Lavoro Ltd

NASDAQ:LVRO

Earnings Call Analysis

Lavoro's Revenue Growth Amid Challenges and Future Projections

Lavoro's fiscal 2024 showed a consolidated revenue increase of 6%, reaching $1.89 billion, driven by a 61% rise in grains revenue. However, gross profit fell 19% to $268.4 million, with margins compressed by 430 basis points. The net loss widened to $154.6 million. Looking ahead, revenue for fiscal 2025 is projected between BRL 8.6 billion and BRL 9.2 billion, with expected adjusted EBITDA growth relative to fiscal 2024. Despite a challenging market, management aims to enhance margins and operating efficiency, anticipating slight growth above market contraction of 10% in the ag retail input market.

Revenue Growth and Market Performance

In fiscal year 2024, Lavoro reported a consolidated revenue increase of 6%, totaling $1.89 billion. The substantial growth in the grains segment, which surged by 61% to $209.9 million, was a pivotal factor in driving this revenue upwards. However, revenue from inputs experienced a modest increase of only 1%, highlighting the mixed performance across their different operations due to ongoing market conditions, especially input price deflation.

Challenges in Profitability

Despite the revenue growth, Lavoro faced significant challenges in profitability, with gross profit falling 19% to $268.4 million, leading to a gross margin decline of 430 basis points to 14.2%. The reduction in margin was largely attributed to a less favorable product mix and the pressures from deflated input prices. This contributed to a stark decrease in adjusted EBITDA, which contracted to $53.4 million, reflecting a 64% year-over-year decline. Overall net losses deepened to $154.6 million versus a loss of $43.7 million in the previous year.

Segment Performance Insights

In the fourth quarter of fiscal year 2024, total revenue rose slightly by 2% year-over-year to BRL 271.1 million, bolstered by a remarkable 41% increase in grains revenue, which amounted to $68.3 million. Contributions from the Crop Care segment were also noteworthy, indicating a continued demand for specialty fertilizers and support for operations like Union Agro, which contributed positively to overall revenue even amid challenges in other areas such as input sales.

Strategic Adjustments and Future Outlook

Looking ahead to fiscal year 2025, Lavoro anticipates a contraction in the ag retail input market by approximately 10%. In response, they expect to outperform the market, with consolidated revenues projected between BRL 8.6 billion to BRL 9.2 billion ($1.5 billion to $1.6 billion in USD), and inputs revenue forecasted at BRL 7.7 billion to BRL 8.3 billion ($1.35 billion to $1.45 billion). Management aims to emphasize margin improvement and operational efficiency while optimizing their retail network to achieve cost savings.

Market Dynamics and Farmer Sentiment

Despite prevailing headwinds, including a decline in credit available to farmers affecting liquidity, the sentiment among farmers is shifting positively. The projected improvement in farmer profitability for the crop years 2024-2025 suggests that farmers are beginning to invest in their operations again, facilitated by stable input prices and favorable grain prices. As drought conditions lessen, an increase in planting acreage and improved yields is expected, allowing for greater engagement in input purchases.

Conclusion and Strategic Focus

Lavoro's leadership recognizes the short-term challenges but is optimistic about overcoming them through strategic partnerships and a committed workforce. The focus will remain on margin recovery, operational fluidity, and enhancing market participation through an organic growth strategy rather than significant acquisitions. Their proactive measures could place them well for future growth in an evolving agribusiness landscape.

Earnings Call Transcript 2024-Q4

[Operator]

Greetings, and welcome to Lavoro's Fiscal Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, and a replay will be made available on the company's Investor Relations website @ir.lavoroagro.com.

It is now my pleasure to introduce your host, Mr. Tigran Karapetian, Head of Investor Relations. Thank you, Mr. Karapetian. You may begin.

[Tigran Karapetian, executive]

Thank you for joining us today on Lavoro's Fiscal 2024 Fourth Quarter Earnings Conference Call for Results ended June 30, 2024.

On today's call are Chief Executive Officer, Ruy Cunha; and Chief Financial Officer, Julian Del Val Neto. The company has provided a supplemental earnings presentation on its Investor Relations website @ ir.lavoragro.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 Form 20-F filed with the SEC yesterday. 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 measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net profit or loss, among others. While the company believes that these non-IFRS 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 to IFRS.

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

I'll now turn it over to Ruy Cunha, CEO.

[Ruy Cunha, executive]

Thank you, Tigran. Good morning, everyone, and thank you for joining us today as we review Lavoro's results for the fiscal year 2024.

I'll begin by touching upon the overall business landscape and the broader economic context of the business. After that, Julian will delve into our financial highlights, and I'll return for some concluding remarks.

Overall, our fourth quarter traditionally our lowest seasonally, preceded largely in line with our expectations from our last market update. On the revenue side, our Brazil Ag Retail segment saw inputs revenue declined 16% to $124.8 million, driven in large part by our conservative approach to credit, which led us to postpone shipments to clients that had outstanding overdue receivables with us.

Nevertheless, we had a strong quarter for by operations, which led to grains revenues to increase by 40% to $67.7 million. Crop Care once again had a strong quarter with revenue increasing 87% to $19.9 million with a strong contribution from Union Agro, our specialty fertilizer business.

Talking about the second semester margin improvement. Our gross margins as a percentage of input sales improved by 70 basis points year-over-year to 22.3% in the quarter, marking the first positive year-over-year impact since the start of the downturn.

We've seen progression in gross margins for our retail business, in particularly as we went on, especially in the third and fourth quarters. Given the seasonality of our business, it makes most sense to look at the year-over-year trends of our gross profit as a percentage of inputs revenue, which excludes the impact of grants.

To that point, our gross margins improved from declining over 1,000 basis points year-over-year in the first quarter to declining 500 basis points in the second quarter, declining 200 basis points for the first quarter and finally, an increasing 600 basis points in the fourth quarter.

This is consistent with what we have been communicating throughout the year, namely that our higher cost inventory cycles out and our inventory cost position improves in a stable environment for input prices, agrochemicals, in particular, this leads to better distribution margins.

It's worth highlighting again these dynamics given the impact that gross margin compression had to our results in fiscal year 2024. As illustrated in the adjusted EBITDA bridge slide in today's presentation, approximately 70% of the decline in attributed gross margin compression, largely driven by dynamics we've outlined and which we expect will gradually resolve.

Now talking a little bit about the market. We see now turning point in the market environment in Brazil. We currently see a mix of contrasting dynamics for the ag input market. 

On the positive side, we see farmer profitability for crop year '24, '25 is projected to show a notable improvement over last year. Recent increases in local grain prices in Brazil, combined with the relatively affordability of inputs have created beneficial exchange ratio for farmers, creating additional incentives for them to increase planted acres and invest in technology to maximize yields.

We expect planted acreage for soy and corn to grow in the low single digits, while yields are projected to improve by mid-single digits following last year's drought affected crop. 

Moreover, input prices have largely stabilized on a sequential basis in recent months, which, as previously noted, is favorable for distribution margins. Contrasting with those positive end market developments in recent months, we observed a deterioration in small and midsized farmers liquidity profile.

In our last call, we discussed how the impact of drought, especially in Brazil's Center West region left many farmers cash constrained after lower-than-expected harvests. 

To give some additional context, credit disbursed to farmers from government programs, banks and other private lenders was down 30% year-over-year in the most recent September quarter.

This amounts to a reduction of approximately BRL 5 billion of credit today available in this system. We believe that this reduction reflects in part the lingering effects of the last year's El Nino. 

As mentioned, the extreme droughts in the regions such as Mato Grosso led to soy bean yields to fell significantly below their 20-year trend line, resulting in lower-than-expected cash flow at harvest for many farmers in the affected regions. This dynamic has made credit more difficult for farmers to access as banks understandably look at the most recent repayment history to make decisions.

In addition, many farmers also held back on commercializing their Safrinha corn, choosing to wait for better market conditions to sell their grains. 

With all that said, I want to emphasize that in the vast majority of cases of farmers repayment delays, the issue is one of liquidity rather than solvency. An estimated 80% of Brazilian farmers own their land, a valuable and appreciating asset and have generating operating margins that have averaged between 25% and 30% over the past decade. 

Consequently, we believe that these farmer liquidity issues will resolve themselves with the cash generated from the upcoming crop seasons. Simply put, farmer demand for inputs to expand profitable planted acres now far exceeds the credit available in the system to support this growth. And this persistent gap in Brazil has only widened in the recent months. 

Looking at our outlook for fiscal year 2025, we expect that the ag retail input market will contract by approximately 10% for that period, with modest volume growth more than offset by the base effect of last year's price declines.

With this challenging market environment, we expect to grow slightly above the market rates. This year, our main priority is to improve margins and operating efficiency to be well positioned when the end market rebounds. 

To this end, we plan to optimize our retail network by consolidating those stores that are closed in proximity and capture fixed cost savings while maintaining high service levels. With all that said, our projections for fiscal year 2025 is for consolidated revenues to the range of BRL 8.6 billion to BRL 9.2 billion and for inputs revenue to range between BRL 7.7 billion and BRL 8.3 billion. 

 In terms of adjusted EBITDA, we anticipated growth relative to fiscal year 2024, driven by margin improvement. On a U.S. dollar basis, consolidated revenue is projected to range between $1.5 billion and $1.6 billion, with inputs revenue of $1.35 billion to $1.45 billion and adjusted EBITDA as well is anticipated to grow relatively to fiscal year 2024.

Our guidance reflects the impact of recent farmer liquidity constraints and the resulting reduction in overall market visibility. With that, I'll now pass over to Julian for a deeper look at the financial results.

[Julian Del Val Neto, executive]

Thanks, Ruy. Good morning, afternoon, evening, wherever you are. Let's talk a little bit about the full year results, and let me start with that.

Our consolidated revenue for the fiscal year 2024 grew by 6%, reaching $1.89 billion. This was mainly driven by a 61% increase in grains revenue particularly in our barter operations, which came in at $209.9 million. Despite headwinds from input price deflation, input revenue increased 1% as our market share gains helped balance those challenges. 

The full year 2024 gross profit was down 19% to $268.4 million and gross margin compressed by 430 basis points to 14.2%. This was largely due to the input price deflation and a less favorable product mix.

The adjusted EBITDA came in at $53.4 million positive for the year, a 64% decline year-over-year. As Ruy mentioned, this was primarily due to gross margin compression to an extra $10 million in allowance for expected credit losses and a $5.5 million increase in provision for expiring inventories.

Net loss was $154.6 million compared to a net loss of $43.7 million in the previous year. Adjusted net loss was $144.9 million compared to an adjusted net profit of $30.9 million the year before.

Alongside a lower gross profit, we saw a headwind from higher finance costs and a smaller benefit from income tax. Net cash flows from operations totaled BRL 43.1 million positive, corresponding to BRL 165.8 million positive, up from BRL 20.9 million corresponding to BRL 108.1 million in the previous year.

Now, talking about our fiscal fourth quarter results, starting with our consolidated results for the fourth quarter, the total revenue increased by 2% year-over-year to BRL 271.1 million primarily driven by a 41% rise in grains revenue to $68.3 million, while inputs revenue declined by 6% to $202.8 million affected by lower input sales in Brazil Ag Retail and the conversion of results from Brazilian Reals to U.S. dollars.

Consolidated gross margin contracted by 100 basis points to 16.7% with gross profit down by 4% to $45.2 million. This margin compression reflects a higher mix of grains revenue and the unfavorable product mix impacting Crop Care, while inputs gross margin improved slightly by 70 basis points to 22.3%. 

Net loss was $77.3 million, an increase of $57.8 million year-over-year, driven by the higher income tax of $35 million and increase of finance costs of $22 million. Adjusted net loss was $76.2 million compared to an adjusted net loss of $15.2 million in prior year, with similar factors impacting the results.

In Brazil Ag Retail revenue decreased by 2% to $192.5 million with a decline of 16% in inputs revenue due to our strategic decision to delay shipments to certain clients with overdue payments, as previously mentioned

Gross profit, however, grew by 13% to $29.8 million, supported by a 210 basis point margin expansion, reaching 15.5%. For Latam Ag Retail revenue increased by 5% to $65.2 million, mainly due to favorable currency effects from the Colombian Pesos.

Gross profit rose by 10% to $10.4 million and gross margin expanded by 70 basis points to 15.9%. In Crop Care, revenue surged by 87% to $19.9 million, led by strong results from Union Agro and Pattern Ag.

However, gross profit declined by 29% to $5.8 million with margins compression to 28.9%, largely due to product mix effects as Per has contribution increased. Adjusted EBITDA was $2.1 million negative, down from $2.4 in the prior year period, reflecting lower gross profit and a decline in other operating income.

Last but not least, our consolidated net debt to the adjusted EBITDA ratio, including payables of acquisition of subsidiary landed at 4.2x. If we exclude those payable, we landed at 3.4x. Our Brazil distribution net debt to adjusted EBITDA ratio, which is the covenant of our CRA landed at 1.7x below the 2.5x limit.

With all that said, I'll pass it back to Ruy for some concluding remarks.

[Ruy Cunha, executive]

Thank you, Julian. I think with that, we summarize both the results from last year and also a little bit of our perspective for the next year.

If I were to provide a summary of the feeling of the market nowadays, is we expect farmers to be optimistic in the midterm. And we're going to have short-term challenges that will have to be dealt with, so we can have better visibility on the actual potential for this upcoming year.

 

It's encouraging to see that some of the factors that have impacted negatively the market in the last year, such as the sharp variation of input prices and also the decline in farming profitability, they are now improving.

Brazil is a country where agribusiness stands as one of its main strengths. Cycles will come and go but this does not change the fact that the region will play an increasingly prominent role in food and energy production.

Believing in this and in the gradual improvement of market fundamentals, Lavoro together with our strategic partners and our over 3,000 employees is focused on overcoming short-term challenges. 

In this context, I'd like to thank and recognize the work of our team, which has shown incredible commitment to our clients and the company in this very dynamic environment.

With that, thank you, and I'll pass over for Q&A.

[Operator]

[Operator Instructions] The first question comes from the line of Kristen Owen with Oppenheimer.

[Kristen Owen, analyst]

We are sitting here on November 1. So, your fiscal first quarter already in the books for 2025. Just wondering if you can help us think about the cadence of your guidance for the fiscal year, how we should be thinking about that first half versus second half and the order trends there?

[Ruy Cunha, executive]

Yes. Hi, Kristen, maybe Julian wants to start just giving some highlights and then I can complement.

[Julian Del Val Neto, executive]

Hi, Kristen, yes, I would say, as we sit here today, I don't think the seasonality, we don't expect it to be materially different from last year. There might be some puts and takes, but I think it's going to be broadly similar in terms of the quarterly and first half versus second half breakdown.

[Ruy Cunha, executive]

Yes. On that, Kristen, the market is performing, let's say, the pace of the market is performing very much in line with what we saw last year, the pace of negotiations, the behavior of the farmers. So, we do not anticipate a lot of changing dynamics in this year.

[Kristen Owen, analyst]

Maybe if we can double-click on sort of where channel inventories are today, given the impact that that had on pricing in the last year. Maybe just where channel inventories are? You noted the pricing is starting to stabilize on a year-over-year basis. And any sort of commentary that you can provide in terms of whether opportunities or risks associated with the bankruptcy of one of your large competitors in the region?

[Ruy Cunha, executive]

Yes. So, on the inventory and input prices, 2 important components here. As I mentioned, the trend line on the input prices is of stabilization, particularly what we've seen in the last months. And this is also being reflected in the farm gate prices, which is an important indication of the margin recovery. So, stabilization scenario is apparently now becoming clearer.

The second thing, even though there is no official data on retail inventory, the sentiment here is that the inventory is mostly normalized. Right now, we do have regions in which we continue to see more competitive price. But I would say that in the beginning of this year, we have a better inventory position overall in the retail in Brazil. 

Now, regarding your second question, I think that the market nowadays very dynamic. As I mentioned, there's some nervousness in the system. But farmers are investing in their area expansion. They continue to buy inputs.

They're coming to our stores to get the basic inputs that they need. So, I think what we need to understand is that even though there's some noise in the short term, the demand remains strong, and this might be an opportunity for us moving forward.

[Kristen Owen, analyst]

One last one for me before I turn it over. You mentioned on the OpEx cost savings side, maybe a little bit of restructuring around the physical footprint. Just help us understand the waterfall for EBITDA next year, how you think about those cost savings contributing to that waterfall.

[Ruy Cunha, executive]

Yes. I think most of what we expect to recover in terms of EBITDA will actually come from margins because the impact in margins that the last year was very much high.

Now, with that being said, we grew by acquisitions combined with organic store openings. And we do see opportunities to eliminate some overlaps and some low-performing stores in specific regions.

I won't anticipate a major restructuring, but we do see opportunities for further consolidation that will have both a positive impact in our SG&A, but also on our profitability. So, we'll provide more details on the next upcoming months. But what I can anticipate is that most of the recovery comes from margin, but we are also counting on footprint optimization as, let's say, a second lever.

[Operator]

Next question comes from the line of Ben Theurer with Barclays.

[Benjamin Theurer, analyst]

Just a quick follow-up as it relates to the outlook and what you're seeing in the market, farmer profitability, somewhat stretched, obviously, and kind of like stressed because of the drought conditions.

Have you seen any improvement of lately? And how do you think that has changed some of the behavior of farmers? As we think about it, there's still an expectation of prices to come down as you reflect in your guidance. So, does that change any way of how farmers go to you, buy the products, process them through? Any comment you have as to the behavioral part that would be much appreciated.

[Ruy Cunha, executive]

So, a few comments. Like last year, farmers are delayed in taking their buying decisions, and they were delayed right now in selling, for instance, the grains from Safrinha.

We also saw, and this particularly, I would say, over the last month or so, a growing concern of farmers to secure their inputs availability.

Given the overall scenario and also the lower margin of some inputs, the imports to Brazil have reduced for some specific products and farmers are now worried about not getting the product. So, I would say, in the last month or so we saw a growing concern on that, and that is accelerating the demands and the visits to the stores.

But overall, I would say the market is moving slowly in line with last year and much lower than the previous years.

Now, when it comes to profitability then, I think it's a combination of 2 things. So, even though the grain prices are not obviously at the peak, and I think corn has a better position, soy is not that much. But in that sense, the calculation that farmers do is that how many bags of corn, so to say, I'll have to use to buy my basic package of inputs.

So, for instance, in our estimations, the quantity of bags of corn for Safrinha into last year, they had to use something around 53 bags to buy a basic package of seeds, fertilizers, and crop protection. 

This number has now come down to 47 bags. And this is, again, a combination of the basic grain prices, but also on the input prices. So, the relationship is getting more positive. And I think farmers will be using this to take their decisions.

[Benjamin Theurer, analyst]

And then I just wanted to maybe get your thoughts as to the sentiment amongst some of your suppliers and how your relationship is with the suppliers.

Obviously, a large competitor of yours had to file bankruptcy. Has that triggered some sort of change in behavior amongst the suppliers of yours and how they think about credit lines towards you? Or is that not the case? Is that unaffected?

[Ruy Cunha, executive]

I think we always need to look at the big picture without having a particular look into some specific player. What we see is that, obviously, after the impact that farmers had on their profitability in the end of last year, there was already concerns when it comes to credit concession.

And that was even applied to ourselves. So, we were more, let's say, conservative in providing credit. And that also holds true for banks and suppliers. So, what I can say is that the conservative approach was already in place when the season started.

I think it continues to be there. And it will basically improve as farmers will improve profitability, we start buying again, money continue to flow through the system and then lenders will feel more, let's say, confident to provide credit again. I think it's a matter of time, but it has started, I would say, early on, on the season.

[Operator]

Next question comes from the line of Austin Moeller with Canaccord.

[Austin Moeller, analyst]

Just the first question I have here. So, the data that we've collected on NOA rainfall data in Brazil, Argentina and Colombia has continued to show elevated drought activity even within the past month. Can you discuss the timing of the coming planting seasons and when you think this may be normalized based on what you've seen historically with El Nino and La Niña?

[Ruy Cunha, executive]

Yes. So, the soy planting evolution right now, I can talk about Brazil, which is a number that I have easily in my mind. The soy planting in Brazil is about 40% of the total area.

This number last year was around 45%. So, I would say, is slightly delayed compared to last year. And if you see an average of the previous years we had, I would say, we should be more towards 47%. So, it's 40% is delayed, but with recent rains, it's progressing faster now.

[Austin Moeller, analyst]

And how are you thinking about your M&A strategy with retailers and the cadence of that in this environment?

[Ruy Cunha, executive]

Yes. I think the environment continues to be similar to what we saw in the last year when it comes to M&A and organic growth opportunities. We believe that nowadays, even though the interesting M&A targets, what we will focus more is on the organic side in which we see more opportunities to continue growing and to gain market participation. So, that will be the main focus of our team this year.

[Operator]

[Operator Instructions] Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Ruy Cunha for closing comments.

[Ruy Cunha, executive]

Thank you. I just want to thank you all for the participation and looking forward to our next quarter review. See you soon. Take care.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.