Lavoro Ltd
NASDAQ:LVRO
Earnings Call Analysis
Q1-2024 Analysis
Lavoro Ltd
Lavoro announced their fiscal 2024 first quarter earnings with revenue surging to $483 million, an increase of 11% year-over-year, and 3% in current local terms. However, this growth came alongside a steep decline in Adjusted EBITDA to $11 million, a 75% drop from the prior year, with margins compressing to 2.3%. This was attributed to significant deflationary pressure, which reduced average prices in crop protection and fertilizer in Brazil by 40% to 50%. Additionally, El Nino's emergence in Brazil led to delayed soybean plantings and may negatively affect the second corn crop, impacting second and third-quarter results across Brazil's retail and Crop Gas segments.
Despite fierce deflationary pressures on product pricing, Lavoro still achieved revenue growth. In Brazil, the retail segment saw revenue go up by 15% due to enhanced sales volumes across various product categories, including crop protection and fertilizers. Grains revenue demonstrated a remarkable 109% rise, thanks to customers engaging in more significant transactions. These numbers demonstrate the company's resilience in gaining market share and volume despite price instability.
Lavoro's consolidated revenue in Latin America saw a 1% decrease, attributed to fertilizer pricing headwinds and supply chain issues, particularly with a key corn feed supplier. Crop Care revenue declined by 1%, with pricing declines in agrochemicals primarily responsible for the dip. However, growth was observed in new mergers and acquisitions activity and double-digit growth for Union Agro, their specialty fertilizer manufacturing subsidiary. The company's strategic moves to diversify suppliers and product offerings help cushion these impacts.
Gross profit for Lavoro tumbled by 34% to $59.5 million, with a gross margin contraction of approximately 450 basis points to 12.3%, predominantly driven by the decline in crop protection and fertilizer prices. Latin American agriculture retail's gross margin also experienced a decline. This contraction reflects the challenges faced in maintaining profitability amidst a quickly changing pricing landscape.
Due to the impact of unpredictable factors such as the El Nino phenomenon and the slower-than-expected recovery in distribution margins, Lavoro has adjusted its financial guidance. The company now projects an Adjusted EBITDA range of $80 million to $110 million, though revenue guidance remains unaltered. This update indicates caution and realism in the face of market volatility.
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Greetings, and welcome to Lavaro's Fiscal First Quarter 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tigran Karapetian, Investor Relations for Lavoro. Thank you. You may begin.
Thank you for joining us today on Lavoro's fiscal 2024 First Quarter Earnings Conference Call for Results ended September 2023. On today's call are 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 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 Act 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 F-1 filed with the SEC on March 23, 2023 or our report on Form 20-F for the period ended June 30, 2023, filed with the SEC today. and our reports filed with DSC time to time for a 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 conceding isolation or as a substitute for the financial information presented in accordance with the IFRS. Please refer to today's release for a reconciliation of [ nonofficial ] measures to the most comparable measure prepared in accordance with the IFRS. I'd like to now turn the call over to Ruy Cunha, CEO.
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 fee quarter for our first quarter 2024 ended in September, Lavoro delivered revenues of USD 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 as strong volume growth flat through 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 through Ag retail in Brazil segment 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 emerging [ of a disruptive ] El Nino phenomenon in Brazil. ever dropped conditions in many producing states, including Mato Grosso, have cost delayed in planting on the soybean crop and created challenges for the next crop as well. We now expect this to adversely impact the second corn crop with reduced planted acres as well as seeing a portion of farmers 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 and Retail segment as well as Crop gas segments. Next, let me provide you with some brief updates on our distribution margins recovery. In our last earnings call, we briefly ended on the effects that ag input price 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 input over time so long as they remain relatively stable. When prices are in uptrend or downward trends, our distribution margins are temporarily impacted given the 3 to 4 months inventory days causing the delay between COGS and average sales price adjustment. 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 revert to normalize to the 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 trends 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 are updating our financial guidance to reflect the unanticipated impact of El Nino as well as this lower recovery in distribution margins. We're 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.
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. So let me start with the first quarter. Consolidated revenue rose by 11% to $482 million as Ruy has mentioned. In constant currency terms, the revenue increase was 3%. The inputs revenue increased 5%, with volume growth more than offsetting pricing declines. Grains revenue increased 109%, driven by greater desire by our customers for entering larger 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. It is more than offset the decline in average sales price, we elaborated on before. oral gain share in the quarter, driven by good execution from our local commercial teams. The contribution from recently acquired [indiscernible] in the South of Brazil contributed roughly 2% to the overall revenue growth for the segment. Now talking about the Lat Am retail revenue, decreased by 1%, 9% in Colombian peso terms relative to the prior year quarter, landing at $66.3 million. The decline was primarily driven by the pricing headwinds to fertilizers as well as supply shortages on corn feed key supplier which resulted in a lost revenue opportunity amounting to just over $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 Lat Am business continued to suffer from the impact of the rupture of supply of Paraquat, top leading herbicide in Colombia for a 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 2 quarters. Crop Care revenue decreased by 1% to $35.7 million, driven by a sharp decline in revenue for [indiscernible] due to price declines in agrochemicals. As a reminder, [indiscernible] is the Crop Care subsidiary and imports of and hydrochemicals from Asia with [ La Boros ] Brazil retail as a customer. An additional detractor in the quarter was [indiscernible] which faced the headwinds from delays in [indiscernible] purchasing, so decisions making, which pushed revenue out to future quarters. Offsetting the year of the impact of this was the new M&A contribution from [indiscernible], a manufacturer of just even 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 kind of 50 basis points to 12.3%. The main driver was the steep price decline in crop protection and fertilizer in our Brazil agricultural retail segment [indiscernible]. Lat Am Agriculture retail sides gross margin declined by 50 basis points to 13.8%. As we had mentioned, driven by the compression in crop protection distribution margin as well as negative product catalog mix shift, a higher-margin seed distribution was tempered by previously mentioned product orders. Crop Care gross margin [ reached ] by 3.3% to 43.3% driven by a lower margin at [indiscernible], as we mentioned, due to agrochemical price declines and negative product mix shift Union Agro while our higher ignore fertilizer product takes a tiny shift from [indiscernible] Pharma decisioning. These effects were partially offset by the financial contribution from the newly acquired [indiscernible], which boosts gross margins more than crop-care average as we expected. Adjusted EBITDA value in Q1 was $11.1 million down $32.9 million from the prior year quarter, while adjusted EBITDA margin contracted 7.9% to 2.3% chiefly driven by the impact of gross margin compression details about. Now SG&A to sales ratio remained close at 11.9% of sales. Yes, higher consulting and legal expense related to Lavoro's public company expenses as well as increase in allowance for expected credit losses due to the impact of El Nino on our expected [indiscernible] payment schedules were offset by the new initiatives charging all overhead expenses. All 3 operation segments, [indiscernible] year-over-year change in adjusted EBITDA as well as adjusted EBITDA margin. Nonrecurring expenses excluded from our adjusted EBITDA increased by $5.4 million to $8.5 million in Q1 '24 due to, number one, M&A accounting and tax diligence expenses to $2.9 million, which includes a onetime deal, great fee related to NS Agro resulting from suspending our [indiscernible] to acquire them. Second, the provision on the second half of the this backbone to employees that will be paid in Q3 2024, $1.3 million; and last related party consequent services expenses recognizes [indiscernible] and the increase of $1.2 million amortization of the fair value of inventories on from acquired companies, which relates to purchase account. Having said that, I'll pass the ball back to Ruy.
Thank you, Julian. And now I'll move to my concluding remarks. Because 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 [indiscernible] that created additional challenges to farmers. In this context, Lavoro is acting to mitigate short-term impact in our results, and at the same time, we've positioned 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 even better positioned to deliver strong results and further consolidate our leadership position. And with that I return to your questions.
[Operator Instructions]. Our first question comes from the line of Bobby Burleson with Canaccord.
So I guess maybe just starting with the share can efforts that you highlighted, this is a tough market, obviously, in Brazil. but you guys are working to kind of accelerate the 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.
Bobby, thanks for the question. Yes, absolutely. We're actually accelerating our share gains through some actions that includes, 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 a higher growth perspective. 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 RTV. 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 minutes as farmers were not taking the same approach as previous years of placing orders in advance. So we managed to present a 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 this is a combination of factors. But it's, in the end, it is related to our strong position to serve this market.
Okay. Great. And then just quickly on the -- 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?
Yes. I think, Bob, 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, I would 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 a shortage of products, right? 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, I would say, slower recovery at 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 crop, but I think the timing will be longer this time.
And Bobby, if I may just add a couple of points. I think just contrasting 2014 and this cycle, you had effectively a number of unrelated whether geopolitical or pandemic-related events occur and El Nino the latest 1 that we're not really related to the market, 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 SNL mandate in the U.S. 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 shot to the system. Now a couple of things that are different is that as far as Brazilian farmers are concerned there in excellent shape, in fact, are even despite this 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 this as you compare to those 2 cycles.
[Operator Instructions]. Our next question comes from the line of Ben Theurer with Barclays. You have your line on mute. Our next question comes from the line of Vincent Anderson with Stifel.
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?
Vincent I think I can start and then [indiscernible] can complement here. 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 Crop Care. Okay? So we have lower expected margins for the second crop, and we have also a shorter time window for this drop 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 is 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.
That's helpful. And then just maybe going back to guidance as a whole, just to help frame your decision-making process. Like 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?
So I think compared to our last discussion on 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 end 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 a very low and unusual levels at from retailers to farmers. And another thing that has caused this concern is what Tigran has just mentioned on the climate events, particularly the new implications and we saw the situation getting worse as both the sire crop was affected in terms of replanting. So farmers are planting and then they have eventually to replant some of the soy and also the shrinkage of time window time for the [indiscernible]. So I think those were the main changes. And so basically, the market. We continue to believe that the markets will recover and the challenges are temporary, but the pace is different based on what I just described.
Okay. That's helpful. And then maybe just one last one on kind of just Brazil in general because the U.S. doesn't have 2 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 [ safrina ] 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?
Vincent, the way to think about it is the reason why the delayed planting and harvesting of soybean is impacting Arena, which may not be super obvious at first, but it's -- effectively, there's a window when you start planting the safrina typically early to mid fab all the way to early March. And the reason why you want to plan then is because of the more drought like potential for drive life 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 safrina as you increase the risk as 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 [ punting ] 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 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 currency business for us, which is a higher margin in agrochemicals and fertilizers.
Right. Yes. What I was getting at is the 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?
Yes, that's probably a good assumption.
Our next question comes from the line of Brian Wright with Roth.
I wonder if you give a little bit of -- how to think about the issue between the medium tech environment for Catarina versus your kind of view for plan at Hector. So how to think about like the relevant impact or the magnitude of the impact on each of those on your outlook.
I would say it's a couple of things. Part of it is the downgrading a part of it is just less acres. We went from, I think, early November, [ Canabo ] 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 [indiscernible] does sell by insecticides for the corn for certain insects and we expect that to be a headwind as a result of the -- what's going on [indiscernible]. The reality is there's still a couple of 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.
Okay. So it sounds like you're kind of thinking more along like this outlook is kind of more predicated on a minus 10% on the acres than the minus 3%? Or is that the range you're kind of thinking as far as what you're predicating things on?
Brian, yes, I think more important than the reduction in acreage here is the assumption behind the level of technification that farmers will want to apply in the corn crop. And 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.
Okay. If I can ask you one more, just on -- the press release you talked about ways to go on the destocking and just like how the weight 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 just help us figure out the relative importance of those.
No, the crop protection is the most important category in the destocking process now. So I think fertilizers is -- 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.
Okay. And I just want to make sure I so I'm recalling the press release correctly the thought processes 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.
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 2/3 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 you mentioned start to recover. And then that will be really this real leading indicator. And we've yet to see a meaningful reversal or uptrend. It's sort of been balancing along kind of in the range bound SKU by SKU is different. But generally speaking, it's sort of stabilizing. It's been bouncing around for the last couple of months.
Our last question comes from the line of Ben Theurer with Barclays.
So 2 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 we're late January, but as we think about the whole agchem destocking that's been an issue in Brazil and all this high inventory you'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 last 1, 2 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 on that, and thank you very much for that.
Ben, I think we mentioned that is -- right now, it's hard to predict. What I can say is that we have some leading indicators that show that the level of inventory is improving, okay? 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 3 months or 6 months, I think right now is we're going to have to see the development of safrina as well as farmers' intentions on starting the new season, whether it is going to be delayed or if they're going to advance some of their purchases. So I would say we should see at least more 3 months of this process of destocking by what the local consultants say with the possibility of extending a couple of months.
Okay. Perfect. And then just for understanding reasons because it's been a while that we have nailed midyear and you've mentioned it as having had an impact. So is that work to last a little longer and I mean a similar situation as we have [indiscernible] for a couple of years prevailing. If we were to assume a similar scenario, can you have a frame or help us understand what the market dynamics would be and how that would impact your business just from a historic context, how it used to be in the past and how we should think about the impact going forward under assumption that El Nino is going to last.
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 replanted all together was between 5% and 6%, which is 4x to 5x higher than normal. That's a fairly large area. Obviously, that's another very atypical thing to add to the series of couple things happening this year. But I can't -- 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.
That concludes our question-and-answer session. I'd like to hand the call back to management for closing remarks.
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 also -- I think it's important to say that this crisis also an opportunity for Lavoro to further consolidate its leadership position. The company solid fundamentals will actually act in our favor. So this moment is a good moment for us to continue expanding market share. We'll continue to invest in the acquisition of new clients. And we expect to bring some news for the next quarters based on our continued investments in the market. Thank you all for participating, and I will be all available for the questions if [ needed ]. Thank you.
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.