"Cash rich and shovel shy" may best characterize food and beverage companies' current approach to capital projects. Macroeconomic factors and market uncertainty continue to argue for a take-it-slow approach to plant expansions and improvements.
The financial implosion of 2008 dragged down all sectors of the economy. Despite economic hardship, people stubbornly refused to starve, however, and food companies have been able to repair their balance sheets and pay down debt. Signs of life for capital spending appeared last year, but it's premature to proclaim, Laissez les bon temps roulez!
Instead, our survey of 37 of the largest publicly held food and beverage companies turns up only a 5.4 percent budgeted increase for capital outlays this year. We emphasize the word "budgeted." Last year this report predicted a 4.1 percent increase, but if you look at the table on the following page, these companies tightened the purse strings during the course of 2012 and underspent their budgets by 8 percent.
The early months of the year are when processors secure funding for capital projects, but lenders report an eerie quiet in 2013. "We're hungry to finance projects, but nobody is coming," notes Elizabeth Hund, head of the food industries division at US Bank in Denver. "I have never seen the industry in such good shape financially, but capital investments haven't rebooted."
At publicly trade firms, capital expenditures compete for available cash with acquisitions and the care and feeding of stockholders. Stockholders are the big winners in recent years, with aggressive stock buybacks augmenting investor returns. Campbell Soup and ConAgra each repurchased 17 percent of outstanding shares in 2012, and ConAgra also was on an MandA bender.
After warming up with four small acquisitions, ConAgra's long courtship of Ralcorp Holdings ended with a resounding "I do" when Ralcorp accepted a $4.5 billion rock. Capital expenditures, on the other hand, dropped 28 percent, totaling $337 million. But, it's worth noting, ConAgra has a fiscal year that ends May 29, so the suddenly bigger Omaha, Neb., company probably will pump up its capital budget for its fiscal 2014, which starts in just two months.
Architectural and engineering companies rely on major expansions and greenfield projects to pay their bills, and the 2009-2011 period was bleak. Last year saw a revival, although 2013 is merely sustaining the rebound. "I wouldn't call it bullish," says Mark Shambaugh, CEO of Fort Wayne, Ind.-based Shambaugh and Son. "There are still a lot of on-the-fence projects," with economic uncertainty resulting in restrained spending by both public and privately held food companies.
His company was the design/build firm for the magilla of all greenfields: Chobani's Twin Falls, Idaho, yogurt plant, which came on line early this year. Fully equipped, the facility represents a $450 million investment, dwarfing other new-plant projects.
That level of spending may be an aberration, but it will impact other industry sectors. Together, Chobani's newest facility and the soon-to-be-completed Muller-Pepsico yogurt plant in upstate New York will generate byproducts that will create production opportunities for other manufacturers.