WEBVTT 1 00:00:07.940 --> 00:00:12.410 Hello and welcome to this Vidcast in which I will talk to you about 2 00:00:13.090 --> 00:00:16.250 a leader in retail distribution in France. Kafu, 3 00:00:16.840 --> 00:00:18.970 it's stock market credibility, 4 00:00:19.560 --> 00:00:24.210 it's margin policy in an inflationary environment. 5 00:00:24.620 --> 00:00:28.690 Let's first start with the announcement made by the company July the 12th. 6 00:00:29.120 --> 00:00:33.930 This year the company announces that it buys Cora and matches 7 00:00:34.520 --> 00:00:36.970 when Heron 75 points of sales. 8 00:00:37.320 --> 00:00:41.970 They're in the same business and it's a perfect compliment for Kafu on a 9 00:00:42.170 --> 00:00:47.090 geographical point of view because these retailers are located in the 10 00:00:47.090 --> 00:00:49.130 east northeast of France, 11 00:00:49.660 --> 00:00:53.050 which is where Kafu is quite weak and in addition to that, 12 00:00:53.050 --> 00:00:57.690 it's a significant increase contribution in terms of turnover with 13 00:00:57.720 --> 00:00:59.730 5.2 billion euros. 14 00:01:01.030 --> 00:01:04.610 The EBITDA is 189 million Euros. 15 00:01:05.110 --> 00:01:08.610 The margins are not very high because we are in a retail business, 16 00:01:09.270 --> 00:01:12.090 but these points of sales are still quite profitable. 17 00:01:13.280 --> 00:01:17.850 Kafu accepts per enterprise value of a little bit more than 1 billion 18 00:01:18.260 --> 00:01:18.950 euros. 19 00:01:18.950 --> 00:01:22.650 You remember that the enterprise value is the value of the business operations 20 00:01:22.950 --> 00:01:25.930 and it includes the debt of the company. 21 00:01:27.440 --> 00:01:30.450 Kafu announces that the anticipate synergies of about 22 00:01:30.590 --> 00:01:33.410 110 million euros, 23 00:01:34.040 --> 00:01:37.530 it's going to progressively show over the next three years, 24 00:01:37.990 --> 00:01:42.570 but of course the day you anticipate synergies you have to pay for RAC 25 00:01:43.080 --> 00:01:46.090 cost. 200 million euros are anticipated. 26 00:01:46.430 --> 00:01:50.210 So if you calculate the multiple enterprise value divided by ebitda, 27 00:01:50.790 --> 00:01:55.330 you get 5.6 without synergies and you get 3.5 28 00:01:55.640 --> 00:01:56.730 with synergies. 29 00:01:57.030 --> 00:02:01.650 So it's quite a good deal and the pro is going to say Bravo to care. 30 00:02:02.160 --> 00:02:06.170 It's a great announcement. It's a great business move. Unfortunately, 31 00:02:06.350 --> 00:02:11.290 the stock market will not be exactly of the same opinion if you 32 00:02:11.290 --> 00:02:15.610 observe the evolution of the stock price in July after the announcement 33 00:02:16.280 --> 00:02:20.850 Kafu and the CAC 40, the French stock market index, they move in parallel. 34 00:02:21.350 --> 00:02:22.730 But at the end of July, 35 00:02:22.980 --> 00:02:27.450 there will be a very significant buy movement volume, 36 00:02:27.500 --> 00:02:32.330 which is going to drive the stock price up by 6% during 37 00:02:32.330 --> 00:02:36.130 the months of August kafu on C 40 parallel ways, 38 00:02:36.790 --> 00:02:39.530 and then the same volume but sell, 39 00:02:39.740 --> 00:02:44.730 which is going to drive the stock price of Kafu down by 5% and 40 00:02:44.730 --> 00:02:48.970 then is going to be further down and over the entire period from the 41 00:02:48.970 --> 00:02:52.690 12th of July to today, Cal four is showing minus 2%. 42 00:02:53.320 --> 00:02:55.090 When the C 40 is quite stable, 43 00:02:55.310 --> 00:02:59.520 though the stock market is not enthusiastic about the the move. 44 00:02:59.980 --> 00:03:03.160 Of course today kafu is a predator, 45 00:03:04.060 --> 00:03:06.560 but yesterday it was a potential prey. 46 00:03:07.820 --> 00:03:10.960 In June, 2021, we produced a, 47 00:03:11.520 --> 00:03:15.760 which was about the attempted takeover of Kafu by Ali Monte 48 00:03:16.700 --> 00:03:17.533 kta, 49 00:03:17.640 --> 00:03:22.560 a company which is based in Quebec and which business is predominantly about 50 00:03:22.700 --> 00:03:23.720 gas distribution, 51 00:03:24.060 --> 00:03:28.920 but there were also some attempted discussions about mergers and 52 00:03:28.920 --> 00:03:30.960 so on and so forth with show on ca. 53 00:03:30.960 --> 00:03:35.920 Casino in France all ended as failures. Nothing worked, 54 00:03:36.460 --> 00:03:41.080 but there's a common platform, if I may say about all these attempts, 55 00:03:41.490 --> 00:03:44.120 which is the undervaluation of Kafu, 56 00:03:44.900 --> 00:03:49.800 and then everybody says there is a kind of credibility gap at Kafu. 57 00:03:50.350 --> 00:03:52.320 What does it mean a credibility gap? 58 00:03:52.550 --> 00:03:55.800 What does it mean you lack of a kind of credibility? 59 00:03:56.590 --> 00:04:00.760 It's a situation where the market valuation of the company is 60 00:04:01.240 --> 00:04:04.960 absolutely inconsistent with its current financial performance, 61 00:04:06.110 --> 00:04:09.040 lack of means negative, but it can also be positive. 62 00:04:09.510 --> 00:04:14.360 Sometimes the market is kind of overenthusiastic about the 63 00:04:14.690 --> 00:04:18.840 value of the company even though the performance is a little bit poor. 64 00:04:19.460 --> 00:04:23.240 But in this case, we are showing a negative credibility gap. 65 00:04:23.550 --> 00:04:27.880 There's some skepticism the market is waiting for something like 66 00:04:28.320 --> 00:04:31.000 enduring performance. Let me give you an example. 67 00:04:31.710 --> 00:04:35.680 Decades ago Danon, the very famous food company, 68 00:04:35.900 --> 00:04:39.600 was in the glass business, flat glass packaging, 69 00:04:39.980 --> 00:04:44.960 and then the company made a strong strategic shift from glass to food. 70 00:04:45.460 --> 00:04:46.560 During a few years, 71 00:04:46.900 --> 00:04:51.520 the market was absolutely skeptical about the relevance of the shift and the 72 00:04:51.520 --> 00:04:54.360 ability of danon to be successful in its new business. 73 00:04:55.150 --> 00:04:59.800 Then the market understood that it was a ride shift with a ride team and then 74 00:04:59.800 --> 00:05:01.080 the stock price went up. 75 00:05:01.940 --> 00:05:06.840 You can also observe credibility gaps when companies are exiting from crisis. 76 00:05:07.820 --> 00:05:09.960 That's the example of a subprime crisis. 77 00:05:10.720 --> 00:05:15.640 A number of companies were ated in terms of profitability as a consequence 78 00:05:15.640 --> 00:05:18.360 of subprime crisis. Then they recovered, 79 00:05:18.700 --> 00:05:23.320 but the market was absolutely not convinced that the recovery was sustainable, 80 00:05:23.720 --> 00:05:26.800 enduring, and then the market is waiting. 81 00:05:27.220 --> 00:05:31.520 The market is skeptical about the sustainability of the performance. 82 00:05:32.260 --> 00:05:36.520 Now, how long does it take to close this credibility gap? 83 00:05:36.520 --> 00:05:40.800 Closing means that the inconsistency becomes consistency. 84 00:05:41.390 --> 00:05:44.360 Well, to be honest, what I'm going to tell you is not very scientific. 85 00:05:44.360 --> 00:05:49.080 It's a result of my personal empirical observation of this kind of situation, 86 00:05:49.430 --> 00:05:54.200 minimum four years and what does it mean you close a credibility 87 00:05:54.260 --> 00:05:56.360 gap when the credibility gap is negative, 88 00:05:57.070 --> 00:06:01.040 when the stock price is lower than what would be suggested by the return 89 00:06:01.040 --> 00:06:01.873 capital. 90 00:06:02.100 --> 00:06:06.720 Either the market is right or the market is wrong. 91 00:06:07.260 --> 00:06:11.400 If the market is right, it means that the return capital employed will fall, 92 00:06:11.510 --> 00:06:15.680 will go down to get adjusted to the stock price, 93 00:06:15.680 --> 00:06:19.880 which is consistent with the return capital and the performance or maybe the 94 00:06:19.880 --> 00:06:23.200 market is wrong and then the stock price is going to go up. 95 00:06:23.740 --> 00:06:26.360 But it takes minimum four years. 96 00:06:28.180 --> 00:06:31.200 In 2021 I was describing Ali Monte, ASION, 97 00:06:31.460 --> 00:06:36.400 kta and Kafu and Walmart and Tesco as a benchmarking 98 00:06:36.720 --> 00:06:40.680 exercise. We could discuss a return on capital, the return on sales, 99 00:06:40.940 --> 00:06:43.160 and so on so forth. And the Marketo book. 100 00:06:43.470 --> 00:06:48.360 Marketo book is calculated dividing the enterprise value of the company market 101 00:06:48.380 --> 00:06:53.120 capitalization plus net financial debt divided by capital employed, 102 00:06:53.120 --> 00:06:55.680 which is the amount of money invested in business operations. 103 00:06:56.420 --> 00:07:00.200 So basically you divide the value of the business operations by how much you 104 00:07:00.520 --> 00:07:04.240 invested. If it's more than one, you create value. If it's less than one, 105 00:07:04.240 --> 00:07:09.200 you destroy value. As far as Kafu was concerned, the market to book was one, 106 00:07:09.660 --> 00:07:12.880 so there was no value creation, no value distraction. 107 00:07:12.990 --> 00:07:16.560 Even though the return capital before tax was 12%, 108 00:07:16.980 --> 00:07:20.120 12% before tax, it's about 8% after tax, 109 00:07:20.550 --> 00:07:22.360 it's more than the cost of capital. 110 00:07:22.620 --> 00:07:25.280 So the company was showing a positive performance. 111 00:07:25.610 --> 00:07:29.640 Still it was not transforming to value creation by the stock market. 112 00:07:30.920 --> 00:07:31.920 Interestingly, at that time, 113 00:07:32.170 --> 00:07:36.880 Tesco was showing a higher return capital employed from 12 for 114 00:07:37.030 --> 00:07:40.960 kafu to 18 to Tesco, but the market to book was 1.5. 115 00:07:41.380 --> 00:07:44.960 So in the case of Tesco, there was also a credibility gap. 116 00:07:45.710 --> 00:07:50.520 Walmart was less profitable in terms of return capital than Tesco 117 00:07:50.910 --> 00:07:53.400 with a of only 17%, 118 00:07:53.700 --> 00:07:56.320 but the market to work was almost three. 119 00:07:56.820 --> 00:08:01.320 So this company is experiencing a strong reputation capital 120 00:08:01.780 --> 00:08:06.040 on the stock market. As far as ion KTA was concerned, 121 00:08:06.300 --> 00:08:07.960 it was a little bit in between. 122 00:08:08.660 --> 00:08:13.440 The return capital was a little bit more than Tesco 19 against 18, 123 00:08:13.660 --> 00:08:16.560 but the market to book was two against 1.5. 124 00:08:17.020 --> 00:08:20.800 So you understand that there are different situations within the same industry 125 00:08:21.340 --> 00:08:26.080 now that their company experiences a strong negative credibility gap. 126 00:08:26.270 --> 00:08:31.080 It's extremely painful to leave because the executive committee 127 00:08:31.380 --> 00:08:35.560 has regular meetings with the board and the board says, you know what? 128 00:08:35.620 --> 00:08:37.360 The return capital is high. 129 00:08:37.980 --> 00:08:40.880 You are absolutely confident in the relevance of your strategy, 130 00:08:40.900 --> 00:08:42.920 but the market does not pay for it. 131 00:08:43.020 --> 00:08:47.680 The market does not buy your strategy and the sustainability of the performance. 132 00:08:48.100 --> 00:08:50.240 So there are very difficult discussions, 133 00:08:50.570 --> 00:08:54.600 especially when it lasts years minimum four years. 134 00:08:54.820 --> 00:08:58.480 You remember now I mentioned the return on capital as oht. 135 00:08:58.480 --> 00:09:02.440 We've already the industrial performance of the company and the market to book 136 00:09:02.580 --> 00:09:06.440 as the relative value creation indicator. Of course, 137 00:09:06.440 --> 00:09:10.800 there is a strong correlation and if you observe the volution of kafu over 20 138 00:09:10.800 --> 00:09:11.633 years, 139 00:09:11.660 --> 00:09:16.560 you understand that 20 years ago the return capital was more than 20% and 140 00:09:16.560 --> 00:09:21.320 the market to book was more than 2.5 and the return capital employees started 141 00:09:21.470 --> 00:09:25.280 declining to get to the level of about 15%. 142 00:09:25.820 --> 00:09:30.280 At the end of 2008, 2009, the market to book went down. 143 00:09:30.510 --> 00:09:35.240 Then they both stabilized and then the return capital started significantly 144 00:09:35.350 --> 00:09:37.840 declining in 2016. 145 00:09:38.450 --> 00:09:43.440 Today the return capital is relatively flat at about 12% and the 146 00:09:43.440 --> 00:09:46.800 market to book is relatively flat at one. 147 00:09:47.700 --> 00:09:49.800 To calculate the return on capital employed, 148 00:09:49.800 --> 00:09:53.600 you have to take into consideration the commercial profitability and the assets 149 00:09:53.600 --> 00:09:56.520 productivity, commercial profitability. 150 00:09:56.570 --> 00:10:00.800 Let's start with the gross margin sales minus cost of sales minus cost of 151 00:10:01.040 --> 00:10:04.960 purchases. 20 years ago it was about 23% quite flat, 152 00:10:05.340 --> 00:10:09.080 and then it started declining in 2016, 153 00:10:09.680 --> 00:10:13.920 17 and so on, and today the gross margin rate is about 20%. 154 00:10:14.980 --> 00:10:17.840 So the company lost 3% in the gross margin, 155 00:10:18.020 --> 00:10:22.160 not 3% in the EBITDA because the EBITDA was about 7%. 156 00:10:22.220 --> 00:10:24.680 In 2003 it went down to five, 157 00:10:25.140 --> 00:10:29.560 and today it's a bit up at the level of around 6%, 158 00:10:30.500 --> 00:10:34.680 so you lose 3% in the gross margin on only 1% in ebitda. 159 00:10:35.430 --> 00:10:39.920 What about sales divided by property, plant and equipment? It's a productivity. 160 00:10:40.270 --> 00:10:44.040 It's the ability of the company to generate revenues out of each and every Euro 161 00:10:44.840 --> 00:10:49.120 invested in the fixed asset in a tangible fixed asset. 162 00:10:49.500 --> 00:10:50.640 In 2003, 163 00:10:50.940 --> 00:10:54.760 the figure was about six euros of revenues for one euro of property, 164 00:10:54.760 --> 00:10:59.600 plant and equipment. It went up from six to seven and then it started declining, 165 00:10:59.660 --> 00:11:02.720 and today it's about five reasonably stable. 166 00:11:03.620 --> 00:11:06.560 That's for the return on sales, commercial profitability, 167 00:11:07.300 --> 00:11:10.800 and for the productivity of the long term non-car assets. 168 00:11:11.110 --> 00:11:12.560 What about the current assets? 169 00:11:13.140 --> 00:11:16.960 The working capital requirement is strongly negative and that's absolutely 170 00:11:17.240 --> 00:11:19.160 straightforward for capital. In the retail business, 171 00:11:19.850 --> 00:11:22.800 there is no cash receivable because people are paying cash. 172 00:11:23.500 --> 00:11:27.000 Of course there's a little bit of accounts receivable because the franchisees it 173 00:11:27.000 --> 00:11:29.640 pay their royalties with the delay, but it's not very big. 174 00:11:29.990 --> 00:11:34.560 What is very big in a cash conversion cycle is inventories and 175 00:11:34.560 --> 00:11:39.320 accounts payable plus inventories, minus accounts payable inventories. 176 00:11:39.510 --> 00:11:43.320 They are about one month's plus in terms of days off, 177 00:11:43.590 --> 00:11:44.720 cost of goods sold, 178 00:11:44.910 --> 00:11:48.600 cost of revenues and about accounts payable, 179 00:11:48.950 --> 00:11:53.880 it's significantly higher. The maximum was experienced in 2005, 180 00:11:54.260 --> 00:11:56.280 it was about 100 days, 181 00:11:56.590 --> 00:12:00.560 then it slightly went down and today it's about 80 days. 182 00:12:01.380 --> 00:12:06.080 So when you combine inventories a bit more than one month and accounts 183 00:12:06.080 --> 00:12:07.760 payable a bit less than three months, 184 00:12:08.340 --> 00:12:12.640 how much you get a strongly negative cash conversion cycle. 185 00:12:13.100 --> 00:12:16.920 You get the money from your customers before you pay your suppliers. 186 00:12:17.300 --> 00:12:21.520 The cash conversion cycle is negative by about 40 days, 187 00:12:22.060 --> 00:12:26.000 so you understand that the company profits very much from this situation in 188 00:12:26.000 --> 00:12:30.680 terms of financing the fixed asset by the negative working capital requirement, 189 00:12:30.750 --> 00:12:34.560 something extremely classical in the retail business. 190 00:12:36.150 --> 00:12:40.720 Then we can use a famous deport in the move formula and calculate return on 191 00:12:40.720 --> 00:12:45.160 sales multiplied by assets turnover in order to get the return capital employed. 192 00:12:45.860 --> 00:12:50.040 The return on sales is EBIT divided by sales. 193 00:12:50.540 --> 00:12:54.320 20 years ago it was about 5%. Today it's about 3%, 194 00:12:54.700 --> 00:12:58.160 so you lose 2% in terms of return on sales. 195 00:12:59.060 --> 00:13:03.400 The assets turnover very much is a consequence of sales 196 00:13:03.560 --> 00:13:05.240 revenues divided by property, 197 00:13:05.240 --> 00:13:10.200 plant and equipment because the working capital requirement is quite negatively 198 00:13:10.420 --> 00:13:15.200 stable and then the return capital employed again was more than 20% 199 00:13:15.200 --> 00:13:20.160 20 years ago and it's about 12% today declining trend. 200 00:13:21.030 --> 00:13:24.760 Once we have explained the competence of the return capital employed and its 201 00:13:24.760 --> 00:13:29.760 evolution, we can try to measure this credibility gap. 202 00:13:30.510 --> 00:13:32.520 There's one interesting way to do it, 203 00:13:32.520 --> 00:13:36.960 which is to calculate the kind of theoretical market to book as opposed to an 204 00:13:36.960 --> 00:13:38.560 actual market to book. 205 00:13:39.390 --> 00:13:42.160 What does it mean theoretical market to book? 206 00:13:42.620 --> 00:13:47.240 We are going to calculate the enterprise value divided by capital employed as it 207 00:13:47.240 --> 00:13:50.560 should be assuming a quite pessimistic assumption, 208 00:13:50.610 --> 00:13:54.960 which is there is absolutely no growth in the revenues, in the profit, 209 00:13:55.340 --> 00:14:00.310 in the free cash flow. Corporate finance gives us an interesting formula, 210 00:14:00.640 --> 00:14:05.230 which is market to book is rose after tax divided by 211 00:14:05.270 --> 00:14:08.150 weighted average cost of capital. Now, 212 00:14:08.150 --> 00:14:12.590 this is quite interesting to understand that this theoretical market to book 213 00:14:13.010 --> 00:14:15.310 is not very far from the financial performance. 214 00:14:15.820 --> 00:14:20.150 Financial performance you remember is not rose, it's rose against work, 215 00:14:20.820 --> 00:14:24.990 it's a rose after tax is greater than the weight, that average cost of capital. 216 00:14:25.140 --> 00:14:29.950 Then the economic profit is positive and the company is performing and then 217 00:14:29.950 --> 00:14:34.870 the market to book is greater than one because rose is more than the 218 00:14:35.060 --> 00:14:39.590 waxs. The meritor is greater than the denominator. This is showing again, 219 00:14:39.890 --> 00:14:44.870 the consistency in financial theory between the economic performance and 220 00:14:44.870 --> 00:14:46.590 the value creation. Now, 221 00:14:46.590 --> 00:14:50.790 if you plot on a graph the market to book no growth versus a market to book 222 00:14:50.940 --> 00:14:51.773 actual, 223 00:14:52.340 --> 00:14:55.640 you understand that there's a perfect consistency between these two indicators. 224 00:14:56.150 --> 00:14:59.600 From 2003 to 2013, 225 00:15:00.360 --> 00:15:03.640 14 starting in 2014, there is a gap. 226 00:15:04.140 --> 00:15:08.800 The gap is created and is going to widen to get the maximum 227 00:15:09.420 --> 00:15:10.880 in 2021. 228 00:15:11.630 --> 00:15:14.720 Then quite surprisingly in 2022, 229 00:15:14.770 --> 00:15:19.360 there is a kind of closing, partial closing of the credibility gap. 230 00:15:19.630 --> 00:15:23.360 It's divided by two. This is a little bit surprising, 231 00:15:23.620 --> 00:15:27.960 but in fact it's explained by the evolution of the long-term interest rate. 232 00:15:28.630 --> 00:15:31.800 When you calculate the weighted average cost of capital for a company, 233 00:15:32.250 --> 00:15:36.040 there is a very strong part of the calculation, which is a cost of equity, 234 00:15:36.040 --> 00:15:37.840 what is expected by shareholders. 235 00:15:38.740 --> 00:15:42.360 You remember that what is expected by shareholders is government bond rates or 236 00:15:42.360 --> 00:15:44.320 risk free rate plus a risk premium, 237 00:15:44.320 --> 00:15:48.880 which is a beta systematic risk coefficient multiplied by the equity 238 00:15:48.940 --> 00:15:50.360 market risk premium. 239 00:15:51.460 --> 00:15:56.200 So the long-term interest rate is absolutely fundamental in the calculation of 240 00:15:56.200 --> 00:16:00.520 the cost of equity and in the calculation of the cost of capital observing the 241 00:16:00.520 --> 00:16:05.080 evolution of the long-term govern born rate in France shows the 242 00:16:05.360 --> 00:16:09.360 stability of the interest rates up to 2009, 243 00:16:09.780 --> 00:16:14.640 it was about 4% and then there's a trend. It's declining and declining, 244 00:16:15.550 --> 00:16:18.000 it's going to be about zero in 2019, 245 00:16:18.560 --> 00:16:21.920 negative in 20 20 0 again in 2021, 246 00:16:22.100 --> 00:16:27.080 and there's a very significant increase in 2022. Of course, 247 00:16:27.140 --> 00:16:31.840 the work is going to be strongly affected by this evolution of the 248 00:16:32.040 --> 00:16:36.080 interest rates and if the work is up the market to book at, 249 00:16:36.100 --> 00:16:37.680 no growth is down. 250 00:16:38.460 --> 00:16:43.160 So basically part of the story might be explained by the long term interest 251 00:16:43.160 --> 00:16:44.920 rates and their evolution in the long term, 252 00:16:45.540 --> 00:16:48.440 but definitely there is another set of explanations, 253 00:16:48.570 --> 00:16:53.160 which you don't find any calculations in the financial calculations, 254 00:16:53.340 --> 00:16:54.760 but in the economics, 255 00:16:55.750 --> 00:17:00.680 back to economics means look at inflation as a current environment 256 00:17:01.540 --> 00:17:04.720 and certainly as the economist used to say, 257 00:17:05.230 --> 00:17:10.200 it's an inflation which is going to be hard to bring down. It's long lasting, 258 00:17:10.550 --> 00:17:12.400 unfortunately, very likely. 259 00:17:13.430 --> 00:17:16.840 Then when you observe that your production costs are increasing, 260 00:17:17.390 --> 00:17:21.040 what can you do? Of course you can increase your sales price, 261 00:17:21.620 --> 00:17:26.120 but you can do it if and only if you have a strong power over your 262 00:17:26.440 --> 00:17:31.080 customers. The source of power might be the strengths of your brands, 263 00:17:31.380 --> 00:17:34.120 the quality of your product in terms of innovation. 264 00:17:34.670 --> 00:17:39.080 Then if the customers really want or must buy your product, 265 00:17:39.340 --> 00:17:44.200 you can increase the sales price and then it's going to compensate more or less 266 00:17:44.480 --> 00:17:45.720 increase in your production cost. 267 00:17:46.380 --> 00:17:50.800 But there is a very important concept which is taught first year at the 268 00:17:50.800 --> 00:17:53.160 university in macroeconomics. 269 00:17:53.550 --> 00:17:56.240 It's a price volume sensitivity. 270 00:17:57.150 --> 00:17:59.440 When you increase your sales price, 271 00:17:59.780 --> 00:18:03.840 it might be at the expense of a decreasing volume. Of course, 272 00:18:04.150 --> 00:18:08.080 there's a very famous counter example, which is luxury goods. 273 00:18:08.540 --> 00:18:09.760 If you increase the price, 274 00:18:09.940 --> 00:18:13.800 it looks more like a luxury product and then the volume is up. 275 00:18:14.060 --> 00:18:16.400 But we are not talking about luxury goods, 276 00:18:16.540 --> 00:18:19.440 we are talking about household consumptions, 277 00:18:19.980 --> 00:18:22.880 and then you understand that the day you want to take a decision, 278 00:18:23.140 --> 00:18:27.360 you are facing a trade off. If you increase your sales price, 279 00:18:27.730 --> 00:18:32.680 maybe you can increase your short term margins or you can maintain your 280 00:18:32.750 --> 00:18:37.560 margins at the current level, but it might be at the expense of the volume. 281 00:18:37.900 --> 00:18:41.800 It might be at the expense of your customer's portfolio. Now, 282 00:18:41.800 --> 00:18:43.480 if you want to keep your customers, 283 00:18:44.030 --> 00:18:47.760 then you have to accept to lose a little bit in terms of margins. 284 00:18:47.830 --> 00:18:51.840 This is a trade off for which you need a decision. Now, 285 00:18:51.840 --> 00:18:53.240 when FU takes a decision, 286 00:18:53.540 --> 00:18:57.400 the company is not alone on the planet and in France they're number two. 287 00:18:57.400 --> 00:18:59.760 In France, number one is lele. 288 00:19:00.670 --> 00:19:03.680 LELE is a company which is not listed. 289 00:19:04.470 --> 00:19:09.160 It's a company with centralized purchasing centers and adherence. 290 00:19:10.140 --> 00:19:14.640 The names themselves adherence and not franchisees. Why? 291 00:19:14.640 --> 00:19:16.640 Because there is a kind of common culture, 292 00:19:16.930 --> 00:19:21.360 which was at the origin of the creation of lele, low prices, 293 00:19:21.980 --> 00:19:23.600 low prices, and low prices. 294 00:19:24.860 --> 00:19:29.600 The turnover generated by Lule in France was about 58 billion 295 00:19:29.890 --> 00:19:34.640 euros in 2022. Same year for Kafu, it was only 42 billion. 296 00:19:34.740 --> 00:19:38.040 So you understand that Lule is a strong number one, 297 00:19:39.000 --> 00:19:43.000 a strong number one with very aggressive business practices. 298 00:19:44.220 --> 00:19:47.360 All the declare suppliers know what it means, 299 00:19:48.020 --> 00:19:52.320 but it's also very lean in terms of business operations, cost cutting, 300 00:19:53.310 --> 00:19:58.160 very frugal operations and very aggressive in terms of communication. 301 00:19:58.510 --> 00:20:01.360 When they benchmark LeClaire with their competitors, 302 00:20:02.300 --> 00:20:07.040 the consequence is successful increase in the market share of LeClaire. 303 00:20:07.060 --> 00:20:09.720 In France recently, 304 00:20:09.780 --> 00:20:14.080 the French Business Journal Leko produced some statistics 305 00:20:14.800 --> 00:20:18.680 provided by Con the very well well-known marketing consulting firm. 306 00:20:19.580 --> 00:20:24.440 If you look at the evolution in 2023 of the market share of 307 00:20:24.480 --> 00:20:27.760 LaClaire, beginning of the year, 22.4, 308 00:20:27.940 --> 00:20:31.440 and then it went up and up and up. Today, 309 00:20:31.500 --> 00:20:34.440 the market share of the company is 23.9. 310 00:20:34.730 --> 00:20:39.480 Increasing the market share by 1.5% in something like 311 00:20:39.570 --> 00:20:44.160 seven months is an outstanding commercial performance. Now, 312 00:20:44.180 --> 00:20:45.520 how do you gain market share? 313 00:20:46.020 --> 00:20:49.720 The first alternative is to sell your products at a cheaper price, 314 00:20:50.780 --> 00:20:51.760 but to sell cheaper, 315 00:20:51.940 --> 00:20:56.120 you need to reduce significantly your purchase prices on your operational cost, 316 00:20:56.860 --> 00:20:59.200 and when they are already acquired low, 317 00:20:59.670 --> 00:21:02.880 what do you have to abandon your operating margins? 318 00:21:04.150 --> 00:21:05.760 It's not demonstrated, 319 00:21:05.940 --> 00:21:10.440 but there are a number of professionals in the industry who say that the 320 00:21:10.470 --> 00:21:13.760 Aderant accept to sell today without any margin. 321 00:21:14.740 --> 00:21:18.960 So when you sell without margin, what does it mean? You have to make a living. 322 00:21:19.550 --> 00:21:24.320 They make a living from the real estate income they generate in your shopping 323 00:21:24.390 --> 00:21:28.840 mall because if you are an adherent of LeClaire, 324 00:21:29.140 --> 00:21:33.560 you are the owner of your point of sales in terms of market share, 325 00:21:33.940 --> 00:21:35.520 but in terms of premises as well, 326 00:21:35.520 --> 00:21:37.720 and you are the owner of the entire shopping mall. 327 00:21:38.020 --> 00:21:42.360 So basically you are going to get some rental income. You are the landlord, 328 00:21:42.360 --> 00:21:46.840 landlords, there are tenants in the mall which are going to pay some rents, 329 00:21:47.580 --> 00:21:51.560 but you understand that it's not very big. So at the end of the day, 330 00:21:51.560 --> 00:21:56.080 the question is, is this very aggressive margin policy, durable, 331 00:21:56.230 --> 00:21:57.560 sustainable, and during, 332 00:21:58.540 --> 00:22:02.680 if you accept to have no operating margin and for example you have some debt, 333 00:22:02.860 --> 00:22:05.560 you have to be able to pay the interest and to repair the loan, 334 00:22:06.150 --> 00:22:11.040 then you understand that it is sustainable if and only if your gearing is 335 00:22:11.300 --> 00:22:16.000 at its minimum. So the question is very much how do you gain market share? 336 00:22:16.260 --> 00:22:20.560 You accept to abandon your margin. Is it durable? That's a question. 337 00:22:21.380 --> 00:22:25.200 Now, there is another alternative to gain market share, external growth. 338 00:22:25.860 --> 00:22:29.240 You don't concur customers, you buy them. 339 00:22:30.340 --> 00:22:35.120 The current market share of kafu is 20.1% coha and 340 00:22:35.210 --> 00:22:38.520 match. Altogether, they represent 2.4%. 341 00:22:38.900 --> 00:22:43.240 So you understand that pho is going to increase its revenues by 12% as a 342 00:22:43.240 --> 00:22:44.640 consequence of this acquisition, 343 00:22:45.180 --> 00:22:49.920 but 20.1 plus 2.4 is 22.5%, 344 00:22:50.580 --> 00:22:54.280 and LA is still ahead of the team because they have 345 00:22:54.280 --> 00:22:58.640 23.9% market share. Now, 346 00:22:58.640 --> 00:23:02.000 of course this is a nice move, but a nice move in terms of growth, 347 00:23:02.180 --> 00:23:07.160 in terms of customer acquisition should be AC carbonite with business, 348 00:23:07.510 --> 00:23:11.600 financial economics, economies of scale synergies. 349 00:23:11.780 --> 00:23:15.600 You have identified synergies, you remember 110 million, 350 00:23:15.860 --> 00:23:18.120 you have to implement them. Now, 351 00:23:18.120 --> 00:23:22.080 the day you reduce your cost and the day you improve your productivity, 352 00:23:22.300 --> 00:23:24.720 what's going to happen? Then you have the possibility, 353 00:23:25.020 --> 00:23:27.560 the ability to reduce your selling prices, 354 00:23:28.500 --> 00:23:31.200 but then it might be at the expense of your margin. 355 00:23:32.140 --> 00:23:35.120 Now you understand that as a consequence of this acquisition, 356 00:23:35.830 --> 00:23:39.960 kafu is improving its ability to fight against LeClaire. 357 00:23:40.700 --> 00:23:42.920 But the question is when you make an investment, 358 00:23:43.260 --> 00:23:48.120 who is going to profit from this investment? If you make an acquisition, 359 00:23:48.980 --> 00:23:50.400 you generate economies of scale, 360 00:23:50.420 --> 00:23:54.480 you improve your productivity and you can reduce your selling prices 361 00:23:55.220 --> 00:23:59.600 or you can maintain them and then your margin will be quite the same, 362 00:23:59.980 --> 00:24:04.480 but not as a percentage to revenues. But in absolute terms, what does it mean? 363 00:24:04.660 --> 00:24:06.640 It means that you have invested for your customers, 364 00:24:07.340 --> 00:24:11.920 you have not invested for your shareholders, and this is very much a trade off. 365 00:24:12.040 --> 00:24:16.920 I was mentioning earlier, customers first or shareholders first. 366 00:24:17.860 --> 00:24:21.080 Now I'd like to conclude this vidcast with two comments. 367 00:24:21.140 --> 00:24:23.440 The first one is a little bit strategy comment. 368 00:24:24.110 --> 00:24:27.680 There's a kind of ideology about pure players. 369 00:24:28.260 --> 00:24:32.600 The company should be a pure player so that the asset managers know where 370 00:24:32.600 --> 00:24:33.760 they're putting their money. 371 00:24:34.680 --> 00:24:37.840 I have a quite mixed feeling about this ideology. 372 00:24:38.500 --> 00:24:43.400 If you take the example of a company like Proctor and Gamble business industrial 373 00:24:43.520 --> 00:24:45.520 conglomerate years ago, 374 00:24:45.810 --> 00:24:49.480 there was a dominant business inside the portfolio of activities, 375 00:24:49.480 --> 00:24:50.680 which was Pampers. 376 00:24:51.190 --> 00:24:55.560 Pampers was absolutely dominant in its industry and when Proctor and Gamble 377 00:24:55.620 --> 00:24:58.880 needed to invest some cash in a business unit, 378 00:24:59.350 --> 00:25:04.040 Pampers was increasing in sales price. The competition was following, 379 00:25:04.540 --> 00:25:06.840 the company was generating tons of cash, 380 00:25:06.930 --> 00:25:11.440 which was reinvested somewhere else when it was needed by p and g. 381 00:25:12.300 --> 00:25:15.760 So there is a kind of financial rationality of this kind of conglomerate. 382 00:25:15.950 --> 00:25:19.880 Sometimes in a portfolio of activities, you have Relay State, 383 00:25:19.880 --> 00:25:21.600 which is a case of cle, 384 00:25:22.260 --> 00:25:25.120 and then there is another example I was privileged to observe. 385 00:25:25.510 --> 00:25:29.120 It's a Canadian company based in British Columbia whose name is Intrawest. 386 00:25:30.030 --> 00:25:34.880 Intrawest is the number one operator for ski winter resorts 387 00:25:34.940 --> 00:25:35.800 in North America. 388 00:25:36.580 --> 00:25:41.280 So they are developing results and they are a real estate developers, 389 00:25:41.860 --> 00:25:46.640 so they have construction rights, they exercise their rights, 390 00:25:46.870 --> 00:25:50.960 they build condos, flats, villas and so on and so forth, which they sell. 391 00:25:51.190 --> 00:25:52.520 It's real estate development. 392 00:25:52.620 --> 00:25:56.680 But real estate development is very volatile business because a sales price 393 00:25:56.680 --> 00:26:01.200 depends very much on the evolution of the market when the sales price are down 394 00:26:01.620 --> 00:26:05.120 and you don't want to spoil your construction, right? 395 00:26:05.300 --> 00:26:06.880 You have to keep on making a living, 396 00:26:07.420 --> 00:26:09.720 and this is why Intrawest is also an investor. 397 00:26:10.430 --> 00:26:14.760 Intrawest owes plenty of assets which are generating rental income 398 00:26:15.220 --> 00:26:19.520 and then you are not forced to exercise your construction right when the market 399 00:26:19.660 --> 00:26:23.000 is not favorable. So that's my first comment. 400 00:26:23.060 --> 00:26:27.520 The second comment is about inflation, back to inflation and business behavior. 401 00:26:28.110 --> 00:26:30.400 When you observe what is happening today in business, 402 00:26:30.610 --> 00:26:33.600 there are two completely different behaviors. 403 00:26:33.990 --> 00:26:38.760 Some companies want to maintain the level of their margins and then they 404 00:26:39.040 --> 00:26:40.440 increase their selling prices. 405 00:26:41.190 --> 00:26:45.320 They use the power of their brands in order to force a client to pay a higher 406 00:26:45.330 --> 00:26:48.160 price, even though it is at the expense of volume. 407 00:26:49.330 --> 00:26:53.760 There are some other companies or industries in which customer 408 00:26:54.140 --> 00:26:56.720 is definitely what is creating value in the long term. 409 00:26:57.260 --> 00:27:01.720 So as inflation is creating plenty of turbulences in some industries, 410 00:27:02.070 --> 00:27:05.360 it's a nice opportunity to win customers. 411 00:27:05.940 --> 00:27:07.720 And of course if you win customers, 412 00:27:07.740 --> 00:27:10.120 it might be at the expense of the margins today, 413 00:27:10.500 --> 00:27:13.960 but when business and inflation are stabilized, 414 00:27:14.270 --> 00:27:16.040 then the customers are in your hands. 415 00:27:16.350 --> 00:27:21.080 Then the price volume sensitivity is lower and then you can 416 00:27:21.110 --> 00:27:24.280 restore your margin. In the case of Kafu, 417 00:27:24.410 --> 00:27:28.800 maybe there is no credibility gap because maybe the market 418 00:27:29.620 --> 00:27:34.040 is understanding that keeping the customers winning, the customers, 419 00:27:34.320 --> 00:27:36.080 maintaining the market share at a high level, 420 00:27:36.390 --> 00:27:40.040 it's going to cost some return capital employed to the company. 421 00:27:40.700 --> 00:27:45.520 If you maintain your EBIT and you invest in the development of an acquisition, 422 00:27:45.550 --> 00:27:47.560 your return capital is going to go down. 423 00:27:48.020 --> 00:27:50.760 So maybe the market has already anticipated that, 424 00:27:51.460 --> 00:27:56.000 but you understand that the day you have accept to abandon some margins in order 425 00:27:56.000 --> 00:27:58.520 to keep or to win customers, 426 00:27:59.020 --> 00:28:04.000 that's much easier when you are a private company like LaClaire than when 427 00:28:04.000 --> 00:28:06.760 you are listed company like Kafu, 428 00:28:06.890 --> 00:28:10.840 which has to produce its income statement each and every quarter. 429 00:28:12.440 --> 00:28:13.190 Thank you very much.