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CQB AT A GLANCE

P/E ► -2.46   EV/EBITDA ► 8.35 HIGH ROA ► -10.1% LOW ROE ► -36.1% LOW Debt to Equity ► 2.11 HIGH Current Ratio ► 1.89 LOW Interest Coverage Ratio ► -3.67 LOW

 

 

 

 

 

 

Chiquita Brands International ((NYSE:CQB))

Generating net sales of $840 million in 2008, Chiquita Brands International, Inc, (CQB) is a leading marketer and distributor of bananas and other produce. Chiquita is the No. 1 seller of bananas in the European Union and the No. 2 seller of bananas in North America. ^[1] Under the brand name Fresh Express, Chiquita is the largest seller of packaged salads in North America. ^[2]

Approximately one-third of the bananas are produced from company owned farms while the remaining bananas and other produce are bought from third-party suppliers from around the world. ^[3]

Business Overview

CQB’s revenue comes from the sale of bananas, bagged salads, other produce and healthy snacks. In August 2008, Chiquita announced that it had completed the sale of its wholly-owned German distribution business, Atlanta AG to UNIVEG Fruit and Vegetables BV, while creating a strategic agreement whereby Atlanta will be Chiquita's preferred supplier of banana ripening and distribution services in Germany, Austria and Denmark. ^[4]

Chiquita is expanded its global presence in emerging markets by entering a joint venture with Haitong Food Group in China to market and sell fresh packaged salads, fresh cut fruits and vegetables, and fresh chilled beverages.^[5]

Business and Financial Metrics

In 2007, the company reported an increase in net sales from $4.5 billion in 2006 ro $4.7 billion in 2007. ^[6] They attributed the rise to increases in banana pricing in Europe and North America and favorable exchanges rates, partially offset by lower volume of sales. ^[7]

The company reported an improvement in the company's operating results from 2006 to 2007.^[8] There was a net operating income of $31 million in 2007, compared to an operating loss of $27 million in 2006. They attributed the the 2007 gains to a their restructuring plan. ^[9] They attributed their operating losses in 2006 to an good will impairment charge of $43 million from the sale of Atlanta AG and a $25 million charge in a plea agreement with the U.S. Department of Justice. ^[10]

CQB Net Sales v. Operating Income

In the company's third quarter report for 2008, the company reported net sales rose 7% to $840 million. There was an operating loss of $5 million, compared to a loss of $7 million in the third quarter of 2007. ^[12] They attributed the increase to improvements in the operating loss are due to a higher pricing for bananas in North America, favorable exchange rates for the Euro, savings from business restructuring, offset by increases in industry and product supply costs and lower sales in salads. ^[13]

Business Segments

Chiquita divides it sales into three segments: bananas, packaged salads and other healthy foods, and other produce.

CQB2007 % of Segment Sales

Bananas (43% net sales)^[15]

Chiquita sources, distributes and markets bananas, with net sales of $2.0 billion in 2007, $1.9 billion in 2006 and $2.0 billion in 2005. ^[16] Banana sales were approximately 43% of Chiquita’s consolidated net sales in 2007 and 2006 and 50% in 2005. Between 2005 and 2007 approximately 30% of sales were in North America and 70% of banana sales were in Europe and other international markets. ^[17] The Middle East and the Far East, the other international markets, are both served through a joint venture that sources its bananas from the Philippines. ^[18]

Salads and Healthy Snacks (27% net sales)^[19]

The company reported Fresh Express had 47% of the retail market share during 2007 and 45% of the retail market share in 2006.^[20] Making it the number one in the retail value-added salad category in the U.S.. ^[21] Net sales of the Salads and Healthy Snacks segment were approximately $1.3 billion, $1.2 billion, and $590 million for the years ended December 31, 2007, 2006 and 2005, respectively. ^[22] The Salads and Healthy Snacks segment includes packaged salads sold under the Fresh Express and other labels, fresh vegetable and fruit ingredients used in foodservice, healthy snacks, and processed fruit ingredient products. ^[23] The company distributes approximately 400 different Fresh Express branded products nationwide to food retailers as well as foodservice distributors and operators and quick-service restaurants. ^[24] The increase in revenue between 2005 and 2006 was due to the full year impact of Chiquita owning the Fresh Express business.^[25] The Fresh Express acquisition has diversified the company’s business, accelerated revenue growth in value-added products and provided a more balanced mix of sales between Europe and North America.^[26] The addition of value added products makes the company less susceptible to risks unique to Europe, such as sourcing preferences in the European Union under the banana import regime and foreign exchange risk. ^[27]

Other Produce (30% net sales) ^[28]

Net sales of the Other Produce segment were approximately $1.4 billion in 2007, 2006 and 2005. The Other Produce segment includes fresh fruit and vegetables other than bananas in Europe, North America and the Far East. The major items sold are grapes, pineapples, melons, stonefruit, apples, kiwi and tomatoes. ^[29]

In August 2008, Chiquita sold their German subsidiary Atlanta AG to UNIVEG. ^[30] Atlanta constituted most of the Other Products sales in Germany and Austria. ^[31] Atlanta will continue to serve as Chiquita's preferred supplier of banana ripening and distribution services in Germany and Austria. ^[32]

Other Products sales in North America and Europe primarkty market Chiquita branded items, they market premium-qulaity items with a consumer focus. ^[33] There is price pressure on theses products due to the growing buying power of larger retailers and discount buyers. ^[34]

Trends and Forces

EU banana import tariffs continue its negative impact on European banana sales.

In January 2006, the European Commission eliminated the quota and licensing arrangement to the import of Latin American bananas and imposed a significantly higher tariff on Latin American bananas. ^[35]At the same time, it maintained a tariff preference for bananas from African, Caribbean and Pacific (“ACP”) sources by exempting the first 775,000 metric tons of ACP bananas from any tariffs. ^[36]As of January 1, 2008, that tariff exemption applies to all ACP bananas. ^[37]

• Tariffs Tariff increases resulted in approximately $115 million of higher tariff costs in 2006 and 2007 compared to 2005. ^[38] Elimination of quotas increased in the volume of bananas sold into the EU and caused banana prices to decrease overall. The average banana prices in Chiquita’s core European markets decreased by 11%, with net sales down $110 million in 2006 compared to 2005; however, in 2007, local prices increased by $18 million, or 2% compared to 2006. ^[39]

• Price Chiquita and its competitors have not been able to pass on costs to the consumer. ^[40]While Chiquita can still demand a premium price for its bananas, premium pricing is not guaranteed because of the potential for significant fluctuations in volume and pricing as a result of variations in supply and demand, competitive market dynamics, the weekly nature of pricing that is characteristic of sales to most retailers and wholesalers in this market. ^[41]Despite a WTO holding that the EU’s banana importing practices violates international trade rules there can be no assurance that any of these challenges will result in changes to the EU regime, or that any resulting changes will favorably impact the companies earnings. ^[42]

Crop disease, weather and other natural conditions can decrease production

Like all fresh produce traders, Chiquita’s core business is vulnerable to weather conditions, crop disease, pests, and other natural conditions. The factors can lower sales volume, increase expenditures for replanting and replacing damaged crops, and limit availability to supply customers. ^[43] Crop Diseases in Bananas In the past, disease has devestated banana crops. In the Ulua Valley of Honduras, 30,000 hectares were lost between 1940 and 1960 due to plant disease. Because it cost between $2,000 and $5,000 to establish a hectare of plantation at the time, direct losses during the reached many millions of dollars. ^[44]

• Panama disease or Fusarium wilt of banana - is caused by the fungus Mycosphaerella fljiensis. It affects both plantains and bananas and can reduce yields by as much as 90%. ^[45] Chiquita acknowledges that the disease poses a potential problem. ^[46]

• Black sigatoka - isknown to exist in almost every region around the globe where banana is cultivated. The disease, which is also known as black leaf streak, is a pathogenic fungus that significantly reduces leaf area and results in yield loss and premature fruit ripening. Severe infestation has been reported to result in an 80% to 100% yield reduction. ^[47]

Weather Floods and hurricanes in Central America and other growing areas can disrupt crop production. ref>CQB 2005 Annual Report</ref> In 2005 the company reported that 5200 acres of banana farms were hit by heavy rains from tropical storms putting them out of production for more than a year. This resulted in a loss of $13 to $18 million dollars. ref>[1] CQB 2005 Annual Report</ref> The company reported that Hurricane Katrina damaged produce for Fresh Express by $2 million. ref>CQB 2005 Annual Report</ref>

Consumer Confidence in Food Safety Affect Sales

Food safety issues that implicate consumer confidence in safety and quality of produce and ingredients adversely affect the sales of products. ^[48]According to company annual reports in 2006 and 2007, and E. Coli outbreak in 2006 resulted in a lack of consumer confidence in packaged salads. ^[49] The company reported safety concerns resulted in net losses of $9 million in 2006 and continued to negatively affect sales in 2007. ^[50]

Competition

Bananas

Bananas are distributed and marketed internationally in a highly competitive environment. Although smaller companies, including growers’ cooperatives, are a competitive factor, Chiquita’s primary competitors are a limited number of other international banana importers and exporters, principally Dole Food Company, Inc., Fresh Del Monte Produce, Inc. and Fyffes plc. .^[51]

• Dole Food - Privately owned, Dole Foods is the world's largest producer of fresh fruits and vegetables. With $6.3 billion in net sales, Dole is the No.1 seller bananas, iceberg lettuce, celery, cauliflower, and packaged fruit products in North America.^[52]

• Fresh Del Monte Produce - No longer related to Del Monte Foods, Fresh Del Monte Produce holds the license to use the name Del Monte on the fresh fruits and vegetables that it grows, transports, and markets worldwide. The firm has 12% of the world market share for bananas. ^[53] In 2007 it reported net sales of $3.5 billion. http://library.corporate-ir.net/library/10/108/108461/items/285073/FDP07AR.pdf

• Fyffes - With group sales at € 407.7 in 2007I, Fyffes is a major European importer and distributor of fresh fruits, Fyffes is best known for its bananas. was the first company to brand bananas, using the “Blue Label”..^[54]ref=122&page=46&zoom=std&view=thumb#The company markets its fruit, which also includes Fyffes Gold Pineapples and melons, under the Fyffes, Turbana, and Nolem brands.^[55]

Bagged Salads

Fresh Express competes with Dole Food Company, Ready Pac Produce, and Earthbound Farms in the value-added salad and packaged vegetable market. .^[56]There are also a growing number of processed food and other food and produce sellers who could enter the value-added salads category and other healthy snack markets. Approximately 30% of the Salads and Healthy Snacks segment net sales are to chain and quick service restaurants, which are characterized by a high volume of sales, but with profit margins that are lower than for retail customers. .^[57]The foodservice competition is predominately national, regional and local processors. .^[58]

CQB 2007 Packaged Salad Market Share

References

1. ↑ 1stPage CQB 2008 10-K Item 1 page 2
2. ↑ 1stPage CQB 2008 10-K Item 1 page 2
3. ↑ 1stPage CQB 2008 10-K Item 1 page1
4. ↑ Trading Markets
5. ↑ Food Business
6. ↑ CQB 2008 10-K Exhibit 13
7. ↑ CQB 2008 10-K Exhibit 13
8. ↑ CQB 2008 10-K Exhibit 13
9. ↑ CQB 2008 10-K Exhibit 13
10. ↑ CQB 2008 10-K Exhibit 13
11. ↑ CQB 2008 10-K Item 1 page 3
12. ↑ CQB 2008 3rd Quarter Earnings Call
13. ↑ CQB 2008 3rd Quarter Earnings Call
14. ↑ CQB 2008 10-K Item 1 page 3
15. ↑ CQB 2008 10-K Exhibit 13 page 6
16. ↑ CQB 2008 10-K Item 1 page 4
17. ↑ CQB 2008 10-K Item 1 page 4
18. ↑ CQB 2008 10-K Item 1 page 4
19. ↑ CQB 2008 10-K Exhibit 13 page 6
20. ↑ CQB 2008 10-K Item 1 page 8
21. ↑ CQB 2008 10-K Item 1 page 8
22. ↑ CQB 2008 10-K Item 1 page 8
23. ↑ CQB 2008 10-K Item 1 page 8
24. ↑ CQB 2008 10-K Item 1 page 8
25. ↑ CQB 2008 10-K Item 1 page 8
26. ↑ CQB 2008 10-K Item 1 page 8
27. ↑ CQB 2008 10-K Item 1 page 8
28. ↑ CQB 2008 10-K Exhibit 13 page 6
29. ↑ CQB 2008 10-K Item 1 page 11
30. ↑ CQB 2008 3rd Quarter Earnings Call
31. ↑ CQB 2008 10-K Item 1 page 11
32. ↑ CQB 2008 3rd Quarter Earnings Call
33. ↑ CQB 2008 10-K Item 1 page 11
34. ↑ CQB 2008 10-K Item 1 page 11
35. ↑ CQB 2008 10-K Item 1A - Risk Factors
36. ↑ CQB 2008 10-K Item 1A - Risk Factors
37. ↑ CQB 2008 10-K Item 1A - Risk Factors
38. ↑ CQB 2008 10-K Item 1A - Risk Factors
39. ↑ CQB 2008 10-K Item 1A - Risk Factors
40. ↑ CQB 2008 10-K Item 1A - Risk Factors
41. ↑ CQB 2008 10-K Item 1A - Risk Factors
42. ↑ CQB 2008 10-K Item 1A - Risk Factors
43. ↑ CQB 2008 10-K Item 1A - Risk Factors
44. ↑ Plant Management Network
45. ↑ Journal of Agricultural and Applied Economics
46. ↑ BananaBook.org
47. ↑ Journal of Agricultural and Applied Economics
48. ↑ CQB 2008 10-K Item 1A - Risk Factors
49. ↑ CQB 2006 Annual Report
50. ↑ CQB 2006 Annual Report
51. ↑ CQB 2008 10-K Item 1 page 8
52. ↑ Dole Company Website
53. ↑ Fresh Del Monte Website
54. ↑ Fyffes Website
55. ↑ Fyffes Website
56. ↑ CQB 2008 10-K Item 1 page 8
57. ↑ CQB 2008 10-K Item 1 page 8
58. ↑ CQB 2008 10-K Item 1 page 8
59. ↑ Trends in Food