DB U.S. Food_watermark

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DB U.S. Food Gross Margin & Profit Growth Forecasts

Excluding companies/periods significantly impacted by the effects of acquisitions, we’re looking for an average of ~2% gross profit growth during 2019, with gross margins flat-to-up-slightly y/y, driven by top line growth, the lapping of transportation cost headwinds, and mix benefits…

Food Sector Average Gross Margin Y/Y Delta (bps) - DB Estimates

250 bps

6%

200 bps

5%

4%

150 bps

3%

100 bps

2%

50 bps

1%

0 bps

0%

(1%)

(50 bps)

(2%)

(100 bps)

(3%)

(150 bps)

(4%)

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

	Gross Margin Y/Y (bps)				Gross Profit Y/Y

Source: Deutsche Bank, company data

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

Excludes company periods significantly impacted by the effects of acquisitions

Deutsche Bank

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

21

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DB U.S. Food Operating Margin & Profit Growth Forecasts

We’re looking for an average of ~4% y/y operating profit growth in 2019, as fewer SG&A-driven cost savings combined with higher rates of brand investment reduce the gross-to-operating-profit leverage equation…

Food Sector Average Operating Margin Y/Y Delta (bps) - DB Estimates

250 bps

14%

200 bps

12%

150 bps

10%

8%

100 bps

6%

50 bps

4%

0 bps

2%

(50 bps)

0%

(100 bps)

(2%)

(150 bps)

(4%)

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

	Operating Margin Y/Y (bps)				Operating Profit Y/Y

Source: Deutsche Bank, company data

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

Excludes company periods significantly impacted by the effects of acquisitions

Deutsche Bank

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

22

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Sector Performance and Observations

Deutsche Bank	Rob Dickerson, ([phone], [e-mail]	23
		Source: Deutsche Bank

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Lower Consensus Reduces Downside Risk for 2019

Although the normal consensus trend in food is for EPS growth expectations to decelerate throughout the year, cost savings drove 2016 growth, while U.S. tax reform benefits have driven 2018... expectations for 2019 EPS growth are now pointing to 3-4% y/y, as incremental savings and tax benefits dissipate, all while brand investment ramps in an effort to drive volume growth...

		Food Basket Consensus EPS Growth Trajectory
12%
10%
8%
6%
4%
2%
0%
January 1st	April 1st	July 1st	October 1st	January 1st	April 1st	July 1st	October 1st	January 1st
2011	2012	2013	2014	2015	2016	2017	2018	2019

Source: DB Research, FactSet data as of 11/14/18

Deutsche Bank

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

24

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Risk Appetite Tilt Towards Safety Driving CPG Outperformance

With continued monetary tightening likely in the U.S., growth in some emerging markets under question, and ongoing heightened global geopolitical risk, we watched the U.S. Dollar strengthen, oil prices drop, and CPG stocks outperform the S&P throughout calendar Q3 results to the tune of ~900 bps.

			U.S. Food, Consumer Staples & S&P Price Performance
80%
70%
60%							U.S. Food recently
	53%					underperforming Consumer		Deutsche Bank
50%						Staples, but outperforming
								estimate
							the S&P...
40%
	31%		29%
30%
20%
		9%	12%
10%			5%				7%
					5%			4%
				1%
			2%				2%
0%							(2%)
			(3%)		(4%)	(2%)
(10%)

(20%)
5 Years	3 Years	1 year	3 Months	1 Month	NTM*

	S&P 500		S&P 500 Consumer Staples		U.S. Food

Source: DB Research, FactSet data as of 11/14/18

Deutsche Bank

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

25

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Relative Sector Valuation Now at Highest Level Since January ‘17

As risk appetite tilted toward “safety”, U.S. food earnings valuations crept on average to a 10% relative premium, the highest we’ve seen since January ’17 and vs. YTD ‘18 parity with the S&P

160	U.S. Food Relative and Absolute P/E to the S&P 500	22x
140		20x
120
		18x	P/E Absolute
100
RelativeP/E		16x
80
		14x
60
40		12x
20		10x
3/02 7/02 11/02	3/03 7/03 11/03 3/04 7/04 11/04 3/05 7/05 11/05 3/06 7/06 11/06 3/07 7/07 11/07 3/08 7/08 11/08 3/09 7/09 11/09 3/10 7/10 11/10 3/11 7/11 11/11 3/12 7/12 11/12 3/13 7/13 11/13 3/14 7/14 11/14 3/15 7/15 11/15 3/16 7/16 11/16 3/17 7/17 11/17 3/18 7/18 11/18

U.S. Food vs. S&P 500 Relative P/E Valuation

Average Food Relative P/E vs. S&P 500

Average 10-Year Food Relative P/E vs. S&P 500

U.S. Food Absolute P/E Valuation

S&P 500 Absolute P/E Valuation

Average U.S. Food Absolute P/E

Source: DB Research, FactSet data as of 11/14/18

Deutsche Bank

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

26

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Sector Beta Well Below Historical Averages

Sector beta dropped to ~25% vs. its ~60% three-year historical sector average

Consumer Staples Sector Beta

70%								65%65%
			60%
60%					58%	57%		58%59%
				55%								54%54%
								54%54%

50%

40%						32%34%
30%							25%27%
20%
10%
0%
15 Year	10 Year	5 Year	3 Year	2 Year	1 Year	3 Month	1 Month

	S&P 500 Consumer Staples		XLP

Source: DB Research, FactSet data as of 11/14/18

Deutsche Bank

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

27

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DB U.S. Food Coverage Ranking

Rating	Ticker	Company	Price	Target	TP	Div. Yield	TSR	NTM (DBe)		CY18E	Rationale
			11/14/18	Price	Upside			P/E	EV/EBITDA	FCF Yield
Buy	CAG	Conagra Brands	$32.64	$42	28.7%	2.4%	31.1%	13.7x	11.1x	4.8%	Top-line & margin improvement, strong FCF generation, PF synergy upside
Buy	HAIN	Hain Celestial	$22.34	$27	20.9%	0.0%	20.9%	17.2x	10.6x	3.6%	Margin upside is real; s/h-friendly cash allocation potential underappreciated

Buy	KHC	Kraft Heinz	$52.64	$63	19.7%	4.7%	24.4%
Buy	NOMD	Nomad Foods	$19.47	$23	18.1%	0.0%	18.1%
Buy	MDLZ	Mondelez	$43.76	$48	9.7%	2.4%	12.0%
Buy	SMPL	Simply Good Foods	$19.43	$21	8.1%	0.0%	8.1%
Hold	HSY	Hershey	$107.95	$110	1.9%	2.6%	4.5%
Hold	GIS	General Mills	$45.30	$46	1.5%	4.3%	5.9%
Hold	TWNK	Hostess Brands	$11.11	$11	(1.0%)	0.0%	(1.0%)
Hold	K	Kellogg	$62.46	$66	5.7%	3.5%	9.2%
Hold	FLO	Flowers Foods	$19.60	$18	(8.2%)	3.6%	(4.5%)
Hold	SJM	J.M. Smucker	$113.94	$107	(6.1%)	3.0%	(3.1%)
Hold	CPB	Campbell Soup	$39.16	$35	(10.6%)	3.6%	(7.1%)
Hold	DF	Dean Foods	$5.99	$5	(16.5%)	2.0%	(14.5%)
Sell	MKC	McCormick	$147.69	$117	(20.8%)	1.4%	(19.4%)

13.5x	12.3x	7.2%	Transitory costs rolling off; volume/mix offsetting brand investments
13.3x	11.5x	8.3%	Strengthening FCF; cash available for share buybacks, debt paydown
17.4x	15.6x	4.5%	Improving fundamentals, global diversification, strategic optionality
32.6x	19.2x	4.0%	New target market strategy and distribution expansion potential
18.8x	13.4x	5.0%	Above-avg top line, under-levered b/s, but higher NT investment needs
15.0x	12.2x	5.6%	Base business cost/price relationship risk, BUFF execution risk
17.0x	10.4x	N/A	Near-term headwinds, new CEO, in temporary rebuild mode
15.6x	13.7x	5.5%	Reinvestments in early innings; EPS & FCF growth limited in medium-term
20.0x	11.4x	5.8%	Well-positioned on top line, cautious on potential offsets to cost savings
13.7x	11.6x	7.1%	Increased focus on brand support; key category private label share gains
16.0x	13.0x	7.2%	CEO departure, brand spend needs, ~5x leverage, LNCE execution risk
17.0x	5.3x	7.4%	Commodity-like margins & volatility, plant deleverage, pricing pressure
27.9x	21.0x	3.6%	Base business volume pressure, RB Food deceleration, premium valuation

Source: Company reports, FactSet, Deutsche Bank estimates and analysis. Prices as of 11/14/18.

Deutsche Bank

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

28

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Upside/Downside to Current Stock Price

Although we believe a number of food companies in the U.S. could face limited share price upside given pressured base business fundamentals, we still favor a number of food companies with potential strategic events where we see at least 10% upside over the next twelve months…

				% Upside / Downside vs. Price Target (NTM)
Conagra Brands																														29%
Hain Celestial																											21%
Kraft Heinz																									20%
Nomad Foods																								18%
Mondelez International																				10%
Simply Good Foods																			8%
Kellogg																		6%
Hershey																2%
General Mills																2%
Hostess Brands												(1%)
J.M. Smucker								(6%)
Flowers Foods								(8%)
Campbell Soup						(11%)
Dean Foods			(17%)
McCormick	(21%)
	(25%)		(20%)			(15%)		(10%)				(5%)		0%		5%		10%				15%		20%				25%		30%

Source: DB Research, FactSet data as of 11/14/18

Deutsche Bank	Rob Dickerson, ([phone], [e-mail]	29
		Source: Deutsche Bank

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DB U.S. Food Coverage Comp Sheet

Deutsche Bank Food Coverage - Rob Dickerson - Comparable Company Analysis

	DB	Share	DB	from	Div	Total	Shares	Market	Net	Enterprise	EV/EBITDA			P/E	Relative P/E		FCF	Net Debt /
Company Name	Rating	Price	Price Target	Price Target	Yield	Return	Out.	Cap	Debt	Value	2018E	2019E	2018E	2019E	2018E	2019E	Yield	2018E EBITDA
Campbell Soup	HOLD	$39	$35	(11)%	4%	(7)%	302	$11,826	$9,668	$21,494	12.3x	13.0x	16.1x	16.0x	76	89	7.2%	5.5x
Conagra Brands	BUY	$33	$42	29%	2%	31%	489	$15,961	$9,000	$24,961	16.1x	11.1x	15.4x	13.7x	72	76	4.8%	5.0x
Dean Foods	HOLD	$6	$5	(17)%	2%	(15)%	91	$545	$887	$1,432	7.1x	5.3x	N/M	17.0x	N/M	94	7.4%	4.4x
Flowers Foods	HOLD	$20	$18	(8)%	4%	(5)%	212	$4,147	$776	$4,922	11.9x	11.4x	21.0x	20.0x	99	111	5.8%	1.9x
General Mills	HOLD	$45	$46	2%	4%	6%	603	$27,329	$15,613	$42,942	12.9x	12.2x	15.0x	15.0x	71	83	5.6%	4.5x
Hain Celestial	BUY	$22	$27	21%	0%	21%	104	$2,323	$666	$2,989	13.2x	10.6x	23.6x	17.2x	111	95	3.6%	2.9x
Hershey	HOLD	$108	$110	2%	3%	5%	210	$22,710	$3,882	$26,593	14.0x	13.4x	45.9x	18.8x	216	104	5.0%	2.0x
Hostess Brands	HOLD	$11	$11	(1)%	0%	(1)%	103	$1,144	$863	$2,007	10.8x	10.4x	20.8x	17.0x	98	94	N/A	4.6x
Kellogg	HOLD	$62	$66	6%	4%	9%	349	$21,799	$8,614	$30,413	12.7x	13.7x	14.4x	15.6x	68	86	5.5%	3.6x
Kraft Heinz	BUY	$53	$63	20%	5%	24%	1,228	$64,642	$31,010	$95,652	12.9x	12.3x	14.4x	13.5x	68	75	7.2%	4.2x
McCormick	SELL	$148	$117	(21)%	1%	(19)%	133	$19,672	$4,912	$24,584	22.0x	21.0x	29.7x	27.9x	140	154	3.6%	4.4x
Mondelez International	BUY	$44	$48	10%	2%	12%	1,480	$64,765	$18,691	$83,456	15.6x	15.6x	18.0x	17.4x	85	96	4.5%	3.5x
Nomad Foods	BUY	$19	$23	18%	0%	18%	176	$3,421	$1,838	$5,259	12.6x	11.5x	14.5x	13.3x	68	74	8.3%	4.4x
Simply Good Foods	BUY	$19	$21	8%	0%	8%	76	$1,480	$79	$1,559	19.8x	19.2x	33.1x	32.6x	156	180	4.0%	1.0x
J.M. Smucker	HOLD	$114	$107	(6)%	3%	(3)%	114	$12,944	$6,523	$19,467	11.6x	11.6x	13.8x	13.7x	65	76	7.1%	3.9x
Mean				3%	2%	6%					13.8x	12.9x	21.2x	18.1x	100	100		3.7x
Median				2%	2%	5%					12.9x	12.2x	18.0x	17.0x	85	94		4.0x
S&P 500					2%	2%							16.8x	15.5x	79	85

Source: DB Research, Company Reports, FactSet data as of 11/14/18

NOMD estimates converted to USD

Deutsche Bank

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

30