CH-757PE-017cgMK Farmers Cooperatives 2001 October 8, 2001.
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CH-757PE-017cgMK
Farmers Cooperatives 2001
October 8, 2001
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CHS Cooperatives - Land O’Lakes
Number of Cooperatives in our System
2000
1400
1100
2300
0
500
1000
1500
2000
2500
1980 1987 1996 2000
Total Trade Area
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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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1999 % 2000 %Sales 11,455 100.0 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
Total Profitability 560 Local Cooperatives
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Financial Analysis of 560 Local Cooperatives
2000Number Profitable 73%
Trends Total
• Sales volume down (2.9)%
• Margins up 4.5%
• Expenses up 5.7%
• Local savings down (10.8)%
• Patronage down (22.3)%
• Total savings down (17.3)%
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1994 2000 % Change
Total Assets 4,103 5,475 33%
Term Debt 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%
Local Co-op Trends
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Local Ownership/ Term/ Local Net Worth
Local Ownership 38.4%The guidelines for the ratios are:50% = strong35-50% = 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 ofAccounts
% TotalSales
%TotalLocalProfit
Term Debtto Equity
%Return
on TotalEquity
% 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
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
$25 and below 418 74.8% 36.1% 31.6% 11 .1
560 100.0% 100.0% 100.0% 22 .2
% of % of Average AverageSize of Number of % of Total Total Sales ProfitAccount Accounts Accounts Sales Profit (million) (million)
Financial Summary560 Cooperatives
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Profits by Size of Co-op
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)
Total RangeSize of Number of Sales Total of Account Accounts Volume Profit Profitability (million)
Financial Summary560 Cooperatives
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State Analysis560 Cooperatives
# Accounts Sales(millions)
Local Profit(millions)
%Profitable
Iowa 76 3,210 19.3 76%Minnesota 109 1,859 30.2 72%West 70 1,218 14.7 74%Wisconsin 80 1,208 11.6 63%Ohio/Michigan 36 1,153 13.9 94%North Dakota 90 1,013 8.8 70%Indiana 33 965 7.3 67%South Dakota 37 913 13.5 71%NE/KS/CO 29 905 13.1 76%
Total 560 12,443 132.4 73%
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Local CooperativesTop 10 Per State/Region - 90 Cooperatives
(Million) (Millions)Sales % Total Local Profit % Total % Profitable
IA 1494 46.5% 7,939 41.2% 90%SD 710 77.7% 11,616 85.9% 100%OH/MI 683 59.3% 9,003 64.9% 100%NE/KS/CO 682 75.3% 11,623 88.2% 100%MN 622 33.4% 13,126 43.4% 100%IN 531 55.0% 4,873 67.1% 80%West 467 38.3% 3,599 24.4% 80%WI 430 35.5% 5,199 45.1% 70%ND 317 31.2% 2,630 29.8% 70%Total 5936 47.7% 69,608 52.5% 88%
Grand Total 12,443 132,400
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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 $2.2 billion invested, 30% of the co-ops created value
–Operational efficiency and capital utilization are the most significant drivers of whether a local co-op creates value
•Co-op performance improves substantially with scale
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-120
-80
-40
0
40
0 1 2
Value Creation at Co-ops
Cumulative local value created at sample co-ops*$ Millions
*Survey of approximately 500 CHS co-opsSource:Member co-op survey; team analysis
Although local co-ops destroy value in aggregate . . .
• On $2.2 billion in capital invested, $105 million of value was destroyed
. . . a significant fraction do create value individually
• 30% of co-ops created value on an individual basis
• Value created by these co-ops equals $28 million on $0.7 billion invested
30% of co-ops create value
Cumulative capital invested$ Billions
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Value Created Across Local Co-ops
24
27
26
14
23
1
2
3
4
*Segmented by value created/invested capital**Mean values for co-ops in quartileSource:Member co-op survey; team analysis
Quartile*Revenue**$ Millions
248
-227
-559
-424
-169
Value created**$ Thousands
5.1
-4.8
-3.0
-7.8
Value created/ invested capitalPercent
ROICPercent
14.2
6.3
1.8
-9.3
Cost of capitalPercent
9.2
9.3
9.5
9.4
Total 4.6 9.4
-18.7
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Drivers of Value Creation
*Co-ops segmented by level of value created/invested capital**Numbers may not add due to roundingSource:Member co-op survey; team analysis
Mean metrics for co-ops segmented by local performance*
-18.7-7.8 -3.0
5.1
Q4 Q3 Q2 Q1
EP/IC**Percent
9.4 9.5 9.3 9.2
Q4 Q3 Q2 Q1
WACCPercent
4.7 4.8 5.0 4.9
Q4 Q3 Q2 Q1
Capital turnoverRatio
81.7 84.2 84.1 81.9
Q4 Q3 Q2 Q1
COGSPercent of sales
Operational efficiency• Co-ops in top quartile
expended almost 5% less in expenses than those in the bottom quartile
-9.3
1.8 6.314.2
Q4 Q3 Q2 Q1
Pretax ROICPercent
-2.0
0.4 1.32.9
Q4 Q3 Q2 Q1
Pretax operating profitPercent of sales
20.315.4 14.6 15.8
Q4 Q3 Q2 Q1
ExpensesPercent of sales
16.5 15.3 14.217.1
Q4 Q3 Q2 Q1
Net PP&EPercent of sales
4.3 4.4 4.8 6.1
Q4 Q3 Q2 Q1
Working capitalPercent of sales
Top quartile
Bottom quartile
Q1
Q4
Capital utilization• Bottom quartile co-
ops are 3% more capitalized than those in the top quartile
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Leverage Ratios for Local Co-ops
1
2
3
4
*Segmented by value created/invested capital**Mean values for co-ops in quartileSource:Member co-op survey; team analysis
Quartile*Revenue**$ Millions
Value created**$ Thousands
Long-term debt to equity Current ratio
Total
24
27
26
14
23
248
-227
-559
-424
-169
0.21
0.23
0.32
0.27
0.25
1.76
1.58
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
Co-op revenue$ Millions
*Survey of approximately 500 local co-ops**Co-op segmented by annual revenue***Average for co-ops in quartileSource:Member co-op survey; team analysis
Key metrics for co-ops segmented by revenues
59.4
18.2
9.8
4.7
1
2
3
4
Quartile**
Revenue***$ Millions
1.1
1.1
0.6
Operating marginPercent
5.8
4.5
2.3
ROICPercent
-5
0
5
10
15
20
25
0 25 50 75 100
-0.2-0.7
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Drivers of Scale Impact on Performance
*Co-ops segmented by level of value created/invested capital**Numbers may not add due to roundingSource:Member co-op survey; team analysis
Mean metrics for co-ops segmented by revenue*
3.4 4.1 4.35.5
Q4 Q3 Q2 Q1
Capital turnoverRatio
78.4 79.4 80.7 85.0
Q4 Q3 Q2 Q1
COGSPercent of sales
Operational efficiency• Top quartile co-ops
expended 8% less in expenses than those in the bottom quartile
Capital utilization• Bottom quartile co-
ops are 4% more capitalized those in the top quartile
-0.7
2.34.5 5.8
Q4 Q3 Q2 Q1
Pretax ROIC**Percent
-0.2
0.61.1 1.1
Q4 Q3 Q2 Q1
Pretax operating profitPercent of sales
22.0 20.2 18.2 14.0
Q4 Q3 Q2 Q1
ExpensesPercent of sales
18.8 17.9 14.219.0
Q4 Q3 Q2 Q1
Net PP&EPercent of sales
5.8 5.7 4.110.9
Q4 Q3 Q2 Q1
Working capitalPercent of sales
Top quartile
Bottom quartile
Q1
Q4
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Effects of Scale on Operational Efficiency andCapital Utilization
5
10
15
20
25
30
0 25 50 75 100
ExpensesPercent of revenue
Co-op revenue$ Millions
Source:Member co-op survey
0
2
4
6
8
0 25 50 75 100
Capital turnoverRatio
Co-op revenue$ Millions
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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 long-term success• Integral piece of co-op system
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