Welcome to Lavoro's Business Update Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be made available on the company's Investor Relations website at ir.lavoroagro.com.
I will now turn the conference over to Tigran Karapetian, Head of Investor Relations. Thank you. You may begin.
Thank you, Tigran, and good morning, everyone. I want to begin by acknowledging that this has been an extraordinarily challenging period for Lavoro and broader Brazilian ag inputs distribution industry. As many of you know, Brazil's agricultural inputs market has faced historical headwinds over the past 2 years. We have navigated severe input price deflation of 40% to 60% in crop protection and fertilizers, El Nino-induced drought conditions and widespread farmer liquidity constraints. These challenges intensified significantly in the late calendar 2024 when the judicial reorganization of a major agricultural retailer triggered a further tightening of inventory financing conditions across our industry.
In our last earnings call, we discussed how ag retail operations in Brazil faced severe inventory shortages during November and December as a direct consequence of this abrupt shift. The constrained product availability in fertilizers and crop protection during these critical months of the first soybean crop season forced the cancellation of a significant number of farmer purchase orders, adversely impacting our second and third quarter results for the business unit.
In January, we made progress with key suppliers that helped partially ease these bottlenecks. However, discussions in the months that followed made it clear that the typical approach of negotiating with each supplier individually lack the speed and scale required to prevent further disruption ahead of the next crop year. While these external factors were largely beyond our control, they reinforce our conviction that fundamental changes to Lavoro Brazil's inventory financing model were necessary.
To that end, with the reorganization plan announced yesterday, we believe we now have a framework to position Lavoro Brazil to emerge on this cycle as a leaner and more resilient business unit. Before diving deeper, I want to emphasize that the reorganization plan discussed today is specific to our subsidiary, Lavoro Agro Holding S.A., which I'll refer to as Lavoro Brazil throughout this call. Lavoro Brazil comprises the Brazil Ag Retail operating segment and also includes Perterra, a subsidiary consolidated under Crop Care.
The reorganization plan is commercially focused in nature pertaining solely to our supplier relationships and does not jeopardize our publicly listed entity or the broader corporate structure. Following weeks of extensive negotiation, Lavoro Brazil reached an agreement with a number of its key suppliers that provides for the extension of payment terms to secure future product supply for a multiyear period in order to help mitigate further supply chain disruption.
Accordingly, Lavoro Brazil formally submitted to the Brazilian courts yesterday an out-of-court negotiated reorganization plan in connection with the agreement. The legal mechanism known in Brazil as Recuperação Extrajudicial, translated as Extrajudicial Reorganization, allows for the reorganization plan to become binding on all eligible product suppliers upon court approval, thereby ensuring broad-based effectiveness.
As mentioned, with the 2025-'26 crop selling season underway, it was critical to identify a solution that would comprehensively resolve Brazil's inventory financing constraints. The reorganization plan we announced yesterday would provide a unified path forward and would help overcome the gridlock of negotiating with each supplier individually.
Key product suppliers mentioned in the press release that are party to the agreement with Lavoro Brazil are committed to supporting the company's reorganization plan. Discussions with all our key suppliers are ongoing at advanced stage. While the full ratification of the agreement is conditional upon court approval of the reorganization plan, its supply and financing terms are already in effect, and the normal flow of inventory from these partners has resumed in the fourth quarter.
To reiterate, the reorganization plan is limited in scope to Lavoro Brazil. All other subsidiaries within Latam Ag Retail segment and Crop Care segment, other than Perterra, are not included in the plan. Additionally, the plan applies exclusively to product suppliers of Lavoro Brazil and does not affect its financial lenders, financial creditors and third-party service providers, contractors or employees.
The reorganization plan, if approved by the court, is intended to accomplish 2 essential goals. First, it creates a standardized, multiyear contractual framework with our suppliers, booked into 4 classes with clear repayment terms and annual supply commitments based on credit exposure. This marks a shift from previous one-off credit arrangements with each suppliers through a standardized model with predefined collateral requirements associated with future supplier inventory financing.
To operationalize this new framework, we are in the process of establishing a new multiyear FIDC that will be backed by Lavoro Brazil receivables and supported by its existing financial lenders. FIDCs are receivables-based financial instruments widely using in Brazilian agribusiness to facilitate structured credit between counterparties. With that said, we see this new FIDC as introducing meaningful financing innovation in Brazil's ag retail sector, which we believe will benefit both Lavoro Brazil and its suppliers. By consolidating claims from multiple suppliers into a single centralized instrument backed by receivables, which have been assessed by independent third parties, this new structure enhances profitability and visibility for Lavoro Brazil, streamlines back office operations for all parties, and it strengthens collateral protection for suppliers.
Second, the reorganization plan provides for the extension of approximately BRL 2.5 billion in supplier trade payables that were originally due to the end of fiscal 2025. Repayments in regular semiannual installments will be spread over multiple years. The extended payment terms will give us the flexibility to adjust Lavoro Brazil's fixed cost structure and drive operational efficiencies in a thoughtful and deliberate manner.
Our retail network rightsizing plan, which we discussed in our last earnings call, is underway, along with actions to reduce overhead and improve commercial efficiency aligned within Lavoro Brazil. These steps are key to restoring profitability and positioning the business to grow from a leaner, more agile basis.
As I mentioned, the reorganization plan is subject to customary court approval procedures. While we cannot predict the exact time line, these processes in Brazil typically take between 3 and 5 months to complete. At which point, the plan would become definitely binding on all eligible supplier creditors of Lavoro Brazil, although no assurance can be provided as to the exact expected timing in our case.
In the interim, as I mentioned before, the agreement reached with our key suppliers is already in effect and the normal flow of inventory was reestablished during the fourth quarter. The full reorganization plan along with supporting materials is available on the company's Investor Relations website.
Now I'll provide a brief commentary on our preliminary financial results for the second quarter. As noted in the 6-K filed today, the complexities associated with the reorganization plan impacted the completion of Lavoro's financial closing procedures. As a result, my remarks today will focus exclusively on preliminary unaudited revenue and gross profit for the quarter. In addition, in line with these developments, the company has also determined that it's appropriate to withdraw its previously issued fiscal 2025 financial outlook at this time.
Consolidated preliminary revenue for the second quarter declined 27% year-over-year to BRL 2.25 billion. This decrease was primarily due to inventory shortages in Brazil Ag Retail, which led to purchase order cancellation and indirectly impacted Crop Care revenue as well. In U.S. dollar terms, revenue decreased 38% year-over-year to $384 million, with the year-over-year change reflecting the additional 15% depreciation of the Brazilian real relative to U.S. dollar.
Breaking down this by segment. Brazil Ag Retail segment's revenue declined 30% year-over-year to BRL 1.84 billion due to the factors discussed earlier. That said, we noted on our last earnings call, projections from ag consultancies continue to indicate a meaningful recovery in farmer profitability for the current crop year, driven by improved weather conditions and stronger commodity prices compared to prior year. Receivable selections from farmers for the first crop, which took place in April and May, was in line with expectations. The percentage of on-time farmer repayments improved notably versus last year, reflecting both better farmer liquidity and the effectiveness of our disciplined credit risk management processes.
Crop Care segment revenue was BRL 251 million in the second quarter 2025, a decrease of 30% year-over-year, primarily due to 2 drivers. First, Agrobiologica, our biologicals business, was adversely impacted by temporary industry-wide regulatory uncertainty surrounding on-farm biologicals. This led many farmers to adopt a wait-and-see approach. Although new legislation has since been enacted that resolves this uncertainty, the pause in demand occurred during the peak of the first soybean crop and the booking window for the safrinha season, resulting in a meaningful impact that will not be recovered this year but should not repeat next year.
Second, sales of specialty fertilizers and adjuvants from Union Agro and Cromo to Lavoro Brazil were negatively affected by the constellation of bundled purchase orders due to broader product shortages. In Brazil, farmers often place consolidated orders that include fertilizers, crop protection, seeds and specialty products. When a key input such as fertilizer is unavailable, the entire bundle maybe canceled, indirectly reducing sales of otherwise available specialty products.
Finally, Latam Ag Retail revenue grew 4% to BRL 287 million, reflecting stable market conditions and the appreciation of the Colombian peso. Consolidated preliminary gross profit decreased 28% to BRL 366 million, with consolidated gross margins contracting 40 basis points to 16.3%. Gross margin for the Brazil Ag Retail segment contracted by 240 basis points to 11.5%. This margin compression reflects our strategic decision to prioritize long-term client relationships by fulfilling orders with equivalent or, in many cases, superior products when originally ordered items were unavailable. This approach underscores our commitment to preserving customer trust and loyalty, which will be critical as market conditions normalize. Latam Ag Retail gross margin expanded by 480 basis points to 22.6%, driven by improved distribution margins in seeds and specialty products and the positive effect from product category mix shifts.
Crop Care gross margins contracted 1,160 basis points to 23.7%, with margin compression reflecting an unfavorable shift in product mix, led by weaker biological sales as well as pressure from fixed costs under absorption and higher raw material costs due to the weaker Brazilian real.
In closing, we're taking decisive and proactive actions to confront the challenges posed by Brazil's current inventory financing landscape. Our conviction in Lavoro Brazil's long-term thesis remains unchanged. By enabling our RTVs to serve as trusted advisers backed by our broad product portfolio of products and services, we continue to generate tangible differentiated value at the farm gate for our clients.
We believe the reorganization plan will provide Lavoro Brazil with a scalable and predictable supply framework, strengthen supplier alignment over the long term, and enhance our ability to drive operational efficiency across the business. Together, these elements will help form the foundation for Lavoro Brazil's evolution into a more resilient, focused and profitable platform.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.