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  "documentTitle": "PepsiCo (PEP)",
  "authorId": "06_Trian_Partners",
  "authorName": "Nelson Peltz",
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  "presentationDate": "2014-02-19 00:00:00",
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  "notes": "The text uses a series of rhetorical questions and data comparisons to challenge management's narrative on earnings and cost-cutting.",
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      "text": "We find it disappointing that management wants a “free” pass on the 2012 earnings re-set and does not take responsibility for the events that brought it on, specifically a reduction in advertising that spurred a need for brand reinvestment.",
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      "text": "EPS growth: 7%",
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      "text": "Guidance for 2014 was weak. Despite plans to buy back 4% of the shares during 2014, a lower share count to begin the year, what should be a lower initial cost base given last year’s $1bn of supposed cost savings, another $1bn of promised cost savings planned for 2014 and nearly 100 bps of tax rate favorability, management expects only 7% constant currency EPS growth in 2014 – the low-end of its long-term target and its peer group. 2014 EPS is expected to be only $4.50, basically in-line with 2011 levels.xviii",
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      "text": "Advertising declines artificially propped up EPS from 2006-2011. Management has defended earnings performance during its tenure by citing the need to re-set earnings and invest back into the business. Specifically, management argues that EPS was purposefully re-set in 2012 to free up $500-600mm for additional advertising and marketing investment. This argument. First, according to the 2012 Annual Report on Form 10-K, advertising and marketing expense only increased $200mm in 2012, or 36% of the promised incremental spend.xix If the other $300-400mm was not spent, why did EPS still decline so much in 2012? Could this be why management brought the one-time Vietnam refranchising gain ($137mm) into “recurring” EPS in 2013, so that the gain would offset additional advertising expense in 2013 ($200mm) that was supposed to have occurred in 2012?xx Second, and most importantly, we believe the need for brand reinvestment was precipitated by years of underinvestment in advertising and marketing from 2006-2011.",
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      "text": "We find it disappointing that management wants a “free” pass on the 2012 earnings re-set and does not take responsibility for the events that brought it on, specifically a reduction in advertising that spurred a need for brand reinvestment. This is the same management team that was overseeing the company when advertising was declining.",
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      "text": "With productivity consistently failing to hit the bottom-line, we question whether associated restructuring charges should be added back to core EPS every year. PepsiCo says that it will successfully complete its three-year, $3bn productivity program this coming year. Nevertheless, management’s 2014 guidance implies operating profit will be essentially flat over",
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      "text": "significantly in 2012, cutting EPS from an expected ~$5.00 to $4.10 because the brands needed reinvestment. And even with the major EPS re-set in 2012, currency-neutral EPS grew only 5% in 2013 after backing out the highly unusual inclusion of a Vietnam refranchising gain embedded in “recurring” EPS as well as tax rate favorability. This rate of growth is well below the 10% EPS growth that PepsiCo’s peers delivered this year (normalized for currency and tax) as well as the company’s target of “high single digit” EPS growth over time.xvii See Appendix D for details.",
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      "text": "Advertising and marketing expense as a percentage of sales decreased from 7.7% in 2006 (and 8.7% in 2005) to 6.5% in 2009, the year prior to the bottling acquisitions. Even factoring in the shift in sales mix after the bottlers were acquired, we estimate that advertising and marketing expense as a percentage of sales declined another 34 bps from 2009-2011. Overall, we estimate that advertising and marketing been held constant as a percentage of sales from 2006-2013, adjusting for the bottling acquisitions, PepsiCo’s EPS would have grown only 39% over this period (~700 bps worse than reported EPS growth).xxi See Appendix E for details.",
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