netrashetty
Netra Shetty
Crown Holdings, Inc. (NYSE: CCK) is one of the largest manufacturers of beverage and food cans (usually for soda and soup) in the U.S. In 2006, Crown generated over $7 billion in revenue with an overall operating margin of about 3%[1]. Although a significant portion of the company's manufacturing takes place in the United States, nearly 78% of Crown's net sales come from outside the US (mostly in Europe). This international exposure has benefited the company as the the dollar has continued its decline against the Euro and the British Pound, making Crown's products relatively cheaper to customers in two of its largest markets.
Crown makes a substantial portion of its products in the United States and Europe. As competition from foreign-based companies that use cheaper, outsourced labor from emerging markets grows, the company will face mounting pricing pressures. In response to these pressures, Crown has begun reducing its costs by closing several unprofitable divisions, better controlling its raw materials costs through future contracts and perhaps most importantly, increasing the portion of its manufacturing that takes place in developing countries.
Business Overview
[2]
Crown Holdings, Inc. operates in four main market segments: beverage cans, food cans and closures, aerosol cans, and specialty packaging.
Beverage Cans: Crown supplies beverage cans and ends and other packaging products to a variety of beverage and beer companies, including Anheuser-Busch Companies (BUD), Cadbury Schweppes (CSG) and Coca-Cola Company (KO). Beverage can manufacturing is capital intensive, requiring significant investment in tools and machinery. Beverage Can sales in North American and Europe combined amount to 41% of Crown's annual sales in 2006.
Contents
1 Business Overview
2 Key Trends and Forces
2.1 Aluminum, steel critical factors in determining profitability
2.2 Weather affects amount of food to be packaged
2.3 High exposure to foreign markets and weakening dollar makes Crown's products more attractive
2.4 New Beverage Consumption Trend
3 Competition
4 References
Food Cans and Closures: Crown manufactures a variety of food cans and sells them to food marketers including Campbell Soup Company (CPB), ConAgra Foods (CAG), Continental and H.J. Heinz Company (HNZ). Food Can sales in North American and Europe combined amount to 37% of Crown's annual sales in 2006.[3].
Aerosol Cans: Crown manufactures aerosol cans for manufacturers of personal care, food, household and industrial products, including CCL Industries, Faultless Starch-Bon Ami and Gillette. Aerosol can sales in Europe amounted to about 14% of Crown's 2006 annual sales.[4]
Specialty Packaging: Crown's specialty packaging primarily serves major European companies such as Abbott Laboratories (ABT), Akzo Nobel N.V. (AKZOY), Nestlé . Specialty packaging in Europe amounted to about 6% of Crown's 2006 annual sales.[5]
[6]
From 2001 through 2005 Crown experienced stagnant revenue and falling profitability. The bankruptcy of its largest food can customer, economic turmoil in South American countries where it bases many manufacturing operations, and asbestos related legal settlements totaling over $900 million over asbestos cases [7]. However, Crown has managed to recuperate since then.
Crown's profits doubled from $139.6MM in 2005 to $205MM in 2006, mainly from selling its unprofitable European plastics operations and its Americas health and beauty care operations. The transaction resulted in proceeds of $627MM and lowered annual operating costs by $47MM. [8]. Favorable dollar conversion rates also helped increase the income from the European sales and manufacturing operations, resulting in profit increases.
Key Trends and Forces
Aluminum, steel critical factors in determining profitability
Aluminum and Steel were responsible for 29% and 31% of the company's direct production costs in 2006. These materials are purchased in highly competitive, price-sensitive markets which are often unpredictable. In 2006, the average market price for steel used in packaging increased approximately 6% and the average price of aluminum ingot on the London Metal Exchange increased approximately 35% during 2006[9]. This added cost would have wiped out close to 12% of Crown's operating income and so, forced Crown to increase its prices, resulting in a decrease of $100 MM in sales from 2005 [10].
Weather affects amount of food to be packaged
The food packaging business is seasonal with the first quarter as the slowest period since the autumn packing period in the Northern Hemisphere ends and new crops are not yet planted. The food packaging industry enters its busiest period in the third quarter when the majority of fruits and vegetables are harvested. Weather represents a substantial uncertainty in the yield of food products and is a major factor in determining the demand for food cans in any given year. A fierce winter storm in Brazil in 2003 led to heavy damage to coffee trees and the coffee bean production. This subsequently led to a drop in Crown's sales of specialty containers to South America that year.
High exposure to foreign markets and weakening dollar makes Crown's products more attractive
Since a large portion of Crown's sales in its Food and Beverage packaging sectors are in Europe and more than 70% of Crown's sales are generated outside the United States, fluctuations in exchange rates heavily influences the company's profitability. Generally speaking, a weak dollar increases demand for Crown's products abroad, by making them more affordable, while resulting in an increase in sales dollars, when the higher currency is translated back into dollars for reporting purposes.
New Beverage Consumption Trend
Due to a growing consumption of energy drinks and the increasing price of aluminum, Crown has shifted its production away from the traditional 12-ounce aluminum cans and equipped more facilities to produce slimline specialty cans (i.e. Red Bull) that require less aluminum. This move better positioned them for the shifting market and caused Crown's beverage packaging revenues to increase 14.6% in the Americas and 18% in Europe in 2006 [11].
Competition
Crown competes with other packaging manufacturers as well as with food processors and packers who manufacture containers for their own use. Crown's biggest competitors include Amcor (AMCR), Ball (BLL), Rexam (REXMY), and Silgan Holdings (SLGN).
Amcor (AMCR)-an Australian based packaging company that specializes in Polyethylene Terephthalate, plastic film, metals, and paper products packaging manufacture and sales. [12]
Ball (BLL)-an American manufacturer of metal and plastic packaging, primarily for beverages, foods and household products, and a supplier of aerospace and other technologies and services to government and commercial customers.[13]
Rexam (REXMY)-a British packaging company who specializes in metal, glass and plastic beverage packaging as well as plastic packaging solutions for beauty, pharmaceutical and food industries.[14]
Silgan Holdings (SLGN)- an American manufacturer of steel and aluminum food containers, custom designed plastic containers, and tubes and closures for a variety of consumer uses.[15]
Crown and Major Competitors (2006)[16]
Company Total Sales ($Mil) Net Profits($Mil) Cost of Goods ($Mil) Gross Margin ($Mil)
Crown Cork & Seal Company (CCK) $6,982 $205.0 $5,863 2.94%
Amcor (AMCR) $8,240 $379.2 $6,870 4.60%
Ball (BLL) $7,141 $329.6 $5,540 4.61%
Silgan Holdings (SLGN) $2,835 $104.2 $2,305 3.68%
Rexam (REXMY) $7,476 $223.0 $5,854 2.98%
Crown makes a substantial portion of its products in the United States and Europe. As competition from foreign-based companies that use cheaper, outsourced labor from emerging markets grows, the company will face mounting pricing pressures. In response to these pressures, Crown has begun reducing its costs by closing several unprofitable divisions, better controlling its raw materials costs through future contracts and perhaps most importantly, increasing the portion of its manufacturing that takes place in developing countries.
Business Overview
[2]
Crown Holdings, Inc. operates in four main market segments: beverage cans, food cans and closures, aerosol cans, and specialty packaging.
Beverage Cans: Crown supplies beverage cans and ends and other packaging products to a variety of beverage and beer companies, including Anheuser-Busch Companies (BUD), Cadbury Schweppes (CSG) and Coca-Cola Company (KO). Beverage can manufacturing is capital intensive, requiring significant investment in tools and machinery. Beverage Can sales in North American and Europe combined amount to 41% of Crown's annual sales in 2006.
Contents
1 Business Overview
2 Key Trends and Forces
2.1 Aluminum, steel critical factors in determining profitability
2.2 Weather affects amount of food to be packaged
2.3 High exposure to foreign markets and weakening dollar makes Crown's products more attractive
2.4 New Beverage Consumption Trend
3 Competition
4 References
Food Cans and Closures: Crown manufactures a variety of food cans and sells them to food marketers including Campbell Soup Company (CPB), ConAgra Foods (CAG), Continental and H.J. Heinz Company (HNZ). Food Can sales in North American and Europe combined amount to 37% of Crown's annual sales in 2006.[3].
Aerosol Cans: Crown manufactures aerosol cans for manufacturers of personal care, food, household and industrial products, including CCL Industries, Faultless Starch-Bon Ami and Gillette. Aerosol can sales in Europe amounted to about 14% of Crown's 2006 annual sales.[4]
Specialty Packaging: Crown's specialty packaging primarily serves major European companies such as Abbott Laboratories (ABT), Akzo Nobel N.V. (AKZOY), Nestlé . Specialty packaging in Europe amounted to about 6% of Crown's 2006 annual sales.[5]
[6]
From 2001 through 2005 Crown experienced stagnant revenue and falling profitability. The bankruptcy of its largest food can customer, economic turmoil in South American countries where it bases many manufacturing operations, and asbestos related legal settlements totaling over $900 million over asbestos cases [7]. However, Crown has managed to recuperate since then.
Crown's profits doubled from $139.6MM in 2005 to $205MM in 2006, mainly from selling its unprofitable European plastics operations and its Americas health and beauty care operations. The transaction resulted in proceeds of $627MM and lowered annual operating costs by $47MM. [8]. Favorable dollar conversion rates also helped increase the income from the European sales and manufacturing operations, resulting in profit increases.
Key Trends and Forces
Aluminum, steel critical factors in determining profitability
Aluminum and Steel were responsible for 29% and 31% of the company's direct production costs in 2006. These materials are purchased in highly competitive, price-sensitive markets which are often unpredictable. In 2006, the average market price for steel used in packaging increased approximately 6% and the average price of aluminum ingot on the London Metal Exchange increased approximately 35% during 2006[9]. This added cost would have wiped out close to 12% of Crown's operating income and so, forced Crown to increase its prices, resulting in a decrease of $100 MM in sales from 2005 [10].
Weather affects amount of food to be packaged
The food packaging business is seasonal with the first quarter as the slowest period since the autumn packing period in the Northern Hemisphere ends and new crops are not yet planted. The food packaging industry enters its busiest period in the third quarter when the majority of fruits and vegetables are harvested. Weather represents a substantial uncertainty in the yield of food products and is a major factor in determining the demand for food cans in any given year. A fierce winter storm in Brazil in 2003 led to heavy damage to coffee trees and the coffee bean production. This subsequently led to a drop in Crown's sales of specialty containers to South America that year.
High exposure to foreign markets and weakening dollar makes Crown's products more attractive
Since a large portion of Crown's sales in its Food and Beverage packaging sectors are in Europe and more than 70% of Crown's sales are generated outside the United States, fluctuations in exchange rates heavily influences the company's profitability. Generally speaking, a weak dollar increases demand for Crown's products abroad, by making them more affordable, while resulting in an increase in sales dollars, when the higher currency is translated back into dollars for reporting purposes.
New Beverage Consumption Trend
Due to a growing consumption of energy drinks and the increasing price of aluminum, Crown has shifted its production away from the traditional 12-ounce aluminum cans and equipped more facilities to produce slimline specialty cans (i.e. Red Bull) that require less aluminum. This move better positioned them for the shifting market and caused Crown's beverage packaging revenues to increase 14.6% in the Americas and 18% in Europe in 2006 [11].
Competition
Crown competes with other packaging manufacturers as well as with food processors and packers who manufacture containers for their own use. Crown's biggest competitors include Amcor (AMCR), Ball (BLL), Rexam (REXMY), and Silgan Holdings (SLGN).
Amcor (AMCR)-an Australian based packaging company that specializes in Polyethylene Terephthalate, plastic film, metals, and paper products packaging manufacture and sales. [12]
Ball (BLL)-an American manufacturer of metal and plastic packaging, primarily for beverages, foods and household products, and a supplier of aerospace and other technologies and services to government and commercial customers.[13]
Rexam (REXMY)-a British packaging company who specializes in metal, glass and plastic beverage packaging as well as plastic packaging solutions for beauty, pharmaceutical and food industries.[14]
Silgan Holdings (SLGN)- an American manufacturer of steel and aluminum food containers, custom designed plastic containers, and tubes and closures for a variety of consumer uses.[15]
Crown and Major Competitors (2006)[16]
Company Total Sales ($Mil) Net Profits($Mil) Cost of Goods ($Mil) Gross Margin ($Mil)
Crown Cork & Seal Company (CCK) $6,982 $205.0 $5,863 2.94%
Amcor (AMCR) $8,240 $379.2 $6,870 4.60%
Ball (BLL) $7,141 $329.6 $5,540 4.61%
Silgan Holdings (SLGN) $2,835 $104.2 $2,305 3.68%
Rexam (REXMY) $7,476 $223.0 $5,854 2.98%