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Chiquita issues earnings warning over bananas

10-Jun-2005

A price-fixing investigation, an attempt to diversify its business, a 33 per cent cut in orders from Wal-Mart and changes in the European banana regime has led to Chiquita issuing an earnings warning, reports Ahmed ElAmin.

In a regulatory filing with the US Securities and Exchange Commission (SEC) this week thecompany said that Wal-Mart, the US' largest retailer, plans to cut banana orders from Chiquita Brands International by one-third. Chiquita saidthe reduced order from its largest North American customer would knock its US market share down to 33 per cent from 37 per cent. The decline is expected to take effect during the current quarter.

The company blamed cheaper bananas from other competitors as the reason for the decline. The reduced orders from Wal-Mart was one of the factors Chiquita cited when warning investors that it faces a difficult period as it goes ahead with the $855m (€700m) acquisition of Fresh Express.

 

Chiquita is attempting to diversify away from the banana business by acquiring Fresh Express, which sells packaged lettuce and fresh fruit in the US. After the sale closes fruit will account for 42per cent of Chiquita's global total sales.

 

The company also warned that changes in the EU banana tariff import system, expected to be implemented in 2006, could adversely affect its European business and overall operating results. Thechange could result in Chiquita's bananas being more expensive that imports from countries exempted from a higher tarrif system.

 

In October 2004, the European Commission announced that it would propose a tariff on Latin American bananas of €230 per tonne, compared to the current €75 per tonne tariff. The new tariffsystem would not apply to bananas imported from certain countries in Africa, the Caribbean and the Pacific, putting Chiquita at a disadvantage, the company said.

 

In 2004, Chiquita sold about 61 million boxes, or 1.1 million tonnes of bananas in Europe, a large majority of which were sold in the EU and are subject to the current tariff of €75 per metric ton. The current €75tariff applies only to bananas imported from Latin America, which is the source of substantially all of the Chiquita's bananas imported into the EU.

 

In 2001, the European Commission announced it would amend the quota and licensing regime for the importation of bananas into the EU. Under the 2001 agreement, the current EU banana tariff rate quota system is scheduled to be followed by a tariff-only system no later than 2006.

 

Under the current quota system, import licenses are required to import bananas into the EU within the quota. Each year, a fixed quantity of licenses is allocated to each eligible operator, includingChiquita.

 

The new tariff system has led nine Latin American governments to apply to the World Trade Organisation for arbitration over the dispute. An arbitration decision is expected by 1 August 2005.

 

Banana sales accounted for about 60 per cent of Chiquita's net sales in 2003 and 55 per cent in 2004.

 

EU regulators raided fruit suppliers across Europe last week after Chiquita blamed some of its employees for sharing pricing and volume information with its competitors on the continent and in North America.

 

In a statement Chiquita said the transfer of the information and other conduct by the unnamed employees may have violated the EU's competition laws and the company's policies. The company said it was cooperating with the European Commission's investigation into price fixing by the food giant. The investigation may expose Chiquita and its rivals to fines if the Commission discovers the information may have resulted in higher prices for consumers.

 

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