May 23rd, 2016 QUIC RESEARCH REPORT

Consumers & Healthcare

Julie Vincent Jon Allion Andrei Florescu Liam Smith

Mondelez (NASDAQ: MDLZ) Stock Pitch A Stock as Sweet as it’s Cookies Introduction

Mondelez is the market leader in the food segment. With a strong portfolio that is well-positioned to capitalize on the sector’s future growth, we believe that Mondelez will see significant upside in the years to come. By adding Mondelez to our U.S portfolio, we will be exposed to the lucrative snack foods segment and benefit from their strong financial position.

Summary

- Mondelez operates in the global snack industry, competing with names such as PepsiCo and Conagra Foods

- Mondelez has a wide range of brand offerings, led by its seven “power ”, each garnering over $1 billion in annual sales

- The company has begun to focus its investments to emerging markets, which grow at fast rates while being driven by increasing consumer demand for

- The company’s increased focus on effective capital deployment will increase margins and a result bolster company profitability QUIC Research Reports focus on emerging investment themes that - Recent e-commerce expansion and a stronger focus on healthy affect current portfolio companies products serve as strong catalysts for the company and companies under coverage.

The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to constitute specific legal, accounting, financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss or damages whatsoever (including direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part without the prior written consent of QUIC and Queen’s University.

QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many factors may affect the applicability of any statement or comment that appear in our documents to an individual's particular circumstances.

© Queen’s University 2016 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Table of Contents

Introduction 1

Company Overview 3

Industry Overview 4

Investment Thesis I: Strong Brand Profile 5

Investment Thesis II: Emerging Markets 6

Investment Thesis III: Margin Expansion 7

Catalysts and Risks 8

Portfolio Fit 8

Valuation 9

Appendix 11

References 12

May 23rd, 2016 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Company Overview

Mondelez’s powerful presence in the snacking Management is in the midst of implementing an category is led by 7 billion-dollar “Power Brands” aggressive growth strategy, which it hopes will help earning 68% of the company’s revenues. These to increase its competitive advantage in the ever- brands include , , and growing space. Management hopes to grow ; LU, , and Oreo biscuits; organic revenue at or above the company growth and gum. Mondelez’s Power Brands benefit rate, achieve operating income of high single digits from significant brand loyalty resulting in operating (and double digits where possible) across all brands margins that are 1 to 2% higher than other brands. and double digit constant currency growth. Power Brands also grow faster than the company average, therefore Mondelez plans to have them contribute to over 80% of total sales over time. EXHIBIT 1

Mondelez is considered the worldwide leader in Mondelez Popular Brands biscuits, chocolate and , and holds a dominate position in gum. Its competitive advantage is that it sells snack items in complimentary food segments. This results in cost leverage, capability sharing and commercial marketing benefits. Moreover, it is able to take advantage of the vast distribution networks some of their subsidiaries have.

Mondelez has operations in approximately 80 countries around the world and distributes its products in over 165.

EXHIBIT 2 EXHIBIT 3 Revenue Segmentation by Geography 2015A Revenue Segmentation by Product 2015A 10% 6% 9% 34% 40% 16%

16%

14%

30% 26%

Europe North America Latin America Biscuits Chocolate Gum and Candy Asia Pacific EEMEA Beverages Cheese and Grocery

Source: Company Reports Source: Company Reports

May 23rd, 2016 3 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Industry Overview

Over the past 5 years, the snack food industry has There are four main drivers of the industry: per benefited from increased demand. This comes as a capita disposable income, the healthy eating index, result of a strengthened economy, leading to the price of corn and the trade-weighted index. higher discretionary spending levels. EXHIBIT 5 The industry is expected to grow at a 3.7% CAGR Percentage of Consumers Who Said They Ate over the next 3 years, with total revenue expected These Snacks in the Last 30 Days to exceed $40B in 2016. Food Percentage The biggest headwind for producers in the snack is Chocolate 64% the ever-changing tastes and preferences of consumers. With many consumers beginning to Fresh Fruit 62% embrace healthier lifestyles, snack food companies are feeling the need to offer new health-conscious Vegetables 52% items. Non-sugary snacks closely aligned with meal-replacement foods are showing the strongest Cookies / Biscuits 51% growth of all areas, proving the movement by Bread / Sandwich 50% consumers to healthier alternatives. Yogurt 50% It is expected that improving economic conditions throughout North America and Europe will lead to Cheese 46% increased demand for premium snacks. As such, companies have begun producing organic and Chips / Crisps 44% whole food snack options to bring to the Nuts / Seeds 41`% marketplace. Gum / Ice Cream 33% EXHIBIT 4 Source: Nielsen Geographic Snack Consumption Breakdown Currently, there are three main companies 100% operating in this industry: Mondelez, PepsiCo and 17% 17% 20% ConAgra foods. Going forward, PepsiCo poses the 30% 28% 80% largest threat to Mondelez because of their 17% portfolio of household brands: Quaker’s, Lay’s, 31% 25% Dorito’s and Fritos. 17% 60% 26% 33% As of 2014, confections (which includes sugary 19% sweets such as chocolate, hard candy and gum) 40% 24% 32% 20% represented the largest sales contribution in Europe and the Middle East/Africa. Salty snacks were 20% 33% 36% favourites in North America, representing roughly 28% 24% 23% one-fifth of all snack consumption. Refrigerated

0% snacks were consumed the most in Asia-Pacific, Latin America Asia Pacific EEMEA Europe North America while cookies and snack cakes were best sellers in Confection Salty Cookies and Cakes Latin America. Refrigerated Fruits and Vegetables Source: Nielsen

May 23rd, 2016 4 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Investment Thesis I: Strong Brand Profile

Mondelez’s powerful presence in the snacking pricing dynamics between Mondelez and their category is led by 7 billion-dollar “Power Brands” competitors are beginning to normalize and earning 68% of the company’s revenues. These improve further into 2016. Mondelez has one of the brands include Cadbury, Cadbury Dairy Milk, and lowest exposure to private labels out of the Milka chocolate; LU, Nabisco, and Oreo biscuits; competition with just 10.6% of their portfolio and Trident gum. Mondelez’s Power Brands benefit composing of private label brands. This means that from significant brand loyalty resulting in operating short-term increases in their cost base poses less of margins that are 1 to 2% higher than other brands. a risk, and Mondelez will continue to benefit from Power Brands also grow faster than the company the strong brand loyalty which has been built over average, therefore Mondelez plans to have them many decades. contribute to over 80% of total sales over time.

EXHIBIT 6 EXHIBIT 7 Leading Brands by Category Brand Exposure to Private Labels vs. Peers

19.5% 20% 16.6% 14.6% 15% 13.2% 13.1% 11.9% 10.6% 10.2% 10%

5% Source: Company Reports 0% In response to a shift in consumer preferences KRFT MKC CAG SJM CPB GIS MDLZ K towards healthier snacks, Mondelez expects 50% of Source: Bernstein its product portfolio to be composed of “Well- Being” offerings by 2020, up from 35% today, In order to focus on the core snacks portfolio and aiming to become the global market leader in growth, Mondelez engaged in a spin-off of better-for-you snack options. The recent U.S release its business in 2015 with D.E Master Blenders of Good Thins is the company’s first new snack to create (JDE). The new brand in over a decade and showcases their ability company, of which Mondelez has a 43.5% equity to provide relevant, healthier snacks at competitive stake in, will leverage both company’s share of the prices. In order to retain future market share for the coffee market and cost savings are expected to Power Brands, Mondelez is focusing on more total $1.5 billion by 2018. JDE sells coffee through aggressive marketing strategies (expected to climb industry leading brands such as and Jacobs to 10% of sales in 2018, a gain of 2%) and simpler, which achieve similar brand loyalty to Mondelez’s more nutritious ingredients. Power Brands.

Mondelez’s brands have seen shelf-space reduction Mondelez has the advantage of product offerings in at some retailers over the past 2 years as they took complementary food categories, resulting in cost a price increase due to rising input costs earlier leverage and capability sharing. For example, in than competitors such as Mars and Nestle. These 2012 Mondelez launched in China using its companies have hedges on their coca purchases distribution network in biscuits. that are longer-term than Mondelez. However, the

May 23rd, 2016 5 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ) Investment Thesis II: Emerging Markets

Mondelez generates approximately 80% of its Mondelez is able to tap into the vast distribution revenues from outside the U.S. It operates in more networks in these emerging nations. So far, than 80 countries around the world, and sells Mondelez has seen a 15% increase in its emerging products in over 165 countries. It is estimated that market sales. Furthermore, Cadbury has significant approximately 40% of Mondelez’s revenues come presence in India which Mondelez is looking from Brazil, Russia, China, India and Southeast Asia forward to capitalizing on. (BRIC nations). One of Mondelez’s strategic objectives stated in Over the past three years, we have seen numerous their 2015 Annual Report is to revolutionize it’s food and beverage companies move into the selling. To do so, they have made large changes to emerging markets as a result of their low per-capita their marketing campaigns and have invested consumption. This means that they have significant significantly in their BRIC nations marketing. This growth potential and are expected to gravitate will help their access to key emerging markets. In towards name brands. 2015, Mondelez acquired an 80% stake in a Vietnamese biscuit manufacturer. This has helped Moreover, with a fast-growing middle class, the them to expand operations and distribution routes BRIC nations have increasing demand for in the Asia-pacific region. convenience food and beverages. Snack food producers with strong brand portfolios will excel in Moreover, Mondelez has invested significantly in it’s this environment, e-commerce platform. They believe that a strong e- commerce platform will allow them to reach new In 2010, Mondelez acquired Cadbury limited, one of customers, and increase margins. They hope that the world’s largest chocolate manufacturers. In the fuelling money into this platform will strengthen years prior to the acquisition, Cadbury worked brand recognition in it’s new key markets. tirelessly to develop production and distribution networks in the BRIC nations. By acquiring Cadbury, EXHIBIT 8 2014 – 2015 Sales Growth by Geography 25% 20% 20%

15% 9% 10% 6% 4% 5% 5% 2% 2% 0% 1% 0%

-5% (2%) Asia Pacific Latin America EEMEA Europe North America Mondelez Net Revenue Global Snack Sales Source: Company Filings, Nielsen

May 23rd, 2016 6 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Investment Thesis III: Margin Expansion

Under pressure from activist investor benefit from a 4% increase in gross margins. This and more recently Bill Ackman, Mondelez is year, Mondelez is expected to open two more undergoing a restructuring plan to expand the similar plants in Russia and India, and by 2018 70% company’s margins. In 2013, the plan was initially of Power Brands are expected to be produced in an increase of 3% to EBITDA margins. The key these lower-cost plants (an increase of ~45%). drivers in Mondelez’s revamped plan for margin expansion lies in plant efficiency, reducing its Moreover, one of Mondelez’s goals is to increase complex system of 100,000 suppliers and 74,000 efficiencies in plants which were garnered through SKUs, and integrating Lean Six Sigma practices. acquisitions, yet never optimized. 40 “advantage lines” have been installed up to 2015, and 35 more First, Mondelez reduced the number of its lines are to be added by 2018. These lines are much employees in September 2015 in order to reduce more efficient due to a modular design that the over-allocation of its work force. Analysts requires less production time, resources, as well as believe that a ~30% reduction of Mondelez’s space. The implementation of these new advantage employees would bring their revenues on par with lines is expected to cut conversion costs by 20% their Multinational peers who also operate in the around the globe. emerging markets. However, this is a large target to hit, thus the management team has planned for Overall, these cost-cutting efforts seem reasonable other efficiency implementations to reduce costs. as Hershey, a competitor, achieved similar gains through almost identical procedures over the EXHIBIT 9 period of 2010 to 2014, even as cocoa prices Multinational Revenue per Employee vs. Peers doubled. Today, Mondelez faces less pressure from $750 $693 key input costs like coca, making their restructuring plan much more achievable. If Mondelez fails in its $600 efforts, it will face pressures from the aforementioned activist investors to sell itself to $436 Kraft-. However, a successful execution of this $450 $371 plan could lead to a merger with PepsiCo’s Frito $299 $265 Lay; this has been discussed in depth in the past. $300 $224 $244 $ Thousands $ EXHIBIT 10 $150 Gross Margin Growth Over Efficiency Improvement Plan 45.9% 45% $0 43.6% BN ULVR NESN MDLZ HSY KHC PG 42.8% 42.4% Source: Company Reports 41.9% A new, 250 acre lower-cost plant was established in 40% 41.1% Salinas, Mexico in the second half of 2015. Due to 38.9% 40.3% its proximity to suppliers, transportation routes, and 38.8% a built-in distribution center, the plant requires 1/3 of the staffing of a regular manufacturing plant to 36.8% produce the same capacity. The purpose of this 35% plant is to help fuel growth in the Americas, and Year 1 Year 2 Year 3 Year 4 Year 5 analysts believe that if 40% of sales in North America are produced in Salinas, the company will Mondelez Hershey Source: Company Reports

May 23rd, 2016 7 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

Catalysts and Risks

1. E-Commerce Expansion: On April 7, 2016 1. Volume Trends: Since it’s split from Kraft Food, Mondelez formed an e-commerce partnership Mondelez has seen weaker volumes as a result with China’s leading online and mobile of higher pricing and category weakness. If this commerce company, Alibaba Group Holding continues, they could experience a slowdown Limited. The strategic deal is in line with the across all categories, which would lead to company’s plans to expand e-commerce weakening revenues. platforms and generate more online sales. 2. Venezuela Operations: Sugar supply in 2. New Snack Brand Launch: On March 7, 2016 Venezuela has become scarce, forcing Coca- Mondelez announced the launch of its first new Cola to halt production of its sugary drinks. snack brand in more than ten years, named Although Mondelez has deconsolidated Good Thins. The new brand will offer low-fat operations in the area at an impairment cost of and low-sugar snacks to meet the growing $788 million, the location still remains a risk. consumer demand for healthier products. Mondelez may have to freeze its production in the area as well and earn less cash from the 3. Healthy Eating: As part of the company’s plan new Venezuelan subsidiary to offer healthier foods, Mondelez set 2020 goals of reducing sodium and saturated fat by 3. Foreign Exchange: With 80% of Mondelez’s 10%, increasing whole grains by 25% and revenues coming from outside the U.S, foreign placing calorie labeling on the front of packs of exchange will hurt the company’s bottom line. all relevant products by YE 2016. In 2015, FX hurt revenue growth by 6%. Portfolio Fit

We believe that Mondelez would be an excellent With intentions to sell, we propose a 15% stake in addition to the Consumers and Healthcare U.S Mondelez for our current U.S portfolio, representing portfolio. MDLZ has exposure to the fast growing roughly a $4,000 investment. snack food segment, and is also a financially stable company. Mondelez owns many “power brands” EXHIBIT 11 which are household staples across North America Proposed Consumer and Healthcare U.S Portfolio Allocation and Europe, while gaining massive growth in the emerging markets. Merck & Co. Mondelez Mondelez will serve as additional exposure to the Starbucks Inc. International, Inc. Corporation 12% 15% food segment within our portfolio, which currently 12% holds fast-serve companies in Starbucks and McDonald’s.

Lastly, we believe Mondelez provides durability in the consumer space that is currently experiencing CVS Health massive threats to e-commerce. As a supplier of McDonald's Corporation Corp. The Home 24% food products that does not sell in brick and mortar 17% Depot, Inc. stores, we believe Mondelez will not only weather 19% the storm, but also thrive in the ever-changing retail environment. Source: QUIC Data

May 23rd, 2016 8 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ) Catalysts and Risks

Comparable Company Analysis

Company Name Market Enterprise EV / EBITDA Price / Earnings Net Debt / EBITDA EV/ Sales Dividend Cap ($MM) Value ($MM) LTM 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E Yield The Company $100,219 $129,744 20.4x 16.9x 15.2x 26.7x 21.5x 2.7x 2.5x 4.9x 4.8x 2.8% Kellogg Company $26,009 $33,955 16.6x 13.4x 12.8x 20.1x 18.6x 3.1x 3.0x 2.6x 2.5x 2.7% General Mills Inc. $37,120 $46,307 13.4x 13.7x 13.4x 21.8x 20.6x 2.4x 2.3x 2.8x 2.8x 2.9% $19,368 $21,722 13.0x 12.6x 12.1x 21.4x 19.9x 1.3x 1.3x 2.9x 2.8x 2.6% PepsiCo Inc. $144,586 $167,502 13.9x 13.3x 12.6x 21.2x 19.6x 1.8x 1.7x 2.7x 2.6x 3.0% Mean $65,460 $79,846 15.5x 14.0x 13.2x 22.2x 20.1x 2.3x 2.2x 3.2x 3.1x 2.8% Median $37,120 $46,307 13.9x 13.4x 12.8x 21.4x 19.9x 2.4x 2.3x 2.8x 2.8x 2.8%

Mondelez International Inc. $67,297 $83,425 18.4x 17.1x 15.1x 23.6x 20.8x 3.3x 2.9x 3.1x 3.1x 1.6%

Mondelez is trading at a small premium on a Price/Earnings, EV/EBITDA and Net Debt/EBITDA basis, and pays a lower yielding dividend than its peers. The company is slightly undervalued with regards to EV/Sales however, a ratio that indicates its future position if manufacturing efficiency is improved according to plans.

EXHIBIT 11

QUIC

Bernstein

RBC

Barclays

Consensus

Credit Suisse

JP Morgan

Goldman Sachs

42 44 46 48 50 52 54

May 23rd, 2016 9 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ) Valuation

We value Mondelez using comparable companies Combined, MDLZ’s WACC is 5.7% - a low number and a discounted cash flow model analyses. Cost of due to the company’s below average beta and cost equity is derived by using a 10-year treasury yield of debt. We assumed a 2% terminal growth rate of 1.85% and a market risk premium as calculated due to global expansion and MDLZ’s particularly by Aswoth Damodoran. The cost of debt was strong brand presence in emerging Markets. Our calculated using the weighted average yield of target share price implies a total return of 24.4% MDLZ’s debt. (capital gain of 22.8% and a dividend yield of 1.6%).

WACC Calculation Share Price Calculation Risk-Free Rate 1.85% PV of UFCF 19,686 Market Risk Premium 6.12% Terminal Year Growth Rate 2.00% Levered Beta 0.92x Discount Rate 5.70% Cost of Equity 7.50% PV of Terminal Value 81,252 Enterprise Value 100,938

Cost of Debt 3.64% Enterprise Value 100,938 Tax Rate 22.00% Less: Total Debt 17,517 After Tax Cost of Debt 2.84% Plus: Cash and Cash Equivalents 1,338 Implied Equity Value 84,759

Capital Structure Shares Outstanding 1,598 Debt 39% Implied Share Price $53.03 Equity 61% Total: 100% Current Price $43.19 Target Price $53.03 Dividend Yield 1.6% WACC 5.70% Total Return 24.4%

Discount Rate (%)

$53.03 4.70% 5.20% 5.70% 6.20% 6.70%

1.00% $ 57.32 $ 48.62 $ 41.82 $ 36.38 $ 31.93

1.50% $ 66.21 $ 55.13 $ 46.76 $ 40.22 $ 34.98

2.00% $ 78.38 $ 63.69 $ 53.03 $ 44.97 $ 38.68

2.50% $ 96.10 $ 75.41 $ 61.27 $ 51.02 $ 43.26

Terminal Growth (%) Terminal Growth 3.00% $ 124.24 $ 92.46 $ 72.55 $ 58.94 $ 49.08

May 23rd, 2016 10 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ) Appendix: Discounted Cash Flow

Historical Period Projection Period 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue 35,810 35,015 35,299 34,244 29,636 26,672 25,339 26,226 27,012 27,823 Year over Year Growth % (2.2%) 0.8% (3.0%) (13.5%) (10.0%) (5.0%) 3.5% 3.0% 3.0% Cost of Sales 22,710 21,939 22,189 21,647 18,124 15,923 14,925 15,237 15,667 16,137 % of Revenue 63.4% 62.7% 62.9% 63.2% 61.2% 59.7% 58.9% 58.1% 58.0% 58.0% Gross Profit 13,100 13,076 13,110 12,597 11,512 10,749 10,414 10,989 11,345 11,686 Margin % 36.6% 37.3% 37.1% 36.8% 38.8% 40.3% 41.1% 41.9% 42.0% 42.0% Operating Expenses 9,382 9,176 8,679 8,457 7,577 6,788 6,449 6,675 6,875 7,081 % of Revenue 26.2% 26.2% 24.6% 24.7% 25.6% 25.5% 25.5% 25.5% 25.5% 25.5% EBITDA 3,718 3,900 4,431 4,120 3,935 3,961 3,965 4,314 4,470 4,604 Year over Year Growth % 4.9% 13.6% (7.0%) (4.5%) 0.6% 0.1% 8.8% 3.6% 3.0% Less: Depreciation and Amortization 225 217 217 206 181 164 156 161 166 171 % of Revenue 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% EBIT 3,667 3,894 4,465 4,182 3,862 3,797 3,809 4,153 4,304 4,433 Year over Year Growth % 6.2% 14.7% (6.3%) (7.7%) (1.7%) 0.3% 9.0% 3.7% 3.0% Less: Income Taxes 932 1,057 760 1,238 745 835 838 914 947 975 Effective Tax Rate 25.4% 27.1% 17.0% 29.6% 19.3% 22.0% 22.0% 22.0% 22.0% 22.0% Net Operating Profit After Taxes 2,735 2,837 3,705 2,944 3,117 2961 2971 3239 3357 3458 Year over Year Growth % 3.7% 30.6% (20.5%) 5.9% (5.0%) 0.3% 9.0% 3.7% 3.0% Plus: Depreciation and Amortization 225 217 217 206 181 164 156 161 166 171 Less Capital Expenditures -1,771 -1,610 -1,622 -1,642 -1,514 1,283 1,218 1,261 1,299 1,338 % of Revenue 4.9% 4.6% 4.6% 4.8% 5.1% 4.8% 4.8% 4.8% 4.8% 4.8% Less: Change in Net Working Capital 423 1,116 -1,063 -426 -623 -114.6 -114.6 -114.6 -114.6 -114.6 Unlevered Free Cash Flow 1,612 2,560 1,237 1,082 1,161 4,293 4,231 4,547 4,708 4,852

Discount Period 0.5 1.5 2.5 3.5 4.5 Discount Factor 97.3% 92.0% 87.1% 82.4% 77.9% Present Value of Unlevered Cash Flows 4,176 3,893 3,958 3,878 3,781

May 23rd, 2016 11 QUIC Research Report May 23rd, 2016 Mondelez Stock Pitch (NASDAQ: MDLZ)

References

1. Bloomberg

2. Capital IQ

3. Company Filings

4. IBIS World

5. Nielsen

6. JP Morgan

7.

8. RBC Capital Markets

9. Scotiabank Global Banking and Markets

10. UBS Securities

May 23rd, 2016 12