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Lectra

Quarterly Report Jul 28, 2016

1477_ir_2016-07-28_b10431db-2f41-4e6c-96eb-edf2b1612977.pdf

Quarterly Report

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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THE SECOND QUARTER AND FIRST HALF 2016

Dear Shareholders,

We report below on Lectra Group's business activity and consolidated financial statements for the second quarter and first half of 2016, ending June 30. Financial statements for the first half have been subject to a limited review by the Statutory Auditors; statements relating solely to the second quarter have not been reviewed.

Detailed comparisons between 2016 and 2015 are based on 2015 exchange rates ("like-for-like") unless stated otherwise.

1. SUMMARY OF OPERATIONS FOR Q2 2016

With an average parity of \$1.13/€1 in Q2, the US dollar was down 2% compared to Q2 2015 (\$1.10/€1). For its part, the yuan declined 7%. Changes in currencies mechanically decreased revenues by €1.2 million (–2%) and income from operations by €0.5 million (–6%) at actual exchange rates compared with like-for-like figures.

Strong Growth in Orders for New Systems for the Third Consecutive Quarter

Orders for new systems totaled €30.5 million, up 17% like-for-like as at actual exchange rates compared with Q2 2015 (€26.2 million).

Orders for new software licenses (€6.9 million) increased by 16%, those for CAD/CAM equipment (€19.4 million) by 18% and orders for training and consulting (€3.7 million) were up 25%.

Orders for new systems also rose relative to Q1 2016 (€26.1 million). They had increased by 20% and 23% respectively, at actual exchange rates, in Q4 2015 and Q1 2016, relative to the corresponding periods in the previous year.

Increase in Income from Operations and Net Income

Revenues totaled €64.1 million, up 8% compared with Q2 2015 (+6% at actual exchange rates).

Revenues from new systems sales increased by 8%, as did recurring revenues with an increase of 4% for recurring contracts and 15% for consumables and parts.

Income from operations amounted to €8.1 million, up 14% (+7% at actual exchange rates). The operating margin was 12.6%, increasing by 0.7 percentage points (+0.1 percentage points at actual exchange rates).

Net income amounted to €5.5 million, up €0.2 million (+5%) at actual exchange rates.

Finally, free cash flow amounted to €3.3 million (€5.2 million in Q2 2015).

Lectra Opens a Subsidiary in Vietnam

Lectra further pursued its development plan in Asia, with the opening of its subsidiary, Lectra Vietnam, on July 1 of this year. The new subsidiary will support Vietnam's businesses in their deployment of Lectra's industry-leading technologies, widely appreciated in Asia and across the world, and will also assist foreign firms to grow their businesses in Vietnam. The signing of the Transpacific Partnership (TPP) in February 2016 has further enhanced the attractiveness of Vietnam's fast-growing economy.

Lectra has been present in Vietnam for over 20 years, serving an extensive customer base, including major Asian companies. It was until now represented by its agent Ly Sinh Cong Trading Service Company (LSC). The entire sales and service personnel have now joined the new subsidiary, based in Ho Chi Minh City.

2. SUMMARY OF OPERATIONS FOR FIRST HALF 2016 AND CONSOLIDATED FINANCIAL STATEMENTS

With an average parity of \$1.12/€1 for H1 2016, the US dollar remained stable compared with H1 2015. For its part, the yuan declined 5%.

Despite the stability of the euro/dollar exchange rate, currency movements mechanically decreased revenues by €1.8 million (–1%) and income from operations by €0.9 million (–6%) at actual exchange rates compared with like-for-like figures.

Revenues and Income from Operations in Line with the Company Roadmap

Revenues totaled €126.3 million, up 10%, and income from operations €15.4 million, up 24%.

This performance is in line with the June 30 target figure corresponding to the middle of the range of objectives announced on February 11.

Orders for New Systems

Orders for new systems amounted to €56.7 million, up €9.4 million (+20%) relative to H1 2015: +8% for new software licenses, +27% for CAD/CAM equipment and +10% for training and consulting.

Geographically, the situation is highly contrasted: orders in Asia-Pacific increased by 60% and by 22% in Europe. They decreased by 22% in the Americas. Orders in the Americas had increased by 25% in H1 2015, while those in Asia-Pacific fell by 26%. In the rest of the world (Northern Africa, South Africa, Turkey, the Middle East, etc.) they increased by 9%.

Orders in the fashion and apparel market were up 7% and up 55% in the automotive market. They decreased by 6% in the furniture market. In the other industries, they increased by 22%. These markets respectively accounted for 45%, 40%, 11% and 4% of total orders.

Revenues

Revenues totaled €126.3 million, up 10% (+9% at actual exchange rates).

Revenues increased in all regions: +8% in Europe, +14% in the Americas, +9% in Asia-Pacific, and +11% in the rest of the world. These regions respectively accounted for 43% (including 7% for France), 27%, 24%, and 6% of total revenues. In 2015, they respectively accounted for 43% (including 7% for France), 26%, 25%, and 6% of total revenues.

Revenues from New Systems Sales

Overall, revenues from new systems sales (€54.6 million) increased by 13%. They represented 43% of total revenues (42% in H1 2015):

  • Revenues from new software licenses (€11.7 million) decreased by 1% and accounted for 9% of total revenues (10% in H1 2015);
  • CAD/CAM equipment revenues (€36.4 million) increased by 25% and accounted for 29% of total revenues (26% in H1 2015);
  • Training and consulting revenues (€5.5 million) decreased by 9% and accounted for 4% of total revenues (5% in H1 2015).

Revenues from Recurring Contracts and Consumables and Parts

Recurring revenues (€71.7 million) increased by 8%. They accounted for 57% of total revenues (58% in H1 2015).

Revenues from recurring contracts—which contributed 56% of recurring revenues and 32% of total revenues—totaled €40.4 million, a 4% increase:

  • Revenues from software evolution and online services contracts (€23.4 million), up 4% compared with 2015, represented 18% of total revenues;
  • Revenues from CAD/CAM equipment maintenance and online services contracts (€17 million), up 4%, contributed 13% of total revenues.

Revenues from consumables and parts (€31.4 million), meanwhile, increased by 13% and represented 25% of total revenues (24% in 2015).

Order Backlog

At June 30, 2016, the order backlog for new systems (€24.9 million) was up €1.9 million at actual exchange rates relative to December 31, 2015; it was up €5.9 million relative to June 30, 2015.

This backlog comprised orders for new software licenses and CAD/CAM equipment totaling €18.2 million, including €16.6 million for shipment in Q3 2016, €0.6 million in Q4 and the remainder in 2017, and €6.7 million for training and consulting, to be delivered as projects progress.

Gross Profit

Gross profit amounted to €93 million.

The overall gross profit margin was 73.6%. Like-for-like, it decreased by 1.9 percentage points relative to H1 2015, given changes in the sales mix.

Personnel expenses and other operating expenses incurred in the execution of service contracts or in training and consulting are not included in the cost of goods sold but are accounted for in selling, general, and administrative expenses.

Overhead Costs

Total overhead costs were €77.6 million, up €3.3 million (+4%) compared with H1 2015.

The breakdown is as follows:

  • €70.1 million in fixed overhead costs (+4%);
  • €7.5 million in variable costs (+5%).

The increase in total overhead costs was 3% at actual exchange rates.

R&D costs (€11.7 million) are fully expensed in the period and included in overhead costs and represented 9.3% of revenues (€11.4 million and 9.8% in H1 2015). After deducting the research tax credit and the corresponding portion of the competitiveness and employment tax credit applicable in France, net R&D costs amounted to €8.2 million (€7.1 million in 2015).

Income from Operations and Net Income

Income from operations reached €15.4 million, an increase of €3.2 million (+24%) like-for-like and €2.3 million (+17%) at actual exchange rates compared with H1 2015.

The operating margin was 12.2%, up 1.5 percentage points like-for-like and 0.9 percentage points at actual exchange rates.

Financial income and expenses represented a net charge of €0.2 million. Foreign exchange gains and losses generated a net loss of €0.1 million.

After an income tax expense of €4.4 million, net income amounted to €10.7 million, up 18% at actual exchange rates (€9 million in H1 2015).

Net earnings per share were €0.35 on basic capital and €0.34 on diluted capital (€0.29 on basic capital and diluted capital in H1 2015).

Free Cash Flow

Free cash flow amounted to €7.1 million, up €3.2 million compared with H1 2015.

The research tax credit (€3.4 million) and the competitiveness and employment tax credit (€0.4 million) for H1 2016 were accounted for but not received. If they had been received, free cash flow would have been €11 million.

Shareholders' Equity

At June 30, 2016, consolidated shareholders' equity amounted to €113.9 million (€113 million at December 31, 2015) after payment on May 6 of the dividend of €9.3 million (€0.30 per share) declared in respect of FY 2015.

The company has been debt free since March 31, 2015. Cash and cash equivalents as well as net cash position totaled €57.8 million (€59.3 million at December 31, 2015).

The working capital requirement was positive at €0.4 million. This includes the receivable of €25.6 million on the French tax administration (Trésor public) corresponding to the research tax credits recognized since fiscal year 2012, which have not yet been received or offset against income tax. Restated for this receivable, the working capital requirement was negative at €25.2 million, a key feature of the Group's business model.

When these tax credits cannot be deducted from corporate income tax, they are treated as a receivable on the French tax administration. If unused in the ensuing three years, they are repaid to the company in the fourth year. Thus, the company expects to receive reimbursement of the remainder (€5.1 million) of the 2012 research tax credit in the course of the year.

3. SHARE CAPITAL – OWNERSHIP – SHARE PRICE PERFORMANCE

Change in Share Capital

At June 30, 2016, the share capital totaled €30,957,385 divided into 30,957,385 shares with a par value of €1.00.

Share capital has increased by €170,986 (with a total share premium of €469,441) due to the creation of 170,986 shares since January 1, 2016 resulting from the exercise of stock options.

Main Shareholders

On April 8, 2016, and again in a second disclosure on April 24, Allianz SE (Germany) reported that, acting through French companies controlled by it, it had increased its shareholding above the thresholds of 5% of the company's capital stock and voting rights and that it held 5.10% of the capital stock and 5.05% of the voting rights.

No other crossing of statutory thresholds has been notified to the company since January 1, 2016.

At the date of publication of this report, and to the company's knowledge:

  • André Harari and Daniel Harari together hold 35.9% of the capital and 35.5% of the voting rights;
  • Delta Lloyd Asset Management NV (Netherlands), on behalf of investment funds and clients managed by it, and Allianz SE (Germany), through French companies controlled by it, each hold more than 5% (but less than 10%) of the capital and the voting rights.

No other shareholder has reported holding more than 5% of the share capital and voting rights.

Treasury Shares

At June 30, 2016, the company held 0.05% of its own shares in treasury shares, solely within the framework of the Liquidity Agreement contracted with Exane BNP Paribas.

Share Price Performance and Trading Volumes

The company's share price at June 30, 2016, was €13.81, up 14% compared with December 31, 2015 (€12.10). It reached a low of €10.76 on February 11 and a high of €14.70 on May 27.

The CAC 40 index and the CAC Mid & Small index fell by 9% and 7% respectively over the six months of this year.

According to Euronext statistics, the number of shares traded on Euronext (2.3 million) fell by 56%, and trading volumes (€30.3 million) were down 52% compared with H1 2015. These figures do not include trading on any other trading platform.

4. SIGNIFICANT POST-CLOSING EVENTS

No significant event has occurred since June 30, 2016.

5. FINANCIAL CALENDAR

The Q3 financial results will be published on October 27, after close of trading on Euronext.

6. BUSINESS TRENDS AND OUTLOOK

The company entered 2016 with even more solid operating fundamentals than in 2015 and an even stronger balance sheet.

The company reported on its business trends and outlook in its February 11, 2016 financial report and in its annual report, to which readers are invited to refer, emphasizing that 2016 looked unpredictable once again. It stated that persistent macroeconomic, geopolitical and monetary uncertainty was liable to continue to weigh heavily on companies' investment decisions.

The company had indicated that its objectives for FY 2016 were to achieve a growth in revenues of 6% to 12% and a growth in income from operations of 8% to 25%, like-for-like.

The June 30 results being in line with its roadmap, the company decided to step up its R&D plan with effect from July 1, 2016. This decision is expected to increase fixed overhead costs (after deduction of the research and development tax credit) by around €1.1 million in the second half of 2016, leading to a 3.5 percentage points reduction in the growth rate of income from operations for the year.

Thus, and taking into account the results and business activity of the first half, the company now expects for FY 2016 to achieve a growth in revenues of 8% to 11% and a growth in income from operations of 9% to 19%, like-for-like.

The company will unveil its new roadmap for 2017-2019, upon publication of its fourth-quarter and fullyear 2016 results, on February 9, 2017.

The Board of Directors July 28, 2016

Company Certification of the First-Half 2016 Report

We certify that, to our knowledge, the first-half financial statements have been prepared in accordance with currently applicable accounting standards and provide a fair view of the assets, financial condition, and results of the company and of its consolidated companies. We further certify that the first-half report on operations presents a true and sincere view of the significant events that occurred during the first six months of the fiscal year and their impact on the financial statements, and a description of the main risks and uncertainties for the coming six months.

Paris, July 28, 2016

Daniel Harari Jérôme Viala Chief Executive Officer Chief Financial Officer

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

ASSETS

(in thousands of euros) June 30, 2016 December 31, 2015 June 30, 2015
Goodwill 32,493 32,769 32,585
Other intangible assets 4,642 4,890 4,687
Property, plant and equipment 19,203 19,706 17,830
Non-current financial assets 2,111 2,100 1,896
Deferred tax assets 9,259 8,696 8,016
Total non-current assets 67,708 68,161 65,014
Inventories 25,532 23,326 23,475
Trade accounts receivable 44,331 53,404 42,790
Other current assets 34,825 31,493 36,821
Cash and cash equivalents 57,826 59,347 41,535
Total current assets 162,514 167,570 144,621
Total assets 230,222 235,731 209,635

EQUITY AND LIABILITIES

(in thousands of euros) June 30, 2016 December 31, 2015 June 30, 2015
Share capital 30,957 30,786 30,723
Share premium 9,488 9,018 8,773
Treasury shares (191) (203) (282)
Currency translation adjustments (9,014) (8,194) (8,135)
Retained earnings and net income 82,618 81,547 66,891
Total equity 113,858 112,954 97,969
Retirement benefit obligations 9,194 8,420 8,444
Borrowings, non-current portion - - -
Total non-current liabilities 9,194 8,420 8,444
Trade and other current payables 52,901 57,561 50,392
Deferred revenues 47,754 50,325 46,656
Current income tax liabilities 3,606 3,561 2,984
Borrowings, current portion - - -
Provisions for other liabilities and charges 2,909 2,910 3,190
Total current liabilities 107,170 114,357 103,222
Total equity and liabilities 230,222 235,731 209,635

CONSOLIDATED INCOME STATEMENT

Three months Six months Three months Six months
ended ended ended ended
(in thousands of euros) June 30, 2016 June 30, 2016 June 30, 2015 June 30, 2015
Revenues 64,132 126,345 60,308 116,428
Cost of goods sold (17,082) (33,366) (14,824) (28,195)
Gross profit 47,050 92,979 45,484 88,233
Research and development (4,196) (8,157) (3,589) (7,147)
Selling, general and administrative expenses (34,768) (69,397) (34,331) (67,912)
Income from operations 8,086 15,425 7,564 13,174
Financial income 1 6 7 3 4 0 128
Financial expenses (153) (258) (120) (230)
Foreign exchange income (loss) 4 2 (142) (286) (411)
Income before tax 7,990 15,098 7,197 12,660
Income tax (2,465) (4,443) (1,916) (3,668)
Net income 5,525 10,655 5,281 8,992
(in euros)
Earnings per share:
- basic 0.18 0.35 0.17 0.29
- diluted 0.17 0.34 0.17 0.29
Shares used in calculating earnings per share
- basic 30,924,887 30,863,180 30,606,349 30,513,708
- diluted 31,714,833 31,666,366 31,683,121 31,537,389

STATEMENT OF COMPREHENSIVE INCOME

Three months
ended
Six months
ended
Three months
ended
Six months
ended
(in thousands of euros) June 30, 2016 June 30, 2016 June 30, 2015 June 30, 2015
Net income 5,525 10,655 5,281 8,992
Currency translation adjustments (820) (820) (72) 368
Tax effect - - - -
Other comprehensive income to be reclassified
in net income
(820) (820) (72) 368
Remeasurement of the net liability arising
from defined benefits pension plans (581) (581) 121 169
Tax effect 190 190 (29) (43)
Other comprehensive income not to be reclassified
in net income
(391) (391) 9 2 126
Total other comprehensive income (1,211) (1,211) 2 0 494
Comprehensive income 4,314 9,444 5,301 9,486

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of euros) Six months ended
June 30, 2016
Six months ended
June 30, 2015
I - OPERATING ACTIVITIES
Net income 10,655 8,992
Net depreciation, amortization and provisions 3,296 3,280
Non-cash operating expenses (625) (525)
Loss (profit) on sale of fixed assets 3 5 2
Changes in deferred income taxes (330) 330
Changes in inventories (2,588) (2,453)
Changes in trade accounts receivable 6,546 5,028
Changes in other current assets and liabilities (7,714) (7,868)
Net cash provided by (used in) operating activities 9,275 6,786
II - INVESTING ACTIVITIES
Purchases of intangible assets (675) (1,020)
Purchases of property, plant and equipment (1,508) (2,058)
Proceeds from sales of intangible assets and property,
plant and equipment 6 7
Purchases of financial assets (1) (1,632) (1,454)
Proceeds from sales of financial assets (1) 1,671 1,721
Net cash provided by (used in) investing activities (2,138) (2,804)
III - FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares 640 1,885
Dividends paid (9,274) (7,646)
Purchases of treasury shares (1,543) (1,534)
Sales of treasury shares 1,605 1,442
Repayments of long-term and short-term borrowings - (394)
Net cash provided by (used in) financing activities (8,572) (6,247)
Increase (decrease) in cash and cash equivalents (1,435) (2,265)
Cash and cash equivalents at opening 59,347 43,484
Increase (decrease) in cash and cash equivalents (1,435) (2,265)
Effect of changes in foreign exchange rates (86) 316
Cash and cash equivalents at closing 57,826 41,535
Free cash flow 7,137 3,982
Income tax (paid) / reimbursed, net
Interest (paid)
(3,013)
-
(2,329)
-

(1) These amounts mainly correspond to the valuation of purchases and sales of treasury shares made through the Liquidity Agreement, and for which the counterpart is shown in the corresponding cash flows arising from financing activities.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands of euros, except for par value
per share expressed in euros)
Number
of shares
Share capital
Par value
per share
Share
capital
Share
premium
Treasury
shares
Currency
translation
adjustments
Retained
earnings
and net
income
Equity
Balance at January 1, 2015 30,329,114 1.00 30,329 7,282 (133) (8,503) 65,327 94,302
Net income 8,992 8,992
Other comprehensive income 368 126 494
Comprehensive income 368 9,118 9,486
Exercised stock options 393,860 1.00 394 1,491 1,885
Fair value of stock options 5 4 5 4
Sale (purchase) of treasury shares (149) (149)
Profit (loss) on treasury shares 3 8 3 8
Dividends paid (7,646) (7,646)
Balance at June 30, 2015 30,722,974 1.00 30,723 8,773 (282) (8,135) 66,891 97,969
Balance at January 1, 2015 30,329,114 1.00 30,329 7,282 (133) (8,503) 65,327 94,302
Net income 23,377 23,377
Other comprehensive income 309 290 599
Comprehensive income 309 23,667 23,976
Exercised stock options 457,285 1.00 457 1,737 2,194
Fair value of stock options 167 167
Sale (purchase) of treasury shares (70) (70)
Profit (loss) on treasury shares 3 0 3 0
Dividends paid (7,646) (7,646)
Balance at December 31, 2015 30,786,399 1.00 30,786 9,018 (203) (8,194) 81,547 112,954
Net income 10,655 10,655
Other comprehensive income (820) (391) (1,211)
Comprehensive income (820) 10,264 9,444
Exercised stock options 170,986 1.00 171 469 640
Fair value of stock options 4 8 4 8
Sale (purchase) of treasury shares 1 2 1 2
Profit (loss) on treasury shares 3 3 3 3
Dividends paid (9,274) (9,274)
Balance at June 30, 2016 30,957,385 1.00 30,957 9,488 (191) (9,014) 82,618 113,858

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 2016

1. BUSINESS ACTIVITY

Lectra was established in 1973 and has been listed since 1987 on Euronext (compartment B). Lectra is the world leader in software, CAD/CAM equipment and associated services dedicated to large-scale users of fabrics, leather, technical textiles and composite materials. Lectra addresses a broad array of major global markets, mainly fashion and apparel, automotive (car seats and interiors, airbags), furniture as well as a wide variety of other industries, such as the aeronautical and marine industries, and wind power.

The company's technology offer is geared to the specific needs of each market, enabling its customers to design, develop and manufacture their products (garments, seats, airbags, etc.). For the fashion and apparel industry, Lectra's software applications also facilitate the management of collections and cover the entire product lifecycle (Product Lifecycle Management, or PLM). Lectra forges long-term relationships with its customers and provides them with full-line, innovative solutions.

The Group's customers comprise large national and international corporations and medium-sized companies. Lectra helps them overcome their major strategic challenges: cutting costs and boosting productivity; reducing time-to-market; managing globalization; developing secure electronic communications; enhancing quality; satisfying the demand for mass-customization; and monitoring and developing their corporate brands. The Group markets end-to-end solutions comprising the sale of software, CAD/CAM equipment and associated services (technical maintenance, support, training, consulting, sales of consumables and parts).

All Lectra software and equipment is designed and developed in-house. Equipment is assembled from sub-elements produced by an international network of subcontractors and tested in the company's industrial facilities in Bordeaux–Cestas (France) where most of Lectra's R&D is performed.

Lectra's strength lies in the skills and experience of its more than 1,500 employees worldwide, encompassing expert R&D, technical and sales teams with deep knowledge of their customers' businesses.

The Group has been present worldwide since the mid-1980s. Based in France, the company serves its customers in more than 100 countries through its extensive network of 34 sales and services subsidiaries, which are backed by agents and distributors in some regions. Thanks to this unrivaled network, Lectra generated 91% of its revenues directly in 2015. Its five International Call Centers, in Bordeaux–Cestas (France), Madrid (Spain), Milan (Italy), Atlanta (U.S.A.) and Shanghai (China) cover Europe, North America and Asia. All of the company's technologies are showcased at its International Advanced Technology & Conference Center in Bordeaux–Cestas (France) for Europe and international visitors, and its two International Advanced Technology Centers in Atlanta (U.S.A.) for North and South America, and Shanghai (China) for Asia and the Pacific. Lectra is geographically close to its customers wherever they are, with nearly 850 employees dedicated to marketing, sales and services in the world. It employs 260 engineers dedicated to R&D, and 150 employees in industrial purchasing, assembly and testing of CAD/CAM equipment, and logistics.

Business Model

Lectra's business model is based on three pillars:

  • a balance of risks, which benefit from natural hedging by the distribution of business activity over market sectors and geographical markets with cycles that are different from each other, and by the very large number of customers throughout the world;
  • a balanced revenue mix between revenues from new systems sales, the company's growth driver, and revenues from recurring contracts and consumables and parts, a key factor in the company's stability, that provide a cushion in periods of difficult economic conditions;
  • the generation of annual free cash flow exceeding net income, assuming utilization or receipt of the annual research tax credit and the competitiveness and employment tax credit applicable in France.

2. SUMMARY OF ACCOUNTING RULES AND METHODS

The consolidated financial statements are compliant with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board as adopted within the European Union, and available for consultation on the European Commission website:

http://ec.europa.eu/finance/accounting/ias/index_en.htm

The condensed consolidated financial statements at June 30, 2016, have been prepared in accordance with IAS 34 - Interim Financial Statements. They do not comprise all of the financial disclosures required in the complete financial statements and should be read in conjunction with the Group's consolidated financial statements and corresponding notes for the fiscal year 2015, available on lectra.com.

The consolidated financial statements have been prepared in accordance with the same rules and methods as those applied in the preparation of the 2015 annual financial statements. They have been prepared under the responsibility of the Board of Directors at its meeting of July 28, 2016. They have been the subject of a limited review by the Statutory Auditors; the Q2 financial statements have not been reviewed separately.

The standards and interpretations adopted by the European Union whose application is required for fiscal years starting from January 1, 2016 have no impact on the Group's financial statements. The Group has not early adopted any standards, amendments or interpretations whose application is not required for fiscal years starting from January 1, 2016.

Comparability of the Group's interim and annual accounts may be affected by the slightly seasonal nature of the Group's business, which mostly achieves a higher level of revenues during the fourth quarter of the year. This, in particular, applies to sales of new software licenses and CAD/CAM equipment. Moreover, overhead costs are reduced during the third quarter due to the summer holidays in France and in European subsidiaries. These two items have a positive impact on income from operations of those quarters.

Comparisons identified as "like-for-like" correspond to 2016 figures restated at 2015 exchange rates, in comparison with actual data for 2015.

Critical Accounting Estimates and Judgments

Preparation of the financial statements in accordance with IFRS demands that certain critical accounting estimates be made. Management is also required to exercise its judgment in applying the Group's accounting policies. Although such estimates are made in a particularly uncertain environment, their relevance is supported by the Group's business model features.

The areas involving a higher degree of judgment or complexity, or requiring material assumptions and estimates in relation to the establishment of the consolidated financial statements, relate to goodwill impairment and deferred tax.

Revenues

Revenues from sales of hardware and software are recognized when the significant risks and benefits relating to ownership are transferred to the purchaser.

For hardware, these conditions are fulfilled upon physical transfer of the hardware in accordance with the contractual sale terms. For software, these conditions are generally fulfilled at the time of installation of the software on the customer's computer (either by CD-ROM or downloading).

Revenues from software evolution contracts and recurring services contracts are billed in advance, and their booking is spread over the duration of the contracts.

Revenues from the billing of services not covered by recurring contracts are recognized at the time of performance of the service or, where appropriate, on a percentage of completion basis.

Cost of Goods Sold

Cost of goods sold comprises all purchases of raw materials included in the costs of manufacturing, the change in inventory and inventory write-downs, all labor costs included in manufacturing costs which constitute the added value, freight-out costs on equipment sold, and a share of depreciation of the manufacturing facilities.

Cost of goods sold does not include salaries and expenses associated with service revenues, which are included under "Selling, General and Administrative Expenses".

Research and Development Costs

The technical feasibility of software and hardware developed by the Group is generally not established until a prototype has been produced or until feedback is received from its pilot sites, setting the stage for their commercialization. Consequently, the technical and economic criteria requiring the recognition of development costs in assets at the moment they occur are not met, and these, together with research costs, are therefore fully expensed in the period in which they are incurred.

The French research tax credit (crédit d'impôt recherche) and the portion of the competitiveness and employment tax credit (crédit d'impôt compétitivité et emploi) relating to R&D personnel, as well as grants linked to R&D projects, if any, are deducted from R&D expenses.

Earnings per Share

Basic net earnings per share are calculated by dividing net income by the weighted-average number of shares outstanding during the period, excluding the weighted-average number of treasury shares.

Diluted net earnings per share are calculated by dividing net income by the weighted-average number of shares adjusted for the dilutive effect of stock options outstanding during the period and excluding the weighted-average number of treasury shares held solely under the Liquidity Agreement.

The dilutive effect of stock options is computed in accordance with the share repurchase method provided by IAS 33. The assumed proceeds from exercise of stock options are regarded as having been used to repurchase shares at the average market price during the period. The number of shares thus obtained is deducted from the total number of shares resulting from the exercise of stock options.

Only options with an exercise price below the said average share price are included in the calculation of the number of shares representing the diluted capital.

Free Cash Flow

Free cash flow is equal to net cash provided by operating activities minus cash used in investing activities—excluding cash used for acquisitions of companies (net of cash acquired).

Operating Segments

Operating segment reporting is based directly on the Group's performance tracking and review systems. The operating segments presented in note 6 are identical to those covered by the information regularly communicated to the Executive Committee, in its capacity as the Group's "chief operating decision maker".

Operating segments refer to the major marketing regions that combine countries with similar economic characteristics in terms of type of product and service, customer type and distribution method. The regions concerned are: the Americas, Europe, Asia-Pacific, and the Rest of the World, where the company operates chiefly in North Africa, South Africa, Turkey, Israel, and the Middle East. These regions are involved in sales and the provision of services to their customers. They do not perform any industrial activities or R&D. They draw on centralized competencies and a wide array of functions that are pooled among all of the regions, including marketing, communication, logistics, procurement, production, R&D, finance, legal affairs, human resources, information systems, etc. All of these crossdivisional activities are reported as an additional operating segment referred to here as the "Corporate" segment.

Performance is measured by the segment's income from operations before non-recurring items and impairment of assets, if any. Marketing regions derive their revenues from external customers; all intersegment billings are excluded from this item. The gross profit margin rates used to determine operating performance are identical for all regions. They are computed for each product line and include added value supplied by the Corporate segment. Consequently, for products or services supplied in full or in part by the Corporate segment, a percentage of consolidated gross profit is retained in the income computed for the Corporate segment in order to cover its costs. Since most of the Corporate segment's general overheads are fixed, its profit margin and consequently its income from operations depend mainly on the volume of business generated by marketing regions.

3. SCOPE OF CONSOLIDATION

At June 30, 2016, the Group's scope of consolidation comprised the parent company, Lectra SA, together with 30 fully-consolidated companies.

In June 2016, the company established a new subsidiary in Vietnam, Lectra Vietnam, with a view to accelerating its development plan in Asia.

Fully consolidated in the June 30, 2016 financial statements, this subsidiary assumed on July 1, 2016 the assets of the agent that previously represented Lectra in this country for many years. At June 30, 2016, only the capital has been paid in; thus, the creation of this subsidiary has no impact on the Group consolidated financial statements. The impact on the income statement and the statement of financial position of the Group will later be immaterial, the bulk of sales in this country having been until then billed by Lectra SA.

There was no other change in the scope of consolidation during the first half of 2016.

In October 2015, the company had created a new subsidiary, Lectra Tunisie CP, whose only business is the sale of consumables and parts in Tunisia. Since October 1, 2015, this subsidiary has taken over this business, which had been until then managed and invoiced directly by Lectra SA in France, as the first subsidiary Lectra Systèmes Tunisie is limited to selling services. The impact of the creation of Lectra Tunisie CP on the income statement and the statement of financial position of the Group was immaterial.

Four sales and service subsidiaries are not consolidated, their revenues being immaterial both separately and combined. At June 30, 2016, their combined revenues totaled €0.6 million, and their combined assets in their statement of financial position totaled €2.7 million. They had no financial debt outside of the Group. Most of these subsidiaries' sales activity is billed directly by Lectra SA.

Transactions with these related parties mainly concern purchases from Lectra SA for the purposes of their local operations, or charges and commissions billed to Lectra SA in order to cover their overheads when they act as agents. The amount concerned by these transactions was not material at June 30, 2016.

4. CONSOLIDATED STATEMENT OF INCOME—LIKE-FOR-LIKE CHANGE

4.1. Q2 2016

Three Months Ended June 30
2016 2015 Changes 2016/2015
(in thousands of euros) Actual At 2015
exchange rates
Actual Actual Like-for-like
Revenues 64,132 65,352 60,308 +6% +8%
Cost of goods sold (17,082) (17,199) (14,824) +15% +16%
Gross profit 47,050 48,153 45,485 +3% +6%
(in % of revenues) 73.4% 73.7% 75.4% -2.0 points -1.7 points
Research and development (4,196) (4,196) (3,589) +17% +17%
Selling, general and administrative expenses (34,768) (35,364) (34,331) +1% +3%
Income from operations 8,086 8,594 7,564 +7% +14%
(in % of revenues) 12.6% 13.2% 12.5% +0.1 points +0.7 points
Income before tax 7,990 8,498 7,197 +11% +18%
Income tax (2,465) na (1,916) +29% n a
Net income 5,525 na 5,281 +5% n a

4.2. First Half 2016

Six Months Ended June 30
2016 2015 Changes 2016/2015
(in thousands of euros) Actual At 2015
exchange rates
Actual Actual Like-for-like
Revenues 126,345 128,178 116,428 +9% +10%
Cost of goods sold (33,366) (33,430) (28,195) +18% +19%
Gross profit 92,979 94,748 88,233 +5% +7%
(in % of revenues) 73.6% 73.9% 75.8% -2.2 points -1.9 points
Research and development (8,157) (8,157) (7,147) +14% +14%
Selling, general and administrative expenses (69,397) (70,223) (67,912) +2% +3%
Income from operations 15,425 16,368 13,174 +17% +24%
(in % of revenues) 12.2% 12.8% 11.3% +0.9 points +1.5 points
Income before tax 15,098 16,040 12,660 +19% +27%
Income tax (4,443) na (3,668) +21% n a
Net income 10,655 na 8,992 +18% n a

5. BREAKDOWN OF REVENUES—LIKE-FOR-LIKE CHANGE

5.1. Q2 2016

Revenues by geographic region

Three Months Ended June 30
2016 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Europe, of which: 27,457 43% 27,763 26,333 43% +4% +5%
- France 4,857 8% 4,855 4,003 7% +21% +21%
Americas 15,618 24% 16,100 16,111 27% -3% 0%
Asia-Pacific 17,131 27% 17,411 14,496 24% +18% +20%
Other countries 3,926 6% 4,078 3,368 6% +17% +21%
Total 64,132 100% 65,352 60,308 100% +6% +8%

Revenues by product line

Three Months Ended June 30
2016 2015 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Software, of which: 17,471 27% 17,790 17,684 29% -1% +1%
- New licenses 5,770 9% 5,861 6,019 10% -4% -3%
- Software evolution and online services contracts 11,701 18% 11,929 11,665 19% 0% +2%
CAD/CAM equipment 18,340 29% 18,562 15,995 27% +15% +16%
Hardware maintenance and online services contracts 8,554 13% 8,754 8,262 14% +4% +6%
Consumables and parts 16,460 26% 16,912 14,763 24% +11% +15%
Training and consulting services 2,833 4% 2,856 3,054 5% -7% -7%
Miscellaneous 474 1% 478 550 1% -14% -13%
Total 64,132 100% 65,352 60,308 100% +6% +8%

Breakdown of revenues between revenues from new systems sales and recurring revenues

Three Months Ended June 30
2016 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Revenues from new systems sales(1) 27,417 43% 27,756 25,618 42% +7% +8%
Recurring revenues(2), of which: 36,715 57% 37,596 34,690 58% +6% +8%
- Recurring contracts 20,255 31% 20,684 19,927 34% +2% +4%
- Consumables and parts 16,460 26% 16,912 14,763 24% +11% +15%
Total 64,132 100% 65,352 60,308 100% +6% +8%

(1) Revenues from sales of new systems comprise sales of new software licenses, CAD/CAM equipment, training and consulting and on-call interventions on the installed base.

(2) Recurring revenues fall into two categories:

- Recurring contracts: software evolution and online services contracts, and CAD/CAM equipment maintenance and online services contracts, which are renewable annually;

- Revenues from sales of consumables and parts, which are statistically recurrent.

5.2. First Half 2016

Revenues by geographic region

Six Months Ended June 30
2016 2015 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Europe, of which: 54,154 43% 54,600 50,335 43% +8% +8%
- France 9,398 7% 9,397 8,138 7% +15% +15%
Americas 33,621 27% 34,211 30,121 26% +12% +14%
Asia-Pacific 30,680 24% 31,160 28,595 25% +7% +9%
Other countries 7,890 6% 8,207 7,377 6% +7% +11%
Total 126,345 100% 128,178 116,428 100% +9% +10%

Revenues by product line

Six Months Ended June 30
2016 2015 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Software, of which: 35,045 28% 35,552 34,877 30% 0% +2%
- New licenses 11,686 9% 11,853 12,028 10% -3% -1%
- Software evolution and online services contracts 23,359 18% 23,699 22,850 20% +2% +4%
CAD/CAM equipment 36,353 29% 36,754 29,440 26% +23% +25%
Hardware maintenance and online services contracts 17,021 13% 17,276 16,626 14% +2% +4%
Consumables and spare parts 31,364 25% 31,991 28,297 24% +11% +13%
Training and consulting services 5,545 4% 5,582 6,111 5% -9% -9%
Miscellaneous 1,017 1% 1,023 1,077 1% -6% -5%
Total 126,345 100% 128,178 116,428 100% +9% +10%

Breakdown of revenues between new systems sales and recurring revenues

Six Months Ended June 30
2016 2015 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Revenues from new systems sales(1) 54,601 43% 55,212 48,656 42% +12% +13%
Recurring revenues(2), of which: 71,744 57% 72,966 67,772 58% +6% +8%
- Recurring contracts 40,380 32% 40,975 39,475 34% +2% +4%
- Consumables and spare parts 31,364 25% 31,991 28,297 24% +11% +13%
Total 126,345 100% 128,178 116,428 100% +9% +10%

(1) Revenues from sales of new systems comprise sales of new software licenses, CAD/CAM equipment, training and consulting and on-call interventions on the installed base.

(2) Recurring revenues fall into two categories:

- Recurring contracts: software evolution and online services contracts, and CAD/CAM equipment maintenance and online services contracts, which are renewable annually;

- Revenues from sales of consumables and parts, which are statistically recurrent.

Breakdown of revenues from new systems sales by market sector

Six Months Ended June 30
2016 2015 Changes 2016/2015
Actual % At 2015 Actual % Actual Like-for-like
(in thousands of euros) exchange rates
Fashion and apparel 22,935 42% 23,235 22,722 46% +1% +2%
Automotive 22,151 41% 22,304 16,385 34% +35% +36%
Furniture 5,968 11% 6,112 7,130 15% -16% -14%
Other industries 3,547 6% 3,561 2,419 5% +47% +47%
Total 54,601 100% 55,212 48,656 100% +12% +13%

6. OPERATING SEGMENTS INFORMATION

Six months ended June 30, 2016
(in thousands of euros)
Europe Americas Asia
Pacific
Other
countries
Corporate Total
Revenues 54,155 33,621 30,680 7,889 - 126,345
Income (loss) from operations 8,791 4,657 1,472 1,245 (740) 15,425
Six months ended June 30, 2015(1) Asia Other
(in thousands of euros) Europe Americas Pacific countries Corporate Total
Revenues 50,335 30,121 28,595 7,377 - 116,428
Income (loss) from operations 7,162 3,085 1,057 1,209 661 13,174

(1) The 2015 amounts have been restated in order to account for the change in gross profit margins (see below) and allow for comparison with 2016.

The standard gross profit margins used to determine the performance of operating segments have been changed from January 1, 2016, to take into account the improvement in the overall profitability of the Group. This new allocation of gross profit between marketing regions and the Corporate segment allows for a more relevant analysis of performance by operating segment. The new margins will leave the income from operations for the Corporate segment close to zero over the full year, but seasonal variations of revenues and overhead costs may lead to a different result every quarter.

Income from operations, which is obtained by adding together the income for each segment, is identical to consolidated income from operations shown in the Group's consolidated financial statements and therefore does not need to be reconciled.

7. CONSOLIDATED CASH FLOW SUMMARY

Six months ended June 30, 2016
(in thousands of euros)
Cash and
cash equivalents
Financial
debts
Net
cash
Free cash flow 7,137 - 7,137
Proceeds from issuance of ordinary shares(1) 640 - 640
Sale and purchase of treasury shares(2) 62 - 62
Dividends paid (9,274) - (9,274)
Impact of currency variations – other (86) - (86)
Change in cash position for the period (1,521) - (1,521)
Cash position at December 31, 2015 59,347 - 59,347
Cash position at June 30, 2016 57,826 - 57,826
Change in cash position for the period (1,521) - (1,521)

(1) Resulting solely from the exercise of stock options.

(2) Carried out solely under the Liquidity Agreement administered by Exane BNP Paribas (see note 9).

Free cash flow at June 30, 2016, was €7.1 million. This figure results from a combination of €9.3 million in cash flows provided by operating activities (including an increase in working capital requirement of €3.8 million) and capital expenditures of €2.1 million.

The main variations in working capital requirement were:

  • –€6.5 million corresponding to the decrease in trade accounts receivable, after the cash receipt of a significant portion of the recurring contracts at the beginning of the year, usually yearly in advance (the variation in trade accounts receivable shown in the consolidated statement of cash flows includes "deferred revenues" in the statement of financial position, which for the most part comprises the share of recurring contracts billed but not yet recognized in revenues);
  • +€2.6 million corresponding to the increase in inventories;

  • +€1.9 million arising from the increase of the receivable on the French tax administration (Trésor public) corresponding to the research tax credit for the first half of 2016, accounted for but not received, after deduction from the remaining amount of corporate income tax due by Lectra SA for the same period (see note 8 hereafter);

  • +€1.6 million arising from the difference between the variable portion of salaries for the Group in respect of fiscal 2015 paid mainly in 2016, and the one recognized during the first half of 2016 and payable in 2017;
  • +€4.3 million corresponding to a decrease in trade accounts payable;
  • –€0.1 million arising from the change in other current assets and liabilities; taken individually, these changes are all immaterial.

The working capital requirement at June 30, 2016, was positive at €0.4 million. It comprised a receivable of €25.6 million on the French tax administration in respect of the research tax credit, which has not been received and has not been deducted from the corporate income tax expense (see note 8 hereafter). Restated for this receivable, the working capital requirement was negative at €25.2 million, which is a key feature of the Group's business model.

8. RESEARCH TAX CREDIT – COMPETITIVENESS AND EMPLOYMENT TAX CREDIT

When the research tax credit and the competitiveness and employment tax credit applicable in France recognized in the year cannot be deducted from the corporate income tax, they are treated as a receivable on the French tax administration. If unused in the ensuing three years, they are repaid to the company in the course of the fourth year.

The competitiveness and employment tax credits relating to fiscal 2015 and the first half of 2016 have been entirely deducted from the corporate income tax due by Lectra SA.

Thus, at June 30, 2016, Lectra SA held a €25.6 million receivable on the French tax administration. This comprised the remaining amount of the research tax credit, after deduction from the corporate income tax due by Lectra SA in the same year: for 2016 (€1.8 million), 2015 (€5.7 million), 2014 (€6.9 million), 2013 (€6.1 million) and 2012 (€5.1 million).

In light of its estimates of tax credits and corporate income tax for the next three fiscal years, the company does not expect to make any payment in respect of corporate income tax, from which will be deducted in full the competitiveness and employment tax credit, and, when applicable, the research tax credit of each fiscal year. It expects to receive the reimbursement of the balance outstanding of these non-deducted tax credits as follows: in 2016 (in respect of the 2012 tax credit), 2017 (in respect of the 2013 tax credit), 2018 (in respect of the 2014 tax credit), 2019 (in respect of the 2015 tax credit) and 2020 (in respect of the 2016 tax credit). This situation will last for as long as the amount of the annual tax credits exceeds the amount of income tax payable.

If the income tax expense were to rise above the amounts of tax credits for the year, the company would continue not paying corporate income tax until the corresponding receivable is deducted in full. Thereafter it would deduct these tax credits each year from the income tax expense for the same year in full and would be required to pay the residual amount.

9. TREASURY SHARES

Since January 1, 2016, the company has purchased 119,355 shares and sold 123,175 shares at an average price of €12.92 and €13.03 respectively under the Liquidity Agreement administered by Exane BNP Paribas.

At June 30, 2016, the company held 14,520 Lectra shares (i.e. 0.05% of the share capital) with an average purchase price of €13.18 entirely under the Liquidity Agreement.

10. CASH AND CASH EQUIVALENTS AND NET CASH

(in thousands of euros) June 30, 2016 December 31, 2015
Cash and cash equivalents 57,826 59,347
Borrowings and financial debts - -
Net cash 57,826 59,347

After the repayment on March 31, 2015 of the remaining of public grants to finance R&D programs for €0.4 million, which were its sole debt, the Group had no remaining borrowing or financial debt. Thus, cash and cash equivalents were equal to net cash, and amounted to €57.8 million.

11. FOREIGN EXCHANGE RISK

The Group's currency risk management policy is unchanged relative to December 31, 2015.

During the first half of 2016, the average parity between the US dollar and the euro was \$1.12/€1.

Exchange Risk Hedging Instruments

Exchange risk hedging instruments at June 30, 2016 comprised forward sales or purchases of foreign currencies (mainly US dollar) for a net total equivalent value (sales minus purchases) of €7.7 million, intended to hedge existing balance sheet positions. Thus, the company has hedged almost all its balance sheet positions.

At the publication date of this report, it has not hedged its net exposure to the US dollar on its operating flows.

12. SENSITIVITY ANALYSIS

Sensitivity of Income from Operations to a Change in Revenues from New Systems Sales

Under the company's business model, each €1 million increase (or decrease) in revenues from new systems sales results in a rise (or fall) in income from operations of approximately €0.45 million.

Sensitivity of Revenues and Income from Operations to a Change in Exchange Rates

The company has based its 2016 scenarios on the December 31, 2015 exchange rates for the currencies in which the Group generates its revenues, notably \$1.10/€1.

In view of the estimated share of revenues and costs denominated in US dollars or in currencies correlated with the US dollar, a 5-cent fall in the euro against the US dollar (leading to an annual average exchange rate of \$1.05/€1) would mechanically increase 2016 annual revenues by approximately €4.4 million and annual income from operations by €2.4 million. Conversely, a 5-cent appreciation of the euro against the US dollar (i.e. \$1.15/€1) would mechanically reduce annual revenues and income from operations by the same amounts.

The parity is \$1.11/€1 at the date of this report.

In addition to fluctuating against the US dollar and against currencies strongly correlated with it, the euro also fluctuates against other currencies. These variations are frequently dissimilar both in direction (upward and downward) and in scale.

PricewaterhouseCoopers Audit KPMG SA « Crystal Park » Domaine de Pelus 63, rue de Villiers 11, rue Archimède 92208 Neuilly-sur-Seine 33692 Mérignac Cedex

STATUTORY AUDITORS' REVIEW REPORT ON THE 2016 CONDENSED HALF-YEAR CONSOLIDATED FINANCIAL STATEMENTS

This is a free translation into English of the statutory auditors' review report on the half-year financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group's half-year management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France.

To the Shareholders,

In compliance with the assignment entrusted to us by the Shareholders' meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on:

  • the review of the accompanying condensed half-year consolidated financial statements of Lectra SA, for the period from January 1 to June 30, 2016 ;
  • the verification of the information presented in the half-yearly management report.

These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review.

1. Conclusion on the financial statements

We conducted our review in accordance with professional standards applicable in France except as explained in the following paragraph. A review of half-year financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have not reviewed the consolidated statement of income for the second quarter of the year 2016 and the comparative 2015 figures.

Based on our review, and subject the limitation referred to in the previous paragraph, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – the standard of IFRSs as adopted by the European Union applicable to interim financial information.

2. Specific verification

We have also verified the information presented in the half-year management report on the condensed half-year consolidated financial statements subject to our review. At the exception of the possible impact of the fact above, we have no other matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements.

Neuilly-sur-Seine and Mérignac, July 28, 2016

The Statutory Auditors

French original signed by

PricewaterhouseCoopers Audit SA KPMG SA

Matthieu Moussy Jean-Pierre Raud

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