Dear shareholders,
This has been a transitional yet hopeful year for Chiquita Brand International, Inc.. We continue to operate as a leading international marketer and distributor of high-quality fresh and value-added produce. Our company is one of the world’s largest banana producers and a major supplier of bananas to Europe and North America. We have refined our objective to become a more consumer-centric organization that is committed to providing energy-rich bananas and other fruits and nutritious blends of convenient green salads. Net sales are higher than they have ever been before for our Chiquita ® premium brand and our newly acquired Fresh Express ® brand. Our acquisition of Fresh Express has proven to be beneficial; however, unforeseen challenges have over shadowed that aspect this year. We would like to describe the events of 2006 by offering our bad news and rectifying efforts, our good news and our bright outlook for improvements in 2007.
Net sales for 2006 were $4.5 billion, a 15 percent increase from $3.9 billion in 2005
Operating loss for 2006 was $28 million, an 85 percent decrease from an operating income of $188 million in 2005.
Net income was $15 million in 2006, a 93 percent decrease from $223 million in 2005.
Net sales have increased this year due to a number of factors; however, due to matters out of our control, our operating losses have drastically offset our revenues. An analysis of these losses has produced the following results:
A $75 million loss is attributable to the higher banana tariffs and lower market prices in the European Union. The cost per metric ton of imported bananas from Latin America, Chiquita’s primary source, rose to 176 from 75 effective January 1, 2006. These tariffs were not applied to bananas imported from Africa or the Caribbean. This has increased volumes and shifted the balance of bananas in Europe and adversely affected the sales of Chiquita bananas.
There were $54 million industry cost increases for fuel, paper, and ship charters. The rising costs of these indispensable supplies have affected the entire industry, and will likely continue to affect us in 2007.
We incurred a $25 million charge for settlement of a liability related to the U.S. Department of Justice investigation of our former Columbian subsidiary. In 2003 our banana-producing subsidiary in Colombia was forced to make payments to local paramilitary groups to protect the lives and safety of our employees. We voluntarily approached the DOJ in April of that year when our senior management became aware that payments to these groups are prohibited under a U.S. antiterrorism law that changed in 2001. Chiquita reached an agreement with the DOJ relating to the investigation. Under terms of the agreement, Chiquita will pay a fine of $25 million over five years.
A $9 million loss in 2006 was related to consumer concerns about the safety of packaged salads after the discovery of E. coli in certain industry spinach products. Although the Food and Drug Administration found no traces of E. coli in our Fresh Express products, we incurred costs due to the abandonment of raw product inventory and non-cancelable purchase commitments.
What We Are Doing To Rectify These Issues
The current European Union banana regime has been strongly rejected by several Latin American governments. The Ecuadorian government has requested for an arbitration panel under expedited World Trade Organization procedures and it has been approved. A ruling is expected late in 2007. We stand behind Ecuador and other Latin American governments with hope that the tariffs will be reduced or reversed.
Since disclosing information to
the Justice Department four years ago, we have cooperated with the
investigation, sold our Colombian operations and enhanced our
compliance programs and procedures. The aim of Chiquita’s
refined programs is to promote transparency and to reinforce our
strong culture of ethics. We want to go complying with our
obligations under U.S. law and in the jurisdictions around the world
that provide a home for our company.
As an example of our leadership in food safety, we formed an independent scientific advisory panel in May 2006 that is committed to bringing healthy, safe products to consumers. We committed $2 million to fund nine groundbreaking research projects recommended by this panel in an effort to better understand and alleviate the threat posed by E. coli in lettuce and leafy greens. Food safety has always been our number one priority, and this panel will further explore how food-safety practices might be enhanced. We plan to share any research findings as widely as possible to inspire the development of advanced safeguards within the fresh-cut industry.
We believe there is an opportunity to partner with expert shipping service providers that can grow with Chiquita and help us to maintain high quality and competitive long-term operating costs. In September 2006, we announced that we are exploring strategic alternatives for the sale and long-term management of our ocean shipping operations. We believe this will enhance shareholder value and allow us to focus our efforts and resources on strengthening customer relationships, generating capital and reducing our debt, as well as investing in new growth opportunities.
Although we are facing some setbacks, net sales rose in nearly every segment of Chiquita Brand International, Inc. in 2006. In total, net sales have increased by 15 percent compared to 2005. The analysis of these gains has produced the following results:
We received $31 million from Chiquita owning Fresh Express for one full year compared with one half year in 2005. We have benefited from the sale of over 50 value-added, premium Fresh Express products. The top selling packaged salads were “Sweet Butter” blends and “5 Lettuce Mix.”
We saved $23 million of net cost savings related to efficiencies in Chiquita’s banana supply-chain and tropical production operations.
We enjoyed $21 million from higher banana pricing in North America
We received $20 million from lower marketing costs compared with 2005, primarily in Europe.
We are looking forward to high performance and profits in 2007. We are committed to continuing our role as a major player in the fresh and value-added premium produce industry. Our vision is to steadily increase revenue and more than double the profitability of our 2005 base through the next five years. Two objectives will direct us to achieving these goals: to pursue profitable growth by delivering groundbreaking, higher-margin products and to build a high-performance organization.
Chiquita is devoted to exceeding our customers’ needs and expectations with differentiated, value-added products that are not only available but are also convenient.
Adding to its existing 50 healthy, fresh products, Fresh Express introduced 12 higher-margin packaged salads. The “Sweet Butter” blends and the “5 Lettuce Mix” outsold new products from other leading brands such as Pepsi, Frito Lay, Kraft and Campbell Soup in the third quarter of 2006. We have faith that these products will continue to top all categories in U.S. supermarkets.
Our mini bananas are now available in several large grocery store chains in North America. Following a successful market test in Finland, we are expanding across Europe.
These are currently the No. 1 brand of sliced apples in the United States. Due to our aggressive distribution through retailers and our quick-service restaurant partners, distribution has increased by 38 percent. Subway restaurants across the U.S. began offering co-branded Chiquita Apple Bites in March of 2007. We are expecting to reach 14,500 stores in the coming year.
Just Fruit in a Bottle has excelled since June of 2006 in its initial European market introduction in Belgium where it is available 70 percent of major grocery retailers. After only six months, Just Fruit in a Bottle is Belgium’s preferred fresh fruit smoothie.
We see a significant opportunity to introduce more healthy, innovative, and high-margin products like these into the marketplace in 2007. Throughout the year we plan to expand our offerings and profitability by meeting consumer demand for fresh, on-the-go foods.
As I look ahead to 2007 I am overcome with optimism and high expectations. Fresh Express has proven to be a beneficial and indispensable segment of Chiquita in our trying times, and I have no doubt that it will be a high point in 2007. I am focused on, and devoted to the improvement of our operating systems and a brighter future for Chiquita Brand International Inc. I would like to express my deep gratitude for the committed efforts of our employees, without which Chiquita would not exist. I would also like to express my many thanks to our shareholders for having faith that our company can withstand any challenges and come out on top of the fresh food market. I look forward to writing a more positive letter in 2008.
Fernando Aguirre, Chairman and Chief Executive Officer
April 12, 2007