Of late, Campbell Soup Company’s (CPB - Analyst Report) business has been countering difficulties due to excess capacity that has mainly resulted from tremendous growth in output, volume declines of U.S. canned soup and the company’s increasing emphasis on new packaging designs, which come in package co-manufacturing contracts.
To clear up this mess, Campbell has decided to shut down two of its manufacturing units – one in Sacramento, California and the other in South Plainfield, New Jersey. The shuttering of these plants will not only address the company’s problem of excess capacity in its U.S. thermal manufacturing network but also help perk up its U.S. supply chain cost structure and asset utilization across its U.S. thermal plant group.
The company expects the shutting down of these plants to position it for profitable growth, while simultaneously improving competitiveness and performance. The company expects this move to help optimize utilization of its U.S. plant network, diversify manufacturing capabilities, lower total delivered costs and enhance flexibility in its manufacturing units.
The oldest in Campbell’s U.S. network, the Sacramento plant, produces soups, sauces and beverages and employs about 700 full-time workers. The company’s decision to shutter this plant is based on the fact that the production cost on a per-case basis at this plant is highest in the group. Moreover, with the closing of this facility the company will save on the capital investments required to maintain a plant as old as this. Campbell plans to close this facility in phases, ceasing all operations by July 2013.
Following the closure of this plant, the company expects to compensate for the lost production of soups, sauces and beverages from the Sacramento plant by improving utilization of its remaining three thermal plants in Maxton, North Carolina; Napoleon, Ohio; and Paris, Texas.
The second Campbell plant in the closure list is its South Plainfield spice plant. This is among the company’s two spice plants supplying ingredients to its U.S. thermal plants, the larger of the two being the plant in Milwaukee. Employing about 27 people, the company plans to close this plant by March 2013. Following the closure, the company will consolidate spice production from its Milwaukee plant.
The closing of these plants is expected to entail pre-tax costs of nearly 115 million for Campbell, majority of which are expected to be incurred in fiscal 2013. Further, the closures will attract capital expenditures of nearly $27 million. However, the complete execution of the said closures is expected to result in annual pre-tax savings of about $30 million starting fiscal 2016, with additional savings of about $21 million in fiscal 2014.
The high-quality foods and simple meals manufacturer, Campbell Soup, operates in a highly competitive food industry and experiences worldwide competition in all its principal products from such well-established rivals as General Mills Inc. (GIS - Analyst Report) and H. J. Heinz Co. .
Currently, Campbell Soup retains a Zacks #3 Rank, implying a short-term ‘Hold’ rating. Moreover, we maintain our long-term ‘Neutral’ recommendation on the stock.