Restructuring for Troubled Times
5th Annual Farmer Cooperatives Conference
November 13-15, 2002  St. Louis, Missouri
Applying information and lessons learned
from the 2001 Farmer Cooperatives
Conference to Our Cooperative
Thomas D. Larson
Executive Vice President
Member and Public Affairs
Today’s Discussion
•
•
•
•
Review 2001 value creation concept
What and how CHS implementing
What and how implementing local co-op
Performance management module
Overview
• Current co-op financial performance
unacceptable
• Ag supply has many untapped
opportunities
• Winning in future food landscape will be
critical
• Need to execute against a 5-part
success model
Value creation is a key metric
Return on
invested capital*
Value
created
=
Annual return of
investment above
that expected
given risk level
ROIC
–
Cost of
capital
X
Invested
capital
Rate of return
required to
compensate
investors for risk
4
*Impact of extraordinary items excluded
Value Creation
• Industry
• Regional co-ops
• Local co-ops
Most ag segments destroy value
ESTIMATE
Contribution to GDP, $ billions, 1999
Feed
Seed
Financing
Fuel and electric
Equipment
Ag chem
Fertilizer
Farm services
1,522
797
152
412
Ag
inputs
57
Input
Distribution
70
Farm
production
106
Primary
processing
Cost of capital
Percent
11.1
10.9
10.4
10.9
Value created
Percent, share of invested capital
-2.0
-7.0
-5.4
-1.1
Secondary
processing
16.4
% of
U.S.
GDP
Food
distribution
10.8
10.6
-2.3
0.1
6
Financial performance of
distribution particularly poor
Revenue
$ Billions
Value
created
$ Millions
Value created/
invested capital
Percent
ESTIMATE
ROIC
Percent
Machinery
19
-187
-2.5
7.9
Feed
16
-53
-1.3
8.5
Fertilizer
11
-122
-3.5
9.1
Chemicals
11
2
Total
Input
Distribution
0.1
-360
57
138
-2.0
-2,519
-7.0
12.6
9.1
3.9
Regionals struggled to create
value in 1999…
Revenue
$ Billions
11
Farmland
Dairy Farmers
of America
8
Value
created
$ Millions
Value created/
invested capital
Percent
ESTIMATE
ROIC
Percent
-168
-8.6
-0.6
-40
-2.8
5.2
Cenex
Harvest States
6
-54
-4.0
4.1
Land O’Lakes
6
-74
-6.4
1.6
-17
-2.5
5.2
Agrilink
1
Value Created Across Local Co-ops
Value created**
$ Thousands
Revenue**
Quartile*
$ Millions
1
24
2
27
3
4
Total
Value created/
invested capital ROIC
Percent
Percent
26
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
Cost of
capital
Percent
14.2
9.2
6.3
9.3
-424
-7.8
1.8
9.5
-559
-18.7
-9.3
9.4
-227
-4.8
4.6
9.4
9
CHS Value Creation (EVA)
•
•
•
•
•
Mid 1990s
Executive management and board
Operating management
Financial measurement
Recognition program
EVA
(economic value-added)
Earnings minus (equity x minimum
acceptable rate of return)
• EVA recognizes there is no free capital
• Equity represents an investment
• Investor expects a return
CHS Co-op Performance Measurements
•
•
•
•
•
Profit
EVA
Cash Flow
ROI
Investment Grade
Local Co-op value creation
•
•
•
•
4% above cost of borrowed capital
9 - 12% ROE
Numerous meetings
Benchmarking
Return on Local Equity
Analysis
Rate of #
Return Accts.
% of
Sales
% of Local
Savings
% of
Accounts
% Greater than
50% Term Debt/
Local Equity
9%+
216
52%
96%
39%
37%
5-9%
110
15%
15%
20%
0-5%
108
17%
6%
20%
27%
Below
0%
117
16%
(17%)
21%
49%
16%
Cooperative System
Ag Supply
$(0-10) $(10-25) $(25-50)
Grain
$(50-75) $(75-100) $(100+)
9%+
-------------------------------------------278 accounts
-------------------------------------------49 accounts
63% savings
49% savings
203 accounts
23 accounts
(10%) savings
(2%) savings
5-9%
0-5%
Below
0
Summary
Return on
local equity
# accounts 481
% savings 53%
# accounts 72
% savings 47%
$ Sales
Volume
# accts. 216
savings- 96%
PFP success model
Strategy
2
4
Pursue operational
excellence
Drive
customer
integration
5
1
Leverage
horizontal
scale
Create
performance
obsession
3
Exploit
vertical
opportunities
Structure
Existing
Emerging
Thank you!!