Lavoro Limited (LVRO)

Executive Summary / Key Takeaways

• Lavoro is undergoing an existential crisis triggered by the judicial reorganization of a major competitor, which collapsed inventory financing across Brazil's agricultural inputs industry, forcing the company into a BRL 2.5 billion debt restructuring that will define its survival.
• The business is splitting into two distinct narratives: Brazil Ag Retail (80%+ of revenue) is in freefall with Q2 FY2025 revenue down 30% due to inventory shortages, while Latam Ag Retail is stable with expanding margins and Crop Care offers long-term biologics growth but faces near-term regulatory and demand headwinds.
• Management has withdrawn all FY2025 guidance and is executing a retail network rightsizing plan that will permanently reduce Brazil revenue potential by ~10%, a necessary trade-off to restore profitability but one that signals the depth of structural damage.
• At $0.70 per share and an enterprise value of $346 million, the market has priced Lavoro as a distressed equity, yet successful restructuring could create a leaner, more resilient market leader in a consolidating industry, offering highly asymmetric risk/reward.
• The critical variables to monitor are court approval of the extrajudicial reorganization plan and the pace of farmer liquidity recovery; failure on either front could trigger further equity dilution or worse, while success could drive a significant re-rating as normalized earnings power returns.

Setting the Scene: The Perfect Storm in Brazilian Ag Retail

Lavoro Limited, founded in 2017 in São Paulo, Brazil, established itself as the first U.S. listed pure-play agricultural inputs retailer in Latin America through an aggressive acquisition-led growth strategy. The company built a dominant position in Brazil's fragmented agricultural inputs market, operating a network of retail stores that distribute seeds, fertilizers, crop protection chemicals, and specialty products to small and medium-sized farmers while providing critical agronomic advisory services. This physical footprint, combined with a growing digital platform and a proprietary Crop Care segment producing biologics and specialty fertilizers, created a vertically integrated model designed to capture value across the agricultural input value chain.

The industry structure Lavoro dominates is inherently cyclical and working-capital intensive. Brazilian agriculture represents one of the world's most productive farming regions, yet input retailers operate as financial intermediaries as much as product distributors. Farmers purchase inputs on credit, repaying after harvest, which means retailer profitability is directly tied to farmer liquidity, commodity prices, and access to inventory financing. This model worked exceptionally well during the agricultural super-cycle but created lethal fragility when conditions reversed. The company's FY2024 results, with revenue growing 6% to $1.89 billion despite severe headwinds, masked underlying deterioration as gross profit collapsed 19% and margins compressed 430 basis points to 14.2%.

The crisis intensified dramatically in late 2024 when a major agricultural retailer entered judicial reorganization, triggering a systemic tightening of inventory financing conditions across the entire industry. This wasn't a Lavoro-specific problem but a market structure failure that left the company unable to source fertilizers and crop protection products during the critical November-December planting window for Brazil's first soybean crop. The result was catastrophic: significant farmer purchase order cancellations, Q2 FY2025 consolidated revenue declining 27% year-over-year to BRL 2.25 billion, and a strategic decision to prioritize long-term customer relationships over margin preservation by fulfilling orders with substitute products when original items were unavailable.

Technology, Products, and Strategic Differentiation

Lavoro's competitive moat extends beyond distribution scale into proprietary product development through its Crop Care segment, which manufactures and imports private-label products including off-patent crop protection, biologicals, and specialty fertilizers. This segment, encompassing Union Agro (specialty fertilizers), Cromo Quimica (adjuvants), and Perterra (biologicals), represented 22% of year-to-date gross profit in Q3 2024, up from less than 16% in the prior year. The strategic importance of this vertical integration lies in margin capture and differentiation: while distribution margins compress during price deflation, proprietary products maintain higher gross margins and create customer lock-in through unique formulations.

Perterra has been one of the most prolific companies in Brazil for product registrations for two consecutive years, building a pipeline of biological solutions that positions Lavoro at the forefront of agriculture's sustainability transition. Biologicals represent the industry's highest-growth category as farmers seek to reduce chemical dependency and meet environmental regulations. However, this advantage is currently impaired by temporary industry-wide regulatory uncertainty surrounding on-farm biological applications, which caused many farmers to adopt a wait-and-see approach during peak sales seasons. The impact was severe in Q2 FY2025, with Crop Care revenue down 30% and gross margins collapsing 1,160 basis points to 23.7% due to unfavorable product mix, fixed cost under-absorption, and weaker biological sales.

The company's hybrid distribution model combines physical stores with digital channels, supported by a network of agronomists (RTVs) who provide on-farm advisory services. This human capital component is a critical differentiator in a market where trust and technical expertise drive purchasing decisions. Management highlighted that proactive recruitment of seasoned RTVs in Q3 2024 brought in over $150 million in future net sales potential, with new hires expected to contribute in the next fiscal year. However, the retail network rightsizing plan now underway will consolidate nearby stores and reassign RTVs to more profitable locations, permanently reducing Brazil Ag Retail input revenue potential by approximately 10% but cutting fixed costs and improving working capital efficiency.

Financial Performance & Segment Dynamics: A Tale of Two Businesses

Lavoro's consolidated financials reveal a company in transition from growth to survival mode. FY2024 revenue of $1.89 billion grew 6% despite a 25% contraction in the broader Brazilian retail inputs market, demonstrating market share gains driven by volume increases across all product categories. However, this top-line resilience masked severe profitability deterioration as input price deflation of 40-60% in crop protection and fertilizers compressed gross margins by 430 basis points to 14.2%. Adjusted EBITDA collapsed 64% to $53.4 million, reflecting not just margin compression but a $10 million increase in expected credit losses and $5.5 million in inventory provisions.

The segment divergence became stark in Q1 FY2025. Consolidated revenue declined 13% to BRL 2.05 billion, yet gross profit increased 10% and margins expanded 320 basis points to 15.6%, driven by stronger distribution margins in Brazil Ag Retail and favorable product mix shifts. This apparent improvement was illusory, reflecting the lagged impact of prior-year price declines rather than fundamental strength. The net loss ballooned to BRL 267.1 million from BRL 71 million in Q1 2024, primarily due to a BRL 152.1 million increase in deferred tax assets and BRL 60.7 million in higher finance costs, signaling balance sheet stress.

Q2 FY2025 preliminary results exposed the true depth of the crisis. Consolidated revenue fell 27% to BRL 2.25 billion, with Brazil Ag Retail plunging 30% to BRL 1.84 billion due to inventory shortages and purchase order cancellations. The segment's gross margin contracted 240 basis points to 11.5% as management prioritized customer retention over profitability, fulfilling orders with equivalent or superior products when original items were unavailable. This strategic choice preserved long-term relationships but destroyed near-term margins, illustrating the impossible trade-offs facing the business.

In stark contrast, Latam Ag Retail delivered its second consecutive quarter of revenue and gross profit growth, with Q2 revenue up 4% to BRL 287 million and gross margin expanding 480 basis points to 22.6%. This segment benefits from stable market conditions in Colombia and currency tailwinds from peso appreciation, providing a modest stabilizing force within the portfolio. However, at only 13% of consolidated revenue, it cannot offset Brazil's collapse.

Crop Care's performance underscores the fragility of Lavoro's differentiation. Q2 revenue declined 30% to BRL 251 million, with margins compressing 1,160 basis points to 23.7%. The segment faced a double whammy: Agrobiologica was directly impacted by regulatory uncertainty, while Union Agro and Cromo suffered from bundled purchase order cancellations tied to broader Brazil Ag Retail shortages. Management expects the regulatory impact will not repeat next year, but the fixed cost structure and raw material cost inflation from BRL weakness created severe operating leverage that amplified the downturn.

Outlook, Management Guidance, and Execution Risk

Lavoro's guidance evolution tells the story of a management team losing visibility and control. In November 2024, the company projected FY2025 consolidated revenues of BRL 8.6-9.2 billion and expected adjusted EBITDA to grow relative to FY2024. By February 2025, after the inventory financing crisis erupted, guidance was slashed to BRL 6.5-7.5 billion and management no longer expected EBITDA growth. In June 2025, the company withdrew all guidance entirely, citing complexities associated with the reorganization plan and incomplete audit procedures for the second quarter.

CEO Ruy Cunha's commentary reveals both realism and strategic conviction. He acknowledges that "this has been an extraordinarily challenging period for Lavoro and broader Brazilian ag inputs distribution industry," while emphasizing that "our conviction in Lavoro Brazil's long-term thesis remains unchanged." The key assumptions underpinning this conviction are that farmer profitability will recover meaningfully in the current crop year, driven by improved weather conditions and stronger commodity prices, and that the percentage of on-time farmer repayments has already improved notably versus last year.

The execution roadmap centers on three pillars: the out-of-court restructuring, retail network rightsizing, and operational efficiency initiatives. The restructuring plan, submitted to Brazilian courts on November 25, 2025, aims to extend approximately BRL 2.5 billion in supplier trade payables originally due by end of FY2025 into multi-year semiannual installments. While court approval is pending, the supply and financing terms with key suppliers are already in effect, and normal inventory flow was re-established in Q4 2025. A new FIDC (receivables-based financial instrument) backed by Lavoro Brazil receivables is being established to consolidate supplier claims and enhance financing innovation.

The retail network rightsizing plan will permanently reduce Brazil's revenue potential by ~10% but is essential for restoring profitability. Management is consolidating nearby stores, reassigning RTVs to higher-return locations, and reducing overhead to create a leaner cost structure. These actions are expected to drive operational efficiencies and improve working capital management, but they also signal that the pre-crisis footprint was unsustainable.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is restructuring execution failure. While key suppliers have agreed to the out-of-court plan, court approval is not guaranteed, and any challenge from dissenting creditors could derail the process. The plan is specific to Lavoro Agro Holding S.A. (Lavoro Brazil) and does not affect financial lenders, but the BRL 2.5 billion in extended payables represents a significant restructuring of the company's capital structure. If the reorganization fails, Lavoro could face judicial reorganization itself, following the path of its distressed competitor.

Farmer liquidity recovery remains highly uncertain. While ag consultancies project improved farmer profitability and management notes better on-time repayment rates, the structural damage to industry financing may be permanent. The judicial reorganization of a major competitor triggered a systemic credit crunch that forced Lavoro to adopt a conservative credit approach, postponing shipments to clients with overdue receivables. If inventory financing conditions remain tight beyond FY2025, Lavoro's ability to source products and meet farmer demand will remain impaired, capping revenue recovery.

The Crop Care segment faces idiosyncratic risks that could undermine its strategic value. Temporary regulatory uncertainty surrounding on-farm biologicals has already caused a meaningful impact that will not be recovered this year. While management expects this will not repeat next year, the segment's 1,160 basis point margin compression in Q2 reveals its vulnerability to policy shifts and demand pauses. If biologicals adoption slows or regulatory headwinds persist, Lavoro's primary growth engine and differentiation strategy will falter.

Competitive dynamics present both risk and opportunity. AgroGalaxy 's judicial reorganization removes a major competitor but also damaged industry financing structures that may take years to repair. Três Tentos Agroindustrial is growing robustly, with Q3 2025 revenue up 43% year-over-year, demonstrating that nimbler competitors can gain share during industry turmoil. Nutrien 's review of its Brazil retail operations signals potential divestiture, which could reduce competition but also indicates the segment's structural challenges.

Currency and commodity volatility remain ever-present threats. The Brazilian real's 15% depreciation relative to the U.S. dollar in Q2 FY2025 directly impacted raw material costs and margin compression. While improved weather and higher corn prices (above BRL 70 per bag for the first time since early 2023) support farmer economics, any reversal in commodity prices or return of drought conditions would quickly erode the fragile recovery.

Valuation Context: Pricing in Distress

Trading at $0.70 per share, Lavoro carries a market capitalization of $82.5 million and an enterprise value of $346.41 million, reflecting a net debt position after accounting for the BRL 2.5 billion in extended supplier payables. The stock trades at an EV/EBITDA multiple of 17.68 based on depressed trailing twelve-month EBITDA of approximately $19.6 million, a figure that masks the true earnings power of a normalized business.

Using the withdrawn FY2025 guidance midpoint of BRL 7.0 billion in consolidated revenue and applying the current USD/BRL exchange rate of 0.185, Lavoro would generate approximately $1.3 billion in annual revenue. This implies an EV/Revenue multiple of just 0.27x, a valuation typically associated with distressed businesses in terminal decline rather than market leaders undergoing temporary restructuring. For context, profitable agricultural input retailers historically traded at 0.5x to 0.8x revenue multiples during normalized market conditions.

The balance sheet presents a mixed picture. The company's net debt-to-adjusted EBITDA ratio for Brazil distribution was 1.7x at FY2024 end, below the 2.5x covenant limit, but consolidated net debt-to-adjusted EBITDA including acquisition payables reached 4.2x. The restructuring plan's extension of BRL 2.5 billion in payables from current to multi-year terms will significantly improve near-term liquidity, though it also represents a permanent increase in the company's effective debt load. With negative ROE of -62.35% and operating margins compressed to near-breakeven levels, the equity appears fully subordinated to the successful completion of the restructuring.

Peer comparisons underscore the valuation disconnect. AgroGalaxy (AGXY3.SA), currently in judicial reorganization, trades at an EV/Revenue multiple of 0.51x despite its distressed status. Três Tentos (TTEN3.SA), growing robustly, commands an EV/Revenue multiple of 3.01x and EV/EBITDA of 53.89x, reflecting market confidence in its execution. Nutrien (NTR), the global fertilizer leader with Brazil retail exposure, trades at 1.63x revenue and 8.30x EBITDA, representing the upper bound for the sector. Lavoro's valuation implies a probability of restructuring failure that may be overly punitive given management's progress in securing supplier agreements and re-establishing inventory flow.

Conclusion: A Binary Bet on Restructuring Execution

Lavoro stands at a critical inflection point where its near-term survival depends entirely on the successful execution of its extrajudicial reorganization plan while its long-term value proposition rests on the resilience of its Crop Care differentiation and Latam stability. The company is sacrificing approximately 10% of its Brazil revenue potential through retail network rightsizing and accepting significant margin compression to preserve customer relationships, necessary actions to emerge as a leaner competitor but painful adjustments that underscore the depth of the industry's structural damage.

The investment thesis is binary: failure to obtain court approval or to normalize supplier relationships would likely lead to further equity value destruction, while successful restructuring in the context of recovering farmer profitability could drive a substantial re-rating. At $0.70 per share, the market has priced in a high probability of permanent impairment, yet the company's market leadership position, proprietary biologics capabilities, and improving farmer liquidity fundamentals suggest this may be overly pessimistic. For investors willing to accept the execution risk and illiquidity of a distressed micro-cap equity, Lavoro offers highly asymmetric upside if management can deliver on its promise to create a more resilient business model in a consolidating industry. The next six months will be decisive.