The Kraft Heinz CompanyEquity Research

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16 April 2018Americas/United States

Equity ResearchPackaged Foods

The Kraft Heinz Company (KHC)

DOWNGRADE RATING Rating(from OUTPERFORM) UNDERPERFORMPrice (12-Apr-18, US$) 60.94Target price (US$) (from 77.00) 55.0052-week price range (US$) 93.77 - 60.03Market cap(US$ m) 74,275Enterprise value (US$ m) 103,424Target price is for 12 months.

Research AnalystsRobert Moskow

212 538 [email protected]

Neel Kulkarni212 538 9034

[email protected]

Prioritizing Growth Rather Than Margins Won’t Be Easy; Lowering to UnderperformWe are downgrading Kraft Heinz to Underperform. We are lowering our 2018 and 2019 EPS to $3.70 and $3.75 compared to consensus of $3.80 and $4.05. We are lowering our target price to $55 (from $77). While KHC stock has devalued considerably since the start of the year, we believe it will head lower still as consensus sales and EBITDA estimates revise down. Organic growth is not Kraft Heinz’ expertise. We harbor serious doubts about the management team’s ability to generate sufficient product innovation to grow its collection of “retro” brands in highly commoditized categories. The company’s expertise in cost-cutting and price realization worked well at a time when all of its peers were forced to run the same playbook. But now, with retailers like Walmart and Kroger demanding more from the vendors to drive growth, the playing field has become more competitive. We provide in this report the feedback we received from numerous industry participants and former employees who expressed similar concerns. M&A optionality deserves smaller value. We believe that Kraft Heinz will find another acquisition target at some point. However the lack of approachable targets, the reduced buying power of its equity, and the narrow range of options that the board is willing to pursue imply a smaller value for the optionality. Valuation. We apply a 12.7x multiple against our 2019 EBITDA to get to our target price, which includes $4/share for the option value of a modestly-sized acquisition. The successful consummation of a big acquisition represents the biggest upside risk to our target price.

Share price performance

KH C.O Q S& P 5 0 0 IN D EX

Ju l - 1 7 O ct - 1 7 Jan - 1 8 A p r - 1 86 0

8 0

1 0 0

1 2 0

On 12-Apr-2018 the S&P 500 INDEX closed at 2663.99Daily Apr13, 2017 - Apr12, 2018, 04/13/17 = US$91.5

Quarterly EPS Q1 Q2 Q3 Q42017A 0.83 0.86 0.83 0.902018E 0.79 0.95 0.95 1.012019E - - - -

Financial and valuation metricsYear 12/17A 12/18E 12/19EEPS (CS adj.) (US$) 3.42 3.70 3.75Prev. EPS (US$) 3.54 3.88 4.15P/E (x) 17.8 16.4 16.3P/E rel. (%) 84.2 92.9 101.4Revenue (US$ m) 26,085.0 26,257.1 25,994.5EBITDA (US$ m) 7,615.0 7,722.0 7,644.8OCFPS (US$) 0.30 3.95 5.34P/OCF (x) 256.7 15.4 11.4EV/EBITDA (current) 13.7 13.5 13.6Net debt (US$ m) 29,907 29,149 24,962ROIC (%) 4.92 5.42 5.59

Number of shares (m) 1,218.81 IC (current, US$ m) 96,154.00BV/share (Next Qtr., US$) 54.0 EV/IC (x) 1.1Net debt (Next Qtr., US$ m) 29,533.4 Dividend (current, US$) 2.50Net debt/tot eq (Next Qtr.,%) 44.4Source: Company data, Thomson Reuters, Credit Suisse estimates

16 April 2018

The Kraft Heinz Company (KHC) 2

The Kraft Heinz Company (KHC)Price (12 Apr 2018): US$60.94; Rating: (from OUTPERFORM) UNDERPERFORM; Target Price: (from US$77.00) US$55.00; Analyst: Robert MoskowIncome Statement 12/17A 12/18E 12/19ERevenue (US$ m) 26,085.0 26,257.1 25,994.5EBITDA 7,615 7,722 7,645Depr. & amort. (910) (910) (910)EBIT (US$) 6,656 6,812 6,735Net interest exp (1,234) (1,330) (1,260)PBT (US$) 5,895 5,922 5,915Income taxes (1,701) (1,362) (1,301)Profit after tax 4,194 4,560 4,614Other NPAT adjustments 0 0 0Cash Flow 12/17A 12/18E 12/19ECash flow from operations 372 4,844 6,556CAPEX (1,217) (850) (867)Free cashflow to the firm (845) 3,994 5,689Cash flow from investments 1,156 (850) (867)Net share issue(/repurchase) 0 0 0Dividends paid (2,888) (3,236) (3,398)Cashflow from financing activities (3,235) (3,236) (1,502)Changes in Net Cash/Debt (1,707) 758 4,188Balance Sheet (US$) 12/17A 12/18E 12/19ECash & cash equivalents 1,629 2,387 6,574Account receivables 1,274 1,490 1,246Total fixed assets 7,120 7,190 5,413Investment securities - - -Total assets 120,232 121,467 123,308Total current liabilities 10,132 9,991 10,394Shareholder equity 66,034 67,410 68,848Total liabilities and equity 120,232 121,467 123,308Net debt 29,907 29,149 24,962Per share 12/17A 12/18E 12/19ENo. of shares (wtd avg) 1,228 1,228 1,228CS adj. EPS 3.42 3.70 3.75Prev. EPS (US$) 3.54 3.88 4.15Dividend (US$) 2.45 2.64 0.00Free cash flow per share (0.69) 3.25 4.63Earnings 12/17A 12/18E 12/19ESales growth (%) (1.5) 0.7 (1.0)EBIT growth (%) (7.9) 2.3 (1.1)Net profit growth (%) 3.0 8.2 1.2EPS growth (%) 2.9 8.3 1.1EBITDA margin (%) 29.2 29.4 29.4EBIT margin (%) 25.5 25.9 25.9Pretax margin (%) 22.6 22.6 22.8Net margin (%) 16.1 17.3 17.7Valuation 12/17A 12/18E 12/19EEV/EBITDA (x) 13.7 13.5 13.6P/E (x) 17.8 16.4 16.3Returns 12/17A 12/18E 12/19EROIC (%) 4.9 5.4 5.6Gearing 12/17A 12/18E 12/19ENet debt/equity (%) 45.1 43.1 36.1Quarterly EPS Q1 Q2 Q3 Q42017A 0.83 0.86 0.83 0.902018E 0.79 0.95 0.95 1.012019E - - - -

Company BackgroundKraft Heinz is a global producer, marketer, and distributor of processed foods and beverages including cheese, meats, refreshment beverages, coffee, refrigerated and frozen meals, ketchup and sauces, snack nuts, dressings, and other grocery products.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (US$) (from 85.00) 67.00Our Blue Sky scenario of $67 assumes Kraft Heinz successfully completes a value creating transaction.

Our Grey Sky Scenario (US$) (from 65.00) 50.00Our Grey Sky scenario of $50 assumes an EV/EBITDA contraction to 11.5x our forward EBITDA estimate resulting from greater-than-expected market share losses to private label products and higher-than-anticipated reinvestment needed to boost sales.

Share price performance

KH C.O Q S& P 5 0 0 IN D EX

Ju l - 1 7 O ct - 1 7 Jan - 1 8 A p r - 1 86 0

8 0

1 0 0

1 2 0

On 12-Apr-2018 the S&P 500 INDEX closed at 2663.99Daily Apr13, 2017 - Apr12, 2018, 04/13/17 = US$91.5

Source: Company data, Thomson Reuters, Credit Suisse estimates

16 April 2018


Lowering to Underperform Company Background The Brazilian private equity firm 3G Capital bought Heinz in 2013 then merged it with Kraft Foods in 2015 with financial backing from Warren Buffett’s Berkshire and a 49% public stake. The company boasts number one or two positions in 17 categories, representing around 80% of sales. It is the second-largest food company in the U.S. with big market leaders like Kraft cheese, Heinz ketchup, Oscar Mayer meats, Lunchables, Jell-O, Ore Ida potatoes, and Planters nuts. Internationally, its Heinz brand holds number one or two positions in more than 50 countries, particularly the UK. The company also owns a handful of “local jewels” internationally such as ABC in Indonesia, Quero in Brazil, and Plasmon in Italy.

Before Kraft Heinz, the highly acquisitive 3G team created enormous shareholder value in the consumer sector by instilling an enormously different culture and business approach at what had been rather sleepy, overcapitalized businesses (like Burger King and Budweiser). With a laser focus on cost savings, it dramatically strips out non-essential overhead costs, restructures the supply chains, and creates an “ownership” environment.

People who work at 3G-controlled companies like Budweiser, Burger King and Kraft Heinz describe it as a culture that attracts and quickly promotes younger executives to high levels of responsibility and dangles big financial rewards for those who achieve “big hairy goals.” Young executives take on a workload that exceeds that of any other company we have heard of in the consumer products industry.

That said, all of the industry contacts we contacted expressed concerns around the sustainability of operating the Kraft Heinz business with this culture. In particular, they said that the turnover rate at Kraft Heinz has increased to an alarming level and increased the execution risk at the company. We find it quite telling that the company chose not to publish its turnover rate in its February 2018 presentation in the section called “Recruit, Develop and Align our People.” With bonuses getting cut to close to zero in 2017, turnover rates are likely to remain very high.

The February presentation also points out (correctly) that the company takes a very selective approach in its recruiting in order to attract the smartest, most motivated people. However, only 30% of MBA interns and corporate trainees accept their summer offers. That means that the majority of top-tier students from Kellogg School of Management, Carnegie Mellon, and the Ivys opt not to return even after Kraft Heinz decides they want them.

While many investors the company seemed to be keeping pace with its peers in terms of revenue growth and market share. The company generated $1.7 billion of merger savings (9% of Kraft Foods’ sales) by radically reducing overhead costs and restructuring the supply chain. The merged company boosted its EBIT margin to nearly 29% compared to a peer average in the high teens. It established a sophisticated process for analyzing data to make revenue management and category management recommendations to retailers. Advertising investment moved modestly higher and product innovation perked up a bit. It closed the old, antiquated Oscar Mayer plant in Madison Wisconsin and opened a new state-of-the-art facility in Davenport Iowa.

Investors traded the stock at a big premium to its staples peers and hungrily anticipated another big transformational acquisition where the management team could apply its differentiated approach.

During the course of 2017, however, a series of events shook investors’ confidence in the company’s investment proposition.

16 April 2018


■ In February 2017, Unilever rejected the company’s $143 billion overture for a merger citing no merit, either financial or strategic, for shareholders. The offer was nearly 1.5x that of Kraft Heinz’s market capitalization. Government officials in the UK also expressed public dissatisfaction with Kraft Heinz’ approach.

■ In 1Q17, Canadian retailers rejected Kraft Heinz’ category management recommendations and pulled merchandising support across the entire portfolio. Canadian organic sales declined 15%. Sales declined again in 4Q17 when the same retailers reduced their inventory positions on Kraft Heinz products at the end of the year.

■ Kraft Heinz’ Oscar Mayer cold cuts and Kraft natural cheese brands experienced market share losses to private label. In natural cheese, Walmart rejected Kraft Heinz’ category management recommendations and significantly lowered private label prices.

■ The company experienced significant customer service problems in Oscar Mayer because of start-up problems at its new Davenport Iowa facility. The company ended up having to pay customers to protect the brand’s distribution while the facility got up to speed.

■ The company lost distribution for Planters peanuts at Sam’s Club because the customer bid out the business at a price that Kraft Heinz refused to accept.

■ Ore Ida frozen potatoes suffered customer service issues because extensive snowfall damaged the roof of its Canadian processing facility. The company expects these problems to persist at least through the first quarter.

These issues caused the stock’s valuation multiple to plummet over the past few months. In particular, KHC shareholders expressed frustration about the company’s inability to consummate another M&A transaction. They also took an increasingly skeptical view about the company’s recent attempts in the press to reposition itself as a strong stand-alone business with a socially responsible conscience.

Figure 1: KHC’s EV/EBITDA multiple premium is now at a 6% premium versus food peers compared to a historical average of 28%

Figure 2: KHC’s revenue growth tracked closely with the food peer average in 2016 and most of 2017. However, we expect it to fall well below its peer average in 2018

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

12/1/15 5/1/16 10/1/16 3/1/17 8/1/17 1/1/18

KHC.O U.S. Food Avg

-0.1%

1.1%

0.0%

-0.5%

1.0%0.9%

-1.4%

0.3%

-1.0%

-0.6%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2014 2015 2016 2017 2018E

Food Average KHC

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

16 April 2018


Figure 3:KHC’s EBIT margin remains well above its peer group, but it does not have much room for further expansion

Figure 4: Kraft Heinz reduced advertising spending by 11% in 2017 when sales trends began to falter

18.9%

21.5%

27.3% 27.8%

18.7%

2014

2015

2016

2017

KHC Average

694

708

629

580

600

620

640

660

680

700

720

2015 2016 2017

Source: Company data, Credit Suisse estimates; peer average includes CAG, CPB, GIS, HSY, K, MDLZ, KHC, SJM

Source: Company data, Credit Suisse estimates

16 April 2018


Hard to Trust the Transition to GrowthSavings ran out and reinvestment needs roseKraft Heinz management responded to its business challenges with a webcast presentation to investors in February. In the presentation, it indicated that 2018 marks the end of its merger phase and the beginning of a new phase of growth for the fully combined company. Management called out its intention to invest an additional $250-$300 million into supply chain, marketing capabilities, and rebuilding its staff of in-store merchandising personnel to drive the growth. The company’s merger savings, which had accumulated to $1.725 billion since 2015, essentially had come to an end.

We share the concern that investors widely expressed after watching the webcast: with margins looking very much at their peak, sales growth stagnating, and the company talking more about reinvestment, it becomes very difficult to believe in the company’s ability to create value as a stand-alone entity. The 3G business model is very good at cutting non-essential overhead, focusing on price realization, and running an efficient plant and distribution network. However, its ability to drive sales growth through marketing, new products, and strategic investment has yet to be proven.

Food peers will reinvest, and so must Kraft HeinzSignificant changes in the retail environment exacerbate these concerns. Kraft Heinz’ business model of cost-cutting and price realization worked well at a time when all of Kraft Heinz’ peers were forced to run the same playbook. But now, with retailers demanding more price support from the vendors to drive growth and the benefits of US corporate tax reform providing more fuel for investment, the playing field has changed. The top two grocer retailers Walmart and Kroger abandoned their margin targets and invested more in price and e-commerce capabilities to drive growth. This gave them more leverage to demand more promotional allowances, supply chain investment, and category growth from their vendors.

Figure 5: Retailers in the Mass, Club, Military, and Dollar Store Channel (led by Walmart) have been gaining market share by investing heavily in price cuts. Average pricing fell 1.5% in the first quarter of 2018. Walmart says it intends to invest incrementally more in price in 2018 than in 2017

Figure 6: Traditional grocers are losing share to the mass competitors while keeping average pricing relatively high

-3%

-2%

-1%

0%

1%

2%

3%All OtherChannels - Pricey.y

All OtherChannels - Unity.y

All OtherChannels - TotalSales

Source: Nielsen xAOC + C, Credit Suisse estimates; data as of 3/24/18 Source: Nielsen xAOC + C, Credit Suisse estimates; data as of 3/24/18

16 April 2018


With Walmart now gaining market share in a weak macro environment, the food companies have no choice but to reinvest more alongside it. Food companies have responded by loading up Walmart with bigger vendor allowances and slotting fees for new products. Kraft Heinz, on the other hand, has experienced significant sales declines. Management seems to recognize the sense of urgency to regain momentum at Walmart. But in our view, the investments required will depress Kraft Heinz’ margin structure more than expected in the consensus view.

Figure 7: Kraft Heinz’ sales have fallen faster in the MCM channel than all of its peers. We believe that this reflects poor performance at its biggest customer, Walmart

MCM Channel Pricing Growth Sales Growth MCM as % of Total Sales

B&G Foods 7.2% -0.8% 32%Kellogg 0.3% 0.1% 40%Campbell Soup 6.4% -3.3% 35%Conagra 2.7% 4.1% 38%General Mills 1.0% 2.2% 40%Hershey 0.3% 1.0% 40%Mondelez 2.6% 2.9% 36%Kraft Heinz 1.7% -3.7% 39%McCormick -0.6% -0.1% 34%Smucker 3.9% 0.7% 51%Pinnacle Foods 3.2% 5.6% 38% Average (ex B&G, Campbell) 1.7% 1.4% 40%

Food Channel Pricing Growth Sales GrowthDiff between MCM

Growth and Food GrowthB&G Foods 0.0% 1.8% -2.6%Kellogg -1.7% -1.7% 1.8%Campbell Soup 0.8% 0.4% -3.7%Conagra 2.1% 0.8% 3.3%General Mills -0.2% 0.7% 1.5%Hershey 0.4% 0.3% 0.6%Mondelez 2.2% 1.5% 1.4%Kraft Heinz 4.3% -1.3% -2.4%McCormick 2.8% 2.1% -2.2%Smucker 3.9% -0.4% 1.1%Pinnacle Foods 5.3% 0.0% 5.6% Average (ex B&G, Campbell) 2.1% 0.2% 1.2%

Source: Nielsen xAOC + C, Credit Suisse estimates; data as of 1/27/18

16 April 2018


Figure 8: Kraft Heinz’ points of distribution losses have accelerated over the past three years, with only Kellogg losing more in the large cap food group. As a result, we believe it will need to make a significant investment in slotting fees for retailers to regain the ground it lost.

2014 2015 2016 2017Latest 52

wksLast 12

wksConagra (1.2) (2.0) (3.2) (5.5) (4.6) (2.1)General Mills 5.6 1.0 (3.4) (5.2) (4.4) (2.6)Kellogg (1.0) (3.4) (4.1) (3.5) (5.0) (8.0)Campbell 6.9 4.0 (1.8) (1.8) (2.4) (3.7)Mondelez 4.8 (0.9) 0.1 3.8 3.6 2.5Kraft Heinz (1.7) 0.2 (2.5) (3.6) (4.3) (5.8)Hershey 6.2 3.3 3.1 5.5 5.2 2.5McCormick 0.3 0.8 (0.9) (2.2) (2.7) (4.4)Smucker 3.7 4.3 0.1 (4.1) (4.1) (4.3)B & G (2.0) (2.5) (2.3) (5.9) (6.1) (7.0)Pinnacle 3.5 6.1 2.5 0.9 0.2 (1.9)Hormel 3.4 (3.8) (0.7) 1.5 1.2 0.6Tyson 2.1 (2.7) (0.2) 1.4 0.7 (0.2) Average 2.4 0.3 (1.0) (1.4) (1.7) (2.7)

Private Label 3.7 6.1 2.2 7.0 7.3 6.4


Challenged PortfolioAn ex-CEO of Kraft Foods once told us that he remembered looking at internal data in the 1990’s indicating that the Kraft portfolio (with retro brands like Philadelphia, Planters, Oscar Mayer, Capri Sun, Velveeta, and Jell-O) basically generated zero volume growth for the entire decade. The only way to generate revenue growth in commodity categories like cheese, meats, and nuts is to focus on new product development to enhance the mix. With products that make it easier for consumers to prepare meals or eat on the go, Kraft traded consumers up to higher price points and enhanced its profit margins

This raises two big concerns for us going forward:

Not an innovative culture. The new leadership at Kraft Heinz talks a lot about the importance of growth, but we don’t see evidence of significant product innovation coming out of the business. Aside from Devour frozen meals and Heinz mustard, we can’t think of any “Big Bet” new product introductions that generated meaningful sales. The February presentation pointed to an internal target for generating innovation at a rate of 7% of net sales. In comparison, innovation at Kraft Foods under the prior CEO averaged 9-10%. The decline might be a casualty of extreme cost-cutting.

The company has taken many steps to clean up its ingredients, modify flavor profiles, and improve packaging. However, what it describes as innovation is really just more renovation. Competing companies like Danone, General Mills, and Coca Cola have are working hard to catch up to consumer demand for organic, gluten free, plant proteins, and prebiotics. In comparison, Kraft Heinz has lagged its peers in delivering strong, revolutionary innovations with a material impact. It launched Heinz mustard in 2015, but the product remains a negligible component at just 0.1% in FY18 company sales when measured on an annualized basis. In comparison, innovative products such as Yoplait Oui and Well Yes! comprise 0.7% of their respective companies’ FY18 sales.

16 April 2018


Figure 9: Kraft Heinz has lagged its peers in bringing strong innovations to market over the past year. Heinz Mustard and Devour comprise barely 0.3% of total company sales. Meanwhile recent launches by Pinnacle Foods, General Mills and Hershey have gathered far more steam with management backing and strong launch initiativesCompany Launch L52 Sales ($M) Annualized L4 Week Sales $M % of FY18 SalesGeneral Mills Yoplait Oui $71 $114 0.7%

Chocolate Peanut Butter Cheerios $17 $29 0.2%Hershey Cookie Layer Crunch $102 $87 1.1%Mondelez Belvita $328 $319 1.2%Smucker Nature's Recipe $106 $113 1.5%Pinnacle Duncan Hines Perfect Size for 1 $49 $57 1.8%Kraft Heinz Heinz Mustard $30 $25 0.1%

Devour $56 $57 0.2%Conagra Healthy Choice Simply Steamers $10 $17 0.2%Campbell Well Yes! $46 $56 0.7%

Source: Nielsen xAOC +C, Credit Suisse estimates; data as of 2/24/18. We calculate annualized L4 week sales with a 12x multiplier to account for any ramp up in the L52 weeks.

Figure 10: We highlight that only one person on KHC’s executive team has CPG experience; the rest came from 3G-held companies, banking, and private equity Name Title History Bernardo Hees CEO CEO at 3G-held Burger King and 3G-held America Latina Logistica (rail logistics company)David Knopf EVP and CFO 3G, Onex Partners (private equity firm), Goldman SachsPaulo Basilio President of U.S. Commercial Business CFO at 3G-held Heinz, CEO at 3G-held America Latina LogisticaPedro Drevon Zone President of LatAm 3G, Banco BBM (financial advisory and wealth management)Rashida La Lande SVP, General Counsel and Corporate Secretary Gibson, Dunn and Crutcher (law firm) partnerRafael Oliveira Zone President of EMEA Goldman SachsEduardo Pelleissone EVP of Global Operations 3G-held America Latina LogisticaCarlos Piani Zone President of Canada PDG Realty, Vinci Partners (private equity firm), CEMAR (electricity distribution company) Rodrigo Wickbold Zone President of APAC Unilever

Source: Company 10-K (2017), Credit Suisse estimates. Previous positions at KHC not included. Several executives also hold or previously held 3G Capital partner roles.

Vulnerable brands in commoditized categories. About 44% of the U.S. retail portfolio competes in cheese, meats, coffee, and nuts where the underlying commodity dictates the price.

16 April 2018


Figure 11: Over 30% of Kraft Heinz’ global sales are exposed to commodity cheese and meats

Figure 12: Over 50% of Kraft Heinz’ U.S. retail sales ($21B) are exposed to commodity cheese, meats, nuts, and coffee

Condiments and sauces

25%

Cheese and dairy21%

Ambient meals9%

Frozen and chilled meals

10%

Meats and seafood

10%

Other25%

Regular Cheese18%

Sliced meat11%

Lunchables7%

Dry dinners 7%

Nuts and seeds6%

Cream cheese

6%

Bacon5%

Juices4%Ground coffee

4%

Frozen potatoes3%

Beverage enhancers

3%

Mayonaisse3%

Condiments3%

Single serve coffee

2%

Frozen meals and apetizers

4%

Salad dressing 2%

Other 15%

Source: Company 10-K, Credit Suisse estimates Source: Company data, Credit Suisse estimates. Condiments includes ketchup and mustard. Specialty cheese ($150M) included in Other.

Figure 13: Kraft Heinz has more exposure to private label penetration in its U.S. categories than most of its food peers

23%21%

19% 19% 18%17%

15%14% 14%

10% 10%9%

4%

0%

5%

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15%

20%

25%

Avg Private Label Market Share

Source: Nielsen xAOC +C, Credit Suisse estimates

16 April 2018


We believe the lack of sufficient product innovation and promotional support in these categories contributed to the retailers’ decisions to expand their private label programs. Without sufficient innovation, the Kraft brands tend to lose their ability to maintain a premium price to private label.

Figure 14: Kraft Heinz lost share in 11 out of 13 of its most important categories in the past 52 weeks

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Figure 15: Private label gained share in 14 out 18 of Kraft Heinz’ most important categories

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16 April 2018


Execution RiskMore pushback from customersOutside industry experts and participants we spoke to generally praised Kraft Heinz for its highly disciplined, data-driven approach to category management and for demanding a positive ROI from the trade for promotional activities. As the market leader in multiple food categories, the company usually takes the lead in retailer discussions about how to best merchandise the categories in which it participates.

So if Kraft Heinz has the best data and the biggest brands, why has the trade pushed back on so many of its recommendations? The disputes with Canadian retailers, the loss of distribution for the Planters brand at Sam’s Club, and the expansion of private label cheese and meats at Walmart all reflect choices by the retailers that swerve away or directly contradict the recommendations Kraft Heinz made. That is an enormous amount of pushback for just one year.

We think the negative outcomes stem from two things:

Retailers have improved their data analytics to make their own category management decisions internally. The big retailers like Amazon, Walmart, Costco, Kroger are closer to the consumer and they have made significant improvements to their data collection and analytics. This has contributed to their growing edge in negotiations around product costs, promotions, and shelf space/screen space allocation.

Kraft Heinz takes a particularly inflexible approach in retailer negotiations. We have heard from more than one source inside and outside the company that Kraft Heinz draws a very hard line between what it defines as “good” and “bad” deals with customers. Sales people and business leaders need to provide an inordinate amount of evidence internally to gain approval from financial leaders for customer programs. This can lead to “analysis-paralysis” or outright disruptions during delicate customer negotiations. Having so many young executives in senior roles may sometimes exacerbate the situation. These up-and-comers are very talented, but they might not have built up the trust of their customer counterparts to get their plans across the finish line. The rapid employee turnover tends to make it difficult to build up trust as well.

Supply chain hiccups have bruised the companyPerhaps above all else, customers rely on their vendors to provide on-time and full deliveries to their warehouses and stores. Vendors failing to get products to the shelves generally leads to lost sales for the retailer. Kraft Heinz’ extensive start-up delays at its Oscar Mayer plant in Davenport Iowa put enormous strain on its customer relationships because they lasted longer than anyone at Kraft expected and they came at a time when retailers were instituting financial penalties on vendors who failed to deliver during their specified delivery windows. The recent snow-related plant disruptions at Kraft Heinz’ Ore Ida potatoes plant in Canada might strain those relations further even though the damage to the plant was clearly unavoidable.

Our industry contracts lauded the company’s strong safety record at its manufacturing facilities and its best-in-class plant-distribution center matrix that 3G put it in place after consolidating the supply chain. However, they were quick to point to the disruptions as a significant problem. Customer fill rates have dropped, especially on promotional events. The retailers don’t like this.

We think it is quite possible that 3G’s supply chain consolidation strategy contributed to the weaker customer service trends. While the company invested in new equipment at a number of facilities and even opened a handful of brand new ones, it reduced the net number of plants to 44 from 55 in North America through plant closures. These actions caused significant service disruptions for the Ore Ida brand, which only had one plant remaining in Canada, down from its previous total of three. The plant experienced a temporary shutdown this winter when snow caused the roof to fall in.

16 April 2018


M&A Optionality Now Merits Less ValueIn an industry like packaged foods with a high degree of market fragmentation and a lot of companies operating with excess overhead, the highly acquisitive 3G team seemed to be playing in a target-rich environment. However, the firm’s failed attempt to engage Unilever in merger discussions shook the confidence of investors who bought the stock specifically for the M&A potential on the horizon. Unilever fended off Kraft Heinz by positioning itself as a sustainably growing business with a focus on long-term investment in its people, products, and society-at-large rather than short-term profits. In contrast, Kraft Heinz found itself cast as a ruthless cost-cutter with the public press and government officials in Europe rallying to Unilever’s defense. Going forward, we think the company’s reputation for cost cutting will make it difficult to engage with boards and management teams that put a high priority on employee and community welfare.

The composition of the Kraft Heinz’ board represents another complicating factor. 3G has set very high standards for its acquisition targets. It says it is looking for companies with a strong long-term growth profile, high quality brands that can travel, a strong international platform (especially in emerging markets), and a good strategic fit. Multinational companies like Danone, Nestle, Unilever, Mondelez, Colgate, General Mills, and Kellogg seem to fit that profile. But most of these companies operate with highly entrenched boards and management teams that are likely to spurn 3G’s offers. Berkshire’s 25% stake in the company makes the situation more complicated because it obviates the possibility of pursuing a hostile bid.

Lastly, we point out that the stock’s currency has already lost substantial value, interest rates are rising (making financing more expensive) and peer companies have already boosted their margins using many of the techniques Kraft Heinz employs. This will make it more difficult and more expensive to find a willing multi-national candidate from which it can derive the same level of synergies as in previous experiences.

So what kind of M&A premium does Kraft Heinz deserve? We use some simple math below to demonstrate that one could make a case for why it merits something quite small even if it buys a company worth as much as $45 billion. Perhaps this explains why the management team had its sights set on much bigger game - like Unilever.

■ Assume a big acquisition where Kraft Heinz extracts synergies worth $3 billion per year (or 10% of sales of a $30 billion business). If we generously assume the synergies last for 15 years and assume a cost of capital of only 6%, the tax-effected present value would be $22 billion.

■ Assume the market cap of the target is $45 billion and KHC pays a 25% premium, or $11.2 billion.

■ The PV of $22 billion less $11 billion x 50% = only $5 billion of value. This represents $4/share for Kraft shareholders today.

Falling equity value reduced its purchasing power It is also important to note the degree to which the erosion of Kraft Heinz’s valuation premium to its peer group has hurt its buying power to consummate a transaction.

■ In relation to Unilever, KHC’s valuation multiple has gone from an 11% premium to a 21% discount. To conduct an all-stock transaction today, it would have to issue 56% more stock to buy it than it would have last February.

■ Similarly, KHC’s valuation multiple has fallen to 5% discount vs a 16% premium previously in relation to Mondelez and to a 10% premium from a 29% premium in relation to Kellogg. It would need to issue 45% or 26% more shares in a stock transaction to buy Mondelez or Kellogg, respectively. For Unilever, the issuance would be even bigger.

16 April 2018


Figure 16: KHC would need to issue 56% more shares than it would have last year to buy Unilever if it were to use equity. It would have to issue 45% more shares for MDLZ, and 26% more shares for K.

Stock Price

Market Cap ($B)

Forward P/E

KHC Forward P/E Premium

Stock Price

Market Cap ($B)

Forward P/E

KHC Forward P/E Premium

Additional KHC equity issuance needed to

conduct a stock deal today

KHC $91 $118 23.8 $61 $75 15.6

Target UL $50 $143 21.5 11% $56 $150 19.7 -21% 56%MDLZ $43 $64 20.5 16% $42 $62 16.4 -5% 45%K $74 $26 18.5 29% $64 $22 14.2 10% 26%

Apr-18Feb-17

Source: Credit Suisse estimates. Stock issuance in billions, market cap in $ million.

16 April 2018


We are below consensus for EPS and EBITDAWe think this year’s 2018 EBITDA expectations are too aggressive. To achieve EBITDA expectations in 2018, the company will need to generate 2% growth with only 3% of help from merger synergies and about a 3% headwind from the plans for $250-$300 million of reinvestment. If we assume that the reinvestment cancels out the benefit of the savings, then the expectations imply 3% organic growth

While 3% may not sound particularly aggressive, it becomes rather daunting when viewed in the context of what happened last year. In 2017, the company generated only 2% EBITDA growth despite enjoying a whopping 9% benefit from merger savings. This implies a significant 7% “organic” EBITDA decline during the year.

Figure 17: We forecast immaterial organic EBITDA growth in FY18 as reinvestment needs will cancel out incremental savings realized from the Kraft merger

FY16 EBITDA 7,778 FY17 EBITDA (restated) 7,770YoY Increase in Savings 718 YoY Increase in Savings 213

Reinvestment Need (275)Organic EBITDA growth (566) Organic EBITDA growth 15 Total Growth 152 Total Growth (48) Growth % 2.0% Growth % -0.6%

FY17 EBITDA 7,930 FY18E CS EBITDA 7,722

Consensus EBITDA growth 265 Growth % 3.4%Consensus FYE EBITDA 8,035


Our concern is that 2018 EBITDA might end up just as bad if not worse than 2017. The company faces a more difficult inflationary environment due to rising freight costs that it can’t pass through and it continues to deal with supply chain disruptions. As a result, we forecast no growth this year or in 2019.

Figure 18: We are below consensus for EBITDA and EPS estimates for FY18 FY18 CS Estimate Consensus Difference (CS - Consensus)Sales $26,257 $26,462 -$205Sales Growth (%) 0.7% 0.9% -0.2%EBITDA ($) $7,722 $8,036 -$314EBITDA Margin (%) 29.4% 30.4% -1.0%EBIT ($) $6,812 $7,152 -$340EBIT Margin (%) 25.9% 27.0% -1.1%Tax Rate (%) 23.0% 23.0% 0.0%Adjusted EPS $3.70 $3.80 -$0.09

FY19 CS Estimate Consensus Difference (CS - Consensus)Sales $25,995 $26,942 -$947Sales Growth (%) -1.0% 1.8% -2.8%EBITDA ($) $7,645 $8,313 -$668EBITDA Margin (%) 29.4% 30.9% -1.4%EBIT ($) $6,735 $7,423 -$689EBIT Margin (%) 25.9% 27.6% -1.6%Tax Rate (%) 22.0% 22.4% -0.4%Adjusted EPS $3.75 $4.05 -$0.30

Source: Thomson Reuters, Credit Suisse estimates

16 April 2018


ValuationTo get to our $55 target price, we assume an EV/EBITDA multiple of 12.7x our 2019 EBITDA estimate (which is below the street by $540M). This represents a 6% premium over the peer group average to account for M&A optionality over the next 12 months.

On a P/E basis, we recognize this valuation implies a 6% discount to the packaged food group vs its historical 8% premium. However, we prefer to use EV/EBITDA due to KHC’s track record for M&A, its financial leverage, and the company’s preference for utilizing EBITDA to measure performance and determine management compensation.

Figure 19: Kraft Heinz forward EV/EBITDA now trades at a 7% premium to its peers compared to a 28% premium for most of 2016 and 2017

12.8

12.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

12/1/15 3/1/16 6/1/16 9/1/16 12/1/16 3/1/17 6/1/17 9/1/17 12/1/17 3/1/18

KHC.O U.S. Food Avg

Source: Credit Suisse estimates, Thomson Reuters Datastream. All multiples are NTM EV/EBITDA. Packaged food group includes CAG, CPB, GIS, K, KHC, MDLZ, MKC, SJM, PF

We validate our target price of $55 through a discounted cash flow analysis using Credit Suisse’s proprietary HOLT® valuation methodology. HOLT® uses an adjusted return on capital metric to project future cash flows with a market-derived discount rate. Our long-run estimates for sales growth, EBITDA margin, tax rate and assumption of constant asset turnover provides a market equity value of $62.8 billion, or approximately $51/share.

16 April 2018


Figure 20: Our HOLT® analysis shows that market-implied expectations for Kraft Heinz’ CFROI® are above consensus forecasts, with a spread at the most expensive end of its peer group.

0%5%10%15%20%25%30%35%

0%5%

10%15%20%25%30%35%

KHC CAG MDLZ MKC GIS THS CPB K PF SJM HRL TSN HSY BGS

CFROI 20-Yr Median CFROI LFY CFROI consensus forecast (NTM) Market-Implied CFROI

1.0% 1.4% 1.6% 1.8% 2.0% 2.3%

(2.1%) (2.0%) (2.0%) (2.0%) (1.6%) (1.5%) (1.0%) (0.9%)

(4%)

(2%)

0%

2%

4%

KHC CAG MDLZ MKC GIS THS CPB K PF SJM HRL TSN HSY BGS

CONSERVATIVE EXPECTATIONS Current price embeds expectations of returns on capital declining

DEMANDING EXPECTATIONS Current price embeds expectations of returns on capital increasing

Spread between NTM forecast returns on capital vs. market-implied

Source: Credit Suisse estimates, HOLT® . HOLT® ’s CFROI is an adjusted return on capital metric that corrects for accounting distortions to capture true economic returns, and allow for comparability across companies, time, industries and markets.

Figure 21: HOLT® discounted cash flow based on our forecasts provides an equity value of $51/share.

Amount (MM)PV Cash Flow Existing Assets $72,443NPV Cash Flow Future Investments $24,725Market Value Investments NATotal Economic Value $97,168

Market Value of Debt and Equivalent $34,908Mraket Value of Minority Interests $199Partial Year Adjustment $819Today's Warrented Equity Value $62,879

Price & April 11, 2018 $62Shares Outstanding $1,220

Downside -16%

Source: Credit Suisse estimates, company data. HOLT® calculates the free cash flow of the company for the first 10 years. After the 10-year explicit forecast, the HOLT® methodology calculates the terminal value by fading returns on capital and growth towards cost of capital and GDP growth respectively. We estimate ~$23 per share including $3 from tax benefits from acquisitions. The HOLT® DCF uses our projections for the next 10 years, following which we calculate the terminal value using fading returns on capital (towards the cost of capital) and growth rate (towards GDP growth) respectively

16 April 2018


AppendixFigure 22: Kraft Heinz processed cheese sales fell nearly 5% in the 4-week span ending 2/24/18…

-10.0

-5.0

0.0

5.0

10.0

15.0

$ % Change vs YA

THE KRAFT HEINZ COMPANY PRIVATE LABEL

Source: Nielsen xAOC

Figure 23: …with private label processed cheese’s average unit price down nearly 5% in response to lower commodity input costs; Kraft Heinz’ price gap has expanded

-10.0

-5.0

0.0

5.0

10.0

15.0

Avg Unit Price % Chg YA

THE KRAFT HEINZ COMPANY PRIVATE LABEL

Source: Nielsen xAOC

16 April 2018


FY18 GuidanceManagement guided to “sustainable organic EBITDA gains” tempered by $250-$300M of re-investment. The first quarter will face a 1.5%-2.0% headwind in the U.S. from Planter’s discontinuation in Club and Ore-Ida’s supply chain problems along with a 1.2% headwind from unfavorable trade spend phasing.

■ “Profitable organic sales”

■ Sustainable organic EBITDA gains, tempered by investments for growth

■ $250-$300M reinvestment in supply chain capabilities, go-to-market capabilities, whitespace expansion, and big bet innovation

■ 1Q sales decline followed by sequential improvement

■ Canadian inventory de-loading to persist until 3Q

■ Unfavorable trade phasing to contribute 1.2% to U.S. sales decline in 1Q; Ore-Ida and Planters shipments to contribute 1.5-2%.

■ Kraft integration synergies ‘fully realized’

■ ‘Strong adjusted EPS growth’ driven by tax savings

■ Tax rate reduction to 23% in 2018, 20-24% range in the long run

■ Incremental interest expense ($100M) and depreciation ($70M) to partially offset EPS growth

■ ‘Significant increase in free cash flow generation

■ Capex of $850M, lower working capital

Figure 24: Kraft Heinz operating margins before one-off items

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2010 2011 2012 2013 2014 2015 2016 2017e 2018e

Heinz margin

KraftHeinz margin


16 April 2018


Figure 25: We estimate approximately 30% of Kraft Heinz sales are challenged

Good 2017 % of Total Sales

3-Yr CAGR 1-Yr Growth

Single Serve Coffee 436 2% 17% 5%Cracker Barrel 311 1% 14% 4%Mustard (Heinz, Grey Poupon) 100 0% 11% -2%Combination Lunches (Lunchables) 1,500 7% 7% 6%Cream Cheese (Philadelphia) 1,068 5% 4% 1%Gravy (Heinz) 157 1% 5% 4%Vinegar (Heinz) 58 0% 4% -2%Cheez Whiz 34 0% 0% -3%Cheese (Sliced, Crumbled, Block) 2,713 13% -3% -4%Velveeta 644 3% 1% -1%Marshmallows (Kraft) 145 1% 0% -4%Ketchup (Heinz) 497 2% 3% 2%Snack Nuts (Planters) 1,202 6% -1% -6%Total 8,863 42% 2% -1%

Stable 2017 % of Total Sales


Isotonic Beverages (Crystal Light) 41 0% 9% 13%Ingredient Cheese 147 1% -7% -13%Pasta sauce (Classico) 250 1% 2% 4%Meat and fish sauce (Lea & Perrins) 323 2% 0% -2%Steak sauce and marinade (A1) 147 1% -1% -2%Mio beverages 133 1% -1% 1%Stuffing (Kraft Stove Top) 212 1% -1% 1%Cottage Cheese 208 1% -3% -14%Frozen Appetizers (Bagel Bites, TGIF) 277 1% -2% 4%Frozen Entrees (Smart Ones, Delimex, T.G.I) 436 2% -2% 7%Dry Dinners (Kraft, Velveeta) 1,304 6% 0% 0%Cool-Whip 224 1% -2% -4%Pickles and relish (Heinz) 22 0% 6% 13%Shelf Stable Juices & Drinks 393 2% 1% -5%Frozen Meat (Boca Burger) 43 0% -2% 4%Ore Ida & Ore Ida ABCS 651 3% -1% 0%Total 4,811 23% -1% -1%

Challenged 2017 % of Total Sales


Mayonnaise 534 3% -5% -6%Powdered Soft Drinks 443 2% -5% -6%Kraft/Good Seasons Salad Dressing 335 2% -6% -10%Sour Cream (Breakstone, Knudsen, Kraft) 110 1% -9% -16%Jell-O Ready to Eat Desserts 240 1% -3% -4%Baker's Chocolate 61 0% -5% -6%Athenos (Cheese) 112 1% -5% -7%Jell-O Dessert Mixes (not RTE) 296 1% -3% 2%Sliced Lunchmeat 1,785 8% -4% -7%Hot Dogs 406 2% -7% -5%Ground Coffee 766 4% -3% -3%Soluble Coffee 102 0% -7% -8%Instant Tea - Mostly Crystal Light 87 0% -6% -3%Capri Sun 511 2% -10% -5%Kraft Barbecue Sauce 139 1% -3% -5%Delimex Taquitos, Smart Ones sandwich 156 1% -6% -4%Heinz dry mixes (chili, soup) 31 0% -15% -10%

Total 6,113 29% -5% -6%

Total Company Growth Rate -1% -2%% of Sales accounted for 93%

Source: Company data, Credit Suisse estimates. We highlight the largest brands in each category in brackets. We categorize sliced/crumbled/block cheese as All cheese ex-Cheese Whiz, Velveeta & Cracker barrel, ingredient cheese & cottage cheese.

16 April 2018


Figure 26: KHC EBIT margin is far above the peer average of 18.7%, implying limited upside

Figure 27: KHC adjusted overhead as a % of sales is at 7.2%, implying little to no further room to cut SG&A

25.9%

20.1% 19.9%18.0%

17.0% 16.9% 16.7%15.7%

15.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Kraft Hershey Smucker McCormick Mondelez Campbell GeneralMills

ConAgra Kellogg

EBIT MARGIN Average

16.7%

15.7% 15.4% 14.7%

12.6% 12.4%

9.5%

7.3% 7.2% 6.5%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

HSY SJM K MDLZ GIS CPB CAG BGS KHC HRL

Source: Company data, Credit Suisse estimates; FY18 data Source: Company data, Credit Suisse estimates. We define adjusted overheads as SG&A ex-R&D and advertising

Figure 28: KHC Asset Turns Figure 29: KHC WC turns

4.82

4.43

4.05 3.75 3.68 3.64

3.13

1.02

0.14

0.64

1.14

1.64

2.14

2.64

3.14

3.64

4.14

4.64

5.14

ConAgra Smucker GeneralMills

Hershey Kraft Kellogg Mondelez Campbell

FIXED ASSET TURNS Average

23.08

20.24

17.32

9.24 8.90

8.28 8.07

5.36

0.14

5.14

10.14

15.14

20.14

25.14

Mondelez GeneralMills

Kellogg Hershey ConAgra Campbell McCormick Smucker

WORKING CAPITAL TURNS Average

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

16 April 2018


Figure 30: KHC Gross Margin Figure 31: KHC ROIC

45.5%

43.6%

39.3% 38.5% 38.2%38.2%

35.8%

33.9%

29.5%

27.2%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

GROSS MARGIN Average

25.3%

16.3%

13.5%13.0%

10.7%

9.8%8.7% 8.4%

6.5% 5.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

ROIC Average

Source: Company data, Credit Suisse estimates; FY18 data Source: Company data, Credit Suisse estimates; FY18 data

16 April 2018

The Kraft H

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Figure 32: Quarterly Income StatementUpdated segments & accounting changes

Income Statement 2017 2018 2019($MM, except per share) 1QA 2QA 3QA 4QA FY17 A 1QE 2QE 3QE 4QE FY18 E 1QE 2QE 3QE 4QE FY19 E

Net Sales 6,324 6,637 6,280 6,844 26,085 6,275 6,672 6,362 6,948 26,257 6,213 6,605 6,298 6,879 25,995y-o-y growth % (3.7%) (2.3%) 0.2% (0.2%) (1.5%) (0.8%) 0.5% 1.3% 1.5% 0.7% (1.0%) (1.0%) (1.0%) (1.0%) (1.0%)

Costs of Goods Sold 4,021 4,276 3,997 4,342 16,636 4,054 4,330 4,078 4,433 16,895 4,044 4,320 4,069 4,423 16,856Gross Profit 2,303 2,361 2,283 2,502 9,449 2,221 2,342 2,284 2,515 9,362 2,168 2,285 2,230 2,456 9,139

Gross Margin 36.4% 35.6% 36.4% 36.6% 36.2% 35.4% 35.1% 35.9% 36.2% 35.7% 34.9% 34.6% 35.4% 35.7% 35.2%

Selling and Marketing 721 676 650 760 2,807 730 601 540 679 2,550 694 565 506 640 2,404Other Expenses / (Income) (8) 0 (6) 0 (14) 0 0 0 0 0 0 0 0 0 0

Total Operating Expenses 713 676 644 760 2,793 730 601 540 679 2,550 694 565 506 640 2,404SG&A Margin 11.3% 10.2% 10.3% 11.1% 10.7% 11.6% 9.0% 8.5% 9.8% 9.7% 11.2% 8.5% 8.0% 9.3% 9.2%

Normalized EBIT 1,610 1,833 1,633 1,735 6,811 1,492 1,741 1,744 1,837 6,812 1,474 1,721 1,724 1,816 6,735EBIT Margin 25.5% 27.6% 26.0% 25.4% 26.1% 23.8% 26.1% 27.4% 26.4% 25.9% 23.7% 26.1% 27.4% 26.4% 25.9%y-o-y growth % (9.6%) (6.1%) (2.6%) (4.6%) (5.8%) (7.4%) (5.0%) 6.8% 5.9% 0.0% (1.2%) (1.1%) (1.1%) (1.1%) (1.1%)

Normalized EBITDA 1,844 2,065 1,888 1,973 7,770 1,719 1,968 1,971 2,064 7,722 1,702 1,948 1,951 2,043 7,645EBITDA Margin 29.2% 31.1% 30.1% 28.8% 29.8% 27.4% 29.5% 31.0% 29.7% 29.4% 27.4% 29.5% 31.0% 29.7% 29.4%y-o-y growth % (6.8%) (4.7%) 4.4% 4.6% (0.6%) (1.0%) (1.0%) (1.0%) (1.0%) (1.0%)

Interest Expense 313 307 306 308 1,234 333 333 333 333 1,330 315 315 315 315 1,260Other Expenses / (Income) (120) (109) (127) (117) (473) (110) (110) (110) (110) (440) (110) (110) (110) (110) (440)

Pretax Income 1,417 1,635 1,454 1,544 6,050 1,269 1,518 1,521 1,614 5,922 1,269 1,516 1,519 1,611 5,915Income Taxes 381 430 440 450 1,701 292 349 350 371 1,362 279 333 334 354 1,301

Tax Rate 26.9% 26.3% 30.3% 29.1% 28.1% 23.0% 23.0% 23.0% 23.0% 23.0% 22.0% 22.0% 22.0% 22.0% 22.0%

Net Income 1,036 1,205 1,014 1,094 4,349 977 1,169 1,171 1,243 4,560 990 1,182 1,185 1,256 4,614Noncontrolling Interests (2) 1 (1) (7) (9) 3 3 3 3 12 3 3 3 3 12Preferred Dividends 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Income to Common 1,038 1,204 1,015 1,101 4,358 974 1,166 1,168 1,240 4,548 987 1,179 1,182 1,253 4,602

Adjusted EPS $0.84 $0.98 $0.83 $0.90 $3.55 $0.79 $0.95 $0.95 $1.01 $3.70 $0.80 $0.96 $0.96 $1.02 $3.75y-o-y growth % 14.4% 15.5% (0.3%) (1.5%) 6.7% (6.1%) (3.1%) 15.1% 12.6% 4.4% 1.3% 1.2% 1.2% 1.1% 1.1%

Diluted Shares Oustanding 1,229 1,229 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228

Sales BreakdownVolume / Mix (3.7%) (0.5%) (0.3%) (1.2%) (1.4%) (3.3%) (2.2%) (0.2%) (0.1%) (1.4%) (1.0%) (1.0%) (1.0%) (1.0%) (1.0%)Price 1.0% (0.3%) 0.5% 0.5% 0.4% 0.8% 0.8% 0.8% 0.8% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0%Currency (0.4%) (0.8%) 0.4% 0.9% 0.0% 1.7% 2.0% 0.7% 0.9% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0%Acquisitions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%53rd Week / Other 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Growth (3.1%) (1.6%) 0.7% 0.3% (1.0%) (0.8%) 0.5% 1.3% 1.5% 0.7% (1.0%) (1.0%) (1.0%) (1.0%) (1.0%)Organic Growth (2.7%) (0.8%) 0.3% (0.7%) (1.0%) (2.5%) (1.4%) 0.6% 0.6% (0.7%) (1.0%) (1.0%) (1.0%) (1.0%) (1.0%)


16 April 2018

The Kraft H

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Figure 33: Segment InformationRestated Segments & ASU Changes

Segment Earnings 2016 2017 2018($MM, except per share) 1QA 2QA 3QA 4QA FY16 A 1QA 2QA 3QA 4QA FY17 A 1QE 2QE 3QE 4QE FY18 E

Sales by SegmentUnited States 4,715 4,692 4,395 4,839 18,641 4,518 4,601 4,351 4,760 18,230 4,382 4,509 4,395 4,808 18,094Canada 504 638 550 617 2,309 440 592 556 589 2,177 436 628 549 589 2,202EMEA 583 578 513 600 2,366 597 647 651 699 2,594 675 711 686 726 2,799Rest of World 758 885 809 801 3,171 769 797 722 796 3,084 782 824 732 825 3,163

Total 6,560 6,793 6,267 6,857 26,487 6,324 6,637 6,280 6,844 26,085 6,275 6,672 6,362 6,948 26,257

Sales GrowthUnited States

Total 0.2% (1.9%) (1.2%) (3.1%) (1.5%) (3.5%) (1.2%) (0.4%) (1.1%) (1.6%) (3.0%) (2.0%) 1.0% 1.0% (0.7%)Organic 0.2% (1.9%) (1.2%) 1.7% (0.3%) (3.5%) (1.2%) (0.4%) (1.1%) (1.6%) (3.0%) (2.0%) 1.0% 1.0% (0.8%)

CanadaTotal (8.5%) (3.9%) 2.0% (2.4%) (3.2%) (12.2%) (6.4%) 1.6% (4.1%) (5.1%) (0.9%) 6.0% (1.3%) 0.1% 1.1%Organic 1.5% 1.2% 2.0% 1.2% 1.5% (14.9%) (3.1%) (2.4%) (8.6%) (7.3%) (7.0%) (2.0%) (2.0%) (2.0%) (3.3%)

EMEATotal (11.7%) (6.9%) (14.5%) (13.4%) (11.1%) (6.8%) (4.9%) 7.3% 9.3% 1.1% 13.1% 9.9% 5.4% 3.9% 7.9%Organic (3.7%) (2.3%) (7.8%) (1.5%) (3.8%) (0.2%) (0.8%) 3.4% 0.9% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0%

Rest of WorldTotal (15.6%) (16.7%) 4.4% (0.7%) (8.2%) 7.5% 1.6% 1.6% 5.2% 4.0% 1.7% 3.4% 1.4% 3.7% 2.6%Organic 10.4% 7.1% 3.6% 4.5% 6.4% 8.1% 3.0% 3.6% 7.0% 5.4% 1.0% 1.0% 1.0% 1.0% 1.0%

Total (3.8%) (4.7%) (1.5%) (3.8%) (3.5%) (3.2%) (1.6%) 0.7% 0.3% (1.0%) (0.8%) 0.5% 1.3% 1.5% 0.7%

EBITDA by SegmentUnited States 1,493 1,518 1,349 1,502 5,862 1,464 1,557 1,433 1,510 5,964 1,342 1,453 1,454 1,527 5,776Canada 151 192 148 151 642 125 189 161 161 636 112 180 175 172 639EMEA 180 212 183 189 781 140 184 182 175 681 150 195 220 215 780Rest of World 166 208 150 144 657 144 171 140 142 597 144 176 150 165 635

Total Segment EBITDA 1,990 2,130 1,830 1,986 7,942 1,873 2,101 1,916 1,988 7,878 1,748 2,004 1,999 2,079 7,830

EBITDA GrowthUnited States 32.9% 25.7% 27.1% 13.3% 25.0% (1.9%) 2.6% 6.2% 0.5% 1.7% (8.3%) (6.7%) 1.5% 1.1% (1.5%)Canada 33.6% 27.2% 34.5% (9.6%) 18.7% (17.2%) (1.6%) 8.8% 6.6% (0.9%) (10.4%) (4.8%) 8.7% 6.8% 0.3%EMEA (15.9%) (5.8%) (17.6%) (27.3%) (16.7%) (22.2%) (13.2%) (0.5%) (7.4%) (12.8%) 7.1% 6.0% 20.9% 22.9% 6.7%Rest of World (12.6%) (8.8%) 20.0% (20.9%) (11.5%) (13.3%) (17.8%) (6.7%) (1.4%) (9.1%) 0.0% 2.9% 7.1% 16.2% 6.3%

Total 21.3% 17.5% 20.6% 2.6% 14.9% (5.9%) (1.4%) 4.7% 0.1% (0.8%) (6.7%) (4.6%) 4.3% 4.6% 0.0%

EBITDA MarginUnited States 31.7% 32.4% 30.7% 31.0% 31.4% 32.4% 33.8% 32.9% 31.7% 32.7% 30.6% 32.2% 33.1% 31.8% 31.9%Canada 30.0% 30.1% 26.9% 24.5% 27.8% 28.4% 31.9% 29.0% 27.3% 29.2% 25.7% 28.7% 31.9% 29.2% 29.0%EMEA 30.9% 36.7% 35.7% 31.5% 33.0% 23.5% 28.4% 28.0% 25.0% 26.3% 22.2% 27.4% 32.1% 29.6% 27.9%Rest of World 21.9% 23.5% 18.5% 18.0% 20.7% 18.7% 21.5% 19.4% 17.8% 19.4% 18.4% 21.4% 20.5% 20.0% 20.1%

Total 30.3% 31.4% 29.2% 29.0% 30.0% 29.6% 31.7% 30.5% 29.0% 30.2% 27.9% 30.0% 31.4% 29.9% 29.8%

Corporate Expense 39 43 27 49 164 29 36 28 15 108 29 36 28 15 108

EBITDA 1,951 2,087 1,803 1,937 7,778 1,844 2,065 1,888 1,973 7,770 1,719 1,968 1,971 2,064 7,722D&A & Other (excl non-recurring) 170 135 126 144 575 234 232 255 238 959 241 241 241 241 962

EBIT 1,781 1,952 1,677 1,793 7,203 1,610 1,833 1,633 1,735 6,811 1,479 1,728 1,731 1,824 6,760


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Figure 34: Segment Information2016 2017 2018

1QA 2QA 3QA 4QA FY16 A 1QA 2QA 3QA 4QA FY17 A 1QE 2QE 3QE 4QE FY18 E

United StatesPrice 0.1% 1.2% (0.7%) 0.3% 0.2% 0.7% (0.4%) 0.4% 0.6% 0.3% 1% 1% 1% 1% 1%Volume / Mix 0.1% (3.1%) (0.5%) 1.4% (0.5%) (4.2%) (0.8%) (0.8%) (1.7%) (1.9%) (4%) (3%) 0% 0% (2%)Acquisitions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%Currency 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0%53rd Week / Other 0.0% 0.0% 0.0% (4.8%) (1.3%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%

Total Growth 0.2% (1.9%) (1.2%) (3.1%) (1.5%) (3.5%) (1.2%) (0.4%) (1.1%) (1.6%) (3%) (2%) 1% 1% (1%)Organic Growth 0.2% (1.9%) (1.2%) 1.7% (0.3%) (3.5%) (1.2%) (0.4%) (1.1%) (1.6%) (3%) (2%) 1% 1% (1%)

CanadaPrice 3.7% 3.1% (1.4%) (3.1%) 0.6% (1.0%) (3.7%) (1.9%) 0.0% (1.7%) 1% 1% 1% 1% 1%Volume / Mix (2.2%) (1.9%) 3.4% 4.3% 0.9% (13.9%) 0.6% (0.5%) (8.6%) (5.3%) (8%) (3%) (3%) (3%) (4%)Acquisitions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%Currency (10.0%) (5.1%) 0.0% 0.8% (3.5%) 2.7% (3.3%) 4.0% 4.5% 1.8% 6.1% 8.0% 0.7% 2.1% 4%53rd Week / Other 0.0% 0.0% 0.0% (4.4%) (1.2%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%

Total Growth (8.5%) (3.9%) 2.0% (2.4%) (3.2%) (12.2%) (6.4%) 1.6% (4.1%) (5.1%) (1%) 6% (1%) 0% 1%Organic Growth 1.5% 1.2% 2.0% 1.2% 1.5% (14.9%) (3.1%) (2.4%) (8.6%) (7.3%) (7%) (2%) (2%) (2%) (3%)

EMEAPrice (2.9%) (2.4%) (2.9%) (2.5%) (2.5%) (0.6%) (1.6%) (0.7%) (0.9%) (0.9%) 0% 0% 0% 0% 0%Volume / Mix (0.8%) 0.1% (4.9%) 1.0% (1.0%) 0.4% 0.8% 4.1% 1.8% 1.6% 0% 0% 0% 0% 0%Acquisitions (4.1%) (2.5%) 0.0% 0.0% (1.5%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%Currency (3.9%) (2.1%) (6.7%) (8.1%) (5.0%) (6.6%) (4.1%) 3.9% 8.4% 0.3% 13.1% 9.9% 5.4% 3.9% 8%53rd Week / Other 0.0% 0.0% 0.0% (3.8%) (1.0%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%

Total Growth (11.7%) (6.9%) (14.5%) (13.4%) (11.1%) (6.8%) (4.9%) 7.3% 9.3% 1.1% 13% 10% 5% 4% 8%Organic Growth (3.7%) (2.3%) (7.8%) (1.5%) (3.8%) (0.2%) (0.8%) 3.4% 0.9% 0.8% 0% 0% 0% 0% 0%

Rest of WorldPrice 2.1% 5.0% 1.9% 2.8% 3.0% 5.1% 3.7% 3.8% 1.3% 3.5% 0% 0% 0% 0% 0%Volume / Mix 8.3% 2.1% 1.7% 1.7% 3.6% 3.0% (0.7%) (0.2%) 5.7% 1.9% 1% 1% 1% 1% 1%Acquisitions 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%Currency (26.0%) (23.8%) 0.8% (0.1%) (13.6%) (0.6%) (1.4%) (2.0%) (1.8%) (1.5%) 0.7% 2.4% 0.4% 2.7% 2%53rd Week / Other 0.0% 0.0% 0.0% (5.1%) (1.2%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%

Total Growth (15.6%) (16.7%) 4.4% (0.7%) (8.2%) 7.5% 1.6% 1.6% 5.2% 4.0% 2% 3% 1% 4% 3%Organic Growth 10.4% 7.1% 3.6% 4.5% 6.4% 8.1% 3.0% 3.6% 7.0% 5.4% 1% 1% 1% 1% 1%

Total CompanyPrice 0.4% 1.6% (0.7%) 0.0% 0.4% 1.0% (0.3%) 0.5% 0.5% 0.4% 1% 1% 1% 1% 1%Volume / Mix 1.0% (2.1%) (0.3%) 1.7% 0.1% (3.7%) (0.5%) (0.3%) (1.2%) (1.4%) (3%) (2%) (0%) (0%) (1%)Acquisitions (0.4%) (0.2%) 0.0% 0.0% (0.1%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%Currency (4.8%) (4.0%) (0.5%) (0.7%) (2.5%) (0.4%) (0.8%) 0.4% 0.9% 0.0% 2% 2% 1% 1% 1%53rd Week / Other 0.0% 0.0% 0.0% (4.7%) (1.2%) 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%

Total Growth (3.8%) (4.7%) (1.5%) (3.8%) (3.5%) (3.2%) (1.6%) 0.7% 0.3% (1.0%) (1%) 1% 1% 2% 1%Organic Growth 1.4% (0.5%) (1.0%) 1.7% 0.4% (2.7%) (0.8%) 0.3% (0.7%) (1.0%) (3%) (1%) 1% 1% (1%)


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Figure 35: DriversEBITDA restated lower for new pension accounting beginning 2017

Quarterly Value Drivers 2016 2017 2018($MM, except per share) 1QA 2QE 3QA 4QA FY16 A 1QA 2QA 3QA 4QA FY17 A 1QE 2QE 3QE 4QE FY18 E

Cash 4,199 4,237 3,920 4,204 4,204 3,242 1,445 1,441 1,629 1,629 2,003 2,105 2,210 2,387 2,387Inventory 2,892 2,881 3,108 2,684 2,618 3,151 3,065 3,188 2,815 2,815 2,889 2,964 3,038 3,113 3,113A/R 939 1,114 855 898 898 1,474 1,434 1,365 1,274 1,274 1,328 1,382 1,436 1,490 1,490A/P 2,773 2,960 3,456 3,996 3,996 3,936 3,888 3,947 4,449 4,449 4,336 4,224 4,111 3,998 3,998Working Capital 1,058 1,035 507 (414) (480) 689 611 606 (360) (360) (119) 122 363 605 605Capital Expenditures 303 211 322 925 1,247 368 322 266 261 1,217 213 213 213 213 850Depreciation + Amortization 313 276 421 916 1,337 180 166 197 165 708 195 195 195 195 780Intangibles 105,591 104,403 104,138 103,422 103,422 103,630 103,965 104,358 104,273 104,273 104,273 104,273 104,273 104,273 104,273Total Assets 123,273 121,684 121,080 120,480 120,480 120,802 119,416 120,051 120,232 120,232 120,638 120,889 121,142 121,467 121,467Total Current Liabilities 6,730 9,593 9,414 9,501 9,501 9,383 7,356 9,387 10,132 10,132 10,315 10,207 10,099 9,991 9,991Total Liabilities 56,673 63,637 63,212 62,906 62,906 62,858 60,870 61,080 53,985 53,985 54,168 54,060 53,952 53,844 53,844Shareholder's Equity 66,600 58,047 57,868 57,574 57,574 57,944 58,546 58,971 66,247 66,247 66,470 66,829 67,190 67,623 67,623Total Debt 25,167 32,753 32,680 32,404 32,404 32,680 31,088 31,509 31,536 31,536 31,536 31,536 31,536 31,536 31,536Net Debt 20,968 28,516 28,760 28,200 28,200 29,438 29,643 30,068 29,907 29,907 29,533 29,431 29,326 29,149 29,149Invested Capital 91,767 90,800 90,548 89,978 89,978 90,624 89,634 90,480 97,783 97,783 98,006 98,365 98,726 99,159 99,159EBIT 1,781 1,952 1,677 1,818 7,228 1,610 1,833 1,633 1,735 6,811 1,492 1,741 1,744 1,837 6,812NOPAT 1,252 1,364 1,248 1,337 5,197 1,177 1,351 1,139 1,229 4,896 1,148 1,340 1,342 1,414 5,245ROIC 5.5% 6.0% 5.5% 5.9% 23.1% 5.2% 6.0% 5.0% 5.0% 20.0% 4.7% 5.4% 5.4% 5.7% 21.2%EBITDA 1,951 2,087 1,803 1,937 7,778 1,844 2,065 1,888 1,973 7,770 1,719 1,968 1,971 2,064 7,722Operating Cash Flow 270 1,834 762 5,076 5,238 (151) 1,042 (875) 511 527 1,354 1,138 1,140 1,212 4,844Free Cash Flow (33) 1,623 440 4,151 3,991 (519) 720 (1,141) 250 (690) 1,141 925 928 999 3,994Share Repurchase 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Dividends 667 847 789 2,795 3,584 736 698 727 727 2,888 768 823 823 823 3,236Dividends / Share $0.575 $0.550 $0.550 $0.575 $2.250 $0.575 $0.625 $0.625 $0.625 $2.450 $0.63 $0.67 $0.67 $0.67 $2.64

Net Debt / EBITDA 3.6x 3.8x 3.8x


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Figure 36: Annual Income StatementIncome Statement($ in millions, except per share) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 29,122 27,447 26,487 26,085 26,257 25,995 25,995 25,995 25,995 25,995 25,995 25,995y-o-y growth % (5.8%) (3.5%) (1.5%) 0.7% (1.0%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Costs of Goods Sold 19,770 17,923 16,198 16,636 16,895 16,856 16,856 16,856 16,856 16,856 16,856 16,856Gross Profit 9,352 9,524 10,289 9,449 9,362 9,139 9,139 9,139 9,139 9,139 9,139 9,139

Gross Margin 32.1% 34.7% 38.8% 36.2% 35.7% 35.2% 35.2% 35.2% 35.2% 35.2% 35.2% 35.2%

Selling and Marketing 3,858 3,625 3,061 2,807 2,550 2,404 2,337 2,269 2,200 2,131 2,060 1,990Other Expenses / (Income) 0 0 0 (14) 0 0 0 0 0 0 0 0

Total Operating Expenses 3,858 3,625 3,061 2,793 2,550 2,404 2,337 2,269 2,200 2,131 2,060 1,990SG&A Margin 13.2% 13.2% 11.6% 10.7% 9.7% 9.2% 9.0% 8.7% 8.5% 8.2% 7.9% 7.7%

Normalized EBIT 5,494 5,899 7,228 6,811 6,812 6,735 6,802 6,870 6,939 7,008 7,078 7,149EBIT Margin 18.9% 21.5% 27.3% 26.1% 25.9% 25.9% 26.2% 26.4% 26.7% 27.0% 27.2% 27.5%y-o-y growth % 7.4% 22.5% (5.8%) 0.0% (1.1%) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Normalized EBITDA 6,526 6,739 7,778 7,770 7,722 7,645 7,712 7,780 7,849 7,918 7,988 8,059EBITDA Margin 22.4% 24.6% 29.4% 29.8% 29.4% 29.4% 29.7% 29.9% 30.2% 30.5% 30.7% 31.0%y-o-y growth % 3.3% 15.4% (0.1%) (0.6%) (1.0%) 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

Interest Expense 1,113 1,097 1,134 1,234 1,330 1,260 1,235 1,210 1,186 1,162 1,139 1,116Other Expenses / (Income) 57 (50) (23) (473) (440) (440) (440) (440) (440) (440) (440) (440)

Pretax Income 4,324 4,852 6,117 6,050 5,922 5,915 6,007 6,100 6,193 6,286 6,379 6,473Income Taxes 1,164 1,440 1,719 1,701 1,362 1,301 1,322 1,342 1,362 1,383 1,403 1,424

Tax Rate 26.9% 29.7% 28.1% 28.1% 23.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%Net Income 3,160 3,412 4,398 4,349 4,560 4,614 4,686 4,758 4,830 4,903 4,976 5,049Noncontrolling Interests 15 13 10 (9) 12 12 12 12 12 12 12 12Preferred Dividends 720 720 309 0 0 0 0 0 0 0 0 0

Income to Common 2,425 2,679 4,079 4,358 4,548 4,602 4,674 4,746 4,818 4,891 4,964 5,037

Adjusted EPS $1.98 $2.19 $3.33 $3.55 $3.70 $3.75 $3.81 $3.86 $3.92 $3.98 $4.04 $4.10y-o-y growth % 10.6% 51.6% 6.7% 4.4% 1.1% 1.6% 1.5% 1.5% 1.5% 1.5% 1.5%

Diluted Shares Oustanding 1,222 1,221 1,226 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228 1,228

Sales BreakdownVolume (0.6%) 0.0% (1.4%) (1.4%) (1.0%) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Price / Mix (0.9%) 0.3% 0.4% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Currency (5.3%) (2.5%) 0.0% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Acquisitions (0.2%) (0.1%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%53rd Week / Other 1.2% (1.2%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Growth (5.1%) (3.6%) 0.5% 2.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Organic Growth (0.9%) 0.3% 0.4% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


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Companies Mentioned (Price as of 12-Apr-2018)Amazon com Inc. (AMZN.OQ, $1448.5)Archer Daniels Midland Inc. (ADM.N, $45.3)B&G Foods Inc - Class A (BGS.N, $25.05)Bunge Limited (BG.N, $75.05)Campbell Soup Company (CPB.N, $42.67)Church & Dwight Co., Inc. (CHD.N, $48.8)Colgate-Palmolive Company (CL.N, $70.94)Conagra Brands (CAG.N, $36.78)Danone (DANO.PA, €64.91)Dr Pepper Snapple Group (DPS.N, $120.75)Freshpet Inc. (FRPT.OQ, $18.0)General Mills (GIS.N, $44.58)Glencore (GLEN.L, 342.45p)Hormel Foods (HRL.N, $35.09)J.M. Smucker Co. (SJM.N, $122.64)Kellogg Company (K.N, $62.61)Kimberly-Clark Corporation (KMB.N, $106.16)L'Oreal (OREP.PA, €190.7)McCormick & Company (MKC.N, $105.08)Molson Coors Brewing Co (TAP.N, $73.61)Mondelez (MDLZ.OQ, $42.03)Nestle (NESN.S, SFr76.14)Newell Brands Inc. (NWL.N, $25.76)Nortech Sys (NSYS.OQ, $3.11)PepsiCo, Inc. (PEP.OQ, $108.31)Pinnacle Foods Inc. (PF.N, $55.46)The Clorox Company (CLX.N, $124.67)The Estee Lauder Companies Inc. (EL.N, $151.49)The Hershey Company (HSY.N, $95.57)The Kraft Heinz Company (KHC.OQ, $60.94, UNDERPERFORM, TP $55.0)The Procter & Gamble Company (PG.N, $77.79)TreeHouse Foods (THS.N, $39.13)Tyson Foods (TSN.N, $70.15)ULTA Beauty, Inc. (ULTA.OQ, $217.81)Walmart Inc. (WMT.N, $85.43)

Disclosure AppendixAnalyst Certification 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 The Kraft Heinz Company (KHC.OQ)

KHC.OQ Closing Price Target Price Date (US$) (US$) Rating 06-Jul-15 72.96 85.00 O * 05-May-16 82.97 96.00 04-Aug-16 85.54 98.00 16-Aug-16 88.96 100.00 15-Nov-16 81.14 95.00 17-Feb-17 96.65 100.00 02-Nov-17 78.03 90.00 10-Jan-18 77.89 92.00 18-Feb-18 70.80 77.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price KHC.OQ

01- Jan- 2016 01- Jan- 2017 01- Jan- 201860

70

80

90

100

O U T PERFO 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 activitiesAs 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 attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European 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 attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); 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, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR

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Target Price and RatingValuation Methodology and Risks: (12 months) for The Kraft Heinz Company (KHC.OQ)

Method: To get to our $55 target price and Underperform rating for KHC, we assume an EV/EBITDA multiple of 12.7x on our 2019 EBITDA estimate, which includes $4/share for the option value of a modestly-sized acquisition.

Risk: Risk to our $55 target price and Underperform rating for KHC include 1) an unanticipated M&A announcement and 2) higher-than-expected organic growth due to high investment returns to fend off private label advances.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): KHC.OQ, ULTA.OQ, HRL.N, SJM.N, THS.N, GIS.N, ADM.N, WMT.N, BG.N, CAG.N, CHD.N, CPB.N, FRPT.OQ, GLEN.L, HSY.N, K.N, KMB.N, MKC.N, MDLZ.OQ, NESN.S, NWL.N, OREP.PA, PF.N, PG.N, TSN.N, DANO.PA, AMZN.OQ, BGS.NCredit Suisse provided investment banking services to the subject company (KHC.OQ, HRL.N, THS.N, GIS.N, ADM.N, WMT.N, BG.N, CPB.N, GLEN.L, KMB.N, MKC.N, MDLZ.OQ, NESN.S, NWL.N, PF.N, PG.N, TSN.N, AMZN.OQ, BGS.N) within the past 12 months.

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Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: KHC.OQ, GIS.N, ADM.N, WMT.N, BG.N, CPB.N, GLEN.L, KMB.N, MDLZ.OQ, NESN.S, NWL.N, PG.N, AMZN.OQCredit Suisse has managed or co-managed a public offering of securities for the subject company (KHC.OQ, GIS.N, WMT.N, BG.N, CPB.N, GLEN.L, KMB.N, MKC.N, NESN.S, BGS.N) within the past 12 months.Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): KHC.OQ, HRL.N, THS.N, GIS.N, ADM.N, WMT.N, BG.N, CPB.N, GLEN.L, KMB.N, MKC.N, MDLZ.OQ, NESN.S, NWL.N, PF.N, PG.N, TSN.N, AMZN.OQ, BGS.NCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (KHC.OQ, ULTA.OQ, CLX.N, HRL.N, SJM.N, THS.N, GIS.N, ADM.N, WMT.N, BG.N, CAG.N, CHD.N, CL.N, CPB.N, EL.N, FRPT.OQ, GLEN.L, HSY.N, K.N, KMB.N, MKC.N, MDLZ.OQ, NESN.S, NWL.N, OREP.PA, PF.N, PG.N, TSN.N, DANO.PA, AMZN.OQ, BGS.N) within the next 3 months.Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): KHC.OQ, GIS.N, ADM.N, WMT.N, BG.N, CPB.N, GLEN.L, KMB.N, MDLZ.OQ, NESN.S, NWL.N, PG.N, AMZN.OQCredit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): AMZN.OQ, ADM.N, BGS.N, BG.N, CPB.N, CHD.N, CL.N, CAG.N, DANO.PA, FRPT.OQ, GIS.N, GLEN.L, HRL.N, SJM.N, K.N, KMB.N, OREP.PA, MKC.N, MDLZ.OQ, NESN.S, NWL.N, PF.N, CLX.N, EL.N, HSY.N, KHC.OQ, PG.N, THS.N, TSN.N, ULTA.OQ, WMT.NA member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (KHC.OQ, ULTA.OQ, CLX.N, HRL.N, SJM.N, THS.N, GIS.N, ADM.N, WMT.N, BG.N, CHD.N, CPB.N, EL.N, FRPT.OQ, GLEN.L, HSY.N, KMB.N, MKC.N, MDLZ.OQ, NESN.S, NWL.N, OREP.PA, PF.N, PG.N, TSN.N, DANO.PA, AMZN.OQ, BGS.N) within the past 12 months.As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (PF.N).As of the end of the preceding month, Credit Suisse beneficially owned between 1% and 3% of the equity and related equity derivatives of (NESN.S).Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (FRPT.OQ, NWL.N).Credit Suisse has a material conflict of interest with the subject company (NESN.S) . 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The Kraft Heinz CompanyEquity Research

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