It could have been a whole lot better. That’s the general sentiment left on Brazilian investors and analysts after the first earnings season of the year, in what was meant to be the kickstart of a crucial year for the country’s economic recovery. As GDP growth projections for the year continue to be scaled down, macroeconomic reforms become even more crucial to boost confidence and unlock Brazil’s economic potential.

A study by consultancy Economatica, surveying 304 Brazilian listed companies, revealed that their profits grew by 9.14 percent on a yearly basis, to a combined BRL 42 billion in Q1 2019. However, when you take banks out of the equation, profits actually dropped by 2.55 percent, at “only” BRL 20.5 billion. Both estimates exclude the earnings of Petrobras, Vale and Oi, due to large distortions in their numbers.

</span></p> <hr /> <p><img class="alignnone size-full wp-image-17688" src="" alt="brazil gdp growth" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">According to Carlos Sequeira, the head of Equity Research at BTG Pactual bank, “a weaker-than-expected economic environment is behind the deterioration in the quality of the results.” According to a bank analysis, comparing the consolidated results to BTG Pactual estimates, 31 percent of companies reported better-than-expected results, while 28 percent reported weaker-than-expected figures, a gap of only 3 percentage points. “This is the smallest gap in the past five quarters. It was 16 percentage points in Q4 18 and 20 points after Q3 18,” he said, in a note to clients.</span></p> <p><span style="font-weight: 400;">Taking a sector-based approach, the lack of trust is starting to take its toll on segments that rely heavily on consumption—both by individuals and companies. According to Economatica, while only 4 out of 27 sectors registered losses in the first quarter, 11 showed smaller profits in comparison to one year ago.</span></p> <p><span style="font-weight: 400;">BTG Pactual calculations corroborate that view. Sectors that rely on consumption, such as food, or those that require higher trust levels, such as capital goods or infrastructure, are among those with the highest percentage of negative results. According to Fundação Getúlio Vargas, </span><a href=""><span style="font-weight: 400;">consumer confidence dropped to 89.5 points</span></a><span style="font-weight: 400;"> in April, the lowest level since October 2018. </span></p> <p><span style="font-weight: 400;">“The economy is not helping, above all in the sectors closely related to trust, such as retail and </span><a href=""><span style="font-weight: 400;">construction</span></a><span style="font-weight: 400;">. You have many companies that were supposed to be improving, but they’re not. The ones who showed good results were due to particular factors. I believe that while things remain stalled in Congress, it will be bad,” explains financial consultant Heloisa Cruz, who manages investment club Stoxos.</span></p> <hr /> <p><img class="alignnone size-full wp-image-17689" src="" alt="brazil confidence level" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Case by case</h2> <p><span style="font-weight: 400;">The first quarter earnings season was also marked by unexpected events, such as the Brumadinho dam burst, which made Vale record its first ever negative EBITDA (</span><span style="font-weight: 400;">earnings before interest, taxes, depreciation, and amortization)</span><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">Suzano, which has merged with Fibria </span><a href=""><span style="font-weight: 400;">to become the largest pulpmaker in the world</span></a><span style="font-weight: 400;">, was hit by high stocks and lower cellulose prices in China, causing losses in the billions. “It was really bad because they had to retain production due to a surplus offer; as market leaders, they had to control it,” explained Ms. Cruz. </span></p> <p><span style="font-weight: 400;">On the positive side, there were particular highlights, such as the case of Eletrobras. The state-owned electric holding amassed BRL 1.347 billion in profits, </span><a href=""><span style="font-weight: 400;">boosted by energy generation revenues</span></a><span style="font-weight: 400;"> after some of the companies’ hydroelectric plants had their revenues boosted by Brazil’s energy agency, Aneel. The holding also benefitted from the sale of its power distributors,</span><a href=""><span style="font-weight: 400;"> as it no longer had to cover for their losses</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Meatpacker JBS was also a positive surprise. The company&#8217;s profits </span><a href=""><span style="font-weight: 400;">nearly doubled</span></a><span style="font-weight: 400;">, to BRL 1.092 billion, propelled by the performance of its U.S. pork plants. In the coming months, the company is also expecting to benefit from the </span><a href=""><span style="font-weight: 400;">swine fever outbreak in China</span></a><span style="font-weight: 400;">.  </span></p> <hr /> <p><img class="alignnone size-full wp-image-17691" src="" alt="brazilian companies profits" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><img class="alignnone size-full wp-image-17690" src="" alt="brazilian companies losses" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Accounting changes</h2> <p><span style="font-weight: 400;">The quarter was also marked by </span><a href=""><span style="font-weight: 400;">the adoption of IFRS 16 accounting standards by Brazilian companies</span></a><span style="font-weight: 400;">, which changed the way earnings were included on accounting reports, inflating some figures. </span></p> <p><a href=""><span style="font-weight: 400;">Before IFRS 16, companies reported lease transactions as either operating or finance leases. </span></a><span style="font-weight: 400;">Now, long-term rental contracts are considered assets or liabilities, so the companies account for their depreciation or financial spending. Considering that many companies choose to lease expensive assets, such as cars, offices, power plants, retail stores, cell towers, and aircraft, changing the way these contracts are recorded on balance sheets can make a huge difference. </span></p> <p><span style="font-weight: 400;">That becomes very evident on EBITDA—an important measure of how much money the company may generate. When you consider </span><a href=""><span style="font-weight: 400;">leases as asset depreciation</span></a><span style="font-weight: 400;">—and not an operational expense—then EBITDA goes up. </span></p> <p><span style="font-weight: 400;">The change aimed to provide more clarity about a company’s assets and liabilities, but also generated some adoption issues in Brazil, mostly for investors who need to compare results. Since many companies did not update their former earnings, lots of comparative references were lost.</span></p> <p><span style="font-weight: 400;">“It makes EBITDA higher, so it is no longer a reference. You’ve been looking at a company for a long time and, all of a sudden, the EBITDA margin has changed. We’ll get used to it eventually, but it was a bad change. I understand why it happened, but I think it could have been just an explanatory note,” said Ms. Cruz.

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MoneyMay 20, 2019

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BY Natália Tomé Scalzaretto

Natália Tomé Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.