AgroGalaxy Participacoes SA

BOVESPA:AGXY3

Earnings Call Analysis

AgroGalaxy Faces Challenges but Shows Optimism for Q3 and Q4 Growth

In the second quarter, AgroGalaxy experienced a challenging environment, with a 42% drop in net revenue due to lower demand from farmers amid unfavorable market conditions and climatic events. However, the company noted a 30% increase in order volume year-over-year in June and July, signaling recovery. They have tripled their barter operations, which now constitute 42% of revenues, providing more security and options for both AgroGalaxy and the farmers. Looking ahead, the company anticipates an improved second half, driven by better weather conditions and a focus on higher-margin specialty products.

AgroGalaxy's Resilience Amidst Market Challenges

In the face of a challenging agribusiness landscape, AgroGalaxy has demonstrated resilience. The company reported results consistent with seasonal expectations, impacted notably by delayed markets for inputs and climatic challenges in key agricultural areas like Mato Grosso and São Paulo, which saw soy production declines of about 5% and even 10% during off-seasons.

Growth in Barter Operations

Notably, AgroGalaxy’s order portfolio increased by 30% year-over-year as of June and July. The company has embraced barter operations, which have become vital to maintaining revenue streams. This second semester has seen AgroGalaxy achieving threefold growth in barter volumes compared to the previous year, reaching 332,000 tonnes against just 5,000 tonnes a year prior.

Financial Performance Insights

The company has faced revenue challenges too, with a significant 42% drop in net revenue attributed to a 48% decline in inputs. Notably, the impact has been cushioned by an increase in pre-paid revenues for the upcoming quarter, amounting to BRL 170 million, compared to BRL 90 million last year. This suggests a more favorable outlook for the third quarter.

Cost Management and Margins

Despite the projected lower revenue from fertilizers, AgroGalaxy’s gross margin improved to 19.5%, up from 16% in the previous year. This improvement is attributed to a strategic shift towards higher-margin specialty products, which now constitute 17% of the revenue mix, compared to just 9% previously.

Expectations for Crop Yield and Trends

Looking ahead, the second half of 2024 promises stability as the company anticipates favorable weather conditions. AgroGalaxy is focused on providing farmers with tailored offerings to incentivize input purchases at optimal times, particularly as planting windows for soy and corn approach.

Strengthening Client Relationships

A pivotal strategy involves increasing client engagement, with expectations to bolster the client portfolio from June to August. The outlook shows a promising 40% increase in performance since last year, attributed to innovative campaigns that have resonated well during the offseason.

Managing Default Risk

Regarding default levels, AgroGalaxy expects figures to be in line with last year, with some fluctuations based on regional climatic impacts. The anticipation of a better off-harvest season contributes to a secure perspective on client repayments.

A Stable Future Vision

Overall, AgroGalaxy's focus on operational efficiency, cost management, and strategic relationships suggest a bright outlook. With continued emphasis on both short-term gains and long-term strategies, the company aims to solidify its position in Brazil’s agricultural sector into 2024 and beyond.

Earnings Call Transcript 2024-Q2

[Flavia Alves Costa, executive]

Good morning, and welcome to teleconference for the earnings call of the second quarter of '24 from AgroGalaxy. I would like to thank all of the members that are accompanying us in one more earnings call.

My name is Flavia Costa, I am international relations analyst. I have Axel Labourt and Eron Martins, our CEO and CFO. I would like to remind you that this conference is being recorded and will be made available at our website at ri.agrogalaxy.com.br where all of the complete material will be also made available. You may download the presentation on the chat icon as well in English as well.

[Operator Instructions]

We'd like to highlight that the information contained in this presentation and any eventual statements that may be made during the conference on business perspectives, projections and financial goals for AgroGalaxy, are based on the premises for the administration of the company as well as information that is currently available. Any future consideration is not a guarantee of performance, they involve uncertainties because they are future events. Therefore, they depend on market circumstances, which may or may not occur.

Investors should understand the general economic conditions, market conditions and other operational aspects that may affect the future performance of AgroGalaxy and all of the things that may go beyond what we express here. So now we will begin the presentation, passing the floor to Axel.

[Axel Labourt, executive]

Thank you, Flavia, and welcome, everyone, who is participating in this earnings call conference. We will start by talking about some of the main highlights, and we are presenting results, focusing on a very challenging market, which has been challenging for all of the agribusiness markets.

We've been making changes, seeking more agility and all of these changes for efficiency are becoming more apparent in this quarter in this still adverse scenario. And the second quarter, we registered results in line with the seasonality of the business with the low seasonality, worse under more impacted even more by the delay of the market of inputs, the drop of the prices of several inputs and severe climatic conditions at some states, especially Mato Grosso do Sul and the Western -- Eastern side of Sao Paulo [indiscernible], which impacted the production of soy during '23 and '24 at approximately 5% and during the off-season harvest of 10%. For smaller farmers, we're very careful and very slow in maximizing efficiency, trying to improve the exchanges that they have today.

So let's begin the next slide. Within this challenging context, it is important to highlight that some of the highlights that we have today in AgroGalaxy that we are sharing with you are part of the context of the market, and we will signal some of the expectations not only for this quarter -- in the second quarter, but also thinking about the second semester of the year, of course, when we entered the higher seasonality of agribusiness in Brazil. So in June and July of this year, we registered an increase in our portfolio of orders at 30% in comparison to the previous year.

It is very important, as you will see later, in next slide, that the market's behavior goes in line with what I said of a more careful behavior of farmers to maximize their exchanges and only buying what they really need at the right time and maybe delaying other decisions for more adequate moments in the development of their field. Barter has been a very strong pillar in all of our results and they continue -- it continues to bring us good results with AgroGalaxy focusing together with the farmers to increase and grow in the Barter operations in the company. In the second semester from '24, we were able to do 3x more in the volumes of Barter than we did during the same period of '23. 332,000 tonnes in relation to the 5,000 tonnes that we did during the same period of last year.

In the first quarter of the year, AgroGalaxy has 42% of its business, if its business in revenue operated through Barter, which not only gives us the safety when we think about the expiry date of the next harvest, but it helps us to have a much more assertive and constructive relationship with farmers, bringing them more options to maximize the exchange relationship and improving the capacity of keeping the inputs healthy selling packages instead of isolated negotiations. Also in this low seasonality and the low season or off-season, our net revenue was affected. We had a drop of 42% against the second quarter of last year in terms of inputs, the impact of 48% negative.

The second semester is a semester where there is a specific higher weight of the revenues, they are from fertilizers. So the second quarter -- the second semester is more impacted by the fertilizer sales. And so because of different conditions in the second semester of the year, we will have a cutoff. In other words, revenue, which will -- cannot be recognized in the second quarter because the delivery occurred in the third quarter of BRL 170 million versus the previous year, practically BRL 90 million more than the previous year.

The BRL 90 million, which were already set up in the -- which are already paid for the second quarter, if we compare it to last year, it will be transformed into 20% of a drop. Considering the market delays, this is very satisfactory, being that AgroGalaxy is being able to take advantage of the markets come back and anticipating many deliveries and revenues. So in the context where we had less revenue for fertilizers, we can advance in other segments or other products. So our gross margin for inputs grew almost 2 percentage points against the same period of last year, reaching 19.5% of gross margin. Here, we can highlight several specialities, a specific weight of the portfolio of our specialties in the second quarter of the year was 17% of our revenue against 7.5 percentage points higher than the same period of last year.

This is because of the campaign which we started in June, and it continued until July, we were able to reach the mark of BRL 74.2 million, which represents a growth of 33% in the last 3 years. This is definitely exceptional performance above all, considering the delays in the market, which once again is one of AgroGalaxy's high points and one of the main, if not the main company that sells special products in Brazil.

Once again, comparing to other quarters, we will talk about our new operational model in seeking a more light structure above all having an operational model that can allow us to be more agile and allows us to respond to the needs of the entire country in a more quick way. We are anticipating market movement. So when we look at the general administrative costs, excluding amortizations and R&D and depreciation, we had a much better year in terms of 17% or of BRL 26 million. The 17% is transformed to 22% if we look at the accumulated over the last 12 months year-over-year. So naturally, the evolution has come from the adjustments and interventions that we made ever since the beginning of the year of '23, and we are reaping these fruits, and we still have, from the adjustments made in 2024, more savings to capture over the year. Eron will comment on those points in higher -- in greater detail.

Please, next slide. I think it is very important that we understand these results of the second quarter of AgroGalaxy and the market within a higher-level context. What's happening with the farmers, what are the market conditions, which have been conditioning somehow the business development and the results of the company. But we will talk about that on the next slide.

So let's -- we continue in agribusiness with unfavorable conditions. For example, in July, the exchange conditions for crops like corn and soy, we are talking about higher investment that farmers need to make to be able to buy the inputs for the development of their farming as the big bag. So we still have an exchange or Barter. The unfavorable compared to the previous years, corn has relative improvement, but when we extend it to the historical series, it is still unfavorable, and that explains, let's go to the next slide, the profitability that we are seeing for farmers, Brazilian farmers, both for soy and for corn, which in relative terms in the comparison, of our historical data, they are low profitability.

There's a lot of heterogeneity and diversity when we talk about farmers that own their farms and those at least their farms, but -- and there are other farmers that are located in Mato Grosso, Para and Mato Grosso do Sul and Minas Gerais have suffered more climatic events, but when we look at the profitability, they have been the lowest than other years, which explains, as I said before. This is affecting the behavior of the farmers where they are buying the minimum possible to maximize as much the productivity of their farms and to be more efficient.

Please, next slide, Flavia. The commercialization of soy now for the harvest of '23, '24. So the liquidation of grains -- so this is another indicator of the behavior that I mentioned. As you can observe, the blue light line in comparison to the harvest '23, '24, which is the darker line or previous harvest like '22, '23, '21, rains continue to be delayed until the month of August, we are practically close to 80%, but the first 7, 8 months of the year had significant delays in comparison to the harvest of '22, '21, very similar to the '23 harvest.

Farmers are still waiting for the right moment to get the right prices to harvest to be able to pay their debts and naturally to invest and the packages of inputs that they need for the next harvest.

Please, Flavia, let's go on to the next slide. Here, we highlight the advance of the grade of inputs in Brazil. We are talking about fertilizers, seeds, and other specialities and pesticides. It is not explicitly only connected to revenue, but also it's connected to our portfolio of request or orders.

If you look at the dark line, that reflects the performance of harvest '24, '25. We talked about this in the earnings call of the first quarter. And at that moment, the market was 20 percentage points delayed against the same period of the previous year. The second quarter had 2 performances that were pretty highlighted and April and May, were mainly delayed, but we were trying to recover what was lost in the first quarter. And in June, there was a much more accelerated improvement higher than June of the previous year, trying to recover some of the lost time that happened in the first 4 months of the year.

The performance with our clients was 30% higher than last year in June and July, and that reflects the advance of the market. That is very important to highlight because in a context in which farmers are looking or waiting for the right moment to make their investments. What we need to do as a retailer in agribusiness in a platform of sales that reaches all of the states is to proactively and creatively bring them conditions and models that can be favorable to their demands, making it more attractive so that they can buy from us.

So finishing the market conditions, I will pass the floor to Eron, who will talk about the financial highlights of the second semester -- of the first semester.

[Eron Martins, executive]

Thank you, Axel. We will be talking about the financial results. Let's start with the net revenue. So as Axel commented in his presentation. And before we get into the details of the variation of inputs and grains, I think that within the quarters of agribusiness, the second quarter is always more representative in terms of revenue that is the period where farmers are taking care of their smaller farms, so they use less of our inputs. So quarter 3 and 4 are always more relevant in the point of view of revenue.

Still, there is a drop of around 42% [indiscernible] detail exactly what that drop is. If we look at the inputs, when we see [indiscernible] as Axel presented, 48% comes from a drop in volume.

In this quarter, we have a market dynamic. Our farmers already have 90 million more in cutoffs than what we had last year, it was 170 million this year, of which 90 million is higher than the period of last year. So the pro rata account brings the 90 within the second quarter, we're talking about the last few days of the quarter, then we would be talking about only a drop of 25% and not 48%. The drop of [indiscernible] large in a quarter that is not relevant for revenue, but it's still very similar to what we have seen with the other market players. I think it is also important to remember our strategy. We will talk about our product mix -- but we decided, as we said in these 12 months to wait for the -- to wait with the commoditized products and try to sell the higher added value products.

So naturally, this will impact our volume of sales, of course, all within what is planned. And if we didn't have these other impacts, it would be lower in terms of variation. I didn't comment on this, but in relation to the 10% variation in relation to the same quarter of last year. 10%, we had a 10% price drop. You will see that in our mix. So we lost gross margin. There are some contexts that are still suffering as well some of the inputs had lower prices in their variation. When you look at grains, that has important impact, 13% of that impact comes from volume. And that's not because we have less operations, our grains are performing very well. Axel, as he commented, we had 42% increase, but this comes because of the drop in the harvest.

As we know, it was lower than the last 10 previous years and has been impacting our volume and the whole market as a whole. If we look at the mix, as I mentioned with fertilizers, our mix is still according to what we have been doing in the last presentations. We've been focusing more on fertilizers. In the last quarter, it was 49.7% of our revenue. In this quarter, it represents 44%, and we are focusing more on specialties. Now it's 17% of the mix against 9% of the last quarter. And in comparison to the first quarter, we had around 12%.

So we have been growing in a relevant way with the special products because they provide very sustainable conditions. They bring better profitability to us and better results to farmers, more than 30% in margin and besides that, they are more sustainable solutions within agribusiness. This is one of the lines that are supporting us in terms of gross margin.

In our gross margin, we have 19.5% against 16 points that came from the first quarter of last year. And we are also continuing with the same revenue, so we were trying to not give discounts. We are trying to work more proactively with our partners and the dealers and bring better market conditions for us at the point of sale. And naturally, if you bring margins of 11 to 10 but the special products with 30% of gross margin, that will give us better results.

On the next slide. This is also aligned with our expectations. We have a greater mix and a much more -- much more savings, remembering all the work that we did last year and which we finalized in February of this year, we've been reaping the effects of all of this work. And so if we compare LTM to the rest, we have these savings of more than BRL 182 million with SG&A fruit of our effective changes. We have a smaller team in the company.

We redid our structure. We gained much more agility. We worked with affiliates, we have 19 less affiliates than we had last year. So in the end, we had reorganizations, logistical reorganizations to take better advantage of our support point. So the reflection is here, savings of 82 in this quarter. All of this consolidates our EBITDA on the next slide. Is it a negative EBITDA? Yes, it is negative.

However, traditionally speaking, if we remove the year of '22, which everybody knew, which was a year that was very out of the curve, we have a quarter with negative EBITDA since all of our fixed costs are maintained, and we have a level of revenue, which is lower. So if we look at the -- this from a positive point of view, the reduction of sales of 42% is lower in scale. We had revenue with higher margins, and we will maintain that and having a better structure allows us to have better impacts that are adjusted, so we have the same predictability. So if we come back to the more revenue in the next quarters, the 2 next quarters are more relevant. As I said, last year, the second quarter, what we try to do is monitor how many clients we have and that tells you how you are prepared to face the second semester. And then I can say from June and July until now, we will be bringing much more new clients in and that will determine the year '24.

We need to be realistic in quarter 2 in terms -- the new clients were very difficult, but June -- from June, new clients started coming in. So the inputs started getting expensive even if the farmers didn't realize there was also an increase in the cost of freight or imported goods. So this also affected the costs of transportation related to the inputs.

So we continue to work very hard with accounts payable and accounts receivable. This is the way that we have been dealing with bank financing. So it's been more restrictive. This is affecting the entire country of Brazil, but we are working with accounts payable and accounts receivable. And we have a good level of stock for this time of the year. Now we will be starting the Barter with our affiliates to improve our cash flows that we are talking about, total of 13 days of 1 day to close the quarter. And finally, I think this is a positive sign our indebtedness, our level of debt. We were able to reduce it an important level of reduction, taking into account that the interest rates are still very high in the market. And all of this is fruit of the work that we have done to reduce our working capital.

We have an improvement in our long-term balance. I'm going to pass the floor back to Axel so he can talk about the expectations that we have for the year of '24.

[Axel Labourt, executive]

Thank you so much, Eron. Let's go on to the next slide, please, Flavia. So let's go back to talking about the advance of the commercialization of inputs in Brazil and what we can expect in the second quarter. As we commented in the first quarter, especially the first 4, 5 months of the year, the market had a relevant material delay, once again, a reflection of the behavior of farmers buying very carefully. And the markets coming back in the month of June or July, which we are very optimistic about for the future. What should we expect and how do we deal with this accelerated improvement to be able to compensate for the losses of the previous years. So in the month of June and July, we worked very hard to improve our portfolio. I need to highlight how creative we have been in engaging our farmers to maximize the exchanges. For the farmers to buy inputs today, it's not attractive enough for them. It's only attractive when it's an urgency, when there's a disease or to treat specific pests or insects. So we had to be very creative because today, farmers are really trying to maximize their exchange.

So we are trying to give them the best offers possible. And as a result, I would like to share with you a campaign that we designed thinking about those -- thinking about the corn that's going to be planted in the beginning of the month of April and reaped in the second half of '25. We started a campaign in the month of August to value this grain.

So paying more for the grain associated naturally to portfolio of other products. So it overcame the expectations. We reached 3 million new bags in the month of August and the campaign was very well accepted in all of the states of Brazil that we are present in, and we were able to reach the 3 million bags yesterday. So in the second -- in the -- with half of the month of August past, we were able to reach our goals, once again, reflecting that when we are able to design an offer that engages farmers that allows them to have -- to make a difference in the productivity and in their exchange relation, they are very happy to do business.

This is the line of work that we have been doing at AgroGalaxy. We will continue to be anticipating the market with speed, agility, bringing the farmers in partnership with our suppliers, the best suppliers of the market offers that allow them to make the best investments possible and have the best productivity and that is what's going to make the difference in the second half of the year, and that is what we are working on.

It's always worthwhile to not forget to the long-term issues. So let's go on to the next slide. So we have a market conjuncture where farmers are operating very carefully, not taking risks, only the minimum, buying only what's absolutely necessary. If we think about Brazil as the largest agricultural market in the world, the predictions for soy in '24 and '25 will be extended. But actually, the main opportunity that we have in Brazil continues to be the productivity per acre. If we look at the historical series, both for corn and soy, over the cycle, the level of investment per acre continues to increase cycle after cycle and harvest after harvest besides what is already natural for the harvest '23 and '24. For '24 and '25, we believe that farmers are still trying to improve their productivity and they believe that once the conditions improve, the second quarter will be a little bit better, the climate will be better. And as I said, we'll bring these farmers a more attractive possibilities. So along these lines, what will be our priorities.

Flavia, next slide, please. We will continue to work on having a higher level of client portfolios, higher than what we had in the months of June and July and in the beginning of August. We will continue to work on an increase and on the synergies that exist with our grains business. We have a platform of resales, which will be more relevant in Brazil. 42% of all businesses done in 2024, have been through AgroGalaxy. As I mentioned, this brings more security and safety for the farmers as well as for us because then in the future, we will have better ways of making predictions and it will also provide better conditions to the farmers. We are on the road to be more and more light company, more agile company, and that is why we are foreseeing for the balance of end of this year, we'll have less cost. Even though it's not so favorable as we expected, we will have a much more stable market than we had in '23 and '24, and this will give farmers more tranquility so they can work with more certainties and less uncertainties. That is what we expect for the second semester of the year.

To close, Flavia, next slide, it's very important to mention that we need to work on the culture of AgroGalaxy. So this is what we have been reinforcing quarter after quarter that we need to be an agile company, a company that anticipates market movements and that is efficient operationally. This is part of the priorities that we have in AgroGalaxy with all of the employees that we have in the company and with all of our branches and the cooperatives and the business we are working so that we can have a very satisfactory second semester. We will stop here, Flavia, and we will open for the questions and answers that any participants may have.

[Flavia Alves Costa, executive]

[Operator Instructions] So let's go to our first question from [indiscernible] Citibank. He sent us a question, I have 2 questions. First, how do you expect the level of default to be for this year for the company and the sector in general? There's been a relevant increase in accounts to accounts receivable in this semester. How should we expect to monetize this? And as you mentioned, the portfolio of orders is growing year after year, but what is the mix of sales of this portfolio? And what is the evolution of the growth in August? Could you share with us how the process is going of [indiscernible] in this segment of seeds?

[Eron Martins, executive]

Flavia, I will talk about default and then Axel can talk about the seeds and the portfolio -- client portfolio. Yes. Default will seem to be very similar to last year, but we are still waiting for better times to come. This year, we believe that the default is connected to more climatic issues that does not affect the whole country. We see that Mato Grosso do Sul is suffering a lot and some parts of Mato Grosso as well. But in general, there is relevant impact from the harvest difficulties. And so a lot of times, the harvest when it comes better, it's to pay off the losses of the previous years. And the off-harvest was better than expected this year, except for Mato Grosso do Sul only, but in June, the farmers had to pay off what they lost during the previous harvests.

So of course, we had a worse year this year compared to last year, but we believe that [indiscernible] off-harvest was very good, and it will be improving the possibilities in the conjuncture. And then I think that the default levels are going to be a little bit the same as last year, which are a little bit higher than '22.

So at the end of the year, probably we'll get the same numbers as we had last year. We continue to do our homework. I think, first of all, 42% of our Barter business is coming from the off-harvest revenue and had really good effects, especially because we are able to conquer new clients that not necessarily had a fit with us. So valuing the grains allow us to have more profitability and more predictability on how we will end the year in terms of default. I'll pass the floor back to Axel so he can talk about our client portfolio and how the negotiations are going.

[Axel Labourt, executive]

Thank you. As I commented on our portfolio of clients, performance in June and July of this year was 40% higher than last year since we had the campaign of the off-season harvest. In the first 15 days of August, we were able to have a new portfolio of 3 million sacks of corn for 2025, and also comment on what should we expect economically speaking. We are with our corn harvest practically finished, what will open a window for soy, which will open a window for planting soy, that is going to be very positive, a minimum period of 90 days for the planting. And then with the rains, we will probably have more weeds in the field.

This behavior, as we commented, and reinforced many times during the presentation of farmers buying less and being more careful, we believe that in the second semester of the year, there will be a higher increase. It's too early to say exactly on it, but we will share some signs, which allow us to be optimistic, and we are working to provide farmers with what they need to plant.

On your specific question on the evolution of the search for strategic partners for the soy seed business, this process began in the first semester of the year. As we had already mentioned, there were several partners interested in the beginning of the process. It's still evolving according to what we expect, and we hope that we will have some news for you in the next quarter. This is what we have to share with you on that.

[Eron Martins, executive]

So for those who heard, you were reading my lips when I talked to Axel. I was just telling him not to speak over what the guidance is available. Are there any other questions for now?

[Flavia Alves Costa, executive]

No. Remembering that in order to ask questions, please click on the Q&A, give us your full name and language in which you would prefer to speak. There are no other questions. Thank you once again for all of those who are present, suppliers, banks, partners, I think it's our [indiscernible] how the year is. This is a challenging year for everyone. But for those who did their homework, I think that there will be a lot of improvement in the second part of '24. So thank you so much, everyone. Thank you for your participation in this earnings call. Have a great day.

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