Good morning, everyone, and a warm welcome to HMS Networks Capital Markets Day here in Stockholm. My name is Thomas Carlsson, Director of Communications at HMS Networks in Halmstad, usually. Yeah, happy to be here in Stockholm. I have the honor of being your host and moderator for the next three hours or so as we look into the HMS Networks Capital Markets Day and our current situation, plans for the future, and financial prospects. So luckily for you, you won't be listening to me, much of me today. Instead, you will be listening to four eminent presenters. I can assure you they have some good slides for you. I listened to their rehearsal yesterday, so a lot of good stuff coming up for you. Before we get going, just some housekeeping issues here.
So we will take questions at the end, so we have ample time for that, about 40 minutes at the end. But we'll run through the presentations and then take questions from the room here at the end. And if you're joining via the webcast, a warm welcome to you as well. Feel free to ask any questions using the chat function, and I will take that with the presenters at the end. So warm welcome to everyone. So the agenda for today: so we will start with Staffan, our CEO, looking into the corporate strategy for the next five years. And then we'll take a deeper dive into the different divisions where the magic actually happens. We'll have a short break at 10:20 A.M.
We will have some chance to chat with the presenters and ask some more questions as well. And then we'll go into the financial details with our CFO, Joakim. And then, ample time for questions at the end there at 11:20 A.M. Sounds good? Good. We have no plan B, so then happy with that. Okay, so with that, I'd like to hand over to our first presenter for today, our CEO, Staffan Dahlström, who will also introduce the rest of the presenters.
Thank you, Thomas. Good morning, everybody. Really nice to see you here, and welcome on the webcast as well. I'm Staffan Dahlström, CEO of this company, but running a company is a team sport, so I would like to get my team on stage here just to quickly introduce all of them. And you see at the same time the organization chart we're having here. Ah, what a team! So Joakim Nideborn, CFO, will present a bit later, coming with a financial update. Alexander Hess, running our IDS division, he will come after me in a moment. Patrik Sandell is running our INT division, also presenter. And then Mira, she's our Chief HR Officer, will not present today, but join us on the Q&A.
Rikard, running our operations, and IT, and sustainability, will not present today, but will also join us on the Q&A. Welcome back on stage a bit later. Look forward to it.
Thank you.
All right. Let's just start with a short, where are we today? As a company, we work with industrial ICT, information and communication technology, well-connected in our industry. Our original products with Anybus, we have over 10 million devices installed around the world, which in our industry is a quite high number, so we've been doing this for many years. We also have over 600,000 machines connected to our cloud solution for remote access and diagnostics. So this is also well-established since years. And since our acquisition of Red Lion, we have more than 500,000 machines using our visualization of data. So we're well-connected.
We're also working with new technologies as 5G and IoT, but as many of you know, we work in a quite conservative industry, so when we talk about new product, it normally take years before they start ramping up. So things like 5G and things are still waiting for the commercial success to be more visible in our numbers. Today, we are around 1,100 employees in 21 countries where we have subsidiaries, one-third in R&D, one-third in sales and marketing, and this is a balance we try to keep. It's one thing to develop product that are great, you also need to make sure you can sell them, and having that mix been very important for us. Headquartered in the beautiful Halmstad, been nice summer there.
Many of you have been there, and please, if you have time to stop by, please let us know. Revenue-wise, we are approaching SEK 3.5 billion. We make an adjusted EBIT of SEK 800 million, and we have been growing the last 5 years, around 18%, combination of organic growth and acquisitions. So this is where we are today. One thing we are not changing is our mission. We, at HMS, HMS is hardware meets software, where we enable valuable data from industrial applications, so our customers can improve their productivity and their sustainability, two really key aspects for our customers. So this is working well, and we maintain that. But HMS is not only Hardware Meets Softwar e, it's also Heart, Mind, and Soul .
This is the internal company culture, where we put our heart, our mind, and soul in the things we do. This is a good combination of hardware meets software and heart, mind, and soul that really build the company. We've been fairly successful, and there are a couple of success factor on this hardware meets software side that we really been seeing is something that make us successful in the past. Been doing this for decades, and we build long-lasting customer relationships. In our industry, it takes years to build trust with customers, and you need to maintain and really deliver good products, good quality, to make sure you can keep that trust over years, and that's something we have done very successfully.
So very few customers is leaving us, and of course, bringing on new customers, make them loyal, that adds over time. We've been fairly successful in doing acquisitions. What we hear from other companies, that the majority of acquisitions fails, and when we buy companies, we integrate them, we want to have synergies, and we've done a few maybe not great acquisitions, but the majority of things has been really good for us. So we stayed out of trouble, we made good acquisitions, and this been part of our success as well. And we focus on markets where we can on smaller markets with limited competition, where we don't really compete with the big guys. So finding this kind of blue ocean, smaller pockets of interesting markets where we can be number one, and number two, number three. That's really what we look for.
We are a product, and engineering, and tech company, so we love our products. We invest heavily in product development and engineering. Product and product excellence have always been something really important for us. This is more on the product side, but on the softer side, we also really try to preserve the fact that, okay, now we've been doing this business for over 30 years, but we started up as a startup, a garage company. Maybe we're not a garage company anymore, but we wanna keep this attitude in the company, feeling that we take decision, we go forward, we have high ambition. That kind of entrepreneurial and business mindset is really strong in our management team and in all our management in the company. And this is also part of our culture.
We call it heart, mind, and soul, where we put a heart, a mind, and a soul in this. So this is important internally to build something that people really care about, the growth of the company and, how we take this forward. We changed our organization, from first of January this year. One key driver was that we want to come back to have decision-making close to our customers. It used to be like that, but we built a matrix organization, and we felt, "Wait a minute, we need to get back to our audience where our people are closer to customers and take away a lot of the, middle functions." This has been really successful, and we've seen that this new organization works. And maybe the most important thing for us is quality. It costs a fortune if our customers cannot manufacture.
So we have a business that is built on trust, and we have a history of 200 parts per million. We don't talk about percent, we talk about parts per million, we talk about quality. So our customers, they trust our products and our softwares, and this is really making sure that they come back as loyal customers. And also sustainability is part of this long-term commitment to our customers. Many of our customers, especially in Europe, are investing heavily in sustainability, and this is the future. In U.S., we have a more of a mixed picture. So these success factors have been important for us for the last 15, 20 years, but they will also remain as important for the coming 5 years.
So it's important to understand what made us successful and making sure that we really nurture and keep these success factors for the future. Products, we've done some acquisitions over the year. The Anybus, that was where we started, originally, first product back in 1994, quite some time ago. Other brands have been acquisitions, and what we do with this is to integrate them, get synergies in sales, in supply, in product development. But we normally keep the well-known brand, because in these small pockets of markets, they are quite well-known. So we wanna make sure that we take, we don't throw everything out and change. So we really wanna make this to be part of the same family.
So we normally change the font, and we have the brand by HMS Networks to illustrate that HMS is the company, but the brand is still intact and maintained. And the new ones here from N-Tron and Red Lion are the two latest additions to this strategy. products, both hardware and software product, and we're really proud about this strong portfolio we have.
Welcome to the Connected Factory.
Welcome to the Connected Factory. Production is running smoothly since the different machines and systems in the plant are constantly communicating. But let's have a look inside and see how HMS products make the factory run. Robots like these are the workhorses of many factories, carrying out complex and synchronized tasks. These particular robots are manufactured in another part of the world and will not be able to communicate in this factory had it not been for an Anybus communication interface from HMS. It integrates into the robot, allowing it to communicate with the factory control system. This conveyor belt has been running for a long time and now needs service. The supplier of the conveyor belt has a long way to travel to site, but by using Ewon remote solutions, it's possible to log in, view machine details, and even reprogram and commission the system without having to travel.
Factory staff and even machine builders can check and do troubleshooting from anywhere. To program the conveyor belt, the operator uses a human-machine interface from Red Lion by HMS Networks. It enables control and data from the machine. The factory network is the bloodline of the entire plant and must be operational at all times. HMS products solve many different communication issues on the factory network, such as data forwarding and network connectivity with N-Tron switches, data conversion between different protocols with Anybus gateways, and network troubleshooting with Anybus diagnostics products. The indoor climate in the factory is important. These air conditioning units communicate with the building automation system to make sure they're not running unnecessarily. Intesis AC interfaces enable air conditioning units to communicate with the building automation system used in the factory. This mobile robot is transporting material between the factory and the warehouse.
The robot's internal communication system is using the communication protocol, CAN, where HMS Ixxat and PEAK-System products offer interfaces, bridges, and gateways to enable communication. Also, an Anybus Wireless Bolt on top of the robot enables it to communicate with the local factory network via Wi-Fi, Bluetooth, or even 5G.... These are some of the ways that HMS makes factories connected.
So a snapshot of what we're doing, and you see the environment. This is industrial, high demands, and customer reliability of product is key for our customers. From first of January this year, we organized ourselves in three divisions, a consequence of acquisition, organic growth. We really felt that we need to have another way of organizing ourselves to make sure that we have more transparency into the organization, more accountability, and making sure that sales and R&D are collaborating with the right products in a good way. So, Industrial Data Solutions, IDS, 46% of revenue. Alex will talk a lot more about this in a few minutes, working with OEMs, system integrators, end users within industrial automation.
INT, Industrial Network Technology, 30% of our business today, where Bartek will tell more about this, where we will also work with OEMs, but a different kind of OEMs also with industrial automation. Then we have New Industries, that is, new initiatives, smaller units we have, faster growing ambition, and there we have building automation, vehicle communication, special products, and I will be talking about that in a few minutes. 24% of our revenue. So we think that this is an organization that is now working well. We think this also works well for the coming five years. So this is established, and we think that this has the potential to be the foundation when we are growing in the coming years.
But before talking about the coming years, I would like to take the opportunity to look back on the last 5 years. We made a plan back in 2019, and at that time, we were slightly smaller. We still had a lot of devices connected, but only 300,000 connected machines. Now we have doubled that. 600 employees, so we also added a lot of new members, and we had a few more. We were 16 countries, SEK 1.5 billion, an operating margin goal of 20%. Actually, we didn't reach in 2019, but that was the ambition. So this was where we were some 5 years ago. And then we set a plan that for 2020, we would like to focus on environment, staff and customers, growth and profitability.
We talked a lot about how to divide our market into Control Centric, Information Centric, and infrastructure. This was a way for us to describe the sweet spots and how we can organically be more focused in our organization to use the full potential where we saw the full potential to really penetrate these areas. We couldn't agree on if it should be 3 or 3.5, so we said SEK pi billion, and that worked well for us. We had originally a target of 20% EBIT margin. 2023, we raised that to 25. This was the focus areas, and when we look on this today, we see also that reality came. It's good with the plan, but you remember COVID, 2021, we had a semiconductor shortage.
That was a big hit in our industry because we normally work with we never work with the latest version of semiconductor. In automotive and industrial, we normally have one generation back, but this was a big issue with lead times and allocations and stuff like that. So that was a big thing. High inflation during these years, and recently, also the tariff discussion. So it's good to make a plan, but reality is not always as you thought it was in 2020. However, we executed on our plans. We went to some new market with new subsidiaries in Dubai, Vietnam, and Australia. We did acquisitions of Procentec in diagnostics. We became the majority owner of the Spanish Owasys business, where we today hold 80% of the shares together with founders.
A lot of new products. This picture show Ewon Edge, but also a lot of new products have been been released over the years here. And we made a big acquisition of Red Lion last year. That's really been a change for us, and at the same time, or slightly after, we got a fantastic opportunity to also acquire a German PEAK-System. Really good match with us, and we're happy we did that as well. That's been a busy, busy year. And that's what, why we started this new organization. So I think we've been executing on the plan, and even it's been a bit bumpy in the world around us, it's the power of the plan is quite clear for us. Let's make a plan, execute, adapt on the way, but really keep our eyes on the long-term goals here.
So we look back, and we can see that we more or less managed to fulfill many of these goals. For sustainability, we are now top 6% of EcoVadis. We want to be even better. We are silver, we want to be gold. We have this, we'll talk more about this. We are committed to science-based targets, working with that. We had a plan to increase the number of female managers, because we know that if we have more female managers, we can also attract more female employees, and we believe that this mix of female, male in R&D teams and sales teams generates so much good performance. So we really want to focus on female managers. From 15% to 27%, we've done good acquisitions in what we called control-centric.
That is now rolled up under Alex's IDS team. We also made good development of our sweet spot. Organic growth have been good, and financially, we overperformed on our target, targets, and Joachim will talk more about this in his session with the details there. We're quite happy with that, and I think that's also important to look back and see what we have done have been working well. That gives us good self-confidence when we also move on to the next five years.... All right, let's look on the market and some trends. The market we operate in is industrial, and the dark blue areas here on the map, this is where we have subsidiaries and own HMS staff. We believe that it's important to have our own staff on markets to really stay close to customers and understand each market.
What we see for the future, we don't really expect that there'll be a lot of geographical new expansion for us. We are talking about, you know, dig where we are, improve our business in US, in Europe, in Asia, but it's not that we have a new geographical markets that we need to penetrate. We're quite happy with the setup we're having, and we will develop this further. There can always be countries like maybe Poland, maybe Turkey. Let's see how it develops, but right now, we dig where we are, and we are on the right places. So, if you look on our business, we are where we have it today, we used to be factory automation. Processes also work with infrastructure, like data centers, material handling, warehouse management.
We work with power and energy, oil and gas, renewable energy, energy distribution, so we want to widen our scope with this industrial automation business. Then we have our small but very successful piece of building automation, a subset of building automation, HVAC, heating, ventilation, and air conditioning. And then we have our vehicle communication with a strong center in Europe, 16% of our revenue. So we feel that we have all these are industrial markets, some differences, but all of them require super high quality, reliability, and stable markets. Customers are quite... They like to talk about new things, but they love to buy the existing things because that's what they trust. So we think this is good for us, and we're happy that we've been expanding the last couple of years in this.
Look at the customer types. We have three types of customers. We started with what we call OEMs. For OEMs, it's either machine builders, where we want to be part of the bill of materials, when they build the machines, they add our things for certain functions, or device manufacturers, where we have the design win, that we are deeply integrated into their microprocessor boards and computer boards. That is a very nice business, but it's also, also a long time to success, but very, very sticky. So the OEM business we do take time to win, but it's a lot of good revenue for years when you win something there. 52%, these are the drives, the robot, the machine builders of the world. But we've also been saying that when we work with this, we are quite far away from the real applications.
We want to come closer to the end users. If we know the end users, we know what, what is their pain points. So we work more and more with end users, larger end users, to understand what is their demands, what do they need for the future. And in many cases, some end users rely on system integrators that they hire to do this kind of integration. So almost half of our business today is with end users and system integrators, and we're very happy to have this mix of customer types. OEMs drives volumes and long-term stability projects, and this kind of newer things becomes one-time products, quite high values in some of them. So it's nice orders, but then we need to find new customers and after each installation.
So it's a good, good combination for us, and we have strategies that is different for these customer groups because they are quite different. If you look on the markets for industrial automation, that is our large part today, we estimate that the market growth is 7%-9% CAGR in the coming 5 years. We see on the IDS market share, where Alex will show more about this, we think that we have a market share of about 13%. It's always difficult when we talk about market share because it's, it's competition, head-on competition, it's a substitute, and there's a gray zone, but we believe that the addressable market right now is EUR 1.2 billion. INT and Bartek's team, they have an 8% market share.
The other 92 is occupied by competitors, but also substitutes, where people have taken microprocessors, adding their own software, things like this. So we believe that that's a EUR 1 billion addressable market for the future. Building automation, also growing a little bit faster, but maybe up to double-digit % here. And here we see, since we are in HVAC, we see a lot of activities in especially cooling, unfortunately, and we see this all over the world, that heating has become more a problem, and it's not only for convenience, it's really if you have a shopping mall, you know, you need to have 20 degrees, otherwise customers will not come to you. So of course, these kind of things is more and more common also in cold countries such as Sweden here.
And then vehicle communication, slower moving market at the moment. We know about the German, vehicle, business is not great, but we also see that there's a lot of things going on in technology and things like that, and I'll be talking more about this. And we think we have a 16% market share here, where we have a, a few really strong competitors in, mainly in Germany here. So all in all, we see that we have a addressable market of some EUR 3 billion, euro, we believe that this is growing some, 7%-9% in general. So we have a quite good, stable market. It's not fantastic growth, but it's stable growth, and, we think that this is a relevant picture, and we keep investing in this growth potential.
If you look on the trends, we focus on five trends: deglobalization, need of automation, digitalization, cybersecurity, and artificial intelligence, and how they affect us with deglobalization. We see that we can be a winner. A lot of our customers are segmenting or changing their manufacturing processes from being a one global supply chain to have much more regional supply chain, and this also drives investments. We are still waiting to see the big boom like in U.S. for more regional investments. More people talk about it, but I think we've seen more of these investments in Mexico the past years, but we expect that this will also come in U.S. This comes also together with increased need of automation.
We have a factory in the U.S., and we are not super impressed about the level of automation and the level of competence and workforce competence. And Rikard and his team is doing a lot of investments and changes there, so we are on the right way. But in the U.S., they are behind in automation, in manufacturing technology. So we also believe the next couple of five years, the U.S. will be a good market for us, and they need to invest more. And honestly, I don't really know who they will hire in all this, Apple $600 billion U.S. factories, something like that. Numbers I can't even understand, but there are not people in the U.S. who can take these jobs. They don't have the competence or the will to take these jobs.
So we see a lot of automation is the future. We see more and more of digitalization, and this is an industry that is a little bit second mover compared to IT, because this is huge investments. If you own a steel plant or a paper mill, you may not be at the front of technology. You are a little bit conservative by nature, and we see more of the digitalization on the factory floor. We see with our IBS products that we collect data, we take this data in the cloud, and then the customer apply their AI and other algorithms in the data in the cloud. But we are enabling the valuable data for them. Cybersecurity, we have a lot of attacks coming in our industry.
We have a lot of concerns there, and a lot of new regulation coming up, and have a separate slide to show what we are doing there, but it's still a quite early market. We expect a lot of opportunities in this, but we also need to nail it. We need to find what HMS as a company can do in products, in services, and I have a few slides on this further on. And then AI, as we said, AI need data. The data is coming from the machines and sensors, and most AI is not applied on the factory floor, it's applied in the cloud. What we do is to gather data, we filter the data, and we bring it up to customers' application in the cloud.
So we feel that there's a lot more need for data, and we all see that AI is coming into the products going forward. I'll talk more about this. So these are trends we are seeing, and we think that these five trends are good for us. We are in a good place in this market. I'm sure there comes some faster and slower moving trends here, but I think we are well positioned for these trends here. So based on this, we've been working for six months to figure out what we can do, and here is the result. All right, so our vision is to grow. Three divisions, we think we have the right organization. Double revenue, that's number two, and one company in culture and how we drive the business.
So this is our growth ambition, and the wheel in the middle here, it's very important that this really shows the six strategic areas that we focus on for the coming five years. We start with in, Grow, Keep. We and many other companies were hit by COVID. The hunters became farmers, and we really need to change this, that we love to keep our existing customers. But we also have customers where we reach the full potential, so it's whatever we do, they will keep on buying our products. That's good, but we need to have much more emphasis on winning new customers and focus on the accounts where we have not yet reached the full potential. And we need Salesforce and our marketing team to rethink about how can we become back to becoming hunters again.
So Win, Grow, Keep is a very important strategy internally to make sure that we are more forward-leaning in the business, more aggressive to win new customers, and build new loyalties with them. Of course, we also focus on keeping our existing customers, but if we have a design win or machine win, of course, it's quite sticky already. We need to be more forward-leaning in sales to this. So Win, Grow, Keep, very important. Product evolution, we are very proud of our products, but we also see that there are a lot of new ideas in the company. We would like to do more investments and making sure that we continue the path of innovation. And at the same time, we also see that things are changing, slowly changing in the industry. More things are going to software.
People are more and more accepting subscription. We talk about annual recurring revenue in IDS, and we're doing more of these things here. So this is an area we focus quite much on. Mergers and acquisitions, we stayed out of trouble, been quite successful with this, and we look on a plan. We have some good candidates. We also try to balance this to make sure we can use our own balance sheet to do these acquisitions, even if we have some other tools as well. But this plan with acquisition is also based that we can finance the acquisitions based on our current and future balance sheet and what we can do there.
And I think also the divisional setup with the team you meet here is also enabling more M&A discussions further out in the organization, closer to customers, closer to product, competition and things like this. So I think we're on a good path there. And then we have our operational efficiency. We feel we are pretty good, but we would like to be great. There are so many more things we can do in this area, and we see we can improve our efficiency, we can improve our gross margin, we think, and this would—we have more things to do. And of course, AI and other tools is also elements that will help us here. Around these four key areas, we also have our planet strategy. We believe that sustainability is really important.
Science-based target is our way to address CO2 emission, but we're also taking broader scope with this to include also social governance, and quite much also, very much also our sustainable procurement. One of our biggest footprint we have today is not how we do things, it's our suppliers and our supplier's suppliers. So we are very actively in working with our supplier base and trying to help and push them to become more green, and that's a big part of this as well. And then, as we said, for years now, happy and high-performing employees generate loyal customers. So we also have a strong focus on our people program, and making sure that we build a company with really engaged employees here. So the new targets for 2030, it's planet, people, and growth. On the planet side, we talk about our Paris Agreement, net CO2 emissions. We want to be top 5 on EcoVadis. EcoVadis is an international body that we believe is taking a bigger than just environmental. It's more about compliance and governance, and procurement, and things like that, that fits very good to us. And many companies in our industry is following EcoVadis as the guideline. Happy customers, we want to keep Net Promoter Score
If you're 9 and 10, you're a promoter. If you're 7 or 8, you're neutral; otherwise, you're detractor. But we see that month by month, we measure this; it's a rollercoaster. We want to have something that is more predictable, and we selected employee engagement index. We want to be what we believe is world class, more than 80, and we want to make sure that we beat our target with female manager beyond 30%. And then, for this group, quite interesting, I think, we want to be more than SEK 7.5 billion in revenue, 2030. We will have a 25% EBITDA, and Joakim will explain a little bit more where we are there in the corner, EBITDA there. And we keep also our dividend policy of 30%-50% of adjusted EPS.
So some news here, especially on the revenue side, where we feel that the market is okay, and we see that we have a good position, and both organically and by M&A, we believe that we can grow significantly here. We're moving to these key elements for us, win, grow, keep. This is we focus on winning new direct customers. We would like to have more than 6% of the revenue for winning new customers, and that's a number that is difficult for you to relate on. We are on 3% at the moment now, so we want to double the number of new customers on a yearly basis.
We want to have, and this is maybe obvious for everybody, everybody in the company that work with sales have individual targets for win, for growth, and for keep, to really make sure that it's not only a team effort, every individual will really focus this to make sure that we do the best out of this. And we will also move into, today, we have a mix of distribution and direct business. We will grow both, but the direct business will be even faster growing, and we believe that with the product we have, we would like to address more of larger companies, with longer sales cycle, more international presence, which is difficult to do with, when you work with distributors.
So distributors are good; they will grow, but we move to a larger share of direct business, moving from 53 to more than 55% in 2030. That's also an important strategy for us. Mergers and acquisitions, we believe that we can continue this. We need to have a balance of finding the right opportunities. We also calculate this on the cash flow. We do dividends, and we use cash flow for M&As, and this plan is also to self-finance the M&As without any issue of new shares or anything like that. If we need to do it, we can do it, but the plan right now is to not do it for the coming five years.
As I said, the divisions will be responsible for this, and we see more opportunities to bolt on certain acquisitions inside our divisions. We maintain our target of, over time, not have a debt level that is more than 2.5, net debt versus EBITDA. We are slightly over that at the moment, and I'm sure Joakim will talk about that a bit later. Product evolution, we have a lot of new ideas, and we believe that more than half of the organic growth the next couple of years will come from new products. So we have some exciting things that we are working on and would like to release quite soon. So we're quite bold here. We would like to focus more also on annual recurring revenue. This is on subscriptions.
We do that on IDS today. Can it be 3% of our revenue today? And we want to move that to 10. And, this may not be a big change, but for us, it's a sign that the customers are moving this direction. Five years ago, it was impossible to have the discussion. They had a CapEx budget, and they could not talk about AR. We see a trend change there, and, we see more opportunities. So more than 10% of revenues will come from our AR. And, we also believe that we'll have more AR functionality inside our product. I will be back on that in a moment.
For operational efficiency, there's a lot of more things we can do, but keep in mind, compared to five years ago, we know so much more when it comes to resilience, flexibility. Five years ago, we and many others had just a global view of this: make where it's cheap, more or less. Now we have completely different strategies. You need to be resilient, you need high flexibility. So I think both we and our customers focus a lot on this, and we think that there, we have more things to do there. So we think that, we can grow sales faster than OpEx, which is, of course, always good for margins.
But also from an efficient point of view, we just released in the U.S. now our new ERP system, and we have a common system now for many businesses, and we see quite good synergies, that it's becoming more efficient, and we can do more synergy out of this. So we also believe that sales growth will be faster than OpEx growth due to these efficiency gains. And we have an ambition to grow our gross margins to beyond 65%. We see that, of course, the software content, ARR, is one element, but we also see that we can do more of smarter pricing and smarter ways how we do things in manufacturing. So we have high ambitions for the gross margins. On the people side, and Mira and her team is focusing a lot on this, happy and high-performing employees generate loyal customers.
You may not get Nobel Prize for that, but it's really important we talk about this. Our team, we need to be happy, but we need to be high-performing as well. That's the combination we look for. Happy non-performers, go somewhere else, and high-performing idiots, go somewhere else. We need to be happy and high-performing. That's the mix of great people we really want to find. Female managers, we think that's an important element. We're doing good steps in that direction. We need great leaders. We have some great leaders, we have some good leaders, but we need, we need to lift this for the coming five years to spend a lot of time to help our leaders to become even better than are.
So we measure our leadership index to be greater than 85, which we believe is world-class, and we want to make sure we have the industry's most engaged employees in our company. So these are people targets. And then on the sustainability, the planet, we look on the environmental. Here we are quite good. We've done a lot of stuff, so our own footprint is quite low, so we don't see a lot of other things we can do here. But we see that this sustainable procurement, how we work with our suppliers and how they do their things, and further down in that value chain, there are more things to do. We work also with labor and human rights, strictly connected to this, but also the governance and ethics. We are a European Scandinavian companies.
We have ethics that we wanna deploy around the world. Not always easy in India or in U.S., and things where we have a different culture, but we are quite strict on this. On our ethics and how we do business, that's more the Scandinavian way of how we do this. So we keep our targets with science-based target, EcoVadis to become a gold rating during this period, and we have quite a busy schedule here. But this is not something we do as a nice sticker, this is important for us, and it's important for our customers. We need to keep focused on this, even if in some markets, it's questioned at the moment. Manufacturing, I just want to take a few seconds to describe our strategy.
If this is complexity of products and this is volume, over the last, I think 15 years, we've been saying we want to invest and have the competence in manufacturing, but we don't have the capacity and maybe the cost level to really work with high volume. So lower volume, high complex partner, we work with our own factories and some local partners. For higher volume, more stable products, we outsource them with our strong EMS partners that we have both in Lithuania, in US, in Romania, China, Germany, around the world. So we're quite well covered here, Canada as well. And the idea is that we do in-house manufacturing for prototyping, new products, high flexibility, high complexity, things that is actually quite difficult to outsource because the volume or complexity is actually too high.
We keep on doing that, but for higher volume, standardized product, we work with suppliers that have capacity and have the scale to drive the cost down. But we have the capacity and the competence to be a good buyer, and I think the mix here has really proven to be a solid way of driving margins to be this combination. And we also want to be close to our customers. We have our own logistics hubs in, in U.S., in China, in Germany, and in Sweden, to be closer to customers. Most of the value add is done here, but we will see a future where we can do more value add configurations and software downloads and things like that, on our local logistics hubs, which is also one tool we can use to manage tariffs and things like that.
All right, last slide for me is about AI, and I just want to show. We are just in the starting of this, but we divide our AI initiatives in two different buckets. Here we talk about how to use AI inside our product. We are not there yet, but we see a lot of ideas and things, how to use AI on the edge in our products to do data analysis and really operate as a for, as a machine learning algorithm inside this. Also, to improve user experience and configuration. And I said before, we see already today quite much business where we collect the data, we package the data, and then bring it to the cloud, and then customer deploy their AI tools, so we just enable the data for them.
So this is on product evolution, and then on operational efficiency, we see a lot of activities to do efficient coding, efficient accounting, efficient forecasting. We're deploying this, and primarily, we work mainly with the Microsoft tools here, but we can do a lot more things here. But also customer-facing things, the front ends, the web page, support tools, we start to use more AI in this. But this is a different thing. That's for operational efficiency, and I think for us, it's been important to segment AI activities in these two different buckets. So we think this is also ways for us to have better products that also improve our operational efficiency going forward. All right, that was a very quick review of our targets, and Thomas, time for next person. Thank you.
Thank you very much, Staffan. Lots of interesting stuff indeed. Okay, so before the break here with some coffee, we're gonna have a look at a closer look at our divisions and where the magic actually happens. So as Staffan mentioned, we have three divisions. We have the industrial data solutions, which take the data from the industrial floor, lift this, and make this available to different systems. So Alex will talk about that. We have industrial network technology, which is more the real-time communication on factory floors between robots, making them, yeah, able to move a robot arm, for example. And then we have new industries, which Staffan will talk about, industrial communication for niche applications in vehicles or in buildings.
So that's what we're gonna have a closer look at now until 10:20, around that. So with that, I'd like to hand over to our next presenter, Alexander Hess, Senior Vice President of IDS, Industrial Data Solutions. Alex, over to you.
Thank you, Thomas. So warm welcome also from my side. Really happy to give you some insights of the IDS business. So, in IDS, we do solutions to connect, secure, diagnose, visualize data in industrial applications, and I will explain a little bit more what's behind that. If we look to our customer base, Staffan already presented the view of HMS, where we have a big portion of OEMs. If we look a little bit deeper into the IDS organization, we have around about 30% of our business directly with OEMs, which is mainly machine builders, so the product is used in the cabinet and then shipped to an end user. We do around about 10% of our business with system integrators, where they put our products together.
They provide a solution which go, which goes to the end user, and we do around about 60% directly with end users. So it's a little bit a different picture for in IDS than for the whole group. If we look to the market, we already mentioned growth between 7%-9% for IDS, what we expect in the market growth, and also there's a difference. So we have different markets which we serve in IDS. We have the IIoT market, for example, where we see a higher growth, but we have also markets which are more conservative. For example, even on the panel meter side, where we expect a lower growth rate, but if we combine all this together, we see a market growth of 7%-9% for the next five years.
The distribution in the company, so 46% of the sales of whole HMS is going through the IDS division, and on the contribution, it will be 40% of the adjusted EBIT year to date. And then a little bit different picture when we come to our customers. So you see, we do two-thirds of our business in the U.S. That's very specific for the division. It's mainly driven by our big acquisition we took, we did with Red Lion in the U.S., where we have our strong brands, Red Lion and Ewon. And then we have 27% of our revenue in EMEA, where we also have a strong brand and a strong recognition with Ewon, and we do 7% in APAC.
So it's a real, real big part, US and EMEA, and also a lot of potential for APAC in the future. If we look into the value proposition, so what is IDS about, and what are the products and the value proposition inside that? So we decided to go into five pillars to segment our portfolio. And from the left to the right, we have products to access the machine. We have seen it in the video. So if you have a machine remotely, you wanna access, you wanna do some maintenance, for example. We have products there with the Cosy, with our Talk2M Cloud, and also now with the new Ewon Edge, Ewon Cloud, to access these machines. Then, in addition to the access, we have the insights. So data is really important.
So 23% of our revenue comes from products which are called in the insights category, where we can use, for example, the remote access already and having in addition, data which we get out of the machine. And therefore, we have products like the Flexy. We have also products which are not using the cloud, like the FlexEdge. And then we have the Netbiter as a product, and also Ewon Edge, Ewon Cloud, where we can, let's say, get all the data out of the machines, and that's 23% of the revenue. And then if we get the data out of the machine, we need to visualize it as well, and there we have our visualize pillar. We have the HMIs, where we can do a visualization.
We have panel meters to visualize, and that's our biggest portion of the IDS revenue with 30%. Then we have our fourth pillar, which is connect. So this our switches. So we have unmanaged switches in the portfolio, managed switches, power over Ethernet, and also media converters in this category. And last but not least, diagnose. So, if you have a network, there are also errors occurs, and we have the right products to do some permanent monitoring, that the errors will not occur, or if you don't have a permanent monitoring, we have the diagnose tools to find out where the, where the error is. So that's how we move on for the next five years in our segmentation.
So we don't—we really focus on these five pillars in our offering, and we also will develop our products under these five categories. Where we are now? So if we look back, Staffan already mentioned it was a bumpy road, so, 2020, COVID, hit at us, and, we had a lot of, supply chain, yeah, disruptions and, a double effect in our business, especially in access and insights, where we saw that, our—where we sell, most of our products through distribution and where we saw the demand is going up and up and up. And this was caused by the end users on the one side. They had a need of, let's say, five devices.
They put an order of 7 or 8 because just to get the devices, and then the distributor collect all the numbers together and said, "Ah, I have a demand of 500. Let's, let's order 700." So it was a double effect. So we got a lot of stocking orders, especially, as said, in access in the insights business. And then, 2023 onwards, this destocking started, so we had this huge backlog to work off, and, yeah, we have a recovery. We are now back on a normalization, I would say. So, book and turn looks more normal. And, we also saw that 2023 onwards, there's started to getting higher demands on cybersecurity regulations, and I will talk more about that when it comes to NIS2 CRA, for example.
If you look today and onwards, 25, we see generally a positive market outlook, still with some uncertainties with the US tariffs, but overall, if you look into the market, it looks positive for IDS. On the product side, yeah, as we had to ensure supply chain at the beginning of the strategic period, we had to focus on redesigns, and this cost us some time to develop new products at the beginning. But beside that, after we were able to start our new development for a, yeah, a next generation product offering, where we launched our Ewon Edge, Ewon Cloud, for example, beginning of this year, where we're really proud of.
And for the future, we have a big, big, opportunity and potential, to leverage our portfolio and technology synergies to create a new, let's say, technology platform and offering for the market, and I will talk more about that in a second. Last but not least, organization. Since January first, we are in a divisional setup. So we have a global, division with IDS. So my management team is, in five different countries. So we are over, yeah, operating in over 17 countries with the division. And, this is in place, this is running now, and, really happy to see also the first positive effects there. If you talk about win, grow, keep, that's really important for us. So with this, we establish for sure in sales, and I will talk more about that.
But also for us, it's important to focus our R&D efforts to spend the time on new products, to win new customers, and to grow customers, and not to only maintain our existing portfolio. We also do a focus on five key vertical markets, which I will explain you here. So we say in the new strategic period, we wanna, for sure, we wanna have our offer broad to all markets, but we wanna focus on five markets, where we wanna dig in on the sales marketing side, more in detail, and also then having the right products behind that. So it starts from the left with food and beverage, and here we have our target customer base, which are OEMs.
So, we mainly sell our products there directly to the OEMs, and there we have the access and the insights product portfolio fitting very well. We are also, in the past, were quite successful in food and beverage, and we really want to expand this and become even more important in that market. Second, logistics. Warehouses are growing. It's a nice growing market. Here, we wanna establish a close collaboration with system integrators, so having our products in there, yeah, with for connect and for diagnose. Then third, energy. In the energy market, we wanna go directly to the end customers, end users, with our insight and visualize portfolio. And then there's a big portion of water and wastewater for us, where we can bring in our full IDS portfolio, where we can also do very, really good cross-selling across all our product offerings.
The same counts for oil and gas, where we have already a really strong footprint, where we wanna continue to focus on the system integrators also with the full portfolio. Trends. Staffan already mentioned the trends for the group. If you look into a little bit more in-depth, for IDS, what does this mean for us? So the deglobalization, we have the big advantage that we have our production, for example, in York and in Halmstad, so we can use this, and we will use this, having also the strategic partners, which is important for us. And we also have a big advantage that we have a global footprint when it comes to our sales and technical support capabilities.
This is very important to speak the local language, to be there, be in the local markets, and that's an opportunity for us, which we wanna use. Increased need of automation. I think there's a lot of talks about dark factories, so having no humans in the factory anymore. This is a growing, that's a big trend, and for sure, we have a perfect offering there. With our approach of win grow, we wanna go directly to the customers, establish the relationship, and also do cross-selling for that, for the automation companies. Digitalization, so we see a big potential here with our new platform, which I will explain in a second. Also, the transfer and the transformation in the market towards more acceptance when it comes to annually recurring revenue.
So there are new business models we can attract with. Cybersecurity in OT, so CRA compliance, we are already a forerunner with our products when it comes to have secure products. For sure, we want to use that, and we also want to leverage our ISO 27001 knowledge on that, and become the first choice of secure products within this market. AI, when we do data, we have the data. We want to have the application interfaces towards the cloud systems to enable the use of AI and, yeah, investigate in new business models around AI as well. With this said, we have three strategic initiatives for the next five years where we want to focus on, and the first initiative is our platform.
So we really see a huge advantage, combining the knowledge we have with our, let's say, Ewon knowledge, together with the Red Lion knowledge, to bring this together and develop one hardware platform, one embedded software platform with a lot of common features like device management, user management, which is always the same, with one cloud infrastructure. And to do this, we will be able to sell products for all our three—let's say, for three out of the five pillars. So access products, insights products, and new visualized products will be all based on this new platform, and that's really exciting. So we see that we don't need to do double developments. We can combine a core development, and we can become much faster when it comes to innovation and new product sales in the future.
Second, improve service offer and capitalize on ARR. So we see already a trend in the market. So we have customers, like, genset companies , they sell or they rent out gensets, and they ask already: Why I need to invest in, in your devices upfront, as a CapEx investment? Can I get this as an, let's say, as a rental? And for sure, that's very interesting for us. We wanna help our, customers on that, and for them, they already run an ARR model with their, customers, and we also can use this and, can, have an ARR model with them.
In addition to that, with the new platform where we have one cloud solution, device management, user management, we will be able to enable a lot of interesting features for the future, which allows us to have additional services which are interesting for our customers, which we can then use in a way of recurrent revenue and sell in a way of recurrent revenue. And this also then giving the customer the choice of a CapEx or OpEx model, and also, if you want to have additional services, you can opt in towards the services. Last but not least, we wanna grow our key account sales and also use and enable cross-selling. So we see a huge potential already above $2 million in cross-selling opportunities when we have the direct access.
As Staffan said, we wanna grow our distribution for sure, but we wanna focus in the strategic period to even get closer to our customers, to our large customers, having a direct connection there, direct approach, and be able to cross-sell towards the customers. So the share will increase in the IDS offering, where we do a lot of distribution today, and we see a huge opportunity to grow that. With this said, thank you very much. Handing over to Bartek.
Thank you, Alex. Good presentation. Now it's time to move on with INT, Industrial Network Technology. I will just grab my water. A great pleasure to be here and tell you a little bit about what we have been doing the last years, but as well, where we are heading ahead, of course. Within INT, we are focusing on real-time communication, control, and security, you know, forming the backbone of industrial automation systems. We operate in similar market as IDS, the industrial automation market, but we have different target customers and different go-to-market. We work primarily with original equipment manufacturers, more specifically, the device makers, where our solutions get tightly integrated into their devices.
From a go-to-market perspective, we have pretty long time to money, it's through direct sales, and the business we're in today start to generate revenue in 2 years when the customer release their product to the market. So looking at our customers, 85% is device makers, pure direct sales. We have pockets of products that goes towards system integrators and end users. Here we do collaborate with IDS in the go-to-market, since they have these channels established, while we're working primarily on direct sales activities. If we look on the expected market growth, it's similar to IDS, around 8%. There are some geographical variances where we see that APAC and North America will have higher growth of approximately 10% within industrial communication, and we're going to see a slightly lower growth in the EMEA region.
From a net sales perspective, we contribute 30% to HMS Group. If we look at adjusted EBITDA, it's slightly higher, 37%, and from a market breakdown is EMEA, our largest market, 56%, followed by APAC, more specifically Japan and China, 27%, and the smallest market is Americas. If we look into INT's four main offerings, it consists of embedded gateway, safety, and wireless. Embedded represents majority of our business, and here we enable real-time communication solutions that shorten customers' time to market and R&D efforts. As Staffan said, this is what we are born out of, and we do believe that we understand this business really well, and we are seen as market leaders when it comes to embedded connectivity in the market.
This follows with our gateway offerings, approximately 20% of our total portfolio, a problem solver on the factory floor, enabling industrial communication, Fieldbus connectivity, and IT connectivity, primarily targeting device makers, machine builders, and system integrators. Followed by a smaller offer, safety, only 5%, pre-certified hardware and software that enables us safe communication of a bus system. This has been a really hot technology for 5, 6 years, as people have been speaking about. Finally, we see this business taking off, actually driven by some regulations, safe regulations, falling into force. And lastly, wireless. Still a small area within our business, 5%, replacing complex cabling installations, which we replace with wireless or enable mobility needs. And we think we understand this business really well, I must say wireless is probably where we are struggling.
HMS was announced as market leader within 5G and factory automation 2 years ago. It's a really hot topic. Everybody loves to speak about wireless, but when it's come to finally actually defining the solution that you will implement in your factory floor, you go for cable, because that has been working for 20 years. And that's probably shows how conservative our market is, to adapt to new technologies. But of course, we have some more work to do here as well. If we move ahead and check on where we are now from a market perspective, pretty similar as IDS. We stepped into a COVID and supply bottlenecks, we increased our lead times to 1 year on some products. That was, of course, creating a really high order intake.
Then we moved into post-COVID recovery, where the demand surged, and are since 2024 in something which we call a normalization. I think still during quarter one, 2024, we shipped out the huge orders that customers placed back in 2022. That was the last quarter we did that. I think it's more important now to look on the order intake for INT. For three consecutive quarters, we had a small uptick in the order intake. The market is normalizing. Customer stocks has emptied out, and what we see now is the actual consumption driven by North America, APAC, where we still see that EMEA is a little bit slow on this recovery, but of course, with a positive outlook. From a product perspective, well as well, innovation lost. The challenge we had was that our products are really tightly integrated into customer devices.
So when redesigning the products due to supply issues of components or component being placed end of life, was pretty challenging to actually avoid the fact that our customers would need to recertify our products. Fantastic work done by R&D here, but the effect, no time for working on new products. Despite this, we managed to release a new generation of gateways to the market, received very successfully during COVID, and even more important, right now, are we working on a new embedded offering. This is a new platform we're going to use in our future products, which is hardware and software decoupled. This will give us the opportunity to offer our communication solutions on several hardwares, fulfilling customer needs of resilience, which is on every customer's agenda post-COVID.
But it will also give us opportunity to deliver industrial communication solution as a software for the future. And from an organizational perspective, it's really nice to have this divisional structure in place and have an organization that focus on device makers, which is slightly different than hunting for a quarterly quota. We have this design win process with pretty long time to money. We have a new management team in place, understand this business, where we create the focus. Of course, as Alex said, we can grow, keep in sales, but equally important in R&D. We have really heavy product roadmaps ahead of us, and we need to make sure that we allocate the right time for the products for the future. And lastly, we are restarting in this division of structure operations in Americas, and I will come back to that shortly.
Staffan presented a couple of trends. They have an impact or opportunities for ideas and some different opportunities for INT as well. Let me walk you through on those. When it comes to de-globalization, we have historically in China been very successful in targeting customers in China that target the Western world with their products. Now it's time to expand this strategy with an in China, for China strategy for some selected vertical pockets. Resilience is on everybody's agenda as well, of course. Our new hardware, software decoupled platform will open up several opportunities here. If you look at increased need of automation, of course, more and more devices are getting connected on the factory floor. We're gonna expand our embedded offering here towards large and XL customers, which I will come back to shortly as well.
But even more important, the networks are now getting quite complex. Today, you don't only have the control data on the network, you have IT security features that need to run on the network in parallel. On top of that, there is a third layer coming in with security regulations, security certification on the network. This is getting complex, and we start to see a behavior on the customer side, that they prefer to buy an industrial communication solution instead of building it on their own. Moving on to digitalization, this drives the hardware and software decoupling trend, opening up opportunities for software offers, but as well for us, the capabilities to upgrade customers' products with featured upgrades by upselling software upgrades to them. Cybersecurity and OT, that will—we have touched that quite much. That will become a hygiene factor.
I mean, we need to be compliant to all regulations. And of course, AI will be very important ahead. We need to make sure that we have capabilities in our products, where customers can execute their AI engines or machine learning softwares. But we will also try to take advantage of the great AI tools on the market and reduce the complexity we have in our in-design journey when the customer integrate their product into their devices by creating a no-code environment, meeting the needs of modern engineers on the factory floor. But wrapping this up, I think there are three elements here. Customers are facing resource constraints, networks are getting really complex, and there is a regulatory uncertainty in the market. These three elements together open up great opportunities for INT for the future five years ahead.
With that said, let's look into our top three strategic initiatives ahead. First of all, new embedded offering to expand addressable market. And what you see on, in the screen here is a matrix, how we on high-level segment the industrial communication device market. We have small, medium, large, and XL customers. This is not in terms of how big the companies are, it's in terms of how many devices with industrial communication solutions they bring to the market annually. And on the Y-axis, you see how expensive these devices are that the customers bring to the market. So the, the small and medium customers, they tend to be pretty niche players in the factory automation market, which a little bit more expensive devices, while large and XL customers, they tend to be the mainstream factory automation players.
They have devices that cost probably less than EUR 100, which are networked to, yeah, more expensive medium voltage drives that cost about EUR 20,000. There is, of course, a price sensitivity for industrial communication solution across this matrix as well, and the green area you see in front of you now, this is where we are playing and winning really well with our existing offering. Already next year, during quarter one, we aim to release an offering targeting the large customer segment. These customers has a little bit specific needs with a mandatory onboard communications, interface on board, which we have in our roadmap. And what I didn't mention for you as well, is that this pocket here, with large XL customers, covers approximately 40% of annual, amount of nodes that is deployed to the market annually.
This is typically a little bit cheaper devices, but these devices has today capabilities to run communication as a software, without any hardware. And here, we do also plan to release a new and better software offering, tapping into new customer segment we are not doing business with today. Very interesting initiative, in the coming five years, or several strategic initiatives in this slide, the coming five years. Second one is to restart and expand Americas. Unfortunately, due to historical lost focus in the previous HMS context, we are restarting from scratch Americas in this new divisional structure with a focus on device makers.
So 2026 will be a lot about reestablishing sales management, building up a sales structure, ensure that we have great win, grow, keep strategies in place, you know, identify the different pockets of opportunities that are available in this huge market, and execute our go-to-market agenda properly. Of course, are we as well on the side looking for M&A candidates to expand our geographical presence faster in that region? And lastly, slightly different initiative, retrofitting of installed automation systems. And imagine there are millions of devices today running in existing automation systems that holds tons of valuable data that the factory owners cannot get access to, to optimize their equipment. We aim to bring a product to the market, but we target these customers, device owners, factory owners, to enable connectivity of these legacy devices that are installed on the factory floor.
Allow the customers to give them access to the IT information, to extract it to their IT environment, and improve the efficiency of the factory, or simply make that old device, secure, to comply with secure regulations, or just enable an OT network connectivity of that old device. We're going to launch this concept under something we call Connected. Plug and play upon arrival, sold through e-commerce only, and which will open up a new pocket of revenue streams for us with pretty fast time to money versus the long time to money business we're doing today with our design wins. With that said, that's all what I had for you, and I will hand it over to Staffan, who will talk about new industries.
Thank you, Bartek. Very exciting. All right, hello again. So I'm back on stage talking about our smallest division, New Industries. And the reason I'm up here is that this is a collection of smaller businesses we have, with the ambition to find this niche application with high growth, higher potential, and we today have a couple of different activities. The customer base is primarily OEMs, but also system integrators and end users, and it's different for different activities here. We see a quite different type of growth here. On average, it's 8%. The vehicle communication is slower, building automation is faster, and today is 24% of revenue on the three different activities, also 23% of our group EBIT, and the majority of the business here is in Europe.
So these are businesses we have acquired, and we now try to form different synergies in this, and we have this under the umbrella in New Industries. Each of these segments are run by three entrepreneurs. So being head of this is just a small hobby project for me. We have a German guy, Thomas, running this, a Spanish guy, David, running this, and a Swedish business development running the OT cybersecurity. Vehicle communication consists of our Ixxat business and our PEAK business and our Owasys business, focusing on vehicle communication. That's the largest part, but still not big enough to become its own division within HMS. Then we have our smallest business with building automation, where we see this HVAC nice market and little bit different.
And now, under the wings, under new industries, we really can focus on helping them in acquisitions and organic growth. And finally, we talk about OT cybersecurity. This is more a special project in business development, and I can talk about all these three activities. So three strategic ambitions, and let's start with vehicle communication. And this is a bit crowded, but here in vehicle communication, we aim to be the best friend of the engineers developing systems for the vehicles. The majority of product we have is not on board the vehicle itself. It's the tools when you develop the vehicle, when you have the aftermarket coming in for airbag, crash testing, and things like this. That's the communication tools around the vehicle, and there we need to make sure that we are the best friends of the development engineer.
We should be the first choice in their mind. We also have products that is on board the vehicle, but then it's more special applications like excavator and lower volume kind of things. And honestly, we don't want to be on board in a personal car. It's a completely different market with a lot of different demands, and there are other companies who can serve that market. But since the market for in-vehicle networks is developing, both with CAN XL and Automotive Ethernet, it's not only- it used to be much of the control in the car with braking and engine system and stuff like that. Now, it's also the infotainment system and the networking, and there's a mix of different Ethernet and CAN system in the cars.
So we put a lot of effort here on the development, on the product, and making sure we have innovation and comply to this new trends we are seeing this, with the ambition to create the number one portfolio for vehicle communication engineers. Quite exciting, and we see a lot of opportunity in this, even if that market is kind of, especially in, Germany, a little bit on the negative side at the moment, but the engineers are still there. The engineers still think about the next generation vehicles and how to make sure they are competitive in the future. Second initiative is about, building automation. With building automation, we are coming from mainly the AC side, and AC, as you probably know, is that a lot of Asian, Japanese, and now also, Chinese, suppliers have been really strong on this.
Cooling is one of the most expensive thing for a building owner, and therefore, we see a lot of opportunities to make smarter networks that control the cooling. So we've been really successful there, a good market presence in Europe, but we're now expanding in Middle East. It's very hot, and they invest a lot in cooling. We also in US, we have been under-penetrating US, so geographical expansion will be in around Saudi and the Gulf States... and also in US. And we're also seeing more of hybrid applications, that there's also in, in Germany, there used to be a gas market for heating. Now, this cooling and heating, heat pumps is coming in, and we're also working with some of the companies to go into more of this heat pump.
It's not for private homes, it's much more for commercial systems, where you have buildings like this. That's where you want a system to make sure that you manage different rooms, if there are people in the room, and things like that. So we think that we have a good market here, and we also see opportunities for acquisitions here. We are quite small, and there's others, quite small local players, and we think there's an opportunity to do more things here in the coming years. Finally, cybersecurity. In OT, operational technology, we see that 86% is the increase of cyberattacks in manufacturing. And this used to be just having different system, and it was so obscure, the systems that were used in manufacturing, so it was difficult to hack.
Now, it's much more Ethernet and Wi-Fi, and this kind of system are used since the last 10, 15 years, so it's also more vulnerable. We see that a lot of our customers are really focusing on this, but also regulation is coming in. CRA, Cyber Resilience Act, European, NIS2 is coming, and some other specific regulations that machine builders and factory owners need to comply to. We've done some test projects. We have a special team here working on talking to customers, what they need. We have, like, firewalls for segmenting your OT networks on the factory floor and things like this, but we haven't fully got it yet. So we have a small team working with this. We have some good products, but when we meet customers say, "Okay, we can buy your product, but, you know, we have a bigger problem.
Can't you just hold our hand because we need to do something big, about analyzing. We need consultants and these kind of things." And we are, "No, we sell a product, and we need to have a better strategy." So we're working hard now to see what is the future here. The market is there. Our customers have a need, but we need to find the right match, because the product we have today, nothing wrong with them, but we need to take something bigger to really make, sure that we are successful here. So this is - we see this more as a business development project for the next one, two years before we can scale it up, but we think this is a market for the future. So this is shortly about, new industries.
It's quite small for us, but it's also a greenhouse for some new innovation, and we all see some potential acquisitions to bring in some small activities here. So this is done in a little bit different way than the structured way of these two large acquisitions, the divisions we have with INT and IDS. All right, Thomas, this is my last slide for this moment, so over to you.
Thank you. Thanks indeed to all the presenters for the divisions. So we're gonna have a short break, some coffee for you here, and take the chance to talk to the presenters during the break. We will meet back here at 10:40 A.M., so see you back soon.
Okay, everyone, welcome back, and welcome back to you guys joining in and on the webcast as well. So we've listened to the business side, our divisions and what they do, so now it's time to look into the financials. We have our CFO, Joakim Nideborn, with us here to talk us through that. So welcome, Joakim.
All right, thanks a lot, Thomas, and great to be back here. I think we're two years ago last time. We here presented 2023 target updates, and now we're evaluating this, this strategic period, 2020 to 2025. I will talk about three things. I will have a short trading update. I think everybody is curious to hear that. And then I will look into the, the last five years, what happened between 2020 and 2025. And then finally, I will also wrap up this whole thing with going through the financial targets once more, and also summarize what my colleagues just said before. But let's look at the trading update first from September, and we're now two months into the Q3, so one month remaining.
I can start by saying that what we said in the Q2 report and the outlook for the rest of the year seems to be developing pretty much in that way. Starting to talk a little bit about the order intake, how the market has been performing. Our two main markets, U.S. and Germany, slightly improving, and it's maybe not a big surprise to the U.S. market. It's been a good momentum throughout the year. For Germany, we're quite happy to see an improvement, not a lot, but moving in the right direction. And we're getting some more comfort on the way with some macro numbers that this seems to be on the right track. A little bit surprising, where the rest of the European Union is slightly down in terms of orders.
Could also be that we're now in the middle of vacation period in August, so that's normally a little bit weaker, for us. So in comparison with what we saw in Q1, Q2, slightly down. Japan, also an important market, especially within INT. Here, we're also seeing a small decline, and we have a couple of big customers in Japan that tend to place pretty big orders. When that happens, you tend to have a good month, and also could be a good quarter even with those bigger orders. We haven't received any of those yet in the Q3, so that could be part of the explanation why we're seeing a little bit weaker development in Japan.
China has been developing very well for us over the last 12-18 months, and we're continuing to see a solid development pretty much in line with what we've seen over the last period. Let me then mention a couple of things on more on the operations side, what we are seeing. We reported in Q2 that we have a backlog--we had a backlog of SEK 50 million from the ERP go live in, in the US, so we're now finally in the same ERP system with the big Red Lion acquisition and the rest of the company. That backlog we have now more or less managed to push out the whole thing in Q3. There might be a little bit remaining that we're gonna probably handle in September, so that's positive.
We also reported on price increases that we needed to get through the price increases to cover the tariff impact. We were suffering a bit on the gross margin in Q2 from tariff impact. Now we can see that those price increases that we've pushed out in the Q2 are actually getting effect. So this is positive for the gross margin, and we should, if our calculations are right, for the remaining of the year, we should be covering the tariff impact fully with these price increases. That's positive to see.
But all in all, the market is, even if it's slightly improving in the main markets, it's still not a supermarket that we're seeing at the moment, so we're continuing to be careful on the OpEx side, as we have been for, yeah, the last 1.5 years or so. So we continue to keep OpEx under control. I also wanted to mention our debt situation, our leverage, and I'm here showing the net debt to EBITDA, adjusted for IFRS 16, so on pre-IFRS 16 basis. That's normally how we internally follow this, and I think that makes the most sense. We were high in Q4 after both the Red Lion and the PEAK-System acquisition within a couple of months. We've been working down from the 3.37 at year-end to 2.92 when we closed the Q2.
For the rest of the year, we believe that we will be able to exit around 2.5 or maybe below 2.5 towards the end of the year. So I think it is very important and positive for us to see that we have a good cash flow, and we managed to amortize our debt pretty rapidly to come down in leverage. So that was it for the trading update, and even if I understand that there are probably a lot of questions around this, we would prefer to discuss the strategy going forward and the financial targets and so on. We will be back within the month with a full Q3 report, and then we can, of course, discuss all the details. So then let's have a look at 2020 to 2025.
My colleagues explained what we've been up to, and, let's see what that materialized in terms of, results and so on. Before we look at the numbers, I have three assumptions that I would like to share, so you understand what we are evaluating. For sales and profitability over this period, 2020-2025, since 2025 is not yet closed, we're looking at 2025, Q2, the last 12 months, but pro forma for the PEAK-System acquisition that we made in, November last year. I think this makes the most sense to, to have somewhat comparable what we could maybe exit the year in 2025 with. In terms of, profitability on the EBIT side, when we started making these big acquisitions, we've been showing adjusted EBIT instead of reported EBIT as the main metric that we're following.
And then we have also adjusted backwards through the period, the whole period, so we're looking at adjusted EBIT every year. So it's not a reported figure that you're seeing in these numbers. In terms of outlook, and now I'm probably tying a rope around my neck and could be hang up here, but what we see in the market is that the second half of 2025 will probably be better than the second half of 2024. We see a better momentum. So the numbers that you're seeing, it's likely that we will come in a little bit better than that. And please don't ask me more details on that statement. So let's start with the net sales.
You can see the CAGR of 18% through the period, and maybe let me first also explain what it is exactly you see in the graph. You see the dark blue, that's the organic business. The light blue is the acquisition impact that specific year. So you have the reported figures on the top in this graph, and it also means that if we did—Let's say, take 2020, when we made the acquisition of Procentec. We made it the first of October, so we have one quarter in 2020, and the rest of the full year effect, you see in the light blue in 2021, the remaining three quarters. That's how we've been segmenting this. And again, in 2025, we also added a pro forma. 2025, Q2, last four months, also the pro forma.
So 18% CAGR, we've been through a round of six. Sorry, that was too much. Six acquisitions. Procentec in 2020, that is now integrated in the IDS division. We had Owasys in 2021, now part of the new industries division. Two small acquisitions in 2022, Global M2M, which is now our sales organization in Australia, and Creasol, which is bolt-on to the Procentec business, also in the IDS division. And last year, PEAK-System into the new industries, and Red Lion be part of the IDS division. My colleagues talked before about what's been happening throughout this period, and just to summarize what they said, in 2021 and 2022, we had this pretty big boost in order intake from the component shortage.
People were stocking up that then led to sort of a boost in net sales during 2022 and 2023, with 2023 being a fantastic year for us at over SEK 3 billion in sales. But then you saw pretty quickly in 2024, a big reduction, as you see in the dark blue here, down to SEK 2.2 billion, where we saw this destocking coming into effect pretty rapidly. And, I mean, the whole industry has been through this, as I think we saw it in a larger amplitude than some of our competitors and peers in the industry. We've been through this many times before, but I wanted you to have the full story.
Sometimes when you look, if you just look at the quarter by quarter, you don't really see the full picture, and I think it makes sense to reflect back what actually happened. So destocking in 2024, Bartek and Alex talked about, we see now the market coming back more to normal in 2025, and we can grow from where we were. We said that we would grow half of the top line with M&A. We've done it for sure, even more, SEK 1.6 in total acquired net sales, looking at the time of the acquisition.... I would like to come back to the organic growth at the end of the year, when we've seen how everything has fully played out. It's a bit difficult at the moment to make the right analysis on this.
FX has been—it was a big part of the growth during a period; now it's come down, so it's still something, but it's not super material. But we'll come back to organic growth when we present the Q4 report, and we can see exactly how this is played out. Then over to my own favorite KPI, gross margin, which I think is super important. And I'm gonna take you through the story, what's happened also throughout the period. And before we start looking at what happened, I just want to say that before this strategic period, we were around 60-61% for a pretty long time, and we had—we struggled to improve it. In 2020, we did some really good things during COVID.
We managed to consolidate some suppliers, consolidate some EMSs, make some selective price increases here and there to become a better business. And we saw in 2020, we're up to 62%. In 2021, we saw a great first year. We're doing more than 64% in gross margin. But then, like, midyear, something happened. There was a major increase in costs from our semi suppliers. So we saw a 10% price increase more or less overnight. We were sitting with a huge backlog, much larger than normal, given the boosted orders, and it took quite a long time to get the price increases through to the market, which we saw during the second half of 2022. We're starting to see the effect of the price increases.
We're coming back to the sixty-four percent, and then in 2023, we had sort of a perfect year. FX was with us, volume was with us, the mix was good, price increases were through, and we managed to get to 65% gross margin. Maybe a little bit boosted with all those conditions, but we saw that it was moving in the right direction. Then it looks dramatic again for 2024 with a big drop, and it's pretty easy to explain. We made the acquisition of Red Lion coming in beginning of Q2, with margins of 57% at the time when we acquired it. So of course, this diluted with such a big acquisition, one third of the total business, of course, this had an impact.
Then we made a PEAK acquisition in November, and also with slightly lower margins, just below 60%, also further diluted this a little bit. So the 62.6 in 2024 is not that we have made something very much differently, it's the mix that is, of the companies that have, come to this. And now we are, of course, determined to, to improve the margins in Red Lion and in PEAK, and we're seeing that journey starting now in, in 2025, or in this twelve-month period. There's only two quarters that are new, but we're seeing the development in the right pace, and, I will also talk a bit more what we've been doing in those acquisitions shortly.
But all in all, you can say, when you look at this, yeah, well, it's been a bit of a bumpy road with the macro situation that's been changing, and I think we've been doing a pretty good job to improve this. Staffan mentioned before that we are going towards the target to reach 65% over time. The gross margin, the ARR transfer, and the business model will be one important thing to get there. All right. Let's look at the profitability. So here I show an adjusted EBIT throughout this whole period. We can first see that we had 21% growth, so growing a little bit faster than the revenues.
We had, two years ago, when we were here, we set first a target of 20% EBIT back in 2020, and that was also a higher level than what we had been on before. And in 2023, with two really good years, with 27 and 26% margin, we figured we probably should increase this, and we set a new target of 25, and of course, then the next year we miss it. I don't think it's very strange that we missed it in 2024. You saw before, when we looked at the sales, it was a pretty massive drop in sales. So all in all, to be able to stay at 22% with that drop, we think was a pretty good job with those conditions.
You can also see that we have grown about SEK 500 million in terms of money in this period, out of which 70% comes from M&A. So it's been a good journey, not only when we made acquisitions, it's been a good journey afterwards that I will show you on also in the next slide. And I think a big part to what we managed also to improve is that we managed to improve the acquisitions. So I've been getting a lot of questions before this session. Will we get an update on Red Lion? What's happening with Red Lion? How have you been developing that? And as you know, Red Lion is an integrated part of IDS.
So first of all, it's not super easy for me to get the numbers out, what is Red Lion actually stand alone. And also, we don't necessarily follow it that way. So I'm gonna give you a one-time analysis, what happened with Red Lion for the first 15 months, what have we done? If we start with net sales, it looks pretty bad. What we look at here is the last 12 months, from Q2 2025, compared to the last 12 months in the period before. So we're down, down 17% reported. If I take away FX, we're down 11%. So why is that? Some of you might remember that when we announced the acquisition, we said that all the, the numbers that you see for Red Lion is boosted by probably SEK 100 million.
It was SEK 1.2 billion, if I talk in SEK, in revenue at the time of the acquisition, out of which SEK 100 million was boosted. I think for sure it was SEK 100 million, maybe a little bit more in retrospect. And then we also have the currency effects on top, which also have been impacting this. So was it then a bad business that we bought, or did we buy it at the wrong time? I think what kind of proves what I said is if you look at order intake, which has been moving in completely the different direction, where we're up 12% reported, or 15%, if I take away the FX effect. So the situation here was in the second half of 2023, Red Lion was delivering out a lot from the backlog.
Orders they received just as HMS before, received during 2021, 2022. And obviously, then the order intake was pretty bad since the orders were already in the book. So I think these two figures together kind of show that this is how it's really been. And not a lot of things that we can do about this dynamics. If we then have a look on the gross margin, we've actually managed to do a couple of things. We have been through the whole distributor setup, reviewing different discounts. The distributor who has been investing in us have maintained a good margin or a good discount.
The ones who have not, have been put in a different category with a lower, lower margin or lower discount, and then if they wanna get back to a good discount, they need to show that they are investing. We've been doing the first phase of investments in their manufacturing facility, looking over some sourcing contracts, and we managed to improve this gross margin from 57% when we acquired it. And then I've adjusted this 57%, so it's per HMS accounting principles, and I've taken away all spot purchases that we had. So it was actually lower, but adjusted 57%, and now it's more 60%. So that we're very happy with that work, and we think that there is a little bit more to do here as well.
On the OpEx side, we have managed to reduce this by 6%, and then it's, of course, a salary revision in this. So without that, it would have been a higher number. What we've done here is to consolidate some back office functions: HR, finance, IT, integrated. Sales, we've been doing a pretty big job to get the sales organizations together. I'll come back to that shortly. We've also taken away more or less a whole layer of management, and really trying to find the individuals that they contribute the most in right positions. The adjusted EBIT margin has improved by four percentage points. So when we started the period, we were around 19%-20%. We're now around 23%, in line with more or less the rest of the business.
Not yet at the 25% target. I think we also said that over time, we wanna get this company also to 25%, as for the rest of the group. I think we're on good track. A little bit more work to be done, and we look forward to discuss that next time and see if we get it the whole way. Alex mentioned that we have $2 million now of cross-selling opportunities, so we set the new ERP and the CRM system live in June this year. So now we can say that the sales organization is fully integrated, working in the same tools, working with the same customer base, and now we can actually measure what's happening.
So it's difficult for us to measure exactly what has happened in the past, but now we have full control of this, and we can see is that we have this SEK 2 million. Since June, we have consolidated this SEK 2 million in opportunities. A little bit, we already managed to convert, no super big money, but this will also be something that will be interesting to evaluate a year or two from now. So what have we done? I think I mentioned most of it. Integration is more or less finalized. Sales organization has been maybe the biggest part. Alex presented also the common product platform that we're gonna have for the future to develop our products. That will gain us some time to market, for sure.
So that's, that's very positive, that we take the knowledge from the different parts of the business. This is, of course, quite difficult, and it will take some time to get this fully fixed, but it's, it's a good initiative. We've done a first phase of investments in the manufacturing. The second phase will be in place during the second half of 2025. And if we just look on the integration cost follow-up, I wanna be transparent with this as well. We said when we announced the acquisition, that we would spend SEK 100 million on the integration. We said SEK 30 million in OpEx, SEK 70 million on CapEx. So far, we've spent SEK 50 million on OpEx and only SEK 10 million on CapEx. So why is that?
The main thing why we are overspending in OpEx is that when we made a plan, we were planning to take the CRM project as a CapEx investment. Now, we didn't do that. We've been taking that over the P&L, which pretty much makes up the difference. So if I take that away and put it back into CapEx, we would be pretty much spot on here. And remaining, we say we have 40% in CapEx, so we actually expect to end up at 100, as we said. And what we're doing, I think we're getting a bit more for the money here than what we had expected to.
In the remaining investments, we are also giving the tariff situation, building out capacity in the manufacturing facility in the U.S., to be able to move some of the products over that is now manufactured in Europe, to have a better tariff situation, simply. So we're taking that SEK 1 billion buffer as well, when we do this change. And in the investments we've been taking, setting up the same ERP, using the same equipment, is making that possible. So I think all in all, we are not going to give another update like this, but I think now you've seen that what we've done so far seems to have been working out somewhat.
Going forward, we expect to see the top line become even better, and we hope that there is a little bit to do on the margin side as well. Let's also take our other big acquisition, PEAK-System, that we made eight months ago. Of course, a little bit less time to work with this, completely different journey in terms of how the market has been. Here, I think we had a pretty good development, with a 7% reported growth, and actually 10% if you were to adjust with the forecast constant currencies, and order intake in a similar manner.
So the business is performing quite well, even if I think we were, and I know some of you were a bit worried that this was pretty heavy towards the automotive industry, which hasn't been the best, also with a big Europe focus. But it's been tracking on quite well. We have managed also to improve gross margin by two percentage points. Same reasoning here, that we have restated for our own accounting principles at the time of the acquisition. What we have been doing is that we've been outsourcing some of the high runners for global EMS contracts to gain a little bit cost advantage, and also we've been looking into the pricing.
We believe that Peak was maybe a bit defensive on pricing the previous years when there was a market where it could actually increase the prices. So we're pushing some price increases, and, and even in a short period of time, we see a little bit of effect of this. In terms of OpEx, it's been growing roughly with sales. We have salary increases in, we have a few selective investments in management positions to, to continue to invest in the business. This was a pretty small organization to start with, so not a lot of, things that we could take away. We're rather been investing slightly. And then the, the, EBIT margin has improved.
This was on a very high level before, almost at the 30% level, so it was difficult to continue to increase the margins on those levels, but we're super happy with the development so far within Peak. We have now cross-selling opportunities of EUR 500,000. Some of that has already materialized, and we're quite positive that we'll manage to materialize the rest of this during next year. So what have-- where are we in the process? Well, integration is progressing pretty much as planned. We're not through everything. We're through a big part of it. We've been having common partner days and collaborating sales, trying to cross-list products with our different partners.
And, the big thing here is also the, the portfolio harmonization between the previous Ixxat brand and the PEAK brand, the vehicle division, main pieces, to have one common roadmap, going forward. And we're in the middle of that, that work as we speak. Yeah, so pretty much as planned, and we have to be happy with it. Then we have, if we continue on the profitability earnings per share, here we have a, a growth of 16%. The reason it's a little bit lower than on, on the EBIT side is that we had this dilution from the, the Red Lion acquisition, 7% dilution on this. And here we also have adjusted, the figures, backwards, so it's all adjusted in, in this graph.
The reason why we're looking at adjusted, maybe it's given, but I'm going to say it anyway. So with the big acquisitions, we have a lot of amortization of excess values, and we think it gives the wrong impression to not adjust for those excess values or the amortization on excess values. So that's why we've been doing this, to give a fair dividend to our owners. I also wanted to speak a little bit about cash conversion. The same story as we've been discussing before, it goes through the cash conversion as well. So here you see the cash flow from operations in the bars, and then the line shows the cash conversion versus EBITDA.
So in the beginning of this period, you saw that we were around 92%-93%, and this was when we had this really high demand, rapid order intake increase, a lot of deliveries that our customers wanted to get out. So we're really decreasing safety stocks, and everybody was paying us very well on time, so very good for the cash conversion. During 2022, 2023, kind of the opposite situation, we had huge buildup of inventory. We also needed to stock up as everyone else to be able to deliver. And this, of course, impacted cash conversion to 57%-59% in this period. And then we're starting to approach something that is a little bit more normal.
We had 74% in 2024 when we started this inventory normalization, and this year we had a really good cash conversion as well, with 85% so far, since we have managed the main thing is that we've managed to decrease our inventory. So over time, when I do the math, I think that we will be around some 75% on cash conversion. I think that if you would look at the average for this period, that's pretty much what you would get. It will always be a little bit bumpy like this when things happen in the market, but 75% is pretty much what you can expect. And then we have, again, the story with the acquisitions, looking at the leverage.
Talked a bit about it in the trading update, and now I actually show reported figures to be, to be fair. We saw then the big increase in 2024. The smaller acquisitions we made hasn't really put us in a tough spot at any point, and now we're at a 3.4 in 2024. And as I said before, what's important for us, that we show that we can continue to come down, and we're positive that we can get to this 2.5 at the end of this year. So now we've been through the whole financial period, and my last slide on this is just how did it play out against the targets then?
So we started at just short of 1.5 billion in 2020, and now the last twelve months from Q2, just above 3.4, so above the 5 billion target, 114% growth so far, and I expect it to be a little bit better when we close the year. On the profitability side, we had a 20% target, so we're being nice to ourselves and evaluating towards the, the original target. And, even if I, I would take the, the adjusted target, I think we would be doing quite well, given the top line is, is performing so good. We're gonna beat that as well with 800+ million versus the 628, and more than 160% increase.
So I think that was good, when we now enter into a new strategic period, to see that, okay, we actually managed to do what we were set out to do in this period, and it's good to show you. It's also good to be able to show our organization that we managed to set targets and deliver on it. Before I hand over to Thomas to start the Q&A session, I just want to conclude what we have said, and starting with the targets. Staffan has already presented this. I'm gonna stay on one specific topic here, and that's the profitability target. Where we say 25% EBITDA. Before it was 25% of an adjusted EBIT. So what are we doing here? Are we trying to move up the P&L?
I would say, no, that's not what we're trying to do. Actually, a little bit the opposite. What we would like to do is when we continue to make big acquisitions, we will have those amortization of the excess values, and we don't believe it's fair to evaluate the ongoing business on that metric. So that's why we're moving to EBITDA. We take away the burden of the amortization, but we keep in the amortization of other intangibles. For us, it's especially capitalized R&D, which could be a big portion. So that we still need to own, and then just get rid of this other thing. What we're also doing is in the adjusted figure before, we've had integration cost, transaction cost, restructuring cost. I know that's not always easy to follow exactly what is what.
So that is now gone from the EBITDA. This is clean. If we have integration costs, it will be included in the EBITDA. Then we might report to you what it is separately, so you know, but we're excluding it from the target level. So all in all, I think we're making it easier, cleaner to follow. That's the ambition, and we're not trying to make it easier for ourselves. I think I commented already on why we have adjusted EPS. It's the same reason as the dividend dividend interval between 30%-50%. All right, let's conclude the strategy then. If you're gonna remember something, I think these are the things to remember. First, we talk about the product offering and go-to-market business models. So product portfolio evolution will be super important for the coming period.
We heard Alex talking about it, a bit of a lost time to do some retrofitting and adapting to new components for us and for our peers; it's been the same. So now we really wanna improve the portfolio that we had, and you saw some of the plans, how we're gonna do that. So our plan here is for more than 50% of the organic growth that we deliver in the strategic period to come from new products. Staffan talked about AI, how it's important to both integrate in our offering, but also to use to make our business more efficient, and difficult to find a good metric for this. But the plan is that when we close this period in 2030, we believe that we will have several AI tools implemented in the strategy.
And of course, we will keep you updated on the way how this is playing out. To move something that is very concrete on the business model, annual recurring revenue should be 10% of the sales, and we'll fill the offer with more value for more service offerings for our customers, and that should then enable this change from 2-3% that we have today. We've been talking about proximity to customers, that we wanna be as close to our customers as possible, and then especially if we're gonna now do business with some of the larger customers. We saw both in IDS and INT, we're working towards some of the larger customers as well. We need to have a direct relationship.
So the business model shift and the relation to larger customers will also lead us to get to direct sales of 55% instead of 43%, as we have today. And then finally, on this side, the M&A part, we believe that somewhere around 50/50 organic and M&A will be the recipe to reach the SEK 7.5 billion in 2030. Then let's look a bit more internally. How do we work in order to achieve this? Staffan talked a lot about company culture, how we would like our employees to be happy and high-performing employees generate loyal customers. How we measure this is with the employee engagement index. It's a new metric for us, and we're today somewhere around 70, 74, and the target is to get even better to 80.
This is a really high priority for us and a key ingredient in the recipe to achieve the growth targets. To enable our employees to be better, we need to invest, continue to invest in our leaders that will show the way how this is gonna be done. We run different programs and sessions with our leaders to make sure that this happens, and we've set a leadership index target of about 85, which is slightly higher than where we are today. You've heard win, grow, keep many times today, and it's because it's, we think that is gonna be such an important thing to really get the sales management super crisp, to have focus on winning new customers, to develop the customers that we can develop and cross-sell.
How we're gonna measure this is with the amount of new customers in the last 24 months, how much did they generate in sales for the last 12 months? Target here is 6% of sales in the last 12 months. We're currently today at half of that. So it's gonna be a big change, and a key thing to get us there. And finally, we would, of course, like to be more efficient in the business as we have. We always strive to become better, and we're implementing various tools. Now, we just invested a lot of money in a common ERP system, and we're looking for different AI tools as well to become better in all the things we do.
How we'll measure this is, hopefully, we'll see an OpEx growing in a slower pace than what the top line is growing. Thomas, that was all for me, and
Good timing.
Yeah. Sometimes you make it.
Suddenly happens. Thank you very much. Okay, so we are going to open up for some questions and answers, both from the room here, of course, and also from the online chat call. So if you could have all the presenters up on stage here, and we can... We have Sandra here in the room, taking any questions you may have. So when you ask, could you please state your name, and we'll take that with the presenters. And also, if we could limit ourselves to two questions to start with, and then we can—so everybody has a chance to say. So, yes, we have a question straight ahead here.
Thank you. Joachim Gunell from DNB Markets. So, we've talked a bit about how behavioral and technological shifts tend to take some time in your, your industry, and, obviously, there's a lot to be excited about over the coming five years. But giving the new, call it, divisional focus, and, and your venture into slightly new areas, do you envision any sort of transformational shift when it comes to technology in either parts of your divisions?
Alex, Bartek, would you say?
Yeah, maybe I can start for IDS. So when we look into these five pillars, which I presented, I think they will be relevant in five years as they are relevant today. Within the pillars, there is a shift, let's say, more the ability to use ARR, for example, AI plays a bigger role. There will be some elements which are changing, but the, let's say, pillars of access, insights, visualize, connect, and diagnose, they will be relevant for the next five years.
Secondly, just to follow up, your ambition seems to be on an organic basis to essentially grow in line with the market across your different segments. So perhaps if you can comment a bit about the market share numbers you provided, which perhaps does not optically look that high. Do you still consider yourself the clear, dominant market leader in a very fragmented market, or who do you really see as the main competitors? And are there any shifts here in regards to where HMS was five years ago?
Yeah, so also answering for IDS, there's not one competitor for the whole IDS, so it's really in the segments. You have competitors for access, you have competitors for visualize, for panel meters, for example, the same for diagnose, and they are totally different. So there's not one big competitor which has the same offer than we have. That's a real advantage for us, which enables us to do cross-selling, while the competitors are focused on that segment. So one competitor is doing remote access, for example, another is doing switches, and they are not doing both. And, for sure, they are in the niches. We wanna keep our marketplace where we are.
We wanna do what I've presented, this technology shift, which will enable us, especially during the strategic period, in the long run, to be much faster, when it comes to new product releases, which will give us a really nice boost also 2030 onwards.
Right. Bartek, do you want to also elaborate on my point?
From my perspective, I think the competitive landscape looks similar, but I think it will change over the coming years. As Staffan touched a bit, the INT landscape consists of few players competing with HMS or INT, then we have a bunch of fragmented technology providers, chip providers, where the customer build their industrial communication solutions on their own. So I would see a trend shift ahead, I believe, where we're gonna grasp a bigger portion of this business with our other peers that offer buy solutions instead of allowing customers to build them on their own.
Talk for these new industries, I think in this vehicle communication, there's one clear leader called a German company called Vector, and they are super strong, and they are almost the default when it comes to the Volkswagen Group and everything. So fighting that competitor is really, really difficult because they are so in deep with their customers, and we try and find segments where we can complement them. But there's a market where there's a clear leader, and we are among the challengers in that, which is unusual for us, but so here, it's different markets and different positions.
Thank you. I'll come back later.
But I can add one more thing, Joachim. I, I think for... If I take INT, you had a question around the market share-
Mm-hmm.
How that seems a bit low in some areas. I think it's important to say also that now we've been. If you take maybe INT, where we said 8% market share, we have a larger market share on the embedded business, and then we have a smaller market share on the gateways. So when you combine that addressable market to EUR 1 billion, EUR 1 billion, I believe it was, right? Then-
...Of course, it's difficult to get into those small details, actually, where are we in the different segments of that? But larger on the embedded, smaller on the gateway, but all in all, it comes down to the eight.
Great. Thank you. I think we had a question in the back of the room there.
Yes. Hello, Jesper Skogmar from Handelsbanken here. I'm just curious, you are talking about some of the, the globalization, et cetera. We have seen - I know that you are kind of neutral to the protocols, but, if we're looking at Ethernet and fieldbuses, et cetera, I've seen a rise from Ethernet, a decline in fieldbus. Do you see both a volume play and a price play here, as the nodes are more expensive when you're selling it to the Ethernet protocols?
For you, Bartek, maybe.
Yeah, I mean, it depends on the target customer. It depends on who that actually would integrate industrial communication solution. The price range between fieldbuses and industrial Ethernet, that is not different. Ethernet is taking more and more market share in the market. I would rather say the price sensitivity depends on which volume segments of device makers that we are targeting, and what the price acceptance for industrial communication solution are for that specific device.
Good. And another question from the room here.
Yeah. Hi, Erik Larsson, SEB. On M&A, I have a couple of questions, and I think the answer might be different between the divisions here, but what's your ideal, call it, target in terms of either geography or product that you're looking for?
Should I go first? We have basically three directions. Number one is expanding our portfolio, within technologies where we are standing today, focusing on factory automation, but as well into process industry. The second is to expand geographically, or that's basically those two that we are focusing on. And there are probably less players within the INT segment than in the IDS segment, I would say.
Mm-hmm. And IDS, from geographical perspective, we focus on EMEA and Americas. That's our focus area. And when it comes to, let's say, targets, they are, yeah, bolt-ons to our five pillars, and there are companies in which fits maybe to one or two of the pillars.
Okay. And then, more broadly for HMS, how would you describe the competition in terms of M&A? What's your, I guess, general value proposition to sellers, why they should go with HMS and not a competitor, except for price, of course?
I think in the acquisition we have done, maybe Red Lion was an exception, but normally we have no competition. We meet these companies early on. PEAK-System was a good example, I think. They want to sell to us, and we like each other, and we shake hands, and we do the deal. With Red Lion, it was larger. That was more of a bidding scenario, but in most cases, we don't have a lot of competition. And to complement us, I think there are three things that we see as no's. We really want to invest in companies who are profitable. So the people who haven't made it themselves, we will not buy them. They need to make money themselves. Secondly, I think it's important that they have an organization.
If it's only one founder and entrepreneur, you know, these entrepreneurs, they are difficult to deal with, you know. We need to have somebody who... There need to be more managers in that company as well. Otherwise, they are too small. And third, they need to have a culture that is relevant for us. So these are the three things we really look for, and if we don't feel that these three are okay, we walk away. That's very important for us, because otherwise, we tried sometimes to buy companies cheap who don't make money. It's not for us. We have not been successful there. So I think this goes for the M&A strategy going forward as well.
Okay. Thank you.
Great. If I can squeeze in a question here from the live chat, I think I'll direct it to you, Staffan. We talked about the new industry section and that we reported 45% on OEMs, 30% on system integrators, and 25 were end users. Could you elaborate a little bit on the difference between vehicle communication and building automation there, what the differences are when these three target groups?
With building automation, there's a larger portion of system integrators because we wanna target the system integrators because they know the real estate owners and the systems there. With vehicle communication, it's primarily OEMs that we target there. And on cybersecurity, we have a mix. We think that the end user is most interesting, but we also see that the machine builders and the OEMs, they also face challenges because they are asked to guarantee uptimes with their machines. And in this world of cyber threats, it's not easy for them to give these guarantees. So we also believe that this OEM business could be potential in the cyber. So it's a mix.
Yes. Gotcha. I'll take one more question, then I'll hand it back to the room. I think this is for Bartek and Alex. Which product categories do you see the greatest potential to expand into? And how do you approach finding synergies in technology development between your different business areas, both within the division and maybe also across the divisions?
I can start, I can start off on this one. Within INT, it's definitely our home turf. We are expanding towards additional customer segments. This is probably where we will enjoy highest growth ahead. In terms of finding technology synergies, I think if we look at INT, we focus strictly on, you know, core real-time communication technology stacks. If we move over to IDS, I think, Alex, you focus more on I/O connectors, edge connectors. It's a slightly different technology. If you look at the building, they have slightly different networks in the building industry, with BACnet, DALI, high portion of proprietary protocols. I think this divisional structure also shows that there are not many synergies on technology level between the different divisions. But of course, within the division, we try to have a common technology base.... You want to add in something, Alex?
Yeah, for IDS, I think, biggest potential for sure, data is really important, so the IIoT field, so our insights fields and also connectivity. We expect a bigger growth from the technology. I showed you the platform, which will support later on access, insights, and visualize. So there we see a real lot of synergies when it comes to, let's say, yeah, same functionalities, same core functionalities, which we can support.
Mm-hmm. Anything to add from new industries there when it comes to the platform technology?
I think in general, we as a management, I mean, we did this organization to drive, accountability, responsibility for sales and R&D in the divisions. And it's, it's easy for top management here to think about synergies between the division. Let's not do that. Let's focus on each division and make them accountable for that. Same for new industries. We try to avoid that discussion. The synergies is mainly in supply, in the global supply chain, and sustainability, and this kind of thing. There we have common platforms, but between the divisions, you guys have a cooperation on some go-to-markets-
Yeah.
But that's, we try to put that on your shoulders to figure out.
Mm-hmm. Right. Good question here from Alexander von Wachenfeldt, and he also had one more question, which I—we touched upon the acquisition situation and how we deal with that. But an interesting part of that: Do you prefer to make a fewer larger acquisitions or many more smaller ones? Can we say anything about that?
I think we, our sweet spot right now is maybe a company with a SEK 300 million revenue. Why do I say that? Normally, you don't have this problem with one guy who is one founder is running a company. Typically, you have an organization, you have a management team with a certain competence. It's feasible to integrate that size. It's not too much of a target, and but still, it will build something to us, so it's worth spending the time. That would be, if I could wish, the perfect target, SEK 300 million. With that said, of course, we will look at larger and smaller.
Mm-hmm. Okay.
A question from the room here.
Thank you. Viktor Trollsten from Danske Bank. So, thinking about the margin target, what is the, and this is a question for you, Joakim, maybe, the organic margin potential until 2030? Just thinking the split here of margin dilutive M&A, which keeps the margin down, and what is explained by the increased R&D investments, and also, what's the timing for those R&D investments? Are they going to be linear or gradual?
So, yeah, good question, and I don't have a perfect business plan to show you. But, we will invest a lot in the coming two years to get a kickstart of these things that Bartek and Alex showed. The organic potential is maybe slightly higher than the 25, I believe that, with the things that we talked about, improving gross margin and so, and with the move to ARR will also help that move. Then what we have seen in the past is if we look at the target pipeline, the majority of targets are not at a 25% margin. Some are even a par, a bit below 20, and then it is a bit of work.
It takes a bit of time to improve these companies, and sometimes you can't do a whole lot with it to improve it. So I think you need to see it as a combined target, with half of the growth still should be coming from M&A over this period of time. And that's why we're not increasing the target. But you're right, organically, yeah, if we should say pure organic, we should probably have a slightly higher target than the 25.
Mm-hmm. We have one more, one more question here in the front.
Thank you so much. Simon Granath with ABG, and a question on, China. I believe that I've asked about it before, but a lot have happened in the global automation market over the past 10 years. China has moved from a relatively low share of proprietary installations to accounting for 50% of the, of them right now, and you have the benefits of being a protocol-agnostic company, not having to care too much about domestic competitors in, in China. What do you see about China going forward? Is it a priority to improve efforts there, or what do you see?
If I start here, I think we, we mapped our business in China in first different industries. There are certain industries that is more government infused, like power and energy, water, wastewater, and some other more machine building. Aviation, for some reason, is not so much, it's more American planes and things like that, European planes. So there are certain... On this scale, it's how much the government is trying to control that through Chinese suppliers, and we try to find the pockets where it's further out from this government control. And then we have our attractiveness from a Chinese perspective, where we have a few, especially in IDS, we have a few products where we see very high competition in China.
We have some other products, mainly in INT, where we have very little competition, like the safety and some of the embedded stuff; we are quite unique. So we try to map this on this to find this less government controlled and more attractive. That's where we have the new China strategy, to find the pockets. So we try to be a little bit selective on where we play, and to be successful there, we also work with more of local supply chain and this. But maybe Bartek, you are the best to answer that in general.
Yeah, I think I touched it in my presentation. We are looking on some pockets of opportunities in China where we're gonna enable an in China for China strategy. And that basically means that you remove all the CMAR regulations you have in Europe, and you can really optimize the product in China for China, probably also sourced in China, targeting that specific vertical. While we will continue to focus on these segments in China, where these customers focus on the Western world, where they want to have this high quality, certified, according to all regulation, approved products as well. So it's two different strategies ahead.
...Thank you. And a follow-up is on M&A, of course, an interesting topic. And I had a question both on timing and in terms of multiples, multiples, because you have now introduced a new KPI, focusing more on ARR and also talking a lot about software revenues. Does this mean that multiples should come up in future acquisitions? And also regarding timing, as Joachim mentioned, the gearing is elevated versus your targets and also versus historical terms, and you're also working with lots of integration. Where are we? When could we see an accelerated M&A pace? Or not even accelerated, but-
Yeah, so I'll try to cover that. If we start with the timing and pace, yeah, obviously, this year we will be working towards reduction, reducing the leverage to below the top 2.5. So maybe into to next year, we could be looking at something. I mean, the work is continuing to build the pipelines. And now, as we talked about also before, we're now letting the divisions run their own agenda, building their own pipelines. So, that work is continuing as we speak. In terms of multiples, if we-- let's say we buy a company that is partly selling recurring revenues, well, yeah, the multiple will be higher. For some reason, for us, it kinda hurts to be up too much in double digits.
We, we like to be 9-10x. I, I think that's okay for us. It depends on the company and the growth. Of course, it could also be a lower multiple, depending on what type of business we're targeting. But it can happen in cases that we will be probably mostly in IDS, that we will be on, maybe into the teens, in margins as well.
I think we have a question from the back of the room. Yes.
Thank you. Fredrik Lithell from Handelsbanken. I have a few questions on the strategy, Joakim, you summarized it towards the end of your presentation. The ARR, that's gonna be more than 10% in 2030. Is that new totally new revenue streams, or is it gonna be replacing traditional perpetual license revenue streams? So that is one question. The other one is more towards direct sales. Is that part of your ambition to increase your gross margin? Is that the driver there, or what is that? Thank you.
Yeah, so I will take your first question on the ARR side. So it's, it's both. So on the one side is, like this example that I mentioned, where you have a customer buying right now the products, looking forward to buy it in a different way. So we wanna convert it and wanna enable that. And for sure, in addition, with the new platform, we will have much more services around it, which will be additional revenue. So it will be a combination of both. And, to your second question, that was... The question was around? Sorry, I missed it.
Direct sales.
Direct sales.
Sure.
So there, the main focus in IDS is to enable cross-selling. So there, we see a huge advantage if we have our full portfolio. If we are direct, we can sell the full portfolio. If we have distributors, not all our distributors selling our full IDS portfolio. We have some distributors selling a part of and selling even competitive products towards the customers. So for us, it's important for the large customers to stay directly to enable this cross-selling opportunities. Yeah.
Let me just add on the margin side, as that was part of the question as well. Obviously, the direct channel will come with a slightly better gross margin, but also with a slighter higher OpEx. So you can see a bit of a shift between the lines.
Just to follow up there, I mean, if you go more towards direct, what do the system integrators say then? Do they feel threatened by you? So is it a conflict in between those channels?
No, I would not say the system integrator. So we have a model today where we sell through distributors. If we go to a system integrator, we would call this as a direct sale as well. So having the system integrator as a direct customer.
Great.
We wanna expand also our system integrator business. So, you have seen in the vertical markets, three times the main customer type was the system integrator, and there we wanna do much more.
Okay. We have Joachim again.
Yes, just some follow-up questions here from Joachim Biél at AB Carnegie. So the step up in product releases, Viktor touched upon this, but just can you talk about the investment needs to realize this? Do we need to see, like, a modernization of your IT platforms, or will there be a lot of, call it, CapEx investments, call it, earlier in this period to realize this? Or will you just reap the benefits from investments already made? If you can talk a bit about that.
I can maybe talk about the timing part. What we expect to see is if you look in percentage, CapEx in percentage, yes, they will be a bit higher in 2026 and 2027. Not necessarily in money, since, you know, we'll be a bigger company towards the end. So my estimate at the moment is that we'll probably see rather flat CapEx side on the R&D. And then I think the other question is maybe for someone else.
Yeah, just whether it's, if, if you think they will require, like, a very comprehensive modernization of your IT platforms as such, or, or do you have the, call it, setup to, to, to just,
I think we rather talk about an evolution. Or what we, of course, are aiming for is to reuse the hundreds of thousands of hours we already have spent on R&D and evolve these IPs into new generation platforms. So it's not a restart we're talking about, it's rather evolution of offerings into new generation platforms from where we are today.
... That's helpful. And just one final question. You've done a great job in showcasing the breadth of the organization and highlighting a lot of people from the organization as such. And perhaps if you, Staffan, would comment a bit about how hungry you are to realize this five-year plan?
Yeah, I'm sure if it's, if you note, but this is quite fun. I mean, I've been here for quite many years now, and another five years, I mean, this is not Soviet Union planning another five-year. This is HMS, and I must say we have a lot of fun when we have done this process. But we also see it when we talk to customers, that we have good access to customers. We are, on one hand, viewed as a small, innovative company, but also a trustworthy company. So if we are, we are this size, where we're small enough to be faster and more agile, but large enough to be trustworthy and have power in our investments and do this. It's, it's fun. So I'm, I'm ready for another five-year here.
That's encouraging.
Great. Thank you. Question from Gustav?
Thank you. Gustav here from Nordea. I thought maybe just build on the ARR question we got here. Is there a risk if you go from less or customers go less direct, then you go more with, if, I don't know, rental, could that have a negative effect on your top line here short term? Or is it too small?
So if you would do a shift from today to tomorrow, just say everything we do on CapEx, we change to ARR, for sure, we would see a drop, but this will not be a step approach. It's a continuous approach over the time, so in our growth, and there we will see a conversion, and as I said, also additional services which will enable additional revenues on the ARR side. Yeah.
Okay, perfect. And then also on the retrofit market, as you touched upon a little bit, now sort of with the importance of data and AI, et cetera, are you seeing a shift in the retrofit market that customers are willing to upgrade old sort of production facilities to a higher extent today? And also, if you can just elaborate a bit on the retrofit market in your different divisions.
Yeah, yeah. I can start from an IT perspective or from a regulation perspective. Security is becoming really important. CRA is coming in during 2027. This will put completely different demands on factory owners, suppliers to the factory automation industry, where a certain level of security needs to be reached, and the industry will not really afford to redesign all the products that are out there in the industry, or that still are supplied into the industry. So, I believe that there will be a need for retrofitting devices to upgrade existing installations to actually be compliant with the required industry standards.
Yeah, I think it's the same for IDS. So we see if you take, especially, let's say, the US market, where the factories are... Yeah, a lot of investments are now ongoing, not only into new factories, also to upgrade the factories, and that's a huge potential for us.
Do you see that, sorry, to build on the market growth, or do you see that sort of adding to that 8% that you see across the group, or is that included as well?
No, it's included.
Mm-hmm. Great. I think I will jump in with one question here from the chat. I think this is for you, Joakim. Given that your aim for long-term gross margin of above 65%, do you see any potential in the EBITDA or margin to surpass 25%, or is this more of an ambitious goal, considering that the SEK 7.5 billion is a much larger revenue base?
I think it's a little bit, the similar question that Viktor asked. We believe that if you were to just take away the M&A part, there is maybe more potential than 25 in the organic business, if we can continue to maintain this nice organic growth. But we believe, as we said, that it will even out with the acquisitions, it'll probably be in a slightly lower level. Yeah.
Yeah. Another question here from Thomas Bergqvist at Pareto Securities. The target price on an annual organic growth of around 8%, which is in line with the expected market growth, are there any particular periods where you see potential for stronger growth, for example, a rebound in 2026 or similar? Or is this target more an even growth target? Maybe you could touch upon that.
Yeah, I wish I knew. I think it's the best we know for now is that it should be somewhat evenly distributed. And, 2026, yeah, I think as any other year, seems reasonable around that level. Yeah.
Okay. All right.
And again, just a comment there. The majority of our revenue is from key customers, and of course, these are dependent on the industry cycle and stuff like that. But that's also why I want to emphasize the focus on win and grow. And we hear from Bartek, it takes two years from the win to make money on it. So of course, we need to look beyond the industry cycle sometimes to see where are we winning and growing, then financial results will come as a consequence of that, maybe one or two years later. So it's important for us in the management team to work internally to see through the revenue only, because we have other things to also measure that are early indicators.
Mm-hmm. Great, I'll squeeze in one more question here. I think this is for both Bartek and Alex on wireless. Could you please elaborate a bit on wireless solutions versus cable between your different business areas? Where do you see the highest demand for wireless solutions, and how do you think this will change in the coming five years? Maybe you could start, Bartek.
Yeah, that's a really good question, and as I said, this is probably also an area we are struggling.
... how, what was really the question?
Yeah, how do you see the wireless situation in the next five years?
I mean, in general, wireless is a great technology, and it reduce really complexity versus expensive and complex cable installations. And as far as when the cable breaks, you probably have a stop in a production cell, that probably stops a large portion of the factory. So there are significant benefits of actually applying wireless, replacing cables, cutting the cables, but as well, of course, in logistics, where you need mobility needs. The question is then: How fast will the market adapt? When will you be ready to actually remove the cable and trust the wireless technology that it will work? This is the question we don't really have figured out yet, because then you probably see much higher revenue from the wireless offering, and I don't have a good question on that.
Yeah.
What we, of course, see is that there are discussions that 5G will change the factory automation industry, and that all communication will run completely over 5G without any cables. But I cannot see that that will happen during the next five-year period in the conservative industry we are in.
But you also often say that wireless is a door opener, that, that-
Yeah
... it starts with a conversation with wireless, but then goes over to other products. Maybe you can elaborate on that as well.
Well, I think it's exactly what it is. It's, it's, everybody loves to speak about it. It takes a lot of time as well to speak about it, and at the end, you turn out to actually offer a, a wide solution.
Yeah.
And-
Alex, anything you want to add there to the wireless?
I think, Bart has already summarized it very well.
Perfect.
But one more, one comment.
Sorry.
In IDS, we see some wireless applications, more on mobile applications, that there's a remote pump station or something. Of course, there we have for mainly 4G wireless and these kind of things. That's quite mature for that kind of access. But inside the factory floor-
Yeah.
It's quite slow. But for these remote assets, wireless has been successfully deployed for 15 years, I think.
Yeah.
Yeah.
Yeah, that's a good remark. Isolated equipment outside of the factory, that's a different discussion.
Yeah.
Inside the factory, that's where we have this slow movement.
Yeah, and there it's standard. So if you're outside, like you said, Staffan, that's used since years.
Another question from Gustav Hageus.
Yeah. Gustav from Nordea again. And sorry for bringing it up, but the red line margin, as you stated, Joakim, 23% today, and you say that you aim up to 25. Do you see that coming just from volumes rebounding, or are you still looking to do any operational activities within?
I think we—I also mentioned that we've done one third of the investments in the operations, in the supply chain, and we were just a couple of weeks ago we ordered a new SMT line that will replace the three very old ones that we have today. So I think the gross margin will help us apart on the way. And then with yeah some operating level leverage continue to grow the business, I think we'll—those things together should get us to the 25. That's my thinking.
Mm-hmm. And then-
Oh, sorry. Go ahead.
Yeah, then just one follow-up here. On the sort of data center order that you talked about in Q4, I think, or Q1 and Q4, can you just elaborate a bit on your offering there and also the potential? You mentioned data centers on one slide, but it was included sort of in a group of accounting for 10%. I don't know, how much does it account for today, and what's the potential?
Yeah. The application we do in data centers is not the servers and the racks itself, it's the power into the data center. So for us, it's like any other industrial building, more or less, and we do the network switching of the monitoring and stuff like for the power part of this. So it's related to data centers, but it's not on the floor inside. It's on the wall, into the building, more or less. And this is one of the applications we're seeing in IDS. Do you have any-- Is that a big portion, or we get some big orders, but it could be any type of building or power application.
Yeah, it's more if we see this verticals, it's more the energy part, and then it can be a data center, it can be something else. So it's not, like we said, not the data center itself. So it's the energy. And for sure, they consume a lot of energy, so that's the beauty of it. Mm-hmm.
Are you seeing this becoming sort of a standard here, a sort of new market for you, or?
Yeah, we wanna focus on this energy part, and there, for sure, energy for data centers is included in that.
Mm-hmm. Joachim, you had another question.
Yes, one just follow-up from me. You showed in INT this matrix where you currently play in the more, call it, high-value niche applications, and you want to, with the new launches, go into, call it, all else equal, cheaper devices, but larger volumes. So just help us understand if... I mean, all else equal, I would assume that these customers have very sophisticated procurement departments. And that being said, just, I understand that you want to go after new customers, but could this in itself be a more competitive field, and with a different margin profile?
I don't think we are willing to trade the volume for margin. We are expanding into new growth areas. Exactly what you say, that average sales price will probably be lower, but we don't expect to reduce our gross margins in this business. This is simply new pockets of opportunities, and that we are playing with in today.
The competitive dynamics, are they $0.20 different to where you currently are?
The competitive dynamic is probably. These customers are probably doing quite much on their own today. But the complexity actually starts to drive a buy behavior, and what I talked about a little bit earlier, where they see a benefit of actually buying an industrial communication solution instead.
... And that's something that we've talked about ever since your IPO, that the OEMs outsourcing a bit more due to increasing complexity. Can you say anything with regards to just a rough estimate, how many of your OEM customers still in-source their solutions today?
It's a really fragmented market, and I don't think I will go into that discussion, okay? I don't, I will not give you a good answer on that.
There's room to grow?
There is room to grow, yes.
Right, one more question regarding ARR. That's hard to say, if you speak in Swedish, it's even harder if you're from southern Sweden. ARR, and if you would give an example of that. I think we discussed that yesterday, but Alex, with Netbiter, and an example of HMS products that can work with ARR.
Yeah, I think I mentioned this with the transsets. So that's the Netbiter, for example, where you can have this as a... Let's say, each transset is equipped with a Netbiter, and then they rent it out to their end users, and they charge on a monthly basis, and we charge on a, yeah, ARR basis as well. That's one example. The other example where we do recurrent revenue is with our infrastructure right now. This we do already with Talk2M, where we charge for, let's say, getting the data out of the system and doing some alarming for the system. And there are a lot of additional potentials with additional services, which we wanna bring towards the market in the future, where we can have a nice service offering, yeah, to enable more ARR revenue.
Okay, that was all the questions from the chat. Any more questions from the room here? Yes.
Yes. Hi, Daniel Thorsson from ABG as well. On an AI-related topic, over the last five years, I think organic growth rate has been slightly lower than your target. Now for the next five years, you see an acceleration. But the products are hardware and also software developed in the hardware, and with AI, we will reduce cost of developing software. Is there a risk that there will emerge new competition that is causing a price headwind, rather than the price tailwind we have seen in the last five years, which make it hard to accelerate the organic growth versus the last five years?
Good question. I think, yeah, we haven't really seen any new competitors in this field for the last five years, I would say.
Yeah.
So it seems to be quite. But that's also dangerous when you, when we say that. So I think we are on our alert to really monitor this. I assume that with this efficiency gains you can get with AI, maybe there are other industries that you wanna break in first. So I think we are maybe not the first target, but we think that we need to stay on our focus to be more efficient ourselves, to potentially meet that competition. But we also see that. We saw this in a couple years ago when there was a hype around IoT and these things 5 years ago. There was some newcomers, but it was really difficult for newcomers because the traditional customers they want somebody they can trust.
And, so it's not easy to be a newcomer in this industry. And with AI, we should be careful because maybe that's something that is changing the game. But so far, we haven't seen it.
Mm-hmm. Great. Any more questions from the room? Perfect. Yeah, we're in good time. So with that, with that, thank you everyone for attending, and, especially you on the call as well. I will stay around for a few more minutes if you wanna talk to the presenters, have a coffee, we're here to, to talk. Otherwise, thanks very much for joining. Bye-bye.
Thank you.