AS Virsi-A (VIRSI) Earnings Call Transcript

Hello. Welcome to Virsi investor webinar. As always, we will start the call with a presentation on Virsi business update and continue with a live Q&A session. We are looking forward to receive your questions [Operator Instructions] This session will be recorded and will be available for rewatch shortly after the call. Let me now introduce you to our host, Virsi Chairman of the Management Board and CEO, Janis Viba; and Member of the Management Board and CFO, Vita Cirjevska. Janis, Vita, the floor is all yours.

Thank you, hello. Hello, dear employees, investors, partners and everybody who is interested in developments of our company. So today, together with Vita, we will walk you through some highlights of first half of 2025. And let's go straight into usual update on what is happening on energy markets across the world. So let's start maybe with fuel. And we see that geo policy, of course, made some significant impact on oil prices in first half of '25. So we see that in beginning of January, actually, oil prices were above $80 per barrel, which was actually quite high. And mostly, it was coming from the fact that markets believe that the economic development will be good. In coming months, so the demand for oil will also be high and that was actually pushing these prices up. At the same time, of course, the bottom of these prices came in late April, beginning of May, then because of Donald Trump's announced tariffs. Obviously, everybody was shocked not only stock market, but also oil market and investors and everybody. And everybody was also afraid that economy will get hurt and that's why also oil demand will go down. And respectively, oil price also went down to $58. But then obviously, these tariffs were extended, also lowered and all those discussions. And in the end, basically, the oil price is now roughly around $65 up to $70 per barrel, most of the time, which is more or less, let's say, usual level if compared to the previous year. At the same time, of course, it's also important to note that geopolitical tensions are still in place. Obviously, the most important points are with regards to Russia-Ukraine war and also Israel and Iran war, which in a way was short but at the same time quite intensive. And that specific time made some quite, let's say, a big impact on oil markets. And another point, which is important is to know that OPEC countries, so the countries which are exporting oil, have already agreed for 3 straight months in second quarter to increase oil supply, which obviously basically limits, let's say, this pressure on oil prices and helps to be -- to have an oil pricing relatively, let's say, at low level. So that's on oil. On natural gas, I guess, some points to mention is that winter in Europe was actually quite cold. Not always it is happening. So because of this cold winter, natural gas pricing and demand, obviously, was quite high in Q1. Then in Q2, mainly because of seasonality and also because of lower demand in the Asian markets, natural gas pricing went down by roughly 20%. And thus, I guess another point, which is worth mentioning is that we see a continuous trend on decrease in Russian natural gas imports to EU and this is mostly now, this -- the Russian natural gas is offset by liquefied natural gas coming from U.S.A. and other regional markets. And most probably, it will continue this trend also in future because, obviously, most of you know is that the -- in this deal between U.S.A. and EU, one big factor is commitment from EU to still buy LNG from U.S.A. in next, say, years. And probably the most interesting market was actually happening in electricity. In first half, mostly because obviously, all Baltic states so disconnected from this BRELL network, which is basically Russian electricity network, and joined the European energy system, which was a long important and complicated project, but it was executed quite successfully. But still because of all the, let's say, pressure and rumors and everything, it had some impact also on electricity pricing in Q1. But now in Q2, we see quite a big drop in electricity pricing, mostly because of 2 reasons. So the first one is that this electricity cable, which is connecting Estonia and Finland and which was damaged back in late '24, now it is restored in June. So again, Finnish electricity is able to flow, let's say, at acceptable level to Baltic states. And therefore, it is able also to stabilize these electricity price. And on renewable electricity, it's also interesting to note that this trend is continuing and already 85% of Latvian electricity, for example, in June is generated from renewable energy, which is obviously with the sun shining and everything is good and we see this electricity pricing in day is actually very low. And it's also, of course, limiting this pressure on overall electricity pricing in Latvia. So that's a quick run through the energy markets. And now let's go just to remind you what is our strategic goals for the company. So we have actually 7 strategic goals. As you can see, it relates to a number of stations and some financials and other goals. And today, as usual, we will try to walk through all of those goals step by step to illustrate how are we doing in each of those goals and how, let's say, we are good at trending towards this '27 benchmark. But besides that, I guess, we also have ESG topic. So before going into these goals, which is also somehow incorporated in ESG, Vita will give you more details about ESG topic.

As we already presented in the last webinar, during 2024, we were preparing quite heavily for the regulated or audited ESG part in Latvia. But then the regulation was adjusted and the audit is not to be held in this year, but anyhow this has shifted our understanding company-wise in a new level. Although there might not be like 100% new KPIs or activities we are doing right now, we actually have shaped everything in these 3 directions, ESG, environment, social, governance, to understand where we move, how we move and the adjusted KPIs where it's necessary. During 2025, we already measure our KPIs quarterly and we monitor how we are shifting towards a more sustainable development of the company. And in our company, we understand the sustainable development not only CO2-wise or environment-wise but really balanced sustainable development. In the E or environment section, we have 2 streams of KPIs. One is several of them are related to CO2 emission reduction, and here, we are highly dependent also on the government activities and on legislation activities that are now happening behind us and ETS to also changes in the future. And we are still waiting for the major decisions to be made and regulation to be in place. But at the same time, we do our own job and we do develop the network with reduced emission in the fueling stations. In 10 stations, we have CNG option for our clients. And in 26 stations, we have electric charging option for our clients. We see that this direction is right and the investments will continue in the next years as well. Our next stream is waste management and optimization. By now or until 2024, we did the basic waste management and we also monitored all the activities in the market and then we did the best we could. But right now, we have really focused-ly in this first half of the year analyzed whether our waste streams, how to manage them, how to give the best offer also to engage clients as well as our employees in waste reduction. And right now, we see that we are targeting in reduced waste, although we have expanded our network. The second big section is a social part, our people to people in our company according to our values. Here, we see that there are people on employee side, people on the client side and people also from our supplier side. And we have 5 balanced KPIs, but the main shift in this first half of the year has been in the loyalty offer to the clients. And we have changed the loyalty offer or the way we offer our loyalty products to attract more customers to have a better offer for them and also to attract new customers to our portfolio. And the third section, governance side, we have done 2 big shifts. One is we have established our own supplier called code of ethics -- or Code of Conduct. And we not only do ourselves the best we can governance-wise, but also we have defined the rules for our suppliers how we would like them to operate in the market as well. And we have approved this new supplier code of ethics and we implement this supplier code of ethics also for our suppliers since 1st of June in the new agreements. And business operation-wise, we have also not only established some rules in general and understand it that some top management level, but we also tried to incorporate it in all levels of our employees. And we have established a training module that consists several older blocks, code of ethics, GDPR, AML sections, but we also continue developing the training module and monitor the activity and training engagement of the employees right now and in the next chapters to come. So that's the sustainability.

Good. So let's go to the first strategic goal on station network. So again, just to recall or remind is that in '24 it was very challenging year because we launched 9 new stations. So it's actually quite a big amount, maybe even the first one in Latvian history where could be launched such, let's say, a number of new stations. And obviously, this is a background needed to understand why maybe in '25 we are a bit slower on new stations and let's say, this investment is not maybe so huge as in '24. And still, in first half of '25, we have launched 1 good and beautiful station in Salacgriva, that's a place, which is basically close to Estonian border. And it was quite important place for us simply because going from Riga to Estonia, there is almost no our stations. So this is now let's say, sold and all the trucks going in A1 road are now able to go to us and fuel. And another thing is that there is a beautiful city in Latvia, which is called Kuldiga, which is the city where we have not been yet and we, in end of June, also launched the process of starting to build this station. And we expect that this station will be completed by November this year. Additionally, we will tell a bit more later, but also we have reviewed our profitability of our network and made some, let's say, adjustments and 2 places are now exited, but they did not sell fuel. So we will tell a bit more later. And I guess, the key point here is simply to stress that there is a big amount of new stations developed over 1.5 years and we simply need some time for them to, let's say, pick up this full operational capacity, which obviously later should translate in good financial numbers in coming months. So that's on network. And now let's go to employees.

Yes. Well, this great shift in network or the fuel stations also arise new teams and new locations and new training and new people to be onboarded. Since first half of the past year, we grew by almost 11% or by 90 employees. But actually, if we look all of this phase of development or since the very beginning of 2024, we have increased our employee count by 22%. This has been a great shift. At the same time, we have targeted to give the best offer to our existing employees but also need to onboard and train new employees to have really a smooth transition in teams and also a smooth experience for our clients. We are very proud and happy about evaluation in the market. And already in 2025, we have been evaluated as a top 6 employer in, let's say, the biggest ranking in Latvia that we have, the CV-Online Top Employer. And our target strategically was to be in a top 10 and we are there. And also, we have -- we want to stress that in this year, we got the eighth place in CV Market.lv's Best Employers ranking. And this is very good sign for us, and we evaluated a lot because this is a good stream of new employees for us. And if we have this assessment in a very good level, we are happy about this evaluation. At the same time streaming employees in and trying to give the best value for our existing teams, we also tried to work on employees offer. We try to update all the benefits package we are giving to our employees and update with the new products we have and the new business lines we have, and we try to work on it consistently. And also this period has been a change in our offices, 2 main offices that we operate which from, Aizkraukle and Riga, where we changed the office in Riga recently in July and also update the training environment and the office in Aizkraukle. So that's for the employee.

Good. Let's go to the next goal. And the next goal, just to remind is that we want to be #1 player in alternative fuel market in Latvia, and in our mind, we are already there. But of course, we need to keep the job to remain there. And I guess in context of that, it is important to note that the demand for alternative fuel types in Latvia continues to increase. There is a specific law, which we hope will be passed in '26, which is called Transport Energy Law, which will specifically put some, let's say, criteria on fuel operators how much renewable fuel should be sold, what should be these emissions reduced and so on. And the reason why we went this law actually in place because we are fully ready to meet those demands of this law. And by meeting the requirements, I mean, 2 things. So the first thing is natural gas or CNG, which we currently sell in 10 locations, we see that the trend is continuing to be good. So year-over-year, we have increased more than 20% in terms of CNG sold. And also important to note is that this CNG network, obviously, is usable later on for selling of biomethane, so this is, at least in our mind, a good rentable or a profitable segment to be at. And on light transport segment, we are seeing this electric charging stations. Currently, we have 26. We have opened 2 stations in this first half of this year. Still overall level of electric cars in Latvia is quite low, only slightly above 1% of total market. But at the same time, we see that those who are going and making this charging in our stations, they are actually doing it quite often. And we are even at least ahead of our, let's say, business plan expectations in terms of this segment. And I guess, important to note is this, of course, let's say, biggest project for this year in terms of investments. So it is a EUR 15 million project, which we are currently working on. So this biomethane plant where all the, let's say, agreements for selling biomethane, for buying resources, for also buying technology and everything are now concluded. So the construction works are going quite according to the plan. And we are seeing that, let's say, in first half of '26 this will be the time when biomethane will be produced. And obviously, later on, given the business plan which we have for this project, it will also leave a very strong impact on our group financials. So next one. Next is, again, just a reminder, we want to go this so-called business diversification goal. What it means, it means that we want to increase profit -- gross profit coming from nonfuel segments in our overall profit. And as you can see, we are steadily doing it in the last couple of years, especially if you look at this shop or convenience store segment, we already see that this year was the first one when in the first half of the year gross profit was actually exceeding 50% in overall gross profit of the group so coming from convenience stores. And most probably, this trend should continue. Even despite that we are still, of course, growing in fuel segment, we are gaining market share, but the shop segment is actually growing even faster. And we like it simply because of higher margins and no credit risk. And yes, so we will continue probably in that direction.

Yes. And the financial measures we have in our strategic goals is EBITDA, as for the shareholders' value and the net profit. As for the first one, we will later on discuss more on the performance of each and every section of the business sides, but we have actually grown in this period of time in gross profit by 8.6% or EUR 1.6 million. We have had good performance in the fuel and convenience stores. Gross profit-wise, energy gross profit has been worse than in past year because we were -- we had the changes in the market and the regulation and this has incurred the additional cost, but we see it as a periodic change and these measures are to be tackled in the next period. And in general terms, if we see the gross profit performance and also the customers' activity, we need to understand that this increase was expected by the increase in our fuel station network, but we also must admit that this period of time there has been sharp competition for the clients in the market as actually the customer activity is very cautious in this period of time. In last year, we actually, in Latvia, experienced a recession, GDP fall by 0.4%. This year, also the Bank of Latvia expected a bit higher increase. But in June, it has been adjusted a bit lower and is expected to be 1.2% the year growth. And we feel really this competition for the customer and customer cautiousness in the market a lot. And let's say, we see that there is a higher potential in the next part of the year because the stations has been set up recently in the new places and they are just growing up their market share. And at the same time, we have this push on the macro side. But we see that the potential still is really high in the next quarters and also in the next years. As we already discussed in the past slides, we had big change in the employee side and also in the property side and the biggest increase has been in the cost of sales. And this shift in the cost of sales is due to the increase in the employee costs and also the fuel station maintenance and maintenance costs. These costs are related to the network extension. And these 2 parts of the cost, they actually constitute around 90% of cost of sales. This cost base is to be held also in the next period. These costs were not there past year because simply, there were not so many stations at that period of time. But right now, we see that the gross profit growth and expansion in the market and the run-up of the new stations should tackle these increased costs in the next period. In general, EBITDA level has been kept at the same level and we see it as a good mark for this period and we see the high potential in the next periods to come. But net profit-wise, in the next slide, we see the first section, EBITDA. The effect is neutral. We could also say that the tax that is related to dividends distributed and also income and expense from the financial expenses are neutral for this period because we try to be really cautious about new, bigger loans. And at the same time, we see that the cost decreased due to the improved rates in this period of time and also Euribor shifting down. So these 3 effects would be rather flat on the net profits. But there are 2 higher effects. The one is positive and not the income, but the much lower cost from the financial instrument value from the electricity instruments because simply in this period of time, the expected cost of the financial instrument price was -- the shift in the price was not as high as it was in the first period of year in the past year. So the costs are there, but significantly lower. And the one cost level that is quite sustainable in the next period as well is depreciation and amortization due to the increased fuel station base. In general, we have a drop in the net profits. But as discussed already in EBITDA section, there is a good potential for the next period. And we see that this year yet and also in the next period, there is a potential to shift up and have it sustainable.

Okay. And now we will run through each of those 3 segments. So let's start with fuel. I guess, key points from this slide is, firstly, to illustrate that market in fuel sales in Latvia in the first half of '25 is actually very stagnant. So we see that there is only a slight increase, around 1%, in terms of volumes sold in overall market. At the same time, we are doing much better in terms of selling volumes, so selling by more than 11% more than year-on-year. And this is obviously giving us additional market share which we are taking from other market players. But this is also, of course, meaning that nobody wants to lose their market share so there is quite a big fight with promotions, discounts so marketing activities and pricing, especially. Still at the same time, if we look at the whole first half of '25, that overall markets for fuel are more or less okay. And yes, let's see how it goes in next quarter. Again, I guess it's just to remind that it's for, let's say, in a very long period, '25 is the first year when Latvia is actually having more competitive excise tax on diesel fuel compared to Lithuania. So what we see is that those Lithuanian customers who fuel up in Lithuania, let's say, in the last couple of years, they are actually not doing it anymore in Lithuania, but they are coming in Latvia. So there is some, let's say, additional excise tax revenue in Latvia and also, of course, some benefit from local fuel traders. And another thing which is important to remind is that '27 will be the first year when fuel segment is actually coming under ETS 2 system scope. ETS is Emission Trading System, which will mean that for fuel traders for each of, say, few liters sold, we will, of course, generate some CO2 emissions and we will need to buy some quota to offset those CO2 emissions. And of course, this price for those CO2 quotas is very, let's say, a big question on how large will they be. But at the same time, let's say, most estimates is that at least it could give something like 15 -- not percent but EUR 0.15 per liter increase in fuel price, maybe even more, which simply will mean that fossil fuels will continue to become more expensive while renewable fuels like biomethane or like electricity, at some point, also CNG, which is generating less CO2s and standard fossil fuels should also become more attractive in terms of pricing compared to the standard fossil fuels. So that's on fuel. Let's go to the convenience stores.

Yes. In convenience stores, I'd say if we could call 2024 a big expansion year then 2025 is already efficiency year. As I already discussed previously, we have this high competition in the market for the customers. And this has been a tough period also for our shops. We actually have switched the loyalty offer to our newer clients, and we do this shift data analytics. And according to data, we analyze our existing customers and also investigate the market in a new direction and try to offer the best offer for our existing clients and also to attract new customers and increase the customer base. But at the same time, we see that, macro-wise, the purchase interest in our products and in products in general in the market is pretty tough because the inflation of the food prices is quite high and the customers are quite cautious. So we need to have the best offer and the best products, at the same time, understanding that the price for the purchases is much higher. And we still try to manage these 2 sides. And if we look at the market shares that we have grown by 11.4% whilst the market has grown in this period by only 2.7%, including Virsi increase. So we see and we feel this competition quite a lot, but we see also the results of our work. At the same time, as I already mentioned the efficiency, we look at our product base, but we also look at the new processes and new investments that we have done in the past year and previously and we also have assessed products, and we see how to improve them. But at the same time, we also established new, let's say, market, new -- we try to establish new market, which is the shops without the fuel stations. And we have made the decision in this year that we need to close the shops that are nonfuel-related shops in Terbata and in Origo center because our general customer did not -- was not that attracted to these shops, and the perception of Virsi in the market is still fuel station with the best coffee in the market and we continue our development in that way. And this period of time, we can say that this test is discontinued and there are no, let's say, no further development on this direction planned in the nearest future. Yes.

And the third segment, which is obviously the smallest one, but still quite ambitious one is energy segment. So we said we are continuing to sell more in terms of volume. And we are also obviously gaining some market share in this segment and continuing to work with quite a lot of independent electricity producers in Latvia so that we are able to buy this renewable energy and then to sell it to our customers. The thing is that, I guess, which is also for other electricity players in the market is the fact that basically we see that the balancing costs are quite high in first half of the year. Obviously, some part of that could be also allocated or connected with exiting this BRELL network. So it was actually quite a big challenge in terms of balancing costs for first half '25. But obviously, we also have reviewed our portfolio. We have increased our margins, and we think that second half should be better. And I guess also important to note that we are still continuing to develop our household portfolio for electricity, and we see that already there is increase by close to 20% in terms of customers in our households, and we are currently still #4 biggest player in Latvia in terms of electricity supply to households. Of course, we will continue to grow, but top 3 is still quite a big way ahead of us. So we will need, let's say, long-term work to get closer to this top 3. And again, some short news on natural gas. So we see that we actually have developed our trading potential. For natural gas, we have sold already first amounts of natural gas to our B2B customers, also to some test B2C customers. We are now evaluating the whole this process. And depending on the results, we will think whether -- and how much -- how ambitious are we going into this segment in future. So that's on natural gas. And let's conclude, I guess, with financials.

Yes. So we actually have discussed already before the shift in the net profit and EBITDA, and as discussed before and showed in the business segments, there is a high potential also based to the CapEx and the fuel station network that we have established in the past year. We see that, actually, here, we have added the line on the CapEx. And the past year and this year, the investments have been quite high. And this year, we should mention that there are 2 main streams of the investments, one big part of the EUR 7.4 million has gone to the fuel station in Salacgriva and another one to the biogas production plant in Naukšeni. And we continue -- we believe that these investments have bigger returns in the future and also shifting the key financials for the shareholders up as well. If we look at the general financial situation, loan-wise and current assets-wise then the current ratio is at 1, and this is also one of our targets, not to fall below 1. And net debt-to-EBITDA is 2.4. The shift -- the biggest shift has been in the past year. Last year, we attracted some new loans for the fuel station network expansion and EBITDA is still running up for these stations. But in this year, we still keep the loan portfolio quite balanced. So there are not big increases in the portfolio compared to the year-end of 2024. Well, we see that the balance sheet and the financials and the potential is good for the future increase and improvement, and we're expecting what's there to come.

Yes. And before we jump in Q&A session, so let's maybe just summarize a few points, which we would like you to take home after today's session. I guess, the first point is that we are currently under a heavy investment stage, and we see a significant growth in our market shares. And obviously, there is a slight lag between, let's say, we see this investment generating also some return in P&L, I would say, more significant than currently we see. Another point is obviously the new station in Salacgriva, which is quite beautiful and a strategical location for us. We are also developing already second station this year in city of Kuldiga. And also a point of the fact that we now exited the segment, which is shops only without fuel simply because we see that profitability of those shops, they are not, let's say, meeting those capital return requirements, which we -- I would like to meet. On biomethane plant, so a short answer is that we are continuing to go in line with the time line and the project plan. So we expect that we will be starting selling biomethane in first half of '26. And again, a lot, I guess we have spoken about this, but still just for everybody to recall we have invested nearly EUR 30 million in '24 and the first half of '25. And all those stations, of course, they had some onetime expenses while you are kind of starting them, and there always we need some time for them to pick up the pace and pick up this full operational, let's say, speed, which we expect will happen in the second half of this year. And obviously, that should also bring some good, let's say, trend on financial indicators for the second half of this year. So these are, I guess, key bullet points. Let's probably go into Q&A section then.

[Operator Instructions] But we will start with the questions that were submitted already. So what milestone should be achieved to turn sustainable profit for electricity segment?

I can take this one. I guess, 2 things. One is obviously we are having, as all the market in the first half, as I mentioned, with balancing costs. We also have a game plan how to solve this that includes also reviewing our portfolio with which, let's say, producers are we working and with whom we are not working for whom we are increasing pricing. And this is actually already very much in progress and should be seen in the next couple of months. So that's the first thing. And the second thing is simply, I guess, to continue to grow our market share in households, also attract B2B customers. And then I think if we do those 2 things, we will definitely have this sustainable profitability for this segment.

The next question, how many franchises are there currently?

So I can take this one as well. So franchises, basically we have currently 3 franchise partners. And 2 of those franchise partners have 2 stations each and the third franchise partner has one. So in total, we have 5 franchise stations in Latvia and we are always looking at ways to expand this network more because, of course, we cannot like cover very fast, let's say, each corner of Latvia. So of course, if anybody is interested in such option, let's discuss.

How much cubic meters of gas will the biogas plant produce on average? What is the expected gross profit?