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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

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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 PresidentMember and Public Affairs


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Today’s Discussion

  • Review 2001 value creation concept

  • What and how CHS implementing

  • What and how implementing local co-op

  • Performance management module


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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 l.jpg
Value creation is a key metric

Return on

invested capital*

Value created

Cost of capital

Invested capital

=

X

ROIC

Annual return of investment above that expected given risk level

Rate of return required to compensate investors for risk

* Impact of extraordinary items excluded


Value creation l.jpg
Value Creation

  • Industry

  • Regional co-ops

  • Local co-ops


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ESTIMATE

Most ag segments destroy value

Contribution to GDP, $ billions, 1999

Feed

Seed

Financing

Fuel and electric

Equipment

Ag chem

Fertilizer

Farm services

16.4% of U.S. GDP

Secon-daryproces-sing

Ag inputs

Farm produc-tion

Primary proces-sing

Food distri-bution

Input Distri-bution

Cost of capitalPercent

11.1

10.9

10.4

10.9

10.8

10.6

Value createdPercent, share of invested capital

-2.0

-7.0

-5.4

-1.1

-2.3

0.1


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Financial performance ofdistribution particularly poor

ESTIMATE

Value created

$ Millions

Value created/ invested capital

Percent

Revenue

$ Billions

ROIC

Percent

Machinery

7.9

19

-2.5

-187

Feed

8.5

-53

16

-1.3

Fertilizer

9.1

-3.5

11

-122

12.6

Chemicals

0.1

11

2

-360

Total

57

-2.0

9.1

Input Distribution

-2,519

-7.0

138

3.9


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ESTIMATE

Regionals struggled to create value in 1999…

Value created

$ Millions

Value created/ invested capital

Percent

Revenue

$ Billions

ROIC

Percent

-0.6

Farmland

11

Dairy Farmers of America

8

5.2

Cenex Harvest States

6

4.1

6

Land O’Lakes

1.6

1

Agrilink

5.2


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Value created/ invested capital

Percent

Cost of capital

Percent

Value created**

$ Thousands

ROIC

Percent

Revenue**

$ Millions

Quartile*

1

14.2

24

5.1

9.2

248

2

6.3

27

-3.0

9.3

-169

3

26

-7.8

1.8

9.5

-424

4

-9.3

9.4

14

-18.7

-559

Total

-4.8

23

4.6

9.4

-227

Value Created Across Local Co-ops

* Segmented by value created/invested capital

** Mean values for co-ops in quartile

Source: Member co-op survey; team analysis


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CHS Value Creation (EVA)

  • Mid 1990s

  • Executive management and board

  • Operating management

  • Financial measurement

  • Recognition program


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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


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CHS Co-op Performance Measurements

  • Profit

  • EVA

  • Cash Flow

  • ROI

  • Investment Grade


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Local Co-op value creation

  • 4% above cost of borrowed capital

  • 9 - 12% ROE

  • Numerous meetings

  • Benchmarking


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% Greater than

Rate of # % of % of Local % of 50% Term Debt/

Return Accts. Sales Savings Accounts Local Equity

9%+ 216 52% 96% 39% 37%

5-9% 110 15% 15% 20% 16%

0-5% 108 17% 6% 20% 27%

Below 11716%(17%) 21% 49%

0%

Return on Local Equity Analysis


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Cooperative System

Ag Supply Grain $ Sales

$(0-10) $(10-25) $(25-50) $(50-75) $(75-100) $(100+) Volume

--------------------------------------------

278 accounts

63% savings

--------------------------------------------

49 accounts

49% savings

9%+

5-9%

0-5%

Below

0

# accts. 216

savings- 96%

203 accounts

(10%) savings

23 accounts

(2%) savings

Summary

# accounts 481 # accounts 72

% savings 53% % savings 47%

Return on

local equity


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2

4

Pursue operational excellence

Drive customer integration

5

Create performance obsession

1

3

Leverage

horizontal scale

Exploit vertical opportunities

PFP success model

Strategy

Structure

Existing

Emerging



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