Localiza Rent a Car S A : Transcription 3Q22

Localiza Rent-a-Car

3Q22 Webcast

November, 16th 2022

Anna Branco:

Good afternoon. Before we begin, for those who need translation, the tool is available in the platform. Please click "interpretation button" using the globe icon on 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's webinar referring to the results for the third quarter of 2022. Today with us are present, Bruno Lasansky, CEO, Rodrigo Tavares, CFO and Nora Lanari, Investor Relations Officer.

Please be advised that this webinar is being recorded and will be made available on ri.localiza.com/en, where the complete material of our Earnings Release is available. You can also download the presentation from the chat icon.

For the Q&A session for analysts and investors, we advise you to signal your interest in participating, through the Q&A icon, on the bottom button of your screens, indicating your name, institution and language. When called, a request to activate your microphone will appear on the screen. For telephone participants, dial *9 (raise hand), once your question is announced, dial *6 to mute and then to unmute the audio.

To send questions in writing via the Q&A icon, at the bottom of your screens, we advise you to make them by indicating your name and company before your question.

We inform you that the values of this presentation are in millions of Reais and in IFRS. We emphasize that the information contained in this presentation and any statements that may be made during the videoconference, regarding Localiza's business prospects, operating and financial projections and goals, constitute beliefs and assumptions of the Company's Management, as well as information currently available. Forward-looking considerations are not guarantees of performance. 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 over to Bruno Lasansky, the Company's CEO, to begin the presentation.

Bruno Lasansky:

Good afternoon, everyone and welcome to the Localiza results webinar. We are pleased to present our first quarter of combined results, a moment the Company advanced fiercely in the materialization of the business combination and in the carve-out conclusion, sustaining high operational and financial performance.

Following reliable planning, in just three months, we completed the creation of a fully operational company with a fleet of around 50,000 cars, 180 branches, 22 used car stores, systems, and teams (carve-out). On October 1st, we sold this company to Brookfield, which started to operate the Unidas brand, and we received, as agreed, the amount of R$3.2 billion with cash effect in 4Q22. Additionally, we agreed upon a positive price adjustment of around R$320 millions related to the change in working capital and the sold fleet value, which will be paid to the company by the end of January 2023.

The resources attained from the carve-out sale will be reinvested in the fleet growth, now with better commercial and mix conditions, in a context of increased vehicle production and increase in relevance of direct sales. We have a balanced net debt/EBITDA ratio and a mix of segments, which allow us to sustain our growth path.

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With the carve-out conclusion, we now have all our focus and energy on the integration process and synergies capture, and we have already taken some important steps in this direction. The Company's leadership has been defined and our teams are already operating integrated, learning the processes and best practices of each company. We also concluded the Rental Car branches integration, which already operates under Localiza's brand, and we are concluding the migration process in the Used cars network. Since 3Q22, we combined the management of car procurement and made progress in negotiating the terms for next year under more attractive conditions for the Company, always maintaining solid and long-term relationships with all automakers. Through a dedicated integration team (IMO), we completed the evaluation and detailed planning of capturing synergies on all operational and financial fronts.

We have compatible cultures, aligned values, complementarity, and strong governance, which will undoubtedly facilitate the integration process.

The high satisfaction level of our customers and engagement of our team, fundamental competitive advantages of the Company, remained at a level of excellence, assuring that we are moving in the right direction. The excellence in conducting the carve-out and integration process, maintaining high performance in the business, is a result of the dedication and extraordinary energy of Localiza's employees, to whom we are deeply grateful.

At last, with the business combination, we started a process to evaluate the combined business portfolio, with the goal of optimizing the capital preliminary allocation and the use of resources, focusing on initiatives aligned with our strategy of growth with value generation.

Now, in a moment of vast car availability, we are thrilled with Localiza's distinct competitive position. We count on a reliable balance sheet, scale, people, brand and energy to capture great opportunities to grow with value creation, fascinating even more our clients. I would like to hand the floor to Rodrigo, our CFO, to talk about the results.

Rodrigo Tavares:

Thank you, Bruno. Good afternoon, everyone. In this quarter, we bring for the first time the combined results of the two companies. To better understand the dynamic and the tendencies, we prepare the release of proforma quarterly numbers dating from the first quarter of 2021 to the second quarter of 2022, adding both companies together. In this release, the annual comparisons will be made upon historical proforma figures from both companies.

The 3Q22 consolidates the result of the companies since July 1st, the date of the business combinations closing. With the conclusion of the carve-out and the beginning of the integration process, this quarter we had additional expenses, related to the business combination, as we highlight in the third slide, which impacted the net income in:

(-) R$66.1 millions with cash effect, related to the integration expenses - such as branches and stores rebranding, systems integration, among others, and the carve-out - such as advisory expenses, investment banks and the creation of the new company to be disinvested;

(-) R$116.2 millions with no cash effect, in fleet write-up amortization;

(-) R$4.4 millions with no cash effect, in customer relationship amortization related to the fleet rental business;

1. R$9.2 millions with no cash effect, of the mark-to-market fair value of the deposit tied to the financing granted to the former Unidas' shareholders;

(-) R$81.1 million with no cash effect, of former Unidas' tax loss write-off, related to the sale of disinvested assets.

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These effects, added up, negatively impacted the quarter net income in R$258.5 millions altogether with the costs related to the business combination, the 3Q22 results were impacted by the new initiatives expenses, with a negative effect of R$22 millions in the net income, and the positive effect of the PIS and Cofins credits as a result of the new reports, that added up to R$175 millions in the EBITDA, being R$72.1 millions of those in the Car Rental and R$102.9 millions in Fleet Rental, generating positive net income impact of R$115.5 millions.

Considering the plentitude of effect impacting this semester, we will release, in addition to the 3Q22 accounting result, the adjusted results for the business combination one-offs, that better reflect our performance. Before diving straight in the results, I would like to explain the fleet write up effect. Moving to slide 4.

During the business combination process, the book value of assets was lesser than the amount effectively paid. The allocation of the difference between the price paid and the book value must be split between goodwill and write-up.

In a typical processes of business combination, the bigger part of this allocation corresponds to the goodwill, as usually the book value of assets reflects their fair market value. In this operation specifically, due to the sharp increase in car prices during this last cycle, the cars fair market value was bigger than the book value, resulting in a more relevant write-up value in this allocation.

Despite having a similar economical effect, the goodwill and the write-up have different effects for an accounting point of view. Meanwhile the goodwill amortization is allocated directly in the fiscal books, affecting the tax effectively paid, the write-up amortization flows through the income statement. It is important to highlight that there is no cash effect in this amortization. The write-up will impact the income statement as follows:

For operating cars, amortization will be allocated corresponding to the expected devaluation of these cars through use, as shown on the slide. On sale of the car, not only the book value of the car will be written off, but also the residual value of the write-up.This effect will last until every former Unidas' car is sold.

In our operation particular case, the equivalent effect was the anticipation of a good share of former Unidas' expected result through used car sales directly in the Company's asset, without going through the result.

We will be fully transparent in the write-up effect, be it in the amortization case or the asset sale. We understand that, to analyze Localiza's performance, these effects must be disregarded. The writeup effects do not reflect our means to buy and sell assets, in the due course of our business.

Well, now to talk about the quarter results, we move on to slide 5.

With the resumption of purchases, we resumed accentuated growth, which will reflect in the volumes of both the Car and Fleet Rental. Were bought around 98 thousand cars and sold nearly 44 thousand, with a net addition of over 54 thousand cars.

The car rental net revenue presented a 30.7% growth, while the fleet rental soared 52.6% in the annual comparison to the proforma 3Q21. With a bigger car supply and the combined receival for both companies, it was possible to accelerate the backlog reduction, allowing us greater growth these last months.

Our distinct competitive position allowed us to negotiate cars in a mix and commercial conditions more favorable for the last quarter of this year and next year, that, added to a significant comparative advantage, considering the synergies gains and maintenance costs reduction from the fleet renewal, will allows us to resume record return levels, without great need of additional prices' passthrough.

To detail our result, I'll hand the floor over to our head of Investor Relations, Nora.

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Nora Lanari:

Thank you, Rodrigo. Good afternoon, everyone. Getting into the details of the result and reinforcing that our annual comparisons will be made considering the proforma result of the 3Q21, in order to add up both companies, we start the presentation by the Car Rental division, on page 6. With the resumption of the fleet's Growth, this quarter saw a volume rise of 7.4% year over year in the rental days, with a revenue growing 30.7%, reflex of a 22.1% average rental rate rise, as seen in page 7.

In this slide, we show the result of optimization of the mix of segments and selectively made prices passthrough that netted in an average rental rate of R$108.2 and a fleet utilization rate of 80.2%. In the annual comparison, the rental rate rise has been practiced gradually in every segment, seeking for a rebalance in the return levels, considering the cost of replenishing cars, maintenance expenses and high interest rates. As of now, we see a diminishing need to make new prices passthrough, considering that we have other levers that will be prioritized to improve return levels. Some are: operational lever with volume addition, efficiency initiatives for cost reduction, including maintenance costs from the fleet renewal, and the capture of the arising business combination synergies.

Moving on to page 8, in the Fleet Rental division we kept on accelerating growth rates sequentially, and in the year over year comparison. The rental days number rose 25.1%, with the net revenue leaping 52.6% against the 3Q21. In this comparison, as evidenced in page 9, the rental rate has a 18.8% growth, reaching R$70.9 per daily rental, reflecting the pricing of newer contracts in a context of rising car prices and interest rates.

We still observe a positive outlook in the demand and in the Fleet Rental and Localiza Meoo results.

Heading to page 10, we show the balances for the purchase and sale of cars. As aforementioned, we have a favorable context for purchasing cars, in which we saw great volume availability and models diversity, with a higher production level and bigger relevance for direct sales. In this context, we bought 97,729 cars and sustained a gradual acceleration in the decommissioning rhythm, with 43,627 cars sold in the quarter. The result was a net addition of 54,102 cars in the period and a net investment of 5.8 billion reais.

Following in page 11, our average purchase price in the Car Rental was R$82.8 thousand, sequentially reducing R$10.8 thousand per car, highlighting the gradual resumption of a mix with more economic cars. The demobilization price drops R$5.4 thousand sequentially, to R$66.3 thousand in the Car Rental, reflecting the sale of entry level cars with higher mileage, seeking fleet renewal. The smaller price drop in the demobilized car in regard to the purchased, allows a sequential reduction in the car replenishment capex.

In fleet rental, we also saw a purchase price reduction, of R$105.2 thousand to R$98.3 thousand. In this division, the shorter price drop reflects the effect of heavy and special vehicles mix's growth. The demobilization prices of the division, on the other hand, suffered a small reduction of 1% in comparison to the 2Q22, as there is no demobilization mix change effect in this division.

On page 12, we highlight the progress of the end of period fleet throughout the year, which evidences better car supply, allowing the company to reach a fleet of 586,453 cars in the end of the period or 537,157 in the proforma, after the carve-out sale.

Onto page 13, we observer that in the annual comparison for the quarters, the net revenue for the rental divisions displayed a 37.9% growth, being 30.7% of those in the Car Rental, and 52.6% in the Fleet Rental, while the Used cars revenue grew 42.2%. As a result, the consolidated net revenue in the quarter grew 40.0% year over year, adding up to 6.1 billion reais.

On page 14 we start the EBITDA analysis, bringing up the reconciliation for the accounting to the adjusted EBITDA. On 3Q22, the adjusted EBITDA was R$2,377.7 millions, disregarding business combination one-offs, which added up to R$100.1 millions. We also bring the adjust effect in each activity, that as can be seen, is around 3 to 5% of the EBITDA.

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On page 15, we display the 30.9% growth for the 3Q22 adjusted EBITDA in comparison to the same period last year, reaching 2.4 billion reais. We highlight the Company's operational result quality, reflect strong volume growth together with practiced prices, in addition to strong margins. The progress in the rental divisions results minimizes the relevance of the temporary Used cars' tail wind effect.

In 3Q22, excluding the business combination one-offs, the Car Rental division presented a 58.9% margin. In comparison to the 3Q21 proforma EBITDA, the 2.2 percentual points reduction in the margin is owed to the recognition PIS and Cofins credits, that in 3Q21 added up to R$320 million reais, in comparison to the R$72.1 millions, resultant from the new reports recognized in 3Q22. Regarding this quarter, it is worth noting the rising rental rates, with volume expansion and bigger operational efficiency, especially with lower levels of default and theft.

The Fleet Rental division presented an adjusted margin for the integration expenses of 73.6%, 8.1 percentual points above last year's proforma period. This margin was positively impacted by the beneficial effect of the PIS and Cofins credits of R$102.9 millions, or 8.9 percentual points, due to the useful life first review of this division assets, allowing the depreciation acceleration for tax purposes. On the other hand, new initiatives expenditure negatively impacted this division's EBITDA margin in 3.3p.p.

In the annual comparison, the Used cars EBITDA margin retracts 6.5 percentual points, to 11.6%. This quarter we selectively accelerated the demobilization of cars with higher mileage from the car rental division, bringing higher preparation costs and directing these cars to the wholesale. With advancing new initiatives expenses, this margin was impacted by 1.2p.p. this quarter. It is also worth highlighting that the car demobilization acceleration occurs especially in the Car Rental, which possesses a smaller EBITDA margin, impacting the overall Used cars margin. The gradual sales rhythm acceleration contributed to the SG&A dilution.

As a result, the consolidated EBITDA margin over rental revenues reached 75.2%.

On page 16 we note that in the Car Rental, the average annualized depreciation per car continues to gain sequentially, at R$4.358. The purchase acceleration and fleet renewal lead to an increase in the average depreciation since the new cars have higher depreciation levels than the formers, which were no longer being depreciated. In the Fleet Rental division, we also see an acceleration in the average annualized depreciation, reaching R$4.195. We highlight that, in Fleet Rental, the new cars have a mix with higher depreciation, by the book value of the assets, that now includes heavy vehicles, and by the higher wear rate, in the event of special vehicles.

On page 17, we bring the reconciliation for the consolidated EBIT of 3Q adjusted for the business combination one-offs, which reached 1.7 billion reais, representing a 10.8% growth year over year. In the EBIT case, in addition to the integration expenses, there is also the amortization effect for the intangibles recognized in the business combination, which brought R$182.6 millions non-cash effects.

Moving on to page 18, we observe that the EBIT margin for the Car Rental division was 49.7%, lower than the 3Q21 due to a smaller EBITDA margin, already analyzed, and a higher 3Q22 depreciation. The Fleet Rental division presented an EBIT margin of 64.5%, presenting 0.9 percentual point increase in comparison to 3Q21, explained by a growing EBITDA, partially offset by higher depreciation.

The adjusted net income of the quarter, displayed on page 19, reaches R$682.1 millions, accounting for the effects aforementioned in the EBIT and also the reversal of the fair value adjustment of the financing to the shareholders with a negative impact of R$9.2 millions, and the former Unidas' tax loss write-off regarding the carve-out, of R$81.1 millions.

On page 20, we see the income dropping 27.6% in the annual comparison. We detail that the EBIT variation described above was more than offset by the financial expenses, which advanced R$669.3 millions, due to an increase in the CDI and the average debt balance, in addition to the mark-to-

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