Bloomberg News

Car Crashes Boost Carlyle’s Axalta Paint Unit: Corporate Brazil

September 16, 2013

Traffic In Rio de Janeiro

Brazil’s registered vehicles jumped 31 percent to 64.8 million in 2010, the latest data available from a World Health Organization study of accidents, from three years earlier. Photographer: Dado Galdieri/Bloomberg

On the streets where Brazilians are seeing more car accidents, Carlyle Group LP (CG:US)’s Axalta Coating Systems sees more business.

Paint demand for repairs is rising as autos crowd onto Brazil’s roads and collisions soar, Axalta Chief Executive Officer Charlie Shaver said. The maker of paints and coatings is studying two acquisitions as part of a goal for a 100 percent boost in revenue in the region to $1.5 billion by 2018.

“If you look at doubling your sales in Latin America in the next five years, we can’t do all of that organically,” Shaver said in an interview in Sao Paulo on Sept. 6. “We in the next year will possibly do -- again, at the right price -- one or two acquisitions in Latin America.”

Shaver’s Latin America target makes the region pivotal in his push to raise global revenue for Wilmington, Delaware-based Axalta to as much as $7 billion by 2018, 63 percent more than 2012’s $4.3 billion. The company, sold to Carlyle in February by DuPont Co. (DD:US) and renamed Axalta, will benefit from fix-ups in Brazil and Mexico’s strongest auto sales since 2008, he said.

Brazil’s registered vehicles jumped 31 percent to 64.8 million in 2010, the latest data available from a World Health Organization study of accidents, from three years earlier. A federal tax cut in late 2011 to stimulate the economy helped spur a 4.7 percent gain in 2012 auto sales.

More Claims

Accidents are surging, too. State-owned insurer Seguro DPVAT paid 300,000 auto claims in 2013’s first half, 38 percent more than a year earlier.

“The more cars in circulation, the higher the number of accidents,” said Dilson Ferreira, executive president of the Brazilian Coatings Manufacturers Association, known as Abrafati. “With insurance companies paying the bill, it’s a guarantee. And looking at the cars on the roads, you rarely see beat-up cars -- people are taking care of their cars.”

Axalta will depend on Latin America, and especially on Brazil, in its bid to climb higher than its current No. 5 spot in a global coatings industry led by Akzo Nobel NV (AKZA), Shaver said. Axalta will put about a third of its $100 million annual investment budget into Latin America, excluding acquisitions, he said, which are likely to be focused on Brazil.

Brazil has about 75 large, fully professional paint manufacturers among an industry of 400 to 500 companies, most of them small and informal, said Ferreira, the trade-group official.

Corporate Cutbacks

As Axalta relocates its headquarters to Philadelphia, it’s cutting expenses significantly at the corporate level and reducing employment in Europe by as much as 5 percent, Shaver said, without elaborating on the size of that pullback.

Axalta’s paints and coatings are also used for industrial applications such as electrical insulation. It’s now focusing on the architectural segment for buildings and other infrastructure uses such as bridges and light poles, Shaver said.

Companies serving those markets may make sense as acquisitions, according to Shaver, who said Axalta’s targets in Latin America would have annual sales of as much as $50 million.

Axalta is a prize that Carlyle sought two years ago, even before Wilmington-based DuPont put it on the market, Shaver said. Carlyle paid more than eight times 2012 earnings before taxes in winning Axalta in a $4.9 billion sale, he said.

While a weak Brazilian economy may shrink paint sales in the country this year by 0.4 percent from 2012’s $4.28 billion, growth is poised to resume in 2014, according to Abrafati, the trade group. A weekly central bank survey of 100 economists released today shows that Brazil’s economy is estimated to grow 2.4 percent this year, compared to 0.9 percent in 2012.

Paint Leadership

“In the long-term, our perspective is that paints will grow ahead of the economy by 1 percent to 1.5 percent,” Ferreira said. Growth in Brazil’s gross domestic product this year is projected to be 2.35 percent, based on a weekly central bank survey of about 100 economists released on Sept. 9.

Brazil’s surge in vehicle ownership also comes at a cost: An estimated 1.2 percent of GDP is lost each year because of road-traffic crashes, according to data compiled by the World Health Organization.

Accidents totaled more than 400,000 in 2009, based on the most-recent government statistics covering all types of crashes. In 2011, the auto death toll was 44,553, 40 percent more than in 2000, Brazil’s health ministry reported.

The auto industry has been shielded from the recent deceleration in Brazil’s economy, said Bernardo Carneiro, a Deutsche Bank AG analyst in Sao Paulo.

Auto Boost

Carneiro cited the tax cuts, an estimated investment of 35 billion reais ($15.3 billion) from 2012 through 2016 in new and expanded factories, and more cash-flush consumers seeking their first cars than in mature markets.

Brazilian auto-repair centers are a fragmented industry, according to Ferreira, the trade-group executive, with small operators that have to pay higher prices for paints and other materials. Profit margins in repairs range from percentages in the mid-teens to the mid-twenties, beating mid-teens margins for industrial paints and coatings, Axalta’s Shaver said.

Carlyle’s average cost of debt in the purchase of Axalta was 5.3 percent, Shaver said, creating “ample liquidity” and helping position the company for the purchases that he sees as necessary to expand in Latin America and elsewhere.

“We sit on over $800 million in cash in unused liquidity today, which is more than enough to do any kind of growth we could even imagine,” Shaver said.

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • CG
    (Carlyle Group LP/The)
    • $29.8 USD
    • 0.60
    • 2.01%
  • DD
    (EI du Pont de Nemours & Co)
    • $72.15 USD
    • 0.72
    • 1.0%
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