Incap published today its Q2 report, and I will discuss that with the company CEO Otto Pukk in this interview. Hello.

Hello, Antti.

Let's actually start from the profit warning that you announced last week. Net sales guidance remained more or less unchanged, but there was a quite steep drop in comparable EBITDA guidance. What has changed since February when you announced the original guidance?

Now, if you look at how we give guidance, we are very conservative. So also small changes, of course, trigger a profit warning. And if you look at that, there hasn't been any big dramatic change from February, when the original guidance came, compared to where we were just about our 20 to 40 line in that sense. And now we all somewhat see us somewhat below. So I wouldn't say that it has been a dramatic or very steep drop in the end of the day from our perspective, that it's more a question of how we have given guidance in the company with these 20 blocks. And then when you have a position that is just above the 20 or within the 20 to 40 and then goes into the 0 to 20, then it triggers a warning. So if that explains the situation, we're now also looking over how we are doing the reporting in general. And I hope that during our Capital Markets Day, we can already suggest a little bit of improvements on how we give guidance. And so in the future.

Yeah, looking forward to that because from investors' perspective, it is a bit different to yours currently. Well, you mentioned that there were two reasons leading to downgrading comparable EBITDA guidance, margin pressure and raw material availability. Could you anyhow quantify which one of these two is a bigger drag for earnings this year?

I think, of course, it's a combination in that sense. I mentioned here during the webinar as well that we feel, especially here in India, increased competition on the Indian market that is a very hot EMS market currently, but also the material availability. If you look at currently, AI is driving very much the material demand. And now we see that in many different material groups, we have prolonged lead times and that I would say the demand from the AI side is under big growth. There is a little bit coming into other sectors as well when it comes to availability. And so this is something we are working very hard with our teams and with our customers on, and try to balance out, try to increase buffers. But it's an effect, of course, of both in that sense. I think the margin pressure is for us more located around our Indian operation. But then if we look at the material availability, that is more, I would say, common all over the group.

That said, on-time delivery, price and quality are hygiene factors. So in the EMS world, it's nothing new that we have margin pressure or increased competition.

Let's take this raw material availability first because it should be more a temporary issue. I wish Incap managed relatively well during the Covid crisis with sourcing. And you didn't have any very visible issues with raw material sourcing back then. Why does it seem that now it's more difficult to source effectively in the market, even if in total the situation is not that bad yet? Yeah.

First of all, I have full confidence in our team and in the capabilities they have, and we have been riding out many crises over the years. As you have seen, is it Covid or is it other material shortages that have been around, what we see now, of course, is a huge development. For example, if we talk about the AI sector where we're expecting the volumes to increase a lot. And I think that these kinds of movements in the market, it takes time before capacity has been built up. So of course it will not only affect Incap. This is a common problem on the market. And we see that memories and power chips and perhaps specialized resistors. So the lead times are increasing, and it's affecting the deliveries, so I think this is a common problem on the market.

That said, as I said in the beginning, I have confidence in our team and I think we will ride this one out as well and be successful in handling those problems. And we solve problems for our customers in the end of the day and provide excellent services.

Okay. Let's then jump to intensifying competition there in India. What does this in practice mean? That competition is intensifying. Are there new players that are entering the market or have old companies increased their capacity? And how do you see this in practice, that the market is more competitive? No.

I think it's a combination of both. We have new companies coming up and we have other companies increasing capacity. So the sector is hot. There are a lot of investments made in the sectors. I think if you look at the valuations of the Indian EMS on the Mumbai Stock Exchange, then with those kind of multiples, it's not a problem of raising capital and building or getting into the EMS business in that sense. So I think this is, as I mentioned during the webinar as well, an effect of how India is, and India is a democracy. It has a government that supports industry to try to attract a lot of industry into India. There's availability of engineers. 1.5 million engineers graduate every year in India. So. So companies moving their R&D or OEMs moving their manufacturing also to India, it is growing and growing and growing. And we see that, of course, in ours.

But before we were perhaps, I would say, one of the few international EMS companies on our level. Now we meet more colleagues in the industry and also more capable companies within. And I think that is positive. That means that the industry is developing in India. And in the long run, that is good for us as well, because that drives innovation and development of excellent engineering skills. So, but we see it in the day to day. There's more pressure, we see more competition on the markets, more competition when it comes to both our existing customers. But perhaps foremost on newer customers and it's how the market looks. It's a hot place to be in India, not only temperature-wise.

Yeah, I understand, and you actually answered a couple of my follow-up questions, but let's still continue from the margin pressure. Do you see this kind of, let's say, over-normal margin pressure in other units than in India currently?

I wouldn't say that. As I said, in EMS business, there's always margin pressure. I would say I want to see that nobody doesn't recognize that. As I mentioned, price, quality, and OTD. That's hygiene factors. You need to be competitive in these to win and maintain the business in the industry. But we see here there are more players coming in. There's more things that we don't see in Europe and in the US in the same way. But I would lie if I said that there is no margin pressure in the business. It's always margin pressure. Price is always a factor. And that's something we need to keep on a competitive level. And I have been successful doing so far. In that sense. And because we have gained business and we have grown, and also as I mentioned during the webinar talking about organic growth here, I think that's our main focus now. And I'm quite sure that we will continue to have a good result in that.

Do you think that you have some kind of competitive advantage in this intensifying competition when it comes to quality and on-time delivery. Or is it more or less a question about price for the customer?

No, I think if you look at quality and on-time delivery, let's start with, I think Incap today is a global company and we have competencies all over the world. Previously when we spoke on the webinar, I talked about that we have the segment knowledge. We are now developing the cooperation and knowledge sharing between the units. And we have great knowledge in different sectors when we combine our teams from different units. And so we talk about world-class competence. And I think that is something we have that perhaps a single company here on the Indian market would have a hard time competing with. And that of course helps us to drive quality. It helps us to drive on-time delivery through process. Control and development and so on. So I think we have an advantage in those things as well. So, yeah, if that answers your question.

Yes, yes, to some extent, but let's continue still from the topic. So investors are obviously wondering if this intensifying competition and margin pressure is temporary or structural. And it looks like this new competition has come to stay in the Indian market. So do you see room to improve your margins back to historical levels in some kind of time frame, and how much could it take? Take time.

I think in that sense that I don't see that here in India, for example, the increased competition will disappear overnight. So that I think is more of a long term. Now once more, I know we have had great double-digit EBIT, but remember we have talked about it several times. So EBIT percentage has never been holy for us. If we can increase the business and increase the value for shareholders by diluting the EBIT a little bit, taking in good business with less margins, then of course we consider that. So for us, it's not only that said. As I said before, I think our setup, with how we're organized decentralized, helps us to drive a profitable business and with the less overheads that we have compared to other businesses. But for us, it's not only, it's a little bit. Of course, good bragging when you meet other CEOs in the business to have double-digit. But it's not only. In that sense, the key is to earn money and as much money as possible for our shareholders. And if the percentage is 10, 12, 11, 9 or 15, that is less important. The important thing is EBIT or EBITDA in absolute numbers.

Yeah. I can of course reassure you that investors and I don't look at EBIT percentage, but in H2 and Q2, net sales increased quite significantly more than EBITDA. So that's an issue that investors are wondering about. But one more question from this topic, and then let's move on. Incap doesn't have medium- to long-term financial targets, which obviously could make it a bit easier for investors to evaluate the long-term margin potential. So I ask how investors should think about the long-term margin potential of Incap as we speak.

I think, of course, we try to create value in the long term for the shareholders. And that is the key to drive shareholder value creation for them. And we believe that we can scale our concept and continue to grow and focus both, I would say, in the near term organically on the growth and also, of course, long term, perhaps inorganically as well. I recognize that we haven't perhaps given a long-term guidance. So this is something we are discussing and developing internally. And we have a Capital Markets Day coming up now. And I hope in here in in. Later this year. And I hope that we will be able to share perhaps a little bit more light on these issues then for the investors. So this is something we are working on.

I also want to be, as I mentioned before, clearer in how we give our guidance. So short term, because I think there is something to develop there. We are a larger company now than we were some years ago. And we have more eyes on us. And the key thing is transparency to the shareholders. But we are continuing to develop the company and we want to create value for the shareholders.

Sounds good. And looking forward to CMD in November. Okay, let's move then to Q2 numbers. What were the highlights of Q2? Uh.

Yeah. I think for me, of course, the return to organic growth. And we had a slower first part of the year and there was an increase in that sense from month to month during quarter two. And I think that is positive development. Of course we don't report order intake, but as we mentioned in Q1, we had very high order intake. This has continued in Q2. And I have seen, or we will start seeing, effects of that. During the second half, which I expect will be better than the first. So I think I would say we have momentum, we are moving in the right direction. And of course, we can always improve. And that's what we are working on with the team. And there will be challenges ahead. But I'm quite sure we have a strong team and we can continue positively to grow the business and also to improve where necessary.

Yeah. Companies have been commenting on demand relatively positively during this earnings season. Which market segments are particularly hot in the market currently? And do you see weakness in any subsegment of the market?

I think still defense sector is very much leading the growth also in Incap. We see increased, I mentioned before that of course AI and things that are around AI, data center, these projects, we also see growth in, otherwise other segments are still, how to say, I would say quite flat or perhaps not in decline, but not in any big growth either. So the main driver I would say is still defense and AI, directly and indirectly in that sense.

Can you anyhow quantify your exposure to defense and data center deliveries, directly or indirectly? Currently.

Yeah. We haven't reported the segments, so I won't comment, but in that sense, of course, we have discussed before, we don't have major exposure to any sector in particular. And we are quite balanced when it comes to the sectors that we are within. So of course, defense now with the acquisition of Lacon increased and is expected to increase still, but it will still not be a dominant part of Incap. And when it comes to data center, then of course we are not doing the core that the tier ones are doing. But there's a lot around that from energy backup systems to. So that falls very much into, I would say, power electronics and other things that we have great competence in at Incap. So we still see it. But none of those segments, or by that means any others, are dominant in that sense.

How did Lacon perform in Q2 and how has integration of Lacon to Incap progressed during the quarter?

I think the integration has progressed very well and we have good progress. And in that I would say that, of course, it's a longer-term thing as well. But I feel that we have achieved the key milestones in that integration. And it very much feels like Lacon is a part of us now. It's Incap Germany and Romania. Not anymore in that sense. So I think that performance-wise, I would also say that they have performed more or less as expected. We have had some delays in some military projects. And that we now see is starting to move. So I expect them also to perform in line with the rest of us a little bit better now during the second half when these projects start moving. So overall, I'm very happy with the integration and our expectations are in line with the performance.

Okay. And finally, going back to the guidance, you guided a 26 to 29 million comparable EBITDA for this year, and this looks like a relatively thin guidance range in this very uncertain world. How confident are you with the guidance and visibility that good to the year-end currently at the end of July?

Yeah. We base our guidance on the visibility and the knowledge that we have currently. And otherwise we wouldn't have given it. So with the knowledge I have today, I'm confident in the guidance, and that's why we also gave it out in that sense.

Okay. Thank you and have a nice trip in India.

Thank you very much, Antti.