CFA Institute Research ChallengeHosted by

CFA Society FranceTeam L

MARKETING, POSITIONING AND CASH GENERATION: THE PREMIUM COCKTAIL TO CRUSH A DISCOUNT

HIGHLIGHTS We initiate coverage of Pernod Ricard (PR) with a BUY recommendation and a one-year target price of EUR 152 per share pointing to 17% upside potential from its 19th January, 2018 closing price of EUR 130. More than on a 1-year horizon, we consider Pernod Ricard as a long term investment opportunity to fully seize the group’s growth potential.

SMART MARKETING POLICY SUPPORTING A POWERFUL BRANDS PORTFOLIO We believe that Pernod Ricard’s powerful “Top-13” brands supported by a strong 19% ad-spend to sales ratio added to an extensive product innovation policy provide a solid basis for organic growth. PR’s portfolio - composed of flagship brands such as Absolut and Jameson - covers the whole products spectrum and enables them to capture the most promising consumption trends going forward. PR has a unique organisation spread between Brand* and Market* companies, which provides brands with heavy marketing power, giving them wide exposure and fostering organic growth potential. We see such an ability being all the more important as the market is increasingly consolidated. Overall, we consider this strategy as the main tool to reach our 5.1% 2017-22 organic sales CAGR estimates.

WELL-OILED PREMIUMISATION PROCESS Pernod Ricard is the global leader in the premium sector where it generates 66% of its revenues. This high-end segment exhibits the most dynamic growth potential reaching up to 9% 2012-16 CAGR in the above-$42/Litres category. PR’s positioning is expected to bring stronger pricing power which we consider as a key advantage to develop sales and a main driver to secure the 62.8% gross margin that we estimate for FY22E. We believe that PR’s value growth strategy is the best path to overcome volume pressure from regulatory constraints.

PREFERENTIAL POSITION IN EMERGING MARKETS PR dominates the premium international styles spirits segment in emerging markets, which generate 38% of its revenues. We expect high single digit growth in Asia RoW mainly driven by India - where PR enjoys a 42% market share in the premium segment- and China where PR ranks #1 in international spirits with the Chivas and Martell brands. We consider that strong fundamentals coupled with low penetration rates of international spirits (1% in Asia Pacific) offer even more momentum for PR’s activity in this region.

ACCELERATING CASH GENERATION TO BOOST DELEVERAGING & FINANCIAL FLEXIBILITY PR focuses on generating stronger cash-flow performance through “Operational Efficiency”, ie tighter cost management and organisational restructuring. We estimate this should accelerate the deleveraging process to FY20 (2019/20) with net debt/EBITDA moving from 3x in FY17 to 1.5x in FY20E. Additional cash generation after this date should bring flexibility to develop the existing brands organically, increase the return of cash to shareholders or perform strategic premium brand acquisitions.

DRIVERS TO SHRINK VALUATION DISCOUNT PR has historically been trading at a 23.6% discount compared to its peers based on EV/EBITDA, which we believe is unjustified given the company’s strong sector positioning and the expected cash-flow momentum. Our valuation leads to a 1-year target price of EUR 152 representing 17% upside potential and reflecting a lower discount to peers. We derive this target price from a combination of three valuation methods: DCF (40%), Sum-Of-The-Parts (SOTP) relative valuation (40%) and multiple linear regression of PR’s P/E valuation (20%). We conclude that PR is undervalued by the market which offers a good entry point for investors. In the longer term, we could expect PR to gradually trade a premium to the sector, leading for additional outperformance potential.

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BUY

PERNOD RICARD S.AValuation Date: 01/19/2018 Current Price: EUR 130 Ticker: RI

TP: EUR 152 Upside: 17%

Stock Exchange: Euronext Paris Sector: Consumer Staples Industry: Alcoholic Beverages

FY13 FY14 FY15 FY16 FY17 FY18E FY19F FY20F 2021F 2022F

REVENUES (in EURm) 8,575 7,945 8,558 8,682 9,010 9,021 9,425 9,984 10,527 10,942

GROSS MARGIN 62.4 % 62.8 % 61.9 % 61.9 % 62.2 % 62.5 % 62.7 % 63% 62.8 % 62.8 %

EBIT MARGIN 26% 25.9 % 26.2 % 26.2 % 26.6 % 27.1 % 27.4 % 27.5 % 27.5 % 27.5 %

EPS 4.46 3.86 3.26 4.68 5.27 5.74 6.25 6.84 7.25 7.58

CASH POSITION (in EURm) 597 477 545 569 677 766 873 1,505 2,541 3,647

NET DEBT-TO-CAPITAL 44% 42% 40% 39% 36% 30% 25% 20% 15% 10%

EV/EBITDA 13.8x 13.2x 16.3x 14.2x 15.5x 15.4x 14.2x 13.1x 12.1x 11.2x

Stock Informations

52w price range 106.7-133.6

3-m Average Daily Volume

398,880

1-year performance

20.8 %

Market capitalisation (EURm)

34,504

Free float 45.8 %

FY18 Dividend Yield

1.6 %

Chart 1: Key stock informations

Source: Bloomberg

Valuation Weight Target Price

DCF 40% 152.6

Relative SOTP 40% 157.5

P/E Regression 20% 140.6

1-Year Target Price 152

Chart 2: Key valuation metrics

Source: Team estimates

Chart 4: Key Financial Metrics

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DJ EUROSTOXX Food & BevPernod Ricard

Chart 3: PR 1-Y Performance

Source: Bloomberg

Source: Pernod Ricard / Team estimates

INVESTMENT SUMMARY We initiate coverage of PR with a BUY recommendation and a one-year target price of EUR 152 pointing to 17% upside potential. Our investment case is backed by four levers: (1) A powerful brand portfolio with dedicated marketing resources (18.8% ad spend to sales ratio, 350bps above peers average); (2) A leading position in the premium spirits market; (3) A deep-rooted presence in emerging countries’ high-growth markets (See Chart 5, Appendix 8: PR’s top-line geographical breakdown); (4) An increasing cash generation capacity (FCF yield increased by 100bps to 4.6% in FY17 and expected to reach 5.8% in FY22E) allowing for balance sheet deleveraging to FY20E. PERNOD RICARD is the #2 global player in the spirits market, one of the fastest growing sector (3.2% 2010-16 CAGR) in the alcoholic beverages industry ahead of beers, wine and cider. The group benefits from a unique corporate organisation divided into six Brand companies and eighty-five Market companies (See Chart 6). We believe that this structure is the pillar for driving an efficient group strategy which is well-adapted to local specificities. While market companies offer a highly extensive distribution network, brand companies design PR’s strategy to promote the brands. One of the most efficient tools is bringing consumers together during so-called « moments de convivialité » (« moments of friendship »)*, while mitigating the regulatory and reputation risks surrounding alcohol consumption. Such a strategy is part of a larger initiative to adopt a best-in class ESG policy rated 70/100 by Sustainalytics - an ESG rating provider - and ranking among the sector’s « out-performers ». We consider that this approach is one of PR’s strengths and should help reducing the stock’s valuation discount (see below). This strategy is a long-term process made possible by a stable shareholder structure and the family owned nature of the company.

EFFICIENTLY SEIZING MARKET OPPORTUNITIES - PR is the international leader of premium spirits in two of the fastest growing markets: China and India (+17% CAGR over 2016-21 for international style spirits). These two markets weigh 20% of PR’s sales and 25% of its operating profit. We estimate that PR’s comprehensive emerging markets penetration strategy in these regions is a key advantage to trigger sustainably higher growth compared to its peers. While having one of the widest industry portfolios, PR maintains a proactive acquisition policy to stick to changing consumer trends, and to keep premiumising its product mix. Additionally, the group capitalises on its brand recognition to deepen its portfolio with flavoured and cocktail spirits obtained through an extensive product innovation policy (33% of organic growth derives from innovation).

INCREASINGLY SOUND FINANCIAL POSITION - We expect PR to generate a EUR 9bn revenue next year with a 4.9% organic growth rate mitigated by a 4.7% negative forex impact. The group should outperform its 4-5% mid-term sales growth guidance in FY19E with a 5.5% organic growth rate driven mainly by Asia (+8.7%) with China and India both reaching high single-digit growth by FY19E. On the one hand PR is tightening its cost management through the operational efficiency roadmap with EUR 400m targeted savings, while maintaining a high ad spend to sales ratio to ensure brand development. Top line growth and operational efficiency translate into accelerating cash generation allowing Pernod Ricard to keep deleveraging and to reach its long-term target capital structure (25% gearing defined as Net Debt over Net Debt + Equity compared with 36% in FY17) by FY19E (See Chart 7). From that year we consider that PR’s growing cash war chest (EUR 3.6bn by FY22E - 10% of assets) should enable the group to: (1) Acquire high value profile targets； (2) Invest in owned brands to foster organic growth and ultimately；(3) Increase shareholder return. We estimate that these three levers should trigger additional share price upside.

TOWARDS A FADING DISCOUNT - Since 2011 PR has been trading at a 12-month forward TEV/EBITDA (See Chart 8) and forward P/E discount to its peers (12% and 21.5% respectively on average since FY11) and especially to its main competitor Diageo. Although both companies’ multiples follow an upward trend, it appears that PR’s strategic move towards volatile emerging markets and bold acquisitions, were « penalised » by the market. Three main reasons explain the discount in our view: (1) Large exposure to the Chinese market (9% of sales), a handicap in downturn periods: sales down 23% for PR in FY14 and 9% in FY15; (2) Weaker financial structure than peers leading to higher risk perception: FY13 net debt-to-ebitda ratio of 3.6x vs 2.3x for Diageo; (3) Slowing vodka sales growth in the US that ultimately led to Absolut’s -PR’s Vodka flagship- impairment in FY15. However, PR returned to positive sales growth in China in FY17 (+2%) for the first time since FY13 as households’ consumption of cognac offsets business gifts which are now forbidden. Besides, PR’s deleveraging process is expected to continue in the medium-run, leading to ongoing reduction of perceived financial risks. As for Vodka, Absolut’s sales returned to growth (+2% FY17 vs -4% in FY16) thanks to the launch of Absolut Lime in February 2017 in the U.S market. All these positive impacts should offset the factors that created the discount in the first place.

STOCK PRICE NOT REFLECTING GROWTH OUTLOOKS & STREAMLINING EFFORTS - Our DCF approach highlights three key value drivers: (1) A future business activity backed by strong fundamentals (+1.3 bn new consumers in emerging market and 794m additional high net worth individuals by FY25E); (2) A consistent and successful market penetration of PR in each key market; (3) An increasing operational efficiency. Our valuation shows that PR is currently undervalued by the market with our fair value estimate at EUR 152.6 (+17.4% upside). As for relative valuation, we consider PR should trade in line to regional players which implies a reduction of the stock’s discount versus international spirits players as explained here-above. Our Sum-of-the-Parts based on target multiples for each business region separately leads to a EUR 157.5 per share target price (+21.2% upside). We completed this valuation with a predicted P/E based on cross-sector regression to assess the most relevant valuation drivers. We found significant relation with earnings growth rate, beta, size, sector, dividend payout and ROE. This analysis leads to a theoretical P/E of 22.3x and a target price of EUR 140.6 (8.2% upside).

INVESTMENT RISKS - The two main risks that impact PR’s profile are the forex impact and regulation constraints. 79% of PR’s sales are generated outside of the Eurozone and are therefore exposed to adverse currency fluctuations. Still PR’s diversified geographic exposure and natural debt hedging mitigate this risk. Even though the spirits industry is confronted with a toughening legal framework especially in emerging markets, PR’s ahead-of-regulation ESG policy tempers adverse law enforcement shocks.

SENSITIVITY ANALYSIS CONFIRMS OUR BUY RECOMMENDATION We performed a Monte Carlo analysis (See Chart 9) in order to assess our DCF model sensitivity. We varied the following parameters by randomly drawing outputs from normal distribution: WACC: 6.4% based our estimates and 25 bps standard deviation. Long term growth rate: 2.5% based on our base case scenario and 25bps standard deviation.Long term CFO/sales ratio: 20.6% average which is our end-of-period ratio (FY23E) and 100bps standard deviation. Out of the 10,000 trials we made, 78% of the outcomes supported a BUY recommendation (at least 7% upside), 14% HOLD (between 0% and 7% upside) and 8% SELL.

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Chart 7: Net Debt vs CFO

Source: Pernod Ricard / Team Estimates

EUROPE 30%

BRAND COMPANIES MARKET COMPANIES

The Absolut Company

Pernod Ricard Asia

Chivas Brothers Pernod Ricard North America

Martell / Mumm Perrier-Jouet

Pernod Ricard EMEA / LATAM

Irish Distillers Pernod Ricard Global Travel Retail

Pernod Ricard Winemakers

Société Pernod

Havana Club International

Société Ricard

Chart 6: Corporate Organisation

Source: Pernod Ricard

OTHERS21%

INDIA10%

CHINA9%

OTHERS16%

UK5%

France9%

OTHERS6%

MEXICO5%

USA19%

ASIA RoW 40%

Chart 5: Revenue Breakdown

Source: Pernod Ricard / Euromonitor

Source: S&P Capital IQ

Chart 8: Forward EV/EBITDA vs peers

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Chart 9: Monte Carlo analysis

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EUROPE 29 %

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Maximum 266 2

BUSINESS OVERVIEW

PERNOD RICARD SA (CAC-40: RI) is a global wine and spirits group, headquartered in Paris, France. Founded in 1975 from the merger between Pernod SAS and Ricard SAS, the group gradually grew as a leader in the alcoholic beverages industry. It currently ranks 2nd in the global wines and spirits market, and notably first worldwide in the premium and prestige segment. PR’s business model aims at transforming raw materials into high-end alcoholic beverages. The group operates a unique organisational scheme: Brand companies responsible for their own production and global strategy, and Market companies which act as distribution network and applies the group’ guidance according to local specificities.

WELL-BALANCED PORTFOLIO STRUCTURE - Until 2001 Pernod Ricard focused on its geographical expansion by two means: implantation of subsidiaries abroad followed by acquisition of local brands (See Chart 11). Since this date, PR has been premiumising its portfolio in two stages: (1) Scope expansion from 2001 to 2008, with disruptive acquisitions (Seagram’s, Allied Domecq and Absolut) and later; (2) Targeted local brands acquisitions (such as Avión and Monkey 47). Meanwhile it has kept on disinvesting non-core businesses, such as Orangina -a soft drink- and Pampryl -a fresh juice- sold in 2000 to its competitor Suntory, or Glenallachie Distillery in 2017. Today, the group has achieved the portfolio restructuring and is now composed of thirteen international strategic brands (62% of sales), fifteen local spirits (19%), four wine brands (6%) and other local brands (See Appendix 25: PR's brand portfolio) . It grants strategic importance to expand its renowned brands by developing flavoured and crafted varieties such as Del Maguey mezcal.

DRIVEN DISTRIBUTION NETWORK - As the firm sells its products across 82 countries - 62% in mature markets and 38% in emerging countries - it needs to get as close as possible to its consumers. To do so three key routes-to-market have been implemented: On-trade, in services related places, Off-Trade, through wholesalers, and Travel Retail in Duty-Free spaces. In addition, PR has taken advantage of new purchase habits (see Industry Overview) by developing two secondary routes: E-commerce and Home trade (See Appendix 1: Glossary). Its supply chain is all-the-more efficient as the group has a decentralised organisation divided at the local level between market companies. Furthermore, PR wholly owns its distribution network, a crucial competitive advantage in emerging markets as opposed to Diageo which relies on multiple partnerships with local distributors, one per segment in each country. More than having an independent supply network, PR has no clear reliance on any specific retailer, as its largest client Carrefour, only represents 1.8% of its revenues (See Appendix 22: 6 Porter Forces).

COMPANY STRATEGY

At the industry level, we identified three main strategies to enhance sales: (1) Increasing consumption per capita; (2) Targeting new customers; (3) Make consumers pay more. PR, as a responsible player, only engages in the two latter to develop its activities. UPMARKET POSITIONING & CONSUMER REJUVENATION - PR’s strategy relies upon premiumisation* ie its ability to expose its products as high-end and « worthy ». The group has been seizing consumers’ purchasing power increase by upgrading its portfolio. It has acquired majority stakes in high-end wine and spirits such as Del Maguey, a Mexican Crafted Mezcal producer in 2017. It went further in its strategy by developing super-premiumised products, with top-brands such as Ballantine’s introducing 15-year old Malt on the Asian Market, or even by implementing a singular luxury experience with L’Orbe, a caviar-infused vodka. PR’s premiumisation also extends to setting up a selective retail policy with, for instance, Vodka Absolut Honey being only available on Travel Retail. Additionally, as spirits are millennials’* most consumed alcoholic beverages (60%), PR also seeks to attract them and win their loyalty, through dedicated products (crafted, flavoured, cocktails) and extensive digital presence (See Chart 12). COMPREHENSIVE 3-STEP EMERGING MARKET PENETRATION - PR aims at generating 50% of its revenues from emerging markets in the upcoming years (vs 38% in FY17, See Chart 13). The group's emerging countries shift was historically performed on Chinese and Indian soil, both markets which are defined by strong consumer loyalty to local style spirits such as Chinese Baiju. PR benefits from a leading position in such key areas that it seeks to strengthen through a well-defined three-step strategy: (1) Acquisition and development of local brands allowing easier market penetration; (2) Incorporating them in market companies enhancing their marketing capabilities while capitalising on their distribution platform; (3) Introduction of PR’s premium international brands to generate higher margin. INNOVATION AS A FURTHER GROWTH DRIVER - To foster innovation which brings 30% of PR’s net sales growth, the group has been focusing on two main topics: top-brands declensions - Jameson Caskmates, Absolut Lime - and breakthrough innovations (See Appendix 26: Innovation). PR has a double initiative. First, it enhances Research and Development with the Pernod Ricard Research Centre (CRPR) and the Breakthrough Innovation Group (BIG) working in concert on disruptive innovations. In 2014 the BIG launched the « Opn project » which is the spirits connected library. Second, it creates innovation incentives through the Kangaroo Fund an Internal Investment Fund, and Chatter its corporate social network. Such initiatives stick to millennials’ sub-culture and foment product exposure to ongoing trends: limited editions, flavoured spirits and crafted beverages. CONSUMER-CENTRIC MARKETING - PR’s multi-canal marketing strategy is based on an efficient consumer pull approach. According to Elliott & Percy, the emotional bond - that companies are able to create between products and consumers - is the ultimate stage of brand development. Since 2015, instead of focusing on singular products, Pernod Ricard has changed its strategy to focus on a collection of brands likely to be « activated » in a range of drinking occasions (« moments de convivialité »). Millennials, who have medium/high revenues and seek meaningful drinking occasions are considered as « Experiencers » rather than just consumers (See Chart 14). Marketing is consequently a key pillar to communicate this shift in ways of consumption, and is supported by significant Advertising & Promotion (A&P) spendings (18.8% of PR’s sales in FY17).

Source: Facebook / Instagram / Twitter

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- 1986: Implantation in Japan.

- 1989: Irish Distillers’ Acquisition.

- Seagram’s S&W Acquisition.

- 2005: Allied Domecq’s Acquisition.

- Absolut’s Acquisition.

- 2015: Monkey 47’s Acquisition.

- Del Maguey’s Acquisition.

- 2014: Kenwood & Avión’s Acquisition.

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All these events were statistically tested and gave significant results for abnormal returns compared with the CAC-40 French index on a 3-day window basis around announcement.

Chart 11: Business & M&A timeline

Chart 12: Social Media Followers

Source: Pernod Ricard

ABSOLUT JAMESON BALLANTINES CHIVAS MALIBU

7.2M 3.7M 4.2M 5.2M 2.4M

30K 27.6K 5.5K - 43K

138K 75K 13K 81K 32K�

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Chart 13: Revenue & Operating profit

Source: Pernod Ricard

Source: Team estimates

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10/19/2017 The Q1 2017/2018 Press Release showed significant acceleration in Asia-Row +7%, with resilient sales in India despite negative regulation outlook.

04/21/2016 The Q3 2015/2016 Press Release triggers growing concerns concerning the Asian Market: -3% in China.

08/27/2015 EUR404 M Impairment on Absolut due to disappointing results on the US Markets (-5% FY 2014/2015).

06/02/2015 Given new anti-corruption laws and weakening economic context, Pernod Ricard announces a stagnation of its sales in China.

02/12/2015 Pernod Ricard shows disappointing results in China & USA for the S1 2014-2015 publication.

01/08/2015 Bank of America and Meryll Lynch upgrade their Pernod Ricard recommendation to «  buy  » as the market is considered to be at an inflection point (China & USA).

INNOVATION

RESOURCES

Innovators

Experiencers

Makers

Achievers

Strivers

Thinkers

Believers

Survivors

Achievement Self-Expression

Chart 14: VALS Matrix

Ideals

Source: Bloomberg / Team estimates

Chart 10: Event study

Source: Facebook / Instagram / Twitter

FY17 Operating Profit

65%

35%

FY17 Revenue

62%

38%

Emerging MarketsMature Markets

3

Reach our glossary and appendixes by clicking on “*” and “See Appendix X”

To get closer to its targets, the group is betting on its digital transformation. In order to collect data more efficiently, PR internalised its advertising management in a hub called « Blue Sky ». Overall, its digital expenses account 25% of the company’s media spending. OPERATIONAL EFFICIENCY FUELS MARKETING PRESENCE - In FY14 PR exhibited an ambitious financial plan - Allegro - which aimed at delivering EUR 150m savings by FY17 (3.5% of sales and structure costs). The objective was to maintain PR’s bottom line, compensating for sales slowdown in China. The plan was handled by cutting 900 support jobs (4.7% of total headcount) to reduce hierarchical layers and rationalise the structure. From FY15 an additional plan was set up, the « operational efficiency » roadmap aiming at realising EUR 200m savings spread across product costings and structure costs (4% of sales and structure costs) half of which being reinvested in advertising and promotion. A further EUR 200m reduction in working capital requirement, notably with tighter management of its payables, receivables and inventory of finished products. When the plan started in FY15 structure costs decreased from 18% to 16.7% of sales, and EBITDA margin stabilised at 28.7%. During FY17 the company achieved EUR 110m of savings namely 25% of the operational efficiency roadmap.

CORPORATE GOVERNANCE PERNOD RICARD’S STABLE SHAREHOLDER STRUCTURE IS A KEY ADVANTAGE that allows for a broad long-term strategy. Even though PR’s equity is composed of only one class of shares, ownership for at least 10 years entitles investors to double voting rights. The majority shareholder is the consortium composed of the Ricard family and M. Gallarza, which owns 15% of the company’s equity and 21% of voting rights (See Chart 15). Such a family owned business supports our investment case for 3 reasons: (1) This type of company has achieved an average annual outperformance of 3.9% compared to peers according to a McKinsey study; (2) Their emerging market penetration potential is enhanced, thanks to greater consumer trust; (3) It enables long-term policy implementation thanks to an increased governance stability. MANAGEMENT CAPITALISING ON GEOGRAPHICAL AND PROFESSIONAL EXPERIENCE - PR’s strategy is implemented by an experienced management team with a strong know-how in the spirits industry. Top-executives average a 20-year experience in the group. Especially Alexandre Ricard, CEO and grandson of the founder, has a comprehensive knowledge of the business. His background in M&A consulting (Morgan Stanley) provides him with a decisive skill set to fine tune the group’s portfolio (See Appendix 27: Executive committee). In addition, his in-house experience as the head of Irish Distillers gave him a clear insight of the brand building process. On the key Chinese market, the nomination as CEO of Jean-Etienne Gourgues emphasises PR’s strategic human resources management. Above his political sphere knowledge as special advisor of the French government, he was previously responsible for the Japanese market and the Martell brand - PR’s best seller in China. Thus, he has operational credentials on Asian markets that will lever business activities in China. PR also grants importance to maintaining its acquired brands’ historical management teams, to preserve authentic know-how, while fostering corporate integration. A recent example is PR taking a majority stake in Monkey 47 - a german premium dry gin company - where it maintained Alexander Stein its founder as CEO. CORPORATE GOVERNANCE SHOWS ALIGNED SHAREHOLDER & EXECUTIVE INTERESTS - PR’s board of director is composed of 14 members among whom 6 are independent (42%). The company grants a huge importance to transparency and minimising conflicts of interest by splitting its governance into 6 committees: Audit, Compensation, Nominating, Strategy, Corporate governance and Social responsibility. One proof of PR’s good practice is its audit committee fully composed of independent directors. Regarding compensations the company shows transparent practices by aligning its board and shareholder interests following the recommendations of the AFEP-MEDEF Code. Remuneration, as Alexandre Ricard’s, is allocated between a fixed portion depending on responsibilities and experiences of the members and a variable incentive based on annual performance objectives. We consider that Alexandre Ricard’s variable compensation is well aligned with the company’s strategy and shareholder interest (See Chart 16).

PERNOD RICARD, A RESPONSIBLE POSITIONING SERVING THE GROUP’S STRATEGY PR created a CSR committee in 2011 that drives the ISR policy at the group level, using its decentralised organisation to implement it locally. Such ahead-of-regulation ESG blueprint has led to its recognition by Vigeo Eiris - an ESG rating agency - as the CSG leader of the industry. Consequently, PR’s shares were introduced in Euronext Vigeo Eiris World 120 and Vigeo Eiris France 20, two SRI indexes. We clearly recognise that PR globally outperforms its peers on this matter, which we estimate is not reflected in the company’s stock price yet (See Chart 17). PROMOTE RESPONSIBLE CONSUMPTION - Over-consumption of alcohol remains a societal and health issue that PR seeks to dissociate from by adopting a wide range of measures. It has for instance set up cautionary product labelling, employee training and consumer information campaigns such as the « designated driver » initiative. In 2017, 86% of PR’s subsidiaries led a campaign to promote responsible consumption. This is consistent with PR’s business activity as the group focuses on premiumisation and customer experience rather than volume expansion. EFFORTS TO TACKLE ENVIRONMENTAL IMPACT - Manufacturing-related energy costs are among the major negative externalities generated by spirits companies, mainly boiling, distillation and packing. As PR has performed vertical integration and owns 5,611 ha of vineyards, the group is keen on reducing its ecological footprint. Its agricultural lands, which account for 2/3 of its water use, were converted for 99% into water-efficient drip irrigation systems. For suppliers, PR imposes standards of sustainable development, with its Blue Source program to ensure best practices throughout the value chain (See Appendix 33: The Absolut Company). PR’s efforts resulted in a 17% water intensity decrease and 26% CO2 emissions downshift which are respectively expected to reach 20% and 30% by 2020. FOCUS ON HUMAN CAPITAL - In the midst of its family company portrait and its start-up spirit, employees are at the centre of the company’s priorities. Pernod Ricard focuses on developing its human capital through employee training with its Pernod Ricard University. According to the 2017 ISay survey, 94% of employees are proud to work for PR.

INDUSTRY OVERVIEW & COMPETITIVE POSITIONING The alcoholic beverages sector includes Spirits (51%), Beers (32%) and Wine (17%). Overall the Spirits market amounted to USD 494bn in 2016 with a 3.2% CAGR over 2010-16 (See Chart 18). It is divided between international style spirits (17.5% of revenues), and local brands. Despite significant margin levels, the industry is highly competitive, with international spirits supply being concentrated among a limited number of players compared to fragmented local production. Such leaders benefit from low customer and supplier bargaining power, which, through time, generate high barriers to entry and ensure high margins. Economic environment, demographic trends and state regulation are the structural industry drivers (See Chart 19 and Appendix 22: 6-Porter Forces).

MACROECONOMICS ARE A KEY MARKET DRIVER… - The Wine and Spirits industry is mainly impacted by the global macroeconomic environment. We found significant positive correlation through regression analyses between spirits spendings and two key metrics: GDP - R2=0.78 - and Disposable Income - R2=0.77 - (See Charts 20 & 21). The regressions were made on a 28-year time series from 1990 to 2017 and show different perspectives in mature and emerging markets.

Type Objective Compensation

Fixed EUR 950,000

Variable Quantitative

criteria

Targeted budget EBIT

Target (T):+30%Max (M):+55%Real (R):31.01%

Targeted budget Net Income

T:20% M:40%R:22.84%

Deleveraging Net Debt/EBITDA

T:30% M:55%R:40%

Variable Qualitative

Criteria

US reorganisation strategy

T:6% M:9%R:7%

Chinese strategy implementation

T:6% M:9%R:7%

Operational Efficiency

T:6% M:9%R:8%

Associates High Devotion

T:6% M:9%R:8%

ESG T:6% M:9%R:7%

Chart 16: Alexandre Ricard’s compensation breakdown

COMPETITIVE RIVALRYBARGAINING POWER OF CUSTOMERS

BARGAINING POWER OF SUPPLIERS

THREAT OF SUBSTITUTES

THREAT OF NEW ENTRANT

POWER OF

STATE

Chart 19: 6-Porter Forces

CAGR(%)

0% 1% 3% 4% 5%

SPIRITS

WINE

BEER

Chart 18: 2012-16 sales CAGR

Chart 17: ESG rating

Source: Pernod Ricard

Source: Bloomberg

Source: Euromonitor

RobecoSAM Rank 69

Sustainalytics Ranking 19/176 (90th Percentile)

Bloomberg ESG Disclosure Score

59.5/100

58%

10%

7%10%

14%

Chart 15: Ownership & voting rights

Source: S&P Capital IQ

Others and Free-float

Société PR

Capital Gr.

GBL

MSF

Voting rights

Ownership

20%

9%11%

7%

53%

Source: Team Estimates4

Mature markets are defined by higher correlation with GDP growth, while emerging markets such as China (R2=0.65) are more heavily dependent on growing disposable income bringing to focus the emergence of middle/high-class incomes. Regarding PR’s geographical breakdown, we observe the following trends:

EUROPE’s economic landscape has been improving, as shown by the recent acceleration of GDP growth to 1.9% in 2016. This rebound, coupled with low interest rates, fuelled a favourable business climate. However Brexit-related political uncertainties may affect trade between the UK (4.8% of PR’s turnover) and the rest of Europe. Russia (2.5% of PR’s turnover) is to recover from a two-year recession supported by a 1.3% increase in household spending. Joining the WTO in 2012 led the country to reduce trade barriers and tariffs on imported goods. AMERICAS’ 1.9% per annum GDP growth between 2012-16, was mainly driven by the US economy (19% of PR’s revenue). The country experienced a 2% annual growth over the period and is currently operating near full employment (4.1%). Expected continuing growth and tax cuts provide bright prospects for companies operating in the US. According to the Bloomberg consensus, USD is expected to depreciate in the short run (USD/EUR -7.3% in FY18). Latin America, however, experienced an economic downturn in 2015-16 (-0.7%). Still, Brazil and Argentina’s recovery should bring regional growth back to +1.7% in 2017. ASIA ROW still holds the most dynamic growth profile, led by India (10% of PR’s revenue) and China (9%). The latter experienced 7.3% per annum GDP growth over 2012-16, with a sharp increase in personal disposable incomes (+9.3% p.a since 2007). This trend is mitigated by the high household and corporate debt levels (128% of GDP). Similarly, India’s 6.9% p.a GDP growth over the same period is tempered by the impact of demonetisation - 2016 banknotes withdrawal to fight corruption - and the implementation of a stratified Value Added Tax (Goods & Services Tax). … ALONGSIDE CHANGING DEMOGRAPHICS… Volume growth in the Spirits industry is tightly linked to demographic trends which are used in our valuation model and explained by three main factors: (1) Increasing population (See Chart 22); (2) A switching age structure; (3) An urbanisation process. MATURE MARKETS (62% of PR’s revenues) are facing two major demographic trends: millenialisation and an ageing population (See Chart 23). Millennials - whose alcohol consumption is composed for 60% of spirits - are the main group age in the US with 21% of the total population, principally in California, Texas and Florida where PR is most implanted, and 19.2% in Europe. Millennials seek product authenticity and diversity, making them less loyal to specific brands. The industry is answering this new consuming habit by widening their product offer. Meanwhile, ageing baby boomers (23% of Europe’s population, 29% in USA) distort the pyramid towards its high-end. As this class age tends to have higher disposable income, spirits players capitalise on this tendency through their portfolio premiumisation. According to McKinsey’ Urban World Global Consumers Report, mature markets 60+ age group should expand by more than 30% to 222 million by 2030, generating one-third of global consumption growth. Both trends should drive spirits consumption in mature markets in the upcoming years. EMERGING MARKETS (38% of PR’s revenues) are characterised by low penetration rates of international styles spirits as consumption remains focused on local spirits, especially Baiju in China. The growing population at a legal age for purchasing alcohol coupled with urbanisation should continue to affect the spirits market. The population in age of drinking is expected to grow by 500 millions for the next ten years, especially in China where the working age class (15-59) is set to rise by 20% by 2030. Furthermore, urbanisation should represent 91% of world consumption growth over the period. Emerging countries should play a major role with India, China and Nigeria accounting for 37% of the urban population growth. As the urbanisation process evolves, we expect trend shifts in emerging markets from historically local spirits consumption towards international styles spirits to shape the growth of global players in those regions. For Africa, which PR considers « the China of yesterday », population should double and get even younger by 2050, according to UNED. The group keeps monitoring the region’s markets where it is distributed by third parties.

… THAT DEFINE SPIRITS SALES GROWTH, LED BY THE UNITED STATES … - From 2014 to 2017 global spirits sales were driven by Scotch (+18%), Vodka (+13%) and American Whiskey (+13%). In the future, the US - where PR has 8.5% volume market share and ranks #2 - should come first in volumes (See Chart 24) with the Vodka market expected to grow by 1% CAGR over 2016-21, providing Absolut with recovery prospects in its key market. Bourbon and other whiskies, where Chivas Regal and Jameson are key players, should also grow by 4% CAGR, while PR’s Avión should benefit from the tequila trend (+3.2%). Demand in Europe should be driven by English Gin in Spain (+7.1%) and the UK (+4%), offering PR’s Beefeater room for growth. Emerging markets growth should be led by India’s blended Scotch where the group owns Royal Stag, Imperial Blue and Blenders Pride, three well-positioned brands. PR’s Chinese market should fuel cognac demand, with expected sales growth of 5% CAGR between 2016-21. For Africa, Nigeria’s Gin where PR had initially entered into agreement with the leader CFAO, and continued with distributors after termination, should generate volumes growth.

…& CREATE NEEDS FOR TAILORED PRODUCTS TO TACKLE CONSUMPTION TRENDS… - The demographic factors previously mentioned generate qualitative/social transformations that foster the industry activity. Growth opportunities through feminine and millennials consumption are seized with innovative products. Women should account for 40% of the global working population by 2030. Thus, women’s disposable income should increase mechanically, nearly doubling in India and rising by more than 90% in China. Historically men consumed twice as much alcohol as women but the gap has disappeared. Industry players seek to take advantage of this trend with marketing campaigns and the creation of crafted, flavoured and sweeter products such as cocktails.  

An Oracle study considered there are 5 ways to seduce millennials: create an experience, make it frictionless, offer customisation, build loyalty and demonstrate value. By developing their existing brands or by acquiring crafted pure players with specific know-how, spirits industry leaders seek to attract these new consumers. In the US, crafted spirits volumes are expected to increase from 4.9 million 9-litres cases in 2015 to 25.6 million in 2020 (See Chart 25). To be as close as possible to an authentic image the following strategies are implemented: produced locally, to ensure heritage and origin and apply a local marketing policy. Product diversification will be a key strategy to assert a leading position. PR was able to concretely seize this trend with, for instance, its partnership with Smooth Ambler, a 2009-founded crafted U.S whiskey, managed in partnership with the creators to ensure know-how transmission and a direct target for millennial consumers.

… ACCOMPANIED BY A LONG-TERM VALUE-GROWTH TENDENCY: PREMIUMISATION - Premiumisation is a consequence of spirits groups appeal for symbolic brands - products with high involvement and strong emotions provided - with high cash-generation potential. These upper segments have outperformed the rest of the market with an up-to 9% CAGR over the last decade while mainstream alcoholic beverages declined over the period (See Chart 26). Additionally, health issues, regulation constraints and a trend towards responsible drinking are hitting volume growth, making price focus all the more important for distillers. In 2016 a survey on behalf of Heineken showed that 75% of millennials limit their alcohol consumption for celebration moments. Besides higher prices are not decisive in the purchase decision for 81% of respondents. Demographic factors such as high-income ageing population also favour higher-quality products. From an economic standpoint, increasing disposable incomes -mainly driven by China and the US- have been offering strong value growth potential for the spirits

Chart 22: Global 15-64 Year-Old Population

15-6

4 y.

o P

op

ula

tio

n

0

1,750,000,000

3,500,000,000

5,250,000,000

7,000,000,000

1960

1968

1976

1984

1992

2000

2008

2016

2024

2032

2040

2048

Source: EUROSTAT / UN / OECD

Source: Discus Spirits Association

Chart 24: 2016 US Volumes breakdown

Volumes in thousand litres

0 200,000 400,000 600,000 800,000

Liqueurs

RumTequila and Mezcal

Whiskies

White Spirits

Others

Brandy & Cognac

Ag

e b

reak

do

wn

80+

70-74

60-64

50-54

40-44

30-34

20-24

% of US population

Women Men

Chart 23: 2016 US Demographic Tree

Source: Worldbank

BABY BOOMERS

MILLENNIALS

Reg

iste

red

cra

ft

dis

tille

rs

0

750

1500

2250

3000

2010

2011

2012

2013

2014

2015

2016

2017

2018

E20

19E20

20E

Chart 25: Craft Distillers in the U.S

-2% 0% 2% 5% 7% 9%

Premium ($17-$26): 3%

Super Premium ($26-$42): 7%

Ultra Premium ($42-$84): 9%

Prestige (>$84): 7%

Chart 21: Disposable Income vs. Consumer spendings on spirits

Co

nsu

mer

sp

end

ing

s g

row

th (

%)

-11%-7%

-4%

0%

4%

7%

11%14%

Disposable Income growth (%)

-6% -3% 0% 3% 6% 9% 12%

y = 1.2226x - 0.0118

R² = 0.7737

Source: EUROSTAT / UN / OECD

Co

nsu

mer

sp

end

ing

s g

row

th (

%)

-11%-7%

-4%0%

4%7%

11%14%

GDP growth (%)

-7% -4% 0% 4% 7% 11% 14%

y = 1.0541x - 0.0213

R² = 0.7834

Chart 20: GDP vs. Consumer spendings on spirits

Source: EUROSTAT / UN / OECD

Chart 26: 2012-16 segment CAGR

Source: Discus Spirits Association

Source: Discus Spirits Association

Mainstream ($8-$12): -1.2%

5

industry, with luxury spirits sales expected to increase by USD 13bn over 2015-20. Marketing plays a key role by promoting the quality image associated with the products - brand awareness - through upward price-signalling that favours Pernod Ricard’s price mix (See Appendix 28: 4-P Marketing Matrix). All else being equal, premium products also offer significant gross margin expansion prospects, that can be reinvested in marketing expenses namely creating a virtuous cycle. ORGANIC GROWTH CAPACITY POST MARKET CONSOLIDATION TREND - The sector is currently consolidated with a 63% 5-player concentration ratio. Until 2014, current leaders have reached a critical size through large M&A transactions such as Pernod Ricard buying Allied Domecq (2005) and Diageo acquiring United Spirits (2012). With the acquisition of the last public major player, Beam in 2013 by Suntory Holdings, targets have rarified, being either too big or privately owned. For these reasons, M&A opportunities should rather lie in local distillers. International groups have started acquiring craft companies, fine-tuning their portfolios in order to adapt to the previously mentioned consumer trends. Still, such transactions remain expensive as targets present high growth profile which means higher multiples, further enhanced by a low interest rates context. These targets are generally valued at $1,000 per cases sold, but High West’s - a Utah based craft distiller - acquisition by Constellation was made at $2,285 per cases (See Chart 27). Consequently, we see the market moving towards an organic growth paradigm.

TWO PROMISING MARKETS: FOCUS ON THE WINE SEGMENT … - The wine market grew by 1.8% in volumes in 2017 and remains highly fragmented: the world’s top-10 producers represent only 13% of total volumes, with E&J Gallo winery being the leader with a 3% market share. Pernod Ricard is the 8th producer with a 0.9% global market share but ranks second among its international competitors behind Constellation. Constraining designation of origins shapes the industry supply and demand, explaining the atomistic characteristic of the market. Tighter margins in the sector result in limited advertising capacities and thus limited branding potential except for brands that benefit from the financial firepower of groups such as PR. … AND GLOBAL TRAVEL RETAIL - Air traffic doubles every 15 years (See Chart 28), directly impacting the global duty-free retail sector which is expected to experience 8.6% CAGR over 2017-21. The market which accounts for 4% of the global spirits consumption is supported by favourable tax incentives, that make up a large part of the product price (80% in France and 55% in the US). As 41% of alcoholic beverages sold in these new shopping centres are spirits, PR which generates 8% of its annual sales in Global Travel Retail should benefit from a strong position. REGULATION RESTRICTS MARKETS POTENTIAL - In November 2017, the UK Supreme court’s advice in favour of minimum alcohol pricing was an example of increasing public regulation surrounding the spirits industry (See Appendix 23: PESTLE). As alcohol remains part of the public debate on health issues, governments have implemented broad legal frameworks. This translates into consumption constraints with age requirements and prohibitions in certain contexts such as driving but also in public places.

Regulation in emerging markets - where PR has a wide exposure - is toughening, putting pressure on international spirits players. In India, the highway liquor ban - said to affect 30% of the country’s retailers - and Goods & Services Tax (GST) cause the country's spirits market to shrink by 5% one month after implementation. The Chinese Communist Party’s general crackdown on corruption, with the anti-extravaganza laws (See Chart 29) forbid luxury-gifting from officials that led to a slowdown in the industry (-3.7% organic growth for PR). As far as limitations are concerned, alcohol prohibition in a few countries mainly due to religious beliefs, prevent international spirit brands from entering the market.

The spirits industry is also impacted by marketing limitations on advertising, product placing, and sponsorship. In the EU, 23 out of 28 countries have implemented a ban on spirits representation on national TV. To assert their interests, global distillers have gathered into lobbying groups spending USD 24.7m in activism and USD 17.1m in campaign donations. The spirits industry capitalises on brand awareness and relies on the efficiency of regulation regarding intellectual property, which prevents global leaders such as Pernod - whose brands represent 40% of its assets - to suffer from counterfeiting (See Investment Risk).

COMPETITIVE POSITIONING

In such a dynamic market, PR holds a leading position, ranking #2 amidst Diageo, Brown Forman, Bacardi and Beam-Suntory. We estimate that the group should keep gaining market shares in the segment, thanks to its upmarket positioning in strategic regions, supported by a diversified portfolio, which results in a higher organic growth potential.

PR: THE BEST PRICE/VOLUME MIX? - We consider that PR’s price/volume positioning is its main advantage against competitors that do not combine both aspects (See Chart 30). The group became the global leader in the premium spirits segment since: (1) It reached a critical size, being second worldwide with 1,033 million litres sold thanks to strong brand visibility, large scale M&A operations; and (2) Extensive upmarket positioning (See Appendix 24: SWOT) that allows PR to derive two-third of its revenues from the high-end segment. To the contrary, PR’s main competitor, Diageo only generates one-third of its sales in the premium market. With volumes twice as high (2,008m litres) we believe that Diageo lags price positioning compared to PR. Likewise Bacardi suffers from the mainstream image of its core bands (Bacardi and Martini) and lacks pricing power. On the other hand, Remy Cointreau which generates 51% of its sales in the super premium and prestige segments (>USD 50/L) benefits from a high price-mix but remains a small player in terms of volumes.

A GLOBAL LEADER WITH A DEEP UNDERSTANDING OF THE INDIAN & CHINESE MARKET - With almost equal presence on each continent in terms of sales, PR can take advantage of the emerging market’s growth opportunity - it was the largest spirits importer in Asia in 2017 - and mitigate local downturn related risks.

In China, PR controls the two key markets: Cognac with Martell and Scotch Whisky with Chivas. The historical presence of Martell which accounts for 80% of PR’s turnover in this area places the group in a preferential position to conquer the Asian Pacific market that should fuel 80% of the global spirits growth between 2016-21. Regarding Chivas and the scotch market, the group aims at positioning itself in the middle class and attract new occasions of « moments de convivialité » such as meal time. To do so it has announced in September 2017 a multi-year marketing partnership with NBA China which: (1) Attracts middle-high income spectators; (2) Relies on the social medias that PR uses for data collection - PR led a Wechat campaign - ; (3) With matches occurring during mealtimes. PR is also positioned on the prestige segment with Chivas Regal Extra and local editions design, such as the Five Gods of Wealth Series Limited Edition, and is ahead of its main competitor in this segment: Diageo’s Johnnie Walker. Both on the premium and prestige segment, Chivas should benefit more than Johnnie Walker from the expected 22% 2016-21 Scotch sales CAGR. PR’s competitive positioning also lies in the efficiency of its distribution process in China. The penetration potential is all the more important as the segment remains highly fragmented with local consumption habits. Niulanshan Distillery Co, the Chinese market leader, only has a 5% market share.

On the Indian market, PR has capitalised on its ability to acquire and develop local spirits brands into its market/brand companies framework, to position its Seagram’s acquisition as a leader in the high-end segment. While spirits represent 67% of the total alcohol consumption in value (See Chart 31) - PR, with a 45% market share in the national premium market has demonstrated a better integration process, gaining market shares over Diageo’s United Spirits on the 2011-16 period. It was also able to capitalise on Seagram's distribution network to generate a double-digit growth in its international spirits portfolio, with Chivas Regal being the leading super premium whisky on Indian soil in 2017. This expansion should be supported by

Chart 28: Global Air Traffic

Chart 31: Whisky leads spirits sales in India

00

0’ li

tre

volu

mes

so

ld

0

550,000

1,100,000

1,650,000

2,200,000

Brand

y and

Cogna

c Ru

m

Whiskie

s

White S

pirits

Spirit

s

2011 2012 2013 2014 2015 2016

Source: Euromonitor

REMY COINTREAU

BROWN-FORMAN

DAVIDE CAMPARI

DIAGEO

PERNOD RICARD

Chart 30: True Positioning Matrix

Chart 29: The effect of the anti-extravaganza laws on the Chinese

0

250,0

00

500,0

00

750,0

00

1,000

,000

Volu

me

/ Gro

wth

of S

pirit

s sa

les

in m

illio

n lit

res

/ %

-9%

3%

16%

28%

40%

2002

2004

2006

2008

2010

2012

2014

2016

Source: National Bureau of Statistics, China

AVERAGE

SAL E S

PR I CE

SPIRITS VOLUMES

Source: Euromonitor / Team estimates

Air

Pas

sen

ger

Tra

ffic

In

RPK

bn

0

1750

3500

5250

7000

Americas Europe Asia Row

1996 2016 2036

Chart 27: Key M&A operations

Source: Airbus global forecasts 2017

Year Acquisition Price

2017Diageo over Casamigos super-premium tequila

0.7 / 1 Bn Dollars

2016Campari over Grand Marnier

760 Million Dollars

2012Sazerac over Southern Comfort & Tuaca

545 Million Dollars

Source: Bloomberg

6

the expected growth of Blended and single malt whiskeys respectively at a 14% and 15% 2016-21 CAGR. We estimate that PR’s positioning in the Indian and Chinese markets will drive its future earnings growth (See Appendix 12: Top-line forecasts). AN INDUSTRY-WIDE PORTFOLIO TO COVER ALL GROWTH OPPORTUNITIES - PR’s brand positioning lies on its core portfolio development strategy. After widening its range through its disruptive acquisitions, the company now operates the whole spirits spectrum which is an increasing competitive advantage as targets have rarified and are more expensive. In this context, it is crucial to cultivate organic growth with marketing and innovation, so as to achieve success similar to Jameson’s Irish whiskey.

We believe PR’s product innovation culture (See Appendix 26: Innovation) coupled with an extensive horizontal marketing strategy (A&P spending 360bps above the 5-leader average, see Chart 32) will be the main tool to deepen its portfolio and enhance organic growth. On the contrary, we see the unbalanced portfolios of Bacardi and Brown Forman - respectively focused on rum and whisky - as a comparative advantage for PR. As for wines, the group’s premium positioning lies on markets where production and consumption are growing: New-Zealand, Australia and California with leading brands such as G.H Mumm being 3rd champagne producer worldwide.

FINANCIAL ANALYSIS

REVENUES GROWTH IS SUPPORTED BY STRONG FUNDAMENTALS

Historical: PR’s broad portfolio of brands posted a 1.9% sales CAGR over FY12-17 (See Chart 33). By breaking down sales growth rate PR shows: (1) A consistent 2.2% organic CAGR temporarily affected by a poor performance in China over FY14 (sales down by 23%), due to the anti-extravagance laws and an economic slowdown in Asia (regional sales decreased by 3.7%); (2) A volatile-yet-neutral forex impact (-6.2% in 2014 negatively impacted by USD and RMB, balanced the following year by a +5.5% effect from the USD); (3) A barely modified scope over the period (-0.4% CAGR). PR’s higher Chinese market exposure than Diageo (less than 5% of its revenues vs 9% for PR) is a double-edged sword. In the last few years, PR posted a slower growth rate due to the economic turmoil in the country but current expectations and 1Q18 results indicating a return to growth in China (Sales +15%) suggest it should be an outperformance factor in the upcoming years.

Forecasts: We consider that PR’s historical slower growth rate should be compensated by stronger results in emerging markets (See Chart 34), increased market penetration (fuelled by ad spend weighing 18.8% of sales) and efficient product innovation. We estimate 4.9% organic growth rate for FY18E, mainly driven by Americas (5.1%) and Asia Row (6.4%). This trend is explained both by global consumption value growth of 5.1%. and market share gains in Asia (+1%). However adverse forex impact (-4.7%), principally coming from a depreciating USD/EUR (-7%) (See Appendix 13: Forex impact forecast) and CNY/EUR (-9%), should lower total growth to reach a EUR 9bn turnover. 1Q18 results support our estimates as revenues reached EUR 2,292m (5.7% YoY organic growth), ensuring 25% of our top-line objective proportionally even with 1Q17. Between FY19E and FY22E, we forecast a 4.9% CAGR reaching PR’s mid-term objective. OPERATING SAVINGS MAKE ROOM FOR ADDITIONAL MARKETING SPENDINGS

Historical: Advertising and Promotion (A&P) expenses are PR’s key to foster its positioning in both premium segment and emerging markets. Therefore, the group adopted a proactive policy by allocating an additional EUR 200m generated from the Operational Efficiency roadmap savings to A&P. In FY17, A&P represented 18.8% of sales, the second highest amount behind Rémy Cointreau (23.1%) and above Campari (17.8%). As part of the streamlining blueprint the group significantly reduced structure costs of sales from 18% in FY14 to 16.8% in FY17. Forecasts: We expect the ad spend to sales ratio to remain constant at 19% of sales in the coming years in line with the group’s guidance. The process is likely to drive up the company’s growth by widening its consumer base and by capitalising on existing powerful brands. As for structure costs and in accordance with the Operational Efficiency roadmap savings, our forecasts conclude in EUR 140m savings until 2020, slightly above the management’s target (See Chart 35). STABLE MARGIN TRENDS JUSTIFY FOCUS ON TOP-LINE GROWTH PR has one of the highest gross margin among its peers (62.2% vs 61.8% for Diageo in FY17). We foresee a slight gross margin improvement (+30bps by FY18) thanks to PR’s growing pricing power. Consequently with the Operational Efficiency roadmap savings we expect a 100bps increase in EBIT margin at 27.5% by FY22. In FY17, the group managed to maintain its EBITDA margin at 29%, in line with the sector and is expected to reach 30% by the end of the forecast period. The group’s additional efforts to deleverage the structure between FY13 and FY17 have led to net profit margin enhancement from 13.9% to 15.8% (+190bps, thanks to a 22% decrease in financial expenses). The cash flow generated should allow PR to keep deleveraging, thus reaching a net margin of 18.6% by FY22.

HIGH WORKING CAPITAL, A DIRECT CONSEQUENCE OF PR’S PREMIUMISATION PROCESS Historical: PR’s high operational excellence requirements have also led to improved working capital management (See Chart 36). On the one hand, the cash conversion cycle has decreased from 460 days in 2014 to 425 in FY17 thanks to two operational leverages: stricter client payment terms (from 51 to 45 days of sales outstanding) and tighter supplier management (higher days of payables outstanding from 164 to 188). On the other hand, inventory levels are increasing, as PR sticks to the current enthusiasm towards ageing spirits, that need longer maturation period. The latter represented by work-in-progress, make most of the inventory level (85%). Forecasts: Our estimates show EUR 70m savings on working capital by FY20 as a consequence of the Operational Efficiency roadmap savings and additional streamlining efforts. Simultaneously, we expect work-in-progress and therefore inventory to increase to 578 days which is consistent with PR focusing on the high-end segment as premium products need a longer ageing period. DELEVERAGING TO ENABLE ROOM FOR MANOEUVRE BY 2020

Historical: Issuance of debt has mostly been used to finance PR’s transformative M&A operations. Absolut’s acquisition resulted in an all-time high debt threshold in FY09 (EUR 10.8bn). Since that date, PR has been implementing a deleveraging policy (net debt-to-EBITDA ratio decreased from 5.6x in FY09 to 3.0x in FY17). Solvency is consequently improved as shown by PR’s debt service coverage (from 0.6 in FY14 to 1 in FY17), as is risk perception regarding the corporate structure. Our Z-score analysis supports this leverage analysis (See Appendix 30: Z-Score). The purpose of PR is to implement a virtuous cycle: deleveraging reduces fixed costs and drives profitability thanks to lower interest expense and refinancing interest rate. This process should also improve PR’s credit rating - S&P global ratings increased its grade from BBB- to BBB in November 2017 - further reducing interest spreads and providing the company flexibility to seize growth opportunities. Forecasts: The management’s guidance is to continue the deleveraging process for the coming years, that is why we target a 25% long-term gearing objective, in line with the industry average, to be reached by FY19. In our forecasts, this ratio falls to a low of 10% in FY22 (See Chart 37). Our estimates state deleveraging as top priority, which should give room for manoeuvre for any potential M&A opportunity after FY19. Such transactions are likely to lead to debt issuance and, potentially lever up the balance sheet towards the 25% target. Returning cash to shareholders could also be considered in the absence of attractive M&A targets.

0

2,750

5,500

8,250

11,000

Am

ou

nt

in E

UR

m

/ g

row

th in

%

-8%-6%-4%-2%0%2%4%6%8%

FY13

FY14

FY15

FY16

FY17

FY18

EFY

19EFY

20EFY

21EFY

22E

Growth Rate Sales

Day

s o

f tu

rno

ver

350

438

525

613

700

2013 2014 2015 2016 2017 2018E

Chart 36: PR’s net working capitalStocks Receivables Payables NWC

Source: Pernod Ricard / Team Estimates

Chart 37 : PR’s capital structure

0%

13%

25%

38%

50%

Am

ou

nt

in E

UR

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0

5,750

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17,250

23,000

FY13

FY14

FY15

FY16

FY17

FY18

EFY

19EFY

20EFY

21EFY

22E

Net Debt Equity Gearing

Constellation 7.4%

Brown Forman 12.8%

Diageo 14.9%

Campari17.8%

Pernod Ricard 18.8%

Remy Cointreau 23.1%

Chart 32: Ad spend to sales in 2017

Chart 35 : Operational Efficiency plan

Rat

io in

%

8%

15%

22%

28%

35%

FY13

FY14

FY15

FY16

FY17

FY18

EFY

19E

FY20

EFY

21E

FY22

E

EBITDA margin Structure Costs /Sales

Source: Pernod Ricard / Team estimates

Chart 34: PR’s recovery in Asia

Chart 33 : Revenue & Growth Estimates

Sale

s g

row

th r

ate

(%)

-5%

-3%

0%

3%

5%

8%

10%

FY14

FY15

FY16

FY17

FY18

EFY

19EFY

20EFY

21EFY

22E

Chart 38 : Cash-Flows generation

Source: Pernod Ricard / Team estimates

0

750

1500

2250

3000

Am

ou

nt

in E

UR

m

0%

5%

11%

16%

21%

FY13

FY14

FY15

FY16

FY17

FY18

EFY

19EFY

20EFY

21EFY

22E

FCF-to-sales CFO FCFE

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

Source: Bloomberg / Team Estimates

Source: Bloomberg / Team Estimate

Allegro Plan Operational Efficiency road map

7

PROMISING CASH GENERATION OFFERS PERNOD RICARD OPPORTUNITIES

Historical: Sound cash generation enables PR to cover its operational requirements, CapEx, debt obligations and dividend payments. Over FY13-FY17, operational CF (CFO) showed 8.6% CAGR, thanks to: (1) Increasing EBITDA; (2) Lowering expansion of working capital requirement from +EUR 250m to +EUR 80m; (3) Decreasing interest burden (See Appendix 15: DuPont decomposition of ROE). The result is the improvement of the CFO-to-Sales ratio by 400bps and FCF/sales ratio from 14.4% to 17.8% which highlights PR’s ability to convert sales into cash (See Chart 38). Forecasts: We foresee an increase in PR’s quick ratio from 0.5 in FY17 to 1 by FY22 which helps in decreasing financial risk. Cash will be used to deleverage until FY20 after which liquidity should increase to reach a EUR 3.7bn war chest, accounting for 10% of total assets. As we consider this position as non-optimal we figure three possibilities: (1) Increased spendings on innovation and marketing to foster organic growth; (2) Return cash to shareholders (the company could temporarily exceed its 33% payout ratio, a medium-term guidance, through exceptional dividend); (3) Finance internally targeted acquisitions of local and premium brands that reinforce PR’s growth profile.

RECOVERING RETURN METRICS LEAD TO SHAREHOLDER VALUE CREATION

Historical: PR’s ROE struggled in FY14 and FY15 due to disappointing business activity in Asia Row and adverse forex impact on USD but gradually recovered to its FY13 level at 10.5% even though remaining below Diageo’s. Our Dupont decomposition analysis (See Appendix 15: DuPont decomposition of ROE) suggests that asset turnover and leverage are responsible for PR’s lag. The main explanation is PR’s heavy balance sheet mainly burdened by intangibles and goodwill (brands and acquisitions) which represent 57% of total assets vs 43% for Diageo (See Appendix 11: Key ratios) Forecasts: We also performed a ROCE/WACC analysis to assess PR’s yearly excess value creation (See Chart 39). According to our forecasts, as ROCE is superior to our WACC estimates (7.9% ROCE vs 6.4% WACC in FY18) it implies an economic surplus for PR (Appendix 16: ROCE). The main explanation is that PR operates in a niche, which generates high margins. The group especially benefits from a large pricing power due to its size, its premium orientation and strong brand-image. We conclude that a return analysis strongly supports our BUY recommendation. CONSISTENT AND TRANSPARENT DIVIDEND POLICY Over the past five years, PR maintained a 35% payout ratio aligned with its long-term objective. The group’s growing dividend coverage ratio supports the safety of the dividend distribution, increasing from 2.5x in FY13 to in 3.2x FY17. The payout ratio is consistent with the industry average except for Diageo which exhibits a higher structural return to shareholders. According to our estimates and management guidance, we expect the group to maintain a 33% payout ratio in the long run. Still, this level could be temporarily exceeded in the case of an exceptional dividend distribution due to excess cash generation.

SOUND M&A CAPACITY TO TRIGGER ADDITIONAL VALUE According to our estimates, PR should reach a EUR 3.6bn cash position by FY22E, 10.5% of total assets, 850bps higher than its historical average level resulting in EUR 2.3bn excess cash (see Chart 41). This would offer room for manoeuvre regarding M&A transactions with targets differing depending on the region: (1) As PR seeks to fine-tune its portfolio in mature markets we see small crafted and high-growth profile spirits distillers being more likely to be targeted; and (2) In emerging markets, larger scale operations could enable PR to improve its key market penetration and develop its distribution network (See Appendix 32: Potential M&A targets). We ran a statistical analysis to check for abnormal returns around PR’s key M&A announcement dates. The results are significative and show that PR’s M&A transactions have historically been welcomed by investors, resulting in positive performance on the stock price (See Chart 40). An example is Smooth Ambler’s acquisition announcement on 9th, December 2016 which generated a daily share price performance of 2.6% compared to the french CAC-40 index performance of 0.6% (See Appendix 31: M&A event study).

VALUATION Our valuation relies on three key valuation methods with different weightings: 40% for DCF, 40% multiples Sum-Of-The-Parts (SOTP) and 20% to our P/E multiple linear regression valuation. We chose to overweight our DCF model as the method is well-suited for PR as the group generates strong positive cashflows with a long-term visibility of the industry outlook. From an industry standpoint, it also enables us to perform sensitivity (See Chart 43 and Appendix 18: DCF Sensitivity Analysis) and scenario analyses (Monte Carlo simulation, Bear/Bull cases) as spirits are correlated to macroeconomic fundamentals. Likewise, we overweighted our Sum-of-the-parts multiple based valuation as it sticks to PR’s well-spread geographical breakdown and highlights the regional specificities of the industry. The multiple linear regression of PR’s P/E helps us identifying valuation drivers to derive a forecast valuation multiple. However, this method only comes as a support of the first two valuations as it faces limitations such as coefficient volatility over time and multicollinearity.

I - DCF VALUATION

We chose to use the FCFF valuation model as it is more accurate for PR’s changing capital structure and more explicit in connecting our assumptions to the target price (See Appendix 17: DCF Valuation). Through our DCF model we reach a 12-month target price of EUR 152.6, suggesting 17.4% upside potential. FREE CASH FLOW ESTIMATES

Modelling the top-line - On the industry level, we identified three main sales drivers: targeting new customers, increasing consumption per capita and price hikes. We chose to apply these three levers altogether to derive PR’s top-line through an extensive four-step top-down approach: (1) We started from regional population growth estimates to capture PR's increasing consumer base. We multiplied this result by (2) forecasts of consumption per capita - which reflect the trend towards increasing consumption per capita. (3) We continue our top-line forecast by multiplying the market volume with the yearly average price per unit of alcohol to include our third lever: make consumers pay more. (4) The last step is to take PR’s potential market share gains into account based on: growing advertising ratio in Americas, increasing penetration of international styles spirits in Asia and historical market share gains in Europe. In accordance with the FY18-FY19 Bloomberg consensus for forex (PR fiscal year adjusted) and our growth estimates we reach 4% top-line CAGR between FY17 and FY22 (See Appendix 14: Segmentation of Income Statement).

Deriving the FCFF - Our FCFF valuation starts from the cash-flow from operations (See Chart 42). As for expenditures, our net CapEx forecasts are aligned with the management’s guidance of a 4% CapEx to sales ratio and we expect growth in working capital requirement to slow down over the period in line with the Operational Efficiency roadmap. MAIN ASSUMPTIONS : DEFINING THE WACC Beta: Our 0.82 beta estimate is based on a 3-year weekly regression of the stock price on the CAC40 index. Risk-Free Rate was calculated by two means: (1) an average of risk-free rates according to PR’s main markets and (2) an average OAT rates during a 10-Year cycle. Both methods give a consistent result of 2.4%.

WACC/g

2.0% 2.3% 2.4% 2.5% 2.6% 2.7% 3.0%

5.9% 145 157 162 167 173 178 198

6.2% 132 143 147 151 155 160 176

6.3% 128 138 142 146 150 155 170

6.4% 125 135 138 142 146 150 164

6.5% 121 130 133 137 141 145 158

6.6% 117 126 130 133 136 140 153

6.9% 108 116 119 122 125 128 138

Chart 43: WACC/g sensitivity analysis

Chart 42: FCFF Calculation from CFO

in EURm FY17 FY18E

Group Net Profit 1,393 1,515

Non-cash charges adjustments

1,100 1,143

Change in working capital

-80 -65

Net interest paid -364 -271

Tax paid -408 -514

CFO 1,641 1,808

Interest -403 -325

Tax rate 25%

Interest net of tax -302 -244

Capex -367 -361

Disposal of asset 17 25

Net investments in fixed assets

-350 -336

FCFF 1,593 1,715

Source: Team Estimates

Chart 39 : ROCE VS WACC

Chart 41 : M&A room for manoeuvre

in EURm FY18E FY19E FY20E FY21E FY22E

Excess Cash

Position174 272 883 1,890 2,967

Chart 40 : Abnormal return in acquisition announcement period

RO

CE

/ W

AC

C (

%)

6%

7%

8%

9%

10%

FY17

FY18

EFY

19E

FY20

EFY

21E

FY22

E

Cu

mu

late

d a

bn

orm

al

retu

rns

vs C

AC

-40

(%)

0.0%

1.3%

2.5%

3.8%

5.0%

Day

-5

Day

-4

Day

-3

Day

-2

Day

-1

Anno

unce

men

t

Day

+1

Day

+2

Day

+3

Day

+4

Day

+5

Source: Bloomberg / Team estimates

Source: Bloomberg / Team estimates

Source: Team estimates

ROCE (%) WACC (%) Value creation

Source: Pernod Ricard / Team Estimates

8

Equity Risk Premium is similarly weighted according to PR’s geographic exposure. It uses France, China and the US as proxies for their respective region. We derive a 6.2% equity risk premium. Using the CAPM model we thus reach a total cost of equity of 7.6%. Gearing: In line with our deleveraging estimates for Pernod Ricard and the sector average, we use a 25% target gearing. Tax Rate: We assume a 25% long term tax rate consistent with PR’s historical effective tax rate and the Alcoholic Beverages sector provided by Damodaran (26%). Cost of Debt should stabilise at 3.8% as per management’s guidance and given PR’s investment grade credit rating and deleveraging process. Tax shield adjusted, this cost is reduced to 2.9%. Long-term growth rate: As PR is well geographically diversified, we use the global GDP growth forecast, and considered that the spirits industry should converge towards it in the long run. Overall our assumptions point to a WACC of 6.4%, which we use in our model to discount the forecast Free Cash Flow to the Firm.

SCENARIO ANALYSIS

Added to our sensitivity analysis we performed both a bull and a bear scenario (See Chart 44) which are based on four key value drivers.

BULL CASE: EUR 172 1-Year TP (32% upside)

- Forex: Instead of fading the forex impact by 2020 as we did in our base case, we neutralised the currency fluctuation effect leading to an estimated EUR 9.4bn revenue (See chart 45). This event could occur in case the ECB maintains its expansionary monetary policy.

- ESG: We decreased the WACC from 6.4% to 6.2% considering PR’s proactive ESG policy. Assuming that more and more investors take the ESG factor into account in their investment strategies, PR’s involvement regarding this matter should deserve a premium.

- Market penetration: For Americas we consider PR reverses the historical trend by gaining back market shares as from FY19 (+0.5% market share) following its corporate reorganisation in the US. In Asia we expect a +2% market share increase vs +1% in our base case scenario for next year due to an accelerated penetration of international styles spirits in emerging countries. As for Europe we increase market shares by +1% in the middle of our valuation while stable in our base case scenario.

- Better than planned efficiency roadmap implementation: While our base case sticks to the management’s guidance concerning the efficiency roadmap, we estimate the impact if PR manages to outperform its objective, generating EUR 143m savings of additional savings, totalling EUR 283m.

BEAR CASE: EUR 121 1-Year TP (7% downside)

- Forex: We increase the negative forex impact in all areas because of the following events occurring: (1) USD/EUR: no growth in the US due to the Trump policy while FED’s rates increase is slower than expected; (2) CNY/EUR: debt crisis in China; (3) GBP/EUR & RUB/EUR: weakening economic context in the UK following BREXIT and political turmoil as Russian presidential election nears. In this case, we downgrade our sales estimate by EUR 165m (See chart 45).

- Regulation: Tighter regulation in India and China as both political leaders consolidate their power which generate negative demand shocks on the Spirits market. To reflect this situation we reviewed our market growth estimates in Asia Row, down from +5% to +2% over the next two years.

- Market share loss: We materialised that PR would not be able to catch momentum in emerging markets, meaning locals would not integrate the group’s brands in their consumption habits, resulting in stable market shares for the period while consumption remains centred on local spirits. As for Americas, restructuring in the US is not sufficient to reverse the trend of market share loss (-1% in FY18/19 then -0.5% for the rest of the period).

- Worse than planned efficiency roadmap implementation: The management misses the guidance on the roadmap and fails its cost-cutting policy, resulting in a 25.2% EBIT margin in FY22 (vs 27.5% in the base case).

II- P/E MULTIPLE LINEAR REGRESSION Our model provides an estimate of the future share price using CAC all-tradable market data. Our model uses the 188 companies for which data is available among a sample of 320 entities. The companies’ forward P/E are regressed against 6 key determinants: growth, beta, size, dividend, sector and ROE (See Chart 46). We thus apply these drivers to PR. This results in a fair value of EUR 130.8 in line with the current stock price (EUR 130). PR currently trades at a 22.8x forward P/E ratio which is expected to be stable on a trailing basis for FY18E. So as to get our 1-year target price, we capitalise this estimated fair value by the cost of equity (7.6%). The resulting price is EUR 140.6 per share (8.2% upside)

III- SOTP VALUATION Based on our SOTP approach we estimate a 12-month target price of EUR 157.5 per share (21,1% upside) . We obtained this relative valuation with 12-month forward EV/EBITDA multiples. The main reason why we chose the EV/EBITDA metric is that it allows comparisons between firms that have different capital structures, which is mainly the case for spirits companies.

PEERS SELECTION - We built four peers groups: one group of pure players for each region (Americas, Europe, Asia RoW) and one group only composed of international players. This analysis allows us to capture regional dynamics into our relative valuation and assess to which extent the results are consistent with the multiples of its international peers (See Appendix 20: Peers Selection).

WHY HAS PR BEEN TRADING AT A DISCOUNT? - Since 2012, PR has been trading at a discount to its international peers on EV/EBITDA multiples (See Chart 47). This discount was mainly due to: (1) More leverage at PR compared to peers - 4.5x total debt / EBITDA for PR vs 2.6x for Diageo in FY12 - due to the acquisition of Absolut. (2) Lower profitability metrics at PR with a ROE weaker than its main competitors: 11.5% in FY12 for PR vs 31% for Diageo and 32% for Brown Forman. (3) Weak US demand from 2012 for Absolut - PR’s main brand - with growth down from 4% to 1%. (4) Higher exposure to the volatile Chinese market - which struggled since FY14 (PR’s sales decreased by 23%) because of a toughening legal framework and economic outlook, triggering a sharp de-rating in early 2015 of PR’s EV/EBITDA compared with Diageo (See Chart 48).

RERATING OF AN UNDERVALUED LEADER - We strongly believe PR should trade in line with pure players of each region in order to reflect the business specificities of each region. This leads to a 14.8% discount compared to PR’s international competitors, meaning a 880bps recovery from the current level of 23.6%. Our discount reduction is driven by: (1) Improving business outlook in China - 1Q18 sales grew by 15% - and Absolut’s return to growth (+2% FY17); (2) Deleveraging of the capital structure to reach the sector average; (3) Investment risk mitigation through an ahead-of-regulation ESG policy (See Appendix 21: Multiples Valuation).

Chart 46 : P/E regression formula

COEFFICIENT PR

Constant 10.3

Sector Constant 3.1

3-Y EPS growth 14.8 19%

BETA -9.3 0.82

Size 1.8 10.46

Dividend (dummy variable)

-4.3 1

ROE n+1 -7.5 10.6%X

X

X

X

+

+

+

+

+

+

X

in EURm

-7% -6% -5% -2% 0%

Impact on sales

-165 -109 BASE CASE

+224 +372

FY18E Sales

8,856 8,912 9,021 9,245 9,393

Chart 48 : EV/EBITDA forward vs Diageo

10x

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13

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17

Pernod Ricard Diageo plc

Chart 44: BULL/BEAR scenarios

Sales

Gross Margin

EBITDA

CFO

-8% -6% -4% -2% 0% 2% 4% 6% 8%

BULLBEAR

Source: Bloomberg / Team estimates

Chart 47 : EV/EBITDA forward

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RI-FR Moyenne

Source: S&P Capital IQ / Team estimates

Chart 45: Forex impact on net sales in Bull / Bear case

Source: Team estimates

Source: S&P Capital IQ / Team estimates

Source: Team estimates

9

INVESTMENT RISKS

I- MARKET RISK MK1: Economic Slowdown - As the spirits industry’s growth is correlated to the global GDP an economic slowdown in key markets would negatively impact PR’s organic growth. The current global economic recovery in mature markets is benefitting the industry but emerging countries are still defined by more uncertainty and outlook volatility. As a consequence, regional downturns are conceivable events and might negatively impact local activity. Although PR generates more than 38% of its revenues in emerging markets its global exposure decreases the group’s dependence on a specific market. MK2: Forex - PR’s diversification also implies an exposure to currencies fluctuation. The group is mainly exposed to USD (19%), INR (10%), CNY (9%), and GBP (4.8%) (See Chart 50). As a consequence, the company’s effort to enhance top-line organic growth could be annihilated because of an adverse forex environment. Management decided not to implement any hedging policy regarding currencies, but benefits from a natural hedge as 55% of its debt is denominated in USD, which is then repaid using USD cash flows. Furthermore, on the long run the forex impact is almost neutralised (0,14% yearly average impact on PR’s sales) as the currencies variations to which the group is exposed tend to offset each other. MK3: Interest Rates - ECB and FED rates are both expected to rise in the short run, after a period of expansionary monetary policy (See Chart 51). The three main consequences are: (1) Adverse forex impact due to capital repatriation to higher-yield countries, included in our financial forecasts; (2) An increased pressure on interest expenses. PR’s leverage is decreasing, lowering interest charges which we expect, should improve the interest coverage ratio from 6x to 14x between FY17 and FY22. PR’s investment grade (BBB) credit profile with a positive outlook mitigates the risk induced by a tightening monetary policy. (3) Higher interest rates could negatively impact P/E multiples and lead to a decrease in share prices as higher yields can move funds from equity to fixed-income markets (See our 10-year monthly P/E regression exhibited in Chart 52).

II- REGULATORY RISK RG1: China has already - with the 2014 anti-extravaganza laws - and may in the future shape demand and supply locally with a tougher legal framework. While fundamentals were strong, much of the consumption was fuelled by officials lavish living: as much as 50% of all premium wines are likely to have been purchased with government-related money during the year 2013. PR is all the more exposed as lobbying practices in the country are forbidden, preventing the group from intervening when their interests are at stake. RG2: India has been hit by a wave of reforms in 2017, which tackled corruption (Demonetisation, November 2016), Goods Taxation (GST, July 2017), and alcohol consumption (Highway Ban, April 2017). Altogether these new laws negatively impacted PR’s activity lowering sales growth to +1% in FY17 compared with +12% in FY16. In FY18, the effect may keep jeopardising sales in H1 (Highway Ban) and pressuring margins (GST). We foreshadow additional laws being implemented as part of Prime Minister Modi’s political incentive to supervise India’s economy.

Although regulation generates short term supply and demand shocks, business players remain able to find alternative growth drivers on the long run. For example, Chinese household consumption fuelled by increasing disposable income took over officials and corporate spirit spendings. As for the Indian market, retailers managed to relocate their stores to comply with Highway Ban without hurting their sales. In addition to business flexibility, legal precedents can also be found to bypass coercive measures

III- POLITICAL RISK PL1: EUROPE - Brexit is likely to bring political uncertainty and threaten free trade between the EU and the UK. A no-deal Brexit would have severe consequences on the alcoholic drinks sector (-1.2% 2016-21 CAGR for the sector). Twenty-eight PR facilities are located in Scotland and the company generates 4% of its turnover on British soil. However, PR’s main competitor Diageo is more exposed to potential negative outlooks resulting from the Brexit implementation which could penalise Britain-based spirits exports. Still, if the UK closes its membership by a Free Trade Agreement, both actors may see little-to-no change in their regular business activities.

PL2: USA represented 67% of the group’s regional earnings in FY17. President Trump’s first term questions the free trade advances between the US and other countries. After considering withdrawal from NAFTA the Trump administration is projecting taxing goods imported by international companies. PR is widely exposed to such a reform as only 4-out-of-96 production sites are located in the US. Yet, any tax increase on PR’s imported spirits are likely to be transferred to consumer through price increase as the group, which is specialised on the high end segment, has higher pricing power. Also, spirits players may overcome protectionist policies by acquiring US-based distillery avoiding tariffs and restrictions on imported goods. PL3: Africa’s political unrests remain a high threat to business development in the region. In 2018, 6 presidential elections will occur and each of these ballots may be an occasion for accrued tensions. Although the continent remains a long-term opportunity for Pernod Ricard -South Africa and Nigeria- it only represents 4% of the group’s earnings, half of which in South Africa.

IV- BUSINESS & OPERATIONAL BO1: Brand reputation - As PR capitalises on its customer experience around « moments de convivialité », brand reputation has a key impact on its earnings perspectives. The main threat is counterfeiting, which may deteriorate a brand’s image. It may deter new consumers on which PR will rely, from purchasing its products due to trust issues: a 2014-survey from wine-search found 44% of Chinese respondents feared buying fake wine in all price categories. The sector shortfall is estimated to be USD 1bn per year (International Federation of Spirits Producers). PR is particularly exposed in emerging markets where regulation is less attentive to intellectual property especially on Chinese online marketplaces (Taobao, Alibaba). To counter this the group bets on innovation by implementing QR codes (See Appendix 26: Innovation). Spirits brand image might also be undermined by adverse events such as internal scandals or process contamination. On the other side, unregulated public relation practices such as bribes can arm companies relying on their brand image.

BO2: Shifting consumption trends - The spirits industry is defined by ever-changing consumption trends (crafted, premiumisation, see Industry Overview). Although International players have been trying to seize such opportunities, consumption trends are changing faster than portfolio compositions creating a risk for distillers to have their products miss the momentum. This situation has already occurred with PR’s acquisition of Absolut which was followed by a decline in the vodka segment (See Chart 53), due to brown spirits gaining back consumer interests in the US. This resulted in a EUR 404m impairment in 2015 for the brand. Today PR’s portfolio diversification allows the group to offset most brand’s weaknesses by another’s performance. Another aspect of the risk is the marijuana recent legalisation in several American states. We consider this authorisation could spread drug use and cannibalise a small amount of spirits consumption as customers switch towards this new trend.

V- OTHER RISKS O1: ESG - An increasing number of investors take the ISR criteria into account in the investment decision-making process. The alcoholic beverage industry’s health related issues force it to adopt an even more responsible policy to avoid public criticism. The industry’s high water consumption and carbon footprint make it vulnerable to eco-friendly regulatory policies. For instance, the implementation of a carbon tax would pressure margins. We consider that PR has been bridging the gap between responsible investors, administrations and the spirits industry by adopting a best-in-class policy following the political momentum in the wake of the 2015 Paris agreements, and the 2017 One planet summit.

USD GBP INR RMB

+/-10% +/-10% +/-10% +/-10%

SALES +/-1.8% +/-0.5% +/-0.9% +/-0.8%

EBITDA +/-1.9% +/-0.4% +/-0.9% +/-0.8%

EPS +/-2.4% +/-0.5% +/-1.2% +/-1.1%

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Chart 51: ECB & FED interest rates

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Chart 50 : Major currencies effect

Chart 49 : Risk Matrix

Source: Team estimates

P/E

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y = -3.404x + 29.899

R² = 0.7422

Chart 52: PR’s P/E regression

Source: Bloomberg

Source: Team estimates

Source: Bloomberg

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Chart 53: Vodka sales in the US

Source: Discus spirits association10

APPENDIX TABLE

APPENDIX 1: GLOSSARY …………………………………………………………………………………………………………………… APPENDIX 2: BALANCE SHEET……………………………………………………………………………………………………………… APPENDIX 3: VERTICAL COMMON SIZE BALANCE SHEET……………………………………………………………………………………... APPENDIX 4: HORIZONTAL COMMON SIZE BALANCE SHEET………………………………………………………………………………….. APPENDIX 5: INCOME STATEMENT………………………………………………………………………………………………………...... APPENDIX 6: VERTICAL COMMON SIZE INCOME STATEMENT………………………………………………………...……………………..… APPENDIX 7: HORIZONTAL COMMON SIZE INCOME STATEMENT…………………………………………………………..………………..… APPENDIX 8: PERNOD RICARD’S TOP-LINE GEOGRAPHICAL BREAKDOWN……………...…………………………………..………………..…. APPENDIX 9: CASH FLOW STATEMENT…………………………………………………………………………….……..………………..… APPENDIX 10: COMMON SIZE CASH FLOW STATEMENT……………………………...…………………………….……..………………..…. APPENDIX 11: KEY RATIOS…………………………………………………………….……..…………………………………………....... APPENDIX 12: TOP-LINE FORECASTS………………………………………………………….……..………………………………………. APPENDIX 13: FOREX IMPACT FORECASTS………………………………………………………….……………………………………....... APPENDIX 14: SEGMENTATION OF INCOME STATEMENT…………………………………………….……………………………………....... APPENDIX 15: DUPONT DECOMPOSITION OF ROE…………………………………………….…………………………………………........ APPENDIX 16: RETURN ON CAPITAL EMPLOYED (ROCE)…………………………………………….……………………………………........ APPENDIX 17: DCF VALUATION…………………………………………….……………………………………………………………...... APPENDIX 18: DCF SENSITIVITY ANALYSIS…………………………………………….…………………………………………………........ APPENDIX 19: BLOOMBERG CONSENSUS…………………………………………….……………………………………..……………...... APPENDIX 20: PEERS SELECTION………………………………………………………………..…….…………………………………...... APPENDIX 21: MULTIPLE VALUATION…………………………………….………………………………………………………………...... APPENDIX 22: 6-PORTER FORCES……………………………………….………………………………………………………………....... APPENDIX 23: PESTLE……………………………………….…………………………………………………………………………....... APPENDIX 24: SWOT……………………………………….…………………………………………………………………………….... APPENDIX 25: PERNOD RICARD’S BRAND PORTFOLIO……………………………………….……………………………………………...... APPENDIX 26: INNOVATION……………………………………….……………………………………………………………………….. APPENDIX 27: EXECUTIVE COMMITTEE …………………………….………………………………………………………………………. APPENDIX 28: 4-P MARKETING MATRIX………………………….………………………………………………………………………..... APPENDIX 29: M-SCORE……………………………………….…………………………………………………………………………... APPENDIX 30: Z-SCORE……………………………………….………………………………………………………………………….... APPENDIX 31: M&A EVENT STUDY………………………………….……………………………………………………………….…….... APPENDIX 32: POTENTIAL M&A TARGETS…………………………….……………………………………………………………………... APPENDIX 33: THE ABSOLUT COMPANY, AN EXAMPLE OF SUCCESFUL ESG IMPLEMENTATION…………………………………………………..

APPENDIX 1: GLOSSARY Industry notions:

International styles spirits: Types of spirits with global reach, distributed by a few number of large producers in every region of the world.

Home trade: New distribution network that allows the consumer to experience spirits tasting at home.

Millennials: Individuals with singular consumption characteristics, usually born between 1977 and 1995.

On-trade: Distribution network where the consumption is made on the point of sales. For instance: Bar, hotel, restaurants…

Off-trade: Distribution network where the consumption is made outside the point of sales. For instance: Grocery stores, liquor stores, wine cellar…

Premiumisation: Process by which a distillers upgrades its existing product or brand towards the high-end, to suggest it in a luxury version or to decline it under different premium forms ie superior quality, and sophisticated packaging. Upmarket positioning is an accelerator of sales and margins growth and highlights the passage of a volume strategy to a value strategy.

Spirits: Alcoholic beverages that have been through a distillation process rather than being fermented, in opposition to beer and wine. The latter include, but are not limited to vodka, gin, whiskey and other liqueurs.

PR Specifics:

Brand companies: Companies that are implanted in the home countries of their portfolio management. Each company is in charge of developing the overall strategy at the local level and they are responsible for production and management of their industrial facilities.

Market companies: Companies are linked to regions (Asia, EMEA/LATAM, North America) except for two French market companies (Pernod and Ricard). The 85 market companies implement the Group’s international brand strategies in their markets and manage local and regional brands in their portfolio.

Moments de convivialité: Marketing notion implemented by PR to focus households consumption around key social events. This process is key for PR which seeks to focus on the consumption environment and experience rather than the drinking frequency.

11 12 12 13 13 14 14 14 15 15 16 17 17 18 19 19 20 20 21 21 22 23 24 25 26 27 27 28 29 29 29 30 30

11

Appendix 2 to 10 present PR's financial statements (Income Statement, Balance Sheet and Cash Flow Statement) which we reprocessed and used for our analysis of the group. Our financial forecasts for PR until FY22 are also integrated in these charts. Along with each statements, we performed the calculation of horizontal and vertical common size charts in order to provide magnitude to absolute data.

APPENDIX 2: BALANCE SHEET

APPENDIX 3: VERTICAL COMMON SIZE BALANCE SHEET

Back to Appendix table

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Net Intangible assets 11,781.00 11,543 12,212 12,085 11,755 11,675 11,598 11,520 11,442 11,364

Net Goodwill 4,973 4,907 5,494 5,486 5,397 5,397 5,397 5,397 5,397 5,397

Net PPE 2,074 2,167 2,352 2,387 2,336 2,452 2,573 2,705 2,846 2,991

Investments in associates 16 15 16 17 15 15 15 15 15 15

Other non current financial assets 416 412 565 831 676 664 653 641 630 618

Deferred tax assets 1,771 1,926 2,339 2,505 2,377 2,377 2,377 2,377 2,377 2,377

NON CURRENT ASSETS 21,031 20,970 22,978 23,311 22,556 22,580 22,612 22,655 22,707 22,762

Inventory 4,484 4,861 5,351 5,294 5,305 5,322 5,608 5,991 6,316 6,565

Trade receivable 1,159 1,051 1,152 1,068 1,134 1,093 1,148 1,200 1,247 1,279

Income tax receivable 27 37 61 92 111 111 111 111 111 111

Other current assets 232 220 310 259 294 294 294 294 294 294

Cash and cash equivalents 597 477 545 569 677 766 873 1,505 2,541 3,647

CURRENT ASSETS 6,499 6,646 7,419 7,282 7,521 7,586 8,034 9,101 10,510 11,895

Asset held for sale 8 2 1 6 10 10 10 10 10 10

TOTAL ASSET 27,538 27,618 30,398 30,599 30,087 30,177 30,656 31,766 33,226 34,667

Capital 411 411 411 411 411 411 411 411 411 411

Share premium 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052

Retained Earnings 6,378 7,141 8,795 8,639 8,850 10,022 11,230 12,351 13,583 14,846

Group net profit 1,172 1,016 861 1,235 1,393 1,541 1,679 1,837 1,946 2,035

GROUP SHAREHOLDER EQUITY 11,013 11,620 13,119 13,337 13,706 15,026 16,372 17,651 18,992 20,344

Non controlling interests 165 157 167 169 180 197 215 235 256 278

SHAREHOLDER EQUITY 11,178 11,777 13,286 13,506 13,886 15,223 16,587 17,886 19,247 20,622

Non current provisions 1,152 1,133 1,054 1,161 1,102 1,102 1,102 1,102 1,102 1,102

Deferred tax liabilities 2,925 3,042 3,373 3,556 3,422 3,422 3,422 3,422 3,422 3,422

Bond - Non Current 6,949 6,844 6,958 7,078 6,900 6,824 5,974 4,774 4,574 4,374

Other non current financial 915 914 587 341 522 361 361 361 361 55

NON CURRENT LIABILITIES 11,941 11,933 11,972 12,136 11,946 11,709 10,859 9,659 9,459 8,940

Current provisions 163 251 173 167 159 159 159 159 159 159

Trade payable 1,546 1,463 1,696 1,688 1,826 1,819 1,945 2,056 2,155 2,209

Income tax payable 127 56 116 101 156 156 156 156 156 156

Other current liabilities 923 887 920 909 935 935 935 935 935 935

Bond - Current 1,001 929 1,514 1,884 94 0 0 900 1,100 1,300

Other current financial liabilities 656 319 719 207 1,086 176 15 15 15 334

CURRENT LIABILITIES 4,416 3,905 5,138 4,956 4,256 3,245 3,210 4,221 4,520 5,093

TOTAL LIABILITIES AND SHAREHOLDER EQUITY

27,535 27,615 30,396 30,598 30,088 30,177 30,656 31,765 33,226 34,667

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Net Intangible assets 42.8% 41.8% 40.2% 39.5% 39.1% 38.7% 37.8% 36.3% 34.4% 32.8%

Net Goodwill 18.1% 17.8% 18.1% 17.9% 17.9% 17.9% 17.6% 17.0% 16.2% 15.6%

Net PPE 7.5% 7.8% 7.7% 7.8% 7.8% 8.1% 8.4% 8.5% 8.6% 8.6%

Other non current financial assets

1.5% 1.5% 1.9% 2.7% 2.2% 2.2% 2.1% 2.0% 1.9% 1.8%

Deferred tax assets 6.4% 7.0% 7.7% 8.2% 7.9% 7.9% 7.8% 7.5% 7.2% 6.9%

NON CURRENT ASSETS 76.37% 75.93% 75.59% 76.18% 74.97% 74.83% 73.76% 71.32% 68.34% 65.66%

Inventory 16.3% 17.6% 17.6% 17.3% 17.6% 17.6% 18.3% 18.9% 19.0% 18.9%

Trade receivable 4.2% 3.8% 3.8% 3.5% 3.8% 3.6% 3.7% 3.8% 3.8% 3.7%

Cash and cash equivalents 2.2% 1.7% 1.8% 1.9% 2.3% 2.5% 2.8% 4.7% 7.6% 10.5%

CURRENT ASSETS 23.60% 24.06% 24.41% 23.80% 25.00% 25.14% 26.21% 28.65% 31.63% 34.31%

TOTAL ASSET 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Capital 1.5% 1.5% 1.4% 1.3% 1.4% 1.4% 1.3% 1.3% 1.2% 1.2%

Share premium 11.1% 11.1% 10.0% 10.0% 10.1% 10.1% 10.0% 9.6% 9.2% 8.8%

Retained Earnings 23.2% 25.9% 28.9% 28.2% 29.4% 33.2% 36.6% 38.9% 40.9% 42.8%

Group net profit 4.3% 3.7% 2.8% 4.0% 4.6% 5.1% 5.5% 5.8% 5.9% 5.9%

SHAREHOLDER EQUITY 40.59% 42.64% 43.71% 44.14% 46.15% 50.45% 54.11% 56.30% 57.93% 59.48%

Non current provisions 4.2% 4.1% 3.5% 3.8% 3.7% 3.7% 3.6% 3.5% 3.3% 3.2%

Deferred tax liabilities 10.6% 11.0% 11.1% 11.6% 11.4% 11.3% 11.2% 10.8% 10.3% 9.9%

Bond - Non Current 25.2% 24.8% 22.9% 23.1% 22.9% 22.6% 19.5% 15.0% 13.8% 12.6%

Other non current financial liabilities

3.3% 3.3% 1.9% 1.1% 1.7% 1.2% 1.2% 1.1% 1.1% 0.1%

NON CURRENT LIABILITIES 43.36% 43.21% 39.38% 39.66% 39.70% 38.80% 35.42% 30.41% 28.47% 25.79%

Current provisions 0.6% 0.9% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%

Trade payable 5.6% 5.3% 5.6% 5.5% 6.1% 6.0% 6.3% 6.5% 6.5% 6.4%

Other current liabilities 3.4% 3.2% 3.0% 3.0% 3.1% 3.1% 3.0% 2.9% 2.8% 2.7%

Bond - Current 3.6% 3.4% 5.0% 6.2% 0.3% 0.0% 0.0% 2.8% 3.3% 3.7%

Other current financial liabilities

2.4% 1.2% 2.4% 0.7% 3.6% 0.6% 0.0% 0.0% 0.0% 1.0%

CURRENT LIABILITIES 16.04% 14.14% 16.90% 16.20% 14.15% 10.75% 10.47% 13.29% 13.60% 14.69%

TOTAL LIABILITIES AND SHAREHOLDER EQUITY

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates 12

APPENDIX 4: HORIZONTAL COMMON SIZE BALANCE SHEET

APPENDIX 5: INCOME STATEMENT

Back to Appendix table

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22ENet Intangible assets 100.0% 98.0% 103.7% 102.6% 99.8% 99.1% 98.4% 97.8% 97.1% 96.5%

Net Goodwill 100.0% 98.7% 110.5% 110.3% 108.5% 108.5% 108.5% 108.5% 108.5% 108.5%

Net PPE 100.0% 104.5% 113.4% 115.1% 112.6% 118.2% 124.0% 130.4% 137.2% 144.2%

Other non current financial assets

100.0% 99.0% 135.8% 199.8% 162.5% 159.7% 156.9% 154.1% 151.3% 148.6%

Deferred tax assets 100.0% 108.8% 132.1% 141.4% 134.2% 134.2% 134.2% 134.2% 134.2% 134.2%

NON CURRENT ASSETS 100.00% 99.71% 109.26% 110.84% 107.25% 107.37% 107.52% 107.72% 107.97% 108.23%

Inventory 100.0% 108.4% 119.3% 118.1% 118.3% 118.7% 125.1% 133.6% 140.9% 146.4%

Trade receivable 100.0% 90.7% 99.4% 92.1% 97.8% 94.3% 99.1% 103.5% 107.6% 110.3%

Cash and cash equivalents 100.0% 79.9% 91.3% 95.3% 113.4% 128.2% 146.2% 252.2% 425.6% 610.8%

CURRENT ASSETS 100.00% 102.26% 114.16% 112.05% 115.73% 116.73% 123.62% 140.04% 161.71% 183.04%

TOTAL ASSET 100.00% 100.29% 110.39% 111.12% 109.26% 109.58% 111.32% 115.35% 120.66% 125.89%

Capital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Share premium 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Retained Earnings 100.0% 112.0% 137.9% 135.4% 138.8% 157.1% 176.1% 193.7% 213.0% 232.8%

Group net profit 100.0% 86.7% 73.5% 105.4% 118.9% 131.5% 143.3% 156.7% 166.0% 173.6%

SHAREHOLDER EQUITY 100.00% 105.36% 118.86% 120.83% 124.23% 136.19% 148.39% 160.01% 172.19% 184.48%

Non current provisions 100.0% 98.4% 91.5% 100.8% 95.7% 95.7% 95.7% 95.7% 95.7% 95.7%

Deferred tax liabilities 100.0% 104.0% 115.3% 121.6% 117.0% 117.0% 117.0% 117.0% 117.0% 117.0%

Bond - Non Current 100.0% 98.5% 100.1% 101.9% 99.3% 98.2% 86.0% 68.7% 65.8% 62.9%

Other non current financial liabilities

100.0% 99.9% 64.2% 37.3% 57.0% 39.5% 39.5% 39.5% 39.5% 4.6%

NON CURRENT LIABILITIES 100.00% 99.93% 100.26% 101.63% 100.04% 98.06% 90.94% 80.89% 79.21% 74.87%

Current provisions 100.0% 154.0% 106.1% 102.5% 97.5% 97.5% 97.5% 97.5% 97.5% 97.5%

Trade payable 100.0% 94.6% 109.7% 109.2% 118.1% 117.6% 125.8% 133.0% 139.4% 142.9%

Other current liabilities 100.0% 96.1% 99.7% 98.5% 101.3% 101.3% 101.3% 101.3% 101.3% 101.3%

Bond - Current 100.0% 92.8% 151.2% 188.2% 9.4% 0.0% 0.0% 89.9% 109.9% 129.9%

Other current financial liabilities

100.0% 48.6% 109.6% 31.6% 165.5% 26.8% 2.3% 2.3% 2.3% 50.9%

CURRENT LIABILITIES 100.00% 88.43% 116.35% 112.23% 96.38% 73.48% 72.70% 95.58% 102.35% 115.32%

TOTAL LIABILITIES AND SHAREHOLDER EQUITY

100.00% 100.29% 110.39% 111.12% 109.27% 109.59% 111.34% 115.36% 120.67% 125.86%

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Net sales 8,575 7,945 8,558 8,682 9,010 9,021 9,425 9,984 10,527 10,942

Organic Growth 4.0% 0.0% 2.0% 2.0% 3.6% 4.9% 5.5% 5.9% 5.4% 3.9%External Growth -1.0% -1.0% 0.0% -1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Forex 1.0% -6.0% 6.0% 0.5% 0.1% -4.7% -1.0% 0.0% 0.0% 0.0%Total Growth 4.4% -7.3% 7.7% 1.4% 3.8% 0.1% 4.5% 5.9% 5.4% 3.9%Cost of sales -3224 -2958 -3262 -3311 -3407 -3,387 -3,511 -3,720 -3,916 -4,066

Gross Margin 5,351 4,987 5,296 5,371 5,603 5,634 5,914 6,265 6,612 6,876

Advertising and promotion expenses -1,644 -1,503 -1,625 -1,646 -1,691 -1,698 -1,791 -1,911 -2,028 -2,109

Structure costs -1,476 -1,428 -1,433 -1,448 -1,517 -1,494 -1,540 -1,610 -1,692 -1,756

EBIT 2,231 2,056 2,238 2,277 2,395 2,441 2,582 2,743 2,891 3,012

Depreciation and amortization -185 -203 -214 -219 -219 -221 -231 -243 -255 -269

EBITDA 2,416 2,259 2,452 2,496 2,614 2,662 2,814 2,986 3,147 3,280

Other operating income/expense -111 -239 -649 -183 -163 -115 -127 -113 -125 -126

Operating profit 2,120 1,817 1,589 2,094 2,232 2,326 2,456 2,630 2,766 2,886

Interest expense -535 -499 -493 -463 -403 -325 -278 -239 -228 -228

Interest income 17 76 65 63 46 53 61 58 56 55

Other financial expense -45 -62 -61 -32 -24 0 0 0 0 0

Other financial income 8 0 0 0 7 0 0 0 0 0

Pretax profit 1,565 1,332 1,100 1,662 1,858 2,055 2,239 2,449 2,594 2,713

Corporate income tax -373 -304 -220 -408 -438 -514 -560 -612 -649 -678

Net profit 1,193 1,028 880 1,254 1,421 1,541 1,679 1,837 1,946 2,035

Non controlling interest 19 11 19 20 28 26 28 31 33 34

Group share 1,174 1,017 861 1,234 1,393 1,515 1,651 1,806 1,913 2,001

EPS basic 4.46 3.86 3.26 4.68 5.27 5.74 6.25 6.84 7.25 7.58

Dividend per share 1.64 1.64 1.80 1.88 2.02 2.11 2.21 2.41 2.56 2.68

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

13

APPENDIX 6: VERTICAL COMMON SIZE INCOME STATEMENT

APPENDIX 7: HORIZONTAL COMMON SIZE INCOME STATEMENT

APPENDIX 8: PR’S TOP LINE GEOGRAPHICAL BREAKDOWN

Pernod Ricard’s activity is well balanced between each region. Taking into account the group’s subdivisions, 30.9% of revenues are made in Europe, 29.5% in Americas and 39.6% in Asia RoW.

This geographical aspect is necessary because our income statement forecasts were made for each region separately. It was also very useful in calculating the forex impact on PR turnover for the next two year.

Our target price also relies on this breakdown as we decided to perform a relative valuation through a SOTP based on geographical segment.

Back to Appendix table

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Net sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost of sales 37.6% 37.2% 38.1% 38.1% 37.8% 37.5% 37.3% 37.3% 37.2% 37.2%

Gross Margin 62.4% 62.8% 61.9% 61.9% 62.2% 62.5% 62.7% 62.7% 62.8% 62.8%

Advertising and promotion expenses 19.2% 18.9% 19% 19% 18.8% 18.8% 19% 19.1% 19.3% 19.3%

Structure costs 17.2% 18% 16.7% 16.7% 16.8% 16.6% 16.3% 16.1% 16.1% 16%

EBIT 26% 25.9% 26.2% 26.2% 26.6% 27.1% 27.4% 27.5% 27.5% 27.5%

Depreciation and amortization 2.2% 2.6% 2.5% 2.5% 2.4% 2.4% 2.5% 2.4% 2.4% 2.5%

EBITDA 28.2% 28.4% 28.7% 28.7% 29% 29.5% 29.9% 29.9% 29.9% 30%

Other operating Income/Expense 1.3% 3% 7.6% 2.1% 1.8% 1.3% 1.3% 1.1% 1.2% 1.1%

Operating profit 24.7% 22.9% 18.6% 24.1% 24.8% 25.8% 26.1% 26.3% 26.3% 26.4%

Interest expense on net financial debt 6.2% 6.3% 5.8% 5.3% 4.5% 3.6% 2.9% 2.4% 2.2% 2.1%

Interest income on net financial debt 0.2% 1% 0.8% 0.7% 0.5% 0.6% 0.6% 0.6% 0.5% 0.5%

Pretax profit 18.3% 16.8% 12.9% 19.1% 20.6% 22.8% 23.8% 24.5% 24.6% 24.8%

Corporate income tax 4.4% 3.8% 2.6% 4.7% 4.9% 5.7% 5.9% 6.1% 6.2% 6.2%

Net profit 13.9% 12.9% 10.3% 14.4% 15.8% 17.1% 17.8% 18.4% 18.5% 18.6%

Non controlling interets 0.2% 0.1% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Group share 13.7% 12.8% 10.1% 14.2% 15.5% 16.8% 17.5% 18.1% 18.2% 18.3%

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Net sales 100% 92.7% 99.8% 101.2% 105.1% 105.2% 109.9% 116.4% 122.8% 127.6%

Cost of sales 100% 91.7% 101.2% 102.7% 105.7% 105.1% 108.9% 115.4% 121.4% 126.1%

Gross Margin 100% 93.2% 99% 100.4% 104.7% 105.3% 110.5% 117.1% 123.6% 128.5%

Advertising and promotion expenses 100% 91.4% 98.8% 100.1% 102.9% 103.3% 109% 116.3% 123.4% 128.3%

Structure costs 100% 96.7% 97.1% 98.1% 102.8% 101.2% 104.4% 109.1% 114.6% 118.9%

EBIT 100% 92.2% 100.3% 102.1% 107.4% 109.4% 115.7% 123% 129.6% 135%

Depreciation and amortization 100% 109.7% 115.7% 118.4% 118.4% 119.2% 125% 131.2% 138% 145.2%

EBITDA 100% 93.5% 101.5% 103.3% 108.2% 110.2% 116.5% 123.6% 130.2% 135.8%

Other operating Income/Expense 100% 215.3% 584.7% 164.9% 146.8% 103.9% 114.1% 101.7% 113% 113.2%

Operating profit 100% 85.7% 75% 98.8% 105.3% 109.7% 115.8% 124.1% 130.5% 136.1%

Interest expense on net financial debt 100% 93.3% 92.1% 86.5% 75.3% 60.7% 51.9% 44.7% 42.6% 42.6%

Interest income on net financial debt 100% 447.1% 382.4% 370.6% 270.6% 314.1% 356.9% 338.9% 330.2% 322.2%

Pretax profit 100% 85.1% 70.3% 106.2% 118.7% 131.3% 143.1% 156.5% 165.8% 173.4%

Corporate income tax 100% 81.5% 59% 109.4% 117.4% 137.7% 150% 164.1% 173.8% 181.8%

Net profit 100% 86.2% 73.8% 105.1% 119.1% 129.2% 140.8% 154% 163.1% 170.6%

Non controlling interets 100% 57.9% 100% 105.3% 147.4% 136.1% 148.2% 162.2% 171.8% 179.6%

Group share 100% 86.6% 73.3% 105.1% 118.7% 129.1% 140.6% 153.8% 163% 170.4%

FY17Zone € 21.6%

Europe hors € 9.3%

Europe 30.9%

USA 19.0%

Canada 2.0%

Other Americas 8.5%

Americas 29.5%

China 9.0%

India 10.0%

Other Asia RoW 20.6%

Asia RoW 39.6%

20%

10%

9%

9%

2%19%

9%

22%

Zone € Europe hors €USA CanadaOther Americas ChinaIndia Other Asia RoW

Source: Euromonitor / Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

14

APPENDIX 9: CASH FLOW STATEMENT

APPENDIX 10: COMMON SIZE CASH FLOW STATEMENT

Back to Appendix table

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Group net profit 1,174 1,017 861 1,234 1,393 1,515 1,651 1,806 1,913 2,001

Non cash charges adjustment

1,069 1,072 1,359 1,080 1,100 1,143 1,147 1,177 1,219 1,265

Change in working capital requirements

-255 -308 -193 -178 -80 -65 -104 -220 -179 -164

Inventory -304 -304 -222 -237 -144 -17 -286 -383 -326 -249Trade receivables -47 58 -56 39 -87 -41 55 52 47 31

Operating and other payables 96 -62 85 20 151 -7 127 110 99 54

Interest paid -536 -504 -520 -471 -410 -325 -278 -239 -228 -228

Interest received 17 76 65 63 46 53 61 58 56 55

Tax paid/received -384 -413 -538 -393 -408 -514 -560 -612 -649 -678

CFO 1,085 940 1,034 1,335 1,641 1,808 1,917 1,969 2,132 2,250

Capital expenditures -304 -273 -323 -333 -367 -361 -377 -399 -421 -438

Proceeds from disposals 50 20 20 16 17 25 25 25 25 25

Purchases of financial assets -53 -79 -79 -108 -35 -71 -71 -71 -71 -71

Disposals of financial assets 116 21 117 66 92 82 82 82 82 82

CFI -191 -311 -265 -359 -293 -325 -341 -363 -385 -401

Dividends -435 -448 -461 -497 -511 -561 -586 -641 -679 -710

Net Debt Repayment -797 -168 -260 -413 -609 -800 -850 -300 0 0

(Acqusitions)/disposals of treasury shares

21 -16 -13 -18 -36 -34 -33 -32 -33 -33

CFF -1,211 -632 -734 -928 -1,156 -1,395 -1,469 -973 -712 -743

Change in cash before FOREX

-317 -3 35 48 192 89 107 633 1035 1106

Effect of exchange rate changes

125 -117 32 -25 -86 0 0 0 0 0

Change in cash after FOREX -192 -120 67 23 106 89 107 633 1035 1106

Cash beginning period 787 597 477 545 569 677 766 873 1505 2541

Cash end of period 597 477 545 569 677 766 873 1,505 2,541 3,647

FCFF 1,238 1,072 1,121 1,367 1,599 1,715 1,773 1,773 1,907 2,008

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Group net profit 13.7% 12.8% 10.1% 14.2% 15.5% 16.8% 17.5% 18.1% 18.2% 18.3%

Non cash charges adjustment

12.5% 13.5% 15.9% 12.4% 12.2% 12.7% 12.2% 11.8% 11.6% 11.6%

Change in working capital requirements

-3.0% -3.9% -2.3% -2.1% -0.9% -0.7% -1.1% -2.2% -1.7% -1.5%

Inventory -3.5% -3.8% -2.6% -2.7% -1.6% -0.2% -3.0% -3.8% -3.1% -2.3%Trade receivables -0.5% 0.7% -0.7% 0.4% -1.0% -0.5% 0.6% 0.5% 0.4% 0.3%

Operating and other payables 1.1% -0.8% 1.0% 0.2% 1.7% -0.1% 1.3% 1.1% 0.9% 0.5%

Interest paid -6.3% -6.3% -6.1% -5.4% -4.6% -3.6% -2.9% -2.4% -2.2% -2.1%

Interest received 0.2% 1.0% 0.8% 0.7% 0.5% 0.6% 0.6% 0.6% 0.5% 0.5%

Tax paid/received -4.5% -5.2% -6.3% -4.5% -4.5% -5.7% -5.9% -6.1% -6.2% -6.2%

CFO 12.7% 11.8% 12.1% 15.4% 18.2% 20% 20.3% 19.7% 20.3% 20.6%

Capital expenditures -3.5% -3.4% -3.8% -3.8% -4.1% -4.0% -4.0% -4.0% -4.0% -4.0%

Proceeds from disposals 0.6% 0.3% 0.2% 0.2% 0.2% 0.3% 0.3% 0.2% 0.2% 0.2%

Purchases of financial assets

-0.6% -1.0% -0.9% -1.2% -0.4% -0.8% -0.8% -0.7% -0.7% -0.6%

Disposals of financial assets

1.4% 0.3% 1.4% 0.8% 1.0% 0.9% 0.9% 0.8% 0.8% 0.8%

CFI -2.2% -3.9% -3.1% -4.1% -3.3% -3.6% -3.6% -3.6% -3.7% -3.7%

Dividends -5.1% -5.6% -5.4% -5.7% -5.7% -6.2% -6.2% -6.4% -6.4% -6.5%

Net Debt Repayment -9.3% -2.1% -3.0% -4.8% -6.8% -8.9% -9.0% -3.0% 0.0% 0.0%

(Acqusitions)/disposals of treasury shares

0.2% -0.2% -0.2% -0.2% -0.4% -0.4% -0.3% -0.3% -0.3% -0.3%

CFF -14.1% -8% -8.6% -10.7% -12.8% -15.5% -15.6% -9.7% -6.8% -6.8%

Change in cash before FOREX

-3.7% 0.0% 0.4% 0.6% 2.1% 1.0% 1.1% 6.3% 9.8% 10.1%

Effect of exchange rate changes

1.5% -1.5% 0.4% -0.3% -1.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Change in cash after FOREX

-2.2% -1.5% 0.8% 0.3% 1.2% 1.0% 1.1% 6.3% 9.8% 10.1%

Cash beginning period 9.2% 7.5% 5.6% 6.3% 6.3% 7.5% 8.1% 8.7% 14.3% 23.2%

Cash end of period 7% 6% 6.4% 6.6% 7.5% 8.5% 9.3% 15.1% 24.1% 33.3%

FCFF 14.4% 13.5% 13.1% 15.7% 17.8% 19% 18.8% 17.8% 18.1% 18.4%

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

15

APPENDIX 11: KEY RATIOS

With the forecasts estimated here above we split ratios into 7 main categories: Activity, Liquidity, Solvency, Margin, Profitability, Cash Flow and Debt coverage ratios. The latter enable us to assess PR financial situation and compare the group to its main competitors. We used the end of year of the financial statement to compute these metrics. We pushed further the analysis of the main Profitability ratios within the ROE / ROCE appendixes.

APPENDIX: VALUATION / TOP-LINE FORCEASTS

Back to Appendix table

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Activity ratios

Inventory turnover 0.734 0.633 0.639 0.622 0.643 0.637 0.642 0.641 0.636 0.631

Days of inventory on hand (DOH)

497 577 571 587 568 573 568 569 574 578

Receivables turnover 7.28 7.19 7.77 7.82 8.18 8.10 8.41 8.50 8.60 8.66

Days of sales outstanding (DSO)

50 51 47 47 45 45 43 43 42 42

Payables turnover 2.22 2.22 2.38 1.92 1.95 1.87 2.02 2.05 2.01 1.98

Number of days of payables 164 165 154 190 188 195 181 178 181 185

Fixed asset turnover 4.16 3.75 3.79 3.66 3.82 3.77 3.75 3.78 3.79 3.75

Total asset turnover 0.307 0.288 0.295 0.285 0.297 0.299 0.310 0.320 0.324 0.322

Liquidity Ratios

Current ratio 1.47 1.70 1.44 1.47 1.77 2.34 2.50 2.16 2.33 2.34

Quick ratio 0.40 0.40 0.34 0.35 0.45 0.61 0.66 0.67 0.86 0.99

Cash ratio 0.14 0.12 0.11 0.11 0.16 0.24 0.27 0.36 0.56 0.72

Operating conversion ratio 547.09 627.32 618.31 633.41 612.35 617.68 611.51 611.99 616.05 620.34

Cash conversion cycle 382.83 462.66 464.66 443.62 424.72 422.29 430.58 433.99 434.88 435.77

Solvency Ratios

Debt-to-assets ratio 0.34 0.32 0.31 0.31 0.28 0.24 0.21 0.19 0.18 0.17

Debt-to-capital ratio 0.44 0.42 0.40 0.39 0.36 0.30 0.25 0.20 0.15 0.10

Debt-to-equity ratio 0.83 0.76 0.72 0.69 0.62 0.48 0.38 0.34 0.31 0.29

Financial leverage ratio 2.66 2.40 2.31 2.28 2.22 2.07 1.91 1.81 1.75 1.70

Interest coverage 4.17 4.12 4.54 4.92 5.94 7.52 9.30 11.47 12.70 13.22

Total Debt/EBITDA 3.84 3.94 3.88 3.75 3.27 2.74 2.24 2.01 1.90 1.83

Net debt/EBITDA 3.59 3.73 3.66 3.52 3.01 2.46 1.93 1.50 1.10 0.72

Net debt/Net debt+Equity 0.44 0.42 0.40 0.39 0.36 0.30 0.25 0.20 0.15 0.10

Margin Ratios

Gross profit margin 62.4% 62.8% 61.9% 61.9% 62.2% 62.5% 62.7% 62.7% 62.8% 62.8%

Advertising ratio 19.2% 18.9% 19.0% 19.0% 18.8% 18.8% 19.0% 19.1% 19.3% 19.3%

Structure cost ratio 17.2% 18.0% 16.7% 16.7% 16.8% 16.6% 16.3% 16.1% 16.1% 16.0%

EBITDA margin 28.2% 28.4% 28.7% 28.7% 29.0% 29.5% 29.9% 29.9% 29.9% 30.0%

EBIT margin 26.0% 25.9% 26.2% 26.2% 26.6% 27.1% 27.4% 27.5% 27.5% 27.5%

Operating profit margin 24.7% 22.9% 18.6% 24.1% 24.8% 25.8% 26.1% 26.3% 26.3% 26.4%

Pretax margin 18.3% 16.8% 12.9% 19.1% 20.6% 22.8% 23.8% 24.5% 24.6% 24.8%

Net profit margin 13.9% 12.9% 10.3% 14.4% 15.8% 17.1% 17.8% 18.4% 18.5% 18.6%

Profitability Ratios

Operating ROA 7.6% 6.6% 5.5% 6.9% 7.4% 7.7% 8.1% 8.4% 8.5% 8.5%

ROA 4.3% 3.7% 3.0% 4.1% 4.6% 5.1% 5.5% 5.9% 6.0% 6.0%

ROE 11.4% 9.0% 7.0% 9.4% 10.3% 10.6% 10.6% 10.7% 10.5% 10.2%

ROIC 7.8% 8.4% 7.7% 8.1% 8.5% 9.0% 9.4% 9.8% 10.1%

ROCE 7.0% 7.6% 7.2% 7.6% 7.9% 8.3% 8.7% 9.1% 9.3%

Cash Flow Ratios

Cash Flow to Revenue 12.7% 11.8% 12.1% 15.4% 18.2% 20.0% 20.3% 19.7% 20.3% 20.6%

Cash Flow to Net income 92.4% 92.4% 120.1% 108.2% 117.8% 119.3% 116.1% 109.0% 111.5% 112.5%

Cash Return on Assets 3.9% 3.4% 3.6% 4.4% 5.4% 6.0% 6.3% 6.3% 6.6% 6.6%

Cash Return on Equity 10.3% 8.2% 8.3% 10.0% 12.0% 12.4% 12.1% 11.4% 11.5% 11.3%

Cash to Operating income 51.2% 51.7% 65.1% 63.8% 73.5% 77.7% 78.1% 74.8% 77.1% 78.0%

Cash flow per share 4.0878 3.5415 3.8957 5.0297 6.1826 6.8118 7.2220 7.4174 8.0333 8.4788

Free cash flow to sales 14.4% 13.5% 13.1% 15.7% 17.8% 19.0% 18.8% 17.8% 18.1% 18.4%

Debt Coverage

Debt Coverage Ratio 0.12 0.11 0.11 0.14 0.19 0.25 0.30 0.33 0.36 0.38

Interest Coverage Ratio 3.74 3.68 4.02 4.67 6.00 8.15 9.92 11.79 13.21 13.86

Reinvestment Ratio 3.57 3.44 3.20 4.01 4.47 5.01 5.08 4.93 5.06 5.14

Debt Payment Ratio 0.55 0.27 0.38 0.37 0.74 2.26 2.26 6.56 - -

Dividend Payment Ratio 2.49 2.10 2.24 2.69 3.21 3.22 3.27 3.07 3.14 3.17

Source: Pernod Ricard / Team estimates

16

APPENDIX 12: TOP-LINE FORECASTS As demographics is one of the main driver for the spirit and wine sector, we started our analysis from population growth estimates. Thus, our top line forecast is split in four steps: - We computed the spirit sector volume growth by multiplying population estimates by volume per capita. - To take into account the price mix we multiplied the total volume expected by estimation of the price per unit which is all-the-more crucial as the sector is experiencing

a premiumisation process. - This computation leads us to a global market value for the next five years from which we derive potential market total growth. - We estimate that PR has not fully penetrated its target market yet, thus we have to consider its market share gains/losses during the period. The bottom line of the following chart represents our forecast of Pernod Ricard’s top line organic growth, the starting point of our valuation process.

APPENDIX: GEOGRAPHICAL REVENUE BREAKDOWN

APPENDIX 13: FOREX IMPACT FORECASTS Given the historical impact of currency fluctuations on PR’s total growth, we decided to estimate its effect for the next two fiscal years (uncertainties surrounding forex markets from 2020 are too high to allow estimation after this horizon). We estimated the currency fluctuations impact through the following steps: - Europe: we divided this region between the Eurozone and other countries. As PR publishes its

results in euro, the only forex effect comes from non-euro countries (UK, Russia, Poland…). - Americas: we decided to highlight the US and Canada as they are the two main markets of PR

in the region. - Asia RoW: here, China and India are the two principal currency exposures of the group in Asia. We computed the remaining secondary currencies in each « other » regional section. Overall, we multiplied the forex impact of each currency by its weight in PR’s turnover to obtain the total effect in every region as can be seen on the second chart.

Back to Appendix table

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Population

North america

348,572 351,229 354,235 357,173 360,201 363,261 366,277 369,260 372,234 375,193 378,134

Larin america

523,695 529,672 535,570 541,367 546,996 552,546 558,007 563,372 568,632 573,685 578,641

Europe 609,330 612,185 615,059 618,056 621,080 623,731 626,026 628,034 629,714 631,049 632,111

Asia 4,069,092 4,110,209 4,150,618 4,190,247 4,228,869 4,266,818 4,304,055 4,340,466 4,375,930 4,409,542 4,442,305

Volume per capita

North america

5.9 5.9 5.9 5.8 5.9 5.9 5.9 5.9 5.9 5.9 5.9

Larin america

3.5 3.5 3.5 3.4 3.4 3.3 3.2 3.2 3.2 3.2 3.1

Europe 5.3 5.3 5.3 5.1 5.1 5.2 5.3 5.3 5.3 5.4 5.4

Asia 5.6 5.6 5.6 5.8 5.9 6 6.1 6.2 6.3 6.4 6.4

Total Market Volume in Litre

North america

2,056,572 2,072,249 2,089,987 2,071,605 2,125,187 2,143,242 2,159,201 2,176,790 2,194,320 2,198,632 2,212,081

Larin america

1,832,933 1,853,852 1,874,495 1,840,648 1,859,786 1,823,402 1,782,832 1,802,790 1,802,563 1,807,108 1,799,574

Americas 3,889,505 3,926,101 3,964,482 3,912,253 3,984,973 3,966,644 3,942,033 3,979,581 3,996,884 4,005,739 4,011,655

Europe 3,229,449 3,244,581 3,259,813 3,152,086 3,167,508 3,243,401 3,286,637 3,309,739 3,331,187 3,376,112 3,394,436

Asia 22,786,914 23,017,169 23,243,462 24,303,432 24,950,328 25,600,908 26,426,900 27,084,507 27,743,393 28,088,780 28,253,062

Price/Unit in USD

North america

20.7 21.0 21.2 22.2 23.2 23.8 24.9 25.1 25.5 26.1 26.6

Larin america

10.5 11.4 12.6 14.6 16.5 17.9 19.2 20.7 22.3 23.9 25.4

Europe 15.0 15.1 15.6 15.8 15.7 15.9 16.1 16.3 16.6 16.8 17.1

Asia 18.3 18.6 18.5 18.3 18.6 19.0 19.4 19.9 20.3 20.7 21.1

Total USD Market Value

North america

42,632,744 43,475,776 44,349,530 45,927,480 49,304,333 51,030,591 53,764,104 54,637,438 55,955,164 57,274,352 58,730,762

Larin america

19,190,803 21,078,297 23,562,402 26,855,051 30,760,867 32,547,722 34,310,609 37,380,859 40,233,216 43,189,875 45,709,167

Americas 61,823,548 64,554,073 67,911,932 72,782,531 80,065,200 83,578,313 88,074,713 92,018,297 96,188,379 100,464,228 104,439,929

Europe 48,441,735 49,122,949 50,918,274 49,645,348 49,571,500 51,407,909 52,766,949 53,915,651 55,297,705 56,718,684 57,875,135

Asia 417,000,528 426,968,490 429,074,307 444,023,703 464,076,106 486,161,243 512,153,313 537,627,468 562,081,143 582,561,297 596,139,615

Total growth

Americas 4.42% 5.20% 7.17% 10.01% 4.39% 5.38% 4.48% 4.53% 4.45% 3.96%

Europe 1.41% 3.65% -2.50% -0.15% 3.70% 2.64% 2.18% 2.56% 2.57% 2.04%

Asia 2.39% 0.49% 3.48% 4.52% 4.76% 5.35% 4.97% 4.55% 3.64% 2.33%

TOTAL 2.54% 1.34% 3.39% 4.81% 4.62% 5.13% 4.68% 4.39% 3.67% 2.53%

Change PR’s market shares

Americas -0.30% -0.10% 0.00% 0.25% 0.25%

Europe 0.10% 0.20% 0.20% 0.20% 0.20%

Asia 1.00% 3.50% 4.50% 4.00% 2.50%

Pernod Ricard’s top-line growth

America 6.55% 2.02% 2.38% 4.03% 6.91% 5.06% 4.37% 4.53% 4.71% 4.22%

Europe -1.49% 1.66% 0.29% 1.06% 3.36% 2.75% 2.38% 2.77% 2.77% 2.24%

Asia 6.95% -3.73% 3.96% 0.78% 1.37% 6.40% 8.65% 9.25% 7.79% 4.89%

FY17 FY18 FY19

AMERICAS - -7.09% -1.59%

ASIA and ROW - -5.89% -0.79%

EUROPE - -1.07% -0.61%

FY17 FY18 FY19

USD/EUR 0.92 0.85 0.83

Variation -7.35% -1.96%

CNY/EUR 0.135 0.123 0.122

Variation -9.07% -0.73%

INR/EUR 0.013 0.013 0.013

Variation -3.43% -1.67%

CAD/EUR 0.714 0.694 0.667

Variation -2.78% -4.00%

Other forex impact in Asia RoW

-5.70% -0.42%

Other forex impact in Americas

-7.52% -0.17%

Other forex impact in Europe

-3.57% -2.04%

Source: Pernod Ricard / Team estimates

17

APPENDIX 14: SEGMENTATION OF INCOME STATEMENT Here can be found the main income statement components for each region that aggregated together gives the operating part of the P&L which is displayed in Appendix 5. After calculating organic growth and overall forex impact, we deducted the expected revenues in each geographical segment. Regarding costs - cost of sales, A&P, structure costs- we applied the Operational Efficiency roadmap guidance and combine it with historical tendencies. We allocated depreciation expenses based on the location of each PR facility in the world. The main objective of this Income statement geographical breakdown is to pave the way for our SOTP valuation which is based on EV/EBITDA multiples (see Appendix 19 - Multiple Valuation).

Back to Appendix table

Europe

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Sales 2,827 2,773 2,731 2,709 2,781 2,828 2,878 2,957 3,039 3,108

Sales Growth -1.9% -1.9% -1.5% -0.8% 2.7% 1.7% 1.8% 2.8% 2.8% 2.2%

Organic -1.5% 1.7% 0.3% 1.1% 3.4% 2.7% 2.4% 2.8% 2.8% 2.2%External -0.9% -1.6% -0.4% 0.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0%

Forex 0.4% -2.0% -1.4% -1.9% -0.9% -1.1% -0.6% 0.0% 0.0% 0.0%Cost of sales 1,086 1,028 1,027 1,047 1,071 1,074 1,078 1,105 1,129 1,150

Gross Margin 1,741 1,745 1,704 1,662 1,710 1,753 1,800 1,852 1,910 1,958

Gross Margin ratio 61.6% 62.9% 62.4% 61.4% 61.5% 62.0% 62.5% 62.6% 62.8% 63.0%

A&P 528 541 521 517 522 526 532 541 547 559

Structure costs 605 611 575 557 584 580 583 591 608 622

EBIT 608 593 608 588 604 648 685 720 755 777

EBIT Margin 21.5% 21.4% 22.3% 21.7% 21.7% 22.9% 23.8% 24.3% 24.8% 25.0%

Depreciation 165 174 182 191 201

EBITDA 813 858 902 946 978

EBITDA Margin

28.7% 29.8% 30.5% 31.1% 31.5%

Americas

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Sales 2,316 2,142 2,382 2,476 2,661 2,607 2,679 2,801 2,933 3,056

Sales Growth 6.9% -7.5% 11.2% 3.9% 7.5% -2.0% 2.8% 4.5% 4.7% 4.2%

Organic 6.6% 2.0% 2.4% 4.0% 6.9% 5.1% 4.4% 4.5% 4.7% 4.2%External -1.4% 0.0% 0.6% -2.1% -0.3% 0.0% 0.0% 0.0% 0.0% 0.0%

Forex 1.7% -9.5% 8.2% 2.0% 0.9% -7.1% -1.6% 0.0% 0.0% 0.0%Cost of sales 826 748 863 837 871 844 864 901 938 978

Gross Margin 1,490 1,394 1,519 1,639 1,790 1,763 1,815 1,900 1,994 2,078

Gross Margin ratio 64.3% 65.1% 63.8% 66.2% 67.3% 67.6% 67.7% 67.8% 68.0% 68.0%

A&P 454 412 478 509 551 545 563 588 616 642

Structure costs 429 403 409 424 449 430 435 448 469 489

EBIT 607 579 632 706 790 788 817 864 909 947

EBIT Margin 26.2% 27.0% 26.5% 28.5% 29.7% 30.2% 30.5% 30.8% 31.0% 31.0%

Depreciation 22 23 24 26 27

EBITDA 810 840 888 935 974

EBITDA Margin

31.1% 31.4% 31.7% 31.9% 31.9%

Asia Row

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

Sales 3,431 3,031 3,446 3,498 3,568 3,586 3,868 4,226 4,555 4,778

Sales Growth 8.4% -11.7% 13.7% 1.5% 2.0% 0.5% 7.9% 9.3% 7.8% 4.9%

Organic 7.0% -3.7% 4.0% 0.8% 1.4% 6.4% 8.6% 9.3% 7.8% 4.9%External -0.4% -0.4% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Forex 1.9% -7.6% 9.9% 0.8% 0.7% -5.9% -0.8% 0.0% 0.0% 0.0%Cost of sales 1,311 1,183 1,373 1,427 1,466 1,469 1,569 1,714 1,848 1,938

Gross Margin 2,120 1,848 2,073 2,071 2,102 2,117 2,299 2,512 2,708 2,840

Gross Margin ratio 61.8% 61.0% 60.2% 59.2% 58.9% 59.0% 59.4% 59.4% 59.4% 59.4%

A&P 663 550 627 621 618 628 696 782 865 908

Structure costs 441 414 447 468 484 484 522 571 615 645

EBIT 1,016 884 999 982 1,000 1,006 1,081 1,160 1,227 1,287

EBIT Margin 29.6% 29.2% 29.0% 28.1% 28.0% 28.0% 27.9% 27.4% 26.9% 26.9%

Depreciation 33 35 36 38 40

EBITDA 1,039 1,115 1,196 1,265 1,327

EBITDA Margin

29.0% 28.8% 28.3% 27.8% 27.8%

Source: Team estimates

18

APPENDIX 15: DUPONT DECOMPOSITION OF ROE This breakdown enlightens the key determinants of the group’s profitability, starting from the Return on Equity. This decomposition is based on the 2, 3 and 5-step Dupont Analysis which states that:

ROE is a measure of the return on capital brought by shareholders. Based on the Dupont decomposition formula, it is affected by total asset turnover, margins and financial leverage. As we decompose PR’s ROE we notice that relatively high margins and leverage have a positive impact on profitability but dragged down by the poor asset turnover performance due to the large level of intangibles which represent 39% of the group’s total assets.

APPENDIX 16: RETURN ON CAPITAL EMPLOYED (ROCE)

We perform this Return On Capital Employed calculation to compare it to our WACC. If the ROCE is currently above the WACC, then the company is creating value over the period. We can confirm from this tree that the positive effect of high margin level is balanced by the asset-heavy characteristic of the spirits business. Large intangibles penalise the company’s return on capital measures.

Back to Appendix table

ROEFY16 FY17 FY18E

9.4% 10.3% 10.6%

ROA

FY16 FY17 FY18E

4.1% 4.6% 5.1%

FINANCIAL LEVERAGE

FY16 FY17 FY18E

2.30 2.24 2.07

NET PROFIT MARGIN

FY16 FY17 FY18E

14.2% 15.5% 17.1%

TOTAL ASSET TURNOVERFY16 FY17 FY18E

0.29 0.30 0.30

TAX BURDEN

FY16 FY17 FY18E

0.74 0.75 0.71

INTEREST BURDEN

FY16 FY17 FY18E

0.80 0.83 0.89

EBIT MARGINFY16 FY17 FY18E

24.1% 24.8% 27.1%

ROCE

FY16 FY17 FY18E

7.2% 7.6% 7.9%

PRE-TAX ROCE

FY16 FY17 FY18E

9.6% 10.1% 10.5%

MARGINAL TAX RATE

FY16 FY17 FY18E

25% 25% 25%

EBIT MARGINFY16 FY17 FY18E

26.2% 26.6% 27.1%

CAPITAL TURNOVER

FY16 FY17 FY18E

36.4% 38.0% 38.8%

- SG&A/REVENUE

FY16 FY17 FY18E

33.1% 33.2% 32.9%

- D&A/REVENUEFY16 FY17 FY18E

2.5% 2.4% 2.4%

+ NET WORKING CAPITAL/REVENUE

FY16 FY17 FY18E

43.6% 42.0% 41.6%

+ FIXED-ASSET TURNOVERFY16 FY17 FY18E

231.0% 221.5% 216.0%

+ GROSS MARGIN

FY16 FY17 FY18E

61.9% 62.2% 62.5%

=

= 1/

x

x

=

=

= X

X

X

X

=

=

Source: Pernod Ricard / Team estimates

Source: Pernod Ricard / Team estimates

19

APPENDIX 17: DCF VALUATION

Discounted Cash Flows method was used as it has the advantage to take into account the cash generation of the firm’s assets. It considers the group’s investment policy and own corporate risk, while mitigating the risk of potential earnings manipulation. For this reason we allowed 40% of our target price calculation to this method.

The FCFF were calculated based on our Cash Flow from Operations assumptions. As FCFF are a measure of cash flows available to all investors (stock holders & bond holders) we add back net interests and subtract net investments.

After applying our DCF methodology, we obtained an estimated fair value per share of EUR 141.8, which represents a 1-year horizon target price of EUR152.6 (with capitalisation of current fair value performed with the 7.6% cost of equity).

APPENDIX 18: DCF SENSITIVITY ANALYSIS We performed a sensitivity analysis of our target price with fluctuations in the long term growth rate and our WACC assumptions. As a consequence, our target price can be found in the following table.

Back to Appendix table

FY18E FY19E FY20E FY21E FY22E FY23E

CFO 1,808 1,917 1,969 2,132 2,250 2,307

CFO/sales 20.04% 20.34% 19.72% 20.25% 20.57% 20.57%

Interest -325 -278 -239 -228 -228 -228

Tax rate 25% 25% 25% 25% 25% 25%

Interest net of tax -244 -208 -179 -171 -171 -171

Capex -361 -377 -399 -421 -438 -449

Disposal of asset 25 25 25 25 25 25

Net investments in fixed assets

-336 -352 -375 -396 -413 -424

FCFF 1,715 1,773 1,773 1,907 2,008 2,054

Assumptions

Cumulative present value of FCFF 7,612

Present value of terminal value 38,734

Enterprise value 46,346

Net financial debt 7,868

Pensions 649

Market value of minorities 180

Estimated market value of equity 37,649

Shares outstanding 265,422,000

Fair value per share 141.8

Target Price N+1 152.6

Assumptions Commentary

Gearing 0.25We consider using Damodaran’s sector average as the best option. This is consistent with (1) the current deleveraging policy of PR and (2) a conservative approach on the long run.

Tax rate (%) 25%We chose to use the 5-year average effective tax rate of Pernod Ricard. It is historically stable and consistent with the observations made within the alcoholic beverage industry (22,5%).

Cost of debt before tax (%) 3.8% We used Pernod Ricard’s current cost of debt as a proxy for the forecasted period. It is likely to remain stable as PR is already « Investment grade » and corresponds to Damodaran’s estimates for the sector (4% before tax cost of debt).

Cost of debt after tax (%) 2.9%

Long term growth rate (%) 2.5%Our long term estimates relies on PwC’s latest economic report stating a global economic growth converging at 2.5% by 2030.

Risk free rate 2.4%

Our calculation is the weighting of PR’s three main regions. We used Chinese (3.9%), French (0.65%) and US (2.36%) 10-year sovereign bonds as proxies for the group of their respective regions in PR’s segmentation.

Equity risk premium (%) 6.2%

We processed the ERP calculation similarly to the risk-free rate, using the same proxies from Damodaran’s database. We obtain a 6.2% ERP from weighting the following figures: 6.55% for China, 6.4% for France and 5.69% for the US.

Beta 0.82Our Beta was obtained through a regression of PR’s 3-Y weekly returns on its reference index, the french CAC40.

Cost of equity (%) 7.6% We used the CAPM model with the previous inputs to compute PR’s cost of equity.WACC (%) 6.4%

WACC/g 2.0% 2.1% 2.2% 2.3% 2.4% 2.5% 2.6% 2.7% 2.8% 2.9% 3.0%

5.9% 144.6 148.6 152.9 157.4 162.1 167.2 172.5 178.2 184.2 190.6 197.5

6.0% 140.1 143.9 148.0 152.2 156.7 161.4 166.4 171.7 177.4 183.4 189.8

6.1% 135.9 139.5 143.3 147.3 151.5 156.0 160.7 165.7 171.0 176.6 182.6

6.2% 131.8 135.3 138.9 142.7 146.6 150.9 155.3 160.0 165.0 170.2 175.8

6.3% 128.0 131.2 134.6 138.2 142.0 146.0 150.2 154.6 159.3 164.2 169.5

6.4% 124.7 127.8 131.0 134.5 138.1 141.8 145.8 150.0 154.5 159.1 164.1

6.5% 120.8 123.7 126.8 130.0 133.4 137.0 140.7 144.7 148.9 153.2 157.9

6.6% 117.4 120.2 123.1 126.2 129.5 132.8 136.4 140.1 144.0 148.2 152.6

6.7% 114.2 116.9 119.7 122.6 125.7 128.9 132.2 135.8 139.5 143.4 147.5

6.8% 111.1 113.6 116.3 119.1 122.0 125.1 128.3 131.6 135.2 138.9 142.8

6.9% 108.1 110.6 113.1 115.8 118.6 121.5 124.5 127.7 131.0 134.6 138.2

Source: Team estimates

Source: Team estimates

20

APPENDIX 19: BLOOMBERG CONSENSUS

As a conclusion of the forecast and valuation process, we display a comparison between the Bloomberg consensus and our estimates on the key metrics. This analysis confirms our BUY recommendation as we expect higher operational performance, strong cash flow conversion and faster deleveraging.

APPENDIX 20: PEERS SELECTION

Below is our selection of peers regarding our SOTP relative valuation. International players are geographically diversified, while each group of regional peers are either national or regional pure players. They were chosen to reflect the specificities of their local market.

Back to Appendix table

EPS Adjusted Revenue EBIT EBITDA Net income Net debtDividend per share

CFO / share ROE

2018

CONSENSUS 5.76 9,011 2,407 2,631 1,522 6,849 2.07 6.70 10.5%

TEAM ESTIMATES

5.74 9,021 2,441 2,662 1,541 6,538 2.11 6.81 10.6%

DELTA VS CONSENSUS

-0.35% 0.11% 1.41% 1.18% 1.25% -4.54% 1.93% 1.64% 0.95%

2019

CONSENSUS 6.22 9,420 2,544 2,782 1,654 6,064 2.23 7.24 10.6%

TEAM ESTIMATES

6.25 9,425 2,582 2,814 1,679 5,420 2.21 7.22 10.6%

DELTA VS CONSENSUS

0.48% 0.05% 1.49% 1.15% 1.51% -10.62% -0.90% -0.28% 0.00%

2020

CONSENSUS 6.76 9,884 2,686 2,934 1,797 5,292 2.41 7.85 11%

TEAM ESTIMATES

6.84 9,984 2,743 2,986 1,837 4,488 2.41 7.42 10.7%

DELTA VS CONSENSUS

1.18% 1.01% 2.12% 1.77% 2.23% -15.19% 0.00% -5.48% -2.73%

Peers Description Principal Market

Main Brands

International

Diageo

Diageo is a British group producing wide range of alcoholic beverages (beers, spirits and ciders)under a large number of brands covering the whole product spectrum. The group is the leader of the spirits market with EUR 13.7bn revenues in FY17 and 25% of global spirits market shares. Diageo aims at increasing its presence in emerging markets and on the premium segment. It is PR’s main competitor.

USJohnnie Walker, Smirnoff, Guinness

Remy Cointreau

Remy Cointreau is a French company which produces and sells spirits and liquors. The group is particularly specialized on the cognac segment with its house Remy Martin (from which the group derives 70% of its revenues). Remy Cointreau heavily depends on the Chinese market where consumers are fond of cognac products. The comapny exhibited a EUR 1,1bn turnover in FY17.

ChinaRemy Martin, Passoa, Cointreau

Davide Campari

Davide Campari is an Italian company specialized in the production of spirits, wines and soft drinks. It is present worlwide with a portfolio composed of almost 50 brands among which Appleton, Campari, Aperol or Grand Marnier. Although the group exhibits some sucesses in the recent year (Aperol performance during the 2016 summer and the acquisition of Grand Marnier), it lags behind leaders of the sector in term of sales ( EUR 1,7bn FY16).

US and ItalyAperol, Grand Marnier, Appleton

Brown FormanBrown Forman manufactures, bottles and sells alcoholic beverages. This American company relies heavily on its main brand Jack Daniel's which represents 70% of its volumes. Brown Forman exhibits one of the highest margin profile of the sector (35% EBITDA margin in FY17) despite lower revenues (EUR 2.4bn in FY17).

US Jack Daniel’s

Americas

ConstellationConstellation is an American-based beer, spirit and wine producer with most of its products sold in the US, Canada and Mexico. Beer represents 57.7% of its EUR 6.9bn turnover, the rest being divided between spirits and wines.

USCorona, Black Velvet

MGP IngredientsMGP Ingredients produces and supplies distilled spirits in the US. The group is specialized on bourbon, gin and whisky which are sold on the US market. The group posted a EUR 300m turnover in FY16.

USSpirits for private label sale

Andrew PellerAndrew Peller is a Canadian wine producers. It manufactures sparkling, table and fortified wines mainly sold in Canada (96%) and in the US (4%). This is a relatively small company with a EUR 240m turnover in FY17.

CanadaSandHill, Red Rooster

Becle SAB de CuervoCuervo is a Mexican alacoholic beverage producer and seller. It manufactures Tequila under its Jose Cuervo brand, whisky with Bushmills house and rum with Kraken. The company principally sells its products in Mexico and exports in the US. Last year, the group generated EUR 1.1bn of revenues.

US and MexicoJose Cuervo, Bushmills, Kraken

Europe

Vranken PommeryVranken-Pommery is a French producer of wines and champagnes. It generates EUR 300m of revenues in FY16. It sells its products under various brands such as Billette, Charles Lafitte, Heidsieck, Pommery and Vranken.

FranceCharles Lafitte, Pommery, Vranken

Marie BrizardMarie Brizard is a French company producing and selling spirits and wines. The company principally offers scotch whisky under its brand William Peel and Vodka with Sobieski. The group also widened its portfolio through a range of non alcoholic syrups.

France and Poland

William Peel, Sobieski

AdViniAdVini is French company that produces and sells wines. It also manages more than 30 wine estates in France. This is a small company principally relying on the French interior market (63% of its EUR 240m turnover).

FranceLaroche, Champy, Maison JeanJean

Stock Spirits GroupStock Spirits Group is an alcoholic beverage company operating in central and eastern Europe (mainly in Poland). It focuses on vodka products with a EUR 261m turnover in FY16. Stock Spirits Group shares are traded on the London Stock Exchange.

Poland1906, Amundsen

Asia RoW

Kweichow Moutai

Kweichow Moutai is a Chinese spirit company principally producing Baiju (a traditional Chinese alcoholic beverage). This company is partially owned by the Chinese state, and currently the most valuable spirits company worldwide. The group exhibits a EUR 5.3bn turnover which is mainly derived from China (95% of sales).

China Moutai, Feitian

Thai BeverageThai Beverage is the largest beer and spirit producer in Southeast Asia with EUR 4.9bn of revenues. In 2017, 57% of its turnover was derived from spirits sales such as scotch whisky, vodka, gin and liquors.

ThailandChang, Crown99. Blue

Wuliangye Yibin Co.Wuliangye manufactures and sells liquor and wine products under the Wuliangye brand in China. The group reached a EUR 3bn turnover for its alcoholic beverages segment last year.

China Wuliangye

Luzhou LaojiaoLuzhou Laojiao is a Chinese company producing a traditionnal spirit called Baiju. It generates all of its EUR 1.1bn turnover in China.

China Luzhou Laojiao

Source: Bloomberg / Team estimates

Source: Companies’ websites21

APPENDIX 21: MULTIPLE VALUATION Our multiple-based valuation relies on a Geographical Sum-Of-The-Part approach that sticks to PR’s segments breakdown. As we identified different characteristics and dynamics for these three regions, we considered the SOTP was more efficient in capturing each market potential. We thus attributed 40% of our target price to this method. For this intent we built three regional pure-players groups to perform the valuation and one composed of international industry leader to to compare our results and check for consistency.

We especially chose EV/EBITDA multiple calculation for three main reasons: (1) The spirits sector is on a globally stable growth rate; (2) Its operational business is considered as mature; (3) PR has relatively low capital expenditures. It is all the more interesting as it is a widely used multiple in the industry.

This EV/EBITDA relative valuation is based on each pure-player group average, from which we derive an implied EV per region. As we obtain our total enterprise value we compute total equity value and a EUR 157.5 1-Y horizon target price.

Our result is coherent when compared with international peers: our valuation results in Pernod Ricard trading with a 14.8% discount, compared with 23.6% currently, which means a 5-point catch up within a year thanks to:

- ROE catching up

- Deleveraging of the capital structure to reach the sector average

- Investment risk mitigation through an ahead-of-regulation ESG policy.

Back to Appendix table

OPERATIONAL

VALUATI

ON

ASIA RoW Forward EV/EBITDA

Thai beverage 16,66x

Kweichow Moutai 18,79x

Wuliangye 17,36x

Luzhou Laojiao 23,38x

Mean 19,05x

Implied Pernod Ricard ASIA RoW EV

19,784

Company Name

Market Capitalization Latest

LTM Total Revenue

LTM Gross Margin %

LTM EBITDA Margin %

LTM Net Debt/EBITDA

LTM Return on Equity %

LTM EV/EBITDA

Forward EV/EBITDA

LTM P/EForward P/E

International Players International Players

Diageo plc 74,931.1 13,548.1 61.2% 32.2% 2,1x 25.5% 18,2x 17,84x 24,9x 23,17x

Rémy Cointreau SA 5,781.7 1,125.9 67.3% 22.9% 1,7x 11.0% 26,1x 22,66x 43,6x 36,02x

Davide Campari-Milano 7,277.3 1,827.3 58.2% 22.5% 3,2x 11.7% 20,8x 19,27x 36,4x 28,40x

Brown-Forman 21,626.6 2,612.2 67.5% 36.4% 1,7x 50.8% 24,5x 23,25x 35,5x 33,18x

Mean 27,404.18 4,778.38 63.6% 28.5% 2,18x 24.8% 22,4x 20,76x 35,1x 30,19x

Americas Americas

Constellation Brands, Inc. 37,011.9 6,204.7 50.6% 36.3% 3,3x 23.5% 19,5x 18,34x 26,1x 25,82x

MGP Ingredients, Inc. 1,058.8 283.2 21.8% 15.9% 0,5x 25.2% 23,4x 21,29x 34,9x 38,11x

Andrew Peller Limited 470.9 230.1 39.7% 14.7% 2,5x 15.3% 16,4x 14,62x 24,7x 30,77x

Becle, S.A.B. de C.V. 4,990.4 1,072.9 61.4% 26.9% - 8.5% 15,9x 14,70x 39,4x 26,23x

Mean 10,883.0 1,947.7 43.38 23.45 - 18.1% 18,8x 17,24x 31,3x 30,23x

Europe Europe

Vranken-Pommery S.A 214.8 306.4 24.3% 10.2% 23,1x 1.8% 29,1x 28,60x 35,7x 32,94x

Marie Brizard 353.4 438.8 36.4% 3.5% 0,1x 9.9% 23,6x 11,77x 15,6x 20,02x

AdVini S.A. 128.9 244.6 37.3% 3.4% 19,8x 10.8% 38,5x 16,38x 13,6x 26,02x

Stock Spirits Group plc 584.7 264.8 49.1% 21.8% 0,7x 8.9% 10,9x 11,21x 18,9x 18,95x

Mean 320.45 313.65 36.78 9.73 10,93x 7.9% 25,5x 16.99 21x 24,48x

Asia Row Asia Row

Kweichow Moutai Co. 118,476.2 6,996.9 90.0% 61.0% - 32.5% 25,4x 18,79x 38,2x 32,84x

Thai Beverage, Ltd. 14,382.7 4,909.8 30.7% 17.0% 0,9x 27.1% 13,3x 16,66x 16,4x 19,52x

Wuliangye Yibin Co.,Ltd. 40,310.0 3,687.9 70.9% 40.0% - 18.4% 24,1x 17,36x 36,4x 28,01x

Luzhou Laojiao Co., Ltd. 12,885.5 1,236.9 70.0% 32.3% - 19.2% 29,9x 23,38x 40,0x 31,10x

Mean 46,513.60 4,207.88 65.40 37.58 - 24.3% 23,2x 19,1x 32,8x 27,87x

Pernod Ricard Pernod Ricard

Pernod Ricard SA 34,643.60 9,010.00 62.2% 28.8% 3x

AMERICAS Forward EV/EBITDA

MGP Ingredients 21,29x

Cuervo 14,70x

Andrew Peller 14,62x

Constellation 18,34x

Mean 17,24x

Implied Pernod Ricard AMERICAS EV

13,970

EUROPE Forward EV/EBITDA

Marie Brizard 11,77x

Stock Spirits Group 11,21x

AdVini 16,38x

Vranken-Pommery 28,60x

Mean 16,99x

Implied Pernod Ricard EUROPE EV

13,811

Total EV 47,565

Total Net Debt 7,868

Pensions liabilities 649

Minority Value 180

Implied Equity Value 38,868

Shares Outstanding 265,422,000

Implied Share Price 146.44

Implied Share Price N+1

157.52

Forward EV/EBITDA

Diageo 17,91x

Remy cointreau 22,63x

Brown forman 23,53x

Campari 19,79x

Mean 20,97x

Pernod Ricard implied forward EV/EBITDA

17,87x

Discount Pernod -14.77%

VALUATI

ON

RATI

OS

OPERATIONAL

RATIOS

Source: S&P Captal IQ / Team estimates

22

APPENDIX 22: 6-PORTER FORCES

COMPETITIVE RIVALRY - HIGH Despite high margin levels, competition in the wine & spirits market is intensive, both nationally and internationally. On the national level and especially in emerging markets, local spirits benefit from consumption habits and compete with international players that struggle in establishing a leading position. This strong local competition emphasises international players’ needs to take into account local specificities and propose a large range of specialised products. On a global level, the spirits sector that shifted towards the high end segment exhibits a fierce non-price competition between a reduced number of distillers: Diageo, Pernod Ricard, Bacardi, Beam Suntory, Campari, Remy Cointreau and Brown Forman. The growing consolidation of the market has not diminished the competition between the leading spirits producers. The competition is now defined by brand positioning: each competitor aims at increasing their visibility, brand reputation and pricing power through large-scale marketing policies.

BARGAINING POWER OF CUSTOMERS - LOW Customers have a low bargaining power over the distillers for 3 main reasons. (1) Switching costs are high for retailers: getting rid of a distiller, even for another competitor is likely to hurt sales as each brand boasts strong reputation. (2) Volumes sold by spirits producers are sharply split between a large number of retailer (See chart Pernod Ricard’s main customers). (3) creating a portfolio remains too expensive for other players to enter the market, plus the acquisition of an already-existing group being unlikely result in lower backward integration threat. The ability of spirit producer to transfer price increases to retailers, and tighten agreement terms ( 54 days of receivables for the leaders average) are additional signals of their bargaining power over customers.

BARGAINING POWER OF SUPPLIERS - LOW The large number of suppliers of raw materials, containers and packaging lead to high competition among them and increase the ability to switch from one partner to another. The suppliers’ bargaining power is all the lower as volumes agreed are a large part of their revenues and backward integration remains a threat. A general example of distillers’ dominance is the length of the average days

payables for the 5 industry leaders being 120 days.

THREAT OF SUBSTITUTES - MEDIUM Even though competition in the sector remains non-price oriented, consumers may be tempted to switch towards cheaper substitutes such as low alcoholic drinks like beers. Consequently we historically observed a transfer between beer and spirits volumes breakdown. As companies struggle with consumption limitations and healthier lifestyles emerge, soft drinks also constitute a substitute for spirits and wines. Still, moving forward we consider this threat as being the most serious to the industry leaders as consumption trends can shift in a limited amount of time.

THREAT OF NEW ENTRANTS - LOW Scale is an essential competitive advantage and generate high barriers to entry for the spirits industry. Extensive capital requirements (distillation facilities and ageing sites) and large marketing and distribution expenses make it difficult for newcomers to succeed. Spirits leaders also capitalise on renowned brands, for which thickness of time is necessary. During such a period, distillers also develop and monopolise relations with retailers.

POWER OF THE STATE - VERY HIGH The State represents the main force acting on the spirits market. Regulation acts on : (1) consumption: minimum drinking age, drinking and driving (2) advertising: limited exposure on main audience channels. We expect that, even though the industry is flexible, regulation can occasionally generate supply & demand shocks. The only way to impede the implementation of such laws, is lobbying which remains a double-edged sword: either engage in lobbying and suffer from negative brand image or ban this practice and be unable to protect the industry’s interests.

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COMPETITIVE RIVALRY

BARGAINING POWER OF CUSTOMERS

BARGAINING POWER OF SUPPLIERS

THREAT OF SUBSTITUTES

THREAT OF NEW ENTRANTS

POWER OF STATE

Weight of Pernod Ricard’s main customer in its turnover

Carrefour 1.75%

Tesco 1.43%

Rewe Handelsgruppe 1.26%

Auchan 1.20%

Ahold Delhaize 1.12%

Wal-mart stores 0.95%

Weight of suppliers in PR’s COGS

Owens-Illinois 3%

Ardagh Packaging

1.63%

Apollo Global Management

1.61%

Saverglass 0.89%

23

APPENDIX 23: PESTLE POLITICS: 4/5

Politics play a major role in the spirits industry framework, and uncertainties remain. Mature Markets: In the US, three major issues are at stake after President Trump’s election (1) the renegotiation of trade agreements: indecision on NAFTA - Canada and Mexico are the two largest countries in terms of spirits import into the US- and Trans Pacific Partnership (TPP) a 12-nation free trade agreement. For this reason Jose Cuervo delayed its IPO in 2016. (2) Trade Barriers setup (3) Cuba. In the UK, Brexit may have mixed effect on the spirits sector which exports EUR 2.3bn of UK wine and spirits and imports EUR 2.9bn of European wine and spirits every year. While trade barriers may affect exchanges between the UK and the Old continent, re-etablishing Duty Free may mitigate its impact. In emerging markets, the political and regulation landscape tend to be more unstable, creating uncertainty for the business of international spirits producers (Indian ruling concerning alcohol retailing & Chinese anti-extravaganza laws). To tackle such issues, distillers have adopted proactive lobbying policies, with Pernod Ricard spending as much as EUR 825k in 2017 in the US. Such practices, tend to be impossible in emerging countries such as China where death penalty can be proclaimed if lobbying proof is established.

ECONOMICS: 3/5 Economies where the spirits industry mainly operates are stable, with in a free-market situation. Two economic factors principally affect spirits demand: GDP and disposable income. GDP is a global driver for spirits growth and while pricing power may be affected in periods of downturn, volumes remain relatively recession proof. As for disposable income, it is the main spirits growth driver in emerging markets: the emergence of a large middle class with higher standards of living offer tremendous opportunities for premium spirits producers. In an inflationary environment raw materials price increase put pressure on margins but distillers’ high pricing power allows the transfer of cost increases to consumers. For international players, exchange rate is an additional factor to take into account as organic performance can be annihilated by adverse currency fluctuations. The main determinant to be monitored in this case is the difference in sovereign monetary policies.

SOCIAL: 3/5 Demographics shape the future demand potential of each market. By 2018, 15-64 year-old should account for 4.96 billion people, 65% of the global population. Further than gross population growth, the social perception of alcohol is also a key shaper of spirits demand. Such vision is determined by religious beliefs and attitude towards consumption. Demographic trends, as the emergence of the millennial generation and the rise of the elderly are direct explanations for these changing habits towards high quality and personalised products. In emerging countries, local spirits consumption is linked with traditions and tends to be resilient despite the increasing penetration of International Style Spirits. Such a shift is supported by the urbanisation phenomenon which implies more exposure to occidental alcohols.

TECHNOLOGY: 2/5 More than a development tool, technology has become a necessity to operate in the wine and spirits industry. As the industry is relying on advertising and promotion, social media presence is the best way to increase product visibility. This is all the more relevant as advertising on traditional channels (TV, radio..) is constrained by a tighter regulation. In a sector where one-third of alcohol production comes from counterfeiting, technology has been used by distillers to assert product authenticity. On the Chinese market , several international distillers have set up QR codes to identify and track their production and differentiate it from smuggled bottles. More than a security, technology is also a mean to increase and magnify a distiller’s product diversity. For instance Pernod Ricard created a cocktail making device -the Opn project- that enables the consumer to mix several PR products. Technology is also a mean to increase and magnify product diversity (Opn)

LEGAL: 5/5 Governments have been tackling the issues relative to public health through an extensive and strict legal framework defining the wine & spirits industry. Such constraints concern age, consumption, labelling, advertising and packaging. The sector is heavily taxed, in the US 54% of the bottle price goes to tax and fees, heavier in France where it concerns 82% of the total price. For consumption, areas such as Middle East and regions of India go further in regulation by simply banning alcohol drinking, that enhance smuggling and counterfeiting, both generating a deadweight loss for spirits producers. In lighter-regulation countries, a minimum age for drinking is required, while limiting alcohol consumption. Restrictions on labelling, advertising and packaging altogether aim at fostering individual responsibility to reduce underage drinking, overconsumption and drinking before driving. The impact of such restrictions results in an increase in marketing costs.

ENVIRONMENTAL: 3/5 The distillation process generates negative externalities: high water consumption and carbon footprint. Water use is an additional problem in emerging markets that experience hydric stress, such as in India. The product process also results in C02 emissions, the principal responsible for global warming. Despite increasing public concerns for this issue, spirits producers remain widely unaffected because of the lack of coercion measures.

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STLE

PE

24

APPENDIX 24: SWOT ANALYSIS

Financial

Reputation

Industry leader

Economies of

Competitive Pressure

Proprietary Technology

Marketing Effectivenes

Concept Developmen

Management

Cost/Price

Portfolio Ressource

StrategyFacility

Financial Structure

Internal Operations

Forex

Property Developmen

Product Line

Brand Image

Marketing

Cost Structure

Profitability

Target Market

Product enhancement

Product line

Vertical Integration

Expansion of facilities

Rival Complacency

Market Growth

Substitute Products

Market Stagnation

Business Cycle Downturn

Total Opportunities

Total Weaknesses

Total Threats

Total Strengths

Pricing

Technology

Entry barriers

Demographics

Market requirements

SRIBuyer Supplier Power

Expansion Prospects

Demographics

Distribution Network

- Debt burden Due to the Absolut acquisition, Net Debt/EBITDA peaked at 5.6x in 2009 to reach 3x in 2017 but is still higher than the sector average (1.8x). - Negative Forex Impact Exposure to USD, RMB, GBP & INR with limited hedging policy leaving earnings exposed to currency fluctuations. - Underperforming vodka segment With Absolut as its first brand in terms of volumes, PR is exposed to

the downturn of this sector and especially in the US. - Weaker profitability profile

An asset-heavy balance sheet is penalising PR’s return ratios (ROE/ROA)

compared to its peers.

- Emerging markets provide wider consumer base

The largest increase (1.3 bn new consumers) should come from countries such as China and India. - Shifting consumption habits Ageing population, millenialisation and female consumption coupled with crafted spirits and premiumisation transform alcohol consumption. Such trends give PR’s extensive portfolio room for growth. - Travel retail As Air traffic doubles every 15-years, PR which already performs 8% of its turnover in this segment is in a preferential position, while only 4% of total revenues are performed in this sector. - Development on new distribution networks The development of e-commerce and home trade is a key growth opportunity, that PR has seized by creating a 5-channel distribution model (On-trade/Off-trade/Travel Retail/E-commerce/Home-Trade)

- Risk of economic

slowdown PR is globally exposed to

economic downturns in key markets such as the US (19%

revenues), China (10%) and India (10%).

- Toughening regulation. The industry is defined by high regulation

standards that impede the normal course of operations. Change in regulation can lead to adverse impact on

business activity such as in India (Highway Ban and Total Ban). - Counterfeiting and black market development This situation is the result of a stricter legal framework. This underground economy may harm PR’s volumes and brand image. - SRI potential negative impact on the industry Socially Responsible Investment criteria may turn the spirits industry investors away - as it has done with the tobacco industry- directly impacting Pernod Ricard’s stock performance.

- Widely diversified global portfolio PR does relies on a large number of renowned brands: 13 premium spirits 4 premium wines & 15 local brands that cover the whole spirits spectrum. - Healthy organic growth profile PR has always been able to generate organic growth with a 2.21% CAGR 2013-17. - PR ranks #1 in premium spirits This segment is defined by higher growth rates, margins and is less affected by regulation constraints. - Strong position in emerging markets The group is notably well implanted in China, and India where it is the leader in premium spirits. - Decentralised business

model Unique organisation between brand and market companies that allow the group to stick to local specificities.

S W

O T

25

APPENDIX 25: PR’S PORTFOLIO OF BRANDS

In this appendix can be found Pernod Ricard’s main brands divided between: Strategic International Brands, Wine Strategic Brands, Strategic Local Brands.

Back to Appendix table

Brand Name Principal market Highlights2016-2017

sales growth

Strategic International Brands

Ricard FranceAnise-based liquor and historic brand of Pernod Ricard. This house is the leader of the french spirit industry with 38,7 millions of litres sold.

4%

Beefeater Spain, USSecond producer of premium gin in the world, Beefeater is a british spirits distilled in London. 24,3 millions of litres of Beafeeter are sold annualy.

5%

Martell China, USMartell is the oldest french cognac house and highly popular in China. This type of spirit is strategic as production is structurally low (due to strict designation of origin) and the demand growing.

6%

Perrier-Jouët US, FrancePerrier-Jouët is a champagne premium brand primarily sold in France and the US. This champagne ranks 3rd on the Us market.

11%

Mumm France, AustraliaMumm is the largest french international champagne brand. This champagne benefits from a premium image as it was linked with prestigious monarchies during the XXth century.

3%

Ballantine's France, SpainBlended scotch whisky produced in Scotland. With 58,5 millions litres sold, Ballantine's is the first european scotch whisky in term of volume.

3%

Royal Salute Asia, Travel retailRoyal Salute is a scotch whisky created to commemorate the coronation of Queen Elizabeth II. This is a premium brand as Royal Salut is the only whisky with a collection that begins at 21 years of age.

-3%

Absolut US, Canada, Travel RetailAbsolut is the leader of premium vodka worldwide and ranks as the 5th spirits across all categories. This is Pernod Ricard's largest brand in term of volume with 98,1 millions litres sold.

2%

Chivas Regal China, USChivas Regal is a premium blended scotch whisky sold worlwide (in more than 150 countries). It is the leader of scotch whisky in China and super premium scotch whisky in India, two key markets for Pernod Ricard.

-3%

The Glenlivet US, Travel RetailThe Glenlivet is the co-leader of single malts whisky. This brand was the fastest-growing on its segment for the past five years.

2%

Jameson US, Russia, IrelandJameson is one of Pernod Ricard best-sellers with 51,3 millions litres produced each year. This brand is the world leader of Irish whisky. Jameson is an example of Pernod Ricard success in capitalizing on its brands.

15%

Havana Club Cuba, Germany, FranceHavana Club, a Cuban spirit, is the No. 3 international rum brand. The house is currently experiencing legal issues with its competitor Baccardi (regarding the brand name) and with the US government (embargo of cuban products).

6%

Malibu US, UK, FranceMalibu is an original Caribbean coconut-flavoured rum. This brand was integrated by Pernod Ricard in 2005 following the Allied Domecq acquisition.

5%

Strategic Wine Brands

Jacob's Creek Australia, UK, USJacob's Creek is an Asutralian premium wine. This is the leader of bottled wine brand in Australia but it is also exported in 70 other countries worldwide. It exhibits a solid reputation as this wine won 7000 awards over the last 10 years.

4%Brancott Estate UK, US, Australia

Brancott Estate is a wine brand based in New Zealand. Its products are then exported (mainly in the UK, US and Australia).

Campo Viejo UK, US, SpainCampo Viejo is the leading wine brand produced in the spanish Rioja region. Wines from this part of Spain are only beginning to gain recognition.

Kenwood US, Canada, SwedenKenwood is a Californian premium wine producer. It was acquired by Pernod Ricard in 2014 to complete its wine portfolio of brands.

Strategic Local Brands

Passport Scotch Brazil, Mexico, AngolaPassport Scotch is a Scotch whisky produced in Scotland and sold in over 50 countries. This brand is increasingly popular among millenial consumers in ermerging markets. It is the 5th fastest growing spirit brand worldwide.

1%

Amaro Ramazzotti ItalyAmaro Ramazzotti was founded in Milan. It produces a large range of Bitter Digestive, Bitter Aperitif and Sweet Liquors.

Ararat Russia, UkraineArarat is an Armenian Brandy (wine-based spirit) sold in 30 different countries. This brand covers a large product spectrum and sell mainstream, premium and super premium brandys.

Blenders Pride IndiaBlenders Pride is an Indian blended whisky. This house has been targeted by Pernod Ricard as a brand to be developed in order to expand its business in Inda. It was incorporated to Pernod Ricard through the Seagram acquisition.

Imperial Blue IndiaImperial Blue is a blend of Indian grain spirits and scotch malts. It is the largest spirits of Pernod Ricard by volume and represents a strategic brand to penetrate the Indian market.

Wyborowa PolandWyborowa is a vodka exclusively produced in Poland with pure rye and water. It was acquired by Pernod Ricard in 2001.

Kalhua MexicoKalhua is the largest coffee-based liquor brand worldwide. Pernod Ricard integrated Kalhua during the Allied Domecq acquisition. This alcohol enters in the composition of the famous B52 cocktail.

Pastis 51 FranceOne of the two historic brands of Pernod Ricard. It is an anise-based spirit created and produced in Marseille, France. It was Ricard's main competitor before the merger in 1975.

100 Pipers India100 Pipers is an Indian scotch whisky sold in 16 countries around the world. It is the 11th worldwide standard scotch and the leader of mainstream scotch whisky in India. It is part of strategic brands Pernod Ricard need to develop to expand its activities in India.

Olmeca Mexico, Russia, TurkeyOlmeca is a premium Tequila produced in the Mexican region of Los Altos. The brand is distributedin 80 countries.

Seagram's Gin US Seagram's Gin was acquired by Pernod Ricard in 2001. This is the leader of gin on the US market.

Royal Stag IndiaJust like Imperial Blue, Royal Stag is a blend of Indian grain spirits and scotch whisky. It is mainly sold on the Indian market and represents a strategic brand for Pernod Ricard which aims at pentrating this market.

Clan Campbell FranceClan Campbell is a blended Scotch whisky produced in the region of Glasgow, Scotland. Is is the leader of premium scotch whisky in France.

Imperial South KoreaImperial is the leading scotch whisky on the South Korean market with almost 54 millions litres sold since 2004. This premium spirit is produced from barley and scottish water.

J.P Wiser's CanadaJ.P Wiser's is the oldest canadian whisky producer. It produces canadian whisky and its variants in the Ontario region.

Source: Pernod Ricard

26

APPENDIX 26: INNOVATION Pernod Ricard grants capital importance to internal growth. To do so, the firm is focusing on innovation through incremental (deepen and widen product range) and breakthrough innovation (customer experience, process and security). One third of PR’s organic growth comes from innovation, and the group is recognised for its innovation culture by often ranking among top 100 innovators (Forbes).

APPENDIX 27: Executive Committee

Back to Appendix table Back to Appendix table

Product innovation

Jameson Caskmates is an American whiskey ageing in beer-filled barrels from the Franciscan Well distillery. After first being sent to the distillery, the barrels used for the Jameson are then poured with beer and age for 2 to 6 months. They are then emptied and sent back to Jameson to age the whiskey and get a craft-beer flavoured brewage. Chivas  Regal Extra is a mix of single malts from small distilleries, aged in Oloroso sherry barrels (a fortified wine) from Spain. Absolut Lime is a new recipe that combines the Vodka’s brand name with 100% natural lime flavours without any added sugar.

Customer experience innovation

The Opn Project is a digital library that uses 75cl cartridges filled with very-own PR spirits to create cocktails. It fosters consumer experience by enabling users to customise beverage  recipes, adapting them to available ingredients. Furthermore, the system will devise a shopping list of ingredients for desired serves and order spirits to be delivered to consumers’ door on demand. « What cocktail » App was created in partnership with Amazon’s show device. It is a voice-led app that enables customer to get access to more than 300 cocktails, according to the ingredients specified.

Process innovation

BIG was founded in 2012, and is dedicated to breakthrough innovation on any business line and covers the whole product development process. The Group employs around 130 people. Chatter is Pernod Ricard’s corporate social network and part of its overall digitalisation process. It was created in 2012 to spread the innovation spirit to all the group’s associates across the globe. This initiative is the result of PR’s will to catalyse ideas while lower ing hierarchical boundaries and ease communication. Kangaroo Fund is a fund, financed by Pernod Ricard that promotes intrapreneurship. It grants through an internal competition, accessible to all associates, funding for innovating products.

Security innovation

QR code To ensure consumer safety, and protect them from counterfeiting Pernod Ricard has developed a QR-and-hologram equipped bottle. It enables them to track the origin and authenticity of their product.

Position in Management

Name Working Experience

Chairman and CEO Alexandre RICARD

Worked seven years outside the Group, for Accenture (Management and Consulting) and Morgan Stanley (M&A Consulting), he joined the Pernod Ricard group in 2003 and became gradually chairman and CEO in 2015 by occupying several positions around the world: Audit, Chief Financial and Administration Officer of Irish Distillers Group, CEO of Pernod Ricard Asia Duty Free, member of Executive Committee, Managing Director for the Group General Management.

Managing Director and CFO

Gilles BOGAERT

Started his career at Arthur Andersen & Co as Auditor from 1991 to 1995, after which he joined PR as Auditor and Business Developer then Finance and Administration Director of Pernod Ricard Argentina in 1998. In 2008, he was named Chairman and Chief Executive Officer of Pernod Ricard Brazil. He has been Managing Director, Finance and operations since 1 July 2009.

General Counsel Ian FitzSimonsMr Fitzsimons joined PR as General Counsel after having held the position of Director of Legal Affairs for Europe and Africa at Seagram.

Global Business Development

DirectorConor McQuaid

He began his career with Golden Vale Group plc before joining Irish Distillers Ltd in 1998 as Regional Manager for Southern Europe. He subsequently became Regional Director for Europe in 2000 before taking up the position of International Commercial Director of Irish Distillers Ltd in July 2005. He was appointed Managing Director of Pernod Ricard South Africa in July 2011. As of 1 March 2015, Conor McQuaid is the Global Business Development Director

Human Resources and Sustainability

& Responsibility Director.

Cedric RAMAT

Prior to joining Pernod Ricard, he worked at Microsoft as Training & Compensation Manager. In 1993, he joined Orangina France where he held successively the positions of HR Manager, Regional Sales Director and HR Director. After the merger of Orangina and Pampryl, he became Human Resources & Information Systems Director of Orangina Pampryl in 1999. He joined Ricard SA as HR Director in 2002. Cédric was appointed Executive VP Human Resources of Pernod Ricard Americas in July 2008. As of July 2016, he is Human Resources and Sustainability & Responsibility Director.

Chairman and CEO of PR EMEA/LATAM

Christian PORTA

Starting his career at Arthur Andersen in Audit Services for four years He joined Pernod Ricard in 1988 as an Internal Auditor and then became Head of Financial Services at Group Headquarters. In 1994, he was appointed Finance and Administration Director at Pernod, before moving to London in 1998 as Managing Director of Campbell Distillers. In 1999, he was appointed Chairman and CEO of Orlando Wyndham, based in Australia, before moving back to London at the beginning of 2004 as Chairman and CEO of Chivas Brothers. Since the 1st of July 2013, he has been Chairman & Chief Executive Officer of Pernod Ricard Europe, now called Pernod Ricard EMEA/LATAM.

Chairman and CEO of PR North

AmericaPaul DUFFY

He joined Pernod Ricard as Assistant Finance Director Treasury / Planning of Irish Distillers Limited. In January 1996, he was appointed Financial Controller of the Irish Distillers Group, and became its Finance Director in March 1997. In January 2001, he was appointed Chairman & CEO of Pernod Ricard UK In May 2005, took up the position of Chairman & CEO of Irish Distillers Group. In July 2008, he became President and CEO of Pernod Ricard USA In September 2012, he was appointed CEO of The Absolut Company. Since the 1st of July 2016 he is the Chairman and CEO of Pernod Ricard North America.

Chairman and CEO of PR Global Travel

RetailMohit LAL

Graduated from the Shri Ram College of Commerce in New Delhi as Chartered accountant, accounting and Finance. Starting his career within Nestlé India Managing Perfetti India’s finances from 1996 to 1999 as CFO In November 1999, he joined Seagram India as Financial Director, a position he held until 2006, the company having been acquired by Pernod Ricard in 2001 and renamed Pernod Ricard India in 2005. After serving as Irish Distillers’ Financial Director from 2006 to 2011, he returned to India as Managing Director of Pernod Ricard India in 2011. He was then appointed Managing Director of Pernod Ricard Travel Retail Asia in 2015. Since 1st of July 2016, Mohit is the Chairman and CEO of Pernod Ricard Global Travel Retail.

Chairman and CEO of PR Asia

Philippe GUETTAT

He joined Pernod Ricard in 1991 as Export Sales Manager at Renault Bisquit. In 1992, he was appointed Marketing Manager at Prasia Distribution (now Pernod Ricard Singapore). He was promoted to Regional Marketing Director of Pernod Ricard Far East in 1994, before becoming Sales & Marketing Director at Casella Far East Ltd. Hong Kong (now Pernod Ricard Hong Kong). In 1997, he was promoted to Managing Director, before being named Vice-President, Marketing & International at Pernod. In 2002, he was appointed Managing Director of Pernod Ricard China. In July 2009, he became CEO of the Absolut Company, the Sweden subsidiary in charge of Absolut, Malibu and Kahlúa. CEO of Martell Mumm Perriet Jouët since October 2012, He was appointed Chairman and CEO of Pernod Ricard Asia in July 2015.

Source: Pernod Ricard27

APPENDIX 28: 4-P MARKETING MATRIX

Back to Appendix table

Aligned with its strategy of producing high quality product, PR is following the premiumisation trend of the wine and spirit industry. The group seeks to take advantage of the large growth potential of the high end segment by attracting a wealthier consumer base. PR’s will is to generate profitability thanks to its brand recognition which lead to an increase pricing power : the group pursues a skimming strategy.

PR has targeted 5 routes to markets in order to reach each type of consumers  : 3 traditional (On

Trade/Off Trade/Retail) and 2 in development (Home Trade and E-Commerce). The group seeks to expand simultaneously these 5 channels by improving business partnerships with wholesalers (On Trade and Off Trade), classic retailers (Off Trade) and online retailers (E-commerce) and to innovate to facilitate Home Trade. The group owns its own distribution network which is managed locally by affiliates called Market Companies and allows PR to reduce outsourcing costs and better handle the dispatch of its products. This is all the more important as PR is selling ageing spirits, the group can only improve its inventory management by reducing transit time. We see the distribution ownership and local management as a crucial competitive advantage of Pernod Ricard.

On a market defined by a strong non-price competition, PR’s objective is to move upmarket and sell high quality wines and spirits. This position is created through the development of internationally renowned brands like Jameson or Absolut. This allows PR to differentiate from its main competitors. Regarding the range of products offered to consumers, PR is pursuing a penetrating strategy  : the group’s portfolio is both wide (PR is present on each spirit category) and deep (each PR brand brand comes with numerous variants). PR also grants importance to the design of its packaging as their bottles are very often associated with an iconic brand.

PRICE PRODUCT  

 PLACEPROMOTION 

28

Communication is fundamental to PR’s business activity. As we highlighted in the other section of this matrix, PR’s main objective is to move upmarket and marketing is the main tool to perform such strategy. First, the group has total control over its communication policy and consumer associations have little or no effect on perception over PR’s products. PR is targeting special consumer categories for its message to have more impact  : millennials is one of these categories. For example, PR used NBA and Hollywood stars to promote its products. Moreover, the group is building its communication strategy around « moments de convivialité  » what is exactly adequate to reach millennials who tend to be « experiencers ».

APPENDIX 29: M-SCORE

The Beneish model is built on mathematical model that uses financial ratios and eight variables to detect whether a company is manipulating its earnings. An M-score of less than -2.22 indicates that the firm is not manipulating its earnings. M-score 5 variable: M  = -6.065 + 0.823*DSRI + 0.906*GMI + 0.593*AQI + 0.717*SGI + 0.107*DEP M-score 8 variable: M  = -4.84 + (0.92*DSRI) + (0.528*GMI) + (0.404 * AQI) + (0.892*SGI) + (0.115*DEPI) - (0.172*SGAI) + (4.679*TATA) - (0.327*LVGI) According to the M-score analysis, it is unlikely that the reporting earnings of Pernod Ricard have been manipulated.

APPENDIX 30: Z-SCORE

The Altman Z-score was introduced in the late 1960s by Professor Edward Altman in order to estimate a company credit-strength and the company likelihood of bankruptcy. The model is build with five key performance ratios aggregated into a single formula which is: Z-score = 1,2A + 1,4B + 3,3C + 0,6D + 1,0. The lower the score, the more likely the firm is to file for bankruptcy

APPENDIX 31: M&A EVENT STUDY We performed a 17-year statistical analysis of PR’s top-9 M&A operations-related abnormal returns to assess the reaction of investors to such announcements. The results of this study were significant on a 3-day pre and post announcement.In the case of potential future acquisitions, we expect increased value for shareholder as seen in the past in large-scale M&A operations (Allied Domecq announcement date +6.7% abnormal return) as well as small scale acquisitions (Monkey 47 +2.35%)

Back to Appendix table

FY12 FY13 FY14 FY15 FY16 FY17

INPUTS

Net sales 8,215 8,575 7,945 8,558 8,682 9,010

COGS 3,169 3,224 2,958 3,262 3,311 3,407

Net receivable 1,197 1,159 1,051 1,152 1,068 1,134

Current asset 6,521 6,499 6,646 7,419 7,282 7,521

PPE 2,049 2,074 2,167 2,352 2,387 2,336

Securities

Depreciation 172 185 203 214 219 219

Total Asset 28,375 27,538 27,618 30,398 30,599 30,087

SGA 2,933 3,120 2,931 3,058 3,094 3,208

Net income 1,174 1,192.9 1,028 880 1,254 1,421

CFO 1,126 1,085 940 1,034 1,335 1,641

Current liabilities 3,706 4,416 3,905 5,138 4,956 4,256

Long term debt 9,296 7,712 7,673 7,458 7,335 7,380

Income from continuing operation 1,969 2,120 1,817 1,589 2,094 2,232

RATIO

Days Sales in Receivables Index (DSRI) 0.928 0.979 1.018 0.914 1.023

Gross Margin Index (GMI) 0.984 0.994 1.014 1.000 0.995

Asset Quality Index (AQI) 0.987 0.989 0.997 1.008 0.983

Sales Growth Index (SGI) 1.044 0.927 1.077 1.014 1.038

Depreciation Index (DEPI) 0.946 0.956 1.027 0.992 0.980

SGA Expenses Index (SGAI)

1.019 1.014 0.969 0.997 0.999

Leverage Index (LVGI) 0.961 0.952 0.988 0.969 0.963

Total Accrual to Total Asset (TATA)

0.038 0.032 0.018 0.025 0.020

M-score 8 variables -2.34 -2.42 -2.29 -2.42 -2.33

M-score 5 variables -2.98 -3.01 -2.84 -2.98 -2.89

FY13 FY14 FY15 FY16 FY17

Imput variable INPUTS

Current asset 6,499 6,646 7,419 7,282 7,521

Current Liabilities 4,416 3,905 5,138 4,956 4,256

Working capital 2,083 2,741 2,281 2,326 3,265

Total asset 27,538 27,618 30,398 30,599 30,087

Total liabilities 16,357 15,838 17,110 17,092 16,202

Retained earnings 7,550 8,157 9,656 9,874 10,243

EBIT 2,231 2,056 2,238 2,277 2,395

Sales 8,575 7,945 8,558 8,682 9,010

Market capitalization 24,143 24,065 23,653 27,791 30,802

FINANCIAL RATIO

A: Working capital/total assets

0.08 0.1 0.08 0.08 0.11

B: Retained earnings/Total assets

0.27 0.3 0.32 0.32 0.34

C: EBIT/Total Assets 0.08 0.07 0.07 0.07 0.08

D: Market capitalization/total liabilities

1.48 1.52 1.38 1.63 1.9

E: Sales/total assets 0.31 0.29 0.28 0.28 0.3

Z-score 1.94 1.98 1.89 2.05 -

Volu

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in s

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0

2,250,000

4,500,000

6,750,000

9,000,000

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0

35

70

105

140

04/01

/2000

17/05

/2000

28/09

/2000

09/02

/2001

25/06

/2001

06/11

/2001

20/03

/2002

01/08

/2002

13/12

/2002

28/04

/2003

09/09

/2003

21/01

/2004

03/06

/2004

15/10

/2004

28/02

/2005

12/07

/2005

23/11

/2005

06/04

/2006

23/08

/2006

09/01

/2007

28/05

/2007

09/10

/2007

25/02

/2008

11/07

/2008

24/11

/2008

14/04

/2009

27/08

/2009

12/01

/2010

28/05

/2010

11/10

/2010

24/02

/2011

12/07

/2011

23/11

/2011

10/04

/2012

23/08

/2012

11/01

/2013

30/05

/2013

11/10

/2013

27/02

/2014

15/07

/2014

26/11

/2014

16/04

/2015

31/08

/2015

15/01

/2016

01/06

/2016

13/10

/2016

27/02

/2017

14/07

/2017

27/11

/2017

Seagram

Allied Domecq Mumm & Absolut

Kenwood

Avión

Monkey 47

Smooth Ambler

Del Maguey

Source: Team estimates

Source: Team estimates

Source: Bloomberg / Team estimates29

APPENDIX 32: POTENTIAL M&A TARGETS We founded our screening on regional pure players Pernod Ricard could acquire, with high EBITDA margin profile, that are either superior to PR’s one, or with high potential synergies.

APPENDIX 33: THE ABSOLUT COMPANY, AN EXAMPLE OF SUCCESSFUL ESG IMPLEMENTATION

Back to Appendix table

CO2

The Absolut company deals with 350 suppliers who must respect a comprehensive specification needs with pesticides and fertilisers use requirements. In exchange, suppliers get an above-the-market compensation.

T h e g r o u p uses winter wheat, that d o e s n o t require water use.

Vinasse, a byproduct of the ethanol industry is sold back to the farmers to feed cattle. This activity is not profitable but enables the company to recycle useless wastes

The Absolut Company is still located on its historical site, place upon an underground lake. Altogether with the other users, they manage an efficient water use.

Rainwater and runoff are collected and used to cool down infrastructures.

During the fermentation process, the ethanol that is emitted is collected and sold to Air Liquide,

Wastewater -rich in carbon- are collected and sold to the city.

As 99% of the production is exported, the company tackles C02 emissions by using HVO (Hydrotreated Vegetable Oil) biodiesel fueled trucks.

Bottles are made with 40% of recycled glass.

The distillery works with 90% o f g r e e n e n e r g y. To compensate for not being 100% green energy reliant, the group uses sustainable means such as reforestation.

OVERALL: The whole production process is automated, while the company has managed to decrease its energy use by 45% since 2004. It aims at having no environmental impact in electricity and water by 2040.

Corporation Country ProductsMarket Cap (EURm)

Revenue (EURm)

EBITDA margin

Asie - RoW

Anhui Yingjia China Spirits 1,799 391 31%

Jiugui Liquor Co. China Liquors and wine 1,101 83.2 25%

Delegat Group Limited New-Zealand Wine 482 193 33%

Americas

Angostura Holdings Limited Trinity and TobagoRum, Bitters and other spirits

386 68 29%

Andrew Peller Limited Canada Premium wine 729 345 17%

Crimson Wine Group USACrafted wine + Ultra premium spirits

211 51 16%

Europe

Altia Oyj Nordic & Baltics Ultra-premium, VSOP - 357 16%

Champagne Bollinger France ChampagnePrivately

owned92.6 25%

Stock Spirits Group PLC UK Spirits 590 283.7 21%

Source: S&P Capital IQ

30

CFA Institute Research Challenge

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 an officer or a 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 Pernod Ricard S.A, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock.