CFA Institute Research Challenge Hosted by CFA Society France Team P

1 Pernod Ricard - Student Research. Target Price: €153.7 Recommandation: BUY STUDENT RESEARCH – TEAM P Agro-Food Industry Pernod Ricard Euronext Paris Valuation date January 12th 2018 Current Price €130.95 Target Price €153.7 Sector Beverages Upside 17% Recommandation BUY

Figure 1: Company data Summary Market Data (12/01/2018) Pernod Ricard is ranked number 2 in the wine and spirits market since 2005 and its Ticker Bloomberg RI.FP acquisition of Allied Domecq (Ballantine’s , Beefeater and Malibu among iconic brands). The Ticker Reuters PERP.PA group produces and distributes a large range of spirits such as Vodka, Whiskey, Gin, Tequila Ticker S&P Capital IQ ENXTPA:RI and Cognac but also wine. Given its geographic positioning, its wide range of brands and a Shares O/S (m) 265.42 Float % 45.8% dynamic market in the spirits premium segment, we initiate coverage with a BUY rating on Closing Price 130.95 Pernod Ricard supported by target price of €153.7 and a potential upside of 17% over a 1 Avg 3M Dly Vlm (mm) 0.41 year period. 52-wk High / Low 133.60 / 103.85 Gap (% Low) 128.6% The main drivers that bring us to stand with this recommendation are as follows: Market Cap (bn€) 34 578  A significant rebound in Asian markets: the group is market leader in China and Net debt 2017 (m€) 7 853 India, which are the two most significant spirits markets. Pernod Ricard will benefit Price Earning Ratio 25.05 from the sharp improvement in these countries that mainly consume whiskey, boosted Price to Book Ratio 2.55 Earnings Per Share 5.28 by a notable increase in volume and a positive pricing/mix. Dividend yield 2016 % 1.53%  An upward perspective in the high margin Whiskey and Cognac markets: Source: S&P Capital IQ underlying trends on these markets are strongly positive, fuelling growth for its Figure 2: Share price 3y whiskey and cognac brands, whose exposure in the total group revenues has been continuously growing since 2012. Whiskey and Cognac will contribute to improve the 150 EBITDA margin, especially in China, India and the US. 140 130  Targeted acquisitions of ultra-premium brands: the group achieved strategic local 120 spirits acquisitions over the past years in ultra-premium brands. These type of 110 alcohols (Mezcal, Gin, Bourbon) are forecasted to grow at a high CAGR. Hereby, we 100 90 expect the group to create value thanks to its recent acquisitions at sensible multiples. 80 Recent news:

70  December 20th 2017: Fitch Ratings decided to upgrade Pernod Ricard’s rating to

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o o o BBB. This decision reflects the strong efforts made by the company to deleverage over

Pernod Ricard CAC 40 Base 100 the past two years as well as solid operating performances and improving profitability. Source: S&P Capital IQ  November 15th 2017: the UK Supreme court decided to implement a minimum price Figure 3: Share price data for alcohol in Scotland. As of May, a 70cl Whiskey bottle will be sold at a min. GBP14. Share price data  June 7th 2017: Pernod announced the purchase of a majority stake of the Mexican Del % change 1m 3m 1y 3y Maguey Single Village, which is ranked n°1 in Mezcal spirits production in the US. This Pernod Ricard 1.1% 7.6% 25.7% 35.3% investment is consistent with its vision of selling ultra-premium spirits. Eurostoxx 50 0.3% 0.2% 9.9% 17.1% CAC 40 1.7% 2.9% 13.4% 30.5%  January 31th 2017: NBV Investment, a subsidiary of Pernod, acquired American Diageo -0.3% 2.8% 21.3% 44.1% spirits producer Smooth Ambler. The portfolio embraces Contradiction Bourbon and Source: S&P Capital IQ Old Scout Single Barrel Bourbons in addition to Gins and Vodkas.

Historical Projected Key financials FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenue (in m€) 8 558.0 8 682.0 9 010.0 9 195.9 9 530.0 9 873.4 10 202.1 10 518.3 10 833.9 Revenue growth 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% EBITDA (in m€) 2 433.0 2 481.0 2 599.0 2 644.4 2 792.4 2 955.5 3 133.9 3 309.4 3 433.2 EBITDA margin (in %) 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% Net income (in m€) 880.0 1 255.0 1 421.0 1 492.7 1 600.5 1 757.8 1 890.5 2 021.2 2 111.8 Net margin (in %) 10.28% 14.5% 15.8% 16.2% 16.8% 17.8% 18.5% 19.2% 19.5% Free Cash Flow (in m€) 1 475.0 1 826.0 1 786.0 1 797.4 1 788.3 1 898.4 2 053.2 2 185.5 2 216.9 FCF yield (in %) 4.3% 5.3% 5.1% 5.2% 5.2% 5.5% 5.9% 6.3% 6.4% Net debt (in m€) 9 086.0 8 793.0 7 870.0 7 709.5 7 082.1 6 515.2 5 749.6 5 013.2 4 290.0 Net debt / EBITDA 3.7x 3.5x 3.0x 2.9x 2.5x 2.2x 1.8x 1.5x 1.2x EV / EBITDA 13.5x 14.8x 14.9x 17.7x 16.8x 15.9x 15.0x 14.2x 13.7x Dividend yield 1.3% 1.4% 1.4% 1.6% 1.7% 1.8% 2.0% 2.1% 2.2%

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1 Business description SalesFigure breakdown 4 : Sales by breakdown strategic poles by strategic poles (2017) The group was created in 1975 following the merger of two French anise-based spirits producers Pernod and Ricard. Pernod Ricard, world’s second largest producer of wines and spirits after Diageo, enjoyed a turnover of €9.01bn as of June 2017 (+3.8% YoY). Specialized 13% in spirits, the group is present in a large range of alcohols from white alcohols, whiskeys, 6% cognac and other liqueurs to champagne and wines (although minor as of today). The following three well-timed acquisitions performed in the first decade of the 2000’s led 19% 62% the group to become the second market leader in wine and spirits: • In 2001, it acquired, jointly with Diageo, in a complex deal, the wine and spirits division of Canadian group “Seagram”, with mostly whiskeys and cognacs, for €3.7bn. Strategic International Brands • In 2005, the group purchased the British “Allied Domecq” which produced premium Strategic Local Brands international spirits brands and premium wines for €10.7bn. Premium Wines • In 2008, the group made its latest large acquisition by purchasing “Vin&Spirits”, owner Others of the Absolut Vodka brand, for €5.6bn. Source: Annual report

Figure 5 : Geographic breakdown An international and decentralized group: (2017) • Pernod Ricard is well implanted internationally with a presence in three major geographical regions (Europe, Americas and Asia). However, its main markets remain Asia and the United States. The group owns more than 85 affiliates, 18,000 employees 30.9% 39.6% and 100 production plants worldwide. • The group has adopted a decentralized organization. All subsidiaries respond to one holding, each of them being specialized in a given brand (eg. development, specific strategy and the production of each brand of alcohol) or in a specific market (eg. handle 29.5% the development and distribution of the products at a local level).

Asia/ROW Americas The group has split its products and strategies into four main poles: Europe • Strategic International Brands: gathers the 14 most prestigious and internationally Source: Annual report renowned brands of the group (12 spirits and 2 champagnes). This division is the main Figure 6: Spirits brands portfolio contributor to the group’s growth for last fiscal year (+4%), mostly driven by whiskey brands such as Jameson, the Martell cognac and the Perrier-Jouët champagne. Strategic Strategic International Local Brands Brands • Strategic Local Brands: embraces the 15 local brands, mainly exploited to penetrate emerging markets. This segment is strongly decelerating with a 1% growth in 2016/17 Polish Vodka Absolut Wyborowa compared to 5% last year. This slowdown is mainly due to the negative impact of Cognac Martell regulations in India. Jameson Blenders Pride Chivas JP Whisers • Premium Wines: an expanding pole composed of 4 premium wines. Last year was the second consecutive year of solid performance for the segment (+4% and +5% The Glenlivet Royal Stag respectively). Ballantine's Imperial Blue Wiskeys Royal Salute 100 Pipers • Other: this diversified segment gathers all products innovation (from innovative Imperial products to the by-products of Strategic International Brands) but also accounts for the Passport Scotch resulting growth from new acquisitions, synergies and the premiumization strategy. Clan Campbell Anisee Ricard Pastis 51 The group’s business model: Gin Beefeater Seagream's Gin Pernod Ricard is continuously focusing its portfolio on strategic local and international Rum Havana Club brands by withdrawing from non-key assets. Last divestitures included non-strategic local Ready-to-drink Malibu assets such as the Vodka Frïs or Distillery Glenallachie. Alongside with the development of Perrier-Jouet its premium wines, Pernod Ricard is also surfing on the strong growth of Whiskey Champagne Mumm consumption worldwide (especially in the US and India) with 50% of its strategic portfolio Armenian being Whiskeys. Additionally, the group is specialized in premium brands which account for Ararat 76% of SIB (Strategic International Brands) volume sales. Koffee Liqueur Local alcohols Kahlua Amaro The group leans on a premiumization strategy that is evidenced by: Ramazzoti (1) Organic Growth through innovation and development of new premium products Tequila Olmeca (2) External Growth through acquisitions of premium trendy alcohols Source: Annual report (3) A strong presence with a top-quality image worldwide through heavy R&D investments

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Figure 7: GDP per year (%) 2 Industry overview and competitive positioning

8,0% Industry overview: 6,0% From a macroeconomic point of view, the main demand drivers in the alcoholic beverages

4,0% industry are: 1/ an increasing GDP, which often translates into higher consumption expenditures; 2/ income class redistribution, leading to rising purchasing power of 2,0% consumers; and 3/ global population growth (predominantly in emerging countries), ultimately meaning an increasing consumer base. 0,0% Regional growth dynamics for Pernod Ricard are therefore obviously specific for each of its -2,0% geographical groups: Americas, Europe and Asia/Rest of the World. 2011 2012 2013 2014 2015 2016

India USA China Eurozone Source: OECD GDP growth: Figure 8: Income class distribution We notice positive trends for the overall economic health of Pernod Ricard key strategic in China (%) markets. China remains one of the fastest growing economies around the world, having its 100% 5 9 13 GDP growth at a still remarkable 6.5%/7% in 2016 and 2017e. India’s economy is also 90% 20 confidently growing at attractive rates of ca. 7%. The US. is expanding gradually with the 80% 29 latest figures for Q2-Q3 2017 reaching 3.2%, the fastest pace over the last couple of years. 70% 33 Michigan consumer sentiment index (MCSI), as a result, is very high, hitting a 95.9 estimate. 60% 30 50% Thus, people are expecting favorable economic conditions, leading to an increase in real 30 personal consumption expenditures, which certainly stimulates demand for the group’s 40% 28 30% products. 20% 44 32 10% 25 Income class redistribution: 0% 2012 2017 2021 The key driving force of future growth for Pernod Ricard is an emerging middle class in Poor Mass middle class China and an increasing high income class in group largest market - US In China, the upper Upper middle class Affluent middle class, i.e. people earning $15,000 to $35,000 per year, is projected to expand from Source: Bloomberg 20% in 2012 to 33% of total population in 2021. Those are the people who can now afford a Figure 9: Income class distribution bottle priced between €15 and €20. Thus, due to emerging middle class, Pernod Ricard has now an opportunity to expand its premium route to market in the region. In the US we in the US (%) observe an increasing number of high income population, that is people earning more than 100% $100,000 and comprising the upper middle and affluent classes. If in 2012, these two 13.3 14.9 16 90% income classes combined represented 38.3% of population, Bloomberg projections suggest 80% that by 2021 this figure will increase to 42.5% of total population. Thus, group ultra- 25 25.8 70% 26.4 premiumization across whiskey, tequila and cognac categories is a sensible strategy in the 60% region in our eyes. 50% 38 40% 37.6 36.9 Population growth: 30% 20% Emerging markets are characterized by rapid population growths that ultimately will lead 10% 23.7 21.8 20.7 to an expanding consumer base target and an expansion of future demand for Pernod 0% Ricard. Asia/Rest of the World is therefore a leading region as far as population growth 2012 2017 2021 indicators are concerned, with India and Africa being at the forefront. Each year the Poor Middle class Upper middle class Affluent population of drinking age in India increases by 15 to 20 million people. In Africa, on the Source: Bloomberg other hand, according to United Nations estimates, the change in population from 2015 to 2050 will be 112%, which is strongly exceeding growth indicators in any other region. Figure 10: estimated change in population (2015 – 2050) Competitive positioning: 120% 112% The wine and spirits market is characterized by a moderate competition (Herfindahl 100% index of 451), represented by large multinational groups. We have determined the four 80% Pernod Ricard’s main competitors in accordance with several criteria: 60% • Diageo plc [D]: the market leader in the wine and spirits market; Diversified brands. 40% • Brown-Forman [BF]: corporation manufactures; Specialized in whiskey. 19% 23% 20% • Constellation Brands [CB]: specifically focused on the American market, a wine and -3% 0% spirits segment. Asia & Africa Europe Americas • Rémy Cointreau [RC]: specialized in cognac; international presence. -20% Oceania Source: The United Nations, Department of Economics and Social Affairs: The 2017 revision

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Figure 11: Positioning matrix Broad range of products [A]: PR D CB BF RC Pernod Ricard has the largest range of wine and spirits brands, producing 36 alcohols, that is to say 7 more than Diageo. These two companies differ from the others which are A mostly focused on one spirit. For instance, note that Jack Daniels and Remy Martel represent respectively 65% of the groups’ sales, while the wine division of Constellation B Brands accounts for 88% of its total sales in 2017. As a result, Pernod Ricard is the most diversified in the spirits market, which allows it to reach a larger base of consumers and C avoid the risks linked to product concentration. Consistency with trendy products [B]: D Whiskey: It is currently one of the most dynamic markets, accounting for 33% of global spirits sales as of 2017. Pernod Ricard stands out against Diageo thanks to its better E positioning in such market. As a matter of fact, whiskey represented 38% of the group’s sales in 2017. The very positive dynamic in China benefitted to it, as well as Brown Source: Team estimates Forman (reported growth of 4.9%) and Rémy Cointreau (organic growth of 7,9%). Constellation Brands appears to be the worst positioned with only one brand of whiskey (less than 3% of its 2017 sales). Ready to drink (RDT): Pernod Ricard shows some lag behind Diageo in this market with Figure 12: Spirits market share in only its range product "Malibu", as opposed to its competitor Diageo that owns 6 RTD 2017 brands. However, note that the RTD category does not know an overall great success from 16% consumers since it represents a very limited fraction of total sales (e.g. 6% of 2017 sales for Diageo). Premium positioning [C]: 11% The premiumization strategy of Pernod Ricard aims at targeting a new range of consumers able to afford high-end brands. This strategy places the company behind the long-established ultra-premium competitor Rémy Cointreau but successfully places it 3% ahead of the others peers. This strategy counts on the rising consumption of ultra- 8% premium brands. Nevertheless, we observe that premium positioning is correlated to a lower EBITDA margin as it is more arduous to perform economies of scale. 61% 1% Presence in emerging market [D]: The French group has achieved a better penetration in Asian emerging markets compared Diageo PLC Pernod Ricard to all of its peers by positioning itself as the leader in India and China, which are currently Brown Forman Constellation Brands the most dynamic markets with respective growth rates of 6.9% and 6.7% in 2016. Its Rémy Cointreau Others competitors Constellation Brands, Brown Forman and Diageo remain mainly present in Source: Market research the US and Europe. As a result, Pernod Ricard enjoys an important comparative advantage considering that these markets show the best perspectives for evolution. Size [E]: Pernod Ricard relies on its size effect as the second largest company in the wine and Figure 13: EBITDA margin (%) spirits market to obtain better margins than its French competitor Rémy Cointreau, which 37.5% represents only 16% of Pernod Ricard’s market capitalization. Constellation Brands can 35.0% 32.5% be likened to a local actor (93% of its 2017 sales were in the USA). Moreover, Brown 30.0% Forman and Rémy Cointreau are not front competitors to Pernod Ricard in terms of size. 27.5% Thanks to its size and its internationalization, the Pernod Ricard group benefits all the 25.0% more from a comparative advantage enabling the company to have a strong negotiation 22.5% power. 20.0% 17.5% Company name 15.0% Brown Forman Constellation Brands Diageo Pernod Ricard Remy Cointreau (local currency) FY 2014 FY 2015 FY 2016 LTM Country US US UK FR FR Brown Forman Diageo Total revenue 3 140 7 332 12 050 9 010 1 095 Remy Cointreau Constellation brands Reported growth (%) 4.9% 12.0% 14.9% 3.8% 4.0% Pernod Ricard EBITDA 1 142 2 497 3 884 2 599 258 Source: S&P Capital IQ Net Income 744 1 535 2 662 1 393 204 FCF 480 641 2 365 1 786 112 Total debt 2 149 9 350 9 225 8 547 468 Enterprise value 27 242 51 625 75 174 42 628 6 089

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3 Investment summary

Figure 14: Global spirits We issue a BUY recommendation on Pernod Ricard with a target price of €153.7 and a consumption (2017) potential upside of 17%. Our valuation is computed by using a combination of the Discounted Cash-Flow model and relative multiple analysis. Our recommendation is underpinned by the following key drivers: 9% Drivers of the investment case 7%  Growing market in Asia (China/India): strong growth has made a come-back in the 8% region, with China gaining momentum in FY 2016/17 (+2% vs. -9% last year), as well 43% as overall in Asia in Q1 2017/18 (+7% in Asia/ROW). The Asian market accounts for 30% of group total revenues, China and India being the two most important division markets. Strong growth in these markets will necessary support Pernod Ricard’s sales, 33% due to its premium positioning that will allow it to catch the emergence of a middle- class and the increasing per capita consumption.  Strong upward perspective in the whiskey market: we expect Pernod Ricard to benefit from the very positive dynamic of whiskey production, according to IWSR reports that White alcohols Whiskey Liqueur predict volumes should increase by 52.6m 9-litre cases over the next five years, especially in India and China, where the group is the market leader, and in the US. Note Cognac Others that Indian local whiskey is the most consumed alcoholic beverage in the country, fully Source: Company data in line with the Pernod Ricard portfolio which includes three major ones. In addition, we observe that the whiskey exposure of Pernod Ricard has substantially grown, from Figure 15: Price range in 2017 35.2% in FY 2015 to 38.3% for FY 2017 and we expect such exposure to be at 40% at (growth %) the end of this year. Volume sales skyrocketed in FY 2017 by +15% for Jameson, +3% for Ballantine’s and that the group is increasing its advertising costs in China for 9% Chivas Regal. As a result, we do think Pernod Ricard will remain able to outperform 7.40% 6.80% the industry over the coming years.  Strategic acquisitions in Ultra-premium brands and innovation: we observe that Pernod Ricard is slowly shifting its strategy upmarket by acquiring ultra-premium 3.40% local brands (42$ - 84$ for a 75cl bottle) with great potential, such as Del Maguey 1.20% (Mezcal, which is expected to grow at +17.8% CAGR 2017-2022 – Future Market Insights), Smooth Ambler (Bourbon) and Ungava (Gin). Group’s growth is also driven by Innovations brands, which accounted for 1/3 of the top line growth last year. These strategies aim at targeting the rise of the upper-class in the US, whose income trends an upward evolution allowing them to afford ultra-premium spirits. Such a strategic positioning is corroborated by data on consumption evolution like the CAGR 2006- 2016, which stands at 9% for ultra-premium brands, as opposed to 3.4% for premium brands. Ultra- Super- Prestige Premium Standard premium premium Limits of the investment case > $84 $42-84 $26-$42 $17-$26 $10-$17  Low organic growth in Western Europe: Pernod Ricard is impacted by the slight Source: Company data positive environment in Western Europe, with an average organic growth of 1.6% the Figure 16: Whiskey vs. other SIB last three years in Europe, which includes the positive dynamic in Eastern Europe. For (growth %) instance, the group only achieved a 1% growth in France last year. The Western Europe market is mature and pricing remains challenging in the region. Hereby, the 5.3% 5.1% group will necessary have to increase its advertising and promotion expenses to 4.3% 3.8% 3.5% remain the market leader in Europe. 2.6% 4.5% 1.90%  The vodka market is shrinking: Absolut is the most important brand of Pernod -1.3% 1.0% Ricard , accounting for 23.1% of its international brands sales. Still, the brand is facing difficulties as the vodka market shrank by 4.3% last year. The US is the Absolut’s most important market, which is challenging (+0.4% LTM), partly due to the negative -1.3% -1.3% pricing effect on the brand and changing consumer preferences.

-6.8% 4 Financial Analysis 2012 2013 2014 2015 2016 2017 Whiskey sales We forecast total revenue of €9,196m in the course of 2018, with organic sales growth of Other Strategic brands 4.2% driven by the awakening of growth market in Asia and its strong market position. sales Furthermore, margins and earnings should continue in the years ahead thanks to costs Source: Company data containments efforts and a better control of non-recurring items.

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Analysis overview Regarding many of Pernod Ricard’s operational and financial characteristics, we believe the group has the financial ability to both foster value creation in its existing operations and Figure 17: ROE vs. ROCE forecasts continue to grow through an acquisition strategy. The group benefits from a more than 10.5% 10.0% 10.0% 10.1% adequate liquidity and cash flows for future investments. The company should be able to reduce its leverage, and the capital structure is solid enough to support future strategic 9.5% 9.1% plans. 9.6% 9.2% 9.2% 8.5% 8.8% 8.8% Historical Projected Key Metrics FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 7.5% Revenue Growth 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% EBITDA Margin 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 6.5% 6.5% EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% ROCE 8.8% 8.8% 9.2% 9.2% 9.2% 9.6% ROE 6.5% 9.1% 10.0% 10.0% 10.1% 10.5% 5.5% ROA 3.0% 4.0% 4.6% 4.8% 5.1% 5.5% 2015 2016 2017 2018e 2019e Net Debt / Equity 94.3% 93.9% 92.1% 91.0% 90.5% 88.5% ROE ROCE EPS 3.26 4.68 5.27 5.54 5.95 6.55 DPS 1.80 1.88 2.02 2.05 2.20 2.42 Source: Company data, Team estimates Performance measurement We used the DuPont analysis to separate the components affecting the return on common equity, as it leads to assess the drivers of Pernod Ricard’s performance. Our projections highlight a progressive improvement in the ROE over the next three years through Figure 18: Evolution of EPS enhancements in the company’s profitability (driven by organic and external growth). The significance of the investment in associates is limited (associates’ contribution to ROE is 7.0 6.55 12% weak). 6.0 5.95 5.27 5.54 10% Historical Projected Expanded Dupont Analysis 5.0 4.68 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 8% Tax Burden 78.2% 74.3% 74.9% 76.0% 76.1% 76.3% 4.0 6% Interest Burden 49.6% 73.5% 78.1% 79.8% 80.9% 83.7% EPS 3.0 EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% 4% Net Profit Margin 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% 2.0 (%) growth EPS Total asset turnover 29.5% 28.5% 29.7% 30.4% 31.1% 31.6% Leverage 2.31 2.28 2.22 2.12 2.03 1.95 1.0 2% Return on equity (ROE) 6.9% 9.2% 10.2% 10.3% 10.4% 10.8% 0.0 0% 2015 2016 2017 2018e 2019e Capital structure analysis Source: Company data, Team estimates The Company has sought to secure its capital structure over the last three years. As of September 2017, Pernod’s total debt amounted to €8,547 million, representing 38.1% of the capital structure, as opposed to 42% in 2015, while the proportion of equity financing increased. Furthermore, we notice that the liquidity ratios improved more than modestly, providing a cushion to the cash generation that has been decreasing.

Historical Projected Figure 19: Net debt forecasts Working Capital Accounts and Ratios FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Current Ratio 1.44 1.47 1.77 1.77 1.78 1.81 10 000 4.0 Quick Ratio 0.37 0.38 0.49 0.50 0.50 0.52 9 000 3.5 Defensive Interval Ratio 111.21 108.20 115.91 117.00 115.90 120.67 8 000 Days sales outstanding (DSO) 58.69 55.66 57.44 57.00 57.00 57.00 3.0 7 000 Days on hand of inventory (DOH) 598.75 583.60 568.34 560.00 560.00 560.00 6 000 2.5 Number of days payables 189.77 186.08 195.62 184.00 184.00 184.00 Cash conversion cycle 467.66 453.18 430.16 433.00 433.00 433.00 5 000 2.0

4 000 1.5 3 000 Cash flow relationships 1.0 Debt/EBITDA Net 2 000 0.5 Since Pernod Ricard has made a number of acquisitions, we analyzed the relationship 1 000 between operating cash flow and its resource allocation over time. Cash flows cover 0 0.0 2015 2016 2017 2018e 2019e 2020e reinvestment needs by a factor of 3.9x, and the trend should improve in the next years. The cash flow relationship with debt and interest indicates that the group should be able to Source: Company data, Team estimates handle more debt should profitable investment opportunities arise.

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Figure 20: Evolution of DPS

3,0 2,42 8% Historical Projected 7% Ratio of Operating CF to Reinvestment and Debt (m€) 2,5 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 2,20 Ratio of Operating CF to Reinvestment and Debt 2,02 2,05 6% Cash generated from operations 1475 1361 1672 1745 1749 1923 2,0 1,88 Total reinvestment spending 361 291 424 470 491 516 5% Ratio of cash flow to reinvestment 4.1 4.7 3.9 3.7 3.6 3.7 1,5 4% Total Debt 9631 9362 8547 8047 7547 7072 DPS Ratio of cash flow to total debt 15.3% 14.5% 19.6% 21.7% 23.2% 27.2% 3% 1,0 Cash interest paid 520 471 410 398.6 394.2 389.9 2% (%) growth DPS Interest coverage ratio 4.3 4.8 5.8 6.1 6.5 6.9 0,5 Ratio of cash flow to interest coverage 2.8 2.9 4.1 4.4 4.4 4.9 1% 0,0 0% Dividend policy 2015 2016 2017 2018e 2019e In light of the dividend compound annual growth rate of 5% over 2012-2017, we expect the Source: Company data, Team estimates CAGR of Dividend/Shares to follow the same trajectory over the 2018-2020 period. We remain confident about the Company’s ability to maintain this ratio during the upcoming years. However, since caution is still the watchword in today’s financial environment, we decided to run our analysis with the current dividend payout ratio of 37%. Figure 21: DCF valuation

DCF valuation (as of 12th of January) Historical Projected Dividend policy FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Hypothesis Dividend policy Dividend 461 497 496 542 582 640 WACC 6.4% Dv / Shares 1.80 1.88 2.02 2.05 2.20 2.42 Terminal growth 1.5% Dividend Yield 3.52 3.80 3.79 4.14 4.44 4.89 Tax rate 22.5% Terminal value 53 420.6 Discount factor 0.57 5 Valuation Present value of Terminal value 30 565.7 Present value of cash-flows 16 301.7 We use two valuation methods in order to issue a target price for Pernod Ricard. Firstly, we employ the DCF method. Secondly, we also compute peer valuation multiples using the Entreprise value 46 867.4 EV/EBITDA ratio. (-) Net debt -7 853.0 (-) Minorities -180.0 DCF method: target price 146.5€ (+12% upside) Equity Value 38 834.4 We applied the Discounted Cash Flow model, since Pernod Ricard is characterized by strong Outstanding shares (in m) 265.0 free cash flows, which we expect to remain robust over the following years. It allowed us to Target price 146.54 predict the intrinsic value of Pernod Ricard due to its market position in the wine & spirits Current price 130.95 industry, as well as the stability of the company in this sector. We came to the conclusion of Upside (in %) 11.9% a €146.5 target price, driven by the following main assumptions: Growth of organic sales, EBITDA: we expect Pernod Ricard to generate an organic growth Source: Team calculation of 3.5% in the coming years (CAGR 2017-2027), mainly due to its positioning in the Asian and North American markets that are still substantially growing (sound growth in Whiskey, Cognac); ii/ the developing market in Africa where Pernod Ricard has increased presence Figure 22: Unlevered FCF forecasts since 2012; iii/ due to its cost-containment efforts over the last three years and its wish to provide stable Advertising and Promotion costs, we expect the EBITDA to grow at a rate of 2000 2.5% CAGR with the EBITDA margin reaching 30% by FY 2020/21. 1800 Capex, working capital and M&A: i/ we assume Capex will remain at 4.0% of revenues, in 1600 line with management guidance during the IR Presentation and in line with historical level; 1400 ii/ we put into practice a normative approach to estimate the changes in working capital 1200 requirements which exhibits negative changes; iii/ we adjusted net debt by assuming that 1000 Pernod Ricard will continue strategic targeted acquisitions in ultra-premium brands which 800 will account for 7% of the group net income, in line with historical outflows. 600 400 Free cash flow: 200 A sales-weighted WACC of 6.4%: 0 2015 2016 2017 2018e 2019e 2020e As Pernod Ricard is diversified all around the world, we decided to first estimate a WACC Source: S&P Capital IQ, Team estimates per region (i.e. Europe, North America and Asia), then weighted in accordance with the revenues generated in these areas. We came to the conclusion of:

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Beta: a weighted average beta of 0.8. We used a one-year regression between the firm’s Figure 23: Sensitivity analysis stock return and a European market index, which is the most consistent market index. Sensivity analysis Damodaran public data have been used to determine betas in Asia/RoW and Americas. Growth in perpetuity Risk free rate: for Europe, we decided to adopt the Euro area yield curves delivered by the 1.00% 1.25% 1.50% 1.75% 2.00% ECB, that indicate a 10 years risk free rate of 1.10%. North American risk free rate has been 5.90% 152.2 159.0 166.5 174.9 184.4 implemented by using the 10 years US Bill (2.5%) and we decided to equally weigh the 10 6.15% 143.4 149.4 156.0 163.4 171.6 6.40% 135.3 140.7 146.5 153.0 160.3 years free rate of China and India for RoW, which gave a rate of 5.5%. WACC 6.65% 128.0 132.8 138.0 143.8 150.2 Expected return: expected return has been computed by using: i/ the S&P 500 Beverages 6.90% 121.4 125.6 130.3 135.4 141.1 10-year average return of 9.5% in North America; ii/ the CAC 40 5-year average return of Source: Team calculation 8.2% in Europe; iii/ the STOXX Asia/Pacific 600 Food & Beverage 3-year average return of 11% in Asia/RoW. Cost of debt: we relied on the average cost of debt expected by Pernod Ricard (3.8%) for Figure 24: Monte-Carlo simulation this year and decided to apply it to all areas.

WACC estimation break-down % of E / D / Cost of Cost of Corporate Regional Areas β Rf total sales (E+D) (E+D) equity debt tax rate WACC Asia / ROW 39.6% 62.6% 37.4% 0.80 5.5% 9.9% 3.8% 22.0% 7.3% Europe 30.9% 62.6% 37.4% 0.54 1.2% 5.0% 3.8% 23.0% 4.2% Americas 29.5% 62.6% 37.4% 1.12 2.6% 10.3% 3.8% 22.5% 7.6% Total 100.0% - - 0.81 3.3% 8.5% 3.8% 22.9% 6.4%

Sensitivity analysis: We took care to check that our result was not too sensitive to the growth rate at perpetuity Source: Team calculation and the WACC. We came to the conclusion that our DCF model was more sensitive to the WACC than the terminal growth for a 0.25% change. This result is consistent because Figure 25: EV/EBITDA valuation mature companies are logically less sensitive to the terminal growth. Monte Carlo Simulation: EBITDA 2017/18e We implemented a Monte Carlo simulation to see if our result is realistic with our DCF Metrics 2599.0 valuation. We started a draw of 50,000 iterations to assure the relevancy of the results. The Multiple applied 19.5x Monte Carlo simulation supports our result, affirming there is more than a 50% probability Enterprise Value 50 755 that the company achieve more than a 12% upside. (-) Net Debt -7853 Relative valuation methods: Target price €160.9 (+22.9% upside) (-) Minorities -180 (=) Equity Value 42 722 We decided to focus on all listed sector companies that could be compared to Pernod Ricard. But we didn’t equally weigh the companies because of strong differences with Average shares out. (m) 265 Pernod Ricard portfolio, their geographical positioning and their size. Indeed, all these Implied share price (€) 160.93 characteristics have an impact on the EV/EBITDA multiple and led us to determine a Current Share price 130.95 synthetic multiple. Upside (in %) 22.9% We use an EV/EBITDA multiple, driven by the assumptions that EBITDA is less sensitive Source: Team calculation than EBIT to accounting manipulations regarding the D&A, and that EBITDA is the most reliable metric to compare companies’ operating income. The set of comparables chosen Figure 26: EBITDA forecasts drive us to an average synthetic EV/EBITDA of 19.5x that we applied to Pernod Ricard without taking into account any drop in value that the group has been experiencing since 3 500 31,0% 2014. We obtain an implied share price of €160.9 and a 22.9% upside. 30,5% 3 000 30,0% Market cap. Enterprise value Likeness to 2 500 EV / EBITDA Company Country local currency local currency Pernod Ricard 29,5% 2017 LTM 2 000 (in m) (in m) weighting 29,0% Diageo UK 65 449 75 174 17,7x 100% 1 500 28,5% (%)Margin EBITDA Brown Forman US 25 250 27 242 20,3x 60% 1 000 28,0% Constellation Brands US 42 414 51 625 17,6x 50% Remy Cointreau France 5 659 6 089 23,9x 50% Davide Campari Italia 7 324 8 261 20,0x 40% Source: S&P Capital IQ, Team estimates Average / Weighted average 19,9x 19,5x

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Figure 27: Final valuation Results: Target price €153.7 (+17.4% upside) Valuation Relative DCF We equally weighted the DCF and relative valuation methods. The DCF method allowed us conclusion multiple to analyze the group’s capacity to create value through its brands portfolio shift and Weighting (in %) 50% 50% geographic positioning. The relative valuation method helped us understand that Pernod Target price 146,5 160,9 Ricard currently suffers from an undervaluation compared to its peers that should Weighted targ. price 153,7 disappear thanks to the significant EBITDA increase we predict in the coming years. As a Current share price 131,0 result, we set a BUY recommendation with a target price of €153.7 (+17.4% upside). Upside 17,4% Equity value (in m€) 40 740 6 Management and Corporate Governance (+) Minorities (in m€) 180 (+) Net debt (in m€) 7 853 Management Team: Entreprise value 48 773 The General Management of the group is carried out by Alexandre Ricard, CEO and th Source: Team calculation Chairman of the Group since the 29 of August 2012, following the passing of Patrick Ricard, and Gilles Bogaert, Managing Director, Financial & Operations. Both have been working for Pernod Ricard for a cumulative total of 37 years. Executive Board: Figure 28: Shareholding structure The Executive Board prepares and approves all decisions related to the functioning of (2017) Pernod Ricard and submits these decisions to the Board of Directors. Inst. Inv. Societe 11% Paul Board of directors: Ricard + MFS IM board The Pernod Ricard Board of Directors is composed of 14 members, whom half are 10% 16% independent members and 42% are female directors, while the attendance rate is at 97%. The governance consists of the following committees: the strategic committee directed by CGC 10% Alexandre Ricard; the audit committee directed by Wolfgang Colberg; the nominations, governance and CSR committee directed by Nicole Bouton; the compensation committee Groupe also directed by Nicole Bouton. Each of these committees is at least composed of 50% Bruxelles Lambert Floating independent members and 100% attendance is required. 7% 46% Shareholder rights:

Source: Registration document We decided to split the shareholding structure into six blocks. The “Société Paul Ricard” (family holding co) remains the main investor in the company with a total of 16%, increasing by 7% in two years its holding in the group. The free-float is currently accounting for around 46% of the company shares while it accounted for 41.5% two years ago. Voting rights did not change very much in the recent years. “The Société Paul Ricard” has a total of 22.4% of voting rights while the free-float is at 41.8%. Thus, the company is becoming more sensitive to changes in financial markets while remaining stable over the time, allowing to perfectly employ its strategy as decided by the board of directors. Figure 29: Voting rights (2017) Social responsibility: Inst. Inv. Societe 11% The group has renownedly built a strong social responsibility in the past years. According MFS IM Paul 7% Ricard + to an inquiry launched by independent survey company Towers Watson, 85% of its board employees declare that they are encouraged to act responsibly. The group committed in 16% CGC 2010 to following a roadmap to 2020 under which Pernod Ricard aims to reduce by 30% its 9% CO2 emissions by 2020. The group almost fulfilled this goal as it has already reduced its carbon emissions by 27%. Groupe Bruxelles Lambert 11% 7 Investment risks

Floating 42% Operational risks: Source: Registration document Digital (OR1): the group is trying to surf on the digital trend with, for example, the through the « lesnouveauxcavistes.com » e-commerce website initiative. However, group is timid compared to competitors like Diageo, that have partnerships with Amazon Prime to make cocktails tutorials or Deliveroo that can home deliver Diageo’s alcohols at all times of the day.

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How to mitigate: Develop partnerships, especially in China where e-commerce is booming. Online sales only represent 8% of the group’s turnover. Figure 30: Risks matrix Severe competition and absence from essential markets (OR2): entry barriers in the beverage market are high but there is already unrelenting competition between the international and local actors. Consumers can easily substitute brands, which forces the FR2 group to anticipate the consumer’s future needs to remain among market leaders. For example, Pernod Ricard is not present in the beer nor RTD segments, which are thriving and may favor the penetration in emerging markets. OR1 FR1 How to mitigate: acquire a local beer or baijiu brand in China, India or Africa but we do think this is not consistent with the group’s premiumization strategy. Continue expanding in the wine industry is also an option, more likely.

Probability OR3 ER1 OR2 Raw material pricing (OR3): the group is threatened by several external matters regarding the fluctuation of raw material prices, such as wheat, potatoes (used is the ER2 production of Vodka), corn or rye (used in the production of whiskey), etc. Climate change and pricing pressure could negatively impact the COGS so that the margin would Impact significantly affect EBITDA margin. Source: Team estimates How to mitigate: by hedging (short term) or partnering with suppliers if necessary (long term). If raw materials were to increase, the group would not be able to increase prices in developed countries where pricing remains challenging due to suppliers control. However, to compensate for the decreasing margin, it should increase prices in emerging countries (supposed to generate organic growth). Figure 31: Growth breakdown (%) Financial Risks 20% Exchange rate risk (FR1): as the group has an important international activity (70% of the TO is not European) and produces 72% of its alcohols in Europe, it is strongly exposed to 15% exchange rates fluctuations (both transaction and conversion risk). For instance, a 5% appreciation of the Euro vs. the Dollar would have a negative impact of ca. €130m on 10% turnover. A 5% appreciation of the Euro VS the Yuan would have a less negative, which remains nonetheless significant (- €55m). 5% How to mitigate: the group hedges with currency swaps but not consequently enough compared to the risk. Plus, as we mentioned, the group cannot easily increase the prices. 0% 2013 2014 2015 2016 2017 2018e2019e2020e Indebtedness and interest rate (FR2): Pernod Ricard remains consequently indebted even if it is quickly deleveraging. As indebted companies are more sensitive to interest rate -5% changes, the group is dependent to the changes in the interest rate when rolling its debt or re-leveraging. In terms of target price, it increases the WACC and reduces the enterprise -10% value. FX change External growth Organic growth -15% How to mitigate: increase the cash or improve the management of debt issuances to Source: Company data, Team estimates decrease the net debt and increase debt average duration. Short term, group could also hedge with an interest rate swap for the variable part of its leverage. Context and External Risks Decreasing global alcoholic consumption (ER1): the alcoholic global consumption is declining at a faster rate this past years (e.g. -1.3% in 2016). This slowdown is mainly due to the decreasing consumption in China, Russia and Brazil caused by economic or political Figure 32: Appreciation of € vs. issues. Awareness campaigns also tend to lower the consumption in Western Europe. other currencies (€m) How to mitigate: Pernod Ricard should concentrate in the economic and social environments where consumption is booming and margins are more favorable. Impact on net +1% +2% +3% +4% +5% +6% sales (in €m) Government or tax policy risk (ER2): a change in the government policy or a new law EUR/USD -26.6 -53.2 -79.8 -106.4 -133.1 -159.7 against alcohol consumption would affect the group’s growth. For example, the “Highway EUR/CNY -11.3 -22.6 -33.9 -45.3 -56.6 -67.9 Ban” in India dragged the group growth in country to 1% vs. 12% in 2015/16. Another EUR/GBP -4.5 -8.6 -13.4 -17.9 -22.3 -26.8 example is the anti-extravaganza campaign in China. Source: Team estimates How to mitigate: focus on neighbor’s countries and travel retail.

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APPENDIX

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Appendix 1 Business description - History

2001 2014 2008 2012 2016 1975 1989 Acquisition of Majority interest in Acquisition of Asia becomes the Majoritary interests in: Merger of Acquisition of the W&S ultra-premium tequila Vin&Sprit n°1 region for the Premium Gin Monkey 47 Pernod&Ricard Orlando Wyndham division of « Avión » (Absolut) group and Smooth Ambler Seagream

2005 2011 2017 1988 1993 2013 Acquisition of Launch of the 2015 Acquisition of Acquisition Creation of Havana The group Allied Domecq Responsib’ALL day Alexandre Ricard Del Maguey Single of Irish Club International’s fastens its to become n°2 (for societal appointed CEO Village, n°1 Distillers joint-venture position in worldwide responsability Africa Mezcal in the US

Source: Company data

Appendix 2 Brand positioning

For a 75cl bottle Standard ($10 - $17) Premium ($26 - $42) Super-premium ($26 - $42) Ultra-premium ($42 - 84) Prestige (> $84) Absolut Vodka Polish Wyborowa 100 pipers Jameson Chivas Chivas Chivas Blenders Pride Ballantine's The Glenlivet The Glenlivet Royal Salute Whiskey Royal Stag JP Wiser"s Imperial Imperial Blue Passport Scotch Clan Campbell Cognac Martell Martell Martell Anisee Pastis 51 Ricard Gin Seagram's Gin Beefeater Rum Havana Club Havana Club Ready-to-drink Malibu Perrier-Jouet Perrier-Jouet Champagne Mumm Perrier-Jouet Mumm Tequila Olmeca Mum Kahlua Armenia Other spirits Amarro Ramazzotti Ararat

Strategic International Brands Strategic Local Brands Source: Company data

Vodka Whiskey Wine

30.57% 30.56%

28.57% 28.98% 27.29% 27.59% 27.57%

20.24% 20.0% 20.6% 19.75% 19.66% 19.34% 18.98% spirits (%) 18.30%

19.0% 18.83%

18.1% 18.6% 18.7% 18.5% Distribution of Pernod Ricard in wine and wine Ricardand Pernod in of Distribution

2011 2012 2013 2014 2015 2016 2017

Source: Annual reports

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Appendix 3 Market analysis (1/2)

Main Market Sales Main brands GDP Population Market General comments markets type growth growth growth obstacles FY17 rate rate

 Largest market both in Americas and globally  Continued strong performance of whiskey, tequila and cognac Jameson, categories Malibu,  Value growth mainly driven Martell, by mix and operational USA Mature 5% 1,8% 0,69% Glenlivet, excellence initiatives Olmeca Altos,  Growth drivers: a) Rising Avion spending power of population, b) Spirits is the fastest growing alcohol beverage segment in U.S. and it continues to take share from other alcohol beverage categories. Jameson, Absolut, Technical impact Chivas, of back-office  Pernod Ricard maintains its Ballantine’s, mutualisation France Mature 1% 0,8% 0,41% leadership position in Ricard, between Ricard France with 30% market Havana Club, and Pernod on 1 share (Nielson). Mumm, July 2015 Perrier-Jouet

Absolut,  Dynamic growth for Jameson, The strategic international Glenlivet, brands as well as strategic Mumm,Chiva wine portfolio  Concentration on prestige UK Mature 7% s, Perrier- 1,02% 0,78% - part of the market, Jouet, particularly in London as Plymouth the number of high-worth Gin, Campo individuals is growing. Viejo

 Market leadership position of the Group  Increased focus on prestige Lillet, Chivas, categories as Germany is Absolut, one of the markets with the largest number of high-net Jameson, worth individuals Ballantine’s,  Key drivers of the growth Malibu, Germany Mature 4% 0,7% 1,19% - are prestige portfolio Monkey 47, (+19%) and innovation Havana Club, (+12%). Ramazzoti,  Growth of imported brands Aperitivo for international categories; Rosato decline of local brands for brandies, schnapps and Colon categories.  Success in the aperitif segment Seagram’s  Market leadership with 24% Gin and market share Beefeater,  Pernod Ricard is #1 in gin Spain Mature 5% Chivas, 3,2% -0,008% - category with the most Ballantine’s, complete portfolio: The Glenlivet, Beefeater Dry, Seagram’s Campo Viejo Gin, Beefeater 24, Plymouth Gin, Burrough’s Reserve,

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Appendix 3 Market analysis (2/2)

Chivas, Ballantine’s,  Quickly growing market in Jameson, Eastern Europe  Price-sensitive consumer Poland Emerging 10% Absolut, 2,8% -0,1% - base, very competitive Wyborowa, commercial environment Ostoya, Pan tadeusz.

Ararat, Difficult  Very dynamic and promising Jameson, environment market Russia Emerging 16% Ballantine’s, -0,4% 0,18% linked to  Penetration of imported Chivas, currency Western style spirits is still Absolut volatility low – 4-5%

 Return to growth for the Anti- first time from FY13 extravaganza  From 2000 to 2010 the Martell, campaign, which growth was driven by the Absolut, has seen a Absolut Chinese consumer China Emerging 2% 6,7% 0,54% Glenlivet, crackdown on and Prestige portfolio. Due Ballantine’s conspicuous to emerging middle class, spending and today Pernod Ricard in gifting China has 2 different routes to market: premium and prestige Demonetisation  Market leadership with 45% (impact on Q1 value market share and Q2);  Temporary deceleration of Blender’s growth in FY17 due to Highway ban Pride, Royal regulatory changes India Emerging 1% 6,9% 1,15% (Impact on Q4 Stag, Imperial  Leadership position in and Q1 FY18); premium, local and Blue international whiskey GST (margin pressure on FY18)

Economic  #1 market in Africa  At the group level, the region Jameson, difficulties is small, but it continues to Martell, across the South grow double digits year by Emerging 15,7% Chivas, -1,3% 1,62% continent Africa year. Ballantine’s, related to petrol  Growth drivers: a) fast Absolut and commodity growing consumer base; b) prices emerging middle class; c) fast urbanization.

Source: Company data, S&P Capital IQ, team analysis

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Appendix 4 Evolution of Strategic International Brands

Absolute Jameson Havana Club 12 26% 7 16% 5 9.0%

25% 6 14% 8.8% 11 4 12% 25% 5 8.6% 10 10% 24% 4 3 8.4% 9 8% 24% 3 8.2% 6% 2 8 23% 2 8.0%

4%

Share of total net salestotal net of Share Share of total net sales total net of Share Share of totalsales net of Share 1

7 23% 1 7.8%

In million of literssold of million9box In In million of 9 liters box sold litersof box9 million In 2% sold liters box of 9 million In 6 22% 0 0% 0 7.6% 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: Annual reports Source: Annual reports Source: Annual reports

Malibu Martell The Glenlivet 4.0 9% 2.2 4.6% 1.2 2.5% 8% 4.5% 3.5 2.1 1.0 7% 4.4% 2.0% 2.1 3.0 6% 4.3% 0.8 1.5% 5% 2.0 4.2% 2.5 0.6 4% 4.1% 2.0 1.0% 2.0 3% 4.0% 0.4 1.9

2% 3.9%

Share of total net salestotal net of Share Share of total net salestotal net of Share Share of total net salestotal net of Share 0.5%

1.5 1.9 0.2

In million of 9 liters box sold litersof box9 million In In million of sold litersof 9millionbox In 1% sold litersof box 9 millionIn 3.8% 1.0 0% 1.8 3.7% 0.0 0.0% 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: Annual reports Source: Annual reports Source: Annual reports

Perrier-Jouet Ballantine's Ricard 0.4 0.7% 8.0 14.5% 5.4 11.5%

0.3 0.6% 7.0 5.2 14.0% 11.0% 0.3 0.5% 6.0 5.0 13.5% sales 5.0 10.5% 0.2 0.4% net 4.8 4.0 13.0% 0.2 0.3% 4.6 10.0% 3.0 12.5% 0.1 0.2% 4.4

2.0

Share of total Share Share of total net sales total net of Share 9.5% sales total net of Share

0.1 0.1% 12.0% 4.2

In million of 9 liters box sold litersof box 9 millionIn In million of 9 liters box sold liters box of 9 million In In million of 9 liters box sold litersof box9 million In 1.0 0.0 0.0% 0.0 11.5% 4.0 9.0% 201220132014201520162017 201220132014201520162017 201220132014201520162017 Source: Annual reports Source: Annual reports Source: Annual reports

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Appendix 5 SWOT analysis

• Major international player in mature markets and in high- • Production centralized in growth potential markets europe (transaction and conversion risks) W S • Robust distribution network and • International group dependent on negociation power due to its size economical and political fluctuation • Leading brands in each main category of (FX risk) alcohol • Not present in the beer segment • Improving financials thanks to high-margin • Lack of presence in the market in the RTD brands (Malibu) • Suitable acquisitions at sensible multiples • Low digital presence despite efforts • Sales diversified by region and type of • Rising free-float, increasing the risk of alcohol loosing control • « Brand Builder »: the group is strongly • Still important indebtedness -> sensitive to invested in the development of its new increasing interest rates acquisitions • Negative price/mix effect (0% on the 4 first • Commitment to an environmental and brands) socially responsible chart • Vodka and Aniseed are not trendy anymore • Strong advertising and branding of its • No customer loyalty portfolio • « Drink less but drink better » trend

• North american market is growing durably • Slowing growth rate of the industry due to and steadily a slightly decreasing global consumption • GDP, Medium class and population growth • Counterfeiting of alcoholic beverages in in the emergeant regions (China, India, China Africa, Eastern Europe) • Competition, especially in india • Premiumization policy: weak price • Stiffening regulations and taxation on the elasticity on the demand on top-of-the-range liqueur industry that can play on the products consumption and the margins • Increasing of the aerian international trafic • Consumer health concerns and and so of the travel retail sales sensibilisation campaingns mostly in • Growth of the market for RTD and punchs Western countries lead to a maturization of • Low presence in digital that can only be the european liqueur market improved (latest to arrive = weakest) • Being perceived as sin stocks and non-ISR • Penetration in emergent markets is not investments saturated yet • Increasing price of raw materials • Strong lobby (alcoholic beverages) O • Diminishing custom taxes in India T Total Strenghts 5 Source: Team analysis 4

3

2

1

Total Threats 0 Total Weakenesses

Total Opportunities

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Appendix 6 Porter’s five forces analysis

Threat of new Legend entrants 0 No threat 1 Insignificant threat 2 Low threat 3 Moderate Threat of Bargaining power substitute 1 4 Significant threat 4 4 of buyers products 5 High threat

2

3 Bargaining power Industry rivalry of suppliers

Rivalry among competitors: Moderate • The competitors are mostly specialized in a region, brands or price range. • Margins in the sector are high, meaning that the competition is not severe (Herfindahl Hirschman index of 451). • Nevertheless, there is a direct competition from leading groups on the wine and whiskey segments.

Threat of new entrants: Low • The industry is composed by a significant share of local actors and a few main actors, holding most of the market share. • Highly profitable markets tend to attract new actors. However, the strong barriers at the entry make it roughly likely. • Note that local actors are continuously growing in emerging countries on specific products (Indian whiskey). Bargaining power of buyers: Significant • Buyers are the final consumer, restaurants/ bars/nightclubs or distributors. • They are sensitive to price changes and reputation. Therefore, they might easily redirect themselves to competition. • However, as Pernod Ricard is focused on high income per capita consumers and offers premium products, the power of buyers is not that significant. Bargaining power of suppliers: Low • The company produces all its alcohols. Hereby, it is sensitive to raw materials prices (corn, wheat, potatoes) • To mitigate that risk, the company buys in high quantity and from several suppliers to generate economies of scale Threat of substitute products: Significant • Substitutes are an non negligible threat. Water can go from indirect substitution to direct substitution (Other brands, RTD, supplier’s brands, local alcohols, other types of alcohols like beer…)

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Appendix 7 PESTEL analysis

• Influence of the politics on the alcohol distribution and taxation policies (Highway ban, Anti-extravaganza campaign) • Actions from public Authorities to sensibilize to alcohol’s dangers (Sensibilization campaigns) P • Political instability in countries where PR is implemented (Africa, Asia, South-America…) Politics

• Inflationary environments can affect the mix-price of the group • Unexpected and strong appreciation of € vs. $ (Production in euro and sales mainly in dollars) • Increasing interest rates (US 10Y and tensions in european bonds) E • General context of economic recovery worldwide • Increasing GDP and income per capita in emerging countries -> benefiting premium products Economy • Increasing wine demand worldwide for the second consecutive year

• Trend to consume less but better, especially in spirits: « Drink less and drink better » • Youth’s alcoholic consumption increasing • Growing « home consumption », to savour the moment and less consumption in bars, especially among young people S (PR’s target) Socio- • Productssubstitution: shifting from vodka to wines, whiskeys and tequila cultural • Booming population in emergings countries and especially youth -> increasing possible consumer base

• Innovation and new lauch of products are essentials in the industry to retain and attract the consumer, leading to significant R&D investments. Example: Fast-growing RTDs T • Rise of e-commerce, especially in China • Manufacturingtechniques, reducing costs Technology

• Increasing environmental responsability in Western countries • Obligation to comply withenvironmental laws and contraints (could increase costs) E • Consumers tend to buy ethical brands and companies Environment

• Publi-promotional restrictions (Evin Law for example) • Sales restrictions for under-age people • Quality control of wines in some countries. L • Restrictions in terms of origins designation blocking actors of the liqueur industry to expend as they wish (Irish wiskeys, champagne…) Legal • Alcohol and alcohol production is banned from certain regions of the world (some indian regions for example)

Source: Team analysis

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Appendix 8 Comparable companies analysis

Profitability Analysis EBITDA Margin Net Income Margin Company FY 2014 FY 2015 FY 2016 LTM FY 2014 FY 2015 FY 2016 LTM Brown Forman 34.1% 34.4% 35.9% 35.0% 22.0% 21.8% 34.5% 23.0% Diageo 33.6% 31.7% 31.5% 32.2% 21.9% 22.0% 21.4% 22.1% Remy Cointreau 16.2% 18.1% 18.8% 22.5% 6.0% 9.6% 9.7% 17.4% Constellation brands 27.3% 28.8% 31.4% 36.3% 39.9% 13.9% 16.1% 23.6% Davide Campari 21.6% 23.2% 22.8% 22.5% 8.3% 10.6% 9.6% 11.4% Lanson-BCC 14.0% 12.6% 10.9% 10.1% 5.8% 4.6% 4.3% 4.0% Pernod Ricard 28.2% 28.4% 28.6% 28.8% 12.8% 10.1% 14.2% 15.5% Mean 25.0% 25.3% 25.7% 26.8% 16.7% 13.2% 15.7% 16.7% Median 27.3% 28.4% 28.6% 28.8% 12.8% 10.6% 14.2% 17.4%

Solvency Analysis EBIT/Interest Exp Net Debt / EBITDA Company 2014 2015 2016 LTM 2014 2015 2016 LTM Brown Forman 44.30x 36.55x 22.47x 16.50x 0.47x 0.79x 1.14x 1.84x Diageo 4.89x 4.17x 5.13x 6.82x 2.85x 3.52x 2.95x 2.09x Remy Cointreau 5.76x 5.91x 8.34x 11.96x 2.51x 2.68x 2.32x 1.58x Constellation brands 5.79x 5.62x 5.16x 6.66x 4.45x 4.32x 4.18x 3.20x Davide Campari 4.92x 5.24x 5.07x 7.19x 3.01x 2.26x 3.19x 3.15x Lanson-BCC 4.31x 4.21x 3.73x 4.00x 12.25x 14.80x 17.69x 20.46x Pernod Ricard 4.09x 4.50x 4.89x 5.91x 3.77x 3.73x 3.54x 3.03x Mean 10.58x 9.46x 7.83x 8.43x 4.19x 4.59x 5.00x 5.05x Median 4.92x 5.24x 5.13x 6.82x 3.01x 3.52x 3.19x 3.03x

EV multiples EV / EBITDA EV/Revenue Company 2014 2015 2016 LTM 2014 2015 2016 LTM Brown Forman 17.69x 21.33x 19.89x 22.86x 6.04x 7.34x 7.14x 8.00x Diageo 17.23x 20.64x 20.76x 18.64x 5.79x 6.54x 6.53x 6.01x Remy Cointreau 21.40x 20.75x 20.20x 22.78x 3.48x 3.51x 3.79x 5.13x Constellation brands 14.19x 18.40x 20.00x 18.15x 3.87x 5.30x 6.28x 6.59x Davide Campari 14.14x 15.37x 17.77x 20.38x 3.06x 3.57x 4.06x 4.59x Lanson-BCC 18.79x 21.23x 25.17x 29.80x 2.63x 2.68x 2.75x 3.01x Pernod Ricard 14.58x 13.49x 14.81x 14.95x 4.11x 3.84x 4.23x 4.31x Mean 16.86x 18.74x 19.80x 21.08x 4.14x 4.68x 4.97x 5.38x Median 17.23x 20.64x 20.00x 20.38x 3.87x 3.84x 4.23x 5.13x

Per Share Analysis P/BV P/E (Diluted) Company 2014 2015 2016 LTM 2014 2015 2016 LTM Brown Forman 10.34x 10.83x 12.66x 15.74x 27.08x 32.48x 19.55x 32.19x Diageo 6.41x 5.82x 6.28x 5.99x 21.03x 24.03x 25.54x 23.13x Remy Cointreau 3.21x 2.94x 3.17x 4.01x 52.94x 34.00x 34.35x 43.53x Constellation brands 3.06x 4.04x 4.60x 5.23x 6.85x 29.83x 31.33x 23.92x Davide Campari 2.38x 2.88x 3.02x 3.89x 29.45x 29.00x 35.43x 35.94x Lanson-BCC 1.02x 0.85x 0.80x 0.90x 14.27x 17.73x 18.98x 23.76x Pernod Ricard 2.07x 1.80x 2.08x 2.25x 23.88x 27.62x 22.60x 22.22x Mean 4.07x 4.16x 4.66x 5.43x 25.07x 27.81x 26.83x 29.24x Median 3.06x 2.94x 3.17x 4.01x 23.88x 29.00x 25.54x 23.92x

Source: S&P Capital IQ

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Appendix 9 Share price performance

150 7000 R²: 0.87

140 6000

130 5000 CAC 40

120

4000 Pernod Ricard 110

3000

100

2000

90 Voulme in k transactions (Pernod Ricard) transactions(Pernod k in Voulme 1000 80

70 0

15 16 17

17 15 16

15 16 15 16 17 17

15 16 17

15 16 17

15 17 16

16 15 17

16 15 17

15 16 17

17 15 16

16 15 17

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

------

- - -

- - -

oct. oct. oct.

juil. juil. juil.

mai mai mai

avr. avr. avr.

juin juin juin

déc. déc. déc.

nov. nov. nov.

août août août

févr. févr. févr.

janv. janv. sept. janv. sept. sept.

mars mars mars

Source: S&P Capital IQ, Bloomberg

Appendix 10 Performance positioning (Pernod Ricard vs. peers)

22%

Diageo 17%

12%

Constellation Brands 7% Pernod Ricard Rémy Cointreau 2%

10% 15% 20% 25% 30% 35% 40% -3%

Brown Forman Reportedgrowth in 2016/17(%)

-8% Operating margin in 2016/17 (%)

Source: S&P Capital IQ,

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Appendix 11 Key financials

Key financial ratio 2015 2016 2017 2018e 2019e 2020e Liquidity Ratio Current Ratio 1.44x 1.47x 1.77x 1.77x 1.80x 1.83x Quick Ratio 0.37x 0.38x 0.49x 0.42x 0.46x 0.48x Cash Ratio 0.11x 0.11x 0.16x 0.07x 0.12x 0.13x Efficiency Ratio Total Asset Turnover 0.30x 0.28x 0.30x 0.30x 0.31x 0.32x Fixed Asset Turnover 4.07x 3.81x 3.87x 3.80x 3.58x 3.37x Acc Receivable Turnover 6.63x 6.43x 6.57x 6.33x 6.41x 6.52x Inventory Turnover 1.68x 1.63x 1.70x 1.68x 1.68x 1.70x Payables Period (days) 190 186 196 180 180 180 Operating Cycle (days) 273 281 270 275 275 271 Cash conversion Cycle (days) 468 453 430 469 457 457 Profitability Ratio Gross Profit Margin 61.9% 61.9% 62.2% 62.0% 62.2% 62.5% EBITDA Margin 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% EBIT Margin 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% Net Income Margin 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% ROA 3.0% 4.0% 4.6% 4.8% 5.1% 5.5% ROE 6.5% 9.1% 10.0% 10.0% 10.1% 10.5% ROCE 8.8% 8.8% 9.2% 9.2% 9.2% 9.6% SG&A/Sale 36.0% 35.8% 35.8% 35.7% 35.4% 35.1% Solvency Ratio Debt Ratio 56% 56% 54% 52% 50% 48% Debt to Equity Ratio 1.29x 1.27x 1.17x 1.07x 0.99x 0.91x Equity Multiplier 2.29x 2.27x 2.17x 2.07x 1.99x 1.91x Long Term Debt Ratio 94.8% 94.7% 94.7% 94.3% 94.0% 93.5% Interest Coverage Ratio 4.50x 4.89x 5.91x 6.06x 6.48x 6.95x Source: S&P Capital IQ, Team estimates

Appendix 12 M-Score

푀 − 푠푐표푟푒 = −4.84 + 0.92 × 퐷푆푅퐼 + 0.528 × 퐺푀퐼 + 0.404 × 퐴푄퐼 + 0.892 × 푆퐺퐼 + 0.115 × 퐷퐸푃퐼 − 0.172 × 푆퐺퐴퐼 + 4.679 × 푇퐴푇퐴 − (0.327 ∗ 퐿푉퐺퐼) Inputs Variables 2013 2014 2015 2016 2017 Net Sales 8 575 7 945 8 558 8 682 9 010 Costs of Goods Sold 3 224 2 958 3 262 3 311 3 407 Net Receivables 1 257 1 147 1 307 1 258 1 347 Current Assets 6 507 6 648 7 420 7 288 7 531 Property Plant and Equiptment 1 940 2 012 2 194 2 360 2 298 Depreciation 185 203 214 219 219 Total Assets 27 537 27 616 30 398 30 598 30 088 Selling general and Administrative Expenses 3 146 2 948 3 077 3 109 3 223 Net Income 1 172 1 016 861 1 235 1 393 Cash Flow from Operations 1 085 940 1 035 1 336 1 642 Current Liabilities 4 418 3 905 5 138 4 956 4 256 Long-term Debt 7 712 7 674 7 458 7 335 7 380 Derivated Variables Day's Sales Receivables Index (DSRI) 0.98 1.06 0.95 1.03 Gross Margin Index (GMI) 0.99 1.01 1.00 0.99 Asset Quality Index (AQI) 1.02 0.94 1.02 1.02 Sales Growth Index (SGI) 0.93 1.08 1.01 1.04 Depreciation Index (DEPI) 0.95 1.03 1.05 0.98 SG&A expenses Index (SGAI) 1.01 0.97 1.00 1.00 Leverage Index (LVGI) 0.95 0.99 0.97 0.96 Total Accuals to total assets (TATA) 0.00 -0.01 0.00 -0.01 M-score -2.5326 -2.3864 -2.5074 -2.4416 Source: S&P Capital IQ, Team estimates

Result: We observe that the company is unlikely to manipulate its earnings as its M-score is always < -2.22

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Appendix 13 Income statement

Historical Projected Income statement (€m) 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Total Revenue 8 558 8 682 9 010 9 196 9 530 9 873 10 202 10 518 10 834 11 159 11 494 11 838 12 194 COGS 3 262 3 311 3 407 3 494 3 602 3 703 3 775 3 839 3 954 4 073 4 195 4 321 4 451 Advertising and Promotion costs 1 625 1 646 1 691 1 747 1 811 1 876 1 938 1 998 2 058 2 120 2 184 2 249 2 317 Structuring costs 1 433 1 448 1 517 1 540 1 563 1 586 1 610 1 634 1 659 1 684 1 709 1 735 1 761

EBITDA 2 433 2 481 2 599 2 644 2 792 2 955 3 134 3 309 3 433 3 561 3 693 3 830 3 970 EBITDA Margin (in %) 28.4% 28.6% 28.8% 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% 31.9% 32.1% 32.3% 32.6% D&A 248 253 252 264 273 283 292 301 311 320 329 339 350

EBIT 2 219 2 262 2 380 2 414 2 554 2 709 2 879 3 046 3 162 3 282 3 406 3 534 3 666 EBIT Margin (in %) 25.9% 26.1% 26.4% 26.3% 26.8% 27.4% 28.2% 29.0% 29.2% 29.4% 29.6% 29.8% 30.1%

Net financial income -428 -400 -357 -350 -346 -342 -337 -333 -329 -325 -321 -317 -313 Net non current income -649 -182 -163 -138 -143 -99 -102 -105 -108 -112 -115 -118 -122

Pretax Income 1 101 1 663 1 859 1 926 2 065 2 268 2 439 2 608 2 725 2 846 2 970 3 098 3 231 in % of Total Revenue 12.9% 19.2% 20.6% 20.9% 21.7% 23.0% 23.9% 24.8% 25.2% 25.5% 25.8% 26.2% 26.5% Income Taxes 221 408 438 433 465 510 549 587 613 640 668 697 713

Total Net Income 880 1 255 1 421 1 493 1 600 1 758 1 891 2 021 2 112 2 205 2 302 2 401 2 518 In % of Total Revenue 10.3% 14.5% 15.8% 16.2% 16.8% 17.8% 18.5% 19.2% 19.5% 19.8% 20.0% 20.3% 20.7% Minority Interests -19 -20 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28 -28

Group Net Income 861 1 235 1 393 1 465 1 572 1 730 1 863 1 993 2 084 2 177 2 274 2 373 2 490 In % of Total Revenue 10.1% 14.2% 15.5% 15.9% 16.5% 17.5% 18.3% 18.9% 19.2% 19.5% 19.8% 20.0% 20.4% Source: Company data, team estimates

Historical Projected Income statement inputs 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e

Sales (% YoY growth) 7.7% 1.4% 3.8% 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% Organic growth (%YoY) 3.3% 1.8% 3.6% 4.2% 3.7% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% Cost of Goods Sold (% margin) 38.1% 38.1% 37.8% 38.0% 37.8% 37.5% 37.0% 36.5% 36.5% 36.5% 36.5% 36.5% 36.5% Advertising and promotion expenses (% margin) 19.0% 19.0% 18.8% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% Structuring costs (% YoY growth) 0.4% 1.0% 4.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Depreciation & Amortization (% sales) 2.5% 2.5% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Amort. of Goodwill and Intangible Assets (% sales) 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Unusual items (% sales) 7.6% 2.1% 1.8% 1.5% 1.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Tax rate (% EBT) 20.1% 24.5% 23.6% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.1%

Source: Company data, team estimates

Top line growth 2015 2016 2017 2018e 2019e 2020e 2021e Americas Group structure (%) 0.6% -2.1% -0.3% 0.0% 0.0% 0.0% 0.0% FX change (%) 8.2% -2.0% 0.9% -3.0% 0.0% 0.0% 0.0% Organic growth (%) 5.6% 4.0% 6.9% 5.5% 4.5% 4.0% 3.5% Reported growth (%) 14.4% -0.1% 7.5% 2.5% 4.5% 4.0% 3.5%

Asia/ROW Group structure (%) -0.2% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0% FX change (%) 9.9% 0.8% 0.7% -2.8% 0.0% 0.0% 0.0% Organic growth (%) 4.0% 0.8% 1.4% 5.6% 5.0% 5.0% 4.5% Reported growth (%) 13.7% 1.3% 2.1% 2.8% 5.0% 5.0% 4.5%

Europe Group structure (%) -0.4% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% FX change (%) -1.4% -1.9% -0.9% -0.5% 0.0% 0.0% 0.0% Organic growth (%) 0.3% 1.1% 3.4% 1.2% 1.0% 1.3% 1.5% Reported growth (%) -1.5% -0.8% 2.8% 0.7% 1.0% 1.3% 1.5% Source: Company data, team estimates

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Appendix 14 Balance sheet statement

Historical Projected Balance sheet statement (€m) 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Assets Intangible assets 12 212 12 085 11 755 11 755 11 755 11 755 11 755 11 755 11 755 11 755 11 755 11 755 11 755 Goodwill 5 494 5 486 5 397 5 397 5 397 5 397 5 397 5 397 5 397 5 397 5 397 5 397 5 397 PPE 2 194 2 360 2 298 2 538 2 791 3 061 3 344 3 641 3 950 4 270 4 601 4 945 5 302 Other LT Assets + LT Inv 739 874 730 730 730 730 730 730 730 730 730 730 730 Deferred Tax Assets 2 339 2 505 2 377 2 377 2 377 2 377 2 377 2 377 2 377 2 377 2 377 2 377 2 377

Total non-current assets 22 978 23 310 22 557 22 797 23 050 23 320 23 603 23 900 24 209 24 529 24 860 25 204 25 561

Inventory 5 351 5 294 5 305 5 361 5 527 5 681 5 791 5 890 6 067 6 249 6 436 6 630 6 828 Total Receivables 1 376 1 324 1 418 1 436 1 488 1 542 1 593 1 643 1 692 1 743 1 795 1 849 1 904 Other 148 101 131 134 138 143 148 153 157 162 167 172 177 Cash 545 569 677 727 716 815 1 032 1 347 1 675 2 141 2 647 3 195 3 792

Total current assets 7 420 7 288 7 531 7 658 7 869 8 181 8 565 9 032 9 591 10 295 11 046 11 845 12 702

Total assets 30 398 30 598 30 088 30 455 30 920 31 500 32 168 32 933 33 800 34 823 35 906 37 049 38 263

Equity and liabilities 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Total equity 13 288 13 506 13 886 14 689 15 554 16 513 17 550 18 664 19 831 21 051 22 327 23 660 25 061

LT Debt 7 458 7 335 7 380 6 880 6 380 5 905 5 455 5 030 4 630 4 330 4 030 3 730 3 430 Deferred tax liabilities 3 373 3 556 3 421 3 421 3 421 3 421 3 421 3 421 3 421 3 421 3 421 3 421 3 421 Other non current assets 1 141 1 245 1 145 1 145 1 145 1 145 1 145 1 145 1 145 1 145 1 145 1 145 1 145

Total non-current liabilities 11 972 12 136 11 946 11 446 10 946 10 471 10 021 9 596 9 196 8 896 8 596 8 296 7 996

Accounts payable 1 696 1 688 1 826 1 762 1 816 1 866 1 903 1 935 1 993 2 053 2 115 2 178 2 244 Accrued expenses 604 583 611 648 671 695 719 741 763 786 810 834 859 Other current liabilities 2 838 2 685 1 819 1 912 1 933 1 955 1 976 1 996 2 016 2 037 2 059 2 081 2 103

Total current liabilities 5 138 4 956 4 256 4 321 4 420 4 517 4 597 4 672 4 773 4 876 4 983 5 093 5 206

Total equity and liabilities 30 398 30 598 30 088 30 455 30 920 31 500 32 168 32 933 33 800 34 823 35 906 37 049 38 263

Source: Company data, team estimates

Historical Projected Balance sheet inputs 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Days Payable Outstanding 189.8 186.1 195.6 184.0 184.0 184.0 184.0 184.0 184.0 184.0 184.0 184.0 184.0 Days Sales Outstanding 58.7 55.7 57.4 57.0 57.0 57.0 57.0 57.0 57.0 57.0 57.0 57.0 57.0 Days Inventory Held 598.7 583.6 568.3 560.0 560.0 560.0 560.0 560.0 560.0 560.0 560.0 560.0 560.0 Prepaid and other current assets 1.7% 1.2% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Accrued Liabilities 7.1% 6.7% 6.8% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Other current liabilities 6.4% 6.4% 5.5% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% Source: Team estimates Appendix 15 Corporate bonds 3 000

2 500

2 000

1 500

1 000

500

Total amount corporateof amount bond issuedTotal 0 juin 20 avr-21 janv-22 juil-22 sept-23sept-24 mai-26 juin-26 janv-42 Maturity Source: Bloomberg

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Appendix 16 Cash flow statement

Historical Projected Cash flow statement (€m) 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Net Income 861 1 235 1 393 1 465 1 572 1 730 1 863 1 993 2 084 2 177 2 274 2 373 2 490 D&A 214 219 219 230 238 247 255 263 271 279 287 296 305 Net change in WCR 529 -26 -835 -12 -123 -116 -86 -78 -130 -134 -138 -142 -146 Other operating items 153 60 109 -84 -90 -95 -100 -105 -110 -115 -121 -126 -132

Cash flow from Ops. 1 757 1 488 886 1 598 1 598 1 766 1 931 2 073 2 114 2 207 2 302 2 401 2 517

CAPEX -323 -333 -367 -368 -381 -395 -408 -421 -433 -446 -460 -474 -488 Other investing items 38 -42 57 -103 -110 -121 -130 -140 -146 -152 -159 -166 -174

Cash flow from Inv. -285 -375 -310 -470 -491 -516 -538 -560 -579 -599 -619 -640 -662

FCF 1 472 1 113 576 1 128 1 107 1 250 1 393 1 513 1 535 1 608 1 683 1 761 1 855

Dividends paid -461 -497 -496 -542 -582 -640 -689 -737 -771 -806 -841 -878 -921 Debt issuance / (rep.) -260 -413 -609 -500 -500 -475 -450 -425 -400 -300 -300 -300 -300 issuance / (rep.) -13 -18 -36 -36 -36 -36 -36 -36 -36 -36 -36 -36 -36

Cash flow from fin. -734 -928 -1 141 -1 078 -1 118 -1 151 -1 175 -1 198 -1 207 -1 142 -1 177 -1 214 -1 257

Net change in cash flow 738 185 -565 50 -11 99 217 314 328 467 506 547 597

Beginning cash balance 477 545 569 677 727 716 815 1 032 1 347 1 675 2 141 2 647 3 195 Ending cash balance 545 569 677 727 716 815 1 032 1 347 1 675 2 141 2 647 3 195 3 792 Source: Company data, team estimates Cash flow inputs 2015 2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e CAPEX (% sales) -3.8% -3.8% -4.1% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% -4.0% Dividends (% earnings) -53.5% -40.2% -35.6% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% -37.0% Other Operating activities (% Dep.) 0.3% 0.3% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 0.0% Purchase of financial assets (% Net Income) 9.2% 8.7% 2.5% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Source: team estimates

Net Debt (€ m) 2015 2016 2017 2018e 2019e 2020e LT Debt 7 458 7 335 7 380 6 880 6 380 5 905 (+) ST Debt 2 173 2 027 1 167 1 167 1 167 1 167 (=) Total Debt 9 631 9 362 8 547 8 047 7 547 7 072 (-) Cash 545 569 677 727 716 815 (=) Net Debt 9 086 8 793 7 870 7 320 6 831 6 257 Net Debt/EBITDA 3.7 3.5 3.0 2.8 2.4 2.1

Source: Company data, team estimates

Appendix 17 Reconciliation of Equity Value

50 000 46 867 -7 853

45 000 -180 40 000 38 834

35 000

30 000

25 000

20 000 Enterprise Value Net debt Minorities Equity Value

Source: Company data, team estimates

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Appendix 18 Valuation

DCF (In €million) 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e Sales 9 196 9 530 9 873 10 202 10 518 10 834 11 159 11 494 11 838 12 194 % growth 2.1% 3.6% 3.6% 3.3% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0%

EBITDA 2 644 2 792 2 955 3 134 3 309 3 433 3 561 3 693 3 830 3 970 % margin 28.8% 29.3% 29.9% 30.7% 31.5% 31.7% 31.9% 32.1% 32.3% 32.6%

EBIT 2 414 2 554 2 709 2 879 3 046 3 162 3 282 3 406 3 534 3 666 % margin 26.3% 26.8% 27.4% 28.2% 29.0% 29.2% 29.4% 29.6% 29.8% 30.1% Taxes 433 465 510 549 587 613 640 668 697 713

EBIAT 1 981 2 089 2 198 2 330 2 460 2 549 2 642 2 738 2 836 2 953 (+) Depreciation & Amortization 196 203 211 218 224 231 238 245 253 260 (-) Capital Expenditures -368 -381 -395 -408 -421 -433 -446 -460 -474 -488 (-) Increase in Net Working Capital -12 -123 -116 -86 -78 -130 -134 -138 -142 -146

Unlevered Free Cash Flow 1 797 1 788 1 898 2 053 2 185 2 217 2 300 2 385 2 473 2 579

Discount Factor 1.00 0.94 0.88 0.83 0.78 0.73 0.69 0.65 0.61 0.57 Present Value of Free Cash Flow 1 797 1 681 1 677 1 705 1 705 1 626 1 585 1 545 1 506 1 476 Source: team estimates

WACC by Cost of Cost of Corporate geographic E/(E+D) D/(E+D) β Rf E(Rm) WACC equity Debt tax rate area Asia / ROW 62.6% 37.4% 0.8 5.5% 11% 9.9% 3.80% 22% 7.3% Europe 62.6% 37.4% 0.54 1.20% 8.2% 5.0% 3.80% 23% 4.2% Americas 62.6% 37.4% 1.12 2.55% 10% 10.3% 3.80% 23% 7.6% Total 62.6% 37.4% 0.81 3.3% 9.7% 8.5% 3.8% 22.5% 6.40% Source: team estimates Appendix 19 Monte Carlo simulation

Monte Carlo simulation Inputs Stock price at T0 130.95 Wacc 6.40% Period 1 year Volatility 10% DCF: €146.5 Trials 50 000

Monte Carlo simulation outputs EV/EBITDA: €160.9 Statistics Gross Mean 144.81 Median 144.09 Standard Deviation 14.54 Variance 211.47 Kustosis 0.19 Skewness 0.30 Coeff of Variation 0.10 Minimum 95.39 25% Percentile 134.74 75% Percentile 154.16 Maximum 220.23 Monte Carlo simulation outputs

Recommendation Range Frequency SELL < 131.5 8972 HOLD 131.5-143.5 15233 BUY > 143.5 25795 Source: team estimates

This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 26 Pernod Ricard - Student Research. Target Price: €153.7 Recommandation: BUY

Appendix 20 Governance (1/2)

Composition of the board Position at Pernod Nb of years Compensation Number of End of Board of directors Independent Female/Male Committee Ricard on the Board (in EUR) shares the term Anne Lange Yes Female - Strategic 1 68 000 100 2021 Manousos Charkoft No Male Employee Director Compensation 4 15 000 50 2017 Strategic, Audit, Wolfgang Colberg Yes Male - Nomination, 9 113 500 1 076 2020 Governance, CSR Compensation, Kory Sorenson Yes Female - 2 97 500 1 000 2019 Audit Gilles Samyn Yes Male - Audit 3 78 500 1 000 2018 Veronica Vargas No Female - - 2 54 000 6 820 2021 Chairman of Board of Compensation, Pierre Pringuet No Male 13 113 500 380 088 2020 Directors Strategic Compensation, Nicole Bouton Yes Female - Nominations, 10 83 500 1 150 2019 Governance, CSR Strategic, César Giron No Male - Nominations, 9 69 500 5 587 2020 Governance, CSR Sylvain Carré No Male Employee Director - 4 15 000 - 2017 Martina Gonzales-Gallarza No Female - - 5 44 500 1 100 2018 Representative of Paul-Charles Ricard No Male - 34 39 500 24 579 562 2021 Société Paul Ricard Ian Gallienne Yes Male - Compensation 5 87 000 100 2018 Alexandre Ricard No Male CEO and Chairman Strategic 5 1 868 000 57 556 2020

Source: registration document

100% 49.8% 54.2% 16.3% 54.3% 3.0% 90%

80% 83.7%

70% 97.0%

60%

50% 50.2% 45.8% 45.7% 40%

30%

20%

10%

0% Brown Forman Diageo Pernod Ricard Constellation Brands Rémy Cointreau

Free-float Non-float

Source: S&P Capital IQ, registration document

This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 27 Pernod Ricard - Student Research. Target Price: €153.7 Recommandation: BUY

Appendix 21 Governance (2/2)

Based on ISS Governance methodology: a decile score of 1 indicates lower governance risk

Board structure: 7/10 Compensation: 2/10 - Independency - Transparency

Total score: 4/10

Audit and risk oversight: 2/10 Shareholder rights: 5/10 - Adverse opinion - Double voting rights - Restated financials

• Board structure: the AFEP-MEDEF code had considered the possibility that Ian Galienne and Gilles Samyn, administrators at Groupe Bruxelles Lambert (GBL) could be not independent when GBL crossed the 10% voting rights threshold. Note that the independency rate is at only 50%

• Shareholder rights: double voting rights are accorded to registered shareholder owning share since at least ten years. According to us, only 5 major shareholders own double voting rights (« Société Paul Ricard », « Mr Rafaël Gonzalez-Gallarza », « Directors and Management of Pernod Ricard », « Shares held by Pernod Ricard employees », « Groupe Bruxelles Lambert »)

• Compensation: the group is transparent concerning compensation as it provides Administrators’ and Executive Directors’ compensations. Note that 2016/17 granted compensation established at €3.6bn (+33% vs 2015/16), mostly due to gaining value of group’s shares.

• Audit and oversight: as far as we know, neither of Pernod Ricard’s auditors (KPMG S.A and Deloitte & Associés) restated financials or issued adverse opinions over the past two years

Source: team analysis

This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 28 Pernod Ricard - Student Research. Target Price: €153.7 Recommandation: BUY

Appendix 22 Glossary

Glossary Term Meaning EUR; € Euro USD; $ Dollar CNY; RMB Yuan GBP; £ Pound Sterling m millions bn billions k thousands EBITDA Earnings before interest, taxes, depreciation and amortization EBIT Earnings before interest and taxes CAGR Compound annual growth rate ST Short term LT Long term GDP Growth domestic product Capex Capital expenditures EPS Earnings per share DPS Dividends per share FCF Free cash flow M&A Mergers and Acquisitions LTM Last twelve months ROE Return on equity ROCE Return on capital employed EV Enterprise value WACC Weighted average cost of capital IR presentation Investor relation presentation DCF Discounted cash flow CEO Chief Executive Officer vs versus SIB Strategic International Brands SLB Strategic Local Brands MCSI Michigan Consumer Sentiment Index loc. cur. Local currency ROW Rest of the World 2017 Fiscal year 2016/17 2018 Fiscal year 2017/18 GBL Groupe Bruxelles Lambert SIB Strategic International Brands SLB Strategic Local Brands CSR Corporate Social Responsability

This report is published for educational purposes only by students competing in The CFA Institute Research Challenge. 29 Disclosures:

Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making: The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society France, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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