Lavoro Ltd (LVRO) 2025 Q2 法說會逐字稿

Welcome to Lavoro's Business Update conference call. (Operator Instructions)

Please note that this conference call is being recorded, and a replay will be made available on the company's investor relations website at ir.lavoroaggro.com.

I will now turn the profits over to Tigran Karapetian, Head of Investor Relations.

Thank you. You may begin.

Thank you for joining us today to discuss our business update.

We will be covering the out of court restructuring agreement with suppliers announced yesterday, and the preliminary unaudited revenue and gross profit figures for Lavoro's fiscal second quarter 2025 ended December 31, 2024.

During this call, we will reference certain preliminary and unaudited financial information which is subject to change and may differ from actual results. For full disclosures, including limitations and risks related to this preliminary information, please refer to the Form 6-K filed today with the SEC.

In addition, please remember that during the course of this call, management will 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 certainties that could differ materially from actual events or those described in these forward-looking statements.

Please refer to the company's registration Form 6-K filed with the SEC today and other reports filed 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.

Before we begin, please note that we will not be hosting a Q&A session today, as we're limited in what we can disclose given ongoing court proceedings and the fact that we have not yet finalized our audit processes for the second quarter of 2025.

With that, I'll now turn it over to Ruy Cunha, CEO.

Thank you, Tigran, and good morning, everyone. I want to begin by acknowledging that this has been an extraordinarily challenging period for Lavoro and broader Brazilian agri ports distribution industry.

As many of you know, Brazil's agricultural inputs market has faced historical headwinds over the past two years. We had navigated severe input price deflation of 40% to 60% in crop protection and fertilizers, El Nino induced drought conditions, and widespread farmer liquidity constraints. These challenges intensified significantly in the late calendar 2024 when the judicial reorganization of a major agricultural retailer triggered a further tightening of inventory financing conditions across our industry.

In our last earnings call, we discussed how ag retail operations in Brazil faced severe inventory shortages during November and December as a direct consequence of this abrupt shift. The constrained product availability in fertilizers and crop protection during these critical months of the first soybean crop season or the cancellation of a significant number of farmer purchase orders, adversely impacting our second and third quarter results for the business unit.

In January, we made progress with key suppliers that helped partially ease these bottlenecks. However, discussions in the months that followed made it clear that the typical approach of negotiating with each supplier individually lacked the speed and scale required to prevent further disruption ahead of the next crop year.

While these external factors were largely beyond our control, they reinforced our conviction that fundamental changes to Lavoro's Brazil's inventory financing model were necessary.

To that end, with the reorganization plan announced yesterday, we believe we now have a framework to position Lavoro Brasil to emerge from this cycle as a leaner and more resilient business unit.

Before diving deeper, I want to emphasize that the reorganization plan discussed today is specific to our subsidiary Lavoro Agro Holding SA. We shall refer to as Lavoro Brasil throughout this call. Lavoro Brasil comprises the Brazil ag retail operating segment and also includes [Perteja], a subsidiary consolidated under [Croker].

The reorganization plan is commercially focused in nature, pertaining solely to our supplier relationships and does not jeopardize our publicly listed entity or the broader corporate structure.

Following weeks of extensive negotiation, Lavoro Brasil reached an agreement with a number of its key suppliers that provides for the extension of payment terms and secure future product supply for a multi-year period in order to help mitigate further supply chain disruption.

Accordingly, Lavoro Brasil formally submitted to the Brazilian courts yesterday an out-of-court negotiated reorganization plan in connection with the agreement.

The legal mechanism known in Brazil as ecoperación est judicial, translated as extrajudicial reorganization, allows for the reorganization plan to become binding on all eligible product suppliers upon court approval, thereby ensuring broad-based effectiveness.

As mentioned, with the 2025-2026 crop selling season underway, it was critical to identify a solution that would comprehensively resolve Brazil's inventory financing constraints. The reorganization plan we announced yesterday would provide a unified path forward and would help overcome the gridlock of negotiating with each supplier individually.

Key product suppliers mention in the press release that a party to the agreement with Lavoro Brasil are committed to supporting the company's reorganization plan. Discussions with other key suppliers are ongoing at advance stage.

While the full ratification of the agreement is conditional upon court approval of the reorganization plan, its supply and financing terms are already in effect, and the normal flow of inventory from these partners has resumed in the fourth quarter.

To reiterate, the reorganization plan is limited in scope to Lavoro Brazil. All other subsidiaries within LatAm ag retail segment and crop care segments other than Perteja are not included in the plan. Additionally, the plan applies exclusively to product suppliers of Lavoro Brasil and does not affect its financial lenders, financial creditors, and third-party services providers, contractors, or employees.

The reorganization plan, if approved by the court, is intended to accomplish two essential goals: first, it creates a standardized, multi-year contractual framework with our suppliers, grouped into four classes with clear repayment terms and annual supply commitments based on credit exposure.

This marks a shift from previous one-off credit arrangements with each suppliers to a standardized model with predefined collateral requirements associated with future supplier inventory financing. To operationalize this new framework, we are in the process of establishing a new multi-year FIDCs that will be backed by Lavoro Brasil receivables and support by its existing financial lenders.

FIDCs are receivables-based financial instruments widely used in Brazilian agribusiness to facilitate structured credits between counterparties. With that said, we see this new FIDCs as introducing meaningful financing innovation in Brazil's a retail sector, which we believe will benefit both Lavoro Brasil and its suppliers.

By consolidating claims from multiple suppliers into a single, centralized instrument, backed by receivables which have been assessed by independent third parties. This new structure enhances stability and visibility for Lavoro Brasil, streamlines back office operations for all parties, and it strengthens collateral protection for suppliers.

Second, the reorganization plan provides for the extension of approximately BRL2.5 billion in supplier trade payables that were originally due to the end of fiscal 2025. Repayments in regular semiannual installments will be spread over multiple years. The extended payment terms will give us the flexibility to adjust Lavoro Brasil fixed cost structure, and drive operational efficiencies in a thoughtful and deliberate manner.

Our retail network right sizing plan, which we discussed in our last earnings call, is under way along wave actions to reduce overheads and improve commercial efficiency aligned within Lavoro Brasil. These steps are key to restoring profitability and positioning the business to grow from a leaner, more agile basis.

As a nation, the reorganization plan is subject to customary court approval procedures. While we cannot predict the exact timeline, these processes in Brazil typically take between three and five months to complete, at which point, the plan would become definitely binding on all eligible supplier creditors of Lavoro Brasil, although no assurance can be provided as to the exact expected timing in our case.

In the interim, as I mentioned before, the agreement reached with our key suppliers is already in effect. And the normal flow of inventory was re-established during the fourth quarter. The full reorganization plan, along with supporting materials is available on the company's Investor Relation website.

Now, I'll provide a brief commentary on our preliminary financial results for the second quarter. As noted in the 6-K file today, the complexities associated with the reorganization plan impacted the completion of Lavoro's financial closing procedures. As a result, my remarks today will focus exclusively on preliminary unaudited revenue and gross profit for the quarter.

In addition, in light of these developments, the company has also determined that it is appropriate to withdraw its previously issued fiscal 2025 financial outlook at this time. Consolidated preliminary revenue for the second quarter declined 27% year over year to BRL2.25 billion.

This decrease was primarily due to inventory shortages in Brazil a retail, which led to purchase order cancellation and indirectly impacted crop care revenue as well. In US dollar terms, revenue decreased 38% year over year to $384 million with the year-over-year change reflecting the additional 15% depreciation of the Brazilian reais relative to the US dollar.

Breaking values by segments. Brazil a retail segment revenue declined 30% year over year to BRL1.84 billion highs due to the factors discussed earlier. That said, we noted on our last earning call projections from ag consultancies continue to indicate a meaningful recovery in farmer profitability for the current crop year, driven by improved weather conditions and stronger commodity prices compared to prior year.

Receivable selections from farmers for the first crop, which took place in April and May was in line with expectations. The percentage of on-time farmer repayments improved notably versus last year, reflecting both better farmer liquidity and the effectiveness of our disciplined credit risk management processes.

Crop care segment revenue was BRL251 million in its second quarter 2025, a decrease of 30% year over year, primarily due to two drivers: first, Agrobiológica, or biological business was adversely impacted by temporary industry-wide regulatory uncertainty surrounding on-farm biologicals. This led many farmers to adopt a wait-and-see approach.

Although new legislation has since been enacted that resolves this uncertainty, the pause in demand occurred during the peak of the first soybean crop and the booking window for the [zaffrania] season, resulting in a meaningful impact that will not be recovered this year, but should not repeat next year.

Second, sales of specialty fertilizers and adjuvants from Union Agro and Cromo to Lavoro Brasil were negatively affected by the cancellation of bundled purchase orders due to broader product shortages. In Brazil, farmers often place consolidated orders that include fertilizers, crop protection, seeds, and specialty products. When a key input such as fertilizer is unavailable, the entire bundle may be canceled, indirectly reducing sales of otherwise available specialty products.

Finally, LatAm ag retail revenue grew 4% to BRL287 million, reflecting stable market conditions and the appreciation of the Colombian peso. Consolidated preliminary gross profits decreased 28% to BRL366 million with consolidated gross margins contracting 40 basis points to 16.3%.

Gross margin for the Brazil ag retail segment contracted by 240 basis points to 11.5%. This margin compression reflects our strategic decision to prioritize long-term client relationships by fulfilling orders with equivalent, or in many cases, superior products when originally ordered items were unavailable. This approach underscores our commitment to preserving customer trust and loyalty, which will be critical as market conditions normalize.

LatAm ag retail gross margin expanded by 480 basis points to 22.6%, driven by improved distribution margins in seeds and specialty products, and the positive effect from product category mix shifts. Crop care gross margins contracted 1,160 basis points to 23.7%, with margin compression reflecting an unfavorable shift in product mix, led by weaker biological sales, as well as pressure from fixed costs under absorption and higher raw material costs, which should be weaker Brazilian reais.

In closing, we're taking decisive and proactive actions to confront the challenges posed by Brazil's current inventory financing landscape. Our conviction in Lavoro Brasil long-term thesis remains unchanged. By enabling our RTVs to serve as trusted advisors, backed by our broad product portfolio of products and services, we continue to generate tangible, differentiated value at the farm gate for our clients.

We believe the reorganization plan will provide Lavoro Brasil with a scalable and predictable supply framework, strengthen supplier alignment over the long term, and enhance our ability to drive operational efficiency across the business. Together, these elements will help form the foundation for Lavoro Brasil's evolution into a more resilient, focused, and profitable platform.

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