Jeff Stroburg, CEO West Central Cooperative Ralston, Iowa Executing Difficult Strategies Sixth Annual Farmer Cooperative Conference October 30, 2003

Lower margins and increased costs are forcing restructuring to maintain healthy profitability.

Healthy Profitability should result in value creation

“Value Creation is not necessarily just generating a positive net margin on the CPA audit.” Roger Ginder ISU Economist

Accounting Profit vs. Economic Profit CPA Audit Profit = Surplus over Expenses - including Debt Expense Economic Profit = Surplus over Risk Adjusted Cost of All Capital Employed by the Cooperative – including the Equity Capital For Value to be created there must be enough profit to give a fair return to equity i.e. Economy profit must be > to zero

The viability of a business unit or location should be considered using a return on – ALL – invested capital (ROIC)

Fertilizer Total Expenses/Gross Revenue

Fertilizer Total Expenses/Tons

Fertilizer Total Expenses/Gross Revenue

Fertilizer Total Expenses/Tons

Grain Total Expenses/Gross Revenue

Grain Total Expenses/Bushels

Grain Total Expenses/Gross Revenue

Grain Total Expenses/Bushels

Lack of Confidence in Equity Redemption Unwillingness to Invest In the Cooperative Insufficient Cash Patronage to Cover Patron Tax Liabilities Inefficiencies in Operations That Hurt Competitiveness Symptoms of Value Creation Problems In Some Cooperatives

Educate Stockholders Return on Invested Capital – including equity capital Break even or marginal profits = value destruction Capital investment decisions must be based on ROI (not IOT) There is not enough margin in agriculture to support some “Legacy Locations”

Determine Minimum ROIC (Equity capital is not free) Establish return requirement on assets – Accounts Receivable Inventories Property Plant Equipment Establish competitive return requirements on equity

Summary If stockholders know how investment decisions are made on a consistent basis they are more likely to “buy in.”

Thank You Are there any questions?