Are Capital Spending Fortunes Improving?

Several companies are placing big bets on the recovery by building 'world's largest' processing plants.

By Dave Fusaro, Editor in Chief

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At least some companies are beginning to believe the economy is in recovery mode. Emboldened by the Wall Street bulls and eager to borrow money before interest rates go up another quarter-point or more, a number of food processors are beginning to invest in their plants and company infrastructure at levels modestly above last year's rate.

Americans' growing appetite for cheese as an ingredient has been sated by a series of huge cheese plants in the West, the newest being this $192 million facility for SouthWest Cheese in Clovis, N.M.

A spot survey of 10 of the larger companies, while not statistically defensible, nevertheless shows an increase of nearly 5 percent in their capital spending budgets for 2005. While some sizable companies are cutting back – General Mills, for example, is down 27 percent – most of those who responded to our survey are spending more, many of them significantly more, on capital improvements this year.

Tyson is one of the bright spots. The animal protein company has budgeted $600-650 million for the current year, up considerably from the $486 million last year and $402 million in 2003. A big piece of the current budget is going to a major plant overhaul, but there are numerous other projects in the work meant to increase capacity and generally put the company on a growth trajectory.

ConAgra's budget is up 36 percent, to $475 million. While much of the money will be going toward information systems upgrades, a fair amount will go toward "machinery, equipment, real estate improvements – things one would expect from a major manufacturer," according to Christopher Kircher, vice president of corporate communications.

Campbell Soup has budgeted $380 million for the current year, up nearly $100 million from 2004 and 2003. Here, too, part of the reason are information system upgrades, but the soup company's budget includes a major expansion of a North Carolina plant and finishing touches on a 2004 expansion of another.

About $40 million is budgeted on the Maxton, N.C., plant to increase capacity for microwaveable bowls and the Soup-at-Hand product line. The project should be complete this summer. Only finishing touches remain in a largely 2004, $20 million project at Marshall, Mich., which added new cookers, canning and warehousing and increased capacity by about 50 percent. It also added 60,000 sq. ft.

The bulk of Campbell's capital budget will go for an enterprise resource planning software upgrade and for trucks, warehouses and other components in a takeover of distribution in Australia.

Getting back to General Mills, the Minneapolis company has been reducing spending for at least the past two years. After spending $750 million in 2003, just over a year after the Pillsbury acquisition, capital expenditures dipped to $653 million in 2004 and are forecast at $450-500 million this year. The company has been more interested in debt reduction, allocating $47 million in 2003, $572 million (just under capital spending) in 2004 and $625 million in 2005. It also has been increasing dividends.

Kraft, traditionally the biggest spender, is holding steady. The leading food firm budgeted $1-1.1 billion for capital this year, at least in line with the $1.006 billion spent last year. But there are no big bricks-and-mortar projects planned. "Approximately two-thirds of the spending will be on 'profit-enhancing' projects (such as cost reduction and new products) and one-third will be on 'profit maintenance' (equipment replacements, systems infrastructure)," says a spokesperson.

Some 'world's largest' projects

The biggest project currently under way is a $192 million American cheddar cheese plant in Clovis, N.M., for SouthWest Cheese Co. The company is a joint venture, formed just for this purpose, among global cheese producer Glanbia Foods (based in Ireland with U.S. headquarters in Twins Falls, Idaho) and two large milk cooperatives — Dairy Farmers of America and Select Milk Cooperative — as well as some local producers.

Gargantuan cheese plants in the Mountain Time Zone have been nearly annual occurrences in the past 10 years, with each new one eclipsing the size of the previous continental record-holder. This 340,000-sq.-ft. cheese factory will be North America's largest when it is commissioned this October, employing 225 at full production. It will consume 6.6 million lbs. of milk each day to produce industrial-size chunks of cheese: 40-lb. blocks, 500-lb. barrels and 640-lb. barrels. A valuable byproduct will be 275,000 lbs. of high-quality, 80 percent concentration whey protein per hour.

A really close second in terms of spending is a $180 million expansion and overhaul that will triple the capacity of Dreyer's Grand Ice Cream's Laurel, Md., plant. Ground was just broken last November. The project also will add a state-of-the-art warehouse to serve the eastern U.S. and will create more than 300 new jobs (current employment is 220) by the time the project is completed in 2007.

The facility was owned by Nestle Ice Cream Co. but was handed over to Oakland, Calif.-based Dreyer's as part of the two companies' 2002 merger. Till now, the plant has been dedicated to frozen novelties, but this 600,000-sq.-ft. expansion will introduce two packaged ice cream lines, enabling the manufacture of Haagen-Dazs and some other packaged products. It also includes 10 new frozen snack production lines plus 200,000 sq. ft. of frozen warehouse space. Total square footage for the Laurel plant will be nearly 700,000 sq. ft. when completed.

Dreyer's has another plant expansion on the list of the 10 largest capital projects for 2005. The company broke ground mid-year 2004 on a $100 million expansion that also will triple the capacity of the former Nestle Ice Cream Bakersfield, Calif., plant. It will create 250 new jobs and should open before summer.

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