Latin America’s Business Leaders Find Strategies for Growth
Top-ranked companies on the Latin America Executive Team, including Rômulo de Mello Dias’s Cielo, are expanding into new sectors and markets to boost profitability.
Analysts polled at the start of the year by Brazil’s central bank predicted that Latin America’s largest economy would grow by less than 2 percent in 2014 — and follow-up forecasts have been even bleaker. But executives at some of the nation’s leading companies insist that the downturn is only temporary, and they are taking steps to position their businesses for the inevitable rebound.
“When there’s a lack of confidence in the country, there’s an opportunity,” observes Marcelo Eduardo Martins, chief financial officer at Cosan, the Brazil-based conglomerate that produces ethanol and sugar, among other products. “We think we should take advantage of our position and invest in businesses that will eventually have to be developed, like railroad infrastructure.”
To that end, Cosan announced in February its plans to acquire Latin America’s largest railroad operator, América Latina Logística, for 10.96 billion reais ($4.7 billion). Its goal is to merge its supply chain operations, Rumo Logística, with ALL to create the biggest railway and logistics company in the region.
The purchase was not driven just by a desire to more efficiently transport Cosan’s products, Martins insists. “ALL is much more than sugar transportation,” the 48-year-old says. “We realized there was a need for a strategic player to become a part of a company like ALL, someone who has a vision for this business and who could potentially transform the infrastructure landscape in Brazil.”
The move demonstrates Cosan’s faith in the country’s long-term growth prospects and belief that its role in the global economy is as strong as ever, Martins explains. “People sometimes question whether this is the right time to make an investment like this, but we believe this is the only time,” he says. “Five or ten years down the road, it may not be possible anymore.”
Portfolio managers and sell-side analysts are impressed with the company’s vision. Cosan is among the highest-ranked outfits on the 2014 Latin America Executive Team, Institutional Investor’s annual roster of the region’s corporate leaders as seen through the eyes of analysts and money managers. It captures fifth place overall, with investment professionals on both sides of the aisle agreeing that Marcos Marinho Lutz is the best chief executive officer in the Agribusiness sector and Martins, the top CFO.
II asks buy-side analysts, money managers and sell-side researchers at securities firms and financial institutions that cover the region — including those who cast and received votes in this year’s Latin America Research Team survey — to name the best CEOs, CFOs and investor relations professionals at the companies in their coverage universes. We also invite them to identify up to four companies that excel in each of eight IR attributes, including providing access to senior managements, financial transparency and disclosure, and so on. This year’s results reflect the opinions of more than 400 buy-siders at over 270 firms that collectively manage an estimated $248 billion in Latin American equities and more than 370 sell-side analysts at close to 40 firms.
The No. 1 company on this year’s team, Cielo, a Brazil–based credit card payments processor, is also placing big bets on the region’s future. Credit card purchases account for roughly 28 percent of private consumption expenditures in Brazil, compared with 45 percent in the U.S., according to Rômulo de Mello Dias, whom buy- and sell-siders agree is the best CEO in the Financials/Nonbanks sector. Dias, 53, aims to ensure that Cielo wins the largest portion of the remaining market share. To do that, he says, it has been crucial to develop partnerships and initiatives that attract long-term customers and keep competitors at bay.
“We’re differentiating ourselves to avoid becoming a commodity,” he reports. “I’m trying to balance between the macroeconomic situation and the strategy that the company needs to follow to be very ‘sticky’ with our customers.”
The key to establishing this stickiness, he adds, is presenting Cielo as a provider of multiple services — to not only merchants but also consumers, in the hope that they will come to prefer the Cielo brand when they are ready to make payments.
In April, Cielo advised that it was partnering with two of Brazil’s largest commercial lenders, Banco Bradesco and Banco do Brasil, to launch Stelo, an e-commerce venture that Dias says will be similar to PayPal, a California-based provider of online payment and money transfer services.
Two months later the company announced a joint venture with software maker Linx to offer an integrated point-of-sale (IPOS) platform to Brazil’s small retailers (those with five or fewer stores). The IPOS solution allows for such services as electronic payments and inventory accounting and will enable Cielo to gain traction within Brazilian retailing’s “long tail” — that is, its large number of small companies, Dias explains.
July brought a new partnership between Cielo and Smiles, one of Brazil’s largest customer loyalty programs, which will allow users of Cielo terminals to accrue points that can redeemed for airline miles.
The company is also positioning itself as a data services provider. Earlier this year it launched the Índice Cielo do Varejo Ampliado, or ICVA index, which tracks consumption trends and other spending indicators, and its CieloAnalytics service provides company-specific reports that can, for example, compare store performance to that of competitors’ and predict sales in potential new store locations.
In July the company reported that net income jumped 25.9 percent year over year in the second quarter, to 796.8 million reais, below consensus estimates of 807 million reais. But Dias explains that the success of all these new products and services won’t be measured in immediate gains in revenue or even market share — he’s gunning for a goal that will take longer to accomplish.
“There are some things you should try, and you should be the first, because at the end of the day if it works, it’s going to create a new standard for the industry,” he declares.
A similar philosophy is being embraced by management at Itaú Unibanco Holding, which lands in second place overall on this year’s Latin America Executive Team. The leaders of Brazil’s second-biggest bank, by assets, have demonstrated a willingness to sacrifice short-term gains to build longer-term strength.
As dark clouds began to gather over the Brazilian economy two years ago, CEO Roberto Egydio Setubal — the buy- and sell-side favorite in Financials/Banks — says he and his associates decided to weather the storm by reducing the bank’s exposure to such risky assets as loans to small businesses and focus instead on safer but slower-growth areas like mortgages and payroll loans.
“What you get at first is reduced revenue because you’re producing fewer loans,” Setubal says. “But over time we expected loss provisions to reduce, and this is exactly what happened.”
Itaú Unibanco’s loan growth lagged its peers in 2012 and 2013, but its losses from bad loans have also fallen. In the first half of 2014, they were down 14 percent year over year, to 4.46 billion reais, and default rates tumbled from 4.2 percent to 3.5 percent. In early August the firm reported that net income in the first six months surged 33 percent, to 9.5 billion reais.
Setubal concedes that his bank sacrificed some market share when it decided to rethink its risk exposure but argues that there are better ways to measure success. “Market share is great, but it has to be sustainable,” the 60-year-old says. “You should make returns on your market share. Otherwise, it doesn’t make sense to have it.”
The bank’s real expansion opportunities lie outside Brazil, Setubal notes, in such places as Chile, Colombia and Peru, where he projects that growth will be stronger. In January the bank announced plans to acquire a controlling stake in Chile’s CorpBanca for $3 billion, the largest banking merger in Latin America since 2008. The deal is expected to be completed in the first quarter of 2015.
Zeroing in on strategic growth opportunities is no problem for Brazil’s OdontoPrev, whose exclusive focus — dental insurance plans — leaves vast room for growth in its home country. The company, which captures 12th place on the team, is eager to take advantage of what CEO Mauro Silvério Figueiredo calls the Brazilian dental paradox. The nation is home to about 259,000 dentists — roughly 100,000 more than in the U.S. — but fewer than 10 percent of its 199 million citizens have dental coverage (compared with 60 percent in the U.S.).
“This is a very embryonic sector,” says Figueiredo, who is No. 1 in the Health Care sector in the eyes of the sell side and captures second place in the estimation of money managers. “It’s so underpenetrated, and because we have what we believe to be the best distribution channels, we are very optimistic about what’s ahead.”
Those channels, crucial in accessing the growth possibilities that Figueiredo sees, have been actively sought. In 2009 the insurance arm of Banco Bradesco, one of Brazil’s largest financial services firms, acquired a 43.5 percent stake in OdontoPrev and began offering dental plans through its various units. Last year the bank took full control of the insurer and also established a partnership with Banco do Brasil and its wholly owned BB Seguros Participações subsidiary to form Brasildental Operadora de Planos Odontologicos, a new dental services company.
While OdontoPrev has long been devoted to dental plans for large corporates, Figueiredo says, its partnership with Bradesco and venture with Banco do Basil provide access to crucial new market segments: namely, small and medium-size enterprises, which offer enormous upside potential. OdontoPrev holds 55,000 SMEs in its portfolio — more than any other dental insurer — but the market encompasses some 9 million companies. “We’re just beginning,” he says.
Figueiredo, 52, believes this segment is the best place to hitch the company’s growth prospects, both because SMEs are growing fast, with less dependence on the broader economy, and because it’s a chance to diversify its sales outlets.
“In the near future we’re going to be less dependent on a specific situation or channel,” he says. “We will not only grow faster and better, but we’ll also feel less turmoil from any one segment.”
In late July, OdontoPrev reported that net profit in the second quarter had jumped 21.4 percent year over year, to 47.8 million reais, while adjusted earnings before interest, taxes, depreciation and amortization surged 23.9 percent, to 76.9 million reais.
The health care sector is also providing growth opportunities for Brazilian conglomerate Ultrapar Participações, best known as the nation’s second-largest fuel distributor but also the operator of one of its largest drugstore chains, Extrafarma, which it acquired in January.
André Covre, deemed the best CFO in the Oil, Gas & Petrochemicals sector, according to money managers and sell-side analysts alike, explains that Brazil’s substantial aging population will drive sales of prescription drugs, over-the-counter medications, and medical supplies and devices — a trend that is largely independent of macroeconomic conditions.
Ultrapar, which captures sixth place on the Latin America Executive Team, has made 18 acquisitions since its initial public offering a decade and a half ago. In just the past five years, it has invested 7 billion reais to expand its operations, reports Covre, 43. More than half the 1.5 billion reais it plans to spend this year will be allocated to its Petróleo Ipiranga fuel distribution network. The company intends to capture market share from independent service stations as the market expands, especially in the northern part of Brazil, where Ultrapar is less dominant and fuel consumption has been growing above the national average.
In early August the company reported that net profit had risen 6 percent year over year in the second quarter, to 301.4 million reais, while sales had grown about 10 percent, to 16.7 billion reais.
CPFL Energia, Brazil’s largest private power distributor and the No. 11 company on the team, is also looking to diversify into the most promising segments of its sector, Electric & Other Utilities, primarily as a means to withstand the challenges that exist in the nation’s energy market.
“We certainly have a difficult year ahead,” acknowledges Wilson Ferreira Jr., the across-the-board choice for the sector’s best CEO. “On the other hand, it is precisely in adverse environments that opportunities arise. That is why we are working to place CPFL Energia at the forefront, anticipating market developments.”
In many ways, the challenging times ahead are an extension of the recent past. CPFL’s adjusted net income plunged 17.4 percent last year, to 1.4 billion reais, and Ferreira says one of the main causes was the government’s most recent tariff review. CPFL took a hit in 2013 when the rates of two of its biggest distributors, Rio Grande Energia and CPFL Paulista de Força e Luz, were reduced, by 11.4 percent and 15.8 percent, respectively.
This year drought is a major complication. Hydroelectric power accounts for roughly 80 percent of the country’s energy, and a severe lack of rain in the first quarter led to a deep depletion of reservoirs at hydroelectric plants. Brazil’s National Electric System Operator ordered them to reduce generation through the end of summer, in an effort to conserve water. As a result, CPFL and other providers were generating less than their physical guarantees — what they sell to the market — and had to turn to the spot market to fulfill their contracts.
Despite the backdrop of lower income and rising costs, CPFL is driving expansion. Its renewable energy subsidiary, CPFL Renováveis, has grown its small hydro, biomass, wind and solar power capacity from 652 megawatts to 1,417 megawatts since 2011.
The company is also angling to become a major player in Brazil’s telecommunications market. Two years ago it created CPFL Telecom to provide infrastructure solutions and network connectivity, Ferreira notes, and the division has already installed 649 kilometers of optical fiber network across 17 cities; the initial plan is to cover 42 in total. With Brasília committed to investing in telecom infrastructure over the next decade, the telecommunications sector is the place to be, the 55-year-old says.
So far, 2014 is showing some signs of promise. In the first quarter sales in CPFL’s concession area sales reflected the highest annual growth in company history, up 7 percent. The residential and commercial distribution segments grew by 13.5 percent and 11.3 percent, respectively, in large part because of greater demand owing to a heat wave. But adjusted net income fell 7.9 percent over the previous quarter, to 34 million reais.
Expansion is also under way at Brazil’s Localiza Rent a Car, which claims the No. 8 spot on the Latin America Executive Team. “We view the Brazilian market as still fragmented and under-penetrated,” says Eugênio Pacelli Mattar, the Transportation sector’s best CEO, according to the sell side, and its No. 2 executive, in the eyes of money managers. “Affordability is still growing, and individuals are still getting acquainted with renting cars.”
In the U.S. the three largest rental car agencies account for more than 90 percent of the market; in Brazil the top-three operators hold just over 50 percent. To strengthen its position, Localiza is opening new branches. It currently has 534 locations in eight countries — up from 381 in 2007 — and is also improving its utilization rate (the amount of time that vehicles are earning money versus waiting to be rented). In July the company announced that the ratio has risen to 70.7 percent in the second quarter, compared with 67.1 percent in the same period last year, and net revenue in the car rental division had climbed 13 percent, to 316.7 million reais.
As one of the major vehicle purchasers in Brazil, Localiza also benefits from solid bargaining power with manufacturers — and in the secondhand market that’s emerging, since Localiza sells most of its cars after a year. Is Mattar, 61, concerned that rentals might decline as more and more Brazilians opt to buy their own vehicles? “A growing car market presents more opportunities than threats to the rent-a-car business,” he insists.