2014 CHS ANNUAL MEETING

Transcription

1 2014 CHS ANNUAL MEETING Financial Report Tim Skidmore FINAL: December 2, 2014 Good morning. Driving Performance Momentum As I prepare to share the financial report with you this morning, I m struck by two thoughts. One: The 12 months since I delivered my first CHS Annual Meeting report have passed in a blink. I could attribute this to aging, but I think it has more to do with the momentum your company has achieved, as it strives to help you grow today and long-term in a competitive global market. Two: First impressions are powerful and they are often correct. A year ago I told you I was drawn to join CHS because I viewed it as a company with tremendous integrity and commitment to helping its owners, employees, customers and other stakeholders grow. My first impression has been proven correct, many times over, but it has fallen short on one very important front. I seriously underestimated just how special this cooperative company and those associated with it are. Lately, I ve been studying our nearly 85 years of history. I ve been struck by the vision and passion that have always driven agricultural cooperatives and this company. (NOTE: on Camera) This vision, passion and direct economic linkage set CHS apart from others in the agriculture and energy spaces. This reinforces my already strong belief that it s a true honor and privilege to be part of the CHS team. So, with that preface, you ll understand why I remind myself every day what I m here to do. To bring my 30 years of experience to our cooperative. To help you grow and to help CHS operate with worldclass efficiency and effectiveness. I sketched out this 3 by 5 card that I carry with me. Yes, I know I can t draw, but this card helps keep me focused. The to do list shown on the left side of the center line -- consists of projects like back office processes and systems intended to make doing business with CHS both efficient and seamless. What s most important is on the right side. That s you, our farmer- and cooperative owners and everything that CHS does that touches you directly. The goal here is to help you grow. This requires deep business relationships between you and our dedicated employees. My assignment today is three-fold. First, to report on our very successful fiscal Second, to review what this means to you in direct economic returns. Third, and most important, I want to talk about how CHS will build and maintain critical performance momentum to keep your company financially strong, sustaining profitable growth, supporting continued investments in your future and returning appropriate and competitive amounts of cash to you CHS Annual Meeting Financial Report Page 1

2 Fiscal 2014, as you know, was an outstanding year for CHS our second best ever for both revenues and earnings. And, thanks to you and your support and that of our dedicated employees, we were able to hit that mark even in an agricultural economy that s softer than it has been for some time. Here s a look at our revenues for the past five years, capped off with $43 billion for fiscal We all know that CHS is a commodities-driven company, so our revenues reflect what s happening across our markets. It s interesting to note that even as our revenues declined slightly, our two highest-volume commodities refined fuels and grain/oilseeds actually posted unit volume growth for fiscal 2014 over And here s how our net income of $1.1 billion stacks up against the past five years. Clearly we ve had a stretch of strong and steady growth on both fronts. (NOTE: On camera) Now I want to walk you through the highlights for each of our business segments. In Energy, year-over-year earnings declined about 10 percent during fiscal 2014 due to lower refining margins for much of the year at our Laurel, Montana, and McPherson, Kansas, refineries. Throughout the year, these two refineries operated safely and efficiently to serve our owners and other customers. As you know, we continue to make significant investments in these refineries and related pipelines, storage facilities and terminals to increase our ability to serve you. Fiscal 2014 was a tremendous year for the rest of our energy businesses. Premium products and new retail facilities contributed to refined fuels volume growth with gallons now topping 3 billion. The long, wet fall and cold, hard winter translated into record volumes and earnings for propane. Yearover-year sales were up 40 percent the third year of growth for this business. Growth for both Cenex-branded and private-label products drove record results for our lubricants business and we captured new opportunities in the Bakken oil production region. CHS remains the national leader in marketing and distribution of renewable fuels, with domestic and global growth contributing to more than 45 percent volume growth and record results in CHS Transportation achieved its own record marks for 2014, partnering with propane to meet customer needs during the high-demand fall and winter, and serving the broad range of CHS businesses from energy, to crop nutrients, to food ingredients. Here s a look at our 2014 energy segment performance. Our Ag segment includes global grain marketing, crop nutrients, Country Operations, and CHS 2014 CHS Annual Meeting Financial Report Page 2

3 Processing and Food Ingredients. Here we saw earnings for fiscal 2014 increase from a year ago. We attribute this to two factors. First, our strong core competencies in logistics and risk management allowed CHS to maximize volumes and margins in global grain marketing and wholesale crop nutrients. This was essential as we dealt with intense rail freight pressure and other challenging issues. Second, strong crop inputs and strong grain margins, contributed to record earnings for Country Operations local retail units. Our CHS Nutrition animal feed operation saw increased profitability as livestock markets rebounded, while CHS Sunflower generated average earnings, even as weather issues decreased the size of the U.S. sunflower crop in fiscal (NOTE: On camera) While we continue to build capacity and expand markets in our global Processing and Food Ingredients business, we recorded a $74.5 million impairment in fiscal 2014 related to our 2012 acquisition of the Solbar soy protein food businesses. Clearly this is disappointing. We have performed a deep dive analysis to determine root causes and are implementing processes to improve our merger and acquisition due diligence and integration. This impairment was related to a charge taken as a result of the spring 2013 voluntary recall of certain food products produced at the Israel facility because they did not meet company quality standards. Upon further inspection throughout fiscal 2014, we determined that the Israel plant was unlikely to meet CHS standards for food-grade soy isolate production in the future. We have moved soy isolate production to our South Sioux City, Neb., facility where we have a higher confidence of meeting our uncompromising commitment to food safety, quality and security. Based on generally accepted accounting principles, we recorded the non-cash asset impairment in fiscal 2014 related to Solbar Israel. This impairment is not patronage sourced and will not affect our fiscal 2014 patronage distribution. (OFF Camera) Now here s a recap of results for our Ag segment The last component of my financial review covers Corporate and other. Within this category, CHS Business Solutions consisting of CHS Hedging, CHS Capital and CHS Insurance saw fiscal 2014 earnings decline from the previous year as lower grain volume affected lending and hedging activity. Throughout the year, each of these businesses successfully partnered with member cooperatives, producers and other customers to add-value through a wide range of programs and services CHS Annual Meeting Financial Report Page 3

4 Corporate and Other is also where we record earnings from our two food joint ventures. Our vegetable oil foods business, Ventura Foods, had an outstanding year with 6 percent volume growth and one of its best earnings contributions ever to CHS. In May, we marked the creation of Ardent Mills, the new flour milling joint venture with Cargill and ConAgra Mills. CHS recorded a $109.2 million tax-free gain associated with Ardent Mills formation. This gain will be passed through to eligible members as part of this year s patronage distribution. So, here s how the Corporate and Other category looks for fiscal And now a final look at the big picture of CHS performance for a very successful fiscal (Show Segment earnings chart lead applause) (Pause On camera) Now to part two of my remarks: A look at how CHS delivered direct economic value to you during fiscal 2014 and what we see ahead in Fiscal 2014 was a landmark year for value returned directly to our owners. Based on fiscal 2013 earnings, CHS returned a record $637 million to its owners in cash patronage, equity redemptions, preferred stock and dividends on preferred stock. This included a one-time retirement of $200 million of qualified equity using preferred stock that benefitted about 7,600 eligible member cooperatives and individuals. Based on fiscal 2014 results, we estimate that in fiscal 2015 we ll distribute around $518 million in cash patronage, equity redemptions and dividends on preferred stock which will make this the second highest year for cash returns in our history. (NOTE: On Camera) Your chairman noted that non-qualified equity will be issued as part of our patronage distribution, with the amount tied to the available Section 199/DPAD deduction. It is important to note that our owners will have no tax liability for the non-qualified certificates assigned to them. Also, these non-qualified equity certificates will carry voting and governance rights. When we look at the big picture of economic returns to our owners, I want to make one very important point. When we include the upcoming February 2015 pro-rata redemptions, redemption of qualified equity held by member cooperatives is current into fiscal That s a revolvement period very few cooperatives can match and one that you can all be proud of. (Pause on camera) 2014 CHS Annual Meeting Financial Report Page 4

5 In my final minutes with you, I want to lay out our plan for driving the critical performance momentum that will keep your company financially strong, sustain profitable growth, support continued investment in your future, and deliver appropriate and competitive cash returns to you. Here s a snapshot of the investments we re making in your energy, grains, crop nutrients and in other businesses. As you can see, we re reinvesting in this company and its businesses at a pace well ahead of depreciation. One only has to look at the reinvestment rate to see that CHS is investing heavily to help our owners grow. And to put this into perspective, let s revisit the direct economic returns we ve delivered to our owners -- $2.1 billion in the past five fiscal years. To sustain profitable business growth, and generate competitive returns to owners, requires that CHS consistently achieve 20 percent Return on Adjusted Equity or ROAE. This metric treats preferred stock like debt since it has no voting or governance rights. To do this, we subtract preferred stock dividends from earnings and reduce equity by the amount of preferred stock on the balance sheet. For fiscal 2014, Return on Adjusted Equity was almost 22 percent, marking the fourth consecutive year we ve exceeded our 20 percent goal. By sustaining ROAE at or above 20 percent, CHS will be able to continue to distribute competitive levels of cash patronage, maintain attractive age of equity revolvement and continue investing in long-lived scale assets to generate attractive future economic returns. In other words to borrow Chairman Bielenberg s term it s the CHS economic flywheel. Maintaining the economic flywheel will require fiscal discipline, managing our businesses for profitable growth, and employing all the balance sheet management tools available to us. This is especially important as we operate through the inevitable cycles in our businesses. Carl will talk more about this concept in his remarks later this morning. We must take full advantage of and leverage what sets CHS apart from the competition. I believe the cooperative business model is a source of competitive advantage versus other models. The cooperative model clearly aligns the economic interests of CHS with its owners, with every transaction conducted at market price, profits and patronage tied directly to the business you do with CHS and the single-taxation structure of patronage-sourced earnings. It s also true from a relationship perspective. Our mission is to help you grow. As an owner and customer, you help guide and drive our growth. In my opinion, there s no other business model where economic interests are so closely aligned. Additionally, we must maintain a solid financial foundation, anchored in prudent and strategic equity management wisely using the balance sheet management tools available to us. This is the key to enabling your company s growth. To me, the strong CHS balance sheet is the secret sauce for continued success CHS Annual Meeting Financial Report Page 5

6 So here s what this looks like. The base is liquidity management. Ensuring that above all this company maintains liquidity under all circumstances. We will maintain financial flexibility by operating inside our financial guardrails both those set by our lenders and the more conservative guidelines we ve established internally. You can see here that we re well within our financial guardrails today and we will stay within them as we build the fertilizer plant at Spiritwood, North Dakota, and our other capital projects laid out in our long-range plan. A few other points to note since 2002 CHS capitalization has quadrupled and, from 2010 through the close of fiscal 2014, our equity has doubled. Our strong balance sheet has been, and continues to be, a source of competitive advantage. Maintaining the strong financial foundation requires optimal management of the five links in our capital structure chain debt, preferred stock, qualified equity, non-qualified equity and unallocated reserve. Together, these provide both the strength and the flexibility that drive the CHS economic flywheel. (NOTE: On camera) Earlier, Chairman Bielenberg discussed the important role of non-qualified equity. In addition, this year we used preferred stock to further strengthen the balance sheet in anticipation of the major capital investments we have planned. We have additional preferred stock capacity, with the ability to issue another $1.5 billion under the shelf registration we filed with the Securities and Exchange Commission this past summer. We plan to incrementally strengthen the balance sheet with preferred stock as attractive capital market opportunities present themselves over-time. As CHS owners, you can feel good about how your company is perceived in the public preferred capital markets. As we ve taken each subsequent preferred offering to the market, it s clear that institutional and retail investors see the tremendous value CHS creates for its owners. Each new offering has been larger than its predecessor and has carried a lower dividend rate. CHS is now the largest non-bank issuer of preferred securities in the United States. And, these preferred stock investors have no governance or voting rights. Their only claim is to the dividend. Preferred stock provides us with a tool to build what is essentially a permanent form of capital to support growth on your behalf. (Pause on camera) We ve covered a lot in our short time together. There s no question building this company s financial foundation in a time of tremendous growth, is a challenging balancing act. Continuing this performance momentum is essential for our future as a farmer-owned cooperative in a competitive and global marketplace. As a company your company we are fortunate to have a strong balance sheet, a secret sauce that creates competitive advantage CHS Annual Meeting Financial Report Page 6

7 My number one goal is keeping this company financially strong, enabling CHS to continue investing in the future and delivering direct economic returns to you, our owners today and for many tomorrow s to come. As I wrap up my remarks, I want to share with you another one of my pocket reminders about why I m here. To build and strengthen the financial foundation of your company your investment in CHS to drive long-term growth and build momentum. It is my privilege to be a member of this outstanding team. Thank you CHS Annual Meeting Financial Report Page 7