Toll road market to be tested by auctions this month

One of the most awaited auctions is that of the north stretch of the São Paulo beltway — Foto: Zanone Fraissat/Folhapress
One of the most awaited auctions is that of the north stretch of the São Paulo beltway — Foto: Zanone Fraissat/Folhapress

Inflation of inputs and global uncertainties have affected highway auctions this year, but the calendar of projects remains active. In April, three important state projects are planned: a block of roads in Rio Grande do Sul, the Belo Horizonte beltway (skirting the capital city of Minas Gerais) and the São Paulo beltway. The contracts add up to R$11.4 billion in investments in new projects.

There are groups studying the three assets, but there is uncertainty about the bids. This is the case of the auctions in Minas Gerais and São Paulo, scheduled for the last week of April. Some groups have requested the postponement of the projects to have more time for analysis. There is no decision yet. The Rio Grande do Sul government decided to keep the scheduled date, even in the face of uncertainties, as a test. The bidding will take place on the 13th, and the envelopes will be delivered this Thursday.

The highway segment is going through a challenging moment. The cost of raw materials such as asphalt and steel skyrocketed, increasing projections for investments. In addition, the high interest rates in Brazil increase the cost of debt for companies. To make things worse, the country will hold presidential elections this year, and the world faces the uncertainty caused by the war in Ukraine.

“There is a huge challenge, because the market has changed a lot between the definition of model and the date for the delivery of the bids,” said Guilherme Martins, head of structuring of companies and divestments at the Brazilian Development Bank (BNDES). The state-owned bank is carrying out studies for several highway projects in Rio Grande do Sul, Minas Gerais, Pernambuco and other states.

These challenges have been dealt with on a case-by-case basis, he said. In some, there will be a need for adjustments, for example, with the reduction of mandatory construction works or an increase in the tariffs of the bidding.

Despite that, the Rio Grande do Sul government has chosen to test the market. “We decided to keep the auction because we found that the project had ‘fat’, which would draw bids despite all the challenges. We believe there will be interest. Maybe less than in a calmer environment and maybe with a not-so-relevant discount [on the tariff]. If it fails [to draw bids], we will reevaluate,” said Leonardo Busatto, the secretary of partnerships of Rio Grande do Sul.

The government plans to bid three blocks of highways. The asset to be offered this month is block 3, which includes roads connecting Caxias do Sul to the capital city and other cities in the countryside. “We gave priority to this block because it is smaller and has a greater possibility of drawing interest, including from regional groups,” the secretary said.

The Rio Grande do Sul highway auction will be an important test for the other projects in the sector, Mr. Martins, with the BNDES, said. “It is the first relevant concession this year and since the beginning of the war. It will be a barometer for the market.”

One of the most awaited auctions is that of the north stretch of the São Paulo beltway. It is a public private partnership that includes completing the construction work and operation for 31 years. Investments are expected to total R$3 billion, of which R$1.7 billion will be required to complete construction.

Part of the funds will come from the government, which is willing to disburse up to R$2 billion. The amount, however, will be the selection criteria for the auction, so it may be discounted depending on how competitive the bidding is.

The project is considered very complex and challenging. The main concern is about the condition of the track already built – about 25% of the construction work remains to be done.

“There is a difficulty in understanding the state of the work that has been executed, and there is a concern of a mismatch between the described and the effective quality,” said Caio Loureiro, a partner at law firm Tozzini Freire. For him, the period given until the auction is considered exiguous and the participation of the private sector is a question mark at this moment.

The São Paulo state government said that “it is confident in the auction result.” And added that the Institute for Technological Research (IPT) has prepared independent technical reports, and that the contract provides, after signing, “a period of six months for an independent rapporteur to analyze the work. In addition, “any divergence may be resolved by an independent technical commission.”

For Lucas Sant’Anna, a partner at Machado Meyer (who worked on modeling the project), the expectation is positive. “We have seen reasonable interest from large groups in the sector,” he said.

Among analysts, the perception is that the interest in the Belo Horizonte beltway has been even greater than that of São Paulo. Four companies are interested, including international groups, said Fernando Marcato, the state’s secretary of infrastructure.

The government mulls postponing the auction at the request of the interested parties. “As some groups are based abroad, the crisis in Russia brings some uncertainty and requires additional studies. The industry is going through difficult circumstances. We are studying the matter. Chances are we will postpone it because we want to draw competition,” he said.

The Belo Horizonte beltway project is also a public-private partnership expected to draw R$5 billion in investments. Of this total, about R$3 billion will come from the government – the funds come from the agreement signed by the state with mining giant Vale after the massive dam failure in Brumadinho.

Since this project will be built from scratch, the contract is seen as very challenging, but also very attractive, said Ana Cândida Carvalho, a partner at law firm BMA Advogados.

One of the main risks is the expropriation required for the construction work. “This is always a bottleneck, and in this case, because it is a metropolitan region, the list of properties to be expropriated is long. The cost is not the biggest concern. The timeline is the most concerning factor instead, because it depends on lawsuits,” she said. Even so, she sees a lot of interest in the project, especially from large operators.

Source: Valor International

https://valorinternational.globo.com

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Market eases bets on longer cycle of interest rates hikes

Central Bank building — Foto: Jorge William/Agência O Globo
Central Bank building — Foto: Jorge William/Agência O Globo

The yield curve has fallen over the last three weeks as the Central Bank’s Monetary Policy Committee (Copom) signaled that it is likely to end the tightening cycle in May after raising the Selic, Brazil’s benchmark interest rate, to 12.75%.

Market agents not only removed bets on a longer cycle as a result. They also started to see cuts totaling 250 basis points in 2023 – around two times what they projected in March 16, the last meeting of the Copom.

Since then, the market has bought into the Central Bank’s statements that the tightening cycle will end in the next meeting of the Copom, and now consider in the future interest curve an interest rate between 12.75% and 13% for this year. In the period, the two-year rate, more associated with short-term inflation, dropped almost 100 basis points, to 12% from 12.935%. The five-year rate also saw a crucial loss of risk premium, to 11.10% from 12.17% — falling below the level seen before the war.

“There was a very strong repricing of the curve as the Central Bank was more emphatic in its statements about stopping the tightening cycle and insisting that the 12.75% level is enough for inflation convergence [with the target],” said Filippe Santa Fé, a fixed-income manager at ASA Hedge. “In this context, it is normal for the market to bet that the rate will plummet along the curve.”

The still challenging inflation scenario is key for the market to adopt a structural bet on lower future interest rates. BTG Pactual projects that the IPCA, Brazil’s official inflation rate, is likely to peak between April and May. This factor, added to the prospect of the end of the tightening cycle, is expected to remove more premium from the fixed rate curve ahead, said economist Álvaro Frasson.

“We see an important disinflation ahead, even though it will be slower than expected,” he said. “The Selic will probably be forced to remain high, between 9% and 10%, in order to deal with any fiscal risk.” BTG estimates that the Central Bank will not be able to interrupt the tightening in May and will raise the benchmark interest rate for the last time to 13.25% in June. The bank foresees a rate of 9.5% at the end of 2023.

The pricing extracted from the yield curve points to a scenario for the moment in which the Selic will end 2022 between 12.75% and 13%, then decline to 10.5% in 2023, still well above the median of 9% of the most recent Focus, Central Bank’s weekly survey with economists. Before the last meeting of the Copom, nominal market rates projected a basic interest rate of 13.5% at the end of this year and 12.25% at the end of next year.

“I don’t think a 250-basis points cut is too much, given that the Selic is likely to have risen more than 1,000 points by the end of the cycle,” said Vinicius Alves, a strategist at Tullett Prebon. The market underestimates the risk of an accelerated tightening in the United States that could limit the eventual impetus for interest rate cuts, he added. “That’s something that would cause the dollar to gain ground globally, pick up inflation and require the [Brazilian] central bank to keep a tight policy for longer,” he said.

Christiano Clemente, the chief investment officer of Santander Private Banking, is dissenting from the recent pricing of Selic declines. “The market is thinking that the Central Bank will stop raising in the middle of this year and, in a matter of four to six months, start to cut the rate,” he said. “It doesn’t make sense to me to raise interest rates and then start cutting them soon after. The most reasonable thing would be a rate that remains constant over a certain time horizon.”

Mr. Clemente notes that the term structure of interest rates is back to the level seen before the war in Ukraine, “returning” the post-war peak stress – the five-year rate even began to trade below the 10.16% seen before the conflict. “But no doubt the Central Bank has taken over the narrative and the more appreciated exchange rate has also helped the curve to fall,” he said.

Mr. Santa Fe also added a caveat about the rates, saying that the high inflation and pressured cores, as well as above-target inflation expectations for 2023, do not support a bet on an end to tightening, let alone monetary easing. “I think we will have a partial correction of this movement,” he said. “The exchange rate has helped the curve to fall and an interruption in that dynamic could lead to a rate adjustment.”

In fact, this was the tone on Tuesday: the rates saw strong advances, reflecting the general movement of higher global interest rates, especially in the U.S. The interbank deposit rate for January 2024 rose to 12% from 11.82%, while the rate for January 2027 rose to 11.1% from 10.85%.

It draws the attention of financial agents that the curve has deepened its “inversion” – that is, the difference between the two- and five-year interest rates became even more negative.

Huang Seen, head of fixed income at Schroders, says that short interest rates have remained high, but long rates have declined with foreign capital inflows.

Source: Valor International

https://valorinternational.globo.com

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Companies lack capital for railroad projects

Marcello Costa — Foto: Divulgação
Marcello Costa — Foto: Divulgação

The Bolsonaro administration has celebrated a wave of multi-billion investments in railroads since the creation of a new legal framework for the sector, but part of the projects are led by companies with share capital apparently incompatible with the size of the announced projects.

A research carried out by Valor suggests that at least five large projects already authorized or under analysis by the Ministry of Infrastructure – with 3,200 kilometers in length and almost R$50 billion in promised investments – were registered by companies with less than R$1 million in capital.

One is Macro Desenvolvimento Ltda., founded in November 2020, which has signed contracts for two new railroad sections: one linking Presidente Kennedy (Espírito Santo) to Sete Lagoas (Minas Gerais) and other linking Sete Lagoas to Anápolis (Goiás). Together, they total 1,326 kilometers and are expected to cost R$29.6 billion, but the company has equity inversely proportional to the boldness of the project: only R$10,000.

Regardless of the apparent contradiction in values, the estimates of multi-billion investments around the new railroads have been used in official events and on social media to expand the list of achievements of President Jair Bolsonaro, who will run for reelection in October.

These projects are based on Law 14.273, passed by Congress in December last year and signed into law by Mr. Bolsonaro, which allows new railroads under the authorization regime.

Under this model, investors are exempted from entering an auction and competing for a public concession. At their own risk, they can simply present a project to the government, which signs an “adhesion contract” with the entrepreneur. The compatibility between the equity and the size of the project is not among the preconditions.

According to market executives interviewed by Valor, who prefer not to be named, this has led to the proliferation of the so-called “paper railroads.” In practice, they are just a kind of title given by the government – the concession – which gives companies the right to build a certain railroad. Without enough capital to make the authorized project viable, they run after investors – usually abroad – who are willing to inject funds and assume the risk.

Given the uncertainties, the chances of “mortality” increase for a good part of the projects authorized or about to be authorized. Despite this, the government boasts that the new legislation is transforming the sector. The law was preceded by a provisional measure (MP 1.065), published in August, which created legal support for the presentation of projects.

As soon as it was published, the provisional measure of railway authorizations soon became part of the showcase of actions of the federal government. In early September, the Planalto Palace held a ceremony with Mr. Bolsonaro to launch the Pro Trilhos program, directed to the projects of the new contracting regime.

In February, the Special Secretariat of Communication (Secom) tweeted that the Pro Trilhos program foresaw R$240.8 billion in investments, with 79 requests from the private sector for the creation of new railroads and the expectation of generating 2.6 million jobs.

The post provoked immediate reaction from government supporters. Among praise for Mr. Bolsonaro and the then Minister of Infrastructure, Tarcísio Gomes de Freitas (Republicans), one post talks about accelerating the sector’s plans of “100 years in three.” Another post classifies the initiative as “incredible!” and mentions that the ministry’s budget is only R$8 billion. “Now, imagine R$240 billion of investments in railroads,” it commented.

Macro Desenvolvimento, which vows to build the two 1,326-kilometer railroads, presents itself as a “project and business solutions developer” with experience in initiatives such as a liquefied natural gas (LNG) regasification terminal and thermoelectric plants.

It also acts as a “strategic partner” for Porto Central, a project that already has the necessary permits and would be the point of arrival of the first railroad. The partner responsible for Macro, Fabrício Freitas, said that the company will receive new injections and foresees that the company will build the stretches in up to 12 years.

“The development of a new project, from its first cost, must be within a structured investment and accounting process,” Mr. Freitas said. “We signed the authorization contracts in December and, from then on, all the funds for the project are being injected into Macro. The accounting process, including capital increases and contributions, is just beginning.”

“The corporate model for the investment is being validated by the shareholders and investors based on the legal guidance we are receiving from specialized law firms, hired for this purpose. We started the project in the simple model of a limited liability company, with fewer costs, and we will continue with the contributions and adjustments as we move forward,” he said.

The other companies with share capital under R$ 1 million did not reply to requests for comment. One of them, Grão-Pará Multimodal, is heading a project valued at R$5.2 billion between Açailândia and Alcântara, in Maranhão. The route would connect Ferrovia Norte-Sul to a port where construction has not yet begun. The company was registered with equity of R$200,000.

Marcello Costa, secretary for Land Transport of the Ministry of Infrastructure, says that the new legal framework for railroads may still be adjusted and does not rule out defining some prerequisites for companies interested in big-ticket projects in the sector.

One possibility is to require a minimum amount of equity per kilometer of authorized railroads or the deposit of amounts proportional to the studies (economic, environmental, engineering) in an account linked to the project. “We may have a new provisional measure, a bill, or even a decree to regulate that which has been left loose or has not been sufficiently studied,” he said.

Mr. Costa evaluates that it is necessary, however, to ponder some differences between the model of concessions and that of authorizations for railroads. “When it is a concession, there is a partnership relationship and the government is looking for a partner. The logic of authorization is completely different,” he said.

First point: the authorization regime allows the emergence of another type of agent in the sector – the “railway developer.” As in real estate, the developer can act in the facilitation, in the solution of the deal. It can bring in investors, cargo owners, and even independent rail operators (who own the trains and take responsibility for transporting goods).

“This new business model allows not-to-big companies to operate and bring in partners. In fact, we are starting to see the emergence of new players in the sector. Several projects presented have a very high level of maturity,” he said.

Second aspect: there have already been 76 requests for authorization, totaling R$224 billion, submitted to the Ministry of Infrastructure. In the worst-case scenario, if only two or three actually get off the ground, the balance will already be positive, Mr. Costa said. Because the counterfactual, not having this legal framework, would be zero investment. The government loses nothing by allowing the authorizations, the secretary said.

“Before it was an impossibility. Without this, the option we had was to work with taxpayer money. We only have R$300 million a year for the Ferrovia de Integração Oeste-Leste [West-East Integration Railroad, known as Fiol], in Bahia, which is the only work in progress.”

Third point: the moment in December, according to Mr. Costa, was to pass the measure. The provisional measure 1,065 was about to lose its validity. The bill which originated the new law had been dragging on for years. “But, as with every new law, it needs some regulation and probably some kind of adjustment, which can be done calmly,” he said.

In this sense, there may be prerequisites for companies interested in large-scale projects. He has only one caveat: “What we cannot create is a selection of private-sector groups by the government ourselves.”

Source: Valor International

https://valorinternational.globo.com

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Healthcare companies still have appetite for acquisitions

Rede D’Or São Luiz reported profit of R$419.5 million in the fourth quarter of last year, up 38.5% year over year — Foto: Guilherme Pinto/Agência O Globo
Rede D’Or São Luiz reported profit of R$419.5 million in the fourth quarter of last year, up 38.5% year over year — Foto: Guilherme Pinto/Agência O Globo

Even after strong consolidation movements in the healthcare industry in recent months, companies maintain the appetite for more deals. Last week, executives from Dasa, Mater Dei and Rede D’Or cited the fact during conference calls. Among the largest recent acquisitions is the purchase of SulAmérica by Rede D’Or, announced in February.

“People talk about a game of musical chairs [in the face of various consolidations]. But we are actually having tectonic plate movements. The sector is changing significantly and quickly,” said Rafael Cardoso Cordeiro, Mater Dei’s chief financial officer.

Mr. Cordeiro did not elaborate, but said that there are still major consolidation moves on the radar. “The Mater Dei network is an important piece. We have been approached and we look for players in our sector. We are important players in the changes that are happening in the sector,” he said.

The company has 2,723 beds in its portfolio, considering recent acquisitions such as Hospital Santa Genoveva and Grupo Porto Dias. Since its debut on the stock exchange, in April 2021, the group has made six purchases – of five hospitals and a data analysis and artificial intelligence company – investing about R$2 billion and increasing twofold its service capacity.

In 2021, Mater Dei reported a record net revenue of R$1 billion, up 43% year over year. Overall, the sector has been supported by the return of elective procedures and drop in spending with Covid-19.

The largest hospital group in the country, Rede D’Or is moving forward to buy SulAmérica, an insurance company that has 4.5 million users of health and dental insurance. According to the terms of the deal, which still lacks regulatory approvals, SulAmérica’s shareholders will receive 13.5% of D’Or, with a premium of 49.3% over the share price on February 18. The purchase will be subjected to a shareholders’ meeting on April 14.

Rede D’Or’s CEO Paulo Moll said that the deal with SulAmérica does not interfere in the company’s plans to continue growing via acquisition. Rede D’Or added 2,213 beds with 17 acquisitions until the first quarter of this year since its IPO. “We don’t change companies’ business models. Most of Rede D’Or’s revenue comes from operators. And in SulAmérica’s case, we obviously see a lot of growth opportunity due to how strong the brand is,” he added.

Otávio Lazcano, chief financial and investor relations officer at Rede D’Or, was optimistic about the future of the business and said that there is room for several synergies, including better use of real estate assets, which can free up cash, and transaction cost reductions between the companies. There are also fiscal and tax efficiencies that the group hopes to capture.

“[We also see] potential reduction in the debt of the expanded company. Rede D’Or has a very long cost of capital and debt term. And SulAmérica is cash positive and will contribute to EBITDA and allow us to reduce net debt,” he said.

The scenario brings strength for the company to accelerate future investments and, according to the executive, opens a window for dividend distribution. He said he was unable to provide monetary estimates for synergies for the time being. The company hopes to have a final verdict on the deal from regulators later this year.

Rede D’Or São Luiz reported profit of R$419.5 million in the fourth quarter of last year, up 38.5% year over year. Between January and December, Rede D’Or’s net income grew 265%, to R$1.67 billion. Net revenue advanced 23.2% in the quarterly comparison, totaling R$5.13 billion.

Dasa, a market leader in medical diagnosis, began its acquisition process in the hospital segment about a year and a half ago and since then has invested about R$2.5 billion in the purchase of nine hospitals. Currently, it has 15 hospital units, which together have 3,500 beds, the second place in the segment behind Rede D’Or.

Dasa’s CFO Felipe Guimarães said the company remains attentive to acquisition opportunities this year, although he argues that the focus for 2022 is to integrate the assets already acquired.

“We believe there are good opportunities to continue consolidations. It tends to be a year in which acquisitions continue, although at a lower level than in 2021,” he said.

On Friday evening, the company unveiled the purchase of Centron – Centro de Tratamento Oncológico, in Rio de Janeiro. In the fourth quarter, the company concluded the acquisition of Hospital da Bahia and São Domingos, which added 679 new beds to its portfolio.

Source: Valor International

https://valorinternational.globo.com

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Domino’s plans to open 35 stores in 2022

Domino's Pizza inaugura uma loja por semana até fim do ano – Meio & Mensagem

After negotiations last year with BK Brasil — which operates the Burger King and Popeyes chains in the country — fell apart, the Domino’s pizzeria chain is looking inward to accelerate expansion this year. The company plans to open 35 stores this year, with growth especially in the Northeast region and with the attraction of new franchisees.

The strategy comes in line with the most recent investment: in September, the chain opened its second pasta factory in Brazil, in Fortaleza, Ceará. Another focus is to further increase the strength of digital sales, which are expected to receive investments of R$10 million this year. Among the projects are the subscription club, to be launched in the first half of the year.

“The last quarter was a record sales quarter. Now, the first quarter also started quite positive, despite the greater concern of the whole sector with inflation,” Fernando Soares, CEO of Domino’s in Brazil, told Valor.

The Brazilian operation is the fifth largest of the brand in emerging countries and the vision of the U.S. group is that the country has the potential for 1,000 stores, well above the current 327 units, of which 217 are franchisees. Domino’s has more than 18,000 stores around the world.

“The growth potential of the segment dropped after the pandemic. We managed to do well due to our greater exposure to deliveries,” he said, reinforcing the plan to reach 600 stores by 2025, but in “new formats” – with smaller stores, according to him, and even more focus on quality and delivery time.

The company does not reveal the numbers for 2021 but says that sales grew more than 12% in the year. A year earlier, sales had been R$455 million. Mr. Soares adds that the company’s revenue today goes beyond the 700,000 to 800,000 pizzas sold monthly in the country. “Our company is structured in other verticals and each area has a revenue generation, such as the franchising, distribution, engineering and technology fields. When you look at it from this perspective, the post-pandemic company has doubled in size.” The company is the one that negotiates with suppliers and then delivers the ingredients to the units.

High on the executive’s agenda is organic growth. He reveals that the demand has increased since BK Brasil and asset management company Vinci Partners, owner of DP Brasil (which is the master franchisee of Domino’s in the country), announced the end of the acquisition agreement in October.

According to the arrangement, Vinci would keep 16.4% of the shares of BK Brasil, but the deterioration of the shares months later weighed on the deal. The company, however, still has the right to exercise preference, until July, in an eventual new purchase negotiation.

“The failure [of the merger] was very friendly. It was a momentary situation caused by the economy, and the doors remained open. But we have been approached by a lot of other players. Not necessarily a complete merger, but more like ‘can I be with you at that point?’ We are attracting a lot of attention from the market,” he said. BK Brasil declined to comment.

In 2020, the sales of limited-service pizzerias — as this type of self-service and delivery restaurant is called — fell 27%, but rose again 24.8% last year, totaling R$3.48 billion, says Euromonitor. Although the category is still below the pre-pandemic period, Domino’s aims to take advantage of the 8.2% growth outlook for 2022. In an extremely scattered sector, it has numerical superiority: it controls 17.3% of the market, followed by Pizza Hut, with 7%, and Patroni, with 6%.

For this, the focus is on the control and analysis of data from the most diverse distribution channels, such as the apps, websites, WhatsApp and telephone, whose service was transferred in 2021 to a call center and the processes were digitalized. According to the executive, the service time worsened, but the ticket grew 30%. Today, 65% of orders are born in digital channels, but the ambition is to exceed 72% still in 2022.

Source: Valor International

https://valorinternational.globo.com

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Flow of foreign capital to Brazil will continue, Goldman says

Ricardo Mora — Foto: Claudio Belli/Valor
Ricardo Mora — Foto: Claudio Belli/Valor

The flow of foreign capital to Brazil will be sustained in the medium term and there will be a new phase of investments towards fixed income assets, said Ricardo Mora, a partner and co-head of Latin America at Goldman Sachs. The American executive of Mexican descent spoke to Valor while in Brazil, his first interview with a local news outlet. Among his functions as the chief executive of the bank in the region, Mr. Mora oversees the executive committee formed by the five co-CEOs of the Brazilian operation.

With more than 30 years of experience in emerging markets, Mr. Mora sees the flow of foreign investment associated with the monetary tightening carried out by the Central Bank as anchors for the Brazilian currency. “When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country,” he said.

The current flow of funds has been “mostly geared towards equity,” the executive said, who believes there will be a new phase of this capital inflow directed to fixed income, which “will anchor the [Brazilian] currency.”

Read the main excerpts from the interview below.

Valor: We see a strong inflow of funds from abroad to the stock exchange. Is Brazil cheap for foreign capital?

Ricardo Mora: When you look at the broader environment or what’s going on in the markets, the perception of cheap can vary. And when you look at currency fluctuations in association with valuations, then what’s perceived to be expensive could be cheaper, from the dollar perspective. And so what’s happened in terms of Brazil specifically is we’ve had from our estimates, there’s been roughly about R$86 billion of foreign inflows. And that’s been mainly geared towards the equity markets. And so you’ve seen the commensurate appreciation of the foreign exchange [rate]. And so roughly R$80 billion have been equities. The remainder have been directed to fixed income, as a result of the CDI [Brazil’s interbank benchmark rate] being higher. From the equity portfolio flows that we’ve seen all these have been in the secondary market, mainly into the commodity space, banks and index. But we have not seen the money come into institutions that serve the local population, in the retail space. We haven’t seen it [inflows], for example, in fields that you would think would be more consumer led, it’s really been more focused on commodities and banks.

Valor: Is this inflow sustainable in the medium term?

Mr. Mora: It’s a good question. The economic engine in Brazil is strong. There will be continued inflows into Brazil, it’s not a matter of whether there’ll be some fits and starts in terms of valuations versus other countries. But in terms of how foreign investors see the country and its economic might, it’s very clear that you can see it in many different avenues. We have just discussed fixed income and equities, but we also look at foreign direct investment. And, through our global network, we’re in touch with sovereign wealth funds, high net worth individuals, family offices, and all have intentions to invest in Brazil.

Valor: About the Brazilian real, do you see the exchange rate back into the fundamentals?

Mr. Mora: From the perspective of Goldman Sachs, there was an overshooting of the currency in terms of depreciation. What we’re doing is more reverting back to the mean. More importantly, the inflows have helped, certainly, but the policies help as well. When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country now. So far, as we discuss, it’s been mostly geared towards equity, and I think the next leg will be fixed income flows. And a stable currency in the backdrop of a robust economy will then allow for continued fixed income flows. That will be the next leg, which then will anchor the currency.

Valor: Do you see the exchange rate below R$5 to the dollar after the elections, in October?

Mr. Mora: I wouldn’t be surprised if we go below that. And it’s a function of the sustainability [of debt]. And that will come down to government policy, fiscal, in the backdrop of what’s happening with the continued drop of inflation as a result of the Central Bank’s hikes. And so in that backdrop, you don’t have for example an overheating economy. There is a certain slack in the economy that will allow it to grow. And so in that backdrop, now, this comes down to the ability for continued growth. And that depends again on fiscal policy and a well-anchored currency.

Valor: Is there a risk of reversal of the inflow to the emerging markets if the Fed hikes interest rates more aggressively?

Mr. Mora: In terms of foreign inflows and broader markets, it’s difficult to gauge where capital flow will go. One thing is certain: in the backdrop of market volatility, investors tend to be less risk averse and to look for value. And they tend to look for assets where there’s strong underlying enterprise value. It’s already well known that there will be at least seven rate hikes in the U.S. If you look at the FCI [financial conditions index], it’s already tightened quite substantially, and the market has been pricing these tighter monetary conditions. From a valuation perspective, you can argue that Brazil is fundamentally strong in value. That’s why we’ve seen these commensurate flows.

Valor: Brazil started raising rates before the Fed. Can this help cushion the impact of interest rate hikes in the United States?

Mr. Mora: The Brazilian central bank was one of the first to move. And they were very early to the recognition that the word “transitory” was a bit of a difficult concept to describe the condition [of inflation] given the backdrop of rising prices. The Brazilian central bank has been quite aggressive and not just moving in small increments of 25 basis points. One sees they are very serious about [monetary] policy. In that backdrop, you’ve seen the currency react. This year, it’s been the combination of central bank policy and foreign inflows. And the Central Bank reacted appropriately. It’s widely recognized that this Central Bank had to react to what was happening on the ground with Covid. And when there was a recognition that inflationary pressures were building, again, reacted very quickly. When you look at the broader emerging markets, there have been certain countries that have been resistant to move as actively as the Brazilian central bank. And that’ll bode very well, in terms of future policy and the ability for foreign investors to know that the central bank and its policy will be reactive [against inflation] as needed, that there’s an independence of the central bank, that they will do what’s right.

Valor: Will the war in Ukraine affect the flow to Brazil?

Mr. Mora: When you look at emerging markets, it used to trade as a beta of one, meaning that if you had a problem in one market, it would affect the others. And now, what you have is a more of a focused view, in terms of recognizing that risks can be isolated, and that portfolio and capital flows will be affected in specific manners. The market now sees that there’s actually very independent and very specific regional differences between these countries and policies. In Brazil, for example, we did see certain portfolio flows leaving Eastern Europe, including Russia, and flowing into Latin America, specifically into Brazil. And so from that perspective, there was some shift in the portfolio flows more geared towards equities as you’ve had these tremendous growth and valuations in developed countries, specifically in the U.S. Of course, most of the capital that has been directed to the U.S. has done very well. It’s hard to take that money away from that performance, and spin it into another jurisdiction. That said, as the macro backdrop has become a bit more challenging in developed markets, we’ve seen these portfolio flows. Brazil, specifically, has very attractive valuations, and it also has the right components of what the world needs, like commodities. In that backdrop, it seems to me very clear that there’ll be continued interest in terms of portfolio flows, either in the private markets or as outright cross border flows.

Valor: Does Goldman see the sustainability-linked bonds as an opportunity in Brazil?

Mr. Mora: We have seen many new, modern operations in Brazil and we see many opportunities in the sustainable bond market. There are new concepts, like carbon credits, debt for nature swaps, the concept of being able to monetize what is already in Brazil in terms of [conserved] nature, for example, the ability to have carbon capture associated with Brazil’s [environmental actions]. Goldman has had a tremendous focus in terms of being able to help our clients that have access to these resources and to monetize them. I think you’re going to continue to see very innovative products around this space. That’s a very good thing in terms of outlook, because monetization means more preservation.

Valor: What are Goldman’s plans for Brazil and Latin America?

Mr. Mora: In Latin America, I would say that in the last two years we’ve had successive record years in the region across divisions. When you look at Latin America, Brazil is core to our focus in terms of our aspirations for the region. And when I specifically look at what’s happening here, and what we’d like to do, one is clearly investing in our people. There’s been a number of initiatives taking place here. For example, we’ve been very active in our hiring in the tech space. We hired 40 engineers last year, and our intention is to hire another 20 this year. Under the Brazil Management Committee, we’ve been able to progress our plans in Brazil.

Source: Valor International

https://valorinternational.globo.com

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Suzano targets new markets of $115bn

Walter Schalka — Foto: Claudio Belli/Valor
Walter Schalka — Foto: Claudio Belli/Valor

Suzano, the largest producer of eucalyptus pulp in the world, plans to enter new markets of $115 billion a year that are likely to grow in tandem with the decarbonization agenda. The company says its transformation project toward the bioeconomy remains firm and cited four fronts: textile, carbon, bio-oil and microfibrillated cellulose.

“We will continue delivering results in the short term. But we have to look to the future, to think on how we will operate to transform the company and the society”, said on Wednesday CEO Walter Schalka.

Some of the new businesses are in the process of becoming operational. The company has already submitted for certification 7,5 million tonnes of carbon equivalent — from a total of 30 million tonnes that can be exploited — and these credits will be traded on the voluntary market, said the director of New Business, Strategy, IT, Digital and Communication of Suzano, Christian Orglmeister.

In addition, the first textile fiber plant from microfibrillated cellulose in partnership with Finland’s Spinnova starts production at the end of the year — this market alone is estimated at $70 billion.

Some of these businesses are on the verge of becoming operational: the company may soon trade 7.5 million tonnes of carbon equivalent in the voluntary market, and the company’s first textile fiber mill in partnership with Finland’s Spinnova will start production at the end of the year.

Marcelo Bacci, Suzano’s chief financial, investor relations and legal officer, said that the reduction of the company’s disbursements to R$1,500 per tonne by 2027, considering investments and production costs, will increase free cash flow generation by R$2.3 billion a year. In 2021, these disbursements totaled R$1.669 per tonne.

The Cerrado project, which foresees the installation of a pulp mill with a production capacity of 2.55 million tonnes per year in Ribas do Rio Pardo (Mato Groso do Sul), will contribute to these gains, since it will have the lowest cash production cost in the world.

The new pulp plant under construction in the interior of São Paulo will bring greater energy efficiency and reduce the pulp cash cost by R$115 per tonne, which means an impact of R$12 per tonne on the company’s cash cost.

“The project will have high energy efficiency, allowing for a 64% growth in energy generation per tonne produced,” said Aires Galhardo, Suzano’s head of pulp operations.

The company currently generates 0.14 megawatt per tonne and will reach 0.23 MW per tonne when the project is operational, as it will generate 0.63 MW per tonne.

The global demand for hardwood pulp will continue to grow over the next few years, driven mainly by the tissue, packaging and specialty paper segments, said Leonardo Grimaldi, the company’s head of commercial pulp, people and management.

The company estimates that the global consumption of hardwood will organically increase by 4.7 million tonnes in the next five years, to 41.1 million tonnes in 2026.

But the prevailing assessment is that this increase can be higher considering two major trends: the replacement of other fibers for hardwood pulp and the migration of plastic to materials from renewable sources, potentially expanding the consumption of the raw material to 43.1 million tonnes in 2026.

On the supply side, considering the projects already unveiled, the expanding capacity including closures and conversions may reach 6.9 million tonnes in the period.

However, supply disruption has occurred more and more frequently and is expected to reduce the additional volume of fiber in the market in the coming years, the executive said. Historically, 700,000 tonnes produced in older mills leave the market each year. This volume reached 2 million tonnes in the 2020-2021 period, he added.

In this scenario, the operation rate of the global industry would be 91% in 2026, compared with 90% in 2021, Mr. Grimaldi said.

Suzano will continue to grow on the tissue paper market and this expansion can be organic, through investments on new projects, or via acquisition, Luís Bueno, the company’s head of consumer goods and corporative relations, said recently.

The executive recalled that there is much room for expanding the demand for tissue in Brazil, given the low per capita consumption index in relation to other markets. Last year, the company operated at 100% capacity in tissue.

Suzano entered this market in 2018 with an initial focus on the North and Northeast regions, where it is already the leader with 66% and 28% shares, respectively. After advancing into the Central-West and Southeast regions, it ended 2021 as the third largest player in this market, with a share of 11.2%.

Source: Valor International

https://valorinternational.globo.com

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Investment plan to bolster Renault in Brazil

Ricardo Gondo — Foto: Silvia Zamboni/Valor
Ricardo Gondo — Foto: Silvia Zamboni/Valor

Renault’s factory in São José dos Pinhais (state of Paraná) stopped 41 days throughout 2021 because of semiconductors shortage. For the same reason, between Monday and Friday the unit’s line work will be interrupted again. To the impossibility of working at full speed, which has become routine in the automotive industry, is added, currently, a strong pressure of costs. Despite the challenging environment, Renault’s global management is about to announce the value of a new investment plan, necessary to develop and produce, in Brazil, a future family of vehicles.

A little less than a month ago, the automaker announced that the Brazilian plant would be prepared to produce a new vehicle platform. This platform will serve as the basis for different new models. It is an important renovation, for several reasons. It is the first major change in platforms for the brand since 2007.

In addition, this new base also bears the signature of the Renault-Nissan-Mitsubishi alliance, which for more than one occasion seemed doomed to failure. The initiative also provides an opportunity for Brazil to be included in the transportation transformation process, since the new platform will also be used to produce electric cars.

The size of the new investment has yet to be defined. But, according to the CEO of Renault Brazil, Ricardo Gondo, the plan is bold. Besides the new platform, it includes a new engine. Therefore, it will require a large amount.

The executive is optimistic about the willingness of the parent company to invest in Brazil. A year ago, the company seemed more hesitant. In March 2021 an investment plan shorter than usual was announced – covering the period between 2021 and 2022 and totaling R$1.1 billion; resources already practically all used in the modernization of products already known.

Despite the plans for an electrification-oriented platform, for Mr. Gondo the production of 100% electric cars in Brazil will still take a long time. “Unlike Europe and the United States, this type of vehicle is still expensive for the Brazilian consumer in general,” he says. The executive recalls that the European consumer also receives tax incentives from governments to exchange the car for an electric model.

Even so, Renault intends to be recognized by the Brazilian public for the electrification of its line. In addition to the two 100% electric models already sold in the country – the Zoe compact model and the Kangoo SUV – next week, the company will introduce the Kwid compact SUV in an electric version. In Brazil, the 100% electric cars are all imported.

The French automaker is also studying the return of the Megàne to Brazil – the name is the same as one of the first models sold by the company in the country, but the Megàne that has just been launched in Europe is different. It has a pickup body and an electric engine.

Despite the high prices of electric cars serving, for now, a niche of the Brazilian market, Renault has plans, in the future, to popularize this type of model through sharing services. The mode is part of Mobilize, a company of the group launched in Brazil in the middle of last year. Sharing and long-term rental are among the new products offered by Mobilize and have helped to increase the company’s revenues.

Renault’s electric vehicles also continue to run on Fernando de Noronha. The project, part of the archipelago’s decarbonization plan, began three years ago. With the delivery of ten more vehicles a few days ago, the electric fleet in Noronha now totals 46 units. In a partnership with Neoenergia, the project includes solar panels for the installation of two clean energy plants.

“Renault was one of the first to enter electric mobility,” says Mr. Gondo, a mechanical engineer who, before taking over the automaker’s command in Brazil three years ago, held different positions in the local operation and also in Europe. According to him, there is no prediction when the supply of components will be resumed. Meanwhile, he says, the brand is working to establish its identity.

Electrification is the group’s global focus. In January, the Renault-Nissan-Mitsubishi alliance announced a $25.8 billion investment program over the next five years focused entirely on electric cars.

Source: Valor International

https://valorinternational.globo.com

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War creates chance for Brazil to integrate into global chains

Lia Valls — Foto: Leo Pinheiro/Valor

The weakening of globalization intensified by the war in Ukraine opens a good chance for Brazil to reduce its economic isolation and connect to global production chains for goods and services. But the opportunity will be lost without opening the economy and comprehensive economic reforms that make Brazil more attractive to international companies.

The thesis that the conflict in Eastern Europe opens a “once-in-a-century opportunity” for Brazil was recently raised by Central Bank President Roberto Campos Neto in an event at public spending watchdog TCU. “Brazil has not inserted itself into global chains,” he said. “Now it has an opportunity with the redivision of global chains.”

For geopolitical reasons, the United States and Western Europe would be interested in reducing their dependence on inputs and products not only from Russia, but also from China. Brazil, at least in theory, could benefit, both because of its geographical proximity and because of shared values, such as democracy. Mr. Campos Neto says that, for this to materialize, the country must be “in the right place, with the right policies.”

Experts told Valor that, in reality, the war is a new chapter in the process of “corrosion of globalization,” as defined by economist Adam Posen, from the Peterson Institute, a Washington-based research organization.

“The deglobalization process is not new,” said Lia Valls, an associate researcher at Fundação Getulio Vargas (Ibre/FGV) and a senior fellow at Cebri, a center for studies on international relations. This trend emerged after the 2008 global financial crisis, which hit the working class in the United States, leading it to question the income inequality caused by globalization.

Since then, there have been several attacks on world economic integration, from Brexit to China’s five-year plan focused on the industry to dominate the high value production chains, from U.S. President Donald Trump’s retaliations against the Asian country to the foreign policy of his successor, Joe Biden, aimed at reindustrializing the U.S.

The pandemic intensified this trend, with the restrictions that several countries imposed on exports of health products and equipment. It also led to disruption in global value chains, such as chips and electronic goods, encouraging companies to rethink supply chains and prioritize secure access to inputs over costs and productivity.

In the war, the problem impacts mostly energy, food and minerals supplied to the world by Russia and Ukraine. But the case raises more general concerns about the risk of disruption in the supply of inputs and final products due to geopolitical risks.

“The U.S. and the European Union will not be the ones to guide the revision of global value chains. These are decisions made by the companies themselves,” said Carlos Pio, a professor of international political economy at the University of Brasília and a former executive-secretary of Brazil’s Foreign Trade Chamber, known as Camex.

In the companies’ decisions about where to produce each input used in the value chain, it matters a lot if the country has an open economy, which reduces costs to move products and capital, and if the business environment in general is competitive. “What the Brazilian government can do to better position the economy as a whole is having a pro-market reform agenda,” Mr. Pio said. He is in favor of a unilateral opening of the economy, since the negotiation of trade agreements with other countries generates slow results and our level of protection is high, according to him.

A criterion widely used to measure the level of integration of an economy into global value chains is the share of imported components in exports of industrial goods. In the case of Brazil, this indicator is at 14%, well below Mexico, with 38.4%, according to data compiled by the World Bank.

In a 2020 report on global value chains, the World Bank highlights some government decisions that have hindered integration into global chains. One is the Inovar-Auto program, put in place during the Rousseff administration, which protected the industry and required a high percentage of local content, causing the industry to stop focusing local production on exports.

But integration into global chains has not made any tangible progress during the Bolsonaro administration despite the pro-market economic view. Economy Minister Paulo Guedes has been criticized for his strategy for trade. He has been publicly arguing for a plan to first give equal competitiveness to companies, with the approval of a tax overhaul, and only then substantially lower import tariffs.

Mr. Pio, who was part of Mr. Guedes’s team until July, believes that the Bolsonaro administration has moved in the direction of trade opening by cutting tariffs, although he considers that this process must be accelerated.

Ms. Valls ponders that Brazil’s disconnection from global value chains, although true, has some nuances. First, Brazil is not outside all chains, but rather of some of the most valuable ones. In the case of food, for example, Brazil has a large footprint. And there are some cases where the country is a major player in a high value chain, she said, citing planemaker Embraer.

Brazil has a greater integration, according to data compiled by the World Bank, as a supplier of inputs for industrial exports from other countries. In this case, the percentage is 17.7%, reflecting the export of basic products used in industrial processes in other economies.

Comparisons of international indicators of participation in production chains can show some distortions. Small countries, such as Chile, have few alternatives other than integrating into trade.

“Our internal market is large, and multinational companies historically come to Brazil to take advantage of it,” Ms. Valls said. The question mark is how to get companies to look beyond the domestic market. The geopolitical environment favorable to the relocation of global value chains is not enough. “If you don’t have the conditions of attractiveness, companies will not come.” This includes commercial issues, such as tariffs trade agreements with other economies, but also factors such as macroeconomic stability, clear and stable rules, infrastructure and quality of human capital.

The Ibre/FGV researcher ponders, on the other hand, that Brazil’s greater connection with global chains is not a panacea, which would bring only gains or solve all development problems. “The discussion over the search for productivity has no end,” she said. “If I want to avoid the so-called middle-income trap, I have to invest in development, human capital.”

It is also necessary to ensure that the gains from globalization are not captured only by companies and, therefore, are also shared with consumers. Another concern is to avoid that, in this process of integration into global chains, standards like the preservation of the environment are loosened.

Source: Valor International

https://valorinternational.globo.com

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Industry offers retailers more money to boost sales

Supermarkets are a battlefield for industries trying to sell — Foto: Maria Isabel Oliveira/Agência O Globo
Foto: Maria Isabel Oliveira/Agência O Globo

The current scenario of fiercer competition between brands, following the drop in consumer disposable income, has made the industry spend more to try to improve its sales. Amounts paid by companies to retail chains, or negotiations involving discounts on invoices, lost strength in the first year of the pandemic, but accelerated again at levels above those of the last five years.

According to a survey conducted by Valor based on the financial statements of eight major chains that publish these figures, over R$2 billion in commercial funds were paid by manufacturers to retailers in 2021, a rise of 11.6% over 2020. For comparison, this expansion rate is more than double the average annual growth of 5.7% seen since 2016.

According to calculations, there was a 3.4% drop in the total amount in 2020 compared to 2019. When the health crisis began two years ago, the payment of emergency aid by the government supported the accelerated demand in consumption, and without the need for companies to support much more aggressive actions, some payments lost strength – a different picture from today.

The information was collected from the footnotes and/or financial reports released by GPA, Assaí, Carrefour (including Atacadão), Americanas, Magazine Luiza, Raia Drogasil and Panvel. Among all the companies, in two there is practically stability (GPA and RD) and in only one, Americanas, there is a drop, of 9.5%, in the amount.

There are companies that do not inform these numbers in their reports, such as Via and Grupo Mateus – the publication is not mandatory, according to Brazilian accounting standards. The industry does not usually inform this data in their earnings reports (Whirlpool, Ambev and M.Dias Branco, for example, do not disclose the information), so the best barometer is the retail market. Adding up all the chains, the expansion in disbursements is in line with the increase in total gross revenue in 2021 (11%).

According to consultants who work with the networks, these negotiations accelerated as of 2021, in a movement that has been extended through 2022, with a focus on increasing sales by commercialized volume. In 2021, much of the increase in revenue came from rising inflation, and not from volume (which even shrank in certain products).

“In the good years, companies take their foot off the gas in terms of funds. That’s not to say that retailers won’t continue to negotiate this with industry, but the commercial stimulus drops. But everything indicates that 2022 will be a year of more bumps, and with retailers feeling more pressure on cash, the need for these agreements on the store side increases,” says Eugenio Foganholo, head of consulting firm Mixxer.

“What happened in 2020 was a disruption of products, with the crisis of the supply chains in the pandemic,” says the chairman of the board of a retailer in São Paulo. “There was a shortage of merchandise, from cell phones to furniture, and no one had to beat a drum to sell. Part of 2021 wasn’t bad either, and that made the funding for actions in TV disappear. But if you look now, there are even wholesalers advertising meat and beer offerings in prime time. And the industry is the one who pays for part of this, under the cooperative advertising agreement.”

These negotiations involve marketing funds (support for campaigns in newspapers, on TVs), or in shelf exposure (who pays more has better space). There are still bonuses associated with industry purchase and customer sales targets, and freight reimbursements. If the chain exceeds the goal, a bonus is paid. And the payment can be made through the reduction of invoices payable to the industry.

Store openings are still part of the negotiations, although they do not involve such significant amounts, through the free delivery of initial batches of products to new stores. Openings receive greater funds than refurbished stores – last year, openings and conversions grew more than in 2020. Between openings and closings, the balance was positive in 204,000 stores, and in 2020 there were 75,000 closings. For 2022, the projection is for a new positive balance.

Among the cases analyzed, Carrefour (whose largest business is Atacadão), Dimed (Panvel) and Assaí lead the increase in payments, with expansion of 32%, 22% and 18%, respectively, in 2021 versus 2020. Carrefour integrated at the time the Makro chain to its store base, absorbing new contracts. The chain and Assaí have resumed openings since 2021.

Consultants also point out two aspects in these negotiations: the pressure that the industry itself faces in its expenses and the effect of high inflation in these trade agreements. Manoel Araujo, head of Martinez de Araujo Consultoria de Varejo, remembers yet another aspect. “I have five brands of a certain product in the store, and I signal that I will look for other cheaper brands in the market. I can still use the store’s own brand, which fits like a glove in these times of crisis. This all ends up entering the daily negotiation of discounts,” he says.

Despite the fact that, strategically, these negotiations are fundamental in the sector. Brazilian accounting rules do not require the disclosure of those numbers in the footnotes or in the earnings reports. And the subject has already been the target of fraud in the sector years ago.

There are chains and industries that only mention in the footnotes the existence of commercial agreements, and others that specify them in the “accounts receivable” or “suppliers” lines. The amount is also credited as a type of credit of the cost of the goods purchased.

Audit reports on chains’s financial statements often cite the bonuses as a “significant” issue that merits exchange of information with management for further clarification but conclude that the handling of the issue in statements is “acceptable”. In 2003, Dutch retailer Royal Ahold admitted that its profits were inflated by $500 million between 2001 and 2002 because of the inclusion of bonuses that never existed.

Source: Valor International

https://valorinternational.globo.com

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