AS Virsi-A (VIRSI) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning. We are delighted to welcome you to Virsi investor webinar. Today, we are hosted by Virsi Chairman of the Management Board and the CEO, Janis Viba; as well as a member of the Management Board and CFO, Vita Cirjevska. During the webinar, you will be introduced with Virsi's most recent key activities and financial results as well as an insight into company's future plans. After the presentation, we will have a Q&A session. [Operator Instructions]. Now without further ado, I would like to hand over to Janis Viba, who will proceed with the presentation.

Thank you. Good morning, dear participants of webinar today together with Vita, we'll explain what has happened all the positive things in '22 with regards to our company. And also, we will obviously answer some questions [ and we'll check ] what is likely to happen in the future. So let me begin by maybe reminding what are our key business areas where we are operating. So obviously, we have 3 business segments. One is convenience stores. Second is pure trade and third one is the segment which is newest -- it's only, let's say, less than 2 years old, it's energy segment where we are selling electricity. That's a bit of background, but maybe let me start with, let's say, a more global overview about what has happened in Energy segment in 2022. And basically, if we define this energy segment in 3 parts, and then we have fuel, we have natural gas and we have electricity. And basically, with regards to fuel, obviously a lot has changed after February 24. Obviously, when the Russia invaded Ukraine, there had been a huge amount of fluctuations in pricing levels of energy commodities. And if you speak about fuels, and we see that once this invasion happened, Russian oil became, let me use a word toxic. And basically, what it meant is that this market lost at least in Europe, quite a significant amount of oil supply. Obviously, when you have problems in supply, but demand is still quite high and you have this pressure on pricing level and this fuel prices increased relatively significantly. But what we see in the last couple of months is that this situation has normalized. And basically, there is even a decreasing trend in fuel pricing. With regard to future, we don't know, obviously, what will happen, but in case there is economy, let's say, booming obviously, that increases this demand for oil. But in case the economy is not booming or even slowing down, then the demand is decreasing, and that could obviously put this pricing levels downward. And one more thing with regard to fuel is worth mentioning that after the February tragic events, obviously, this all supply chains, our oil products are becoming much more complex and much more longer, which means that also that has an impact on this pricing effect. Okay. That's about fuel. With regard to natural gas, obviously, here, the fluctuations have been much, much higher than in fuel, we have experienced pricing level for natural gas around EUR 20 per megawatt hour in let's say, history years, but what we saw this year is that the increase was almost like 10x or even 15x at some point. And obviously, the main reason for this was, again, this situation with Russian invasion, where this natural gas product has been used also as a political instrument and therefore, there was time when this price was huge, this price increase. But what happened in the second half of the year, we see that we have experienced quite warm winter. We also see that there has been a slower economic growth in Asian region, which is reducing the demand for natural gas, and we are currently therefore seeing that natural gas pricing level is actually decreasing, and it's already today below EUR 50 per megawatt hour level, which obviously is a very good thing for energy market as such. And also worth mentioning that obviously in this -- and I think in Finland, there is a new terminal starting to operate with regards to LNG. And this is, of course, reducing this risk of supply for the Baltic region in the future. And then the third and final one is electricity. So electricity is actually very much correlated with what we see in the natural gas market because electricity is a very significant part of produce for natural gas. So what we see is that, again, when the natural gas prices were higher than electricity also was extremely expensive. But now in let's say, the last couple of months, we see that electricity pricing is around close to EUR 100 per megawatt, which is obviously much cheaper than it was in maybe summer. But still, it is around 2x more expensive than historical average. And yes, that, of course, also worth mentioning that with regards to renewable energy, there is still big potential, especially in Latvia, but this progress is quite slow. So we need to look how it goes in the future. So that's a broad overview about this energy market. And now Vita, our CFO, will tell you more about financial results.

So getting on the Virsi's results, we see the typical to data that we are already used to in presentations and also the abundancy that we are used to over the past years. We see that the net profit for the reporting period has grown by 56% in 2022. And we see that EBITDA has reached actually the high growth over the past period and plus 27% and reaching EUR 12.3 million. We also this time present you in separate color, light green color, the effect from the financial instruments, the derivative instrument for the electricity. Purchase from 2021, where the effect on the net profit has been EUR 3.1 million in income -- in financial income. And in 2021, it was EUR 1.1 million. If we exclude these effects that are highly correlated with the electricity price deviations, then we see that the actual growth also for this has been significant, it's 31% in 2022. These results are special also for the market. We are asking right now last year because GDP in Latvia is strong in last year by only 2%. We are under really high inflation effect. It's 17.3% from last year. And also, there is a really high pressure on the labor market over the past year. So managing all the effects and the costs, we see that actually these growth rates are comparable to like the start-up. But actually, the company is already in 28 years. If you look at the other financial measures at the return on equity, of course, including also the financial instruments, the fact these ROE are growing very steadily. But also looking at the effect when the ROE is adjusted. Of the financial instruments, we see that our rates are very stable and at higher levels. So it's about 12% over the past year. Our balance sheet at the end of the year is well balanced, and we have a high growth strategy for the next period and the CapEx for next year at a really aggressive and aggressive strategy. And we know that over the 2022, we have periods when we needed to adjust our cash flows due to changes in legislation and via component. But in the end of the year, we finished at very healthy and very, let's say, forward-looking position when net debt to EBITDA is 0.9%. And further, Janis with a more precise description on segment and how we reached.

Yes, and also about key events and to [ comment a little ]. So what basically we think are the key events in '22 is obviously the first one is this adoption to the reality of geopolitics. Because we remember that we started the year with COVID and we are having this tragic war in Ukraine, and then we are having also some economic issues in several countries. So it's very, let's say, tough environment to operate. But we have managed to implement our strategy successfully further. And we see that, obviously, we also have exited all, let's say, relationships with Russian and our Russian contract parties, which we did already in early of the year because it's, of course, our obligation to do so. So what we also -- what we saw in Vita's presentation is that we have a very strong results. And not only our profit is increasing, but also our market share. So it's very important to note that we are able to grow market shares by also growing this profit, which is obviously a very good situation to be in. And what we also have done in '22, we are operating quite ambitiously to continue to increase our number of fuel stations. And we have opened 5 new stations. One is outside of capital city of Riga, but 4 of them are in Riga or near Riga because in Riga, we have still, let's say, less presence than we would like to have. And what we are also having is that we are working currently on the electricity charging project, which means that we have attracted European Union funds, not union, very specific world, which I always forget that. This way we have attracted the funds in Europe, based on which 50% of this project is subsidized from Europe, and therefore, we can move on. And let's say, in roughly 1 year's time we think that around 20 stations in our network will become the points where you can charge electricity in a very powerful devices. And what also it's important to note that the electricity business is continuing to develop, and we are very happy about results, which is exceeding our expectations and also business clients. And currently, just to remind, we are doing electricity sales to business segment that we are working also on this electricity product for private persons. And then, of course, sustainability is a word, which is important for any company, I guess. So what we are doing is currently, we have almost completed the project where half of our stations will have these solar panels. We are also, of course, throughout the year, have done very specific actions to lower our energy consumption in our network, which means that we have basically made efficiency much, say, better than it used to be maybe a couple of years ago. And then there is a biomethane project, which is obviously this green natural gas, which we are working on, and hopefully, in let's say [Technical difficulty] hopefully in '24, we already started using biomethane, which in our mind is a very, very good option for this heavy truck as a fuel. So this is about [ '24 ]. And then if we speak shortly about each segment, I will begin with fuel. So what is happening in fuel is that basically, as mentioned, a lot of geopolitical impact on this because of which the supply chains are getting much more expensive and longer and therefore, the pricing for fuel products is increasing. But what is also worth mentioning is that we are -- as you can see in the graph, we are growing our volumes in sold amount of fuel that is not turnover. It's sold amount in liters. We are growing by around 7% in '22, while the market was actually decreasing by roughly 1%, which means that we are -- we have been able to grow our market share quite significantly despite that there is obviously the increased competition in the sector, and we are experiencing many, I would say, price wars, how we call it this other market players, but [ compete ]. And then on a fuel, alternative fuel partner, we are seeing that our CNG or compressed natural gas segment is continuing to increase even despite the fact that there was obviously a period of very expensive natural gas prices, but we see that still the volumes are increasing, and that's a very good thing, which we see. And with regard to market share of electricity costs, yes, it may sound that it's like a market is booming, but still the fact are such that we are having around 4,000 [ cars ] in the market on electricity, but the whole market is around 760,000. So it means that currently, electricity is only around 0.5%. So it's not like a very huge business currently, but of course, knowing that in the future, it will develop, we are, as mentioned already doing some homework to expand our station in the electricity charging points in our stations. Okay. Then we are going to Vita.

About Q4 results, it might sound that on the utility side and the energy prices, it has been a challenging year, but in stores, it has been challenging year as well. Actually, it has a big target first on the beginning of 2022. As in the last quarter of 2021, we opened 4 new stores. We had our expectations that the pandemic should be over, not over, but the restrictions will be over. Thus, we will have better conditions for our clients and the, let's say, the demand will increase. But in -- it also in Jan and February. We know all the negative effects and let's say, internal consolidations of the clients and the stress they had at that time. And also, it had an effect on the inflation and the increased purchase prices for the store products. As the same way, inflation was that high that it actually impacted our employees as well as our clients and the real wage sense and the optimism of the employee and the optimism on the clients on the other side was decreased. So -- and there were 2 main struggles for 2022. First one was managing the quality product we set as a target for our customers and the quality offer we want to offer to our clients with a highly increase in prices and also with the different kind of challenges in the logistics for the product. That was one core program in the stores, but also within our employees, we had a real struggle on the labor market side. As in the end of 2021, we had a new market chain to enter the market. And of course, the competition for these employees was increased. We have over 500 employees on our fuel station stores. And of course, we had to focus a lot on what -- how our employees feel themselves, what are their salaries, how we can motivate them. And now in the end of 2022, we have found the balanced way for the product, the best offer, not challenging the quality of our very popular coffee and food. And also, we have a quite motivated team, and we believe we will succeed in the next period. In general, not to show that it has been a bad result here also for the stores, it has been a very good year and a year-to-year increase in Virsi stand-alone as such was by 18% at the gross profit level compared to 2021. And also looking at the network on Nielsen data, the growth was 16.1%, whilst the other markets, including Virsi grew only by 12.6%. So thanks to our store team. And let's move on to next segment.

Okay. So we did referred our Energy segment, which as mentioned is quite, let's say, mute, less than 2 years of operations, but what we can see is that, we have already successfully expanded our relationships with our B2B or business customers. And that's like the first step because then the second step, what we are planning to do is our development of this product for private customers, which we hope to launch in the second half of this year. And what we also do is that we are having good relationships with our local Latvian electricity producers, which are producing this green electricity from several green sources like biomass, biogas and warm water and sand and so on. And we see that this is actually helping us to boost this volume and to make some operations also in this wholesale market further. And also, of course, it's important to note that this volume, as you can see in the graph, is constantly increasing of purchase and sold electricity and that means that we are having good -- into good direction, we are increasing our, say, market share in some specific segments. And also being able to deliver a cheaper electricity to our group companies, which obviously you can see this financial instrument, impact in our financial statement. So yes, that's about energy.

Thanks. We already back to the net profit and EBITDA growth and EBITDA terms, it has been a very good year, a 27% growth. And we already touched on the -- our profit drivers. Looking at the turnover, of course, our key turnover driver and this year has been fuel. It's still over 80% of the turnover. And we know that in a profit sense, we have set this target in the IPO that no matter the fuel growth, the rest of the segment could grow even faster and reach over 50%. Right now, still the fuel keeps over the 50% margin. And we know that the fuel we have fixed unitary profit. And in this year, while prices were growing with a fixed unitary profits, our gross margin has sacrificed a bit. So in 2022, the gross margin for the order portfolio was [ 8.7% ]. In general terms, gross profit grew by 37%, similar to EBITDA. We see that, although for this year and this year price, the margin had to sacrifice a bit in a longer term, the economies of scale and the increased market share can give us benefit, and we are better -- in a better position compared to our competitors and in a sense, to our suppliers. Company as such continues to provide a pretty tough planning policy on the other costs. I only touched the situation in the labor market. This has been one of the biggest cost drivers in this year and the situation in the labor market has been really tough for 2022, where we had to come back on the labor cost twice and understand what is the best offer to have the best service for the clients and not sacrifice with our employees. So profit drivers together with the cost [ pruning ] has given us the increased profit as we commented already before. And that, in a sense, will give you also increase in the dividend per share. In this slide, it's only a proposal from the management side, and this should be agreed in the shareholders' meeting. The -- let's say, the dividend payable is already presented for you next to the taxes. So in last year, we paid EUR 0.07 per dividend to our shareholders and all the shares that are distributed to the shareholders next to the income tax. So income taxes are paid here in Latvia. And if you need further information right now for state revenue services in your location, please contact us, [ better speak ] for further information. And for the next year, we see similar increases in profit, the potential dividend of EUR 0.11, but dividend for the 2022 results that is provisionally payable in the middle of this year. And let's go to the balance sheet. So the profit drivers lead us to a stronger balance sheet. And this year, it has been quite turbulent working capital planning as prices increase and the uncertainty in the market for the huge overall debtors as well as our creditors and looking at the inventories, we also had a tough management with the BO component in the middle of the year. But all in all, we finished well. And we grew all the networks by 5 stations. So we are reaching 70 stations. And this year, we have invested EUR 10.9 million in the CapEx and additional EUR 1.2 million in associated companies. And the main investment strategy to enter the fuel station network, including CNG, network expansion. Additionally, we have driven in 2022, the strategic -- strategies for the improved IP. And this is one of the strategies we would like to continue over the next years, and we see that this is one of our potential competitive advantages in the next period. If we talk about the financial streams for the company, we have used the same strategies in past year, which is EUR 7 million long-term SCB operating cash flows. In the end of 2021, we rise capital in the IPO in NASDAQ, and we still are targeting to meet the aims set and the investment continues. But in 2022, as Janis already mentioned, we have attracted assets funding our European Union for alternative fuel infrastructure and facility funding as an additional component to rich financing portfolio. And similarly, right now, we look also the digitalization options from external financing to drive our growth even faster. Let's go to the liability side. In liability side, we see that we have growth equity-wise and liabilities wise about in the same levels. I should mention on the equity side that there has been first period for dividend payout in public, and it was EUR 1.1 million in last year as a net effect from the equity and the other material affected by rising the profitability of our network. Once in 3 years, we reevaluate our company's network station properties, and we have recognized EUR 6.8 million increase in the value of the company's assets, at the same time with the revaluation reserve in 2022. Speaking about balancing our investments and assets to the liabilities, we see that our liquidity ratio, although the year has been tough, has been -- is now around 1.3 and has increased over the past year as in 2020, it was only 1. So I think it's a good position. We have still strategies and aim to reach according to equal target set. But we are in a good shape to continue, yes.

Definitely. Then with regards to our strategy, so what we see is that during the IPO process, we -- let's say, we promised into '24 specific targets to be reached. So I guess now it's a good time to look at the picture because '22, it's almost like midpoint and we can evaluate how we are going. And yes, in terms of EBITDA, we are -- or EBITDA, we are basically moving, I would say, very strong. And it seems that we still should be able to make the '24 target. With regards to profit, we are also seeing that we are actually already overachieving this '24. But again, let's please remember that around EUR 3 million in this EUR 10.3 million was coming from these financial instruments with regards to our [ visitors ]. So in reality, it's around [ EUR 7.3 million ]. So it's still a very, very strong performance, and we are continuing to purchase or chase or EUR 9 million target for '24. And with regard to number of stations we are currently, again, around in the middle of around 70, up from 60. And we are -- should be able to reach this 80 station target. And then obviously, we are working on other things like alternative fuels where we are still working on this competitive, that's our biomethane project and also on future working with this LNG options. That's on top of electricity and CNG, which we already have in the moment. And also to remind, we have this specific target where we want to diversify our business model, and we want to, I would say, decrease this importance from fuel in our business model and the season -- this trend is actually going according to the plan. So we see that currently around 44% from gross profits coming from nonfuel products, and we expect that, that should increase more than 50% in '24. And then regards to business diversification, we discussed between the synergy segment that we set up, and we have already done it, that we started for this business segment. We will move on to this private customer segment. And meanwhile, we are also working specifically to become more and more attractive employer of choice. Okay. So that's the big picture of our objectives. And I guess, we are pretty much having this formal part ended, and we will open any questions.

Yes. Thank you. [Operator Instructions] So please join the discussion and ask your questions to the company, if you have any. The first question in line, could you please tell about the company's strategic development plan?

Yes. I guess we are quite ambitious about the 3 main things, which I'd like to mention is, firstly, we will continue to grow our network. So we want to become in next, I would say 5 years, somewhere between 80 to 90 stations in Latvia which is obviously still a way to go because currently, we are having 70 stations and bigger and bigger focus will be on this store business because obviously, the margins are quite good in store, and we think that there's still a good potential for this. And secondly, as already indicated, we are moving to develop our energy segment much, let's say, stronger and we are planning to launch this private customer [ JCB ] business this year. And then in '24, most probably, we will also try to put natural gas offer on [ private ] so that we have all energy products like fuel, gas and electricity in one package to our customers. And thirdly, again, as I already mentioned, we want to strengthen our position on alternative fuels. And therefore, we are already working with electricity CNG, but in future also on biomethane for heavy truck segment. So that would be like a big picture. Of course, there is much more detail, but I guess that's the answer.

The next question is a combination of 2. What will be the dividend payout policy for this year? And can you please comment on the stagnation of the share price value?

So the dividend payout policy was indicated in the presentation, it was set before the IPO is 20%, which we believe is the balance ratio to balance the further development and the payout of the company and further information and details was also over the presentation to the potential amount payable. And regarding the information of the share price, if you look at the Virsi stock performance in First North, you should consider the bigger picture and the stock exchange fluctuations or indexes performance in general. And we see that in the First North, we actually are the second performer in over the past 12 months. And if we look at the Baltic's indexes, we are also doing very well. We believe that looking at Virsi where we are in a very stormy situation in the stormy market, and we're dealing with utilities and having presented you a stable price in the stock exchange is actually a good indicator. We also believe that the price should be higher, but we take into account the external factors as well for this current period.

What are the further development plans of the Skulte Terminal? And what is the role of Virsi in it?

Yes, but let's say, complex and topic we can speak for hours about it, but I'll just give a very high level what's the situation. So just to remind, we are purchased 20% stake in Skulte last year. In the tender, we received national interest object status for this project. Then we agreed with strategic investors to present our, let's say, [Technical difficulty]. And then last week, it was also quite surprising to us that government basically said that now they want another proposal from us because they think that the demand which we have, let's say, put in this offer of too expensive, which we don't agree because we think that these amounts are very, let's say, limited in comparison to other [ operating stores ] in other countries. But basically, what is happening in future, I guess, a couple of scenarios. So the one scenario is that we somehow agree with government and meet some compromise. So in order to continue to work on building this terminal, second option would be that government would build this terminal on their own, but it's very, let's say, expensive for the national budget. And also it's very, let's say, in terms of -- in terms of this term, it means that it will basically demand much more years than if it will be done by a private investor. And thirdly, it's also possible that we agree with strategic investors and our key customers that we are moving on without any government support, but that is very, let's say, a challenging scenario, but we are also looking at it. Probably also a question which needs to be answered is whether Virsi has some impact in case this project stops. The answer is no because we have not invested a material amount of investment in this project. The game plan is that we would have more material investment once we have agreed with the government and project would be already started to be building and kicking off. So currently, even if the project stops, let's put like this last case scenario, let's call it that. Then I can assure that there is no material impact to Virsi Group because we have not made material investments in this project currently.

Thank you. Growth is good, but can you give an indication of growth per station, meaning ignoring the overall growth of the network? In general, what is growth [ profitability ] per station in last year.

Okay. So actually, the KPI as profitability per station is what we are not presenting to you, and that we cannot provide such information. But in general terms, if you look at the growth of the network, which is [ 5 ] stations and reaching 70, and if you look at the growth rate of the profits, then you'll see that the profits grow more aggressively than the network stations. And also, if you look at, let's say, target set [Technical difficulty] let's say, outside the station networks and investments targeted, they are not so purposely related to the network station. Of course, they go hand in hand. This is a base and this is, let's say, cash cow for our business and further development. But looking in the future, there are more things to achieve besides the number of stations.

What are key areas of growth for 2023, meaning this year?

Okay. I can take this. So obviously, we see that the fuel market is actually -- I will be surprised if it is very, let's say, growing in Latvia -- most likely, it will be more of stagnating more than 1 is, let's say, the 10 which we see in the last couple of years. So there will be probably no significant decrease but also no significant growth. So this growth in this fuel segment, yes, there will be some because we are gaining market share, but it will not be like not very significant for us. So what we see is that the growth will actually come from 2 other segments. So the first one is that this convenience stores where we are quite aggressively put some targets, which probably we cannot comment on this, let's say, public currently, but I can assure you that there is quite an ambitious target for this convenience stores. And then the second one, obviously, is the synergy segment where we are also seeing quite a good potential to move on and grow further. So the short answer is convenience stores and energy will be obviously the main sources of growth in '23.

Jumping from growth to key challenges. What would be the key challenge is to achieve growth in 2023 or to achieve the targets of 2014? I think the same question repeated.

Yes. So basically, the [ client ] just other end like it's basically, I guess, -- the key challenges obviously are most several. Of course, one is the overall market situation because there is an extreme competition in fuel market. And yes, we are growing market share, growing profits, but it's very hard to deliver because the market is quite [ volatile ]. What could I do. Yes, in our -- that's probably one challenge, but we are confident that we will be okay on that. And then the second challenge, obviously, I guess there are some financial costs. For example, our funding cost is increasing. Of course, we are still having some interesting situation in our [ JCB ] market. We are kind of hedging with a lower price, but still, no, there are some interesting situation. And the last one, of course, is a very significant is labor market because labor market, we see that this particular segment, which is working in these networks, and this is very much the same segment for which each retail chain is thriving. And of course, it will be pushing probably the cost even further in the next years, and we should be ready for it.

How much is the euro amount of the investment in the LNG terminal at the end of last year meaning 31st December 2022?

If you look at the annual report, actually, from the associated companies now, if you can draw the amount. So the amount actually is immaterial amounts to the investments done. I think the most investment from our side is, let's say, intelligent investment in [ energy ]. And the idea and actually the time and energy spend on the project.

Thank you. With this, we are over with the Q&A session. All questions have been answered. I will remind that the recording of the webinar will soon be available on Virsi announcement. Therefore, please follow Virsi news to find out more. Participants, thank you for joining us today, and have a nice day.

Thank you.

Thank you.