HMS Networks AB

STO:HMS

Earnings Call Analysis

Company Outlook Amid Order Normalization

The company faced a significant 41% decline in organic order intake, resulting in SEK 426 million for the quarter and concluding the year with SEK 2.3 billion in orders against SEK 3 billion in sales. Despite this, they've maintained a stable adjusted EBIT margin of 25%. They highlighted an upsurge in orders from North America, in contrast to the European and Japanese markets, which are still normalizing post-COVID. Major events include a 10% raised dividend, projecting SEK 4.40 per share, upcoming acquisition of Red Lion expected to significantly boost revenue, and a bolstered workforce with an additional 400 employees. The company maintains a positive outlook with organic growth contributing to a revenue target surpassing pi-billion by 2025 and a projected organic revenue growth of 5% to 10% for the full year 2023.

Navigating Through Supply Challenges and ERP Integration

The company successfully navigated through supply chain challenges and has seen an easing of inventory pressures with better lead times and reduced spend on spot market component acquisition. Their ERP system, after initial hiccups, is now functioning smoothly, setting the company up for growth and reflecting significant integration and development, including the successful incorporation of Procentec into Anybus. These strategic moves are laying the groundwork for the company's expansion and operational efficiency.

Significant Acquisition to Bolster U.S. Presence and Product Range

The acquisition of Red Lion, which comprises over 40% of sales, signals a major strategic move to expand the company's footprint, particularly in the U.S., and to bolster its product offerings. Red Lion's sales are primarily U.S.-based, and its industrial gateways, ethernet switches, and human machine interface products are largely complementary to the company's existing portfolio. The financials indicate a strong gross margin of 55%, and an EBITDA margin of 21%, which the company aims to improve toward a 25% target. The acquisition is expected to be accretive to EPS from day one with an anticipated closure in early Q2 and a funding mix of additional debt and equity.

Order Intake Decline Indicates Market Normalization

The company experienced a significant organic decline in order intake of 34%, primarily due to market normalization post-pandemic demand spikes. While the underlying demand appears to have only a minor decrease, these numbers suggest a cautious outlook where the business anticipates a potential further decline for possibly one or two more quarters before observing a rebound. Geographically, Europe is facing more challenges while the U.S. shows signs of recovery and destocking nearing completion, which could forecast a stronger 2024 in that region.

Maintaining Solid Execution Amid Margin Pressures

Despite anticipations of a tough start to 2024, the company has executed solidly, maintaining a margin around 25%. However, they are preparing for possible margin pressures as they continue investing in the business, with a pragmatic view that short-term margin dips are acceptable while pursuing long-term goals. The executive team is focused on ensuring investments are fruitful while being mindful of the operational expenditure that may impact profitability in the immediate future.

Positive Long-Term Outlook Despite Short-Term Challenges

The company's leadership remains optimistic about the long-term opportunities posed by digitalization in manufacturing despite short-term fluctuations in the market. A series of investments made in 2023 are poised to bear fruit, and the company is strategically positioned to access emerging markets. While there is a caution around the immediate quarter's cost structure, the overall sentiment is one of looking forward to reaping the benefits of the investments and the ongoing integration of Red Lion.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the HMS Networks Q4 presentation for 2023. [Operator Instructions]. Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead.

[Staffan Dahlstrom, executive]

Thank you, operator. Good morning, everybody. Good morning from a wintery Halmstad Sweden. I heard that the sound here might be a little bit not full quality, but let's try it out and continue. So welcome to this quarter 4 presentation, I'll start with a couple of updates, and then Joakim will go and talk more about the Red Lion acquisition and some more details about our financials.

We just presented our quarter 4 and stable net sales and actually quite much stability when it comes to revenue, but also from a profit wise, is quite good. The big thing here is with the order intake. As we have communicated in the previous quarters, we are in the cycle of this kind of destocking and adjustments from the previous years of the boosting orders is catching up at the moment. And Joakim will spend quite much time to make sure you understand what we see and be as transparent as we can be. But 40 -- minus 41% on organic order intake.

From an EBIT perspective, we are -- when we look on this, we see that we are flat. The reason why we stay flat because we have some cost of acquisition and this onetime costs and some restructuring. So we do adjusted EBIT on this. It's quite much flat from same quarter last year, and we land an adjusted EBIT margin of 25%. And we see a general stable development, I would say.

We also concluded yesterday, the Board concluded that they proposed a dividend up 10% from last year to SEK 4.40. And let me -- just for you, the newcomers of the call, talk about our business very briefly. We talk about Hardware Meets Software, that is HMS, and we work with Industrial ICT, Information and Communication Technology, and well connected in this industry, been here for many years, and we are one established and well-known player in our almost 10 million devices connected through our Anybus brand and soon, 0.5 million Ewon connected cloud -- cloud-connected machines.

On one hand, we are a tech company working with new technology, but most of our customers are industrial end users in automotive, pulp and paper, food and beverage, all these industries like to talk about technology, but they even more like to have a stable supply of technology and the products for a very long life cycle.

We are 800 employees. I talked about this acquisition that will add another 400, but Joakim will talk about this more in detail.

Headquartered here in beautiful Halmstad, Sweden, but Sweden is a very small market for us. The majority of our business would be Continental Europe, North America and Japan. That's our 3 biggest markets.

Revenue of SEK 3 billion EBIT margin, 25%, and we've been growing around 20% on average per year, the last 10 years. The majority of that had been our organic growth, and then we made a couple of small acquisitions during the years here.

We work with industrial automation, in manufacturing, transportation & infrastructure, power & energy and then we have a smaller it's like 5%, 6%, 7% revenue today in building automation, where it's the communication that is used in HVAC systems in commercial buildings and industrial buildings.

The common denominator is the communication. Communication technology is the same or similar in these industries. We work with 2 types of customers. Makers, [indiscernible] Atlas Copco and ABBs of the world, but also the users that could be Volkswagen or [indiscernible], so the companies that manufacture something that use automation technology.

The majority of our business is in the makers, where we have 44% of our revenue. We've got device manufacturers where we work with [indiscernible] sales with indesign, a very sticky model we have.

We also work with machine builders that we would like to be part of every machines, building material, either in the standard or at least be on their option list. Here, we work with a combination of direct sales and distribution. And then we work more and more with end users. We've done some acquisitions here to be larger in this portion here, and it's now representing 31% of our revenue.

So as you see, we have a quite a good mix of the -- different type of customers. I think Joakim will also talk about the geographic mix we had, a bit later.

We are executing on our 2025 plan where we had 4 original targets with organic growth -- sorry, with organic growth with M&A, with our people agenda, have been high-performing employees, generating loyal customers, but also a very detailed sustainability agenda. We're executing this for -- but for -- since last year, we added 2 things we added operational efficiencies. Actually, there you see in quarter 4 some restructuring costs, where we are taking some measures now to improve our efficiency but also doing some organizational changes. We also work with a sales excellence program, but we see an opportunity to be more -- even more efficient in our sales around the world in our 18 countries where we have direct sales.

So the plan here in 2025, we keep on working with the planet, keep working with the people, keep working with the growth. where we focus a lot now with size-based targets, but also how it can help our customers so they can improve. I mean, we can't count on that in our data, but of course, the nature doesn't care.

We see last year, we saved 1 million ton of CO2 with our customers by using remote access of machine, by using smarter energy system and things like this. This is not on our books, it's on their books, but it's still a contribution that we would like to improve to triple this effect in the coming years.

We talk about a high number of Net Promoter Scores with customers, with employees. We also would like to share -- increase our share with female managers. We are at 22%, 23% right now. Good improvement from previous years, but we need to keep on working with this diversity.

We have new growth ambitions and profitability ambitions, we would like to be 25% EBIT. That's the base. And we keep on working with our pi-billion for 2025. We see that organic growth will make us a more than pi-billion 2025 but the plus stands for acquisitions. And as Joakim will talk, the big acquisition of Red Lion coming up here in Spring will, of course, change our total revenue.

Short business update, as soon as it's a full year, we talk about the yearly design wins. These are customers that we acquire and work with through our design win process, especially, I would say, device manufacturer and some machine builders, very sticky. They integrate our solution deeply into their brains, their electronics and their software. We start with design wins. This means that it takes maybe 12, 18 months for them to be convinced and then integrate our technology, then they go into active base, and we have 1,843 customers in active base.

The active base in our industry could be like 7 to 8 years up to 15 years. This means that they may factor this robot series and keep on selling it for maybe 7, 8 years or in the process industry, the life slightly even longer.

When this product discontinued, not available for sale anymore, we terminate this as a design win. So this is the balance you can see here.

So we see that we keep attracting new design wins, 139 new ones. So we have -- keep on having attractive product offer to win customers, and this accumulates to a base of a good chunk of customers that keep on ordering, of course, based on their needs. So in good times, they order a lot in bad times, they don't order a lot. But it's a steady flow of orders.

And we also see quite a few of terminated design wins. This means that the feeling we have on the market is that people keep on rolling what they have. During COVID, there was a lot of issues with component supplies and not too many developments was made -- new developments, the maintenance of existing products to be able to ship that was the key thing here.

So this works well. We think that the CAGR of 6% year-by-year here is a solid pace, and we are happy with this.

We see that the discussion of order intake normalization, it continues as expected in Europe and Japan, we see this continuing. But the interesting news here is that we are increasing our orders in North America. North America was early into this adjustment, and now they're also early out. So we see this as indicator that we think that these inventory adjustments are in the right -- getting to the end also in the next quarters, probably in Europe and Japan as well.

We spent a lot of time in R&D, especially on Ewon now when we focus on the next-generation products, both on the hardware but also the cloud access here. And we talked about the Red Lion acquisition. We signed 11 of December. Joakim will talk more about this. But we are really excited about the opportunity to become bigger in North America, but also do more cross-selling where we see a lot of synergies in sales between the 2 companies.

If we look at the full year, we talked about the story about order normalization. We see stable design wins, we see that previous years, a challenge in supply have eased. We still have quite high inventory, but we see that our lead times is better. We don't spend a lot of money on buying components from spot market anymore. So things are normalizing here.

We also spent a lot of time in changing ERP system during the year after some hiccups. It's working really well now. We integrate the acquisition of Procentec made some years ago into Anybus and we updated our financial targets. Many of you joined our Capital Markets Day in September.

So we are trying to build a company platform that is ready for growth in the coming years. So 2023 have also been an investment year to build a new [indiscernible] company.

All right. Joakim. We're both sitting here with a bit of cold, but I hope you can -- your voice is still loud and clear.

[Joakim Nideborn, executive]

I hope so. Thank you Staffan. It helps when I get the chance to speak about my 2 favorite topics, the Red Lion acquisition and our numbers.

So let's start with the Red Lion acquisition. And we think when we make an acquisition this large, more than 40% of sales, in HMS. We want ample time to explain what it is we're doing. And also, we've already seen this, but let's take it one more time.

Just a quick overview of the company. So a U.S. company, 84% of sales in the U.S. quite similar to HMS in many ways to a large extent, complementing offers, maybe 90%, 95% complementing and 10% overlap. So the offer is divided in 3 different parts. The one that's called Access, which is industrial gateways, protocol converters, remote access and so on. which is quite similar to the Anybus and Ewon offering that HMS is carrying.

Then we have the second part, which is what's called Connect, which is basically ethernet switches something that we've been after for a couple of years trying to complement our offer with that. I think in ethernet switch, is something you'll find in all installations and we see big opportunities for cross-selling in this area. And also to bring this offer to Europe, we hope we can be successful with that.

And then the last part is the visualization part. Which to the largest extent, human machine interface products. And the main difference between Red Lion and HMS is the main customer groups where HMS in general, are quite strong on the manufacturing floors. And Red Lion has been a bit better in finding more, what can we say, remote applications like different energy sources, water and wastewater oil and gas and those type of applications.

I think we'll have a good chance of cross-selling to some of those areas as well. The company has been around since 1972, about 400 employees, out of which 300 is in the U.S., 4 development centers, 2 in the U.S., 1 in Germany, 1 in India. It's also a pretty good mix there. And what we're really keen on is to try to utilize the strong distributor network that they have in North America that will allow us better access to the local market there.

From a financial perspective, about SEK 1.4 billion in the last 12 months ending in Q3 2023. 55% gross margin, so strong gross margins. The reason why it's a little bit lower than HMS, we feel is that they go through distribution to a very large extent. And of course, there is a middle man that needs to make some money as well. Otherwise, we see a strong and very popular product offering.

And this comes down to solid EBITDA margins of 21%. And obviously, this is something we want to work with to start to push it towards our 25% target.

The rationale for the acquisitions, I think I touched upon it already, mainly 2 things. One is the geographic presence to get a stronger footprint in the U.S. and to create a platform to build from -- also with American-made products. But also to get this wider product offering and potentially move slightly upwards in the value chain with that.

We also see a surprisingly strong culture fit, we must say. We're really happy to see this when we've been talking to management and visiting the sites that we think quite like in how we treat each other, treat people and want to make people to grow and so on. So that's very nice to see.

Yes, some financial aspects as well. So we signed a binding agreement on December 11. We paid USD 345 million, about SEK 3.6 billion. And of course, on enterprise value basis. We think when we look at the numbers, this will be accretive to the EPS basically from day 1. And we're seeing full close in early Q2, most likely at this point in time. We're through the antitrust filing. So that went well. And we had this foreign investment approval that is pending that we think we'll get in a few months' time.

And I think Staffan touched upon already, we'll take up $225 million worth of new debt. And actually today, we're going to hold an extra AGM to mandate the Board to issue some new shares to cover that USD 120 million financing that we're going to have replaced by equity.

So this will -- in terms of leverage, this will end up somewhere around 2x net debt to EBITDA when the share issue has been done, and that will be done after closing.

All right, that was Red Lion. Let's have a look on the financials, and I'll start maybe on the most interesting topic this time, the order intake. And maybe as the first comment is, it's not as bad as it looks when you see this. You're looking at this graph to the upper left that used to be really good looking is now starting to look not so nice anymore.

I think we expected this to happen. We're a little bit surprised that it happened so quickly after second quarter 2023, this order normalization. And we see organic decline now by 34%, giving a total order intake of SEK 426 million. And then we also need to keep in mind that the Swedish krona has actually strengthened, which is impacting this negatively for us, having a lot of the order book in euros and dollars.

For the full year, SEK 2.3 billion in order intake, you'll see in a second, that we had SEK 3 billion in sales obviously, a big difference there, and that's -- this is really this normalization of the order book that we're seeing.

I'll try to talk through this on the next slide to give you some more clarity and what we feel is happening. But before that, maybe just to highlight, I think Staffan touched upon it already, it's a little bit of a different picture looking in different geographies where we see maybe in Europe as worse as we believe it's going to get in Q4. It's been escalating a little bit since Q3 on this order normalization.

Japan is also at similar levels as we saw in Q3. Whereas in the U.S., we see a bit of a trend shift where we are significantly up versus Q2 and also slightly upwards as Q3. So we think that most of this destocking has been done in the U.S., and we see -- when we look at the point of sale to what our distributors actually push to the market. We see a growth in those numbers. So that's quite positive. And we think we're going to see much better development during 2024 in the U.S.

And then it's not too bad that we get a big acquisition coming in to support also in times when maybe the European market, which is our biggest market, will be a bit weaker, at least at the start of the year.

But to try to explain to you what we believe we're seeing. We've been talking to probably 100-plus of our largest customers to see what they are actually doing, how do they see upon the future. And it's pretty clear that they are a bit hesitant and they are as we write the report in a way to see mode what's going to happen on their demand some have destocking that they need to get done. I mean, we're in the same position ourselves. We carry a little bit too much inventory at the time. And maybe the reason for that is that we've been so keen on being able to deliver. So we've been taking on a bit too much. Not a huge problem, not great for the cash flow short term, but we'll get that sorted.

And for the underlying demand, if I now get to that, we see that -- you've been seeing this graph now with us for many, many quarters. And they reported SEK 426 million, we see maybe some SEK 618 million in underlying demand.

And then we adjust SEK 42 million, which is a revaluation of the order book, where the -- the Swedish Krona is now getting stronger. So that's not really any new orders that is impacting just the existing order book that is revalued.

And we have this destocking effect that we expect to be -- or estimated to be about SEK 150 million after these discussions with our top 100 customers.

Of course, that's not a precise science, but it's the best estimate we can do and what we've been trying to do through this whole period just to give you the best feeling for what the underlying market is like.

So if you believe in this, you see that it's for sure, the market is down a little bit, but it's not like when you see the numbers in the report, and you think, Jesus, what's going on it's a small decline that we're seeing. And we think that we might see that for another quarter or 2 as well before we see a big jump up.

Just to put it in a different perspective, comparing -- making a bridge from Q4 2022 to Q4 '23, we were starting to normalize the 2022 number going from the SEK 718 million to the left, adjusting for the boost effect that we saw in Q4 2022 to a normalized level of SEK 633 million.

And then if I go to the very right in the graph from the reported SEK 426 million in Q4 this year, adding back the revaluation of backlog, adding back the destocking to get to the SEK 618 million. If you buy these concept, you see that we're down some 2% in underlying market demand.

Of course, everybody can have their own view on this, but this is our best estimate of what we feel is going on in the market at the moment.

Going over to the sales, slightly different curve, quite stable, as we say. I think stable is the exact word that we use. Quite happy with SEK 760 million in sales in Q4. And the reason for this number is, of course, that we have this built up order book that's been with our means quite big that we can use to deliver out. So we use another SEK 300 million [ partly ] from the order book on top of the order intake to get to this number.

We need to keep in mind when you do the year-on-year comparison, that Q4 2022, as you also see in the graph, was extremely strong. By far the best quarter in 2022. So some people might be a bit surprised that we have organic decline in sales minus 3% from quarter-to-quarter. And I think for the full year, we're still up 15% in sales. So I think when we summarize the year, I think we would put a good year to the books and with over SEK 3 billion in sales for the first time. So quite happy with that, actually.

I think we've had also on the sales. Americas is doing well. Japan has been doing well with a big order book. A small slowdown in Europe. And I mean, we're going to have -- we will talk about that when we look at the outlook. We'll have a bit more challenging on the sales from the next quarter or two given that the order book is now getting a bit smaller. So I'll talk a bit more about that on this slide.

So to the left, looking at the order book. If we take maybe the first step to look at is the closing level for 2022, that was about SEK 1.4 billion. And now we've been seeing this pretty dramatic reduction throughout the year and the second part of 2023, primarily. And in Q4, you also see the SEK 300 million reduction from previous quarter.

We see now that the order book is coming back to more normal levels. And if you look on the right side to the graph, we have been looking at this metric backlog divided by rolling 12 months net sales. You also see that we started before the component shortage we were about 0.18 0.17, something like that, and now we're down to 0.26 having been on 0.65 in mid-2022. So it's been, again, a pretty rapid reduction here not necessarily bad. It is going quickly. It means that we can come back to growth faster.

But just to show that now, I think we're starting to get to the level where we should be, so there's not too much extra to take from now we need to see the order intake coming back to support the sales.

Looking at the sales bit per region. The U.S. had a better quarter as we touched upon, a little bit weaker in -- we normally see in Europe, 59% of sales, normally 60%, 62%, something like that. And then APAC, about 18% of sales.

Talking about the profitability, I think all in all, we get to a pretty good number. There are some adjustment items to comment on. So we do adjusted margins of 25.3% in the quarter with an adjusted EBITA of SEK 193 million. For the full year, adjusted EBITDA of SEK 777 million like the airplane easy to remember and 25.7%. So we're happy to see that we meet actually financial targets of 25% in EBIT for both the quarter and the year.

The one main driver to that has been the continued strength in the gross margin, where we reach 65.3% in Q4 and 65% for the year, compared to 63.6% in Q4 last year. So we've seen an improvement throughout the year, and -- yes, I think we've been doing a decent job to navigate through this price situation that's been going up and down for the last 2 years. And good to see we can come out on top.

Of course, I should say also that we have some help from currency here, and we have some help from the fact that we're getting some economy of scale also good that we can utilize that. But that is also drivers to this improved margins.

Looking at the OpEx. You might have noted that the growth rate has come down quite a bit in Q4 compared to previous quarters in the year, where we have been 20%, 25% up. We only have a 3% organic increase in OpEx if we adjust for a small restructuring program that we ran with a restructuring cost of SEK 7 million, where we primarily -- we've taken out some synergies and integration of Procentec that we've been working on throughout the year, especially on the sales organization in Europe, where we see we can do this a bit more efficiently.

And then we have SEK 70 million of acquisition costs related to the Red Lion acquisition that we also adjust for. So 3% organic increase in OpEx and you've seen 20% plus throughout the year. For the full year, we're still 20% up -- sorry, 20% up in organic OpEx increase. And of course, for 2024, we'll be a lot more careful.

We will still have -- we'll still see a small increase in OpEx for 2024. But it will be maybe mid-single digits or something like that. But we have been a bit more cost cautious going forward. And I think we've also been through some of the investments to larger extent in 2023 with ERP system that we'll be rolling out, taking also a lot of cost over the P&L and some investments in the sales organization around the world.

Earnings per share to SEK 2.36 in earnings per share, SEK 2.86 adjusted in Q4. And for the full year, we had SEK 12.23 and SEK 12.73 adjusted. Based on this, the Board came to the proposal of SEK 4.4 for dividend for 2023. I think Staffan commented on this already 10% up versus last year.

And maybe actually I also briefly mentioned that we have a pretty big net financial item in Q4 where we have the Swedish krona -- the strengthening of the Swedish Krona is making some of the impact some revaluation of internal balances. So that's pretty much the domain on the net financials.

Cash flow, SEK 119 million and the cash conversion, that is a bit lower than what we would have hoped for. I think the main -- the reason is the same as it was the last 2, 3 quarters that we still see a bit of a buildup on inventory. So we've placed a lot of orders during 2022 when -- that we can't cancel, we can't reschedule. So we need to take all the volumes.

And I think we'll have a bit of a challenge with this going forward. So we would like to take the inventory down from these levels. I think we will have a difficult time doing that for the coming quarter, maybe even 2 quarters will be challenging. But then we should see a bit of a working capital release towards the end of 2024.

And again, I think the driver of this is that we've really been keen on getting delivered performance up. So I think that's positive, and we managed to do that and get the sales going in the right direction, but maybe we'll be a bit too optimistic in some of those forecasts. We'll work on that, not a big problem, a bit of a cash constraint in the short term. That's all.

For the full year, cash flow of SEK 519 million. And also here, you see a pretty big inventory buildup of SEK 227 million. That is, of course, impacting, where a big part of that can be released, we believe, in next year -- or sorry, in this year, of course, we're already in January.

So going to the balance sheet. Not a lot of happening here since last time we have interest-bearing net cash, if you can call it that, with SEK 99 million. And then we have the leasing debt of SEK 261 million, and that's related to our option for the overseas 20% that we do not own SEK 127 million. So I think this is all good, and this will be looking a lot differently in the quarter 2 when we get the acquisition in, then we can talk more about this.

And then just to wrap this up before we hand over to questions, a quick summary of 2023. The main items that you should take away, what we have been seeing now especially in the second half, is this big order intake normalization, also been reducing our backlog drastically with some SEK 630 million.

I think we must say that the execution has been solid on the net sales, the 15% organic growth, do more than SEK 3 billion in sales. The gross margin improvements of 2 percentage points to 65%, quite happy with that.

Adjusted EBIT of SEK 777 million reaching the target of 25%. Dividend increased by 10%. We have the nice acquisition of Red Lion that we signed in December 11. So I think those were maybe the main takeaways for 2023.

And now I think we hand over to operator and see if we have any questions from the call.

[Operator]

[Operator Instructions] The next question comes from Simon Granath from ABG Sundal Collier.

[Simon Granath, analyst]

Congrats on the solid ending to 2023, particularly in terms of orders -- earnings. And firstly, on the U.S., you say that orders have started to recover. Does this mean underlying as well? Or is it mainly from lower destockings? I'm trying to grasp the situation around underlying demand in the U.S., a market that seems to be much healthier than Europe currently. And perhaps a follow-up to that is around change in demand in China.

[Joakim Nideborn, executive]

Yes. Maybe if we start with the U.S. question. I think it's a little bit a million dollar question that you asked, what is it [indiscernible] that's driving. I think what we see is that our distributors and some of the main customers are not destocking anymore. And I think I imagine as well at the point of sale -- so the volumes that our distributors actually sell into the market, that is increasing. So I think we see that the underlying market has started to move in the right direction for the first time in a couple of quarters.

And exactly what is driving everything. I think that's difficult to say. And I think -- well, I don't think we know more than what I just said. And then what was the other question around China?

[Simon Granath, analyst]

Yes, exactly. You did mention in conjunction with Q3 that demand had softened somewhat in China. So I'm also trying to understand any change in sentiment in China.

[Staffan Dahlstrom, executive]

Staffan here. I think we see the same thing that China is weaker. I wouldn't say to see a change there. It's stable on this new lower level. It's a fairly small part of our -- we have some 4% in China as well. But we try to understand also is that we have some Central European companies that have quite an activity in China as well. So in -- so we are having indirect exposure as well. We see a quite soft market like in Germany at the moment. Part of that is probably that the Chinese market for the Germans are quite soft. But I wouldn't say it's changed in -- neither direction for quarter 3. It's just the same as we saw them.

[Joakim Nideborn, executive]

Yes, I agree. I think maybe we can put it like this. I think 2023 in general has been quite weak in China. That's for sure. So I think we're in a good position to see growth in 2024 with the over optimism that we saw from -- basically from 2022, going into 2023 in China. Where the economy did not develop at all as expected.

[Simon Granath, analyst]

That's helpful. And on demand in terms of deliveries from your customers, currently, your order book remains strong, but with the recent somewhat slowdown in some of your markets. Does this also mean that some customers are pushing deliveries on historically placed orders? It didn't seem to be the case in Q4, but perhaps something to expect for H1?

[Staffan Dahlstrom, executive]

Nothing general that we -- most customers -- we normally don't allow this kind of cancellation. We don't allow -- we are practical with some customers. So we see some maybe delays. But I wouldn't say it's a general theme again, maybe some German customers are more negative than others, but we see some ask for postponed deliveries. Sometimes we say yes, sometimes we say no. So it's a mixed bag, but not a general theme.

[Joakim Nideborn, executive]

Just a quick question for me to operator. Is the line good from our side. I got a line quality warning.

[Staffan Dahlstrom, executive]

It is really bad. We can't reach the operator.

[Operator]

The next question comes from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

You can hear me at least.

[Joakim Nideborn, executive]

Yes, we can hear you. Loud and clear .

[Joachim Gunell, analyst]

Lovely. No, your line isn't that time, to be frank. But -- can you talk about -- I mean, in light of the backlog dynamics you highlighted. How should we think about the net sales trajectory for, say, Q1, Q2 on the basis of what you described?

[Staffan Dahlstrom, executive]

I think we give you a lot of data about what we think. And I think that's what we are thinking, and we are really transparent about this, but that conclusion, I think we will not comment on that further, I think.

[Joachim Gunell, analyst]

Okay. Are there any meaningful differences in terms of do you expected market recovery or growth trends that you expect across your different brands going into next year?

[Staffan Dahlstrom, executive]

I think I think if we look in 2023 from a brand point of view, Anybus and this embedded things that represent a quite big part of the order book, that's been quite positive. I think what we've been suffering is the Ewon revenue has been a disappointment through the years. That's a lot related to much more inventory buildup at our distributors than we expected.

And I think also it's a double effect that some large customers and our distributors have both had high inventory. There was like a double effect there. And I think we underestimated that effect. So from a revenue point of view, 2023, Ewon was a disappointment, which means we see an opportunity for 2024, that, that revenue will probably pick up faster because the shelves at our distributors will be much more empty than before.

[Joachim Gunell, analyst]

That's helpful. And perhaps a question for you Joakim, you seem very excited about Red Lion. So can you just talk about how you envision Red Lion being accretive to the overall growth profile of HMS and ultimately, earnings both over, say, kind of the short-term time frame 2024, 2025. But I mean, based on the investments that you will take now, how this should basically impact group overall growth and profitability from, call it, more midterm time frame? .

[Joakim Nideborn, executive]

I like the question, but I'm not sure if I will answer it. It's -- I think we have a lot of opportunities to cross-sell some parts of this offering. And as I touched upon this before, the switches in Europe, we see potential and then just to utilize the line channels for our products in the U.S. to get a completely different access to that market and also to have that platform to build from that we have in with Red Lion. For instance, as a potential of making more smaller acquisitions in the U.S. to have something to integrate that into, I think that's also a possibility.

And then we get the manufacturing site, and we've already said we'll do some investments in that site to have this made in the U.S. to be able to utilize on that. And I think that's also positive. To touch on what growth numbers we will see for the future, I think we said when we made the acquisition that we will not be able to comment on recent growth for Red Lion until the deal is closed, out of respect for factories, to current owners. So I think we have to pass on that.

And I think for the EPS accretion you have enough information in the press release to , I think, within 10, 15 minutes to get a fair idea of what accretion will be. So I'll leave it to you, with your calculate to get that number.

[Staffan Dahlstrom, executive]

Joakim, could you just share a little bit of view on how we see this now after meeting them. We still haven't got our -- the keys yet, so we don't know all the details. But I think it's quite clear for us that for the first phase here, let's say, this is from closing the rest of 2024, we call this stabilized. It's important for us to making sure that we stabilize their customers, their staff, their supply. So I think we will want to do a lot of transformative things with their business in 2024, [ we need to ] stabilize this.

After that stabilization phase, we go into what we call growth and profitability. Maybe this is 2025. Where we see a lot of opportunities in cross-selling, operational efficiency, synchronizing, purchasing of material and things like this. But I would say this is not for 2024. It will take a longer time to get that.

So I think we just want to make sure that we don't have -- we have no expectation this to be a quick win. We see good opportunities, but the challenge is really to grow the common top line, I think, because their profitability is good, but they have been on the single-digit organic growth before. We need to help them to get faster growth for the next 3, 4 years, I think. So that's how we see our -- the time frames.

[Operator]

The next question comes from Christian Newman from Danske Bank.

[Unknown Analyst]

Christian here from Danske Bank, covering from -- for Victor, can you hear me?

[Staffan Dahlstrom, executive]

Yes.

[Unknown Analyst]

Yes. So would you say that it's fair to assume that Red Lion P&L dynamics will mimic that of HMS? Or will they like face another trade story?

[Joakim Nideborn, executive]

I'm not sure if I fully understood, but I think in terms of what we see in the market right now, I think we've seen at least looking at the last year that the -- what we've been seeing in the U.S. in HMS in demand and so on has been very similar to what Red Lion has been going through with order boost, order normalization and so on. But maybe that's not what you were after.

[Unknown Analyst]

Yes. I was more thinking about -- like the destocking that will affect the EBIT negatively in H1 and the easier comps in the second half of the year.

[Joakim Nideborn, executive]

Right. So I think the -- we're commenting again on that, that for our U.S. business, we've been seeing some improvement now in Q4. And we hope that 2024 will also get to a better start in the U.S. I think we see the same -- expect a similar situation for the Red Lion business. So that's helpful in a way.

[Unknown Analyst]

Okay. And then just a small detailed question on the acquisition. So is the equity component of SEK 120 million. Is that fixed? And also, what is your best guess on the interest part or the debt part?

[Joakim Nideborn, executive]

Yes. I think the SEK 120 million, it's pretty much fixed. Of course, we'll do the -- share [indiscernible] will be in Swedish Kronas. I mean, of course, it's depending on the exchange rate between dollars and kronas since the debt will be drawn in dollars in that sense, but at $120 million. But it will be equivalent to the $120 million.

And then the exchange rate, we've decided to not go fully transparent with that. But I think you can get a pretty fair understanding on looking at it. We will take a part of that EBITDA in dollars and part of that will be in euros. And then you can look at the going rates and add some margin to that, you get a pretty good feeling I think.

[Operator]

The next question comes from Gustav Berneblad from Nordea.

[Gustav Berneblad, analyst]

Just a couple of questions here. And if we start with sort of the EBIT margin. Do you expect this to normalize going forward? Or should we expect a Q4 where we are seeing sort of these levels going forward? Because, I mean, looking in the past, it has been quite lower. But during these 2 last years, it has been around 25%. So just if you can comment on that, please.

[Joakim Nideborn, executive]

So I think we -- we've been doing -- it's a good question. I think we've been doing some work to get it to move north for sure. And that we think -- obviously, we have a very solid year 2022 and 2023 in the bank. And with what -- I guess, we're flagging for, it's a bit of a tougher -- at least tougher start to 2024. Of course, if the top line were to go down a little bit, it would be challenging to maintain the margins on the 25%.

We'll do some smart things to try to cover it with a bit of a lower OpEx increase, but there will still be an increase. So that will, of course, put some pressure to it. At the same time, we want to be -- we think we're in a good space with the company. We think we have -- we're doing some decent investments, and we don't want to stop that. So I think we'll be fine with seeing a bit of a drop for the 25% in the short run.

And then that's still the target to go to the 25%. But it's a target, not a guarantee that every year will be 25%. So we're still working towards that in the longer run, but there might be a quarter 2 where we'll have difficulty to meet that.

[Gustav Berneblad, analyst]

Yes. Okay. That's helpful. And then maybe if you can just comment on the SEK 9 million in other operating income that seems to not be treated as a nonrecurring item. So if you can just give some flavor on that one.

[Joakim Nideborn, executive]

That is also currency revaluations to some internal balances. So it's -- part of that comes in net financials and some part of that comes in the EBIT results. So it will not be recurring if the currency rates stay flat, but you never know what's going to happen with that. Earlier, we've been seeing some losses there. So it's -- I think it is even outs a little bit.

[Gustav Berneblad, analyst]

Okay. Perfect. And then just the last one here. I mean, in terms of the slower order intake, you have been giving a lot of details there, but given that you have a good dialogue with your customers, is it possible to sort of give anything on what end markets are more depressed right now or anything what you're hearing from your customers?

[Staffan Dahlstrom, executive]

That's a really good question. And we -- as Joakim said, we're talking to quite many of our customers, especially the large one, and that's why we say that it's a little bit of wait and see because, of course, they want to manage their inventory and their cash flow on these things.

But they are also a little bit concerned about how strong is the market, especially, I would say, in Europe. I wouldn't say that -- when we look on this, I don't see that we are so negative on the market. The underlying market should be quite good for us. But as I said, customers are a little bit waiting because they also expect that our lead times and other vendors' lead times will be much lower. So they think if they see a pickup, they expect the suppliers to be keen on delivery.

So I think maybe actually this kind of recent events in Red Sea with longer transportation, maybe that will also change some of this thinking with customers that they may not fully expect that everything will come, the way they want it later. So let's see how it goes. But the underlying market demand, we think is pretty okay.

[Operator]

The next question comes from Simon Granath from ABG Sundal Collier.

[Simon Granath, analyst]

I was cut off earlier before I was able to respond to your question. But nonetheless, on Red Lion. A question for Staffan, who has been navigating this ship for quite some time. What made you take the decision to how's your offering now with ethernet switches. Perhaps a Red Lion is about the full product and also market switch. I presume that ethernet switch has played a large role in it on trying to grasp whether anything has changed in the market or in your company over recent years that has made you take the decision to expand into this product area as you have historically have not spoken too much about it.

[Staffan Dahlstrom, executive]

Exactly. Good question. I think -- when we look at this for maybe 5 years ago, we saw that -- I mean, ethernet switches are that's crowded market, kind of -- there are so many other vendors and there's price pressure. I think what we see in the market, and this is also related to our acquisition of Procentec that the switch is a component where you also do a lot of potential diagnostics, potential even cybersecurity things to how to distribute traffic inside of factory. So I think we reevaluate our view of the strategic importance of the switch. So I think that is one thing.

But we also see with many of our customers that -- and this is an essential component in many of the installations and not having that was leaving some kind of gap in our offer. So I think both that we are missing this key component but also that we reevaluated our view of how -- that this may not only be a commodity or standard item, there's potential to develop the functionality in these products.

So I think these are the two combinations of our -- yes, a little bit updated view on it.

[Simon Granath, analyst]

Very good. That's much helpful. And then I also have a follow-up on costs, which were a little bit lower than I anticipated. Have you made any efforts to strengthen profitability here, perhaps around marketing activities as I do not see your head count coming down?

[Joakim Nideborn, executive]

No, I wouldn't say that. I think we'll -- as I said before, we'll still have an increase in 2024, but we will be cautious, and we will we're really taking the investments that we need to do that we're [indiscernible] how the best pay off and rest. We're waiting to see how everything develops. But nothing that we're trying to save cost in Q4.

[Simon Granath, analyst]

And as a final question for me. On net working capital, you also made some helpful colors on the outlook ahead. But would you expect a net working capital release for the full year 2024 still?

[Joakim Nideborn, executive]

Yes, I would.

[Operator]

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

[Staffan Dahlstrom, executive]

Thank you very much for attending this quarter 4 call. Exciting times for us, especially now with the acquisition of Red Lion. I think also what's clear for us is that, there are some ups and downs, but in the quarters, but we have a solid outlook when it comes to digitalization in manufacturing, new opportunities. We are quite excited about the coming years, and we stick to our long-term vision for the company. And we think we have a good access to a very interesting market for the coming years. So we remain positive and keep a little bit of extra carefulness on the cost side for the coming quarter, I think.

We made a lot of investment in 2023. Now it's time to harvest some of these effects of these new investments. And we look forward to talk more about the coming quarters, especially after we have closing on Red Lion. So have a good winter time here and look forward to hear more from you and communicate more in spring time. Thank you, and goodbye.