2024 Valuation PDF

1 Summary 2 CORPORATE VALUATION Financial Modeling and Corporate Valuation 3 INTRODUCTION TO VALUATION 4 Why do we value companies? Many Reasons to Value companies 1 Investment Decisions 2 Mer...

1 Summary 2 CORPORATE VALUATION Financial Modeling and Corporate Valuation 3 INTRODUCTION TO VALUATION 4 Why do we value companies? Many Reasons to Value companies 1 Investment Decisions 2 Mergers and Acquisitions Valuation is crucial for buying or selling It helps in pricing deals between stocks and pricing shares for an IPO. companies, acquisitions, divestitures. 3 Capital Raising 4 Strategic Planning Valuation is essential for equity and It aids in investment and strategic debt financing. planning for businesses. 5 Context matters Business & Sector Strategic Positioning Risks & Scenarios Valuation is sensitive to sector A company’s strategic Operational and financial risks, or company business positioning versus competition including competitive landscape, characteristics. It depends on: plays a crucial role in valuation. regulation, and geopolitical factors, affect valuation. Different - products' life cycle positions in M&A or IPO pricing - pricing power of translate into different products/brands. assumptions. 6 Different valuation methods Different sectors, companies, assets deserve different valuation methodologies DCF DDM Discounted cash flows Dividend Discount Model Multiples Book Value Also called comparable method Equity value / Book value 7 Other methods: EVA, Goodwill, etc. Some sectors (banks, hospitality…) have specific methods. Valuation: indirect & direct methodologies 8 Intrinsic value / Market value / Relative value Intrinsic Value The perceived or calculated value of an asset, based on underlying fundamentals - perceptions of its true value. Market Value The current value of an asset or company as determined by the market forces of supply and demand. Relative Value The worth of an asset when compared to similar assets or benchmarks in 9 the market. Valuation & Pricing: numbers can be different for various reasons Valuation Pricing Relies on the choice of a method (DCF, Is an agreement between 2 parties to multiples, …) for each asset sell / buy a certain asset at a certain ✓ using fundamentals with a set of price at a certain point in time assumptions: growth, margin, asset turnover, wacc, growth to infinity… Valuation is subjective Pricing is objective ✓ Even though terminology can be misleading: ✓ a buyer and a seller finding an fair value, intrinsic value agreement to buy/sell an asset at a given price at a given date ✓ it’s your calculation based on your Illustration assumptions 10 Valuation Valuation of a company A valuation is: ✓ a combination of different methods to value the different types of assets ✓ built in a perspective of ongoing business - different than a break-up value The view of a previous analyst: a valuation based on an average of different methods (with on top different weightings) looks not serious (too easy to manipulate) Be ready to defend the choice of your method and set of assumptions Be ready to discuss the outcome of alternative methods, one of them might be preferred by investors 11 Back to Menu Valuation combines different methods depending on business complexity Example: Renault valuation with several methods Auto business: valuation based on a DCF or a mix between EV /sales and EBIT Nissan: 44,3% stake valued with a DDM. Some investors prefer to use a market value with a discount Finance business valued at equity. If valued as a bank (it is a captive), valuation would be higher based on return on equity, cost of capital and LT growth of outstanding loans Daimler: market value (listed) Other assets / debt: valuation at book or equity value FYI: Renault has sold its stake in Daimler (2021) and is currently reducing its stake in Nissan 12 ADJUSTED NET ASSETS METHOD 13 Adjusted Net Asset Value - ANAV Also called book value or equity value Understanding the Foundations: Book value (Shareholder’s Equity) = Assets - Liabilities Book Value Adjustments Valuation Purpose Starting point: the Reassessing the value of ANAV is useful for company's assets minus assets and liabilities based Asset-intensive liabilities represents the on their fair value businesses, book value or shareholder’s Current market conditions Companies undergoing equity. Fundamentals restructuring, It provides a more accurate Situations where However, this often doesn't representation of the liquidation value is reflect true market value. company's worth. important.  Adjusted Net Asset Value Step 1: Identifying Assets and Liabilities 1 Review Balance Sheet Balance Sheet provides a comprehensive list of assets and liabilities at their book values. Examine each item and assess its fair value. 2 Identify Off-Balance Sheet Items Look beyond the balance sheet to identify any off-balance sheet item that may impact the company's value. These could include operating leases, pending lawsuits, or intangible assets. Step 2: Adjusting Book Values 1 Fixed Asset Revaluation 3 Financial Asset Marking 2 Inventory Revaluation 4 Liability Reassessment Adjusted Net Asset Value Step 3: Calculating Adjusted Net Asset Value 1. Sum all Adjusted Assets 3. Adjusted Net Assets = 2. Sum all Adjusted Liabilities Adjusted Assets Aggregate all adjusted current liabilities, long-term – Adjusted Liabilities asset values: current & debt, and any newly recognized  company's estimated non-current and off- contingent liabilities. market value based on its balance-sheet assets adjusted balance sheet.  Accounting measures of value : Example Book Value Fair Value Assets Long-term Assets The bottom of a balance sheet indicates the book value or Tangible Assets 3 000 4 500 Intangible Assets 1 000 1 000 owner’s equity or net assets. Other intangible assets 2 000 It measures the net cumulative amount of equity capital (cash and Current Assets Inventory 1 620 1 600 retained profits) that shareholders have invested in the company Accounts Receivable 980 980 since it was first established Cash 7 200 7 200 Estimated value = Book value = Total assets – liabilities = Net Total Assets 13 800 17 280 Equity = 7 300 Liabilities & Owner's Equity Adjusted net asset value: Current Liabilities Accounts payable 500 500 ✓ Adjust value (revalued) Assets & Liabilities: see numbers in red Current debt 1 000 1 000 ✓ Identify off-balance sheet items: new intangible asset for 2 000 Long-term debt 5 000 5 000 Owner's Equity ✓ Adjusted net asset value Contributed Capital 5 000 10 780 = 17 280 – (500-1000-5000) = 10 780 Retaines Earningsq 2 300 Total Liabilities & Owner's Equity 13 800 17 280 Back to Menu Why can’t we use only Adjusted Asset Value? Accounting often uses historical costs and not market value for assets: accountants depreciate assets event if their market price increases Accounting data is not a measure of the selling or listing price. It reflects the past. What is relevant for investors is the firm’s future performance. Accounting provides you with the Crash VALUE => amount of cash you would receive if you sold separately the various assets that make up the firm’s assets (trade receivables, inventories, equipment, land and buildings) THE DISCOUNTED CASH FLOW (DCF) METHOD AT A GLANCE 19 DCF: main assumption n CFt The value of any asset is equal to the Value =  t =1 (1 + k ) t present value of its future cash flows Discounted Cash Flow method (DCF) = « intrinsic » valuation method CF: the expected cash-flow k: the discount rate t: the period 20 ADVANTAGE : A FUNDAMENTAL VALUE FOCUS Intrinsic Value DCF focuses on a company's ability to generate cash flows. This provides a measure of intrinsic value. Long-Term Perspective It considers the company's long-term potential. This avoids short-term market fluctuations. Comprehensive Analysis DCF requires a thorough understanding of the business. This leads to more informed investment decisions. 21 Follow the steps to apply the DCF Method Small case 1 Step 1: Choose Cash Flow Model 5 Step 5: Compute Terminal Value (TV) 2 Step 2: Develop Pro-Forma Data 6 Step 6: Discount and Sum Discount FCF & Terminal Value and add them 3 Step 3: Build Business Plan 7 Step 7: Adjust for Net Debt Calculate FCF using pro-forma data If using FCFF, subtract net debt to determine Equity Value 4 Step 4: Calculate Discount Rate 22 Classic DCF valuation of an ongoing business Two periods Period 1: Discounted FCF over a period of n years – business plan period ✓ FCF are based on your own estimates (business plan / own analysis) ✓ Duration of the period (5/10/15 years) depending on business visibility, cyclicity Period 2: Terminal value (or discounting FCF from n+1 to infinity) 𝑛 𝐶𝐹𝑡 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 Enterprise Value = ෍ 𝑡 + 𝑛 1 + 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 1 + 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 23 𝑡=1 DCF Step 1: choice of cash flows Step 1: Determine which free cash flow model to use for the analysis The prevailing approach: Free Cash-Flow to the Firm (FCFF) ✓ Unlevered cash-flows (i.e., before financing) Free Cash Flow to the Firm ✓ Available to all fund's providers – Debt interests x (1-tax rate) In contrast with Free Cash-Flows to Equity (FCFE) – Debt capital repayment, net ✓ After the debt-related cash-flows ✓ Available solely to equity providers = Free Cash Flow to Equity 24 DCF Step 1: choice of cash flows Sales Sales -- Cost Cost of of Goods Goods Sold Sold -- Other Other operating operating expenditures expenditures == Earnings Earnings before before interest interest & & Taxes Taxes (EBIT) (EBIT) -- taxes taxes = Net operating profit after taxes (NOPAT)  Cash Flow from Operations = Net operating profit after taxes (NOPAT)  Cash Flow from Operations + net non-cash charges + net non-cash charges - change in working capital requirements - change in working capital requirements - Capital Expenditures - net (CAPEX)  Cash Flow from Investments - Capital Expenditures - net (CAPEX)  Cash Flow from Investments = Free Cash Flow to the Firm (FCFF) - Available to the Firm = Free Cash Flow to the Firm (FCFF) - Available to the Firm - Debt Service + New Debt  Cash Flow from Financing - Debt Service  Cash Flow from Financing = Free Cash Flow to Equity - Available to Equity holders (Shareholders) = Free Cash Flow to Equity - Available to Equity holders (Shareholders) 25 DCF Steps 2 & 3: free cash flow calculation Step 2: Develop pro-forma financial estimates Develop projections Adjust financial statements if necessary Step 3: Calculate free cash flows using the pro-forma data FCFF: free cash flow to the firm FCFE: free cash flow to equity 26 DCF Step 4: Discount rate Step 4: Calculate Discount rate If using FCFF, discount rate is the Weighted Average Cost of Capital (WACC) ✓ In the context of evaluating a potential merger target, we adjust the target’s WACC to reflect any changes in the target’s risk or capital structure that may result from the merger (WACC adjusted) If using FCFE, discount rate is Cost of Equity 𝑲𝒆 27 DCF Step 5: Terminal Value Step 5 : Determine the Terminal Value: there is 2 different methods 1. Perpetuity: TV is the value of the FCF at the end of the period (n) growing at g % to infinity 𝐹𝐶𝐹𝑛 1+𝑔 Terminal value for FCFF = 𝑊𝐴𝐶𝐶−𝑔 2. Multiple: TV is a multiple of last EBITDA (calculation can also be based on last FCF or EBIT) Terminal Value for FCFF = 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 × 𝐸𝐵𝐼𝑇𝐷𝐴𝑛 𝑃𝑟𝑖𝑐𝑒 Where Multiple is from a comparable company 𝐸𝐵𝐼𝑇𝐷𝐴 Terminal value is critical as it often represents a large % of company enterprise value (EV) 28 Perpetuity method is highly preferred, Multiple method is too arbitrary DCF Steps 6 & 7: Discounting Step 6: Discount FCF and the terminal value to determine the value of: The Firm if using FCFF The Equity if using FCFE These cash flows (CF6 to ) will be captured by the terminal value Cash Flows CF1 CF2 CF3 CF4 CF5 CF6 CF7 CF8 …  Years 0 1 2 3 4 5 6 7 8 Step 7: If using FCFF, subtract net debt to calculate the equity value Net debt = Gross debt - Cash 29 Back to Menu FCFF & FCFE 𝑛 𝐹𝐶𝐹𝐹𝑛 (1 + 𝑔) 𝐹𝐶𝐹𝐹𝑡 ൘(𝑊𝐴𝐶𝐶 − 𝑔) Enterprise Value = ෍ 𝑡 + 1 + 𝑊𝐴𝐶𝐶 1 + 𝑊𝐴𝐶𝐶 𝑛 𝑡=1 𝑛 𝐹𝐶𝐹𝐹𝑛 (1 + 𝑔) 𝐹𝐶𝐹𝐹𝑡 ൘(𝑊𝐴𝐶𝐶 − 𝑔) Equity Value = ෍ 𝑡 + 𝑛 − Net Debt 1 + 𝑊𝐴𝐶𝐶 1 + 𝑊𝐴𝐶𝐶 𝑡=1 𝑛 𝐹𝐶𝐹𝐸𝑛 (1 + 𝑔) 𝐹𝐶𝐹𝐸𝑡 ൘(𝐾 −𝑔) 𝑒 Equity Value = ෍ 𝑡 + 1 + 𝐾𝑒 1 + 𝐾𝑒 𝑛 30 𝑡=1 DCF METHOD INSIGHTS 31 DCF valuation Discounted Free Cash Flows valuation: “The method par excellence” Advantages: ✓ The most popular & recognized method ✓ Method based on a business plan ✓ Method able to capture different future earnings and cash generation profile Weaknesses: ✓ Method requiring heavy preliminary homework ✓ Method better suited for businesses offering good visibility on future FCF generation, more challenging to implement for volatile/cyclical businesses ✓ Method sensitive to specific parameters: discount rate, top-line growth, margin, asset rotation 32  About the company business plan Formatting the business plan Discounted period: duration (5/10/15 years) depending on business visibility & volatility Period 1 Period 2 Period 3 BP: our own company estimates (3/5 our own company estimates moving sector trends moving to long-term years) on growth, operating margin, to long-term sector trends or macro-economic growth asset rotation normalized trends Underlying assumption: Company growth & profitability cannot outperform the sector in the long run 33 Sector growth & profitability cannot outperform the macroeconomy in the long run DCF valuation: an example 34 About the company business plan Quality of input is key Important preliminary homework required to build a relevant sample of peers ✓ Assumptions must be put into perspective vs. company’s past performances ✓ Assumptions must be put into perspective vs. peers ✓ Assumptions must be put into perspective vs. company & peers mid-term plan EBIT must be restated to reflect economic reality ✓ Extraordinary one-offs: cash-in/out must be restated if not related to the operating cycle ✓ Restructurings: cash-out must not be restated if required to maintain competitiveness vs peers 35 About the company business plan Valuation is highly sensitive to growth (g) and ROCE (Return on Capital Employed) EBIT (1 − t) ROCE = Growth cannot outperform the sector or the Capital Employed economy in the long run EBIT (1 − t) Sales ROCE cannot improve indefinitely (i.e., ROCE = Sales × Capital Employed attracting new competitors) ROCE = EBIT margin × Asset Turnover 36 About the Terminal Value Terminal value is critical as it often represents a large % of company enterprise value (EV) 𝐹𝐶𝐹𝑛 1+𝑔 Perpetuity: Terminal value for FCFF = 𝑊𝐴𝐶𝐶−𝑔 Multiple: Terminal Value for FCFF = 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 × 𝐸𝐵𝐼𝑇𝐷𝐴𝑛 Perpetuity method is highly preferred Perpetuity method looks more rational. It is however highly sensitive to the (WACC - g) factor Multiple method is arbitrary: after your homework to build a BP, you arbitrary decide on a multiple for more than 50% of EV valuation without any relevant comps. 37 ABOUT THE COST OF CAPITAL 1 - What’s the cost of capital? The required rate of return by capital contributors to decide an investment Composed of cost of debt and cost of equity Calculated for a specific project Depending on the level of risk: the riskier the project’s cash flows, the higher its cost of capital Can be derived from the WACC of the company as a whole and adjusted to reflect the specific risk For a company it is the required rate of return for the average-risk investment of the company A marginal cost: cost to raise incremental funds for a project 38 ABOUT THE COST OF CAPITAL 2 - Why cost of capital is key? It’s a threshold: a project is value creative if its return is higher than the cost of capital It has the most important impact on the valuation of a company or of an investment project → The key factor in decision-making process: ✓ for investments by the management ✓ for company valuation by investors 39 ABOUT THE COST OF CAPITAL 3-1 How to measure the cost of capital? 𝐸𝑞𝑢𝑖𝑡𝑦 𝐷𝑒𝑏𝑡 𝑊𝐴𝐶𝐶 = × 𝑘𝑒% + × 𝑘𝑑% × 1 − 𝑡 𝐷𝑒𝑏𝑡+𝐸𝑞𝑢𝑖𝑡𝑦 𝐷𝑒𝑏𝑡+𝐸𝑞𝑢𝑖𝑡𝑦 The most common method is to measure the Management choses the optimal capital weighted average cost of capital (WACC) structure. WACC is based on the marginal cost of each Cost of debt & equity are determined in financial components: debt and equity. market by investors (not by the management) 40 Detailed calculations will be covered during the second semester ABOUT THE COST OF CAPITAL 3-2 How to measure the cost of debt? It’s the cost to raise incremental debt (market value) Cost of debt is considered after tax (depending on the country tax law) Good starting point: ✓ The cost of current company debt ✓ The interest cost on existing unsecured loans or bonds To get a forward-looking measure: cost of recently-raised debt by comparable companies Cost of debt is lower than cost of equity: i) less risky (a priority fixed claim on a firm’s cash flow), ii) interest expenses are tax deductible, iii) debt can be secured with underlying assets. 41 ABOUT THE COST OF CAPITAL 3-3 How to measure the cost of equity? It is the rate of return required by company shareholders It is trickier to assess as future cash flows are difficult to predict (amount & timing) Common approach: to look at historical return on equity. Idea: equity investors are expecting similar rate of return going forward (rate is then adjusted for company-specific considerations) Cost of equity is higher than cost of debt Most common calculation method: Capital Asset Pricing Model (CAPM) 42 ABOUT THE COST OF CAPITAL 3-4 CAPM: the most common method to assess the cost of equity E(Ri) = Rf + ßi [E(Rm) - Rf] E(Ri): expected return on stock i Rf: risk-free rate ßi: return sensitivity of stock i to a change in the market return E(Rm): expected return on the market [E(Rm) - Rf]: expected market risk premium. It’s the premium that investors demand for investing in a market portfolio vs. risk-free rate. When using the CAPM to assess the cost of equity, we estimate ß relative to an equity market index 43 ABOUT THE COST OF CAPITAL 4-1 The practical limits of the cost of equity calculation Risk-free rate: what is the most appropriate duration? CAPM prerequisite: risk-free rate must remain stable over the period under review However, see different recommendations: CFA is recommending a 7 to 10 years duration, in line with the duration of projected cash flows Vernimmen is recommending a 3m duration because interest rates are not stable over time (from > 15% in the 80ties to negative level in 2021/22)  Risk-free rate (mid-April 2024): difference between short term and 10y is > 1% ✓ US T-bonds: 4,39% /10y vs 5,37% /3m 44 ✓ German bunds: 2,40% /10y vs 3,47% /1y ABOUT THE COST OF CAPITAL 4-2 The practical limits of the cost of equity calculation Beta: different parameters contributing to different results The ß of a company or a project is sensitive to the systematic component of: Business risk, i.e. related to sales risk (growth) and/or to operating risk (cost structure) Financial risk: volatility of cash flows related to the use of financing that has a fixed cost (debt) A market model regression of the company stock returns (Ri) vs. market returns (Rm) over n periods Length of the estimation period: looking for a right balance between data richness captured / long period of time and company specific changes that are better reflected / shorter period Frequency of the return interval (daily, wow, mom): errors sems more limited with smaller intervals, Choosing an appropriate market index 45 ABOUT THE COST OF CAPITAL 4-3 The practical limits of the cost of equity calculation Equity risk premium: Calculation: average rate of return of a country’s market portfolio vs. the average rate of return of the risk-free rate in that country Assumption: historical equity risk premium over a long period of time is a good indicator of the equity risk premium going forward Limitations: 1. i) Level of risk of the stock index may change over time, ii) same with risk aversion of investors, iii) estimates are sensitive to the method of estimation and the historical period covered 2. Equity risk premium: a figure usually given by data service providers (a black box) (*) 3. Risk-free rate must be the same in the formula 46 Website for information about the premium risk https://www.fairness-finance.com/fairness-finance/finance/calculateur/wacc.dhtml ABOUT THE COST OF CAPITAL Vernimmen analysis: 18 reports on 9 squeeze-out (from € 2m to € 100m) over a period of 2 months Risk-free rate (Rf): from spot rate to 20 years duration, Beta (ß): from 0,62 to 1,85 ✓ Length of the estimation period: from 1 to 5 years, 50% of report giving no indication Market risk premium [E(Rm) - Rf]: from 5,5% to 10,5% (over a period of only 2m!) ✓ A data bought to a service provider - risk of 2 different risk-free rate used in the same formula ✓ Calculation based on historical data: periods going from < 3m (8 reports), 6m (1), 2 years (1), 10y (1), 119y (1), 6 reports giving any indications. La Lettre Vernimmen (n° 189 - June 2021) 47 ABOUT THE COST OF CAPITAL 5 - To what extend is it possible to reduce the cost of capital? Cost of capital depends solely on the risk of economic assets, i.e. on sector characteristics: Reducing sensitivity to economic outlook: the stronger the sensitivity, the higher its cost of capital Improving business visibility: the more volatile the business, the higher its cost of capital Reducing the break-even point: the higher the fixed costs, the higher its cost of capital Earnings growth rate: the stronger the growth rate, the higher its cost of capital Net impact on value creation appears however quite limited as shifting towards less volatile and/or lower fixed costs businesses translate usually into lower margin potential or FCF generation 48 Why a sensitivity or scenario analysis ? The DCF value of a cash flow stream is very sensitive to growth rate changes Example: CF0 = $100, rate of return = 10% ✓ If constant growth g = 5% → Present Value = $2100 ✓ If constant growth g = 0% → Present Value = $1000  Cutting the growth rate from 5% to 0% has reduced the DCF value by > 50% The higher the risk of the cash flow stream, the higher the WACC, the lower its discounted value ✓ If the annual cash flow is riskier, a higher rate of return is required to compensate you for the increase in risk 49 Frequently asked questions About the weight of the terminal value About the discount rate being the same for every representing often more than 50% of our period, even for the Terminal Value calculation valuation Question : Is it normal………………..? Question : Is it normal………………..? Often, there is no economic and financial visibility Probably « YES » because in our reasoning, beyond the forecast period the underlying of the notion of infinity period logically incorporates more value. We could imagine adding a different premium to the discount rate per year to take risk into account. However, a problem remains because in the model we consider the maximum value over the most distant time space and therefore the most uncertain in cash flow production 50 Back to Menu To summarise The DCF is a practical & flexible tool to value companies The DCF calculates the value through a business plan ✓ Build a business plan: forecast FCF for 5-10 years – depending on the Cy Size ✓ Compute WACC ✓ Choose a method to estimate the terminal value beyond the scope of the BP ✓ Subtract value of debt from value of assets to find net value of equity The FCF metric is often used by analysts to determine the value of a company. This method of valuation gained popularity as an alternative to the dividend discount model (DDM), especially if a company does not pay a dividend. Maybe too much flexibility (many assumptions)? ☺ 51 OTHER METHODS USING DISCOUNTED ITEMS 52 The one-year model We could consider a one-stage model We would use the following assumptions: ✓ From the current period, free cash flows grow at a constant growth rate g ✓ Discount rate would be WACC or Ke depending on free cash flow choice ➔ Valuation would be based only on the Perpetuity formula 𝐹𝐶𝐹𝐹0 1+𝑔 ➔ Equity Value for FCFF = − Net debt 𝑊𝐴𝐶𝐶−𝑔 𝐹𝐶𝐹𝐸0 1+𝑔 ➔ Equity Value for FCFE = 𝐾𝑒 −𝑔 53 Back to Menu The DDM model Also called the Gordon-Shapiro dividend model We consider the following assumptions: ✓ The value of an asset is equal to the present value of future cash flows generated by the asset ✓ Shares pay dividends ✓ We calculate the value of one share by discounting a stream of dividends received per share 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑0 1+𝑔 ➔ Value per share = 𝐾𝑒 − 𝑔 54  The EVA Method : What is EVA The goal of most companies is to create value for the shareholder. But how is value creation measured? EVA = Economic Value Added Two possible formulas: EVA = NOPAT − WACC × Invested Capital EVA = ROCE − WACC Calculation of what excess earnings remain after the company’s costs of capital 55  A STEP FURTHER: ASSESSING THE FREE CASH FLOW GENERATION 56  Towards an Investment Opinion Goals: 4 different steps: an iterative process 1. To estimate company future earnings and FCF generation … a prerequisite to 1. Top-line growth scenario value a company 2. EBITDA / EBIT bridge 2. To measure company sensitivity (earnings / valuation) to specific events 3. Free Cash-Flow bridge + net debt bridge 3. To measure company relative sensitivity compared to peers 4. Valuation & Recommendation 57  Top Line Scenario Free cashflow bridge Brand / Product pricing power Technological content Investment policy Valuation Competitive landscape WCR management Entry barriers FCFF FCFE Make or Buy strategy FCF yield DDM Quality of input is key EV / Sales PE EV /EBITDA Price to sales Years to upgrade brand image EV /EBIT Price to book 1 event to destroy it Net debt bridge … … Valuation Sensitivity Net cash / Debt management EBIT bridge Dividend policy Cost structure understanding Share buyback policy Recommendation Fixed / Variable costs Top line drop through to EBIT Story Growth Diagnostic on cost base efficiency P&L bottom line Valuation Need for efficiency measures Momentum Cost of debt management Efficiency measures Tax policy 58 Diagnosis / Decision / Execution Assessing FCF generation properly is key Why is it a key step? All is about reporting, not accounting Valuation mechanism is not discriminant: Reporting is not fully audited when accounting is technics are well-known, widespread, regulated available on shelf Quality, granularity and regularity of reporting is What matters is the quality of input and very different by sector / company the accuracy of models As external people, we fully rely on reporting to Meaning that what matters is a deep qualify earnings / build a relevant model company and sector knowledge Degradation of reporting quality overtime is 59 usually a negative signal for analysts Financial Modeling and Simulation – preliminary remarks What’s the type of reporting segment? by business line or by region? Companies are obliged to release key data by reporting segment (revenue, EBIT, assets) Target: to build an exhibit by reporting segment and then at the consolidated level Usually, the granularity at EBIT level is more limited than at net revenue level What’s the type of reporting? by function or by nature? Important to structure your model depending on company type of reporting Double counting risks when mixing both types (R&D costs for example mainly composed of labor and amortization costs) 60 Financial Modeling and Simulation – preliminary remarks Some wording: Net sales, net revenue, sales revenue, turnover, top-line are different words used by companies to represent the same concept (different practices by country, sector or companies). Same thing with operating profit and EBIT To show the difference between the “pure” result from operation and some extraordinary items affecting this result, companies are using different wording ✓ Restated, before one-off, underlying operating profit or EBIT ✓ Reported, published Operating profit or EBIT ✓ Some companies use, e.g., operating profit for restated and EBIT for reported Question mark: what are extraordinary items, who decides to restate them and when: it’s up to the company, behaviour is different by company (more or less cautious) 61 BUILDING A TOP-LINE GROWTH SCENARIO 62 Top-line scenario Company A n Net revenue - COGS Target of this session: to estimate future top line growth - OPEX Model must be built by reporting segment, then at consolidated level - Other cost, net = EBIT Key drivers to focus on: volume, mix, pricing, scope, forex - Taxes = NOPAT The best is to get these drivers by reporting segment - Increase in WCR - Capex Horizon timeframe: 3/5/7 years depending on company / sector visibility = FCFF - Net debt = FCFE 63 Top-line scenario: Example - From segment to consolidated Segment Rpting 1 Q1 Q2 Q3 Q4 FY H1 9m H2 Target: what are net revenue main drivers Net revenue n-1 1 300 1 400 1 000 1 500 5 200 2 700 3 700 2 500 Scope 0,5% 0,6% 0,4% 0,7% By reporting segment Volume 2,0% 3,5% 2,5% 1,5% Mix 0,5% 0,6% 0,4% 0,7% At consolidated level Price 3,1% 2,5% 3,4% 1,0% Forex 1,1% -2,5% -3,4% 1,0% It’s not always possible or not relevant due to Net revenue n 1 394 sector specificity Change in % 7,2% Segment Rpting 2 Q1 Q2 Q3 Q4 FY H1 9m H2 Consolidated Q1 Q2 Q3 Q4 FY H1 9m H2 Net revenue n-1 1 250 1 800 1 100 1 450 5 600 3 050 4 150 2 550 Net revenue n-1 2 550 3 200 2 100 2 950 10 800 5 750 7 850 5 050 Scope -0,5% -0,7% -0,5% -0,9% Scope Volume 1,0% 0,7% -1,0% -1,5% Volume Mix 0,8% 1,0% 0,7% 0,5% Mix Price 4,2% 2,0% -2,0% -1,0% Price Forex -1,5% 0,0% -2,0% -0,5% Forex Net revenue n Net revenue n Change in % Change in % 64 Top-line scenario Quality of input is key 1. What is the accessible market? 2. How are competitors performing? What are their mid-term targets? 3. What are company own mid-term targets? What is company track-record? We must be able to justify / defend our assumptions in front of investors Reported data must come from company and competitors various reports, not from data providers (as data from providers are often aggregated with level of aggregation moving year on year) 66 TOP-LINE SCENARIO What is the accessible market?  Market size in volume / value  Growth during previous years in volume / value (CAGR, momentum)  Main drivers: volume, mix, pricing, scope, forex  Market structure: consolidated, fragmented, cyclical – what’s the momentum?  Long term megatrends / challenges 67 TOP-LINE SCENARIO Where to find data? Some examples of corporate website  Company reports: annual report, qoq report, ESG report, corporate presentation, Company corporate web site: 10K / 10Q for US companies https://www.michelin.com/en/  Competitors reports https://www.loreal.com/en/ EDGAR: https://www.sec.gov/edgar  Professional associations / lobbying groups https://finance.yahoo.com (international data)  Professional / specialized press https://www.google.com/finance (market news)  Dedicated organization / regulator: https://www.pappers.fr/ national, European, global Bloomberg, Reuters, Capital IQ  European Commission internet site https://single-market-economy.ec.europa.eu/ 68 Save all data sources quoted in your readings Top-line scenario How are competitors performing? Who are the main players, direct competitors? Track-record during previous years – main drivers (volume, mix, pricing, forex) Reporting segment: products / geographical – growth main drivers Relative strength / weaknesses: brands, products pricing power, relative techno content Short and mid-term targets Target: To build the most relevant sample of peers To qualify their track-record, to know what they are doing, what they are targeting 69 Top-line scenario About your company track-record: assess and qualify previous performances Top-line growth during previous years (CAGR and momentum) Main drivers: volume (market share gains?), mix, pricing, scope, FX Main drivers: product segment / region Qualify company growth versus peers Where are differences coming from? What are company short and mid-term targets? Qualify them versus peers 70 Top line scenario Top line main drivers 1. Volumes 2. Pricing 3. Mix 4. Scope 5. Forex From segment reporting to consolidated figures 71 Top line scenario Volume effect Important and easy to assess: Aeronautics, Automobile, Oil and Energy, Wine & Spirits, Less relevant for some other sectors: rational is more to think in term of like-for-like at constant structure (aggregating volume, mix and/or pricing): Food Retail, Luxury, Services, Not relevant for some other sectors: e.g., Engineering, all businesses with long term contracts. Rationale is more to think in terms of order intake, book to bill and backlog 72 Top line scenario Price effect Net revenue is published net of rebates, incentives, … Price effect usually difficult to assess: ✓ Price move usually focused on certain products / regions, not on 100% sales ✓ Price effect usually lower than price hikes announcement because of competitive pressure and/or commercial practices (e.g., part given back to wholesalers or dealers) Price effect on net revenue is highly powerful: 100% dropthrough to EBIT Price effect rarely published alone (a strategic data for competitors), often aggregated with volume or mix – depending on sector practices, presentation often used as a communication tool 73 Top line scenario Top line scenario Mix effect Mix reflects sales of goods or services with higher / lower than average contribution to sales revenue Different types of mix: product mix, country mix, distribution or channel mix Mix can have a positive effect on net revenue but negative on EBIT (e.g., for products with higher-than- average contribution to sales but with weaker margins) A reporting / communication tool: ✓ Mix often aggregated with pricing (e.g., Michelin guidance to offset rise of raw materials by price mix) ✓ Stellantis (the merger between PSA and FCA): mix mainly driven by positive impact on sales from new model launches (lower incentives versus the model phased out) 74  Sales in '000 unit by segment Q2 n-1 Q2 n n / n-1 Top line scenario - Mix A/B-class (compact segment) 100 94 -6,0% C-class (mid-segment) 125 120 -4,0% E-class (high-end segment) 110 115 4,5% S-class (luxury) 20 26 30,0% SUVs 250 285 14,0% Total 605 640 5,8% Product mix (a German car-maker) Net revenue in Eur m Avrg Price Q2 n-1 Q2 n Change '000 Eur Eur m Eur m % Available: A/B-class (compact segment) 30  Unit sales by body type per quarter C-class (mid-segment) 50 E-class (high-end segment) 75 S-class (luxury) 100  Average price by body type SUVs 85 Total  Assuming stable pricing and Forex Net revenue in Eur m n / n-1 n / n-1 Eur m % Net revenue n-1 Target: to assess mix effect on net revenue Volume Mix Pricing FX 75 Net revenue n Top line scenario - Scope 2023 Q1 Q2 Q3 Q4 2023 H1 H2 2022 Net sales 125,0 125,0 125,0 125,0 500,0 250,0 250,0 Volume 2,5 3,8 -1,3 1,3 6,3 6,3 0,0 Mix & price 3,8 -2,5 -1,3 0,0 0,0 1,3 -1,3 Scope 0,0 0,0 25,0 25,0 50,0 0,0 50,0 Forex 1,0 0,8 0,0 -1,9 -0,1 1,8 -1,9 2023 Net sales 132,3 127,0 147,5 149,4 556,1 259,3 296,9 Scope effect on net revenue: how it works? Volume 2,0% 3,0% -1,0% 1,0% 1,3% 2,5% 0,0% Mix & price 3,0% -2,0% -1,0% 0,0% 0,0% 0,5% -0,5% Company A taking the control of company B Scope 0,0% 0,0% 20,0% 20,0% 10,0% 0,0% 20,0% Forex 0,8% 0,6% 0,0% -1,5% 0,0% 0,7% -0,8% → Full consolidation Total change in % 5,8% 1,6% 18,0% 19,5% 11,2% 3,7% 18,8% Net sales of company B (€100m) to be added 2024 Q1 Q2 Q3 Q4 2024 H1 H2 2023 Net sales 132,3 127,0 147,5 149,4 556,1 259,3 296,9 to company A (€500m) minus potential Volume 0,0 -1,3 6,3 3,8 8,8 -1,3 10,0 intercompany sales Mix & price 2,5 3,1 -1,3 0,0 4,4 5,6 -1,3 Scope 25,0 25,0 0,0 0,0 50,0 50,0 0,0 Deal announcement in March 2023 but Forex -1,3 0,0 1,0 1,3 1,0 -1,3 2,3 2024 Net sales 158,5 153,9 153,5 154,4 620,3 312,4 307,9 deal closing on June 30, 2023. Consolidation Volume 0,0% -1,0% 5,0% 3,0% 1,8% -0,5% 4,0% of company B as of July 1st, 2023 Mix & price 2,0% 2,5% -1,0% 0,0% 0,9% 2,3% -0,5% Scope 20,0% 20,0% 0,0% 0,0% 10,0% 20,0% 0,0% Forex -1,0% 0,0% 0,8% 1,0% 0,2% -0,5% 0,9% 77 Total change in % 19,8% 21,2% 4,1% 3,3% 11,5% 20,5% 3,7% Top line scenario – Example FX Example for revenue denominated in USD: What do you need: Euro depreciation has a positive impact on Break-down of sales by currency consolidated net revenue For main currencies: average level for the past (mom basis), spot level for the future FX effect = period net Rev. x [1 – (Tx n / Tx n-1)] Your focus for main currencies: € appreciation → [1 – (Tx n / Tx n-1)] < 0 € depreciation → [1 – (Tx n / Tx n-1)] > 0 Consolidated sales by currency Change in average level for the period (qoq, hoh, yoy): average level / past, spot / future FX effect = - period net Rev. x Var. Tx (n / n-1) Forex impact on net revenue and on operating or pre-tax profit are different 78 Top line scenario – Example FX Net revenue in Eur m 2023 Europe 5 000 US 3 000 UK 1 300 Japan 700 FX effect basic example: Net revenue 10 000 Net revenue breakdown by region is given FX average rate 2022 2023 Change in % EUR/USD 1,05 1,08 2,9% Average level for main currencies is given EUR/GBP 0,85 0,87 2,4% EUR/JPY 137,8 151,6 10,0% Company A Forex Effect 2023 Target: to assess Forex effect on sales Europe US UK Japan FX effect in Eur m 0 FX effect in % 0,0% 79 Top line scenario - FX - Example FX effect (a German car maker) You have the breakdown of unit sold by region. Assume that the breakdown of net revenue is the same. For China, you have the split between imported cars (fully consolidated) and locally produced through 50/50 JVs (consolidated at equity). Q1 2024 net revenue is: €26 700m Target: to assess the FX effect on sales 81 Top line scenario Net revenue by segment reporting in Eur m From reporting segments to Segment Reporting Conso consolidated figures SR1 SR2 SR3 Net revenue n-1 16 200 9 500 19 200 44 900 Scope 5,0% 0,7% 0,0% Volume 1,0% -1,0% 3,0% Mix Price 5,0% 4,0% 2,5% Target: to assess at consolidated level each Forex -2,3% -1,0% -3,7% Net revenue n 17 609 9 757 19 546 effect coming from the different reporting Change in % 8,7% 2,7% 1,8% segments Table XX – Source: company report 83 MICHELIN & L’ORÉAL TOP-LINES 85 Top line scenario – Michelin Michelin Top Line Scenario 1. Volumes 2. Mix 3. Pricing 4. FX 5. Scope 6. Consolidated data Corporate site: https://www.michelin.com/en/ 86 Top-line scenario - Michelin Michelin: building estimates at consolidated level looks more relevant 3 reporting segments: Auto (original & replacement), Trucks, Specialty (= Mining, Aero, 2 Wheels,…) Data by reporting segment: net revenue, operating profit, assets Limited granularity: Michelin does not release main effects by segment reporting No possibility of building an accurate net revenue and EBIT bridge by reporting segment → Reasoning at consolidated level 87 Top-line scenario – Michelin Volumes: available data on a regular basis Industry unit sales (yoy basis): market breakdown by segment, region, OE/R Market trend in % (mom basis): by segment, region, OE/R Michelin net revenue (qoq basis): breakdown by segment, region only at consolidated level Volumes reported in tons at consolidated level and by unit at division level Tire weight = approx. 10kg /Auto, 60kg /Truck, up to 5,5 tons /Mining yoy basis = year on year basis, hoh = half-year, qoq = quarter, mom = month OE = Original Equipment / R = Replacement 88 Top-line scenario – Michelin Michelin net revenue sensitivity by business Businesses Weight Sensitivity Cyclicality Main drivers Auto Replacement + 2 Wheels 42% Consumption very low Fleet, miles driven Auto Original Equipment 10% Car production very high GDP, regulation, consumer confidence Transportation (Truck OE + R + services) 26% Manufacturing low GDP, freight transported, PMI, regulation Specialty (Mining, Ag. Business, Conveyor belts) 22% Raw materials high GDP, commodity prices, public spending Michelin number of facilities by region Michelin sales breakdown by region in % Europe 43 North America 38 Asia 32 Europe 38% South America 6 North America 35% Rest of World 27% 89 Africa Middle East 4 Top-line scenario – Michelin Volume effect on net revenue Michelin volume effect on net revenue in % Average volume growth: +1,3% /last 30y, flat /last 10y and 20y, -2,0% /last 5 years Growth slowing down, weaker than market and most smaller competitors: - Market growth driven by China, India, - Michelin clear strategy to defend pricing rather than running after volumes Recent momentum vs. peers improving Sharp decline /2009 and 2020 related to specific crisis (Subprime, Covid) 90  Segment SR Business Growth Growth Growth Seg R Reporting Weight Weight Assump Contrib. Contrib. Growth Top line scenario: Michelin Light Vehicules 50,4% Europe 40% 20,2% 0,9% 0,2% 0,5% 0,9% R 70% 14,1% 1,0% 0,1% OE 30% 6,0% 0,5% 0,0% Michelin global leader (with North America R 37% 70% 18,6% 13,1% 0,9% 1,0% 0,2% 0,1% Bridgestone) OE 30% 5,6% 0,5% 0,0% Emerging 23% 11,6% 1,1% 0,1% Technological leadership R 60% 7,0% 1,5% 0,1% OE 40% 4,6% 0,5% 0,0% Global and well-balanced presence Transportation 26,2% Europe 40% 10,5% 1,0% 0,1% 0,2% 0,9% (= Truck) R 70% 7,3% 1,0% 0,1% OE 30% 3,1% 1,0% 0,0% Momentum improving thanks to North America 37% 9,7% 1,0% 0,1% better profitability (operating R 70% 6,8% 1,0% 0,1% OE 30% 2,9% 1,0% 0,0% profitability, FCF, ROCE) fuelled by Emerging 23% 6,0% 0,5% 0,0% past and ongoing efficiency measures R OE 70% 30% 4,2% 1,8% 0,5% 0,5% 0,0% 0,0% Non-tyre business development Specialty 23,4% Tyre business Mining 80% 36% 18,7% 6,7% 1,6% 2,5% 0,3% 0,2% 1,2% 5,3% Other CE 24% 4,5% 1,0% 0,0% But strong competition from low- Ag 20% 3,7% 1,5% 0,1% cost tyres coming mainly from China Other 20% 3,7% 1,0% 0,0% Non-Tyre bus. 20% 4,7% 19,7% 0,9% → Must be cautious on volume growth Total Tyre 95,3% 1,0% 1,0% 1,0% 91 Total non-Tyre 4,7% 0,9% 0,9% 19,7% Consolidated 100,0% 1,9% 1,9% 1,9% Top-line scenario - Michelin Michelin mix effect on net revenue in % Mix effect structurally positive Average Mix = +0,8% /last 10 y, +1,1% /last 5 years Driven mainly by growing size of wheels in the Auto business (design x safety x fuel efficiency and SUVs) Car electrification: a strong + impact on mix / Auto (weight x torque, noise) For other reporting segment, TCO* is key Going forward, a positive mix effect (0,5% to 1.0%) looks relevant *TCO = Total Cost of Ownership 92 Sources: Michelin Top-line scenario: Michelin About pricing, Michelin’s target is to offset raw material cost inflation by price-mix Raw Mat price highly volatile but manageable: lag between purchasing and P&L impact (6m /Natural Rubber, 3m /Synthetic Rub) Adjustment clauses on pricing: ✓ OE business + Mining : indexation clauses (from 3 to 12m lag) ✓ Replacement business: pricing adjusted after 3/6 months lag Pricing quite reactive to Raw Mat price movement (up and down – it’s a competitive business) Target To assess Raw Mat cost development and then to deduct price effect to be computed in the model Mid-term: approx. € 200m raw material cost inflation (at constant volume) → Very convincing track-record on price discipline during last 10 years 93 Top-line scenario: Michelin Michelin Forex estimates: Michelin publish on a quarterly basis (qoq) a detailed breakdown of its sales by currency Currency qoq average level: ✓ Past: available ✓ Future: spot price extrapolated → Michelin FX effect on net revenue estimated with a rather good outcome 94 Top-line scenario – Michelin FX Michelin 2023 FX effect: -2,9% reported vs -2,3% estimated 95 Top-line scenario – Michelin FX Michelin 2024 FX effect estimate: -1,2% (-1,2% reported in H1, -1,9% /Q1, -0,4 /Q2) 96 Top line scenario: Michelin Scope effect: FCG acquisition Consolidation as of Q4 2023 A non-tyre business 2022: €202m net revenue, €43m EBIT 2015-2022 period: net revenue growth (+11% CAGR), EBITDA margin = 25/30% Consideration: € 700m for 100% EV 97 Top line scenario - Michelin Volumes: +0,5% (vs. flat /last 10y and 20y and +1,3% /last 30y) and vs. +1% est. by Michelin 2024 - 2027: our top-line scenario Michelin /23-30 strategic plan) Mix: +0,8% (vs. reported +1,1% /last 5y and +0,8% /last 10y) Pricing: +0,5% (to offset approx. €200m raw material cost inflation per year) Scope: FCG acquisition as of Q4 2023, other to come /non-tyre business Non-tyre business: growing contribution to net revenue growth based on Michelin estimate (+29% CAGR during 2023 /2030) 98 Top line scenario - Michelin Michelin 2023-2030 strategic plan Net revenue growth: +5% CAGR /2023-2030 With non-tyre business representing 20% net revenue in 2030 vs approx. 5% in 2023 Implied results Consolidated net revenue up by around € 12 bn during the period Non tyre business: +29% CAGR, net revenue up by around € 7bn ✓ Growth driven by organic and acquisitions (FCG consolidated as of Q4 2023) Tyre business: +2,4% CAGR, net revenue up by around € 5bn ✓ Our guess: +0,8% /Mix, +0,5% /pricing to offset long term raw material cost inflation ✓ Implied volume effect at around 1,1% (It’s rather optimistic, Cf. flat /last 10y) 99 Top-line scenario – L’Oréal L’Oréal available data Net revenue reporting: like-for-like effect on a qoq basis, (like-for-like, scope, FX) on a hoh basis Like-for-like = (volume + mix + pricing): no split given by these drivers (except in 2023) 4 reporting segments: Professional Pdts, Consumer Pdts, L’Oréal Luxe, Dermatological Beauty Net revenue breakdown given by division, region and categories EBIT reported by segment but no granularity on main drivers by segment reporting → Rather good level of information at net revenue level but very poor granularity on EBIT → No possibility to build an accurate EBIT bridge by reporting segment 100 Top-line scenario – L’Oréal Net revenue development - main drivers reported (in Eur m and %) 2013 2104 2015 2016 2017 2018 2019 2020 2021 2022 2023 Net revenue n-1 20 812 21 315 21 658 24 290 24 916 26 024 26 937 29 874 27 992 32 288 38 261 Like for like 1 041 789 845 1 142 1 196 1 848 2 155 -1 225 4 507 3 519 4 209 Scope 208 85 217 97 -698 234 215 149 224 129 612 Forex -770 -490 1 559 -680 -324 -1 171 566 -807 -448 2 325 -1 913 Total 21 291 21 698 24 279 24 849 25 091 26 935 29 874 27 992 32 275 38 261 41 168 Divisions total 21 315 21 658 24 290 24 916 26 024 26 937 29 874 27 992 32 288 38 261 41 183 Other 836 874 967 921 0 0 0 0 0 0 0 Consolidated 22 151 22 532 25 257 25 837 26 024 26 937 29 874 27 992 32 288 38 261 41 183 Like for like 5,0% 3,7% 3,9% 4,7% 4,8% 7,1% 8,0% -4,1% 16,1% 10,9% 11,0% Scope 1,0% 0,4% 1,0% 0,4% -2,8% 0,9% 0,8% 0,5% 0,8% 0,4% 1,6% Forex -3,7% -2,3% 7,2% -2,8% -1,3% -4,5% 2,1% -2,7% -1,6% 7,2% -5,0% Divisions total 10,3% 1,6% 12,2% 2,6% 4,4% 3,5% 10,9% -6,3% 15,3% 18,5% 7,6% Other -49,4% 4,5% 10,7% -4,8% Consolidated 10,4% 1,7% 12,1% 2,3% 0,7% 3,5% 10,9% -6,3% 15,3% 18,5% 7,6% 101 Top-line scenario – L’Oréal L’Oréal net revenue growth vs. beauty market 16,0% 12,0% L’Oréal CAGR net revenue growth 8,0% CAGR -3y -5y -7y -10y 4,0% Net revenue - div. 13,7% 8,9% 7,4% 6,8% 0,0% Net revenue - conso. 13,7% 8,9% 6,9% 6,4% -4,0% -8,0% 14 2015 16 17 18 19 2020 21 22 23 Global beauty market L'Oréal like-for-like 102 Top-line scenario – L’Oréal Group net revenue growth Sustained growth: CAGR +6,8% /last 10y at group level Accelerating: +6,8% /last 10y, +7,4% /-7y, +8,9% /-5y, +13,7% /-3y despite Covid crisis Driven by like-for-like effect (volume + mix + pricing), FX negative /different periods (approx. €1bn), scope effect slightly positive (approx. €+0,5bn) Resilient during crisis in 2020 thanks to growing digital business L’Oréal growth faster than beauty market 103 Top-line scenario – L’Oréal L’Oréal top line growth by division (in Eur m) Net revenue 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Professional Products 2 974 3 032 3 400 3 400 3 350 3 263 3 442 3 097 3 784 4 477 4 654 Consumer Products 10 873 10 768 11 844 11 993 12 119 12 032 12 748 11 704 12 234 14 021 15 173 L'Oreal Luxe 5 865 6 198 7 230 7 662 8 472 9 367 11 020 10 180 12 346 14 638 14 924 Dermatological Beauty 1 602 1 660 1 816 1 861 2 083 2 276 2 664 3 011 3 924 5 125 6 432 Divisions total 21 315 21 658 24 290 24 916 26 024 26 937 29 874 27 992 32 288 38 261 41 183 Other 836 874 967 921 0 0 0 0 0 0 0 Consolidated 22 151 22 532 25 257 25 837 26 024 26 937 29 874 27 992 32 288 38 261 41 183 Other = Body Shop sold in 2016 104 Top-line scenario – L’Oréal L’Oréal top line growth by division in Eur m Divisions CAGR net revenue growth in % Net revenue 2013- 2023 CAGR -3y -5y -7y -10y Professional 14,5% 7,4% 4,6% 4,6% Consumer 9,0% 4,7% 3,4% 3,4% Luxe 13,6% 9,8% 10,0% 9,8% Dermato Pdt 28,8% 23,1% 19,4% 14,9% Divisions 13,7% 8,9% 7,4% 6,8% 105 Top-line scenario – L’Oréal L’Oréal divisions growth vs. market (in %) Professionnal Products Consumer Products 25% 10% 15% 5% 5% -5% 0% -15% -5% 14 2015 16 17 18 19 2020 21 2022 2023 14 2015 16 17 18 19 2020 21 2022 2023 Market L'OR Professional LfL Market L'OR Consummer LfL L'Oréal Luxe Dermatological Products 25% 30% 15% 20% 5% -5% 10% -15% 0% 14 2015 16 17 18 19 2020 21 2022 2023 14 2015 16 17 18 19 2020 21 2022 2023 106 Market L'OR Luxe LfL Market L'OR Dermatological P. LfL Top-line scenario – L’Oréal Growth by division All divisions are growing Dermatological Beauty: impressive momentum despite a more demanding basis Luxe: double digit growth (CAGR: +10/14% /3,5,7 and 10y), slowdown since Q3 2023 (due to China) Professional Products: good resilience & improving momentum Consumer Products: slow growth but improving momentum (some good reasons) → Consumer & Professional: the most affected during Covid crisis (shops and hairdresser closed) Groupe is gaining market share in all division except Consumer Products until 2020 107 Top-line scenario – L’Oréal Net revenue breakdown by region - new presentation as of 2021 - data in Eur m Old Presentation 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Western Europe 7 483 7 698 7 968 8 008 8 125 8 065 8 277 7 514 North America 5 356 5 389 6 654 7 099 7 351 7 234 7 567 6 903 8 156 10 164 11 147 New Markets 8 475 8 571 9 667 9 810 10 548 11 638 14 030 13 575 Asia Pacific 4 382 4 564 5 463 5 635 6 152 7 406 9 658 9 800 Estearn Europe 1 693 1 585 1 530 1 572 1 751 1 754 1 910 1 685 Latin America 1 895 1 854 1 871 1 838 1 953 1 785 1 773 1 469 1 772 2 376 2 917 Africa Middle East 505 568 728 764 692 694 689 621 Divisions total 21 315 21 658 24 290 24 916 26 024 26 938 29 874 27 992 32 288 38 261 41 183 New Presentation 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Europe 9 177 9 283 9 498 9 580 9 876 9 819 10 187 9 199 10 185 11 437 13 008 North America 5 356 5 389 6 654 7 099 7 351 7 234 7 567 6 903 8 156 10 164 11 147 New Markets 6 782 6 986 8 138 8 238 8 797 9 884 12 120 11 889 13 947 16 660 17 028 North Asia 8 318 9 863 11 321 10 663 SAPMENA SSA 2 102 2 312 2 962 3 448 Latin America 1 895 1 854 1 871 1 838 1 953 1 785 1 773 1 469 1 772 2 376 2 917 108 Total 21 315 21 658 24 290 24 916 26 024 26 938 29 874 27 992 32 288 38 261 41 183 Top-line scenario – L’Oréal L’OR net revenue well balanced by region in % L’OR CAGR net revenue growth by region in % 2013 - 2023 CAGR -3y -5y -7y -10y 7% Europe Europe 12,2% 5,8% 4,5% 3,6% 8% 32% North Ameri ca North America 17,3% 9,0% 6,7% 7,6% New markets 12,7% 11,5% 10,9% 9,6% North Asia o/w Latin America 25,7% 10,3% 6,8% 4,4% 26% SAPMENA SSA Divisions total 13,7% 8,9% 7,4% 6,8% Latin America 27% North Asia = mainly China SAPMENA SSA = South Asia Pacific, Middle-East, North Africa, Sub-Saharan Africa 109 Top-line scenario – L’Oréal L’Oréal net revenue growth by region vs market in % Europe North America 30% 10% 20% 10% 0% 0% -10% -10% 14 2015 16 17 18 19 2020 21 22 23 14 2015 16 17 18 19 2020 21 22 23 Market L'OR Europe Market L'OR North America New Markets Latin America 25% 15% 20% 5% 0% -5% -20% 14 2015 16 17 18 19 2020 21 22 23 14 2015 16 17 18 19 2020 21 22 23 Market L'OR Latin America 110 Market L'OR New Markets Top-line scenario – L’Oréal Growth by region Sales well balanced by region Growth sustained and accelerating in each region Europe and North America: mature markets, resilient and accelerating Strong momentum in Asia (China: a potential risk going forward?) Market share gains in all region except North America (main reason: group working to reduce exposure to US department stores) 111 Top-line scenario – L’Oréal L’Oréal net revenue by category - CAGR in % 2014-2023 CAGR Net revenue 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -3y -5y -9y Skincare 6 489 7 190 8 557 10 453 11 052 12 982 15 344 16 447 14,2% 14,0% 10,9% Make-up 4 751 5 784 7 383 7 854 5 969 6 626 7 739 8 124 10,8% 1,9% 6,1% Haircare 4 449 4 782 4 358 4 461 4 254 4 880 5 750 6 320 14,1% 7,7% 4,0% Hair colourants 2 860 3 091 2 950 3 032 2 972 3 016 3 362 3 426 4,8% 3,0% 2,0% Perfumes 2 123 2 376 2 495 2 770 2 529 3 512 4 546 5 171 26,9% 15,7% 10,4% Other 986 1 067 1 194 1 304 1 216 1 271 1 520 1 695 11,7% 7,3% 6,2% Divisions total 21 658 24 290 24 916 26 024 26 937 29 874 27 992 32 288 38 261 41 183 13,7% 8,9% 7,4% Skincare 10,8% 22,2% 5,7% 17,5% 18,2% 7,2% Make-up 21,7% 6,4% -24,0% 11,0% 16,8% 5,0% Haircare 7,5% 2,4% -4,6% 14,7% 17,8% 9,9% Hair colourants 8,1% 2,8% -2,0% 1,5% 11,5% 1,9% Perfumes 11,9% 11,0% -8,7% 38,9% 29,5% 13,7% Other 8,2% 9,1% -6,7% 4,5% 19,6% 11,6% Reported 12,2% 2,6% 4,4% 3,5% 10,9% -6,3% 15,3% 18,5% 7,6% 112 Top-line scenario – L’Oréal L’Oréal net revenue growth by category vs market Skincare Makeup 20% 15% 15% 10% 5% -5% 0% -5% -25% 14 2015 16 17 18 19 2020 21 2022 2023 14 2015 16 17 18 19 2020 21 2022 2023 Market L'OR Skincare Market L'OR Makeup Haircare Perfumes 20% 40% 15% 10% 20% 5% 0% 0% -5% -20% 14 2015 16 17 18 19 2020 21 2022 2023 14 2015 16 17 18 19 2020 21 2022 2023 113 Market L'OR Haircare Market L'OR Perfumes Top-line scenario – L’Oréal By categories Growth driven by Skincare and Fragrances L’Oréal exposed to the fastest growing categories L’Oréal gaining market share on all categories 114 Top-line scenario – L’Oréal - FX 2023 reported FX effect on net revenue: -5,0% or € -1,9bn (vs -2,3% or € -0,9bn estimated) mainly driven by a stronger Euro vs. most currencies Sales breakdown by currency by period Currency change vs. Euro Forex effect on net revenue in Eur m 2023 Q1 H1 9m FY Q1 Q2 Q3 Q4 2023 H1 9m Q1 Q2 Q3 Q4 2023 H1 9m Euro Eur 19,1% 19,1% 19,1% 20,0% US dollar USD 23,6% 23,6% 23,6% 25,4% 4,7% -2,2% -7,4% -5,3% -2,7% 1,1% -1,6% 100 -51 -157 -158 -266 50 -108 Chinese Yuan CNY 19,4% 19,4% 19,4% 17,0% -3,0% -7,8% -12,4% -6,5% -7,5% -5,4% -7,7% -52 -141 -227 -66 -486 -193 -419 Pound Sterling GBP 3,6% 3,6% 3,6% 4,1% -5,3% -2,7% -0,4% 0,3% -2,1% -4,0% -2,8% -17 -9 -2 -4 -32 -27 -28 Canadian dollar CAD 2,4% 2,4% 2,4% 2,4% -2,0% -7,1% -9,9% -5,5% -6,2% -4,6% -6,3% -4 -16 -22 -15 -57 -20 -43 Russian roubble RUB 2,0% 2,0% 2,0% 0,0% 23,2% -19,2% -40,9% -36,1% -22,5% -1,2% -12,3% 42 -46 -64 69 0 -4 -69 Brazilian Real BRA 2,0% 2,0% 2,0% 2,3% 5,2% -3,1% -0,6% 0,7% 0,4% 0,9% 0,5% 10 -6 -0 1 4 3 3 Mexican Peso MEX 1,6% 1,6% 1,6% 1,6% 14,9% 10,7% 9,8% 6,3% 10,3% 12,7% 11,8% 22 16 15 10 63 37 53 Australian dollar AUD 1,3% 1,3% 1,3% 1,6% -1,2% -8,6% -11,3% -6,0% -6,9% -5,0% -7,0% -1 -10 -14 -16 -42 -12 -26 Japanese yen JPY 1,3% 1,3% 1,3% 1,3% -8,1% -7,7% -11,5% -9,4% -9,1% -7,9% -9,1% -10 -9 -14 -12 -45 -19 -33 Other 23,7% 23,7% 23,7% 23,7% Net sales / n-1 9 061 18 360 27 942 38 261 Forex estimated 1,0% -2,9% -5,1% -1,9% -2,3% -1,0% -2,4% 89 -273 -485 -192 -861 -185 -670 Forex reported 0,6% -5,3% -8,8% -6,1% -5,0% -2,4% -4,6% 115 Top-Line scenario – L’Oréal - FX 2024 estimated FX effect on net revenue: slightly negative (-1,0% or - € 0,4bn) Negative impact coming mainly from CNY, USD and BRA 116 Top-line scenario – L’Oréal What’s L’Oréal sustainable growth? L’Oréal is by far the global leader: Unilever Beauty (n° 2) and Estee Lauder (n°3) net revenue represent only 64% and 39% of L’Oréal net revenue Sustained growth: +6,8% over the last 10 years Good resilience during previous crisis Momentum is accelerating (CAGR: +6,8% /last 10y, +7,4% /-7y, 8,9% /-5y and +13,7% /-3y) Fuelled by over exposure to fastest growing divisions, regions, categories With market share gains in most division, regions, categories, especially those outperforming 117 Top-line scenario – L’Oréal L’Oréal sustainable growth rate: +7,1% (to be fine-tuned) Reasoning by division, not at consolidated level Recent more cautious estimates due to China H1 2024 net revenue: +7,5% (+7,3% like for like) 118 Top-line scenario – L’Oréal Top-line growth scenario: net sales in Eur m L’Oréal top line scenario 2023-2033 g = +6,1% → 2033 sales = € 75bn g = +7,1% → 2033 sales = € 82bn g = +8,1% → 2033 sales = € 90bn Incremental 1% = + 8bn /sales /period +7,1% looks reasonable / conservative? Assumption to be fine-tuned post cost base and financial structure analysis The focus of all analysts / portfolio managers: a major input for the valuation 119 EBIT / EBITDA BRIDGE 120 Building an EBIT bridge Targets of this session To assess and measure the journey from top line to EBIT To assess and measure company EBIT sensitivity to various factors To assess and measure company EBIT relative sensitivity compared to peers 121  Top Line Scenario Free cashflow bridge Brand / Product pricing power Technological content Investment policy Valuation Competitive landscape WCR management Entry barriers FCFF FCFE Make or Buy strategy FCF yield DDM Quality of input is key EV / Sales PE EV /EBITDA Price to sales Years to upgrade brand image EV /EBIT Price to book 1 event to destroy it Net debt bridge … … Valuation Sensitivity Net cash / Debt management EBIT bridge Dividend policy Cost structure understanding Share buyback policy Recommendation Fixed / Variable costs Top line drop through to EBIT Story Growth Diagnostic on cost base efficiency P&L bottom line Valuation Need for efficiency measures