To offer superior products and roof management solutions to ICI customers in Central and Eastern Canada and North Eastern US at premium prices.
Vision To be the leading provider of total roof management solutions. External Environment A thorough analysis of the external environment in which GWL operates has been completed, including an industry value curve, uncovering two key opportunities: ?The North American green roofing market is expected to double over the next five years with 10% yearly growth for the following 15 years, and ?Residential housing starts are expected to increase in 2010, rising 16. 2% in Canada and 24. 9% in the United States . Some threats to GWL’s business were also revealed, including a decrease in new construction projects, both residential and commercial, due to the economic slowdown, as well as an increasing trend of American competitors competing in Canadian markets.
Appendix 1 contains a detailed analysis. Internal Environment High quality specialized products, and the roof management program (RMP) areGWL’s foremost strengths. A heavy debt load, no cash flow, and numerous accounting policy issues remain GWL’s most significant weaknesses. Appendix 1 contains a detailed analysis of the internal environment.
Three constraints were observed: ?A line of credit is secured by a bank covenant requiring 75% of accounts receivable (AR) is under 90 days ? Approximately 20% of incremental sales is required to finance growth in the form of working capital ? Long-term cost of capital is 11% Financial AssessmentAn analysis of liquidity (Appendix 2) shows that increasingly short term cash management may lead to problems in paying current liabilities. AR turnover is rising due to increased collections time (51 days to 76 days), increasing overall financing costs as this cash is required to fund operations. Issues arising from this turnover increase are compounded as our present credit terms move from 30 to 90 days. There is a significant dependency on loans as the times interest earned ratio indicates a decline in GWL’s ability to cover interests on outstanding debt, from 100. times to 36. 6.
Other means of financing should be considered as the company is heavily dependent on debt. GWL’s COGS is comparable to its competitor (Beacon). On average gross profit is higher, due to the exclusion of sales commission from COGS. An analysis of EPS indicates GWL is lower than our competitor; this is attributed to high marketing/training/sales commissions. Strategic Alternatives Expand Geographically GWL could expand geographically by building a manufacturing facility in western Canada. An analysis of this alternative is below:PROS: •Preference of Daniel and Pierre Laroche & Annette Michaud •Possible revenues of up to $15M yearly within five years •Larger installed base leading to stable long-term cash flows from the RMP •High-quality, specialized products to cope with Canada’s harsh winters •Economic recession has decreased cost of capital investment •Location in western Canada positions GWL for further expansion into the US •Alberta has the lowest provincial tax rate in Canada at 10% CONS: •Further capital investment increases debt load Difficult market penetration as GWL’s brand isn’t established in the region •New sales and manufacturing staff required •Alberta has the highest average wages of any province ($974/weekly) •Investment returns aren’t guaranteed due to persisting economic uncertainty •Long training cycle for new sales staff •Negative NPV of $3.
8M (Appendix 3) Expand Customer Base One option for GWL is to move into the residential roofing market, thereby expanding its customer base. An analysis of this alternative is below: Pros: GWL’s warranty program and experience dealing directly with insurance companies will differentiate them from the competition ? Access to a new market (new housing starts and residential roof replacements) ? Increased sales and production lead to increased job security for staff ? Canadian and US Government home renovation tax credit will entice customers to replace existing roofs ? Housing starts expected to rise 16. 2% in 2010 in Canada and 24. 9% in the US (with additional forecasted growth of 49% in the US for 2011 ). Current knowledge, experience, and manufacturing processes transferrable to the residential industry ? Asphalt costs steadily decreasing due to an oil price drop (42% decline from September 2008), translates into lower direct material costs Cons: ?Operations currently at near-capacity, growth would require new capital investment ? Additional sales and manufacturing staff would be required ? New housing starts growth fuelled primarily by BC and Alberta (53.
9% and 22. 5% respectively), both provinces in which GWL currently has no presence ?Increased asphalt prices may result from the large portion of government stimulus spending (in both Canada and the US) earmarked for infrastructure projects. ?No brand recognition in the residential market ?Protectionism risk from American government – tax credits may only be available when services/materials are purchased from American companies ? Reputational threat if local contractors are forced out of business Expand Product Offering GWL’s product offering could be expanded to include Enviro-roofing. An analysis of this alternative follows: PROS: •Preference of Pierre Laroche •$567K R&D costs from 2008 can be capitalized Obtain first mover advantage and establish a reputation in the market prior to entry of competitors •Societal trend towards green products ensures attractiveness to environmentally-friendly customers •North American green-roof market will double over the next five years with growth at 10% yearly for the following 15 years •GWL’s green-roofing product will endure Canadian winters •Technologic advancements will allow GWL to maintain high-quality product offerings •Ontario and Quebec lead the country in green-roofing, exhibiting high product acceptance in current areas of operation (Appendix 4 ) •Government incentives encourage installing green-roofing •Toronto’s recent bylaw requiring green roofs on new commercial development from 2010 establishes a customer base and sets an important precedent for other cities . •Economic advantages include reduced energy costs, greater life expectancy and lower maintenance costs •Environmental advantages include improvements to water/air quality and increased biodiversity CONS: •High marketing ($500K) and on-going R&D costs ($250K yearly) •Difficulty finding knowledgeable staff as the product is relatively new •Training costs for existing employees resulting in additional expenses •High capital investment of $6. M to build a new facility will increase GWL’s debt load and interest expense •Against the preferences of Daniel Laroche and Annette Michaud •Uncertainty of success due to lack of experience in the green roofing industry •Negative NPV of $3.
9M (Appendix 5) •Weight loads prevent some buildings from being fitted with green roofs. Recommendations Updated Mission & Vision An updated mission for GWL is: To offer superior products and roof management solutions to ICI customers and quality roofing products to residential customers in Central and Eastern Canada as well as North-Eastern United States at premium prices. And an updated vision for GWL is:To provide total roof-management solutions to ICI customers and be the leading provider of quality roofing products. Strategic Recommendations The alternatives analyzed above are summarized below in a decision matrix: Strategic AlternativesBank Covenant11% ReturnResource AvailabilityStakeholder PreferenceRiskTotal Enviro-Roofing122229 Alberta Expansion1231310 Residential Roofing111317 (Figure 1. 0, where 1 signifies best fit) Despite the allure of significant growth potential in the green roofing market, the required added manufacturing capability will be costly. Though a financing plan could be developed to fund this investment, it isn’t certain that 11% returns can be realized over a five year period as shown in Appendix 5.
Although Western Canada expansion is consistent with GWL’s stakeholder preferences, economic uncertainty, high capital investment, and high risk make this alternative unattractive. Furthermore, financial analysis shows that this option does not provide 11% return and has a negative NPV as shown in Appendix 3. It is recommended that GWL expand their customer base by moving into the residential roofing market. This allows GWL to meet bank covenants and the required 11% return as illustrated in Appendix 6. Due to cash flow restriction, rather than expanding manufacturing capacity through capital investment, GWL should operate their manufacturing facility at near 100% capacity and sell excess product to the residential roofing market.
Research indicates that the commercial roofing industry will experience a decline due to the challenging economic climate , which will free up additional capacity to produce roofing materials for residential customers. This approach will not require hiring additional staff. Furthermore, it is recommended that once the company’s cash flow position improves next year, GWL should spend 500K to expand capacity at its current facility. This will allow GWL to accommodate any rebound in the commercial industry as well as maintain its commitment to the residential roofing industry.
It is not recommended that GWL install residential roofs but rather concentrate on supplying materials (shingles, etc. ) to wholesale distributors.This mitigates the potential risk of poor brand recognition and competing with local residential roofing contractors. Additionally, it is recommended that GWL support industry lobby and/or special groups working to prevent protectionism from the American Government. Finally, GWL should continue to monitor developments in the green roofing industry. As this industry segment has very promising future prospects, it is recommended that once GWL’s cash position improve and the Enviroof project economics become viable, GWL should build a green roofing manufacturing facility and begin offering Enviroof solutions to its customers.
Operational RecommendationsUnionization/Spoilage/ Communication There has been talk of unionization and quality control issues as employees feel that they may lose their jobs due to speculation about GWL building a manufacturing facility outside of Quebec. To alleviate these issues and concerns GWL should communicate that the possibility of building a new production facility outside Quebec would be an expansion of GWL’s operations and not a relocation of production. Performance Management No bonuses have been paid at GWL for the past two years as they have been based financial targets, which have not been met. As a result, there is concern that these knowledgeable managers may leave the company.The implementation of bonuses tied to a Balanced Scorecard will help to alleviate these issues by providing a more balanced measure of performance through the use of financial and non-financial measures. It will also help employees to better align their goals with the goals of the company.
A Balanced Scorecard for GWL is shown in Appendix 7. GWL should not re-price its current outstanding stock options so they are “in the money”. This would be a short-sighted fix, as the purpose of stock options is to reward long-term performance. Furthermore, the issuance of stock options to employees should be discontinued, as it is not a viable form of compensation.The company’s stock is not widely held or traded, therefore limiting capital appreciation of the stock. Public vs.
Private All outstanding shares would need to be repurchased by GWL if it were to revert to a private company. Due to the high cost associated with this action, it is recommended that GWL remain a public company. Changes in Accounting Policies As GWL will continue to be a publicly traded Canadian company it must implement IFRS by January 2011. GWL will therefore be required to present comparable statements for 2010 financial information so timelines to complete this project are short.
As with all large projects the key to success is planning.A high level project plan is presented in Appendix 8. Based on the information reviewed, a high level preliminary assessment of standards is presented in Appendix 9. It is recommended that IFRS become a high priority in order to allow sufficient time to implement the necessary changes. Accounting for Stock Options CICA Section 3870 requires enterprises to estimate the fair value of equity instruments on which the transactions are based and to recognize compensation expense based on the fair value of the equity instruments.
It is recommended that GWL recognize outstanding stock options as part of compensation expense to comply with the requirements of Canadian GAAP and IFRS.Accounting for Revenues and Expense It has been suggested that there is flexibility in GAAP to defer expenses and recognize future revenues to positively influence earnings for GWL. According to core GAAP principals revenue must be recognized when three criteria are met: (1)Seller has transferred significant risks and rewards of ownership to the buyer (2)Reasonable assurance exists regarding measurement of consideration (3)Ultimate collection is reasonably assured Essentially, this occurs when roof maintenance is completed and the customer is billed for the work. GWL revenue should be recognized as per these criteria to ensure compliance with GAAP.
In addition, GWL must comply with the Matching Principal which states that expenses are recognized when obligations are incurred and offset against recognized revenues. Therefore based on accounting principals, it is not recommended to change accounting policies as suggested. Corporate Structure In recent years GWL has been experiencing rapid growth – however the corporate structure has not changed to reflect this, resulting in inefficiencies among departments. It is recommended that IT, HR and Finance be separated into their own administrative areas to ensure appropriate roles and accountabilities are defined and there is effective operation and utilization of support departments.It is key that each area has access to sales, operations and financial information through IT reporting so there is accurate and timely data available for decision making. Contract Compliance As part of the RMP, a sales representative must physically visit the customer’s site every three months.
Recently GWL has been receiving complaints from customers who are seeing sales reps only one or two times a year. This issue must be rectified before customers pursue legal action that would be costly for GWL - monetarily and also in terms of their reputation. The responsibility for these maintenance visits should rest with the operations staff and not the sales staff, who should be concentrating on making new sales and gaining new customers.Furthermore, the RMP is not a financially effective use of the salespeople’s time.
Operations staff are in a better position to assess the condition of the roof and answer customer questions. Such visits and the resulting customer satisfaction should be built into performance reviews for operations staff. Succession Management GWL has no policy in place for succession management. Senior management should immediately schedule a meeting to research similar policies utilized by other companies and design and implement one for GWL.
It should include directions on how to select a new President/CEO and directions on how to deal with the interim should the current President/CEO suddenly be unable to fulfill their duties.It is recommended that Ross Simpson be offered the position of CEO based on his experience in the residential and American roofing industry. Furthermore, he is knowledgeable in the area of green roofing, which will be an asset should GWL decide to move in this direction in the future. Advertising As shown in Appendix 10, if the annual advertising campaign was eliminated, revenues will rise from $926K to $1374K.
Therefore it is recommended that this cost be discontinued. Capital Injection It is not recommended that GWL issue any capital at this time as it is anticipated that added cash flow from moving into the residential roofing market will meet current financing needs and allow GWL to pay down debt. Credit PolicyIt is recommended that GWL return to the previous credit policy of net 30 days, as the financial impact of this change is a negative $255k. This will further aggravate cash flow issues and result in a net loss as shown in Appendix 11.
Transfer price The current transfer price meets the definition of an arm-length transaction in accordance with the CRA and IRS . Therefore GWL will not be able to lower its transfer price. Implementation Plan To smooth the implementation of the recommendations, GWL should make changes to internal accounting policies to ensure compliance with GAAP, secure distribution contracts to acquire residential sales channels, and appoint a new CEO along with developing a succession management policy to ensure continuous execution of strategic plans.A more detailed implementation plan can be found in Appendix 12. In addition, Pro Forma financial statements were prepared to show the financial impacts of these recommendations. This information is presented in Appendix 13 & 14.
Conclusion Based on the above detailed analysis, it is recommended that GWL move into the residential roofing industry. The implementation of the proposed strategic and operational actions will move GWL forward to achieve the goals of the company and the recommended vision. This plan will leverage GWL’s specific strengths to capitalize on market opportunities and reduce company weaknesses and mitigate environmental threats.
