Welcome to the HMS Networks' Q3 Presentation for 2024 . During the questions and answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to CEO Staffan Dahlström and CFO Joakim Neidborn. Please go ahead.
Thank you. Good morning, everybody. Greetings from sunny Stockholm, and me and Joakim would like to take you through the Quarter Three report. Not too much sunshine on that, unfortunately, but let's take a look on the agenda for the day. So I will start with a short business update and talk a little bit about our new organization that we presented earlier this week, and then I'll switch to Joakim, and you will talk about some financial results, and we end up with a Q&A. But let's first look on the quarter we're closing. We start from the top. We see net sales minus 30% organic.
The reason why we see plus, minus here is, of course, we added the big Red Lion part compared to last year, but of course, we are very disappointed to see this weak market situation. We were expecting this to be slowly ticking up, but we see it continuing this kind of low level. Order intake also negative, minus 8% organic. We still see that there are some inventory adjustments, and Joakim will talk a little bit more about this in the numbers. However, we see that we improved our cost level. We have minus 22% on our organic OpEx, so we're trying to mitigate what we can on the cost side to adjust for this weaker market.
And we see that our adjusted EBIT is 194, a little bit of reduction from quarter three last year, but we are quite okay with our adjusted EBIT margin of 24.5%. So I think what we've done, what we can to really mitigate the weak market. And we are also improving the cash flow. After a couple of quarters with inventory building up, we are now taking good activities to really reduce inventory, and Joakim will also talk a little bit more about that.
So let's switch to business update, where we see, as I said, market is weak. Especially we are surprised about North America, where we see some good traction before. But quarter three really was a weak quarter also for Red Lion. Difficult to say what it is, but of course, in U.S., there's a lot of wait and see at the moment. People are waiting for the election, and maybe this is giving us a bit softer market as well, but it's easy for customers to wait with some investment decisions. In Europe, we are a little bit concerned about Germany.
Automotive market is really slow. In general, the machine building market is also slow. So I think, here we see a lot of negative press, negative attitude by customers, so this is not good at all. Asia, we see a good development in China. However, China is a quite small market, some 5%-6% of our revenue, but we had a good quarter in China.
Market in Japan is still very much into adjusting for their big inventory, and our large customer there is talking about they don't need to place new orders in the couple of quarters. So there, it will take some time before we see a move up in Japan, but it's mainly due to the inventory situation of large customers. We see quite good development of winning new customers, so we feel that we have an attractive offer, but it's the existing customers that see a weak market. But we do good design wins, and we feel that we are winning businesses.
We also presented our new organization. We have some slides about that to focus on how we build this company into three division: Industrial Data Solutions, Industrial Network Technology, and New Industries. Talk more about this. And we also made a new acquisition, PEAK-S ystem. We signed it first of October, and we will get our hands on this the first of November. Interesting company. And we also divested a small part of the Red Lion.
It's a German business, quite small, where we see a lot of similarities to our Ewon business, and we felt that there was not really any business logic to integrate this, so we divested this by a management buyout, and leaving this to the management to take forward. PEAK- System, interesting German company, key offering in software and hardware for communication technology, especially for vehicles, like EV cars, heavy duty vehicles, internal logistics, medical, and some other applications.
There's some similarities with our Ixxat business, but it's a complete, complementary products, and we see that we have 50 employees, quite many R&D, very well-established company. They also have a development center in France. So we think that this is a good addition to HMS, very profitable organization, they have a single-digit growth at the moment, and it's a EUR 25 million revenue. So it's not a small... big business, but it's very profitable, and it helps on our profit level. So we're quite excited about this. People may ask about why we invest in automotive at this time.
We agree that we see a weak market in automotive in the short run, but of course, we do this acquisition in the long run, and we see good long-term business opportunities in automotive and this medical business. If you look on the next steps here, we expect to close first of November, and they will be part of this new division we call the New Industries and the subdivision of Vehicle Communication, and we'll start a quite slow integration during 2025.
We have our Ixxat business in Ravensburg. This is in Darmstadt, fairly close to each other, but we see a lot of synergies in the product offer and how we can use our both companies go to market. You see also at the top here what we paid, EUR 69 million. It's a highly profitable company, so we see that the multiple is 9.2, which we think is a fair price in the market conditions here. So we are happy with this. There will be some transaction costs, but this is a nice company, and we look forward to get our hands on this for helping them to take the next step in their growth.
Let's take a look on the new organization that we announced early in the week. We see on the left side is our current matrix model, where with our business units, we're responsible for products, and the market unit is responsible for the go-to market. We started this maybe 7 years ago, and we are now probably before our acquisition, we probably have grown 3-4 times.
We added Red Lion, Intesis, and now also Peak- System. So we feel that our matrix organization, we've really grown out of it, and we also see Red Lion and Peak- System as good, good additions. So our organization, it served us well for some years, but we see some challenges that R&D has become quite far away from customers. Sales become quite far away from product and technologies matrix, and we see a little bit of unclear accountability, difficult to integrate new companies.
So I think we also see that some of them, where this matrix is so easy for the market units to complain to the business unit. It's easy for the business units to complain to the market units. We can't have it like this. We need to move on, and we think that these three divisions that we have will be much easier, so three divisions, all facing customers, responsible for sales, marketing, product management, R&D, industrial data solutions, industrial network technology, and new industries, and each of these have their own customer group and also their own product offering.
There'll be some shared services. We keep our common supply chain, since we believe there's a lot of synergies in purchasing power, volumes, and we now integrate Red Lion supply chain with HMS supply chain, and we keep some group functions for M&A, so we think this will create a customer-focused organization from sales to R&D and back to customers. It will reduce complexity, and we also get a full accountability in these divisions for strategy, resource allocation, and financial performance.
This is the right step for us for our continued growth here. Take a look on these three divisions. The largest portion will be our IDS, Industrial Data Solutions, representing some 44% of our revenue. It will be our Ewon business, our Red Lion business, our Intesis business, and our Anybus Diagnostics business. But here we focus on industrial automation and its machine builders, system integrators, end users. Here we see both synergies in the go-to market with a strong common product platform, but we also see product synergies in technology going forward.
Secondly, we have industrial network technology, technology for communication, control, and security. Here, it's much more of what's used to call embedded. Here, we work with direct sales, with larger device makers. They integrate our technology in their devices, quite long sales cycle, but a very sticky business where we get revenue for the coming 10 years. And this would be 34% of revenue with a very focused global organization here. And finally, we have what we call New Industries, where we would like to collect our business outside industrial automation.
This is also a platform for future acquisition to grow, to become larger. Today, we start with our Building Automation division, and we also add the vehicle communication, including Ixxat, Peak- System, and our Owasys' business there. So this is a high-level view, but we believe that all these three have different customer groups and much more synergies. So we look forward to take this step from first of January. All right. So Joakim, what do you say about the financial results?
I think I'm gonna start off with the most challenging situation, looking at the order intake, and then you will see that the slides become better and better the longer I go. But let's jump in to talk about the order intake. And I think Staffan already mentioned that we have more or less in all markets, maybe except for China, we have a quite challenging situation still in Q3. And underlying demand is down to the lowest levels that we've seen since 2021 in this situation, primarily driven by continued destocking by some of our key customers.
A nd we have slightly different characteristics for our three main markets in the U.S., Germany, and Japan. Just to mention a little bit of that, I think U.S. is maybe where we saw the biggest miss compared to what we believed ourselves for Q3. We see that the product, the project business within Red Lion is a bit weaker, and also the Anybus embedded sales in the HMS sales organization is a bit lower than what we expected, primarily again, driven by large inventories with some of our key customers.
On a positive note in the U.S., we can see that the part of our business goes through distribution is actually up when we look at the point of sale, so what the distributors are selling into the market. So it's a slightly different story, looking at what we push to the market and what's going out to the end customers. If we take then Germany, which I think you've all seen, is pretty dark at the moment, and we thought that we would see a stabilization in Q3 and maybe a small tick up if we went back a quarter or two. That is not the case.
We see a more challenging view now than we did a quarter or two ago. And we think it's flattening out at this moment, but maybe not any soon improvements. I think we have to wait until 2025 to see anything better than what we are performing at the moment. In Japan, where we had a lot of good orders in 2021 and 2022, we still see that some of the main customers are keeping quite a bit of inventory, and I think we need to wait probably a couple of quarters out in 2025 to see a great improvement in the Japanese market.
All in all, what we see is that we are not losing any customers, but we have these big inventory adjustments going on. This is difficult to make, but we made this estimate of how much destocking we're seeing, and we believe that to be around SEK 100 million, which is the same that we had in the second quarter. And you've been seeing this graph now with us for some couple of years, and it's a completely different story now compared to what it was in 2021 and 2022 . And with this, I think we're really starting to see the end of this destocking.
We have maybe a quarter or a bit more, and then we expect to see a gradually improving business. Going over to the sales, that is a little bit better. We're reporting flat numbers, but organically, minus 30%, so also there is a pretty challenging situation. We're meeting a strong Q3 in 2023 , which makes it more challenging to report good organics, organic numbers on the sales side.
We were a little bit surprised that we had this book-to-bill of 0.87. We thought that we would be more around 1, both with sales a bit higher and with order intake being a bit higher. And here, I think the main thing, just as in the order intake, it is the embedded business where we have the inventory adjustments. And of course, it doesn't help that the underlying market is weak as a whole.
We've been seeing some peers reporting as well with similar situation that we have in our view. And well, we can only be happy to see that we have slightly improving design wins, that we also state in the report. That's something positive. And we have also the Ewon business is trending quite well, and back to the same levels as we had last year. Also, Intesis is doing quite well. So it's really down. Our biggest challenge is the embedded business. Talking a little bit about Red Lion. Here, we're meeting also a tough comparable in Q3.
We have reported before that we had a bit of a boost situation in Red Lion during 2023, both in orders and a little bit in sales as well, due to inventory buildup. So now we are down 26% compared to last year, SEK 244 million, and we expected to see a decline, maybe not that big. Again, the product business is suffering a little bit, and on the order side, we are down 1% to 244. As you might know, the Red Lion business keeps a very short order book, so sales and orders are expected to be about the same, which you also see now in the quarter.
We're working full speed with the integration, and now with the announcement that we made earlier this week, Staffan commented on the new organization. Now we can really set full speed on all the areas, and this is, of course, something we need to balance with investing for the future and keeping focus on the current business. What we can see so far is that we've been doing quite well in the back office integration. That is more or less done.
We are doing some investments in supply chain, and you already see some improvement in the gross margin side, and we think that we can squeeze out a little bit more with coming investments as well in supply chain, being more efficient on the delivery side, and then the big thing that we're now putting full speed to when the new organization is announced, to really merge the HMS and Red Lion sales organization, not only in North America,
but that's where we have the biggest potential, so that is now going on at full speed, and we hope to see some good results from that, maybe during second half of next year, but again, it's this down to combining focus both on the current business and doing the right things for the future. We're not the biggest organization. We're trying to balance that. Looking at the backlog, that has been on very high levels for some time. You see now we are down to SEK 605 million in order backlog, which we believe is pretty much where we should be when everything is as normal.
We have the same ratio of rolling 12 months net sales compared to backlog now as we had in 2020, 2021, beginning of 2021, before we started to see this big backlog being built up from component shortages. So what this basically means is that the order intake that we will get is pretty much what we expect to sell. Short-term book-to-bill around one. Hopefully, we'll see that improving throughout 2025.
And then, having a look at the sales per region, we see now that the European and the US market is about the same size for us, just about 40%, and then APAC is 14% of sales. So this is pretty much where we expect to be going forward as well with the current business that we have. And then I said that you will see improvements the longer I go in through the P&L.
And I think despite this very weak top line being 30% down organically, I think we do a decent job in holding up the profitability level. We do an adjusted EBIT of SEK 194 million, with the main adjustments being amortization of excess values from the big acquisition with Red Lion. So we're almost delivering on the margin target of 25%, just being 0.5 percentage points below. And the reason why we can do this is, well, first, that the gross margin is quite good. We have 63.5% compared to 65.4%, but then you need to keep in mind that we are diluting the margins with the Red Lion acquisition slightly.
So take away Red Lion, we would have been at the same level as we were last year in HMS and then with a 30% reduction in volumes. Of course, this is driven a little bit by a favorable product mix. The embedded business has a slightly lower gross margin than the rest of the business, and so when the embedded business comes back, you will see a different margin.
Then we're also quite happy with the gross margin development within Red Lion. We've had some quick wins, and we expect to be able to add a little bit more, as I said before. We're also keeping pretty tight cost control. The OpEx is SEK 343 million, down 22% organically, and we're trying to save back where we can. You should also know that we have some one-offs in Q3.
We always have a vacation effect, so the accounting impact of the way we account for vacation provisions, and then we're also, since the performance is not where we would have expected ourselves, we're releasing some bonus provisions in Q3, where we have been accrued for higher payout than what we see that we're gonna have.
So all in all, this is impacting EBIT positively with SEK 25 million, reducing OpEx with SEK 25 million. About 50/50 on the vacation provisions, which we always see in Q3, but not any other quarter, necessarily, and then the other half from these bonus provisions being released. And then let me just talk about the financial implications of the organization change that Staffan mentioned. So we're going into the three divisions, the Industrial Data Solutions, Industrial Network Technologies, and New Industries.
And with this change, we see that we have about 40 positions that are being redundant, primarily in the... when we merge the sales and marketing organizations, but also some high-level management positions that we see that we can do without. So this will translate to about SEK 40 million savings, and as you might remember, we did a restructuring program also in Q2, where we took out some SEK 40 million in one-year savings.
Accumulated, we will have saved SEK 80 million in cost savings going forward. And on the program from Q2, we're quite happy with that impact. We see the full impact that we should already now, and the impact from this reorganization, we will have full impact from 1st of January in 2025. As a result of this, we'll also see that we're gonna take restructuring cost of some SEK 25 million in Q4, and we need to get back to the exact number, but they will be in that range.
With this, with the divestment of the MB Connect Line business and with the acquisition of PEAK- System, we should be just above 1,100 employees when we go into 2025. And then we have the earnings per share, 2.51 SEK, and maybe worth mentioning, compared to previous years, we have now pretty massive interest costs, given the big acquisition of Red Lion. So we have net financials of 45 million SEK, and the interest cost now being 36 out of that.
Other than that, not so much interesting to say around this. But the cash flow from operations, SEK 205 million , a number that we're very happy with. We see the best cash flow, maybe the best cash flow ever, actually. And Staffan mentioned that we're doing inventory reductions.
Despite the lower sales, we managed to reduce inventory with some SEK 130 million since April. Now in the quarter, we do a reduction of some SEK 79 million in inventory, which we're happy that we can do. We expect to see a continued decline throughout Q4 and into 2025. Maybe not in the same pace as we've seen now, but we should see further reductions for the coming quarters as well so all in all, with the cash flow, SEK 205 million, we see a cash conversion of almost 100%. Not possible to sustain forever, but good that we can. When business is being a bit softer, we can do these adjustments.
Then the balance sheet, looking at the net debt, we have almost SEK 2.6 billion in net debt. We see that we're coming down some SEK 200 million from Q2, which is good to see. And in the quarter on net debt adjusted EBITDA as reported of 2.79, and as many like to see, without the IFRS 16 impact, we're at 2.72. It's a little bit on the high side, and with the acquisition of PEAK- System, we will take this up a little bit more. And I think with this, it's important to say that we are aware that we are on the high side.
We feel quite comfortable with this since we know that we're gonna reduce this during 2025 and work on integrating the companies and stay a little bit more cautious to acquisitions for the coming quarters, at least, and then just to summarize. We have three big news in the report, so the first point I wanna make is that despite the challenging markets and continued destocking, we see good gross margins, good cost control, resulting in a quite okay result.
Staffan presented a new organization that will kick in 1st of January. We think that will be very positive to get even better focus on our customers and grouping the offers together to serve the customers in the right way, and we're getting a full accountability all the way through the profit and loss with our division heads.
And then finally, the acquisition of PEAK- System that will strengthen the New Industries division, and also the divestment of MB Connect Line that we expect to close now any day. With that, I'd like to hand over to operator for some questions.
... If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Simon Granath from ABG. Please go ahead.
Thank you. Good morning, Staffan and Joakim. Initially, Staffan, you have been in this industry for many years. Could you expand a bit on how the current market demand, situation, or trajectory differ from historical downturns, if that is the case? What early signs should we be looking for that suggest that demand is picking up? Thank you.
I think we have two different parts of the business. This would be the new IDS division, where we work with machine builders, system integrators, and end users. That is more of. There's always business to do there, and there we see a different part of the industry is okay. Some others are quite not so good. What we have seen now in the previous downturns as well, and upturns, is that our big embedded business with Anybus, that's really related to the wins we get.
We do that all the time, like we do right now, but orders is really depending on how many robots our customers are selling or how many other machines. So here we see that that is more cyclic, and that's a little bit what we see right now. These are two different aspects of the business, and that will help now when we go into divisions with IDS versus this INT, which is more direct. I think we have seen this before, and we also, if you look from, for example, yesterday, ABB and their robot and discrete, it's quite similar to our business.
See very similar patterns, but they also see that their machine business is suffering, and this will come back, but right now it's a couple of quarters of a weak demand, and we need to work on the things we can affect, and win new customers, but the existing market is a bit weak for the moment. But it's nothing we really see as something new. It is what it is, and we need to try to deal with it on the cost side and make sure we win new customers, because there's a market out there still.
Thank you so much, and speaking of things you may affect, how do you view current cost levels, partly in light of your adjusted EBIT margin target of 25%? Could we see more actions for you to enhance margins, or is the current organization relatively slim to meet higher demand when that comes and thus drive expanding margins?
So I think, as you see in the numbers, we've been reducing quite a bit of cost, and both on the personnel side, the two different terms this year, but also on keeping back on being on trade shows and fairs and traveling, and so on. So I think we really try to keep a tight budget for the moment. Of course, when business comes back, we will probably invest in more customer activities and so on. And I don't expect us to. If we have to do another cost program, it would hurt a lot more. So I think that is definitely not what we're targeting. Then we'll need to see how the business develops, of course.
You can expect now, from first January, we're moving to this new organization. There will be some fine-tunings when we get to do certain learnings and stuff like that. But we've done this reduction now to be ready for this new divisions. So we don't really expect any big cuts going forward, but there'll probably be some adjustments and fine-tuning the first couple of quarters, 2025.
Very clear. Thanks. And on the destocking impact here, I interpret the SEK 100 million impact as greater than you previously expected, which then probably, to be fair, reflects a sequential downturn in the market. Could you elaborate a bit on your visibility here? Do you have clear sight on many of your largest customers in terms of their inventories, or is your visibility relatively broad-based?
I think you summarized it quite well, first of all. And in terms of visibility, of course, we have closer discussions with the larger customers. So I think what we know for a fact is that some of the customers will not order for one or two quarters more. I mean, that we've heard from them.
And then, of course, there is a large customer base where we don't really know exactly, and we maybe don't have the same close relationship, so we can't find out exactly how they think. So I think what we said is pretty much what we know. We try to be as transparent as we can. Again, we expect to see a small uptick in 2025, hopefully with the second half being significantly better than the first.
I think with several of our customers, large customers, we talked with them for the last year about the inventory levels. I think they have underestimated how much their own channels, their distributors, also had in inventory. So I think there are several layers of this. So I think this, this took a longer time than we expected, and, I mean, maybe this will, after the end of this year, we will, we will be on par, we guess, for this. But it's been longer than we expected.
Appreciate the transparency here. And then finally, on Red Lion, I think you said that you have some more cost synergies on the cards, and that we should expect, but are the margin improvements here that we saw sequentially mainly a result of your efforts or rather a mix effect? And then could the gross margins for Red Lion start to reach the rest of HMS over time, or is that level too ambitious, considering mix effect, regional effects, et cetera?
... I think the gross margin improvement that we see in Red Lion is part of some things that Red Lion management did before we stepped in, but also some things that I think we have helped them and support to do. And I wouldn't wanna promise that we're gonna get them up to HMS pre-Red Lion levels, but I think there are a couple of percentage points over maybe the coming two years or so to grow into, for sure.
I think we talked about this previous calls as well. We identified that they've been really underinvested in their supply chain. So we're doing some investment now as we plan for. It will take some time before these new machines and these automation systems are in place there, but during 2025, we are sure that we'll improve, like, first pass yield and quality.
Secondly, that should also have some cost effects in efficiency and things like this. So there are more things to do, but now I think we've picked the low-hanging fruit, and we need to climb a little bit further up in the tree to get the next level, but there are some more things to do.
Thank you. Appreciate the call.
Thank you.
The next question comes from Joachim Gunell from DNB Markets. Please go ahead.
Thank you for that, and good morning from a rainy Oslo. So can you just discuss here, I mean, touch upon the previous topics, but what gives you comfort around the shift at this higher level of performance after EBITDA, and then basically your line of sight here to not be in a position where any sort of, say, covenant would come under breach?
I think, of course, we have been in close dialogues with the bank before making this acquisition of PEAK- System, and we made a plan that we think will be solid to, of course, not break covenants. I think that would be a bit irresponsible of us to put us in that situation.
I think what we see here with the strong cash flow, and there's more. We see some of the effects of the cost saving we're doing as well. So I think even if this is a really weak quarter on the top line, we managed to make good margins, okay margins. So I think cash flow margins are good, despite the fact that we have a very weak quarter.
So we are not concerned so much about the midterm here. So we think that this debt level will go down during 2025 into more realistic numbers. So that's really our ambition, and I would say we don't think about this at night. We think we all have a good plan here.
Lovely. No, absolutely. And I mean, the factors that you can control is the ones that you've actually come in ahead of expectations here. But when it comes to integration, can you just talk about how, like, from an organizational point of view, integration with both Red Lion and how well prepared you are to digest yet another project with PEAK- System? And ultimately, also, if there's been any progress on, say, the go-to-market strategy now in the U.S. with the Red Lion distributor network.
Maybe if I start talking about integration, we have one team working with Red Lion integration, and that will be part of this New Industries division. With PEAK- System, it's a completely different organization now with this vehicle communication subdivision. So these are different people and a different integration.
We think that will be slower as well. So there's not... They don't compete with the same kind of integration activities. So we don't really see a competing situation there, that we don't have the resources. So I think from integration point of view, we will manage this without any problem. And then the question was about sales in U.S. or?
Yeah, exactly. I mean, some of the rationale behind the Red Lion acquisition was, of course, tapping into another distribution network in the U.S. for your existing brand. So, I mean, it's very early days, of course, but are you seeing any, call it, traction there?
We have some examples of, like, cross-selling and some of the distributors carrying some of our wireless products now. So we've been seeing a positive momentum in the attitude at the distributor. They see an opportunity to do more things together.
We were a little bit afraid that now we set up multiple distributors in some markets, that will just create a lot of conflict, but in U.S., they're used to that. So it seems like that have been worked out well. So we see quite positive tone by the distributors, but it will take a couple of quarters before we see the result in sales activities, in project, and things like this. But we think we are on the right track there.
Perfect. And just finally, I think, I joined a bit later, so forgive me if this was covered already. But just on the strong growth margin here in light of the lower volumes, is it fair to expect a directionally higher gross margin amidst higher volumes should markets recover into next year?
I think actually this might be a bit strange what I say, but I think the opposite, since one big reason why the gross margin is strong is that we have quite little of Anybus embedded sales, where we go with a completely different gross margin. So when business comes back, what we believe will come back the most is the Anybus embedded. So even if that's a bit counterintuitive, I think the gross margins will be slightly reduced when we see growth coming back.
That's very helpful. Thank you both, and have a great day.
Thank you.
Thank you.
Enjoy Oslo.
... The next question comes from Gustav Berneblad from Nordea. Please go ahead.
Yes. Hi, it's Gustav here from Nordea. Maybe just to start off here with the guidance for a recovery in 2025, and obviously, you touched upon it a little bit, and it's very hard to say exactly, but you say that the larger customers is not expected to place orders here in the coming one to two quarters. But is there anything else that gives you the conviction that we are likely to see the recovery in H1, would you say?
Yeah, I think-
That, that's a good question.
I think that the large customers believe they will place orders in, yeah, maybe Q2 or so in 2025 . I think that is, that gives comfort, of course. And I think what we're trying to say is that we don't necessarily see a big uptick unless that happens.
I think also when we look on some of our business, like Ewon facing against having more at the machine builders, there we see a quite good development. If you look on some US distributor, look on there, we call it point of sales, how much they are selling, that looks quite good, so we see some signs that the business is not completely minus thirty everywhere, so I think that there are some hope for a recovery, but we think it will take some time.
But I would say that we this negative market will change in a couple of quarters. That's our belief. But at the same time, we said this six months ago, that six months later better, so we're moving this window further out. So, maybe you are, maybe we're not fully trustworthy when we say it, because we said it half a year ago, that now it should be good. I think we're pushing this out again, so, yeah, we think we see some signs, but it's really, really difficult to make an assessment of the market right now.
That's fair. Then maybe just to jump on the strong margin here. I mean, looking at the Q1 report, you had sort of specified the R&D or capitalized R&D and so forth, and you said that it will be lower the remaining part of the year, but looking at the year-over-year figures, it seems to be down some SEK 5 million, and then you didn't have Red Lion last year. So I was just wondering, is it possible to say anything, how much you are capitalizing and how much you did last year?
I think it's, let's see, yearly pace this year should be around SEK 80million-SEK 90 million . Last year, I think we did SEK 35 million or SEK 40 million , something like that. So it's significantly higher this year, of course. I think we communicated this in Q4, that we're starting. The big project that we're running now is for the Ewon remote access and remote data offering, next generation. That will carry on throughout the year, and then we should see a reduction in the capitalized base.
Perfect. Is it fair to assume that it's quite evenly split out through between the quarters, or?
Yes. Yes. It's about the same pace, yeah.
Yeah, okay. Great. And then just a clarifying question. I mean, the bonuses, so the pay, reversed impact our SEK 25 million. Is that... Are you adjusting for that as well, or?
Let me just clarify that once more, so we have, when I was explaining that, we had SEK 25 million in relief compared to a normal quarter in Q3. Half of that, so SEK 12 million-SEK 13 million, is because of vacation effects that we always have in Q3 since July and August is in Q3, and then just specific for this Q3, compared to any other quarter, we did a reversal of bonus provisions since we've been accruing too much of some SEK 12 million-SEK 13 million, and both of those will hit the reported EBIT, and both will hit the adjusted EBIT, so we're not adjusting for these items.
Okay, so then it's fair to assume that the Adjusted EBIT is 182 or 80, 81, basically, or?
Yeah, depending on how you want to define it. It's
Yeah
... of course, up to you. Yeah.
Yep. Yeah. Okay, perfect. And then just the last one here. Is it possible to give any sort of ballpark numbers of how much the product mix is impacting the gross margin?
About one and a half percentage point, I would say.
Perfect. All right, that, that was all for me. Thank you very much.
Thank you.
Thank you.
The next question comes from Viktor Högberg, from Danske Bank. Please go ahead.
Good morning. So just given the upcoming new organization, was Peak the last piece to that puzzle? Would you have done it otherwise, still? Just thinking about how important Peak was to do, given, you know, the questions here about gearing and the uncertain outlook, just thinking about the timing for it and how strategically important you think Peak was.
Good question. I mean, we've been following Peak quite many years. I was there first time 1999, I think. So it takes a long time to build relationships in this industry. So the owners were ready to retire, actually, three owners, but one was the widow of one co-owner that wasn't here anymore. So I think they were ready to sell these kind of things. It's maybe not perfect timing, but it was for sale. They would like to sell to us. We would like to build a bigger business with this Peak and Ixxat. So I think maybe not optimal timing if you look on our leverage, but still a good opportunity. So we feel that this was...
We thought a lot about it, and we come to the conclusion that this market will keep on growing in automotive and medical device market, and we got a fair price for it. Look on their profitability, and it's a very mature and a well-established business. Also distributed in U.S., Asia, and Germany. So it ticked all our boxes, and we are actually quite happy. We are happy that we did this, but we did a lot of analysis before taking this step.
Just to comment on your question about the reorg, if that was dependent on Peak, it was not. I think Red Lion was, of course, a big piece to get that to make sense, but not Peak. It would have happened anyway.
Given the uncertain demand outlook currently and inflation coming down, what are your discussions with customers on price going into next year? Do you see the ability to keep prices? That's been your communication before. Or any kinda changes in pricing strategy going into 2025?
If I start there, I think we are having a more moderate view on price increases than previous years. We'll be more aggressive. So I think the customer expectation is, of course, they want lower price always, but I think in general, it's industry. It's increased price of a few percentage is acceptable, but we take it quite slow. We think that this reorg we're doing and we are taking a little bit of how to say? We are not aggressive on price increases. We believe that price will be stable for 2025 , rather than increased.
Okay, perfect. And just on the new group here, the working capital and CapEx profile, of course, we have elevated temporary CapEx in Red Lion now. But just how do you see cash conversion in the new group going forward?
I think we over time, I think, I expect cash conversion to be around 75%. In the short term, I think we can have a decent cash conversion throughout 2025, since I think we'll be able to reduce inventory a little bit more. And then I think we should bottom out around this, yeah, around then, 75%. That should be sort of the normal situation.
Okay, perfect. Okay, great. That was it for me. Thank you.
Thanks, Viktor.
Thank you.
The next question comes from Erik Larsson from SEB. Please go ahead.
Thank you, and good morning. I just have one question on the destocking effects that we've talked about a bit already, but you've been very transparent with all of these effects for some years, and that's much appreciated. And if we look back on what you estimated for lost orders around a billion, we are at around SEK 700 million now in total destocking. And I know this is all an estimate, and you haven't really retroactively changed previous estimates, so it would just be interesting to hear. Maybe a difficult question, but how do you think about this? Could it be up to SEK 300 million left in destocking?
I think it, it's a good question, and we discussed it a lot internally, on how we should see that. I think we have two views on it. One extreme would be to say, yeah, maybe it's SEK 300 million left, but at the same time, I think the business is larger.
So with larger customers and more customers and so on, I think we need to keep a larger backlog to have the business running. And with that said, it could be that we shouldn't see a lot more. So I think the answer that you probably will not be very happy with is that we think it will be somewhere between zero left to max SEK 300 million left. I think that's as honest as we can be on this item.
Yeah, yeah. No, I understand it. It's fair enough. Still appreciate the transparency. That's all for me. Thank you.
Thank you.
Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thanks, operator. Thanks, everybody, for joining this call, and rest assured that we'll keep on working hard to make sure the new organization comes in place, the synergies with Red Lion and Peak comes in place. But we also need to make sure that we keep on winning new accounts. There's still a lot of business out there that is not our business, there's somebody else having it.
So we are very focused on winning and growing the business long term here. But right now, we have some, I would say, headwinds in the short perspective, in the macro, but we keep on fighting for the future growth instead. So stay tuned, and we present this the coming quarter as well. Have a nice day. Thank you.