2019 Set-up

■"Complicated" stories (especially those with elevated leverage or weak fundamentals) have definitively underperformed—being viewed more as "value traps" than "value opportunities" (e.g., TAP, MO, ENR, EPC, COTY, NWL, SPB)

At present, given the market's defensive bias, enthusiasm over better-than- expected top-line momentum coming out of CY3Q, and newfound optimism over future gross margin stability/expansion, Consumer Staples (especially HPC/ Beverages) has rapidly become one of the most expensive sectors in the market (see Figure 1 and Slide 21 in enclosed deck).

Looking forward to 2019, while we acknowledge the factors that have led us here, and while we remain cognizant of further potential downside to risk assets

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could a ect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.

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1Noting that comments made by Fed Chairman Powell later today and/or coming out of the G20 this weekend could be important in this context

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28 November 2018

Global Consumer Research 2019 Set-up

Top Picks exiting 2018

Given the risk/reward distribution associated with the above scenario, we maintain our current positioning – biased slightly towards secular growth and quality over "safety," cyclicals, and self-help.

Top Core CPG Holdings: KO, IFF

■KO remains our top pick among core CPG, as we see KO's growth investments as well-placed, and the system's pricing power able to o set commodity inflation over time. See also "Marching Along" (10/30/18).

■While IFF remains to us a growth company (5%+ volume growth) — tied to the stable core of CPG where growth is scarce — driven by consumer tailwinds around health & wellness, convenience, and the increasing popularity of smaller local/regional brands, we see it as a core CPG holding likely to work in most macro scenarios. While there is much skepticism around the integration of Frutarom, we view IFF as hyperfocused on this and executing on a smooth transition. We still see upside potential to $200 over the next three years, and are encouraged by recent management commentary regarding early cross-selling wins.

Top Growth Picks: MNST, STZ, EL

■For MNST, we see outsized +HSD-DD top-line growth as sustainable in the near-term, margins well positioned to stabilize behind recent price increases, and recent market concerns over new competition (Bang, Coca-Cola Energy) as exaggerated—noting that (i) MNST's valuation compares favorably with many other CPG players o ering far less (and/or more expensive) growth, (ii) MNST itself is a likely buyer of its own stock, with current Board authorization of ~$700M in repurchases, and (iii) KO too could easily opt to increase its existing MNST stake (either as a matter of strategy, or tactically on any pullback that it sees as overdone).

■For STZ, while we acknowledge recent overhangs caused by an unexpected CEO change, insider selling, early fits and starts in Canada post recreational cannabis legalization, and fears over of a potential slowing in core Beer volume/profit growth, we see such concerns as more than priced in below $200. While STZ has perhaps become a "show me" stock again, we seek highly favorable risk/reward to the extent the company can simply deliver on its FY19 commitments and guide in line with FY20 Street expectations.

■For EL, it's still (nearly) all about China. However, following strong FY1Q results and seemingly conservative full-year guidance (i.e., guidance that already allows for China slowing), we now see EL as increasingly wellplaced to beat 2Q expectations and raise FY19 guidance alongside its results in February, or at its subsequent Investor Day on March 6.

Top Value Picks: MO, TAP

■While MO will likely face an enduring overhang given the FDA's recent e orts to eliminate menthol cigarettes from the market, we see underappreciated upside to the extent that either (i) announced e-vapor limitations spur a near-term lift in combustible volumes, (ii) e-vapor limitations ultimately expand and become more all-encompassing, (iii)

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28 November 2018

Global Consumer Research 2019 Set-up

MO's pending IQOS PMTA/MRTP applications are approved and IQOS achieves commercial success, (iv) menthol/nicotine reduction regulation is prolonged or made less absolute, and/or (iv) MO is able to consolidate combustible share in a non-menthol world given Marlboro's leading non-menthol brand equity. We also see MO's dividend as safe (current dividend yield = 6%), its credit rating (A3/A-/A-) secure, and balance sheet as advantaged vs. peers (just over 1x net debt/EBITDA)—providing the company with strategic optionality with which to potentially diversify.

■While work remains to be done in the US, TAP has so far convincingly rea rmed its 2018 FCF guidance ($1.5B +/- 10%), and maintained its commitment to deleveraging to 3.75x by mid-FY19 (at which time it plans to reinstitute a dividend payout ratio target in the range of 20-25% of EBITDA)—each aided by accelerated cost savings likely to flow over the balance of 2018/19, and likely favorable STW vs. STR shipment timing in 1H19. Our $1.5 billion FY19 FCF estimate implies an ~11% FCF yield on today's market cap—compelling to the extent that such FCF remains a stable annuity stream into the future (as is our base case).

Maintain cautious stance of PEP and HPC names

We continue to remain more cautious on PEP (new CEO, lingering NAB investment needs) and core HPC names (e.g., PG, CL, and Sell-rated KMB, CLX, CHD). While recent top-line results have been solid (especially at PG, CLX, CHD) and incremental pricing/lower oil prices do raise prospects of margin stabilization/expansion in 2019, we (a) caution against extrapolating top-line strength indefinitely, (b) are mindful that other costs (e.g., pulp, natural gas) remain inflationary, with any outsized deflationary benefits likely to be ultimately returned to the consumer in the form of price rollbacks/promotions, and (c) note that recent stock performance already reflects a portion of these benefits— meaning that risks from here could easily skew to the downside (See slides 11-14 in enclosed slide deck).

Figure 1: CPG (especially HPC/Beverages) has rapidly become one of the most expensive sectors in the market

Source: FactSet, Deutsche Bank analysis

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Looking back, 2018 has been a volatile year for the market and for CPG

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Unprecedented strategic actions and external events have exacerbated this volatility

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In general, relative CPG multiples have climbed sharply into year-end (given macro concerns, pricing optimism) after reaching their lowest point since 2009 in May 2018

Through May 2018, cost inflation and a reluctance/inability to take pricing led to the erosion of the CPG valuation premium

But positive pricing commentary (in some categories) since and global growth fears have led to a rebound in CPG stock performance and relative CPG valuations

Source: FactSet, Deutsche Bank analysis

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Improving organic growth trends (led by US strength, especially in HPC) have helped justify this recent CPG multiple expansion

Relative to expectations, organic growth trends have improved since 1Q across Beverages and HPC, making it easier to stomach the elevated multiples at which CPG companies now trade

Easing retailer pressure, notably in the US, has ushered in new confidence and determination to take price to allay input inflation

Source: FactSet, Company filings, Deutsche Bank analysis. Beverages includes CCEP, KO, MNST, PEP, STZ, and TAP. HPC includes CHD, CL, CLX, EPC, KMB, and PG.