Corpfocus/20″/dt1st/mark2nd

By JASON BOOTH

Staff Reporter

Dole Food Co. has been tripped up by bananas.

Unusually wet weather in Central America brought on by El Ni & #324;o caused an overproduction of bananas in the first half of the year, thus lowering the price. Then the Russian economy went into crisis mode, effectively shutting down a market that accounted for up to 8 percent of world banana imports and further dampening banana prices worldwide.

As a result, the Westlake Village-based fruit and vegetable grower/marketer announced last week that it expects to earn around $15.9 million in the third quarter ended Sept. 31, down about 35 percent from the like period last year. Full-year earnings are expected to be around 20 percent below 1997.

“They have been beset by unusual problems this year,” said Nomi Ghez, an analyst at Goldman Sachs in New York. “El Ni & #324;o was an incredibly significant factor at the beginning of the year. Then Russia collapsed in the middle of the year. Nobody foresaw that.”

The string of bad news has not been well received by investors. Dole stock has fallen by about 40 percent since August, and now stands at around $30.

Even before the latest announcement, the volatility in commodity prices had been causing mixed results.

The company reported net income for the second quarter ended June 30 of $82.1 million ($1.36 per diluted share), compared with $70.4 million ($1.17) for the like period a year ago. But in the first quarter ended March 31, earnings were $22.8 million (38 cents), down from $42 million (70 cents).

Dole has long recognized that the fruit business is a volatile one, and has been attempting in recent years to reduce its dependence on bananas and pineapples.

Its short-term strategy calls for an immediate reduction in the number of bananas it grows and buys. While the company would not say how much it will cut banana production, analysts predict the firm will lower volume commitments in 1999 by some 7 million boxes, or about 5 percent of total production.

For the longer term, it has been diversifying into value-added products, such as pre-cut and bagged salads, juices and cut flowers. Dole recently opened its third U.S. plant dedicated to processing pre-packaged vegetables.

“We are not backing away from bananas and pineapples,” said spokesman Thomas Pernice. “But we are trying to grow businesses with greater price stability in order to inoculate ourselves from swings in commodity prices.”

Another way Dole has tried to stabilize its overseas revenues is by purchasing distributors around the world, particularly in Europe.

In September, the company agreed to pay around $90 million for Swedish produce marketer Saba Trading AB, which has a 40 percent market share in that country. The deal should give Dole an edge in that market over competitor Chiquita Brands International Inc., which had been the leading supplier to Saba.

In 1997, Dole expanded its presence in Europe by acquiring Spain’s Pascual Hermanos, and entering a joint venture with Norwegian fruit and vegetable producer Bama Group.

“We have squeezed out as much savings as we can through production efficiency,” said Pernice. “Now we are trying to build a worldwide distribution system that would allow us to deliver produce any place in the world at lower cost.”

The third strategy has been to sell or spin off non-core assets in order to raise capital to pay down the firm’s relatively steep debt. Dole recently sold its dried fruit-and-nut division and has systematically sold off real estate. The sales have allowed the company to reduce its net debt from $891 million in 1996 to around $737 million.

While Dole’s stock has suffered, analysts remain relatively positive.

“They are doing the right thing,” said Ghez. “The main problem was oversupply in bananas, that’s why the share price is depressed. Now they are cutting production and reducing their cost structure.”

The restructuring is also boosting the confidence of fixed-income analysts. In August, the company’s debt rating was raised to Baa2, up from Baa3, by Moody’s Investors Service. Moody’s said at the time that the upgrade was in deference to the company’s emphasis on higher-value-added products, such as pre-packaged salads, as well as enhanced sourcing and distribution capability.

S & P; Rating Services also recently upgraded its long-term outlook for Dole to positive.

“The upgrade has to do with the fact that the company has done a lot to improve their balance sheet,” said analyst Pamela Atkins with S & P; Rating Services. “Over the last couple of years they have sold off non-core assets and reduced debt. They are in a difficult industry because commodity prices change on a daily basis. But despite the challenges, they are doing things that will improve the operations of the company.”