cfroi key adjustments and valuation framework cfroiﬁ key adjustments and valuation framework greg...

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CONFIDENTIAL � For Education and Training Purposes Only

CFROI® Key Adjustments and Valuation

Framework

Greg Collett

[email protected]

+44 207 88 33 643

Prepared for training purposes. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.


1

HOLT CFROI® Overview

1. Performance Measurement

CFROI® allows comparison of performance across time and

borders. To do this we need to:

! Capture all off balance sheet assets such as operating leases.

! Account for intangible assets (normally classified as Goodwill).

! Capitalise Research and Development.

! Inflation adjust the assets to current dollars.

2. Valuation

Key advantages of the HOLT DCF Model

Quantify Market expectations � what returns and growth are priced in.

Warranted Price � �what�s it worth� using system derived returns and growth.

Sensitivity Analysis � what happens if...


2

Linking Corporate Performance To Valuation

AccountingData

AccountingData Share PriceShare PriceCFROI®CFROI®

Cash FlowIncome Statement CFROI®

Asset GrowthBalance Sheet Cash InvestmentEPS, ROE, ROCE Asset Life Life Cycle - Fade

Discount Rate


3

From Accounting To Cash

Net Income+/- Special Items (after tax)+ Depreciation/Amortization Expense+ Interest Expense+ R&D Expense+ Rental Expense+ Minority Interest Expense+ Net Pension Cash Flow Adjustment+ LIFO charge to FIFO Inventory+ Monetary Holding Gain/Loss- Equity Method Investment Income

£10

Cash InCash InInflation AdjustedGross Cash FlowNet Income

Book Assets =10%Net Book Assets+ Accumulated Depreciation+ Inflation Adjustment to Gross Plant+ LIFO Inventory Reserve+ Capitalized Operating Leases+ Capitalized R&D- Equity Method Investments- Goodwill- Non-Debt Monetary Liabilities & Def. Taxes

Inflation AdjustedGross Investment

Cash OutCash Out£100


4

From Cash To CFROI® (Internal Rate of Return)

Net Monetary Assets+ Inflation Adjusted Land & Improvements+ Investments (Non-Equity Method )+ Inventory (w/ LIFO Inventory Reserve)+ Other LT Assets less Pension Assets

Net Income (Before Extraordinary Items)+/- Special Items (after tax)+ Depreciation/Amortization Expense+ Interest Expense+ R&D Expense+ Rental Expense+ Minority Interest Expense+ Net Pension Cash Flow Adjustment+ LIFO charge to FIFO Inventory+ Monetary Holding Gain/Loss- Equity Method Investment Income

£100Inflation AdjustedGross Investment

13-Year Asset Life

£10

£25

Gross Cash Flow

CFROI® = 6.0%CFROI® = 6.0%

Non-Depreciating Assets

Net Book Assets+ Accumulated Depreciation+ Inflation Adjustment to Gross Plant+ LIFO Inventory Reserve+ Capitalized Operating Leases+ Capitalized R&D- Equity Method Investments- Pension Assets- Goodwill- Non-Debt Monetary Liabilities & Deferred Taxes


5

Inflation Adjustment of PPE � Why do it?

Cash Flow

$10,000

Gross PPE

$100,000

Income Statement increases due to inflation over 10

years

Cash Flow

$14,382

Inflation Adjustment

$50,000

$50,000

CFROI = 5.6%

ROIC = 10,000/50,000 = 20%

Asset Life = 15 Years

CFROI = 5.6%

$43,856

Capex = Depreciation

Net PPE

Accumulated Depreciation

$50,000

$50,000

ROIC = 14,382/50,000 = 28,8%

Net PPE

Acc Depreciation


6

Inflation Adjustment of PPE � How we do it.

Gross Plant Inflation Adjustment Calculator

Input OutputAdjusted Gross Plant (As per AFS) 100,000 Historical Value Adjusted Gross Plant 100,000Estimated Project Life 15 Gross Plant Inflation Adjustment % 44%Historic Real Asset Growth 0.00% Infaltion Adjustment to Gross Plant 43,856Starting Year 2007 Inflation-adjusted Gross Plant 143,856

Select Currency: 1

This calculator is illustrative and for Internal Use Only.

United States Dollars

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007

2005

2003

2001

1999

1997

1995

1993

Years

Inflation Adjustment

Current Value of Project Layers


7

Operating Leases � Why capitalise leases?

0

50

100

150

200

250

300

MRW TSCO DELB GENC CASP CARR COLR SBRY JMT AHLN MEOG KESBV AXFO0

5

10

15

20

25

30

35

40

Cap Lease/Net Assets CFROI (RHS) RONA (RHS)

European Retail Sector

The vast differences in leasing policies between these companies makes comparisons all but impossible.


8

Operating Leases � How do we capitalise leases?

Rental Expense:

Asset Life:

Real Debt Rate:

Gross Capitalised Lease Value:

72.29

8.71

2.3

581.82

Capitalised Lease = PV (Real Debt Rate, Life, Expense, Future Value (0))

Axfood AB (2007) Source: Credit Suisse HOLT


9

R&D Capitalisation � Why do it?

!R&D is an expenditure similar to Capex

! It is a long term investment from which companies expect future cash flows.

!R&D Conversion to cash flow varies across companies and industries

! It aids comparability.

ASTRAZENECA PLC (AZN)


10

R&D Capitalisation � How we do it?

Year 2003 2004 2005 2006 2007R&D Expediture 100 105 110 116 122

100 105 110 116100 105 110

100 105100

Total Capitalised R&D 553

Inflation 5% 5% 5% 5% 5%

$553 is added to the balance sheet and the expense ($100) is added back to net income.


11

HOLT�s CFROI® Valuation Model

Key Features

! Valuations are done as of today � good comparison to current price

! Mean Reversion beyond the forecast period

! Returns (CFROIs) fade to 6%

! Asset growth fades to 2.5% real

! Discount rate fades to 6%

Over time, competition will erode excess returns and growth rates to cost of capital and GDP levels respectively.

Benefits

! Reflects economic reality

! Allows estimation of the competitive advantage period


12

Industrial Life Cycle

Increasing CFROIs & High Reinvestment

Above-Averagebut Fading CFROIs

Below-AverageCFROIs

AverageCFROIs

CFROIsDiscount Rate

(Investors� RequiredRate of Return)

Growth Fading Mature Turnaround?

ReinvestmentRates


13

CFROI® and Asset Growth Benchmarks

0

2

4

6

8

10

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

0

2

4

6

8

10

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

CFROI

Real Asset Growth Rate

6.0% Average

2.5% Average

%

%

U.S. Industrial/Service Firms

2005e

2005eConclusion: Companies earn a reasonably stable 6+% after tax, after inflation

CFROI® and grow their assets at a 2.5+% real rate annually.


14

CFROI Model is Mean Reverting

In Fade period, long term fade targets are used to calculate CFROI and Growth.

0

5

10

15

20

25

30

35

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

CFROI = 6%Discount Rate = 6%

RAGR = 2.5%

CFROI RAGR Discount Rate


15

HOLT Pricing Puzzle

Operational

Drivers

Financial

DriversValue Drivers Cash Flows

WarrantedValue =

Gross Cash Flow

Ch Investment

Net Cash Receipts

1 + DR

less

Asset

Growth

Assets

CFROI®

Sales

Growth

Turns

MarginsSG&A

COGS

PPE

Payables

Receivables

Inventory

Price Realization

Volume

Fade


16

The CFROI Model has three stages

6 7 8 9 10 95 96 97 98 99 100

t

0200400600800

100012001400

1 2 3 4 5

PV o

f NC

R

101

102

103

104

105

106

107

108

ST Fade LT Fade Wind Down

Exponential Fade (10%) and LT Fade

Targets derive CFROI and Growth

NDA Release + GCF on assets not yet

retired


17

Calculation of Net Cash Receipts

! The forecasted stream of Net Cash Receipts is what we discount to determine the Total Economic Value of the firm.

Outflows -New

Investments

Gross Cash Flow

Increase in Net Working

Capital

GrowthCapex

NCR

AssetBase

XEconomicReturns

AssetBase

X

ValueThis!

Outflows -New

Investments

Gross Cash Flow

Increase in Net Working

Capital

GrowthCapex

Firm�s Net Cash Receipts

NCR

Maintenance Capex

AssetBase

XEconomicReturns

AssetBase

XGrowth

ValueThis!

Retirement


18

Calculating NCR using CFROI and Growth

Gross Cash Flow

Investment

less

Reinvestment

Assets

CFROI®

Fade How do we calculate these?

NOPAT

Ch Investment

Net Cash Receipts FCFWarranted

Value =1 + Discount Rate WACC


19

Calculating Gross Cash Flow

Gross Cash Flow is the payment (pmt) needed to earn the CFROI (rate) given the

Gross Investment (pv), Non-Depreciating Assets (fv), and Life (nper).

Total Investment

CFROI is a user input in forecast and function of Fade logic beyond that

Gross Investment is grown at real asset growth rate

NCR

NDA% is held constant in ST and LT Fade period

Life is held constant is ST and LT fade period

NDANDA

Gross Cash Flow

CFROICFROI

LifeLife

Gross Investment

Gross Investment Total

Investment

RATERATE

NN

PVPV

FVFV

PMT(GCF)

PMT(GCF)


20

Gross Cash Flow Calculation

Year CFROIReal Asset

GrowthProject

ROIGross

Investment NDAGross

Cash Flow0 100,000 20,0001 12.00% 7.00% 14.02% 107,000 21,400 23,3882 11.17% 6.50% 13.01% 113,955 22,791 24,2003 10.34% 6.00% 12.00% 120,792 24,158 24,9074 9.51% 5.50% 11.00% 127,436 25,487 25,4965 8.68% 5.00% 10.00% 133,808 26,762 25,9576 8.36% 4.75% 9.60% 140,164 28,033 26,8607 8.06% 4.53% 9.24% 146,506 29,301 27,7668 7.80% 4.32% 8.92% 152,839 30,568 28,6749 7.56% 4.14% 8.62% 159,167 31,833 29,588

10 7.35% 3.98% 8.36% 165,495 33,099 30,509

99 5.40% 2.50% 6.00% 1,498,597 299,719 255,408100 5.40% 2.50% 6.00% 1,536,064 307,213 261,793

Assumes Life of 6 years.

CFROICFROI

LifeLife

Gross Investment

Gross Investment

NDANDA

Short Term Fade

Long Term Fade


21


WarrantedValue

=

Gross Cash Flow

Investment

Net Cash Receipts

1 + Discount Rate

less

Reinvestment

Assets

CFROI®

Now you know where this comes from!

Fade

How do we calculate this?


22

Investment Calculation

Total InvestmentGross

Cash Flow

NCR

Retirement = Replacement of Depreciating Assets from life years ago. This can be thought of as maintenance Capex.

Note: NDA has an infinite life and therefore does not retire

Gross Cash Flow

PMT(GCF)

Total Investment

Retirement

Growth

INV

Growth = ∆ Gross Investment. This can be thought of as growth Capex.

Therefore: INV = Growth Capex + Maint. Capex


23

What are Retirements?10

10%

CAPEX Inflation Retire-ments

Total Investment

1 100 5%2 110 5%3 121 5%4 133 5%5 146 5%6 161 5%7 177 5%8 195 5%9 214 5%10 236 5%11 259 5% 163 42212 285 5% 179 46413 314 5% 197 51114 345 5% 217 56215 380 5% 238 61816 418 5% 262 68017 459 5% 289 74818 505 5% 317 82319 556 5% 349 90520 612 5% 384 996

4,134 2,596 6,73061% 39% 100%

Project Life

GrowthBusiness starts from scratch and grows at 10% for 20 years. The assumption here is that CAPEX buys depreciating assets, as opposed to working capital.

How can the 100 you spent ten years ago represent the replacement cost today?

HOLT delayers the Inflation Adjusted Gross Plant which takes care of this problem.

This simple example has been created to illustrate the principle of retirements in a 5% inflation environment.

In year 11, the first layer of CAPEX has to be retired (scrapped) and replaced. This is in addition to the 10% growth in the business. Cash requirement is thus 422.


24


YearReal Asset

GrowthGross

InvestmentDepr.

Assets NDA RetirementDA

GrowthOutflowfor DA

Outflowfor NDA

Total Investment

10,00011,14312,41713,83715,419

0 100,000 80,000 20,000 17,1821 7.00% 107,000 85,600 21,400 10,000 5,600 15,600 1,400 17,0002 6.50% 113,955 91,164 22,791 11,143 5,564 16,707 1,391 18,0983 6.00% 120,792 96,634 24,158 12,417 5,470 17,887 1,367 19,2554 5.50% 127,436 101,949 25,487 13,837 5,315 19,152 1,329 20,4815 5.00% 133,808 107,046 26,762 15,419 5,097 20,517 1,274 21,7916 4.75% 140,164 112,131 28,033 17,182 5,085 22,267 1,271 23,5387 4.53% 146,506 117,205 29,301 15,600 5,074 20,674 1,268 21,9428 4.32% 152,839 122,271 30,568 16,707 5,066 21,774 1,267 23,0409 4.14% 159,167 127,333 31,833 17,887 5,062 22,950 1,266 24,215

Given our life of 6 years and Historic Growth Rate of 11.14%, we construct a stream of outflows that sum up to our current level of Depreciating Assets

Assumes 11.14% Historic Growth and life of 6 years. Then, in each year of the fade, we look back 6 years to determine the retirement for the current year.

∑Short Term Fade

Long Term Fade


25


YearGross

Cash Flow -Total

Investment = NCR

01 23,388 17,000 6,3882 24,200 18,098 6,1023 24,907 19,255 5,6524 25,496 20,481 5,0155 25,957 21,791 4,1666 26,860 23,538 3,3227 27,766 21,942 5,8238 28,674 23,040 5,6349 29,588 24,215 5,373

10 30,509 25,481 5,028

99 255,408 219,697 35,711100 261,793 225,710 36,084

Short Term Fade

Long Term Fade

26


The HOLT Value-to-Cost Ratio as a Discounted Cash Flow Metric

David [email protected]

Michael [email protected]

Prepared for [client]. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.


27

What is the HOLT Value-to-Cost Ratio?

It is a measure of a firm�s enterprise value divided by its inflation-adjusted net asset value. It is analogous to the Price-to-Book Ratio (PBR) and similar to Tobin�s Q ratio, which is an economic measure of market value of assets divided by their replacement cost.

AssetsNetAdjustedInflationValueEnterpriseRatioCosttoValue

ValueBookEquityCapMarketEquityRatioBooktoPrice

=

=


28

How Does VCR Differ From PBR?

� VCR uses Enterprise Value rather than Equity Value� Better reflects the true economic cost of the asset base

� VCR inflation-adjusts the asset base.

� Allows for better global comparisons.

� Capitalizes operating leases and R&D

PBR is consistent with a Dividend Discount Model or Equity Free Cash Flow valuation framework.

VCR is consistent with the HOLT Cash Value Added (CVA) valuationframework.


29

What Is the HOLT Cash Value Added?Illustrative ExampleAssume a company earns Gross Cash Flow of $2,610 during the year. IAGI is $10,000 and NDA are $2,500. The required rate of return is 6% and the assets have a 6 year life. Using the PMT Excel function or formula in the appendix, the calculated capital charge is $1,675. The remaining $935 represents the CVA or Economic Profit generated by the company.

CVA Charge

CFROI rate rate WACC18.2% 6.0%

Life nper nper Life6.0 6.0

2,610 1,675IAGI pv pv IAGI

10,000 10,000CVA

NDA fv 935 fv NDA2,500 2,500

-=

Economic Profit

GCF

Note: when performing valuations, CVA should be based on the beginning of year asset base.


30

The HOLT Prizing Puzzle Using CVA

The HOLT CVA Valuation Model measures attributes of the business:

! Economic Value of Net Assets! Value of Excess Return on those Assets! Value of Growth

( )∑∞

= ++=

1nn

n0 WACC1

CVAIANAValue

Growth

Excess Return

Net Assets

crea

tes


31

The Relationship Between VCR and DCF ValuationThe Enterprise Value is the present value of all future Net Cash Receipts (NCR). This value is equivalent to the economic net asset value (IANA) plus the present value of all future economic profit streams (CVA). The VCR can be related to future economic profits where WACC is the weighted average cost of capital.

( )

( )

( )∑

∑

∑

∞

=

∞

=

∞

=

+×⎟⎟⎠

⎞⎜⎜⎝

⎛+=

++=

+=

1nn

n

0

1nn

n0

1nn

n

WACC1CVA

IANA11VCR

WACC1CVAIANAValueEnterprise

WACC1NCRValueEnterprise

Wealth Creation Term


32

VCR and the Components of Value Creation

Assume a business is growing at 7.5% percent. The chart below depicts the three attributes of the CVA valuation framework given various Excess Return profiles. The middle band represents the value due to an excess return and the top band represents the value due to growth. Growing a business that operates at its cost of capital creates no wealth.

Net Assets

Excess Return

Growth

0.0

0.5

1.0

1.5

2.0

2.5

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Excess Return

VCR Growth

Excess ReturnCost


33

�Cash Counts�

Value-to-Cost Spread (HOLT)R2 = 0.733

0

1

2

3

4

5

6

7

8

9

10

-10 -5 0 5 10 15 20 25 30 35 40

CFROI - DR

Valu

e/C

ost

US, Market cap > 10bn, 2005


34

Source: HOLT, 25 Sep 2005Note: Value-Cost Ratio is Enterprise Value divided by Inflation Adjusted Net Assets

CIBN

NZYMb

BOC

AKZO

AIRP

SOLBt

CLN

LONN

GIVN

BAYG

LING

ICI

YAR

DSMN

BASFSYNN

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

0% 2% 4% 6% 8% 10% 12% 14% 16%

Value-Cost Ratio (VCR) vs CFROI

Interesting Longs

Interesting Shorts

Valu

e-C

ost R

atio

CFROI® Used In Valuation

BUY

SELL


35

Expectations Analysis

CFROI Benchmarking (Mkt Implied vs 5 Year Range)

0%

2%

4%

6%

8%

10%

12%Sy

ngen

ta

Akz

o N

obel

Giv

auda

n

DSM

Lonz

a G

roup

Cla

riant

BA

SF

Bay

er

Yara

Intl

Air

Liqu

ide

Lind

e

Solv

ay S

ocie

te

ICI

Nov

ozym

es

CIB

A S

peci

alty

BO

C G

roup

CFR

OI®

Less AttractiveMore Attractive

Source: HOLT Sector Specialist analysis, 19 Sept 2005

Last 5 Year CFROI® Range

Market Implied CFROI® FY5


36

Global Industry VCRs: Top and Bottom of the ClassThe top and bottom aggregate Global Industry VCRs are plotted below. Household & Personal Products is trading at a lofty 3.7, indicating that fade is not anticipated. Utilities trade at 0.98 indicating that they are priced at their economic book value.

Industry Value/Cost Ratios

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1988 1990 1992 1994 1996 1998 2000 2002 2004

Household & Personal Products

Utilities

Software & Services

Automobiles & Components

Source: CSFB HOLT World AggreGator October 2004


37

Regional VCRs: Historical Trends and LevelsRegional VCRs are plotted below. North America is trading at a lofty 1.9 indicating that impressive value creation is expected to continue. Note how most regions traded at their economic book values in 1990. Are wealth creation expectations running too high?

Regional Value/Cost Ratios

0.0

0.5

1.0

1.5

2.0

2.5

1988 1990 1992 1994 1996 1998 2000 2002 2004

Europe NJA

North America ROW

World

Source: CSFB HOLT World AggreGator October 2004

38


HOLT�s Economic P/E

David [email protected]

Greg [email protected]

Prepared for [client]. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.


39

What is the Economic P/E?

! The Value to Cost Ratio indicates the market�s expectation of cash flows per dollar of replacement cost of assets.

! Positive spread industries command VCRs greater than 1.

! Cost of capital industries have a VCR of 1. i.e. EV = Replacement Cost.

! The fact that one VCR is greater than another does not make it superior.

! Dividing VCR by CFROI normalises the VCR and converts it to an Economic PE ratio.


40

What is the Economic P/E?

VCR Economic PE =

CFROI

EV

IANA Economic PE =

GCF � Ecn Dep

IANA

IANA cancels out

EV PriceEconomic PE =

GCF � Ecn Dep Earnings

IANA = Inflation Adjusted Net Assets or Replacement Cost

EV = Market Cap plus Debt


41

World 1800: All CompaniesAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7

A g g re g a te A n n u a l V a lu e C o s t R a tio s

0 .0

0 .5

1 .0

1 .5

2 .0

2 .5

1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7

Valu

e C

ost R

atio

0 .0 %

1 .0 %

2 .0 %

3 .0 %

4 .0 %

5 .0 %

6 .0 %

7 .0 %

8 .0 %

9 .0 %

1 0 .0 %

CFR

OI (

%)

C F R O Is H is to r ic V C R s E s t. V C R (b a s e d o n A g g re G a to r s he e t)

A g g re g a te E c o n o m ic P E

0

5

1 0

1 5

2 0

2 5

3 0

3 5

1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7

P o rtfo lio : W o rld 1 8 0 0 Ind e x - M S C I (G IC ); L e ve l: A ll; R e g io n : G lo b a l S o u rc e : H O L T A g g re G a to r�

High CFROI should produce high VCRs due to increased EV, however, in this case, VCR has not kept up with the increase in CFROI with a resulting decline in Economic PE ratio.

Economic PE decreases when the VCR ratio increases slower than CFROI.


42

World 1800: Capital GoodsAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7


0 .0

0 .5

1 .0

1 .5

2 .0

2 .5

1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7

Valu

e C

ost R

atio

0 .0 %

2 .0 %

4 .0 %

6 .0 %

8 .0 %

1 0 .0 %

1 2 .0 %

CFR

OI (

%)

C F R O Is H is to r i c V C R s E s t. V C R (b a s e d o n A g g re G a to r s he e t)


0

5

1 0

1 5

2 0

2 5

3 0

3 5

1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7

P o rtfo lio : W o rld 1 8 0 0 Ind e x - M S C I (G IC ); L e ve l: C a p i ta l G o o d s ; R e g io n : G lo b a l S o u rc e : H O L T A g g re G a to r�

VCRs have increased over the last 5 years, indicating that the market is expecting greater NCRs for every dollar cost of replacement assets. In isolation, this looks like higher expectations.

However, CFROIs have also increased and since these means NCRs will be higher, maybe VCRs have not kept pace with CFROI increase.

This is in fact so. Economic PE has declined.


43

Disclosure and Notice

References to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please follow the attached link: http://www.creditsuisse.com/en/who_we_are/ourstructure.htmlThis material has been prepared by individual sales and/or trading personnel of Credit Suisse Securities (Europe) Limited or its subsidiaries or affiliates (collectively "Credit Suisse") and not by Credit Suisse's research department. It is not investment research or a research recommendation for the purposes of FSA rules as it does not constitute substantive research or analysis. All Credit Suisse research recommendations can be accessed through the following hyperlink: https://s.research-and-analytics.csfb.com/login.asp subject to the use of a suitable login. 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Credit Suisse accepts no liability for loss arising from the use of this material.. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Moreover, any investment or service to which this material may relate, will not be made available by Credit Suisse to such retail customers. All valuations are subject to Credit Suisse valuation terms. Information provided on trades executed with Credit Suisse will not constitute an official confirmation of the trade details. FOR IMPORTANT DISCLOSURES on companies covered in Credit Suisse Investment Banking Division research reports, please see www.credit-suisse.com/researchdisclosures.Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor a guarantee of future returns. Actual results will vary from the analysis.With respect to the analysis in this report based on the HOLT� methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the HOLT methodology and (2) no part of the Firm�s compensation was, is, or will be directly related to the specific views disclosed in this report. The HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishesthe baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. The HOLT methodology does not assign a price target to a security. The default scenario that is produced by the HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. Additional information about the HOLT methodology is available on request.Credit Suisse Securities (Europe) Limited is authorised and regulated by the Financial Services Authority.CFROI®, CFROE, HOLT, HOLTfolio, HOLTSelect, HS60, HS40, ValueSearch, AggreGator, Signal Flag and �Powered by HOLT� are trademarks or registered trademarks of Credit Suisse or its affiliates in the United States and other countries.HOLT is a corporate performance and valuation advisory service of Credit Suisse© 2008 Credit Suisse and its subsidiaries and affiliates. All rights reservedJanuary 29 2008

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44

World 1800: Durables and ApparelAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7


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Parallel movement in CFROI and VCR leads to flat Economic PE performance

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