BACK ON TRACK.

The Pool retools in search for profitability

It's not hard to find a shareholder of Saskatchewan Wheat Pool. Just drive down any rural road and you'll probably find one living at the first house you encounter. If not there, certainly at the next one.

The Pool and the province of Saskatchewan have been synonymous. It was even formed by an act of the Legislature. The grain co-operative emerged more than 75 years ago as farmers strengthened their purchasing and political power by uniting. The organization grew to become the province's largest business -- generating billions of dollars in sales -- and helping to shape the agricultural policy of successive provincial governments.

But, despite its size, the Pool is not immune to the vagaries of a constantly changing business environment. The bigger they are and all that.

Five years ago, for example, the company reorganized its share structure to make listing on the Toronto Stock Exchange possible. Becoming a publicly traded company flowed from the organization's need for new capital as it embarked on a repositioning strategy. In part, the realignment resulted from a fundamentally changed business environment that followed the end of the Crow Rate subsidy, increasing globalization and liberalized trade rules.

But external issues were not the only forces weighing on the Pool. Fresh capital was required to improve its balance sheet. Unlike a traditional corporation where shareholder equity is a measure of financial strength, member equity on a co-operative balance sheet is a liability owed to the shareholders in return for patronage or dividends. Farm demographics -- the aging farming population -- brought increasing member demands for patronage pay outs at the same time as the organization's capital needs to build concrete elevators and diversification mounted. So the company went to the market for equity capital.

The transition from a 'pure' co-op to a corporation brought plenty of fallout from long-time members and, while the noise from the restructuring has largely died away, the din was just one example of the challenges the organization has faced in recent years.

The 1996 TSE listing brought not only new capital, it introduced thousands of non-farmer shareholders to the mix. And they too have had a bumpy ride as Pool share prices have fluctuated from a high of $24.40 to less than $3 as profits in the mid-'90s turned to losses by the end of the decade.

The man charged with getting the company back on track is Mayo Schmidt, a one-time member of the Miama Dolphins football team who has enjoyed a professional career as a food industry executive with the likes of ConAgra and General Mills in both Canada and the U.S.

He also made a couple other changes in the executive offices at Victoria Avenue and Albert Street, including luring former ConAgra colleague Mike McCord to Regina as chief financial officer and bringing in former Canadian Wheat Board Commissioner Richard Klassen as executive vice-president of the Food and Industrial Group.

The road map Schmidt and his team recommended to the Pool's board of directors amounts to a 180-degree reversal of conventional operating procedure in the Prairie grain business. Schmidt calls it destination marketing.

In broad terms, Prairie grain farming has been supply-driven. Farmers made their production choices and then sold the inventory into the system which found a home for the product. The bulk of the selling was done by the Canadian Wheat Board, and the Pool or other grain companies moved the product.

Schmidt's plan is a complete reversal. Not that any of the players change roles but, he envisions a demand-driven system where crop production decisions flow from a customer's purchase order. The Pool would continue to handle delivery but Schmidt sees further opportunities to enhance value to both the producer and the buyer; value that will translate into revenues and, ultimately, profits for the organization.

First of all, producers will require more market intelligence to ensure they are growing crops that buyers are seeking. That market intelligence has value and that's a role for the Pool in Schmidt's view.

He encapsulates it this way. Certain customers are prepared to pay a premium for a long-term supply relationship with producers provided they can be assured supplies of higher quality, identity-preserved product. In other words, they know what they're getting and they get it consistently.

"Our business is no different than any other. It's what our customers are willing to pay and what they're willing to buy," Schmidt states.

The Pool acts as a Canadian Wheat Board Accredited Exporter (AE) so it can identify sales opportunities on behalf of the Wheat Board. For non-board products, it deals directly with end users, completing the destination marketing equation from producer to consumer.

"We want to access the highest grade of customers," offers Schmidt in explaining this leg of his strategy for revitalizing the Pool's financial situation. It's an integrated approach. Selling proprietary seed lines, inputs, handling the grain when it's harvested, cleaning it, shipping it by efficient unit trains to gain margins, money that can be used to attract more grain into the handling pipeline because this is a low-margin, high-volume business. But it all starts with a premium customer.

This has the potential to heighten tensions between the central desk sellers at the Canadian Wheat Board and the Pool, the organization that long was the Board's biggest supporter. It's not secret that the Board and grain handlers, including the Pool, are at loggerheads over grain transportation. Nonetheless, Schmidt says the Pool remains committed to single desk selling but says just as the Pool and every other player in the ag sector has undergone change as the industry restructures, the Board too must decide whether it's a marketing agency or a transporter.

"We have created the pipeline from seed to end customers," says Schmidt in noting that injecting someone else into that pipeline is an impediment.

"Who's in charge in this whole process?" Schmidt asks of the role of the Board in the business. "That's what this debate has come to more than: what's good for the industry?"

The Wheat Board, he adds, relies on AE's like the Pool to sell more than half the production in Western Canada because "we have the contacts with the customers. They are facilitators of marketing."

Customer, customer, customer. The refrain is straightforward. Addressing the organization's top line by building on the value of a pipeline from producer to consumer is a critical plank in Schmidt's long-term strategy for restoring the Pool to its former prominence.

"The focus on destination marketing will also create new opportunities for our growing agri-food processing operations," touts the Pool's most recent annual report. "Today, the Pool is moving to leverage the ability our new executives to establish wider ranging alliances with destination customers while holding operating management to a higher standard of performance."

A second element of Schmidt's plan flows from that commitment to stronger performance standards which includes making the corporation's size fit its business base. That's meant staff reductions, asset shedding and accelerated elevator closures. More often than not, these measures were greeted with criticism but, Schmidt notes, that was last year's news. For the most part, these changes are completed although senior management is constantly reviewing every operational division to ensure they are carrying their weight and adding to the organization's core business.

The concept of destination marketing and winning leverage through the Pool's pipeline and attendant processing operations has both supporters and doubters.

Murray Fulton, the province's most seasoned co-op watcher and now head of the Agricultural Economics department at the University of Saskatchewan, remains a doubter and wonders whether producers will respond quickly enough to fill the destination marketing pipeline.

"We're not there yet on the crop side. These are still commodity markets contends Fulton who says a "pull through system" is probably 10 years away.

The company will also have to rebuild its grassroots alliances, says Fulton.

"They (the Pool) traditionally had a fairly substantial chunk of the Saskatchewan market. It's down substantially," says Professor Fulton in noting that the changes the Pool has undergone -- from share restructuring to elevator closures -- undermined loyalty at the farm gate. Moving from a presence in every small town to a more centralized system of concrete elevators, says Fulton, has resulted in "a bit of a disconnect between the size of the infrastructure the Pool has built and its market share."

Schmidt concurs with Fulton's assessment on this front. The Pool, despite accelerated elevator closure, and the entire grain handling system have excess capacity. But that, he contends, is the very reason for sharpening the focus on destination customers.

For example, the Pool recently sold its interest in XCAN so it can now look for dominant players in individual markets to help secure destination customers rather than spend capital to build its own infrastructure in each market.

"Some players can sell more (product) than they can originate. We have the opposite' Schmidt says.

As Schmidt and the other players in the Pool's executive suite -- called the Mayo Clinic in some industry circles -- press to streamline the organization's internal workings and expand its market penetration, they can now point to progress in getting the organization back on track.

The latest financial results showed considerable improvement in cash flow, sales volumes and operating costs. And the full impact of cost cutting will not be seen until later in this fiscal year.

Equity analyst David Vanderwood of the Vancouver investment firm Odlum Brown is bullish on the recent news. "I think they're on the right track. There's light at the end of the tunnel. They're doing the right things. Operating earnings are going up."

While Vanderwood says the company s financial performance -- with stock prices plummeting from the $24 range to less than $3 -- means the Pool has a long ways to go to win back the investment community's credibility but "if they can break even, they've (management) done the job."

Fulton too acknowledges the positive news in recent weeks but, like Vanderwood, says the organization's heavy debt load remains an issue.

"I expect by the fall we'll have a pretty good sense (of the Pool's prospects)," adds Fulton.

On this point, Schmidt and Fulton are on the same page. The first quarter of the current fiscal year, which brought better financial news, is traditionally a good one. The next two quarters are much tougher. The test of the Pool's progress will come in the next four or five months before the final quarter, historically the company's strongest.

"This is a pivotal year as we reposition our company' says Schmidt.

Like Wayne Gretzky, he adds, in the future the Pool will be skating to where the puck is going to be.

"It all comes down to people. We have the assets but this (change) is happening because of people -- the board of directors will to put themselves at risk to rationalize these businesses. Most failures come from a CEO failing to execute. We will be accountable and execute according to plan."