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

Good afternoon, ladies and gentlemen. My name is Pawel Wieprzowski. On behalf of Wood & Company, I am very pleased to welcome you to the second quarter conference call with Warsaw Stock Exchange Management Board. Today, the company is represented by Mrs. Izabela Olszewska, Member of the Management Board; Piotr Borowski, Member of the Management Board; Adam Mlodkowski, Vice President of the Management Board of the Polish Power Exchange; as well as Piotr Kajczuk, Financial Director at the Warsaw Stock Exchange. Gentlemen, please go ahead.

Hello. My name is Izabela Olszewska. So thank you very much, Pawel, for organizing this conference call on behalf of Warsaw -- Wood & Company, and thank you very much for your kind introduction. So let's start our today's presentation with Slide #3. And generally, these are [indiscernible] business part of the financial market presentation. And -- but let me shortly comment on Slide #3 where, for the best visibility, I have placed some milestones on 1 page. And they are presented, I would say, in 3 layers. So the first layer is the financials and then core business and the last one, the new initiatives, the new business initiatives in the capital group of Warsaw Stock Exchange. All these milestones will be discussed and developed in details in further presentation. So I would propose just to go to the Slide #4. And I think that already additionally, I'm starting with an overview of the equity turnover in Europe. And 2020 was a year of very high activity on all European markets. But in Q1 this year, trading in some markets slowed down. But it was not the case of Warsaw Stock Exchange, so we had a very good Q1. But our trading volume slowed down only in Q2 2021. But all in all, this electronic order book turnover change, these parameters ranked Warsaw Stock Exchange in the top among stock exchanges in Europe for the first half of this year. And even in the second quarter, it was a growth of trading volumes by more than 3%. And Q2 2020 was very active because it was COVID time and the volatility was high. So we are very happy that this year, the Q2 was even better than the last year. Let's go to the Slide #5 when we present the investor activity on the cash market. And on the Main Market, the -- after the high special credit volumes, and they were the result of several factors. So I would like to mention, first of all, the high activity of retail clients. So I already informed during the last -- last our call that we have ultra-low interest rates in Poland. And currently keeping money on the bank deposits with the inflation on the level of 5%, it's really a loss. So our retail clients, they look for the new investment opportunities, and we observed the high activity of prepaid clients on Warsaw Stock Exchange. So 24%, it was the share in turnover of retail clients for the first half of this year. The second factor was the inflow of fresh new capital to mutual funds, including equity funds. Also, in the first half of the year, we had the use of very interesting companies. Only in Q2, there were 5 deals of new companies and good macroeconomic parameters in Poland. So I think that this -- all factors are still varied. So it is why we hope that the whole 2021 year, it will be really good for the business on the Warsaw Stock Exchange in the financial market. Just to comment also on the time between the end of the second quarter and today. So July and August, it was the holiday period. So they were weaker in terms of turnover, but September is currently much, much better. So just also to comment on the future. So I just want to underline that there are sort of good companies in verification, the Polish Security Commission (sic) [ Securities and Exchange Commission ]. So we do expect a continuation of those IPO periods in the next months of the year. And I think that, of course, as a consequence of these, we can expect also very good result in trading volumes. On our SME market, NewConnect, we observed a drop in turnover, and it was a significant drop by more than 50%. Although, please remember that this is much more important, and it means that even a small nominal change translated to a large percentage change. But it was underlying that the most activity-traded companies from NewConnect, they migrate from this market to the Main Market of the Warsaw Stock Exchange, which is a natural thing. And in Q2, we had 3 companies that migrated from the SME platform to the Main Market. Also, in the previous year, we observed a relatively huge interest in NewConnect but especially in so-called COVID winners companies. So it means the companies from gaming sector, technology and biotech sectors. But now this interest is much lower. But if you look at the graph on the left-hand side in the bottom, so you can see that Q2 2021 was much, much better than the whole year 2019. Systematically, we have been developing our structured product market. And currently, they are around 2,500 structured product [ resets ] delivered by 6 issuers. And they are based on various commodities and the value of underlying. So this is the chance for our special retail clients to have the exposure to values underlying. In the first half of 2021, we had the view of 3 ETFs: 2 are based on foreign indices, Nasdaq-100 and S&P 500; and 1 is based on our, I would say, local index, WIGtech. So this is the index that consists of the company from technology sectors. And the 2 prospectus of the new ETF is in the Polish FFA, including 1 ETF related to fixed income market. So we hope that is the decision of the approval of the Polish Security Commission is by the end of the year. So we'll have 2 new ETFs even this year. We run constantly marketing and sales activities, further recover of interest in conferences, especially from automotive innovative companies from -- such as like green-tech, biotech, med-tech, life science, gaming sectors, but also other companies as well. So started the first addition of our, I'll say, flagship program, which is supporting research coverage for the smaller companies. So currently, this program covers 65 companies and reports, which are distributed free of charge to investors because the costs are covered by Warsaw Stock Exchange. And these reports are delivered by 10 investment firms from Poland. The liquidity on the equity market is supported by, of course, market measures, but also the participants of our high-volume provider and high-volume funds, and they increase their activity on the market. And also, we are very happy to inform that there is a constant growth of the new investment accounts, however, much smaller than in the previous year. So now here on the Slide #6, which is dedicated to derivatives market. And I have to comment on derivatives. So first of all, due to the dropping volatility in the second quarter of this year, the trading volume was lower quarter-on-quarter, but it was similar to quarter 2 regulatory year. However, and this is the second comment, we observed the change of the structure of the trading. And now WIG20 index contracts and single-stock contracts, they were loss -- less traded. And we observed the growth of trading in FX futures, especially the futures based on the currency per U.S. dollar to Polish zloty. Also in derivative space, we had active programs supporting the liquidity and this is high-volume provider and high-volume funds program. And also, we had very active market makers on derivatives market. Now I just want to comment on ESG, which is a very hot topic on capital markets, and also, it's very important topic for the Warsaw Stock Exchange. So we are on the Slide #7. And at the Management Board of the Warsaw Stock Exchange is just preparing the whole capital group to advance ESG reporting. So we are waiting on our own ESG strategy, plus we are just in the process of implementation of relevant policies. But we also help our listed companies to prepare to ESG reporting requirements. We treat it as a business-oriented issue because we realize that if the companies are not prepared for reporting, so they be out of the investment radar of global investors. But we would like to have global capital here rather than somewhere else. So it is why together with EBRD, we prepared the ESG reporting guidelines, which is the manual for our listed companies. We also prepared the new set of best practice for listed companies, which cover ESG factors. And the company issued reports, how they follow the best practice. We also -- we are involved in training for our especially institutional investors. And on the product side, currently, we have a neutral fund based on our ESG index and also the structured products based on this WIG-ESG. And our daughter company, GPW Benchmark, is working on the new set of ESG indices. And currently, they also are working on bringing our WIG index family. So that's all from my side. And Piotr Borowski, over to you.

Thank you, Izabela. Ladies and gentlemen, we are on the Slide #9, financial results. We can say that we have a good second quarter of the last year. Our sales revenue is slightly down by 3%, but it was a mixed bag because the revenue on the financial market increased, while year-on-year, while revenue in the commodity market was slightly down. Operating expenses increased by 15.5% year-on-year. While if we deduct the one-off fee for the market regulator that was accounted in our books in the first quarter, in the second quarter, we observed a decrease of expenses quarter-on-quarter from PLN 51.7 million to PLN 51 million. So we can say that operating expenses were stable quarter-on-quarter. EBITDA decreased by 8.5% year-on-year and by 7.8% quarter-on-quarter, while the net profit rose healthy by 4.1% year-on-year, by 17% quarter-on-quarter, and it was due to mainly a decrease in financial expenses in the second quarter and the sharp increase of the share of profit of entities measured by the equity method, and I will elaborate this topic later on. On the Slide 10, you can see that we generated a very healthy EBITDA margin at the level of 58.9% and a high net profit margin at the level of 46.1%. And these metrics were record high during the last couple of quarters. Slide 11. Trading revenue was slower -- was lower by 5.1% year-on-year and 21.5% quarter-on-quarter. It was due to a lower market activity, mainly on the equity market in the second quarter and on the -- our Main Market and NewConnect, while there was a sharp increase in the bond trading especially the treasury bond trading on our TBSP platform. Slide #12. Year-on-year, we had an increase of listing revenue that shows PLN 5.5 million in the second quarter. Still, we see new issuers coming to our market. On the stock market, we had a few listings, in the Main Market and on NewConnect and also a couple of new issuers on the bond market. For the secondary market, secondary issuers, market is very active. So we are very positive and very optimistic about this business line. Slide #13. We noted a steady increase of the revenue from the market data and all this is important for us, so we are still finding new clients, not only for our stock exchange, the Warsaw Stock Exchange data, but also for the TGE and GPW Benchmark, which is our index factor. And also, for our bond market TBSP, still there's capacity to slightly increase this business line, revenues from this. And this is all at the time being. Now I'm handing over to Adam Mlodkowski, Vice President of our Commodity Exchange. Adam, please.

Thank you, Piotr. Hello, everyone, Adam Mlodkowski from Polish Exchange -- Polish Energy Exchange speaking. We are on Slide 14. The best result we achieved on the gas market, which continues to grow steadily. The lower turnover on the spot market compared to the previous quarter of 2021 was due to the seasonality. The turnover on the energy market was worse than in Q2 2020. But you should remember that the results from Q2 last year was the highest in our history, caused by market uncertainty of volumes related to the development of the COVID-19 [Audio Gap]

I think as the message that operating expenses were flat quarter-on-quarter because if we deduct the one-off fee accounted in the first quarter of this year for our market regulator, we have a similar picture in the second quarter. So depreciation was down by 1.3% quarter-on-quarter. Employee costs were down by 1.5% quarter-on-quarter. And external services were slightly higher. It was due to IT costs, promotion and advisory costs connected with our new projects. On the Slide #20, you can see the share of profit of entities measured by the equity method, and it was a record high in the second quarter, the best result, mainly due to the very good financial results of KDPW Capital Group, which is the National Securities Depository (sic) [ National Depository for Securities ] on CCP. They had a very good quarter in all business lines, like clearing settlement depository services and services for issuers like corporate actions, they're very active. And we can say that there's a very valuable asset in our portfolio. Slide #21, consolidated statement. We still have very liquid position. Our assets increased when compared with the end of the last year. And that was mainly driven by an increase in the net liquid financial assets, which grew by PLN 59 million. So we had a very comfortable position and situation. And we paid in August dividend of PLN 104.9 million, which was a PLN 2.5 per share, and the dividend yield was around 5.2%. So we think it was a good information for our shareholders. And even though when we pay the dividend, we still have very liquid position in our balance sheet. Thank you. It was the last slide in our presentation.

Thank you so much for the title presentation. I have a couple of questions, if I may start. So first of all, could you please elaborate a bit more on the IT product you sold to Kuwait Stock Exchange? How does this contract work? Do you receive a monthly payments for it? Or it's just you had a single upfront payment? So could you please elaborate a bit more on the details of this deal? That's my first question. Hello, hello? Can you hear me?

Yes. Yes, we can hear you. Piotr, would you like to comment on it? Piotr Borowski?

Yes. It's our new project perspective. We are testing this type of share, but then we'll be delivering it to other exchanges. And it depends on -- there are 2 possible ways of treating our clients, so it can be a part of our consulting services, helping other exchange to work on the liquidity, which is not very common, and it can be limited in time process, or we can install it other service and charge on a monthly basis. We are doing this to [ attitudes ] of our clients, and now we are testing it with Kuwait. But it's very promising because we know that lower exchanges don't have such tools to measure the liquidity.

Perfect. My second question is about the very solid profits from associates that you recorded in the second quarter. I believe that was all-time-high profit from associates you've ever reported. I know that this is basically the stems from the -- a very strong KDPW contribution, roughly PLN 7 million as far as I remember. Do you think that this level of profit contribution from this entity is a sustainable one? So shall we expect similar level of profits from this entity to be contributed in the next few quarters?

It was extremely active quarter for them, for KDPW, because it was a period of corporate action like payment of dividends and registering a new issue of shares. Because the regulations change in Poland and other share issuers, they have to register shares with the central depository. So I'm not sure the next quarters will be such a good one, but I think that the perspective for the KDPW services are very great. And we also started to clear transactions for our TBSP treasury bond market, which was not the case in the last year. So they have a new promising business lines, and they will generate profits in the next quarters.

Perfect. Looking at the second quarter EBITDA margin was an extremely high level, like close to 60%. What shall we expect going forward? Because this is very solid EBITDA margin stemmed from the lower than market and we expected OpEx. So could you please share with us your considerations over the possible OpEx growth in the upcoming quarters?

Yes. I think that OpEx can grow, especially in the last quarter, the fourth quarter of this year, because it's kind of a seasonality in our business, and every year in the last quarter, we had a higher promotion costs and IT costs. So I think that it will be difficult to keep such a high EBITDA margin in the next quarters, which is extremely high this quarter. So we expect -- we can expect some increase of OpEx also connected with our new projects, new business initiatives that we develop, and then it will generate some advisory costs and human costs.

Perfect. I know that during the last conference call, you started thinking about introducing of foreign stocks to your product offering. And you're aiming at introducing trading of these foreign equities at the Warsaw Stock Exchange in the fourth quarter. What's the long-term target in terms of the number of stocks, I mean, the foreign stocks that you want to be traded at the Warsaw Stock Exchange?

Okay. So maybe I will take this question. So you're right, we are just working to prepare the launch of new market, named GlobalConnect. And it will be organized in the form of MTF, mutual trading facility. And we would like to offer to the investors, the trading in the large names among West European and American companies. I think that we started from our European companies, and then we will add the American companies. And this market, of course, is for all stock exchange investors but mainly will be dedicated to retail clients. And we -- I think that we have some -- we will have some competitive advantages. Currently, the retail clients, if they want to buy the foreign stock, they need to go to the brokers. And they -- of course, they have to cover the currency risk, and it is very expensive. So we will offer the trading in Polish zloty, and we offer also reputation of the market makers. And the access to this market will be easy because the GlobalConnect will be operated on the same trading platform as other our equity markets. So the access for the brokers will be -- currently, no additional effort is expected for exchange members. And we've shown that we'll achieve the internal readiness by the end of this year. However, there are 2 important factors when the market will really start because now we are waiting for the green light from the Polish Security Commission. So there is no mandatory approval of the regulations from the FFA side. However, we want to be sure that the supervisor has no objections for the -- to the structure of the market. So this is the one thing. And the second thing, that -- the companies will be launched to trading by so-called introducing market makers, so -- which is the investment term based in Poland. So of course, we can say that the market is open when the first company is available to trading. But let's hope that we will manage to open it by the end of this year. There are some markets already similar to our idea, and one is in Austria, organized by Vienna Stock Exchange. Also, the Moscow Stock Exchange (sic) [ Moscow Exchange ] opened such a market. Deutsche Börse has such a market. But when we look at the similar market in Vienna, so they opened in 2017, and now they have around 700 companies offer to their investors. So our goal is during the, I would say, the first period of running of this market, I think that 1 year, 1.5 years to reach around 100 companies listed there, but -- not listed, sorry, traded. But it will depend on the interest of our investors. And what are -- what to think about the trading volume? When you look at the Vienna Stock Exchange, so the trading volumes are similar to our NewConnect trading volumes but in the best period of the NewConnect. So it's around PLN 1 million per months. And we think that maybe this is something that can be our benchmark in the -- at the beginning of a market -- GlobalConnect operation.

Perfect. And if I may ask some few more questions on these foreign stocks. Are you not concerned that these foreign stocks, once they are introduced into your product offering, could potentially cannibalize the volumes of the Polish stocks that are traded at the Warsaw Stock Exchange? Because since the local investors will have additional investment opportunities, they may switch from trading in Polish stocks to trading in foreign stocks. Are you not concerned with such a risk?

So first of all, we have the same trading fees. So if the investors decide to trade on foreign stocks, so we'll charge the similar trading fee. However, I think that currently, the -- we have the situation in the Polish market that the -- that our investors, the local investors, may look for some diversification of their portfolio. So they look also for foreign stocks. And we think that we can offer them trading foreign stocks here in Poland rather than send them to the other platforms. So we treat it as a kind of, I would say, not the cannibalization but as a complementary market to our current offer. And we think that we'll have, as I mentioned earlier, the competitive advantages. And we hope that those clients, they really want to trade in foreign stocks, they would take here on our platform rather than go to other platforms and other exchanges.

Perfect. Do you have any kind of initial estimates what might be the volumes trade in foreign stocks once you reach your target of, let's say, 100 foreign stocks? Do you have any kind of like long-term target or some figure you could recall now?

Okay. So I have an impression that I already mentioned some kind of benchmarks. In Vienna Stock Exchange, it's -- of course, it's very difficult to predict how it will -- in which pace and how it will be developed here in Poland, but they have around PLN 1 million per month, which is not a huge volume, but it's like similar -- like, as I mentioned, on the NewConnect but in the best time of the NewConnect. So last quarter, we had around PLN 3 million on the NewConnect. So this is somehow similar. That's what we expect here. But we will see, of course.

Okay. So essentially, your rough estimate once this 100 stock target is reached is that it can potentially add roughly PLN 1 billion of additional trading volumes to your equities line, correct?

Yes. But of course, it's just the -- when we look at the Vienna Stock Exchange and we see like similar figures, but of course, to be honest, I don't know how much time it will take to reach these volumes and this number of stocks. Further, we made the research among our investors, and there is the interest in foreign stocks. So we do hope that it will be a good proposal for them.

Okay. Perfect. So my last question would be on the pace of introduction of these stocks. Because as far as I remember, you suggested, at the initial stage, you want to introduce like 20, 30 foreign stocks in the fourth quarter, and then you want to reach 100 stocks. So this 100 stocks is the target for which year, for which quarter?

Yes. So I think that it very much depends on the introducing market maker, which is the external decision, to be honest. And there is a special role of broker-dealer in investment company proposals. Just to, first of all, how to say, bring these stocks to the Polish market and then to provide the market-making services. So it's not the internal decision of the Warsaw Stock Exchange, but rather, it depends on the decision of the broker-dealer. And we have the cooperation with 1 broker-dealer and others that are interested in playing the similar role in the future. So we discussed with this potential introducing market maker around 100 possible names. But it will be -- it's very difficult to declare where -- when they decide to launch the stocks to this GlobalConnect. And if they decide just to start from the, let's say, 1, 2 companies and check what will be the interest, or they start on the 20 in 1 go. So probably, later on, it will be much easier to discuss the pace of the implementation of the new companies. But as I mentioned, it's not the decision of the Warsaw Stock Exchange, but rather, it's very much dependent on the decision of the introducing market maker. So I mean the broker-dealer from Poland. But this is the broker-dealer from Poland -- sorry, one [indiscernible] explanation that this is the broker-dealer investment firms from Poland, but this is part of the international capital growth. This is very important because it's much easier for such entities to bring the companies here, if they are the part of international growth.

Okay. Perfect. That's clear and very helpful. Operator, do we have any other questions?

[Operator Instructions] It appears we have no questions at this time.

Okay. Perfect. Ladies and gentlemen, thank you so much for attending this call and for the presentation. And on behalf of Wood & Company, I wish you all good afternoon and a great weekend. Let's speak following the third quarter results. New members of the Management Board, please have a good luck with your development plans, and speak to you in November. Thank you.

Thank you very much, Pawel Wieprzowski. Thank you. Bye. Bye-bye.

Thank you very much. Bye.

Thank you very much.