Krause Fund Research Spring 2015

Consumer Staples Group, Inc. (NASDAQ: KRFT)

Recommendation: SELL April 30, 2015 April

Analysts Current Price $86.94 Di Yan Target Price $70.64 [email protected] Leslie Wille [email protected] Concerns behind the Future No. 5 Food Yuqing Fang and Beverage Company in the World [email protected]

Company Overview • Kraft’s stock price soared upwards by 47.71% after the merger with was announced, but we predict that its stock Kraft Foods Group, Inc. (NASDAQ: KRFT) is one of the price will return to normal levels of $65.00-$75.00 when Kraft largest consumer packaged food and beverage companies in continues to underperform the market expectation. Although the North America and worldwide. Kraft was founded in 1980 and merger will probably increase international sales due to Heinz’s is headquartered in Northfield, Illinois. In March 2014, Kraft high international presence and save costs for Kraft as the new Foods Group and H.J. Heinz Company announced that they company achieves higher level of economies of scale, the would merge into The Company, becoming the appreciation of U.S. dollar can offset part of incremental profits. third largest food and beverage company in North America.i Kraft currently operates in seven business segments: • Kraft’s revenues have decreased since 2010 and its net Beverages, Cheese, Refrigerated Meals, Meals & Desserts, income hit a four-year low in 2014. Earnings per share declined Enhancers & Snack Nuts, Canada, and Others, all of which are by 60.7% during 2014 and Kraft’s relatively high debt to equity primarily in the United States and Canada. In 2014, Kraft’s net ratio demonstrates its potential low liquidity and high default income decreased by 61.6%, but gained a sharp stock risk. Free cash flow dropped from $4,449 million to $607 appreciation of approximately 38% after the merger million last year. The state of the economy also is expected to announcement. The biggest revenue streams of Kraft are from improve within the next five years; therefore, we expect Kraft’s the cheese and refrigerated meals segments.ii,iii net income to grow 1.02% this year, and 2.01% in 2019. • In recent years, Kraft was almost involved in several product recalls due to various food quality issues every year. Stock Performance Highlights Since the food products industry is highly competitive and Market Capitalization $52.05B consumers care about the safety of foods, there is no doubt that Share Outstanding 601.4M frequent products recalls can lessen the company’s reputation 52 Week Range $53.33 – $91.32 and shrink the consumer base. Beta Value 0.60 • Kraft’s stock price largely underperformed the consumer Average Daily Volume 6.785M staples sector market index as well as S&P 500 last year. Key Statistics Book Value Per Share $7.43 12-Month Stock Performance EPS (ttm) $1.75 (S&P 500 in Red & Consumer Staples Sector in Black) Dividend Yield 2.50% Dividend Payout $2.20 Price/Earnings (ttm) 50.79 Price/Sales (ttm) 2.83 Price/Book (mrq) 11.79 Financial Ratios Return on Assets (ttm) 5.41% Return on Equity (ttm) 21.84% Operation Margin (ttm) 10.96% Current Ratio 1.00

Debt to Equity 2.29 Figure 1:Source: Yahoo! Finance

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in quarters 1-4 respectively.

We recommend selling Kraft Foods Group, Inc. (NASDAQ: KRFT) at this time based on our fundamental analysis and valuation model. Although the Kraft-Heinz merger has pushed Kraft’s stock price up by more than 30%, and the deal can expand Kraft’s international markets and save costs due to higher levels of economies of scale, Kraft’s historical operational performance was quite unsatisfactory to investors. Its revenues have decreased for three years and its net income suffered a sharp decrease in 2014, which gave rise to the cash reserve concern and potential default risk. Furthermore, several Figure 3: Source: Federal Reserve Bank of St. Louisvi recall issues occurred in recent years, which were associated with the increase in commodity prices, which might impact Based on the projections of authority institutions, including the Kraft’s consumer base in the future. Therefore, despite the International Monetary Fund, the European Commission, and healthy economic outlook due to increasing GDP, disposable the Federal Reserve, the Real GDP in 2015 will increase personal income, and the low unemployment rate, we expect approximately 3.15%, and 3.06% in 2016.vii Furthermore, new Kraft’s revenue growth rate to be similar to the inflation rate of job openings will give more opportunities to people and boost 2%. Finally, the target stock price of $66-$72, compared to the the economy. However, the impact of the federal funds rate market price at $86.94, leads us to believe that selling Kraft at adjustment in 2015 on stocks, along with the economic this time will maximize Krause Fund’s profits. slowdown in the Eurozone, will also slow down the growth of the U.S. GDP. In addition, the decrease in the CCI in January and soft spending in February indicate that people prefer saving more than spending. So, we predict that the Real GDP will increase by 2.6%, as it did in the last quarter of 2014, within the next six months. We also estimate that the Real GDP will Gross Domestic Product increase approximately 3.0% in the next 2-3 years. Real Gross Domestic Product is a vital and commonly used determinant to measure the economic performance of a country. Unemployment Rate The Real GDP is defined as the nominal GDP adjusted by the As seen in the graph below by the Bureau of Labor Statistics, inflation rate that reflects the market value of goods and the unemployment rate gradually recovered to a lower rate after iv services measured annually. Since nearly two-thirds of GDP is the recession in 2008 and 2009.viii driven by individual’s consumption, it is an important indicator of the consumer staples sector.

According to the graph below by the Federal Reserve Bank of St. Louis, the U.S. Real GDP has historically remained in an upward trend except during recessions.

Figure 4: Source: Federal Reserve Bank of St. Louisix Since 2010, the unemployment rate has continued to decrease by an average of 0.1% each year. Additionally, the unemployment rate decreased to 5.5% by February this year

v and held steady at 5.5% in March. Based on the projections of Figure 2: Source: Federal Reserve Bank of St. Louis International Monetary Fund, European Commission, and the Below is a chart showing the percentage change of Real Gross Federal Reserve, the unemployment rate in 2015 will be Domestic Product. As seen in the chart, the Real GDP increased approximately 5.6%, and 5.4% in 2016.x Referring to the news by 2.5% on average in 2014, with -2.1%, 4.6%, 5.0%, and 2.2% posted on the Board of Governors of the Federal Reserve

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System, “labor market conditions have improved further with an increase in the minimum wage may cause the CPI to strong job gains and a lower unemployment rate.” Hence, we decrease to some degree, it will likely be offset by increases in predict that the unemployment rate will probably not change a the price of consumer goods.xvii, xviii In conclusion, an increasing lot in the short term, it will only decrease by 2%, as compared CPI will cause consumers to have less confidence in the to 5.8% in the fourth quarter of 2014 since jobless people still consumer staples industry because they will have less need time to find work. In the long term, our group predicts that purchasing power. the unemployment rate will remain low and stay around 5.5%.xi Disposable Personal Income We believe that the low unemployment rate will have positive Although the demand for consumer staples is not incredibly impacts on consumer staple sectors. A lower unemployment sensitive to a change in price, higher DPI does influence the rate can indicate an increase in purchasing power for customers, industries in the consumer staples sector. This is because and thus promotes consumer spending. consumers tend to pursue higher quality products with higher

prices when they have more money available after taxes. Consumer Price Index Therefore, higher DPI changes consumers’ preferences for The CPI is important for understanding the consumer staples purchasing daily-used goods because they will hesitate less industry because it reflects changes in price due to rising costs when purchasing quality goods, which can enhance the profits of food, beverages, drugs, personal and household items, of companies selling higher priced goods. tobacco, and alcohol.xii The CPI has risen at a relatively steady rate for the last 10 years, due in part to a rise in food and beverage prices. The price of meat, grains, fruits and vegetables, and dairy products have increased in the last several years due to droughts, disease among animals, extremely cold weather, and a citrus greening disease in Florida. In general, the prices of all foods beverages using ingredients from these categories were affected by the calamities. This is because the price of products not directly affected rose when more people started to turn to cheaper options, thusly causing them to go into higher demand.xiii Figure 6: Source: Trading Economics | U.S. Bureau of Economic Analysis Since the minimum wage has also increased substantially in the last ten years, prices within the beverage industry have Based on DPI’s 10-year historical data shown above, we see increased because the average American can afford to pay that the overall trend of DPI was increasing with little xix higher prices for their drinks.xiv fluctuations month by month. The end-of-year DPI at $9,457.5 billion in 2004 increased to $13,207.4 billion in 2014 Below is a graph representing the steady rise in the CPI from with an average annual increasing rate of 3.44%. Also, we xv 1990 – 2014. notice that the annual increasing rate of DPI in 2014 was

4.67%.xx

Associating DPI’s historical average performance with its most recent increasing rate, we are confident in expecting DPI to increase by at least 3.5% in next 6 months and to reach approximately $13.7 trillion at the end of 2015. Regarding the current stable economy but with some uncertain factors for long-term forecast, we would like to adjust the annual increasing rate of DPI to be a range of 2.44% – 4.44% in the next 2-3 years.

An increase in DPI indicates customers’ stronger purchasing power and implies the upward trend of consumers’ demand, both of which are beneficial for companies in the consumer Figure 5: Source: Federal Reserve Bank of St. Louis staples sector to improve sales. Companies’ stock prices will

CPI increased 2.04% last year and 1.93% on average in the last also go up under this optimistic situation. Considering Kraft’s three years. xvi So, the inflation rate is steadily increasing. previous performance and its characteristic of lower sensitivity to market index change, we believe that Kraft’s revenues will We believe the CPI for the consumer staples industry will grow by an average annual increasing rate of around 1.6%. continue to steadily rise by about 2% in the short term, and by 2.2% in the next two-three years. We believe it will be very Demographics similar to the national expected inflation rate because there will only be a small level of growth within the industry. Although Demographics are constantly changing, causing consumer preferences and the number of consumers in each demographic

3 to vary. This can affect companies who sell products, which The table below demonstrates how sectors within the consumer are coming in or out of favor, as well as the money flowing staples industry have performed relative to each other in the through the industry as the types of products bought and sold S&P 500 in the last 5 years. In general, those, which have change. xxi performed the best, are food and staples retailing, tobacco, beverages, and food products.xxvi The population in America is expected to increase by another 100 million people by 2050. The number of people aged 65 and older are expected to increase from 13%-20% by the middle of the century, but the working class is estimated to increase by 42%. Birth rates are also expected to escalate causing a small population bubble. This is because the children of the youngest baby boomers will begin to have children of their own, and the grandchildren of the early baby boomers will begin to have babies as well. Birth rates in the U.S. have been higher in the last decade than they have in the last 45 years. xxii

Below is a chart representing expected population growth in the United States between 2010 and 2050. xxiii Figure 8: Source: Fidelity, “Consumer Staples”

Industry Overview The food products industry in the consumer staples sector covers seven main product lines: Grains and Pulses, Oilseeds and Nuts, Fruits and Vegetables, Roots and Tubers, Meat and Dairy Products, Honey and Sugar, Spices and Stimulants.xxvii

Figure 7: Source: The American Century Major players, including Kraft, General Mills, Kellogg, Hershey, and Tyson Foods, in this mature industry compete Greater amounts of consumer goods, namely staple items such with each other intensely. However, the food products industry as food, beverages, and personal and household products, will is defensive and it is not sensitive to the changes in economic need to be produced to support such large population growth. and financial environment. Companies in this industry create This will cause the consumer staples industry to grow, but it revenues simply by manufacturing and wholesaling. will be at a very gradual rate as the population expands throughout the next 35 years. xxiv We expect the industry to Industry Trends and Recent Developments grow by approximately 1.5-2% in the next 2-3 years due the A recent trend in the food industry is a change in preferences population boom and the rise in Real GDP. among the millennial generation. According to the latest survey from Mintel, many consumers said store brands match name Capital Market Outlook brands in flavor, packaging and assortment, and 37% of U.S. xxviii The market outlook for the food industry is positive. Real GDP consumers prefer to buy store brands over national brands. is expected to increase by 3% in the short term, giving rise to a This has, and will likely continue to harm premium brands such healthier economy. Unemployment is expected to decrease by as Kraft. .2%, which will also give a boost to consumer staples industries and increase purchasing power. CPI is anticipated to increase by Rising health awareness among consumers is causing them to 2%, and interest rates will remain low. We believe that the purchase fresh looking food with low fat and more protein. On positive changes in Real GDP and unemployment rates will the other hand, consumers are also starting to buy more outweigh the effects of a rising CPI and low interest rates on the convenient, faster to make, food, and packaged foods are industry. The population is also expected to grow considerably expected to increase in 2015. xxix Healthier foods are usually in the next 20 years, which will raise demand for staple items.xxv more expensive than processed foods. In addition, higher For these reasons, we estimate that the food industry will grow convenience foods (i.e. sliced fruits and vegetables, by approximately 2% in the next 5 years. We believe it will individually packaged foods, ready-to-eat meals) will drive the perform better in 5 years than in the next year because an prices of packaged food up, which is a good sign for companies increase in population and employment rates will take time. such as Kraft.

Competitive Landscape

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The food products industry within the U.S. is mature, which makes it difficult for new entrants to come into the market because many of the major players within the industry have reached economies of scale. The main threat of new entrants exists overseas, where there is expected to be a large amount of growth in the industry in the long term. xxx The threat of store Company Overview brands also remains relatively high in the food industry, but it is expected to slowly decline within the next year.xxxi This is Ø Business Segment because as the economy continues to emerge out of the There are seven recession of 2008, the average consumer is willing to spend business segments in more unstapled items. Shown in the forecasted income Kraft. The three statements below, we expect Kraft sales to increase by 1.01% largest segments this year and next. created 55% percent of Kraft’s total As the price of so many commodities in the food industry rise, revenues in 2014. many companies within the industry will have a hard time keeping their profits up. With the rise of food prices due to We believe that Kraft inflation, companies may be forced to lower their prices in will enhance its order to raise demand.xxxii This will cause their product margins leading segments’ Figure 9: Source: Kraft Foods Group 2014 10-K to be squeezed even smaller. It is also likely to hurt the industry shares to consolidate its as a whole because once one company lowers its prices, others major revenues as well as awareness among consumers. will need to do the same in order to stay alive. For this reason, Therefore, it is reasonable to think that Kraft will at least we do not expect Kraft sales to increase by a very large amount maintain 55% of total shares for these three segments in the within the next year. We predict its net earnings to increase by future, and we expect it to grow up to 58% in the terminal year 1.15% over the next five years. 2019.

Changing consumer preferences are causing the market is Ø Corporate Strategyxxxix shifting away from unhealthy snacking foods with high Kraft focuses on three “C’s” in its strategy in response to amounts of sugar, sodium, and calories, towards healthier, xxxiii changes in markets after its separation from the Monelez. organic, or gluten free options. For this reason, major manufacturers within the industry will need to introduce Consumers: Kraft pays attention to the change in consumers’ healthier product lines, and all natural products in order to income, background, demographics, and values. There are two remain on top. things that Kraft believes that are most worth considering: one is bifurcation of consumer spending power, and the other is Catalysts for Growth/Change cohorts. Kraft currently launches new food products or provides Domestic Market: The U.S. population has grown at an average new flavors in accordance to the demands from the Hispanic rate of 0.73% in the last 3 years. xxxiv This will raise demand for population and millennial generation, both of which are thought food products, and allow the food products industry to continue to have more potential to increase the company’s sales and to develop.xxxv profits.

China’s Cheese Market: Since the cheese segment is one of Customers: Having unique price packs are essential to grab primary revenue creators of companies in the food products market shares in both traditional and non-traditional channels, industry, and since China houses the largest population in the which contains a variety of strong competitors. Kraft will world, but still has low consumer awareness of cheese, current continue to focus on promotion programs to boost volumes. growing cheese demand in China will stimulate food processing companies’ exploration in the Chinese market. This will be Communication: Kraft bases its strategy on the change of the advantageous to consumer staples companies and may increase market and consumers’ demand, which allows Kraft to focus on revenues and profits in international cheese markets.xxxvi This how to improve its efficiency and whether previous changes catalyst can definitely benefit Kraft, whose largest revenue were effective by applying data measuring tools. Besides, creator is its cheese segment. digital and data-ready mediums are also useful in reflecting the market’s response to the change of companies’ products and Environmental Issue: Environmental issues might hurt the marketing strategy, as Kraft believes it is important to hear packaged food and beverages industry since some materials customers’ thoughts. used to package food and beverages need to be degraded for Ø Life Cycle decades of years and will pollute the soil. However, green materials for packaging food, such as recycled bottles and As a company with more than 30 years of history, Kraft has boxes, can help mitigate these environmental concerns. entered into the maturity stage of its life cycle. Even though its xxxvii ,xxxviii revenues decreased in recent years, overall sales were quite

5 stable since the fluctuations were always below 1%. Also, seen operating income, followed by refrigerated meals and from the data provided in the table below, we notice that beverages.xl Kraft’s cash flow used for investing and financing activities were all negative in the last four years. The investing cash In 2015, our group estimates the net sales will increase only by outflows were used as capital expenditures to maintain 1.02% due to the low inflation rate and soft consumer spending manufacturing equipment; the financial cash outflows were in recent months. Our group estimates that the cost of sales of mainly used to pay dividends. Considering Kraft’s cash flow Kraft will keep increasing since Kraft does not have many and revenues in recent years, we believe that Kraft is a mature useful strategies to hedge it from the risk of commodity prices. company. Hedging Kraft’s cost for key commodities, such as dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. xli

Products and Markets Kraft has numerous brands ranging from Lunchables to Figure 10: Source: NetAdvantage , and to Stove Top.xlii Kraft’s brands

are what make it successful because they are well-known by Financial Summary consumers and have a strong presence in the food industry. Kraft Foods Group’s revenues have been decreasing for 4 years. Additionally, Kraft’s net income declined by 61.58% in As can be seen in figure 1, Kraft generates most of its revenue 2014 resulting in decreases in EPS as well, though the net from cheese and dairy sales. Revenues generated from each of income kept increasing from 2011 to 2013. Kraft’s assets, debt, their main product categories, cheese & dairy and refrigerated and capital expenditures were all cut during 2014. Nevertheless, meals, have remained stable over the last 3 years. Cheese and although there is a decline in EPS, Kraft increased its dividend dairy, and refrigerated meal sales are both expected continue to payment in 2014, which was favored by investors. Regarding grow by 3-4% each year for the next 5 years, because they Kraft’s overall performance revealed by the metrics below, we include lots of big name brands. We expect all other segments concluded that Kraft performed somewhat passively in 2014, to grow by .5-1.75% each year. Brands, which are not but it still chose to pay higher dividends to attract investors to generating very much revenue, such as Jell-O, are on the verge cover its future development expenditures. of being discarded, according to Kraft executives.xliii

In 2013, Kraft announced 40 new products.xliv In 2014, Kraft announced new product lines for meats and protein packs, peanuts, Philadelphia , and Maxwell House coffee, with many “better for you” healthy new product offerings in 2015.xlv, xlvi

Kraft primarily sells its products to wholesalers, distributors, supermarket chains, mass merchandisers, supercenters, club stores, convenience stores, drug stores, value stores, and other retail food outlets in the United States and Canada.xlvii Wal- Figure 11: Source: NetAdvantage and KRFT's 10-K Mart is one of their main customers and accounted for 26% of their net revenues in the year 2013, and their largest five Analysis of recent earnings releases customers accounted for 43% of their net revenues.xlviii Based on the Kraft’s past annual reports, Kraft had stable revenues in past years. In addition, Kraft saved $314 million in Production and Distribution the cost of sales from 2012 to 2011, and $1,104 million from 2013 to 2012. However, the cost of sales of Kraft increased by Raw materials and suppliers: Kraft uses large quantities of $1965 million in 2014 compared to that of in 2013. The large commodities, including dairy products, coffee beans, meat spending from cost of sales led to the dramatic decline in products, wheat, corn products, soybean and vegetable oil, nuts, operating income. In addition, Kraft experienced higher and other sweeteners to manufacture its products. Kraft uses expenditures on selling, general and administrative expenses commodity futures and options to partially hedge the price of compared with SG&A in 2013. High operating cost of Kraft certain input costs, including dairy products, coffee beans, meat directly resulted in a distinctive decrease in net earning by 1672 products, wheat, corn products, soybean oils, sugar, and natural millions, and a huge decline in earnings per share by 62% in gas. For derivatives not designated as hedging instruments, a change in value is currently recorded in earnings, resulting in 2014. xlix volatility in both gross profits and net earnings. Kraft has According to the results of operations by reportable segment, it different suppliers since it sources both nationally and globally. is evident that cheese contributes to the highest part of Hence, its providers can range anywhere from international producers to smaller local independent sellers.

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Kraft-Heinz merger will be beneficial for increasing market Costs: Variable costs are mostly raw and agricultural materials share, cost saving, and product development in the future. Kraft uses in products. The most significant cost components of Therefore, such a compelling P/E ratio seems reasonable from Kraft’s cheese products are dairy commodities, including milk the merger perspective. Given Kraft’s prior financial and cheese. Market supply and demand, as well as government performance and its appealing P/E ratio, we expect Kraft to first programs, significantly influences the prices for milk and other raise more capital investment from equity, then develop more in dairy products. There are also a lot of external factors that can operations and obtain more market shares. influence the prices of raw and agricultural materials, such as coffee beans, since Kraft buys them globally. Hence, external The graph below shows one-year stock price changes of Kraft factors, such as global competition for resources, currency and its competitors. Even though Kraft suffered from a decline fluctuations, severe weather or global climate change, in net income, it did outperform its competitors with respect to consumer, industrial or investment demand, changes in annual stock returns since the beginning of 2015, and the governmental regulation and trade, alternative energy, and superiority was fairly obvious. The other four companies all agricultural programs can all influence the prices of raw and had similar stock performance, which made the competition agricultural materials. l landscape stable but hard to have a breakthrough.

Manufacturing process and distribution: Kraft has its own manufacturing and processing facilities both in the United States and Canada. Since Kraft has different product lines and brands, it distributes its plants almost equally to each type of product. As of December 28, 2013, Kraft distributed it products through 39 distribution centers. In addition, other logistics companies also helped Kraft to facilitate distribution work. li

Competition

The food products industry is highly competitive. The major Figure 13: Source: Yahoo! Finance competitors of Kraft in this industry are Hershey, Kellogg, General Mills, and Nestle. Due to the recent announcement of We believe an analysis of the cheese segment, the largest the Kraft-Heinz merger, Kraft’s stock price increased by around business segment for Kraft, is necessary to understand Kraft’s 30%, which resulted in sharp increases in both P/E ratio and performance, compared to its competitors in each sub-industry. market capitalization. Originally, Kraft’s P/E ratio was 35.6 and Seen from the chart below, Kraft’s superiority in this segment is its market capitalization was $36.42B, both of which were in quite obvious, since its market share is 8.8%, while the other the top position among major competitors in food products market shares are mainly composed by small companies. Other industry. big companies in the cheese industry includes, Associated Milk Producers Inc., Sargento Foods Inc., Cabot Creamery, which However, Kraft does not have outstanding EPS and ROE ratios, account for 2.8%, 2.2%, and 2.0% of the total sales in the which reveals that Kraft’s profitability cannot play a significant cheese industry respectively. Therefore, although Kraft does not role in attracting investments, compared with its competitors. have a very large market share, it still has a strong Its D/E ratio of 2.30 is also in the second place, implying its competitiveness because of its large company size and brand potential high risk to raise capital for future development. loyalty. Thus, we expect Kraft to continue to focus most on Therefore, we can infer that Kraft’s high P/E ratio is mainly developing this segment to increase profits and market attributed to its high market expectation, rather than its high awareness.lii growth rate, favored profitability, or low potential risk. Investors perhaps still believe that a giant food producing company is worth holding because of quality goods and brand loyalty despite its recent unsatisfactory financial performance.

Figure 14: Source: IBIS WOLRD Cheese Production Industry One of Kraft’s largest revenue streams is the beverages segment. Kraft is a leading coffee producer and is ranked in fifth place, with 9.6% of the market. In 2010, Starbucks Corporation paid Kraft $2.76 billion for violation of a retailing contract. However, , Inc. received this

Figure 12: Source: Yahoo! Finance payment. Therefore, this issue indeed hurt Kraft to some extent since Kraft not only lost profits from collaborating with Nevertheless, Kraft’s current high P/E ratio and market Starbucks, but also did not receive the compensation fees. capitalization cannot completely be credited to the technical Kraft’s previously strong performance in the coffee industry factor that its stock price went up dramatically. In fact, the was somewhat affected and that is why it only maintains 9.6%

7 of the market, while other coffee producers all have more than higher economies of scales, which will have a big positive 14% of the market, becoming top choices for consumers. liii influence for Kraft’s credit rating as well as brand loyalty, since this is Kraft’s main market. lviii

International markets expansion: Kraft currently operates in 117 different countries worldwide. The extensive and wide geographical presence of the company throughout the globe Figure 15: Source: IBIS WOLRD Coffee Production Industry creates a diversified portfolio of investments and reduces the overall risk of the company.lix Furthermore, the Kraft-Heinz Other Topics merger also explores more international markets for Kraft since Kraft recently replaced many of its top managers, which Heinz currently carries wider international awareness – 60% of • lx could cause a setback due to the loss of key personnel. sales generated from regions other than North America. However, it could also give the company a fresh outlook and perspective to increase efficiency and revamp Strong manufacturing and distribution ability: Kraft has 34 advertising. liv manufacturing and processing facilities in the U.S. and 2 in Canada. The company also operates 36 distribution centers in • Since a large portion of Kraft’s sales are in Canada, the the U.S. and 3 in Canada. Each of these distribution centers value of the Canadian dollar relative to the U.S. dollar includes facilities for storing refrigerated, dry, and frozen affects Kraft’s revenue. In 2013 net revenue was $73 goods. Such a strong manufacturing and distribution network allows Kraft has to supply fresh and high quality food and million less than in 2012 due to foreign exchange rates, and lxi lv beverages to its customers. in 2012 it was $21 million less than it was in 2011. The value of the U.S. dollar is expected to outperform other Ø Weaknesses developed markets in the next couple of years, which could lead to a larger amount of decreased revenues due to foreign Cash Reserve Concern: Kraft recorded a sharp drop in free cash exchange rates for Kraft. lvi flow from $4,379 million in 2013 to $608 million in 2014, which raised a cash reserve concern. Although Kraft increased • In March 24, 2015, 3G Capital, a Brazilian private-equity its dividend payout in 2014 under the burden of limited free company, which acquired H.J. Heinz in 2013, announced to cash flow, investors still will doubt whether Kraft can have a acquire Kraft and promote the merger between Kraft and good liquidation in the future to avoid credit degrading and to Heinz. The new company, which will be called The Kraft ensure the ability to afford cost of debt and dividend payments. Heinz Company, will become the third largest food and beverage company in North. This deal was also backed by Product Recalls: In March 2015, Kraft recalled 6.5 million cases of its cheese product which were thought to contain Warren Buffet’s Berkshire Hathaway, Inc. Berkshire and lxii 3G will invest $10 billion in this deal, which values Kraft at metal ; in May through June of 2014, Kraft recalled 1.2 million cases of cheese product which were not properly stored about $46 billion. Kraft shareholders will receive a $16.5 lxiii special dividend funded by 3G Capital and Berkshire. Also, and thought to cause illness ; in October 2013, Kraft recalled 735 thousand varieties of its cheese products which were Buffet and 3G planned to apply their cost cut strategy to lxiv Kraft, which suggests Kraft’s appealing prospective in terms thought to spoil before expiration date . Being involved in of profitability. lvii However, since the merger was frequent recall issues in recent years not only might drag the announced, Kraft's stock price increased from around $62 to consumers’ satisfaction down and lower Kraft’s reputation, but around $88, or 42% within one week, which was mainly due also can increase its expenses.

to high expectations surrounding the merger from the Ø Opportunities market. If expectations drop because of Kraft’s continuously disappointing earning performance, Kraft's stock price will Market Expansion Overseas: Currently most of Kraft’s decrease. Kraft’s price has already dropped from the high operations are in North America, but since the consumer staples $90.61 to its current value $86.94. This leads us to believe market in North America is mature, opportunities for expansion arise for Kraft in growing economies like China and Latin that the price may continue to fall back towards the same lxv, lxvi levels it was at before the merger was announced within the America. next couple of months. “Better-for-you” Options: In North America increasing demand S.W.O.T. Analysis for healthy foods also poses an opportunity for Kraft as it invests into “better-for-you” options. Kraft has already invested

significant research into healthier products, which could put it Ø Strengths lxvii ahead of its competitors in the short term. Economies of scales: The announcement of the Kraft-Heinz Ø Threats merger came associated with a cost-saving plan, which aims to achieve an annual reduction in $1.5 billion by the end of 2017. Rising price of commodities: In the past few years the price of After the merger, Kraft’s market in North America, will realize dairy products, meat, coffee, and beans has risen sharply, which

8 are all part of Kraft’s top 5 revenue producing product categories. In response to the rise, Kraft has raised its prices across 45% of its product portfolio and is leading its competitors in price raises. For this reason, Kraft’s market share may decrease in the product categories most affected, such as cheese and meat. lxviii Since Kraft started paying out dividends in 2012, we believe

that Dividend Discounted Model might contain more uncertain Rise in private labels: Since private label brands are becoming factors for Kraft’s estimating intrinsic value. Also, Kraft more plentiful and popular, national brands held by Kraft are currently is traded with premiums, which makes the Relative receiving lots of downward pricing pressure. Combined with Model also become less convincing. Based on our confident the upward pricing pressure posed by the rise in commodity forecasting for each individual cash flow stream, we would like prices, consumers are likely to turn towards private label to use Discounted Cash Flow / Economic Cash Model as our companies even more in 2015. lxix, lxx key valuation model.

Key Investment Positives and Negatives Revenue Decomposition The positive news for the packaged food market is that the Based on our long-term forecast for the Real GDP growth rate population is expanding both nationally and globally. Hence, at 3% and Kraft’s previous negative revenue change rates, we there will be an increased demand for food worldwide.lxxi The expect Kraft, as an off-cyclical consumer staples company, to demand for food will exceed the supply, causing prices to grow its revenues at an average annual growth rate below 2%, increase. This will benefit investors in the industry because the but with an upward trend which will get close to 3% in the companies they have invested in will receive higher product steady state growth period. According to Kraft’s business margins and therefore earn higher profits. Therefore, as stock segmentation, our team decomposed its revenues into 7 streams: prices in the industry rise, investors will receive higher beverages, cheese, refrigerated meals, meals & desserts, dividends. enhancers & snack nuts, Canada, and others. Our forecasting

rationales for each revenue stream are shown below. The negative news for the packaged goods industry is that people are becoming more concerned about the environment, • Beverages: Despite its negative revenue change rates in the and that the effects of large amounts of plastics and other last 3 years due to lower pricing, this segment’s operating materials used for packaged foods will harm it. lxxii High income and operating margin increased, which will make competition from store brands will make it harder for Kraft to Kraft maintain its emphasis on promoting beverage grow in the future. products. Kraft's role in the beverages industry cannot be neglected. However, this industry, including Coca Cola and PepsiCo, is almost saturated. Thus, we expect its growth rate Catalysts for Growth/Change in beverages to first recover to -0.5% and gradually increase In 2015, our group expects that Kraft will continue its strategy to 0.5% after 2016. to invest in high-margin categories and fast-growing, • Cheese & Refrigerated Meals: As the two biggest revenue developing markets, including China, India, Turkey and Chile. creators for Kraft, these two segments also have kept stable In addition, since Kraft imports raw materials globally, external operating margins. Additionally, brands in these two factors, including currency, policy change, economic status in segments already have a large number of loyal customers. countries, will also influence Kraft’s growth to some degree. So we expect both of them to maintain their latest growth Domestically, the growing population will increase the demand rates at about 3% with less than 0.15% increment year by for food and beverage products. However, Kraft will face year. Furthermore, these two segments are also projected to fierce challenges from store brands and soft consumer spending increase their weights in the company’s total revenues by nationally. lxxiii Competition will drive Kraft to focus more on 2% in the next 5 years. cost cutting rather than marketing. lxxiv • Meals & Desserts, Enhancers & Snack Nuts, and Canada: These three business segments did not have satisfactory performance in the past because of decreased pricing as well as an unfavorable volume/mix. Therefore, we predicted that they will have a slow recovering rate, which will be consistent with the inflation rate and will gradually reach 1%. Valuation Summary • Other business: This segment, including the Foodservice We valued Kraft by applying three financial models, which are business and some other international businesses, realized Discounted Cash Flow / Economic Profits Model, Dividend increasing revenues by setting high prices, some of which Discounted Model, and Relative P/E Model. The target price were offset by high shipping expenses. Therefore, we have a calculated by each model is showing below: conservative projection for this segment that the increasing rate will start at 0.25% in 2015 and go up by 0.25% year by year.

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Kraft declared dividends per share at $0.5, $2.05, and $2.15 in Cost of Goods Sold 2012, 2013, and 2014 respectively. Although Kraft’s earnings per share decreased in 2014, it still increased its dividends. Kraft included not only has food producing expenditures in cost Thus, we can infer that Kraft tended to use growing dividends to of goods sold, but also part of commodity contracts, foreign release investors’ concerns about earning profits from Kraft and exchange contracts, hedging activities, and postemployment attract more capital investments. Regarding our forecast for benefit plans. Since PPI is increasing and Kraft bore some Kraft’s incremental profits, we expect its dividends to increase losses from those contracts or activities mentioned above, by 5 cents per year and reach $2.40 in terminal year 2019. Kraft’s cost of goods sold to sales increased from 60% in 2013 to 71% in 2014. Additionally, such a high percentage can also be attributed to its cost saving initiatives expenses. Dividend Discount Model (DDM) Nevertheless, the Kraft-Heinz merger improves the economies Our estimation for Kraft’s intrinsic value using DDM is $65.43, of scale and the cost saving initiatives will gradually realize its adjusted to $ 66.05 as of April 21, 2015. Despite the similarity effect in reducing cost of goods sold, so we expect Kraft’s cost between the intrinsic values calculated by using the DCF/EP of goods sold to sales to reach 69% in 2015 and keep decreasing models and the DDM, we put less emphasis on this model since by 0.5% per year in the future. Kraft started paying out dividends in 2012 due to its split-off from Kraft Foods Group, Inc. and Mondelez International. Selling, General, and Administrative Expense Therefore, Kraft’s dividend policy is subject to change in the next few years. The merger with Heinz can also affect Kraft’s Kraft’s SG&A expenses have reached the highest percentage of future dividend payout policy. The key assumptions that we sales at 16.24% in recent years. We expect Kraft to spend more made were CV growth rate for EPS of 2% and CV ROE of on marketing, especially for advertisements, in 2015 to 34.20%. Since Kraft is a non-cyclical company and its historical highlight the merger and attract more customers. Our estimation profits have decreased for 4 years, we would like to choose an for SG&A to sales in 2015 is 17%, which will be decreased by EPS growth rate lower than inflation rate of 3%. Because we 0.5% in the later years when the Kraft Heinz Company’s still expect the Kraft-Heinz merger can improve Kraft’s domestic and international awareness are achieved. profitability, and because we got an increasing rate of net

income in terminal year 2019 at around 2%, we would like to Capital Expenditures assume EPS will keep a 2% growth rate after 2019. According to Kraft’s estimation for its capital expenditures, which will be approximately $550 million to $600 million, our team used its historical average capital expenditures to gross Relative Price to Earnings (P/E) Model PP&E to estimate capital expenditures at $564 million in 2015, We believe this model does not provide an accurate estimate of which accounts for 5.5% of gross PP&E. We also expect that Kraft’s intrinsic value because it gives a very low prediction of this level of capital expenditures to gross PP&E will be the current stock price. We feel that Kraft’s intrinsic value falls maintained in the next 4 years after 2015 to sustain the between $53.30- $70.00, while the relative P/E yielded a price necessary physical conditions for manufacturing. of $36.45. This is because the earnings of the other companies used had much smaller earnings per share than Kraft had Weighted Average Cost of Capital recently.

Our weighted average cost of capital estimation is around This model gave a P/E for Kraft in 2015 of 51. Since Kraft’s 4.89% for Kraft. Since Kraft did not issue any preferred stock profitability is low, its risk is high, and its growth is low, the in recent years, no market value and risk of preferred stock was P/E is high because consumer expectations for the stock have calculated. significantly increased due to the announcement of the merger

with Heinz. We used the Capital Asset Pricing Model (CAPM) to calculate the cost of equity. Kraft has a beta under 1, which means Kraft is relatively stable in the market no matter how markets move. DCF/ EP Models Risk free rate is calculated by using the current yield to We believe this model provides the best estimate of Dr Pepper maturity (YTM) of the 30-year U.S. Treasury bond. The risk Snapple Group’s intrinsic value because it incorporates most of premium is 4.62%, which is the U.S. historical geometric our expectations about the future growth of DPS, as well as our average. Based on the variables in the CAPM, we got the cost estimations for the WACC and the current state of the economy. of equity of 5.27%. We estimated Kraft’s pre-tax cost of debt We estimated CV growth of NOPLAT to be approximately 2% by using the YTM of Kraft’s 30-year bond. After taking away because it is not expected to grow very rapidly since the the effect of the marginal tax rate of 33%, we calculated the industry is very mature. Growth in the food industry is also after-tax cost of debt of 3.04%. After using the market value of expected to be greater than growth in the beverage industry equity and debt (including the PV of operating lease), we got since it is dominated by so few companies, which we the final weighted average cost of capital of 4.89%. anticipated to be 1.4%.lxxv Finally, Real GDP is only expected to increase by 3.15% in 2015, so the CV growth of NOPLAT Dividend Payout Policy had to be less than that.

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increase in the risk free rate will cause Kraft’s stock price to We believe the DCF/EP model provides a better estimate than decrease by $5.17 and vice versa. Thus, we can see that Kraft’s the DDM because we felt we had more control over the stock price is more sensitive to the change in risk free rate than assumptions used. We felt more comfortable with our CV to the same amount change in CV ROIC. growth of NOPLAT than with our CV growth of EPS because more of our own assumptions and forecasts were used to calculate NOPLAT. If we had estimated the CV growth of NOPLAT to be 3% instead of 2%, the intrinsic value in the DCF would have risen by 54.4%. If we had estimated it to be 1%, the intrinsic value would have decreased by 26.71%.

We also believe this model provides a better estimate than the relative P/E because the relative P/E yields an intrinsic value After tax Cost of Debt vs. Cost of Equity which we believe is lower than the appropriate range we believe for the stock. The after tax cost of debt and cost of equity are both important assumptions used in the WACC. We predict Kraft’s cost of debt will decrease in the future because the merger with Heinz is likely to lower its level of risk due to a higher level of product diversification. A 0.1% decrease in the after tax cost of debt will cause the intrinsic value of Kraft to rise only by $0.54.

Beta vs. CV Growth of NOPLAT Kraft’s cost of equity is also expected to increase because its beta will move closer to 1 after the merger with Heinz is Beta is an important factor in our analysis because it largely complete due to product diversification. A 0.1% increase in the affects the cost of equity. On the other hand, CV growth of cost of equity causes Kraft’s stock price to decrease by $2.66. NOPLAT largely affects the results of the DCF/EP model. As The effect of the higher cost of equity will likely outweigh the beta increases by 0.01, the price of the stock decreases by effect of a higher cost of debt on Kraft. Therefore, Kraft’s stock $1.24; as beta decreases by 0.01, the stock price increases price will decrease in the next 2-3 years, and we believe Kraft by$1.28. In general, firms, which are more diversified, have a stock should be sold. beta closer to 1 because they represent the market more closely than smaller, less diversified firms. For this reason, Kraft’s beta is likely to move closer to 1 due to the anticipated merger with Heinz. We believe this will cause Kraft’s stock price to decrease. We also believe Kraft’s stock price will decrease as initial consumer expectations from the merger announcement wear off. Together, we believe the stock price will decrease back to its original value, which was from $60 to $66, before the merger was announced. As the CV growth of NOPLAT increases by 0.25%, the price of the stock increases by $8.42 COGS/Sales vs. SGA/Sales and vice versa. The cost of goods sold could rise if the prices of commodities rise. Since we are assuming that commodity prices within the food industry will rise, the cost of goods sold for Kraft will likely rise as well, despite its ability to hedge against changes in commodity prices. A 0.5% increase in the cost of goods sold/sales will cause Kraft’s stock price to decrease by $3.31. Selling and administrative expenses could rise if the corporate structure of Kraft changes due to the merger with Heinz (i.e. more advertising, higher administrative salaries, etc.). A 0.5% CV ROIC vs. Risk Free Rate rise in selling and administrative expenses/sales will cause Kraft’s stock price to decrease by $3.31. We assumed CV ROIC to be 24.82% based off of our projections for NOPLAT and invested capital. Since we anticipate an increase in NOPLAT and a decrease in invested capital, we believe the CV of ROIC will be 11.78% greater than the current value. A 0.2% rise in CV ROIC will cause the stock price to rise by $0.06. The risk free rate was assumed to be the same as a 30-year treasury bond for Kraft, which was roughly equal to 2.54%. We assume that interest rates will remain low for the next 2-3 years, but will steadily increase. A 0.2%

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CV Growth of NOPLAT vs. CapEx The CV growth of NOPLAT largely affects the results of the DCF/EP model and will cause Kraft’s stock price to increase by $2.67 as it increases by 0.1%. Kraft’s capital expenditures are subject to change after the merger with Heinz is complete, although it is unclear how they will change at this time. A 0.1% increase in capital expenditures will cause a $0.24 decrease in Kraft’s intrinsic value and vice versa.

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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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lxxv Sarah Day Levesque, “Private Label Beverages,” Mintel Online, Dec. 2013, accessed Apr. 20, 2015.

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Kraft Foods Group, Inc. Key Assumptions of Valuation Model

Ticker Symbol KRFT Current Share Price $86.94 Current Model Date 4/30/2015 Fiscal Year End December 31

Pre‐Tax Cost of Debt 4.53% Beta 0.6 Risk‐Free Rate 2.54% Equity Risk Premium 4.62% CV Growth of NOPLAT 2.00% CV Growth of EPS 2.00% Current Dividend Yield 2.20% Marginal Tax Rate 35% Effective Tax Rate After Tax Debt 2.94%

CV ROIC 24.82% Cost of Equity 5.31% SGA/Sales 18.00% COGS/Sales 69.0% WACC 4.92% CapEx/Sales 2.64% Kraft Foods Group, Inc. Revenue Decomposition

Fiscal Years Ending December 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Beverages 2,718 2,681 2,637 2,624 2,624 2,637 2,650 2,663 Growth ‐9.10% ‐1.36% ‐1.64% ‐0.50% 0.00% 0.50% 0.50% 0.50% Cheese 3,829 3,925 4,066 4,216 4,375 4,544 4,723 4,908 Growth 1.08% 2.51% 3.59% 3.69% 3.78% 3.86% 3.93% 3.93% Refrigerated Meals 3,280 3,334 3,433 3,536 3,643 3,755 3,871 3,991 Growth ‐1.00% 1.65% 2.97% 3.00% 3.03% 3.06% 3.09% 3.12% Meals & Desserts 2,311 2,305 2,155 2,090 2,059 2,059 2,080 2,100 Growth 1.76% ‐0.26% ‐6.51% ‐3.00% ‐1.50% 0.00% 1.00% 1.00% Enhancers & Snack Nuts 2,220 2,101 2,062 2,064 2,067 2,070 2,073 2,076 Growth ‐1.73% ‐5.36% ‐1.86% 0.10% 0.14% 0.14% 0.14% 0.14% Canada 2,010 2,037 1,937 1,931 1,929 1,931 1,937 1,947 Growth 2.19% 1.34% ‐4.91% ‐0.30% ‐0.10% 0.10% 0.30% 0.50% Other Business 1,903 1,835 1,925 1,930 1,949 1,973 2,003 2,038 Growth ‐4.28% ‐3.57% 4.90% 0.25% 1.00% 1.25% 1.50% 1.75% Total Net Sales 18,271 18,218 18,205 18,391 18,647 18,969 19,336 19,724 Change in Net Sales ‐1.64% ‐0.29% ‐0.07% 1.02% 1.39% 1.73% 1.93% 2.01%

% of Sales 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Beverages 14.88% 14.72% 14.49% 14.27% 14.07% 13.90% 13.71% 13.50% Cheese 20.96% 21.54% 22.33% 22.92% 23.46% 23.96% 24.43% 24.89% Refrigerated Meals 17.95% 18.30% 18.86% 19.23% 19.54% 19.79% 20.02% 20.24% Meals & Desserts 12.65% 12.65% 11.84% 11.37% 11.04% 10.85% 10.75% 10.65% Enhancers & Snack Nuts 12.15% 11.53% 11.33% 11.22% 11.08% 10.91% 10.72% 10.52% Canada 11.00% 11.18% 10.64% 10.50% 10.35% 10.18% 10.02% 9.87% Other Business 10.42% 10.07% 10.57% 10.49% 10.45% 10.40% 10.36% 10.33% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Kraft Foods Group, Inc. 0.6582147 0.6039082 0.7127163 0.6562571 0.6591273 0.6580447 0.6580107 ######### Income Statement 10.00% 9.35% 9.36% 9.30% 9.50% 9.38% 9.38% 9.39% (Millions, except per share data) 16.52% 11.66% 16.24% 15.52% 15.17% 15.02% 14.72% 15.00% Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Net revenues 18,339 18,218 18,205 18,391 18,647 18,969 19,336 19,724 Cost of sales 12,071 11,002 12,975 12,690 12,773 12,899 13,052 13,215 Depreciation & Amortization 428 393 385 390 407 408 414 418 Gross profit 5,840 6,823 4,845 5,311 5,466 5,662 5,871 6,091 Selling, general & administrative expense 3,029 2,124 2,956 3,310 3,263 3,225 3,190 3,156 Asset impairment & exit costs 141 108 (1) ‐ ‐ ‐ ‐ ‐ Operating income 2,670 4,591 1,890 2,001 2,203 2,437 2,680 2,935 Interest & other expense, net (258) (501) (484) (460.43) (499.05) (494.19) (486.45) (495.61) Royalty income from affiliates 41 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Earnings from continuing operations before income taxes 2,453 4,090 1,406 1,540 1,704 1,943 2,194 2,440 Provision for income taxes 811 1,375 363 539 596 680 768 854 Net earnings 1,642 2,715 1,043 1,001 1,108 1,263 1,426 1,586 Year end shares outstanding 592.76 596.23 601.40 600.08 598.92 597.94 597.11 596.43 Basic EPS: $ 2.77 $ 4.55 $ 1.75 $ 1.67 $ 1.85 $ 2.11 $ 2.39 $ 2.66 Dividends Declared: $ 0.50 $ 2.05 $ 2.15 $ 1.45 $ 1.50 $ 1.55 $ 1.60 $ 1.65 Kraft Foods Group, Inc. Balance Sheet (Millions) Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Asset Current Asset Cash & cash equivalents 1,255 1,686 1,293 2,037 668 1,566 1,910 1,171 Receivables, net 1,089 1,048 1,080 1,067 1,046 1,085 1,097 1,118 Inventories, net 1,928 1,616 1,775 1,821 1,828 1,822 1,823 1,883 Deferred income taxes 420 360 384 330 384 525 519 595 Other current assets 131 198 259 191 198 202 219 226 Total current assets 4,823 4,908 4,791 5,446 4,124 5,200 5,569 4,993 Property, plant & equipment, gross 8,402 7,822 8,043 8,529 9,002 9,465 9,917 10,359 Less: accumulated depreciation 4,198 3,707 3,851 4,241 4,648 5,057 5,470 5,888 Property, plant & equipment, net 4,204 4,115 4,192 4,288 4,354 4,408 4,447 4,471 Goodwill 11,346 11,505 11,404 11,404 11,404 11,404 11,404 11,404 Intangible assets, net 2,631 2,229 2,234 2,234 2,234 2,234 2,234 2,234 Other assets 325 391 326 326 326 326 326 326 Total assets 23,329 23,148 22,947 23,698 22,442 23,572 23,980 23,429 51.79% 26.18% 105.79% 61.25% 64.41% 77.15% 67.60% 69.72% Liabilites & Equity Current Liabilities 80.71% 95.79% 86.59% 82.01% 83.91% 85.80% 86.82% 85.03% Current portion of long-term debt 5 - 1,405 1,406 6 1,006 1,039 3 Accounts payable 1,556 1,548 1,537 1,493 1,534 1,563 1,583 1,601 Accrued marketing 740 685 511 627 637 661 653 651 Accrued employment costs 194 184 163 189 197 191 193 197 Dividends payable 296 313 324 324 324 324 324 324 Accrued postretirement health care costs 236 197 192 192 192 192 192 192 Other current liabilities 579 483 641 568 564 591 574 576 Total current liabilities 3,606 3,410 4,773 4,798 3,454 4,529 4,558 3,544 Long-term debt 9,966 9,976 8,627 9,523 9,375 9,175 9,358 9,303 Deferred income taxes 288 662 340 257 502 641 585 719 Accrued pension costs 1,990 405 1,105 1,105 1,105 1,105 1,105 1,105 Accrued postretirement health care costs 3,502 3,080 3,399 3,399 3,399 3,399 3,399 3,399 Other liabilities 405 428 338 338 338 338 338 338 Total liabilities 19,757 17,961 18,582 19,421 18,174 19,187 19,342 18,408

Stockholders' Equity Common stock 4,240 4,434 4,678 4,761 4,844 4,927 5,010 5,093 Parent company investment - - - ‐ ‐ ‐ ‐ ‐ Retained earnings (deficit) (206) 1,281 1,045 1,174 1,382 1,716 2,186 2,786 Accumulated other comprehensive income (loss) (360) (499) (562) (562) (562) (562) (562) (562) Treasury stock, at cost 2 29 796 1,096 1,396 1,696 1,996 2,296 Total stockholders' equity (deficit) 3,572 5,187 4,365 4,277 4,268 4,385 4,638 5,021 Total liabilities and stockholders' equity 23,329 23,148 22,947 23,698 22,442 23,572 23,980 23,429 Kraft Foods Group, Inc. ‐0.0563026 ‐0.049088 ‐0.0523685 ‐0.0712094 ‐0.0665175 Cash Flow Statement (Millions) ‐2.15% ‐2.40% ‐3.06% ‐2.94% Fiscal Years Ending December 31 2010 2011 2012 2013 2014 Net earnings 3,531 1,839 1,642 2,715 1,043 Depreciation & amortization 354 364 428 393 385 Stock-based compensation 49 51 54 65 95 Deferred income tax provision (benefit) (74) 69 470 708 (361) Losses (gains) on divestitures, net 6 - - - - Gains on discontinued operations (1,596) - - - - Asset impairement, net of cash proceeds - - 28 28 - Market-based impacts to postemployment benefit plans - - - (1,561) 1,341 Other non-cash expense, net 57 58 159 138 67 Receivables, net (80) 238 220 35 (22) Inventories, net (69) (169) 21 235 (53) Accounts payable (5) 226 (241) 45 45 Other current assets (5) (88) (61) (9) (41) Other current liabilities (1,329) 84 205 (217) (164) Change in pension & postretirement assets & liabilities, net (11) (8) 110 (532) (315) Net cash flows from operating activities 828 2,664 3,035 2,043 2,020 Capital expenditures (448) (401) (440) (557) (535) Proceeds from divestitures 3,698 - - - - Proceeds from sale of property, plant & equipment - - 18 131 2 Other investing activities - - - - (2) Net cash flows from investing activities 3,250 (401) (422) (426) (535) Long-term debt repaid (9) (9) (8) (4) - Dividends paid - - - (1,207) (1,266) Repurchase of common stock under share repurchase program - - - - (740) Proceeds from stock option exercises - - 14 96 115 Long-term debt proceeds - - 5,963 - - Net transfer to Mondelez International - - (7,210) - - Net transfers to Kraft ParentCo & affiliates (4,037) (2,238) - - - Other financing activities (32) (18) (117) (56) 25 Net cash flows from financing activities (4,078) (2,265) (1,358) (1,171) (1,866) Effect of exchange rate changes on cash & cash equivalents - - - (15) (12) Net change in cash & cash equivalents - (2) 1,255 431 (393) Cash & cash equivalents - beginning of period 2 2 - 1,255 1,686 Cash & cash equivalents - end of period 2 - 1,255 1,686 1,293 Kraft Foods Group, Inc. Cash Flow Statement (Millions) Fiscal Years Ending December 31 2015E 2016E 2017E 2018E 2019E Net earnings 1,001 1,108 1,263 1,426 1,586 Depreciation & amortization 390 407 408 414 418 Change in accounts receivables 13 21 (39) (12) (21) Change in inventories, net (46) (7) 6 (1) (60) Change in accounts payable (44) 40 29 19 18 Change in accrued marketing 116 11 24 (8) (2) Change in accrued employment costs 26 8 (6) 2 3 Change in other current assets 68 (7) (4) (17) (6) Change in other current liabilities (73) (4) 27 (17) 2 Change in deferred income taxes (29) 191 (2) (50) 58 Net cash flows from operating activities 1,422 1,769 1,707 1,755 1,996 Capital expenditures (486) (474) (463) (452) (442) Net cash flows from investing activities (486) (474) (463) (452) (442) Change in current portion of long-term debt 1 (1,400) 1,000 33 (1,036) Change in long-term debt 896 (148) (200) 183 (55) Payment of dividends (872) (900) (928) (957) (985) Repurchase of common stock under share repurchase program (300) (300) (300) (300) (300) Proceeds from issuance of stock 83 83 83 83 83 Net cash flows from financing activities (192) (2,665) (346) (958) (2,293) Net change in cash & cash equivalents 744 (1,369) 898 344 (739) Cash & cash equivalents - beginning of period 1293 2,037 668 1,566 1,910 Cash & cash equivalents - end of period 2,037 668 1,566 1,910 1,171 Kraft Foods Group, Inc. Common Size Income Statement (Millions, except per share data) Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of sales 65.82% 60.39% 71.27% 69.00% 68.50% 68.00% 67.50% 67.00% Depreciation 2.33% 2.16% 2.11% 2.12% 2.19% 2.15% 2.14% 2.12% Gross profit 31.84% 37.45% 26.61% 28.88% 29.31% 29.85% 30.36% 30.88% Selling, general & administrative expense 16.52% 11.66% 16.24% 18.00% 17.50% 17.00% 16.50% 16.00% Asset impairment & exit costs 0.77% 0.59% ‐0.01% ‐‐‐‐‐ Operating income 14.56% 25.20% 10.38% 10.88% 11.81% 12.85% 13.86% 14.88% Interest & other expense, net ‐1.41% ‐2.75% ‐2.66% ‐2.50% ‐2.68% ‐2.61% ‐2.52% ‐2.51% Royalty income from affiliates 0.22% ‐‐‐‐‐‐‐ Earnings from continuing operations before income taxes 13.38% 22.45% 7.72% 8.38% 9.14% 10.24% 11.34% 12.37% Provision for income taxes 4.42% 7.55% 1.99% 2.93% 3.20% 3.58% 3.97% 4.33% Net earnings 8.95% 14.90% 5.73% 5.44% 5.94% 6.66% 7.37% 8.04% Kraft Foods Group, Inc. Common Size Balance Sheet (% of sales, 2 decimals) Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Asset Current Asset Cash & cash equivalents 6.84% 9.25% 7.10% 11.08% 3.58% 8.26% 9.88% 5.94% Receivables, net 5.94% 5.75% 5.93% 5.80% 5.61% 5.72% 5.67% 5.67% Inventories, net 10.51% 8.87% 9.75% 9.90% 9.80% 9.60% 9.43% 9.55% Deferred income taxes 2.29% 1.98% 2.11% 1.80% 2.06% 2.77% 2.68% 3.02% Other current assets 0.71% 1.09% 1.42% 1.04% 1.06% 1.06% 1.13% 1.14% Total current assets 26.30% 26.94% 26.32% 29.61% 22.12% 27.41% 28.80% 25.32% Property, plant & equipment, gross 45.81% 42.94% 44.18% 46.37% 48.28% 49.90% 51.29% 52.52% Less: accumulated depreciation 22.89% 20.35% 21.15% 23.06% 25.27% 27.49% 29.74% 32.02% Property, plant & equipment, net 22.92% 22.59% 23.03% 23.31% 23.67% 23.97% 24.18% 24.31% Goodwill 61.87% 63.15% 62.64% 62.01% 61.16% 60.12% 58.98% 57.82% Intangible assets, net 14.35% 12.24% 12.27% 12.15% 11.98% 11.78% 11.55% 11.33% Other assets 1.77% 2.15% 1.79% 1.77% 1.75% 1.72% 1.69% 1.65% Total assets 127.21% 127.06% 126.05% 128.85% 120.35% 124.26% 124.02% 118.78%

Liabilites & Equity Current Liabilities Current portion of long-term debt 0.03% - 7.72% 7.64% 0.03% 5.30% 5.37% 0.02% Accounts payable 8.48% 8.50% 8.44% 8.12% 8.23% 8.24% 8.19% 8.12% Accrued marketing 4.04% 3.76% 2.81% 3.41% 3.42% 3.49% 3.38% 3.30% Accrued employment costs 1.06% 1.01% 0.90% 1.03% 1.06% 1.01% 1.00% 1.00% Dividends payable 1.61% 1.72% 1.78% 1.76% 1.74% 1.71% 1.68% 1.64% Accrued postretirement health care costs 1.29% 1.08% 1.05% 1.04% 1.03% 1.01% 0.99% 0.97% Other current liabilities 3.16% 2.65% 3.52% 3.09% 3.02% 3.11% 2.97% 2.92% Total current liabilities 19.66% 18.72% 26.22% 26.09% 18.53% 23.87% 23.57% 17.97% Long-term debt 54.34% 54.76% 47.39% 51.78% 50.28% 48.37% 48.40% 47.16% Deferred income taxes 1.57% 3.63% 1.87% 1.40% 2.69% 3.38% 3.02% 3.65% Accrued pension costs 10.85% 2.22% 6.07% 6.01% 5.93% 5.83% 5.71% 5.60% Accrued postretirement health care costs 19.10% 16.91% 18.67% 18.48% 18.23% 17.92% 17.58% 17.23% Other liabilities 2.21% 2.35% 1.86% 1.84% 1.81% 1.78% 1.75% 1.71% Total liabilities 107.73% 98.59% 102.07% 105.60% 97.46% 101.15% 100.03% 93.33%

Stockholders' Equity Common stock 23.12% 24.34% 25.70% 25.89% 25.98% 25.97% 25.91% 25.82% Parent company investment - - - ‐‐‐‐‐ Retained earnings (deficit) -1.12% 7.03% 5.74% 6.39% 7.41% 9.05% 11.30% 14.13% Accumulated other comprehensive income (loss) -2.51% -2.74% -3.09% ‐3.06% ‐3.01% ‐2.96% ‐2.91% ‐2.85% Treasury stock, at cost 0.01% 0.16% 4.37% 5.96% 7.49% 8.94% 10.32% 11.64% Total stockholders' equity (deficit) 19.48% 28.47% 23.98% 35.18% 37.86% 41.00% 44.63% 48.74% Total liabilities and stockholders' equity 127.21% 127.06% 126.05% 140.77% 135.32% 142.14% 144.66% 142.06% Kraft Foods Group, Inc. 2010 2011 2012 2013 2014 Value Driver Estimation 36.90% 38.60% 36.20% 35.60% 33.00% 36.06% 35.89% 35.35% 35.35% 35.13% Millions Fiscal Years Ending December 31 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Net revenue 17,797 18,655 18,339 18,218 18,205 18,391 18,647 18,969 19,336 19,724 Less: Cost of sales 11,424 12,397 12,071 11,002 12,975 12,690 12,773 12,899 13,052 13,215 Less: Selling, general & administrative Expense 3,066 2,973 3,029 2,124 2,956 3,310 3,263 3,225 3,190 3,156 Less: Depreciation 354 364 428 393 385 390 407 408 414 418 Plus: Implied interest on operating lease 43 79 67 22 24 16 16 17 17 17 EBITA 2,996 3,000 2,878 4,721 1,913 2,017 2,220 2,454 2,697 2,952

Provision for income taxes 1,110 1,130 811 1,375 363 539 596 680 768 854 Tax shield on interest expense 3 3 93 178 160 166 179 175 172 174 Tax shield on earnings from discontinued activities 607 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Tax shield on interets on PV of operating leases 16 31 24 8 8 6 6 6 6 6 Tax shield on assets impairments (3) (1) 51 38 (0) ‐ ‐ ‐ ‐ ‐ Tax on Royalty income from affiliates 16 21 15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total Adjusted Taxes 503 1,141 965 1,600 530 711 782 861 946 1,034 Change in deferred taxes (74) 69 470 708 (361) (29) 191 (2) (50) 58 NOPLAT 2,419 1,928 2,383 3,829 1,022 1,277 1,629 1,591 1,701 1,976

Operating Current Assets Normal Cash (1% of sales) 178 187 183 182 182 184 186 190 193 197 Accounts Receivable 1,196 903 1,089 1,048 1,080 1,067 1,046 1,085 1,097 1,118 Inventory 1,773 1,943 1,928 1,616 1,775 1,821 1,828 1,822 1,823 1,883 Other operating current assets 165 194 131 198 259 191 198 202 219 226 Operating Current Liabilities Accounts payable 1,285 1,447 1,556 1,548 1,537 1,493 1,534 1,563 1,583 1,601 Accrued expenses 751 817 934 869 674 815 835 853 846 847 Dividends payable ‐ ‐ 296 313 324 324 324 324 324 324 Net operating working capital 1,276 963 545 314 761 630 566 559 580 651 Net PPE 4,283 4,278 4,204 4,115 4,192 4,288 4,354 4,408 4,447 4,471 Net intangible assets 2,630 2,630 2,631 2,229 2,234 2,234 2,234 2,234 2,234 2,234 Capitalized PV of operating leases 1,319 1,112 367 404 355 363 368 373 376 378 Other operating assets 23 29 325 391 326 326 326 326 326 326 Net other operating assets 3,972 3,771 3,323 3,024 2,915 2,923 2,928 2,933 2,936 2,938 Less: Other operating liablities ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Invested Capital 9,531 9,011 8,073 7,453 7,868 7,841 7,848 7,900 7,963 8,061

NOPLAT 2,383 3,829 1,022 1,277 1,629 1,591 1,701 1,976 Beg. Invested Capital 9,011 8,073 7,453 7,868 7,841 7,848 7,900 7,963 ROIC 20.23% 26.44% 47.44% 13.71% 16.23% 20.78% 20.28% 21.53% 24.8%

NOPLAT 2,383 3,829 1,022 1,277 1,629 1,591 1,701 1,976 End. Invested Capital ‐ Begin. Invested Capital (938) (620) 415 (27) 7 52 63 98 FCF 2,448 3,321 4,449 607 1,304 1,622 1,539 1,638 1,879

Beg. Invested Capital 9,011 8,073 7,453 7,868 7,841 7,848 7,900 7,963 ROIC‐WACC 21.52% 42.52% 8.79% 11.31% 15.86% 15.36% 16.61% 19.90% EP 1,459 1,940 3,432 655 890 1,243 1,205 1,312 1,585 Kraft Foods Group, Inc. Weighted Average Cost of Capital (WACC) Estimation WACC 4.92%

Pre‐Tax Cost of Debt 4.53% Marginal Tax Rate 35.00% After‐Tax Cost of Debt 2.94%

Beta 0.6 Risk‐Free Rate 2.54% Equity Risk‐Premium 4.62% Cost of equity 5.31%

Shares Outstanding 601,403,000 Share Price $86.94 Market value of equity $52,285,976,820 Market Value of Debt (Including PV of Operating Leas $10,386,616,896 Market value of firm $62,672,593,716 Kraft Foods Group, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models (Millions)

Key Inputs: CV Growth 2.00% CV ROIC 24.82% WACC 4.92% Cost of Equity 5.31%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

DCF Model Period 1 2 3 4 4 FCF $ 1,304 $ 1,622 $ 1,539 $ 1,638 $ 1,879 Continuing value (CV) $ 62,238 PV of FCF Discounted by WACC $ 1,243 $ 1,473 $ 1,333 $ 1,351 $ 51,361

Value of Operating Assets $ 56,761 Plus: Excess cash$ 1,111 Less: Long term Debt $ 8,627 Less: Short term Debt $ 1,405 Less: ESOP $ 704 Less: PV of Operating Leases $ 355 Less: Accrued post retirement health care costs $ 3,591 Less: Accrued pension costs $ 1,105

Value of Equity $ 42,085 Shares Outstanding 601.40 Intrinsic Value (per share) $ 69.98

Adjusted Value (per share) $ 70.64

Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E

EP Model Period 1 2 3 4 4 Economic Profit to Discount$ 890 $ 1,243 $ 1,205 $ 1,312 $ 1,585 Continuing Value (CV) $ 54,275 PV of FCF Discounted by WACC$ 848 $ 1,129 $ 1,043 $ 1,083 $ 44,789

PV (Economic Profit)$ 48,893 + Beginning Invested Capital (T=0)$ 7,868

Value of Operating Assets $ 56,761 Plus: Excess cash$ 1,111 Less: Long term Debt $ 8,627 Less: Short term Debt $ 1,405 Less: ESOP $ 704 Less: PV of Operating Leases $ 355 Less: Accrued post retirement health care costs $ 3,591 Less: Accrued pension costs $ 1,105

Value of Equity $ 42,085 Shares Outstanding 601.40 Intrinsic Value (per share)$ 69.98

Adjusted Value (per share) $ 70.64 Kraft Foods Group, Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending December 31 2015E 2016E 2017E 2018E 2019E

EPS$ 1.67 $ 1.85 $ 2.11 $ 2.39 $ 2.66

Key Assumptions CV growth 2.00% CV ROE 34.20% Cost of Equity 5.31%

Future Cash Flows P/E Multiple (CV Year) 28.43 EPS (CV Year)$ 2.66 Future Stock Price$ 75.59 Dividends Per Share$ 1.45 $ 1.50 $ 1.55 $ 1.60 $ 1.65 Future Cash Flows$ 1.45 $ 1.50 $ 1.55 $ 1.60 $ 75.59 Discounted Period 12344 Discounted Cash Flows$ 1.38 $ 1.35 $ 1.33 $ 1.30 $ 61.45 Intrinsic Value$ 65.43

Adjusted Value (per share)$ 66.05 Kraft Foods Group, Inc. Relative Valuation Models EPS EPS Est. 5yr Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16 MDLZ Mondelez International, Inc $38.35 $1.72 $1.99 22.3 19.3 8.74 2.55 2.20 DANOY Danone $14.41 $0.65 $0.70 22.2 20.6 9.90 2.24 2.08 GIS General Mills, Inc. $56.53 $2.83 $2.98 20.0 19.0 5.92 3.37 3.20 HSY The Hershey Company $101.31 $4.36 $4.79 23.2 21.2 9.96 2.33 2.12 K Kellogg Company $66.01 $3.61 $3.83 18.3 17.2 4.40 4.16 3.92 TSN Tyson Foods, Inc. $38.37 $3.43 $3.66 11.2 10.5 19.00 0.59 0.55 Average 21.2 19.4 2.5 2.3

KRFT Kraft Foods Group, Inc. $87.66 $1.67 $1.85 52.5 47.4 8.73 6.0 5.4

Implied Value: Relative P/E (EPS15) $ 35.36 Relative P/E (EPS16)$ 35.96 PEG Ratio (EPS15)$ 36.99 PEG Ratio (EPS16)$ 37.87 Kraft Foods Group, Inc. Key Management Ratios

Fiscal Years Ending December 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity Ratios Current Ratio CA/CL 1.34 1.44 1.00 1.14 1.19 1.15 1.22 1.41 Quick Ratio (Cash+ST Secruities+AR)/CL 0.65 0.80 0.50 0.65 0.50 0.59 0.66 0.65 Cash Ratio Cash/CL 0.35 0.49 0.27 0.42 0.19 0.35 0.42 0.33

Activity or Asset‐Management Ratios Inventory Turnover Net Sales/AR 16.84 17.38 16.86 17.24 17.83 17.48 17.63 17.64 Receivable Turnover COGS/Inventory 6.26 6.81 7.31 6.97 6.99 7.08 7.16 7.02 Fixed Assets Turnover Net Sales/PPE, net 4.36 4.43 4.34 4.29 4.28 4.30 4.35 4.41

Financial Leverage Ratios Debt Ratio Total Debt/Total Assets 0.43 0.43 0.38 0.40 0.42 0.39 0.39 0.40 D/E Ratio Total Debt/Total SE 2.79 1.92 1.98 2.23 2.20 2.09 2.02 1.85 Interest Coverage EBITA/Interest Expense 11.15 9.42 3.95 4.38 4.45 4.97 5.54 5.96

Profitability Ratios Net Profit Margin Net Income/Revenues 8.95% 14.90% 5.73% 5.44% 5.94% 6.66% 7.37% 8.04% Gross Profit Margin Gross Porfit/Revenues 31.84% 37.45% 26.61% 28.88% 29.31% 29.85% 30.36% 30.88% Return on Assets Net Income/Total Assets 7.63% 11.64% 4.51% 4.36% 4.67% 5.63% 6.05% 6.61% Return on Equity Net Income/Total SE 9.46% 76.01% 20.11% 22.94% 25.90% 29.59% 32.51% 34.20%

Payout Policy Ratios Payout Ratio Div. per share/EPS 18.05% 45.05% 122.86% 86.90% 81.11% 73.39% 67.00% 62.05% Total Payout Ratio (Dividend + Repurchase)/NI 20.22% 0.30% 1.52% 57.13% 54.18% 49.75% 46.06% 43.21% Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases 2015 106 2014 109 2013 115 2016 85 2015 85 2014 93 2017 62 2016 71 2015 59 2018 49 2017 56 2016 47 2019 41 2018 49 2017 38 Thereafter 84 Thereafter 126 Thereafter 90 Total Minimum Payments 427 Total Minimum Payments 496 Total Minimum Payments 442 Less: Interest 72 Less: Interest 92 Less: Interest 75 PV of Minimum Payments 355 PV of Minimum Payments 404 PV of Minimum Payments 367

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 6.00% Pre‐Tax Cost of Debt 6.00% Pre‐Tax Cost of Debt 6.00% Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 2.4

Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 106 100.0 1 109 102.8 1 115 108.5 2 85 75.6 2 85 75.6 2 93 82.8 3 62 52.1 3 71 59.6 3 59 49.5 4 49 38.8 4 56 44.4 4 47 37.2 5 41 30.6 5 49 36.6 5 38 28.4 6 & beyond 41 57.5 6 & beyond 49 84.9 6 & beyond 38 61.0 PV of Minimum Payments 354.6 PV of Minimum Payments 404.0 PV of Minimum Payments 367.4 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 14,870,166 Average Time to Maturity (years): 7.00 Expected Annual Number of Options Exercised: 2,124,309

Current Average Strike Price:$ 39.26 Cost of Equity: 5.31% Current Stock Price: $86.94

2015E 2016E 2017E 2018E 2019E 2020E 2021E Increase in Shares Outstanding: 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 Average Strike Price:$ 39.26 $ 39.26 $ 39.26 $ 39.26 $ 39.26 $ 39.26 $ 39.26 Increase in Common Stock Account: 83,400,388 83,400,388 83,400,388 83,400,388 83,400,388 83,400,388 83,400,388

Change in Treasury Stock 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 Expected Price of Repurchased Shares:$ 86.94 $ 91.56 $ 96.42 $ 101.54 $ 106.94 $ 112.62 $ 118.60 Number of Shares Repurchased: 3,450,656 3,276,602 3,111,329 2,954,391 2,805,370 2,663,866 2,529,499

Shares Outstanding (beginning of the year) 601,403,000 600,076,654 598,924,361 597,937,341 597,107,259 596,426,199 595,886,642 Plus: Shares Issued Through ESOP 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 2,124,309 Less: Shares Repurchased in Treasury 3,450,656 3,276,602 3,111,329 2,954,391 2,805,370 2,663,866 2,529,499 Shares Outstanding (end of the year) 600,076,654 598,924,361 597,937,341 597,107,259 596,426,199 595,886,642 595,481,453 VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol KRFT Current Stock Price $86.94 Risk Free Rate 2.54% Current Dividend Yield 2.20% Annualized St. Dev. of Stock Returns 38.80%

Average Average B‐S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 14,870,166 39.26 7.00 $ 47.34 $ 704,010,478 Total 14,870,166$ 39.26 7.00$ 58.57 $ 704,010,478 Beta $70.64 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.65 0.66 0.50% 49.05 48.37 47.70 47.04 46.39 45.75 45.13 44.51 43.91 43.31 42.73 42.15 41.59 0.75% 52.44 51.69 50.94 50.21 49.50 48.79 48.10 47.43 46.76 46.11 45.47 44.84 44.22 1.00% 56.30 55.45 54.62 53.81 53.01 52.23 51.46 50.71 49.97 49.25 48.54 47.85 47.16 1.25% 60.71 59.75 58.82 57.90 57.01 56.13 55.28 54.44 53.61 52.81 52.02 51.24 50.49 1.50% 65.81 64.72 63.66 62.62 61.61 60.62 59.65 58.70 57.78 56.87 55.98 55.11 54.26 1.75% 71.78 70.53 69.31 68.11 66.95 65.82 64.71 63.63 62.58 61.55 60.54 59.56 58.60 CV Growth of NOPLAT 2.00% 78.87 77.40 75.97 74.59 73.24 71.92 70.64 69.40 68.18 67.00 65.84 64.72 63.62 2.25% 87.40 85.66 83.97 82.32 80.73 79.18 77.68 76.22 74.80 73.42 72.08 70.78 69.51 2.50% 97.89 95.77 93.72 91.74 89.82 87.97 86.18 84.44 82.75 81.12 79.54 78.00 76.50 2.75% 111.08 108.44 105.90 103.45 101.09 98.82 96.63 94.52 92.47 90.50 88.59 86.75 84.96 3.00% 128.18 124.78 121.52 118.40 115.42 112.55 109.81 107.16 104.63 102.18 99.83 97.56 95.38 3.25% 151.22 146.64 142.30 138.17 134.24 130.50 126.93 123.52 120.26 117.14 114.15 111.29 108.54 3.50% 183.95 177.42 171.29 165.52 160.07 154.94 150.08 145.48 141.11 136.96 133.02 129.27 125.69

CV ROIC $70.64 23.62% 23.82% 24.02% 24.22% 24.42% 24.62% 24.82% 25.02% 25.22% 25.42% 25.62% 25.82% 26.02% 1.34% 119.95 120.06 120.16 120.26 120.36 120.46 120.56 120.65 120.75 120.84 120.93 121.02 121.11 1.54% 108.36 108.46 108.55 108.65 108.74 108.83 108.92 109.00 109.09 109.17 109.26 109.34 109.42 1.74% 98.49 98.58 98.67 98.75 98.84 98.92 99.00 99.08 99.16 99.24 99.31 99.39 99.46 1.94% 89.98 90.06 90.14 90.22 90.30 90.37 90.45 90.52 90.59 90.67 90.74 90.81 90.88 2.14% 82.56 82.63 82.71 82.78 82.85 82.93 83.00 83.06 83.13 83.20 83.27 83.33 83.39 2.34% 76.04 76.11 76.18 76.25 76.31 76.38 76.45 76.51 76.57 76.64 76.70 76.76 76.82 Risk Free Rate 2.54% 70.26 70.32 70.39 70.45 70.52 70.58 70.64 70.70 70.76 70.82 70.88 70.93 70.99 2.74% 65.10 65.16 65.23 65.29 65.35 65.41 65.46 65.52 65.58 65.63 65.68 65.74 65.79 2.94% 60.47 60.53 60.59 60.65 60.70 60.76 60.81 60.87 60.92 60.97 61.02 61.07 61.12 3.14% 56.29 56.35 56.40 56.46 56.51 56.56 56.62 56.67 56.72 56.77 56.81 56.86 56.91 3.34% 52.50 52.55 52.61 52.66 52.71 52.76 52.81 52.85 52.90 52.95 52.99 53.04 53.08 3.54% 49.04 49.09 49.14 49.19 49.24 49.29 49.33 49.38 49.42 49.47 49.51 49.56 49.60 3.74% 45.88 45.93 45.97 46.02 46.07 46.11 46.16 46.20 46.24 46.28 46.33 46.37 46.41

After Tax Cost of Debt $70.64 2.34% 2.44% 2.54% 2.64% 2.74% 2.84% 2.94% 3.04% 3.14% 3.24% 3.34% 3.44% 3.54% 4.71% 95.41 94.55 93.70 92.86 92.04 91.23 90.43 89.64 88.86 88.09 87.33 86.58 85.84 4.81% 91.23 90.43 89.64 88.86 88.09 87.33 86.58 85.84 85.11 84.39 83.68 82.98 82.29 4.91% 87.33 86.58 85.84 85.11 84.39 83.68 82.98 82.29 81.61 80.93 80.26 79.60 78.95 5.01% 83.69 82.98 82.29 81.61 80.93 80.27 79.61 78.96 78.32 77.68 77.05 76.43 75.82 5.11% 80.27 79.61 78.96 78.32 77.68 77.06 76.44 75.83 75.22 74.62 74.03 73.45 72.87 5.21% 77.06 76.44 75.83 75.23 74.63 74.04 73.45 72.88 72.31 71.75 71.19 70.64 70.09 Cost of Equity 5.31% 74.04 73.46 72.88 72.31 71.75 71.19 70.64 70.10 69.56 69.03 68.50 67.98 67.47 5.41% 71.20 70.65 70.10 69.56 69.03 68.50 67.98 67.47 66.96 66.46 65.96 65.47 64.98 5.51% 68.51 67.99 67.47 66.96 66.46 65.96 65.47 64.98 64.50 64.02 63.55 63.08 62.62 5.61% 65.97 65.47 64.99 64.50 64.03 63.55 63.09 62.63 62.17 61.71 61.27 60.82 60.38 5.71% 63.56 63.09 62.63 62.17 61.72 61.27 60.83 60.39 59.95 59.52 59.10 58.68 58.26 5.81% 61.28 60.83 60.39 59.96 59.53 59.10 58.68 58.26 57.85 57.44 57.03 56.63 56.23 5.91% 59.11 58.68 58.27 57.85 57.44 57.04 56.64 56.24 55.84 55.45 55.07 54.69 54.31

COGS/Sales $70.64 66.00% 66.50% 67.00% 67.50% 68.00% 68.50% 69.00% 69.50% 70.00% 70.50% 71.00% 71.50% 72.00% 15.00% 110.40 107.09 103.77 100.46 97.15 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 15.50% 107.09 103.77 100.46 97.15 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 16.00% 103.77 100.46 97.15 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 16.50% 100.46 97.15 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 17.00% 97.15 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 17.50% 93.83 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 SGA/Sales 18.00% 90.52 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 18.50% 87.21 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 19.00% 83.89 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 44.14 19.50% 80.58 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 44.14 40.82 20.00% 77.27 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 44.14 40.82 37.51 20.50% 73.95 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 44.14 40.82 37.51 34.20 21.00% 70.64 67.33 64.02 60.70 57.39 54.08 50.76 47.45 44.14 40.82 37.51 34.20 30.88

CV Growth of NOPLAT 70.64 1.40% 1.50% 1.60% 1.70% 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50% 2.60% 2.04% 59.56 61.44 63.42 65.53 67.77 70.16 72.72 75.46 78.39 81.56 84.97 88.67 92.68 2.14% 59.28 61.14 63.12 65.21 67.45 69.83 72.37 75.10 78.02 81.17 84.57 88.25 92.25 2.24% 58.99 60.84 62.81 64.90 67.12 69.49 72.03 74.74 77.65 80.79 84.17 87.84 91.82 2.34% 58.70 60.54 62.50 64.58 66.80 69.16 71.68 74.38 77.28 80.40 83.77 87.42 91.38 2.44% 58.41 60.24 62.20 64.27 66.47 68.82 71.33 74.02 76.91 80.02 83.37 87.01 90.95 2.54% 58.12 59.95 61.89 63.95 66.15 68.49 70.99 73.67 76.54 79.64 82.98 86.59 90.52 CapEx 2.64% 57.83 59.65 61.58 63.64 65.82 68.15 70.64 73.31 76.17 79.25 82.58 86.18 90.09 2.74% 57.54 59.35 61.28 63.32 65.50 67.82 70.30 72.95 75.80 78.87 82.18 85.76 89.66 2.84% 57.25 59.05 60.97 63.01 65.17 67.48 69.95 72.59 75.43 78.48 81.78 85.35 89.22 2.94% 56.96 58.76 60.66 62.69 64.85 67.15 69.60 72.23 75.06 78.10 81.38 84.93 88.79 3.04% 56.67 58.46 60.36 62.37 64.52 66.81 69.26 71.88 74.69 77.71 80.98 84.52 88.36 3.14% 56.38 58.16 60.05 62.06 64.20 66.47 68.91 71.52 74.32 77.33 80.58 84.10 87.93 3.24% 56.09 57.86 59.74 61.74 63.87 66.14 68.56 71.16 73.95 76.95 80.18 83.69 87.50