Lavoro - Q3 2024

Transcript

Operator (participant)

Welcome to Lavoro's Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded, and a replay will be made available on the company's investor relations website at ir.lavoro.com. I will now turn the conference over to Tigran Kirakosyan, Head of Investor Relations. Thank you. You may begin.

Tigran Karapetian (Head of Investor Relations)

Thank you for joining us today on Lavoro's Fiscal 2024 third quarter earnings conference call for results ended on March 20, 2024. On today's call are our Chief Executive Officer, Ruy Cunha, and Chief Financial Officer, Julian Garrido. The company has provided a supplemental earnings presentation on its investor relations website at ir.lavoro.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 will 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, Form 20-F for the period end of June 30, 2024, and Form 6-K filed with the SEC today, and other reports filed from time to time with the SEC for detailed discussions 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, adjusted net profit or loss, among others. While the company believes that 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 with the IFRS.

Please refer to today's release for the consolidation 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, CEO.

Ruy Cunha (CEO)

Thank you, Tigran. Good afternoon, and thanks, everyone, for joining. I'll begin by touching upon the overall business landscape and the broader economic context of the business. After that, Julian will dive into our financial highlights, and I will return for some concluding remarks. First, highlights of our strategy to date. For our third quarter, 2024, the story is broadly consistent with what we have seen so far in our fiscal year. First, we continue to outperform the Brazil retail inputs market. Robust double-digit volume growth, led by market share gains, helped counteract severe input price declines and adverse climate events affecting our industry this year. Our Brazil Ag Retail segment inputs revenue decreased by 7% year-over-year in Brazilian reais in the quarter, and 4% year to date as compared to retail inputs market shrinking by over 25%.

Notably, our quarterly sales volumes increased by 20% for crop protection, 34% for fertilizers, 44% for seeds, and 47% for specialty products, significantly outpacing the overall retail market's growth, which hover in the low to middle single digits. Second, our gross margins continue to stabilize, considering the pronounced seasonality affecting our performance. We find it beneficial to analyze changes in our gross margins on a year-over-year basis. For Brazil Ag Retail, our gross margins on inputs revenues declined by 190 basis points to 12%, compared to a 510 basis points decline in second quarter of 2024, and a decline of over 1,000 basis points in the first quarter of 2024.

This is consistent with what we communicated in the previous quarter, namely that as our higher cost inventory cycles over in favor of lower cost replacement inventory, our costs of goods sold gradually catches up in the inputs price decline at the farm gates. Third, our Crop Care segment continued yet again to perform well, with revenue and gross profit growing 30% and 14%, respectively, for the quarter. Despite the challenging market conditions for premium specialty products, Agrobiológica, our biologicals business, was a strong contributor, with revenue increasing by 57%, driven in part by robust demand for our bioinsecticide products and strong commercial execution, as well as continued cross-selling synergies with our Brazil Ag Retail operations....

Care's importance to Lavoro continues to grow in importance, representing 22% of our year-to-date gross profit, compared to less than 16% in the prior year period. Fourth, our proactive efforts to recruit seasoned agronomists who are bringing in new clients to our platforms continue to bear fruits. With additional $35 million in future net sales potential from new hires in the quarter, pushing our total for the year to over $150 million potential. As mentioned in the last earnings call, we expect these RTVs to contribute to our results only next year. Our market share growth this year was primarily driven by an increased share of wallet with existing clients. The addition of these new agronomists will enable us to also expand our clientele next year. Now let's talk a little bit about and guidance.

Actually, what has changed, leading us to revise our forecast for the year. The Brazilian farmer had a challenging year in this last season. In addition to the meaningful decrease in prices for soy and corn, they had to contend with severe drought caused by El Niño climate, which caused yield losses, estimated at 6% for soybean harvest, and fears around the shortened Safrinha growing season, leading them to downgrade their spend and seek seed technology selection, which partly led to second corn yields being down by 4%. Farmer profitability, a fundamental driver for our industry, is expected to improve in the upcoming crop year 2024-2025. However, in the near term, we continue to observe farmers' behavior in Brazil remaining more risk-averse, which is translating to postponement of purchasing decisions closer to the need.

While this had been the story for the past year and a half, it did intensify to a greater extent than we had expected. As of the end of April, the retail market bookings curve for the crop year 2024-2025, measured as the total farmer purchase orders divided by total expected demands, were estimated to be around 17%, compared to 27% in April last year. Consequently, a portion of products that we were projecting to ship in fourth quarter 2024 are being pushed into the next fiscal year, adversely impacting our results for the quarter ahead. This is the first factor driving our guidance revision. The second factor has to do with farmer credit.

The combined effects of El Niño on farmer profitability in key egg-producing states, coupled with the weakness in grain commodity prices, which has prompting farmers to postpone the sale of their stored grains and has led to widespread delays in farmer repayments to retailers across the industry. Our stringent credit standards and industry-leading average client credit worthiness have shielded us from meaningful surprises, particularly compared to the rest of the industry. We were still impacted by payment delays in April. In many cases, we opted to comply to requests for short-term payment term extensions for a number of our long-standing profitable clients. We did so to further strengthen these relationships and drive greater wallet share over time. However, our product credit approval policy compels us to wait for these clients to repay us before shipping them additional products on credit.

As a result of these decisions, we expect an adverse impact in our fourth quarter 2024 results compared to our prior expectations. Additionally, our allowance for expected credit losses for the second half is now projected to be roughly $4 million higher than what we had originally expected. Finally, we are also negatively impacted with bonus related to supplier agreements that didn't materialize, in that some cases shifted to first quarter 2025. With all that said, we are revising our fiscal year 2024 projections as follows: Revenue is now projected to range between $1.8 billion and $1.95 billion. Input revenues to range between $1.6 billion and $1.75 billion, and Adjusted EBITDA to range between $46 million and $55 million.

In Brazilian reais, our revised guidance is for revenues of BRL 8.9 billion-BRL 9.7 billion. Input revenues between BRL 7.9 billion and BRL 8.7 billion, and Adjusted EBITDA between BRL 230 million and BRL 280 million reais.... As told, the vast majority of revisions to our Adjusted EBITDA projections have to do with the adverse revenue impact that now we expect for the fourth quarter to our Brazil Ag Retail segment that I previously detailed. Regarding the next fiscal year, to conclude, I wanted to just provide a few comments on the crop year 2024-2025, and how it's shaping up for us in the industry.

Current projections from outside market consultants is for the retail ag, ag inputs market to decline by approximately 10% in the next year, driven mainly due to base effect of price declines that occurred through this year. Volumes are expected to grow low single digits. While it's still early for us to provide a fiscal year 2025 guidance, we expect to continue to outpace the market as we did this year, driven by market share gains and helped by the contribution of RTVs hired this year. We also anticipate gross margins to improve relative to this year and for Adjusted EBITDA to grow year-over-year. I'll now pass on to Julian for further details on our financial results.

Julian Garrido (CFO)

Thank you, Ruy. So let's start. First, the consolidated revenue for the third quarter rose by 6% to $514.2 million. Expressed in Brazilian reais, revenue grew 1%. Inputs revenue decreased 1%, as robust volume growth, contribution from recent M&A and currency tailwinds continue to be offset by the deflationary headwinds from input price declines. Grain revenue grew 61% to $87.5 million, driven in part by a greater desire by our farmer clients for barter transactions. Looking at revenue by segment. Brazil Ag retail saw revenue increase by 5% to $450 million, reflecting higher grains revenue, which grew 61% to $86.8 million.

The impact of M&A with newly acquired Referência and Coram, collectively contributing to 5% to third quarter 2024 segment revenue, and the currency tailwind from translating our results to USD. Inputs revenue declined 3% to $363.2 million as the impact of input price deflation and the adverse effects of the drought caused by El Niño, more than offset significant volume increases across all product categories. Revenue trends were uneven across our various operating regions in Brazil.

For instance, our operation in Brazil Cluster South, comprising the states of Paraná, Rio Grande do Sul, and Santa Catarina, which were comparatively spared from the drought conditions, saw inputs revenue grow 9% year-over-year in Q3, contrasting to an input revenue decline of 17% in our Brazil Cluster North operations, which comprise the state of Mato Grosso, most affected by the drought. Latin America LatAm Retail revenue increased 5% to $50.5 million for the third quarter. Revenue was roughly flat when in Brazilian reais terms. The growth was led by the currency tailwind stemming from the appreciation of the Colombian peso relative to US dollars, 22% year-over-year in third quarter 2024, and Brazilian reais 16%.

Robust growth in fertilizer sales volume, 51%, partially offset by input prices declines in crop protection and fertilizers, lower corn seed revenue due to drought conditions in the north of the country, stemming from El Niño, reducing planted corn acres by an estimate of 10%, and the ongoing impact of the discontinuation of major herbicide from major suppliers' product lineup. Now, Crop Care revenue grew 30% to $22.1 million for third quarter 2024, led by biologicals, which grew 53% year-over-year, specialty fertilizers, which grew 6%, and the contribution of recent acquired Cromo Química, which represented 5% of segment revenue in the quarter.

Now, shifting to consolidated gross profit for the quarter, we saw that increase by 16% to $60.2 million, as gross margin contracted by 310 basis points year-over-year to 11.5%, driven by an increased mix of grains revenue, the impact of input prices deflationary environment across all segments, and increased freight expenses as a percent of revenue. Looking at this gross profit by segment, we see Brazil Ag Retail gross margin contracted by 240 basis points year-over-year to 9.7% in third quarter 2024. While gross margin inputs, which excludes the mix effect of grains revenue, contracted by 190 basis points to 12%....

The prices at the farm gate for crop protection and fertilizer prices declined year-over-year and quarter-over-quarter in third quarter 2024. Our average cost of goods sold continued to gradually improve with the cycling of higher cost inventory in favor, helping drive this improvement. LatAm Retail segment profit was $7.3 million in the third quarter, a decrease of 4% over the prior year, while our gross margins declined 100 basis points to 14.4%, due primarily to the impact of pricing deflation to crop protection and fertilizer distribution margins, as well as the negative impact from lower contribution from the higher margin seed product sales.

Crop Care segment gross profit grew 14% year-over-year to $9.1 million in third quarter, while gross margin decreased by 550 basis points to 41.2%. As the benefit of a more favorable mix of higher margin biological as percentage of segment revenue was more than offset by three things. The margin contraction within biological, driven by tactical price reductions to stimulate sales volume. Second, negative product mix within Union Agro, as farmers continue to favor more affordable basic products in lieu of premium foliar fertilizers, due in part by the El Niño-driven risk aversion of the Safrinha crop. And the third is an increase in freight rates. Net loss for the quarter was $64.8 million, compared to a net loss of $74.3 million in the prior year period.

The $9.5 million year-over-year positive improvement reflects the absence of a one-time NASDAQ listing expenses incurred in the third quarter last year, $61.5 million positive impact relative to prior year quarter, partially offset by, one, a decrease in gross profits, $11.7 million, an increase in SG&A, $12 million led by higher D&A expenses, minus $2.9, and an increased allowance for expected credit loss of, $4.3 million. Higher total financial costs, $20.4 million, led by a loss on fair value of commodity forward contracts and derivatives, $4.9, and foreign exchange difference, $6.4. And last is an increase in income tax expenses, $11.3 million.

Adjusted EBITDA was $3.7 million in third quarter 2024, compared to $24.8 million in prior year, with adjusted EBITDA margin contracted 440 basis points to 0.7%, reflecting the gross margin pressure I detailed about, along with a 150 basis points year-over-year increase in the SG&A, excluding D&A, as percentage of revenue. Adjusted net loss was $62.7 million in third quarter, compared to $7.9 million in prior years, driven by the items I just mentioned, and lower non-recurrent expenses items. With all that said, I'll pass it back to Ruy for some concluding remarks.

Ruy Cunha (CEO)

Thank you, Julian. So I would like to extend my gratitude to everyone participating in our conference today and for your interest in the progress of our company. Allow me to emphasize some key points from today's discussion. By any market metric, it can be said that the year 2023 to 2024 has been extremely challenging for the entire agricultural value chain. Extreme weather events have penalized the profitability of farmers, which had already been affected by lower commodity prices. The market scenario has led producers and farmers to make purchasing decisions increasingly later, waiting for better conditions to sell their grains. This behavior, combined with a more conservative stance on our part, has led us to defer billings that are now expected to occur in the first quarter of the next year. In this context, however, Lavoro has focused on what it can control.

The company had another quarter of strong volume growth and market share gains in retail Brazil and in Colombia. Our industrial unit, CropCare, performed better this quarter than last year and significantly better than the market. This performance, combined with our conviction that the strong fundamentals of agribusiness in South America remain intact, make us believe in a natural market recovery and in the company's outperforming the market in the upcoming quarters as well. With that, I'll come back to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and you may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Kristen Owen with Oppenheimer. Please proceed with your question.

Kristen Owen (Analyst)

... Hi, good afternoon. Thank you for taking the question. I was wondering if we can start with the full year 2024 guidance. You, you've lowered the range by $250 million, and still a pretty wide range between the top and the bottom, and we're about 60 days into the quarter. So I'm just wondering, what are the swing factors that get you to the various ends of the full year guidance at this stage?

Julian Garrido (CFO)

Oh, hi. I can take this one. So the main uncertainty at this point is the pace of shipments as we pointed out. Actually, at this point in time, as we're close to the end of the fiscal year, we have our order bookings enough to fulfill the expected, let's say, higher end of the guidance. But one thing that is still to be observed is the behavior of farmers also being willing to accept and engage with us through the shipment in the last quarter that are actually the first products to be used in the next season. So there's a lot of farming behavior at this point.

If they will be willing to accept the shipments of fertilizers, mainly, that will be considered in our, let's say, top end of the guidance. I would say, maybe a second factor is related to our decision also to ship some products to farmers as long as they also meet our expectations regarding the documentation and collaterals that still need to be finished. So I would say right now, the variation is mostly depending on farmers' behavior and some finalization on the credit procedures from both sides, from our side and from the farmer side as well.

Kristen Owen (Analyst)

Okay. So, for 2025, you suggested that the shipment timing is really just a shift, not necessarily that this is lost revenue. Would we anticipate that revenue that's shifting out of the fourth quarter would actually hit in Q1? Or what's the level of clarity that you have on that?

Julian Garrido (CFO)

That's correct. So those are firm orders in our order bank right now, and we just need to feel comfortable with the whole procedure of documentation and collaterals for credit sales. And we need to align with farmers for the best timing for them to start receiving the product. So it's a matter of timing, and most likely will shift to the first quarter of 2024, 2025.

Kristen Owen (Analyst)

Okay. Thank you very much. I'll take my follow-up questions offline. Thank you.

Operator (participant)

Our next question comes from the line of Rahi Parikh with Barclays. Please proceed with your question.

Rahi Parikh (Analyst)

Great. Thank you. Thank you for the time. My main questions revolve around biologicals. Do you expect to contract pricing further to gain volumes, going forward, or do you think it would be stable from here on out? And on competition, do you see other players also lowering price for biologicals to facilitate buying? What are you seeing out there with your peers? Thank you.

Julian Garrido (CFO)

Thanks for the question. I can take this one. So I think on the pricing side for biologicals, we do not expect, let's say, heavier discounts from now on. We need to have one thing in perspective, which is the type of biologicals that we provide is most crop protection biological solutions. And somehow the prices of crop protection biologicals are also related to the crop protection agrochemicals that were highly depressed this year. So there was some effect of discounts to grow volumes, also some effect of the overall crop protection prices in the market being depressed. So this led farmers to be more demanding regarding prices, and this led to producers or manufacturers to take decisions to lower prices in the last months.

I'll say this, trend now is to stabilize, and I do see some possibility of recovering some prices as we expect also the agrochemical prices to start recovering as well.

Rahi Parikh (Analyst)

Okay, great. Thank you so much.

Operator (participant)

Thank you. We have reached the end of our question and answer session, and with that, this will conclude today's teleconference. You may disconnect your lines at this time.