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STRATEGIC PLAN

Waste Disposal Inc. (WDI)

Prepared for:

Board of Directors of Waste Disposal Inc.

March 12, 2021

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TABLE OF CONTENTS

Contents TABLE OF CONTENTS 1

Executive Summary 4

Introduction 5

Overall Situational Assessment 5

Vision Statement, Mission Statement, and Core Values 5

Critique of Vision and Mission 6

Key Success Factors 6

Key Stakeholder Preferences 7

Current Strategy 7

Constraints 8

Qualitative constraints 8

Quantitative constraints 8

Financial Analysis 8

Financing Options 8

Loan Covenants 9

External and Internal Analysis 9

Analysis of Strategic Options 10

Option #1: PPP Agreement for Organics Facility 10

Qualitative Analysis 10

Quantitative Analysis 11

Strategic Alignment 11

Financing 11

Requirements 11

Options 11

Financial Reporting 11

Tax Implications 11

Option #2: Environmental Consulting Services 11

Qualitative Analysis 12

Quantitative Analysis 12

Strategic Alignment 12

Financing 13

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Financial Reporting 13

Tax Implications 13

Option #3: Modify Recycling Division 13

Qualitative Analysis 14

Quantitative Analysis 14

Strategic Alignment 15

Financing 15

Requirements 15

Options 15

Financial Reporting 15

Tax Implications 15

Option #4: Investment in Pristine Research Inc. 16

Qualitative Analysis 16

Quantitative Analysis 16

Strategic Alignment 17

Financing 17

Requirement 17

Options 17

Financing Reporting 17

Tax Implication 18

Decision Matrix 18

Recommendations 19

Overall Strategy 20

Implementation Plan 20

Financial Forecast 22

Financing Recommendation 22

Data Analysis 22

Approach 22

Results 23

Conclusion and Relevance to WDI 25

Operational Issues 26

Vision and Mission 26

Ethical Concerns 26

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Performance Management Issue 26

Governance Issue 28

Management Accounting Issue 29

Taxation Issue 30

Financial Reporting Issue 31

Assurance Issue 31

Overall Conclusion 32

References 33

Exhibits 34

Exhibit 2: Financial Analysis 34

Exhibit 3: SWOT Analysis5 36

Exhibit 4: PESTEL Analysis5 39

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Executive Summary WDI is looking for guidance for the strategic direction that WDI should pursue. WDI is currently well established in its local market and seeks to grow its market share while staying true to its founding values. Strong customer service, technological advancements, and environmental sustainability are all the main factors considered when planning a strategy for WDI.

The key success factors to staying competitive in the market include: leading-edge technology, data analytics, vertical integration, reducing GHG emissions, strong customer service, and offering a variety of services.

WDI has 4 strategic options available to pursue:

1) PPP Agreement for Organics Facility 2) Start a Consulting Division 3) Modify Recycling Division 4) Invest in Pristine

This report analyzes WDI’s internal and external environments, and performs qualitative and quantitative analyses of these alternatives.

Strategic recommendations for WDI:

● Accept the PPP to build an Organics Facility ● Start a Consulting Division ● Only process recycling with a positive contribution margin ● Do not invest in Pristine

Operating recommendations for WDI:

● Update the vision and mission statements ● Expand the board of directors seats and form subcommittees ● Continue treating drivers as employees ● Implement and update balanced scorecard to align management goals ● Update landfill sites obligations in the financial statements ● Do not proceed with the Kingsley trucking proposal ● Prepare a GHG emission statement and have it reviewed by SCG

By following the above recommendations, WDI will improve cash flow and municipal market share. Additionally, these recommendations will differentiate WDI from competition and diversify revenue streams while improving growth.

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Introduction This report will assess the current strategy of WDI as well as evaluate the viability of strategic options available to WDI. First, the report will outline the strategic goals of WDI to better understand the current position of WDI, and develop a basis for evaluating the proposed strategic options. Next, this report will evaluate the qualitative, quantitative, and other financial considerations of the strategic options. A recommendation will then be presented on the strategic options available based on their fit with the overall goals of WDI.

Overall Situational Assessment The overall situational assessment will provide a preliminary evaluation of the strategic and operational issues faced by WDI.

Vision Statement, Mission Statement, and Core Values

A vision statement reveals what WDI hopes to achieve in the long-term. It focuses on the ultimate goals that WDI is trying to accomplish.

A mission statement is used to explain why WDI exists. This is to ensure all internal (employees) and external stakeholders (customers, vendors, suppliers, public community, etc.) understand the organization’s values and culture.

A core values statement is meant to support the vision and mission statements as well as demonstrate to external stakeholders what behaviour they can expect from WDI.

Vision Statement and Mission Statement:

WDI’s vision and mission statements were created in 2014 and are as follows:

Vision statement: “To be a premier waste management company while meeting the needs of our customers, employees, local communities, and the environment.”

Mission statement: “We are waste disposal experts providing collection, disposal, and recycling services to our customers, using environmentally responsible and sustainable methods, and leading-edge technologies.”

Core values

1. Operate safely and in compliance with all safety regulations. 2. Act with integrity and honesty in an ethical manner. 3. Treat employees with respect and ensure they are adequately trained and fairly

compensated. 4. Provide customers with effective and efficient service.

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5. Stay up to date with waste disposal technologies and educate customers on waste disposal alternatives.

6. Promote sustainable practices within the company.

Critique of Vision and Mission

Vision, mission, and core values should be re-evaluated annually; however, in this case, WDI has not updated its vision and mission since they were created in 2014.

The vision and mission statements demonstrate that WDI’s goal is to provide excellent services to customers while protecting the environment with leading-edge technologies; however, WDI is currently falling behind in adapting to technological advancements in the industry. This does not align the core values with WDI’s vision and mission.

If WDI decides to choose a new strategic objective; the vision, and mission statement must be reformed to reflect the new company strategy.

Key Success Factors

Key Success Factors WDI’s Position

Leading-edge technology Not Met. WDI still sorts collected materials by hand. Investment in new technological improvements has lagged behind competitors.

Data analytics for routing efficiency Met. WDI installed route optimization software to increase routing efficiency.

Effective cost management through vertical integration

Met. WDI operates landfill disposal sites, transfer stations, and collection centers.

Reduction of GHG Emissions Not Met. WDI must reduce GHG emissions by 30% to stay competitive with the industry.

Strong customer service Met. WDI has high contract renewal rates due to its excellent customer service.

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Variety of services Met. WDI operates a variety of corporate and municipal disposal services. Including both recycling and waste disposal services.

Key Stakeholder Preferences Key stakeholders and their preferences are identified as follows:

Laura Simmons

● Build a reputation for providing excellent customer service ● Invest in leading-edge technologies to enhance WDI’s environmental reputation ● Long-term focused and determined to achieve the company vision

Brian Leung

● Prefers the conservative approach to investing when cash flows are available ● Diversify into the non-traditional segments with growth potentials ● Possibility of investing in WDI when Laura manages to buy out Kingsley

Marlene Rubes

● Focus on reducing costs to achieve improved margins and objectives ● Increase the value of WDI quickly and then sell to a strategic buyer

Robert Manning

● Being sustainable and environmentally friendly in daily operation while maintaining healthy margins

Current Strategy WDI operates as a waste disposal company that provides a number of collection, disposal, and recycling services. WDI operates multiple landfill disposal sites, transfer stations, and collection centers in Nova Scotia and New Brunswick. WDI attributes its success to providing excellent customer service while being quick to adapt to new technology. WDI also places a strong emphasis on protecting the environment. WDI’s excellent customer service has led to strong retention of customers through contract renewals.

However, WDI has been lagging behind competition in adopting new technology and automation. This has limited its growth as WDI struggles to compete with competition on price due to its inefficient processes.

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Constraints The following constraints are currently restricting WDI from achieving its strategy:

Qualitative constraints ● Not offering recycling or organic waste services that new customers are seeking.

Regulation may also further increase demand for these services. ● WDI has higher than industry operating costs due to not collecting and using

biogas from landfill sites as fuel. ● Goal incongruence caused by disagreements between Laura Simmons and Jack

Kingsley on WDI’s strategic directions. ● Inefficiency due to lagging behind in technological improvements.

Quantitative constraints ● WDI currently operates with no excess cash and must maintain $120,000 to meet

normal operating expenditures. ● The line of credit cannot exceed 50% of accounts receivable; and earnings

before interest to taxes over interest cannot be lower than 1.8. ● WDI must ensure it has the capital to cover any asset retirement obligations to

return landfills back to their original states after use. ● High debt ratio limits WDI’s ability to invest and make any necessary upgrades.

Financial Analysis

See Exhibit 1 for Financial Statement Ratio Calculations; and Exhibit 2 for Financial Analysis

Financing Options Potential financing options are identified as follow:

Equity Financing

● Kingsley can purchase non-voting preferred shares with a cumulative annual dividend.

● Kingsley has the option to convert preferred shares to common shares on a one-for-one basis.

Line of Credit

● From GBI bank, and is renewed every two years. The next renewal date is September 2022.

● Secured by accounts receivable and cannot exceed 50% of the balance in accounts receivable.

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Unsecured Debt

● Starlight Capital can lend up to $10,000,000. ● Although the loan does not require business assets as collateral, its covenants

limit WDI’s abilities to sell assets and transfer the control of shares. ● A variable interest is required annually when EBITDA is more than a certain

amount, increasing the cost of financing.

Loan Covenants The line of credit and the term loan with GBI Bank Inc. contain two covenants:

● Line of credit covenant – maintain EBIT to interest ratio at or above 1.8 ○ EBIT to interest ratio is trending downward throughout the three-year

period between 2018 and 2020, indicating that less operating income is generated to cover the interest expense.

○ WDI is narrowly meeting the covenant based on the draft balance sheet, with a ratio of 1.8. This declining ratio increases the likelihood of a covenant breach.

● Term loan covenant – maintain a debt-to-equity ratio at or below 3.5 ○ The debt-to-equity ratio is trending upwards, and this may be the result of

share issuance to Kingsley and the repayment of REC bank loan. ○ The debt-to-equity ratio for 2020 is 2.8 and is within the covenant limit.

However, it is greater than the benchmark of 2.6, indicating more reliance on debt than the industry standard.

There are also two covenants attached to the unsecured debt from the Starlight proposal:

● No dividend payout while the debt is outstanding. ○ WDI paid a $6 million dividend in 2018 but no dividend payout in the last

two years. ○ This covenant restricts WDI’s ability to pay out an annual dividend to

Kingsley if Kingsley decides to purchase the cumulative preferred shares. ● Any asset or share sale will need to be approved by Starlight.

○ This limits WDI’s ability to transfer the control of shares and eventually increases the cost and complexity of the sale.

External and Internal Analysis

See Exhibit 3 for the SWOT Analysis; and Exhibit 4 for the PESTEL analysis.

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Analysis of Strategic Options WDI has 4 strategic options available to pursue:

1) PPP Agreement for Organics Facility 2) Start a Consulting Division 3) Modify Recycling Division 4) Invest in Pristine

Option #1: PPP Agreement for Organics Facility WDI was approached by six local municipalities to enter into a Public-Private Partnership (PPP) agreement to open and operate an organic waste treatment facility.

Qualitative Analysis

Pros Cons

● Will use the most advanced technology for the breakdown of organic material. Fitting with WDI’s strategy of being a leader in technology.

● There is still a large capital investment required. Taking on additional debt may be difficult for WDI to service as they already have little free cash flow.

● Provincial governments are encouraging residents to divert organic waste from landfills. This will allow WDI to stay ahead of changing regulations.

● Municipalities have a large amount of control over the contract, increasing risk the terms of the contract may negatively change.

● Utilization of biogas for fuel will not only reduce costs for WDI but also be consistent with WDI’s goal to improve environmental sustainability.

● Should WDI ownership change, the organics contract will be terminated. This may deter future investors from pursuing WDI.

● Can utilize existing fleet of vehicles for collecting organics, reducing capital investment required.

● Contract requires stringent quality specifications. WDI may face significant penalties if it cannot meet the specifications.

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Quantitative Analysis See Exhibit 5

Results

Using a discount rate of 10%, investing in the organics facility has a positive cash flow of $12.45M over the 30 years. However, the board’s objectives are not met as operating cash flows will not increase by $1.7M until 2024.

A 30-year timeframe was used as that is the duration of the contract.

Strategic Alignment WDI’s vision, mission, and core values seek to improve elements of technological advancements, environmental sustainability, and customer service. Pursuing the organics facility achieves this by using biogas as fuel to increase sustainability, building relationships with new municipalities, and using a state-of-the-art facility.

Financing

Requirements ● WDI will need to raise $12M for the purchase of equipment.

Options ● Utilize Starlight Capital loan of $10M ● Kinsley can purchase more non-voting preferred shares

Financial Reporting Under ASPE 3056 the arrangement will be considered a jointly controlled operation:

● All assets, liabilities, and income from the operation must be recorded on WDI’s financial statements.

Tax Implications WDI must report expenses and income from the joint operation on its financial statements. WDI will be allocated 50% of the before-tax income from the organics facility which is active business income and will be taxable.

Option #2: Environmental Consulting Services

Thom Lancaster has approached Laura about the possibility of WDI adding an environmental consulting division to its operations.

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Qualitative Analysis

Pros Cons

● Opportunity to sell consulting, and innovative services to new and existing customers. This diversifies WDI’s earning potential.

● Opportunity cost for WDI to lose referral fees from consulting engineering firms. This decreases the profit margin initially.

● Having up-to-date knowledge in house will benefit other WDI’s operations to improve existing services.

● Consulting business has higher legal liability risk which could result in large contingent liabilities.

● Consulting services offer higher margins since it does not rely on natural resources, such as fuel to operate.

● Contracts are not long-term and stable; therefore, revenue and profit levels will fluctuate and be difficult to forecast and budget.

● Does not require any capital investment. Allows WDI to allocate funds towards other capital investments.

● Free cash flows will not improve immediately while the book of business takes time to build up.

Quantitative Analysis See Exhibit 6

Profitability Analysis

This option meets WDI’s goals and objectives as the consulting services would improve the operating profit margin above 9% by 2022. As net income increases, this would also increase shareholder value.

Strategic Alignment

This option aligns with WDI’s current mission, vision, and core values by providing niche remediation consulting to customers and advising companies on product end-of-life disposal responsibilities. There is also a growing market for environmental consulting

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services since there is increased attention to environmental protection laws. Additionally, having various types of services provided is a KSF for WDI.

Financing

This option does not require any upfront capital; therefore, WDI does not need to look for any financing alternative.

Financial Reporting

1) WDI recognizes revenue based on ASPE 3400. ● Performance will be met when service is recognized using the percentage

of completion method. ● Measurement is reasonably assured. This is based on the ability to

reliably estimate stages of completion. ● Collection is reasonably assured. This is important since the estimated

average accounts receivable collection period is 35 days. 2) Contingent liabilities (ASPE 3290) should be reviewed for possible accrual

entries.

Tax Implications

Revenue recognized from the consulting services division will be considered as WDI’s active business income. Consulting services’ revenue and expenses incurred will be included in WDI’s Corporate Income Tax Return (T2).

Option #3: Modify Recycling Division WDI is considering three options for the recycling division:

Option 1

Temporarily shut down the recycling plants until selling prices for current products rebounds.

Option 2

Continue to recycle materials with a positive contribution margin and sell any other unprocessed recyclable materials.

Option 3

Continue recycling materials with a positive contribution margin, sell any other unprocessed recyclable materials, and invest in aluminum or PET plastics.

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Qualitative Analysis Pros Cons

Option 1

● Labour can be better utilized than when selling prices are low. This is consistent with Jack’s objective to reduce costs.

● If the price of recycled materials continues to decrease, the recycling facility will close indefinitely. This does not support WDI's mission to provide recycling services to customers.

Option 2

● Does not require large capital expenditure. This is in line with Brian’s objective to invest when cash flows are available

● Will result in WDI earning lower than industry profit as competitors are able to process materials more efficiently with technology

Option 3

● Allows WDI to provide PET or aluminum recycling. This increases customer services by meeting customers’ changing demands

● Will meet WDI’s core values of staying up to date with advanced technologies and promoting sustainable practices.

● Laura may approve of updating the recycling plant whereas Jack may not. If key stakeholder preferences are misaligned, disagreements may hurt board relationships.

● Large financing requirement may make WDI unable to invest in the other strategic options.

Quantitative Analysis

See Exhibits 7, 8, and 9

Contribution Margin Analysis

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Based on the quantitative analysis, the contribution margin for processed recycled materials from greatest to least is: Aluminum, PET plastics, OCC, mixed paper, and glass.

Profitability Analysis and Discounted Cash Flow Analysis

All options except option 1 will meet the board’s objectives to increase the recycling division operating income by 5% in 2021. In 2022, all options will meet the 5% requirement.

It is still possible for profitable investments to generate negative cash flow. A discounted cash flow analysis has been made to further compare the options.

An appropriate timeframe to do a discounted cash flow analysis is 10 years because this is the useful life of the equipment. The NPV of the aluminum investment is $6.4M and the NPV of the PET plastics investment is $2.8M.

Strategic Alignment Closing the recycling plant is not in line with WDI’s vision and mission of being environmentally responsible and providing recycling services to customers, whereas updating the plants.

Financing

Requirements ● PET plastics requires $10M

● Aluminum requires $20M

Options ● Utilize Starlight Capital loan for $10M ● Kinsley can purchase more non-voting preferred shares

Financial Reporting Inventory may be overvalued because it may not be calculated at the lower of cost and net realizable value (ASPE 3031).

Tax Implications WDI can opt to claim CCA up to 100% on the class 53 equipment in the first year, resulting in tax savings of $4.6M for Aluminum equipment in 2021 and $2.3M for PET plastics equipment.

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Option #4: Investment in Pristine Research Inc.

The board is considering acquiring 45% ownership of Pristine to expand into the hazardous waste cleanup business.

Qualitative Analysis

Pros Cons

● Pristine excels at technological innovation. This investment is aligned with WDI’s goal to be in the lead of technologies.

● R&D is subjected to time and technological uncertainty, increasing the risk of this investment.

● Pristine has high growth prospects due to increased regulations and increasing demand for oil spills cleanup technology, leading to a potential revenue increase. Its strong financial performance also aligns with Laura and Brian’s goal to expand into segments with higher margins.

● The transaction will close in early March 2021. This time constraint may limit WDI’s ability to conduct rigorous due diligence to identify any financial or operational issues.

● Opportunity to enhance WDI’s reputation and promote environmental responsibility by supporting Pristine’s R&D.

● From a tax perspective, the transaction involves a share purchase which is inherently unfavorable to WDI.

● Share purchase option enables WDI to control a well-established company at a lower cost.

● Capital requirement results in a significant cash outflow, may not meet Kingsley’s objectives and Brian’s investing approach.

Quantitative Analysis Valuation

See Exhibits 10 and 11

The value of Pristine shares calculated using the asset-based approach is approximately $3.7M, and the capitalized cash flows approach puts the share value

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between $3.5M to $3.8M. The asking price is not reasonable quantitatively as both valuations calculated fall below $4M. The recommended maximum purchase price is $3.8M.

Ratio Analysis

See Exhibit 10

Pristine's operating margins are significantly higher than WDI, this can improve WDI’s total operating margin when presented with consolidated financial statements after WDI purchases additional shares and acquires control of Pristine.

Strategic Alignment

The investment broadens WDI’s service line, thus supporting WDI’s vision to meet the demands of customers and local communities. It is also in line with WDI’s mission and core values as Pristine shares similar values of being innovative, sustainable, and environmentally responsible.

Financing

Requirement

● $4M is required for the share purchase.

Options

● Accepting the Starlight loan. ● Issuing convertible preferred shares to Kingsley

Financing Reporting

WDI will have significant influence over Pristine after acquiring 45% of Pristine shares. ASPE 3051 Investments requires WDI to use either the cost method or equity method to account for this investment, and the investment will be initially recorded at $4M under both methods. The equity method should be used as this increases the overall income from the investment.

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Tax Implication

As there is no acquisition of control, Pristine will file its own tax return and does not have to share the small business deductions with WDI. A share purchase means WDI will not gain the tax advantage of bringing assets up to the FMV to take higher future CCA. Also, goodwill that arises from share purchase is not eligible for CCA deduction. Additionally, WDI may need to pay Part IV tax on dividends received from Pristine as they are connected.

Decision Matrix As WDI is looking to meet its future plan and objectives, WDI should use the assessment criteria listed below to help choose the strategic option.

Strategic Option

Strategic fit

Long-term

sustainability

Meeting financial

goals and targets

Financing availability

Differentiation

PPP Agreement for organic facility

✔ ✔ ✔ ✔ ✔

Adding a consulting division

✔ ✔ ✔ Not Required

✔

Modifying recycling division

✔ * ✔ ✔ ✔ ✔

Investing in Pristine

✔ ✔ 🗶🗶 ✔ ✔

* Only option 1 of modifying the recycling division does not meet WDI’s vision and mission due to the closing down of the recycling plant.

Strategic fit: To align with WDI’s vision, mission, and core values.

Long-term sustainability: Have the objectives to lower GHG emissions, increasing avoidance of GHG emissions, increasing the volumes of recycled materials, increasing use of non-fossil renewable fuels, reducing water usage, and increasing wildlife habitat surrounding landfill sites been met.

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Meeting company goals and targets: To ensure the option satisfies WDI’s target required rate of return.

Financing availability: To ensure there is available financing for WDI.

Differentiation: Aims to distinguish services from WDI’s competitors in the market.

Recommendations Invest in PPP Agreement for organic facility

Having WDI commit to an organic waste facility requires a very large investment; however, these costs will be lower than typical as the municipalities will front the cost of the land and building. This allows WDI to meet its vision and mission by investing in the latest technology and being environmentally sustainable and meet targeted increase annual free cash flow by at least $1.7M by 2025. As a result, we recommend WDI to agree to enter into the agreement to build and operate an organic waste treatment facility.

Invest in adding a consulting division

This overall strategic option aligns with WDI’s vision and mission as well as having a differentiation strategy from competitors. This option does not require any significant capital investment, which means WDI can use its financing availability for other strategic options. Overall, as industry competitors are looking to expand environmental consulting services to their product line, WDI can have a competitive advantage by adding this division before its competitors and increasing its book of business first.

Invest in modifying recycling division

This overall strategic option does not align with WDI’s vision and mission since one of the options includes closing the recycling plant; however, it does meet the board’s objectives to increase the recycling division operating income by 5% in 2022. WDI should proceed with option 2 and recycle those materials that have a positive contribution margin, while selling any other unprocessed recyclable materials. This way WDI does not require any capital investment for the recycling plant while simultaneously increasing operating income.

Do not invest in Pristine Research Inc.

Even though this investment aligns with WDI’s vision and mission, it requires large long-term investment and will not assist WDI in improving total operating margins and free cash flow immediately. Additionally, the risk of this investment is relatively high due to the uncertainties of R&D. Therefore, WDI should focus on their core business and resources of improving the current operations of the company.

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Overall Strategy WDI should proceed with investing in the organic facility, adding a consulting division, and modifying the recycling division processes. This strategy aligns best with the overall success factors of WDI and will allow the most significant growth in revenue and operating profits while also staying true to WDI’s vision, mission, and core values.

This strategy allows WDI to continue thriving in the industry, while also expanding their product line, and maintaining their competitive advantage.

Implementation Plan

Strategic/ Operational Options

Task Time Frame Champion Cost Note

Consulting services

Business registration and legal requirement investigation

Start Immediately

2-3 weeks*

● Josefina Angles

● External lawyers

Legal fees based on the market rate

These tasks will be done by March 31, 2021 Employee

recruitment and training

Start Immediately

4-6 weeks

● Thom Lancaster

● Human resources

2021 salaries: $740,250

Marketing Annual process

● Brian Leung ● Sales

department

$350,000 for 2021

Commence business

Start April 1, 2021

● Laura Simmons

● Thom Lancaster

None No upfront cost

Recycling division

Modify operations (option 2)

Modify the division immediately

1-2 weeks

● Peter Zhang ● Division

manager None No upfront

cost

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PPP agreement for the organic facility

Finalize agreement March 2021 ● Board

members None

This is only an estimated date

Monitor facility construction

From the start to the completion of construction

● Division manager

Salaries: $112,500

Cost based on average wage of managers

Employee recruitment and training

Start September 2021

2-3 months

● Peter Zhang ● Human

resources

Salaries and benefits

This is only an estimated date

Financing and equipment purchase

September 2021

2-3 month

● Brian Leung ● Finance and

purchase department

$12M

Commence business

Start early 2022

● Executive management None

Corporate governance

Create subcommittees

Start March 2021 2-3 months

● Board members None

Start date and time span are estimated only; more time may be needed to establish subcommittees

Establish dispute resolution

Start March 2021

2-3 weeks

● Board members None

Expand the board seats and select new board members

Start June 2021

3-4 months

● Board members

● Nominating committee

None

Vision and mission statements

Update vision and mission statements

Immediately ● Executive management None

Balance scorecard

Implement and update balanced scorecard

Start March 2021

3-4 weeks

● Executive management

● Division managers

None

* The estimated time span to complete the task.

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Financial Forecast See Exhibits 12 and 13

The pro-forma financial statements show a steady increase in forecasted operating income and cash flow from 2021 to 2025 due to the implementation of strategic and operational recommendations.

The forecasted total operating margin is 9.12% and 12.18% in 2021 and 2022, respectively, achieving WDI’s goal and is in line with the industry benchmark. Next, the operating margin of the recycling division improves drastically in 2021 and 2022 at 9.89%, outperforming the industry average and exceeding WDI’s target of 5%. Also, the forecasted free cash flows increase more than $1.7M each year due to improving profitability. Additionally, WDI will meet the debt covenant based on the forecasted result.

Financing Recommendation There is no initial capital requirement for consulting and recycling divisions, WDI needs total funding of $12M to finance organic waste equipment. The options available for financing the organic facility are the line of credit ($3.7M), Kingsley equity ($9M), and Starlight loan ($10M). Although the line of credit has the lowest financing cost among the three options, this option is not recommended as WDI currently has no free cash on hand; borrowing from the line of credit may leave WDI insufficient funds to meet short-term business needs.

WDI should not borrow more than $5M from Starlight as its forecasted EBITDA will exceed the $15M threshold and WDI will likely pay variable interest annually, increasing the total financing cost of this option. Therefore, WDI should utilize the Kingsley option as the share issuance allows WDI to maintain lower financial leverage and have the capability to use debt financing for future investment opportunities. This option also reduces financial stress as WDI can pay accumulated dividends later when free cash flow is available. Thus, WDI should issue shares to Kingsley in exchange for $9M and borrow $3M from Starlight. We recommend that WDI repay the starlight loan quickly to reduce the effect of the loan covenant on the transfer of shares. The recommended repayment schedule is $1.5M in 2022 and 2023.

Data Analysis Information about the waste generation and management for Atlantic Canada has been visualized to assist WDI in making informed decisions about trends in the industry.

Approach The information most beneficial to WDI is to know which materials are seeing the highest growth and volume of disposal. Generated goods have not been included in the visualizations as they do not provide useful information to WDI. WDI offers recycling

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and disposal services and should make decisions based on the volume of disposal, not on the volume of goods generated. As such, only goods recycled, combusted, and landfilled have been included in the visualizations.

All recycled, combusted, and landfilled materials have been further consolidated for each service line in the visualizations. This has been done to take a macroscopic look at each service line regardless of disposal technique. The goal of the visualization was to understand which materials were seeing the most significant growth in the market, and to use the visualizations to make informed decisions about available strategic options.

Results The results show that a majority of the materials disposed of in the Atlantic Canada Region have at best increased marginally between 2006 and 2020. The visualizations, however, do provide insight into which materials are outliers and should be pursued or avoided by WDI.

Materials

Paper and Paperboard were the only materials to drop in tonnage over this period. Paper and Paperboard dropped significantly from 8.7M tonnes in 2006 to 6.8M tonnes in 2020.

Conversely, collection of organics rose from 3.4M to 3.9M over the same period.

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Durable Goods

The durable goods division saw slight increases in most materials between 2006 and 2020. An outlier is a steady growth in the disposal of Furniture and Furnishings over this period.

Nondurable

Both Directories and Other paper nondurable goods showed a complete stop of disposal in 2010 and onwards.

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There was a slight increase in Clothing and Footwear disposal and a slight decrease in Newspaper over the period.

Container and Packaging

The disposal of almost all Containers and Packaging remained stagnant over the 2006 and 2020 period. Notably it appears that Corrugated Boxes were the only Paper & Paperboard Packaging products to consistently be disposed over this period.

However, there was growth in aluminum disposal from 195K in 2006 to 380K in 2020.

Conclusion and Relevance to WDI Based on the visualization, the volume of aluminum disposal has increased. However, annual aluminum volumes are still only 380K and are far lower than the organics volumes of 3.8M. As a result, it may not be in WDI’s best interest to invest in recycling aluminum as demand for disposal of this material is low.

Organics tonnages have increased consistently over the years. This is expected as more families move to the region and have more food and yard waste. Additionally, organics disposal volumes are nearing 4M per year which is the second highest disposed of material next to Paper and Paperboard. This further suggests that there is high demand for organics disposal, and an organics disposal facility would be beneficial to WDI to capture this demand. It also appears that while Paper and Paperboard volumes are decreasing the organics volumes increase, further suggesting an organics facility would be a sound investment for WDI.

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Operational Issues

Vision and Mission The vision and mission statements have been updated to reflect WDI’s strategic direction:

Vision statement

To be the premier waste management company by leading the industry in sustainable practices and customer service through the use of technological advancements and always relying on our core values.

Mission statement

To put our customers first and keep our communities clean by providing environmentally sustainable collection, disposal, and recycling services while utilizing leading-edge technologies.

Ethical Concerns WDI has a surplus of recycled OCC and paper, and management may decide to divert it to a landfill site. Dumping this material may raise ethical issues as WDI’s customers expect that OCC and mixed paper will be recycled.

Another ethical concern is that Jack is the majority shareholder and he wants to quickly increase WDI’s profits and sell the company by 2025. This is a concern because this may motivate Jack to make WDI’s financial statements look better at the expense of WDI’s vision, mission, and core values so WDI is more attractive to potential buyers in 2025.

The following changes are recommended:

● The surplus OCC and paper should be recycled. This ensures WDI acts true to its core values of acting with integrity and honesty in an ethical manner, and promoting sustainable practices within the company.

● The board of directors should have an open conversation with Jack and explain to him that potential buyers will look at more than just WDI’s financials in 2025. This may shift Jack’s mindset so that he does what is best for WDI versus making WDI’s financial statements look as good as they can until 2025.

Performance Management Issue Balanced Scorecard

A balanced scorecard measures performance in an organization from four different perspectives: financial, customer, internal, and learning and growth.

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● This allows management to focus on various aspects of the business aside from strictly financial metrics.

● Proper implementation of this balance scorecard will better align the goals of WDI and employees

Balanced Scorecard

Financial Activities

Measures Targets

- Increase operating profitability

- Net profit margin - 9% profit margin

- Increase annual free cash flows

- Cash position - Increase free cash flow by at least $1.7M

Customer Activities

- Customer satisfaction - Customer satisfaction levels based on surveys

- Maintain a minimum customer satisfaction level rate that would meet WDI’s standard

- Maintain existing customers

- Customer retention rates - Maintain or beat the customer renewal rate from previous year

Internal Activities

- Assess the efficiency and quality of WDI’s operations

- Effective and efficient collection routes

- Automated single or driverless collection trucks robotics for sorting and dismantling

- Lowering fuel costs

- More robotics counts than previous years and less human operating labour

- GHG emission produced - GHG emission rate by direct measurement or

- Lower GHG emissions by 10%

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indirect such as fuel used or electricity produced

Learning and growth

- Maintaining and keeping employees

- Employee turnover - Lower turnover ratio than previous years and lower training costs

- Employee knowledge base

- Required time to learn other jobs within the company

- Training report for each employee when assigned to a different department when there is temporary labour shortage

Governance Issue Current Board Structure

Conflict of Interest

Laura and Brian currently hold two board of director seats and are also on WDI’s management team. The board is responsible for oversight and evaluating the performance of management, so having executive management members on the board may cause a conflict of interest as they can assess their own performance and potentially make biased and preference-based decisions.

Board Composition

Currently, the board consists of four members, two from WDI management and two from Kingsley. Such a composition could lead to a tie in voting and cause a deadlock in strategic decision-making, and this is very likely considering the goal incongruence between Laura and Kingsley. Further, the goal incongruence may cause severe consequences for WDI as no formal procedures are established to resolve the boardroom disagreements.

The current board has considerable financial and managerial skills as well as industry-related experience. However, the board lacks an individual with legal expertise which is crucial if WDI starts consulting services.

Recommendation

● Expand the board from four to five, and add two outside directors. This means WDI will need to replace at least one executive management member with an outside director to maintain the independence of the board. Further, the new

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board members should have qualified legal expertise and industry-related knowledge to carry out their responsibility effectively.

● Establish effective governance dispute resolution through the implementation of formal resolution processes and application of techniques such as internal negotiation and mediation.

● Create the following subcommittees of the board, and delegate the responsibility to those with appropriate skill sets to improve the effectiveness of decision-making:

o Audit and finance committee can oversee the quality of WDI’s financial and budgeting functions.

o Risk committee can oversee WDI’s risk management and evaluate and monitor WDI’s risk framework and activities.

o Nominating committee can evaluate board size and effectiveness as well as elect new board members.

Management Accounting Issue Trucking Proposal

WDI is facing increasing labour and operating costs. If WDI wishes to stay competitive on price, an option available is to contract our labour to Kingsley’s drivers and pay a fee based on kilometres driven.

Quantitative Analysis

See Exhibit 14

Outsourcing to Kingsley will decrease annual operating costs by $11.25K. This equates to a 7% decrease in operating costs.

Qualitative Analysis

Pros

● WDI will not have to use its own vehicles and will be able to use its vehicles in other service lines. This will decrease operating costs for WDI.

● The fixed fee for Kingsley drivers will make it easier to forecast operating costs. This will make it easier for WDI to project future cash flows to cover debts and operating expenses.

● Assuming that drivers will be laid off as a result of subcontracting labour, WDI will save additional costs relating to CPP and EI.

Cons

● Outsourcing labour will decrease employee morale and have other employees fear their job security. This is inconsistent with WDI priding itself on low turnover rates.

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● The proposal is only applicable to diesel vehicles. With the shift towards environmental sustainability and using natural gases to fuel trucks, outsourcing diesel labour does not improve WDI’s environmental position.

● If the contract with Kingsley ends, WDI will need to rehire back drivers to cover the contracted routes. This will create a large upfront cost for WDI to train new drivers.

Recommendation

Although outsourcing to Kingsley will result in some savings in operating costs, we do not recommend WDI pursue this offer. The savings are not enough to justify the loss of employee morale as a result of replacing drivers with contractors.

Taxation Issue Contractor Versus Employee

In-house drivers are currently treated as employees. There may be significant cost and tax savings for WDI if drivers were treated as contractors instead of employees.

Tax effects to WDI if drivers are treated as contractors

● Not responsible for the employer's portion of CPP, EI, payroll taxes, and vacation pay.

● Lower payroll administration costs (calculating withholdings, taxable benefits, issuing T4).

● Labour laws (wages, overtime pay, and statutory holidays) do not apply.

Tax effects to drivers if they are treated as contractors

● More expenses to deduct such as meals and entertainment and travel expenses. ● Income splitting opportunity with spouse. ● Will not qualify for EI and WDI’s portion of CPP and will not receive medical and

life insurance benefits. Criteria to be met to treat drivers as contractors

● Control: Supports employee status because WDI sets drivers’ schedules, wages, and performance required.

● Ownership of equipment: Supports employee status because WDI owns the trucks that drivers use.

● Chance of profit: Supports employee status because drivers earn a set wage regardless of how efficiently they collect.

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● Integration: Supports employee status because drivers are not allowed to subcontract their services while employed by WDI.

● Specific results: Supports employee status because the drivers were hired by WDI to continue employment for an ongoing basis.

Recommendation

All factors indicate drivers are correctly treated as employees. There will be no tax changes as the drivers will remain as employees.

Financial Reporting Issue Landfill Site Obligations

See Exhibit 15

Marlene would like to use the low end of the range to calculate the landfill site obligation rather than the high end that WDI has been using historically.

● Estimated Result - the estimated landfill site obligation as calculated will be $2.5M at the low-end and $3.9M at the high-end.

● Changes in Estimate - the recent report indicates the current best estimate therefore the obligation should be updated to reflect the best estimate per ASPE 1506. WDI has the option to use either high end or low end.

Recommendation

As Marlene indicates a desire to use the low-end, the adjustment will be for $4.6M, the adjusted journal entry is provided in Exhibit 15. The adjustment will decrease debt-to-equity ratio from 2.81 to 2.63 which is beneficial to current loan covenants.

Assurance Issue GHG Emissions Statement

The type of report that SCG could issue to provide a reasonable level of assurance is ISAE 3410.

● From “International Standards on Assurance Engagement (ISAE) 3410, Assurance Engagements on Green Gas Statements,2” the objective of an engagement under ISAE 3410 is to obtain either limited or reasonable assurance, as applicable, about whether the GHG statement is free from material misstatement, whether due to fraud or error.

o In Canada, ISAE 3410 is also viewed as CSAE 34103

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The type of information4 can be broken down as follows:

● Scope 1 emission includes direct GHG emissions from operations (landfill sites, recycled materials)

● Scope 2 emission includes indirect GHG emissions that are attributable to electricity and heat usage.

● Scope 3 emission includes indirect GHG emissions from business activities, but occur from sources not owned or controlled by WDI (If WDI were to use Kingsley’s trucking).

Overall, by using the standard of ISAE 3410, this adds confidence to the public which would help to attract new customers, new investors, and lenders.

Overall Conclusion This report assessed the overall situation of WDI and evaluated the current strategic options available. It is recommended that WDI accept the PPP agreement for the organic facility, start the environmental consulting division, and modify the recycling division. These strategies will ensure that WDI remains true to its vision and mission statements while also promoting growth and long-term sustainability in the business.

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References

1 CPA. “Waste Disposal Inc. - Capstone 1 Case,” 09 Nov, 2020”.

https://education.cpacanada.ca/d2l/le/content/64163/viewContent/1444627/View

2 International Standards on Assurance Engagement (ISAE) 3410, Assurance Engagements on Green Gas Statements

https://www.ifac.org/system/files/publications/files/At_a_Glance-ISAE%203410%20Final.pdf

3 Canadian Standard on Assurance Engagements (CSAE3410)

https://mbchamber.mb.ca/2011/03/21/assurance-engagements-on-greenhouse-gas-statements-deloitte/

4 GHG Statement Sample

https://aasc.org.ph/downloads/ED/publications/PDFs/GHG-Statement-Sample.pdf

5 CPA. “Strategy and Governance: Chapter 5 – Internal and External Analysis”.

https://www.knotia.ca/Knowledge/Home.aspx?productID=980

6 Government of Canada. “Zero plastic waste: the need for action.” Canada.ca, 03 Jan, 2020.

https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/zero-plastic-waste/need-action.html

7 Milner, Alicia. “Compressed Natural Gas.” Waste and Recycling Mag, 01 Apr, 2013.

https://www.wasterecyclingmag.ca/feature/compressed-natural-gas/

8 Government of Canada. “Technical Requirements for a Natural Landfill Site Permit:

Specified Risk Material Confinement.” Canada.ca, 22 May, 2013.

https://www.inspection.gc.ca/animal-health/terrestrial-animals/diseases/reportable/bse/srm/permits-for-landfill-sites/natural-landfill-site/eng/1365081890622/1365082356158

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Exhibits

Exhibit 2: Financial Analysis

The expected annual revenue growth for the industry is 1.9%; however, WDI only had 0.56% increase from 2019.

● Landfill site revenue increased in 2020 due to WDI accepting waste from two competitors.

○ This is likely to be a one time increase and is expected to decrease in the foreseeable future.

Operating margin for the recycling segment this year is only 1.6%. This is well below the industry’s expected increase of 4.3% from prior years.

● Price of mixed paper, OCC, and glass have declined. This results in a decrease in recycling revenue.

○ COGS has also increased by 4.88%. This could be caused by not enough investment in technology for the recycling segment to improve the efficiency.

Calculation & Discussion of Ratios Industry Specific Ratio(s) Labour and Benefits Industry: 16.60% WDI: 16.92% (2020); 15.11% (2019); 14.51% (2018) Amortization Industry: 7.20% WDI: 10.73% (2020); 9.47% (2019); 9.10% (2018) WDI is in line with industry averages in labour and benefits indicating presence of cost controls in these areas. Internally, WDI’s labour and benefits ratio has increased by 1.81% from 2019 to 2020, and 0.60% from 2018 to 2019. This could be due to WDI paying higher wages and benefits to employees in order to retain their work services since it is hard to attract new hires in this industry. Competitors in the industry utilize operating leases rather than purchasing assets. This has resulted in a higher-than-average amortization cost for WDI. Additionally, as WDI does not have the ability to produce biogas as fuel, fuel spending is higher than industry averages. Liquidity Ratio(s) Current ratio Industry: 1.50 WDI: 0.82 (2020); 0.53 (2019); 0.88 (2018)

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WDI having a lower than industry current ratio may be a product of WDI operating with no excess cash. The current ratio decreased from 2018 to 2019 due to WDI borrowed a loan from REC Bank. The current ratio then increased in 2020 when repaid the loan. Solvency Ratio(s) Debt-to-equity Industry: 2.60 WDI: 2.81 (2020); 6.25 (2019); 9.99 (2018) A higher ratio than the industry standard means that WDI is more leveraged, and therefore, considered more financially risky than its competitors. In 2020, Jack Kingsley had joined and purchased shares for $10,000,000. This increases the shareholder’s equity, which leads to lower debt to equity ratio. Activity / efficiency Ratio(s) Days in receivables Industry: 45.00 WDI: 45.40 (2020); 41.59 (2019); 40.00 (2018) Although WDI meets the industry average for days in receivables, WDI operates with the minimum amount of cash needed to cover expenses. WDI has seen a yearly increase in its days in receivables because they are collecting payments slower. This could be troublesome for WDI in the future if they are not collecting cash fast enough to cover operating expenses. Profitability Ratio(s) Operating margins Industry: 10.00% WDI: 8.04% (2020); 12.92% (2019); 14.70 (2018)

Recycling Segment: 4.30% Recycling Division: 1.64% (2020).

WDI’s operating margin is less than the industry standard by 1.96%. This could be due to competitors having improved efficiencies due to advancements in automation.

WDI’s operating margin has decreased by 1.78% from 2018 to 2019. This is mainly due to 12.50% higher landfill site remediation obligation. From 2019 to 2020, the operating margin has decreased by 4.88%. This is mainly due to higher expenses in labour and benefits, as well as amortization.

WDI’s recycling division’s operating margin is below industry’s standard. This could be due to the improved efficiencies from the competitor’s automation advancements. WDI may improve its recycling division profit margin year over year by investing more capital into automation.

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Exhibit 3: SWOT Analysis5

Strengths Weaknesses

● Strong emphasis on customer service has resulted in high retention of contract renewals.

● WDI has strong core values and places emphasis on them being visible at each location. This shows a strong tone at the top and helps align employee goals with WDI.

● The CEO Laura Simmons has years of industry experience, and can see new trends in the market emerge. This allows WDI to jump WDI on new trends before competition, and have a competitive advantage.

● Employees are cross trained in different departments as they are shifted around as demand is needed, creating a highly educated workforce. This allows WDI to have a cost labour force, rather than hiring new employees or subcontracting to fill the missing role.

● Turnover rates are very low in WDI. Employees average 12 years. This decreases hiring and training costs – as well as reduces incidents as drivers are more skilled.

● WDI is well established in the Atlantic Provinces. This gives WDI a competitive advantage through name recognition compared to new

● WDI cannot provide the PET plastics and aluminum recycling, or disposal of organic waste. This results in higher bids for new contracts and may result in losing out on new contracts.

● WDI is a smaller operation than many of the competitors. This makes it difficult for WDI to compete on price.

● Unlike competitors, WDI does not currently capture biogas at its landfill sites. This results in wasted resources that could be utilized to fuel equipment, and reduce costs.

● WDI is falling behind the industry in adapting to technological advancements. This leads to WDI having difficulty competing in price with companies that automate.

● There is currently a stockpile of Recycled OCC and Paper that must be disposed of. This may throw off inventory valuations, and be expensive to dispose of.

● Significant cash flow issues due to the repayment of term loan, and declining margins on the current business. Currently, WDI is only able to maintain a minimum cash balance to meet normal operational needs. There is no excess cash on hand for strategic

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entrants to the market as long as WDI can compete on price.

● WDI has a strong vertical integration. As WDI operates landfill disposal sites, transfer stations, and collection centers, they can reduce costs by utilizing their own facilities for processing rather than using competition’s facilities.

investment or operational improvement.

● Lack of presence and experience in emerging segments, such as environmental consulting and hazardous waste cleanup. This is a weakness as WDI may not have positive return on its investment into these markets due to its lack of experience.

Opportunities Threats

● Currently offers 5-Year contracts and up to 15-Year. There may be an opportunity to offer shorter term contracts to attract new customers.

● WDI could begin capturing biogas at landfill sites and use the biogas as fuel for operations, reducing operating costs.

● Upgrade vehicles to run off natural gas. This is an opportunity to increase sustainability and gain favour with environmentally conscious customers.

● There is an opportunity to add a niche environmental consulting business to the operations of WDI. This would differentiate WDI from competition.

● Upgrade recycling equipment to allow processing of aluminum and PET plastics. This will capture new demand for customers that require these services.

● Existing customers may soon start to want the recycling and disposal services that WDI does not offer. This is a threat to WDI losing out on renewing contracts if they cannot offer the services in a cost-effective manner.

● Kingsley is coming on as a “hands-on” investor. Kingsley may force WDI into a direction that does not fit with WDI’s current position and may be detrimental to growth.

● Regulation of GHG emissions may erode profit margins in some services lines as emissions regulations become more stringent.

● Profit margin on recycling services may continue to decrease if the selling price of the commodity continues to decrease.

● National waste collections companies are looking to expand

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● Invest in Pristine Research Inc. and capture the hazardous waste cleanup market on the East Coast.

into the Nova Scotia/New Brunswick market. There is risk that WDI may not be able to compete against the national companies on contract pricing.

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Exhibit 4: PESTEL Analysis5

Political

● A carbon tax act was implemented to penalize companies for having excess GHG emissions.

● Increased pressure on municipalities and corporations to divert waste from landfill sites and operate with more sustainable practices due to new regulation.

● There is a push for the ban of harmful single use of plastics in Canada starting as early as 2021 (6).

Economic

● While the overall industry is in a mature stage, profit margins are expected to decline over time as fuel and wage prices increase.

● Large capital requirements to enter the market creates a barrier to entry and limits new entrants.

Societal

● An increasing number of new customers are looking for collection services for PET plastics and Aluminum. WDI does not currently offer these services.

● Increasing push towards Zero-waste policies will see a decrease in demand for waste collection services.

Technological

● New technology allows biogas from landfills to be used as fuel for trucks. ● As the useful life of electronics such as phones and computers decrease, there is

an increase of hazardous waste. ● Automation in the industry seeks to reduce the number of man hours needed to

operate. Robotic arms on trucks allow one driver to complete a route.

Environmental

● Canada is one of the leading producers of Compressed Natural Gas (CNG), which is seeing increased use in trucks in the industry as a cleaner burning alternative to diesel (7).

● There is growing demand and regulation to have the disposal of organic waste diverted away from landfills to reduce GHG emissions.

Legal

● Recycling demand is tied to requirements for manufacturers to be responsible for the disposal of packaging.

● There are specific regulatory requirements that must be met to operate, maintain and close a landfill site (8).