2014: a sour year for corporate Latin America: the relatively favorable business environment prevailing in Latin America during the first half of 2014 deteriorated fast from the third quarter amid unfavorable international conditions.

Author:Ramirez, David
Position:THE LATIN 500: THE BIGGEST COMPANIES IN LATIN AMERICA - Company rankings - Statistical table - Cover story
 
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Business performance was affected by low prices of oil and other commodities, weaker currencies--mainly in Brazil--, slower regional GDP growth, and restricted global liquidity, especially for low-rated companies," explained Marianna Waltz, associate managing director at Moody's Investor Service to Latin Trade.

Indeed, exchange rate depreciation played a major role in explaining why the revenues of LT 500--the ranking of the region's largest non-financial companies fell 7 percent in U.S. dollar terms last year, to $2.54 trillion, while earnings plunged 46 percent, to $82.3 billion, even though several firms were able to post positive revenue and profit growth in their respective local currencies.

DIVERSIFICATION, THE KEY

The dispersion in the behavior of LT 500 is wide, both across industries and within them. Geographic and/or market segment diversification was key for the success of several companies. However., in the oil & gas sector in particular , vertically integrated firms handled the adversities posed by significantly lower international prices much better than those focused only in upstream activities.

The Argentinean government-controlled YPF (26th in LT 500), whose revenue and net income soared 20 and 34 percent in U.S. dollars (58 and 76 percent in Argentinean pesos, respectively) largely due to its downstream business is a good case in point. YPF registered one of the best performances amongst the top 50 firms within LT 500.

Similarly, other vertically integrated firms, such as Petrobras (2nd in LT 500) and Chilean group Copec (15th) were able to post double-digit revenue growth in local currency, although exchange rate differentials made it decline slightly in U.S. dollar terms (by around 2 percent in each case). Nevertheless, while Copec's earnings also increased significantly last year, Petrobras generated historic losses on account of the provisions required by external auditors following the scandalous revelations of corruption practices.

Pemex's performance in 2014 was affected by falling oil prices and compulsory contributions to the government. Olaf Sandoval, senior economist at Grupo Bursatil Mexicano (GBM), expects only gradual changes in this trend the short run, "although in the longer term, the industry could gain dynamism following Pemex's restructuring and new investments," he added.

"The fact that many oil firms are government-owned, and thus have government support, is reassuring for their credit fundamentals, but the sector will remain affected in 2015 by uncertainty towards long-term prices, and capital expenditure and costs reductions. Integrated companies are better off, but will suffer from deteriorating margins," said Waltz.

THE POWER OF ELECTRICITY

Diversification was also important for the success of the region's electricity sector in 2014. In most cases, companies diversified into generation, transmission and distribution businesses--this is, fully vertically integrated--were able to benefit from higher profitability in the last segment of the chain (distribution), which had an overall positive net impact on consolidated revenues. In this context, many electricity firms in LT 500 posted revenue and earnings growth, both in domestic currency and in U.S. dollars.

Brazilian power distributors in particular benefited from government measures to avoid excessive tariff increases to end-users as electricity spot prices soared on account of one of the worst droughts in the country's history. Cemig (79th), CPFL Energia (89th) and Copel (110th) posted 34, 18 and 52 percent revenue growth in reais (18, 4, and 34 percent in dollars, respectively). In the meantime, Eletrobras (47th and the largest power utilities in the region) expanded its local currency revenue by only 7 percent (and it declined 5 percent in dollars).

Notwithstanding, the Brazilian electricity industry will face several challenges in 2015. "Generators will continue to suffer because they will have to buy more costly electricity in the spot market, while distributors would also face higher costs from rising delinquency rates and electricity losses. However, the main risk is for rationing in 2016, if there is not enough rain in the upcoming rainy season," according to Erick Rodrigues, an analyst for Moody's.

Outside Brazil, Enersis (49th), another large vertically integrated giant headquartered in Chile, was a power-sector outperformer, with revenue soaring 20 percent in Chilean pesos (3 percent in dollars) on the back of strong generation output in Colombia and Chile, and higher spot prices in Colombia and Brazil, as per a corporate results presentation. Enersis consolidated earnings, however, dropped 7 percent in local currency (20 percent down in dollars) due to exchange rate differentials and write offs. "From a credit and operational perspective, Enersis' main challenge in 2015 will be its restructuring process, together with weak demand growth in its main markets" said Natividad Martel, a senior analyst with Moody's.

Albeit the negative effects suffered from its concentration in the power generation segment in Brazil, diversification in other markets such as Chile allowed U.S.-based AES Gener (48th) to experience 9 percent revenue increase in U.S. dollars.

In all, Latin America's most important industry, its energy sector--which includes companies in oil & gas and electricity as per LT 500 classification--posted revenues of $849 billion in 2014, a median 1 percent down from a year before, while its earnings went to $8.6 billion, a median decline of 11 percent.

OTHER OUTPERFORMERS

Geographic diversification paid off for the outstanding performance of JBS (5th), the world's largest meat producer. While U.S. dollar revenue in the region's food industry dropped by a median of nearly

6 percent last year (to $182 billion), JBS's total revenue increased 14 percent (30 percent in local currency). "In 2014, JBS grew in all segments in all geographies--Canada, U.S., Brazil, Mercosur," explained Rodrigues, who added that the firm also benefited from recent M&As in Brazil. The reai's depreciation cheapened imports of inputs used by JBS for industrial processing, which lowered production costs, said Waltz.

The region's beverages industry generated $101 billion revenue in 2014--a median drop of 4 percent from 2013. AmBev (20th) was one of the best performers amongst the largest firms in the industry in local currency terms, posting 9 percent revenue growth in reais "boosted by consumption during the World Cup. Foreign revenue from operations in Latin America and Canada also contributed. The company is a dominant player and strong in distribution and innovation, which allows it to manage all situations with more success than its rivals," according to Rodrigues.

Retail, another major industry in LT 500, grossed $338 billion revenues last year, signaling a median decline of almost 6 percent from 2013. This reflects the underperformance of the bigger retailers, such as Walmart de Mexico y Centroamerica (9th, the region's largest retailer), whose revenue in U.S. dollars dropped 8 percent (although it grew 4 percent in Mexican pesos albeit moderate sales in Mexico). Several other big retailers, such as Casino, Carrefour and Cencosud also posted negative revenue growth in foreign currency. In contrast, Companhia Brasileira de Distribuigao (CBD, formerly Grupo Pao de Agucar, 14th in LT 500 ranking) outperformed in 2014. The Brazilian retailer was the only one amongst the region's bigger retailers to be able to experience positive revenue growth in U.S. dollars (though by a small 0.1 percent), while in reais it soared by 14 percent, supported principally by the opening of new stores (212, as per a company earnings report).

LOSING STEAM

According to LT's calculations, holding companies ("holdcos") generated $142 billion revenue last year, a median decline of 6 percent from 2013. Groups with larger stakes in construction, such as Odebrecht (6th) and Camargo Correa (81st) benefited from infrastructure developments around the region, but revenue in U.S. dollars fell 1.5 and 10 percent, respectively. Grupo Alfa's (29th) revenue stood flat in dollars, aided by its processed foods division, while its petrochemical division lost revenue.

"It was a very difficult year for the chemical industry," said GBM's Sandoval referring to the sector's performance in 2014. Indeed, according to LT's 500 calculations, median revenue and earnings in chemicals dropped by 3 and 20 percent in U.S. dollars, to $52 billion and $1.2 billion, respectively. Still, Mexichem (103th) was an outperformer, with revenue growing 8 percent in U.S. dollars. Sandoval justified this behavior in the recovery of exports to key destinations in Latin America and Europe, as well as the effect of previous acquisitions.

Sandoval projects continued difficulties in the industry in 2015 due to oil price volatility, though the second half could bring more stability for the main players, such as Braskem (23rd), the largest firm in the sector. The Brazil-based chemicals producer experienced minor reduction in revenue in U.S. dollars in 2014 (1 percent), although sales in domestic currency grew at positive rates (12 percent).

LT 500 tech industry--mainly composed of mobile-telephony providers, but also of technology manufacturers--saw a median revenue decline of 11 percent in 2014, to $209 billion, in hand with limited organic growth as the sector matures. The revenue of America Movil (4th), the industry's largest firm, dropped 4 percent in U.S. dollars, but it rose 8 percent in Mexican pesos, both explained by exchange rate differentials. As Sandoval explained, however, "regulatory changes had an important weight on America Movil's performance last year, principally owing to the reduction of interconnection tariffs in Mexico, Brazil, Chile (and Colombia) in a higher competition environment." Intense competition also affected local currency revenue of other operators focused...

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