Interview with André Harari, Chairman of the Board of Directors and Daniel Harari, Chief Executive Officer
(March 03, 2009)

How did Lectra fare in 2008?

André Harari: For Lectra, as for all companies, 2008 was an atypical year due to the outbreak of the global crisis. Conditions had been steadily worsening even before the financial system was shaken in September. The uncertainties were already accumulating in number as early as July. Then, at the beginning of autumn, the financial, stock market, and banking crisis took an unprecedented turn for the worse. The direct consequence of this was a further, brutal deterioration of the economy in all our sectors of activity the world over. Caught up in this downward spiral, companies were fully subjected to a slowdown of their business activities, on a scale rarely seen in many decades.
In these exceedingly unusual circumstances, our revenues and earnings—albeit well below our expectations—resisted as a result of the efficacy of the measures we have taken as well as of the solidity of our business model.

Daniel Harari: At €7 million, income from operations fell only 9% relative to 2007, despite a 6% drop in revenues. This performance can be credited to the speed and effectiveness of the cost-cutting measures we introduced as early as July 1 and reinforced in September, and of course to our robust business model. Our net income came to €3.2 million. Free cash flow was negative at €4.8 million, but it would have been a positive €5.1 million and superior to net income had certain temporary factors been absent.
 When you look at our sales curve over the year, you can see it clearly headed downward quarter after quarter. The decline in orders for new software licenses and CAD/CAM equipment reached 31% over the year and 48% in the fourth quarter. We’ve never seen anything like it. The situation is very tough for our customers. Regardless of their country or sector of activity, the economic downturn has forced them to cut back or halt production, and above all to suspend their investments. When you watch your financial performance decline, your bank credit collapse, and your outlook darken, you reduce investments to a bare minimum and take drastic actions to cut costs.

Have you seen any evolution in the crisis since its onset?

Daniel Harari: Apprehension and hesitation have spread and gained in strength, and there is great uncertainty as to the depth and the duration of the crisis. At this time, nobody knows when it will end, and everyone is essentially playing by ear. Of course, we are seeing a few niches of opportunity through all this. Some customers are competitive enough to win market share from their competitors. And in some rare markets, activity could stay brisk. But regardless of these opportunities, which are relatively mild in any case, we need to be prepared for a difficult year in 2009. Not only are we ready to confront these conditions, we intend to emerge strengthened from this period.

How do you plan to make progress in these adverse conditions? 

André Harari: Pragmatically, with determination and perseverance. Today we have an extremely robust business model. In recent years, we have sharply boosted the volume and share of recurring revenues in our total revenues. In 2008, they proved that they do make an essential contribution to business stability. 

Daniel Harari: The first source of these revenues is our subscription contracts—software evolution contracts, CAD/CAM equipment maintenance contracts, and online support contracts via our five International Call Centers. These contracts concern approximately two-thirds of Lectra’s 23,000 customers and account for 33% of our revenues. The second source is the sale of spare parts and consumables, which account for another 18% of our activity. We market an integrated technological offer, unmatched in reach and performance and responding to all the needs of each customer. Our solutions, specific to each market sector, benefit from a vigorous research and development program. But equally important, we also offer services enabling those customers to make the most of our solutions and optimize their investments over the long term. I’d like to stress the expansion of our training and consulting activities in 2008.

André Harari: In tandem with our business model, the defining strengths underlying this unmatched offer and the expertise of our teams propelled us ten years ago to global leadership, while at the same time bolstering our financial fundamentals. This has enabled us to safeguard our assets in this difficult period, and to hold to our course. Even so, we have cut our fixed overhead costs again and are constantly on the lookout for ways to adapt to the changing conditions on a daily basis. Our two immediate imperatives are to protect the company’s financial position in the short term and to limit its exposure to risks.

How much room for maneuver do you have now? 
 
 Daniel Harari: Fixed overheads were reduced by 7% in 2008 compared to our initial budget, representing a decline of 3% compared to 2007. Measures taken starting in July include, in particular, the suspension of our recruitment plan, not systematically replacing all departures, the eradication of temporary work missions, and the termination of certain subcontracting contracts. We have managed to safeguard jobs until now. Management and all our teams are fighting together for the company. Lectra has a huge amount of human capital, and its preservation has always been a priority for us. That was a prime consideration in our decision to not delocalize production to China, unlike some of our competitors. We preferred to invest heavily in research and development to bring out a new generation of equipment at the beginning of 2007, with manufacturing costs below those of the previous generation. Those companies which did choose to delocalize must be regretting that decision now, since the rise of wages in China and the appreciation of the RMB have neutralized any advantage that they could have hoped to obtain. At this time, our manufacturing costs are competitive while our offer represents more advanced technology and greater added value. We have also kept practically all our research teams in France, which has enabled us to capitalize on our accumulated expertise while preserving our intellectual property. 
 
André Harari: In addition, our borrowings are set to fall. Under the French government’s economic stimulus plan, the €14 million research tax credit owed by the State will be paid to us in full in the first half of 2009. We are also expecting the International Court of Arbitration of the International Chamber of Commerce to issue its decision before the end of the second quarter, bringing to a close the procedure Lectra initiated against Induyco in 2005 after our acquisition of Investronica. Our financial situation is solid. Our 2009 action plan is benefiting directly from recent efforts to improve our operating ratios. And the dollar’s appreciation, if it lasts, will produce two positive effects: the first is mechanical, boosting our revenues and income from operations; the second is competitive, as our main competitor is American.

What is the 2009 action plan based on, and what are your objectives?

André Harari:  Given the lack of visibility, it must be understood that we have opted to not formulate an outlook for 2009. Our plan, however, is the result of exploring all types of action possible. On the one hand, we intend to continue to reduce our fixed overhead expenses, further boost our security ratio, return to significant positive free cash flow, and preserve our margins. On the other hand, we have mobilized all the teams towards sales and customer satisfaction, favoring a strong, rapid rebound of orders for new systems as soon as the situation allows. Our management teams are committed and accountable. Daniel and I have a large stake in the company, holding 40% of the capital and ensuring the stability of the shareholding. The turmoil dragging down our stock price is hurting us as much as the rest of our shareholders. We strive to protect and foster the value of our company
over the long term.

Daniel Harari: Difficult times are also an opportunity to focus on what works best: that’s why we are re-centering on our priorities. The Group’s managers are concentrating on building high value-added sales which offer the best service to the customer.

André Harari: More broadly, our relational value player strategy and the pertinence of our solutions will enable us to benefit fully from the economic upturn as soon as it begins to occur. In fact, more than ever, the companies in our market sectors and regions will need to invest in vital technologies to reinforce their competitiveness. Our history is evidence of Lectra’s resilience. All companies have to contend with difficulties at some time or other, and our past trials have helped us mature, consolidate, and move forward. They have taught us to confront adversity while holding to our convictions. That’s what gives us confidence for the future, once the crisis is over. The key objectives of our strategic plan remain unchanged.