Lavoro Limited (LVRO) Q2 2024 Earnings Call Transcript

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Overview

The earnings call reveals mixed signals: while Crop Care revenue and gross profit grew significantly, overall consolidated gross profit and adjusted EBITDA decreased due to input price deflation. The Q&A section highlights uncertainties, such as the impact of safrinha corn sales and farmer bankruptcies. Despite some positive outlooks, like Crop Care's growth and sales staff expansion, the lack of clear guidance and declining financial metrics suggest a neutral sentiment. Without market cap data, the stock reaction is uncertain, but the mixed results and cautious outlook likely lead to a neutral price movement.

Key Financial Performance

Revenue $618 million, a 1% increase year-over-year, driven by volume growth and market share gains offsetting input price deflation.

Consolidated Gross Profit $103 million, a 17% decrease year-over-year, primarily due to steep price declines in crop protection and fertilizers.

Adjusted EBITDA $40 million, a 48% decrease year-over-year, influenced by gross margin compression.

Adjusted Net Profit $2.6 million, a decline of $34.8 million year-over-year, driven by lower adjusted EBITDA and higher financial costs.

Gross Margin 16.7%, a contraction of 360 basis points year-over-year, mainly due to price declines in crop protection and fertilizers.

Adjusted EBITDA Margin 6.5%, a contraction of 48.8% year-over-year, primarily influenced by gross margin compression.

SG&A to Sales Ratio 11.3%, an increase of 300 basis points year-over-year, due to higher investments and increased allowance for expected credit losses.

Brazil Ag Retail Gross Margin 13.9%, a contraction of 510 basis points year-over-year, but improved sequentially from the first quarter.

Latam Ag Retail Gross Margin 17.8%, a decline of 230 basis points year-over-year, driven by compression in crop protection and fertilizer distribution margins.

Crop Care Gross Margin 35.3%, a decline of 160 basis points year-over-year, primarily due to unfavorable mix effects.

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Operating Highlights

Crop Care Revenue Growth: Crop Care recorded revenue of $72.8 million in Q2 2024, a 26% increase year-over-year, driven by strong performance in specialty fertilizers.

Integra Product Performance: The specialty fertilizer product Integra showed a remarkable 55% increase in sales.

Cromo Química Acquisition: The acquisition of Cromo Química contributed 5% to Crop Care segment revenue.

Brazil Ag Retail Volume Growth: In Brazil Ag Retail, crop protection, fertilizers, and specialty products volumes grew 46%, 63%, and 29% year-over-year, respectively.

Market Share Gains: Lavoro gained market share in Brazil, driven by strong execution from local commercial teams.

Colombian Operation Performance: Lavoro's Colombian operation showed notable gains in market share despite challenges.

RTV Hiring: Lavoro concluded Q2 with over 1,040 RTVs in Brazil, a 25% increase from Q1.

SG&A Increase: SG&A excluding depreciation increased by 300 basis points to 11.3% due to higher investments in hiring.

Sales Team Investments: Lavoro is making significant investments to enhance its sales teams, positioning itself for market recovery.

Market Outlook: Lavoro anticipates a 25% decrease in Brazil's retail input market for the 2023-2024 crop year.

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Risk or Challenges

Input Price Deflation: The company is experiencing significant input price deflation in crop protection and fertilizers, which has adversely impacted gross margins and overall profitability.

Market Environment: The agricultural retail market in Brazil is highly competitive, with pressures from both local and international players affecting pricing and market share.

El Nino Impact: Adverse weather conditions, specifically the effects of El Nino, have negatively influenced demand for biological products and altered farmers' purchasing behaviors.

Supply Chain Challenges: The company faces challenges related to supply chain dynamics, including the timing of farmers' orders and the lag between purchasing inputs and selling them.

Economic Factors: The overall economic environment, including inflationary pressures and fluctuating currency values, poses risks to revenue and profitability.

Credit Risk: Increased allowance for expected credit losses due to the impact of El Nino on payment schedules from farmer clients, indicating potential credit risk.

Operational Costs: Higher SG&A expenses due to investments in hiring new sales representatives, which have yet to yield expected sales contributions.

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Guidance & Outlook

Market Share Gains: Lavoro achieved significant market share gains in Brazil Ag Retail, with crop protection, fertilizers, and specialty products volumes growing 46%, 63%, and 29% year-over-year.

Hiring of RTVs: The company increased its seasonal technical sales representatives (RTVs) to over 1,040, a 25% increase from the previous quarter, with expected positive contributions in the next fiscal year.

Crop Care Performance: Crop Care segment saw revenues and gross profits grow over 20% year-over-year, indicating strong performance despite market challenges.

Investment in Sales Teams: Lavoro is making substantial investments to enhance its sales teams, positioning itself to capitalize on anticipated market recovery.

Revenue Outlook: Lavoro maintains its financial outlook, expecting a 25% decrease in Brazil's retail input market for the 2023-2024 crop year.

Gross Margin Recovery: The company anticipates a gradual recovery in gross margins as local input prices stabilize and higher-cost inventory cycles are cycled through.

Future Market Conditions: The company is optimistic about the market landscape, believing it has the potential to accelerate transformation within the agricultural sector in Brazil and South America.

Adjusted EBITDA: Adjusted EBITDA for Q2 2024 was $40 million, down 48% year-over-year, reflecting ongoing margin pressures.

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Shareholder Return Plan

Share Buyback Program: None

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Key Q&A

Q:Can you just remind us, maybe some of the factors in addition to kind of the planning activity on the safrinha corn that you guys were watching throughout so far in calendar 2024 to decide whether or not you were able to kind of maintain the guidance that you laid out back in January? What were those main kind of things that you were – you guys were looking at?

A:We continue to see an overall decline in markets above 25%, driven mainly by price. There will be a reduction in the area of corn in the second crop and expected reduction in productivity, affecting farmers' decisions on seed technology. The planting of safrinha is advancing fast, which may encourage last-minute sales, but its impact on sales volumes is uncertain.

Q:How are your customer cohort in the small and medium farmer positioned relative to where bankruptcy filings are happening? Is there anything that's changing rapidly in terms of balance sheet health in the area?

A:Some areas, particularly Mato Grosso and Goiás, have been more affected by drought, impacting farmers' productivity. While some farmers are close to breakeven, the overall expectation for the soy crop is around 150 million tons, indicating that farmers should generally meet their commitments. The increase in bankruptcy filings is noted, but it hasn't changed our perspective significantly.

Q:I wanted to understand, like within your guidance parameters, how do you think about Crop Care into the second half, just as you're coming out of this whole destocking environment?

A:We expect further acceleration in the third and fourth quarters, but the mix of Crop Care will change with lower participation of biologicals. Growth will be driven by specialty fertilizers and adjuvants, but overall volumes for biologics are expected to be lower than last year.

Q:What are the puts and takes here from a Weber pattern and how this could potentially impact the Latam business into the second fiscal half?

A:The Latam business is holding gross margins better than the Brazil retail business, but sales are challenged by price and unfavorable climate conditions. We expect a stronger second half, depending on climate conditions normalizing.

Q:How are you tracking against your three-year ramp up algorithm for your sales staff?

A:We're executing our hiring according to plan, with better performance than expected. The compensation structure is relatively low fixed salary with a larger variable component based on sales.

Q:How you are able to monitor prices across all the growing regions you sell to and coordinate price and margin targets?

A:Pricing decisions are decentralized to ensure adequate pricing levels in the market, while COGS is more centralized to leverage scale in negotiations with suppliers.

Q:Review of Unclear Management Responses

A:Management's response regarding the impact of bankruptcy filings on their customer cohort lacked clarity, particularly in terms of the extent of the problem and how it might affect their overall perspective.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

LVRO Transcript

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The earnings call highlights significant challenges: decreased revenue in key segments, margin pressures, and a net loss despite some growth in specific areas like grains and Crop Care. The Q&A reveals uncertainties in future revenue and no expectation of further pricing cuts, which could stabilize margins. However, the overall sentiment remains negative due to ongoing financial pressures, adverse market conditions, and a weak adjusted EBITDA. Without a market cap, the stock's reaction is uncertain, but the negative financial trends suggest a likely decline in stock price.

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The company reported strong financial performance with significant revenue and EBITDA growth, particularly in the Crop Care segment. Despite challenges like postponed acquisitions and regulatory hurdles, the company projects continued revenue growth and has strategies to mitigate pricing headwinds. Positive factors such as increased gross profit and margin expansion, alongside optimistic guidance for FY 2024, outweigh the risks. The earnings call Q&A also highlights robust demand and growth potential, suggesting a positive stock price movement.

LVRO Report

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