The position adopted by the European Parliament on a regulation aimed at “deforestation-free” products will inevitably impact the European Union’s relations with Brazil, analysts say.
“The question now is whether today’s [Tuesday’s] vote will impact the negotiations of the additional environmental instrument as part of the ratification of the EU-Mercosur agreement,” said Emily Rees, director of Brussels-based consultancy Trade Strategies. “The Czech Presidency of the [European] Council will now have to evaluate these two dossiers side by side.”
Brazil, along with 13 other commodity-producing countries, recently stressed the importance of being consulted before the European decision-making process moves forward. The EU Commissioner for Environment, Virginijus Sinkevicius, acknowledged in a debate in Parliament that expanding the scope of the regulation to more commodities such as corn and chicken meat could “overload the system at the beginning” and lead to a dispute in the World Trade Organization.
Pedro de Camargo Neto, a leading agricultural specialist and an independent member of the board of Brazilian meatpacker BRF, one of the world’s largest poultry producers, the advancement of this “controversial legislation does not help the essential rapprochement of Brazil with the European Union, a region where we have very strong cultural, business and trade links.”
Companies have made an effort to ensure the complete legality of the production chain by tracing the acquisition of inputs, he said. The introduction of an additional complement, where something that goes beyond the national legislation is required, introduces an unnecessary complicator, he said. “About 90% of deforestation today is illegal. Complicating things by introducing the requirement to prohibit even legal deforestation hinders even the pressure that the organized sectors in Brazil have been putting on the public authorities to enforce environmental legislation,” he said.
Pedro de Camargo Neto recalled that the markets are already in turmoil as a result of the Covid-19 pandemic and the war in Ukraine. And that even the European Union is facing adjustment difficulties at this time, hence the difficulty of understanding the “untimely” introduction of a future new requirement.
Natura’s board meets as of Wednesday to discuss a reorganization that could spin off businesses into three independent companies
09/14/2022
Natura made – and acknowledged – several mistakes in the integration with Avon, notably in the remuneration of sales consultants — Foto: Hermes de Paula/Agência O Globo
By abandoning the global dream started a decade ago with the acquisition of Australia’s Aesop, Natura&Co may be giving some respite to investors who have faced massive losses on the stock exchange over the past year, despite the market’s first negative signs.
On Tuesday, the shares plunged again, falling more than 6% after the website Capital Reset reported that Natura&Co plans to concentrate operations in Latin America, abandoning its global platform. Natura’s board meets as of Wednesday to discuss the reorganization, which could spin off businesses into three independent companies.
Natura has already signaled a drastic cut in the holding company’s expenses. In the first conference calls after taking over as CEO, Fábio Barbosa said he had identified measures, which included layoffs, that would allow the holding company to reduce expenses by 40%.
“The holding company was getting heavy,” the CEO said, stressing that there were no decisions on the group’s four major brands – Natura, Avon, Aesop and The Body Shop.
In the view of an asset manager that holds Natura shares, changing the structure of the big brands is the key to improving the return on assets. Therefore, the way stocks reacted Tuesday and the latest reports show that asset management companies are “lost,” with recommendations seemingly outdated.
Contrary to what it may seem, argued a Rio de Janeiro-based asset manager, concentrating business in Latin America is the best decision and has the potential to recover some lost value. Since the peak on July 12, 2021, when the holding company was valued at R$84 billion, Natura plummeted 74%, wiping out R$60 billion.
Natura made – and acknowledged – several mistakes in the integration with Avon, notably in the remuneration of sales consultants, but it is also a fact that a course correction is already underway, with signs of recovery in the results in Latin America.
What would explain, then, the company’s struggle in the stock exchange? One argument is the difficulty in communicating with the market, which hinders analysts’ visibility of the business. But this has also started to change with the hiring of Mr. Barbosa and the change in the investor relations team. Helena Villares, who covered consumption for Itaú BBA, was hired in July.
An investor said that all of Natura’s problems seem to be priced in – even exaggeratedly. Considering the sum-of-the-parts valuation, the company seems cheap, especially at a time when the management team indicates that it may break up the business to create (or recover) value. “The stock is cheap, considerably cheap. It could potentially be worth twice the current price,” another asset manager said.
In a report released Monday, BTG Pactual analysts acknowledged that the asset sale could be a trigger, but pondered that any recovery still depends on a successful restructuring.
Moreover, short-term fundamentals are negative, with margins still pressured and sales weak while rising interest rates continue to weigh on financial expenses. Natura’s leverage ratio (net debt-to-EBITDA) is 3.5 times. “There is little room to improve the bottom line,” wrote Luiz Guanais, Gabriel Disselli and Victor Rogatis.
For those betting that the stock will rise, short-term results – the third quarter will still be bad – cloud the potential of the spin-off. An asset manager reckons that Natura alone is worth between R$25 billion and R$30 billion, considering a reasonable multiple (enterprise-value-to-EBITDA ratio) of 10 times. The company is currently worth R$22 billion.
“The market is placing a negative price tag on The Body Shop, Avon International and Aesop,” the asset manager said. In the restructuring, the spinoff of Australia’s Aesop, a company that shows continuous growth with high margins (16%), would generate value for the business either in a stock exchange listing or in the sale of the business.
Britain’s The Body Shop, however, is a more complicated matter. The business is not growing and suffers from high inflation and the UK’s embattled economy. The company bought for €1 billion from L’Oréal in 2017 is unlikely to reach a similar valuation soon, but Natura can still come out on top by disposing of the asset, one asset manager said.
Avon International’s assets left in Europe face a different situation. Without great chances of being sold, the best alternative for them may be to close loss-making operations around the world, which has already been happening. “The idea is to reduce as much as possible the presence in countries where we continue to operate with losses and, especially, with negative cash flow,” said Guilherme Castellan, Natura &Co’s chief financial officer, in the last earnings conference call.
Even if it concentrates operations in Latin America, where it holds a relevant market share – mainly in Brazil –, Natura’s problems will not be fully solved. The integration between Natura and Avon still generates many cultural problems between both teams, several sources told Pipeline, Valor’s business website.
Among employees who already knew Natura, the arrival of Avon represented a blow – including in their bonuses – and many consider that the merger has worsened the company and work. On Avon’s side, the pressure for results is increasing, which causes employees to leave.
Last month, for example, Avon’s chief marketing officer Danielle Bibas left after nearly 13 years at the company. And Diego Santelices, one of the executives who headed Avon’s successful sponsorship of the reality television show Big Brother Brasil, decided to leave the company for Electrolux, a household appliance manufacturer.
“Avon’s team feels very insecure. Since Natura bought it, there have been several cuts. My boss was fired and can’t even say goodbye to the employees,” a source said. In the outplacement consultancies financed by Natura, “every appointment has a new [former] Avon [employee].”
While dealing with the cultural frictions of integration of this size, Natura has also decided to transfer the whole Avon administrative body – around 600 people – from Interlagos (in the south zone of São Paulo) to Natura’s headquarters on the other side of the city. The change is expected to materialize in early October.
Natura did not immediately reply to a request for comment.
The original story in Portuguese was first published on Valor’s business website Pipeline.
*By Luiz Henrique Mendes, Raquel Brandão — São Paulo
New contract provides for investments of R$10.4bn in construction
09/14/2022
Tarcila Reis Jordão — Foto: Silvia Zamboni/Valor
The government of São Paulo is expected to hold the Noroeste Paulista lot auction this Thursday. It is the new bidding of two toll road concessions that are coming to an end: Tebe (controlled by engineering companies) and Triângulo do Sol (owned by Bertin and the Italian group Atlantia).
The lot includes 600 kilometers of roads, which connect cities such as São José do Rio Preto, Araraquara, São Carlos and Barretos. In all, the new contract foresees R$10.4 billion in capital expenditure in construction, in addition to R$4 billion in operating costs over the course of the 30-year contract.
Among the main interventions, 123 kilometers of road dualling, 99 kilometers of third lanes, 42 pedestrian overpasses, and others are planned. “The new concession is a mature asset from the standpoint of demand, but it needs to expand its capacity,” said Tarcila Reis Jordão, São Paulo’s deputy secretary of partnerships.
In the market, the forecast is that there will be at least one person interested in the asset. The São Paulo government believes there will be competition. “The expectation is very positive. There is a prospect of two to four bidders, which is very relevant for a R$10 billion investment project, on the eve of an election and after all these input price variations. We are excited,” Ms. Jordão said.
Pátria is pointed out as a strong candidate, due to the synergy that would exist with the road network already operated by the company. Last week, CCR told Valor that it would “most likely” compete for the asset. Ecorodovias has also hinted to the market about its interest in the project, although its high level of leverage is seen as a possible obstacle.
Besides these groups, Arteris and Acciona have analyzed the asset, according to sources. Arteris could also see synergies, but has not participated in auctions for years and was put up for sale by its shareholders, which reduces any expectation about it.
Ecorodovias said it seeks “projects that have synergy with the concessions portfolio and are aligned with sustainable growth guidelines.” Arteris says it “evaluates opportunities for new projects that fit the requirements of risk-return required by its shareholders.” Pátria and Acciona declined to comment.
A factor that helps to make the concession attractive, according to analysts, is that tolls are already charged on the highways, in addition to a known traffic history, which reduces the risk of demand and guarantees revenue generation since the beginning of the contract.
“The fact that these are highways that were in the hands of two concessionaires is well regarded. Besides the question of demand, there is more security in relation to the conditions of the roads than if they were operated by public agencies,” said Letícia Queiroz de Andrade, a partner at the law firm Queiroz Maluf.
Caio Loureiro, a partner at the law firm TozziniFreire, the perception that this is a low-risk project could even attract the participation of a new entrant.
In the bidding, the winner will be the one who offers the highest fixed concession payment, whose minimum value was set at R$7.6 million. In addition to this initial payment, the contract provides for a variable disbursement of 8.5% of gross revenue.
The funds from the variable fee should be mostly destined for an account that will serve as a “safety cushion” to mitigate the risks of toll default. The project foresees free-flow toll collection. In this system, there are no toll plazas, and the fee is collected electronically (through gantries), according to the distance traveled. The transition from the physical plazas to the system will take seven years.
The new concession foresees a 10% reduction in the value of the tariff in relation to the prices currently charged. For vehicles that use toll tags, there will be another 5% reduction. Besides this, the project foresees additional discounts for frequent users.
According to analysts, this auction will not necessarily be the last major highway bid this year. Mr. Loureiro, with TozziniFreire, points out that there are still expectations regarding other relevant federal projects: the auction of the BR-040 highway, between Minas Gerais and Rio de Janeiro; one or two lots of the Paraná highways; and the BR-381 highway, in Minas Gerais.
For Ms. Queiroz, the greatest demand today is for medium-sized projects, not large auctions. “The market is heated, there is interest mainly in smaller projects, in the states,” she said. Today, however, these initiatives are affected by the elections, which cast doubt on the continuity of the concessions.
Controlling shareholders of IGB Electronics launched tender offer to buy out minority shareholders
09/13/2022
Gradiente unveiled the intention to go private by acquiring shares from minority shareholders. The transaction is a step for IGB Electronics to exit the judicial reorganization that has been dragging on since 2018. With no prospect of resuming electronics production, the company still hopes being able to license the Gradiente brand for use by third parties, but there is no plan in place at the moment to implement this possibility.
Gradiente was one of the largest electronics companies in Brazil in the 1970s. Today, however, IGB is a non-operational company, and revenues come from leasing its factories in the Manaus Free Trade Zone.
Last Friday, the controlling shareholders of IGB Electronics launched an offer to pay R$40.51 per IGB share. The financial volume totaled more than R$1.7 million, compared with R$31,000 on Friday. The amount offered implies a 55% premium over the previous closing price.
The process of going private was already planned in its judicial reorganization approved by a court from Amazonas in 2019, said a source linked to the company, who spoke on condition of anonymity. “Today IGB is a security with derisory volume of trade, and having public float hinders the ability to leave the judicial reorganization,” the source added.
The offer was launched by controlling shareholder HAG Holding, a company created in 2008 to encompass the assets of Gradiente, which has Eugenio Emilio Staub as the only partner. The funds to buy the shares will be disbursed by Mr. Staub himself, the source said.
In 2021, IGB Electronics posted a net loss of R$54.1 million, a 36.1% reduction in losses compared to the previous year. Net revenue totaled R$5.5 million, up 5% compared to 2020.
“The main reason for going private is to reduce costs. Today, keeping the company public costs about R$1.5 million per year. In addition, this will eliminate speculation involving the securities,” the source said. IGB has about 850 minority shareholders, of which 761 have less than 1,000 shares.
A case of constant speculation involving IGB stock is the lawsuit the company is filing against Apple for the use of the iPhone trademark. In progress for more than 10 years, an appeal filed by the company is currently on hold at the Federal Supreme Court (STF) awaiting trial.
After successive defeats in court, last July, Prosecutor-General of the Republic Augusto Aras gave an opinion against IGB’s request, saying that Apple has the rights to use the iPhone trademark in the country, despite Gradiente’s claim that it registered it in 2000, seven years before the launching of the American cell phone.
The process of going private has nothing to do with the lawsuit involving Apple and the iPhone, said the source linked to the company. After a conciliation hearing failed to result in an agreement, the case awaits trial, with no set date.
After the end of the process, expected to happen in the coming weeks if there is no request for a meeting by up to 10% of minority shareholders, IGB plans its exit from the judicial reorganization process. The company recently reached an agreement with the Secretariat of Federal Revenue to renegotiate debts.
The source said that IGB only continues to exist for emotional reasons of the controlling family.
Founded by a group of engineering students from the University of São Paulo (USP) in October 1964 as a manufacturer of transistors amplifiers, an innovation at the time, the company was sold to businessman Émile Staub in 1970, who soon passed the control to his son, Eugênio, who remains at the head of the company.
The company was one of those that best benefited from the economic miracle of the 1970s, going public in 1974, taking advantage of the import restrictions imposed by the military government, gaining scale by producing the most varied electronic products, notably stereos, in its factories in the Manaus Free Trade Zone.
The situation began to change in the 1990s, with the opening of the economy during the Collor administration, when Gradiente found itself swallowed by the entry of electronic products from Asia. The company tried to diversify its production, betting on videogames, with a partnership with Nintendo, but never managed to get back on its feet.
After successive unsuccessful attempts at restructuring, Gradiente, then known as IGB Electronics, a maneuver made to avoid the company’s bankruptcy and subsequent loss of the brand, filed for protection from creditors in 2018, a process that has dragged on ever since.
Sought for comment, the company shared the notice of material fact sent to the market last week.
Companies reported highest monthly output this year, but credit crunch is affecting consumers
09/13/2022
August was an exceptional month for the automotive industry when compared to the entire period following the start of the pandemic. Production volume was the highest in the year, up 43.9% year-over-year. In addition, production through August reversed the decline to a 4.7% growth and, for the first time in the year, no plant stopped for lack of semiconductors.
While industry leaders have many reasons to celebrate, a number of factors, on the other hand, are cause for concern. The main one continues to be the credit crunch. In August, 70% of the new vehicles sold were paid for in cash.
The leaders of the segment acknowledge that this result is not good because, far from revealing that the consumer, in general, has surplus cash, it actually exposes the difficulty in accessing credit, including high interest rates.
Consumers who need financing to buy a car are not in the market, and those who have funds available are once again doing the math to find out whether it is worth spending the money to buy a good that depreciates as soon as it leaves the dealership.
Márcio de Lima Leite — Foto: Silvia Zamboni/Valor
A good part of the cash sales was seen in regions where agriculture is the main activity, said Márcio de Lima Leite, head of the National Association of Vehicle Manufacturers (Anfavea), during the presentation of the sector’s performance last week.
The cash payment modality has also been sustained, in part, by direct sales, or deals closed directly by automakers with large fleet owners, mainly rental companies. The participation of direct sales of automobiles and light commercial vehicles from January to August is noteworthy: 53.3%, according to data from the National Federation of Automotive Vehicles Distribution (Fenabrave).
According to Fenabrave, Fiat was the brand that sold the most in the first eight months of the year, both in retail and direct sales. The second place changes, however, depending on the modality. In retail, the second place went to General Motors, followed by Toyota. In direct sales, Volkswagen took second place, followed by GM. VW’s Gol leads the direct sales ranking in August, but in retail, GM’s Onix was in the first place.
The credit restrictions also hit the second-hand car market, which, during the peak of the semiconductor crisis, was the option for those who did not want to wait in line for new ones. According to Fenabrave, in August, the used car and light commercial sales fell 9.8% year-over-year. In the year-to-date, the drop is 18.12%.
The growth in production, domestic sales and exports last month reveals that the pace of the assembly lines was accelerated thanks to a better offer of semiconductors. The executives of the sector already expected that, in August, Brazil would benefit from the vacation season in the Northern Hemisphere, which reduced demand for chips in Europe and the United States. It is unclear, however, what the supply of semiconductors will look like in the coming weeks.
According to Anfavea, to reach the goal of a market of 2.14 million vehicles in 2022, automakers need to sell 198,000 units in September, 196,000 in October, 204,000 in November, and 233,000 in December. The association is preparing for weaker sales during the World Cup. In August, 208,600 vehicles were sold, up 20.7% year-over-year.
Anfavea maintains its optimism in relation to the domestic market. It considers that sales in recent months have been much more impacted by the lack of supply, caused by the shortage of semiconductors, than by economic factors.
Truck and bus manufacturers are preparing for the last four years of euphoria. With the new emissions rule starting in January, prices will rise. For this reason, many transportation companies have brought purchases forward this year.
The leaders in the sector are now engaged in trying to attract investments from the semiconductor industry to Brazil to reduce dependence on Asian supply, where it is concentrated. This week, a delegation formed by representatives of Anfavea and the federal government is in Japan to present projects to potential investors.
On the external front, the situation in Argentina continues to worry the industry installed in Brazil, which depends, as do other exporters, on foreign exchange reserves, which are increasingly scarce in the country. Argentina closed the month with $600 million in net reserves, according to that country’s central bank.
In Brazil, the employment data was also positive in August, with a slight increase of 1.1% in the permanent staff in relation to a year ago. But the scenario may change in the coming months since Mercedes-Benz announced last week its intention to eliminate 2,200 jobs and close 1,400 temporary jobs in its plant in São Bernardo do Campo, São Paulo.
Following the tendency of its main competitors, Mercedes is entering a new phase, focused on the outsourcing of part of its activities. Negotiations between the company and the local metalworkers’ union start Tuesday.
Cargo handling is helping company to go through a critical period
09/13/2022
Patrick Fehring and Leandro Lopes — Foto: Leo Pinheiro/Valor
Just like the airline industry, RioGaleão, the concessionaire that runs Rio de Janeiro’s international airport, also went through turbulent times in the last two years, especially with the sharp drop in the number of flights at the height of the pandemic. The effects of the health crisis led the company controlled by Singaporean owners to announce in February that it would return the airport to the federal government. This is a long process likely to be concluded in 2023. In the meantime, the concessionaire continues to operate the airport terminal, one of the main ones in the country. The pandemic, however, allowed RioGaleão a turning point in the cargo business, helping the company to get through this most critical period.
In July, RioGaleão signed a contract with United Airlines for use by the American company of a new aircraft maintenance center. The agreement will allow United to operate, for 17 years, the hangar previously occupied in Galeão by the maintenance and engineering arm of TAP Air Portugal.
The Portuguese airline’s subsidiary is leaving a space of more than 60,000 square meters, which will receive investments of R$70 million by United in adaptations and modernization. The new center will be responsible for the maintenance of all the U.S. airline’s aircraft, most of which were made by Boeing and Airbus. United, which has a daily route between Rio and Houston, is expected to take over the activities in Galeão in the second half of the year.
“United has now a 17-year bond with Rio de Janeiro,” said Alexandre Monteiro, CEO of RioGaleão. United told Valor that the partnership includes the lease of a hangar for the United Tech Ops team, as the airline’s maintenance, repair and overhaul division is called. According to the U.S. company, the maintenance team at Galeão will be able to make better use of ground time to perform maintenance services on the company’s aircraft.
When it comes to the airport, the most common image is of people arriving and departing, but RioGaleão has made the cargo terminal a key business for the company’s finances and for the state of Rio. Considered one of the country’s main logistics hubs, Galeão handles 80% of all domestic air cargo that arrives in Rio through the airport. The terminal also receives 25% of the cargo imported by the state.
RioGaleão is controlled by Singapore’s Changi Airports, which holds a 51% stake in the concessionaire, and Infraero, with the remaining 49%. Changi entered the deal together with Odebrecht, as minority shareholders, by purchasing the airport for R$19 billion, a premium of almost 300% in relation to the initial price in an auction held in November 2013. Changi took over Galeão in 2017, when Odebrecht, entangled in the Car Wash scandal, left the business. In February, RioGaleão asked the federal government to launch a new auction for the airport.
“Galeão has a strategic position in Rio de Janeiro,” Mr. Monteiro said, highlighting the airport’s location, close to the country’s main highways: Via Dutra and BR-101. In the first half of this year, the executive said, the terminal handled $4.3 billion of imported cargo, and if this pace is maintained, the company will close the year with record handling since the beginning of the concession, in 2014. The company closed last year with $8.5 billion in imported cargo handled at the terminal, which competes for the market with Viracopos, in Campinas, and Cumbica, in Guarulhos, both in the São Paulo state.
The company estimates an average reduction of 63% in the time to release imported cargo and has accounted for $60 billion in cargo handling since RioGaleão took over the operations, said Leandro Lopes, RioGaleão’s commercial and cargo business development manager. Patrick Fehring, the company’s head of airline business, added that imported cargo handling accounts for 55% of the company’s revenues, up from 21% in 2019, before the pandemic, and 43% in 2021.
Next year, RioGaleão will start operating a new 30,000-square-meter shed, the result of a partnership with the real estate investment company Hire Capital.
The cargo terminal will anchor United’s activities, since parts and equipment for the aircraft will pass through there. The unit has in the air transport industry one of its main service activities, together with the oil and gas, pharmaceutical and chemical sectors – among other activities, mostly with higher added value volumes. This category also includes equipment, musical instruments and materials for Rock in Rio.
Pharmaceutical and chemical products, in fact, meant a high volume of cargo handled. Several batches of Active Pharmaceutical Ingredient (API), a necessary input for the production of the Covid-19 vaccine, came through the terminal, taking advantage of the available structure, with thermal chambers with temperatures between 2 and 8 degrees, Mr. Lopes said. The terminal also started to receive products destined for agribusiness when activities resumed.
The demand for flights and, consequently, passenger traffic in the airports is still an unknown factor for the segment, not only for the company. At the same time, RioGaleão is losing ground as most domestic flights depart or are destined for the neighboring airport Santos Dumont. As Galeão receives international flights and hosts fewer domestic routes, the hub concept is compromised, making the airport less profitable.
Number of downgrades or negative moves in ratings is quite small, survey by Fitch and Moody’s shows
09/13/2022
Aeris’s plant in Pecém, Ceará: manufacturer of equipment for powergeneration is among companies downgraded recently — Foto: Divulgação
The interest rate hikes aimed at curbing inflation have punished consumers and companies in recent months, increasing default rates and causing lenders to impose stricter conditions to extend credit. This more negative scenario, however, has had little impact on the credit ratings of most companies.
The number of downgrades or negative moves in companies’ ratings has been quite small, a survey by credit rating agencies Fitch and Moody’s shows. Fitch downgraded five companies in the last two years – the period when the Brazilian Central Bank conducted the monetary tightening cycle – including four in 2021 (Eldorado, Andrade Gutierrez Engenharia, General Shopping and USJ) and only one this year (Hidrovias do Brasil), considering the global scale assessment of the debt issued by non-financial companies in the Brazilian market.
In addition, nine companies were downgraded according to the local scale, including five in 2021 (Restoque, Smartfit, Anima, AES Tietê and Inbrands) and four this year (Aeris, Le Buscuit, Restoque and Espaçolaser).
For comparison purposes, between 2015 and 2016, the period in which Brazil’s key interest rate Selic was raised to 14% per year, the number of downgrades totaled 49 under the global scale credit rating, and 94 by the local scale rating. In all cases, Fitch excludes rating actions that followed variations in sovereign credit ratings, like actions driven by the change in Brazil’s risk rating.
Moody’s, on the other hand, analyzed the rating actions related to the debt of Brazilian non-financial companies issued abroad. And found that, between 2021 and 2022, there were 5 downgrades or outlook changes to negative, compared with 154 between 2015 and 2016. In this case, the agency also accounts for changes caused by sovereign rating downgrades.
Ricardo Carvalho, the managing director of Fitch Ratings, sees a historical correlation between interest rates and companies’ risk ratings. But in this cycle, although the Selic has returned to levels close to those seen between 2015 and 2016, a record period in terms of downgrades, the impact is very low. This can be explained mainly by the difference in the prospective scenarios that companies work with today and those envisioned seven years ago. “The business environment in 2015 and 2016 was very hostile, similar to what companies experienced in 2020, when the pandemic hit,” he said. “The difference is that, at that time, companies incorporated a scenario of a continuous cash generation cycle, which was dashed, and had to deal with an intense decline in activity indicators and rising interest rates.”
As a result, companies started 2015 more leveraged, with plans for a lot of capital expenditure based on a scenario of economic growth, Mr. Carvalho said. The country’s economic and political crisis – a backdrop that included the now questioned anti-corruption task force Car Wash, the country’s loss of investment grade, and the consequent impeachment of then-president Dilma Rousseff – dashed expectations and hurt companies in a more generalized way, the executive said. Rising interest rates, therefore, had a much more perverse effect on the health of companies.
Today, companies operate under a sluggish growth perspective, which translates into more modest investment plans and, consequently, lower leverage ratios. “Cash generation is expected to recover gradually. Nobody expects a fabulous recovery,” he said.
The companies’ leverage ratios, which went through a period of more intense adjustments during the pandemic, are also more conservative. Credit ratings already consider the current condition of these earnings reports, which reduces the need for rating changes.
But this does not mean that companies are doing great, Mr. Carvalho said. “We don’t have an investment cycle today, companies have idle capacity, and many have yet to recover the level of demand seen in 2019, especially those that depend on domestic demand,” he said. “We are far from a favorable environment in Brazil.”
Interest rates are not the main factor influencing the rating of companies, but it is still possible to see a direct correlation between the Selic and rating actions, said Marianna Waltz, managing director of Moody’s. After all, high interest rates and the prospect of sluggish GDP growth impact companies’ EBITDA and cash generation. “Most will generate less EBITDA this year,” she said. On the other hand, companies face the cycle of high interest rates with stronger results and better leverage ratios. This is because these companies made a strong adjustment during the pandemic, making them leaner and more liquid. “All the companies had to make very severe adjustments, restructured their balance sheets, debt, and headcount,” she said. “So we don’t expect negative changes in the ratings.”
The fact that Brazil has moved first to raise interest rates and that companies are well positioned greatly reduces the risk of default among companies, Ms. Waltz said. According to her, Moody’s expected default measure for Latin American companies, excluding Argentina, is currently at 1.2%, which suggests a risk of default within the group of companies covered by the agency. In March, the index was 2.2%. Given that Brazil hosts 100 of the 150 companies analyzed, it is possible to say that the situation of local companies has great weight in the indicator. The global index is much higher, of 3.7%.
Mr. Carvalho, with Fitch, recalled that the corporate debt market is much stronger and more active than seven years ago, which contributes to mitigating the impact of rising interest rates on companies’ risk. As a result, companies had access to liquidity and were able to extend the term of their debts, even in a contractionary interest rate scenario. “We thought that liquidity would shrink as of June, but this did not happen,” he said. As a result, the volume of debentures issued this year, up to July, already totals R$158 billion.
This large debt offer will mean, over time, higher leverage ratios, but this will still happen very gradually given the low investment scenario. According to the executive, the risk from now on is that interest rates remain high for a “longer than reasonable period.” “The big concern is the time frame of interest rates,” Mr. Carvalho said.
New projection for U.S. crop reinforces estimate for strong corn exports thisyear
09/12/2022
Brazilian corn exports gained an even more favorable scenario after Pro Farmer crop tour – which monitored the main producing regions in the United States – pointed out a new drop in American production, which now is projected at 349.5 million tonnes in the 2022/23 season, 15 million tonnes less than the volume forecast by the U.S. Department of Agriculture in the August report.
According to Flávio Roberto de França Júnior, grain coordinator at Datagro, the new projection for the U.S. crop reinforces the estimate for a heated corn export in Brazil this year, projected at 40 million tonnes by the consultancy, close to the record of 42.7 million tonnes reached in 2019.
“There is demand from all over, whether it’s the conflict in Ukraine, the drought in the U.S. and Europe, or geopolitical issues that will cause U.S. sanctions on the Chinese,” Mr. França Júnior told Valor.
Foreign sales are indeed higher in 2022 as was already expected after last year’s harvest loss in Brazil. According to the Brazilian Association of Grain Exporters (Anec), in the 12 months through August, corn exports totaled 19.1 million tonnes. In the full year 2021, Brazil’s shipments totaled 20.6 million.
“Unlike soybeans, which have demand but no supply from Brazil [because of adverse weather in the South region], corn has availability and a surplus to export, and will maintain a favorable pace of shipments by the end of the year,” the analyst said.
At the beginning of August, Brazil and China signed a sanitary agreement that allows the sale of Brazilian corn to the Asian country this year, and not in 2023, as previously unveiled by the Ministry of Agriculture. Thus, Brazil gained a way out with the potential for strong demand. According to the USDA, China is expected to import 18 million tonnes in the 2022/23 harvest.
“We have a worldwide shortage of corn and an important new fact in this scenario: the release of exports to China. We cannot say how much they [the Chinese] will buy from Brazil, but they typically import large volumes,” Mr. França Júnior said.
André Pessôa, CEO of Agroconsult, also expects a larger volume leaving Brazil after the agreement with China. “We export to Asia, the Middle East, Latin America, and Europe. China will be another great engine for Brazilian sales, especially at a time when the U.S. and Ukraine are reducing their production,” said Mr. Pessôa, who projects Brazilian exports at 40 million tonnes this year.
But Paulo Molinari, an analyst at Safras & Mercado, is not so upbeat about Brazilian sales to the Asian country. He believes volumes will not be so large this year, and perhaps not even in 2023.
“The agreement signed for corn imports works as a protection for the first ship that takes the grains, ensuring that the Brazilian product will not be contaminated when it arrives in China. But this doesn’t mean that they [the Chinese] will buy now, because they are 30 days away from a 270 million tonnes harvest. The need for imports may come only in the first half of next year, after the end of the export season in Brazil,” Mr. Molinari said.
Still, the analyst expects a red-hot demand for Brazilian corn by the end of the year, especially from Europe, where crops have been suffering from the heat wave. “Europe has a harvest loss of 15 million to 20 million tonnes. Part of this demand will be supplied by wheat, and part by imports of Brazilian and Argentine corn.”
The estimate of Safras & Mercado indicates that Brazil will export 37 million tonnes, an amount that can grow as the demand increases and the exchange rate reaches a favorable level for foreign sales. “It could exceed 40 million tonnes. But for this to materialize, the country needs to ship on average 3.5 million tonnes per month in the last four months of the year. The exchange rate of R$5.2 to the dollar stimulates sales. We will have demand, but it is not possible to predict what the exchange rate will look like considering market volatility,” the Safras analyst said.
First infrastructure project is expected to be in the electric sector
09/12/2022
João Antonio Mattei — Foto: Divulgação
BN Engenharia, Bueno Netto group’s construction company, is getting ready to enter the infrastructure sector. João Antonio Mattei, the company’s managing director, says the company is expected to work mainly in basic sanitation, logistics and energy. The first works are expected to be for the electric sector, the executive said.
The company plans to operate in private works and in PPPs (Public Private Partnerships). According to the company, there is no fear that the result of the presidential election will weaken the number of contracts in infrastructure made by the private sector. In 2021, 68.8% of the investments in the area were made by the private sector, according to consulting firm Inter.B.
BN is structuring the team to work in infrastructure projects, and has hired the engineer Lucas Guimarães, former Cesbe’s country manager in Peru, to head the new business development sector.
Currently, the company works with residential and corporate buildings, as well as hospitals and distribution centers, among other projects. Last year, BN grossed R$630 million, and Mr. Mattei expects revenue to reach R$700 million this year. According to him, the company already has a portfolio of projects to exceed this amount by 2023.
About half of the revenue comes from work for Benx, Bueno Netto group’s developer. BN and Benx have operated separately since 2011. Mr. Mattei points out, however, that the construction company does not do all the construction work for the developer: nearly 25% of the projects go to other construction companies, because they have a lower budget.
In the residential segment, BN prefers to operate in larger, high-end projects. The company is building Parque Global, a R$900 million project by Benx and Related Brasil in São Paulo’s south region. This amount can double if BN wins the bid to also build the hospital and the shopping mall planned in the development. “We are confident,” says Mr. Mattei.
Mr. Mattei says he had been planning to enter the infrastructure sector since 2019, when he realized there was space left by the large construction companies that were targeted by anti-corruption task force Car Wash.
“The infrastructure sector lacks healthy engineering companies,” he says. BN recently earned the B Corp Certification, awarded to ventures that put in place ESG practices. Three years ago, however, the group’s board did not accept the idea. This position changed at the end of 2020, when BN started planning to enter the heavy construction segment.
The company wanted to buy a construction company with experience in infrastructure, but the project did not go ahead. The search for acquisition left contacts that Mr. Mattei hopes to use in future works. “We can form consortiums,” he said.
There are fewer film releases, high liabilities, and logistical hurdles
09/12/2022
There is still no happy ending for movie theaters after the shock caused by the Covid-19 pandemic. And this saga will have more chapters. Last Wednesday, British giant Cineworld filed for protection from creditors in the United States. In Brazil, as companies still try to overcome the challenges posed by the health crisis, new obstacles emerge.
The sector’s perspective is that everything will be back to normal by the end of 2023. But it is necessary to deal with the slower pace of premieres compared to before the pandemic. Other problems include high losses caused by lower revenues, logistical hurdles, long lead times for the delivery of spare parts – for projectors, for example – and tougher negotiations with shopping malls for rented spaces.
The federal government submitted a budget bill late in August which, if approved, extinguishes Condecine. This contribution aimed at the national film industry collected R$973 million in 2021. It is the main source of funds for the promotion of audiovisual production in Brazil.
The potential loss of this money is concerning because one of the biggest barriers to a more consistent return of the audiences at this time is the lean catalog of films, especially the big box office ones.
In 2019, the sector was in a good situation, with an year-over-year growth of 13.5% in box office income, to R$2.8 billion, and an audience of 176 million spectators. In 2021, it reached 29% of that. Now average attendance is half of that of 2019.
“We have 60% of the normal number of films for that period,” said Marcos Barros, who chairs the board of CineSystem and the Brazilian Association of Multiplex Operating Cinema Companies (Abraplex), whose members represent half of Brazilian theaters. In 2021, 308 films were released, 30.6% below 2019, according to Ancine data.
The number of movies is likely to take time to resume the pre-pandemic levels after operations were interrupted during the most critical period of Covid-19, said Marcelo Lima, director of Expocine, an event focused on the audiovisual market that will hold its ninth edition this month. The vast majority of the films were shot by 2019.
Márcio Fraccaroli, director of film distributor Paris Filmes, also highlighted that the film stock “got old.” According to him, the shortage also reflects the lack of public policies for Brazilian filmmaking, which has pushed many production companies to streaming services. “We are in the phase of looking for content,” he said.
This year, the company is expected to distribute 17 to 19 movies, well below the more than 30 average seen before the pandemic. “Next year will still be bad for Brazilian releases, and the domestic audiovisual industry helps to bring the public back. Besides the economic issue, we have this problem. The audience in other Latin American countries, for example, is already at 75% to 80% of that seen in 2019,” he said. In Brazil, the death by Covid of actor and comedian Paulo Gustavo, who used to draw large audiences, was a blow.
Warner Bros, the behemoth that distributes Universal Pictures films, released this year 19 movies in Brazil but foresees more releases until December.
Some people are optimistic about the schedule of premieres in 2023. Juliano Russo, chief commercial and marketing officer of Cinépolis Brasil, cited new superhero movies as a driver. “We are very optimistic with the recovery curve. Next year may surprise and stay close or equal to the audience of 2019,” he said. The Mexican chain arrived in Brazil in 2010 and has 57 theaters and 423 screens. Among the current obstacles, Mr. Russo said, are the longer deadlines to import chocolates and candies.
Patricia Cotta — Foto: Leo Pinheiro/Valor
Patricia Cotta, the marketing manager of the Kinoplex chain, is also confident that 2023 will be a year of blockbuster releases and said that the company has been betting on aggressive pricing strategies to win back the audience and get them back into the habit of going to the movies. It launched, for example, a passport that gives discounts on all sessions, including weekend ones. There were even promotions of two tickets for R$11 (less than $2).
“People are responding very quickly to promotions. This shows that they need to make ends meet to have entertainment.” From January to July, Kinoplex received 5 million people, up 220% from 2021, but still down from the 9 million seen in 2019. The network has 271 theaters in 19 cities.
With an eye on this, some companies have joined forces to offer tickets for R$10 between September 15 to 21. However, it is still necessary to deal with the high cost of operation while revenue does not return to normal levels and financial health continues to be shaken by the period when movie theaters closed. Between 2019 and 2021, 241 theaters closed. There are 3,266 operating now, but more theaters may still close this year.
The groups struggled in recent years. They sold popcorn with delivery and held drive-in movie sessions, but none of this paid off. So, in addition to joining federal programs of reduced working hours and suspension of labor contracts, the sector tapped an emergency line of credit offered by Ancine and the Brazilian Development Bank (BNDES), which totaled R$400 million.
For small companies, loans are non-reimbursable. Larger networks have at least eight years to pay, and interest rates are much lower than market rates, Mr. Barros said. With 160 theaters, Cinesystem took a credit of R$40 million. “Very possibly we will negotiate to extend this term because the audiences have not returned,” he said. The company, which is listed on the stock exchange, ended the second half of this year with revenues of R$59.5 million, 530.5% above 2021, but still 33% below the same period of 2019.
Cinépolis and Cinemark have also tapped this line of credit and took R$35.3 million each in loans. Cinépolis does not disclose financial figures. Cinemark, a public company listed in the United States, posted higher revenues in Brazil in the first half – $87.9 million, up from $9.9 million in the same period last year. The company holds 30% of the Brazilian cinema market, with 626 screens in 86 theaters in 48 cities. The company declined to comment.
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