Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Transcript 2022-Q2

[Operator]

Go ahead, Marta.

[Marta Jezewska-Wasilewska, analyst]

Good afternoon or good morning to anyone in U.S. Welcome to Warsaw Stock Exchange Second Quarter Results Call. My name is Marta Jezewska, and I represent Wood & Company, and host of today's call. Now with no further delay, let me pass the microphone to Izabela Sheva, Management Board member of Warsaw Stock Exchange. Izabela?

[Izabela Olszewska, executive]

Hello to everyone. Thank you very much, Marta, for your kind introduction. So it will be my pleasure to guide you through the first part of today's presentation, which is devoted to the business situation on the financial market. But let's start with the achievements and milestones of the second quarter of 2022. So in the second quarter, we have reduced the current strategy. Just to remind you, we announced our strategy in 2018. And the current year is the last year of the implementation of this strategy. We have reviewed the strategy and all our strategic initiatives together with the external advisors and the external advisor is Boston Consulting Group.

The conclusions were presented during the event, which took place in June in our premises. Also, they were presented in the press release and in the form of video materials. To summarize the conclusion, so in 2018, we set ourselves ambitious goals, both in financial dimension and also in the area of creating completely new business segments. So the diversification was a keyword in our strategy. As far as the financial results are concerned, so we can say we did well. In the recent years, the average profits were higher by about 40% than in the previous 5-year period, so before we took the helm in the company. We managed to create new product services.

Also, the strategy was live, so we added some new important initiatives, which were relevant to the situation in the market. For example, one of the added initiative was ESG implementation. But a couple of initiatives will be delivered with some delay due to demanding conditions during the strategy implementation, like pandemic of Coronavirus. And sometimes in some initiatives, we were too optimistic with our assumptions. 2 important international parts. So at the market, we were upgraded to develop market status by FTSE Russell. It happened in 2018 and also the full member admission to work Federation of exchange and supplies in June this year.

In the second quarter, we concluded also a share purchase agreement and shareholders' agreement, which are connected with our project of acquisition of a little bit more than 61% stake in the Armenia Securities Exchange. So this is the conditional transaction, and now we are waiting for the event of 2 conditions. One is the approval of the shares by the Central Bank of Armenia and the second condition is a relevant amendment to article of association in which, as the new owner, we'll have some corporate rights. The conditions must be led by the end of September and it will activate the payment for the shares.

So we have the ready plan for development of Armenian market. So we prepared the business plan, and it has been reviewed and approved by EBRD. In the second quarter, we also paid dividend for 2021, and it was PLN 2.74 per share. And just to remind you that we have active dividend policy now. And according to this policy, it's the PLN 2.74 per share. So we paid more because of a very good business year 2021. So the Management Board decided to propose to the shareholders' meeting the higher dividend. And currently, it is giving 7.5% dividend year and it proves that our company's solid dividend corporate. We had the new management board in July 27, the new joint term of office started.

And the current situation is that 3-person have been already approved by Polish Security Commission and whereas 2 others are waiting for approval. The next slide, please. The next slide is about investor activity on the cash market. And the second quarter this year was marked by war in Ukraine. And mainly, I just want to underline the wide economic consequences of the war. So I mean here, energy crisis, high prices of raw materials, which fueled the inflation. And finally, the capital decision of National Bank of Poland to grow the interest rate in our country, also our currency became much weaker.

So the activity of investors in the second quarter was slightly limited. And we noticed a decrease of trading value in relation to first quarter this year and also in relation to the relevant period last year. So we are the neighbor country of Ukraine but we received the opinion from our investors that because of different geostrategic position, so we are the member of NATO and European Union, so they don't identify additional risk. But of course, they look at the market situation. And I think the global investors currently may have a position of wait and see. For retail clients, decreasing valuation of stocks and plus uncertainty in the second quarter just resulted, there were factors of some limitation in the trading activity.

And it's worth saying that the first quarter of this year, it was the quarter with the outbreak of war. So we had very high volatility and heavy trading because of also uncertainty. And it compels a high basis. So it is why it is such a percentage decrease during 2 quarters. The second quarter [indiscernible] was, in turn, a very good IPO time. And we had a couple of IPOs of very good companies, for example, Pepco, the debut was in May 2021, and it fueled the trading volumes. So again, year-on-year, there's the drop in trading volume higher than 30%. Also, the session as the trading value decreased, plus the average fee was relatively low to the 11 basis points. So we think that it shows less activity of retail clients.

And it will be also my comment to the third bullet point in which we are touching our SME platform, NewConnect. And of course, there was a decrease of turnover on NewConnect as well but in this market, the retail lines are the dominated group of investors. So as I mentioned earlier, they were less active, so it caused a drop in trading volumes on NewConnect. And on structured products and ETFs in second quarter, the most popular were those which predicted rebound like certificate, long [indiscernible] or ETF with leverage. For ETFs, we noticed some drop quarter-on-quarter of trading volume that are over. But in Q1, we observed that the owners of ETF based on S&P 500, they closed the low positions. So it was just organic heavy trading period. The share of participants of our liquidity programs, HVP and HVF, so that was slightly lower year-on-year but we managed to onboard the 2 new entities. So one, it is HVP, high-volume provider and one is high-volume funds, and they joined us in June this year.

Maybe, sorry, could I ask about the previous slide because I just want to also add some comment on [indiscernible] market, especially from the point of view of ECM and DCM. So in the second quarter, there were only further bills, all on SME class for NewConnect. And generally, since the beginning of the year, these companies made a debut on the main market. They were all transferred to NewConnect to the main market and 10 companies made a build on NewConnect. So it's worth saying that the IPO market is very quiet now and the total value on European exchanges in the first half of the year dropped by 90%, 90 comparing to the relevant period in the previous year. So there are 14 prospectus in Polish Security Commission having started substandard and fight ongoing processes.

So there are 5 companies that are waiting for the approval to transfer NewConnect to the main market. I just want also to underline the vibrant SPO market in the first half of this year, so secondary public offering. So we had 47 SPOs on the main market and with the value of about PLN 7 billion and 39 SPOs on NewConnect with a value of PLN 150 million. On the DCM side, the second quarter was a time of uncertainty in the corporate market, and there is a clear reason for that. And this was the lack of demand from the local institutional side because our funds, they were suffering from a wave of redemption of debt funds.

So within recent 12 months, the asset of corporate loans bonds has netted by 30%. So some of our planned space of corporate bonds have been postponed to the second half of the year, provided that the situation with redemptions stabilize. The good news is that there were some issues of corporate directed to retail clients, and they were organized in the form of public offering, and they were very successful. Now the next slide, please. And this slide is about our derivatives market, and we had an increase of trading volume year-on-year and drop quarter-on-quarter, especially we are glad that the [indiscernible] over increased because [indiscernible] futures, they are the most profitable for us, products and all derivatives.

And in the first quarter, because first quarter was the best, at least over volume quarter-on-quarter, so we had a high volatility. And in the last bullet point on the slide, you can see volatility in the second quarter and in the first quarter. And it is why in the first quarter, we had very high turnover base on derivatives market. Also, we have active HVP and HVF programs, liquidity programs on the relative markets. And the share of these participants of these programs, they were roughly similar in the same quarter on both 2022 and 2021. The next slide, please.

And the next slide is about ESG. We always inform about ESG during our results presentation because we realized that this is absolutely an important topic for our analysts and investors. So in December last year, the Warsaw Stock Exchange Group announced the ESG strategy until 2025. And now, we are busy with the implementation of the strategy. We have established the ESG Committee, which is the body responsible for monitoring of implementation of this strategy. Also, each of the company from our group, so the [indiscernible] Company, JPW and also total companies, they developed and approved an operational plans of activities for this year in order to achieve the goal of our strategy. ESG topic is regularly discussed on the meeting of the management board, of the [indiscernible] company as well as on the meetings of [indiscernible].

Of course, we inform our employees why ESG is so important in our company. We even published an integrated report that shows how the value is built in our company and of course, it included the topic of sustainable development. We feel the responsibility to educate the market about ESG, so we pared out some training, some workshops, educational activities with some partners. Also, we promote ESG, we promote green bond market. Also, we organized, in the second quarter, the conference ESG Warsaw and we are one of the partners of the second edition of ESG Leaders competition. So that's all from my side as for now and Piotr Kajczuk, over to you.

[Piotr Kajczuk, executive]

Thank you very much. Good morning and good afternoon wherever you are. When we are talking about the results of second quarter of 2022, it's worth to point that revenue are stable year-on-year but dropped 10% quarter-by-quarter. It was due to the war in Ukraine, also by rise of interest rates and uncertainty on the market. Also, in second quarter, we changed the structure of the revenues because on financial markets, revenues dropped down but increased on commodity markets.

On the other hand, we have operating expenses, which increased by 22.6% year-on-year but dropped 9.2% quarter-to-quarter. But you have to keep in mind that in first quarter, we set up a provision for the fees for Polish Supervisory Commission in amount of PLN 14.6 million. I will elaborate about the cost and expenses later. Looking at EBITDA, we see that it dropped down by 18.8% year-on-year and 8% by quarter. Net profit, on the level, PLN 38.1 million similar to the first quarter but decreased by 15.5% year-on-year. It is because the rise of revenues from the interest from our deposits.

In the next slide, we have the results on the quarterly basis, about the trends I told previously. But worth to mention is that looking at the EBITDA margin, we can find that it's stabilized and deliver 46%, 47% last quarters, slightly increased margin on net profit to 38.4%, thanks to revenues from interest from deposits. Also, it was mentioned that we paid 5th August dividend, PLN 2.74 per share. It is more of PLN 0.14 than dividend policy because of the good year of 2021. In the next slide, we are talking about the trading revenue on the financial market.

It is at the level of PLN 38.4 million in second quarter, it dropped down 8.1% year-on-year and 28.5% quarter-to-quarter. As I said, it was due to the uncertainty on the market caused by the Ukrainian war, inflation, rights of interest rates and exchange in assets. Our volumes dropped down, down shares 35% on the revised is 11% and on the debt market, more than 50%. In the next slide, we are talking about the information listing revenues, he has the right. They were at PLN 5.6 million, and it has increased by 6.3% year-on-year and dropped quarter-to-quarter by 11.9%.

As on the trading, it was due to the uncertainty regarding economic consideration. On our main market, we had 0 IPOs, only 4 IPOs on NewConnect. And we had SBOs. In the next slide, we have information services. We recorded PLN 15 million in the second quarter of 2022. It is rise of 5.5% year-on-year and 6.9% quarter-to-quarter, mainly thanks to new clients which we acquired. It is one company distributing GPW real-time data, 6 non-display users; 3, for GPW data, 2 for WIBOR data and one for BondSpot data. It's worth to mention that subscriber base rised by 18% year-on-year. Now we will talk about the commodity market and Piotr Listwon, Vice President of Commodity Exchange, the floor is yours.

[Piotr Listwon, executive]

Thank you, Piotr. Regarding the commodity market, trading volumes in both the electricity and gas markets decreased by 13% and 27% quarter-on-quarter and over 31% and 16% year-on-year respectively. The reason for this situation is the [indiscernible], which is commonly used in this presentation accompanying trading companies and electricity producers. Uncertainty about the coal prices, emission allowances prices, also taking into account the ongoing talks on the reform of the emission trading system and the prices of energy companies in foreign markets, all this results in record high valuations of electricity and gas in Poland and lower turnover on the Polish Power Exchange. Good news, however, results from the summary of the trading in property rights, which recorded a significant increase of almost 59% quarter-on-quarter and over 25% year-on-year, reaching the level of 9 terawatt hours in the second quarter of this year. While certificates are pretty stable, trading volumes totaled 36.8 kilotons equivalent in second quarter of this year, which is a decrease by 1.8% year-on-year but comparing to the first quarter, it's grown by over 112%. Next slide, please.

On the revenues side of the commodity markets, the results directly comes from the turnover of the volumes that we achieved in the second quarter of this year. Thus, while the revenues from the electricity and gas markets decreased by almost half and almost PLN 1 million respectively, the revenues from the trading of the property rights achieved a very good result at the level of PLN 9 million as well, which is increasing by PLN 3.7 million. Next page, please. The revenues from the settlement of the transactions is similarly to our turnover. So our provisions are coming directly from the volumes that are traded on the exchange and cleared by our clearing house. So we see it decrease by 2% year-on-year and almost 12% quarter-on-quarter, reaching the level of PLN 11 million. Revenues from the warranty of a region registered increased over 30% year-on-year and over 36% quarter-on-quarter, reaching the level of PLN 8.5 million. That's what we have from the company side. May I ask Piotr to take over the voice again.

[Unknown Executive]

Thank you very much. Let's stop light on the expenses now in the second quarter of 2022. As I mentioned, it was increased by 22.6% year-on-year to the level of PLN 62.5 million, and it was dropped by 9.2% quarter-to-quarter. But as I mentioned, in first quarter, we set up a provision for fee from Polish Supervisory Commission in the amount of PEN 14.6 million. In the graph below, you have a little bit of view on this increase year-on-year on this cost in second quarter 2022. And the main factors, which caused this increase start from depreciation, we shortened the useful life of our trading system by 1 year from first quarter 2025 to first quarter 2024. It means that the depreciation and amortization costs rised PLN 0.3 million monthly. In terms of the year, it is PLN 3.5 million yearly. The second factor is employee forecast. We have the mixture of the 2 trends. The first one is the increase of the FTEs, especially in GPW because of the running projects in our subsidiaries, especially new subsidiaries. On the other hand, we have the release of provision against social security contributions regarding employees in projects.

In this first quarter of 2021, we set a provision for the security contributions but retained classification of these employees from the individuals to the individual switch run business. It means that they will not be charged by the social security contributions but by VAT. So we released this provision, PLN 3 million, from employee costs, and we set up provision PLN 1.3 million in taxes for the VAT. It was the next factor. Next is our external services, and we have a few points. First one are IT costs, which increased PLN 2.9 million. Second is international energy market, which rised PLN 1.4 million; third, our advisory services, which increased PLN 1.9 million and promotion, which rise PLN 0.6 million. Coming back to IT, first point is NASDAQ. NASDAQ is the provider of the trading and clearing system for commodity markets. And this rise, it's thanks to the rise of exchange rate by 19% and valorization of this cost by 4.3%. Another factor included in this rise is that NASDAQ, we received this invoice from NASDAQ in second quarter, but the invoices for all the year. And this rise in the second quarter, we have to distribute between first and second quarter. It means that in the second quarter, this price could be lower by PLN 0.6 million.

Another point in our IT costs are licenses and services in GPW regarding network and transaction system, also they raised. International energy markets. Also, here we have 2 trends because this is net income by costs and revenues. Costs are the cost of support and development of the common system used by commodity exchanges in Europe, including TGE, our commodity exchange. On the other hand, we have revenues which recover part of the cost. There are 2 sources of these revenues. First one is Polish Operator, which will cover part of the cost. Second are the other participants of this market because some of the participants have direct contract with the vendor of the system and they are charged directly by this vendor. Then the costs are distributed to other participants, which have not deli contract with the vendor. And those revenues dropped down in the second quarter but we are in negotiation with Polish Operator to recover some of these costs. Third point, our advisory services. Mainly rise comes from verification of the current strategy, which is first stage to develop new strategy and some costs are related to the second quarter. Also, this rise is coming from projects, like, for example, in private markets, Logistics PCOL, or marketing advertisement, TO. Also, increases from audit of new trading system projects and promotion, as I mentioned, PLN 0.6 million.

In 2021, our activities were limited by pandemia. In this year, we had many events like, for example, Congress 519 Impact22 or well switch brokerage houses conference. At the end, we can mention that this PLN 0.8 million on other expenses are mainly due to the rise of energy prices and business trends. Also, we moved more in this year than a year before because of the pandemia where when it was limited. In the next slide, we have the share of profits of our affiliates. Main impact is made by the Polish Depository, GPW. The share at the level of PLN 7.8 million, it's more or less stable year-on-year but it's rised by 71.3% quarter-to-quarter. This is because of seasonality. Polish Depository has additional revenues in second quarter from general meeting services and dividend payments.

Also, they had more revenues from the guarantee funds because they manage guarantee funds and Polish Depository has income from the interest from the deposits. And the last slide in our presentation regards statement of financial position and balance sheet. And comparing second quarter to the first quarter, it's worth to mention that we moved one position coming from the dividend payment in the amount of PLN 150 million from equity to the other current liabilities at the bottom because at the moment of 30 June 2022, we recommend to pay the dividend and dividend was paid, as I mentioned, in 1, August. Thank you very much, and I expect now questions.

[Operator]

[Operator Instructions] Our first question comes from Mr. Miguel Dias from Oben Corp.

[Unknown Analyst]

So my first question would be regarding the cost to guidance. We understand that you are making significant investments, and that's why your cost to income, it's in an upward trend. And my question would be, would you expect this trend to be reversed? And also, what is your medium-term long-term guidance for cost to income? That's on the cost income guidance. Also, I would like to ask you something regarding your dividend.

Taking into consideration everything that is going on in the economy and given future expectations, I would like to ask you if you still see dividend expansion in the next years as guided in your fourth quarter call in 2021? Regarding volumes, I would like to ask you, where do you see the risk of lower volumes and how do you see this impacting your [indiscernible] And in inflationary and recessionary scenario, how much would you be able to flex your trading fees to compensate for these lower volumes?

[Unknown Executive]

Okay. I want to take the first question about the cost to income guidance for the next quarter of this year, we can expect because we reached 33% of cost to income. This is in line with our strategy because of the branding software strategic projects. And we can expect in the next quarter that it will be more or less on this level. We will try to push it down in the next year but we have to keep in mind that we will have new strategy and new financial goals will come from the strategy.

[Izabela Olszewska, executive]

So maybe I will take on other questions. So just about the dividend policy, so the dividend policy just again is somehow connected with the strategy in the sense that when we announced 2018 strategy, we also announced the dividend policy. And I think that's the same this time. So we are going to announce the new strategy and also our dividend policy. So what I can offer now and the answer that we would like to stay the highly dividend company. And this is our goal to be seen by our shareholders, by investors and analysts as a good dividend company. But we don't have the complete answer as for now because it will be elaborated together with working on the strategy. Now the question about volumes, so that's true that this demanding time for us and we presented the results, also the comparison year-on-year.

So 2021 was an extremely good business year for us with vibrant IPO market and also high valuation that brought the retail clients in the market. And now the macro-economic conditions are weaker and also uncertainty, I think that there are conditions in which we see the limited activity of, especially retail clients because the valuations are now low. But also, the global investors, some of them, as I mentioned, and yet they have waited 3 position. But of course, we don't want to seat and just look at the situation but we want to be more active and offer to investors some products.

And I think that we have many [indiscernible] to offer ETC and ETN products, which are absent on our market now. And just we are in the final stage of approval of our rules and regulation in order to have the possibility to offer this to investors. Also, I think that this is the last stage of our preparation to open the GlobalConnect market, which will offer the trading in foreign caps, mainly from the blue chips from the Western Europe and the States, maybe in the mix also the international or foreign ETFs.

And also, we are expecting some revenues from our strategic initiatives on our project, so like the projects selected with the advertising market or a slight market or some others. So of course, in this year, probably, it will be just the beginning with the revenues in this project but there are also the stream of the potential new revenues for the next years. And I think that this is the answer. So there was also the question about the fees. So there are no discussion now about any adjustment or increase of the fees. So we are not considering such a moment.

[Unknown Analyst]

Just to touch again on the GlobalConnect, would you be able to provide any sort of guidance to the sort of volumes that you would be expecting in the coming years and how that translates into your revenue?

[Izabela Olszewska, executive]

Yes. So as we are just inform EBITDA here, so from our side, we are ready to start the market. We received also the green light from Polish Advisory. Now this is the last phase because we are waiting for the readiness of our external partners. So I mean, here, the market maker, which will introduce also the foreign spot trading and plus, the readiness of our brokerage houses, some of them, they declared to be on the market on the day 1, so as soon as they receive the readiness, we will be ready to start the market. And the plan is to organize some kind of pilots.

So we with just a couple of European stores and check everything operates in a proper way. And then as the next cut. Now answering your second part of the question, so what kind of volumes we can expect. So we can look at the general global market because they organized before us in 2017. And now they have around 600 items. And the monthly average turnover is on the level of PLN 1 billion. So this is something that we can consider. Of course, we were not going to start with 600 items just from the beginning, but we can look at the situation on the Vienna Stock Exchange and we think that here, we can expect the similar figures.

[Unknown Analyst]

And just to finalize, let's touch on the acquisition of the Armenia Securities Exchange. I'd like to ask you what's the impact that you see coming from there? And is there any future plans to take the company public?

[Izabela Olszewska, executive]

So we are going to fully consolidate Armenia Stock Exchange. And of course, this is a very small business but very healthy. So the EBITDA margin is 30% and net profit margin is 23% but they are really small, so they're around PLN 6 million. So just we had some estimation and calculation about the impact on our revenues and profits. So it will be plus 2.5% with the [indiscernible] and plus 1.5% on the profit side. It's worth saying that the company has no debt and it has PLN 12 million of cash. So as we elaborated the plan, how to develop this market and what kind of initiatives we can implement to develop the market. And I think that the majority of the cost to implement these initiatives can be covered through their own financial resources. So we're not going just to like the dividend at the beginning. And as for now we cannot inform about any floating plans. It is not on the table now.

[Operator]

[Operator Instructions] Okay. It looks like the presentation was fairly exhausted. I'll pass the line back to our host, Marta, for any additional questions or concluding remarks. Please go ahead.

[Marta Jezewska-Wasilewska, analyst]

Thank you very much for joining the call. Thank you, Izabela, for hosting the call. I hope to see all of you and many more in the following conference during November, I guess. Thank you.

[Unknown Executive]

Thank you very much.

[Izabela Olszewska, executive]

Thank you very much. Goodbye.

[Unknown Executive]

Goodbye. See you.

[Piotr Listwon, executive]

Thank you. Goodbye.

[Operator]

Goodbye. This concludes today's conference call. We'll now be closing all the lines. Goodbye, and have a nice weekend. Thank you.