investment philosophies funds, institutional funds and not...

EDWARD KERSCHNER 4/3/2006 4:13:07 PM

NYU Kerschner Presentation 2006 1

April 2006

INVESTMENT PHILOSOPHIESINVESTMENT

PHILOSOPHIESEdward M. Kerschner, CFA

Chief Investment OfficerCitigroup Investment Research

Edward M. Kerschner, CFAChief Investment Officer

Citigroup Investment Research

Citigroup Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with compani es covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report, and who may be associated persons of the member or member organization, are not registered/qualified as research analysts with the NYSE and/or NASD, but instead have satisfied the registration/qualification requirements or other research-related standards of a non-US jurisdiction.

See slides 255 to 257 for Analyst Certification and Important Disclosures

NYU B40.3124

April 2006

Course DescriptionCourse Description

• The class will offer perspectives on:

1) techniques for managing investments for mutual funds, institutional funds and not -for-profits, as well as

2) the current economic and market environment.

• Each session will have one or more guest speakers.

• Each class will begin with the speaker making a presentation, during which active class interaction is encouraged. Students will be expected to have read materials provided by speakers in advance as well as other relevant materials obtained on your own. Active class participation is encouraged.

• The class will offer perspectives on:

1) techniques for managing investments for mutual funds, institutional funds and not -for-profits, as well as

2) the current economic and market environment.

• Each session will have one or more guest speakers.

• Each class will begin with the speaker making a presentation, during which active class interaction is encouraged. Students will be expected to have read materials provided by speakers in advance as well as other relevant materials obtained on your own. Active class participation is encouraged.

April 2006

Course ScheduleCourse Schedule

• April 3, 2005Ed Kerschner – Citigroup Investment Research

• April 10, 2005Thomas Luddy – J.P. Morgan Chase

• April 17, 2005Charles Boorady & Deborah Weinswig – Citigroup

• April 24, 2005Jack Laporte -- T Rowe Price

• May 1, 2005Richard Hoey – Dreyfus Funds

• May 8, 2005Bill Miller – Legg Mason

• April 3, 2005Ed Kerschner – Citigroup Investment Research

• April 10, 2005Thomas Luddy – J.P. Morgan Chase

• April 17, 2005Charles Boorady & Deborah Weinswig – Citigroup

• April 24, 2005Jack Laporte -- T Rowe Price

• May 1, 2005Richard Hoey – Dreyfus Funds

• May 8, 2005Bill Miller – Legg Mason

April 2006

Course GradingCourse Grading

The class grades will be based upon three written assignments and class participation.

1) Class ParticipationTake advantage of the unique talents that will be addressing the class each week. Read the materials that will be provided to us before the class. Do your own research on them, their organizations, their funds, their management style, etc. Be prepared to pose challenging questions.

The class grades will be based upon three written assignments and class participation.

1) Class ParticipationTake advantage of the unique talents that will be addressing the class each week. Read the materials that will be provided to us before the class. Do your own research on them, their organizations, their funds, their management style, etc. Be prepared to pose challenging questions.

April 2006


2) Discussion PaperIf you ask a question you will then have the option to write up both the question and the speaker’s response and then to expand on the issue beyond what was covered in class. The paper should be no longer than two, double spaced pages (plus any supporting charts, graphs or tables in addition.) On the paper, clearly note that it was you who asked the question in class. If you hear a question asked and want to do the same write-up that too is encouraged. In that case, on the paper clearly note that it was not you who asked the question in class. Each of you should do a minimum of one of these discussion papers, and no more than three.

2) Discussion PaperIf you ask a question you will then have the option to write up both the question and the speaker’s response and then to expand on the issue beyond what was covered in class. The paper should be no longer than two, double spaced pages (plus any supporting charts, graphs or tables in addition.) On the paper, clearly note that it was you who asked the question in class. If you hear a question asked and want to do the same write-up that too is encouraged. In that case, on the paper clearly note that it was not you who asked the question in class. Each of you should do a minimum of one of these discussion papers, and no more than three.

April 2006


3) Investment IssueI will suggest a topic that I am currently researching some time within the first three sessions. If you feel you can provide some original analysis that can help with that issue you should submit a paper again no longer than two double spaced pages (plus any supporting charts, graphs or tables in addition.)

3) Investment IssueI will suggest a topic that I am currently researching some time within the first three sessions. If you feel you can provide some original analysis that can help with that issue you should submit a paper again no longer than two double spaced pages (plus any supporting charts, graphs or tables in addition.)



April 2006


4) Final PaperThe traditional “compare and contrast” paper: Compare and contrast the styles, commentaries and remarks of two or more of the guest speakers and support your comments with other references and/or your own original analysis. The paper should be no longer than three double spaced pages (plus any supporting charts, graphs or tables in addition.)

4) Final PaperThe traditional “compare and contrast” paper: Compare and contrast the styles, commentaries and remarks of two or more of the guest speakers and support your comments with other references and/or your own original analysis. The paper should be no longer than three double spaced pages (plus any supporting charts, graphs or tables in addition.)

April 2006

Thematic InvestingThematic InvestingEdward M. Kerschner, CFA




Citigroup Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with compani es covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report, and who may be associated persons of the member or member organization, are not registered/qualified as research analysts with the NYSE and/or NASD, but instead have satisfied the registration/qualification requirements or other research-related standards of a non-US jurisdiction.

See slides 248 to 251 for Analyst Certification and Important Disclosures

NYU B40.3124

April 2006

ManiasManiasThematicsThematics

MinutiaMinutia

April 2006

ManiasManias

April 2006

ManiasManias

Mania (n) excessive or unreasonable enthusiasmMania (n) excessive or unreasonable enthusiasm

Bernard Baruch, 1932Bernard Baruch, 1932

“Without due recognition of crowd-thinking(which often seems crowd madness) our theories of economies leave much to be desired.”

“Without due recognition of crowd-thinking(which often seems crowd madness) our theories of economies leave much to be desired.”

Merriam-Webster DictionaryMerriam-Webster Dictionary

April 2006

Jeffrey P. BezosPerson of the Year

Time Magazine, December, 1999

Jeffrey P. BezosPerson of the Year

Time Magazine, December, 1999

Dot Com – 1998-2000Dot Com – 1998-2000

In the minds of many investors, because they were prized fortheir potential earnings power five or ten years hence, these stocks could not be valued by traditional metrics such as price-to-earnings multiples.

Instead, many turned to new metrics: price-to-sales, revenues per customer, gross profit per customer, etc.

In the minds of many investors, because they were prized fortheir potential earnings power five or ten years hence, these stocks could not be valued by traditional metrics such as price-to-earnings multiples.

Instead, many turned to new metrics: price-to-sales, revenues per customer, gross profit per customer, etc.

ManiasManias



April 2006

Dot Com – 1998-2000Dot Com – 1998-2000

NASDAQ fell 78% from its peak

-78%

ò

NASDAQ fell 78% from its peak

-78%

ò

ManiasManias

April 2006

LBOs – US 1989LBOs – US 1989“Deals were being done not because they made economic and financial sense, but because investors, bankers and others were hungry for fees. Inappropriate companies were being taken private in leveraged transactions—one-product companies, companies subject to commodity price swings, technology companies with volatile markets and high R&D spending, among others.”Theodore J. Forstmann, The Wall Street Journal “Leveraged to the Hilt—Violating Our Rules of Prudence, ” 1989

“Deals were being done not because they made economic and financial sense, but because investors, bankers and others were hungry for fees. Inappropriate companies were being taken private in leveraged transactions—one-product companies, companies subject to commodity price swings, technology companies with volatile markets and high R&D spending, among others.”Theodore J. Forstmann, The Wall Street Journal “Leveraged to the Hilt—Violating Our Rules of Prudence, ” 1989

ManiasManias

April 2006

Saturday, October 14, 1989

THE DOW PLUNGES 190 POINTS, ABOUT 7%, IN A LATE SELL OFF; TAKEOVER STOCKS HIT HARD

LBOs – US 1989LBOs – US 1989ManiasManias

April 2006

LBOs – US 1989LBOs – US 1989

UAL fell 70% over the next year

-70%

ò

UAL fell 70% over the next year

-70%

ò

ManiasManias

April 2006

Harold Harold GeneenGeneen

Conglomerates – US 1968-70Conglomerates – US 1968-70

ITT Acquired:

• Sheraton Hotels

• Avis

• Hartford Insurance

• Continental Baking

• . . .

By 1970, ITT owned over 400 separate companies in 70 countries.

ITT Acquired:

• Sheraton Hotels

• Avis

• Hartford Insurance

• Continental Baking

• . . .

By 1970, ITT owned over 400 separate companies in 70 countries.

ManiasManias

April 2006

The business schools are creating a generation of managers who believe that effective management techniques transcend industrial categories. . . . [Diversification] liberates management’s thinking about expansion: Uncommitted to any individual industry, management can swing capital quickly into any business field that looks profitable enough.

The business schools are creating a generation of managers who believe that effective management techniques transcend industrial categories. . . . [Diversification] liberates management’s thinking about expansion: Uncommitted to any individual industry, management can swing capital quickly into any business field that looks profitable enough.

Business Week, 1968Business Week, 1968

Conglomerates – US 1968-70Conglomerates – US 1968-70ManiasManias



April 2006

“Now maybe this is one of those situations in which the solution lies in integrating the problem and raising it to a higher level. . . . There’s no reason why you can’t take 200 square miles some place that has the natural resources, which means primarily water—and even the water problem can be solved separately if it has to be—and create an ideal city with solutions for all these urban problems before it’s even built.”

“Now maybe this is one of those situations in which the solution lies in integrating the problem and raising it to a higher level. . . . There’s no reason why you can’t take 200 square miles some place that has the natural resources, which means primarily water—and even the water problem can be solved separately if it has to be—and create an ideal city with solutions for all these urban problems before it’s even built.”

Roy Ash, CEO of Litton Industries, told Fortune in 1966 how his company was thinking of addressing the problem—with a “de novo city”

Roy Ash, CEO of Litton Industries, told Fortune in 1966 how his company was thinking of addressing the problem—with a “de novo city”

Conglomerates – US 1968-70Conglomerates – US 1968-70ManiasManias

April 2006

Conglomerates – US 1968-70Conglomerates – US 1968-70

Those who bought these conglomerates at the 1968 peak lost 56% by 1974 even

though the market was up 10%

-56%

ò

Those who bought these conglomerates at the 1968 peak lost 56% by 1974 even

though the market was up 10%

-56%

ò

ManiasManias

April 2006

Tulip Mania – Holland 1635Tulip Mania – Holland 1635

Source: How Much Is A Tulip Worth, Mark Hirschey, AIMR, July/August 1968

four tons of wheat

+ eight tons of rye

+ one bed

+ four oxen

+ eight pigs

+ 12 sheep

+ one suit of clothes

+ two casks of wine

+ four tons of beer

+ two tons of butter

+ 1,000 pounds of cheese

+ one silver drinking cup

four tons of wheat

+ eight tons of rye

+ one bed

+ four oxen

+ eight pigs

+ 12 sheep

+ one suit of clothes

+ two casks of wine

+ four tons of beer

+ two tons of butter

+ 1,000 pounds of cheese

+ one silver drinking cup

==

ManiasManias

April 2006

Tulip Mania – Holland 1635Tulip Mania – Holland 1635

In six weeks tulip prices fell by 90%

-90%

ò

In six weeks tulip prices fell by 90%

-90%

ò

ManiasManias

April 2006

MinutiaMinutia

April 2006

MinutiaMinutia

Minutia (n) trifles, details, smallness; a minute orminor detail

Minutia (n) trifles, details, smallness; a minute orminor detail

Chicago Transit Authority, 1969Chicago Transit Authority, 1969

Does anyone really know what time it is?Does anyone really know what time it is?

Merriam-Webster DictionaryMerriam-Webster Dictionary



April 2006 Source: Bureau of Economic Analysis, U.S. Department of Commerce

Does Anyone Really Know What Time It Is?Does Anyone Really Know What Time It Is?Economic data is revised and revised and . . .Economic data is revised and revised and . . .

GDP RevisionsGDP RevisionsBenchmark RevisionsBenchmark Revisions

FlashFlash AdvAdv PrelimPrelim FinalFinal 1st 1st 2nd2nd 3rd3rd 4th4th 5th5th

1985 Q11985 Q1 2.1%2.1% 1.3%1.3% 0.7%0.7% 0.3%0.3% 3.7%3.7% 3.1%3.1% 3.8%3.8% 4.9%4.9%

1995 Q41995 Q4 0.9%0.9% 0.5%0.5% 0.3%0.3% 2.2%2.2% 2.8%2.8%

6th6th

3.3%3.3%

3.4%3.4%

3.2%3.2%

7th7th

3.0%3.0%

3.8%3.8%

8th8th

1993 Q11993 Q1 1.8%1.8% 0.9%0.9% 0.7%0.7% 0.8%0.8% 1.2%1.2% 0.0%0.0% -0.1%-0.1% 0.1%0.1% -0.7%-0.7% -0.1%-0.1% 0.5%0.5%

1991 Q21991 Q2 0.4%0.4% -0.1%-0.1% -0.5%-0.5% 1.4%1.4% 1.7%1.7% 1.5%1.5% 2.2%2.2% 1.7%1.7% 2.6%2.6% 2.3%2.3% 2.6%2.6%??April 2006

The Stock Market is Not the Economy The Stock Market is Not the Economy

All data is the most currently available as of 03/06.

Source: Standard & Poors, Bureau of Economic Analysis, U.S. Department of Commerce

U.S. GDPU.S. GDP

Exports $1.2 tr.Exports $1.2 tr.

GDP $10.8 tr.GDP $10.8 tr.

Sales ofU.S. Foreign

Affiliates

Sales ofU.S. Foreign

Affiliates

$3.0 tr.$3.0 tr.

USA 78%USA 78%

Non-US 22%Non-US 22%

S&P 500 Sales by Region

S&P 500 Sales by Region

S&P 500 is very different composition than GDPS&P 500 is very different composition than GDP

April 2006

19%

10%15%

10%

12%

7%

5%4% 4%

Real Estate0.2%

14%

12%11%

21%

9%9%

8%

7%

6%

5%

5%

3%1%1%2%

GDP by sectorGDP by sector

S&P 500 Sales by sectorS&P 500 Sales by sector Consumer DiscretionaryConsumer Staples

Energy

Financials

HealthcareIndustrials

Information Technology

Materials

Telecom ServicesUtilities

GovernmentReal estateServicesRetail tradeFinanceConsumer DurablesWholesale tradeNondurablesUtilitiesConstructionTransportationAgricultureMining

The Stock Market is Not the EconomyThe Stock Market is Not the Economy

All data are for 2003Source: Standard & Poors, Bureau of Economic Analysis, U.S. Department of Commerce

Tech

Real Estate

April 2006

459 changes to S&P 500 since 1988459 changes to S&P 500 since 1988

S&P is Not a Passive Index S&P is Not a Passive Index The Stock Market is Not the Economy The Stock Market is Not the Economy

Source: Standard & Poors

0

10

20

30

40

50

60

70

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

M&A (298) Representation/Transfer (84)Retructurings (65) Bankruptcies (12)

April 2006

Thematic InvestingThematic Investing

April 2006


Determining how• Demographic• Technological• Political • Structural

trends will affect financial markets, and identifying market sectors and individual securities that will benefit.



PP



April 2006

Brand BehemothsBrand Behemoths

April 2006

Brand Behemoths Brand Behemoths

Sources: Nestlé

Ø There are projected to be 1.2 billion more consumers able to buy packaged goods by 2010 than there were in 2000.

Ø There are projected to be 1.2 billion more consumers able to buy packaged goods by 2010 than there were in 2000.

April 2006


Sources: Clayton M. Christensen, Scott Cook, and Taddy Hall, Marketing Malpractice,Harvard Business Review, December 2005.

Ø In the U.S. alone, an estimated 30,000 new consumer products are launched each year – 90% fail!

Ø In the U.S. alone, an estimated 30,000 new consumer products are launched each year – 90% fail!

April 2006


Sources: Professors Peter N. Golder and Joel H. Steckeland Citigroup Investment Research

Ø Ten “Brand Behemoths,” we estimate, will be leaders in about 50% of the consumer nondurable “brands space” by 2010, with the remaining 50% dispersed amongst 88 other companies.

Ø Ten “Brand Behemoths,” we estimate, will be leaders in about 50% of the consumer nondurable “brands space” by 2010, with the remaining 50% dispersed amongst 88 other companies.

April 2006


Sources: Citigroup Investment Research

ØWho are these Brand Behemoths and how do they execute brand leadership on a global basis?

ØWho are these Brand Behemoths and how do they execute brand leadership on a global basis?

April 2006

The Origin of BrandsThe Origin of Brands



April 2006

Origin of Brands Origin of Brands The evolution of the word “brand”The evolution of the word “brand”

Sources: Oxford English Dictionary

A particular sort or class of goods, as indicated by the trade-marks on them.

1854

A trade-mark, whether made by burning or otherwise.1827

The impression of a product in the minds of potential users or consumers.

1958

The mark made by burning with a hot iron.1552

A piece of wood that is, or has been, burning on the hearth.c. 950

MeaningRecorded Use

April 2006

Early brandingEarly branding

Source: Hixenbaugh Ancient Art

Origin of Brands Origin of Brands

Roman Bronze Stamp 2nd – 4th Century AD

Used as A Pottery Workshop Trademark

Roman Bronze Stamp 2nd – 4th Century AD

Used as A Pottery Workshop Trademark

April 2006


Source: Citigroup Investment Research

Factors limiting the development of brandsFactors limiting the development of brands

Ø The absence of mass-production techniques.Ø The absence of mass-production techniques.

Ø Inadequate transportation systems.Ø Inadequate transportation systems.

Ø The lack of printing technologies.Ø The lack of printing technologies.

Ø Widespread illiteracy.Ø Widespread illiteracy.

April 2006


Sources: Image by courtesy of the Wedgwood Museum Trust, Barlaston, Staffordshire (England)

Wedgwood - One of the first consumer brandsWedgwood - One of the first consumer brands

Page from the Wedgwood Useful Ware Catalogue, 1774Page from the Wedgwood Useful Ware Catalogue, 1774

April 2006


Sources: Historical Statistics of the United States

Nineteenth century U.S.Nineteenth century U.S.

20%

10%

0%

5%

10%

15%

20%

25%

1870 1900

Illiterate Americans as a Percentage of Total Population

Illiterate Americans as a Percentage of Total Population

April 2006


Source: Used with permission by Procter & Gamble

Best known consumer brands began in 19th centuryBest known consumer brands began in 19th century

Procter and Gamble’s Moon and Stars TrademarkProcter and Gamble’s Moon and Stars Trademark



April 2006


Sources: Quaker Oats: Reprinted permission of the Quaker Oats Company; Heinz: H.J. Heinz Company, L.P., owner of the copyright to the advertisement (used with permission); Pillsbury’s: Courtesy of The J.M. Smucker Company;

Establishing the quality and reliability of brandsEstablishing the quality and reliability of brands

Heinz, 1902Heinz, 1902 Pillsbury’s, 1908Pillsbury’s, 1908Quaker Oats, 1896Quaker Oats, 1896

April 2006



1st stage of brands: Owner-Entrepreneurs1st stage of brands: Owner-Entrepreneurs

Procter & Gamble

Heinz

Gillette

Coca-Cola

Harley Procter

H.J. Heinz

King C. Gillette

Asa G. Candler

April 2006


Source: Daniel Pope, The Making of Modern Advertising (New York, Basic Books, 1983)

2nd stage of brands: Specialized managers2nd stage of brands: Specialized managers

Studebaker18Eastman Kodak8

U.S. Rubber19Joseph Campbell9

Postum Cereal14American Tobacco4Maxwell -Chalmers Motor Car15Victor Talking Machine5Kellogg Toasted Corn Flake16Liggett & Myers Tobacco6Hudson Motor Car17Goodyear Tire & Rubber7

Columbia Graphophone20Old Dutch Cleanser10

Cream of Wheat13Procter & Gamble3Colgate12Willys -Overland2R.J. Reynolds Tobacco.11Quaker Oats1

20 Largest Advertisers in National Magazines in 191520 Largest Advertisers in National Magazines in 1915

April 2006


Source: Historical Statistics of the united States

Depression and warDepression and war

Volume of Advertising per CapitaVolume of Advertising per Capita

$0

$10

$20

$30

$40

1860 1870 1880 1890 1900 1910 1920 1930 1940 1950

April 2006


Source: David A. Aaker, Managing Brand Equity (New York: The Free Press, 1991)

3rd Stage: Focus on market segmentation3rd Stage: Focus on market segmentation

Heavy-duty, with a fabric softenerSoloConcentrated liquid detergent - with proteins to clean stainsEraContains bleach - for "Sparkling whites - with color -safe bleach"OxydolWith "Borax, nature's natural sweetener" for baby's clothesDreftConcentrated power, less suds to avoid clogging washing machinesDashIncludes fabric softenerBoldOriginally an "enzyme" detergent but now a detergent with a fragranceGainWorks in cold, warm, or hot waterCheerFor extra -tough family laundry jobsTide"Mild, Gentle soap for diapers and baby clothes"Ivory Snow

Segmentation of Procter & Gamble Laundry DetergentSegmentation of Procter & Gamble Laundry Detergent

April 2006


Source: PEPSI and PEPSI-COLA are registered trademarks of PepsiCo, Inc. Used with permission.

Market segmentation facilitated by T.V.Market segmentation facilitated by T.V.

“Come Alive! You’re in the Pepsi Generation!”“Come Alive! You’re in the Pepsi Generation!”



April 2006



Importance of intangibles Importance of intangibles

Ø QualityØ Quality

Ø Brand IdentityØ Brand Identity

Ø InnovationØ Innovation

Ø AspirationsØ Aspirations

April 2006

Importance of Intangibles Importance of Intangibles


QualityQuality

PerrierPerrier

Poland SpringPoland Spring

April 2006

Importance of IntangiblesImportance of Intangibles


QualityQuality

SchlitzSchlitz

MillerMillerApril 2006



Brand identityBrand identity

SmirnoffSmirnoff

AbsolutAbsolut

April 2006



Brand identityBrand identity

IBM PCIBM PC

DellDellApril 2006



InnovationInnovation

CompuServeCompuServe

ProdigyProdigyAOLAOL



April 2006



AspirationsAspirations

Weight WatchersWeight Watchers

Healthy ChoiceHealthy ChoiceApril 2006



AspirationsAspirations

Kentucky Fried Chicken

Kentucky Fried Chicken

Boston MarketBoston Market

April 2006


Source: Clayton M. Christensen, Scott Cook, and Taddy Hall, Marketing Malpractice, Harvard Business Review, December 2005

Number of brands is proliferatingNumber of brands is proliferating

New Consumer Products Introduced in One YearNew Consumer Products Introduced in One Year

3,000

Fail27,000

April 2006


Source: Peter N. Golder, Historical method in marketing Research with New Evidence on Long-Term Market Share Stability, Journal of Marketing Research, May 2000

Branding was never easy!Branding was never easy!

23%

8%9%

8%7%

16%

28%

0%

10%

20%

30%

Number 1 Number 2 Number 3 Top 5 Top 10 Below 10 Failed

Long-Term Success Rate of 1923 Market Leaders (Market Rank in 1997)

Long-Term Success Rate of 1923 Market Leaders (Market Rank in 1997)

April 2006

Identifying Brand BehemothsIdentifying Brand Behemoths

April 2006

Identifying Brand Behemoths Identifying Brand Behemoths

Source: Citigroup Investment ResearchSource: Citigroup Investment Research

Brands! Brands! Brands!Brands! Brands! Brands!

Hershey’sHershey’s

Kentucky Fried ChickenKentucky Fried Chicken

DoritosDoritos

RevlonRevlonMaybelineMaybeline

CokeCoke

TostitosTostitos

Stouffer’sStouffer’s

BritanniaBritannia

SecretSecret

PerrierPerrier

KnorrKnorr

Ben & Jerry’sBen & Jerry’s

LiptonLipton

OreoOreo

GatoradeGatorade

Old SpiceOld Spice

SureSureClairolClairol

PampersPampersAquafreshAquafresh

EvianEvian

TropicanaTropicana

OrtegaOrtega

DannonDannon

Del MonteDel Monte

CadburyCadbury

San PellegrinoSan Pellegrino

Taster’s ChoiceTaster’s Choice

PepsiPepsi

Cover GirlCover Girl

TideTide

IvoryIvory Mr. CleanMr. Clean

KinderKinder

McDonald’sMcDonald’s

SuntorySuntory

Juicy FruitJuicy Fruit

NescaféNescafé

LaysLays

A1A1

BreyersBreyers

SwifferSwiffer

Pine SolPine Sol

Minute MaidMinute Maid

FritosFritos

AvonAvon

Grey PouponGrey Poupon

Chips AhoyChips Ahoy

Lever 2000Lever 2000

Red BullRed Bull

HuggiesHuggies

AllAll

ColgateColgate

TilexTilex

7-Eleven7-Eleven

Maxwell HouseMaxwell House

Hellman’sHellman’sEnfamilEnfamil

Campbell’sCampbell’s

FerreroFerrero

Nirula’sNirula’sDoveDove

Head & ShouldersHead & Shoulders

FebrezeFebreze

CrestCrest

KleenexKleenex

We built a data base of over 3,500 brands globally



April 2006



30 Consumer nondurable product categories30 Consumer nondurable product categories

YogurtFast Food

Household ProductsFood, Beverage, and Tobacco

Color CosmeticsGumBeerBath & ShowerFunctional DrinksBaby Food

DiapersReady MealsBottled WaterDeodorantIce CreamBiscuits

Hair CareSoupsCarbonatesFacial TissuesSauces & DressingsBreakfast Cereals

Fruit/Vegetable Juice

Surface CareTeaCoffeeOral HygieneSweet & Savory SnacksCigarettesLaundry CareSpiritsChocolate Confectionery

April 2006



8 Region/Country categories8 Region/Country categories

1. China2. East Asia3. Eastern Europe4. India

8. Western Europe7. U.S.6. Latin and South America5. Japan

April 2006



30 Categories x 8 regions/countries30 Categories x 8 regions/countries

CATEGORY

REGION

240 category / region combinations

April 2006



2004 Brand leaders by category/region2004 Brand leaders by category/region

Royal Numico - Bebelac, Bebiko, Bebilon, Ben, Bobo-Vita, bubu, Deva, Hami, Hamilon, Malishka, Malutka, Malysh, Milumil, Milupa, Nutricia, Nutrilon, Top-Top

Unilever -Axe, Lynx, Ego, Denim, Dove, Lifebuoy, Lotos, Lux, Nelly, TimoteiProcter & Gamble -Camay, Safeguard

Eastern Europe

Bristol-Myers SquibbEnfamilAbbott Laboratories -Isomil, PediaSure, SimilacNovartis – Gerber

East Asiatic Co. -Dumex, FutureNestlé - Lactogen, Nan, Neslac, NestleBristol-Myers Squibb -Alacta, Enfagrow, Enfakid, Enfamil, Enfapro, O-Lac

Baby Food

Unilever -Caress, Dove, Lever 2000, Suave, Vaseline Intensive CareLimited Brands - Bath & Body Works, Victoria's Secret

Unilever -Dove, Lux, Pears, SunsilkProcter & Gamble -Olay, Rejoice, Safeguard, ZestZhongshan Meiri - Enear, Pnlss, Vinic, Zici

Bath & Shower

USChina

April 2006

Identifying Brand Behemoths Identifying Brand Behemoths 2010 Forecasts based on four primary factors2010 Forecasts based on four primary factors

Ø Market share stability over time.Ø Market share stability over time.

Ø Global and regional market shares.Ø Global and regional market shares.

Ø Leadership position in more than one category.

Ø Leadership position in more than one category.

Ø Current market share, plus market share advantage over closest competitors.

Ø Current market share, plus market share advantage over closest competitors.

Source: Professors Peter N. Golder and Joel H. Steckel and Citigroup Investment Research April 2006

Identifying Brand Behemoths Identifying Brand Behemoths 2010 Forecasted market leader by region/category2010 Forecasted market leader by region/category

NestlNestléUnileverKraft FoodsNestléNestleCoffeeB. A. Tob.Japan TobITC GroupPhilip Mor. KT&GChina Nat ToCigarettes

UnileverLionUnileverUnileverUnileverHenkelDeodorantAvon Prod.ShiseidoUnileverAvon Prod.Amore PacL’OréalColor Cosmetics

McDonaldMcDonald ’sNirulas Cor.McDonald ’sIto-YokadoYum! Bra.Fast FoodKim.Uni-CharmKim.-ClarkP&GKim.-ClarkP&GDiapers

NestlMeiji SeikaCadburyNestléCadburyMarsChocolate Conf.CocaCoca-ColaCoca-ColaCoca-ColaCoca-ColaCoca-ColaCarbonatesKelloggKelloggKelloggCereal Par.KelloggCereal Par. Breakfast Cer.DanoneSuntoryCoca-ColaNestléDanoneDanoneBottled WaterPepsiEzaki Britannia InDanoneLotte GrpKraft Foods IBiscuits/CookiesAmBevAsahiUB GroupBBHHite Brew.TsingtaoBeerUnileverKao CorpUnileverUnileverUnileverUnileverBath & ShowerNestlMeiji NestléRoyal Nu. NestléEast AsiaticBaby Food

Latin/South America

JapanIndiaEastern Europe

East AsiaChinaCategory

Source: Professors Peter N. Golder and Joel H. Steckel and Citigroup Investment Research



April 2006


PositionsCompany


2010(f) Brand leaders: Total number of # 1 positions2010(f) Brand leaders: Total number of # 1 positions

38UnileverNestlé 17

Coca-Cola 11Procter & Gamble 14

PepsiCo 10Kimberly -Clark 9Danone 9Kellogg 6Colgate -Palmolive 5Kraft Foods 5Lotte Group 5McDonald ’s 5L’Oréal 4Wrigley 4

April 2006


PositionsCompany


38UnileverNestlé 17Procter & Gamble 14PepsiCo 10Kimberly -Clark 9Danone 9Kellogg 6Colgate -Palmolive 5L’Oréal 4Wrigley 4

2010(f) Brand leaders: Total number of # 1 positions2010(f) Brand leaders: Total number of # 1 positions

April 2006


Ø L’OréalØ Kimberly-Clark

Ø Kellogg

Ø Danone

Ø Colgate-Palmolive Ø Nestlé

Ø PepsiCo

Ø Procter & Gamble

Ø UnileverØWrigley


10 Brand Behemoths10 Brand Behemoths

April 2006

Identifying Brand Behemoths Identifying Brand Behemoths Brand behemoths are far from matureBrand behemoths are far from mature

Unilever

NestleOther (124 positions

held by 88 companies)

Kellogg

Procter & Gamble

Kimberly-Clark

Danone

Colgate-PalmoliveL'Oreal

Wrigley

PepsiCo

Number of #1 Ranks held by 10 Brand Behemothsin 240 Category/Region Combinations

(2010 Forecast)

Number of #1 Ranks held by 10 Brand Behemothsin 240 Category/Region Combinations

(2010 Forecast)


April 2006

Four primary factors drive brand dominance Four primary factors drive brand dominance Brand BehemothsBrand Behemoths

3. “Stretching” Across Categories3. “Stretching” Across Categories

4. Prolonged Period of Share Stability4. Prolonged Period of Share Stability

2. Regional Growth Opportunities2. Regional Growth Opportunities

1. Distinct Competitive Advantage1. Distinct Competitive Advantage

Source: Professors Peter N. Golder and Joel H. Steckel and Citigroup Investment Research April 2006

Distinct Competitive AdvantageDistinct Competitive Advantage



April 2006

Distinct Competitive Advantage Distinct Competitive Advantage Market share advantage of behemoth over #2 company Market share advantage of behemoth over #2 company

2546334Wrigley0521334Unilever

1%43%13%6Colgate -Palmolive

Min Share Advantage

Max Share Advantage

Mean Advantage

Number of # 1 Regional

Categories

33016 6Kellogg22511 9Danone

1523193L’Oréal555299Kimberly -Clark

5%45%18%Average

0391016Procter & Gamble3672610PepsiCo0721416Nestlé

Source: Citigroup Investment Research and Euromonitor International, 2004 April 2006

Distinct Competitive Advantage Distinct Competitive Advantage


Strengths of brand behemothsStrengths of brand behemoths

Ø Globally LocalØ Globally Local

Ø Behavior ModificationØ Behavior Modification

Ø New and ImprovedØ New and Improved

Ø Economies of SkillØ Economies of Skill

Ø Branding the BasicsØ Branding the Basics

April 2006

Branding the basicsBranding the basicsDistinct Competitive AdvantageDistinct Competitive Advantage

April 2006


Source: Nestlé

Branding the basics: Higher income/more productsBranding the basics: Higher income/more products

Number of Global ConsumersWho Can and Cannot Afford Packaged Goods

Number of Global ConsumersWho Can and Cannot Afford Packaged Goods

2.46 2.38 1.97

2.793.68 4.85

0

2

4

6

8

10

1990 2000 2010E

CANNOT AFFORD CAN AFFORD

+1.2 billion

Bill

ions

April 2006

Bolivia

ChinaColombia

IndiaIran

Peru

Thailand ChileMexico

Czech Republic

Spain Italy Canada

Australia

France

Austria Sweden

Japan

Netherlands

U.S. Norway

Finland

$0

$500

$1,000

$0 $10,000 $20,000 $30,000 $40,000 $50,000

Fo

od

Exp

end

itu

reP

er C

apit

a

GDP Per Capita


Source: United Nations Statistics Division, 2003

Branding the basics: Consumers “trade up”Branding the basics: Consumers “trade up”

GDP per Capita and Food Expenditures per CapitaGDP per Capita and Food Expenditures per Capita

April 2006


Source: Euromonitor International, 2003

Branding the basics: WaterBranding the basics: Water

Bottled Water Markets (Billions of Liters) and Annual per Capita Consumption (Liters)

Bottled Water Markets (Billions of Liters) and Annual per Capita Consumption (Liters)

0

5

10

15

20

Mexico U.S. Ita

ly

Germany Fra

nce China

Indone

sia Spain

Brazil

Thaila

ndPola

nd U.K.

Japan

Russia Ind

ia

Canad

a

Argent

ina

0

50

100

150

200

Absolute Volume (LHS) Per Capita/Year (RHS)



April 2006


Source: Citigroup Investment Research estimates, 2004

Branding the basics: WaterBranding the basics: Water

Danone Water Sales

Danone Water Sales

North America 5%

Europe 41%

Asia/Oceania 45%

Latin America 7%Africa/Middle East

2%

0

1

2

3

4

Bil.

€

Total Sales = €3.0 Bil.

April 2006


Source: Danone

Branding the basics: BiscuitsBranding the basics: Biscuits

Danone’s Market Share of Asian Biscuit MarketsDanone’s Market Share of Asian Biscuit Markets

30%

14%

c. 20%

>40%

0%

10%

20%

30%

40%

50%

India Malaysia China (East & North) Indonesia

Priced @1 yuan,

500 rupiah or30 ringgit cents

April 2006



Branding the basics: MilkBranding the basics: Milk

NestléGlobal Market Share by Category

NestléGlobal Market Share by Category

50%

35%

25%

18%

40%

0% 10% 20% 30% 40% 50% 60%

Condensed &Evaporated Milk

Powdered Milk

Dehydrated Bouillons& Seasonings

Infant Nutrition

Mineral Water

* Mineral Water global share by value

April 2006

Globally localGlobally localDistinct Competitive AdvantageDistinct Competitive Advantage

April 2006



Globally local: Acquire local presenceGlobally local: Acquire local presence

53

1412

22

14

3437

62

39

0

10

20

30

40

50

60

70

Colgate-Palmolive

Danone Kellogg Kimberly-Clark

L'Oréal Nestlé PepsiCo Procter &Gamble

Unilever Wrigley

Average Number of Years in Emerging Markets (China, East Asia, India)

Average Number of Years in Emerging Markets (China, East Asia, India)

99

39 years on average

April 2006


Source: Unilever, 2004

Globally local: Traditional retailers still significantGlobally local: Traditional retailers still significant

Retail Trade Development in Asia/AfricaRetail Trade Development in Asia/Africa

0%

20%

40%

60%

80%

100%

Nigeria India Iran Egypt Indonesia China Turkey Philippines

Traditional Modern Trade

How do you deliver to retailers without

addresses?



April 2006


Source: Unilever, 2005

Globally local: Emerging market opportunityGlobally local: Emerging market opportunity

Unilever Sales Growth by Region

(Regional Sales as a Percent of Total)

Unilever Sales Growth by Region

(Regional Sales as a Percent of Total)

-1%

+4%

+9%

-2% 0 % 2 % 4 % 6% 8% 10%

Europe (41%)

Americas (33%)

Asia / Africa (26%)

April 2006



Globally local: Expertise in assimilationGlobally local: Expertise in assimilation

Unilever Global and Regional Category Market Share Positions

Unilever Global and Regional Category Market Share Positions

121121Savory & Dressings

12

1

Asia-Pac

11111Spreads

12211Ice Cream

2

Africa / Middle East

1211Tea

GlobalSouth America

North AmericaEurope

. . . red hot peppers in Brazil

Mayo w/ Olive flavor in Poland

April 2006

Distinct Competitive Advantage Distinct Competitive Advantage Globally local: Expertise in assimilationGlobally local: Expertise in assimilation

6.4

0

1

2

3

4

5

6

7

U.S.

U.K.

Holland

Austra

liaSp

ain

S. Afr

icaMexi

co

Belgiu

mJap

anFra

nce

Vene

zuela

Polan

d

Thaila

nd Saudi

Colombia Eg

yptBra

zil

Turke

y

Russia

China Ind

ia

4 kgDeveloped

Developing 1 kg

Paprika -flavored chips in Latvia

Masala-flavored chips in India

Annual Salty Snack Consumption per CapitaAnnual Salty Snack Consumption per Capita

Spicy Crab and Beijing Duck

chips in China

Kilo

gra

ms

Source: PepsiCo April 2006


Source: Company reports and Citigroup Investment Research

Globally local: Constant innovationGlobally local: Constant innovation

PepsiCo’s Frito-Lay Product Innovations (2001-2005)PepsiCo’s Frito-Lay Product Innovations (2001-2005)

18

090708

11

No. of Innovations

Munchies Snack Mix, Lays Reduced Fat PC, Baked Doritos, Tostitos Gold2002

Tostitos Scoops, Kettle Chips, Mystery Cheetos, 3D Ruffles, Rold Gold Nuggets2001

Sample of New ProductsYear

Tostitos Light, Salt & Vinegar Stax, Tostitos Light, Cheddar Baked Lays, Doritos Hot2005

Wow!, Black Pepper Jack Doritos, Baked Crunchy Cheetos, Munchies Kid Mix2004Baked Lay’s (Smart Snack), Stax, Guacamole Doritos, Rollitos, Lay’s Natural BBQ PC2003

53 in 5 years

April 2006


Source: A.C. Nielsen and Citigroup Investment Research

Globally local: Changing consumer preferencesGlobally local: Changing consumer preferences

Kellogg’s Total Blended Price for Cereal

Kellogg’s Total Blended Price for Cereal

$2.50

$2.60

$2.70

$2.80

$2.90

$3.00

1999 2000 2001 2002 2003 2004 2005 2006

April 2006

Behavior modificationBehavior modificationDistinct Competitive AdvantageDistinct Competitive Advantage



April 2006


Source: Procter & Gamble

Potential Number of Consumers at Various Levels of GDP per Capita

Potential Number of Consumers at Various Levels of GDP per Capita

Behavior modification: Start using the productBehavior modification: Start using the product

0

1

2

3

4

5

6

7

$0 $5,000 $10,000 $15,000 $20,000

GDP per Capita

Bill

ions

of

Peo

ple

LaundryDentifrice, Shampoo

Diapers

Facial Moisturizers, Fem Pads

Hair Styling and Color

Blades & RazorsTampons, Baby Wipes

April 2006


Source: Euromonitor International, U.S. Census Bureau, AC Nielsen, and Citigroup Investment Research

Behavior modification: Use more of the productBehavior modification: Use more of the product

Gum Annual per Capita Consumption

Gum Annual per Capita Consumption

1.6

1.0

0.7

0.4

0.1

0.0

0.5

1.0

1.5

2.0

North America Western Europe Eastern Europe Australia/Pacific Asia

Pou

nds

April 2006



Toothpasteper Capita Consumption

Toothpasteper Capita Consumption

600

150190

0

100

200

300

400

500

600

700

2004 1999 2004

Gra

ms

China


U.S.

April 2006


12.5%10.0%

5.0%

0%

20%

40%

60%

80%

100%

Facial Tissue Toilet Tissue Detergent


Tissue & DetergentRussia per Capita Consumption compared to Western European per Capita Consumption

Tissue & DetergentRussia per Capita Consumption compared to Western European per Capita Consumption

Source: Citigroup Investment Research –Wendy Nicholson’s June 12, 2005, “from Russia With Love”report

April 2006

90% Use Shampoo

10% No

Shampoo18% Other Shampoo

51% Lowest Priced

21%Premium Priced


Source: Citigroup Investment Research, 2004

Behavior modification: Moving up the value chainBehavior modification: Moving up the value chain

P&G Opportunity:Russian Shampoo Usage (% of Population)

P&G Opportunity:Russian Shampoo Usage (% of Population)

April 2006

New and improvedNew and improvedDistinct Competitive AdvantageDistinct Competitive Advantage



April 2006


Source: Company Reports

New and improved: “Innovation critical”New and improved: “Innovation critical”

L’OréalR&D as a Percentage of Sales

L’OréalR&D as a Percentage of Sales

0%

1%

2%

3%

4%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Trendline

April 2006


Source: Citigroup Investment Research estimates. Consensus estimates (IBES and company reports) for Shiseido

New and improved: Effectiveness & innovationNew and improved: Effectiveness & innovation

“Output” (innovation Churn + Like -For - Like Growth, 2003 -2006E) Relative to “Input” (R&D) Innovation Churn = % group sales delivered from the introduction of new products over 3 yrs

“Output” (innovation Churn + Like -For - Like Growth, 2003 -2006E) Relative to “Input” (R&D) Innovation Churn = % group sales delivered from the introduction of new products over 3 yrs

0 5 10 15 20 25 30 35 40 45

Henkel

Shiseido

Kao

Unilever

P&G

Estée Lauder

Beiersdorf

Colgate-Palmolive

Clorox

Avon Products

Reckitt Benckiser

L'Oréal

Output/Input Input Output

Output Relative to R&D SpendingOutput Relative to R&D Spending

April 2006


Source: L’Or éal

New and improved: Effectiveness & innovationNew and improved: Effectiveness & innovation

L’Oréal New Product InnovationSteel Colour – Strengthening Nail Color

L’Oréal New Product InnovationSteel Colour – Strengthening Nail Color

Want long-lasting color and steel -strong nails? Discover Steel Colour, L’Oréal’s newest innovation in nail enamel. This nail strengthener is specially formulated with steel elements to strengthen, harden, and protect nails while delivering stunning color that lasts! With 23 chic new shades, this no-nonsense polish helps nails resist breaking and splitting without compromising on incredible color.

April 2006

Economies of skillEconomies of skillDistinct Competitive AdvantageDistinct Competitive Advantage

April 2006


Source: Citigroup Investment Research estimates

Economies of skill: Pioneer new technologiesEconomies of skill: Pioneer new technologies

Dried Parent Roll

Wholesale Products

$0

$2,000

$4,000

$6,000

$ / t

on

Converted Tissue Products

Wood Pulp = $580/ton

Retail Products = $5,362/ton

Kimberly Clark Value-Added in the Facial Tissue Production Process

Kimberly Clark Value-Added in the Facial Tissue Production Process

Manufacturing Value Added:

$1,900/ton

April 2006


Source: U.S. Patent and Trademark Office

Economies of skill: Building the patent estateEconomies of skill: Building the patent estate

Kimberly-Clark vs. Georgia Pacific Annual Number of Patents Issued

Kimberly-Clark vs. Georgia Pacific Annual Number of Patents Issued

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006

Kimberly-Clark Georgia-Pacific

KMB = 12x GP



April 2006

Regional Growth OpportunitiesRegional Growth Opportunities

April 2006

Regional Growth Opportunities Regional Growth Opportunities

Nestlé

34KelloggBreakfast Cereals24DanoneYogurt

24%Colgate-PalmoliveOral Hygiene

181521

7

Baby FoodBottled WaterCoffeeReady Meals

20 22L’OrealColor Cosmetics

Hair Care

38Kimberly-ClarkFacial Tissues

GlobalShare

Brand BehemothCategory


Still relatively low global market shareStill relatively low global market share

34%30PepsiCoFunctional Dr.

S & S Snacks

GlobalShare

Brand BehemothCategory

38WrigleyGum

2131191016

Unilever

Bath & ShowerDeodorantIce CreamSauces & Dres singsTea

392713

Procter & Gamble

DiapersLaundry Care Surface Care

Average 24%

April 2006


Source: Citigroup Investment Research and Euromonitor International

No local or global behemoths in emerging marketsNo local or global behemoths in emerging markets

“Local Brand Dispersion Index”Percentage of Companies by Region that are Leaders in Just One Category (2004)

“Local Brand Dispersion Index”Percentage of Companies by Region that are Leaders in Just One Category (2004)

0% 20% 40% 60% 80% 100%

Japan

China

India

East Asia

Eastern Europe

Latin/South America

U.S.

Western Europe

? Dominated by global behemoths Many different compan ies?

April 2006

30 Categories

P&G2

Unilever 2

Other Companies

26

#1 Leader in Just China

16

#1 Leader in More than Just

China 10


Source: Citigroup Investment Research and Euromonitor International, 2004

ChinaBrand Leaders

ChinaBrand Leaders

No local or global behemoths in emerging marketsNo local or global behemoths in emerging markets

April 2006 Source: United Nations Population Division, 2005

Women Aged 15-75 Years by RegionWomen Aged 15-75 Years by Region

499 487

356

263

194

124 12271

0

200

400

600

Asia-Pacific

China India Africa LatAm E. Europe N.America

W. Europe

Mil

lio

ns

Regional Growth Opportunities Regional Growth Opportunities Women’s skin care: A major area of growthWomen’s skin care: A major area of growth

April 2006 Source: Company Reports and Citigroup Investment Research

L’Oréal’s Annual Sales Growthin China and India

L’Oréal’s Annual Sales Growthin China and India

0%

50%

100%

150%

1998 1999 2000 2001 2002 2003 2004 2005 2006

China India400%

Regional Growth Opportunities Regional Growth Opportunities Rapidly growing “Beauty” marketsRapidly growing “Beauty” markets



April 2006 Source: United Nations Populations Division

Diapers: Opportunity in emerging markets Diapers: Opportunity in emerging markets

Projected Population of 0-4 Year-Olds in 2010Projected Population of 0-4 Year-Olds in 2010

1 28 3

120

85

0

40

80

120

India Australia China S. Korea Russia U.K.

Mill

ion

s


April 2006

“Stretching” Across Categories“Stretching” Across Categories

April 2006 Source: Citigroup Investment Research and Euromonitor International

Coffee, Deodorant, Diapers, Hair Care, Laundry Care, Oral Hygiene, Surface Care7Procter & Gamble

Bath & Shower, Color Cosmetics, Deodorant, Hair Care, Ice Cream, Laundry Care, Sauces & Dressings, Soups, Surface Care, Tea

10Unilever

Biscuits, Bottled Water, Yogurt3Danone

Biscuits, Fruit/Vegetable Juice, Functional Drinks, Sweet & Savory Snacks4PepsiCo

Baby Food, Bottled Water, Chocolate Confectionery, Coffee, Ready Meals5Nestlé

Oral Hygiene1Colgate-PalmoliveColor Cosmetics, Hair Care2L’OréalDiapers, Facial Tissues2Kimberly-Clark

Gum1WrigleyBreakfast Cereals1Kellogg

Categories# of CategoriesBrand Behemoth

“Stretching” Across Categories “Stretching” Across Categories Brand behemoth leadership positions by categoryBrand behemoth leadership positions by category

April 2006

0.0

1.0

2.0

3.0

4.0

Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03

Frosted Flakes Breakfast BarsFroot Loops Breakfast Bars

0

Source: A.C. Nielsen

From cereal to breakfast barsFrom cereal to breakfast bars“Stretching” Across Categories “Stretching” Across Categories

Kellogg’s New Breakfast Bar Volume TrendsKellogg’s New Breakfast Bar Volume Trends

* Food, drug, and mass channels, excluding Wal-Mart

From Zero to 2.5 million

units/month in 3 months

Mill

ions

April 2006

Increasing number of male oriented skincare productsIncreasing number of male oriented skincare products“Stretching” Across Categories “Stretching” Across Categories

20%

40%

0%

10%

20%

30%

40%

50%

2005 2015e

Men in U.S. and Europe Using Skincare Products(Percentage)

Men in U.S. and Europe Using Skincare Products(Percentage)


Half are “borrowed”from their partners

April 2006

6%

10%

16%

20%

23%

17%

19%

17%

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001 2002 2003 2004 2005 2006

SUSTAINABLE LEVEL

From gum to mintsFrom gum to mints“Stretching” Across Categories “Stretching” Across Categories

Wrigley’s New Productsas a Percentage of Total Sales

Wrigley’s New Productsas a Percentage of Total Sales

Source: Company reports and Citigroup Investment Research

Introduced Thin-film

breath strips, Eclipse Flash

Launched Eclipse Mints

Acquired Altoids andLifesavers



April 2006

From babies to adult incontinence segmentFrom babies to adult incontinence segment“Stretching” Across Categories “Stretching” Across Categories

Persons with Urinary Incontinence by AgePersons with Urinary Incontinence by Age

Source: Tri-State Incontinence Support Group, 2001

0 %

1 0 %

2 0 %

3 0 %

4 0 %

5 0 %

0 10 20 3 0 4 0 5 0 6 0 70 80

M a l e Female

19 million North American adults

have some form of incontinence

April 2006

Prolonged Share StabilityProlonged Share Stability

April 2006

Prolonged Period of Share Stability Prolonged Period of Share Stability

Source: Citigroup Investment Research and company reports

Year of first entry into regionYear of first entry into region

2004198119901915NMFNMF19271891Wrigley19132003199219331926193018721906Unilever19851988199119351948197319301837Procter & Gamble19881982196619471907196619361902PepsiCo19121908199119051921191318671900Nestlé19851997199119931939196319071953L’Oréal19941994199519631955NMF19551872Kimberly -Clark199419951993NMF1951196319221906Kellogg19901987198919991970198019191942Danone19371992199219301927197819201806Colgate -Palmolive

IndiaChinaEastern Europe

East Asia

Latin/S. AmericaJapanWestern

EuropeU.S.

April 2006 Source: Citigroup Investment Research, Euromonitor International, Professors Peter N. Golder and Joel H. Steckel

Continue to slowly gain market shareContinue to slowly gain market share

Brand Behemoth's # 1 Ranksin 240 Category/Region Combinations

Brand Behemoth's # 1 Ranksin 240 Category/Region Combinations

46.7%47.1%

48.3%

45%

46%

47%

48%

49%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

Prolonged Period of Share Stability Prolonged Period of Share Stability

Trendline

April 2006


Source: Citigroup Investment Research April 2006

Ø L’OréalØ Kimberly-Clark

Ø Kellogg

Ø Danone

Ø Colgate-Palmolive Ø Nestlé

Ø PepsiCo

Ø Procter & Gamble

Ø UnileverØWrigley





April 2006


April 2006






PP

April 2006

Techno Savvy Techno Savvy

April 2006

Techno Savvy Adapters Techno Savvy Adapters Electricity: Electric Lighting SystemElectricity: Electric Lighting System

Sources: National Science Foundation

Inventor/Discoverer: Inventor/Discoverer: Michael FaradayMichael Faraday

and othersand othersFor: For:

LighthouseLighthouseIlluminationIllumination

c. 1880 c. 1750c. 1880 c. 1750

April 2006

Techno Savvy Adapters Techno Savvy Adapters Interchangeable Parts: Mass-Produced CarsInterchangeable Parts: Mass-Produced Cars

Sources: Courtesy of Ford Motor Company

Inventor/Discoverer: Inventor/Discoverer: Eli WhitneyEli Whitney

For: For: Rifle ProductionRifle Production

c. 1900 c. 1800c. 1900 c. 1800

April 2006

Techno Savvy Adapters Techno Savvy Adapters Wireless Broadcasting: RadioWireless Broadcasting: Radio

Sources: Courtesy of Thomson

Inventor/Discoverer: Inventor/Discoverer: GuglielmoGuglielmo MarconiMarconi

For: For: Ship to Shore Ship to Shore

MessagesMessages

c. 1920 c. 1890c. 1920 c. 1890



April 2006

Techno Savvy Techno Savvy AdaptersAdapters

A significant competitive advantage can be gained by adapting existing technologies.

– Ford: mass production – Edison: electrical lighting system

A significant competitive advantage can be gained by adapting existing technologies.

– Ford: mass production – Edison: electrical lighting system

April 2006

Techno Savvy Exploiter Techno Savvy Exploiter Phonograph: Music ReproductionPhonograph: Music Reproduction

Sources: Scientific American, 1896

Inventor/Discoverer: Inventor/Discoverer: Thomas EdisonThomas Edison

For: For: DictationDictation

c. 1890 1877c. 1890 1877

April 2006

Techno Savvy Exploiter Techno Savvy Exploiter Transistor: Transistor RadioTransistor: Transistor Radio

Sources: Courtesy of Sony Electronics, Inc.

Inventor/Discoverer: Inventor/Discoverer: Bell LabsBell Labs

For: For: Long Distance Long Distance

CallingCalling

1955 19471955 1947

April 2006

Techno Savvy Exploiter Techno Savvy Exploiter Television System: Broadcast TelevisionTelevision System: Broadcast Television

Sources: Courtesy of Thomson

Inventor/Discoverer: Inventor/Discoverer: Philo T. FarnsworthPhilo T. Farnsworth

For: For: LaboratoryLaboratory

1939 19211939 1921

April 2006

Techno Savvy Techno Savvy ExploitersExploiters

Identifying the optimal application of a relatively new technology is often as important as the technology itself.

– Phonograph for music not dictation– Transistors for radios not hearing aids

Identifying the optimal application of a relatively new technology is often as important as the technology itself.

– Phonograph for music not dictation– Transistors for radios not hearing aids

April 2006

Techno Savvy Innovator Techno Savvy Innovator Electronic Calculator: Business ComputerElectronic Calculator: Business Computer

Sources: Courtesy of IBM

Inventor/Discoverer: Inventor/Discoverer: MauchlyMauchly & Eckert& Eckert

For: For: Gun Firing TablesGun Firing Tables

1952 19441952 1944



April 2006

Techno Savvy Innovator Techno Savvy Innovator BASIC: PC SoftwareBASIC: PC Software

Sources: Used with Permission from Microsoft Corporation

Inventor/Discoverer: Inventor/Discoverer: Dartmouth ProfessorsDartmouth Professors

For: For: College ComputingCollege Computing

1975 19631975 1963

April 2006

Techno Savvy Innovator Techno Savvy Innovator DNA: Human InsulinDNA: Human Insulin

Sources: The New York Times, December 2, 1981

Inventor/Discoverer: Inventor/Discoverer: Watson & CrickWatson & Crick

For: For: Cancer ResearchCancer Research

1977 19531977 1953

April 2006

Techno Savvy Techno Savvy InnovatorsInnovators

Innovators actually create something new, often by taking science from the laboratoryto the market place.

– Microsoft: PC software– Genentech: human insulin

Innovators actually create something new, often by taking science from the laboratoryto the market place.

– Microsoft: PC software– Genentech: human insulin

April 2006


Profiting from Adapting, Exploitingand Innovating Technologies

Profiting from Adapting, Exploitingand Innovating Technologies

April 2006


Sources: Gartner Consulting, Citigroup Investment Research

50+ Candidates50+ Candidates

ZigBee (802.15.4)Web services-enabled business model

Voice over Internet ProtocolVirtual PrototypingVideo Telephony

Video on DemandTruth VerificationTelematics

RFID payments: WorldwideRFID (case/pallet)Retinal Displays

Reference Data StandardsReal-time Patient Remote MonitoringProduct content/ data management

Power Line BroadbandPHRPhood

P2P NetworksOil & Gas Drilling / Completion TechNatural Language Processing

Nanotech -based ManufacturingMRAMMicropayments

Microelectromechanical SystemsMicro fuel cellsMesh Networks Sensor

Location “Aware” ServicesLifetime ValueLEP/OLED

Interactive TVInkjet processesInfrastructure Virtualization

Idea ManagementHSA “Smart Card”eSignatures

EMPIEmotion DetectionEmbedded Diagnostic Tols

Electronic shelf LabelsElectronic inke-Forms

Dual Clutch TransmissionDriver-Load MatchingDigital Rights Mgmt Technologies

Controlled Medical VocabularyContextual PersonalizationComputer- brain interface

Blu-ray BiometricsBioinformatics

Augmented RealityAudio MiningArtificial Intelligence

April 2006

Techno Savvy Techno Savvy Nine TechnologiesNine Technologies

A d a p t e rDual Clutch

TransmissionDrilling and Completion

HSA "Smart Card"

Explo i ter R F I D VoIPReal Time Patient

Monitoring

Inovator Fuel Cells e-money P h o o d




April 2006


AdaptersAdapters

April 2006

Techno Savvy Adapters Techno Savvy Adapters The Evolution of the Automobile TransmissionThe Evolution of the Automobile Transmission

Sources: Ford Motor Company, Citigroup Investment Research and Volkswagen

Ford Model – TFord Model – TAutomatic

TransmissionAutomatic

TransmissionDual Clutch

TransmissionDual Clutch

Transmission

April 2006

Techno Savvy Adapters Techno Savvy Adapters Dual Clutch TransmissionDual Clutch Transmission

Source: Volkswagen

Performance Improvements of DCT Transmission versus 6-Speed Manual

Performance Improvements of DCT Transmission versus 6-Speed Manual

Time

Spee

d

DCT

Manual

Top Speed:Manual 247 km/h / 154 mphDCT 247 km/h / 154 mph

Accelerates faster

Manual:

DCT: 10.3 liters/100 km

11.5 liters/100 km

Fuel Efficiency

Uses less fuel

April 2006

Techno Savvy Adapters Techno Savvy Adapters Dual Clutch TransmissionDual Clutch Transmission

Mass-produced dual clutch transmission

Product/Competitive Advantage

BorgWarnerAdapter

Germany, 1940Origin/Source

Technology is particularly attractive in Europe, with highly taxed gasoline; China, India & S. Korea

April 2006

Techno Savvy Adapters Techno Savvy Adapters The Evolution of Energy ProductionThe Evolution of Energy Production

Sources: Citigroup Investment Research, Environmental protection Agency and EOG

Do-It-Yourself Energy

Do-It-Yourself Energy

Early Vertical Oil Rigs

Early Vertical Oil Rigs

Horizontal wells, 3-D seismic, Fracturing

Horizontal wells, 3-D seismic, Fracturing

April 2006

Techno Savvy AdaptersTechno Savvy AdaptersDrilling and Completion TechnologyDrilling and Completion Technology

Sources: Citigroup Investment Research and EOG

Land Acquisition Price/AcreLand Acquisition Price/Acre

$172

$5,466

$11,500

$17,000

$11,200

$0$2,000$4,000

$6,000$8,000

$10,000

$12,000$14,000

$16,000$18,000$20,000

Early 2004 3-Mar-04 23-Nov-04 30-Nov-04 11-Jan-05

Carizzo

Encana

Chesa-

peake

XTO Energy



April 2006

Techno Savvy Adapters Techno Savvy Adapters Drilling and Completion TechnologyDrilling and Completion Technology

More productive wellsProduct/Competitive Advantage

EOG ResourcesAdapter

Oilfield Equipment & ServicesOrigin/Source

EOG’s has 321,000 acres in Barnett Shale at cost of $172/acre; recent deals $11,000-$17,000/acre.

April 2006

Techno Savvy Adapters Techno Savvy Adapters The Evolution of Medical Payment ProcessesThe Evolution of Medical Payment Processes

FormsForms The WebThe Web The Smart CardThe Smart Card


April 2006

Techno Savvy Adapters Techno Savvy Adapters HSA Smart Card TechnologyHSA Smart Card Technology

Sources: Forrester Research, Inc.

Comparative Analysis of Health PlansComparative Analysis of Health PlansHealth plan CDHP platform HSA custodian HSA debit card vendor

Anthem NASCO

Evolution Benefits

Lumenos Employer Products Division Mellon Bank

UnitedHealthCare

Humana JPMorgan Chase

Independence Blue Cross The Bancorp Bank

Blue Shield of California Wells Fargo

Definity Health US Bank, Wells Fargo

BCBS of Arizona HSA Bank

BCBS of Michigan Menu of local and national banks

HSA administrator

FlexBen JPMorgan Chase

Assurant Health MSAver HSA Bank

April 2006

Techno Savvy Adapters Techno Savvy Adapters HSA Smart Card TechnologyHSA Smart Card Technology

Combo medical, drug benefit, HSA, debit/credit card


UnitedHealth GroupAdapter

Card & ATM TechnologyOrigin/Source

Cost per payment drops from $3.00 in 2000 to $0.95 in 2008; per customer contact $6.50 to $0.75

April 2006


ExploitersExploiters

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters The Evolution of Inventory ManagementThe Evolution of Inventory Management

Sources: Citigroup Investment Research and Manhattan Associates

“What you see is what you have”

“What you see is what you have”

Closing for inventory

Closing for inventory RFIDRFID



April 2006

Techno Savvy Exploiters Techno Savvy Exploiters RFIDRFID


Distribution CentersDistribution Centers

3

110

26

0

25

50

75

100

125

BJ's Wal-Mart Costco

Earnings Accretion with RFID

Earnings Accretion with RFID

22%

15%

27%

0%

5%

10%

15%

20%

25%

30%

BJ's Wal-Mart Costco

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters RFIDRFID

Reduced store labor and distribution costs


BJs Wholesale ClubExploiter

WW II Aircraft IdentificationOrigin/Source

Only 3 distribution centers; easier to go RFID. Then, easier to track BJ’s large number of SKUs.

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters The Evolution of Enterprise CommunicationsThe Evolution of Enterprise Communications

Sources: The Jimmie Dodd Photograph Collection (JD2287a/12), TheCenter for American History, The University of Texas at Austin and Citigroup Investment Research

The Early Switchboard

The Early Switchboard

The Button SwitchboardThe Button

Switchboard VoIPVoIP

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters VOIPVOIP

Sources: Gartner Consulting

Market Share by TechnologyMarket Share by Technology

0%

20%

40%

60%

2004 2005 2006 2007 2008

PBX Traditional Line

Pure IP

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters VOIPVOIP

Significant incremental spending on security & network switching.


Cisco SystemsExploiter

Vocaltec (Israel)Origin/Source

3-5x as much spend in security & networking equipment as VoIP; CSCO 80% mkt share

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters The Evolution of Human Organ SupportThe Evolution of Human Organ Support

Sources: Citigroup Investment Research and Medtronic

The Human Pancreas

The Human Pancreas

Test strip and insulin injectionTest strip and

insulin injection External Artificial Pancreas

External Artificial Pancreas



April 2006

Techno Savvy Exploiters Techno Savvy Exploiters Real Time Patient MonitoringReal Time Patient Monitoring

The Evolution of CHF Monitoring TechnologyThe Evolution of CHF

Monitoring Technology

Sources: Medtronic

1998 2000 2004<

Microprocessor

Sensor

Memory

Telemetry Wireless

InSyncSentryTM

OptiVolTM

ChronicleTM

CareLinkTM Network

Monitoring Devices for

Chronic Disease

DataMgmt

Network

0

5,000

10,000

15,000

20,000

25,000

Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3

FY03 F Y 0 4 FY05 YTD

0

5 0

100

150

200

250

300

350

400Patients Enrolled (LHS)

Active Clinics (RHS)

Medtronic CareLinkAdoption

Medtronic CareLinkAdoption

April 2006

Techno Savvy Exploiters Techno Savvy Exploiters Real Time Patient MonitoringReal Time Patient Monitoring

Monitoring for congestive heart failure, low blood sugar levels


MedtronicExploiter

InternetOrigin/Source

In 2007 MDT is expected to combine the glucose sensor with an insulin pump to create one device.

April 2006


Adaptors & ExploitersAdaptors & Exploiters

April 2006


InnovatorsInnovators

April 2006

Techno Savvy Innovators Techno Savvy Innovators The Evolution of Backup Power GenerationThe Evolution of Backup Power Generation

Sources: Citigroup Investment Research and Plug Power

Dependent on the Power GridDependent on the Power Grid

Plug Power’s PEM system

Plug Power’s PEM system

Diesel GeneratorLead Acid BatteriesDiesel Generator

Lead Acid Batteries

April 2006

Techno Savvy Innovators Techno Savvy Innovators Fuel CellsFuel Cells

Sources: Plug Power

Telecom Backup System Original Cost

Telecom Backup System Original Cost

$15,000

$18,000

$12,000

$14,000

$16,000

$18,000

$20,000

GenCore Lead Acid Battery0

2

4

6

8

10

12

GenCore Lead-Acid Battery

10

3 - 5

Telecom Backup System Useful Life (years)

Telecom Backup System Useful Life (years)

+ $12,000 to replace each time



April 2006


Commercial Fuel CellsProduct/Competitive Advantage

Plug PowerInnovator

19th Century EnglandOrigin/Source

First to bring to market a reliable, economically viable fuel cell for on-site power generation

April 2006

Techno Savvy Innovators Techno Savvy Innovators The Evolution of Portable Power SourcesThe Evolution of Portable Power Sources

Sources: Citigroup Investment Research and Mechanical Technology

“Wet” Cell Battery

“Wet” Cell Battery

Lithium Ion Battery

Lithium Ion Battery

Direct Methanol Fuel Cell

Direct Methanol Fuel Cell

April 2006


Sources: Thad Starner, assistant professor of computing at the Georgia Institute of Technology College of Computing

Improvements in Laptop Components

Improvements in Laptop Components

0

400

800

1200

LithiumPrismatic

LithiumCylindrical

DMFC 20%efficient

DMFC 30%efficient

Lithium Ion Batteries vsDMFCs (Watt hours per liter)

Lithium Ion Batteries vsDMFCs (Watt hours per liter)

1

10

100

1,000

10,000

1990 1992 1994 1996 1998 2000 2002 2004

Disk Capacity

CPU Speed

Available RAM

Battery Energy Density 2-3x

April 2006


Commercial fuel cellsProduct/Competitive Advantage

Mechanical TechnologyInnovator

19th Century EnglandOrigin/Source

Entered into alliance with Gillette ’s Duracell to develop and commercialize MTI’s micro fuel cell

April 2006

Techno Savvy InnovatorsTechno Savvy InnovatorsThe Evolution of Local Day-to-Day Payment MethodsThe Evolution of Local Day-to-Day Payment Methods

Sources: British Library, Citigroup Investment Research, MasterC ard, and Visa

BarterBarter CashCash e-moneye-money

April 2006

Techno Savvy Innovators Techno Savvy Innovators

Sources: European Central Bank and Bank for International Settlements

Credit Card PenetrationPer Person (2002)

Credit Card PenetrationPer Person (2002)

e-Moneye-Money

Debit Card PenetrationPer Person (2002)

Debit Card PenetrationPer Person (2002)

0.9 0.9

0.5

0.0

0.2

0.4

0.6

0.8

1.0

U.S. EuropeanUnion

East & CentralEurope

4.4

0.50.1

0.0

1.0

2.0

3.0

4.0

5.0

U.S. EuropeanUnion

East & CentralEurope



April 2006

Techno Savvy Innovators Techno Savvy Innovators e-Moneye-Money

eTop UpProduct/Competitive Advantage

Euronet WoldwideInnovator

Late 1990sOrigin/Source

Euronet Woldwide is the world’s largest processor of prepaid transactions

April 2006

Techno Savvy InnovatorsTechno Savvy InnovatorsThe Evolution of Peer-to-Peer Payment MethodsThe Evolution of Peer-to-Peer Payment Methods

Source: Citigroup Investment Research and eBay

ChecksChecks PayPalPayPalWireWireHOW TO WIRE FUNDSHOW TO WIRE FUNDS••Transfer funds to your Bank accounts Transfer funds to your Bank accounts by issuing a wire transfer request.by issuing a wire transfer request.••All incoming wires to your Bank All incoming wires to your Bank accounts are $10. accounts are $10. ••Incoming wires received by 4:30 P.M. Incoming wires received by 4:30 P.M. (ET) will be posted same business day.(ET) will be posted same business day.••Wires should be directed to:Wires should be directed to:Account Name Bank, ABA: Account Name Bank, ABA: 99999999999999999999Beneficiary: Customer Name and Beneficiary: Customer Name and Account SWIFT Code (required only for Account SWIFT Code (required only for international transfers): BBBB9999international transfers): BBBB9999••Outgoing domestic wire transfers are Outgoing domestic wire transfers are $30$30••Outgoing international wire transfers Outgoing international wire transfers are $40. are $40. ••We must receive requests for We must receive requests for international wire transfers by 2:00 international wire transfers by 2:00 P.M. (ET) and for domestic wires by P.M. (ET) and for domestic wires by 2:30 P.M. to be sent that business day.2:30 P.M. to be sent that business day.

April 2006


Sources: Citigroup Investment Research and eBay

PayPal “Off eBay”Total Payment Volume

($ billions)

PayPal “Off eBay”Total Payment Volume

($ billions)

$0.0

$2.0

$4.0

$6.0

2001 2002 2003 2004

65 64

5 3

30 2823

13 1 3

0

20

40

60

80

AmericanExpress

PayPal Discover JPMorganChase

Bank ofAmerica

WellsFargo

DeutscheBank

Barclays

Global User Accounts at Leading Transaction

Processing Firms

Global User Accounts at Leading Transaction

Processing Firms

April 2006


PayPalProduct/Competitive Advantage

eBayInnovator

Late 1990sOrigin/Source

“Off-eBay” (25% of PayPal’s TPV), 80% CAGR over 3 years; still only 0.5% of total global eCommerce

April 2006

Techno Savvy InnovatorsTechno Savvy InnovatorsThe Evolution of Flavor EnhancersThe Evolution of Flavor Enhancers


Herbs and Spices

Herbs and Spices MSGMSG

Taste-receptor-based

technology

Taste-receptor-based

technology

April 2006


Sources: Citigroup Investment Research and Company Reports

Market Opportunities for Senomyx and CollaboratorsMarket Opportunities for Senomyx and Collaborators

PhoodPhood

Collaborator Product Category

Annual Sales for Product Category

$(BB)

Wet soup& savory beverages

$2.8

Non-alcoholic beverage $15.2

Powdered beverages $0.5

Dehydrated, culinary, frozen food & wet soup

$12.7

$31 bnmarket; royalty

payments = 1-4%



April 2006

Techno Savvy Innovators Techno Savvy Innovators PhoodPhood

Flavor EnhancersProduct/Competitive Advantage

SenomyxInnovator

Ancient ChinaOrigin/Source

’05 designated “Generally Recognized As Safe” —Nestle to begin consumer acceptance testing

April 2006

Techno Savvy InnovatorsTechno Savvy InnovatorsThe Evolution of Food AdditivesThe Evolution of Food Additives


Vitamin CVitamin C CalciumCalcium DHADHA

April 2006


Sources: Martek Biosciences

Martek’s Estimated Food Market Opportunity Utilizing DHA ($ millions)

Martek’s Estimated Food Market Opportunity Utilizing DHA ($ millions)

PhoodPhood

$1,360 $1,480$1,110

$5,100

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Dairy Beverages Cereals Breads

Kellogg launches initial DHA product in

‘06

April 2006

Techno Savvy Innovators Techno Savvy Innovators PhoodPhood

Food AdditivesProduct/Competitive Advantage

Martek BioscienceInnovator

Ancient ChinaOrigin/Source

QHC “for reduced risk of coronary heart disease.”May also decrease risk of Alzheimer’s

April 2006

Techno SavvyTechno Savvy

April 2006 April 2006






PP



April 2006

Riding the Wave Riding the Wave

An Elongated M&A CycleAn Elongated M&A Cycle

April 2006

Riding the WaveRiding the Wave

Number of Mergers & Value of U.S. M&A Activity/percentage of market value

Number of Mergers & Value of U.S. M&A Activity/percentage of market value


An elongated M&A cycleAn elongated M&A cycle

10

100

1000

10000

100000

1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 20050%

2%

4%

6%

8%

10%

Number of Mergers in the US Value of MergersRecessions shaded

April 2006 Source: Citigroup Investment Research

Ø 1898-1903 “Trustification” of industrial America

Ø 1923-1929 Emergence of the assembly line

Ø 1960s Conglomerates

Ø 1980s LBOs & Private Market Value

Ø 1990s Deregulation-driven consolidation

Ø 2004-???? Internet and Info Technologies

Ø 1898-1903 “Trustification” of industrial America

Ø 1923-1929 Emergence of the assembly line

Ø 1960s Conglomerates

Ø 1980s LBOs & Private Market Value

Ø 1990s Deregulation-driven consolidation

Ø 2004-???? Internet and Info Technologies

Riding the WaveRiding the WaveU.S. merger activity typically occurs in waves U.S. merger activity typically occurs in waves

Each wave ended around the time of a recessionEach wave ended around the time of a recession

April 2006

Financials31%

Telecom, Media and Entertainment

19%

Healthcare11%

Other39%

Riding the WaveRiding the Wave

U.S. M&A Transactions: Deals Completed by Target Macro Industry 2004

U.S. M&A Transactions: Deals Completed by Target Macro Industry 2004


Merger activity typically “clusters” in a few areasMerger activity typically “clusters” in a few areas

April 2006

Riding the Wave Riding the Wave

April 2006

Risky Business Risky Business A Less Volatile Economy,but More Volatile Stocks

A Less Volatile Economy,but More Volatile Stocks



April 2006

-15%

-10%

-5%

0%

5%

10%

15%

20%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Investment PolicyInvestment Policy

Real GDP GrowthReal GDP Growth

“The Great Moderation”—a less volatile economy“The Great Moderation”—a less volatile economy

Sources: Bureau of Economic Analysis and Citigroup Investment Research April 2006

Risky BusinessRisky BusinessDeclining Aggregate Economic VolatilityDeclining Aggregate Economic Volatility

Source: Bureau of Economic Analysis; Campbell, Lettau, Malkiel and Xu; Comin and Mulani

GDP Growth (10-Yr Rolling Standard Deviation)

GDP Growth (10-Yr Rolling Standard Deviation)

0%

2%

4%

6%

8%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

April 2006

0%

1%

2%

3%

4%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

5%

10%

15%

20%

25%

Aggregate (LHS) Firm-Level (RHS)

Risky BusinessRisky BusinessA Less Volatile Economy, But More Volatile StocksA Less Volatile Economy, But More Volatile Stocks

Source: Source: Comin and Mulani

Aggregate and Firm-Level Sales Growth (10-Yr Rolling Standard Deviation)

Aggregate and Firm-Level Sales Growth (10-Yr Rolling Standard Deviation)

April 2006

Risky BusinessRisky BusinessIs Stock Volatility at a Cyclical Trough? Is Stock Volatility at a Cyclical Trough?

Source: Bureau of Economic Analysis; Campbell, Lettau, Malkiel and Xu; Comin and Mulani

Volatility of a “Typical Stock”(12 Mo. & 10-Yr Standard Deviation)

Volatility of a “Typical Stock”(12 Mo. & 10-Yr Standard Deviation)

Linear Trendline of Twelve-Month Moving Average

0

0.01

0.02

0.03

0.04

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Twelve-Month Moving AverageTen-Year Moving Average

April 2006

Risky BusinessRisky Business1) Improved inventory management 1) Improved inventory management

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

Non-Farm Inventories to Final Sales RatioNon-Farm Inventories to Final Sales Ratio

2.0

2.5

3.0

3.5

4.0

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

April 2006

Risky BusinessRisky Business2) Shift to a service economy2) Shift to a service economy


Employment by Service Industries(% of Total Nonagricultural Employment)

Employment by Service Industries(% of Total Nonagricultural Employment)

50%

70%

90%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005



April 2006

Risky BusinessRisky Business3) Globalization3) Globalization


Exports and Imports of Goods (Percent of GDP)

Exports and Imports of Goods (Percent of GDP)

0%

5%

10%

15%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Imports Exports

April 2006

Risky BusinessRisky Business4) Flexible labor markets4) Flexible labor markets


Median Number of Years of Tenure with Current Employer

Median Number of Years of Tenure with Current Employer

5

6

7

8

9

10

1980 1985 1990 1995 2000 2005

April 2006

Risky BusinessRisky Business5) “Smoother” consumer spending5) “Smoother” consumer spending

Source: Bureau of Economic Analysis, Bureau of Labor Statistics,National Science Foundation, Comin and Mulani

Residential and Nonresidential Construction Growth (10-Yr Rolling Standard Deviation)

Residential and Nonresidential Construction Growth (10-Yr Rolling Standard Deviation)

5%

15%

25%

35%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Residential Nonresidential

April 2006

Risky BusinessRisky Business6) Improved financial markets6) Improved financial markets


Bank Loans (Percent of Credit Market Instruments)

Bank Loans (Percent of Credit Market Instruments)

10%

20%

30%

40%

50%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

April 2006

Risky BusinessRisky Business7) Improved monetary policy7) Improved monetary policy


GDP and Inflation (CPI) Growth(10-Yr Rolling Standard Deviation)GDP and Inflation (CPI) Growth(10-Yr Rolling Standard Deviation)

0%

2%

4%

6%

8%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Output Inflation

April 2006

Risky BusinessRisky Business8) Innovation-driven competition8) Innovation-driven competition


R&D and Firm-Level VolatilityR&D and Firm-Level Volatility

5%

10%

15%

20%

25%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 20050%

1%

2%

Firm-Level Volatility (LHS)Private R&D as % GDP (RHS)



April 2006

Risky BusinessRisky BusinessRelationship Between Five-Year Future Volatility of Stock Returns and Financial Statement ItemsRelationship Between Five-Year Future Volatility of Stock Returns and Financial Statement Items


0.87R-Squared

8,520Observations

-0.0018(-0.53)

Sales/GDP

0.0001(1.06)

Sales/GDP Squared

-0.0995(-3.74)

Capital Expenditures/Sales

-0.1038(-5.12)

Profit/Sale

0.0175(5.55)

Book to Market Ratio

0.0001(7.46)

Age Squared

-0.0066(-9.38)

Age

-0.1256(-12.49)

5 Year Past-Volatility

0.4652(46.69)

Constant

Coefficient (T-Stat)Independent Variable

April 2006

ØProfit to Sales Ratio: Firms with higher net margins experience lower volatility levels. Profits enable firms to maintain liquidity, the lack of which may result in higher volatility.

Ø Capital Expenditures:Firms with high levels of capital expenditures relative to sales experience lower volatility in the future.

Ø Book Value to Stock Market Price: The ratio has a positive effect on future volatility, so that high Price-to-Book (the reciprocal) is associated with lower volatility in the future, to the extent that a high Price-to-Book ratio is indicative of a market perception of a “growth stock.”

ØProfit to Sales Ratio: Firms with higher net margins experience lower volatility levels. Profits enable firms to maintain liquidity, the lack of which may result in higher volatility.

Ø Capital Expenditures:Firms with high levels of capital expenditures relative to sales experience lower volatility in the future.

Ø Book Value to Stock Market Price: The ratio has a positive effect on future volatility, so that high Price-to-Book (the reciprocal) is associated with lower volatility in the future, to the extent that a high Price-to-Book ratio is indicative of a market perception of a “growth stock.”

Risky BusinessRisky BusinessFirm Specific Factors Assoc. with Future VolatilityFirm Specific Factors Assoc. with Future Volatility

Source: Comin and Mulani

April 2006

ØAge: Older firms tend to be less volatile. The likely explanation of this is that, as firms age, they become more stable and volatility declines. But this effect does diminish eventually, as evidenced by the age-squared relationship.

ØSize: Larger firms tend to be less volatile than smaller firms; are likely more diversified and are in a better position to copewith product-specific shocks.

ØAge: Older firms tend to be less volatile. The likely explanation of this is that, as firms age, they become more stable and volatility declines. But this effect does diminish eventually, as evidenced by the age-squared relationship.

ØSize: Larger firms tend to be less volatile than smaller firms; are likely more diversified and are in a better position to copewith product-specific shocks.



April 2006

Risky BusinessRisky BusinessRelationship Between Future Volatility of Stock Returns and Financial Statement ItemsRelationship Between Future Volatility of Stock Returns and Financial Statement Items


BothAdvertisingR&DNone(T-Statistic)

0.9R-Squared

1,7919792,4362,936Observations

0.3421(1.67)

0.0738(0.71)R&D/Sales

-1.0137(-4.32)

0.5767(1.29)Advertisting/Sales

0.0092(0.83)

-0.0598(-2.09)

0.0097(1.67)

-0.019(-2.25)Sales/GDP

0.0002(0.36)

0.0043(1.65)

-0.0002(-1.04)

0.0004(1.25)

Sales/GDP Squared

-0.2059(-1.77)

0.0513(0.5)

-0.2846(-3.01)

-0.0361(-1.37)Cap Exp/Sales

-0.2255(-2.22)

-0.7979(-4.85)

-0.0325(-1.23)

-0.0866(-1.7)Profit/Sales

0.0384(2.88)

0.0282(2.08)

0.032(4.39)

0.005(1.39)

Book to Market Ratio

0.0004(9.58)

0.0002(4.3)

0.0001(3.45)

0.0001(5.72)Age Squared

-0.0239(-10.25)

-0.0187(-5.44)

-0.0066(-4.59)

-0.0062(-5.17)Age

-0.2781(-12.96)

-0.2217(-7.94)

-0.1743(-8.45)

-0.118(-6.59)

5 Year Past-Volatility

0.79(20.26)

0.7817(14.07)

0.501(22.96)

.04058(24.37)Constant

Division by Participation in R&D and AdvertisingDivision by Participation in R&D and Advertising

April 2006

ØR&D has a positive effect on future volatility. Other things remaining the same, firms engaging in R&D—and subject to the windfall gains from the success of their innovations and losses from the innovations of their competitors—are expected to have a higher level of volatility than firms who do not engage in R&D.

Ø Advertising is associated with lower future volatility. Advertising helps firms create a brand image and generate a relatively steady stream of sales.

ØR&D has a positive effect on future volatility. Other things remaining the same, firms engaging in R&D—and subject to the windfall gains from the success of their innovations and losses from the innovations of their competitors—are expected to have a higher level of volatility than firms who do not engage in R&D.

Ø Advertising is associated with lower future volatility. Advertising helps firms create a brand image and generate a relatively steady stream of sales.



April 2006

Risky BusinessRisky Business


An Econometric Model: Char. of Low Volatility FirmsAn Econometric Model: Char. of Low Volatility Firms

Ø Old AgeØ High Price-to-Book

Ø High Net MarginsØ High Levels of Capital Expenditures

Ø Large Size Ø High Levels of AdvertisingØ Low Levels of R&D Spending

Ø Old AgeØ High Price-to-Book

Ø High Net MarginsØ High Levels of Capital Expenditures

Ø Large Size Ø High Levels of AdvertisingØ Low Levels of R&D Spending



April 2006


Source: Campbell, Lettau, Malkiel, and Xu

Average stock return volatility attributable to…Average stock return volatility attributable to…

0.00

0.01

0.02

0.03

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Market FactorsMarket Factors

0.00

0.01

0.02

0.03

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Industry-Specific FactorsIndustry-Specific Factors

0.00

0.01

0.02

0.03

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Firm-Specific FactorsFirm-Specific Factors

April 2006


0.0

0.1

0.2

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Stan

dard

dev

iatio

n

20-stock portfolios

50-stock portfolios

Additional stocks required for well-diversified portfolioAdditional stocks required for well-diversified portfolio

Source: Campbell, Lettau, Malkiel, and Xu

Simulated Portfolio DiversificationSimulated Portfolio DiversificationRiskRisk

April 2006

Risky Business Risky Business

April 2006






PP

April 2006

The Aging Baby Boomer:The Aging Baby Boomer:

Source: U.S. Bureau of the Census

The Key DemographicThe Key Demographic

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

< 5 5-9 10- 14 15- 19 20- 24 25- 29 30- 34 35- 39 40- 44 45- 49 50- 54 55- 59 60- 64 65- 69 70- 74 75- 79 80- 84 85 >

Age

1965-1975

Twenties1985-1995

Forties2005-2015

Sixties

April 2006


U.S. Life ExpectancyU.S. Life Expectancy

0

10

20

30

40

50

60

70

80

90

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Male Female

Source: US Department of Health and Human Services

Living LongerLiving Longer



April 2006

60%

70%

80%

90%

100%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: Bureau of Labor Statistics

55-64 Year Old Labor Participation Rate55-64 Year Old Labor Participation Rate

The Aging Baby Boomer: The Aging Baby Boomer: Working LongerWorking Longer

April 2006

Plans for RetirementPlans for Retirement

The Aging Baby Boomer: The Aging Baby Boomer:

Source: 2005 Pulte Homes Baby Boomer Study

Plans to Keep Working LongerPlans to Keep Working Longer

Stay in my current job as

long as possible 35%

Find a new job 22%Other 13%

Work part-time, doing the same type of work you

do now 5%

Retire 25%

April 2006

Be around people 4%Be productive or useful 14%

Do something fun 5%

Don’t know/Refused 3%

Help other people 6%

Learn new things 3%

Pursue a dream 4%

Stay mentally active 14%

Stay physically active 9%

Need health benefits 14%Need money 25%

Why keep working?Why keep working?


Source: Staying Ahead of the Curve 2003: The AARP Working in Retirement Study

. . . And Most Not for the Money. . . And Most Not for the Money

April 2006

The Next American Dream The Next American Dream

Healthy, Wealthy and Active:The Baby Boomer in 2010

Healthy, Wealthy and Active:The Baby Boomer in 2010

April 2006

The Next American Dream: HealthyThe Next American Dream: Healthy

63%

42%

0%

20%

40%

60%

80%

care about maintaining a healthy weight doing things to maintain a health weight

Source: Yankelovich Partners Inc.

But living an unhealthy lifestyle But living an unhealthy lifestyle

April 2006

64%

29%

0%

20%

40%

60%

80%

watching daily caloric intake Overweight


The Next American Dream: HealthyThe Next American Dream: HealthyBut living an unhealthy lifestyle But living an unhealthy lifestyle



April 2006

The Next American Dream: WealthyThe Next American Dream: Wealthy

$0

$40

$80

$120

$160

$200

<35 35-44 45-54 55-64 65-74 75+

(tho

usan

ds)

Median Net WorthMedian Net Worth

Source: Federal Reserve

Confused about investing / need financial adviceConfused about investing / need financial advice

April 2006

33%

28%

0%

10%

20%

30%

40%

50%

"I am in control of my finances." describe themselves as a “somewhatexperienced” investor


The Next American Dream: WealthyThe Next American Dream: WealthyConfused about investing / need financial adviceConfused about investing / need financial advice

April 2006

75%

55%

0%

20%

40%

60%

80%

value being able to take a day off when youwant to

plan to work into their retirement years ornever retire

Source: Yankelovich Partners Inc., AARP

Actively Working / Actively relaxing Actively Working / Actively relaxing The Next American Dream: ActiveThe Next American Dream: Active

April 2006

47%

15%

42%

11%

38%

11%

0%

20%

40%

60%

walk run cruise swim drive hike


The Next American Dream: ActiveThe Next American Dream: ActiveActively Working / Actively relaxing Actively Working / Actively relaxing

April 2006


HealthyHealthy

April 2006 Source: Yankelovich Partners Inc.

Boomers’ Health–Related ActivitiesBoomers’ Health–Related Activities

The Next American Dream: HealthyThe Next American Dream: Healthy“Care About” Versus “Currently Doing”“Care About” Versus “Currently Doing”

63%

49% 50% 51%

40%35%

38% 40%

33%

42%

0%

20%

40%

60%

80%

Healthy weight Exercising Reducing fat in diet Watch cholesterol Alcohol moderation

Care About Currently Doing



April 2006

The Next American Dream: HealthyThe Next American Dream: Healthy50-59: the most obese segment of the population50-59: the most obese segment of the population

Source: Centers for Disease Control

Obesity by age groupObesity by age group

0%

10%

20%

30%

18-24 25-34 35-44 45-54 55-64 65+

2002 2003

April 2006 Source: Yankelovich partners, inc.

“I am overweight.”“I am overweight.”

The Next American Dream: HealthyThe Next American Dream: HealthyOwn admission: Most overweight age groupOwn admission: Most overweight age group

38%

54%

64%

56%

0 %

20%

40%

60%

80%

<26 27-40 41-59 60+

April 2006 Source: The American Society for Aesthetic Plastic Surgery

The Next American Dream: HealthyThe Next American Dream: HealthyNo wrinklesNo wrinkles

2.27

0.72

0.13

1.11

0.59

2.84

0

1

2

3

Botox Injection Chemical Peel Laser Skin Resurfacing

2003 2004

Nonsurgical Cosmetic Proc. (Millions)

Nonsurgical Cosmetic Proc. (Millions)

Age Distribution for BotoxProcedures

Age Distribution for BotoxProcedures

15%

78%

7 %

0%

20%

40%

60%

80%

100%

<18 19-34 35-64 65+

nmf

April 2006

The Next American Dream: HealthyThe Next American Dream: HealthyNo fast food; but eat out moreNo fast food; but eat out more

Source: Bureau of Labor Statistics,Consumer Expenditure Survey; Yankelovich Partners Inc.

“I Eat Fast Food A Few Times a Week”“I Eat Fast Food A

Few Times a Week”

0%

10%

20%

30%

40%

16-24 25-38 39-57 58+

0.0%

2.0%

4.0%

6.0%

8.0%

Age 40 Age 50 Age 60

Today's 60 yr olds

Boomers

Spending on Food Away from Home

Spending on Food Away from Home

April 2006

The Next American Dream: HealthyThe Next American Dream: HealthyMore fish; Less breadMore fish; Less bread

0.0%

0.1%

0.2%

0.3%

0.4%


Today's 60 yr olds

Boomers

Spending on Fishand Seafood

Spending on Fishand Seafood

0.0%

0.1%

0.2%

0.3%


Today's 60 yr olds

Boomers

Spending on BreadSpending on Bread

Source: Bureau of Labor Statistics, Consumer Expenditure Survey April 2006 Source: Yankelovich Partners, Inc and BLS –Consumer Expenditure Survey, 2004

The Next American Dream: HealthyThe Next American Dream: HealthyStressedStressed

“I care about reducing my stress levels.”

“I care about reducing my stress levels.”

56%55%

56%

61%

40%

50%

60%

70%

2002 2003 2004 2005

Spending on Alcoholic Beverages

Spending on Alcoholic Beverages

0.00%

0.50%

1.00%

1.50%


Today's 60 Yr Old Boomer



April 2006 Source: Yankelovich partners, inc.

Indulgence, despite small steps to improve healthIndulgence, despite small steps to improve healthThe Next American Dream: HealthyThe Next American Dream: Healthy

Health-Related BehaviorsHealth-Related Behaviors

0%

10%

20%

30%

40%

50%

Sweets to aminimum

Drinking water High fiber food

2002 2003 2004 2005

NA NA

Stress-Related BehaviorsStress-Related Behaviors

0%

10%

20%

30%

40%

50%

Eat SomethingDecadent

Alcohol in Moderation Smoke

2002 2003 2004 2005

April 2006 Source: Yankelovich partners, Inc.

Boomers are exercising lessBoomers are exercising lessThe Next American Dream: HealthyThe Next American Dream: Healthy

Express Yourself by Engaging in Sports

Express Yourself by Engaging in Sports Types of Exercise Types of Exercise

0%

10%

20%

30%

40%

Equipment Weightlift Cycle Run Outdoors

2003 2004 2005

19%20%

18%17%

0%

10%

20%

30%

2002 2003 2004 2005

April 2006 Source: AC Nielsen, Pepsi Co., Citigroup Investment Research

Boomers don’t dietBoomers don’t dietThe Next American Dream: HealthyThe Next American Dream: Healthy

Atkins Nutritional Retail SalesAtkins Nutritional Retail Sales

-100%

0%

100%

200%

300%

Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05

PepsiCo’s Frito-LaySnack ClassificationPepsiCo’s Frito-LaySnack Classification

Quaker Rice Cakes

Baked Lays, Baked Doritos, Cereal Bars

Cheetos, Lays, Ruffles, Doritos

Nutritional> 5g of fat> 10g of fat

Good for youBetter for youFun For You

April 2006

Health Expenditures by Public, Private and Out-of-Pocket PayorsHealth Expenditures by Public, Private and Out-of-Pocket Payors


0%

20%

40%

60%

80%

100%

1965 1975 1988 1995 2001 2002 2004E 2006E 2008E

Private Out-of-Pocket Private Insurance Private Other Public Total

HSA’s change landscape; More out-of-pocket costHSA’s change landscape; More out-of-pocket costThe Next American Dream: HealthyThe Next American Dream: Healthy

April 2006 Source: Mercer Human Resource Consulting, Rand Health and Journal of the American medical Association

HSA Adoption LevelHSA Adoption Level

-8%

-10%

-17%

-22%

-23%

-27%

-31%

-40% -30% -20% -10% 0 %

Depression

Hypertension

Gastric acid disorder

Asthma

Diabetes

Arthritis

Allergic rhinitis

Average Prescription Drug Use after Doubling of Co-Payments

Average Prescription Drug Use after Doubling of Co-Payments

HSAs grow; pharma losesHSAs grow; pharma losesThe Next American Dream: HealthyThe Next American Dream: Healthy

0%

10%

20%

30%

40%

2005 2006E 2007E

April 2006


WealthyWealthy



April 2006

The Next American Dream: WealthyThe Next American Dream: WealthyBoomers are at their peak income levels Boomers are at their peak income levels

Household Income LevelHousehold Income Level

Source: Bureau of Labor Statistics, Consumer Expenditure Survey

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

under 25 25-34 35-44 45-54 55-64 65-74 75+

April 2006

The Next American Dream: WealthyThe Next American Dream: WealthyBoomers save more; Equity inflows returnedBoomers save more; Equity inflows returned

Savings Rate Savings Rate

0%

5%

10%

15%

20%

25%


Today's 60 yr olds

Boomers

NMF

Source: Bureau of Labor Statistics, Consumer Expenditure Survey;Stockval

Net New Flow: Stock Mutual Funds

Net New Flow: Stock Mutual Funds

-$60

-$40

-$20

$0

$20

$40

$60

2000 2001 2002 2003 2004 2005 2006

billi

ons

April 2006 Source: Yankelovich partners, Inc.

Investment AdviceInvestment AdviceThe Next American Dream: WealthyThe Next American Dream: Wealthy

Amount of Influence on Boomers Decisions in money Matters or Investing

Amount of Influence on Boomers Decisions in money Matters or Investing

10%

7%

6%

5% 5% 5 % 5%

4% 4 %

0%

2%

4%

6%

8%

10%

12%

Inv. Counselor Employer Friend/Relative Accountant Minister /Church

Rep at Inv. Firm Stockbroker Banker Inv. Rep atBank

April 2006


ActiveActive

April 2006

Spending on Leisure Spending on Leisure


Boomers are lazily active and spend on their homesBoomers are lazily active and spend on their homesThe Next American Dream: ActiveThe Next American Dream: Active

1.6%1.8%

2.5%

1.6%

1.9%

0%

1%

2%

3%


Today's 60 yr olds

Boomers

Spending on HousingSpending on Housing

31.1%

29.5%

30.3%

32.6%

30.6%

28%

29%

30%

31%

32%

33%


Today's 60 yr olds

Boomers

April 2006

10%

16%

21%20%

14%

19%

21 to 29 30 to 39 40 to 49 50 to 59 60 to 64 65 or older

Las Vegas Visitor Demographics

Las Vegas Visitor Demographics

Source: Abercrombie & Kent; Las Vegas Convention and Visitors Authority

Active CruisersActive Cruisers

Boomers like “safe excitement”Boomers like “safe excitement”The Next American Dream: ActiveThe Next American Dream: Active



April 2006

Planned Spending on Home Improvement

Planned Spending on Home Improvement

Source: Yankelovich Partners Inc

More on home improvement; DIFM yes / DIY noMore on home improvement; DIFM yes / DIY noThe Next American Dream: ActiveThe Next American Dream: Active

Ways in which you Express Yourself: Making

Home Improvement

Ways in which you Express Yourself: Making

Home Improvement

24%

37%

44%

36%

0%

20%

40%

60%

<26 27-40 41-59 60+

$1,073

$2,493

$3,663

$1,904

$0

$1,000

$2,000

$3,000

$4,000

16-24 25-38 39-57 58+

April 2006 Source: Del Webb Baby Boomer Survey 2004

Del Webb Baby Boomer SurveyDel Webb Baby Boomer Survey

0%

20%

40%

60%

Less maintenance Smaller house

Main reason for moving

0%

20%

40%

60%

Beautiful living area Big kitchen

Features desired in a new home

Boomers move & improveBoomers move & improveThe Next American Dream: ActiveThe Next American Dream: Active

April 2006 Source: Del Webb Baby Boomer Survey 2004

“Jewel Boxes”“Jewel Boxes”The Next American Dream: ActiveThe Next American Dream: Active

“Desired Number of Square Feet in Your New Home?”

“Desired Number of Square Feet in Your New Home?”

22%

5%

45%

28%

0 % 10% 20% 30% 40% 50% 60% 70%

Not Sure

<1000

1000-1999

>2000

“I prefer spending my leisure time around the house rather

than out and about.”

“I prefer spending my leisure time around the house rather

than out and about.”

63%67%

0%

20%

40%

60%

80%

<26 27-40 41-59 60+

2004 2005

April 2006 Source Yankelovich Partners, Inc.

CommunityCommunityThe Next American Dream: ActiveThe Next American Dream: Active

19%

24%

35% 36%

0%

10%

20%

30%

40%

2002 2003 2004 2005

Important Characteristic: A Good Neighbor

Important Characteristic: A Good Neighbor

Signs of Success and Accomplishment

Signs of Success and Accomplishment

6%8%

12%

24%

0%

10%

20%

30%

40%

DesignerClothes

ExpensiveJewelry

Expensive Car CommunityLeader

April 2006 Source:Citigroup Investment Research

CommunityCommunityThe Next American Dream: ActiveThe Next American Dream: Active

Re-UrbanizationRe-Urbanization

Projects include “Hudson Tea”(conversion to condos of former tea factory) and “Maxwell Place ” (condo building on former Maxwell House Coffee plan)

Hoboken, New JerseyToll Brothers

“Mariani Square” community on site of former Del Monte fruit processing plant

San Jose, CaliforniaPulte Corp

Waterfront homes on former naval base

Hunters point, San Francisco

LennarCorp

CommentLocationCompany

April 2006

The Next American Dream: ActiveThe Next American Dream: ActiveBigger cars; No tinkeringBigger cars; No tinkering

Spending on Vehicle Purchases

Spending on Vehicle Purchases

0%

2%

4%

6%

8%

10%


Today's 60 yr olds

Boomers

Enjoys Working onTheir Car

Enjoys Working onTheir Car

0%

4%

8%

12%

16%

16-24 25-38 39-57 58+

Source: Bureau of Labor Statistics, Consumer Expenditure Survey;Yankelovich Partners Inc



April 2006

Spending on Apparel Spending on Apparel


Much less spending on apparel and jewelryMuch less spending on apparel and jewelryThe Next American Dream: ActiveThe Next American Dream: Active

6.7%

6.0%

3.9%

5.9%

4.2%

0%

2%

4%

6%

8%


Today's 60 yr olds Boomers

Spending on JewelrySpending on Jewelry

0.45%0.41%

0.39%

0.52%

0.24%

0.0%

0.2%

0.4%

0.6%


Today's 60 yr oldsBoomers

April 2006 Source: American Express Platinum Luxury Survey, July 2004 and Motorcycle Industry Council

A quick escape ride / Experience A quick escape ride / Experience The Next American Dream: ActiveThe Next American Dream: Active

21% 20%

59%

0%

20%

40%

60%

80%

100%

Personal Luxuries Home Luxuries Experiences

Personal SatisfactionPersonal Satisfaction

3x

Age Distribution of Motorcycle OwnersAge Distribution of Motorcycle Owners

25%

10%

28%

0%

10%

20%

30%

35-39 40-49 50+

April 2006

Transforming “things” into “experiences”Transforming “things” into “experiences”


Gourmet CookingPots and PansWilliams-Sonoma

"Jewel Boxes"HousingToll Brothers

Luxury for the MassesMass Market ConsumablesTarget

"My Third Place"CoffeeStarbucks

Unique / Customized LuxuryLuxury Apparel & AccessoriesNeiman Marcus / Saks

“Better Than Home”LodgingFour Seasons Hotels / Starwood Hotels

"Club Membership""Forgiving Fit" ApparelChico's

"Safe Excitement"CruisesCarnival Corp / Royal Caribbean Cruises

“Treasure Hunt”ConsumablesBJ's Wholesale / Costco

ExperienceProductCompany

The Next American DreamThe Next American Dream

April 2006


Ø Large drug companies benefits

Ø Life Insurers benefit

Ø “Equity Culture” is dead

Ø Boomers are “couch potatoes”

Ø Large drug companies benefits

Ø Life Insurers benefit

Ø “Equity Culture” is dead

Ø Boomers are “couch potatoes”

MisconceptionsMisconceptions

Four “obvious” hypotheses about consumer behavior, which proved to be invalid

Four “obvious” hypotheses about consumer behavior, which proved to be invalid

April 2006



Well PositionedWell Positioned

Ø Healthy:Managed health care, generic pharmaceuticals, and biotech companies.

ØWealthy:Advisory-based brokers, asset managers, selected insurance companies.

ØActive: Homebuilders and home improvement, high-end hotels, casinos, and cruise lines.

Ø Healthy:Managed health care, generic pharmaceuticals, and biotech companies.

ØWealthy:Advisory-based brokers, asset managers, selected insurance companies.

ØActive: Homebuilders and home improvement, high-end hotels, casinos, and cruise lines.

April 2006



Poorly PositionedPoorly Positioned

Ø Healthy:Bread, Large-cap Drugs, Fast-food restaurants, Tobacco, Beer, Carbonated drink makers.

ØWealthy:Consumer banks, Traditional mortality protection life insurers.

ØActive: Auto parts retailers, Theme-parks, Jewelry retailers, Department stores, Bookstores.

Ø Healthy:Bread, Large-cap Drugs, Fast-food restaurants, Tobacco, Beer, Carbonated drink makers.

ØWealthy:Consumer banks, Traditional mortality protection life insurers.

ØActive: Auto parts retailers, Theme-parks, Jewelry retailers, Department stores, Bookstores.



April 2006


April 2006

Investment Policy&

Thematic Investing

Investment Policy&

Thematic Investing

April 2006April 2006

1. Analyst or household member currently has a (long, short or derivative) position in subject company (State which one):

2. Citigroup owns 1% or more of any class of common equity securities of subject company:

YES

3. Analyst or household member is an officer, director or advisory board member of subject company:

4. Analyst received compensation from subject company in past twelve months:

5.Subject company is or was an investment banking client of Citigroup Global Markets Inc.:

6. Subject company is or was a non-investment banking securities related client of Citigroup Global Markets Inc.:

7. Subject company is or was a non-securities client of Citigroup Global Markets Inc.:

8. Citigroup Global Markets Inc. or affiliates received compensation from subject company in the past twelve months:

A director of Citigroup Inc. serves as a director of PepsiCo and Target

Corporation.

CL, DA, K, KMB, OREP.PA, PG, UN, WWY, BJ, COST,

RCL, CHS, FS, SCHW, SBUX, WSM, BWA, CSCO,

EOG, MKTY, UNH, WMT, HSY, ELOS, JNC, BBY, HDI, HET, HAR, and MAR – no

required media disclosures

9. Additional material conflicts as applicable:

NESN, CCL, HOT, SKS, TOL, EBAY, EEFT, MATK,

MDT, PLUG, SNMX, MO, STZ

PEP, TGT

REQUIRED DISCLOSURES (15 in total)

April 2006April 2006

Guide to Fundamental Research Investment Ratings:Citigroup Investment Research's stock recommendations include a risk rating and an investment rating.Risk ratings, which take into account both price volatility and fundamental criteria, are: Low [L], Medium [M], High [H], and Speculative [S].Investment ratings are a function of Citigroup Investment Research's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating.For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are: Buy [1] (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Hold [2] (0% -10% for Low-Risk stocks, 0% -15% for Medium-Risk stocks, 0% -20% for High-Risk stocks, and 0% -35% for Speculative stocks); and Sell [3] (negative total return).For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings are: Buy [1] (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks, 30% or more for High -Risk stocks, and 40% or more for Speculative stocks); Hold [2] (5% -15% for Low-Risk stocks, 10% -20% for Medium -Risk stocks, 15% -30% for High-Risk stocks, and 20% -40% for Speculative stocks); and Sell [3] (5% or less for Low-Risk stocks, 10% or less for Medium -Risk stocks, 15% or less for High-Risk stocks, and 20% or less for Speculative stocks).Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk rating, or a change in target price. At other times, the expected total returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk.

IMPORTANT DISCLOSURESAnalysts' compensation is determined based upon activities and s ervices intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profita bility, which includes revenues from, among other business units, the Private Client Division, Institutional Equities, and Investment Banking.For important disclosures regarding the companies that are the subject of this research report, please contact Citigroup Investment Research Equity Research, 388 Greenwich Street, 29th Floor, New York, NY, 10013, Attention: Production Administration. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments, are contained on the Firm's disclosure website at www.citigroupgeo.com. Private Client Division clients should refer to www.smithbarney.com/research.

37%48%47%% of companies in each rating category that are investment banking clients

17%41%42%Citigroup Investment Research Global Fundamental Equity ResearchCoverage (2784)

SellHoldBuyData current as of 31 December 2005

Citigroup Investment Research Equity Ratings Distribution

April 2006ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST

© 2005 Citigroup Global Markets Inc. Member of SIPC. Citigroup Investment Research is a division and service mark of Citigroup Gl obal Markets Inc. and its affiliates and is used and registered throughout the world. Citigroup and the Umbrella Device are trademarks and service marks of Citicorp or its affiliates and are used and registered throughout the world. Nikkois a registered trademark of Nikko Cordial Corporation. All rights reserved. Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. The Firm accepts no liability whatsoever for the actions of third parties. The Firm makes no representations or warranties whatsoe ver as to the data and information provided in any third party referenced website and shall have no liability or responsibility arising out of, or in connection with, any such referenced website.

This report is made available in Australia to wholesale clients through Citigroup Global Markets Australia Pty Ltd. (ABN 64 003 114 832 and AFSL No. 240992) and to retail clients through Citigroup Wealth Advisors Pty Ltd. (ABN 19 009 145 555 and AFSL No. 240813), Participants of the ASX Group and regulated by the Australian Securities & In vestments Commission. If this publication is being made availab le in certain provinces of Canada by Citigroup Global Markets (Canada) Inc. ("CGM Canada"), CGM Canada has approved this publication. This report may not be distributed to private clients in Germany. This report is distributed in Germany by Citigroup Global Markets Deutschland AG & Co. KGaA, which is regulated by Bundesanstaltfuer Finanzdienstleistungsaufsicht(BaFin ). If this report is made available in Hong Kong by, or on behalf of, Citigroup Global Markets Asia Ltd., it is attri butable to Citigroup Global Markets Asia Ltd., Citibank Tower, Citibank Plaza, 3 Garden Road, Hong Kong. Citigroup Global Marke ts Asia Ltd. is regulated by Hong Kong Securities and Futures Commission. If this report is made available in Hong Kong by The Citigroup Private Bank to its clients, it is attributable to Citibank N.A., Citibank Tower, Citibank Plaza, 3 Garden Road, Hong Kong. The Citigroup Private Bank and Citibank N.A. is regulated by the Hong Kong Monetary Authority. This publication is made available in India by Citigroup Global Markets India Private Limited, which is regulated by Securities and Exchange B oard of India. If this report was prepared by Citigroup Investment Research and distributed in Japan by Nikko Citigroup Ltd., it is being so distributed under license. NikkoCitigroup Limited is regulated by Financial Services Agency, Securities and Exchange Surveillance Commission, Japan Securities Dealers Association, Tokyo Stock Exchange and Osaka Securities Exchange. This publication is made available in Korea by Citigroup Global Markets Korea Securities Ltd., which is regulated by Financial Supervisory Commission and the Financial Supervisory Service. This publication is made available in Malaysia by Citigroup Global Markets Malaysia SdnBhd , which is regulated by Malaysia Securities Commission. This pu blication is made available in Mexico by Acciones y Valores Banamex , S.A. De C. V., Casa de Bolsa , which is regulated by Comision NacionalBancaria y de Valores . In New Zealand this report is made available through Citigrou p Global Markets New Zealand Ltd., a Participant of the New Zealand Exchange Limited and regulated by the New Zealand Securities Commission. This pu blication is made available in Poland by Dom MaklerskiBanku HandlowegoSA an indirect subsidiary of Citigroup Inc., which is regulated by KomisjaPapierówWartosciowychi Gield . This publication is made available in the Russian Federation through ZAO Citibank, which is licensed to carry out banking activities in the Russian Federation in accordance with the general banking license issued by the Central Bank of the Russian Federation and brokerage activities in accordance with the license issued by the Federal Service for Financial Markets. Neither this report nor any information contained in this report shall be considered as advertising the securities mentioned in this report within the territory of the Russian Federation or outside the Russian Federation. This report does not constitute an appraisal within the meaning of the Federal Law of the Russian Federation of 29 July 1998 No. 135-FZ (as amended) On Appraisal Activities in the Russian Federation. This publicatio n is made available in Singapore through Citigroup Global Markets Singapore Pte . Ltd., a Capital Markets Services Licence holder, and regulated by Monetary Authority of Singapore. Citigroup Global Markets (Pty)Ltd. is incorporated in the Republic of South Africa (company registration number 2000/025866/07) and its registered office is at 145 West Street, Johannesburg 2196. Citigroup Global Markets (Pty) Ltd. is regula ted by JSE Securities Exchange South Africa, South African Reserve Bank and the Financial Services Board. The investments and services contained herein are not available to private customers in SouthAfrica. This publication is made available in Taiwan through Citigroup Securities Investment Consulting Inc. which is regulate d by Securities & Future Bureau. This publication is made available in United Kin gdom by Citigroup Global Markets Limited, which is regulated by Financial Services Authority. This material may relate to inves tments or services of a person outside of the UK or to other matters which are not reg ulated by the FSA and further details as to where this may be th e case are available upon request in respect of this material. FSA rules require that a firm must establish, implement and make available a policy for managing conflicts of interest arising as a result of publicati on or distribution of investment research. The policy applicableto Citigroup's equity research products can be found at www.citigroupgeo.com. This publication is made available in United States by Citigroup Global Markets Inc, which is regulated by NASD, NYSE and the US Securities and Exchange Commission. Unless specified to the contrary, within EU Member States, this publication is made available by Citigroup Global Markets Limited, which is regulated by Financial Services Authority. Compensation of equity research analysts is determined by equity research management and Citigroup's senior management and is not linked to specific transactions or recommendations. This repo rt may have been distributed simultaneously, in multiple formats, to the Firm's worldwide institutional and retail customers. This documentis not to be construed as providing investment services in any jurisdiction where the provision of such services would be illegal. Subject to the nature and contents of this document, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Certaininvestments contained herein may have tax implications for private customers whereby levels and basis of taxation may be subject to change. If in doubt, investors should seek advice from a tax adviser. This advice has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regar d to their objectives, financial situation and needs.

Investing in non -U.S. securities, including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of the U.S. Securities and Exchange Commission. There may be limited information available on foreign securities. Foreign companies are generally not subje ct to uniform audit and reporting standards, practices and requi rements comparable to those in the U.S. Securities of some foreign compa nies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend payment for U.S. investors. Net dividends to ADR investors are estimated, using withholding tax rates conventions, deemed accurate, but investors are urged to consult their tax advisor for exact dividend computations. Investors who have received this report from the Firm may be prohibited in certain states or other jurisdictions from purchasing securities mentioned in this report from the Firm. Please ask your Financial Consultant for additional details. Citigroup Global Markets Inc. takes responsibility for this report in the United States. Any orders by non -US investors resulting from the information contained in this re port may be placed only through Citigroup Global Markets Inc.

Securities recommended, offered, or sold by the Firm: (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or other obligations of any insured depository ins titution (including Citibank); and (iii) are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources that the Firm believes to be reliable, we do not guarantee its accuracy and it may be incomplete and condensed. Note, however, that the Firm has taken all reasonable steps to determine the accuracy and completeness of thedisclosures made in the Important Disclosures section of this report. In pro ducing its research reports, members of the Firm’s research department may have received assistance from the subject company(ies) referred to in this report. Any such assistance may have included access to sites owned, leased or otherwise operated or controlled by the issuers and meetings with management, employees or other parties associated with the subject company(ies). Firm policy prohibits research analysts from sending draft research to subject companies. However, it should be presumed tha t the author of this report has had discussions with the subjectcompany to ensure factual accuracy prior to publication. All opinions, projections and estimates constitute the judgment of theauthor as of the date of the report and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. It should be assumed that any prices quoted in this report are as of close of business the day before, unle ss otherwise indicated. Although Citigroup Investment Research does not set a predetermined frequency for publication, if this is a fundamental researchreport, it is the intention of Citigroup Investment Research to provide research coverage of this/these issuer(s), including in response to news affecting this issuer, subject to applicable quiet periods and c apacity constraints. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security.Any decision to purchase securities mentioned in this research must take into account existing public information on such security or any registered prospectus.

For securities recommended in this report in which the Firm is not a market maker, the Firm usually provides bids and offers and may act as principal in connection with such transactions. The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. The Firm regularly trades in the securities of the subject company(ies ) discussed in this report. The Firm may engage in securities transactions in a manner inconsistent with this research report and, with respect to securities coveredby this report, will buy or sell from customers on a principal basis.

OTHER DISCLOSURES

April 2006 April 2006

Investment Policy&

Thematic Investing

Investment Policy&

Thematic InvestingEdward M. Kerschner, CFA




investment philosophies funds, institutional funds and not...

Documents