Localiza – Rent3 BS

Disclosure

The Research Analyst who has written this report does not hold securities in the subject company and has not
received compensation from it at any time. The Research Analyst has not also collaborated with the subject
company‟s accounting and financial divisions or participated in its marketing activities. The same is applicable
to the subject company‟s competitors. The Research Analyst also certifies that the content and the conclusions
of this report represent the true opinion of the author of the report.

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“Agility and speed in delivering information is part of our commitment”

(Localiza‟s Book of Values and Code of Ethics)

Localiza Rent a Car – RENT3 - rents automobiles, through Localiza, sells used cars through Localiza
Semi Novos, offers fleet management through Total Fleet and owns franchising through Localiza
Franchising. Localiza and its subsidiaries had 3.195 employees in 2008, up 18.7% compared to 2007, when
they had 2.692 employees. Present in 203 locations it has a fleet of 33.378 cars. In 2005 Localiza was worth
R$1.017bn. According to Nora Lanari, Localiza‟s Investor Relations Analyst in Belo Horizonte, “Localiza‟s
business is the renting of cars. The integrated platform of Localiza‟s business is composed of the rent a car
division, the fleet rental division and franchising of the car division. The renting of cars is run by the company
or franchisees. The fleet rental service is managed directly by Localiza‟s headquarter”.

Localiza Rent a Car is the largest rental car company in Latin America. Only in Brazil, Localiza has been the
market leader since 1981. With a net revenue of R$446,1ml and a net profit of R$30,2ml until March 31, 2009,
it operates synergically through Localiza, Total Fleet, Localiza Franchising and Localiza Semi Novos. Localiza
Rent a car serves corporations, the travel industry, individuals, insurance companies, mini lease and
replacement. It has the largest fleet in Brazil, with 33.378 cars. Its EBITDA until March 31, 2009, was
R$115,4ml. The company had an increase of 8,5% in the average rented fleet of the car rental business, and of
the fleet rental business of 25,8% until the end of March 2009. Its main competitors are Hertz, Avis and
Unidas.

Localiza

Vision: Be an admired company; Business: Mobility with convenience; Mission: Contribute to our business
success and to the clients‟ leisure, renting cars with efficiency and kindness; Principles: Value the client,
praise our collaborators‟ performance, ethical behavior, care for the company‟s image, strive for excellence, add
value to the company.

“The secret of well-succeeded companies is always to have a Spartan philosophy and to put clients first”
(Salim Mattar, Founder and CEO, Localiza Rent a Car, 2005)

According to Salim Mattar, Localiza‟s Founder and President, in an interview for IstoÉ Dinheiro in 2005, had
Brazil a culture of renting cars, there should be in the market 200.000 vehicles, four times the amount it had in
2005. He also said that, Localiza‟s “multiplier in relation to Brazil‟s GDP is eight times. If Brazil grows 1%, we
grow 8%. If it grows 5%, we grow 40%”. According to Mrs Lanari, clients who rent a car do so, “in 80% of cases,
for business related matters and 20% for leisure”. She also said that the company “kept the rental car rates the
same from 1998 to 2008, in nominal terms”, and the increase in the rate has only occurred given “the drop in
the volume and price of used cars” in the current crisis. The conclusion is: Localiza has been growing over the
past years, even though its prices have been kept the same in the same period, in nominal terms.
Localiza Rent a Car has been a market leader for so long in part because it has adopted international standards
of Corporate Governance well before Bovespa‟s New Market became a reality. The company has reportedly
adhered to the USGAAT from the Securities and Exchange Commission since 1997, perceiving that, in a
foreseeable future, transparency in conducting its businesses would be a sine qua non condition to strengthen
its market leadership. Furthermore, the company has invested heavily in its people, preparing them for the
most pressing demands of clients, without losing their professional demeanour. The girls, with impeccable
uniform and make up, and the guys, half casual, half socially dressed with ties.

It is also a company of vision and effectiveness, for its leadership in the rental car business dates back to 1981,
in a demonstration that its management has a passion for being at the top of the game. Not surprisingly, two of
the business schools where Localiza sends its employees to take their MBAs are Fundação Dom Cabral, a
leading business school in Minas Gerais and to Kellog School of Management. FDC has also partnered with the
World Economic Forum in the issue of The Brazil Competitiveness Report 2009, edited by Dr. Carlos Arruda,
FDC‟s professor of Innovation and Competitiveness, Marina Silva Araújo, an FDC economist, Irene Mia and
Emilio Lozoya Austin, from the World Economic Forum.

We also think that Localiza‟s vision, business and mission has been fulfilled, by the way we saw its staff deals
with its customers – we made phone call to Localiza Semi Novos anonymously and went there to see and talk to
the employees. We did not contract its services, though. As a result, we cannot say a word about the cars and
the renting and sale processes themselves. But we considered the customer service of quality. As for its
business, we did some simulations both in Portuguese and Spanish in its website, as though we were to rent a
car and found the process easy to handle. The program is the same in both languages (Portuguese, English and
Spanish). It is simple, fast, agile and convenient. If the client has access to the internet, wherever he or she is he
or she can make a reservation at Localiza. As for its principles, we believe that Localiza does value the client,
treating him with impartiality, courtesy and professionalism. Visiting its stores we had that impression, as well
as a sense that its employees try to follow Localiza‟s principles, namely, acting ethically, taking care for the
company‟s image, and striving for excellence.

The Independent Internal Committees

Localiza has five committees (Personnel Management, Ethics, Disclosure, Board of Directors and Audit
Committees), which oversee every detail of the company so as to hold every collaborator accountable for the
company‟s Book of Values and Code of Ethics. This initiative demonstrates independence, high standards of
governance, professionalism and objectivity in dealing with company matters of importance not only to
Localiza itself, but also to customers, suppliers, investors, collaborators and the community.

Furthermore, we believe that Localiza has been taking further steps to curb the negative effects of the current
crisis by stating that it will suspend the “acquisition of new cars to adjust the fleet”. It has also stated that the
company “will maintain its current position of focusing on liquidity and funding operations with its own cash
flow”. Localiza has also assured it has the intention to pay “in advance almost all its short-term debt”. In view
of that, we believe that the company has strong foundations in which to navigate in these turbulent times and
that it is likely to emerge stronger and more competitive by the end of 2009 or the beginning of 2010.

In a reportage, the magazine Capital Aberto gave us some insights into how Localiza might recover more
rapidly and become more profitable. It should keep paying attention to: 1. the growth in Brazil‟s air traffic,
since the more people travel, the more cars are rented; 2. the outsourcing of fleets by companies, eager to
reduce costs. 3. The inclusion of Localiza cars as stand-by cars in the insurance company‟s portfolios.

Brazilian Auto Industry News

According to Reuters, “the production of cars in Brazil has dropped 6.9% in April compared with March, to
254,7 thousand units”. Only in the three first months of the year there has been a drop of 16,4%, with less 916,2
thousand units produced nationwide. As the government has announced the reduction of the IPI (Tax on
Imported Products), to boost the automotive sector as a whole early in January, it seems that it has helped keep
the sales flat. As a result, the car sales in Brazil has seen a weak drop in sales in the four first months of 2009: -
0,7%, even though only in April the car sales has had a drop of 13,7%. Car sales are likely to have the first drop
since 2003 in Brazil, of 3,9%, to 2,710 millions of cars sold year end, forecasted Anfavea, the Association of
Producers of Cars. Anfavea has also forecasted a “decline of 11,2%” in the production of cars in Brazil, “to 2,860
millions of cars, a 11,2% decline, the first one since 2002”, says the reporting.

That said, it is going to be, more than ever, important to Localiza strive to continue to create value through the
company‟s “business integrated platform, web of distribution, brand, know-how, point of sales of used cars,
rating, amongst others.”

www.localiza.com

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Localiza Franchising

Vision: contribute so that Localiza becomes an admired company; Business: business opportunity;
Mission: contribute to the franchisee‟s success, transferring know-how with efficiency and promoting strong
relationships; Principles: Value the franchisee; praise our collaborators‟ performance; ethical behavior; care
for the company‟s image; strive for excellence; add value to the company

Present in 217 places in 8 countries, namely, Argentina, Ecuador, Paraguay, Bolivia, Chile, Colombia, Peru and
Uruguay, Localiza Franchising has a fleet of 8.247 cars. It focuses on brand licensing, transference of know-
how, assistance, support and franchising network management. The franchising business poses great growth
opportunities for Localiza Rent a Car not only in Brazil but also abroad. Only in Brazil, Localiza has 94 cities
with open franchising opportunities. There are also 21 open opportunities in Argentina, 2 in Uruguay, 4 in
Bolivia, 8 in Chile, 9 in Ecuador and 2 in Paraguay. If fulfilled this franchising potential both internally and
abroad, Localiza will add these franchisees to its more than 400 locations open throughout Latin America.
More importantly, this expansion means a long term advantage to Localiza, for it will enable the company not
only to consolidate its market leadership in the region, but also devise new strategies on how to diversify and
create synergies amongst its businesses in the region and beyond.

Yet, while we believe that Localiza has the expertise, the vision and drive to fulfill its full potential in Latin
America, we also think that by focusing only in South America, the company is overlooking some of the most
desired touristic regions in the world, namely, the Caribbean and Central America. Those places would be an
outstanding and highly profitable market for Localiza, since they are places where Cruises packed with tourists
normally come in the morning and leave at night, leaving tourists free to know the places. Therefore, Localiza‟s
services might help tourists to know, in a short space of time, the natural beauty of those little countries.

It is also noteworthy that in the latest Global Competitiveness Report (2008-2009), from the World Economic
Forum, Panama ranked 48(score:4.24), Costa Rica 59(4.23), Barbados 47(4.40), Puerto Rico 41(4.51), whereas
Brazil ranked only 64(4.13) and Argentina 88(3.87). Thus, for Localiza, Panama, Costa Rica, Barbados and
Puerto Rico may well be already structured and well-positioned to absorb Localiza‟s rent a car businesses
effectively. At the same time, these countries could be a bridge to the company to larger and other important
markets, such as Mexico, Venezuela, Canada and the USA. In view of that, we think that if Localiza business is
“business opportunity”, it should go north to the Central America and the Caribbean, before its competitors do
so.

We also think that, beyond the Americas, the key for Localiza‟s expansion might be to know in detail in which
countries there is a great amount of people and influx of tourists; places where, at the same time, the public
transport is deemed deficient. We have got some examples: Egypt, India and China, which we think might be a
good bet.
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Total Fleet

Vision: be recognized as the company that has the best renting solution and fleet management in Brazil;
Business: productivity; Mission: contribute to the success of our clients‟ businesses, through both an
efficient renting and fleet management; Principles: value the client; praise our collaborators‟ performance;
ethical behavior; care for the company‟s image; strive for excellence; add value to the company.

Total fleet is a pioneer in its segment in Brazil. Its launching dates back to 1998, when Localiza Rent a Car
decided to convert its fleet rental division into a separated company. The result was the emergence of Total
Fleet, which today has more than 20.000 cars, cutting edge technology to manage its fleet system in order to
supply the demands of corporate clients nationwide. Once the cars are no more used in Total Fleet, they are
sent to Localiza Semi Novos, to be sold to the final customer.

Even so, the fleets have a high level of depreciation. To diminish those negative effects and boost the sale of its
used cars, Localiza has increased the number of promotions for clients and advertising in the media.
Furthermore, the company has increased the car and fleet rental rates to offset that cost of depreciation of its
fleets.

Associated to the Fleet Synergy International, Total Fleet has international standards of fleet management of
its 21.608 cars.

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“We have always had confidence in our business and in the future. We know that the market, in Brazil, is
bigger than the crisis”

(Salim Mattar, Founder and CEO, Localiza Rent a Car, 2004)

Localiza Semi Novos

Vision: be an admired company; Business: trust; Mission: contribute to our clients‟ success in purchasing
quality used cars, with transparency and kindness; Principles: value the client; praise our collaborators‟
performance; ethical behavior; care for the company‟s image; strive for excellence; add value to the company

Localiza Semi Novos is a division of Localiza Rent a Car with 37 points of sale throughout Brazil. 79 per cent of
the used cars at Semi Novos are sold to the final consumer, according to the company. This subsidiary enables
the company to reduce the costs of depreciation of its fleet cars. Similarly, Semi Novos diminishes Localiza‟s
dependence on intermediaries. Also noteworthy, once there is an increase in the rental car demand Localiza
Rent a Car cannot deal with, the Semi Novos division makes it available for the renting division its fleet of used
cars so that the rental division can face that peak of demand rapidly in benefit of clients. Thus, through its
integrated platform, Localiza creates a business situation in which it has not only bargaining power, but also
cost reduction and can make cross selling.

Given the reduction of credit consumers are facing, the crisis hitting the auto industry, the reduction of their
expending and the high rates of unemployment and risk of unemployment many are facing these days, we
expect Localiza Semi Novos to act prudently so as to attract clients to its stores and avoid great losses.
According to Geração Futuro, “the sale in the Semi Novos is characterized as sale of active, there is no tax on
these actives similar to those auto resellers have to absorb”. In other words, the Semi Novos division can sell its
cars at lower prices than similar companies, for it does not have to absorb some tax and transfer them to
clients.
 Competitors
Unidas
We went to Unidas simulating
that we were interested in
renting a car and found the
customer service professional,
clear and direct. The vendor
did not have a prospectus to
give us, nonetheless.
Unidas has been in the
market for 23 years and has a
fleet of 27.000 vehicles to
serve more than 600
corporate clients nationwide
in the outsourcing of its fleets.
It has 120 points of sale all
over Brazil.
www.unidas.com.br
Hertz
Hertz is the world‟s largest car
general use rental brand. It
operates from 147 countries
worldwide. In Brazil, it is
Localiza‟s main competitor
not only due to its global
reach and expertise, but also
to its scale and ability to adapt
quickly to ever changing
competition circumstances.
We asked Hertz‟s Directorate
of Investor Relations for an
interview but received no
reply both from the office in
the Unites States and Brazil
last April.
www.hertz.com.br
Avis
Avis is a rental car company
with a global reach. It is
present in 165 countries and
has a fleet of 1.200.000
vehicles and stores in 4.800
places all over the world. Its
revenues in 2004 totaled
US$5,o0 bn worldwide. The
company has been in Brazil
for 26 years and is expanding
rapidly. In the last five years it
has reportedly grown 120% in
the country, reaching 100
stores.
www.avis.com.br
Winning Culture
In two visits to Localiza Semi Novos branches in São Paulo we could
sense that that this division of Localiza is not only very well-organized,
but also has a winning culture. Confident without arrogance, objective
and transparent without being ill-mannered; modern and dynamic
without losing the faith in its core values such as ethics and mutual
respect. Based on our visits and conversations with Localiza‟s
employees, we believe that this company has a winning culture, where
trust is an essential value and client satisfaction is at the heart of its
employees. We also made a phone call to Localiza Semi Novos,
simulating an interest in buying a car and received a professional and
friendly customer service. We got all the information we needed to buy
a car if we in fact needed one.
Courteous staff was what we found out at Semi Novos. According to its
employees, Localiza is an interesting place to work, and, in spite of the
crisis hitting the auto industry, the company is doing well and will open
18 new stores of used cars in 2009. Thence, more opportunities to
progress in the company will inevitably emerge, mainly for those
already in the company prepared to take up new responsibilities. These
openings will also bring in new talented people from the market.
According to Paulo César Negro, Localiza Semi Novo‟s Quality
Consultant, responsible for receiving the cars from Total Fleet and
Localiza to be sold at Semi Novos, when he was working at Absoluta
and Rommer, both car sales companies here in SP, the idea he had
about Localiza was that it was “a big and solid company”. He says that
that is the opinion outsiders normally have about Localiza. With over
ten years of experience in the car business, Mr Negro said that, once he
was hired by Localiza eight months ago, after a friend had told him to
apply for a place at the company, the opinion he previously hold about
Localiza proved true. As the conversation turned to matters of treating
all clients equally and mutual respect, we asked him whether he hold
those values before coming to Localiza or whether they were
internalized after being at Localiza. He said that he “already had those
values, but being at Localiza reinforced them in me, certainly”. A
courteous person, Mr Negro finalized saying that “Localiza gives me all
I need to do my job properly”, and invited us to have some coffee.
Marketing Strategy
“Localiza. Vai com você.”
“Localiza. Donde és facil alquilar un alto.”
“Localiza. We make it easy to rent a car.”
“Localiza has set an aggressive marketing strategy with advertising in
the major magazines, newspapers and radio. Moreover, it has a fidelity
programme that “keeps our clients abreast of many promotions”, said
Mrs Lanari. Moreover, the company has reportedly accepted payments
in installments in order to leverage the sales of used cars from
Localiza‟s rental fleets. Localiza has also accepted payment by credit card in installments without interests,
policy not matched by none of its competitors so far, says the company. The company also sponsors cultural
events, such as theatre productions and shows.

Community Affairs

Localiza Rent a Car takes part in a wide array of community affairs programmes, encompassing the fields of
culture, education and social action itself. By analyzing the projects Localiza supports we have some clues of
the coherence between the company values and its community affairs action. Thus, giving support to Junior
Achievement Minas Gerais, whose aim is to foster entrepreneurship values in Public Schools, means a natural
path to a company with an entrepreneurial spirit itself. The same may be applied to the Institute of
Entrepreneurial Studies, which intends to educate young business leaders whose ideals are those of being
social and political leaders who respect the principles of a free society, free economy and the rule of law.

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“Each employee doing what he or she likes means not only to value the individual, but energize the company”
(Salim Mattar, Founder and CEO, Localiza Rent a Car)

Human Resources Management

The company offers training to its collaborators as well as seeks to promote meritocracy. As a result, the level of
satisfaction of employees and the trust they have in the senior management is high, according to a Hewitt
Consulting survey made for the newspaper Valor Econômico. According to the survey, 80% of Localiza‟s
employees trusted their senior management leadership. In our visits, we felt that finding is likely to be true.
However, for us, Localiza‟s hiring process is not apparently any different from what other companies do in the
market. Thus, it seems that what sets Localiza apart from the competition are its strong core values, followed
by its employees. Localiza Rent a Car is one of the few Brazilian companies we saw that has stated clearly, as
multinationals normally do, that it wishes to practice “the principles of non discrimination on the basis of
nationality, race, religion, gender or age, promoting diversity”.

To be part of Localiza, a new hire is likely to have passed in several interviews. According to Mrs Lanari, “the
hiring process is made with a lot of criterion, so that our customer service continues outstanding”. There are
interviews, writing assessments, psychological tests, practical tests and oftentimes group dynamics. That way,
Localiza seeks to choose the right candidate for the available place. “We need to choose competent and talented
people, eager to contribute to Localiza‟s growth and success”, she added.

For Mrs Lanari, what makes it distinctive to work at Localiza as opposed to its competitors is, firstly, the fact
that in its field “Localiza is the leading company in the market. Furthermore, it has a remuneration and
benefits package that include fixed and variable remuneration and a stock option plan. For the best performing
vendors, there may be the distribution of trips, post-graduate courses, etc. As regards the stock option plan,
over of the 500 highest ranked employees are eligible to it”. We were also informed that for each car sold, a
vendor receives a commission of 0.7% over the sales‟ total value.

With reference to stocks bought by insiders recently, it has been stated that the purpose of the Share Purchase
Option (SPO) are to align “shareholders‟ interests with those of the employees; to retain talents; and to have a
long-term vision in the decision-making process”. There have been five SPO annually, starting in 2007, each of
them granting 900,000 options, totaling 4.500,000 options per programme. And the company reports that,
“on November 24, 2008, the discontinuance of this stock buyback program was approved, and 4,226,300
shares of a total of 4,500,000 authorized shares were purchased, for R$43.6 million”. In the 2007-2008
exercise, 291 employees reportedly took part in the SPO. The Board of Directors has also approved on
November 24, 2008 another buyback programme. This time, the number of shares approved for acquisition
has been 5,856,862.
Dividends
Localiza has stated that “in 2008, the Board of Directors approved early payments of interest on capital in the
gross amount of R$31.6 million or R$27.0 million net of withholding income tax. Management has proposed to
distribute R$5.6 million in dividends, totalling R$32.6 million, equivalent to 25% of net income for 2008,
computed according to Statutory records”. Also, according to Mrs. Lanari, the cash generated from earnings
and not paid out as dividend “will be reinvested in Localiza‟s businesses, which has been growing in revenues at
a rate of over 30% between 2004-2008”.
Furthermore, since Localiza has had a track record of paying to holders of its shares dividends and interest
attributable to shareholder‟s equity since 1999, we believe that if the company keeps its forward thinking
management style, dividends will continue to be paid consistently for many years to come. In May 7, 2009,
Localiza carried out a payment of interest on shareholder‟s equity totaling R$8,204,300.00, corresponding to
R$0.041544609 per share.

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“Most investors would single out China and Brazil as the strongest emerging market economies, where
policymakers have been aggressive in cutting interest rates”
(Financial Times – May 6 2009)

Rent3 at Bovespa

According to Economática, from May 2005, the month Localiza entered New Market, to 19 January 2007,
Localiza‟s profitability over Ibovespa was 221,19%. Looking at Rent3 at Bovespa, we can see that Localiza‟s
stocks were last traded (May 8, 2009) at R$12,82. In the last 52 weeks its peak was R$21,63, whereas its trough
R$5,03. Historically speaking, Rent3 valued +128,67% in 2006 year end; -6,70% in 2007 and -61,56% in 2008,
according to ADVFN Brazil. Nonetheless, despite the crisis, only in the five months of 2009 Rent3 has valued
+82,02; in May, +13,96%, but in the last 365 days -32,15.

Not surprisingly, Rent3 has been the 71 most traded share at Bovespa in 2008. Before the credit crisis, back in
2005, Localiza‟s average daily volume had been US$4,57 millions, US$10,58 millions in 2006 and US$13,54
millions in 2007. In 2008, it was US$8,41 millions.

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“Shareholders place their bets on Localiza because it is transparent and it has also given a medium return on
investment of 34% in the last five years”
(Salim Mattar, Founder and CEO, Localiza Rent a Car)

Corporate Governance

Awarded by the magazine Institutional Investor as the company with the “Best CEO” in Brazil, as well as “Most
Shareholder Friendly” in 2008, Localiza has a long tradition of high level of Corporate Governance. It has also
been awarded the prize of “Best Company in Governance for shareholders”, by the magazine Capital Aberto.
For Mrs Lanari, the most important aspects to stress whilst trying to sell Localiza to an investor are “the growth
opportunities for the sector, Localiza‟s competitive advantages, as well as its consistent results”. However,
according to Capital Aberto magazine, Localiza has established a mechanism of protection against the
dispersion of the shareholding base, according to which investors who acquire 10% of Localiza‟s stocks must
make additional acquisitions only through auctions at Bovespa.

According to the Financial Times, “overseas investors took more than R$26bn from Bovespa between June and
January. Since then, more than R$5.7bn has returned, including R$3.8bn last month alone”. The FT says that
“by buying emerging marketing equities an investor could get exposure to equities, cyclical assets and risk
assets”. That is one of the reasons “Bovespa index is up 75% higher than its trough at the end of October”.
Through its five Internal Regulation Committees, Localiza can oversee everything that is happening in the
company, from bottom to top. The committees are mechanism of control which has the effect of making the
company more competitive and forward thinking. Adhering to the US GAAP from SEC has also been important
to enable the company to compete on the same footing with its American counterparts, like Hertz. In an
interview to IstoÉ Dinheiro, Salim Mattar, Localiza‟s founder and CEO, said “we have always been transparent,
because we believe that, by acting that way, we will have better financing conditions in the market”. In our few
visits to Localiza‟s stores we could sense that its employees and management have embodied that philosophy.

We believe that a clear sign of Localiza‟s high standards of corporate governance is the fact that the company
was already attracting the attention of international investors back in the 90‟s, in a moment in which there was
no Bovespa‟s New Market. In 1997 the DLJ (today Credit Suisse) bank invested US$50ml in Localiza and
bought 33% of Localiza‟s stocks. According to Mr Mattar, “DLJ made a typical investment of „private equity‟,
that is to say, it bought a share of our stocks, betting in the company‟s growth in value and in the possibility of
leaving in the medium term”. Asked by the reporter if DLJ had earned money with Localiza, Mr Mattar said, “A
lot of money. They invested US$50ml and earned over US$20ml in dividends, and they have just left with
more than US$130ml”.

“When a foreign investor places his bets in a company and earns money, it is good for Brazil. It will bring in
more foreign investments”, he added.