How To Value Aesop (Britain)

Transcription

1 CORPORATE FINANCE Natura Cosméticos S.A. of Emeis Holdings Pty Ltd. Advisory March 12, 2013

2 KPMG Corporate Finance Ltda. Av. Nove de Julho, º andar São Paulo, SP - Brasil Caixa Postal São Paulo, SP - Brasil Central Tel 55 (11) Fax 55 (11) Internet To Natura Cosméticos S.A. São Paulo, SP, Brasil March 12, 2013 Attention: Directors of Natura Cosméticos S.A. Dear Sirs: In accordance with the terms of our proposalp for professional services dated January 23, 2013, and subsequent understandings, g, we have performed a valuation of Emeis Holdings Pty Ltd., as of the base-date January 31, 2013, as represented in this attached report. The delivery of this report concludes the obligations of KPMG Corporate Finance Ltda. with Natura Cosméticos S.A., as it relates to the valuation of Emeis Holdings Pty Ltd. and as a result of the aforementioned proposal. This report is considered a free translation of the final Portuguese version that was issued on March 12, If there are any discrepancies or differences between the versions, the version in Portuguese will prevail. Very truly yours, Luis Augusto Motta Partner KPMG Corporate Finance Ltda., uma sociedade simples brasileira, de responsabilidade limitada, e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Corporate Finance Ltda., a Brazilian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Contents 1. Introduction 3 Background Objective Valuation criteria Sources of information Scope Important t notes and scope limitationsit ti Subsequent events Report use and disclosure 2. Valuation criteria 3. Brief Description of the company 4. Assumptions used in the valuation 5. Discount rate 6. Estimate of the company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae Page 2

4 1. Introduction Background (Source: Natura management) On December 20, 2012, Natura Cosmetics S.A. ("Natura" or the "Client"), pursuant to the provisions of CVM Instruction 358/2002, acquired 65 percent of Emeis Holdings Pty Ltd. ("Aesop" or ithe "Company"). The amount paid in the context of the acquisition was AUD $ million, subject to certain adjustments that were part of the contract of purchase and sale agreement. Aesop was founded in 1987 in Australia, with a focus on producing personal care products tailored to high-end retail. As of the acquisition date, Aesop operated in more than 60 locations in 11 countries. The product range includes skin, body and hair care. The Company's products are available online and in more than 60 signature stores in major cities including Paris, Tokyo and New York, as well as department stores around the world. Objective The objective of our services was to perform a valuation of Aesop, to meet the provisions of Article 256 of the Corporation Law and Annex 19 of CVM Instruction 481. Valuation criteria For the purposes of the valuation the Discounted Cash Flow ( DCF ) method was used, as this is a widely used convention for determining the value of companies with business plans that have likely certainly of future profitability. The DCF method is further described under Section 2 of this report. Sources of information The base-date for this valuation was January 31, Our work was based in the following information: The Company s audited financial statements as of June 30, 2010, 2011 and 2012 (The Company s year end is June 30th); Balance sheet and income statement data as of January 31, 2013; Internal documents prepared by Natura s Management; Business Plan and projections prepared by Natura s management; Information obtained throught interviews with Natura s Management; Data and market information regarding the Company s industry. The information used in the Company s valuation was provided by the Client. KPMG has assumed that the information received is correct and that no essential information was withheld. Information was not verified due to the scope of this work, therefore, KPMG does not assume any responsibility for its accuracy and perfection. Scope Our work involved the following procedures: Analysis of Aesop s financial statements for the last three fiscal years and balance sheet as of the base-date; Interviews with Management to complement and verify our understanding of Company s current operations and its future expectations; Analysis of the Company s business plan and its main assumptions developed by Management; Analysis if the business plan, operational projections, studies about the Company and/or internal valuations performed by the Natura; 3

5 1. Introduction (cont.) Analysis of marketing data prepared by Natura and comparison of these with public data; Sensitivity analysis to evaluate the impact of key variables on the value of the Company; Analysis of market multiples of comparable companies; Economic-financial modeling of the Company s operations; and Estimate of the discount rate to be applied. Important notes and scope limitations We emphasize that this report was prepared based on the understandings with the Company s Management and that the objective set above reflects these understandings. The work was focused on the preparation of a financial projection model for the purpose of estimating future cash flows generated by the Company, based on the premises discussed and approved by Company Management. We emphasize that the determination of the economic value of possible contingencies, the market value of fixed assets and other adjustments to the financial statements (if applicable) were not part of the scope of this report. Thus, with respect to such items our work was based on information and analysis made available by the Client and/or their respective auditors, lawyers and/or other advisors. Therefore, KPMG does not express an opinion or provide any kind of guarantee in relation to the financial statements. Although we have processed information, we do not provide any kind of attestation as to the authenticiy of the information collected or an opinion or any kind of guaranty in relation to its integrity. The scope of our work does not include the detection of fraud in operations, processes, accounting registries or Company documents. Although we apply our best efforts to accomplish the objetive of this work, due to the very nature of the services rendered, we do not and will not assure the sucessful implementation of any expected operation within any timeframe, nor will we be responsible for any opportunities that are not identified, presented or explored, for whatever reason. The work was carried out under the technical supervision of KPMG in an independent manner. However, due to the very nature of the work, the analysis is subjective, thus other professionals may express a different point of view than that of KPMG. During the work, we have made the analysis procedures which h we deemedd appropriate in accordance with the scope set. However, KPMG is not responsible for the information supplied to it and will not be liable or pay, in any event, damages or losses arising or resulting from the omission of data and information by the Management of the Company or the Client. We emphasize also that the work did not constitute an audit according to generally accepted auditing standards and should not be interpreted as such. 4

6 1. Introduction (cont.) KPMG does not state an opinion as to whether or not assumptions considered in the financial projections are correct or in relation to the probability of the future results of the Company reaching the projected values. It must be emphasized that the actual future realization of projections depends on the continuing validity of the assumptions they are based on. Any advice, opinion or recommendation provided by KPMG as part of the engagement shall not amount to any form of guarantee that KPMG has determined or predicted future events or circumstances. Valuations, in general, present significant degrees of subjectivity. Furthermore, the projections and assumptions used in valuations are based in future expectations, which could be confirmed or not, in view of the fact that projected events may not occur, due to a number of exogenous economic and operating factors. Thus, there are no guarantees that any assumptions, estimates, projections, results or conclusions presented in the valuation report will be effectively observed and/or verified, in its entirely or partially. The figures observed in the future may be different and the differences may be significant. These possibilities are not a bias or a defect of the valuation process and are recognized as part of its nature. Hence, KPMG is not responsible and can not be held responsible for any differences between the valuation results and the results observed a posteriori. We emphasize that a valuation establishes an estimate value to be used for a theoretical interaction between a buyer and a seller, both with a firm intention of closing the deal, with full access to the relevant facts, without an immediate need to buy or sell. An effective negotiation does not always reflect these elements, and may include other elements, and consequently does not necessarily occur at the value estimated as result of the valuation exercise. The services proposed herein may be based on legal and administrative rules. In this regard, we note that our legislation is complex and very often the same provision can be interpreted in more than one way. KPMG seeks always to be up-to-date in relation to the various interpretative tendencies, in order to permit an ample evaluation of the alternatives and risks involved. Even so, it is certain that there may be some interpretations of the law that differ from ours. Under these circumstances, neither KPMG, nor any other firm, can give Client total assurance that it will not be questioned by third parties or assessed for additional tax by the authorities, including supervisory agencies. Our services will be based on current legislation and regulations. The scope of this proposal does not include the updating of services and/or their respective reports in light of laws or regulations that may come into effect after conclusion of the services. The sums of individual amounts presented in this report may differ from the result of the sum presented due to rounding. Report use and disclosure This report was prepared for the exclusive use of the Client s management, and therefore should not be disclosed to third parties without our prior written consent. Nevertheless, we understand that the tax authorities could request access to this report, and we henceforth authorize its disclosure in this specific case. 5

7 1. Introduction (cont.) Subsequent events The valuation was based on the income statement and on the balance sheet as of the Valuation Date and on information obtained prior to the date of issue of this report. We wish to stress that any events that have occurred after the Valuation Date were not considered. This valuation was performed using the Discounted Cash Flow criteria as of the base-date and based on information obtained prior to issuance of this report. KPMG was not commissioned and is not obliged to update this report following its date of issue. Free translation This summary report is a free translation to English (requested by Natura Management) of the report issued in Portuguese. If there are any discrepancies or differences between the versions, the version in Portuguese will prevail. 6

8 Content Page 1. Introduction 2. Valuation criteria 8 3. Brief description of the company 4. Assumptions used in the valuation 5. Discount rate 6. Estimate of the company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae 7

9 2. Valuation criteria As mentioned previously, the valuation of the Company was performed according to the DCF criteria. The DCF method is applicable to any company provided it has a business plan in place which is reasonably determinable and achievable. This criterion is especially applicable to companies that have reasonable prospects for expansion or significant changes in profitability parameters from its operations and which business plans are regarded as adequate to enable estimating and measuring these events. This criterion also includes the value of intangible assets such as trademarks, customer portfolio, and market share, since these assets can reflect the capacity to generate results of the company being valued. The DCF method is based on the concept that the value of a company is directly related to the amounts and periods during which free cash flows, derived from operations, will be available for distribution. Therefore, for the shareholder, the value of the company is measured by the amount of financial resources that are expected to be generated in the future by the business, discounted to present value, to reflect the time and risk associated with the cash generation. For valuation purposes, it is considered that 100% of excess cash flows would be available for distribution at the time they are generated. Contingent assets, non-operating assets and financial assets are added to the value obtained, as described above, while existing bank debts, loans, contingent liabilities and non operating liabilities are subtracted, when applicable, to obtain the equity value of the company. In order to calculate future cash flows generated by a company s operations, income statements are projected. The projected values of depreciation and amortization are added back while the projected capital investments are deducted. In addition, appropriate net working capital adjustments are included. Other items that affect the company s cash flow are also considered when appropriate. It is important to point out that the net profit calculated in the income projections should not be compared with the accounting net profit to be reported in subsequent financial years. This is due to the fact, among other reasons, that the effective net income is impacted by non-operating or nonrecurrent factors, which (since they are not known in advance or foreseeable) are not considered in the projections, such as occasional revenue, non-operating revenue, revenues and/or expenses with monetary and exchange variations, and others. The purpose of projecting future income statements is to calculate the projected cash flows of the Company that is being valued and comprises future cash flows available for both shareholders and creditors of the company. At this stage of the valuation, the objective is to determine the capacity to generate cash from the company s normal operations, in other words, its potential to generate wealth to its capital providers as/or a result of its operating characteristics. The calculation of the discount rate is a fundamental stage of any valuation. This single factor reflects subjective aspects which vary from investor to investor such as cost of opportunity and personal perception of the investment risk involved. The weighted average cost of capital ( WACC ) is generally used as the discount rate to be applied to the projected cash flows of companies. The WACC is calculated on the basis of a capital structure to be adopted over the long term to finance the operations of the company being valued and based on the average weighted cost of equity capital and third parties capital, inherent tto the company s capital structure. t 8

10 Contents Page 1. Introduction 2. Valuation criteria 3. Brief description of the company 10 Brief company description Products Geographic presence Sales channel 4. Assumptions used in the valuation 5. Discount rate 6. Estimate of the company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae 9

11 3. Brief Company description (Source: Aesop and Natura) Brief company description Aesop is an Australian company that operates in the cosmetics segment, with products in Skin Care, Body Care and Hair Care lines amount others, including products for men, for the household and domestic animals. The Aesop brand is recognized in the market for its high quality as well as its use botanical natural ingredients. The company was founded in 1987 in the city of Melbourne, Australia. Over the years Aesop has expanded its presence into new markets; launching in United States in 1990, followed by its arrival in Europe and Asia. Currently, its products are sold in over 50 signature stores in major cities around the world. Aesop also has a strong presence in department stores. Their business model has been successful in various countries around the world. Company timeline Aesop was founded by Dennis Paphitis in Melbourne, Australia. Launch in EUA. Launch of the Body Care e Skin Care lines. Launch in the UK, Japan, Malaysia, France and Hong Kong. Launch in the EU, first signature stores inaugurated, UK subsidiary was established. Signature stores opened in Hong Kong, Sydney, Taiwan, Singapore, Paris and Canberra French and Japanese subsidiary established, three signature stores opened in Australia Singapore subsidiary established, signature stores opened in London and Australia Four signature stores opened in Australia Hong Kong and US subsidiarys established, signature stores opened in Tokyo, Paris, Melbourne and Singapore New signature stores opened in the US and departament stores point of sale expansion. 10

12 3. Brief Company description (cont.) (Source: Aesop and Natura) Geographic presence Europe London regional hub Revenue share: 13,9% Responsible for EMEA area management, marketing, retail operations and development APAC (excl. Australia) Hong Kong regional hub Revenue share: 39 39,3% 3% Responsible for APAC area management, marketing, retail operations and development Americas New York regional hub Revenue share: 3,7% Responsable for US area management, marketing, retail operations and development Australia Global head office Revenue share: 40,6% Responsible for brand, marketing and channel strategy, finance and treasuty and R&D 11

13 3. Brief Company description (cont.) (Source: Aesop and Natura) Products The Company's product portfolio consists of the following lines: Participation of each range of products in revenue (04/2012): Other 15% Skin Care: The products in the Skin Care line are formulated with high concentrations of active botanicals and federallly approved ingredients. The formulations also contain anti-oxidants, vitamins and the highest quality plant-based extracts. Body Care: The range is composed of soaps, gel cleansers, blams and oils, that are gentle to the skin and of high quality. Hair Care 5% Body Care 30% Skin Care 50% Hair Care: The range of Hair Care products are disigned to adress the needs of all scalp and hair types. Other: Other products include deodorants, fragrances, shaving products, gift and travel kits, petcare and domestic items. Product innovation The R&D team is located in a specially built laboratory at the Company's headquarters in Melbourne. R&D is focused on product innovation, formula research and creating prototypes that go through rigorous testing. The Company combines the newest technologies with practical and scientific principles to create quality products. The Company engages with the experimentation of using new ingredients. 12

14 3. Brief Company description (cont.) (Source: Aesop and Natura) Sales channels Listed below are the various sales channels of the Company: Signature stores: Includes all brand products and services. Number of stores: 54 Department stores: Reaches mainstream customers who are open to product experiementation. Number of stores: 63 Digital: Global presence presence, offers simple introduction to new clients. Sales channel allocation in revenue (04/2012): Wholesale 10% Digital 2% Signature stores 48% Wholesale: Expands brand awareness amongst target consumer. Department stores 40% Number of stores:

15 Content 1. Introdução Page 1. Introduction 2. Valuation criteria 3. Brief company description 4. Assumptions used in the valuation 15 Initial considerations Macroeconomic assumptions Operational assumptions Income statement 5. Discount rate 6. Estimate of the company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae 14

16 4. Assumptions Initial considerations The assumptions used in the projections were provided the Management team of Natura and were analyzed by KPMG. Currency The projections were made using the Australian Dollar as a currency and were prepared in nominal terms (taking into account the effects of inflation), as of the base-date of January 31, Projection horizon From a theoretical point of view the projection horizon would extend to infinity given the longevity of the industry that the Company operates in. However, due to practical reasons (including the difficulty of estimating parameters for longer periods), we considered a projection horizon limited to a few years, according to the Company s characteristics and current situation. A terminal value is then added at the end of this period. Discount period For the year in which the cash flows are generated, we considered the assumption that the monthly flows have different values over time. Therefore, the cash flows at the beginning of the year should be discounted for less time than those at the end of the year. Consequently, for practical reasons, the period s cash flows were discounted as they occurred in the middle point of each period. Other considerations The valuation using the discounted cash flow was conducted considering a scenario in which Aesop operated through a distribution network, which will be acquired by the minority shareholders of the Company. In this review, observing the characteristics of the Company, it was considered a forecast horizon of six years and five months, from the base date until June 30, The terminal value was calculated based on a perpetual future cash flows, based on the normalized value of the operating cash flow of last year of the projection, According to the characteristics of the Company was also considered the perpetuity p of cash flows after the forecast period, based on the following formula and the nominal growth rate of 50% of the projected growth for the Australian GDP (2.38% p.a.): Perpetuity value by the end of the last year of projection = Normalized free cash flow of the last year (Discount rate - Perpetuity growth rate) = FCn x (1+g) (i-g) 15

17 4. Assumptions (cont.) Macroeconomic assumptions The long term real GDP growth in Australia, the U.S., Europe and Asia along with inflation were used for each geographic region for a long-term growth assumption. The macroeconomic assumptions used in the valuation are as follows: Revenue growth by region: The net revenue growth by region was projected according assumptions and discussions with Natura s Management and is demonstrated on the following page. Macroeconomic assumptions Source Real GDP growth (annual average) Australia 3,00% Economist Inteligence Unit US 2,40% Economist Inteligence Unit Europe 1,30% OECD Economic Outlook Asia (excluding Australia) 4,66% Economist Inteligence Unit Macroeconomic assumptions Inflation (historical average) Source Australia 1,75% Australian Bureau of Satistics US 2,05% Global Financial Data Europe 2,40% Eurostat Asia (excluding Australia) 4,58% Economist Inteligence Unit Operational assumptions Net operating revenue Aesop s net operating revenue has been projected using based on geographic regions where the Company operated as of the base-date. 16

18 4. Assumptions (cont.) The following table shows the compounded annual growth rate (CAGR) between the 2010 to 2012 for each operating region of the Company, as well as the main objectives for the Company to achieve furture growth over the next five years. Region CAGR (FY' 10 - FY'12) Australia 12,10% 10% APAC (excluding Australia) 10,70% Europe 33,40% US 137,30% Online sales/digital Source: Client n/a Future profitability goals Australia represents the largest market for Aesop and w ill continue in this position for the next three years. Ensure that the brand's positioning remains relevant and desirable to the core costumers. Increase the number of signature stores. Improve back-end systems and retail execution. Japan: Continue to expand the netw ork of signature stores by tw o new stores by year. Expand number of w holesalers, particularly outside Tokyo. Increase exposure, brand recognition and market share. Build local management team. Singapore: Continue to build brand recognition. Expand the netw ork of signature stores and w holesalers, increasing its market share. Develop management team w ith focus on retail. Hong Kong: Establish Hong Kong as the regional base for Asia. Position the brand appropriately, strenghtening its value, given the highly comercial local conditions. Expand the number of signature stores, improve the standard of operating performance in the ones that already exists and increase its market share. United Kingdom : Develop signature stores and departament store counters, particularly outside London. Develop management team. France: Continue to develop the netw ork of signature stores and departament stores counters. Relocate the office and develop the management team. Develop the brand's presence, ensure that the French positioning sets an example for other EU countries. Oportunidade significante de crescimento, já que se trata do maior mercado de cosméticos do mundo. Expand distribution. Build brand presence through events and editorial. Build consumer database. Recruit and develop retail team. Launch a new global sales plataform. Develop and execute an online marketing strategy. Launch online magazine and content. 17

19 4. Assumptions (cont.) Net revenues by geographic region: The following table displays net revenues by geographic region: Revenue by region Historical Projections AUD Net revenues % Grow th 26,7% 22,1% 28,1% 30,7% 34,2% 23,9% 9,2% 9,6% 9,7% 9,5% Australia % Grow th 23,2% 14,9% 22,7% 18,1% 18,4% 14,6% 4,8% 4,8% 4,8% 4,8% % Total 45,0% 42,4% 40,6% 36,7% 32,4% 29,9% 28,7% 27,4% 26,2% 25,1% APAC (excl. Aust.) % Grow th 21,5% 16,9% 16,1% 22,0% 24,0% 20,0% 9,2% 9,2% 9,2% 9,2% % Total 45,4% 43,4% 39,3% 36,7% 33,9% 32,9% 32,9% 32,8% 32,6% 32,6% Europe % Grow th 97,6% 69,1% 40,4% 45,0% 48,0% 35,0% 3,7% 3,7% 3,7% 3,7% % Total 9,2% 12,7% 13,9% 15,5% 17,0% 18,6% 17,6% 16,7% 15,8% 14,9% US % Grow th -0,8% 333,8% 208,0% 140,0% 80,0% 30,0% 4,4% 4,4% 4,4% 4,4% % Total 0,4% 1,5% 3,7% 6,7% 9,0% 9,5% 9,1% 8,7% 8,2% 7,9% Online sales % Grow th 0,0% 0,0% 0,0% 0,0% 131,7% 48,9% 40,0% 35,0% 30,0% 25,0% % Total 0,0% 0,0% 2,5% 4,4% 7,6% 9,2% 11,7% 14,5% 17,1% 19,6% 18

20 4. Assumptions (cont.) Cost of goods sold Costs of goods sold were estimated to be variable with net revenue and also considered economies of scale to be gained during the projection period. The following table shows the composition of the cost of goods sold per geographic region: COGS by region Historical Projections AUD Total COGS (5.085) (6.381) (7.683) (10.388) (13.805) (17.048) (18.447) (20.009) (21.726) (23.571) % Sales 16,2% 16,7% 15,7% 16,2% 16,1% 16,0% 15,9% 15,7% 15,5% 15,4% Australia (2.060) (2.346) (2.753) (3.375) (3.931) (4.431) (4.638) (4.854) (5.081) (5.319) % Grow th 14,6% 14,5% 13,8% 14,4% 14,1% 13,9% 13,9% 13,9% 13,9% 13,9% % Total 40,5% 36,8% 35,8% 32,5% 28,5% 26,0% 25,1% 24,3% 23,4% 22,6% APAC (excl. Aust.) (2.571) (3.065) (3.287) (4.241) (5.227) (6.323) (6.889) (7.505) (8.176) (8.907) % Grow th 18,1% 18,5% 17,1% 18,0% 17,9% 18,1% 18,0% 18,0% 17,9% 17,9% % Total 50,6% 48,0% 42,8% 40,8% 37,9% 37,1% 37,3% 37,5% 37,6% 37,8% Europe (410) (858) (1.095) (1.570) (2.322) (3.135) (3.241) (3.350) (3.463) (3.580) % Grow th 14,3% 17,7% 16,0% 15,9% 15,8% 15,9% 15,8% 15,8% 15,7% 15,7% % Total 8,1% 13,5% 14,2% 15,1% 16,8% 18,4% 17,6% 16,7% 15,9% 15,2% US (43) (113) (396) (892) (1.605) (2.086) (2.179) (2.276) (2.377) (2.483) % Grow th 32,1% 19,3% 22,0% 20,6% 20,6% 20,6% 20,6% 20,6% 20,6% 20,6% % Total 0,8% 1,8% 5,2% 8,6% 11,6% 12,2% 11,8% 11,4% 10,9% 10,5% Online sales - - (153) (311) (721) (1.073) (1.501) (2.024) (2.629) (3.283) % Grow th 0,0% 0,0% n/a 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% 11,0% % Total 0,0% 0,0% 2,0% 3,0% 5,2% 6,3% 8,1% 10,1% 12,1% 13,9% 19

21 4. Assumptions (cont.) Operational Expenses The following table presents the projected operating expenses and other income: Operational expenses AUD Regional overheads (8,4) (9,5) (10,2) (10,8) (11,5) (12,4) (13,3) Head office overheads (8,9) (11,6) (13,3) (14,4) (15,6) (16,9) (18,4) Other OPEX (28,6) (39,5) (48,9) (53,8) (59,3) (65,3) (71,8) Other revenue Total (45,9) (60,6) (72,5) (79,1) (86,4) (94,6) (103,5) Other expenses are comprised of rental expenses, insurance, transportation, legal, IT, sales and administration, among others. Other revenues consisted of financial income and were not projected for valuation purposes. Depreciation and amortization The fixed asset base as of the base-date was used in the calculation of depreciation as well as depreciation of new investments. As of the base date, the Company had a balance of fixed assets of AUD $ 6.9 million, which was depreciated at the rate of 20% p.a. until the end of the projection period. A deprecation of 20% p.a. was also considered for new investments. Income tax A blended income tax rate based on geographic regions was used to calculate projected taxes. Investiments Below are projected investments which includes the opening of signature stores, current maintenance of department stores, digital operation (online sales) among others necessary to achieve the Company s projected growth. Capex AUD Capex Working capital The working capital was projected using the following accounts and average days as of the base-date. Applications No. of days Basis of calculations Trade accounts receivable 36 Days of net revenue Inventory 274 Days of COGS Origins No. of days Basis of calculations Accounts Payable 187 Days of COGS Taxes Payable 1 Days of net revenue Payroll Expense 11 Days of COGS e operational expenses 20

22 4. Assumptions (cont.) Income statement The projected income statement for Aesop is presented below: Income statemente t Historical Projections o AUD Net sales Sales growth% 22,1% 28,1% 30,7% 34,2% 23,9% 9,2% 9,6% 9,7% 9,5% Cost of goods sold (5.085) (6.381) (7.683) (10.388) (13.805) (17.048) (18.447) (20.009) (21.726) (23.571) Gross profit SG&A (21.815) (26.652) (34.480) (45.929) (60.618) (72.465) (79.056) (86.361) (94.638) ( ) EBITDA Depreciation (888) (1.114) (1.595) (3.843) (5.242) (5.966) (4.602) (5.196) (4.502) (3.677) EBIT Financial income EBT Corporate taxes (1.201) (1.396) (1.814) (1.143) (1.874) (3.299) (4.270) (4.783) (5.711) (6.751) Tax rate% 34% 33% 35% 29% 30% 30% 30% 30% 30% 30% Net profit

23 4. Assumptions (cont.) Income statement (cont.) The vertical analysis of Aesop s projected income statement is presented below: Vertical analysis (% of net sales) Historical Projections AUD Net sales 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% 100,0% Cost of goods sold 16,2% 16,7% 15,7% 16,2% 16,1% 16,0% 15,9% 15,7% 15,5% 15,4% Gross profit 83,8% 83,3% 84,3% 83,8% 83,9% 84,0% 84,1% 84,3% 84,5% 84,6% SG&A 69,7% 69,7% 70,3% 71,7% 70,5% 68,1% 68,0% 67,8% 67,7% 67,6% EBITDA 14,1% 13,6% 14,0% 12,1% 13,4% 15,9% 16,2% 16,5% 16,7% 17,0% Depreciation i 28% 2,8% 29% 2,9% 33% 3,3% 60% 6,0% 61% 6,1% 5,6% 40% 4,0% 41% 4,1% 32% 3,2% 24% 2,4% EBIT 11,3% 10,7% 10,7% 6,1% 7,3% 10,3% 12,2% 12,5% 13,5% 14,6% Financial income 0,0% 0,3% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% EBT 11,3% 11,0% 10,7% 6,1% 7,3% 10,3% 12,2% 12,5% 13,5% 14,6% Corporate taxes 3,8% 3,7% 3,7% 1,8% 2,2% 3,1% 3,7% 3,8% 4,1% 4,4% Net profit 7,4% 7,4% 7,0% 4,3% 5,1% 7,2% 8,5% 8,7% 9,4% 10,2% 22

24 Content Page 1. Introduction 2. Valuation criteria 3. Brief company description 4. Assumptions used in the valuation 5. Discount rate 24 Methodology for the calculation of the discount rate Cost of equity Cost of debt Calculation of the discount rate 6. Estimate of the company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae 23

25 5. Discount rate Methodology for the calculation of the discount rate Establishing the discount rate is a fundamental stage of the economic valuation. This single factor reflects aspects of a subjective nature, varying from one investor to another, such as opportunity cost and individual perception of investment risk. WACC The Weighted Average Cost of Capital (WACC) was used was an appropriate parameter to calculate the discount rate to be applied to the Company s cash flows. The WACC methodology takes into consideration various financing components used by companies to finance its cash needs, including debt and equity cost, and is calculated according to the chart below: WACC Weighted Average Cost of Capital = D/(D+E) x + Kd * (1-t) Cost of equity (Ke) Cost of equity may be calculated through the Capital Assets Pricing Model (CAPM). The cost of equity was calculated according to the following formula: Ke Cost of equity = (Rf + ß* (E[Rm] - Rf) + Rb + Rs Where: D = Total Debt E = Total Equity t = Tax rate Kd = Cost of debt Ke = Cost of equity x E/(D+E) Ke Where: Rf = Average risk-free return β = Beta - specific risk coefficient E[Rm] = Average long-term return obtained on the stock market E[Rm] - Rf = Market premium Rb = Country risk Rs = Size Premium 24

26 5. Discount rate (cont.) Cost of equity Risk free rate The Australian Treasury bond of 15 years, of 3.35 % was used for average risk free return (Rf) (Source: Bloomberg). Beta calculation Beta is the specific risk coefficient of the shares of a company compared to a market index, representing the stock market as a whole. In the case of valuations of companies that are listed and have significant negotiations on the stock exchange, the share Beta is calculated by the correlation of weekly returns of their own stocks compared to the selected market index during a certain period prior to the valuation date. In the case of companies that are not listed on the stock exchange, or which do not have significant trading volumes, the company s Beta can be represented using the average beta for the sector in which the company operates. Thus, theaverage Beta for the sector is calculated l based on the average correlations of weekly returns of several companies from the same sector, in relation to the weekly returns of the market index during a certain period. In order to estimate the Company s Beta, the average Beta of comparable companies from the cosmetics sector was used. This Beta was obtained by averaging the unlevered Betas of comparable companies shown in the following table, with the value of This Beta was then re-leveraged according to the capital structure of the Company and at the current basic rate of income tax and social contribution incurred on the Company's operations. As a result the beta utilized was Comparable companies Leveraged Beta Debt to Equity Effect. tax rate Unlevered beta TUPPERWARE BRANDS CORP 1,34 72,8% 30,5% 0,89 NU SKIN ENTERPRISES INC - A 1,10 34,5% 34,5% 0,90 BEIERSDORF AG 0,41 62,2% 62,2% 0,33 ORIFLAME COSMETICS SA-SDR 0,82 17,3% 17,3% 0,72 L'OREAL 0,52 1,3% 28,5% 0,51 ESTEE LAUDER COMPANIES-CL A 1,04 7,2% 30,2% 0,99 ELIZABETH ARDEN INC 1,40 63,1% 23,9% 0,94 REVLON INC-CLASS A 1,18 18,7% 38,3% 1,06 Unlevered beta Debt to Equity Tax rate Relevered beta Source: Bloomberg 0,73 35% 30% 0,99 Market risk premium For the long term stock market risk premium (E[Rm] Rf), we used the average return above the Treasury Bond rate provided by investing in the Australian stock market, which was of 5.80% (Source: Prof Aswath Damodaran website). Size premium For the premium for company size (Rs) was considered the rate of 6.36%, according to information released by Ibbotson Associates, for comparablesized companies (Source: Ibbotson Associates). 25

27 5. Discount rate (cont.) The calculation for the Company s cost of equity is presented in the table below: Cost of equity - Ke Risk free rate 3,35% Beta re-alavancado 0,985 Market risk premium 5,80% Size premium 6,36% Cost of equity (Nominal in AUD) 15,42% Discount rate calculation Based on the structure of capital employed and the cost of equity and debt, the discount rate was calculated at 12.71% p.a. Cost of debt For purposes of the cost of debt, was considered the nominal cost of an american coporate bond in the retail segment rated BB + of 7.0%. After the effect of taxes (we used the rate of Aesop) the cost of debt is 4.90%. Cost of debt (Nominal in AU$) - Kd Cost of debt 7,00% Long term effective tax rate 30% Post tax cost of debt (Nominal in AUD) Kd 4,90% Capital structure The capital structure adopted was defined based on target capital structure observed in comparable companies. Based on this criterion, the structure of capital employed was 74.3% equity and 25.7% of debt. 26

28 Content Page 1. Introdução 2. Valuation criteria i 3. Brief Company description 4. Assumptions used in the valuation 5. Discount rate 6. Estimate in the company s value 28 Operating free cash flow of the Company Adjustments for non-operating assets and liabilities 7. Comparable company multiples analysis 8. Conclusion Annex: Curriculum Vitae 27

29 6. Estimate in the company s value Operating free cash flow of the Company The projected operating free cash flows of the Company were based on assumptions previously discussed in this report and were discounted considering the base date of January 31, The estimated projected cash flows for the period are presented below: Free cash flow AUD Terminal value Net profit Depreciation Increases (decreases) in w orking capital (1.715) (2.484) (2.379) (1.077) (1.219) (340) (2.448) (1.636) Capital expenditures (6.460) (6.995) (7.210) (2.347) (2.970) (4.502) (2.870) (2.609) Free operating cash flow s (1.590) Terminal value Parcial period 0,4167 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 Discount period 0,2083 0,9167 1,9167 2,9167 3,9167 3,9167 4,9167 4,9167 Discount 12,71% 0,9748 0,8936 0,7905 0,6992 0,6185 0,6185 0,5553 0,5553 Present value of free operating cash flows (646) As indicated in the purchase agreement, the applicable adjustments to the value of the firm (enterprise value) to obtain the economic and financial value of the company (equity value), will be assumed by the former controlling shareholders of Aesop. Therefore, for the present case, the transaction value is equivalent to the enterprise value of the Company. The table below presents the calculation of Aesop s enterprise value. Calculation of the economic and financial value of the company Discount rate 12,71% Terminal Grow th rate ("g") 2,38% Sum of discounted cash flow s Present value of terminal value Business enterprise value (before adjustments) Therefore, the value of 65% share of Aesop is equal to AUD$ 74,548 28

30 Content Page 1. Introduction 2. Valuation criteria 3. Brief Company description 4. Assumptions used in the valuation 5. Discount rate 6. Estimate in the company s value 7. Comparable company multiples analysis Conclusion Appendix: Curriculum Vitae 29

31 7. Comparable company multiples analysis Comparable company multiples analysis The market multiples analysis obtains the market values of similar companies listed on stock exchanges and uses this as a basis for estimating the value of a particular company. Since the market values of these companies are calculated based on its trading share value on stock exchanges, which typically are not equivalent to the acquisition share price, the use of these multiples can be used as a parameter to the valuation of acquisition of minority stakes in companies. As a result, we use this criterion to evaluate the EV/EBITDA multiple would be reasonable for the exercise of stock options and sale agreement between the parties concerning minority equity investments that will remain with the former controlling shareholders of the Company. The following table presents the EV/EBITDA market multiples of the comparable companies as of the base-date. Company EV/EBTIDA (jan 2013) ESTEE LAUDER COMPANIES-CL A 14,2 L'OREAL 15,6 ORIFLAME COSMETICS SA-SDR 8,6 REVLON INC-CLASS A 8,6 ELIZABETH ARDEN INC 11,2 AVON PRODUCTS INC 13,3 L'OCCITANE INTERNATIONAL SA 15,7 TUPPERWARE BRANDS CORP 11,1 NU SKIN ENTERPRISES INC - A 8,7 BEIERSDORF AG 16,4 Average 12,3 Median 12,2 Selected multiple 12,3 As shown to the right, the median EV/EBITDA multiple is equal to12. 30

32 Contents Page 1. Introduction 2. Valuation criteria 3. Brief Company description 4. Assumptions used in the valuation 5. Discount rate 6. Estimate in the company s value 7. Comparable company multiples analysis 8. Conclusion 32 Appendix: Curriculum Vitae 31

33 8. Conclusion Due to the structuring of the transaction of this acquisition, our conclusion below is expressed in relation to the "enterprise value" of the Company in order to provide comparability with the proposed transaction value. Consequently, adjustments to be made regarding the net debt and working capital, are not covered by this conclusion, since both will be considered adjustments from the final price to be paid for the acquired interest in the Company. Based on all previous sections of this report, we conclude that the estimated economic-financial value of the Company, as of the base-date of January 31, 2013, is approximately AUD $ 114,690 thousand. Consequently, the value of 65% stake in the capital of Aesop is, of AUD $ 74,548 thousand. Additionally, based on the content of section 7 of this report we also concluded that the EV/EBITDA multiple equal to 12 times, agreed between the parties, for the exercise of options or sale of the remaining equity interest of 35% to be reasonable. Importantes t notes This report does not constitute a recommendation nor a price proposal, solicitation, advice or recommendation by KPMG for the acquisition of the Company by Natura, KPMG can not be held responsible for any decision taken by Natura. KPMG states that neither it nor the team responsible for the preparation of this evaluation have any conflict of interest that will diminish the independence necessary to perform its functions. The economic and financial evaluation of Aesop was conducted by a team of qualified consultants and the work is constantly monitored and reviewed by a senior manager. The work team was also composed of a reviewer-partner and a responsible partner, both with experience in evaluating companies. The approval of the valuation report occurred only after review of the senior manager, reviewer partner, and the responsible partner. KPMG also states that does not have credit relations with Natura neither Aesop nor with any type of business relationship that may impact the result obtained for this review. Use and disclosure of report This document has been prepared solely to meet the provisions of Article 256 of the Corporation Law and Annex 19 of CVM Rule 481 with respect to the acquisition of control of Aesop by Natura. We emphasize that a full understanding of this report and its conclusion is only possible through its complete reading. Thus, one should not draw conclusions by reading just part of it. Natura should perform their own analyzes regarding the convenience and opportunity to acquire a controlling stake in the Company and should consult their own legal and financial advisers, to establish your own opinion about this acquisition. Sums of individual values presented in this report can differ from the result of the sum due to rounding. 32

34 Content Page 1. Introduction 2. Valuation criteria 3. Brief Company description 4. Assumptions used in the valuation 5. Discount rate 6. Estimate of company s value 7. Comparable company multiples analysis 8. Conclusion Appendix: Curriculum Vitae 34 33

35 Appendix Curriculum Vitae Name Position Luís Augusto Motta Pinto da Luz Partner - Corporate Finance - KPMG São Paulo Qualifications Development Partners Program - Fundação Dom Cabral Latin America Leadership Development Partners KPMG MBA in Finance and Controllership - USP, São Paulo 1995/96 Undergraduate degree in Accountancy - FCPES - RJ - Cândido Mendes Experience Luís has wide experience in business modeling, valuation and financial advisory services related to acquisitions, mergers and feasibility studies and site location. Luis joined KPMG in 2002 and previously he worked for Arthur Andersen between 1987 and 2002, in Consulting and Corporate Finance, developing economic and financial analyses and diagnoses of companies. From 1985 to 1987, Luís worked for Banco Graphus as an operations analyst in fixed-income, commodities and capital markets Sector Expertise Consumer and Industrialized Products (Food, Beverages, Capital goods, Auto parts, Consumer Products, among others), Real Estate, Information Technology, Telecommunications and Retail. 34

36 KPMG Corporate Finance Ltda., a Brazilian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( "KPMG International" ), a Swiss entity. All rights reserved. Printed in Brazil. The KPMG name, logo, and the cutting through complexity expression are registered or commercial trademarks of KPMG International.