Restructuring for Troubled Times 5th Annual Farmer Cooperatives Conference November 1315, 2002 St. L

1
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

2
Todays 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

4
Value creation is a key metric
Return on invested capital
Value created
Invested capital
Cost of 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
5
Value Creation

• Industry
• Regional co-ops
• Local co-ops

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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
Food distri-bution
Primary proces-sing
Farm produc-tion
Ag inputs
Input Distri-bution
Cost of capitalPercent
10.6
10.8
10.9
10.4
10.9
11.1
Value createdPercent, share of invested capital
0.1
-2.3
-1.1
-5.4
-7.0
-2.0
7
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
16
-53
-1.3
Fertilizer
9.1
11
-3.5
-122
Chemicals
12.6
0.1
11
2
-360
Total
9.1
57
-2.0
Input Distribution
-2,519
-7.0
138
3.9
8
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 OLakes
1.6
1
Agrilink
5.2
9
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
10
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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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
accts. 216 savings- 96
9 5-9 0-5 Below 0
23 accounts (2) savings
203 accounts (10) savings
Summary accounts
481 accounts 72 savings 53 savings
47
Return on local equity
16
PFP success model
Strategy
Structure
Existing
Emerging
17
Thank you!!