Your board and management have developed a basic set of organizational
beliefs regarding what it will take to succeed – as a business
and as a cooperative – in this changing environment. Those
beliefs focus on the strategic importance of competitive size and
scale, business performance and financial results, balance sheet
strength, portfolio management, the quality of our people and system
focus.
A YEAR OF TRANSITION
As we consider the basic focus of these beliefs, 2003 was a transition
year for our system. In the late 1990s, right through to 2001, we
concentrated intensely on size and scale. During that period, we
achieved significant growth in all our core businesses. This growth,
while necessary from a strategic and competitive point of view,
at times came at the expense of short-term performance and balance
sheet strength.
As we moved into 2003, while we continued to pursue growth-related
cost savings, we intensified our focus on customers, performance
and balance sheet strength.
Our sharpened focus on performance is reflected in 2003 results.
Overall, we recorded $84 million in 2003 net earnings. While this
is down from $99 million in 2002, when you factor out the impact
of legal settlements and other one-time gains and losses, earnings
from operations were up significantly.
The past year also saw an intensified focus on balance sheet strength,
as we paid down term debt by $131 million. Importantly, as we closed
the year, we improved our capital structure with the completion
of a new financing package which included a favorable restructuring
of existing debt and a three-year extension of our revolving line
of credit. This debt restructuring effort (which did not increase
our debt level) enabled us to take advantage of declining long-term
interest rates, spread term debt payments over a longer period and
maintain strong liquidity.
FEED
Our Feed strategies continued to evolve in 2003, as we moved from
the focus on strategic growth reflected in the 2001 acquisition
of Purina Mills, to 2002’s sharp internal focus on the capturing
of growth-related cost savings, to 2003’s intense focus on
customers. Going forward, Feed’s priorities are strengthening
its focus on members and customers, leveraging brand strength, building
livestock feed volumes and achieving optimal efficiency and
productivity, while providing customers with high-quality service.
Early in 2004, for example, Feed began a regional market-aligned
restructuring intended to bring the management of the manufacturing, distribution, customer service and sales functions even closer to
the customer.
Looking at 2003 performance, key areas of strength were companion
animals, beef feed, horse feed and animal milk replacers. Challenges
in the livestock/commodity feed markets, however, were reflected
in reduced volume and earnings in that segment. Feed continued its
sharp focus on customers, operating efficiency and the effective
leveraging of our LAND O LAKES and Purina brands. The end result
was that Feed reported positive earnings for the year and is well
positioned for 2004.
DAIRY FOODS
Looking back over the past six or seven years, Land O’Lakes
realized significant growth in Dairy Foods. Our focus has been on
building an efficient, strategically located infrastructure; continuing
to grow and leverage the strength of our brand; enhancing our people
power; maximizing supply chain efficiency in terms of cost and customer
service; and leveraging market- and customer-focused research and
development and product innovation to build competitive advantage.
We will remain sharply focused on these core strategies going forward.
In 2003, Dairy Foods was intensely dedicated to performance and
value. That focus produced strong Value Added volumes and earnings
– driven by the value of our brand and the performance of
our cornerstone Butter and Superspreads, Foodservice and Deli Cheese
businesses.
The importance of our commitment to driving earnings in our Value
Added business was amplified by the challenges we faced in the Industrial
(manufacturing) side of Dairy Foods, where milk production levels
continued to adversely affect the profitability of the domestic
dairy manufacturing infrastructure. While the past year saw notable
improvement in our Industrial performance, we continued to realize
losses in this segment.
From Land O’Lakes perspective, our Industrial operations will
continue to be guided by two key principles. First, our responsibility
to provide a market for member milk and optimize the value captured
from the marketplace. Second, given ongoing shifts in milk production,
to work with other organizations to optimize the use of –
and return from – manufacturing assets on a regional basis.
As dairy production declines in the Midwest and East, we have been
aggressive in seeking partnerships with others. Simply owning plants
for the sake of owning plants does not serve our goal of optimizing
member returns.
Looking to the West, we are completing the Phase I start-up of our
new world-scale mozzarella and whey production facility –
Cheese and Protein International (CPI). The equipment for Phase
II is being installed now and we will be ready for additional production
by the second half of 2004. Phase II will significantly lower per-unit
production costs and, long-term, this plant will be a strategic,
least-cost and profitable asset for our system and our members.
SEED
Seed, in recent years, has completed aggressive growth initiatives
– becoming the nation’s third-largest farm seed company.
Seed is now focused on translating that growth into enhanced performance.
In 2003, Seed achieved record earnings, driven by positive performance
that included increased volume, aggressive cost-reduction efforts
and the continued growth of the CROPLAN GENETICS brand.
The foundation of Seed’s strategy going forward will be to
build upon “knowledge” as a key point of difference,
putting the best-trained and best-equipped workforce in the field;
continue to grow the CROPLAN GENETICS brand; be the industry’s
technology leader, delivering the very best in seed genetics and
traits to customers; and leverage the strength of the cooperative
distribution system, helping local cooperative dealers build sales
and earnings.
AGRONOMY
Land O’Lakes position in Agronomy is defined by our 50-percent
ownership in the Agriliance joint venture – the nation’s
leading marketer of crop production inputs. This joint venture,
established in 2000, initially focused on integrating the diverse
systems and cultures of the organizations that came together to
form Agriliance. Over time, that focus shifted toward capturing
significant growth-related cost savings and, most recently, to delivering
on the full performance potential of the new, larger organization.
Despite a very tough industry environment, shaped by such forces
as the impact of high natural gas prices on the ability of domestic
crop nutrient manufacturers to remain competitive and a declining
crop protection products market, Agriliance has translated its continuing
focus on performance and its dedication to customer service into
increased earnings in each of its past three fiscal years.
Layers/Eggs
The past year was also a transition year in our Layers/Eggs business,
which we conduct through our MoArk joint venture. Recent years have
seen us grow this business to a top-three position in the shell
eggs and processed egg products market. Going into 2003, translating
that growth into improved performance was a key priority. Thanks
to a combination of significant market improvements, our increased
size and scale, our focus on performance and the ability to leverage
our brands (LAND O LAKES and Eggland’s Best), earnings were
up significantly. These performance-focused efforts will continue
in 2004.
Vision for the Future
As Land O’Lakes looks to the future, we remain dedicated to
our Vision of “being one of the best food and agricultural
companies in the world.” Our focus on performance remains
sharp, our dedication to our cooperative responsibilities steadfast
and our passion for delivering value to members and customers strong.
Sincerely,
Jim D. Fife
Chairman of the Board
John E. Gherty
President and Chief Executive Officer
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