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2007 Capital Spending Report

April 11, 2008
Economic uncertainty clouds 2008 capital forecast.

Accelerating economic weakness and general uncertainty about the direction of the U.S. economy make forecasting capital spending particularly daunting in 2008. However, even with the downward economic trend, 22 of the largest publicly held food companies anticipate a collective 7 percent increase in capital expenditures in 2008.

While the majority of food companies are forecasting increased spending, the industry’s recent history of underspending, combined with the specter of a looming recession, makes us worry that actual capital expenditures may be less than what planners have budgeted.

In 2007, for instance, nine of the 27 food processors we track spent less than they budgeted. Some cuts were dramatic and clearly tied to the difficult year – Tyson Foods is a key example, spending 29 percent less than expected. However, the actual capital spending for 26 major food companies in 2007 was $12.565 billion, up $271 million (about 2 percent) beyond what they had budgeted.

Four food industry giants have announced plans to scale back their CapEx budgets by double digits. The funding at Smithfield Foods – which broke ground in January 2007 on a $200 million joint venture beef plant and has been investing heavily the past three years – is down by 40 percent. Del Monte is cutting back 44 percent.

Molson Coors, which trimmed its 2008 budget, explained why: “Capital expenditures in 2008 are expected to be lower than 2007 primarily due to the completion of the Shenandoah [Va.] brewery in the U.S. in early 2007 and the initial $90 million purchase of kegs in the U.K. in early 2007,” the company said in its annual report. The Molson side of the house completed a $35 million brewery in Moncton, New Brunswick, in October 2007.

Even in the face of rising commodity costs and economic challenges for the broader economy, 15 of our 27 reporting companies project increases, five of them upping the ante by 25 percent or more, including three with increases over 50 percent.

Hershey Co. – which budgeted $275 million last year but only spent $189 million – is catching up by increasing the CapEx budget by a staggering 66 percent. “We anticipate capital expenditures of $300-325 million in 2008, of which approximately $150-170 million is associated with our global supply chain transformation program,” the company said in its 2007 annual report. A key element of the 2007 budget (and still being paid off) is construction of a joint venture plant in China.

Similarly, Tyson budgeted $400 million in its 2007 fiscal year but spent only $285 million. Optimistically budgeting $450 million this year, Tyson officials note the challenges presented by the rise in commodity costs, which if continued at the current pace, could torpedo the company’s relatively bullish spending forecasts. “We currently believe we’ll experience almost $800 million in increased grain and related input costs in fiscal 2008,” says President/CEO Richard Bond.

In all, we’ve identified $11.067 billion in budgeted new construction or expansion activities for the current year. While that may look like a decline from the $12.565 billion we reported last year, five companies this year declined to give capital spending outlooks. Using just the same 22 companies for which we have numbers for both years, last year’s figure was $10.330 billion.

Once again, the biggest gainer, in dollar terms, is Pepsi-Co, budgeting $300 million more for CapEx than it spent in 2007 (it, too, underspent, by $200 million). Yet, in percentage terms, the company has trimmed its rate of spending growth by more than 10 percent over last year’s number. Last year’s $2.4 billion was used to install an SAP enterprise resource planning system at the company’s Quaker, Tropicana and Gatorade divisions, among other things.

John B. Sanfilippo & Son Inc. produced a commemorative can to celebrate its new corporate headquarters and manufacturing facility in Elgin, Ill., west of Chicago.

Does all this growth make sense in what looks to be a difficult economic year? “Part of the need for capital spending is to deal with margin compression,” says Dennis Krause, senior vice president and industry leader in food, beverage and agribusiness for GE Corporate Lending, Norwalk, Conn. “Everyone knows what’s happened to corn. Wheat prices are soaring. The only way to preserve earnings is by getting more efficient.”

In times like these, big, well capitalized companies will spend; small companies will defer capital expenditures. Krause, who was chief financial officer at Triumph Foods, says it will be interesting to see if the bigger companies can then steal market share from third- and fourth-tier brands, which no longer have a price edge.

Greenfield growth

While there are several new projects planned for 2008, none comes close to the whopping $359 million factory and distribution center that Nestle Beverages began in 2007 (and is still under construction in Anderson, Ind.). The biggest project this year is less than half that size. John B. Sanfilippo & Son Inc. opened a new $117 million, 1.1 million-sq.-ft. headquarters, manufacturing and distribution center in Elgin, just west of Chicago. While it falls in Sanfilippo’s FY2008, the move-in occurred late last year.

The only other $100 million project is the Really Cool Foods production and distribution facility in Cambridge City, Ind. The company plans to build and equip the complex in a number of stages. The first facility to be built on the site will be a new, 77,000-sq.-ft. USDA-certified organic commissary and distribution center. The company plans to build other modules and will begin hiring production workers this year.

Hormel Foods soon will break ground on a new production facility in Dubuque, Iowa. Total cost of the project is estimated at $89 million. “Consumer demand for shelf-stable microwave meals is exploding,” says Jeffrey Ettinger, chairman, president and CEO.“This investment will allow us to increase production capacity and continue our leadership through innovation and new products.”

Groundbreaking for the 327,000-sq.-ft. facility is scheduled for early this summer, and the plant is expected to be operational by November 2009. The deal is subject to the finalization of state and local incentives. Initially, a total of 180 new jobs will be created, with more expected in future phases.

Three U.S. Mars divisions are busy. Mars Petcare US broke ground in November on an $80 million new plant for Cesar Canine Cuisine Small Dogs food in Fort Smith, Ark. It should be done in mid-2009. Just this March, Mars Food US announced a $10 million expansion of its Greenville, Miss., plant that makes Uncle Ben’s 90-second Ready Rice. And Mars Snackfood US is still completing a $70 million expansion of its Elizabethtown, Pa., chocolate factory.

Riviana Foods announced it will construct a new 400,000-sq.- ft. rice processing and packaging plant and on-site warehousing/ distribution center on a 31-arce site located adjacent to its packaging facility in Memphis, Tenn. Construction will begin in the second quarter of 2008, with final completion anticipated by mid-2010. Local media estimate the cost at $67 million. “Development of this new facility is an important step in our ongoing effort to transform Riviana into the world’s most efficient, technically advanced rice company,” says Bastiaan de Zeeuw, president/CEO.

The Molson side of the Molson Coors house in October 2007 opened its first new brewery in 52 years. The Moncton, N ew Brunswick, facility cost $35 million. Coors’ Shenandoah, Va., brewery began operations early in 2007.

Several new plants, while not dedicated to food production,nonetheless are owned or partially financed by food processors and will use food plant waste and byproducts to make fuel.Tyson, along with Syntroleum Corp., announced the formation of Dynamic Fuels LLC, a joint venture and a plant in Geismar, La. It will produce renewable synthetic fuels (for diesel, jet and military fuels) from Tyson’s animal fat feedstock. “We anticipate total initial capital spending of approximately $75 million for the construction of the initial facility, which is 50 percent of the estimated cost to construct the first facility,” said a Tyson company spokesperson. Construction is expected to begin in fiscal 2008 and continue through fiscal 2009, with production targeted for 2010.

Environmental Power Corp. in December broke ground on a biogas facility adjacent to the JBS Swift beef processing facility in Grand Island, Neb. The plant should be operational by the end of this year and will use much of the plant’s waste products to offset an estimated 25 percent of the Swift plant’s natural gas requirements.

Ditto for Seaboard Foods. The company last year formed High Plains Bioenergy as a subsidiary and began building a biodiesel plant in Guymon, Okla., with a capacity to produce 30 million gallons annually. The renewable fuel plant will use animal fats – including pork fat, a byproduct from the Seaboard Foods’ Guymon pork processing plant – and vegetable oils as the feedstock for biodiesel. It should be operational by the end of this year.

Flowers Foods has earmarked approximately $19 million to build a 200,000-sq.- ft. bakery in Bardstown, Ky. According to Flowers’ annual report, it will produce breads and buns for markets in Tennessee, Kentucky, Ohio and Indiana. Construction began in January, and it is expected to open with one production line this fall, with a second line to be added at a later date.

Starbucks also is building. The coffee giant announced the construction of a coffee roasting and packaging facility. Construction began this year on the 117,000-sq.-ft. building, which is located in Saint Matthews, S.C. The facility is due to be operational in early 2009.

Expansion in a year of contraction While some prognosticators forecast economic contraction in 2008, the food industry has announced a rash of facility expansion projects. For instance, Kellogg plans to expand its Battle Creek, Mich., warehouse/R&D facility. The company will add 157,000 sq. ft. of additional space, which will accommodate up to 300 employees. Construction on the project is set to begin this quarter, with an expected completion date of third quarter 2009.

Construction is set to begin on the W.K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Mich.

The expansion of the company’s global research center (W. K. Kellogg Institute for Food and Nutrition Research) combined with a new manufacturing facility in Kutno, Poland, represent approximately 15 percent of the company’s 2008 capital plan. “The facility in Poland will help us meet consumer demand for our ready-to-eat cereals in the emerging Central and Eastern European markets,” says the annual report. “The expansion of the W. K. Kellogg Institute … refl ects our commitment to research and innovation, which is a key driver to the growth of our business.”

Major expansions are in the works at Campbell Soup and its Pepperidge Farm unit. Campbell plans to expand and enhance its corporate headquarters in Camden, N.J., with construction expected to continue into fi scal years following 2008. Expansion of the company’s beverage production capacity also is on the docket. Meanwhile, Pepperidge Farm plans to increase its highcapacity bread production facility in Lakeland, Fla., to a total of 320,000 sq. ft. The expansion will increase the plant’s production capacity by 31 million loaves annually. (In neither case did Campbell reveal the cost of the expansions.)

Nestle will invest $60 million in its Jonesboro, Ark., with much of the increased space being handed over to Nation Pizza Products. The plant was built in 2003 and will be expanded by 50,000 sq. ft., creating 200 jobs. Nestle will make more Stouffers and Lean Cuisine pizza-like products there, with Nation Pizza operating parts of the expansion.

A water bottling plant in Latrobe, Pa., closed in November 2006 when LeNature was forced into bankruptcy, is being reopened by Pittsburgh-based grocer Giant Eagle.

Sargento Foods plans to spend $3 million to expand production facilities in Plymouth, Hilbert and Kiel, Wis.

Sanderson Farms disclosed in March it is evaluating sites in North Carolina for a possible new chicken processing plant, although no concrete plans have been made.

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