Hellenic Exchanges Athens Stock Exchange SA

ATHEX:EXAE

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome and thank you for joining the Hellenic Exchanges Athens Stock Exchange conference call to present and discuss the first quarter 2020 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Nikos Koskoletos, CFO; and Mr. Stelios Konstantinou, Head of Investor Relations. Gentlemen, you may now proceed.

[Stelios Konstantinou, executive]

Good afternoon, ladies and gentlemen, and good morning to those of you listening to us from the other side of the Atlantic. We would like to present the financial results of the group for the first quarter of 2020, which were published yesterday and are available on the IR section of our website, and then take any questions that you might have. Nick?

[Nikos Koskoletos, executive]

Okay. Thank you, Stelios, and good afternoon and good morning to all.

Before I say a few words on the Q1 2020 results and comment on how the market dynamics seem to be unfolding in 2020, we would like to share a few pieces of information as to how we're continuing to deal with the COVID-19 pandemic as a group.

So we continue to operate smoothly as the necessary measures to limit the extent of the financial impact of the COVID 2019 pandemic are in place. Today's glitch was one of our network mishap, but I'm sure that other members are in continuous communication with our member support and think that we're back -- we will be back to operating. So in this framework, we wanted to say that we've been using our technology infrastructure. And we've created a strong crisis reports -- response mechanism.

At this point, with close to 80% of us are currently working remotely. And we'll continue to do so until further notice because we are extremely cautious on this matter because the issue of upholding social distancing is rather precarious and should we drastically curb our current operating setup.

Having said that, so to the actual operation -- the operating performance, the group's results were significantly higher compared to those of the corresponding first quarter of 2019. And that is because market statistics were particularly good. Market cap, EUR 55 billion versus EUR 48 billion on average last year and EUR 85 million in average daily traded value in Q1 versus EUR 46 million last year. So on the -- one thing that we should note on the flip side of the positive Q1 base effect, Q2 is unfolding in a situation that is a negative base effect as the result of the stagnation post the COVID pandemic sail off in March. So the second quarter traded value -- the average is significantly lower, so the average market cap currently at 3-year lows.

So -- and the conclusion -- as a conclusion, what we want to note out is for the remainder of the year, the revenue of the group is expected to be negatively affected due to the aforementioned drop in trading activity and the reduction in what seems to be corporate actions given the originally thought pipeline. So we need to stress out that the increase in earnings in the first quarter in 2020 definitely is expected to be reduced drastically in the following quarters of 2020.

So at this point, I'd like to pass it on to Stelios to go through our Q1 performance in more detail.

[Stelios Konstantinou, executive]

Thank you, Nick.

So moving on. We start the overview of our first quarter 2020 financial performance from the top. The consolidated turnover of the group in the first quarter of 2020 was EUR 8.2 million compared to EUR 6.1 million in the first quarter of last year, up 33.5%. And if we concentrate at the 5 most important revenue drivers, which together account for just under 80% of total turnover, we have the following picture.

Revenue from clearing made up 35% of total turnover and amounted to EUR 2.9 million compared to EUR 1.6 million in Q1 2019, and that's up 75%. And the increase is due to the 88% increase in clearing revenue in the cash market while derivatives market revenue was up 25%. Revenue from trading represents 20% of total consolidated turnover and in the first quarter of 2020 was up 74% to EUR 1.6 million compared to EUR 930,000 with almost all of the increase coming from the cash market, which was up 82%.

As far as revenue from the derivatives markets, both trading and clearing, is concerned, in the first quarter of this year, trading activity, i.e., the number of contracts, dropped by 3.5% to 38,700 contracts compared to 40,100. However, revenue was up 25% and the average revenue per contract was also up 35% to EUR 0.249 per contract compared to EUR 0.184 per contract in the first quarter of last year. As you know, pricing depends on the type of investor, the product being traded and the prices of the underlying securities. And as a result, market volumes and our revenue do not always go hand-in-hand.

Lastly, on derivatives, trading and clearing revenue in the first quarter of this year was EUR 560,000 compared to EUR 450,000 last year, and that corresponds to 12.5% of total trading and clearing revenue and to just under 7% of total turnover.

Revenue from exchange services makes up 10% of total turnover, and this line includes the quarterly subscription fees paid by listed companies, fees on rights issues and IPOs as well as fees paid by members and amounted to EUR 787,000, up 18.5% compared to the first quarter of last year.

Finally, revenue from depository services is up 21%, amounting to EUR 618,000 compared to EUR 641,000 in the first quarter of last year. Revenue from this slide makes up 8% of all turnover and includes revenue from rights issues, quarterly subscriptions paid by operators and revenue from inheritances. Most revenue from that line was from subscription fees of operators, which is a custody fee that is based on the capitalization of the market as well as corporate actions by issuers.

Lastly, on the top line, revenue from market data makes up 8% total turnover and includes the fees that we collect from data vendors for the provision of Athens Exchange market data. The fees that we collect depend essentially on the number of data terminals to which these data vendors disseminate Athex data to and as such, is one of the few revenue lines that does not directly depend on market activity. The revenue from market data dropped 3.6%.

Turning now to the expense side. Total operating expenses, including ancillary services, increased by 13.6% in the first quarter of this year to EUR 4.7 million compared to EUR 4.2 million last year. Operating expenses were up by approximately EUR 600,000 or 15.4% in the first quarter of this year at EUR 4.4 million compared to EUR 3.8 million.

If we break down OpEx, we see that personnel costs were up 12.5% while all other OpEx was up 20.5%. Now the increase that we see in OpEx is due to 3 factors mainly. First, the targeted raises given to employees after a number of years of no increases as well as the strengthening of the management structure that was implemented late last year and at the very beginning of this year. And that led to an increase in EUR 300,000 in staff salaries. Second, the fee of EUR 102,000, which was paid to the Hellenic Capital Market Commission, they're the regulator, for examining the licensing dossiers as part of the application by our subsidiary, ATHEXCSD, to obtain a license under the CSDR regulation. And finally, the EUR 100,000 donation by the group to the Ministry of Health to support the effort to combat the COVID-19 pandemic.

Personnel, remuneration and expenses accounts for 62% of total operating expenses and is, by far, the largest expense category. Head count at the group at the end of March 2020 was 223 compared to 225 at the end of the first quarter last year.

Turning now to the bottom line. The earnings before interest and taxes of the group increased to 155% to EUR 2 million compared to EUR 0.8 million in the first quarter of last year. Interest income in 2020 was EUR 40,000 compared to EUR 121,000 in the first quarter of last year. The average interest rate being a very low 0.21%.

Last, the net after-tax profit for the group amounted to EUR 1.55 million compared to EUR 580,000 in the first quarter of last year, which is a 169% increase. The effective tax rate on consolidated earnings in the first quarter of this year was 21.5% compared to 33.3% in the first quarter of last year. However, we'd like to remind you that in 2020, the nominal corporate income tax rate is 24% as was the case in 2019. However, you might remember that for the first 3 quarters of last year, the rate used was 28% since the lowering tax rate to 24% was only passed in early 2020.

Turning now to the balance sheet. The cash and cash equivalents of the group at the end of March 2020 increased to EUR 76.2 million compared to EUR 73.4 million at the end of 2019. And at the parent company, the cash and cash equivalents were EUR 18.2 million compared to EUR 17.3 million last year. Almost 40% of the cash, i.e., EUR 30.2 million at the end of the first quarter of this year, is kept at the Central Bank where interest rates are negative, currently at minus 0.5%. And this is an obligation that our subsidiary, AthexClear, has under the EMIR regulation.

Also on the balance sheet is a further EUR 199.3 million that we report both as an asset and a liability. And these assets are and liabilities are third-party cash assets and concerned margins in the cash and derivatives markets. And these funds are also deposited at the Central Bank, the Bank of Greece.

Now before we go into Q&A, just a brief reminder. In only 3 days on Friday in May, we'll have our AGM, our Annual General Meeting. And at the General Meeting, we have up for approval by shareholders payment of an ordinary dividend of EUR 0.07 per share, which corresponds to a EUR 4.2 million payout, which is in turn a 69% payout ratio and a special dividend of EUR 0.09 per share, which corresponds to a EUR 5.4 million payout. If, as expected, these distributions are approved by shareholders, the record date for the dividend is June 5 and the payment date is June 11. And the expected payment date for the special dividend have not yet been determined and it will be announced as soon as they are.

And with these final comments and reminder about the AGM, we'd like to thank you for participating and we'd like to open the floor to any questions that you might have.

[Operator]

[Operator Instructions] The first question is from the line of Memisoglu Osman with Ambrosia Capital.

[Osman Memisoglu, analyst]

I have two questions. One is on the cost side. You had roughly a 15% increase in Q1. Maybe there were a few one-offs, I may have missed some of it in the presentation. What's the outlook, if you could give us any color, for the remainder of 2020? And then the second question is on your CapEx outlook. It was almost nonmaterial in the first quarter. Any color for the remainder of the year on CapEx would also be helpful.

[Nikos Koskoletos, executive]

Yes. So Osman, it's -- now on the -- sorry. Okay. So on the operating expense, it -- there were a series of structural elements that have led to the increase because of the -- as mentioned by Stelios, there was again multiple years of not having adjusted any of the personnel expenditures on that side. Overall, there were a series of one-offs, as mentioned, by the -- and reported in our financial statements. I would say that the run rate, though, it will be in the high single digits for the overall operating expense base, I would use that. On one hand, with regard to the CapEx and this is something that interrelating, hence, the difficulty of actually providing any information, additional information on that is that there's a series of issues that have been revised as to what is designated. Part of what we were doing as CapEx, it seems was due to the -- [ for us, 38 ], there's an issue there with regards to what needs to be reclassified instead of being CapEx into OpEx. For all intent and purposes, though, we would see that the operating expense line will be -- would be driven a tad higher in the sense of what I mentioned before, whereas the CapEx will be trimmed lower.

In terms of actual cash outflow, though, it's actually the same. It's just a matter of how you book the actual element. So it's not that we've cut back on our expenditure plans. So there's an issue of timing in Q1 as well. Because due to the whole pandemic, you understand that a lot of things were cut back just to reassess as to where we stand. But that is not to say that we've cut -- there's been a strategic decision to cut back on CapEx. One thing that we should keep in mind here is that we do not want to undermine, in any way, our capacity. So yes, we all have stress. The unfortunate development of the market levels and activity has dropped. But I think we all know that the way it can dry up, it can ramp up back up. So we would not want to impair our capacity in any way.

[Osman Memisoglu, analyst]

Sure. Just to maybe a little double check, clarify. In Q1, was there a reclassification then from CapEx to OpEx?

[Nikos Koskoletos, executive]

There was on the particular element of -- on the operating -- on the personnel costs. They were close to -- maybe close to EUR 65,000 more that were booked into the operating expense, just on the operating -- just on the personnel costs. On the other elements, again, it has not been as drastic, but it's something that we will be seeing in the -- as the year progresses.

[Osman Memisoglu, analyst]

Okay. So -- but it sounds more like a timing issue for Q1 CapEx being quite low.

[Nikos Koskoletos, executive]

Correct. Correct.

[Operator]

The next question is from the line of Kalogeropoulos Yiannis with Beta Securities.

[John Kalogeropoulos, analyst]

I have a question regarding your top line revenues. Do you expect any additional or increased revenues from the liberalization of the energy market and the operation of the energy market in 2020?

[Nikos Koskoletos, executive]

Look, from the energy market, as you probably know, we are part shareholders. We have a 20%, 21% stake in the business. But more importantly, perhaps, we also provide services to the exchange. And that includes anything from rents, rental income as they are located in our office buildings as well as back-office services since we provide HR and financial management services to them. And from those, we book revenue that approximates, on a yearly basis, EUR 1 million, EUR 1 million plus a year. Now the energy market being a new venture and since the target model, the so-called new target model, has not yet been implemented, it is expected to be implemented this year, we'll see how the market grows. As far as the potential, it was limited last year. If I recall, in terms of earnings, the number of that core function was approximately EUR 100 million. So it's a new project in the development, let's say, phased. And more important at this stage, there is the fact that we would be booked from the service provided, okay?

[John Kalogeropoulos, analyst]

Okay. So to get it right, the -- any expected incremental revenues from the operation of the target model are rather skewed towards 2021 rather this year. And you stick with EUR 1 million to EUR 1.5 million from the services related to the energy market for 2020, correct?

[Nikos Koskoletos, executive]

The EUR 1.5 million might be on the high end. I think closer to EUR 1 million or thereabouts is fair, okay? Sorry, just to follow up on that, that would include the dividend that we are looking to -- the dividend as shareholders. So right now, the way we operate because we're shareholders, we do not -- our top line is only correlated to the extent that we have the service level agreement that we have and whatever it is that we get as shareholders of the energy exchange. So we support the energy exchange and we're shareholders of the energy exchange. If target to -- if the target model proves to be something that has a lot of activity, then our benefit will be as shareholders, not as -- because we do not consolidate the exchange.

[John Kalogeropoulos, analyst]

Yes. Okay. Clear. And do you have any further expansion plans apart from Kuwait and Lebanon Exchanges for 2020 scheduled for this year?

[Stelios Konstantinou, executive]

I think it's very -- we have clearly stated that it's something that we are in -- we are actively looking at opportunities without having to be mandated to actually execute in 2020 or when the opportunity needs to be a correct opportunity, it needs to be an opportunity that we could deliver. So I think those plans are still live. But given the fact that we have concentrated all our efforts over the past 2 months in adjusting our operating environment to the remote structure, so to speak, and safeguarding our operation, it is something that has gone a bit to the back burner. But that does not mean that when the opportunity arises, we do not look into anything that we could contribute to -- mostly to the same level of engagement as is the case in Kuwait or Lebanon, which, by the way, has been postponed for this year given the disruption there. But in any case, that is the same line of operation that we have. So no, we have not stopped looking, but it's not something that we are in any rush of doing.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Nikos Koskoletos, executive]

Thank you for taking the time to participate. And should you need any further clarification more privately, we'd be more than happy to take your questions, take your calls. Thanks again for participating.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant day.