Incap 1H 2023: QUESTIONS AND ANSWERS

In connection with our half-year report on 28 July we organised a webcast on our results. This is a summary of the questions and answers in the webcast.

Q: You made a great acquisition in the United States. Is the stomach full for a moment in terms of acquisitions, or can we see new acquisitions, for example in Germany, in the near future?

A: I agree that the Pennatronics acquisition was a great one and a good start. M&A will have a big role also in Incap's future growth. We are constantly working on that and have a good pipeline, but all depends on if a suitable target is found in a reasonable time frame. We now have a footstep in the US market and an established, experienced US team that can help with evaluating targets on the American continent. We also investigate the opportunities in the German market and other European markets. We look at acquisitions at many different levels. Value creation is always the key driver in our corporate transactions, everything we do should benefit our shareholders.

Q: How many bigger customer accounts does the acquired Pennatronics have?

A: They have six accounts with annual revenue of over EUR 1 million.

Q: How do you see the future of Pennatronics and new US customers? Do you have European customers that are willing to start production in US as soon as possible or US customers that are interested in starting production in Europe or in India?

A: We certainly see cross-selling opportunities, but these projects take time. I am nevertheless happy to say that we are already in discussions with customers on both sides.

Q: Can you improve the margins of Pennatronics and put it at Group levels?

A: Pennatronics' margins are good in the US market, but we are constantly looking at synergies and believe we can benefit from them in the longer term.

Q: Do you have free capacity in the US at the moment? How likely are you to expand the US-factory in the near future?

A: Yes, we have free capacity in the US unit at the moment, and that was also an important acquisition criterion for us. We are prepared to expand it if needed, so we have a good facility and a lot of interesting things to offer our existing and new customers.

Q: How much are your annual depreciations increasing due to the acquisition?

A: Pennatronics alone accounts for approximately EUR 0.5 million; on Group level the PPA calculation is work in progress.

Q: What will be the impact of the Inflation Reduction Act for Incap/Pennatronics?

A: It is unlikely to have a material impact on our figures and business.

Q: What was the main reason for Pennatronics' owners to sell their business to Incap?

A: The former owners are great guys that have been in the business for a long time, but now they decided to focus on other things than the Pennatronics business, although they remain owners of Incap and other businesses as well.

Q: What are the key challenges related to integration of Pennatronics? Are there any big differences in way of doing business or organizations between Incap and Pennatronics?

A: A big difference for Pennatronics is that they are part of listed company now. Incap is a decentralized organization, but they are excellent people who see a lot of possibilities in joining Incap. Our way of empowering people to take the helm of the business is likely to be very welcome.

Q: Do you have any M&A processes going on?

A: We have no insider projects ongoing at the moment.

Q: How would you describe your investment plan in general this year and in 2024?

A: As a rule, we do need-based planning. In the first half of this year, we have operated this way in Estonia and Slovakia, for example. We will do this also in the future, if there is a need for it, and if there is business case for it.

Q: How would you describe your success in acquiring new customers or growing previous customers in 2023? Did you manage to get new clients with Pennatronics. to fill your factories? What are your expectations for new clients?

A: We have done excellent work. There has been great development, and basically all our customer accounts have grown this year, except for the largest customer who is doing destocking this year. We have also received new customers, but of course with the dominant share of our biggest customer, this does not show in the numbers. The expectation with all our customers is that we can get good cooperation with them that there will be a win-win situation for both parties. We have good customer relationships, and we are in business for a long run.

Q: How has the recent acquisition helped in customer diversification? What's the share of your biggest customer now?

A: The acquisition has of course helped a bit, but also the biggest customer's reduced purchasing had an impact.

Q: How confident are you that your biggest customer is still prioritizing you and not leaving you for other EMS providers?

A: There is never anything written in stone, but we have a good relationship with them, close cooperation on product development and new product introduction. We also try not to give any customer any reason to ever leave Incap. In our business, there are no guarantees, but I am not particularly worried.

Q: You mentioned that reducing the stock levels of your biggest customer will affect your business especially in the second half of the year. How confident are you in the outlook and guidance for the end of the year?

A: We are rather confident that we will be able to keep the guidance we have given for 2023. We are working very hard on especially the profitability side to be able to keep the guidance.

Q: Do you see the end of the destocking exercise yet? Can we expect a ramp up from the largest customer in 2023 and can that happen already in Q1 or Q2?

A: It will not happen in 2023, and it is early to comment on how 2024 will look, as it is a moving target. We are cooperating closely with the customer on this issue, and their destocking depends on their sales development in in the second half of this year.

Q: Could you please give some more colour to this inventory destocking effect in 2023. Could orders be down by some 50% y/y from this one customer in H2 2023?

A: We have started to prepare for lower volumes, and the main impact will come in Q3 and Q4.

Q: What will be the effect for you operating profit margin from destocking in H2 2023?

A: We are trying to defend the profitability, and that's why we are keeping our guidance. Our flexible operational model helps to do this e.g. through reduction of manpower. We did not suffer too much in 1H, but profitability will be under stress in 2H.

Q: You say growth was good except for the destocking of the biggest customer. So to understand this, what was your revenue from all other customers than the biggest in Q2 2023, and what was the same number in Q2 2022?

A: We do not disclose these figures, but to give a ballpark figure, the growth was roughly 15-20%.

Q: Does you full year revenue growth guidance include Pennatronics sales effect or not?

A: Our current guidance is valid.

Q: Are you seeing higher pricing pressure than in the previous years?

A: There is some price pressure in the market, but also in costs. We have discussions with our customers on price increases. On the other hand, the component situation is improving, their prices partially going down as availability improves, so this is always a complex issue.