NASDAQ:LVRO Lavoro Q2 2024 Earnings Report $2.78 -0.15 (-4.95%) Closing price 04/25/2025 03:58 PM EasternExtended Trading$2.90 +0.12 (+4.13%) As of 04/25/2025 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Lavoro EPS ResultsActual EPS$0.02Consensus EPS $0.12Beat/MissMissed by -$0.10One Year Ago EPSN/ALavoro Revenue ResultsActual Revenue$618.96 millionExpected Revenue$626.10 millionBeat/MissMissed by -$7.14 millionYoY Revenue GrowthN/ALavoro Announcement DetailsQuarterQ2 2024Date3/7/2024TimeAfter Market ClosesConference Call DateThursday, March 7, 2024Conference Call Time5:00PM ETUpcoming EarningsLavoro's Q3 2025 earnings is scheduled for Monday, June 2, 2025, with a conference call scheduled on Friday, May 30, 2025 at 12:30 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Lavoro Q2 2024 Earnings Call TranscriptProvided by QuartrMarch 7, 2024 ShareLink copied to clipboard.There are 7 speakers on the call. Operator00:00:00Welcome to the Lavoro's Fiscal Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. 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.lavoroagro.com. I will now turn the conference over to Tigran Kopishen, Head of Investor Relations. Thank you, and you may begin. Speaker 100:00:40Thank you for joining us today on Livorno's fiscal 2024 Second Quarter Earnings Conference Call for results ended December 2023. On today's call are Chief Executive Officer, Roy Cunha and Chief Financial Officer, Julian Garrido. The company has provided supplemental earnings presentation on its Investor Relations website at ir.lavorogro.com that may be helpful in your analysis for 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 operational 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. Speaker 100:01:37Please refer to the company's registration statement on Form F-one filed with the SEC on March 23, 2020, or our report on Form 20F for the period ended June 30, 2023 filed with the SEC. SEC. Please note that on today's call, management will refer to certain non IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, pro form a adjusted EBITDA and pro form a adjusted EBITDA margin, 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 financial information presented in accordance with the IFRS. Please refer to today's release for reconciliation of non IFRS measures to the most comparable measures prepared in accordance to IFRS. Speaker 100:02:30I'd like now to turn the call over to Huiy Kwinga, CEO. Speaker 200:02:37Thank you, Tigran. Good afternoon, and thanks, everyone, for joining. I'll begin by touching upon the overall business landscape and the broader economic context, after which Julian will delve into our financial highlights, and I'll return for some concluding remarks. For fiscal Q2 of 2024 ending in December, LaVora delivered revenues of US618 million dollars marking a 1% increase compared to prior year period as volume growth led by market share gains helped to offset continued significant input price, deflationary pressures in crop protection and fertilizers across our retail footprint. In our Brazil Ag Retail segment, 2nd quarter volumes for crop protection, fertilizers and specialty products, respectively, grew 46%, 63% and 29% year over year. Speaker 200:03:40The benefits of scale of our platform and strong execution from our commercial team led to another quarter of strong market share gains. Our strategic priorities of attracting seasonal technical sales representatives continue in its momentum. We concluded the Q2 with just over 10 40 RTVs in Brazil, an increase of 25% versus our Q1. We anticipate the positive contribution of these new hires to primarily materialize in our next fiscal year. Crop Care delivered a standout performance in the quarter as revenues and gross profit saw both a year over year growth of more than 20% in spite of the challenging overall market environment and the adverse impact of El Nino to demand for biologicals in the quarter. Speaker 200:04:38Crop Care's share of portfolio consolidated gross profit continued to expand, reaching nearly 24%, up from 16% in the prior year. This further validates the importance of our vertically integrated business model. 2nd quarter consolidated gross profit of BRL103 3,000,000 and adjusted EBITDA of BRL 40,000,000 decreased 17% 48%, respectively, over the prior year period as the headwinds from the industry wide input price deflation in crop protection and fertilizers continue to adversely impact our margins. With that said, it's noteworthy to highlight the meaningful sequential improvement in the year over year changes to our margins from our Q1 to the 2nd quarter. I'd like to spend a few moments here to explain certain key fundamental drivers to ag input distribution margins as we had a lot of discussions on this important topic following our last earnings call where we briefly touched on them. Speaker 200:05:50Simply put, we generate gross margins by selling our inventory at a certain target markup over cost. The size of the markup depends on the nature of the product category with more technical or specialized products such as biologicals, foliar fertilizers, adjuvant or seeds, commanding premium margins relative to crop protection or fertilizers, for instance. There are 3 critical factors that impact our gross margins. Number 1 is the price we pay to suppliers to purchase our inputs, which is effectively the COGS embedded in our inventory. 2nd is the price that we sell to farmers, which is a function of localized supply and demand and which is impacted by things such as weather, farmer profitability and sentiment, relative price competition, etcetera. Speaker 200:06:40And third, the overall pricing trend lines, whether inflationary or deflationary environment. This factor plays a role due to the time delay between when we purchase products to build inventory and when we sell our inventory. Our inventory days range between 90 to 130 depending on the seasonality and there is some variability depending on the product category. In essence, our COGS tend to lag our average sales by 3 to 5 months. A deflationary environment acts as a headwind to gross margins, so long as the trend line remains intact. Speaker 200:07:22For illustrative purpose, one would purchase an inventory at 100 with the goal of selling at 120 around the time of planting. Yet, 4 months later, the prevailing retail price has decreased to $110 or $105 Once pricing flattens out, both from suppliers to retailers and retailers to farmers, costs gradually catch ups to retail prices as the higher cost inventory cycles over. In a normal market environment, by which I mean an environment where input prices are not declining by 30%, 40% or even 60% year over year, such as what we experienced this year, the third factor of pricing tends to play a relatively minor role, which is manageable as farmers start placing purchase orders with retailers months in advance and these bookings curves built as the crop season unfolds. In contrast, when the deflationary environment is as in tense as we have witnessed in the past few quarters, this adverse pressure is difficult to mitigate. Moreover, Brazilian farmers have been uncharacteristically placing orders much close to the point of use, which has diminished the role that bookings and purchase orders played in providing retailers visibility. Speaker 200:08:50With all that said, the mechanics I just described will help to explain what is happening with our Brazil ag retail business. Our 2nd quarter gross margins in Brazil saw sequential improvement in the last year over year trends, with margins contracting 510 basis points to 13.9% compared to a year over year decline of minus 10.70 basis points to 8.7% in our 1st quarter results. This improvement is largely explained by the mechanics I just described, with local input prices from retailers to farmers having broadly stabilized in recent months and as we gradually cycle through our higher cost inventory, driving an improvement in our COGS, margins are consequently recovering. The sequential improvement was most pronounced in the product categories most affected by deflationary trends, such as crop protection, where 2nd quarter gross margins year over year contraction went from -1300 basis points in the first quarter to minus 2 60 basis points in the 2nd quarter. To conclude, our financial outlook remains unchanged. Speaker 200:10:22Our market outlook remains consistent with our assessment in our last earnings call in late January. We continue to foresee a 25% decrease in Brazil's retail input market for 2023, 2024 crop year ending in June 2024. As previously mentioned, local input prices from retailers to farmers in Brazil have broadly stabilized through disparities remaining across various regions, influenced by the ongoing destocking of excess agrochemicals inventories. In closing, the accelerate pace of progress of the first soybean harvest combined with recent favorable weather conditions have led to a strong start to safrinha corn planting season, which currently stands at 71%, above the 5 year average of 52%. Now with that, I'll pass to Julien for further details on our financial results. Speaker 300:11:32Thanks, Louis. Good morning, afternoon, good evening, wherever you are. So let's cover our consolidated financial results for this fiscal Q2 2024, ended on December 31, 2020. So let me start with the revenues. The consolidated revenue for the 2nd quarter rose by 1% to EUR 618 point $7,000,000 as we have mentioned before. Speaker 300:11:58In constant currency terms, the revenue decreased by 5%. If I split in between inputs revenue and grains revenue, inputs revenue increased 1%, driven by volume growth expansion, resulting from market share gain offsetting price declines. The grain revenue resulted in an increase of 57%, driven by greater desire of our customers for entering into barter transactions. Now if I look at the revenue by segment, the 1st segment, Brazil Ag Retail, revenue increased by 1%, reflecting the unit volume growth in crop protection, fertilizer, specialty products, seeds, which increased by 46%, 63% and 29%, respectively. These increases were offset by price deflation and negative product mix across all categories. Speaker 300:12:56Notably, due to the impact of El Nino, which had decreased the mix of higher technology corn seed varieties and changes in farmers purchasing time, seed product revenue declined by 11% year on year. Once again, we've all gained share in the quarter, driven by good execution for our local commercial teams. Contribution from recently acquired components, Geferens and Cordone together contributed to 6% to the overall revenue growth for the segment. Now taking a look at Latin Ag and Retail, the revenue totaled $55,800,000 which is a 2% decrease from previous year, a 17% decline in Colombia peso terms. This drop mainly due to challenges in fertilizer and crop protections distribution revenue, along with the lingering effects of discounting pearcraft, the herbicide from a supplier product lineup. Speaker 300:13:58However, growth in specialty products, seeds and service sales as well as the Colombian pesos appreciation against the U. S. Dollar and Brazil Real partially offset its revenue declines. Last but not least, Crop Care recorded revenue of $72,800,000 in the Q2 2024, demonstrating a notable 26% increase compared to the prior year. This growth was driven by robust performance with the specialty fertilizer products, TEGRA, showing a remarkable 55% increase. Speaker 300:14:31Additionally, the recent acquisition of Givent and enhancer manufacturer, Chroma Kimica, contributed 5% to Crop Care segment revenue for the Q2 of 2024. Now let's go and talk about consolidated gross profit. The consolidated gross profit for the quarter decreased by 17% to $103,000,000 Gross margin contracted by 3 60 basis points to 3.7%. And the main driver was the steep price decline in crop protection and fertilizers in our Brazil Agriculture Retail segment detailed by the way before. What in agriculture retail on the gross margin perspective declined by 230 basis points to 17.8%, driven by compression in crop protection of fertilizer distribution margins. Speaker 300:15:26And the gross margins of Crop Care retreated by 160 basis points to 35.3%, primarily due to unfavorable mix effects resulting from the performance of high margin biological products during the quarter. However, the financial contribution from the recently acquired Chromo Chemica, which has gross margin higher than the crop care average, helped offset some of these effects. The adjusted EBITDA in the Q2 of 2024 was 40,100,000 dollars down $37,400,000 from the prior year quarter, while adjusted EBITDA margin contracted by 48 point 8% to 6.5%, again, primarily influenced by the gross margin compression discussed earlier. The SG and A, excluding the depreciation and amortization to sales ratio increased by 300 basis points to 11.3, mainly due to higher investments as the hiring of new 291 RTVs have yet to contribute to our sales. And we also had the increase in the allowance for expected credit losses, resulting from the impact of the El Nino and our expected payment schedule from our pharma clients. Speaker 300:16:46All three operating segments saw negative year over year change in adjusted EBITDA as well as EBITDA. Adjustment items excluded from adjusted EBITDA increased by $1,500,000 to 2 point $4,000,000 for the Q2 of 2024, due primarily to higher stock based compensation expense of $500,000 right there, an increase in related product consultancy service expenses in Q2 $900,000 Last but not least, the adjusted net profit was $2,600,000 a decline of $34,800,000 over the prior year quarter driven by the lower adjusted EBITDA, higher financial costs of $5,400,000 reflecting high interest rates on trade tables and it was partially offset by an increased positive contribution from our income tax. Now I refer back to Hu Speaker 200:17:44Thank you, Julien, and thank you all for participating in today's conference call and for your ongoing interest in our company progress. Allow me to highlight some key points from our discussion today. So our 2nd quarter results underscore Lavoro's resilience in the face of challenging market conditions. Our retail operation in Brazil has demonstrated robust year over year volume growth even amidst one of the most competitive market environments we have witnessed in over a decade. Similarly, our Colombian operation has also shown a comparable trend with notable gains in market share. Speaker 200:18:29Furthermore, our industrial division, Crop Care, achieved double digit growth in both revenues and gross profit compared to previous year, and this growth was primarily driven by strong performances in Specialty fertilizers and edibles, which offset any temporary setbacks experienced in the Biological Solutions segment. Lavoro's significant volume gains validate the continuing interest of farmers in investing in agricultural inputs, further solidifying Lavoro's position as their preferred partner. The confidence expressed by farmers is reinforced forced by the substantial investments the company is currently making to enhance its sales teams, placing LaVora in advantageous position to capitalize on the anticipated market recovery. I firmly believe that the current market landscape has the potential to accelerate the ongoing transformation within the agricultural retail sector in Brazil and South America. In this regard, I'm confident that Alavoro will maintain its prominent role in the market and continue to lead the way in driving positive Operator00:19:48Thank you very much, sir. Ladies and gentlemen, we will now begin with a question and answer session. Our first question is from Bobby Burleson of Canaccord. Please go ahead. Speaker 400:20:23Hi. Thanks for taking my questions. So I guess the first one is, can you just remind us maybe some of the factors in addition to kind of the plant activity on the Trefino corn that you guys were watching throughout so far in calendar 2024 to decide whether or not you were able to maintain the guidance that you laid out back in January? What were those main kind of things that you guys were looking at? Speaker 200:20:59Hi, Bobby. Thanks for the question. So yes, a few components on that. So first, the one of the key elements in driving our vision was the expectation regarding the overall market for this fiscal year. So we continue to see an overall decline in markets about 25%, and this has not changed too much. Speaker 200:21:26It's mainly driven by price. We also mentioned that the area of corn in the 2nd crop will see a reduction as well as some expected reduction in productivity that would, in consequence, also affect farmers' decisions whether to invest in medium technology seat as opposed to higher technology seats, and this is also being confirmed. And also some tendency to use a lower, let's say, level of biological solutions. So I would say, largely, those were the main facts in addition to the normalization of the retail inventory. So all of that to say that those indicators, they seem to be progressing as we expected. Speaker 200:22:26I think on the positive note, we see that the as we mentioned, the planting of safrinha is advancing fast. That means that the time window for farmers to operate in saffrona is going to be improving compared to what we expected originally, okay? So this might encourage some last minute sales, but yet it is difficult to predict if this is going to have a meaningful impact on the sales volumes or not. Speaker 400:22:58Okay, great. And then just as a quick follow-up with the farmer balance sheets in Brazil, we know that they tend to have healthier balance sheets, but there's definitely some concern on the part of grain traders that bankruptcy filings have increased in the region. And I'm just wondering your customer cohort in the small and medium farmer, how are they kind of positioned relative to where those filings are happening? Is there anything that's changing rapidly in terms of balance sheet health in the area? Thanks. Speaker 200:23:40Yes. So what we saw, Bobby, is that some areas have been more affected by the drought. And I think this obviously had a more negative impact on farmers in Mato Grosso and in Goia. I think those were the main affected areas and in some cases with lower productivities. We have some farmers that particularly those who rent the lands, they are close to a breakeven point at this moment. Speaker 200:24:09So I think the most critical areas is Mato Grosso and then part of Serhade. With that being said, it's not generalized it's not a generalized problem. And the current expectations for the soy crop is something around 150,000,000 tons, which is it's still a pretty good number. So I would say in general, farmers should be able to meet their commitments. But yes, we'll see some areas of potential risks. Speaker 200:24:46I think another important factor, you just mentioned the Chapter 11s or some farmers filing for bankruptcy. Indeed, the number has increased. It has increased from, I would say, a relatively small number. We will have to look into the next month to see the extent of the problem. But right now, I think it has not changed our perspective. Speaker 200:25:16If anything, maybe a little bit better than we expected considering the current soy production. Regarding Lavoro, I think all the, let's say, the negative effects related to bad debt provisions is already contemplated in our results. So it does not change the perspectives we have for the year. Speaker 400:25:43Okay. Thank you for that color. Operator00:25:48Thank you very much. The next question is from Benjamin Theurer of Barclays. Please go ahead. Speaker 500:25:56Hi. Good afternoon and evening. Thanks for taking my question. We wanted to follow-up on the Crop Care business and just to understand a little bit what you're kind of looking into the second fiscal half. We obviously had a very soft first quarter, a nice sequential improvement in 2Q, but still down on a year over year basis. Speaker 500:26:17Now normal seasonality second half tends to be lower in crop Care than first half. Wanted to understand like within your guidance parameters, how do you think about Crop Care into the second half just as you're coming out of this whole destocking environment over the last couple of quarters? And what's kind of baked in for the guidance in specific crop care? And then I have a quick follow-up. Speaker 200:26:44Okay. Hi, Ben, and thanks for the question. So I think there's 2 relevant impacts here. The first is a phasing effect, as you mentioned. So we had a very, say, slow start in the Q1, accelerating in the Q2, and we expect further acceleration in the 3rd Q4. Speaker 200:27:07But with that being said, the mix of Crop Care is will probably change with lower participation of biologicals than in what we had in last year. So the acceleration we'll see in the last quarters of the year is being mostly driven by specialty fertilizers and adjuvants business. Even though, as I mentioned, depending on the scenario of Safrina and the pests that eventually occur, we might get some surprises or some positive surprises when it comes to Biologics. But I would say overall, the expectation for the Biologics business this year is to be lower volumes than last year. So it's not only a phasing effect. Speaker 200:27:56We're going to grow in those other categories, but the growth will partially offset the negative margin headwinds. So that is our current considerations. Speaker 500:28:12Okay, perfect. And then just quickly as well on the Latin American business, if we could dig in a little deeper into your expectations for the back half and how maybe some of the phenomena you've talked about with El Nino obviously impacting Brazil to a sizable way, but it also does have an impact in that LatAm. I just wanted to understand what are the puts and takes here from just a weather pattern and how this could potentially impact the LatAm business into the 2nd fiscal half? Because that was kind of a little bit of an under pro form a, I guess, during the quarter as well. Speaker 200:28:56Yes. So Ben, on the LatAm business, I think that the dynamic, even though they're subject to the same global trends, I think there's some different aspects to consider. The first one is our Latin business is being able to hold gross margins better than the Brazil retail business. And then the competitive environment is, let's say, less intense. So we are holding margins a little better. Speaker 200:29:30The challenge remains in sales, partially is driven by price, but it's also partially is being driven by unfavorable climate conditions that we're having in that region. So right now, we'll depend we expect the second half of the year to be considerably stronger than the first half, But that will also depend on, let's say, the some of the climate conditions that are postponing farmers' decision to buy to be normalized. But we do expect, I would say, a stronger second half of the year. Speaker 500:30:11Okay, perfect. Thank you very much. I'll pass it on. Operator00:30:17Thank you very much. The next question is from Vincent Anderson of Stifel. Please go ahead. Speaker 600:30:24Yes, thanks. Good evening, gentlemen. I was just hoping to kind of get an update on how you feel about your sales staff. You hired a lot, but I'm curious how you're tracking against your 3 year ramp up algorithm. And then just remind me how the performance compensation metrics work for them between revenues, volumes and gross profit dollars? Speaker 200:30:48Hi, Vincent. We're executing our hirings according to plan. Actually, we're Speaker 600:30:57I think we're even Speaker 200:31:00with better performance than we expected in the last month. So we saw a significant growth in the last quarter. But to say largely in line with what we expected to bring in new sales teams. Most of them I mean, the compensation structure in the market is fairly standard. So we have, let's say, relatively low fixed salary, but then you have a relatively larger variable compensation, which is a proxy, something around 1% of their sales, okay? Speaker 200:31:38What we expect is I mean, some of those guys are already having a positive impact in sales, I'd say, mostly in Safranha. But the full benefit will only be achieved next year, right, with their full year of work with us. I think the interesting thing is also that we're trying to hire experienced sales consultants, and we're being able to bring consultants with a very large potential order book with them. And those experienced sales consultants, they tend to be much more productive than the new ones, right? So usually it takes between 3 to 4 years to have a sales consultant fully operational or to the maximum capacity. Speaker 200:32:37And many of those guys that are bringing right now, they're already experienced and they're already operating the region that they've been working on. So I think that we may experience, I would say, accelerated growth coming from those new sales guys in the next year. Speaker 600:32:53That's very helpful. Thank you. And then my other question was just I'm trying to get a feel for your pricing model in these kinds of market conditions in terms of how you are able to monitor prices across all the growing regions you sell to and coordinate price and margin targets kind of from a centralized position down to your individual locations? Or is it still mostly a bottoms up effort and these individual locations are loosely held to a goal of some kind? Speaker 200:33:27Yes. So in the way that we are organized, I'll say in Brazil, but it's also valid for Colombia. So we have a decentralized pricing decisions because we need to be mindful of the right pricing being performed at the market. So we have Brazil divided in clusters, and we have 3 major clusters in Brazil, North, South and East. And each one of those clusters, they have specialized marketing and pricing teams that are fully dedicated to looking to the overall farm gate price being performance by product and then with that and based on that, taking our price and markup decisions. Speaker 200:34:17So it's decentralized to the point that we need to have adequate pricing levels to where we compete. And then on the COGS side, I would say it's probably more centralized because then we also need to leverage our scale and ability to discuss margin recomposition with suppliers at a central level, right? So we try to maximize that by combining our negotiations with suppliers on a central level and then taking tactical pricing decisions at the regional level. Speaker 600:34:58Okay. All right. No, that's helpful. I was trying to get a feel for when you have these kinds of price movements, if there's a mechanism to communicate that individual locations should not sell below a certain price or anything like that. But what you described sounds pretty robust and I appreciate that detail. Speaker 200:35:36Okay. Again, thank you all for your participation in the meeting. Again, I think once again, the company has shown the resilience of this platform. We're very excited about the second half of the year. We continue to be strong believers in the fundamentals of the Brazilian and the South American markets. Speaker 200:36:00And we'll keep you posted in new developments. But right now, I think we were tracking in line with what we have already projected as planned for this year. Thank you very much. Operator00:36:19Thank you very much, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for your participation and you may now disconnect your line.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallLavoro Q2 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K) Lavoro Earnings HeadlinesLavoro price target lowered to $5 from $6 at OppenheimerApril 23 at 11:16 AM | markets.businessinsider.comThese Analysts Think Lavoro Limited's (NASDAQ:LVRO) Sales Are Under ThreatFebruary 11, 2025 | finance.yahoo.comThe Trump Dump is starting; Get out of stocks now?The first 365 days of the Trump presidency… Will be the best time to get rich in American history.April 26, 2025 | Paradigm Press (Ad)Lavoro Limited (NASDAQ:LVRO) Consensus Forecasts Have Become A Little Darker Since Its Latest ReportFebruary 6, 2025 | finance.yahoo.comLavoro price target lowered to $5.50 from $6.25 at CanaccordFebruary 5, 2025 | markets.businessinsider.comLavoro revises FY2025 revenue outlook to $1.12B-$1.28B amid supply chain disruptionsFebruary 4, 2025 | msn.comSee More Lavoro Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Lavoro? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Lavoro and other key companies, straight to your email. Email Address About LavoroLavoro (NASDAQ:LVRO) operates as an agricultural inputs retailer. The company operates through three segments: Brazil Cluster, LATAM Cluster, and Crop Care Cluster. It distributes agricultural inputs, such as crop protection, seeds, fertilizers, foliar fertilizers, biologicals, adjuvants, organominerals, and others for the agricultural industry. The company also produces specialty fertilizers, crop protection products, and biological crop inputs. It operates in Brazil, Colombia, and Uruguay. The company sells its products through its physical stores and digital channel. 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There are 7 speakers on the call. Operator00:00:00Welcome to the Lavoro's Fiscal Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. 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.lavoroagro.com. I will now turn the conference over to Tigran Kopishen, Head of Investor Relations. Thank you, and you may begin. Speaker 100:00:40Thank you for joining us today on Livorno's fiscal 2024 Second Quarter Earnings Conference Call for results ended December 2023. On today's call are Chief Executive Officer, Roy Cunha and Chief Financial Officer, Julian Garrido. The company has provided supplemental earnings presentation on its Investor Relations website at ir.lavorogro.com that may be helpful in your analysis for 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 operational 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. Speaker 100:01:37Please refer to the company's registration statement on Form F-one filed with the SEC on March 23, 2020, or our report on Form 20F for the period ended June 30, 2023 filed with the SEC. SEC. Please note that on today's call, management will refer to certain non IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, pro form a adjusted EBITDA and pro form a adjusted EBITDA margin, 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 financial information presented in accordance with the IFRS. Please refer to today's release for reconciliation of non IFRS measures to the most comparable measures prepared in accordance to IFRS. Speaker 100:02:30I'd like now to turn the call over to Huiy Kwinga, CEO. Speaker 200:02:37Thank you, Tigran. Good afternoon, and thanks, everyone, for joining. I'll begin by touching upon the overall business landscape and the broader economic context, after which Julian will delve into our financial highlights, and I'll return for some concluding remarks. For fiscal Q2 of 2024 ending in December, LaVora delivered revenues of US618 million dollars marking a 1% increase compared to prior year period as volume growth led by market share gains helped to offset continued significant input price, deflationary pressures in crop protection and fertilizers across our retail footprint. In our Brazil Ag Retail segment, 2nd quarter volumes for crop protection, fertilizers and specialty products, respectively, grew 46%, 63% and 29% year over year. Speaker 200:03:40The benefits of scale of our platform and strong execution from our commercial team led to another quarter of strong market share gains. Our strategic priorities of attracting seasonal technical sales representatives continue in its momentum. We concluded the Q2 with just over 10 40 RTVs in Brazil, an increase of 25% versus our Q1. We anticipate the positive contribution of these new hires to primarily materialize in our next fiscal year. Crop Care delivered a standout performance in the quarter as revenues and gross profit saw both a year over year growth of more than 20% in spite of the challenging overall market environment and the adverse impact of El Nino to demand for biologicals in the quarter. Speaker 200:04:38Crop Care's share of portfolio consolidated gross profit continued to expand, reaching nearly 24%, up from 16% in the prior year. This further validates the importance of our vertically integrated business model. 2nd quarter consolidated gross profit of BRL103 3,000,000 and adjusted EBITDA of BRL 40,000,000 decreased 17% 48%, respectively, over the prior year period as the headwinds from the industry wide input price deflation in crop protection and fertilizers continue to adversely impact our margins. With that said, it's noteworthy to highlight the meaningful sequential improvement in the year over year changes to our margins from our Q1 to the 2nd quarter. I'd like to spend a few moments here to explain certain key fundamental drivers to ag input distribution margins as we had a lot of discussions on this important topic following our last earnings call where we briefly touched on them. Speaker 200:05:50Simply put, we generate gross margins by selling our inventory at a certain target markup over cost. The size of the markup depends on the nature of the product category with more technical or specialized products such as biologicals, foliar fertilizers, adjuvant or seeds, commanding premium margins relative to crop protection or fertilizers, for instance. There are 3 critical factors that impact our gross margins. Number 1 is the price we pay to suppliers to purchase our inputs, which is effectively the COGS embedded in our inventory. 2nd is the price that we sell to farmers, which is a function of localized supply and demand and which is impacted by things such as weather, farmer profitability and sentiment, relative price competition, etcetera. Speaker 200:06:40And third, the overall pricing trend lines, whether inflationary or deflationary environment. This factor plays a role due to the time delay between when we purchase products to build inventory and when we sell our inventory. Our inventory days range between 90 to 130 depending on the seasonality and there is some variability depending on the product category. In essence, our COGS tend to lag our average sales by 3 to 5 months. A deflationary environment acts as a headwind to gross margins, so long as the trend line remains intact. Speaker 200:07:22For illustrative purpose, one would purchase an inventory at 100 with the goal of selling at 120 around the time of planting. Yet, 4 months later, the prevailing retail price has decreased to $110 or $105 Once pricing flattens out, both from suppliers to retailers and retailers to farmers, costs gradually catch ups to retail prices as the higher cost inventory cycles over. In a normal market environment, by which I mean an environment where input prices are not declining by 30%, 40% or even 60% year over year, such as what we experienced this year, the third factor of pricing tends to play a relatively minor role, which is manageable as farmers start placing purchase orders with retailers months in advance and these bookings curves built as the crop season unfolds. In contrast, when the deflationary environment is as in tense as we have witnessed in the past few quarters, this adverse pressure is difficult to mitigate. Moreover, Brazilian farmers have been uncharacteristically placing orders much close to the point of use, which has diminished the role that bookings and purchase orders played in providing retailers visibility. Speaker 200:08:50With all that said, the mechanics I just described will help to explain what is happening with our Brazil ag retail business. Our 2nd quarter gross margins in Brazil saw sequential improvement in the last year over year trends, with margins contracting 510 basis points to 13.9% compared to a year over year decline of minus 10.70 basis points to 8.7% in our 1st quarter results. This improvement is largely explained by the mechanics I just described, with local input prices from retailers to farmers having broadly stabilized in recent months and as we gradually cycle through our higher cost inventory, driving an improvement in our COGS, margins are consequently recovering. The sequential improvement was most pronounced in the product categories most affected by deflationary trends, such as crop protection, where 2nd quarter gross margins year over year contraction went from -1300 basis points in the first quarter to minus 2 60 basis points in the 2nd quarter. To conclude, our financial outlook remains unchanged. Speaker 200:10:22Our market outlook remains consistent with our assessment in our last earnings call in late January. We continue to foresee a 25% decrease in Brazil's retail input market for 2023, 2024 crop year ending in June 2024. As previously mentioned, local input prices from retailers to farmers in Brazil have broadly stabilized through disparities remaining across various regions, influenced by the ongoing destocking of excess agrochemicals inventories. In closing, the accelerate pace of progress of the first soybean harvest combined with recent favorable weather conditions have led to a strong start to safrinha corn planting season, which currently stands at 71%, above the 5 year average of 52%. Now with that, I'll pass to Julien for further details on our financial results. Speaker 300:11:32Thanks, Louis. Good morning, afternoon, good evening, wherever you are. So let's cover our consolidated financial results for this fiscal Q2 2024, ended on December 31, 2020. So let me start with the revenues. The consolidated revenue for the 2nd quarter rose by 1% to EUR 618 point $7,000,000 as we have mentioned before. Speaker 300:11:58In constant currency terms, the revenue decreased by 5%. If I split in between inputs revenue and grains revenue, inputs revenue increased 1%, driven by volume growth expansion, resulting from market share gain offsetting price declines. The grain revenue resulted in an increase of 57%, driven by greater desire of our customers for entering into barter transactions. Now if I look at the revenue by segment, the 1st segment, Brazil Ag Retail, revenue increased by 1%, reflecting the unit volume growth in crop protection, fertilizer, specialty products, seeds, which increased by 46%, 63% and 29%, respectively. These increases were offset by price deflation and negative product mix across all categories. Speaker 300:12:56Notably, due to the impact of El Nino, which had decreased the mix of higher technology corn seed varieties and changes in farmers purchasing time, seed product revenue declined by 11% year on year. Once again, we've all gained share in the quarter, driven by good execution for our local commercial teams. Contribution from recently acquired components, Geferens and Cordone together contributed to 6% to the overall revenue growth for the segment. Now taking a look at Latin Ag and Retail, the revenue totaled $55,800,000 which is a 2% decrease from previous year, a 17% decline in Colombia peso terms. This drop mainly due to challenges in fertilizer and crop protections distribution revenue, along with the lingering effects of discounting pearcraft, the herbicide from a supplier product lineup. Speaker 300:13:58However, growth in specialty products, seeds and service sales as well as the Colombian pesos appreciation against the U. S. Dollar and Brazil Real partially offset its revenue declines. Last but not least, Crop Care recorded revenue of $72,800,000 in the Q2 2024, demonstrating a notable 26% increase compared to the prior year. This growth was driven by robust performance with the specialty fertilizer products, TEGRA, showing a remarkable 55% increase. Speaker 300:14:31Additionally, the recent acquisition of Givent and enhancer manufacturer, Chroma Kimica, contributed 5% to Crop Care segment revenue for the Q2 of 2024. Now let's go and talk about consolidated gross profit. The consolidated gross profit for the quarter decreased by 17% to $103,000,000 Gross margin contracted by 3 60 basis points to 3.7%. And the main driver was the steep price decline in crop protection and fertilizers in our Brazil Agriculture Retail segment detailed by the way before. What in agriculture retail on the gross margin perspective declined by 230 basis points to 17.8%, driven by compression in crop protection of fertilizer distribution margins. Speaker 300:15:26And the gross margins of Crop Care retreated by 160 basis points to 35.3%, primarily due to unfavorable mix effects resulting from the performance of high margin biological products during the quarter. However, the financial contribution from the recently acquired Chromo Chemica, which has gross margin higher than the crop care average, helped offset some of these effects. The adjusted EBITDA in the Q2 of 2024 was 40,100,000 dollars down $37,400,000 from the prior year quarter, while adjusted EBITDA margin contracted by 48 point 8% to 6.5%, again, primarily influenced by the gross margin compression discussed earlier. The SG and A, excluding the depreciation and amortization to sales ratio increased by 300 basis points to 11.3, mainly due to higher investments as the hiring of new 291 RTVs have yet to contribute to our sales. And we also had the increase in the allowance for expected credit losses, resulting from the impact of the El Nino and our expected payment schedule from our pharma clients. Speaker 300:16:46All three operating segments saw negative year over year change in adjusted EBITDA as well as EBITDA. Adjustment items excluded from adjusted EBITDA increased by $1,500,000 to 2 point $4,000,000 for the Q2 of 2024, due primarily to higher stock based compensation expense of $500,000 right there, an increase in related product consultancy service expenses in Q2 $900,000 Last but not least, the adjusted net profit was $2,600,000 a decline of $34,800,000 over the prior year quarter driven by the lower adjusted EBITDA, higher financial costs of $5,400,000 reflecting high interest rates on trade tables and it was partially offset by an increased positive contribution from our income tax. Now I refer back to Hu Speaker 200:17:44Thank you, Julien, and thank you all for participating in today's conference call and for your ongoing interest in our company progress. Allow me to highlight some key points from our discussion today. So our 2nd quarter results underscore Lavoro's resilience in the face of challenging market conditions. Our retail operation in Brazil has demonstrated robust year over year volume growth even amidst one of the most competitive market environments we have witnessed in over a decade. Similarly, our Colombian operation has also shown a comparable trend with notable gains in market share. Speaker 200:18:29Furthermore, our industrial division, Crop Care, achieved double digit growth in both revenues and gross profit compared to previous year, and this growth was primarily driven by strong performances in Specialty fertilizers and edibles, which offset any temporary setbacks experienced in the Biological Solutions segment. Lavoro's significant volume gains validate the continuing interest of farmers in investing in agricultural inputs, further solidifying Lavoro's position as their preferred partner. The confidence expressed by farmers is reinforced forced by the substantial investments the company is currently making to enhance its sales teams, placing LaVora in advantageous position to capitalize on the anticipated market recovery. I firmly believe that the current market landscape has the potential to accelerate the ongoing transformation within the agricultural retail sector in Brazil and South America. In this regard, I'm confident that Alavoro will maintain its prominent role in the market and continue to lead the way in driving positive Operator00:19:48Thank you very much, sir. Ladies and gentlemen, we will now begin with a question and answer session. Our first question is from Bobby Burleson of Canaccord. Please go ahead. Speaker 400:20:23Hi. Thanks for taking my questions. So I guess the first one is, can you just remind us maybe some of the factors in addition to kind of the plant activity on the Trefino corn that you guys were watching throughout so far in calendar 2024 to decide whether or not you were able to maintain the guidance that you laid out back in January? What were those main kind of things that you guys were looking at? Speaker 200:20:59Hi, Bobby. Thanks for the question. So yes, a few components on that. So first, the one of the key elements in driving our vision was the expectation regarding the overall market for this fiscal year. So we continue to see an overall decline in markets about 25%, and this has not changed too much. Speaker 200:21:26It's mainly driven by price. We also mentioned that the area of corn in the 2nd crop will see a reduction as well as some expected reduction in productivity that would, in consequence, also affect farmers' decisions whether to invest in medium technology seat as opposed to higher technology seats, and this is also being confirmed. And also some tendency to use a lower, let's say, level of biological solutions. So I would say, largely, those were the main facts in addition to the normalization of the retail inventory. So all of that to say that those indicators, they seem to be progressing as we expected. Speaker 200:22:26I think on the positive note, we see that the as we mentioned, the planting of safrinha is advancing fast. That means that the time window for farmers to operate in saffrona is going to be improving compared to what we expected originally, okay? So this might encourage some last minute sales, but yet it is difficult to predict if this is going to have a meaningful impact on the sales volumes or not. Speaker 400:22:58Okay, great. And then just as a quick follow-up with the farmer balance sheets in Brazil, we know that they tend to have healthier balance sheets, but there's definitely some concern on the part of grain traders that bankruptcy filings have increased in the region. And I'm just wondering your customer cohort in the small and medium farmer, how are they kind of positioned relative to where those filings are happening? Is there anything that's changing rapidly in terms of balance sheet health in the area? Thanks. Speaker 200:23:40Yes. So what we saw, Bobby, is that some areas have been more affected by the drought. And I think this obviously had a more negative impact on farmers in Mato Grosso and in Goia. I think those were the main affected areas and in some cases with lower productivities. We have some farmers that particularly those who rent the lands, they are close to a breakeven point at this moment. Speaker 200:24:09So I think the most critical areas is Mato Grosso and then part of Serhade. With that being said, it's not generalized it's not a generalized problem. And the current expectations for the soy crop is something around 150,000,000 tons, which is it's still a pretty good number. So I would say in general, farmers should be able to meet their commitments. But yes, we'll see some areas of potential risks. Speaker 200:24:46I think another important factor, you just mentioned the Chapter 11s or some farmers filing for bankruptcy. Indeed, the number has increased. It has increased from, I would say, a relatively small number. We will have to look into the next month to see the extent of the problem. But right now, I think it has not changed our perspective. Speaker 200:25:16If anything, maybe a little bit better than we expected considering the current soy production. Regarding Lavoro, I think all the, let's say, the negative effects related to bad debt provisions is already contemplated in our results. So it does not change the perspectives we have for the year. Speaker 400:25:43Okay. Thank you for that color. Operator00:25:48Thank you very much. The next question is from Benjamin Theurer of Barclays. Please go ahead. Speaker 500:25:56Hi. Good afternoon and evening. Thanks for taking my question. We wanted to follow-up on the Crop Care business and just to understand a little bit what you're kind of looking into the second fiscal half. We obviously had a very soft first quarter, a nice sequential improvement in 2Q, but still down on a year over year basis. Speaker 500:26:17Now normal seasonality second half tends to be lower in crop Care than first half. Wanted to understand like within your guidance parameters, how do you think about Crop Care into the second half just as you're coming out of this whole destocking environment over the last couple of quarters? And what's kind of baked in for the guidance in specific crop care? And then I have a quick follow-up. Speaker 200:26:44Okay. Hi, Ben, and thanks for the question. So I think there's 2 relevant impacts here. The first is a phasing effect, as you mentioned. So we had a very, say, slow start in the Q1, accelerating in the Q2, and we expect further acceleration in the 3rd Q4. Speaker 200:27:07But with that being said, the mix of Crop Care is will probably change with lower participation of biologicals than in what we had in last year. So the acceleration we'll see in the last quarters of the year is being mostly driven by specialty fertilizers and adjuvants business. Even though, as I mentioned, depending on the scenario of Safrina and the pests that eventually occur, we might get some surprises or some positive surprises when it comes to Biologics. But I would say overall, the expectation for the Biologics business this year is to be lower volumes than last year. So it's not only a phasing effect. Speaker 200:27:56We're going to grow in those other categories, but the growth will partially offset the negative margin headwinds. So that is our current considerations. Speaker 500:28:12Okay, perfect. And then just quickly as well on the Latin American business, if we could dig in a little deeper into your expectations for the back half and how maybe some of the phenomena you've talked about with El Nino obviously impacting Brazil to a sizable way, but it also does have an impact in that LatAm. I just wanted to understand what are the puts and takes here from just a weather pattern and how this could potentially impact the LatAm business into the 2nd fiscal half? Because that was kind of a little bit of an under pro form a, I guess, during the quarter as well. Speaker 200:28:56Yes. So Ben, on the LatAm business, I think that the dynamic, even though they're subject to the same global trends, I think there's some different aspects to consider. The first one is our Latin business is being able to hold gross margins better than the Brazil retail business. And then the competitive environment is, let's say, less intense. So we are holding margins a little better. Speaker 200:29:30The challenge remains in sales, partially is driven by price, but it's also partially is being driven by unfavorable climate conditions that we're having in that region. So right now, we'll depend we expect the second half of the year to be considerably stronger than the first half, But that will also depend on, let's say, the some of the climate conditions that are postponing farmers' decision to buy to be normalized. But we do expect, I would say, a stronger second half of the year. Speaker 500:30:11Okay, perfect. Thank you very much. I'll pass it on. Operator00:30:17Thank you very much. The next question is from Vincent Anderson of Stifel. Please go ahead. Speaker 600:30:24Yes, thanks. Good evening, gentlemen. I was just hoping to kind of get an update on how you feel about your sales staff. You hired a lot, but I'm curious how you're tracking against your 3 year ramp up algorithm. And then just remind me how the performance compensation metrics work for them between revenues, volumes and gross profit dollars? Speaker 200:30:48Hi, Vincent. We're executing our hirings according to plan. Actually, we're Speaker 600:30:57I think we're even Speaker 200:31:00with better performance than we expected in the last month. So we saw a significant growth in the last quarter. But to say largely in line with what we expected to bring in new sales teams. Most of them I mean, the compensation structure in the market is fairly standard. So we have, let's say, relatively low fixed salary, but then you have a relatively larger variable compensation, which is a proxy, something around 1% of their sales, okay? Speaker 200:31:38What we expect is I mean, some of those guys are already having a positive impact in sales, I'd say, mostly in Safranha. But the full benefit will only be achieved next year, right, with their full year of work with us. I think the interesting thing is also that we're trying to hire experienced sales consultants, and we're being able to bring consultants with a very large potential order book with them. And those experienced sales consultants, they tend to be much more productive than the new ones, right? So usually it takes between 3 to 4 years to have a sales consultant fully operational or to the maximum capacity. Speaker 200:32:37And many of those guys that are bringing right now, they're already experienced and they're already operating the region that they've been working on. So I think that we may experience, I would say, accelerated growth coming from those new sales guys in the next year. Speaker 600:32:53That's very helpful. Thank you. And then my other question was just I'm trying to get a feel for your pricing model in these kinds of market conditions in terms of how you are able to monitor prices across all the growing regions you sell to and coordinate price and margin targets kind of from a centralized position down to your individual locations? Or is it still mostly a bottoms up effort and these individual locations are loosely held to a goal of some kind? Speaker 200:33:27Yes. So in the way that we are organized, I'll say in Brazil, but it's also valid for Colombia. So we have a decentralized pricing decisions because we need to be mindful of the right pricing being performed at the market. So we have Brazil divided in clusters, and we have 3 major clusters in Brazil, North, South and East. And each one of those clusters, they have specialized marketing and pricing teams that are fully dedicated to looking to the overall farm gate price being performance by product and then with that and based on that, taking our price and markup decisions. Speaker 200:34:17So it's decentralized to the point that we need to have adequate pricing levels to where we compete. And then on the COGS side, I would say it's probably more centralized because then we also need to leverage our scale and ability to discuss margin recomposition with suppliers at a central level, right? So we try to maximize that by combining our negotiations with suppliers on a central level and then taking tactical pricing decisions at the regional level. Speaker 600:34:58Okay. All right. No, that's helpful. I was trying to get a feel for when you have these kinds of price movements, if there's a mechanism to communicate that individual locations should not sell below a certain price or anything like that. But what you described sounds pretty robust and I appreciate that detail. Speaker 200:35:36Okay. Again, thank you all for your participation in the meeting. Again, I think once again, the company has shown the resilience of this platform. We're very excited about the second half of the year. We continue to be strong believers in the fundamentals of the Brazilian and the South American markets. Speaker 200:36:00And we'll keep you posted in new developments. But right now, I think we were tracking in line with what we have already projected as planned for this year. Thank you very much. Operator00:36:19Thank you very much, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for your participation and you may now disconnect your line.Read morePowered by