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

Good morning. Welcome to Virsi Investor webinar. As always, we will start with the company's presentation followed by a live Q&A session. [Operator Instructions] This session is being recorded and will be available for rewatch shortly after the call. Let me now introduce you to our hosts. I have Virsi Chairman of the Management Board and the CEO, Janis Viba; and Management Board member and CFO, Vita Cirjevska. Janis, Vita, please continue.

Thank you, Leva. And hello to all investors and everybody who is interested in our company's development. So we had quite, let's say, interesting and full of events year 2024. It was also the year of record high investment amount where we invested around EUR 23 million. So a lot of things to talk about today. So we'll kick off right away together with Vita. So I guess we will start with, as usual, I would say, macro slide since we are operating in fuel, natural gas and electricity market. So these are the areas where we're also looking what is happening. So on fuel side, in terms of macro level we saw that in year 2024, oil prices were around $70 to $90 per barrel, which is actually not super significant fluctuations if you compare it with previous months. And the trend was that this, let's say, peak in oil prices was usually at a point when there were some tensions in Middle East because Middle East is obviously a very important area in terms of producing oil and also in terms of our transporting oil. And when the extensions were, let's say, not so big, then obviously, the oil price was going down. Also important to remind that OPEC Plus countries are still expanding those oil production cuts, at least until end of 2024. We will see how it goes in '25. And of course, the biggest event in world politics was Donald Trump's election in U.S.A., which obviously is very interesting what will happen next because nobody knows. His policies are very unpredictable, but what we might guess is that if this tariffs and, let's say, war on trade continues to escalate, then obviously, it will lead to higher inflation rate in countries affected and also very likely that this economic development will be slower than it will be without tariffs. So from that perspective, oil prices might actually continue to be low or maybe even lower. But on the other hand, we will, of course, have to remember about sanction policy. There are some, let's say, discussions about putting additional sanctions on Venezuela and Iran, which are both quite big oil producers. So depending on where we go with sanctions, of course, the Russian sanctions also is open, let's say, question what will happen next. But if these sanctions are, let's say, bigger other than currently, then this will again give higher impact on oil price. So we'll see which of those effects will take over. On natural gas, relatively, I would say, calm year, at least in the first half of '24. The prices of natural gas was actually already in the first half of the year, lower than previous years, and it was around the same level as in '21. And this was primarily driven, of course, because Europe had stocked up storage levels and also the demand for natural gas was not very strong. But actually, something changed towards the end of the year. So of course, yes, we remember that there was a suspension of natural gas transit to Ukraine, which, of course, limited this supply of natural gas in the markets and also together with the relatively cold winter in Europe, also had some push towards higher prices for natural gas. So we saw that actually towards end of the year, the prices reached almost already EUR 50 per megawatt, which was actually quite a big jump versus maybe previous months. And on electricity, of course, I guess, we remember as well, but just to remind that in September, EstLink 2 cable resumed operations. The cable, of course, connecting Finland and Estonia and which had a good and, let's say, stabilizing effect on electricity prices in our region. With regards to Latvia and maybe more specific is that our solar power capacity is now doubled in '24 versus '23, but still this solar panel capacity level is still quite far away from Lithuanian and Estonian markets. So still we need some catch-up to do. So that's a very quick run through of macro-level picture. And now, I guess, just a couple of words also on our strategic goals. So previously, we had communicated strategic goals up until '26. But this year, we have a -- actually, last -- late last year, we have revised our strategic plan and also put some numbers how we see the company developing until '27. And there are 2, I guess, items, which I would like to stress. So one is that we are putting our target of 90 stations, which we previously expected to launch in '26. Now this target is put on '27. I will explain the reasons why. And also in terms of financials, which is EBITDA and net profit numbers, we are basically still reaching the targets, which we communicated before, but the thing is that we are putting them also in '27 rather than '26. And this 1 year delay is mostly because we see this picture in economy and the geopolicy around the globe has changed quite drastically versus maybe a couple of years ago when we created initial long-term plan. And we see that, of course, this economic development is being much lower than we hoped it will be. Just to remind in Latvia, we had negative GDP growth in '24, which obviously is making us a bit more careful about making huge investments. So we are still doing investments, but maybe at a bit lower pace and that bit longer period. But all in all, still, we are holding that our assumptions in '27 will be very strong. We see that these financials should be increased quite significantly, mostly because we believe that those investments, which we have done in '24 and also some years before, those will generate return in the coming years because all those investments, usually, at least in our business, they need to have some time to start generating investments at, let's say, good return levels. So this is on strategic goals, but we are also having goals on ESG, and that is where Vita will jump in.

So about the sustainability and ESG for -- in the year 2024, we actually had a major shift in our general understanding and general target setting through all the organization. We see that this has been like explanatory task to go through all the areas and understand what can we do better and how can we do better and how to align these targets along the organization. We have been setting our 15 key performance indicators for 2025. We have assessed the impact also in the longer term until 2030, but currently due to the legislation, we go step by step and the first year for 2025 is set internally. We have set in these growth in 3 areas in E, S and G. Environment, our own value creating the future today, is about the emissions generated in our own operations and also all through our trade activity and also the waste management. In the social perspective, where we see the 3 directions, employees, clients and suppliers. And also in governance, where we see our business relationship governance internally and also creating this awareness and training of our employees to, say, shift the understanding of sustainable business internally. So this has been a big road to these targets because initially, we were setting our targets on efficiency, but more like just increasing the efficiency in all areas as much as you can in a way you can. Then we had a period of 2 to 3 years where we had this sustainability as a goal, but also increasing sustainability. And actually, all the things done under these activities were good in a sense and were also towards the improvement, but this has been aligning our goals through the organization and having one understanding on what we can do and what we need to do to make this more sustainable.

Okay. So let's move then each goals step by step. So let's start with station network. So we are actually very happy and proud about '24 because it was really a powerful year as we launched 10 trading sites. And in our business, 10 trading sites is actually a very big number. Very rarely somebody can do like that something in 1 year. But we have done it, and we did it. Basically, we are actually happy about that work, which was devoted to, let's say, launching these projects and took several years before in terms of documentation and everything. This is finally kind of resulted in real, let's say, stations, which we can see in the routes. And in terms of locations, so we have launched 8 fuel stations in Latvia. One is shop-only trading place in Latvia and one is also a fuel station outside Latvia, which is located in Lithuania. So quite, let's say, across geography, quite dispersed and also in terms of business you have shop and also shops with fuel, so quite different options. But yes, so we are very happy about this because obviously, this acquired quite a big effort and quite a big investment amount, and we are confident that this will bring those returns in coming years.

So -- but to extend the shop network and also the fuel stations, we need the employees. And this has been quite a challenging year also in towards building up our value as an employer. This has been challenging in the past years due to macro situation and the payroll models and challenges in the market. But this year, we made our own challenge. We made the challenge of new teams, new cities to open up in Latvia, also new country, Lithuania. And we have increased the average count of employees by 15%. This has been also challenging to apply all our processes, values and align everybody in the same level as we have done through our stations. But we see that we have found the right people in the right places, and we're happy about them. And in the last year, we also received a CV-Online Top Employer awards in a level that we did not expect it so fast to reach as our top target was set the top 10 in 2026, and now in 2027. But actually, we reached it already in the top for the year 2023. And we reached place 4 in the main category, and we are a top selection as a first thing to come in mind as an employer in the last year. And also very high level in the trading sector, the second place and first place in Zemgale region. As we are mainly represented in Latvia, so this Latvian top is our main benchmark in our values as an employer. And I think it has been a great year for our HR and everybody involved and also thanks to our employees who have sustained our fast growth in the past year.

Okay. So the next strategic goal is to be a leading player on alternative fuels. So here again, I will just remind that we are having 2, let's say, main alternative fuel products. So the first one is CNG, which is compressed natural gas, which is mostly devoted to heavy trucks. And on the other hand, we have electrical points, charging points, which is obviously mostly devoted to light transport segment. And in both of these segments, we are happy that we are seeing quite significant growth. We are seeing that both of these segments are growing quite good and also the margins are quite okay. And that's why we obviously will continue to develop both of these fields and to continue to keep our #1 position in those fields in Latvian market. But one thing I wanted to maybe talk a bit more today is this biomethane plant, which we talked about in some of the media in Latvia. But just to be on the same page. So currently, we are already completing the field work and biomethane plant is started to being kind of developed. And we are, as you can see in those pictures, that's the step 1. Next step will be to install the equipment and everything. And we are expecting that by Q1 '26, we should be able to finalize this project and start already producing biomethane. But again, just to remind you, biomethane is in a way like a green or friendly for natural gas, which is being produced from different kind of waste. And in Latvia, there is a small, let's say, town located in northern parts of Latvia, where we are building this plant. There are quite a big amount of agricultural raw materials, which we can use for this plant. So then you have to transport these materials to be biogas station, then you are basically making this biogas cleaner until biomethane level. And once you have biomethane, you are putting into the grid. And then throughout this grid, you can sell this biomethane to your buyers. And we already have concluded agreements with our buyers for this product. So we now have to move on and basically launch this plant by Q1 '26. So that's on biomethane. And just to remind that another goal, which we have is business diversification. So how do we measure business diversification is that we are measuring what percentage of our gross profit is coming from nonfuel segments. And we see that we have made some good progress over the past years in this field. So for example, we see that our shop or convenience store segment was making around 39% of our gross profit back in '22. Then in '24, this is already close to 50%, which is quite a material increase, and we are happy about that because convenience stores are obviously having higher margins. You also don't have credit risk. And especially, we are happy about this because it's not that fuel is not growing, fuel is also growing, but simply convenience stores are growing much faster. So currently it seems that we are in line with fulfilling this goal in the coming years.

So the next goal, EBITDA, as Janis already presented, we have experienced growth in gross profits area, and we will also touch upon each big segment for gross profits in later slides of this presentation, but the gross profits have gone up by 9.3% or EUR 3.5 million and have generated a big value for Virsi. At the same time, as we have discussed already in the previous slide, this has been a period of big investments. And in respect to EBITDA, the main effect from these investments or opening up new markets comes from the payroll expenses, where our cost of sales has gone up and administration has gone up. And in cost of sales, the effect is that the main around 85% of the cost in growth in this area comes from payroll. We have attracted 160 new employees for Virsi over this year and also as the fuel station network opening works, we firstly onboard people in our existing teams. We train them for several months. And when the station is ready, we build these teams in the new stations. But that means costs before actual profit. And this has been the year of investments and expansions and new projects as well. So there has been effect from the cost. And year 2024 in respect to 2023 and EBITDA respect has been like steadily, and that has been no big growth, but we have sustained the same level over this year, and we are happy about the result. And we see that this base or this year has been based for future developments. And to the net profit. And in respect to the net profit, we see that almost 0 effect from the EBITDA, but also the other effect for the net profit are related to this expansion. In this past year, we have built out the new stations and invested in new projects in total of around EUR 23.3 million in investment cash flow and part of that comes from the lending from the banks. Our lending from banks have increased by 30%. That means this lending base has increased. Also we experienced EURIBOR effects in the end of 2023. EURIBOR actually reached its peak over the past years and this effect from the EURIBOR, when you address the agreement rate, has been, let's say, the highest over 2024. Each and every year, we still managed to get the better rates on the fixed rate on our loans. And we see that in the next coming years, according to the forecast, these expenses in the rate level should become less. We also see that the lending will be less over the next year as the big investment here has been over 2024. So we see that this cost has been there, but we see there is such a big shift over the next year should not be there. Also the depreciation and amortization that has been shift up because the fixed asset base has also gone up significantly due to the new stations, new locations and new investment projects. And this drives us to the net profit, where they are shifting down from the past year. Also over the past years, we saw the effects from the financial instrument valuation due to the electricity price turbulences where it went up in 2022 and then shifted down in 2023. In this year, we see that this electricity price has been normalized. And we see that right now the value of the financial instruments has reached its stable level. And here in respect to 2023, the cost has decreased. So in total, our net profits have decreased by EUR 270,000, but in percentage terms and in the perspective terms, we still see that the result is good and result is a good base for the future net profit growth.

And I guess now we will quickly go through each of those biggest business segments. We'll start with fuel. So what has happened in our fuel is that as you can see in right-hand side. So the market in Latvia in terms of liters sold in retail in '24 has been growing by 1.2%. We have managed to grow by 8.8%. So it obviously indicates that we have quite a strong growth despite the fact that market is quite stagnant, which also means that we are increasing our market share. And obviously, we are happy about it because of the new customers coming and also staying with us. In terms of other things, which we are, let's say, happy about is our mobile application because when we launched it a year-and-a-half ago, we saw that there is maybe quite a small percentage of customers using it initially. But now this percentage is already much, much bigger, and we are happy because obviously, customers can pay by this app. If they're in hurry, they can -- they are not going into that store and also our employees are, let's say, less overloaded. Two things about Latvia, in general, so we see that '25 is currently the first year since a very long period of time when Latvia is more competitive on excise tax for diesel compared to Lithuania. So we see that Lithuanian, let's say, customers, business customers are few in Latvia and also our Latvian transit customers, which previously fueled in Lithuania, are coming to Latvia and doing it in Latvia. And second thing is just remind that we are having -- we are approaching this emission trading system in year 2027, which basically defines that all fuel traders have to buy quotas for each of the CO2 kind of put into the market. And current estimate is based on current prices, the increase in liters sold could reach at least $0.15 per liter when we are into this system. So this means that fuel -- fossil fuel products will most likely become much cheaper, but more expensive in the future, while renewable or alternative fuel types could actually become more competitive, competitive versus fossil fuels.

Yes. So in respect to convenience store, which has now been our biggest business in a gross profit perspective and also employee perspective, this has been quite a challenging year. As I also mentioned, in the HR block, this has been opening up the new markets. That means challenges in choosing the products and services we offer. This means challenges in the supplier selection and logistics chains, but we had done a major work and also set up everything to be up and running. For the shop, this has been also a turning point in this year, opening up new shop in Latvia and also watching our customers what are they interested in or not, if there is no fuel station around. So this has been big year for -- also for the shops. But in the end, we have still managed to grow our results, and we are growing much faster than the market, as you see on our also Nielsen data for the fuel stations in Latvia. When the shops, the tendency is that we keep up on a bigger increase over the past year, we gone up by 18.6%, while the shop together with us only by 8.8%. In respect of the shops, we have also been able to put more interest on the loyalty system, where we have reworked that or shaped up at the end of the past year. We have created new offerings, and we have understood which are the main project of interest and how to attract the customers more to get this better breakeven on the supply-demand side for the shops. And we believe to have the effect already in the 2025.

And the last segment, which we wanted to touch on, is energy or in other words, electricity sale. And this, I guess, a key point to understand is that we are still a relatively new player in the market since we started this segment was, I guess, a couple of years ago. But we see a very positive and strong dynamics in terms of the electricity volume, which we are buying from producers and also selling to our customers. As you can see in the graph, and we are also happy that in '24 alone, we have managed to double our number of business customers. And also in only slightly more than 1 years' time, we have managed to become fourth largest electricity supplier for hospitals, which in our mind is very good, and we will obviously continue to expand this segment because it's very, let's say, naturally, it goes together with our other products, which we are offering to our customers.

So we arrived to our key financial indicators. So the last section of our presentation. As we went through the presentation, we saw this has arrived to the general understanding that this year has been a year of investment, a year of development, and here we're opening up new directions in our portfolio. And we see that the main business is still growing at a good pace and -- but we need to have these expenses to shift our operations at a new level. In this year, return on equity is 6.7%, which comes from the equity side, from the net profit side effect. As we discussed before, if you see the equity asset proportions 48.9% and our net debt EBITDA ratio is 2.3%. This year, it has been shifting up because we had the lending here, the investments here, and we saw that EBITDA was sustained at the same level as in 2023. We believe that our financial situation and financial results at this stage is in a good shape. And we have done a lot of homework this year, and we are waiting for the result on the next years to come.

Exactly, so I guess that's pretty much from us on the formal side of our presentation. So thank you for your attention. But let's go to the questions if there are any.

There indeed are some questions received. [Operator Instructions] And we'll start with the first one. What is the plant capacity for biogas plant?

Yes. Thank you for the question. So the answer is that capacity is 5.5 megawatts. And we expect that we will be able to produce up to 60,000 megawatt hours per year.

Coming back to the slide that you showed in regards to EBITDA. In your EBITDA bridge from 2023 to 2024, you showed increased gross profit, but then separately showed a negative impact of increase in cost of sales. But surely, gross profit is after cost of sales. What was the separate item of cost of sales?

This separate item in a better wording in English would be selling costs. So these are sales costs or sales team. And the gross profit is obviously sales deducting cost of goods sold. So this is purely selling costs.

Which include salaries for our sections.

Our next question, what financial instruments do you still have on the balance sheet? What is the current policy regarding the use of financial instruments?

Okay. We -- as we mentioned over the past years, the financial instruments in our balance sheet are mainly payers of -- the major effect is from the contract in the period of the instruments contracted in 2021. But the use of these financial instruments is planned in 2023 to 2027. So the top value or the main amount of the instruments units behind that was in 2023. And right now, we are sort of spending them over the next years. We see that our policy will be to get the most from the situation on the offer we can have. There are no strict policies in respect to that. And if we see the past year's effects, there have been ups and downs in the financial instruments, but they are mainly related to electricity price dynamics that we could not affect on a global base.

Continuing on the financials. Adjusted ROE, return on equity has been declining. What are your expectations and targets for coming years?

Yes, it's true that its ROE has been declining slightly. I guess the main message here is that we are currently undergoing a very heavy investment phase. And obviously, when you're in -- investment is so, let's say, large, at least to our balance sheet, then, of course, you're putting more equity in the company, but not yet receiving those, let's say, returns immediately because you have to have some time when stations are picking up the speed and start generating those returns. And as indicated also in the strategic goals, so we expect that this heavy investment will pick up the terms in this and next year. And in order to obviously reach our financial targets for '27, just to remind, we had more than EUR 20 million EBITDA planned for '27. This will obviously also increase our ROE in coming years. So we are in a way like currently at the bottom in terms of ROE. We are scaling up the business. Once they are kind of going and giving us a return those new stations, then definitely, there should be ROE development, positive signs.

What is the plan for natural gas trading?

Yes, also a good question. So we are -- already we have started selling natural gas to our B2B customers since early '25. So that's the first step. We actually did the same also in our electricity, first was B2B and then B2C followed. So we are now looking how it will hold the B2B portfolio, we will develop. And of course, it's possible. I am not able to say when and obviously, it will be 100% true. But it is possible that the next step will be also natural gas selling to households in the future.

According to financial report data, energy gross margin has decreased by 85% to EUR 1.3 per megawatt hour. Do you see this margin remaining stable going forward? Ignitis data shows energy sales average gross margin being around EUR 3 to EUR 4 per megawatt hour.

I guess, very complex to answer this question. In short, but I guess a lot of factors. So you have B2C segment, you have B2B, you have energy, which are buying from households and selling into the market. So it's very, I would say, complex to compare this EUR 1.3 versus EUR 3 to EUR 4 versus Ignitis. And I guess honest answer would be that in case we are managing to increase our household portfolio as we plan to do, the margin is relatively bigger in this area. So the weighted average margin hopefully should also increase in future if we manage to execute our strategic plan for the segment as we have expected. So that's, I guess, the answer, which is not very concrete, but also the best which we can provide...

Thank you. Are you able to provide additional information about the network expansion outside Latvia? How many stations are you planning to open? And would all of these be in Lithuania? Or would you also consider further expansion to Estonia, for example?

I can take it. So basically, Estonia is currently not -- I can honestly say not in our list simply because we have quite big other projects, which are demanding quite a big amount of capital, and we see that this return on other projects is quite okay. So Estonia is not in this area of next projects. With regards to Lithuania, that's a little more complex question because when we launched Lithuania operations, the assumption was that our B2B customers will continue to fill in Lithuania because always the excise tax was lower in Lithuania than in Latvia. Now actually, the situation has changed. In Latvia, excise tax is now for the first time in many years, cheaper than in Lithuania. So a lot of B2B customers are going to Latvia to fuel, which, of course, makes us, let's say, our ambitions to invest significant amounts of capital in Lithuania expansion, let's say, less ambitious currently. So we are not, let's say, so currently focusing in aggressively growing Lithuania simply because of those tax policy items. We are better now launching maybe capital and other projects where we see higher return.

One more question coming in. Could you elaborate on factors that will contribute to the net profit increase by 2.6x in 2027, given that the filling station network is going to be expanded by 10%?

Again, we try to kind of explain that when you launch new stations, it is very often that you need some time when those stations are fully, let's say, operational and fully able to provide returns. It's very often that we see that in the first or maybe even second year, the station is still picking up the speed and the real result is coming in 3 years or maybe fourth year. Of course, there are some exceptions that also the first year is already super good. But basically, because we have launched quite many extensions -- stations in '23, '24, which are still kind of picking up the space, we see that this will generate us returns. So you are basically having the scale effect because we don't see that we will need to grow in OpEx so much in future because infrastructure, everything is in place. We just need to scale up our sales volumes in our network. And not only new stations, we are also seeing that we still can get more results also from existing stations.

Seems we have answered all the questions. And so we will be closing the call shortly. Janis, Vita, over you for the final remarks.

Final remarks from myself is simply one. Thank you for '24 for being here with us, and we are really excited to look for next year because I guess the growth will be quite strong next year.

Thanks also to our team for sustaining our dynamics.