Chiquita Slips on Salad Bet as Cash Dwindles: Corporate Finance
Chiquita Brands International Inc. (CQB) is burning through cash faster than any U.S. packaged-foods company after its $855 million 2005 purchase of Fresh Express Inc. in a bid to diversify into salads failed to raise profit.
The owner of the namesake banana label is consuming funds at a rate that would exhaust its $53 million of cash in fewer than eight months, down from 131 months two years ago, according to data compiled by Bloomberg. The firm’s $200 million 4.25 percent convertible securities, which traded above face value last year, have dropped to 79 cents on the dollar.
Chiquita, which agreed in June to limit capital spending in exchange for loosened loan covenants, is working to trim costs as declining earnings raise leverage to the most since 2007. Sales of $953 million by the salads and healthy snacks unit in 2011 are down 20 percent since the purchase of Fresh Express as customers such as Wal-Mart Stores Inc. favor their own brands.
“I threw in the towel,” said James Lee, an analyst at Bethesda, Maryland-based Calvert Investment Management Inc., which oversees about $12.5 billion and sold its Chiquita bonds last year. The company’s salad business is “the biggest disappointment. You’d just think that if you’ve been in one line of business for a number of years, you’d be better at it,” he said.
The estimated time Chiquita can operate using existing cash without additional financing is less than the median cash burn rate of 12 months for the six packaged foods and meats companies with negative free cash flows and market values bigger than $50 million, Bloomberg data show. Chiquita had negative free cash flow of $83.6 million in the 12 months through June 30.
“We do have a bit of cash burn” that reflects costs linked to debt repayment, moving the company’s headquarters to Charlotte, North Carolina, and a weakening euro, Chief Financial Officer Brian Kocher said in a telephone interview. “Our number one priority is paying down our debt.” The euro has fallen 8.2 percent against a basket of currencies over the past year, Bloomberg data show.
The company repaid $50 million of its 7.5 percent senior unsecured notes due November 2014 in December, cutting its ratio of total debt to earnings before taxes, interest, depreciation and amortization to 4.09 at the end of last year, Bloomberg data show.
Chiquita has missed earnings estimates for the past two quarters and said a weakening euro cost the company $26 million in the three months ended June 30, Kocher said during an Aug. 7 teleconference to discuss earnings with analysts and investors. Analysts expect Chiquita to post a $27.9 million loss this year.
The company’s $589 million of total debt is the most relative to earnings among 31 packaged foods and meats companies in the U.S. with more than $100 million owed, Bloomberg data show. Leverage of 7.55 times in the three months ended June 30 was up from 4.09 a year ago and higher than 5.71 at similarly- rated Dole Food Co. (DOLE)
Grocers such as Bentonville, Arkansas-based Wal-Mart and Kroger Co. are increasing sales of packaged salads through so- called private labels, the marketing of another company’s products under their own brand, as consumers purchase cheaper goods amid a sputtering economic recovery, according to Bryan Hunt, a high-yield debt analyst at Wells Fargo & Co.
Chiquita avoided selling private label salads out of concern that it would curb sales under its own brand even as competitors such as Dole entered the market, Hunt said. Chiquita said in February that it would sell private-label salads.
“Retailers’ desire to expand their private label offerings has made it very difficult for the brands in the bag lettuce business,” Hunt, based in Charlotte, North Carolina, said in a telephone interview. Chiquita’s unit “has been losing share for a very long time due to growth in the consumption of private label,” he said.
Equity investors are paying less for Chiquita’s revenue than 95 percent of its peers, Bloomberg data show. A price to sales ratio of 0.09 has declined from 0.15 in February and is 12 times less than the 1.05 industry average. The stock has dropped 26 percent this year to $6.14 yesterday.
Chairman and Chief Executive Officer Fernando Aguirre said in a June 2005 statement that buying Fresh Express would “help us diversify our business and improve the quality of our earnings” as Chiquita worked to trim its dependence on bananas.
“We expect this to result in increased sales, reduced costs and strong bottom-line performance,” Aguirre said.
Operating income for the salad business last year fell 93 percent from 2010 to $7 million as capital expenditures at the unit increased 18 percent to $33.4 million, Bloomberg data show. Banana revenue accounted for 64 percent of the company’s $3.1 billion total in 2011, the highest portion since at least 2003.
While operating income from Chiquita’s banana unit rose 58 percent last year to $127.2 million, it remains below the $182 million recorded in 2005.
Buying Fresh Express “hasn’t introduced any stability into their earnings stream,” Heather Jones, an equity analyst at BB&T Capital Markets in Richmond, Virginia, said in a telephone interview. “It levered up the balance sheet, it worsened the company.”
Chiquita, which said in an Aug. 7 statement it would search for a new CEO, may save at least $60 million per year by cutting more than 300 jobs and reducing research and development expenses in a bid to become a “high volume, lower cost operator,” the company said in the statement.
“This year, in terms of their profitability, it’s a disaster,” Mary Ross Gilbert, a managing director and equity analyst at Imperial Capital LLC in Los Angeles, said in a telephone interview. “But the brands are very good. We’re starting to see an improvement in execution.”
Chiquita, rated five levels below investment-grade at B2 by Moody’s Investors Service and an equivalent B by Standard & Poor’s, agreed with lenders June 26 to amend the covenants on its $330 million senior secured term loan and $150 million revolving credit facility to allow increased leverage levels while limiting capital expenditures to $125 million in 2012 and $85 million next year, according to a regulatory filing.
The company spent $75.5 million investing in its business last year, Bloomberg data show.
Chiquita has an average maturity of 3.4 years for its $306 million of bonds outstanding that include $106 million of the 7.5 percent notes. Those bonds traded at 98.5 cents on the dollar on Aug. 8 to yield 8.25 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
While Chiquita’s ratio of debt to Ebitda may approach 4 times if its projected cost cuts are successful, only $53 million of cash on hand contributes to “tight” liquidity despite the relaxed covenants, Kim Noland, an analyst at debt research firm Gimme Credit LLC, wrote in an Aug. 14 report.
“At least the company is making debt reduction a priority now rather than using free cash flow for innovation and diversification,” Noland wrote. “Chiquita needs to address the 2014 maturity of its bonds soon, but the frothy high yield market could permit a refinancing.”
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