Processed & Packaged Goods Industry Dan Finan, Taylor McGraw, Patrick Noonan, Mitchell Schmitt

Agenda Introduction & Summary Industry Overview and Assumptions Company Assumptions & Detailed Earnings Analysis Valuation Methodology & Valuation Calculations Conclusion

Introduction & Summary Mitchell Schmitt

Key Industry Players

Headquarters in Vevey, Switzerland (IFRS) Recorded 92.15B in Revenues for 2013; Most in U.S. Product Lines include powdered and liquid beverages, water, dairy products, nutrition, etc. Main customers are wholesalers, grocery stores, and food service contractors Mature Company; Founded in 1866 Attempts to gain economies of scale once established (Current expansion in emerging markets) Risk factors include commodity pricing, increased regulation in countries they operate, and consumer preferences

Headquarters in Deerfield, IL Spun off from Kraft Foods Oct. 1, 2012 to reflect standalone global food and snack business Done to enhance international growth for coming periods $35.3B in revenue for 2013 Notable brands include Oreo, Cadbury, Trident, and Tang Retail, grocery store customers Risk factors include failed expansion, highly saturated industry, consolidation of retail customers

Stock Price

Market Information Mondelez International Nestle Current Price $76.33 $35.94 Previous Year High $78.05 $36.05 Previous Year Low $63.38 $28.22 % Fluctuation 18.80% 21.72% Shares Outstanding 3.19B 1.7B Market Cap. $243.46B $61.13B P/E Ratio $22.76 $16.44 Ent. Value $258.20 $74.33B Recommendation Buy

Valuation Information Nestle Mondelez Realized 2013 EPAT $ 8,835 $ 5,485 Forecasted EPAT 2014 $ 9,872 $ 6,172 Forecasted EPAT 2015 $ 10,168 $ 6,326 NEA $ 79,046 $ 50,226 Firm Value/ 2013 EPAT 27.56 11.14 Firm Value/ 2014 EPAT 24.66 9.90 Firm Value/NEA 3.08 1.22

Industry Overview & Assumptions Patrick Noonan

Products & Markets

Characteristics of the Industry Key Drivers: Demand from supermarkets, grocery wholesalers and grocery stores Wholesalers are the link to stores and stores are the link to consumers High competition for in-store advertising and shelf space World commodity prices & other input prices Volatile commodity prices Packaging materials Consumer preferences & demand Continually changing World price of crude oil and natural gas Product and packaging plants Transportation costs Consolidation of retail customers creates larger retailers with increased influence in the marketplace. Many of the industry’s retail customers such as supermarkets and food distributors continue to consolidate, decreasing number of customers. Large retail customers can resist price increases and demand lower pricing. Larger retailers have scale to develop supply chains that allow them to operate with reduced inventories. Must distinguish among short-term fads, mid-term trends and long-term changes in consumer preferences. Recently, consumers have increasingly focused on health and wellness, including weight management and reducing sodium consumption. As commodities become constrained, prices may rise sharply. Some key commodities that our industry is reliant on include sugar, coffee, cocoa, wheat, corn products, soybean and vegetable oils, and dairy.

Industry Performance Snacking category within Processed & Packaged goods continues to grow Growth is highly correlated to GDP growth, urbanization of population and rising discretionary income levels Demand: Temporary emerging market slow down in 2013 – took a toll on global growth Expect overall growth rate expected to return to normal in 2014 Snack food consumption is highly correlated to GDP growth, urbanization of the population and rising discretionary income levels associated with a growing middle class. Over the long-term, we expect these trends to continue leading to growth in key consumer behaviors including increased snacking occasions, greater use of convenience food and migrating to more frequent, smaller meals.

Industry Outlook Life Cycle – Industry is mature, characterized by saturated domestic markets and well- established brands. Weak dollar against the currencies of major trading partners will boost industry exports. Growing global middle class. Mondelez Divestiture Competition Medium Concentration High Life Cycle Stage Mature Capital Intensity Technology Change Regulation & Policy Industry Assistance Low Source: www.ibisworld.com Industry leaders compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. Divestiture - it will create a global snacks business with revenue of $32 billion, containing such brands as Oreo cookies, Trident gum and Cadbury chocolates. It will also create a North American grocery business with revenue of $16 billion, including such brands as Jell-O desserts, Oscar Mayer processed meats and Kraft macaroni and cheese. There are big threats facing potential new entrants to the industry. Specifically, the extremely well fixed position of the industry’s major players. These major players have high customer and brand loyalty and have the resources necessary to invest in advertising and promotions needed to secure and improve market share. The major players also experience favorable contracts with key suppliers. New entrants will have trouble attaining the same inputs for the same low prices. Additionally, new entrants will not have the established distribution channels in place that more mature firms already operate. Overall, there is little threat from new entrants into the processed and packaged good industry.

Operating Conditions High levels of capital intensity Technology and systems Revenue volatility Levels of regulation Environmental regulation

Estimated Revenue Growth Long run future growth of the industry and the member companies are expected to converge to the growth in the macro economy by 2019– this is due to market saturation and the mature industry as a whole.

Nestle Profitability Map

Mondelez Profitability Map

Company Assumptions & Detailed Earnings Analysis Taylor McGraw

Company Comparison Comparing Mondelez International to Nestle Operate in similar industries Have similar focus on international expansion Major products: packaged snack foods, coffee, bottled water, gum, candy In terms of revenue, NESN is ~3x size of MDLZ

Company Assumptions – Growth Rate Growth rate for packaged foods industry Projected sales growth rate: MDLZ: 2.5% NESN: between 3.0% and 4.0%

Company Assumptions – EPM MDLZ EPM for 2014, onward: 13.64% (projected increase from 2013 EPM of 2.5%) NSN EPM for 2014, onward: 10.40% (average of 2010-2013 EPM)

Company Assumptions – EATO MDLZ EATO for 2014, onward: 0.70 (2013 EATO) NESN EATO for 2014, onward: 1.00 (increase from 2013 EATO of 0.13)

Future Earnings Uncertainty Both of the companies and their competitors are likely to pursue acquisitions in the future as they seek to aggressively expand into emerging markets. Projected to be a large source of growth for MDLZ and NESN Accompanied by much uncertainty – could be a driver behind undervalued stock prices

Valuation Methodology & Calculations Dan Finan

Valuation Methodology We ultimately decided to employ the Abnormal Enterprise Income Growth Model. Residual Income was considered Its reliance on NEA works well with the future growth strategies of Nestle and Mondelez …but the AEIG Model primarily uses forecasts within our designated time horizon to derive total estimated value, and thus provides us with the most confidence.

The Big Picture Across the industry, domestic sales are saturated and stagnant, but emerging markets are on the verge of a boom. Both companies plan to pursue an aggressive acquisition strategy in these emerging markets to capture significant market share. At the moment, Mondelez’s recent spin-off hinders its growth rate.

Key Elements Weighted average cost of capital (WACC) Nestle: 6.42% Mondelez: 7.84% Growth rate of sales Nestle: 3.00% from 2014-15, 3.50% from 2016-17, 4.00% thereafter Mondelez: 2.50%

Nestle Valuation

Mondelez Valuation

Recommendation for Nestle BUY

Recommendation for Mondelez BUY

Our Thoughts Both Nestle and Mondelez are undervalued. Growth in emerging markets remains highly uncertain… …but from our perspective, population growth and the emerging middle class will create a great deal of value for both companies.

An Earnings Call Excerpt… Paul Bulcke, Nestle CEO: “The macro-environment in 2013 was one of soft growth, minimal in the developed world and below recent levels in the emerging markets. Our response was to increase brand support, accelerate innovation, and to ensure our pricing was sensitive to consumer needs.” Despite this nominal growth… “The emerging markets had an organic growth of 9.3%, now representing 44% of the group's sales.”

Questions? Processed & Packaged Goods