Monday, May 10, 2010

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.


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.


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.

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