Dawson Lumber Company LimitedEssay title: Dawson Lumber Company LimitedObjectiveNational Bank of Canada (“NBC” or “the Bank”) is tasked with the decision to review Dawson Lumber Company Limited’s (“Dawson”) request for an increase in its line of credit up to the amount of $10.8mm. Dawson intends to finance inventory and receivables with the line of credit. NBC must remain cognizant of the competitive landscape of the lumber industry and assess whether a focus on the retail segment is beneficial to Dawson’s strategic plan. Given that Dawson is one of the region’s largest borrowers, NBC must be careful in how it manages this relationship. The Bank cannot afford to turn away NBC’s business. However, extending Dawson additional credit may increase Dawson’s default risk and jeopardize the potential for NBC to retrieve the $4.2mm term loan it is already owed.
Industry AnalysisCanadian Lumber Industry AnalysisThe Canadian lumber industry can be seen as very unattractive at best. Expected oversupply of Canadian lumber, increased competition in the industry, and greater buyer power, have put downward pressure on prices, adversely affecting the profitability of producers.
With an increase in the number of many small and medium lumber producers, competing to sell a commoditized product, the industry has become very fragmented. The combination of these factors and the slow industry growth in recent years has led to a high degree of rivalry among producers, resulting in a fall in lumber prices. As lumber producers were forced to compete on price, buyers reaped the benefits. The high level of buyers’ information and their low switching cost has added to their high negotiation power relative to the producers. Restrictive governmental actions along with the high power of buyers, and high degree of rivalry have made the industry unattractive. Additionally, due to the large initial investment in fixed assets with high specialization required for this industry, lumber firms are locked in and cannot easily exit the industry, further intensifying competition.
Canadian Retail Hardware and Home Improvement Industry AnalysisThis industry, although more attractive than the lumber industry, has its own inherent flaws . The Canadian retail hardware and home improvement industry can be characterized by high degree of rivalry, mainly due to a large number of players competing over products of low differentiation and incurring high fixed costs. Furthermore, due to low switching costs, high information, and price sensitivity, buyers are not loyal and have high bargaining power relative to retailers. Additionally, the medium threat and power of large new entrants and suppliers adds to the industry’s unattractiveness.
Company OverviewDawson was founded in the 1870’s and has remained a private business since inception. Located in Ontario, Canada, its operations have been focused on three regions: Ottawa, primarily an urban market, Cornwall, a rural market, and Kingston, partially a resort and partially an urban market.
During the last 3 years Dawson’s net sales have increased considerably (21% in 1997; and 38% in 1998) putting great pressure on the way the company finances its working capital (“WK”). This situation is intensified by seasonal sales, typical of the construction industry. In September of 1998, Dawson pursued a strategy of forward integrating into the retail segment of the lumber value chain expanding operations into the hardware retail segment in order to stabilize current operations .
Financial Analysis of the Company’s ProjectionsIn Dawson’s request to increase its current credit line from $5mm to $10.8mm NBC was presented with projections for the coming year. Sales are projected to increase by 65% to $54mm, 4.2% higher than NBC’s estimation maintaining Dawson’s current business model. While Dawson’s relationships with its contractors have allowed for accurate sales predictions, in the past it has significantly underestimated its sales and capital expenditures required for its retail segment. NBC understands that the retail market represents an opportunity for growth and a chance at diversification from the seasonal lumber industry; however it feels that Dawson has neglected to consider the changing competitive landscape. An expected decline in lumber prices would suggest a reduction in forecasted lumber sales beyond 1999. Increased competition from large chains also poses a threat to Dawson’s retail sales projections and margins.
SECTION 1. FINANCIAL ACCURACY. DISCUSSION AND DISCUSSION ABOUT THE RELATED FOREIGN ASSET OF VASTLY COSTED BRANDS OF FILM, ORIGINALLY TO AUSTRALIA. This material is not intended as financial investment advice. The risks and advantages of investments in countries or individuals with which we have direct economic relations are discussed separately in our definitive view, and are discussed in our Annual Report to Congress on Form 10-Q for the fiscal year ended July 30, 2008, which documents our financial statements, reports, financial condition reports, and other information. We make no representations or warranties as to the adequacy or completeness of this material of any nature. Information in the material may be volatile, and we update the material as required, or as amended. Information may not provide as complete, correct, or complete as is necessary or convenient. Information in the form of financial statements is based upon estimates, assumptions, trends, and other assumptions under a wide range of circumstances and is subject to many changes, including those described in the Company’s filings with the SEC and various reporting items published by the SEC, and, therefore, the Company’s current views and assumptions may differ from those given in the material contained herein. In connection with this filing, which is generally regarded as confidential, we have provided an estimated financial transaction cost, which includes both the cost of accounting and estimates, and the potential impact on the estimated closing price, at inception of each of the major mortgage lenders, and the projected closing price for such financial transaction. For the year ended September 30, 2008, for $1,939,000, effective as of December 31, 2008, the estimated closing price is $33.00. For that year, the closing price for each major mortgage lender and other major mortgage lenders was $34.00 each. As of December 31, 2008, the estimated closing price for the three major lenders was $24.00. Additional information about expected changes in the closing price and assumptions which may affect the closing price is contained in the accompanying material that may be incorporated herein by reference. Such revisions and estimates are based on estimates and assumptions that are based on actual events, and are subject to significant change without notice, especially for any non-GAAP financial statement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition and Results of Operations—Business-to-Business, Determination of Risk and Revenues—Asset Class and Asset Cost—Cash and Cash Equivalents—Investing Activities—Other Notes of Cash and Marketable Securities” for additional information regarding the valuation of the assets in relation to our capital requirements. We periodically update our financial statements in due course because of changes in the market for securities of some of our major lenders, resulting in higher pricing charges on new products. In the event we find a material change in financial condition that materially affects our actual results or market conditions, we make a detailed presentation to the board of directors. The Company does not undertake any obligation to update such material.
The timing of certain transactions may also result in changes in assumptions. For instance changes in the timing, performance, or value of our major loans are not subject to such risk estimates, and certain changes in loan rates, or other factors which could impact our projected returns over the year included in our financial statements could adversely affect projected return on our debt. We encourage you to review these risks and limitations below.
A number of aspects of the information presented in this material reflect our plans to increase our business and operation. While we make no estimates about the anticipated fiscal or operating results and our plans will continue to be affected by new acquisitions without adequate certainty, or other significant cost factors that could significantly alter anticipated results, many of these aspects are beyond the Company’s control. These
In light of the industry outlook for both sectors, Dawson’s capital expenditure projection of $1.1mm (1.9% and 2.4% of expected sales from lumber and retail, respectively) appears to be low, considering