2016 Capital Spending Report: Partners in CapEx

Manufacturing ventures entail risk, and food processors increasingly are partnering with other food companies to mitigate the risk of new-plant projects.

By Kevin T. Higgins, Managing Editor

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The Age of the Plant Partnership is upon us, if the greenfield projects currently under way in the food industry are any indication.

Colocation of a key supplier’s operations adjacent to a food or beverage production plant is not unusual, provided throughput is sufficient to justify it. When Gatorade embarked on a series of new plant constructions a decade ago, blowmolding facilities usually were built on the property, with a corridor delivering PET bottles just in time. And when Beef Products Inc. set up shop in Dakota Dunes, S.D., for its meat recovery process, trim meat from the Tyson packinghouse next door arrived via an enclosed conveyor line.

But a new breed of plant partnerships is cropping up. Perhaps it’s a risk mitigation strategy or an effort to share the cost of multi-million-dollar projects, but collaborations between food companies are becoming more common. Available cash and perhaps access to a credit facility underwrite greenfield projects and major plant expansions, sometimes over the course of several years’ budgets. A Hershey Co. confectionery plant that came on line last year in Malaysia accounted for almost one-third of the company's 2015 capital expenditures, though the plant’s total price tag of $270 million was spread over three years.

Sharing the cost of projects of that magnitude may account for an uptick in joint projects. For a new pork plant in Coldwater Township, Mich., Pennsylvania’s Clemens Food Group LLC forged a partnership with Cooper Farms, an Ohio turkey processor. Sharing the cost of a $255.7 million project – which represents about 70 percent of Clemens’ annual sales – has obvious appeal.

Seaboard Foods and Triumph Foods formed a 50/50 partnership last year for a pork processing facility that will come on line next year in Sioux City, Iowa. For Seaboard and Triumph, joint ventures are standard operating procedure: The two companies also share ownership of bacon processing plants in Salt Lake City and Missoula, Mont.

J.R. Simplot Co. could have self-funded a $100 million packing house under development in Kuna, Idaho, but it chose to go the joint venture route with Caviness Beef Packers, Amarillo, Texas. Caviness may be 1,200 miles away, but core competency, like currency, travels well.

Wayne Farms LLC hasn’t struck any formal partnerships with other food companies, but some downstream customers who are described as business partners are re-shaping its production. Wayne’s Dothan, Ala., discontinued deboning and other further processing after Ala-Trade Foods contracted for the facility’s entire capacity of whole birds, or wads. That resulted in the layoff of 580 workers, but 500 new jobs are being created by a Dothan expansion that will double the plant’s capacity. The scenario is being repeated at Wayne’s Laurel, Miss., facility.

Bricks, mortar and machines

Greenfield projects are the rock stars of CapEx, a budgetary category that typically equates to about 3 percent of company revenues in any given year. Analysis of spending by 46 publicly traded food companies bears this out. In 2014, those companies doled out $15.6 billion in capital expenditures, a figure equal to 3.49 percent of 2014 sales. A dozen of those corporations experienced sales declines in 2015, and aggregate capital outlays dipped to $14.7 billion. Still, that represented 2.94 percent of total sales.

All told, those 46 companies anticipate $21.3 billion in 2016 CapEx spending. If the last two years’ pattern prevails, actual spending will be about 88 percent of that. (Budgeted capital funds for Monster Beverage Co. have been excluded from calculations. Monster’s 2016 CapEx budget of $2.8 billion is 23 times greater than 2015 spending and exceeds 2015 revenues. It includes the acquisition cost for American Fruits and Flavors plus share repurchases).

Adding production capacity is easier to justify when market demand grows or raw materials are abundant. Those factors are reflected in many of today’s plant projects. Distilled spirits in general and bourbon whiskey in particular illustrate the impact of demand. In the past two years, Kentucky has seen $581 million in bourbon and brewing projects, with more on the way. Drinkers outside the U.S. are getting their first taste of this distinctive American spirit, and they like it.

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