Bidding for Electives Begins Today

Bidding for elective courses in second year began today. I'm happy to report that I still have 500 points to bid (the rumor that I lost points for study tours is apparently untrue). However, I only have to take 4 courses this term (maximum and minimum). I'm trying to bundle them together all on Tuesday, Wednesday and Thursday so I can have a four day long weekend every week (and so far it seems possible).

I'm thinking of taking all the core IB courses in one go (so I can concentrate on electives at LBS) including: Corporate Finance, Financial Management, M&A and Options and Derivatives. Considering the sessions (date / time / profs) I want, I will have plenty of points (some courses requiring as few as 0 points).

I just need to confirm my selection with a few friends before placing my bid. Bidding ends one week after the open.

First Year Final Grades Released

Grades from our Q4 classes were released today. While most students felt like this was the toughest batch of courses, I think that the grades panned out as they usually do (some up, some down, class wide aggregate average change of zero). I myself had flat grades (no significant change from previous).

Investment Banking and M&A - Scotia Capital

I returned from the Latin America Study Tour very early this morning. After filling up on Chinese food at lunch and running a few errands throughout the day, I'm finally settled at my new place.

Tomorrow, I'll be starting as a Summer Associate, Investment Banking and M&A at Scotia Capital. I anticipate being very busy and will also not be putting up any posts until I return to school in late August (probably with a post from MBA Orientation Camp).

So far, the CFA / MBA journey has been an exceptionally rewarding one and I am really looking forward to what challenges await in the summer and the opportunities of the coming year.

PREVI

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Previ is Latin America’s largest pension fund (34th in the world) and manages funds for Banco de Brasil employees. They have R$142 AuM where the 10 largest pension funds (including themselves) have less than R$300B and the entire industry is estimated at less than R$500B. They have the following allocations:

Fixed Income: 31% (max 100%)
Equities: 63% (max 70%)
Real Estate: 3% (max 8%)
Structured Investments: .54% (max 20%)
Investments Abroad: 0% (max 10%)
Loans to participants: 3% (max 15%)

The interesting story here is that they currently have zero exposure abroad (or 100% domestic exposure). They only recently made a change such that they could invest a maximum of 10% of their assets in foreign countries and will probably be looking in the future to find good investment opportunities abroad.

They currently benchmark against the IPSA (indexed to inflation) and look for a +5.5% spread (usually ending up at a hurdle rate of 12.6%). They currently earn through the common 2/20 model, with a 2% management fee and a 20% performance fee for every dollar earned above the benchmark.

Being a pension fund, they prefer low leverage as there is plenty of volatility in the Brazilian markets. Their high (63%) exposure in equities is a result of their heavy investments in certain Brazilian companies and their lack of asset reallocation (doesn’t make sense at the moment for them to divest from large or controlling positions).

However, their corporate governance focuses on how they manage investment decisions to focus on dividends as a cash flow, investment rates of return and the liquidity of their positions. They also try to make investments in sectors which are a priority for developing Brazil’s industries in general including Structured Investments in Private Equity and Venture Capital as well as infrastructure such as the metro, roads, rail, sea ports and airports.

They even presented a case study on Vale. In 2001 Vale was in rough shape. The company needed a corporate reorganization as the financial performance was weak and less than expectations, they lacked strategic direction and transparency. In a move of shareholder activism Previ (similar to what OTPP did with Petro-Can last summer) shook up the corporate structure and took at 14.4% stake in the company.

Previ focused the restructuring of Vale on different strategic horizons. Horizon 1: lead in iron ore and expand capacity in pellets. Horizon 2: Global prominence in bauxite and alumina, growth though exploration, acquisition and joint venture and develop logistics networks. Horizon 3: Acquire non-ferrous businesses. Since these changes, Vale has traded at a spread over the IBovespa index, earning a return from 2001 of 412.02% beating the index’s performance of 54.91%.

This also brings me to the original point of my interest in the study tour. In the current economic market place, it becomes increasingly difficult to be insulated from the world economy and to be truly domestic. In the Vale example, while Previ doesn’t officially have investments in foreign companies, Vale does, having recently acquired Inco from Canada. Their commoditized products, namely iron ore and nickel, also trade on the international market. So while Previ doesn’t officially have foreign investments, they are not insensitive to the global macroeconomic conditions.

The example I’m always given is a company like IBM, where although they may be a US company, they have clients around the globe so they actually have exposure to international markets.

Petrobras

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Petrobras is one of the top oil producer, refiner and associated industries company in the world, headquartered in Rio de Janeiro. They are currently 55% owned by the government (representing 1/3 of the total equity of the company) with the government owning a golden share (similar to Embraer and Vale) which allows the government the first right of refusal on various governance issues. Looking at massive capitalization, Petrobras is considering issuing more of their stock which is currently trading at a PE of 10.5x with an industry benchmark of 10x.

However, with Petrobras in the midst of heavy capitalization which begs the question of whether or not they plan to maintain this government owned model if they decide to continue to raise capital in the public markets. Currently, they command 14.17B boe and their major costs are their appraisal costs in exploration and their production costs split between lifting costs and government costs. The current extraction price of oil is an attractive $24.74 USD with a $9.51 lifting cost and a $15.23 government cost.

Petrobras is currently seeking to drill for oil in more extreme depths than it is currently operating at looking at their Presalt projects (projects similar in nature to Canada’s oil sands in that they are looking at unique locations with which to extract oil). When asked if this will increase their lifting costs, they remarked that they initially expected costs to rise as much as 20%, but have since revised that number to be equal to or less than current costs as a result of the economies of scale through automation.

However, it is not without challenges. The new oil sites will be 300 km out from the coast line where the traditional helicopters used do not have enough range, requiring them to purchase new types of equipment. They will also require hubs as jump points to the new rigs to store inventory, food and maintenance equipment. There are also implications for transport of product back to shore.

There are also new changes expected in the regulatory model they use. Currently, they are using a concession model, but may possibly switch to a production sharing agreement where companies bid and allocate a percentage of the oil profit to the government. The strategy for some of these companies (example those in China) may have a strategic benefit to bid higher (as a strategic buyer versus a financial buyer) in order to gain access to the oil reserves (the story I had come to investigate, the effect of a resource race on international business relationships) producing a sort of vertical integration which would technically remove a double bottom line (an idea thwarted by the financial theory we learned in Finance II but revisited in Managerial Accounting). The current rules for bidding are that at least 30% of the profit must return back to the government, and the government can refuse bids which are not economically viable (allocating too much of the profit to the government and overbidding for the resource) and Petrobras continues to dictate what technology is used in extraction.

Another interesting relationship they have with China is through the Chinese Development Bank where they have procured a $10B loan, $3B of which is executed through a barter system of trading oil for products. However, apparently China’s new policies with trade throughout the world are stepping on a few toes as they are generally changing their strategy such that they don’t want products from the rest of the world, but are continuing to export to partners. However, a company like Brazil (and Canada) wouldn’t be interested in just exporting commodities without developing their own industries which causes some friction in the business relationship.

When asked why they don’t just acquire refineries as part of their strategy, they mentioned that it is really expensive to do, that complex regulations make it difficult and that retrofitting or upgrading their a rig to increase capacity is generally not financially viable.

They prefer to make an entry via a joint venture with partners to explore new reserves in different geographies. Once a discovery is made they also prefer not to be an operator in these locations.
Also, in some countries like Argentina, where the regulations are about to dictate the price of oil, the financial viability of projects in the region become unattractive (a very subtle and modern form of expropriation) and companies in that region are generally looking to divest operations in those markets as capital continues to flee Argentina.

With Brazil having a leading role in the development of bio fuel (Ethanol), Petrobras explained how they could create bio fuel efficiently from sugar cane with an Energy Out / Energy In ratio of 8.3, beating wheat at 1.2, corn at 1.3 to 1.8 and sugar beet at 1.9. They use their Petrobras Research Center, the largest in Latin America, to focus on three development goals: Expand limits (exploration), Enhance Product Mix (new product techniques) and Sustainability (CO2 production, H2O management and energy efficiency). One example of a project they are working on is 2nd generation bio fuels, where they use a special enzyme from biomass byproducts to create more ethanol.

[LAIST] A Weekend in Rio de Janeiro

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Saturday in Rio – Christ the Redeemer

We had planned to visit Sugar Loaf Mountain, but the conditions were not appropriate for a visit so we ended up going to Christ the Redeemer. We also picked up some supplies for the soccer match the next day. We also got a chance to check out the local night life.

Flamengo versus Sao Paulo

Our guide took us to a soccer match at Maracana between Flamengo (the soccer club with the second largest fan base, second only to Manchester United). As we were walking to the Metro station, already half a street away from our hotel and decked out in Flamengo gear, we were being heckled by a Sao Paulo fan.

We were certainly sitting in the right section as there was almost as much entertainment behind us as there was on the field. The fans are passionate, cheering through the entire game non-stop and waving their massive flags. While we didn’t understand the Portuguese cheers, we shouted similar phonetic sounds while mimicking the same motions.

While the game ended in a 1:1 tie, it was certainly an experience to be there when the team scored a goal (as well as each time there was a “controversial” call). I can understand why this experience and culture would be described as a “religion” by our guide.

[LAIST] May 7th Visits – Rio de Janeiro

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Upon arriving at Rio late at night, we made a quick reconnasance of the area before calling it a night. The next morning, we were up and ready to go to our next set of meetings.

TV Globo

TV Globo is the largest group of media and entertainment companies in Latin America. They are focused on TV and entertainment, print and media and radio; telecommunications and distribution.
Because of their influence on the Brazilian society, they have been playing a unique role as educator. Although Brazil has language unity, there is a great deal of cultural diversity which plays a unique challenge to media broadcasters. In a growing economy, Brazil’s newspaper readership has been growing rather than falling, primarily because of the growing C class (lower middle class).
Brazil is divided into a class system (not well explained if it is a formal or informal class system – need to look into this more) where there are A1, A2, B1, B2, C, D and E rankings.

TV Globo mentioned that infrastructure remains the biggest challenge for Brazil, not just in terms of roads and rail, but rather in education in the form of schools and labs for students to learn.
TV Globo uses their Tela Nouvella’s (sophisticated versions of soap opera’s) to address social change. They often hire sociologists to address social issues that are currently on the minds of Brazilians addressing topics such as racism and . They treat this service as a charitable non-cash forgone revenue expense.

Vale

The next presentation was at Vale (recent acquirer of Inco) the largest producer and has the most reserves of iron ore in the world (2nd largest resource producer in the world). Their business is 35% based in iron ore, demonstrates stable demand and has recently successfully moved from a yearly pricing model to a quarterly pricing model.

We had a talk from a political analyst two was describing the broad range of international investments of Vale in different parts of the world including Asia Pacific, South America and Africa.
In the crisis period, 38% of their revenue was from China, their number one client, who was previously only accounting for 17.4% of their revenue previously (number one position in the past also).

The cycle for mining is usually 3 to 8 years for exploration followed by licensing and 4 to 5 years to open and build the mine and infrastructure required to develop the mine. Their required IRR is 12+% and they have 12 golden shares held by the government (similar to Embraer).
One of their largest challenges is relocating indigenous people, developing infrastructure and developing communities at mine sites. Once a mine’s resources are deleted, there is a large outflow of business which can potentially decimate at geography, so Vale is careful to build a legacy plan and invest in the community remain stable after their exit including schools and diversified industry.

Brookfield Brazil

Next we had a talk from the CEO of Brookfield Brazil, an asset management company with $100B USD AuM and $22B invested capital. They talked about the macro factors affecting investment in Brazil including the allocation of 4% of Brazilian GDP towards social development, allocating resource surpluses towards financial deficits versus social deficits and the challenges of moving from an “artificially fixed exchange rate” to a floating rate.

He also mentioned the rebirth of the consumer class in Brazil, or the so called D and E class to the C class and how Brookfield was capitalizing on commercial real estate development. Their strategy is to invest in tangible assets where there are high barriers to entry, predictable long term cash flows and they prefer to be operators rather than passive investors.

Their IRR is 12% and they tend to focus on quality of investments rather than increased marginal returns. Their strategy allows their mall properties to command the same sales per square foot as comparable US malls. The mall model is different in Brazil than what we are used to in NA. Rather than have high city density where consumers drive to malls or super centers in sub-urban areas, Brazil malls tend to be in the city, with high density, vertical and paid parking (a surprisingly large 12-15% of mall revenue) and demonstrate less dependency on large anchor stores (such as Walmart or Sears). Consumption growth is currently well above the GDP which is having a large effect on the financial and economic strategy of the country.

With their high 16.7% Tier 1 capital ratio in Brazil allowed many Brazilian asset management firms like Brookfield take advantage of depressed prices in the market as a result of the recent financial crisis. They prefer to avoid higher leverage, look for quality of earnings and a high level of liquidity which allowed them to take advantage of special situations.

With the acquisition of many new properties, they have boosted their CAGR to a whooping +119% (keep in mind that this is a result of massive acquisitions and actually investing more of their AuM). When investing, the look for different partners including: Institutional, sovereign, pension, endowment and family funds. We were told they were partnering with 2 Canadian Pension funds, 1 Asian sovereign fund and 2 European family offices. You can probably guess who the Canadian and Asian sovereign funds are.

They prefer partners who have the same market views and investing profiles: long term, stable predictable growth and high cash positions and liquidity (all attractive makings of a proper pension fund investment).

They also have a unique array of investments, including agriculture. They raise cattle as one of their primary investments and follow their operator strategy. What does this mean? They may be one of the few companies where cowboys who work in a company which complies with Sarb-Ox and is audited by Deloitte. The work environment creates a unique culture.

LAIST - May 6th Company Visits

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Itau Unibanco

On Thursday, we had an opportunity to visit Itau Unibanco, the 10th largest bank in the world with $98 USD market capitalization, as result of their recent merger between Banco Itau and Unibanco in 2008. With 95% of their assets in Brazil, they enjoy an ROE of 22.3%, CAGR of 21.7% and 33.5% market share of the Brazil market. Itau Unibanco described their unique role in the Brazilian economy (their success being highly correlated to the success of Brazil using such measures as the GDP).

Brazil’s financial success has been attributed to their stability in the financial crisis. They have the highest reserve requirements in the world, something that in good times causes you to have a huge cash drag on your capital investment performance but in bad times allows you to take advantage of special situations. Yet, Brazil has a long way to go. We’ve repeatedly heard the story that Brazil’s infrastructure is in need of significant investment, as when the GDP accelerates beyond 5 – 6%, the country experiences inflationary pressure. With the upcoming election, it appears that regardless of who wins, the broad based economic policies will be the same (similar to the UK’s hung government elections currently underway).

Brazil is currently in the process of extending credit to its citizens and managing the introduction of delinquency and risk modeling to correctly price the value of different types of credit (credit cards, mortgages etc) to different people. They are making a particular effort to “get it right” using a variety of measures such as loan value / asset value and credit ratings. Itau Unibanco’s strategy is to correctly price mortgages in the market using a credit score system and charge a spread over loans made as a ratio of asset value.

Copagaz

Next was Copagaz, a Zahran group company, very similar to PKM, CPSB where I worked in Malaysia as well as SS. Lootah in the UAE in the MEIST, as a family owned private holding company which consists of a portfolio of a variety of other subsidiaries. Copagaz is primarily a propane distribution company which started when the owner and founder, Ueze Zahran. He tells the story of how he was first interested in propane gas when his mother, living in Mato Grosso, met her sister in Sao Paulo and saw the blue flame of propane gas, a much improved method of cooking over the traditional wood fire. In amazement, Ueze’s mother asked him to go to Sao Paulo and return with a stove and four propane tanks.

Seeing the opportunity and need for a propane company, Ueze created Copagaz, what started as a small gas distributor and has evolved into the Zahran Group of companies including Globo Network programming in TV, FM radio and other media, and agriculture including soybeans, Arabian horses and Simmental and Nelore cattle.

Ueze was asked about the growth of his company and remarked that infrastructure was the largest of his costs and one of his biggest issues (a story which has become a common theme). Because of the nature of liquid petroleum gas (LPG) delivery, his has high costs in replacement on the wear and tear on the actual propane tanks themselves.

Copagaz also built schools to promote reading. They have literary classes available after school and for those who decide to continue with schooling, Copagaz will support up to 70% of the tuition and has had their first graduate of this program in 2000.

After a uniquely interesting meeting, Ueze asked to treat us to dinner at Fogo de Chao (“Fire of the ground”), the best Brazilian steak house in town where we had our fill of meat and drink and dessert. Apparently, in the Brazilian culture, it is more important to have a heavy lunch than dinner as every where we’ve been so far has served hot meals for lunch with sandwiches and other cold fair surprisingly difficult to procure.

Ambev

Our last visit of the day was to Ambev maker of beverages. While we in Canada are more familiar with Ambev’s alcoholic line of beverages (after the acquisition of Labatt and Alexander Keith’s), in Brazil, they have their own line of beers as well as a complementary array of isotonic (sports drinks) and soft drinks.

Ambev currently enjoys an EBITDA margin in the 48.8% range and has demonstrated steady EBITDA growth (their mission is to double EBITDA every 5 years which they have been successful at for at least the past ten years). Their strategy is to compete for market share where their share is low, but to grow the market if they have over 70%.

Their Strategic pillars are: Top line revenue growth, manage their brand equity, pursue excellence, cost efficiency, financial discipline, all built on the foundation of their people. They are also religious in improving their processes, trying hard to learn manufacturing processes like Toyota's lean manufacturing and others such as green and black belts in six sigma.

While many companies preach a culture of success, we were shown how living this philosophy has consequences. For example, their philosophy of “dream big” is accompanied by the responsibility that their sales targets must never be smaller than the previous year. They also have a employee review process that is similarly modeled after GE’s style meritocracy, where growth can be accelerated through achievements, but being laid off can be guaranteed just as quickly though failure.

We then headed over to the airport where we flew to Rio de Janeiro.

Nextel Institute

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

The Nextel Institute is a NGO which provides additional training for at risk and vulnerable youth aged 16 to 24. They are funded by Nextel and work in partnerships with companies like Agencia Click.

They have had explosive growth, placing 70% of their 124 participants in 2008 and 60% of 390 in 2009, more than doubling their success rate.

This tremendous growth has caused this foundation to look at developing new locations and partnering with additional companies to absorb the additional youth looking for employment.

Agencia Click

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Much of this visit was confidential (as is the nature of high tech I suppose), but there were some interesting ideas which they discussed with us which were fairly clever.

The idea that a product or service needs to be irresistible rather than big, that online media has changed our perception of advertising from a 360 view around us to a 365 day world requiring open, continuous and on demand and that creating time was the new strategy rather than buying time.

Bom Bril

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Gustavo Ramos, former UofT Engineering student (class of ’95) and Columbia MBA (’01) and CEO of Bom Bril, gave us a presentation on his involvement in the company since arriving in 2006 and finding Bom Bril, a leading manufacturer of consumer products, on the verge of bankruptcy and in receivership with the government. Bom Bril had delayed payables such as wages to employees and had not paid any taxes. The largest liability was to the government in the form of unpaid tax.

Having never worked in a distressed company before, Gustavo smiles as he recalls how he approached the problem: His professor at Columbia had said that gold rule of finance: “Cash is king”.

With his work cut out for him, Gustavo started to fix the problems, first by negotiating a 15 year payment schedule to alleviate the government debt. He proceeded to adjust prices and margins on products, renegotiate with suppliers (focusing on the value of Bom Bril to the industry as an ongoing concern) to reduce working capital and cutting marketing spending.

Gustavo generally tried to insulate the end consumer from the financial problems at Bom Bril as well as the lower level employees (no layoffs). When asked if Bom Bril was ever a takeover target, he mentioned the 2001 attempt by Clorox to take over Bom Bril which fell through when Clorox balked at the liabilities on their balance sheet at the due diligence stage.

In my opinion, I think this was a very bold strategy that worked for Bom Bril and reminds me of our Coca Cola case that we had with Anita McGahan in Strategy I, when we were talking about the intangible value of Coca Cola and why that couldn’t be duplicated by Sir Richard Branson in his attempt to introduce Virgin Cola. Although Virgin Cola’s annual spend on marketing was equal to Coca Cola, Coke had built up a tremendous amount of brand equity over its history dating back to world wars and that wasn’t going to be reproduced over night. In the same way, I expect that Bom Bril’s strong brand equity allowed them to coast briefly as Gustavo put their ship back in order. Either way, it was a bold move which has been attributed to the companies turn around.

With the return of Bom Bril to profitable status (with 40% growth and a 17% EBITDA margin), Gustavo laid out his plans for the future of Bom Bril:

• Remodel product lines – expand, change formulas, improve the packaging
• Launch new product categories – clothing care, silver and brass polish with all new products branded with Bom Bril
• Heavily reinvest in marketing to make up for lost time – Launching new brands and supporting old ones. Having a spend that focuses on the Point of Sale rather than just mass marketing. Marketing is budgeted at 5% of sales

He also explained how Brazil’s market for Consumer Product Goods (CPGs) are different than in Canada. Where we are familiar with large distributors and retailers (such as Tesco, Carrefour, Loblaws, Walmart, etc. which only account for 15% of Brazil’s CPG market) where we drive our cars to the store, Brazilians walk to the local mom and pop shop and distributors have a much more difficult time managing the various touch points.

He acknowledges the 3 most important factors for CPG: Brand equity, distribution channels and low cost / scale.

Recently, Bom Bril’s new found success has increased its appetite for acquisitions, having purchased Lysoform, a European disinfection product to add to its repertoire of products. Bom Bril continues to expand, looking for acquisitions or partners who are leaders in niche categories to fill the blanks in their portfolio.

In understanding Bom Bril’s business, we learned about the exclusive nature of relationships with Bom Bril’s distribution network and the economies of scale achieved with non-competitive products where the high costs of the fragmented distribution network could be shared with partners like Kraft.

Their COGS are generally (80 to 85%) composed of raw material costs and they are therefore sensitive to changes in the price of iron ore, the primary ingredient of their flagship “Bom Bril” product, an inexpensive steel wool whose name is almost generisized in the same way as Kleenex and Band-Aid.

Bom Bril is also the first company to release a line of eco products in Brazil: “Ecobril”. Their ideology has been successful on the premise that performance and cost (retail price) are the primary drivers of success in this CPG space, and ecologically friendly is a tertiary concern. This caps their price of their products at 10 to 20% MAX above the price of their normal products. However, by balancing these pillars, they have had success beyond other entrants into the eco space. They also focus on the 4 R’s, which are the 3 R’s we are used to plus “Respect for Biodiversity” which acknowledges their use of natural raw materials versus synthetic and no animal testing.

Another interesting story about Bom Bril’s EcoBril line is that some of the products have the options of buying refills. The irony is at this stage, the cost to manufacture the refill is almost the same as the original packed bottle (due to low economies of scale), however, the nature of the business is to charge 30% less. With increased economies of scale, Bom Bril expects to bring this price down making eco refills more attractive as a product line to Bom Bril in the long run.

Bom Bril’s history is quite fascinating and integrated into the social fabric of Brazil as a staple CPG company and product. Mr. Bom Bril, played by Carlos Moreano, is a local celebrity how has the accolade of being the longest running ad campaign series as noted in the 1995 Guiness Book of World Records.The visit to Bom Bril concluded with a walk through their factory (no photos permitted), but it was interesting to see the unique history (and plans for the future) of the company.

Gol de Letra

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

[Delayed from yesterday, photos and video forth coming]

The Gol de Letra Foundation is a non-for-profit organization founded by Rai Souza Vieira de Oliveira, former Captain of the National Brazilian football team, and Lenardo Nascimento de Araujo, midfielder for Brazil and current manager of the Italian A.C. Milan FC.

The project reaches 1200 youth and has been running for 10 years in Sao Paulo and Rio de Janeiro and has received recognition from international organizations such as UNESCO in 2001 as the world model for helping underprivileged children. Their core values are dignity, fraternity, perseverance, solidarity.

They find the most vulnerable children in the community and provide a place for them to play and learn. Typical school programs only last half a day, with school access not nearly as prevalent as in countries such as Canada, so programs such as Gol de Letra fill the gap to provide opportunities not necessarily available otherwise.

Their programs promote literacy, physical education, music and social interaction with peers. We were treated to an impromptu Brazilian musical performance by some of the children.

Certainly one of our more fun visits, we also participated in a game of “chain tag” running around with the kids. It was absolutely moving when the adorable little kids were giving us hugs goodbye.

Natura

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Natura has earned its place as the leading cosmetic company in Brazil through its enlightened management practices. Their philosophy emphasizes the idea of harmony, and the use of cosmetics as a moment of self-reflection. Their factory headquarters could easily be mistaken for a California high tech company in Silicon Valley, with its campus style feel. They have exceptional benefits for their employees, living their ideals of respect and the triple bottom line: Monetary, social and environmental benefits. There is an onsite day care, laundry, restaurant, movie rentals, internet and other amenities for the one million employees (80% of whom are women). Shifts begin and end with a 10 minute exercise routine each day.

Natura aims to be carbon neutral, and has a variety of unique initiatives: they were the first cosmetics company to do a “true beauty” campaign using employees and customers in ads rather than models, a strategy later adopted by Dove in North America. They were the first to use organic alcohol in their perfumes. They also aim to be carbon neutral and label their products with water consumption, % certified raw resource usage and even brail lettering, practices that are well ahead of their time in the cosmetics market place.

Natura is a major player in developing the industry. They have the largest perfume plant in Brazil and hire perfumists (which they say are less common than astronauts) who require 10 years of training in order to create new perfume formulas.

In focusing on relationships, their sales model is also fairly unique. The use a direct sales model and word of mouth that would be similar to a highly structured multi-level marketing model with some key differentiators. Rather than force consultants to build tiers underneath them to make money (a model which often collapses in on itself), consultants focus on building relationships with clients and can occasionally introduce new potential consultants into Natura. After bringing in 10 other members, the consultant can potentially become an orientation consultant effectively giving themselves an unbiased merit based promotion. However, each consultant must being to make sales within the first three months or risk losing their consultant status.


90% of their consultants are women and range in age from 18 to 85. The only requirement for employment is to have no outstanding bank debt – There is no educational limitation. The most important quality to work at Natura is belief in the philosophy (Natura is known to do job postings withholding their name and posting only their values).

However, don’t be fooled into thinking that this socially responsible and relationship based mindset makes them any less competitive. Quite the opposite, they enjoy a 40% EBITDA margin and an exceptionally well run production facility. They structure their manufacturing teams in the same model as Toyota, using a team based around production lines in a Total Productive Manufacturing (TPM) system incorporating job rotations. Their manufacturing facility is highly (almost completely) automated, and their inventory management system requires a shockingly low amount of space (rather than have forklifts and operators, the inventory is housed in extremely narrow shelving units managed by an entirely automated system, saving a great deal of real estate). RFID technology is also used to ensure that complex orders are filled to exact specifications as required by their consultants.

Natura is currently focusing on Latin American markets employing different business models for different locations (beginning to employ a bricks-and-mortar store front concept for other geographies) and it’s only non-Latin America presence is in France, but they seem to have their sights set on some of the larger cosmetics markets in the world.

Embraer

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

After World War II, Brazil decided to implement a strategic national aircraft manufacturing project. In 1969, the Empresa Brasileria de Aeronautica (Embraer) was established for the manufacturing of two of Brazil’s first prototypes. In 1994, Embraer was privatized merging its technological and industrial capabilities with an entrepreneurial drive. Today, Embraer is the largest manufacturing exporter (3rd or 4th largest exporter in general) in Brazil.

They focus on their 5 pillars – High tech, qualified people, global presence, cash intensiveness and flexibility. Because of the exceptionally technological nature of aircraft design and manufacturing, they hire a large number of Ph.D (2%) and post-graduates (4%) in various technical fields. With the PPP and associated salaries, they tend to hire engineers locally, many coming from Brazilian universities such as ITA (founded in 1950, which has a graduating class of between 120 to 150 students per year going into various fields). Embraer’s engineers are coveted around the world for their proficiency and technical skills.

They also support the local community through education, opening a high school in 2002 with a technical and engineering focus which now boasts being the top school in Sao Paulo (competing with local private schools) with 80% of their students excelling in the college entrance exams (100% matriculation rate).

Embraer has a variety of different aircraft, the most unique being the Ipanema, the first certified and serialized 100% biofuel aircraft (apparently used for crop dusting). The development for their commercial aircraft is usually between 4 to 5 years with a 10 year product life cycle and their Embraer 170 to 195 series (70 to 122 seaters for midsize commercial use) share 80% common parts which allows airlines to maintain smaller inventories of spare parts and reduce the training required (the 170 and 175 pair and the 190 and 195 pair share wings and engines between pairs, 95% commonality, and the series has otherwise identical fuselages which are scaled for size).

Since Privatization Embraer has been trading on the NYSE (53%) and Bovespa (47%), but the government still holds a “golden share” which restricts some of Embraer’s actions (the 6 positions: No acquisition by foreign investors, approval of change in logo, and 4 rules relating to defense contracts).

When asked what was their biggest input cost exposure, our host explained the idea of currency fluctuation in the value of the Brazilian Real versus international currencies (which reminded all the first years of our recent GMP exam – a case study of the international manufacture and sales of airplanes).

They also identified to us the mechanics of their revenue streams:

Example. Assume a client (a major commercial airline) is thinking about to buying around 14 aircraft. They might make a firm order for 10 planes, but retain options to buy 8 more (using the same financial terms) if they decide they want more capacity. Embraer recognizes that historically, 50% of all options materialize (become orders) and has currently delivered 3 of the planes to the client.

What mechanics are involved in understanding their sales as well as their operations?

Maximum Sales = Firm Order + Options = 10 + 8 = 18

Firm Backlog = Firm Order – Deliveries = 10 – 3 = 7

Expected Sales = Firm Order + Options * P(Option materializes) = 10 + 8 * 50% = 14

Expected backlog = Expected Sales – Deliveries = 14 – 3 = 11

There are implications for managing and maintaining a consistent backlog (guaranteed revenue streams). Also aircraft sales are considered to be a lagging indicator of the economy.

Ethanol Fuel – Is Sustainable Fuel Socially Responsible?

In our Business Ethics class, I had done a presentation on the Ethics of Ethanol Fuel and now that I am in Brazil, the topic of ethanol fuel and its relationship to sugar cane and other staple food commodities has been emphasized. And even if global trade increases and creates wealth it does not make any guarantees with regards to how that wealth is distributed as explained by our GMP Prof. Blum.

I proposed this question: “Is it ethical for rich countries to drive cars if it causes poor countries to starve?”

This problem was exacerbated in the World Food crisis in 2007 and 2008, when oil prices hit all time highs and the arbitrage relationship between oil and food was exploited.

Here is the relationship:

1. The US and Brazil are the largest producers (89%) of ethanol fuel using corn and sugar cane (respectively).
2. When oil prices increase, people have a tendency to switch to ethanol based fuels.
3. When the demand for ethanol increases (as a substitute) the demand on the inputs for ethanol (corn, sugar cane, potatoes) also increases.
4. There are real arbitrage opportunities by hedgers, speculators and even farmers as they shift the use of arable land to produce more valuable crops. However, even with arbitrage there are limits as arable land is limited (to create more arable land, there is often deforestation which creates its own sustainability issues).
5. Also poor countries have a much higher sensitivity to fluctuations in the price of raw commodities whereas rich countries are insulated from food costs because they only represent a small percentage of the final costs (including value added costs such as manufacturing, distribution and retail costs). It’s the difference between eating a bowl of rice versus a bowl of Rice Krispies.

The consultants at Deloitte confirmed this relationship in very concrete terms using the Brazilian gas pumps as an example (where prices for ethanol based fuel versus gasoline are explicitly posted in the same way gas prices are at the pump). Currently, the cost of Ethanol fuel is 50% the price of gasoline (although it only provides 70% of the performance). However, in the “off season” when sugar cane is more expensive, it can even reach a price of 80% of gasoline (which is clearly not as cost effective). There is a direct relationship between the price of sugar cane and the price of ethanol fuel.

Deloitte Brazil

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Deloitte is a well recognized name in the consulting world, operating in 140 countries. In Brazil, Deloitte made its entry in 1911 where they were asked to audit British railroad companies. Today, Deloitte has grown to 4000 professionals working with 132 partners. They have a multifunctional approach (versus a siloed approach) where they provide integrated solutions and command a leading 19% market share of audit services in Brazil followed by KPMG at 17% and PWC at 11%.

They structure their portfolio of advisory services based on industry verticals. In Canada, Deloitte is known to focus on public and financial services whereas in Brazil they focus on manufacturing, retail and the growing financial services sector. Their growth targets are projected to move from 10% to 20% across the board with the highest growth occurring in their consulting services at 25%.

Even with the recent global financial distress, like many other consulting and advisory service firms, they have shifted their focus in branches like their Corporate Finance advisory from M&A deals to restructuring distressed companies and managing them in receivership. According to our contacts at Deloitte, Brazilian banks have been exceptionally successful despite (or rather because of) the financial crisis in the US. The top banks in Brazil are local banks (rather than subsidiaries of foreign parents) and their international presence has allowed them to extend their services beyond retail banking into commercial banking and even IPO’s in global capital markets.

Also, with the upcoming convergence of IFRS (Brazil’s current standard) and US GAAP and Brazil’s increasing role in the global market place, they anticipate having a spike in engagements from clients looking for advice on the implications of the changes in accounting standards and their implications on the complicated tax systems in Brazil (greatly differing by state).
Deloitte is also heavily involved in projects like the World Coup 2014 and the Olympics in Rio where they are not only assisting with capacity management of the facilities for the event itself, but also the legacy planning for the facilities in the future after the event itself is finished (ensuring long term sustainability and viability of the project costs).

Deloitte also has a strong focus on social projects, celebrating their “Impact Day” on June 11, the day of the World Cup, where they have a series of planned activities matching their core of applying knowledge with the development of educational programs. All of their professionals will be volunteering throughout the country taking children to play football with star athletes and preparing creative activities throughout the day.

Because of Deloitte’s unique relationship with a variety of top companies (boasting a client list that includes 80% of the Global F500 companies), they have provided us with contacts for our study tour which we will be visiting over the next few days. They also gave us an insider’s view of details into the developments of sectors within the Brazilian economy including the development of the infrastructure (marking the return of their focus on railroads). They gave us an in depth look at why Brazil is such an attractive country with which to have a presence in the global market place and why they have earned their place among the BRIC countries as one of the top emerging markets.

Port de Santos

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Chinese Feng Shui associates water with money, with its ebbs and flows representing the movement and acquisition of fortune and wealth. At first I had always thought this was a crazy superstition, but some of the most prosperous cities in the world are those that are located on waterways and at some point in their history benefited from trade with other cities (ex. New York, Montreal, Toronto, etc).

The Port of Santos is no exception. Operating along the Tiete-Parana waterway, the Port de Santos is the largest container port in Latin America (and 41st largest in the world). It dwarfs other Latin American ports, the next four largest ports having a combined capacity of about 24% (versus Port de Santos’ 25%) of Brazil’s total exports. Port de Santos acts as a gateway to Latin America, acting as a free port with rail access to Bolivia and road access to Paraguay moving dry bulk, liquid bulk and break bulk goods. Much of the development of industry in Sao Paulo and Cubatao can be attributed to the presence of the port and Brazil’s first hydro electric dam.

We were fortunate to have a boat ride along the waterway as a logistics consultant from Deloitte highlighted the presence of different companies and products being moved through the port. There were cranes towering over massive cargo freighters moving quantities of containers holding anything from sugar to wind farm turbine blades.

There are currently several investment projects underway to improve the infrastructure and information technology systems of the port with the most notable and ambitious being the expansion and dredging of the canal itself: Moving from a 12-14m depth and 150m width allowing 1 way traffic to having a 15m depth and 220m width allowing 2 way traffic, potentially increasing the capacity of cargo movement by 30%.

With the resource race between hungry countries like China, Brazil’s highly coveted natural resources make it a target for investment by foreign countries. While the port is owned and operated by Companhia Docas do Estado de Sao Paulo (CODESP), a government agency, the terminal and services are owned and operated by different companies.

Churrascaria – Nova Pampa

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

After our tour of the coffee plantation, we had lunch at the notorious Brazilian style steak house. These steak houses are the ones where you have a small badge on the table. If you want more meat, you leave it on the green “Sim, por favor” side. If you are stuffed, you switch it to the red “Nao, obrigado” side.


We were all excited and started scarfing down loads of sausage, steak, chicken and cheese stuffed cheese (not a typo).
Even when some of us decided to get some vegetables from the salad bar (to prevent us from dying of scurvy), we were quick to discover that most of the “vegetables” were potatoes… And there was slices of roast beef in the salad bar:

With all the beer and meat, those of us who were able to save room for desert were in for a treat: A decadent array of scrumptious and rich cakes. Needless to say, we were ALL sleeping on the bus ride back.

Fazenda Tozan

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Tozan Farm (Fazenda Tozan) was established before the independence of Brazil in 198. The name comes from “To” meaning East and “Zan” meaning mountain, an allusion to Tai Zan mountain, and was a pseudonym for Hisaya Iwasaki, of the Iwasaki family – founder of the Mitsubishi Group.

The farm first belonged to Floriano de Camargo Peneado and originally only grew sugar cane, the first major crop of Brazil. His son, Caitan-Mor Floriano de Camargo Peneado took over the farm in 1854 and diversified the crops to include corn, rice and finally coffee. In 1885, the farm intensified its coffee growth. However, 1925 saw the “super growth” of coffee, dramatically increasing the supply of coffee much faster than demand, causing the price of coffee to plummet.

In 1927, the Iwasaki family, wanting to diversify their financial holdings in anticipation of financial “stress” (as it manifested in 1929 in New York), bought a large number of farms around the world including Tozan Farm. After purchasing these farms, they used their economies of scale to leverage technologies from different areas (for example, the “Vespa de Uganda”, a technology used to fight coffee “plague” affecting the plants). They also further diversified their farm holdings to include cotton, cereals, “practical reforestation” and Nelore cattle.

Since arriving in Sao Paolo, the popularity of coffee increased as it started following the coastal border of Brazil. Today, 65% of the coffee in Brazil is Arabica (sweeter) and the rest is Robusta (stronger).

The history of coffee itself is quite interestingly international as well. Originally discovered by an Ethiopian Sheppard from the city Cafa, he noticed that his sheep strangely “acted more aggressively” when they had eaten the fruit of a particular plant. Coffee then began to spread from that region and found its way to the Muslim world where the Arab’s were the first to roast the coffee beans and prepare coffee in the manner which we recognize it today (originally the beans were taken for their sweet juice). The Dutch, famous navigators, introduced coffee to Europe through Venice, where the first coffee shop was opened (and we are told is still there).

Peiro was translating for our guide, who didn’t speak any English, however, there are somethings for which you don’t need a translator. His passion for coffee was quite apparent as he was animatedly speaking Portuguese while gesturing to the various devices and machines used in the past for the harvest and preparation of different varieties and grades of coffee beans.

Latin America Study Tour Begins

[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Our study tour begins on a lucky note, as all of us are able to come in on the same flight leaving Toronto (for the first years, this is immediately following our Operations Management exam and a quick round of pints at Bedford) where we had a quick bite and night cap at Pearson.

Upon arriving in Sao Paolo airport this morning, we were greeted by Peiro, our guide and Santana, our bus driver who took us to the hotel. Laura was there cheerfully waiting for us and welcomed us with a round of hugs. After the necessary paperwork and unpacking, a few of us felt a bit adventurous and began wandering the city under the leadership of “Bovespa”.

We found a fresh juice shop where we ordered a variety of exotic fruit juices: Mango, papaya etc. We proceeded to find a nice little restaurant serving a buffet of local fair. It was exceptionally interesting to try to explain that some of us were doing the all you can eat R$ 20,80 (R$ 1.6 = CND$ 1) while some were going for the food by weight R$ 2,80 per 100g.

After a bit of exploring in the city we found a beautiful lake with locals enjoying the good weather. Tomorrow, our study tour begins with a visit to a coffee plantation. A heavily resourced based economy and the B in BRIC countries, Brazil has a bright future as was highlighted in the Toronto CFA talk on Geopolitics of Investing. Coffee was one of Brazil’s earliest successful and staple exports and continues to play a large role in their economy today.