Localiza Rent a Car SA

BOVESPA:RENT3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to Localiza Rent a Car Conference Call of the First Quarter of 2018.

Hosting the event today are Mr. Mauricio Teixeira, CFO; and Nora Lanari, Investor Relations Director.

We would like to inform that the numbers in this presentation are stated in millions of Brazilian reais and based on IFRS. The presentation will be recorded. [Operator Instructions]

The conference call audio and the accompanying slide presentation are being broadcast simultaneously over the Internet at www.localiza.com/ir address.

The slide presentation can be downloaded at the same address by clicking on the banner First Q '18 webcast.

Before proceeding, we would like to clarify that any statements made in the conference call concerning the business outlook of the company, forecasts as well as operating and financial targets represent the opinions and assumptions of the company's management, which may or may not occur. Investors must comprehend that economic conditions and other operating factors may affect the company's future and lead to materially different results from those stated in this call.

To start the first quarter 2018 teleconference, I turn the floor over to the CFO, Mauricio Teixeira.

[Mauricio Teixeira, executive]

Good afternoon, and thank you for your presence. It's a pleasure to present the first quarter 2018 results of Localiza, now officially in the position of CFO and Investor Relations officer of the company. After a whole year of joint management of the financial department with Roberto, we have completed a succession process, and I'm very excited and trust in the company's bright future.

For the first quarter 2018, Localiza continued its path of growth and value generation trade in 2017 obtaining, once again, impressive results. But before we talk about the financial and operational highlights, it's worth discussing 2 interesting issues of this quarter. The first one is the 2018 annual report published by ABLA, which contains the 2017 data of the Brazilian Car Rental sector.

As you can see on Page 2. It estimated at 12.3% growth of the Car Rental and Fleet Rental markets, considering Rent a Car division gross revenues, Localiza has gained share at the of 3 percentage points in 2017 from 29.3% to 32.3%. In the Fleet Rental division, Localiza has maintained a stable market share following the market's overall growth. Another market that deserves highlight is the company's initiatives in sustainability and social responsibility.

Localiza has set in course a project to provide its whole network in Brazil with solar energy. In the first phase of the project, which has concluded in March, all the rental locations and Seminovos stores in 4 states accounting for 30% the company's energy consumption was already being served by solar power. The second phase will be in operation as of June this year, and its goal is to have until 2019, 100% of the company's stores on all Brazilian states running on clean and renewable energy.

The company has also been working on another sustainability front such as the adoption of UN Global compact in 2017, which places Localiza among the select group of worldwide companies committed to corporate social responsibility and taking actions for a better world.

After this introduction, let's move onto the quarter's highlights. On Page 3, we see the operational highlights. In the first quarter of 2018, the company has presented, once again, solid results consistent with its performance in 2017. The Rent a Car segment, once more, has brought great growth for the 53% increase in the daily rental volumes when compared to the same quarter of the previous year. Fleet Rental also had a relevant performance in terms of growth with a 22.1% volume increase compared to the first quarter of 2017.

Seminovos ended the quarter with over 25,000 cars sold, an increase in the average sale price and showing a better operational efficiency. Our fleet ended the period with approximately 193,000 cars, roughly stable when compared to the end of 2017. The results of Others growth can be seen in our financial result as you see on Slide 4. From top to bottom line, the growth reached thresholds of 30% to 40% when compared to the same quarter of 2017. We had, once again, a net income of BRL 176 million, a record, which accounted for 43% -- 46.3% growth when compared to the previous year.

To give more details of the first quarter, I hand the floor to Nora Lanari, Investor Relations Officer.

[Nora Lanari, executive]

Good afternoon. To detail a little more the quarter's results, I would like to start with the Rent a Car division. As you can see on Page 5, on the first quarter, the company kept a growth rate year-on-year. And net revenues shoot up by a solid 47.4% due to the increase in volume of 53.3%.

On Slide 6, we see that the Rent a Car average daily rate dropped by 5.7% when compared to First Q '17. Even though the first quarter is usually a strong quarter in retail sales, the mix of the first quarter 2018 was impacted by higher growth on lower rates, higher utilization rates. We can also see that this is the third consecutive quarter of stable rates after a period of decreases. The gain in the utilization rate was of 2.9 percentage points in the first quarter of 2018.

Keep in mind that ever since last quarter, we have changed the calculation methodology for the utilization rate to consider only the period when the car is at the rental location available for rental, excluding time frame for mobilization decommissioning.

On Page 7, we showed the corporate network of rental locations, which grew by 6 new locations, from which 3 were previously operated by franchisees that have returned to the company.

Moving on to Slide 8. The Fleet Rental division management, the growth rate remained accelerated in the past quarter, a similar rate that was seen in the fourth quarter of 2017. The average daily rate drops by 5.6% of the reflection, mainly of the prices of new contracts.

In a context of lower interest rates as well as the absorption of how it contracts with the lower average rate. However, the drop in daily rate should not impact the ROIC cost of debt spread since interest rates have also dropped.

Moving onto Slide 9. We show the evolution of the fleet in the period. The first quarter is traditionally a net seller, which means that the car sale is higher than purchases after the demand peak generated by summer vacation and Carnival. We sold in the first quarter, 25,000 cars and bought almost 24,000 resulting in a fleet reduction of only 1,441 cars, a low in historical sequence.

The net divestment was of BRL 86.7 million.

On Slide 10, we show the number of points of sales from Seminovos network, which remains stable.

On Slide 11, we show the end of period's fleet, already highlighting the beginning -- as highlighted in the beginning of the call.

Now moving to Page 12. We see an increase in net revenues -- consolidated net revenues of 36.1% when compared to the first quarter of 2017. And that can be split on a 38% growth for rental business and 34.5% in Seminovos revenues.

Now moving onto Page 13. Consolidated EBITDA increased by 33.8% as a result of the growth in company's business units. The Rent a Car EBITDA margin shows a drop when compared to the 2017 first quarter due to lower pricing. But at the same time a 0.8 percentage point gain in comparison to the margin of the year 2017.

In the Fleet Rental segment, margin has dropped by 1.7 percentage points due to decrease in average daily rates. On Seminovos, the EBITDA margin was 5.7% higher than on the First Q '17 due to the dilution of sales expenses, because of higher selling volume in the rise of sold car prices.

In terms of depreciation shown on Slide 14, we see that the Rent a Car and Fleet Rental followed different trends in average values. On RAC segment, the annualized average depreciation was BRL 715.9 per car, 15.1% lower when compared to that of the First Q '17 due to the rise in sold car prices and the company's better efficiency in selling its assets. SG&A over net revenues reached 6.7% in the period.

In Fleet Rental, we see an increase in depreciation to BRL 3,410. This figure reflects our estimates of new car prices and on selling prices at the end of the cycle. Due to lower average depreciation per car in the Rent a Car, there is a 4 percentage point gain on EBIT margin in this division shown on Page 15.

Fleet Rental's EBIT margin drops due to the aforementioned factors: lower average daily rate and higher depreciation, compensated by the drop in interest rates.

Net profit in the first quarter, on Page 16, is for the fifth consecutive quarter a record, 46.3% increase when compared to First Q '17, a result from the company's growth combined with excellence in execution and focus on value generation.

On Slide 17 and 18, we highlight cash generation of BRL 316.2 million after fleet renewal. First quarter, accounts payables reduced by BRL 294 million, especially for payment of cost pushed on the previous quarter. Therefore, cash generation before interest was BRL 9.4 million. Despite the reduction in accounts payable, which resulted in a small increase in net debt as seen on Page 19, the company reduced its leverage ratios in 2018.

You will see on Page 20 that from this quarter on we started to disclose leverage ratios, excluding net debt from the company's credit card receivables, which have immediately liquidated and can be transformed in cash quickly.

In First Q '18, the net debt minus credit card receivables to EBITDA ratio dropped to 2.5x compared to 2.9x at the end of 2017. We see the current leverage level was comfortable, especially when you take into account the interest rates we have been able to secure and the debt profile shown on Page 21.

So we see that the company's capital structure is very efficient and consistent with our goals of value generation for shareholders.

Finally, I would like to turn the floor back to Mauricio for -- to wrap up.

[Mauricio Teixeira, executive]

To wrap up, I would like to point out, the evolution of ROIC minus cost of debt spread on Slide 22. Once again, we've seen this spread enlarging. ROIC dropped by 1.4 percentage points, mainly impacted by the lower ROIC of the Fleet Rental segment, which as we discussed, is due to the new contracts priced at lower levels strictly as a reflection of lower interest rates. However, the spread increased by 1 point in the period since the drop in the cost of debt was 2.4 percentage points. The increase in the spread reinforces Localiza's commitment to grow with value creation.

We are now available to answer questions.

[Operator]

[Operator Instructions] First question comes from Renato Mimica from BTG Pactual.

[Renato Mimica, analyst]

I have 2 questions. First, about cost. When you look at the breakdown in the first quarter, there has been an increase -- substantial increase in Other line. Does that include costs of additional adjustments related to Hertz? And if yes, how much is -- are those costs? That's the first question.

[Nora Lanari, executive]

Mimica, thank you for the question. In fact, in the first quarter we still have the remaining of one-off event from Hertz of BRL 2.8 million, but they were placed in costs with third-party services. This has an effect of 1.5 percentage points on the margin. In Others, we have a percent of this application of the contract of Hertz but it was offset by higher revenues. On net, this impacted is zeroed.

[Renato Mimica, analyst]

Okay. The second question is about the dynamic of tariffs on Rent a Car. Obviously, the elasticity of demand price is impressive, your strategy has been -- has proven to be very right. Now talking about the next 2 quarters. Since we have more corporate mix, or higher corporate percentage in the mix. Does the dynamic in the drop of tariffs or rates will continue? Or do you see this higher -- do you think this will continue for the corporate segment as well, given the elasticity demand price?

[Unknown Executive]

The effect that we see for the 2018 segment by segment is that if more -- we expect more effects due to the mix rather than variation in rates per segment. Imagining that we have been growing lately, so that depends a lot on the different rates of growth in each segment rather than elasticity.

[Nora Lanari, executive]

Just to add -- Nora. It's obvious that it depends considerably on the competitive environment, and this will be monitored throughout the year.

[Operator]

The next question comes from Pedro Bruno from Santander.

[Pedro Bruno, analyst]

I have 2 questions. First is regarding the higher drop in cars. We're talking about Rent a Car and the speed of reduction of new cars for 700 has increased a lot. And I would like to understand whether this is a structure improvement at Seminovos? And it seems to be because the margin of Seminovos is improving when you compare the first quarter to the fourth quarter of last year. Although the cost dilution is also -- has an impact. But this is the first question. Whether -- I would like to know if this improvement is structural in the effect of Seminovos?

[Mauricio Teixeira, executive]

Pedro, yes, depreciation -- Texeira -- has dropped in the first quarter because of 3 factors: some are structural, others, circumstantial. We have -- we're buying a good amount of cars and selling, we're buying cars at a good price and selling with the corporation cost that's also lower. And given the scale and the growth we had throughout last year. And also, in terms of value, the cost of operation of Seminovos is different. We have a very good productivity. And that reflected on depreciation. And the third factor which is circumstantial is the inflation prices of new cars, which caused an increase in prices of Seminovos or used cars. And the rest has to do with our size and operation.

[Pedro Bruno, analyst]

My second question is similar to the question of Mimica. Making a follow-up about the competitive scenario of Rent a Car. So the continuation of my question would be, how do you see the average daily rate evolving from now on with the max, the -- best impact -- main impact coming from price, you answered that. So what is your expectation for 2018 in Rent a Car segment?

[Unknown Executive]

Pedro, we still see a competitive scenario. There has been no change in terms of dynamic of mergers or new competitors. This market remains competitive, and we want to continue to grow and gain market share. So we don't see much change when compared to the end of last year. No change in dynamics in that scenario.

[Operator]

The next question comes from Pedro Pinto from Credit Suisse.

[Pedro Pinto, analyst]

I would like to understand -- just a follow-up on Pedro's question regarding depreciation. We've seen a significant drop given to the structural decisions to buy the cars at a good price and selling them well. In the depreciation of cars in the fleet segment, it's counterintuitive to think that the depreciation would have to rise, although it continues at healthy levels. Just a follow-up.

[Mauricio Teixeira, executive]

Yes -- Texeira. The fleet has a different dynamic because the cycle is a longer. Contracts last 2 to 3 years, and the correlation of the cars price. So used cars with -- new cars is not as direct. But we react very quickly. And the fleet we anticipated and depreciation has dropped at the -- throughout last year, and now it has reached a good level. And we understand it's a good level in terms of the dynamic price of -- the price dynamics of cars that will be sold within 2 or 3 years. We believe that this is the level we should continue.

[Nora Lanari, executive]

Just to complete -- Nora. At the Fleet, this -- contract cycle are 2 to 3 years. When you look at depreciation in the fleet, in the first quarter 2016, it was 4,100 then 3,300 in the first quarter 2017. So we had to lower it so that the EBITDA margin of Seminovos for the fleet, would reach the normal standards, it reached 11%. And now it's close to 6% or a bit lower than that. So as we remove those cars from the base that have been depreciated, the new cars have to come in reflecting our expected price and cost of sale for the future. So we're cleaning this space, and we have calibrated depreciation of fleet upwards, and added to that the effect that Mauricio mentioned, which is the dynamic of a car for -- that will last 3 years, it's different from one that last for 1 year with us.

[Operator]

The next question is from Lucas Marquiori from Banco Safra.

[Lucas Marquiori, analyst]

I would like to hear your comment about 2 topics. I'm a bit -- I have questions about that. First, the RAC margin has dropped year-on-year. When do you think we'll be -- see this reflected on the gain of volume that you have. Will it begin to improve as up to second or third quarter, reflecting this operational gain in volume you have in RAC. And the second question on ROIC. We've seen that the spread is increasing and it's great. On the top part of ROIC, do you see that it will continue to drop or has it reached the standard at 14% from now on? These 2 points.

[Mauricio Teixeira, executive]

Lucas, thank you for the question -- Texeira. On the margin of RAC, we see that the EBITDA of RAC margin considering a much lower interest rate scenario, we have a different spread. But this quarter we -- there was the effect that Nora mentioned, that was 1.5 percentage points, which is the brand of Hertz that we didn't classify as ours, but it was absorbed in the results that would helped our margin, but we preferred not to repeat that. We prefer to have a market completely all direct. So the margin of RAC would be stable if it wasn't for that. So if there was a spread, lower interest rates, we probably will be able to have a lower margin, of course. What we want is the spread, that's what matters.

And the second question. We have seen a drop in ROIC. But this happens also, we saw a drop in the EBITDA margin for fleet, because the new contracts have a lower ROIC but with the same spread. So -- and in the last line, at the bottom line, what matters is the spread. And we are pricing the new contracts with the same levels we had made in the past. At lower figures, we can allow a ROIC that's a bit lower, but maintaining the spread as usual.

[Nora Lanari, executive]

Lucas -- Nora. Just a compliment on your question. You're probably wondering, well, if we had a one-off of 1.8. So 1.5 percentage point in addition to the EBITDA margin.

[Lucas Marquiori, analyst]

Can I assume that it will grow from now on?

[Nora Lanari, executive]

We don't anticipate that, Lucas. We -- giving back this operational leverage to our customers in form of price. We're also investing in process technology to be made throughout the year. So we're not counting on an EBITDA margin much higher than that, okay?

[Lucas Marquiori, analyst]

Okay. Just to follow up on ROIC, quickly. This replacement of the portfolio, so old contracts from ROIC of fleet to new contracts. What's the percentage that has been renewed and already in terms of contracts for the fleet segment?

[Unknown Executive]

The average term is 2.5 years. So the drop in interest rate has started since second half of last year. But we were already thinking of future interest rates. So we are now at the transition phase. I'd say that considering 2.5 years, we're close to a stable return on ROIC for this segment. Interest rate has started to drop more considerably since the second half of last year. So we had a second half of last year and this year, there are still some contracts to be renewed. And also, we are growing. And new contracts come at a lower price levels, but that's for the spread not necessarily for the ROIC.

[Operator]

[Operator Instructions] The next question comes from Rogério Araújo from UBS.

[Rogério Araújo, analyst]

I have 2 questions. First, a follow up of previous questions on a different point of view. The spread of ROIC has reached 9% on your calculation. How much is the drop in contracted ROIC based on this fleet contract turnover for the next 12 months? And today, in your mind, what is the sustainable level that you want to stay at to -- for it to be profitable for the company and not give much room for competitors? What is that level? And if it could give discounts on rates on the part of Localiza on purpose to reach that level?

[Mauricio Teixeira, executive]

Rogério, as for your first question, yes, the dynamic, as Nora mentioned, we still have 1 year to go to end this old contract and renew contracts that used to be higher with lower given the interest rates, but we don't give guidance into how much that will be in the future. That's not part of our policy. And -- but we are halfway through and advancing in this process. But I cannot say exactly how much.

As for the spread. This level is sustainable. Of course, it depends on other factors, such as growth and competition. But the spread levels at the current levels for last year -- at the end of last year and beginning of this year are spread levels that generate lots of value for shareholders and allow for a capital base and grow. So as long as we remain in this growth rate with this spread, we are pleased. And Nora says, if you ask if it could generate additional discounts on rates, we're going to price growth and margins with profitability. So we will calibrate our pricing to provide growth for shareholders. And -- growth and return for shareholders. But of course it depends on the economy and the penetration of individual segment, competition. But we have to calibrate all these factors to have sustainable growth for this year.

[Rogério Araújo, analyst]

And for the World Cup, the next question. In 2014, there was some tension as to the drop in the corporate segment. That was more than offset by tourism, but the cup was in Brazil. What do you expect for the World Cup in Russia? We won't have tourism, but do you expect a drop in corporate sales?

[Unknown Executive]

Rogerio, we believe that, for this year, the impact will not be the same we expected for 2014. Of course, people rescheduled their trips maybe because of games, but they will continue to travel. So we don't believe that this will have an impact on our sales. The difference is that the World Cup is not in Brazil, and it's so different. And also, not to mention that our customer base is much more diversified now. So this effect of peak. One question people ask is about the election. Today, our customer base is too big for the election to play such a significant role, and the World Cup would be the same in terms of effect.

[Operator]

The next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

I have 2 questions. First regarding the tax rate reported in the first quarter of around 27% when compared to 21% in the previous quarter. You mentioned that one of the reasons for this tax rate was the interest on equity? So it's the part of this movement is one-off event at least in part. Because we've seen net income growing a lot last year. And the tax rate did not necessarily increase because of that. And the second question is about pricing dynamics on Rent a Car? When you answer the first question you mentioned that if everything else remains constant, you don't see any reason for it to drop forward. And this drop in prices there was affect by a decrease in cost that you worked very hard on that you have reached the price nowadays, that's very hard for the competition to equal. So now do you plan to add volume to the base even without lowering prices or not? Could you comment a bit on that?

[Mauricio Teixeira, executive]

I'll answer the first, and the second, Nora will answer. In terms of tax rate, there was an increase in the first quarter. That's the result of net income. Because income before taxes has grown, but the PL, which is the basis for interest and equity came from the growth of third-party capital, because of the leverage we had. So in terms of -- in percentage terms, it accounts for less of the interest and equity than it used to. Also, there is a drop in interest and equity when compared to the first quarter. So these 2 effects combined had a change in the tax rate, but of course with a higher net income or higher income and less of our own capital and more capital coming from third parties. This percentage of tax rate is more realistic of what to expect for 2018.

[Nora Lanari, executive]

And, Bruno, also to answer your second part of the question. It's very hard to know how far will the competition go. Because we're talking about 10,000 competitors in a very fragmented market. Of course, we want to continue to gain market share in that market, but it's hard to say whether there would be more room to lower prices even further. On our point of view, we see some instability in prices because of mix. But since the economic activity is supposed to grow this year, we believe that it will be more of a base case. It all depends on the competitive environment. And it will increase because of a mix. We don't know how far the competition will go.

[Bruno Amorim, analyst]

So do you think it means that within the same business lines you believe that at the margin you would need to lower prices less to bring volume to the base or not necessarily?

[Nora Lanari, executive]

Well, as I said, it's pretty much stable. But that's so dynamic, however, so it's hard to say because it could change tomorrow.

[Operator]

The next question comes from [ Marco Silverman ].

[Unknown Analyst]

I have one question. I noticed an increase in PDD, provision for doubtful debtors. Is it -- given the adoption of IFRS, or has there been any other impact in -- what's the size of this impact, if you please?

[Unknown Executive]

Well, the adoption of IFRS 9, we did this provision as of the beginning. Since the new standard was launched, this initial load on the balance was launched against [ TL ] according to our understanding of the application of the new standards and our audit team. So the adoption of the standard did not have an impact on itself because it didn't have any impact on the results. On the net income -- the net income impact is mixed between -- we have grown more individuals than in legal entities, so it has to do with the ridesharing. And these segments have a higher percentage. All of that has been priced and foreseen. And that in percentage of revenues, as we have grown it grows as a percentage of revenue. But it didn't impact the results, although you see on the balance sheet. But it's much more to do with the niche of -- the mix of customers. And just to complete, in addition to the mix, there was an impact because we revisited our processes and criteria for provisioning. And we decided to be more conservative. So we've raised the bar a bit.

[Unknown Analyst]

Okay, but just as a follow-up. So from now -- for the future, is this a new level for provisioning for the company or it's just for this quarter?

[Unknown Executive]

Well, it's not -- this is the reality. This is the rate for the quarter, yes. It not an impact of the new standard, it's the rate for the quarter.

[Operator]

The next question is from Leandro Fontanesi from Bradesco BBI.

[Leandro Fontanesi, analyst]

I have 2 questions. The first one, I would like to know if you will continue to grow organically. Because you mentioned, we observe the reaction of competitors but then our competitors that are growing a lot with purchases. So if you see a more aggressive competitor, do you still -- will maintain organic growth?

And the second question, is looking at Seminovos operation, your level of expenses over revenue was low. It used to be at 9%, and now it's 6% or 7%. Given that you have increased the fleet considerably -- and we may see in the next -- can we see some adjustment in that structure in the next quarter that will lead to an increase in SG&A in Seminovos?

[Mauricio Teixeira, executive]

I will talk about the organic growth -- Teixeira. Well, we see that their focus should be in our business and in our core business and the market that we know and the way that we know to work. Of course, we always assess new opportunities. But it doesn't make much sense -- with exception of Hertz, there was a partnership, it was very strategic. But in terms of acquisition, there's a lot of overlap. We don't see gains in synergy in acquisitions so far. Our focus is on organic growth. There is a lot to grow, still. Of course, there is an opportunity, we'll look into that.

[Nora Lanari, executive]

And may I address your second. Nora. This lower SG&A of 6%, 7% is -- right now we're growing a lot. So we'll continue to increase the structure. But we're working to keep this efficiency level. So for 2018, we'll open new stores thinking about the needs of sales for 2019. On the other hand, in 2018, we'll have to sell more cars than we sold in 2017. So there's no relevant change in that level. We don't anticipate any major change in that level.

[Operator]

[Operator Instructions] The next question is from Natalia [indiscernible] from Citibank.

[Unknown Analyst]

I have 2 questions. The first is about the election cycle. Historically there was boost, the Car Rental business. What is your expectation for the election, especially the second part of the election -- the second run?

[Unknown Executive]

Well, thank you for question, Natalia. Well, historically, in the past, it did have some effect, but given the reality of the elections in our base, we're able to absorb any special demand. And election as a macroeconomic scenario, we see the market is still growing on the demand side. And the political and economic scenario, we don't see any major threats in the politics. We see that the economic activity is resuming, I mean, growing. And we don't see any threats in the macroeconomic scenario and political scenario.

[Unknown Analyst]

And my second question is more of a follow-up. I would like to know what do you expect for the depreciation level of vehicles. Will it be stable or reduced for the coming years?

And for the second quarter, could you give any indication on the growth of fleet or daily rate?

[Mauricio Teixeira, executive]

Well, we don't give guidance -- Teixeira, but in terms of depreciation, we believe we are at the right level. We don't expect any drop or increase in depreciation. We expect a stable level. This is very well calculated and programmed. And we see a positive margin at Seminovos. So it's very well adapted to the current reality of the market. Of course, in the next 2 or 3 months, we see stability. And we don't know about the future, but we see stability in that level in the short-term.

[Operator]

I would like to turn the floor over to Mr. Mauricio Teixeira.

[Mauricio Teixeira, executive]

Thank you very much for attending our call. And our team is available to answer any further questions you may have. Thank you, and have a good day.

[Operator]

This concludes Localiza Rent a Car audio conference for today. Thank you very much for attending, and have a good day.