Localiza Rent a Car SA

BOVESPA:RENT3

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, and welcome to the Localiza earnings release call referring to the results for the fourth quarter and the year of 2022. Today, we have with us 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 on ri.localiza.com/yen 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 numbers in this presentation are in millions of BRL and IFRS. We emphasize that the information contained in this presentation and any statements that may be made during the video conference call regarding Localiza's business prospects, operating and financial projections and goals, constant beliefs and assumptions of company management as well as information currently available. Forward-looking statements are not guarantees of performance as they involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not occur.

Now I will turn the floor over to Bruno Lasansky the company's CEO, to begin his presentation.

[Bruno Sebastian Lasansky, executive]

Good afternoon, everyone. In 2022, we took wide sets towards our purpose of building the future of sustainable mobility. The results achieved in the year aftermath of our long-term vision and efficient capital allocation reinforced our DNA of growth with value generation and enchanting our customers. To continue our transformation journey, we have become even more prepared to soar higher with the conclusion of the business combination with Locamerica.

We carried out a divestment or the carve-out in just 3 months, which constituted the creation of a company with trained professionals, functional systems, 49,000 cars and 200 branches, and we completed the sale of this company with the creation of value for our shareholders.

Following robust planning led by our integration office, we concluded with agility and excellence, the integration of the teams, Car Rental agencies, Seminovos stores, sales and admin teams, and we continue to advance in the integration of systems, capturing synergies and the initiatives of organizational culture and engagement. In addition, we have balanced out the accounting practice and made the necessary reclassifications. We are still moving forward with the integration. But we understand that the business combination places Localiza&Co and admirable competitive position with greater scale and even better positioned to capture profitable growth opportunities.

And still in the context of the combination, it was essential to reassess our business portfolio in order to rationalize and optimize the allocation of capital and the use of resources, focusing only on initiatives aligned with our strategy of growth with value creation. In this sense, we've launched Localiza mines, with solutions aimed at those who own a car, such as overhaul and maintenance, which already has more than 15,000 customers. We also prioritized the rental of Heavy Vehicles, a new avenue with high growth potential, leveraging the Company's confidence, know-how, and customers. On the other hand, we decided to discontinue the initiatives for buying and selling used cars, Acelero and Willz, taking advantage of technology and learning, but reducing the investments and increasing our focus. We have a world-class leadership team that's ready for the challenges of our business as well as the operational framework technology and portfolio of solutions built so that we can continue to surprise our customers with a lot of innovation and leadership. The high engagement of our team is recognized by the fourth best place to work in the country by the great Place to Work ranking. And the company's organizational climate is in the 90th percentile, placing Localiza&Co among the 10% best companies evaluated by Korn Ferry.

We were also recognized by our passion for our customers with the NPS Awards and Reclame Aqui Awards in the categories of car rental, Seminovos and subscription car categories for several consecutive years.

We are building our future supported by very clear strategic directions. First of all, accelerated growth with value creation in the main business in the core business; two, transforming our customer experience; and three, selective investments in adjacent businesses. We will achieve these goals with a high-performance team and a solid culture, investing even more innovation and technology, expanding our competitive edge.

We also have our brand as a driver with -- underwent a recent rebranding process to communicate in a clear and more modern way, all the entire portfolio of solutions that we offer to our customers. We also launched our corporate brand, Localiza&Co to improve our communication with our stakeholders such as employees, investors and partners.

In 2023, we have several value creation levers to offset the effects of the normalization of the Seminovos margins, higher depreciation and the high interest rate in environ with lower economic growth.

The first refers to investment in the fleet. For 2023, we managed to close the purchase volume of cars and better commercial and mix conditions, which will allow the renewal of the fleet and consequent reduction in maintenance costs. In addition, we will start to capture synergies resulting from the combination of the businesses in costs and expenses as well as several efficiency and productivity initiatives, including advances and processes associated to telemetry.

Finally, we have the opportunity to generate additional revenues from mix and segment management in addition to the new solutions developed by the company, such as subscription car rental for application drivers, such as Zarp Localiza and Localiza+, among others. These levers added to our diligence and discipline in capital allocation will contribute to keep the ROIC spread in line with the objectives of value creation outlined by management. We believe that 2022 was a historical year for Localiza&Co. We completed a business combination, which is still in the integration phase that positions us as one of the largest and most complete mobility platforms in the world. We continue to grow with value generation at high levels of return for our shareholders even in a challenging market context. And we've moved forward with our ESG agenda with a deep recognition by the market and customers leaving a legacy for future generations.

In the coming years, we will reap the rewards of last year's investments and continue on our journey of transformation, supported by our vision of the future with great diligence and discipline and allocation of capital and passion for our customers.

Now I'd like to hand over to Rodrigo, our CFO, to talk about the results.

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Bruno. Good afternoon, everyone. Before going through the numbers, I would like to point out that the format of the results presentation follows the one that we've used the last quarter. The annual comparisons will be made over historical pro forma numbers of both companies. In addition to that, considering the various effects that have impacted this quarter, in addition to the 4Q '22 actual results, we will show the numbers adjusted by the business combination discontinuation of our car purchase and sales initiatives, which we believe better reflect our performance.

In summary, we have 4 main messages. We grew substantially with an adequate mix and purchasing conditions. Even with the impacts of balancing out the practices not adjusted in the result, we presented robust margins in the car rental and fleet management. Even though we have still not fully captured the benefits of having a younger fleet, variable expenses and synergies. The used car results for Seminovos was heavily impacted by specific issues related to the mismatch between the preparation and sale of cars through the auction channel, which have already been overcome in the first quarter. And lastly, leverage, as expected, ends the year at a higher level due to the strong investment in Fleet Group. We believe that over the course of the year, the net debt over EBITDA ratio will reverse the trend as these investments mature.

On Slide #4, we present the quarter highlights. Sustaining a purchase phase similar to last quarter and now substantially capturing better purchasing conditions, we were able to add over or more than 55,000 cars with a significant reduction of the purchase sale to 74,900 in the Car Rental division. Even with the carve-out sale, we were able to grow nearly 5,000 cars in the quarter, replenishing 60% of the car rental revenue from the car out within just 1 quarter. With that, we ended the year with 591,000 cars, a 21% growth in fleet rental, with another strong fleet addition. And in addition to capturing the prices, we delivered a net revenue growth of 59% year-over-year, highlighting the segment's excellent momentum.

We'd like to highlight that our competitive position enabled us to negotiate cars with a more favorable mix and commercial conditions for the last quarter and for 2023, which combined to the important comparative advantage considering synergy gains and lower maintenance cost based on a younger fleet, which have not been fully reflected in the rental merchants, places that at the level of return for these new vehicles within the company's profitability objectives.

To detail the results, I'll hand over to our Head of Investor Relations, Nora Lanari.

[Nora Lanari, executive]

Thank you, Rodrigo. Good afternoon, everyone. Now going into the details of the results and reiterating that. As we did last quarter, the annual comparison will be made considering 4Q '21 pro forma in order to add both companies together. We'll start the presentation with the Car Rental division on Page 5.

In the annual comparison, the net revenue grows 28.2% with the quarter growing 6.7% year-over-year despite the carve-out divestment, which reduced the fleet division by 15%. The volume impacted by the carve-out grew 4% in 2022 and dropped 7.3% in 4Q '22 year-over-year.

On Page 6, we have the evolution of the average daily rental rate, which rose 23.6% in the year and 16.3% in the quarter and reflects the customer mix and prices transferred needed in order to replenish the company's profitability levels despite greater invested capital and higher cost of debt.

Even with a higher average rental rate and a higher number of cars being prepared and decommissioned, we kept a healthy level of utilization at 77.9%, demonstrating our efficient price management and fleet allocation in addition to highlighting the demand resiliency. We'd like to stress that this level of price obtained added to the commercial conditions in car purchases, the efficiency initiatives for cost reduction, including maintenance costs, reflecting file renewal, the dilution of fixed expenses and the synergies from the business combination, which will be captured during 2023 makes us comfortable to reach the ROIC level expected for the newly purchased cars above the company's back.

Moving on to Page 7. In Fleet Rental division, we sustained a strong sequential and year-over-year growth pace with a net revenue increasing 58.9% and the number of rental days growing 30.1% year-over-year. In this comparison, as shown on Page 8, the rental rate increased to 20.6%, reaching 74.7 per daily rental, reflecting the new contract prices in the context of rising new car prices and higher interest rates in addition to a mix of segments effect. We keep on seeing a positive perspective into demand with the fleet rental results in multiple segments.

Our trust is underscored by the perception of our product quality measured by the NPS levels, but also by the operating perspective, analyzing the credit risk level and the quality of our portfolio and asset management. Even in a scenario of rising default levels observed in the market, we didn't identify a material effect in our portfolio.

Moving to Page 9, we show the balance of buying and selling cars. As mentioned, we have a favorable scenario for purchasing car in which we see great volume availability and diversity of models with a gradual increase in production with credit relevance of direct sales now underscored by 2 consent quarters of strong purchases.

We bought 358,000 cars and sold 41,593 in the quarter resulted in an addition of 55,865 cars in the period and a net investment of BRL 5.4 billion, also considering prerenewal. Continuing on Page 10, our average car rental price purchase was BRL 74,900 reducing sequentially BRL 79,000 per car, highly in the gradual return of the mix compiled by a greater share of entry-level cars in a more favorable commercial condition compared will be better than those being applied.

The sales price decreased sequentially BRL 3,700 reaching BRL 62,600 in car rental, a reflex of selling entry car -- entry-level cars with a higher mileage to renew the fleet. The lower price decrease is the selling price compared to the purchase price allows a sequential decrease in the car replenishing CapEx.

In Fleet Rental, we also note a decrease in purchase prices coming from BRL 98,300 to BRL 96,500. In this division, the smaller price decrease reflects the effect of growing truck and special vehicles mix. Excluding trucks, the purchase price was BRL 92,700. The division sales price, on the other hand, were stable compared to 3Q '22 at BRL 62,900 since the mix effect has no effects in this division.

On Page 11, we highlight the evolution of the total fleet throughout the year, reaching 591,041 cars in the period. With the net of carve-out with a 21% growth. Going on to Page 12. We see that year-over-year in the fourth quarter, the rental net revenue presented a 23.7% growth, 67% accounting for car rental and 58.9% in fleet rental, while Seminovos net revenue increased 61.8%. As a result, consolidated net revenue in the quarter increased 40.3% year-over-year, adding up to BRL 6.9 billion.

On Pages 13 and 14, we show the reconciliation of accounting EBITDA with the adjusted one-offs related to integrating and effects of discontinuation of purchase and sales initiatives. In 4Q '22, adjustments totaled BRL 109.1 million, of which BRL 77.1 million mainly related to integration and BRL 32 million related to discontinuation of car purchase and sales operations. In the year, adjustments totaled BRL 261.2 million.

On Page 15, we show the 4Q '22 adjusted EBITDA evolution compared year-over-year. We highlight the company's operational results quality, reflecting strong growth in volumes and practice prices with a positive impact on current fleet rental margins. The capacity to consolidate a new level of prices and cost structure will allow a higher margin level in both car and fleet rental tailoring the return levels to the context of higher capital costs, depreciation levels and interest rates.

In 4Q '22, excluding the one-off effects related to business combination Car Rental division presented an EBITDA margin of 61%. And compared year-over-year, 10.3 percentage increase on margin is due to rising prices at the beginning of fleet renewal process, even with higher cost of mobilization due to the strong purchase of cars and carve-out effects.

In addition, not included in the adjustment. This quarter, we balanced out the company's accountability practice with a negative impact of BRL 25.3 million in Car Rental division equal to 1.4% percentage points on EBITDA. The Fleet Rental division presented an adjusted margin for business combination expenses of 66.5%, 4.4 percentage points higher year-over-year.

In this division, the margin was positively impacted by the evolution of volumes and average daily rental fees, offsetting the increase of cost for fleet mobilization. Additionally, the evolution of new initiatives expenses negatively impacted the EBITDA margin in this division by 1 percentage point. The effects of greater mobilization and new initiatives were adjusted in the EBITDA.

In Seminovos, year-over-year, the adjusted by one-off EBITDA margin decreased 9.2 percentage points to 5.2%. In this quarter, we had the effect of mismatching the purchase and decommissioning of cars. With the great availability of new cars in favorable conditions, we increased decommissioning with higher mileage advancing the preparation cost. We decommissioned 61,000 cars and sold 41,000, with the impact of BRL 42 million or 1.6 percentage points in EBITDA margin being BRL 39 million in car rental and 2.5% in fleet rental.

Additionally, with the scope of the business combination, we had a one-off increase of sales of Seminovos through the auction channel with a total effect of BRL 52.8 million, accounting for 2.1 percentage points in the margin, of which BRL 27 million were in car rental and 25.8% in fleet rental. These 2 items are not adjusted in the disclosed margin. In 2023, we efficiently expanded sales volume in the Seminovos division. And in the first quarter, with around 35,000 cars sold in margins between 7% and 8%. As a result, the consolidated EBITDA margin for 4Q '22 adjusted for the business combination one-offs had a record level of 67.6%.

On Page 16, in car rental, the annualized average depreciation per car continues to progress sequentially at BRL 4,669. The purchase and fleet renewal acceleration caused an average depreciation to rise once the new cars presents a higher depreciation level than the older ones, which weren't being depreciated.

In the fleet rental, the average annualized depreciation also accelerates for the same reason. We highlight that in fleet rental, the new cars have a mix with higher depreciation levels due to the asset price, which started to include heavy vehicles and with greater wear and special vehicles.

On Page 17, we display the consolidation -- consolidated adjusted for business combination one-offs and discontinued operations. And a bit, in addition to the adjustments regarding integration costs, there are also the effect of amortization of intangibles, recognizing the business combination, bringing a noncash effect of BRL 148.2 million.

On Page 18, we show the same adjusted EBITDA of 1.5%, an increase of 22% year-over-year. In the year, EBITDA increased 22%, achieving BRL 6.3 billion. The car rental EBITDA margin 45.1%; and fleet rental 48% are both lower year-over-year due to higher depreciation and smaller Seminovos margin as previously mentioned. We underscore that EBITDA is the utmost metric to measure operating result and ROIC, our main performance index.

We have an acquired fleet between 2Q '21 and 3Q '22, bringing higher depreciation caused by the purchase conditions of the period in shortage in supply. For the vehicles bode 4Q '22 and onwards, we see smaller depreciation and return on line with the company goals. The adjusted net income for the quarter achieved BRL 637.7 million with the effects mentioned on EBITDA and tax loss write-off related to discontinued operations of BRL 23.8 million.

On Page 21, we show the annual adjusted net income, which reached BRL 2.75 billion. On Page 22, we see the adjusted net income for 4Q '22 of BRL 637.7 million impacted by financial expenses, which increased BRL 422.9 million due to increase of interest rates and average debt balance, partially offset by small tax over revenue.

I'd like to pass the floor back to Rodrigo to present cash generation.

[Rodrigo Tavares Goncalves de Sousa, executive]

On Page 23, we show the cash generation by operations before growth of BRL 3.5 billion in 2022, consumed by net investment and renewal and fleet growth of BRL 10.8 billion, resulting in cash consumption of BRL 7.7 billion. We understand that as we mature these investments in new cars, operating leverage and synergy gains, combined with replenishing cap fix reduction will contribute to smaller cash consumption as seen on Page 24.

In the second half, net debt increased BRL 7.7 billion in order to fund the fleet growth acceleration in the second half of the year, ending the period at BRL 26.1 billion. On Page 25, we ended the quarter with a strong debt profile and cash position, including issuances announced by March 14, 2023, the company would have BRL 10.6 billion in cash.

On Slide 26, our debt ratios show acceleration of car purchase towards growth ended the year at 3.2x of net debt over EBITDA. On Page 27, we show the ROIC spread evolution, excluding the write-off goodwill and one-off effects compared to cost of debt after taxes. We see a spread of 6.7 percentage points considering the last 12 months.

We have the confidence that despite the challenges we are facing ahead, actually, the company is restoring the level of result and return, making investment decisions accounting for the car cycle evaluating the long-term effects in a way to reinforce and consolidate even further its competitive differentials.

We are now are open to answer your questions.

[Operator]

[Operator Instructions] The first question is from Daniel Gasparete from Itau. Let's continue to our next question from Lucas Marquiori from BTG.

[Lucas Marquiori, analyst]

I have 2 questions and I want to understand better. I think it's clear that the company after the merger. I want to talk about 2 specific points. You already said that the margin on Seminovos for January and February, I think that the effects of the accelerated demobilization and also using the auction channel are not available for the beginning of the year. But is that worsening on the Seminovos margin and Q4 changes the strategy for Seminovos for 2023, if you could comment a bit if the curve is sharper than you imagine, would be important to know. And the second topic, Rodrigo mentioned at the end of capturing operating synergies, we know that most of the synergies will show more in 2024, especially in goodwill. Is there anything that we can expect for 2023, if you could mention what is more evident for 2023, so we can bridge it would be great to help --- to have some help there.

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Lucas. Thank you for your questions. Well, about Seminovos results, we already mentioned there were 2 one-offs. One is about the divestment. Think about the context of integration and integrating the stores and systems commissioning, we bought almost 100,000 cars in the quarter. So we had to prepare the divestment and reinforce the inventory in a temporary moment that would make sense, but that's not going to happen. We already always work with close to 30-day inventory. So we pretty much sell with an inventory, and that didn't happen. Same is something very specific that happened in the auction sale.

The Seminovos market is a challenging market now. And the first quarter was much better probably because of the integration of Seminovos that has advanced and the distance of the used car price to a new car price is pretty much back to historic levels, pre-pandemic. And in some cases, even higher than the historical level difference. So yes, there is a market effect. There's a faster lending than what I expected. But in the first quarter, we already see a situation that's much different than the last one.

But now we're also seeing margin replenishment in rental, and that's moving fast. So you mentioned synergy. So even without adjusting the accounting practices, we already see a sequential increase to the rental margins, and we expect that to continue. About the synergies. Obviously, when you talk about a premium and others in 2024, but we expect the operating synergies to start their cycle in 2Q '23. A part will be through renewing the fleet, be it because of mix or mileage. We have a strong mix and the variable cost of that renewal, but also synergy, which is diluting the fixed cost and the market that's still growing and demanding that, that will happen and be visible as well as the synergies of best practices among the companies in bad debt, maintenance, cost effect, accidents and all of that, that contributes to increase the margin sequentially during the year.

[Operator]

Next question is from Daniel.

[Daniel Gasparete, analyst]

I also have 2 questions. The first one is, I'd like to know the trend on depreciation. You mentioned that a bit in the release and in the call. So I'd like to know what you think it's going to be during the year, an increase in depreciation? Is that going to be in the second half, so we can understand that better. And second is understand the occupancy rate. Most of the indicators that we've seen here internally owners or not have pointed to weaker activity. So we'd like to see your opinion in the demand with a slower economy. Those 2 things.

[Nora Lanari, executive]

Thank you, Daniel. About depreciation in the first quarter, especially in the beginning of this year, you'll see a stronger evolution and depreciation, especially with the change in the period. When we have a younger fleet, we depreciate in 18 months instead of '24. And in the beginning, that has an effect. And I'd say that it's a temporary effect. So instead of depreciation in 6 or 7 months, it's going to be depreciate in 1 or 2 months because it's closer to sale.

So in the first quarter, we'll speed up the depreciation, but then it will go back to normal. And as we start selling the vintage to and replace it with 3, then we'll have the decrease in the depreciation, and that will only happen closer to the end of the year. So we should go up in the first quarter, together with the second stabilization of depreciation. And at the end of the year, depending on the conditions, we maybe see that state settling or even it lower, again, especially in rental car rental. Fleet has its own dynamics with a trend of going up because as we renew the fleet with more expensive cars, fleet renewal is slower, and that's positive for a longer period of time.

And Daniel, to your second question about the occupancy rate, we can see that fourth quarter is, in fact, affected by the company's decision to buy earlier because of the commercial conditions. So we have a strong addition in fleet in the fourth quarter. So we have replenishment of that carve-out, but the impact is a lot of cars and commissioning and decommissioning and that affects our utilization rate.

For the first quarter, we already have operational fleet or/ rental that are more balanced out. So that's a trend, and we see them being used in rental. So we still don't see an impact of demand at the end. Obviously, after the high season, we see that settling in individuals, but we have room for that to grow during the year.

[Operator]

Next question is from Guilherme Mendes from JPMorgan.

[Guilherme Mendes, analyst]

I have 2 points. First of all, following up in car purchases. So buying in better conditions and the ROIC spread, your message is clear on that side. But if you can explain the dynamic of the car purchases. So comparing to prepandemic levels in terms of the conditions and discounts, is it back to pre-pandemic levels or is it just an improvement vis-a-vis what we've seen in the worst moments for car purchases in 2021 and 2022?

And the second question is in heavy vehicles. Will you provide more information in terms of growth levels and fleet and profitability of that segment, that would be great.

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you, Guilherme. First point. Profitability and discount levels. When we talk about that, we also have to talk about the mix. So for discounts, especially in mix, aren't the same levels that we had pre pandemic. And what does that mean? We had an increase in car mix. The cars became expensive, more premiums. So automatic 1.0 or 1,000 cylinder cards that are sold in that segment in the subscription car segment, the small SUVs that didn't even exist before the pandemic. We also had -- we had basic cars that was -- that were very basic, prepandemic. And all of that pointed to lower depreciation, but also lower rates.

So you see consumers appreciating those elements. That's why the conditions aren't the same to pre-pandemic. And the difference between new cars and used cars are similar now and some even higher than the prepandemic levels. About the heavy vehicle business, it is growing. We still have inventory of that and it's sold at a very appealing profitability. The point is we should see the new vintage of those trucks, especially Euro 6 within the context of price increase and higher rates that's going to be transferred to customers. So the business is evolving well. We have some significant synergies in what we call the aquarium that are our own customers that rent lightweight vehicles.

So the thing is our supply has to fit with an adequate profitability for that business. So Marco, you mentioned this segment during the Investor Day and mentioned something close to 5,000 units. So just for reference, we don't give guidance on that. It's in fleet management, but just so the market can understand that better.

[Operator]

Next question is from Victor Mizusaki from Bradesco BBI.

[Victor Mizusaki, analyst]

I have 2 questions. The first one is about the income tax rate, you mentioned that the rate was lower. And apparently, that's somehow connected to the financial results. Can you comment on those gains in the fourth quarter and mark-to-market if that's related to the financing operation for the transaction? And the second question is about the PIS and COFINS tax. So if in the fourth quarter, there were any credits or benefits that you could capture?

[Rodrigo Tavares Goncalves de Sousa, executive]

Thank you Victor. Starting off with PIS and COFINS, no, we didn't just see traditional we're always very transparent concerning getting credit. And with the new expectations of the ICMS base will no longer be considered in taking PIS and COFINS credit. We truly believe that the credit will be used in a monetized manner, which is actually our strategy. In addition, after that change, Rent a Car is slightly better and fleet close to the breakeven in relation to getting PIS and COFINS credit.

About the actual rates in interest over own capital, we consider a normalized rate of 20%, and that's what should be considered, especially for the benefit relating to deferred taxes and interest on own capital. And in this quarter, if I understood your question correctly, we're talking about an effect associated to loans from shareholders because of the acquisition. Just to make it very clear, as part of the acquisition price, there was a loan to all shareholders here from the former Locamerica. And that loan is marked as if all shareholders had a loan of a full duration of 5 years. That's why there's a different rate compared to the market, and there's a present value into that.

So in practice, some of those loans will be settled. And especially in this quarter, over BRL 200 million was settled with an actual cash effect that takes place in the order of BRL 90 million that we had in this period, exclusively related to settling the loans earlier. That could happen in the future, or not depending on the market conditions and the shareholder decision of remaining or not with that loan.

[Operator]

Next question is from Regis Cardoso from Credit Suisse.

[Regis Cardoso, analyst]

There are some topics that I'd like to ask about and maybe some quick questions. One of them is, could you mention how relevant [ localizamize ] has been in your results if it affects margins. Is that something that we should take into account? Another quick one is we saw a decrease of BRL 2 billion in the supplier account, and we expected an increase because of the seasonality at the end of the year. So could you mention if there were any specific strategies in negotiation that you may have used on that?

And another topic and a longer question actually, were actually a more objective and longer answer about the new initiatives. Could you comment on that for 2023, if you have any measures or higher focus on the growth measures, be it internationalization, heavy vehicles or localized. I think that's enough so I don't take up too much of your time.

[Nora Lanari, executive]

First of all, about [ localizamize ]. The effect is still small. And it has a negative effect to the EBITDA but positive on financial expenses because it's part of the result comes from advanced payments to suppliers. We provide that to -- under EBITDA and there are some costs that are above the EBITDA line, but relatively small within the overall context. And what was the other question?

[Regis Cardoso, analyst]

Suppliers.

[Nora Lanari, executive]

So here, there were some events. So in fact, you can see that we bought a similar volume. But in the third quarter specifically, we had longer terms, longer than usual. And that was active management that we did, so that would match with the financial flow, the incoming flow from the carve-out. It was one-off, but it was 10 or 15 days that part of that supply was paid in the beginning of October instead of the end of September. So that's why the number of suppliers payable in the third quarter was higher than usual. Once again, to match that with the incoming flow from the sale and the Carve-out. So typically, payment terms is 60 days, and in some cases, we've been able to extend that directly with the automaker through the negotiation of commercial contracts. But in general, we pay in 60 days. About the new initiatives, I'll let Bruno talk about that.

[Bruno Sebastian Lasansky, executive]

Just to talk about our initiatives. As we mentioned in Investor Day, we are investing in a selective manner in these adjacent businesses, but we've reassessed our portfolio and decided to close the initiatives of buying and selling cars, especially [ Asaleo ], that freeze up capital and time of senior management to focus on the 3 initiatives that we established as a priority, which are the heavy vehicles, we see good traction for -- with high growth, generating value in the contracts that we are closing on this season with this combination of business before the inventory that we had, had a ROIC spread strategy aligned with Locamerica. So with this new cycle, we start pricing this business in the ROIC spread target of Localiza and with very high NPS. So that initiatives of heavy vehicles also is looking for working with customers in our portfolio with several assets and that are loyal to our brands.

Localiza mines as mentioned, in addition to the financial issues, there's a relevant aspect regarding customer relations. We're talking about 40 million cars that are [ about ] cars with pain points, but potentially our Seminovo clients or subscription client customers, and we can increase our cross-selling with these customers with new products we have in our platform. And also, the benefit with the relations with the car repair garages that makes that relationship even closer. And also internationalizing especially as we've been mentioning with the market, our focus on countries is not Localiza&Co going global. It's choosing specific markets to replicate the Brazilian success story. And the reason is that we don't have synergy of relevant revenues or relevant costs when we go into another country, and we chose Mexico as our main target market.

We're still at the early stages. We've been looking at it closely, we have a CEO who is an executive with 20 years of experience in the sector that adheres to our culture. And this growth, we will communicate to the market in detail throughout the year. But we will do this little by little. We're not going to do anything different from what we consider validating our investment strategy, both with customers and getting ROIC and financial gains within our goals. Those are the avenues we're working on in our strategic planning.

[Operator]

Our next question is from Rogério Araújo from Bank of America.

[Rogério Araújo, analyst]

I have 2 questions. I want to explore the purchase and selling. I think it's a problem of the mix of the spread. You sold cars that were bought a while ago. But regardless of that there was a relevant worsening of 17, 18 points of worsening in the purchase and selling. Can you give us more details of what exactly was this mix in the quarter? And how one-off it was and maybe any relevance of a similar mix that the fleet still has.

You mentioned 20,000 vehicles ready for selling, but we're so dead. So it's a mix similar to what was sold in the fourth quarter '22. So are we still going to see a worse spread of purchasing and selling in this quarter? And on that topic still, is there -- is fleet demand smaller? How is that compared to previous months -- or I want to understand if it's a problem of the fleet that is being sold that is -- has high mileage. It's a bit older or if the demand is worse today than it was before I'll ask the second question after.

[Rodrigo Tavares Goncalves de Sousa, executive]

Okay. Thank you, Rogério. The first thing about the mix. Yes, there is a relevant change in the mix. We're starting to deactivating faster the cars that were in ZAP. We extended their useful life and they were on ZAP. This mix is made up by 1.0 cars with high mileage that were for the whole sale market. So that's the main characteristic of this fleet. So something very sporadic and momentaneous. The option is momentaneous. The mix is worse because it's 1.0 with high mileage, salt in a wholesale channel. And that should persist for the first next quarters.

Although we're already looking -- seeing some growth in the sales volume, the first 2 months, we're experiencing 25% higher sales than the previous one. So with the integration of new processes, we're seeing a strong increase in sales volume associated to that mix. About the sales of the fleet, it's a positive piece of information. When I compare car by car, we're seeing more than 2 months of reduction of the distance of the net sales with a fee. It has a certain delay of information. But for more than 2 months, the net sales price with the reference, the numbers are getting closer, especially in retail, but also in wholesale.

[Rogério Araújo, analyst]

I have a follow-up. You mentioned the auctions, but just to understand what that was specifically and it shouldn't happen again in the next quarters.

[Rodrigo Tavares Goncalves de Sousa, executive]

It was something very specific. We had car sold in that channel, and they're not going to happen any longer in the next quarters.

[Rogério Araújo, analyst]

Okay. Great. My second question is about the fleet management demand. You talking about subscription cars with competitiveness compared to renting the asset. So you have a potential for growth in that division. If you could give us more information about how strong the demand is for Localiza me, maybe some information on backlog if growth is increasing or if it's stable. And if you could also give us some information about outsourcing corporate fleets compared to Localiza me. Are they both strong? Is their main driver for growth? And if there are bids happening and the companies didn't outsource that before they outsourced on a part of their fleet, and they're increasing there now. So 2 factors of our outsourcing, so I can understand better what is happening in the following quarters.

[Bruno Sebastian Lasansky, executive]

Thank you, Rogerio. About subscription cars, we are starting to see the results of building a competitive edge. We have consistent increase in subscription car sales becoming relevant in our mix of new contracts. And that is because of several aspects. First, consolidating the brand as leader of the category, but also with good pricing, be it risk of default, operating risks and the levers -- levels of excellence of the company with technology in which we have very sound information that our default amount is significantly lower compared to our competition. And the operating challenges is where we see our competitors having more trouble in operating. So it's a very positive perspective. We have a very good brand of the NPS and level of digitalization evolving in the customer journey and operating excellence, which allows us to have a lower price compared to our competitors.

In fleet outsourcing, we see the first cycle of the year after vacation and Carnival, that's usually when sales grow slowly, and we see some increase in speed in the last month of the quarter. Our pipeline is very robust and healthy in the return rates that we expect for ROIC spread. So at the moment, with high interest rates and high capital costs, the clients are also try to outsource fleets to balance their expenses as well.

[Operator]

Our next question is from Pedro Bruno from XP.

[Pedro Bruno, analyst]

It was already answered in a certain way. But I want some update on the levers to recompose the ROIC. Individually, it's well explained, but I wanted to see the full picture. You mentioned the bargaining power with the automakers with discounts in the mix, and that's very important. And you already mentioned this a lot. The synergies with scale and third and last, you also put this as the last levers price. So that was less explored in the call. So if you could give us some idea of how you see this because of your fleet movement. In addition, you've been speeding up growth, understanding that the ROIC spread is built up again even if it's not at the levels before the pandemic, as you mentioned, but maybe this third level of price. You -- how could you explain that better of repassing the price in the market?

[Nora Lanari, executive]

Pedro, we thank you for your question. When we talk about better conditions and synergies and variable and fixed costs, those are the ideal variables for us to explain that returning to those levels are almost what they were before the pandemic. Price is the last lever to be used because it hurts the customer at the end of the day and even hurts the demand. But it has been happening. And one of the things that we could show in this quarter is that for 2 consecutive quarters, we grew almost at 100,000 cars. We have to carve-out, but the -- those cars are still in the market. And with that price path, making it robust, the rigs price ratio is every 3 points of price we have one of rigs. So we need to repass this price is not huge and it's been happening selectively, especially in some segments in which that need was higher, especially the ride-shared corporate. So that's where we see a more relevant price increase.

So we will use this lever the minimum possible, so we can have the return that we always communicated. Of course, with the increase of cost of capital, we're always calculating the need compared to our benchmark, which is [ CD plus our ] spread.

[Operator]

Next question is from Bruno Amorim from Goldman Sachs.

[Bruno Amorim, analyst]

I have 2 questions. One is more strategic, the other one is more objective. First of all, about heavy vehicles. So I'd like to know about your decision to invest in a relevant matter in that segment because historically, you test new initiatives going -- starting small and then you grow that very fast when you feel that there's competitive edge and profitability was proven. So I'd like to know at what point are you at? So in that decision of growing that in a more relevant manner, faster way in heavy vehicles based on that logic.

And the second one and also more strategic and following up on Bruno's comment about the Mexico strategy, starting small testing the initiative, you know better than anyone, where in this -- in your industry, scale is relevant. So I'd like to understand your game plan. If you can talk about that competitive dynamics there and how you test that initiative in your small and an industry where scale is important to buy and sell vehicles. So the store chain, those are the 2 questions on the strategy side.

[Rodrigo Tavares Goncalves de Sousa, executive]

I'll talk about heavy vehicles, and then Bruno Lasansky can talk about Mexico. For heavy vehicles, we already have 5,000 units and revenue is about BRL 500 million per year. So it's far from saying that it's something small, it's still testing. It's some short decision that we are investing in heavy vehicles. And obviously, as in all capital allocation processes, all initiatives are competing for the same capital. And to add access to capital, we have to be sure that the return is according to the return required by the organization.

So here, we have a big business already. In 2022, the company was the second largest buyer of heavy vehicles in the country, even though that wasn't our biggest focus. And the growth rate, the capital allocation rate as in any other segment depends on the capacity of return in that segment. To add to that, we have to remember that, that's still a year of transition for Localiza where the car renewal CapEx, not only for rental, but also fleet is settling. We're in a phase where we're capturing synergies and where you have operational leverage and volume. So that business still demands a lot of capital. And our capital to focus on growth was lower during the pandemic, and that should get back to normal shortly.

On the other hand, we're in a very robust competitive advantage. We have a strong balance sheet. We have the leveraging advantages to come. So that's strong for rental and fleet because of the commercial advantages that Bruno mentioned. And Bruno, specifically about Mexico. We'll give more details later on. But the country has over 100 million inhabitants and 5 million tourists. So it's very relevant in terms of size. At the same time, we see a very disseminated supply with very low enchantment and satisfaction level for customers and little access to capital with the current players that they have in that market.

So -- what are we thinking? Scale is obviously relevant. But we do have relevant scale that enables us to start off well, not only because of the knowledge that we have of the business and availability of technology and talent, but also even leveraging our relationship with automakers in Brazil, and that enables us to go into the purchase expectation with some interesting advantages in that sense. And our mindset is to validate the thesis, as we mentioned, in quarterly cycles that are assessed by management and the Board of Directors, where we decide to increase capital allocation according to the attraction or appealing this.

Obviously, first of all, we have to demonstrate that we've incented the customer that we have a value proposition that's better than the competition and that we've achieved all the parts of the equation ROIC and the unit economics of the business in that country, be it buying for rental and purchasing sales; and finally, having an efficient operation as we have here in Brazil.

We're also taking advantage of all the learnings that we have with the international players. Recently, I was talking to our partner enterprise to see what worked and didn't work in their end expansion in Germany and the United Kingdom. So we add on that international knowledge that Localiza comes together with local management that really knows the local market to have the best of both worlds. So we will advance and share that with the market. It's a very big market, a very interesting market, and we believe we can build the competitive edge that we have in Brazil.

[Bruno Sebastian Lasansky, executive]

I'd like to add that because with all those initiatives, there's probably going to be a question about leverage and capital allocation. So in terms of scale Bruno, the Mexico leader has a scale that is equal to 5 days of purchase of Localiza. So we believe that the model is adequate in achieving an important relative scale is not that big of a challenge when we compare that to our benchmark. About leverage. All of these capital initiatives, many of these investments were in the past half year. So the cars didn't mature their investment yet. And what does that mean? Most of these cars have won 2 or 3 months of operating results. So we have the burden of an increase of indebtedness in the short term because the investment is now and the benefit is only reaped during the year. We expect that the leverage should be a little bit more moderate in the upcoming months. And as of the second half and probably the end of the third quarter, we should see operating generation growing at a faster rate compared to indebtedness and those rates start to converge and be lower and most likely achieving levels even smaller at this -- the end of this year compared to the end of last year.

[Bruno Amorim, analyst]

Perfect. That's very clear. Just a quick and objective follow-up on that about the potential to lower maintenance costs. Could you talk about that? And how much has already been realized? And how much is still yet to be realized? Any metrics that you can share with us would be great.

[Rodrigo Tavares Goncalves de Sousa, executive]

If you consider the last year, we had an impact of 8 points that's in Rent a Car. So when you look at Rent a car alone and compare year-over-year, that's 8 points. And we're still in the process. The previous question was about the sales mix. So the sales mix of 70,000, 80,000, 90,000 kilometers, depending on the car. So as you eliminate those cars, you'll have 4 factors in maintenance gains. First of all, its fleet renewal, lower -- less kilometers and a lower premium, and that's an positive impact on that.

And the third one is taking the Locamerica maintenance processes to the same level that we have at Localiza, which is what we call the synergies and matching the best practices. And given the new scale, and this is the biggest one, we increased the level of the entire corporation. There are some examples that with the scale alone, we can control the logistics of some parts into that on our own. And we also have a 35% reduction, for instance, in tires because we import them directly. So there's still an avenue that's at the beginning of the process to improve the maintenance costs.

[Operator]

Next question is from Lucas Barbosa from Santander.

[Lucas Barbosa, analyst]

I have 2 on my side. First of all, to end at the conversation about Seminovos. So I'd like to know about the dynamics of depreciation and Seminovo margin. So the EBITDA margin of Seminovos dropped 300 bps, a little under that quarter-over-quarter. And RAC depreciation increased just 7%. So you had a reasonable increment of fleet. So in my understanding, you're comfortable with the Seminovos dynamic and the margin drop was according to expected. So I'd like to know if I understood that correctly. And then I'll ask the second question.

[Rodrigo Tavares Goncalves de Sousa, executive]

Like I mentioned, Seminovos had one-off effects that will not happen again. So the convergence has been faster. And from the depreciation period that goes from 24 to 18 speeds up depreciation. So we're comfortable with the dynamics of the depreciation relation with the Seminovos margin without any major concerns in that sense.

[Lucas Barbosa, analyst]

Okay, Rodrigo. And if you allow me a second question, thinking of growth moving forward, a follow-up to the last question, Bruno's question. Now that car supply -- brand new car supply is no longer an issue, what do you think will determine the rate of growth in the next 8 months? Is it the balance? Is the demand, ROIC spreads, Seminovos?

[Rodrigo Tavares Goncalves de Sousa, executive]

At the end of the day, it's the demand in the ROIC spread that should be the limiting factor. I believe that if we have a robust demand with adequate ROIC spread, the capital restriction shouldn't be an issue. So Seminovos is one of the biggest targets of the organization because in the first quarter, it's 25% growth and it's ramping up according to expected.

So we grew in absolute terms before the carve-out with 100,000 cars, grew in fleet, grew in Rent-a-Car and that shows the robustness of that market. So we have a favorable competitive environment and even with a decrease of fleet in the market, but we continue to increase. So given that there is a demand and adequate profitability, I believe that that's what will determine our appetite to allocate our capital.

[Operator]

Next question is from Tiago Almeida from Milestone.

[Tiago Almeida, analyst]

I have a follow-up to Lucas' question. A while back, we talked a lot about ROIC spread and that it was approximately 2% to 3% and had a strategy to postpone sales of vehicles to be able to map out the depreciation curves even better and so on. Now thinking that we have an interest rate curve that's high for a longer period of time or higher for a longer period of time, and the competitive scenario with a bigger competitor going into fleet, when we think about 3 to 5 years from now, how do you say the biggest growth levers? And what do you imagine in terms of maintenance, vis-a-vis invested capital for company growth. So a very open question really to understand your vision and Bruno's vision of capital allocation with the satisfactory ROIC for the Board of Directors.

[Bruno Sebastian Lasansky, executive]

Tiago, let me start answering your question. Thank you for your question. So the company has a history of ROIC spread on top of the cost of debt and after taxes from 5 to 8 percentage points, and we consistently deliver that. So the figure that we're looking for reflects our competitive advantages. And at that ROIC spread level, the company is positive, and it's more difficult for the competition because of purchase conditions and cost of debt and scale. So our driver for growth is a ROIC spread at that level. We believe that there's a lot of room to grow volume, not only in RAC, but also in fleet management and fleet management, it's more obvious for the market given that new avenue for the subscription cars, but even in traditional fleet with the ROIC spread at that level.

And the price lever, once again, the company uses that carefully because we know that at a given time, the market is not inelastic to price. So we prefer to have a cushion here by improving operating efficiency and internal processes and leverage and a bit of the business combination justifies itself within that context. So the company sees a lot of opportunities in improving operating margins in fleet management and car rental that can offset the normalization of Seminovos and depreciation with higher interest rates and then we'll direct our growth.

Based on the competitive advantage, we see ourselves in a robust position. We believe that there is room to grow, and we have already contracted the purchase and sale volume for the year.

[Operator]

Our next question is from [ Gilami Cosa ] from AZ Quest. [ Gilami ] actually sent his question in writing. Localiza&Co is following the tax reform and the change in the bracket of a rate for services.

[Unknown Executive]

[ Gilami ], thank you for your question. I think it's early to give you an answer. We have 2 bills being discussed, and we think it has an important profile to collect taxes, which will impact the company, but it's too early to say. We're going to need laws to regulate generating factors calculation basis. We don't have all those details of the final bill. We have a long transition phase. So the company will have time to adjust and pull the levers that it considers relevant to maintain a spread level within the company's objectives.

[Operator]

Our last question is from Isabella Lamas from GPS (sic) [ UBS ].

[Isabella Pinheiro F. Lamas, analyst]

There are some topics that I would like to know. First is the integration cost. I would like to understand how this would all sold in the following months? Is there anything that is still going to happen? Will it be reduced in the next months? And also about the price of the cars purchased. You've mentioned that the conditions are better, but I want to know that dynamic for the next quarters and differentiate in a rack and fleet because you highlighted that in fleet, you will continue to invest in heavy vehicles with a unique price. Should we see a higher impact? Will it stay at these levels? Is the mix still capable of improving. I want to see your outlook for the year.

And one last point, the CapEx, you said that you have a robust plan to expand Seminovos stores. So can you give us a little bit more information, the number of stores? How will that be distributed logistically?

[Nora Lanari, executive]

Thank you for your question Isabella. First, let me talk about integration. Most of those costs that we had in the last quarter are still associated to structuring the loan because of the merger with Locamerica. Looking forward, these expenses should drop in a very, very relevant manner. So we expect that if we do have any expense, it's more residual in nature compared to what we had before. Of course, throughout the year, it's a relevant figure. But when you compare it to 20 million, the amount we invested in integration is very adequate. So from now forward, we will have a steep reduction because those costs are associated to integration.

Purchase price also has a positive trend. When you look in the short and midterm, most of it is the mix, but we also had not only commercial conditions, but the tenure is also part of that. So it's a positive trend for Rent-a-Car. In fleet, it's bought after the order. So the price for fleet is less rude. What is relevant is the guarantee that I'm pricing it the right way in the correct ROIC spread. So the higher the better actually because we're putting more capital in the right profitability. And the same is for heavy vehicles. We want to give more visibility as heavy vehicles grow to separate that price from fleets to the market can have a better idea. About the CapEx for Seminovos. We're not highlighting it, but it wasn't relevant. It's going to be a relevant number. We expect it to open tens of stores. About the CapEx for Seminovos, the CapEx -- the relevant CapEx for the company is cars. Even if it is robust, plan, we're not going to spend a lot in that expansion plan, and we're preparing for what we're going to need in 2024 for us. Rodrigo said in the call, we've been growing at the end. We have an expectation to grow in 2023, and we're going to have to divest robustly in 2024 because we're renewing the fleet for rental car, we had the delta to add. So we already have the cities map, we have a lot of capital arity and a lot of room for growth in Seminovos without clashing with price limit. There's a lot of market for that.

The second point about the price of the cars purchased and sold. Just to link with Achates question, how do we see price of new cars that are sold 2023? We're still seeing inflation on new cars, and that's an important part. The Seminovas are not following that inflation, so the spread between the new cars and the Seminovos we've mentioned in the call is already at the pre-pandemic levels, and we're seeing stability in the spread, which is positive news since we're ramping up sales volumes now.

[Operator]

To conclude, I pass the floor to Bruno Lasansky.

[Bruno Sebastian Lasansky, executive]

Once again, thank you very much for your questions. Just to reiterate that after a transformation year, the beginning of 2023, we have a very unique competitive position and we're ready to carry out our strategic plan to bring growth with value generation. Thank you very much. Our team, as always, will be at your disposal for further explanations. I wish you all a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]