Cap Ex remains right on target
Baking & Snack’s 19th Annual Capital Spending Survey predicts greater focus on strategic investments with heavy emphasis on new product introductions, increasing productivity and quick return on investment.
BakingBusiness.com, Feb. 1, 2012
by Dan Malovany

When it comes to the economy, it’s the same old story about slow or no growth, persistently high unemployment and consumers who continue to search for a little confidence. When it comes to dealing with volatile commodity prices or unpredictable government regulations, the baking and snack industries have learned how to take a punch and keep on standing. Despite an uncertain future, companies invested big time in 2011. But what is the 2012 capital spending outlook?

“If there is a theme for 2012, it’s ‘steady as she goes,’ ” noted Marjorie Troxel Hellmer, president of Kansas City, MO-based Cypress Research Associates, which completed Baking & Snack’s 19th Annual Capital Spending Survey.

In fact, 37% of executives responding to the survey indicated that their companies doled out more than they initially budgeted for 2011, another 45% invested as budgeted and only 18% spent less than what they scheduled for capital expenditures. In 2012, 38% plan to increase spending, 28% plan to remain the same, and 29% will lower their investments, while 5% remained unsure when the survey was fielded in November and December.

According to Ms. Troxel Hellmer, 2011 saw a huge rebound in capital expenditures after the industry cut back on investing during the peak of the recession. While the outlook for 2012 capital spending remains more or less on track with last year, she noted there might be significant differences in where bakers and snack manufacturers invest this year. “There isn’t as much activity with bricks and mortar and with new buildings,” she said. “A lot of companies made those big investments already.

Focus on equipment and ROI

Rather, the investment approach for 2012 will be more strategic with a greater emphasis on equipment for producing new products as well as for improving productivity and controlling costs by enhancing operational efficiencies (see “Cap Ex gets back on track”).

Where are bakers and snack producers investing in 2012? Specifically, 74% of those surveyed indicated they’re spending in new processing equipment followed by maintenance and replacement parts (64%), new packaging equipment (63%), system integration and automation (51%), upgrading existing facilities (51%), warehousing/distribution (36%) and new buildings (21%). The percentages sum to more than 100% because most respondents indicated multiple categories.

 

How much are they targeting in each area? According to the survey, 30% of budgeted dollars will be spent on new processing equipment, followed by maintenance and replacement parts (19%), new packaging equipment (14%), upgrading existing facilities (13%), systems integration (11%), warehousing/distribution (7%) and new buildings (6%).

As far as budgeting is concerned, Ms. Troxel Hellmer stressed, the industry has gotten more disciplined in its approach to justifying expenditures. “Companies need to have a high level of predictability to justify spending, and because there is so much internal accountability with those budget controls, they’re not going out and creating a whole new product that may have, in someone’s mind, great promise,” she explained.

Respondents to the survey indicated their companies remain extremely focused on how they invest. “Companies today are lean and mean, yet they’re making investments, and they’re very targeted to achieve quick return on investment (ROI) — one to two or three years — and they know what they’re spending it on,” Ms. Troxel Hellmer noted. “Companies are keeping an eye on their budgets much more so than in the past. Still, if they have it in their budgets, they’re going to spend it.”

No rose-tinted glasses

While the overall economy may be in the dumps in many parts of the country, nearly everyone surveyed remained much more optimistic about the industry as a whole. In fact, a whopping 93% of respondents had a positive outlook for the industry in 2012, even higher than the 89% who said so last year. “They’re positive about the industry, but not necessarily the economy,” Ms. Troxel Hellmer said.

That optimism is tempered by the business environment where rising costs persist and passing on pricing can be a tricky proposition. In fact, 70% of those surveyed stated that their companies are financially sound, but their profits took a hit during the past year. Another 15% said their companies are firmly in the black while 15% suggested their companies are unstable and that profits are turbulent at this time.

From a macroeconomic perspective, the economy seems better, but it’s not without significant soft spots, said Scott Smith, president, Shearer’s Foods, Brewster, OH, one of several industry veterans interviewed by Cypress Research Associates for this report.

“Consumer demand is weaker, and we have continued pressure from commodity prices,” he observed. “Equipment suppliers, though, are still busy, and people are buying for their plants. Companies are finding a way to keep growing their businesses. Our industry is generally better than many other parts of the economy. It’s not a lot better, but it’s not a lot worse either.”

Alon Ozery, partner, Ozery Bakery, Toronto, ON, noted the overall economy seems to have gotten worse than in the past and will continue to falter. However, he added, the outlook isn’t dire for many food industry sectors. Although consumers aren’t eating out as much in food service establishments as in the past, they’re spending on competitively priced, value-added products in the retail channel. “Through the lens of the industry, it’s about the same as last year and will get better,” he said.

John Anthony Orlando, vice-president of operations, Orlando Baking Co., Cleveland, OH, also described the operating environment as a mixed bag. “Business is increasing, and ingredients [prices] are going up,” he said. “It’s improved in some ways, but not others. It’s better than a year ago because sales have improved.”

That combination of a lagging economy along with unpredictable commodity costs could create another challenge that the industry hasn’t dealt with for years, according to said Dave Hipenbecker, director, network strategy and project engineering, The Kroger Co., Cincinnati, OH.

“Everyone needs to get comfortable with inflation. It’s going to happen,” he said. “Companies can’t hold down prices and still remain profitable in business. Prices are going to go up, and [businesses] need to be prepared for it.”

For better or worse

Tough times during the past five years have taught bakers and snack manufacturers a number of lessons on how to survive — or even thrive — in difficult periods. “Overall, the economy is the same, but the industry has learned to deal with it,” Mr. Hipenbecker said. “Because of that, people aren’t afraid to spend. They understand where the economy is. They’ve made the adjustments to take all of those projects they had put on hold and move forward.”

While capital expenditures rebounded significantly last year, the amount of investment in 2012 will remain below 2007’s pre-recessionary levels, according to Ms. Troxel Hellmer. That’s especially true with companies spending $50 million or more annually. “It’s still an industry fighting back,” she said. “There is a return of confidence, but companies are not confident enough to spend as they did before the recession.”

Some companies such as Orlando Baking reduced spending at the beginning of the 2008-09 recession and have become more selective with investments. “Our main focus now is on return on investments,” Mr. Orlando said. “If we don’t see a quick return, we won’t do it.”

Likewise, Bill Quigg, president, Richmond Baking, Richmond, IN, recalled that the company tightened spending during the economic meltdown several years ago, but now the contract manufacturer and private label cookie and ingredient producer plans to invest big time to add capacity this year. In fact, Mr. Quigg observed, the company is spending more in 2012 than it did five years ago. “We didn’t see the [expected] uptick in the economy, but we’re spending again ahead of the curve,” he said.

Specifically, Richmond Baking is investing four times what it did in 2011, according to Mr. Quigg. The company already has placed equipment orders and plans to wrap up its cap ex program by the end of the calendar year.

Others, like Shearer’s Foods, made huge investments during the past few years despite the recession. Specifically, the salted snack manufacturer built the industry’s first Platinum Leadership in Energy and Environmental Design (LEED) operation in Massillon, OH, and acquired Snack Alliance, Hermiston, OR. After completing the bulk of the second phase of the Massillon facility in 2011, the company’s capital spending will likely decrease 25% this year. Despite the decline, Mr. Smith noted, its level of investment in 2012 has actually risen compared with the past. “On an absolute basis, spending has increased because we’re now at five plants today versus one to two five years ago,” he said.

More optimistic for 2013

Although the broader economic outlook remains uncertain, the industry seems bullish about its prospects moving forward, according to Ms. Troxel Hellmer. In fact, 26% of survey respondents indicated that their companies expect to spend a greater amount on capital expenditures in 2013 compared with 2012. That’s a significantly higher rate than the 18% tallied by last year’s survey who had predicted spending increases for the following year.

 Another 38% plan to spend about the same amount in 2013 as they will this year, while only 6% look to invest less. The wildcard is the 30% who remain “unsure” at this time about 2013 capital spending. That may be because many of those companies operate on a strict year-to-year budgeting process.

“The economy is in the tank, but the companies in this industry are figuring out how to deal with it so it is not affecting their investments as much,” Ms. Troxel Hellmer said. “They’re not as reactionary as in the past, although they are still dealing with many of the same issues as before. They have survived to this point, and they’ve figured out the model they need for long-term success.”