2016 AGM: General Manager's Report

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May 12, 2016
2016 AGM: General Manager's Report

I am pleased to report that Pembina Co-op completed another very successful year. In my report, I will review the highlights and business plans of our four commodity lines - petroleum, agro, general merchandise and food, as well as reviewing the 2015 financial results and summarizing the budget for the coming year. I will conclude my report with recognition of our employees’ achievements.

Petroleum

Our petroleum division completed another successful year despite the volatility in crude pricing as overproduction drove the price of crude oil down to levels nobody would have believed possible a year or two ago. While everyone feels good due to the lower cost to fill their tank with fuel, the reality is that we will all suffer more in the long run as the lower crude values impact the economy in Western Canada. Many people will face major lifestyle changes as employment demand is reduced and companies adapt to remain viable with the reduction in oil prices. This will also impact governments who have relied on energy profits to fund the services they provide. There will be changes and we will adapt.

On our retail operations, the lower fuel prices did not impact our savings as much as most would think. Our margins remain fairly consistent on a per litre basis whether fuel is 75 cents a litre or $1.25 per litre. Our focus on being efficient with delivery costs and the continued acceptance of our cardlocks served us well over the past year. Losses on inventory levels as the price of crude dropped was offset partially by lower fuel costs to operate our delivery units and lower credit card processing fees that are based on a percentage of the invoice total.

The dropping fuel prices did have a negative impact on the operations of the Co-op refinery, and therefore, the patronage allocation our Co-op receives from FCL. There were large market losses on inventory as the Co-op refinery has to build significant fuel inventory to meet the heavy demand during spring seeding and harvesting. While refining margins were strong for gasoline, diesel fuel margins were much weaker. This was a result of lower diesel demand as decreased activity in the oil fields reduced the amount of trucking in Western Canada. With farmers representing a strong portion of the Co-op’s fuel market, refinery operations are more reliant on diesel sales compared to gasoline sales, and during the past year, this was negative on refinery earnings. This is reflected in the 2015 patronage allocations for fuel.

While the economics of the refinery were under pressure, the actual refining performance has greatly improved over the past year. Problems arising from the expansion have been corrected and the refinery’s capacity is being achieved. The Carsland terminal in southern Alberta is operational and the logistics with fuel delivery is improving.

One of FCL’s major strategies to improve fuel delivery during the peak seasons has been the expansion of the bulk plants throughout western Canada. In the coming months, FCL will be proceeding with construction of a new bulk plant at Swan Lake. This will cause some inconvenience for the upcoming year as construction progresses. The new plant will be built to the south of the existing plant. The office will be moved to a temporary location until we are able to de-commission the existing plant and set it in that location. We will also need to upgrade the cardlock to enable it to access fuel directly off of the new plant. Storage capacity of the new plant will be 2.5 million litres, which is double the storage of our existing plant.

Over the past five years, we have purchased fuel trucks equipped with bottom fill to ensure we would be ready for a new plant. The larger system will enable us to fill trucks in less than ten minutes compared to over a half hour as well as improving the safety for our drivers as everything is completed at ground level. During the upcoming year, we will need to determine the best option for replacing the fourth delivery unit to accommodate bottom loading. Improvements in loading speed will reduce our fleet requirements by a half-truck with our present bulk plant volume. With delivery unit prices of over $400,000 we will need to develop a plan to increase our volume in order to maintain delivery efficiency that enables us to remain competitive.

Agro

Our Agro Division continues to evolve as we concentrate on remaining relevant, as farming operations are getting larger and more sophisticated. The retail landscape is constantly changing as companies merge to grow their operations and then consolidate sites to gain efficiency, and therefore, profitability. This creates opportunities for our co-op to expand sales as some customers do not agree with the changes they are seeing at their local outlet and the co-op has the opportunity to earn their business.

Through the summer we continued to work through challenges due to personnel changes as Tony Hoess accepted a fertilizer merchandiser position with FCL. Tony has lead the agro division since our amalgamation in 2001 and his expertise will be missed. Derek Van De Kerckhove and Kim Desrochers have taken the senior management positions for the agro division and have adapted to their new roles quickly. Our organization structure enables us to develop people from within our co-op for management positions and this have been vital to our Co-ops success over the past 15 years.

Last summer, FCL made the decision to enter the fertilizer business. They have spent the past year developing the processes necessary to start selling fertilizer to retails on July 1st. The agreements have been completed to construct two fertilizer terminals near Brandon and Saskatoon to service co-operatives in Manitoba and Saskatchewan. Both facilities should be completed in time to supply the fall market in 2017. Agreements have also been made with third party warehouses for Alberta co-ops. The sheds will be equipped with high-speed blenders, which will enable co-ops to be more competitive in the direct to farm business. As farm size continues to increase, this segment of the fertilizer market is that portion that is growing at the fastest rate.

We completed construction of fertilizer sheds at Swan Lake and Baldur, replacing systems that served us well but were worn out. The new facilities will reduce congestion in our yards as the truckers bringing product into the site are away from farmers who are picking up product. Both the in-load speed and the blending speeds have improved dramatically over the old system. We chose to go with shed systems as we have found that they stand the test of time much better than our bin systems have.

In the coming year, we will complete plans to replace our blending system at Manitou. We have achieved strong member support at this site and the current system is nearing the end of its lifespan.

In our business plan for the upcoming year, we will eliminating our custom spraying services at St Leon Agro and concentrate our resources on fertilizer application with the Terragator. We purchased a new Terragator at Swan Lake Agro and will review these operations to determine if it is a viable option for some of our other sites that depend on rented machines.

General Merchandise

We have started construction of a new building centre in Souris. If we are able to avoid construction delays, we plan to be open by December. The store will feature a similar design to the store we built in Pilot Mound. At 12,000 square feet, the store is large enough to offer a wide selection of hardware and building material products, and yet small enough to enable customers to get the products they want quickly. In addition to the new store, improvements will be made to the lumber storage system in the yard and the addition of a truck equipped with a crane to deliver shingles.

At Notre Dame, we have focussed on growing our grain handling sales by developing our sales team and partnering with a contractor to offer a turnkey service for the construction of larger bins. Rather than having each site dabble in bin sales, we believe we will provide better overall service and success by consolidating this service into a central location that can develop the required expertise.

While it is great to talk about new facilities and services, there are also portions of our business that are declining and reaching the point where we are no longer able to operate a viable business. We faced this situation during the past year when me made the decision to close our hardware store in Mariapolis. As farm size grows and rural population decline, businesses that depend on selling personal consumption products and services will be forced to close their doors or consolidate their businesses to survive. Our commitment is to operate our stores as long as we can.

Food

Our two Co-op food stores provide a good selection of products out of modern facilities and are well positioned to serve their communities for many years. The greatest challenge in our food operations remains profitability. The food business is the most competitive segment of the retail market. Large companies are attracted to the stable cash flows generated by food sales. They focus on operating large stores in urban markets to lower their operating cost on a per unit basis, allowing them to decrease their selling prices to attract more customers. With travel distance for shopping becoming less of a barrier each year, these larger stores continue to attract business from our smaller communities. Customers still value the convenience of the local store to provide the necessities such as bread and milk, but the stores cannot survive if that ends up being their market. We will continue to focus on service and utilize the Co-op marketing programs to remain as competitive as we can to retain our customers’ business.

2015 Operations

Pembina Co-op ended the year with sales of $129.2 million compared to $127.2 million last year. The local savings were $3.24 million, up from $2.57 million in 2014. The deflation in petroleum pricing was offset by increased sales of crop inputs. Changes made to our accounting procedures whereby we recorded custom application and equipment rental revenue as sales rather than as expense recovery in the previous year increased our margin and expenses by $1.51 million. This had no net impact on our local savings.

Our patronage refund from FCL was $4.67 million, a decrease of $626,000 million from 2014 levels. The lower refinery earnings were reflected in the patronage allocation Pembina Co-op receives from FCL, and are reflected in the Co-op’s petroleum allocation to its members. The net savings before income taxes were $7.91 million compared to $7.87 million last year.

Even though we manage our accounts receivable on a continual basis, we cannot totally eliminate the potential for losses due to uncollectable accounts. When the audit is completed on the financial statement, management has to identify outstanding accounts that are potentially doubtful for collection. Our Co-op standard has been that once an account’s ageing goes beyond 180 days, it is deemed to be doubtful and needs to be identified on the financial statement. The Co-op’s bad debt expense includes accounts that have been actually written off as uncollectable, and accounts that are deemed doubtful. During the past year, we were able to make headway on some accounts and decrease the allowance for doubtful accounts by $79,000 to $432,000. As lower commodity prices impact farm income, we will need to be more cautious in the area of accounts receivable. We will continue to aggressively promote the FCC farm input financing program that provides operating credit at very competitive interest rates. We have also been monitoring cardlock accounts more closely and have been reacting quicker when accounts exceed their credit terms or limits. Besides the credit risk involved with accounts receivable, we are also restricted by our cash flow and our line of credit limits on the amount of accounts receivable we are able to carry.

With the popularity of credit card reward programs, we continue to see increases in the amount of purchases being made on credit cards. While convenient for both our members and the Co-op, the downside of accepting credit cards continues to be the transaction cost. Last year, the total cost was $719,000. The only expenses that exceed credit card fees are salaries, depreciation and repairs. Some will argue that the Co-op is able to reduce its credit risks with credit cards, but the reality is that the majority of members utilizing the credit cards for points would be considered very low risk for defaulting on their account.

I want to pass on my appreciation to our managers and their staff for their efforts in achieving these strong financial results. It is truly a team effort.

2016 Budget

For the coming year, our budget projects sales of $135.9 million with a local savings of $2.58 million and a net savings of $7.58 million. We will continue to invest in our facilities with $3.6 million in planned capital expenditures in the upcoming year. The major projects include construction of a new building centre in Souris, completion of the fertilizer sheds at Swan Lake and Baldur, numerous vehicles including a fuel truck and a Terragator, and lumber storage systems at Oakbank and Pilot Mound.

Human Resources

In order to achieve our targets for the coming year, we will need to have the continued support of our members and the dedicated effort of our management and staff. Their dedication and desire to succeed are one of the primary reasons that our Co-op continues to succeed, both in good times and difficult times.

Pembina Co-op would like to recognize the following employees who have reached service milestones during the past twelve months:

5 Years Service

  • Robert Van Damme, Swan Lake Agro
  • Warren Lea, Bulk Petroleum
  • Linda Doherty, Bulk Petroleum
  • Roy Williment, Manitou Agro
  • Colin Martel, Swan Lake Agro

10 Years Service

  • Catherine Jordan, Administration
  • Greg Young, Manitou Agro
  • Jeff Parsonage, Baldur Agro

15 Years Service

  • Bev Nickles, Mariapolis Agro
  • Perry Beernaerts, Pilot Mound Building Centre

20 Years Service

  • Tressa Hunter, Manitou Food
  • Viola Caillier, St Leon Building Centre
  • Yvonne Evans, Administration

35 Years Service

  • Larry Neilson, Souris Building Centre
  • Henry Talbot, St Leon Building Centre
  • Terry Campbell, Minto Agro

45 Years Service

  • Hubert Grenier, St Leon Building Centre

In 2011, Pembina Co-op initiated a Perfect Attendance Record (PAR) program to recognize its non-management employees who did not miss any workdays throughout the year. Nineteen employees qualified for the award, including Crystal Van Damme, Tony Bisson, Anthony Friesen, Cory Grice, Grant Lusignan, Adam Van Damme, Sherry Desender, Ken Ryckman, Lisa Holland, Barb Loewen, Warren Lea, Chris Van Damme, Susan Schneider, Barry Nordal, Bruce Sholdice, Justin Plant, Don Joye, Sheldon Klassen and Greg Young.

I would also like to recognize several employees who have retired from Pembina Co-op over the past year and those who have announced upcoming retirement plans. Larry Nielson retired as Yard Lead Hand at Souris in February after completing 35 years of service. Wilf Klippenstein has announced his upcoming retirement in June. Wilf started his career with Pembina Co-op in 1995 and has managed the Manitou food store since 1997. Barb Loewen will also be retiring as food clerk at Crystal City in June. Barb began her co-op career at Crystal City in 1988 with her main focus being on operating the store’s produce department. Kathy Almey has announced her intentions to retire in July as the office supervisor in our Administration department. Kathy began her career with Mariapolis Co-op in 1980. Ken Ryckman has also announced his plans to retire in September as yard person – driver at Souris. Ken’s retirement date will coincide with his 15th anniversary of working for Pembina Co-op. We thank each of these people for their dedication towards making our co-op successful and wish them a full and happy retirement.

The future success of Pembina Co-op depends on its ability to have qualified people assume the management positions when vacancies occur. This begins with recruiting employees who possess the capability and desire to develop their career beyond the position they are applying for. Training plans are developed to improve their skills so they are prepared to assume increased responsibility when the opportunities emerge. This is evident throughout our organization as most of our managers started their careers in an entry-level position and worked their way up through our system. An example of this is Matt Almey, who started as lumber supervisor at Oakbank, then became the building centre manager at St Claude and St Leon, and is presently completing an eight-month training program at Portage Co-op to become a general manager. Robert Lesage replaced Matt as the building centre manager at St Leon after completing several training programs that promoted his career that began as a hardware clerk at Notre Dame. Career development is critical to Pembina Co-op’s future success.

 

On behalf of the entire staff, I would like to thank you for your continued support and we look forward to serving you in the coming year. Thank you.

Dale Pouteau, General Manager