AgroGalaxy Participacoes SA

BOVESPA:AGXY3

Earnings Call Transcript

[Operator]

I would like to highlight the simultaneous translation is available on the platform for those who need. To access this feature, click the interpretation button at the globe icon at the bottom of your screen and select then your language of choice, Portuguese or English. Those listening to the video conference in English, you can mute the original Portuguese audio by clicking on mute original audio.

Please note that this video conference is being recorded and will be available on the company's IR website at www.ri.agrogalaxy.com.br where the complete materials for our earnings call can also be found. The presentation is also available in the chat icon included English version.

[Operator Instructions]. I would like to emphasize that the information contained in this presentation as well as any statements that may be made during this video conference regarding business outlook, projections, operational and financial goals of AgroGalaxy are based on the beliefs and assumptions of the company's management as well as information currently available.

Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events, and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operational factors may affect the future performance of AgroGalaxy and lead to results that differ materially from those expressed in such statements.

Today, we are honored to have the following executives of the company with us, Mr. Eron Martins, CEO of AgroGalaxy; and Mr. Luiz Conrado Sundfeld, CFO and Investor Relations Officer. I will now the turn the floor over to Mr. Eron Martins.

[Eron Martins, executive]

Good morning, everyone. I'd like to thank everyone for participating over 85 people attending this earnings conference call for the Q3 2024 of AgroGalaxy. On the first slide that I'm going to share with you after the disclaimer. I'm going to summarize a little something that you have listened before -- to before. As a CEO, let me summarize the context of AgroGalaxy -- the latest 2 years, '23 and '24, we are talking about a market that after the commodities boom into input up to 2022.

Let me remind you about the COVID, the closure of the plants of active principles and after the war in Ukraine and Russia impacting the fertilizers. And we had a boom in the price of those products and consequently the price of the commodities. And then we bring the market to a closer reality -- closer to the benchmark.

So everybody that works in the supply chain and the retail chain earns a percentage of the revenue. So if this revenue is reduced, the price isolated from your discount related to the market. So you have a reduction of the capacity of generating gross profit. So we are talking about the products that were reduced by 70%, 80% in the fertilizers about 80%. So this drop in the agriculture inputs market reduced the margin of the profits. And this reduction affects the results that we present, but I'd like to share with you also the next -- for the next 2 slides, I'm going to talk about the producer side.

The producers, our client -- it moves -- they move our clients. They've been facing the reduction of the price of the commodities. And the increase in the cost of production, the cost of leasing that had a boom in 2020, it was not readjusted lately. So the producer and us are facing many challenges because of the price of the money due to the high interest rates. And it made -- it created difficulties for the producer to settle their debt, their payments, generating a high default rate that has been seen in the market in a generalized way.

So going further in detail on the perspectives of the producer so next slide. Here, you have a follow-up of the prices talking about corn and soybean. So you can see this reduction that happened for the years of '23 and '24, connected to the reduction of the input prices. So all the rates are dropping to half in defenses and fertilizers, what's important here.

The next slide, how did it impact the producers. This is some data that we have been following. We're talking about a producer debt or for the latest harvest, they had profitability over 30%, so the soy over 34%, 35%. And after the price readjustment, it goes up to 2.3% and even negative profitability numbers. Now they have been reestablishing margin inferior from comparison with the benchmark. But when you face the market, those levels of profitability for the producer and consequently for the whole chain, the whole sector. Everybody had to do their homework to adjust.

So on the next slide, we summarize what we did as a homework. And a lot that I'm going to share with you here, you have heard before the judicial reorganization. But a lot of what I'm talking here is part of our plan that was presented in December. The difference is that now we are in judicial reorganization, some process are sped up. So we improved the mix of products, AgroGalaxy. We will prioritize higher value, aggregated value mix, on going for crop protection fee in special products. Up to the disclosure of those results being acknowledged -- recognized as the leader of the sale of special products.

And we plan to keep in this vertical, even in this judicial reorganization content. We've been reducing the expenses started in '23 in February '24, mainly. We closed 19 stores and with the beginning of the reorganization, we sped up these processes, we readjusted our structure, and I'm going to show you the size of the AgroGalaxy today in the areas we're working on but we are still in the regions that are connected to our business strategy.

Now we have less fewer hierarchical layers in our organizational structure and it reduces expenses, of course, and helps the decision making to be -- this is a reality that we can see -- have been seen since the moment we changed it.

So here, we have a simple structure, leaner structures and processes. So we are adjusting the inventory levels. We are still strict when it comes to inventory, connected to the reality of the Agro business. So we will keep the inventory levels healthy that protect us from the volatility of the market. Everybody could see the dollar fluctuations. So if you don't have an inventory level that is projected for the reality, you'd face challenges. So Conrado will start as a CFO in this presentation talking about other topics. But we are looking for solutions. The market is still a little insecure within retail in this market. But we are still looking forward to healthy funding for our operations.

So I'll turn the floor over to Conrado and before he starts talking about the numbers, I'd like to emphasize that it's very important. We talked internally about that over 600 people participating in this event. It's very important that for you that to read the numbers of AgroGalaxy, you have to understand they are numbers of the end of September 30, in which you had the starting of the judicial reorganization. So the period between 18 and 30 is a short period, those numbers have been severely impacted by the organization because we have to recognize all the effects, all the agreements that were terminated.

And I'm not going to steal the portfolio of Conrado, but we have to be aware that almost everything that has been presented here, the cash effect either is embedded in the judicial reorganization, it will be paid within the plan. It was -- it has been approved, the first version. So everything that you will see here connected to the payment is connected to the dynamics of approval of the plan.

And Conrado now, I'll give the floor to you -- for you to get into further details for the numbers of the Q3 2024.

[Luiz Conrado dos Santos Carvalho Sundfeld, executive]

Good morning everybody. I'm glad to be here with you. Thanks for having me [indiscernible] this time here. So following what Eron said on the accounts closure of Q3, it has been postponed twice. But it's important that we mentioned that it was not -- we had a review, not an audit process, but we had some revision, some -- we had a more robust process because of the judicial reorganization process. And then our audit, the due diligence and tested all the accounts in further details, even higher than the profit and loss statements.

Because of this delay -- those tests have been made, not only looking at a time line of September. But those very basis were tested in '24 as we went through Q3. And then we had a second review in all the basis. It has been a long process and thoroughly test.

Before showing the numbers, let me tell you that we are going to present the financial statements that are recorded at this presentation, we're going to organize and separate as the management considers the fact of judicial reorganization in the results to the ordinary results of our operation for the Q3. So we're going to present those numbers in a breakdown [ mode ]. As Eron said at the beginning, we have to show you that the -- from the moment that we had to start the judicial reorganization we had some fines and some assets differences. So many results that we are going to show you here are extraordinary separated from the ordinary results that we're going to show you.

So the first graph on the left side, is the net revenue for Q3 '24. So the company had a revenue of BRL 1.21 million different from Q3 that was [ BRL 2.4 billion ]. And this drop was mainly caused by 2 main factors. The first was the condition, as Eron said, the price condition and with exchange relation that the producers saw in Q3. So the producers postponed the purchase of -- so the revenue occurred in a slower pace. So we got BRL 570 million less compared to Q3 '23. And from the perspective of volume is 40% lower and about the price, we performed 3% below. So we had a volume drop and in grain it was similar.

It's important to mention not only postponing the portfolio, we started our judicial reorganization in September. So a process started, and then we could not sell installments for a long period. So we had to sell cash because we were entering this process of judicial reorganization. And since that the supply of inputs of AgroGalaxy from that moment on was interrupted. So we had to cancel a big portfolio of fertilizer requests. So we sold our inventory. We had a good, not that big of inventory, but we -- we've been operating in a very lean and efficient way regarding inventory. So the company had not an ideal inventory level so from that moment on up to the end of December, we sold -- basically and it had an impact on our revenue.

Following the second graph on the right side, you see the gross margin, and it had some relevant impact in gross margin. And in the next slide, we will into further details about those effects that come from the judicial reorganization. So we have a gross margin the numbers dropped in a big variation. So the inputs -- the main effect is not the ordinary margin. We performed with a positive gross margin, when you look at the ordinary operations like buying, selling inputs.

We reduced about 3% in inputs, but the main effect you see here is like some impacts in the cost of the operation that came from the recovery judicial reorganization fines and penalties that came from the interruption of our contracts of supply for our vendors. So we had many penalties that we recognizing the cost of the products for our CMV for the Q3. So it's important to mention that all those penalties and fines were recognized inside these statements and inside the main framework of creditors. So if I have an obligation, counterpart? My accounts payable are part of recovery -- share recovery as well.

Those obligations don't have a cash effect immediate in Q3, but there will be amortizated, let's say like that. As we finish the judicial recovery. So when we finish the assembly of creditors and set the deadlines and corrections and nominal impact in the value.

So in this minus BRL 378 million, we have BRL 200 million in impacting the DMV due to those effects. I told you about fines and penalties that we received because of contracts. And we finished the accounts of September, looking at December. So you have all the market value of readjustment and inventory based in the prices -- on the prices that we're practicing. On the third quarter, not only in the fourth quarter, so many accounts do -- so not only basis of Q3.

So following that, we have this bottom left graph, SG&A. So we have the comparison here. We've been trying to separate the ordinary of Q3, we need for comparing to Q3 '23. That's the green part of the graph, we had in SG&A, BRL 147 million compared to Q3 '23, we had like a drop in the figure, BRL 30 million. So it corroborates on what Eron had said before. We had been implementing this reducing in SG&A. And after the judicial reorganization, this process set up. So our expectation is that as this plan continue to move on, you're going to reduce expenses even more. So it's important to highlight the gray area above and you see the judicial recovery effects, BRL 769 million, main event here affects our PDD.

So as we started the judicial recovery, we made this decision aiming at like seeking liquidity, selling power portfolio of accounts receivable due over 30 days. So we have a special fact that was disclosed today a relevant fact, was to show the part of this portfolio, and we started and we are still negotiating. I'm talking about the [indiscernible] of the other part of the portfolio, aiming at liquidity, get cash for the company and the impact in SG&A is the adjustment from the discount, the premium of this portfolio discounted from the provision of the PDD that existed before inside this portfolio and the premium that we received the sale of this portfolio.

So this impact -- besides the impact of the sale of this portfolio, you have the acknowledgment, some other expenses like closing stores, we closed 70 stores after the recovery, the judicial reorganization we acknowledged, the fines that were in the terms and conditions of the contract of the stores and some expenses came from the selling, ex when you close the business in the region, so you have to settle those taxes. So all those impacts are inside what we consider the impacts that come from the judicial reorganization inside the BRL 768.8 million.

When you see the bottom right graph. So it was an impact, a very -- an extraordinary impact, minus BRL 990 million and the ordinary is BRL 247.7 million. So you can see the separation there. So the gross profit impact in detail here, you can see the main effects that cause this adjustment is extraordinary adjustment. That's a onetime adjustment, especially the penalties and contract fines and inventory loss. And it's important to show you that excluding those effects, in the gross margin, we have a good one, but a little like behind, but a 5% margin. So in the inputs, we had a reduction of prices of 3% and total grain, the reduction was a little higher.

On the right side, you can see that -- I mentioned that before in the slide -- the previous slide, the main effect is the provision that the company had to do in the accounts receivables, since we've been like we decided to sell them, and we are assuming the sale of the portfolio. We had an increase of the PDD in the quarter. So we have BRL 342 million. So it's an extraordinary effect that came from the judicial reorganization. That is the loss of our asset due to the non-predictability expectation of utilization of that tax that we put in our statement. So we had this drop of BRL 210 million. This asset is still in the company, the accrued loss is still there, but we are going to include asset in the statements, when we have some predictability. And then we could use this law.

So those are the main effects of the judicial reorganization and also the ordinary operation effects and results, as you can see.

Now I'll turn the floor over to Eron.

[Eron Martins, executive]

So let me update how we are in the time line of the judicial reorganization, so you can see here. So you have heard that before, we requested that in September 17, we had the deferral on October 1. The judicial administrator has been nominated, presented the plan, we updated the list of creditors. And today is the last day for the creditors to challenge this plan.

So since it was inside the judiciary recess, [indiscernible] applying for objections. So the level is below, what is a benchmark for judicial reorganizations and the objections. We're not worried about that. We've talked a lot with journalist and the fact that some creditors challenge that create a necessity of an assembly. So we are preparing the environment for us to have the conditions to vote the presented plan as soon as possible. We want to do that as soon as possible. But it doesn't depend exclusively on us.

So at this moment, we've been acting on partnering different vendors. So we are prioritizing vendors that allow us to do business. So there are products that are arriving -- coming at our inventory, our warehouses. We have some partnerships. I cannot tell you names. But you have a range of vendors that are negotiating, are dealing with us to give some support for the plan for '25 and our estimates, we cannot say that in stone because it doesn't depend exclusively on us. It depends on the negotiations and on the trends. So our idea is to submit the approval of the plan in the middle of April this year, so we've been working for that.

On the next slide, you can see what's behind the incentive plan. So you could see, as I said before, many things coincide with the first slide that talked about what we've been doing. We had been doing before the recovery actions. So we have a geographical positioning with the adjustment of the number of the stores. We are focusing on states that are suitable for our mix. So we want to reduce the share of the fertilizers and the added value products. So we understand that those actions are -- they reduced the revenue in the short term, but we are going to have healthier margins because of the mix that we are adjusting. Inside the revenue we've been doing that, we've been selecting the private concession better it impacts the revenue, but all those numbers are reflected in the plan that is disclosed, you can access that.

But there's a positive effect in the EBITDA, the adjustment in the mix. So we are changing from 8%, 9% margin products as fertilizers and prioritizing crop protection and setting the speeds for special products that delivered over 30% margin. So when we prioritize specialties, you guys have been following us for a long time. So you could see that we've been doing that gradually, trying to get these advantages as the resell -- bringing those kind of products.

So we are redesigning this structures, and we've reduced a number of the stores. We increased the sales force, create a healthier revenue you have to adjust. We did it, we adjusted. We are a leaner company. We have -- we are more agile, and we have -- unless it's peaked in the decision making processes. We changed different themes. Now we are a store. We are a store and the store has autonomy to [indiscernible]. And also, as every company has to do, we've been renegotiating all the service agreements looking for the risk that fit our new reality.

And talking about working capital, we've been -- our plan is based on like cash sales and the portfolio sales, the additional cash that is flowing in the company. It was a value that was not predicted, but helps the cash sales, but we were still strong with the suppliers. We are considering the resumption of business over time and they've been individually with all the suppliers. So the inventory, we not -- we have to keep inventory levels that are healthy. We will not -- lots of [indiscernible] in inventory for rebates. We do not want to expose ourselves to volatility -- to the volatility of the market.

And regarding the accounts receivable, as Conrado arrived, he brought some new tools that have been impacting our portfolio. So the idea is to keep receiving and having accounts receivable deadlines better for AgroGalaxy. And now we have some numbers that are in the plan that was submitted. I'm not going to go further into details. But there is a growth, and it's a solid growth with increase in margins based on this mix improvement and we want to reduce the SG&A. So we don't want to lose control.

We will grow inside within the plan. So with our revenue plan increasing not only the number of the stores, but the productivity of the sectors. But we are not going to expand and increase the structure. We're going to change the way of operation. So it naturally will -- if we work on the growth of revenue with a healthier margins and a better -- a richer mix in keeping the tight leash in the SG&A. So we're going to bring the EBITDA to [ 7.2 ] BRL 713 million in 2035, containing the fixed costs and to work on the attention of our sales force.

The next slide shows our presence in Brazil. So it's important to mention that we had 3 business units, and we simplified that even more. So now we have 2 business units, why 2 different business units? Because the agricultural contexts are different. The size of the producers are different. The way to serve the producers are different. So we have the South represented by Parana and Sao Paulo. Sergio Fraga leads this business unit and Maria that has been working with us for over 20 year, [indiscernible]. And with those 2, we have 73 stores and a sales force of 235 people.

Of course, with the capacity to increase -- to increase the head count due to the evolution of the sales, but it will allow us to deliver what we predicted for the plan for 2025.

And in this last slide, we have a little of what has been happening at the end of this year. So since we signed the agreements with the suppliers, we had some purchases in cash. And I can see that we are recovering the trust of the producer. And we are still dealing with the producers. Today these increase our portfolio, buying this with the supply team to deliver the values that we predicted on '25. So we have some great indicators that can base that claim.

We have this portfolio that was sold. We have some cash to do business in cash, had a [indiscernible] resumption and some warrants new effect, we will leave from our silos in the south, the producer's grain. So when the producer deposits its grain in our silos, it's like a trust certificate. So the producers are depositing the grain. We're paying the grain. So the producer will yield the trust in us.

So when the trust is back, the producers will pay visit, visit our stores more and then we go back to the normal and the expected operation for '25. So we end the formal presentation and we open the floor to Q&A. And I believe that Patricia or Luciano will conduct the Q&A very well. Thank you.

[Operator]

Now we will begin the Q&A session. [Operator Instructions]. Let's move to our first question from Peter with the [indiscernible] Finances. So first question is, what is the number of stores in total? The current presentation shows some stores in '24 and the other report mentioned 91. Did you close are 18 stores in the last month, the closure stopped or they're still ongoing?

[Eron Martins, executive]

The number of the stores is 73. So we started the judicial reorganization of the 17. So we stayed a month working on the restructuring the size of the company. So the number of the stores at that moment was 73, but you cannot close a store overnight. We have move the inventory, remove all the office supplies this intermediate number that disclosed, was that the number of the stores that -- which were actually closed at that time. So we have some stores have been closed at the moment, but the number is 73.

[Operator]

Thank you, Eron. Our second is Peter from Peter. The question is, please explain [ Joe's ] the bad provisions constituted in the accounts receivable. And why the information were not sufficient for the PUC to state their opinion on this financial [indiscernible] literally?

[Unknown Executive]

Let's talk first about the provisions. If you look at the first slide, the provisions that we had regarding the accounts receivable part of it was ordinary. We reviewed the portfolio in September. Again, we reviewed the same portfolio in December. So we had to run the closure in over 3 months. And this is the ordinary provision for the accounts receivable due to the default rate of that portfolio that is up to 120 days. So the other part of the portfolio that goes beyond the 120 days, we had the prediction, not only based on the PDD policy, but it was a prediction done with expectation of the company on the sale of this portfolio comparing the provision that we had for that portfolio against the level of discount that the company will pay minus the premium the company maintains.

So the second issue here is the limitation of the audit report. It's not only -- the impact is not only for the portfolio, but it's scope limitation due to the reality of the recovery -- the judicial recovery of the reality. So we had some proposals of which is in our portfolio. So this yield negotiations are being realized. So we have some MoU with some financial institutions. So there is a scope limitation based on the provision that we have done. I hope I was clear.

[Operator]

Thank you, Mr. Conrado. Our next question comes from [ Osmar Angelin ] Investor. In the scope of the judicial reorganization, if approved, in the actual terms and conditions. How do you believe that the company will be able to access private credit in the future? Since this the [ CRAs ] investors were extremely penalized in this plan?

[Unknown Executive]

Well, Eron has talked about the [indiscernible] of grains that we started in our silos after the plan. The producer is still trusting our company in halting their grain in our silos. So I think this was just those over confidence. And it's unfortunate what happened with the CRAs, not only the financial creditors, but all the creditors, it goes over trust.

So our projections that are part of the plan, we've been -- we have to carry out the goals that we established in the plants to generate revenue, generate results and the cash that we predicted and consequently, as we've established trust, we are still operating not only for the financial market directly, but in the capital market as well. So it's not only trust, it's about performance as we believe.

[Unknown Executive]

So our next question comes from [ Mr. Pascal Gustavo ] journalist of [ Money Times ]. Eron, good morning. Just emphasizing what are the products that are in the mix of more added value [indiscernible] to us?

[Eron Martins, executive]

So we have always crafted from fertilizer seeds, crop protectors and specialty. So you guys could see the revenue grades from the barter, that is the goal. So we keep a static capacity in the south. So we buy and sell grain. But from those products, what are we withdrawing strategically fertilizing, why? Because we understand that we reached a sale of 30% of fertilizing. So it hasn't very big impact in the working capital because you pay cash to sell installments. So we're going to decrease the fertilizers here in our mix is for us. We don't have a barter. We have to present a complete solution. But we are going to prioritize the fertilizers in the complete package. So the producer that buy seed specialties or protectors with us, if they pay in grain. So we will have some solutions for them to receive some fertilizers in the package.

[Operator]

Our next and last question comes from Pedro [indiscernible], Buyside Analyst of Itau BBA. I understand that the accounts receivable is connected to cash reinforcement, right?

[Eron Martins, executive]

Part of this resource part of this cash will be allocated for a set of debts. The sale of the accounts receivables and the reestablishing our operation. Those amounts will be used for purchasing of inventory because it will bring some effective margin for us to create new business. It's important that in function of the judicial reorganization plan, we can liquidate settle any obligation with the creditors we will only be able to settle those obligations after the plan is approved according to the conditions of the plan. So any cash that generates now will boost our business regarding the sale of the portfolio or the generation of cash and revenue of the business. I hope that was clear for you.

[Operator]

So the Q&A session has concluded, and we'd like to hand the floor back to the company for their final remarks.

[Eron Martins, executive]

Thank you for participating in this earnings call and not only the participation. So we have many suppliers and vendors, many partners, some of them closed deals with us. But I'd like to tell you that the door is still open for us to talk the recovery of AgroGalaxy is not only made with those actions that we showed you here. But with a strong model in partnership with the vendors, with suppliers, we don't have AgroGalaxy without suppliers and without the products. So we are calm, you start the sales in '25, when the door is open for us to close those partnerships. Thanks for understanding.

Thanks for your patience. Not everyone could talk to me during this process, but the doors are still open for us to reestablish the contact and the partnerships. Thank you very much, everybody. Have a great Tuesday.

[Operator]

Video conference for the disclosure of Q3 '24 of AgroGalaxy Participações is now concluded. The Investor Relations department remains available to address any additional questions or concerns. Thank you all for participating, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]