Interview with André Harari, Chairman of the Board of Directors and Daniel Harari, Chief Executive Officer

(February 26,  2010)

Strengthened for a reset economy
Faced with an unprecedented drop in orders, Lectra’s earnings held up well, demonstrating the effectiveness of its management by durable cuts in costs and preserved margins, as well as the robustness of its business model. Having proved its resilience in the past, Lectra prepared to confront the new global challenges of the post-crisis economy. It has a number of major assets in terms of technology, marketing and human resources, along with a clear strategic roadmap for emerging strengthened from this difficult period, with a unique range of solutions indispensable to customers in its different markets.

You expected 2009 to be difficult. How did Lectra fare?


Daniel Harari: During the first three quarters, the reality was worse than anything we had imagined, even in our most pessimistic scenarios. Like all companies, the economic crisis continued to have a severe impact on Lectra. Most of our customers experienced a decline in their activity—to levels rarely seen in decades. Regardless of their country or sector of activity, they were forced to take drastic measures, cutting back or halting production and, above all, keeping their investments to a strict minimum or freezing them altogether. Consequently, our sales activity dipped sharply right from the earliest signs of the crisis. The decline in orders for new software licences and CAD/CAM equipment reached 65% in the second quarter of 2009, compared to 2007, the pre-crisis reference year, and ended the year down 55%. In these extraordinary circumstances, our revenues suffered a serious decline: At €153.2 million, they were down 23% relative to 2008. Compared to 2007, the decrease in revenues works out to €63.3 million, or 30%. Although it came to a loss of €2.8 million, income from operations before non-recurring items held up well. This was due to effective cost-cutting measures implemented as early as 2008, and again in 2009; the preservation of our margins in spite of severe competition; and the robustness of our business model. Our net loss came to €3.6 million, and we registered a highly positive free cash flow of €9.3 million.

Last year, you said you would tackle the difficult conditions arising from the crisis with pragmatism, determination and perseverance. Where do you stand now, a year later?


Daniel Harari: Our two immediate imperatives were to safeguard the company’s financial position and limit its exposure to risks. The entire company has been mobilized to carry the action plan through to a successful conclusion and optimize our sales activity by making supporting our customers our main priority.

André Harari: In May, Daniel and I embarked upon a long process of careful consideration, taking the distance necessary to rethink the company fundamentally and map out the strategy for the years to come. Our primary goal was to ensure Lectra emerges from this crisis strengthened, sustainably growing its revenues and earnings to match its potential. We are convinced that the world we are entering will be different, with upheavals taking place across the board. There will be new patterns of macroeconomic growth, new value propositions and new regulations. There will be a shake-up geographically and in every sector of industry. So, we needed to take a fresh look at the way we think and conduct business. This plan seeks to “reset” Lectra for the post-crisis “reset economy.” In building our future, we have deliberately withstood the powerful external pressures on most listed companies to focus on the short term. To construct our future growth on solid foundations, we have given priority to the long term, accelerated the necessary reforms, taken precise, decisive action, and initiated projects, all with the appropriate level of ambition. This has implied taking controlled risks, without endangering the company. When growth returns—in 2010 or after—the economic and competitive landscape will have changed substantially. We will be ready to take full advantage of these historic conditions. Our preference is for organic growth, but we do not rule out the possibility of seizing suitably targeted acquisition opportunities, provided their financial terms are especially favorable, given the context created by the crisis.

Daniel Harari: Jérôme Viala and Véronique Zoccoletto, who sit with me on the Executive Committee, immediately joined us in the process of re-thinking our future. By October, the entire international management team was working on framing our action plan for 2010, to take immediate effect as of January 1. We are aware that we are now facing the difficult part—the execution of our plan—but we also know that this represents a motivating new challenge for our teams. The success of this strategy and of the far-reaching transformation of our company calls for the utmost discipline in its execution. Lectra has acquired this culture over the years. Alongside our highly entrepreneurial spirit, this provides additional reasons to feel confident. Our plan remains totally faithful to our enduring fundamentals. This is true of our vision, strategic objectives, value proposition and our business model. We are now taking these to the next level by accelerating our evolution—but seamlessly, without breaking with the past.

You often speak of entrepreneurship as one of your core values. In what way does this now represent an advantage?


André Harari: Lectra is a great entrepreneurial adventure. The entire company is demonstrating tireless combativeness in executing this strategy and proving its relevance through its results. Never look back; always move forward until you reach your stated goal. Never give up, and never let pessimism get the upper hand. Find an answer to every problem; exude energy; demonstrate courage and perseverance to keep pressing onward. Have a clear vision; set goalposts for each person; be willing to take risks and seize opportunities in a tough economic environment. Reinvent yourself continuously; be bold. Forge teams capable of confronting today’s challenges while building for the long term. Those are the principal attributes of entrepreneurship and motivating factors for our teams. This is our modus operandi. The crisis has revived the key role of entrepreneurial-shareholdership, one of Lectra’s main strengths within its competitive battlefield. Our 40% stake in the capital is a guarantee of the stability of our shareownership, enabling us to preserve our assets while building for the long term. Our primary goal is to create value for our customers and maximize their long-term satisfaction. That, in return, will create value for our employees, our industrial partners and, of course, our shareholders. 

Daniel Harari: We have suffered a sharp drop in our market capitalization, down to €64 million at the end of 2009. Most investors have been discouraged by a lack of visibility, the weakness of our share price, down 60% since the onset of the crisis, and the illiquidity of our shares market. This poor stock market performance has dragged us back 17 years— clearly an unpleasant situation. But our plan should progressively restore our market capitalization to a level that reflects the true value of the company and enable us to resume appropriate remuneration of our shareholders as soon as possible.

You mentioned the opportunities created by the crisis. What are they, and how do you plan to benefit from them?   


Daniel Harari: Our ambition is to rewrite the rules of our industry and bolster our leadership. For more than 20 years, our competitive environment led people to think that there was just one path, namely developing more or less sophisticated, but ever cheaper, products requiring few or no associated services. With the crisis, this “good enough” approach—which was never ours—clearly reaches a dead end. Our strategy is based on firm convictions, innovation and expertise, all combining to offer our customers the best return on their investment. What do our customers need? They need to rethink their business models, reset their own organizations, and return to profitability. For that, they need innovative systems that cut their material costs and time-to-market—systems that are ever more comprehensive and integrated, enabling them to communicate securely. We will be reinforcing our presence with our customers, better explaining the added value our solutions offer. It is in their interests to invest, even in these difficult times, in order to operate more efficiently and turn the post-crisis period into one of opportunity. Today, Lectra’s integrated technology is the industry standard. Our offer, which marries technology with services, and especially our pioneering Smart Services, is the most advanced and comprehensive on the market. Unrivaled in terms of scope and performance, it fulfills the needs of our customers, enabling each of them to obtain the best possible results from our solutions and optimize their investment in the long term.  
  
André Harari: All these upheavals in our market sectors and geographical regions benefit Lectra: In developed countries, we will see changing business models, adjustment plans, sector consolidation, relocation, and repatriation, while emerging countries will experience rising exports and growth in their domestic markets… The resulting dynamic is further boosted by our unmatched local presence on every continent. Here too, our strategic vision is playing an essential role. For example, since the 1980s, we have had a direct presence in all developed countries as well as in Greater China and Brazil, and we opened our subsidiary in India (where we were previously represented by a distributor) two years ago.

In the litigation against Induyco, the International Arbitration Tribunal awarded Lectra €25.3 million.


André Harari: This was the culmination of a long battle. We acquired Investronica in 2004. We have invested a great deal of energy, along with nearly €10 million in legal and expert fees and procedural costs, to assert our rights in the arbitration that we initiated against Induyco, Investronica’s former shareholder, in June 2005. Even though the parties had agreed in the share purchase agreement that all disputes would be finally settled by international arbitration, Induyco—a subsidiary of the powerful Spanish group El Corte Inglès—has refused to execute the decision. Induyco has since obtained a ruling in Spain temporarily suspending calls on the bank guarantees it had granted us, and has challenged the decision in the British courts. As a result, we have not recorded the award in our 2009 financial statements. Lectra considers both court actions to be entirely without merit and intends to mount an aggressive and vigorous defense of its rights and to seek recovery of the amounts due to it under the award.

Have you glimpsed any signs of improvement in the last few months? 


Daniel Harari: There was a clear rebound in activity in the fourth quarter of 2009, with a 22% increase in orders for new software licenses and CAD/CAM equipment, compared to 2008. Revenues, income from perations, and free cash flow exceeded our expectations. Some customers have already resumed investments—several world-leading firms placed significant orders at the end of the year. It is encouraging, but we must remain cautious. The financial situation of most companies has been severely weakened by the crisis, and they are deferring decisions pending confirmation of a rebound and a durable improvement in their activity. And, indeed, we are prepared for a persistently weak economy in 2010. Like last year, we have decided not to formulate any estimates, given the lack of visibility. HowEver, barring a further deterioration in the economy, we expect income from operations and net income to be positive. A recovery should spur on our sales activity and bring a rapid return to profitability. Our business model again demonstrated its robustness in 2009. This is the model that has enabled us to finance investments of €170 million in R&D since 1998, a level which we have sustained in 2009, unlike our competitors. It has also enabled us to finance €80 million in acquisitions, and investments of €60 million in infrastructure—in particular those specifically for our customers as well as our information technology systems—making a total of €310 million.

What are your objectives for the medium term?


André Harari: We expect our plan to bring about a return to sustainable growth in terms of revenues, net income and free cash flow, starting in 2011. Since its inception, Lectra has become a world leader, generating 90% of its activity outside France. The company has emerged victorious at each decisive step of its development. Thanks to Lectra’s innovative capabilities and the energy of its teams, we are convinced that we will, as before, emerge victorious from the present difficult times. Our history is evidence of our resilience. The five core values that underpin our unique corporate culture—entrepreneurship, leadership, innovation, excellence and customer care—are more relevant than ever before. They are crucial to the success of our strategy, and an integral part of our day-to-day business concerns. We therefore have every reason to feel confident that we will strengthen our leadership and return to profitable growth.