CH-757PE-017cgMK
Farmers Cooperatives 2001
October 8, 2001
CH-757PE-017cgMK
CHS Cooperatives - Land O’Lakes
Number of Cooperatives in our System
2500
2300
2000
2000
1400
1500
1100
1000
500
0
1980
1987
1996
Total Trade Area
2000
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Data Base
• 560 Cooperatives
• 16 states
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Industry Trends
• Continued emphasis on critical mass
• Continued use of E-Business
• Continued analysis of service income vs.
product margins
• Constant challenge to find, hire, and
retain quality people
• A general trend of greater returns being
generated by larger operations
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Local Cooperative Issues
• Build a unified cooperative system
• Ability to generate adequate returns and
cash flow
• Enhance marketing strategies and skills
• Human Resources programs and
development
• Develop and implement coordinated
E-Commerce strategy
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CH-757PE-017cgMK
Total Profitability 560 Local Cooperatives
1999
11,455
%
100.0
2000
11,112
%
100.0
Gross Margin
1,771
15.4
1,852
16.6
Expenses
1,642
14.3
1,737
15.6
Savings
129
1.1
115
1.0
Patronage
170
1.4
132
1.1
Total Savings
299
2.6
247
2.2
Sales
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CH-757PE-017cgMK
Financial Analysis of 560 Local Cooperatives
Number Profitable
2000
73%
Trends
• Sales volume down
• Margins up
Total
(2.9)%
4.5%
•
•
•
•
Expenses up
Local savings down
Patronage down
5.7%
(10.8)%
(22.3)%
Total savings down
(17.3)%
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Local Co-op Trends
1994
2000
% Change
4,103
5,475
33%
288
707
145%
Member Equity
2,287
2,920
28%
Term Debt/ Equity
12.6%
24.2%
Member Ownership
56.0%
53.3%
Return on Equity
10.8%
8.4%
Total Assets
Term Debt
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CH-757PE-017cgMK
Local Ownership/ Term/ Local Net Worth
Local Ownership
38.4%
The guidelines for the ratios are:
50% = strong
35-50% = acceptable
< 35% = concern
Term Debt/ Local Equity
44.4%
The guidelines for the ratios are:
< 35% = strong
35 - 75% = manageable
> 75% = concern
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Market Segmentation and
Cooperatives
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Market Segmentation
• What is your market?
• What will your market be?
• What should your market be?
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Local Cooperative Analysis
Number of % Total
Accounts Sales
%
Total
Local
Profit
Term Debt
to Equity
%
Return
on Total
Equity
% Profitable
Top 10
90
50%
56%
30.8%
9.1%
90%
2nd 10
90
20%
22%
20.7%
8.5%
78%
3rd 10
88
12%
8%
18.1%
6.3%
66%
Other
235
18%
14%
15.2%
7.3%
67%
Total
503
100%
100%
24.2%
8.4%
73%
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Profits by Size of Co-op
Financial Summary
560 Cooperatives
Size of
Account
Number of
% of
Accounts Accounts
% of
Total
Sales
% of
Total
Profit
Average
Average
Sales
(million)
Profit
(million)
Over $100 million
11
1.9%
15.1%
12.1%
172
1.5
$75 - $100 million
10
1.7%
6.6%
8.8%
83
1.2
$50 - $75 million
37
6.6%
18.1%
23.3%
61
.8
$25 - $50 million
84
15.0%
24.1%
24.2%
36
.4
418
560
74.8%
100.0%
36.1%
31.6%
100.0% 100.0%
11
22
.1
.2
$25 and below
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CH-757PE-017cgMK
Profits by Size of Co-op
Financial Summary
560 Cooperatives
Total
Size of
Account
Number of
Accounts
Sales
Volume
Range
Total
Profit
of
Profitability (million)
Over $100 million
11
1,890
16.1
3.9 - (1.4)
$75 - $100 million
10
829
11.7
2.0 - .2
$50 - $75 million
37
2,254
30.9
3.7 - (1.1)
$25 - $50 million
84
3,004
32.1
2.3 - (1.0)
$25 and below
418
4,466
41.6
1.7 - (1.0)
Total
560
12,443
132.4
3.9 - (1.4)
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State Analysis
560 Cooperatives
# Accounts
Iowa
Minnesota
West
Wisconsin
Ohio/Michigan
North Dakota
Indiana
South Dakota
NE/KS/CO
76
109
70
80
36
90
33
37
29
Total
560
Sales
Local Profit
%
(millions) (millions) Profitable
3,210
19.3
76%
1,859
30.2
72%
1,218
14.7
74%
1,208
11.6
63%
1,153
13.9
94%
1,013
8.8
70%
965
7.3
67%
913
13.5
71%
905
13.1
76%
12,443
132.4
73%
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Local Cooperatives
Top 10 Per State/Region - 90 Cooperatives
IA
SD
OH/MI
NE/KS/CO
MN
IN
West
WI
ND
Total
Grand Total
(Million)
Sales
1494
710
683
682
622
531
467
430
317
5936
12,443
% Total
46.5%
77.7%
59.3%
75.3%
33.4%
55.0%
38.3%
35.5%
31.2%
47.7%
(Millions)
Local Profit
7,939
11,616
9,003
11,623
13,126
4,873
3,599
5,199
2,630
69,608
% Total % Profitable
90%
41.2%
100%
85.9%
100%
64.9%
100%
88.2%
100%
43.4%
80%
67.1%
80%
24.4%
70%
45.1%
70%
29.8%
52.5%
88%
132,400
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Key Findings
• Although local co-ops destroy value in the
aggregate, a significant fraction do create value on
an individual basis
–Although a sample of 500 local co-ops destroyed
$105 million in 1999 on $2.2 billion invested, 30%
of the co-ops created value
–Operational efficiency and capital utilization are
the most significant drivers of whether a local coop creates value
• Co-op performance improves substantially with scale
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Value Creation at Co-ops
Cumulative local value created at sample co-ops*
$ Millions
40
Although local co-ops destroy
value in aggregate . . .
• On $2.2 billion in capital invested,
0
$105 million of value was
destroyed
-40
-80
. . . a significant fraction do create
value individually
30% of
co-ops
create
value
• 30% of co-ops created value on
an individual basis
• Value created by these co-ops
equals $28 million on $0.7 billion
invested
-120
0
1
Cumulative capital invested
$ Billions
* Survey of approximately 500 CHS co-ops
Source: Member co-op survey; team analysis
2
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Value Created Across Local Co-ops
Revenue**
Quartile* $ Millions
Value created**
$ Thousands
24
1
27
2
26
3
4
Total
Value created/
invested capital
Percent
14
23
* Segmented by value created/invested capital
** Mean values for co-ops in quartile
Source: Member co-op survey; team analysis
248
-169
5.1
-3.0
-424
-7.8
-559
-18.7
-227
-4.8
ROIC
Percent
Cost of
capital
Percent
14.2
9.2
6.3
9.3
1.8
9.5
-9.3
9.4
4.6
9.4
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Drivers of Value Creation
Mean metrics for co-ops segmented by local performance*
Q4
-9.3
Q4
EP/IC**
Percent
-18.7
Q4
Q3
6.3
Q2
Q3
Q2
Q1
-3.0
Q3
Q2
Q2
Q1
20.3
15.4
14.6
15.8
Q3
Q2
Q1
Q1
Net PP&E
Percent of sales
Capital turnover
Ratio
5.0
4.7
4.8
Q1
WACC
Percent
9.4
9.5
Q4
Q3
Operational efficiency
• Co-ops in top quartile
expended almost 5%
less in expenses than
those in the bottom
quartile
14.2
5.1
-7.8
Q3
81.9
Expenses
Percent of sales
Q4
Pretax ROIC
Percent
1.8
Q4 Bottom quartile
COGS
Percent of sales
81.7 84.2 84.1
Pretax operating profit
2.9
Percent of sales
1.3
0.4
-2.0
Q4
Q1 Top quartile
4.9
17.1
16.5
15.3
14.2
Q4
Q3
Q2
Q1
Capital utilization
• Bottom quartile coops are 3% more
capitalized than those
in the top quartile
Working capital
Percent of sales
9.3
9.2
Q2
Q1
Q4
* Co-ops segmented by level of value created/invested capital
** Numbers may not add due to rounding
Source: Member co-op survey; team analysis
Q3
Q2
Q1
4.3
4.4
4.8
Q4
Q3
Q2
6.1
Q1
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Leverage Ratios for Local Co-ops
Revenue**
Quartile* $ Millions
Value created**
$ Thousands
24
1
27
2
26
3
4
Total
14
Long-term
debt to equity
248
-169
-424
-559
23
* Segmented by value created/invested capital
** Mean values for co-ops in quartile
Source: Member co-op survey; team analysis
-227
Current ratio
0.21
1.76
0.23
1.58
0.32
0.27
0.25
1.49
1.29
1.55
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KEY FINDINGS
• Although local co-ops destroy value in the
aggregate, a significant fraction do create
value on an individual basis
• Co-op performance improves
substantially with scale
–While smaller co-ops benefit from larger
gross margins . . .
–. . . the advantage is eroded by subscale
operations and overcapitalization
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Scale Impact on Co-op Performance
Return on invested capital at sample co-ops*
Percent
Key metrics for co-ops segmented by revenues
25
20
Revenue***
Quartile** $ Millions
15
1
10
2
Operating
margin
Percent
59.4
ROIC
Percent
1.1
18.2
5.8
1.1
4.5
5
3
9.8
0.6
2.3
0
4
4.7
-0.2
-0.7
-5
0
25
50
75
100
Co-op revenue
$ Millions
* Survey of approximately 500 local co-ops
** Co-op segmented by annual revenue
*** Average for co-ops in quartile
Source: Member co-op survey; team analysis
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Drivers of Scale Impact on Performance
Q1 Top quartile
Q4 Bottom quartile
Mean metrics for co-ops segmented by revenue*
COGS
Percent of sales
Pretax operating profit
Percent of sales
1.1
1.1
0.6
-0.2
Q4
78.4
79.4
80.7
85.0
Q4
Q3
Q2
Q1
Expenses
Percent of sales
Q3
Q2
Q1
22.0
20.2
18.2
14.0
Q4
Q3
Q2
Q1
Operational efficiency
• Top quartile co-ops
expended 8% less in
expenses than those
in the bottom quartile
Pretax ROIC**
Percent
2.3
-0.7
Q4
Q3
4.5
Q2
5.8
Q1
Net PP&E
Percent of sales
Capital turnover
Ratio
4.3
4.1
3.4
5.5
19.0
18.8
17.9
14.2
Q4
Q3
Q2
Q1
5.8
5.7
4.1
Q3
Q2
Q1
Capital utilization
• Bottom quartile coops are 4% more
capitalized those in
the top quartile
Working capital
Percent of sales
Q4
Q3
Q2
Q1
10.9
Q4
* Co-ops segmented by level of value created/invested capital
** Numbers may not add due to rounding
Source: Member co-op survey; team analysis
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Effects of Scale on Operational Efficiency and
Capital Utilization
Expenses
Percent of revenue
Capital turnover
Ratio
30
8
25
6
20
4
15
2
10
5
0
0
25
Co-op revenue
$ Millions
50
75
100
0
25
50
75
100
Co-op revenue
$ Millions
Source: Member co-op survey
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Successful Co-ops
• Vision and Mission
• Outstanding Management/Staff
• Understand the producers’ needs for
value-added strategies
• Efficient, profitable
• Manage equity and capital for longterm success
• Integral piece of co-op system
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