January 26, 2010 Expanding the World

Volume 13 | Issue 1

Santa Barbara Engenharia has already had huge success in the industrial and infrastructure construction market. Two years ago the company's

Brazil’s construction industry has boomed in recent years, along with the country’s economy. Even during 2009, when most of the world reeled from the effects of the economic crisis, Brazil has managed to maintain GDP growth. Now that the worst of the turbulence appears to be over, the country’s builders are ready to return to the fast growth of the years before 2009.

The pace of expansion since 2000, and the prospect for more as the economy heats up again, has drawn a lot of competitors into the construction market, reducing margins for builders and inspiring Santa Barbara Engenharia to look for another way to increase profit. The company now wants to invest in projects that will continue to produce revenue even after the construction is finished.

“We can’t just work, we don’t want to just work, in industrial construction, because in the end it’s a commodity,” explained Santa Barbara’s Chief Executive Officer, Marcelo Dias. “So we’re looking at other types of projects that require additional expertise, and provide more value-add. We have a lot of infrastructure projects on the books. We think Brazil will need to use a lot of private funding for these projects; the federal government can’t handle all of them.”

Santa Barbara’s goal is to follow in the footsteps of other construction companies that have moved from being just builders into infrastructure management. Examples include Spain’s Sacyr Vallehermoso and Ferrovial, which in addition to construction also have divisions that manage toll highways, ports, airports and parking garages, and France’s Bouygues, which has branched out into television, real estate promotion and cellular telephone networks.

Brazil is in need of immense investments in its transport infrastructure, to help the economy become more flexible and to reduce the cost to companies of moving people and goods around the country and to export markets. Santa Barbara’s idea is to build railroads, ports, airports and other vital facilities, and to seek partnerships to help operate them.

“The development of the projects will be financed by the company, but we’ll search for partners too, from companies with experience in that area, from investment funds, and others,” said Dias. “The projects obviously have to be self-sustainable. We’ll also have to find partners, international operators that already have expertise in these areas. We’ll look for local operators as well.”

The builder already has the financial muscle to take on these types of projects after explosive growth in the past few years, and even into 2009. In 2007 Santa Barbara had revenue of about R$220 million and more than doubled that amount in 2008 with sales of about R$490 million. The company is on track to have revenue of about R$700 million this year.

Toward the end of 2007 Santa Barbara made the decision to expand into infrastructure management, and started to make preparations for the move. Dias expects the first projects of this nature to start up in 2013 or 2014, and the goal is for revenue to reach 6 percent of total sales over the medium to long term.

“With this growth our ability to finance our own projects grew quickly as well,” said Dias. “What we believe is that we don’t lack money; we lack good projects. We have a unit already that’s developing these types of projects; we’re going to invest in this sort of research of finding partners and good investment ideas. There will be at least three years of investment before we have a project going.”

INDUSTRIAL CONSTRUCTION GOING STRONG
While Santa Barbara has turned its attention toward developing long-term projects to operate infrastructure, the company isn’t ignoring its beginnings in industrial construction. Since starting out in 1967, the Belo Horizonte-based builder has completed more than 1,000 projects all around Brazil, including schools, hospitals, shopping centers, airports, highways, dams, cement factories, steel plants and refinery installations.

The demand for such structures around the country is still growing, from the government and from private business, and Santa Barbara is growing along with it. The company is constantly hiring new workers, both for administrative purposes and to work on the job sites, and the level of expertise of employees is also increasing rapidly.

“We have 300 engineers now,” said Dias. “We have about 5,000 people working in the company, without counting construction workers. Growth is coming from the mining sector, from oil and gas, and from many public contracts too. Those are the drivers that have pushed our growth so much.”

The outlook for growth in those areas is good as well. Gross domestic product increased 1.9 percent in the second quarter of this year from the first quarter, after shrinking in the first quarter, according to a report published Sept. 11 by the Brazilian Institute of Geography and Statistics. The contraction in the first quarter followed periods of expansion of as much as 6.8 percent in previous periods.

The steelmaking and oil industries will be particularly prolific in their spending in coming years, based on projects already announced. Petrobras, Brazil’s state-owned oil company, has announced a capital spending budget of more than $170 billion for 2009-2013, and Cia Vale do Rio Doce has already announced three projects that could double the country’s steel output, from about 35 million tons per year now, over the next five to six years.

“Companies are getting back to announcing new projects and we have a green light for several projects,” said Dias. “Vale is going again, especially in iron ore and steel. Petrobras is a constant go. There’s going to be a big division in our sector over Petrobras in the next few years, between those that work for them and those that don’t.”

Work generated by Petrobras alone will probably provide Santa Barbara with about 20 percent of the company’s revenue for the next five years, Dias said. The builder is careful to maintain a diverse portfolio of projects though, because management doesn’t want to be too dependent on any one source of income, while at the same time moving out of some sectors that it has deemed non-strategic.

The strategic sectors defined by Santa Barbara are infrastructure, steel, energy and mining, though the company will also continue with some hospital projects as well. The builder also wants to strike a balance between public- and private-sector projects, with the goal of getting about half of its revenue from each side over the long term, while recognizing that year-to-year the figures might swing back and forth.

The company is already well on its way to transforming itself from a construction company into a services provider and builder. Between its plans to move into infrastructure management and to benefit from the many projects that are coming through in mining, steel and energy, Santa Barbara has ambitious goals for growth, both of revenue and within its sector, concluded Dias.

“Our main vision is to be among the 10 largest engineering and construction companies in Brazil by 2015,” he said. “We’ll get there partly through growth in our new projects unit, and partly through our traditional business of industrial construction.”

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