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

Ladies and gentlemen, thank you for standing by. I'm Constantino, the Chorus Call operator. Welcome, and thank you for joining the Hellenic Exchanges-Athens Stock Exchange Conference Call to present and discuss the 9 months 2020 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Nikos Koskoletos, CFO; and Mr. Stelios Konstantinou, Head of Investor Relations. Gentlemen, you may now proceed.

Good afternoon, ladies and gentlemen, and good morning to those of you listening to us from the other side of the Atlantic. We would like to present the financial results of the group for the 9 months of 2020, which were published yesterday and are available in the IR section of our website. And then take any questions that you might have. Nick?

Thank you, Stelios. And good afternoon and good morning to all. So we made a habit of filling in on how we're dealing with the COVID-19 pandemic at the group before saying a few words on our results and comment on how the market dynamics seem to be unfolding. So as we've mentioned before, we are continuously working on our remote platform. During the third quarter, more on-premises work had been conducted, but we never went off the 50% threshold. At most, we went to 35% to 40% on-premise working. However, as soon as the ramp-up in what is now the second wave and the lockdown, we reverted back to a more conservative scenario, more strict operating environment because that is something that we have very high on our agenda. And we are currently at a 20% on-premise work, close to 80% to 85% is working remotely. We're speaking on the COVID-19 pandemic. We have incurred approximately EUR 180,000 in expenses for the COVID-19 pandemic. However, obviously, that has been offset by the fact that we've had a reduction of what used to be extensive corporate travel and other relevant expenses to the fact that we are working in this kind of an environment. Now speaking on the market dynamics, it's been quite a roller coaster ride, especially over the last few weeks. But let's talk about the 9-month period. The average market cap dropped by 11% compared to the 9-month period. At the end of September of 2019, we're at close to EUR 54 billion. We were also then, at the end of September, we're closer to EUR 48 billion. And then from -- the bank's market cap had a significant reduction as well. The same period of time from EUR 7.5 billion to just less than EUR 6 billion for the same period. The average traded value that, too, dropped for the 9-month period to EUR 63 million and changed for the 9-month period versus EUR 67 million last year. But obviously, you are very well aware of the fact that basically, with the first half of the year that anchored these numbers higher because the third quarter, obviously, was much weaker, especially when it comes to average trading value at EUR 42 million for the quarter, making it one of the weakest quarters witnessed. And then obviously, October was pretty weak as well, with a drop in market cap as well that bottomed up right before the announcements with regards to the prospects of vaccine coming on board with the efficacy rate that they've been announcing. It seems that the markets have taken off a much more positive spin to that. And then November has a much, much different -- much more different backdrop, vis-à-vis, the very weak Q3 and October month. So as a result of what I mentioned before with regards to the third quarter, the results were weaker. The 9 months, again, weaker as well compared to a well-anchored first half. So at this point, I'd like to pass it on to Stelios to go through to our 9 months 2020 performance in more detail.

Thanks, Nick. After this brief market overview, let's start the overview of our 9 months 2020 financial performance. And as always, we'll start at the top. The consolidated turnover of the group in the 9 months of 2020 was EUR 22.1 million compared to EUR 25.5 million in the 9 months of 2019, down 13.6%. If we break that down into the 3 revenue segments, and that's how we like to think of our top line, we see that: first, trading-based revenue, i.e., revenue from trading, clearing and settlement, was down 21% on the back of lower ADTV in the cash market in the 9 months of 2020 compared to last year; second, market cap-based revenue, i.e., exchange, depository and clearing house services, was down 12% because of the application of IFRS 15 in 2020, which allocates revenue from corporate actions over 3 to 5 years, depending on the service provided. That is from IPOs and rights issues. IFRS 15 began being applied in the last quarter of 2019 -- in Q4 2019. And if it had been applied in the 9 months 2019 results, revenue from corporate actions last year would have been lower by about EUR 1 million; and thirdly, revenue from ancillary services, which includes market data, other ancillary services and on, was up 4%. If we look at revenue over the last 5 quarters, we see a strong start in Q1. A weak Q-on-Q performance as the effects of the COVID-19 pandemic appeared and what, at first glance, appears to be an even weaker Q3-on-Q3. However, it should be noted that Q3 results are not comparable: first, because we had, last year, TITAN's public offer to delist; and, as already mentioned, the effects of IFRS 15, which makes the results from corporate actions not directly comparable. And the combined effect of these 2 is approximately EUR 3.7 million. Now if we move on and look at the sixth most important revenue drivers of the top line, which together account for about 88% of all revenue, we see that revenue from clearing made up 31% of total turnover and amounted to EUR 6.8 million versus EUR 6.9 million in the 9 months of last year, and then that's down marginally by 1.8%. And the drop is due to the 4.1% drop in clearing revenue in the cash market, while derivatives market revenue was down about 10%. Revenue from trading represents 17% of total consolidated turnover, and in 9 months -- and in the 9 months of 2020, it was down 3.3% to EUR 3.8 million compared to EUR 3.9 million last year on the back, again, of lower trading activity in the cash and derivatives markets. Now as far as revenue from the derivatives markets, both trading and clearing is concerned. In the 9 months of 2020, trading activity, i.e. number of contracts, dropped by 16%, as mentioned already. However, revenue was down 10.4%. And as you can imagine, the average revenue per contract was up 8.3% to EUR 0.207 per contract compared to EUR 0.191 per contract last year. As you know, pricing depends on the type of investor, the product being traded and the prices of the underlying securities. And as a result, market volumes and our revenue do not always hand -- go hand-in-hand. Lastly on derivatives, trading and clearing revenue in the 9 months of 2020 was EUR 1.45 million compared to EUR 1.61 million, corresponding to a 13.6% of total trading and clearing revenue and 6.6% of total turnover. Moving on. Revenue from exchange services makes up 10% of total turnover, and this line includes quarterly subscription fees paid by listed companies, fees on rights issues and IPOs as well as fees paid by members and amounted to EUR 2.3 million, and it's down 12.5% compared to the 9 months of 2019. Note, however, and as mentioned earlier, if we had booked revenue in the 9 months of 2019 under the new standard, under IFRS 15 that is, it would have been lower by EUR 519,000 in exchange services and lower by EUR 480,000 in depository services. Revenue from market data makes up 9% of total turnover and includes the fees that we collect from data vendors for the provision of Athex market data. The fees that we collect depend essentially on the number of data terminals to which these data vendors disseminate our market data to, and as such, is one of the key revenue lines and does not directly depend on market activity. Revenue from market data was up 4.5%. Revenue from depository services is down 12%, coming in at EUR 1.9 million compared to EUR 2.2 million in the 9 months of 2019. Revenue from this line makes up 9% of total turnover and increased revenue from rights issues, quarterly subscriptions paid by operators and revenue from inheritances. Most revenue from that line was from the subscription fees of operators, which is essentially a custody-type-like fee that is based on the capitalization of the market; and second, on corporate actions by issuers. Revenue from ancillary services makes up 11% of total turnover. And in the 9 months of this year, it was up 17% to EUR 2.5 million compared to EUR 2.1 million in the 9 months of last year. And this line includes revenue from the support to other markets, such as the Energy Exchange group, The Boursa Kuwait, The Kuwait stock exchange and others such as the [ Boursa ] Cyber Stock Exchange. It also includes colocation services, Xnet and in-broker and some other revenue lines like EMIR trade reporting and the provision of [indiscernible]. Finally, the top line, we would also like to note the 70% reduction in revenue from settlement from EUR 4 million in the 9 months of last year to EUR 1.2 million in the 9 months of this year. And this reduction, as already previously mentioned, is due to the EUR 2.7 million in revenue that we booked from TITAN's public offer to delist in the third quarter of last year, ahead of the listing of the new corporate entity. Turning now to the expense side. Total operating expenses, including ancillary services, increased by 8.6% in the 9 months of 2020 at EUR 14.6 million compared to EUR 13.5 million last year. Operating expenses were up by about EUR 1.8 million or 14.7% in the 9 months of this year at EUR 13.7 million compared to EUR 12 million last year. If we break down OpEx, we see that personnel costs were up by 8.1%, whereas all other expenses were up by 26.2%. Now the drivers behind the increases are: first, targeted raises given to employees after a number of years of no increasing and the strengthening of the management structure, leading to an increase of approximately EUR 600,000 in staff salaries and social-security contributions. The year-on-year rate of change is expected to abate going forward as the first round of wage increases occurred in the third quarter of last year; second, consultant fees, which came in at about EUR 700,000 this year and included fees for an actuarial study, tax and legal services and for the improvement of the business organization; third, approximately EUR 100,000 paid in fees to the -- to our regulator, the Hellenic Capital Market Commission, to examine the licensing dossier of our subsidiary, ATHEXCSD, to obtain a license under CSDR; and lastly, a EUR 100,000 donation by the group to the Ministry of Health to support the effort to combat the COVID-19 pandemic. Personnel, remuneration and expenses accounts for 60% of total OpEx compared to 63% in the 9 months of 2019 and is by far the largest expense category. Headcount at the group at the end of September 2020 was 228 compared to 217 at the end of September 2019. Turning now to the bottom line. The earnings before interest and taxes of the group dropped 59% to EUR 3.3 million compared to EUR 8.1 million in the 9 months of last year. Interest income in the 9 months was EUR 95,000 compared to EUR 319,000 in the 9 months of 2019. And thus, the net after-tax profit of the group amounted to EUR 2.5 million compared to EUR 5.9 million in the 9 months of last year, which is a 57% increase. The effective rate -- tax rate on consolidated earnings in the 9 months of 2020 was 25.5% compared to 29% in the 9 months of 2019. However, we remind you that for 2019, the nominal corporate income tax rate is 24%, which is the same as in 2019. However, for the first 3 quarters of 2019, the tax rate used was 28% as the law of lowering the tax rate to 24% was only passed in early 2020. Turning now to the balance sheet, the cash and cash equivalents of the group at the end of September 2020 dropped to EUR 65 million compared to EUR 73.4 million at the end of 2019. Approximately 20% of that cash, which is about EUR 13 million at the end of the 9 months of 2020, is kept at the Central Bank where interest rates are negative, currently at minus 0.5%. Also on the balance sheet, a further EUR 191.6 million that we put as both an asset and a liability, our third-party cash assets and concerned margins in the cash and derivatives markets, clearing fund assets. And these funds are also deposited at the Bank of Greece. And with that remark, I'd like to thank you for listening in. And we'd like now to open the call to any questions that you might have. Thank you.

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

I just wanted to ask you if you could give us any color on the outlook for ancillary services. I saw a bit of an increase this quarter in Q3, so I wanted to see if there's any guidance or any other lines, any other outlook you can provide.

Yes. Hi, Osman. Thank you for your question. So the ancillary services is -- it is actually one of -- it's a very important strategic access for us. It is something that we've communicated in the past or at least in other investor meetings that we've had, is the fact that obviously, aside from the quarter element of the strategic access of going after and trying to enhance what is tradable in terms of the universe. And I think you know very well that there's a good chunk of corporate Greece that is not listed and that you can see it from the fact that our market cap to GDP is lower vis-à-vis other countries. And it's not just a matter of the value of what is listed, but even the actual economic activity of what is listed. So the strategic access to do that and then get out there and speak to confidence to get more tradable assets on the exchange, that's one; two, is expanding our offered services across the value chain, and this is where ancillary services come into play; and then even more so is, our third access is, amplify its -- leveraging our existing capacity in terms of offering our services to other infrastructures, whether it be the energy exchange or in the broader geography. So those last 2 pillars effectively will be making, if that's our orientation, more and more as part of the ancillary services that you currently see. So what happens is, first of all, you have a pickup there because as the energy market has come to its maturity, it was supposed to be launched in September, but launched in November, but we were in the third quarter, delivering a series of systems, so you see that coming up. But on the other hand, we do see, aside from the delivery of those systems, that we start having maintenance fees on those systems, so you will see a recurring nature of that effect. And then we also have some revenues from Kuwait as well that also made up a good chunk of what we saw in the third quarter, and we also expect to see that in the following years. And then that also, just to remind you, includes what we are currently already have in place with a separate exchange. We have done some work for the Hellenic Gas Transmission System Operator, where we've built them an auction unit system for the regasification and the Revithoussa facility. So there's a little -- nothing both that we are putting together there in order to make it more of a distinct revenue line aside from the more transactional or market-based revenue lines as well.

But is it at all possible to give us a bit of a quantitative color for maybe next year? How much can this grow in the shorter term? Obviously, it's very important for you strategically, as you mentioned.

I think it's -- strategically, it is fair to assume that we will see that line growing. I think that, that particular segment bottomed in 2019, and we will be seeing that line growing in -- as it grew in 2020, and they will continue to grow in 2021. But that is a function of the opportunities that we do find in the market, and we are actively looking into the broader geography with regards to where we could tap into providing more services. So it's a matter of, do all the stars and the moon is aligning? You get everything that you're seeking or you have to have a more conservative approach. So I wouldn't want to give any guidance per se, but it is something that we are strategically continuously focusing on.

And coming back to the initial part of your comments regarding the, I guess, the market encompassing more of the corporates in the country, are there any other color you can provide maybe related to recovery fund, which was, I think, mentioned in the press, maybe a month or 2 ago? Any more color on that front?

Well, on the recovery front -- so on the recovery front per se, aside from us being very, very well aware of the fact that a good -- a significant amount of that money will be geared towards sustainable investments, what is called the green aspect of it. But we're firm believers that sustainability and all that matters of sustainable finance are elements that we should foster and be ambassadors of improving the domestic systems, understanding of these merits and being able to adapt. And in order to reposition themselves against a more sustainable footprint that is something that we are firm believers are -- of, and that's something that we've done from last year with the issuance of the ESG guide that we had. And then we're looking into amplifying our efforts towards that direction, and we think that we need to enable the market to be more ready for the recovery funds because those will not be just thrown out of a helicopter and scattered around. They're very specific, very strict rules. And when it comes to the sustainability matters and everything we want to avoid greenwashing, and we want everything to be happen in a way that could create value in a sustainable way. So there are things that we're doing on that front. Aside from the recovery fund though, there's -- we are in continuous discussions with, for example, the -- on what possibly could be privatized or what is not currently listed, and there are a number of large corporates that we have discussions with, but these are discussions that you constantly need to have in order to have it out there for these corporates to explore the opportunity. That does not mean that we're close to anything like that nor is it our job to get a company listed, but it is our job to promote the idea of the exchange to the unlisted part of corporate Greece.

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

Yes. Just a follow-up on this. So I understand you don't want to be more quantitative on ancillary services, but I'm sure you have a budget of what to expect from ASPs in ancillary services from Energy Exchange as revenues and from Kuwait Stock Exchange, if you could please further clarify this? And thus far, as I noticed, during the third quarter, you had -- you booked in other expenses, consultant fees of around EUR 534,000, which seems quite that amount. Could you please further clarify on this?

Okay. So I'll take the second question first, and that is related to -- there was a 1 uplift from the fact that there was a -- there were a series of consultancies that were booked in the third quarter. The predominant amount was related to the valid -- evaluate commission. The Board commissioned a validation of our strategy to an international consultant, so that uplift that you see is definitely not something that we expect to continue to see in any repetitive nature. So that's explained that one-off pickup in the third quarter. And then obviously, in the second quarter, we also had that. So I would say that Q2 and Q3 are higher, Q3, much higher than what could be assumed as a more reasonable run rate for a particular expense line. Now with regards to our budgeting, I would not want to get into too many details with regards to how we go about what kind of targets we are setting for our business development function. So allow me not to get into too many details on that, but, however, it's something that we've mentioned in the past that our relationship with the energy exchange when it comes to full maturity is a -- it is more than EUR 1 million in relationship. So that is something that you could also keep in mind. And with regards to Kuwait, the current structure is something that is close to EUR 500,000 -- it's around EUR 500,000 over a 3- year period of time. But that is based on what is currently agreed, and that is something that we currently -- and we continuously work on amplifying. So and Kuwait was upgraded to an emerging market, and that increases what potentially could be as more demand with regards to how we provide services and how we support the capital market there. That's why I cannot turn around, just give you a number, because that number would not be based on something concrete.

So for Kuwait, you've spent EUR 500,000 over 3 years?

That is the current relationship, yes.

Yes, because I've seen that in the third quarter, you booked EUR 273,000, which is more than half of it.

Okay. It is something that relates to what is the current relationship, and again, that is a relationship that we have a dedicated team, but we keep on adding potential services to that.

[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.

Thank you, everyone, for participating, giving the time to listen to our comments. If you'd like to reach us, you know where to find us, and we'll be happy to speak more privately about any questions that you might have. Thanks again for participating. Bye-bye.

Ladies, and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a pleasant evening.