Posts

Analysis: Costs, interest still weigh on balance sheets

Retailers suffered both from inflation and interest on debts

11/17/2022

Companies in this sample reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion — Foto: Divulgação/B3

Companies in this sample reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion — Foto: Divulgação/B3

On the last day of the third-quarter earnings season, it is already possible to glimpse the state of public non-financial companies.

Taking the benchmark stock index Ibovespa as a base and excluding banks, insurance companies, and holding companies – and also heavyweights Petrobras and Vale, so as not to distort the numbers –, there are about 70 companies that can tell the story of the quarter. It would not be necessary to do so, but it should be noted that this is a tiny sample of the Brazilian business world and about 20% of the total number of publicly traded companies.

They are the most traded stocks and, for this reason, are part of Ibovespa. They reported a combined sales revenue of R$1.6 trillion in the January-September period and boast a market capitalization of nearly R$2 trillion, considering Monday’s prices.

Costs, again

Once again, costs weighed considerably on the result. The situation has improved in relation to cost inflation, and the rise in raw material prices, especially after the start of the war in Ukraine. There has been a cooldown, but the levels are still high compared to last year.

The numbers tell this story. This group of companies increased their sales revenues by 10% in the quarter and 15% in the nine months (for reference, official inflation is 6.47% in the 12 months through October). Costs, however, are up 17% in the quarter and 20% in the nine months. Excluding administrative expenses, sales, marketing, fees, and so on, the calculator is unforgiving. The operating profit was down 30% in the quarter – and 15% lower through September. It is a still profitable sample, but with a downward trend. Of the companies selected, 15 reported a loss (about 20%), compared to 11 in the third quarter last year (15%).

Interest rates

Going down the earnings reports, one comes to the dreaded financial line items, usually scary in times of exchange rate instability. This is not the case now. One difference with previous quarters was that this time companies complained a lot more about interest rates, whose effects hit their cash flows.

Retail suffered both from inflation on the sales line and interest on debts, the remedy against inflation that increased financial expenses. In the report that accompanies the financial statements, Americanas summarized the operating situation: “Between July and September, a combination of factors in the macroeconomic scenario challenged retailing as a whole in the country. The industry raised prices sharply, reflecting inflationary pressure and high interest rates, and Brazilian households, in debt and with reduced purchasing power, stopped buying more expensive items.”

Besides scaring consumers, the high interest rates have taken a toll on the companies’ finances. Cash-and-carry chain Assaí reported a net financial expense of R$440 million, up 168%, which accounted for 3.2% of sales. According to the company, this result continues “being impacted by the high interest rate, with an increase of about three times the [interbank deposit rate] CDI in the period, and the higher volume of gross debt given the backdrop of high investments in expansion, in particular, the project of hypermarket conversions.”

It was not only retail, of course. Positivo Tecnologia faced problems with cost and interest rates as well. The manufacturer of computers and electronic voting machines increased sales by almost 30%, but costs advanced further and ate into the gross margin. Financial expenses took another chunk of the profit because of interest on higher debt, according to the company. In the Simpar group, which owns logistics and car-rental companies, the financial result was negative by R$1.25 billion, four times higher. The figure surprised the market and the effect was immediate: the shares closed down 8%.

By Nelson Niero — São Paulo

Source: Valor International

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

High rates will double companies’ costs with interest

Vivian Lee — Foto: Silvia Zamboni/Valor

The companies that tapped the capital markets to issue debt in 2021 taking advantage of the very low Selic rate will see their costs with interest expenses almost double in 2022. This is because, of the R$250 billion of funds raised last year through bond issues, 76% are pegged to the interbank deposit rate (CDI).

This higher cost does not yet bring to the fore a solvency risk for those companies that, in most cases, still require low leverage. But it will certainly affect profitability, with a direct effect on profit and, consequently, on growth capacity in the medium term.

“The higher interest rate causes a redistribution of results, which used to go to shareholders and now also go to creditors,” said Alexandre Muller, JGP’s managing partner. In order to estimate the impact of the higher Selic policy interest rate, which started 2021 at 2%, the analyst looked at the evolution of the debt of the companies that make up IDEX-CDI, an index created by JGP that includes CDI-linked, liquid bonds. Considering an average CDI of 4.46% last year, the effective interest cost of these companies will be R$6.68 billion in 2021. If the Selic increases to 12%, as predicted by the market, the average CDI this year would increase to 12.31%, raising the cost of this group of companies by 84% in 2022, to R$12.31 billion.

Mr. Muller explains that one indicator tracked by JGP is the return on invested capital (ROIC). A given company whose operations generate an 8.9% ROIC creates value when the cost of capital is 6.5%. The point is that when the cost of capital goes up, smaller, less profitable companies suffer. “Interest rate changes cause more market concentration, because larger companies, which have the power to adjust prices, can survive, while smaller ones have a harder time.”

But higher interest rates are not the only factor making companies’ debt more expensive. Vivian Lee, a partner at Ibiúna Investimentos, recalled that the spread, which is the rate paid above the CDI for the bonds, can also go up again in the coming months. She recalled that in 2021, as investors migrated to fixed income assets from the stock market, there was a strong flow to corporate debt funds, which reduced the spread substantially, to nearly 1.4%. The companies took advantage of the favorable moment and accelerated issuance between October and November. At the same time, faced with a more uncertain environment of rising interest rates, corporate debt funds became more selective at the end of the year.

With a more balanced demand and a flood of offerings, the spread rose to around 1.8%. “The market was busy at the end of the year, showing that even with the migration to fixed income, investors will not support such low spreads,” he said. The point, he said, is that issuers who need to roll over their doubts or even strengthen their cash reserve this year have to do so in the first half of the year, because from then on investors’ willingness to take risk is likely to decrease due to the presidential election. In other words, there may be a new concentration of offerings in the coming months and, therefore, a repricing of securities. “Whoever needs to go back to the market may have to pay a higher spread, besides a much higher CDI,” he said.

For Laurence Mello, head of corporate debt strategy at AZ Quest, the landscape for companies will worsen with the interest rate hike, “but won’t necessarily be bad,” especially when looking at the “high grade” companies, those with good risk ratings. These are companies that have already made adjustments and are now in good liquidity conditions. “Looking at the structure of their balance sheets, the companies are able to pay debts,” he said. Even so, financial costs will rise, impacting profitability and these companies’ performance in the stock market.

The consequence will be, in his view, a setback in the dynamics of the debt market, which went through a period of lengthening terms and reducing spreads. “Companies will need more leverage, more equity, and will make shorter term issues,” Mr. Mello said, adding that this dynamic may affect the speed of growth of these companies.

The impact of the increased cost of debt is likely to be different depending on the company’s profile, said Artur Nehmi, head of fixed income at Sparta. Sectors that offer basic public services, whose capital has natural protection from the rise in inflation, will have fewer problems, he said. This is the case of companies in the energy, infrastructure or sanitation industries, which are important issuers of bonds. But cyclical companies will have a harder time, as their revenues will drop due to the economic slowdown, while financial expenses will increase with higher interest rates.

Another company profile that may be more affected by the increase in interest rates are those that exchanged IPOs for debt offerings as a way of strengthening cash reserve. “Some of these companies had room on their balance sheets to issue equity, but not necessarily to issue debt,” he said.

For Ricardo Carvalho, an analyst at Fitch, higher interest rates will pressure the companies’ financial expenses. But the perverse effect for companies will come from demand. “Interest rates rise because inflation is high, and this combination impacts income and has a restrictive effect for companies,” he said. He points out that companies’ leverage ratios are still low – their net debt-to-EBITDA ratios are at 1.5%, according to Central Bank data, compared with 3.5% in 2019. This means that balance sheets are likely to remain well, even as credit cost conditions worsen. “The question mark now is how long interest rates will stay high. But companies did their homework, lengthened their liabilities and are more prepared to face this more adverse scenario,” he said. “Results will be weaker in terms of revenues and interest rates, but this is not a risk that concerns us.” Given this, Mr. Carvalho believes that there will be a smaller number of upgrades of companies’ ratings. “Yet we don’t expect a material number of downgrades either.”

For Yuri Ramos, head of investment banking at BV, the Selic and the cost of debt is likely to have an accounting impact for companies. But, according to him, most of them were already planning for a higher interest rate level, which may indicate a milder effect on these companies. Even with this interest rate increase underway, he said, the capital market is likely to remain heated this year, propped up by infrastructure companies, for example. He recalled that there were several concessions in this sector last year, such as that of Rio’s sanitation company Cedae, and companies will seek long-term financing to make the necessary investments viable.

Source: Valor international

https://valorinternational.globo.com/

/by

E-commerce platforms pass on costs to customers

Veja o que você precisa para abrir um e-commerce

The rise in interest rates, the increase in logistics costs and the need for companies to recover some profitability have led Brazilian online marketplaces to raise prices. On such e-commerce platforms, product or service information is provided by multiple third parties, and they charge for the services they offer. They have already reported there was a reduction in shipping subsidies, reflecting an increase in the value paid by sellers, and a raise in commission rates.

Interest-free installments have also been reduced, and charges for fees that were previously exempt are expected to begin in the coming months. Some of these announcements have been made to sellers in recent weeks, and the measures vary from company to company, but involve most of the major platforms — Mercado Libre, Via and Amazon —, retailers told Valor.

According to consultants, this may be a sign of greater rationality in business management, after companies have lost a lot of market capitalization and after strong competition has affected the margins of some companies.

Those measures may increase final prices at a time when the inflation in the digital environment already exceeds the official inflation. Sellers say they will have to raise prices. Online inflation was 18.8% from January to October, above the Brazil’s benchmark inflation index IPCA or the General Market Price Index (IGP-M).

Sources say that some platforms have been guiding retailers to “improve” their prices so to adapt to these increases. Online marketplaces do not interfere in the commercial policy of the stores, but there is constant contact between them.

The most important change is coming from Mercado Libre, which communicated the changes to its partners on December 9. When contacted, the company confirmed the decision. Among the main changes in the rules is a reduction in the interest-free installment plans, and a reduction or elimination (depending on the retailer) of the freight subsidy Mercado Livre used to give to those who chose the platform for its deliveries. It will also take longer for the retailer to receive the money for the sale.

In a change announced this month, purchases of up to R$299 can be financed in up to nine interest-free installments. Between R$300 and R$1,499, the installment plan applies in 10 interest-free installments. Previously, in both situations, there was no fee charged in up to 12 installments.

Mercado Libre will also keep the shopkeeper’s resources in cash for longer. As of February, retailers with a reputation already calculated by the platform will receive the purchase price within five working days after delivery by the group. Previously, this happened in 48 hours.

Also since this month, there was an average increase of 3% in shipping costs that the shopkeeper pays for the free service on products up to 30 kilos. The subsidies have also been changed: retailers who sell for delivery within 24 hours, and with a good reputation on the website (green rating), now have a 10% subsidy on the shipping rate in 2022 instead of 40% in 2021. This change applies to new items starting at $79.

If the merchant’s reputation is not good, the company will no longer give discounts on the free shipping rate. It is a way for the company, in addition to reducing costs, to encourage sellers to have better grades.

Finally, there was also a change in the policy regarding financial investments. After February, the accounts of companies will no longer generate yields paid by Mercado Pago, the company’s payments arm. Funds held in accounts offered yields above the savings account.

For the company, the changes reflect the worsening economic situation. “We are living a very challenging outlook, with very strong interest rates and inflation, and with increases in costs such as energy and fuel, which affect the business. We intend to continue investing, but we are not unscathed by all this, so we have made some adjustments,” said Julia Rueff, head of the Mercado Libre’s online marketplace for Brazil.

Ms. Rueff believes that the company continues to have a competitive set of conditions compared to its rivals and sees no risk of losing sellers. So far, only Magazine Luiza and Americanas have not reported changes in rules. “These are adjustments to preserve our value proposition, and everything we offer and have been improving. We are a technology company, which demands hiring, investments,” she said.

“And if you analyze it well, this 3% increase in shipping costs, for example, for a much higher fuel inflation, we pass it on much less. So it was something studied and passed on to the store owners in advance.” In 2021, the company announced R$10 billion in investments in the country, more than double that of 2020.

Also in late 2021, Via (Casas Bahia and Ponto) informed storeowners about the withdrawal of discounts on their commission rate and also unveiled increases. The company exempted new sellers to draw more retailers and reduced the rates for others.

According to sellers consulted, Via raised this rate by up to five points compared to 2020. “They reduced [the rates] in part of 2021 to 2%, 3% to even 5%, and that was up to 14% previously. But as of this year, the overall rate [for all segments] went to 21%. For our lines, the commission went up to 18% from 14% on average,” said Jefferson Oliveira, head of Viabem, a healthcare products store.

Another change was the reduction of the interests-free installment plan. “They used to sell an R$100 product in 10 installments of R$10, without interest. Now, depending on the price of the product, they do only up to three times without interest. In six installments, they are charging 0.99% per month, a rate that they did not have last year,” the executive said.

“The commission with which Via worked before lasted for a long time. It is not sustainable, so they went up about five points now,” said Roberto Wajnsztok, a consultant at Origin5, which provides services with tenants. “In addition, investments have skyrocketed for a sector with weaker sales. Just look at Mercado Libre’s spending. It is necessary to give an answer to the market in the next earnings report.”

Amazon begins, in March, to charge fees to collect parcels, and as of June the company will implement fees for storage of products in the company’s centers and for removal of inventory (when the retailer picks up their products back at Amazon’s centers). The information has been passed on to retailers for several months. The company maintains its fees of 8% to 16%.

For Mr. Oliveira, it will be necessary to pass on part of these hikes to customers. “Our internal costs have also gone up, and that adds up to these changes in the rules,” he said.

For Gabriel Lima, CEO of the consulting firm ENext, Amazon and Mercado Libre could even pass on more of the impacts on costs, especially in logistics, with the rise in fuel. “Either they can still move more, or they prefer to maintain a strategy still competitive against Magazine Luiza and Americanas, which can also make their hikes at some point.”

Magazine Luiza says it has not changed its contract conditions, with commission rate at 12.8%, which can reach 16% when there is a request for early payment. But it sees a normalization process in the market, after the phase of lower rates. The company declined to say whether it will make adjustments in the short term. “What we see is a normalization in the conditions facing a market more pressured by inflation and interest rates. The platform needs to be sustainable and the ‘seller’ needs to be able to manage these costs and have their margins positive. It has to work both ways,” said Leandro Soares, executive director of Magazine’s online marketplace.

Source: Valor international

https://valorinternational.globo.com/

/by