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

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. EBITA guidance. What has changed since February, when you announced original guidance?

Now, if you look at how we give guidance, we are very conservative. Also small changes are, of course, a trigger to profit warning. If you were look at that, it has not been a big dramatic change from February, when the original guidance came, compared to we were just about there, around 22 for the line in that sense, and now we are some points below. So I wouldn't say that it has been a dramatic or very steep drop from our perspective, that it is more a question of how we have given steering in the company with these 20 blocks. When you have a position that is just about 20 or within the 20 to 40, and then goes into the 0 to 20, then it triggers warning. If that explains the situation. We are all looking now also at how we are doing the reporting in general, and I hope that during our Capital Markets Day we can already suggest little bit improvements on how we give steering in the future.

Looking forward to that, because from investors' perspective. it is a bit different to yours currently. But, well, you mentioned that there were two reasons leading to downgrading comparable EBITA 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 you see it is, of course, a combination. I mentioned there on the webinar as well that we feel, especially here in India, increased competition on the Indian market, that this has been a very hot EMS market currently, but also the material availability. We look at currently AI is driving very much to the material amount, and now we see that in many different material groups, that we have prolonged lead times and, how to say, demand from the AI side. This is the big growth. There is a little bit coming into other sectors as well when it comes to availability. So this is something we are working very hard with our teams and with our customers and try to balance, to increase buffers and so, but it is an effect, of course, of both in that sense. I think the margin pressure is for us. more located around the Indian operations, but if we look at raw material availability, it is more, how to say, a common issue all over the group that affects on-time delivery, price and quality, all high-impact factors 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 could be and should be more temporary issue. I wish Incap managed relatively well during Covid crisis with sourcing, and you didn't have any very visible issues with raw material sourcing back then. Why it seems to be that now it is more difficult to source effectively in the market, even if as a total. the situation is not that bad yet?

First, we have full confidence in our team and in the capabilities they have, and we have been riding out many crises over years, as you have seen, is it Covid or is it other material sources that have been around. What we see now. of course, is 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 kind of movements in the market. it takes time before further capacity has been built up, and 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 and so, lead times are increasing and affecting deliveries. So I think this is a common problem on the market, as I said in the beginning. I have confidence in our team, and I think we will ride this one out as well, be successful in handling those problems and minimize those 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 that 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?

I think it's a combination of both. We have new companies coming up, and we have other companies increasing capacity. The sector is hot, so there are a lot of investments made in the sector. I think if we look at the valuations of the Indian EMSs on the Mumbai Stock Exchange, then who can do multi-bags. This is 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 on the webinar as well, an effect of how India is. India is a democracy, the government supports industry, they try to attract a lot of industry into India, there is availability of engineers, one and half million engineers graduate every year in India, so companies. are moving there and EMS moving their manufacturing to India. It is growing and growing and growing, and we see that, of course, in EMS. But before we were perhaps, how to say, one of the international EMS companies on our level, then now we meet more colleagues in the industry and also more capable companies within India. 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 and so forth. But we see it in the day to day, there is more pressure, we see more competition on the market, more competition when it comes to both our existing customers, but perhaps most new customers, and it's how the market does it, a hot place to be in India, not only temperature-wise.

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 to normal. margin pressure in other units but in India currently?

I wouldn't say that. As I said, it is, of course, in the EMS business this old base margin pressure that I would say, it's hard to see that nobody doesn't recognize that. As I mentioned, price, quality and on-time delivery, that's hygiene factors, you need to be competitive in the EMS to win and maintain business in the EMS industry. But we see here there are more players coming in, there are more things that we don't see in Europe and the US in the same way. But I don't say that there is no margin pressure in the EMS business. There is always pressure, and that is something we need to keep on competitive level. We have been successful doing so far in that sense, because we have gained business and we have grown, and also we were, as I mentioned on the webinar, talking about organic growth here, and 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 with 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 and so, let's start with that. I think Incap today is a global company and we have competences all over the world. Here previously when I spoke on the webinar, talked about that we have the segment knowledge. We have now been 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. The product knowledge, competence, I think this is something we have that perhaps no single company here on the Indian market has to compete with, and that of course helps us to drive quality, it helps us to drive on-time delivery through process. how to say, control and development and so on. So I think we have an advantage in those things as well, so if that answers your question.

Yes, yes, that sums it up, but let's continue still from the topic. Investors are obviously wondering if this intensifying competition and margin pressure is temporary or structural, and it looks like that this new competition has come to stay in 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 time?

I think in that sense that I don't see that here in India, for example, increased competition will disappear overnight. So that I think is more of a long term. Once more, we have had a great double-digit EBIT, and remember we talked about it several times here, but percentage, we have never been overly focused on if we can increase the business and increase the value for shareholders by allowing EBITA a little bit, taking in good business. This is with less margins, of course, we consider that. So for us it is not holy. As I said before, I think our set-up with how we are organized, decentralized and so, helps us to drive profitable business and with the less overheads that we have compared to other business. But for us it's not holy, it's a little bit of course good bragging when you meet other companies in the business to have double digit, but it is not all. In that sense the key is to own money and as much money as possible for our shareholders, and if the EBITA percentage is 10, 11 or 15, that is less important. The important thing is a bit more EBITA in absolute numbers.

I can. Of course, I reassure you that investors and I don't look at EBIT percentage, but in Q2 net sales increased quite significantly more than EBITA, so that's an issue that investors are wondering. 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, 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 take the whole concept and continue to grow and focus both, how to 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, and this is something we are discussing and developing internally. We have a Capital Markets Day coming up now later this year, and I hope that we will be able to share perhaps a little bit more light on these issues 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 steering short term, because I think there we have something to develop there. We are a larger company now than we were some years ago, and key thing is transparency to the shareholders, but we continue to develop. I think 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?

I think for me that, of course, the return to organic growth. We had a slower first part of the year. and also saw increase in that sense from month to month during quarter two, and I think that is positive development. Order intake, of course, we don't report, but as we mentioned in Q1 we had very high order intake. This has continued in Q2, and we will start seeing effect of that during the second half, which I expect will be better than the first. So I think. how to say, we have momentum, we are moving in the right direction, and of course. we can always improve, and that is what we're working on with the team. 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 in all ways necessary.

Many companies have been commenting demand relatively positively during this earnings season. Which market segments are particularly hot in the market. currently, and do you see weakness in any sub-segment of the market?

I think still defence sector is very much leading the growth. Also in Incap we see increase, as mentioned before, that of course AI and things around the AI data center projects, there we also see. growth, and while other segments are still, I would say, quite. quite flat, or perhaps not in decline, but not in any big growth either, so the main driver. I would say is still defence and indirectly and indirectly that some.

Can you anyhow quantify your exposure to defence and data center deliveries directly or indirectly currently?

We haven't reported end segment by segment, so we have to 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 our sectors that we are in. So of course defence now with the acquisition of Lacon increased and is expected to increase still, but it will still not be a huge or dominant part of Incap. When it comes to the AI data center, of course. we are not doing the core that is there they're doing. But this is a lot around that, from energy backup systems to that fit very much into, how to say, power electronics and other things that we have great competency in at Incap. So we still see it, but none of those segments are by any means dominant in Incap in Azure.

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

I think integration has progressed very well, and we have had good progress, and in that I would say that, of course. it is a long-term thing as well, but I feel that we have seen 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 and local management and so. So I think that performance-wise. I would also say that they have performed more or less as expected, when we had some delays in military projects, and that we now see is starting to move. So we expect them to perform in line with the rest of us, a little bit better in the second half, when these projects start moving. Overall, we're happy with the integration and. our expectations are in line with the performance.

And finally, going back to the guidance, you guided. 26 to 29 million comparable. EBITA for this year, and this looks like relatively thin. guidance range in this very uncertain world. How confident are you with the guidance and the visibility that Q2 year-end are currently in. or at the end of July?

We base our guidance on the visibility and the knowledge. what we have currently, and advice we would have given at that time. So with the knowledge I have today, I am confident in the guidance, and that's why we also gave it in that sense.

Thank you, Otto, and have a nice trip in India.

Thank you very much, Antti.