Lavoro Limited (LVROF) Earnings Call Transcript & Summary

Great. Thank you, everybody, for joining us. Our next presenter is Lavoro. And for those of you that don't know the company, Lavoro is an ag retailer that acts as your gateway to the farm. And they're -- through their knowledge, through their relationships, their distribution reach, they're able to bring key technologies to farmers going forward. So we're very happy to have them here at our conference. So I think what we'll do is a slide show presentation that will be delivered by Ruy Cunha, who's the CEO of Lavoro, and that will give you an overview of the business. We've got 25 minutes total. So if we have a few minutes at the end of the presentation, we'll do some Q&A. And with that, I will hand it over.

All right. Thank you, Bobby. Good morning, everyone. I'm Ruy Cunha, CEO of Lavoro. The presentation will be shared. So I advise you to please read the legal disclaimers and also the risk factors. So today, we're going to talk about Lavoro. I'm going to introduce you to our company. Just before that, sort of get to know me a little bit better. I've been working in agriculture in Lat Am for the last 12 years and leading Lavoro -- and I'm being with Lavoro since the beginning since 2018. Lavoro is a company that is changing the landscape of retail in Lat Am. And by the way, there's a lot of changes happening on the retailer in Lat Am. And why retail is actually important in this whole context. So just to give you a quick introduction of the macro story behind Lavoro here. So the world needs more food, right? So I think this is undisputed. And Latin America will be a key component in supplying this food or closing the food supply gap. A lot of food production needs to come from increase in productivity in Lat Am. And this comes with investments in technology and support to small and midsized farmers, which are in number, a very significant chunk of the farmers in Lat Am. This is where the retailers came in. Retailers are the trusted advisers to the small and midsized farmers in Lat Am. So they provide products, services, and they provide advice so the farmers can have the best use of their inputs and be more productive. So basically, differently from the large farmers, the small and midsized farmers, they are much more dependent and they rely much more on the retailer in order to be more successful and in order to produce more. So retailers really play a key role in the overall scheme of things here. So if I move to the next slide, we believe that Lavoro, as a major retailer, has the ability to have a major impact in this segment well above the other players. And for a few reasons. Number one, scale. Lavoro is the largest ag inputs retailer in Brazil. And we also have developed a very structured M&A process and very strong M&A capabilities with a team of dedicated professionals that have closed 22 deals over the last 5 years. Once we acquire those companies -- and we acquire in a way that we keep the original founder and we keep a lot of the original team in order to secure a smooth transition. And then we add value to those companies by improving their portfolio, adding new technology tools, adding expertise. And in particular, I would just like to highlight 2 things. So on portfolio, we have an extensive product line in biologics. So one of the things that we add to the portfolio of newly acquired companies is the biologics product portfolio, also specialty fertilizers, and we also help them with the digital agenda. So as a result, I will show you in a minute, the acquired companies, they tend to accelerate their growth and value creation once they join Lavoro. So the next slide, let's see some highlights of the company. So first of all, Lavoro operates currently in 3 countries: Brazil, Colombia and Uruguay. The company has just signed a deal to enter in Chile and Peru. So the first key point about Lavoro, it's a Latin American platform. Now some of the key characteristics that you see on the right side of this slide, Lavoro is a large scale operation. So I already mentioned that we're #1 player in Lat Am. We have almost 900 sales reps visiting clients on a weekly basis. We serve more than 53,000 clients through almost 200 stores. Our net revenues in the last fiscal year was $1.6 billion, and our fiscal year ends in June. So scale is really key. Second point is Lavoro is a growth platform. Our growth over the -- pro forma growth over the last 2 years was 53% in revenues and 131% in EBITDA. So as we grow, the company is also gaining more efficiency. Also, the third key point is the M&A. I mentioned that we have some very specific capabilities, and we have closed 22 deals over the last years. And we do have 10 MOUs signed, which will help us to continue growing in the M&A agenda. And finally, Lavoro is more than a retailer. We have this vertical operation. So we have one company, the name is Crop Care. That is a company that produces biologics, specialty fertilizers and imports agrochemicals. And a lot of those products, they go directly to Lavoro. So Lavoro has their own line of proprietary products that help us to differentiate our portfolio and also to improve our margins. Now talking about portfolio and technology. So I mentioned that technology will be key to help farmers to be more productive. And Lavoro offers the 4 main categories of products that farmers need to be productive: crop protection, fertilizer, seeds and specialties. But so does some of the retailers. So what is the difference between Lavoro and the typical retailer? It's the size of the portfolio. So we have the ability, because of our size, to select the right partners. And you can see here, we have -- in each one of the categories, we have the most important players, even some global players like Bayer, BASF, Corteva, and Lavoro has the ability to select between those suppliers the portfolio that better fits to clients in a specific region. So if you take a country like Brazil, there's a lot of different scenarios and agricultural needs. And Lavoro has the ability to select a wide range of portfolio to better fit the clients' needs. In addition to that, I already mentioned, we also have a line of proprietary products. So the quality of our portfolio is a key component in helping our clients to be more productive. Now moving to the next slide. Now that we understood a little bit of retail and the key highlights of Lavoro. Looking ahead, Lavoro has 4 main growth engines to support our value creation over the next years. The first one is addressable market expansion, and here is related to the whole macro story of growing production in Latin America. The second point is growing our footprint, and this will be done by executing on our M&A strategy and also the opening of new stores. Then we have the third engine, which is adding new customers. And basically, the strategy here is that by adding new sales consultants with some specific methodology that we have developed, we can serve a larger set of clients. And then finally, we also have new sources of value. And here, those are areas in which we can have a very accretive growth not only in revenue but also in margins. And I'm talking about the expansion in Crop Care and also new areas to us like entering services and the whole digital arena. So those are the main engines that will help our future growth and value creation. So if you look at the slides, our ambition is to grow revenues from $1.6 billion to $3.4 billion in 2 years. So this is equivalent to a CAGR of 48%. And the breakdown is related to the engines I just mentioned. So we're pretty confident with this plan because the engines are well known to us. So let's go into a little bit more detail on each one in the next slides. So let's first talk about the market. So the ag input market is driven by the ag input -- the ag production in the region. So let's take Brazil, which is the major driver in the region. If you take the grain production over the last 10 years in Brazil, it has grown around 70%. So Brazil is already responsible for 35% of the global soybean production and 9% of global corn production. The growth in production has been done by adding new technology. For instance, new seeds technology have helped farmers to accelerate their crops. And farmers in Brazil, they have 2, sometimes even 3 crops per year, helping them to be more profitable and having a higher income per acre. This higher income allows them to make more investments in agri inputs. So this is driving a lot of the growth in the ag inputs segment. I'd also like to mention that Brazil has a lot of space to expand the agricultural land. So if you just take what is current pasture land and transform it into a land for agricultural use, we have an opportunity of 116 million acres. This is more or less equivalent to the total area harvest in Argentina, for instance. So there's a lot of opportunity of transforming pasture land into farmland. So this is also another example of how we're going to grow these markets. So if you look at this historical growth in the ag inputs market, this market is growing in Brazil 16% per year. So very accelerated growth. And then on the right side of the slide, you understand that the growth in the ag inputs market, so more investments in technology, is also helping farmers to be more productive. And the more productive they are, the more they invest in ag inputs. So this creates a positive spin. And as you can see, not only the income is growing for farmers, but it's also interesting to note that farmers they have in Brazil, typically 1 soy crop and 1 corn crop. And you see that corn, which is the second crop that used to be a small crop in Brazil, because of technology, is becoming actually a very large crop. So they do have like an expansion in their income based on the higher production of corn that they had over the last years. Next slide, please. Now in addition to the growth in the addressable market, we have an opportunity in the inorganic expansion. So we have more than 2,000 ag input retailers only in Brazil today. The vast majority of those companies are mom-and-pop operations with less than $20 million in annual revenues. According to [ ANDA, ] which is a major association of retailers in Brazil, 89% of retailers are still owned by their original founders. Out of those, 75% are interested in having M&A discussions because they understand the new retail model that is being created is a retail of large scale and much more sophisticated services. And this is where we see a lot of opportunities for Lavoro. Lavoro is the #1 consolidator in this market. We have developed this technology of finding good companies and making the acquisitions and then making the integration just after. So in this chart, you can see the 22 deals that I mentioned that we closed. And in addition to this, I also mentioned that we have a pipeline of MOUs. So there's a lot of opportunities for further consolidation. In the next slide, you'll see that we believe that Brazil is probably 10 to 15 years behind U.S. in this consolidation of retail segments in agriculture. And this is obviously, again, an opportunity for us. And to explore this opportunity, Lavoro keeps a dedicated M&A team with 15 professionals that only do M&As for Lavoro. We have a large proprietary deal flow with more than 80 targets, 80 potential targets, and we have 10 signed MOUs. In addition to this, we also have a dedicated integration team. Once we acquire those companies, we start the work of value creation. So all of that to say that we do see a lot of opportunities for further consolidation beyond what we already did in Lavoro so far. Now once we acquire those companies, we start another agenda, which is the organic growth. And then we can see on the next slide, that organic growth is an important component in our value creation strategy. We do organic growth by 2 main engines. One is footprint expansion and the second one is adding customers. Let's talk first about footprint expansion. We have developed a methodology to find the right place to put a new store, and we are adding 20 stores per year every year in Lavoro. We currently cover approximately 80 million acres with our current footprint, and we do see an opportunity to expand more 14 million acres in the next 2 years. So 17% expansion by adding new stores. So this is another great opportunity that we see for expansion. Now moving to the next slide. We also have an opportunity to add new clients. And to do so, we need to add more sales consultants. So just so you understand, Lavoro believes that farming is a complex operation. And farmers, they need support in order to take their decisions. We have mapped more than 70 decisions that farmers need to make in their growing season. And sometimes, small and midsized farmers are not properly equipped to take those decisions, either because they don't have the product expertise or they don't have the agronomists on the ground to help them to select the right products and then also to help them to set up the machines. So our approach is to have a massive presence of our consultants, helping them to take the best decisions. And this is also another differentiation in Lavoro, which is a lot of investments in the sales consultant in order for this guy to be more effective. This includes training. This includes also a wider portfolio, as I have mentioned, and also investments in technology, for instance, sales force tools that help them to be more effective in meeting clients' expectations. Next slide, please. Once we apply those tools, we usually can accelerate the growth of the acquired companies by quite a bit, between 2 and 3x faster than what they grew prior to Lavoro's acquisition. So here, you can see by vintage the historical growth of the companies we acquired in the gray bars. And then on the blue bars, you see the acceleration after the acquisition of Lavoro. So a very consistent track record of accelerating those companies. Now in addition to this, we also explore synergies and help them to be more profitable. So I mentioned the portfolio expansion. We also help them to take costs out by plugging them into our shared service operation and also help them with the basic planning of supply chain and sales. All that to say that we also explore opportunities for gaining synergies. Next slide, please. Now on the new opportunities for value creation, we do have Crop Care, and Crop Care has these exciting opportunities about biologics and specialty fertilizers, high-margin products and very effective products to help clients to reduce their investments because biologics and specialty fertilizers help them to reduce the overall investments and increase their crop yield. Next slide. Our projections for sales in Crop Care are very interesting and aggressive because we have seen the massive growth between '21 and '22 already realized. And as you can see in the Slides 23 and 24, growth is also very aggressive driven by the adoption of those products, future M&As and cross-selling with Lavoro. Next slide. Finally, there's an additional opportunity on services. Those are not captured in our financial projections, but we do see a lot of additional opportunities to offer services related to soil testing, financial services, logistics services, so on and so forth. Currently, this is -- represents 0 in terms of revenues in Lavoro. But in the future, this will be upgrade, too. So if you look at Nutrien, for instance, which is our comparable in U.S., 13% of their gross profit comes from services. Next slide. So in summary, this is the Lavoro flywheel. The more we grow, the more we can invest in services, the more we can invest in portfolio and in technology, and then we further differentiate the company. So this creates a positive spin. Next slide. That will help us to achieve our financial projections. So this is the perspectives we have for growth in revenues and EBITDA. We expect to double our revenues in the next years driven by organic and inorganic opportunities. And we expect to multiply the EBITDA by 3x, driven by volume, better mix with Crop Care and operational efficiencies. And with that, finalize the summary of the company and open up to you, guys. Thank you.

Thank you so much. So I think I'll just -- we just have a few minutes here, so I'll kick it off. Just maybe trying to understand if you were to kind of rank for us the margin opportunities as you expand. You obviously -- some of these in-house products carry nice margins. There's a services opportunity. And then as you consolidate through acquisition, I imagine there's some redundant infrastructure that you guys consolidate. But just let us know how you would rank the margin expansion opportunities there.

Yes. So we have 3 major components of growth in margins. The first one is Crop Care expansion. So we plan to grow our EBITDA margins from 6.7% to 9-point-something percent. So a major part to come from Crop Care expansion. Then we also have the growth in some high-margin categories, specialty products and seeds. So we have dedicated teams to grow those categories. And Lavoro has centralized -- fully centralized purchasing as well. So this should also help in the internal gain of margins in the retail. And finally, we have space for SG&A optimization. So Crop Care, better mix and better purchasing and then SG&A dilution. These should bring additional 3 points in EBITDA margins for the next 2 years.

And obviously, there are a lot of other questions that we could ask, but a big kind of macro one that I think is important for you, as investors, to maybe get a handle on is what you touched on at the beginning with Latin America's rising role on the global stage in terms of food export and food security. Can you just kind of maybe contextualize Lavoro within the broader macro trends that we're seeing?

Yes. So Lavoro is the leading ag retailer in the region, right? And we do believe that the impact Lavoro will have will be major. Because if you take only Brazil, 65% of the culture or harvest lands in Brazil is being handled by small and midsized farms. So 65% is in this particular segment. That is being served by retail. And Lavoro is not only the largest retailer, but it's also the one which is actually creating this new model. So we have identified in the comparison with U.S. that the Latin American farmers, they are less leveraged, they are more profitable, but they lack the technology to accelerate their production. And this is where exactly Lavoro comes in. So we will come with better products and better services to help this major part of the farmers to accelerate production. So pretty big impact, I would say.

Fantastic. And I'm just going to sneak one more in here. Just in terms of the services, I know you recently started partnering with Pattern Ag related to soil analysis. What does that do for you in terms of furthering that particular opportunity? Any other kind of pieces of the puzzle you need to put in place for the soil services?

Yes. So we signed this agreement with Pattern Ag to bring the technology to Brazil. Pattern Ag has a very interesting product that I would say the technology is not available in Brazil. And it is the first step towards the more sophisticated digital agronomy, more sophisticated agriculture with variable rate application. So in order to optimize the ag input application, you need to understand your soil. So Pattern Ag is preparing this tool for us, and we plan to launch in the markets early next year. And we strongly believe that this will be a game changer in the market by adding a lot more information and better decisions to our clients with this specific tool.

Fantastic. I think we've run out of time, but thank you, Ruy Cunha, really great overview of Lavoro. I think we're going to be following the story very closely to see next milestones in '23.

Thanks for having me.

Thank you.