Investing in the future

by Bryan Salvage
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General upkeep of facilities and equipment, keeping up with growing production needs and new business opportunities, as well as spending money on consolidating operations to become more efficient are several important reasons for maintaining a healthy capital expenditures budget.

However, the flagging economy and a variety of industry and market challenges are forcing companies of all sizes to adjust their capital spending plans, forcing many to do more with less.

Industry leader Tyson Foods Inc. announced earlier this year it will cut its initial capital spending plans for the coming year. "Our chief financial officer, Dennis Leatherby, reported during our most recent earnings call that we have reduced our outlook for fiscal 2009 capital expenditures to under $500 million. We previously reported…we expected capital spending for fiscal 2009 to be $600 - $650 million," company spokesman Gary Mickelson says.

Healthy capital spending is essential to maintaining a competitive standing and position a company for future opportunities, Tyson officials said. In January the company announced its Cherokee, Iowa processing plant, which produces deli meats and hot dogs, is being renovated. "We’re in the midst of a $5 million renovation project in part of the plant that is currently not in use," Mickelson says. "The intent is to better utilize current assets within the plant and the company."

Once completed, this area could house four slicing lines and other equipment designed to help the plant slice and package various types of deli meats, Mickelson says. The project, scheduled to be completed by mid-summer, could result in additional jobs at the plant.

In announcing its second-quarter results this past December, Smithfield, Va.-based Smithfield Foods said its capital spending was cut in half from the prior year. "Capital expenditures have been reduced and are significantly below depreciation," said C. Larry Pope, president and CEO. "As a result, we believe that our current liquidity is more than adequate to address projected cash needs. In addition, we do not anticipate covenant compliance issues with our credit facilities for the remainder of the fiscal year."

On Feb. 17, the company announced a planned reorganization of its pork group. As a result, Smithfield estimates $53 million in capital expenditures will be required relative to plant consolidations in the remainder of fiscal 2009 and in fiscal 2010. Total capital expenditures are expected to remain below depreciation in this fiscal year and next.

"We have begun to manage capital expenditures," Pope said while addressing the Consumer Analyst Group of New York Conference in Boca Raton, Fla. this past month. "We have been running for a number of years at much more than the depreciation and, in many cases the last several years, more than twice depreciation. We are now going below depreciation. And we will be generating cash flow from our CapEx reductions."

Jeffrey Ettinger, chairman, president and CEO of Hormel Foods, Austin, Minn., said last November, "In light of tight capital markets and the pullback in consumer spending, we will continue to manage our capital conservatively, delaying any capital projects that are not time critical."

Bucking the trend

Smaller companies are also scaling back on capital spending – but not all of them. Alma Meats LLC, Alma, Mo., is a smaller processor that processes meat products for retail and foodservice customers. "We’re going to be pretty conservative in capital spending this year, given what has been happening with the economy, but to some extent we’re bucking the trend," says Jerry Bublitz, president and CEO. "We’re actually up in capital spending [this year], but what’s getting us there is our co-packing component.

"We changed direction midway through the third quarter last year... when we saw the first signs of the economy shift coming," he adds. "We tried to concentrate more on the co-packing business. We already were doing quite a bit of co-packing, but we’re looking for some fairly large significant projects that can help us weather the storm."

Jordan Dorfman, president and CEO of Chicago Meat Authority, says he’s holding "tight purse strings" on capital spending for 2009. Spending will primarily be project-based and probably total less than last year’s sum.

Headded , however, CMA wasn’t forced to adjust its capital spending due to the sagging economy. "We bought a building, rehabbed it and got it on line for approximately $2 million," he added.

In August 2008, CMA announced it acquired a 20,000 square-foot USDAinspected plant directly across from CMA’s current Chicago plant from a company manufacturing appetizers for the foodservice industry. This acquisition allows CMA to increase plant size, expand existing product lines, introduce new capabilities and reconfigure its current production lines for improved efficiency.

CMA capital-spending projects for this year include equipment as needed for ongoing sales projects plus minor building capital expenditures, probably less than $300,000. Looking forward, Dorfman says, "We continually invest as needed to keep our business and our sales opportunities [on the] ‘cutting edge’."

Meanwhile, Dakota Provisions, Huron, S.D., has earmarked $1 million for capital spending in 2009, which is less than last year’s total, says Ken Rutledge, president and CEO. Capital spending for 2009 includes investing in packaging machinery and slicers. Looking to 2010 and beyond, Rutledge says he plans to spend more in capital spending to expand his plant for additional ready-to-eat production.

Many members of the American Association of Meat Processors, which represents small companies in the meat industry, don’t have a plant-improvement plan outlined and simply operate on a "replace as needed" basis, explains Dr. Jay Wenther, AAMP’s executive director.

"Others may always be searching or working on the next line of business opportunities and will purchase equipment as more business heads their direction," he adds. "Many of the members I have spoken to have shown equal or greater sales this past year [compared to the year before]."

One member company invested in a new stuffer, another is investing in more capital equipment because new business opportunities were realized and another member plans to make improvements to his livestock-handling pens. "We also have a number of members who most likely perform routine maintenance on their equipment and repair it instead of purchasing new equipment," he added.

Looking forward, it’s safe to say as the economy improves, orders increase and the population grows, industry-wide capital spending will increase in kind.

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