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

Good morning, and welcome to Virsi Investor Webinar. We will start with the presentation on Virsi business update and continue with a live Q&A session. [Operator Instructions] This session is being recorded and will be available shortly after the call. Let me now introduce you with our hosts: the CEO and the Chairman of the Management Board of Virsi, Janis Viba; and Member of the Board and CFO, Vita Cirjevska. Janis Viba, the floor is all yours.

Thank you, Leva. Good morning, everybody. First of all, thanks for joining this webinar for our employees, investors, customers, partners. So today, together with Vita, we will go through our main events, which happened in 6-months period. And of course, also, we'll take a look at the financial results for the first half of this year. So let us begin, as usual, maybe with overall high level, it's a picture what is happening in energy markets in the first half of the year. Here, we divide the -- this slide in 3 parts. So one is fuel, then it's natural gas and then it's electricity. And if we start with fuel, we see that actually, there has not been major fluctuations in prices in fuel. We see that oil prices for Brent is actually fluctuating between $76 up to $90 per barrel in the first 6 months, which is not actually a big fluctuations compared maybe to some recent years. Still, this was primarily driven, these fluctuations, by some challenges in the Middle East, of course, because as everybody knows, Middle East is quite strategic area where logistics is done for oil and also oil mining is done. And because of the situation among Iran, Israel and also things which are happening in Gaza, of course, always when there is some, let's say, more turbulent times in this area, oil prices are fluctuating up. And when there is some, let's say -- we cannot say a relaxed period, but at least some less tensions, then the oil price is actually going down. Moreover, OPEC is continuing to extend these production restrictions for oil with the aim to stabilize this oil price. And more or less, they are succeeding because oil price is not like being very low, but also at the same time, it's not very high. And if we speak about what will happen in the next couple of quarters, of course, it's -- nobody can say, but probably there will be 2 factors fighting. So one is like global economic development, the stronger it will be, the more demand for oil, the bigger the price. And on the other side, of course, we have these tensions in the Middle East, which are affecting supply side of the oil. So the bigger the tensions, let's say, bigger the worry about the supply side, which could also drive prices up. So we will see which of those factors wins in the end. On natural gas, actually, the same probably story as for fuel, no major fluctuations, prices are more or less stable between EUR 30 to EUR 40 per megawatt hour. And this has, at least in Latvia contributed to recovery of natural gas consumption, meaning that there are usually 2 products, which is natural gas and propane, fighting for this demand and if in the last couple of years, propane was gaining market share because of the pricing for natural gas, and currently, we see that natural gas is recovering because pricing is normalizing and customers are going back to natural gas as a product. Also important to note that Balticconnector connection pipeline between Finland and Estonia has been restored in April. So it took around 6-months period to get it done. But at least now we are back on, let's say, safe side on connection side. Also, it's important to note that we see that gas storage facilities in Europe are well filled, meaning that Europe seems to be quite ready for winter. So there should be no, like, supply shocks in winter months. And if, again, speaking about what will happen in future months, very hard to say. But most probably geopolitics will determine whether there will be some fluctuations or not because, of course, we see that when Ukraine entered Russia, this city of Sudzha [indiscernible], I guess, we see that actually there were some worries that this will disturb this natural gas flow to Europe because Sudzha obviously is a strategic transit point of natural gas. But currently, these worries have not come through. And initially there were some price increase in July, August, but now probably it's slowly going down again. And on the electricity side, in Latvia, we at least see that there is quite increasing this share of solar electricity in overall electricity production, meaning that when sun is shining, wind is blowing, of course, we see that electricity prices are quite low in the daytime, but it's not the case, of course, when it's not true and the sun is not shining. But more importantly, probably, we have to mention this EstLink 2 connection between Baltics and Finland, there are some technical, I would say, challenges or difficulties because of which this pipeline is not actually working probably until September. And it means that Baltics cannot get this electricity in, let's say, sufficient amount from Finland and pricing is very different in Finland and Baltics because of that, meaning that Baltics are much higher-priced, especially in summer months. So probably, we have to wait for September to get back to normal. And also an interesting number on the energy -- renewable energy usage in electricity production. So we see that nearly 80% of electricity in Latvia this year is already produced from renewable energy, which is, I would say, quite a significant number. And obviously, it will continue most likely to increase in future months. So that's a broad picture. We now go on to our strategic goals of the company. I would like to remind that we have these 6 strategic goals, where we want to be in '26 and where we are in '23. So what we, together with Vita, will do today, we will go through each of those goals and try to give you some insight, where we are currently with fulfillment of these goals. So let's start with the development of the network. So I would say quite busy first 6 months of the year, quite busy not only in terms of workload, but also in terms of investment done. We have opened 3 new stations. One is in Riga, one in Sigulda and the third is in Salaspils, so 3 new stations in 3 different cities of Latvia. And also important to note that we have opened one place in Origo, which is a shopping mall in Latvia, where we are offering shop products without offering fuel. And maybe even more important, as of end of June, there were 6 stations in construction stage, so meaning that we are actually quite aggressively going with expansion of our network and obviously, gaining some market share in the future. Then of course, there are some modernization works done for existing network as usual. And important also to notice that we have -- as also publicly communicated already, we have made the next step in our biomethane production project by attracting quite a big amount of financing, but we will talk about it a bit later. But overall, I guess, one specific number, which I want to emphasize, is that overall investments in first half of the 6 months of the year are exceeding already EUR 10 million. So these are quite material investments for future long-term growth of our company and also profitability. So that's on the first strategic goal. Let's proceed with employee.

Yes. Well, employee value creation is one of our strategic targets, and this has been actually a period of challenges but also huge awards that we are happy of. And about the challenges, actually, we have been developing quite fast, and we have been developing our employee offer during 2023. And coming to 2024, we believe we have one of the best offers in the market actually in the retail segment for all employees. But at the same time, our network is growing at high speed, and we are growing in new cities, in new geographies and also in some places, we are sort of doubling our presence. And in this sense, it's quite hard to fight for the new employees. And for Virsi, as we can say that the economics is quite in a slowdown period, but at the same time, our labor market is still very highly employed and unemployment rate is at 6.9%, and especially, it's a very tricky period if we look at the summer time when we see the peaks in seasonal employment. So this has been quite a challenge for our personnel department. At the same time we look at the existing team and on regular basis, we are evaluating our employee needs through eNPS surveys. And we try to improve our offer as much as we can on a regular basis, on insurance base, also the offering in the payrolls and also looking at different kind of support we can provide to our team. But it has been also rewarding as we -- when we decided to go to IPO, we wanted to get some KPI to be reached and somehow assess ourselves in respect to market in Latvia, and we selected CV-Online Top where you can -- where you have a survey of top-of-mind employer in Latvia. So at that time, we were somewhere in Top 50 and still the last year in the survey, we were in -- placed at 38. But this year, we worked hard, and that has been rewarded by us being #4 in Latvia. We know that this is very, say, very high evaluation for us. And we know that there has been a lot of work done. But at the same time, we still see that there will be hard work to stay in this place and maybe even improve it. As we remember, the strategic goal was for us to be Top 10 until 2026. And the last one that has been also challenging, and I'd say that has been like a different segment is discovering new market for Virsi as we have now entered Lithuanian market and for our employees, it means discovering new markets, new employer terms, new regulations, taxations and understanding how to build the team and how to employ the team to provide our clients in Lithuania the same high values and quality as we do it in Latvia. So that was for this period.

So the next goal, what we want to emphasize is obviously to be #1 in alternative fuel offering in Latvian market. And in a way, we're going to say that we are already #1 because we are offering CNG product to our customers in 9 stations. And it's very, let's say, good number, which we see is that close to 50% was the growth in CNG consumption by our customers in first 6 months. So we like this product. We also like that our customers appreciate it because it's obviously currently cheaper than other fossil fuels and also less harmful to nature. So we expect that this will continue to develop because we see that waste management, logistic companies and also bus parks are quite satisfied with these products. That's on the truck or heavy truck side. If we speak about light segment of cars, then we see that, of course, the market share of electricity cars is continuing to increase, but it is still quite low. It is a bit more than 1% of our total market share in Latvia, so which means that there is some progress, but we still need to wait several years for this segment to become more material. At the same time, we are not waiting. We are already launching charging stations. So in the first 6 months, we launched 3 new charging points in 3 cities, in Riga, in capital city, we actually launched the most powerful charging station in Riga, which is around 320 kilowatts of power. So quite a good number, I would say. And in total, by end of 6 months of '24, we had 17 DC charging points in place, and we actually have done it in less than 2 years' time. So I would say it's a very good progress, which was delivered by the team. And it's also important to note that in coming years, there are some legislative changes locally and also in Europe, which will most probably increase this cost burden for fossil fuels. Locally there are some specific regulation, but this -- which is coming from Europe in '27, is called ETS2, which is emission trading system, which clearly states that each fuel trader will have to buy CO2 quotas for each CO2, which has been released in environment, which will, in turn, most likely, increase this cost of fossil fuels. And that's why we are already working quite hard to offer our customers some alternative types of fuels so that they are already, perhaps today, making some decision to buy alternative fuel cars rather than fossil fuel cars. And also an important point on biomethane, so we have -- it's a quite big complex project. But currently, we have attracted around EUR 12 million funding from European fund, which is developing such green projects. And we are currently also in final stages on this project approval in local institutions. So if we are, let's say, following our plan, it's very likely that in next few months' time, we will start already construction works for this plant, and we will finish them in -- by end of 2025 and start producing biomethane. We like this project because it is, firstly, financially looking very strong. So we are exporting -- we are planning to export biomethane into Europe -- European countries, where we have specific options of buyers. Secondly, we are also seeing that this project is very well going in line with our business model diversification actions. And this, as a green project, obviously, is highly valued also by our financial partners. And we also see that in long term, we can offer also biomethane to our customers in Latvia because, obviously, in future, the greener you will be in your fuel consumption, the better you will become in terms of competition in Latvia among competitors. So that's on this side. Yes, next one, again, just to show how are we doing with business diversification. What we understand was that we understand that this gross profit share of others and fuel products should increase over time. And as you can see in this graph, overall gross profit obviously is increasing each year, but it is also good to see that the share of convenience stores in this gross profit is also increasing from 39% in '22, up to already 48% in '24. So this is something we like, especially because it's not like fossil fuels segment is decreasing. It's also increasing, but this convenience stores is increasing even more. So financials?

Yes. So EBITDA targets. Well, to describe EBITDA performance in this particular period, I would split it in 2 parts. The first one is stable and significant growth of our 2 major business segments. It's fuel gross profit that has gone up by 10% and convenience store gross profit that has raised by 16% compared to the same period last year. If we look at the Energy segment, we can see a drop in the -- compared to the last year, but it's still profitable at its nature. And if we look at the price fluctuations and the dynamics in the market in the past years, we can say that in last half of 2022 and 2023, it was a good time to have good short-term projects and profitable and high-margin projects in this period that we have been actually implementing in our profits as well. But at this period of time, the market and the energy prices sort of have gone back to the normal or back to the prices that we had before 2022 and also the margins in that sense. And at this period of time, the profits are still there, but it has normalized. And we see that our total gross profit has gone up by 6.6% or EUR 1.2 million. At the same time, we have actually doubled the CapEx investments in this period, and we have new projects arriving all the time in our portfolio during 2024. And this takes along also the cost. And here, specifically, we have a rise in the cost of sales or sales personnel, so it's payroll and also in administration sense, there are new people onboarded and new consultations needed to expand the new projects. In these 2 segments, we see that we need to onboard the team, train the team ahead of the new projects starting, and that raises the cost. But I'd say it's a short-term effect because the new fuel stations and new projects are opening one by one. And also, if we look now in the August and compare to June, we have new stations on our portfolio, and we see that, well, in general, the EBITDA performance in the first 6 months, it has been rather development-stage, and we see that there will be a good base for growth in next period. So compared to 2023, EBITDA has been dropping by EUR 1.3 million and by 16.9%. But on the other hand, as I said, it's a base for the future growth. And if we look at the net profit, so the main effect on the net profit performance, it's still the same: investment development and EBITDA performance. And we see that the EBITDA effect is almost EUR 1.3 million, and depreciation is EUR 600,000. So this has been from the newly established project performance, and we see that these cost increases will be mitigated by future profits in the next period. We also see that there is sort of slight negative impact also from the interest expenses, but we can say that this increase is due to the dynamics in Euribor. If we remember year 2022, June, the Euribor was still at 0. Then a year passed, in the middle of 2023, it was already 3.6%. And in the very beginning of 2024, it was almost 4%. Now it's coming back to shifting down, but we are still far from 2022. And obviously, there is increase in the borrowing expenses. But at the same time, we try to expand our station network as much as possible from the operating cash flows, and we try to be quite conservative in our lending amounts and try to control the expenses. Well, in the previous period, if you remember, there was also effects on the financial instrument valuation and related to electricity agreement contracted in 2021. So in this period of time -- and also, if you remember, electricity price scheduled in the previous slides, the prices has gone more to the stable phase. So this means that it's not that big valuation adjustments to our balance sheet. It's rather usage of the instrument itself or the amount we already taken in our business. So these effects have been less. The costs are just EUR 0.5 million. And then previously in 2023, at this period of time, it was EUR 1.3 million in costs. And we have arrived to EUR 2 million net profit for this period, first 6 months of 2024. But as I said, this has been quite a base for development and looking ahead for good results in the future, yes, even better.

Yes. And next, we will go through each of the business segments, just to show maybe what are key points which we would like to emphasize. So let's start with fuel. On the fuel side, it's an interesting point that still in last years, the consumption of fuel in retail trade is still below the level of 2019 in Latvia. So what it means? It means that number of amount of fuel is being consumed less, which in turn, of course, makes this competition even more intensive, and we see quite aggressive discounts, promotions and some activities on various sales channels, how to attract the leaders by each of the players in the market. Overall, we see that we are doing quite well because we managed to increase in 6 months our fuel sales by 6.3%. Market was actually quite stagnant around close to 0. So which means that we also managed to increase our market share. And then also, it's important to note that in Latvia, we are still quite expensive in terms of our fuel compared to Lithuania, especially Lithuania. And main reason is the fact that we have this safety or reserve levy, if we call it correctly, so which means that from this factor alone, close to EUR 0.10 per liter, our fuel in Latvia is more expensive than in our neighboring countries. And on top of that, we are also having the highest excise tax in Baltics for diesel fuel, which again makes maybe our market not so attractive for transit customers, which, of course, is something I think about when thinking about it in future in policy development. Overall, I guess it's also important to note that we are seeing very good growth in our mobile app user amount. Each, almost, week or months, we see that number of users are going up, which means that our customers seem to love our mobile app, which are, of course, giving the opportunity to pay for fuel not -- by not going into the shop, but also outside near this fuel pump. But also, if you go into the shop, you can see the discounts and offers by using this app also in the shops. So we are quite happy that more users opt for this app usage. Yes. So let's go with next one.

So convenience stores have been also under some challenging period of time. And if we see, some are -- compared to the labor or employee value side, the same effect also affect the Convenience Store segment as this is the most employee-intensive segment for us. And also, this segment has been mostly affected by this economic slowdown or private person purchase power slowdown and slow recovery during 2024. We see that there has been quite a competition in the market. At the same time, we are changing our products and trying to offer the best offer for our clients. We are always trying to do our best to get the freshest and the highest quality of food. At the same time, over the past years, when the inflation was peaking, that is right now, I'd say, slowing down in a sort of normal stage, these increases in the prices, they have affected the market and they have a long-term impact also on our offers. And in this period, when we see the prices and the demand side, let's say, slowdown and also the high prices and the purchases for our goods, we are really struggling to keep up with the margins. We are doing quite well. And also we are doing quite well in the market. If you see the market dynamics, so the turnover in the market has gone up by 7.2%. At the same time, Virsi has grown by 17.4%. We are also working a lot to improve our gross profits. And as I already said previously, the convenience store gross profit has gone up by 16%, and we are doing it continuously year-by-year. Also, the labor market challenges, I already described to you the labor market challenges to attract new clients, but at the same time -- new employees. But at the same time, when you get the new employees in the team, you need to onboard them, train them. And especially, it has been quite a challenge in Lithuanian market, when you find the right person to understand how to implement our values, implement our assortment and the key products, the Virsi coffee that is our -- I'd say, queen of our stores, how to implement it in a Lithuanian shop and also how to also set up all the supply chains to have all the products in the best value in the best shape for our clients in Lithuania, almost at Poland border. So that's for the convenience stores.

Yes, and we conclude the business segments by Energy segment. So again, mixed feelings, because from a profit side, there are some, let's say, decrease in comparison to previous years, while on sales side, there is quite significant increase. So actually, first half of '24 was a record, let's say, in terms of electricity purchased and sold for our group. What we are happy about? We are happy about that we are having a strong relationship with more than 100 independent electricity producers in Latvia. Around 70% of them are solar power plants. And we see that there is interesting numbers that out of all amount of electricity which is produced in Latvia and which is connected to this main electricity grid, Virsi Group is already consuming close to 20% of this electricity, which is, of course, later sold in wholesale market to other -- our partners or customers. And important also to note that we are continuing to grow our business customers by more than 70%, number of business customers has increased in first 6 months, and maybe also important to note that in less than 1 year because we launched a household product for electricity back in September last year. So in less than 1 year, we have already become fourth biggest electricity provider for households in Latvia. So I would say it's quite a good progress, given the short time of period where we are operating in this segment. Okay. Then, let's continue with financials.

This is a summary of the financials. I already discussed the net profit and EBITDA dynamics. And I'd say this is a period, this first 6 months of 2024, where we established the base for the future returns to increase. At this stage, our return on equity is 5.7. Adjusted return on equity is 7.7. There has been adjustments from the net profits and mostly from EBITDA side, as described before. But at the same time, we see that our balance sheet is still strong, and we are -- we have created the base and value for the future growth. We have -- we see that there is a slight increase in net debt to EBITDA performance indicator. At the same time, this also has been a short-term effect from one contract and one specific delivery in the end of June. At the same time, in this particular period, it's already normalized and stable at this period of time. So in general, we see that our balance sheet is strong, as we have been used to, and ready for new challenges and next period of investments and results. Yes.

Yes. That's from our side, and we are ready for questions.

[Operator Instructions] So let's start with the first question that we have received. What are Virsi's plans for network expansion in other countries?

Yes. So as I already mentioned, so we worked quite hard in the first 6 months to prepare ground for opening our first station in Lithuania. We opened station in July, so only a few weeks ago. And I would say that key strategic, let's say, task currently is to focus on Lithuania because we have built all the infrastructure, IT, finance, legal, everything is done. But of course, we only currently have 1 station. So we are -- I guess, it's a question of scale, how quickly we can scale it up. With regards to other countries, I would say, no specific plans currently, all the focus will go to Lithuania at least in the next several quarters, for sure.

What is the reason of energy sales decrease 2023 versus 2024? And what is the outlook for the future?

Okay. So the energy sales actually has not decreased. If you look at the turnover, it is actually up. But if you look at the market and the margins, this is -- as we already discussed before, this is a situation where these one-offs that have been there in 2023 and 2022, they are just done and we're back to normal. And we see that we are actually going there in several directions in our Energy segment, and we are trying to grow it up, but this has been period of wacky one-offs.

Have you considered attracting financing through another share or bond issue instead of bank financing?

Yes. Of course, we have considered it but current, let's say, plan is not to do any new equity issue or any bond attraction. And simply because very simple reason, the most -- the cheapest way for us to attract funding is currently from banks. We have a strong balance sheet. The last funding which we attracted from banks was Euribor plus 1.3. So I would say you will probably never get such a cheap funding from bonds. That's for sure. And on equity side, we currently also don't see any new issue.

Will there be some benefits besides dividends for shareholders, the participant suggested, as it's a very popular thing abroad?

Yes. We believe that our, let's say, shareholders' program is one of the best right now and -- here and locally in the market. And to get more information, please just come up to our website and check out the offer.

Talking about the Lithuanian market, in what time period do you plan to open more stations there?

Yes. As I mentioned, we have built and put quite heavy work to build this infrastructure, so we need to scale it up. And to scale it up, we are looking at 3 scenarios. One is to build stations, one is to buy station and the third one is to rent station. Buy or rent is obviously quicker option, build is much longer option. I will simply say that all of those scenarios are currently in place. We are looking at opportunities, which currently are in the market. And we -- if we see financially, a good option, we will do it. But I cannot, unfortunately, tell more than that.

Will there be more shops without fuel sales also in other parts of Riga?

I'd say each shop and each fuel station is an investment project when we assess each and every place, existing ones and the new potentials in our business cases. And right now, we will not disclose any further plans. But yes, assessing opportunities is what we do.

And the last question that we have received. My company gives the employees an allowance into mobility each month. Many use this to buy petrol at Virsi stations, but Virsi policy now is to only allow this money to be used for non-fuel goods. Why is that? And the guest says that this results in less use of Virsi by these employees.

Interesting point, I'll let -- let us take a look at that and we will get back in probably a few days time.

Thank you. We have addressed all the questions. With this, we're ready to close the call. I'll just remind that the recording of the webinar will soon be available online. Thank you for joining us today.

Thank you.

Thank you.