2010 Capital Spending Outlook: Pent-Up Demand Causes an Explosion in Projects

After last year's drop in capital expenditures, budgets for the Food Processing Top 100 survey group are up 19 percent for 2010.

By Dave Fusaro, Editor in Chief

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With an improving economy and pent-up demand for plant improvements, capital spending in the food & beverage industry this year should be up a whopping 19.3 percent, according to Food Processing research. That comes on the heels of an 8.7 percent decline in actual spending in 2009, the first drop we detected in the five years we've been doing this annual outlook.

Our survey of the 32 public companies in our Top 100© list turned up a total of $13.644 billion in capital expenditures budgeted for 2010, up from the $11.439 billion the same companies actually spent in 2009.

A couple of huge companies accounted for a couple of huge increases – PepsiCo, for instance, raised its industry-leading 2009 outlay by 71 percent to $3.6 billion, and Tyson Foods' budget is up 63 percent. But it's not just a few biggies: of those 32 top companies we track, 24 were budgeting increased capital spending for 2010; only three were forecasting decreases.

The reason for the PepsiCo increase is twofold. "First, we spent less in 2009 than in 2008 or 2007. Second, we completed the mergers with our two largest bottlers, PepsiAmericas and Pepsi Bottling Group, earlier this year and we are a bigger company now -- nearly $60 billion," says a spokesman. "In 2010, we do plan to invest in our business, particularly in the areas that will support growth -- such as fleet, coolers, and SAP. We also have a strong focus on emerging markets."

"A lot of people didn't pull the trigger on big projects last year," says John Gunst, packaging design manager at Power Engineers (www.powereng.com/food), Boise, Idaho. He said his company saw the turnaround coming long before the end of 2009, "and it shows no signs of slowing down."

Capital Spending Top Projects in 2010

Our annual report last year at this time foretold the first budgeted decrease in capital expenditures that we had seen. At the time of our report, it was just a 2.9 percent decline. But as the recession deepened, more and more discretionary projects were put on hold. The result was an 8.7 percent decline in actual 2009 spending versus 2008. In fact, 2009 actual spending was 5 percent below what those companies budgeted for the year.

For example, Tyson, which has a fiscal year starting Oct. 1, originally budgeted $600 million for its FY2009, but asked us last April to pencil in a figure of $500 million; the company ultimately spent $368 million.

Fourteen of the companies for which we have a complete set of figures spent less than they budgeted last year; only five spent more.

The first hints of a recovery in food & beverage manufacturing came when we took our annual Manufacturing Trends Survey between Thanksgiving and Christmas; results were in our January issue. Sixty-eight percent of respondents predicted some increase in production this year, and 16 percent foresaw an increase of 20 percent or more. Sixty-six percent expressed optimism coming into the new year. Fifty-five percent of those who knew the figures said their company's capital spending budget would be increasing over 2009 funding. And 60 percent of those familiar with the situation said their plants had deferred important capital projects in 2009 because of the economy.

Despite the fresh memory of the recession, there appears to be a surprising number of greenfield plants on our list this year – and most of those were started during the dark days of 2009. Maybe it was cheap capital or government incentives, but some heroic food & beverage companies continue to build.

Financial incentives played a significant role in ConAgra's decision to build a $155 million plant in Delhi, La. (it's projected to cost $200 million with scheduled upgrades). It will turn local sweet potatoes into foodservice fries for ConAgra's Lamb Weston division.

Louisiana also landed what may be the world's largest sugar refinery, a $120 million joint venture among Imperial Sugar, Cargill and local cooperative Sugar Growers and Refiners Inc. It's being built adjacent to an existing but aging Imperial facility in Gramercy. The project has created 500 construction jobs and should employ 145 when it comes on line in early 2011. It's equally owned by the three partners and was subsidized by federal and state funds to help the region recover from Hurricanes Katrina and Rita.

Coca-Cola Bottling Co. of Shreveport, La., began construction on a $10 million warehouse and distribution center to replace its existing facility there.

Elsewhere, Sara Lee is building a $130 million plant in Kansas City, Mo., to process deli meats for both retail and foodservice under the Hillshire Farm and Sara Lee brands. The 187,000-sq.-ft. facility, which will employ more than 250, should be running in 2011.

With two years of independence under its belt, Dr Pepper Snapple Group is completing its first major capital project, a $120 million bottling and distribution center for the West Coast, in Victorville, Calif. A former Air Force base there is being developed into a distribution hub for a number of companies. The Dr Pepper plant will be 300,000 sq. ft. with 550,000 sq. ft. of warehouse and shipping space.

It may only be an expansion, but it's a big one: Unilever is spending $100 million to enable its Covington, Tenn., plant, which has been producing Slim-Fast products, to make ice cream and frozen novelties (Breyers, Klondike, Good Humor and Popsicle products). The expansion will include the construction of 32,000 sq. ft. of freezer space. Slim-Fast and ice cream in the same plant -- ironic?

Another $100 million expansion is by the Hilmar Ingredients division of Hilmar Cheese Co. at the Dalhart, Texas, facility. The company will double its investment in the plant to make more natural American-style cheese and functional whey products. "Ultimately, the addition will give us the ability to double capacity in Texas," explains President/CEO John Jeter. "We are installing emerging technology to increase our ability to meet our customers' changing needs."

General Mills' is adding on to its Wellston, Ohio, plant, to make pizza. Big G will invest more than $70 million and create 70 new jobs to expand production.

Sanderson Farms has the honor of the biggest percentage increase (+448 percent). After spending $25 million and $49 million in its 2009 and 2008 fiscal years (which end Oct. 31), the Laurel, Miss.-based poultry processor is budgeting $137 million this year. Most of that is for a new processing complex in Kinston, N.C., "which is moving forward as planned and we expect to begin processing chickens at this location in January 2011," said a spokesperson.

The biggest decline belongs to aforementioned Imperial Sugar, and that despite the big new refinery. The Sugarland, Texas, company's capex budgets have traditionally been in the high teens, but it had to spend $163 million last year to rebuild the parts of its Port Wentworth, Ga., sugar refinery that was damaged by an explosion in February 2008. Its $22 million budget for this year, which includes some funds for the Gramercy joint venture, is a return to normalcy.

No (more) skimping on safety

Between foodborne contamination incidents and third-party inspections, food safety is driving some of the capital spending. "Nobody wants to be the next Peanut Corp. of America," says Gunst of Power Engineers.

"We're seeing a lot of projects relating to food safety," says Mike Murphy, a vice president in the food division of SSOE (www.ssoe.com), a Toledo, Ohio, engineering and architectural firm. "A lot of the facilities out there are dated and especially [susceptible] to microorganisms. They were not built with sanitation in mind, so they need improvements in sanitation and cleanability."

Gunst agrees, noting activity in completely new floor drain systems; in washrooms, lockers and footbath areas for personnel sanitation; and in new walls, HVAC systems and other ways of segregating raw from cooked areas of the plant.

Gunst also says Power Engineers is being employed as kind of a third-party inspector, with larger processors sending Power employees out to assess suppliers' facilities from an AEC firm's viewpoint.

The emphasis on food safety includes allergens, so Burns & McDonnell (www.burnsmcd.com/fcp), Kansas City, Mo., is seeing some activity in new lines that will never run peanut and wheat-containing products, says David Dixon, senior director of strategic accounts.

"Overall, there's a lot more emphasis on cost justification, and often that means more throughput on the same lines," says Dixon. "It might mean de-bottlenecking a line, adding a new conveyor or some other line modification – anything to increase capacity without building new."

And it's not just about throughput or food safety. "There are always opportunities, especially in the food industry, to take out costs and to invest in automation," says Todd Allsup, vice president of food & beverage facility services at Stellar (www.stellar.net), Jacksonville, Fla. "There are trends toward more visibility to the plant floor, for collecting data and using it to manage the business better.

"It seems a lot of companies in the past year held onto their cash waiting for the economy to shake out," he continues. "I think the better companies have some cash on their books and are ready to spend."

Other projects
Among General Mills' $630 million capex funds are "projects relating to growth": capacity for grain snack bars, yogurt and cereal. Plus $30 million of the budget goes toward completing the replacement of a Latin American plant destroyed by fire in 2008.

Smithfield Foods has spent heavily in recent years to increase capacity and build new plants. It spent $460 million in fiscal years 2007 and 2008. But the company, which recorded a $190 million loss last year, spent just $175 million in 2009 and forecasts the same amount for 2010.

While some of Tyson Foods' spending will be for traditional, domestic projects, the 2010 projection does include significant spending on international operations (especially China and Brazil) as well as the completion of the new Dynamic Fuels plant in Geismar, La. This joint venture between Tyson and Syntroleum Corp. will produce diesel from non-food-grade animal fats rendered or procured by Tyson, such as inedible beef tallow, pork choice white grease, chicken fat and used cooking grease. It's expected to be operational this summer.

Reser's Fine Foods will create 500 new jobs, according to local press reports, in an expansion of its Halifax County chilled deli salads plant. The company reportedly is spending $15 million this year in the first of a three-phase expansion of the plant.

Lance acquired the Stella D'Oro brand last October, and notes that some of its increased cap spending will be to upgrade those facilities.

Chiquita expects "slightly higher capital expenditures in 2010 as we continue to invest in our salads business."

TreeHouse Foods' spending is for food safety, quality and productivity improvements and installation of an ERP system.

It opened late last year, but Mars Petcare last September opened the doors on a LEED Gold-certified pet food plant in Fort Smith, Ark. The $80 million, 305,000-sq.-ft. facility will produce Cesar Canine Cuisine. It's Arkansas' first sustainable manufacturing facility and the first sustainable pet food manufacturing facility in the world.

Minneapolis-based Malt-O-Meal has been enjoying the past year's trend toward private label foods. The family-held cereal maker late last year opened its first facility in the east, in Asheboro, N.C. The 350,000-sq.-ft. facility sits on 33 acres and "represents an investment of $140 million." It should employ 133. It already is producing Frosted Mini Spooners and Frosted Flakes and has room for additional lines.

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