Mycronic AB (publ)

STO:MYCR

Earnings Call Transcript 2021-Q1

[Tobias Bulow, Director of Investor Relations]

Good morning, and warm welcome to Mycronic's First Quarter 2021. My name is Tobias Bulow, and I'm heading Investor Relations. With me today, here in Stockholm, I have the Mycronic President and CEO, Anders Lindqvist; as well as our CFO, Torbjörn Wingårdh. [Operator Instructions] We will end at latest 11:00. And for your information, this session will also be uploaded as on demand on the web. With that, I leave over to Anders.

[Anders Lindqvist, President & CEO]

Okay. Thank you very much, Tobias. So today, we would like to present an agenda looking like this. Of course, talk about the quarter a little bit in short with the new operating model we have when we run the business through 4 different divisions. We will go deeper in that as well. And Torbjörn will give you a detailed view on the financials. We will end up with talking about our strong platform for future growth and then ending with the question-and-answer session as Tobias just explained. But first, talking about what we do at Mycronic. So at Mycronic, we make it possible for our customers and our partners to develop products based on the latest technology within electronics. And it's therefore that we're saying that, together, we are bringing tomorrow's electronics to life. If we move into the quarter and the result, you could see that we had a very high relative growth of 75% compared to the same quarter last year. And it's a little bit what I usually call a mathematical effect because it's partly because of the comparative quarter, last year was a very strong quarter -- very weak -- sorry, the opposite. It was a very weak quarter. And in this year, we had a very strong quarter on the sales. And therefore, of course, the relative growth look very strong. And we had a good -- a very good sales in the quarter. We had a delivery of 3 mask writers from the PG division, including a high-value mask writer being in the Prexision 800 Evo. We had a very strong performance in the HV division. And also good -- reasonably good performance in the other divisions. Because of the product mix, especially because of the delivery of the high-value Prexision mask writer, the EBIT came out very strong at SEK 498 million, corresponding to a margin of 39%. But we also had a very good performance in the other divisions. And in the former Assembly Solutions divisions, which was the model that we used until April last year, we have made -- we announced a target last year that we want to reach an EBIT to be about 10% for this year, and we actually recorded an EBIT of 13% in the former Assembly Solutions. And also, all this, despite headwind, where we had a negative currency effect of SEK 90 million in the sale -- for sales in the quarter. If you look on the order intake. And here, we are comparing to a quarter which had very high order intake last year. The order intake last year, we had 5 mask writers. And the order intake this quarter was SEK 1.027 billion, which is quite a normal number, I would say. And I think it's quite a good number as well. If you see our guidance for this year is to deliver revenue of SEK 3.9 billion. And then you can see that the order intake of SEK 1.027 billion is supporting that quite well. And that is without any display -- any high-value orders in the Pattern Generators division. But anyway, we had very good orders in the High Flex division, especially in North America and China. We have 2 orders of SLX mask writers for the semicon industry in PG. And we have a very good momentum in the High Volume business in China driven by the automation trend. And the backlog is then, of course, reduced because of the high sales and the lesser order intake to SEK 1.7 billion coming from SEK 2.7 billion and consist of, at the quarter, of 12 mask writers. If we move into the divisional view. And since a year ago, we changed our operating model. And now we drive the business in 4 different divisions in a very decentralized way. And the reason is to get closer to our customers, having a short decision-making paths and be much quickly on reacting and really realizing the full potential of every business. So starting with Pattern Generators. So as said, we had very good deliveries, 1 Prexision 800, which is an Evo, which is a high-value machine, the first Prexision Lite 8 Evo and also 1 SLX machine, so that was a very strong quarter. And of course, the -- it's not possible really in the PG division to make comparisons between quarters because the deliveries are a little bit up and down all the time, so it needs to be viewed in a longer view. And on the order intake, we had 2 SLX machines, and that should be compared to 5 mask writers last year. So, of course, that was the reason behind the decline. On the backlog, it's down to SEK 800 million coming from SEK 1.9 billion in that case. And in the backlog, we have also a change in delivery, which is 1 SLX machine that should have been delivered in the first half of this year, that is now moved to the third quarter. And in the backlog, as of now, we have actually 13 systems. I said we have 12 systems in the quarter 1, but we also received an order in early April for an SLX machine. So now we have 13 systems to be delivered from the backlog in the future. So in the High Flex division, we see a good development and also an improved demand. And we see this demand being sequentially improved. So from a low point that was somewhere mid last year, we have seen that quarter by -- or month-by-month -- actually, quarter-by-quarter, we have seen an improved demand. And this has been especially visible in the U.S.A. and in China. And we also have a very good improvement on the result. When we announced this target of being about 10% in the Assembly Solutions division, a lot of that was coming from efficiency measures. And we have done a lot of activities to improve cost efficiency in this division. And it has been difficult to see the effect of that because we also had a decline of revenue during last year. But now when revenues start to pick up, again, we clearly see the effect, and we are very happy with this improvement.So we recorded an EBIT of SEK 35 million for the quarter, which is equal to a 13% margin. And also just compared to the same quarter last year, the order intake is flat. But comparing it to the previous quarters, it's actually improving. We -- and that improvement, as I said, is mainly coming from U.S. and China, and Eastern Europe is extremely slow at the moment in this division.If we move in to the High Volume division. So this is mainly selling and dispensing equipment and it's mainly active in the Chinese market. We have a very strong performance. We have a very strong domestic market and domestic market is China, in general, in this case. You see that the automation trend that is ongoing in China, it's really increasing the confidence in doing investments. The order intake increased by 46% compared to the same quarter last year. And we are improving our positions and also gaining share in this market. And the growth of sales was 67% and EBIT is following very nicely. So we have 64% up and corresponding to a 24% margin. So I think we see a very strong continued performance in this High Volume division. We are, of course, very happy with that. Then we have a division, Global Technologies, where we currently have 2 lines of business. And one of this business line is, we call it, camera module assembly, which is mainly for the automotive market. And the automotive market has been very slow. So last year was really bad for this line of business. But we have seen a recent pickup in the automotive business, but still from a very low level. We actually also have started to see sales outside of the automotive, as an example, in the drone market, where the same technology is also possible to use. The other line of business is optoelectronics. And in the quarter, we had a very strong U.S. market, very much driven by needs in data communication, fueled by 5G and cloud investments. So that has been very strong. We are usually very strong in China. It was a little bit slower in the quarter, but it improved towards the end of the quarter. Actually, so that we saw an improvement. Still the result is not very good here, recorded minus SEK 14 million in EBIT, which is actually an improvement from the same quarter last year, but still not good, of course. And we have actions in the pipe to improve. That should be visible a little bit later this year. Also, this division is the one where we have the biggest impact from potential trade conflicts between countries and companies. Of course, which is, so far, haven't had a major impact, but of course, this is increasing the uncertainty of our business here. If we look a little bit on our long-term target. We feel very confident still with them. So we confirm our long-term targets. And one of them is that we should reach a sales of SEK 5 billion, and that is not later than the year 2023. We should have a profitability, which -- it's above 15% EBIT over a business cycle. So this is on average in the cycle. And a capital structure that is -- where the net debt is less than 3x. We are far away from that at the moment. On the short term targets, we confirm them as well, and this is -- this year, we want to reach sales of SEK 3.9 billion. And this SEK 3.9 billion, I have also said and that we said also when we did the guidance, the first time that this is in the currency -- at the currency levels that was existing at the end of 2020 -- or end December, actually, 2020. So you can have that in mind also when you want to recalibrate on that one. And another short-term target is that this year, during 2021, we should be -- we want to be above 10% in EBIT margin for the former Assembly Solutions divisions, that was called the Business Area Assembly Solution in the past. And we work through the quarter. And of course, this is really a minimum. So we are very happy to see that we are above this level currently. So with that, I will now hand over to Torbjörn here to go a little bit more in detail on the financial side. Thank you.

[Torbjörn Wingårdh, Chief Financial Officer]

Thank you very much, Anders. So in terms of net sales and EBIT margin on a rolling 12-month basis, our net sales rolling 12 months amounted to SEK 4.437 billion, which was a very good level, and thanks then to this very strong first quarter. The EBIT margin in the first quarter was 39% and on a -- or only 12-month basis, it was 30%. So in addition then to the strong performance from PG, we also see a positive margin development from improving performance in High Flex and also improving in High Volume, which already was at a very good level. And as you see here in this graph that aftermarket provides a stable base of recurring revenue for our business and for the group. Looking then at the last year compared to this year, we see then the very strong volume with the effect from Pattern Generators and also from High Volume. And the cost increase we see here is in line with those volume increase. Our R&D investments in [ interim ] was stable. And we have also seen on the selling side that we have cost savings from travel restrictions and less industry fairs, which in the short perspective, of course, saves costs, but then longer term, it can be a challenge, which we try to work around as much as possible under the current circumstances.You all know that we are now presenting the segments in terms of our divisions, which is new then, and is related to the organizational change we did last year. We have -- we see here then the very strong difference and positive difference between last year's first quarter and this year's quarter related to the strong deliveries within Pattern Generators. As Anders have commented on previously, also, we are very satisfied to see the improvement on High Flex and that now it's starting to show all the good actions that has been taken in terms of their performance during last year are now showing in these volumes that we can see here in the first quarter.High Volume already performing on a good level, also show an improvement year-over-year. And we are very satisfied to see that Global Technologies coming into an improvement compared to what they have done before. And as Anders commented, actions are being implemented in that division to improve performance. And the cost for group functions is at a stable level. All this resulting in a 39% EBIT margin for this quarter. In terms of R&D for innovation and growth, we saw a decrease in R&D spending from quarter 1 2020. And we always have a stringent approach to our R&D investments in terms of having solid business cases when we do investments here. We also have seen with the distributed organization, the reorganization last year, that more responsibility is taken by the divisions in terms of making the right decisions. And we find that, that is a good effect, and we then see the R&D spend, a decrease, which is not necessarily the level that we'll find ourselves going forward. It's connected to the amount of R&D investment opportunities we see. Low levels of capitalization and amortization during the quarter. And then the resulting R&D cost to sales ratio was 11.5%, then a decrease for the 14 -- compared to the 14.2% last year. We end the quarter with a very strong cash position of a bit more than SEK 1.6 billion. We had a slight increase in working capital, primarily driven by lower advances for customers, which is a result of the deliveries within the PG division. We also acquired a minority interest in one of our subsidiaries within the HV division, and that included then an outflow of SEK 39 million. And the net cash position then is SEK 1.4 billion. So we feel -- on a very good footing in terms of the active M&A strategy as part of our growth strategy that we have communicated several times before. And with that, I'd like to give the word back to you, Anders.

[Anders Lindqvist, President & CEO]

Okay. Thank you very much. So I will conclude the presentation. So we feel that we have a very good foundations for continued strong performance. We have a solid -- it remains solid. Could see that the new organization that has now actually been in place then more than a year because the implementation, the starting date was April 1 last year. You see that the results have started to come because of the customer-centric scalable decentralized organization. And I think it was especially good during the pandemic, which is still out there, obviously, but I think we have managed that in a very good way and very much thanks to the decentralized way of working, we could take fast and good decisions. If you look on the product portfolio, we have a very competitive product portfolio. And we continue to invest to keep it competitive for the future as well. And there is no change in our attitude to this at all. In the growth plan that we have, acquisitions is a part -- or a part of that, of course. Obviously, we haven't done one in a while now, but it's -- they're really ready to do it. As Torbjörn said, we have good funding, good -- we have the means to do it, of course, but it has to make sense and it has to add value to our business. And of course, being selective in that -- it doesn't happen really every day, but this is really something that we have on the radar and it's included in the strategy, to grow by meaningful and good acquisitions. And finally, we have a very strong culture being innovative, dynamic and responsible and customer-centric as well, which is a very good base for us to deliver the future results. So by that, I feel really that we have a very good position to continue to be successful and continue our strong performance. So that's ending the part of the presentation. I hand over to Tobias again here.

[Tobias Bulow, Director of Investor Relations]

Thank you, Anders. And with that, we conclude the presentation and then move over to the Q&A session. So operator, please go ahead.

[Operator]

[Operator Instructions] And our first question comes from the line of Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congrats to a very solid earnings in the quarter. I had a question on the -- you could talk anything about visibility of the Pattern Generators, especially on the display side. As you mentioned, you had a very good order intake on the SLX side, IC side, while less so in display. And I was thinking if you could share with us some of the market dynamics that you see. Are there any technology shifts already in the AMOLED? Or is it, more temporary impact from all the OEM, let's say, turbulence in Huawei and LG, et cetera, that impact short term? So how should we think on the visibility for the display will be great if you can elaborate a bit.

[Anders Lindqvist, President & CEO]

Okay. Yes, thank you. I was expecting that, of course, that should happen. So I think, first of all, there's no conflict in between SLX and display, right? As the semicon market segment is isolated from the display one. So we could -- to be successful in the semicon doesn't mean unsuccess in the display. So that is -- we could be good in both at the same time and then vice versa as well. And we have been very successful, I think, in the semicon market space with the SLX, where we -- I mean, when we launched that machine, we said we should take the majority of orders of the launch and that we have definitely done. So I think that is good. But as you say, we haven't seen any orders on the display side for quite some while. And it's important -- we are quite early in this value chain in the display industry. If you look from the -- where the consumer is actually buying panels in the shape of TVs and computers and smartphones and all that, there is a panel maker, and there is a mask maker, and then there is us selling to the mask maker. So it is a very long, how do you say, investment cycle, it's a very long investment decisions. And what we sell today could be used -- the technology could be seen in a few years in the future. So if you look on the technology trends, we see no difference there really. It's still the shift from LCD to AMOLED is still ongoing, and the majority of panels are still LCD. So that shift will go on for some time. We also see that this increase in complexity for displays are also there, still there. No change in that as well as the area of displays and so on. And also new technologies coming in, in forms of microLED and mini-LED and stuff like that. So we don't really see any difference in the drivers long-term at all. I could see that the shift from LCD to AMOLED is a little bit slower than it has. And this is actually due to the success of panels makers where they produce a lot of LCD panels right now because of the big need in the market. That's really driven by consumer behavior. At the moment, we believe that long term, that should be a good thing for us because it means that if our customers' customers are profitable, of course, they have a big willingness to invest in future technologies. So -- or at least the ability to do that, and that should be positive for us. So we have not -- so short answer is that we have not seen any change on the technology side in the market that should impact demand for our products. And no really big change other than usual in the market dynamics on who is doing what and so on. So it's -- yes, we don't -- we see -- we just see that there is a...

[Daniel Djurberg, Research Analyst]

So for your funnel, so to say, the visibility on your ongoing discussion with the likes of Photronics and then so on. So you have the same number although similar discussions ongoing that you saw like a year back or a few years back or whatever?

[Anders Lindqvist, President & CEO]

Yes, I would say that all the major customers have similar or have the long-term plans from the customers are looking the same as they did. And then, of course, they can be in different stages in discussions on new equipment and so on, but absolutely.

[Daniel Djurberg, Research Analyst]

May I have one last question, perhaps? And I think we could just -- perhaps, Torbjörn, more for me to understand on the R&D in the former AS, i.e. High Flex and High Volume, it was down quite much in High Flex, but up a bit in High Volume. So how to think about the R&D resources or they would say, [indiscernible], so they can work for one project more with High Flex for a while and then go to High Volume? Or what is the deviation depending on?

[Torbjörn Wingårdh, Chief Financial Officer]

You should think about the R&D spending in terms of the divisional taking responsible for their own R&D. I think, to a certain extent, there may be some resources, but it's not really much. It's more like the divisions adapt and review their own business cases for R&D in a clear and accountable fashion. That the group level percentage goes down is not sort of a group centralized planned event. It is an event of the -- as a consequence of the division's diligent and disciplined approach to R&D capped to our new organization.

[Daniel Djurberg, Research Analyst]

Okay. And if you look at the High Flex, for example, it's down 27%. Of course, a lot of -- some of that is currency, I guess. But is that more of a plan to make it more profitable then? Or if you can just comment on it?

[Torbjörn Wingårdh, Chief Financial Officer]

Well, the R&D spending, and it was absolutely part of all the actions taken to improve the cost structure of the HF division. Yes, we can confirm that.

[Operator]

Our next question comes from the line of Mikael Laséen of Carnegie.

[Mikael Laséen]

Yes. I have a few questions, but I'll take them one by one. And first of all, can you comment on the component shortage, what you said in the report? And maybe also initially here during the call, I missed a couple of minutes here in the beginning. What do you see? And can you elaborate on those comments and also how this relates to the unchanged guidance? Because the start of 2021 is really, really strong. And suggest, I mean, a significant slowdown, perhaps later on. So if you can elaborate around that.

[Anders Lindqvist, President & CEO]

So yes, on the component shortage, yes, that was commented in the report. And for the quarter, there was no impact, I would say, or very little impact on that. And of course, we are affected in both ends of this in a way because also semicon, especially and it's also on our customer side and so on. But if you look on the supply side, for us, we haven't been -- we haven't -- there's -- of course, there's a little bit more management with the inventory and suppliers and so on, but no big impact. If you look forward, we believe that it could have a bigger impact going forward. But we don't -- at the moment, we don't really foresee a big change.And that is not a part of an unchanged guidance. I think in the guidance, you need to remember that we actually peg that to a fixed currency, which is equal to end of December 2020. And so you might want to recalibrate a little bit depending on that one. But you're right. I mean we have a good start of the year. And I think I'm very happy with the order intake of a little bit more than SEK 1 billion in the quarter given that we had on the PG side, we had no large mask writers in that with 2 SLXs in that order intake and which is -- so I think we have a good base for our business, obviously. But that -- on that business, we don't really take an order and turn that around in this short time. So it's -- but we are confident with the guidance of SEK 3.9 billion, that I should add.

[Operator]

Our next question comes from the line of Viktor Westman of Redeye.

[Viktor Westman, Analyst]

Congratulations on a strong quarter. I want to ask about the growth prospects for the High Volume division, what is the runway there? And what do you think the market growth can be here?

[Anders Lindqvist, President & CEO]

All right. So we do a lot of things, I think, and we have been very successful for quite some time in this division. I think we deliver good performance quarter-by-quarter in here, and now it's more visible also because of the divisional breakdown that you can see. We have been driven very much in the past by the investments in the mobile phone industry and so on, which also see a lot of technology change, 5G being one of them, of course. Yes, so on. Going forward, we want to be present in many more segments. We are present now also in semicon with dispensing equipment. We are also present in a segment which is growing very, very fast, and especially in China, which is electrical vehicles or new energy vehicles as it's called in China. And we're trying to expand our applications within dispensing into more market segments to capture growth opportunities besides that. We're also expanding geographically. So still the majority of our business is in China, but we are expanding in the countries around, obviously, and also globally. And we're growing very fast outside of China, but coming from a smaller base, the percent vote is high, but it's a smaller base, but rapid growth. And end of last year, we opened a sales office in Vietnam as an example of that geographical expansion. Then coming to the market, we are -- we're actually taking share in this market. We are growing faster in market, but we really want to participate in those market segments that is growing fast, like new energy or electrical vehicles, like semicon for dispensing and so on. So -- and our ambition is to grow, at least, with that market and preferably above, of course.

[Viktor Westman, Analyst]

But would you characterize these markets as a super cycle or a rather long-term structural growth trend?

[Anders Lindqvist, President & CEO]

I think it depends. They are not the same, all of them. Some of them are short term incentive -- intensive, of course. But I think in general, there will be -- always, I mean, long-term trend, this is a good market to be in. And then it can be faster and slower in between, of course.

[Viktor Westman, Analyst]

Yes. I'm just going to -- do a quick follow-up on the first question because I anticipated your answers about automotive there. So can you just say what's the time line to address automotive dispensing?

[Anders Lindqvist, President & CEO]

Yes, we already do have sales in automotive dispensing for -- especially for the new energy vehicles in there. We want, of course, to address more and more applications as going forward as a part of growth initiative. I cannot really disclose any time line for how complete -- but I think a good thing with electrical vehicles is that they're much more electronics, much more electronic applications in such a vehicle than another one. And of course, we want to participate in as many as possible where it makes sense with our technology.

[Operator]

Our next question comes from the line of Anders Rudolfsson of DNB Markets.

[Anders Rudolfsson]

Congratulations to a great report. Looking into -- we have been through the pandemic now for a year. We can see there is a lot of, so to speak, pent-up demand for a number of products out there in different sectors. So the first question is, do you see anything regarding that in this report? And perhaps if it will be looking ahead?The other question is perhaps related to that as well. As we can see that China now building up their own, so to speak, high-tech industry, really want to compete with the U.S. And so on. Will that lead to much more interest of your products with less -- look into less for short-term 2022 or later?

[Anders Lindqvist, President & CEO]

Okay. So first, on the pent-up demand. So I think the -- you need to split that a little bit in the world, I think, geographically. And I think we -- the China business has been good since mid of last year or even early before mid of last -- because I think there is no accumulated demand at all in that part of the world. And so while we have seen good increase recently, especially in the U.S., if you take the remaining countries. And Europe is actually still slow, especially Eastern Europe. So there's a big difference in between. I don't think it's difficult to say what is kind of a onetime effect of accumulated need and what is sustainable. But I think if you look on the sequential development, I think we have a step-by-step improvement. It doesn't really say that it's one good month, so that's it. But that is very difficult to say what is what. The -- add the question there about China and the technology, I think it's -- and the same actually goes for other regions as well. I mean, U.S. and Europe also want to be independent. And we could see parallel supply chains being built up, maybe there's a lot of discussion on the semiconductor side, where that should be manufactured and so on. And I would say, short term, this is -- or medium-term, this should be good for us, of course, the more -- if we can sell to 3 places instead of one, of course, that is -- that should be a benefit for us. And including China, of course, and the increased need of technology.

[Operator]

Our next question comes from the line of Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, Research Analyst]

Yes. I had a question on M&A. You highlighted that you have a good [ course ] for M&A. And a lot of companies that I cover indicate that pricing, especially on software and companies with high recurring is quite high right now, ridiculously high, more or less. I was thinking, have you seen a lot of M&A process that has been hurdled or have been done due to this and a bit problematic for you? And also the second question would be a question on AS. You have a target of at least 10% EBIT margin for this year and moving forward. I was thinking if this target is doing any -- is it a big hurdle for mitigating growth, I would say? Do you need to back off a lot of procurements due to pricing? Or is this ambition to be about 10% that we saw in Q1 here and onwards, more of an internal thing that to do the operations better?

[Anders Lindqvist, President & CEO]

Yes, I was thinking about your second question so much, I almost forgot about the first one. So yes, M&A, you talked about, right. And the pricing and so on. I think it's right. I mean, I've seen in some very strange -- or ridiculous price level. We have not jumped off any kind of products because of pricing yet, I would say. So that has not -- it has not been the reason for not doing an acquisition in a while, actually, so that is one. But we are quite selective. And I think we really want to have high-performing companies in our portfolio. And they are normally a little bit expensive, but I think that is how it should be, that the good companies cost a little bit more. But as you say, in some markets or some segments, this has been very, very crazy.I think we are more, of course, we have different avenues in our M&A strategy on what we want to acquire and so on, and it could be technology and so on, but we are mainly looking on the equipment manufacturers that can complement and increase competitiveness of our portfolio and so on. And I think it's a little bit less of craziness on that side. But it has not been a reason for not doing it so far, but it could definitely be, of course, that you're absolutely right. Then it was about HF. What has really created this improvement in profitability and so on. And are we saying nay to -- no to the market. So no, that's not the case. All the gain -- and when I communicated the target of 10%, I said that, that should be reachable with no change in revenue. Now since I said that the revenue declined actually, so that was one reason for not having it visible in the past. But we have done a lot of efficiency measures. And the idea is to deliver as much sales power and innovation power and market coverage, than someone asked before, they have to do it in a different way and become more scalable to get more leverage in the business. And -- but without jeopardizing anything on an innovation or market coverage and so on. We are saying no to deals, of course, when there's no money in it. I mean, that's -- we see that as empty calories in a way. So that doesn't really help, but believe that it should not impact the growth rate, at least not profitable growth rate. So that's in the plan, to continue to grow.

[Operator]

Our next question comes from the line of Mikael Laséen of Carnegie.

[Mikael Laséen]

Yes, I was curious about the High Volume results. I noticed that the margin improvement was almost more than 10 percentage points quarter-on-quarter when we're talking about gross margin. So what is the reason behind the gross margin and the strong result? What is -- unusual quarter or just a normal thing? And how should we look at the gross margin going forward because it has varied quite a lot in that segment.

[Anders Lindqvist, President & CEO]

Yes. And that is correct. And there is -- the majority of businesses in China, there's a very high cost pressure -- price pressure actually in China. So that is heavy impact on volume, but also our cost down initiatives are working in parallel on that. So the majority of changes here is customer mix, I would say, product and customer mix. Maybe more customer mix than product mix where we had this time before quite big orders to a few customers with, of course, a bigger negotiating power when it comes to prices and different scope. So it's -- it will vary with product and customer mix going forward as well, but around these levels, I would say.

[Mikael Laséen]

Okay. Just a follow-up. So when we look at the order backlog of nearly SEK 700 million for High Volume, what type of sort of margin is built into that? Is it sort of the run rate the past 12 months that we should think about a fair level or a bit higher even maybe going forward depending on the mix?

[Torbjörn Wingårdh, Chief Financial Officer]

Thank you very much for that question. I think, firstly, we're not disclosing the gross margin levels in the backlog, even though it is a very interesting aspect of it that we are -- that we, of course, ourselves are keeping track of. I think it's fair to say that due to contractual reasons in the Chinese market, the turnaround of a contract, from an IFRS revenue recognition perspective, is a bit longer than the pure sort of building the machine and deliver it aspect. So I think that's an important aspect to bring in. So part of the realization of the revenue recognition in each quarter comes from orders a couple of months back. That means that the price pressure that Anders is commenting on, that effect is a little bit delayed. So trying to answer as directly on your question at the end, should we look at higher gross margins? I would not think that, that is something that should build into your forecast.

[Mikael Laséen]

Okay. For IFRS accounting here, what is the reason for that delay?

[Torbjörn Wingårdh, Chief Financial Officer]

Okay. Yes. So I think maybe not this meeting is the right place to go into the details of IFRS revenue recognition, but it's connected to the change in usage of the equipment from all aspects that are important. So I'm sure you're familiar with the IFRS revenue recognition conditions.

[Mikael Laséen]

Yes. Exactly, but I was just curious about the revenue. So the revenue model that you have in China that is different compared to Europe or the Americas as an example.

[Torbjörn Wingårdh, Chief Financial Officer]

No. No. No, but the contractual model.

[Operator]

Our next question comes from the line of Viktor Westman of Redeye.

[Viktor Westman, Analyst]

A question for Torbjörn. Can you help me understand the SEK 32 million in operating income? I was a bit surprised that there was not a negative currency effect here. So what are those SEK 32 million related to?

[Torbjörn Wingårdh, Chief Financial Officer]

So I interpret that as you referring to the other operating income and expenses. And on that line, we have a number of currency effects, which you are correctly relating to, but we also have contributions in different parts of the world, mainly related to R&D spending where we get local government subsidies for R&D investments. So those are main aspects there. So that's impacted. Yes.

[Viktor Westman, Analyst]

Yes. Okay. Great. And I'm going to assume those -- yes. So I'm going to assume those are one term thing. I have another question also on the EBIT margin...

[Torbjörn Wingårdh, Chief Financial Officer]

No, you should not -- sorry, sorry. You should not assume the other one -- okay. All right.

[Viktor Westman, Analyst]

I was going to ask also one question about the EBIT margin target. It was interesting to read Anders comment in the report that he was talking about being well above the 10% EBIT margin in the AS divisions combined. This was the first time I heard or read this actually. Can you say what's the reason behind that? What's the reason behind this new optimism? Is there anything that has changed in terms of long-term margin prospects?

[Anders Lindqvist, President & CEO]

No, I can describe the thinking a little bit when we made a target that and I think I explained it at that time why 10%. And I always say minimum 10%. So it means that everything above is better, of course. So this is a minimum thing. And the reason why putting it up at the first place was we let -- we benchmarked to other business, other companies. There is no one really exactly like us, but I think we have a lot of peers in a very similar industry, it's a very similar business model and so on. And we could see that the level of earnings to EBIT level was higher in these businesses, even higher than 15%, 20%. And then we said, okay, then we should be at least at 10%. Once we are at 10%, of course, we will not be happy with 10%. So it's kind of a journey of continuous improvement, of course. And of course, it's easier to be more positive and we now deliver 13% also. So that is part of that, that it's visible that what we actually are doing is paying off and it's not onetime items or onetime effects in that. It's a good level to be at. But the target is 10%, minimum, not 10% -- but at least 10%.

[Viktor Westman, Analyst]

Yes. Okay. I'm sorry for squeezing in a last question also. The SLX market, SLX continues to impress us. Isn't it time to increase the market TAM estimates for SLX?

[Anders Lindqvist, President & CEO]

That's difficult. I think we -- the SLX market is partly a replacement market and partly a new investment market. And I think the analysis we did in the past on the market size was quite wide actually. And then also the assumption on our sales and that -- so we have not seen any reasons of change in that. But on the other hand, I mean, the shortage of semiconductor is some -- on every news today, of course. And also, there is, I think, a lot of -- what we have also said and the reason why we launched SLX, that there is a need, of course, of less advanced semiconductors as well very much also in the new applications in automotive and so on. So I think we have a good position there, but that was in the assumption when we launched a machine and also estimated our potential in the market.

[Operator]

We currently have no further questions. I'll hand back to the speakers for any final remarks.

[Tobias Bulow, Director of Investor Relations]

Okay. As there seems to be no questions left, we will then end the call. Thanks for joining today, and welcome back next quarter.