Late last year, during a meeting that assembled representatives of shareholders, of the directors of Odebrecht S.A. and...
Interview: Odebrecht might have a partner in the construction business and even go public, says Guidolin
Aline Bronzati and Cristiane Barbieri, special for Broadcast
São Paulo, January 18, 2019 – Before being bombarded with questions, Luciano Guidolin, CEO of Odebrecht S.A., asked for a break. He wanted to explain in detail the current situation of the group, which was at the epicenter of Operation Car Watch and suffered the consequences of its crimes. The mission of the production engineer, who graduated from the Polytechnic School of the University of São Paulo (USP) and earned a master’s degree in business administration with honors from Harvard University, is far from simple. At 46, for two years he has been orchestrating a group whose revenue fell from R$132 billion in 2015 to R$80 billion, which is the figure expected for last year. Even worse, the group’s holds debt that, although down in recent months, stands at nearly R$70 billion.
“We have to look back at the last three years and see that Odebrecht has undergone a major transformation focused on its operations,” said Guidolin during the meeting that took a little over two hours at Odebrecht’s headquarters in São Paulo city. “We came from a moment of accelerating investments and believing in the growth prospects for the country when, in 2016, the economy slowed and oil prices fell, which affected many of our clients, and then the consequences of Operation Car Wash, which had a major impact on our reputation and led to credit restrictions.”
With few choices, the group opted to cooperate with the authorities in Brazil and other countries. In 2016, leniency agreements were entered into with the authorities in Brazil, Switzerland and the United States and, in 2017, with countries in Latin America, where Odebrecht also committed wrongdoings. “Meanwhile, we implemented our compliance department, which is monitored by the U.S. Department of Justice and Brazil’s Federal Prosecution Office (MPF),” he said.
With very high debt and tight credit, the solution was to put assets worth R$12 billion up for sale. Of the 15 companies, seven are left. The role of Odebrecht S.A. was redefined, with the company becoming a manager of businesses and investments whereby each operation is autonomous and financially independent and each has its own governance. The professional board of directors was strengthened and members of the Odebrecht family stepped down.
With the threat of a court-supervised reorganization averted, the economic scenario improving and the company now legally authorized to bid on government contracts, the idea now is to “start planning a new future.” To Guidolin, by the end of this process, Odebrecht will be a leaner corporate group, but with a new governance model and a capital structure adjusted to the scale of its operations. In fact, it also is a requirement of the leniency agreements entered into with the supervisory agencies and the government. “We are embarking on a new growth cycle,” he projects.
In the group’s 2030 vision that is beginning to be formulated, Odebrecht will not necessarily be the holding company for all the businesses, including for its core engineering business. While it renegotiates its debt and plans to sell R$5 billion in assets of the R$12 billion put on the market, the company is starting new construction projects. It also dreams of its governance being so highly regarded that its companies could attract investors and go public. “There is no reason why our companies should be closely held and 100% controlled by Odebrecht.” Defining himself as resilient and optimistic, after having battled cancer as a teenager and overcome other tough moments in his life, Guidolin welcomed Broadcast for the following interview:
Broadcast: What decisions were taken during the year-end meeting, when the group gathered its leaders?
Luciano Guidolin: I presented three fronts for our three-year plan: conclude the group’s financial restructuring, rebuild our image and reputation and build the future, focusing less on the first front and more on the third front. It means thinking ahead and building this future based on the lessons that Odebrecht has learned and how it has changed from the viewpoint of its governance and commitment to ethics, integrity and responsibility, but also based on all the good qualities that it continues to be able to deliver and our commitment to each project and client, to driving innovation, to entrepreneurship and to delivering for our clients. We have Ocyan, whose drilling rigs are among the best of all suppliers to Petrobras, competing with global companies. Braskem is a world-class global petrochemical company, with plants in Germany, United States and Mexico. Some of its products are at the forefront in their industries. Atvos, a bold project that weathered a very difficult moment in its industry, is Brazil’s second largest ethanol producer. Those are qualities that we have built over the years.
Broadcast: What is the strategy for asset divestments?
Guidolin: Of the R$12 billion target, we have sold R$7.5 billion in assets and still have R$5 billion to go. There was an important stake in the Chaglla Hydropower Plant in Peru worth US$1.4 billion that was sold to a Chinese investor, Three Gorges, in 2017. The sale’s consummation was pending our leniency agreement in Peru, which we concluded successfully in late 2018. We also have a stake in the concessionaire Ruta de Lima and some smaller infrastructure assets. We sold a stake in an energy company and a diamond mining operation in Angola, as well as the public-private partnership (PPP) Inova BH, an educational PPP that we sold to a private investor.
Broadcast: What about Braskem?
Guidolin: Odebrecht always has believed in the petrochemical industry. When the group faced difficulties, we often heard that we needed to sell Braskem. But we had a very clear vision that Braskem’s value was not recognized. And that vision proved accurate, with the company’s market capitalization more than tripling over the past three years. Today, we are looking at a deal with a very strong strategic rationale, which involves combining Braskem’s assets with those of LyondellBasell. It’s a global company based in the Netherlands that is larger than Braskem, that offers excellent opportunities for capturing synergies and that complements Braskem well in terms of products and geographies. It is an opportunity to remain an investor in the petrochemical industry as part of a larger corporate group. That is will be rationale of the Odebrecht group going forward: a group with a few businesses that it operates and controls, other investments in which it participates and contributes to their governance and other companies in which it contributes as a shareholder without holding control.
Broadcast: When will the negotiations with Lyondell be concluded?
Guidolin: We announced that the due diligence process began in the second quarter of last year, and that phase is nearly concluded. Now, we are in a stage of negotiations and bilateral conversations between the parties.
Broadcast: Will Odebrecht be a minority shareholder?
Guidolin: Odebrecht’s intention is to remain a shareholder in the petrochemical industry, in this business combination, exchanging Odebrecht shares for shares in the new company.
Broadcast: Does Petrobras agree with that?
Guidolin: In the shareholders agreement with Odebrecht, Petrobras has the option of exercising its tag-along rights with Odebrecht, as well as the stock market as a whole.
Broadcast: What is the biggest financial challenge for Odebrecht today? Is it Atvos?
Guidolin: From the volume standpoint, there is the restructuring of the international bonds secured by engineering and construction, which is a process that began in November and aims to align the debt profile and characteristics with our current situation and with the growth curve in engineering. The amount of debt and the debt profile were not compatible with the characteristics of our business at the time and, as a result, the liabilities were being negotiated at steep discounts in the international market. The other discussion is Atvos, where, despite the sharp increase in the company’s operating income and even though Odebrecht injected capital of nearly US$2 billion in the company, there are issues related to financing working capital and to Atvos’ debt structure and characteristics that must be resolved. But both companies have an opportunity to grow. Atvos has the opportunity to use the full sugarcane crushing capacity of its mills and significantly grow its cash generation, while the construction company, whose operations was scaled back by the reduction in infrastructure projects, also has an opportunity to grow. These are the two most significant processes in terms of scale.
Broadcast: Do you plan to sell Atvos?
Guidolin: Today, we see a very important improvement in Atvos’ quality and operating income, but the market did not recognize the opportunities in the sugar and ethanol industry. Atvos’ priority is to deleverage, to conclude the investment to be able to operate at full capacity and to seek partners. Given our strategic direction, in the future we do not see Odebrecht holding 100% of these assets. Today it owns 100% of Atvos because of a set of factors. It owned 55% and the other 45% was held by local and international funds and BNDESPar. When Atvos required a capital injection, only Odebrecht contributed, becoming the sole parent company. Now, Odebrecht’s interest in Atvos will depend on opportunities involving strategic partners or a future IPO once its debt is restructured and the operational investment is concluded.
Broadcast: How will you restructure Atvos’ debt?
Guidolin: By dialoguing with creditors. We started negotiations last year and will intensify them in this first quarter.
Broadcast: What are the other financial challenges?
Guidolin: We have been monitoring areas that require structural solutions and the creditors, working with us, have understood the process and supported Odebrecht. In 2017, we concluded the restructuring of Ocyan. In 2018, we had the funds to settle our commitments involving the Federal Prosecution Office, the financial penalties, the company’s operations and other creditors. The dialogue is still ongoing.
Broadcast: Was there any resistance from banks?
Guidolin: We enjoyed support and the understanding that the deleveraging effort and the focus on our core businesses were necessary and had to be done.
Broadcast: Do you need to raise more capital this year?
Guidolin: It will depend on the speed of the divestment program, but we’ve been talking with creditors so that we can implement this process and find structural solutions for the assets.
Broadcast: Will the R$5 billion divestment program be concluded this year?
Guidolin: Yes. Chaglla should be concluded in the first quarter and Santo Antônio over the course of the year, also with a Chinese investor.
Broadcast: What is the status of the negotiations with the creditors of the construction company’s international bonds?
Guidolin: The dialogue with creditors through their financial advisors started in early December, is ongoing and the parties have set a timeframe for the discussion. It will end when we reach an agreement.
Broadcast: Have any proposals been made yet?
Guidolin: Not yet. The process takes several months, but it is in the company’s interest to conclude the process as soon as possible.
Broadcast: What is Odebrecht 2030?
Guidolin: The final design isn’t ready, but it certainly will have an important core in engineering, given our expectation of a recovery in infrastructure investments, in our installed technical capacity and in the homework that we have done internally. There will be space in Brazil and other countries in which an engineering company that acts ethically, with integrity and transparency, can grow. That is our belief. We could have other businesses and hold interests in companies. If the discussions with Lyondell result in a deal, we could have investments in the petrochemical industry. Today we hold controlling interests in businesses in the sugar and ethanol, oil and gas, infrastructure and real estate industries. Starting with this group of companies, we will maintain some businesses and maintain stakes in others, but this structure has not yet been defined.
Broadcast: There is space for an engineering company to work ethically, with integrity and transparency, but will Odebrecht have that image?
Guidolin: On the one hand, we had our image exposed, which is the result of things that happened, four, five or even ten years ago. On the other hand, we will have the capacity to show that Odebrecht is the safest company to work with, since it not only has learned from its mistakes, but also is monitored by Brazil and the United States and clearly understands its commitment to maintaining such a position. In parallel, despite this challenging period for the company, Odebrecht has not failed to deliver and complete its projects. It found the necessary resources and competency. While it was not able to secure long-term financing for Galeão, the airport was still ready to receive the Olympics. Our concrete actions will define us over time.
Broadcast: Will there be any communication campaign to reinforce this process?
Guidolin: Some of our companies have changed their brands, but we think that any change over these last three years would have been seen as merely cosmetic. We made concrete efforts and are working with this vision of the future. With the entry of a new partner, we could discuss a change, perhaps not in the name, but in the brand’s presentation. First, we wanted to implement these changes.
Broadcast: Will the construction company have a new partner?
Guidolin: In the future, we are not ruling out the possibility of having partners in the construction company, or even of taking the company public.
Broadcast: But are there any negotiations on the table?
Guidolin: No. As we look at the challenges of the present, we cannot stop thinking about where we were headed. At the construction company, we already have discussed the partnership model, which could be based on geographies or specialties or involve the entire company. There is still a vision in the group that the governance model we have could be an advantage and that the stock market could be a way to improve liquidity and increase the value of our assets. And that is true for all of our businesses. There is no reason why our companies should be closely held and 100% controlled by Odebrecht.
Broadcast: Is Odebrecht qualified to participate in the recovery in Brazil’s public works?
Guidolin: Yes, from a formal viewpoint, we are fully qualified. We were the first company to enter into a formal agreement with the Federal Prosecution Office (MPF), with the Office of the Attorney General, with the Federal Controller General and with Brazil’s Antitrust Authority (CADE). We have signed agreements with various authorities at various levels over the last three years. We have the technical competency and now will seek to present the best solutions and projects. We already are building a thermal power plant for Furnas, the Bus Rapid Transit (BRT) in Belém, the second phase of the metro in Panamá and two other projects in the United States. We are in discussions to resume important projects in Peru and in the countries where we had very intense exposure during this process.
Broadcast: How did you receive the news article published by the newspaper O Estado de S. Paulo regarding the annulment of part of the agreement with the Prosecution Office in São Paulo?
Guidolin: We are certain and confident of the agreements entered into with the Courts, in accordance with the law and the applicable requirements. Our goal is to collaborate at all levels.
Broadcast: Did the way Operation Car Wash was conducted compromise the financial health of companies, which should not pay for the mistakes of its executives and other people involved?
Guidolin: I never felt, in Brazil, the desire to kill the company.
Broadcast: How about Odebrecht Transport?
Guidolin: OTP divested certain assets, such as Galeão, Embraport and Logum. It will divest more assets. Rota das Bandeiras is talking to an investor, and so are the urban mobility assets in Rio de Janeiro. Another big project is Rota do Oeste, which is the concession for Highway BR-163, which is a key route for agricultural goods coming from the Midwest. With the economic problems of the concession holders, it has to be readdressed, with adjustments to the size of the investments or a solution for refunding the investments already made. It’s in the interest of OTP to resume the project. These are programs being developed by OTP because the company has its own financial structure and partners. They are expected to be concluded in the first half of this year.
Broadcast: Have you already made your imprint on Odebrecht?
Guidolin: Odebrecht has always had the imprint of a very large group of people. A company that operates in so many countries and businesses has specific features in each industry, such as ethanol, engineering, petrochemicals. Odebrecht is not a company with a single face. They do share a strong culture of delegation, trust, believing in the capacity of people, which in fact is being complemented and strengthened by our governance process, policies and control and management practices. The goal is to strengthen the business, not to change its personality.
Broadcast: Is it hard to deal with so many different profiles?
Guidolin: It’s been a great learning opportunity for me. I am 46 and, in May, I will have been at the helm of Odebrecht for two years. At Odebrecht today, while we have executives with a lot of experience in their 50s or 60s, with 20 or 30 years of experience, a young generation has risen very quickly. It’s a healthy process. Odebrecht has always focused intensely on developing people. This enabled it to come out of a process that would have worn down any organization and require a series of changes in leadership positions at once at various levels, and which was only possible because people were already being prepared. Two years later, they already know their business and have begun to consider how to develop the new generations.
Broadcast: Do you think the personal challenges you faced in your life helped you to build your resilience, your resourcefulness to coordinate such a difficult process?
Guidolin: You have to be resilient, optimistic and determined to be a leader in the Odebrecht group. People do draw on their personal experiences, but I think nothing comes easy to anybody.
Broadcast: What was your biggest challenge in these two years at Odebrecht?
Guidolin: To conclude a phase that allows us to look more and more ahead to the future. It’s a process. It’s not like getting to the last page of a book. Our main goal is to do our homework, resolve the financial structuring issues and then, having a well-balanced foundation on which to look forward. That is the big challenge of 2019.