Record financial results. A successful transformation. A Strong Foundation for Future Developments.
Interview with André Harari, Chairman of the Board* of Directors and Daniel Harari, Chief Executive Officer* (2016 Annual Report).
*André Harari resigned from his position as Chairman of the Board of Directors and as Director on 27 July 2017. Daniel Harari has been appointed to the position of Chairman and CEO.
How did the year 2016 work out?
André Harari: We achieved record financial results in 2016. Like-for-like, revenues were up 10%, at €260.2 million, and income from operations rose 18%, to €37.3 million. Net income, at actual exchange rates, rose 14% to €27 million. Our balance sheet is stronger than ever: we are debt-free, our net cash position has increased by 28% to €75.7 million, and our shareholders’ equity rose 18% to €132.6 million. These numbers are particularly satisfactory given the persistently difficult macroeconomic and geopolitical conditions throughout the year, in some countries especially.
“Like-for-like, 2016 revenues were up 10% and income from operations rose 18%. Our balance sheet is stronger than ever. These results demonstrate our ability to accelerate our organic growth and strengthen our profitability.”
André Harari, Chairman of the Board of Directors
Your roadmap for 2013-2016 set ambitious financial targets: did you achieve them?
Daniel Harari: We did achieve them overall, at actual exchange rates. In four years, total revenues have grown 31%, income from operations and net income multiplied respectively by 1.9 and 2. The operating margin reached 14.3%, up 4.6 percentage points. We generated €70.8 million in free cash flow and paid out €29.9 million in dividends to our shareholders.
André Harari: These results demonstrate our ability to accelerate our organic growth and strengthen our profitability. Investors have welcomed them, lifting our share price from €4.73 at the end of 2012 to €18.02 at end-2016. In other words, Lectra’s share price has been multiplied by 3.8, and our market capitalization by 4.1, rising to €563 million. I would like to thank our long-term shareholders for their enduring confidence over the years, as well as those who have joined us more recently.
“In four years, total revenues have grown 31%, income from operations and net income multiplied respectively by 1.9 and 2. We generated €70.8 million in free cash flow and paid out €29.9 million in dividends to our shareholders.”
Daniel Harari, Chief Executive Officer
What is your assessment of the Lectra 3.0 strategy?André Harari: As early as 2009, we had anticipated a different post-crisis world, with new patterns of macroeconomic growth, a shake-up in all industry sectors, and so on. To build our future growth on solid foundations, we started with a blank page, building the Lectra 3.0 strategy with three main objectives: safeguard the company’s financial condition, fundamentally rethink its value proposition and positioning, and enable it to emerge stronger from the unprecedented economic and financial crisis that hit the entire world. This strategy was rolled out through two roadmaps. The first, from 2010 to 2012, aimed at resetting Lectra in light of this new post-crisis economic order, to prepare the company for emerging challenges and to seize the resulting opportunities. The second, from 2013 to 2016, to enable Lectra to fulfill its growth potential.
Daniel Harari: Prioritizing our long-term strategy over short-term profitability, we embarked on a transformation plan backed by a €50 million investments for the future program, fully-expensed. Its aims comprised a major expansion and extensive renewal of our sales and marketing teams, bolstering our teams of software R&D engineers, and accelerating our investment in marketing. Lectra has emerged entirely transformed. It has bolstered our technological advance, enhanced the expertise of our teams and the value of our offer, notably in cutting room automation. It has boosted our overall competitiveness, forged strong relationships with prestigious customers in all of our main market sectors and geographic markets, consolidated our positions in automotive and fashion and apparel, and acquired strong positions in furniture.
André Harari: The result has been to enhance our capabilities in all areas and our assets are today stronger than ever.
How did you build your new strategic roadmap for 2017-2019?André Harari: Having a clear vision, finding the answers to the most complex challenges, instilling energy and courage, never giving up, being prepared to take controlled risks, seizing opportunities, and constantly reinventing the company have been our driving forces, Daniel and me, since we took over Lectra’s management in 1990. Launching initiatives aimed at building for the future to create more value for our customers, our teams and our shareholders are part of our DNA as entrepreneurs. The 2017-2019 roadmap is fully in line with that and continues to prioritize the Company’s long-term strategy.
Daniel Harari: We worked closely with our main customers in each of our market sectors and geographic markets to gain insight into their changing business and societal environment, with wide regional variations. We concluded that four major trends would shape these markets. First, the Millennials, who are shaking up rules, behavior, needs and demands in terms of delivery times, quality, patterns of consumption, product personalization and respect for the environment. Secondly, the digitalization of business, made possible by an entire ecosystem of new technologies, from the cloud to mobility, and from augmented reality to artificial intelligence. Thirdly, the emergence of Industry 4.0, now spearheading today’s fourth industrial revolution, driven by real-time communication between different participants, objects, production lines and services. Lastly, China’s evolving economy, as it accelerates its transition towards a growth model firmly anchored in consumption, added-value and productivity, under the impetus of the government’s Made in China 2025 initiative. The impact of these four major trends is already perceptible on the world stage and will be felt with growing strengths, generating many challenges for our customers.
“Launching initiatives aimed at building for the future to create more value for our customers, our teams and our shareholders are part of our DNA as entrepreneurs. The 2017-2019 roadmap continues to prioritize the Company’s long-term strategy.”
Will these trends impact Lectra too?Daniel Harari: Of course. For example, our new offer will take account of the Millennials’ habit of communicating and acquiring information anytime, anywhere, and on any connected device. Similarly, the integration of new technologies will significantly enhance the value of our offer, bolstering our premium positioning and our competitive edge. China will be an increasingly important factor in our financial results and investment decisions, not only because of its expanding domestic market, but also because of the global consequences of coming changes, for Chinese and foreign firms alike. But the greatest impact will come from Industry 4.0. This presents an unprecedented opportunity for Lectra, calling for the integration of smart solutions and services, and the replacement of production plants incompatible with connected factory concepts. With nearly ten years’ experience in the industrial Internet of things, combined with its expertise in software solutions to automate and optimize the design and development of fashion collections, Lectra is in a formidable position to help customers step into this new industrial age. The combination of SaaS—Software as a Service—with the cloud are opening up new horizons for innovation. We have been working on this for the past two years.
“Industry 4.0 presents an unprecedented opportunity for Lectra. With nearly ten years’ experience in the industrial Internet of things, combined with its expertise in software solutions, Lectra is in a formidable position to help customers step into this new industrial age.”
Where does this roadmap stand relative to the previous one?André Harari: We framed the 2017-2019 strategic roadmap to enable Lectra to consolidate its global leadership within this new context and achieve sustained growth, while maintaining short-term profitability. We will continue to focus on our main market sectors, i.e. fashion and apparel, automotive and furniture, and to maintain our premium positioning, primarily targeting the Company’s top 5,000 customers or potential customers across the world, compared to 3,000 in the previous roadmap. So this is not a disruptive strategy, rather a progressive shift to prepare Lectra for tomorrow’s challenges.
Daniel Harari: We plan three phases. Phase 1 in 2017, during which we will develop and pilot test our new offer with selected customers. Phase 2 in 2018, during which we will progressively launch this offer. Phase 3 early 2019, to support its ramp-up across the world.
What are its strategic objectives?André Harari: There are five. To accelerate revenue growth, both organic and through targeted acquisitions—the last ones dating back to 2004. To accentuate Lectra’s technological leadership and leverage new technologies to further enhance the value of its product and services offer. To strengthen Lectra’s competitive position and long-term relationships with customers. To progressively transform most of its revenues from new software licenses into recurring subscriptions by establishing a SaaS business model. And, finally, to maintain the Group’s profitability and generate a high level of free cash flow in order to self-finance internal and external development.
What were the macroeconomic assumptions used to build your scenarios?
André Harari: Staying cautious, the roadmap is based on macroeconomic forecasts known at beginning of 2017. These suggest a slight pick-up in global growth over the next three years. However, geopolitical tensions, new fiscal and regulatory measures following elections in 2016 and 2017—notably in the United States and Europe—and the possible calling into question of free trade agreements, as well as fresh currency turmoil, could breed uncertainty and impact businesses’ investment decisions throughout the period.
Daniel Harari: However conditions turn out, our customers will have no choice but to adapt and deploy technologies compatible with Industry 4.0 in response to tomorrow’s new challenges.
“By keeping innovation at the heart of our strategy we will bolster our competitive leadership and our value proposition.”
What are your financial targets?André Harari: Based on like-for-like comparisons, we expect to see 6 to 12% annual organic revenue growth, reflecting increased revenues from new systems and higher recurring revenues, and 15% annual operating margin before non-recurring items, potentially lower in the first two years to accelerate Lectra’s shift to the new SaaS business model. All this while maintaining a security ratio—i.e. the percentage of annual fixed overhead costs covered by gross profit on recurring revenues—equal to or greater than 80%. Given the possible uncertainties, these objectives are subject to review over the three-year period. They will also be adjusted if the Company executes one or more targeted acquisitions. The strength of our business model and the close fit between our roadmap and the demands of Industry 4.0 give us confidence in our medium-term growth prospects.
Daniel Harari: In addition to Industry 4.0 and SaaS offers, five other accelerators will boost Lectra’s growth. China, as the country upgrades its manufacturing plant and expands its domestic market. Leather, which is increasingly used in the automotive and furniture industries, and almost all materials are still cut by hand, but cutting processes need to be automated. Airbags, due to the growing number being fitted to each vehicle, and to the potential to renew installed bases for older-generation automated cutters. Personalization of consumer products, which will entail hefty investments in cutting-edge technology. Finally, digitalization of the fashion and apparel industry, which implies adopting collaborative technologies to facilitate management of collections and products.
Do you have the necessary resources to fulfill your growth potential?Daniel Harari: Our sales and pre-sales consultants teams, as well as marketing, services, production and administrative staff will from now on grow more slowly than revenues. Moreover, Lectra’s Bordeaux-Cestas industrial site already has the capacity, with another 50 or so employees, to increase its output by 50% with no major additional investment. However, we plan to step up our investments dedicated to the design and development of our offers. Which is why, starting in July 2016, we have accelerated our R&D plan and why R&D expenditures will progressively rise, averaging around 10% of annual revenues over the period 2017-2019, versus 9.4% previously. This will boost our annual R&D spend by around 50% in 2019 compared to 2016. By keeping innovation at the heart of our strategy we will bolster our competitive leadership and our value proposition.
Do you have a timetable for acquisitions?
Daniel Harari: We have sufficient cash on hand to finance targeted acquisitions and could borrow up to half of our shareholders’ equity if required in order to make a major acquisition. There is no lack of opportunities, but one thing is certain: we will take all the time necessary to scrutinize the benefits and consequences of each one, both for Lectra and our shareholders.
André Harari: At the same time, we are determined to pursue our dividend-payment policy over the roadmap’s period, with a payout ratio of around 40% of net income. Our aim is to achieve a steadily rising dividend per share.
“2017 opens up a new era for the Company. Our 2017-2019 strategic roadmap marks a first stage in Lectra’s evolution over the next ten years.”
You have both been closely associated with the management of Lectra for the past 25 years: how do you plan to be involved in the future?André Harari: 2017 opens up a new era for the Company. Our 2017-2019 roadmap marks a first stage in Lectra’s evolution over the next ten years. Since 1991, while Daniel has devoted most of his time to the operational side, I have personally made sure Lectra has in place the best practices in terms of corporate governance, financial transparency and organization, together with a clear vision, rock solid balance sheet, a strong corporate culture, a high degree of resilience and exacting standards. I have also ensured that Lectra’s core values and uncompromising ethical standards have been upheld in the conduct of its business. The Board of Directors was strengthened in 2016 with the appointment of a fifth member, and by the designation of a Lead Director at the beginning of 2017. Our three independent Directors now are deeply familiar with the Company, and their extremely broad industrial, financial and international experience are a vital asset. Consequently, the Company stands ready for me to hand over the Chairmanship of the Board to Daniel at the expiration of my current term, in April 2020, at which moment I will have reached the mandatory age limit for the position of Chairman of the Board. At that time, or should I relinquish my position at an earlier date, the Board of Directors will, in principle, terminate the separation between the positions of Chairman on the one hand, and Chief Executive Officer on the other, reuniting them as was the case before 2002. Daniel would then be appointed Chairman and Chief Executive Officer, the position he held between 1991 and 2001.
Daniel Harari: I intend to lead Lectra for the next ten years and take it to a new dimension. The management team at headquarters and in the subsidiaries has been further strengthened over the past three years. The membership of the Executive Committee was increased to five in July, last year, with the appointment of Céline Choussy Bedouet, Chief Marketing and Communications Officer. Jérôme Viala, who has worked with me for 26 years, was appointed Executive Vice President for the Group, on January 1, 2017, becoming number 2 on the Executive Committee. Finally, each of the members has been assigned new tasks aimed at the successful accomplishment of our roadmap for 2017-2019.
What are your objectives for 2017?Daniel Harari: The Company entered 2017 with extremely strong operating and financial fundamentals. However, 2017 looks unpredictable once again. As in previous years, the main uncertainty concerns the level of orders for new systems and corresponding revenues. In these conditions, the Company is targeting 6 to 12% revenue growth and 7 to 15% growth in income from operations before non-recurring items, like-for-like.