Release Date: August 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Localiza Rent A Car SA (LZRFY, Financial) reported a 16.1% growth in rental revenue for the second quarter of 2024, demonstrating strong demand despite challenges such as deep floods in Rio Grande do Sul.
- The company achieved a 12.9% year-over-year increase in the average daily rental rate, reflecting effective pricing strategies.
- Localiza Rent A Car SA (LZRFY) expanded its branch network to 681 branches, including 17 agency branches in Mexico and 157 franchises in Brazil, indicating growth in market presence.
- The fleet management division saw a 27.2% year-over-year increase in revenue, showcasing healthy management of new contracts and rationalization processes.
- The company sold 69,316 cars in the second quarter, a 31.5% increase year-over-year, with an average selling price increase of 9.2%, highlighting improved sales performance and mix of cars sold.
Negative Points
- Localiza Rent A Car SA (LZRFY) faced significant depreciation impacts, with an additional depreciation impact of BRL1,386 million compared to the first quarter, affecting overall profitability.
- The company reported a negative EBITDA margin of 0.8% for the Seminovos division, indicating challenges in the used car market.
- The floods in Rio Grande do Sul resulted in the loss of approximately 2,000 vehicles and eight branches, leading to an impact of BRL103 million.
- The company experienced a negative net income of BRL570 million for the quarter, driven by increased depreciation and impairment costs.
- Localiza Rent A Car SA (LZRFY) is still undergoing integration processes, including system integrations and back-office adjustments, which are expected to continue impacting margins until the second half of 2025.
Q & A Highlights
Q: What motivated the decision of shortening the depreciation cycle from 18 to 15 months at the moment, and is the company comfortable in returning to that level of cycle given the Seminovos market?
A: Lucas, thank you for your question. The useful life of the car. When we look at the car that we buy today, the expectation is that the car will be deactivated close to these 15 months. So depreciation has a prospective factor. And the expectation of the company is that throughout the second quarter of 2025, we'll be very close to the normalized cycle. To have a 15-month cycle, you should renew 80% of your fleet for Rent a Car, which is basically 12 divided by 15. The evolution that we've been doing in Seminovos when we annualize the last quarter. And the recent results shows that we're going in the right direction to achieve that level of renewal. So the decision was to use the car's lifecycle that is going in depreciation today that has an effect. You advance the depreciation of the cars that are in the fleet today, this effect takes place, especially in the two to three quarters. Now considering the marginal vehicle, we thought it was necessary to make the change. In regards to opening the increase of the gap, an important qualification is that to increase that gap, you need a different variation between the prices of new and used cars, not necessarily a drop in the prices of the used car. If you're thinking 15 months in advance, you have to believe that the price variation of new car will be certainly greater, then the price variation of the used cars.
Q: How does the depreciation guidance talk to the spread of buying and selling used new cars for Rent a Car? And how is the sales mix of used cars between retail and wholesale and how will this vary in the following months?
A: Thank you, Victor. Looking at the expectation of depreciation if you do some assumptions about a purchase price in terms of Seminovos costs at a margin of Seminovos that is normalized, you will see that the spread will be between 96% and 98%, the ratio between purchase and sales price. So with these assumptions, especially if we talk about the first quarter of 2025, looking at the assumptions for next year, we can simulate and it will achieve a result of 96% to 98%. I'd like to remind you, Victor, that the cycle that you saw at the first slide had met in inflation of the price of cars. We just like the cycle in which the price increased 78% and the expectation of inflation changes in the current phase of the cycle? The second, yes, great point. When we show the cycle before the pandemic, that ratio between new and used car was constant and when you had inflation of new cars. You also had inflation on used car. So when you look at the car that you buy today and at the car that you would sell in 15 months, there was a 15 month inflation that would affect the spread of purchase and sale and then the recent market that has changed. That's why we don't have the expectation at least in the short term of going back to the spreads of before the pandemic.
Q: What is the rate of drop that was used in the depreciation calculation? For the past two months from what you've been showing, the drop level was back to the levels of 2023.
A: As we mentioned, not necessarily we have to go back to that of drop rate, but the 96% to 98% difference, it's very transparent are the assumptions that we are using for new cars and used cars. If I could add, Nora, I would like to give you an outlook of how we see this end of July and what we see in July, it's a very high traction in increase of volume of cars sold by Seminovos and about price. In July, we see a drop marginally above the normalized rate of 0.3% to 0.5% per month. On the other hand, Localiza Seminovos has been more effective in managing price that more than offset this drop in the market. This is just the beginning of the quarter, but we continue to be confident in the company's capacity of scale up and continue to rejuvenate the fleet with efficiency.
Q: About the change in the assumption of the useful lifecycle of the car from 18 to 15 months, was this applied to the entire RAC fleet? Why did you already depreciate using the 15 months since I gave more visibility shortening the cycle? Thank you.
A: Yes, the RAC was 18 months and fleet management, the depreciation time is by contract. For Rent a Car, the cars don't have a predetermined useful life for each car. In this case, you have one useful life, which was 18 months. And now we decided giving that expectation of this marginal car will be deactivated with 15 months, we decided to change that. Just the peak of average, like for 30 months, we were depreciating 24 months. We had already shorten that cycle last year. And now we're doing another shortening of the cycle given the advance of rejuvenating the fleet, increasing the capacity of deactivation and of the used car and also the Rampage of what we expect to happen in the next cycle.
Q: What is the drive for impairment now? The rate of drop in cars with back to normal and from now on, it won't be necessary for impairment. There's another similar one, Rodrigo, before we go I'll answer that one. What is the effect of the reduction of 18 to 15 months cycle on that?
A: When we talk about the provisional measure, it really sped up this drop. In the first quarter we had an adjustment, but we had a very strong drop at the beginning. So we expected stabilization that didn't happen in that period added to that we saw this increase of the distance between new cars to used cars. Therefore, we decided to review the residual value of the car, and we decided to recognize these two changes, one of the useful life cycle for the reasons I just mentioned. And this return of the drop of price that had stabilized in the first quarter. About the effect, once again, it's a temporary effect. It impacts most of the cars, about 30% of our cars from Rent a Car today have more than 14 months of useful life in the fleet and as we time goes by this effect, increases. So it's greater in the third quarter and then in the fourth quarter and the first quarter of next year, it will basically not exist anymore. So in fact, you'll have a short-term effect. So a higher depreciation specifically in the cars that are older, but afterwards, this becomes normalized.
Q: Given the current scenario of uncertainty and depreciation, how slower is the RAC depreciation process than you'd wish? Would it make more sense for the company to expedite allocation in capital and fleet management
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
