Localiza Rent a Car S.A. (RENT3) Earnings Call Transcript & Summary

[Foreign Language] We have 45 participants and being on time is one of our values. So I'll begin the presentation. First of all, I'd like to thank everyone for your presence. I know it was short notice for many. So I have with me Oscar Bernardes, the Chair of our Board of Directors; Eugênio Mattar, CEO and founder of Localiza; Rodrigo Tavares, our CFO. So we're going to talk about our governance and succession journey and talk about the questions that arose from the proposal that we submitted. Given the number of participants here to organize things, I'd like to ask you to send your questions to [email protected]. We'll receive the questions and answer them throughout the webinar. The ones that we don't have time to answer, we will answer them later. So it's important to get these questions by e-mail. The meeting is being recorded. We're going to make the link of the presentation available on our Investor Relations website. So I'd like to start off by saying that since we have simultaneous translation, the presentation that we're going to show on the screen is the presentation in Portuguese, but the link for the English presentation is available on our IR website, and then we'll send it later on, so at ir.localiza.com under Presentations. I'm going to share my screen. Please let me know when you can see it.

Yes, we can see it.

Okay. Thank you. This is what we're going to cover today. We're going to talk about the highlights of 2020. We're going to talk about the Board of Directors and our journey of governance so far, the agenda for 2021, the succession process and lastly, compensation. And then we can cover all the topics related to General Shareholders meetings. I'd like to remind you that it was a very challenging year. 2020 was very challenging, but the company was able to prove its adaptability and resilience with a record profit of over BRL 1 billion and our NPS in excellence value. We've evolved the ESG agenda by neutralizing the carbon emissions 1 and 2 for 2019. We established a partnership of commitment to the climate. We entered the carbon disclosure project questionnaire. We launched the diversity and inclusion program with five groups of affinity, gender, LGBTI+, migrants and refugees and people with disabilities and race. So we also have a volunteer team. We have over 500 volunteers to disseminate that cultural diversity at the company. We also evolved a lot in the corporate citizenship agenda. That was intensified during the pandemic. We created Localiza Institute that will manage -- mainly manage the S component of ESG. And we also obtained ISO 37001 certification for anticorruption. So we also have investments in the future of mobility. We've launched Localiza Labs, Localiza Meoo in September and bought Mobi7 telematics and Internet of Things company in March 2020. So we have also have to mention the announcement of the year, the combination of our business with Unidas, all of that maintaining a high level of engagement of our employees. So Localiza is among the 10% best evaluated companies in terms of engagement. And this year is even increasing our figures, going relevant with relevance into 90s. So that's a very robust assessment even during the pandemic. That shows our care that we have with our customers, our results and also with our employees. Now I'm going to hand over to Oscar. He's going to talk about our journey throughout the past years. Oscar, the floor is yours.

Good afternoon, everyone. And good morning to the ones that are in the U.S. So I'd like to take this opportunity to put to you up to speed of the activities of our Board of Directors in the past 4 years. In 2017, we decided to update our culture program to adjust to the company's growth and market evolution. Many changes were made in relation to the people, the size of the company and the competitive dynamics. Therefore, we believe we had to update our culture. We defined our purpose, which is building the future of mobility in a sustainable manner. And we clearly showed our pillars, which are our customers, people and results. In the past years, we renewed the Board to include new competencies and skills. We had 4 major changes to the Board. We defined the roles of the committees, including independent external specialist in each one of the committees. We strengthened our compliance model. We reviewed the limits for approval. We defined the referral policy and the corporate risks management. Now we're concluding Eugênio's succession plan as announced. Given the need for Eugênio to become the executive chair for a short-term period to support Bruno, especially given the merger with Unidas. It's not a position that we see as a permanent position in the company. But for these more critical times, we believe that's essential to have Eugênio's full-time dedication to the company. We're proposing the creation of the reference administrators and shareholders program. Eugênio will give the details on that. The important thing is that we began this process of bringing the Board members closer to shareholders, and that will be permanent. That was not only done for this shareholders' meeting. We actually decided that, that is a need and that we will develop it more and more. Our current governance structure. Next, our core -- our current governance structure has 2 areas: internal audit and compliance that report directly to the Audit and Risk Committee. We already have mentioned these 3 committees. And we're creating the Tax Committee to comply with the requests of our shareholders. And we will have to manage any duplicate roles between the Audit Committee and the Tax Committee, and that is another challenge that we have. 2020 was a year of many challenges for the Board. I myself was surprised when I saw the number of meetings, a total of 52 meetings, being at 30 of the Board, 12 of the Audit Committee, 7 of the People Committee and 3 Governance Committee. And why did we hold so many meetings? Because we had many challenges: we had to face the pandemic, which required closed work during many weeks. We had the fiber attachment, which also required dedicated attention from the Board. And we had the entire Unidas process that involved many strategic discussions and meetings with specialists, so that we can feel comfortable in the exchange relationship that you approved, a lot of time discussing succession, among other many important matters. But you can reassured that the Board worked a lot in 2020 that was elected by you. As we have done in the past 3 years, we did an assessment of the performance of the Board and the Board members through an external specialist. And we're very proud that we've received good score in all the items in the assessment. And each year, the Board is getting better and better. We believe -- go back. Sorry. The competencies matrix of the Board meets the challenges, and we're suggesting the reelection of these Board members because we believe that they have an adequate balance of knowledge of the company and also new visions, perspectives and skills. I know that there's some restrictions in relation to the level of independence of the Board members that have been with the company 14 and 12 years. But at this time, we believe that it's critical for us to have that company memory and history alongside all these new Board members. And I'm very happy to have supported Localiza in its governance, and I'm prepared to support Eugênio in future challenges, including the incorporation of the new Board members that will come after the merger with Unidas is concluded. To talk about the 2021 agenda, I'd like to hand over to Eugênio, as he is the person who will implement that governance agenda for 2021. Thank you, everyone.

Thank you, Oscar. The host has to allow me to open my camera. Thank you. Good afternoon, good morning to everyone. Thank you, Oscar. The 2021 agenda starts off with me. And with good governance and good standard of succession at Localiza, I asked Oscar to stay with me 2 more years to be my mentor as the Chairman. The 2021 agenda is an agenda with a lot of work involved. We start off with the initiative of having more connection and engagement of the Board of Directors with investors to hear investors' demands and having that best connection with management, reinforce communication and the responsibilities of the Executive Chair and the CEO, so everything works well. The approval of the program for reference shareholder managers, which is part of our plan of having a succession in the best quality possible, monitoring the actions in relation to the CADE, which is the Brazilian antitrust regulatory agency, and the process to integrate with Unidas, which would be next year. To integrate the companies and make the culture fit, consider the culture and the best processes and the sustainability and materiality matrix review, we truly want to be a company that invests not only in the environment, but also in social as we have an excellent governance standards. And then we're going to define the significant and material topics to define the KPIs for ESG, include the sustainability goals in the C-level management contracts and commitments in the long-term with ESG. Next, Nora. So let's talk about the succession. First of all, first and foremost, we want to have a succession program absolute excellence. In our program, we have a double succession that is being planned since 2016. We have the succession of a founding CEO to an executive CEO and the Chairman to the Executive Chair. And we are handling this with excellence. And in fact, to have excellence in this process, we developed a program for reference administrating shareholders. And I'm going to explain why this idea came about. First of all, the 4 founders started this Car Rental business 48 years ago with 6 used and finance Herbies. Everybody knows that story. Today we're a world-class company, BRL 45 billion in market value and the benchmark in management and generating value. You know that our TSR since the IPO is approximately 30% per year. And the founders are still close to the company, monitoring company's performance and all the challenges that are faced and always contributing whenever necessary and required. In addition, as founders, we created a forum to develop the next generations to get them ready as shareholders. Looking at the future, we realized that our car rental industry and particularly Localiza, given our position in the market and our skills and all the skills that we have to developed has a number of opportunities to grow in transforming the mobility of the future and generating continued value for all shareholders. So we created the program of subscription cars for individuals, small- and medium-sized companies, cars for app drivers and so on, where we have a lot of opportunities for growth in the future. When I took on as CEO in 2013, to me, it was very clear, my 4 main goals. The first one was to have the succession of the management team, which was the reference back then, but they had gotten old, all of them together. So today we have a young team, a world-class team in many different company levels. My second goal was to accelerate growth even in a low-growth environment of the GDP. So when we look back, since 2016, we've been growing over 20% per year. My third goal was do the company's digital transformation in customers' experience in the way we operate the business and in creating new digital businesses. We created Localiza Labs in agile management model of integrating business and technology. We created Localiza Meoo, Localiza Drive, and we're in the vanguard of our industry in the world. The fourth objective, which is why we're here today, was to carry out my succession with excellence. So we trained a successor internally with the competencies of the future to make our dream come true of being a company that is highly relevant in the world of mobility and make value generation long-lasting for all stakeholders. However, even more than the new executive succession, we're dreaming more. We want relevant partners in the execution of the company day-to-day work, as we've had in the past 48 years. With that idea in mind, in parallel to the work of the founders, in training the next generation to maintain their participation in the company and preserving the culture and acting as potential executives or Board members without ever leaving our strict model of governance behind, in 2018 we hired a consulting firm to determine the best practices and succession of founders and to listen to all our stakeholders, a very well-planned program, which was very carefully planned. So we idealized and the Board approved this program of reference administrator shareholders for management that are [ sects ] by -- according to their skills, energy, transforming culture and exemplary behavior as actual owners. So this is a very long-term program. It's a 20-year program. It's restricted to a few executives, to a few people, so that they have a relevant shareholder interest across time and turn Localiza into their personal program for life. So we're going to allocated 2.5% of the company shares to be granted through this program. The concessions or the grants will also be in a long period, 10 years, and 65% in the last 12 years and 55% in the 10 -- and only in the last year, the 10th year. The People's Committee will choose them, and it has to be approved by the Board where no -- so governance independent without interested parties with permanent monitoring of the consistency of the deliverables and considering these grantees and potential future receivers knowing that the people that were referred deserves that grant and deserve to be a part of the plan. If not, we can discontinue the program and they would only receive what was already vested. So there's the callback in the program. If there are any conduct deviations, which we don't believe that's why they're being chosen, but that will make all investors feel confident that there's absolute governance in the program and represents the interest of all shareholders. Initially, we will refer the CEO and another executive director who were assessed by us and 2 people that we would love having as actual partners of the company, relevant shareholders of the company and that are part of the company's day to day, so 2 executives that were very important for the company in the past 5 years and especially for me to be able to achieve my 4 goals that I mentioned. Another fact is that the grant should be relevant in the first grant for each referral to establish a new status and the size of that responsibility that they will have. This is a partnership program. It's not a compensation program. Compensation is separate. That's as an executive, this is a partnership program. But according to Brazilian regulations, we don't have the ground have a partnership agreement. So to be legally compliant, we're going to handle this as a compensation program, considering the costs in the income statement and reporting that in the chapter of the reference form as we'll further address and avoid to delude the shareholders in these grants. We'll also have -- be active in purchasing shares and opportunities, so that we can mitigate the cost of these grants. For instance, the one that we're doing this year, in 2019, we were already considering this program. And then the pandemic came in and the share prices dropped. When we bought back shares, which already have sufficient results to do the grant that we have, so it's 0 cost. Not to mention that we're going to report these grants in income statement as a cost and the buyback of shares that are already in the treasury, that gain goes through these shareholders' equity, so they won't be reported in different places. But for the effects of final assessment of shareholders, we're going to offset that whenever possible. And to be very straight, we carefully had a road show with many shareholders in Brazil and abroad presenting this program that will go to the shareholders' meeting for approval, and we're also sharing it here with all our investors in this webinar. And in the road show, we had an excellent evaluation about our intention and the program. And to conclude, I'd like to end by saying that our intention is to be remembered in the future for what we did and how we did it to make the company a world-class company that generates value for all shareholders. That what's truly brings us together. So on that page, there's a summary of what I just mentioned. I'll ask Nora to move on to the next page that has a summary of the plan that I already mentioned. Nora?

I'd like to remind you that this material will be available. It's already on our IR website. This is a summary of what Eugênio just mentioned. This is the summary of all the characteristics of the program. So as we mentioned, it is a very restricted group. So Oscar has been saying, it's probably just a handful of executives for a program that would last 20 years with the possibility of annual grants, it doesn't mean that we will. A limit of up to 2.5% of Localiza capital stock with the best being distributed in 10 years, 10% third year, 15% the fifth year, 20% seventh year, and the rest, 55% in the tenth years. So as Eugênio mentioned, so 75% in the last 3 years. So with this referred -- referrals come from the People Committee from the Board of Directors and approved by the Board, not directly connected to performance. That's part of the compensation program that is subject to the assessment and dimensions of customer leadership, sustainability and value generation. So performance will be measured in those dimensions. The share grant model that will be taxed as compensation and booked in the income statement. We don't like a pro forma adjustment, so that will go through our costs and expenses. To talk about compensation, which is probably the last one in the manual, Localiza has a compensation mix that's divided into 3 groups. So fixed compensation in the last year, 55% of the management was comprised of fixed compensation. And we have the short-term incentives and long-term incentives. They're connected to KPIs, and you can see that on the right side of the slide into 3 major groups, corporate goals. So they're in the management contracts for all employees. And it's a proxy of the EVA and organizational climate, which means engagement. That's what we showed you in the second slide. So it's important to achieve results with a motivated team and an engaged team. The second component the -- of the big goals, the individual goals, such as growth, NPS, healthy brand positioning, productivity. And that depends on the position and the role of each employee on the platform, plus competencies assessment, which includes customers, market results, leadership innovation and integrated actions. So for the short-term bonus, we have to have an assessment according to the management contract performance and that will determine profit sharing. And based on that bonus, we can invest that in the long-term incentive programs through the coaptation or matching. So the new program that Eugênio just mentioned is more about shareholder participation as he mentioned, but it doesn't change our compensation. So obviously, it will be in the compensation factor in the income statement in Chapter 13 number form, but the traditional components of compensation do not change. Nothing changes about these components. But you can see that the proposal for 2021 has 20 million extra, which is the effect of that first grant that fits into the first year. So last year, the proposal approved minus taxes was 59.74. And this year, we submitted 80 million to the General Shareholders Meeting, and that's part of the first concession that we're -- or grant that we're proposing this year. That was the summary. That's what we wanted to present. And I'm going to try to moderate the questions that we have. So to organize things, please ask the questions via IR website. We already received some questions in advance. So let me start off with the first one.

I'm not going to say the name of the person that sent the questions. So the first one is, how will P&L be impacted by 2.5% of capital in the next 20 years? Will the P&L be affected by that? Eugênio, can you answer or Rodrigo?

Yes, I can answer, Nora. So the costs will be diluted in 20 years. And then we'll handle that in the income statement. There's a gross amount and net amount of income tax, and that will be part of our cost. So we're going to try to offset that, as I mentioned, offset these costs with potential opportunities to buy back shares, as we did with the first tranche that we're going to grant. We already got money from that because of the back in March. So it's a long-term aspect and it will be a part of the company and costs in a very transparent manner and clear and very adequate. 2.5% in 20 years is very suitable and much lower than what the market usually practices. But we believe that that's more than enough because it's just for a few people. It is a separate program. We're very comfortable with this grant.

The follow-up for that question Eugênio is for a full retirement of Eugênio, even as the Executive Chairman, what are the main topics that we should monitor?

First of all, I hope that my handover to the executive Chairman is brief, after we conclude the merger with Unidas and Bruno being established in his position and being freer to working on the institutional side as well. I'm planning on working on my succession as I did when I became the CEO. I'm going to consider who can be my successor. If there any problems come up or after we're actually ready, the bylaws enable me to work up to 75 years of age, but I don't have to stay that long, it could be a bit earlier or a bit after. Our committee has an assessment, and almost all of our Board members are independent because we go through a straight permanent evaluation. And depending on the assessment as a Chairman, I can go up to 75. But that depends on the Board's evaluation and also investors' perception of us here, all the investors that are here. So that's the plan. And I hope that I can do that with all the excellence that I've handled the discussion on all Localiza executives of how we handle the succession of the CEO now and the succession of the Chairman. So that's the standard of excellence that we permanently want to apply at Localiza.

Eugênio, who would be the Board members responsible for managing this plan? And are they among the eligible beneficiaries? I think you already mentioned that. Would you like you so the comment again?

Our People Committee is spearheaded by [indiscernible], so it' is his responsibility. And in the People Committee, we don't have any beneficiaries. And this is a process that you listen to the company, you listen to investors, you listen to the founders. All of that is analyzed by the People's Committee, who will recommend them to the Board. So you can see all these different dimensions of all these stakeholders involved in this process and then we present that to the Board. And in the Board, there are no potential beneficiaries either, so just management that are actually working in the companies day to day.

I'm getting more questions here. So how the goals or performance evaluation be connected to the shareholders' interest? And how will that evaluation be carried out? And lastly, an estimate of the number of beneficiaries.

First of all, there's a formal evaluation, 360-degree results that all our management undergoes. That program is -- this program actually is a partnership program. It's a shareholder's program. So when you look at the senior management of the company, so which ones in opportunities come know how to make things work to capture those opportunities? And who are those people in times of trouble, such as now, during the pandemic, are the ones that know how to navigate in such troubled waters? What is their behavior? So we elected or chosen a restricted group. It's just for few and why few? Because we want these 2.5% to be distributed to the people that are able to have a participant or relevant participation in the company. So if you talk about 5%, 5 people, that's 5% for people, so that for each person, that's pretty relevant. And we have growth expectations for the company in time. It's not a program for many people because we don't want it to be diluted. We want that throughout these people's lives and their careers, they will have a very relevant shareholder position. I think it's worth mentioning, Eugênio, that these reference shareholder executives who have close contact with the founders and the second generation of the founders, they will be part of training forms with the second generation because, in fact, what has been designed here is how you can make these values and the founder's contribution long lasting for the company, which added a lot of value, and we want to maintain that. It's not that the founders have demanded the company. Quite on the contrary, they're still very close to the company. And we want these reference managers to be a part of that group.

That's well noted, Oscar. And their assessment will be a permanent assessment. So every single year, we'll be looking at them in 4 different dimensions that Nora mentioned: customers, don't forget that Localiza is obsessed with customers; results; their actions in ESG; and in leadership. So people that were -- that have these shares grant, it's a 10-year program, so they have to perform in those 10 years accordingly, and not only company performance, but also tier personal performance. So why are we not saying goals? Because it's a 20-year program. And if we have a market crisis and the share prices dropped for the entire market, that wouldn't be an objective assessment. So how do we behave in relation to the market in general? So it's objective. It's qualitative with objectives by generating value, in the perception of customer quality, in ESG and in leadership. During a crisis, you can see who the real leaders are. In times of trouble or an opportunities, you can see their ability in leadership. So it's a permanent evaluation. And if in 5 years from now, that executive is no longer performing, they can lose that grant or they'll receive what has already been vested, and the rest, they will not receive. So it's a strict permanent evaluation process. And these grantees have to do their work in the long term. They'll be part of the founding shareholders forum to connect the new with the old. In the future, we want that to be a continuous cycle.

[Operator Instructions] We have some more questions, Eugênio. Please explain again as it's a 10-year investing, why does the program last 20?

Good question. Great question. We're going to grant to the CEO right now as we mentioned, in 3 or 4 years from now. I'm not going to give him the entire grant, just a relevant asset. So for every 4 years, so the third year, he vests the first one. And after the third year, we'll have other grants potentially. And we want a program that where they accumulate this -- these shares, so we have a relevant shareholder in the future. If one is set at 4 and the other at 8 and the other at 12, this is -- what we're really considering is very long term. If it's 12, it's going to vest in 20, right? When you granted 12, but they vest in 20. So a relevant one for the first referral. And then it's only new grants over 3 years. So it's a very well-designed program to have consistency and actually be a long-term program. To summarize, the 20 years of firm grants, the last grants could be on the 19th year and then you have the 10 years for vesting. So that's what we're saying and even to fit in new executives, so that they can be a part of the program. So as we mentioned, today we're starting off with the 2 executives, but that number could be greater in the future considering all the prerequisites and the performances and the dimensions that Eugênio mentioned. It's always going to be a very restrictive number of people.

We have 2 more questions here. Since it's a partnership program that's in addition to the compensation program, why not 100% of vesting in the 10th year?

That's a good question. We want people to start to have that perception of value of getting dividends, of being a real shareholder, of being a part of the forums, the founder's forum of being perceived by investors as a shareholder. And if we let that to the end, only in 10 years from now, they wouldn't feel that. Our original design was even considering something else. But according to Brazilian regulation, we learned some interesting -- we saw some interesting things in the market, but we can't apply that because of Brazilian regulation. So it's -- so the person can perceive that or realize that they're actually a relevant shareholder, first of all, because of a bigger brand in the beginning and they build on that net worth across time. And we want them to make this part of their wealth and not getting rid of that. So -- and that's another important thing. I've seen their partnership engagement across time, their shareholder engagement. So that's an excellent question. Thank you. Out of -- we consider loan for use shares, but there's so many legal implications that it's not worth it.

I think we have no further questions from e-mail or WhatsApp. We can conclude. Eugênio, Oscar, would you like to say anything?

I would like to thank everyone and remind you that we're always available to answer your questions. You can talk to Nora. She can put us in touch. So reach out to us. One thing that we're truly beginning, and we will maintain this big integration with our investors. Every year, I go to Harvard for a program, and I've read an interesting article, it's called the Missing Link. And it was always talking about the fact that Board of Directors weren't talking to shareholders, and we want to end that. We want to create a very productive link for contact with our shareholders. Thank you for your participation.

I would also like to thank everyone for their presence. And once again, I'd like to reaffirm as a relevant shareholder in the company, the founders, all 4 of them in sync with this process. We truly believe in the company. We truly believe in the team and everything that we're doing. And we want to have a succession plan of excellence. As we don't have a natural succession, family succession, we're doing it with management, including people -- in bringing people in that will have a relevant shareholder position, so they can truly be engaged with the company. This works very well. Many companies do this well. And Localiza wants to do it even better. So our intention is to be the benchmark in this process and generate value to everyone who is here who are all investors or representing company investors. So thank you very much. If you have any questions, as always, our doors are open. Our IR team is always ready to answer any of your questions and so are we. Thank you very much. And good afternoon to everyone.

Thank you. Good afternoon, everyone.

Thank you. Bye-Bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]