Harvesting Gains

By: subSPAC

EXECUTIVE SUMMARY

• In the past several years, the agricultural market has been subject to escalating uncertainty, catalyzed by a triad of disruptive forces, including a global pandemic, the geopolitical uncertainty exemplified by the ongoing war in Ukraine, and unpredictable climatic events leading to droughts and diminished yields.
• These factors have injected volatility into the market, causing prices to move unpredictably due to periods of shortages and excess supply. 
• Despite the volatility, however, prices remain on a long-term upward trajectory.

DETAIL

In the past several years, the agricultural market has been subject to escalating uncertainty, catalyzed by a triad of disruptive forces, including a global pandemic, the geopolitical uncertainty exemplified by the ongoing war in Ukraine, and unpredictable climatic events leading to droughts and diminished yields.

These factors have injected volatility into the market, causing prices to move unpredictably due to periods of shortages and excess supply. Despite the volatility, however, prices remain on a long-term upward trajectory. This trend has opened up avenues for growth for agriculture input retailers, and Brazil-based Lavoro, in particular, has been a notable beneficiary.

Lavoro’s strategic approach of acquisitions, geographical expansion, and distribution optimization has resulted in a sustained growth trajectory and improved margins, even amidst market turmoil.

However, the company is now contending with a series of issues, such as falling farmer profitability, declining fertilizer prices, and a shifting sales cycle. These factors pose significant risks to the momentum it has built. With all of this uncertainty, does Lavoro have the capacity to rebound from these challenges and sustain the forward momentum it demonstrated earlier in the year?

From Seed to Scale

Lavoro holds a prominent position in Brazil’s agricultural landscape, commanding close to a 10% market share as the country’s largest agricultural inputs retailer. Its sphere of influence extends to the niche sector of agricultural biologics inputs, where it is a leading provider. The company serves a key function in the agricultural market, supplying various inputs such as crop protection measures, fertilizers, seeds, and specialty items. With this comprehensive portfolio, Lavoro acts as a catalyst for farmers to embrace innovative technologies that aim to drive up productivity.

Established in 2017, Lavoro has rapidly expanded its geographical reach, encompassing operations in Brazil, Colombia, and Uruguay. Its customer base is now substantial, reaching more than 72,000 farmers across over 150 million acres, serviced through over 210 stores. This represents a significant expansion, with the company doubling its footprint within five years, indicative of a successful and sustained scaling strategy.

Unusually, Lavoro has managed to derive benefits from the extended period of market uncertainty that has been a feature of the agricultural market in recent years. This uncertain landscape, shaped by factors like the global pandemic, climate change, and geopolitical conflicts, has led to erratic crop and input prices. Yet, the long-term trend has been generally upward, to Lavoro’s advantage. Its location within Latin America, currently the largest and fastest-growing agricultural export region with a CAGR of 8.5%, presents Lavoro with additional growth opportunities.

Acquisitions have been a key part of Lavoro’s expansion strategy. The recent successful acquisition of Cromo Quimica marks the company’s 29th acquisition since its inception. Lavoro is also poised for further growth, with MOUs signed to acquire eight other targets. The effective integration of these acquisitions into Lavoro’s operations has had a noticeable positive impact on its financial metrics, driving rapid revenue growth and margin expansion. 

Against the Grain

In recent months, Lavoro has grappled with significant challenges that have led to a noticeable, albeit modest, decline in sales. The factors influencing this downturn include fluctuating input prices in Brazil, depreciation of the Colombian Peso, and declining crop protection and fertilizer input prices.

Moreover, the shifting of sales timing to the first half of the year foreshadows a potential reduction in demand during the latter half of the year. Compounding these issues are the headwinds presented by a reduction in farmer income as grain prices face downward pressure. Despite the daunting challenges, there are indicators that Lavoro may soon experience a rebound in demand.

Key among these is the prospect of Brazil overtaking the US’s share of global exports, spurred by lower corn prices, increasing import demand from China, and droughts in Argentina triggering higher imports. Brazil, being Lavoro’s most substantial market, holds promise for the company as it is poised for a significant uptick in grain production in the second half of the year.

The country witnessed an impressive increase in grain production: soybean production rose by 20% and corn production by 8%, attributable to favorable weather conditions. This upswing in grain production, coupled with the shifting dynamics of global agricultural exports, could well provide Lavoro with the momentum needed to navigate its recent challenges and reestablish its growth trajectory. 

Financials and Valuation 

Looking at Lavoro’s third-quarter financial results, the company registered a slight contraction in revenues by 2.6% compared to the previous quarter, reporting revenues of $486.4 million. Yet, a broader perspective paints a brighter picture. The cumulative revenues for the first nine months of 2023 demonstrate a robust growth of 25.3%, escalating from $1.22 billion to $1.529 billion. Simultaneously, Lavoro experienced a downtrend in both gross profits and EBITDA margins in Q3 2023, seeing reductions of 15.3% and 43.5% respectively.

This contraction is attributed to factors such as sales phasing, decreased margins from fertilizers and herbicides, and higher operating investments. However, over the nine months, the company’s gross profit experienced a substantial increase, surging by 35.4% from $210.5 million to $285 million. Adjusted EBITDA also exhibited an upward trend, rising from $107.5 million to $147.9 million.

Looking forward, Lavoro anticipates generating revenues of between $1.99 billion to $2.13 billion for the full year. This projection is coupled with an expected EBITDA margin of between 8.4% and 8.6%, translating to an implied EBITDA of between $172 million and $178 million. If realized, this guidance represents a significant growth in EBITDA, between 60-65% compared to the previous year.

From a market perspective, as of the last trade, Lavoro’s shares were priced at around $5.77/share, giving it a market capitalization of $672 million. This valuation translates into a ratio of enterprise value to EBITDA (EV/EBITDA) close to 7.2x. Given the current market conditions and future outlook, this valuation appears reasonable, suggesting that Lavoro is valued reasonably within its market context.

Bottom Line 

Lavoro has showcased its ability to navigate the turbulent agricultural market, benefiting from long-term trends and demonstrating resilience amidst fluctuating conditions. Recent financial indicators reflect a mixed performance with a modest decline in the short term, but significant growth over nine months. Despite the headwinds, its solid growth in gross profits and EBITDA provide a positive outlook. With a strategic approach to acquisitions and geographic expansion, coupled with Brazil’s predicted surge in grain production, Lavoro appears well-positioned to capitalize on these opportunities and continue its growth. 

Originally Posted July 23, 2023 – Harvesting Gains