Euronext Athens Holding S.A. (EXAE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome, and thank you for joining the Hellenic Exchanges Athens Stock Exchange Conference Call to present and discuss the full year 2019 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Nick Koskoletos, CFO; and Mr. Stelios Konstantinou, Head of Investor Relations. Gentlemen, you may now proceed.

Good afternoon, ladies and gentlemen. And good evening to those of you listening to us from the other side of the Atlantic. In these extraordinary unprecedented times, and we are here to present the financial results of the group for 2019, which were published yesterday. And are available in the IR section of our website and then take any questions that you might have.

Thank you, Stelios, and good afternoon and good morning to all. Before I say a few words on the 2019 results and a comment on how the market dynamics seem to be unfolding in 2020, we'd like to say a few words to how we're dealing with the COVID 2019 pandemic here at the group. We're rather quick in implementing an extensive work-from-home protocol, which has now reached close to 90% of our staff, and has been so for the past couple of weeks. Thanks to our technological infrastructure. We've implemented a strict protocol regarding the access rights to our facilities. There's no traveling, obviously, and no external party meetings on our premises. We have created a strong crisis response mechanism, which ensures both the seamless business continuity and system security. And at the same time, we've ensured remote functionalities for our members on both the trading side, which we just recently launched and the post-trading side, which we already had in place. So that's facilitating in turn their own work-from-home protocols and unobstructed market operation and better access to our facilities. Now moving on to some highlights about the performance of a market in 2019. Average capitalization stood close to 5% higher at EUR 54.8 billion versus EUR 52.2 million in 2018. ADV, average traded value increased by 21% at EUR 67 million versus EUR 55.7 million in 2018, while we had a pickup in turnover velocity as well, which creeped up from 26.6% to 30.7%. And another thing, we had a series of corporate actions and public offers that further supported our positive performance in 2019. But we should note at this point that EUR 1.1 million of revenue has effectively been allocated for future years, given the implementation of IFRS 15, that deals with revenue from contracts. That's a particular element of our activity, namely IPOs and secondary offerings. As is the case with all market infrastructures around the world that report under IFRS fall under this category, thus necessitating the recognition of revenue over time rather than in time. So given this backdrop, we recorded a bottom line of EUR 6.1 million equates to EUR 0.10 per share and consistent with the group's dividend policy. The board will propose to the upcoming AGM, EUR 0.07 per share dividend, an additional EUR 0.09 of return of capital, which brings the total proposed distribution to EUR 0.16 per share, implying 3.6% yield of the average 2019 share price, which is similar to 2018 yield, while we note, the gradual reduction of the capital return component versus previous years. At this point, I'd like to pass it on to Stelios, our Investor Relations officer, to go through the 2019 performance in more detail. Stelios?

Thanks, Nick. So let's start with the overview of our 2019 financial performance at the top. The consolidated turnover of the group in 2019 was EUR 33.4 million compared to EUR 26.6 million in 2018. That's up 25%. Now if we concentrate, as we always do, at the 5 most important revenue drivers, which, together, account for approximately 70% of total turnover. We have the following picture. Revenue from clearing made up about 28% of total turnover and amounted to EUR 9.3 million versus EUR 7.9 million in 2018, up 17%. The increase is due to the 19% increase in clearing revenue of cash market, while derivatives market revenue was up 5%. Revenue from trading represents 16% of total consolidated turnover. And in 2019, it was up 23% to EUR 5.3 million versus EUR 4.3 million. Now as far as revenue from the derivatives market is concerned, both trading and clearing, in 2019, trading activity, i.e., the number of contracts, dropped by 25%. However, revenue was up 5%, and the average revenue per contract was up 40% to EUR 0.199 per contract compared to EUR 0.142 per contract year earlier. As you know, pricing depends on the type of investor, the product being traded and the prices on the underlying securities and as a result, market volumes and our revenue do not always go hand-in-hand. Lastly, on derivatives, trading and clearing revenue in 2019 was EUR 2.1 million versus EUR 2 million last year, and that corresponds to 14.4% of total trading and clearing revenue and 6.3% of total turnover. Revenue from exchange services makes up 9% of total turnover. And this line includes the quarterly subscription fees paid by listed companies, fees on rights issued on IPOs as well as fees paid by members and amounted to EUR 3.1 million, and is up 2.6% compared to 2018. The impact here from IFRS 15 was EUR 186 million as we booked EUR 189,000 as revenue from the total of EUR 776,000 that we would have had the IFRS 15 not been in effect. Listed company subscriptions were flat at EUR 2 million, member subscriptions were up 6.2%. Finally, revenue from depository services was up marginally 0.6%, amounting to EUR 2.46 million compared to EUR 2.44 million in 2018. Revenue from this slide, makes up 7% of total turnover, and includes revenue from rights issues, quarterly subscriptions paid by operators and revenue from inheritances. Hereto, revenue was impacted by IFRS 15 to the tune of EUR 524 million as we recorded revenue of EUR 250,000 instead of EUR 774,000 as we would have had IFRS 15, not been in effect. Now moving on. Revenue from market data makes up approximately 8% of total turnover and includes the fees that we collect from data vendors for the provision of FX market data. The fees that we collect depend essentially on the number of data terminals to which means data vendors disseminate FX market data to, and as such, is one of the few revenue lines that does not directly depend on market activity. Revenue from market data dropped 12% to EUR 2.6 million compared to EUR 2.9 million. Lastly, on the top line, there were a series of public offers during 2019 that generated roughly an additional EUR 3.1 million, with the largest being tightened at EUR 2.6 million. And that drove revenue up 256% to EUR 4.9 million from EUR 1.4 million in 2018. Moving down the P&L to the expense side. Total operating expenses, including ancillary services increased by 4% in 2019 at EUR 18.9 million compared to EUR 18.2 million. OpEx was 6.7% higher in 2019 at EUR 17.2 million compared to EUR 16.1 million. And if we break that down, OpEx, that is, we see that personnel costs were up 5.8% to EUR 10.4 million compared to EUR 9.9 million, whereas all other OpEx was up 5.7% to EUR 6.7 million compared to EUR 6.2 million. Personnel, remuneration and expenses accounts for 61% of total operating expenses, and is the same percentage-wise as in 2018, then is by far the largest expense category. These expenses are up 5.8%, mainly because a EUR 283,000 increase in salary costs, EUR 555,000 as bonus paid to employees in 2019. And whereas, we had a EUR 362,000 drop in severance payments in 2019. Headcount at the group at the end of December was 218 compared to 227 at the end of 2018. Now as far as other OpEx is concerned, the main reasons for the increase are a 39% increase in third-party remuneration and expenses, which is mainly due to an increase in fees paid to consultants. And building -- and an increase of 28% in building and equipment management expenses. Now if we turn to the bottom line. The earnings before interest and taxes of the group increased 136% to EUR 9.2 million compared to EUR 3.9 million in 2018. Interest income in 2019 was EUR 366,000 compared to EUR 565,000 in 2018, with the average interest rate and in 2019 at 0.49% compared to 0.68% in 2018. And thus, the net after-tax profits of the group amounted to EUR 6.1 million compared to EUR 3 million in 2018, a 101% increase. Now the effective tax rate on consolidated earnings in 2019 was 35.9% compared to 24.5% in 2018. And the higher tax rate charge relates to the reassessment, the recoverability of our deferred tax asset base. In addition, as regards the corporate income tax rate, I would like to remind all of you that for fiscal year 2019, the rate is 24%, down from 29% for 2018. And in addition, for the results that we reported in the first 3 quarters of 2019, the 28% tax rate was used since the reduction to 24% was only legislated in early 2020. Now turning to the balance sheet. The cash and cash equivalents of the group at the end of December 2019, dropped to EUR 73.4 million compared to EUR 74.6 million at the end of 2018, signifying that effectively, the payment of both last year's dividend and capital return was effectively fully funded by the group's free cash flow. Part of the cash, EUR 30 million at the end of 2019 compared to EUR 29.6 million at the end of 2018, is kept at the Central Bank, where interest rates are negative, currently minus 0.5%. And this is an obligation that our subsidiary AthexClear has under the EMIR regulation, and the remainder of the cash of the group is kept in a number of banks that operate in Greece, both foreign and local. Now also on the balance sheet, a further EUR 186.4 million that we report both as an asset and a liability, our third-party cash assets and concerned margins in the cash and derivatives markets. These -- and these funds are also deposited at the Central Bank. And with these remarks, this is the end of the comments. We would be happy to take any questions that you might now have.

[Operator Instructions] The first question comes from the line of Memisoglu, Osman with Ambrosia Capital.

Just wanted to confirm on the revenue side, particularly the depository services and market data, in particular, they were lower -- are that -- is that accounting related? Or was there any change in the underlying business fundamentals, main market data? And then regarding the capital return amount outlook, how should we think about it past 2020? Do you have still cash and reserves on the balance sheet to continue a similar rate?

Okay. Thanks for that, Osman. Now with regard to the depository services, the impact was pretty much the IFRS 15 comment made by Stelios, and that refers to the booking of revenue that occurs when new shares are registered. So at the end of the day, the number that we recorded, just to remind you, was EUR 250,000, vis-à-vis a 774, which would have been the case if IFRS 15 was not there. Now with regard to the data feed market data is -- it appears to be a structural slippage, given the fact that the Greek market has been, over time, falling out of favor. We see that, that particular line has been declining. There's no accounting treatment there, so to speak, per se. More so, there is an issue of less demand vis-à-vis the early part of the previous decade, where the number was much higher. So there's no other comment on that of any significant nature. Now with regard to the capital return, I think the idea here is that we will be -- we will be using our capital return as an element to gross up and support our distribution policy, thus having a notable dividend yield for our shareholders. But I think you should take note from its declining nature over the years. So I think that trend stands to continue.

Is there a cash level on the balance sheet where you would put a line at EUR 50 million or north of that? Any color on that front?

It is not an easy exercise, given the fact that our reserves at the end of the day or with regards -- it's not just a matter of cash, it has to do with the actual capital, but you have on hand vis-à-vis your regulatory requirements either it be -- with regard to the exchange, the Clearing House, the CCP and the central depository. Especially given the fact that we are moving to being regulated under CSDR, and that has increased capital requirements. So it's just not necessarily a function of how much cash we have on the balance sheet. It's at the end of the day, how much capital we need to hold at hand in order to support our services. Having said that, then even that is dynamic, given the fact that it is a function of how much volume you have that you need to be processed. So you cannot really go to the bare minimum of what is the regulatory requirement in terms of capital. You also need to have excess buffers given the fact that you might have a spike in volume that you need to be able to accommodate given your capital base. So I think we should -- I would keep in mind that it is -- the majority of the amount that we could have distributed has already been done, and that will be waning as time goes on.

The next question comes from the line of Kourtesis, Iakovos with Piraeus Securities.

Yes. In terms of ordinary dividend policy, your official policy going forward continues to be to pay 70% payout ratio, will it stand for 2020? Second question has to do with your average fee per bond rating. I've noticed that it has recently risen up, it was below EUR 1, and now it stands at EUR 1.10 or something like this. Did you say something there? And in terms of personnel costs, excluding potential or bonuses for 2020, would they be increased? How should I think about it?

Now with regards to the dividend policy, the 70% that you see is off the group bottom line, we stand to -- whereas it's closer to a 95% of the parent company in terms of policy, our goal is to distribute the vast majority of the parent company's generated bottom line. So you should not keep the 70% as a reference number. It's more a function of the capability and our objective to generate the parent companies. Now with regards to the bond, you know what, it's something that we would need to get back to you on with regards to the intricacies of that particular element in terms of our pricing and what has driven that number. So allow us to get back to you on that, if you will. And then with regards to personnel costs, there were -- the personnel costs were up 6%, as you saw in 2019. There were some increases that drove that number. So you will see that number carrying over in its full in -- to the full extent in the next year.

So I should expect decreased personnel costs in 2020, excluding bonuses?

Excluding bonuses, you should expect a similar level of personnel costs.

[Operator Instructions] We'll have a follow-up question from the line of Memisoglu, Osman with Ambrosia Capital.

Just following up on the previous question on cost. You mentioned in your presentation consulting cost going up. Will that continue in 2020 or why isn't all that is going on -- will it slow down those investments or projects? And also somewhat related to these projects, the ancillary revenues, again, what's the outlook there for 2020, particularly given the current situation and your overseas investments?

Okay. Our -- with regards to our overseas investments, those have not picked up any significant traction, and there's nothing significant booked with regards to those activities in 2019. So given circumstances, I wouldn't expect something soon for that matter. In Lebanon, there's also a -- the political situation there that the whole initiative has been frozen for the time being. That's one. Two, with regards to the consulting services, the will -- they stand to remain at the same levels, given the fact that there's the element of the risk assessments that need to be done with regards to our EMIR license and enters the CSDR as well, initiatives that has been running. So I think, though, in terms of those numbers, you will see the same levels. But there's another fact with regards to what drove the 2019 is that -- and this is something to keep in mind is the fact that consulting services are ad hoc general in nature. So it's not a structural issue. It's just that the element of 2019. 2010 -- 2020, we should expect those levels to be at the levels that have been discussed.

And if I may follow-up on the ancillary revenues of EUR 2.6 million for 2019, should we expect an increase there? So putting aside the overseas related bit, the underlying business, do you expect that to grow? Or given the circumstances there, there are some challenges there?

Sorry, can you repeat that question?

For the ancillary services revenue, you posted EUR 2.6 million, more than a 10% increase year-over-year. Do you expect a similar trend for 2020? Or are there challenges given the current situation and the overseas business slowing down and all that?

No. Okay. Well, the ancillary services there, one thing we should keep in mind is that the exchange has developed services with regards to colocation facilities, and that is something that is booked in that line. So that is pretty much structural in nature. We don't have -- we do not anticipate that number to abate. Now with regards to the rest of the elements there, the Xnet product does not seem to have any disturbance as we speak. And I think that is pretty much not directly impacted from what's happening with the market. The facilitation that we offered to the [ separate ] exchange, that is structural in nature and that is not something that will be affected from what's happening in the market. And then the other element as well is that the -- our services capital markets commission, and that too is something that is structural in nature. So I think that the vast majority of the components of that revenue line are not necessarily affected by market activity.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Okay. Thank you, all, for participating. If you do end up having any more questions, our Investor Relations is at your disposal. In the meantime, stay safe and wishing you all the best.

Thank you for participating. Take care.

Ladies and gentlemen, conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant day.