Letter number 136 of February 2021
- QUESTIONS & COMMENTS
News : Will Danone's innovation to integrate the cost of its carbon footprint into its accounts be sustainable?
It seemed to us that Danone's publication in February 2020 of net earnings per share (EPS) less the cost of its carbon footprint (which reduces it by 36% compared to standard EPS), was a breakthrough innovation, reconciling financial and extra-financial analysis, which until now had always been at loggerheads.
So, on the occasion of the publication of the last edition of the French Vernimmen, we organised a round table discussion between Nadia Ben Salem-Nicolas, head of investor relations and financial communication for Danone, on the issuer side, and Pierre Tegner, a financial analyst who follows Danone for ODDO-BHF. Below is the transcript of the discussion.
The Vernimmen: What was the reaction of your investor clients to the publication of this aggregate? Did it go completely unnoticed because it was published in February 2020, when the financial markets had other concerns? Have you had any reactions to it?
Pierre Tegner: Relationships between the financial and non-financial worlds are rather limited for the simple reason that mainstream financial analysts are not frequently consulted by SRI or ESG investors. In most cases, analysts specialising in SRI are consulted by SRI investors.
In this case, as Danone is a company that has been doing SRI for at least 20 years or more, investors are automatically aware of these issues.
I had relatively few comments since, at the same time as this indicator was presented, a long-term plan was presented to reduce Danone's carbon footprint, to tackle the issue of plastics and the supply chain. Although this was not new, it generated a lot of interest, both from SRI investors and also from mainstream investors.
As this was a first, I'd say that investors' critical sense was not very sharp at the beginning, even though one of them mentioned that to make €1 in profit, globally Danone generates a 36-cent carbon footprint, which is still quite high, since the carbon footprint of the food-processing industry as a general rule is 20%. That's the only comment I heard.
I think it's an indicator that should be long-term so that, little by little, investors can develop a critical sense and help Danone refine the presentation of this EPS.
The Vernimmen: What led Danone to present this indicator? Where did the idea come from? We know that Danone is very committed to these issues, but how did it mature within the company?
Nadia Ben Salem-Nicolas: I'm going to put things into perspective first, to understand the terms of the debate and the origin of this reflection at Danone. Maybe I'm stating the obvious but it's important to be clear. As a food company, Danone's activity is intrinsically linked to agriculture. Agriculture accounts for 60% of Danone's carbon footprint. And when I say Danone's carbon footprint, we measure it across our entire value chain, i.e. both direct emissions from equipment owned by the company (drying towers, vehicles and ovens), but also indirect emissions all the way to the activities of our suppliers, including farmers and milk producers.
After the energy sector, agriculture is the world's second largest carbon emitter. I think it's about 15-16% of global greenhouse gas emissions, so that's a lot.
The good news is that agriculture can also be part of the solution and help address a number of challenges, including global warming, and I come to this idea which is (I'm always surprised when I talk to investors about it) relatively unknown. In fact, the public understands that cows emit methane, but relatively few people know that healthy soils have the ability to capture carbon in the soil. This is an idea that is a scientific reality, even if it is not widely known. Today there are various regenerative farming practices that can transform soil, which emits greenhouse gases, into a carbon-retaining agent, since carbon accounts for about 60% of the organic matter in a soil.
So, for a company like Danone, carbon is not just a moral issue or an issue of generational aid; it's an eminently economic issue. It's a question of the resilience of our model. It's a question of farm productivity. It's a challenge for the future of agriculture. And it's a criterion of preference for consumers at a time when they are increasingly demanding transparency and seeking natural ingredients.
So, to come to your question. What led us to make this decision, a sort of marriage of the financial and the non-financial? I'd say that there was a dual impetus for this marriage.
The first impetus was, it has to be said, investor-driven as we felt that investors were more ready to take on board the fact that economic interests were, or are, increasingly closely linked to environmental and social issues, given the advent of new financial risks. And so, we had the Paris Accord, coalitions that were formed, Climate Action 100+, the letter from the BlackRock CEO that refers to reshaping finance under the impetus of climate issues. So that's the first issue.
And on the other hand, the approach of a company like Danone, which is committed to nine long-term objectives that merge economic, social and environmental goals in line with sustainable development goals, a company that is a forerunner in the fight against global warming. It is over 10 years since Danone has had quantified targets for reducing carbon emissions throughout its value chain, it is over 10 years since Danone introduced environmental targets in the remuneration packages of its executives, and it is over 10 years since the company has received strong external recognition for its emission reduction projects, as it is one of only eight companies out of more than 8,000 that applied, to be given an AAA rating by the CDP rating agency. Danone has such solid expertise in emissions measurement that we were able to determine, and that was also a driving force in 2019, that we had reached our peak in CO² emissions, which meant that from now on, from the end of 2019, Danone's growth would be achieved with a reduction of its emissions in absolute terms. Business growth, sales growth, which go hand in hand with a reduction in carbon emissions. That's a major factor.
So we thought: what do we do with this information? And in the face of the climate emergency, how can we put innovation into financial communication, make our indicators evolve in order to demonstrate the creation of financial and environmental value? Because in the markets, if you can't measure it, it doesn't exist.
So, we did some deep thinking on the issue and we asked ourselves the question: what was the right indicator? We came to this definition of carbon EPS fairly quickly because in our industry, valuation is frequently based on P/E ratio. So, we decided to communicate for the first time on the evolution of current EPS adjusted for the cost of carbon that takes into account an estimate of the financial impact of greenhouse gas emissions on our entire value chain.
It has been shown that in 2019, this evolution was more than 12%, higher than the current EPS which was only 8%, thanks to carbon efficiency gains that were generated in 2019 and amounted to 9%. More importantly, as carbon emissions peaked in 2019, these greenhouse gases were expected to decrease in absolute terms in the future, and this carbon-adjusted current EPS was expected to increase faster than current EPS automatically.
What led us to do this? It's really about wanting to take the plunge in order to translate the notion of impact into tangible value and take into account the positive/negative impacts of carbon in financial reporting. For us, it was about helping investors in their investment choices, demonstrating the true value creation of companies and encouraging other companies to accelerate their transformation.
My answer is a bit long, but that's the process that led us to take this decision last February.
The Vernimmen: Have you had any reactions from analysts, investors or at least ESG agencies?
Nadia Ben Salem-Nicolas: The short answer is that those who are interested are even more interested; and those who are not interested are not necessarily more interested. And sometimes those who are interested and those who are not can be part of the same institution.
Many have welcomed efforts to be a forerunner, to integrate the extra-financial into the financial. At a time when there are no extra-financial reporting standards, I think that any initiative that allows analysts and investors to better understand and compare the value creation of companies is, in general, rather supported and encouraged. Still, I've had some pretty interesting discussions, questions that I've never been asked before, and not at all by ESG gurus, to get more detail on carbon emissions by activity, by geography, which hasn't happened very much so far.
The fact that we were transparent, rigorous on the methodology, the choice of the price per tonne of carbon, the rationality, the reflection, the details of the calculation were appreciated. I'm thinking of a final reaction that also backs up our decision: it's the support of other companies, since there are other companies, like Atos, that have announced that they will take similar measures. So, I think that's what's important. There was no overnight re-rating, it was not what was planned. What was important for us was that the reflection began to be structured, that we began to ask ourselves how to value positive or negative externalities. How to take them into account in a model? Should they be taken into account? Is the value of a company only a discounted sum of cash flows with a terminal value? How do we integrate this extra-financial into the financial? How is the impact measured?
I think we weren't expecting a reaction in terms of valuation within a week. What we wanted, and what we have started to see, is a discussion on these topics and then, gradually, there will be adjustments in the construction of models. What's important is that things are moving, and that there are debates like this one.
The Vernimmen: Pierre, are you aware of similar initiatives by other groups?
Pierre Tegner: Similar initiatives to work out carbon per share and deduct it from EPS, no. This is unique from what the ESG team at ODDO told me. So that's the big problem, i.e. to get people interested, Danone has to give a little more information. Typically, when there is an acquisition, we, the financial analysts, in a very traditional way, we work out ROIC/WACC to see when the operation creates value. Behind this, has Danone's M&A department announced criteria to find out how to assess the acquisition in relation to the environmental issue? The more details they give, the more interest it's going to generate.
But because it's quite unique, if they get too sophisticated too quickly, they risk losing investors. So, it's a fair balance, to provide details for those who have an interest in it and allow other companies to worry about it.
When I hear Nadia speak and when I hear Emmanuel Faber (CEO of Danone) speak, there's an example that comes to mind, but it's still a long way off what Danone has done. It is that of Unilever, when Paul Polman arrived as CEO in 2008, he started to communicate a lot about SRI. In 2010, he launched the Unilever Sustainable Living Plan with the aim of doubling in size while maintaining a stable carbon footprint, environmental footprint. We were getting closer to this idea, but it was not quantified. And today, all we can hope for is that, indeed, there are other companies following Danone, to compete and challenge Danone in the development of this criterion, because competition is a source of innovation. Everybody knows that. And the more competitors there are, the better. For the moment, Danone is all alone, yes.
The Vernimmen: Do you think you can continue to be the only one to publish this aggregate, or the growth rate of this aggregate, if you are not compared to others?
Nadia Ben Salem-Nicolas: I have investors who are asking me more and more questions about our carbon emissions, what's behind it, how we measure them, what carbon accounting tools are available. And who are also looking at the reports of our competitors and starting to do their own benchmarking work and getting to the carbon-adjusted EPS of other companies as well. So, even if others don't publish it, there are investors who are interested, and I think that's the point. It's mostly to ask questions, to look, to start comparing. I don't think we're going to have carbon-adjusted EPS approval-stamped by the auditors tomorrow, as is the case for EBITDA.
But we're going to continue to do so, in order to continue to enhance Danone's financial and extra-financial value creation. We're going to continue to welcome similar initiatives, whether it's carbon EPS or something else. We're going to continue to educate and share on this choice of indicator. We are also in favour of standardisation and harmonisation of extra-financial reporting. I think that the European political and economic authorities are in the process of seizing it so as not to leave this area of sovereignty to others. It is really essential to allow investors, as well as all stakeholders, to compare the actions of companies in terms of sustainable development in order to be able to measure the impacts of each of them. This is why we joined a working group under the aegis of the UN, which we did six months ago, called the CFO TaskForce for the SDGs. It is a working group that brings together international financial directors and those responsible for the investment choices of funds to work collectively towards a collective approach to sustainable finance in line with the UN's sustainable development objectives.
What will this working group come up with? Will it be carbon-adjusted EPS that will be retained? I don't know. But it is a group that is working towards standardisation and harmonisation of this extra-financial reporting tool.
The Vernimmen: What are the next steps? Should all externalities ideally be taken into account, and should we also reprocess, for example, those of plastics in EPS?
Nadia Ben Salem-Nicolas: The next steps are to continue to publish, to educate, to continue to communicate with our investors on this aggregate, and then to continue to work together, because it's interesting that Danone is carrying it but, as I said in the introduction, it's even more interesting if there are several going in this direction, if we don't hold back on the choice of this indicator. What's interesting is that the extra-financial aspect is measured and captured, and is valued in the financial aspect.
Then afterwards, I get your question on plastics. I want to insist you can't do one without the other. When we work on the climate, we also work on agriculture, we work on water and we work on plastics. Because our goal is to be carbon neutral by 2050 along our entire value chain. And this ambition will only be achieved through concrete actions, on material environmental issues for Danone's economic model, and that's regenerative agriculture. I repeat, agriculture accounts for 60% of our emissions, it is the preservation and restoration of water resources. And it is also, because it accounts for about 10% of our emissions, packaging and a circular economy of our packaging in order to reduce their impact on the environment.
The Vernimmen: You have chosen to communicate on the evolution of Carbon EPS and not on the mass of Carbon EPS as such. What are the reasons for this?
Nadia Ben Salem-Nicolas: We didn't want to confuse investors to say that our EPS and valuation had to be adjusted accordingly, but rather to show in a dynamic way the virtue of our model and the fact that we reached, I repeat, our carbon emissions peak as early as 2019.
What we are communicating about and what is interesting in the discussion with investors is really the benefits to the shareholder of decarbonising our business. It is to show that a company that has reached its emissions peak, because it is working on regenerative agriculture projects in particular, will be in a better position to improve its EPS, in any case faster than a company that continues to increase its emissions.
What is important is the evolution of the aggregate and not so much the aggregate itself.
The Vernimmen: The price per tonne of carbon of €35 that you assumed is not far from the market price of carbon credits in the European system. Do you intend to change this price, or to keep it constant in order to be able to compare your carbon-adjusted EPS? Necessarily, if this price changes, it creates an additional complexity in the assessment of the criterion.
Nadia Ben Salem-Nicolas: I don't have a definitive and closed answer on this point today. Why did we use €35/t? Obviously, this was the subject of internal discussions and debates. In fact, in 2015, we determined a cost for carbon emissions of €35/t, which is in line with what is included in our risk analysis in the CDP Climat questionnaire and which is based on 3 benchmark elements via a bundle of indices to make this assumption solid: it is the cost of a tonne of carbon on the voluntary market, the cost of a tonne of carbon on the regulated ETS market and it is a benchmark for companies that communicate on a carbon cost.
So, the idea is that this assumption should remain rather stable over time in order to be able to compare this indicator. Afterwards, of course, this assumption should not be uncorrelated from market assumptions either. So, at the moment, the plan is to maintain, at least for next year, this assumption of €35/t.
The Vernimmen: Do you take into account a tax effect on this carbon cost to calculate EPS?
Nadia Ben Salem-Nicolas: No, it's a gross cost, not after tax, because the idea was also to have an aggregate that was accessible to everyone, not to have fun with a complex aggregate. Already, we have to go into a bit of detail about the issues, the number of shares, the cost assumption. A tax layer has not been added in the definition of the indicator's aggregate.
The Vernimmen: Which scopes were used for carbon use estimates? Scopes 1 and 2, we believe. Does that go as far as scope 3, i.e. Danone's entire value chain?
Nadia Ben Salem-Nicolas: Yes, it is a scope of responsibility 1, 2 and 3. That's how we've been measuring it for more than 10 years. That's how we set targets, that's how it's accounted for, including scope 3, which is all the indirect emissions due to the activities of a given organisation: emissions from suppliers and consumers. This includes agriculture, transport, product distribution. This is not the easiest area to measure, but it is where a company's greatest opportunities to reduce emissions lie.
In the case of Danone, scope 3 emissions account for 95% of our total emissions. Our direct responsibility and the emissions related to electricity purchases, therefore scope 1 and scope 2, account for 5% of our total emissions.
So, we understand very quickly that where we have a lever, room for manoeuvre, is on scope 3. Of this 95%, agriculture accounts 60%. It's not only the cows that emit less carbon, and by working on how they are raised, on whether they graze in fields, what they are fed, we can influence the amount of emissions. But in addition, as I said in my introduction, it is very important to work on retention, on soil quality, because healthy soils can capture carbon.
The Vernimmen: Pierre, what is your assessment of the capacity of accounting standards to take externalities into account? We saw it with stock options, following the bursting of the TMT bubble, which are not a cash cost and which IFRS had taken into account. In your opinion, can accounting regulators, other than SRI agencies, actually come up with earnings after externalities?
Pierre Tegner: I'll answer in a practical way. Regulators, I think, have eno…ugh imagination to find a way to develop a criterion that integrates carbon and in particular to change it, knowing that what accounting regulators mainly seek is sustainability.
In practice, however, we are above all witnessing an inflation of accounting standards that creates permanent changes and does not make it easier to monitor key performance indicators.
Then, there would need to be fairly broad consensus, and behind it, Danone would have to convince the regulators of the need to build sustainable and long-lasting indicators that are in keeping with the times. But, for the moment, we're a long way off. I think the essential thing is that we are able to understand a rather complex subject and that we manage to integrate it, even in a qualitative way.
 In February 2021, Danone has gone on publishing a carbon-adjusted EPS.
Originally published by the Financial Times, this graph shows, since the 2008 financial crisis, divergences in bond issue sizes on both sides of the Atlantic that can be explained in several ways:
- a stronger growth rate of the US economy and a propensity since 2015 of large US groups to be on average more indebted than European groups,
- a very large share of European business financing provided by banks in Europe (80% in the euro zone compared to 35% in the United States),
the much cheaper cost of bank credit in Europe due to a significantly higher intensity of competition, as this month's research article shows.
With the collaboration of Simon Gueguen, lecturer-researcher at CY Cergy Paris University
The comparison between the cost of bank debt and the cost of bond debt poses methodological problems. Direct observation of interest rates, even when taking into account loan maturities, does not make it possible to identify the cheapest type of debt, for at least two reasons.
Firstly, the choice of method is not independent of market conditions. The CFO takes market conditions into account when choosing between bank debt and bond debt, so that consideration of the exact issue date is crucial. Second, even with apparently equivalent characteristics, bank debt and bond debt do not, in practice, have the same degree of seniority. According to a Moody's database, in the event of default, 84% of bank loans are repaid, compared to only 35% of bonds. A recent article proposes a method to overcome these difficulties and to compare the cost of the two types of debt.
To solve the first difficulty, M. Schwert uses a database of bank loans linked to market spread data on bonds of the same issuers on the dates of the loans. Of course, this implies that only companies for which there is an active bond market (mainly large companies) were included in the sample. This allows M. Schwert to compare the margin negotiated with the bank and the actual margin on the bond market on exactly the same date.
The second problem is more difficult to overcome, as there is generally no possibility to issue debt on the market with the same degree of effective seniority as bank debt. When M. Schwert compares bank debt and bond debt, without taking this problem into account, he finds that for companies with significant risk of bankruptcy, the margins are higher on bond debt than on bank debt. However, if bond debt seems more expensive, it is because it offers less security than bank debt in case of default.
To solve this problem, the author uses a structural model to take into account the risk of bankruptcy, as well as the loss rate in the event of bankruptcy, for both types of debt. Once this is taken into account, the results are irrefutable: bank debt is much more expensive than bond debt. According to M. Schwert's estimates, a bank lender receives on average 140 to 170 basis points more than a bond lender with equivalent risk. This means that about half of the margin received by banks is a form of premium compared to a market margin of equivalent date and risk.
These results raise questions about the possible reasons for the higher cost of bank debt. M. Schwert shows that the illiquidity of this debt alone cannot justify such a discrepancy. The fact that only banks provide debt at these seniority levels may explain the use of bank debt by firms. As the margin actually paid is lower than that of the bond debt (when the level of risk is not corrected), a CFO concerned with minimising the amount of interest paid may choose to borrow from the bank. However, in a competitive situation, the remuneration received by lenders should be the same for a given level of risk.
The most convincing explanation is the existence of ancillary benefits received by the company in the banking relationship. On the one hand, obtaining a bank loan is quicker, and the characteristics of the bank loan can be negotiated in detail to match the exact needs of the issuer. On the other hand, the very fact of obtaining this loan enables the company to send a positive signal to all its investors, since the bank has carried out a selection process. There are therefore specific benefits of the relationship between the bank and the company. Bank debt is more expensive than bond debt, but the additional cost is linked to the distribution of these benefits between the bank and the company.
It should thus be noted that the database used by M. Schwert is composed solely of US companies, and therefore active in a market where banking competition is much lower than in Europe. Lucky US commercial bankers! Unlucky US corporates!
 Based on US data between 1997 and 2017.
 M. Schwert (2020), "Does borrowing from banks cost more than borrowing from the market?", Journal of Finance, vol. 75(2), 2020, p. 905 to 947.
 The reason for banks' superiority in the provision of senior debt is an open research question, not addressed in this article.
A company pays an exceptional dividend representing 40% of its equity value financed by new debt (a leverage recapitalisation). What is the impact on its P/E ratio?
Too many people try to do the calculation in their head, which leads nowhere because not all the data are available, such as the cost of debt or the corporate tax rate, or they make the mistake of forgetting the additional financial costs of the debt.
The correct reasoning is much simpler. P/E ratios and risk vary in opposite directions. After this exceptional dividend, the share has of course become riskier because it bears a much higher amount of debt. So the P/E ratio will go down.
Where does risk come into play in the discounted amount of future repayments to determine the value of a debt? If we consider that 33% of the debt will never be repaid, are the actual repayments calculated as 66% of the theoretical repayments?
You have two possibilities:
Either you discount the repayment and interest flows at an interest rate much higher than the nominal interest rate of the loan to take into account the risk of partial repayment of the debt.
Either you estimate that part of the debt will not be repaid and you then eliminate it from the flows, which you discount at a normal rate for a borrower who would normally repay its debt.
Why is it that when a share pays a dividend, its value goes down?
Take the case of a company that is worth 100 because of its results, prospects and assets, 10 of which are cash.
Now this company pays 4 in dividends to its shareholders. In other words, it is depriving itself of an asset of 4 that is leaving its coffers to go into those of its shareholders.
Logically, how much is this company worth now? It's the same as before, except that it has just deprived itself of an asset of 4, so it's worth 100 - 4 = 96.
So that's why a company that pays a dividend sees its value drop. If this were not the case, we would have finally found a way to eradicate poverty from this lowly world. Unfortunately, this is not the case!
When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio?
In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It cannot serve twice.
For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt.
When the 10-year government bond rate is negative, what should I do in the computation of the cost of equity using the CAPM? Should I use another risk-free rate or put this negative value?
It is very important to take a risk-free money rate that is the one used to calculate the risk premium. If the risk premium was calculated using a rate such as the 10-year government bond rate, then take the same 10-year government bond rate as the risk-free money rate. If the risk premium was calculated using a short-term risk-free money rate, such as a treasury bill, then use the same short-term rate in your formula to be consistent, homogeneous and fair. Indeed, in the CAPM equation where: required rate of return = risk-free rate + beta x (market rate of return - risk-free rate), the risk-free rate can only be one, even if the expression (market rate of return - risk-free rate) is replaced by what it means, i.e. the risk premium.
It does not matter whether the risk-free rate is positive or negative.
In order to obtain a more accurate picture of net debt, must all available cash be taken into account, bearing in mind that some of the cash is necessary for operational needs and some is superfluous (excess cash)? Wouldn't the only real cash to be deducted from the gross debt be the one that could be used without disrupting the company's operations?
You are right, even if in the practice of calculating net debt in the D/EBITDA ratio, monitoring compliance with covenants, or valuing the company in an indirect approach, this is never done.
This should only be done by the financier who internally forecasts his/her cash needs and who knows that part of the cash is not available and is "in the pipes". This part is however decreasing with time and progress in terms of means of payment (instant payment).
This is not done by third parties who do not have the means to make these estimates but it doesn’t impact very much their estimate of net debt for their own needs.
It would be different of course if part of the cash was in a country with exchange control style restrictions, but that is another story.
Regularly on the Vernimmen.com Facebook page we publish comments on financial news that we deem to be of interest, publish a question and its answer or quote of financial interest.
Here are some of our recent comments:
Another IPO cancelled
And no small size, €10bn expected on the London Stock Exchange, where the private equity fund EQT was thinking of IPOing Evidensia, a chain of veterinary clinics, but who would blame it?, accepted an offer from Silver Lake and Nestlé that values the company at €12.3bn, allowing EQT to exit in part and reinvest for a new round for the balance.
The frontier between the stock markets and the private equity world has therefore been steadily rising since its fall in 2007.
Aviva illustrates the power of shareholders
After BlackRock, which had raised the possibility, Aviva is raising its voice to 30 mining, oil and gas groups, to whom it has written to ask that they set themselves the objective and the means to achieve zero greenhouse gas emissions, both in their activity and in the use of their products made by their customers. If they fail to do so, Aviva will sell the shares and loans/bonds it holds in those 30 groups that have not (yet) made the commitments that Total or Shell have already made on their side, for example.
As Aviva manages €400bn on behalf of third parties, it is unlikely that this letter will go straight to the bin. Few managers like falling share prices and rising financing costs.
Return and risk
Recently, the Kingdom of Spain issued €5bn worth of 50-year bonds which were swallowed like churros. A few weeks before, Belgium and France had done the same on this maturity, at a rate of 0.5% for France, and the same enthusiastic welcome from investors.
Are they aware that, if in 10 years time, the 40-year rate double to 1%, this bond would only be worth 84% of its par, and 59% if it goes to 2%, its level not so long ago? As for a jump to 5%, it would reduce the value of this bond to 23% of its par value, the logical consequence of having to be satisfied with a 0.5% coupon against a market rate of 5% for another 40 years. This gives a certain bitterness to this sentence attributed to Franz Kafka or Woody Allen, "Eternity is long, especially towards the end".
Indeed, the sensitivity of a bond to market interest rates is never as high as when the bond is long and the nominal rate is low. Exactly the conditions we are talking about.