Lavoro Limited

Welcome to Levero's fiscal fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded and a replay will be made available on the company's investing relations website at ir.leveroagro.com. I'll now turn the conference over to Tigran Karapetian, Head of Investor Relations. Thank you. You may begin.

Thank you for joining us today on the World's Fiscal 23 Fourth Quarter Earnings Conference Call for results ended June 30th, 2023. On today's call are Chief Executive Officer Luis Cunha, Chief Financial Officer Julian Garrido, and Chief Strategy Officer Gustavo Modonesi. 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 in 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 may differ materially from actual events or those described in the 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 30th, 2023 followed the SEC today. And other reports fall 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 and pro-forma 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 to substitute for the financial information presented in accordance with IFRS. Please refer to today's release for 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 Rui Cunha, CEO.

Thank you, Tigran. Good morning. I'll begin by touching upon the overall business landscape and the broader economic context, after which Julianne will delve into our financial highlights and outlook. Stav will then update us on our M&A pursuits and strategic pathways, and I'll return for some concluding remarks. First talking about fiscal year 23. For the full fiscal year 23 ending 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 existing biopesticides and specialty fertilizer products, contribution from successful new product introduction, as well as continual evidence of strong cross-selling synergies with our Brazil ag retail operations, where crop care continues to gain shelf share. Crop care now accounts for nearly 19% of our adjusted EBITDA in fiscal year 23, a jump from 8% the previous year, and we anticipate this trend of increasing contribution needs to continue. Moving on to our 4Q results ended in June. our revenue and gross profits 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 decline in those products were exacerbated by excess channel inventories in some categories, herbicides 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 sub-region and product. Nevertheless, We're now observing signs of stabilization and pockets of improvement in some areas, indicating that the worst of the impact is now behind us. Taking the full picture into account, our expectations for the retail egg input business in Brazil is to see overall shrinkage of approximately 20%. for the 2023-2024 crop year, which corresponds to our fiscal year 2024. Our view is that the fundamentals long-term secular growth drivers from Brazil's agri-tail segment have not changed. What we have been witnessing in the past few quarters is the normalization of input prices that overshot in 2021-2022 as a result of temporary factors that have now waned, namely the impact of COVID-led plant shutdowns on Chinese agrochemical production and the effects of the war in Ukraine. These price adjustments have a high impact for agribusiness depending on where you sit in the value chain. Plus, ag input retailers that act as trusted advisors 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 NS day, the key drivers for our retail operations have historically been and do 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 their 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 last possible minute, as opposed to outright demand erosion. More importantly, thus far in first Q24, 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, namely 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.

Thanks, Rui. 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. 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 price and volume of corn seed products. Lat-10, Ag retail declined by 3% compared to prior year, driven entirely by the headwind from the devaluation of the Colombian PIS relative to Brazilian real, as the segment achieved a 10% growth in a local currency terse. So our Latin operations in Colombia performed well, despite headwinds resulting from the removal of Paracrat, a financial 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 base 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 years' figures. Gross profit as a percentage of inputs ready declined for Latam and Brazil by 8%, and 350 base points, respectively, fueled largely by the effect of prices declines in crop protection and fertilizer, partially alleviated by 12 million benefit from supplier renegotiations related to herbicide that we had previously highlighted in our last earnings call. Operating expenses per quarter fell 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 is stood at minus $13.5 million relative to adjusted net loss of minus $25.7 million in the previous year's 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 in the last, a greater benefit for income tax line items. These drivers were particularly offset by higher amortization from recent M&As-related topics, and financial expenses were largely due to the higher benchmark interest rates in Brazil. Adjusted EBITDA was 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 24 is for consolidated revenue in the range of $2 to $2.3 billion, with inputs revenue, which exclude grains revenue from our barter operations, of $1.7 to $2 billion. Adjusted EBITDA is forecasted to range from $135 million to $165 million. represented an adjusted EBITDA as percentage of input revenue of 7.9% to 8.3%. It's important to note that our green 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 fertilizing and crop protection products concentrated in the first half of the year. These pressures are partially mitigated by two pillars. Number one, anticipated market share gains. Number two, contribution from the recent acquisition called Referencia. And the four-year contribution of M&A completed last year. From a seasonality perspective, our fiscal year 24 adjusted EBITDA is expected to deviate mainly from patterns seen in prior years. We anticipate 40 to 50% of our adjusted EBITDA to be realized in the second half of the year, which compares to a range of 25, 25 in prior two years when we consider the perform adjusted EBITDA. The key drivers for that are basically two topics. Number one, the previously mentioned shift in farmers' purchasing behavior to buying inputs much closer to time of use. And number two, the phasing effects in crop care and specialty revenues for our Brazil AG retail segment, where we see a shift from Q1 to Q2 and second half. Further, we expect our upcoming growth Q1 to be in the low point of the year in terms of adjusted BTDAH contribution due to the flexionary effects on input prices and the previously referenced phasing effects of crop-carrying specialty products sales. With that, let me pass the call over to Gustavo.

Let me begin with comments around our M&A activities. First, in July, we successfully completed the previously announced acquisition of Referencia Agroinsumos, which is an ag retailer with nine stores in the state of Rio Grande do Sul. Referencia 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 MS Agro operates as a leading agri-tailor, 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 NSIRO 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 requires 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, PatternAg, providing metagenomic soil analysis on nearly 80,000 acres across four Brazilian states. The feedback from clients and our RTVs have been very positive, and we are excited for our next upcoming campaign. Just as a reminder, PatternAg 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 the onsets 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 patterned egg and crop care, as well as with our broader portfolio of egg inputs. Second, we are about to launch our first campaign for the upcoming winter harvest, also known here as our Safrinha, with our partner Stanon. Stanon is a step change evolution in soil chemistry 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 TANON as a practical example, our RTVs will be able to provide clients with timely recommendations for a 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 this service. Third, we are in the early stages of further expanding our agronomic service offering beyond soil testing with a partnership with a 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 partner operations to generate synergies and further expand our solution offering. With that said, let me hand it off to Rui for concluding remarks. Thanks, Gustavo. In summary, We believe that the headwinds impacting our industry in Brazil will be limited to fiscal year 24, with fiscal year 25 onwards reverting to historical growth patterns. At our NS Day last November, we outlined Lavoro's flywheel. Our strategy hints on harnessing the inherent strengths 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 seasoned RTVs are opting to join Laboro to benefit from the strength and financial stability of our platform. Our scale, regional, and product diversification vertical integration with crop care, strong balance sheets, 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 care remarks. Operator, please open the call for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate a line in the question queue. You may press star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Bobby Burleson with Canaccord.

Please proceed with your question. Yeah, thanks for taking my questions. So I guess this is just a – I'm going to throw 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?

Hi Bobby, this is Rui. Thanks for the question.

So a few indications on that, Bobby. 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're gonna 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've seen, 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. uh we we have seen our order bank uh being 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 a different story okay great that's very helpful and then just uh on the uh topic of pricing so it sounds like volumes have come back already off of a low base um

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?

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. So we see margins starting to improve, and I believe the situation will be normalized by the beginning of the third quarter.

Okay, great. And just curious on CropCare, you mentioned I think it was 19% of shelf right now. I'm curious 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?

Yeah, just a small correction. So CropCare represents 19% of our EBITDA. It's growing. But in any case, it's fair to say that the company is growing volumes at a very rapid pace. Bobby, I think there's more space for CropCare to grow, and we're both talking about the biologic segment that continues to be a fast-growing segment in Brazil, and we continue to get, you know, client traction on the biologic 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 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'll 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 labor. We're not there yet.

Okay, great. Thank you. And we have reached the end of our question and answer session. I'll now turn the call back over to Mr. Hunya for closing remarks. Well, okay.

So, thank you all for your participation. I think fiscal year 23 has been a great journey. We have faced very challenging marketing conditions in the last few weeks of that year, and the company has managed to show strong resilience and very strong results. fiscal year 24 we'll 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 you know the strong secular fundamentals of our industry they remain intact so hope to come to review 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.

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