A Financial Management System to Measure and Manage the Value of Your Business

Goal Observed Weaknesses of Privately Held Agribusinesses Observed Weaknesses of Privately Held Agribusinesses Ways to Overcome the Weaknesses Ways to Overcome the Weaknesses EVA Financial Management System to Focus on Maximizing Shareholder Value and Motivating Employees EVA Financial Management System to Focus on Maximizing Shareholder Value and Motivating Employees

Observed Strategic Weaknesses of Privately Owned Agribusinesses Ownership StructureOwnership Structure Breadth/Depth of Management TeamBreadth/Depth of Management Team Inadequate Strategic Business PlanInadequate Strategic Business Plan Inadequate Financial Management PlanInadequate Financial Management Plan Need to develop a strategic plan and a framework to measure and manage the value of your businessNeed to develop a strategic plan and a framework to measure and manage the value of your business Key to maximizing long-term shareholder wealthKey to maximizing long-term shareholder wealth

Five Forces That Determine Industry Profitability INDUSTRY COMPETITORS Rivalry Amount Existing Firms SUPPLIERS CUSTOMERS POTENTIAL ENTRANTS SUBSTITUTES

Type of Competition Determines Industry Returns Rate of Return Market Share Large, economies of scale Small and niche-focused Low High

Comparison of Publicly Traded and Privately Held Companies Breadth/Depth Documented Of Management Business Plan Flexibility Discipline Breadth/Depth Documented Of Management Business Plan Flexibility Discipline PrivatelyHeld(“Small”)PrivatelyHeld(“Small”) Publicly Traded (“Big”) (“Big”) Key managers in all aspects of the business with a strong leader: operations, sales, marketing, and finance Strong overall leader with weaker individual managers. Rely on outside advisors. Strategic plan in place to guide management and measure results. Typically operate on a year-to-year or season-to- season basis Tendency to be inflexible due to organizational structure and public reporting requirements. Flexible, can quickly adapt to changes in the marketplace. Shareholder and analyst scrutiny focuses mgmt. on maximizing shareholder value. Stock market creates discipline. Managers not focused on maximizing shareholder value. Owners focused on minimizing taxes. Privately held, middle market companies fail to systematically measure and manage the value of their businesses. LIQUIDITY Privately held, middle market companies fail to systematically measure and manage the value of their businesses. LIQUIDITY

Focus on Maximizing Terminal Value 40% of total present value is recognized in the final year of the bond. Same relationship in exists in valuing a company. 40% of total present value is recognized in the final year of the bond. Same relationship in exists in valuing a company. Cash Flows from a 10-yr. $1000 Bond at 10%

Typical Accounting Measures Balance Sheet Accounts Receivable Turnover Accounts Receivable Turnover Inventory Turnover Inventory Turnover Asset Turnover Asset Turnover Working Capital to Sales Working Capital to Sales Debt to Equity Debt to Equity Income Statement Gross Profit Margin Gross Profit Margin Operating Profit Margin Operating Profit Margin(EBIT/Sales) Net Profit Margin Net Profit Margin Earnings per Share Earnings per Share Return on Capital Employed Return on Assets Return on Capital Employed Return on Assets ROE = Profit Margin x Asset Turnover x Financial Leverage

Shortcomings of Accounting Measures Fragile association between accounting returns and creation of shareholder wealth. Fragile association between accounting returns and creation of shareholder wealth. Improvements in accounting measures may actual destroy shareholder value. Improvements in accounting measures may actual destroy shareholder value. Wide array of performance measures creates confusion and conflicts among managers. Wide array of performance measures creates confusion and conflicts among managers.

Economic Value Added (EVA ® ) Residual income measure that subtracts the cost of capital from the operating profits generated in the business Residual income measure that subtracts the cost of capital from the operating profits generated in the business Accounts properly for all the ways in which corporate value may be created or destroyed Accounts properly for all the ways in which corporate value may be created or destroyed Only performance measure to tie directly to the intrinsic market value of a company Only performance measure to tie directly to the intrinsic market value of a company EVA = [rate of return (r) – cost of capital (c*)] x Capital Employed EVA = NOPAT – c* x Capital Employed EVA = Operating Profits – a Capital Charge

EVA Basics …one should as soon compute earnings without a capital charge “as play tennis with the net down.” All EVA does is simply lift the net back up where it belongs.

EVA Value Creation Strategies Improve operating profits without tying up any more capital. Improve operating profits without tying up any more capital. Increase capital only if return on investment more than covers the charge for additional capital. Increase capital only if return on investment more than covers the charge for additional capital. Liquidate capital where the earnings lost are more than offset by a savings on the capital charge. Liquidate capital where the earnings lost are more than offset by a savings on the capital charge. Structure balance sheet in a way that lowers the cost of capital. Structure balance sheet in a way that lowers the cost of capital. EVA = ( r – c*) x Capital Employed

EVA Example - 3 Ways to Add Value Each Adds Shareholder Value in a Different Way….Only Performance Measure to Identify Each

EVA Example – Stop Destroying Value Turning off the spigot on unrewarding projects is the last way to add value.

The EVA Valuation Formula Market Value Added (MVA) = Market Value – Capital Market Value Added (MVA) = Market Value – Capital MVA = Present Value of all Future EVA MVA = Present Value of all Future EVA Market Value = Capital + Present Value of all Future EVA Market Value = Capital + Present Value of all Future EVA r / c* > 1.0 company will be valued at a premium to its economic book value (capital) r / c* > 1.0 company will be valued at a premium to its economic book value (capital) r / c* < 1.0 then company will be valued at a discount to its economic book value (capital) r / c* < 1.0 then company will be valued at a discount to its economic book value (capital)

Graphical Example of EVA and Value Creation Return on Capital - r Cost of Capital - c* r = 15% & c* = 15% EVA = $0 Value = Capital r = 15% & c* = 15% EVA = $0 Value = Capital r = 25% & c* = 15% EVA = $100 Value > Capital r = 25% & c* = 15% EVA = $100 Value > Capital r = 5% & c* = 15% EVA = ($100) Value < Capital r = 5% & c* = 15% EVA = ($100) Value < Capital Capital Employed Capital Employed

Key Benefits of EVA Framework Links strategic, operating, and financial planning Links strategic, operating, and financial planning Helps managers make better decisions Helps managers make better decisions Capital charge converts the balance sheet into another line-item expense Capital charge converts the balance sheet into another line-item expense EVA = Sales – Operating Costs – Capital Costs EVA = Sales – Operating Costs – Capital Costs Easy to communicate to all employees Easy to communicate to all employees Performance expressed in a single profit measure expressed in dollars Performance expressed in a single profit measure expressed in dollars EVA IS THE MOST RELIABLE UNAMBIGUOUS CONTINUOUS- IMPROVEMENT METRIC

Four Applications of EVA MEASUREMENT MEASUREMENT Most accurate measure of corporate performance Most accurate measure of corporate performance Translates accounting profits to economic reality Translates accounting profits to economic reality MANAGEMENT MANAGEMENT Four ways to increase value Four ways to increase value MOTIVATION MOTIVATION Cause managers to think and act like owners Cause managers to think and act like owners “Bank” bonuses to insure sustainability and long-term thinking “Bank” bonuses to insure sustainability and long-term thinking MINDSET MINDSET Transforms corporate culture Transforms corporate culture Internal corporate governance Internal corporate governance

KENT GROUP INC. Investment Bankers Specializing in the Agribusiness and Food Industries W. Sarah Lane, Suite 175 Brookfield, WI Tele: Fax: