If you have been reading this blog for several
years, you know that competitive swimming has been my favorite activity after
investing. Actually, it helped me keep my balance
during the stress filled period from 2007 to 2009. When you swim, your mind is focused on your
strokes, your times, how you “feel the water” and nothing else. By the time practice is over, any stress you
may have brought to the pool has disappeared and you are ready for another day.
Lately, my attention has been drawn to the efforts
of past champions, from the business and swimming worlds, to make a
come-back. Both fields are very
competitive, staying on top is difficult as trailblazers, by breaking records,
make the seemingly impossible possible and keep moving the goal posts. Staying on top is as difficult for leading
companies as it is for elite swimmers, and once they slip, coming back is
terribly hard. For all, aging is the
ultimate debaser of idols.
Four champions are battling gamely, and given their
track record, their efforts are worth watching closely.
Grant Hackett is the greatest long distance swimmer
of all times, having won silver or gold medals in the 200m, 400m, 800m and
1500m free at world and Olympic venues.
At age 34, after taking a six year break from competition and with the
benefit of only six months of intensive practice, he qualified for the
Australian 4x200m relay at this summer World Championships and finished third
in the 400m free at the Australian Nationals.
And he did so in world class times.
It is one thing to come back in the 50m or even the 100m
free past age 30 (Anthony Irvin, at 33, is a rare example of success), but it
is altogether different in the 200m and even more so the 400m. It simply never happened before. When Vladimir Salnikov of the USSR capped his
great comeback in Seoul by winning gold in the 1500m he was 28 years old, he
had not dropped swimming for 6 years and he certainly had practiced for more
than 6 months prior.
In a way, Hackett is so atypical as to have little predictive
value for others. He continues to enjoy
an exceptional fitness level and a huge physiological advantage thanks to a
lung capacity in excess of 13 liters[1]. Finally, those six years away from elite
swimming seem to have rekindled his love for the sport.
The case of Michael Phelps is more complex. The greatest all around swimmer ever, Phelps
shares with Hackett the mental fortitude required for top level
performance. While Hackett has
exceptional fitness, Phelps has great feel for the water. Both swimmers worked very hard on their
conditioning, with Hackett enjoying a natural
edge there; as a result, Phelps has to train harder to regain his top form, a
cruel challenge when you are pushing 30.
Finally, Phelps never took more than 1-1.5 full years off and I think
that it shows in the mental freshness area.
So far this year, his times have been unimpressive,
and while his coach puts that on a heavy work load, one would assume that his
competitors are in the same situation, yet performed better. Phelps must now get back to the grind to catch
up with his peers (Lochte, Clary, Cseh) and push back younger, fresher,
upcoming rivals (le Clos, Hagino, Seliskar).
I wouldn’t bet against Phelps, particularly if he
focuses on one or two races (100 fly, 200 IM), but he will need great mental
strength to repeat as #1. Success is
possible but will only be achieved the (very) hard way.
In the business world, two companies are also fighting
to get back on top. Petrobras is one.
Its new management team is finding much fat to
cut. For example, it discovered that its
PR department employed 1,146 people; this compares with 45 at Vale[2][3]. More generally, Petrobras has over 446,000
employees vs. 94,000 at Shell, yet Shell had revenues of US$421 billion in 2014
vs. US$144 billion at Petrobras[4].
I have long sustained that Petrobras is like Ali
Baba’s cave, full of treasures or at least a bric à brac of valuable assets.
The new management team has announced a divestiture program of at least
US$13.7 billion. That should not be too
difficult to achieve. Indeed, it
probably should be expanded in order to make the company more manageable and
efficient.
But a successful turnaround will depend on factors
beyond the company control. To wit:
-1Q2015 showed a marked improvement in earnings
before interest and taxes, largely as a result of the lifting of the government
mandated freeze on diesel and gasoline prices.
Hopefully, this hands off policy on the part of the government will
continue even if unemployment rises and the economy contracts;
-Company gross debt expressed in Brazilian reales
rose 14% q-o-q to a whopping R$400
billion as a result of currency depreciation. So far in 2Q15, the real has
appreciated, but a swing back the other way is always possible;
-Despite a large downward revision, 2015 capex are
expected to exceed operating cash flows (US$29 billion vs. US$25 billion) for the eighth year in a row. The company should unveil its new medium-term
plan next month. We will see how much
leeway the government, as controlling shareholder, will allow the company.
-After Congress made some positive noise about
revising the onerous local content rules and the requirement that Petrobras be
the lead operator in new pre-salt projects with a 30% equity stake, President
Dilma Rousseff publicly came down against those sensible proposals;
-Finally, Petrobras operates in a country which is
struggling with well known problems, the solutions to which are socially
unpopular and politically difficult;
In sum, everybody knows what it will take for Petrobras
to regain its former health, and some welcome remedies (most importantly the
freedom to price oil derivatives) are already in place. But the crux of the problem is political in
nature, and unfortunately the President is no free-market believer and even if she
were, she would have a hard time leading the way after losing control of her own
party.
Imagine Michael Phelps being limited to five morning
swim and two dry land practices per week, at venues to be decided on a weekly
basis by the Baltimore municipal council[5]. He could still make the C and perhaps the B
finals on the Arena Grand Prix circuit, but he wouldn’t stand a chance to make
it to Rio in 2016.
Petrobras won’t be another PDVSA but it won’t stand
a chance to emulate Total. Where, in
between, will it settle is still in doubt.
A world leader in iron ore mining,Vale shares some
of the same pains with Petrobras. A
national champion, Vale was greatly pressured by then President Lula to use its
bountiful cash flows to invest in new projects, whether or not those fell
within its area of expertise. Unlike
Petrobras, Vale was a privately controlled entity, yet the conflict with the
government got so severe that its CEO had to resign and a new one, more
politically attuned, was appointed.
But the damage was done, with investments in
fertilizers, non-ferrous and precious metals, coal and lower grade iron
ore. To be fair, the commodity boom of
the last decade made capacity expansions very tempting particularly since the
alternative - share buybacks and big
dividend increases – was anathema to the government.
As Chinese demand for iron ore fell and prices
swooned 60% from their highs, miners scrambled to slash operating costs,
renegotiate capex-related contracts and divest from non-core assets. By their nature, mining projects are
long-term and very expensive, so that cancelling them midway makes little
sense. As in the oil sector, being the
lowest cost producer is the name of the game.
A global production cutback would raise ore prices and operating costs, and it
would give some breathing space to high cost producers. So far, the most efficient miners have chosen
to raise production to lower costs and flush out their weaker competitors
(Chinese and some Australian). Besides, it is unclear the extent to which China would salvage its iron ore industry. So are the short/medium terms prospects of the Chinese economy.
Unlike Petrobras, Vale is reasonably lean and well
managed. It has divested assets and
continues doing so. It is cutting
costs. Its survival is thus not in
question. But for the reasons mentioned
above, it will be some years before it returns to a high degree of profitability.
Both Petrobras and Vale are suffering from
unfavorable commodity dynamics, weakening export markets as well as political
and economic crises at home. French
readers who see similarities between present day Brazil and France in the Hollande-Ayrault years will be correct,
except that the situation in Brazil is much worse.
I think that Hackett will do great this summer at World,
flirting with 1’ 46” flat on the 200m free and making Australia the favorite to
win gold in the 4x200m relay. Phelps
won’t be there; he may have it in him to win gold in Rio, in either the 100 m
fly or the 200 IM, but for the first time, I think that his challenge may be
more mental than physical.
Petrobras has rebounded from a scary bottom and
will “make it”, but I must say that I have lowered my expectations; B finals at
best. As for Vale, A finals but no medals.
Both should do better in 2020 in Tokyo.
[1] As per Hackett, it didn’t decrease in the
six years since his retirement. Sydney
Herald Tribune April 2, 2015.
[2]
Folha de Sao Paulo May 17,
2015.
[3] Also, this number includes PR employees of
the holding only, and none at subsidiaries
like BR Distribuidora.
[4] In case you think that the recent devaluation
of the Brazilian real distorted the comparison, the numbers were US$467 billion
vs. US$145billion in 2012.
[5] I know, he and Bob Bowman are moving to
Arizona, but this is to make a point!
