Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Transcript 2022-Q1

[Operator]

Pawel, please go ahead.

[Pawel Wieprzowski, analyst]

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski. On behalf of Wood & Company, I'm very pleased to welcome you to the first quarter conference call with Warsaw Stock Exchange management. Today, the company is represented by Mr. Marek Dietl, President of the Management Board; Izabela Olszewska and Piotr Borowski, Members of the Management Board; as well as Adam Mlodkowski, Vice President of the Management Board of the Polish Power Exchange. Gentlemen, please go ahead.

[Izabela Olszewska, executive]

So hello, let me start. I'm Izabela Olszewska, member of the management board in charge of business development and sales. And as usually, let's start from the -- with the slide which presents the highlights of the first quarter 2022. So it was a quarter with the increased volumes and trading values in many product line on the financial market. And you can see the results on the left-hand side. So you can see all of the spectacular increase in the -- both markets. But of course, we started the year with a lower base.

But anyway, it is -- there's the increase, which is year-on-year almost 180%. Revenue, EBITDA and net profit, all of these financial results, they are quite solid. However, year-on-year, a little bit lower. And the reason for this can be seen in, first of all, the change of trading structure. So we observed the increased activity of liquidity program participants. So I mean here HVP, high-volume provider and high-volume car programs as well as market makers. And all these guys, they trade with the lower rates.

And the second reason, it was a drop of trading volumes in the commodity space, especially on electricity and property rights markets. Good news for shareholders is that the Management Board of GPW just proposed a higher dividend per share to PLN 2.74 for [ group share ], the higher that it is from dividend policy. And of course, we decided to propose such dividends to the -- to our shareholders because of the very good result of 2021 year. So dividend yield currently is much higher than the 7%. And we think that we are -- as a dividend company, I think that we proved that this dividend is really -- will be very solid.

I just would like to inform you about ongoing review of current strategy, and this is the strategy with the end -- in 2022. And first of all, we would like to prepare the closing report with the conclusion, what was the scope, what was not good and what was the reason that, for example, we didn't achieve some goals. And it will be finished in the first part of the year. But for the second half of the year, we have planned the preparation of the new growth strategy for 5 years starting from 2023.

We continuously work on product development and client acquisition. And in the first half -- in the first quarter of this year, we implemented the new ETF from the family of BETA ETF. But this is the first ETF based on bond index. We also informed about the new clients in the trading space and also about the new issuers. But also have a very good business line, which is the market data sale. And here also, we have done of new data vendors and non-display clients.

Just to describe some main things, main information from the GPW Group companies. So first of all, the GPW benchmark. It works now on the new alternative indices, the alternative to WIBOR. And they published a consultation paper, and they started a public consultation on transaction-based interest rate benchmarks.

On -- in our commodity space, we are working on development of the agriculture market. This is a very important new business line. And together with our partners, which operates within the agriculture market council, we try to create a very good solution and which -- and also promote the agriculture markets among the potential clients.

Also, we conducted actions to optimize the IPO process. And currently, the time from allocation to debut has been shortened. And I think that we can short this time to 2 days, which is a very good result. And it's comparable to other big exchanges which offer the same time from allocation to debut.

Next slide, please. So with the -- next slide, please. I can see the first one. Okay. So just a moment. Okay now. So the next few slides, I would like to guide you through the business topics on the financial market, what's going on in the individual segments and product line. So the first quarter of this year was the time marked by the outbreak of war. And the war had and still has a huge impact on what's happened to trading volumes on the secondary market to what is now the primary market.

So the trading volumes on the main market increased year-on-year and also quarter-on-quarter. And the average sessions turnover reached the level of almost PLN 1.6 billion. And I just want to underline the very high volatility, which was connected with the uncertainty. And it was also the result of the war. And the high volatility always attracted liquidity and calls the highest trading volumes.

We had some road shows and -- to London and Amsterdam in order to collect the opinion of our global clients. So the good news is the global investors approach, it's very rationale to our market. They realize that we have the neighbor of Ukraine. But our geostrategic position is completely different than Ukraine one. So we are the member of EU and NATO. So they don't treat us as a country with a much higher risk.

Also, in March, we had some changes in emerging market indices, and especially MSCI indices because we are the part of MSCI Emerging Markets Indices. And Russia was removed from these indices. So it was not the standard rebalancing because it was impossible to say the Russian stocks and buy other assets. But in case of new flows in the future to emerging market indices, we think that Poland is one of the beneficiary because our stake in this indices increased.

In Q1, we observed the highest interest of our investors in -- especially in banks, whereas in the first quarter of the previous years, and the investors focus more on company's strong technology sector. And around 30% of trading volumes concerned 3 companies, 2 banks, PKO BP PKO and also Allegro from the e-commerce sector.

Just a few comments on IPO market. So in the first quarter, we had 2 debuts on main market and 7 on NewConnect. There are 12 prospectus with Polish FSA, waiting for approval. However, due to the current situation and the lower valuations on the market and some uncertainty on the market, so we observe the companies are just suspending IPO process. So we expect the better second half of this year in -- on primary markets.

Just on NewConnect, which is our SME market, we had decreasing turnover. And the main reasons we think are, first of all, decrease of interest in COVID sectors. Some of the investors, they liked very much medicine sector, biotech, gaming, technology in the previous years and in 2020. But now they are not so much interested in the sectors. And also, in times of high volatility, I think that it's normal that investors chose the market with high liquidity, and this is the main market on NewConnect. We have relatively lower volatility, and of course, much lower trading volumes.

Structured products and ETFs, those product lines, they grow constantly. And structured products, most structured products, the most popular were products based on German index stock. And on the ETF side, we observed the interest in ETF on our blue chip index, WIG20. But rest assured, which allowed to earn on bearish market. First quarter, it was a high activity in liquidity program, high-volume provider and high-volume funds. I already mentioned it with presenting our highlights.

The next slide, it's about derivatives. As on derivatives market, we had an increase of total trading volumes year-on-year and quarter-on-quarter. The good news is it included also our WIG20 future -- index future contract, which is the most profitable product on derivatives side. Also, currency futures, there was a growth year-on-year and some drop quarter-on-quarter, which was related with the change of trading characteristics by the clients.

But the number of open position just is -- has been maintained on the high level. So we hope that also in the currency futures, that the volumes will return in the next quarter. Derivatives Trading is very sensitive to volatility and the higher volatility, the higher trading volumes. So since the beginning of the year till the outbreak of war, so 24 February, the average volatility of our blue chip index WIG20 was 23%.

On the day of the war broke out, the volatility reached 47% and then gradually increased up to 65% in March, so high volatility time.

On the next slide, I just want to focus a little bit on our ESG strategy, which was announced in the end of the last year. And we are now focused on the implementation of the strategy. The Management Board just adopted some indicators for measuring the results of the strategy. And there are 2 groups of measures, strategic measures resulting directly from our strategy and operational measures which results from GRI standards and also our guidelines for ESG reporting preferred by our company with the partnership with EBRD.

So the mother company, Warsaw Stock Exchange, and our daughter companies, just we have elaborated operational plans for this year in ESG area. And we are going to publish integrated reports very soon in which ESG will have also an important place. We are, as an organizer of trading platform for other companies, we've been supporting our issuers, first of all, in understanding ESG and also adjusting to ESG trend. So together with the Polish Development Fund and EBRD, we provided our companies and market participants with educational activities.

And also, we promote green bonds, especially in cooperation with International Finance Corporation, which is sister organization of the World Bank. So we have a common project on green bonds. And within -- with the framework of the strategy for capital market development, which is the strategy and just the program managed by Ministry of Finance, there is also a very important part of this strategy which is devoted to green transformation and green bonds. So now just there is a part of our presentation on the financial results. So Piotr, over to you.

[Piotr Borowski, executive]

Thank you, Izabela. In the first quarter of this year, we have a quite solid financial results of capital group of GPW. Sales revenue in this period decreased slightly by 1.2% year-on-year. Operating expenses increased by 4.6% year-on-year. EBITDA decreased by 5.5% year-on-year. And it was resulted mainly by lower revenue in the commodity market combined with the higher revenue in the financial market and increase in operating expenses. Overall, it resulted in a net profit decrease by 2.1% as it resulted in a net profit of PLN 38.1 million.

The EBITDA margin stood at the level of 46%, while the net profit margin was at the level of 34.5%. So when we look on the financial markets, the trading revenue was higher by 1% year-on-year in the first quarter. It was mainly the effect of high volumes resulted from the war in Ukraine, as Izabela mentioned. And in this period, so there was high market share of market makers and HFT firms, high-volume providers. It resulted in slightly lower average trading fee on the stock market, which was at the level of 2.11 bps.

Listing revenue was lower by 2.1% year-on-year. And it was mainly a result of lower activity on IPO and SPO market. We had a smaller amount of IPO and SPOs in the first quarter when compared with the first quarter of the last year.

Revenue from market data is the stable source of income. That was higher by 4 -- by 3.2% when compared with the first quarter of last year, So we're increasing our client base. We are signing the new contract, subscribing new clients for market data from our capital group, mainly the stock exchange, but also commodity exchange and BondSpot. The first quarter of this year was a record high in terms of number of data subscribers.

So now I hand you over to Piotr Mlodkowski, the CEO of our commodity exchange to can.

[Adam Mlodkowski, executive]

Thank you, Piotr.

[Piotr Borowski, executive]

Sorry. Adam Mlodkowski, CFO of the commodity exchange, and was also in the Polish conference.

[Adam Mlodkowski, executive]

Thank you, Piotr. Adam Mlodkowski speaking. I would like to present you results from the commodity market in Q1 2022. Total electricity turnover in Q1 was 42 terawatt hour. And the watt -- terawatt hours, it means a decrease about 12% year-over-year. On the forward market, decrease was even higher than on the spot market. And the reason for these declines could be a significant increase of prices on the longer contracts on the electricity market.

On the gas market, total turnover was 42.4 terawatt hours. It means an increase of 16% year-over-year. And I would like to unblind this Q1 2022 as the best first calendar quarter in the history of this market, ETG. On the green energy markets, we observed a decrease in turnover of the both tariffs of property rights, more than 30% year-over-year.

On the next slide, please. Consequently related to changes in turnover on the markets, we see the decrease of revenues from trade in electricity and property right and an increase from trade in gas, which is also an increase from other fees paid by market participants of 16% year-on-year. And I think this is about revenue.

Next slide, please. Yes, due to lower turnover on electricity and property rights, revenue from clearing was lower more than 4% year-over-year. We also noted a decrease of revenue from the Register of Certificates of the Origin by 8.2% year-on-year, mainly driven by the lower volume of property rights issue. Thank you very much. This is all about the commodity market. Piotr, the floor is yours again.

[Piotr Borowski, executive]

Thank you, Adam. So coming back to the financials of the Capital Group. Operating expenses, they were higher by 4.6% year-on-year in the first quarter. The cost/income ratio was at the level of 62.4% in the first quarter. And depreciation and amortization increased by 11.5%. It was mainly due to the reduction of the depreciation period of our current trading system, UTP trading system, and it's connected with the implementation of WATS, as our new trading system we are working on. The shortened amortization period results in an increase in depreciation charges by PLN 0.3 million per month. And it will be accounted this -- deployed from the beginning of this first quarter to the end of the first quarter '24.

Total employee costs increased by 2.8%. It is mainly driven by additional headcount in our new strategic initiatives. Polish Digital Logistic Operator and Telemetry Project. External services increased by 5.3% year-on-year. And it was mainly driven -- was increased by rising cost of advisory services and cost of promotion, education and market development events.

The share of profit of entities measured by the equity method in first quarter was at the level of PLN 4.6 million. And traditionally, the biggest contribution was of KDPW, our national depository for securities. And it amounted to 4 -- PLN 5.3 million. You can see the results of the KDPW group in the slide attached to this presentation. So altogether, the reduction of profit of entities was PLN 4.6 million because there was also a small contribution of our stock exchange center operator of the buildings we are located in.

Consolidated statement of our group, the last slide please in our presentation. There was a considerable decrease of receivables due to the VIP refund of the commodity exchange. The amount of PLN 99.2 million. And the first quarter in January, we redeemed the bonds series in the amount of PLN 120 million. And we are planning to redeem another issue of bonds in October this year.

And as we mentioned, the Management Board proposed to the AGM to pay dividends in the amount of 2.40 -- PLN 2.74 per share. And the decision on this payment will be taken by general shareholders' meeting planned on 23rd of June this year. Thank you. It was the last slide in our presentation. Turning over to Pawel.

[Pawel Wieprzowski, analyst]

Thank you so much for delivering such today presentation. I think we shall start with the Q&A question. If you don't mind, I'll just ask first few questions. First of all, you've mentioned that in the first quarter, cost-to-income ratio stood at 62%. What -- but this has been, of course, in place by the Polish Financial Supervisor fee. What's your guidance for the 2022 as far as this ratio is concerned? And then, and which cost category will be the drivers of the cost -- overall cost position?

[Piotr Borowski, executive]

We think that the cost-to-income ratio at the end of this year can be up to 63%. And it will be mainly driven by employee costs and advisory costs connected with our new strategic projects.

[Pawel Wieprzowski, analyst]

Okay. My second question is on GlobalConnect project. So introducing to your offer foreign stocks. What will be the cost of this initiative? What will be the expected revenue for you? If you could recall maybe some case studies of such program? That would be immensely useful.

[Izabela Olszewska, executive]

So maybe I will take this question. So just about the cost of the GlobalConnect. I think that the costs are very low. Still well close to 0, because we are going to offer GlobalConnect on the current platform. And for -- so the access of our broker dealers to our systems, that would stay the same. So this is just another group of trading on our trading platform.

On the revenue side, we identified quite interesting potential. Because when you look at other platforms, which are seen like the GlobalConnect, for example, the platform organized by Vienna Stock Exchange. So we observed that since the start of the platform, the trading volumes they grow in the pace of 100% annually. And in the 2022, so this year, so they have like PLN 1.2 billion trading bonds every month. So we can see that there is interest of investors in trading blue chips from the EU and the states, just locally on the local exchange.

And we would like to offer to our clients the same. Now we are -- let's hope in the final stage of our consultation and discussion with Polish Security Commission, and as we declared earlier, we will be ready to start the market in about 2 months since we received the green light from Polish FSA.

[Pawel Wieprzowski, analyst]

Okay. Thank you so much. There is a question on our chat. I'll just read it. Can you shed some light on the strategic objectives of Armenian Stock Exchange acquisition? What is your expected yearly revenue and profit?

[Izabela Olszewska, executive]

So I know, just whether I should answer or just, Marek you...

[Marek Dietl, executive]

You can go ahead.

[Izabela Olszewska, executive]

Okay. Yes, I can go ahead. Okay. So as we inform the market, we signed the memorandum and then also the agreement, the shareholder -- share purchase agreement with the Armenian Stock Exchange. And this is the smaller stock exchange than we are, but very profitable. And I just want to clarify that this is -- on the EBITDA profitability, they reached the level of 30%. And as far as the net profit is concerned, it is 23% profitability. So I think that this is a very healthy business, of course, with much lower scale.

The Warsaw Stock Exchange is going to buy 65% package, right, and say around PLN 8.4 million. So it's worth underlying that currently the Armenia Stock Exchange, they have around PLN 11 billion in cash, and note that. And the financial results since 2019, just they have been growing in double-digit space and the value of net assets doubled. So I think that these are very good financial results. And the root -- M&A target, together with just EBRD, we prepared the business plan for part of development of this market. And I think that we have a plan how to find the income synergies in the future.

[Pawel Wieprzowski, analyst]

That's around -- this is all as far as questions is concerned. I see no further questions on the chat. So I will ask some few more. Recently, you released the dividend recommendation from 2021 profit. Dividend per share proposed by you is PLN 2.74 per share. In your financial forecast, the minimum dividend per share was assumed at PLN 2.6. So it's PLN 0.14 plus more than the minimum payout ratio that you assumed in your financial forecast.

Why have you decided to increase your dividend proposal? That's the first question. And second question, what's your consideration regarding the future dividend policy? Shall we assume that if you have -- if you generate solid financial performance going forward, you will be paying more than the absolute minimum disclosed in your dividend policy?

[Piotr Borowski, executive]

Okay. Maybe I will answer this question. We decided to increase our recommendation in terms of dividend because we have a very, very good last year, with a net profit of PLN 161 million. So those are mainly the base of this decision, our recommendation. So it means that there is an increase of dividend per share by 10% year-on-year. So I think that our shareholders will be glad with this recommendation.

However, it's not an indication for the future because it's -- it depends on the situation on the market. In this year, as we know that the war in Ukraine can have immense impact. So it's very difficult to forecast. So I can say that we'll for sure stick to our dividend policy. But as for the extra dividend, we cannot for now say anything about this.

[Pawel Wieprzowski, analyst]

Absolutely. Thank you. When are you planning to release the new strategy?

[Piotr Borowski, executive]

We are working on a new strategy on summing up the existing strategy. And it should be announced by the end of this year.

[Pawel Wieprzowski, analyst]

Could you please shed some light on your expectations regarding revenues this year that you expect from the strategic initiatives you have been launching over the last 2, 3 years?

[Izabela Olszewska, executive]

So maybe I will take your question, but I'm not sure if I could hear you well, unfortunately. So the question was about the strategic initiatives, yes?

[Pawel Wieprzowski, analyst]

Yes, yes. So what's your revenue forecast from this initiative this year? How many million do you expect?

[Izabela Olszewska, executive]

Okay, okay. Yes. So as we just announced here, so the plan is to achieve around like PLN 15.5 million from the strategic initiatives. Of course, it includes a couple of million of revenues from the planned M&A and overtaking of the stake in Armenian Stock Exchange. But also -- there are also a couple of initiatives that we think that they will start to generate the first, I think, revenues.

And as we inform you during the presentation, in a couple of, I would say, weeks now, we are going to present the closing report, which will analyze and summarize the implementation of these initiatives within the current strategy. So I think that it will be the clear information about the stage of the initiatives and also about the results of these initiatives.

[Pawel Wieprzowski, analyst]

Perfect. My last question is about MSCI. You've mentioned that, at this stage, the international investors are differentiating Poland and Ukraine in terms of the geopolitical risk profile of these 2 countries, is concerned. Nonetheless, have you had during your road shows in London and Western Europe any kind of hints that the clients or the investors may be considering bleeding Polish stock market amidst this shrinking universe in the emerging -- of the emerging Europe?

[Izabela Olszewska, executive]

Yes. So according to the feedback received from our global investors, so they think that our -- Poland will be one of the beneficiary of the changes in MSCI indices. So just to give you some figures. So in MSCI Emerging Market Europe, our stake increased from just 15% up to 46%. But this is the highest growth. But I think that the [ found ] base of -- on this industry probably will also merge with the MSCI EMEA [ founds ]. And here, our share was around 4%, a little bit less, and now it's 5.31%, so also increase.

In MSCI Emerging Market World, it was much, much lower increase. But still, I think that we can be the beneficiary of the new [ flows ] of the index. And according to the report that we received from our representatives in London, so there is the observation that, currently, that there are -- the flows to this emerging market indices. So it was more quite time before because of this -- of the impact of the war. But now there is -- there are the first net flows to these indices. So let's hope that we'll be the beneficiary of the whole situation.

[Pawel Wieprzowski, analyst]

Marvelous. Let's do hope so. So I see 2 more questions on the chat. Do you expect further decline in electricity trading given sustained rise in prices? That's the first question. The second question, to what extent will the suspension of Russian oil and gas exports affects gas electricity trading?

[Izabela Olszewska, executive]

I couldn't hear the first question. I'm sorry. But -- so could you please correct -- repeat it a little bit louder?

[Pawel Wieprzowski, analyst]

Absolutely. Do you expect further declines in electricity trading given sustained rise in prices?

[Izabela Olszewska, executive]

Okay. So I can that -- so this is, I think, the question, which is -- which should go to Adam Mlodkowski.

[Adam Mlodkowski, executive]

Yes. It is hard to predict the future situation on the electricity market. We observed high volatility on this market. And the prices are constantly going up. So in the last periods, the turnover is rather stable, but it is not very high. So in current situation, we don't predict any significant risk in some increase of the turnover on this market.

[Pawel Wieprzowski, analyst]

And the second question I see, again, on the commodities. To what extent will the suspension of Russian oil/gas export affect gas electricity trading?

[Adam Mlodkowski, executive]

Excuse me, excuse me. Could you repeat this question again? Because I have poor quality.

[Pawel Wieprzowski, analyst]

Sure. To what extent will the suspension of Russian oil and gas exports affect gas electricity trading?

[Adam Mlodkowski, executive]

Okay. So I understand you correctly, I just like to answer this question. As a country, we are -- we prepared to this situation on the eastern border. And we are quite independent from the delivery of the gas from Russian market. According to the strategic plan, that pipeline should be opened in the October this year. So -- and on the other hand, we also have reserves of gas storages. So we don't think that there will be a problem with trading gas on our platform. We try to also develop interconnectors with other countries. So the situation on the gas market currently is also, I would say, quite stable.

[Pawel Wieprzowski, analyst]

Okay. Perfect. It seems that, that was the last question. I don't see any further questions on the chat. So gentlemen, on behalf of Wood & Company, I would like to thank the Warsaw Stock Exchange team for delivering the presentation and answering the question. And thank you also to all call participants for taking the time and dialing in. Have a great day, and hope to speak to you soon. Stay safe.