LVRO Financial Analysis

Analysis Date: 2/4/2025

Business Model

Lavoro operates as an agricultural inputs retailer in Latin America, distributing crop protection products, seeds, fertilizers, and specialty products. It also has a Crop Care segment that manufactures and distributes private label specialty products and imports/distributes off-patent crop protection products. Additionally, they engage in grains revenue through barter operations.

Revenue Sources

• Inputs Revenue: Sale of agricultural inputs such as crop protection, seeds, fertilizers, and specialty products through Brazil Ag Retail and Latam Ag Retail segments.
• Grains Revenue: Revenue generated from barter operations, primarily within the Brazil Ag Retail segment.
• Crop Care Products: Revenue from manufacturing and distributing private label specialty products (biologicals, adjuvants, specialty fertilizers) and off-patent crop protection products.

Income Statement Analysis

• Revenue decreased by 13% year-over-year in BRL and 24% in USD, primarily due to Brazil Ag Retail segment impacted by input price deflation and farmer liquidity constraints. Grains revenue also saw a significant decrease of 52% in BRL and 57% in USD.
• Gross Profit increased by 10% in BRL but decreased by 4% in USD. Gross margin expanded by 320 bps to 15.6%, driven by improved distribution margins in Brazil Ag Retail.
• EBITDA increased significantly by 101% in BRL and 77% in USD, while Adjusted EBITDA decreased by 5% in BRL and 16% in USD, indicating that adjustment items played a significant role in the EBITDA increase.
• Net loss significantly increased to R$267.1 million in 1Q25 from R$71.0 million in 1Q24, primarily due to changes in deferred tax assets and higher finance costs.

Capital Allocation

The earnings call transcript and earnings release do not provide specific details on dividends or share repurchases. However, management highlighted cost-saving initiatives, including retail network optimization by closing approximately 70 stores in Brazil, aimed at improving profitability and efficiency. Reinvestment is implied through these optimization efforts and strategic measures to capitalize on market recovery. No explicit mention of dividends or share repurchases was found in the provided documents.

Management Commentary

Outlook for Brazilian farmer profitability for crop year ’24/’25 improved further since last update, reflecting higher commodity prices and upward revisions to yield expectations.

Gross Margin expanded 320 bps to 15.6%, led by improved distribution margin in Brazil Ag Retail (+350bps) due to improvements in inventory cost positioning.

Crop Care had strong performance, with revenue, gross profit and Adjusted EBITDA growth.

Farmers’ liquidity restrictions led to steep decline in cash-based inputs purchases, increasing Lavoro’s working capital financing requirements year-to-date.

Judicial recovery events, including that of a major ag retailer, triggered a sharp increase in risk aversion among suppliers and financial institutions in late CY2024, leading to a significant tightening in inventory financing conditions.

FY2025 guidance revised to reflect impact to Brazil Ag Retail revenue from widespread inventory shortages in 2Q25, with residual effects impacting 2H25.

Lavoro no longer expects its Adjusted EBITDA to grow relative to FY2024.

Overall Sentiment: Cautious. Management acknowledges improved farmer profitability outlook and gross margin expansion but is significantly concerned about liquidity constraints, inventory financing issues, and the resulting revised negative EBITDA growth outlook for FY2025. The sentiment leans towards negative in the near term due to these challenges, despite positive aspects in specific segments and profitability projections.

Recommendation

Rating: Hold

Reason for Rating: Given the mixed signals from Q1 2025 results and revised FY2025 outlook, a Hold recommendation is appropriate. While gross margins improved and Crop Care segment showed strength, significant revenue decline in Brazil Ag Retail due to liquidity and financing issues, coupled with a lowered EBITDA outlook, create considerable uncertainty. The improved farmer profitability outlook is a positive sign for the future, but near-term headwinds are substantial.

Disclaimer: This analysis is for informational purposes only and not investment advice. The analysis is based on limited information from provided documents and is subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/4/2025, 9:31:28 AM