Lavoro Ltd

NASDAQ:LVRO

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Lavoro's Fiscal Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's Investor Relations website at ir.lavoroagro.com.

I will now turn the conference over to Jeff Sonnek with Investor Relations at ICR. Thank you. You may begin.

[Jeff Sonnek]

Good afternoon, and thank you for joining us today on Lavoro's fiscal 2023 third quarter earnings conference call for results ended March 31, 2023.

On today's call are Chief Executive Officer, Ruy Cunha; Chief Financial Officer, Julian Garrido; and Chief Strategy Officer; Gustavo Modenesi. The company has provided a supplemental earnings presentation on its Investor Relations website at ir.lavoroagro.com that may be helpful in your analysis of the quarterly performance.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future results and operations and financial position, industry and business trends, business strategy and market growth among others.

These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's registration statement on Form F-1 filed with the SEC on March 23, 2023, or our report on Form 6-K for the period ended December 31, 2022, filed with the SEC and other reports filed from time to time with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note, on today's call, management will refer to certain non-IFRS financial measures including adjusted EBITDA, adjusted EBITDA margin, pro forma adjusted EBITDA and pro forma adjusted EBITDA margin among others.

While the company believes these non-IFRS financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance for IFRS.

Please refer to today's release for reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS.

I'd now like to turn the call over to Ruy Cunha, Chief Executive Officer. Ruy?

[Ruy Cunha, executive]

Thank you, Jeff. Good afternoon, and thank you for joining us today. I'll begin with an overview of our business, then pass the call to Julian for his financial remarks, followed by a brief update from Gustavo on our strategic initiatives.

In my initial remarks about the business, I would like to highlight a few key points about the market in our region. First and more important, farming income is expected to continue at healthy levels, which should encourage farmers to keep investing in ag inputs.

With that being said, market has been very dynamic in the last months considering price fluctuations in some important commodity prices like soy and corn and the price reduction in fertilizers and herbicides back to normal levels.

As a result, many farmers decided to postpone their purchases of ag inputs waiting for a more stable scenario, and margins in some product categories have been penalized as retailers need to unload excess inventory acquired at a higher prices.

In this context, Lavoro had a great fiscal third quarter with results that were consistent with our expectations. We generated $486 million of revenues and $25.2 million of adjusted EBITDA. Although these figures are lower versus prior year, this is largely a function of phasing of sales and related mix impact on margins.

However, on a year-to-date basis, revenues increased 25% and adjusted EBITDA increased 38%, demonstrating the powerful growth of the Lavoro platform, which put us on track for a solid finish to our fiscal year.

The last quarter, we've also made significant progress in our strategic initiatives, including the successful acquisition of Cromo Química, a company that is specialized in high-performance adjuvants that will be a great addition to our vertically integrated Crop Care platform.

We're also pleased to announce another value-added services to our customers with the launch of agricultural insurance solutions in partnership with a company from Banco do Brasil. Gustavo will provide more detailed information on those in a minute.

Looking forward, we are very excited about future opportunities. Lavoro is the largest ag inputs retailer in Brazil, yet we believe we only have 10% share in this market, which presents a tremendous long-term opportunities that we intend to capitalize on.

Lavoro is also the first and only Latin America agricultural pure play listed on the U.S. stock exchanges, which we believe presents investors with an amazing opportunity to directly participate in this advantaged agricultural region.

We offer farmers a comprehensive portfolio of products and services through our differentiated business model that places our network of more than 1,000 highly skilled technical sales reps or RTVs with our unique ability to offer vertically integrated, private label, specialty crop input products via our Crop Care business, which includes our portfolio of proprietized biologics as well as native digital tools that complement the third-party products that with distributors.

Our goal is to help our farmer clients succeed by providing omnichannel support throughout the crop cycle, generating value for farmers and, in turn, gaining their trust. By leveraging the direct economic services provided by our RTVs with our proprietary analytics tools, we believe that we can build an [ intimate ] understanding of our farmer clients and offer products and services tailored to their specific needs.

In terms of footprint, we have a broad geographical presence that spans approximately 148 million acres and offers more than 72,000 customers operating in the key agricultural centers of Brazil and Colombia. Our customer base is focused on the small to midsized farmers whose operations are large enough to make growth investments, and thus, are keen to adopt technology yet have been underserved by the lack of quality consultation and competitive price solutions.

These customers are served by our 215 retail locations and supported by our approximately 1,000 RTVs to help them plan, purchase the right inputs and manage their farming operation to optimize our costs.

With that, I'd like to introduce Julian Garrido, our new CFO, who has joined us last month. Julian has over 30 years of executive leadership experience in multinational and publicly traded companies, most recently serving as Chief Financial Officer at Alpargatas SA, a large Brazilian manufacturing company.

His financial depth will be valuable as we build out our public company infrastructure and execute on our growth strategy. Julian's energy, integrity and dedication to developing people and partnerships are key traits that we are excited about, and we look forward to all of his future contributions.

[Julian Del Val Neto, executive]

Thanks, Ruy, for the kind introduction. I'm thrilled to be here as CFO at such a pivotal moment in Lavoro's history, following its transformation into a stand-alone U.S. listed public company.

My experience working in various companies throughout Latin America has provided me with valuable insights and skills that I believe will contribute manfully to the opportunities that lie ahead for Lavoro's in ultimately creating long-term value for our customers and shareholders.

With that, on to the financials. I'll begin by covering our consolidated financial results for the fiscal third quarter 2023 period ended March 31, 2023. I'll then go into details about our segment performance before summarizing our year-to-date results and finish with thoughts on our full year fiscal 2023 guidance.

Consolidated revenue decreased 2.6% to $486 million in the third quarter of fiscal 2023 compared to the prior year. The slight decrease was driven by 3 factors: the currency devaluation in Colombia, which impacted our Latin America cluster revenue by approximately $10 million; a portion of Crop Care biological input sales being pulled forward into the first half 2023 results; and an industry-related reduction in prices for fertilizers and herbicides. Excluding the currency impact, consolidated constant currency revenue for the third quarter of fiscal 2023 would be essentially flat for the prior year.

Gross profit decreased 15.2% to $71.9 million in the third quarter compared to prior year, and gross margin declined 2.2 percentage points to 14.8%. This probably reflects the lower mix of Crop Care in our consolidated sales and lower margin from fertilizers and herbicides, reflecting the softer pricing environment.

We are in ongoing negotiations with suppliers related to the volume of herbicide products that has already been purchased in an effort to mitigate some of the short-term margin impacts. Partially offsetting the decline was higher sales of specialties, which now represented approximately 10% of the overall mix of inputs sold in the third quarter.

Operating expenses were $48.6 million in the third quarter compared to prior year. Of the $7 million year-over-year increase, approximately $5 million was related to investment in organic growth drives such as RTVs, back-office support and point of sales, and approximately $2 million was related to M&A infrastructure integration costs.

Net loss for the third quarter of fiscal 2023 was $74.3 million compared to net profit of $14.5 million in the prior year and included onetime expenses of $61.5 million related to expenses associated with our business combination transaction, and $5.5 million related to bonus compensation following the business combination with TPB.

Adjusting for these onetime items, our adjusted net loss was $7.3 million compared to adjusted net profit of $15.1 million in the prior year, driven by the combination of lower revenue, lower gross margin and higher SG&A to the factors I just mentioned previously.

Adjusted EBITDA was $25.2 million in the third quarter of fiscal 2023 compared to $44.7 million in the prior year, and adjusted EBITDA margin was 5.2% versus 8.9% last year.

Now on to our segment results for the quarter, starting with our Brazil Cluster, which comprises our business dedicated to distribution of agriculture inputs in Brazil. Revenue decreased by $1.3 million to $426.5 million compared to the prior year, primarily driven by a 6.7% reduction in grain revenue, while revenue generated from inputs was consistent with last year.

Within inputs, the rise in sales of specialty fully offset lower industry pricing for fertilizer and herbicide. The seasonality of input sales also showed moderate change compared to the previous year, but still align with our historical averages. Gross margin declined by 3.7 percentage points to 12.1%, reflecting the lower margins from herbicide, partially offset by the increased contribution of specialty in the overall mix of inputs sold.

In our Latin America Cluster, which includes our agriculture input distribution business outside of Brazil, revenue decreased by 12% to $48.2 million compared to the prior year, primarily driven by the devaluation of the Colombian currency, which I mentioned previously.

On a constant currency basis, revenue increased 7.1%, supported by a 7.9% increase in input revenue, due to strong sales of specialties, crop protection, fertilizers and corn seeds, and a 22% increase in services revenue, reflecting increased profitability and new client growth.

Gross margin expanded by 1.9 percentage points to 15.8%, driven by favorable mix of high-margin inputs and strong commercial execution.

Finally, looking at our Crop Care segment, which is our vertical integrated portfolio of high-margin private label crop inputs. Revenue declined by 13.7% to $17.1 million, primarily due to the phasing of biologic input sales in the Brazil Cluster, a portion of which were brought forward from the third quarter to the first half 2023. This resulted in a 27% decrease in Intercompany revenue.

Gross margin expanded significantly by 13 percentage points to 46.8%, reflecting strong volume and price growth in high-margin products such as specialty fertilizers. Importantly, in the third quarter, Crop Care represented approximately 11% of consolidated gross profit.

Briefly turning now to our year-end date results. As Ruy noted in his opening remarks, although we saw some shifting in sales timing that impact our third quarter results, on a year-to-date basis our strong performance is more clearly visible.

In the first 9 months, consolidated revenue increased 25.3% to $1.5 billion. Gross profit increased 35% to $285 million, representing a gross margin of 18.6% versus 17.3% last year. And operating expenses increased by 32% to $141.7 million. Adjusted EBITDA was $147.9 million, representing a margin of 9.7 for the first 9-month period ended March 31, 2023.

Now turning to our outlook for the full year fiscal 2023. Notably, we are refining our guidance presentation to provide revenue and adjusted EBITDA guidance on both a consolidated basis to reflect our reported results through the end of fiscal year as well as on a pro forma basis.

Our consolidated as reported guidance aligns with the more traditional approach you are accustomed to. It contemplates our actual year-to-date results. It makes an assumption for our fiscal fourth quarter base business, while also including any contribution for acquisition on a partial quarter basis from the date of closing.

This contrasts with the prevailing pro forma guidance that we established during the business combination, where we are estimating the annualized contribution of the entire portfolio, including those that were expected to close in fiscal 2023. In that regard, we have updated our pro forma guidance for 2020 to exclude NS Agro, which Gustavo will speak to in a moment.

On a consolidated as-reported basis, we expect to achieve revenues in the range of $1.95 billion to $2.05 billion and adjusted EBITDA of $154 million to $159 million, representing an adjusted EBITDA margin of between 7.8% and 7.9%.

As Ruy mentioned, our strong year-to-date performance has put us in a position to increase our organic growth outlook for the full year fiscal 2023. The main drivers to achieve our organic projections are; number one, organic revenue growth capturing synergies from cross-selling between Crop Care in the retail segment; number two, gross margin expansion, which is chiefly benefited by Crop Care and the continued enhancement of our product mix, in particular, through specialty sales; and number three, the improvement of our operating leverage as a ramp-up of our commercial efficiency and synergies from past acquisitions.

On a pro forma basis, we now expect to achieve revenues in the range of $1.99 billion to $2.13 billion and adjusted EBITDA of $172 million to $178 million, representing an adjusted EBITDA margin of between 8.4% and 8.6%. As I noted, the difference between today's update and our prior pro forma estimate reflects the delayed closing of NS Agro.

With that, let me pass the call over to Gustavo.

[Gustavo Modenesi, executive]

Thank you so much, Julian. So let me start first with some M&A updates. Yesterday, May 31, we completed the acquisition of a majority stake in Cromo Química, a company specializing in the production of high-performance adjuvants for agriculture with a focus on soybean, corn, cotton, and winter crops. This acquisition strengthens our specialties portfolio within our vertically integrated Crop Care segment.

With respect to M&A updates for those opportunities that have binding signed MoUs. First, as previously reported on February 28, we entered into an agreement to acquire Referência Agroinsumos, a leading inputs retailer offering major brands such as Bayer and Corteva. Referência has 9 distribution locations serving approximately 2,000 customers in the Central and Southern region of the Rio Grande do Sul state in Brazil, which greatly expands our presence in that important region of the country. We expect to close this transaction in the fourth quarter of this current fiscal year.

Second, regarding the NS Agro acquisition that we signed in August 2022. We initially expected to close this transaction by the end of fiscal 2023. However, the diligence process is taking a bit longer than we originally anticipated. And our latest view is that we will likely not complete the NS Agro's transaction by the end of this fiscal year.

Given this, we believe it is prudent to remove NS Agro from our pro forma guidance for 2023. We will continue to stay close to the NS Agro business and look forward to updating you more on our fiscal fourth quarter earnings call.

Taking a step back, I would just like to remind you that M&A is a core competency of Lavoro. We have acquired and integrated 28 companies since 2017, and we currently have a total of 8 active MoUs. Our M&A strategy aims to enhance our reach, capabilities and scale, building upon the solid foundation of our organic growth profile. Our 2 key areas of focus continue to include targets that provide entry to new markets in LatAm and targets that expand our vertically integrated Crop Care portfolio.

Now moving to our organic strategic initiatives. We are very excited to have opened our largest flagship store in Latin America, which is located in Central Mato Grosso in the City of Sorriso, the town with the largest planted area in the whole world.

We're also continuing our work to add new capabilities and service offerings to our customers. This includes a new strategic partnership with Brasilseg to deliver tailored agricultural insurance solutions as well as the launch of our Soja Certa campaign for the '23, '24 crop cycle, which offers special conditions for customers to negotiate inputs using barter contracts.

And finally, we are making fast progress on our capacity expansion project at Agrobiológica's new manufacturing sites. Agrobiológica is part of our Crop Care segment and specialized in the development, production and sale of biological agricultural products. Production processes are undergoing validation and are anticipated to be operational in December of '23.

I will now turn the call back to Ruy to provide some closing remarks.

[Ruy Cunha, executive]

Thank you, Gustavo. So here's some takeaways from today's call. Lavoro had 25% year-over-year growth in revenues and 38% year-over-year growth in adjusted EBITDA in 9 months. The company has been successfully executing on the strategic agenda, including an exciting new acquisition concluded in the last quarter. We plan to continue working in the NS Agro deal, but we do not expect to close the deal before June. Consequently, we updated our guidance to reflect that change.

In summary, we're very excited about the opportunities ahead for Lavoro. The financial profile of our business is compelling, driven by a combination of consistent organic growth that is supplemented by a proven M&A consolidation strategy.

When you look at these high rates of growth when coupled with the inherent margin advantages, we enjoy from our vertical integrated Crop Care solutions business and future penetration of other adjacent services, creates an attractive recipe for significant margin expansions in the years ahead. Combined, we expect to compound adjusted EBITDA growth well over revenue rates. Thank you.

[Operator]

Thank you. I will now turn the call back over to Mr. Cunha for closing comments.

[Ruy Cunha, executive]

Okay. Thank you all for joining us today. In name of Lavoro and the name of my team, I appreciate every participating on this call and also to communicate that we are very excited about the results year-to-date, and about what we see for the rest of the year.

I'm going to be available as well as my team to clarify further questions and comments that you may have later. And hope to see you all in the next quarter of the year. Thank you.

[Operator]

Pardon me, we do have a question from Bobby Burleson with Canaccord.

[Bobby Burleson, analyst]

So congratulations on maintaining the guidance. I understand it's kind of, for some folks, a tough environment in terms of maybe some excess inventory in Brazil in a few pockets. Maybe -- and I apologize if I missed this, but if you could go over kind of how you guys are positioned kind of idiosyncratically versus the broader market, some large international players talking about some pockets of softness.

So just -- how you're positioned with the small and medium-sized farmer. And anything about your portfolio that might be different that helps you navigate that. And then as we look out past fiscal '23, what kind of impact do you expect if there's any kind of near or medium-term impact from pricing or excess inventory out there?

[Ruy Cunha, executive]

Bobby. It's Ruy. So let me first talk about the inventory situation at Lavoro, and then we can talk about what we see going forward.

As we mentioned, the overall market, we see some retailers with excess inventory. At Lavoro, we are comfortable with our current position, so both in terms of the size of the inventory at this moment of the year as well as the health of the cost of this inventory, in which we have been working over the last months.

So maybe giving you some more clarity on that. The most critical categories when it comes to inventory holding would be fertilizers and agrochemicals, and in particular, herbicides. Lavoro has a policy to not carry a large amount of inventory of fertilizers at any point in time. So we should not -- we have not been significantly affected by changes in price other than, I would say, normal course of business.

And when it comes to herbicides, we have been doing a great job to align the costs of some of the herbicides that we have carried with our suppliers. So we are confident that even though we may see some further impact of herbicides in the next quarter, I'd say, it should not be something extraordinary, and we do not expect meaningful impacts spilling over the next year.

Talking about the overall market, if I understood your question, Bobby. I think we need to see how the next quarter in these markets will happen. So right now, we do see retailers carrying a lot of inventory. But let's see how the next quarter will be in terms of sales and how this inventory move. I would expect the -- I would say, the market situation to be normalized by the third quarter of this year.

[Bobby Burleson, analyst]

Great. And maybe if I might just ask a follow-on question. If we think about just the performance of your farmer customers on the global market and their export opportunities, what are you guys tracking in terms of significant opportunities to kind of create a long tail for growth for your farmers, either by crop or by market, a few things that might stand out from your perspective?

[Ruy Cunha, executive]

So looking at the market, we continue to see -- I mean, the Latin American farmers, in particular, the Brazilian farmers, we had I'd say, a lot of opportunities ahead, both in terms of -- they will continue to invest in productivity gains. We will see additional area of soy and corn being planted next year. They will use more ag inputs in volume. So we see them continuing investing in inputs.

So -- and I think given the margins, that they have very healthy margins, particularly in Brazil even compared to U.S., they are more resilient to a dynamic scenario as we have today. So what I would expect is farmers in Latin America, particularly in Brazil, will continue to invest in ag inputs. And I would expect to see relevant growth in productivity next year as well.

[Operator]

Thank you, and this concludes today's conference call. Thank you for participating. You may now disconnect.