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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:22} Imed, can you share a brief introduction to your role and responsibilities at Lectra?

{audio:0:00:27} I was based more in the main subsidiary, covering the whole African market, as well as in trans-territorial organization – or a model of collaboration – with my colleagues in Europe; mainly southern Europe but also some other countries, such as Belgium. The role was more about driving sales and marketing, with a deep evolution in service, as well as with the pre-sales team that was driving the technical assessment of customer needs, not only in fashion, but also in other areas, such as automotive.

{audio:0:01:22} It was about how you can support the customers, in their end-to-end journey, from the qualification of their business needs until deployment, training and the kick-off of the machine that they use, the software or the consulting missions.

{audio:0:01:44} Can you just briefly explain how Lectra structures the sales team? 

{audio:0:01:53} The first team, the pre-sales, they are solution experts but they are also involved in consulting, when it comes to making a technical assessment of the customer needs. For example, if the customer has a new project, new customers or new materials, they can be supported by this pre-sales team who, first of all, have to answer the customer’s technical questions. There are usually business needs behind those customer requests so they have to look at how they can use this technical assessment to generate a lead or to introduce a business opportunity.

{audio:0:02:54} Moving on in the sales cycle, once the pre-sales team have finished their job, they need to hand it over to the sales and marketing team, who will be able to better qualify the opportunity, getting in touch with the right people on the customer’s side and making sure that the lead from the pre-sales team leads to a concrete business opportunity.

{audio:0:03:33} Sometimes the marketing team will be involved where we may use the enquiry to drive some kind of mailing or phone call, so that you can create an awareness at the customer level in order that they can better understand the value or advantages of the solution.

{audio:0:04:06} Let’s say that everything goes well and that the sales cycle continues until they close and the customer buys the solution, whether that be software and/or hardware or a consulting service. Once the order is signed, it all moves to the delivery team which is, pretty much, the technical team. The technical team will schedule the handover, the installation and, if necessary, training before the production kick-off. I am still involved in that cycle because this is where you really need to make sure the delivery phase goes smoothly to ensure the customer leverages all the advantages of that solution.

{audio:0:05:12} We also have service contracts that are proposed, in parallel, with the software or hardware solution. We talk about recurrent and non-recurrent revenues and, of course, these service contracts are recurrent, not only from a revenue perspective, but also from a quality of delivery perspective. As long as you have this type of contract with the customer, you can guarantee that you will be in touch with each other. The customer will come back to you each time they have anything that is not clear or anytime there is an issue or downtime. You can fix that problem but also, maybe you can identify another new lead to enable you to propose an additional service, whether that be training or additional software/hardware.

{audio:0:06:17} Can we take a step back. How would you describe the different types of fashion customers that Lectra has, between the big retailers, luxury companies and suppliers? 

{audio:0:06:31} We have two main types. Firstly, we have the brand owners; they are giving jobs to their factories or their sub-contractors or partners. These brand owners are very customer-centric and efficiency-centric. They see the big picture. They are driving the market itself, in terms of both the market trends and costs and prices. Secondly, we have their production plants, clients or suppliers. They are mainly sub-contractors and are also our customers. They are on a different level from the brand owners because they have to be very reactive and have to have control of their costs, so they can not only honor and meet the brand owners’ goals, but also keep their margin and their profitability safe. The approach is different between these two segments.

{audio:0:08:11} Do they behave differently when acquiring equipment?

{audio:0:08:13} Absolutely; the behavior is different between the two populations of customers, but there are some common advantages, ideas and topics. When it comes to talking about the efficiency, cost reduction, quality and data integration, everybody is involved. The brand owners, of course, are more involved, because they are more mature. The sub-contractors may be less involved because they have different brand owners for whom they are working, which means a different culture, different level of maturity and demand. Everybody is involved in our solutions. The premium solution goes more to the most demanding brand owners or the biggest sub-contractors, because they have volume which gives them a better return on investment. Obviously, the sales and marketing approach is different, but they are both our customers.

{audio:0:09:35} What is the revenue or volume required, by the sub-contractor, for it to make sense purchasing the Lectra machines?

{audio:0:09:47} I can tell you that a customer that is making less than €1 million annually, can be our customer. That is due to a number of factors, but mainly owing to the high prices of material and labor, which means that using the machine will help them to increase the productivity, improve the flow, speed and dynamics, to enable them to be in a better position to control their costs. Of course, we have some customers who have more than €100 million in revenue, every year.

{audio:0:10:38} Taking a typical supplier, in South East Asia, what is the historical cutting process that they would use, that Lectra is looking to replace?

{audio:0:10:54} The standard cutting process, usually used by everybody, even if they have machines, is manual cutting. Once you have reached a threshold of volume, you must have an automatic cutting line, otherwise you will not be able to meet your objectives. Manual cutting is always there because, when the machine is down, you need to switch back to manual cutting. There are different capacities and configurations to the cutting line itself. That means the capacity can go from 2.5cm up to 9cm. That also means the speed of spreading, the length of the table on the spreading line varies. 

{audio:0:12:02} It may also depend if the customer runs one shift or three shifts, 24/7. There are a lot of different configurations but it also depends on how the customers – or sometimes the stores – are pulling these production lines. They are mainly a combination of manual and automatic cutting lines.

{audio:0:12:29} As a general rule, customers would have both manual and automatic cutting machines. When you are going into a customer – a sub-contractor or a manufacturer for one of the big brands – what machines do they, typically, already have?  

{audio:0:12:52} If they currently have no Lectra machines, the most frequent machines that we are replacing are Gerber machines, who have now been acquired by Lectra, so we are no longer talking about the American brand. You also have Bullmer, which is German. To be honest, the other German brand – which is Kuris – is not really used much. You have some other Italian brands, such as the Efka Group and, more recently, Morgan Tecnica who are, basically, former Lectra employees. There are also some other brands, but they are not as present in the market. 

{audio:0:13:55} Mostly, there is Lectra plus the old Lectra Vector machines, as well as Gerber, Bullmer, Kuris, some Morgan Tecnica. Investronica is going to disappear and is no longer running.

{audio:0:14:20} Can you briefly explain the core Lectra Vector machine, for the fashion companies?

{audio:0:14:28} When you see this technology, owned by Lectra, there is not really any competitor technology that can compete with or beat Lectra, especially if we look at the length of the machine life. The process of the automatic cutting machine is very simple. It is equipped with a conveyor that will, first of all, take the feed of the mattress, it terms of the fabrics. Once this mattress lands in the cutting area, the machine will have received the job order from what we call the CAD system. The idea is that, once the machine gets the job order, receives the landed mattress or fabrics, there are four corner points, so we are sure that the mattress has landed in the correct dimension of the cutting window and we can start cutting.

{audio:0:15:58} Before the head starts really cutting, there is a vacuum that needs to be applied, so you can compress the mattress to obtain a really compressed thickness of the material. The cutting head will then start moving, in the cutting window. Sometimes you have a mattress of 10 or even 20 meters, but that is not an issue, even if the cutting window is only 1.5 or two meters in length. The cutting head will always keep cutting and, in the meantime, you have the conveyor that moves the mattress up. Once the mattress is cut, you will move to the offload area, where you can pick up the cut pieces.

{audio:0:16:53} There is a lot of important technology, whether that be electronic or mechanical. There is a lot of vibration, you have the vacuum, you need to maintain the mattress fixed in the correct position, even when the mattress has almost finished the cutting process. You also have the small areas, like the notches or drills that you need to cut, which is not easy to do; it all depends on the type of material that is being cut, as well as the thickness and speed at which you are, therefore, running the machine.

{audio:0:17:37} There are many parameters that need to be properly set but, also, the machine has to be performing to meet the requirements and to obtain a good quality cut. It is not something that is easy. For example, all the other brands have not achieved the level of technology that is owned and developed by Lectra. It is not only the actual technology and whether it is electronic or mechanical, but also the business itself, in terms of the fact that the technical experts or developers that are producing, manufacturing and designing the cutting machine, need to understand the fashion business.

{audio:0:18:38} I want the machine to go very fast but you need to understand the combination or the correlation between the speed, the quality, the resistance of the material and a number of other parameters. If you do not understand this and what is happening on the mattress when you accelerate or decelerate and, also, what is happening in the vacuum and to the fabric itself, in that moment, you cannot develop the right machines to give you the right quality.

{audio:0:19:14} I think Morgan Tecnica have lots of Lectra employees; what makes it so difficult for another company to replicate Lectra’s products, if they have the expertise and the people?

{audio:0:19:26} That’s a very good question. People like Morgan Tecnica, for example, in the software, yes, they have even developed things that are a little bit better than Lectra. But they are still too young and too weak to develop a machine that is very tough and can really resist the mechanical side, to be as good as Lectra. That means, maybe you pick up the best software developer from Lectra, but you don’t have the best electronic and mechanical designer. You also need to put your machine in production so you can gauge the feedback and all the technical issues. You will never achieve the best quality from the first design or release of machine. Sometimes you need five or 10 versions and a number of hours of production, so you can discover if your design is really good enough to compete with the one from Lectra.

{audio:0:20:53} Can we walk through a typical sales pitch? Let’s say that you are running sales for Lectra; you’ve got a Vector machine. You are going into a factory; what is the sales pitch?

{audio:0:21:05} First of all, if I am representing Lectra, there are a number of simple and standard things. One of the strongest elements of Lectra is that they are present everywhere. Before we talk about the product, we are talking about the service itself which explains why, today, we are talking about everything as a service. You can have the best machine but if you don’t have the best service behind it, you are dead.

{audio:0:21:43} It is very important to ensure that the customer believes in you, that you are available and that you have a technical team. For me, the start point is always the business needs or the pain points of the customer. What does the customer need? Based on that, you will propose the right solution, whether that be software or hardware. In terms of the machines, how many pieces is the customer producing every day? What kind of fabric? How big are the pieces? Who is your customer? How many people do you have? How many pieces would you like to achieve, as an objective? Where do you see yourself in the next two, three, four or five years? Have you thought about expanding your business scope and covering other markets?

{audio:0:22:50} These are things that qualify the business needs but also to show the customer that you understand his business area. You can even walk around the factory to see how the customer is organized and how professional he is. That means they will see you, not just as a supplier, but as an expert and, more importantly, as an advisor, which will lead them to trust you and all the things that you will say later.

{audio:0:23:36} When we talk about service, we mean service people but, also, spare parts, software updates and upgrades; the compatibility of the Lectra system with other non-Lectra systems. Then the product itself, which means that, you can say to the customer, do you know that your neighbor has been using our Vector system for 20 years now and that all the brand owners – Nike, Adidas, Hugo Boss, Calvin Klein – and their sub-contractors are using our machines. If they meet the quality that, for example, is required by Nike, only using Lectra machines, then you can also achieve that quality.

{audio:0:24:32} Then, of course, you have the operational costs, when it comes to calculating the return of investment. It is very important to explain to the customer that he can buy another brand of cutting machine but, firstly, he must think about which costs he will be paying if the machine goes down. Secondly, will the machine be good enough to run for five, 10, 20 years? Sometimes, with other brands, we talk about the software itself. Some other competitors don’t have the French version, for example, if the customer is French speaking. If they only have English or Italian, that will complicate the way a French speaker will use and understand the machine. There are a lot of things to discuss but, based on the customer profile, you will choose the right pitch to use.

{audio:0:25:44} How does that return on investment calculation look, for the customer? 

{audio:0:25:53} Firstly, customers are looking for fabric or material savings. It doesn’t matter if it is a sub-contractor that is paying the cost of the fabric or whether it is the brand owners. It is everybody’s concern.

{audio:0:26:22} Fabric is the biggest cost of goods?

{audio:0:26:27} Exactly; this is the biggest cost. Sometimes the labor costs are involved. If they do not use a cutting machine, he will use 10 or 20 cutting operators and manual cutting tools. That costs a lot of money and time and is unstable productivity. No operator can give you the same level of productivity and quality every day. There is also the issue of operator availability. If the operator is sick, they can’t do anything. If an accident happens, there is no guarantee you can replace them with another operator. 

{audio:0:27:22} It’s a kind of acknowledgement that you need to drive, with the customer, about his costs and put those cost elements in a priority order, from his perspective. Once you agree with your customer, regarding these elements, then you can position yourself as to how you can adapt your sales approach and which pitch to use to convince your customer.

{audio:0:28:02} Who is the decision maker? Who is the actual buyer of the machine that you pitching to?

{audio:0:28:07} The actual buyers are usually the technical staff, including production; maintenance and production. Then it comes to the purchase where they are fighting for a good price. The decision maker depends on the organization and its culture and relationships. There is one person that will approve that investment and that purchase and it depends on how he drives his internal business. You need to work on a bottom up and vice versa approach. That means you need to convince these technical staff first, so they will help you to convince the leader and also work on the big boss’s mindset so he can be aware of all the business challenges for people, for example, from maintenance and production.

{audio:0:29:28} The idea is that you combine these two approaches. I call these people the champions because they will support you to position your customer value proposition.

{audio:0:29:43} Who is the hardest person to convince, in the sales process?

{audio:0:29:47} It is usually the purchase manager, particularly if he is new or coming from a different world. Sometimes there is also a conflict of interest, especially when they are not seeing the real impact on the business but also the real value of your product or solution, in terms of potential gain or cost savings. If you give the technical staff the technical arguments and proof, no one will say no. You can lead them to the meeting point so that they can acknowledge the value of your solution.

{audio:0:30:58} What was really the biggest challenge in selling new machines?

{audio:0:31:03} The major problem that is a real roadblock that impacts the Lectra business is the fact that Lectra does not have a great reputation. The first reason behind that is the quality of service. Maybe they are better than all the others, but they are not good enough to meet the customer expectations. That means that prices for services, spare parts, new machines and service contracts are very expensive. However, the quality of service that the Lectra team offers is not good enough. 

{audio:0:32:07} For example, when I arrived at Lectra there were people that had been there for 30 years. 30 years ago, the business was growing by itself. I said, guys, we need to change the game. We need to go faster and be perfect. In some departments, I found a husband and his wife, in the same team; that should not be possible. It’s not healthy. If a customer is not happy and the big boss, for example, is the husband and one of the team that is involved in the issue is his wife, can you imagine that he will find a clean solution from that? No. 

{audio:0:33:15} There are a lot of areas where Lectra can really improve things. There is no balance in the teams’ skills and performances. For example, when I arrived, there was only one single technician – who was not the best – who was taking all the training, attending all the events. He traveled everywhere and he was trained on machines for which he was rarely available to intervene. Why? Because they were located in a different area from where he was based. The right people were not taking the right training. That’s because the one who hired him, his boss, who was the technical service manager, has a good – maybe even private – relationship with him. He travels to France, to do all the training but he never did a skills transfer program, for example. That means that all the other technicians were not trained, but we sent them to intervene on these machines. The customer then discovers that these people are not really trained for that specific type of machine.

{audio:0:35:01} How important is the service capabilities in the purchasing decision for customers?

{audio:0:35:07} It is always important. At the end of the day, the customer will say, I know that Lectra’s service is not perfect but at least they have more people, who are more available. They have more machines which means better knowledge. If he compares with the other competitors, fortunately, they did not understand how to play on Lectra’s weaknesses. This is why they are not good enough.

{audio:0:35:51} So the service quality for Lectra is not great; it definitely could be better. But the service from the competitors is nowhere near good enough, relative to Lectra, anyway, so Lectra is still better?

{audio:0:36:06} What else is a big limitation to selling these new machines?  

{audio:0:36:19} The running and operating costs are also a challenge. If you look at the Lectra machines, they had a big change in their sales approach, in relation to these running costs. A few years ago, Lectra decide to improve the sales of spare parts and consumables. This applied especially to spare parts because they present the biggest part of the costs. For example, if you have bristles that, normally, in the old machines, allowed you to run up to 4,000 hours, today, the same bristle can only work for 1,000 hours.

{audio:0:37:27} The problem is that they didn’t properly manage this change. Yes, you can revise and decide to make more recurring revenue that you are generating from spare parts, but you cannot directly or instantly go from 5,000 to 1,000. It is not acceptable. You can reduce from 5,000 to 4,000 or maybe 3,000, but not from 5,000 to 1,000. 

{audio:0:38:04} The customers are not idiots and, of course, notice and remark on this, especially the mature ones. I got this feedback, several times. Sometimes they are justifying that there are no materials available on the worldwide market; the costs of these materials are increasing. You can also think about proposing a product that might be a bit more expensive, but the duration of its life cycle cannot be that much shorter. The customer gets a shock. They had been using Lectra machines for years, they just changed to a new machine and the bristle that they used to replace every five years, now they have to replace every year.

{audio:0:39:06} So with the new machines, Lectra has reduced the quality of the parts to drive higher demand and more recurring revenue?

{audio:0:39:12} Yes; I can tell you that the first nightmare of customers is when they see the spare parts cost. Lectra are very smart; their concept is very special, where they mix or make a fusion of the service contract, spare parts included in the service contract and then, also, the remote support. 

{audio:0:39:50} It’s a fairly complex contract. 

{audio:0:39:53} The developer even designed a new kind of contact where you can choose by the number of running hours that you do every year. The perception of the customer is that you are really renting the machine, but not owning it, like on some kind of lease.

{audio:0:40:18} Let’s say I’m a customer and if I’m buying a Vector machine, how much does it cost under the SaaS model?  

{audio:0:40:30} Actually, they moved to the SaaS model, firstly with the CAD systems and apps and it is already in progress for the machines. The cost of the SaaS model depends on the product that you are talking about. If we talk about the CAD system, there are mainly two software elements. The first one is the design, when you want to make a pattern. The second one is really very tricky because it is about the nesting.

{audio:0:41:09} No; Kaledo is software relating to the style and is for drawing. This is the cheapest software in Lectra. The first one that I’m talking about, for pattern making, is Modaris. The second one is the nesting software, which is called Diamino. Diamino is about making the nesting more efficient, which means the consumption of the material. Our customers are very sensitive to the cost of fabrics so they spend a lot of money on their nesting software.

{audio:0:41:57} To answer your question, the subscription or the SaaS costs, for Diamino, depends on the version and whether it is standard or expert. For the expert, it’s around €4,000 to €5,000 annually. For the nesting, they made a very hard SaaS model because you own a number of credits and each time you make products you take from that credit. In general, it goes from €7,000 or €9,000 up to €20,000 – depending on the usage –per single workstation, or single license.

{audio:0:43:03} These two software packages are on top of the actual equipment, the hardware?

{audio:0:43:10} You use it at the beginning of the value chain, so from the design team.

{audio:0:43:17} On the cutting floor, you have the Vector machines?

{audio:0:43:21} For the moment. Only on some specific services, apps or some software but not the main pilot of the machine. There is only one machine which they built, from scratch, that was designed to work on the SaaS model. This is only destined for single-ply cutting, which is not the Vector; it is called Virga.

{audio:0:43:57} It’s a different machine.

{audio:0:44:00} Yes; Vector is a multi-ply cutting machine.

{audio:0:44:02} That is mainly on the perpetual license, today?

{audio:0:44:05} Exactly. Up to this point, it has been the perpetual license. The other one is the SaaS model and, of course, it costs a lot of money and it only works in the cloud. 

{audio:0:44:17} What is the difference in the pricing between the older Vectra machine on a perpetual license and Vigra in saas?

{audio:0:44:36} The gap is huge. For the old one, for example, I would say that the customer would have to pay €10,000 to use his Vector machine. For the new one, depending on the volume of usage, he may be paying €18,000. It is not a 1%, 2%, 3%, 10% or 20% difference.

{audio:0:45:24} It’s almost double the revenue, per customer, potentially, if they all move to SaaS?

{audio:0:45:31} Can the customer afford that?

{audio:0:45:34} As I said, if the customer is working with very good clients – the brand owners – I can tell you that he will not be happy but he will continue working with Lectra, as long as he has no second supplier or competitor that can provide him with a similar or equal solution.

{audio:0:46:07} Isn’t there a competitor that can do it cheaper?

{audio:0:46:12} Not anymore because they are Lectra now. I can give you some names. Morgan Tecnica, no, because I know them very well. They need at least five to 10 years more to achieve the level that will allow them to cover the serious markets, such as automotive, aerospace and so on. Currently, they are not able to do so. They still have a lot of technical problems for the fashion industry. Firstly, they need to focus on meeting the fashion industry level before they move on to other areas.

{audio:0:47:13} In terms of competition, it’s more about the American brands. There is a company that is 135 years old. I don’t know if you know who I am talking about?

{audio:0:47:25} It must be a pretty big company.

{audio:0:47:43} Are they moving into this space or are they already in it?

{audio:0:47:46} They are already there but, in the beginning, they started with cutting composite hard materials, such as carbon fiber and fiberglass. If you are good enough at cutting these materials, then you can cut everything.

{audio:0:48:10} They probably have a better service network than Lectra, as well, given their size and scale?

{audio:0:48:15} I am still up to date regarding the market and competitive intelligence so yes, they have a plan here.

{audio:0:48:32} Why haven’t they moved in already, to fashion and fabric?

{audio:0:48:39} They are just not as big as Lectra?

{audio:0:48:40} I think, in the future, it will be between Lectra and Eastman.

{audio:0:48:46} Who do you think is going to win?

{audio:0:48:47} It could be them. I know the internal story of Lectra; the owners were two brothers and now there is only Daniel Harari who I think is going to sell everything in the next couple of years.

{audio:0:49:20} The company will only be owned by investors and investors only look at the money. That means you will only take part of the market. Of course, you can’t forget the company’s history, which means that, commercially, they are not really very welcome. They are perceived almost as vampires.

{audio:0:49:54} Do you mean the brothers?

Former Sales Director at Lectra

Lectra: Selling CAD / CAM Equipment

Many companies have tried to replicate Lectra's machines but failed because of the technological complexity 

Lectra’s poor service quality is creating a potential opportunity for competitors

Lectra changed the pricing of spare parts and consumables which leads to 2x annual TCO for a machine on saas vs perpetual license 

Eastman could pose a threat to Lectra in the future 

Lectra

Lectra is a French-listed, family-owned business that manufactures and sells CAD, CAM, and PLM equipment for the fashion, auto, and furniture industries. The company has over 50 years of experience designing and building technology for brands and suppliers to design and produce products more efficiently.

Lectra sells the hardware with software and maintenance contracts which leads to 66% of revenue being recurring each year. The company is currently in a transition to shift from perpetual licenses to software-as-a-service. 

Lectra is owned and operated by Daniel Harari, who turned around the company with his brother in the 1970’s. For the last 20 years, the company has compounded FCF per share at over 8% per year at incremental ROIC comfortably over 20%. 