HMS Networks AB (publ)

Thank you. Good morning, everybody. Greetings from sunny Stockholm. And mean joking, we would like to take you through the quarter free report. Not too much sunshine on that, unfortunately. But let's take a look on the agenda for the day. So I will start with a short business update and talk a little bit about our new organization that we presented early this week. And then I switched to your Kim and you will talk about some financial results and we end up with a Q&A. But let's first look on the quarter we're closing. We start from the top. We see net sales minus 30% organic. The reason why we see plus minus here is, of course, we added the big red lion part compared to last year. But of course, we are very disappointed to see this weak market situation. We were expecting this to be slowly ticking up, but we see it continue on this kind of low level. Order intake also negative minus 8% organic. We still see that there are some inventory adjustments and Joakim will talk a little bit about a little bit more about this in the numbers. However, we see that we improved our cost level. We have minus 22% on our organic OPEX. So we're trying to mitigate what we can on the cost side to adjust for this weaker market. And we see that our adjusted EBIT is 194, a little bit of reduction from quarter three last year, but we are quite okay with our adjusted EBIT margin of 24.5%. I think what we've done, what we can to really mitigate the weak market. And we are also improving the cash flow. After a couple of quarters with inventory building up, we are now taking good activities to really reduce inventory and Joakim will also talk a little bit more about that. So let's switch to business update where we see, as I said, market is weak, especially we are surprised about North America, we see some good traction before, but quarter three really was a weak quarter also for Red Lion. And difficult to say what it is. But of course, in US, there's a lot of wait and see at the moment, people are waiting for the election. And maybe this is giving us a bit softer market as well. But it's easy for customers to wait with some investment decisions. In Europe, we are a little bit concerned about Germany. Automotive market is really slow. In general, the machine building market is also slow. So I think here we see a lot of negative press, negative attitude by customers. So this is not good at all. Asia, we see a good development in China. However, China is quite small market, some five, six percent of our revenue, but we had a good quarter in China. Marketing Japan is still very much into adjusting for their big inventory and our large customers there is talking about they don't need to place new orders in the couple of quarters. So there we will take some time before we see move up in Japan. It's mainly due to the inventory situation of large customers. We see quite good development of winning new customers. So we feel that we have an attractive offer. But it's the existing customers that see a weak market. But we do good design wins. And we feel that we are winning businesses. We also presented our new organization. We have some slides about that to focus on how we build this company into free division, industrial data solutions, industrial network technology and new industries. Talk more about this. And we also made a new acquisition, peak system. We signed it first of October and we will get our hands on this the first of November. Interesting company. And we also divested a small part of the Red Lion. So German business, quite small, where we see a lot of similarities to our business. And we felt that there was not really any business logic to integrate this. So we divested this by a management buyout and leaving this to the management to take forward. Peak system, interesting German company. Key offering in the software and hardware for communication technology, especially for vehicles like EV cars, heavy duty vehicles, interlogistics, medical and some other applications. There's some similarities with our IXAD business. But it's a complete complementing product. And we see that we have 50 employees, quite many R&D, very well established company. They also have a development center in France. So we think that this is a good addition to HMS, very profitable organization. They have a single digit growth at the moment and it's a 25 million euro revenue. So it's not a small, big business, but it's very profitable and it helps on a profit level. So we're quite excited about this. People may ask about why we invest in automotive at this time. We agree that we see a weak market in automotive in the short run. But of course, we do this acquisition in the long run. We see good long term business opportunities in automotive and this medical business. If you look on the next steps here, we expect to close first of November and they will be part of this new division we call the new industries and the subdivision of vehicle communication. And we'll start quite slow integration during 2025. We have our IXAD business in Aarhusburg. This is in Darmstadt, fairly close to each other. But we see a lot of synergies in the product offer and how we can use our both companies go to market. You see also at the top here, what we paid 69 million euro. It's a highly profitable company. So we see that the multiple is 9.2, which we think is a fair price in the market conditions here. So we are happy with this. There will be some transaction costs, but this is a nice company and we look forward to get our hands on this for helping them to take the next step in their growth. Let's take a look on the new organization that we announced early in the week. We see on the left side is our current matrix model with our business units, responsible products and our market units responsible for the go to market. We started this maybe seven years ago and we are now probably before our acquisition, we probably have grown three, four times. We added Red Lion, Big Shank and now also Peak System. So we feel that our matrix organization, we've really grown out of it and we also see Red Lion and Peak System as good additions. So our organization, it serves us well for some years. But we see some challenges that R&D has become quite far away from customers, sales become quite far away from product and technology as matrix. And we see a little bit of unclear accountability, difficult to integrate new companies. So I think we also see that some of them, where we have this matrix, it's so easy for the market units to complain on the business units. It's easy for the business units to complain on the market units. We can't have it like this. We need to move on. And we think that these three divisions that we have will be much easier. So three divisions, all facing customers responsible for sales, marketing, product management, R&D, industrial data solutions, industrial network technology and new industries. And each of these have their own customer group and also their own product offering. There'll be some shared services. We keep our common supply chain since we believe there's a lot of synergies in purchasing power, volumes, and we now integrate Red Lion's supply chain with HMS supply chain. And we keep some group functions for M&A. So we think this will create the customer focused organization from sales to R&D and back to customers. It will reduce complexity and we also get the full accountability in these divisions for strategy, resource allocation and financial performance. So this is the right step for us for our continued growth here. Take a look on these three divisions. The largest portion will be our IDS, industrial data solutions, representing some 44% of our revenue. It will be our E1 business, our Red Lion business, our Entron business and our Enibus diagnostic business. But here we focus on industrial automation and its machine builders, system integrators and end users. And here we see both synergies in the -to-market with a strong common product platform, but we also see product synergies in technology going forward. Secondly, we have industrial network technology, technology for communication, control and security. Here it's much more of what you call embedded. Here we work with direct sales with larger device makers. They integrate our technology in their devices, quite long sales cycle, but a very sticky business where we get revenue for the coming 10 years. And this would be 34% of revenue with a very focused global organization here. And finally, we have what we call new industries where we would like to collect our business outside industrial automation. This is also a platform for future acquisition to grow, to become larger. Today we start with our building automation division and we also add the vehicle communication, including IXAT, peak systems and our OVASIS business there. So this is a high level view, but we believe that all these three have different customer groups and much more synergies. So we look forward to take this step from 1st of January. All right. So Joakim, what do you say about the financial results?

I think I'm going to start off with the most challenging situation looking at the order intake. And then you will see that the slides become better and better the longer I go. But let's let's jump in to talk about the order intake. And I think Stafan already mentioned that we have more or less in all markets, maybe except for China, we have a quite challenging situation still in Q3. And underlying demand is down to the lowest levels that we've seen since 2021 in this situation, primarily driven by continued de-stocking by some of our key customers. And we have slightly different characteristics for our three main markets in the US, Germany and Japan. Just to mention a little bit of that, I think the US is maybe where we saw the biggest miss compared to what we believed ourselves for Q3. We see that the product, the product business within Red Lion is a bit weaker and also the Ennebuss embedded sales in the HMS sales organization is a bit slower than what we expected, primarily driven by large inventories with some of our key customers. On a positive note in the US, we can see that the part of our business goes through distribution is actually up when we look at the point of sale. So what the distributors are selling into the market. So it's a slightly different story looking at the looking at the what we push to the market and what what's going out to the end customers. If we take then Germany, which I think you've all seen is pretty dark at the moment. And we thought that we would see a stabilization in Q3 and maybe a small tick up if we went back a quarter or two. That is not the case. We see a more challenging view now than we did a quarter or two ago. And we think it's flattening out at this moment, but maybe not any soon improvements. I think we have to wait until 2025 to see anything better than what we are performing at the moment. In Japan, where we had a lot of good orders in 2021 and 2022, we still see that some of the main customers are keeping quite a bit of inventory. And I think we need to wait probably a couple of quarters out in 2025 to see a great improvement in the Japanese market. All in all, what we see is that we are not losing any customers, but we have these big inventory adjustments going on. And we this is difficult to make, but we made this estimate of how much de-stocking we are seeing. And we believe that to be around 100 million, which is the same that we had in the second quarter. And you've been seeing this graph now with us for some couple of years. And it's a completely different story now compared to what it was in 2021 and 2022. And with this, I think we're really starting to see the end of this de-stocking. We have maybe a quarter or a bit more, and then we expect to see a gradual improvement in business. Going over to the sales, that is a little bit better. We're reporting flat numbers, but organically minus 30 percent. So also there is a pretty challenging situation. We're meeting a strong Q3 in 2023, which makes it more challenging to report good organic numbers on the sales side. We were a little bit surprised that we had this book to bill of 0.87. We thought that we would be more around one, both with sales a bit higher and with the order intake being a bit higher. And here, I think the main thing, just as in the order intake, it is the embedded business. Where we have the inventory adjustments. And of course, it doesn't help that the underlying market is weak as a whole. We've been seeing some peers reporting as well with similar situation that we have on our view. And well, we can only be happy to see that we have slightly improving design wins that we also state in the report. That's something positive. And we have also the E1 business is trending quite well. And back to the same levels as we had last year. Also, Intesis is doing quite well. So it's really down. Our biggest challenge is the embedded business. Talking a little bit about Red Lion. Here we're meeting also a tough comparable in Q3. We have reported before that we had a bit of a boost situation in Red Lion during 2023, both in orders and a little bit in sales as well. Due to inventory buildup. So now we are down 26% compared to last year, 244 million. And we expected to see decline, maybe not that big. Again, the product business is suffering a little bit. And on the order side, we are down 1% to 244. As you might know, the Red Lion business keeps a very short order book. So sales and orders are expected to be about the same, which you also see now in the quarter. We're working full speed with the integration. And now with the announcement that we made earlier this week, Stefan commented on the new organization. Now we can really set full speed on all the areas. And this is, of course, something we need to balance with investing for the future and keeping focus on the current business. What we can see so far is that we've been doing quite well in the back office integration that is more or less done. We are doing some investments in supply chain and you already see some improvement in the gross margin side. And we think that we can squeeze out a little bit more with the coming investments as well in supply chain being more efficient on the delivery side. And then the big thing that we're now putting full speed to when the new organization is announced to really merge the HMS and Red Lion sales organization, not only in North America, but that's where we have the biggest potential. So that is now going on at full speed and we hope to see some good results from that maybe during the second half of next year. But again, it's down to combining focus both on the current business and doing the right things for the future. We're not the biggest organization. We were trying to balance that. Looking at the backlog that has been on very high levels for some time. You see now we are down to six hundred five million in order backlog, which we believe is pretty much where we should be when everything is as normal. We have the same ratio of rolling 12 months net sales compared to backlog now, as we had in 2020, 2021, beginning of 2021 before we started to see this this big backlog being built up from component shortages. So what this basically means is that the order intake that we will get is pretty much what we expect to sell short term book to build around one. Hopefully we'll see that improving throughout 2025. And then having a look at the sales per region, we see now that the European and the US market is about the same size for us, just about 40 percent. And then APAC is 14 percent of sales. This is pretty much where we expect to be going forward as well with the current business that we have. And then I said that you will see improvements the longer I go in through the P&L. And I think despite this very weak top line being 30 percent down organically, I think we do a decent job in holding up the profitability level. We do an adjusted EBIT of 194 million with the main adjustments being amortization of excess values from the big acquisition with Reliant. So we're almost delivering on the the margin target of 25 percent, just being point five percentage points below. And the reason why we can do this is, well, first that the gross margin is quite good. We have sixty three point five compared to sixty five point four. But then you need to keep in mind that we are diluting the margins with the Reliant acquisition slightly. So take away relying would have been at the same level as we were last year in HMS and then with a 30 percent reduction in volumes. Of course, this is driven a little bit by a favorable product mix. The embedded business has a slightly lower gross margin than the rest of the business. And so when the embedded business comes back, you will see a different margin. Then we're also quite happy with the gross margin development within Reliant. We've had some some quick wins and we expect to be able to add a little bit more, as I said before. We're also keeping a pretty tight cost control. The OPEX is three hundred forty three million down 22 percent organically. And we're trying to to save back where we can. You should also know that we have some one offs in Q3. We always have a vacation effect. So the counting impact of the way we count for for vacation provisions. And then we're also since the performance is not where we would have expected ourselves, we're releasing some bonus provisions in Q3. We have been accrual for higher payout than what we see that we're going to have. So all in all, this is impacting EBIT positively with 25 million, reducing OPEX with 25 million, about 50 50 on the vacation provisions, which we always see in Q3, but not any other quarter necessarily. And then the other half from from these bonus provisions being released. And then let me talk about the financial implications of the organization change that Staffan mentioned. So we're going into the three divisions, the data solutions, industrial network technologies and new industries. And with this change, we we see that we have about 40 positions that are being redundant, primarily in the when we merge these sales and marketing organizations, but also some high level management positions that we see that we can can do without. So this will translate to about 40 million savings. And as you might remember, we did a restructuring program also in Q2 where we took out some 40 million in one year savings. So accumulated we now we will have saved 80 million in cost savings going forward. And on the program from Q2, we're quite happy with that impact. We see the full impact that we should already now. And the impact from this this reorganization, we will have fully impact from first of January in 2025. As a result of this, we also take we also see that we're going to take restructuring cost of some 25 million in Q4. And we need to get back to the exact number, but there will be in that range. So with this with divestment of the Ambicon X-Line business and with acquisition of peak systems, we should be just above 1100 employees when we go into 2025. Then we have the earnings per share 2.51 SEC and maybe worth mentioning compared to previous years. We have now pretty massive interest cost given the big acquisition of Reliance. So we have net financials of 45 million and the interest cost now being 36 out of that. Other than that, not so much interesting to say around this. But the cash flow from operations, 205 million, a number that we're very happy with. We see the best cash flow, maybe the best cash flow ever, actually. And we mentioned that we're doing inventory reductions. Despite the lower sales, we managed to reduce inventory with some 130 million since April. And now in the quarter, we do a reduction of some 79 million in inventory, which we're happy that we can do. And we expect to see a continued decline throughout Q4 and into 2025, maybe not in the same pace as we've seen now, but we should see further reductions for the coming quarters as well. So all in all, with the cash flow of 205 million, we see a cash conversion of almost 100 percent. Not possible to sustain forever, but good that we can, when business is being a bit soft, we can do these adjustments. Then the balance sheet, looking at the net debt, we have almost 2.6 billion in net debt. We see that we're coming down some 200 million from Q2, which is good to see. And in the quarter on net debt adjusted EBITDA as reported of 2.79. And as many like to see, without the IFRS 16 impact, we're at 2.72. It's a little bit on the high side. And with the acquisition of peak systems, we will tick this up a little bit more. And I think with this, it's important to say that we are aware that we are on the high side. We feel quite comfortable with this, since we know that we're going to reduce this during 2025 and work on integrating the companies and stay a little bit more cautious to acquisitions for the coming quarters, at least. And then just to summarize, we have three big news in the report. So the first point I want to make is that despite the challenging markets and continued restocking, we see good gross margins, good cost control resulting in quite okay results. Staffan presented a new organization that will kick in 1st of January. We think that will be very positive to get even better focus on our customers and grouping the offers together to serve the customers in the right way. And we're getting a full accountability all the way through the profit and loss with our division heads. And then finally, the acquisition of peak system that will strengthen the new division, new industries, and also the divestment of MB Connect line that we expect to close now any day. With that, I'd like to hand over to operator for some questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Simon Grunaf from ABG. Please go ahead.

Thank you. Good morning, Staffan and Joakim. And initially, Staffan, you have been in this industry for many years. Could you expand a bit on how the current market demand situation or trajectory differ from historical downturns? If that is the case, what early signs should we be looking for that suggest that demand is picking up? Thank you.

I think we have two different parts of the business. This would be the new IDS division where we work with machine builders, system users, and end users. That is more of a...there's always business to do there. And there we see a different part of the industry is OK. Some others are quite not so good. What we have seen now and previous downturns as well and upturns is that our big embedded business with Enibus, that's really related to the wins we get. We do that all the time, like we do right now. But orders is really depending on how many robots our customers are selling or how many other machines. So here we see that that is more cyclic. And that's a little bit what we see right now. So these are two different aspects of the business. And that will help now when we go into divisions with IDS versus this INT which is more direct. So I think we have seen this before. And we also, if you look from, for example, yesterday, ABB and their robot and discreet, it's quite similar to our business, see very similar patterns, but they also see that their machine business is suffering. And this will come back. But right now it's a couple of quarters of a weak demand. And we need to work on the things we can affect and win new customers. But the existing market is a bit weak for the moment. But it's nothing we really see as something new. It is what it is. And we need to try to deal with it on the cost side and make sure we win new customers because there's a market out there still.

Thank you so much. And speaking of things you may affect, how do you view current cost levels, partly in light of your adjusted EBITS margin target of 25 percent? Could we see more actions for new to enhanced margins or is the current organization relatively slim to meet higher demand when that comes and does drive expanding margins?

So I think as you see on the numbers, we've been reducing quite a bit of cost and both on the personnel side, the two different turns this year, but also on keeping back on being on trade shows and fairs and traveling and so on. So I think we really try to keep a tight budget for the moment. And of course, when business comes back, we will probably invest in more customer activities and so on. And I don't expect us to if we were to if we have to do another cost program, it would hurt a lot more. So I think that is definitely not what we're targeting. And then we need to see how the business develops, of course.

And you can expect now from January, we move into this new organization. There will be some fine tunings when we do certain learnings and stuff like that. But we've done this reduction now to be ready for this new divisions. So we don't really expect any big cuts going forward, but there will probably be some adjustments and fine tuning the first couple of quarters 2025.

Very clear. Thanks. And on the de-stocking impact here, I think you can interpret the 100 million impact as greater than you previously expected, which then probably, to be fair, reflects a sequential downturn in the market. Could you elaborate a bit on your visibility here? Do you have clear sight on many of your largest customers in terms of their inventories or is your visibility relatively broad based?

I think it's I think you summarize it quite well, first of all. And in terms of visibility, of course, we have closer discussions with the larger customers. So I think what we know for a fact is that some of the customers will not order for a couple of for one or two quarters more. I mean, that we've heard from them. And then, of course, there is a large customer base where we don't really know exactly. And we maybe don't have the same close relationship, so we can find out exactly how they think. So I think I think what we said is pretty much what we know. We try to be as transparent as we can. And and again, we expect to see a small uptick in in 2025, hopefully with the second half being significantly better than the first.

I think several of our customers, large customers, we talked with them for the last year about the inventory levels. I think they have underestimated how much their own channels, their distributors also had in inventory. So I think there's several layers of this. I think this is took longer time than we expected. And I mean, maybe this will at the end of this year, we will we will be on par, we guess for this. But it's been longer than we expected.

Appreciate the transparency here. And then finally, on Red Lion, I think you said that you have some more cost synergies on the cards and that we should expect. But are the margin improvements here that we saw sequentially mainly a result of your efforts or rather a mix effect? And then could the gross margins for Red Lion start to reach the rest of HMS over time or is that level too ambitious considering mix effects, region on effects, etc.?

I think the gross margin improvement that we see in Red Lion is part of some things that that Red Lion management did before we stepped in. Also some things that I think we have helped and support to do. And I wouldn't want to promise that we're going to get them up to HMS pre-Red Lion levels. But I think there are a couple of percentage points over maybe the coming two years or so to to grow into for sure.

And we think we talked about this previous calls as well. We identified that they've been really under invested in their supply chain. So we're doing some investment now as we plan for. It will take some time before these new machines and these automation systems are in place there. But during 2025, we are sure that we will improve like first past yield and quality. Secondly, that should also have some cost effects in efficiency and things like this. So there are more things to do. But now I think we picked the low hanging fruits and there are some we need to climb a little bit further up in the tree to get the next level. But there are some more things to do.

Thank you. Appreciate the call.

Thank you.

The next question comes from Joachim Gunnell from DNB Markets. Please go ahead.

Thank you for that. And good morning from Rainy Oslo. So can you just discuss here, I mean, touch upon the previous topics, what gives you comfort around the ship at this higher level of performance at the EBTA and then basically your line of sight here to not be in a position where any sort of covenant would come under breach?

I think, of course, we've been in close dialogues with the bank before making this acquisition of peak systems. And we made a plan that we think will be solid to, of course, not break covenants. I think that would be a bit irresponsible of us to put us in that situation.

I think what we see here with the strong cash flow and there's more we see some effects of the cost savings doing as well. So I think even if this is a really weak quarter on the on the top line, we managed to make good margins, OK margins. So I think cash flow margins are good, despite the fact that we have a very weak quarter. So we are not concerned so much about the midterm here. So we think that this debt level will go down during 2025 into more realistic numbers. So that's really our ambition. And I would say we don't think about this at night. We think we have a good plan here.

Lovely. No, absolutely. I mean, the factors that you can control is the ones that you've actually come in ahead of expectations here. But when it comes to integration, you just talk about how like from an organizational point of view, integration with both Red Lion and how well prepared you are to digest yet another project with peak system. And ultimately also, if there's been any progress on the go to market strategy now in the US with the Red Lion distributor network.

If I start talking about integration, we have one team working with Red Lion integration and that will be part of this new ideas division. The peak system, it's a completely different organization now with this vehicle communication subdivision. So these are different people and a different integration. We think that will be slower as well. So that's not they don't compete with the same kind of integration activities. So we don't really see a competing situation there that we don't have the resources. So I think from integration point of view, we will manage this in without any problem. And then the question was about sales in US or.

Yeah, exactly. I mean, some of the rationale behind the Red Lion acquisition was, of course, tapping into another distribution network in the US for your existing brand. So I mean, it's very early days, of course, but are you seeing any traction there?

We see some we have some examples of like cross selling and some of the distributors carrying some wireless products now. So we're seeing a positive momentum in the attitude at the distributor. They see an opportunity to do more things together. We were a little bit afraid that now we set up multiple distributors in some markets that will just create a lot of conflict in US. They're used to that. So it seems like that that have been worked out well. We see quite positive tone by the distributors, but it will take a couple of quarters before we see the result in sales activities and projects and things like this. But we think we are on the right track there.

Perfect. And just finally, I think I joined a bit later, so forgive me if this was covered already. But just on the strong gross margin here in light of the lower volumes, is it fair to expect a directionally higher gross margin amidst higher volumes should markets recover into next year?

I think actually this is might be strange what I say, but I think the opposite since one big reason why the gross margin is strong is that we have quite little of any bus embedded sales. We will go with a completely different gross margin. So when business comes back, what we believe will come back the most is the end of us embedded. So even if that's a bit counterintuitive, I think the gross margins will be slightly reduced when we see growth coming back.

That's very helpful. Thank you both and have a great day.

Thank you. Thank you, Gajoslo.

The next question comes from Gustav Bernablad from Nordea. Please go ahead.

Yes, hi, it's Gustav here from Nordea. Maybe just to start off here with the guidance for recovery in 2025. And obviously, we touched upon it a little bit and it's very hard to say exactly, but you say that the larger customers are not expected to place orders here in the coming one to two quarters. But is there anything else that gives you the conviction that we are likely to see the recovery in H1, would you say? That's a good question.

I think that the large customers believe they will place orders in maybe Q2 or so in 2025. I think that gives comfort, of course. And I think what we're trying to say is that we don't necessarily see a big uptick unless that happens.

I think also when we look on some of our business like E1, facing against having marked at the machine builders, there we see quite good development. If we look on some US distributor, look on there, we call it point of sales, how much they are selling. That looks quite good. So we see some signs that the business is not completely minus 30 everywhere. So I think that there are some hope for recovery, but we think it will take some time. But I would say that this negative market will change in a couple of quarters. That's our belief. But at the same time, we said this six months ago that six months later, we're moving this window further out. So maybe you are not fully trustworthy when we say it because we said it half a year ago that now it should be good. I think we're pushing this out again. We see some signs, but it's really, really difficult to make an assessment of the market right now.

That's fair. That's fair. And then maybe just to jump on the strong margin here. I mean, looking at the Q1 report, you had you sort of specified the R&D or capitalized R&D and so forth. And you said that it will be lower the remaining part of the year. But looking at the year over year figures, it seems to be down some five million and then you didn't have RID line last year. So I was just wondering, is it possible to say anything how much you are capitalizing and how much you did last year?

I think it's a yearly pace this year should be around 80, 90 million. Last year, I think we did 35, 35 or 40, something like that. So it's significantly higher this year, of course. I think we communicated this in Q4 that we're starting the big party that we're running now is for the E1 remote access and remote data offering next generation. That will carry on throughout the year. And then we should see a reduction in the capitalized pace. Perfect.

Is it fair to assume that it's quite evenly split up between the quarters?

Yes. Yes. It's about the same pace.

Yeah. Okay, great. And then just a clarifying question. I mean, the bonuses, so the pay reversed impact of 25 million. Are you adjusting for that as well?

Let me just clarify that once more. So we have what I was explaining that we had 25 million in relief compared to a normal quarter in Q3. Half of that, so 12, 13 million, is because of vacation effects that we always have in Q3 since July and August is in Q3. And then for just for this Q3 compared to any other quarter, we did a reversal of bonus provisions since we've been accruing too much of some 12, 13 million. And both of those will hit the reported EBIT and both will hit the adjusted EBIT. So we're not adjusting for these items.

Okay, so then it's fair to assume that the adjusted EBIT is 182 or 81 basically or? Depending on how you want to define it. It's up to you. Okay, perfect. And then just the last one here. Is it possible to give any sort of ballpark numbers of how much the product mix is impacting the gross margin?

About one and a half percentage points, I would say.

Perfect. All right. That was all for me. Thank you very much. Thank you. Thank you.

The next question comes from Victor Hogberg from Danske Bank. Please go ahead.

Good morning. So given the upcoming new organization, what's the last piece to that puzzle? Would you have done it otherwise still? Just thinking about how important PEEK was to do given the questions here about gearing and the uncertain outlook. And you're thinking about the time for it and how strategically important you think PEEK was.

Good question. We've been following PEEK, Pratman and Ears. I was there first time in 1999, I think. It takes a long time to build relationships in this industry. So the owners were ready to retire. Actually, three owners, but one was the widow of one co-owner that wasn't here anymore. So I think they were ready to sell. And these kind of things, it's maybe not perfect timing, but it was for sale. They would like to sell to us. We would like to build a bigger business with this PEEK and Iksat. So I think maybe not optimal timing if you look on our leverage, but still a good opportunity. So we feel that this was a we thought a lot about it and come to the conclusion that this market will keep on growing in automotive and medical device market. And we got a fair price for it. Look on their profitability. And it's a very mature and well-established business, also distributed in the US, Asia and Germany. So it ticked all our boxes. And we are actually quite happy. We are happy that we did this, but we did a lot of analysis before taking

this step. And you have to comment on your question about the reorg, if that was dependent on PEEK. It was not. I think Red Lion was, of course, a big piece to get that to make sense, but not PEEK. It would have happened anyway.

And given the uncertain demand outlook currently and inflation coming down, what are your discussions with customers on price going into next year? Do you see the ability to keep prices? That's been your communication before or any kind of changes in pricing strategy going into 2025?

If I start there, I think we are having a more moderate view on price increases than previous years. We'll be more aggressive. So I think the customer expectation is, of course, they want lower price always. But I think in general, it's industry. It's increased price of a few percentage is acceptable, but we take it quite slow. We think that this reorg we're doing and we are taking a little bit of, how should I say, we are not aggressive on price increases. We believe that price will be stable for 2025 rather than increased.

Okay, perfect. And just on the new group here, the working capital and capex profile, of course, I'm elevated temporary capex in Red Lion now. But just how do you see cash conversion in the new group going forward?

I think we over time, I think I expect cash conversion to be around 75 percent. In the short term, I think we can have a decent cash conversion throughout 2025, since I think we'll be able to reduce inventory a little bit more. And then I think we should bottom out around this. Around 75 percent. That should be sort of the normal situation.

Perfect. Okay, great. That was it for me. Thank you.

Thank you.

The next question comes from Eric Larson from SEB. Please go ahead.

Thank you, and good morning. I just have one question on the de-stocking effects that we've talked about a bit already. But you've been very transparent with all of these effects for some years, and that's much appreciated. And if we look back on what you estimated for boost orders, around a billion, we are at around 700 million now in total de-stocking. I know this is all an estimate, and you haven't really retroactively changed previous estimates. So it would just be interesting to hear. Maybe a difficult question, but how do you think about this? Could it be up to 300 million left in de-stocking?

I think it's a good question, and we discussed it a lot internally, how we should see that. I think we have two views on it. One extreme would be to say, yeah, maybe it's 300 left. But at the same time, I think the business is larger. So with larger customers and more customers and so on, I think we need to keep a larger backlog to have the business running. And with that said, it could be that we shouldn't see a lot more. So I think the answer that you probably will not be very happy with is that we think it will be somewhere between zero left to max 300 million left. I think that's as honest as we can be on this item.

Yeah, yeah, no, I understand it. It's fair enough. I still appreciate the transparency. That's all from me. Thank you.

Thank you.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thanks, operator. Thanks, everybody, for joining this call. And you rest assured that we'll keep on working hard to make sure the new organization comes in place, the synergies with Red Lion and Peak comes in place. But we also need to make sure that we keep on winning new accounts. There's still a lot of business out there that is not our business. There's somebody else having it. So we are very focused on winning and growing the business long term here. But right now we have some I would say headwinds in the short perspective in the macro. But we keep on fighting for the future growth instead. So stay tuned. And we present this the coming quarter as well. Have a nice day. Thank you.