WEBVTT 1 00:00:07.505 --> 00:00:10.375 Hello and welcome to this educational field which is 2 00:00:10.445 --> 00:00:14.095 devoted to a Japanese industrial company whose name is 3 00:00:14.475 --> 00:00:16.095 Kao Kao Corporation. 4 00:00:16.205 --> 00:00:18.975 It's a quite diversified industrial company 5 00:00:19.315 --> 00:00:24.055 but mostly focusing on care, taking care 6 00:00:24.075 --> 00:00:27.695 of people, hygiene, beauty, and cosmetics. 7 00:00:28.515 --> 00:00:30.975 We are going to discuss traditional issues such 8 00:00:30.975 --> 00:00:33.495 as is it growing, what is the performance 9 00:00:33.495 --> 00:00:36.335 or relationship between growth, performance and value? 10 00:00:36.715 --> 00:00:37.735 And a very specific 11 00:00:37.995 --> 00:00:40.775 and interesting point as far as the company's concerned, 12 00:00:41.065 --> 00:00:44.055 which is return to shareholders, shares, buyback, 13 00:00:44.735 --> 00:00:46.935 dividend policy, sustainable growth 14 00:00:47.725 --> 00:00:49.375 care is not exactly a startup. 15 00:00:49.755 --> 00:00:52.615 The company was created in 1887. 16 00:00:52.755 --> 00:00:56.455 The date is quite important because just 20 years 17 00:00:56.515 --> 00:00:59.815 before there were the opening of Japan, you maybe 18 00:01:00.335 --> 00:01:02.655 remember Commodore Perry making a kind 19 00:01:02.655 --> 00:01:05.295 of brutal interru in the harbor wars 20 00:01:05.795 --> 00:01:08.255 and forcing Japan to open the doors. 21 00:01:08.905 --> 00:01:11.055 Japan had been closed during centuries. 22 00:01:11.525 --> 00:01:12.535 This is the end of it. 23 00:01:12.685 --> 00:01:15.655 They have to be open to trade with western countries 24 00:01:16.515 --> 00:01:18.895 and in fact, cow is going to start with 25 00:01:18.895 --> 00:01:22.095 that business model importing sundries from 26 00:01:22.095 --> 00:01:23.335 Western countries. 27 00:01:24.155 --> 00:01:27.255 Now when you import, you don't manufacture 15 years later 28 00:01:27.255 --> 00:01:29.215 as they decide to start manufacturing 29 00:01:29.395 --> 00:01:32.135 by themself at the beginning of the 20th century. 30 00:01:33.575 --> 00:01:35.055 Interestingly, the company is going 31 00:01:35.055 --> 00:01:38.255 to be very quickly listed in a stock exchange 32 00:01:38.795 --> 00:01:40.295 in 1919. 33 00:01:41.105 --> 00:01:44.455 Funny enough, it's the same year as CocaCola listing, 34 00:01:45.115 --> 00:01:46.655 not exactly the same kind of capital, 35 00:01:47.245 --> 00:01:49.615 just a simple historical correlation. 36 00:01:50.845 --> 00:01:54.335 They are going to start a business which is soap, 37 00:01:54.725 --> 00:01:57.415 soap making in 1923. 38 00:01:57.925 --> 00:02:00.055 Another anecdote about soap. 39 00:02:00.315 --> 00:02:05.135 Now, L'Oreal buys Mo Savo in 1928. 40 00:02:05.725 --> 00:02:07.935 L'Oreal is created in 1909 41 00:02:08.275 --> 00:02:11.215 and is getting to become the company which you know, 42 00:02:11.925 --> 00:02:13.575 manufacturing is okay, 43 00:02:13.715 --> 00:02:15.775 but if you want to innovate, you need 44 00:02:15.775 --> 00:02:17.255 to invest in the research centers. 45 00:02:17.255 --> 00:02:21.615 They're going to open their first research center in 1934. 46 00:02:22.485 --> 00:02:24.335 Then they start getting abroad 47 00:02:24.335 --> 00:02:27.655 after World War II 1964 48 00:02:28.195 --> 00:02:30.815 and they're going to start partnerships 49 00:02:30.845 --> 00:02:33.095 with different companies including, for example, 50 00:02:33.435 --> 00:02:36.575 in the cosmetics industry is a very well known biased of 51 00:02:37.165 --> 00:02:39.375 Nive Cow joint venture 52 00:02:40.005 --> 00:02:44.855 took place in 1971, so it's a company with a long history 53 00:02:45.785 --> 00:02:48.135 quite focusing on some industries, 54 00:02:48.405 --> 00:02:50.495 some segments which I'm going to describe 55 00:02:51.115 --> 00:02:55.495 and progressively moving throughout its own track, 56 00:02:56.165 --> 00:02:57.215 getting abroad 57 00:02:57.355 --> 00:03:01.645 and trying to grow within this development strategy. 58 00:03:02.535 --> 00:03:05.365 Today, basically there are three segments at cow. 59 00:03:06.025 --> 00:03:08.005 One is named Hygiene Living Care. 60 00:03:08.115 --> 00:03:09.605 It's about cleanliness, 61 00:03:10.035 --> 00:03:12.085 it's about taking care, it's about detergent. 62 00:03:12.245 --> 00:03:14.205 A little bit like you liver by the way. 63 00:03:14.715 --> 00:03:16.965 They have another segment which is named other 64 00:03:17.645 --> 00:03:21.205 consumer products other in fact, it's again care, 65 00:03:21.345 --> 00:03:23.165 but it's beauty, it's cosmetics 66 00:03:23.165 --> 00:03:27.525 and it is a dominant segment of the company with almost 50% 67 00:03:27.665 --> 00:03:28.885 of the revenues. 68 00:03:28.945 --> 00:03:31.045 I'm going to give you the figures a little bit later. 69 00:03:31.335 --> 00:03:34.165 There is a certain traditional business which is again 70 00:03:34.685 --> 00:03:37.085 focusing on hygiene uncleanliness, which is 71 00:03:37.235 --> 00:03:38.925 what they know their core business 72 00:03:39.505 --> 00:03:42.845 and it's about chemical business B2B business 73 00:03:42.905 --> 00:03:46.525 for industry decarbonization circular economy, 74 00:03:46.535 --> 00:03:50.405 which is quite consistent with their ESG mindset. 75 00:03:51.545 --> 00:03:55.165 Now today the company is generating 1 trillion, 76 00:03:55.505 --> 00:03:57.805 1.6 trillion Japanese yen, 77 00:03:58.015 --> 00:04:00.965 which is roughly 10.6 billion USD 78 00:04:01.305 --> 00:04:03.405 and 9 billion euros just 79 00:04:03.405 --> 00:04:05.165 to give you the size of the company. 80 00:04:05.505 --> 00:04:07.365 So it's a quite big company. 81 00:04:07.915 --> 00:04:11.085 It's not a small company, it's not medium-sized company, 82 00:04:11.155 --> 00:04:15.725 it's not an extremely big company just in between as far 83 00:04:15.745 --> 00:04:17.285 as the return says is concerned, 84 00:04:17.285 --> 00:04:20.365 the operating comm represents 9% of revenues, 85 00:04:20.865 --> 00:04:23.765 but you remember that EBIT is interesting 86 00:04:23.785 --> 00:04:25.005 but Rosa is much better. 87 00:04:25.065 --> 00:04:26.765 We are going to discuss that a little bit later. 88 00:04:27.065 --> 00:04:31.845 32,500 employees, so again, quite a big corporation 89 00:04:32.225 --> 00:04:35.965 and 100 countries are consuming the cow 90 00:04:36.005 --> 00:04:37.565 products throughout the planet. 91 00:04:38.925 --> 00:04:41.605 Interestingly, when you look at the revenues by segment 92 00:04:41.825 --> 00:04:45.165 as a percentage to the total revenue, it's very stable. 93 00:04:46.145 --> 00:04:49.045 The first one is other which is again, beauty 94 00:04:49.065 --> 00:04:51.525 and cosmetics with about 45%. 95 00:04:52.115 --> 00:04:55.565 Then you have hygiene and living care and chemicals 96 00:04:55.865 --> 00:04:57.445 and at the end of the day you understand 97 00:04:57.445 --> 00:04:59.645 that this company is quite stable. 98 00:05:00.035 --> 00:05:02.365 It's just a little bit in the mindset of the company. 99 00:05:02.665 --> 00:05:04.485 We are going to observe that a little bit later. 100 00:05:05.665 --> 00:05:10.605 Now the company is about QA making live beautiful. 101 00:05:10.955 --> 00:05:14.245 This was the first slide of this educational film. 102 00:05:14.515 --> 00:05:17.085 What does it mean puree In Japanese it means 103 00:05:17.615 --> 00:05:18.965 order and beauty. 104 00:05:19.515 --> 00:05:20.645 It's about harmony, 105 00:05:21.425 --> 00:05:23.845 but they have another mission statement in the company, 106 00:05:23.845 --> 00:05:25.165 which is I hope 107 00:05:25.265 --> 00:05:28.245 by Japanese pronunciation is not going to be too terrible. 108 00:05:29.075 --> 00:05:33.405 Yoki ery, which means product excellence. 109 00:05:33.825 --> 00:05:36.845 So it's not about cheap stuff, you know, which is just sold 110 00:05:36.905 --> 00:05:38.165 by marketing, right? 111 00:05:38.305 --> 00:05:40.165 No, it's about the quality of the product 112 00:05:40.435 --> 00:05:42.965 because it's about care, it's about hygiene. 113 00:05:43.065 --> 00:05:45.165 It has to be very safe for the customers, 114 00:05:45.275 --> 00:05:47.605 something extremely important for the company. 115 00:05:48.385 --> 00:05:51.205 Now, the company is not only taking care of its people, 116 00:05:51.625 --> 00:05:54.165 not only taking care of the customer, it's also taking care 117 00:05:54.165 --> 00:05:55.405 of the financial metrics. 118 00:05:55.945 --> 00:05:57.605 And this is very interesting. 119 00:05:58.115 --> 00:06:01.365 It's very rigorous on a financial metrics point of view. 120 00:06:01.745 --> 00:06:03.205 The company is producing 121 00:06:03.225 --> 00:06:06.005 and communicating its K 27, 122 00:06:06.395 --> 00:06:09.405 what will cow look like in 2027, 123 00:06:10.185 --> 00:06:14.165 but the targets are return on invested, capital economy, 124 00:06:14.455 --> 00:06:16.525 value added are pretty income 125 00:06:17.065 --> 00:06:19.525 and sales grows outside Japan 126 00:06:19.525 --> 00:06:22.645 because in Japan we are quite uh, at the end 127 00:06:22.645 --> 00:06:23.645 of the growth story. 128 00:06:23.985 --> 00:06:25.765 Now we have to expand abroad, 129 00:06:26.185 --> 00:06:28.165 but you understand it's about finance and finance 130 00:06:28.225 --> 00:06:30.125 and finance and sales and growth 131 00:06:30.825 --> 00:06:33.845 and then the companies explaining the strategies which are 132 00:06:33.965 --> 00:06:37.285 going to support achieving these targets. 133 00:06:37.705 --> 00:06:39.765 But you understand that return capital 134 00:06:40.345 --> 00:06:43.205 and economic value added are extremely strong 135 00:06:43.635 --> 00:06:44.645 financial metrics. 136 00:06:46.435 --> 00:06:48.805 This is why in the agenda of the swim, I'm going to start 137 00:06:48.805 --> 00:06:53.165 with EVA ROIC and also sustainable development 138 00:06:53.165 --> 00:06:55.325 because you have to combine these two. 139 00:06:55.715 --> 00:06:57.605 Then we are going to get back to growth 140 00:06:57.665 --> 00:07:00.845 and you remember that growth is creating value only if 141 00:07:00.845 --> 00:07:01.885 it's profitable growth. 142 00:07:02.305 --> 00:07:05.365 So we are going to look at performance and then growth 143 00:07:05.785 --> 00:07:08.125 and value creation, but if you grow, 144 00:07:08.125 --> 00:07:10.045 you consume financial resources. 145 00:07:10.145 --> 00:07:12.565 So it's quite interesting to have a look at 146 00:07:12.745 --> 00:07:14.885 how the company's financing is gross. 147 00:07:15.705 --> 00:07:19.125 I'm going to look at the consolidated cash flow statement 148 00:07:19.385 --> 00:07:21.605 and we are going to make some observations about that. 149 00:07:22.195 --> 00:07:25.485 Last but not least, um, the strategy, the financial strategy 150 00:07:25.485 --> 00:07:28.285 of the company is very clear and conservative. 151 00:07:29.145 --> 00:07:30.565 Now you have the performance 152 00:07:30.945 --> 00:07:32.885 and the financial strategy is conservative, 153 00:07:32.885 --> 00:07:34.645 which has a huge impact on the 154 00:07:34.645 --> 00:07:35.845 debt structure of the company. 155 00:07:36.225 --> 00:07:38.205 We are going to discuss the rationality 156 00:07:38.545 --> 00:07:39.605 of this debt structure. 157 00:07:40.855 --> 00:07:42.035 It starts with EV. 158 00:07:42.035 --> 00:07:46.715 A economic value added is a concept Tools develop years ago, 159 00:07:46.715 --> 00:07:49.675 decades ago by very well known economist whose name 160 00:07:49.735 --> 00:07:51.035 was Irving Fisher. 161 00:07:51.815 --> 00:07:53.835 Irving Fisher was a professor 162 00:07:54.335 --> 00:07:57.395 and among his students a gentleman whose name was 163 00:07:57.395 --> 00:07:58.675 John Mannar Kanes. 164 00:07:59.095 --> 00:08:00.995 So I was quite good professor 165 00:08:01.215 --> 00:08:03.715 and an extremely talented economist 166 00:08:03.855 --> 00:08:05.475 and he said, you know what? 167 00:08:06.145 --> 00:08:08.155 When you generate a profit, you have 168 00:08:08.155 --> 00:08:11.555 to rerate all investors including the shareholders. 169 00:08:12.305 --> 00:08:15.675 This concept is developed by Fisher, is popularized 170 00:08:15.855 --> 00:08:18.475 by Peter Drug in a very well known book about 171 00:08:18.915 --> 00:08:22.035 entrepreneurship and aims that economic profit EP 172 00:08:22.755 --> 00:08:25.315 economic profit is going to be net operating profit 173 00:08:25.315 --> 00:08:27.195 after tax, less cost of financing. 174 00:08:27.295 --> 00:08:30.595 That's it. The concept is used 175 00:08:30.695 --> 00:08:32.475 by Stern Tiwa an associate, 176 00:08:32.675 --> 00:08:35.155 a very well known consulting firm based in New York 177 00:08:35.535 --> 00:08:37.635 and they're going to protect the name. 178 00:08:38.065 --> 00:08:39.875 They're not going to protect the concept 179 00:08:39.875 --> 00:08:43.915 because the concept says that profit is revenues less cost 180 00:08:44.015 --> 00:08:45.435 and it's difficult to get a patent. 181 00:08:45.455 --> 00:08:48.395 On top of that, they're going to protect the brand name 182 00:08:48.955 --> 00:08:53.715 EVA trademark and basically again, what does it say? 183 00:08:54.175 --> 00:08:58.085 It says that you have to remunerate all the investors in a p 184 00:08:58.085 --> 00:09:00.885 and l, you remunerate the bank securities interest expense, 185 00:09:01.465 --> 00:09:03.365 but you calculate the earnings after tax 186 00:09:03.385 --> 00:09:06.765 or bottom line which is supposedly generating some return 187 00:09:06.785 --> 00:09:08.965 for the shareholders, but you don't know what the expect. 188 00:09:09.505 --> 00:09:12.125 And so in the calculation of the economic value added, 189 00:09:12.425 --> 00:09:15.765 you take into account what is expected by shareholders 190 00:09:15.985 --> 00:09:18.885 as a matter of remuneration for their investment 191 00:09:19.665 --> 00:09:22.725 and the concept is absolutely central in economic value, 192 00:09:22.725 --> 00:09:25.965 but that is the cost of financing the weighted average cost 193 00:09:25.965 --> 00:09:28.005 of capital, the work which you using 194 00:09:28.685 --> 00:09:30.885 discounted cashflow methods of any kind. 195 00:09:32.545 --> 00:09:34.885 Now to calculate economic value added, we need 196 00:09:34.885 --> 00:09:36.685 to understand the WAC and the right. 197 00:09:36.985 --> 00:09:38.285 The wack is basically 198 00:09:38.315 --> 00:09:41.245 what investors are expecting out of their investment. 199 00:09:41.825 --> 00:09:43.525 The way that average cost of capital 200 00:09:44.265 --> 00:09:46.165 is the weighted average cost of shareholders 201 00:09:46.225 --> 00:09:49.125 and bankers expect some returns respectively, 202 00:09:49.425 --> 00:09:51.885 the expected return on equity, the cost of equity 203 00:09:51.905 --> 00:09:53.565 and the cost of debt after tax 204 00:09:53.565 --> 00:09:57.285 because interest expense deductible from the taxable income, 205 00:09:57.585 --> 00:10:00.805 you multiply that respectively by the contribution made 206 00:10:00.805 --> 00:10:02.445 by shareholders and contribution made 207 00:10:02.445 --> 00:10:05.205 by the financial creators into way to that rate, 208 00:10:05.205 --> 00:10:06.525 which is not very difficult 209 00:10:06.525 --> 00:10:08.645 to calculate on a mathematical point of view. 210 00:10:09.155 --> 00:10:12.685 This is what is expected by the investors. Why? 211 00:10:12.685 --> 00:10:14.885 Because they can get this return on the market. 212 00:10:15.665 --> 00:10:17.405 The bankers, they know at which rate 213 00:10:17.405 --> 00:10:18.445 they can land on the market. 214 00:10:18.625 --> 00:10:20.845 The shareholders, there's a model which is named 215 00:10:20.845 --> 00:10:22.325 capital asset pricing model. 216 00:10:22.635 --> 00:10:24.205 They have an idea about which kind 217 00:10:24.205 --> 00:10:26.965 of returns they can expect out of this level of risk. 218 00:10:27.265 --> 00:10:30.245 Now the WAC is not only what is imposed 219 00:10:30.465 --> 00:10:33.005 to the business operations when they calculate the net 220 00:10:33.005 --> 00:10:35.365 present value of their investment, it's imposed 221 00:10:35.385 --> 00:10:36.405 by the capital market. 222 00:10:36.755 --> 00:10:38.845 It's what is offered by the capital market. 223 00:10:39.465 --> 00:10:41.285 Now if you want to create value, if you want 224 00:10:41.285 --> 00:10:42.365 to be performing, you have 225 00:10:42.365 --> 00:10:45.445 to generate more in your business operations at 226 00:10:45.445 --> 00:10:48.485 what the market is offering in the same category of risk. 227 00:10:48.635 --> 00:10:51.005 This is named the return on capital employee. 228 00:10:51.155 --> 00:10:53.165 This is named the return invested capital, 229 00:10:53.175 --> 00:10:54.645 which is basically the same 230 00:10:55.105 --> 00:10:57.565 and how do calculate a return on capital? 231 00:10:58.235 --> 00:11:01.405 It's a kind of return on investment return invested capital, 232 00:11:01.755 --> 00:11:04.605 it's how you earn divided by how much you invested, 233 00:11:04.865 --> 00:11:07.645 how mature is the ebit, the operating income, 234 00:11:07.665 --> 00:11:08.885 the income from operations, 235 00:11:08.915 --> 00:11:12.925 operating revenues minus all the operating expenses divided 236 00:11:13.065 --> 00:11:15.165 by how much you invested capital employed. 237 00:11:15.475 --> 00:11:18.565 Capital employed is basically made of long-term assets, 238 00:11:19.565 --> 00:11:22.125 property plant equipment, brands and so on and so forth. 239 00:11:22.545 --> 00:11:25.445 And the working capital requirement, I'm going 240 00:11:25.445 --> 00:11:29.005 to discuss these two items for cow before taxes. 241 00:11:29.035 --> 00:11:32.245 Sometimes when it is indicator used by the company, 242 00:11:32.245 --> 00:11:35.085 sometimes the company is using ROIC or rose say 243 00:11:35.085 --> 00:11:37.165 after tax, which is a case of cow, 244 00:11:37.665 --> 00:11:40.245 but when we calculate the economic value added, it must be 245 00:11:40.245 --> 00:11:42.845 after tax because a wack is after tax. 246 00:11:42.865 --> 00:11:45.205 You rerate your shareholders after tax 247 00:11:45.625 --> 00:11:47.765 and you take into account the tax deductability 248 00:11:48.025 --> 00:11:49.085 of the interest expense. 249 00:11:49.625 --> 00:11:52.725 The wack is after tax, the rowing should be after tax. 250 00:11:53.905 --> 00:11:56.605 Now based on these two parameters we can calculate economic 251 00:11:56.605 --> 00:11:59.405 value added, but interestingly you can calculate in 252 00:11:59.405 --> 00:12:02.405 percentage in cents per dollar or in dollars. 253 00:12:03.385 --> 00:12:06.325 Now how do you calculate the EVA percentage cents? 254 00:12:06.715 --> 00:12:08.125 It's heroic again 255 00:12:08.125 --> 00:12:11.925 after tax minus the weighted average cost of capital. 256 00:12:12.785 --> 00:12:17.285 If we go back to the formula using ROIC as A is EV, 257 00:12:17.325 --> 00:12:20.205 a percentage is EBIT divided by capital employed 258 00:12:20.305 --> 00:12:22.685 or invested capital multiplied 259 00:12:22.685 --> 00:12:24.765 by one minus corporate tax rate, 260 00:12:25.355 --> 00:12:27.045 less weighted average cost of capital. 261 00:12:27.865 --> 00:12:30.365 Now this is how many cents you make out each 262 00:12:30.365 --> 00:12:31.525 and every dollar invested. 263 00:12:32.065 --> 00:12:34.565 If you want to understand how many dollars you actually 264 00:12:34.565 --> 00:12:37.085 generated as a resident income as a profit, 265 00:12:37.185 --> 00:12:39.885 as an economic profit, you have to multiply 266 00:12:39.985 --> 00:12:42.085 how many dollars are invested multiply by 267 00:12:42.225 --> 00:12:44.125 how many cents you make per dollar investment. 268 00:12:44.985 --> 00:12:46.045 That's quite simple. 269 00:12:46.665 --> 00:12:49.965 So for example, if you made a 3% EVA 270 00:12:50.265 --> 00:12:52.005 and if you invest 100 million, 271 00:12:52.105 --> 00:12:53.605 you make a profit of 3 million. 272 00:12:54.185 --> 00:12:57.645 So EVA dollars is how much you have invested these dollars 273 00:12:58.525 --> 00:13:00.165 multiplied by EVA percentage. 274 00:13:00.165 --> 00:13:01.725 This is a no dimension figure 275 00:13:01.725 --> 00:13:03.165 because it's about cents per dollar 276 00:13:03.705 --> 00:13:07.525 and then you multiply capital employed by EVA percentage, 277 00:13:08.025 --> 00:13:11.765 but EVA percentage is EBIT divided by capital employee 278 00:13:11.785 --> 00:13:14.885 and then you see twice capital employee, you're going 279 00:13:14.885 --> 00:13:17.725 to get rid of that in the calculation multiplied 280 00:13:17.725 --> 00:13:22.285 by one minus tax rate, less the wac, but WAC standing load. 281 00:13:22.425 --> 00:13:24.525 So the WAC is going to be multiplied 282 00:13:24.665 --> 00:13:26.005 by the capital employee. 283 00:13:26.555 --> 00:13:29.645 This is what the EVA endorses is EBIT 284 00:13:29.645 --> 00:13:32.485 after tax, less capital employed multiplied 285 00:13:32.485 --> 00:13:34.685 by the weighted average cost of capital. 286 00:13:35.555 --> 00:13:38.325 This is a theory and this is the practice by the way 287 00:13:38.325 --> 00:13:40.645 because a number of captains are using this indicators 288 00:13:41.575 --> 00:13:43.405 which one is better than the other? 289 00:13:43.865 --> 00:13:47.645 No, because EA percentage about elective performance 290 00:13:48.425 --> 00:13:51.165 and the if EA dollars is about the absolute profit, 291 00:13:51.305 --> 00:13:53.325 so you need both by the way. 292 00:13:53.345 --> 00:13:55.525 You remember when you evaluate an investment, 293 00:13:55.905 --> 00:13:57.405 you calculate the net price value 294 00:13:57.465 --> 00:13:58.805 and the internal rate of return 295 00:13:59.145 --> 00:14:01.405 and you confront the internal rate of return 296 00:14:01.405 --> 00:14:03.085 with a weighted average cost of capital. 297 00:14:03.315 --> 00:14:04.525 It's the same story here. 298 00:14:05.105 --> 00:14:07.765 The VA is dollars and BV is dollars. 299 00:14:08.185 --> 00:14:11.965 The VA percentage is cents, the internal rate 300 00:14:11.965 --> 00:14:13.445 of return is cents. 301 00:14:13.955 --> 00:14:16.845 When you compare the internal rate of return with the wac, 302 00:14:17.025 --> 00:14:19.565 you have the relative performance. 303 00:14:20.075 --> 00:14:22.245 When you calculate the net present value, 304 00:14:22.425 --> 00:14:24.885 you have the absolute value creation, 305 00:14:25.395 --> 00:14:26.565 exactly the same start. 306 00:14:27.705 --> 00:14:30.285 Now if you worried about the terminology which is actually 307 00:14:30.355 --> 00:14:32.765 used by cow, COW corporation, 308 00:14:33.515 --> 00:14:35.445 EBIT is operating income multiplied 309 00:14:35.445 --> 00:14:39.365 by one minus tax rate is EBIT after tax system the no tax 310 00:14:39.785 --> 00:14:42.445 and it's quite generalized terminology. 311 00:14:43.035 --> 00:14:45.165 NOTEPAD stands for net operating profit 312 00:14:45.615 --> 00:14:50.445 after tax capital employed multiplied by the WAC is 313 00:14:50.465 --> 00:14:52.325 how much you have invested. 314 00:14:52.465 --> 00:14:54.365 So the financial resources you had 315 00:14:54.365 --> 00:14:55.845 to mobilize from the capital markets 316 00:14:55.985 --> 00:14:57.605 to finance your capital employee 317 00:14:57.985 --> 00:15:01.085 but applied by the weighted average cost of financing 318 00:15:01.105 --> 00:15:02.725 of these financial resources. 319 00:15:03.195 --> 00:15:04.725 It's then the cost of financing 320 00:15:05.105 --> 00:15:09.245 and cow that the cost of capital, so it's not the cost 321 00:15:09.245 --> 00:15:13.005 of capital is percentage, it is the cost of capital in 322 00:15:13.565 --> 00:15:14.725 Japanese yen in ta. 323 00:15:15.545 --> 00:15:17.645 Now EVA is EBITDA tax, 324 00:15:17.665 --> 00:15:21.005 so notepad less capital employed times the wac. 325 00:15:21.715 --> 00:15:24.325 There's a question which is what is the difference 326 00:15:24.325 --> 00:15:25.805 between the EVA and the Netherland 327 00:15:25.805 --> 00:15:28.445 because at the end of the day the Netherland is kind 328 00:15:28.445 --> 00:15:31.805 of bottom line and EVA is also a kind of bottom line, yes, 329 00:15:32.185 --> 00:15:36.365 but in the net earnings you rerate your bankers in EVA, 330 00:15:36.425 --> 00:15:39.325 you remunerate your bankers and your shareholders 331 00:15:39.825 --> 00:15:42.085 and the big difference between the p and l 332 00:15:42.085 --> 00:15:44.965 and the EVA calculation is a remuneration which is 333 00:15:45.925 --> 00:15:48.605 actually attributable to shareholders beyond 334 00:15:49.195 --> 00:15:51.285 what they expect from capital market. 335 00:15:52.435 --> 00:15:54.125 When in the calculation of the EV, 336 00:15:54.125 --> 00:15:56.965 you deep dive a little bit in the figures you can 337 00:15:57.285 --> 00:15:59.245 demonstrate I'm not going to do it, 338 00:15:59.245 --> 00:16:00.405 but it's easy to make 339 00:16:00.835 --> 00:16:04.205 that the EVA is a net earnings bottom line of the p 340 00:16:04.205 --> 00:16:07.765 and l, less equity what was invested by shareholders 341 00:16:07.865 --> 00:16:09.965 but divide by the cost of equity capital, 342 00:16:10.345 --> 00:16:11.965 the expected return equity. 343 00:16:12.425 --> 00:16:15.485 So you understand that the EVA is about return on capital, 344 00:16:15.865 --> 00:16:17.245 so something which is valid 345 00:16:17.665 --> 00:16:19.605 and explicit for business operations. 346 00:16:19.605 --> 00:16:22.525 At the end of the day, it's net earnings attributable to 347 00:16:23.165 --> 00:16:26.285 shareholders minus equity investment made by shareholders 348 00:16:27.325 --> 00:16:29.045 multiplied by the expected return on 349 00:16:29.045 --> 00:16:30.085 shareholders investment. 350 00:16:30.345 --> 00:16:32.645 So it's very much focusing on shareholders. 351 00:16:34.025 --> 00:16:36.405 Now when you look at the communication which is 352 00:16:36.645 --> 00:16:38.605 provided by the company, you have plenty of slides 353 00:16:38.625 --> 00:16:42.885 and graphs explaining the va, the noad and so on so forth, 354 00:16:43.385 --> 00:16:46.365 and here you have in green light green, dark green, 355 00:16:46.825 --> 00:16:49.565 the notepad, the cost of capital, the EVA. 356 00:16:49.745 --> 00:16:51.805 In fact what is provided is the EVA, 357 00:16:51.805 --> 00:16:54.165 which is notepad minus cost of capital 358 00:16:54.825 --> 00:16:57.565 and you have the cost of capital, you have two periods, 359 00:16:58.445 --> 00:17:00.125 Japanese accounting standards 360 00:17:00.145 --> 00:17:02.645 and then international accounting standards. 361 00:17:03.195 --> 00:17:05.165 What is quite interesting is to observe 362 00:17:05.165 --> 00:17:09.605 that the EVA was at its maximum in 20 17 20 18. 363 00:17:10.315 --> 00:17:11.565 Then there is a drop up. 364 00:17:11.565 --> 00:17:14.805 There are roughly a break even in 22, 23 365 00:17:15.305 --> 00:17:19.965 and it's getting up in 24, but when you have the EVA 366 00:17:20.425 --> 00:17:23.525 and when you have a cost of capital, you can deduct from 367 00:17:23.525 --> 00:17:26.845 that the notepad because the notepad minus cost 368 00:17:26.845 --> 00:17:31.205 of capital is EVA, so notepad is EVA plus cost of capital. 369 00:17:32.555 --> 00:17:35.845 Then you can calculate the notepad two year 2024, 370 00:17:36.265 --> 00:17:40.205 it is 33.2 plus 77.8 is exactly 371 00:17:40.585 --> 00:17:45.285 111 in another part of the financial communication, 372 00:17:45.425 --> 00:17:49.925 and again it's integrated annual report of the company 2025, 373 00:17:50.175 --> 00:17:53.845 about 2024, what you get, you get the same stuff, 374 00:17:53.945 --> 00:17:56.325 but now they directly give you the adjusted. 375 00:17:56.805 --> 00:18:00.845 Adjusted means getting rid of exceptional items, notepad 376 00:18:00.905 --> 00:18:02.085 and the economic value added 377 00:18:02.225 --> 00:18:04.965 and you get the notepad, which is 111, 378 00:18:05.745 --> 00:18:08.205 but there's also very interesting figure, 379 00:18:08.215 --> 00:18:10.245 which is the IC itself. 380 00:18:11.065 --> 00:18:13.405 You remember I said that the EVA was high 381 00:18:13.405 --> 00:18:17.285 and then it went down, the rig goes down, the rig gets 382 00:18:17.305 --> 00:18:21.645 to a low point in 2023 at 4.1% 383 00:18:21.785 --> 00:18:23.765 and then 24 up up. 384 00:18:23.765 --> 00:18:27.525 Again. This is why the EVA is down and it's up again, 385 00:18:28.225 --> 00:18:31.845 but when you get the reic, you can make some calculations 386 00:18:32.595 --> 00:18:35.125 with the notepad and with the economic profit, 387 00:18:35.395 --> 00:18:36.925 with the economic value added. 388 00:18:37.695 --> 00:18:39.605 Which kind of data do we have? 389 00:18:39.705 --> 00:18:41.885 We have the EVA, we have the reic, we have the notepad 390 00:18:41.885 --> 00:18:43.125 and the cost of financing, 391 00:18:43.825 --> 00:18:46.205 but there are a few formulas which put all 392 00:18:46.205 --> 00:18:47.365 these items together. 393 00:18:47.765 --> 00:18:50.325 EVA again is noad, less cost of financing. 394 00:18:51.555 --> 00:18:56.085 ROIC is notepad divided by average invested capital, 395 00:18:56.115 --> 00:18:57.645 average capital employed. 396 00:18:57.645 --> 00:18:59.685 This is a formula which is provided by the capital 397 00:18:59.785 --> 00:19:02.205 and they explain how the capital needs their capital 398 00:19:02.565 --> 00:19:04.885 employed, which is absolutely straightforward. 399 00:19:05.345 --> 00:19:07.685 The cost of financing is a cost of capital 400 00:19:07.905 --> 00:19:11.125 or work multipli by the average capital employee. 401 00:19:11.785 --> 00:19:14.205 But then you understand that you know if the aic, 402 00:19:14.225 --> 00:19:17.605 no patent cost of financing here there's a parameter which 403 00:19:17.605 --> 00:19:20.205 you can deduct from that, which is a wack 404 00:19:21.125 --> 00:19:23.845 implicit in the calculation of the cost of financing 405 00:19:24.265 --> 00:19:25.405 and of the EVA. 406 00:19:26.385 --> 00:19:30.525 The average capital employed is notepad divided by roic. 407 00:19:31.105 --> 00:19:33.445 Why? Because ROIC is notepad divided 408 00:19:33.665 --> 00:19:35.085 by average capital employed. 409 00:19:35.105 --> 00:19:36.645 So you can take the notepad 410 00:19:36.785 --> 00:19:40.125 twenty twenty four, one hundred and eleven, you divide 411 00:19:40.185 --> 00:19:42.285 by the roic, which is provided by the company 412 00:19:42.385 --> 00:19:45.805 and you get the average capital employed 1.2 trillion. 413 00:19:46.715 --> 00:19:50.365 Then the wac, the WAC is cost of financing divided 414 00:19:50.545 --> 00:19:52.045 by average capital employed. 415 00:19:52.305 --> 00:19:53.405 Why? Because the cost 416 00:19:53.405 --> 00:19:56.405 of financing is you multiplies the average capital employed 417 00:19:56.425 --> 00:19:59.925 by the wac and then once you know the average capital 418 00:20:00.285 --> 00:20:02.525 employed and once the cost of financing is 419 00:20:02.685 --> 00:20:04.325 provided, you can calculate the WAC 420 00:20:04.705 --> 00:20:07.805 and the wac, which is implicit in all these calculations is 421 00:20:07.805 --> 00:20:11.925 the cost of financing 77.8 divided by 1.2 trillion. 422 00:20:12.235 --> 00:20:13.605 It's 6.4%. 423 00:20:14.435 --> 00:20:19.405 This calculation can be made for 2024 and back to 2018 424 00:20:20.105 --> 00:20:21.245 before 2018. 425 00:20:21.625 --> 00:20:24.165 We don't have any information about the rig, 426 00:20:24.215 --> 00:20:26.365 about the notepad, about EV we have 427 00:20:26.365 --> 00:20:27.885 but we don't have the rig so we don't, 428 00:20:27.885 --> 00:20:29.245 we can't calculate the wac. 429 00:20:30.205 --> 00:20:33.925 Interestingly, the WAC is 6.4 in 430 00:20:33.925 --> 00:20:38.405 20 24, 6 0.5 in 2022 431 00:20:38.475 --> 00:20:42.605 roughly is the same and then 5, 5, 5, 5, 5 432 00:20:43.185 --> 00:20:44.965 and it is provided by the company. 433 00:20:45.385 --> 00:20:48.365 The fact that the company has an opinion which is the wack 434 00:20:48.365 --> 00:20:49.645 should be around 5%. 435 00:20:49.785 --> 00:20:52.325 It was 5% during four consecutive years 436 00:20:52.785 --> 00:20:56.285 and then for some reason the WAC went up to 6.5, 437 00:20:57.025 --> 00:21:00.645 but for a really incredible reason, the WAC went down 438 00:21:00.665 --> 00:21:03.245 to 3.4 in 2023 439 00:21:04.065 --> 00:21:08.005 and then you say, why is the WAC so different in 2023 440 00:21:08.515 --> 00:21:10.725 from 20 22, 20 24, 441 00:21:11.625 --> 00:21:16.525 why is the WAC up coming from the 5% which look like a 442 00:21:16.525 --> 00:21:18.245 kind of normal work for the company? 443 00:21:18.785 --> 00:21:20.365 No explanation in the 444 00:21:20.365 --> 00:21:22.165 financial communication of the company. 445 00:21:23.465 --> 00:21:26.165 Now, when you want to calculate a weighted average cost 446 00:21:26.165 --> 00:21:29.525 of capital, a very critical information is a risk 447 00:21:29.555 --> 00:21:30.765 free rate of return. 448 00:21:31.075 --> 00:21:32.205 Then the central Bank 449 00:21:32.205 --> 00:21:35.165 of Japan is providing some information about interest rate. 450 00:21:35.265 --> 00:21:36.525 You know what? Zero 451 00:21:37.425 --> 00:21:40.725 and zero in 20 17, 20 18, et cetera. 452 00:21:41.065 --> 00:21:44.965 It starts getting a little bit up at the end of 2024 453 00:21:45.345 --> 00:21:48.245 and it is up in 2025, but not that big. 454 00:21:48.865 --> 00:21:51.445 So it was not zero, it was marginally negative, 455 00:21:51.505 --> 00:21:54.485 but let's take zero to simplify the calculation, 456 00:21:54.785 --> 00:21:57.485 so the evolution of the what cannot be explained 457 00:21:57.485 --> 00:21:59.485 by the evolution of the interest rate. 458 00:22:00.425 --> 00:22:03.725 Now the question also about the cost of equity is of beta. 459 00:22:04.945 --> 00:22:07.725 Now, when you come from the trajectories of cow as opposed 460 00:22:07.725 --> 00:22:12.445 to the NE UK 225, what do you observe? 461 00:22:12.465 --> 00:22:14.565 You observe that the NECA was flat 462 00:22:14.745 --> 00:22:17.685 and cow down negative beta 463 00:22:18.425 --> 00:22:21.885 or beta close to zero and then it went up. 464 00:22:22.105 --> 00:22:24.205 No change for cow and then it is up 465 00:22:24.225 --> 00:22:25.485 and cow, there is no change. 466 00:22:25.785 --> 00:22:30.205 You understand that there doesn't seem to be any correlation 467 00:22:30.795 --> 00:22:34.005 between what is happening to the market on what is happening 468 00:22:34.005 --> 00:22:38.565 to cow, and this is quite interesting when you calculate the 469 00:22:38.665 --> 00:22:42.365 wac, when you calculate the wack, you take the cost 470 00:22:42.365 --> 00:22:44.365 of equity and the cost of that pro ratta 471 00:22:44.365 --> 00:22:46.725 as a respective contribution of shareholders and bankers. 472 00:22:46.725 --> 00:22:50.005 Bankers are out of the picture, the debt is negative. 473 00:22:50.005 --> 00:22:53.645 Then the WAC is is limited to the cost of equity capital, 474 00:22:53.795 --> 00:22:57.245 cost of equity, capital, capital asset pricing model, 475 00:22:57.345 --> 00:23:01.605 carbon born rate plus risk-free rate plus beta, 476 00:23:01.865 --> 00:23:04.645 the sensitivities of correlation multipli 477 00:23:04.705 --> 00:23:06.685 by the equity market risk premium. 478 00:23:07.265 --> 00:23:09.045 The equity market risk premium is 479 00:23:09.285 --> 00:23:11.085 provided by website demo darran 480 00:23:11.085 --> 00:23:14.005 and so on so forth history called forward looking. 481 00:23:14.435 --> 00:23:18.365 It's in a range which is five to 7% government born rate, 482 00:23:18.555 --> 00:23:20.005 Neil Beta. 483 00:23:20.945 --> 00:23:23.725 The beta which you can observe should not be very high. 484 00:23:24.185 --> 00:23:28.005 The rate which you can read on websites are sometimes a 485 00:23:28.005 --> 00:23:32.165 little bit less than 0.2, sometimes between 0.2 and 0.4. 486 00:23:33.265 --> 00:23:36.445 By the way, it does not look like the beta of a share. 487 00:23:36.865 --> 00:23:40.925 It looks like the beta of a bond, but it's very low. 488 00:23:41.225 --> 00:23:45.725 Now if you multiply 0.2, 0.3, 0.4 by five, six, 7%, 489 00:23:46.145 --> 00:23:49.565 you get a cost of equity which is maximum 3% 490 00:23:50.385 --> 00:23:52.445 and then the work should be 3% 491 00:23:52.445 --> 00:23:54.165 because the wack is a cost of equity. 492 00:23:54.825 --> 00:23:56.005 So it's quite strange 493 00:23:56.275 --> 00:23:57.485 because at the end 494 00:23:57.485 --> 00:24:01.085 of the day they say the W we feel comfortable is 5%, 495 00:24:01.865 --> 00:24:05.325 the wack is 6.4% in 2024. 496 00:24:05.995 --> 00:24:07.965 It's roughly the same in 2022 497 00:24:08.225 --> 00:24:11.605 and it goes down just in 2023. 498 00:24:12.225 --> 00:24:15.125 But if you take the beta, which is quite normal for beauty 499 00:24:15.185 --> 00:24:18.725 and cosmetics business companies which are very well known 500 00:24:18.725 --> 00:24:22.405 across the world, you get a beta which is about 0.8 501 00:24:23.135 --> 00:24:24.405 0.8 multiplied 502 00:24:24.425 --> 00:24:28.485 by say 6% is about 5% plus the risk free rate, 503 00:24:28.635 --> 00:24:33.405 it's 5%, so it's quite normal that they take a wack of 5%. 504 00:24:33.915 --> 00:24:38.805 What is strange is why the wack up in 2022 or 2024 505 00:24:39.065 --> 00:24:42.245 and why the collapsing in 2023, 506 00:24:42.905 --> 00:24:44.125 no explanation, 507 00:24:45.145 --> 00:24:47.365 but a very interesting slide, 508 00:24:47.765 --> 00:24:50.605 a very interesting communication, the link between 509 00:24:51.205 --> 00:24:53.405 economic value added and actual 510 00:24:53.885 --> 00:24:55.285 remuneration for the top managers. 511 00:24:55.915 --> 00:24:58.365 When you look at how these guys are remunerated, 512 00:24:58.385 --> 00:25:01.565 you understand that economic value added is absolutely fun 513 00:25:01.565 --> 00:25:06.325 Them it's 35% of the short term compensation, 514 00:25:06.435 --> 00:25:07.885 incentive compensation. 515 00:25:08.305 --> 00:25:12.725 It is also in the long term compensation together with ESG. 516 00:25:12.725 --> 00:25:14.245 I'll get back to this point in a second, 517 00:25:14.665 --> 00:25:17.605 but you understand that EVA is absolutely fun them 518 00:25:19.145 --> 00:25:21.885 Now you understand that the ROIC is down 519 00:25:22.545 --> 00:25:25.245 and the WA is nicely down so 520 00:25:25.245 --> 00:25:30.045 that EVA remains a little bit positive, difficult 521 00:25:30.045 --> 00:25:32.085 to have an idea of why they did that, 522 00:25:32.105 --> 00:25:34.485 but maybe there's a link with the remuneration. 523 00:25:35.345 --> 00:25:36.605 Now interestingly, 524 00:25:37.235 --> 00:25:39.725 this company is about making life beautiful, 525 00:25:40.105 --> 00:25:43.245 but it's very much and strongly about ESG 526 00:25:43.505 --> 00:25:46.205 and it's not just punchline or things like that. 527 00:25:46.665 --> 00:25:50.605 Now they are very good in ESG and they are very consistent. 528 00:25:51.215 --> 00:25:53.605 There is an interesting institution as far 529 00:25:53.605 --> 00:25:55.645 as ESG rating is concerned, 530 00:25:55.645 --> 00:25:59.085 which is named CDP Carbon Disclosure Project 531 00:26:00.225 --> 00:26:03.045 and the company is evaluating is providing a rating 532 00:26:03.225 --> 00:26:05.005 to a number of corporation, 533 00:26:06.375 --> 00:26:11.045 about 25,000 corporation representing 85% of the s 534 00:26:11.045 --> 00:26:15.165 and p 500 and so so of very big stake, 535 00:26:15.745 --> 00:26:18.125 and these companies provide information against 536 00:26:18.125 --> 00:26:19.365 which they receive a rating. 537 00:26:20.025 --> 00:26:23.845 Out of these almost 25,000 companies, only 2% of them 538 00:26:24.475 --> 00:26:29.045 have an A rating in one of the three categories. 539 00:26:29.945 --> 00:26:32.965 The categories are climate, forests 540 00:26:33.265 --> 00:26:37.645 and water, which are quite important items as far 541 00:26:37.645 --> 00:26:39.605 as ESG and climate is concerned, 542 00:26:40.065 --> 00:26:42.045 and you understand that only 2% 543 00:26:42.045 --> 00:26:44.885 of these companies have at least one a rating. 544 00:26:45.115 --> 00:26:49.405 Only eight companies have an A rating in each 545 00:26:49.665 --> 00:26:51.045 and every category 546 00:26:51.865 --> 00:26:55.485 and eight companies out of almost 25,000. 547 00:26:55.745 --> 00:26:57.685 It means that it's an outstanding performance 548 00:26:57.685 --> 00:27:00.645 and it's not a one time, it's not a one shot 549 00:27:01.105 --> 00:27:03.125 during the last five years. 550 00:27:03.785 --> 00:27:06.285 Cow got the triple A rating. 551 00:27:07.605 --> 00:27:11.445 TDP also says, well, if you get one A score at least 552 00:27:11.535 --> 00:27:14.925 among the three, your stock price on the average exceeded 553 00:27:15.145 --> 00:27:17.845 by 6% the PS over the last decade. 554 00:27:18.545 --> 00:27:20.085 To be honest, I don't know exactly 555 00:27:20.185 --> 00:27:21.445 how they made the calculations. 556 00:27:21.445 --> 00:27:24.165 Sometimes a study says, ah, if you have an A rating, 557 00:27:24.265 --> 00:27:27.005 if you are good in ESG, your stock price is going to go 558 00:27:27.505 --> 00:27:31.005 beyond what happens to a non ESG friendly company. 559 00:27:31.005 --> 00:27:33.285 Sometimes it's demonstrated the other way around. 560 00:27:33.525 --> 00:27:38.205 I don't know, but at least you can be good in ESG without 561 00:27:38.765 --> 00:27:41.845 deteriorating your financial performance. 562 00:27:43.405 --> 00:27:45.685 Interestingly, if you look at the company, 563 00:27:46.465 --> 00:27:48.445 the financial performance was declining, 564 00:27:48.905 --> 00:27:51.245 but a few years ago it was quite okay. 565 00:27:51.945 --> 00:27:54.925 The company is quite rigorous in its financial management 566 00:27:54.925 --> 00:27:57.645 using metrics which are really strong matrix 567 00:27:57.835 --> 00:27:58.885 incorporate finance. 568 00:27:59.745 --> 00:28:02.405 Now they seem to be back to financial performance, 569 00:28:02.665 --> 00:28:06.565 but at least they are quite good in sustainable development 570 00:28:06.745 --> 00:28:09.525 and it seems that rigorous financial management 571 00:28:10.185 --> 00:28:13.045 and evolution of performance are absolutely not incompatible 572 00:28:13.075 --> 00:28:14.525 with sustainable development. 573 00:28:14.935 --> 00:28:17.525 Maybe there is a positive correlation in the long term, 574 00:28:17.735 --> 00:28:19.685 which would be extremely nice. 575 00:28:20.345 --> 00:28:23.045 Now, let's go back to performance through growth. 576 00:28:23.875 --> 00:28:25.605 What the revenue growth is, 577 00:28:26.225 --> 00:28:29.005 how you construct the performance with return on the sales 578 00:28:29.025 --> 00:28:31.805 and assets turnover, traditional relationship 579 00:28:31.805 --> 00:28:33.885 between value creation and performance 580 00:28:34.665 --> 00:28:37.205 and the earn line growth, which is estimated 581 00:28:37.265 --> 00:28:40.565 by investors in your stock price will end 582 00:28:40.565 --> 00:28:42.525 with the financing growth. 583 00:28:43.465 --> 00:28:46.125 The campaign is not growing at a very high rate. 584 00:28:46.825 --> 00:28:50.125 The gross rate is a little bit more than zero, 585 00:28:50.515 --> 00:28:52.965 sometimes a little bit negative, 586 00:28:53.385 --> 00:28:55.405 little bit negative because of the COVID. 587 00:28:55.985 --> 00:28:59.165 Oh, there's one year in which you have a high growth rate is 588 00:28:59.165 --> 00:29:01.845 2022 because of an acquisition, 589 00:29:02.105 --> 00:29:04.285 but the like for like growth this year 590 00:29:04.865 --> 00:29:08.925 is on less 3.7%, so you understand 591 00:29:08.925 --> 00:29:10.965 that the company is not skyrocketing. 592 00:29:11.905 --> 00:29:15.285 Before this period, the company developed itself 593 00:29:15.285 --> 00:29:17.005 through a number of acquisitions, 594 00:29:17.065 --> 00:29:19.765 but during the last years, not many acquisitions 595 00:29:20.315 --> 00:29:21.845 just one significant. 596 00:29:22.705 --> 00:29:25.525 At the end of the day, this is going to be a question 597 00:29:25.585 --> 00:29:28.245 for the financial structure of the future. 598 00:29:29.715 --> 00:29:31.645 What about the cash operating profit? 599 00:29:32.025 --> 00:29:34.845 The ebitda, the E BDA is a strong component in the 600 00:29:34.845 --> 00:29:39.485 calculation of on sales, the cash operating profit 601 00:29:40.065 --> 00:29:42.445 is and down 602 00:29:42.785 --> 00:29:45.725 and up again, which is quite consistent with the evolution 603 00:29:45.725 --> 00:29:47.685 of the roic, which I described. 604 00:29:48.265 --> 00:29:49.765 So here on the graph you see 605 00:29:49.765 --> 00:29:53.405 that revenues are quite stable down recovery 606 00:29:54.265 --> 00:29:57.885 and up any B walls up together 607 00:29:57.955 --> 00:29:59.285 with uh, revenues. 608 00:29:59.835 --> 00:30:03.405 Then it went down and it is only up the last year. 609 00:30:04.065 --> 00:30:07.725 We are going to have a look at the reasons why the EBTA went 610 00:30:07.725 --> 00:30:08.965 down in a minute, 611 00:30:10.185 --> 00:30:12.925 but then we have to look at the operating cost. 612 00:30:13.625 --> 00:30:14.685 In the operating cost. 613 00:30:14.685 --> 00:30:17.205 What you have, you have the cost of sales cost 614 00:30:17.205 --> 00:30:18.485 of goods sold, which is the cost 615 00:30:18.485 --> 00:30:20.205 of manufacturing the goods which you 616 00:30:20.275 --> 00:30:21.725 deliver to your customers. 617 00:30:22.075 --> 00:30:25.845 Then you deduct indirect cost, selling general and admin, 618 00:30:26.585 --> 00:30:27.685 and you remember that 619 00:30:27.705 --> 00:30:30.525 for some companies you put in a separate line advertising 620 00:30:30.525 --> 00:30:33.125 and promotion, research and development, sales 621 00:30:33.185 --> 00:30:34.965 and marketing or whatsoever. 622 00:30:35.595 --> 00:30:37.125 Here you have sg, NA 623 00:30:37.465 --> 00:30:40.205 and sg NA is going to be split in two different items, 624 00:30:40.415 --> 00:30:42.005 which is the next graph, 625 00:30:42.505 --> 00:30:44.965 but just observing this graph, what do you observe? 626 00:30:45.145 --> 00:30:47.805 You observe that the cost of sales say cost 627 00:30:47.805 --> 00:30:50.405 of goods sold was quite the same as SG NA 628 00:30:50.665 --> 00:30:53.085 and then in 2017 there is gap 629 00:30:53.745 --> 00:30:56.565 and you understand that the A for one is exactly the down 630 00:30:56.585 --> 00:30:58.685 for the other, which very much means 631 00:30:58.715 --> 00:31:01.485 that there's a change in your accounting standards. 632 00:31:01.485 --> 00:31:03.965 They're going to adopt IFRS 15. 633 00:31:04.305 --> 00:31:06.005 The objective of this film is not 634 00:31:06.005 --> 00:31:08.645 to discuss about accounting for revenues and costs, 635 00:31:08.985 --> 00:31:10.445 but basically you understand 636 00:31:10.445 --> 00:31:15.125 that this is the reason why there is a split later on SG 637 00:31:15.125 --> 00:31:19.205 and a is quite stable, 30% no change, 638 00:31:19.385 --> 00:31:22.365 the same stability as false segments. 639 00:31:22.915 --> 00:31:25.485 What about the cost of sales, the cost of goods, 640 00:31:25.485 --> 00:31:28.365 so it's stable and then it goes up 641 00:31:28.825 --> 00:31:31.485 and this is the reason why the EBITDA 642 00:31:31.665 --> 00:31:33.725 and the EBIT are going to be down. 643 00:31:33.825 --> 00:31:37.365 The rest is quite the same, but what happened at that time? 644 00:31:38.195 --> 00:31:39.365 Well, inflation, 645 00:31:40.275 --> 00:31:42.965 this is why there will be some explanations about that. 646 00:31:43.735 --> 00:31:45.645 Let's move on with the operating cost. 647 00:31:45.945 --> 00:31:49.885 We have now the SGNA, which is 35% extremely stable. 648 00:31:50.465 --> 00:31:53.085 The company is providing some information about research 649 00:31:53.085 --> 00:31:55.645 and development and advertising and promotion. 650 00:31:56.315 --> 00:31:59.885 Both items are quite important in this kind of industry. 651 00:32:00.845 --> 00:32:02.765 Advertising and promotion is about 10%. 652 00:32:02.765 --> 00:32:06.125 It was 10%, it was a little bit less and now it's about 10%. 653 00:32:07.125 --> 00:32:09.125 Research and development is about 4%. 654 00:32:09.125 --> 00:32:11.645 4% is good benchmark a number 655 00:32:11.645 --> 00:32:14.565 of companies in the cosmetics business, a r 656 00:32:14.565 --> 00:32:17.365 and d figure is about three, 3.5, et cetera 657 00:32:17.465 --> 00:32:19.525 or less as a percentage to revenue. 658 00:32:19.625 --> 00:32:21.525 So the companies investing in innovation, 659 00:32:22.545 --> 00:32:26.445 not very much in promoting advertising et cetera. 660 00:32:27.025 --> 00:32:29.645 10% is not that high compared 661 00:32:29.645 --> 00:32:31.765 with some big players in the market, 662 00:32:32.945 --> 00:32:34.765 but these figures are quite stable. 663 00:32:35.785 --> 00:32:39.445 Now you understand that the return on capital is going 664 00:32:39.445 --> 00:32:42.325 to be explained at least partly by the evolution 665 00:32:42.325 --> 00:32:43.445 of the return on sales. 666 00:32:44.945 --> 00:32:47.845 Return capital is return on sales, tax assets turnover, 667 00:32:48.505 --> 00:32:50.285 but if you look at the evolution 668 00:32:50.285 --> 00:32:53.125 of the return on sales is very much driven by the evolution 669 00:32:53.125 --> 00:32:54.245 of the cost of sales 670 00:32:54.785 --> 00:32:59.765 and the cost of sales has been quite impacted by inflation. 671 00:33:00.625 --> 00:33:02.965 So when you have inflation in your costs, 672 00:33:03.145 --> 00:33:06.285 the question is do it transfers inflation to your customers? 673 00:33:06.705 --> 00:33:08.725 If you're transferring inflation to the customers, 674 00:33:08.725 --> 00:33:11.725 maybe your EBIT is going to be a bit more sustainable, 675 00:33:12.265 --> 00:33:15.165 but it might be at the expense of losing customers. 676 00:33:15.305 --> 00:33:17.725 You remember the educational film which was devoted 677 00:33:17.785 --> 00:33:22.365 to Unilever now it was about return on sales. 678 00:33:22.425 --> 00:33:24.965 Return on sales is multiplied by asset turnover 679 00:33:24.985 --> 00:33:27.525 to give you the return on capital assets. 680 00:33:27.805 --> 00:33:29.885 Turnover is made of property plate and equipment 681 00:33:29.905 --> 00:33:30.965 and brands and so on. 682 00:33:30.965 --> 00:33:33.085 Goodwill, no major change 683 00:33:33.085 --> 00:33:35.085 because there are not many acquisitions 684 00:33:35.905 --> 00:33:38.485 and it's also about the working capital requirement. 685 00:33:38.535 --> 00:33:41.045 Let's start with the property, plant and equipment. 686 00:33:41.515 --> 00:33:43.645 Then if you look at the last 10 years, you understand 687 00:33:43.645 --> 00:33:44.685 that there are two periods. 688 00:33:45.235 --> 00:33:48.005 There's one period where investment as a percentage 689 00:33:48.005 --> 00:33:50.525 to revenue is much more than depreciation is a percentage 690 00:33:50.525 --> 00:33:54.365 to revenue, which it means that the building its capacity, 691 00:33:55.155 --> 00:33:57.805 it's creating some manufacturing footprint 692 00:33:58.425 --> 00:34:02.245 and then CapEx is up, depreciation is up, 693 00:34:02.305 --> 00:34:05.125 but with kind of time lag, of course there's a time lag 694 00:34:05.125 --> 00:34:07.445 because depreciation is a memorial of the CapEx, right? 695 00:34:07.955 --> 00:34:11.605 Then they start being together and then what happens? 696 00:34:12.135 --> 00:34:14.325 CapEx is stabilizing and then dropping. 697 00:34:14.755 --> 00:34:16.165 What happens to the precision? 698 00:34:16.165 --> 00:34:17.485 The precision is also dropping, 699 00:34:17.905 --> 00:34:20.325 but you understand that today CapEx 700 00:34:20.325 --> 00:34:23.125 and the precision are quite the same, so you understand 701 00:34:23.125 --> 00:34:25.165 that you have a period of capacity increase 702 00:34:25.665 --> 00:34:28.525 and you have a period of capacity optimization. 703 00:34:29.345 --> 00:34:31.645 Now you manufacture as much 704 00:34:31.665 --> 00:34:34.165 as possible throughout your capacity. 705 00:34:35.225 --> 00:34:36.845 Now that's worth for the long-term 706 00:34:36.945 --> 00:34:39.125 and non-current asset and production. 707 00:34:39.415 --> 00:34:41.485 Let's move to the working capital requirement. 708 00:34:41.485 --> 00:34:43.165 This then cash conversion cycle. 709 00:34:43.585 --> 00:34:47.045 In fact, risk plus receivables, minus payables in days 710 00:34:47.045 --> 00:34:49.885 of sales and then what happens? 711 00:34:50.585 --> 00:34:52.365 You look at accounts receivable, 712 00:34:52.365 --> 00:34:54.725 you look at accounts payable, they are quite the same. 713 00:34:55.505 --> 00:34:56.885 One is paying for the other. 714 00:34:57.915 --> 00:35:01.645 What makes a cash conversion cycle go up in the long term 715 00:35:02.395 --> 00:35:06.085 plus 18 days in 10 years, which is an increase 716 00:35:06.085 --> 00:35:09.325 of 50% is definitely the inval. 717 00:35:10.185 --> 00:35:14.165 The evolution of the infant level is explaining the 718 00:35:14.165 --> 00:35:15.885 evolution of the cash conversion cycle. 719 00:35:17.055 --> 00:35:19.635 Now we should deep dive into the explanation of that. 720 00:35:19.635 --> 00:35:23.675 Maybe it's a matter of supply chain risk, et cetera, 721 00:35:24.095 --> 00:35:27.915 but at the end of the day it's a version of the inventories. 722 00:35:28.265 --> 00:35:32.235 Last year's cash conversion cycle is down a little bit 723 00:35:32.385 --> 00:35:36.395 because the I level is down a little bit, 724 00:35:36.735 --> 00:35:38.685 but again, accounts receivable 725 00:35:38.905 --> 00:35:40.805 and accounts people are quite the same. 726 00:35:41.905 --> 00:35:44.685 Now, if you combine what happens to the non-car assets, 727 00:35:44.685 --> 00:35:46.405 what happens to the operating cycle? 728 00:35:46.705 --> 00:35:49.045 You get the assets turnover, which you multiply 729 00:35:49.105 --> 00:35:52.045 by the return sales to get the return on capital employed. 730 00:35:53.565 --> 00:35:55.285 Interestingly, in the assets turnover, 731 00:35:55.475 --> 00:35:59.925 there's a first period CapEx up cash conversion cycle up. 732 00:36:00.435 --> 00:36:02.965 Then you understand that the assets turnover is down. 733 00:36:03.115 --> 00:36:07.485 That says mechanical stuff, second period stabilization y, 734 00:36:08.385 --> 00:36:11.005 not because the cash conversion cycle is collapsing. 735 00:36:11.105 --> 00:36:12.445 Now it's still a little bit up 736 00:36:12.465 --> 00:36:15.085 and then it goes down a little bit, but 737 00:36:15.085 --> 00:36:17.125 because the capital expenditures are down, 738 00:36:18.055 --> 00:36:23.045 CapEx down cash conversion, cycle up assets turnover flat, 739 00:36:23.785 --> 00:36:26.525 but you understand that during this first period, 740 00:36:27.145 --> 00:36:28.645 the return on sales was up, 741 00:36:28.825 --> 00:36:31.285 but the assets turnover was significantly down. 742 00:36:31.775 --> 00:36:33.565 Conse the return capital 743 00:36:33.585 --> 00:36:37.365 and broad went down second on stage second period, 744 00:36:37.465 --> 00:36:40.845 the assets turnover is flat and the return on sales is down. 745 00:36:41.075 --> 00:36:42.885 Then the return on capital is down 746 00:36:42.885 --> 00:36:44.605 because the return on sales is down 747 00:36:44.865 --> 00:36:46.325 and the assets turnover is stable. 748 00:36:47.345 --> 00:36:49.245 Wow. It's just observing the graph. 749 00:36:49.875 --> 00:36:53.885 This is why all the whole period, the performance is down 750 00:36:54.145 --> 00:36:56.965 and getting a little bit up at the end of the period. 751 00:36:58.305 --> 00:37:02.285 You remember that what creates value is return capital 752 00:37:02.785 --> 00:37:04.165 as opposed to cost of capital. 753 00:37:04.555 --> 00:37:06.525 It's a financial performance, which is a one 754 00:37:06.525 --> 00:37:08.485 and unique source of value creation. 755 00:37:08.905 --> 00:37:10.885 How do you measure value creation market 756 00:37:10.985 --> 00:37:13.925 to book enterprise value divided by capital employee? 757 00:37:14.425 --> 00:37:16.605 The enterprise value is the value 758 00:37:16.625 --> 00:37:17.965 of your business operations. 759 00:37:17.995 --> 00:37:20.885 It's market cap plus net financial debt, which you divide 760 00:37:20.885 --> 00:37:21.885 by the actual amount 761 00:37:21.885 --> 00:37:23.805 of money invested in the business operations 762 00:37:24.465 --> 00:37:26.525 and you understand that this is the same dynamic. 763 00:37:27.315 --> 00:37:30.365 There's a perfect correlation between the return capital 764 00:37:31.145 --> 00:37:32.485 and the market to book, 765 00:37:33.065 --> 00:37:34.325 but more interesting than 766 00:37:34.325 --> 00:37:37.125 that when you look at the actual market to book, 767 00:37:37.145 --> 00:37:40.965 you can compare that with the market to book as it would be 768 00:37:41.665 --> 00:37:44.325 taking into account the financial performance of the company 769 00:37:44.585 --> 00:37:45.965 and its potential growth. 770 00:37:47.145 --> 00:37:50.205 The market to book no growth is rose 771 00:37:50.375 --> 00:37:53.605 after tax, less growth divided by what? 772 00:37:53.755 --> 00:37:56.205 Less growth. Growth is zero though the market 773 00:37:56.265 --> 00:37:59.125 to book no growth is return capital and product 774 00:37:59.125 --> 00:38:00.605 after tax divided by the whack. 775 00:38:01.195 --> 00:38:05.245 This is a theoretical market to book as if in the minds 776 00:38:05.245 --> 00:38:07.565 of investors there is absolutely no growth 777 00:38:08.465 --> 00:38:12.085 and if you take my calculation of the gross after attacks 778 00:38:12.345 --> 00:38:16.605 and my calculation of the wac, what do you get three periods 779 00:38:17.305 --> 00:38:18.645 during the first period? 780 00:38:18.945 --> 00:38:22.845 The market to book no growth is more than the actual market 781 00:38:22.905 --> 00:38:26.285 to book, which means that the investors are anticipating 782 00:38:26.945 --> 00:38:30.165 if the figures are right that there will be a decline 783 00:38:30.745 --> 00:38:32.445 in the value of the company, 784 00:38:32.765 --> 00:38:35.925 a decline in its financial performance, performance, 785 00:38:35.925 --> 00:38:37.725 then it's down for both. 786 00:38:38.275 --> 00:38:40.085 It's down for both. What does it mean? 787 00:38:40.505 --> 00:38:42.365 It means that the rose is down 788 00:38:42.665 --> 00:38:44.925 and it means that the market to book is down, 789 00:38:45.425 --> 00:38:48.605 but they are quite the same interpretation. 790 00:38:48.655 --> 00:38:52.805 Gross is new during the last two years. What happens? 791 00:38:53.665 --> 00:38:54.925 The market 792 00:38:55.025 --> 00:38:57.885 to book is getting a little bit up even though the return 793 00:38:57.885 --> 00:38:58.925 capital is down 794 00:38:58.985 --> 00:39:00.525 and then is a little bit up, 795 00:39:01.095 --> 00:39:03.885 which might be interpreted as well. 796 00:39:03.885 --> 00:39:06.605 The market is anticipating that the company is going 797 00:39:06.605 --> 00:39:09.405 to bounce back and get back to additional performance, 798 00:39:10.265 --> 00:39:11.725 but these are my figures. 799 00:39:12.545 --> 00:39:15.165 If I take the return on capital employed 800 00:39:15.165 --> 00:39:17.805 after tax as a roic, which is provided by the company 801 00:39:17.945 --> 00:39:19.085 and the wac which is 802 00:39:19.285 --> 00:39:20.925 provided by the company, you in a 803 00:39:20.925 --> 00:39:22.085 completely different picture. 804 00:39:23.105 --> 00:39:26.285 If you take the cow version of the return invested capital 805 00:39:27.065 --> 00:39:28.125 and the work which is 806 00:39:28.845 --> 00:39:32.125 provided by the calculation starting in 2018 807 00:39:32.125 --> 00:39:33.685 because I cannot calculate the one 808 00:39:33.685 --> 00:39:35.365 before, I don't have the roic. 809 00:39:35.995 --> 00:39:38.285 Then you understand that each and every year there is a gap 810 00:39:39.425 --> 00:39:41.405 and supposedly it would mean 811 00:39:41.405 --> 00:39:44.645 that the market is anticipating a very significant route 812 00:39:44.875 --> 00:39:46.565 because the actual market 813 00:39:46.665 --> 00:39:48.845 to book is much more than the market 814 00:39:49.025 --> 00:39:51.365 to book calculated without any growth. 815 00:39:52.345 --> 00:39:54.685 But you remember what I said a few minutes ago? 816 00:39:55.185 --> 00:39:57.045 I'm a little bit suspicious about their 817 00:39:57.045 --> 00:39:58.405 calculation of the wack. 818 00:39:59.465 --> 00:40:00.845 Now, what is very important 819 00:40:00.905 --> 00:40:02.765 to understand is who is right, who is wrong? 820 00:40:02.805 --> 00:40:05.725 I don't know, but there are different conclusions 821 00:40:06.235 --> 00:40:07.965 because there are different works. 822 00:40:09.345 --> 00:40:11.365 The work is something which is calculated, 823 00:40:11.365 --> 00:40:14.725 taking into account the beta you feel comfortable with. 824 00:40:15.385 --> 00:40:17.885 Is it the 0.2 which you read on the graphs? 825 00:40:18.185 --> 00:40:20.725 Is it the 0.8, which is one which is valid 826 00:40:20.785 --> 00:40:22.525 for this industry or whatsoever? 827 00:40:23.015 --> 00:40:26.285 There are no divided by capital employee. 828 00:40:26.285 --> 00:40:28.885 It's much more objective minus taxes. Taxes. 829 00:40:29.105 --> 00:40:31.005 You can calculate an app around tax rate. 830 00:40:31.595 --> 00:40:34.245 There's a little bit of subjectivity in the wac. 831 00:40:34.395 --> 00:40:36.885 This is obvious, but at the end of the day, 832 00:40:36.885 --> 00:40:39.325 if you make a mistake in the calculation of the wac, 833 00:40:39.505 --> 00:40:41.205 you make a mistake in the conclusions. 834 00:40:41.755 --> 00:40:43.085 This is why the wack is 835 00:40:43.805 --> 00:40:46.525 absolutely critical in each and every company. 836 00:40:47.985 --> 00:40:51.765 Now, growth financing we observed the last 10 years, 837 00:40:51.945 --> 00:40:54.965 we look at the evolution of ebitda, et cetera, 838 00:40:55.425 --> 00:40:57.525 and what I propose you is a kind of 839 00:40:58.205 --> 00:41:02.325 simplified cash flow statement, users sources of funds. 840 00:41:02.595 --> 00:41:04.205 What about the sources of funds? 841 00:41:04.235 --> 00:41:05.805 It's about the operating cash flow. 842 00:41:06.465 --> 00:41:07.845 The operating cash flow starts 843 00:41:07.845 --> 00:41:09.165 with the funds from operations, 844 00:41:09.165 --> 00:41:12.565 which is the accumulated EBITDA during this period, 845 00:41:13.075 --> 00:41:15.525 less a change in the working character requirement. 846 00:41:15.865 --> 00:41:19.285 EBITDA was 14 15% of revenues, 847 00:41:19.745 --> 00:41:22.125 so it's 2.4 trillion yen 848 00:41:22.865 --> 00:41:25.005 change in working capital requirement. 849 00:41:25.105 --> 00:41:26.365 Yes, there was a change. Why? 850 00:41:26.395 --> 00:41:29.885 Because the cash conversion cycle went up by 18 deaths, 851 00:41:29.885 --> 00:41:32.685 but in the meantime, the growth is not that big, 852 00:41:33.385 --> 00:41:35.605 so the change in working capital requirements is 853 00:41:35.605 --> 00:41:36.645 100 billion. 854 00:41:36.955 --> 00:41:40.845 Yeah, funds from operation 2.4 minus to 100. 855 00:41:40.845 --> 00:41:44.965 What is 2.3? Interest expense negligible. Why? 856 00:41:44.965 --> 00:41:46.365 There's no debt taxes. 857 00:41:46.665 --> 00:41:49.565 You have to pay taxes you funds, which are generated 858 00:41:49.625 --> 00:41:50.925 by the business operations. 859 00:41:51.195 --> 00:41:55.045 It's about 1.8 trillion. Now, what do you do with the Monet? 860 00:41:55.545 --> 00:41:58.645 Ah, in the Monet you make some CapEx investment, 861 00:41:59.295 --> 00:42:03.645 768 acquisitions, peanuts 44, 862 00:42:04.035 --> 00:42:06.845 just one acquisition over the period dividends. 863 00:42:06.865 --> 00:42:11.285 Ah, you return to shareholders, you return 590 864 00:42:11.955 --> 00:42:13.045 through dividends 865 00:42:13.425 --> 00:42:17.165 and an additional 250 through share buybacks, 866 00:42:17.705 --> 00:42:20.845 so you understand that you return more to the shareholders 867 00:42:21.025 --> 00:42:23.565 and what you invest in your business operations, 868 00:42:24.015 --> 00:42:26.045 which is quite consistent with the fact 869 00:42:26.045 --> 00:42:27.765 that the company is not growing. 870 00:42:28.725 --> 00:42:31.365 When a company is generating a nice p and l 871 00:42:31.585 --> 00:42:33.845 and is not growing, CapEx is limited. 872 00:42:34.315 --> 00:42:36.965 Working capital requirement increase is limited 873 00:42:37.505 --> 00:42:39.965 and if you make some profit, what do you do with the profit? 874 00:42:40.225 --> 00:42:42.925 You remember you retain or you return. 875 00:42:42.925 --> 00:42:45.685 If you don't need to retain because you're not growing 876 00:42:45.745 --> 00:42:48.925 and investing so much in capacity, you return, 877 00:42:50.465 --> 00:42:52.845 but if you want to grow, which is a little bit part 878 00:42:52.865 --> 00:42:56.045 of the K 27, you have to return less 879 00:42:56.505 --> 00:42:58.005 and you have to retain more, 880 00:42:58.415 --> 00:43:01.965 which is a change in the financial strategy Today, the cost 881 00:43:01.965 --> 00:43:04.445 of the financial and industrial strategy is 882 00:43:05.165 --> 00:43:08.485 absolutely financed by the EBITDA tomorrow. 883 00:43:09.275 --> 00:43:11.485 What do they want to do with their financial structure? 884 00:43:12.865 --> 00:43:16.085 You understand that today the EBITDA is 885 00:43:16.265 --> 00:43:17.885 by far paying the CapEx. 886 00:43:18.825 --> 00:43:21.285 EBITDA is about three times the CapEx 887 00:43:21.465 --> 00:43:24.325 and as CapEx is down from six to 4%. 888 00:43:24.985 --> 00:43:27.685 EBITDA is now four times the CapEx, 889 00:43:27.905 --> 00:43:31.005 so the free cash flow is EBITDA minus CapEx plus 890 00:43:31.005 --> 00:43:32.045 minus a few things. 891 00:43:32.585 --> 00:43:34.565 The company is generating plenty of cash. 892 00:43:34.755 --> 00:43:36.285 When you generate plenty of cash, 893 00:43:36.665 --> 00:43:38.805 you generate a free cash flow, which is very positive 894 00:43:39.305 --> 00:43:41.885 and the free cash flow can be used for acquisitions 895 00:43:42.425 --> 00:43:44.725 and shares buyback dividend. 896 00:43:45.235 --> 00:43:48.485 What is the distribution policy? It's very interesting. 897 00:43:49.065 --> 00:43:51.365 You see that the networkings of the company are down 898 00:43:51.365 --> 00:43:53.365 because the return sales is down 899 00:43:53.365 --> 00:43:55.645 because the is down, okay, and then it's up. 900 00:43:55.715 --> 00:43:58.645 It's exactly the same profile. What do they do? 901 00:43:58.745 --> 00:44:03.165 Oh, the dividend. The dividend is growing at a steady rate. 902 00:44:03.465 --> 00:44:06.965 The dividend is predictable. It's like a bond, okay? 903 00:44:07.385 --> 00:44:10.325 And then when you have too much money in the back account 904 00:44:10.325 --> 00:44:11.725 and you don't know what to do with the money, 905 00:44:12.065 --> 00:44:13.685 you give money back to the shareholders. 906 00:44:13.875 --> 00:44:14.925 It's a share buyback 907 00:44:15.345 --> 00:44:17.725 and interestingly, if you look at the graph, you understand 908 00:44:17.725 --> 00:44:19.885 that share buyback is 50 billion. 909 00:44:20.825 --> 00:44:24.165 It is about five times 50 billion throughout the years, 910 00:44:24.265 --> 00:44:26.845 and the financial structure is explained by that. 911 00:44:27.105 --> 00:44:31.605 The company is negative debt company each and every year. 912 00:44:32.305 --> 00:44:34.885 Now, sometimes it's strongly negative. What do you do? 913 00:44:34.905 --> 00:44:37.405 Ah, you generate cash. Yes, you buy back. 914 00:44:37.715 --> 00:44:40.365 When you buy back, the gearing is a little bit up. 915 00:44:40.555 --> 00:44:44.085 Gearing debt divided by equity and then what happens? 916 00:44:44.185 --> 00:44:46.045 You don't make buybacks, but you make money. 917 00:44:46.345 --> 00:44:47.445 The gearing is down. 918 00:44:47.445 --> 00:44:50.965 Then you make a buyback and a back and it goes down 919 00:44:51.065 --> 00:44:53.285 and it goes up and it goes up and it goes down. 920 00:44:53.465 --> 00:44:57.485 Why? Because your financial structure is 100% explained by 921 00:44:58.165 --> 00:44:59.885 a positive free cash flow each 922 00:44:59.885 --> 00:45:02.045 and every year, which by far pays the dividend 923 00:45:02.185 --> 00:45:05.085 and then the net cash is going to be positive 924 00:45:05.185 --> 00:45:08.805 or negative depending on your buy back, your shares or not. 925 00:45:10.165 --> 00:45:13.765 Interestingly, this concept is named sustainable growth 926 00:45:13.985 --> 00:45:15.765 and what does it mean sustainable growth. 927 00:45:16.105 --> 00:45:19.125 It means that we can calculate the ability of the company 928 00:45:19.225 --> 00:45:20.685 to self-finance his growth. 929 00:45:21.315 --> 00:45:22.965 It's return equity multiplied 930 00:45:22.985 --> 00:45:24.845 by one minus the distribution rate, 931 00:45:25.225 --> 00:45:26.285 but interestingly, 932 00:45:26.385 --> 00:45:29.805 if the company is growing at a rate which is lower than the 933 00:45:29.805 --> 00:45:33.245 rate at which it can grow, it generates cash in excess. 934 00:45:33.745 --> 00:45:36.525 And then if you are in a low growth business, 935 00:45:36.745 --> 00:45:41.045 modest financing needs high ebitda, internal CapEx financing 936 00:45:41.265 --> 00:45:43.565 and you make a lot of money, then if you 937 00:45:44.255 --> 00:45:47.005 don't acquire companies, you are going 938 00:45:47.005 --> 00:45:49.605 to get cash in excess, which you return to the shareholders 939 00:45:50.275 --> 00:45:52.125 when it is the also way around. 940 00:45:52.155 --> 00:45:54.045 When you are growing at a high rate 941 00:45:54.505 --> 00:45:57.205 and at a rate which is higher than what your performance 942 00:45:57.745 --> 00:45:59.925 is supporting in terms of gross financing, 943 00:46:00.315 --> 00:46:02.565 then you don't return the cash to shareholders. 944 00:46:02.915 --> 00:46:05.045 Then maybe you are going to increase your debt. 945 00:46:05.255 --> 00:46:08.085 Maybe you are going to reduce your dividend payout. 946 00:46:08.335 --> 00:46:10.405 Maybe you're going to make an equity issue. 947 00:46:11.265 --> 00:46:13.845 In the case of the account, it's about regular dividends 948 00:46:13.845 --> 00:46:16.245 because the free cash flow is paying the dividend every 949 00:46:16.245 --> 00:46:19.805 year, no doubt and share buyback if necessary. 950 00:46:19.835 --> 00:46:22.045 Necessary means we have to much cash 951 00:46:22.045 --> 00:46:23.685 and we don't know what to do with the cash. 952 00:46:24.635 --> 00:46:27.085 There's an interesting company which looks a little bit like 953 00:46:27.085 --> 00:46:29.285 that, who then is biased off nive, 954 00:46:29.335 --> 00:46:30.645 which I mentioned earlier. 955 00:46:31.555 --> 00:46:35.805 High profitability via PTAs in the 15 to 20 range. 956 00:46:35.875 --> 00:46:40.325 Same story as cow industrial investment, CapEx, four 5%. 957 00:46:40.465 --> 00:46:43.485 So again, if bid die is by far paying for CapEx, 958 00:46:44.035 --> 00:46:46.885 organic gross one acquisition for cow, 959 00:46:47.765 --> 00:46:51.325 a few limited acquisitions for bios off net cash, 960 00:46:51.635 --> 00:46:55.485 very positive, plenty of cash in excess and dividends. 961 00:46:56.005 --> 00:46:57.725 Dividend is absolutely predictable 962 00:46:58.065 --> 00:46:59.925 and sometimes a share buyback. 963 00:47:00.265 --> 00:47:01.285 The difference is 964 00:47:01.285 --> 00:47:04.005 that the share buyback is on a regular basis for cow. 965 00:47:04.475 --> 00:47:06.725 It's a bit exceptional for bio, 966 00:47:07.385 --> 00:47:10.085 but in both case, the similarities 967 00:47:10.155 --> 00:47:12.645 that it explains the evolution of the financial structure 968 00:47:12.645 --> 00:47:15.125 of the campaign, but what is different between cow 969 00:47:15.125 --> 00:47:18.805 and bios is shareholding structure, completely different. 970 00:47:19.025 --> 00:47:21.685 Biased off. It's a family, family control. 971 00:47:21.705 --> 00:47:24.405 The hers family with more, not much more, 972 00:47:24.425 --> 00:47:27.445 but more than 50% of the share you're controlled. 973 00:47:28.225 --> 00:47:29.725 As far as Carol is concerned, 974 00:47:30.305 --> 00:47:33.925 the shareholder structure is about institutional investor a 975 00:47:33.925 --> 00:47:36.445 little bit the original family, but not that much. 976 00:47:37.145 --> 00:47:39.325 And among the institutional investors, 977 00:47:39.595 --> 00:47:43.125 it's Anglosaxon world, BlackRock, van wa, 978 00:47:43.525 --> 00:47:44.925 fidelity, and so on and so forth. 979 00:47:45.105 --> 00:47:48.285 Of course, mized on the list because Mizing invested in each 980 00:47:48.285 --> 00:47:50.765 and every significant company in Japan, 981 00:47:51.505 --> 00:47:54.445 but you understand that for the Anglo-Saxon world, 982 00:47:55.005 --> 00:47:58.525 a negative gearing is really a question Jere pick. 983 00:47:58.705 --> 00:48:01.045 You want to profit from the leverage effect 984 00:48:01.105 --> 00:48:03.125 or whatsoever and return the cash. 985 00:48:03.155 --> 00:48:05.125 Here they accept 986 00:48:05.345 --> 00:48:09.445 to maintain the gearing at a struggling negative level. 987 00:48:10.015 --> 00:48:13.645 Which strategy behind that? There might be two strategies. 988 00:48:13.825 --> 00:48:17.885 One is offensive. I want to be able to grasp an opportunity 989 00:48:18.485 --> 00:48:19.845 I want to grow abroad 990 00:48:20.385 --> 00:48:23.365 and then maybe there will be some potential acquisitions. 991 00:48:23.845 --> 00:48:27.245 I have the financial power to do it. Defensive strategy. 992 00:48:27.875 --> 00:48:32.085 Defensive is if there is some aggression in my own 993 00:48:32.115 --> 00:48:36.645 battlefield, in my own homeland, I want to be ready to 994 00:48:36.665 --> 00:48:38.205 to answer against ion. 995 00:48:38.225 --> 00:48:39.565 So defensive strategy. 996 00:48:39.985 --> 00:48:42.805 You remember lafa was not able 997 00:48:43.145 --> 00:48:46.485 to defend itself from the aggression of Racom. 998 00:48:46.855 --> 00:48:49.045 There is a film which is on this issue. 999 00:48:50.585 --> 00:48:52.685 Now we know that there is a relationship 1000 00:48:52.685 --> 00:48:55.445 between performance, financial structure and debt. 1001 00:48:55.945 --> 00:48:58.565 Thanks to that you can increase the leverage effect. 1002 00:48:58.625 --> 00:49:01.565 You remember a return equity as a function of the gearing. 1003 00:49:02.155 --> 00:49:04.885 It's positive. It's the rosa is more than the interest rate. 1004 00:49:05.755 --> 00:49:07.565 Also, debt is quite interesting. 1005 00:49:07.625 --> 00:49:10.525 The cars of taxation interest expense, 1006 00:49:10.615 --> 00:49:14.085 deductible from the taxable income, so the remuneration 1007 00:49:14.085 --> 00:49:15.925 of the financial operator is deductible. 1008 00:49:16.225 --> 00:49:18.725 The remuneration of the shareholders is under the earnings 1009 00:49:18.895 --> 00:49:21.245 after tax, so there is a kind 1010 00:49:21.245 --> 00:49:23.645 of tax asymmetry which is in favor of debt, 1011 00:49:24.185 --> 00:49:26.285 but we all know that the WAC is not 1012 00:49:26.285 --> 00:49:27.845 very sensitive to the debt structure. 1013 00:49:28.065 --> 00:49:32.085 The only thing which is changing is the deductible 1014 00:49:32.265 --> 00:49:33.485 of the interest expense. 1015 00:49:34.185 --> 00:49:35.805 Now, if you have a low debt, 1016 00:49:36.865 --> 00:49:38.965 you have a real options in your hand. 1017 00:49:38.985 --> 00:49:41.845 The ability to grow is you have high 1018 00:49:41.845 --> 00:49:43.125 debt in your balance sheet. 1019 00:49:43.125 --> 00:49:45.645 There is a high vulnerability in your own business. 1020 00:49:45.945 --> 00:49:48.205 So you understand there is a kind of compromise 1021 00:49:48.225 --> 00:49:50.405 and optimum, which is very difficult to find. 1022 00:49:51.645 --> 00:49:52.775 When you look at the beauty 1023 00:49:52.835 --> 00:49:55.415 and cosmetics business, there are companies 1024 00:49:55.415 --> 00:49:57.935 with high low gearing. 1025 00:49:59.365 --> 00:50:03.695 Very often the performing companies have negligible 1026 00:50:04.075 --> 00:50:05.215 or negative debt 1027 00:50:05.955 --> 00:50:08.975 and there's a kind of correlation between system. 1028 00:50:09.795 --> 00:50:12.495 Of course, CAO is not part of the same league in terms 1029 00:50:12.495 --> 00:50:15.495 of performance, but is try to recover 1030 00:50:15.835 --> 00:50:19.255 and is try to grow, generate economi scale, improve the p 1031 00:50:19.255 --> 00:50:21.615 and l and the return sales and the return capital. 1032 00:50:22.245 --> 00:50:25.695 Okay? But they are part of the league with negative debt. 1033 00:50:25.995 --> 00:50:29.005 That's a very well known company in the cosmetics industry. 1034 00:50:29.005 --> 00:50:30.285 His name is Estel There. 1035 00:50:31.125 --> 00:50:33.805 Estello there massively returned cash to the shareholders. 1036 00:50:33.905 --> 00:50:36.365 In the last years, the consequences, the company went down, 1037 00:50:36.985 --> 00:50:38.125 the gearing went up. 1038 00:50:38.395 --> 00:50:40.285 They massively bought back their shares, 1039 00:50:40.425 --> 00:50:43.245 but they took care about their shareholders more than 1040 00:50:43.305 --> 00:50:44.725 to their customers 1041 00:50:45.465 --> 00:50:46.925 and this is why in the long term, 1042 00:50:47.035 --> 00:50:49.685 this strategy is absolutely not sustainable. 1043 00:50:51.465 --> 00:50:53.285 Now, a couple of conclusions about cow 1044 00:50:54.045 --> 00:50:55.565 economic performance, it was okay. 1045 00:50:55.785 --> 00:50:59.805 It went down calculation, the work that seems to be up 1046 00:51:00.065 --> 00:51:03.525 and at the end of the day it's probably a company which is 1047 00:51:03.645 --> 00:51:06.285 going to optimize its assets, turnover, 1048 00:51:06.965 --> 00:51:09.525 increase the return sales back to performance, 1049 00:51:09.985 --> 00:51:14.965 but the company is absolutely strict in terms of ESG 1050 00:51:14.965 --> 00:51:16.205 and sustainable development 1051 00:51:16.425 --> 00:51:17.565 and that's quite interesting 1052 00:51:17.585 --> 00:51:21.405 to observe the evolution in parallel of financial metrics 1053 00:51:22.065 --> 00:51:25.805 and sustainability metrics, CDP rating and any other. 1054 00:51:25.945 --> 00:51:28.045 The second conclusion is about the financial strategy. 1055 00:51:28.315 --> 00:51:30.565 Very conservative negative gearing, 1056 00:51:31.105 --> 00:51:33.885 but the negative gearing is the ability to grow. 1057 00:51:34.475 --> 00:51:36.005 It's not the growth itself. 1058 00:51:36.465 --> 00:51:38.485 So the growth itself consists in organic 1059 00:51:38.585 --> 00:51:41.165 and external growth, organic growth about innovation. 1060 00:51:41.235 --> 00:51:44.405 They innovate, they want to move abroad, they want 1061 00:51:44.405 --> 00:51:48.005 to intensify their growth outside Japan, 1062 00:51:48.345 --> 00:51:50.045 or maybe it's about acquisition. 1063 00:51:50.065 --> 00:51:52.885 Of course they have the financial strategy which fits with 1064 00:51:52.885 --> 00:51:55.405 that, but the financial strategy is not 1065 00:51:55.425 --> 00:51:56.565 the business strategy. 1066 00:51:56.665 --> 00:51:58.805 It is a support of the business strategy 1067 00:51:59.185 --> 00:52:02.325 and the business strategy is about product and acquisitions. 1068 00:52:03.615 --> 00:52:04.405 Thank you very much.