Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the Warsaw Stock Exchange 1Q 2021 Results Call. I now have the pleasure of handing over to your host, Pawel, to begin today's presentation.

[Pawel Wieprzowski, analyst]

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski. On behalf of Wood & Company, a very warm welcome you to the first quarter results conference call with Warsaw Stock Exchange management. Today, the company is represented by Izabela Olszewska, member of the Management Board; Piotr Borowski, also member of the Management Board of the Warsaw Stock Exchange; and Mr. Adam Mlodkowski, Vice President of the Management Board of the Polish Power Exchange.

Gentlemen, congrats on the results. Please go ahead.

[Izabela Olszewska, executive]

Hello. I am Izabela Olszewska. I'm the member of the Management Board. I'm in charge of business and sales. And in my part of presentation, I will keep the focus on trading volumes and the investors' activity in the first quarter of 2021.

And just Slide #3. And just starting with the international landscape, just the Warsaw Stock Exchange maintain its leading position on the European markets when it comes to the dynamics of the trading volume growth. And trading volumes in Q1 were 37% higher than the same period last year. And the chart shows that other exchanges of our old continent, I would say, recorded slower growth or declines. But of course, this is for Q1, but we are now in May, so let me comment on April and May.

So the market was most like in April and a little bit better in May. Trading volumes were and are still not best, but a little bit worse than in Q1 months. In Q1 the year, the Warsaw Stock Exchange recorded very well velocity ratio with an increase of -- in market capitalization by about 40%.

So please look at Slide #4, and this is about the situation on equity markets. So the Q1 2021 was very good on the equity market, although our trading volume was lower than in the last quarter of the previous year. But of course, we should remember that in Q4 last year, there were 2 extraordinary months: So October, with the debut of Allegro company, and it was the largest IPO in the Warsaw Stock Exchange history, the second IPO in the whole Europe. So the value of offer reached PLN 10.6 billion. And this debut was accompanied by an extremely high turnover, especially in the first session after debut. In December, we noticed a very heavy trading on another blue chip, CD PROJEKT. This is a company games provider, producer, and they released the long-awaited game, Cyberpunk. And of course, together with the release of this game, so the investors, they traded a lot in the stocks of this company.

The high trading volumes in Q1 were a result of several main factors. And just I would like to point out the continuing significant investors' activity on Allegro stock. And the share of trading in Allegro in the total trading volume reached almost 11%; also, high volatility of CD PROJEKT stock, so almost 19% of the total trading volume. We had also the big news of huge games -- huge company games provider, which is registered in the U.S. And the value of offer was PLN 1.7 billion, again, the big company. And it resulted in the trading activity, especially high trading activity, in the first sessions after the debut. Also, the increased base and activities of retail investors, there was also in Q1. So we continue with this high activity of our retail clients.

And I would like also to underline the inflow of new capital to equity funds in Poland, and it was around PLN 2 billion of fresh capital. We are optimists when it comes to our equity line partner. So on Wednesday this week, we had another interesting debut, just a [ petco ] company. This company represent the commerce sector, and the value of offer was PLN 3.7 billion. And there are a few prospectus of other companies with Polish FSA waiting for approval. So we think that this year would be a good year on the primary market. We see also an interest of foreign investors and traders in our markets.

Commenting on the situation on our SME platform, NewConnect. So we noticed a quite significant decline on trading volumes quarter-on-quarter. However, in Q1, the trading volume was still much higher than a year ago. And we think that the trading volumes in this market would rather stabilize on the levels observed in the first quarter or first half of 2020. So the third and fourth quarter of 2020 seems to be very extraordinary.

In the other segments of equity markets, the structured products have been becoming more and more popular among our investors. Currently, we have 2,200 products. Also in Q1, our ETFs offer, just -- to our ETF offers, there were 2 additional products, ETFs based on Nasdaq-100 Index and ETFs based on S&P 500. Both ETFs, they are with built-in currency risk hedging, which means that they are really good, especially for our retail clients.

We continued in Q1 with our sales and marketing activities. So we organized the -- another -- the sixth addition of Innovation Day. This is a very good event based on the opinion of our investors because the goal is to present the innovative companies to our investors, both those who are already listed on our market and those who are just being prepared to listing. We continued the second edition of Growth Academy. This is our educational and networking project dedicated to mid- and small caps. But some of our participants, they already declared that they are very much interested in floating on our markets. We also continued with our project, the title, It's Worth Being a Listed Company. In this program, we would like to provide support to our issuers in various forms. So education but also, last year, we decreased listing fees for COVID [ losers ]. And also, we had many one-on-one meetings with potential stocks and bond issuers.

In the liquidity space, we had our high-volume providers very active in equity turnover. So their share in equity turnover reached more than 13%. And what is also worth underlying is that, again, the number of brokerage accounts for retail clients increased. And comparing the situation at the end of Q1 with the year-end 2019, it was an increase of more than 86,000 accounts.

So just going to derivatives markets, so Slide #5. The trading volume in Q1 was comparable to Q1 previous year, 2020. But if we're saying clearly that the structure of turnover was slightly different, so single stock futures and currency futures were more popular than WIG20 futures. And bearing in mind that the trading fees are lower for single stock futures and currency futures than for WIG20 futures, so I would say in the total bill, we earned less by 15% quarter-on-quarter. We are very open for the new products and the new single stock futures that are in the pipeline. So we are going to launch single stock futures based on [ petco ] stock. And it will happen very soon in June.

And so in the liquidity space, the share of HVP participants program, it was 11%, a little bit lower than in the Q1 2020. However, I would like to underline that we have had a relatively large share of all liquidity providers, so not only HVP but also market makers on our derivatives.

Now a few words about ESG, Slide #6. ESG is a very hot topic for us. We have been continuing to prepare our company and our capital group to the best standards of reporting and simultaneously also as an organizer of trading platform for 800 companies. We want to support our listed companies in this area. So first of all, the updated best practice for listed companies 2021, which will be effective as of 1st of July this year, they have been implemented. And they cover ESG factors, including, of course, climate, sustainable development, social issues and some other important factors on ESG space. The companies, they are obliged to comply or explain if they are not compliant with our best practice document.

Also, together with the European Bank for Reconstruction and Development, we published the ESG reporting guidelines. This is a very practical manual based on interview with -- among other global investors. And we hope that these guidelines will support our issuers in nonfinancial reporting, which will address investor expectations. Of course, we organized some education activities for our issuers, for both sell side and buy side. And on the product development side, we have already ESG -- this ESG index. And our daughter company, GPW Benchmark, has been analyzing low-carbon indicators. And of course, we would like to green -- we'd like to focus on greening of this index family. Also, we have started the cooperation with the Ministry of Finance in Poland to develop the set of incentives for green bonds market. So we look at ESG through business plans. This is absolutely very important topic for us.

So that is from my side at the moment. And Piotr, over to you.

[Piotr Borowski, executive]

Thank you, Izabela. So I'm Piotr Borowski, in charge of operations and finance.

We are on Slide #8. This excellent market situation resulted in very good sales revenues. Warsaw Stock Exchange capital group generated total revenues in the first quarter at the level of PLN 112 million, which also increased by 15.5% year-on-year. Operating expenses also increased to the level of PLN 66.8 million, and it was mainly due to the higher employee costs and higher external service charges connected with our new strategic initiatives. We also created the higher provision for the fee -- for market regulator at the level of PLN 14 million. This, for me, is higher when compared to the same provision in the first quarter of last year. We created the provision with the maximum possible amount, not to be surprised this year by our regulator.

EBITDA was at the level of PLN 53.6 million, and the growth increased year-on-year by 7.1%. And the net profit was much higher by 32% when compared in the first quarter of last year. And the net profit for this quarter was PLN 38.7 million.

Slide #9. This good sales revenue resulted in a still very healthy EBITDA margin at the level of 47.8% in the first quarter. Next, accounting for the net profit margin, amounted 34.4% for the first quarter of this year.

Slide #10. We had excellent quarter on the financial market and the securities market, and this resulted in high trading revenue, which increased by 28% year-on-year to the level of PLN 53.2 million. We observed quite high average equity turnover per one trading session, which was PLN 1.6 million (sic) [ PLN 1.6 billion ] in the first quarter, which was slightly lower than the last quarter of the last year, which was PLN 1.8 million (sic) [ PLN 1.8 billion ]. But on the other hand, this quarter -- the first quarter of this year was much, much better than the first quarter of the last year because then the turnover was around PLN 1 billion. Average fee is more stable on the stock market. It was 2.22 bps.

What is worth mentioning is that we have higher activity not only on the equity market but also on the futures and options market. And especially, we are very glad with the bonds market with the treasury bonds market and our better company bonds part. They had very good first quarter with a higher turnover, especially on the conditional transaction, which was higher by 93%.

Slide #11. Listing revenues was also higher than in the first quarter of the last year, higher by 16% and amounted PLN 6.2 million. And that's mainly due to the new listings of secondary offerings and IPOs. We had a big IPO in the first quarter. It was mentioned by Izabela, further the additional income. And we are quite optimistic on this business line. We expect more IPOs in the coming months of this year.

Slide #12, revenue from information services from our market data. We are quite successful in this, and there is steady growth. It was higher by almost 12% year-on-year. And we developed this business line due to the very active especially securities market. We are all the time connecting the new clients and with that, data vendors and non-display clients not only for the market data from the Warsaw Stock Exchange but also from BondSpot data or GPW benchmark and also from our commodity exchange. So we observed the increase in the all segments of this business line.

And so this was the notes from me, and I'm handing over to Adam Mlodkowski from our commodity exchange.

[Adam Mlodkowski, executive]

Thank you, Piotr. Welcome, everyone, Adam Mlodkowski from TGE speaking. I'm here to present to you the most important information about the commodity market in the first quarter 2021. We're on Slide 14.

In the first quarter, the volume of electricity traded on TGE, the head market, reached the highest level in history, which also resulted in a record volume of trading in the entire spot energy market, which amounted to 9.6 terawatt hour. In relation to the first quarter of 2020, the turnover on the spot market increased by 13% and in comparison to the fourth quarter of 2020 by 2%. The decrease in turnover on the forward market resulted in a decrease in the total volume of electricity trading, which in Q1 '21 amounted to 47.7 terawatt hour. It has to -- which means minus 28.3% year-over-year and minus 21.4% quarter-on-quarter. But it has to be noted that we deal here with the base effect because the first quarter of 2020 was the beginning of the lockdown, which was followed by a record high turnover on the forward market and which made it the best first calendar quarter in terms of turnover on the energy market in the whole history of TGE. And so the first quarter of this year ranked second, second one in this ranking.

The total volume of trading of -- on natural gas market in Q1 was 36.5 terawatt hour, down by 8.9% (sic) [ 8.5% ] compared to first quarter 2020 and by 9.2% compared to the previous quarter. Relatively close to the beginning of the year compared to the previous year resulted in an increase in the turnover on the spot gas market in the first quarter of this year. And in relation to the same period of 2020, the volume increased by over 1/3, reaching the level of 10 terawatt hour. The volume of trading on the gas forward market in Q1 '21 was 26.5 terawatt hours, recording year-on-year decrease by 18.5%.

And on the [ RIS ] property rights market, the trading volume in the first quarter of 2021 amounted to 7.2 terawatt hour and was higher by 7.8% compared to the first quarter of the previous year. On the agricultural exchange market, the first quarter of 2021 brought the largest trading volume so far, amounting 4,500 tonnes. But note that this market is nearing the development phase.

Let's go to the next slide, referring to revenues in the first quarter 2021. The fall in turnover on the energy and gas market contributed to the decrease in revenues in the first quarter of this year. On the energy market, revenues decreased by 18.6% year-over-year, and on the gas market, of 7.3% year-over-year. Revenues from property rights trading fell by 4.1% year-over-year, which was due to a significant decline in trading white certificates. In Q1, we recall that the higher revenues from other fees paid by participants, it was a result of increased prices in the fee table and new fees collected from participants for [indiscernible].

And now the last slide from this part, revenues from the clearing and the register of certifications of origin. In Q1 '21, our clearinghouse reached revenues from transaction settlement of PLN 13 million, which means minus 0.8% year-on-year and plus 2.4% quarter-on-quarter. In spite of a fairly large decrease in turnover in the forward energy gas market, turnover in the spot market increased, as I mentioned before. Hence, we noted such a small decrease in income from segment, maintaining the certificate of origin register and the guarantees register generated revenues in the level of PLN 6.8 million. Such a high level of revenues in relation to the previous quarters is mainly from the greater number of issued certificate of origin.

And that's all for the commodity market for today. Thank you for your attention.

[Piotr Borowski, executive]

Thank you, Adam. So we are on Slide 18, again, results of the capital group of Warsaw Stock Exchange operating expenses. The cost-to-income ratio slightly increased to the level of 59.5%. And as I mentioned, we created a higher provision this year for the market regulator at the level of PLN 14.2 million compared with the PLN 10 million in the first quarter of the last year.

Depreciation was lower by 10% and amounted to PLN 8.8 million, and there was an increase of total employee costs and external service charges. Employee costs increased mainly due to the -- our new business project. And external services, there were several factors like new strategic initiatives but also higher cost of IT and then new markets like international energy market started by the commodity exchange and higher promotion, educational costs we observed in the first quarter of last year.

Slide #19. We had a very good share of profit of entities measured by the equity method in the first quarter of this year because it was at the level of PLN 5.4 million. It was a record high in the last couple of quarters. It was mainly due to the excellent results of the KDPW, which is the national depository for securities, increasing health in the Polish market. They profited from a very active market situation in securities. But also, they opened a new business line like registering, which is obligatory in Poland, registering of nonpublic bonds. And from this year, they started the business line of -- in the register of nonpublic shares for the stocks company, which is also obligatory in Poland. And also, there's another new shareholders' identification services concerning the public companies. It was the main factor influencing the increasing part of our financials.

Slide #20 concerns the statement of the financial position. You can see we have an excellent liquidity position. There was a sharp increase in net liquid financial assets from PLN 616 million (sic) [ PLN 716 million ] at the end of last year to the PLN 798.5 million at the end of this quarter. And it is one of the factors that the management Board of the Warsaw Stock Exchange recommended to pay the dividend for the last year. The dividend payment recommended by us is PLN 104.9 million, which is PLN 2.5 per share and is in line with our dividend policy. And this dividend will be higher by PLN 0.1 when compared with the dividend of 2019. And of course, the decision about the dividend payment will be taken by our shareholders' meeting, which is planned for the 21st of June.

And this is the last slide in our presentation. Thank you.

[Operator]

[Operator Instructions]

[Pawel Wieprzowski, analyst]

If I may, I will start, Pawel Wieprzowski, Wood & Company. You've mentioned that you are working now on several strategic initiatives. There is now new projects in the pipeline, the digital logistics operator. Could you please elaborate a bit more about the potential cost of these projects and revenues that you expect? And when shall we expect or shall we see the first impact on your P&L from these initiatives and these projects?

[Izabela Olszewska, executive]

Okay. So maybe I will start with describing the -- some initiatives, and I will comment on revenues. But just I would like to ask Piotr just to comment on the cost of initiatives.

So we are, I would say, in the middle of our strategy implementation. And the goal of the strategy is to diversify the sources of revenues. So we would like to be less dependent on equity trading. And sometimes, we have no influence on the macroeconomic situation. And we would like to have more predictable sources of revenues. So we decided to implement a couple of initiatives in the financial marketplace and commodity space.

And some of these initiatives, they are being implemented with the support of grants that we received from National Centre of Research and Development. And there are bigger projects, and we need to wait for the results some more time. But some of the -- our initiatives, they have been already implemented. And we started to charge. And we have first revenues from -- for example, from our GPW Growth Academy and also, for example, the first revenues from agriculture market. They are not huge revenues. This is just the beginning. However, it's very positive that we started just to generate the revenues.

As it was declared during the previous investor conference, we expect a couple of million Polish zloty as revenues from our strategic initiatives this year. And we don't -- we haven't changed our minds. So still, we expect these revenues. Of course, perhaps the majority of these revenues we'll have in the end of the year. So the first quarter, this is just the beginning.

So Piotr, if you can comment on cost side of our strategic revenues.

[Piotr Borowski, executive]

Yes. We confirm the OpEx of our group, we -- I expect this slight increase this year when compared with the last year's operating costs, but it will not be a sharp increase in percentage like for the first quarter. It should be rather -- average lower. And then CapEx, due to the new business projects, we estimate that it will be also higher -- slightly higher than in the last year, which was on a quite reasonable level at PLN 40 million. Still, it will be higher this year. Thank you.

[Pawel Wieprzowski, analyst]

Okay. Perfect. My next question would be more precise about the potential impact from the strategic initiatives on 2021 financials. You've mentioned recently that we shall expect low single-digit millions of revenues in this year. Do you still think this is the correct figure? Or do you see an upside to this low single-digit millions number?

[Izabela Olszewska, executive]

Yes. So we haven't changed just our opinion and expectation. So I can confirm that it was declared during the previous investor conference, and we still expect that it will be single-digit million revenues from the strategic initiatives this year.

[Pawel Wieprzowski, analyst]

Okay. Perfect. My next question concerns the M&A in Armenia. You are considering purchasing the majority stake in Armenian stock exchange. Could please update us on what's happening with the deal, at what stage it is now? When shall we expect some news flow?

[Izabela Olszewska, executive]

So this -- the Armenian deal is, of course, still on our radar. And as we mentioned in, again, our previous comments, this Armenian business seems to be a very healthy one. But of course, we need to conduct due diligence. We hope to finish it in the first quarter of this year. In the meantime, we are in the process of preparation of the business plans and together with EBRD. EBRD is also involved in this deal and together with management Board of Armenian stock exchange. So after the results of due diligence, we will make the final decision. And I think that then, till this moment, of course, there will be no flow of financial resources.

And also, it's worth saying that this transaction has some built-in mechanism that within 3 years, we can withdraw and gain our invested capital. So I think that the conditions which have been negotiated so far, they are very good for the Warsaw Stock Exchange. But of course, the due diligence results will be here the most important for the final decision.

[Pawel Wieprzowski, analyst]

Perfect. My next question is about the pension reform that we'll have this year over in Poland, i.e., splitting the second pillar assets between the third pillar and the first pillar. The default option is that all office members or private pension funds members are going to the third pillar, unless they declare that they prefer to join the first pillar. Have you run any kind of analysis? Or do you have any expectations regarding the fraction of the office members that will go to the third pillar or the first pillar?

[Izabela Olszewska, executive]

Of course, we have prepared some scenarios because it's difficult to say now what is the percentage of Polish citizens that will decide to transfer their funds to private accounts. Or maybe some of them, they decide to transfer to social security system. And of course, there are some scenarios, and we analyze them. So -- but of course, we need to analyze it and see the wider picture because this is one reform. And currently, it has not been decided when this reform will start in Poland. We expected that the Polish citizens, they will have a window for their declaration beginning on the 1st of June. But now it's not obvious, so obvious. So probably, it will be late.

But we need to look at it together with another reform, and I mean here employee capital schemes. So this is the initiative of the government that was implemented in 2019, and the idea is to build long-term savings of Polish citizens. And this is the reform which is mandatory for the companies, for the Polish companies and enterprises and voluntary for their employees. However, the assets of employee capital schemes, they reached the level of almost PLN 5 billion and [indiscernible] percent is invested on our exchange.

So looking at the situation, on the private pension fund side, we're probably a part of the financial resources. We will cover so-called conversion fee because if somebody will decide to transfer the funds to private accounts, so the conversion fee should be paid. And it's 15%. But together with the employee capital schemes, we think that we can expect a couple of single-digit billion Polish zloty as inflow to Warsaw Stock Exchange. So we assess it altogether as a positive reform or 2 reforms for the Warsaw Stock Exchange future inflows to the market. However, of course, it's very difficult to say and how Polish citizens will behave and to which options they will choose.

[Pawel Wieprzowski, analyst]

Perfect. Last question from my side, I promise. You've mentioned in your part of the presentation that you are working very hard in promoting ESG initiatives and all the issues associated with corporate governance, et cetera. I know that you are collaborating with EBRD in this area. Could you please shed some light on your future plans as far as the collaboration with EBRD and promotion to standards is concerned? I know that you'll be running shortly a conference on ESG. So any colors would be appreciated.

[Izabela Olszewska, executive]

Yes. So yes, with -- we just finished the project together with EBRD in the sense that the reporting guidelines, they have been published. And of course, this is the first step. But then we plan to organize some workshops and trainings for the companies. So at the beginning, we'll do this together with the external adviser who prepared these guidelines for us and for EBRD. But then we would like to take over at the exchange these training activities. And we will organize the workshops, the training for the companies with -- by our staff. So it will be organized by our staff.

As I mentioned, these reporting guidelines, they are very practical. So they refer to the regulations, also new CSRD directive. But also, the -- our team, project team, they met global investors and also our local investors, institutional investors and also some enterprises and just tried to collect what are the needs on the side of the investors and how they should be addressed by the companies. And everything is included in the guidance. So we hope that it will be a very practical and good material for our companies. And it will inspire them to prepare good reports for the investors.

And we are -- as an exchange, we are very much interested in this because this is a part of our business. If the global capital decide that the companies, they are good and they report properly, so we hope that this capital will be here in Poland. But if the companies will not provide the reports according to the expectation of the global investors, so we can expect that there will be blacklisted, and they will be outside of -- rather of their interest. So this is the loss of business for us as an organizer of trading platform for many, many companies.

[Operator]

[Operator Instructions] We currently have no questions. I'll pass back to your host.

[Pawel Wieprzowski, analyst]

Ladies and gentlemen, it's been a pleasure to moderate today's call. Thank you so much for participating in it. Have a great afternoon and a great weekend and speak to you after the second quarter results. Stay safe. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

[Piotr Borowski, executive]

Thank you very much.