COMPETITIVE ANALYSIS FOR THE BELOW:

It was January 1, 2013, and Mike Rice, president and chief executive officer of Rice Commercial Group, was assessing his options after his company's recent acquisition of Phil's Haulage (PH). PH was a hauling company, located in Mount Albert, Ontario, Canada, a small town an hour northeast of Toronto. The company transported construction materials and aggregates1

from one location to another. After a few successful years of growth in the hauling business, Rice was contemplating a new opportunity for PH: Should the company expand into the excavation market? THE INDUSTRY The Site Preparation Process Hauling and excavating were two components of site preparation, the process of readying undeveloped land for construction. The site preparation process included hauling, excavating and grading, demolition of buildings and other structures, site services installation, septic system installation, earth moving and land clearing, followed by the preparation of a foundation suitable for the construction of new development infrastructure. The first step in the process was to remove any unwanted trees, shrubs and structures from the site. Once the land was clear of these unwanted objects, the first layer of topsoil was also removed because it was too soft and was considered an unsuitable foundation for construction. The removed materials were then hauled to an off-site dump location. The next and final step in the site preparation process was to grade the land using a cut-and-fill method. This grading method removed earth from higher elevated areas and placed it into lower elevated areas, and then compacted the earth in layers to create a level site that provided a strong foundation for construction. If there was a shortage of suitable material2 on the site, additional material was purchased and hauled to the site. Conversely, if there was excess material on the site, it was hauled off the site to a selected dumping location.

Grading was often the most time-consuming and complex part of the site preparation process, and it required the use of heavy machinery, including excavators, bulldozers and road rollers. The site preparation process varied in length, depending on the slope and acreage of the land, but the process usually ranged between two to three months for smaller projects and up to six months for larger projects. Once this process had been completed, construction of the new infrastructure could begin.

Site Preparation Contractors The Canadian site-preparation contractors industry was comprised of 8,297 businesses that generated $3.89 billion in revenue annually.3 These businesses were typically small (99 per cent of them employed fewer than 100 people)4

and, therefore, usually specialized in only one or two of the site preparation services. The site preparation contractors industry was directly tied to the construction industry since new construction opportunities created demand for site preparation. As a whole, the Canadian construction industry was projected to grow 1.4 per cent from 2012 to 2013, with over $404.5 billion worth of intended construction investments (see Exhibit 1). Of the $404.5 billion, public sector construction investments were projected to increase 1.9 per cent to $89.3 billion in 2013, with the remaining $315.2 billion coming from private corporations. Construction investment was expected to increase in six of Canada's 13 provinces and territories for 2013. Alberta expected the largest increase in construction investment ($2.7 billion), while Ontario was a close second with an expected $2.6 billion increase.5 Construction and construction-related activities employed over 1.24 million Canadians. 6

The Government of Ontario was extending Highway 404 to reach 13 kilometres farther north. Highway 404 was a major transportation route that connected downtown Toronto with the region to the northeast. Recent developments at the northern end of Highway 404 included Canadian head offices for Honda Motor Company, BMW Canada, and an office complex and training facility for Enbridge.

THE CUSTOMER PH contracted its hauling services to many different organizations in Mount Albert and the surrounding area, but the majority of its business came from land development companies. Land development companies purchased undeveloped land with the intention of building a commercial, residential or industrial complex. These companies were responsible for the zoning7 of the land with municipal governments, as well as for site preparation, new construction and maintenance of the complex if it were leased. Land development companies contracted many different organizations throughout their development process. They chose their contractors based on a number of criteria, including proximity to the development site, price, reliability and convenience. Proximity to the development site was important because certain transportation and labour cost savings were often associated with shorter travel routes. Reliability and convenience were also essential because land development companies had to co-ordinate numerous contractors and were always looking for ways to simplify operations. THE COMPETITION There were many hauling competitors located within the Greater Toronto Area. Most of these competitors were smaller companies, usually family owned and operated, with fewer than 10 employees. These companies focused mainly on hauling, but some offered other site preparation services, such as trenching or excavating. Exhibit 2 identifies major competitors within the region northeast of Toronto. PHIL'S HAULAGE History Phil's Haulage, founded in 1985, was family owned and operated until 2012, when it was bought by Rice Commercial Group. PH was located in Mount Albert, a small town with a population of 2,700 people, located northeast of Toronto. Mount Albert, which was primarily a farming community, was home to approximately 30 locally owned shops, restaurants and businesses. PH's headquarters in Mount Albert was a 15-minute drive from Highway 404. PH had started as a one-man operation with a single dump truck. By the end of fiscal 2012, the operation had grown into a company with 15 employees and a fleet of 11 tri-axle dump trucks. In recent years, PH had launched a successful topsoil manufacturing division, which sold to nurseries and garden centres in and around Mount Albert. Current Operations Approximately 85 per cent of PH's business came from its hauling operations. Over the years, PH had established a strong reputation and had completed many contracts for large land development companies and other construction companies within the area, including Aecon, Lafarge Construction and R.B. Somerville. The majority of PH's contracts were held with land development companies, where PH was contracted for

the hauling needs on development sites. The contracts included moving any unwanted materials (trees, man- made structures, topsoil, etc.) to selected dumpsites and then hauling any purchased earth back to the

development site. When contracted, PH would provide the machinery required for hauling, usually a fleet of dump trucks, and the skilled operators required to drive the machinery. The balance of PH's business came from the sale of topsoil that PH produced in-house. When topsoil was removed from development sites, PH usually offered a reduced price on its hauling services so it could keep the topsoil to return to its facility. Most land development companies were more than willing to accept this arrangement because they had no use for the excess topsoil. As well, the raw topsoil that was collected from the development sites was not useful as a gardening product because it often included rocks and metals. To create a product it could sell, PH removed all metals from the soil, ground the soil and rocks down to a finer consistency and then added loam8

and manure to make a gardening topsoil that could be sold to local

nurseries and gardening centres.

EXPANSION INTO EXCAVATION Rice was considering expanding PH's operations into excavation. Adding excavating capabilities would allow PH to complete the entire grading process when preparing a site. Excavation was the process of moving earth, rock or other materials with tools, equipment or explosives. Excavation had a wide range of important applications, including mining and exploration, environmental restoration and construction. If Rice were to proceed with the excavating opportunity, PH would focus solely on the construction-related excavating. If the excavating opportunity were pursued, Rice estimated that PH would be awarded between seven and 15 excavating contracts in fiscal 2013. Contracts varied drastically in size: smaller contracts earned $100,000, while larger contracts earned upwards of $700,000. Rice estimated that the average excavating contract would generate revenue of $350,000 and would take 16 weeks to complete. Since the majority of these excavating contracts would come from existing hauling clients, no additional marketing expenditures would be incurred. Moving forward with the excavating opportunity would include significant upfront investments and ongoing costs. Excavating would require new heavy machinery, such as excavators, bulldozers, road rollers, water trucks and mobile maintenance vehicles. A complete list of the new machinery and equipment required is given in Exhibit 7. Rice projected that excavating related machinery and equipment expenses, which included fuel, insurance, maintenance and cleaning, would total approximately 25 per cent of revenue from the excavating contracts. All new equipment and trucks would be depreciated using the straight-line method, with an expected useful life of 10 years and no residual value. New employees would need to be hired if PH proceeded with the excavating work. One skilled operator was required to operate each piece of heavy machinery. On average, Rice expected to hire four skilled operators for each contract. Operators would typically work 10-hour days, six days a week, and would receive $30 per hour (including benefits) as compensation. Additional full-time site supervisors would also need to be hired at an annual salary of $90,000 (including benefits). One site supervisor was required for every two contracts acquired by PH. A new administrative assistant would also need to be hired at an annual salary of $35,000 (including benefits) to handle the additional administrative tasks associated with the new excavating business. All salaried employees required one month of paid training to ensure the quality of their work. For the excavating opportunity, customers would have payment terms of net 30. The change in PH's inventory was expected to be negligible.

CONCLUSION Rice was excited at the prospect of transforming PH into a larger and more dominant player in the site preparation industry. Before making a decision about expanding into excavating, Rice wanted to evaluate the health of PH's current operations from a profitability and cash-flow standpoint. If the expansion into excavating were to be pursued, Rice needed to decide how it would be financed. In spite of Rice Commercial Group's backing, Rice wanted PH to remain financially self-sufficient. Rice sat down to perform a thorough analysis. He planned to make the necessary decisions and project a statement of earnings and a statement of financial position for fiscal 2013.

EXHIBIT 4: STATEMENT OF EARNINGS Year ended December 31

2012 2011

REVENUE Sales $7,263,015 100.0% $6,803,008 100.0% EXPENSES Truck expense1 1,985,426 27.3% 1,581,739 23.3% Subcontracts2 1,822,497 25.1% 1,714,273 25.2% Salaries and benefits 1,359,260 18.7% 1,343,745 19.8% Purchases 570,022 7.8% 592,722 8.7% Management wages 107,408 1.5% 208,433 3.1% Office and general 78,761 1.1% 53,806 0.8% Interest and bank charges 59,426 0.8% 85,944 1.3% Professional fees 31,850 0.4% 42,505 0.6% Advertising and promotion 30,182 0.4% 27,386 0.4% Telephone 18,263 0.3% 24,875 0.4% Rent 15,000 0.2% 15,500 0.2% Meals and entertainment 5,350 0.1% 11,206 0.2% Bad debt expense3

(94,545) (1.3%) 159,913 2.4% Gain on sale of trucks (149,050) (2.1%) (147,420) (2.2%) Depreciation 724,718 10.0% 855,059 12.6% Total expenses 6,564,568 90.4% 6,569,686 96.6% Net income before taxes 698,447 9.6% 233,322 3.4% Income tax 102,493 1.4% 39,967 0.6% Net income after taxes $595,954 8.2% $193,355 2.8%