Lavoro Q2 2025 Earnings Call Transcript

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June 18, 2025

Key Takeaways

  • Out-of-court reorganization plan with key suppliers extends about $2.5 billion in trade payables into a standardized multi-year framework, resuming normal inventory flow and securing future supply for Lavoro Brazil.
  • Introduction of a receivables-backed FIDC financing instrument centralizes supplier claims, enhances collateral protection and streamlines back-office operations.
  • Preliminary Q2 revenue fell 27% year-over-year to R$1.84 billion (down 38% to $384 million USD), driven by inventory shortages in Brazil ag retail and order cancellations, prompting withdrawal of the 2025 outlook.
  • Consolidated gross profit decreased 28% to R$366 million with Brazil retail margin contracting 240 bps to 11.5% due to product substitutions and Crop Care margin down 1,160 bps from unfavorable mix and cost pressures.
  • LATAM ag retail revenue grew 4% to $122 million with gross margin expanding 480 bps to 22.6%, supported by improved distribution margins and favorable product mix shifts.
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Earnings Conference Call
Lavoro Q2 2025
00:00 / 00:00

There are 3 speakers on the call.

Operator

Welcome to Lovallo's Business Update Conference Call. 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.lavoroagro.com. I will now turn the conference over to Tigran Karpishin, Head of Investor Relations. Thank you. You may begin.

Speaker 1

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 Lovore's fiscal second quarter twenty twenty five ended 12/31/2024. 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 six ks filed today with the SEC. In addition, 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.

Speaker 1

These statements are based on management's current expectations and beliefs and involve risks, uncertainties that could differ materially from actual events or those described in these forward looking statements. Please refer to the company's registration Form six ks filed with the SEC today and other reports found 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 and 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 twenty twenty five. With that, I'll now turn it over to Rui Kunya, CEO.

Speaker 2

Thank you, Tigran, and good morning, everyone. I want to begin by acknowledging that this has been an extraordinary challenging period for Aboru and broader Brazilian ag inputs distribution industry. As many of you know, Brazil's agricultural inputs market has faced historical headwinds over the past two years. It had navigated the year 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 twenty twenty four when the judicial reorganization of a major agricultural retailer triggered a sudden tightening of inventory financing conditions across our industry.

Speaker 2

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 constraint product availability in fertilizers and crop protection during these critical months of the first soybean crop season caused 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 may be 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.

Speaker 2

To that end, with the reorganization plan announced yesterday, we believe we now have a framework to position Alvaro Brazil to emerge on 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, which I'll refer to as Lavoro Brazil Prohold Stock. Lavoro Brazil comprises the Brazil ag retail operating segment and also includes Forteja, a subsidiary consolidated under Crop Care. 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, Lavono Brazil 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 multiyear period in order to help mitigate further supply chain disruption.

Speaker 2

Accordingly, Lahore Brazil 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, 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 twenty twenty five, twenty twenty six top 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 mentioned in the press release that are partying through the agreement with Lavro Brasil are committed to supporting the company's reorganization plan.

Speaker 2

Discussions with all our key suppliers are ongoing at advanced 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 Latin ag retail segment and crop care segments other than Pertera are not included in the plan. Additionally, the plan applies exclusively to product suppliers of La Vora Brazil and does not affect its financial lenders, financial creditors and third party service providers, contractors or employees.

Speaker 2

The reorganization plan is approved by the court is intended to accomplish two essential goals. First, it creates a standardized multi year contractual framework with our suppliers, booked 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 FIDIC that will be backed by Lavoro Brazil receivables and support by its existing financial lenders. FEDICs are receivables based financial instruments widely used in Brazilian agribusiness to facilitate structured credits between counterparties.

Speaker 2

With that said, we see this new Fiji case introducing meaningful financing innovation in Brazil's ag retail sector, which we believe will benefit both Bravoir Brazil 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 predictability and visibility for Lavota Brazil, streamlines back office operations for all parties and strengthens collateral protection for suppliers. Second, the reorganization plan provides for the expansion of approximately $2,500,000,000 in supplier trade payables that were originally due to the end of fiscal twenty twenty five. Repayments in regular semiannual installments will be spread over multiple years.

Speaker 2

The extended payment terms will give us the flexibility to adjust Lavros Brazil fixed cost structure and drive operational efficiencies in a thoughtful and deliberate manner. Our retail network rightsizing plan, which we discussed in our last earnings call is underway along with actions to reduce overhead and improve commercial efficiency aligned within Flavor Brazil. These steps are key to restoring profitability and positioning the business to grow from a leaner, more agile base. As I mentioned, 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.

Speaker 2

At which point, the plan would become definitely binding on all eligible supplier creditors of Lavota Brazil. Although no assurance can be provided as to the exact expected timing or 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 reestablished during the fourth quarter. The full reorganization plan along with supporting materials is available on the company's Investor Relations website. Now, I'll provide a brief commentary on our preliminary financial results for the second quarter.

Speaker 2

As noted in the six ks filed 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 with these developments, the company has also determined that it's appropriate to withdraw its previously issued fiscal twenty twenty five financial outlook at this time. Consolidated preliminary revenue for the second quarter declined 27% year over year to billion dollars This decrease was primarily due to inventory shortages in Brazil ag retail, which led to purchase order cancellation and indirectly impacted crop care revenue as well. In U.

Speaker 2

S. Dollar terms, revenue decreased 38% year over year to $384,000,000 with a year over year change reflecting the addition of 15% depreciation of the Brazilian real relative to U. S. Dollar. Breaking down these by segments, Brazil ag retail segment revenue declined 30% year over year to R1.84 billion dollars due to the factors discussed earlier.

Speaker 2

That said, we noted on our last earnings 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. Top Care segment revenue was million dollars in second quarter twenty twenty five, a decrease of 30% year over year, primarily due to two drivers. First, agrobiological, our biologicals business was adversely impacted by temporary industry wide regulatory uncertainty surrounding on farm biologicals.

Speaker 2

This led many farmers to adopt a wait and see approach. Although new legislation has since been enacted that results this uncertainty, the pause in demands occurred during the peak of the first soybean crop and the booking window for the safrinha 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 Uniwago and Cromo to La Verro, Brazil 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 vendor may be canceled indirectly reducing sales of otherwise available specialty product.

Speaker 2

Finally, LATAM Ag retail revenue grew 4% to million dollars stable market conditions and the appreciation of the Colombian peso. Consolidated preliminary gross profit decreased 28% to R366 million dollars with consolidated gross margins contracting 40 basis points to 16.3%. Gross margin for the Brazil Ag Retail segment contracted by two forty 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.

Speaker 2

LATAM and retail gross margin expanded by four eighty basis points to 22.6%, driven by improved distribution margins in seeds and specialty products and the positive effect from product category mix shifts. Top Care gross margins contracted eleven sixty 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 real. 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's Brazil long term thesis remains unchanged. By enabling our RTVs to service 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.

Speaker 2

We believe the reorganization plan will provide La Vorro Brazil 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 Brazil's evolution into a more resilient, focused and profitable platform.

Operator

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

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