Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Goldman Sachs-hosted WSE conference call. At this time, I would like to turn the conference over to today's speakers. Please go ahead.

[Marek Dietl, executive]

Hello, everyone. Good morning or good afternoon, wherever you are. My name is Marek Dietl. I'm the CEO of the Warsaw Stock Exchange. Thank you very much for joining us today for our quarterly results.

We will start with a brief introduction to capital markets in Poland. Hopefully, you have a presentation in front of you. And without any further introductions, I will just go to the Slide #2, where you have the overview of main Polish government initiatives related to the COVID-19 crisis. In a nutshell, it's 8% of GDP. So it's by far largest stimulus program in the history -- in modern history of Poland. And it consists of actions targeted for protecting jobs, helping micro businesses up to 9 employees. Poland is a very entrepreneurial country with 3 million entrepreneurs. So it's really important to keep those small companies going. There's also a facility for medium-sized companies, enterprises, which they are offered up to PLN 0.8 million of loan on preferred conditions. And if they keep their employment, 75% of the money will be reimbursed -- will be not refundable for them. And there is also in the pipeline a program to help large companies. It's still being debated by the European Union Commission, and hopefully, it will be soon in the market.

All the initiatives are also supported by the Polish Central Bank with quantitative easing. It's the first quantitative easing in the history of National Bank of Poland. So despite the size of this easing, still the Polish currency policy laws remains quite stable. There's also on the right-hand side, you see the regulatory package offered by the Polish Financial Supervision Commission, which relaxed some regulation and tweaked buffers for the banking sector. So the banks are very liquid now and they possess enough cash to finance the economy. And some selected supervisory duties were moved or postponed to ease the life of the banking sector. Polish economy realized very strongly on the banking sector, so liquidity of this industry is absolutely crucial.

There will be a space for questions later on. So I move quickly to the Page #3, which is -- which shows the different indices of the Warsaw Stock Exchange. And it's a logarithmic scale, so the dynamics of the indexes from December last year -- actually there are some indexes like the WIG Games, so gaming index, which actually rose almost 50%. There is also Tech index, so tech companies have performed very well, 17% plus. But let's say, old economy companies are underperforming, especially banks. They performed pretty poorly, and their weight in our main indexes is very strong. So banking sectors and the retail actually draw down our main indexes.

What is visible on the Page 4 where we compare indexes of the Warsaw Stock Exchange main index week 20, this green line, to other indexes ranging from regional, like Budapest or Prague into S&P. And actually, on average, the Warsaw Stock Exchange main index week 20 performed at the bottom of the list. It is mainly driven by very poor performance of banks and retail and also utilities. But as I mentioned before, some industries performed quite well.

On the Page 5, you see the total trading volumes turnover and valuation of the domestic companies. About half of the market cap of the companies on our venue are the local ones the -- rather the international ones. And we see quite a heavy drop in the valuation, but at the same time, recently, we have very nice trading volumes. Actually, from the beginning of this year, the trading volumes were quite good, but March was actually a great month for us when it comes to the trading volumes.

On the Page 6 is an update on the Polish pension reform. Just a brief history. By the end of 20th century, there was a compulsory capital market-based system. Pension system was introduced. It was called OFE, O-F-E. And in 2014, it was partially dissolved and the funders forced to steadily sell or pay assets. And back in 2019, a new system was introduced, which is voluntary by default. It is called PPK. It's on to the right-hand side. And we see the first assets were paid in by the future retiree in 2019. And in 2020, there were -- the assets of those funds were around PLN 600 million, roughly EUR 150 million. At the same time, the assets, the size of the assets of OFE's old system dropped. And due to this drop, it's mainly driven by the valuation -- change in valuation, the Polish government decided to suspend the reform of OFE, of this old system. They were supposed to be provided by the end of August this year, but it was suspended to an indefinite date.

And we see that we have on the Page 17 (sic) [ 7 ], inflow of funds into our market of -- and WIG, our broad market index returns, this green line. And we see in March plenty of investors that are a bit scared or quite scary and they dropped of the market. Mainly mutual fund investors decided to sell off the stake in those funds. But at the same time, we had almost 60,000 new -- sorry, 56,000, I think, new brokerage accounts opened in Poland. So some retail investors came back. Of course, there was a net outflows from our exchange due to the crisis.

Other long-term thing in our market is the capital market development strategy, which was prepared and also -- prepared by a couple of company but also by EBRD, European Bank Reconstruction Development. And it assumes quite a strong regulation and modernization for structural market and sets a very ambitious target developing the capital markets. We are happy to announce that the Polish government did not withdraw from this strategy, which was accepted in December 2019. So it's supposed to be continued despite the COVID-19 crisis.

And now, let me hand over to our CSO, Iza Olszewska; and our Chief Operation of Finance, Piotr Borowski, for the presentation of the group results. And the Q&A session will follow. Thank you very much.

[Izabela Olszewska, executive]

Good afternoon. My name is Izabela Olszewska. I'm a member of the Board of the Warsaw Stock Exchange. And just I would like to lead you through the business part of the presentation.

So please let's start from the Slide #12. The first quarter of the year was really good for the Warsaw Stock Exchange trading business and the extraordinary situation, which was connected with the coronavirus pandemic was the main reason of the high volatility on the market. And we observed the increased activity of investors. And it's resulted in the high volume. So when you look at the numbers, so the volumes on the stock market were significantly higher than in the previous quarter and also the corresponding period in the previous year.

So let me share with you some key observation for the stock market. So the first one is the growing activity of retail investors. It was already mentioned by our CEO. Just I would like to add that in recent years, the share of retail investors dropped significantly. So we are very happy that the new investors, they appear on the market and also the old one closed their accounts. And now our focus is on keeping further these investors. We think that external circumstances as well as our diversified offer of products allow us to keep them further on the market.

The second observation is a significant increase of activity on Warsaw Stock Exchange SME market, NewConnect, and also continued interesting in the gaming sector. So when -- after the fall of indices, we had the recovery started in the second part of March. And the biggest gains were recorded by NewConnect, NCIndex and WIG Games index. And this was connected with the activity also of retail investors because it shows they trust technology companies, gaming sector and also new technology sector companies.

In Q1, we organized, first time in our exchange history, the IR road shows in a new online forum. And organizing of IR road shows are a constant activity because we support our listed companies looking for new investors and new sources of capital. But this time, we arranged this roadshow in online forum, but in Japan and Singapore, which means that we also opened our new geographical direction, which is Asia.

Also the last observation here is the high activity of liquidity providers, which are our partners in high-volume provider program. And even though there is a percentage decrease, the nominal value of their turnover grew up because the whole pie grew as well.

Now let's go to the Slide #13 and the derivative segment. So high volatility on the market had also a positive impact on all our derivatives. So the total volumes increased by more than 80% year-to-year, and the most accredited contracts were single-stock futures. Again, on derivatives market, liquidity providers operate increasing high-volume provider program, increased their activity and increased the share in turnover.

Now on the Slide 14. There are some highlights related to all categories of our instruments, but especially, I would like to highlight something else, a very diversified offer of Warsaw Stock Exchange. So we offer to our investors not only equities and derivatives but also white pallet of structured products. As of the end of Q1, we had 1,300 various structured products in trading. There were trackers, suitable factors for different appetite on risks and with values underlying. And of course, this is very important to underline that these products, they allow, especially retail investors, to earn on Polish markets, because in Poland, retail investors have very limited access to short selling. So the structured products, they are for them a good alternative.

And the Q1 was also the best period ever for listed ETFs. So of course, that's true that with ETFs, we started from a low base. And currently, there are 7 ETFs listed on our Polish indices, WIG20 and WIG40, but also that and S&P 500. But the most popular was an ETF based on WIG20 chart. And again, the large number of trades in this segment of the market, they indicated the high activity of retail investors.

So that's all for now from my side, and just -- I think the next slide belongs to Piotr Borowski.

[Piotr Borowski, executive]

All right. Thank you, Iza. Hello, everybody. Piotr Borowski, I'm the COO and CFO of the Warsaw Stock Exchange.

We are on the Slide #16. So the high trading volumes reflected high revenues from the financial markets. You can see that there's strong increase in sales revenues by 15%, EBITDA by 29%, almost 30%, and net profit by almost 20%. That was really a very good quarter for us. And operating expenses were under control. They also rose slightly by 3.2% due to the development of our strategic initiatives. And I will develop on this further on the next slide.

On the Slide 17, you see that we still enjoy a very high EBITDA margin, which is 51.6%, almost the same like at the end of the year. While the net profit margin rose because of the much higher trading revenue.

On the Slide 18, we see the sharp increase in trading revenues from the financial markets because we enjoyed strong increase in trading volumes in all business lines, what was said by Izabela. So in equities, derivatives and fixed income, altogether, it was a much better quarter, one of the best in our history.

Then Slide #19. The listing revenues were stable. We charge our issuers with the listing fees at the beginning of the year, and we calculate this listing fees on the value of shares at the end of the previous year. So it was a good situation for us because it was before the decrease of prices the listing fee was calculated. And that's why it's at the same level like for the last year.

Slide 20. The market data services, they are very good source of income, very stable. And we are very optimistic about this because we expect a moderate growth in this business line. And we are signing a new contract with data vendors for this kind of services within our group, so not only Warsaw Stock Exchange, but also commodity exchange and the bulk spot and the bond trading entity.

So this is about the revenues of the Warsaw Stock Exchange. And now I would ask Pawel Ostrowski, CFO of our Commodity Exchange to comment on the revenues of the Commodity Exchange. Please, Pawel.

[Pawel Ostrowski;CFO of Commodity Exchange, executive]

Hello, Pawel Ostrowski, Polish Power Exchange. Good afternoon. So I would like to briefly go through the main data of the commodities market.

So starting with Page 22 and talking about the electricity market. So the volume of trading is quite stable. So first quarter is on 66 terawatt hours. So that was quite interesting quarter. So we have quite decent results in terms of turnover in January, 11 terawatt hour. In each of the following months from February until the end of March, the turnover exceeded 20 terawatts hours. So that previously happened only in 2 months of 2019. And this is quite significant.

On gas market, we -- the winter was warm. So it wasn't conducive to the gas consumption and then high turnover in the market. So hence, we have the poor January on the 11, 2 terawatts hour of turnover. Next 2 months were better. In March, we had 3 terawatt hour, and this was much, much better increase year-on-year, amount almost to 50% increase.

Property rights. So we recorded slight increase in trading in green certificates. That was by 2.3% in January. At end of March, 8.9 terawatt hours, decreased by 4%. In this market, we saw a sharp drop in prices in mid-March. That was also a significant, important issue. The current prices stabilized around PLN 130. We could observe the upward trend in rights certificates. It's been broken, and they have already returned to around PLN 2,000 per [ PAE ].

So that's mainly about what's happening on -- in terms of the volumes. I will say mainly on the following slides what was behind our revenues and mainly following the turnover, the volume we are trading on the power exchange.

When we talk about revenues, on Page 23, so they have increased quite significantly. On electricity market, first quarter, we could observe almost 50% increase year-on-year mainly due to the increase in power trading. This was the high -- the main reason was the high volatility of CO2 prices, and then that affected the volatility of electricity prices. That was similarly for gas. And the main driver was the change in fuel prices on global markets. That was main issue. That would also -- we could observe increased interest in electricity, energy and gas trading amount in companies, our clients.

We continued our TGE liquidity improvement program. We consult that with market on an ongoing basis. For that purpose, we've created market council that operate this market, including markets, the [ take up ] program, for example.

The most -- maybe not most, but worth highlighting subject would be the [ nanomakers ] in the first quarter. One of them for organizational reasons, including pandemic [indiscernible] just gave up. At the time we acquired the [ nanomakers ] on a larger number of instruments from can be fees instrument for our liquidity. So we are working currently in making similar solutions for the gas market also to appear soon. We are gradually increasing the efficiency from sales of additional services. So here, we would like to increase the revenue. We could observe quite good results quarter-on-quarter basis, and we would like to follow all the activity on the Warsaw Stock Exchange in that area. So that's something we will work on, and we would like to heavily increase our revenues.

If we could move to the Page 24, revenues from clearing. That's quite obvious, but I would like to underwrite, there's quite strong correlation between revenues realized by clearinghouse. With the trading, there is some slight delay in timing of numbers, of course. So revenue from clearing increased almost 20% on a year-on-year basis. And revenue from operation of register certificates decreased to PLN 5.6 million mainly due to the end of a co-generation program. In terms of the transaction in renewable electricity in the register of guarantees, we also observed some decline. So these are main figures, as I mentioned. So in terms of clearing, just following the situation on the main markets on the power exchange.

So that's briefly from side of Polish Power Exchange.

[Piotr Borowski, executive]

Okay. Thank you, Pawel. It's Piotr Borowski again. I will continue on the financial situation of the Warsaw Stock Exchange Group.

So we are on the Slide #26. There is a structure of our operating expenses, and they grew slightly by 3.2%. It was mainly due to the salaries and employee cost growth. Why we are hiring a new people for our strategic initiatives, because several big projects opened as we are still diversifying our business. And there was also a growth of external services. It was mainly the cost of IT services and advisory services, also mainly connected to our strategic projects. And we booked a lower provision for the tax for our market regulator. It was the 80% of the maximum value for the last year, and it was also consulted with our auditor. And we are very comfortable with this.

Slide #27, share of profit of our associates. There was a big growth by the 100% year-on-year. It was mainly due to the very good quarter accounted by the KDPW. KDPW, the national depository for securities, the entity which provides services in settlement, clearing and depository for Polish financial market.

And the last slide, consolidated balance sheet of GPW Group. We have a very solid balance sheet, and we are planning to pay dividend. We recommended to our AGM to pay the PLN 2.4 per share dividend for the last year. And we observed the increase in the balance of cash of PLN 55 million due to the trading revenue, very good quarter in trading, and due to the annual fees that we collect in advance for the whole year in January, especially the annual fees from our issuers.

That's all about the presentation. Thank you.

[Operator]

[Operator Instructions]

[Unknown Analyst]

This is [indiscernible]. I have 2 questions. First of all, thank you so much for holding a conference call and congrats to your results. My first question is about your strategic initiatives. Could you please name the 3 projects that are on the top of your initiatives agenda to be launched this year?

[Marek Dietl, executive]

Sure. Thank you for the question. This is Marek again. On top of our list is agriculture market, and this has been launched this year by -- in March. And yesterday, we had the first transaction on this exchange, the auction for 250 tons of wheat. There were 1 private seller and 10 buyers. And we are very positive on that. And we are still in the test phase until the end of August, so we do not record any revenues because the users can trade for free. But we are very positive that it can be another important pillar in our revenues.

Second -- ticked out number one, for sure. Number 2 is GPW -- number two is introduction of new products to our exchange last year. And this year, we are very busy introducing structured products, ETFs, new index -- indices and so on and so on. And we have -- harvest the results last quarter when especially those newly introduced instruments were very actively traded. And we'll continue to offer new products, so expansion of our core business. And number 3 would be GPW data we received funding commercial center of research and development. And step-by-step, we introduced new data products. If I can name also a fourth one, we have first technology ready for sale to the third party. And our newly established company, GPW Tech is going to sell it -- to start deploying it and offering it to the third parties next quarter. So basically, the mix of new platforms, expansion of existing platforms and new data and technology products, that's the pillars of our growth strategy.

[Unknown Analyst]

Perfect. My second question relates to the provisions you recorded in the fourth quarter and the first quarter of this year. Could you please confirm that even if you need to release these provisions and pay these amounts, you are still dedicated to pay the dividends as disclosed in your strategy last year? So at least PLN 2.5 per share from 2020 profit.

[Marek Dietl, executive]

Nothing changes in that respect. We have a very consistent and stable policy when it comes to dividends. We want to increase by PLN 0.10 every year. So our aim as a Board -- of course, AGM is to decide, but our aim is to recommend to the AGM the amount we have in our financial KPIs. And we also do our best to be able to resolve this provision because they are related to some VAT issues, and we are quite convinced that there will be a solution. But of course, to be on the safe side, we introduced those provisions. But still, we believe that the court settlement and out-of-court discussion with the Ministry of Finance will find a positive commencement on our end. So we'll [indiscernible]. As I mentioned, even if we have to pay this additional VAT, we are comfortable with our dividend policy.

[Unknown Analyst]

Okay. Perfect. And maybe one more question. You've mentioned that you are working on introducing new ETFs and other project -- product to your offer. Could you please share what's your thoughts on the potential development of the entire cost system investment industry in Poland? Do you see the huge space for products that are offered here? And if so, do you think that the next step should be adding, for instance, ETFs benchmark to some foreign stocks?

[Marek Dietl, executive]

Basically, we believe that the ETF space can be the developed in Poland. We are very positive on that. Especially, we are contemplating some solutions for that instrument. But maybe I will leave the floor to Izabela Olszewska, our Chief Sales Officer, for further details. Iza, the floor is yours.

[Izabela Olszewska, executive]

Yes. So I think that passive investment becomes more and more popular in Poland. So yes, we are working on some new ETFs with the ETF providers. And what I would like to also confirm that the first in the line is the ETF based on debt incremental bond. But of course, we have currently 2 ETFs, which are based on foreign indices. So I'd like to mention and one on S&P500. So the investors, they've got already according indices. But of course, if there's such an interest, we can add more. But currently, the most important was to create all the possible ETFs based on -- ETFs based on our indices, and also that can reflect different situation in the market, so short leverage, et cetera. So the answer is yes, we think about also foreign indices. But I that's now the most -- the biggest interest is in bond ETFs and also with the Polish indices ETFs. Especially -- okay.

[Marek Dietl, executive]

No. Please, please go ahead.

[Izabela Olszewska, executive]

No. I just wanted to add that we still work on a securities lending and borrowing system, which will, for sure, allow especially retail investors from other strategies that they can use now. So ETFs, again, especially those short ETFs, they allow them to earn on Polish market. It is why the interest was so high in the recent periods.

[Unknown Analyst]

This is [ Ashwin Chamartin ] from Goldman Sachs. Thank you so much for your time and a very insightful presentation. We've seen, obviously, with the impact of market volatility change in some market rules, specifically with regard to short-sell bans and trading hours. And that's true of the EM as much as it is DM. With that, have there been any considerations for a change on your side, if I may ask, please?

[Marek Dietl, executive]

We are -- you mean trading hours? You meant trading hours, change in trading hours?

[Unknown Analyst]

Yes. Trading hours or indeed short-sell bans.

[Marek Dietl, executive]

Yes. Okay. Yes. We do not plan to introduce any changes. Currently, we went for a roller coaster related to, at the same time, high volatility market and very high investors' activity, still very high investment activity, and at the same time, we achieved 95% of the staff working in the home office space. So currently, we do not consider any change in trading hours and any major changes in our back-end technologies and so on because it will -- we don't want to create additional weight for our business continuity.

[Piotr Borowski, executive]

And concerning the short selling, there is no ban in Poland for -- on short selling. And we haven't heard about this -- such intentions from our regulator. No discussion about this now.

[Unknown Analyst]

Understood. And a quick follow-up as well. You mentioned some of your initiatives around ETFs on the credit side, which sounds very, very interesting. Any ambition in terms of new product launches this year, or indeed, next year on the derivatives side, please?

[Marek Dietl, executive]

So maybe I will hand over to Izabela. What is the time line for...

[Izabela Olszewska, executive]

Yes. So we have single-stock options in the pipeline. So currently, we are working on this product, and we think that everything will be ready in the end of the year. But of course, the moment when we start to offer single-stock options, it will depend on the market and the interest of market participants to use these products. And also the most important are also the market makers, which are absolutely needed here. So we think that we'll be ready, as I mentioned, in the end of the year. But perhaps, we can start in the next year, at the beginning of the next year.

[Operator]

Are there any other questions?

[Unknown Analyst]

Sorry, one more, if I may, if there's no one else jumping on. ESG, we're seeing an increase in take-up. And indeed, it's a subject and theme that's increasingly dominating mind share with investors on our side. Could you perhaps talk to how you think about ESG? And any initiatives that you may all be running to help improve any ESG metrics?

[Marek Dietl, executive]

ESG was supposed to be a core topic for us this year, but we had to cancel the conferences around that. But still, we continue working on our ESG. And again, Izabela, if you can step in and tell us more about our plenty of our ESG initiative, but selectively the top ones like with the EBRD and so on.

[Izabela Olszewska, executive]

Yes. Yes, yes. So of course, we realized that ESG topic is absolutely important, and we approached it from the business perspective. So at least we would like to help our companies to follow the ESG. ESG, I would say -- they revealed the ESG policy, and of course, how they -- they plan to do in their strategies related to the ESG things. But we started the whole plan how to implement ESG strategy on our market. We started from ourselves, so as the management with Warsaw Stock Exchange, we prepared the whole program. And also we have a very good partner because this is EBRD. So we are very close to finish our arrangement and start the project, which will be focused on our companies and preparing the guidelines for the companies not only listed here in Poland, but in the whole region. So this the -- our main initiative. Also we will soon start the trainings and workshops for our sell side and buy side also to show them how it is important to push the companies to use ESG in their business and their strategies and policies. So we are now the member of UN Global Compass as well. So we are very close to the topic. So a lot of things in this ESG is now -- and a lot of projects are open. And we operate as a moderator, I would say, of all these initiatives.

Also as our CEO mentioned in the first part of the presentation, this topic of ESG is a part of a strategy for development of the capital market in Poland. So this is the document we built. All the -- the most important initiatives for the capital market. And ESG is one of this important things that's -- the owner of the strategy, the Ministry of Finance, thinks that it should be implemented very strongly. So we are the part of the group, but also there are some other market participants, so I think that very soon we'll have open a couple of growth initiatives in ESG area.

[Marek Dietl, executive]

Just to jump in, we have also BTSG index, social index, which is covering 60 companies. So it's someone -- and there are already some funds which are benchmarking themselves to this index. So we would also welcome an ETF provider -- ESG/ETF provider, which will benchmark you to the BTSG.

So any question?

[Unknown Executive]

If there are no other questions, we would finish today. I would like to thank you for joining the conference and taking your time to listen to the presentation about our business. If you have any questions in the meantime and if you would like to know more about our business and financials, please contact investors department. We'll very happy to help and cooperate, and we are there for you. Thank you all for joining, and goodbye.

[Marek Dietl, executive]

Thank you very much for questions and listening to us. Thank you very much.

[Piotr Borowski, executive]

Thank you so much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.