Crown Cork & Seal Company (CCK)

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See all Bulls Reasons Bulls: Reasons To Buy Exports will increase due to cheaper prices for international customers 0% agree Exports will increase due to cheaper prices for international customers With a weak dollar, Crown will see a gain in its main sectors of European food and beverage packaging as exports will increase due to cheaper prices for international customers. Sales in the European food business were up 8.5% during the quarter, driven largely by currency (+8%), and a modest lift from pricing (+0.5%) and volumes (+1.5%)[1]. View or Edit Reason 0 votes 0% agree Increased profitability should be sustainable 0% agree Increased profitability should be sustainable Following the divestment of its plastics business, Crown has been able to earn operating margins more in line with the rest of its industry. Profitability of around 8%, which the company earned for 2005 and 2006, should be sustainable. View or Edit Reason 0 votes 0% agree Successful track record in politically complicated countries provides more opportunities of growth 0% agree Successful track record in politically complicated countries provides more opportunities of growth Crown's global scale and history of multinational operations provide the company with opportunities for growth in an industry where growth is not often found. Management has a track record of successfully operating in regions that are politically complicated,... read more View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Standard products has led to market saturation 0% agree Standard products has led to market saturation The worldwide food and beverage can markets have experienced limited growth in demand in recent years. Food and beverage cans are standardized products, allowing for relatively little differentiation among competitors. This has led to overcapacity and price... read more View or Edit Reason 0 votes 0% agree Highly leveraged business 0% agree Highly leveraged business Crown Holdings is highly leveraged with $3.5 billion of total indebtedness and shareholders’ deficit of $545 million[1]. As a result of its substantial indebtedness, a significant portion of CCK's cash flow is required to pay interest and principal on its... read more View or Edit Reason 0 votes 0% agree Significant pension plan obligations could affect financial growth negatively 0% agree Significant pension plan obligations could affect financial growth negatively The Company has significant pension plan obligations worldwide and significant unfunded U.S. postretirement obligations (by approximately $134 million[1]), which could reduce its cash flow and negatively impact its financial condition. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Jack Phiyong Mo Related Articles Rexam (REXMY) Abbott Laboratories (ABT) Akzo Nobel N.V. (AKZOY) Aluminum Prices Amcor (AMCRY)

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.

[edit] 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.

• 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.

[edit] Key Trends and Forces

[edit] 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].

[edit] 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.

[edit] 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.

[edit] 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].

[edit] 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]

[edit] References

1. ↑ CCK 2006 10k, Pg 1
2. ↑ CCK 2006 10k, Pg 1-3
3. ↑ CCK 2006 10k, Pg 7
4. ↑ CCK 2006 10k, Pg 9
5. ↑ CCK 2006 10k, Pg 10
6. ↑ CCK 2006 10k p21
7. ↑ CCK 2002 10k p 21
8. ↑ CCK 2006 10k, Pg 15
9. ↑ CCK 2006 10k p 14
10. ↑ Figures computed from stats on CCK 2006 10k p 24-25
11. ↑ [CCK Morningstar Analyst Report 7-19-2007]
12. ↑ AMCRY 2006 20f
13. ↑ BLL 2006 10k
14. ↑ REX 2006 20f
15. ↑ SLGN 2006 10k
16. ↑ [All Data from respective annual reports (10k, 20f, or 40f) filed with the SEC]