DB U.S. Food_watermark

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DB Estimates vs. Consensus: FY’19 After Q3’18 Results

FY'19E		FY'19 Operating Profit			FY'19 Operating Margin				FY'19 EPS
Company Name	Oper. Profit	Oper. Profit	Delta vs.	% Delta vs.	Oper. Margin	Oper. Margin	Delta vs.	EPS	EPS	Delta vs.	% Delta vs.
	DB Estimate	Consensus	Consensus	Consensus	DB Estimate	Consensus	Consensus	DB Estimate	Consensus	Consensus	Consensus
Campbell Soup	$1,333	$1,365	na	na	14.6%	13.8%	78 bps	$2.40	$2.42	($0.02)	(1%)
Conagra Brands	$1,497	$1,519	na	na	15.3%	15.6%	(36 bps)	$2.10	$2.17	($0.07)	(3%)
Dean Foods	$105	$74	na	na	1.4%	1.0%	43 bps	$0.35	$0.18	na	na
Flowers Foods	$289	$285	$5	2%	7.1%	7.1%	5 bps	$0.98	$0.97	$0.00	0%
General Mills	$2,798	$2,804	($5)	(0%)	16.4%	16.4%	(3 bps)	$3.05	$3.06	($0.01)	(0%)
Hain Celestial	$182	$197	($15)	(8%)	7.5%	7.9%	(49 bps)	$1.10	$1.18	($0.07)	(6%)
Hershey	$1,679	$1,669	$10	1%	21.0%	21.0%	1 bps	$5.75	$5.65	$0.10	2%
Hostess Brands	$152	$158	($7)	(4%)	17.7%	18.0%	(36 bps)	$0.65	$0.65	$0.00	1%
Kellogg	$1,938	$1,965	($27)	(1%)	14.1%	14.3%	(19 bps)	$4.35	$4.42	($0.06)	(1%)
Kraft Heinz	$6,779	$6,643	$135	2%	25.4%	25.0%	43 bps	$3.90	$3.76	$0.14	4%
McCormick	$1,009	$1,044	($35)	(3%)	18.1%	18.5%	(43 bps)	$5.30	$5.39	($0.09)	(2%)
Mondelez	$4,354	$4,388	($34)	(1%)	16.8%	16.9%	(5 bps)	$2.52	$2.49	$0.03	1%
Nomad Foods	€ 350	€ 358	(€ 7)	(2%)	15.2%	15.6%	(42 bps)	€ 1.28	€ 1.30	(€ 0.01)	(1%)
Simply Good Foods	$74	$77	($3)	(5%)	15.5%	16.2%	(68 bps)	$0.60	$0.58	$0.02	4%
Smucker	$1,233	$1,465	($232)	(16%)	15.6%	18.5%	(288 bps)	$8.30	$8.37	($0.06)	(1%)
Mean				(3%)			(28 bps)				(0%)
Y/Y Growth	4.3%	6.4%			6 bps	9 bps		3.3%	5.1%

Source: Deutsche Bank, company data, FactSet

Notes: Kellogg DB estimates have been updated following the company’s investor event on 11/13/18

Deutsche Bank	Rob Dickerson, ([phone], [e-mail]	11
		Source: Deutsche Bank

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Top-Down Top Line & Regional Review

Deutsche Bank	Rob Dickerson, ([phone], [e-mail]	12
		Source: Deutsche Bank

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Emerging Markets Growth a Q3 Bright Spot

Although growth in emerging markets has decelerated each year since 2012, it's still expected to contribute meaningfully to global food sales over the next three years, and was an evident positive contributor to Q3 net sales growth

Developed Markets vs. Emerging Markets Organic Growth (Y/Y)

14%	12.5%
12%
10%			9.3%
		9.0%		8.5%	9.1%
						8.2%
								7.5%							7.6%
8%										6.9% 7.0%			7.2%	7.0%
							6.7%		6.0%			6.5%				6.4%				6.1%
																	5.8%											5.8%
6%																		5.5% 5.2%							5.3%
																								4.7%
																										4.3%
	3.6%			3.7%																	3.6%3.4%
4%																											3.4%
															2.4%
							2.2%					2.0% 2.1%																2.3%
2%		1.6%						1.3%						1.4%		1.3%	1.6%	1.3% 1.3% 1.0%
					1.0%					1.1%
			0.7%																						0.8%	0.6% 0.6%
									0.5%													0.5%
						0.3%					0.2%
0%																					(0.2%)		(0.6%)
(2%)	1Q12	2Q12	3Q12	4Q12	1Q13	2Q13	3Q13	4Q13	1Q14	2Q14	3Q14	4Q14	1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16	4Q16	1Q17	2Q17		3Q17	4Q17	1Q18	2Q18	3Q18

Developed Markets

Emerging Markets

Source: DB Research, Company reports - Calculated by taking simple average of reported EM and DM organic growth for CLX, KO, BN, MJN, MDLZ, NESN, PEP, PM, ULVR

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Rob Dickerson, ([phone], [e-mail]

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Q3’18 Regional Commentary – Developed Markets

Innovation and promotion-driven volume growth for some;

N.A./U.S. organic growth remains buoyed by price/mix, but increasingly difficult to sustain

		North America / U.S.
	Pricing:	Slight increase in ability to take pricing due to higher input costs, but shifting retail landscape remains intense and
		promotional/deal activity heavy
	Volume:	~1% growth in volume on average, push for innovation and increasing brand investment continues
	BGS	Sales growth driven by both net pricing and volume, confident with 4Q guidance, pricing benefit
	BN	Single digit growth in volume, some downward pressure on pricing driven by both mix and price investment
	CAG	Volume growth across all retail segments: Refrigerated & Frozen, Grocery & Snacks and International
	DF	Lower volume, anticipate input costs to increase in 2019, they are confident that consumers are able to take incremental pricing
	FLO	Higher price/mix, lower volumes due to cycling prior-year hurricane activity, lower cake and foodservice; partially offset by Dave’s Killer
		Bread growth, new products, expansion markets, and pricing
	GIS	Negative organic volume, positive price/mix; expects improvement as US retail distribution trends stabilize and price/mix benefits
		increase
	HAIN	Last earnings Hain put a planned 4% to 5% broad-based price increase in the trade through and realized those benefits this quarter.
	HSY	Organic sales decreased y/y, as volume growth was more than offset from higher planned promotion - lower pricing not being seen by
		consumers, but rather a give-back to retailers
	K	Sales driven by single-serve innovation but impacted by higher cost in co-packaging and transportation. Believes their comsumers can
		handle higher price/mix going forward
	KHC	Pricing decreased driven by increased in-store activity as well as commodity-driven pricing actions; volume increase characterized by
		consumption-led growth
	MDLZ	Volume decline as a consequence of N.A. operational challenges, but positive pricing and spoke to additional pricing expected
	MKC	Higher volume/mix from distribution gains and brand marketing (and maybe some volume pull-forward from announced pricing plans);
		Consumer segment had positive pricing
	NESN	Positive volume and pricing (reflecting commodity and freight cost inflation); continues to emphasize faster innovation and portfolio
		management
	PEP	Posted low single digit organic revenue growth, strong innovation and brand marketing, offset by cost pressure
	SMPL	Volume grew low double digit y/y, zero pricing
	THS	Experienced volume loss in all categories but mainly in snacks and meals; pricing was slightly positive
	TWNK	Positive point of sale, expects pricing through multifaceted price increase and merchandising program, coupled with trade rate
		reductions on select product lines; organic sales growth flat in the quarter
	ULVR	Saw a recovery in North America following a weaker first half, but still highly competitive given shifting retail channel landscape; some
		pricing, but promotional activity remains intense and deal activity heavy
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Q3’18 Regional Commentary – Developed Markets

Unusually warm weather in E.U./U.K. aided some and hurt others on volume growth; pricing environment remains challenging

		European Union / U.K.
	Pricing:	Mostly positive pricing but retail environment remains challenging in Europe
	Volume:	Volume was a toss up depending on the impact of unusual summer weather on product portfolio
	BN	Europe slightly negative y/y, but good momentum and U.K. and Nordics growing solidly
	GIS	Negative organic volume, positive price/mix, slightly driven by abnormal summer weather in Europe
	K	Markets remain challenging in Continental Europe, although volume performance was strong; pricing under pressure
	KHC	Strong growth in southern Europe and Germany
	MDLZ	Organic net revenue increased slightly, offset by a malware incident
	MKC	Volume declined tempered by unusually warm weather, but had slightly positive pricing in Consumer segment
	NESN	Low growth environment; pricing declined slightly, as deflation persisted given lower commodity costs
	NOMD	LSD volume increase, basically flat pricing given high promotional activity; expects to pass through higher prices on fish & peas
	PEP	MSD organic revenue growth in the U.K. and France
	ULVR	Underlying sales increased slightly from good weather, good execution and strong innovation; retail environment in Europe remains
		tough

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Rob Dickerson, ([phone], [e-mail]

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Q3’18 Regional Commentary – Emerging Markets

Latam: Strong momentum in Mexico; Brazil potentially in the early stages of a recovery

		Latin America
	Overview:	Overall growth remains in the mid-single digit. While most businesses are still recovering in Brazil, we're seeing strong
		momentum in Mexico along with a challenging macro environment in Argentina
	BN	Sales up MSD with Mexico and Argentina delivering strong growth; Brazil still pressured
	GIS	LatAm improved dramatically with good growth in Brazil despite trucking strike; operating profit affected by input cost inflation and
		SG&A
	HSY	Strength continued in Mexico and Brazil

KStrong growth in Brazil, continued growth in Mexico and rebounding in Caribbean/Central America. Management thinks there's pricing opportunities moving forward, currency risk is manageable because they are not big in some hyperinflation economies.

	KHC	Strong organic volume/mix gains from a combination of pasta sauce and condiments growth in Brazil; white space expansion across
		the region
	MDLZ	Positive volume and pricing in Mexico; inflation-driven growth in Argentina; declined in Brazil due to price gaps issues
	NESN	LSD organic growth with positive real internal growth and pricing; Brazil remains challenging with soft consumer confidence; Mexico
		MSD organic growth with positive contributions from most categories
	PEP	Organic revenue grew 10%, driven by HSD growth in Mexico and double-digit growth in Argentina, Brazil, and Colombia
	ULVR	Pricing starting to normalize in Brazil, but market volume slightly down; very high inflation in Argentina has severely impacted
		consumer demand

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Rob Dickerson, ([phone], [e-mail]

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Q3’18 Regional Commentary – Emerging Markets

		Strength in Asia/China driven by innovation and e-commerce
		Asia / China
	Overview:	Strong growth in the region, high focus on e-commerce
	BN	Early Nutrition sales contracted in China due to a unfavorable y/y comparison and slowdown of birth rates
	GIS	Strong growth due to effective consumer activations, innovation, and improved in-store execution
	HSY	Sales grew double digits driven by Hershey's core portfolio; transformation of local business ahead of expectations
	K	Grew strongly on an organic basis
	MDLZ	Positive volume and pricing; delivered its fifth consecutive quarter of growth fueled by biscuits and e-commerce
	MKC	Strong consumer sales in China driven by strong performance on core products as well as e-commerce growth; positive volume and
		pricing
	NESN	Delivered good broad-based growth with all geographies and all categories contributing; solid volume and positive pricing; China
		growth driven by e-commerce and innovations in infant nutrition, coffee, and culinary
	PEP	Strong double-digit organic revenue growth in China
	ULVR	Market share has been improving quarter-to-quarter in China; e-commerce the key driver of market growth

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Rob Dickerson, ([phone], [e-mail]

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Q3’18 Regional Commentary – Emerging Markets

Continued growth in India and Russia despite mixed commentary on currency/inflation

	Middle East / India
Overview:	Strong growth in India affected by innovation within the space
BN	Africa and Middle East very strong
HSY	Strength continued in India business, continues innovation in the region
K	Continues to expand in India
MDLZ	HSD growth in India
NESN	Africa and Middle East MSD organic sales growth, supported by volume strength
ULVR	Market growth in India remains strong, foresees inflationary environment but have been able to secure volume growth

	Eastern Europe / Russia
Overview:	Solid growth continues, driven by a combination of pricing and volume
BN	Russia delivered another quarter of growth
MDLZ	MSD revenue growth with positive volume and pricing; share gains in chocolate and biscuits
NESN	MSD organic growth supported by good volume, pricing decreased slightly
ULVR	Using pricing to offset at least a portion of the currency impacts in Russia, expecting volatility

Deutsche Bank

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DB Organic Sales and Margin Outlook

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		Source: Deutsche Bank

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DB U.S. Food Organic Revenue Growth Forecasts

We’re looking for ~1.5% organic sales growth in 2019 for the U.S.-based food sector, driven by a balance of pricing/mix and volumes… the risk, of course, is that innovation doesn’t help volume performance, which in turn could pressure pricing…

Food Sector Average Organic Revenue Growth Drivers - DB Estimates

3%

2%

1%

0%

(1%)

(2%)

(3%)

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

Organic Sales Growth Y/Y (Two-Year Stacked)

Organic Sales Growth Y/Y

Average Volume Y/Y

Average Pricing Y/Y

Source: DB Research, Company Reports

Includes CAG, CPB, GIS, HSY, K, KHC, MDLZ, MKC, SJM

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