Lavoro Q3 2024 Earnings Call Transcript

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June 3, 2024

There are 6 speakers on the call.

Operator

Welcome to the Lavoro's Fiscal Third Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. 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.lavorogro.com. I will now turn the conference over to Tigran Karapishan, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you for joining us today on Lavoro's fiscal 2024 Q3 earnings conference call for results ended on March 2024. On today's call are our Chief Executive Officer, Jui Cunha and Chief Financial Officer, Julian Garrido. The company has provided a supplemental earnings presentation on its Investor Relations website at ir.lavorogro.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.

Speaker 1

Please refer to the company's registration statement on Form F-1, Form 1EF for the period ended June 30, 2024 and Form 6 ks 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 reconciliation of non IFRS financial measures to the most comparable measures prepared in accordance with IFRS. I'd now like to turn the call over to

Speaker 2

Trigand. 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 delve into our financial highlights, and I will return for some concluding remarks. First, highlights of our strategy to date.

Speaker 2

For our Q3 2024, the story is broadly consistent with what we have seen so far in our fiscal year. 1st, we continue to outperform the Brazil retail inputs markets. Thus, double digit volume growth led by market share gains helped counter attack 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 reals 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, 40% for seeds and 47% for specialty products, significantly outpacing the overall retail markets growth, which hover in the low to middle single digits.

Speaker 2

2nd, 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 BrasilAg Retail, our gross margins on inputs revenues declined by 190 basis points to 12% compared to a 5.10% decline in Q2 of 2024 and a decline of over 1,000 basis points in the Q1 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 catch up in the inputs price decline at the farm gates. 3rd, our Crop Care segment continued yet again to perform well with revenue and gross profit growing 30% 14%, respectively, for the quarter.

Speaker 2

Despite the challenging market conditions for premium specialty products, Agrobiologica, our biologicals business was a strong contributor with revenue increasing by 57%, driven in part by robust demand from our for our bio insecticides products and strong commercial execution, as well as continued cross selling synergies with our Brazil ag retail operations. Crop Care's importance to La Vora continues to grow in importance, representing 22% of our year to date gross profit compared to less than 16% in the prior year period. 4th, our proactive efforts to recruit seasoned agronomists who are bringing in new clients to our platforms continue to bear fruits. With additional $35,000,000 in future net sales potential from new hires in the quarter, pushing our total for the year to over $150,000,000 potential. As mentioned in the last earnings call, we expect these RTVs to contribute to our results only next year.

Speaker 2

Our market share growth this year was finally 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 the incremental guidance. And actually and what has changed leading us to revise our forecast for the year. The Brazilian farmer had a challenging year in this last season.

Speaker 2

In addition to the meaningful decrease in prices for soy and corn, they had to contend with severe drought caused by El Nino climate, which caused yield losses estimated at 6% for soybean harvest and fears around the shortened saffronia growing season, leading them to downgrade their expense and seed technology selection, which partly led to 2nd 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 has been distorted 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 measure as the total farmer purchase orders divided by total expected demand were estimated to be around 17% compared to 27% in April last year.

Speaker 2

Consequently, a portion of products that we were projecting to ship in Q4 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 Nino on farmer profitability in key ag producing states, coupled with the weakness in grain commodity prices, which has prompting farmers to postpone the sale of their started 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.

Speaker 2

We were still impacted by payment delays in April. In many cases, we opted to comply to request 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. And as a result of these decisions, we expect an adverse impact in our Q4 2024 results compared to our prior expectations.

Speaker 2

Additional, our allowance for expected credit losses for the second half is now projected to be roughly $4,000,000 higher than what we have originally expected. Finally, we are also negatively impacted with bonus related to supplier agreements that didn't materialize in that some cases shifted to Q1 2025. With all that said, we are revising our fiscal year 2024 projections as follows. Revenue is now projected to range between $1,800,000,000 and one point $95,000,000,000 input revenues to range between $1,600,000,000 $1,750,000,000 and adjusted EBITDA to range between $46,000,000 $55,000,000 In Brazilian reals, our revised guidance is for revenues of BRL 8,900,000,000 to BRL 9,700,000,000, inputs revenues between BRL 7,900,000,000 and BRL 8,700,000,000 and adjusted EBITDA between BRL 230 and BRL 280,000,000. 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 Q4 to our Brazil ag retail segments that I previously detailed.

Speaker 2

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 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 the 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.

Speaker 2

I'll now pass on to Julian for further details on our financial results.

Speaker 3

Thank you, Huy. So let's start. 1st, the consolidated revenue for the 3rd quarter rose by 6% to $514,200,000 Expressing Brazilian reais revenue grew 1%. Inputs revenue decreased 1% as robust volume growth contribution from recent M and A and currency tailwinds continue to be offset by the deflationary headwinds from input price declines. Grain revenue grew 61 percent to $87,500,000 driven in part by a greater desire by our pharma clients for barter transactions.

Speaker 3

Looking at revenue by segment. Brazil AG Retail saw revenue increase by 5% to BRL 450,000,000 reflecting higher grains revenue, which grew 61 percent to $86,800,000 the impact of M and A with newly acquired Referencing Corren collectively contributing to 5% to Q3 2024 segment revenue and the currency tailwind from translating our results to USD. Inputs revenue declined 3% to $363,200,000 as the impact of input price deflation and the adverse effects of the drought caused by El Nino 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 Parana, Rio Grande do Sul and Santa Catarina, which were comparably spared from the drought conditions, saw input 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.

Speaker 3

Latin America Latin AG Retail revenue increased 5% to $50,500,000 for the 3rd quarter. Revenue was roughly flat when in Brazil reais terms. The growth was led by the currency tailwind stemming from the appreciation of the Colombian peso relative to U. S. Dollars, 22% year over year and Q3 2024 percent and Brazil Reais 16%.

Speaker 3

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 Nino, 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 $22,100,000 for Q3 2024, led by biologicals, which grew 53% year over year specialty fertilizers, which grew 6% and the contribution of recent acquired Chromo Kimica, which represented 5% of segment revenue in the quarter. Now shifting to consolidated gross profit for the quarter. We saw the increase by 16% to $60,200,000 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 cross border by segment, we see Brazil AG Retail gross margin contracted by 2 40 basis points year over year to 9.7% in Q3 of 2024, while gross margin inputs, which excludes the mix effect of grains revenue, contracted by 190 basis points to 12%.

Speaker 3

The prices at Farm Gate for crop protection and fertilizer prices declined year over year and quarter over quarter in Q3 2024. Our average cost of goods sold continued to gradually improve with the cycling of higher cost inventory in favor, helping drive this improvement. Last 10, H and Retail segment profit was $7,300,000 in the 3rd quarter, a decrease of 4% over the prior year, while gross margins declined 130 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 feed product sales. Crop Care segment gross profit grew 14% year over year to $9,100,000 in 3rd quarter, while gross margin decreased by 550 basis points to 41.2 percent as the benefit of a more favorable mix of higher margin biological as percentage of segment revenue was more than offset by 3 things.

Speaker 3

The margin contraction within biological, driven by tactical price reductions to stimulate sales volume 2nd, negative product mix within Unangro as farmers continue to favor more affordable basic products in Unangro premium full year fertilizers due in part by the El Nio driven risk aversion of the safrinha crop. And the third is an increase in freight rates. Net loss for the quarter was $64,800,000 compared to a net loss of $74,300,000 in the prior year period. The $9,500,000 year over year positive improvement reflects the absence of a one time Nasdaq listing expenses incurred in the Q3 last year, dollars 61,500,000 positive impact relative to prior year quarter, partially offset by: 1, a decrease in gross profits, dollars 11,700,000 an increase in SG and A, dollars 12,000,000 led by higher D and A expenses, dollars minus $2,900,000 and an increase allowance for expected credit loss of $4,300,000 Higher total financial cost, dollars 20,400,000 led by a loss on fair value of commodity forward contracts and derivatives, dollars 4,900,000 and foreign exchange difference, dollars 6,400,000 dollars And last is an increase in income tax expenses, dollars 11,300,000 Adjusted EBITDA was 3,700,000 dollars in Q3 'twenty four compared to $24,800,000 in prior year with adjusted EBITDA margin contracted 4.40 basis points to 0.7 percent, reflecting the gross margin pressure you tell you about, along with a 150 basis points year over year increase in the SG and A, excluding D and A as a percentage of revenue.

Speaker 3

Adjusted net loss was $62,700,000 in Q3 compared to $7,900,000 in the prior year, driven by the items I just mentioned and lower non recurring expenses items. With all that said, I'll pass it back to Rui for some concluding remarks.

Speaker 2

Thank you, Julian. So I would like to extend my gratitude to everyone participating in our conference today and our 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 2020 2024 has been extremely challenging for the entire agriculture value chain. Extreme weather events have penalized the profitability of farmers, which had already been affected by lower commodity prices.

Speaker 2

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 Q1 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, Crop Care, performed better this quarter than last year and significantly better than the market.

Speaker 2

This performance, combined with our conviction that the strong fundamentals of our agribusiness in South America remain intact, make us believe in a natural market recovery and in the companies outperforming the market in the upcoming quarters as well. With that, I'll come back to the operator for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from the line of Kristen Owen with Oppenheimer. Please proceed with your question.

Speaker 4

Hi, good afternoon. Thank you for taking the question. I was wondering if we can start with the full year 2024 guidance. You've lowered the range by $250,000,000 and still a pretty wide range between the top and the bottom end. We're about 60 days into the quarter.

Speaker 4

So I'm just wondering what are the swing factors get you to the various end of the full year guidance at this stage?

Speaker 2

Hi. I can take this one. So the main uncertainty at this point is the pace of shipments as we pointed out. Actually, we 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 under to be observed is the behavior of farmers in also being willing to accept and engage with us through the shipments in the last quarter that are actually the first products to be used in the next season.

Speaker 2

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 procedures from both sides, from our side and from the pharma side as well.

Speaker 4

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, that revenue that's shifting out of the Q4 would actually hit in Q1? Or what's the level of clarity that you have on that?

Speaker 2

That's correct. So as long as so those are firm orders in our order bank right now, and we just need to feel comfortable with the whole procedure of the communication and collaterals for credit sales. And we need to align with farmers for the best time for them start receiving the product. So it's a matter of timing and most likely will shift to the Q1 of 2024, 2024.

Speaker 4

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

Operator

Our next question comes from the line of rahi Parekh with Barclays. Please proceed with your question.

Speaker 5

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?

Speaker 5

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.

Speaker 2

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 in somehow the prices of Crop Protection Biologicals are also related to the crop protection agrochemicals that were highly depressed this year.

Speaker 2

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'd 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.

Speaker 5

Okay, great. Thank you so much.

Operator

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.

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Earnings Conference Call
Lavoro Q3 2024
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