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

Ladies and gentlemen, good morning. We are delighted to welcome you to this investor webinar. We will start with the company's presentation and continue with a live Q&A session. [Operator Instructions] This session is being recorded and will be available for shortly after the call. Let me now introduce you with our hosts. We have the Chairman of the Management Board and the CEO, Janis Viba; and a member of the Management Board and CFO, Vita Cirjevska. And now let me hand over to Janis Viba.

Yes. Thank you. Good morning, everybody. So today, we have a plan. We have time to take a look back at 2023 results and the key events in our company and also to maybe give you some insights in what our future plans with regards to overall strategy. And as usual, I would suggest that we start with the overall overview of what's happening in the energy markets.  So obviously, we are dividing the energy market in 3 segments of fuel, natural gas, and electricity. With regards to fuel, the year 2023 was somewhat a bit more relaxing if compared to 2022. We saw that there are some price fluctuations in the market as fuel price, oil prices were actually fluctuating somewhere between $70 up to $95 per barrel. But if you look at the start of the year of '23, so we might remember that there was an embargo pushed for Russian oil and oil products. In February 2, European markets. So what happened later is that basically, Russian oil searched for alternative markets and they actually managed to find such markets in Europe -- sorry, in China and also in India and other markets.  Obviously, these new markets currently and also in '23 are purchasing Russian oil with some discounts. But still, the fact is that this is a market which is still giving some notable revenue for Russian products. Then closer to midyear, we saw that the oil price is starting to drop a bit. And the countries of exporting oil, primarily Saudi Arabia and Russia agreed that they will be cutting their production in order to stabilize this price and maybe even to try to push it up. In a way, they succeeded, but maybe not so much as they wanted. And then obviously, the year-end came, and a lot of geopolitical tensions in Middle East. There is this Red Sea as you may know, Red Sea is one of the, let's say, most important logistical roles for oil products. And because of these pensions, this road was becoming riskier. And obviously, because of that, in turn, as the price for oil products was slightly increasing. So that was overall '23, but again, it was maybe not so drastic in a way in terms of pricing as '22.  With regards to natural gas, so what we are currently seeing is that the drop in price of natural gas is still happening. And actually, currently, the price for natural gas is already below EUR 30 per megawatt, which means that we are already back to pre-COVID pricing level. And the reasons for this drop are mostly 2. So the first is that entering the winter season, there were huge already storage capacity reserve for natural gas and everybody will be cleared for this coming heating season, that's one. And the second one is that we had also a quite mild winter in Europe, which obviously had some impact on lower demand for natural gas, which in turn, of course, also had a lower impact on this pricing increase.  And one region regional thing, which we would like to remind is that is this pipeline connecting Finland and Estonia. So there was what officially is called incident a few months ago, and we know that this pipeline is currently not working. The recent estimates are showing that it could start work by the end of April. But this is just basically the LNG low from Finland currently is not able to make it to other Baltic countries, and this is not a somewhat strategic risk with regards to this critical infrastructure, which we have in this region. So that's natural gas.  And then electricity, I guess, what we can say is that, again, quite stable and decreasing dental pricing, prices are currently around EUR 100 per megawatt. And again, this is mostly in line with the drop also in natural gas because a big share of electricity, as we know, is being produced from natural gas. But on top of that, we also see that, for example, at and also at about the companies, there is a significant increase in renewable energy production. For example, we have the solar power plants reservations in terms of power already some 5x higher than in '22, which means that basically, the overall importance of this renewable energy is actually becoming more and more significant. And therefore, it's also helping to stabilize these prices, especially if there is some and win at the same time in a particular day. So this is a very, very quick runs to the energy, and we can maybe now go next already our company-specific events.  So let us start by reminding what are our strategic goals. So we see that our strategic goals are basically mentioning a number of patients, we also are willing to become one of the top employers in Latvia, also to be a leader in alternative fuels to also diversify our business model and then we have specific targets on EBITDA and also net pro. And what we will do today with Vita is that we will go through each of these goals and try to illustrate how have we succeeded in reaching of the growth in this year and also what is outlook for next year. So let's maybe start on this station network.  So obviously, a very big portion of CapEx is allocated into this segment. And in '23, we opened 3 new stations. 2 of them are in the smaller towns in Latvia in [indiscernible] and another one is in [indiscernible], and 2 of these, which are in very last are actually franchised stations, which is a good step for us because in this region, we were not yet presented. On top of that, we also made quite a significant investment in the reconstruction of 3 stations of our existing network. 2 of them are in Riga, one in a smaller town in Zen. Those which are in Riga are important because in one of them, we constructed a shop. Before there was not a shop, but only fuel products available. And another one is also important because this is like a new role being built and now is finished, which is going beside our this station and transport flow has increased a lot. So we wanted to rebuild the station to meet the customer demand.  And also important to note that at the end of last year, we had 3 stations in development phase. So one in [indiscernible] City, and one which is in Riga is actually already it's good news. We already launched this week the operations of this patient and the insights of the remaining 2 are expected to be opened by the end of the first half of this year. But this is only the beginning because based on our strategic growth, we need to reach 80 stations by end of '24 and by end of '26. So there is a lot of projects currently either already approved or being approved so that we can start expanding the network even more over the next few months.  And then also a very important point is that as [indiscernible] is that we have launched a plan to launch a station in [indiscernible], which is a strategic project for us because a lot of our customers, especially, obviously, the B2B customers are going through senate Europe. So we need one point where we can serve the demand for these customers. And we plan that this will be launched again in May, June, but the project is quite complex because it's not only about building the station, which we all understand, but it's also a lot of other activities like how to develop an appropriate accounting system, IT system, there are a lot of legal items, which we had [indiscernible], so we will obviously do this because that's the first step in the China market. So we need to make it properly and then we can already start doing something on top of this one point in future months.

Yes. So the second target relates to our employees, and we are finishing 2023 with employees in last year, just below 800. With the existing situation in the labor market and with the inflation and the labor cost and accessibility of the labor, we understand that this is a focus for us, and we want to create value for customers through our employees, and we want to become the best employer and obviously, choice #1. But in this 2026 target, we have set up the aim to become top 10 employer in Latvia according to CV online survey for the employers. And this is obviously a short haul or Sprint run in the first quarter of each year, but we want to create also value for our employees in the long term. And we see that we can work on this employer value the base or the core of it.  And in 2023, actually, this has been running like financially intensive because we have increased this [indiscernible] for the fuel station employees compared to 2022 time, and actually, we also have reorganized the model for the compensation as such. And currently, we believe that we have the best offer in the market. And we also work more in engaging our employees and engaging with the market to understand what is the best offer physical environment based and also through the team works with our teams. We have revised our values of the company in smaller teams, and that helps us shape our culture of the company and also work towards our target in the long term with each and every employee in the company.  And also, we have the service for the employees 2 times a year. And for the external, I'd say, employers core assessment on year to have really understanding on what exactly is regard to our employees to let them feel better and let us become the best choice or employees market. That's on the employees.

Yes. Then let's move to the next target, which we want to be a leading player in terms of alternative fuel as an out-under provider. So there is this complex world of the compensation of trumpet. So we feel that we have this role in the local transport segment to offer customers with more sustainable types of fuel, not only in the existing ones. And which is good is that we see that the demand for alternative fuel material is continuing to grow. Currently, we are already a leader in terms in the market in terms of providing several options. So the first option is actually for the heavy trucks, which we are offering compressed natural gas. Currently, we are actually the only fuel trader at the market who is able to do that. And we see that this product is valued by logistic companies also by bus companies, bus management companies and others, and we see the demand for this product was actually increasing more than 30%.  And also the future perspective is quite good for the product because we see that natural gas price has been stabilized or even still going down. So economically, it makes sense and also from an environmental perspective, it makes sense because it provides less CO2 emissions if you compare with these other products. In terms of other segment, which is electric cars, this is still in early development in late because only less than 1% market is consistent currently offers electrical costs. But we are still providing future strategy for these segments. And already in '23, we have opened 14 charging points, high power charging points offering at least 160 gigawatts for customers. And we also plan to continue the expansion of these points, at least until 20 stations until end of '24. And we are obviously doing this because we see high potential in the future for this segment and also our ability to cross-sell these customers with products from our shops. And then an important project, which is still under kind of R&D stage, there is no, let's say, specific investment made, but we are reaching a point, which hopefully will allow us to start already billet production site with the aim to produce Biomet by year '25. So let's see how it goes. But currently, we are -- at least the plan is that we should sort out our finance and legal items to be able to build this production site and start producing Biomet already in '25.  And then about diversification of the business. So again, we see where we were in '21 and where we are now, and we see that, for example, in '21, the huge share of gross profit was coming from fuel. And the shop products and other segments were lower fuel. Now when we look at '23, we see that there has been some shift, not only the overall gross profit has increased quite significantly, but also the share of fuel products is actually decreasing. And this is mostly because other segments are growing faster than fuel segment, and we have a new leader in terms of gross profit, which is our shop or convenience store segment, which is already being the highest segment in terms of gross profit.  Another thing which is important to note is that we have the Energy segment, also doing very well on over 3 years, the Energy segment has managed to become a very critical and important business segment already providing us with a very tangible, say, financial numbers in our overall business model. So business diversification in a way you can see it is already happening.

Well, to ensure that the company continues to grow, we have to ensure that there are stable cash flows. And actually, this has been a great year also for the EBITDA increase. We have grown by 11.7% from year 2023 to 2022. The strong base for this increase has been the growth for all business segments. And as Jan mentioned already, the strongest amongst them has been the retail, the retail shops or convenience stores. That has grown by EUR 4.3 million or 33% in gross margin -- in the gross profit and also in the margins as such. Also a very strong position has been for the MSG segment that has grown actually just below 6x. This is a sort of spot us still a young brother and it's running like a start-up, and we are happy about the results presented.  And in respect of the pure fuel segment, Jan will present news a bit later how the dynamic has led to us to the result, but we must admit that this has been planned actually already in the budget, and these results compared to 2022 are a lot of effects from 2022 dynamics in the fuel market. And in 2023, we have been continuing to grow and increase our market share as such, still. But this drop on the gross profit of 15% or almost EUR 5 million is amortized by the cost increase and the main thing that has increased from the year-to-year and is there to stay is the labor cost. And I have mentioned it already that in 2023, we were actually sort of pushed by the market and pushed by the labor to overview our compensation model in the stations twice.  One was in the 1st of January, 2 one in the 1st of July. But for the last part of the half of the year, we have a feeling that the offer is right now really focused and stronger for our employees. But the net effect of this increase has given us EUR 2.1 million in the sales costs and that's their stake. We have also been able to decrease our maintenance and maintenance costs. And in respect to energy and electricity in our stations, we have contracted let's say, profitable or a good price contract that has led us to decrease in the cost of $700,000 in the 2023 compared to 2022.  In respect to other income and expenses, where we see also an increase of almost EUR 1.3 million, there are 2 main effects. One lies within 2022 where we had to cancel a couple of energy segment agreements, and we received the compensation on the agreement cancellation of almost EUR 1 million or EUR 900,000. And in 2023, we had a write-off of some costs or investments in the PO stations that has been renewed or the old station that has been removed and replaced with the new ones during the year according to our CapEx plan. And we see that this has been like a one-time cost, but this investment and the transformation of the stations will give us profit in the longer term in other levels. And so the net profit, we have finished 2023 with a net profit of EUR 5.1 million.  And compared to the net profit in 2022, if the financial instruments value would be canceled, would be in the same level of EUR 7.2 million. The main effect of change compared to 2022 is the financial instrument value. And this is the electricity instrument that we own in our balance sheet that has a positive value in its -- in the balance sheet of EUR 2.1 million and should be amortized over the next 4 years until the end of 2027. Currently, we see this change in the pricing and the effect of the profit and loss statement, which relates to the change in the electricity price in the market. The first price up or the income in 2022 was EUR 3.1 million, and it's related to the cost of electricity at the end of 2022. But as Jan presented in the beginning during the 2023 electricity price has decreased and stabilized over the year.  So right now, it's just around 100. And in this value change in the price year-to-year gives us effect of 1.2 or almost EUR 3 million and is the main effect for the changes in the net profit year-by-year. We also experienced the cost increase and the depreciation that is mainly related on the asset banks where we have more valuable profit more valuable properties and also we are opening up new stations, and this increase relates to our expansion, but we also experienced increase due to Euribor increase during 2023 when until the beginning of the year, we were living on the fixed margins of the loans. But during 2023, we needed to experience the [indiscernible] Euribor -- but we see that the future perspective for Euribor is to go down. And also, we have been able to change our financials or the banks in the end of the year. One bank and contract our existing bank SMB with a better rate than the board. So we see that, that position is strong and the base is good for the future investments and the growth.

So let's go next in each of the segments a bit more in detail. So let's start with sales. You can see one of the projects which we worked on '23. So application, which you can use in your mobile, and you can pay by not entering the shop. So this is one of the products which we worked on, and the result is quite good because we already see around 60,000 or customers that have been downloaded this application, and many of them are also using it. So let's maybe go next in a couple of, let's say, market-specific things which are happening. So one thing is, obviously, is that we see that the economy in Latvia and also another multi countries and overall, the region is struggling. This is that we closed '23 in terms of GDP with minus 0.3 percentage growth and also in consumption segment, overall country was experiencing minus 2.5% growth, which obviously leads that these macro conditions are not very excellent. It also means that there are some impact on fuel market. And we see that starting from September, actually, the year-on-year market -- retail market fuel sales are actually decreasing 26% versus 22%, but not for us. For us, it's actually increasing in '23 versus '22 by 10%, while the overall market was actually increasing by more than 1% only, which means that we cover again more of the market share.  But because overall growth in the market is quite low, it means that the competition among fuel players are very, very aggressive. And we see a lot of marketing activities, including discounts and many promotions, which obviously are giving some negative impact on the margins for this segment. And therefore, and this is a quite challenging environment we have to work at currently. Still, what we can also mention very country-specific is that in '23, we had the year fuel operators, but they're allowed to not use BOQ mixture. And mostly fewer players did it because obviously, BOQ is costing more. But it will -- it has ended in '24. So on January, they have to use this view or petrol. And from April, you will also have to use it for diesel, which obviously will give some push to the prices.  And we also see that in, let's say, some specific work regulations and also international regulations, we see that there could be some additional pressure on fossil fuel prices in coming years. As an example, in 2017, we will, as a transport segment, not only granted also on the fuel operators, we will need to enter this ETS, which is emission trading system. So it means that each [indiscernible] to buy quarters for providing the market with specific CO2 amounts, which obviously means that these quarters are posting something which might also make the pool products more expensive. So this is also one of the arguments why we have already been talking to B2B customers are trying to tell them that maybe it's time to switch to some of them you also rather than diesel because the coming years might surely experience quite a big price increase. So that's pretty much it.

And now about our winter of 2023, our convenience store. The convenience store has been underpayment lag or 2023. This has been ESG labor costs and technology change. In the bottom of all, we still keep our strategy to grow our sales and to provide the client the best product we can. And during 2023, our shop has also transformed a bit or let's say, added up some direction besides the regular one next to the next few stations or the fuel products. We have opened our first shop in [indiscernible]. We have created our own robot, that's Robert Barista that sells coffee in retail center in [indiscernible]. And we also[indiscernible] in last year. This has been sort of diversification, but obviously, all 3 of these projects are quite new to the market, and they still have that sort of testing phase of finding their best fit in the market. But let's go to the core operations.  So in respect to the core operations of the shop, this has been another successful year for which shops have grown in turnover by 22.2% from year to year, whilst the market, including which has grown only by 13.4%. This has been a good year in respect to the margins of the product and the supply chain as such as our store products in 2022 based the quite big challenges in finding the best solution that should fit to our customer. That should be the ESG requirements and also would be available in, let's say, in implantable manner and expect the pricing and the supplies provided. So in 2023, the base established in 2022 created a strong offer, and we continue to bring gross profits that are increased of 33%.  In respect to the workforce and the labor cost, we have a feel that each hour of the labor becomes less accessible because there are less lab towers in the market and it becomes more and more costly. And unemployment rate in Mattias still quite low, it's 26.5% in 2023. Thus, we need to make technology work for us, thus we need to revise our business processes, and we need to make it lean to be able to deliver the best quality and the shortest possible and way and give you the best value for what we can. This has been challenging. I must admit that the base is strong, and the team is very strong, and we're really thankful for that. And in the next slide, I would introduce you to our new water, our new processes with the clean. And I would also like to invite you to a new term coffee shop [indiscernible] that we already presented in the previous slides and then enjoy our new product, and we are giving you the offer during the next week. In the 8th March, International Women's Day. So basically, you can please your woman that you like over the next week and provide them with our [indiscernible].  We invite you to copy this code, we will also provide you the code in the chat section and send you over the e-mail after the presentation, and you can activate it in [indiscernible]. So welcome.

And then the final segment, which means obviously, energy segment. So it's important to note that this picture is coming also from our launch of electricity product to households, which we did back in September and which is actually also quite a unique product because you can combine the electricity together with discount in fuel segment and also discounts in our convenience stores. So with regards to what has happened over the last year in the electricity segment. So what we see is that we have been able to continue a very aggressive point in aggressive growth. Obviously, this segment is very new, but over around 3 years, it has shown a very, let's say, healthy and strong results. And the growth rate is very significant in terms also of how we sold to customers. So it's more than 3x higher than last year. And also, we have purchased more than 50% more electricity from our local partners in '23 versus '22. And this cooperation with local electricity partners, which are producing the electricity from water, solar, biomass, or biogas. This is currently being very productive. And we are utilizing this cooperation to achieve our goals.  Also important that this cooperation is providing our partners with certificates of original, which is basically those green papers for electricity, which in turn also help values. So we are purchasing those papers from our partners and then realizing them further in other markets. And also important to note that we are continuing to increase our base of B2B customers which is a very nice thing is that already a few months of launching this offer to house calls, we can already see that there are several thousand of households, which have conducted agreement with us and are already our electricity customers. So this is quite very important also achievement for us, and we see that this trend will continue to increase in coming years. And then always, of course, as well.

And now about the key financial indicators and about the general financial position we are having at the end of 2023. We must say that this has been another strong growth year. Obviously, net profit has been affected by the financial instrument revaluation or electricity prices in the market. But still, this has been a strong year. And excluding financial instruments, our net profit for the year has been EUR 7.2 million, the same as for 2022. The actual data effect, return on equity ratio. But as for the current position, we see that we have established a strong base for the next periods to come to succeed and reach our goal set for 2026.  We see that we have reached a net debt/EBITDA ratio at 1.5x. That is increased from year 2022. And this is mainly effect from net cash accumulated by the end of 2022 to be able to develop ourselves during 2023. Our new loans over the 2023 has been at very low levels. Actually, we have about 4 million in the last days of the year that has been related to our expansion projects that are still in construction in progress in the end of the year and during this first quarter of the year. But we kept the loan level lowest, we still had our resources. We still had our big projects to invest. And the interest rates were high. And during this year, it has been like a tough year for the investments and investments in total.  In respect to the cash flow has exceeded EUR 17 million. That has been absolute boom if we analyze it back to the previous years. As you see the ambition in our long-term strategy, we still have a lot of work to do, but we feel that the balance sheet, the current position we own and the current relationship with the banks is strong enough to be able to succeed and develop over the next years.

So this is it from our side. We once again want to thank each single employee, each of our partners, and shareholders for -- in our mind, very strong  '23. And we are also looking further to the next achievements in future years. So I guess, now it's time for questions.

[Operator Instructions] First question, how do you see the future of gasoline cars versus electric cars in your business? Is the change to electric cars a threat or an opportunity?

It definitely is an opportunity in the short answer. But with regards to the first part of the question, so let's say, most optimistic estimates are showing that by 2030, in that market, there should be around 10% of the transport of light cars using electricity. So currently, this ratio is only 0.8%. So it's in a way, optimistic approach. But even if it happens, we already are working, as we mentioned, in quite big and stronger and part charging point network. And we see that these customers which are already owning electricity are coming into stations, also buying some food and coffee and other products. That's one thing. So it's a good -- as a cross-sell opportunity. Another one is that the margins which we have in electricity charging are actually somewhat higher than in fuel, so in a way, we don't see it as a threat but more as an opportunity.

Thank you. This operates very low debt-equity. Is it because lack of growth or plans to finance expansion with debt or equity, if any?

Yes. I'd say, this past year has been sort of transition. We had the IPO in 2021 that increased the equity side. And we have been also under quite turbulent obstacles over the past years. Our CapEx plans has been quite higher than they actually were in the past years because we needed to analyze month-by-month where to invest, when not to invest, and how fast to proceed, knowing that nothing is known. And right now, we are in a quite strong position as we have still quite big projects ahead of us, and we have still the capacity to be able to have more lending in the banks. And right now, the current strategy is to take on more loans and have quite high CapEx over the next years.

Where is the cost of the hedge that you had? The participant thinks that had a big game in 2022 and their loss in 2023. Is this excluded from your EBITDA growth?

Yes. So in the EBITDA, we exclude the financial costs and income and depreciation and amortization, and the changes in the value of the financial instruments or financial income or costs for the year 2022 and 2023. So the effect is in net profit.

And as we already mentioned, the effect is plus EUR 3 million roughly in '22 and minus EUR 2 million in '23. This was EUR 9 million over a 2-year period. And also what it mentioned, it's important to understand that the remaining volume of cement is still positive. It's around EUR 2 million in our balance sheet. So overall, this, let's say, exercise with this instrument is still very positive in that it fluctuating among the years. And it's -- if you are not exporting it from core results, you might have a bit tricky, picky picture. But if you export it, then everything I guess what we also try to show that everything is quite logical.

And a follow-up question on the same topic. Is the company still entering into similar financial instruments? And what has been learned from this experience with benefit of 2020 inside ports.

I guess, amount in which we are entering it is much, let's say, a smaller one because what we wanted to do is we wanted to hedge our future next years of electricity volume purchases. And this price, which we fixed is still much, much better than currently in the market. And what are the learnings is that, that was a very good start to do back in '21 because then our basically pricing was much lower. So that's definitely a plus. The only minus is that as we already discussed that you have these fluctuations, which if you are not, let's say, looking into details in balance sheet, then you might get a bit confused. But overall, there is no, let's say, plan that we will be entering some huge amounts in the following years. But again, disclaimers that you never know, it's a super attractive view…

There is a question regarding shareholder loyalty. So will shareholder loyalty offer continuing this year to test new products?

Yes, the plan is to continue, and we actually have a bit of a focus this year on the data analysis and the customer, say, behavior in our shops and what is the demand not only in common side, but actually on the actual purchases, and we will provide the offers based on the data and the last offer for the shareholders was in November of the last year, and you will continue receiving new products over the next period as well. And of course, Janis recorded in his presentation.

What are the company's strategic goals related to station development in the Baltic space?

We are very complete as we already illustrated. So first artisan market, which we plan to open the first session in May, June. And potentially, next steps, we'll also follow after opening this first station. But again, we will probably not go into details, there are several scenarios. But the regional end market is currently for us a bit more important than Estonian simply because a bigger customer focus going through the rise rather than Estonia because when they are entering Europe and so on. And also Estonia market pricing for fuel is usually lower than the one in Latvia and Estonia. So the shortest answer is that Virsi is, let's say, under development, Estonia is currently not in plan.

What dividend amount to expect this year?

Dividend policy remains as in the past year. So it's 20% of the consolidated net profit. The information and say the offer from the board side is provided in the annual reports, but it's after shareholders to decide in the May of this year, and the payout is expected in June.

Thank you. This was also our last question today. The recording of the webinar will soon be available online, please follow the announcement to stay up to date. On the top of Virsi, thank you, everybody. It's always a pleasure to be with you today.

Thank you.

Thank you.