Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Transcript 2020-Q2

[Pawel Wieprzowski, analyst]

[Audio Gap]

WOOD & Company. I would like to very warmly welcome you at the Second Quarter 2020 Conference Call with Warsaw Stock Exchange. The company is represented today by Marek Dietl, CEO; Izabela Olszewska, Member of the Management Board; Piotr Borowski, Member of the Management Board; and Piotr Listwon, Vice President of the Management Board.

Now I would like to pass the floor to the management.

[Marek Dietl, executive]

Thank you very much for hosting. It's Marek Dietl. Just -- I hope you got the presentation in front of you. So let us quickly jump to the Slide #3, where I would like to summarize the key results from quarter -- for the second quarter 2020. So we have a very healthy EBITDA of over PLN 63 million, plus 10% compared with last year. We have very good net profit of PLN 43.5 million, so again, up from the last year. We have a good cost/income ratio of 44.5%. And few days ago, we paid out dividend of PLN 2.40 per share.

Besides a healthy business performance, we have -- we're also progressing in our strategic initiatives, according to our Strategy #GPW2022. So we extended the Analytical Coverage Support Programme. We added 12 companies to this program [ in response of ] research, and we also gained definitive distribution partner for the research. Those researches are also available in English, so I hope you will find it useful when you invested in Poland and to the Warsaw Stock Exchange.

We also pursue our pre-IPO program with our subsidiary, GPW Ventures. When we got the first investor, it's a Polish agency for support of agriculture, and we will partner with them in establishing the pre-IPO fund of agro tech businesses. We keep on working with the global institutions on ESG issues, and we started a program with EBRD, which will help the listed companies to do reporting on the ESG activities. So again, it will be beneficial from the -- for the global investors community as they will be better informed about the ESG efforts of our issuers. And last but not least, we received another free grant from the National Centre for Research and Development. This time it's for a blockchain project, and we'd like to use blockchain to trade tokens and smart contracts on nonfinancial assets. We believe that the digitalization of assets and also going into the space of nonfinancial assets is a very promising space. And we are happy that we received over PLN 8 million in prefunding. The total project is for over PLN 12 million.

And I would like to pass to Izabela for a key -- for a business update on our recent performance in Q2. Thank you.

[Izabela Olszewska, executive]

Good afternoon. It's Izabela Olszewska speaking. So we are now on the Slide 4. And as a part of today in my presentation of business insights from financial markets, so just I would like to start by looking at the turnover on European submarkets. And the percentage increase in turnover on the Warsaw Stock Exchange year-to-year was one of the best in Europe.

Of course, certainly, we need to have in mind a base for calculation is the calculated percentage. But of course -- but anyway, that is a very good achievement. And we think that growth dynamics of our turnover, they were really, really good in Q2 this year. Also, turnover velocity was very high in the whole history of our exchange, but also on the European background and we are amongst the biggest name in Europe.

When I go to the Slide #5, so this is about the investor activity on our equity market. And the value of central order book trading on both our main market and the new connect market were record-breaking in Q2 this year. Among indices, the greatest increase was recorded by our index of smaller caps, sWIG80. It was more than plus 30% and it corresponds to the observed growing share in trading of retail clients. So our retail clients they were really interested in trading of smaller caps, especially those companies that operate in sectors resistant to COVID like gaming sector, biotech, new technologies, health care sector or e-commerce.

So in Q2, we noticed a few external factors they attracted the interest in stock exchange. And I would like to mention, first of all, the ultra-low interest rates in Poland, which together with inflation rates, they caused -- the situation where keeping savings of Polish citizens on bank deposits, they were inefficient. So the new clients just -- we observed the flow of new clients to the market. And they discovered that there is a great possibility to earn money on our exchange, so the brokers opened more than 17,000 new accounts in the first half of this year.

But the very important message that I would like just also to pass to you is that despite of good external factors, so there are other factors that contributed to the current positive quarterly results. And this is the continuous work of our exchange on new products based on education and on liquidity support programs. So as far as the products' concerns, so I would like to mention structured products, and we observed growing interest in biostructured products. We have currently more than 1,600 different products. The most active in Q2, there were those based on German index, DAX, and crude oil vent. But we have also various categories of structured products and for every investor despite of the level of risk appetite.

Deposit investment is still growing in Poland. And when we look on ETF turnover value, so you can see that this is a huge growth year-to-year. So we are going to add more ETFs. Also, in this year, we expect a new 2 ETFs or 3 -- even 3. So, of course, the pallet of these instruments will be growing on the market even in this year. On the side of education activities, so we organize a lot of product education to our investors. Also, we organized passive investment conference and there was Innovation Day. The last one just gathered more than 1,000 participants among retail clients.

As far as liquidity support programs are concerned, so of course, we continue with the High Volume Provider program and the new participants of these programs joined us. We -- one of the cash market participants joined the High Volume Provider program and one HVP participant added cash market to its operation. So we can see that the share of HVP participants in equity turnover was slightly lower than in Q1. However, in the nominal value, their activity was bigger than in the previous quarter.

Let's go to the Slide #6, and this is about derivatives market. And on the derivatives market, volatility is the king. And in Q2, we had still high levels of volatility. So WIG20 volatility was on the level of almost 36%, whereas the WIG volatility was on the level of 32%. And so it resulted in the -- again, the high volumes on derivatives market, slightly lower than in the first quarter. But in the first quarter, March was extremely active because of the start of the pandemic and very high activity of our investors on derivatives market.

The most active projects, there were index futures and single-stock futures. And again, on this market, we have a couple of liquidity support programs. So we are proud that the new derivatives market maker joined to this market. And also HVP participants, they increased their activity and the churn in turnover in Q2, it was on the level of 14%.

So thank you, and I'll pass the floor to Piotr Borowski.

[Piotr Borowski, executive]

Thank you, Izabela. Piotr Borowski speaking. Now I will give you a short overview of our financial results. Well, in the second quarter, we had a very good financial results because of this increased market activity on our market expansion financial markets. So the sales revenues increased by 13.5% year-on-year and were mainly driven by higher revenues on the financial market, while operating expenses increased moderately only by 4%. And this growth was driven -- this increase was driven by salaries and other employee costs, which is connected with our growth strategy with strategic projects that are now in our pipeline.

EBITDA increased by almost by 10% year-on-year, while net profit amounted to a PLN 43.5 million and increased year-on-year, 2.2%. We are moving to the Slide 9. So there's good revenues and more or less stable costs resulted in a very high EBITDA margin at the level of 62.5% and high net profit margin at 43% in Q2 2020.

On the Slide 10, trading revenues on the financial markets rose by 54% year-on-year. And we observed very positive trends there. Very positive information because the average daily turnover in shares increased from less than PLN 1 billion per session in the first quarter to PLN 1.2 billion in the second quarter. So the daily volume was much higher in the second quarter, but also the average fee we charge on the trading -- trade transactions was higher than in the first quarter. So at the end of Q2, it was 2.31 bps.

This was the result of higher activity of retail clients. We had much more orders and transactions generated by the retail clients, and normally, they post smaller order. Small trades and smaller trades means we earn more per trade because we charge more for the relatively smaller trades. It's connected with our fee structure. So the smaller trades generally are more profitable for us.

Let's jump to the Slide #11, listing revenue. Listing revenues were down, decreased by 25% year-on-year. While the listing revenues are influenced by the number of listed companies, so we had some delistings. So the number of the number of companies listed on the stock exchange decreased. And also the valuation at the end of the last year was lower, and the valuation is the base for the calculation of the annual fees for listing. But looking forward, we are quite optimistic. We see much more activity also on the primary market, so we expect some big and small IPOs in the coming months.

Slide #12. We had -- we have quite stable growth of revenues from information services from information products like indices and market data. It's stable and modestly growing business. We see new data vendors and new end clients, especially the number of individual investors increase. So they are active on the market, and that's why they generate demand for information services or market data.

Now I ask Piotr Listwon from commodity exchange to talk about the commodity business line.

[Piotr Listwon, executive]

Okay. Thank you. Hello, everyone. First, let me present to you turnover in Q2 2020. Three main commodity business lines ran by TGE, which is electricity, gas and property rights markets.

I would like to turn your attention to the fact that trading volumes in derivatives for both electricity and gas markets, which accounts for 86% of shares in total volumes traded on the energy and gas markets are used to be influenced by the seasonal trading behaviors. It means that volumes at first half of the year are usually smaller than in the second. You can find a confirmation of that in the volumes showed on charts for each quarters of the year.

Same situation happened in first and second quarter of 2020. Both are on the very close level year-on-year on the gas market and even improved by 18.8% on the electricity market, what was driven by the high price volatility caused by the COVID situation.

On the property rights market, after a significant drop in third quarter of 2019, caused by the end of trading cogeneration certificates in June last year, we are observing steady increase in volumes quarter-on-quarter. Volumes in second quarter are usually higher than in other quarters because in June, all obliged entities needs to [ redempt ] their certificates of origin.

In terms of energy efficiency, turnover since third quarter 2019 hedged down from 172 kiloton of oil equivalent to 56.4 in second quarter in 2020. It should be noted that so high volumes in second quarter and third quarter of 2019 were driven by the expansion in June 2019 support system of energy efficiency auction certificates until June 2021. That regulatory move had huge impact on the level of demand and supply price volatility.

And finally, on the volumes in Q2 and Q3 2019. Current level of the turnover is similar to the level in Q2 and Q3 2018. So 30 -- 53 and 60 kiloton equivalent, respectively.

If you go to Slide 15, revenue from the electricity and gas and property rights market. First, please bear in mind that revenues from commodity markets are strongly correlated with their turnovers because fees are calculated upon the volume traded instead of their value it is -- as it is collected by the Warsaw Stock Exchange. That's why we may simplify that change in the revenues are correlated somehow with the change in the numbers. That's why total revenue in second quarter 2020 amounts to almost PLN 63 million, which means that increased 2.3% quarter-on-quarter and decreased 12% and 4% year-on-year.

Main factors, which had the biggest impact on revenues comparison year-on-year basis on which we should focus on, is significant drop of revenue from trading and property rights from PLN 12.5 million to PLN 8.3 million due to discontinuation of trading in cogeneration certificates as of 30th of June 2019 and decrease of energy efficiency certificates turnover, as I mentioned before.

Please let's go -- let's move to Slide 16, revenues from clearing. Here, again, we are dealing with the correlation between traded volumes and on the exchange and the clearing fees calculated per each megawatt hours. So we see decrease of revenue from clearing in the second quarter to PLN 11.4 million, which has decreased 6.9% year-on-year due to lack of volumes to clear from cogeneration certificates.

Revenue from operation of the register increased in second quarter to PLN 9.1 million, driven by an increase in the volume of issued and cancelled RES certificates. Yes. That's the -- I mean I think the main factors and revenues and turnovers in the commodity markets. So I pass voice to my colleagues for the next slides. Hello?

[Izabela Olszewska, executive]

Piotr Borowski, are you here with us?

[Piotr Borowski, executive]

Yes. And again, sorry, my connection has been broken. So can you come back to financials?

[Izabela Olszewska, executive]

Yes, Slide #18.

[Piotr Borowski, executive]

Yes. Thank you very much. So the cost/income ratio was at the level of 44.5% lower than the second quarter as a result of a higher sales revenues and stable costs. Depreciation was a bit lower year-on-year, lower by 6 -- sorry, 3.6%. And there was an increase of salaries and other employee costs. The increase was 15% year-on-year, but almost 0 quarter-to-quarter. This is because we employed new contractors, new employees and new people to -- in our projects, strategic projects that we are now working on.

So this year, we had increase of revenue -- of employee costs, personnel costs. There was also a decrease of external services in the second quarter. Well, we had a smaller costs of marketing, business trips and external advisory services. In the second quarter, we created the provisions against the potential tax payable by our clearinghouse for the commodity exchange at the amount of PLN 2.9 million. Now we are in a discussion with our tax advisers to prepare the strategy because there are some doubts concerning the taxes as there are discrepancies between the EU and Polish tax regulations.

Also, we written off part of the investment in our daughter company, BondSpot, which trades bonds in the professional market. [ The right to ] write-off was at the level of PLN 3.5 million. It was because we observed a decrease in trading on the treasury bond market. And we expect lower revenues this year than we've forecasted.

The Slide 19, share of profit of entities of associates. There was an increase, 21% year-on-year and it amounted PLN 4.4 million. And it was driven mainly by the very good results by the net profit of KDPW, our associates. It's a national depository for securities. They had a PLN 4.2 million profit in the second quarter when compared with the PLN 3.8 million in the first quarter of this year (sic) [ second quarter of last year ].

Slide #20, our consolidated balance. We can say that the first half was very good in terms of business and in terms of financials, and there was a very good healthy growth of our financial assets and cash and cash equivalents. And we paid in August this year -- 2 days ago, we paid a dividend, PLN 2.4 per share. Thank you very much.

[Izabela Olszewska, executive]

Yes. We are ready to answer any questions you might have at the moment, so please. Thank you.

[Pawel Wieprzowski, analyst]

If I may start. Pawel Wieprzowski, WOOD & Company. In fact, I have 2 questions. The first one is you've mentioned that you started collaborating with EBRD in ESG field. Could you please elaborate a bit about this agreement?

[Marek Dietl, executive]

Piotr, can you answer the question?

[Pawel Wieprzowski, analyst]

Okay. And the second question is, could you please share with us your considerations on the upcoming IPOs? So how many IPOs can we expect this year and next year?

[Marek Dietl, executive]

Again, Iza, if you can answer the question.

[Izabela Olszewska, executive]

Okay. Okay. So let's start on the first question. So that's true. So we have started the project with EBRD. And this is the project related to ESG topics. So we discovered that the ESG is absolutely important trend in the market, and we would like to prepare our issuers for reporting according to the expectation of the investors. So we had some road shows abroad and also within the global funds. And we -- all of them, they inform us that from the next year, the ESG integration will be on the level of almost 100%. So it's very important information. And the companies that they will not report on ESG, they will go to the watch list and those who -- which will report according to the standards which are described by foreign investors and our local investors, of course, they will be investable. So it is why we discuss it with EBRD.

And currently, we are in the procurement process, and we are looking for the adviser who will prepare for us the guidelines for our companies, how to report ESG for the investors. And we are the partner and of course, we have some financial contribution to this project. As I mentioned, we received -- we are in the process of procurement. We received some proposals, and now there is the valuation of these proposals. And probably the winner will be announced very soon. So this is about ESG, absolutely important topic for us within the exchange. We adopted the ESG strategy. And we have a lot of plans related with the implementation of ESG within our company and also helping our markets in the process of ESG factors implementation to their policies.

And as far as IPO market is concerned, so we think that the rest of the year, it will be a good period for IPO. So we had the public announcement from 3 companies that are going to be listed on our exchange. So it is Allegro, which is the famous name and game producer of huge games and also our -- the company from our media sector, Canal+. But also, we expect some several IPOs of small- and medium-sized companies, especially from gaming sectors. And around 28 companies, they announced that they are looking for floating on our NewConnect market. So we think that this will be a good time for IPO business line and -- but also, we expect some SPOs in the second part of the year. Thank you.

[Operator]

[Operator Instructions] It appears we have no questions on my side.

[Marek Dietl, executive]

So Pawel, since there are no questions, I don't know if we continue or what is the plan?

[Pawel Wieprzowski, analyst]

No. I think we should conclude the conference call at this stage. I'm quite confident that if there are further questions, investors can directly contact Investor Relations department. So thank you so much for the call today.

[Marek Dietl, executive]

On behalf of the Management Board of Warsaw Stock Exchange, thank you very much. And please don't hesitate to contact our IR team or the Management Board. We are always ready to answer your question. Thank you very much.

[Operator]

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