Lavoro Limited (NASDAQ:LVRO) Q2 2024 Earnings Conference Call January 24, 2024 5:00 PM ET
Company Participants
Tigran Karapetian – Head of Investor Relations
Ruy Cunha – Chief Executive Officer
Julian Garrido – Chief Financial Officer
Gustavo Modenesi – Chief Strategy Officer
Conference Call Participants
Bobby Burleson – Canaccord
Vincent Anderson – Stifel
Brian Wright – ROTH Capital Partners
Ben Theurer – Barclays
Operator
Greetings, and welcome to the Lavoro’s Fiscal First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Tigran Karapetian, Investor Relations for Lavaro. Thank you. You may begin.
Tigran Karapetian
Thank you for joining us today on Lavaro’s fiscal 2024 first quarter earnings conference call or results ended September 2023. 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.lavoroagro.com. That may be helpful in your analysis of the quarterly performance.
Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future results and operations and financial position, industry and business trends, business strategy and market growth, among others. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could materially differ from actual events or those described in these forward-looking statements.
Please refer to the company’s registration statement on Form F1 filed with the SEC on March 23, 2023, or our report on Form 20F for the period ended June 30, 2023, filed with the SEC today. And our reports filed with the SEC time to time for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.
Please note, on today’s call, management will refer to certain non-IFRS financial measures, including adjusted EBITDA, adjusted EBITDA margin, 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 IFRS. Please refer to today’s release for a reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with the IFRS.
I’d like to now turn the call over to Ruy Cunha, CEO.
Ruy Cunha
Thank you, Tigran. 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 then I will return for some concluding remarks.
So, on our last quarter for our first quarter 2024 ended in September, Lavoro delivered revenues of $483 million, up 11% year-over-year, and up 3% in current local terms. Adjusted EBITDA was $11 million, declining 75% over the previous year quarter. Our revenue grew in the quarter in spite of the intense industry-wide deflationary pressures felt across major product categories, a strong volume growth led to market share gains, as well as currency tailwinds and growth in grains revenues more than offset the 40% to 50% average price declines in crop protection and fertilizer in Brazil. These deflationary pressures were a headwind to our profitability, in particular to ag retail in Brazil segments, where gross margins contracted by 10.7% compared to previous year to reach 8.7%. It translated to Lavoro’s adjusted EBITDA margins compressed to 2.3%.
Now let me take a moment to update you on the market environment. Since our last update, we saw an emergence of a disruptive El Nino phenomenon in Brazil. Severe drought conditions in many producing states, including Mato Grosso have caused delays in planting of the soybean crops and created challenges for the next crop as well. We now expect these to adversely impact the second corn crop with reduced planted acers, as well as seeing a portion of farmers opt for medium-tech corn seeds over high-tech alternatives, as well as curtail investment in specialty inputs such as biological solutions. We anticipate this impact to our second and third quarter results, both in Brazil ag retail segment, as well as crop care segments.
Next, let me provide you with some brief updates on our distribution margins recovery. In our last earnings call we briefly explained on the effect that ag input prices variations have on our distribution margins. As a reminder, we explained that as a markup business, we are relatively agnostic to absolute price levels of inputs over time, so long as they remain relatively stable. When prices are in an uptrend or downward trend, our distribution margins are temporarily impacted, given the three to four months inventory days causing the delay between COGS and average sales price adjusting. I refer to this as temporary given the fact that this trend eventually dissipates. Naturally, inventory turnover causes the inventory COGS to catch up to sales price and distribution margins reverts to normalize — to their normal average.
So this in a sense what occurs is a normal environment when our margins are relatively stable. What is unusual about the last 12 months in Brazil is that, the sheer steepness of the deflationary trend with crop protection and fertilizer prices declining 40% to 60% year-over-year over multiple quarters is a pressure that ag retail industry has not experienced since 2014. While our distribution margins for fertilizer and crop protection have indeed been gradually recovering, the pace of the improvement thus far has been below what we have expected. The destocking of excess agrochemical inventories is taking longer than expected.
With all that said, we’re updating our financial guidance to reflect the unanticipated impact of El Nino, as well as the slower recovery in distribution margins. We are now forecasting adjusted EBITDA to be in the range of $80 million to $110 million, while our guidance for revenue remains unchanged.
With that, let me turn to Julian for some details on our financials.
Julian Garrido
Thanks, Ruy. I’ll begin by covering our consolidated financial results for the fiscal first quarter 2024, which ended on September 30, 2023, and providing additional details regarding our revised full year fiscal 2024 guidance.
Let me start with the first quarter. Consolidated revenue grows by 11% to $483 million, as Ruy have mentioned. In constant currency terms, the revenue increase was 3%. The inputs revenue increased 5%, with volume growth more than offsetting price declines. Grains revenue increased 109%, driven by a greater desire by our customers for entering barter transactions.
Looking at revenue by segment, Brazil retail saw revenue increasing by 15%, reflecting the improved sales volumes of crop protection, fertilizers, and specialty product categories, which increased 54%, 53%, and 33%, respectively. This more than offset the decline in average sales price that we elaborated on before. Lavoro gained share in the quarter, driven by good execution from our local commercial teams. The contribution from recently acquired Referencia in the south of Brazil contributed roughly 2% of the overall revenue growth for the segment.
Now talking about the Latam retail revenue, it decreased by 1%, 9% in Colombian Peso terms relative to the prior quarter, landing at $66.3 million. The decline was probably driven by the pricing headwinds to fertilizers, as well as supply shortages of corn seeds from our key supplier, which resulted in loss revenue opportunity amounting to just under $2 million for the quarter. Actions have already been put in place to add new suppliers to mitigate impact for the rest of the year.
In addition, our Latam business continue to suffer from the impact of the [rupture] (ph) of supply of Paraquat, the top leading herbicide in Colombia, from our key supplier. The year-over-year headwind from Paraquat amounted to just over $2 million in the quarter and is expected to continue impacting the results for the next two quarters. Crop care revenue decreased by 1% to $35.7 million, tuned by a sharp decline in revenue for Perterra due to price declines in agrochemicals. As a reminder, Perterra is the crop care subsidiary that imports off-patent agrochemicals from Asia with Lavoro’s Brasil retail as the customer.
An additional detractor in the quarter was Agrobiologica, which faced headwinds from delays in farmers’ purchases or decisions making, which pushed revenue out to future quarters. Of setting the year over the impact of this was the new M&A contribution from Cromo Quimica, a manufacturer an adjuvant acquired in Q4, as well as double-digit growth for Union Agro, our specialty fertilizer manufacturing subsidiary.
Consolidated gross profit for the quarter decreased by 34% to $59.5 million, gross margin contracted by a 850 basis points to 12.3%. The main driver was the steep price decline in crop protection and fertilizers in our Brazil agriculture retail segment, dictated by Ruy. Latam agriculture retail saw its gross margin decline by 50 basis points to 13.8%, as we had mentioned, driven by the compression in crop protection distribution margin, as well as a negative product category mixed shift, this high margin seed distribution was tempered by previously mentioned product shortage.
Crop care gross margin [indiscernible] by 3.3% to 43.3%, driven by a lower margin at Perterra, as we mentioned, due to agrochemical price declines, and negative product mix shift at Union Agro, while higher margin soil fertilizer product face time shift from delayed farm decision making. These effects were partially offset by the financial contribution from the newly acquired Cromo Quimica, which boosts gross margins more than Crop Care average as we expected. Adjusted EBITDA in Q1 was $11.1 million down, $32.9 million from the prior quarter. While Adjusted EBITDA margin contracted 7.9% to 2.3%, chiefly driven by the impact of gross margin compression [indiscernible].
Now SG&A to sales ratio remain constant at 11.9% of sales, less higher consulting and legal expense related to Lavoro’s public company expenses, as well as increasing allowance for expected credit losses due to the impact of El Nino on our expected [FIAGROquota] (ph) payment schedules, were offset by the new initiatives charging low overhead expenses. All three operation segments saw negative year-over-year change in adjusted EBITDA, as well as adjusted EBITDA margin. No recurring expenses excluded from adjusted EBITDA increased by $5.4 million to $8.5 million in Q1 2024. Due to, number one, M&A accounting and tax due diligence expenses $0.9 million, which includes a one-time [deal break] (ph) fee related to NS Agro, resulting from suspending our plans to acquire them.
Second, the provision of the second half of the DeSPAC bonus to employees that will be paid in Q3 2024, $1.3 million. And last, related party consultancy services expenses, recognized as non-recurring $2.3 million and the increase of $1.3 million amortization of the fair value of inventories sold from acquired companies, which relates to purchase accounts.
Having said that, I’ll pass the ball back to Ruy.
Ruy Cunha
Thank you, Julien. And now I’ll move to my concluding remarks. Guys, we’re living in a very unusual situation in the global ag markets, but particularly in Brazil. Even though grain prices and ag input price adjustments are normal and expected the intensity of some of those movements was not seen in the last decade, given the high inventory levels carried by retailers. On top of that, we had the severe impact from El Nino that created additional challenges to farmers.
In this context, Lavoro is acting to mitigate short-term impacts in our results, and at the same time, we are positioning the company to capitalize on the expected market recovery. Lavoro has gained market share in the first quarter and hired new experienced RTVs that can bring potential new sales of more than $100 million for the next fiscal year. The market scenario is temporary and will improve as the secular trends and strong fundamentals of Latam agriculture have not changed. When this occurs, Lavoro will be in an even better position to deliver strong results and further consolidate our leadership position.
And with that, I’ll turn to your questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bobby Burleson with Canaccord. Please proceed with your question.
Bobby Burleson
Hi. Thanks for taking my questions. So I guess maybe just starting with the share gain efforts that you highlighted. This is a tough market obviously in Brazil, but you guys are working to kind of accelerate those share gains. I’m curious, your position in the market versus other players and how that might advantage you in some ways? And maybe just expand on the efforts underway to drive share gain.
Ruy Cunha
Hi, Bob. Thanks for the question. Yes, absolutely. We’re actually accelerating our share gain through some actions that include, as I mentioned, the hiring of experienced sales consultants that — in this more challenging scenario, they see the opportunity of joining a company that is more solid and with higher growth perspectives. So we have been very successful in attracting new RTVs, as well as we have been achieving a very low level of attrition between our current RTVs. So I think this is a first key component of that.
In addition to this, we have been very successful in also preparing our logistics to deliver products to clients and to take orders in the last minute as farmers were not taking the same approach as previous years of placing orders in advance. So we’ve managed to present the very strong volume growth that Julian has mentioned by being better prepared to supply these last-minute orders and we plan to continue doing so. So I think there’s a combination of factors, but in the end, it’s related to our strong position to serve this market.
Bobby Burleson
Okay. Great. And then just quickly on the comparison to 2014. I guess this is the worst environment you’ve seen since. And I’m wondering maybe just contrast the way things unfolded in terms of recovery from 2014 versus the way things are positioned to recover, in your opinion, from this current situation?
Ruy Cunha
Yes, I think, Bobby, the difference between the current scenario in 2014 is that: first, the magnitude of the change in prices were not even that close. So we have a, let’s say, higher intensity of price changes in this time, particularly in the fertilizers and herbicides. And I think another point that is important is that, the inventory on the retail channel is at a much higher level this time, because retailers were preparing for shortage of products. So what may be different this time is the pace of which the retail comes back to normal inventory levels and the situation of the overall market normalize. So it will be a, I’d say, slower recovery this time and it’s definitely slower than what we have anticipated. We see early signs of improvement, so we see improvements in the level of inventories, we see farmers already planning for the next crops, but I think the timing will be longer this time.
Bobby Burleson
Okay. Super helpful.
Tigran Karapetian
And Bobby, if I may just add a couple of points. I think just contrasting 2014 and this cycle. This cycle, you had effectively a number of unrelated, whether geopolitical or pandemic-related events occur, and El Nino being the latest one. That were not really related to the market, to the supply and demand for these products, just hit all at the same time. 2014, the decline then was driven by kind of the hangover from the ethanol mandate in the US. So it was more of a supply and demand question. Here, as far as inputs are concerned, it’s sort of reverting to the mean after the post-pandemic shock to the system.
Now, a couple of things that are different is that, as far as Brazilian farmers are concerned, they’re in excellent shape. In fact, even despite these headwinds, their margins are still double digits. And they will see a recovery next year once a lot of these trends dissipate and normalize. So that’s a couple of things just for you to think about as you compare those two cycles.
Bobby Burleson
Okay. Thanks Tigran. Thanks, Ruy. I’ll jump back in the queue. Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Ben Theurer with Barclays. Please proceed with your question. Ben, your line is live. You have your line on mute. Our next question comes from the line of Vincent Anderson with Stifel. Please proceed with your question.
Vincent Anderson
Yes, thanks. Good evening, guys. So I just wanted to dig into the biologicals component of the guidance. I know you’re starting up new capacity, so maybe there’s some fixed cost absorption there that you’re not getting in this revised guidance. But maybe beyond that, can you talk about the revised expectations between repeat customers that are not buying versus just pace of adoption being slower in this market environment?
Ruy Cunha
Hi, Vincent, I think I can start and then [indiscernible] can compliment you. So, first thing, the short-term impact on the biological solution is related to the fact that farmers are more skeptical to invest now in the corn crop. So we have lower expected margins for the second crop and we have also a shorter time window for this crop as the soy crop got delayed, so we get higher risks for them to invest. So I think the level of adoption of biological solutions in the corn crop this time will be lower than in the previous year. So this is what is reflected in our guidance. I don’t think this is — again, it’s not a structural change, but it’s something that will affect the next corn crop.
Regarding our new facility, we have the facility ready. We will not initiate production on the new facility until August. So we will most likely postpone some of the additional costs related to initiating this operation. And we expect the market to normalize and then we will eventually accelerate again. So I think it’s a temporary thing that we’ll face over the next months.
Vincent Anderson
That’s helpful, thanks. And then just maybe going back to guidance as a whole, just to help frame your decision making process. The drought obviously has been developing for a couple of months now. Internationally fertilizer prices have been falling for a while now. So I’m trying to just understand where the tipping point was in terms of your expectations on the year. And is it just as simple as you had to make volume commitments before you were certain corn would be delayed? Or is there something else that I’m missing?
Ruy Cunha
So I think compared to our last discussion, some of the things that have changed, first is the fact that we expect some of the margins on the inputs to be improving and prices, not prices from suppliers to retailers, but end prices to farmers to be recovering faster. So one thing that we observed is that, given the competitive scenario in the market, we continue to see prices at very low and unusual levels from retailers to farmers. Another thing that has caused this concern is what Tigran has just mentioned on the climate events, particularly the El Nino implications. And we saw the situation getting worse as both the soy crop was affected in terms of replanting. So farmers were planting and then they have eventually to replant some of the soy and also the shrinkage of time — window time for the safrinha. So I think those were the main changes. So basically the markets — we continue to believe that the markets will recover and the challenges are temporary, but the pace is just different based on what I just described.
Vincent Anderson
Okay, that’s helpful. And then maybe just one last one on kind of just Brazil in general, because the US doesn’t have two growing seasons. So I don’t have a good comparison. But is the Brazilian farmer — is there an opportunity right now for a Brazilian farmer who’s looking at a very difficult safrinha corn environment to then sell them more product to maximize soybean yields or have most of the opportunities to do kind of in season adjustments to things like nutrient levels or biologicals, has that window largely passed?
Tigran Karapetian
Vincent, the way to think about it is the reason why the delayed planting and harvesting of soybean is impacting the safrinha, which may not be super obvious at first. But effectively, there’s a window when you start planting the safrinha, typically early to mid-Feb all the way to early March. And the reason why you want to plant then is because the more drought-like or potential for drought-like conditions in Brazil in general kick in in April, May, and you don’t want your seedlings to be in the growth phases when those things happen. And so, what happens when you have a delayed planting for the safrinha is you increase the risk. The farmer has a higher risk of facing yield challenges. And therefore, what they’re doing is either they’re doing what they did last year, so they keep planting exactly like they did last year, or they’re downgrading technology in terms of medium technology for the seed, or they are shifting their crop type to other types, whether it’s beans or sorghum or other types. And those obviously also have potential for demand for agrochemicals. But from our standpoint, what’s impacting us more so is the corn seed business for us, which is a higher margin in agrochemicals and fertilizers.
Vincent Anderson
Right. Yes, what I was getting at is, a farmer facing that likelihood. Does it change their purchasing behaviors on the soy that’s already in the ground? But it sounds like the impact of corn just outweighs any opportunity for incremental sales into the current soybean crop that is causing the delay.
Tigran Karapetian
Yes, that’s probably a good assumption.
Vincent Anderson
Okay. All right. Well, thank you.
Operator
Our next question comes from the line of Brian Wright with ROTH. Please proceed with your question.
Brian Wright
Thanks. Good afternoon. [indiscernible] a little bit of how to think about the issue between a medium tech seed environment per safrinha versus your kind of view per planted hectare. So how to think about the relevant impact or the magnitude of the impact on each of those on your outlook?
Tigran Karapetian
I would say it’s a couple of things. A part of it is the downgrading. A part of it is just less acres. We went from, I think, early November [indiscernible] and some of the consultancies were forecasting acres to be anywhere between minus 2 to plus 5. I think now the consensus is more like anywhere between minus 10 and minus 3. So it’s sort of shifted. And it’s also impacting our crop care business in the sense that our biologicals — Agrobiologica does sell bioinsecticides for the corn for certain insects and we expect that to be a headwind as a result of — what’s going on in safrinha. Now the reality is, there’s still a couple weeks left and so we took, I would say, an approach of not guessing and sort of taking what we thought was a scenario that’s likely and rather than wait, there’s chances that the acres actually end up being better than we expect, but we didn’t want to take a chance.
Brian Wright
Okay. So it sounds like you’re kind of thinking more along, like, did this outlook is kind of more predicated on a minus 10 on acres than the minus 3, or is that the range you’re kind of thinking as far as what you’re predicating things on?
Tigran Karapetian
Brian, yes. I think more important than the reduction in acres here is the assumption behind the level of technification that farmers will want to apply in the corn crop. This is actually more impactful to the overall retail results, right? So we basically believe that they may be trading down some seeds in the sense that using lower technology seeds and also lower application of biological solutions. It’s not as much as the reduction in area that, as Tigran mentioned, there’s still not a consensus in this market, but I think there’s an overall consensus that farmers will be more cautious this year with those types of technology investments.
Brian Wright
Okay, No, thank you. If I could ask you one more just on — the press release has talked about ways to go on the de-stocking and just like — and how to weigh it and you also mentioned the fertilizer, but just maybe how to think about relative impact. Is it more fertilizer, more crop protection on the destocking or like you just help us figure out the relative importance of those?
Ruy Cunha
The crop protection is the most important category in the destocking process now. So I think fertilizers, they had an impact, but looking forward, the most important category to be looking at is the level of destocking of herbicides, fungicides and insecticides. So this is what we expect to see normalization over the next months.
Brian Wright
Okay, and I just want to make sure, I’ve read — so I’m recalling the press release correctly that the thought process is, by the end of March kind of time frame? Is the kind of view on the substantially complete on the destocking or is that a fair characterization?
Tigran Karapetian
Brian, I think it’s hard to say. I mean, certainly, some of the data that we’ve been hearing from consultancies that run surveys suggest that, as of December, we’re probably two thirds along the way. But to be quite honest, the data is really hard to get. And we’ll really see it when we see prices at the farm gate, as Ruy mentioned, start to recover. And then that will be really the real leading indicator. And we’ve yet to see a meaningful reversal or uptrend. It’s sort of been bouncing around in a range bound way. Skew by skew is different, but generally speaking, it’s sort of stabilizing. It’s been bouncing around for the last couple of months.
Brian Wright
Okay, thank you so much.
Operator
Our last question comes from the line of Ben Theurer with Barclays. Please proceed with your question. Ben, your line is live.
Ben Theurer
Okay. Does this work? Can you hear me? Hello?
Ruy Cunha
Now we can hear you.
Ben Theurer
Oh, finally, we got this done, technology. First of all, thank you very much for squeezing me in at the end. I had a few technical issues. So two things I wanted to ask. First of all, as you look into it, I mean, obviously the data we just got is ending September and late January. But as we think about the whole ag chem destocking that’s been an issue in Brazil and all this high inventory we’ve talked about. So what’s like your kind of like your best guess with that softened outlook that we’re going to get through this. Is that still going to last one, two, or even more quarters than that? So, anything that you have from off the ground information, that would be my very first question. I’m not sure if you’ve answered this already, but I got lost, so hopefully you can help me out on that. And thank you very much for that.
Ruy Cunha
Ben, I think we mentioned that right now it’s hard to predict. What I can say is that, we have some lead indicators that show that the level of inventory is improving. So when you compare the levels of inventory of retailers in January last year to December last year, we saw a decline back towards, I would say, more normal levels. The thing is that, it’s hard to predict if the normalization is going to occur between three months or six months. I think right now we’re going to have to see the development of safrinha, as well as farmers’ intentions on starting the new season, whether it’s going to be delayed or if they’re going to advance some of their purchases. So I would say we should see at least three months of this process of destocking by what the local consultants say with the possibility of extending a couple of months more.
Ben Theurer
Okay, perfect. And then just for understanding reasons, because it’s been a while that we had El Nino. You’ve mentioned it as having had an impact. Does that work to last a little longer in a similar situation as we had in El Nino for a couple of years prevailing? If we were to assume a similar scenario, can you frame or help us understand what the market dynamics would be and how that would impact your business just from I guess historic context that used to be in the past and how we should think about the impact going forward under the assumption that El Nino is going to last?
Tigran Karapetian
Yes, I mean, Ben, always difficult to predict headache events. But I would say relative to the historical data, this has been a particularly severe El Nino. Just to give you one indicator, the percentage of soybeans that had to be replanted in Brazil, so basically that to scrap and replant it all together was between 5% and 6%, which is 4 times to 5 times higher than normal. That’s a fairly large area. Obviously that’s another atypical thing, after the series of atypical things happening this year. But we can’t, obviously, predict what’s going to happen next year with the El Nino, but I would say relative to historical El Nino, this one has definitely been on the severe side.
Ben Theurer
Perfect. Well, thank you very much and good luck with what is left over here.
Operator
That concludes our question-and-answer session. I’d like to hand the call back to management for closing remarks.
Ruy Cunha
So I think we covered most of the topics already. Maybe the last comment from my side is, I mean, it became very clear all the challenges, but we’re also, I think it’s important to say that this crisis is also an opportunity for Lavoro to further consolidate its leadership position. The company’s solid fundamentals will actually act in our favor. So this moment is a good moment for us to continue expanding market share. We will continue to invest in the acquisition of new clients. And we expect to bring some news for the next quarter based on our continued investments in the market. Thank you all for participating and I will be all available for further questions if you need. Thank you.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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