Reason for Report: 1Q15 Earnings Update

June 19, 2015

Kraft Foods Group, Inc. (KRFT – NASDAQ) $84.01*

Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.

Previous Edition: Apr 22, 2015; 4Q14 & FY14 Earnings Update (share price and brokers’ material as of Apr 17, 2015)

Brokers’ Recommendations: Positive: 46.2% (6 firms), Neutral: 38.5% (5), Negative: 15.3% (2), Prev. Ed.: 6; 5; 2

Brokers’ Target Price: $91.50 (10 firms) Brokers’ Avg. Expected Return: 8.9%

*NOTE: Though dated Jun 19, 2015; share price and brokers’ material are till June 9, 2015.

NOTE: The tables below (Revenues, Margins, Earnings per Share and Balance Sheet) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Kraft Foods Group, Inc. is one of the largest food and beverage companies in North America

Out of the 13 firms covering the stock, 6 firms provided a positive rating, 5 firms rendered a neutral rating, while 2 firms remained negative on the stock.

Neutral and Negative or equivalent outlook (7/13 firms): Kraft’s revenues have remained soft for the past few quarters which concern these analysts. Most of these firms do not expect much improvement in the top line in 2015. However, like their bullish counterparts, these firms also believe that Kraft possesses strong fundamentals. They believe that the deal with H.J. Heinz Company will widen Kraft’s international presence, which has been a concern for Kraft owing to its limited international presence.

Positive or equivalent outlook (6/13 firms): Most of the bullish firms are encouraged by Kraft’s merger deal with Heinz as they believe it should lead to significant revenue and cost synergies. These firms believe that recent management changes should also accelerate the pace of change at the company. These firms also commend Kraft’s respectable long-term fundamentals including strong brand portfolio, aggressive cost reductions and efficiency-improvement initiatives.

Jun 19, 2015

Overview

Headquartered in Northfield, IL, Kraft Foods Group, Inc. (KRFT) is one of the largest consumer packaged food and beverage companies in North America. It sells branded cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, mainly across the U.S. and Canada. Some of its popular brands include Kraft, Maxwell House, Oscar Mayer, Planters and JELL-O.

© Copyright 2015, Zacks Investment Research. All Rights Reserved Kraft Foods Group was spun off from Mondelez International into a separate independent company on Oct 1, 2012, and consists of the North American grocery business of the old Kraft Foods.

Kraft’s reportable segments are Beverages, Cheese, Refrigerated Meals, Meals & Desserts, Enhancers & Snack Nuts, and Canada. The remaining businesses including Foodservice and Exports are clubbed under “Other Businesses”.

On Mar 25, Kraft entered into a definitive deal to be acquired by privately owned ketchup maker, H.J. Heinz Company, to form The Kraft Heinz Company — the third largest food and beverage company in North America.

The deal is being backed by Brazilian private equity firm, 3G Capital, and billionaire investor, Warren Buffett. Heinz is jointly owned by 3G Capital and Buffett’s Berkshire Hathaway. Kraft shareholders will own 49% stake in the combined entity while also receiving a special cash dividend of $16.50 per share ($10 billion) to be funded by an equity contribution by Berkshire Hathaway and 3G Capital. Kraft shareholders will get one share of Kraft Heinz against every Kraft share they own. The deal has been approved by the boards of both the companies and has received antitrust clearance in Canada. The deal is however, awaiting shareholders’ approval, and other customary closing conditions. A special meeting of shareholders to vote on the merger will be held on Jul 1.

The firms identified the following issues for evaluating the investment merits of Kraft Foods:

Key Positive Arguments Key Negative Arguments Kraft has a diverse portfolio of popular brands across 17 Kraft’s overall performance in 2014 was below diverse core categories. It boasts a dozen more-than-a- expectations. Price increases to cover rising century-old brands as well as three Billion Dollar brands commodity costs and softness in certain categories — Philadelphia cream cheeses, Kraft cheeses, dinners due to the lack of innovation/brand building and dressings, and Oscar Mayer meats. activities hurt sales during the year. Kraft’s organic sales growth lagged market expectations in 2014 and is unlikely to improve much in 2015. Kraft Foods’ aggressive cost reduction and efficiency Kraft Foods’ business is squarely focused on North improvement initiatives will provide more liquidity to America, which will be an impediment to growth invest in brand building and marketing initiatives. versus peers who have significant exposure in the emerging markets. The Heinz buyout, if successful, should allow Kraft’s U.S. food producers like Kraft are struggling due to brands to gain a foothold in the international markets. the shift in consumers’ preference toward natural and organic ingredients over packaged and processed food.

Note: The company’s fiscal year ends on the last Saturday of December. To know more about the company, you can visit the company’s website www.kraftfoodsgroup.com.

Jun 19, 2015

Long-Term Growth

Management’s long-term growth targets include organic sales growth at or above market growth rates of the North American food and beverage industry, mid single-digit operating income growth and mid-to-high single-digit earnings growth.

Kraft is aggressively reducing costs and improving efficiencies under its multi-year restructuring program. As part of this $600 million program, the company is cutting overhead expenses, managing labor costs, outsourcing distribution, reducing IT expenditure, simplifying the supply chain and increasing capacity

Zacks Investment Research Page 2 www.zackspro.com utilization. Moreover, the company is undergoing a firm-wide culture change and realigning compensation plans. The company has simplified its business model by pruning several lower-margin businesses over the last few years to drive efficiency. Management is targeting a net productivity savings of 2.5% annually from its efforts that will provide more cash/liquidity to invest in its brand-building, innovation and marketing initiatives and pay back shareholders.

Kraft has been struggling with its top line due to broader macro pressures. The merger with Heinz, if successful, will bring popular consumer food brands like Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia under one roof. Kraft Heinz will own eight Billion Dollar brands and is expected to garner approximately $28 billion in revenues. The merger is likely to result in revenue synergies like increased scale and resultant additional shelf space and provide opportunity for Kraft’s brands to set foot in the overseas markets using Heinz’s international platform. This should improve Kraft’s sales over the long term. Kraft Heinz is also expected to save $1.5 billion in annual costs by 2017-end gaining from increased scale and aggressive cost cuts. Jun 19, 2015

Target Price/Valuation

Rating Distribution Positive 46.2% Neutral 38.5%↑ Negative 15.3%↓ Avg. Target Price $91.50 Maximum Target $100.00↑ Minimum Target $83.00↑ No. of firms with Target Price/Total 10/13

The risks to the target price include:

 Continued weak top line performance  Competition from private labels

Recent Events

Kraft Foods, Heinz Merger Approved by Canadian Bureau – June 10, 2015

Kraft Foods recently announced that the Canadian Competition Bureau approved its merger with privately owned ketchup maker, H.J. Heinz Company. The regulatory body issued a "no action" letter, which indicates that it has no issues with the proposed merger of the two companies.

Earlier in the same week, Kraft issued a press release stating that the waiting period under the Hart-Scott- Rodino (HSR) Act, in relation to its proposed merger has expired.

The merger still requires the approval of Kraft shareholders and needs to meet other customary closing conditions. In this regard, Kraft Foods will hold a meeting with stockholders to vote on the merger on Jul 1, 2015.

Kraft-Heinz Merger to Create the 3rd Largest Food Giant - March 25, 2015

Zacks Investment Research Page 3 www.zackspro.com Kraft Foods announced a definitive merger agreement with privately owned ketchup maker, H.J. Heinz Company, to form The Kraft Heinz Company. The deal is being backed by Brazilian private equity firm, 3G Capital, and billionaire investor, Warren Buffet.

Once combined, the Kraft Heinz Company will be the third largest food and beverage company in North America and the fifth largest in the world. The merger is reportedly valued at $46 billion.

Heinz is jointly owned by 3G Capital and Buffet’s Berkshire Hathaway. The investment companies acquired Heinz for $28 billion in 2013.

Kraft shareholders will own 49% stake in the combined entity while also receiving a special cash dividend of $16.50 per share that represents 27% of Kraft’s closing price on Mar 24. Kraft shareholders will get one share of Kraft Heinz against every Kraft share they own. The $10 billion special dividend to be paid to Kraft shareholders will be funded by an equity contribution by Berkshire Hathaway and 3G Capital. Heinz shareholders will own 51% stake in the new company.

Kraft Beats First Quarter Earnings, Lags Sales - April 28, 2015

Kraft Foods could not sustain the top-line growth witnessed in the fourth quarter of 2014 as sales once again stalled in the first quarter of 2015. Profits of the company, however, improved on the back of lower costs.

First-quarter earnings per share of $0.86 beat the Zacks Consensus Estimate of $0.81 by 6.2%.

On a year-over-year basis, earnings increased in a high single-digit range, gaining from lower advertising and overhead costs. Moreover, lower interest expense and share count aided earnings. Revenues, however, remained lackluster.

First-quarter adjusted earnings exclude unfavorable impact from post-employment benefit plans and expenses related to cost savings initiatives and the proposed Heinz merger. Including these special items, earnings per share came at $0.72, down 15.3% year over year.

Kraft’s first-quarter net revenue declined 0.2% year over year to $4.35 billion and missed the Zacks Consensus Estimate of $4.44 billion by 2.1%. Currency headwinds due to a weaker Canadian dollar offset positive organic revenue growth.

Revenues

Net revenue declined 0.2% year over year to $4.35 billion. The company results are in line with Zacks Digest average revenue.

Organic revenues increased 1.1% as pricing gains made up for weaker volumes. Organic revenues, however, were weaker than 3.4% growth in the last quarter due to sluggish volumes.

In the first quarter, volume/mix remained flat despite a 1.1 percentage points (pp) benefit from favorable timing of Easter-related shipments. Easter fell earlier in the second quarter of 2015 than the last year, which led to higher Easter-related shipments in the first quarter of 2015.

Excluding the Easter benefit, volume/mix declined in the quarter, comparing unfavorably with last quarter’s 1.5 pp positive impact. Volume erosion as a result of higher pricing in Cheese, Refrigerated Meals and Canada segments as well as category weakness in Meals and Desserts hurt volumes.

Zacks Investment Research Page 4 www.zackspro.com Pricing improved 1.2 pp due to carryover impact of significant pricing action undertaken last year. In 2014, the costs of key ingredients, like cheese and meat, reached record highs compelling Kraft to raise prices of most of its products. The price increases led to market share losses, lower volumes and gross margin weakness last year.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

Total Revenue 1Q14A 4Q14A 2014A 1Q15A 2Q15E 2015E 2016E Digest High $4,362.0 $4,696.0 $18,205.0 $4,352.0 $4,746.0 $18,233.0↓ $18,601.0↓ Digest Low $4,362.0 $4,695.7 $18,204.7 $4,352.0 $4,693.0 $18,068.0↓ $18,546.0↓ Digest Average $4,362.0 $4,696.0 $18,205.0 $4,352.0 $4,719.5 $18,150.5↓ $18,573.5↓ YOY growth -3.3% 2.2% -0.1% -0.2% -0.6% -0.3%↓ 2.3%↓

Segment Details

Beverage business revenues increased 4.2% (both reported and organic) to $702 million benefiting from higher pricing as well as volume/mix gains.

Volume/mix increased 2.7 pp as gains in Capri Sun ready-to-drink beverages (ahead of a planned price increase) and the successful launch of McCafe coffee – in partnership with McDonald's – offset weakness in powdered beverages due to category declines. Pricing increased 1.5 pp gaining from the carryover impact of price increases undertaken last year in roast and ground coffee.

Cheese business revenues improved 1.3% (up 1.1% organically) to $1.02 billion as higher pricing made up for volume mix declines. Pricing improved 2.7 pp due to price hikes from the last year. Volume/mix declined 1.6 pp, worse than 0.5 pp drop in the previous quarter resulting from buying softness due to higher prices, particularly in natural cheese and sandwich cheese, which offset gains from the Easter shift. Kraft took significant pricing action in cheese last year as cheese costs shot up sharply.

Refrigerated Meals business revenues improved 2.1% (both reported and organic) to $833 million as pricing gains offset volume/mix declines. Pricing increased 3.2 pp due to the carryover benefit price increases taken in previous quarters in cold cuts and hot dogs, which were offset by lower net pricing in bacon. However volume/mix declined 1.1 pp due to volume erosion as a result of higher pricing which offset gains from the Easter shift, particularly in bacon.

Meals & Desserts business revenues declined 2% (both reported and organic) to $488 million due to weak volume/mix as well as pricing. While volume/mix declined 1.6 pp, pricing decreased 0.4 pp. Category weakness in both meals and desserts offset benefit from the Easter shift. Market share losses in desserts as well as increased promotional spending also hurt volumes.

Enhancers & Snack Nuts business revenues declined 2% (both reported and organic) to $493 million mainly due to pricing decline of 3.0 pp. Pricing declined due to timing of promotional activity compared with the last year. Volume/mix increased 1.0 pp backed by gains in Planters snack nuts due to new products.

Canada business revenues declined 10.5% to $382 million due to currency headwinds. Organically, revenues grew only 0.2% as pricing gains were offset by volume/mix decline. Pricing increased 4.0 pp due to significant price increases which took place in February. Volume/mix declined 3.8 pp due to volume erosion resulting from these price increases, particularly in peanut butter, and roast and ground coffee.

Other Business revenues declined 0.7% to $434 million. Organically, revenues increased 2.6% due to volume/mix gains of 5.3 pp, which made up for pricing declines of 2.7 pp.

Provided below is a summary of revenue segment as compiled by Zacks Digest:

Zacks Investment Research Page 5 www.zackspro.com Revenue($M) 1Q14A 4Q14A 2014A 1Q15A 2Q15E 2015E 2016E Beverages $674.0 $577.0 $2,627.0 $702.0 $748.0 $2,715.0↑ $2,762.0↓ Cheese $1,007.0 $1,170.0 $4,066.0 $1,020.0 $940.0 $3,997.0↑ $4,078.0↓ Refrigerated Meals $816.0 $793.0 $3,433.0 $833.0 $934.0 $3,511.0↓ $3,599.0↑ Meals & Desserts $498.0 $627.0 $2,155.0 $488.0 $536.0 $2,203.0↓ $2,247.0↓ Enhancers & Snack Nuts $503.0 $488.0 $2,062.0 $493.0 $612.0 $2,083.0↓ $2,125.0↓ Canada $427.0 $533.0 $1,937.0 $382.0 $473.0 $1,765.0↓ $1,792.0↓ Other Businesses $437.0 $508.0 $1,925.0 $434.0 $502.0 $1,959.0↓ $1,998.0↓ $18,150.5 Total Revenue $4,362.0 $4,696.0 $18,205.0 $4,352.0 $4,719.5 ↓ $18,573.5↓

Margins

Adjusted operating income improved at a mid single-digit rate to $870 million in the first quarter as lower advertising and overhead costs made up for the weak sales performance.

The effective tax rate was 32.2%, lower than 34.9% last year.

Provided below is a summary of margins as compiled by Zacks Digest:

Margins 1Q14A 4Q14A 2014A 1Q15A 2Q15E 2015E 2016E Gross 34.3% 30.9% 32.0% 33.2% Operating 19.8% 17.3% 18.4% 20.0% Pre-Tax 17.0% 14.6% 15.7% 17.6%

Note: Blank cell indicates that the brokers have not provided figures.

Earnings per Share

Kraft Foods’ 1Q15 earnings per share were $0.86 which increased in a high single digit range, gaining from lower advertising and overhead costs. Moreover, lower interest expense and share count aided earnings. The Zacks Digest average EPS was $0.87.

Provided below is a summary of EPS as compiled by Zacks Digest:

EPS (in $) 1Q14A 4Q14A 2014A 1Q15A 2Q15E 2015E 2016E Digest High $0.85 $0.81 $3.29 $0.90 Digest Low $0.78 $0.80 $3.22 $0.86 Digest Avg. $0.81 $0.81 $3.26 $0.87 Digest YoY Growth -9.3% 13.4% 3.3% 7.7%

Note: Blank cell indicates that the brokers have not provided figures.

Zacks Investment Research Page 6 www.zackspro.com Analyst Kinjel Shah

Last done by Kinjel Shah

Copy Editor Debasmita Banerjea Content Editor Kinjel Shah Lead Analyst Kinjel Shah Reason for Update 1Q15 Earnings Update

Zacks Investment Research Page 7 www.zackspro.com