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Latin America’s Top Executives Learn to Cope with a Sluggish Economy

The 2013 Latin America Executive Team looks to consolidation, technology and scale to drive earnings growth despite a weak macro climate.

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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.

In addition to pursuing acquisitions, Dias is also seeking to enhance the company’s visibility to consumers. “At the end of the day, we are a business-to-business company, not a business-to-consumer company,” he acknowledges. But, he adds, “if we are able to convince the customer to ask for the machine of Cielo, we are going to be in a good position. As this gains traction, more and more we expect people will ask for the Cielo machine.”

Marketing to consumers is a relatively new strategy for Cielo. In July 2010 the government stripped the company of its monopoly on Visa card processing, and did the same to Redecard, which had a similar position with MasterCard, American Express and other cards. Now both companies compete head-to-head on a range of cards. To promote its brand in this new environment, the company changed its name from VisaNet to Cielo and started putting the name “Cielo” in places where customers would see it: on its wireless terminals and on receipts.

Last November the company took its marketing to another level by signing a social-network marketing partnership with Facebook. Under the deal, Cielo is offering customers a pop-up option of “checking in” to a given location — so the location appears on their Facebook time line — when they pay for a transaction using a Cielo machine. He calls this “business-to-business-to-consumer” servicing. “Talking to customers is a whole different thing” than talking to merchants, Dias concedes, but he believes the marketing push is vital for promoting the Cielo brand and positioning the company for future growth.

S.A.C.I. Falabella, the department store operator that’s one of six Chilean companies among the Most Honored Companies, also has an eye on Brazil as it looks for fertile growth opportunities. Already one of South America’s largest retailers, with more than 65,000 employees and operations in Chile, Argentina, Colombia and Peru, Falabella added Brazil to the lineup in May by agreeing to purchase of a 50.1 percent stake in Dicico, a São Paulo–based home improvement chain, for R388 million.

The rationale is simple, says CEO Sandro Solari Donaggio. Sixty-five percent of the company’s sales and 74 percent of its ebitda are concentrated in Chile, a country of 17 million. By contrast, he points out, Brazil has a population of nearly 200 million people. “If we also consider the rest of the countries, our ability to grow is exponential,” he says. Falabella plans to invest nearly $4 billion on its expansion drive over the next five years, which Solari believes will enable the retailer to maintain its current strong rate of growth.

In the first half of 2013, ­Falabella’s ebitda rose 20 percent, to 402.9 billion Chilean pesos ($794 million). Revenue was up more than 9 percent, at 3.1 trillion pesos.

Solari is taking more than its stores abroad. Consumer lending is a big part of the company’s business in Chile, and the CEO is determined to increase that activity in other markets as well. Income from Falabella’s banking operations grew by 9 percent in the first half of 2013, to 215.4 billion pesos, thanks to its heftier loan portfolio.

The company is also offering online shopping in foreign markets. In 2012, Falabella launched an e-commerce platform that for the first time covers all of the group’s store brands and all of the countries in which it operates.

“Our goal is to continue building a company that will exist forever,” Solari says, “and in that sense, we’re aware that the future of the different companies in the Falabella group is not achieved by simply repeating historical formulas.”

As it seeks to expand in Brazil, Falabella will be running up against Lojas Renner, the country’s second-­largest fashion retailer, by sales, which has ambitious growth plans of its own. CEO José Galló, voted the best in the Retailing sector by the buy and sell sides, is pursuing a goal to operate 408 stores by 2021, up from 209 today. The company’s ebitda rose 21 percent in 2012, to R714.4 million, and was up 6.5 percent in the first half of this year, to R291.8 million.

The company has felt the impact of the country’s economic slowdown, but the downturn also presents opportunities for expansion, says Galló. “We have seen that, in times past, smaller retailers that have more fragile structures always take it harder, and there are retailers who are not really very prepared in terms of competition. So we see this as an opportunity to snap up more space on the market.” Lojas Renner acquired Maxmix Comercial, which operates the Camicado Houseware retail brand, in 2011 for R165 million and plans to triple the chain’s network to 125 stores by 2021.

Galló is also forging ahead with investments in new lines. In the second quarter the company launched Youcom, a clothing retailer geared to the youth market; it expects to have 14 outlets by the end of this year and plans to grow that number to at least 400 by 2021.

Although Lojas Renner is going full speed ahead, some other leading Latin companies are altering their strategies. That’s the case with Grupo Financiero Banorte, Mexico’s third-­largest bank by assets. “We can’t extrapolate from the success we’ve had in the past,” says CEO Alejandro Valenzuela del Río, who is voted the No. 3 CEO in his sector by both the buy and sell sides.

Twenty years ago, Banorte was a regional bank that ranked 17th in Mexico. Then it embarked on a long string of acquisitions that grew the bank’s assets 20-fold, to $120 billion at the end of September. Results for the company have been strong. Net income rose 28 percent in 2012, to 10.89 billion pesos ($839 million), and was up 25 percent in the first half of 2013, to 6.36 billion pesos.

Such breakneck expansion is no longer possible for Banorte. Instead, Valenzuela is focusing on deepening the bank’s relationship with its clients to drive growth.

“We will not be focusing on more M&A — we already did that,” he says. “We’ve been a market-share-oriented institution more than a value-­proposition-oriented institution, and that needs to change,” he adds.

That adjustment starts with developing a better understanding, in granular detail, of the bank’s customers and their demands. Banorte has developed a new IT platform that can analyze data about client transactions to help the bank more effectively tailor and pitch its products to individual account holders. “We’re calling it the ‘client vision’ and are truly generating a new business model that, instead of pushing products on clients as we do today, will truly understand their requirements to generate more value,” Valenzuela says.

One product area that ­Banorte seeks to grow through use of the new platform is its suite of consumer loan offerings. Already the signs are promising. The bank’s consumer loan portfolio had grown 19 percent by the end of June from a year earlier, to 129 billion pesos; mortgages were up 14 percent, credit card balances gained 23 percent, and payroll loans expanded by 41 percent. “We feel that the strategy of moving to this sector over the past year is proving to be a good one,” Valenzuela says.

The growth in consumer lending has helped offset the blow Banorte took to its loan portfolio on the corporate side. The wallop was delivered by Mexican housing developers, which have struggled to restructure their debt and repay loans over the past year. In the first half of 2013, Banorte set aside 5.21 billion pesos in provisions for bad loans, a whopping 96 percent increase over the first half of 2012.

A sharp economic slowdown is magnifying the challenges facing Banorte. The economy, which expanded at an average rate of more than 4 percent in each of the past three years, is likely to grow by just 1.3 percent in 2013. Another reason for the softer trend, says Valenzuela, has been policy uncertainty and curtailed government spending as President Enrique Peña Nieto took over from Felipe Calderón in December 2012. These strains have meant that Banorte, too, has had to revise expectations. “We were thinking 12 months ago we could grow at a rate of 15 percent,” Valenzuela says, “but it will end up being more like 10 to 12 percent.”

Nevertheless, the CEO is confident the new approach will help the bank navigate the economy’s twists and turns.

“Banorte has been learning to deal with these changes in macro policy and is working with a strategy that, more than growing through market-share growth, is about understanding the dynamics of where we can generate value for our clients and, therefore, generate value for the institution,” he says. If the bank can do that, Banorte will “go through the upturns and downturns with the capacity to do well,” he contends. • •

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