Before making an investment decision, investors should carefully consider all the information set forth in this website, particularly the risks described below. The Company’s business, financial condition, and results of operations may be materially adversely affected by any of these or other risks. The market price of the Company’s common shares may decrease due to any of these risks, and investors may lose all or part of their investment. Additional risks and uncertainties not currently known to the Company, or those that the Company deems immaterial at the time of writing, may also materially and adversely affect the Company’s business and in the stock price.
a) Risks related to the Company
(i) Change in the residual value of cars
• The results of the Company could be affected by changes in the estimated sales value of cars and other estimations that could differ from actual values
The estimated depreciation of the cars is calculated by the difference between the acquisition cost of the car and the value estimated for the foreseen sales date, less estimated sales discounts and estimated selling expenses.
In addition to the estimation of residual value, other estimates could affect depreciation and cause the same impacts:
– Estimated commercial discounts: commercial discounts are negotiated on sales to consumers and mainly those to resellers.
Estimations of discounts below the actual amount have a negative impact on the result when the cars are sold.
– Estimated selling expenses: sales to resellers and mainly consumers require a chain of stores, a team of salespersons and spending on advertising.
Estimations of these costs below the actual amount have a negative impact on the result when the cars are sold.
• Change in the residual value of cars due to the idle capacity of carmakers
Brazil’s economic crisis, which deepened in 2015, its political scenario, which played a major factor in 2016, the weak domestic demand and the barriers imposed by countries that traditionally import Brazil’s surplus production could increase the inventory of new cars or the underutilization of carmakers’ installed capacity. Carmakers have been seeking to adjust inventories by reducing vehicle production.
This economic scenario could adversely affect the market for used cars and consequently the depreciable value of the fleet as a result of possible fluctuations in the estimated residual value of cars.
Moreover, the decline in vehicle production could lead carmakers to delay the delivery of cars, which could impact the Company’s operating results due to the extension of the terms for decommissioning cars.
(ii) The business of the Company requires intensive long-term capital to finance fleet investments
The Company depends on its capacity to raise funds to make investments in fleet renewal and expansion, which, in turn, depends on the operating performance, cash generation, and capacity to obtain long-term funds in the capital markets and/or through banks. The Company cannot assure that it will be able to obtain sufficient funds to invest in capital goods and to finance its fleet renewal and expansion strategy at adequate terms and costs, as a result of adverse macroeconomic conditions, its performance or other external factors, which could adversely affect it.
(iii) The Company is subject to restrictive covenants
The Company is subject to restrictive financial covenants pursuant to the terms and conditions of the debenture indentures, which include, among others, early maturity provisions upon resolution by the General Meeting of Debenture holders, such as failure to maintain certain leverage ratios. If leverage ratios reach the limits established in the covenants, the Company would be unable to take on new debt.
(iv) The loss of services of Senior Management or the incapacity to attract and retain employees could adversely affect the Company’s activity, financial situation and operating results of the Company
The Company’s Management and operations depend greatly on the participation of its key Executive Officers and Senior Managers. The Company cannot assure that it will have success in attracting and retaining key executives. The loss of key managers or Company’s incapacity to attract and hire other members could adversely affect its capacity to implement its business strategy and maintain its financial condition and operating results.
(v) The Company is not covered by insurance against certain risks
Cars from our Car Rental Division are only covered by insurance during the period in which they are rented. Thus, the Company is exposed to liabilities for which it is not insured, for personal injury, death and pecuniary damage resulting from losses from rented cars above the value covered by the insurance contracted by customers or for cars not covered by insurance contracted by customers. If the Company is unable to recover these amounts from users/ customers who rented cars, its operating results could be adversely affected.
(vi) The Company is subject to the risk of a review of its local rating
Company’s local rating, assigned by rating agencies Moody’s, Standard & Poor’s and Fitch, at Aa1.br, brAA+/Negative and AAA(bra)/Stable, respectively, could be impacted by the downgrading of Brazil’s sovereign rating. If the Company’s local rating is downgraded to the equivalent of Aa3.br, AA- and AA-, respectively and individually, the 7th issue of debentures of the Company will require a General Meeting of Debenture Holders to decide on the early maturity of the debentures. Moreover, such downgrading could increase borrowing costs and make access to debt capital markets more selective.
b) Risks related to industries where the Company operates
(i) A decline in the level of trust and economic activity in Brazil could reduce the demand for car rentals
The operating results of the Company, particularly those related to the car rental and used cars market, are strongly affected by the level of trust and of economic activity in Brazil. A decline in economic activity results in reduction in employability, travels, investments and, consequently, in demand for car rentals and sale of used cars. In the event of a decline in consumption, the Company could reduce the size of its fleet in order to maintain its occupancy rate. These factors could negatively affect: (i) Company’s operating results due to the loss of scale resulting from the dilution of fixed costs; (ii) demand in the Fleet Rental Division; and (iii) demand for decommissioned cars.
(ii) Car rental demand could be affected by the decline in the flow of airline passengers.
The car rental operations at airports account for a material share of the Company’s revenues. For the fiscal year ended December 31, 2016, 33.0% of this segment’s revenues (excluding revenue from car sales and franchises) were generated from rentals at airports. Thus, a decrease in the flow of passengers traveling by air over a prolonged period of time could adversely affect its business and operating results. The events that could lead to a decrease in flow include: higher airfares, strikes, decreased economic activity, airplane accidents, terrorist incidents and natural occurrences.
(iii) The car rental and fleet rental segments are highly competitive
The car rental and fleet rental segments are highly competitive. According to the Brazilian Association of Car Rental Companies (ABLA), as of December 31, 2016, there were approximately eleven thousand and one hundred ninety-nine (11,199) car rental and fleet management companies operating in Brazil. However, according to ABLA, there are approximately twenty-nine thousand (29,000) taxpayer IDs (CNPJ) with the CNAE service code “car rental without driver,” and therefore the car rental market could be larger than the estimates of ABLA. The fleet rental segment has few entry barriers and the rental rates are a key factor in customers’ decision. The Company faces competition from Brazilian and foreign rental companies of various sizes. These competitors include several car rental companies in local markets that, due to their small size and their local operation, operate with lower fixed costs and offer competitive prices, despite their smaller scale to acquire cars and higher loan capital costs. The highly competitive environment and the growth strategy adopted by competitors could trigger a decline in car rental rates and adversely affect the business and operating results of the Company.
c) Risks related to shareholders
(i) The Bylaws of the Company contain provisions to safeguard dispersed shareholding, which could impede or delay operations that benefit our shareholders.
Article 38 of Company’s Bylaws contains certain provisions that make it difficult to acquire substantial tranches of our outstanding shares by a single investor or a group of investors. Any shareholder or group of shareholders representing the same interest, who becomes the holder of 15% or more of the capital should send a letter to the Investor Relations Officer, which should contain: (i) the information envisaged in Article 12 of CVM Instruction 358/02 and items “i” through “m” of clause I of Appendix II CVM Instruction 361/02, as amended; (ii) information about any other corporate rights owned by them; (iii) information about the obligation to carry out a Public Tender Offer (PTO) to attain the Material Shareholding Interest; (iv) information about the highest price paid by the New Material Shareholder in the twelve (12) months before the Material Shareholding Interest was attained, adjusted for corporate events such as distribution of dividends or interest on equity, stock splits, reverse splits and bonus issues, except those related to corporate restructuring operations; and (v) information about the acquisition price per share that is the object of the PTO for attaining the Material Shareholding Interest that the New Material Shareholder proposes to pay, subject to paragraph 2 of Article 38 of the Bylaws. Provisions of this kind could cause difficulties or restrict operations that could be of interest to certain investors.
(ii) The Company does not have any controlling shareholder or controlling group holding more than 50% of the voting capital, which could make us susceptible to alliances among shareholders, conflicts of interest between shareholders and other events arising from the absence of a controlling shareholder or controlling group holding more than 50% of its voting capital.
The Company does not have one controlling shareholder or any group holding absolute majority of its voting capital. Thus, there could be alliances or voting agreements among shareholders, which could have the same effect as having a controlling group. If a controlling group emerges and it holds the decision-making power in the Company, the Company’s policies and strategies could undergo sudden and unexpected changes, including, but not limited to, the replacement of its management. Moreover, we could become more vulnerable to hostile takeover attempts and resulting conflicts.
The absence of a shareholder or controlling group holding more than 50% of the voting capital could make certain decision-making processes difficult as the quorum required by law for certain resolutions could not be reached. In this case, the Company and non-controlling shareholders could not enjoy the same protection granted by Federal Law 6,404/76 against abuses by other shareholders and, consequently, could have difficulty in obtaining indemnification for damages caused. At present, the Company is under the control of the founders who jointly hold 25.4% of the capital. Any sudden or unexpected change in our management team, our business policy or strategic direction, hostile takeover attempt or any dispute between the concerned shareholders and their respective rights could adversely affect the Company.
d) Risks related to regulation of industries where the Company operates
(i) The Company is subject to the risk of non-renewal of airport concessions/rentals.
In Brazil, the Company directly conducts rental operations at 70 airports, while its franchisees operate in 33 other airports. The Company conducts operations at each airport in Brazil pursuant to its concession/rental agreements entered into with INFRAERO or private concessionaires and state and municipal airport authorities. The terms of these concessions/rentals range from 12 to 120 months. Of the concession/rental agreements referred to above, 21 are due to expire in 2017 and 10 in 2018. In 2016, 33.0% of the car rental revenue came from rentals at airports (excluding revenues from car sales and franchisees).
Despite its scale in airports, the Company cannot foresee whether it will continue to be successful in renewing all or substantially all of these concessions/rentals on acceptable costs. The loss of a significant amount of concessions/rentals at small airports, or the loss of any concession/rental at major airports, could result in a material decrease in its revenue and could adversely affect its businesses, operating results and outlook.
(ii) Changes in tax legislation could result in increases in certain direct and indirect taxes, which could reduce Company’s profitability
On a regular basis, the Brazilian government proposes amendments to the tax regime applicable to different sectors of the economy, which could result in an increase in the tax burden of the Company and of its clients and suppliers.
Such amendments include changes in rates, calculation bases and deductibility hypotheses, and occasionally the creation of temporary taxes whose receipts are allocated to specific governmental purposes. If these changes increase, directly or indirectly, the Company’s tax burden, its gross margin could be reduced, which would have an adverse impact on its business and operating results.
Changes in Brazilian law resulting in higher tax rates could adversely affect the operating results of the Company. The federal government is discussing a tax reform that is analyzing certain alternatives for simplifying the tax code, which could increase the taxes payable by the Company. The alternatives include the return of Provisory Contribution on Financial Transactions (CPMF) and the unification of Social Integration Program (PIS) contribution and the Social Security Financing Contribution (COFINS). Furthermore, although no longer a priority anymore, the possibility exists of: (a) increasing Withholding Income Tax (IRRF) on payment of interest on equity paid or credited to partners or shareholders from 15% to 18%; (b) limiting Long-term Interest Rate (TJLP) percentage applicable to equity to 5%; and (c) suspending the tax benefit for technological innovation research and development established by Law 11196/05 (“Lei do Bem”).
If these changes increase the Company’s tax burden, its profit margin could decline, adversely affecting its results.
Moreover, the reduction in the federal value-added tax on manufactured goods (Imposto sobre Produtos Industrializados, “IPI”) on new vehicle sales affect directly the market for used vehicles. If the IPI on new car sales were reduced, the residual value of the Company’s vehicles also would decrease, which could have an adverse effect on the deprecation of the cars of the Company and its subsidiary Localiza Fleet and, consequently, on their operating results.
e) Risks related to clients
The Company is subject to credit risk due to lack of payment for car rental by customers and on the sale of decommissioned cars. In the fiscal years ended December 31, 2016, 2015 and 2014, payments in installments or payment methods other than credit cards represented 90.3%, 67.4% and 67.6%, respectively, of the Company’s accounts receivable. Losses above the estimates could adversely impact the financial and operating results of the Company. Likewise, the Company is subject to credit risk regarding customers for fleet rental of companies and franchisees, in case of breach of the respective agreements.
f) Risks related to foreign countries where the Company operates
(i) Losses of franchise agreements abroad
Besides Brazil, the Company operates in six South American countries (Argentina, Chile, Colombia, Ecuador, Paraguay and Uruguay) on a franchising basis, with total annual revenue of R$1.4 million, R$1.6 million and R$1.0 million in 2016, 2015 and 2014, respectively. The loss of any international franchise could affect the Company’s distribution network in South America.
g) Risks related to subsidiaries
Risk related to the wholly owned subsidiary Localiza Fleet are basically the same as those related to the Company’s activities.