Profits boosted by two provisions

With the chief executive of Fyffes, Mr David McCann, now finished his first full day in the witness box, some feeling for the amount of exposure the Irish corporate world is to be exposed to is becoming apparent, writes Colm Keena

Going through his witness statement, Mr McCann gave the court an insight into his view of how Fyffes was doing in late 1999 and early 2000, the period immediately prior to the sale of Fyffes shares by DCC in February 2000.

Board packs were sent to Fyffes directors prior to each of its board meetings. Monthly accounts were sent between meetings as were information memorandums. Mr Jim Flavin, chairman of DCC, was a non-executive director of Fyffes.

Since becoming a plc in 1981, Fyffes had an excellent record of profit growth, up to 1999. The annual growth in profits was a factor of both acquisitions and improvements in trading.

Business in the UK was a large part of Fyffes' banana division's operations. Banana prices in the UK were on the floor in 1999 and in September, Fyffes' UK business recorded a loss.

The situation in the UK had been proving difficult since April 1999, with huge competition and an oversupply of bananas. (The price of bananas in Ireland "held up" despite the worldwide glut in the product.) "It was just a very, very bad time," Mr McCann said.

The company's financial year ended on October 31st, 1999. The figures for the year, when released, came in ahead of the previous year and so the market was pleased.

However, what the market did not know was that the profits figure had been boosted by the release of two provisions which had to do with Hurricane Mitch and loans to banana growers. This had the effect of boosting the 1999 figures by €19 million, almost a quarter of the total profit for the year.

Without the boost, Fyfffes would not have achieved an increase in profits in 1999.

For 2000, Fyffes budgeted for a profit of €84.1 million. This would be an improvement of approximately 5 per cent. What the public did not know was that the company would have to achieve this increase in profits while starting out from a position where it was already €19 million down on the previous year's outcome (because the released provisions contribution to the 1999 figure would not re-occur).

"We had got through (1999) by the skin of our teeth, with the help of appropriate and proper provisions," Mr McCann said.

The market was not told of the role the provisions played in the 1999 results. "We didn't tell anyone. We didn't have an obligation to report that detail," Mr McCann said.

He said the targets for 2000 were "very challenging".

Mr Flavin attended the board meeting on October 29th, 1999, where the 2000 budget was presented and discussed.

Trading in the UK in bananas produced another loss in October. November was again bad. On December 14th, 1999, Fyffes announced its preliminary results statement for 1999 to the stock exchange.

The then chairman, Mr Neil McCann, said the company had the strongest balance sheet in the international fresh produce sector... "The board believes that from this position of strength, 2000 will be another year of growth for Fyffes."

The first three months of the 2000 year (November and December 1999, and January 2000), produced the worst first quarter results produced by Fyffes in the previous 10 years. A report to directors, including Mr Flavin, on January 25th, 2000, outlined the grim situation.

If it was to meet market expectations for 2000, Fyffes would have to perform wonderfully well in the remaining nine months.

Yet in February 2000, the Fyffes share price was at unprecedented heights. To a significant extent, this was due to market enthusiasm for its worldoffruit.com project.

In the period February 3rd to February 14th, DCC offloaded most of its Fyffes shareholding, for €106 million. On March 20th, 2000, Fyffes issued a profit warning. Within two days the share price fell by 25 per cent.