Localiza Rent a Car S A : 4Q23 and 2023 Speech

4Q23 and 2023 Webinar Transcription

Operator:

Good afternoon. Before we begin, for those who need translation, the tool is available on the platform. Please click the "interpretation button" using the globe icon at the bottom of the screen and choose your language of preference. You may also choose to mute or unmute the original audio by clicking the "unmute original audio" button.

Good afternoon, and welcome to the Localiza&Co webinar regarding the results of the 4th quarter and the year 2023. With us today are Bruno Lasansky, our CEO, Rodrigo Tavares, CFO, and Nora Lanari, Director of Investor Relations of the Company.

We would like to inform you that this webinar is being recorded and will be made available at ri.localiza.com, where you can find the complete Disclosure of Results material. The presentation is also available for download on the IR website.

For the Q&A session for analysts and investors, we kindly ask you to indicate your interest in participating via the Q&A icon at the bottom of your screens, by typing your NAME, INSTITUTION, and LANGUAGE. When called upon, a request to activate your microphone will appear on the screen.

To submit questions in writing, please use the Q&A icon at the bottom of your screens and fill in your NAME and INSTITUTION before the question.

Please note that the values in this presentation are in millions of Brazilian Reais and in IFRS. We emphasize that the information contained in this presentation and any statements that may be made during the video conference regarding Localiza's business outlook, projections, and operational and financial targets constitute beliefs and assumptions of the Company's Management, as well as information currently available. Future considerations are not performance guarantees. They involve risks, uncertainties, and assumptions, as they refer to future events and therefore depend on circumstances that may or may not occur.

Now, I will hand the floor to Bruno Lasansky, CEO of the Company, to begin the presentation.

BRUNO LASANSKY:

In 2023, we celebrated the 50 years of Localiza&Co, a year marked by remarkable advances and significant challenges.

We progressed in the integration process, with substantial gains in productivity. We expanded our Seminovos sales network, contributing to the increase in car sales volume and the reduction of the average age of cars sold, although still distant from our historical levels. Furthermore, we expanded the capillarity of Car Rental, which showed revenue growth in all segments, more than offsetting the effects of the carve-out. We scaled Localiza FAST, offering an agile and completely digital experience expanding the differential in enchantment to our customers. We captured strong growth in Fleet Rental, highlighting the success of Localiza Meoo, our subscription car. We successfully started our operations in Mexico with the opening of 10 branches in the main airports,

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around a thousand cars in the fleet and an NPS at an excellence level. We have significantly advanced in technology, use of data and telemetry, resulting in a strong reduction in theft, fraud, and accidents. All of this progress were driven by a highly engaged team and a solid Management and Culture process.

Our continuous evolution was recognized by several rankings throughout 2023, of which we highlight: one of the 10 best companies to work for in Brazil by Great Place to Work; 1st place in the Reclame Aqui Awards in all categories in our sector, recognizing the excellence in service to our customers; winning the Company of the Year award by the Exame's magazine in the ranking of the Biggest and Best of the year.

Even with all these advancements, we faced an environment characterized by high interest rates and credit restrictions. These factors negatively impacted our debt cost and Seminovos sales, which were also affected by the consumer's lower purchasing power compared to the increase in car prices. Additionally, we suffered the effects of the Popular Car Provisional Measure, which negatively impacted car prices and depreciation.

Given the uncertainty regarding the residual value of cars, in 2024, we will remain focused on 5 priorities:

1. rental pricing to restore return levels.
2. optimization of segment portfolio and capital allocation discipline.
3. fleet utilization and efficient cost management.
4. expansion of Seminovos sales capacity to support fleet rejuvenation process and
5. innovation with the aim of further enhancing the enchantment differential for our customers.

Finally, I would like to highlight that even with the pandemic and all the challenges of recent years, Localiza&Co expanded its invested capital base from R$10 billion to R$43 billion from 2019 to 2023, a CAGR of 44% per year, with 22% annual growth in invested capital since the business combination on July 1, 2022.

Our current scale combined with a robust balance sheet increases our relative competitive advantages and positions us solidly to maintain our growth trajectory with value generation.

To present the highlights of the year and the quarter, I'll hand the floor to our CFO Rodrigo Tavares.

RODRIGO TAVARES:

Thank you, Bruno, and good day, everyone.

Moving to page 2, as we have done since the beginning of the business combination process, we will present the quarterly results adjusted for the one-off of fleet write-up amortization and the write-off of Locamerica Rent a Car's tax loss, which impacted net income by R$45.3 million.

Additionally, this quarter we had a negative effect of R$63.3 million, with R$28.7 million related to the present value adjustment (PVA), through the anticipated liquidation of the derivatives linked to the Locamerica's shareholders financing operation in the midst of the business combination,

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and R$34.6 million of negative EBIT from operations in Mexico. These effects were not adjusted in the result.

Another highlight was the change in the allocation of costs for preparing used cars for rent. In 4Q23, the preparation cost was approximately R$190 million, with around R$155 million in car rental and R$35 million in Fleet Rental, with a negative effect on rental margins in contrast to the positive effect on the Seminovos margin.

We estimate a positive depreciation effect of around R$150 million before taxes in face of the change, or R$100 million in the quarter's profit, around 40% in Fleet Rental and 60% in Car Rental.

Turning to the year's highlights on page 3, after a year and a half of a robust integration process, we have already captured significant advances in our productivity, processes, and practices.

In 2023, we achieved significant gains in operational efficiency, reflected in margin improvement. In comparison to 2022:

• Rental revenue grew by 26.0% during the year, even with the effects of the carve-out.
• Operating costs increased by 7.5% in the year or just 1.3% if we disregard the effect of the change in preparation.
• SG&A grew 1.2% in the yearly comparison.

These efficiencies brought an operating result R$2.8 billion higher than in the previous year with an increase of 6.3p.p. in the rental EBITDA margin.

On the other hand, the effects of the cycle of increased depreciation and still high interest rates offset operational gains, representing more than 52% of net rental revenue in 2023.

We still see room for operational improvement as we move forward with rejuvenating the fleet and completing the integration process. Furthermore, any reduction in interest rates could contribute to an increase in return levels.

Moving now to the highlights of the quarter on slide 4, we see at the top the robust revenue growth in both rental divisions, as well as in Seminovos. Net revenue from Car Rental increases 22.3%, Fleet Rental presents growth of 40.4% and Used Cars of 39.4% in the annual comparison.

At the bottom, we see that EBIT adjusted for capital gains totaled R$1.8 billion, growth of 23.5% in the annual comparison. Adjusted net profit, excluding the effects of capital gains and tax losses, totaled R$750.9 million, growth of 17.8%. Furthermore, we showed an improvement in the net debt/fleet value ratio, which ended the quarter at 0.56x.

In short, we highlight the company's commercial and operational excellence to face the scenario of higher interest rates and depreciation. We grew 34% in consolidated net revenue for the quarter, with significant advances in costs and expenses, increasing rental margins.

We still see volatility in the price of cars, which requires attention in capital allocation, but the robust operational delivery gives us the conviction that we are on the path of gradual recovery of the ROIC spread to historical levels.

Now, to present the results I'll hand the floor to our IR director, Nora.

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NORA LANARI:

Thank you, Rodrigo, and good afternoon, everyone.

Entering into the details of the results, we'll start the presentation with the Car Rental division in Brazil on page 5. The net revenue of this division reached approximately R$2.3 billion, a growth of 22.3% compared to the previous year, reflecting the first quarter on a comparable basis after the carve-out. In just one year, the Company has rebuilt the carve-out in volume and revenue, a result of commercial excellence and brand strength.

On page 6, we show a 9.6% increase in average daily rates, reaching R$126.8 in the quarter. The utilization rate shows a 1.8 percentage point growth compared to the previous year, reaching 79.7%, even in a quarter of strong car purchases. The increase in utilization rate, in the context of higher average daily rates, demonstrates the resilience of demand in the quarter.

Moving to page 7, we present the evolution of the rental network. After reducing the number of branches in 2022 due to the carve-out, we have resumed expanding our own network with the opening of 15 branches in Brazil and another 10 in Mexico. We ended the period with 712 branches in Latin America. It is worth noting that the average rented fleet has advanced from 2021 to 2023, even with fewer branches in Brazil, as a result of increased productivity per branch.

Turning to page 8, in the Fleet Rental division, we continue with a robust growth pace, with net revenue reaching R$1.9 billion, a 40.4% increase compared to 4Q22, reflecting a 19.1% growth in the number of daily rentals. In 2023, revenue grew by 50.5%, with a 25.4% increase in the volume of this division.

Moving to page 9, we present the average rate of R$87.81, which advanced by 17.6% in the quarter, reflecting the pricing of new contracts in a context of higher interest rates, car prices, and depreciation. The utilization rate decreased by 1.4 percentage points compared to 4Q22.

Moving to page 10, we show the balances of car purchases and sales. In 4Q23, 107,532 cars were purchased for the Company's own operation in Brazil, with 70,375 in the Car Rental division and 37,157 in the Fleet Management division, and 56,514 were sold, resulting in the addition of 51,018 cars.

In Car Rental, the strong fleet addition in 4Q23 aims to support the increased year-end demand. In the first quarter of 2024, the Company will reduce the pace of purchases in Car Rental, aiming to adjust the fleet after the peak season.

Moving to page 11, we present the Seminovos network, which ended the quarter with 215 sales points. Throughout the year, 29 stores were opened, with 20 in the second semester, still in the maturation phase. The new openings aim to support the increase in sales for fleet renewal, a movement that is expected to continue throughout 2024.

Continuing on page 12, we present the average purchase and divestment price. In 4Q23, in the Car Rental division, the average purchase price was R$81.3 thousand and the selling price reached R$65.8 thousand, resulting in lower fleet renewal capex compared to 3Q23. The integration and standardization of car deactivation processes throughout 3Q23, combined with the continuation of the fleet rejuvenation process, are expected to contribute to increased retail sales in 2024.

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In Fleet Rental, the average purchase price of R$91.6 thousand in 4Q23 reflects the mix of light vehicles with better conditions, while the average selling price reached R$66.9 thousand, advancing sequentially and contributing to the reduction of fleet renewal capex compared to 3Q23, also in this division.

On page 13, we show the advancement of the end-of-period fleet, which reached 657,612 cars in the fourth quarter of the year, a net addition of 11.3% compared to the previous year, with a growth of 19.1% in the Fleet Rental division and 4.8% in the Car Rental division, which returns to growth after recomposing the carve-out effects.

Moving to page 14, we see that in the annual comparison, rental net revenue reached R$4.2 billion, a growth of 30.1%, with 22.3% in the Car Rental division and 40.4% in the Fleet Rental. Seminovos revenue totaled R$3.7 billion in the quarter, a 39.4% increase compared to the same period of the previous year, resulting from the significant increase in Seminovos sales on an annual comparison. As a result, consolidated revenue for the quarter totals R$7.9 billion. We ended the year with consolidated net revenue of R$28.9 billion, a growth of 33.9%.

On page 15 we present an EBITDA of R$2.9 billion in 4Q23, a 33.0% increase compared to 4Q22. In this quarter, we started allocating the costs of vehicle preparation for fleet deactivation to the rental divisions. These preparation costs were previously allocated to Seminovos, an area of the Company's efficiency; however, with the centralization of operations, the management of vehicle preparation for sale is now handled by the Car Rental and Fleet Management Divisions. This change had a negative effect on rental margins, offset by a positive effect on Seminovos margins.

In 4Q23, the EBITDA margin of the Car Rental division was 62.7%, an increase of 1.7 percentage points compared to the margin in 4Q22. In Fleet Management, the margin was 71.5%, an increase of 5.0 percentage points compared to the margin in 4Q22. The consolidated rental margin reached 66.7%, an increase of 3.4 percentage points compared to 4Q22, despite the change in the allocation of preparation costs.

Excluding the effects of the change in the allocation of preparation costs for comparison purposes, the EBITDA margin of the Car Rental division would have been 69.5%, a strong increase of 8.5 percentage points, reflecting volume, price, utilization, and lower maintenance costs per car gains, in addition to SG&A reduction. In Fleet Management, the comparable EBITDA margin would have been 73.5%, a gain of 7.0 percentage points, mainly explained by new contracts priced in the context of higher car prices and depreciation, in addition to greater cost and expense efficiency. New initiatives associated with mobility, telemetry, and workshops brought revenues of R$45.2 million but negatively impacted the EBITDA margin of this division by 2.5 percentage points in the quarter.

The margin of Seminovos in 4Q23 was 3.5%. For comparison purposes, keeping the preparation costs in Seminovos, the margin in 4Q23 would have been -1.7%, reflecting the more challenging scenario for car sales, in a context of lower consumer purchasing power, high interest rates for financing, and still restricted credit, combined with a mix of cars with higher mileage, concentrated in wholesale.

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Moving on to Page 16 we see the evolution of the average annualized depreciation per car. In Car Rental, the average annualized depreciation of R$6,113.1 incorporates the effect of revising cost assumptions and estimated selling prices to reflect the more challenging scenario in Seminovos; the lower relative participation of cars with higher depreciation rates in the fleet mix, cars from the 2nd vintage; as well as the exclusion of preparation costs from the total cost assumptions.

In the Fleet Rental Division, the average depreciation per car of R$6,689.7 in 4Q23 reflects the renewal of part of the cars with lower depreciation. In this division, the effect of excluding preparation costs from the depreciation assumption has a diluted effect due to the longer cycle.

Excluding the effects of the change, the annualized depreciation in the Car Rental would be R$7.3 thousand and R$7.6 thousand in the Fleet Rental.

On Page 17 adjusted EBIT adjusted for goodwill reached R$1.8 billion in the quarter, a 23.5% increase compared to adjusted EBIT in 4Q22. Accounting EBIT showed a robust growth of 47.4% compared to the same period of the previous year. Despite the strong operational advance, the increase in depreciation and lower Seminovos results impacted the EBIT margin of the Car Rental, which was 41.0% in 4Q23. In the Fleet Rental Division, the EBIT margin reached 49.6%, an increase of 1.6p.p.

Turning to Page 18 we present a net profit of R$705.6 million, a 59.1% increase compared to the same period of the previous year. Excluding non-cash impacts from the amortization of write-up and tax loss' write-off, adjusted net profit totaled R$750.9 million in 4Q23, a 17.8% increase compared to 4Q22, reflecting the increase of R$714.8 million in operational results partially offset by the negative effect of R$601.6 million, resulting from the increase in depreciation of cars and other fixed assets, financial expenses, and income tax.

Moving to Page 19 we bring the Free Cash Flow. In the year, the R$7.0 billion generated by the rental operation was consumed by higher CAPEX for fleet renewal and growth. The Company expanded the vehicle base by 21% in the year, from R$43.2 billion in 2022 to R$52.4 billion at the end of 2023.

On page 20 we see that the Company ended the year with net debt of R$29.3 billion.

Moving on to page 21 we present the debt profile and cash position of R$11.5 billion at the end of the period. Including the announced issuances and settlements up to January 31, 2024, the Company would have approximately R$12.7 billion in cash.

On page 22 we present comfortable debt ratios, mainly evidenced by net debt to fleet value at 0.56x and net debt EBITDA at 2.78x.

On page 23 we present a ROIC of 13.7% in 2023, with a spread of 4.1 percentage points to the after-tax cost of debt, reflecting the adverse market for car sales, still high interest rates, in addition to the capital base coming from the business combination priced at lower spreads.

We are now available to answer your questions.

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