2014 Capital Spending Report: New Projects Line Up

April 7, 2014
Small brewers are among the leaders in our annual look at construction, which foresees a 15 percent increase.

Packaged bacon and other value-added production is driving annual revenue growth of 3-4 percent at Tyson Foods. Pork and chicken consumption are climbing, but demand for beef is falling as prices rise, putting a chill on capital investments.

The investment community’s attitude toward food and beverage processing is, at best, cool.

Solid but stolid sums up the Street’s view of publicly traded food companies. Sure, many food corporations are consistently profitable and deliver products indispensable to human life, but they lack the sizzle investors love.

In its most recent ratings on 97 industries, Value Line investment survey placed the food industry in the bottom quartile of buy recommendations, ahead of metal fabrication and toiletries but far behind glamour industries like automotive and coal.

Coal? Really?

Food has some fans, however, including the sometimes-contrarian Warren Buffett. Buffett ponied up almost $12.25 billion of Berkshire Hathaway’s money to get a 50 percent stake in H.J. Heinz, a center-of-the-store mainstay and one of the oldest food processors in the world. In his annual letter to shareholders of Berkshire Hathaway in February, the oracle of Omaha wrote, “Our partnership took control of Heinz in June, and operating results so far are encouraging.” He closed with the forecast, “Earnings in 2014 will be substantial.”

If investors are often indifferent, fund managers can be darn’ right hostile. Ralcorp brushed off ConAgra Foods’ acquisition overtures for a year but finally caved under pressure from hedge fund manager Keith Meister, claimed a seat on the board after purchasing 2.8 million shares of Ralcorp stock. Fund manager Nelson Peltz thinks Pepsico would be better off dumping its eponymous brand. And hedge-fund advisor Sandell Asset Management wants Bob Evans Farms Inc. to focus on its restaurant business and get rid of BEF Foods, the vertically integrated corporation’s food processing division.

Wall Street opinions aside, the food and beverage industry appears to have a upbeat view of itself, at least for the current year. As in years past, we collected capital spending data from 37 of the largest food and beverage companies and come up with a projected 14.8 percent increase this year. That estimate may be based on only 37 companies, but these are some of the biggest in the business and our survey found $18.5 billion in budgeted funds.

Many publicly traded food companies express their capital expenditure budgets as a percentage of net sales, typically in the low single digits. Bob Evans continues to ramp up a capital spending boom that began in 2010 and is set at 13 percent of net sales this year. A good chunk will spruce up the firm’s Bob Evans and Owens restaurants, but about $100 million since 2011 has bolstered manufacturing capacity and capabilities in a retooled network of four production facilities. Bob Evans' 2014 capital budget is 39 percent higher than 2013 spending and three times larger than 2012 outlays.

Reinvestment in production is becoming fashionable throughout the industry. Capital spending plans in 2014 at 35 food companies are up 14.9 percent over 2013 spending and up 26.2 percent over 2013 budgets. That may be more a reflection of a slow-growth 2013 than a bullish 2014. Capital spending budgets at 18 companies tracked since 2011 are only 3.3 percent bigger than they were two years ago.

Food Processing’s annual Manufacturing Trends Survey provides a wider marker of CapEx plans. Two out of five respondents expected capital spending to be flat at their plants this year, one in 10 was bracing for declines, and half said spending would be up this year, with most expecting to have at least 5 percent more to work with.

A bonus depreciation allowance in the tax code expired Jan. 1, although financial lenders discount the break as a project-driver. “We’re probably seeing a pick up in CapEx,” says Chris Nay, senior managing director-food and beverage in the Chicago office of GE Capital Corporate Finance “Food safety improvements and efficiencies are driving the day, along with sustainability projects” to goose suppliers’ rankings in retailers’ sustainability indexes.

Food company balance sheets are generally strong, and when they seek financing, they are finding lenders “clamoring for food assets” and offering favorable terms, he says.

Go East, hop head

Growing demand drives capacity expansion, and companies blessed with in-demand products are leading brick-and-mortar activity. Seafood, poultry, health-and-wellness products and craft beer are among the most active categories, and that’s reflected in projects recently completed or under development.

Heart-healthy omega-3 is in demand, and that’s making seafood processing a booming sector. A record 1,000 exhibitors were on hand in Boston last month for the annual Seafood and Seafood Processing Expo. “There is a huge push in the food industry to get heart-healthy ingredients into products,” observes Bob Graham, vice president-food and consumer products group at the Austin Co. in Atlanta. This year’s Boston show was multiple times larger than it was pre-recession, he reports.

Likewise, poultry processors are gearing up to meet demand that is forecast to increase 2.5-4 percent this year. Sanderson Farms canceled plans to build in North Carolina two years ago, in part because skyrocketing feed prices distorted the business model. Corn prices have receded from their peak, and now it’s full steam ahead on a $170 million new operation in Palestine, Texas, that will add 15 percent capacity for Sanderson.

Stable commodity prices are giving many firms the confidence to go ahead with capital projects. “Barring a major drought or other disruption, no one sees corn going to $11 a bushel,” says Nay. Sugar prices are “at an all time low,” he adds. “It can’t go any lower” without triggering price supports.

Craft beer is becoming mainstream, and the micro-breweries of the not-too-distant past are growing up and expanding. The West Coast was an incubator for the category in the 1990s, and many of those brewers are setting up shop east of the Mississippi to be closer to their thirsty customers. Chico, Calif.’s Sierra Nevada led the charge with a new plant that opened in Mills River, N.C., this year, 10 miles upstream from a New Belgium brewery under construction in Asheville. Lagunitas is set to start brewing in Chicago, and Ruckus Brewing is developing a 100,000-bbl. plant in Allentown, Pa. San Diego’s Stone Brewing Co. is scouting sites in the Northeast.

The West Coast invasion has inspired a counterinsurgency by the granddaddy of the craft brews. Besides adding a canning line in Upper Macungie Township, Pa., for Sam Adams lager and Rebel IPA, its answer to hoppy West Coast brews, Boston Beer Co. acquired Angel City Brewing in Los Angeles and turned the reins over to its Alchemy & Science division, which also is managing a greenfield brewery project in Miami.

Craft beers have stolen much of imported beers’ luster over the last 20 years, but that isn’t deterring Constellation Brands from making a nine-figure investment to double capacity at a recently acquired brewery in Mexico. Constellation paid $4.75 billion last June to turn Mexican malt beverages into a big part of its portfolio.

Constellation was the long-time U.S. importer of Grupo Modelo’s brands. Last year, Anheuser Busch InBev acquired Modelo, and part of the deal lets Constellation maintain its import rights. It also gives Constellation ownership of Modelo’s Compañia Cervecera de Coahuila brewery in Nava, Mexico.

Highly automated and efficient, Compañia Cervecera opened in 2010 with a three-phase plan to increase capacity to more than 25 million barrels, equal to almost half the combined output of Modelo’s seven other breweries. Compañia Cervecera’s operational costs are pegged at 40 percent less than the other breweries.

In a January earnings report, Constellation CEO Rob Sands called the firm’s beer business “the highlight of the third quarter,” adding “the Nava brewery in Mexico is executing successfully in all key performance areas, and expansion activities continue to proceed.”

The means of production

The investment community may be indifferent toward food manufacturing, but the same isn’t true of lenders. “Currently, we see value-added food products that are convenient and healthy [as a] tremendous growth opportunity,” maintains Elizabeth Hund, senior vice president and head of the food industries division at U.S. Bank in Denver. When a company’s growth forecasts match industry trends, bankers will provide capital, she adds.

Gluten-free products are a case in point. The category is growing at about a 17 percent annual clip. When Boulder Brands Inc. acquired Udi’s, it not only gained control of North America’s largest gluten-free production facility, it transformed itself from a sales and marketing organization to a full-fledged food manufacturer. Before that, co-manufacturers were responsible for production. Boulder Brands’ capital budget also has ratcheted up sharply, with last year’s investments up $16 million over 2012.

Co-packers and a network of small plants had filled Bob Evans’ processing needs until a transformation got under way in 2010. Over the past two years, the company has realigned its manufacturing capacity, closing some facilities and investing in two fresh plants for sausage products and two ready-to-eat facilities for refrigerated side dishes, “the fastest growing segment of our business,” according Mike Townsley, BEF Foods president. The company estimates its retail share of that category at 45-50 percent, yet co-manufacturers handled all of the production until 2012.

BEF acquired Kettle Creations, one of its copackers, that year and added a third production line at that Lima, Ohio, facility last year, with plans for a fourth line when demand builds. BEF also invested in an overhaul and expansion to an RTE plant in Sulphur Springs, Texas.

“It’s been a fairly systematic execution of a strategy that stretches back to 2007,” explains Townsley. A new CEO brought in consultants from AT Kearney that year to help set a long-term strategy for both the restaurants and manufacturing. BEF now is poised for “aggressive growth over the next five years,” he says.

Besides retail, BEF is active in foodservice. The additional capacity and flexibility is driving speed to market and innovation in the restaurants. Sausage gravy is an example: Although all the restaurants used the same recipe, “we had 560 different chefs producing it,” says Townsley. Now the gravy is made in the plants and only heated in the stores, resulting in consistent quality.

Lean manufacturing and Six Sigma programs that launched in 2009 have carved out about $25 million in production savings over the last two years, relieving some of the pressure on capital needs. Manufacturing investment was critical, though: “We couldn’t grow without it,” says Townsley.

Clif Bar & Co. is another firm investing in the means of production, with an initial commitment of $90 million to build a new bakery. Like Boulder Brands, it will mark the 23-year-old company’s first manufacturing venture. Currently, copackers produce the firm’s energy bars.

Show me the money

Construction cranes at food facility sites have been a frequent sight in recent years in southern Idaho, where economic development authorities are wooing companies interested in shortening the supply chain to California and other western states. Photo: Southern Idaho Economic Development Organization

High tax rates and strict regulations work against greenfield projects in the Golden State. For example, the California Transparency in Supply Chains Act requires some managers to be trained in rooting out human trafficking and slavery in supply chains. Add in severely crimped water supplies, and even California firms are thinking twice about building there. In the case of Clif Bar, the new bakery is being built in Twin Falls, Idaho, about 700 miles northeast of its Emeryville, Calif., headquarters.

All western states want to host food companies that are eager to tap into the California market but don’t want to manufacture there. The Southern Idaho Economic Development Organization has been the most successful, luring seven food projects in 2013 worth a combined $800 million, including Clif Bar.

Chobani’s Greek yogurt was the most notable production facility to come on line last year, but 450,000 milking cows and a million head of cattle in the region appeal to both dairy processors and packers, notes Jan Rogers, the organization’s executive director.

“In a lot of cases, raw materials make us attractive to food,” says Rogers. “It’s not just about the money: you have to have a strong business proposition.” Some communities in her region have voted to tax themselves for expanded wastewater treatment in anticipation of attracting manufacturers.

The state does not disclose the financial assistance it provides to manufacturers who locate or expand in Idaho, though the legislature is poised to approve an economic incentive package, and development authorities make full use of TIF and community block grants, says Rogers. “I don’t consider those incentives; they’re necessary to move a project forward.”

Small government and free enterprise rhetoric aside, North and South Carolina have been notably aggressive in offering financial inducements to manufacturers as they try to replace lost jobs in furniture-making and textile production. Georgia also is sweetening financial lures.

To attract RC Creations, a subsidiary of Acme Smoked Fish Corp., North Carolina development authorities assembled a $15 million package of tax breaks, worker training programs and wastewater facility construction. The Brooklyn-based firm will invest $28.5 million in construction and equipment for the plant, 600 miles from its headquarters.

“Indiana will never do that; we’re not the writers of big incentive checks,” insists John Sampson, president of the Northeast Indiana Regional Partnership in Fort Wayne, Ind. “Government officials run on job creation, and we’re focused on grooming qualified talent to fill those jobs.”

After a spate of new plants and major expansions, his region is running low on shovel-ready sites for food, although there is activity in shell-building programs. A 200,000-sq.-ft. industrial spec building is being built in Blufton, Ind., Sampson says, and though it may be more space than most food companies require, the shell will accelerate start-up for the manufacturer who ultimately buys it.

Indiana, Michigan, Ohio and Wisconsin are actively soliciting food ventures, says Nay, and the common link is water. Unlike California’s Central Valley, the Great Lakes states do not anticipate a water shortage anytime soon.

Water also is a selling point for Pennsylvania’s Lehigh Valley. The two counties in the region could tap the aquifer below them for 150 million gallons a day, but only 68 million gallons currently is being used, according to Don Cunningham, president and CEO of Lehigh Valley Economic Development. The availability of developed sites and natural resources has attracted several beverage bottlers to the area, and fracking operations in western Pennsylvania promise the availability of inexpensive natural gas for years to come.

Logistics, utilities, transportation, skilled workers — the factors that drive new plants and capital expansions in food production are constant. The motives for undertaking them also are constant: meeting increased demand, moving from commodities to value-added production and tapping into an emerging opportunity. Fortunately in U.S. food & beverage, there always is new demand and shifting trends and a need for a place to make the product.

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