Localiza Rent a Car SA

BOVESPA:RENT3

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and welcome to the Localiza webinar referring to the results for the third quarter of 2022. Today, with us, we have Mr. Bruno Lasansky, CEO; Rodrigo Tavares, CFO; and Nora Lanari, Investor Relations Officer. Please be advised that this webinar is being recorded and will be made available at ri.localiza.com/en with the complete material of the earnings releases available. You can also download the presentation from the chat icon. [Operator Instructions] We would like to inform you that the amounts in this presentation are in millions of BRL and in IFRS. We emphasize that the information contained in this presentation and any statements made during this conference call regarding Localiza's business prospects, operating and financial projections and goals are the beliefs and assumptions of company management as well as information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur. Now I would like to hand over to Mr. Bruno Lasansky, our CEO, to begin his presentation.

[Bruno Sebastian Lasansky, executive]

[Interpreted] Good afternoon, everyone, and welcome to the Localiza earnings webinar. We are pleased to present our first quarter of combined results, a moment where the company advanced fiercely in the materialization of the business combination and the carve-out conclusion sustaining high operational and financial performance. Following our robust planning in just 3 months, we have completed the creation of a fully operational company with a fleet of approximately 50,000 cars, 180 branches, 22 Seminovo store systems and teams. On October 1, we sold the company to started to operate the Unidas brand, and we received the amount of BRL 3.2 billion with a cash effect in 4Q '22.

Additionally, we have agreed on a positive price adjustment of approximately BRL 320 million that will be received by the company in 1Q '23. The funds obtained from the carve-out sale will be reinvested in fleet growth now with better commercial and mix conditions in the context of increased vehicle production and an increase in relevance in direct sales. We have a balanced net debt over EBITDA ratio in a mix of segments, which allow us to sustain our growth path. With the conclusion of the carve-out, we now will focus our energy on the integration process and also capturing synergies. We've already taken some important steps in this direction. Company leadership has been defined, and our teams are already operating in an integrated manner, learning the processes and best practices of each company.

We have also concluded the integration of the rental car branches that are already operating under Localiza brand, and we're concluding the migration process in the Seminovos network. Since 3Q '22, we've combined management of car procurement and have made progress in negotiating the terms for the next year under more attractive conditions for the company, always maintaining solid and long-term relationships with all automakers. Through a dedicated integration team, we've completed the evaluation and detailed planning of capturing these synergies on all operational and financial fronts.

We have compatible cultures, aligned values, complementarity and strong governance, which without a doubt will facilitate the integration process. The high satisfaction level of our customers and the engagement of our team and which are fundamental competitive advantages for the company have remained at the level of excellence, showing us that we are moving in the right direction. The excellence in conducting the carve-out and the integration process, maintaining high performance in the business is the result of the dedication and extraordinary energy of Localiza employees to whom we are deeply grateful. And last, with the business combination, we've started a process to evaluate the combined business portfolio with the goal of optimizing the capital, preliminary allocation and use of resources focusing on initiatives in line with our strategy of growth with value generation. Now in a moment of vast car availability, we are thrilled with Localiza's distinct competitive position. We count on a reliable balance sheet, scale, people, brands and energy to capture the great opportunities for growth with value creation, fascinating even more our customers. Now I'd like to hand over to Rodrigo Tavares, our CFO, to talk about the results.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Bruno. Good afternoon, everyone. In this quarter, for the first time, we have the combined results of both companies to better understand the dynamic and the tendencies. We prepared the release of a pro forma quarterly numbers dating from the first quarter of '21 to the second quarter of '22, adding both companies together. In this release, the annual comparisons will be made on the historical pro forma figures of both companies. 3Q '23 consolidates the results of the company since July 1, the date of the business combination closing. With the conclusion of the carve-out and the beginning of the integration process. In this quarter, we've had additional expenses related to the business combination as we've highlighted on Slide #3 that have affected the net income, minus BRL 66.1 million with a cash effect related to the integration expenses such as rebranding of the branches and stores, system integration among others.

With the carve-out such as advisory expenses, investment banks and the creation of the new company to be divested minus BRL 116.2 million with no cash effect in fleet side-- in fleet write-up amortization, minus BRL 4.4 million with no cash effect in customer relationship amortization related to the free rental business, plus BRL 9.2 million with no cash effect of mark-to-market fair value of the deposit tied to the financing granted to the former Unidas shareholders, minus BRL 81.1 million with no cash effect of the former Unidas tax loss write-off related to the sale of the divested assets. These assets effect together have negatively affected the quarter net income by BRL 258.5 million. In addition to the costs related to the business combination, the 3Q '22 results were impacted by the new initiatives expenses with a negative effect of BRL 22 million to the net income and a positive effect of the PIS and COFINS credits as a result of new reports that added up to BRL 175 million in the EBITDA being BRL 72.1 million in car rental and BRL 102.9 million in fleet rental, generating a positive net income impact of BRL 115.5 million. Consider the number of effects that have affected this quarter, in addition to the 3Q '22 accounting result, we had the adjusted results for the business combination one-offs that better reflect our performance. Before diving into the results, I would like to explain the fleet write-up effect. Moving on to Slide #4. So, during the business combination process, the book value of assets was lower to the amount that was effectively paid. The allocation of the difference between the price paid and the book value must be split between goodwill and write-up. In typical processes of business combinations, most of the allocation is related to goodwill. As the book value usually reflects the fair market value. In this operation, specifically due to the sharp increase in car prices during the last cycle, the car fair market value was higher than the book value, resulting in a relevant write-up amount in this allocation. On the top part of the chart, we have the conceptual explanation. So, you have the amount that was actually paid. The difference of the amount paid compared to the market value would be the goodwill. And we have the difference between the market value and the book value, and that's what we mean -- that's what we call the write-up here in this case.

So, despite having a similar economical effect, the goodwill and the write-up have different effects for an accounting point of view. While goodwill amortization is allocated directly to the tax books affecting the tax that was actually paid. The write-up amortization goes through the income statement. So it's worth noting that there is no cash effect in this amortization. The write-up will affect our income statement as follows: 4 operating cars, amortization will be allocated, which corresponds to the expected evaluation of these cars from use, as shown on the slide. When the car is sold, not only the book value will be written off, but also the write-up. On the bottom part of this slide, we have 60,000 book value and 10,000 associated to write up. In the 3 following months, we would have 300,000 per month, that would be the amortization of the write-up. When the asset is actually divested or sold, we would have the same 60,000 in the books and have 8,500, which would be a result of the original write-up minus amortization.

In this specific case, we sold the car for BRL 69,000. By writing off the 60,000 of the book value, we would ascertain an amount of 9,000 of margin for the Seminovos. But we would also have the write-off of, say, 8,500 from the write-off. That means that the actual accounting result would be from the 9,000 to actually 500 in Seminovos in this specific example. This effect will last until all the former Unidas cars are sold. For our operations, the equivalent effect was in anticipation of a great part of the results -- expected results in selling the Seminovos of the former Unidas directly in company's assets without going through the income statement. We will be very transparent in the right of effect, be it in the amortization case or the sale of these assets. We believe that to analyze Localiza's real performance, these effects must be disregarded as the write-up effects do not reflect our ability to buy and sell assets according to the due course of business. Now to talk about the quarter results, we will move on to Slide #5.

By resuming purchases, we've been growing fast, which will reflect in the volume of car and fleet rental. We bought approximately 98,000 cars and sold 44,000 with a net addition of over 54,000 cars. The car rental net revenue presented a 30.7% growth while the fleet rental moved up to 52.6% in the annual comparison to the pro forma 3Q '21 results. With the bigger car supply and combined receipt from both companies, we were able to expedite servicing the backlog that we had, allowing us to grow more in the past months. Our distinct competitive position allow us to negotiate cars in the mix and more favorable commercial conditions for the last quarter of this year and next year that added to a significant competitive advantage, considering the synergy gains and maintenance cost reduction from fleet renewal will allow us to resume record return levels without great need for additional price transfers. To detail our results, I'll hand the floor over to our Investor Relations Officer, Nora.

[Nora Lanari, executive]

[Interpreted] Thank you, Rodrigo. Good afternoon, everyone. Going into the details of the results and reinforcing that our annual comparisons will be made considering the pro forma results of 3Q '21 to add both companies. We start the presentation by the Car Rental division on Page 6. With the resumption of the fleet growth this quarter, the number of day rentals was 7.4% year-over-year with a revenue growth of 30.7% reflects of 22.1% average rental rate rise as seen on Page 7. In this slide, we show the result of streamlining the mix of segments and selectively made prices, pass-through that netted in an average rental rate of BRL 108 and a fleet utilization rate of 80.2%. In the annual comparison, the rental rate rise has been practiced gradually in every segment, seeking for a rebalance of the return levels considering the cost of replenishing cars, maintenance expenses and high interest rates.

As of now, we see a diminished need of to make new price pass-through considering we have other levers that will be prioritized to improve return levels. Some are operational lever with volume addition efficiency initiatives for cost reduction, including maintenance costs from the fleet renewal and the capture of a rising business combined combination synergies. Moving on to Page 8 on the Fleet Rental division. We kept on accelerating growth rate sequentially. And in year-over-year, the rental days number rose 25.1% and the net revenue leaping 52.6% year-over-year. In this comparison, as seen on Page 9, the rental rate has an 18.8% growth, reaching BRL 7.9 per day [ Libran ], reflecting the pricing of new core contracts in the context of rising car prices and interest rates. We still have a positive outlook in the demand and in the fleet rental and Localiza's new results.

Page 10 shows the balance of the purchase and sales of cars. As aforementioned, we have a favorable context for purchasing cars in which we saw great volume availability and model diversity with a higher production level and bigger relevance in direct sales. In this context, we bought 729 cars and sustain a gradual acceleration in decommissioning rhythm with 43, 626 cars sold in the quarter. The result was a net addition of 54 102 cars in the period and a net investment of BRL 5.8 billion. Following on Page 11, our average purchase price in the car rental was 82,800 sequentially reducing 10,800 per car, highlighting the gradual reduction of a mix with more economy cars. The demobilization price dropped 5,400 sequentially to BRL 66,300 in car rental, reflected sales of entry-level cars with higher mileage, seeking fleet renewal. The smaller price drop in the demobilized car in regard to purchase allows a sequential reduction of car replenishing CapEx. In spite fleet rental, there was also a price reduction from1 5,200 to $90,300. In this division, the shorter price drop reflects the effect of heavy and special vehicles mix growth. The demobilization price of the division, on the other hand, suffered a small reduction of 1% in comparison to 2Q '22, as there is no demobilization mix change effect in this division.

On Page 12, we highlight the progress of the end of period fleet throughout the year, which shows better car supply, allowing the company to reach a fleet of 586,453 cars at the end of the period or 537,157 in the pro forma after the carve-out sales. On Page 13, we see that the annual comparison of the quarters, the net revenue for the rental division displayed 37.9% growth, being 30 0.7% in car rental, 52.6% in fleet rental, while the Seminovos revenue grew 42.2%. As a result, the consolidated net revenue in the quarter grew 40% year-over-year, adding up to BRL 6.1 billion. On Page 14, we start the EBITDA analysis, bringing up the recommendation of the adjusted EBITDA and the accounting.

On 3Q '22, the adjusted EBITDA was BRL 2.37 million. Disregarding business combination one-off that added BRL 101 million. We also bring the adjust of each activity that can be seen is around 3% to 5% of the EBITDA. On Page 15, we display the 30.9% growth of the adjusted EBITDA of 3Q '22 year-over-year, achieving BRL 2.4 billion. We highlight the company's operational result quality, reflecting strong volume growth together with practice price in addition to strong margins. The advance in Rental division's results minimize the relevance of temporary Seminovos tailwind effect. In 3Q '22, excluding the combination one-off, the Car Rental division presented a 58.9% margin. In comparison, year-over-year pro forma EBITDA, the 2.2% point reduction in the margin is on to the recognition of PIS COFINS credits in the 3Q '21 added to BRL 120 million in comparison to the BRL 72.1 million resulted from the new reports recognized in 3Q '22. Regarding this quarter, it's worth noting the rising rental rates with volume expansion and bigger operation efficiency, especially with lower levels of default and debt.

The Fleet Rental division presented an adjusted margin for integrated expenses of 73.6%, 8.1 percentage points above last year's pro forma period. This margin was positively impacted by the beneficial effect of PIS and COFINS credits of BRL 102.9 million or 8.9 percentage points due to the useful life first review of this division assets, allowing the depreciation acceleration for tax purposes. On the other hand, new initiatives expenditures negatively impacted this evasions EBITDA margin and 3.3 percentage points. In the annual comparison, the Seminovos EBITDA margin rechecked at 6.5 percentage points to 11.6%. This quarter, we selectively accelerated the deposition of cars with higher mileage from the Car Rental division, bringing higher preparation costs and directly basis cars to the wholesale. With advancing new initiatives expenses, this margin was impacted by 1.2 percentage points this quarter. It's worth mentioning that the car demobilization acceleration occur, especially in the car rental, which has a smaller EBITDA margin impacting the overall Seminovos margin. The gradual sales rhythm acceleration contributed to SG&A dilution. As a result, the consolidated EBITDA margin over rental revenues reached 70 to 5.2%.

On Page 16, we know that the car rental average depreciation continues to gain sequentially at 4,358 per car. The purchase acceleration in fleet renewal lead to an increase in the average depreciation since the new cars have higher depreciation levels than the older ones that were no longer being depreciated. In the Fleet Rental division, we see the acceleration for the same region. We highlight that in fleet redline cars have a mix with higher depreciation by the book value of the assets that now include heavy vehicles and by higher wear rate for specialty vehicles. On Page 17, we bring the reconciliation for the consolidated EBITDA 3Q 2022 adjusted for the business combination one-offs that achieved BRL 1.7 billion, accounting for 10.8% growth year-over-year. In the EBIT case, in addition to the integration expenses, there is also the amortization effect for the intangibles recognition -- recognizing the business combination, which brought BRL182.6 million noncash tax.

On Page 18, the EBITDA margin for Car Rental division was 49.7%. -- lower year-over-year due to smaller EBITDA margin already explained and higher depreciation in 3Q '22. The Fleet Rental division presented an EBIT margin of 64.5% presenting 0.9% points increase year-over-year, explained by the growing EBITDA, partially offset by higher depreciation. The adjusted net income of the quarter showed on Page 19, achieved 682.1 million, accounting for the effects aforementioned in a bit and also the reversal of the fair value adjustments of the financing to the shareholders with a negative impact, BRL 9.2 million and the former united tax loss write-off regarding the carve-out of $81.1 million.

On Page 20, we see the income drop being 27.6% of annual comparison. We detailed that [ EBIT ] variation described above was more than offset by the financial expenses, which advanced JPR669.3 million due to the increase of CDI and average debt balance in addition to mark-to-market effects of swaps, setting the comparison with 21 raised the debt to BRL 190 million. This cost of capital rise reinforces the need of caution in the capital allocation, making the right decisions to allow restoring the return levels. We are sure that gradually, the company is restoring the balance between results and returns, making investment decisions, thinking in the car cycle and evaluating the long-term effect in a way to reinforce and solidify even more its competitive differentials. I would like to turn the floor back to Rodrigo to present the cash generation, leverage and ROIC.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] On Page 21, we show the operational free cash generation for a growth of BRL 3.7 billion in year-to-date consumed by the net investment of BRL 4.9 billion in fleet growth resulting in the cash consumption, BRL 1.2 billion. As seen on Page 22, the net debt grew BRL 4.9 billion in the year, mainly in order to finance fleet growth ending the period at BRL 21.2 billion. On Page 23, we can verify that we ended the quarter with a healthy debt profile and cash position, including $1 billion issuance of debentures made in October. The company has BRL 8.7 billion in cash. On Slide 24, our debt ratio show that the company is prepared for the growth trajectory, highlighting the net EBITDA ratio for the past 12 months, which stood at 2.76x on Page 25, we show the ROIC spread evolution versus the cost of debt. We see a strong spread of 7.6 percentage points considering the past 12 months.

The return to played in 2021 was positively affected by the cycle of pricing price of car sale. We highlight to those that analyze our sector, the importance of understanding that the level of return will be monitored 0-- Is the level of return of the car to replenishing rate? We reiterate that because the casual elevated ROIC resulted from fleet appreciation, so little to nothing about the company's ability to create that consistently. Today, watching the reduction of car supply. We are sure that we made the right decision by delaying growth in fleet renewal in a moment when we have access to a mix of cars with higher total cost ownership and worse commercial conditions, which demanded strong prices pass-through. What we planted at the moment leaves us well positioned to accelerate growth in the context after merger and production resumption, considering lower financial leverage and cost of issuance in addition to the fleet of less total cost of ownership. We are now at your disposal to answer questions.

[Operator]

We remind you that for the Q&A session, we advise you to signal your interest in participating through the Q&A icon on the bottom button of our screens, senior name, company and language. When called a required to activate your microphone will appear on the screen. For phone participants, DISA, raise hand. And once your question is announced, ILSR 6 to mute and time the audio to send questions in writing on the Q&A icon at the bottom of your screen, we advise you to make them by indicating your name and company before your question. First question is from Andre Ferreira from Bradesco BBI.

[Andre Ferreira, analyst]

[Interpreted] I have 2 questions actually. First of all, about the negotiations with automakers for payment terms. And if the amount that was negotiated in the third quarter will be paid this year or next quarter? And that the Seminovos margin, I'd like to know which effect contributed the most towards that. There was a normal drop and the slowdown of the FAPE table, the Blue Book table, how does that go?

[Bruno Sebastian Lasansky, executive]

[Interpreted] Well, about payment terms for automakers, specifically in the third quarter, we match that with the payment flow to automakers with receiving -- by receiving the money from the carve out. So that's what we did to match the cash flow, a better match for the cash flow. In terms of payment terms, in general, we had no changes. Some automakers have a longer payment terms, as others less. But really, the payment flow didn't really change except for the third quarter when we had that matching with the money coming in or the funds coming in from the carve-out. So about the drop in Seminovos, as we had already reported, we do expect a soft landing of the Seminovos margin given the fact that the cars that are being gradually decommissioned have a higher book value. We still have a large number of cars at an older or lower book value amount.

So even though the Seminovos margin trend is still settling, we believe that, that would be happening more gradually. We also have a positive effect in that case because with the increase in the sales volume, you have the dilution of this SG&A for the Seminovos. So there's -- it contains a part of that effect, but not in whole. So the perspective are according to what expected, we were already signaling that to the market. There was 1 percentage point compared to the previous quarter. We also believe that, that margin will settle at a smoother curve in upcoming quarters. Andre, I'd like to add to what Rodrigo mentioned. This is Nora speaking. In the margin of Seminovos and fleet management, we have a 1.2 percentage point impact given the new initiatives. Some of them, we will potentially reassess when we rationalize the portfolio, but that's worth mentioning.

And the second point related to the Seminovos EBITDA margin as we decommissioned de-proportionally, more cars from rack, the Seminovos margin in RAC is lower than fleet. So you have a mix effect in comprising in composing that margin. I don't know if you're considering it individually or consolidated. Then about purchase conditions, it's worth noting that we are in a very privileged position, I'd say, because the company has a robust balance sheet for those purchases. We're growing strong again. And you see an increase in direct sales in addition to a sequential growth in vehicle production. So we've been getting a better balance between production and demand. Consequently, that helps us out based on the point of view for commercial terms and purchase mix because that is as important as a discount on we're buying.

[Operator]

Next question from Rogério Araújo from Bank of America.

[Rogério Araújo, analyst]

[Interpreted] Good morning, everyone. Bruno, Rodrigo, Nora. I have a follow-up on the last question about Seminovos. We've seen a sales price, and we're trying to calculate the spread of purchase and sale in car rental. That's lower than what the market is informing in terms of a price increase in the last quarter that's accrued. You said that the you decommissioned the older fleet in car rental in that quarter. So when we think of the sales price and the purchase and sale spread, can we consider the third quarter as something that's not recurrent, it's a worse mix of an older fleet and that's more warm. Should we see an average price that's not following the trends of a new car price increases in the recent past? Can you explore that in a little more? Still in Seminovos about depreciation. We believe that there are some vehicles that had 0 depreciation, especially in fleet rental but also car rental and others coming in with a higher depreciation. Could you give us an idea of the depreciation level of the vehicles that are coming in now, not only in RAC, but also in fleet so that we have a better idea about what would be the normal levels in future quarters.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] That's my question. Thank you, Rogério. About the mix part. When we extended the useful life of these cars, we basically did that for the 1,000 cylinder cars for the [ Zap ] and so the app drivers that are less sensitive to mileage. Those are most of the cars that are being decommissioned right now. So we have an unproportional volume of 1,000 cylinder cars with a very high mileage. So that means 70,000, 80,000 kilometers on them that were being used by the app drivers that are being decommissioned and sent to the wholesale market. But there's still a relevant volume of these cars in the fleet for Localiza. So the third quarter did have an proportional allocation of those cars, but we should see -- still see decommissioning of that type of car in a high level in the upcoming quarters. The mix in that curve should change only after the second quarter '23 because some cars will be decommissioned gradually.

We will decommission cars that don't have that much mileage on it. Right now, we're focusing on the 1,000 cylinder cars with very high mileage. Then in the next 2 or 3 quarters, these cars will still be the bigger number, higher number of cars that are being decommissioned moving forward. About depreciation, we can say that we can have 3 types of cars at Localiza. Some are fully depreciated, not only in RAC, but also in fleet, obviously, fleet much more because the cars are older, but we also have that in RAC. Some cars were bought from the end of 2021 and the first 3 quarters of 2022 and still in that context of supply restrictions. So there's a mix of higher depreciation, not only because of the market conditions, but also the mix in the purchase of cars. Now with these new commercial terms and new purchase mix, we have this new group of cars coming in with healthier depreciation, so to speak, that -- with the depreciation of the second group, but higher than the cars that haven't been depreciated yet. So what we should be worried about now is going back to replenishment.

So the new cars that are coming in, the EBITDA margin should increase because in maintenance, maintenance will drop a lot as these cars have a better mix and lower mileage. So our expectation is that this new group of cars, when it's younger, in maintenance alone, we already have an impact of 3 points to the margin. When you add to that synergies and cost dilution, even with the depreciation of that third group, the expectation is that the replenishment is back at historical levels. So that's what we're constantly monitoring.

[Bruno Sebastian Lasansky, executive]

[Interpreted] Rogerio, just to add to what Rodrigo mentioned about the Seminovos spread, I think it's worth noting that in the high in the new cars, as they were scarce, we had Seminovos that were very close to new car prices. Last year, we would expect that -- already expected that these gaps would normalize. So the company had already mapped that out. So the point is Seminovos will not keep up the same price level as it has in car increases to the new car increases. The second point is we still have a process where we're making the fleet younger up till we sell these SUVs a little more that were bought in 2020 and 2021.

[Operator]

Next question is from Guilherme Mendes from JPMorgan.

[Guilherme Mendes, analyst]

[Interpreted] Hi, everyone Bruno, Rodrigo and Nora. Thanks for taking my question- 2 actually. First, a follow-up on return. You've been talking a lot about the ROIC spread composition and about price not being the only lever. So when we think about the lever that Nora mentioned in the introduction about costs, so the synergies and so on, can you give us some more flavor about how you balance out those levers? About how much you're capturing synergies and what's coming in from cost cuts? My second question is about heavy. Where Unidas was focusing on that before M&A and now we already see new Localiza is focusing on investing in that segment again. So what type of fleet size do you expect for that segment and strategy in the middle and long term?

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Guilherme, for your question. I'll talk about replenishment, and then I'll ask Bruno to talk about the heavy vehicles. When we were looking at the return in pleasant and we were saying that new cars, there was still a gap according to historical return because basically, we have 3 levers. So better mix conditions in the purchase, the cost efficiency and a price increase. Today, we've begun a process or actually are advanced in negotiating the volumes for next year. So today, 80% of our needs for next year are pretty much closed. Based on these new conditions and our perspective actually exceeded our expectations based on what we had. So we've closed most of that gap in replenishment because we were able to streamline our mix and the term. We still have the levers of synergy, which I mentioned, the gains in maintenance and have more cars per store and fixed cost, best practices and so on.

So with that, by using those 2 levers, we believe that we could close or be very close to the return in replenishment and getting those figures back to historical levels. Obviously, we may have to adjust prices in 1 or maybe another segment, but the need to increase prices to achieve those returns. Based on the information that we currently have available is pretty limited. Bruno?

[Bruno Sebastian Lasansky, executive]

[Interpreted] Thank you, Guilherme, for your question. About heavy vehicles. As you know, we've been working in reevaluating the portfolio of the combined company. So looking deeper into each of these aspects in the portfolio. Based on our assessment, we see a very big market with the clear pain points of customers and robust skill at Unidas that was built by Unidas in the past years that shows us an adequate and satisfactory return levels and even greater that us as Localiza imagined having -- before having access to that. The customer [ inch and ] level and NPS is very adequate. That's where we're deciding to continue to explore that initiative. We do believe that by adding the expertise from Unidas and also based on what Localiza can add, we can build competitive advantages in that segment where we stick to that path. So the decision is not to discontinue is to stick on that -- stay on that path. We will continue to analyze that and inform the market about that segment. So to summarize, we found a level of return and the work done so far by Unidas -- at higher levels than what we expected for that segment.

[Guilherme Mendes, analyst]

[Interpreted]That's very clear, Bruno. Thank you for your answer. Thank you, Rodrigo.

[Operator]

I would like to remind you that please use the Q&A button to tell you're interested. So your name and institution. --when called upon, you will see on to unmute your microphone. Our next question is from Lucas Marquiori from BTG Pactual.

[Lucas Marquiori, analyst]

[Interpreted] I have 2 questions. First, you've been very vocal in the improvement of buying new vehicles. But not just the average purchase price, the 82,000 are still an average price that is higher than your main competitor. Is there any legacy effect or mix effect that does reflect on the purchase price? So we understand what should be this average purchase price for the next quarters. If there is any gap to close this purchase price. The second topic, also commenting on the recent answer about the analysis of the heavy vehicle market, you also mentioned the internationalization, and that's something that we're not sure about on our side. If you could tell us how the international expansion is going, if it's a feasible effort due to the integration with Unidas, is a market analysis that you made so far, if you could tell if you could comment about the domestic and international markets, please?

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Lucas, about the purchase price. We did speed up buying cars. There is a mix effect. Most of the new cars conditions will be in effect next year and most of it in the last bimester of this year. So it will have a direct impact on the last maybe quarter by master, but most of the effects that we're seeing will be for next year. This said, yes, definitely, there is some mix effect. We bought a large number of vehicles. We made the fleet newer, but the average price is not the best indicator. There are cars with different prices, with higher prices, but the return can be much better depending on the rental and where this car is and what is the rate there. So the fact that the average price being higher than the competitors definitely a matter of mix associated not to a higher price. That doesn't mean a lower profitability. About the international part, I will ask Bruno to comment.

[Bruno Sebastian Lasansky, executive]

[Interpreted] Thank you, Lucas, for your question. About the internationalization. Before I go into it, I would like to point out that we're in a permanent evaluation of a business portfolio of the company, and we're until the end of the year evaluating to decide potential fronts where we will simplify and rationalize the portfolio, as I mentioned here and in the release. So this increase of focus that will take place until the end of the year means that we will communicate to the market. We're focusing on the areas that we think there is more opportunity to generate value in the long term for the company. About internationalization, specifically, we've been being very vocal since the 90s, we operate in countries in South America and we've been studying what are the factors that allow us to replicate our success in countries outside of Brazil.

And when you talk about internationalization, actually, we're speaking of replicating the success in Brazil and other countries. That means building leadership positions in other markets, where we believe it's possible to create these differentials. The reason is that there's very few revenue and cost synergy in these businesses. So more than internationalization, it's the correct choice of market where we think it's possible to build competitive advantages that we have in Brazil.

[Lucas Marquiori, analyst]

[Interpreted] And where are we in this process? We've been looking at this permanently.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Our focus of attention will continue to be Latin America, where there are many markets without the level of development they could have and where we understand it's possible to create these differentials. And these plans are not aggressive to enter. You already know our robust planning profile. One of our advantages is that these plants were already being conducted, but now we have very experienced senior talent that can start this journey that will not be aggressive, I reiterate. On the contrary, they will follow our discipline of allocating capital and continuous decision of -- invest in them to build success stories in other countries. So it's a sequence of movements. We don't have anything to announce to the market as of now. But we've been seeing this with good eyes because there are some countries with high potential where we can replicate Localiza's success story here in Brazil.

[Operator]

Our next question is from Daniel Gasparete from Itau BBA.

[Daniel Gasparete, analyst]

[Interpreted] I have 2 questions, if possible. I would like to understand your vision about the speed of demand, not just repassing the rates, but the usage and if it's as expected. The second question, if possible, your opinion about the competitive landscape, not only nonplayers, but your opinion about the changes in the competitive market and fleets.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Daniel. In regard to the elasticity of demand, there are limits of for price. That's why we want to reach our return without the need of increasing rates and pass this to the consumers. That's why these efficiencies are so important. Demand is still strong. Replacement for rental also increased price of car by subscription is also more costly for an app driver is also more expensive than a used car. So these segments are sub-penetrated -- and the level of growth or the pate was much lower than we historically had. So we have a repressed demand. The demand is still strong, and we're not immune to that elasticity and much like to macroeconomic aspects. But we are seeing an increase of car rental demand in all our segments.

About the competitive landscape, we're at a very special moment after the combination of the 2 companies. We have a robust balance sheet, a mix of fleet with low total cost, when you look at depreciation and the mix of our fleet. Most competitors are reducing their growth rhythm and their appetite for purchasing when we have an oversupply of vehicles. So the competitive landscape is also very positive for all that we built, which makes our strategy to postpone this growth was the right one since now we will be able to grow and renew our fleet when we have wide availability of vehicles and less appetite from our competitors.

[Operator]

Our next question is from Pedro Pinto from Eleven. Pedro, you can open your line, please.

[Unknown Analyst]

[Interpreted] Good morning. Congratulations for the results. I would like to confirm an analysis that we've been conducting, considering the cars you bought, almost 100,000 vehicles. And if we consider the sales of used cars of about 50,000, we have net growth year-over-year that is more conservative. I understand that renewal with higher allocation to -- so I would like to understand what is the strategy of fleet growth from now on and the allocation in these 2 segments? Second, last week, the labor court in Sao Paulo established work relations with Uber. I would like to know how this impacts you, if you can reallocate that part of Uber quickly.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you for your questions. I think that about your analysis, we added almost 100,000 new cars. We are also decommissioning about 50,000 vehicles that will affect the quarter. But we have our own purchases in the fourth quarter that will come in. So there's an important net addition to our fleet expected for the year. In this quarter specifically, we did decommission more cars because we had a backlog that was higher because of the reasons you know. Added to that, it's important to say that we have the goal to grow in car rentals as well. We have a robust demand in both divisions, car rental and fleet rental and we aim at renewing our fleet gradually. So rental cars, specifically, we will calibrate growth with renewal. -- and with the net addition to the fleet. As to your question about Uber, we've seen other court rulings in that same direction in the past. But I think they're not the final decisions yet. The platforms will address this ruling and the company will continue to monitor them.

[Operator]

Next question, Pedro Bruno from XP.

[Pedro Bruno, analyst]

[Interpreted] I would like to understand, even if it is more subjective, about the performance of the 50,000 cars from the carve-out in the third quarter.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Now for projections in the fourth quarter, Nora said that you will still add more to the fleet to offset even more this carve-out. And in the third quarter, it was very strong in [ EBIT ] throughout the half year. So we still have revenue EBITDA result to be seen throughout the fourth quarter as well. Our opinion is that this offsets in a very relevant manner, the carve-out conclusion.

[Pedro Bruno, analyst]

[Interpreted] So I would like you to tell us -- how -- what's the performance of these cars -- in the company's results in terms of combined revenue and how this fleet operated so we can try to imagine the impact now after it leases in the fourth quarter.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Pedro. Of course, with the carve-out, this third quarter, we had the result of the 39,000 cars. But the growth rhythm that we showed is important to point out. We ended the third quarter with a larger fleet than before. In 1 quarter, we grew more than the equivalent of the entire carve-out. Of course, these figures are not added. We also had a net Income of the results of the carve-out with very important adjustments of BRL 320 million for the price of the cars and working capital. But the company is speeding up. In the first quarter, we continue to have a very strong speed of growth exactly so that we can continue to grow even disregarding this effect of the carve-out. So it's an important result, that's 49,000 cars that we're performing similarly to the other cars of the organization. The change of the former Unidas car to Rent-a-Car for Localiza when there's some inefficiencies when the car is moving from one place to the other can be rented. But our expectation is to continue to grow, even considering the effect of this investment.

[Bruno Sebastian Lasansky, executive]

[Interpreted] Pedro. If you look at the 50,000 cars as compared to the operating fleet and average of the third quarter, we're talking about 16% with performance similar to what Rodrigo said to the company's average. But it's worth reiterating that this inefficiency during this location, we rebranded the branches that were transferring cars that were not active. But we go into the high season now. So we're going to increase performance after this first inseparation moment in the high season. I'm going to reiterate what you said. A lot of that purchase of the third quarter that was very robust. Still then go to the results because we have decommissioning, preparing and bringing the cars to the branches. So in a way, we are sure that the high season will allow us to put us in shape.

[Operator]

Next question is from Regis Cardoso from Credit Suisse.

[Regis Cardoso, analyst]

[Interpreted] Hi, everyone. Good afternoon. Thank you for taking my question, Bruno, Rodrigo and Nora. I'd like to go back to depreciation. According to the math we did, I know there's many ways to do that, but the more straightforward is comparing it to the car purchase price, and that would be greater than 5%. I'd like to understand because we did similar math considering the historical purchase prices and the average age of the segments, and we reached a similar conclusion. So is that correct? That's what I'd like to understand. Are you already depreciating new cars with at 5% or if new cars have higher depreciation than that at the end. Another question also about depreciation, so we can understand the return equation overall. What do you see on the other side of the depreciation equation? In terms of Seminovos or used car prices?

[Bruno Sebastian Lasansky, executive]

[Interpreted] So maybe Rodrigo can give further detail about that evolution.

[Regis Cardoso, analyst]

[Interpreted] -- not just the price then, the actual , in your price and Seminovos and new cars. So what I'm trying to understand actually is what's the impact in economic depreciation when you have that effect of the Seminovos margin? That's the making of our price. And then on the other hand, the economic depreciation effect also related to the discount, the purchase of these new cars.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Okay. Let me separate first. fleet and rack for fleet. Because typically, fleet has higher depreciation than RAC because the commercial terms, I'd say less than out the first year of depreciation, you will have a discount in the second year. So fleet depreciation is higher than RAC. What recently happened, that was the opposite because the cars appreciated and fleet had a higher volume of cars, so fleet depreciation was lower. But moving forward, that should reestablish. Another important aspect in fleet depreciation is that we've already integrated the depreciation methodologies because of both companies were very similar, but the assumptions were 100% Aren't 100% homogeneous yet.

So we expect a positive benefit when we consider the assumptions and the seminovos prices and efficiency from Localiza in the fleet of former Unidas. That's still in the integration process. and we will unify the methodologies and accounting is the same, but that aspect isn't 100% the thing. When we look at rack depreciation, and you mentioned the 5% to date purchase and sale, it's really hard to do that math. What we look at is the return for each car. But the depreciation level of new cars is slightly higher to historical levels. When you look at the past, there is a percentage. So that should be a trend that will happen. When you look at the price dynamic, let's separate the list price of a car is still going up. So it's still going up. The price for consumers, we still haven't seen that detach yet, except for some specific models. It has allowed according to our math, pretty much 1% difference in variation to the list price. So we still see a price increase for consumers.

Obviously, promotions and financing and so on, but we still haven't seen that detached from the price that's actually charged. What we've seen is the return in the seminovos in the used car prices. So during the pandemic, they were very close. Even cars sold -- used cars sold at a premium. And now we're at historical level of that difference. It's back now. Now there's a bigger gap. So we're at the same levels pre-pandemic levels when we compare new car to used card prices. At Localiza, there's still a mix different with higher mileage that's more prevalent in the wholesale market for the high-mileage cars. So in this quarter, that affects us specifically. We'll probably see that effect for 2 more quarters with a higher number of cars with higher mileage, 1,000 cylinder cars that are sold to the wholesale market. So in the price dynamic, that's the summary I wanted to give you.

[Regis Cardoso, analyst]

[Interpreted] Thank you, Rodrigo. Can I go back to depreciation? In the ITR in the accounting practices, you explained the depreciation that you're using for each of the segments. Is it there? I didn't see that yet. Is that something you can share with us?

[Bruno Sebastian Lasansky, executive]

[Interpreted] The percentage perspective of the fleet moving forward, we don't give guidance on that because there's a lot of variation. But in the ITR, should be there. We didn't change any information structurally. Regis, the problem is we have a lot of ups and downs in the market. We're buying a group of cars at more normalized prices. But like Rodrigo mentioned 3 different groups. One depreciated 0, 1 at 5 and the other should go towards a more normal depreciation. But since the market is changing a lot, we're not going to set guidance on that. There's still -- It's [ on ] high-trend for the upcoming quarters. As Rodrigo we mentioned, it doesn't hinder the ROIC spread to go back to the range that we usually operate in. And to remind you, it's from 500 to 800 bps higher than the cost of debt. So in replenishment, regardless of the size of the nominal amount or depreciation, this new group of cars is already at that level of return. So the problem of giving you guidance for that is you have the speed of semi novels or used card renewals that depreciate 0 and the new cars coming in.

[Regis Cardoso, analyst]

[Interpreted]Okay, got it. Rodrigo and Nora, and congratulations on your results.

[Operator]

Next question is from Isabella Lamas.

[Isabella Pinheiro F. Lamas, analyst]

[Interpreted] I'd like to touch on the PIS and COFINS credits that you received new reports this quarter and the first one was for fleet management. I'd like to know if these new reports are already covering the cars that were bought in this quarter. What percentage of the total fleet is covered by the reports and there they have a perspective of covering the purchase cars, but you should also speed up the renewal, so we can really understand the dynamics and the comparison in between quarters. That's it.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Isabella. The last report obtained was in November, if I'm not mistaken, from the last year. So for the first quarters, we had no reports. Now, in the third quarter, we received 3 reports for RAC, RAC Localiza, RAC Localiza Fleet and Localiza. Unidas fleet does not have any cars covered by the depreciation report according to the expedited depreciation for 2 or 3 years of the useful life of the car. So for RAC, we have good coverage of cars, not only for Localiza, but also Unidas. And our perspective is not to do that for every quarter. It should be every 2 or 3 quarters because it is a very hard, operational work, especially in fleet, where the car inspection has to be done at the fleet customers, and that increases the complexity, but really relevant and bigger amounts that are not covered, I would say, are the fleet cover fleet cars from the former unis none of these cars are covered by any of these reports.

[Bruno Sebastian Lasansky, executive]

[Interpreted] And Isabella to add, we've seen questions if that's recurring or not. And as Rodrigo mentioned, we'll continue to get these reports for every 2 or 3 quarters. So it is occurring, but the effect should be in the third quarter. So if you dilute the effect of the report in the 9 months of the year, you have a good reference of what would actually be the recurring for the quarter. And in RAC, almost close to half of the effect of the quarter in fleet a bit over 1/3 is the effect of the quarter. So in modeling and forecast is about our suggestion is that you use the credits up to the limit of the debit and don't suppose that all the excess credit will be monetized. We do that internally for pricing, fleet and racks. So the more conservative way to do that, so you can understand the impact of PIS and COFINS is use it up to the limit of the debit. And as Nora mentioned, the effect takes place in the third quarter, but it's an effect that should from the first quarter of this year, a great part of that effect, it's not just the third quarter, but across the 9 months of the year.

[Operator]

Next question is from Filipe Nielsen from Citi.

[Filipe Nielsen;EquityResearch;Citi, analyst]

[Interpreted] Hi, everyone. I have to actually -- I'll try to be brief. The first one is about free cash flow that you announced that, and I'd like to understand if that's pro forma, considering the merger, the combination or if it's Localiza alone and if it's only Localiza, what would be the pro forma free cash flow? And the second one is about fleet renewal. You mentioned that you would gradually increase car sales. I'd like to understand which factors are hindering or make you prefer to do that slower gradually instead of going -- instead of selling faster? Another final understanding if you're still selling in a block when it's Unidas car or if you're going to be cherry-picking the older cars for the sales?

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, Filipe, for your questions. I'll start with the last one. No, we're not cherry picking. Actually, there's even a contractual obligation to have the new you Unidas, so to speak, new cars and cars just like Localiza's cars, about no cherry picking them. So about free cash flow, it's accounting cash flow and to do an exercise to show the income statement, the pro forma income state. So it considers Unidas [ effect ] as of June 1. And the fleet renewal, the sales speed. Well, we slowed down sales during the pandemic to pretty much 1/3 of our capacity in Seminovos. So if you look at the volume, Localiza stand-alone, we were selling approximately 4,000 or pretty much that. We had sold a peak of 17,000 cars a month.

We decided to maintain the seminovos framework close to the 130 stores even during the entire pandemic knowing that we would have some idleness because we wanted to ramp up the sales volume after the cars would be normalized again, car supply would be normalized because -- and selling cars faster would require us to expand and faster than what we're already selling over 44,000 cars in the last quarter. And that would obliged to have an expansion of Seminovos or changed the prices. So we've decided to manage an older fleet based on mileage, and we believe that we can gradually make the fleet younger as the cars are replenished faster in rack and fleet.

[Operator]

Our next question is from Josh Milberg from Morgan Stanley.

[Joshua Milberg, analyst]

[Interpreted] Thank you for the event -- when I was with you in London in September, one of the things we discussed was the possibility a follow-on offer highly motivated by the opportunities of good agreements with the automakers and your growth and your fleet renewal. I would like to ask if you can give us an update of how your thoughts are evolving about that possibility? And if there is any scenario in which new growth avenues and initiatives such as heavy deal could change your plans?

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted]Josh, thank you. When you look at Localiza's balance sheet, we're talking about $2.76. We have a lot of space to grow. All our business are double digit, still maintaining a healthy leverage level. So throughout 2030, we can still grow fast with a leverage a little bit higher than 3x EBITDA. Even considering initiatives like heavy vehicles today, if you're talking about 1 billion BRL in rental, just for a theoretical example, that would impact [ COGS ] by 0.01 without considering the bid associated with the investment. So even if we go international and heavy growth, we understand that our balance sheet today can withstand that type of growth. The follow-on is the more expensive money of reduction for the shareholders, a consistent growth above debt. So dilution is usually the last instrument we use, of course. We're always looking for market opportunities. We had the opportunity of using the capital, the shareholders' capital well to have a result a return above the cost of equity, we will evaluate. But at the moment, it's not part of our plans.

[Operator]

We have a question from [ Fernando ] and from the chat. I'm going to read his 3 questions. Why the price of buying cars by Localiza is higher than [ Movida ]. Is there any specific reason for that? The second question is about the P&L that grew BRL 6.2 billion. If this is about goodwill or write-up or the tax gain. The third one is just in addition to goodwill.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] I think I answered the first question. We did speed up. And the conditions are in the best relative position for the last time because of the dynamic with the reduction all that. So we're talking about a mix effect. Remembering that a more expensive car doesn't mean a lower return. P&L is a goodwill and write up the assets of Unidas came in at market value and not book value, and this increased significantly the net equity, the company's equity, which is what we already mentioned, 35% on the goodwill is a tax gain that will allow us to amortize that goodwill as soon as we incorporate the company. You wrote MTM. I know it wasn't a question, but it's good to say that. We hedge our debt associated to the fleet contracts.

In this quarter specifically, we had a negative effect of BRL 145 million because of derivative instruments. We're not doing the hedge accounting, so it doesn't go strike to the equity. It goes to the result, BRL 145 million associated to derivative instruments, which is a large part of our financial expenses because of that. That's why I was using the TAM of the car to explain the MTM of the debt, which affected the company's results this quarter. Just to add and give you figures. And this is on Page 71. The total goodwill to eliminate is BRL 7.9 billion.

[Operator]

We're going to close the call since we don't have any additional questions. Before we close, I would just like to remind you, I think you received the same day for our Localiza Day. It will take place on December 7 in Sao Paulo from 130 to 6 p.m. and genos Fernando Bruno and Rodrigo will be there. We would love to have you there as well. And to conclude, I would like to pass the floor to Rodrigo.

[Rodrigo Tavares Goncalves de Sousa, executive]

[Interpreted] Thank you, everyone, for your presence, VR Investor Relations team is all leave here at your disposal. Have a great day.