Gielda Papierów Wartosciowych w Warszawie S.A. (GPW) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Warsaw Stock Exchange Full Year 2020 Results Call. My name is Simone, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Joanna Bolinska, Head of Investor Relations for Warsaw Stock Exchange to begin. Joanna, please go ahead.

Hello, everyone. Welcome, everyone, on the call dedicated to financial results of the Warsaw Stock Exchange Group for the fourth quarter of 2020. Today, we think that we'll be in a traditional manner. First, we will present you all the numbers, and then we will move on to the Q&A session. We have all the members of Warsaw Stock Exchange management board on the call. Happy to present everything to you and then move on to the questions as well commodity health. I will hand over now to the speakers.

Thank you very much, Joanna. Hello, everyone. My name is Marek Dietl, I'm the CEO of Warsaw Stock Exchange. If I may ask you to flip the presentation to the Page 3, where we presented the highlights of 2020, except the financial results, which were excellent. And Izabela and Piotr are going to present you with the excellent financial results. But besides of that, we were very active in future new products in the financial markets and also in our derivatives market. We also worked on simplifying our structure of bond issuing with making one central place for non-governmental bonds and the other place for government bonds trading. We were doing a lot of our strategy, especially in agriculture market, which we introduced new products, where we also improved our IT to service product, and we also collected almost 40 authorized warehouses and 28 other warehouse for agriculture markets are pending for the authorization. And we have 3 brokers what is good enough for running this new business line. We've been also doing a lot in the technology space, mainly through our GPW Tech, our subsidiary focused on the of the technology and the communication of technology, and we developed the -- or complete the development of free product, it's TCA Tool. So take our tool to estimate implicit, explicit, constant market impact of the trade, so very handy tools for asset managers, brokers, and also for exchanges, and we are now busy testing this with our clients in a cloud-based model. So the clients are already testing that. And some resellers also check the market potential for that. We were also working currently on our blockchain-based tokenized asset exchange, where we received our research and development grant or building up. We were also very successful in gaining few customers for our data services mainly due to the to the -- to our new [ OLED ] products. So for us, that will be new. So with this Polish LIBOR called WIBOR. So our subsidiary GPW Benchmark got full BMR authorization for this key interest rate benchmark, and we are very actively marketing this, a money market benchmark from California to Tokyo. And we were very pleased with our virtual roadshow with Asian American investors. For obvious reason, we changed our plans from offline roadshows to online roadshows, but it really played out quite well. We also started last year the process of acquiring maturities take at Armenia stock exchange, it's one exchange where -- what quite profitable and currently, we signed term sheet and currently with help of EBRD advisers from the EBRD were building up the business plan for the Armenian capital market. We also acquired 28 new clients for our information services for all the -- our business lines, including GPW, what is our equities trading and corporate bonds, but also for bond spot, what is a government bond and TGE, what is commodities trading. So we have now have centered the sales of the data services and look like performance and our sales performance has improved in this business line. And for more details, I would like to hand over to Izabela for business update and later to Piotr for financial update. Thank you.

Hello, [indiscernible] member of the management board in charge of business development and sales. And I would like to focus in my part of today's results presentation. On more detail information related to the trading volumes and our investors activity. And let's start with an international perspective. So on the -- we are on the Slide #4. In 2020, the Warsaw Stock Exchange was the European leader in terms of the dynamics of equity turnover growth. And the change of equity turnover value year-on-year reached the level of above 56%. And it was a better result than the results achieved by the global exchanges, such as Nasdaq Nordics and Baltics, Deutsche Börse, SIX Swiss Exchange or Euronext. When we look on the Slide #5, another market indicator, turnover velocity. So the average value in 2020 was 59.8, but in 2 months in October and December, the Warsaw Stock Exchange was ranked on the top amongst European stock exchanges. And in October -- so we were the most liquid exchange in the whole European Union, measured by velocity. And in December, we took a second position right behind Deutsche Börse. And then we are on the Slide #6. And in Q4, there was a significant increase of trading volumes on the main stock market by 129% year-on-year and 62% quarter-on-quarter. And prior year was really good in terms of turnover, and the total turnover value reached the level of almost PLN 300 billion. And there -- we believe that there are a few main reasons of such growth of turnover. So one is the persistent high activity of our retail clients. And the share of retail clients in total turnover reached 25%, and it was the highest level since 2009 when this parameter was on the level 27%. In 2020, a number of individual brokerage accounts increased by more than 85 -- 84,000. The other factor was higher trading volume connected with the debut of Allegro. So just to remind you that it was a second big debut in Europe and the 9th in the whole world. And the value of the offer was PLN 10.6 billion. So Allegro accounted for around 21% of the total turnover in Q4 and average session turnover in Q4, it was PLN 384 million. Also, we had a very heavy trading volumes on another company, CD PROJEKT company from gaming sector. And here, increasing oversupplies after the release of the new game, Cyberpunk in December. So the rising star of 2020 in terms of turnover growth was our NewConnect market, which is the SME platform. And NewConnect is the market where leader investors are going out, and they were active mainly on the companies, which we call COVID winners. So from gaming sector, biotech, fintech, and the trading volume reached the level of more than PLN 5 billion in Q4. And this was as much as almost 1,200% more than a year before. And investors were also active in other segments of equity market on structured products and ETF. So as of the end of 2020, we had available around 2,000 products -- structured products and 7 ETF. And it's worth saying that at the beginning of this year, the new ETF was launched based on Nasdaq-100 Index. And so we are expecting another one based on S&P 500 next week. In the previous years, numerous sales and education activities were carried out by us and especially we promoted gaming on the Warsaw Stock Exchange gaming sector and also the sector of innovative companies. Also in Q4, we organized a quarterly roadshow dedicated to our foreign investors. Market liquidity is supported by market makers, but also the participants of our 2 programs, high-volume provider and high-volume fund. And the share of HVP and HVC (sic) [ HVF ] participants in equity turnover, it was 11.1% in Q4. So now let's go to the Slide #7, and this is about the -- our derivatives market. So trading volumes on derivatives are always connected with market volatility. And in Q4, volatility was higher than in Q3, but below levels from the first quarters of the previous year. The trading volumes on derivatives market increased by 96% year-on-year and 42% quarter-on-quarter. And the future contract based on our blue chip in the big 20 remain the flagship product. And this contract accounted for over 50% of total trading volume. And I just want to also underline that we have some other derivatives and especially promising category of products are the single stock futures, and we have already informed the market that at the exchange, we are ready to add new single stock futures as soon as there is such a demand of market participants and in October last year, new 4 single stock futures will launch. So our high-volume provided program covers also derivatives market. And the share of HVP in total trading volumes was above 12%. And now on the Slide #8, we try to summarize the achievements in individual segments of our markets. And in fact, one conclusion is appropriate here that the previous year 2020 was very -- was a great year for our financial market, and market conditions were favorable. However, just I would like to underline that much has been done. I would say, to help lag. So the new products were launched: new derivatives, ETF, structured products. We organize numerous sales and educational activities. We had active program research coverage support, which included 51 companies and 13 broker dealers. And we started with the new program dedicated to issuers and potential issuers, and its work being a listed company. And in this program, we proposed several educational activities for the companies plus also, we did some pricing activities, especially for the companies that suffer on COVID last year. And let's go to the Slide #9, and this is above ESG, which we think is one of the most powerful trends which will shape the financial markets globally, but also in Poland. And if we looked at the ESG, I would say, 2 business plans. So we know from our roadshows that this is very important. Also the ESG is important topic for our global clients. And if our issuers try to adjust to ESG reporting requirements, they will be blacklisted by global investors, and it means lots of business for the exchange. So it is why we try to support our issuers to adjust to this trend. So we have twofold role. So first of all, as a -- Warsaw Stock Exchange as a public company. So we need to adjust ourselves as a public company to the new expectation of regulators and investors. And in this role, we have prepared to do this. However, we have been already producing integrated reports for 2 recent years. And these reports included also nonfinancial factors like social environment and also governance factors. The second role is the roll-off of the [ product ] organizer of trading platform. And here, together with EBRD, the exchange is involved in the project aimed at creation, the guidelines for listed companies. So the selected advisers will recommend our company's works and how to report in every category of ESG factors. So we also became, last year, a member of UN Global Compact organization, and we want to show from their experience and knowledge. And last but not least, we are involved in product offer development. So we offer already WIG-ESG, but also our daughter company, GPW Benchmark is working on some other indicators like green, weaker [ indices ] family and also some low carbon indicators. So that's it from my side, and I would like to just leave the floor to my colleague, Piotr Borowski.

Thank you, Izabela. Good afternoon, everybody. This is Piotr Borowski, I am in change of operations, regulations and finance on the Warsaw Stock Exchange. We are on the Slide #11. As Izabela explained the very good activity -- market activity resulted in excellent financial results in 2020. We had record high sales revenue, record high EBITDA in the history of the Warsaw Stock Exchange and also very high net profit at the level of PLN 151.4 million. It was, in many respects, record year in the 30 years of history of our stock exchange. On the Slide #12, you see the sales revenue quarter-by-quarter. So it was a year-on-year increase of 44.4%. We had very healthy EBITDA margin at the level of 55.6% in the last quarter of the last year and also very good net profit margin at the level of 40.3%. These excellent results were mainly due to the very high activity on investors on financial market and equities, but also in derivatives as well. Slide #13. Trading revenue, it was higher by 150 -- sorry, 118.7% (sic) [ 119.7% ]. And this was the result of activity of all groups of investors, especially the retail investors, but also very active market makers in this period. And we observed a sharp increase of average turnover in shares per session on the main market. And this resulted in this excellent level of revenues. Slide #14. We also enjoy the increase of listing revenue by 21.5%. And despite the pandemic and difficult time, the IPO market was very active. We had the biggest-ever IPO of Allegro company, but also some smaller IPOs in the fourth quarter. Altogether, 5 of them on the Main Market and 3 new listings on NewConnect, and it resulted in higher listing revenues by 21.5% in the last quarter of the last year. Also there were SPOs so the existing listed companies also issued shares altogether in the value of PLN 2 billion. So in this respect, it was very successful quarter for us. Slide #15. Information services, market data segment is also evolving very well. It was a year-on-year increase by 13.3%. And we are very glad with this because we see the increase in all the investor groups. We have new subscriptions for market data and new distributors. So it looks really, really good. That's all for the moment from my end. I hand over to Adam Mlodkowski, Deputy President of Polish Power Exchange.

Thank you, Piotr. Hello. Can you hear me?

Yes.

Yes.

My name is Adam Mlodkowski. I am the CFO of TGE, and I will present to you a few slides about situation on the commodity markets. So let's go through the numbers on Slide 17. In the fourth quarter 2020, the volume of electricity traded on TGE amounted to 60.7 terawatt hours compared with 66.7 terawatt hours in the fourth quarter of 2019 and 53 terawatt hours in the third quarter of 2020. This represents a decline by 8.9% year-on-year and an increase by 14.6% quarter-on-quarter. Primarily, the year-over-year decline is the result of high level of yearly instruments' open interest that was established in previous quarters. There was also still a significant impact of possible removal of the exchange obligation since it could concern delivery years starting with 2021 and hence, affected trading on underlying instrument of the electricity for that market. The volume of natural gas traded on TGE totaled 40.2 terawatts hours compared with 40.7 terawatt hours in the fourth quarter of 2019 and 35.2 terawatt hours in the third quarter of 2020. Similar to the electricity market, ISM trading volumes were extraordinarily high in the first half of the year. Despite declines year-on-year in the second half of 2020, the annual volume of natural gas and electricity traded on TGE exceeded 2019 volume and new -- hello, again, Adam Mlodkowski. I will continue the presentation. We were at Slide 17. And on the green, you concentrate your attention on the second part of this slide. On the green certificates market, we note slight growth year-on-year by 1.4%, with trading volumes 6.3 terawatt hours. There was a bit bigger growth regarding the whole 2020 by 4.1% and quarter-on-quarter by 6.3%. This seems to be a result of increased level of certificates redemption obligation and high volume of certificates issued. We still observed a drop in the liquidity on the white certificates market. The supply of these certificates is still relatively low, which keeps prices high. At the end of 2020, there was a decline in an overall volume of white certificates issued. This amounted to 46.5% year-on-year. In the fourth quarter 2020, the volume of white certificates traded on TGE totaled 29.2 kiloton compared with 20 -- 81 kiloton in the fourth quarter 2019, which we said, decreased by 63.9% and 24.9 kiloton in third quarter 2020, which means an increase by 70.3%. But I would like to say that the situation was predicted in our financial plan on 2020. On the next slide, we can see that the revenues from trading on electricity markets in fourth quarter 2020 increased by 8% year-on-year to PLN 5.3 million. The increase comes from rising of the spot market trading fees and these markets' relatively high volumes. Fourth quarter 2020 was, as I mentioned before, the best quarter of TGE's story on the spot electricity market. And the revenues trading on natural gas markets are stable in the fourth quarter 2020. They increased by 0.6% year-on-year to PLN 3.4 million and despite the lower overall trading volume. It's the result of high spot market volume that has a bit higher fees than gas forward market. The property rights market revenues dropped in fourth quarter 2020 by 9.7% year-on-year to PLN 6.1 million. It comes from the significant decrease of white certificates trading volume, but revenues from property rights were PLN 0.5 million higher than in third quarter 2020. TGE has stable revenues from other resources than trading fees in the fourth quarter, they amounted to PLN 3.3 million. And finally, the last slide of my presentation, revenues from clearing. In fourth quarter 2020, there was an increase in revenues from clearing by 2.6% year-on-year. They amounted to PLN 12.7 million. The growth is a result of high volumes on spot market regarding both electricity and natural gas. Natural gas spot market has relatively high clearing fee of PLN 0.08 per megawatt hour. There was also an increase of clearing fees on electricity spot markets in our clearing house in line with the TGE's action. The revenues from operations of the certificates of origin register amounted to PLN 5.5 million, which means growth by 8.7% year-on-year. The result of postponing the time of certificate redemption by the President of Energy Regulatory Office from third quarter to fourth quarter 2020. That's all about the commodity market. Thank you for your attention.

Thank you, Adam. This Piotr Borowski again. So you jump to the Slide #21, operating expenses and financial expenses in Q4 '20. So we observed the increase of operating expenses by 21.5%. It was mainly due to the higher employee costs. Employee costs were higher because we hired new staff. 7 persons are working on our strategic projects. And as this was extremely successful financial year, we created additional provisions for the annual bonus for our employees to share the success with them. Also external services was slightly higher by PLN 1 million, and it was due to the higher cost of IT, but also the higher cost of promotion and education. We observed a sharp increase of the retail investors in trading of the establishment. So due to this fact, we have to spend more money for the education of the market because we wanted these investors to stay with us for longer time. Slide #22. Share of profit of entities measured by equity method in the last quarter of the last year stood at the level of PLN 4.8 million. It was much higher year-on-year, but also the quarter-on-quarter and it was mainly because of the contribution of KDPW Group, it's a national depository for securities in CCP. On the Polish market, they had also a very successful financial year '22 because of the market activity. So they enjoyed the increase of revenue from clearing fees, settlement fees and depository fees. So they contributed to our success as well. Slide #23. Consolidated balance sheet. As you can observe, we have a very healthy, good liquid position with a lot of cash generated during the last year. So we observed the increase of assets and of the liquid financial assets. So thank you very much for your attention. This was the last slide during this presentation. I hand over to the organizer of the conference.

[Operator Instructions]

This Pawel Wieprzowski from Wood & Company. I have a few questions. First of all, thank you so much for the presentation. It's been very insightful indeed. There was a miss versus the consensus on the fourth quarter results, I mean, higher-than-expected operating costs, and these were salaries and external services more specific in each of categories by roughly PLN 2 million higher than the ones I centered into my focus. And could you please elaborate if that high salaries and external services costs should be sustained in this year? Or these were rather inflated by some one-offs? That's my first question.

It's Marek Dietl. So in a nutshell, when it comes to salaries, simply, our bonus system is very progressive and very great operational performance we had last year resulted also that we had to -- that we have to pay higher variable compensation. And personally, I'm very happy because it's a clear sign that we that we had a great year behind us. And also, we were rather moderating last year when it comes to salary increase. This variable compensation comes in the good moment when the team was really working very hard on transferring our organization from centralized in one building to decentralize due to COVID constraints. So it's a very timely bonus. And it's hopefully, it will stay with us, this bonus. So next year, we're going to have also so excellent results, but we never know. Our business is extremely volatile. When it comes to external services, simply the more [ retainable ] of the technology, the more we have external services related to the third-party subcontractors and also some IT specialists are well paid. IT specialist, they're all sole entrepreneurs. So they issue us invoices every month. So they are that in terms of accounting treatment as external services and they usually work only for us. And this is the nature of the Polish IT business. And if we're going to rather stabilize on this level because we do not expect that much new hiring related to our services. So it will -- definitely, it will not grow as fast. And just basically rather we're going to stabilize or increase in moderate pace. Piotr, as a CFO, would you like to add something?

Not really, because I lost connection for...

Okay. So that's all. So that does.

Okay. One only one factor which caused increase of -- in the external services. One more, it's promotional cost because we postponed all the events for the year to the first quarter because of the pandemic situation. And thanks to that, you can see the increase of the promotional costs also in fourth quarter except other factors, for example, personnel costs and IT costs.

Okay. My next question is, you recently held a passive investment conference. And last year, you've managed to launch the few ETFs. Do you think that -- do you plan launching further ETFs this year? And if so, what will be the benchmark on the equities, indices or also fixed income? Yes.

Izabela, if you can deal with this question, please.

Yes, sure. So as I mentioned during my part of the presentation, so we have just launched ETF based on Nasdaq-100 Index, and we are expecting the new one based on S&P 500, and the debut is next Monday. And then according to the information that we have received on the ETF producers, I would say, or -- so we can expect the ETF based on our WIGtech index. So again, based on stocks, but technology from technology sector. And then probably this year or maybe next year, there will be another approach to ETF based on fixed income. So this is the plan. But of course, we cooperate not only with 1 ETF provider, but also with other providers. And let's hope that they will decide also to launch the products to our exchange because some of the foreign ETF providers just decide to stay with the only global exchanges. But we hope that 1 or 2, perhaps we decide also to list ETF on our exchange. So this is the plan about ETFs.

Perfect. Last year, you announced collaboration with EBRD on promotion of ESG ratings. Could you please elaborate a bit more what are the plans for this year for this cooperation? Do you plan any -- do we expect any event? And could you please just run us through the pipeline, if there are any projects on the table at this stage regarding this initiative?

I -- yes, yes. So to be honest, we cooperate with EBRD with the project, which is focused on preparation of guidelines for our issuers. And we wanted to have prepared very detailed and practical guidelines because currently, our issuers could be potentially lost how to properly report ESG factors. So there are some regulations, but it's very difficult to measure all these factors and prepare the relevant information to -- especially to global investors. So we want to offer them the guidelines. About ESG ratings. So we cooperate with another partner, which is for Sustainalytics. And Sustainalytics prepared for us some ratings for the purpose of creation of WIG-ESG, and they prepared the ranking of the companies, which are included in WIG-ESG index. And this is -- but this is a slightly different cooperation. So I think that this is my explanation of the cooperation with EBRD.

Maybe 2 more questions. In 2020, the most pronounced event that happened on -- or one of the most pronounced events that happened, the Warsaw Stock Exchange was at significant spike of retail investment activity. Do you think that this level of activity should be sustained in or can be sustained in 2021?

So who is going to answer?

You can continue. You are doing that very well.

Okay. Okay. So I believe that in 2021, we'll have also the high activity of retail clients, and what are the reasons that I think that it will be also the continuation of the trends from the previous year. First of all, in Poland, we have seen record low interest rates. And the National Bank of Poland announced that they are not going to change it. So I think that Polish citizens, they look for alternatives to multiply or even protect their capital, and one of the interesting possibility is the Warsaw Stock Exchange. And also, I think another reason is the IPO pipeline. So now the IPO market is -- I think it's very active and promising, and we have a lot of questions from the potential issuer side. So there are 5 perspectives in Polish FSA. And also a lot of companies that want to go to NewConnect market. So also, I think that there will be some new opportunities for retail clients to invest in good companies from interesting sectors. And also, I think that our offer is more and more interesting. So the offer of structured products and these structured products allow especially our retail clients to go short and to earn market of a particular commodity underlying for some structured products to earn money because the short selling is not so open in the Polish market for retail clients. So the structured product and also ETFs. So I think that we managed to bring the attention of retail clients. And I also follow what Sustainalytics and our broker dealers just comment in the public domain, and they all think that the strength of active trading of retail clients who will be continuing this year.

Okay. Perfect. That's very clear. My last question with regards the dividend policy. Well, 2020 results are stellar compared to the previous year. It seems that the equities -- strong equity volumes will stay with us in 2022, which are essentially the most important contributor to your top line, roughly 35% of your topline comes from the equities trading. So it seems that this year should also be not that bad. Hence, do you expect any possible positive surprise on the dividend from your financial forecast? You outlined the dividend policy growth path, which assumes that you should pay at least PLN 2.5 per share dividend from 2020 profit. Can we expect anything more than this PLN 2.5 per share?

Piotr Borowski speaking.

May I deal with this question? The idea was that we increased by PLN 10 grosz per share was that we have a stable dividend policy. So our investors know what to expect is a minimum. The bottom is then 10% -- PLN 10 grosz-plus every year, and this is the minimum. So we do not intend to change our dividend policy. But it's too early to talk about. This strongly depends on the -- on many other factors than our profit or cash position.

And when can we expect the dividend proposal to be released?

We usually -- that one, we do -- we usually release that somewhere in March, don't we?

Being a bit towards now meeting of shareholders, it will be in the...

Yes. The final [ petition ] of the quarter recommendation. When do we do that?

The recommendation? Usually, May.

May. Okay. So in 2 months.

April, May. Yes.

Do we have any further questions?

[Operator Instructions] We currently have no further questions, so I will hand back to the team.

Okay. Ladies and gentlemen, thank you so much for the participation in this conference call. I'd like to also thank the Warsaw Stock Exchange management, Board members for participating and presenting these results. Congrats to the entire team for delivering such strong 2020 figures. And let's keep our fingers crossed for also very decent set of results in 2021. Thank you so much. Have a great weekend, everyone. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a great day. You may now disconnect your lines.

Goodbye.

Goodbye.

Thank you very much. Goodbye.