Lavoro Limited
Q4 2023 Earnings Call Transcript

Published: 3 Nov 2023

[Operator:]

Welcome to Lavoro's Fiscal Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded and a replay will be made available on the company's Investor Relations website at ir.lavoroagro.com. I will now turn the conference over to Tigran Karapetian Head of Investor Relations. Thank you. You may begin.

[Tigran Karapetian:]

Thank you for joining us today on Lavoro's Fiscal 2023 fourth quarter earnings conference call for results ended June 30, 2023. On today's call are Chief Executive Officer, Ruy Cunha; Chief Financial Officer, Julian Garrido; and Chief Strategy Officer, Gustavo Modenesi. 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 strategy and market growth among others. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that may differ materially from actual events or those described in the 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 other reports filed from time to time with the SEC for detailed discussions of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-IFRS financial measures including adjusted EBITDA, adjusted EBITDA margin, pro forma adjusted EBITDA and pro forma adjusted EBITDA margin among others. While the company believes 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 now to turn the call over to Ruy Cunha, CEO.

[Ruy Cunha:]

Thank you, Tigran. Good morning. 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 outlook. Gustavo then update us on our M&A pursuits and strategic pathways and I'll return for some concluding remarks. First talking about fiscal year 2023. For the full fiscal year 2023 ended in June, Lavoro delivered revenue of $1.8 billion and adjusted EBITDA of $150 million. This represents an increase of 24% and 64%, respectively from previous year. Notably, our Crop Care segment once again was a significant growth driver, as we saw revenues and gross profit expand by 94% and 138% respectively. This growth is attributed to strong demand for our existing biopesticides and specialty fertilizer products, contribution from successful new product introduction, as well as continued evidence of strong cross-selling synergies with our Brazil Ag Retail operations, where Crop Care continues to gain shop share. Crop Care now accounts for nearly 19% of our adjusted EBITDA in fiscal year 2023, a jump from 8% the previous year and we anticipate this trend of increasing contribution mix to continue. Moving on to our 4Q results ended in June. Our revenue and gross profit rose by 17% and 27% year-over-year respectively. This was achieved, despite more challenging-than-expected market conditions in the final six weeks of the quarter, conditions which have persisted in the first quarter of this year and have similarly weighted on our performance. Let me take a few minutes to address the market environment in Brazil as we see them. In our last earnings call we pointed out the price volatility in commodities like soybean and corn coupled with declining fertilizer and agrochemical prices as posing challenges to our Brazil operations. In line with recent public commentary from our peers and suppliers, we saw a further worsening in the pricing trends in key categories such as herbicides and fertilizers. A significant global pricing declines in those products were exacerbated by excess channel inventories in some categories, herbicide in particular. We believe that the gradual process of clearing this excess inventory will take until the end of calendar 2023 to unfold with variations depending on the subregion and products. Nevertheless, we are now observing signs of stabilization and pockets of improvements in some areas, indicating that the worst of the impact is now behind us. Taking that full picture into account, our expectations for the retail ag input business in Brazil to see overall shrinkage of approximately 20% for the '23/'24 crop year, which corresponds to our fiscal year '24. Our view is that the fundamentals' long-term secular growth drivers from Brazil Ag Retail segment have not changed. What we have been witnessing in the past few quarters is the normalization of input prices that overshot in 2021/'22 as a result of temporary factors that have now waned, mainly the impact of COVID-led plant shutdowns on Chinese agrochemical production and the effects of the war in Ukraine. These price adjustments have underlying impacts for agribusiness depending on where you sit in the value chain. Plus ag input retailers that act as trusted advisers to small and medium-sized farmers and monetizing our services by selling inputs to them were relatively agnostic of prices of inputs over time. So long, as they are relatively stable, our distribution gross margins are fairly similar irrespective of the baseline of input prices. With that said, input price declines do act as temporary headwinds to our distribution margins, while the deflationary period remains intact, with these detrimental effects subsiding as the trend dissipates. As detailed during our Analyst Day, the key drivers for our retail operations have historically been and two remain. First, farmers' profit expectations of future crops, which directly impact their willingness to invest in inputs and technology to optimize their crop yields. And second, planted acreage expansion. As farmers' optimism about profits and upcoming crop season increases, so does per acre spent in inputs in order to maximize crop yields and thus profits. While the instability in corn, soybean and input prices of the past few months have increased the volatility in farmers' future profit expectations, we believe this is mainly manifesting in the form of delaying their input purchase decisions to the less possible units, as opposed to ultra-high demand erosion. More importantly, first [indiscernible] in first Q '24, we have been seeing strong volume growth albeit more than offset by price declines. And we believe this volume increase is only partially explained by our market share gains. The deflationary periods that we're currently experiencing is sharper than we've seen in a few years with agrochemicals and fertilizer prices down strong double digits year-over-year. Nevertheless, we view this just as a temporary effect that we expect should not persist beyond the end of this current fiscal year ending in June '24 and should not affect our long-term growth algorithm. Management focus remains primarily on the conditions we can affect mainly helping our farmers' customers to improve their productivity with our products and services, unit volume growth and market share gains. Over time we believe our financial results will reflect our operating performance. With that said, I'll pass on to Julian for further details of our financial results.

[Julian Garrido:]

Thanks Ruy. Good morning afternoon evening wherever you are. I'll begin by covering our consolidated financial results for the fiscal fourth quarter 2023 period ended on June 30th, 2023 and providing thoughts on our full year fiscal 2024 guidance. Consolidated revenue for the fourth quarter rose by 16.6% to $266 million. The increase was driven by 31.9% year-over-year growth in our Brazil Ag Retail segment, reflecting improved sales volumes of fertilizers crop protection and specialty products which more than offset price declines in these categories and increasing both pricing volume of corn seed products. LatAm Ag Retail declined by 3% compared to prior year, driven entirely by the headwind from the devaluation of the Colombian peso relative to Brazilian real as the segment has achieved a 10% growth in the local currency terms. So, our at Am operations in Colombia performed well despite headwinds resulting from the removal of paraquat a financially relevant herbicide from the product lineup of a supplier of ours. Gross profit for the quarter increased by 26.7% to $46.9 million with gross margin widening by 140 basis points to 17.7%. This improvement in both gross profit and gross margin was largely driven by 86% year-over-year growth in biological sales. This important increase is partially a result of a shift in sales from Q3 to Q4 further amplified by a favorable comparison to prior year's fees. Gross profit, as a percentage of inputs revenue, declined for LatAm and Brazil by 100 and 350 basis points respectively, fueled largely by the effect of price declines in crop protection and fertilizer partially alleviated by a $12 million benefit from supplier renegotiations related to herbicide that we had previously highlighted in our last earnings call. Operating expenses for the quarter totaled $50.5 million marking a decrease of $4.2 million versus prior year. This reduction was realized primarily due to overhead cost efficiency initiatives. The quarter concluded with a net loss of $19.5 million an improvement when compared to the minus $27.5 million net loss we had prior year. Excluding $5.9 million of non-recurring items the adjusted net loss stood at minus $13.5 million relative to adjusted net loss of minus $25.7 million in the prior year previous year sorry fourth quarter. This progress is attributed to a combination of four things; number one, increased revenue; number two, gross margin growth; number three, reduced operating expenses; and the last, a greater benefit from income tax line item. These drivers were partially offset by higher amortization from recent M&As related OpEx and financial expenses largely due to the higher benchmark interest rates in Brazil. Adjusted EBITDA was a positive $2.4 million compared to negative $16.3 million in the prior year with adjusted EBITDA margin improving by over 800 basis points year-over-year. Let's take a look at the financial outlook. Our outlook for fiscal year 2024 is for consolidated revenue in the range of $2 billion to $2.3 billion with inputs revenue which excludes grains revenue from our partner operations of $1.7 billion to $2 billion. Adjusted EBITDA is forecasted to range from $135 million to $165 million, representing an adjusted EBITDA as a percentage of input revenue of 7.9% to 8.3%. It's important to note that our grain revenue which we expect to nearly double this year given a favorable comparison to prior year operates on a near zero margin. We have delineated the outlook for inputs revenue separately to provide clearer insights into our financial trends and profitability trajectory. Our projections reflect the nearly negative 20% ag input market decline in Brazil that we mentioned before and margin pressure in our ag retail distribution due to the pricing headwinds in fertilizer and crop protection products concentrated in the first half of the year. These pressures are partially mitigated by three pillars

[Gustavo Modenesi:]

Let me begin with comments around our M&A activities. First in July we successfully completed the previously announced acquisition of Referência Agroinsumos, which is an ag retailer with nine stores in the state of Rio Grande do Sul. Referência greatly expands our footprint in this state the third largest in Brazil with around 24 million of planted acres. Second we want to provide an update regarding NS Agro, a previously announced acquisition that we initially expected to close by end of last fiscal year. In our last earnings call we had indicated that we were postponing our decision pending further diligence. Ultimately, after a rigorous assessment of the prevailing market and macroeconomic conditions in Chile where NS Agro operates as a leading ag retailer, we have decided to postpone the transaction indefinitely. The size of the transaction which would have been the largest in Lavoro's history by a sizable margin combined with volatile Chilean peso and the current market environment in Brazil were the key variables influencing our decision. Lavoro intends to remain in close communication with NS Agro ownership and to monitor the company with the view of potentially revisiting a transaction at a future date as conditions evolve. Lastly on this topic, our deal pipeline remains as full as ever with seven signed MOUs at present. In addition we continue to have an active dialogue with dozens of companies at different phases of our M&A process. The current market conditions require us to be disciplined and discerning at pursuing companies that are both financially and operationally robust. By maintaining this rigorous approach, we are confident in our ability to close transactions that are highly accretive to Lavoro, perpetuating our successful inorganic growth trend and strategy of the past years. Next I want to provide some updates on the progress that we are making on our strategic initiatives aimed at further differentiating our agronomic and financial services offering to our clients. First, we successfully completed our initial commercial pilot program with our partner Pattern Ag providing metagenomic soil analysis on nearly 80,000 acres across four Brazilian states. The feedback from clients and our RTVs has been very positive and we are excited for our next upcoming campaign. Just as a reminder Pattern Ag is a vertically integrated metagenomics platform that sequences the DNA in the soil at scale enabling our RTVs to better advise their farmer clients by predicting their own sets of pests and disease for future crops and providing actionable insights to improve soil health and drive better crop yields. In addition to providing a differentiated service to our customers, we are enthusiastic by the prospect for synergies between Pattern Ag and Crop Care as well as with our broader portfolio of ag inputs. Second, we are about to launch our first campaign for the upcoming winter harvest, also known here as our safrinha with our partners Stenon. Stenon is a step-change evolution in soil chem through testing with its FarmLab solution, which is a portable sensor-based device enabling accurate real-time analysis of nitrogen and other agronomically relevant soil indicators. At present, nitrogen soil testing is not commonplace in Brazil among the segment of small- and medium-sized farmers that we serve. These services are typically inaccurate, expensive and take weeks to get the data and the results for farmers. With Stenon, as a practical example, our RTVs will be able to provide clients with timely recommendations for nitrogen application across their corn planting area, resulting in improved costs and crop yields. We are planning to sample 100,000 acres in the coming crop season across the state of Paraná where 100 RTVs have been trained and are ready to execute on these serves. Third, we are in the early stages of further expanding our agronomics service offering. We own soil testing with a partnership with our local weather station provider, enabling high accuracy microclimate predictions helping farmer clients with decision-making around making pesticide applications among other things. Finally, we continue to make advancements on our crop insurance plans. We are pleased with the early results from our strategic partnership with Brasilseg and BTG to deliver tailored insurance against weather events. We plan on expanding our set of insurance provider partners and to leverage our barter operations to generate synergies and further expand our solution offering. With that said, let me hand it off to Ruy for concluding remarks.

[Ruy Cunha:]

Thanks Gustavo. In summary, we believe that the headwinds impacting our industry in Brazil will be limited to fiscal year 2024 with fiscal year 2025 onwards reverting to historical growth patterns. At our Analyst Day last November, we outlined Lavoro's flywheel. Our strategy hints on harnessing the inherent strength and scale of our platform to attract retain and train the best RTVs in our operational regions, which in turn leads to greater market share gains and increase our scale. We have seen these factors bearing fruits thus far this year as seasonal RTVs are opting to join Lavoro to benefit from the strength and financial stability of our platform. Our scale regional and product diversification, vertical integration with Crop Care, strong balance sheet and ability to invest in technology and in services, set us apart relative to the rest of the industry. We believe we are uniquely positioned to capitalize on the current environment, accelerate our market share gains and improve our financial performance as market conditions normalize. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator:]

Thank you. 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:]

Yes, thanks for taking my questions. So I guess this is just a – I'm going to put this out there for the team. No particular person. But just trying to understand I guess confidence in the second half. You guys have talked about unusual seasonality and farmers delaying their purchasing to kind of the last minute. Are there some metrics you can kind of point us to in terms of your confidence that they'll have to make a certain amount of purchases and this is in fact a delay in purchasing that's really exacerbating things here in the first half and not a loss of business?

[Ruy Cunha:]

Hi, Bobby, it's Ruy. Thanks for the question.

[Bobby Burleson:]

Hi, Ruy.

[Ruy Cunha:]

Yes we're – hi, so a few indications on that Bobby is – number one, is the fact that what really is driving farmers' buying decisions is their profitability. And we do see that the farmers they continue to be profitable. So this is I think the first key indicator. The second important indicator is the area expansion. So we continue to see farmers planting and they've got to use inputs. So really what – and the third one I would say is even in our own order banks we see the formation of upcoming orders in a different phasing that's true. But the order bank is also being formed. So I think what is really interesting to note is the fundamentals are there. And we do believe that by what we're seeing I mean we already saw an increase in volumes even in the first quarter of this fiscal year but we haven't seen that in total market also because of the price. So I think we're fairly confident to say that volumes will increase. We have seen our order bank be increased. And one thing that we will have to continue monitoring is the situation of inventories in the retail channel because this may affect prices but this is a different story, okay?

[Bobby Burleson:]

Great. No that's very helpful. And then just on the topic of pricing. So it sounds like volumes have come back already off of a low base but pricing is still a headwind. And in your guidance were you assuming pricing remains a headwind through the balance of the fiscal year? Is that correct?

[Ruy Cunha:]

So we are assuming that in the first two quarters, we're going to have a higher impact of pricing and the situation is going to be starting to normalize in the third and fourth quarter. This is based on what we've seen and what we are discussing with other players but most importantly, we also see in the order bank, right? So we see margins starting to improve. And I believe the situation will be normalized by the beginning of the third quarter.

[Q – Bobby Burleson:]

Okay. Great. And just curious on Crop Care you mentioned, I think it was 19% of shelf right now. And curious like where you think that can go. Is this kind of environment more conducive to taking additional shelf space with Crop Care? Or does it make it tougher? Or is it a neutral impact on those goals of growing Crop Care as a percentage of sales?

[Ruy Cunha:]

Yes, just a small correction. So Crop Care represents 19% of our EBITDA. It's grown -- yes. So, yes. But in any case, it's fair to say that the company's growing volumes at a very rapid pace. Bobby, I think there's more space for Crop Care to grow and we're both talking about the biologics segment that is -- continues to be a fast-growing segment in Brazil and we continue to get client traction on the biologics segment. So, I do not expect meaningful changes in the demand for biologics. And we are also being successful in introducing the other products like adjuvants and specialty fertilizers from other two companies that we have in Crop Care. So just this first quarter of this year we're accelerating sales of specialty fertilizers from Union Agro even more rapidly than some other companies that we have. So it's really interesting to see the demand for Crop Care. They remain strong. We do see some phasing effects and we will see this phasing effect during the year but the demand is still strong. And I do see more space for Crop Care to gain shelf representation in Lavoro. We're not there yet.

[Q – Bobby Burleson:]

Okay. Great. Thank you

[Operator:]

And we have reached the end of our question-and-answer session. I'll now turn the call back over to Mr. Cunha for closing remarks.

[Ruy Cunha:]

Well, okay. So thank you all for your participation. I think it has been a -- fiscal year 2023 has been a great journey. We have faced a very challenging marketing conditions in these last few weeks of that year and the company has managed to show the strong resilience and very strong results. Fiscal year 2024, we will see some unusual patterns. But again, the fundamentals of the market they remain strong. Farmers remain profitable. We -- the demand will continue to grow. And even though it is an adjustment year, the strong secular fundamentals of our industry they remain intact. So hope to come to -- with you guys in the next upcoming calls and very excited to see the new introduction of products and services that we're going to announce this year. Thank you very much.

[Operator:]

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.