HMS Networks AB (publ) (HMS) Earnings Call Transcript & Summary

Welcome to the HMS Networks Q3 Presentation for 2025. [Operator Instructions] Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead.

Thank you, operator. Good morning, everybody. Welcome to this quarter 3 report. Greetings from a sunny Stockholm, and we're also pleased me, Joakim, to have some sunshine in this report. And the agenda for today, is that I will do a quick snapshot of where we are and our strategy, a little bit of business update, and then Joakim will do a deep dive in the financial summary, and we finish up with some Q&A at the end. So we published our quarter 3 this morning and some good signs, we think, good level on net sales. We are back on organic growth that really makes us happy. We also have some headwinds with currency. Joakim will dive into that later. Order intake, fantastic, plus 26%. But keep in mind that we had a quite weak quarter last year, quarter 3. So comparables are not that challenging. But still, 26% is still 26%. That's really good. And we continue to deliver good adjusted EBIT, both SEK 244 million in adjusted EBIT, but a margin of 27% is good for us, and we're very pleased to see this. We also can conclude that when we talk about adjustment in the EBIT, it's very little of this kind of reorganization things during acquisitions. So it's very clean adjusted EBIT at the moment. A good cash flow, record level, and we are very happy to see that. And the combination of good cash flow and good profit also make us perform well on net debt and our covenants. Just on year-to-date, this accumulates, we don't reach organic growth for the year. Of course, this is what we follow. Good order intake, and we are happy to see the cash flow to continue to be good throughout the year. So we move into the strategy, but Joakim will be back more on data on the numbers in a moment. We presented our new strategy last month. This spans for -- from next year until 2030. We try to focus on 5-year periods because in our industry, it takes some time to develop new products. It takes even longer to make them commercially successful. So we believe that strategic period of 5 years makes sense for us because then we can set plans, execute and see good results over the time. We talk about 3-2-1 grow; 3 divisions, double revenue to EUR 7.5 billion (sic) [ SEK 7.5 billion ] but also maintain the feeling of being one company. We have acquisitions. We are growing internally, but we want to make sure that we feel and work like one company. There are 6 elements in the strategy. And if we start with the centerpiece here, Win-Grow-Keep where we have more structured strategies for winning new customers and growing existing customers to their full potential. So we have more forward leaning in winning, and we put more effort in the sales and marketing in the coming years. We talk about continuing with mergers and acquisitions. We made a dozen acquisitions in the last 10 years, some okay and some really successful. And we would like to continue to perform on this and half of the growth will come from acquisitions, half will come from our own organic growth. We are strong in engineering and R&D, and we believe that we should keep on investing in our product evolution, where we develop both new product, but we also see opportunities for new business models. We are improving our Software-as-a-Service portion of the business, and this is one ambition to be more than 10% of revenue in 2030 to be coming from this subscription and SaaS revenue. We also see good opportunities to improve our operational efficiency to drive gross margin, operating margin. We are maybe quite okay on gross margin, operating margin compared to others, but we still see improvements. We can improve both the cost side, but also how we do things and efficiency. And we also feel that AI tools give us fantastic opportunities to also improve our internal efficiency. These 4 key elements are framed with 2 core things for us. We talk about the planet, where we support our science-based targets that we are just in the finishing to get our targets approved 2030 and 2050 approvals for reduction of CO2. And we also have the key element of what we call people, our employees, where we believe that happy and high-performing employees generate loyal customers. So this is really what we want to do. We set new targets for 2030, where we have planet, people and growth. For planet, we keep our high ambition on sustainability, reducing CO2 emissions to be net zero 2050. We also follow something called EcoVadis, that is an industry rating for most -- well, key companies in our world of industrial automation, and we would like to be top 5 here. This is gold rating by large customers. We would like to continue our people strategy. We have happy customers. Net Promoter Scores more than 50. We are getting back to that. We are not fully there yet, but this is a big ambition for us. We also think that having happy employees is not about happy, it's about engagement. So we measure engagement index where we want to be industry-leading of over 80. And we keep also a focus of adding more female managers. And we've been growing this from, I think, 14% 5 years ago to 28%. So we're not at 30% yet. But we believe that a mix of, of course, female, male, but also in backgrounds in different age, and this gives much more of an innovative climate and more productive climate in the company. So that's why we focus on this female managers. And then the numbers, growth, we would like to more than double to SEK 7.5 billion in 2030, have growth -- profit target of 25% EBITA, and we move from adjusted EBIT to EBITA instead. And we would like to continue to generate good cash flow, so we can also give dividends between 30% and 50% of our EPS. So these are the targets, and we are doing the following to really fulfill that. We talked about product evolution. We think that more than 50% of the organic growth will come from new products that we have not seen yet. There are a lot of new ideas, and we're doing a lot of developments. We are quite excited about the coming years and the new products coming out. We also see that AI will improve our products and the functionality. So we'll implement certain AI functions in our products. We also, as I briefly mentioned, move into more of recurring revenue, this kind of software subscriptions, annual recurring revenue to be more than 10% of our revenue. This is coming mainly from subscription of the software piece that we have that is fairly small at the moment, but we see that this can improve for the coming years. And we believe that having high intimacy with customers is key for us, and we would like to improve our distribution business, of course, but we also would like to grow the direct sales even faster. And we see this win and grow strategy we're having. There's a direct connection to have more direct customer contacts and fully understand the future need of our large customers. And we continue to successfully execute on our M&A strategy and each of our divisions have their own M&A agenda, and we see good opportunities in this industry to continue finding right M&As. We also see that our company culture, heart, mind and soul is a uniting factor for our different business, and we would like to drive this to be generating the most engaged employees in the industry. So here, we measure this with employment engagement index to be larger than 80. But having happy and engaged employees, of course, comes with good leaders where we've put a lot of efforts on our leaders and leadership trainings, and we would like to measure this with our leadership index to be greater than 85. Win-Grow-Keep, here we talk about more winning, more growing. So we would like to have more of 6% of last 12 months' sales from customers that have won, 6% may be sounding as a low number. Today, we have 3%. This also means that we have a big bunch of happy and loyal customers that keep on buying our products. This is what we call keep. Of course, we'll keep on serving them. But we also see that we need some hunters to drive new business and be a little bit more aggressive on the market to win more. And we continue our investments in AI systems to drive our operational efficiency. From 1st of Jan 2025, we introduced our new organization with 3 divisions: IDS, that is 47% of our revenue. Industrial Automation is the focus. And here, we work with machine builders, system integrators and end users. Second division, INT, 29% of business goes actually to the same market, industrial automation, but a different customer group with device manufacturers that requires a different go-to-market. There's a very long sales cycle with design wins, but then we build a very long revenue cycle with these customers and big loyalty. So therefore, we need a dedicated go-to-market for these customers. And then we have new industries, which is today a mix of building automation and vehicle communication today representing 24% of our business. So this was a bit about our strategy. If we take one quick snapshot of the business in quarter 3. before Joakim talk about the numbers, we see good growth. So we see some kind of change in the market that is kind of difficult market. Of course, we still have geopolitical issues. We still have customs and tariffs and all these things, but we see organic growth, and it seems like our customers are normalizing their behaviors despite quite a troublesome world around us. Both North America and Europe generate good orders. APAC, excluding China, is more hesitant, like Japan is still quite hesitant, but China is better for us. So good net sales driven by IDS performance in North America. So North America is the engine for the growth in general, especially for our IDS division, where they have a large portion of their revenue in North America. As I explained, we have a new strategic plan. We rolled it out internally and to our investors in the Capital Markets Day. Internally, super good engagement, and we are very excited about this. And we have a strong focus on our sustainability. We talk about people, planet and profit. So that's what we do and growth. And we keep on investing in what we said in improving our production in U.S. We are very happy to have local production in U.S., but we noted a year ago that it was not up to standards to what we think is world-class manufacturing. So we are seeing good progress there. And the end of the year, we should be finished with these investments, and we are on the right track there. And we start to seeing also improvement in quality, in performance. And of course, this will lead to good gross margins and net margins for us. Last quarter, we talked about that our introduction of the new ERP system in U.S. made us delay some orders, and they are delivered this quarter here. So this gives a good addition. And we've been mitigating the tariff cost by increased pricing in the U.S. and customers have been accepted this in a quite good way. We are not -- we have products with limited competition and the customers understand that it's not our fault that the tariffs are hitting us. So I think we had a good conversation with customers. I don't even recall that we lost any customers there. And most of our competition in U.S. is not domestic U.S. companies. It's actually Asian or European companies. So we are on par with this other. Actually, some of this competitors like from Taiwan and others, they probably have more challenges than we have. So with that, Joakim, let's move into the numbers.

Let's do that. And we do as we normally do and start with the order intake. Solid quarter, SEK 855 million in order intake, so 26% growth, out of which 22% organic growth. And of course, then we know that we're comparing with maybe one of our weakest quarters in Q3 2024. So the numbers in itself, the organic growth in itself is maybe not representative for what we've seen sequentially. And sequentially, still, I think we do okay. We improved a little bit from Q2. And looking at the year-to-date number, we still see an organic growth of 14% on orders, which is good to be able to conclude. If we look on the different markets, we've said -- as Staffan said, that North America continues to be strong. And if we look at this sequentially, I think North America is the major driver for this development. Year-on-year, everything is up more than 20% in terms of geographic markets, but it's maybe more than the weak comparable than the current business. We also see a very small positive development in Europe, a few million better than previous quarters. And then that leaves APAC, where we have some issues in Japan or maybe not issues, we lack the big orders, especially in the INT division, and I'll come back to that as well. And with Japan struggling a bit and China continuing to develop well, we have now -- China has now surpassed Japan, and China is actually the third largest market for the INT division. We also see good development in the building automation part of new industries, where the Middle East continues to deliver new records and becoming the largest market for us in building automation. So I think what we can see in the quarter is that we're now having more markets to stand on. China is becoming a bigger part for us. Middle East is becoming a market to count on. And I think that's very positive that we develop the group with more of these markets that can contribute to the overall development. If you look on the bottom left graph, so you see here that we also have a bit of a negative FX effect of minus 6%, but that is more than made up by the acquisition, which is now the PEAK Systems part that is coming in as the last quarter where that is not part of the organic business. So that's adding an 11%. Let's continue to the sales. And here, we delivered record volumes with a few million margin to Q1. Also here, we see a bit of a weaker currency that is impacting that. So overall, quite okay result, we must say. And as Staffan mentioned, it's the first quarter since Q3 2023, where we have organic growth. So it's good to deliver this 8% organic growth in the quarter. We had some deliveries in Q2 that we couldn't get out because of the change of ERP systems in the U.S. manufacturing. That is now being developed in -- being delivered in full in Q3. So we're making up on those SEK 50 million, which is, of course, adding to the development in Q3. That also results in a book-to-bill that is lower than 1.96. We've been seeing slightly higher book-to-bill for the earlier part of the year, and we hope that we will get back to deliver good book-to-bill ratios going forward. One of the contributing factors to development is the U.S. manufacturing that is ramping up. And we've been making some investments that we said we were going to do when we took this business over. We still have some developments that are being done pretty much as we speak. We were over there 2 weeks ago and looked how it's been developing. And then we can see that we -- in some of the process steps, we already improved the yield a lot, and we know that there are some results to come during Q4. Q4 will be a challenge, and the team is working really hard to be able to deliver good volumes while making the change at the same time. So that will be a very important quarter to follow. And then Staffan also mentioned that the tariff situation is handled for the time being in terms of being compensated. And we see some positive effects here on the sales side from those price increases to mitigate the tariff impact. Just a quick deep dive on the different divisions. We're starting with IDS, where we are delivering maybe the strongest numbers in -- among the different divisions, especially on the sales side, where we do a new record quarter with SEK 439 million and showing some sales growth organically of 21%. Also then slightly weak comparable in Q3 '24, but this is quite strong for this business, we believe, with a 10% organic development. Sorry, 21% organic development. We're also managing to deliver for this division really strong margins with 27%. This has been improved a lot, primarily driven by the volume, but also some gross margin improvements that we will talk more about that in a second when we look at the gross margin for the group. And all in all, as we said, good deliveries from the U.S. This is very U.S. heavy this business. And so that becomes really key for achieving good numbers. And we see that, and we also still keep a pretty nice order book for the remaining parts of the year. And the main difference compared to Q2, which you saw was significantly lower. Here, we have those SEK 50 million that was delivered out in Q3 instead. And then also, you see the price increase effect from the tariffs. This is, of course, the area where we have the highest tariff effect. So all in all, a solid quarter from IDS and a big contributor to the strong group results. Then we have INT, where we are a little bit still struggling. We're almost on the same level as before in net sales, same level as last year. We're still not really up to organic growth yet. We hope that, that will come in Q4. On the order side, you see really good numbers if you look at the percentages with 34% organic development. And then again, maybe here, we had the weakest development in Q3 last year. So if you look sequentially, we're more or less on track with the same pace that we've been seeing for the earlier quarters this year. And this market is quite German heavy, and we are still not seeing that lift in Germany. It's still quite a hesitant situation from the customers, which we are convinced that, that will turn at some point, but we see kind of similar signals when we talk around in the industry. So it's maybe not so surprising even if we had hoped to see a bit of a better development. Still for INT, this is a bit of a cash cow. We delivered good margins of over 28% adjusted EBIT. So it's -- even with some potential on the volume side, we do quite okay. And I mentioned China before, this is where you see the biggest impact of China developing strong. Then the final division, New Industries. A bit of a mixed picture within the division. We have the vehicle communications part, which is developing more or less sideways. And given a strong weight with German automotive players on the customer list, I think that is okay in this market. And then the positive thing this quarter is the building automation business, which were a bit weaker in Q2 and now is coming back with record order intake, really nice order intake. And I mentioned Middle East before, that is going very strong in the building automation business. So all in all, we do a 21% organic order intake increase and a 14% increase in sales. And I think we have to be fairly happy with that development in this market. So let's look at all this comes down to in terms of results, a record quarter in EBIT, SEK 244 million in adjusted EBIT and 27.3%. As Staffan said that there are basically no strange adjustments here. It's only the amortization on over values. And as you might have seen on the Capital Markets Day, we will go over to report EBITDA with only the a -- for next year as the financial metric, and then we will take away this adjusted EBIT. So it's essentially the same thing that we present today. Looking at year-to-date, we are close to achieving the 25% target, 24.5%. So we hope that we can maybe be there somewhere in Q4 and be able to close that gap. Let's see how that plays out. On the gross margin side, 64.1%, which we think is a very good level. And 2 major things. We have a favorable product mix on the margin side, the INT embedded offer, where we normally have really good volume on the different customers, but a slightly lower margin is developing weaker and then the other parts of the group is developing stronger, which is giving us this positive mix effect. And then also the price increase effect from the tariffs is compensating. So we see a bit of an increase, both from last year and from previous quarters. I also want to mention, I forgot to say that in the beginning here that we have -- on the EBIT side, we have now, first of all, a pretty good natural hedge in terms of higher cost base in the U.S. to mitigate the dollar weakening. And then we also have some really efficient FX hedges, some hedging contracts that are compensating the full -- more or less the full FX loss. on the EBIT line. We still see the impact, of course, on sales and orders. So when you look at comparables, I think you need to look at the organic development. But on the bottom line, this is more or less neutralized. And then just final comments on the OpEx. We see a small increase, 7%, probably half of that inflation and half related to some sales and marketing investments. We're starting to fill some positions and to start up some smaller investments here now to get going for the future. And then as always, we have some vacation effects in Q2, maybe some SEK 50 million of lower OpEx, which is, of course, helping, especially in the third quarter. Looking at the EPS then at SEK 3.88, a very strong level. And of course, the strong result is the main driving factor. A pretty clean net financials. We see also that interest rates are coming down and the debt itself is coming down, which is, of course, lowering the burden on the net financials and then improving the EPS. Then we have a onetime effect. In the fact that we have some lower tax related to the U.S. in the quarter, which we cannot expect to see going forward, but it's always rewarding when that happens. And that boosts, of course, the EPS a little bit as well. And then maybe my favorite part of this report, the cash flow, which is very strong. We have a cash conversion of over 90% and good profits in the base coming over to SEK 258 million in cash flow from operations. We're continuing also to see a decline in inventories. So we've been seeing that throughout the year. And I think we have a little bit left to take in Q4 as well and then coming more into a good level on the inventory side. So that is supporting as well and very nice to have that to delever the balance sheet, which we see also now on this slide that we're continuing to do. We are closing the quarter of net debt to EBITDA of 2.66 as reported. And if I exclude IFRS 16, as we might think is more -- a better way to see it, we are doing 2.6. And then just to compare this -- after Q2, this was 2.92 and after Q4, this was 3.37. So we've been reducing some 30 basis points in the quarter, which is, of course, very good to see. We've said before that we should be below 2.5 at the year-end, and everything points to that, that will actually happen as well. Now we've been talking a lot. We're going to open up for questions in a minute. Just a very high-level wrap-up from what we've been seeing. So all in all, recovery in several geographic markets. North America sticks out as the strongest area, still some more potential in Europe, a little bit hesitant for INT. And happy to say that Middle East and China are now growing into more important markets for the group. We're doing the investments in the production facility in the U.S. We've been already now building the capacity, and that will happen even more during Q4 going into 2026. We will have a better capacity and more flexibility if we need to change some production to the U.S. to set up a better tariff situation and get tariffs on the components instead of finished goods. And all in all, we think that this tariff situation has been fairly well mitigated for the time being at least. And we still try to keep flexible to see what happens if there will be changes coming forward. And then finally, all in all, a good result, record profitability and cash flow, SEK 244 million EBIT, cash conversion of 91% and a strong cash flow. And we continue to delever as planned with the business. And with that, I think we can hand over to operator and open up for some questions.

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

Staffan and Joakim, congrats on the robust numbers. Initially, we have recently been talking about smaller projects progressing decently despite the elevated uncertainty shown in recent quarters, while larger projects have been halted. Are you witnessing any change in customer behavior of the larger projects more recently?

Not really. No, we are lacking large orders still, but it's a broad-based increase of smaller orders from many customers, I would say. But we still lack the large orders that we would like to see.

Maybe the only area that sticks out for us is maybe Japan for the INT division, where we normally would get some large order every quarter. So I think it's more about a timing effect, and we hope that, that will materialize. Otherwise, things like Staffan said, yes.

That's very clear. And on cost, I think we've been talking about that if sales volumes do not pick up as you've been anticipating, OpEx would likely stay low. But if volumes come, you would also increase costs partly in order to reach your targets as well. So my question is essentially if you're presently seeing the progress you've been anticipating.

Yes, I think so. I mean, if you look on the market demand, it's not great, but it's okay. And I think with the cost side we're having right now, we are performing well on this market. But to be really happy, we would like to see a stronger market because it's still not great, and we hope it to be better in the coming years. But right now, we are pleased to see these signals that it's actually moving in the right direction with a little bit of organic order intake -- organic growth in net sales and things like this, but the market is still a little bit hesitant, I would say.

That's also very clear. And then a question on tariffs. Were you able to fully compensate for the tariffs in the quarter as a whole in terms of gross profit? And furthermore, given your report comment that you anticipate further changes in tariff regulations, how would you anticipate customers would react to changes in tariffs? If there are more tariffs, would you then be able to increase prices further? Or if the opposite happens, if tariffs diminish, are current prices then sustainable?

In general, I think that we've done some general price increasing, and we have not specifically only increased by tariff only. So we combine this with some strategic pricing and inflation and things like this. So we think that if the tariffs are increasing somewhat, we might not be able to do another round of price increases short term. But let's see that. I think we took some extra headroom when we did this change during the year here. So we are -- I would say that we are probably fully -- on the total, we are fully compensating ourselves at the moment, but there is some differences from some customers that are minus and some customers are plus. But in total, we are covering our extra cost and actually probably a few dollars more.

The next question comes from Joachim Gunell from DNB Carnegie.

So it's not only the weather in Stockholm that is sunny. I think that you were also a bit sunnier in the way that you communicate with regards to end markets. So can you perhaps say just a bit about -- I mean, how you think about the pacing of orders throughout the quarter and then the start of October? Adding to Simon's question, I mean, you've been very cautious on diligent and strict on OpEx in a tougher for longer market scenario. But here for the first time in 7 quarters, you're actually increasing your OpEx year-over-year organically. So how should we think about that?

Well, actually, I think when we look at the total, it's quite sunny, but I think it's been like an early spring that some days, it's been too colder than we expected. Some days, it's great weather, but you never know. So I think it has not been rock solid improvements during the quarter. It's been a little bit of up and down. And we had some weeks disappointing, some weeks, positive surprise, but it's I would say, it's not rock solid. That's my feeling at the moment.

I think we normally see a weak August with some vacations in especially in Europe, and that was the same this year. So July was quite good. September was quite good. And I think October has continued in a similar pace that we've been seeing in the quarter. So I think it's -- this is pretty much where the market is at the moment. That's pretty much our takeaway.

Perfect. And also, I mean, how is the progress of ramping up and modernizing the production facility in York going? And what further steps need to be taken to get to Swedish manufacturing standards in your view?

I think what we saw there last week was -- 2 weeks ago when we were there is that we are maybe halfway. Some process steps are fully completed, where we see very good progress. I mean, we are doubling the output in some -- and the quality is now almost on the level we expect there. And still we are phasing in this. But for some of the process steps, we are getting the new equipment in quarter 4, and we need some adjustment time. But at the end of the year, everything should be -- all the machines and all the new investments are in place and the renovation of the facilities and everything. And then we need some maybe a quarter or 2 to really work on the details to make sure that this is clockwork. But we are taking good steps in the right direction. And this also gives a very positive atmosphere with the operators. People are smiling the production there. We are doing investments, and they also feel that they are important and we see quality is rising. So we also see the pride is coming with the staff there, which is very important for building good quality.

That sounds encouraging. And margins have been, I mean, stellar here in light of still fairly low organic volumes, right? So can you just talk a bit about the FX hedges here in Q3? What would the translation effect on -- perhaps for Joakim, what would the EBIT translation effect have been without the FX hedges? And all else equal, I think is it fair to assume that FX will incrementally become a headwind on Q4 margins?

Yes. So I don't want to go into exactly the impact from the hedges. We don't normally report that. But we've had -- we've been super lucky with the timing throughout the first 3 quarters in the year and especially in Q3, we're getting a great effect on the hedges we've done. Obviously, that will not continue in the same pace going forward, given that the hedges we have taken at that point in time, the U.S. dollar was at a lower level. So I think you can expect a couple of million in negative EBIT effect from FX in Q4 in relation to what we've seen now in Q3.

And then just finally, I mean, we are now 3 quarters into the new organizational structure. So can you just comment a bit of, call it, signs where you are seeing traction of this new strategy and that you are reaping the benefits from this more, call it, effective and decentralized setup?

I think we're starting to see that the new organization launched here in the 1st of January is starting to work well. And of course, this has also reduced headcounts with almost 10% in that change. That was also, as always, a little bit of a negative feeling the first couple of quarters. that is behind us and people are positive and they realize that what we're doing now is the right organization. People are closer to customers and each division is feeling that they have the accountability to run their business. So I think we're doing good progress there. When it comes to the strategy, we are just rolling it out. We are seeing very good excitement in the organization about this. And actually, one of the operators in the York facility 2 weeks ago, he told me, I really love our 3-2-1 grow and he's a production operator on the factory floor in U.S. So we've been rolling out this in a good and successful way. But of course, the proof is in the pudding, but now we need to deliver on this. And it will take some time before we see the effects of being more forward leading in sales, investing more in product development. That will take years before we see the real financial impact. But that's why we do the 5-year plan.

Seems you are on the right track.

The next question comes from Gustav Berneblad from Nordea.

It's Gustav here from Nordea. I thought maybe just to start off on IDS. I mean, just looking sequentially Q-over-Q, I mean, it's a massive margin expansion. Of course, I mean, I understand Q3 is seasonally strong on margins and you have a bit higher volumes and price increases. But can you just comment a bit on this expansion? And are there anything that sticks out that we shouldn't sort of know about here?

I think you summarized it pretty well. I think when you have a 64% gross margin, the volume comes down pretty well to the bottom line. And then with an improvement in the gross margin in itself, that's been very successful, of course. And just for IDS, just to make that point again, we were a bit short in Q2. So it's maybe not fully fair to just compare those 2 quarters. We had some SEK 50 million that was spilling over into Q3 due to the manufacturing stop and then start with the new ERP. So that, of course, makes a difference when you compare those 2 quarters. But we are very happy with the development and 27% EBIT margin is, of course, a very good level for IDS.

Okay. That's very clear. And then also if -- I mean, we look at Q2 here, a bit larger if we look on the year-on-year growth in R&D expenses. And now, I mean, in Q3, you are close to flat. Is it possible to say anything regarding the capitalized development cost in Q3 this year compared to last year?

Yes, we were -- I think we were up SEK 7 million, if I don't recall incorrectly. You can probably go back and check that if you want. It's in the report.

That's quite accurate.

Yes. And then if you -- maybe a more important comment on that going. So I think what we're seeing is that we are ramping up in some areas, the development pace. You saw also we made the sales and marketing was up a little bit in Q3. So we are starting to invest a little bit to fulfill the strategy for 2030. And I think I mentioned it also on the Capital Markets Day that we will see in 2026 and 2027, probably a higher investment pace in R&D to come out with the new platform for IDS and also to execute on the new, especially the INT initiatives, we will be trying to address some larger customers, both with a software offering and a new embedded offering. So that will drive some more investment pace going forward. And I think, yes, you will see maybe a little bit already in Q3, and you will see it in next year and '27 as well.

Okay. That's very clear also. And then just a final one here on margins. You commented a bit on the positive mix effect. How should we think about this going forward, short term, so to say?

Yes. So I think what we believe and what we still believe is that the embedded business in INT has some more volume in it. So we think that we will see slightly higher levels in INT. And if that becomes a larger share of the total, of course, that will put some pressure on the gross margins from today's level. Still, I think we've done some pretty good job here. So -- and we do have some potential still with the investments in the York facility. somewhere around that level, I think, 63% plus, I would expect us to be able to deliver anyway.

I think also we need to look on the gross margin a little bit on longer term. We see variations quarter-on-quarter due to, as we say, the product mix since we have some customers with fantastic margins, some with mediocre margins. But all in all, the trend should go in the right direction. And we have a target to be over 65% in the new strategic plan. So that's what we focus on for the midterm. But there will be some variations quarter-by-quarter.

The next question comes from Jesper Stugemo from Handelsbanken.

Staffan and Joakim. Many good questions already. But given that China now has surpassed Japan, I guess this is more related to market dynamics and current demand picture? Or is it this a strategic refocus that you have in China to prioritize this market given that you have a -- it seems like you have a good portfolio there with little domestic competition.

I think the strategy we have for China is to be more selective. Primarily, we see for division INT that they have a product offer that is attractive in China, limited competition. But if we look on things like IDS, we see much more domestic competition there. I think we are also reducing our efforts in IDS division there or at least not investing in it. So I think we try to really analyze where can we be successful, where can we win and put all the more eggs in that part of the business and then just accept that some of these domestic competitors we have for IDS, it's really difficult to win with an American-made product with the same functionality as a Chinese-made product in China. You can win with that in the U.S., but you can't win with that in China. So I think we realize that put our focus where we can win.

Yes. All right. And a follow-up on the Japanese orders here, larger orders. You haven't seen them here in Q3. So what are your expectations on the volumes in the coming quarters? How close are your dialogue with the customers there? And how good visibility do you have?

Very good question, and it's not easy to answer. I think we expect that our customers will come back in Japan. It's been a tough market. A lot of our Japanese customers used to be successful in China. And both -- we see this both in Europe and in Japan that the domestic competition in China is increasing and some of our Japanese customers are suffering on that. So it's not that we have lost customers in Japan, but our customers have problems with their Chinese markets. I think that's a clear indication. But we expect Japan to come up again and the Japanese market itself looks promising, but the China export is difficult for them.

The next question comes from Thomas Blikstad from Pareto Securities.

Congratulations on a very strong quarter. A lot of good questions already answered here, so I'll be very short. I was just wondering if it's possible to get a refresher on how much of your manufacturing is currently outsourced to EMS companies? And what's your view on this long term would impact on margins and so forth?

Good question, and we love to talk about this. And we have a strategy with manufacturing to do all the new and ramp-up products as well as low-volume products in our own manufacturing. And then when these products are good and stable and keep on growing, we normally work with strategic EMS suppliers in Europe, in Asia and also in North America to make sure that they can deliver the high volumes because we feel that we don't have the capacity for this high volume. And I think that strategy has proved working well for us. And Joakim, what could it be? If we look on revenue? Could we say 50-50 at the moment?

50-50, yes. So before the acquisition of Red Lion, we had a majority was outsourced, and then we took on a big manufacturing plant announce and then we'll be making some small adjustments. So I think it's about 50-50 at the moment.

And if you look on part numbers, maybe more than 90% of part numbers is made in-house, but these are low volumes and maybe 10% is done through EMS, but that's the high volume. So that's really the dynamic we are looking to fulfill.

Okay. That's very clear. And sort of you don't expect any, let's say, development here, just the same strategy going forward basically?

I think the long term, we are moving production out of China to -- from one strategic EMS or actually one location. It's the Norwegian Kitron that is we're working with there from there -- we are reducing some parts in China and ramping them up in Malaysia due to some customer needs and opinions about that they have higher taxes on made in China and things like this. So this gives us a flexibility to move between different sites as well without us doing all the CapEx investment to do that. So it works pretty well, actually.

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

Thank you, and thank you all for your participation in this quarter 3 call. And we are happy to see some more sunshine, as I said. It's not great, but it's okay. And I think we deliver a fair result on the circumstances. But we keep on running out with our long-term strategy for 2030. We have a big focus on this. I'm sure that there will be some variations during the quarters, the coming quarters. And this market -- more positive market we are seeing right now, it's not for granted that it will continue, but we see that it's -- the signal we are seeing today is that it's moving in the right direction. That's quite clear for us. So please stay tuned. We are coming up with quarter 4 quite soon as well in the quarter and look forward to talk to you at that time. Thank you, and goodbye.