Market regulator hopes Lula administration will tackle budget problem

Brazil’s securities market authority also needs new public hiring test, according to current and previous directors

11/28/2022

In the 20 years between the Lula administration back in 2003 and his third term in office starting in 2023, Brazil’s capital market has evolved as never. But despite several IPOs, a record number of investors, and the emergence of new products, the Securities and Exchange Commission of Brazil (CVM), the country’s market regulator, has shrunk in size. There has not been a single public hiring test since 2010, and the financial independence provided by law has never happened in practice.

The prevailing assessment is that the financing of the agency is a delicate matter because of the discussions about public spending in the new administration. On the other hand, people close to President-elect Luiz Inácio Lula da Silva’s team have signaled that a public hiring test would be feasible.

The Brazilian capital market began to take off in the 2000s, during Mr. Lula’s first term in office. Novo Mercado was created at the time and established stricter corporate governance rules and greater transparency for the market. In the following years, in 2006 and 2007, the country experienced the first IPO boom, which consolidated the new phase. A new record occurred between 2020 and 2021, with 73 offerings.

Currently, there are nearly 700 listed companies on the CVM, which represent a fraction of the 78,162 entities regulated by the capital market authority. They include investment funds, brokerage firms, administrators, analysts, consultants, investment advisors, distributors, credit rating agencies, and securitization companies, among others. CVM operates with a surplus. Annually, it collects about R$800 million from inspection fees, a counterpart for the regulator’s service. The regular budget totals nearly R$260 million and discretionary spending is historically around R$25 million.

Law 10.303, of 2001, provided that funds from the collection of the inspection fee can be used to fund the activities of the agency, but this financial autonomy does not exist in fact: the funds go to the single account of the National Treasury. CVM has to prepare its budget proposal and send it to the Ministry of Economy, which can change it. The general budget is forwarded to Congress, which can also change the amounts. In 2022, the agency’s budget was under threat – it was almost cut by more than 50%, but, at the end, managed to keep it in full.

Joao Pedro Nascimento — Foto: Leo Pinheiro/Valor

Joao Pedro Nascimento — Foto: Leo Pinheiro/Valor

CVM has been warning in recent years about the increased level of risk related to the lack of personnel. A number of employees was moved from the Brazilian Development Bank (BNDES) and other state-owned companies to CVM, but it is insufficient in view of the growth of the market. CVM President João Pedro Nascimento speaks of funding and personnel problems even before taking office, as predecessors like Marcelo Barbosa and Leonardo Pereira did before him.

“CVM has reached a limit situation. We badly need a public hiring test in order to be prepared to serve a market that grows in size and complexity,” said Mr. Nascimento. This year, preparations were started for a hiring test to be held in 2023. And now, for it to materialize, the approval of the Lula administration will be necessary. The matter is a priority to be dealt with by the presidential transition team.

On the financing side, the current president of the CVM intends to create a capital market improvement fund, with part of the funds from the fees, which also depends on Brasília. “It is important to be able to predict that a certain amount will be allocated to CVM. In other words, predictability. Then we can organize ourselves to make the best use of those funds.”

In response to the special secretariat of treasury and budget, CVM has indicated representatives who will work to meet the demands of the presidential transition team, including the agency’s chief.

Those who led CVM know the difficulties. Economist Maria Helena Santana held the position between 2007 and 2012, when the market was a fraction of its current size. “[Back then], we didn’t manage to keep part of the money with CVM, and proportionally, today, the amount that stays in the hands of the agency is even smaller,” she said. The agency needs to have a minimum of predictability to make long-term plans, she said.

Under Marcelo Trindade, Ms. Santana’s predecessor, CVM had its funding most assured. The lawyer took over in 2004, replacing Luiz Leonardo Cantidiano. After facing difficulties in his relationship with the Ministry of Finance, Mr. Cantidiano resigned. “Because it generated this serious consequence, the government came to its senses and ensured the conditions for the functioning of the agency, from the standpoint of autonomy and financing,” said Mr. Trindade.

After the episode with Mr. Cantidiano, there are no more reports of government interference in CVM, which continues its work independently. “I hope the good times will come back, and I wish the new administration remembers its successful experience so that things work well,” said Mr. Trindade.

Another historical problem faced by CVM is the slowness in defining new board members, who have fixed terms. In the Bolsonaro administration, for example, the board spent most of 2020 with only four members and 2021 with only three, out of a total of five. Mr. Nascimento was an exception, as he took office immediately after the departure of Mr. Barbosa, his predecessor.

Maintaining the current composition, the next vacancy in the board should open at the end of 2023, as the term of director Flávia Perlingeiro will come to an end. Regarding CVM’s work, lawyers and former directors of the agency told Valor there is independence to establish a liberal regulatory agenda and make decisions. “The profile of the new minister will make all the difference in the nominations and projects for CVM. João Pedro [Nascimento] will work hard to build a good relationship,” a former director says.

*By Juliana Schincariol — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
/by

BorgWarner to make battery systems for electric cars in São Paulo

Sets will be completed in Piracicaba with batteries imported from Germany

11/25/2022

Marcelo Rezende — Foto: Divulgação

Marcelo Rezende — Foto: Divulgação

Keeping up with the electrification of vehicles without losing money or going out of business has become one of the biggest challenges for many auto parts makers. The large ones have been able to adapt by buying up other companies. At the beginning of the year, the U.S.-based BorgWarner, a well-known player in components for combustion engines, acquired the German battery maker Akasol, which already had three plants – two in Germany and one in the United States. The fourth one – the first since the acquisition – will be inaugurated in the first quarter of 2023 in Piracicaba, São Paulo, and already has a client: the Brazilian subsidiary of Mercedes-Benz.

After posting a global turnover of $14.8 billion in 2021, BorgWarner has set the goal of generating 45% of its revenues from electrification systems by 2030, said Marcelo Rezende, the company’s managing director for batteries in Brazil. This year alone, the company won $2.9 billion in new businesses in the electric vehicles market, compared with a target of $2.5 billion originally projected to be reached by 2025, he said.

Mr. Rezende is a trained mechanical engineer who came from Delphi, a company acquired by BorgWarner two years ago. The deal included Delphi’s plant in Piracicaba, the same that has just been revamped to receive Akasol’s new line, a brand that will remain in the market. The battery systems will be produced in a previously rented facility.

The systems will be made from imported components, which will be complemented with items produced in Piracicaba. The lithium-ion batteries will arrive from Germany through the Port of Santos. It is a large component (1.8 x 0.7 meters) that weighs 500 kilos. The management and charging modules will be added in Brazil, as well as one that interconnects the others. Each bus will have, on average, four sets of batteries, distributed on the roof and rear of the vehicle.

According to Mr. Rezende, the local sourcing of part of the systems will guarantee the bus buyer access to Finame, a special credit line for commercial vehicles offered by the Brazilian Development Bank (BNDES), which has been adapted to include electric vehicles. Mercedes’s bus also marks the German company’s debut in electromobility in Brazil – the automaker is the first customer of BorgWarner’s new operation as well.

Mr. Rezende believes, however, in the expansion of electrification not only in the city bus segment, but also in the truck and delivery van segments. He says the company has been talking to other automakers. “Brazil is the fourth-largest commercial vehicle market in the world and the demand for electric vehicles is expected to grow 400% in the next five years,” he said.

Although at the beginning of the operation the pace will be slower, the new plant will have the capacity to produce 4,000 battery systems per year. According to Mr. Rezende, when it reaches this volume, the amount of power produced will be enough to power 200 homes for a year.

BorgWarner’s management team does not reveal data such as investment in the new plant, number of employees or sales in Brazil, where the company has been operating for almost 50 years. But the company cites sales growth percentages in several divisions. According to BorgWarner, in the year to date, the Brazilian plants have produced 13.4% more than in 2021, including supply to automakers, aftermarket, and exports.

The production of starter motors and alternators to serve the automakers in Brazil grew 110%. The increased demand for cars with turbocharged engines is also benefiting BorgWarner, which is expanding its production of turbochargers in Itatiba, São Paulo.

According to the company, turbochargers exclusively for bi-fuel engines (which run both on gasoline and ethanol) will be in 30% of the light vehicles sold in the country this year. This share is expected to increase to 37% in 2023, 45% in 2025, and 54% in 2030.

This explains why, despite the strategy for electrification systems, the company is not neglecting the combustion vehicle market. “We believe Brazil is still going to benefit greatly from the technological path of its biofuels in the light vehicle segment,” said Wilson Lentini, BorgWarner’s general manager for emissions, thermal, and turbo systems in Brazil.

The advance of electrification in other parts of the world is also beginning to open up opportunities for plants in Brazil, which are taking over the supply of components that are no longer being produced in regions that are more advanced in electrification, such as Europe.

According to Mr. Rezende, the company will start next year exporting these products to Argentina, Uzbekistan, and South Korea, meeting global needs of a customer.

In 2022, 4% of BorgWarner’s sales of starter motors and alternators were injected in expanding the capacity of the production lines for these components at the Brusque plant, in Santa Catarina. The plan is for these investments to reach the equivalent of 6.5% of sales in 2023 and to set up a third production shift at the plant. Besides Brusque, the group’s other plant, in Itatiba, São Paulo, also operates in three shifts.

For Mr. Rezende, in the age of electrification, local production continues to be a priority whenever possible. “The decision for the fourth battery system factory in Brazil was a strategic one, so the company will be able to serve customers in the region.”

*By Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Proposals to tax agribusiness production creates legal imbroglio

Tax experts question efforts like the ones that angered farmers in Paraná and Goiás

11/25/2022

After confusion in the Goiás Assembly on Tuesday, discussion about fund fed by agriculture production had to be postponed — Foto: Denise Xavier/Alego

After confusion in the Goiás Assembly on Tuesday, discussion about fund fed by agriculture production had to be postponed — Foto: Denise Xavier/Alego

Two proposals aiming to tax agriculture production and commercialization in Goiás and Paraná caused turmoil this week and, as a consequence, the cell phones of tax experts used to advise businesspeople in the sector rang more frequently in the last days.

Similarly, the two bills suggest the creation of funds fed by percentages collected from the production and commercialization of agribusiness chains. In Goiás, the proposal for the creation of the State Infrastructure Fund (Fundeinfra) came from Governor Ronaldo Caiado. In Paraná, it was suggested by Governor Ratinho Junior.

The governors, both supporters of President Jair Bolsonaro, faced strong resistance from the sector, which led to a riot in a legislative session in Goiás. The sector is a stronghold of Bolsonarism and felt “betrayed.”

Goiás’s Fundeinfra was approved last Wednesday and will collect up to 1.65% of the agricultural and mineral production, which is expected to yield R$1 billion a year. The money will be used for infrastructure and will not go through the state treasury. According to the secretary general of Goiás, Adriano da Rocha Lima, the money will go to the agency responsible for public works.

The funds will be managed by a council formed by representatives of the government and the agribusiness sector, he said. After the approval of the fund by the state deputies, the next step is the preparation of the decree that will regulate the collection in each segment. Goiás will tax soy, corn, and sugarcane.

“A dialogue will be opened to adjust the collection in the most assertive way possible,” Mr. Lima told Valor. According to him, the collection will compensate the impact on the state cash flow of sales tax ICMS reduction in some segments, such as fuels.

“It is a way for the sector to contribute with something that, in the end, will return to the producer himself. If the roads improve, there are logistical benefits and costs fall,” he said.

The formation of funds that tax the sector to increase the cash flow of states is not a recent strategy. It has existed since 1999 when Mato Grosso do Sul created the Road System Development Fund (Fundersul). Then, in 2000, another state, Mato Grosso, created the State Fund for Transportation and Housing (Fethab). This fund regulates the contribution collected in the country’s largest agricultural state and has served as a reference for others that were created afterward.

Among them are Maranhão’s State Fund for Industrial Development, approved in 2005, and Tocantins’s State Fund for Transportation, in 2019. For the most part, the money collected is earmarked for infrastructure, construction works, and logistics projects.

Besides the levy on agricultural products, these funds have other points in common, such as the definition that contributions are not compulsory but tied to the concession of tax benefits in the states. Tax experts question this aspect.

Another common point in those funds is money management. In general, they are managed by boards of directors that may include the participation of private entities.

Tax attorney Marcelo Guaritá, partner at the Peluso, Stupp e Guaritá law firm, explains that the contributions are required in exchange for some incentive, benefit, tax calculation regime, or tax deferral.

As a result, there is a consensus among tax specialists about the creation of a kind of “disguised tax.” The problem with funds that tax agriculture production, critics say, is not the search for revenue for public policies, but the way this search is being carried out.

“These funds are a legal fiction. They are not treated as taxes, so they are not under tax or budget legislation,” said Mr. Guaritá. According to the lawyer, who has been a member of São Paulo Municipal Tax Council, it is like “signing a blank check” and handing it into the hands of the governors.

Mr. Guaritá and other tax lawyers consulted by Valor said that the tool was designed by the states as a way to collect taxes “outside the box” of the tax rules to avoid constraints.

Mr. Guaritá reiterates that several constitutional principles guide tax collection in the country. “Taxes need to be shared with municipalities, for example. In Mato Grosso, part of the funds goes to the Judiciary branch, to the Legislative branch, and even to private associations. If it were a tax, it wouldn’t work like this,” he said.

Even the terms fee, tax, and contribution could not be used in these collections. Each one of them has a different meaning in the tax system and is subject to different rules, said Henrique Erbolato, a tax lawyer and partner at Santos Neto Advogados.

In Mato Grosso, where Fethab is in force and collected more than R$2.7 billion in 2021, the collection of the contribution varies between 0.03% and 11.5% of the Standard Fiscal Unit of Mato Grosso (UPF), depending on the product. In Mato Grosso, the sector’s contribution is collected from soy, corn, cotton, beans, wood, and cattle. The gross production value of the agribusiness sector in the state is around R$200 billion per year.

The contribution is not mandatory, but in Mato Grosso, it is tied to sales tax ICMS exemption. If a soy exporter chooses not to contribute to the fund, he will have to pay ICMS earlier to the state, and it will be refunded only after the international shipment is made.

Due to the possibility of refunding, the Federal Supreme Court (STF) understood that there is no compulsoriness. The court analyzed the functioning of the collection that allocates money to Fethab in direct action for the declaration of unconstitutionality (ADI). “In the end, it’s a matter of cash flow,” said Mr. Lima, from the government of Goiás.

Critics say this is not so simple. “It turns out that this [how the fund works] leads a taxpayer to prefer to deliver a little bit to the fund rather than having to face a whole bureaucratic process to get back a money that before [the emergence of the fund] he wouldn’t need to disburse [ICMS on exports],” said Henrique Erbolato, a tax lawyer and a partner at Santos Neto Advogados law firm.

João Reis, a partner at Machado Meyer Advogados, added that the charge ends up causing distortions in the chain that affect the competitiveness of Brazilian products abroad. “There are other ways to compensate for revenue losses in the states, such as in Goiás. There are legislative bills that offer alternative solutions and can be discussed in Congress, because they involve the Brazilian state.”

The debate in the Supreme Court is not over. The emphasis is on the constitutionality of the funds. “The Federal Constitution has a provision that says that it is not up to any state to restrict the hypotheses of tax immunity,” stated Mr. Erbolato.

The issue was analyzed by tax specialist Heleno Torres, a professor at the Law School of the University of São Paulo (USP). Mr. Torres’s opinion says that Fethab legislation cannot condition the tax benefit to a collection: “In other words, the threat of revoking the non-taxation of export operations runs up against the prohibition of this taxation.”

“It is flagrantly unconstitutional,” continues the text. Besides paying ICMS, exporters are also exempted by the Constitution from federal tax IPI, social taxes PIS and Cofins, sales tax ICMS and municipal tax ISS.

Among the authors of at least three ADIs waiting in the Supreme Court queue are Abiec, an association that represents meatpackers, and Aprosoja, a soybean growers association. Two of them are waiting to be evaluated by Justice Gilmar Mendes.

If the Supreme Court decides in the future that the collection of Fethab was undue, for example, there is no guarantee that the money will be returned to taxpayers. Issues involving the return of large sums are subject to the invocation, by the states, of the argument of financial loss to the cash flow.

“Even if in a few years they rule that the collection could not have occurred, they [states] invoke this to get the collection to be valid after the judgment,” says the partner of Santos Neto.

Even as the decision of an ADI is valid for everyone, lawyers have been advising clients to go to court individually. “The taxpayer who just waited for the ADI’s decision can get rid of the payment [only] from then on, while those who went to court individually beforehand have their right guaranteed. This is how the Supreme Court has understood it,” explained the tax specialist of Santos Neto firm.

This may be a favorable step for the interests of law firms, but the professionals themselves recognize that it is not good for legal security in the country. Given the legal scenario, political pressure moves forced by the sector at this moment would be a more efficient alternative to stop a possible wave of new funds of this nature, according to legal experts.

*By Erica Polo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Commercial orange production in Florida at risk of ending

Specialist says that U.S. industry will have to import fruits very soon

11/23/2022

The moment when the U.S. orange juice industry will operate only with imported fruit is near. In 21 years, the production in the state of Florida, which concentrates the largest citrus grove in the country, fell to 28 million from 230 million boxes, according to the U.S. Department of Agriculture (USDA). With the damage caused by the hurricane Ian, the volume may shrink to about 14 million boxes.

“To run a juice plant you need to have a good volume of fruit, otherwise the cost per tonne gets too high. So, the discussion at this moment is whether it is viable to continue producing oranges or import 100% of the raw material”, said Andrés Padilla, industry specialist of Rabobank Brazil to Valor. In his opinion, the situation is irreversible. “When you think that production has already fallen almost 90%, the chance of going to zero is great.”

Mr. Padilla affirms that U.S. farmers made a mistake in their strategy to combat citrus greening, a phytosanitary problem. Unlike Brazilian producers of the citrus belt that spreads over São Paulo and Minas Gerais, who uprooted the infected trees and planted new ones, the U.S. citrus producers tried to control it. “Today, all the plantations in Florida have the disease”, he commented.

In addition to the hurricanes and the greening, Florida’s production has suffered due to the rising cost of land and labor. “Of the four big plants that are left, one or two at the most will run at the next harvest. It’s not worth opening shifts because the losses are for sure,” said the analyst.

The drop in the supply of oranges in the U.S. will open space for a greater volume of exports from Brazil, whose production is recovering after two years of problems caused by La Niña. According to the Rabobank specialist, the country is likely to reach 314 million boxes, a 20% increase. But he considers that, in the short term, the low Brazilian stocks of the beverage will limit the increase in shipments.

But the juice demand of today, and the future, is a big question mark in the U.S. and in the world. According to Mr. Padilla, consumption has declined dramatically over the past decade. From the 2016/2017 harvest to the current cycle of 2022/23 the projection is for a 13% global retreat, to 1.56 million tonnes of the beverage equivalent to concentrated and frozen product (FCOJ).

“Not so long ago, a negative image of the product was created – due to the calories – from data that were not the most correct from the scientific point of view. Several nutritionists started to tell people to opt for the consumption of the fruit in natura”, he explained.

To the Rabobank expert, the industry – including the Brazilian industry – also failed to advance in emerging markets, such as China: “The Chinese demand grew a little, but not enough to counteract the fall in consumption in Europe, the biggest import market.”

In the medium term, the orange high may sustain the orange juice contracts in the New York Stock Exchange. However, at a time of global economic recession, the high price may accelerate the reduction in consumption.

*By José Florentino — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Brazil becomes Sylvamo’s export platform

Country, which accounts for 40% of results and has the company’s best margin, has consolidated as a gate to mature markets

11/23/2022

Rodrigo Davoli — Foto: Silvia Zamboni/Valor

Rodrigo Davoli — Foto: Silvia Zamboni/Valor

Sylvamo, an independent company since the spin-off of the printing and writing paper assets of International Paper (IP) worldwide, found a new strength in the Brazilian operation a year after listing it shares on the New York Stock Exchange (NYSE).

Brazil, which accounts for 40% of results and has the company’s best margin, has consolidated as a platform for mature markets with a developed paper industry, including the United States and Europe, thanks to the competitiveness of the papers produced in the local mills.

The competitive advantage starts with eucalyptus forests, which are more productive and have shorter cycle, and is sustained with the integrated production of pulp and paper, said Rodrigo Davoli, Sylvamo’s CEO in Brazil and vice-president for Latin America.

“Brazil has great relevance in the business and remains extremely strategic,” said the executive. In the third quarter, net sales in Latin America, served by the Mogi Guaçu (São Paulo), Luiz Antônio (São Paulo), and Três Lagoas (Mato Grosso do Sul) mills – the only one that does not have integrated pulp production – totaled $270 million, 35% higher than a year earlier. The adjusted EBITDA margin was 27%, compared with 18% in Europe and 20% in North America.

In 12 months through September, the Brazilian operation reported revenues of more than $1 billion and produced a little more than 1 million tonnes of paper. About half of this volume was absorbed by the domestic market, while the other half was exported mainly to Latin America, maintaining the mix seen a few years ago.

Under Sylvamo’s structure, looking at Brazil as a viable exporter could help make viable an old plan to build a second paper machine in Três Lagoas. Asked about the project, Mr. Davoli said the company is always studying opportunities. “Thinking of Brazil as an export platform, it may be that at some point [the company] has to talk about capacity expansion. Brazil is the place if it has to make an expansion decision.”

The Latin American market for printing and writing papers was one of the most affected by the pandemic and demand fell as much as 30% in the first year. There has already been a recovery and Brazil is close to returning to pre-Covid levels. From January to September, according to the Brazilian Industry of Trees (Ibá), the national production fell 4.1% year-over-year, to 1.65 million tonnes. Domestic sales were stable at 1 million tonnes and exports grew 6.1% to 683,000 tonnes.

Sylvamo grew above average in the Brazilian market, according to Mr. Davoli, as well as in the other regions where it is present. “The third quarter was quite similar to the second quarter. We had an important shutdown [for maintenance] in the Mogi Guaçu plant that impacted the results, but the paper business is extremely resilient,” he said.

At this moment, the Brazilian operation sees opportunities in cost reduction projects with high return, including marginal expansion of production capacity. There are also possibilities in automation and modernization, in line with the financial discipline strategy. Together, these projects total about $10 million in investments. The company is the market leader in cut-size paper, with a 53% share. It used to be 50%.

In general, faster inflation has been the main concern of the paper industry and one of the most relevant pressures came from logistics and freight prices, particularly for foreign trade, the executive said. “International logistics was a complex theme and weighed too much on margins. We see signs of improvement, but still not much for Latin America,” he said.

On the demand side, there is recovery in different areas, especially education, which accounts for 30% of the consumption of printing and writing paper in Latin America. There is also expansion in other applications, such as e-commerce labels or thermal papers, whose base is offset paper.

Looking ahead to 2023, the company adopts a cautious tone. Although the perception is of solid demand in Brazil, it is unclear how the dynamics outside the country will be. Proper cost management will remain a priority at Sylvamo, whose strategy has been to try to pass on as much costs as possible in this line.

Globally, Sylvamo reported net sales of $2.7 billion up to September. In October, it concluded the sale of a unit in Russia for $420 million – the decision to sell was made because of the invasion of Ukraine – and announced the purchase of an uncoated paper mill in Nymolla, Sweden, from Stora Enso, for $150 million.

*By Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Companies go to court to stop Boeing from recruiting their engineers

Class associations accuse U.S.-based aircraft company of threatening national sovereignty

11/23/2022

Boeing’s offensive to recruit engineers from the elite of Brazil’s aerospace and defense industry has ended up in court. Two trade associations have filed a lawsuit to try and stop the U.S.-based plane maker from hiring “highly-skilled engineers” that are currently working in strategic companies of the country’s Defense Industrial Base (BID).

In one year, Boeing has taken more than 200 engineers from other companies to its center, in the most acute movement of brain drain that this industry has ever experienced, according to estimates by representatives of the Brazilian Association of Defense and Security Materials Industries (Abimde) and the Aerospace Industries Association of Brazil (Aiab).

In the suit filed Tuesday in the 3rd Federal Court of São José dos Campos, the trade groups warn that the U.S.-based company’s move puts the survival of companies in the sector at risk and threatens national sovereignty. The goal of the suit is to stop the “systematic hiring that leaves a trail of predatory actions in the companies of the BID, until alternatives are discussed that can guarantee the preservation of national sovereignty.”

With the move, the intention is also to bring the American company to the center of the debate, as well as the Ministry of Defense and the Federal Attorney General’s Office (AGU). “These are hundreds of engineers, but the core of the issue is not quantitative. It is qualitative. That is the difference with other brain drain processes,” said Aiab head Julio Shidara.

“Aiab defends free competition and the free market. But such principles are not absolute. They must be subject to constitutional imperatives such as national sovereignty,” he added.

So far, 10 of the most important companies in the defense sector have had engineers “co-opted” by Boeing, and some have lost about 70% of their staff in specific areas essential to the business, according to the associations.

In Embraer’s case, the situation would be more worrisome given the access that Boeing had to “proprietary information” during the negotiation period for the purchase of the Brazilian manufacturer’s commercial aircraft, which did not move forward. Embraer and Boeing have taken the conflict to arbitration and there is no outcome yet.

In the associations’ view, Boeing’s move unbalances the market and represents a threat because the companies that make up the BID “aim to constantly update the Navy, Air Force, and Army technologies.” “The companies that are being harassed are the ones that provide technology that maintains the defense capability of the Armed Forces,” they said.

Boeing declined to comment.

*By Stella Fontes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Companies perform better than expected in Q3 driven by GDP growth

Overall figures were not disappointing, but slowdown and interest rates are a concern

11/23/2022

Emy Shayo Cherman — Foto: Ana Paula Paiva/Valor

Emy Shayo Cherman — Foto: Ana Paula Paiva/Valor

Brazilian public companies reported good results in the third quarter, supported by the country’s better-than-expected economic activity in the period. However, the persistence of inflation and uncertainty about the interest rates are raising the risk of deceleration in the following months.

According to an analysis carried out by Valor Data with 408 public non-financial companies, excluding the effects of Petrobras and Vale to avoid distorting the sample, net profit fell by 31% year-over-year and increased 15% over the second quarter. Revenues advanced 15% in one year, to R$931.2 billion, and grew 5% over June.

Production costs, although lower when compared to the second quarter – with the reflection of the invasion of Ukraine by Russia – are still at high levels. The 21% increase was greater than the advance in revenue and ate into profits.

“Overall, our perception of the results was positive, better than expected,” said Emy Shayo Cherman, Latin America and Brazil equity strategist at J.P. Morgan. She said the market had low expectations, but GDP growth projected for the third quarter, compared with initial estimates of contraction, helped results to overcome projections.

The main positive highlights were the oil and gas and pulp and paper sectors. “Petrobras reported revenues above the consensus, even with Brent prices below the previous quarter,” said Victor Penna, manager of the market analysis team at BB Investimentos. For him, the sector will be strong in the fourth quarter, since demand and supply remain tight, which would be enough to hold oil prices up.

The market now monitors the controversy surrounding the payment of dividends by Petrobras. In the earnings conference call, the chief financial and investor relations officer, Rodrigo Araújo Alves, said the company’s cash is close to the optimal point of $8 billion and that debt is “stable, controlled” around $65 billion.

Most sectors posted mixed results in the third quarter, said XP’s strategist Jennie Li. “We didn’t see any where all companies had positive or negative results, it depended a lot on the circumstances they were in.”

Construction companies reported results above the expected by the market, while the greater devaluation of iron ore and steel, driven by China, pressured the results of Vale and steelmakers.

Ms. Shayo, with J.P. Morgan, noted that the improved activity of the Brazilian economy impacted mainly services, with disappointing consumer spending figures, as shown by the results of retailers. “Expectations were unrealistic and there was an overestimation by the market.” She recalled that discretionary consumption was especially impacted by the corrosion of the population’s income.

The higher interest rates, still with virtually no effect on the overall sample, have done considerable damage to the balance sheets of consumer companies, as evidenced by the comments of executives and the alarming numbers on the bottom line – the rise in interest rates increases the cost of debt, which is higher because companies have capitalized in recent years.

But that’s not all. The deleterious effect of interest rates also appears in sales. The high default rate has hurt the results of retailers such as Americanas, Magazine Luiza, and Via. The chief financial and investor relations officer of Magazine Luiza, Roberto Bellissimo, said in the earnings conference call that the company is issuing fewer cards as a way to face this situation.

The worsening of the financial result of Americanas, which was negative by R$612.3 million, more than doubled compared to the negative result of the third quarter 2021. The company links the bad figures to the high interest rates in the period, which led to the net loss of R$211.5 million, and to the 19.6% drop in sales of electronics, because they are products of higher average ticket that depend on credit.

In the case of Grupo Pão de Açúcar (GPA), many stores managed to partially pass on inflation to prices, but in regions where competition is fiercer, especially with the Extra brand in the suburbs of São Paulo and Rio de Janeiro, this is harder to do, CEO Marcelo Pimentel told analysts in the earnings conference call. The investments related to the quality of fruits and vegetables had an initial impact, but the group could not pass on direct inflation to these prices.

“If fiscal and political uncertainties remain in place, the Central Bank may have to raise interest rates again, which will put further pressure on companies’ bottom lines,” said Ms. Li. She notes that large publicly traded companies still have ways to protect margins by being more resilient, which reduces liquidity risks.

“This increase [in financial costs] is problematic for the company when it is not capitalized and is burning cash,” said Victor Natal, Itaú BBA’s strategist for individual clients. He points out that it is natural for companies’ financial expenses to increase and that they are used to this amid Brazil’s history of high interest rates. “I believe we have already been through the worst in relation to this,” he said.

For the fourth quarter, the banks believe there will be a slowdown, even with the period being the best for consumer companies, which usually rely on Black Friday and the holiday season. “Sales are likely to increase compared to the third quarter, but they will still be weak year-over-year,” said Mr. Natal, with Itaú BBA.

In the view of Mr. Penna, with BB Investimentos, the atypical fourth quarter, with the FIFA World Cup, is likely to boost consumption figures, especially of beverages. “Ambev may benefit in the ‘away-from-home’ segment, with increased consumption in bars and restaurants,” he said. “The purchasing power of consumers is a point to keep an eye on.”

*By Felipe Laurence, Victoria Netto — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by

Lenders seek opportunities in benefits segment

Banks and fintechs see in the sector opening room to enhance cross-selling and financial services

11/23/2022

The opening of the food and meal card segment, which will take place as of May 2023, is expected to bring more opportunities for banks and other financial institutions to strengthen their operations in the benefits sector. With an estimated volume of R$150 billion after this regulatory change, the segment itself is already interesting, but for banks, it also represents a way to increase their relationship with companies, including small ones, and to enhance cross-selling.

Bradesco and Banco do Brasil operate in this niche through Alelo, which is part of EloPar, and now Elo will also start operating in the open arrangement. Santander created Ben in 2019 and Itaú bought a stake in Ticket the same year.

As with credit cards, the world of benefit cards will be divided between open and closed arrangements. In the closed arrangement, which is the traditional model for this market, issuing, accreditation, and the card’s flag are all done by the same company. The values, in turn, can be used in the accredited network. Today, this market is dominated by Alelo, Sodexo, and Ticket, which hold a slice of almost 80%. The rest is spread over almost 180 local and regional companies.

The bulk of the market is in food and meal benefits, which can be offered to the workers with or without tax benefits for the employers through the Worker’s Food Program (PAT). There are, however, several other types of benefits that can be offered, such as culture vouchers, pharmacy, and fuel, among others.

In the open arrangement, issuing, accreditation, and flagging are done by different institutions. More recently, benefits startups have started to operate through this “flagged” model, which expands the acceptance network. As of May, the open arrangement will be able to offer companies the same tax benefit as the closed one under PAT.

Márcio Alencar, Alelo’s head of digital strategy, marketing and business says that today the company has a 30% share in PAT, or R$40 billion, and another R$6 billion in its ecosystem in other benefits, which already operates in an open arrangement model. He believes that, with the regulatory changes, this 85%/15% ratio between closed and open arrangements tends to seek a balance in the medium to long term.

“It’s not because the open arrangement in PAT starts in May that there will be mass migration. It will be gradual. We have long-term relationships with the Human Resources departments of companies, for our more than 1 million stores we already offer several other financial services, and the end customer is already very well served here. He is not going to simply change overnight.”

In any case, Alelo is already testing a flexible benefits model in partnership with Elo expected to be launched in early 2023. Pedro Cardoso, head of new business at Elo, says that since decree 10,854, issued in November 2021, which established an 18 month timeframe for the entry into force of the open arrangement in PAT, the company had been studying entering this segment. “We have one of the largest payment arrangements in Brazil, with more than 8 million accredited establishments, and 45 million cards issued. So, we started studying how to use this network to structure a benefits product.”

Since in the open arrangement Elo is the flag and Alelo is the issuer, they will be together and will not compete directly with each other, although an eventual expansion of this partnership could end up cannibalizing Alelo’s closed arrangement market. “There is no conflict, there is room for collaboration. It will be up to the company to contract what is best for its employee, the closed or the open arrangement,” said Mr. Alencar.

Ignacio Estivariz — Foto: Divulgação

Ignacio Estivariz — Foto: Divulgação

Mercado Pago entered into the benefits market around three months ago. According to Ignacio Estivariz, the company’s senior officer of digital banking, the company realized it could modernize this segment just as it did with the digital account. In partnership with Visa, the same plastic is used for the debit and benefits function. In the app, there are sub-accounts, since the meal benefit, for example, can only be used in restaurants. “For the company, it makes it easier to manage all benefits in one card, and the client still has all the benefits of the free of charge Mercado Pago account,” explained the executive.

Mr. Estivariz points out that Mercado Pago currently has 35 million users in Brazil and that, in theory, this is the potential market for the benefits product. He states that the fintech will get the interchange fee from the card, but that this is not the main reason for offering the benefit. “We are always looking at where technology can bring a differentiator, where the current experience is not very good. Now we are in this process of talking to HRs, bringing in the companies. Not to mention the benefits of financial inclusion, since the benefits card is often the first step on that path,” he said.

Mr. Estivariz mentions a company in Manaus (Amazonas) in which employees still received their meal cards in paper vouchers which were accepted at a single restaurant. Now, with the agreement with Mercado Pago, everything was digitalized. Marco Garcia, the owner of the packaging company Rubberon, reveals that many of his employees had access to a debit or credit card for the first time through Mercado Pago. The positive reaction of the company’s employees has spread throughout the region to a point where other entrepreneurs have sought Mr. Garcia out for more details about the product and directions on how to implement it in their businesses.

Ticket, a brand of Edenred Brazil, has a broad portfolio of benefits. Besides food and meal cards, it offers solutions for transportation, culture, incentives and rewards, salary anticipation, health, well-being, education, and remote work. In late 2021, the brand launched Ticket Vantagens, which offers a series of benefits to users, such as a online marketplace with selected products, discount club with cashbacks, and access to a corporate education platform.

“The constant increments in the portfolio are part of the brand’s strategy of investing in relationship and digitalization. The solutions reinforce the brand’s digital transformation, respecting labor legislation and union agreements,” said the company to Valor.

In 2019, Itaú acquired an 11% minority stake in Ticket, which remains independent, with Edenred as its parent and manager. According to the company, the partnership enabled the bank to expand its portfolio of HR solutions offered to its corporate clients. “At the same time, the new distribution channel strengthens Ticket’s existing sales organization and arrives to support the brand’s constant growth in the Brazilian market.”

The entry of the open arrangement model in PAT will be important for newcomers in the market to be able to access the HRs of large companies as well. This is because the program’s tax benefit applies to companies that calculate their taxes based on the so-called real profit. “With the opening of the market, larger companies may start considering new providers,” said Karen Fletcher, leader of the legal department of Caju, a startup founded in 2020 that concentrates benefits on a credit card with the Visa flag. Today, 13,000 companies with about 400,000 users use the Caju card.

Other changes that may increase competition in the sector are the prohibition of the bonus given to HRs of the hiring companies by the issuers of food cards, which ends up increasing the rate that these issuers charge restaurants and supermarkets, and the post-payment (deadline for HRs to pay the value of the contracted benefit), said Ms. Fletcher. “For the new entrants, it was very difficult to compete with companies that could afford offereioffer both the payment term and aggressive discounts.”

The changes in the rules for food and meal cards were made by decree at the end of 2021, and by a provisional measure approved this year. The discussions were not simple. There was much debate, for example, about the freedom for the user to change the management of his or her benefit card. This portability may even need to be postponed since there is resistance and sources from the sector comment that the operationalization is not simple and there are still regulatory doubts about how it will be done.

For portability to work, government regulations will be needed to define, for example, which body will manage this registry, whether Central Bank, Ministry of Economy, or Ministry of Labor. The Brazilian Association of Worker’s Benefit Companies (ABBT) has been active in talks with the government, as has Zetta, an association founded by Mercado Pago and Nubank, which also represents other fintechs. The transition to Lula administration, however, has somewhat delayed the talks.

With the arrival of the open arrangement, it is still likely that there will be a consolidation in the market and local companies will end up being bought out or even shut down if they cannot adapt to the new features, which require investments in technology. An obstacle is that the market leaders already have a very large market share, and, among these smaller companies, many do not have the governance standards required by the large groups, which makes an eventual M&A operation more complex.

When contacted, BB and Bradesco preferred to speak only through Alelo. Itaú, Sodexo, and Santander declined to comment.

*By Álvaro Campos, Mariana Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo
/by

Brazil will run IDB for first time

Ilan Goldfajn was supported by the United States, Canada, and Mercosur

11/22/2022

Ilan Goldfajn — Foto: Ana Paula Paiva/Valor

Ilan Goldfajn — Foto: Ana Paula Paiva/Valor

With the decisive support of the United States, Canada and the entire Mercosur, former Brazil’s Central Bank President Ilan Goldfajn was elected Sunday president of the Inter-American Development Bank (IDB). Mr. Goldfajn, the first Brazilian in the position, will take office for a five-year term on December 19th.

The victory was considered “overwhelming” by the Brazilian government, which celebrated the conquest. The IDB’s election system considers the votes of countries according to their participation in the institution’s capital. Mr. Goldfajn obtained the support of 17 countries, which correspond to more than 80% of the voting power.

“Taking over the presidency of the IDB is an honor and a great opportunity for me, as a Brazilian, after 63 years that JK [Juscelino Kubitschek] had this dream,” Mr. Goldfajn told Valor.

In his first speech after being elected president, Mr. Goldfajn pledged to lead the institution “in all its diversity.” “I will be the president of the high-income, middle-income, and low-income countries. I will be the president of the regional members and also of the non-regional members. I will be the president of the countries of South America, Central America, North America, and the Caribbean countries,” he said in a video posted on Twitter by the IDB’s executive director for Brazil and Suriname, Martha Seillier.

The result shows that the noise caused by former Finance Minister Guido Mantega, who sent letters to a number of countries asking for postponement of the election, has been contained. The maneuver left some countries confused about the Brazilian candidacy.

“This is a candidacy of the Brazilian state, which will govern on behalf of and for the benefit of the entire region,” Foreign Trade Secretary Lucas Ferraz, who coordinated Mr. Goldfajn’s campaign and was responsible for negotiations with the organization’s member countries, told Valor.

Mr. Ferraz pointed out, on the other hand, that this is a “legacy” of president Jair Bolsonaro (Liberal Party, PL) and the Minister of Economy, Paulo Guedes. It was also one of the rare victories of Brazilian diplomacy under the Bolsonaro administration, in which the promises of gains in the rapprochement with Mr. Trump did not materialize, for example.

Despite resistance from some wings of the new administration, Mr. Goldfajn defends causes that are common to President-elect Luiz Inácio Lula da Silva and the Biden administration, who has been advocating a more present role in issues such as climate change.

In a statement, the Ministry of Economy said that Mr. Goldfajn’s election is a result of the campaign led by the ministry. Moreover, it stressed that it is a recognition of the platform presented by Brazil: physical and digital infrastructure; fight against poverty, inequality and food insecurity; and climate change and biodiversity.

To Márcio Olímpio Fernandes, political analyst at Ohmresearch, Mr. Goldfajn’s election means an attempt at stabilization for the IDB after a tense period of the Claver-Carone administration, whose appointment by Mr. Trump broke the tradition of the institution always being chaired by a Latin American.

According to Pedro Silva Barros, economist at Ipea and head of the institute’s mission to Venezuela under the Lula and Rousseff administrations, the expectation in the new administration is that Mr. Goldfajn “will not repeat Claver-Carone’s mistake, which was to make a Trumpist management without [former President Donald] Trump” in power.

“What the new government of Brazil expects is for Mr. Goldfajn to do a Latin American management, not a pro-Bolsonaro management without Bolsonaro,” he said. “There will be in the coming period a resumption of Latin Americanism led by Brazil and Mr. Lula. The IDB can and should support that agenda.”

Source: Valor International

https://valorinternational.globo.com/
/by

Minerva in talks to acquire slaughterhouse in Uruguay

Brazilian company signed an exclusivity agreement with Japan’s NH Foods

11/22/2022

NH Foods had paid nearly $135 million for BPU five years ago — Foto: Divulgação

NH Foods had paid nearly $135 million for BPU five years ago — Foto: Divulgação

Minerva Foods is close to buying another facility abroad. The Brazilian company signed an exclusivity agreement with Japan’s NH Foods to discuss the acquisition of Breeders & Packers Uruguay (BPU), an Uruguayan slaughterhouse with the capacity to process nearly 1,000 animals per day.

Sources say Minerva is in the due diligence stage. The deal is expected to be defined by December 15, when the exclusivity period ends.

Sources say the amounts were not defined yet, but Minerva is expected to disburse $35 million to $45 million. Rabobank is advising Minerva.

NH Foods decided to sell the Uruguayan operation amid the down cycle of the cattle-raising business in the neighboring country. NH Foods had paid nearly $135 million for BPU five years ago.

If it buys the facility, Minerva will expand its processing capacity in the country by 40%. The company currently has three units in Uruguay, with a combined capacity of 2,500 heads of cattle a day. In Uruguay, Marfrig, another Brazilian company, is the leading meat producer.

Minerva’s decision to take over BPU is based on the bet on a turnaround of the cattle-raising market in Uruguay with a larger offer of cattle in the next years. In a recent conference call with analysts, the company cited better perspectives for Uruguay.

The deal with NH Foods in Uruguay may start a global partnership and involve NH’s operations in Australia. Nippon Ham owns the third-largest beef facility in the country.

Minerva is valued at R$8.1 billion on the stock exchange.

*By Luiz Henrique Mendes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
/by