mondelez (mdlz.oq) - credit suisse

KEY CONCLUSIONS

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

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Food / Agribusiness (US) 21 October 2014

Mondelez (MDLZ.OQ) COMPANY UPDATE

The Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas. Please contact your Sales person to access the supplemental analysis behind this report.

Fix or Sell, Investors Win Either Way We believe that Mondelez represents the most compelling risk-reward proposition in our coverage space of food. This is an ideal entry point because the stock's underperformance began well before the recent market weakness in October due to concerns that management's turnaround efforts had stalled. The Investment Policy Committee has added Mondelez to the U.S. & Global Focus List, as it is now considered one of its top investment ideas. Management has bold margin target goals, and we think it can do

better. Our analysis indicates that the company has the potential to boost its margins by 700-800 bps, well above management's goal of 300-400 bps, if it fully implements zero-based budgeting practices and reduces its excessive overhead costs.

Untapped pricing power. Our margin expansion assumption includes 100 bps of margin leverage from making better pricing decisions. This includes raising price or reducing promotion modestly in the markets where its market share is 70% or higher than its nearest competitor and making more conservative decisions in markets without clear leadership.

Downside protection. Near-term projects to reduce costs provide a clear line of sight to 300-400 bps of margin expansion even if sales stagnate.

Enormous asset value. If management fails to turn the business around, we believe the board will find another party to run it, either by selling the business to a strategic acquirer or to a private equity firm in a leveraged buyout. The addition of activist investor Nelson Peltz to the board increases management's sense of urgency and opens up the possibility for alternative avenues for value creation.

We Believe MDLZ' True Margin Expansion Potential Is 700-800 BPS

Source: Company data, Credit Suisse estimates. Notes: * SCR stands for Supply Chain Reinvention, ** ZBB stands for Zero Based Budgeting

RESEARCH ANALYSTS Robert Moskow 212 538 3095 [email protected]

Rachel Nabatian 212-325-2131 [email protected]

Clay Crumbliss, CFA 212 538 1076 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

IDEAS ENGINE SERIES

IDEAS ENGINE 2 Mondelez (MDLZ.OQ)

Mondelez (MDLZ.OQ)

Price (20-Oct-14,US$) 32.9 Market Cap (US$mn) 56890.6

Previous Value

Current value

Rating

OUTPERFORM Target Price (US$)

42.00

Year 12/13A 12/14E 12/15E 12/16E EPS (CS Adj.) (US$) 1.54 1.67 1.96 2.30 EPS Prev (US$) 1.69 1.96 2.30 EPS (Qtr 1) (US$) 0.35 0.39 0.45 EPS (Qtr 2) (US$) 0.36 0.40 0.46 EPS (Qtr 3) (US$) 0.40 0.40 0.48 EPS (Qtr 4) (US$) 0.42 0.48 0.57 Source: Credit Suisse Estimates, IBES

Income Statement 2013FYA 2014FYE 2015FYE 2016FYE Sales revenue 35,299 34,791 34,984 36,383 EBITDA 5,344 5,506 6,127 6,942 Depr. & amort. -1,077 -1,089 -1,211 -1,339 EBIT (US$) 4,267 4,417 4,916 5,604 Net interest exp -1,011 -874 -860 -860 Other adj. 0 0 0 0 PBT (US$) 3,256 3,543 4,055 4,743 Income taxes -488 -678 -791 -1,044 Profit after tax 2,768 2,865 3,264 3,700 Minorities -20 -25 -24 -24 Associates & other 0 0 0 0 Net profit (US$) 2,748 2,840 3,240 3,676 Other NPAT adjustments 0 0 0 0 Reported net income 2,748 2,840 3,240 3,676 Cash Flow 2013FYA 2014FYE 2015FYE 2016FYE EBIT 4,267 4,417 4,916 5,604 Net interest -1,011 -874 -860 -860 Cash taxes paid -488 -678 -791 -1,044 Change in working capital 1,063 -1,348 -48 -240 Other cash & non-cash items 2,579 2,764 1,187 1,315 Cash flow from operations 6,410 4,280 4,404 4,774 CAPEX -2,024 -2,545 -2,624 -2,694 Free cashflow to the firm 4,386 1,736 1,780 2,080 Cash flow from investments -1,483 -1,827 -1,749 -1,819 Cashflow from financing -6,645 -1,322 -3,295 -3,068 Changes in Net Cash/Debt 1,705 -1,586 -640 2,526 Net debt at start 18,801 17,096 18,682 19,322 Change in net debt -1,705 1,586 640 -2,526 Net debt at end 17,096 18,682 19,322 16,795 Balance Sheet 2013FYA 2014FYE 2015FYE 2016FYE Total current assets 13,216 14,967 14,315 14,501 Total fixed assets 10,247 12,111 12,649 13,129 Total liabilities 42,664 44,653 44,593 42,012 Shareholder equity 29,734 31,360 31,305 34,553 Minority interests 159 159 159 159 Total liabilities and equity 72,557 76,172 76,058 76,724 Net debt 17,096 18,682 19,322 16,795

Per Share 2013FYA 2014FYE 2015FYE 2016FYE Equiv. FPO (period Avg.) (mn) 1,789 1,705 1,653 1,602 EPS (CS Adj.) (US$) 1.5 1.7 2.0 2.3 Prev. EPS (US$) 1.5 1.7 2.0 2.3 DPS (US$) 0.6 0.6 0.6 0.6 Dividend yield (%) 1.7 1.7 1.8 1.9 Dividend Payout (%) 36.5 33.6 30.7 27.7 Earnings 2013FYA 2014FYE 2015FYE 2016FYE Sales growth (%) 0.8 -1.4 0.6 4.0 EBIT growth (%) 0.6 3.5 11.3 14.0 Net income growth (%) 10.2 3.3 14.1 13.4 EPS growth (%) 10.1 8.4 17.8 17.0 EBITDA margin (%) 15.1 15.8 17.5 19.1 EBIT margin (%) 12.1 12.7 14.1 15.4 Pretax profit margin (%) 9.2 10.2 11.6 13.0 Net income margin (%) 7.8 8.2 9.3 10.1 Valuation 2013FYA 2014FYE 2015FYE 2016FYE EV/Sales (x) 2.1 2.2 2.2 2.0 EV/EBITDA (x) 13.8 13.7 12.4 10.6 EV/EBIT (x) 17.3 17.1 15.5 13.1 P/E (x) 21.4 19.8 16.8 14.3 Price to book (x) 1.6 1.4 1.6 1.5 Asset turnover 0.5 0.5 0.5 0.5 Returns 2013FYA 2014FYE 2015FYE 2016FYE ROE 7.3 7.5 8.9 10.8 ROGIC (%) 0.1 0.1 0.1 0.1 Interest burden 0.8 0.8 0.8 0.8 Tax burden 0.1 0.2 0.2 0.2 Financial leverage 2.0 1.9 2.3 2.2 Gearing 2013FYA 2014FYE 2015FYE 2016FYE Net debt/equity (%) 57.2 59.3 61.4 48.4 Net Debt to EBITDA (x) 3.2 3.4 3.2 2.4 Interest coverage ratio (X) 4.2 5.1 5.7 6.5

Source: Company data, Credit Suisse Estimates

S& P 5 0 0 IN D EX M D LZ.O Q

1 - M ay - 1 3 1 - Sep - 1 3 1 - Jan - 1 4 1 - M ay - 1 4 1 - Sep - 1 41 ,4 0 0

1 ,6 5 0

1 ,9 0 0

2 ,1 5 0

2 5

3 0

3 5

4 0


Enormous Margin Expansion Opportunity Perhaps no company in the consumer space has a better opportunity to generate shareholder value through these efforts. Mondelez ranks at the low end of its peer group in terms of overhead costs, asset efficiency, and operating margins.

Exhibit 1: Mondelez' Overhead Costs Are 420 BPS Higher than Its Peer Average

Source: Company data, Credit Suisse estimates. Overhead margin calculated as SG&A excluding advertising and R&D but including consumer promotion. Average overhead margin includes Hershey, Smucker, Kellogg, Campbell, General Mills, and Kraft.

Exhibit 2: Mondelez Ranks at the Bottom of Its Peer Group in Terms of Sales Efficiency

Source: Company data, Credit Suisse estimates.

Exhibit 3: Mondelez' Overall Operating Margin Trails Its Peers

Source: Company data, Credit Suisse estimates; Note: Based on FY 13 results. Excludes unusual items; KO: excluded restructuring, impairments, productivity, reinvestment, and CCE transaction costs; CL: excluded restructuring, Venezuela devaluation, charges for French competition law matters, and cost of land sale in Mexico. PG: excluded restructuring, Venezuela devaluation, European legal matters, and impairments; GIS: excluded mark-to-market, Venezuela devaluation, restructuring, and integration costs; NESN: excluded impairments and restructuring costs; CPB: excluded restructuring and transaction costs; PEP: excluded restructuring, mark-to-market, and integration costs; K: excluded Project K, integration, and mark-to-market costs; HNZ: 2012 adjusted margins.

Robust Cost-Cutting Program Mondelez is now in the early stages of instituting a major culture change to increase the focus of the organization on cost control and productivity. Giving responsibility for these programs to two of its top executives, Daniel Myers and James Kehoe, indicates the importance of the efforts. In addition, the company just hired a new chief financial officer, Brian Gladden, with 20 years of experience at General Electric and Dell to bring more cost discipline and control into the corporate culture.

Up until recently, the company had put too much emphasis on growth and not enough on training the organization to control its spending in a sensible way. The distractions from integrating acquisitions and splitting up the company between 2007 and 2012 led to insufficient reinvestment in the supply chain to support the growth.

Management's efforts are focused on improving margins by reducing overhead costs, modernizing the supply chain, and putting more controls on spending. There are three major efforts taking place:

14.3% 14.0% 13.7%

17.9% 18.1% 17.9%

10%11%12%13%14%15%16%17%18%19%

FY11 FY12 FY13

Group Average MDLZ

Employees (in K) Plants

Sales (in $ millions)

Sales / Employee (in

K)

Sales / Plant (in $

millions)Kraft Foods 23 36 18,300 813 508 Procter & Gamble 118 137 83,000 703 606 Mead Johnson 7 9 4,200 583 467 ConAgra* 33 85 16,100 491 189 Kellogg 30 40 14,800 488 370 Hershey 15 10 7,150 483 715 Colgate 37 unk 17,420 466 unkCampbell Soup 19 26 8,268 426 318 General Mills 43 65 17,900 416 275 Heinz (FY 12) 32 70 11,650 362 166 Unilever 174 unk 62,246 358 unkMondelez 101 171 35,000 347 205 Nestle 333 447 87,577 263 196

*Used our FY 15 sales forecast to align with smaller employee and plant count resulting fromdivestiture of grain milling operations

24.0% 23.8%

19.2% 19.1%

16.3% 15.8% 15.3% 15.1% 14.6% 14.4% 14.1% 13.2%12.1%

0%

5%

10%

15%

20%

25%

30%

KO CL HSY PG GIS NESN CPB PEP K HNZ ULVR BN MDLZ


■ Regional consolidation. Consolidating country-led management teams and back office personnel into regional groups to eliminate duplication and encourage commonalities.

■ Supply chain reinvention. Modernizing the manufacturing footprint with new facilities in low-cost labor markets and closing underperforming facilities; further training the organization on Lean Six Sigma principles to improving manufacturing capacity and efficiency.

■ Zero-based budgeting. Introducing stricter processes and hurdle rates when determining annual budgets for overhead expenses and general sales and marketing programs.

In total, Mondelez expects to raise its operating margin from a base of 12% in 2013 to a range of 15-16% by 2016.

Exhibit 4: Management's Plan for Operating Margin Enhancement Implies High-Teens EPS

Growth over Next Two Years and an Operating Margin in the "Mid 15's"


Strong Asset Platform One of the main reasons for our confidence in the company's plans is the strength of its brands and the attractiveness of the categories in which it competes. With global brands like Oreos, Cadbury, Trident gum, and Halls candy, Mondelez has enormous scale and influence with retailers and consumers.

A high proportion of Mondelez' sales come from markets where it has substantial market leadership and pricing power. By our math, Mondelez' average market share is 70% higher than its nearest competitor in the snack category overall. In fact, 46% of its sales come from markets where the relative market share is even higher than 70%. These are the markets where it truly controls its own destiny.

Exhibit 5: Mondelez' Average Market Share in Snacks Is 70% Higher than Its Nearest

Competitor

Source: Euromonitor, Company data, Credit Suisse estimates.

Mondelez' brands operate in countries with strong GDP growth and positive momentum in per capita consumption. As consumers in these markets find more economic opportunities and enter the middle class, they can afford to buy more treats for their families rather than just basic foodstuffs. Our analysis finds that 62% of its sales come from markets where the categories have rising per capita consumption.

Exhibit 6: 62% of Mondelez' Snack Sales Come from Markets Where per Capita

Consumption Is Growing on a Volume Basis

Source: Euromonitor, Company data, Credit Suisse estimates.

2014 2015 2016Sales 34,791 34,984 36,383 % Growth 0.6% 4.0%Gross Margin 36.5% 37.6% 39.3%SG&A (% of sales) 22.9% 22.9% 23.3%Operating Income 4,417 4,916 5,604 O.I. Margin 12.7% 14.1% 15.4%

Weighted average relative

market share

% of categories where relative share

is at least 70% higher than nearest

competitor% of total

MDLZ salesChocolate 1.4 46% 27%Biscuits 2.1 56% 33%Candy 0.9 17% 9%Gum 2.8 35% 5%

Weighted Average 1.7 46% 75%

Coffee (to be divested) 0.8 0% 11%Grocery and Powdered Beverage 14%

% of markets where per capita consumption is

growing

% of portfolio (ex beverage and

grocery)Biscuits 72% 45%Chocolate 64% 36%Candy/Gum 34% 19% Weighted Average 62% 100%


Goals Understate Full Margin Potential We believe that management's goals understate the potential upside for Mondelez' operating margins. Breaking down the impact of management's initiatives, we calculate that the company expects supply chain reinvention and Lean Six Sigma to drive roughly 300 bps of the target through gross margin expansion, with only 100 bps coming from SG&A leverage.

We believe that ZBB presents a much bigger opportunity for SG&A leverage than 100 bps. Other companies that adopted ZBB in the consumer staples space expanded their margins by 700-800 bps, with about half the expansion coming from SG&A leverage. As a result, we figure Mondelez has another 250 bps of opportunity to capture if it executes ZBB to its full potential.

In addition, we think the company could benefit from taking a more sophisticated approach to leveraging its pricing power. In markets where it has clear leadership positions and a wide selection of offerings at multiple price points, it should be able to identify the products in the portfolio that are more inelastic to price changes and disproportionately raise the pricing on those products when commodity inflation rises. In addition, it should avoid raising prices ahead of competition in markets where it does not have clear leadership.

Exhibit 7: Mondelez Has Strong Share in a Number of Its Larger Markets; Central Europe

Uses Regional Model

Source: Company data, Credit Suisse estimates, Nielsen xAOC, Euromonitor; *Central Europe includes Austria, Czech Republic, Germany, Italy, Poland, and Ukraine. **Austria removed from Central Europe totals to avoid double counting.

Exhibit 8: Biscuits Is Likely the Category Where MDLZ Has the Most Pricing Leverage

Source: Company data, Credit Suisse estimates, Nielsen xAOC, Euromonitor.

Exhibit 9: MDLZ Is the Dominant Gum Player in Latin American Countries

Source: Company data, Credit Suisse estimates, Nielsen xAOC, Euromonitor; *Latin America includes Mexico, Brazil, Argentina, Venezuela, and Colombia.

For example, 46% of Mondelez' sales come from markets where its market share is 70% or higher than its next biggest competitor. In the biscuits category, Mondelez has enormous influence in the U.S., France, China, and Canada. In chocolate, it dominates the UK, Australia, India, Sweden, Belgium, and Austria. Raising prices or reducing promotional spending in these markets by 2% would improve the company's total profit margin by 75 bps.

In addition to exercising more pricing power in these markets, we think the company can boost its gross margin by at least 25 bps by recovering volume in markets where it raised pricing without sufficient pricing power. Specifically, in France and Brazil, it raised pricing on chocolate before the leaders in those markets took action, thus leading to market share losses. Biscuit sales fell in France because the pricing decisions on chocolate caused retailers to punish Mondelez by reducing biscuits shelf space.

Top Markets

Rel Share Sales Est% of

categoryU.K. 1.7 1,700 18%Australia/NZ 2.5 900 10%India 3.0 580 6%Sw eden 1.9 300 3%Belgium 2.8 250 3%Austria 3.0 250 3%

Central Europe 1.1 1,435 15%Total** 5,165 55%

Chocolate

Top Markets


categoryU.S. 2.6 5,000 43%France 1.1 900 8%China 6.4 800 7%Canada 3.4 500 4%

Total 7,200 62%

Biscuits

Top Markets


categoryMexico 6.6 500 16%Brazil 9.7 200 6%Argentina 1.4 170 5%Canada 1.0 160 5%France 1.3 160 5%Venezuela 2.2 100 3%Colombia 1.6 30 1%

Latin America* 5.7 1,000 32%Total 1,320 42%

Gum


Exhibit 10: Mondelez Did Not Have Share Leadership When It Took Price Increases in

Chocolate in France and Brazil

Source: Company data, Credit Suisse estimates, Nielsen xAOC, Euromonitor.

Adding these elements together, we estimate 700-800 bps of true margin expansion potential. This includes 300-400 bps of expansion from capital spending projects in the supply chain and corporate restructuring that will reduce Mondelez' cost profile regardless of consumer trends or whether the full benefits of pricing power and Zero-Based Budgeting fall to the bottom line.

Exhibit 11: We Believe MDLZ' True Margin Expansion Potential Is 700-800 BPS


Companies Who Regain Focus Capture Enormous Upside We identify three US food companies that improved their performance dramatically on their own without needing to sell themselves to a strategic acquirer: Hershey, Heinz, and Campbell. The CEOs of these companies narrowed their strategies, tightening their spending controls and reinvesting in their businesses.

They had several characteristics in common:

■ Strong brands with defensible positions;

■ Good cash flow and opportunities for reinvestment; and

■ Huge opportunities to reduce costs through overhead reductions, supply chain productivity or relationships with suppliers

Hershey is the best example of what a focused confectionery company with dominant market share and pricing power can achieve. Margins have improved by 500 bps to 20%, and earnings are up 115% (CAGR of 14%) since 2008. The stock has outperformed its peers by 87% since then, with most of the outperformance taking place two years after the new CEO announced his plans.

Exhibit 12: HSY Margins Are Up 500 BPS Since 2008


MDLZ Share

MDLZ Share Rank

MDLZ Relative

ShareSales

EstLeader/Nearest Competitor & Share

Brazil 32.6% 2 0.7 $1,000 Nestle #1, 43.8%France 9.9% 4 0.3 $500 Ferrero #1, 28.8%

Chocolate

2013 Adjs 2016

Gross Margin 37.3%Supply Chain Reinvention 300 bpsPricing 100 bps

2016 Gross Margin 400 bps 41.3%

SG&A (% of sales) 24.1%ZBB 75 bpsAdditional ZBB Efforts 250 bpsOH Savings 75 bpsDilution for Coffee Sale (50 bps)

2016 SG&A (% of sales) 350 bps 20.6%

Operating Margin 12.1% 750 bps 19.6%

15.0%16.2%

17.7% 17.9% 18.5% 19.2% 19.8%

0%

5%

10%

15%

20%

25%

2008A 2009A 2010A 2011A 2012A 2013A 2014E

EBIT Margin


Exhibit 13: HSY Has Massively Outperformed Its Peers Since 2010

Source: Thomson Reuters. Note: Staples ETF is the Consumer Staples Select Sector SPDR Fund (ticker XLP).

Campbell stock performed strongly in the first two years after management announced its new strategy in mid-2011, keeping pace with the broader staples group. However, it has lagged recently because of a lack of organic sales growth and operating margin contraction. Nonetheless, the company's portfolio is better positioned for growth now that it has added faster-growing businesses.

Exhibit 14: CPB Stock Has Lagged Recently, but It Outperformed Its Peers for Two Years

After Management Changed Its Strategy

Source: Thomson Reuters. Note: Staples ETF is the Consumer Staples Select Sector SPDR Fund (ticker XLP).

Heinz may represent the best example of what can go right for a stock when a management team regains focus. After a nasty proxy fight with Nelson Peltz in 2006, the company stepped up its growth and margin targets by radically improving the efficiency of its trade promotion spending, instituting a multi-year IT project to bring consistency and consolidation to its far-flung global operations, and hiring from the outside to upgrade the talent of the management team. These efforts helped the stock outperform its peer group for several years, and made it more attractive to potential acquirers. 3G Capital eventually bought the company because it believed in the power of Heinz' brand, and it believed it could take profit margins to another level. The take-out price of $72.50/share in February 2013 was 100% higher than where the stock was before Peltz got involved.

High Potential for a Takeout If Management Fails The presence of Trian's Nelson Peltz on Mondelez the board significantly increases the probability that the company will maximize value through a strategic deal if management fails. With nearly a 2.5% stake in the company, Peltz is not in a position to completely control the direction of the board. But in an environment such as this, where private equity shops are bidding high multiples for consumer staples assets and competitors are consolidating to reduce their costs and enhance their scale, the board simply has to take a serious look at strategic alternatives.

One strategic option for Mondelez would be to pursue Peltz' original vision for Mondelez – a merger with Pepsico's Frito Lay to create the world's biggest global snack company. Pepsico's board has firmly decided against such a path, but over time it is certainly possible that the board may change its mind, especially if and when there is a change in the CEO position. A merger would yield significant synergies (perhaps 8% of sales) because of the high degree of geographic overlap between the companies in major markets like the US, Canada, India, Mexico, Brazil, and Russia.

It is fair to assume that Mondelez would appeal to private equity firms as well. Private equity firms sometimes have more success implementing cultural change because they are so highly motivated to make big returns on their investments. In addition, they don't carry the political baggage of incumbent CEOs who have worked for their companies for long periods of time. Our sense is that very few of the incumbent CEOs in place today have the stomach for truly revolutionary change.

3G Capital is the private equity firm that has made the biggest transactions in the consumer staples space, and it must be at least thinking of Mondelez as a potential target. Mondelez is a prized asset in the consumer staples space, and the principal partners of 3G like to think big. We doubt 3G would be satisfied just owning Heinz in the food space, and it has Warren Buffet's trust and firepower to help it realize its ambitions.

3G's has set the new "gold standard" in consumer staples for reducing overhead costs, rethinking supply chains, and improving operational effectiveness. 3G creates value by putting dynamic management teams in charge and instilling a culture of cost-cutting that incumbent management teams can't achieve.

50

75

100

125

150

175

200

225

250

275

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

HSY Staples ETF

80

100

120

140

160

Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

CPB Staples ETF


3G has a large presence on the board of InBev, which bought Anheuser-Busch in 2008 and achieved synergies worth 13% of sales. After reinvesting a portion of the savings back into the brands, the operating margins increased 700 bps from the 2008 base. Assuming little to no margin expansion, we figure Budweiser could be worth $75-80 billion today compared with the $52 billion InBev paid in 2008.

Exhibit 15: InBev Expanded Budweiser's Operating Margins by 700 BPS After Buying the

Business in 2008


3G Capital bought Heinz in 2013 and quickly boosted Heinz' operating margins to 20% compared to only 15% before 3G bought it.

Exhibit 16: 3G Boosted Heinz' Adjusted Operating Margin by 550 BPS Shortly After Buying

the Company

Source: Credit Suisse estimates, Heinz filings.

Obviously, the number of private equity firms who could even contemplate a $100 billion deal like this one is highly limited. But if we stretch our imagination, we can envision other private equity firms taking an interest in Mondelez as well.

JAB is the investment arm and holding company of the billionaire Reimann family. The Reimanns became well-known in the consumer space in 1997 when they merged their Benckiser chemical company with Reckitt and Colman to create Reckitt-Benckiser. JAB now owns Coty perfume, Bally shoes, Jimmy Choo, and the D.E. Master Blenders coffee company.

JAB and Mondelez have signed an agreement to merge D.E. Master Blenders with Mondelez' Jacob coffee to create the joint venture Jacobs Douwe Egberts with $7 billion in beverage sales. We don't profess to have any insight into JAB's plans for the future, but this arrangement will give JAB significant insights into Mondelez and the management team. If JAB gets the impression that it can run Mondelez better than Mondelez, it would not be out of the realm of possibility for it to make a bid for the business.

51%

32%

61%

39%

20%

30%

40%

50%

60%

70%

Gross Margin EBIT Margin

2009 1H14

14.9%15.4%

14.4% 14.8%

20.3%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2010 2011 2012 2013 PF Apr-Dec 13


Valuation Our 12-month valuation target price of $42 takes a probability weighted average of three potential scenarios we see for the company over the next two years.

■ The company achieves its stated margin target of 300-400 bps and revenue grows at a pace of 3-4%. We believe the stock would trade at $46/share by the end of 2016 assuming a 18x forward P/E.

■ The company underachieves its margin target and disappoints the street.

■ In the event of scenario two, we believe the believe the board would seek another management team to run the business, either by selling the business to a strategic acquirer or to a private equity firm in a leveraged buyout. If so, we believe Mondelez would fetch a price of $51/share because the acquirer would price the asset with the assumption that it could expand margins to 19-20%.

It is certainly possible that the board would take a more complacent approach and not pursue strategic options at all. But Peltz and other shareholders aren't likely to sit by and let that happen.

Exhibit 17: Probability Weighted Value/Share of Mondelez = $42/share


Scenario ProbabilityValuation in two

years

Discounted Value to

12/31/15Incumbent management achieves margin target of 15.5% with revenue growth of 3-4%

40% 46$ 42$

Incumbent management underachieves margin target (13-14% ), revenue growth stalls, and no corporate action takes place

20% 35$ 32$

Acquirer buys the business with plans to improve margins to 19.5%

40% 51$ 46$

Probability Weighted Value 46$ 42$


Companies Mentioned (Price as of 20-Oct-2014) AVI Limited (AVIJ.J, R67.0) Accenture Plc (ACN.N, $76.44) Anheuser-Busch InBev (ABI.BR, €83.48) Asahi Group Hldg (2502.OS, ¥2,724) Campbell Soup Company (CPB.N, $42.75) Colgate-Palmolive (CL.N, $64.54) ConAgra Foods, Inc. (CAG.N, $34.27) Danone (DANO.PA, €50.11) General Mills (GIS.N, $49.92) Green Mountain (GMCR.OQ, $143.03) J.M. Smucker Co. (SJM.N, $101.03) Kellogg Company (K.N, $61.76) Kraft Foods Group (KRFT.OQ, $55.88) Mead Johnson Nutrition Co. (MJN.N, $97.02) Mondelez (MDLZ.OQ, $32.94, OUTPERFORM, TP $42.0) Nestle (NESN.VX, SFr66.8) PepsiCo, Inc. (PEP.N, $93.55) Procter & Gamble Co. (PG.N, $84.18) Tesco (TSCO.L, 179.3p) The Coca-Cola Company (KO.N, $43.29) The Hershey Company (HSY.N, $93.22) Tiger Brands Ltd (TBSJ.J, R313.5) Unilever (UNc.AS, €29.62) Wal-Mart Stores, Inc. (WMT.N, $75.14)

Disclosure Appendix

Important Global Disclosures I, Robert Moskow, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Mondelez (MDLZ.OQ)

MDLZ.OQ Closing Price Target Price Date (US$) (US$) Rating 02-Nov-11 34.64 28.70 O 20-Jan-12 38.67 45.00 22-Feb-12 37.99 31.50 02-Oct-12 28.00 31.00 17-Apr-13 29.84 33.00 08-Aug-13 32.70 34.00 17-Sep-13 31.98 36.00 09-Jan-14 35.36 37.00 N 13-Feb-14 34.01 35.00 07-May-14 38.10 42.00 O * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price MDLZ.OQ

1- Jan- 12 1- Jan- 13 1- Jan- 1425

30

35

40

45

O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities


As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (54% banking clients) Neutral/Hold* 39% (50% banking clients) Underperform/Sell* 14% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Price Target: (12 months) for Mondelez (MDLZ.OQ)

Method: Our 12 month target price of $42 is a probability weighted average of 3 scenarios: 1) current management reaches stated goals-$42, 40% probability, 2) current management does not reach stated goals-$32, 20% probability, and 3) an acquirer buys the business-$46, 40% probability.

Risk: Risks to our $42 target price are the efficacy of increased investment and cost-cutting programs, pricing and mix offset continued commodity cost pressures, competition from value brands and private label, and continued weakening macro conditions in Europe and the U.S.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (MDLZ.OQ, GIS.N, ABI.BR, HSY.N, PEP.N, WMT.N, KRFT.OQ, K.N, MJN.N, CPB.N, SJM.N, NESN.VX, CL.N, KO.N, PG.N, CAG.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (MDLZ.OQ, GIS.N, ABI.BR, PEP.N, WMT.N, KRFT.OQ, MJN.N, CPB.N, NESN.VX, KO.N, PG.N, CAG.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (NESN.VX) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (MDLZ.OQ, GIS.N, WMT.N, KRFT.OQ, NESN.VX, KO.N, PG.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (MDLZ.OQ, GIS.N, ABI.BR, PEP.N, WMT.N, KRFT.OQ, MJN.N, CPB.N, NESN.VX, KO.N, PG.N, CAG.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MDLZ.OQ, GIS.N, ABI.BR, HSY.N, PEP.N, WMT.N, KRFT.OQ, K.N, AVIJ.J, MJN.N, CPB.N, SJM.N, NESN.VX, CL.N, KO.N, PG.N, CAG.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (NESN.VX) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (MDLZ.OQ, GIS.N, HSY.N, PEP.N, GMCR.OQ, WMT.N, KRFT.OQ, ACN.N, K.N, MJN.N, CPB.N, SJM.N, CL.N, KO.N, PG.N, CAG.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (GMCR.OQ, NESN.VX). Credit Suisse has a material conflict of interest with the subject company (CPB.N) . Credit Suisse Securities (USA) LLC acted as financial advisor to Bolthouse Holding Corp in connection with the announced sale of the company to Campbell Soup Company. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PEP.N). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of PEP.N As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PG.N). An analyst or a member of the analyst's household has a long position in the common stock of (PG).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (MDLZ.OQ, DANO.PA, GIS.N, ABI.BR, HSY.N, PEP.N, GMCR.OQ, WMT.N, KRFT.OQ, ACN.N, K.N, AVIJ.J, MJN.N, CPB.N, SJM.N, NESN.VX, CL.N, KO.N, TBSJ.J, UNc.AS, PG.N, PG.N, CAG.N) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.


For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (DANO.PA, ABI.BR, NESN.VX, UNc.AS). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (MDLZ.OQ, GIS.N, WMT.N, KRFT.OQ, CPB.N, NESN.VX, KO.N, PG.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.


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mondelez (mdlz.oq) - credit suisse

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