Lavoro Limited

Greetings and welcome to Lavoro's 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 company's investor relations website at ir.lavoroagro.com. It is now my pleasure to introduce your host, Mr. Tikran Kharapeshan, Head of Investor Relations. Thank you, Mr. Kharapeshan. You may begin.

Thank you for joining us today on Lavorre's fiscal 2024 fourth quarter earnings conference call for results ended June 30th, 2024. On today's call, our Chief Executive Officer Hui Cunha and Chief Financial Officer Julian Garrido. The company has provided supplemental earnings presentation on its investor relations website at ir.lavorreagro.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 expectation and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's registration form 20F filed with the SEC yesterday and other reports filed from time to time with the SEC 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 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 the 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 we review the world's results for the fiscal year 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 traditionally 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 decline 16% to $124.8 million, 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. CropCare, once again, had a strong quarter, with revenue increasing 87% to $19.9 million, with a strong contribution from Union Agro, our specialty fertilizer business. While talking about the second semester margin improvements, our gross margins as a percentage of input sales improved by 70 basis points year-over-year to 22.3% 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 seasonality of our business, it makes most sense to look at the year-over-year trends of our gross profits as a percentage of input 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 worth highlighting again these dynamics, given the impact that gross margin compression had to our results in fiscal year 2024. As illustrated in the adjusted EBITDA breed 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 a turning point in the market environment in Brazil. We can clearly see a mix of contrasting dynamics for the ag input markets. On the positive sides, we see farmer profitability for crop year 24-25 is 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 invest in 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 favorable for distribution margins. Contrasting with those positive end-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 drought, especially in Brazil's center-west region, left many farmers cash-constrained after lower-than-expected harvests. To give some additional context, credit disbursed to farmers from government programs, banks, and other private lenders was down 30% year over year in the most recent September quarter. This amounts to a reduction of approximately 5 billion reais of credit available in the system. We believe that this reduction reflects in 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-year trend line, resulting in 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 sovereignty. An estimated 80% of Brazilian farmers own their land, a valuable and appreciating asset, 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 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 proximity 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 improvements. On a U.S. dollar basis, consolidated revenue is projected to range between $1.5 billion and $1.6 billion, 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 pharma 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.