Incap published its Q1 report today morning and we will discuss about that with the company CEO Otto Puk. Welcome once again to the interview, Otto.

Thank you very much, Antti. Always a pleasure talking to you.

Let's start from the Q1 figures. The quarter wasn't the best quarter for Incap, definitely. Flattish organic growth and single-digit margin in Q1. Could you please briefly go through the drivers and also comment was there anything surprising to you in Q1 development?

In that sense, we had in our internal plan expected a little bit of a softer, slow Q1. And as we mentioned in the report as well, we had some material issues in the first months that postponed some of the orders and delayed some of the order deliveries into Q2. But it was a little bit of a soft market to start with. We have big projects that we have been ramping up to and of course having idle capacity waiting for, for example, material, and that costs and that also affected the profitability. But overall, yeah, it's not very nice numbers in that sense, but still we are quite good in spirit. The way we see it, there are already clear improvements in margin moving on now. Now in Q2, we see strong order intake and we don't see any reason for us to doubt our guidance that we have given out. So yes, a little bit of boring numbers or so in the beginning of the year, but I'm quite sure those will be happier moving on.

Okay. Let's continue from this material issue. Most of your Nordic peers have reported their Q1 figures and there have been very little comments about any availability issue regarding the components. Do you think that you source different components or source somewhat differently otherwise because you have seen these issues but peers not?

No, I think that we source from very similar sources. Of course, who is affected and in what way when it comes, as I mentioned, foremost we are talking about a component need that is driven by higher demand perhaps usually in data centers and, I would say, the components used there. that get a little bit prioritized. It depends on, of course, who the supplier is, what the project is. And so I think we have been affected and I've seen also some of our other peers also reporting they have been affected. So I think it goes quite commonly for the industry. But as I said, I don't see any systematic big problem here in components availability. We had it with some orders getting pushed out and I would say not helping the figures that... that we had in Q1 by doing so. But as I wrote in the report as well that I don't see any systematic thing here. We see clearly that when it comes to the data centers, the different suppliers are increasing volumes in their productions and I don't see this now will be a persistent long-term problem. So if that answers your question.

Yes, it does. How about pricing? Component pricing is also increasing, but do you have any issues with the pass-through to customers?

Yeah, of course, pass-through to customers never is a live exercise. It's where we do negotiations and renegotiations and pass-through increases to the customers. But it takes, of course, it's always a little bit like a delayed response. So fully we haven't seen now this component. We see that on the market, the recent increase in pressure on the pricing and exactly where they will land and so that perhaps is not there yet. But I wouldn't say that this is also something out of the ordinary. This is something that happens on the market, prices go up and down and we work closely with our customers to pass through increases but also give them decreases when the time is of that nature.

Okay. Then regarding margin, you reported single-digit EBITDA margin in Q1, which is quite uncommon to Incap. Top line obviously didn't help, but according to my initial analysis, the main problem was actually staff costs that increased some three million euros year-on-year or quarter-on-quarter. Obviously, Lacon acquisition explained fair share of this increase. Was there anything else in staff costs in Q1 or anything untypical? Do you expect these staff costs to remain on that level going forward?

Of course, we are not used to seeing Incap in significantly different numbers. Now, even if we have a soft quarter, suddenly we are shooting out numbers very close to many other in the industry when they have good quarters. So I wouldn't say, but of course the numbers were affected and as we had some push out, we had low utilization. of the capacity we had built up and we had some idle capacities and then of course that cost and that contributed. When it comes now to the increase in staff costs, that foremost, as you well mentioned, comes from Lacon and I expect the level of the staff costs to be on that level or around that level moving forward as well. But that said, I expect high utilization and then that will balance out that increase of costs. So it's a big puzzle, of course, but if we have postponement in material and we postpone orders and we have already had capacities built up for that and then it's idle capacities and so, of course, costs and low utilization is... They're always a big driver when it comes to profitability.

Yeah, that's clear. It's winner's curse that you are suffering and hopefully not to see very often on the single-digit side going forward.

No, but I'm quite confident in the sense that we will bounce back. And as I said, we haven't changed our steering and that remains. So yeah, a little bit slow start of the year, but there's lots of positive, I think, to take away from this report as well. And then, as I mentioned in the webcast. But because there is some fundamental changes here, one is of course the dependency on our biggest customer. That dynamic has now changed with Lacon coming into the picture and we see much, much healthier or I would say very healthy numbers when it comes to that. And I think that changes also the risk profile on Incap quite significantly coming from a situation where we were very much The one customer company. company almost and now going down to much, much healthier numbers. So when it comes to this, as I said in the interview as well, the healthy numbers in any EMS company, I think if you have a customer being somewhere 20-30 percent of the business then I would consider that healthy. We are well in that bracket nowadays with our big customer.

Yeah, that's very, very true as well and also recognized by investors, I think. Let's continue then about Lacon. How was Lacon's contribution during these first six weeks that the company was consolidated into Incap in Q1?

Again, six weeks, or a couple of days in February and March, and Lacon contributed as expected. I think the development there has gone well. We see the military orders that we were expecting are coming in now. And so that was one of the risk with acquisition, of course, that if... if the growth that we expected wouldn't realize but it seems to be going well for them. We didn't report the number by itself but it contributed as expected. So I look very positively on how Lacon has joined the group and how they are contributing and of course next quarter we will see more effect as we have a full quarter with the Incap Germany and Romania now. And we look forward to it.

As you are now in control of Lacon fully, could you please open a little bit more how is Lacon customer portfolio and how does order book look like as we speak?

Yeah, and Lacon has a very balanced customer portfolio and so as we mentioned when we did the acquisition, that was one of the key things when we looked at the company, that they are well balanced and have customers in many different segments, everything from railroad and other kind of mobility sectors to aerospace and defense, which is a growing sector for them. And so it's a well, well balanced customer portfolio that they have and I think now, yeah, coming in, we're working very hard with the integration. We try to get them into the cooperation. We already see that there's a lot of opportunities from their customer base but also ours to do cross-selling opportunities and drive value synergies. So overall, yeah, we expect that good cooperation and so to continue and that the Lacon people, or the now new Incap Germany and Romania people, will feel very much at home in our Incap family.

One of your peers flagged some macro-driven headwinds in their German business. How do you see operating environment in Germany and also... Competitive landscape when, for example, automotive industry is struggling and some EMS companies need to find new business to replace that segment. Yeah, we are not in automotive in Germany and in Incap group generally only a very small part of our business is automotive. So of course from that we haven't been affected that in Germany you have had a lot of those automotive industry and so of course during difficult times and part of perhaps the supply chain moving abroad from Germany and so on. So that is not affecting us. And if you look at these companies that are purely automotive that now try to find some kind of new customer bases. So it's not that easy in the EMS industry that these companies would go in and steal some customers from us or so. We have been working, you know, years with our customer base and we have a service offering with everything from from product design to complete box build solutions in Germany with this kind of design capabilities and so that many companies don't have that have been in automotive sector. Bear in mind that automotive is very low margin business and you don't have very much extra services providing to your customer and we come from another spectrum. I'm not that worried about that we don't see any big effect in our German business on that this should be some kind of big threat or something like that. So I recognize what they write. In that sense, I have understood the trend in the industry, but it's nothing that we see have been impacting us. Okay, that's clear. And finally regarding Lacon, it obviously increased your share in defense business. Can you open up anyhow how big share is defense and aerospace of Incap's portfolio on pro forma basis after the Lacon acquisition?

Yeah, you know, exact percentages we haven't reported, so that I can't comment on. But as we said during the acquisition as well, that Incap currently has a very small share of defense in that sense, even if that is where we, I would say, have ambitions and so then relatively small, and even with the Lacon ramp-up, also Lacon is a well balanced company. We won't have any dominant part in the defense. So it will still be rather in the tens of percentages than up in the 20s and so on, if that answers a little bit on it. And this, I think, is key, that sure, we want to explore and increase the defense sector and grow, but... But we don't want to go all in into the defense sector like we have seen some of our peers are doing. And really, there will be a life after the Ukrainian war and there will be a life after this that we see the growth now in the defense sector. And I think the key is that we remain a balanced company and we don't have any sector predominant being. being too dominant for us. So that is something we are deliberately working on and safeguarding that we have balance also in different kind of market conditions for different sectors.

Yeah, I fully agree with that argument. As well. Then let's go to energy sector. Energy prices have increased quite steeply recently and you have also some green energy related customers in your portfolio. Do you think that this customer segment will benefit the situation if high energy prices persist over a longer period of time?

Of course, if they persist over a longer period of time, then I would expect them to benefit in that sense. And I don't think that I would say sustainability or sustainable energy or alternative energy sources in that sense when it comes to solar and wind and so on are dead in that sense. I think they still have a very clear role in our energy systems. And so regardless of the oil price, but now the energy cost increases, I expect them to. still be fairly temporary and so I don't expect now any quick changes in the demand now for our customers but I might be wrong in that sense but at least that is my understanding that the market is still expecting to bounce back here after the Middle East crisis that we have and so on. But let's see, at least we haven't seen any huge increase due to the current situation in the Middle East.

Okay. Then let's go to strategic questions. You have closed a relatively large acquisition and reduced quite significant customer risks that you had in your portfolio. Before the acquisition, so my question is, what are the main topics and themes that are in your table when thinking about strategic development of the company?

I think I strongly believe in the decentralized model that we have, but of course we need to develop that as well. And now, you know, when I started, there were two sites in Incap and it was very easy to travel in between them. Now we have 11 and of course that is, or perhaps even more if I did the count right. But of course we need to look through how the model is developed. to operate and so on and safeguard still what is relevant. I strongly believe that with that we will continue with the decentralized model but we need to develop that as well. I mentioned that we are working on different tools when it comes to this kind of data lakes and so that we can build different tools on to support us running the company in this manner. And that is the key focus now to take Incap to the Incap 2.0 in that sense in the organization and how we operate and things we are working on and looking into how to develop and then of course we will continue with that and let you guys also know as soon as we have have something interesting to tell in that sense. But I would say that the fundamental is there. I think there is still a sweet spot on the market, you know, in this 500 to a billion bracket for agile, flexible and efficient EMS companies that don't become rigid and, like we say, go over to the dark side of the business. when they become big. And I think that is what we're aiming for, to take this scale, to hit that sweet spot and get the best from both worlds, being a larger company but also having a mindset and a model that allows us to be small and efficient and personalized when needed.

Yeah. Also from my perspective, there is still some way to grow before you are too big.

Yes, yes, yes. This whole thing always. We look forward to that.

Yeah, I do too. And finally, the last question, what are the main things in Incap's business that worry you as a CEO the most in short term? In long term. Or do you sleep well?

Always. No, no, I sleep fine. Of course, going out with a little bit disappointing numbers like this and still seeing the context, of course, that is frustrating in that sense. And I think perhaps that this is the key thing that many of the things we do long term. So if you look at it in a perspective, we look up in a couple of years at a time. And so then there is very positive development. And I'm quite sure that over the next next five, ten years, if you look at it in the long term, or you have to be even in a closer perspective, but if you look longer, we will still have a positive development. But it always goes a little bit up and down. We had a setback a few years ago with our biggest customer at that point where we were dependent and they overpurchased and we dealt with that, and it goes a little bit up and down. You have COVID and so on, but in the bigger picture we are moving I think quite steadily and nicely always in towards improvement and I'm quite confident in what we're doing in that sense so the frustrating part is yes it's always a little bit you know volatility in that sense and then we or need to answer a lot of questions about the present, but the present is also part of a bigger picture and that is how I see it and I hope that our investors also understand that we are an industrial company and it's a slow-moving ship, but once you get the ship moving it will eventually reach its target. And I think we all have a good momentum in what we're doing currently and then we'll continue in that as well.

Thank you for the interview and have a nice 1st of May.

Yes, have a nice Vappu.

Hyvää vappua.