AgroGalaxy Participacoes SA

BOVESPA:AGXY3

Earnings Call Transcript 2023-Q2

[Daniel Kuratomi, executive]

Welcome to the earnings call for 2023. I want to thank you all for your presence during another earnings call. For those in English, please select the language by choosing the interpretation icon below.

I'm Daniel Kuratomi, the IR Head. And today, I'm here with our CEO, Welles Pascoal, as you already know; Axel Labourt, he's our VP for Operations; and also Eron Martins, our CFO and Investor Relations; and Gabby Medeiros from our IR team that you already know. Axel and Eron have a broad experience in agribusiness. They're going to share a bit of their experience here. And as we announced, Maurício Puliti gave up his position as CFO, and he's in our Board at the moment.

So I would like to also let you know that this earnings call is being recorded and will be provided on our Investor Relations website with our materials that are also available. And we also provide the presentations in Portuguese and English at our chat. [Operator Instructions]

So we would like to let you know that all of the information in this presentation and possible statements that could be made during this earnings call related to business perspectives, forecasts and operational targets, AgroGalaxy represent beliefs and assumptions from the company's management as well as the information that's currently available.

Future statements are not a guarantee of performance. They involve risks, uncertainties and they -- which can or not occur. Investors must comprehend that general economic conditions in the market and other operational factors may affect the future performance at AgroGalaxy and lead to results that differ materially from those listed in certain future statements.

Now I'm going to pass the floor to Welles to begin our presentation.

[Welles Pascoal, executive]

Good morning, everyone. It's a huge pleasure to share with you guys, part of our morning here.

Before we begin to talk about the main points in the presentation, I wanted to mention a few comments about the scenarios and events that placed us in a situation that is currently the scenario we're experiencing in 2023.

So I'm completing 42 years of work in agribusiness and I had the opportunity to go through excellent years in agribusiness. And I'll also talk about crises with those that especially impacted the sector in a very strong way, such as in the '95, 2005, 2008, 2015 where farmers do not have necessary grains to pay and fulfill their commitments and this led to an impact in agribusiness for all of the stakeholders and people that are in the supply chain.

So in 2023, I'm not going to call this a crisis. I'm going to say that it is a year where we had market adjustments and a consequence of many different factors, among which certain factors that started off about 2 years ago, which was the pandemic that everyone experienced and so ever since that period from 2020.

So what happened at that moment was that we had an impact in our supply chain with suppliers and also distributors and retailers for farming inputs and reaching the farmers. And from the suppliers perspective, we see that China is one of the biggest producers of inputs and active ingredients that are important for different agrochemicals, and they've had to shut down their factories at that period and getting back to certain operation in these factories.

Some chemicals take 2 or 3 months, 6 months, a year or even more than a year to have their products ready, so the products farmers use on their plantations. So what this led to was an increase in the price of products due to a fear of such lack. And then we had a huge amount of products that really flooded the market. And this is a consequence.

Brazil finished with an inventory of chemicals last year of over 30% of the volume sold. And so Brazil -- this is an all-time. Brazil never had this, and I've already heard some messages from some important sources saying that this volume going to be even more than 30% of what was sold. So you can imagine the imbalances it would generate in the market.

On the other hand, the war between Russia and Ukraine, and everyone there was here last year in this business saw a potential lack of products in the market with fertilizers, which, in some way, increased the price of these fertilizers. So if we today, consider the current prices that we saw in the first half of this year, fertilizers compared to last year, we can see price drops representing almost 50%.

If we look at the case with chemicals, especially herbicides, we'll see that there's a drop in prices of almost 70%. This creates a huge imbalance in the market overall. So when we consider the distributor's perspective and the retailers' perspective, and we add the high cost of cash in Brazil with Selic being 13.75%, which is something we coexisted with during quite a while, this causes a imbalance, but also a very big difficulty in our cash position to be able to generate all of this.

On the other hand, we had an all-time harvest with production above 320 million tons of grains. And we can see that soy is above 150 million tons, and corn is an all-time high as well. So what I want to show you with this is that this is normal in agribusiness. It's a business that's constantly growing, and we all must remember that this business is very cyclical. So what happens is that farmers, if they harvest -- have a good harvest, then what happens sometimes is that they can get used to during 3 harvests have all-time high prices in grains.

So I'm going to give you one example. And so we had soy above $17 per batch. Of course, farmers were kind of sitting on top of what they had produced and waiting for best prices. Now what happened with this is that we had a very strong default rate in the sector as a whole. And I want to make this very clear, this is not a specific problem with one company. It's everyone's problem.

And it didn't only affect our distribution in Brazil. You can take a look, and I'm sure many of you guys have already seen the global results of the main companies that supply inputs. All of them, without exceptions, were impacted by everything I mentioned that took place in Brazil.

Of course, we did have to do some very strong work to be able to leave or exit the scenario, fix things in our house and prepare for the second half, which is what we're in now, where we normally already have the biggest amount of the billing for inputs, around 70% between the third and fourth quarters, but also many orders that still need to take place.

I'm going to tell you guys about this issue a bit with the entrance of orders to be part of our portfolio, which is built until the end of the year. We're seeing that farmers, as we can see on the last point here, are biting mouth -- hand to mouth. So they still have an expectation that the price of the inputs could drop even more. So of course, this has made our lives a little more difficult. And we know that we have a logistical component or factor that's very critical in our country due to the geographic dimensions we're in.

And so I just want to show you guys what our harvest from '13 to '14 and '22 to '23. So constant growth in our graph, as you can see with soy in production. So someone that has experienced a crisis in certain years said, "Hey, agribusiness is going to hit the bottom." And the answer is no. Agribusiness continues to boom. And this is what's going to happen, years of excellent harvest and years of adjustments and years of crisis.

What's important is that we need to see this, understand what's going on and take on the necessary measures to correct issues at the right moment and really prepare for the harvest that are currently underway and those that will take place in certain moments. And so this is the dynamic in our business.

Next slide, please. So to show you now, I am totally sure that we will grow 3% or 4% in our plantations and we'll continue to grow in productivity at a level of technology which is really high. And farmers know what they must use to improve their productivity and consequently have better prices.

I'm not seeing excellent prices. I'm not a specialist in this field for commodity prices, but I do think that we'll have to coexist with prices that are lower. We won't see prices of like $17 or $18 for soy unless a very drastic event take place in our market.

But if we look at this commercialization of soy in the month of March '23, we'll see that it reached 28%, which is very low if compared to the previous harvest that you can see in this graph. So what happened in September is that we already took on an important leap of 75% of our soy commercialized. So this demonstrates that we are accelerating and gaining traction.

So I'm going to give you some data here about our orders in our portfolio. The second quarter of this year, our orders in our portfolio and now we built our portfolio that grew 27% and compared to the third quarter. So the farmers are getting back to having an appetite. But we really needed to work on intense efforts and we had to get back to our suppliers, demonstrate that the market had too much stock and that it would be impossible to coexist with such high stocks. And in such a difficult moment with high cost of cash, and negotiating with them was not easy initially. But some of them tried to close the doors until the moment where they noticed that the supply chain was the main issue.

If we had to get back, we had to sell the stock we had in-house and adjust our organization, search for synergies where to save money and prioritize cash. And so what I can mention beforehand, absolutely, is that we were one of the first companies to notice the strong movement in the market and make the necessary measures to correct this route.

We would like to say that we're very well prepared to capture these opportunities that we have for our harvest in '23 and '24. So the harvest will start happening at certain moments and we know which areas are going to be planted in September. And so farmers will keep up moving along with their work and our suppliers as well with their business, including banks and everyone that's part of this supply chain.

To end this first part of this meeting, I would like to talk about our organization, how we're structured currently and you all knew -- know Sheilla. Sheilla continues on a medical absence. Our main objective is to preserve her so that she can have excellent recovery and get back to our market.

So this is what we're doing, and we're not going to pressure her, rush her until she can really be ready to take on the level of responsibility she can. So we've already talked about Axel and Eron. I'm completely reliant and confident about their work, with all of their experience in agribusiness. And we also have 2 leaders commercially, 2 directors. And we also mentioned the exit that we announced with Fernando Manzeppi, our Commercial Director, who we really thank for all of his work at AgroGalaxy. And so we want to thank him for this work and say that we're very confident for the work with Hélio and Sergio, as an interim process they will report directly to me until we can finish structuring this.

And so our proposal for this leadership area is to have a lean structure that's agile and so that we can be closer to our customers and also make decisions at the right time. So this is what our purpose is, and we're going to continue moving along.

Then I'll invite Axel Labourt to speak with you guys about some operational highlights during the second quarter of 2023.

[Axel Labourt, executive]

Thank you very much, Welles. Thank you all. Good morning. And as we present the earnings for this -- as Welles mentioned, I have a lot of experience with agribusiness and the petrochemical industry and had a lot of experience in different countries. And so I've worked in agribusiness and other industries for quite a while. And in the last few years, also as Chairman at [indiscernible] with Argentina, Bolívia, Uruguay and Peru.

Part of my experience is not highlighted here, but I think is worth mentioning. When Dow announced this, I was invited to lead the transformation and interaction of the agricultural divisions in both companies. I worked with them -- with Welles and other people that continue to work at Corteva and preparing these divisions, everyone already knows very well.

During this period, I was responsible for searching for synergies and savings and this definition tracks to the market as well as the deployment to become -- of this process to really become an independent company, which took place in 2019. It's a pleasure to be with you guys in agribusiness once again. I've already worked with Welles and so it's a pleasure to be here with you guys once again.

So let's move on. I want to reinforce this. And I would like to highlight Welles' comments about the characteristics of this harvest and what's going on and what we've seen for our farmers. So here, you can see some graphs. And so here, you see in the cerrado region, as you can see, there's exchange ratio in soy and you can see the sacks of soy that farmers need to pay for the fertilizers and the inputs and seeds. And so as Welles mentioned, once again, you can see that this exchange in soy is above that of 2021. But if you look at the past harvest, the ratio seems favorable. And so it's not about economic unfeasibility. It's about an occasional price dynamic or uncertainty related to the volatility of the market. And of course, farmers hold on until they can feel confident about this.

So with corn, the situation is a little different. In the past 3 or 4 months, the exchange ratio in cerrado and also in the south of the country has increased. We have a ratio that is higher. This is one of the main reasons that we designed this with a campaign and so we can consider this possible delays in the corn and off-season harvest as well. We've seen that this campaign has led to good results on the field, about BRL 200 million in receivables that were supposed to be paid now in August or September. And you can see this as a consequence of this corn and the off-season.

And so when it comes to economic feasibility, the Brazilian farmers continue to make money, maybe less than in the last harvest, but it is a profitable industry. And actually, the challenges and difficulties we had, especially in the second quarter and the first semester of 2023 are temporary, and we've been able to overthrow them very well.

I wanted to mention -- Gabby, please next slide. It's very difficult to mention on this slide, the amount of things that have been done by the team. I just wanted to mention some points that I think are really important. So everyone online probably heard multiple times some of the comments and the focus we have in the technological centers, and this is the -- really focused on taking to farmers the tools to have greater productivity. And actually, this allows us to sell products that bring more margins.

And so -- and the CTAs, we had over 200 protocols with integrated management of the products. We have a lot of harvest at this practice, and this allows us to share how this is even in a moment of difficulty, where you have farmers taking a little longer postponing the purchase of inputs, we were able to reach results that really make sense to highlight.

So in specialties in the second quarter of '23, we've been able to reach a mix of 9.4% of our total revenue at AgroGalaxy in the second quarter, a growth of 4.3 percentage points compared to the same period last year. If we look at the revenue for specialties in the first semester of '23 compared to the first semester of '22, our revenue from specialties grew 30%.

So when we look at the bio inputs, numbers become even better. In the second quarter, we were able to have a revenue from bio inputs of BRL 27 million, which allowed us to, in the first semester of the year, overcome the milestone of BRL 100 million in revenue of bio inputs, which represents growth compared to the same period last year of 60%.

And so in a period once again, where farmers are postponing certain decisions when it comes to the purchase of inputs, we've been able to sell now more specialties, we've been able to sell more bio inputs. And I can say that AgroGalaxy is the largest platform for sales of bio puts in Brazil. So this is really an important highlight in a scenario and context that's very challenging. This is very good.

But another important highlight that we should also mention and share with you guys is that the most important asset that our farmers have is the grains that they harvest on the field. So of course, in this period and this very challenging scenario, AgroGalaxy has been receiving farmers that continue to trust in us, almost 20% more grains in the same period last year. So this is another sign of their trust that Brazilian farmers have towards AgroGalaxy, leaving the biggest and most important asset they have.

So we're growing in our customer base. We've been able to go over the 30,000 customer milestone, a growth of over 30% compared to the same period last year. And we continue to evolve in the ESG targets, especially those related to sustainability. And I just mentioned this now with the sale of bio inputs.

And as Welles mentioned, we are implementing major changes when it comes to management and the structure changes and adjustments that are very necessary. And I can also share this with you guys when we show you our structure. This is our biggest sales force on the field and our index for turnover -- volunteer turnover or the index of people that request to be dismissed voluntarily is still at the same level, 7% or 8%. It didn't change in this quarter. And I want to share that this is one of the lowest in the industry.

So here, you can see some of the main highlights. Once again, as we understand, we're in a challenging context. We still have good things to share. We continue to advance with the metrics that we consider to be important when it comes to efficiency and market share gains in the specialties that are so important for us.

Now I'll pass the floor on to our new CFO at AgroGalaxy, so that he can present some of the highlights of the second quarter.

[Eron Martins, executive]

Thank you, Axel. It's a pleasure to be here with you guys and talking to you guys. It's my first earnings call as a CFO at AgroGalaxy. I've been around for over 30 years from this period, 6 out of Brazil. I have a lot of experience in agribusiness, especially in resale. Initially, at Agrex, Mitsubishi, where we had experience with some [indiscernible] and then I was also CFO of Lavoro Agro ever since the beginning, where I was also in touch with agribusiness all over Brazil as well as experience in Colombia. I went through the industry, I was CFO at Adama. And also with fertilizers when I began working as a CFO, I've actually grown at São Luís, Maranhão.

So about the seasonality in the business, I wanted to mention that the second quarter is a quarter that traditionally has very low revenue, and that's normal. We come from the harvest in summer, and we're in a bit of the off-season, preparing the plantations and taking care of them so that we can harvest in August and September. So this revenue of about 10% is a historic index. It's a period with low revenue and numbers are normally impacted, of course, you have all of the structure in an operation like ours as well as our competitors, and you have to absorb these costs.

So I think what's important to mention here is that we need to look at the orders a bit more. And then I have a slide where I'll explain this a bit more, but this year, we do notice that the orders are going a little slower than what they were last year. So it is true that last year had circumstances that were very occasional that made farmers anticipate their purchases.

We can never forget that we had just started the war, there was still a lot of repercussion in the market about the COVID effects. Most of the factories were closed down, which inflated the defensive substances and fertilizers also had a big impact in the war period. This made farmers be very concerned with guaranteeing their inputs for their plantations and harvest, and this made them anticipate their purchases.

So who's been working in agribusiness for quite a while knows that this kind of scenario doesn't bring any kind of concern. Why does it not bring concerns? Well, because once again, we're going to be in an all-time high year for grain production, over 300 million tons. And this positively impacts the mood of the farmers. And when they have a good mood going and high spirits with a good harvest and off-season makes him, as soon as he finishes this harvest and he starts noticing the rain period and everything else he'll come and start working with us to sign orders that they still haven't signed and to really guarantee the inputs that they need for the summer period within a window that will allow them to also operate in the off-season harvest.

So if we talk about the net revenue, it is a period where you have a reduction of 6.9% mainly levered by inputs. Last year, we had fertilizers that were 40% or 50% higher than -- we had some lever even 70% more. And what we are looking into this year is going back to normal levels.

So this reduction is not a AgroGalaxy effort. It's a natural trend for the levels of a market that we consider to be equivalent. And even so, I think we can look at this positively that we're able to grow in volumes, about 8%. And our operation for grains, Axel was able to mention is performing very well. So this demonstrates the trust that our farmers have in depositing their most valuable assets in our facilities.

So if we move on to the next slide of the revenue mix, we can see that this is where we really feel the proudest in our day-to-day activities because it's a materiality of strategy. And so we know this comes through our CTAs. This is what allows us to advance in the sale of specialities.

So this is intense work from the technical team on the fields, and we can reach close to about 10% of our sales of specialties and an important highlight is in bio inputs. So we were able to reach in this quarter, BRL 27 million of sales of bio inputs. And this is a win-win scenario for everyone.

On one side, you have farmers that have plantations that are more sustainable, and increase of productivity and more sacks per hectare. And of course, this brings healthier margins in our business. So this is important to highlight.

When we look at the gross margins, and this is a period where we're going to have important adjustments, and Welles used this expression very well, it's a period with gross margins that are lower than last year. And this is coming in due to a reduction in prices that I just mentioned, but also because of some work we worked -- we implemented ever since the beginning when we noticed the first signs of adjusting our stock levels and inventory levels.

So then with the partnership and negotiation with each of our suppliers, we were able to give back part of the stock that was left over from the last harvest. And in this quarter, we also had the sale of part of the stock, which impacts the gross margin occasionally in the closure of the semester.

So AgroGalaxy starts the second semester where this game in agribusiness is really taking place, and we start off with a very healthy situation in our profitability when it comes to the rest of the year.

So I'm going to talk about SG&A and EBITDA. And this really has a growth. We've been reaching 10% of our net revenue. And it's important to understand what's behind this. So we have a strategy and it goes through the growth of market share. We opened up 24 stores in the last 12 months. And this increase brings in an increase in SG&A. So an increase of expenses with all of this process, hiring commercial teams. And within the ramp-up period that we work with, which is like 2 to 3 years, they are going to bring in revenues.

So this increase you guys mentioned in our SG&A is really due to the opening of stores because eventually they're going to be absorbed with the ramp-up and EBITDA becomes like a consequence of all of this. So this affected the net revenue, and it also brought in that in this movement to adjust our stock levels, we ended up selling some stock that were out of the market level.

The SG&A also prepared 24 stores to have a ramp-up in the next few months. And this made us to have an EBITDA reduction. And so BRL 504 million compared to BRL 549 million in last year. And so even with this reduction, it's important that you remember that if we remove this EBITDA of 2022, which is very occasional due to many different situations with the war and inflation that take place in fertilizers, but also inputs. If we eliminate the 2022, the BRL 504 million we're delivering in the end of the second quarter of '23 is an all-time high. It's a number that we're proud of, and this is a result of the work we do with store openings, concentrating on the ramp-up and really making this material and represented in our EBITDA in a shortest period of time possible.

Moving on to the next one, we're going to talk about our financial results. And then this is, of course, very subject to the Selic situation. So we're talking about the closure of our Selic rate [ 375 ] and last year it was about 12.5% on average. So this, of course, affects our financial expenses when it comes to the company or any others that work in our retail market. And of course, this funds the process so that the products can reach the farmers.

So I think we can positively look at our capacity to have the repercussion of this interest rate that ends -- that we end up paying or negotiating within our purchases. So this adjustment to present value of BRL 22 million in the quarter is mainly due to our capacity within this negotiation of really taking our interest rates to the fields, and this, of course, protects us with the financial costs.

So another important piece of information is that even in this scenario with credit that is occasionally difficult, this is, of course, the overall market, not only AgroGalaxy due to certain events, we've still been able to work with our bank partners to have a very healthy spread level, about 3.4%, 3.6%, when it comes to the CDI.

And I'm going to talk about our net income as well, which is a consequence of what we mentioned so far. And this is a number that comes from this reduction in EBITDA that I mentioned with low interest and SG&A also because we had prepared this, and we had also opened up 24 stores and the increase of the net debt as well temporarily and then talk about the debt level and profile.

We had a delay -- a temporary delay here. We are quite comfortable in saying that we experienced in 2015 that this, of course, is a scenario of great concern, it's an all-time high. And farmers are finding the best moment for this on [ reaching ] these grains, which impacts the net debt, of course, and occasionally makes us close the quarter with this loss of BRL 257 million adjusted.

When you look at our debt profile a bit, we can reach BRL 1.6 billion in debt. And within the quarter, there's an increment of the covenant of 3.3x the EBITDA. And of course, once again, it's a very controlled number. We have a clear vision of how to make this number go back to levels below 3.

It's a quarter where, as I mentioned, we have low revenue. It's a quarter where we are working on the receipts and the fact that we had already looked at the possibility of reaching an EBITDA of BRL 300 million, BRL 500 million and BRL 550 million and the different initiatives that already have effects in-house of the receipts will allow us to reduce this net debt and of course, go through the covenants that are mentioned and measured at the end of the year in December.

So when we look at the next period, we can see the quick reconciliation and understand that what happened in this period in regards to the debt and I think the biggest bit of information is the fundraising. We had an important CRA financial instrument, which helped us to extend the debt terms in a very healthy way. We've been working on this with the banks. And soon, we'll be able to share more information as well so that we can achieve even better results in our debt profile.

And the cash flow on this next slide, as you can see, here, we're talking about working capital and our operational cash generation. Within the inputs section, you'll notice what I mentioned in the average term for receipt as there is temporary degradation of about 60 days. And this is coming from delays on behalf of the farmers with the payment of these accounts, and we've mapped out each of these points. I've already mentioned also that we recovered over BRL 160 million in the last few months with some initiatives with campaigns to value these grains.

And you can start noticing the effects of the reduction in our stock levels, and this is work done with our suppliers and partners as well as work for the sale of stocks with the old prices and also some important levers with the suppliers to offset this mismatch occasionally of the receipts. Even so, we ended with 17 days working capital worse than the same quarter last year.

And if we move on to cash generation, it's important to remember, we can see that as a reflection on these initiatives in working capital, we have an improvement in our working capital and also in the inputs, which allowed us to -- we can -- help us have a very solid cash position when it comes to BRL 1.4 billion, which is what we had at the closure of the quarter.

So the last slides, I'll mention a bit of how the maturities are. So it's a temporary movement with a degradation in grains. So we had have already recovered part of these numbers to have BRL 160 million, especially with these initiatives. We've also mapped out what we're still missing and also the off-season harvest and also part of the off-season harvest coming in from the team before the investments.

On the last slide, Welles talked about in the beginning of this presentation, we are experiencing a moment where our portfolio is below what it was in the past. In the presentation, you can see the 33% last year where we were anticipating this because of a concern from the farmers, but we must look at two important factors that are positive.

In the first quarter, we had a level of 41% lower than the previous year. Now we're already 33%. So we can already notice that there's a movement where farmers come in to guarantee their packages for the harvest.

What's important to remember is that this movement allows us to improve our negotiations at a moment where we're closing these agreements and sign these agreements with farmers and taking advantage of these negotiations. So we're going to start the quarter with levels of stock that are low due to the homework we did. And we also have sales with purchase prices that are updated, and this allows us to have a significant improvement for the second quarter, which is what's basing all of our guidances that were published and to the market.

Now I'll pass the floor back to our CEO, and I'm going to mention an update here in regards to our new operational model with the deployment of SAP. We consider this to be one of our main segments for improvements in SG&A reductions. Our system is ready to be launched and strategically based on this movement where farmers are going to have us at the last moment, there's going to be an important movement with delivery of products in the second quarter. We prefer to consider this go-live more towards the first semester in 2024 to avoid any risks in the service.

So this postponing is temporary. It doesn't mean we're going to abandon this. Actually, we expect profitability in this operational model. But to avoid any risks, we temporarily are taking this to the first quarter of 2024.

Then I'll pass the floor back to our CEO, so that he can talk about our action plans again. Thank you very much.

[Welles Pascoal, executive]

Thank you so much, Eron. Thank you, Axel. I wanted to mention a bit about our priorities. So we designed this 180-day plan. So within this plan, our priorities are, first of all, cash, preserving cash, having a healthy cash position. And here, I'm very proud of the work that was done because we ended the first semester of this year with a cash position of BRL 1.4 billion, which is the fruit of intense work done by our entire team to receive the cash we placed with our customers and farmers, renegotiating with suppliers and all of the work that was done as well to extend our debts with a bank, which is something that we've been working on and also that we believe we'll be able to have good success with as we implement this extension.

And so our priorities besides cash position are delivering the plan for 2023. As we mentioned, in all of the presentations, the year is going to be achieved still. The good news, as I mentioned, is that we are prepared to capture the opportunities for business that we have been seeing at this moment and that are gaining more traction from now until the end of the year, when we plant the summer harvest and prepare to plant the second harvest of 2024.

Another priority are the savings, all of the areas where we can save certain -- a bit of sense without generating any stupidities are savings that are not going to get in the way of the actual business, servicing our customers well and capturing our business opportunities.

And last, but not least important, we want to take care of our organization and our people and our customers. This is our focus. And so within this, some priorities were already mentioned. And of course, we consider the reduction of nonpayment. So we've been doing excellent work towards this. We talked about the Safrinha plan that was launched and we said, "Look, customers that have not come to negotiate with us, we really need to pressure. We need to use the tools available to force them to come and negotiate with us."

And this number is currently about -- we already received over BRL 200 million of customers that had delayed payments and had their social security numbers blocked or credit rating issues. So here, we need to also mention that through a campaign and a very solid partnership with our suppliers, we were able to value the grains of our customers by almost 10%, which allowed us to bring in-house 2.5 million sacks of grains. So everything we do here considers big amounts of volumes. So we just have to focus.

And of course, customers that did not have success with negotiating, we won't stop or be paralyzed towards. We're going to implement the guarantees we have with these customers, and we're here to negotiate as long as we have a proposal for those who still have not paid that is reasonable for both parties and that we can thus equate these debts for the receipt in the future that we consider will be a good future.

So balancing out our stocks, this homework was done, and I'm going to show you a slide about this with our stock position. Well, I'll just show you this now. If we were to take our stock numbers and values in the 31st of December '22, this amount was BRL 1.6 billion, a very high number, considering the level of operation we had. We were able to achieve BRL 400 million in balancing out measures, returns and innovations, which brought us a very good number.

So we've also mentioned a lot of emphasis on special specific campaigns. We were able to sell BRL 900 million in stock that we had stocked in-house. So of course, some products within this product line had higher prices, which, in some way, impacted our margins and made this affect our margins in the first semester.

Now how is this important? Well, the level of stock that we have today coming from the stock from the 31st of December is BRL 300 million, which is completely compatible with our operation, and we are buying products today to be able to meet the needs of our customers at market prices. So this can be translated into margins that are a lot healthier for the second semester.

Here, we would like to focus as an organization. So we can move back to the last slide, and I want to show you once again that another point I would like to mention is a focus on profitability, as I mentioned. So a product mix coming from all of the work done at the CTA efficiency in our processes and operations.

We also decided to work with stores that already opened ever since 2019. These stores that were opened in this period already add up to 60 stores. And so this is an important maturity process. So this normally takes 3 to 4 years. And so what we're doing is working on these initiatives that will allow us to reduce this maturity period. And thus, extract more value from these stores.

We also made a decision to not open up more stores in the next 2 years, 2024 and 2025. And this year, when we had this opening plan of 12 to 15 stores, we'll be opening up eight, where we already have teams hired, stores rented and other investments prepared for this opening. So we really want to be strict towards the use of our capital.

And this is what we can talk about as what's most -- the greatest luxury we have in an organization, which is really understanding how to use our capital that's available. So my message, and I wanted to stop here and say, "Look, guys, we did our homework. We are prepared for the 2023 and 2024 harvest. Our team is prepared. And we took on the commitment within normality issues in the market that we've been seeing from now until the end of the year to deliver sales that -- and revenue of about BRL 11 billion to BRL 11.3 billion and delivering an EBITDA of about BRL 500 million to BRL 550 million."

So all of our organization will be focused on this -- towards this direction, taking advantage of the opportunities that we have in this period for a harvest in Brazil that's really going to be a period of growth.

So I'm going to stop around here and just thank you guys for sharing this time with us. And I want to thank you, everyone I met in my team for really working hard day after day to put us in this position where we're at today.

Thank you so much. I will now pass the floor back to Daniel Kuratomi so we can get into Q&As and questions that you may have to share with this team here. Thank you very much.

[Daniel Kuratomi, executive]

[Operator Instructions] The first question is from Joaquim, the sell side here at Citi. Could you please enable his mic.

[Joaquim Atie, analyst]

I just wanted to explore a bit of the guidance that you guys shared yesterday. So I was a bit surprised because the expectations were a little different. And I wanted you to explore a bit of the volume and price so that we can reach this guidance of BRL 11 billion or BRL 11.3 billion. Not sure if you guys have already mentioned this, it was clear though in your presentation, but could you explain what the situation is like for the renegotiations with suppliers? And what our expectations are for this pipeline for orders until September, August? And finally, how we can consider the cash flow in the next quarters.

[Axel Labourt, executive]

If you want to mention this first part, and then I'll talk about the cash flow at the end. Okay. Thank you, Joaquim for this question, and I will try to answer these questions.

But when it comes to focus on the second semester and how we're going to be achieving the guidance that was shared, of course, the focus will be on volumes, as you mentioned. And Welles and Eron gave us some details about the store openings in the last few years and how we have a really big opportunity to shorten the maturity cycle and the life cycle of these stores that they can reach maturity as soon as possible.

So naturally, volumes will be the important bias in the game in this second quarter, especially considering the delays in the purchases from farmers. So generally, the margins to reach the guidance, but also volume. And of course, as Welles mentioned, the fact that as we start off with an inventory stock that is basically at about 15% or 20% of our portfolio of orders, we have the opportunity to work with suppliers once we've already done a big part of the pending items to buy products that are very competitive.

So there will be volumes. There will also be margins considering competitive cost that is a lot more consistent to the new market dynamics. Besides this, I also want to say that, of course, we'll want to go deeper into these two points, but the working capital efficiency aspect, which is going to be fundamental to be able to reach this new guidance. And last, but not least, I also want to say everything related to synergies and operational efficiency that, of course, reflects on the SG&A.

Eron mentioned that give us when we compare with the revenue and the SG&A of 10%, this is not sustainable. We must go back to a level that is closer to 6%, 7% or 8%, which is a level that is healthy for retail. And we have a very detailed plan of how we can do this in the second semester of the year. Eron? It's on mute.

[Eron Martins, executive]

Yes. That always happens. But anyways, we talked about how we did our homework which considers cash, which is quite intense on the fields, charging the amounts that are still pending and monitoring case by case. Some of the cases we have are farmers that have soy that's still waiting on the right moment to price them. So of course, this -- Welles brought in the information that we brought in BRL 200 million of the reduction after some initiatives we implemented in the last few months. So this helps a lot.

And I think the guidance of reducing store openings to focus our energy on accelerating the maturity of the existing stores will help us because new stores will bring sales and we've been noticing this in the volumes, but also a reduction in CapEx. So working on working capital to reduce nonpayment with a healthy level of default since the grains are there to be commercialized. And we're also working on this in a very precise way when it comes to the level of stock and inventory, and we're going to end the year with a level that's a lot healthier, which already is a reflection of some of these improvements we've been doing.

And on the other hand, the reduction of store openings as well, which will lead to an improvement in what's considered CapEx. So we're very comfortable to deliver the margins and do our homework improving our working capital and capital investments.

[Axel Labourt, executive]

Well, I just wanted to mention that before we move on to the next question, I would like to try to answer the second question from Joaquim along with suppliers. Joaquim Atie, I'd say that the biggest -- the most of the conversations that are more difficult with our suppliers have already been complete and most of them already took place. Some conversations are very difficult, some processes are very difficult. And other discussions with suppliers were very positive.

So naturally, there will be some movement in the supplier mix. But generally speaking, Joaquim and all of the suppliers at our company AgroGalaxy, the performance in the receivables in the last 2 months, let's say, we started off in the peak of nonpayment, which was almost double last year, and we were able to reduce this at a pace that was better than last year.

Although this is transparent. All of the renegotiations were done. So we've been working with many of them on the campaigns to value grains, and they've seen this work reach them and so the trust has been renewed in the cases of that we're uncertain. And most of these pending items have already been solved. I'm very confident that we are close to the harvest and we're in a very comfortable position to supply the commitments.

So we have many suppliers on our call, and I think we also need to thank them for their partnership. Adjustment moments are important for everyone. And when you're in agribusiness, you know that from time to time, this takes place and really counting on suppliers and understand the moment we're in and come and talk to us and negotiate is really what helps us to have the necessary comfort to reach the closing of our year.

[Daniel Kuratomi, executive]

Our next question is from Pedro at XP.

[Pedro Luis Fonseca, analyst]

And thanks for the opportunity with this question. Welcome to the new executive members and those that are already in the company before. I just wanted to cover two points. First of all, I wanted to insist on CapEx and cash flow. And so it would be important to get you as this helped to estimate the timing you have been waiting on in the main lines for cash flow in the second quarter financial expenses and CapEx. Eron just mentioned that there was a bit of an expectation for a reduction in CapEx. And so what we can expect for CapEx in the second quarter?

And when we talk about working capital, there's a lot of moving parts. So when it comes to suppliers -- and so when it comes to customers, they're still suffering with a bit of delays. And so when we think about the end of the year, what's the net of this, what we can consider when it comes to consumption or releasing the working capital for the second semester? And so this is the first point I wanted to approach.

And the second point is a follow-up on -- the slide that I thought was very interesting that Welles mentioned with the variation of the stock at the end of the year and some measures of what this would be. So the BRL 300 million that are residual, do these -- are these still having part of the stock coming from the generic products that still suffer more with margin issues or like a super supply? Or is it really more about the stock that you guys mentioned will have more competitive prices and help reach the guidance for margins in the year? These would be the main points.

[Eron Martins, executive]

Great. So the first part is up to me. And I think the fact that we held on to the openings of these new stores, we basically have very little CapEx to work on until the end of the year. So I'm mentioning small numbers. I'm not going to disclose or break down each one in a detailed way, but we can see what we're going to be working on as CapEx and how this will impact our working capital.

We ended the quarter with 17 days worse than what it was last year. And we want to end the year with our numbers and days that are better than what we had in '22. That's what we're working on internally. And this, of course, is going to require some effective work. And we also have some teams monitoring this and some work with purchases in installments and also in cash upfront.

[Axel Labourt, executive]

So I can try to answer part of this question on stocks and then, of course, you can contribute to additional points. So the BRL 300 million that Welles mentioned that are now being projected on the screen are BRL 300 million that were balanced out when it comes to prices. So when we look at the stock, this is especially for inputs considering the biologicals, it really needs to make a difference.

The dynamic for prices is a dynamic that is very stable. So prices didn't change that much compared to the past. But of course, we consider -- if you consider the pace of sales in the first semester, which I mentioned in my part of the presentation, it seemed to be very positive because without a shift in prices, you would end up with like 60% more inputs.

Now what's missing in this total amount of our stock is mainly -- was mainly solved. When it comes to pricing, there could be some small initiatives with suppliers, but most of them are balanced out. So the BRL 300 million that represent about 15% or 16%, 17%. What we have in our order portfolio is very balanced when it comes to pricing, it's relatively low. So we're not going to only sell the BRL 300 million with better margins, but we'll also have the possibility to have replenishment stock with costs that are a lot more connected to the current market dynamics. Welles, you want to contribute with anything else?

[Welles Pascoal, executive]

No, Axel, thank you so much. I think the answer is very precise. So this volume, of course, we feel lot a more comfortable with it because these are products that we're going to sell in the short term as well, and this is very important. We're not thinking about inventories that are going to be left to the harvest in the next year. We're talking about products that we're going to use to actually process and build this portfolio that we continue to build and build during the year.

[Daniel Kuratomi, executive]

We have one more question here from [ Thiago ] at BTG.

[Unknown Analyst]

I wanted to go back to the discussion on the guidance to get a feel about how this was built. We had some discussions since the beginning of the year about how there's a clear impact on pricing in the retail of inputs and the discussion was growing volumes to offset this drop in prices to make revenue in the retail business kind of flat year-over-year. But I want to understand because if we look at the guidance numbers, this is pretty much implicit still.

But when it comes to the recovery of volumes, I would like to understand if once you have July and part of August, are already considered in the commercialization of the harvest in the past, accelerating things. As you mentioned, do you already have some indication of this volume accelerating in the second half of the year, once again, as was expected in the beginning?

And also, if in line with this, you could talk about margins because your margins are very good in the retail last year maybe also based on the trend towards the growth of prices. But when we look at the comparisons year-over-year with a balanced stock, should we start thinking about margins also at similar levels?

[Welles Pascoal, executive]

Well, I'm going to try to answer this [ Thiago ]. First of all, the year '22 was a year that's kind of out of the curve when it comes to profitability, where we had these prices that were really, really high and this, of course, allowed us to get more money and have better margins and then bring more cash in-house. But I don't think this is going to be the reality in 2022. That's the first point. But we will have margins that are healthy.

And why is that? Well, because the market is delayed and the market being late is an advantage for us because putting things in order with the necessary inventories, prices and volumes we can focus as an organization to capture orders that are based on the market costs today that we consider to be a lot more similar to years before '22. So this is going to be the biggest focus. And I think that proceeds will keep up with the levels we have. And for specialties such as Axel mentioned, we'll have variations that are a lot smaller than what we had in other products if you compare fertilizers and chemicals with specialties. I consider there to be a normal flow of business, not compared, of course, to 2022.

[Unknown Executive]

[ Thiago ] to try to contribute to your question related to accelerating the orders, maybe I can give you an example. At the moment, specifically, we have the sale and delivery of fertilizers on the field. So we're very close to plantations in different regions and fertilization is becoming something critical with many logistical challenges as we can see or was mentioned by one of your colleagues in the Q&A session.

So if we look at the average fertilizers at AgroGalaxy in the second half or second quarter, we have about 8,000, 9,000 tons per week. So after a year -- 1.5 weeks or 2 weeks this average kind of doubled. And probably in the next week, it will grow even more.

So really, there is an acceleration that is extremely aggressive in the orders and deliveries on the field. And then you have herbicide, seeds. So this is really going to be a third quarter that's going to be very intense with a lot of operational challenges, but we've been preparing for a few weeks to honor our commitments with these producers.

[Eron Martins, executive]

Another point to also help with the guidance on the EBITDA is that we worked on some adjustments in our structure. We tried to tighten up and have a structure that will be quicker and more agile and then we'll go back to the indicators about 6.5% to 7% of revenue when it comes to SG&A, which will allow us to also deliver the EBITDA that we published.

[Daniel Kuratomi, executive]

We did receive a few questions in writing, and I want to read some of them. So [ Adair ] from CreditCorp, asks us to talk about the covenant of the debt and when it's issued. If you could maybe talk about this topic a bit.

[Eron Martins, executive]

Yes, our covenant is measured in December. And everything we mentioned so far considering the guidance yesterday, we have a very positive perspective of delivering our EBITDA and the movements that we've already been working on ever since the end of last quarter allow us to reduce our debt, especially when it comes to the reduction of working capital and the CapEx with a reduction in the pace for opening up new stores as well as the ramp-ups that will allow us to deliver the EBITDA margins.

[Daniel Kuratomi, executive]

So we have another one here from [ Igor ] about the SG&A and CapEx. What would be the recurring SG&A in the company?

[Eron Martins, executive]

Well, it's kind of like what I mentioned. We are working on getting back to levels of 6.5% to 7% by the end of the year. This is the number after the work that was done in July. And the CapEx is what I mentioned. Normally, it's a one shot. So you adjust the store to have the opening. We already implemented the CapEx of the 24 stores that were opened, and we have 1 or 2 stores that will be opening until the end of the year, so it's a small CapEx, and this is not something that will impact our cash position significantly.

[Daniel Kuratomi, executive]

Well, we have one more here in [indiscernible] from Santander about a short-term future. What's the pace of sales for this harvest in summer stocks with the current levels of BRL 300 million? Is there any kind of risk with the lack of supplies, especially for imports due to the time -- long time or SLA for the purchases for the summer harvest?

[Welles Pascoal, executive]

Well, it's really going to be an operational challenge for the entire industry. And so we believe that this will continue to have a purchase modalities kind of mouth to hand or hand to mouth because the levels of uncertainties on prices really has not ended. And so this, on one side, will give us some room and some possibility to have conversations with our suppliers related to pending receipts or delays and late payments. We're really focused on what needs to be built in the cycle in the short term. So there's no way to rush away from this. So I'm trusting that we'll be able to honor these commitments so that farmers can have what they need at the moment they need it.

[Daniel Kuratomi, executive]

So there's two points here I want to kind of tie in. One is that the company has short-term maturities for the next 12 months. And I want you to talk about what the conversations are like with the banks and the market. They asked about guidance for the net debt at the end of the year. We're not going to give anyone guidance but could you talk about this theme and kind of tie in these two points, that would be great.

[Unknown Executive]

Yes, we're very close to our main bank partners and this has been moving along very well to renegotiate the short-term debts and part of these partners are actually here in this call. So it's something that we hope to be able to communicate with the market soon.

[Daniel Kuratomi, executive]

Well, a last question here in writing is that I was told about the returns of inputs to suppliers, and he would like to know if there's any costs for the company.

[Unknown Executive]

All of the costs related, well, normally, when you talk about balancing out the stocks, this doesn't necessarily -- it's not necessarily restricted to returns. It could be renewal of these debts for stocks that we're going to be selling a bit later on. And it could even be balancing out the prices. So it's a combination of these factors.

When we talk about the returning of stock, all of the operational costs related to this return, of course, are negotiated and discussed with the suppliers. There are some returns, for example, in seeds that are in line with the levels that we consider every year, the cost of returns are already previously agreed upon with suppliers. And there's other stock returns that are naturally extraordinary volumes, now we have to try to find the most optimal way to have these returns.

But when it comes to pending items, we have no other points. Everything that was given back, all the operational costs associated have been solved with each of the suppliers.

[Daniel Kuratomi, executive]

Okay. Guys, we have no more questions. So with that, we'll end our Q&A session. I want to thank everyone once again for being here today. And I want to say and reinforce that our Investor Relations department is available to service you and work with the executives, we guys have an IR website as well and we'll always be available, me and Gabby. Thank you.

[Welles Pascoal, executive]

Thank you all, and have a great day. Thank you, guys. Have a nice day. Bye.

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