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Annual Report 2018

ROOTS IN THE PRESENT, EYES ON THE FUTURE

Engaging with members and consumers and mindful of today’s challenges, La Coop fédérée is mobilizing resources to make tomorrow’s world a prosperous place, embracing its roots, and open to progress and innovation.

Highlights

6,5 G$
Revenues
210 M$
Earnings before patronage refunds and income taxes
11 M$
Dividends paid to the Cooperative Pork Chain
43 M$
Patronage refunds
553 M$
Working capital
1,4 G$
Preferred shares and La Coop's equity

president’s message

GHISLAIN GERVAIS,
president

 

 

OUR BUSINESS MODEL IS A MODEL FOR THE FUTURE, HAILED FOR ITS RESILIENCE, LONGEVITY AND CAPACITY TO CREATE WEALTH.

 

 

Read the President's message

For La Coop fédérée (“La Coop”), fiscal 2018 was highlighted by major projects and unprecedented key investment decisions. Ahead of its 100th anniversary, a strategic thinking exercise focused on the model for the “La Coop fédérée of tommorow”. Meanwhile, work on Vision 2020, the modernization project for La Coop’s network business model forged ahead, achieving an important milestone with the implementation of the first regional agricultural partnership.

La Coop’s consolidated sales totalled $6.5 billion in 2018, maintaining the upward trend of recent years . Earnings before patronage refunds and income taxes amounted to $211 million - an excellent performance amid market uncertainty and volatility triggered by the NAFTA renegotiations and the trade war between China and the United States.

This result was mostly driven by the pork and poultry processing and marketing activities of Olymel, La Coop’s Meat Division. The investments made in recent years, the beneficial relationships Olymel maintains with its business partners, and the restructuring of its pork processing operations in eastern Canada all contributed. Olymel has not only achieved record results in the past three years, but its operations are also less sensitive to risk arising from the volatility of this commodity market.

Olymel’s growth was bolstered by major acquisitions this year, including Triomphe Foods, a well-established Québec business known for its wide range of deli meats and specialty hams, and Pinty’s Delicious Foods, an Ontario poultry slaughtering and processing business specializing in fully cooked products.

La Coop’s other divisions also contributed to strong 2018 performance. The Agri-business Division made forays outside Québec with the acquisitions of Standard Nutrition and Maizex Seeds, specializing in animal nutrition and grain marketing, and the purchase of crop production assets from Cargill. These transactions are in line with La Coop’s growth plan to become a Canadian leader in the agriculture sector by building on its existing operations and extending the Agri-business Division’s reach to Ontario and the Western provinces and Ontario.

Meanwhile, the Agri-business Division’s structural projects are well underway in Québec. The Port of Québec’s grain transfer port terminal project aims to provide Québec and Canadian agricultural producers access to the international grain export market. Work on the Bécancour urea and methanol plant project also continues.
 

”We need to pursue market development without losing 
our cooperative soul.”
 

The Retail Division (Groupe BMR) has again improved its operating and financial results, opening a new store in Montréal – La Shop – based on a unique and innovative omni channel concept to enhance its traditional hardware offering. Groupe BMR has also fully embraced the digital shift with its first online sales.

These investments could not have been made without backing from financial institutions. We thank our financial partners for recognizing La Coop’s quality management and for their support through preferred shares and a renewed credit facility.

On behalf of the Board of Directors, I extend my thanks to Gaétan Desroches, Réjean Nadeau, Sébastien Léveillé, Pascal Houle and their respective teams for their determination and continuous efforts to successfully carry out these numerous projects. My thanks also go out the 14,020 employees who make up the extended La Coop family and are the organization’s main strength.
 

La Coop fédérée of tomorrow

During the past year, the Board of Directors launched a strategic thinking exercise to define the model for “La Coop fédérée of tomorrow.” Planning focused on key areas such as growth strategy, governance, financial model, patronage refunds, talent, and brand image.

Thinking was framed by the major challenges ahead. While the agri-food industry’s rapid consolidation is heightening market competitiveness, it is also generating growth opportunities. The dilution of sales to members resulting from the acquisitions made in recent years is an immense challenge for maintaining La Coop’s cooperative identity. We need to pursue market development without losing our cooperative soul.

We know very well that the growth of the agricultural cooperatives network is vital. We do not live in a vacuum. We need to position ourselves strongly across all our business sectors to ensure our credibility and relevance. We must give ourselves the means to fulfill our ambitions by achieving critical mass, extending value chains and constantly improving our working methods. The aim is to make La Coop’s network a key player with the capacity to operate in the market for the benefit of our members.

That said, growth must not be achieved at any cost. A key element highlighted during the strategic thinking exercise is the critical importance of sound governance. The actions that will arise from our planning aim to maintain the democratic process specific to the cooperative model and ensure that La Coop remains under the control of Québec agriculture producers. New types of memberships might need to be created in certain sectors to ensure that our cooperative model develops as we expand into new regions and sectors.

In the spirit of sound governance, patronage refund distribution must be based on the principles of objectivity, transparency and equity, and strike a fair balance between La Coop’s various components. We need, at the same time, to reward profitable sectors and support sectors with long-term potential, as well as La Coop’s traditional businesses, founding cooperatives while attracting and retaining new members.
 

“La Coop’s contribution to Canadian economic growth is already very impressive.”
 

Another growth-related challenge is to make La Coop an employer of choice that can attract and retain quality employees. This challenge takes on greater importance given labour scarcity and succession issues. Strategic succession planning is therefore a key aspect of “La Coop fédérée of tomorrow.” Amid increased labour mobility, maintaining our organizational values and cooperative culture within all our employees is also vital.

“La Coop fédérée of tomorrow” spurs us to sharpen the focus of our efforts to reposition ourselves on our identity. The goal is to project a brand that is both contemporary and reflects its roots, true to its origins across all of Québec’s social and regional transformations.
 

Vision 2020

Consolidation is challenging our network, and guiding our Vision 2020 actions. As you know, the consolidation of agricultural cooperatives is not new, but rather an ongoing process beginning the 1950s. At that time, La Coop’s network comprised nearly 565 member cooperatives. In 2020, member agricultural producers will be largely made up of less than 10 large cooperatives.

Our forerunners did the right thing in setting up an extensive network of businesses to share, help each other and provide each other services. They likely did not think that the fruits of their efforts would continue down through the years into the 21st century. Those who went before us gave us much, and we must do the same for those who will come after.

To do so, we must strive to build a network that is strong, prosperous, agile and resilient. That’s what Vision 2020 aims to achieve, with the orchestrated consolidation of agricultural cooperatives, and by setting up regional agricultural partnerships between the consolidated cooperatives and La Coop.

The Vision 2020 project achieved an important milestone this year with the launch of the first regional partnership between VIVACO groupe coopératif and La Coop. Other projects are also underway, including two other potential partnerships with the Avantis and Unifrontières cooperatives. Vision 2020 is a project we are implementing together to ensure the continuity of La Coop’s network, a modern service offering and ultimately, prosperity for Québec agricultural families.
 

Of Concern to Agricultural producers

Fiscal 2018 was also a year of uncertainty for agricultural producers, particularly with respect to trade relationships. The Canada-United-States-Mexico Agreement (CUSMA) was signed under pressure from the United States. As we all know, supply management was on the chopping block. Our government granted the United States further concessions related to our milk, eggs and poultry production system.

La Coop expressed its disappointment. While acknowledging the importance for Canada of building strong trade links with its North American partners and that trade liberalization generally promotes economic growth, La Coop would have liked to see the CUSMA fully protect supply management, a system that continues to demonstrate its effectiveness and relevance.

That said, the agreement has a positive aspect that we welcome. We’re confident it will contribute to maintaining and increasing our exports of pork and other agricultural goods to the United States. Exports are a foundation of our overall growth strategy and the recent entry into force of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) in the six countries that have ratified it, including Canada, will give us preferential access to large Asian markets.

La Coop is well aware that the past year was difficult for hog producers in both Québec and elsewhere in Canada. The Cooperative Pork Chain also serves as a structural tool for supporting producers through such difficult cycles. Farms have reaped concrete benefits from the Cooperative Pork Chain.

Since its implementation in 2012, members of the Cooperative Pork Chain have received several million dollars in patronage refunds and dividends. A financial support program has been implemented to help producers convert their facilities to comply with new animal well-being standards.

The Fermes Boréales breeding facilities are producing quality piglets with excellent technical and economic results. A number of producers have expressed interest in participating in the project, and a second expansion phase is being planned. The Pork Chain supports its members, enabling them to market quality pork that is recognized and sought after by high value-added markets.

La Coop also welcomes adoption of the Politique bioalimentaire 2018-2025, a flagship bio-food policy. La Coop is wholeheartedly behind its dual goal – to better meet consumer expectations while providing greater support to businesses and organizations operating in this sector. Over the coming year, La Coop will closely follow its implementation and collaborate with the authorities concerned.
 

Looking ahead

The future is promising. Demand for agricultural products is growing continuously as populations and revenues rise across the world. La Coop is very well positioned here in Canada, as well as in the most attractive export markets, particularly in Asia.

Against this backdrop, La Coop’s contribution to Canadian economic growth can only expand. And La Coop’s current contribution is already very impressive. Including the direct, indirect and induced benefits, La Coop contributes nearly $4 billion to Canada’s GDP and creates over 35,000 full-time jobs. Its operations generate tax revenues of about $1 billion per year for the federal and provincial governments. Those who went before us, who aimed to build a vast cooperative network, would be very proud of these numbers.

To conclude, I would like to extend my thanks to my colleagues on the Board of Directors for their vision and energy, and their trust in me. I am also grateful to all the directors in La Coop’s network. With your commitment and determination, we’re able to adapt the cooperative model to our members’ needs.
 

Ghislain Gervais 

President 

Management discussion and analysis

GAÉTAN DESROCHES, agr., MBA
Chief Executive Officer

 

STRIVING TO BE MORE COMPETITIVE, LA COOP FÉDÉRÉE MUST KEEP FORGING AHEAD AND PREPARE FOR FUTURE GROWTH.

 

Read the Management Discussion and Analysis

La Coop fédérée (“La Coop”) generated $6.516 billion in sales and $210.7 million in earnings before patronage refunds and income taxes for the fiscal year ended October 27, 2018, compared with $6.272 billion and $351.2 million, respectively, for fiscal 2017.

The Meat Division (Olymel L.P.) had a good year, but results fell short of the record fiscal 2017 performance. Olymel’s earnings before income taxes attributable to members amounted to $167.9 million, down $122.5 million from $290.4 million in fiscal 2017. The record performance in 2017 was driven by a highly favourable market, bolstered by strong sustained demand from China. Also, the stronger Canadian dollar had a downward impact on the industry’s meat margins during the year. Meat Division sales were up $5.6 million, driven by increases in processed poultry volumes and selling prices. The higher sales also resulted from the addition of four months’ sales generated by the acquired assets of a business specializing in the marketing of processed pork. This increase was partly offset by the decline in fresh pork selling prices.

The Agri-business Division reported earnings before income taxes attributable to members of $33.4 million, down $8.4 million from $41.8 million. Business acquisitions made in recent months triggered an increase in acquisition and integration costs as well as higher financial expenses resulting from greater use of financing. Performance of day-to-day operations improved in the Animal Production Sector, particularly for animal feed, and in the Eastern and Western crop production sectors. Agri-business Division’s external sales were up $192.1 million from last year, stemming essentially from multiple acquisitions carried out during fiscal 2018, particularly in the animal and crop production sectors. Higher sales in the Animal Production Sector was driven by growth and gains in market shares in the ruminant and dairy segment, and by the addition of six months ’ sales of an acquired business operating in the animal nutrition sector. In addition, higher fertilizer sales volumes, particularly in Western Canada, bolstered crop production sales. Sales growth in the Grains Sector stemmed from spiking prices in early summer.
 

“At La Coop, we gave ourselves clear orientations as well as the means to implement them. We succeeded!”
 

The Retail Division posted earnings before taxes, including corporate expenses, of approximately $1.3 million, up $0.2 million from $1.1 million last year. The Division’s sales growth more than offset the increase in direct costs related to higher sales. The widespread labour shortage in the market led to additional costs in the distribution sector and higher transportation costs. A $1.8 million loss on the disposal of a subsidiary’s total assets was recorded, giving rise to a $513,000 loss for the year in consolidated results. BMR’s external sales were up $34.9 million from fiscal 2017, driven by higher material sales stemming from Ontario market development efforts, increased market share in the dimensional lumber sector and higher average material selling prices. Retail stores recorded higher sales, attributable to the hiring of sales representatives, corporate store renovations and Montréal market development. It should also be mentioned that sales declined as a result of the discontinuation of farm machinery distribution operations, which was completed in May 2018.

Because of a 50% interest held via a subsidiary, Energy Sector results are reported as a share of results of a joint arrangement. The share recorded for fiscal 2018 was $10.1 million compared with $5.6 million in 2017. The increase comes from growth in sales volume, the inclusion of profits for a full year from a business acquired last year, the addition of new corporate sites and procurement synergies.

Cost of sales and selling and administrative expenses amounted to $6.346 billion, compared with $5.935 billion in the previous year. The increase resulted mainly from sales growth, higher prices for certain raw materials, the integration of the businesses acquired during the year and direct costs related to higher sales driving growth.

Financial expenses for fiscal 2018 increased to $22.6 million from $17.8 million for the previous fiscal year, owing to the combination of increases in average debt and interest rates.

Including the results of its divisions, La Coop reported consolidated operating income of $146.9 million, compared with $318.7 million in fiscal 2017.

The other contributions to earnings included the share of results of joint arrangements, namely businesses in which La Coop has joint control. This share increased to $47.2 million from $34.4 million for the previous fiscal year, following the change in the business model for allocating results of Agri-business Division’s joint arrangements and improved Energy Sector performance.

The share of results of entities subject to significant influence – entities in which we have less than a 50% interest – amounted to a loss of $0.1 million compared with a profit of $0.7 million in fiscal 2017. The decline in this share is due to the change in presentation method of an entity which is considered a subsidiary since the beginning of the year.

Other investments, which represent interest and dividend income from other investments, totalled $1.7 million compared with $2.1 million for the prior fiscal year.

Net gains (losses) on disposal and remeasurement of assets amounted to a gain of $9.6 million in 2018 compared with a $4.8 million loss in 2017. The gain was essentially generated by the remeasurement of an investment held as a result of acquisition of control. In 2017, the loss stemmed from the impairment of long-lived assets, namely the impairment of an interest in an entity under significant influence, and the recognition of losses on disposal of property, plant and equipment.

The gain arising from an insurance benefit, related to an insurance recovery at a Meat Division facility, totalled $5.5 million in 2018.

Earnings before patronage refunds and income taxes totalled $210.7 million compared with $351.2 million for fiscal 2017.

For the year ended October 27, 2018, after deducting $42.4 million in declared patronage refunds and $32.9 million in income taxes, La Coop reported net earnings of $135.4 million compared with $197.9 million in fiscal 2017. Net earnings attributable to members of La Coop and included in the reserve amounted to $115.6 million in fiscal 2018 and $168.3 million in fiscal 2017 while net earnings attributable to non-controlling interests amounted to $19.8 million and $29.6 million, respectively.

Note also that in light of fiscal 2018 results, the Board of Directors resolved on January 16, 2019, to pay an $11.2 million dividend to holders of shares in the Cooperative Pork Chain.
 

Parent company

The parent company’s net expenses, including the real estate subsidiary’s results, increased to $27.4 million from $15.2 million for the previous fiscal year, owing to the recording of the actuarial expense and unfavourable return on actuarial assets.
 

“We should be proud that our achievements, programs and organizational culture are resonating in our business communities and among the general public.”
 

Human resources

All of the network’s human resources teams worked together to address current issues, during another important year of transformation and modernization marked by labour recruitment challenges . Each division has a strong and dedicated human resources team that ensures harmonious growth and innovative practices.

Vision 2020

Major projects were carried out as part of the Vision 2020 project to facilitate the operationalization of the business models of cooperatives under consolidation. Multiple workshops were offered to ensure employee engagement and buy-in, and alignment of conditions for new cooperatives. Change management is clearly the key to success for this kind of transformation.

Human resources program

As the nation-wide expansion continued, a number of employee programs were reviewed to align them with target markets, including revamping the pension plan and bonus program and introducing Canada-wide salary scales. Amid a labour shortage, attracting and retaining talent was at the heart of our thinking.

Performance management has also been under review by the parent company and certain divisions. The focus of this review was to put discussions between employees and their manager back at the core of the performance management process and to encourage frequent meetings for ensuring continuous monitoring and eliminating bureaucracy as much as possible.

Numerous training management tools were implemented and improved to deliver virtual content to employees. We have also developed internal expertise in creating training capsules, which facilitates the digital shift in training, to the benefit of the entire network. We’re pleased to have received subsidies to make this shift a success and we continue to develop our digital expertise.

Awards and competitions

Groupe BMR, the Agri-business Division and Olymel have all won numerous awards in different competitions the parent company and the divisions have taken part in to raise La Coop’s profile and make it more attractive to talent.

Looking ahead

Looking ahead at the coming year, we have numerous challenges to face and projects to carry out. Data management, which will facilitate proactive strategic decision-making, will be a priority in the coming years. In collaboration with the entire network, we will undertake an analysis of our human resource management systems. An ambitious project to revamp corporate policies is also in the cards. Finally, with regards to talent and culture, strategic planning will focus on three important areas: succession planning, leadership development and internal mobility. This will allow us to develop an avant-garde internal culture and a capacity to execute our projects throughout the organization, thereby consolidating our positioning as an employer of choice.
 

A year of transformation that sets the stage for future growth

While La Coop further improved its competitiveness in fiscal 2018, it will have to keep forging ahead.

Despite a tense political climate owing to trade agreements, a more difficult business environment for several of our sectors (agriculture, meat and retail), and the initial signs of a demographic shift with the shortage of labour and succession issues, we successfully completed our five-year 2013-2018 plan. Mission accomplished! We stuck to the plan and delivered.

At La Coop, we gave ourselves clear orientations as well as the means to implement them. We succeeded! At the time of writing, our pilot project, namely the partnership between La Coop and VIVACO groupe coopératif, has been carried out. This partnership is part of Vision 2020, the modernization project for La Coop network’s business model. La Coop’s network transformation in Québec accelerated with the creation of La Coop Novago and Avantis Coopérative during the year.

The strategic framework in the 2017-2018 master plan for achieving growth is in place. We firmly intended to reach a critical mass in order to improve our competitiveness and grow faster than the market in line with our strategic drivers. Given market consolidation, we had to move faster to seize business opportunities. With our great agility, we’re ahead of our initial plan for certain items.

I would like to take this opportunity to acknowledge the efforts made by our teams, both in the parent company and in the divisions. Despite a few setbacks, La Coop and its divisions have earned prestigious recognitions and distinctions and won major awards. We should be proud that our achievements, programs and organizational culture are resonating in our business communities and among the general public.

In Québec, probably more than elsewhere in Canada, people’s awareness of the food they consume, sustainable development and environmental protection has grown very strongly. This should make us very proud!

During fiscal 2018, we injected $217 million in capital expenditures into the Québec and Canadian economy. La Coop plays the role of leader in its industry, for the benefit of families, rural life, regions and agricultural producers.

Having initiated the next strategic session on La Coop fédérée of tomorrow, the outcome of this exercise, once adopted, will set the stage for La Coop’s 100 th anniversary in 2022.

We have carried out at least three strategic planning exercises over the past fifteen years. We have developed an operating model that have proved its mettle. La Coop and its network have demonstrated that when we work together, we can move mountains.

This year again, our economic tour, our meetings with politicians, the public and media, confirmed that La Coop is a key player in the Québec and Canadian agricultural community for food and health security, protection of the lands, promoting agricultural interests and the survival of our regions.

Let’s continue to cherish our roots in agricultural cooperatives. La Coop and its divisions continue to provide a humane environment where talented people can enjoy rewarding careers. Our employees - our human resources - are among our most valuable assets and are key to our success. We must keep attracting new employees in order to meet the challenges of the 5.0 era.

La Coop has a brand strategy that will enable it to proudly enter the 21 st century. Between 1922 and now, we have changed names three times and the logo and symbol at least five teams. Each change has propelled forward the cooperative as well as its federation, activities and members. The goal of our television and web campaigns is to establish the presence of La Coop and its members among consumers and inform them of its plans. As highlighted last year, this exceptional, widely acclaimed campaign is the prelude to our positioning for modernizing the brand image of La Coop and its network. To be recognized, we need to be known. By taking actions on several fronts, we can optimize our growing popularity and also maintain our good reputation.

If we wish to leave our mark on our times, as our founders did, La Coop must have a structuring influence on society. We cannot be satisfied with the status quo. La Coop must become a powerful symbol for all the generations interested in agriculture and food. Leveraging its current heritage, La Coop must build a global and inclusive brand.

The management committee and I would like to extend special thanks to all the members of the Board of Directors and the President Ghislain Gervais for their support and advice during the past year. We are thankful for the commitment and dedication you showed during the past fiscal year.

We would also like to thank our financial partners, our joint ventures and in particular our partners in the Energy Sector, which contribute to the success of La Coop and the network. We especially wish to thank all the general managers of the affiliated cooperatives for their excellent collaboration.

I would like to express my deep appreciation for all the personnel of our organization and my colleagues on the management committee.

To conclude, I thank our divisions and management teams as well as all the employees in Québec and Canada, for their loyalty, their commitment and their support in achieving the year’s results.
 

Gaétan Desroches, agr., MBA

Chief Executive Officer 

AGRI-BUSINESS DIVISION

SÉBASTIEN LÉVEILLÉ, agr., MBA
Executive Vice-President Agri-business

 

AFTER A YEAR FULL OF ACHIEVEMENTS, WE ARE MORE DEDICATED THAN EVER TO OUR OBJECTIVE- FARMING COMMON SENSE- FOR THE PROSPERITY OF FARMING FAMILIES.

 

Meat Division

RÉJEAN NADEAU
President and CEO

 

OLYMEL REPORTED EXCELLENT RESULTS FOR FISCAL 2018, BUT FELL SHORT OF THE EXCEPTIONAL PERFORMANCE OF THE PREVIOUS TWO YEARS.

 

Retail Division

PASCAL HOULE, CPA, CMA,
Chief Executive Officer

 

BMR GROUP CONTINUED ITS WINNING STREAK IN FISCAL 2018, IMPROVING ON PRIOR-YEAR PERFORMANCE.

 

Financial Position

PAUL NOISEUX, CPA, CGA
Chief Financial Officer

 

LA COOP'S CONSOLIDATED BALANCE SHEET SHOWED TOTAL ASSETS OF OVER $3.2 BILLION AS AT OCTOBER 27, 2018, COMPARED WITH $2.7 BILLION AT THE END OF THE PREVIOUS FISCAL YEAR.

 

 

CONSOLIDATED FINANCIAL STATEMENTS

The complete document is available in pdf format.

 

 

 

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