Localiza Rent a Car SA

BOVESPA:RENT3

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, and welcome to the Localiza Rent a Car Webinar, referring to the Results for The Third Quarter 2021. Today, with us, we have Mr. Rodrigo Tavares, CFO; and Ms. Nora Lanari, Investor Relations Officer. [Operator Instructions] 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. [Operator Instructions] 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 video conference 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. Investors should understand that general economic conditions, market conditions and other operating factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements. Now I hand over to Rodrigo, the company's CFO, to begin the presentation.

[Rodrigo Tavares Goncalves de Sousa, executive]

Good afternoon, everyone, and welcome to the Localiza results webinar. After the second wave of the pandemic, in the second quarter, we felt the positive effect of the advances in the vaccination, which contributed to the resumption of demand in all car rental segments. Even in the context of rising rental prices, which is especially necessary due to the increase in the value of new cars and maintenance costs, we have noticed a gradual and consistent increase in our volumes, already higher than what we presented in 1Q '21 with the utilization rate back to historic levels. Increases in car prices and maintenance costs and the basic interest rates substantially impacted the entire mobility chain. But the demand resilience reinforces the position of rental as an affordable and viable transport option for the most diverse mobility needs. The demand for long term rental, both from large companies as well as individuals and SMEs is currently strong, resulting in the highest ever backlog. We continue to live in a context of limited car supply caused by insufficient supply of inputs in the chain, especially the semiconductors. This scenario, once again, impacted purchases in the quarter, and it should last with the perspective of normalization only as of the second half of next year. In this context, we are seeking better car allocation by segment according to the mileage and the needs of our customers, thus managing to maintain the NPS at levels of excellence as well as monetizing the asset without losing sight of our long-term relationships and customer vision. In this way, we are reducing the impact of the postponement of the fleet decommissioning until purchase volumes return to higher levels. We continue developing Localiza's journey of digital transformation and building the future of sustainable mobility. Our strategy is to develop our competence in technology and data science and to look at our ecosystem has been consistently evolving through the Localiza Labs. We have intensified our efforts in the pursuit of innovation within the customer journey, efficient cost management and greater productivity on several fronts. And we already have some important initiatives in the experimentation and expansion phase. We're coming close to 150,000 connected cars. And as a result, we have a daily generation of approximately 65 million data points and more than 9 million kilometers monitored per month, which in addition to reducing delinquency rates is an important tool for that production and increase in rate of recovery. We remain diligent in the allocation of capital, and we'll take advantage of this moment to look even more broadly at new opportunities that can enhance our business whether by strengthening our competitive advantages, increasing our growth or return prospects. Our balance sheet keeps strengthening with substantial reduction of leverage ratios. In addition, our fleet replacement cost is the lowest in the industry, ensuring cash preservation, which is fundamental while going through a period of uncertainty and an increase in interest rates. This quarter, we concluded a technical study that supported the review of the useful life of our cars from the tax perspective, which accelerates depreciation and tax credit with a direct impact on results. Based on the technical report issued by a qualified entity by the Brazilian revenue service, the fiscal useful life of the cars was reduced from 48 or 60 months to, on average, 24 months for cars covered by the report. As a result, we had an increase in tax depreciation and the recognition of the corresponding PIS and COFINS tax credits impacting the quarter's EBITDA by about BRL 320 million. Finally, in the last 12 months, we achieved a ROIC of 16.8% and spread over debt after taxes of 13.9 percentage points. To present the results, we will move on to Page 2 of our webcast. In 3Q '21, we show a growth of 54.1% in revenue from the car rental division year-over-year. Utilization rate was 81.3% and the average daily rate achieved BRL 92, reflecting our pricing strategy and the mix of segments. Revenue from the fleet rental division has been growing sequentially and year-over-year shows an increase of 14.7% against 3Q '20 due to the combined effect of volume and prices with a stable utilization rate and an average daily rate 8.4% higher. On Page 3, we show the financial highlights for 3Q '21. Compared to the same period last year, net revenue from car rental grew 43.3% and from Seminovos dropped 36.1%, impacted by lower car decommissioning volumes in the context of lower purchases. As a result, consolidated revenue decrease was 9.6%. The EBITDA grow 33.1% sic [ 83.1% ] year-over-year due to the higher operating result from both rental and Seminovos. EBIT advances 112.2% in the same comparison. Finally, we see a 106.3% increase in net income for the quarter, which reached BRL 671.4 million, surpassing the BRL 2 billion mark in the last 12 months. To present the details of the third quarter results, I would like to hand the floor over to our Investor Relations Officer, Nora Lanari.

[Nora Lanari, executive]

Good afternoon, everyone. Starting with the car rental division. As you can see on Page 4, in the third quarter, the number of daily rentals increased by 11% and revenue grew by 54.1% year-over-year, which is a reflection of the volumes redemption from the vaccination against COVID evolution and the higher level of fleet utilization rates. We also continue to adjust our rental rates in all segments to accommodate new car price increases and higher interest rates. We see a resilient demand with consistent growth in all segments, which reinforces our confidence in rental growth avenues for the coming years. On Page 5, we show the result of the efficient management of prices and mix. In the context of low car supply and growing demand, the car rental division reached a utilization rate above 81% and an average daily rate of BRL 92. On Page 6, we show that the network of own branches was extended by 9 in the last 12 months or 2021, from 442 to 451 branches, which reinforces our confidence in growth opportunities. The company has been increasing convenience for its customers and getting ready to accelerate volumes as car delivery returns to more robust levels. Moving on to Page 7. In the fleet management division, we see the average rented fleet increased by 7.5%, and net revenue increased by 14.7% compared to 3Q '20. In this comparison, rates have increased by 8.4%, reaching BRL 1,753 per month per rented car, and reflecting the pricing of new contracts in the context of rising new car prices and interest rates. We're excited about what we have seen in the demand and results of Localiza Meoo and fleet management. The number of orders continues to increase in fleet rental and has a backlog of over 20,000 cars, but we're still being affected by the scenario of restricted production of new cars. Moving on to Page 8. We show the balance of cars produced and sold. The quarter was affected by lockdowns in Malaysia, which aggravated the semiconductor's global crisis resulting in further suspensions in the production of cars in Brazil. In this context, we've bought 22,437 cars and reduced car decommissioning, which resulted in the sale of 21,620 cars, an increase of 817 cars between purchase and sale, and a net investment of BRL 327.5 million. Our average purchase price was BRL 72,700 compared to a sales price of BRL 60,500 resulting in a replacement effort of BRL 12,200 per car, showing the importance of maintaining discipline when buying cars. On Page 9, we show the used car network or Seminovos. At the end of 3Q '21, we had 132 points of sale and 21,620 cars sold, a reduction of 52.5% in volumes sold year-over-year. The average price was 34.5% higher than the prices charged in the same period of the prior year and reflect the context of a sharp increase in the price of new cars, which we were able to capture in our decommissioning. On Page 10, we show the fleet at the end of 3Q compared to the prior year. In car rental, we ended the quarter with a fleet of 207,550 cars, a reduction of 4.1%. While in fleet rental, the end-of-period fleet increased by 6.5%. On a consolidated basis, the fleet decreased 1.7%, reflecting the lower number of cars being activated and decommissioned in addition to the lower number of vehicles available for sale. Moving on to Page 11. We see that the consolidated net revenue of the quarter dropped 9.6% year-over-year. Net rental revenues increased by 43.3% with a 54.1% increase in the car rental division and 14.7% in fleet rental whilst Seminovos dropped 36.1%, impacted by the lower car decommissioning and sales volume, partially offset by higher prices. On Page 12, we see that EBITDA growth, 83.1% in 3Q '21 year-over-year, reaching BRL 1,187 million with a strong contribution from car rental and used vehicles. The positive performance in car rental is due to the increase in revenue, resulting from higher volumes and rising the rental rates. In addition to higher margin, benefited by a greater recognition of the credits of PIS and COFINS taxes, the result of a study that accommodated the reduction of the fiscal useful life of the cars object to the report issued. The average fiscal useful life of these cars approached 24 months compared to 48 months that was previously used to obtain PIS and COFINS credits. It's worth noting that the credit recovered from these cars practically doubled. The higher volume of credit should be recurring as we obtain new reports updating the fiscal useful life of new cars entering the fleet. Despite the expansion, some effects still have negative impact on the car rental EBITDA margin, especially the maintenance line, property tax, licensing and others, which remains high as the fleet age continues, increases in the price of cars and parts, and larger effect recognition. Another line impacted was profit sharing, reflecting higher increased provision due to the strong result of the company. Finally, margins have been impacted by continued investments in the brand and in the technology and data teams preparing the company for the next growth cycle and a more prominent presence in the mobility ecosystem. These combined effects resulted in an advance of 22.4 percentage points in the car rental EBITDA margin. Moving on to the fleet rental division. The EBITDA margin decreased by 12.6 percentage points, mainly due to the increase in maintenance costs due to the fleet aging in addition to increase in expenses with team, technology, advertising for Localiza Meoo. Last year's basis of comparison is helped by the lower personnel costs associated with MP 926, reduced maintenance costs due to lower usage of the fleet and reduced expenses with marketing and consulting during the beginning of the pandemic. In the last quarter, we have seen the order backlog increase, which should contribute to the gradual acceleration of growth and cost dilution as vehicle deliveries advanced. The tailwind continues at Seminovos and contributes to a higher EBITDA due to the strong improvement in prices, even with less volume of cars sold. In the annual comparison, the Seminovos margin goes from 6.3% in 3Q '20 to 18.6% this quarter. As a result, the consolidated EBITDA margin reaches the level of 80.9%. On Page 13, we see that in RAC, the annualized average depreciation per car advances sequentially to BRL 938. In the fleet rental division, the average annual depreciation per car is similar, BRL 975. The higher renewal of RAC cars as well as the fewer cars sold with an impact on the lower dilution of fixed costs, explain the advance in depreciation in this division. Anyhow, the depreciation at low levels in the 2 business divisions is a result of the increase in new car prices and consequent impact on used car sales prices and tends to advance slowly while the pace of fleet renewal remains low. On Page 14, we can see that the consolidated EBIT in 3Q '21 reached BRL 1.069 billion representing an increase of 112.2% year-over-year. The EBIT margin of the car rental division was 72.7%, representing an increase of 39.9 percentage points compared to 3Q '20, mainly explained by the effects that impacted the EBITDA. In the fleet rental division, the EBIT margin was 73.6%, an increase of 0.2 percentage points year-over-year, mainly explained by the reduction in depreciation and higher margin on the sale of cars in this division. Net income for the quarter on Page 15 grew 106.3% year-over-year, reaching BRL 671.4 million. In addition to the EBIT variation described above, financial expenses increased 77.6%, especially due to the increase in CDI and income taxes, which increased 543.2% due to the higher EBIT and higher rate. On Page 16, we show a cash consumption of BRL 208.8 million in the 9 months of 2021, explained mainly by the reduction of BRL 851.3 million in the automakers' account. As can be seen on Page 17, net debt increased by BRL 541.7 million, ending the quarter at BRL 6.7 billion. On Page 18, we can see that we ended the quarter with a strong debt profile and strong cash position, including the issuance of BRL 2 billion in debentures made in October in the pro forma analysis. The company has almost BRL 5.5 billion in cash. The chart below shows the cost structure of our debt, also considering the pro forma analysis. The total gross debt about 16% are prefixed from being hedged by derivatives, ensuring the profitability contract in this rental division. Another 28% are indexed to 109.5% of the CDI and the remaining 56% are indexed to CDI plus 1.68%. Additionally, as a mitigator of the interest rate increase, the availability of cash is fully applied to the percentage of the CDI, which helps to protect the company from the increase in interest rates. The efficient management of the cost of debt, maintaining protection for long-term contracts in fleet rental and the prioritization of CDI plus instead of a percentage of the CDI makes Localiza relatively well-positioned for a scenario of higher interest rates. On Slide 19, we can see that the net debt over EBITDA ratio for the last 12 months was at 1.9x, a level that gives us peace of mind to finance our short-term growth with third-party capital. I would like to turn the floor back over to Rodrigo to present our ROIC spread.

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Nora. On Page 20, we present the evolution of the ROIC spread versus the cost of debt. In 3Q '21, considering the last 12 months, we see an increasing spread, which reached 13.9 percentage points. We emphasize that despite the high level of short term returns, the current context highlights the importance of decision-making thinking about the complete rental cycle as well as the replacement cost of the cars. That's why we maintain our austerity in capital allocation, certain that we are making the decisions with a long-term vision, seeking growth with value creation. Finally, in terms of sustainability, this quarter is an important milestone in the history of Localiza. The company launched the Localiza institute to drive social transformation by supporting projects that facilitate young people's access to education and fosters entrepreneurship in community. We also made progress in other important sustainability initiatives such as signing the form for companies with refugees, an important step towards advancing the company's diversity agenda. We also launched Frota Experience, an education platform aimed at fleet rental customers with a focus on traffic safety. In the environmental pillar, we completed the greenhouse gas mission inventory reporting for the first time the complete scope 3 with customer emissions, which has already been audited. We are aware of the relevance of the sustainability journey and the path ahead, but we are also proud of the progress we have made in recent years. We're now available to answer your questions.

[Operator]

[Operator Instructions] Our first question is from Regis Cardoso.

[Regis Cardoso, analyst]

Congratulations on your results. I'd like to touch on a couple of points that we're in doubt about here. And maybe the main one is related to GTF or even margin pressure in the period. So it seems like the margin pressure was driven by costs and expenses given that the revenues went up. So is that fully a reason from maintenance? And moving forward, and therefore, it would have to come through rate increases or am I interpreting that wrong? Is there another driver? And another topic in that sense is that in the third quarter, quarter-over-quarter, there was no daily rate increase. That stood out to me. There was even a slight drop, and that stood out to me because I know that you have a strong backlog in this segment. So I'd like to understand that, why weren't you able to increase the rates in the quarter? Is it about contracts that are -- that have come to an end and you can't replenish vehicles because it's -- you have a completely new product line, which is Meoo, that adds to that? And lastly, if you can comment as your peers did, the book value -- different book value for your fleet? And also compared to peers, do you have any understanding of lower car prices that -- or purchases that evolved sequentially, does that have an effect on the mix effect?

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Regis. Let's talk about margins first. In fact, when you look at the margins, first, you have some nonrecurring effect. When you look at the profit-sharing given the record profit, so we do -- we've increased the profit sharing that's why we have a provision for that and contingencies that gave us the margin of 41%. The main driver of that it's in maintenance line, but actually, it's best. We have an increase in criminal activities. And that's why we decided to significantly shorten our rule to recognize the effect. And that's what affects our margins in rental car. In fleet management, we have robust investments, not only in brand and marketing for new customers to actually form Localiza Meoo. And therefore, the margin in fleet management in the short-term is lower. In relation to the rates in fleet management, we have a renewal. And we do have low deliveries coming from the automakers. The new contracts are being priced at much higher rates than the historical rates that we have here in our portfolio. So as that turnover has been a bit slower, given the lack of deliveries from automakers, the rate is not going up as much. And there's also the mix effect for each contract of fleet management, and reflecting future purchases in cars, commercial conditions to have a spread on the cost of debt. So it has to do with the portfolio turnover. About the purchase price, that's already part of our strategy. The replenishment cost is something critical. We've been working with lowest levels in the industry, pretty much half when you look at the difference in the sale price and replenishment price. That's why we're affected with the less -- lower production volumes from the automakers. About the fleet -- about the book value of the fleet, we don't disclose that figure, but I'd say that we have a book value that's the lowest among the entire market. And our sales prices is one of the highest sales prices in all of the market. So when you look at that ratio, it's highly positive compared to market price and prices that are booked.

[Regis Cardoso, analyst]

Rodrigo, just a quick follow-up. In -- the theft theme also showed up to or stood out in this quarter and last quarter. So there's a mismatch between fleet growth and -- or the number of purchases and sales, right? So fleet is dropping more than what you would expect in purchase and sales. So I'd like to know if it's related to that effect that you mentioned. And if you allow me another follow-up about fleet management. More -- I was talking about more about volume than rate, and that's related to the car price -- car purchase price because there's some repressed demand in fleet management, which is a market that -- from the start lets you price cars more expensively and lower discounts in contracts. But in the sequential comparison, there was no growth. Is that something -- a one-off for this quarter? Or will it continue?

[Rodrigo Tavares Goncalves de Sousa, executive]

About theft, as I mentioned, there was a strong shortening in that rule of recognition and it has to do with that purchase and sale of the fleet, what you said is correct. About fleet, I thought you were focusing on the rate. I apologize that. So while you mentioned logistics, since you have less deliveries from the automakers, you have a backlog, like I mentioned, of over 20,000 cars, and that may lead to a slower renewal, not only affecting the rates, but also the volumes.

[Nora Lanari, executive]

I'd like to add, Regis. The takeaway is, we -- by taking advantage of the Seminovos tailwinds and accelerating the PIS and COFINS credit, we've invested in brand, technology, data, robustness of our team and the new ecosystem. So what's stood out here is theft, and maintenance includes licensing, vehicle tax, and others. So licensing is expensive because of the car prices and same as the fuel prices but the main detractor there was theft. In the second quarter, we had an increase, in fact, partially explained by the increase in criminality and also by reviewing the rule that still affects the third quarter. So we should see that number lowering as recovery in a normalized run rate, and we see the amount of theft dropping. But the important takeaway is company has been increasing in speeding up investments to expand its presence in ecosystem, and it affects the -- not only rental rates, fleet management and taking advantage of the good results of the company and that tailwind from Seminovos. About the book value, we've seen the comparisons in relation to the FIPE or Bluebook list in Brazil. What Rodrigo mentioned is that our book value is the lowest for 2 reasons because the lower price that we purchase and a slower renewal of the fleet. When we compare the book value in the balance sheet to the cars sold, we have an important advantage based on the replenishment cost of cars as we mentioned at approximately 12,000. It's the most relevant effort from our history, but less -- having to consume less or burn less cash compared to other peers in the industry. That's important so that we can face a year where the interest rates are considerably increasing.

[Operator]

Our next question from Bruno Amorim, Goldman Sachs.

[Bruno Amorim, analyst]

I have 2 questions. The first one is a follow-up about the purchase price, sale price and the implication that, that has for company profitability moving forward. Forgetting the short term, looking at 12, 18 months, when these cars that are being purchased now will be sold, we see an increase to 55% of the cars purchased year-over-year. Sold prices of cars sold increased 29% in the same period. When we look at the cap -- gap between purchased price and sold at BRL 17,000 per car, used to be BRL 5,000, BRL 6,000 per car in the past. So first of all, I'd like to understand from you if that doesn't imply that in 12 or 18 months are contracting much worse Seminovos margin and depreciation than when we were seeing before in 2019? That's the first question. And the other is a scenario for RAC, specifically. Once again, imagining a post-restrictive world in new car supply. Imagine that in the next 12, 18 months, new car sales will go back to normal so that you and your competition can put more cars into the market. Do you believe that you can grow in a RAC, maintaining the current price levels that, in a way, are higher and rewarding the higher car prices or to go back to growth that you had in the past that you would have -- that the prices in the market would have to settle down a little.

[Rodrigo Tavares Goncalves de Sousa, executive]

So about replenishment cost, like we mentioned, it's an increase, it's BRL 12,000, significantly lower than the market. That's why we've been extremely diligent in capital allocation. We know that the Rent-a-Car business is very capital-intensive. Depreciation costs and the costs that I'll have in car resale highly affect the investment cycle and return cycle. That's why we're truly focused on cars with a little cost of -- a lower total cost of ownership. And that's one of the reasons why we've been adopting the mentioned strategy. So we can expect an increase in depreciation, yes, it could take a little longer depending on the dynamics of car supply restriction. If supply grows faster depreciation will also grow faster with replenishment in those cars. Otherwise, we'll still see low depreciation compared to historical levels. Sales for Seminovos margin, but that one has a lag. It takes a little longer to feel the effect. It only feels the effect when the new cars purchased are decommissioned. So the first effect that we should start seeing is an increase in depreciation, depending on the fleet renovation rate to then talk about the drop in the Seminovos margin.

[Nora Lanari, executive]

Bruno, I'd like to add to Rodrigo's comment. When you compare the price increase of 55% year-over-year of 30% for sale, it's worth mentioning that the automakers had downtime even with the entry cars. So you're comparing the price of 1 year ago and what you're bringing in today. So there is a mix effect in addition to what Rodrigo mentioned that we can't disregard it. So that the effect on the sale price will lag compared to the price of purchase. So depreciation will increase as the cars that are 100% appreciated in our fleet, they will be sold, and the new cars will have depreciation levels that I would call more back to normal.

[Bruno Amorim, analyst]

No, just a follow-up to clarify. The number that we see here is impacted by the mix. But you mentioned BRL 12,000 per car. I imagine that that's comparable already. Can you give us an idea of what that number was in the past so we can understand how much it got worse?

[Nora Lanari, executive]

The BRL 12,000 that we gave you is consolidated, Bruno. It's different than the BRL 17,000. I don't know if you're separating RAC and fleet to get to the BRL 17,000. So we're buying a BRL 72,200 and selling at BRL 60,500. So that's the BRL 12,000 that I mentioned. In consolidated, we have some mix effects. So the first one, automakers shut down, the ones that deliver the cars that are most sold in the country, so they were closed. And there is an effect of the BRL 12,000 consolidated, there's also the Localiza Mayo effect. It's the subscription and starting off with SUVS, which is what the market is telling us. SUVs, compact, medium compact, compact SUVs, medium-sized SUVs, and that's also part of the mix. I'm not sure if the math you did -- you separated RAC from fleet.

[Rodrigo Tavares Goncalves de Sousa, executive]

The other question about the demand. In relation to the demand, we see that in -- most segments are underpenetrated. So we believe that there's still a potential to grow in most, if not in all rental car segments and fleet management. So with the growth of the cost of acquisition and interest rate, price transfers have already been occurring, but we still see a robust demand for those segments at those price levels. It's worth noting that when compared to the past, the rates are still highly competitive. When we look at the scenario, not just 1 or 2 years, but we go back to 5 or 6 years, you'll see that today's rates are still competitive, and that's why there's a latent demand in our rental -- fleet rental segments.

[Operator]

Pedro Bruno, XP, next question from you.

[Pedro Bruno, analyst]

Nora, can you hear me?

[Nora Lanari, executive]

Yes, we can.

[Pedro Bruno, analyst]

I'd like to know about the announcement of Cosan entering car rental segment and the joint venture with Porto Seguro. Can you comment on now you see any potential impacts to the industry separately by the 3 potential segments. So [indiscernible] public about what they mentioned entering car subscription which is pretty obvious as it already existed in Porto Seguro, but potentially with fleet rental and then even rental cars. So could you comment about the 3 areas that would be interesting. And a second question about same thing. Do you believe that these signs could be a confirmation of your claim that this market has a low barrier to enter and even positive -- that could lead to a positive analysis from the Brazilian antitrust agency, CADE.

[Rodrigo Tavares Goncalves de Sousa, executive]

Without a doubt, there's low barrier to entry and that movement is -- does confirm that. So the industry, you can buy a car. The car is available to everyone. A service has a defined period, and you don't have any barriers to enter, any new players. The market is growing, that also attracts players. And I believe that Cosan together with Porto Seguro reinforces that. They have capital, they're well managed. We highly respect them as competition in that industry. And in the subscription cars, they should advance faster given the experience of Porto Seguro. It's still a market that's growing strongly. We believe that there are advantages there. So definitely, it's a market that they're going to be able to compete. In fleet management, that would be a natural consequence of entering the market. It's a corporate market, it's more competitive. They should enter as well and become another competitor in the market that is extremely disseminated among many players and still -- and profitability can support themselves. Rent a Car should be the last one, the last segment that they will enter. But they do have huge capillarity today. So they could also have the ability of entering in the rental car segment, confirming that there isn't an barrier to entry when you're a big player like Cosan and Porto Seguro.

[Unknown Executive]

We have a question from [indiscernible], HSBC analyst. I'll translate it, and we can answer it. Quite a resilient performance in the context of supply chain constraints. I have a few questions. What was the reason for the sequential decline in EBITDA margin for the car rental segment? Second question. What is the reason for the higher tax rate in the quarter? And 3, have you been able to retain the fleet mix amidst varying level of supply chain constraints faced by different automakers? And lastly, can you elaborate on the impact of the interest rate increase on Localiza from the perspective shift from car ownership to your subscription model?

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, [indiscernible] So the first question, when you exclude the nonrecurring effects, especially of profit sharing and other positions, we have a slight EBITDA margin increase that would reach 41% instead of the 37%. And disregarding the tax credits, because then the margin was 66%, which is strong quarter-over-quarter. So if I consider all these items that were, so to speak, extraordinary, we're talking about a slightly higher margin. But as we mentioned, the main factor was the increase in criminal activities and shortening that role of recognizing theft and which increases the expenses associated to theft. That's the main reason for margins. So even though it increased when you eliminate those aspects that I mentioned. So income tax varies with the sale of Seminovo cars, you have book value that's depreciated. You can have a variation of income tax quarter-over-quarter, but there's nothing significant that we should expect for upcoming quarters. Even in the point of view of cash, accelerated tax depreciation would help us in cash, it wouldn't affect the result, but a very positive effect based on cash in the income tax item. Our mix has changed to more premium cars, SUVs, reflecting automaker production. But within that context, I believe that we were able to sustain our mix closer to the original one. That's why our acquisition cost is much lower than the market. When we look at interest rates, so we're talking about capital-intensive business, the interest rate has an effect on the business, but does not have an effect on competitiveness. So when you look at ownership versus rent, the interest rate part may even help us. The spreads start going up, the cost of having a car and carrying that car goes up, not only for companies, but also individuals. Cost of financing for individual goes even -- increases even more than the corporate cost. So the interest rate increase, although it affects the business, it could actually increase the appealingness and the attractiveness of the rental solution instead of actually owning a car.

[Unknown Executive]

We have the next question from Rodrigo Faria from SulAmerica Investments, which is very similar to the previous question. Could you talk about the vehicle purchase mix in this quarter compared to first quarter, second quarter?

[Nora Lanari, executive]

That's a mix effect, Rodrigo will talk about that and the total cost of ownership that's worth noting as well.

[Rodrigo Tavares Goncalves de Sousa, executive]

As I mentioned, the mix for this quarter was the more premium mix. So the automakers where we have a higher share suffered a little more in this quarter. And that said, October was the best month in the year in relation to car we seek with some of our partner, important partners coming back. That's why our mix for the third quarter was richer, more expensive with the share of not only SUVs, but large pickups compared to the first and second quarter. That explains a great part of the price variation that we had in the second quarter. But that said, we were also able to maintain a competitive mix in the market. Related to TCO, as Nora mentioned, we're highly focused in having higher shared more competitive cars regardless their end treat price. Obviously, sometimes there is a relationship there, but not necessarily. So we're not only focused in having a higher percentage of SUVs or mainstream cars, but also having a higher percentage in cars that will have a higher return with lower depreciation and consequently, more competitive Seminovo margin.

[Operator]

Next question, Victor Mizusaki from Bradesco. Well, I think Victor is having an issue with his audio. So I'm going to move on to Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

Congratulations on your results. I'd like to know about recognizing the PIS and COFINS credits. You recognized an amount that's higher than normal, but you have a positive effect on EBITDA that will shorten the term for the credit that you were recognizing. You weren't able to use the entire credit because you had 48 to 60 months to recognize that but now at 24 months, you're able to recognize a large part or if not the entire credit if you operate 2 years in RAC, which is less likely and that in a faster way. And you can generate a higher NPV. So my doubt is how much in EBITDA can you generate recurringly moving forward, looking at the operation, removing that one-off? How much can you generate in EBITDA more because of that? You also mentioned the technical study of one part of the RAC. Is there any other extraordinary recognitions that we can consider moving forward?

[Rodrigo Tavares Goncalves de Sousa, executive]

Well, that's very technical. Let me try to explain that and give you more clarity in relation to that. So we contracted a report by an entity that was registered with the federal -- Brazilian federal income tax service. And they consider 200 cars that were in rental car until February 28, all cars in the company from up to February 28 were covered by this report. So there are 4 effects that are more complex. The first one is on the 203,000 cars, you have a rental active credit since the beginning of the year. So for each one of the cars individually, you'll ascertain how much the credit should have been and how much we had? And then you -- it's a one-off entry. In addition to the cars that weren't fully depreciated, still the 203,000, part of them were depreciated. You speed up the credit receipt once it was 1 over 48, and now it's 1 over 24. So a large amount of those 203,000 cars aren't fully depreciated and on that amount, you can speed up the recovery of PIS and COFINS credit until the 24th month. In addition, the cars purchased after February could have the same benefit provided that we have new reports, be it them cars that are already in our fleet or be them cars that we will buy in the future. If all cars that have been part of the report, until today, we would have an additional recognition of BRL 24 million, but they were being newer cars and most of that speeding up would come from the future before getting to the 24th month. In addition, you're speeding up tax depreciation, which leads to a high deferral in income tax and social contribution. You don't have a effect on the bottom line, it's going to lower the book value in tax terms. And then when you sell it, you'll recognize the tax. So you do have a relevant cash effect by deferring that portion.

[Operator]

Now let's go on to [indiscernible] from BTG.

[Unknown Analyst]

My question is about fleet growth. You mentioned that in October, you had the best month in fleet supply. And we saw news in the Valor Daily that Anfavea is talking about these problems in the automakers chain going up to 2023. So can you give us some more flavor and expectation about fleet growth and renewal for the next quarters?

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, [ Elini ]. In fact, the supply restrictions should last. Nobody really has the exact date for that. Most believe that as of the second half, we should have an improvement. That said, we always have to compare that in relative terms. One is historic levels coming back to normal. Another thing is an improvement in relation to what we've been seeing in the second and third quarter. The quarter was -- especially because of Malaysia that affected the semiconductor, it was the worst quarter in the year. And that wasn't expected. Fourth quarter started off as a stronger quarter, and we still expect restrictions, it shouldn't be a strong quarter yet, but we expect it to be the best quarter in the year in relation to renewal. For next year, the perspective that the automakers are giving us are more positive, but still not in relation to the annuality that we had before the pandemic. So we expect a gradual improvement, especially after the second half and completely normal in 2023.

[Nora Lanari, executive]

[ Elini ], to add, I think it's worth noting, and we wrote that in the press release that in conversations with automakers, we have signed different times than we had in 2021, that already guarantees growth for next year. And potentially some efforts to make our fleet younger. So we would grow the fleet, make it younger, and our escape valve would be how fast we can make the fleet younger depending on the car supply for next year.

[Unknown Executive]

We have a question from [ Philippe ] from Citi. You talked about the mix, I think that was answered. A second one, how is the debt portion positioned which is not linked to the CDI? How have -- what is your strategy to allocate the debt in pre and post fixed rates? Has that strategy changed the company capital structure somehow?

[Rodrigo Tavares Goncalves de Sousa, executive]

Well, thank you, Philippe. Most of our debt is in CDI+, I mean, some sort of spread. When we contract debt that is not such as issuance of a debenture in PCA or debt in foreign currency, we swapped to transform it into CDI+. There's a relatively small portion that's in CDI, very low, 109%. That is even lower than the yields that we are able to allocate our cash in the investments that we may make, and that's the best hedging that we have. So our debt is basically on the spread on the fixed CDI and in fleet management, as we price the contract with a duration of 2, 3 or 4 years already locking in the spread, what we do is with derivative, I can lock up that difference and transform my floating debt into pre. So my CDI+ debt can be transformed into pre-fixed debt, which is exactly the interest rate that we used to price that contract in -- for the next 2 or 3 years. So the portion of the debt that's priced is actually hedging our contracts in fleet management. That means if interest rate goes up, we're hedged and I can guarantee that spread and yield in fleet. It's not a change in strategy or capital structure because of that, that's always what we've done. But now that we're having a stronger interest rate rise, we've seen the derivative instruments playing their role and protecting or hedging that variation, that's why we have benefited in that short term.

[Operator]

We have another question here from Rogerio Araujo from UBS.

[Rogério Araújo, analyst]

Hi, everyone. Can you hear me?

[Operator]

Rogerio, your audio is choppy.

[Rogério Araújo, analyst]

How about now?

[Operator]

No, Rogerio. Sorry. If you don't mind, set it in the chat, please. Victor, we received your question, we're going to read it. Do you want to try to unmute again? Otherwise, I'll read it here. So the change in ascertaining the PIS and COFINS credit has a relevant impact to profitability. What have you done for that change? Is there any risk that the revenue will understand the tax ascertainment in a different way?

[Rodrigo Tavares Goncalves de Sousa, executive]

Well, first of all, what motivated us is the fact that our use for life credit card is not 48 months. So in Rent-a-car or ride sharing, it's 48 months but it doesn't have an adequate use for life. You're talking about cars that would have 250,000 kilometers and for those purposes. So the reason for that was a technical matter. About the revenue service, we looked -- we talked to an agency that's recommended by the IRS to assess the useful life of any property, plant or equipment. So it was conservative, but it did come from a characteristic of the business because that car is not a car that was made to the last 48 months. And that's why, according to the technical agency, they deemed that the use for life of the car in rental is 24 months. And that's what motivated the -- getting the tax credits in 24 instead of 48 months. Obviously, they could challenge us on that, but we are -- we do have the legal and tax grounds if they challenge us.

[Victor Mizusaki, analyst]

I have a follow-up, Rodrigo, about that. So for instance, I think it was in the second quarter, when the Supreme Court judged that -- and there was case and a number of companies recognized it. In this specific case, there was no judgment, right? Or a formal consultation with the IRS or an event that would give you the legal security to not have any issues with that?

[Rodrigo Tavares Goncalves de Sousa, executive]

We based ourselves on Article 320 of the income tax regulation. It sets forth the entity or agency that will tell you about the useful life of property, plant or equipment. So once again, based on the legal opinion, we have many -- we have the grounds to make that change.

[Unknown Executive]

We have a question. Rogerio, I'll get back to you. We have a question from Guilherme Mendes from JPMorgan. Supposing that there's a worsening from the automakers, what's the limit of fleet age and use utilization that we would consider?

[Rodrigo Tavares Goncalves de Sousa, executive]

We don't have a magic number or a limit. We're going to have to do the math in relation to car replenishment and extension of its useful life. What we're doing to preserve the quality of the experience of our customers is reinforcing maintenance protocols and changing how we do that. And when you look at a car with 30,000, 40,000 kilometers, it's not necessarily an old car. A well-cared car can remain in the fleet for a pretty long period. Obviously, there's no limit or special number that we can mention. And in addition, it's important to note that there are different limits depending on the segment. So a ride-sharing driver, for instance, is already using an already buy-used car with over 60,000 kilometers on it. So if I offer them a 40,000, 45,000- kilometer car, that's actually positive in their opinion. What might be a little different when you have a premium agency, right, or branch. So we're very much aware of those limits, not only for the global fleet, but also individually for each segment in relation to perception of value and perception of quality that, that specific customer has. With that, Guilherme, we've been able to maintain the NPS per segment at excellent levels.

[Operator]

Let's try to go back to Rogerio. Can we hear your question, Rogerio? Let's try.

[Rogério Araújo, analyst]

Is it better now?

[Operator]

No, still not good, Rogerio. Well, we have your question in the chat. Let me read it. So the expectations of the spread of purchase and sale, of course, does that change? So price sales and purchase price expectations are still the same? And second question. With part for RAC, did you consider the accelerated depreciation? What would be an ideal function of that?

[Rodrigo Tavares Goncalves de Sousa, executive]

The spread expectations of purchase in sale, considering a restriction scenario are actually tougher negotiations. So when you look at the replenishment cost, you expect a higher depreciation than what we see today without a doubt. About the RAC percentage, as I mentioned, there were 203,000 cars that were part of that report versus the current fleet. Once again, by understanding the technical side, we'll request reports for the cars that are currently in the fleet and for future cars as well that will enter the portfolio. So I can't say -- we can't mention the percentage because these reports are individually directed. From that competent agency to confirm the useful life for the new cars that will enter the Localiza portfolio and defined according to license plate. Don't forget the 203,000 cars of the first report, it's accelerated for the ones that weren't completely depreciated.

[Nora Lanari, executive]

Rogerio, about your first question about the spread of purchase and sale cars. Compared to pre-COVID, yes, it did change. We're in a context where the restructure of inputs added to the exchange rate devaluation affected new car prices. So when you look at the history, the company used to sell a car at approximately 104% of the purchase price, and then there's the cost -- sales expenses and depreciation. And now the spread is much more positive because not only lower depreciation, but also an EBITDA with higher margin. It should come back to normal at some time, but we still have FX pressure and input pressure. So it's really hard to be accurate when these levels would go back to normal of the 104%, 105%. That depends on future car price increases and future negotiations, as Rodrigo mentioned.

[Unknown Executive]

I think that was our last question in the chat. So with that, the Localiza conference call is now over. The IR team and Rodrigo, we are at your disposition at your -- available for you if you have any additional questions. Good afternoon, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]