A one-two punch of increased banana costs and decreased sales of packaged salads left Chiquita Brands International Inc. reeling on the ropes in the second quarter as profits fell 42% compared with the second quarter of 2013.
“We remain confident in our ability to grow this business profitably and expect to benefit in the second half of 2014 from the pricing and efficiency initiatives announced in May and which became effective in July,” president Ed Lonergan said during a conference call Aug. 7.
The Charlotte, N.C.-based company posted profits of $18 million for the second quarter, shaking off a net loss of $25 million in the first three months of 2014. Banana sales were up 3%, or $537 million, but operating income from the company’s signature fruit dropped 19%.
Mother Nature and an extended spot market this year contributed to the banana woes, said Brian Kocher, executive vice president and chief operating officer.
“Normally the spot market ends with the first quarter,” Kocher said. “This year we are just exiting the spot market now. We haven’t disclosed the numbers for the second quarter yet, but in the first quarter this year it had a $9 million impact.”
As the company moves to close its merger with Dublin-based Fyffes Plc., Lonergan said it is maintaining its strategic plan to not be a cost leader. He said Chiquita wants to provide the right products at the right prices, not necessarily the lowest prices.
That philosophy hit consumers July 7 when Chiquita increased per-case prices on its Fresh Express packaged salads by 30 cents and decreased package sizes on some salads.
Those changes did not affect the second quarter, though, which saw a net sales decrease of 4% in packaged salads and healthy snacks, which the company reports together. Cost saving measures, however, gave Chiquita’s salad and healthy snacks traction to more than double their operating income to $7 million for the quarter, compared to 2013’s $3 million.
Russian sanctions; tax inversion
Chiquita officials discussed two political issues during the quarterly earnings call, touching on the potential effect of Russian sanctions and congressional concerns about U.S. companies engaging in so-called tax inversion moves.
They said bananas bound for Russia are mostly purchased through traders in Ecuador, which means the sanctions won’t be an issue for Chiquita. Lonergan said Chiquita expects consumption in Russia to increase as people there use bananas to replace other fruits hit by the sanctions.
Regarding the company’s plan to merge with Fyffes by year’s end, which will result in an annual tax savings of $40 million for the new entity, Lonergan said Chiquita shouldn’t be lumped in with other U.S. companies that are changing corporate citizenship.
“Tax didn’t motivate our transaction and it wasn’t a driver of our transaction,” said Lonergan. “Not a single dollar of those synergies comes from tax.”
Chiquita paid $4 million in U.S. taxes on its profits during the second quarter. It sells 39% of its bananas in Europe and the Middle East, which helps keep its U.S. taxes down.
Lonergan said that the company plans to maintain offices and employees in the U.S., including about 320 corporate jobs in Charlotte. He said after the merger the combined ChiquitaFyffes will have about 5,000 employees in the U.S. and a worldwide total of between 33,000 and 34,000.
The companies have scheduled Sept. 17 stockholder votes on the $1 billion merger. Lonergan said even though some in Congress are pushing for changes to tax laws for companies moving overseas, nothing has been proposed that would dissuade the companies’ merger plans.