Dr Pepper Snapple Group continued reliable performance in 2d qtr, offering better diet-CSD performance than its bigger rivals and claiming progress in continued move back to premium positioning for Snapple tea/juice brand.  “Good start to the year,” summarized prexy/ceo Larry Young.  “A slight beat but largely in-line quarter,” assessed RBC Capital’s Nik Modi, in typical analyst comment.  Sales rose 1% to $1.66 bil and operating income grew 6% to $369 mil.  For 6 mos, sales are up 2.5% to $3.1 bil and operating income up 5.1% to $639 mil.  Volume in US/Canada edged up 1% while smaller Mexico/Caribbean region soared 7%.

CSDs edged up 1%, while noncarbs rose more robust 3%.  On CSD side, flagship Dr Pepper brand was up 1% on strength of fountain biz, full-calorie Dr Pepper (+2%), offsetting 3% decline in Diet Dr Pepper, which was sequential improvement over prior qtr and better performance than core diets of key rivals.  DPS brass attributed that in part to effort to break out individual ad support rather than simply lumping it together with Dr Pepper and Dr Pepper Ten sibling brands as in past.  Onset this fall of college football activation should add further lift.  So-called Core 4 CSDs slipped 1%, as Canada Dry rose 7% but was offset by mid-single-digit declines of 7 Up, Sunkist and A&W.  Schweppes brand surged 8% on strength of sparkling waters and ginger ale.  Squirt rose 6% and Mexican mineral water Penafiel soared 12% as distribution and promo activity increased in heavily Hispanic areas of US.  (Brand also continues to make headway in Mexico itself, entering dominant Oxxo c-store chain.)  Crush was off 4%

On noncarb side, Snapple grew 11% primarily on product innovation, with further gains anticipated following rollout of Snapple Straight Up teas in 18-oz bottles.  Brand grew distribution by 1.7 points in grocery, 1.3 points in convenience, Young reported.  DPS is continuing to tilt Snapple back toward more premium positioning, phasing out value-oriented gallon jugs, often at discounted prices.  Hawaiian Punch rose 2% but Mott’s sagged 7% driven by declines in juice, tho co claimed 3.4 points of additional grocery ACV for brand’s single-serve packs.  Heavy promo activity helped Clamato to 8% gain.  Water segment grew 6% on growth of such non-owned “allied” brands as Bai-5, Fiji Water and Vita Coco coconut water.

On innovation front, co’s naturally sweetened CSDs have been expanded to 3 markets, tho it’s still too early to assess potential, and Dr Pepper Cherry has been relaunched, and Tropical 7 Up flavor is back for limited time.  Tho ceo Young no longer talks up Ten 10-calorie CSDs as enthusiastically as in past, he continued to argue that they’re solid part of mix that includes conventional diets and naturally sweetened entries, as response to changed consumer tastes.  His team is watching Diet Pepsi reformulation with interest but not planning similar move with any of their key brands for now.

As always, DPS execs talked up benefits of their Rapid Continuous Improvement (RCI) program, tho some Wall Streeters, including Modi, have been questioning whether co may be reaching limits of efficiencies it can harvest via program.  DPS cfo Marty Ellen insisted on conference call that there’s plenty of run room, citing as example move to telephone sales in Ohio market that garnered 20% increase in volume on high-volume water and energy brands.  That’s being expanded to other markets as way to reach c-stores and other small operators. 

Eyeing Partnerships with Other Outside Brands but Not Pursuing Equity Model   Question from analyst about why DPS doesn’t take more equity stakes in promising brands, as it recently did with Bai Brands, drew more detailed rationale than we’d heard to date.  Cfo Marty Ellen cited high multiples, saying, “to acquire them would be just too expensive and we’re not sure the right thing to do in terms of amount of money it would take to own these businesses.”  But co isn’t too proud to recognize that indie cos can fill innovation gaps, and it’s happy to undertake distribution partnerships with brands like Vita Coco.  “Looking at some others,” he offered.  As for Bai, that transaction was “not so much about buying equity as to help them fund some future innovation which will flow through our system,” he said.

Mojo Organics continued to make progress in transition away from unsuccessful smoothie line using licensed Chiquita brand, reporting encouraging sell-in of new Mojo-branded organic coconut-water-based line and reporting in financial filing that it had reached settlement with Chiquita Brands that drops co’s demand that it pay $1.5 mil in liquidated damages and $500K in royalties for failed alliance.  Tho Chiquita foray was a misstep, Mojo is now ready to “turn the page,” said Glenn Simpson, ceo of Jersey City, NJ-based co, which is publicly traded as MOJO.  As reported (BBI, May 1), co had heard from retailers that, tho Chiquita brand carries high awareness, it lacks excitement particularly among younger consumers.  New line produced offshore should be on its first retail shelves in US within 60 days, Glenn anticipates.

LiDestri Food & Beverage is latest copacker to hoist flag as HPP toller, installing Hiperbaric unit at its facility in Greece, NY, under name Finger Lakes Fresh Press.  LiDestri has opted for Hiperbaric’s largest unit, 525L, which has listed capacity of 525 liters, pr mfr’s Web site, diameter of 380 mm and throughput of over 3,000 kg per hr.  It’s expected to be commissioned in Nov at initial cost of $6 mil, and will represent first tolling availability in western NY region.  Co claims it’s already looking toward Phase II addition of further HPP capacity.  Investment was boosted by support from Empire State Development agency, said Alan Davis, vp of biz development & contract mfg.  LiDestri does about 40 mil cases of contract volume at network of 5 plants.  HPP, or high-pressure processing, employs pressure rather than heat to protect foods/bevs, preserving greater flavor and nutritional efficacy than pasteurization.

Avg prices for CSDs rose 3.8% last 4 wks thru Jul 11 in Nielsen all-channel data reported by Wells Fargo Securities’ Bonnie Herzog.  That’s generally steady vs +4.1% avg for 12 wks and +4% for 52 wks in all channel (incl c-stores) data.  While pricing held for most part, CSD volume declines accelerated to -4.7% last 4 wks (vs -3.5% for 12 wks), with steeper drops for each of top-3 suppliers.  Coca-Cola volume sank 4.7% (vs -3% for 12 wks) on avg 4.6% price increase in AOC data last 4 wks.  “Brand Coke (43% of KO CSD sales) had a particularly soft 0.4% sales growth this period,” noted Bonnie.  PepsiCo CSD volume sagged 5.7% (vs -4.9% for 12 wks) even as avg price increase eased to +3.4% (+4.5% for 12 wks) over last 4 wks.  Dr Pepper Snapple CSD volume dipped 2.8% last 4 wks with avg price gain of 2.7%, up from +2.4% avg price increase over last 12 and 52 wks. Private-label brand prices were also up 2.7% last 4 wks in AOC data while volume off 0.7%.  Note that diet CSD brands continue to struggle with decline accelerating to -8.5% last 4 wks vs 6.8% drop previous 12 wks.

Steady Energy Gains   Energy drink volume increased 8.6% last 4 wks in Nielsen all-channel, in line with category’s gain pace over previous 12 wks.  Avg prices eased a bit to +1.2% vs +1.7% for 12 wks.  In first months since Monster Energy segued to Coke bottling system, Monster volume was up 10.1% with avg 0.5% price drop in Nielsen data.  Coca-Cola energy brands (now part of MNST) were down 8.4% with 8.7% avg price drop last 4 wks.  Meanwhile, Red Bull sales continue to outperform as it combined 5.7% volume gain with solid 4.6% avg price increase last 4 wks.  For last 12 wks, Red Bull prices up avg 4.6% while MNST prices off 0.3%.  Recall MNST still has 6 wks to go before its announced Aug 31 price increase.  PepsiCo energy brand (Amp) trends improved last 4 wks with 4% volume gain (vs +2.4% for 12 wks) combined with solid 9.6% avg price bump.

Gatorade Gains Decelerate; Lower Powerade Prices   Sports drinks volume increased 1.3% in all-channel data last 4 wks, vs 1.8% gain previous 12 wks.  Avg prices were down a bit too from +1.5% for 12 wks to 1.2% gain last 4 wks.  Gatorade slowed from 4% gain pace previous 12 wks to 1.4% gain last 4 wks as avg price increase doubled to +1.5%.  A decline from avg price increase of 2.3% for 12 wks to small decline (-0.4%) last 4 wks helped swing Powerade volume from drop of 5% to a 0.8% increase.

Nestle, KO Waters Take Volume Hit on Higher Prices   Bottled water volume increased 4.6% last 4 wks, matching category’s gain pace over previous 12 wks.  Avg prices (+0.5%) in line with 12-wk avg as well.  Nestle volume trends worsened in last 4 wks to -4.7% as its avg price climbed to +2.3%, up from avg 1% increase previous 12 wks.  Coca-Cola bottled water volume fell from 1.5% gain previous 12 wks to 2.9% drop last 4 wks as avg price increase doubled to +6.4%.  Lower prices, down avg 6% last 4 wks continue to help drive double-digit gains for PepsiCo waters, up 16.5% last 4 wks, 12% last 12 wks.   

Coca-Cola continued to harvest rewards of its move away from aggressive price promotion, scoring 4% organic revenue gain in 2d qtr and winning kudos from broad range of Wall St analysts.  “KO’s results suggests that volume trends have stabilized, especially in the light of strong price/mix realization,” wrote RBC Capital’s Nik Modi, in typical remark.  Or, from Stifel’s Mark Swartzberg:  “In spite of the weak price/mix in Asia Pacific, we look at 1H and see evidence Coke is getting better at driving for revenue, putting less emphasis on volume.”

Reported net operating revenues dipped 3% to $12.16 bil and operating income sagged 20% to $2.54 bil, but organic revenue was up 4%.  For 6 mos, revs dipped 1% to $22.88 bil and operating income dropped 13% to $4.83 bil, but organic revenue was up 6%.  Chmn/ceo Muhtar Kent heralded qtr that brought 2% unit volume gain despite adverse timing shift of Easter holiday and challenges in once-booming Brazil, Russia and India markets.  Margins improved despite double-digit increase in media spend, he noted, and co brought in record cash from operations.

Coke’s global CSD volume rose 1% and noncarbs rose 5% for total gain of 2%.  CSDs benefited from 1% growth in brand Coca-Cola, 6% in Coke Zero, 3% in Sprite and 2% in Fanta.  But struggling Diet Coke brand plunged 7%.  Asked about brand on conference call this morning, KO brass professed not to have lost hope for turnaround, saying it’s largely “US-centric” issue, in Kent’s phrase, and tying it to consumers’ broader push away from highly processed foods to stores’ fresh-food aisles, a familiar refrain these days from ceo’s of big food/bev conglomerates.  That shift has made for “a good dietary change for the country, but the impact on categories appealing to diet-oriented positioning has been very dramatic,” Muhtar allowed.  Still, Coke Zero grew, Diet Coke’s consumer base is stabilizing and co is looking at multiple programs to strengthen brand and offer “adjacent” innovation, presumably line extensions.  Not least, archrival’s move to change formula of Diet Pepsi “will create a lot of buzz in the category, some of it good,” Kent figures.

On noncarb side, heroes were iced tea, up 7% in volume, and bottled water, +8%, as well as “value-added dairy,” up double-digits, presumably from small base.  Juice/juice drinks sagged 1% on higher pricing.

In key North America market, Kent credited new focus on revenue mgmt for strong performance.  Combo of pricing and product mix was up 4% thanks to continued emphasis on smaller, proprietary packs that command more cents per ounce, even as co raised avg price of its core 12-oz cans and 2-liter bottles.  With minicans up by double digits, overall consumer transactions rose 2%.  “More people enjoying more Cokes more often, for a little bit more money,” is how N Amer chief Sandy Douglas characterized strategy.

Region’s 2% volume growth outpaced analysts’ consensus view of -0.3%, noted Morgan Stanley’s Dara Mohsenian, thanks to 1% CSD gain and 4% noncarb gain.  Standout performers included Smartwater, Gold Peak Tea and Honest Tea, all up by double digits, KO noted.  (Volume lost due to divestment of some bottling territories was generally offset by addition of Monster brand to about half of Coke’s US territory.)  Net operating revenues rose 3% to $5.92 bil, while operating profit advanced 7% to $887 mil.

Not Wavering on Aversion to Big-Ticket Deals    Pressed on acquisitions by one analyst, Kent continued to hew to position that co is interested in smaller acquisitions but not seeking major moves.  “We’ll be looking at bolt-on targets that fit our strategic portfolio, the same way you’ve seen us look at it the last 3-4-5 years” via deals to buy Innocent juice line in UK, Honest Tea and Zico Coconut Water, Kent noted, citing Smartwater’s entry into new European markets as example of acquired brand that offers ability to scale up geographically.  Asked whether big transaction is out of question, Kent replied, “Nobody can say what the future holds,” but said observers should regard co’s M&A actions over past few years as best indication of future.

Seeking to reprise early craft-soda success, Original New York Seltzer continues to build distribution from its Southern Calif base, opening up Nev via Nevada Beverage in Las Vegas and Crown Distributing in northern part of states, including Reno, Tahoe and Carson City metros.  Brand also is entering Utah via Golden Beverages and expects to have network set for Northern Calif imminently, said Josh Danson.  On retail front, brand launched in World Market stores last week and sold out entire chain nationally within 48 hours, Danson maintained.  It’s also entered Foodland chain in Hawaii via DSD shop Johnson Bros.

Dunkin’ Donuts is upping its game in tea in Chicago test starting in Oct, at time its coffee rival Starbucks has been makin’ big bet on its Teavana entry.  Tho chain has sold regular, decaf and green teas for some time, it will experiment with more premium blends in its hundreds of Chicago stores, via black, hibiscus, chamomile, mint and fifth blend called “harmony leaf,” all sold in triangular sachets, Bloomberg reported. 

SodaStream International has tapped Dallas agency Commerce House to execute ambitious repositioning from initial identity as soda co to one more aligned with sparkling water.  Decade-old agency charged with developing TV and video campaign would be most familiar to BBI readers as shop that worked on positioning of Zico Coconut Water as all-natural sports drink; it’s also done creative for Guinness, Samsung and Dallas Fire Dept.  Recall that, after initial splash that included Super Bowl ad as home soda maker, SodaStream has concluded that soda’s not place to be these days and is seeking to segue to more health-oriented positioning as sparkling water purveyor, under tagline “Water made exciting” and out-of-home ads that declared, “Be a sparkling water maker.”  New campaign will begin to test later this summer, with initial creative breaking as soon as next week, a rep told BBI.  

AriZona Iced Tea has delivered on its plans to offer teas and juices made with real sugar, offering total of 8 popular flavors in 2 sizes.  Recall that AriZona principals Don Vultaggio and sons Wes and Spencer had acknowledged this spring they were working to adapt to changing consumer preferences regarding sugar, with range of solutions (BBI, Mar 19).  The 100% pure cane sugar entries have hit shelves in 8-packs of 11-oz cans in Mucho Mango, Watermelon and Fruit Punch flavors priced at $3.99-4.99 as well as in 16-oz glass bottles in Watermelon, Mucho Mango, Fruit Punch, Green Tea, Lemon Tea, Arnold Palmer, Sweet Tea and Golden Bear Strawberry Lemonade flavors priced at $1.50-1.75.  As it often does with new entries, Long Island-based co is launching new subline in core Northeast market and gradually expanding it nationally over course of 2015.  “Real sugar, same refreshing taste,” consumers are assured.

In its 4^th energy drink survey, CLSA “found easing concerns over the potentially negative health effects of energy drinks and a rising percent of men” who said they have at least 1 per week, reported Caroline Levy.  Among the 1K consumers age 18-40 surveyed, 53% of all males had health concerns about energy drinks, down from 63% in 2014.  Also, “for the first time, less than half of male energy drinkers,” 43%, had health concerns, while 46% of female energy drinkers were concerned.  With more non-energy-drinkers concerned about health issues, “We believe this represents a potential opportunity for Monster (and the entire category) as negative headlines and regulatory scrutiny about energy drinks continue to dissipate,” said Caroline.

Consumption Trends/Patterns   Survey found that 48% of males said they had a least 1 energy drink per week, big bounce up from 28% in 2014.  That’s 71% increase in just a year, noted Caroline.  Only 21% of females had a drink a week but “40% of female energy drinkers report increased consumption over the past year,” she added. While more people are drinking energy drinks, “the frequency of consumption remains largely flat,” as the majority (59%) drink just 1-2 a week, “while only 10% of energy drinkers admitted to consuming more than eight per week, which is consistent with prior surveys,” said Caroline.  Survey also found energy drink consumption was higher among Hispanic consumers compared to Whites. Around 51% of Hispanic males and 29% of females had at least 1 per wk compared to 43% of White males and 18% of White females.  Hispanics were also “more likely to consume at higher rates” with 24% of Hispanic males reporting drinking “at least three” per week vs 18% of White males.  Energy drinks are predominantly consumed in the afternoon, with 60% of respondents downing at least one during that time period. Survey also found energy drink consumption “with or before alcohol use has slightly increased,” noted Caroline. This yr, 55% of male drinkers said they had never mixed their energy drink with alcohol, down from 60% in 2014.  Energy drink consumers also tend to be big drinkers of soda, with 80% saying they had a soda per wk vs 62% among non-energy drink consumers, found CLSA.  Nearly a quarter (23%) of male energy drinkers said they consume “at least” 14 sodas a week. 

Monster’s Fave  For first time CLSA asked energy drink consumers what brand they viewed most favorably, and Monster came out on top, chosen by 54%, compared to 46% for Red Bull.  Monster scored higher among men and among 18-30 yr old consumers. Red Bull scored higher among non-energy drinkers and among women.