Risk Factors

Risks Related to the Company

Our success relies on our ability to attract, train and retain qualified professional and also members of our senior management.

Our success depends on our ability to attract, train and retain qualified professionals to conduct our business. There is competition to hire qualified professionals in the RAC segment and lack of specialized and qualified personnel. Although we may be able to hire, train and retain qualified professionals, we cannot assure you that we will not incur significant costs to do so. Moreover, our business is highly dependent on the members of our senior management, who have been playing a key role in our success. In the event any of the members of our senior management team leaves us, it may be difficult to replace them. This may adversely affect our business and results of operations.

The sales price of vehicles used in our operations and the demand in the used car market are fundamental for the expected return on our RAC and GTF contracts. Failure to establish accurate sales price may have an adverse effect on us.

Our business model consists of a cycle that begins with the purchase of vehicles to be rented by our clients and ends with the subsequent sale of such vehicles at the end of a period we consider appropriate for that purpose, based on factors such as market conditions, mileage, condition of the vehicle at the time of sale and history of accidents.

The rental price and daily rates of each vehicle are determined taking into account the vehicle’s selling price at the end of the relevant cycle, and the sales price and volume of sales are determining factors in obtaining the minimum expected return on each transaction. In addition, prices practiced in the used car market may also affect the rental price.

Restrictions on the availability of credit and increases in interest rate, for instance, may directly or indirectly affect the secondary market for cars and significantly decrease their market liquidity. The volatility of market prices may also decrease the vehicles’ sales price, resulting in a greater discount compared to their purchaser price. Moreover, we cannot ensure that the market will absorb the volume of vehicles we are selling. In case our future depreciation estimate is not adequate, our business, financial condition and operational results may be negatively affected. As a result of these factors, our actual depreciation, calculated as the difference between the cost of acquisition of the vehicle and its estimated market value on the date of sale, may be above the depreciation we expected and recorded in our financial statements, making us increase the rental price above our competitors, what can reduce our competiveness. On the other hand, underestimating our vehicles’ depreciation may cause us to reduce our rental price, what can cause a reduction in our operating margin. Therefore, both overestimating and underestimating our vehicle’s depreciation may adversely affect our business.

Our business requires intensive long-term capital to finance our growth strategy.

Both the implementation of our growth strategy and our competitiveness depend on our ability to make investments and renew and expand our fleet. In order to finance our fleet, we need to raise capital for investments, either through debt or capital increases. We cannot assure you that we will be able to obtain sufficient financing to fund our capital expenditures and to finance our growth strategy, or that we will obtain financing at acceptable costs and terms, due to adverse macroeconomic conditions (resulting in a significant increase in interest rates, for instance), our performance or other external factors, which could in turn adversely affect us. Failure to renew our fleet may cause our rental car business to be less competitive in comparison to our competitors.

Our strategy of companies’ acquisitions may not be successful.

We cannot assure you that we will successfully identify, negotiate or complete any acquisitions. Additionally, the integration of acquired companies may be more costly than expected.

We may not be able to successfully integrate acquired companies or their assets into our business. We also may not be able to identify potential liabilities in the acquired companies since the great majority of companies in our sector does not prepare audited financial information. The failure of our acquisition strategy could have an adverse effect on our financial condition and results of operations.

In addition, any future significant acquisitions may be subject to approval by the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica) or by other Brazilian authorities. We may be unable to obtain the required approvals in a timely manner or at all in order to efficiently and strategically integrate the acquired companies.

We do not maintain insurance against certain risks.

Our business exposes us to claims for personal injury, death and property damage resulting from the use of the cars we rent. In addition, our rental cars may be damaged or stolen while they are being used by customers. The cars of our RAC segment are covered by third-party insurance with limited coverage for pecuniary loss, pain and suffering and bodily injury during the period they are rented by our clients. We may be liable for payment of damages to third parties in case of loss exceeding the insurance coverage.

The cars of our GTF segment may not be covered by third-party insurance or may have limited coverage for pecuniary loss, pain and suffering and bodily injury during the period they are rented by our clients, depending on the type of insurance contracted by the client, or in the event the client chooses not to contract insurance coverage.

Accordingly, we may be exposed to liabilities in respect of which we may not be insured, related to vehicle damage resulting from car rentals in excess of the insured amount or in vehicles that are not insured.

Moreover, our insurance hiring policy may be adjusted to comply with future rules of Brazilian authorities and to maintain the financial balance of vehicle rentals. In the event we are unable to recover the relevant amounts from users/clients who rented our vehicles, our business, financial condition and operational results may be adversely affected.

We rely on automated and computerized systems.

We rely on automated systems to operate our business, including a back-up computerized system, telecommunications systems and website. Our internet sales performance may be affected by system interruptions or failures that make our website unavailable, or that hinder the booking of our vehicles. Significant failures in our booking or telecommunications systems may reduce the attractiveness of our services and cause clients to rent vehicles from our competitors. In addition, information technology is fundamental to maintain our internal control systems. Our IT systems are exposed to viruses, malware and other problems that may unexpectedly interfere with our operations, in addition to failures in network security controls that also may affect our performance, as servers are vulnerable to viruses failures or breakdowns that may result in interruptions, delays, loss of data or inability to accept and confirm bookings of clients. Any interruption in systems or in their underlying infrastructure may adversely affect us resulting in financial losses, higher costs or generally harm us.

Our main clients may choose not to renew their GTF contracts and we may be unable to enter into new GTF contracts.

GTF operations represent a significant share of our business, accounting for 36.5%, 16.6% and 10.5% of our net revenue in 2014, 2015 and in the nine months ended September 30, 2016, respectively. This segment relies on long-term contracts with clients and the expansion and diversification of this portfolio is key to our business strategy. Accordingly, if we are unable to successfully implement our strategy for this segment, our business may be adversely affected. Our main clients may choose not to renew their GTF contracts, and we may be unable to enter into new GTF contracts. This may significantly decrease our revenue, adversely affecting our business, financial condition and results of operations.

We may be adversely affected by the increase in the cost of acquisition of new cars.

We periodically renew our fleet of vehicles in our RAC and GTF segments on a need basis as vehicles become worn out. Accordingly, our results are affected by the conditions for the acquisition of vehicles negotiated with our suppliers and the scale of these acquisitions, individually negotiated by us or jointly negotiated with the other companies of our economic group.

An increased demand for new vehicles may decrease the ability of automakers to meet market demand and/or result in price increases. If we are unable to maintain our currently negotiated discounts with suppliers, or, in case an unfavorable change occurs in the sales policy of vehicles to RAC and GTF companies, we may be subject to cost increases and, as a result, a decrease in our margins. Because the price we charge from our RAC and GTF clients is based on the cost of acquisition of new vehicles, we may not be able to pass these costs to our customers, and, therefore be adversely affected.

Our financing agreements contain restrictive covenants on our incurrence of debt that may negatively affect our ability to meet our payment obligations.

We are subject to certain contractual provisions under our existing debt instruments that require us to maintain specified financial ratios or restrict our autonomy and ability to enter into new financing agreements, among other obligations. Any event of default under our existing financing instruments could trigger cross defaults under our other debt instruments and even cause all amounts outstanding with respect to our financial instruments to become due and payable immediately. The acceleration of our debt would cause significant effects on our financial condition. Our assets and cash flow may not be sufficient to fully repay or service borrowings under our outstanding financing instruments upon an event of default. In addition, limitations on our incurrence of indebtedness may affect our ability to obtain new loans necessary to finance our activities and maturing obligations, as well as our growth strategy, which may adversely affect our (i) ability to meet our payment obligations, (ii) cash flow, (iii) results of operations, and (iv) growth strategy.

Difficulties in managing liquidity risk may adversely affect our financial and operating performance and limit our growth.

Our operations are capital intensive. We may have difficulties in obtaining working capital from investors and financial institutions to fund our operating activities, which may result in a mismatch between the terms or volumes required to meet our operating needs and, accordingly, limit or restrict our activities in order to meet our commitments, adversely affecting our financial condition, results operations and our growth.

In addition, any impact on our ability to meet our financial commitments may result in the loss of the vehicles that are subject to finance lease agreements we enter into with financial institutions. Under these finance lease agreements, we agree to a fiduciary transfer of the vehicle to the lender, which can in an event of default take possession of the vehicle, while our obligation to pay the remaining balance of the finance lease continues, adversely affecting our financial condition, results of operations and our growth.

One of the members of our board of directors and indirect controlling shareholder is a party to criminal proceedings that may adversely affect us.

Since 2009, one of the members of our board of directors and indirect controlling shareholder, Fernando Antonio Simões, is a defendant in a pending criminal proceeding in the city of Salvador, State of Bahia, regarding an alleged fraud in a bidding process. This criminal proceeding is currently in its initial stage and additional evidence may be presented in court. Mr. Simões is also a defendant in three other pending criminal proceedings in the cities of Itaquaquecetuba, Carapicuíba and Mogi das Cruzes, in the State of São Paulo. Mr. Simões and other members of our management may have to allocate a significant amount of their time and attention to these proceedings.

In the event unfavorable decisions are rendered in the abovementioned proceedings, our reputation with clients, suppliers and investors may be harmed. Mr. Simões may be convicted and required to cease his management activities in us, which may materially and adversely affect our businesses and results of operations. For more information, see "Management—Legal and Other Administrative Proceedings Involving our Management—Fernando Antonio Simões."

The Company may have to obtain additional capital in the future through the issue of shares, which may result in a dilution of shareholders’ interest in its capital stock.

The Company may need to raise additional funds in the future through public and private issues of shares or securities convertible into shares to finance its growth initiatives. Any financing through the primary public distribution of shares or securities convertible into shares to be carried out without preemptive rights to the shareholders, pursuant to applicable regulations, may result in the dilution of these investors’ interest in the Company‘s capital stock.

There is no way to guarantee the future payment of dividends or interest on equity to Company shareholders.

Any future decision to pay dividends to Company shareholders will be discretionary and must comply with the Brazilian Corporation Law. The decision to pay dividends and/or interest on equity will depend on the Company’s profitability, financial situation, investment plan, restrictions imposed by applicable laws, as well as other factors. In addition, the Company’s ability to pay dividends and/or interest on equity will depend on its ability to generate net income. Therefore, there is no way to ensure that the Company will pay or will be able to pay dividends to its shareholders.

The volatility and lack of liquidity in the Brazilian capital market and/or of the shares issued by the Company may limit shareholders’ ability to sell their shares at the price and time desired.

The Brazilian securities market is substantially smaller, less liquid, more volatile and more concentrated than the main international securities markets. These market characteristics may substantially limit shareholders’ ability to sell their shares at the price and time they wish to do so and, consequently, may adversely affect the shares’ market price. In addition, the market price of Company shares may fluctuate for various reasons, including the risk factors listed in this Reference Form, reasons related to the Company‘s operating and financial performance as well as national and international macroeconomic conditions which cannot be controlled by the Company.

Risks related to the direct or indirect controlling shareholder or control group

The Company has a direct controlling shareholder whose interests may be in conflict with the interests of its investors

Today, the Company’s direct controlling shareholder, JSL S.A., holds, and will continue to hold after the completion of the public share offering intended by the Company, the majority of its capital stock. This controlling shareholder has powers to, among other actions, (i) elect and remove the majority of the members of its Board of Directors, establish the Company’s administrative policy and exercise general control over the management of the Company and its subsidiaries, (ii) sell or transfer shares representing the Company‘s control, pursuant to the Bylaws, and (iii) determine the outcome of any resolution by the Company’s shareholders, including in transactions with related-parties, corporate reorganizations, sale of assets, including the sale of all or substantially all the assets, as well as partnerships and the time of payment and distribution of any future dividends, in accordance with the requirements for the payment of mandatory dividends imposed by the Brazilian Corporation Law.

The Company’s controlling shareholder may be interested in making acquisitions, asset sales, establishing partnerships, taking out financing or undertaking similar operations which may be conflicting with the interests of its other investors and cause a material adverse effect on its activities, financial situation and operating results.

Risks Related to the Company’s Suppliers

The Brazilian automotive manufacturing market is highly concentrated.

Our main suppliers are the car manufacturers. The Brazilian automotive manufacturing industry of cars and auto parts is strongly controlled by six car manufacturers: FIAT, Ford, GM, Hyundai, Volkswagen and Renault, which together accounted for more than 80% of sales in the domestic market in 2015, according to the ANFAVEA. In case of a change in installed capacity or the policies and sales terms of vehicles by automakers, our ability to renew and expand our fleet and, as a result, our businesses, results of operations, financial conditions and prospects, may be adversely affected.

Risks Related to the Company’s Clients

We are exposed to credit risk in our operating activities, which may adversely affect our financial condition and results of operations.

We are subject to credit risk related to the payment of car rentals and GTF agreements by our clients. The default rate of our clients was 2.8%, 1.5% and 1.5% in the nine months ended September 30, 2016 and in the years ended December 31, 2015 and 2014, respectively. In the event our clients fail to meet their obligations, resulting in losses above expectations, our financial condition and results of operations may be adversely affected.

Risks related to the sectors of the economy in which the company operates

The deterioration of economic and market conditions in other countries, especially in emerging countries or the United States, can adversely affect the Brazilian economy and the Company‘s business.

The Company‘s growth is directly tied to the expansion of the Brazilian domestic market and its business is strongly integrated into the economy and its clients’ operations, distributed in various economic sectors. The Company’s operating results, especially those related to the car rental market, are strongly affected by the level of confidence and economic activity in Brazil. An economic downturn leads to reduced tourism trips, business deals, and investment, as well as increased unemployment, consequently reducing demand for car rental and fleet management. The slowdown in the country’s economic growth pace, with retraction of wholesale and retail demand and fewer investments in capital goods and infrastructure can directly affect the Company’s operating and financial results. A reduction in economic activity typically results in decreased leisure travel and tourism activities, which can reduce car rental demand. Considering that the Company’s RAC activities are partially enhanced by touristic flow, a strong decline in tourism due to an economic downturn may impact said activities.

In addition, the securities market and the Brazilian economy are affected by international economic and market conditions in general, especially the economic conditions in the United States. Share prices on the BM&FBOVESPA, for example, are traditionally sensitive to fluctuations in U.S. interest rates and the behavior of the major North American stock exchanges. Any increase in other countries’ interest rates, particularly in the United States, may reduce global liquidity and investors’ interest in Brazil‘s capital market, negatively affecting the price of the Company’s shares.

The reduced demand for used vehicles may adversely impact the Company‘s business.

The sale of used vehicles is an important aspect of the business cycle, given that this activity’s volume and price are important elements for achieving the expected return of each operation. A reduction in demand for the Company‘s decommissioned assets, as well as restrictions to credit granting and higher interest rates on vehicle financing may directly or indirectly affect the secondary market of these assets and significantly reduce its liquidity. Market price volatility may also reduce the price of the Company’s decommissioned assets or their sale value, creating a greater discount compared to their acquisition price. All these factors can affect the ability to sell these decommissioned assets at the initially estimated prices, which may adversely affect the Company’s business, financial situation and operating results.

Strong competition in the RAC and GTF segments may affect our results of operations.

The RAC and GTF segments are highly competitive and scattered. According to the Brazilian Association of Car Rental Companies, in 2015, the car rental segment had 7,455 car rental companies, with revenues of R$16,300 million, a fleet of 853,217 vehicles with an average age of 19.5 months, and 8,626 stores. We face competition from domestic and foreign car rental companies of different sizes. In the fleet rental and management sectors, we compete with the same companies devoted to car rental and companies exclusively devoted to fleet rental and management. Some of these competitors are foreign companies who have access to significant resources and the ability to pursue market share expansion strategies through more competitive pricing. We also face numerous competitors in local markets who, by nature of their small size and their local operation, operate with lower fixed costs and can offer more competitive prices than those we offer. This may lead to reduced demand in the segments in which we operate or increased costs in attracting and retaining new customers, which may adversely affect our growth and profitability.

The GTF segment faces low entry barriers and rental fees are an important factor for clients in deciding whether to engage these services. The highly competitive environment and growth strategies of our competitors may materially affect our results of operations.

Risks related to the regulation of the sectors in which the company operates

Changes in Brazilian tax law or conflicts regarding its interpretation may adversely affect us.

The Brazilian federal, state and municipal governments have regularly implemented changes to tax policies that affect us, our clients and our suppliers. These changes may include amendments to tax rates and/or the enactment of new temporary or permanent taxes, the collection of which is related to specific governmental purposes. Changes implemented in Brazilian tax laws for specific purposes, such as the reduction in 2012 of the Tax on Industrialized Products (Imposto sobre Produtos Industrializados) on new vehicles, may impact the depreciation of our fleet and the market value of our assets. Some of these governmental measures may increase our tax burden, which may have a material adverse effect on us.

The Brazilian government has exercised and continues to exercise significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our common shares.

The Brazilian government has frequently intervened in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, wage and price controls, currency devaluations, capital controls, limits on imports, non-renewal or changes in concessions and administrative contract regimes, among others. We cannot predict the policies or regulations the government might create in the future. Our business, financial condition, results of operations and the trading price of our common shares and prospects may be adversely affected by changes in government policies or regulations at the federal, state or municipal levels

Risks related to social and environmental issues

Environmental, occupational health and safety laws and regulations may require us to incur higher costs than those we currently incur to comply with these laws and regulations. Noncompliance with these laws and regulations may result in civil, criminal and administrative penalties.

We are subject to federal, state and municipal law, as well as regulations, authorizations and licenses regarding environmental, occupational health and safety. Any failure to comply with these laws, regulations, licenses and authorizations, or any failure in obtaining or renewing them, may result in civil, criminal and administrative penalties, including the imposition of fines, cancelation of licenses and authorizations, in addition to negative publicity and liability for remedying or paying for environmental damage. We already incurred and will continue to incur capital and operating expenditures to comply with these laws and regulations. Environmental regulations are becoming stricter in Brazil, and the investments required regarding future expenditures to comply with regulations may increase and adversely affect the availability of funds for capital expenditures and other purposes.

Description of the main market risks

Market risk involves the risk related to potential fluctuations in the fair value of future cash flows of a given financial instrument in response to variations in its market price. Market prices involve three types of risk: interest rate risk, foreign exchange rate risk and price risk, where the latter can be broken down into commodities, stocks, or other price-related risks.

Interest rate risk

Interest rate risk involves potential fluctuations in the fair value of the future cash flows of a given financial instrument in response to variations in market interest rates. The Company‘s exposure to risk associated with market interest rate fluctuations relates primarily to obligations with loans, financing, financial investments and marketable securities of the Company, subject to floating interest rates.

Sensitivity to interest rates

The following sensitivity analysis of financial instruments was prepared according to CVM Instruction 475/2008, to show the balances of the main financial assets and liabilities, taking into consideration a probable scenario (Scenario I), with stresses of 25% (Scenario II) and 50% (Scenario III).

The objective of this sensitivity analysis is to measure the impact of changes in market variables on the Company’ financial instruments, assuming that all other market factors remain constant, showing the impact on the statement of income and equity of the Company. Such amounts may differ from those stated upon their settlement due to the estimates used in their preparation.

The Company conducted a study of the potential impact of variations in interest rates on the amounts of financial investments and borrowings and financing, including leases payable. The debt was divided into two parts: debt subject to the CDI rate and debt subject to the TJLP, which could be subject to different changes in accordance with the inherent rate.

Operation (in thousands) Exposure (in thousands) Risk Potential gain (loss) Probable scenario Scenario I + 25% deterioration Scenario I + 50% deterioration
Financial investments
Position at 9.30.2016 R$ 136 CDI 12,5% 15,6% 18,8%
Impact on profit or loss/ equity Gain (2) 2 6
Debt pegged to CDI
Position at 9.30.2016 R$ 601 CDI 12,5% 15,6% 18,8%
Impact on profit or loss/ equity (Loss) 10 (9) (28)
Debt pegged to TJLP
Position at 9.30.2016 R$ 2 TJLP 7,5% 9,4% 11,3%
Impact on profit or loss/ equity (Loss) - (0) (0)

(*) Source of the indexes: Market Readout report - BACEN and BM&F

This study assumed a probable scenario of a 2.2% increase in the CDI rate, based on the future interest rate curve of the BM&F (the average rate at September 30, 2016 was 14.13%), impacting proportionately the Company’s debt and financial investments. And with regard to TJLP, the scenario considered probable by the Company is a 0.1% increase over the rate at September 30, 2016.

Scenario II considers an increase of 25% in the CDI and TJLP rates, when compared to the probable scenario. Scenario III considers an increase of 50% in the CDI and TJLP rates also compared to the probable scenario

On September 30, 2016 the Company had confirming payables totaling R$491.4 million - Automakers (Circular Letter CVM/SNC/SEP no. 01/2016) tied to prefixed rates, where an eventual change in interest rate would not impact the Company’s expenses.

Foreign exchange rate risk

Due to various pressures, the Brazilian currency varied significantly against the U.S. dollar and other currencies. It is not possible to guarantee that the Real will not appreciate or depreciate against the U.S. dollar.

On September 30, 2016, the Company was exposed to foreign exchange rate risks due to a foreign-currency denominated loan totaling US$31.4 million, taken out under Resolution no. 3,844/2010 of the Brazilian Central Bank ("Resolution 3,844"). Said loan was paid off and, therefore, the Company was no longer exposed to foreign exchange rate risks on the date of this Reference Form.