Financial Strategy at Times of Transition: The Zamboni Case
December 2016
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Alexander Corporate Finance’s mission was defined by my partner Kiko Martinez and I from a conceptual conviction and based on our professional experience and academic interests. We discussed at length how we saw that most companies and executives believe corporate strategy and management are completely separate from the financial strategy. 

We did not conclude whether this was a consequence of the method usually adopted to assess company performance, namely to analyze results only up to the EBITDA line, which leads one to believe that financial performance and capital structure are but a footnote. Or due to Valuation courses instead, where Company Value equals the discounted operating cash flow, and capital structure is only featured at net debt deduction to obtain Equity Value, or in defining something as intangible as the discount rate. Whatever the reason, this was a fact. 

At a time of great transformation in the Brazilian economy, companies sought advisors to “restructure their debt.” When we were approached and asked if we did that, we answered: “No. Debt is like fever. We have to diagnose the patient to understand the disease!” Most times this dialogue ended in a monologue... 

In March 2014, our focus was on working together with international private equity funds interested in Brazil, when the Zamboni Case came up by chance. Today, it is definitely one of our favorites. 

I was invited by André Balbi Cerviño, an old friend, for an informal conversation in the Zamboni Advisory Board, of which he was a member. 

In a succession and professionalization process, the wholesale company had concentrated all its resources to seek growth in sales. Zamboni, one of the largest companies in its segment, had grown and developed from its strongest characteristics, with great focus on its wide client network and service excellence. But financial management was not part of the company’s culture. 

The challenging status of capital structure in a company open to changes, an experienced and committed advisory board, and the deep involvement of shareholders with the company provided a perfect scenario for our work. And the Free Translation 

business characteristics were ideal: cash flow adjustments would have an immediate impact. 

There is a great challenge in consulting work: no matter how much a consultant is the “hands on” type, in reality the work is done by the company and its management. In the Zamboni Case, it was no different. By paying attention and importance to the strategic aspects in financial management, with the addition of an experienced CFO, the company’s restructuring internalized procedures and processes. 

Efforts were converted into figures, with substantial reduction in net debt and growth in cash generation. 

The debt was the result of working capital management. By adopting a financial strategy that was coordinated with the commercial strategy, the company’s natural qualities could prevail and show as positive results. And debt, like fever, lowered. 

 Fabiana Zamboni, President of Zamboni Comercial 

 Zamboni: A few lessons on a succession and professionalization process. 

 The Zamboni Group was founded in 1969 by my father, Alencar Zamboni, as a small wholesale business in Além Paraíba, in the border of Rio de Janeiro and Minas Gerais states. Decades later, in 2006, we transferred the company’s headquarters to Rio de Janeiro and, more recently, we began operating in Espírito Santo. 

In 1994 the company won its first Best Wholesale Distributor in Rio de Janeiro State ABAD award, and last year we won our 24th award. We trade around 250 categories of products with over twenty thousand clients, a portfolio that ranges from Foodstuff and Cleaning Materials to Cosmetics. 

As in many family business stories, Zamboni also went through its professionalization and succession process. We kick started this stage in 2013, when my father Alencar took over the posts of Chair of the Advisory Board and Chair of the Family Council. My sister Paula left management and took a position in both Boards, and I took over as CEO of Zamboni Comercial. 

I believe the experience we had in this process is very similar to that of several family companies trying to reconcile accelerated growth with structural changes. I was surprised by the invitation to write this article, as we are still a “young” company in this new stage and I saw no reason to perform an “assessment of achievements” with so many challenges still left to face. But I gave in to the argument that one of the duties of a CEO is to share the good and the tough experiences with others, just like I always benefited from listening to far more experienced CEOs. 

During this succession and professionalization process, we underestimated some challenges and imposed on ourselves several concurrent targets. Based on our commercial origin and logistics capacity, we decided to accelerate business growth. We understood the importance of information systems, and we decided to implement a market ERP system. Though necessary, this implementation and customization was far more lengthy and costly than originally planned. 

For many years, we adopted a governance system supported by an Advisory Board. By keeping corporate decisions within our Family Council, and with the support of two or three seasoned advisors in the Advisory Board, we’ve been 

able to gather support in our different stages. And this moment of transition was no different. 

As a result of this accelerated growth, unexpected costs, and management based on managing KPIs that measured commercial efficiency exclusively, we ended 2013 with an unprecedented debt in our history, —and with the clear sense that we were not managing capital structure correctly. 

Our focus was essentially commercial and operational. Zamboni was organized in different offices, all connected to commercial and logistics activities. Financial management was a department under the operational and management office. In our view, financial activities were managed as a “consequence” rather than a “strategy.” 

At the suggestion of our advisors, in March 2014, in the face of a situation where we kept growing in revenue but had negative cash flow (where net debt was at its highest historic level) we hired Alexander Corporate Finance to help us build a financial strategy at this very difficult time. 

We used the consulting firm diagnosis as basis for a deep reformulation of our entire financial management. We adopted new management instruments, restructured, and began to focus on these activities. First, we hired an interim CFO who adopted a series of short-term measures aimed at working capital. Next, we selected a market professional for this post, ensuring that short-term gains were absorbed in permanent procedures and processes. 

After so many years, our very view of the business changed. Growth made clear the impact of working capital on the capital structure. The main source of funds must always be operating cash generation, and never third-party funds. Free Translation 

We began to adopt active management of the financial strategy. We reorganized our offices, bringing commercial goals in line with financial goals. We reduced the structure and defined two statutory offices, to be occupied by very experienced executives. A more agile structure, where the financial outlook was part of all relevant decisions. 

This process yielded quick, surprising results. We were fortunate to make the decision to do our homework at that time. The credit market was not yet so skittish as it became later that year. We were supported by our financial partners and, with limited extensions, we adjusted the flow of payments. Without the need for any measure that would harm the business, sale of assets, capital injection or hostile negotiations, we generated cash, adjusted processes 

and repositioned the capital structure at desirable levels. Approximately two years later, towards the end of the first semester of 2016, with reduction in debt and growth in EBITDA, our net debt to EBITDA ratio, which used to be 9.28x, was now 0.73x. 

By better understanding our own company, we recognized the effects that structuring measures could have on our profitability. For this purpose, in 2016 we hired Gradus Management Consulting, revised our entire budgeting process, and adopted the well-known zero-based budgeting. We optimized several processes and costs, and analyzed and adjusted logistics activities. This work resulted in significant operational gains. 

Regardless, there is always something else to be done. The lesson is that there is always more than one perspective from which to look at the business. But challenges never end and there is no comfort zone, especially in the economic environment we live in. Once a task is finished, a new task comes up. 

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