2015 Packaged Food Preview - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies 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.

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12 January 2015

Americas/United States

Equity Research

Packaged Foods (Food / Agribusiness (US)) / MARKET WEIGHT

2015 Packaged Food Preview SECTOR REVIEW

Cost-Cutting, Consolidation, and Fear Will

Keep Food Stocks Afloat This Year

Our outlook for U.S. food stocks is more constructive than usual. We

expect earnings revisions to stabilize in 2015 and earnings growth in the range

of 6-7%. Management teams have adjusted to weaker demand by cutting

spending, reducing capacity, and setting more realistic expectations. While not

a formula for long-term success, it provides a bigger cushion to margins. In

addition, we expect a fair degree of sector rotation as investors seek safe

havens away from international uncertainties. We forecast stock price

appreciation of 6-8% with multiples staying at elevated levels, assuming that

interest rates move only modestly higher and at a slow and orderly pace.

Not good, but a "less bad" demand environment for 2015. Slow wage

growth and the structural trend toward "real food" have slowed the growth rate

of these companies permanently. However, we expect a bit of a respite in 2015

as SNAP benefits rise and gas prices fall. In addition, easier comparisons to

disruptions from last year's Polar Vortex ought to help growth optically in 1Q.

Ripe environment for more consolidation. Persistently low borrowing rates,

high valuation multiples, and changes in the CEO seat at Kraft, ConAgra, and

B&G Foods increase the probability of further consolidation and portfolio

"pruning." 3G has a new $5 billion fund which conceivably could target

Campbell, Kellogg, or Kraft. Roll-up plays like TreeHouse, Pinnacle, Smucker,

and Hormel tend to benefit in environments like these.

Mead and Hershey stand to benefit the most from ingredient deflation. All

else being equal, we estimate EPS benefits of 11% and 9% respectively. These

companies have significantly greater pricing power than their food peers.

Still negative on Kellogg, but less so. There may be a ray of hope on the

horizon for breakfast cereal companies now that the noise around low-carb diets

has started to fade. Books like Wheat Belly and Grain Brain have slipped off

the New York Times Best Sellers list.

MDLZ and MJN remain our highest conviction calls

■ Lowering Mondelez EPS to account for currency, but still above consensus

■ Raising Hershey target to $108 to maintain valuation premium to food group

■ Lowering Kellogg EPS for currency – in-line with consensus

All material changes are summarized on page 3 of this report.

Research Analysts

Robert Moskow

212 538 3095

[email protected]

Rachel Nabatian

212-325-2131

[email protected]

Clay Crumbliss, CFA

212 538 1076

[email protected]

12 January 2015

2015 Packaged Food Preview 2

Table of contents 2014 Review 3

P/E multiples moved even higher in 2014 4 Sales growth decelerated more than expected 5 Gross margin contracted further 5 Operating margins improved modestly 6 Free cash flow weakened 7 A multitude of earnings misses in 2014 7 Valuation 10

Themes for 2015 12 Shift to the U.S. as a safe-haven likely to continue 12 Gluten-free diet trend may have peaked 13 "Real Food" trend accelerating 14 Cost-cutting will insulate earnings in the near-term 15 Ripe environment for more consolidation 16 Mead Johnson and Hershey stand to benefit from falling commodities 17

Campbell Soup 21 ConAgra 23 General Mills 25 Hershey 28 Hormel 30 Kellogg 32 Kraft Foods 36 Mondelez 37 McCormick 40 Mead Johnson 42 Smucker 45 Our Thesis: More Headwinds Than Tailwinds 48

Lack of emerging markets exposure 48 Stuck in a shrinking middle in the U.S. 49 Marketing effectiveness is declining 51 The result of all these headwinds is market share erosion 52 The Bull Case 53

Appendix 55

12 January 2015


Here we provide a summary of the earnings and target price changes were are

making in conjunction with this report.

Price Price Rating* Target Price Year EPS EPS FY1E EPS FY2E EPS FY3E

Company ccy 08 Jan 14 Prev. Cur. Prev. Cur. End Ccy Prev. Cur. Prev. Cur. Prev. Cur.

Kellogg Company (K) US$ 67.21 — U — 62.00 Dec 13 US$ 3.91 3.90 4.12 4.05 4.39 4.30

Mondelez (MDLZ) US$ 37.59 — O — 42.00 Dec 13 US$ — 1.72 1.96 1.89 2.30 2.19

The Hershey Company (HSY) US$ 107.17 — N 99.00 108.00 Dec 13 US$ — 4.01 — 4.43 — 4.83

*O – Outperform, N – Neutral, U – Underperform, R – Restricted [V] = Stock considered volatile (see Disclosure Appendix).

Source: Company data, Credit Suisse estimates.

12 January 2015


2014 Review Large cap packaged food stocks underperformed the market and their peers in 2014, but

still rose a healthy 8% on average.

Exhibit 1: Large Cap Food Stocks Rose At A Slightly Slower Pace Than Their Staples

Peers CS

Rating 31 Dec 13 31 Dec 14 % Change

Food

ConAgra NEUTRAL $33.70 $36.28 8%

Campbell UNDERPERFORM $43.28 $44.00 2%

General Mills NEUTRAL $49.91 $53.33 7%

Hershey NEUTRAL $97.23 $103.93 7%

Kellogg UNDERPERFORM $61.07 $65.44 7%

Mondelez OUTPERFORM $35.30 $36.32 3%

Kraft NEUTRAL $53.91 $62.66 16%

McCormick NEUTRAL $68.92 $74.30 8%

Mead Johnson OUTPERFORM $83.76 $100.54 20%

Smucker NEUTRAL $103.62 $100.98 (3%)

Average 8%

Household Products

Church & Dwight NEUTRAL $66.28 $78.81 19%

Colgate OUTPERFORM $65.21 $69.19 6%

Clorox UNDERPERFORM $92.76 $104.21 12%

Estee Lauder OUTPERFORM $75.32 $76.20 1%

Kimberly Clark UNDERPERFORM $100.12 $115.54 15%

Proctor & Gamble OUTPERFORM $81.41 $91.09 12%

Average 11%

Beverage

Coca Cola Enterprises NA $44.13 $44.22 0%

Dr Pepper/Snapple NEUTRAL $48.72 $71.68 47%

Pepsico NEUTRAL $82.94 $94.56 14%

Coke OUTPERFORM $41.31 $42.22 2%

Molson OUTPERFORM $56.15 $74.52 33%

Average 9%

Source: Company data, Credit Suisse estimates

P/E multiples moved even higher in 2014

As was the case across the consumer staples sector, the market shrugged off the profit

warnings and bad fundamental news and bid up P/E multiples by half a turn. This was

due to a multiple of factors including the continuation of the low interest rate environment,

the increased flow of funds into equities, and the accelerated pace of M&A in the space.

Barring a radical change in expectations for interest rates, we think valuation multiples will

stay where they are.

12 January 2015


Exhibit 2: Forward P/E Multiples Now Average 17.1x, Up From 16.5x Last Year Forward P/E Multiples

2008 2009 2010 2011 2012 2013 2014 2015

CAG 14.9 11.2 12.9 11.9 14.0 13.6 13.6 15.3

CPB 16.5 13.7 13.3 13.5 13.7 13.4 16.4 17.2

GIS 15.7 14.8 14.9 13.7 14.8 14.4 16.7 17.1

HSY 18.3 18.8 15.4 17.0 19.8 20.1 23.6 22.2 K

117.7 13.9 15.0 14.8 14.3 15.0 15.2 15.9

KRFT NA NA NA NA NA 15.1 17.1 17.4

MDLZ 16.8 13.6 12.5 13.6 14.8 16.1 20.2 19.7

MKC 17.9 14.5 14.4 16.6 16.3 18.8 20.0 20.0

SJM 16.0 13.2 13.9 13.5 14.5 15.6 16.5 16.9

MJN NA NA 18.4 23.4 22.0 19.9 23.0 23.0

Average 16.5 13.6 14.1 14.0 14.6 15.1 16.5 17.1

(ex MDLZ, HSY, MJN)

Average 16.7 14.2 14.5 15.3 16.0 16.2 18.2 18.5

1. Kellogg's P/E multiple rerates 1.0x lower beginning 2014 due to pension accounting change Source: Thomson Reuters estimates as of 12/31/14

Sales growth decelerated more than expected

The biggest negative surprise for the industry in 2014 was weak volume. Consumers

remained very cautious and emerging markets slowed down. Organic sales fell 0.3% on

average in our coverage with volume down 1.2%. We expect a modest degree of

recovery in 2015, especially in the U.S., but we expect growth to remain below historical

averages.

Exhibit 3: Organic sales growth in our coverage fell 0.3%, well below our initial forecast

of 2.1% growth.

1.2%

3.2%

3.8% 3.7%3.3%

4.3%

6.0%

2.3%

1.5%

4.1%

3.5%

1.7%

-0.3%2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E


Gross margin contracted further

Dilution from tack-on acquisitions and the negative impact on operating leverage from

weak volume caused another year of gross margin contraction, well below our expectation

for a 90 bp recovery. In our forecast, we assume a modest recovery in U.S. sales trends

as disposable income improves. But these companies' efforts to improve the quality of

their products (organically and through acquisitions) with more expensive and more

natural ingredients pose a significant threat to long-term gross margin expansion.

12 January 2015


Exhibit 4: Average gross margin in the packaged food sector declined 60 bps in 2014.

37.1%36.9% 36.9%

36.2%

34.8%

36.9%

37.7%

36.3%

35.6% 35.6%

35.0%

35.4%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E


Operating margins improved modestly

In response to weak sales trends and declining gross margin, management teams took

steps to cut their spending on overhead and advertising and tightened their headcounts.

As a result, most of them were able to expand their operating margins modestly (albeit

below our initial expectations). Given the multitude of restructuring programs taking place

today in the space, we expect SG&A cuts to continue to roll through the P&L's in 2015,

thus providing another year of operating margin gains.

Exhibit 5: Operating margins improved modestly in 2014 due to SG&A cuts

16.0%

15.4% 15.3%15.1%

13.9%

15.3% 15.4%15.1%

14.7%14.9%

15.2%

15.7%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E


12 January 2015


Exhibit 6: Operating profit growth essentially stagnated in calendar 2014

Calendarized

2008 2009 2010 2011 2012 2013 2014E

CPB 2% 8% -4% 0% -6% -2% 5%

GIS* 11% 9% 2% 3% 5% 0% -5%

HNZ* -2% 1% 4% 1% 5% NA NA

HSY -14% 14% 14% 8% 13% 12% 7%

K 5% 2% -1% -1% -4% 1% 1%

KRFT 5% 2%

MDLZ* 5% 6% 9% 14% 4% 1% 2%

CAG* 14% 20% -6% -1% 3% -2% -2%

Average 3% 9% 3% 3% 3% 2% 1% Source: Company data, Credit Suisse estimates

Free cash flow weakened

Most food companies generated weaker free cash flow in 2014. Unlike the massive

increases in 2013, they raised their dividends at a slower pace.

Exhibit 7: Dividend Increases Averaged 8% Over The Past Year (vs 10% last year)

Current 2007 +/- 2014 2015

BGS 87% 135% -48% HRL 17.6% 25.0%

KRFT 69% NA NA SJM 11.5% 10.3%

GIS 58% 45% 13% MJN 13.3% 10.3%

HSY 54% 55% -1% HSY 15.5% 9.2%

CPB 50% 41% 9% MKC 8.8% 8.1%

K 50% 43% 7% GIS 15.2% 7.9%

MKC 47% 43% 5% MDLZ 8.0% 7.0%

CAG 46% 51% -5% K 4.5% 6.5%

MJN 41% NA NA BGS 10.3% 6.3%

SJM 46% 40% 6% CPB 7.6% 5.0%

MDLZ 35% NA NA KRFT 5.5% 4.8%

HRL 45% 28% 17% CAG 4.2% 0.0%

AVG 52% 53% 0% AVG 10.2% 8.4%

Other

TSN 14% 20% -6% TSN 50.0% 33.3%

ADM 31% 21% 10% BG 11.1% 13.3%

BG 23% 11% 12% ADM 26.3% 0.0%

Dividend IncreasesDividend Payout Ratio


A multitude of earnings misses in 2014

The combination of these factors caused most of the U.S. food companies to miss

consensus expectations during the course of 2014. Within the food sector, EPS growth

slipped to 5% due to weak sales and stagnant operating margins.

But there was a significant divergence of performance within the group with most of the

U.S.-centric food companies (Kellogg, General Mills, ConAgra, Campbell) barely

generating any EPS growth at all and the companies in advantaged categories or

emerging markets (Mondelez, Mead Johnson, and Hershey) growing at a 8-13% pace.

12 January 2015


Exhibit 8: Calendar EPS Growth Slipped to 5% in 2014

2008A 2009A 2010A 2011A 2012A 2013A 2014E

CAG NA 51% (4%) 9% 16% 4% 1%

CPB 1

7% 13% 1% 3% 3% 2% 5%

GIS 19% 14% 3% 8% 8% 1% (2%)

HSY (10%) 15% 18% 10% 15% 15% 8%

K 2

8% 6% 4% 3% (3%) 5% 1%

KRFT NA NA NA NA NA 5% 4%

MDLZ 1% 7% (1%) 13% 7% 10% 13%

MKC 11% 9% 13% 5% 9% 3% 7%

SJM 9% 26% 10% (3%) 12% 10% (1%)

MJN 17% 9% 15% 10% 9% 10%

Average 6% 18% 6% 7% 9% 6% 5%

1. For comparability, CY12 and CY13 growth rates adjusted to consider the sale of European business.

2. CY12 results exclude the accounting restatement for comparability. Source: Company data, Credit Suisse estimates

Campbell, ConAgra, General Mills, Kellogg, Hershey, and Smucker all lowered their EPS

guidance for the year. Only McCormick and Mead Johnson raised their EPS estimates in

a relatively high quality way. Mondelez raised its EPS estimate but lowered its sales

estimate twice.

Exhibit 9: Seven out of the eleven biggest market cap food companies in our coverage lowered EPS guidance this year

Sales algorithm

as of 2013 As of 2015

EPS algorithm as

of 2013 As of 2015 2014

CPB3-4% No Change 5-7% No Change Lowered FY 14 guidance on 11/19/13.

Guided below algorithm for FY 15

CAG3-4% Low Single-Digit Low DD for two

years

High SD after

FY 15

Profit warning on 2/11/14 and 6/17/14

GISLow SD No Change High SD No Change Lowered guidance on 3/14/14 and

11/7/14

KRFTIn line with

categories (2%)

No Change Mid to High SD No Change On-track to achieve EPS consensus

but missed sales expectations

K4-5% Low Single-Digit High SD No Change Lowered guidance on 7/31/14

HRL3-4% No Change 10-12% No Change Moved to low-end of EPS guidance

5/21/14 then returned to mid-point

HSY5-7% No Change 9-11% No Change Profit warning on 7/16/14 then lowered

guidance 10/29/14

MDLZ5-7% Closer to 4-5% Low Teens No Change Lowered revenue guidance 5/7/14 and

8/6/14, but raised c.c. EPS guidance

MKC4-6%* No Change 9-11% No Change Raised EPS guidance 10/2/14

MJN7-8% No Change 10-12% (estimate) No Change Raised EPS guidance 4/24/14 and top-

line guidance twice

SJM6%* NA 8% No Change Lowered EPS guidance 2/14/14 and

profit warning 11/12/14

* includes acquisitions Source: Company data, Credit Suisse estimates

12 January 2015


Unlike in prior years, consensus appears to already anticipate a lower growth environment

for 2015. Perhaps the street has been "scared straight" after so many years of

underperformance? If so, the set-up for positive revisions in 2015 is better-than-normal.

Exhibit 10: Consensus is for Only 7% EPS Growth in 2015 Compared to an Average of

8% Over the Past Four Years

Consensus Expectations For EPS Growth at Beginning of Calendar Year

2008 2009 2010 2011 2012 2013 2014 2015

CAG NA NA 5% 13% 10% 6% 16% 10%

CPB 12% 5% 6% 7% (2%) 3% 8% (1%)

GIS 10% 4% 6% 13% 10% 5% 11% 12%

HSY 3% (2%) 7% 8% 11% 11% 11% 10%

K 7% 6% 13% 5% 5% 6% 6% 1%

KRFT NA NA NA NA NA 4% 5% 8%

MDLZ 3% 11% 7% 15% 10% 11% 10% 8%

MKC 10% 3% 7% 6% 11% 11% 10% 7%

SJM NA NA NA NA NA NA 7% 4%

MJN 10% 10% 10% 10% 9% 9% 12%

Average 8% 5% 8% 10% 8% 7% 9% 7%

8% 8% 8% 8% 8% 8% 8% 8%

Calendar EPS Surprise % vs Consensus at Beginning of Year

2008 2009 2010 2011 2012 2013 2014

CAG NA NA (11%) (4%) 6% (2%) (15%)

CPB (5%) 8% (5%) (4%) 5% (1%) (4%)

GIS 9% 10% (3%) (5%) (2%) (4%) (12%)

HSY (13%) 17% 11% 2% 4% 4% (3%)

K 1% 0% (9%) (2%) (8%) (1%) (5%)

KRFT NA NA NA NA NA 1% (1%)

MDLZ (2%) (4%) (8%) (2%) (3%) (1%) 3%

MKC 1% 6% 6% (1%) (2%) (8%) (3%)

SJM NA NA NA NA NA NA (9%)

MJN NA 7% (1%) 5% 1% 1% 2%

Average (2%) 6% (3%) (1%) 0% (1%) (5%) Source: Thomson Reuters, CS Estimates. Figures represent the difference between actual results during

the calendar year and the consensus estimate as of the first day of each calendar year

Our estimates are above consensus for Mondelez, McCormick and Kellogg.

12 January 2015


Exhibit 11: We forecast mid-single digit EPS growth instead of the high single-digit pace

factored into consensus for CPB, GIS, and K, and we are modestly below consensus for

CAG

CS Estimates Consensus % Variance

Non-calendar Year Ends

FY2015 FY2016 FY2015 FY2016 FY2015 FY2016

CAG $2.28 $2.42 $2.26 $2.40 1% 1%

CPB $2.47 $2.61 $2.46 $2.59 0% 1%

GIS $2.85 $3.05 $2.83 $3.03 1% 1%

SJM $5.55 $5.90 $5.56 $5.93 (0%) (0%)

Average 0% 0%

Calendar Year Ends

FY2015 FY2016 FY2015 FY2016 FY2015 FY2016

HSY $4.43 $4.83 $4.45 $4.87 (0%) (1%)

K $4.05 $4.30 $4.05 $4.31 (0%) (0%)

KRFT $3.35 $3.58 $3.36 $3.57 (0%) 1%

MDLZ $1.89 $2.19 $1.86 $2.16 2% 1%

MJN $4.14 $4.56 $4.15 $4.60 (0%) (1%)

MKC $3.66 $3.98 $3.60 $3.91 2% 2%

PF $1.91 $2.10 $1.91 $2.09 (0%) 0%

Average 0% 0%

Estimates as of 09 Jan 2015 Source: Credit Suisse estimates compared to I/B/E/S estimates (Thomson Reuters)

Valuation

We tend to get more positive on the food space when the valuation gap between food and

other sectors widens to an attractive level. As can be seen in the chart below, the group is

trading at a relatively wide discount to its staples peers right now - a 12% discount

compared to the 9% discount they fetch historically.

Exhibit 12: Food stocks are trading at a 12% discount to staples peers compared to a 9%

discount historically

10x

12x

14x

16x

18x

20x

22x

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

Ap

r-09

Jul-

09

Oct-

09

Jan

-10

Ap

r-10

Jul-

10

Oct-

10

Jan

-11

Ap

r-11

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Pkg Food HH Beverage Source: Thomson Reuters, as of 12/31/14

12 January 2015


Exhibit 13: ConAgra and Kellogg are trading at a bigger discount to their food peers than their 10-year average; Kraft is

trading at a bigger premium Average P/E Multiples

CPB CAG DF GIS HSY K MDLZ KRFT MKC SJM

Pkg Food

(ex HSY,

DF) SPX HPC Bevg

HPC/Bev

Avg

20 yr avg 17.3 15.0 14.3 16.7 20.5 17.7 16.5 17.9 17.5 16.2 16.8 16.9 20.0 22.0 20.8

10 yr avg 15.6 14.3 15.1 15.6 20.5 16.0 16.1 17.9 17.8 15.4 15.8 14.3 17.3 17.4 17.3

5 yr avg 14.7 13.2 14.1 15.2 20.4 15.0 16.2 17.9 17.6 15.3 15.4 14.0 16.8 16.7 16.7

Current 17.8 15.2 29.5 17.7 23.7 16.2 20.5 19.1 21.3 17.8 18.2 16.1 21.1 20.5 20.7

Food P/E Premium / (Discount) to Other Sectors

CPB CAG DF GIS HSY K MDLZ KRFT MKC SJM

Pkg Food

(ex HSY,

DF) SPX HPC Bevg

Food vs

HPC/Bev

Avg

20 yr avg 3% -11% -15% -1% 22% 5% -2% NA 4% -4% - 0% -16% -23% -20%

10 yr avg -1% -9% -5% -2% 29% 1% 2% NA 12% -3% - 11% -8% -9% -9%

5 yr avg -5% -14% -8% -1% 33% -2% 5% NA 15% 0% - 10% -9% -8% -9%

Current -2% -17% 62% -3% 30% -11% 13% 5% 17% -2% - 13% -14% -11% -12% Source: Factset. Multiples are based on consensus EPS for next 4 quarters.

As is the case across the consumer staples group, investors view food stocks as a proxy

for long duration bonds due to the consistency and sustainability of their cash flows. As a

result, perhaps it is no surprise that food stock P/E's are above historical averages when

viewed in the context of bond yields. U.S.-centric food stock dividend yields of 2.8% look

pretty attractive in relation to 10-year Treasuries now dipping below 2%. These stocks

tend to underperform when the Fed raises its borrowing rate, but the Fed's cautious

approach mitigates that risk in our view.

Exhibit 14: Food stock dividend yields look attractive in comparison to Treasury rates

1%

2%

3%

4%

5%

6%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Yie

ld (

%)

Select Packaged Food Dividend Yield 10-year Treasury Yield

Source: Thomson Reuters, Credit Suisse estimates. Select packaged food stocks include CAG, CPB, GIS,

and K

12 January 2015


Themes for 2015 Shift to the U.S. as a safe-haven likely to continue

Just about every consumer staples company has warned of slowing demand in emerging

markets, and investors are worried that political and economic trends in these markets will

worsen now that oil has dropped below $60/barrel. This is the type of environment where

investors tend to seek out U.S. food names as a safe haven.

Exhibit 15: The average growth rate for western consumer staples companies in

developing markets is slipping

Source: Company data, Credit Suisse estimates. Includes Nestle, Unilever, Henkel, Kraft, Coke (volume),

Colgate, L’Oreal, Danone, Reckitt

While not a game-changer for U.S. food, we believe that the stronger economic backdrop

will improve fundamental performance in 2015, especially in relation to the unusually weak

2014. Lower gas prices, a positive adjustment in SNAP benefits, and the slow but

continuous improvement in employment should help improve consumer confidence,

especially among lower-income consumers who have yet to enjoy any of the benefits of

the broader economic recovery. Wal-Mart estimates that the SNAP cutbacks at the end of

2013 represented a 0.7% drag on its food sales in 2014, and lower gas prices are likely to

boost U.S. disposable income by at least $80 billion. These factors aren't game changers,

but they certainly must come as a relief for manufacturers and consumers alike.

Implications: Positive for Hershey, Kraft, ConAgra, General Mills, Smucker. Negative for

Mondelez, Mead Johnson

That said, we don't view lower gasoline prices as a clear positive for packaged foods

trends. We find no statistical relationship between U.S. gasoline spending and food at-

home spending in our analysis of government data over the past 34 years. In fact, the

data indicates a modest positive correlation between food at-home spending and gasoline

presumably because consumers try to save money on food when gasoline prices rise.

Spending on discretionary items like clothing, electronics, and restaurants have a negative

correlation with gasoline spending, not grocery.

12 January 2015


Exhibit 16: Modestly positive correlation between gas

spending and food-at-home spending since 1980

Exhibit 17: Modestly negative correlation between gas

spending and food-away-from-home spending since 1980

(meaning spending goes down when gas prices go up)

y = 1.75x + 0.04R² = 0.10

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%

Rea

l S

pe

nd

ing

on

Fo

dd

at h

om

e, Y

oY

%

Gas spending, % of DPI, YoY Change

Expansions, 1980-2014

y = -0.58x + 0.06R² = 0.01

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%

Rea

l S

pe

nd

ing

on

Fo

dd

aw

ay f

rom

ho

me

, Y

oY

%

Gas spending, % of DPI, YoY Change

Expansions, 1980-2014

Source: Bureau of Economic Analysis, Company data, Credit Suisse

estimates

Source: Bureau of Economic Analysis, Company data, Credit Suisse

estimates

Gluten-free diet trend may have peaked

We are not ready to write the obituary on the gluten-free category, but we definitely see

evidence of it slowing down. Anti-grain diet books like Wheat Belly, Grain Brain, and The

Pale Kitchen have dropped off of the The New York Times top-sellers lists just over the

past five months. The organic foods division of Boulder Brands, the market leader in

gluten-free food marketing, is now growing at a slower pace. Nielsen data also indicates a

slowing growth trend, down to low teens from high teens just one year ago. We expect the

gluten free category to continue to grow, but at a slower pace with the incremental

consumption coming more from celiac disease sufferers than dieters.

Exhibit 18: Nielsen estimates the Gluten Free market at $20 billion in annual sales and

growing at an 11-12% rate

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

4 W

/E 0

1/0

1/1

1

4 W

/E 0

2/2

6/1

1

4 W

/E 0

4/2

3/1

1

4 W

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8/1

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4 W

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8/1

3/1

1

4 W

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0/0

8/1

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4 W

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2/0

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1

4 W

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1/2

8/1

2

4 W

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3/2

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2

4 W

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5/1

9/1

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4 W

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7/1

4/1

2

4 W

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9/0

8/1

2

4 W

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1/0

3/1

2

4 W

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2/2

9/1

2

4 W

/E 0

2/2

3/1

3

4 W

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4/2

0/1

3

4 W

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6/1

5/1

3

4 W

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8/1

0/1

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0/0

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4 W

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1/0

1/1

4

Gluten Free Dry Grocery % $ Growth YoY

Source: Nielsen

Implications. Grain-based companies like Kellogg and General Mills have an opportunity

to bring consumers back into their franchises by proactively touting their whole grain

cereal brands with low sugar.

12 January 2015


"Real Food" trend accelerating

The trend toward "real food," in our view, will continue to present a significant challenge to

the processed food industry. Whole Foods brought "real food" into the mainstream, and

major grocery chains have made huge improvements to their organic foods sections to

catch up. "Real food" advocates seek more transparency in the food they eat. They read

ingredient label carefully, and they actively limit their consumption of artificial flavors,

preservatives, added sugars, and refined grains. Basically, they say they won't eat

packaged foods from a box unless the ingredient list is less than five ingredients long. A

large percentage of "real food" advocates are Millennials, who generally steer away from

mainstream brands.

We view the trend toward "real food" as a primary reason for the steady decline in market

share. Most of the share losses have come from the growth of smaller, more nimble

competitors in the "middle tier" like Chobani, Annie's, Keurig, and KIND.

Exhibit 19: The top 25 food and beverage companies have lost 400 bps of market share

since 2009 mostly due to growth in the "middle tier"

$ Market Share 2009 2010 2011 2012 2013 2014

Pt Change

vs 2009

Top 25 49.4% 48.7% 47.5% 46.9% 46.1% 45.1% (436)

Private Label 18.5% 18.9% 19.6% 19.4% 19.5% 19.6% 108

Middle Tier 32.1% 32.4% 32.9% 33.7% 34.4% 35.3% 327

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -

Dollar Sales Growth Index 2009 2010 2011 2012 2013 2014

% Growth

Since 2009

Top 25 100 101 103 104 104 104 4%

Private Label 100 104 113 115 118 120 20%

Middle Tier 100 103 110 116 120 125 25%

Total 100 102 107 110 112 114 14%


Two recipe books on the New York Times best sellers list today tap into this trend - Thug

Kitchen and The Pioneer Woman. Thug Kitchen uses salty language to goad people into

caring more about the food they eat and spending more time preparing food at home

rather than buying take-out or convenience-oriented packaged foods. Famous

author/activists like Michael Pollan, Michael Moss, and Mark Bittman have published many

highly thoughtful and well-researched books touting this philosophy already.

The conundrum for the big food companies is that all of their scale in manufacturing, R&D,

and marketing is geared toward using cheap ingredients to optimize taste and

convenience and the lowest possible cost to the consumer. For example, Kraft literally

invented pasteurized processed cheese for the purpose of extending shelf life and limiting

the need for refrigeration. As a result, the idea of "Kraft Organic cheese" almost sounds

like a contradiction in terms to consumers. Consumers are more willing to try niche

“homespun” brands when seeking “natural” and “organic” solutions as opposed to the big

corporate brands.

To address the demand for "real food," food companies will have to buy higher quality,

more expensive ingredients and acquire the small, fast-growing organic brands with much

lower profit margins. This represents a significant threat to gross margin and ROIC over

time. We think it is no coincidence that two of the most active acquirers of organic foods

brands, Campbell and General Mills, have experienced over 300 bps of gross margin

dilution over the past three years.

Implications. This trend is clearly a positive for organic foods companies like WhiteWave,

FreshPet, and Hain Celestial and clearly a negative for "Big Food" companies.

12 January 2015


Cost-cutting will insulate earnings in the near-term

With sales growth decelerating in just about every market and the private equity firm 3G

demonstrating how much fat can be removed from the cost structures of Heinz and

Budweiser, consumer staples management teams have put unprecedented attention on

cost-cutting and supply chain restructuring to adjust to the new reality. We count five big

food companies (Campbell, ConAgra, General Mills, Kellogg, and Mondelez) that have

announced restructuring programs since 3G's buyout of Heinz. Some of these companies

want to avoid unsolicited scrutiny from private equity and activist investors; some want to

make their businesses look more attractive to potential buyers in the future. It is difficult to

gain any certainty on the true motives.

In some categories, like soup and cereal, the manufacturers significantly reduced their

manufacturing capacity to adjust to the reality of a structurally weaker and more

competitive demand environment. Kellogg, General Mills, and Post all announced or

closed a major cereal facility over the past two years, representing as much as 12% of

North American capacity. They seem to recognize that U.S. consumers have shifted away

from carbs and more toward protein for breakfast.

Exhibit 20: By the end of 2015, the industry leaders will close approximately 12% of

North American breakfast cereal capacity

26

23

21

22

23

24

25

26

27

# o

f N

.A.

Ma

nu

fac

turi

ng

Fa

cil

itie

s

Current Planned


12 January 2015


Exhibit 21: Recent Restructuring Programs US Staples Companies Announced Charges Program Savings

CAG Feb-11

$65M over 18

months, including

approximately $25M

of cash charges

Exit of certain manufacturing facilities, disposal of

underutilized manufacturing assets, and actions designed

to optimize the company's distribution network

Contribute to their overall cost

savings commitment -

$275M/year FY12-FY14

(consumer foods COGS)

HNZ May-11$160M, or $0.35 per

share

Increase manufacturing efficiency and accelerate

productivity on a global scale - reduce global workforce by

800-1,000 positions

$0.15/share in FY13

CPB Jun-11 $75M in 4Q of FY12

Improve supply chain efficiency and reduce overhead

costs across the organization and exit the Russian market

- eliminate approx 770 positions

Annual savings of $60M

beginning in FY12, increasing

to approx $70M in FY14

KFT Jan-12

$1.5B from 2012-

2014 with $575M for

Kraft Foods and

$925M for MDLZ

Reduction of approx 1,600 positions in North America

throughout 2012, about 40% of which are due to the

realignment of U.S. sales

NA

PG Feb-12 $3.5B over 4 years Cut 5,700 non-manufacturing jobs by end of FY13

Lower costs by $10B by 2016;

$3B OH, $6B COGS, $1B

marketing

PEP Feb-12

$383M 4Q FY11,

$425M in FY12 and

$100M from FY13

through FY15

Optimization of operating practices and organizational

structure, including reduction of approx 8,700 employees

(or 3% of global workforce)

Over $500M in incremental

cost savings in FY12, $500M

in FY13, and $500M in FY14

GIS May-12$94M FY12 (4Q) and

$15M FY13

Productivity and cost savings plan; eliminates approx 850

positions globally and asset write-downsNA

CPB Sep-12 $115M Closed Sacramento soup plants; eliminates 700 jobs$21M in FY14 and $30M by

FY16

HNZ Sep-13 $160MEliminate 1,200 jobs globally with $90M spent on

severance and compensation for former executives$150M

MKC Oct-13 $27MClosed Silvo in Netherlands and centralized shares

services in PolandNA

K Oct-13 $1.2B-$1.4BProject K - closed cereal plants in Ontario and snack plant

in Australia (expand Thailand); 2,900 jobs eliminated (7%)

Cash savings of $425-$475M

per year by 2018

CPB Nov-13 $20M Eliminated 250 salaried positions, mostly in HQ $40M

CAG Dec-13 $200M for initial plan

Optimize private label manufacturing facilities and

consolidate mixing centers across company; enhance

SG&A efficiency

NA

MDLZ May-14

$3.5B (approx $2.5B

in cash) with up to

$2.2B of incremental

capex

Reduction in operating cost structure by supply chain

reinvention, regional consolidation with category-led

model, overhead reduction, and zero-based budgeting

$1.5B of annual savings by

2018

GIS Sep-14 $360M (50% cash)

Project Century, Project Catalyst, and overhead cost

reductions - streamline N.A. manufacturing and

distribution, realign U.S. organizational structure, and

policy and procedure changes

$40M in FY15, $260-$280 in

FY16, and more than $350M

in FY17


Implications. Mondelez is the best "self-help" story in the group and has the best

opportunity to accelerate its earnings growth through cost-cutting and margin expansion.

Ripe environment for more consolidation

We predict that the mini-M&A boom 3G and Berkshire started in early 2013 will continue to

accelerate in 2015. 3G has global ambitions and a new $5 billion fund that is likely to

target another blue chip brand in the food and beverage industry. But what will they buy?

Kraft strikes us as an attractive target given the change in the CEO seat, the opportunities

12 January 2015


for cost synergies with Heinz, and the potential cash generation from asset sales. But the

complexity of the Kraft portfolio and its commoditized nature might be a turn off. Campbell

Soup and Kellogg seem a better fit with the 3G profile because they have dominant brands

in important categories, enormous cash flow, high margins, and plenty of room for cost-

cutting. But convincing the Dorrance family or the Kellogg Trust to sell sounds like a tall

order.

New CEOs will assume positions at ConAgra, Kraft Foods, and B&G Foods. We would be

highly surprised if John Cahill at Kraft and whoever takes the helm of ConAgra did not take

steps to optimize their portfolios through divestitures of struggling brands and acquisitions

of brands and businesses that they believe will strengthen their competitive positions. In

an environment where humdrum brands like Ragu, Skippy, and Hillshire can fetch

EV/EBITDA multiples in the mid-to-high teens, how could these companies not consider

selling brands that are demanding more than their fair share of management's resources?

Implications: Positive for mid-cap roll-up plays like Pinnacle, Smucker, Hormel, and B&G

Foods. Implications for ConAgra and Kraft are difficult to determine until the new CEOs

provide their strategic view.

Mead Johnson and Hershey stand to benefit from

falling commodities

Our model indicates a fair degree of cost deflation for the group (2%) due to declining

agricultural commodities and lower crude and natural gas. However, we believe that rising

costs for freight and rail will offset commodity deflation to a large degree. As a result, we

expect many of the companies in our coverage to guide to inflation in 2015.

12 January 2015


Exhibit 22: Inflation/Deflation by commodity input

Input

CY15E

Inflation/

(Deflation)

Food Ingredients

Flour -9%

Wheat -11%

Durum Wheat 62%

Corn -16%

Oat/Other Grains -5%

Soybean/vegetable Oil -19%

Sugar -1%

HFCS 14%

Cocoa -3%

Coffee 1%

Class A Eggs 6%

Cheese -17%

Milk -16%

Tomatoes 19%

Potatoes 0%

Peanuts -3%

Almonds 25%

Hogs -22%

Beef Cut-Out Value 8%

Whole Chicken 3%

Packaging

Paper 0%

Plastic -4%

Steel 8%

Overhead

Crude Oil -44%

Natural Gas -29%

Labor 1%

Freight 15% Source: Company data, Credit Suisse estimates

12 January 2015


Exhibit 23: Management teams are still guiding to inflation in 2015

FY14

FY12 FY13 Original Updated FY15 Notes

CPB 6% 4% 2-3% 2-3% 3-4% at the high end; per 1Q

CAG 10% 2-3% <2% 1-2% 2-3% reiterated in 2Q

GIS 10% 2-3% 3% >expected 3% reiterated in 2Q

HSY 0% 0% NA >expected NA

MDLZ 3-5% NA NA NA

KRFT 5% 2-3% NA NA NA

PF 7-8% 2.5% 2.0% 2.5% 3%

SJM 16% NA NA NA NA

K 7% ~5% Moderate 3-4% NA at the high end; per 3Q


The food processor's ability to capture the benefits of ingredient deflation depends heavily

on its pricing power and on the type of categories in which it participates. Cheese, coffee,

and vegetable oil processors adjust their prices very quickly in sync with commodity

changes. In addition, packaged foods brands in struggling categories (like breakfast

cereal and soup) tend to use falling commodity cost environments to drive their volume

higher through promotional discounts.

Mead Johnson, Hershey, Mondelez, Kraft, Dean Foods, and Tyson's Hillshire division

have the best opportunities to capture the benefits of ingredient deflation while ConAgra,

General Mills, Kellogg, and Campbell don't have much of an opportunity at all. Lower

vegetable oil costs will lead to significant deflation for ConAgra's inputs in Wesson Oil and

margarine brands, but it will have to lower prices for those brands quickly due to their

commoditized nature. Coffee futures indicate that prices will slip from the sharp spikes in

2014, but we expect Smucker to discount its brands in response to protect market share.

Exhibit 24: We believe Mead and Hershey have the best opportunity to capture the benefits of ingredient inflation (CS

estimates)

Ingredient

Deflation EPS EPS Base

Percent of

EPS

Pricing

Power

Factor

Estimated

benefit to

EPS Key product lines

ConAgra $370 $0.57 $2.17 26.4% 10% 3% Margarine, vegetable oil, meals

Smucker 1

145 0.96 5.55 17.3 20 3 Coffee, peanut butter

Mead Johnson 2

122 0.47 3.70 12.7 90 11 Infant formula

Mondelez 3

388 0.19 1.72 11.2 30 3 Chocolate, coffee

Hershey 3

139 0.41 4.01 10.2 90 9 Chocolate

Kraft 263 0.30 3.18 9.3 15 1 Cheese, hot dogs, lunchmeat

General Mills 178 0.20 2.82 6.9 30 2 Cereal, yogurt, soup

Kellogg 98 0.19 3.91 5.0 30 1 Cereal, baked goods

Campbell (44) (0.10) 2.53 (3.8) 30 (1) Soup, baked goods

1. Assumes Smucker will buy 530M pounds of coffee in FY 16 and coffee bean prices will be down 8%

2. Assumes 30% of COGS are dairy, 70% of which is dry / powdered milk; wtd avg price will be down approx 35%

3. Assumes cocoa hedged in June


Mead Johnson and Hershey have the stickiest pricing. Hershey participates in a duopoly

chocolate category with strong demand and very little threat from private label. Demand

12 January 2015


for Mead's infant formula products in emerging markets have proven highly inelastic due to

the important role they play in ensuring infant health For example, Hershey's gross margin

expanded over 200 bps in 2013 when cocoa prices started falling. Mead Johnson's gross

margin expanded 160 bps in 2013 when dairy prices fell.

Kraft and Hillshire compete in more commoditized categories than Hershey, so we expect

the benefits from pricing to be smaller and shorter in duration. Of the two, we believe

Hillshire has stickier pricing than Kraft. As shown in the chart below, Kraft's gross margin

expanded dramatically in 2009 on the heels of a significant price increase the year before.

However, the price increase in 2011 did not generate much of a benefit. Hillshire's pricing

in 2011, on the other hand, provided a strong boost to gross profits and appears poised to

benefit profits again in 2015.

Exhibit 25: Hillshire's gross profit increased in 2009, 2011

and 2014 when pricing went higher

Exhibit 26: Kraft's gross profit fell in 2011 even though it

raised pricing significantly

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

2008E 2009 2010 2011 2012 2013 2014

Gross Profit Pricing

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

5,200

5,400

5,600

5,800

6,000

6,200

6,400

2008 2009 2010 2011 2012 2013 2014E 2015E

Gross Profit Pricing

Source: Company data, Credit Suisse estimates. Left axis is gross

profit in $M; right axis is net price increase in fiscal year

Source: Company data, Credit Suisse estimates. Left axis is gross

profit in $M; right axis is net price increase in fiscal year

Implications: Positive for Mead Johnson and Hershey. Dean Foods, Kraft, and Tyson

Foods will benefit to some degree.

Exhibit 27: We expect 2% COGs deflation for the packaged foods group on average in

2015

0.7%

-1.5%

-1.9% -1.9%

-2.5% -2.6% -2.7%

-3.4%-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Campbell Kellogg Mondelez General Mills Smucker Hershey Kraft Foods ConAgra


12 January 2015


Campbell Soup Bull Case

Incremental improvements to management and portfolio

The cultural and portfolio changes at Campbell are significant enough to merit attention

and perhaps improve the growth rate over time. The acquisitions of Bolthouse, Plum

Organics, and Kelsen have added $1 billion of sales from faster-growing health-and-

wellness categories and, in the case of Kelsen, emerging markets. The divesture of the

struggling European soup business made sense. These moves helped reduce the

exposure of the portfolio to canned soup, which is arguably in structural decline.

Judging food is an inherently subjective process, but the improvements at Campbell are

noteworthy. Adding quality back to the soup formulations and backing away from sodium

reduction has improved consumer testing to over 60% preferred versus competition. The

Bolthouse and Plum products provide vegetable and ancient grain-based solutions that we

can't find in any other processed food product. The dinner sauces give Millennials a way

to prepare fresh chicken, pork, and beef in an adventurous but convenient way.

In addition, we give credit to CEO Denise Morrison for upgrading the talent of the people

around her. In total, 6 out of 11 of the top leaders are new to their roles or to the

organization. Recent outside hires include Luca Mignini to run International, Raymond

Liguori to run M&A, and Carlos Barroso to lead R&D. As an example of the company's

emphasis on performance, Ed Carolan was promoted to run U.S. Retail after successfully

driving up soup sales in FY13. Morrison strengthened the company's marketing

capabilities by hiring Michael Senackerib as CMO and Yin Woon Ran. Mark Alexander

was a good choice to take on the SR VP role of North America after Sean Connolly left to

take on the CEO role at Hillshire.

Jewels in the portfolio

Pepperidge Farm in particular would fetch a premium multiple if management ever spun it

off or sold it. This is not to say that Campbell is considering or ever would consider it, but

the Pepperidge snacks business (cookies, crackers, and bread) would be an attractive

asset for Kellogg or Mondelez if Campbell ever decided to sell. The dis-synergies for

Campbell would be minimal because Campbell essentially lets Pepperidge run on its own.

Strong free cash flow

Campbell is a strong free cash flow generator with a higher EBITDA to FCF conversion

ratio and higher free cash to sales than its peer group. In addition, the company is

directing more of its free cash flow to share repurchase. We expect $300 million of share

repurchase in FY 15 and at least $200 million of debt reduction.

Bear Case

Growth areas in the portfolio are dilutive to margins and capital returns

The company's relative market share, scale and capital investments in canned soup give it

a competitive advantaged versus its peers in terms of gross margin flexibility. But this

presents a structural problem with the company's portfolio. As the company innovates into

new packaging ideas, it pushes its margin structure lower by utilizing lower margin co-

packers outside of its existing platform. Plum Organics is a good example of this as it

utilizes more co-packers than the entire Campbell organization despite having only a tiny

base of sales. Campbell's gross margin has fallen over 400 bps since FY 10 and ROIC

has fallen over 800 bps.

12 January 2015


Canned soup declines appear structural

Canned soup will always be an important category to consumers and retailers, but we

think it is declining in a slow and structural manner. The business is getting picked away

by organic/fresh soups at the high end and multi-serve meals at the low end. The

company has launched several ideas to re-ignite consumer interest (Go Soups in a pouch,

Slow Kettle Style soups in plastic tubs, and the new dinner sauces platform), but these are

$50 million ideas that are too small to matter when put in the context of a $2 billion soup

business. The launch of organic versions of Campbell Soup this year sounds like a

contradiction in terms given the heritage of the brand.

No obvious solution to turn around declines in V8 beverages

V8 beverage was considered a major growth driver of the portfolio a few years ago, and

management directed significant investment into it Management blames the weak trends

in the category, but V8's unique positioning in vegetable-based ingredients should have

insulated it from the category trends.

We think are several problems with beverages division: first of all, the management team

diluted the equity of the brand by extending into too many sub-brands (Splash, Energy,

and Fusion). These efforts starved the core V8 red brand of consistent advertising support

and left it unable to regain the consumers it lost when it tried to reduce sodium content.

We also think Campbell lacks the distribution infrastructure to compete effectively in

single-serve beverages. The company recently exited its partnership with Coca Cola in the

convenience channel because Coke had made V8 a low priority. It remains to be seen

whether the new network of third-party brokers will improve

Low growth rate due to low exposure to growth segments

Despite the acquisitions, Campbell's low exposure to emerging markets, high exposure to

off-trend categories, and inconsistent marketing efforts to the demographics with strong

growth (especially Hispanics and Millenials) explain why Campbell's sales growth has

chronically under-delivered on expectations and why the growth algorithm of 5-7% EPS is

so far below its peer group.

Entrenched family ownership stake

Campbell is the perennial take-out candidate due to its unleveraged balance sheet, strong

cash flow, and the obvious administrative and supply chain synergies it would have with

Heinz in tomato processing. But by all accounts, the Dorrance family (with almost 50%

ownership of the stock) remains firmly commitment to maintaining control. The Dorrances

weren't fans of Heinz when the outspoken Bill Johnson was CEO. We think they would be

even less willing to sell to a private equity firm such as 3G.

12 January 2015


ConAgra Bull Case

CEO's retirement opens the door to portfolio restructuring

Late last year CEO Gary Rodkin announced his intent to retire effective May 2015. A

successor has not been announced and management recently said there was no update

on the search. The announcement of the next CEO, whenever it comes, will provide some

clarity in terms of the strategic direction of the company. The Ralcorp acquisition has

done more harm than good and investors are already talking about the merits of a

potential split up. While the selection of top management is no guarantee as to what

happens, at a minimum it should remove some of the overhang on the stock.

Consumer Foods division appears to be stabilizing

Last year management said that it had decided to cut back significantly on its efforts to

attract Millennials to its top brands and adopt a "fix and grow" strategy targeted at its core

consumers. This strategic change appears to have stabilized the business, at least for

now. Chef Boyardee is turning around, gaining share and posting volume and dollar sales

growth, albeit on an easy comparison. The company launched new innovation in 2Q under

the Healthy Choice brand that management thinks will help drive growth. Finally, Orville

Redenbacher is seeing "positive developments" and management intends to duplicate the

success they saw with the Act II brand by revamping the packaging graphics.

High free cash generation allows for continued debt reduction

Management has transitioned the company into an operating company that is being run

with a focus on free cash flow and productivity (as opposed to volume). ConAgra has one

of the highest FCF yields in our group (6% vs the average of 4.4%).

Following the Ralcorp acquisition, the cash flow priority remains debt reduction. In fact

ConAgra has not raised the dividend since 1Q of FY13. Management is targeting $1.5B in

debt repurchases by 2015.

Lamb Weston is a hidden jewel

We believe Lamb Weston has a better growth profile than investors realize. The Lamb

Weston foodservice business has a leading market position in Japan, China, Korea, and

the Middle East. It makes a high quality product and is known as a quality innovator and

product developer, well-equipped to suit customers' needs. The global expansion of

restaurant chains has helped the business expand further into emerging markets. The

business is now recovering from the loss of major customer in FY 14 with domestic market

share gains and business expansion internationally. In addition, the new potato crop is

more efficient for processing which will help profitability in FY15.

Bear Case

Execution problems during Private Brands integration

Management has been quite explicit in owning up to the execution errors that have

plagued the Private Brands segment. CEO Rodkin summarized it by saying that it simply

takes them way too long to do simple things that customers expect. While we appreciate

the brutal honesty, and we can envision a FY 16 where Private Brands profits start to grow

again sequentially (as management promises), the prospects of Private Brands returning

to its historical 10% profit margin sound dim at best.

12 January 2015


Untested marriage of private label and branded businesses

The complexity of the Ralcorp integration and the quality of Ralcorp assets remains our

biggest concern. It remains to be seen whether the hybrid model will enhance ConAgra’s

strategic relationships with retailers or even the degree to which the company will try to

leverage the model in its selling and marketing efforts. Coordination between the branded

and private label businesses will be very difficult to manage.

In addition, Ralcorp itself was always run as a loose affiliation of different operating units

without any regard to a unified approach to selling or supply. ConAgra appears to have

effectively addressed this problem by consolidating the sales forces into a “one-face to the

customer approach” while still giving P&L responsibility to the six business units.

Weak brand portfolio with disproportionate exposure to low-income consumers

ConAgra has a strong management team that has proven it can generate value for

shareholders by instituting operating and financial discipline to underperforming assets.

However, it is clear the lower-end consumer is struggling the most and ConAgra has

significant exposure to this particular demographic. Individuals are stretching their dollars

by wasting less and shopping on an "as-needed" basis instead of stockpiling inventory.

This has led to significant volume "misses" where even management was surprised by

how poorly the consumer was fairing. At this point, there is little to lead us to believe that

this trend will reverse in the near term.

As an example, the frozen business has not been performing well. The frozen category

was traditionally dominated by the carried lunch occasion, which has suffered in the

weaker labor environment. And shifting consumer preferences toward fresher foods

(frozen is understandably not perceived as "fresh") has also weighed on sales. As with

many other categories in the industry (i.e. cereal and soup), it is up to the branded leaders

to change how the consumer thinks about these products.

In order to fix this problem, management will change course by redirecting much of the

marketing and advertising spend towards promotion and merchandising in an effort to

boost volume and regain share. In our view, this is not a sustainable brand-building

strategy.

12 January 2015


General Mills Bull Case

Well-positioned in attractive growth categories such as yogurt and snack bars

General Mills has dominant positions in two of the fastest growing categories in the U.S. –

snack bars and yogurt. The U.S. is still an emerging market for the yogurt category with

per capita consumption rates growing rapidly as consumers look for healthier meal and

snack products. In snack bars, the company has developed an outstanding franchise for

its Nature Valley granola brand and Fiber One.

Significant cost savings through restructuring, lower commodity costs, and

continued HMM initiatives

The new restructuring program announced in late calendar 2014 essentially has three

buckets where the company expects to reduce costs, all on top of their ongoing HMM

initiatives. Cumulative savings are expected to be $40M in FY15, $260M - $280M in FY16,

and more than $350M in FY17.

■ Project Century. This involves streamlining the North American manufacturing and

distribution network and is expected to deliver $100M of savings by FY17.

■ Project Catalyst involves realigning the US organizational structure and is expected to

provide $125M - $150M of savings by FY16. The company has realigned the US

Retail business into 5 operating units: cereal, yogurt, snacks, meals, and baking

products. As part of this, sales of natural and organic brands will be folded into their

respective units which will allow for the smaller brands to benefit from increased

sourcing, manufacturing, and R&D resources as part of a larger operating unit. And

the company is creating a natural and organic center of excellence that will report to

the new CMO that is expected to help the smaller brands stay more connected and

leverage marketing capabilities.

■ Overhead cost reductions by making changes to various policies and practices that

are expected to deliver significant savings over and above Projects Century and

Catalyst.

Management expects to incur restructuring charges of approximately $360M associated

with these actions, around 50% of which will be cash.

In addition, the company has done a good job executing its Holistic Margin Management

strategy (HMM) to respond to rising input costs. The efforts here include productivity

savings, mix management, and pricing. This is an ongoing initiative where management

constantly strives to remove costs from the system. Cumulative savings are expected to

reach $4B by 2020 as the company expands the efforts internationally.

Diversification into international markets

General Mills has historically been a landlocked company with large domestic exposure.

Over the past few years, it has taken important steps to expand the portfolio into faster

growing emerging markets and into faster growing categories. The acquisitions of Yoki

and the Yoplait license along with the heavy investment into China have significantly

changed the mix and potentially improved the growth profile. In addition, the company is

launching Yoplait in China where the yogurt category is around $8B and projected to more

than double over the next five years. In mid-2012 CFO Don Mulligan suggested that Mills

could conceivably shift its mix to 40-50% international sales over time (currently around

35%).

12 January 2015


Strong cash flow generation and share repurchase

General Mills has generated strong free cash flow over the last five years. This reflects

the strong cash generation from operations and working capital management and

conservative spending on capital expenditures at less than 4% of sales.

The strong free cash flow has given management significant flexibility with regards to

capital allocation, and they have done a good job of keeping their shareholders happy with

it. This year, we expect the company to buy back $1.4B in stock and reduce its diluted

share count by 3-4% while at the same time paying $820M for the acquisition of Annie's

Homegrown. In total, the company has repurchased over $5B worth of stock since 2010

and increased its dividend 75% since 2010.

The company's conservative debt-to-EBITDA ratio of 2.5x gives it flexibility to return more

cash to shareholders in the future, or secondarily make more acquisitions if need be.

Bear Case

Unrealistic long term growth objectives in an environment of rapidly changing

consumer preferences

Our larger concern is that General Mills is clinging to unrealistic long term growth

objectives in an environment where consumers keep shifting to more organic, natural, and

less processed food solutions. Fiscal 2015 will mark the fourth year over the past five

where the company failed to achieve its internal objectives for executive compensation.

Despite the recent acquisition of Annie's, General Mills' organic foods sales now total only

$600 million, which is just 6% of the U.S. Retail division. Management recently decided to

fold the Small Planet natural foods brands into its core business units to provide them with

more sales and operations resources. Whether this will hurt or help the company keep up

with the unique and rapidly changing demands of the organic foods consumer and retailer

remains to be seen.

Large exposure to declining cereal category

Approximately 22% of sales are in ready-to-eat cereal and this is a category that has

struggled for some time. Cereal has consistently underperformed overall food sales since

2009. In that time period, cereal volume was down 3% annually compared to overall food

that was flat.

Exhibit 28: Food Sales vs Cereal Sales Exhibit 29: Cereal Sales Growth vs Price Growth

1.8%

4.8%

2.1%

1.3% 1.4%

-2.9%

1.5%

-0.3%

-3.6%

-5.5%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2010 2011 2012 2013 2014

Food Sales (CAGR +2.3%) Cereal Sales (CAGR -2.2%)

1.8%

4.8%

2.1%

1.3% 1.4%

-2.0%

4.5%

3.2%

-0.7% -0.8%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014

Cereal Sales Growth Cereal Price Growth

Source: Nielsen xAOC, Credit Suisse research Source: Nielsen xAOC, Credit Suisse research

12 January 2015


International expansion is dilutive to margins

While we agree with the strategic rationale for international expansion, investors need to

be cognizant of the degree to which these deals have diluted the company's operating

margin. International margins average 10% versus a whopping 22% for U.S. Retail.

Greater scale and HMM implementation will help narrow the gap over time. But despite

spending $3 billion on deals in a low-cost borrowing rate environment, EPS is still growing

below the company's high single-digit algorithm.

Exhibit 30: Operating margin dilution has been significant

(200)

(100)

0

100

200

300

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015E

Adjusted Operating Margins Y/Y Change (bps)

Source: Company data, Credit Suisse research

12 January 2015


Hershey Bear Case

2015 sales rebound

One of the main reasons we downgraded the stock in July was our concern that Mars and

Nestle were waking up to the attractiveness of the U.S. market after several years of

losing market share to Hershey. Mars in particular appeared to have more firepower

having just paid off the high cost of debt it owed to Berkshire. But Hershey bounced back

quickly in the back half of the year, taking market share away from Mars and Nestle and

getting back on track in the U.S.

For 2015, we expect Hershey sales growth of 7.6% driven primarily by pricing and

acquisitions, and partially offset by modest volume declines. We expect Hershey to

continue to gain share due to new product launches slated for the coming quarters (such

as Hershey caramels and Brookside clusters). Slowing confectionery category sales

growth poses the primary risk to our forecast, especially if consumers balk at the higher

confectionery prices and shift to snacks outside of the confectionery category.

Gross margin expansion from falling input costs

We think the benefit from falling input costs to gross margin could be as high as 150 bps.

We believe this is above the market's expectations, which is perhaps closer to 75 bps.

Hershey announced an 8% price increase in July 2014, when main input costs peaked.

Since this increase was announced, cocoa prices have fallen ~4% and sugar has dropped

~12%. We expect continued declines in these costs in the near term, and we think dairy

prices could fall ~15% in 2015. We expect total company pricing to increase 6% in 2015.

Reinvesting in advertising again in 2015

Hershey plans to increase ad spend in the low single-digits in 2014. The company expects

to increase this to the high-single digits in 2015. Hershey's advertising efforts have

generated strong volume response in the past.

Valuation

Hershey is trading at a 30% premium to its food peers on a P/E basis, which is essentially

in-line with historical trends.

Bull Case

Competition from other snack types remains a threat

In 2014, Hershey faced tough competition from all types of snacks due to intensifying

levels of promotion across the space, especially for instant consumables. This caused

consumers to diversify their snack consumption away from confectionary. Nabisco, Frito

Lay, KIND, and other small entrepreneurial companies flooded the market with

merchandising activity. Hostess is back to participating in the category as well. Salty

snacks have been growing 4-5%, baked snacks have been growing 3-4%, and meat

snacks have been growing in the double-digit range.

Macro issues holding back international growth could spill over into 2015

We believe Hershey can still hit the goal of $1.5-2B international sales (pre-acquisitions)

by 2017, but the near-term could continue to be impacted by the global macro

environment and country specific issues (particularly in Mexico and Brazil).

In Mexico, Hershey sales were dampened by the sluggish economy and the VAT tax.

These impacted consumer confidence and purchasing power, and the chocolate category

12 January 2015


overall was hurt in early 2014. In Brazil, in addition to the tough economic environment,

volume elasticity related to a price increase was greater than Hershey anticipated. The

chocolate category in Brazil was down in the beginning of the year as well. We are

currently forecasting double-digit growth in both regions in 2015. This compares to roughly

-1% in 2014.

For China, we forecast core sales growth of 35%, and SGM (we estimate $220M in 2014

sales) growing in the mid-single digit range. Hershey management lowered its estimate

for SGM’s sales since announcing its intention to the buy the business in December 2013.

12 January 2015


Hormel Bull Case

Substantial step up in FY15 earnings

We believe Hormel is set up for an excellent FY15, and we think guidance of $2.45-

$2.55/sh (9-14% growth) is conservative. We believe Hormel can achieve 16-17% EPS

growth in FY15. Strong domestic protein demand, Hormel’s expansion in value-added

foodservice items, and accretion from the CytoSport acquisition should boost earnings.

JOTS is poised to benefit from lower corn prices and easy comparisons to last year’s non-

recurring increased propane acquisition costs. Given the tick up in eggs set for turkey, we

cannot expect the same kind of large benefit from commodity turkey pricing that was

experienced in FY14. In addition, demand for turkey increased last year due to higher pork

prices resulting from PEDv, which should not be the case in FY15.

Lower input costs should provide relief to Grocery Products margins (after 1Q when the

company works through the rest of the high cost inventory). However, for Refrigerated

Foods this will lower margins vs. 2014. Last year the segment benefitted from wide pork

operating spreads due to high pork cutout prices.

Hormel has transformed into a value-added company with consistent growth and

returns

Hormel continues to move away from a commodity-based protein company and toward a

predictable and stable branded packaged food company. We believe that at this point,

only ~20% of the company is truly commoditized products and ~80% is value-added.

Hormel has made a number of strategic acquisitions to expedite this change including

Farmer John, Lloyd’s, Country Crock, Skippy peanut butter, Wholly Guacamole, and

CytoSport (Muscle Milk).

The company has a strong track record. Sales have grown consistently for the last 11-

years at a CAGR of 8%, while the 11-year EPS CAGR is 11%. Hormel’s sales growth goal

is to hit roughly $10.6B by 2017. That represents a CAGR of 5% between 2012-2017. For

EPS, the company plans to grow earnings at a CAGR of 10% (~$2.90 by 2017). Hormel

targets an ROIC in the top 25% of the companies it considers its peer group, which

includes a combination of packaged foods companies (Smucker, McCormick, Hershey)

and protein companies (Tyson, Smithfield, Hillshire).

Pristine balance sheet gives the company flexibility

We forecast Hormel will finish FY15 will -$450M net debt. The company recently increased

the dividend to $1.00/sh, an increase of 25%. We think this reflects positively on

management’s confidence regarding the outlook, the balance sheet, and the company’s

strong free cash flow generation ($600 million in FY 14). We believe the healthy balance

sheet provides Hormel with substantial flexibility to continue to make acquisitions.

Trading at discount to packaged food peers

Hormel is currently trading at 10x 2016 EBITDA, a 10% discount to packaged-food peers.

While some discount could be merited given 20% of the business is still commodity-

oriented, we believe this current gap is too large. We do note that the stock looks

expensive on P/E basis (trading at 19.7x one-year forward earnings versus the 10-year

average of 16.4x and the group at 18.3x), but we think EV/EBITDA is a more appropriate

valuation method.

12 January 2015


Bear Case

M&A discipline may not be as strong as in the past

Historically, Hormel’s M&A discipline was a strong part of our investment thesis. We liked

that the company was sticking to smaller, tack-on deals based on protein-based foods (i.e.

Skippy). The company’s actions in 2014 make us question whether Hormel is still as

disciplined. Hormel bid for Ragu, a pasta enhancer, and paid 15x EBITDA for CytoSport

(Muscle Milk), when sales growth stagnated.

Roughly 20% of sales are still pure commodity businesses, which are difficult to

predict. As demonstrated by the drought in 2012 and the rapid surge in corn prices

(amongst many other examples), things can change rather quickly and hurt commodity

business margins. Hormel recently updated the normalized margin ranges by segment.

For JOTS and Refrigerated Foods, management raised and widened the ranges. While we

find the positive revision encouraging, the wider difference between Hormel’s high end and

low end indicates that Hormel’s portfolio remains subject to volatility in the protein markets.

12 January 2015


Kellogg Bull Case

Project K and global reorganization will boost margins and provide fuel to revitalize

cereal category

In 2013 Kellogg announced a massive $1.2 to $1.4 billion Project K restructuring program

to reduce administrative costs, cut capacity, and reduce headcount 7%.

Exhibit 31: Timing of Project K Spending and Savings 2013 2014 2015 2016 2017 2018 Cumulative

CS Estimate of annual

Project K spending

215 330 330 330 150 50 $1.2 to $1.4B

CS Estimate of annual

Project K savings

50 150 250 350 425 - 475

Reinvestment "modest" "larger" Source: Company data, Credit Suisse estimates

The program has realigned the organization around global brand management teams to

promote the use of best practices in marketing, product innovation, and selling practices

around the world without sacrificing the distinctiveness of local tastes.

Portfolio diversification into faster growing, on-trend snack categories

The acquisition of Pringles from P&G changed the ballgame for Kellogg by shifting the

portfolio away from cereal and more into snacks and international markets. This reduced

Kellogg's percent of sales from breakfast cereal to 45% from 50% and increased the

international sales to 34% from 30%. Kellogg folded its under-scaled European snacks

business into Pringles' management infrastructure in Geneva. They also made good

headway integrating Pringles in the U.S. without having to take on the complicated

challenge of folding into the U.S. Snacks' division's DSD network.

While expanding snacks was the right thing to do, the saturation of the Pringles business

domestically and globally makes us skeptical that it will improve Kellogg's growth profile.

Reduced industry manufacturing capacity for cereal will improve utilization and

tighten pricing

Given the declining demand profile of breakfast cereal, we think Kellogg is taking

appropriate steps by rationalizing its manufacturing capacity in North America and adding

capacity in lower cost geographies like India. Specifically, they will close their London

Ontario plant and evaluate further reductions in the coming months.

In a similar vein, Post Foods announced a plant closure in California this year, and

General Mills appears to be on the verge of announcing some form of capacity

consolidation as well.

We are just estimating, but we figure these steps will shutter ~12% of the capacity in the

industry. This is what the industry needs to keep pricing firm.

12 January 2015


Exhibit 32: We estimate that the breakfast cereal industry in North America will reduce

the number of its facilities by 12%

26

23

21

22

23

24

25

26

27

# o

f N

.A.

Ma

nu

fac

turi

ng

Fa

cil

itie

s

Current Planned


Possible takeout candidate, although large trust ownership presents challenges

The packaged food space was dominated by M&A activity in 2014. Kellogg remains the

subject of much speculation in terms of takeout candidates and this has resulted in the

stock trading at a multiple that is higher than the fundamentals support. However, more

than 20% of the shares are held by the Kellogg Foundation Trust which presents a clear

hurdle to a takeover. We recognize that this is not a deal breaker, but we place a low

probability on this occurring.

Bear Case

Losing share in a declining cereal category

Breakfast cereal lands in the cross-hairs of several dietary movements at once: gluten-free,

lactose-free, and the backlash against "added sugars" and "empty carbs." Just about

every nutritionist, dietician, and athlete seemed to have something negative to say about

carbohydrates in 2013 and 2014 and something positive to say about protein and "good

fats." In the past, we too would have considered these issues faddish rather than

structural. But the sustainability of these trends has been shocking.

That said, there may be a ray of hope on the horizon for breakfast cereal companies now

that the noise around low-carb diets has started to fade. Books like Wheat Belly and Grain

Brain have slipped off the New York Times Best Sellers list. Protein remains popular, but

whole grain could make a comeback if marketed more aggressively

Kellogg's U.S. cereal business declines accelerated from bad to worse in 2014.

Management insists that they increased brand building support but apparently it wasn't

sufficient in size or quality to prevent market share losses and category declines.

12 January 2015


Exhibit 33: Cereal category sales declines have accelerated in the past year

(2.9%)

1.5%

(0.2%)

(3.6%)

(5.5%)

(1.0%)

(2.9%)

(3.5%)

(2.9%)

(4.7%)

(6%)

(5%)

(4%)

(3%)

(2%)

(1%)

0%

1%

2%

2010 2011 2012 2013 2014

Y/Y

Ch

an

ge

(%

)

Sales Volume

Source: Nielsen xAOC, Credit Suisse research

Inconsistent brand support has hurt the long term equity

Management insists that it doesn't need to increase advertising because it already spends

more than enough. But what concerns us more is that management has gotten into a

disturbing habit of starting every year with the intention to increase advertising, only to cut

the budget as the year progresses. Patterns like these can be highly demoralizing to the

marketing managers who are trying to revitalize brands

Exhibit 34: Management has modestly lowered its guidance for brand building spending

in each of the past four years.

2011 2012 2013 2014

Brand Building Guidance "Up Low SD" "Significant

investment in

innovation and

brand building"

"Growth" "Will grow at a

faster pace than

sales"

Change to Guidance "As we have refined

our plans, we have

made some shifts in

investment from

advertising to on-

pack consumer

promotions"

"Even inlcuding

these

efficiencies we

still expect

brand-building

at a rate equal

to or greater

than sales

growth" (8/12)

"We expect

advertising will

be flat-to-up for

full year despite

savings" (8/13)

"At or above the

pace of sales

growth" (7/14)

Actual growth in advertising Up 0.6% Down 1.6% Up 1.0% Source: Company data, Credit Suisse estimates

Kashi brand continues to struggle

Kashi started to lose its edge a couple of years ago when certain organic grocers started

pulling it off their shelves because of the inclusion of GMO ingredients. The press also

discovered that Kellogg had donated money to support a "NO" vote to Proposition 37 in

12 January 2015


California, which recommended forcing packaged foods products to indicate on their

ingredient statements whether they used GMO ingredients.

We think the Kashi brand is still sufficiently resonant with organic foods consumers to

regain momentum. Their strategy regarding GMO is quite similar to Annie's and other

organic foods brands, which offer both non-GMO and GMO products in their portfolio and

concentrate the non-GMO products at organic retailers.

The good news is that Kellogg has separated the business from the corporate

headquarters and brought back Brian Denholm to run it.

12 January 2015


Kraft Foods Bull Case

Potential to create shareholder value through asset sales

The ascension of John Cahill to the CEO role at Kraft indicates that the board wants to

accelerate the pace of change. He may take a more aggressive stance than his

predecessor to selling brands to streamline the portfolio. Selling Oscar Mayer and

Maxwell House, for example, could unlock a fair degree of value for shareholders if they

fetch the similar multiples that Tyson and JAB paid for meat and coffee business in 2014.

However, selling these on-trend businesses would probably dilute Kraft's growth, and

therefore pose an even bigger challenge to the remaining portfolio.

Margin expansion in 2015 and beyond

We believe Kraft's gross margin will expand in 2015 to some degree as lower commodity

input costs flow through (cheese, milk, and pork) and competitors catch up to the price

increases Kraft took last year. Kraft took pricing on over half the portfolio, particularly for

coffee, cheese, and Oscar Mayer lunchmeat and hot dogs. In addition, we expect dairy

and pork costs to drop in 2015, which should help gross margin.

Kraft is also still in the middle innings of reducing its overhead costs and improving the

efficiency of its supply chain. At the time of its spin from Mondelez, management said that

it lacked cost leadership in almost every one of its categories despite its size and scale.

Overhead as a percent of sales has significantly improved to 7.6% in 2013 from 12% in

2010. However, its supply chain ran into some significant start-up problems and quality

control issues in 2014 as it tried to consolidate manufacturing lines.

Focus on cash flow

Cash flow is now part of management's executive compensation evaluation, and the

company has instituted "manage for cash" training throughout the organization. Its

dividend payout ratio and dividend yield both exceed industry averages.

Bear Case

Hard to see a sustainable positive trend in portfolio management strategy

One of the things we worry about with Kraft is that for every success story within the

portfolio there seems to be an opposing story of a brand that is struggling to compete with

its branded competitor or justify a premium to private label. This includes antiquated

brands that face major competitive threats (like Maxwell House and Jell-O) and brands

that simply operate in unattractive categories (like Kraft salad dressing,

Mayonnaise/Miracle Whip, and Capri Sun). Former CEO Tony Vernon sounded unwilling

to entertain the idea of divesting brands, but perhaps the CEO change will lead to some

tougher decisions.

"Agile marketing" strategy may struggle to reach Millennials

We understand the potential efficiencies that Kraft can generate by shifting more media

spend to digital and away from television. However, we continue to question whether

Kraft's brands can truly resonate with the Millennial demographic that uses digital media

the most, particularly for the antiquated/vulnerable brands listed above. How many

Millennials will opt in to the idea of getting a Tweet from Miracle Whip when they walk into

a grocery store? In general, the portfolio seems poorly positioned to capture the hearts

and minds of this cohort of emerging consumers.

12 January 2015


Mondelez Bull Case

Massive margin expansion opportunity ahead

Up until recently, the company had put too much emphasis on growth and not enough on

training the organization to control its spending in a sensible way. The distractions from

integrating acquisitions and splitting up the company between 2007 and 2012 led to

insufficient reinvestment in the supply chain to support the growth.

Mondelez has communicated operating margin expansion goals of +300-400 bps (to 15-

16%) by 2016. This improvement comes from Supply Chain Reinvention (SCR), Overhead

savings, and Zero Based Budgeting (ZBB). We see a clear line of sight to this target, and

we believe Mondelez can easily exceed this target. We believe the full margin expansion

potential is 700-800 bps as Mondelez fully implements ZBB and leverages its untapped

pricing power. We think the company’s visibility into cost savings gives it a competitive

advantage over other companies that are struggling to cope with slowing emerging

markets.

■ Supply Chain Reinvention (SCR): Modernizing the manufacturing footprint with new

facilities in low-cost labor markets and closing underperforming facilities; further

training the organization on Lean Six Sigma principles to improve manufacturing

capacity and efficiency.

■ Regional consolidation: In order to eliminate duplication and encourage

commonalities, Mondelez is consolidating country-led management teams and back

office personnel into regional groups. Europe began its transition in 2011 and North

America followed in 2014. Mondelez initiated the transition for Asia and Latin America

on January 1, 2015.

■ Zero Based Budgeting (ZBB): Introducing stricter processes and hurdle rates when

determining annual budgets for overhead expenses and general sales and marketing

programs. We believe that ZBB presents a much bigger opportunity for SG&A

leverage than the 100 bps that Mondelez targeted. Other companies that adopted ZBB

in the consumer staples space expanded their margins by 700-800 bps, with about

half the expansion coming from SG&A leverage. As a result, we figure Mondelez has

another 250 bps of opportunity to capture if it executes ZBB to its full potential.

■ Untapped pricing power: We think Mondelez can achieve an extra 100 bps of

margin leverage from making better pricing decisions. This includes raising price or

reducing promotion modestly in the markets where its market share is 70% or higher

than its nearest competitor and making more conservative decisions in markets

without clear leadership.

12 January 2015


Exhibit 35: We think Mondelez' visibility into cost savings gives it a competitive

advantage over other companies that are struggling to cope with slowing emerging

markets

Gross Margin SG&A

Operating

Margin

37% 24% 12%

41% 21% ~19-20%

40% 23% 15-16%

CS

Assumption

Management Target

CurrentMargins

+300

to

400 bps

+300

to

400 bps

Pricing

Power

+100

bps

Additional

ZBB**

-250

bps

SCR*

+300

bps

Coffee JV

Dilution

+50

bps

Overhead

Savings

-75

bps

ZBB**

-75

bps


Investors can still win even in the turnaround story doesn't play out. We believe that

if management fails to turn the business around, we believe the board will find another

party to run it, either by selling the business to a strategic acquirer or to a private equity

firm in a leveraged buyout. We believe the addition of Nelson Peltz to the board increases

management’s sense of urgency and opens up the possibility for alternative methods of

value creation.

Top-line recovery in Europe if chocolate competitors raise price. Despite not having

market leadership, Mondelez raised prices of chocolate products ahead of competitors in

Europe. The idea was to protect margins, but Mondelez lost significant market share in

chocolate as a result. The repercussions were particularly severe in France where a

retailer punished Mondelez for the chocolate price increase by also reducing biscuit shelf

space. We expect Mondelez' market share will rebound in 2015 as competitors realize

they have to cover their costs. Nestle's profit margins have fallen because it has yet to

completely follow Mondelez' lead.

12 January 2015


Bear Case

"Accident prone" business model

Out of the gate since splitting with Kraft Foods, Mondelez had a number of execution

mishaps in emerging markets. In 2012, sales in developing markets slipped to 1%

because of inventory build-up in Brazil (resulting from a transition to a new information

system and poor allocation of marketing resources) and management in Russia failed to

respond to widening price gaps in coffee and chocolate. In 2013, China sales fell double-

digit in 3Q because management unwisely thought they could "bend the trend" in the

biscuits category by ramping up marketing and distribution, which led to a build-up of

inventory at distributors.

Story well understood by the street

Mondelez seems to be a consensus long, and the stock is up since the pull back in

October. We still believe there is more room to run to the ~$42 range.

Foreign exchange rates will dampen growth in 2015. We expect a 7% headwind to

sales and $0.16 of headwind to EPS growth from f/x.

12 January 2015


McCormick Bull Case

Market leader in an attractive category

Consumer demand for spices and seasoning continues to grow, and McCormick is the 4x

the size of its next largest competitor in the U.S. Herbs and spices is one of the fastest

growing flavor categories, and the growth is levered toward emerging markets and a

rebound in cooking at-home in developed markets. McCormick has leading positions in

the UK, France, Canada, and Poland as well.

Emerging markets to expand to 20% of sales by 2015

In 2012, emerging markets represented 14% of sales (up from 10% in 2011) with

acquisitions focused on emerging markets. The acquisition of WAPC (Wuhan Asia Pacific

Condiments) increased the company’s sales in China by more than 60%. It is also

exceeding internal expectations in both sales and profit. The 2011 Kamis acquisition in

Poland also exceeded management expectations in its first year on a sales growth basis,

but Kohinoor in India has been more challenging.

Returning more cash to shareholders

With the company returning to a comfortable debt/EBITDA level below 2.0x, management

is now returning more cash to shareholders. In FY 14, we expect the company to return

100% of its free cash flow to shareholders including over $180M for share repurchase for

the second year in a row. This will reduce share count by about 2% in 2014.

McCormick’s free cash flow has grown at a CAGR of 11% since FY02. As a percent of

sales, the company’s FCF has generally outperformed its peer group.

Strong reinvestment into marketing

In category where practically none of McCormick's competitors are investing in advertising,

McCormick stands out for its commitment to investment and category growth. This gives

the company a competitive advantage in its relationship with retailers and consumers.

McCormick has more than doubled its advertising spending since 2005. They are

spending a larger proportion of dollars on digital in response to rising social media

participation and searches for online recipes.

Bear Case

Competitive incursions in U.S. Retail

It is just plain odd to hear a company with McCormick's clout get thrown off its game by

regional competitors who literally have no more than 0.2% share each. McCormick's

aggressive price increases over the past three years (up about 15%) provided a window

for competition that is difficult to close. Its market share has declined every year for four

consecutive years. Grocer retailers have surprised the food industry leaders by expanding

their selections to emphasize choice rather than rationalizing their selections to emphasize

efficiency. In Florida and California, Hispanic value offerings in cello bags have infiltrated

produce section. In Chicago, a premium bottled brand has gained traction.

To meet the challenge, management has restructured its sales force to a regional

structure. They have achieved some early wins persuading retailers to adopt their "Gold

Standard" shelf set and raise prices of competitive products closer to McCormick's. But

consumers and retailers clearly like having more choices, not fewer. So despite

McCormick's considerable muscle in the category, management is actively tempering

investor expectations for how quickly the U.S. can turn around.

12 January 2015


Industrial division continues to struggle

Management used to tout the huge potential for margin expansion in the Industrial division

from moving up the value-added curve, but the business has now backed off its long-term

profit margin target of 12%. Part of the problem is that it McCormick has had trouble

fetching a premium price for all of the R&D and consumer research it does on what are

essentially unbranded ingredient solutions for big customers like Pepsico and Yum.

In 2013, the Industrial business was negatively impacted by weaker QSR (quick serve

restaurant) demand in the US as well as in China due to product safety scares. While the

Industrial segment recovered in 2014, China is still operating below its historical levels.

Anti-trust concerns limit the opportunities for acquisitions domestically

As has been the pattern historically, McCormick assumes 2% growth per year from

acquisitions as it rolls up smaller spice and seasonings brands. McCormick has created

significant shareholder value by giving regional brands more access to McCormick's

manufacturing scale, distribution reach, and marketing resources. However, we notice

that management has backed off of spice and seasonings acquisitions in the U.S. after the

extensive anti-trust review it endured during its acquisition of Lawry's from Unilever. As a

result, it now puts more of its M&A focus on brands in emerging markets, which garner

much higher valuation multiples and operate in more volatile operating conditions.

12 January 2015


Mead Johnson Bull Case

Best emerging market play in consumer staples

Mead Johnson is the global leader in the fast-growing pediatric nutrition category with

positions 50 markets and 65% of sales coming from Asian and Latin American markets.

One of the most compelling aspects of the pediatric nutrition category is that it is the first

thing young families in emerging markets seek when they enter the middle class. Better

nutrition for their young children is a huge priority because they don't have the same

access to vitamin-enriched foods or supplements that we in the U.S. take for granted.

Because income levels are still low, the per capita use of pediatric nutrition products still

has plenty of room for growth in Asia and Latin America when compared to the U.S. and

Europe.

Pricing power and premium-ization

Premium-ization continues to an important degree in developing markets, and the

company's strong R&D and marketing capabilities provide it with a competitive advantage

in this segment. For example, Mead is the pioneer in research and product development

emphasizing DHA for brain development in young children. The Enfa brand's positive

reputation supports the brand's premium positioning and gives the company more price

power than just about any consumer staples company we cover.

Operating and financial leverage supports double-digit EPS growth

The company's ability to leverage "non-demand generating expenses" (such as IT)

suggests 20-30 bps of margin expansion per year through 2016. The ability to drop this

benefit to the bottom line depends on the necessity to fund incremental demand

generation or (in recent years) compensate for unexpected challenges in emerging

markets. We believe the company's $500 million share repurchase program will do more

than just offset dilution from options. In addition, the company's tax rate is likely to keep

falling further as it expands manufacturing capacity in Singapore's low tax regime.

Strong long-term fundamentals in China

Management expects the weaker economic conditions in China to dampen the growth rate

of the pediatric nutrition category to some degree. They have backed away from their

objective of launching Enfa in 50 new cities per year. But there are several long-term

factors that make China uniquely attractive

■ The memories of the 2008 melamine scandal in the local dairy industry remains very

strong in the minds of consumers and engenders loyalty to foreign brands produced of

China. This gives us a high degree of confidence in the sustainability of the premium

segment of the market.

■ The easing of the One-Child policy is expected to result in a 1.5 million increase in

births over time.

■ Ninety percent of the women in China have full time jobs, which accentuates the

importance of the category as a supplement for breast feeding.

■ The wide price gap between the super-premium segment and Mead's premium

products insulates Mead's sales from the discounting in the market.

■ Competitor Danone has warned investors that the combination of the recall and the

negative press from their bribery scandal has severely hurt the image of their Dumex

brand with consumers.

12 January 2015


Early stages of market penetration in Latin America

The company is the #2 player in Latin America (Nestle is #1) with strong positions in

Mexico, Ecuador, Peru, Argentina and Brazil. They continue to expect 15% growth in

these markets due to increased investment and the growth of the premium segment, in

which they are the market leader. Brazil represents the highest potential because it has

such a big middle class with very low per capita usage of the category. Mothers in these

markets tend to shift their children to regular milk when they are still infants, which is highly

detrimental to nutritional development. Much of Mead's investment in the market is

therefore focused on educating pediatricians and mothers on the benefits of using

nutritional products instead.

We expect Mead to continue to make tack-on acquisitions in Latin America. Their strategy

is to acquire a strong local brand with good distribution, then introduce their Enfa brand as

a premium entrant. The acquisition of Sancor, the #2 competitor in Argentina, was the

perfect example of this type of deal.

North American demand recovering

The U.S has strong potential for a rebound both in terms of sales and margins.

■ The economic recovery in the U.S. (such as it is) as helped stabilize the multi-year

decline in the birth rate since the recession.

■ Demographically, there is a big increase in the number of woman 16-26 due to the

"boom-let" in in the 1980's.

■ Mead's expansion into the toddler segment of the U.S. market with Enfagrow has

been highly successful

■ These factors help offset the structural challenge of declining per capita usage of the

category as nurses and push new mothers to breast feed exclusively and even ban

the free product samples of infant formula that Mead's DTP sales forces provides.

Bear Case

China government is intent on building a local brand champion

The most frequent concern we hear from investors is that the company's results and stock

price have become more volatile now that the Chinese government has placed the foreign

brands firmly in its crosshairs. Investors who own this stock unfortunately must live with

the inevitability of negative headlines, even if they prove to be immaterial. We list a few

big ones below:

■ The Chinese government recently launched an anti-trust investigation, which led to

price rollbacks and fines for the leading manufacturers.

■ The Hong Kong government put a limit on how many cans of infant formula people

could bring over the border into the mainland of China.

■ The Chinese government announced that it would provide significant financing to local

competitors in the category to foster consolidation

■ The Chinese media aired a highly negative news program, which cited instances

where pediatric nutrition manufacturers had been bribing pediatricians to recommend

their products to consumers. Although the program only provided evidence for one

manufacturer, Danone, the program implicated all of the major foreign brands. This,

plus a letter from the SEC, led Mead to announce an internal investigation into its

direct-to-professional sales force in China which is still pending.

12 January 2015


But while the government's consolidation of the category may indeed build a bigger local

brand merely through consolidation, it will take a much longer time to persuade the

Chinese consumer to buy the brand instead of foreign-made products. Consumers make

the final decision on what to buy for their children, not the government, and the

consumer's loyalty to foreign-made brands in this sensitive category runs very deep due to

the memories of the melamine scandal.

12 January 2015


Smucker Bull Case

Diversified portfolio of leading brands

The top five categories in Smucker's portfolio are coffee, peanut butter, fruit spreads, oils

and shortenings, and baking mixes/frostings. The company is either #1 or #2 in each of

these categories in terms of market share as well as several niche categories like canned

milk, frozen peanut butter and jelly sandwiches, and ice cream toppings. This puts at least

80% of the company's portfolio in an advantaged position.

Exhibit 36: Top Five Categories with Market Share and Percent of Sales

Closest Other % of 2014

Smucker Brand Sales

Coffee 30% 15% 46%

Peanut Butter 46% 17% 17%

Fruit Spreads 44% 15% 8%

Oil and Shortening 11% 14% 8%

Baking Mixes 15% 34% 6%

Source: Nielsen xAOC as of year-end calendar 2014, Company data, Credit Suisse research.

Closest competitors: Kraft (coffee); Hormel (peanut butter); Welch's (fruit spreads); ConAgra (oil and

shortening); General Mills (baking mixes).

Smucker's market-leading positions benefit the company in many different ways:

■ It give Smucker scale with retailers to get better merchandising

■ Smucker is the category leader in pricing, thus giving it more control over its destiny

■ Smucker has greater scale than its competitors in manufacturing and distribution, thus

making them the low-cost provider to its customers

Superior cash flow generation and margins

Smucker's generates significant free cash. It is one of the most efficient cash generators in

the sector owing to strong capital discipline, low capital spending requirements on its base

business, and the strong margin structure. The advantage to having large profit margins

in the consumer staples space is that it gives a company more flexibility to respond to

volatility in the market. This is especially important in a portfolio like Smucker's that has a

high exposure to commodity price movements as well as intense competition from other

brands.

12 January 2015


Exhibit 37: Smucker's EBITDA margin has consistently exceeded the peer average

24%

21% 21%22%

18% 18% 18% 18%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014

Smucker Peer Average

Source: Company data, Credit Suisse research.

Low cost manufacturer with an advantaged supply chain

Smucker is the low-cost manufacturer of ground coffee owing to a supply chain that enjoys

a number of competitive advantages. In coffee, they enjoy superior technology in flavor

management systems, which provide consistent flavor profiles for coffee using different

beans and blends. This gives Smucker flexibility in sourcing different types of beans from

various suppliers as it suits the company while still maintaining its taste standards. The

coffee operations are located exclusively in New Orleans, where there is a large port

closely located to SJM's roasting and finishing facilities. This reduces transportation costs

and improves the speed to market. Its expert procurement team has the most years of

experience and the best industry relationships around the world.

Acquisitions of Jif, Crisco, and Folgers from Proctor and Gamble gave SJM the best talent

and a vastly enhanced quality management foundation. Many of the people who were

acquired in the Jif/Crisco transaction are also managing coffee plants and brought many of

the P&G best practices with them.

Proven acquisition strategy

The company has executed a disciplined approach to acquisitions over the years that has

created enormous value for shareholders. Consistent with their portfolio strategy, they

focus almost entirely on brands with leading market positions, thus reinforcing their market

power. Since 2002, acquisitions have contributed nearly $4B in incremental sales with the

highly successful Reverse Morris Trust mergers with Folgers in 2008 and Jif/Crisco in

2002 (both from Procter & Gamble) playing the biggest roles. On the flip side, one might

assume that the absence of transformational transactions going forward limits the

company's ability to keep generating outsized returns.

Expectations appear low relative to peers

Consensus expectations are for EPS growth of only 4% in calendar 2015, compared to the

peer average of 8%. With perhaps a $0.50 benefit from lower coffee costs coming in

FY16, Smucker might have a good chance of stabilizing its cycle of downward earnings

revisions .

12 January 2015


Bear Case

Heightened competitive intensity in coffee and peanut butter

Management was overzealous in its forecast for coffee profit growth this year given weak

consumer spending patterns, rising green coffee costs, and intensified competition.

Smucker announced a major profit warning this year when its biggest brand, Folgers, tried

to raise merchandised price points at a time when roast and ground competitors

maintained heavy promotional support.

Kraft has "upped its game" significantly in coffee. After spinning off from its sibling

company Mondelez, Kraft management increased the focus and investment behind its

roast and ground coffee business. Kraft successfully launched the Gevalia brand to

replace the loss of its distribution agreement with Starbucks, and Gevalia now has a 5%

share of the market. Kraft's Maxwell House is now operating with an improved, more

efficient supply chain, and has regained some of the market share it lost. And Kraft intends

to put significant support behind the launch of its new McCafe brand in the bagged coffee

and K-cup segments of the market.

Smucker also lost significant market share in peanut butter not long after Hormel

purchased the Skippy brand from Unilever. Unilever had been largely ignoring Skippy for

years. Hormel intends to manage the brand much more aggressively, thus posing a more

formidable competitor to Smucker going forward.

Relatively weak position in single serve coffee

We expect the at-home coffee category to grow at a healthy 5% pace over the next few

years as the consumer palate for coffee varieties gets more sophisticated and as

consumers buy more machines for single-serve consumption. However, we think the

Smucker brands will grow at a slower pace than the category because they aren't

positioned as well in this fast-growing segment.

Management disagrees with our assessment because they view their licensing

arrangement with Green Mountain as a competitive advantage, but we have trouble

seeing how the Smucker business will generate long-term value in this segment unless it

obtains permission from Dunkin' to distribute Dunkin' K-Cups in the grocery channel.

Folgers K-Cup sales have improved lately, but stagnated significantly in FY 14.

Resistance among core Folgers consumers to adopt K-Cup machines remains relatively

high.

Most of the growth in the category has come from younger consumers who are buying

Starbucks and Green Mountain brands and machines to mimic the coffee house

experience at home. Folgers, on the other hand, is skewed to older consumers who are

less willing to buy single serve machines and more price-sensitive on a per cup basis.

The introduction of Folgers in single-serve K-Cups brought younger consumers to the

category, but it is now being drowned out in the market by an influx of non-licensed single-

serve cups following the expiration of the Keurig patent. Smucker's license of the Dunkin'

Donuts brand isn't helpful in this regard because it doesn't include permission to market

Dunkin in single-serve cups.

Portfolio is under-levered to health and wellness / better-for-you trends

It strikes us that Smucker's portfolio is not well-suited for the reality of today's eating trends

given all the changes in the consumer landscape around health and wellness. With coffee

as the likely exception, items such as processed peanut butter, jellies, oils, and baking

mixes appear out-of-favor given their highly processed nature and high sugar content.

While peanut butter has found some favor because of its protein content, it is likely that a

certain group of consumers will continue to shift towards fresher, healthier varieties over

the highly processed ones. In order to remain competitive, we think Smucker should

explore diversifying its portfolio into more on-trend categories with longer-term appeal to

today's consumer.

12 January 2015


Our Thesis: More Headwinds Than Tailwinds Below we highlight the headwinds that make us cautious on the group as whole.

Lack of emerging markets exposure

One of the main comments of our bearish thesis on food is that beverage, household

products, and European-based staples stocks (like Nestle and Unilever) offer better

growth than U.S. food stocks at a more reasonable price. U.S. food companies don't have

nearly the same exposure to developing markets as their staples peers.

Exhibit 38: Developing markets as a percentage of sales

0%

10%

20%

30%

40%

50%

60%

Uni

leve

r

Hei

neke

n

Carl

sber

g

Colg

ate

Dan

one

Coca

Col

a

Mon

dele

z

Dia

geo

Nes

tle

P&G

Kim

bler

ly C

Peps

ico

Hei

nz

Kel

logg

McC

orm

ick

Clor

ox

Her

shey

Gen

eral

Mill

s

Cam

pbel

l


Consumers in international markets tend to clean their house the same way and drink

similar beer and colas. But the cultural idiosyncrasies on food consumption have been in

place for thousands of years and are hard to change. U.S. food companies are trying to

make acquisitions to catch up to their European peers. But they are years behind in terms

of management experience in these markets and brand development. For example,

■ Campbell experienced this famously when they entered Russia and China and found it

impossible to commercialize soup preparation despite the fact that consumers were

eating over 200 servings of soup per capita per year.

■ Breakfast cereal has failed to gain stronghold in China because of the cultural

preference for warm food in the morning (congee) and the digestive problems related

to dairy.

■ Frozen food presents a challenge in most emerging markets because a large

percentage of the population still doesn't own a freezer at home, and because the cold-

chain distribution networks are still in their infancy.

■ Confectionery brands are very global, but chewing gum is experiencing a cyclical

downturn and chocolate preferences in Europe are very different from that of the U.S.

■ Coffee brands like Douwe Egberts, Nescafe, and Starbucks and powdered beverages

like Tang have become truly global.

■ Biscuits and snack chips have gone global. Oreos and Frito Lay have adapted their

brands to fit the local preferences of consumers in multiple markets. In fact, Oreos are

12 January 2015


now sold as a luxury good in the Duty Free shops of airports next to Louis Vuitton and

Chanel. However, these brands are the exception to the rule. Most of the biscuits,

crackers, and snack chips sold in Russia and China are sold as commodities in bulk

bins.

■ Condiments are often global. Heinz has done an excellent job of introducing its Heinz

master brand as the premium offering in markets like Russia, Poland, and China while

simultaneously marketing a popular local brand.

■ Yogurt is global. This brand's long-term prospects depend heavily on whether it can

introduce the Yoplait brand into emerging markets like China, Brazil, and India. It won’t

be easy. Yogurt is considered a commodity in China, and not a particularly good one

given digestive problems related to dairy.

Exhibit 39: U.S Foods volume growth has lagged the consumer staples average (ex food)

over the past three and six years

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

U.S. Food Rest of Consumer

3-Year Avg

6-Year Avg

Source: Company data, Credit Suisse estimates. “Rest of Consumer” includes Reckitt, Coke, Colgate,

P&G, Pepsico, Danone, Nestle, Unilever, Inbev, Heineken, SABMiller, Carlsberg, Diageo

Stuck in a shrinking middle in the U.S.

Processed food consumption skews to lower income consumers who haven't kept

pace with the economic recovery. Business can’t be good for brands like Chef

Boyardee when its core consumer is under-employed and dramatically changing its

shopping behavior. Their core consumer is shopping less often and reducing her

transaction size per trip. Packaged foods companies have struggled to wean themselves

away from high volume promotional incentives that consumers no longer want.

Record participation in the “SNAP” program (formerly called “food stamps”) is evidence of

just how stressed the core consumer really is. Food stamps issued as a percent of total

food purchased in the U.S. has skyrocketed to above 12% from 6% over the past five

years. Wal-Mart estimated that the government cuts to SNAP benefits in 2014 caused a

70 bp drag to food consumption.

12 January 2015


Exhibit 40: Food Stamps Issued as a % of Total Food Purchased for Food at Home

5%

6%

7%

8%

9%

10%

11%

12%

13%

Source: USDA, BEA, Food and Nutrition Service

In response, grocers have made a bigger and more sustainable effort to cater to lower

income consumers (and higher income consumers too) with a broader array of own brand

offerings. We believe private label market share will remain in the 21-22% range for an

extended period of time.

Grocers view private label as a positive for several reasons: it gives them a way to

differentiate the branding of their stores, it provides a negotiating tool in their dealings with

branded suppliers, and it often enhances profit margins. The quality of packaged foods

offerings has improved as well, which has helped improve consumer loyalty. Most grocers

now have a two-tiered pricing strategy with premium and discount versions on the shelf

next to each other. Costco’s strategy is to make Kirkland branded products that exceed

their branded peers in terms of quality.

Exhibit 41: Private Label $ market share still rangebound

18%

19%

20%

Dec

-11

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Source: Nielsen’s Scantrack Expanded AOC. All categories including dairy

Higher income consumers transitioning to organic and "real food." Processed foods

companies point to two big changes in the consumer demand for food: consumers want

more transparency and they want more nutritious products. The growth of Whole Foods

played a major role in helping consumers understand where their food comes from, and in

12 January 2015


encouraging consumers to ask more questions. The major grocery chains have made

huge improvements to their organic foods sections to catch up.

Consumers seeking more transparency are typically called "Real food" advocates. Real

Food advocates read ingredient labels carefully, and they actively limit their consumption

of artificial flavors, preservatives and added sugars. Basically, they say they won't eat

packaged foods from a box unless the ingredient list is less than five ingredients long. A

large percentage of real food" advocates are Millennials, who generally steer away from

mainstream brands.

Consumers seeking better nutrition in their food present more of an opportunity for

processed food marketers, because the food companies can add or subtract ingredients to

achieve specific nutrition objectives. Special K with protein and Gluten free Chex cereal

are good examples. But these consumers tend to distrust the nutritional value of

processed foods brands because of the tendency to include too much sugar, sodium, or

fat.

Entrepreneurial ventures like Chobani, Annie's, KIND, and Freshpet have done a better

job of developing new, disruptive food and beverage products that meet the changing

needs of consumers, especially Millennials. They take more risk than their much larger

competitors, and, because they are often privately owned and "mission-driven," they

willingly operate at a lower return on capital in their early stages. Financially driven big

food companies don't have that luxury.

The conundrum for the big food companies is that all of their scale in manufacturing, R&D,

and marketing is geared toward using cheap ingredients to optimize taste and

convenience and the lowest possible cost to the consumer. For example, Kraft literally

invented pasteurized processed cheese for the purpose of extending shelf life and limiting

the need for refrigeration. As a result, the idea of "Kraft Organic cheese" almost sounds

like a contradiction in terms to consumers.

To address the demand for "real food," food companies will have to buy higher quality,

more expensive ingredients and acquire the small, fast-growing organic brands with much

lower profit margins. This represents a significant threat to gross margin and ROIC over

time. We think it is no coincidence that two of the most active acquirers of organic foods

brands, Campbell and General Mills, have experienced over 300 bps of gross margin

dilution over the past three years.

Marketing effectiveness is declining

Food companies are more marketing companies than manufacturers – the largest

percentage of their asset value rests in the intangible value of their brands. Maintaining

the equity of these brands has become increasingly complex. In the 1970’s, for example,

a food company could launch a national advertising campaign that would air on only three

television channels and quickly grab the attention of millions of viewers. Since then, the

explosion of cable channels, digital video recording, and video games has made the

marketer’s task much more complex. People consume media in a much different way

than before and they have more choices. Ex-CEO of Sara Lee Brenda Barnes once

admitted to us that a new generation of young consumers is growing up without ever

having to watch a commercial on TV.

Food companies have responded by reallocating their marketing dollars away from

television and into Facebook and Twitter. The adjustment has been not been easy. Not

many consumers care enough Jell-O to join an on-line community.

In fact, one could argue that the growing appeal of Facebook and other social media

vehicles reduces the barriers to entry for branded products. Television advertising is

prohibitively expensive for a start-up brand, but it is really cheap to set up a Facebook

page or produce advertisements on You Tube (especially when your consumers produce

12 January 2015


the ads for you). As more companies find ways to grow their brands through inexpensive

word-of-mouth vehicles, what happens to the benefit of scale?

In response, food companies have become more risk averse, not less. Product

launches that truly drive category growth are expensive and risky. So the industry falls

back on a more risk-averse approach. In fact, the industry has significantly cut back on

new product introductions for fear that consumers simply don’t have the money to try

them. This has boosted profit margins, but hurt volume.

Food companies have been cutting their advertising investment. General Mills,

ConAgra, Kellogg, and Campbell all cut their advertising budgets in response to weak

sales trends and shifted their spending to short-term marketing vehicles such as in-store

merchandising. This trend only exacerbates our concerns about the long-term health of

these companies' brand equities.

Exhibit 42: Most Food Companies Have Reduced

Advertising Spending As % of Sales Over Past 4 Years.

All of them reduced spending in FY 14

Exhibit 43: Hershey now spends the most on advertising

as a percentage of sales.

1.0% 1.0%

-0.1%

-1.4%

-0.7%

-1.3%

-1.6%

-0.3%-0.1%

-0.2%0.0%

-0.4%-0.2%

-0.4%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Hershey Kraft ConAgra Campbell Mondelez GeneralMills

Kellogg

7.9% 7.6%

4.9% 4.8% 4.9%

3.9%

2.6%

5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Source: Company data, Credit Suisse estimates. All companies

represented on a FY 14 vs FY 10 basis except for CPB (FY 11) and

KRFT (FY 11), and CAG (FY 12)

Source: Company data, Credit Suisse estimates. Campbell and

ConAgra include consumer promotion expense

The result of all these headwinds is market share

erosion

Our analysis indicates that the top 25 food and beverage companies have lost 439 bps of

market share since 2009 – the equivalent of $17 billion in sales! This included another

100 bps of share declines in 2015.

12 January 2015


Exhibit 44: Top 25 food and beverage companies lost 100 bps of market share in 2014

and 436 bps of market share since 2009

$ Sales 2009 2010 2011 2012 2013 2014

Top 25 181,621 182,739 187,323 189,189 189,106 188,367

Private Label 68,089 71,120 77,120 78,327 80,078 81,982

Middle Tier 117,820 121,466 129,658 136,214 141,301 147,702

Total 367,530 375,326 394,102 403,731 410,485 418,051

$ Market Share 2009 2010 2011 2012 2013 2014

Pt Change

vs 2009

Top 25 49.4% 48.7% 47.5% 46.9% 46.1% 45.1% (436)

Private Label 18.5% 18.9% 19.6% 19.4% 19.5% 19.6% 108

Middle Tier 32.1% 32.4% 32.9% 33.7% 34.4% 35.3% 327

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -

Dollar Sales Growth Index 2009 2010 2011 2012 2013 2014

% Growth

Since 2009

Top 25 100 101 103 104 104 104 4%

Private Label 100 104 113 115 118 120 20%

Middle Tier 100 103 110 116 120 125 25%

Total 100 102 107 110 112 114 14% Source: Nielsen AOC (in $ millions)

What does this mean for Kraft? Kraft management readily admits that they have

squandered their lead. Brands like Planters, Maxwell House, Jell-O, and Kraft Singles are

shadows of their former selves. Management vows to mend its ways by investing in

advertising (now slightly above 3% of sales), but only for the brands that develop a well-

thought out path to profitability.

What does this mean for Campbell? Campbell is the company we are most concerned

about structurally because the company has yet to prove it can stem the declines in its

canned soup business (and now beverages too?). They also lack any platform in

emerging markets to compensate for the slowing macro trends in developed markets.

Campbell has acquired brands like Bolthouse and built new platforms like baking sauces

to stimulate growth, but it remains to be seen whether these are big enough to move the

needle.

The Bull Case

These are resilient and predictable business models. Despite all the challenges,

packaged food is still a safe haven for investors during times of market stress. In 2008

when the markets crashed and the cyclical stocks cratered, the packaged foods business

models held up relatively well. Volume declined and the stocks fell. But the weakness

wasn’t nearly as bad as the overall market.

In fact, despite all of its faults, the U.S. food group has generally lived up to its reputation

for delivering modest but steady shareholder returns over time. U.S. food companies have

outperformed the S&P 500 significantly over the past six years and only modestly

underperformed versus the S&P consumer staples sector (SP 477) despite having a

decidedly slower growth profile.

12 January 2015


Exhibit 45: U.S. food stock price appreciation has averaged 6% per year since 2006,

modestly below the overall consumer staples group

2006 2007 2008 2009 2010 2011 2012 2013 2014 CAGR

CPB 100 92 73 89 89 85 89 111 115 2%

CAG 100 89 60 86 83 99 108 124 137 4%

GIS 100 100 102 123 124 141 139 173 189 8%

HSY 100 79 70 73 96 122 143 193 214 10%

K 100 106 84 108 102 100 110 122 134 4%

KFT/MDLZ 100 92 74 77 89 106 108 149 162 6%

MKC 100 99 82 94 122 130 162 178 198 9%

Average 100 94 78 93 101 112 123 150 164 6%

S&P 500 100 104 62 79 89 89 99 130 147 5%

S&P Consumer Staples 100 113 90 103 113 126 133 165 190 8% Source: Thomson Reuters

Better management teams in place. Our view of the group has evolved as management

teams adopted more realistic expectations for growth and manage their businesses for

cash and value rather than volume. Many of the CEOs in place today seem to “get it.”

The perennial underperformers in the space like ConAgra and Heinz streamlined their

portfolios, upgraded information systems, and upgraded their marketing capabilities so

that they can manage through an increasingly dynamic marketplace. Sara Lee broke itself

up and sold its parts.

Potential for further consolidation and private equity bids. With borrowing costs so

low, the potential for leveraged buyouts is higher. The strong cash flow characteristics of

these companies make them attractive targets for private equity shops

These companies have pricing power over time. Investors should take comfort in the

fact that food companies are still the ones that dictate pricing, not grocers. The branded

companies do a pretty good job over time of passing through commodity costs to

consumers. The dialogue created with consumers through advertising campaigns gives

them the power to do this. Pricing tends to lag inflation for six months or so, but history

indicates that it always catches up.

Exhibit 46: Long Term CPI Index and PPI Index For Food at Home

90

100

110

120

130

140

150

160

170

180

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

CPI PPI

Source: Bureau of Labor Statistics

More cash for shareholders. Having de-leveraged their balance sheets significantly

since 2008 and sold off non-core assets, the management teams of food companies have

been making a greater effort to return more cash to shareholders. Dividend increases in

the space averaged 10% over the past year and dividend payout ratios are generally

higher since 2007.

12 January 2015


Appendix Exhibit 47: Basket of COGS by Company

CAG CPB GIS HNZ HSY K KRFT SJM MDLZ

FY 13 Sales 14,186 8,450 17,564 11,714 7,490 15,244 19,085 5,898 36,749

FY 13 COGS 10,933 5,292 11,120 7,456 4,111 9,376 12,530 3,859 22,891

COGS % 77% 63% 63% 64% 55% 62% 66% 65% 62%

Total Packaging 19.8% 20.0% 17.0% 22.0% 13.0% 17.0% 20.0% 10.0% 20.0%

Food Costs 51.2% 38.0% 40.0% 43.0% 55.0% 40.0% 45.0% 65.0% 55.0%

Overhead/Labor 29.0% 42.0% 43.0% 35.0% 32.0% 43.0% 35.0% 25.0% 25.0%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Food

Flour 0.6% 3.2% 3.6% 1.5% 0.0% 4.5% 0.0% 0.0% 5.0%

Wheat 4.0% 1.2% 1.5% 0.0% 0.0% 0.0% 0.0% 3.0% 0.0%

Durum Wheat 1.9%

Corn 2.2% 0.0% 1.6% 0.5% 0.0% 2.4% 0.0% 0.0% 0.0%

Other Grains 0.0% 0.0% 2.0% 7.0% 0.0% 2.7% 0.5% 0.0% 0.0%

Vegetable Oil 9.8% 0.7% 1.6% 3.6% 0.0% 1.6% 7.7% 5.0% 4.4%

Sugar 0.5% 1.5% 3.2% 0.6% 5.5% 6.0% 3.3% 3.0% 8.3%

HFCS 3.0% 2.0% 3.0% 4.7% 0.0% 1.1% 1.4% 0.0% 0.9%

Cocoa 0.0% 0.5% 2.4% 0.0% 22.0% 4.3% 0.0% 0.0% 7.6%

Coffee 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.3% 25.0% 7.9%

Eggs 0.7% 0.6% 0.4% 0.0% 0.0% 0.8% 1.4% 0.0% 0.0%

Cheese 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 8.1% 0.0% 2.8%

Milk 1.6% 1.4% 2.5% 1.0% 11.0% 0.0% 2.3% 3.0% 3.0%

Tomatoes 4.1% 9.4% 0.7% 7.0% 0.0% 0.0% 0.0% 1.5% 0.0%

Potatoes 0.0% 0.0% 0.0% 3.9% 0.0% 0.0% 0.0% 0.0% 0.0%

Peanuts 0.0% 0.0% 0.0% 0.0% 5.5% 1.5% 0.0% 15.0% 0.0%

Tree Nuts/Almonds 0.0% 0.2% 0.0% 0.0% 1.7% 0.4% 1.6% 0.0% 3.5%

Pork 6.6% 3.4% 2.3% 1.8% 0.0% 0.3% 4.1% 0.0% 0.0%

Beef 1.8% 1.7% 0.1% 0.8% 0.0% 0.0% 2.1% 0.0% 0.0%

Chicken 3.8% 1.7% 0.5% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0%

Other 12.3% 10.6% 14.2% 9.9% 9.4% 14.4% 7.3% 9.5% 11.6%

Packaging

Paper Packaging 6.9% 4.0% 10.2% 5.5% 5.2% 11.9% 12.0% 3.0% 13.0%

Plastic Packaging 6.9% 4.0% 3.4% 5.5% 5.2% 3.4% 5.0% 7.0% 5.0%

"Metal" Packaging 5.9% 12.0% 3.4% 11.0% 2.6% 1.7% 3.0% 0.0% 2.0%

Overhead

Crude 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Energy (Nat Gas) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Labor 18.0% 32.0% 32.0% 24.0% 20.0% 31.0% 25.0% 15.0% 13.0%

Freight 4.0% 3.0% 4.0% 4.0% 5.0% 5.0% 3.0% 3.0% 5.0%

Total Grains 6.9% 4.4% 8.7% 9.0% 0.0% 9.6% 2.4% 3.0% 5.0% Source: Company data, Credit Suisse estimates

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Exhibit 48: Historical Organic Sales Growth in U.S. Packaged Food

Volume 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Avg 09-13

MJN 0.2 (2.4) 5.8 11.3 0.1 4.6 5.5 4.6 3.9

MDLZ 1.1 3.1 (2.2) - 2.1

HSY - 0.3 1.0 4.1 4.4 2.0 (0.9) (1.1) (5.0) 4.5 3.4 1.9 7.6 2.9 (1.1) 2.5

MKC - - 2.5 4.0 0.4 1.7 1.9 0.4 (1.6) 3.2 2.5 1.6 0.3 0.7 2.5 1.2

KFT 2.2 1.4 0.7 1.8 (0.5) (2.3) 1.7 (1.8) (0.8) 2.6 0.5 0.8 GIS 5.0 1.3 2.5 1.3 2.0 3.0 3.3 3.8 0.0 2.8 (2.1) (1.4) 0.8 (1.5) 0.3 0.0

HNZ 1.2 (2.8) 0.6 1.3 1.8 4.2 4.0 (0.3) (2.7) 1.2 (0.8) 1.7 (0.1)

CPB 4.3 0.5 4.3 5.8 (0.8) 2.5 4.5 (0.5) (3.5) 1.7 (1.0) 0.6 1.1 1.3 0.6 (0.2)

K (1.4) (0.2) - 2.1 4.5 3.1 2.1 0.9 (0.7) (2.1) (0.0) (0.6) (0.5) (2.5) 0.5 (0.8)

KRFT (2.2) 0.6 (0.9) (0.5) (0.8)

SJM - (0.5) (0.5) (3.2) (2.2) 0.4 (2.8) 1.1 (1.2)

CAG (1.0) 3.5 (1.5) 1.5 1.0 (0.8) (1.3) (3.1) (3.4) (0.5) (3.3) (1.0) (1.8)

SLE/HSH 0.1 (0.1) (0.1) (2.9) (4.5) (4.8) 1.7 (0.5) (3.2) (2.2)

Average (ex MJN) 1.6 0.1 1.6 2.4 1.9 1.4 2.0 0.2 (1.8) 0.8 (0.9) (0.1) 1.2 (1.2) 0.3 (0.1)

Price/Mix 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Avg 09-13

HSY - - 1.0 1.7 2.2 0.5 (0.2) 4.0 9.7 1.9 5.9 5.9 0.3 1.6 6.4 4.7

SJM 8.0 4.0 1.0 9.6 8.4 (4.0) (1.6) 1.4 3.8

MJN 8.1 5.9 3.5 3.4 5.8 3.4 3.0 3.4 4.4

KFT (1.0) (0.2) 1.3 (0.1) 3.5 3.7 3.4 8.2 2.0 1.1 6.0 3.0

GIS 2.0 3.0 2.3 1.8 3.0 7.2 4.2 (0.1) 5.4 4.1 1.5 0.7 1.0 3.0

SLE/HSH 1.9 4.5 5.1 1.6 4.0 8.2 0.6 0.2 2.9

HNZ 1.5 3.7 0.3 (0.5) 0.2 1.1 2.8 6.2 4.8 1.0 3.6 2.2 2.9

MKC (0.5) 1.0 (0.3) 2.3 2.1 5.1 3.7 (0.4) 4.6 4.4 1.4 1.7 1.5 2.7

K 2.3 4.2 3.8 2.9 1.9 3.7 3.3 4.5 3.7 0.9 4.6 3.2 0.8 0.9 1.5 2.6

CAG 2.5 2.5 1.0 (0.6) 1.5 5.0 5.5 (0.6) 3.9 4.0 0.1 0.4 1.0 2.6

MDLZ 3.3 0.7 4.4 3.6 2.0

CPB (1.5) 0.3 3.5 0.5 3.3 2.8 0.8 4.3 2.3 (1.8) 2.3 1.0 1.1 (0.8) 0.8 1.0

KRFT - 2.3 (0.6) 1.6 2.5 0.6

Average (ex MJN) 0.3 1.6 1.7 1.4 1.8 1.9 2.4 5.8 4.1 0.7 4.9 3.6 0.1 1.0 2.2 2.7

Organic Sales % 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Avg 09-13

MJN 8.3 3.5 9.3 14.7 5.9 8.0 8.5 8.0 8.3

HSY - 0.3 2.0 5.8 6.6 2.5 (1.1) 2.9 4.7 6.4 9.3 7.8 7.0 4.5 5.3 7.0

MDLZ 4.5 4.1 2.2 3.6 4.3

MKC 2.0 5.0 0.1 4.0 4.0 5.5 2.0 2.7 7.1 6.0 3.3 2.4 4.0 4.2

KFT 1.2 1.2 2.0 1.7 3.0 1.4 5.1 6.5 1.2 3.7 6.5 3.8

SJM 8.0 3.5 0.5 6.3 6.2 0.2 (4.4) 2.5 3.4

GIS 5.0 1.3 4.5 4.3 4.3 4.8 6.3 10.9 4.2 2.7 3.4 2.7 2.4 (0.8) 1.3 3.1

HNZ 2.7 0.9 0.9 0.8 2.1 5.3 6.8 5.9 2.2 2.2 2.7 3.9 2.8

K 0.9 4.0 3.8 5.0 6.4 6.8 5.4 5.3 3.0 (1.3) 4.5 2.5 0.6 (1.6) 2.0 1.9

SLE/HSH 2.0 4.4 5.0 (1.3) (0.5) 3.4 2.3 (0.4) (3.2) - 0.7

CAG - - 2.5 1.5 4.5 (2.1) 3.0 6.0 4.7 (1.9) 0.8 0.6 (1.1) (2.9) - 0.6

CPB 2.8 0.8 7.8 6.3 2.5 5.3 5.3 3.8 (1.2) (0.1) 1.3 1.6 0.9 0.5 1.4 0.5

KRFT - 0.1 (0.3) 0.7 2.0 (0.1)

Average (ex MJN) 1.8 1.2 3.2 3.8 3.7 3.3 4.3 6.0 2.3 1.5 4.1 3.5 1.7 (0.3) 2.2 2.7


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Exhibit 49: Historical gross margin trends Exhibit 50: Historical EBIT margin trends

GROSS MARGIN 2010 2011 2012 2013 2014 2015

Campbell 41.0% 40.2% 38.8% 37.3% 35.4% 34.7%

ConAgra 25.5% 22.7% 22.5% 22.5% 22.1% 21.9%

General Mills 39.7% 39.4% 36.9% 36.1% 35.4% 34.6%

Hershey 42.9% 42.4% 43.8% 46.0% 45.1% 45.5%

Kellogg 42.7% 41.3% 40.2% 39.0% 38.9% 39.6%

Mondelez 36.5% 35.6% 37.4% 37.3% 37.0% 36.7%

Kraft 32.5% 32.2% 32.2%

McCormick 42.5% 41.2% 40.3% 40.4% 40.9% 41.3%

Smucker 38.4% 34.2% 34.6% 36.3% 36.2%Average 38.7% 37.6% 36.8% 36.2% 35.9% 35.8%

EBIT MARGIN 2010 2011 2012 2013 2014 2015

Campbell 17.7% 17.4% 15.9% 15.3% 15.5% 15.1%

ConAgra 10.9% 10.5% 10.0% 10.3% 10.1% 10.5%

General Mills 17.9% 18.0% 16.7% 16.3% 16.2% 15.9%

Hershey 17.7% 17.9% 18.5% 19.2% 19.5% 19.8%

Kellogg 16.1% 15.0% 14.7% 14.6% 14.8% 15.1%

Mondelez 13.0% 13.7% 12.1% 12.1% 12.7% 13.7%

Kraft 16.6% 18.1% 18.6%

McCormick 15.3% 14.6% 14.4% 14.3% 14.4% 14.7%

SmuckerAverage 15.5% 15.3% 14.6% 14.8% 15.2% 15.4%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Exhibit 51: Historical asset turns Exhibit 52: Historical leverage trends

FIXED ASSET TURNS 2010 2011 2012 2013 2014 2015

Campbell 3.74 3.67 3.62 3.56 3.57 3.41

ConAgra 4.60 4.61 4.86 4.00 4.16 4.22

General Mills 4.68 4.45 4.56 4.58 4.54 4.48

Hershey 3.94 3.90 NA 3.96 3.61 3.71

Kellogg 3.96 4.02 3.58 3.84 3.69 3.64

Mondelez 3.57 3.94 3.50 3.28 2.85 2.75

Kraft 4.43 4.29 4.32

McCormick NA NA NA NA NA NA

Smucker 5.56 5.04 5.16 4.43 4.19 Average 4.08 4.31 4.19 4.10 3.89 3.84

Net Debt to EBITDA 2010 2011 2012 2013 2014 2015

Campbell 1.6x 1.6x 1.6x 2.5x 2.4x 2.2x

ConAgra 1.5x 1.4x 1.7x 4.6x 4.0x 3.5x

General Mills 1.9x 2.0x 2.1x 2.1x 2.3x 2.4x

Hershey 0.8x 0.9x 0.8x 0.5x 0.9x 0.8x

Kellogg 2.3x 2.4x 3.0x 2.6x 2.6x 2.5x

Mondelez 3.4x 2.8x 3.4x 3.2x 3.4x 3.2x

Kraft 2.4x 2.2x 2.0x

McCormick 1.4x 1.9x 1.6x 1.7x 1.6x 1.5x

Smucker 0.9x 1.6x 1.4x 1.7x 1.7xAverage 1.8x 1.7x 2.0x 2.3x 2.3x 2.2x


Exhibit 53: Historical returns on invested capital trends Exhibit 54: Historical free cash flow conversion trends

ROIC 2010 2011 2012 2013 2014 2015

Campbell 26.7% 24.8% 25.3% 16.2% 16.3% 15.6%

ConAgra 11.4% 12.4% 11.8% 7.2% 8.0% 8.0%

General Mills 15.3% 13.9% 12.8% 12.8% 12.4% 12.1%

Hershey 34.6% 34.3% 35.9% 36.7% 28.5% 30.5%

Kellogg 18.6% 19.1% 14.7% 14.5% 14.3% 14.6%

Mondelez 7.4% 9.5% 7.2% 7.7% 7.2% 7.7%

Kraft 15.2% 16.4% 17.2%

McCormick 15.9% 13.6% 15.2% 13.9% 14.2% 14.3%

Smucker 9.6% 8.4% 9.4% 8.9% 8.4%Average 17.6% 15.9% 15.6% 15.3% 14.5% 14.8%

FCF TO SALES 2010 2011 2012 2013 2014 2015

Campbell 9.7% 11.3% 10.3% 8.5% 6.7% 9.4%

ConAgra 8.2% 7.2% 5.4% 6.2% 6.0% 8.0%

General Mills 10.5% 5.9% 10.4% 13.0% 10.7% 10.4%

Hershey 12.7% 4.2% 12.6% 12.1% 7.7% 11.3%

Kellogg 4.3% 7.6% 9.0% 8.2% 7.0% 7.4%

Mondelez 4.2% 5.1% 6.6% 13.6% 6.9% 7.7%

Kraft 8.2% 8.6% 10.8%

McCormick 9.8% 6.6% 8.6% 8.9% 9.2% 9.5%

Smucker 4.4% 8.3% 11.0% 10.3% 9.2%Average 8.5% 6.8% 9.0% 9.8% 7.8% 9.3%


12 January 2015


Companies Mentioned (Price as of 08-Jan-2015)

B&G Foods Inc - Class A (BGS.N, $29.92, NEUTRAL, TP $29.0) Campbell Soup Company (CPB.N, $45.53, UNDERPERFORM, TP $42.0) Carlsberg (CARLb.CO, Dkr478.5) Church & Dwight Co., Inc. (CHD.N, $79.98) Clorox Co. (CLX.N, $107.31) Colgate-Palmolive (CL.N, $69.28) ConAgra Foods, Inc. (CAG.N, $36.69, NEUTRAL, TP $34.0) Danone (DANO.PA, €54.46) Diageo (DEO.N, $111.72) Diamond Foods, Inc. (DMND.OQ, $27.76, OUTPERFORM, TP $32.0) Dr Pepper Snapple Group, Inc (DPS.N, $74.2) Estee Lauder Companies Inc (EL.N, $75.4) Freshpet Inc. (FRPT.OQ, $16.6, NEUTRAL[V], TP $19.0) General Mills (GIS.N, $53.57, NEUTRAL, TP $53.0) Hain Celestial (HAIN.OQ, $56.9) Heineken (HEIN.AS, €59.03) Henkel (HNKG_p.F, €91.85) Hormel Foods (HRL.N, $51.69, NEUTRAL, TP $57.0) Ingredion Inc (INGR.N, $85.29, OUTPERFORM, TP $89.0) J.M. Smucker Co. (SJM.N, $101.69, NEUTRAL, TP $105.0) Kellogg Company (K.N, $67.21, UNDERPERFORM, TP $62.0) Kimberly-Clark Corporation (KMB.N, $116.99) Kraft Foods Group (KRFT.OQ, $63.99, NEUTRAL, TP $62.0) L'Oreal (OREP.PA, €139.8) McCormick & Company (MKC.N, $75.52, NEUTRAL, TP $72.0) Mead Johnson Nutrition Co. (MJN.N, $101.41, OUTPERFORM, TP $110.0) Molson Coors Brewing Co (TAP.N, $77.73) Mondelez (MDLZ.OQ, $37.59, OUTPERFORM, TP $42.0) Nestle (NESN.VX, SFr72.85) PepsiCo, Inc. (PEP.N, $97.48) Pinnacle Foods Inc. (PF.N, $35.64, OUTPERFORM, TP $37.0) Post Hldgs (POST.N, $41.44) Procter & Gamble Co. (PG.N, $91.1) Reckitt Benckiser (RB.L, 5260.0p) Starbucks (SBUX.OQ, $82.49) The Coca-Cola Company (KO.N, $43.51) The Hershey Company (HSY.N, $107.17, NEUTRAL, TP $108.0) The Whitewave Foods Company (WWAV.N, $34.59) TreeHouse Foods (THS.N, $91.59, NEUTRAL, TP $86.0) Tyson Foods (TSN.N, $41.2, NEUTRAL, TP $42.0) Unilever (UNc.AS, €33.17) Wal-Mart Stores, Inc. (WMT.N, $90.47)

Disclosure Appendix

Important Global Disclosures

I, Robert Moskow, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for B&G Foods Inc - Class A (BGS.N)

BGS.N Closing Price Target Price

Date (US$) (US$) Rating

17-Feb-12 23.71 21.00 N

19-Jul-12 26.75 25.00

01-Oct-12 30.76 R

04-Oct-12 30.54 32.00 N

10-Jun-13 31.17 R

29-Jul-13 34.90 35.00 N

13-Feb-14 28.41 31.00

10-Apr-14 31.67 34.00

18-Jul-14 29.62 32.00

21-Oct-14 29.50 29.00

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

REST RICT ED

12 January 2015


3-Year Price and Rating History for Campbell Soup Company (CPB.N)

CPB.N Closing Price Target Price


20-Feb-12 32.90 33.00 N

09-Jul-12 32.72 R

23-Aug-12 34.70 35.00 N

01-Oct-12 35.04 35.00 U

25-Feb-13 39.98 40.00

16-May-13 47.85 44.00

26-Jul-13 47.07 48.00 N

30-Aug-13 43.18 47.00

15-Nov-13 42.42 46.00

19-Nov-13 39.20 41.00

20-May-14 44.04 42.00 U

08-Sep-14 43.39 41.00

25-Nov-14 44.64 42.00


N EU T RA L

REST RICT ED

U N D ERPERFO RM

3-Year Price and Rating History for ConAgra Foods, Inc. (CAG.N)

CAG.N Closing Price Target Price


22-Feb-12 26.11 27.00 N

21-Sep-12 27.51 29.00

27-Nov-12 29.63 32.00

20-Feb-13 33.65 36.00

28-Jun-13 34.93 37.00

10-Sep-13 31.54 36.00

19-Sep-13 30.80 34.00

19-Dec-13 33.47 35.00

11-Feb-14 29.08 31.00

18-Sep-14 33.48 34.00


N EU T RA L

3-Year Price and Rating History for Diamond Foods, Inc. (DMND.OQ)

DMND.OQ Closing Price Target Price


23-Jun-14 28.31 32.00 O *


O U T PERFO RM

12 January 2015


3-Year Price and Rating History for Freshpet Inc. (FRPT.OQ)

FRPT.OQ Closing Price Target Price


02-Dec-14 17.23 19.00 N *


N EU T RA L

3-Year Price and Rating History for General Mills (GIS.N)

GIS.N Closing Price Target Price


15-Feb-12 39.61 41.00 N

20-Sep-12 40.44 42.00

20-Dec-12 41.57 44.00

21-Mar-13 47.86 46.00

27-Jun-13 48.34 50.00

18-Sep-13 50.15 51.00

25-Jun-14 51.76 53.00


N EU T RA L

3-Year Price and Rating History for Hormel Foods (HRL.N)

HRL.N Closing Price Target Price


28-Feb-12 28.48 32.00 N

24-May-13 41.53 39.00

29-Jul-13 42.24 46.00 O

26-Nov-13 44.95 49.00

02-Jul-14 48.36 50.00 N

21-Aug-14 49.92 52.00

14-Nov-14 54.50 57.00


N EU T RA L

O U T PERFO RM

12 January 2015


3-Year Price and Rating History for Ingredion Inc (INGR.N)

INGR.N Closing Price Target Price


15-Apr-14 67.10 80.00 O *

11-Sep-14 79.31 85.00

17-Dec-14 82.75 89.00


O U T PERFO RM

3-Year Price and Rating History for J.M. Smucker Co. (SJM.N)

SJM.N Closing Price Target Price


13-Nov-13 107.93 115.00 N *

09-Jan-14 97.98 108.00

18-Feb-14 95.31 97.00

05-Jun-14 104.31 108.00

19-Jun-14 106.60 111.00

12-Nov-14 100.38 105.00


N EU T RA L

3-Year Price and Rating History for Kellogg Company (K.N)

K.N Closing Price Target Price


02-Feb-12 50.59 53.00 N

15-Feb-12 52.87 56.00

23-Apr-12 50.70 54.00

01-Nov-12 53.50 55.00

16-Jan-13 57.03 55.00 U

06-Feb-13 58.99 57.00

02-May-13 63.42 62.00

06-Feb-14 57.74 57.00

01-May-14 65.37 60.00

31-Jul-14 59.83 58.00

30-Oct-14 64.04 62.00


N EU T RA L

U N D ERPERFO RM

12 January 2015


3-Year Price and Rating History for Kraft Foods Group (KRFT.OQ)

KRFT.OQ Closing Price Target Price


02-Oct-12 45.42 50.00 O *

03-May-13 53.11 57.00

01-Aug-13 57.14 61.00

06-Jun-14 59.72 65.00

30-Jul-14 57.24 63.00

30-Oct-14 56.16 58.00 N

18-Dec-14 63.38 62.00


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for McCormick & Company (MKC.N)

MKC.N Closing Price Target Price


26-Jan-12 51.07 50.00 N

27-Mar-12 54.22 56.00

27-Jun-12 59.09 59.00

28-Sep-12 62.04 61.00

03-Apr-13 71.60 70.00

25-Mar-14 71.20 72.00


N EU T RA L

3-Year Price and Rating History for Mead Johnson Nutrition Co. (MJN.N)

MJN.N Closing Price Target Price


24-Jan-12 70.75 82.00 O

26-Apr-12 86.53 98.00

18-Jul-12 73.01 86.00

26-Jul-12 70.69 84.00

25-Oct-12 63.53 76.00

16-Jan-13 66.96 76.00 N

07-Aug-13 79.05 90.00 O

09-Jan-14 84.23 92.00

24-Apr-14 88.22 97.00

23-Jul-14 95.08 105.00

23-Oct-14 100.66 110.00


O U T PERFO RM

N EU T RA L

12 January 2015


3-Year Price and Rating History for Mondelez (MDLZ.OQ)

MDLZ.OQ Closing Price Target Price


20-Jan-12 38.67 30.33 O

22-Feb-12 37.99 31.50

02-Oct-12 28.00 31.00

17-Apr-13 29.84 33.00

08-Aug-13 32.70 34.00

17-Sep-13 31.98 36.00

09-Jan-14 35.36 37.00 N

13-Feb-14 34.01 35.00

07-May-14 38.10 42.00 O


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Pinnacle Foods Inc. (PF.N)

PF.N Closing Price Target Price


07-May-13 24.49 27.00 O *

16-May-13 25.32 28.00

14-Aug-13 26.34 30.00

10-Sep-13 27.66 R

09-Oct-13 25.28 30.00 O

13-Nov-13 27.36 31.00

09-Dec-13 27.97 R

09-Jan-14 27.16 31.00 O

06-Mar-14 28.37 33.00

07-Mar-14 28.97 R

08-Apr-14 29.38 33.31 O

01-May-14 30.32 33.00

13-May-14 34.00 36.00 N

13-Jun-14 33.04 36.00 O

11-Sep-14 32.35 R

08-Oct-14 32.45 36.00 O

12-Nov-14 33.68 37.00


O U T PERFO RM

REST RICT ED

N EU T RA L

3-Year Price and Rating History for The Hershey Company (HSY.N)

HSY.N Closing Price Target Price


25-Jan-12 61.65 68.00 O

24-Apr-12 66.00 75.00

26-Jun-12 70.00 78.00

11-Dec-12 73.31 82.00

01-Feb-13 80.14 90.00

24-Apr-13 89.34 103.00

24-Oct-13 96.41 109.00

25-Feb-14 106.77 117.00

24-Apr-14 96.02 108.00

16-Jul-14 92.34 101.00 N

24-Jul-14 92.34 99.00


O U T PERFO RM

N EU T RA L

12 January 2015


3-Year Price and Rating History for TreeHouse Foods (THS.N)

THS.N Closing Price Target Price


08-Feb-12 54.75 51.00 N

15-May-12 57.80 62.00

08-Aug-12 50.77 55.00

07-Nov-12 51.86 50.00 U

25-Feb-13 57.76 54.00

09-May-13 63.79 56.00

08-Aug-13 72.93 67.00

13-Feb-14 70.18 70.00 N

28-Apr-14 74.06 72.00

01-Jul-14 80.73 82.00

06-Nov-14 85.49 86.00


N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for Tyson Foods (TSN.N)

TSN.N Closing Price Target Price


06-Feb-12 19.15 20.00 N

07-Aug-12 14.77 18.00

19-Nov-12 18.72 20.00

04-Feb-13 22.83 24.00

30-Jul-13 27.31 28.00

05-Aug-13 29.69 30.00

12-Feb-14 36.89 36.00

01-May-14 42.41 40.00

09-Jun-14 37.50 35.00 U

28-Jul-14 40.56 38.00

01-Oct-14 39.99 42.00 N


N EU T RA L

U N D ERPERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of a ll companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

12 January 2015


Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cove r multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (54% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for B&G Foods Inc - Class A (BGS.N)

Method: Our 12-month target price of $29 is based on 11.5x our 2016 EBITDA estimate of $224M, which assumes a 7% premium to food peers due to management's largely successful track record for M&A and consistent dividend increases.

Risk: Risks to our $29 target price for BGS are rising commodity costs, particularly meat, maple syrup, packaging and fuel, rising interest rates, changes to the tax code, and increased competition from private equity for acquisition candidates.

Price Target: (12 months) for ConAgra Foods, Inc. (CAG.N)

Method: Our target price of $34 reflects a 14x P/E multiple against our FY16 EPS estimate. This represents a 20% discount to peers due to our concerns about the private label business and the long-term growth profile of the core brands.

Risk: Risks to our $34/share target price include challenges associated with the Ralcorp integration (including realization of synergies and issues related to the hybrid private label / branded business model), volatile commodity input costs (especially in vegetable oil and protein), market share losses to competition or private label, and future volume declines.

Price Target: (12 months) for Campbell Soup Company (CPB.N)

Method: Our target price of $42 is based on 16x our FY16 EPS estimate, an 11% discount to peers, reflecting the company’s below peer EPS

growth rate.

Risk: Major risks to our $42 / share target price for Campbell Soup include competitive pressure in simple meals, inflationary pressure in major input costs like energy, steel, resins, and soybean oil, and the cost of failure if new product introductions do not resonate with consumers or retail customers.

Price Target: (12 months) for Diamond Foods, Inc. (DMND.OQ)

Method: Our $32 DMND target price is 12x our FY16 EBITDA estimate.

Risk: Risks to our $32 target price for DMND are changes in walnut prices through the fiscal year, an increase in other commodity inputs for the snacking business, and high leverage.

Price Target: (12 months) for Freshpet Inc. (FRPT.OQ)

Method: Our $19 target price assumes a 21x multiple on our FY16 EBITDA estimate. This represents an approximate 26% premium to select peers, which we think is justified by our expectation for more than 30% sales growth over the next three years.

12 January 2015


Risk: Risks to our $19 TP include slower consumer adoption than expected, lower velocity and productivity at the retail stores, and less SG&A leverage.

Price Target: (12 months) for General Mills (GIS.N)

Method: Our 12-month target price of $53 is based on a 17x P/E against our calendar 2016 EPS estimate, in-line with the company's peers.

Risk: Our $53 target price would be at risk if General Mills does not meet our assumptions that the company can grow sales at a rate faster than the packaged food industry average by introducing succesful new products, leveraging its strong brands, and participating in fast-growing categories like yogurt and snack bars, and that productivity savings help offset rising input costs.

Price Target: (12 months) for Hormel Foods (HRL.N)

Method: Our 12-month target price of $57/share for Hormel Foods is based on a 11x our FY16 EBITDA estimate.

Risk: Risks to our $57/share target price for Hormel Foods include: changes in agricultural (beef, pork, turkey, sugar) commodity prices, the impact of animal disease on meat demand, foreign exchange fluctuations, and Turkey margins returning to more "normalized" levels.

Price Target: (12 months) for The Hershey Company (HSY.N)

Method: Our target price of $108 is based on a 22.5x P/E against our 2016 EPS estimate. This is a 28% premium to food peers, in-line with the

stock’s historic premium to the large cap food group average.

Risk: Risks to HSY achieving our $108 target price are: (1) execution risk in the growing premium/dark chocolate category; (2) volatile cocoa, nuts and dairy commodity input costs; and (3) the risk of competitive incursion in chocolate from Mars.

Price Target: (12 months) for Ingredion Inc (INGR.N)

Method: Our target price of $89 assumes a 13x multiple on our FY16 EPS estimate.

Risk: Risks to our $89 target price include on-going structural problems in emerging markets (especially Argentina), government regulations related to taxation on sweetened products, a structurally declining US soft drink market, and HFCS pricing in North America.

Price Target: (12 months) for Kellogg Company (K.N)

Method: We apply a EV / EBITDA multiple of 10.2x our FY16 EBITDA estimate to reach a $62 target price. This represents a 7% discount to the large cap packaged food group average. We use a relative EV / EBITDA multiple for our valuation of Kellogg stock rather than P/E because of the disproportionate impact of Kellogg's pension accounting methods on its net earnings.

Risk: Risks to our $62/share target price include slowing sales from a declining US cereal cateogory, price pressure from competition in all of its major categories, volatile macro economic conditions in Latin America and Western Europe.

Price Target: (12 months) for Kraft Foods Group (KRFT.OQ)

Method: Our 12 month target price of $62 for Kraft Foods Group is based on a 17.5x P/E against our FY16 EPS estimate, in-line with the peer averagae.

Risk: Risks to our $62/share target price for Kraft Foods Group include high financial leverage and a high dividend payout ratio reducing management's flexibility, a high need for reinvestment in the brands, and a spotty execution track record with main brands losing market share over the last ten years.

Price Target: (12 months) for Mondelez (MDLZ.OQ)

Method: Our 12 month target price of $42 is a probability weighted average of 3 scenarios: 1) current management reaches stated goals-$42, 40% probability, 2) current management does not reach stated goals-$32, 20% probability, and 3) an acquirer buys the business-$46, 40% probability.

Risk: Risks to our $42 target price are the efficacy of increased investment and cost-cutting programs, pricing and mix offset continued commodity cost pressures, competition from value brands and private label, and continued weakening macro conditions in Europe and the U.S.

Price Target: (12 months) for Mead Johnson Nutrition Co. (MJN.N)

Method: Our target price of $110 / share reflects a 24x P/E multiple against our forward 12-month rolling EPS estimate. We think the premium to peers is justified by the vast difference in top-line growth rates (8% versus ~2%) and the attractiveness of the business to strategic consolidators in the industry.

12 January 2015


Risk: Risks to our $110 / share target price for Mead Johnson Nutrition Co. are consumers trading down to private label products in the U.S., declines in China's growth rate, changes in the federally-funded WIC (Women, Infants, and Children) nutrition program, and input cost inflation predominantly for the company's largest input cost non-fat dry milk.

Price Target: (12 months) for McCormick & Company (MKC.N)

Method: Our 12-month target price of $72 is based on an 18x P/E against our 2016 EPS estimate. This represents a smaller premium to the food peer group than the historical average (10% vs 15%) due to our concerns about U.S. trends.

Risk: Major risks to McCormick's earnings base, long-term growth rate and our $72 target price include weak macro conditions in France (10% of sales), private label incursions, price competition in bulk commodity ingredients, and delayed new product launches by Industrial customers.

Price Target: (12 months) for Pinnacle Foods Inc. (PF.N)

Method: Our 12-month $37 target price reflects a 10.9x multiple against our 2016 EBITDAforecast.

Risk: Risks to our $37 target price include incorrect assumption around our probability-weighted valuation framework, reduced consumer demand in the U.S. for branded products versus private label, a shift away from the frozen category, and increased commodity input inflation.

Price Target: (12 months) for J.M. Smucker Co. (SJM.N)

Method: Our target price of $105 is based on a multiple of 17x our forward 12 month estimate. We do not view Smucker as more or less advantaged than its packaged food peers over the next twelve months and therefore apply a group multiple.

Risk: Key risks to our $105 target price include intensified competition in key categories, downward pricing action in key categories resulting from falling commodity costs, margin compression from commodity inflation, a structural shift in consumer preferences, or changes to the long-term M&A strategy.

Price Target: (12 months) for TreeHouse Foods (THS.N)

Method: Our target price of $86/sh assumes 10.5x our 2016 EBITDA. This multiple seems reasonable in a packaged food space where large caps are fetching ~11x despite much slower growth.

Risk: Risks to our $86/share target price on THS are that branded competitors in the highly competitive pickle category out-promote private label or that THS loses bid business to discount competitors. In addition, rising energy costs would harm profit margins as they flow through packaging and distribution costs and acquisition integration could fall short of management's targets

Price Target: (12 months) for Tyson Foods (TSN.N)

Method: Our $42 target price is based on a 7.5x EBITDA multiple against our FY 15 EBITDA estimate.

Risk: Risks to our $42 target price for TSN are if the deal with Hillshire does not go through, increased volatility in commodity meat and grain costs, disruption in exports due to volatile international trade conditions, disease, and foreign exchange.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, HSY.N, K.N, MJN.N, MKC.N, PF.N, SJM.N, THS.N, TSN.N, TAP.N, OREP.PA, WMT.N, KMB.N, DPS.N, WWAV.N, CL.N, PG.N, PEP.N, CHD.N, HEIN.AS, NESN.VX, KO.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, MJN.N, PF.N, THS.N, OREP.PA, WMT.N, DPS.N, WWAV.N, PG.N, PEP.N, HEIN.AS, NESN.VX, KO.N) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (NESN.VX) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (DMND.OQ, FRPT.OQ, GIS.N, PF.N, WMT.N, WWAV.N, PG.N, NESN.VX, KO.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, MJN.N, PF.N, THS.N, OREP.PA, WMT.N, DPS.N, WWAV.N, PG.N, PEP.N, HEIN.AS, NESN.VX, KO.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, HSY.N, K.N, MJN.N, MKC.N, PF.N, SJM.N, THS.N, TSN.N, OREP.PA, CLX.N, WMT.N, KMB.N, DPS.N, WWAV.N, CL.N, PG.N, EL.N, PEP.N, CHD.N, HEIN.AS, NESN.VX, KO.N) within the next 3 months.

12 January 2015


Credit Suisse has received compensation for products and services other than investment banking services from the subject company (NESN.VX) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, HSY.N, INGR.N, K.N, KRFT.OQ, MDLZ.OQ, MJN.N, MKC.N, PF.N, SJM.N, THS.N, TSN.N, TAP.N, CLX.N, WMT.N, KMB.N, DPS.N, WWAV.N, CL.N, PG.N, EL.N, PEP.N, CHD.N, KO.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (NESN.VX).

Credit Suisse has a material conflict of interest with the subject company (CPB.N) . Credit Suisse Securities (USA) LLC acted as financial advisor to Bolthouse Holding Corp in connection with the announced sale of the company to Campbell Soup Company.

Credit Suisse has a material conflict of interest with the subject company (CLX.N) . Pamela Thomas-Graham, an employee of Credit Suisse, is a member of the Board of Directors of The Clorox Company.

Credit Suisse has a material conflict of interest with the subject company (NESN.VX) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program for capital reduction purposes.

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (CLX.N). An analyst or a member of the analyst's household has a long position in the common stock of (CLX).

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PG.N). An analyst or a member of the analyst's household has a long position in the common stock of (PG).

As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PEP.N). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of PEP.N

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BGS.N, CAG.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, HRL.N, HSY.N, INGR.N, K.N, KRFT.OQ, MDLZ.OQ, MJN.N, MKC.N, PF.N, SJM.N, THS.N, TSN.N, TAP.N, RB.L, OREP.PA, CLX.N, CLX.N, WMT.N, KMB.N, DPS.N, WWAV.N, CL.N, HNKG_p.F, PG.N, PG.N, DANO.PA, CARLb.CO, EL.N, PEP.N, CHD.N, HEIN.AS, NESN.VX, KO.N, UNc.AS) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (RB.L, OREP.PA, HNKG_p.F, DANO.PA, CARLb.CO, HEIN.AS, NESN.VX, UNc.AS).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BGS.N, CPB.N, DMND.OQ, FRPT.OQ, GIS.N, KRFT.OQ, MDLZ.OQ, PF.N, WMT.N, DPS.N, WWAV.N, PG.N, HEIN.AS, NESN.VX, KO.N) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

12 January 2015


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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