2011 Capital Spending Outlook: Benjamins for Bricks (and Mortar)

Our annual Capital Spending Report foresees a 20 percent increase.

By Bob Sperber, Plant Operations Editor

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Most savings to date have come from the U.S. retail businesses, but General Mills says the program also is bringing state-of-the-art manufacturing processes and global sourcing of packaging and ingredients to its international business. The company sees HMM as a way to protect margins as commodity and energy costs increase. "Our goal is to capture a cumulative $1 billion in supply chain HMM savings from fiscal 2010 through fiscal 2012, and we are targeting $4 billion in cumulative savings worldwide over the decade to 2020," states the annual report.

Hershey's Project Next Century requires extra investment this year in order to realize cost benefits in the long run – an estimated $60-80 million a year starting in 2014. But it also earmarks $200-225 million to upgrade the Key West Hershey production facility, thereby explaining a big part of the company's 89 percent budget increase for 2011.

Big spenders
Most of PepsiCo's year-over-year rise in spending is related to recent acquisitions. Its capex budget includes about $150 million related to the integration of its two largest bottlers, Pepsi Bottling Group and PepsiAmericas, acquired in 2009. Additional capital spending will be earmarked for the company's $3.8 billion majority acquisition of Wimm-Bill-Dann Foods OJSC, in February. This is a company incorporated in the Russian Federation, a "fast-growing, strategically important market offering abundant opportunity," according to Indra Nooyi, PepsiCo chairman and CEO. She said the company's dairy operations will help capitalize on "a huge, untapped potential to bridge snacks and beverages. We see the emerging opportunity to 'snackify' beverages and 'drinkify' snacks as the next frontier in food and beverage convenience."

Pepsi's rival Coca-Cola, too, upped its capital expenditures to integrate a major bottler -- which explains why its capex budget is up a whopping 40 percent to $1.1 billion for 2011. Last October, Coke acquired the North American business of Coca-Cola Enterprises (CCE). Beyond integration, the budget will include investments "to further enhance our operational effectiveness." Expenditures specific to the added bottling business accounts for an estimated $1 billion of its 2011 capital expenditure program, the company reports.

Anheuser-Busch Inbev plans to spend $2.7-2.9 billion for 2011, targeting building capacity to meet demand in key growth markets "and to drive our commercial innovation pipeline." This is consistent with last year's capital spending, which was "primarily related to higher investments in the growth regions of Brazil and China," the company reports. Of total spending, 53 percent went to improvements at production facilities and 38 percent went to logistics and commercial investments.

J.M. Smucker's 72 percent spending hike comes partly from restructuring. Production consolidations and its Folgers acquisition occupied spending in 2010. This year, the company continues consolidating coffee, fruit spreads, syrups and topping production, closing four plants while expanding three. Some $150 million will be spent to complete a new plant in hometown Orrville, Ohio.

Seaboard Corp. budgets a 105 percent increase and, while the pork segment gets a nice bump to $33.5 million (from just $9.6 million in 2010), the big increases are in the diversified company's nonfood Marine segment ($51.4 million in total) and Power segment ($87.4 million).

TreeHouse Foods' 113 percent increase in capital spending to a budget of $85 million this year includes safety, quality and productivity improvements, upgrades at its San Antonio, Texas, salsa and North East, Pa., salad dressing facilities – both facilities acquired in 2007. The company also plans to invest about $10 million for a new enterprise resource planning system following a roughly $25 million system investment last year.

Lancaster Colony is planning a plant expansion at its Kentucky frozen roll facility, reflected in a major bump in spending from $13 million to $43 million.

Reductions & reasons

This year, six companies have reduced their capital budgets, compared to three last year. Only Imperial Sugar has reduced spending both years in a row, with the biggest decrease in our group, a 68 percent reduction. Why? The company completed repairs to its fire-ravaged Port Wentworth, Ga., refinery, and also finished kicking in its share for the new Gramercy, La., plant. The latter is the result of a three-way joint venture with Cargill and co-op Sugar Growers and Refiners. The plant is expected to be complete midyear and will replace Imperial's current facility to reach an estimated 50 percent increase in capacity in 2012.

The next-largest capex reduction in our group belongs to Sanderson Farms. The poultry company trims capital spending by 54 percent as it nears completion of a new Kinston and Lenoir County, N.C., poultry complex, which accounted for $108 million of $145 million spent last year. Sanderson's dip in capital expenditures could be temporary, however. While not in the budget for 2011, another new 1.25-million bird-a-week plant, possibly for Goldsboro, N.C., is waiting in the wings if Sanderson can get approval.

On the heels of a capex reduction in 2010 from a budgeted $350 million, Campbell Soup earlier this year announced it would spend $300 million, but since has adjusted that figure down to $275 million as it struggles with low margins, earnings and cash flow.

Pilgrim's Pride, Del Monte and Flowers Foods also reduced spending plans, as did Smithfield Foods. Some, including Smithfield, Pilgrim's Pride and Tyson Foods were pushed into high-yield bonds in large part due to the volatility of doing business with livestock, according to Wells Fargo's Hunt.

High feed costs and excess supply in the pork market hurt profits for animal protein companies, but there's been a "significant turnaround" in the past 18 months, says Hunt. Tighter hog supplies and rising pork prices make pork packing "amazingly profitable right now," he says, hitting weekly records not seen in more than a decade. Healthy profits, which Hunt sees continuing through 2011, "will give Smithfield the wherewithal to pay off their debt, but also the latitude and the fortitude to spend more money on capex."

Maybe Smithfield bit off more than it could chew with its restructuring program, now in its third year. But after spending more than $80 million on processing and manufacturing operations, the company will move upstream to streamline its raw material inputs to retain its role as a low-cost producer.

Asked for the lesson Smithfield teaches, Hunt says it's important to mind internal operations even when growing and consolidating in the good times. "Capital is precious. At any given point in time you never know when capital markets are going to turn away from you or not in your favor. And when acquisitions are made or consolidations occur, you need to turn the juicer and extract every possible dime at every possible moment," he adds.

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