Lavoro (NASDAQ: LAVO), an agribusiness company, conducted its fiscal fourth quarter 2024 earnings call on August 15, 2024. The company's CEO Ruy Cunha and CFO Julian Garrido presented the financial outcomes for the quarter ending June 30, 2024. While Lavoro experienced a 6% increase in annual consolidated revenue, reaching $1.89 billion, it faced a significant net loss of $77.2 million for the quarter. The loss was attributed to a rise in input costs and finance charges. Despite the challenges, Lavoro's Grain revenue saw a substantial increase, and the company remains optimistic about future growth and operational efficiency.
Key Takeaways
- Lavoro's annual consolidated revenue increased by 6% to $1.89 billion, with Grain revenue up by 61%.
- Gross profit declined by 19% to $268.4 million, and gross margin compressed by 430 basis points to 14.2%.
- Q4 revenue rose by 2% to $271.1 million, but net loss widened to $77.2 million due to increased income tax and finance costs.
- The company anticipates a 10% contraction in Ag Retail Inputs markets for fiscal year 2025 but aims to grow above market rates.
- Lavoro's management remains optimistic for the mid-term, focusing on organic growth and maintaining strong supplier relationships.
Company Outlook
- Lavoro expects the Ag Retail Inputs markets to contract by 10% in fiscal year 2025.
- The company projects its consolidated revenue to be between R$8.6 billion and R$9.2 billion, with an improvement in adjusted EBITDA.
Bearish Highlights
- Inputs revenue decreased by 6% to $202.8 million due to strategic credit decisions and lower sales in Brazil.
- Gross margin decreased by 100 basis points to 16.7%, with gross profit down 4% to $45.2 million.
- The net loss for the quarter increased significantly to $77.2 million from the previous year.
Bullish Highlights
- Grain revenue increased by 41% to $68.3 million in Q4.
- Gross profit in Brazil Ag Retail increased by 13% to $29.8 million.
- Latam Ag Retail revenue grew by 5%, and Crop Care revenue surged by 87% to $19.9 million.
Misses
- Adjusted net loss for Q4 was $76.2 million, a substantial increase from the previous year's $15.2 million.
- Brazil Ag Retail Inputs revenue fell by 16% due to strategic shipment delays.
Q&A Highlights
- CEO Ruy Cunha discussed a conservative credit approach in place since the season's start due to profitability concerns among farmers.
- Approximately 40% of Brazil's soybean area has been planted, slightly behind schedule compared to previous years.
- The company's M&A strategy will focus on leveraging existing opportunities for organic growth rather than acquisitions.
Lavoro's earnings call revealed a company facing the dual realities of revenue growth in certain sectors and significant losses due to various challenges. With a clear focus on organic growth and operational efficiency, Lavoro aims to navigate the contraction in the Ag Retail Inputs markets and improve its financial health in the coming fiscal year.
InvestingPro Insights
Lavoro's recent earnings call paints a picture of a company navigating challenging market conditions, and InvestingPro data provides additional context to the company's financial situation. As of the last twelve months ending Q3 2024, Lavoro reported revenue of $1.85 billion, showing a modest growth of 1.51% year-over-year. This aligns with the company's reported 6% increase in annual consolidated revenue to $1.89 billion for fiscal year 2024.
However, the company's profitability remains a concern. InvestingPro Tips highlight that Lavoro is not profitable over the last twelve months and analysts do not anticipate the company will be profitable this year. This is reflected in the negative P/E ratio of -6.4 and a return on assets of -4.64%. These figures corroborate the significant net loss of $77.2 million reported for Q4 2024.
Despite these challenges, InvestingPro Tips also indicate that Lavoro is trading at a low revenue valuation multiple, which could be of interest to value-oriented investors. The company's price-to-book ratio stands at 1.91, suggesting that the stock is trading above its book value but not excessively so.
It's worth noting that Lavoro's stock price has taken a significant hit, falling by 26.61% over the last three months and 28.57% over the last six months. This decline aligns with the company's reported financial struggles and market expectations.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights that could provide a deeper understanding of Lavoro's financial health and market position. There are 10 additional InvestingPro Tips available for Lavoro, which could offer valuable perspective for those considering an investment in the company.
Full transcript - Lavoro Ltd (LVRO) Q4 2024:
Operator: Greetings, and welcome to the Lavoro's Fiscal Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and a replay will be made available on companies Investor Relations website at ir.lavoroagro.com. It is now my pleasure to introduce your host, Mr. Tigran Karapetian, Head of Investor Relations. Thank you Mr. Karapetian. You may begin.
Tigran Karapetian: Thank you for joining us today on Lavaro's fiscal 2024 fourth quarter earnings conference call for results ended June 30th 2024. On today's call are, our Chief Executive Officer, Ruy Cunha; and Chief Financial Officer, Julian Garrido. 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 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 could materially differ from actual events or those described in these forward-looking statements. Please refer to the company's registration statement on Form 20-F 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 financial 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 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'll now turn it over to Ruy Cunha, CEO.
Ruy Cunha: Thank you, Tigran. Good morning, everyone, and thank you for joining us today as we review Lavoro'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. Crop Care, 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 improvement, 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, and 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 Inputs revenue, which excludes the impact of Grains. 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, to 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 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 bridge slide in today's presentation, approximately 70% of the declining attributed gross margin compression largely driven by dynamics we've outlined and which we expect will gradually resolve. Now, 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 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 drought affected crop. Moreover, input prices have largely stabilized on a sequential basis in recent months, which, as previously noted, is favorable for both 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 dispersed 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 R$5 billion 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 droughts 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 harvests 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 resilient 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 close in 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 R$8.6 billion to R$9.2 billion and for Inputs revenue to range between R$7.7 billion and R$8.3 billion. In terms of our adjusted EBITDA, we anticipated growth relative to fiscal year 2024 driven by margin improvements. On a US 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 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.
Julian Garrido: Thanks, Ruy. Good morning/afternoon, everybody, wherever you are. Let's talk a little bit about the fiscal year results and let me start with that. Our consolidated revenue for the fiscal year 2024 grew by 6%, reaching $1.89 billion. This was mainly driven by 61% 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%, further our market share gains helped balance those challenges. The full year 2024 gross profit was down 19% to $268.4 million and gross margin compressed by 430 basis points to 14.2%. This was largely due to the input price deflation and a less favorable product mix. The adjusted EBITDA back in the amount or $53.4 million positive for the year, 64% decline year-over-year. As Ruy mentioned, this was primarily due to gross margin compression to an extra $10 million in allowing for expected credit losses and a $5.5 million increase in provision for expiring inventories. 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 $30.9 million the year before. Alongside our lower gross profit, we saw a headwind from higher finance costs and a smaller benefit for income tax. Net cash flows for operations totaled $33.1 million positive corresponding to R$165.8 million positive, up from $20.9 million and corresponding to R$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% year-over-year to $271.1 million primarily driven by a 41% rise in Grains revenue to $68.3 million while Inputs revenue declined by 6% to $202.8 million affected by lower Input sales in Brazil Ag Retail and the conversion of results from Brazil reais to US dollars. Consolidated gross margin contracted by 100 basis points to 16.7% with the gross profit down by 4% 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 improved slightly by 70 basis points to 22.3%. Net loss was $77.2 million, an increase of $57.8 million year-over-year driven by the higher income tax of $35 million and increase of finance costs of $22 million. Adjusted net loss was $76.2 million compared to an adjusted net loss of $15.2 million per year with similar factors impacting the results. In Brazil Ag Retail, revenue decreased by 2% to $192.5 million with a decline of 16% in Inputs revenue due to our strategic decision to delay shipments to certain clients with overdue payments, as previously mentioned. Gross profits however grew by 13% to $29.8 million supported by a 210 basis point margin expansion reaching 15.5%. For the Latam Ag Retail revenue increased by 5% to $65.2 million mainly due to favorable currency effects from the Columbian business. Gross profit rose by 10% to $10.4 million and gross margin expanded by 70 basis points to 15.9%. In Crop Care, revenue surged by 87% to $19.9 million led by strong results from Union Agro and Perterra. However gross profit declined by 29% to $5.8 million with margins compressions to 28.9% largely due to product mix effects as Perterra’s contribution increased. Adjusted EBITDA was $2.1 million negative, down from $2.4 million in a prior year period reflecting lower gross profit and a decline in other operating income. Last but not least our consolidated net debt-to-adjusted EBITDA, the ratio, including payables of acquisition of subsidiary landed at 4.2. If we excluded those payables we landed at 3.4. Our Brazil distribution net debt-to-adjusted EBITDA, the other ratio which is the coverage of our [crop] landed at 1.7 times below the 2.5 times limit. With all that said, I will pass it back to Ruy for some concluding remarks.
Ruy Cunha: Thank you, Julian. I think with that we’ve summarized both the results from last year and also a little bit of our perspective for the next year. If I were to provide a summary of the feeling of the market nowadays is, we expect farmers to be optimistic in the mid-term 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 declining farming profitability, they are now improving. Brazil is a country where agri business 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. Believing in this and in the gradual improvement of market fundamentals, Lavoro 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.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.
Kristen Owen: 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 cadence of your guidance for the fiscal year, how we should be thinking about first half versus second half and the order trends there?
Ruy Cunha: Yeah, thanks. Hi, Kristen. Julian, maybe you want to start just giving some highlights and then I can complement.
Julian Garrido: 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.
Ruy Cunha: Yeah, on that, Kristen, the market's performing, let's say the pace of the market's 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 in this year.
Kristen Owen: 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. And to maybe just where channel inventories are. You noted the pricing is starting to stabilize on a year-over-year basis. 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?
Ruy Cunha: 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 nervousness 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 we 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.
Kristen Owen: That's very helpful. One last one for me before I turn it over. You mentioned on the OpEx cost savings side, maybe a little bit of restructuring around the physical footprint. Just help us understand in the waterfall for EBITDA next year, how you think about those cost savings contributing to that waterfall?
Julian Garrido: Yeah, I think most of what we expect to recover in terms of EBITDA will actually come from margins, because the [intact] 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. 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 level.
Kristen Owen: Thank you, I'll pass it on.
Operator: Thank you. Next question comes from the line of Ben Theurer with Barclays (LON:BARC). Please go ahead.
Ben Theurer: 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 of lately and how do you think that has changed some of the behavior of farmers, right? 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.
Ruy Cunha: Sure, hi Ben. 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 suffering. 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. 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 would say the market is moving slowly in line with last year and much slower than the previous years. Now when it comes to profitability, Ben, I think it's a combination of two things. So even though the grain prices are not obviously at their peak and I think corn has a better position, soy is 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 quantity of bags of corn for safrinha, 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 the input prices. So the relationship is getting more positive and I think farmers will be using these to take their decisions.
Ben Theurer: 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?
Ruy Cunha: I think we always need to look at the big picture without having a particular look into the 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, right? 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 for stability, 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 has started, I’d say, early on in the season.
Ben Theurer: Okay. Perfect, great. Thank you very much for the question.
Ruy Cunha: Thank you.
Operator: Thank you. Next question comes from the line of Austin Moeller with Canaccord. Please go ahead.
Austin Moeller: 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 Nino and La Nina?
Ruy Cunha: Yeah, so the soy planting evolution right now, so I can talk about Brazil which is the number that I have in my mind. So the soy 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 rains it's progressing faster now.
Austin Moeller: That's good to hear. And how are you thinking about your M&A strategy with retailers and the cadence of that in this environment?
Ruy Cunha: Yeah, I think the environment, it 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.
Austin Moeller: Excellent, thanks for the color.
Operator: Thank you. [Operator Instructions] Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Ruy Cunha for closing comments.
Ruy Cunha: Thank you, Jaswan. Thank you all for the participation and looking forward to our next quarterly review. See you soon. Take care, bye.
Operator: Thank you. This concludes our today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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