Chiquita prepares for tough second half

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Mike Knowles

BY MIKE KNOWLES

@mikefruitnet

Chiquita prepares for tough second half

The next six months are likely to be more difficult as volumes flatten, although pricing remains favourable, says the company

Chiquita prepares for tough second half

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Chiquita Brands International is expecting the second half of the year to be "challenging" as sales volumes in Europe and North America come under increasing pressure, with the third quarter set to be particularly difficult.

In a press release issued today, the company has reported significant year-on-year increases in banana prices in all markets for April-May 2008 on flat volumes in North America and lower volumes in Europe.

In its Fresh Express value-added salads business, meanwhile, the company reported that net revenue per case and volume increased slightly during the two-month period year-over-year.

"We are pleased that banana pricing remains favourable as we continue working to offset higher industry costs," said Fernando Aguirre, chairman and chief executive officer. "At the same time, banana volumes remain flat to down, reflecting industry-wide supply constraints due to a series of adverse weather conditions throughout Central America and Ecuador that have substantially raised the cost of sourcing high-quality fruit. These higher sourcing costs, along with significant increases in industry and other product supply costs, continue to impact our results."

Mr Aguirre added: "We continue to expect strong year-over-year improvement in operating performance for the full year 2008, based largely on very strong first half results. However, we continue to expect the second half will be challenging. Pricing in Europe has begun to moderate and reflect normal seasonal trends, as previously expected, and industry and other product supply costs continue to increase substantially. We expect these factors to result in a difficult third quarter, which is likely to reflect a significant loss, and a more normal fourth quarter."

Since its last update in May, the company's estimate of year-on-year industry and other product supply cost increases in 2008 has risen by a total of US$60m–US$65m, principally due to market fuel prices, purchased raw products (primarily bananas and lettuce), and market fertiliser prices.

The company's new estimate of such full-year cost increases now totals US$240m–US$265m, including an estimated US$30m benefit from internal cost savings initiatives but excluding fuel hedging gains. The company's fuel hedging portfolio is now set to generate an estimated US$42m in gains during 2008, based on current market forward rates, compared with an earlier estimate of US$30m.

North American banana pricing during the second quarter was up 36 per cent, the company reported, reflecting higher year-on-year fuel surcharges linked to a third-party fuel price index, increases in base contract prices, and a price surcharge implemented in response to significantly higher sourcing costs during a period of reduced industry supply.

"Banana volume sold in the region was flat due to a series of adverse weather conditions throughout Central America and Ecuador, which have substantially constrained industry-wide volume availability and have significantly increased the cost of sourcing high quality fruit," it said.

Banana prices in the company's core European markets were up 8 per cent year-on-year for the period on a local currency basis, or 26 per cent on a US dollar basis. Volume sold in the core European markets was down 11 per cent year-over-year for the period, due to constrained industry-wide volume availability, the cancellation of some lower-price contracts that were no longer sufficiently profitable in a rising cost environment, and the company's continuing strategy to focus on its premium quality product and price differentiation rather than on market share.

In Asia Pacific and the Middle East, pricing rose 17 per cent year-on-year on a US dollar basis, primarily due to supply constraints and favourable currency exchange rates. Volume sold in these regions increased by 25 per cent year-on-year due to weather-related and other improvements in farm productivity in the Philippines.

In the company's trading markets, which consist primarily of European and Mediterranean countries that do not belong to the European Union, pricing rose 31 per cent year-over-year. The company's volume in this region declined 48 per cent, reflecting shifts in volumes to the company's North American and core European markets due to industry-wide shortages.

In the Salads and Healthy Snacks segment, net revenue per case increased 1 per cent year-on-year. Volume of retail value-added salads, including both Fresh Express and Verdelli Farms branded products, increased 1 per cent year-on-year in the two-month period. Volume growth slowed during the period due to a decrease in promotional activity, as well as temporary capacity constraints involved in the ongoing integration of Verdelli into one cohesive processing and distribution network for Fresh Express value-added salads across North America. The company expects these volume constraints to be resolved in the next several months.

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