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TOCQUEVILLE VALUE EUROPE Our birthday, guiding principles and holdings DON FITZGERALD, CFA Fund Manager 7th Annual Value Investing Seminar Trani Italy July 13 14 2010 Trani, Italy July 13-14, 2010

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Every year dedicated value investors from around the world make their way to Italy to exchange investment ideas. It is a unique event in a great location far from the madding crowd. Link to the event. http://www.valueinvestingseminar.it/pages/eng/index.aspThis is the presentation I gave this year.

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TOCQUEVILLE VALUE EUROPE

Our birthday, guiding principles and holdings 

DON FITZGERALD, CFAFund Manager

7th Annual Value Investing Seminar Trani Italy July 13 14 2010

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Trani, Italy July 13-14, 2010

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Tocqueville Value Europe 10 year anniversary

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Tocqueville Value Europe 10 year anniversary

No. 2 of 67 funds marketed in France - European Equities category

Compared to MSCI EUROPE total return

3Source: Europerformance. Past performance is no indication as to future performance and is not constant over time

Compared to MSCI EUROPE total return

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Tocqueville Value Europe 10 year anniversary

With volatility well below the market...

Volatility Tocqueville Value Europe MSCI Europey Europe

1 month 16.64 21.52

1 year 16.19 19.87

3 years 19.18 20.85y

5 years 16.11 17.49

Since inception 14 99 17 16Since inception 14.99 17.16

4Source: Europerformance at 31/05/10, past performance is no indication as to future performance and is not constant over time

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Our Value Investing Principles

Independence of thoughtIndependence of thought 

Contrarian stance

Evaluate fundamentals to determine intrinsic value

Invest with margin of safety to intrinsic value

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Our Value Investing Principles

Independence of thought

Confident in own judgement

Mindset ‐ buy a small part of a business

Ignore market’s noise, capitalise on occasional inefficiencies

Index not a factor in portfolio construction

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DCC - Buying where others exit

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DCC – Buying where others exit

DCC €1.5 Bn market cap / Dublin Listed

5 divisions 21 operating businesses

Energy EnvironmentalSerCom Healthcare Food & Beverage

Distributor of IT & Distributor of Distributor of

Recycling and waste

Distributor of Oil & LPG

consumer electronics p

Distributor of consumables to

hospitals ghealth food &

beveragesmanagement

services

13%

Operating Profit Split  18%

13%

UK

Ireland

Rest of world

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69%

Source : Company accounts, Tocqueville estimates

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DCC – Buying where others exit

Strategy

Building leading positions

Focus on high returns on capital

Financial disciplineFinancial discipline

Contrarian perspective - Invest capital where others exit

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DCC – Buying where others exit

Reasons to avoid

For “top‐down” investor  For event‐driven hedge fund

Exposed to weak economies

Conglomerate structure

Limited Catalysts

Inefficient capital structureg

Difficult to forecast

p

Helped by favourable weather

Under-researched

Boring

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DCC – Buying where others exit

Why stay invested ?

Management - careful steward of shareholder’s capital and owners

Portfolio optimization may continue

Favourable environment for bolt-on acquisitions

Solid balance sheet

Defensive business model – basic needs, below the radar business

Track record solid – EPS growth 10% last 10 years11Source : Company accounts, Tocqueville estimates

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DCC – Buying where others exit

Why stay invested ? 

Valuation Modest

EV – ca. 10x Net Operating profit after taxes

FCF yield before acquisitions to Enterprise Value ca. 10%

Growing (5 years CAGR 14%) stable dividend (3.6% yield)

Limited risks – Weather related, GBP/EUR

Mini Catalysts – Portfolio changes, Acquisitions & earnings upgrades

12Source : Company accounts, Tocqueville estimates

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Our Value Investing Principles

Contrarian stance

Beware of passing fads

Be counter‐cyclical

Our hunting ground:

Profit warningsProfit warnings

Turnaround situations

Fallen angelsFallen angels

Limited analyst coverage 

Disappointing IPOsDisappointing IPOs

Company break‐ups

Inefficient balance sheets

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Inefficient balance‐sheets

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KESA – The good, the bad & the ugly

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KESA – the good, the bad & the ugly 

European consumer electronics (number 3 in Europe) and householdEuropean consumer electronics (number 3 in Europe) and household appliance retailing group

London-listed

Sales - GBP 5Bn; EV - GBP 800m

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Kingfisher spin-off 2003

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KESA – the good, the bad & the ugly 

The “good” ‐ Darty France  

Market leader -13% market share

S i d i b dService-driven brand

Well located, small stores

Generates over 100% of the group EBIT

EBIT margin ca 5% (pre crisis ca 7%)EBIT margin ca. 5% (pre-crisis ca. 7%)

Own real estate of 1/3 of stores

Grows by internet penetration & share gains from independents

We estimate the value of the Darty retail business alone at ca GBP 1 Bn vs

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We estimate the value of the Darty retail business alone at ca. GBP 1 Bn vscurrent EV of GBP 800m

Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

The “good” continued 

Profitable established operations in:Profitable established operations in:

Belgium, Netherlands, Czech Republic (each with 5% - 8% market share)

Combined ca. GBP 20 to 25m EBIT p.a.

“Getting Better” - DartyBox - internet service, FranceGetting Better DartyBox internet service, France

Break even next year if subscribers reach 350k

“Getting Better” - 36 stores in Turkey & Italy – ca. 1% market share

Currently lose ca GBP 20m p aCurrently lose ca. GBP 20m p.a.

Need scale to breakeven

17Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

The “bad” – COMET, UK Weak no. 3 in very competitive market y p

Intensifying competitive pressure from:

Service-led propositions of reinvigorated Currys, John Lewis and arrival of Best Buy.

Price-led propositions of Argos / Supermarkets

Pre-crisis avg. EBIT of GBP 40m / 2.5% EBIT margin

Annual rental bill – ca. GBP 75m

Can remain viable by:Can remain viable by:

Better mix (e.g. push on accessories, service), leveraging synergies with web avoiding price war

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with web, avoiding price war

Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

The “ugly” – Darty Spain (formerly Menaje del Hogar) 

Bought 2007 for ca. GBP 100m (.6x sales) – GBP 37m losses inBought 2007 for ca. GBP 100m (.6x sales) GBP 37m losses in 2008/09

Competition MediaMarkt / Corte Inglés; Large independent sectorCompetition MediaMarkt / Corte Inglés; Large independent sector

New management finally restructuring:

21 stores closed out of 71

Service concept / Conversion to Darty banner

Losses ca GBP15m in 2009/10

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Losses ca. GBP15m in 2009/10

Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

Previous Management

Rejected KKR bid for group at 325p in 2006

However, off-loaded But (2006) at attractive price

Disastrous Spanish acquisition

Back-tracked on share buyback

Comet – claim purchasing synergies – no obvious buyer

20Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

New CEO / CFO team since 2009. Initiatives:

“Dartyzation” of the network

Common sourcing

Improved internet strategy

Sold Switzerland

21Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

So what’s it all worth? 

lMay 2010 July 2010

EV ca. GBP 650m  ca. GBP 800m

Share Price 100p 125pShare Price 100p 125p

Darty retail France + profitable international – pro-rata central costs

= ca. GBP 140m EBIT vs ca. GBP 95m at group level. ca. GBP 140m EBIT vs ca. GBP 95m at group level.

On 3 year view - eliminate start-up losses and maintain Comet close to breakevenbreakeven

Pays 5p dividend

22Source : Company accounts, Tocqueville estimates

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KESA – the good, the bad & the ugly 

Kesa – Sum of the parts

Worst C tBase C t

Darty retail france 1020 8,5x EBIT - market leader 1020GBP 300m freehold

CaseComments scenario Com ments

GBP 300m freehold

Dartybox 55 EUR 200 per subscriber 0Comet 160 5% of sales - ca 4x avg. EBIT -100 Managed exit over

several years yBenelux, Czech 140 7x EBIT 140Italy, Turkey 18 .5m per store 18Spain 0 -40 4 years of lossesInvestment Properties 30 estimateInvestment Properties 30 estimate Fair EV 1423 1038Average debt over year -50 -50Pension obligation -117 Adjusted upwards due to m ore -117

realistic discount rateCapitalized costs -149 9x annual -149Equity Value 1107 722Value per share 2 09 1 36

23Source : Company accounts, Tocqueville estimates

Value per share 2,09 1,36Note - Excludes GBP300m of core retail property

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GATEGROUP - Waiting for clouds to clear

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GATEGROUP ‐Waiting for clouds to clear

Provides outsourced services to airline industry CHF 650m Market‐CapZ i h li d i 05/09Zurich listed since 05/09

25Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

Provides outsourced services to airline industry 

(2008) (2008)

26Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

Medium term prospects for airline catering? 

Global passenger growth Low Cost Carriers

VSOutsourcing trend Down-trading in food

Catering – factor of differentiation Less business travel?

Overall market growth below global passenger growth

27Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

GATEGROUP is out‐growing airline catering industry 

Independent caterers gain market share from captive caterers

Non-catering businesses

Related fields e.g. rail

On-board retail new opportunity

One-stop-shop strategy

28Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

Competitive Environment 

No. 1 independent player with 25% market share; No. 2 globally after LSG (30%*)

More rational than airline industry

Scale at hub important

New entrants (food companies, logistics) on short haul

Good contract win (40%) & retention (80%) rate

29Source: Company data & Tocqueville estimates *Includes intragroup

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GATEGROUP ‐ waiting for clouds to clear

Why out of favour?

Airline-related

Pays no dividendPays no dividend

Limited track record / history of financial statements

Low book equity on Balance Sheet

Generous equity incentive planGenerous equity incentive plan

No short term earnings growth - high EUR exposure (40%), volcano, BA strikes etcstrikes etc.

Perceived share overhang from PE investors

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GATEGROUP ‐ waiting for clouds to clear

Why better business than market perceives?

Competitive advantage – reputation, global reach & scale, cost-leader, one-p g p , g , ,stop shop

Visibility from long term contracts (3 – 10 years; typically 5 years)y g ( y yp y y )

75% of 2009 revenues from contracts valid through 2012

Cost-plus element

S l h (LCC h d f d d di ) l l l dStructural threats (LCC growth and food downtrading) largely played out

Flexible cost structure

One-stop-shop strategy

High returns on capital / Cash generative

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High returns on capital / Cash generative

Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

Visibility from long‐term contracts

BA 13% 353 2019 only long‐haulDA 9% 244

Carrier Expires Comments% of revenues

Revenues (CHF m) 2009

DA 9% 244UA 7% 190Easy Jet 5% 136Swiss 4% 108 2015Iberia 3% 81 2011Budget airlines  (ex. Easy Jet) 7% 190Railway 2% 54Others 57% 1 546Group 100% 2 712

Client concentration – Top 3 27%, Top 5 35%

32Source: Company data & Tocqueville estimates

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GATEGROUP ‐ waiting for clouds to clear

Short term caution due to :

CHF strength

SeasonalitySeasonality

Risks

Loss of major contract / Client failure

Poor acquisitionsq

Structural dynamics mis-evaluated

Cyclical, terrorist / health scare etc.

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GATEGROUP ‐ waiting for clouds to clear

Texas Pacific sold business for CHF 1.8Bn in 2006

Valuation 

Publicly listed catering + logistics businesses valued much more generously

2009 / 10 Period - Can it get much worse?

Severe recession swine flu volcano ash BA StrikeSevere recession, swine flu, volcano ash, BA Strike

2010 Guidance - Stable top line - small improvement in margin

Normalized earning power:

Recover what lost in recessionRecover what lost in recession No market share gains No M+A

CHF 650 f NOL l ff ti t t *

34Source: Company data & Tocqueville estimates

CHF 650m of NOLs assures low effective tax rate*

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GATEGROUP ‐ waiting for clouds to clear

Valuation 

2009 A Normalized Shares outstanding 19 7 2009 A Normalized Sales 2712 3000Reported EBIT 98add back amortization of intangibles 21

Shares outstanding 19,7Max equity incentive plan 1,6Share price 32Adjusted Market Cap 681,6 g

listing costs 6,6share-based payments 23,4Adjusted EBITA 149 210EBITDA 202 255

j p ,Cash -258Debt 693Pension obligation 70

EBITDA 202 255EBITDA Margin 7,4% 8,5%EV / Adjusted EBITA 8,0 5,7EV / EBITDA 5 9 4 7

Adjusted Enterprise Value 1187

EV / EBITDA 5,9 4,7Net Debt / EBITDA 2,2Maintenance capex 50Pre-tax FCF to Firm after maintenance capex 205pPost tax FCF 154

35Source: Company data & Tocqueville estimates *Even if not all utilized

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Our Value Investing Principles

Evaluate the fundamentals

Sustainable business model?

Entry barriers and competitive advantages?

Operational and financial risks?

How credible and motivated is management?

Principle catalysts?Principle catalysts?

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NESTLE – At times good ideas are obvious

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NESTLE – At times good ideas are obvious 

Dominates attractive categories - Premium position & Limited private label competitionp p

28 Billionaire brands => Scale in marketing & pricing power

Geographic spread - 30% of sales / ca. 40% of profits from emerging market consumer

Strong corporate culture

Focus on long term, sustainable growth

Balance sheet

History of sensible capex dividends and share buybacksHistory of sensible capex, dividends and share buybacks

Limited regulatory, fiscal & cyclical risks

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Nestle ModelNESTLE – At times good ideas are obvious 

Nestle ModelConsistent earnings growth (ca. 10% p.a.) driven by ca. 5-6% p.a.

organic sales growth and regular (ca. 30 bps) margin improvements

Can Nestle grow sales?

Its food categories are growing

World market share - “only” 16% in its categories

Raise prices39Source : Company accounts, Tocqueville estimates

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NESTLE – At times good ideas are obvious 

MARGINS 1990 -2009

Can Nestle improve margins?

Mix effect - higher growth in EM (45% of sales by 2020) & premium products

Evolutionary operational improvements

40Source : Company accounts, Tocqueville estimates

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NESTLE – At times good ideas are obvious 

Are shares undervalued? 

EV e L’Oreal is ca 10 5 EBITEV ex L’Oreal is ca. 10.5x EBIT

Discount to long term average & sector

Premium to World Equity Market (9x EBIT)

Can the stock continue to re-rate?Can the stock continue to re-rate?

Better communication re L’Oreal

Premium for quality?

Any catalysts?

No – Get rich slow scheme

41Source : Company accounts, Tocqueville estimates

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NESTLE – At times good ideas are obvious 

Which would you prefer to own?

A ll i f l b l b t i l ith 3 5% di id d i ld (th tA small piece of a global best in class company with ca. 3.5% dividend yield (that should grow high single digits year after year)

OR 10 year German Bund that yields 2 5 %10 year German Bund that yields 2.5 %

It li i fl ti li k d b d th t i ld 2%Italian inflation-linked bonds that yield ca. 2% (based upon “official” inflation statistics)

Negative cash flow after storage costs

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Our Value Investing Principles

Margin of safety

Why is margin of safety important?

Over time market price should converge to intrinsic value

V l i i iValuation imprecise art

Future unpredictable

Protects against bad luck, poor investment timing and errors of judgement

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VICAT – Cash cows & young bulls – A year later

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VICAT ‐ Cash cows & young bulls – A year later

Cement good industry if in right markets

Why we own Vicat?g y g

Balanced portfolio - cash generative local oligopolies & fast new growth marketsgrowth markets

Quality operator with proven management

Underappreciated through the cycle earnings power

B l h tBalance sheet

Status change: developed vs emerging mix

Remains undervalued

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VICAT ‐ Cash cows & young bulls – A year later

July 2010 Update 

Contrary to market thinking prices largely held

Earnings down 1/3 from 2006 peak

Turkey / US to recover over time

E t S l d l ith itEgypt, Senegal - deal with new capacity

Acquisition of 51% of Bharati Cement (Southern India)Acquisition of 51% of Bharati Cement (Southern India)

Helps consolidate the region; Synergies with Sagar

Growth market - unstructured => short term price pressures

Emerging markets - 44% of capacity (2006) to ca. 73% (2014)

46Source : Company accounts, Tocqueville estimates

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VICAT ‐ Cash cows & young bulls – A year later

Intrinsic Value

Earnings / Cash flow Balance Sheet

FCF yield to equity before expansionary capex ca. 10%

Replacement value of Assets implies share value of ca. EUR 65

Earnings / Cash flow Balance Sheet

EV / EBIT 8x 2011, 2011 PE 8xUn-justified discount to peers of ca. 20%=> private market, peer & historical average multiple analysis imply share value of ca. EUR 75

Assume fair EV of 7x normalized EBITDA of EUR 750 in 2012/13 implies

Looking forward….

pshare value of EUR 87

Blue-sky medium term (2014/15) potential - EBIT EUR 600m / EBITDA EUR 900m vs current EV EUR 3.4Bn

47Source : Company accounts, Tocqueville estimates

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VICAT ‐ Cash cows & young bulls – A year later

Static intrinsic value - EUR 65 to 75

Intrinsic value growing towards EUR 90

100

120

Intrinsic value growing towards EUR 90

Presented at ValuePresented at Value

80

100 Presented at Value Presented at Value Investing seminar, Investing seminar, July 2009July 2009

60

20

40

0Bought

48Source : Bloomberg

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Our Value Investing Principles

Independence of thought DCCIndependence of thought   DCC 

C t i t KESAContrarian stance  KESA

Evaluate fundamentals   NESTLE

Margin of safety  VICAT

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THE BEST TACTICS DO NOT ALWAYS WORK OUT

My disclaimerTHE BEST TACTICS DO NOT ALWAYS WORK OUT………..

Giovanni Trapattoni Trainer Republic of Ireland soccer team

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Giovanni Trapattoni, Trainer Republic of Ireland soccer team

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DUE TO BAD LUCK OR UNFORESEEN EVENTSMy disclaimer

……………….DUE TO BAD LUCK OR UNFORESEEN EVENTS 

France 2 1 Republic of Ireland (on aggregate)

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France 2-1 Republic of Ireland (on aggregate) World Cup 2010 Playoff November 2009

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BUT HARDWORK GENERALLY YIELDS IMPRESSIVE RESULTSMy disclaimerBUT HARD WORK GENERALLY YIELDS IMPRESSIVE RESULTS

Germany 4 : 1 EnglandGermany 4 : 0 Argentinay gGermany 3 : 2  Uruguay

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German soccer team in training

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My disclaimer

SO DO YOUR OWN  HOMEWORK

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The official disclaimer

This document is strictly confidential and for the use of intended recipients only. It may not be reproduced, communicated or published in its entirety or in part, without the prior written authorisation of Tocqueville Finance S.A.

This commercial document should not be interpreted as a contractual or pre-contractual commitment on the part of Tocqueville Finance S.A. It is produced purely for illustrative purposes and may be amended at any time without previous notice.

The information/analyses contained in this document, particularly figures, have come partly from external sources considered to be trustworthy. However, Tocqueville Finance SA cannot guarantee that the information/analyses are complete, accurate and up-to-date.

Tocqueville Finance S.A. draws investors’ attention to the fact that past performances are presented on q p p pthe basis of figures relating to previous years and are not an indication of future performance.

Moreover, Tocqueville Finance S.A. in no way guarantees the current or future performances of funds cited in this document

Investors are reminded that any financial investment includes risks (market risks, capital risk, foreign exchange risk) that may result in financial losses. Therefore, Tocqueville Finance S.A. recommends that prior to any investment, the recipient of this document carefully reads the prospectuses of the cited funds which are available free of charge at its head office located 8 rue Lamennais, Paris 75008 or on its website

t ill fi f d th t th h th i d k l d d d t kwww.tocquevillefinance.fr and ensures that they have the experience and knowledge needed to make an investment decision, particularly with regard to the legal and tax implications.

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Grazie

Grazie per la vostraattenzioneattenzione

Q l h d d ?C t t

Qualche domanda? Contact:

DON FITZGERALD, CFAFund Manager, European Equities

Tocqueville Finance S.A.Tel. :+33 (0)1 53 77 20 36

[email protected]

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g @ q