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Interview with André Harari, Chairman of the Board of Directors and Daniel Harari, Chief Executive Officer (February 28, 2013).
A new roadmap and clear, ambitious financial goals for 2015
Bolstered by its record earnings in 2011 and its very strong balance sheet, Lectra gave precedence to its long-term strategy in 2012, with a far-reaching plan to accelerate its transformation while continuing its steadfast investment in R&D. Results held up well in 2012 despite the weak economy and the cost of investments for the future, demonstrating the relevance of this choice and the strength of its business model. Forecasts suggested 2012 would be not only difficult but also unpredictable for the world as a whole. How did the year work out? André Harari: Our results beat our expectations, based on the assumption that business conditions would remain sluggish throughout the year. After rising 20% in 2010 and then 10% in 2011, following sharp falls in 2008 and 2009, our revenues fell 7%, like-for-like, to €198.4 million. Income from operations was down by 43% to €19.8 million, and net income reached €13.6 million. The operating margin was 10%, almost double the pre-crisis level. Continuing its makeover, our balance sheet is now very strong: we have cut our financial borrowings to €6.7 million and ended the year with €21.0 million in cash and cash equivalents.
“Our 2012 financial results are all the more remarkable considering the cost of investments for the future, which accounted for almost three quarters of the drop in income from operations.”
Daniel Harari: These results are all the more remarkable when one considers the cost of our investments for the future related to the company’s transformation plan, which accounted for almost three-quarters of the drop in income from operations, at actual exchange rates. Even more than deteriorating macroeconomic conditions, you had emphasized the dangers of alternating good and bad news, the lack of visibility, and businesses’ growing concerns. How did these weigh on customers’ investment decisions? Daniel Harari: The fear factor caused our customers to rein in their investments starting late 2011. With further worsening economic conditions, purchasing decisions remained on hold throughout the year. In the end, though, we succeeded in restricting the decline in orders for software licenses and equipment to just 6%, by bolstering our value proposition, and thanks also to the performance of our sales teams. In addition, it seems that some companies have adapted more rapidly to persistently weaker conditions.
The decline stemmed primarily from the automotive market, while fashion grew by 3% and furniture by 11%. The 18% fall in the automotive market was significant, but the situation was uneven. We made very strong progress in North America, with a 58% rise, which compares with a 32% fall in Europe, where we are experiencing a subsidence in the market. The 42% decline in the Asia-Pacific region was attributable to heavy investment by our customers in 2011, which enabled them to cover their production needs. All around the world, we find we have consolidated and often even increased our leadership among the major automotive parts manufacturers, which gives us great confidence for the coming years. In all our main markets, the trust our customers have shown in us is a source of great pride for the company.
“Despite these challenging years during the crisis, our winning spirit is stronger than ever.”
Have emerging countries remained predominant? Daniel Harari: Geographically too, the situation remained uneven, with an impressive 25% growth in orders in North America, a decline of just 2% in Europe, of 8% in South America, and of 29% in the Asia-Pacific region. With 54% of total orders, emerging countries remained predominant. Our presence in the eight growth markets expected to account for half of global growth in the present decade is a vehicle for dynamic growth. The other half will take place in developed countries, where we hold a significant market share. Thus, we intend to pursue our growth in the United States, where the industrial revival that started in 2012 is expected to gather pace. Why embark on such large-scale investments for the future in a general context of spending cuts? André Harari: At the height of the crisis, in 2009, our immediate imperative was to safeguard the company’s financial condition. Daniel and I embarked on a long review process, leading to a fundamental rethink of the company and charting a strategy for the coming years. Our 2010–2012 roadmap aimed to “reset” Lectra for the new, post-crisis economic order—the “reset economy”. To build future growth on solid foundations, we initiated a series of reforms that enabled us to cut our fixed overhead costs by 20%—while still continuing to innovate—and to end 2011 with record earnings, more competitive than ever. Our strategy called for a second transformation phase in order to build our new post-crisis structure on these new, very solid foundations.
Didn’t the macroeconomic environment in 2012 change the situation? André Harari: On the contrary. We didn’t wait for events to happen, and at the end of 2011 we decided to give precedence to our long-term strategy over short-term profitability, by accelerating the company’s transformation and devoting the requisite financial resources to this. This decision was both responsible and necessary. The plan is set to last until 2015, and we knew when we launched it that we were going to encounter fresh difficulties, demanding highly disciplined execution and representing a considerable, but exciting, challenge for our employees. Altogether, these investments for the future will represent €50 million over the period 2012–2015, fully expensed, while their benefits will only be felt progressively. Our fixed overhead costs should continue to be limited to around €130 million in 2015, which, adjusting for inflation, would be below the 2007 level.
“The €50 million investment of the transformation plan aims to bolster our worldwide sales and marketing teams significantly, keep innovation at the heart of our strategy, and accelerate our investment in marketing.”
What are the main points of this transformation plan? Daniel Harari: There are three. Bolstering our worldwide sales and marketing teams significantly. Keeping innovation at the heart of our strategy. And finally, accelerating our investment in marketing. Isn’t there a risk this initiative might temporarily affect your share price? André Harari: Launching initiatives aimed at building for the future and knowing how to take controlled risks, with discernment, courage and determination, are part of our DNA as entrepreneurs. Barring a return to a situation of grave economic and financial crisis, we are determined to see this plan through to completion. With close to 40% of the capital, Daniel and I guarantee the stability of Lectra’s shareholder structure. Despite these challenging years during the crisis, our winning spirit is stronger than ever. Although our stock market performance was disappointing in 2012, we remain highly confident as to the impact these decisions will have on our company’s valuation in the medium term.
Daniel Harari: We intend to make use of all the levers at our disposal, together with the expected gains from the transformation plan, to step up the pace of revenues and earnings growth, as well as our capacity to create value for our customers—and in turn for our employees and our shareholders. Does your new roadmap for 2013–2015 signal continuity? André Harari: Its five overriding objectives remain unchanged. Accentuate Lectra’s technological leadership and the high value of its product and service offer. Strengthen its competitive position and long-term relationships with customers. Accelerate organic growth. Boost profitability by regularly increasing operating margin. And lastly, generate free cash flow in excess of net income—assuming that the French research tax credit and new tax credit for encouraging competitiveness and jobs recognized in the year are received or used.
What is your ambition, in continuing to put innovation at the heart of your strategy? André Harari: Our ambition is threefold. Maximize the potential of our most promising markets in our core software, CAD/CAM equipment and associated services business—with special emphasis on consulting in our areas of expertise. Become a recognized leader in PLM for the fashion industries. And finally, further strengthen our business model, which has demonstrated its strength, by developing revenues from new systems sales as much as recurring revenues. We also want to expand our presence alongside our major global customers, to support them in their drive for competitiveness, primarily targeting our top 3,000 customers and providing dedicated resources for the top 300. Daniel Harari: Lectra is the only player in its industry supplying a complete high-value offer across all its geographic markets and market sectors, giving its customers a unique long-term competitive advantage. The company will benefit from its increasingly assured premium positioning, sustained by its new generations of solutions, enhanced technological leadership, high-performing and innovative services, and the expertise of its teams in our customers’ businesses.
“Our development will be fully internally funded and we will continue to offer our shareholders a sustainable dividend payment policy.”
What proportion of your offer have you renewed? Daniel Harari: Practically all of it. The products we have rolled out in the past couple of years will sustain and enhance our technological and commercial leadership, and our growth. We have enriched our software offer for fashion with new versions of our flagship solutions, i.e. Kaledo, Lectra Fashion PLM and Modaris. We have renewed practically our entire CAD/CAM equipment offer. Our new ranges of automated cutters, Versalis for leather and Vector for fabrics as well as composite materials, are without equal. In addition, we have launched a pioneering lean manufacturing offer dedicated to our major customers. What macroeconomic assumptions did you use to build your scenarios? Daniel Harari: For the sake of caution, our roadmap assumes that macroeconomic conditions will be as weak as in 2012. But they do also assume a rise in companies’ confidence: they will need to adapt and build for their own future. The crisis has amplified the challenges they face: they will need to accelerate their investment activity, postponed over several years, and to acquire the technologies necessary to boost their competitiveness and their growth. What are your financial goals, looking to 2015, in these conditions? André Harari: They are clear and ambitious: a compound annual revenue growth rate equal to or greater than 10%, an operating margin (excluding non-recurring items) of 15% in 2015, and to more than double income from operations (excluding non-recurring items) and net income in three years. That implies an operating margin above the record level achieved in 2011 and three times the pre-crisis level. These goals are founded on organic growth. Given the prevailing uncertainties, we may have to revise them in the course of the period, if our roadmap proves harder to fulfill, or if macroeconomic conditions worsen.
“Our three financial goals for 2015 are: a compound annual revenue growth equal to or greater than 10%, an operating margin of 15%, and to more than double income from operations and net income.”
How do you expect the looming currency war to affect you? Daniel Harari: Faced with slower growth, most major countries, particularly the United States, China and Japan, have already eased or could ease their monetary policy. Besides the risk to the global economy, such policies could result in a lasting rise in the euro. The latter’s appreciation against the dollar and numerous other currencies since the beginning of the year has led us to base our scenarios for 2013–2015 on the exchange rates of February 1, 2013, in particular $1.35/€1. We remain highly sensitive to currency fluctuations: a simultaneous rise of 1% in the euro against the dollar and all other currencies would mechanically reduce our annual revenues by around €1.0 million and income from operations by €0.6 million. Will you continue to finance your growth internally? André Harari: Yes, our development will be fully internally funded. We intend to remain a zero-debt company once we have repaid the 2007 loan. We will continue to offer our shareholders a sustainable dividend-payment policy, with a payout ratio of around 33%. Exceptionally, this ratio could even rise to 50% until our investments for the future produce their impact in full: let us not forget, they are already taken into account in the computation of net income and free cash flow. We will preserve the rest of the cash for possible targeted acquisitions, should the right opportunities arise. What are your scenarios for 2013? Daniel Harari: Although the economy is likely to remain weak, as I said before, I do expect business confidence to pick up this year. Visibility nevertheless remains limited. Our most cautious scenario expects total revenues to grow by 6% to around €203 million, an income from operations before non-recurring items of around €15 million, an operating margin before non-recurring items of 7.5%, a 2.5 percentage point decline owing to the growing scale of investments for the future, and a net income close to €10 million. Naturally, our goal is more ambitious. Every extra €1 million of revenues from new systems sales in relation to this scenario will increase income from operations by approximately €0.45 million.
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