Page 1 of 2

The days of easy, carefree growth in Brazil came to an abrupt end at the start of this decade. Weaker commodities prices, infrastructure bottlenecks and persistent inflation throttled the economy’s expansion rate from a peak of 7.5 percent in 2010 to less than 1 percent last year, and economists predict that real gross domestic product will grow by just a modest 2.5 percent this year and next. The sluggish economy, combined with popular frustration over poor public services and corruption, spilled over into massive street demonstrations earlier this year.

Those conditions would hardly seem to represent an ideal investment climate, but don’t tell that to Fabio ­Schvartsman. The chief executive officer of pulp and paper manufacturer Klabin is on an expansion spree. He is investing in five existing pulp-making plants to increase their capacity by a total of 290,000 tons in 2014. The company also plans to spend 7.2 billion reais ($3.3 billion) to build a new 1.5 million-ton pulp plant in the southern state of Paraná, which is due to come on stream by the first quarter of 2016. All told, Klabin’s production potential is set to more than double over the next two and half years, from 1.7 million to 3.5 million tons.

Schvartsman doesn’t hold any particularly rosy views about the broader Brazilian outlook, but he believes the addition of modern capacity — combined with the group’s sizable timber holdings in the state of Paraná — will untether his company’s fortunes from that of the economy.

“Obviously, if the performance of the Brazilian and international economies are better, it’ll be better for us,” he tells Institutional Investor. “But the good thing is that we are not counting on that. Our strategy doesn’t require a strong economy in order to be profitable.”

So far, Schvartsman’s strategy has delivered strong results. Klabin’s earnings before interest, taxes, depreciation and amortization rose 31 percent in 2012, to R1.35 billion; ebitda in the first half of this year grew 17 percent, compared with the year-earlier period, to R693 million.

Investors certainly do appreciate that performance. Schvarts­man is voted the top chief executive in the Pulp & Paper sector by both buy- and sell-side analysts II surveyed for the 2013 Latin America Executive Team, the magazine’s fourth annual ranking of the region’s top CEOs, CFOs, investor relations professionals and IR teams. The company’s chief financial officer, Antonio ­Sergio Alfano, is deemed best in the sector by buy-side analysts and No. 2 by the sell-side. The buy side also awards top marks to Klabin’s investor relations team and to IR chief Vinicius Campos.

Those results are good enough to rank Klabin in seventh place among the Most Honored Companies in the executive ranking. Brazil’s CCR, a highway operator, wins first place, followed by runner-up Lojas Renner, a Brazilian department store chain.

Like Klabin, many of the top-ranked companies are moving beyond the cost-­cutting strategies of the past two years and looking for ways to generate growth, regardless of what the next economic cycle may bring. Some are looking to buffer themselves against difficult economic conditions through expansion and market-share grabs. Others are finding innovative ways to build relationships with customers and generate added value for them. Still others are seeking to get ahead of their competitors by investing in technologies that they hope will give them an edge.

This last approach describes the strategy at Kroton Educacional, a Brazilian distance-­learning company. CEO Rodrigo Calvo Galindo, singled out as the best chief executive in the Education sector by both the buy and sell sides, says the company has shifted its focus from improving its internal operations to trying to identify growth drivers for the long haul.

“I’m not talking about the five-year perspective but the ten-, 15-, 20-year perspective,” Galindo says. “How the postsecondary education industry will be impacted by technology and how we can deliver high-­quality education in ten years by taking into consideration how technology will impact the business.”

The company came up with one early answer to those questions last year with the release of its Kroton Learning System, a suite of technology products designed with the help of academics and information technology companies in Brazil, India, South Korea and the U.S. that supports online courses and monitors students’ progress. Only a fraction of the products are currently available to the market, says Galindo, but the full coterie should be delivered by 2015.

Galindo has also looked to acquisitions to power growth. In April, Kroton agreed to buy rival Anhanguera Educacional Participações for about R5 billion, to form the world’s largest for-profit education provider. Each company has some 500,000 postsecondary students. But Anhanguera offers more campus-based programs, whereas Kroton specializes in distance learning. The combined group will have a presence in 80 cities, with overlap in only four.

“We believe the long-term benefits are much more important than the short-term benefits,” Galindo says of the deal, “because we’re talking about achieving the capacity to invest more and more in technology for education.” Given the size of the merger, Kroton will need six months to a year to integrate the two businesses, but when that’s achieved Galindo expects to revert to acquisition mode. More than 2,400 institutions focus on the postsecondary education market in Brazil, he says, leaving “a lot of space to continue consolidation.”

When it comes to organic growth, Galindo acknowledges it will be difficult to maintain the company’s recent pace. In addition to making two acquisitions in late 2011 and the first half of 2012, the company also greatly improved its efficiency. Kroton kept a tight lid on its teacher payrolls even as the number of students grew by 30 percent last year, not counting acquisitions. Ebitda surged by 249 percent in 2012, to R388 million, and it was up 84 percent in the first half of 2013, to R367 million.

Over the next five years, Kroton aims to grow student numbers by 10 to 15 percent a year. Galindo believes those targets are realistic even if the economy remains subdued because the educational sector has proved to be resilient to headwinds so far. Kroton is currently waiting on Brazil’s Ministry of Education to approve 125 new postsecondary courses; 20 new course units, or subjects; and 278 new distance-­learning centers, which support the company’s programs.

“If we have all of this, we’ll have the opportunity to grow much more than 10 to 15 percent yearly,” Galindo says. “It won’t depend on GDP or the level of unemployment; we’re talking about offering more units and more courses in more cities — reaching more markets.”

In the midst of this rapid growth, Carlos Alberto Bolina Lazar, Kroton’s head of IR, stresses the importance of keeping shareholders apprised of developments.

“This was a commitment we made: To put information in front of the market to get them comfortable with our strategy,” says Lazar, who is chosen by the buy side and sell side as the outstanding IR professional among his peers. The company has grown dramatically via acquisition since 2010, when Kroton bought IUNI Educacional, an outfit of roughly the same size that was owned by Galindo’s family and run by him. “It was important to get the confidence of the market, and for them to understand all the challenges we were surpassing,” says Lazar.

For Cielo, Brazil’s largest credit card payments processor, growth hasn’t been much of a challenge. The expansion of the consumer economy in Brazil and the increasing use of credit and debit cards have virtually guaranteed steady profit gains in recent years. The company’s ebitda rose 28 percent last year, to R3.08 billion, and advanced by 22 percent in the second quarter of 2013, the latest figures available, to R859 million.

Credit cards account for a modest 28 percent of consumer spending in Brazil, and the company sees plenty of opportunities to win market share from its biggest competition — the use of cash and checks. “Even with its problems with GDP and economic policy, we do believe there is still a lot of room to grow in Brazil,” says CEO Rômulo de Mello Dias, voted the top CEO in the Financials/Nonbanks sector by both buy- and sell-side analysts. Cielo ranks No. 6 overall.

But Dias isn’t just counting on consumers to use cards for more store purchases. The executive is focusing on building the company’s e-commerce business by strengthening its relationships with banks and merchants. He hopes such efforts will generate new revenue streams and ward off potential competitive threats.

“This is one of the reasons we are investing so much in e-commerce,” says Dias. “If an international acquirer decides to come to Brazil, what would be one of the first verticals they would attack? E-commerce, because anyone can go there. But if we have the eyes of the dealers and agreements with the banks, it’s more difficult for competitors to move the merchants and clients to them.” E-commerce currently represents 8 percent of Cielo’s sales volume, and he hopes to increase that proportion to 20 percent over the next eight years. In a step toward attaining that goal, Cielo agreed to acquire ­Merchant e-Solutions, a Redwood City, ­California–based vendor of e-commerce platforms, in July 2012. Previously, the company had been consolidating its position in the domestic market, buying Brazil’s Braspag Tecnologia em Pagamento, an online payments processor, in May 2011 and two Brazilian mobile payment providers, M4U and Paggo Soluções de Meios de Pagamento, in 2010.

Single Page    1 | 2
Related Topics: Latin America Executive Team· Brazil· Mexico· CCR· Lojas Renner· Grupo Financiero Banorte· Falabella· Sandro Solari· Kroton Educacional· Rodrigo Galindo· Alejandro Valenzuela del Rio· Klabin· Fabio Schvartsman