Localiza Rent a Car SA
BOVESPA:RENT3
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So good afternoon, and welcome to the Localiza Earnings Release Call referring to the Results for the First Quarter of 2023. Today with us, we have Mr. Rodrigo Tavares, CFO; and Nora Lanari, Investor Relations Officer. Please be advised that this webinar is being recorded and will be made available at ri.localiza.com/yen, where the complete material of our earnings release is available. The presentation is also available for download on the company's IR website.
[Operator Instructions] We'd like to inform you that the numbers in this presentation are in millions of reals 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 prospects, operating and financial projections and goals constitute the beliefs and assumptions of company management, as well as information currently available. Forward-looking statements are not a guarantee of performance as they involve risks, uncertainties and assumptions as refer to future events, and therefore, depend on circumstances that may or may not occur.
Now I will hand the floor over to Rodrigo Tavares, CFO of the company, to begin his presentation.
Good afternoon, everybody. We will begin our call to announce the results for the first quarter of '23 in a celebratory tone. Tomorrow, we will celebrate Localiza & Co's 50th anniversary. We have more than 18,000 employees sharing a single goal, delight our more than 15 million customers with one of the most complete portfolios of mobility solutions in the world. With a strong culture centered on people, customers and results, we constantly seek to grow generating value for our various stakeholders, and positively impacting society.
We will continue to reinvent ourselves with the agility and the unrest of a young company, expanding the use of technology and keeping the customer at the center of our decisions. We'd like to thank all our employees, customers, partners and investors for trusting and supporting Localiza & Co over so many years. We remain firm in the important mission of offering mobility solutions in an efficient, safe, innovative and sustainable manner. To everyone who was and is part of this journey, we would like to thank you very much, and we continue together with the same drive as the first day.
Now about the results for the quarter. We have 5 main messages: Significant improvement in rental operational margins results variable cost reduction, fixed cost dilution, which are both resulting from the beginning of fleet renewal process and capturing synergy gains. The inflection in financial leverage, which starts downwards trajectory earlier than anticipated, having peaked in the previous quarter. The integration expenses were marginal this quarter, just 3 months after the carve-out, highlighting the company's planning and execution capability.
A growing Seminovos sales volume in a context of a challenging vehicle market and the continuity of the convergence cycle of depreciation in Seminovos margins, considering the fleet renewable and the vehicle market dynamics. For comparison purposes, the figures for the first quarter 2022 are pro forma. In addition, the figures for 1Q '22 and 4Q '22 were adjusted for the extraordinary effects of the business combination to better reflect our actual performance.
Now moving on to the highlights for the quarter on Slide 3. We can see that the company revenue has increased more than 52% in the annual comparison, driven by the 26.7% growth in rental revenue and by the strong surge in Seminovos, which grew by more than [ 90%. ] The strong growth in Seminovos revenue in the quarter follows our strategy of increasing sales volumes and accelerating the reach of the nation of our fleet based on the strong purchase of cars at the end of last year.
The operating result is also another major highlight for the quarter, showing our focus on the pursuit for profitability and efficiency in addition to growth, we had an increase of almost 40% in EBITDA in the annual comparison and a robust sequential increase of 21%, surpassing BRL 2.6 billion in the quarter. The annualized ROIC for 1Q '23 was 15.6% with a spread of 5.8% in relation to the after-tax cost of debt. In the context of higher depreciation as a result of investments in the period of short of cars added to a high level of interest, the advances in operating results are essential for us to maintain the level of ROIC spread at healthy levels. Therefore, we will remain focused on the strategy of expanding and increasing our operating results and optimizing the use of invested capital.
To provide further details about our results, I hand the floor over to our Investor Relations Officer, Nora.
Thank you, Rodrigo. Good afternoon, everyone. Going into the details of the results, we will start the presentation with the Car Rental division on Page 4. Net revenue from this division totaled BRL 1.961 billion, growth of 10.2% in the annual comparison and 5.4% compared to the fourth quarter last year. The growth in volume and average daily rate resulted in the recomposition of revenue loss with the sale of the carve-out in just 2 quarters, reinforcing the commercial excellence and the high quality of the solutions offered by Localiza.
On Page 5, we showed the increase in the average rate, which reached BRL 116, an increase of 11.6% in the annual comparison, and 0.5% in the sequential comparison, more than offsetting the seasonal effect of the high season and end of year festivities in 4Q. Utilization rate remained stable both in the annual and sequential comparison.
Moving on to Page 6. In the Fleet Rental division, we continued to grow at a strong pace with net revenue totaling BRL 1.459 billion, 58.6% higher than 1Q '22 based on the 29% growth in the number of daily rates and in the increase in the average ticket. In the sequential comparison, we maintained a consistent increase in volume also reflected an increase in the average rates.
As shown on Page 7, the rate has increased by 22.8% in the annual comparison and 3.7% in the sequential comparison, achieving BRL 77.5 per day due to capturing higher prices and new contracts, combined with the termination of old contracts that were signed in the context of lower prices. Utilization rate shows a slight decrease in the annual sequential comparisons due to the strong net addition of cars in the last quarter, resulting in a greater number of vehicles being prepared for rent and decommissioned for sale. We continue to see a positive perspective in demand and results from fleet rental into many different segments. Our confidence is reinforced by the perception of quality of our products measured by the NPS level, but also by the operational perspective, the quality of our portfolio and asset management.
Moving on to Page 8, we show the car purchase and sale balances. Despite the challenging context, especially due to the scarcity of credit in the market, we had a substantial increase in sales volume in the quarter, an important movement towards the rejuvenation of our fleet with the sale of cars with the highest mileage, mainly entry-level cars that had their useful life extended during the period of lower production of new vehicles. 55,191 cards were sold in the quarter with a purchase of 48,161 cars after the strong purchase in 4Q '22 resulting in a fleet reduction of 7,030 cars in the period. Despite the reduction in total fleet, the company average operating fleet increased from 503,000 cars in the fourth quarter to 530,000 cars in the first quarter, resulting in a substantial increase in fleet productivity.
Continuing on Page 9. Our average car rental purchase price was BRL 76,800 reflecting a mix composed of a larger share of economy cars and more favorable commercial conditions. The sale price was BRL 59,700 reflecting the continued sale of entry-level cars with higher mileage with the aim of rejuvenating the fleet. The highest current CapEx for renovation is due to the fact that we are decommissioning cars with the mix made up of these cheaper models in the sales channel.
Renewal CapEx tends to have a gradual reduction from the moment we reduced the mileage level of cars sold and increased the retail channel, which would start to occur in the second half of the year. In fleet rental, we had an average purchase price of BRL 99,000. In this division, we have a context in which the purchase mix underwent a structural change, both due to the effect of Meoo, the subscription car and the increase in the segment of heavy vehicles and special cars, while the sale price of BRL 66,200 reflects the mix comprised of mainly of light vehicles.
On Page 10, we show the -- lower increase of the fleet at the end of the period, which reached 583,299 cars in the first quarter of the year and that addition of 17.9% year-over-year despite the carve-out. Compared to 4Q '22, the 1.3% reduction in the fleet at the end of the period reflects the lower number of cars in preparation and available for sale in the Car Rental division after the strong decommissioning of cars in 4Q '22.
Moving to Page 11. You can see that in the annual comparison, net revenue from rentals grew 52.2%, with a 10.2% increase in the Car Rental division and 58.6% in Fleet Rental. While Seminovos revenue rose 90.9%. As a result, net revenue totaled BRL 6.8 billion in 1Q '23.
On Page 12, we show the EBITDA of BRL 2.623 billion in 1Q '23, an increase of 39.9% year-over-year and 21.2% quarter-over-quarter. We'd like to reiterate the quality of the company's operating results, reflecting a strong increase in volumes and prices in addition to increased efficiency and cost dilution, which had a positive impact on car rental margins and fleet rental. The combination of these elements is essential for sustaining healthy levels of return in the context of higher cost of capital level of depreciation and interest. In 1Q '23, the Car Rental division posted a margin of 66.1%.
Compared to 4Q '22 EBITDA, the expansion of 5.1 percentage points of the margin is resulting from lower maintenance costs due to the progress in the fleet renewal process and lower mobilization costs with a positive impact of nearly 0.7 percentage points to the margin. Lower expenses with consulting and advertising approximately 3.5 percentage points adheres to the Zero Litigation Program, nearly 1 percentage point in addition to an improvement in bad debt, around 1.0 percentage points after balancing out the practices carried out in 4Q '22. The Fleet Rental division posted a margin of 76.2%, 9.7 percentage points higher than the margin for the fourth quarter of '22.
The margins for the quarter was positively impacted by the effect of a new fleet economic useful life report, which accelerated depreciation for tax purposes, increasing the PIS and COFINS credit taking contributing approximately 5 percentage points to the margin. If we exclude the tax effects caused by the report on the result for the period of BRL 79.6 million in expenses with new initiatives of BRL 9.1 million, the margin would be 73.3%, an increase of 6.8 percentage points compared to the fourth quarter of 2022. Such progress is mainly explained by the increase in volume and average daily rate reduction in maintenance costs around 3.5 percentage points to the margin. Adherence to the Zero Litigation Program, approximately 1 point and reduction in bad debt approximately 2 percentage points. In Seminovos, quarter-over-quarter, the EBITDA margin increased 1.2 percentage points to 6.4% and maintains the trend of normalization in the coming quarters.
On Page 13, we see that in RAC, the average annualized depreciation per car continues to increase sequentially. At BRL 5,941 due to fleet renewal. New cars have normalized depreciation, while cars being sold has low or no depreciation. We would like to remind you that we still have a portion of the fleet acquired in a production restriction period that brings greater depreciation due to the purchase conditions in the shortage period. For the vintage purchase from 4Q '22 onwards, we see a lower level of depreciation returns in line with the company's objectives.
In the Fleet Rental division, average annual depreciation also accelerates due to the decommissioning of cars that do not depreciate achieving BRL 5,540. We'd like to emphasize that in Fleet Rental, the new cars have a mix of higher depreciation due to the asset price, which now includes heavy vehicles and integrated wear and tear in the case of special vehicles. We'd like to reiterate that the higher depreciation is reflected in the price of new contracts.
Moving on to Page 14. We see adjusted EBIT of BRL 1.765 billion in the quarter, growth of 15.7% compared to 1Q '22, and 18.9% quarter-over-quarter. The EBIT margin of the Car Rental division achieved 45.5% and fleet rental 59.9%, advancing sequentially due to the higher EBITDA margin and higher results from Seminovos.
On Page 15, net income for the quarter, adjusted to the effect of the added value of the fleet and customer base achieved BRL 604.6 million, a BRL 281.2 million, increasing EBIT was more than offset by the BRL 321.9 million increase in financial expenses impacted by the increase of BRL 159.1 million due to the higher debt balance, BRL 25 million from the negative effect of the MTM and negative variation of BRL 110.3 million in adjusting to present value made in the context of the business combination due to the early settlements that occurred in 4Q '22.
I'd like to hand the floor back over to Rodrigo to present cash generation, leverage and ROIC.
On Page 16, we have the free cash flow. And this quarter, cash generation from the rental operation totaled BRL 1.8 billion, consumed in the renovation of [ 55,000 ] cars in addition to the reduction of BRL 2 billion in the balance of accounts payable with automakers. The reduction in the fleet by 7,000 cars reduced cash burn, resulting in a consumption of BRL 1.2 billion in the quarter.
As we can see on Page 17, net debt increased by BRL 2.2 billion in the quarter, mainly due to the reduction in the balance of accounts payable with automakers in addition to the investment in fleet renewal. Net debt ended the period at BRL 28.3 billion. On Page 18, we can see the debt profile and a robust cash position of BRL 7.3 billion, including the issuances announced by April 2023, the company would have BRL 8.2 billion in cash.
On Slide 19, we show our debt ratios. We would like to highlight net debt over EBITDA LTM ratio, which ended the quarter at 3.19x, a slight reduction compared to the previous quarter. We believe that the downward trend will continue for the coming quarters, even with the continued growth of the fleet as a result of the strong operating results.
On Page 20, we present the annualized ROIC of 15.6% in 1Q '23. We see a spread of 5.8 percentage points considering the annualized quarter. This -- the challenges we see ahead. The company is gradually rebalancing the composition of results and returns, making investment decisions thinking about the car's cycle and evaluating the long-term effects. In order to further strengthen and consolidate its competitive advantages.
We are now at your disposal to answer your questions.
[Operator Instructions] Our first question is from Guilherme Mendes from JPMorgan.
Rodrigo, Nora, we have 2 on our side. For Seminovos, in the last release, you mentioned about 7%, 8% in January and February and the other quarter, it's close to 6%, 6.5%. So March was a weaker month naturally. I'd like to understand what explains that trend? Is it a mix? Is it the sales channel or a slowdown of the demand? And second point is about operating margins, very strong in RAC and fleet even adjusted by the report. So is there still a trend of a substantial growth quarter-over-quarter? That's an expectation that we had for the second half of the year, or have you achieved those objectives in a faster way?
So about Seminovos, when you consider the effects of new businesses in Seminovos, the margin is 6.7%, a little bit under the 7% that we had in the first quarter. In fact, we're decommissioning the cars that have higher mileage in the wholesale channel and the vehicle market is more challenging. Even the performance according to the CP table in Brazil, and that also shows a normalization of the Seminovos margins in a faster way, about operating margins in Rent a Car and Fleet Management, that's already a result. We're part of rejuvenating the fleet in a slight increase in rates, diluting fixed costs and capturing some synergies that can still contribute towards that.
As we renew the fleet, we expect that those benefits will continue to happen. Always remembering that there's a certain seasonality associated to the second quarter comparing to the first. But when we look at the -- in the year and the synergy and cost dilutions should still have a positive impact to our operating margins. Sorry, Guilherme, just to add, that we explained in the release, we have 1 point in the margin and fleet this quarter that should not take place in the upcoming quarters.
Next question is from Rogerio from BofA.
I have 2. The first one is about the fleet growth speed. We've seen a small reduction in the [ GTF ] segment compared to the other ones. I'd like to know the perspective of demand. How do you see for individuals or corporate fleet if it's outsourced and the competition. And my second question is the same for car rental. So your main competitor is reducing their fleet. So for the demand perspectives -- for the upcoming quarters, do you expect going back to growing the fleet again or stronger rates, how is the supply and demand for car rental as well?
About fleet management, we still see a very robust demand in a competitive scenario. So there is huge competition in the fleet scenario and still strong demand in the industry. But what happened is that in the second half, there was a huge backlog of cars because of restrictions in billing. So that backlog really accelerated our -- both in the second half and that was gradually decreasing. In the first quarter, we already go into -- back to normal with normalized backlog. So there is no longer an effect of reducing the previous backlog.
But there's still a perspective of growing for fleet and not only for subscription cars, but also corporate is very resilient even in a macro context with some challenges. So in Rent a Car, obviously, there is a period of adjustments after the fourth quarter, in the second half almost 200,000 cars were purchased. We had a growth of almost 100,000 cars before the carve-out. So that was extremely accelerated and now enables us to focus on growing the industry that although the total fleet has dropped, the operating fleet and rental fleet have increased, showing that we have better use of our capital. We still have opportunities to improve that efficiency and RAC demand has its seasonality that takes place in the second half. So the perspective for the year is still a perspective of growth.
Next question is from Regis from CS.
I have some topics that I'd like to address. One is about car prices, because prices of cars purchased in the quarter was much higher. You mentioned that part of that is structural, because there's heavy vehicles and a bit of the profile of subscription cars. But maybe we can break down that number somehow. And what would be the contribution of a mix effect from the heavy vehicles or other segments, but inside light vehicles? Or is there a perceptive contribution of a discount when buying? Is still -- there's still an effect of inflation, nominal inflation on cars. That's first and then I'll ask my next question.
About price inflation and discounts, the news is positive in the fleet market. And there is a mix effect definitely, especially when you compare before the merger, we pretty much had a mix of light vehicles. And now we have various products and agro and heavy vehicle, special vehicles that influence that. While in the sale, we don't have that effect. Subscription cars, which has been a strong market, we see a more premium mix. So it's a consumer that wants a product that has higher added value, especially sedans, turbo or small SUV, and those cars have a higher cost. So -- but that's positive, right? As these cars are coming in with an adequate return within our ROIC and spread strategy, you have more employed capital that would be a positive -- something positive for this segment.
And the other one is about profitability for the business this year. We discussed this in past conference calls that the more difficult moment in the market would lead to depreciation and reduce Seminovos margin and that can compress your ROIC spread across 2023, and then would go back to normal as from 2024, because you would have the new vintage of cars that were bought with a higher discount. So I'd like an update about that dynamic, and you mentioned that the leverage peak was in the past, it was a bit faster. And maybe food for thought is the annualized profit for the first quarter, shouldn't you have 5 points of spread in the cost of debt in the current selling rates. So I'd like to understand if you imagine that there would be an increase in profitability or that depends on the cost of debt.
Let's remember that after the merger, there was a capital base, the former Locamerica that had a ROIC spread level that was lower than Localiza's. So that's capital that as we have the renewal, you'll have an increase in the ROIC spread of that capital. And especially in fleet, there's still a period for maturity. But when we look at the new capital to be employed in fleet and Rent a Car, these vintages are very healthy. What has been happening in practice is a mix and positive news and other not so positive. So the convergence and depreciation in margin of Seminovos those have been happening faster, given the situation in the market -- in the vehicle market in general.
On the other hand, in operating margins, we've obtained faster efficiency than planned as well. So when we think of the margin levels, not only in RAC and fleet but it had to be achieved in the second half were already achieved in most part in the first quarter of the year. And to remind you, we have a fleet with an average age of over 13 months, that's still in the renewal process. And we have growth that should come in to help dilute the costs in addition to the benefits of the actual synergy of the 2 companies. So when we look forward to get that spread of 5 points to 7 points, which is our history here, we have to look at the operating improvements across the year.
Next question is from Fernanda, BTG.
Hi, everyone, can you hear me.
Yes, we can.
I have 2 questions. The first one is about the report. You mentioned close to BRL 80 million, if I understood correctly, that's only for the first quarter, right? So moving forward, should we expect the same volume of the reports in the Fleet segment in the next quarters -- upcoming quarters? Or if that was higher in the first quarter, should we see lower levels for the next quarters?
And the second question is in heavy vehicles, you mentioned that the add-on to the purchase price, it's because of your exposure not only to special vehicles but also heavy vehicles. So if you can update that in that segment, last data that we have here is a fleet close to 5,000 trucks. So if it still continues at that level or if you had a considerable evolution in that sense.
So the report for the first quarter, all dates back to January 1, 2023, it doesn't pay back for previous fiscal years. That said, the cars that have -- that are older -- that have an older and more increased useful life, they do have an effect. It's non-recurring, but it's hard to estimate given that we have the fleet from Locamerica plus the fleet that we had for Localiza. But the run rate moving forward is a little lower, in fact, for the heavy vehicles. Rodrigo explained as heavy as one of the increase reasons for the increase, but that wasn't the biggest one. If we rule out the heavy vehicles, it will only be 1,000 less. You have an effect of the subscription cars, special vehicles and agro. Those 2 contribute towards the price increase, but we have been growing in a robust manner in subscription cars. So in general, the segment has been doing well with an obvious challenge of profitable raising the Euro 6 trucks as they can be valued in the cycle. So we have capital allocation that's very careful, it shouldn't be relevant for this year, given that we can grow not only in RAC and also in fleet in 2023.
Next question is from Josh, Morgan Stanley.
I had 2 questions. The first one that you mentioned about how resilient the car market has been in subscription cars, so more about the premium segment. And how you're thinking about depreciation in that segment? And if there's any implications currently for that segment and base of developing the electric vehicles market where we've had many news of investment in the domestic market. That's my first question.
In the macroeconomic scenario, that's more challenging, it's even positive for the demand, not only for subscription car, but also corporate demand because then our efficiencies, especially in capital in purchase and sale and maintenance have -- give us a huge incentive for an individual or a company instead of using their own capital using a solution that's more appealing based on the financial, operational and convenience point of view. And that's why our demand has improved a lot in the segment of subscription cars. It's also a segment that has lower depreciation than the depreciation of corporate cars.
First of all, because we're talking about or car -- or plans that run at 1,500 kilometers per month and less severe use. And when they are decommissioned, most of these cars have a profile for retail, where you can get a better price in selling it. That's why cars in general -- the subscription cars in general have better depreciation than identical cars that are used in the corporate contracts. About electric cars, I'd say that still in each market, the demand is still very low. We see a lot of uncertainties on the residual prices of those cars, which means that are specific sales. Most of the sales are usually the first family car, Sedan, 1.5 -- 1.0 turbo or an entry-level SUV car.
My second question is a follow-up of Fernando's question about the heavy vehicles. I understood that you won't grow much more -- you won't grow more in heavy vehicles than light vehicles. But still, I'd like to hear your point of view about how you see that market. Last year, in Localiza Day, you were very optimistic about that opportunity. So I'd like to hear if you see any changes as a result of the transition to Euro 6 or other factors or if you can share your vision about the upside in the share for that market. And if you could also talk about how you compare the economics of the heavy vehicles and light vehicles?
The strategy doesn't really change. We like that division. It's a new track for growth, but it has to deliver the same return as light vehicles, be it fleet or subscription or any other segments that we take part in. So in that sense, the heavy vehicle industry is more susceptible to the macroeconomic activity, because it depends on the macro economy. And with the strong increase of the Euro 6 compared to the Euro 5 there's some difficulties in transferring the tariffs to customers and still maintain the profitability that we would like.
In that sense, our capital allocation will follow that discipline. So, in fact, if there is a market, if there is a demand, according to our profitability criteria, we will allocate more capital in heavy vehicles in an incremental manner. If not, we will allocate our capital, focusing more on light vehicles. But in general terms, at least based on Localiza's point of view about ROIC and profitability, that condition is fundamental. I can't even say -- I can't even compare, because to allocate the capital, the return has to exist. We have a macroeconomic challenge and a change in technology from Euro 5 to Euro 6 and that allocation of capital will depend on the market. So your perspective on that market hasn't really changed then.
Next question is from Alberto, UBS.
I'm going into the Seminovos area. The first question is a bit more technical. So the discount that you used to give, and we have that technical discount in our model. In the cash flow, it was a higher amount than the COGS that you had for Seminovos since last year that has changed. Cash flow has a lower amount than the cost of the current Seminovos, in the past 2 quarters, it increased a lot last quarter, a little bit over BRL 400 million, this one -- as well. Do you have any explanations for that? I know it's a bit more technical if you want to send me the answer by e-mail, that's fine.
For some years now, we've changed the practice of the technical discount. So the differences that you'll see between the balance sheet and cash flow are mainly related to cars that have been ramped or lost or the cost of preparation in our income statement in the revenues line for Seminovos, and then you have the cost line, depreciation of the vehicles sold and cost of preparation. But we can map that out and go into the details of those figures for you later. But the main explanation is total loss or robbed and preparation for sale.
So you're reversing -- it's a reversal of the robbed cars. What about the ones that you've recovered, does that happen as well?
No. This -- the preparation will affect us the most. A robbed or stolen vehicle will not go through free cash flow.
Yes, you can give me the details later.
We'll do that. It's very technical, but the main takeaway, Alberto is that the technical discount that Localiza used to give in the past, it hasn't -- we haven't been doing that for years now. So the explanation of the difference is not a technical discount.
You can show me later exactly which balance sheet line flash cash flow and income statement that you'd like to see, and we'll go into the details of each one of them.
Okay, great.
If you allow me another question in Seminovos, we're trying to estimate the value of your current fleet? And with the carve-out, it's harder now. So can we consider that the cars that left were mainly Unidas or older cars or if they were on average distributed according to the Localiza standard.
I'll take that one. No, it's not about more cars of Localiza or Unidas. At the end of the day, we have more Localiza cars, because the fleet cycle is longer. So given the fact that the Rent a Car cycle is shorter, then naturally, you're decommissioning more Rent a Car cars, and Localiza had more Rent a Car cars, and that's what happens. You have a margin still -- in the -- more than you have in Rent a Car and about the fleet age and in that case, most of the cars, we've been decommissioning the ones with a higher mileage. And that's explained given the fact that we're sending more of those cars to wholesale.
Most of the decommissioned cars are the cars that we extended their useful life during the pandemic and allocated them for the app driver. So they went up to 70,000, 80,000 and sometimes even more than 100,000 kilometers. So now we're starting the rejuvenation process through those cars that have a very positive effect, because maintenance goes up unproportionately in cars over 60,000 kilometers. But not a fact that we're directing one car or the other. Just the fact that we have more Rent a Car at Localiza and the cars that had higher mileage that had a profile of mainly app drivers.
Next question, Daniel from Itau.
I have 2 questions on our side as well. First of all, about income tax rate this quarter a bit under than we imagined and what you've been seeing in the past quarters. So I'd like to understand how you see that figure and how it should behave when it's back to normal? I'd also like to explore the effect in this quarter, if you have the same effect for the other quarters? And the second one is just more visibility about stabilizing depreciation. You mentioned that we -- it should be higher in the next quarter. Just want to corroborate if it's the same thing. Last quarter, you said it would be the peak in the second quarter, 3 stable and fourth dropping. So I want to check if that's still what you believe or if that has changed.
About income tax, the lowest rate is because of interest on own capital. If you increase your equity, then you can use more interest on loan capital. And that effect alone would take the rate to 16%. But there were other effects as well that lowered that tax rate, about 3 points, where we have a part of that and other some smaller aspects. So the -- that income tax rate should be under 20% from 18% to 20%, and obviously, depending of the performance of the company's profit.
About depreciation, it goes up as you replace the first vintage that was depreciated with the third one. So the peak takes place when you decrease the first vintage and then you haven't started to strongly decommission the second one. So it's the peak of depreciation, it takes place, and it will start to drop when you start to replace the second vintage with the ones that we're buying right now. And that won't happen in the second quarter -- that will probably take place at the end of the year. That's when we'll have the peak of the second vintage compared to the proportional Localiza fleet.
And as we decommission the second fit to gen replace it with the third one, then we'll see the depreciation start to drop. Daniel to add, if you consider the first one, we still have in the second quarter and a part of the third quarter selling the first vintage. And in the second half -- second quarter, we start selling vintage 2, that's what affects depreciation the most. That's why we think that moving forward, it will be a peak in the second half of the year, probably fourth quarter, and then we have a more relevant of -- relevance -- high relevance of the -- that third vintage and because the cars are higher, but then we have ROIC spread in line with what the company usually has 5 points to 8 points above the cost of debt.
That's clear. So depreciation should reach a peak approximately in the fourth quarter. And the second point that Rodrigo did mentioned, if you could Zero Litigation does not have an effect in the next quarter. Is that correct?
Yes, sorry. No effect in the next quarters. That was just a small effect in fleet. And in the margin of Rent a Car, no effects in the upcoming quarters. And it really depends actually about the Seminovos market in vehicles to talk about depreciation. Today -- with today's data in our perspective and the peak of vintage would be at the end of the year, and then we start to lower that depreciation.
Victor from Bradesco.
I have 2 questions. First one, looking at the debt profile for next year? If I'm not mistaken, we see BRL 6.5 billion in debt amortization. And when we compare that to your track record, the Localiza debt is running in the short-term. So my question is, how have you been handling that? Should we start to see higher roll-over in the second half? And how do you see the spread and cost of debt? And the second one is a follow-up to Daniel's question about the actual rates in the long-term ROIC or spread from 5 points to 8 points over the cost of capital. Is the rate that you consider 18% to 20%?
In the beginning of the year, we have -- the spread in relation to the debt went up because of the market effect. So we funded in the last quarter, when you look at the last quarter of last year at 5 and 7 years with very competitive spreads in the beginning of this year, we lowered that duration of debt given the value for money relationship. When you look at next year, you start seeing our debt planning and there should still be a rollover in the short-term, 2 or 3 years in addition to longer issuances, but always looking at the value from any of the cost of debt in the short-term compared to the duration here in the long-term. About actual rates, when we have ROIC and replenishment, we don't consider that rate. It's a bit higher, we consider the effects of interest on own capital. So the rate is a bit lower, but it's higher than the rate that we see here in the first quarter.
Next question, Pedro Bruno from XP.
Can you hear me?
Yes, we can.
So, Rodrigo already mention this partly, it's mainly a validation of a concept about how you see this in practice, which is transferring price when we compare RAC or even retail and RAC with fleet allocation and now with new products, thinking of heavy vehicles and subscription cars. So in practice, can we actually see that the profile -- less discretionary profile and consumption in fleet and heavy vehicles or even subscription cars, because subscription cars doesn't have that concept. So would that -- do you have a better pricing power, given the fact that some of these markets still have very low penetration, very low share and less competition? I think you understand the point here. It's more about validating. So what can you share with us in terms of practical experience with these new segments and different competitive profile when pricing given the current scenario and a relevant need for a price increase. That's it.
Obviously, we're monitoring the competition in all different segments, and we are in a competitive market. When we see the fleet -- when we look at the fleet market, it's a car that we haven't bought yet. So we need a return, minimum return to then order a car. So the competitive dynamics enable us to work with lower or higher spreads. So in fact, we have a bar under which would not allocate additional capital. So that would be, in general, to manage fleet. So we're talking about heavy vehicles, special vehicles, agri and so on. So that's a dynamic of pricing, competitive pricing, and it plays that role of looking in that ROIC spread level about how much we can reach in that.
When you look at the short-term rental, those cars have already been contracted in their part of a group. So in that case, the competitive dynamics has played a more fundamental role in pricing, because, in fact, you're trying to balance out the idleness in allocating your capital and seeing how much would be allocated working or not, versus profitability. Obviously, across time, if we believe that there is a lower demand, where the competition is tighter, you will adjust that to allocation in that segment. So we do look a lot at the competitive dynamics for the pricing.
In RAC, we see something gradual. So especially in discretionary, there's a stronger macroeconomic effect. And in the markets where you have direct competition of a car that spot and rented. So macro effect is something that helps me like the replacement of Meoo and the other one that's challenging in terms of the demand for this service, I'm not sure if I answered your question.
Yes, you did.
Let's move on to the next question from Bruno Amorim from Goldman Sachs.
I have a follow-up in the depreciation dynamics and financial expenses. But about depreciation, I'd like some help from you. To understand the dynamics in short, medium and long-term, so if we look at pre-pandemic, especially in RAC, a range of 4% to 6% of the car price. And with what you reported in the first quarter, the company would be running at 7%, which is above pre-pandemic level, and there should be determination of that ratio of what it was pre-pandemic, but it seems that most of the adjustments in depreciation was already done. So my question is short or mid or long-term, what would be a reference in percentage per cars that percentage? How do you -- what do you see? Obviously, giving you a discount and the purchase -- so the percentage would go to BRL 10,000, BRL 8,000, BRL 9,000 per car? Or is it just a marginal BRL 1,000 per car?
And then thinking of the company after vintage to thinking of a new normal for maybe 2025, is that 7% a good reference? Close to the range pre-pandemic or do you have another opinion. That's the first question. Second one, more objective. You mentioned that the peak of leverage was before expected and EBITDA should continue to increase, but that doesn't necessarily mean that net debt won't grow any longer. So I'd like to check that with you. And if it's still growing as you renew the fluid, or would we see net debt stable? And what's the implication of that moving forward?
Let me start off with the second, because the first one would take longer. In fact, EBITDA grows faster than net debt. And the second quarter is relatively positive for cash generation because in the first quarter, you have the payment of the costs that were very high in the first one. And the first one, we had longer-terms with the automakers. So in the second quarter, we paid less cars. So that has a positive effect in cash generation and net debt growth. And by renewing the fleet, when we have an old car, you spent an amount from BRL 15,000 to renew a car. And that's an area for growth, net debt would still have to grow for that.
But the EBITDA, most of that growth -- increase of debt that happened last year, the EBITDA of those cars 100% considered. That's why the growth of the EBITDA is much stronger than the net debt, contributing to a relative deleveraging and improvement in the ratio. That's the first point that I wanted to mention. Financial expenses for this quarter had some effect, and it contributed negatively a BRL 5 million and also part of Zero Litigation that increases the financial expenses. So some of these topics increased financial expenses is non-recurring in a negative manner for that quarter. And depreciation is a bigger topic.
So there are many factors that play in here. One of them are in the conversations and negotiations in purchasing cars, we've been able to have a longer-term instead of higher discounts. So if I got a higher discount, the depreciation would drop higher longer-terms. No, it affects the financial expenses and the capital base and so on. So we can't just look at depreciation alone because many things that connect to each other and that was a simple effect in the payment terms that -- to the automakers that could affect depreciation. And then when we compare depreciation of vintage 3 that we have today is a bit higher structurally than pre-pandemic levels.
So here, we're talking about 6% to 8%. And why does that happen? Because in most part, because of the mix. So before the pandemic, you had a prevalence of 1.0 cars, 1,000 cylinder cars that didn't have many accessories with lower depreciation and they also had a lower rate. So today, in rent car and in fleet management, you have a premium mix, given a consumer demand or even production changes at the automakers. So there's a change that's not much structural that's related -- not related to discounts, it's about the mix. So the pricing of replenishing the third vintage is higher in percentage-wise than pre-pandemic levels.
So 6% to 8% and vintage 2 has a higher percentage rate in that. That's why when we look at depreciation, it's been growing because of the increase in the relevance of vintage 2 compared to the vintage one. When we say that the peak would occur at the end of the year, it's about thinking of that effect of emptying the first vintage that doesn't depreciate that much before we go into emptying the second one. That said, the market is very sensitive and volatile. So if you think of the variations of price -- car prices at 1% to 2%, where you have the prospective depreciation, that's much higher from 10% to 20% depending on the case.
So it's very complicated to have a super stable reference of any depreciation parameter that depends on many concept matters, be it the vehicle market or even the dynamics of choosing in between a higher payment term or longer payment terms or higher discounts. So you have to consider many different factors to give you a better understanding. Perfect. That helps a lot. Depreciation is how we mark-to-market. So any estimate of prices to sell, we consider that through depreciation. We're moving towards the end of the call, we have a long list of questions. So I'll just read the last one right now. And then we'll follow-up with the other questions that were not answered during the call.
So next question is in writing from Ivan. [ Ivan from Capital. ] Could you give us more visibility in SG&A. For the first quarter, we had this line substantial under the last ones, in nominal values and also net revenues. That event can see in the 3 operations of Localiza and substantially contributed to margin gains. What factors had the gain in SG&A? And what's the recurrence of those factors? I understand the dilution of costs across time, but the fact that the nominal values are substantially lower than the fourth close to BRL 250 million makes us wonder how we should look at that for the next quarters.
I'll start answering. Thank you, Ivan, for the questions. So we have some factors here. The first one is that we're drastically reducing the expenses with the integration and the consulting and store rebranding and the entire integration process. I'd like to remind you that in the quarter and the fourth quarter of last year, we had some detractor effects where we had some civil provisions, the auction and the financing for investors. And this half -- or actually, in the fourth quarter last year, we adjusted the bad debt bars for Locamerica to the Localiza standards and that affected the fourth quarter. So when you compare that to the first quarter, we already have a significant improvement in bad debt and theft.
The effect in bad debt and advertising drops when we -- after the rebranding, less expenses in stores for -- in terms of advertising and the agencies and the new brand and the Zero Litigation effect. As we mentioned, that's non-recurring. So approximately BRL 40 million. So that would give 1 point of margin in RAC and fleet, so BRL 19 million in RAC and BRL 19 million, rounding it up to BRL 20 million in fleet management. So that's what we would exclude, and we also have the effect of less expenses related to the business combination.
We have a long list of questions still, unfortunately, we won't have time to answer all of them. We will follow-up here. Filipe and Alberto, we'll get back to you to each one of you.
So now I'll hand over to Rodrigo for his final remarks.
Thank you, everyone, for your presence. Our IR team is available for any further clarification. Have a great day, everyone.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]