Introduction
The 2006 fiscal year was one of transition for Chiquita Brands International Inc. We facilitated a successful acquisition of the Fresh Express brand in June 2005, which has contributed to a significant increase in net sales. However, we have also been affected by increased costs related to production and legal actions.
In January 2006, the European Commission eliminated the quota and increased the tariff on bananas imported from Latin America by more than 100 percent. This decision has been challenged by the government of Ecuador and is in arbitration until some time this year. We are optimistic regarding the decision.
Along with the increased tariff on imports to Europe, we have faced increased transportation expenses due to rising fuel costs as well as increased packaging and shipping costs. We also face costs related to government regulations in foreign countries where we operate, such as the Ivory Coast and the Philippines.
During 2006, net sales and profits benefited from the increasing value of the euro and its favorable exchange rate. Net sales were up nearly 15 percent to $4,499,084,000, but operating income suffered a loss of $27,697,000. Net income was $4,471,387,000 for the year.
Contributing to our operating losses, we have a $43 million goodwill impairment, to be paid over five years, in reserve on our financial statements from our purchase of Atlanta AG in Germany.
Our cash flow was limited to $15 million as a result of declining operating capital. Our debt stands at $1 billion, $44 million of which is in the form of borrowings from our revolving credit facility to fund working capital.
We have also dealt with the financial implications of natural disasters. In 2006, we spent $25 million on logistics and other expenses of replacement fruit due to shortfalls in production caused by Hurricanes Katrina and Stan and Tropical Storm Gamma.
In addition, we expect a $4 million dollar shortfall in our Fresh Cut segment due to a freeze in Arizona, where we produce much of our lettuce.
Last year also brought about decreased consumer confidence in certain foods due to health concerns. An E. coli outbreak in September prompted a recall of some brands’ products containing spinach as well as an outcry for better health standards at production sites. Related to that situation, we faced $9 million in direct costs related to abandoned raw product inventory and non-cancelable transactions.
There was no E. coli found in Fresh Express spinach. However, to protect our employees and consumers, we are investing in safer harvesting practices and establishing more stringent health guidelines at our facilities.
Although we have been challenged during the last year, we look forward to a prosperous new one. During the next five years, we hope to double our profitability through two key objectives: delivering innovative products and maintaining high performance as an organization.
We are committed to remaining the leader in branded fresh foods by meeting consumer needs with a variety of products. In 2006, we introduced 12 new lines in our Fresh Express brand, two of which became the most popular new products in the third quarter in supermarkets around the country.
We are looking at ways to decrease costs and increase shareholder wealth by synergizing components of production to streamline the process. We are exploring partnerships with shipping service providers, which would allow us to decrease operating costs while contributing to the growth of another company.
These are only a few of the many innovations and successes being created by our dedicated employees and shareholders, without whom we could not succeed. Thank you for your continued investment and faith in our vision.
Sincerely,
Fernando Aguirre
Chairman and Chief Executive Officer
April 12, 2007