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Restructuring for Troubled Times5th Annual Farmer Cooperatives ConferenceNovember 13-15, 2002 St. Louis, Missouri
Applying information and lessons learned from the 2001 Farmer Cooperatives
Conference to Our Cooperative
Thomas D. LarsonExecutive 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
4
Value creation is a key metric
* Impact of extraordinary items excluded
Value created
Invested capital
Annual return of investment above that expected given risk level
== XXROIC
Rate of return required to compensate investors for risk
Cost of capital––
Return on invested capital*
Value Creation
• Industry
• Regional co-ops
• Local co-ops
6
Most ag segments destroy valueContribution to GDP, $ billions, 1999
152
1,522
57 70 106
797
412
FeedSeedFinancingFuel and electric
16.4% of U.S. GDP
ESTIMATE
Food distri-bution
Secon-daryproces-sing
Primary proces-sing
Farm produc-tion
Input Distri-bution
Ag inputs
EquipmentAg chemFertilizerFarm services
Value createdPercent, share of invested capital
Cost of capitalPercent
0.1 -2.3 -1.1 -5.4 -7.0 -2.0
10.610.810.910.410.911.1
Value created
$ Millions
Value created/ invested capital
Percent
Financial performance ofdistribution particularly poor
ESTIMATE
19
16
11
11
Revenue
$ Billions
Machinery
Feed
Fertilizer
Chemicals
Input Distribution
Total
ROIC
Percent
7.9
8.5
9.1
12.6
3.9
9.157 -360 -2.0
2
-122
-53
-187
0.1
-2.5
-1.3
-3.5
-2,519138 -7.0
Revenue$ Billions
Value created$ Millions
Value created/ invested capitalPercent
ROICPercent
11
8
6
6
1
Farmland
Cenex Harvest States
Land O’Lakes
Agrilink -17
-74
-54
-40
-168
-2.5
-6.4
-4.0
-2.8
-8.6 -0.6
4.1
1.6
5.2
Dairy Farmers of America
Regionals struggled to create value in 1999…
5.2
ESTIMATE
9
Value Created Across Local Co-ops
*Segmented by value created/invested capital**Mean values for co-ops in quartileSource:Member co-op survey; team analysis
24
27
26
14
23
1
2
3
4
Quartile*Revenue**
$ Millions
248
-227
-559
-424
-169
Value created**
$ Thousands
5.1
-4.8
-3.0
-7.8
Value created/ invested capital
Percent
ROIC
Percent
14.2
6.3
1.8
-9.3
Cost of capital
Percent
9.2
9.3
9.5
9.4
Total 4.6 9.4
-18.7
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
9%+ 216 52% 96% 39% 37%
5-9% 110 15% 15% 20% 16%
0-5% 108 17% 6% 20% 27%
Below 117 16% (17%) 21% 49%
0%
% Greater thanRate of # % of % of Local % of 50% Term Debt/Return Accts. Sales Savings Accounts Local Equity
Cooperative System
Ag Supply Grain $ Sales $(0-10) $(10-25) $(25-50) $(50-75) $(75-100) $(100+) Volume
--------------------------------------------278 accounts
63% savings
23 accounts
(2%) savings
--------------------------------------------49 accounts
49% savings
203 accounts
(10%) savings
# accts. 216savings- 96%
9%+
5-9%
0-5%
Below 0
Return on local equity
Summary# accounts 481 # accounts 72% savings 53% % savings 47%
PFP success modelStrategy
StructureExisting Emerging
Leveragehorizontal scale
1
Pursue operational excellence
2
Exploit vertical opportunities
3
Drive customer integration
4
Create performance obsession
5
Thank you!!