every quarterly report, and this time I wanted to mention a few things about our missile activities, so which is within the Dynamics business area. And this is a very important area to us, and it has been growing continuously, sort of roughly 5% over a long time now. And it’s a mix of Saab’s own products. And it is also very much partnership-oriented when it comes to missiles. This is sort of the flavor of the products that we have. And of course you know about RBS 15, which is anti-ship missile, which can be launched from either fighter aircraft or from a naval platform or even from land. And we can now also attack land targets with it. It’s a very capable long-range capability and all-weather capability that is extremely difficult to jam, even if it’s possible.
The RBS 70, as I’ve talked about, short-range air defense system with the next-generation sights and all that, which is a very competitive type of short-range air defense system which can then, as I said, be combined with our sensors and create sort of a complete air defense systems with also mobile or actually even carried by soldiers. And that is the system that you see in the upper-right corner and which I talked about earlier.
The Bamse is more of a medium air defense systems with great capabilities as well. It’s the larger systems within operations in Sweden. And this is also a Saab-own product. When it comes to collaboration programs, we have the Ground-Launched Small Diameter Bomb, which is a partnership with Boeing. That is more of a long-range guided precision weapon with really high accuracy that is right now launched together with Boeing in the marketplace. And we are imminently shortly expecting contracts on that.
On the fighter side, we have collaborations with both the defense in Germany, but also with MBDA. And this is both on the short-range air-to-air missile, the IRIS-T, and also the Meteor beyond-visual-range missiles. And then we have a long-range sort of air-to-surface capability, which is — the application is to take out sort of solid structures and infrastructures, military infrastructure, long distances launched from then again a fighter aircraft which is also collaborations with MBDA.
And looking how we approach this area, it’s a lot about how we keep an OEM capability being capable of developing and manufacturing complete missiles, but doing that over time through having own products completely, but also doing partnerships with other strategic partnerships. So we can be both a subsystem supplier and a complete missile prime supplier. And we have more than 60 customers worldwide over time, and we have a significant install base within European and NATO customers. And we continuously have to sort of evolve this portfolio with the R&D investments. So it’s not only on the sensor side we invest a lot of money, but also when it comes to these advanced missile systems.
I will say we have a great market potential here. We have a substantial interest now in air defense systems, both short-ranges, medium-range, and long-range air defense systems. And there’s a lot of collaboration programs being sort of materializing within the European area, but also within NATO.
We have a great backlog now. And we are going from a rather intensive development period, both when it comes from RBS 70, but also RBS 15 into a production period which will of course improve our margins going forward. So that was a little bit of a deep dive in the missile systems area.
A few comments also on the sustainability area, which is also important to Saab, and as you know, the foundation is of course to us to have resilient societies and keeping people in societies safe, and that is the foundation for sustainability. But we also have many other initiatives when it comes to, for example, how we work with the environmental side. We have launched an electricity reduction campaign within the company, that will have at least a six months now sort of length. And we’re taking a number of measures to reduce our electricity within the company. And our target is to reduce it at least 10% over this time period, which is quite possible.
On the diversity inclusion side, we have had a focus period now to create — to increase the awareness because diversity and inclusion to us is absolutely highest priority, for everyone to feel welcome and that we treat everyone in a fair way and give everyone the same opportunities within Saab. We have focus campaigns on this. And this is also very much connected to sustainability.
And as you’ve seen, we have partnered now with Heart Aerospace. We’ve made a small investment in that company. And we will have a collaboration agreement with them for the future sustainable aviation technology. And they are, as you know, investing in a concept for battery-driven aircraft transport, which is interesting technologies for us going forward. And it sort of supports our investments in sustainable technologies in a broad way. And I look forward to that sort of partnership going forward and seeing how that can affect the rest of our sort of product based within Saab from a technology perspective.
And we have also received an A rating from Position Green’s ESG100, which is about how we actually report and what KPIs we use in our reporting. And they look upon us as being — having a very clear message in our sustainability reporting, which is a great ranking to get them. So that is a little bit of the sustainability highlights I have in the quarter.
So my last slide, and before I hand over to our CFO, who will dig in more to the numbers. I mean obviously we are putting a lot of effort now in capturing the market opportunities. I mean, looking at the growth in Europe, my view is that it is a little bit slow in the beginning when it comes to the spending. As I said, the processes are a little bit slow. But it’s a multiple-year growth opportunity we see in Europe and elsewhere, and at least until 2030 I will say. So that is of course, and NATO is also an aspect of this, that we will have to capture.
And I must say, I still see the Ukrainian war as a very tragic thing, and I really hope that there will be some piece into that going forward shortly. But if that is not about why I think the European countries are growing, it’s sort of an awakening to realize that you have to have resilient societies from many perspectives. It could be pandemic, could be cyber threat, could be an infrastructures threat, it could be a military threat. So I think many countries will sort of grow the resilience now, and that’s why we see also the defense spending increasing in Europe and elsewhere. And that will continue, I think for many years to come.
We will have to focus then on our multi-domestic growth strategy. And I think we are absolutely growing our operations in the right countries, U.S., U.K., Germany, and Australia, from many perspectives, NATO, but also of course where the market is and also where our collaboration with industries are. The capacity increase that I talked about will be incredibly important to support of course. And we are really working hard now to increase our production capacity, but also on the engineering side we have a backlog of SEK112 billion. So that is going to, important to replenish the stockpiles in many countries and to increase the capabilities in many countries.
Competencies and resources, as I said, we have recruited more than 500 people. We put a lot of effort in retaining our skillful employees also. And the pace and the effort to actually get more people into the company is continuing. And I do see an interest from many young people to actually have realized that what we actually do is an important contribution to resilient society. So we are attractive as a company.
Even though we have a lot to do from our backlog side, we also spend a lot of effort in looking ahead. So new technologies to offer autonomous systems and cloud technology and connectivity and distributed sensor systems and cyber security offers will be as important as delivering on our existing backlog. So we will stay ahead and be state-of-the-art also going forward. So it’s always a trade-off between how much we spend on R&D and how much we actually — also the trend on increasing the margin is important, but that is also the trade-off. We’re not going to give up on future technologies.
And then, of course, we also must admit that we have to work really hard on the supply chain side and also pay attention to the inflation and how we secure our contracts and hedge our currency exposures and all that, like anyone else. And I must say that 90% of what we do is hedged from an index inflation perspective and also from a currency perspective. We are reasonably well-off when it comes to supply chain.
As we’ve said, we’re not just-in-time type of production company. We have plenty in stock. But of course, I mean, when lead times increase from five, 10 weeks to 50 weeks going forward, we have to pay attention and work hard to secure our material as well. So there are a number of things to focus on going forward, but we are doing really well, and we are ready to support the increased defense capabilities needed in the marketplace.
So with that, I will hand over to our CFO, Christian Luiga, who will cover our numbers a bit more in detail.
Christian Luiga
Thank you, Micael, and good morning, everyone. And I’ll try to give a brief update, but a bit more flavor on our financial summary before we get into Q&A.
Starting with the order backlog. The order backlog is now at SEK112 billion. It’s up from SEK105 billion in the beginning of the year, which is a good signal that we are growing the potential for future growth. Another very important part of this is to see that next year’s order backlog to sales is SEK24.1 billion, up 20%, compared to where we stood last year. And this is also another potential upside — sorry, I mean 11% up compared to that.
The current year also on that, we have SEK12.4 billion in our order to sales for the quarter four sales, which is up 20%. If you calculate that, you see that we have a good potential and base for reaching our sales guidance of 5% for the year. As Micael has said, it’s been a bit slow on the customer side, but the dialogue is intense, and the potential is improving every day as we go.
The important number, and I want to reemphasize that, is that our medium and small orders, if you aggregate those together, they were growing about 40% in the quarter, which shows that even though we have ups and downs when the large orders come between the quarters, we have a steady growth on the fundamental base here, that also is very important for the income statement structure.
Before I step into the numbers on quarter three, I’d like to say this is a solid quarter as Micael said, but it included also not only a solid number quarter, it’s a solid quarter for many aspects, which actually gives us the flavor of what we’re doing. We have a quite big increase in employees, which is very good, building capability. So we have spent a lot of time taking care of those people coming in.
We are now initiating and starting to order tools, rebuilding, parts of our plans in building the capability needs for the future, which is also something our people are spending a lot of time on. And on top of that, we have more customer relationship meetings that we have had in a long time. So it is a melting box of high intensity.
And in this, we do deliver, as I said to you in the beginning of the year, we will have a stronger second half than the first half. We continue to deliver on the plan we set out where the growth is now 9.5% in the quarter, and it will continue to be then at least 10-ish going forward into the quarter four to meet our 5% guidance. And EBITDA and EBIT is growing around 14%, also up where we have guided on an 8%, 12% and to be in the upper range of that. Now we are at 8.2% year-to-date EBIT growth, moving steadily up, and we have one quarter to go.
Net income and EPS is impacted by our reevaluation, temporary reevaluation of our short-term investments. And we can see here that we have an EPS of SEK2.27 in the quarter. Meanwhile, it should have increased with 8%, if we wouldn’t have had revaluation in the quarter. If we look at the impact on the nine months, the increase in EPS for the company would have been 11% without that reevaluation.
I will skip this, I’m thinking about time for your Q&A, and go for the sales picture. I think most importantly, all business areas are growing in this quarter. This picture tells you quite a lot. It shows how well Dynamics is pushing now or boosting our sales and boosting our numbers. But that said, all BAs are growing and not that bad. Surveillance is growing 4%, but they are pushed by primarily U.S. revenue in this, which means that organically they are actually slightly negative. And they are around zero on year-to-date. Surveillance will pick up in the fourth quarter.
And those who remember, we had actually minus 21% in Dynamics last quarter. And I said in that quarter report that you shouldn’t be worried, it will turn around and here it did. I want to say that this is very important that we — the supply chain issue that you all have brought up is something we work with intensively. It’s not a walk in the park. But the more we work with it and the more serious we take it, the more we’ve been able to push it outside the — any material effect. And so far, and as we see for quarter four, we don’t see any material impact from supply chain issues. And we will just have to continue that hard work we are doing to make sure we can deliver to our customers on time.
Together with the cash flow, this is one of my favorite pictures that I wake up to in the morning, making sure that our EBITDA is growing. And meanwhile, we bring in positive cash flow. And as you knew, we had a quite slow first half on sales, and now it’s picking up. We have around 5% CAGR, and it is also picking up as we see our numbers now in quarter three and quarter four. Meanwhile, EBITDA is growing steadily and EBITDA margin has grown 0.3% since the beginning of the year and something we continue to then push for. And this has then led to that our EBIT on group level has increased to 7% on the half-year.
The EBIT and EBIT margins, here is also something where we see Dynamics coming through. Of course, Dynamics’ higher growth impacts this and gives us the leverage on the group. Still, we are not flattish or making a bit more profit in the other business areas as well. And that is important. The quarter in Dynamics is ground combat based, but it is fun to see that units like Barracuda where we actually had to close down some loss-making units last year, and we had action plans, we have delivered on those action plans, and the profitability is going up. And the signal with that is that when we see something, we want something to do something about something, we actually can fix that and get out of it.
On Combitech, growth has started to pick up in the quarter. It’s a good quarter from that point of view. We’re growing 13%, but the profitability doesn’t really follow that path. So meanwhile, we have a great position, both in industrial digitalization, but also within defense. And we’re strengthening that with new orders every day. We have a very good potential there. We need to work with the cost base and get people in. It has been both a bit uneven utilization, but there’s also been some subunits that has been extremely negative in this. And we are taking actions right now to solve some of those issues and make sure that we get back to a better profitability path.
On the cash flow, it was a bit better quarter maybe than we expected from the beginning, but not for the year. It depends on how the payments come in and out, but it is where we are heading, a positive cash flow for the year. We can see that the change in working capital is down. That’s a combination of very large payments last year coming in, in that quarter, but also as we are building up inventory to mitigate the supply chain issues in the company.
Investments are a bit down, compared this year with last year, and that is the R&D primarily in Aeronautics. That is less this year on the Gripen and the advanced training aircraft systems. Other than that, there’s no shocking news here, and we continue to guide on a positive cash flow for the year, but it will be below last year’s SEK3.3 billion.
We have a very strong balance sheet right now, and it is a net liquidity of SEK0.4 billion. And as we’ve said, we’re looking forward to continuous positive cash flow. This is a strength to have right now going in, in a situation where we will have to grow and expand, but also in an environment that is maybe a bit uncertain from a cost of capital point of view, et cetera, to have this and focus on delivering on our strategy and not have to worry about our cash position. If things, bad comes to worse, we also have an additional SEK6 billion on top of our liquidity of SEK11.5 billion to utilize in revolving credit facilities.
Finally, the outlook. Organic sales growth of around 5%. And I repeat myself, beginning of the year we said we would have a weaker first half and a stronger second half. It needed to be around 10% at least in the second half to compensate for the first half, and we are right now delivering on that with a good prospect in our order to sales backlog for quarter four. Operating income to improve to 8% to 12%.
Year-to-date, we are at 8.2%, quarter four — quarter three at 14%. And we will continue to have then a bit stronger than 8% quarter four to deliver on the upper range of 8% to 12%. And standing at an operational cash flow that is positive already, and we have one quarter to go, we feel confident that we will deliver a positive cash flow for the year.
Thank you, Merton.
Merton Kaplan
Thank you very much, Christian and Micael, for those highlights. We are about to go into the Q&A session right now. I can see already that we have a lot of interesting and good question that’s been coming in from our listeners. And we also have some analysts on the line.
So before I hand over to you, the moderator, to manage this, I would like to just remind for the ones calling in from the conference call to ask questions, one or two questions at a time, and you can come back with follow-up on that so everybody gets the same time to an opportunity to ask questions.
So with that, moderator, floor is yours.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Erik Golrang from SEB. Please go ahead.
Erik Golrang
Thank you. I’ll stop with two questions then. First one on the profit mix in the group. I mean, the overall group is trending positively EBITDA margin-wise, as you show, but it’s quite a bit of a tale of 2 stories with Aeronautics continuing to be quite low, whereas you’re leaning more and more towards profit development in Dynamics. How should we think about Aeronautics and its ability to lift margins to an acceptable level in the medium term? Are there any immediate changes coming up here that would support that?
And then the second question on the investment level. As you highlighted, quite a bit down from the year-ago levels. Are there any projects coming up here on the way into 2023 that could see that capitalized development cost go up again? Or where should we expect the investment level to be from here? Thank you.
Micael Johansson
So I can start, and you can fill in, Christian. I would say that, yes, of course, I don’t think it’s strange now that when we see the growth now in the marketplace and the contracts coming in, of course the product level is affected first. Those are the sort of the cycles that are the shortest one. And the need is obvious since many countries have sort of given Ukraine lot of support on the support weapon side. But more and more sophisticated systems are needed in the marketplace. That would transfer into sensors and EW systems and command and control systems, and over time, of course, also platforms.
So I think that trend, I mean that we see Dynamics pulling now is not sort of a strange thing. When it comes to Aeronautics, as I said, I mean, it is still affected by sort of the investments we made in West Lafayette and before we get up to sort of levels of productions in that — on that side and that we see a little bit of a turnaround on the commercial aviation side. It will be affected in aeronautics. But also the third parameter is of course the production rate of aircraft for existing customers in Sweden and Brazil. So it’s going to go in the right direction, definitely, from low levels. But it will take little bit of time sort of towards medium term before we sort of see the numbers getting back to sort of better levels than what we see now in terms of 5-ish percent. You want to add something to that?
Christian Luiga
Yes, I just want to add that Aeronautics, as you say, has a weak performance maybe in the quarter, it looks like, but it’s improving from last year. And quarter three, especially in Aeronautics, is always very weak. It has a seasonal effect with the vacation period that is stronger than the other units. And that also means that with the lower sales in that quarter, the negative impact from the advanced trainer and the aerostructures business becomes more dilutive in a sense. So I’m not that worried per se in that sense. But it, as Micael says, it takes a little bit longer.
On the capital development cost, we want to develop the new future capabilities. And I think I mentioned that earlier that we take more and more of those R&D investments on our P&L compared to the balance sheet, depending on, of course, the — how they are structured and following IFRS. But we may see — we hope to see actually a bit stronger year-over-year development on capitalized development costs. We have said we want to bring scale on marketing and sales and administration, not so much on the capitalized development cost and or the development cost per se. And we want to use that sales now cost to write bids for our customers, and that’s what we should spend that money on.
Erik Golrang
Thank you. If I could do just one follow-up. Do you have any sense for inventory levels? And I’m thinking on consumables, only on consumables, perhaps particularly within Dynamics, but also in the other areas, if you think that’s relevant, given recent developments. Could you put sort of inventory levels with your clients in those areas into some kind of perspective? You had a good overview of that.
Micael Johansson
You mean how — what inventory levels would sort of be with the clients, how much they want to keep in stock. That’s an incredibly difficult question to answer. But I mean, the levels and the dialogues we have with customers are sort of high levels of numbers of weapons. What that means in terms of inventory and how much will be continuously used in supporting Ukraine, I don’t know. But I mean, we’re talking thousands of — thousands and thousands of support weapons needed. And the stocks are depleted, so we’re talking high numbers, yes. But I can’t sort of give an average answer on how much inventory which — will each and every country sort of need. That’s up to the defense force to decide of course.
Erik Golrang
And again, as a follow-up, if you put those thousands and thousands into perspective, how many units sold say in ‘21? And I realize it’s a mix factor, but just to get —
Christian Luiga
How many we sold in ‘21?
Erik Golrang
Yes, yes.
Christian Luiga
I don’t have the answer to that.
Micael Johansson
I don’t have the number in my head actually. It’s —
Christian Luiga
We have to come back and see if we can say it and how, yes.
Micael Johansson
Exactly, I was about to say that. I mean we — because that’s a sensitive — that could be sensitive information, of course, for some countries. So we can’t even mention how many we sell, and sometimes we don’t mention the countries either. But of course, I mean, you can think about it like that. Before Ukraine, we doubled output from the Karlskoga organization from one year to the other in terms of units leaving the factory.
Then I’m talking about weapons and also ammunitions. And we are at sort of levels of 175,000, sort of, entities leaving the sort of the factories. And that was before we saw sort of the bad thing happening and the tragic war in Ukraine. And we are now investing to sort of growing that capacity even further. That’s sort of what we’re talking about.
Merton Kaplan
Great, Erik. Can we have the next question, please? Moderator?
Operator
The next question comes from the line of Bjorn Enarson from Danske Bank. Please go ahead.
Bjorn Enarson
Yes. Thank you. Yes, two questions. One on Aeronautics again. On civil aviation, a lot of companies have for quite some quarters now talking about a turnaround. You are still seeing a negative development. If you can shed some light on that difference?
And a second question concerns RBS 70. You gave us an update there, but what about Sweden and the competition between IRIS-T and RBS 70, if there are any news there, please share those? Thank you.
Micael Johansson
So when it comes to Aeronautics and civil aviation, I mean we’ve stopped sort of the bleeding, if I put it that way, and we’re going in the right direction. But we are still not profitable on the commercial aviation side. And that depends on sort of the mix of programs we are involved in. So we are doing a lot of efforts to sort of improve that going forward. We would need more volumes into that. But it’s not a quick turnaround just because we’ve seen a rather substantial turnaround in the marketplace when it comes to the platform, so to say. But it’s going in the right direction. I don’t want to comment sort of monetary-wise or numbers wise on than. But we’re not continuously sort of deteriorating that side on the contrary, going in the right direction. So we also see some improvements.
On the RBS 70 side, I mean, I can’t comment on competition as such. We have a very capable system. I think — I hope that this will be an important part now. And I can’t sort of speculate, but I assume air defense systems of different ranges will be needed in the Swedish sort of defense going forward. So we look forward to see what’s stated in the report coming out Tuesday, but also in many other European countries.
And just recently, we got a contract in Lithuania, as you saw that we had a press release on. And these things will continue to happen. We have a very capable system. But I don’t want to say — we are very competitive in terms of comparing ourselves with competition, absolutely.
Bjorn Enarson
And a follow-up on those partnerships that you have, I mean, you are involved in IRIS-T and Taurus, et cetera, and Meteor. What’s the contribution to you if those missiles are — and they are winning a lot of orders in Europe right now.
Micael Johansson
Different participation — yes, it’s sort of different participation levels in the different systems, sort of, more smaller parts when it comes to IRIS-T and a little bit more in Meteor. I don’t want to quantify it sort of in percentage, but — and even more when it comes to Taurus in terms of how big is our portion of that. And also Diehl has a portion of the content in RBS 15. So all in all, these partnerships are really beneficial to us, I would say. And sometimes we compete almost with ourselves and sometimes we don’t. But it’s a very good mix of own products and partnership products.
Bjorn Enarson
Sure. Thank you.
Merton Kaplan
Great. Thank you, Bjorn. We have more questions on the line. Let’s continue, moderator.
Operator
The next question comes from the line of Virginia Montorsi from Bank of America. Please go ahead.
Virginia Montorsi
Good morning, everybody. I actually had two. So the first one would be on the T-7. So we’ve seen that Boeing recently took some charges in Q3 related to the T-7. Is this something that impacts you as well?
And the second one would be on the Gripen and the current campaigns, the opportunities that you see. Is there any color you can give us on that? Thank you very much.
Micael Johansson
Yes. Thank you for those questions. I mean, the relationship with Boeing is excellent, but we have our different responsibilities when it comes to the T-7 programs and sort of what parts of that aircraft we are responsible for. And we have our own portion of that, and we take liability of that, and they have to take liability for their parts and the overall program. So we are not effective sort of in between ourselves on the performance of each party in this program. So it’s — we’re partners, but we don’t sort of have any cross liabilities on performance between the companies. That’s how I would put it.
When it comes to the campaigns on the Gripen side, as you know, we have a defense planning process, of course, going forward with — in Sweden, and let’s see what they say about sort of the security interest of fighter systems going forward. That’s one thing. Then of course, in Brazil, we are negotiating an amendment of another four aircrafts. And then they’ve stated clearly that they want another batch of 26 aircrafts. So that is also sort of in discussions. Colombia has shown an interest to our aircraft, and that is very much going to be important to us in Latin America to have sort of Colombia involved in that. And Peru is one country looking closely on what Colombia is going to do going forward. So let’s see how that develops.
And then, of course, we have our existing countries on the C/D side like Hungary, with the extension of the contract they have with the Swedish government. And also an interest lately from Bulgaria. Let’s see how that develops. Also government-to-government discussion but of course supported by us on the C/D side. And South Africa now started to fly their aircrafts again, which is extremely good to see, and we just recently got a support contract to help them get more aircrafts in there. So there are a number of sort of initiatives and campaigns going that still, all in all, gives us a good future for the fighter system, Gripen.
Virginia Montorsi
Thank you very much. Very clear.
Merton Kaplan
Thank you, Virginia. I believe we have one more on the line before I take some questions from the audience. Moderator, please let’s go ahead with the next.
Operator
The next question from the phone comes from the line of Sash Tusa from Agency Partners. Please go ahead.
Sash Tusa
Thank you very much, indeed. Good morning. I’ve got two questions. I’m afraid they’re also of civil aerospace focus. Firstly, I wondered whether just as an indication you could give us the rough breakdown of your civil aerospace activities really between Airbus, Boeing and others, so that we can get some sort of indication of which prime contractors’ production ramp might have more of an impact on you and which prime might be less significant?
And then the second question that I have actually refers to Heart Aerospace. I’m afraid I have a long enough memory to remember the last time you were involved in regional aircraft. And I just wondered if you could talk about how you have bounded, how you have delineated your investments and your exposure with Heart? Or is this something that is going to be slightly more open-ended in terms of how much you might invest over the coming years?
Micael Johansson
So while you think about potential breakdowns in aviation —
Christian Luiga
You can start with Heart.
Micael Johansson
I can start with Heart Aerospace then. This is sort of a — from our side, it’s supporting our sort of innovation path when it comes to new technologies. It’s not sort of an entrance into the commercial aerospace segment, again, us sort of producing commercial aircraft. That’s not what this is all about. It’s more about the technologies and maybe subsystem product level support to Heart Aerospace and collaborating with them on how to approach that on an electrically-driven aircraft going forward, which I think is a very interesting avenue.
There are several players trying to do this, and we thought that we will start a collaboration with them on this. It’s a marginal investment, and let’s see how it goes. I mean this is — we’re still in a concept phase, and it’s one of sort of many initiatives with new technologies, but it’s about bringing technology also back into Saab, affecting our autonomous systems going forward or other systems and products. It’s not about sort of getting back into the commercial aerospace area again. So that’s what I have to say about Heart right now. But it’s an interesting and a valuable collaboration with them, absolutely.
Christian Luiga
So not to complicate things that I can’t answer too much, but it is Airbus and Boeing that we support from our structures. But the mix, I can’t give you. And it varies also depending on the production year by year. Yes, I know you’re trying to figure out maybe if you believe Boeing or Airbus will be more successful, if we will be more successful. But that is more actually dependent on what kind of programs we participate in than being exposed to either or of those aircraft manufacturers.
I want to add just to what Micael said before as I have the opportunity now that both, a, we have taken down the loss. We have worked very hard with the costs. And we are delivering according to plan this year. So we’re not slipping in any way in what we’re trying to do. But on the other hand also, it is extremely important when we work with this, that this is a very strong cost pressure sub-supply segment. It’s not like Boeing and Airbus is easy to work with and trying to give away a lot of money. So you have to be very careful how you expose yourself because you step into a very long-term relationship and commitments when you sign up on this. So we are extremely careful also on making sure we understand how we commit ourselves into these programs, learning from history. So it is a very delicate issue. Meanwhile, we are very strong and committed in the contracts we have today to Airbus and Boeing. That’s what I would like to just add.
Sash Tusa
Alright. Thank you very much for that. And just as a very quick follow-on. Are your contracts with Airbus and Boeing typically fixed price? Or are there escalation clauses to cover inflation included in the contract?
Christian Luiga
They are both. There could be sort of a range before we have to — we can share, and depends maybe on what kind of cost also that we need — that we can share.
Sash Tusa
Great. Thank you.
Merton Kaplan
Thank you, Sash. And we have a few minutes left, so I’m going to take the opportunity to ask one question to you or maybe two, Micael, and one to Christian. We have a lot of questions here. I think one that we covered very briefly, but maybe you want to add a bit more on that. What are your expectations for the commander of chief’s plan review that would come out? Do you have a view on that? Or what would you like to see?
Micael Johansson
What I would like to see, I mean, I can’t speculate actually on what will be said Tuesday and all that. But what I would like to see is that they reiterate the future long-term necessity of having a strong air defense, i.e., continuing to develop the Gripen E platform and have an idea of how do we take the next step in partnership with someone on — or continuing sort of with that, sort of area of air defense systems, including the fighter system. That is important. Likewise, which is a security interest of Sweden, extremely important. Also extremely useful now in the Nordic region, together with other countries, fighter systems in coping with the threat from the East, so to say.
And then, of course, the underwater system, submarines, the same thing, continuing having a long-term view on the importance of having the right number and the capability in the under-the-water domain, because that is a deterrence that is extremely important also from a threat perspective to have. And we will have sort of a NATO pond in the Baltic Sea to protect going forward. So I hope that, that will be an important comment on that going forward.
But there’s also other things that sort of will improve our regional capability, like how do we continue to have air surveillance in terms of more globalized? I hope that will be in there. And I need to reiterate, I don’t know, but these are important things to me. And also the sensor chain that needs to be refurbished and replaced going forward.
And things like short-range defense systems like RBS 70 that, that comes into play. But this is my wish list of, say, a few of them, but I have no clue what’s going to be said Tuesday. And of course, important to understand also how they view the change in defense planning process and capability views now entering into NATO. So we have to adopt to that, of course, what are the capabilities needed.
Merton Kaplan
We look forward to that. Thank you, Micael. And one last question to you, Christian, we have. It’s a long question here, but the net debt is now net liquidity. And then we are — we have one investor here that wants to understand given the credit market turbulence and with a high inflation environment, do you see Saab reduce or change the strategy in how you view the debt or the cash position?
Christian Luiga
Well, we have said that we want to be cash flow positive. Any the dividend policy, I will leave to the Board to come back and then propose for the shareholders meeting of course later on. But we see that it’s good to have a strong balance sheet, both going into expansion, as I said, but also in the turbulent environment. And that we have now, and it could come up, M&A opportunities in this market. It could come up important investments we need to do, and it could be turbulent out there where we need to have a strong balance sheet in general. And that’s what we’re preparing for. And we will be careful with our money as we always try to be, and we will be very clear on if we invest in something why we invest in that and what we expect from it.
Merton Kaplan
Thank you, very much to you.
Micael Johansson
Thank you.
Merton Kaplan
Thanks a lot.
Micael Johansson
Thanks for joining us today.
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