Lavoro Limited

fiscal fourth quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. As a reminder this conference is being recorded and a replay will be made available on the company's investor relations website at .LavoroAgro.com. It is now my pleasure to introduce your host Mr. Tigran Karapeshin, head of investor relations. Thank you Mr. Karapeshin. You may begin.

Thank you for joining us today on the Lavoro's fiscal 2024 fourth quarter earnings conference call for results ended June 30th 2024. On today's call our chief executive officer Rui Cunha and chief financial officer Julian Gallido. The company has provided supplemental earnings presentation on its investor relations website at .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 might 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 expectation and beliefs and involve risks and uncertainties that could defer materially from actual events or those described in these forward-looking statements. Please refer to the company's registration form 20f filed with the ICC for a detailed discussion of the risks that could cause actual results to defer 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 measures including adjusted EBITDA, adjusted EBITDA margin, adjusted net profit or loss among others. While the company believes that these non IFRS 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 to IFRS. Please refer to today's release for reconciliation of non IFRS measures to the most comparable measure prepared in accordance with IFRS.

I'll now turn it over to Rui Cunha, CEO. Thank you Tigran. Good morning everyone and thank you

for joining us today as a review of world's results for the Fiskaria 2024. I'll begin by touching upon the overall business landscape and the broader economic context of the business. After that Julian will delve into our financial highlights and I'll return for some concluding remarks. Overall our fourth quarter traditional our lowest seasonally proceeded largely in line with our expectations from our last market update. On the revenue side our Brazil ag retail segment saw inputs revenue declined 16% to 124.8 million dollars driven in large part by our conservative approach to credit which led us to postpone shipments to clients that had outstanding overdue receivables with us. Nevertheless we had a strong quarter for barter operations which led to grains revenues to increase by 40% to 67.7 million dollars. Prop care once again had a strong quarter with revenue increasing 87% to 19.9 million with a strong contribution from O Neon Agro our specialty fertilizer business. Talking about the second semester margin improvements our gross margins is a percentage of input sales improved by 70 basis points year over year to .3% in the quarter marking the first positive year over year impact since the start of the downturn. We see progression in gross margins for our retail business in particularly as we went on especially in the third and fourth quarters. Given the functionality of our business it makes most sense to look at the year over year trends of our gross profits as a percentage of inputs revenue which excludes the impact of grants. To that point our gross margins improved from declining over 1,000 basis points year over year in the first quarter to declining 500 basis points in the second quarter declining 200 basis points for the first quarter and finally an increase in 600 basis points in the fourth quarter. This is consistent with what we have been communicating throughout the year namely that our higher cost inventory cycles out and our inventory cost position improves in a stable environment for input prices agrochemicals in particular this leads to better distribution margins. It's also important to note that the impact of gross margin compression has had to result in fiscal year 2024. As illustrated in the adjusted EBITDA bridge slide in today's presentation approximately 70% of the declining attributed gross margin compression largely driven by dynamics with outlines and which we expect will gradually resolve. Talking a little bit about the markets we see now turning point in the market environment in Brazil. We currently see a mix of contrasting dynamics for the ag input markets. On the positive sides we see farmer profitability for crop year 2024-25 projected to show a notable improvement over last year. Recent increases in local grain prices in Brazil combined with the relatively affordability of inputs have created beneficial exchange ratio for farmers creating additional incentives for them to increase planted acres and investing technology to maximize yields. We expect planted acreage for soy and corn to grow in the low single digits while yields are projected to improve by mid single digits following last year's dropped affected crop. Moreover input prices have largely stabilized on a sequential basis in recent months which as previously noted is favor for distribution margins. Contrasting with those positive and market developments in recent months we observed a deterioration in small and mid-sized farmers liquidity profile. In our last call we discussed how the impact of droughts especially in Brazil's central west region left many farmers cash constrained after lower than expected harvest. To give some additional context credit dispersed to farmers from government programs banks and other private lenders was down 30% year over year in the most recent September quarter. These amounts to a reduction of approximately five billion reais of credit available in the system. We believe that this reduction reflecting part the lingering effects of the last year's El Nino. As mentioned the extreme drops in the region such as Mato Grosso led to soybean yields to fell significantly below their 20 years trend line resulting lower than expected cash flow at harvest for many farmers in the affected regions. This dynamic has made credit more difficult for farmers to access as banks understandably look at the most recent repayment history to make decisions. In addition many farmers also held back on commercializing their Safrinha corn choosing to wait for better market conditions to sell their grains. With all that said I want to emphasize that in the vast majority of cases of farmers repayment delays the issue is one of liquidity rather than solvency. An estimated 80% of Brazilian farmers own their lands available and appreciating assets and have generating operating margins that have averaged between 25 and 30% over the past decade. Consequently we believe that these farmer liquidity issues will resolve themselves with the cash generated from the upcoming crop seasons. Simply put farmer demand for inputs to expand profitable planted acres now far exceeds the credit available in the system to support this growth. And this persistent gap in Brazil has only widened in the recent months. Looking at our outlook for fiscal year 2025 we expect that the ag retail inputs markets will contract by approximately 10% for that period with modest volume growth more than offset by the base effect of the last year's price declines. With this challenging market environment we expect to grow slightly above the market rates. This year our main priority is to improve margins and operating efficiency to be well positioned when the end market rebounds. To this end we plan to optimize our retail network by consolidating those stores that are closing for symmetry and capture fixed cost savings while maintaining high service levels. With all that said our projections for fiscal year 2025 is for consolidated revenues to the range of 8.6 billion to 9.2 billion reais and for inputs revenue to range between 7.7 billion and 8.3 billion reais. In terms of our adjusted EBITDA we anticipated growth relative to fiscal year 2024 driven by margin improvement. On our US dollar basis consolidated revenue is projected to range between 1.5 billion and 1.6 billion dollars with inputs revenue of 1.35 billion to 1.45 billion and adjusted EBITDA as well is anticipated to grow relatively to fiscal year 2024. Our guidance reflects the impact of recent farmer liquidity constraints and the resulting reduction in overall market visibility. With that I'll now pass over to Julian for a deeper look at the financial results.

Thanks Rui. Good morning afternoon, evening whatever you are. Let's talk a little bit about the four year results and let me start with that. Our consolidated revenue for the fiscal year 2024 grew by 6 percent reaching 1.89 billion. This was mainly driven by 61 percent increase in grain revenue, particularly in our barter operations which came in at 209.9 million. Despite headwinds from input price deflation, input revenue increased 1 percent as our market share gains helped balance those challenges. The full year 2024 gross profit was down 19 percent to 268.4 million and gross margin compressed by 430 base points to 14.2. This was largely due to the input price deflation and a less favorable product mix. We adjusted EBITDA to 53.4 million positive for the year, 64 percent decline year over year. As we mentioned this was primarily due to gross margin compression to an extra 10 million in an hour allowing itself for expected credit losses and a 5.5 million increase in provision for expiring EBITDAs. Net loss was 154.6 million compared to a net loss of 43.7 million in previous year. Adjusted net loss was 144.9 million compared to an adjusted net profit of 40.9 million the year before. Alongside our lower gross profit we saw headwinds from higher finance costs and a smaller benefit from income cuts. That's cash flows for operations total 33.1 million positive corresponding to 165.8 million positive reais. Up from 20.9 million that's corresponding to 108.1 million the previous year. Now talking about our fiscal fourth quarter results, start with our consolidated results for the fourth quarter. The total revenue increased by 2 percent year over year to 271.1 million, privately driven by a 41 percent rise in grains revenue to 68.3 million, while inputs revenue declined by 6 percent to 202.8 million affected by lower input sales in Brazil ag retail and the conversion of results from Brazil re-item to US dollars. Consolidated gross margin contracted by 100 base points to 16.7 million, with the gross profit down by 4 percent to 45.2 million. This margin compression reflects a higher mix of grain revenue and the unfavorable product mix impacting crop care while inputs gross margin slightly by 70 basis points to 22.3 percent. Net loss was 77.3 million, an increase of 57.8 million year over year driven by the higher income tax of 35 million, an increase of finance costs of 22 million. Adjusted net loss was 76.2 million compared to an adjusted net loss of 15.2 million prior year with similar factors impacting the results. With the ag retail revenue increased by 2 percent to 192.5 million, with a decline of 16 percent in inputs revenue due to our strategic decision to delay shipments to certain clients with overdue payments as previously mentioned. Gross profit however grew by 13 percent to 29.8 million, supported by a 210 basis point margin expansion reaching 15.5 percent. For last year in ag repayment revenue increased by 5 percent to 65.2 million mainly due to favorable currency effects from the Colombian business. Gross profit rose by 10 percent to 10.4 million, gross margin expanded by 70 basis points to 15.9. In crop care revenue surged by 87 percent to 19.9 million led by strong results from human agri per terra. However gross profit declined by 29 percent to 5.8 million with margins compressions to 28.9 largely due to product mix effects. Spare tax contribution increased. Adjusted revenue to that was 2.1 million negative down from 2.4 in the prior year period reflecting lower gross profit and a decline in other operating income. Last but not least our consolidated net debt uh to be adjusted to be to the other ratio including tables of acquisition of subsidiary lambda f4.2 if we excluded those people we landed at 3.4. Our Brazil distribution net debt to adjusted to be to the other ratio which is the covenant of our crap lambda f1.7x below the 2.5 limit. With all that said I'll pass it back to Rui

for some concluding remarks. Thank you Julien. I think with that we

summarized both the results from last year and also a little bit of our perspective for the next year. For work to provide a summary of the feeling of the market nowadays is we expect farmers to be optimistic in the midterm and we're going to have short-term challenges that will have to be dealt with so we can have better visibility on the actual potential for this upcoming year. It's encouraging to see that some of the factors that have impacted negatively the market in the last year such as the sharp variation of input prices and also the decline in farming profitability they are now improving. Brazil is a country where agribusiness stands as one of its main strengths. Cycles will come and go but this does not change the fact that the region will play an increasingly prominent role in food and energy production. Living in this and in the gradual improvement of market fundamentals Lav together with our strategic partners and our over 3 000 employees is focused on overcoming short-term challenges. In this context I'd like to thank and recognize the work of our team which has shown incredible commitment to our clients and the company in these very dynamic environments.

With that

thank

you and I'll pass over for Q&A.

Thank you. We will now 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 your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.

Hi good morning. Thank you for taking the question. We are sitting here on November 1st so your fiscal first quarter already in the books for 2025. Just wondering if you can help us think about the the cadence of your guidance for the fiscal year. How we should be thinking about that first half versus second half and the order trends there.

Yeah thanks. Hi Kristen.

Maybe you want to start just giving some highlights and then I can compliment.

Hi Kristen. Yeah I would say as we sit here today I don't think the seasonality we don't expect it to be materially different from last year. There might be some puts and takes but I think it's going to be broadly similar in terms of the quarterly and first half versus second

half breakdown.

Yeah on that Kristen the markets performing. Let's say the pace of the markets performing very much in line with what we saw last year. The pace of negotiations, the behavior of the farmers. So we do not anticipate a lot of changing

dynamics in this year.

Okay maybe if we can double click on sort of where channel inventories are today given the impact that that had on pricing in the last year. So maybe just where channel inventories are. You noted the pricing is starting to stabilize on a -over-year basis and any sort of commentary that you can provide in terms of whether opportunities or risks associated with the bankruptcy of one of your large competitors in the region.

Yeah so on the inventory

and input prices. So two important components here. So as I mentioned the trend line on the input prices is of stabilization particularly what we've seen in the last months and this is also being reflected in the farm gate prices which is an important indication of the margin recovery. So stabilization scenario is apparently now becoming more clear. The second thing even though there's no official data on retail inventory. The sentiment here is that the inventory is mostly normalized right now. We do have regions in which we continue to see more competitive price but I would say that in the beginning of this year we have a better inventory position overall in the retail in Brazil. Now regarding your second question. I think that the markets nowadays are very dynamic as I mentioned. There's some nervoses in the system but farmers are investing in their area expansion. They continue to buy inputs. They're coming to our stores to get the basic inputs that they need. So I think what I need to understand is that even though there's some noise in the short term the demand remains strong and this might be an opportunity for us moving forward.

That's very helpful. One last one for me before I turn it over. You mentioned on the OVEX cost savings side maybe a little bit of restructuring around the physical footprint. Just help us understand the waterfall for Ibadon next year. How you think about those cost savings contributing to that waterfall?

Yeah I think most of what we expect to recover in terms of EBITDA will actually come from margins because the impact in margins that the last year was very much high. Now with that being said we grew by acquisitions combined with organic store openings and we do see opportunities to eliminate some overlaps and some low performing stores in specific regions. I won't anticipate a major restructuring but we do see opportunities for further consolidation that will have both a positive impact in our SG&A but also on our profitability. So we'll provide more details on the next upcoming months but what I can anticipate is that most of the recovery comes from margin but we are also counting on footprint optimization as

a second lever.

Thank you I'll pass it on.

Thank you. Next question comes from the line of Ben Twerr with Barclays. Please go ahead.

Yeah good morning and thanks for taking my question. Just a quick follow-up as it relates to the outlook and what you're seeing in the market, farmer profitability somewhat stretched obviously and kind of like stressed because of the drought conditions. Have you seen any improvement lately and how do you think that has changed some of the behavior of farmers? As we think about it there's still an expectation of prices to come down as you reflect in your guidance. So does that change any way of how farmers go to you, buy the products, process them through? Any comment you have as to the behavioral part that would be much appreciated?

Sure, I'll have that. So a few comments. Like last year, farmers are delayed in taking their buying decisions and they were delayed right now in selling for instance the grains from Safrini. We also saw and this particularly I'd say over the last month or so a growing concern of farmers to secure their inputs availability. Given the overall scenario and also the lower margin of some inputs, the imports to Brazil have reduced for some specific products and farmers are now worried about not getting the products. So I would say in the last month or so we saw a growing concern on that and that is accelerating the demand and the visits to the stores. But overall I'd say the market is moving slowly in line with last year and much slower than the previous years. Now when it comes to profitability then I think it's a combination of two things. So even though grain prices are not obviously at their peak and I think corn has a better position, sorry it's not that much, but in that sense the calculation that farmers do is that how many bags of corn, so to say, I'll have to use to buy my basic package of inputs. So for instance in our estimations the bags, the quantity of bags of corn for Safrini, in the last year they had to use something around 53 bags to buy a basic package of seeds, fertilizers and crop protection. This number has now came down to 47 bags and this is again a combination of the basic grain prices but also on the input prices. So the relationship is getting more positive and I think farmers will be using these two to take their decisions.

Okay,

got it, very clear. And then I just wanted to maybe get your thoughts to the sentiment amongst some of your suppliers and how your relationship is with the suppliers. Obviously a large competitor of yours had to file bankruptcy. Has that triggered some sort of change in behavior amongst the suppliers of yours and how they think about credit lines towards you or is that not the case, is that unaffected?

I think we always need to look at the big picture without having a particular look into some specific player. What we see is that obviously after the impact that farmers had on their profitability in the end of last year there was already concerns when it comes to credit concessions and that was even applied to ourselves. So we were more conservative in providing credit and that also holds true for banks and suppliers. So what I can say is that the conservative approach was already in place when the season started. I think it continues to be there and it will basically improve as farmers will improve profitability, we start buying again, money continue to flow through the system and then lenders will feel more, let's say, confident to provide credit again. I think it's a matter of time but it had started I would say early on on the season.

Okay, perfect. Thank you very much for the call. Talk to you soon. Thank you.

Thank you. Next question comes from the line of Austin Moller with Canna Car. Please go ahead.

Hello, good morning. Just the first question I have here. So the data that we've collected on NOAA rainfall data in Brazil, Argentina, and Colombia has continued to show elevated drought activity even within the past month. Can you discuss the timing of the coming planting seasons and when you think this may be normalized based on what you've seen historically with El and La Nina?

Yeah, so the soil planting evolution right now, so I can talk about Brazil which is a number that I have easily in my mind. So the soil planting in Brazil is about 40% of the total area. This number last year was around 45%. So I would say it's slightly delayed compared to last year. And if you see an average of the previous years we had, I would say we should be more towards 47%. So it's 40% is delayed but with recent ranges progressing faster now.

That's good to hear. And how are you thinking about your M&A strategy with retailers and the

Yeah, I think the environment continues to be similar to what we saw in the last year when it comes to M&A and organic growth opportunities. We believe that nowadays even though the interesting M&A targets, what we will focus more is on the organic side in which we see more opportunities to continue growing and to gain market participation. So that will be the

main focus of our team this year.

Excellent, thanks for the call.

Thank

you. A reminder to all the participants that you may press star and 1 to

ask a question.

Ladies

and

gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Rui Cunha for closing comments.

Thank you, Josephine. Thank you all for the participation and looking forward to our next quarter review. See you soon. Thank you. Thank

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