Executive Summary / Key Takeaways

• Lavoro Limited is undergoing a significant strategic re-alignment, highlighted by an out-of-court restructuring plan (EJ Plan) for its Lavoro Brazil subsidiary, aimed at stabilizing supplier relationships and improving financial flexibility in a challenging agricultural inputs market.
• The company's integrated business model, particularly its Crop Care segment with proprietary biologicals and off-patent crop protection products, offers a crucial technological differentiator and a growing contribution to gross profit, providing a foundation for future growth.
• Recent financial performance reflects severe market headwinds, including input price deflation and farmer liquidity constraints, leading to a preliminary 27% year-over-year consolidated revenue decline in Q2 2025 and the withdrawal of fiscal year 2025 financial guidance.
• Lavoro's strategic initiatives, such as the EJ Plan, retail network optimization, and conservative credit policies, are designed to enhance operational efficiency and restore profitability, positioning the company for a leaner and more resilient future.
• While facing intense competition from global giants, Lavoro's regional agility, hybrid distribution model, and focus on proprietary products provide a competitive edge, though its smaller scale and higher leverage present ongoing challenges.

A Foundation of Integration and Innovation in Latin American Agriculture

Lavoro Limited, founded in 2017 in São Paulo, Brazil, has rapidly established itself as a pivotal agricultural inputs retailer across Latin America, spanning Brazil, Colombia, Ecuador, Peru, Chile, Paraguay, and Uruguay. The company's core business involves distributing a comprehensive range of agricultural inputs, including crop protection, seeds, fertilizers, and biologicals, alongside producing specialty fertilizers and proprietary crop protection products. Lavoro's growth trajectory has historically been fueled by strategic acquisitions, which have expanded its footprint and diversified its offerings, particularly within its vertically integrated Crop Care segment.

The Crop Care segment stands as a significant technological differentiator and a growing contributor to Lavoro's gross profit, representing 22% of year-to-date gross profit in Q3 2024, up from less than 16% in the prior year. This segment includes Agrobiologica, a biologicals business that has seen robust demand for its bioinsecticide products, aligning with the growing global trend towards sustainable agriculture. Perterra, another key subsidiary within Crop Care, has been notably prolific in product registrations in Brazil, developing a strong pipeline of herbicides, insecticides, and fungicides. This capability provides Lavoro with a competitive edge by enabling it to bring new, often off-patent, crop protection solutions to market efficiently, potentially offering cost advantages to farmers and enhancing Lavoro's margins. Union Agro further strengthens this segment with its specialty fertilizers. The strategic integration of these production capabilities with Lavoro's extensive retail channel aims to streamline the supply chain, enhance customer reach, and offer more tailored, end-to-end solutions to farmers.

Beyond product innovation, Lavoro is also introducing financial innovation to address market-specific challenges. The company is establishing a new multi-year FIDC (receivables-based financial instrument) backed by Lavoro Brazil's receivables and supported by existing financial lenders. This FIDC is designed to consolidate claims from multiple suppliers into a single, centralized instrument, enhancing profitability and visibility for Lavoro Brazil, streamlining back-office operations for all parties, and strengthening collateral protection for suppliers. This financial mechanism is a critical operational differentiator in Brazil's credit-constrained agricultural retail sector, aiming to improve financial flexibility and mitigate future supply chain disruptions.

Navigating a Turbulent Market: Performance and Strategic Responses

The Brazilian agricultural inputs market has endured an extraordinarily challenging period over the past two years, marked by severe input price deflation of 40% to 60% in crop protection and fertilizers, El Niño-induced drought conditions, and widespread farmer liquidity constraints. These headwinds intensified significantly in late calendar 2024, exacerbated by the judicial reorganization of a major agricultural retailer, which triggered a tightening of inventory financing conditions across the industry. This environment led to constrained product availability and the cancellation of a significant number of farmer purchase orders, adversely impacting Lavoro's financial results.

Lavoro's preliminary unaudited results for the second quarter of fiscal year 2025 (ended December 31, 2024) reflect these severe market conditions. Consolidated preliminary revenue declined 27% year-over-year to BRL 2.25 billion, or 38% in U.S. dollar terms to $384 million, partly due to a 15% depreciation of the Brazilian real. Consolidated preliminary gross profit decreased 28% to BRL 366 million, with gross margins contracting 40 basis points to 16.3%. The Brazil Ag Retail segment, the most affected, saw revenue decline 30% year-over-year to BRL 1.84 billion, with gross margins contracting 240 basis points to 11.5%. This margin compression was a strategic decision to prioritize long-term client relationships by fulfilling orders with equivalent or superior products when original items were unavailable. The Crop Care segment also experienced a 30% year-over-year revenue decrease to BRL 251 million, with gross margins contracting 1,160 basis points to 23.7%, primarily due to temporary industry-wide regulatory uncertainty affecting biological sales and an unfavorable product mix. In contrast, the Latam Ag Retail segment demonstrated relative resilience, with revenue growing 4% to BRL 287 million and gross margin expanding 480 basis points to 22.6%, driven by improved distribution margins and positive product mix shifts.

For the full fiscal year 2024, Lavoro reported consolidated revenue growth of 6% to $1.89 billion, largely driven by a 61% increase in Grain revenue from barter operations. However, gross profit for FY2024 was down 19% to $268.4 million, and gross margin compressed by 430 basis points to 14.2%, primarily due to input price deflation and a less favorable product mix. Adjusted EBITDA for FY2024 declined 64% year-over-year to $53.4 million, impacted by gross margin compression and increased provisions for expected credit losses and expiring inventories. Despite these challenges, Q4 2024 saw a positive shift, with gross margins as a percentage of Input sales improving by 70 basis points year-over-year to 22.3%, indicating a gradual resolution of higher-cost inventory cycles.

The Restructuring Imperative and Path Forward

In response to the persistent market challenges and the critical need for a stable supply chain, Lavoro Brazil, a subsidiary comprising the Brazil Ag Retail segment and Perterra, announced an out-of-court restructuring agreement (EJ Plan) with its principal product suppliers on June 18, 2025. By September 9, 2025, Lavoro Brazil had obtained statutory majority support from supplier creditors, including major players like Adama Brasil, UPL (UPLYF) Brasil, FMC Agrícola (FMC), BASF (BASFY), Ourofino, and EuroChem, for this plan. The EJ Plan covers approximately R$2.5 billion of trade payables to suppliers, rescheduling these obligations over a two-to-five-year period upon court approval. This commercially focused plan aims to establish a standardized, multi-year contractual framework with suppliers, support product availability, enhance financial flexibility, and mitigate future supply chain disruptions. The extended payment terms will also provide Lavoro Brazil with the flexibility to adjust its fixed cost structure and drive operational efficiencies.

Complementing this restructuring, Lavoro is actively implementing a retail network rightsizing plan. This involves consolidating stores in close proximity to more profitable locations, which is expected to reduce Brazil Ag Retail input revenue potential by approximately 10% but will lower fixed costs by eliminating duplicative administrative and freight expenses and enhancing working capital efficiency. These benefits are anticipated to materialize in the second half of the fiscal year.

Competitive Landscape: A Regional Player's Stance

Lavoro operates within a highly competitive agricultural inputs market, contending with global giants such as Nutrien Ltd. (NTR), Corteva Agriscience (CTVA), Yara International (YARIY), and Mosaic Company (MOS), alongside numerous regional players. Lavoro's competitive positioning is characterized by its regional agility, integrated business model, and hybrid physical-digital distribution channels, which foster strong customer engagement and loyalty in Latin America. Its proprietary Crop Care products, particularly Perterra's robust pipeline of registered agrochemicals and Agrobiologica's biological solutions, provide a distinct advantage by offering tailored, high-margin products that cater to local farmer needs.

However, Lavoro's smaller scale compared to global competitors like Nutrien and Yara presents certain vulnerabilities. While Lavoro's gross profit margin of 14.21% (TTM) is lower than Yara's 27%, reflecting the latter's production scale and cost efficiencies, Lavoro's focus on specialty products and direct farmer relationships aims to offset this. The company's operating profit margin of -1.63% and net profit margin of -15.46% (TTM) underscore the impact of recent market headwinds and higher finance costs, contrasting with the positive margins of larger, more diversified players. Lavoro's debt-to-equity ratio of 2.15 (TTM) is also higher than Yara's 0.58, indicating a more leveraged capital structure. The current ratio of 0.95 (TTM) suggests liquidity pressures, particularly when compared to Yara's 1.83.

The EJ Plan and the new FIDC are strategic responses designed to address these competitive pressures, particularly in the realm of inventory financing and supplier relationships. By standardizing supply agreements and extending payment terms, Lavoro aims to secure product availability and enhance its financial flexibility, thereby strengthening its competitive stance against rivals who may have more robust balance sheets or established credit lines. While direct quantitative comparisons for all aspects of technological depth are challenging, Lavoro's consistent product registrations through Perterra demonstrate an effective, localized innovation strategy that complements its retail presence.

Outlook and Risks

Lavoro has withdrawn its previously issued fiscal year 2025 financial outlook due to the complexities surrounding the reorganization plan and the widespread supply constraints experienced in Q2 2025. However, prior guidance indicated consolidated net revenue between BRL 6.5 billion and BRL 7.5 billion (or $1.12 billion and $1.28 billion in USD, assuming an average BRL 5.9 exchange rate), with no adjusted EBITDA growth expected for fiscal year 2025 compared to fiscal year 2024. Management anticipates a "second semester with a good result" if supply normalizes, suggesting a potential recovery in the latter half of the fiscal year. Projections from agricultural consultancies indicate a meaningful recovery in farmer profitability for the current crop year, driven by improved weather conditions and stronger commodity prices, which should positively impact demand for agricultural inputs.

Despite these positive market trends, Lavoro faces several pertinent risks. The court approval process for the EJ Plan typically takes between three and five months, and there is no assurance regarding the exact timing. Delays in this approval could prolong uncertainty and impact supplier confidence. Furthermore, Lavoro received a notice of non-compliance from Nasdaq on July 10, 2025, due to the delayed filing of its interim financial information for the six-month period ended December 31, 2024. While the company is working to regain compliance, this highlights operational complexities and potential risks to its public listing. General market volatility, including fluctuations in commodity prices, currency exchange rates, and weather patterns, also remains a significant factor influencing Lavoro's performance.

Conclusion

Lavoro Limited stands at a critical juncture, strategically re-aligning its operations to overcome significant market headwinds and liquidity challenges in the Latin American agricultural inputs sector. The out-of-court restructuring plan for Lavoro Brazil, coupled with ongoing retail network optimization and the innovative FIDC financing structure, represents a decisive pivot towards a leaner, more resilient, and ultimately more profitable business model. While recent financial performance has been impacted by severe input price deflation and farmer liquidity issues, the company's integrated approach, particularly its technologically differentiated Crop Care segment, provides a strong foundation for future growth.

The successful execution of the EJ Plan and the normalization of supply chains are paramount to Lavoro's near-term recovery and its ability to capitalize on improving farmer profitability. Despite competitive pressures from larger global players, Lavoro's regional agility, hybrid distribution model, and proprietary product portfolio offer a distinct competitive advantage. Investors should closely monitor the progress of the restructuring, the resolution of liquidity constraints, and the company's ability to translate its strategic initiatives into sustained margin improvement and EBITDA growth. Lavoro's long-term thesis remains rooted in the fundamental strength of agribusiness in South America, positioning the company for a potential rebound as market conditions stabilize and its strategic re-alignment takes full effect.