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

[Audio Gap] you today in the morning with the viewers of Poland on [ Air ] And my name is Tomasz Bardzilowski. I'm the CEO of the Warsaw Stock Exchange. And we have for you a presentation which talks about the Polish capital market, about the stock exchange, our results, our plans. And after the presentation, which will take probably around 25, 30 minutes, we are open for your questions. So let me go to the first slide. About a few words about Polish economy, which has been performing extremely well over the past years, has been one of the strongest economy in the European Union for many years. Right now, it's sixth largest economy in the EU and 20th largest economy in the world. What's important is a steady growth of GDP. This year the growth GDP is forecast to be at 3.4%. Inflation, which is falling, at the moment, it's already below 3%. The average for the year is expected around 3.7%. Our main macroeconomic risk is high fiscal deficit, which is exceeding 6% of GDP. However, the government level is still well below some of the other European countries at 60% of GDP. And what's important is that the economy is relatively balanced in terms of current account. We don't have any major current account deficit. So overall, the growth in the economy has been extremely strong. And as you can see here also in this chart in the upper right corner, Polish economy has reached 8% of EU average in terms of GDP per capita, which is a remarkable achievement starting many years ago in the '90s at well below 50%. So the strong economy growth is something that we can be, of course, proud of. Let's go to next slide. However, what we also can point out that the development of capital market has been lagging the economic growth, especially in the last decade. And now the market capitalization of the Warsaw Stock Exchange to GDP is just 22%, and this is well below the EU average, which is over 60%. And you can see here also on this chart that in Germany, the same ratio is at 47%. So over twice -- over 2x bigger compared to Poland. And you see that in the past, this ratio has been higher. It was 35% of GDP in 2014, and we have this decline to 22%, meaning that really the development of the Warsaw Exchange has been lagging the development of the Polish economy. And of course, this is something that we want to change. This is something also that we view as a big opportunity. One of the problems is a limited pool of domestic institutional capital in Poland. The size of pension fund assets to GDP is just 8%. The size of investment fund assets to GDP is 10%, so well below some other countries in Germany, the size of mutual fund assets -- investment fund assets to GDP is well over -- is closer to 80%. We have pension funds, and they still represent over 40% of the free float of the stock exchange. Good news is that there's a new pension fund scheme called PPK, employee investment plans, and it has been set up a few years ago, and it's growing quite fast, although it's still quite small in terms of assets. It's only 30% of GDP. The older pension funds of -- which really were the main driver behind the development of the Warsaw Stock Exchange, and they are not really growing because they have to now transfer part of the asset to the social security system to the Pillar 1 scheme. And mutual funds, which in Poland are called TFI. They are bigger, over PLN 400 billion, so close to EUR 100 billion. However, the problem is here that they invest on a small proportion of the assets into local equities. There are many reasons for that, but I believe that once interest rates will be lower, they will reduce or start to reduce the bond portfolio and debt exposure and to increase the equity exposure. However, the big opportunity is related to retail investors. When you look at the household financial assets, Poland stands out as a country in which the households have one of the highest share of savings invested in the -- in cash and bank deposits. It's at 50% of the financial savings, and this compares to EU average of just 31%. And in some of the countries, this ratio is as low at 12% or 15% in those countries when the capital markets is most developed. And just by reducing this ratio from where it is right now, 52% in Poland to the EU average of 31%, we could free up capital of well over EUR 150 billion, so much bigger than the current size of the free float on the Warsaw Stock Exchange and almost 6x more than the current share -- the current investments of direct investments of retail investors in listed shares, which is just PLN 100 billion or EUR 25 billion. So how to develop the market, in my opinion, and this is a chart that we've shown -- have showed in our strategy presentation last year in November. The biggest is really to create and to revive domestic institutional investors both -- domestic investors, both institutional and retail, i.e., further development of pension funds, investment funds but also private market, i.e., private equity and VC capital. In terms of growth, how to attract more investors, it's mainly through better and more attractive product offering, financial education, but also tax incentives. Once we have this strong domestic pool of capital, we will attract more IPOs with the strong ecosystem of investment firms and with good corporate governance, high standards and also ESG and balanced regulation. I think when we have it all, definitely, we will be more interested -- interesting for foreign investors, including retail investors from Europe and from Germany, hopefully. Now let me tell you a few highlights about the Warsaw Stock Exchange, and then I will talk also about our results. We are, I would say, not the first league, not a major exchange in Europe, #6 after the biggest ones, including Deutsche Borse, Euronext, SIX, NASDAQ and BME. Our market cap is EUR 250 billion. What -- however, we are by far the largest in the Central Europe, over 50% bigger than Vienna Stock Exchange and also the smaller exchanges. What's important is that we are a relatively liquid exchange. Our cash equity turnover, you will see on the next slide, the significant increase that we've seen this year is over 3x bigger than on the next exchange in the Central Europe and so-called velocity ratio, i.e., the share of turnover and turnover to our market cap is one of the highest in Europe at 45%. Actually, only 1 exchange is better than Warsaw in this respect, and this is Deutsche Borse. You see it in this column on the right, Deutsche Borse is at 48.6% and Athens as well, I see. And in terms of cash equity turnover, we've seen a significant increase year-to-date of 45% year-on-year basis. Hopefully, this higher liquidity will stay with us and will also help to boost the revenues of the Warsaw Stock Exchange. What we are really proud of and very happy is a very strong performance of our main indices year-to-date. The main indices are all above 30% up and in dollar terms, close even to 50% increase. And although despite this fantastic performance, the market doesn't really look so expensive, especially relative to other global markets. On the chart on the right, you see the P/E ratio of MSCI Poland compared to MSCI World and MSCI Emerging Markets. So compared to MSCI Emerging Markets, it's still almost 30% discount -- 27% discount on forward-looking P/E ratio. In terms of our valuation, Warsaw Exchange, we are -- we look inexpensive when you look at the P/E ratio of just 30%, 13x PE also at a discount in the valuation when you look at the EBITDA ratio, although we are paying one of the highest dividend within the group of global exchanges. You can also see here that when we look at the ROE versus price to book value metrics, we are also below the median and one of the most attractively valued exchange in the world. And hopefully, our ROE will continue to improve, which will justify a higher valuation. A few words about our strategic directions, which have been published in November last year. So in the plan for 3 years, we have -- want to focus on 2 pillars. First pillar is capital market development and, of course, building shareholder value. However, we think that whatever is good for the capital market also should be good for Warsaw Stock Exchange. So it's many growth initiatives talking to our stakeholders, to the Ministry of Finance, to the regulator. Our main area of growth that we see is attracting retail investors but also supporting new issues and supporting current issuers. What we want to offer is more value for the issuers from being a listed company. Financial education is also quite very high on our agenda. And we believe that we should also engage in activities aiming at increasing the -- or enhancing capital markets in the whole Central European region. In terms of building shareholder value, we want to expand the portfolio of new products and indices. Products, which are very high on our agenda, are exchange-traded funds, also new derivatives and bonds. Improving -- strengthening sustainable development is something which also is quite important for us. We still see a lot of room to improve efficiency also by enhancing synergies within the group. You will see later on our cost-income ratio, which is relatively high. And we want to accelerate our growth through partnership, and we see a value -- we see potential for M&As, for boosting growth from M&As, especially given our strong cash position. But what's important, we will remain a company with attractive dividend policy with the aim of increasing dividend per share. Here, you see our financial ambitions. Just let me -- and in terms of what we really focus on is the -- what we control, i.e., the cost growth. We don't want the cost growth to increase more than 4% to 6% on an annualized basis in the period between 2004 and 2027. And as a result of the revenue growth that we see at -- below -- at around 6% to 8%, we hope that this will result into double-digit EBITDA growth. Of course, this year, revenue growth, you will see it is much higher. So we also have some more room to accelerate with some investments, given strong performance. We want to reduce our cost/income ratio. It has been at 72% in 2023. We think it's too high, and we are aiming at 65% in 2007. Also, our ROE, we want to increase it to 18% from 15% in 2024. Speaking of financial results, our -- when you look at this pie chart, our revenues are comprising from financial market revenues, mainly cash equities. Cash equities are 1/3 of total revenues. And then we also own power exchange and power exchange in the first -- last 12 months represented 32% of total revenues. We -- so you will see that we are very much dependent on trading. Over -- well over 60% of our revenues are dependent on trading and our strategy game is to lower the share of trading revenues. So we are less volatile and have a more stable revenue base. In terms of our year-to-date results, we are very happy to see very strong growth in revenues. In the first half, it was almost 16% in the second quarter, 19%, driven by financial segment revenues, mainly increasing turnover in cash equities. However, we are also very happy to see a recovery in commodity market revenues in our power exchange. This was one of the biggest positive surprises for us this year. At the beginning of the year, we guided for flat revenues in this segment. And in the first half, we have almost 11% growth. In terms of other revenues, we have a decline here. These are some of the noncore investments that we will -- that we -- and the share and -- in absolute value, we -- in our strategy, we want to focus on core business rather than develop some noncore initiatives. Operating expenses in the first half, the growth was 6.7%; in the second quarter, 8%. So slightly above the range that we see for 3 years in our strategy. However, this is, in our view, justified by high revenue growth, also some of the initiatives that we will talk on next slides. Our cost-income ratio, you will see that has been reduced to 64% in the first half. So we've already, you may say, achieved our 3-year plan. And the -- as a positive result of operating -- high operating leverage, we've increased our EBITDA in the first half by well over 40%, on an adjusted basis 34%. In terms of net profit growth, it was similar growth, 40% on a reported basis and 35% on an adjusted basis. You will see that we have a relatively high income from associates. This is a 32% in the depository -- national depository company. In terms of operating expenses, our -- they grew, as I said, by 6.7% in the first half and the key part of our expenses are personnel costs. Here, we saw over 10% growth in the first half, and it accelerated in the second quarter. It was mainly related to employment growth, mainly in the IT segment, and this is related to the fact that we are right now working on the launch of the new trading platform. Also, the increase in personnel cost is a result of the increase in employee remuneration by average of 6%, which took place in October last year. And also, we increased the revenues for annual bonuses. On the other hand, you see that we are quite -- we have a good cost control in terms of external services, which were reduced by 2% in the first half. And what you can see on this line chart that over last year, we managed to reduce or to -- in each quarter, we have to -- we managed to have a higher revenue growth than cost growth. Myself, I was appointed to the -- as a new CEO in the second quarter of last year. So -- and this was, for us, a key objective basically to improve profitability and make sure that we have a good cost control and the cost growth is not higher than revenue growth. As a result, we managed to increase our margins. The EBITDA margin went up within last year from 36% to 43% and reduce our cost/income ratio to closer or even below the targeted 65%. You can see here our history of our net profit growth and especially the history of our dividend payment. Over the -- since the IPO, we have never missed a dividend payment. Last year, dividend was PLN 3.15 per share, which was 89% of earnings, even higher than our official policy of paying between 60% to 80% of consolidated earnings as dividends. It was a 5% growth on a year-on-year basis. And as I said, for us, the steady growth in dividend per share is extremely important part of our strategy. The -- when you look at our CapEx, our CapEx grew significantly over the last years, mainly as the work on the new trading platform accelerated. I believe that the CapEx should be peaking this year. And then once we will launch the new trading platform in October -- in November this year, the CapEx going forward will -- should decline. On the other hand, the depreciation next year will grow as we will start to depreciate the new trading platform was. In terms of our outlook for the -- in terms of -- for the coming 2 quarters in the second half of the year, we saw still very strong increases in equity turnover in July and in August -- in the first half of August. Also the same in commodity market when we had -- especially the gas segment is impressive with the growth of over 80% in the segment. On the other hand, we have a decline in electricity trading in the second quarter, and this is similar to what we saw in the previous quarters, in the first and second quarter. What we want -- also it's worthwhile here that in the past, there was an obligation to trade electricity on the -- on our power exchange. This obligation has been removed 2 years ago, but now we hear from the Energy Ministry that the obligation at least to trade a part of the output is likely to be reintroduced, which will help our revenues from the power exchange going forward. In terms of operating cost growth, we are guiding for a higher rate of growth in the second half of this year compared to the second quarter. And this is mainly due to the intensification of the works of implementation of the new trading platform, WATS, and also other IT systems that we will be launching as well as higher investments in expenses for market -- for capital market promotion. CapEx should stay at similar level as we saw in the first half. And I think it's worth to mention a major initiative, which is -- which may help to develop the capital market, especially attracting new retail investors. This initiative has been presented by Ministry of Finance. I'm talking about the new investment account -- Personal Investment Account. It's Polish -- [indiscernible] this is in the OKI and we believe it may be an important driver for growth of the capital market in Poland. Let me tell you a few words what this initiative is all about. So it was presented a month ago by the Finance Ministry. It's basically a voluntary savings scheme and investment account in which when you invest, there are no tax on investments of up to PLN 100,000, roughly EUR 22,000. And above that amount, there will be a low tax on assets. Above that limit, it will be calculated as 19%, which is a current level of the capital gain tax on risk-free assets, which will be -- so when we take the current data, will be around 0.8% on the assets above PLN 100,000. You will be -- you have higher flexibility in terms of investments. So there will be no limits and ability to withdraw funds at that time. You also will be able to invest in any assets submitted to trading investment funds and up to PLN 25,000 in deposits or -- bank deposits or treasury bonds. And according to Ministry of Finance, within 3 years, the value of assets on the new personal investment account may reach PLN 100 billion. And importantly -- important to say that this account has been modeled based on the Swedish account ISK. And here on the chart, you see the development of those Swedish accounts right now. It's extremely popular in Sweden. Over 40% of other population owns and ISK and total value of assets is close to EUR 180 billion so really impressive amount. And Sweden is by far the most developed capital market in Europe. So we hope that with the new account, similar to Swedish account, Poland also may increase and develop the capital market and the current share of the Warsaw Stock Exchange capitalization to GDP at only 20% will be increasing. And that's really our presentation. As I said, we managed to do it within 30 minutes. So we have time right now for Q&A. And I will be happy to answer any of the questions.

Yes. Thank you so much, Tomasz, for the insightful presentation. [Operator Instructions] we received already some questions from the chat. First question would be, what do you consider the main reason for the high discount at which the Warsaw Stock Exchange is trading versus Western peers, like, for example, Deutsche Börse.

Yes. Well, thank you for this question. Yes, there's a discount as we saw in the chart. I think that you can explain there are many possible explanations. This is a discount related to just higher interest rates in Poland. Our Main rate is 5%, much lower than the Eurozone. Second, when you look at the Main index, it's comprised of a banking sector and also of utilities companies, which tend to trade at lower multiples. Speaking about Warsaw Stock Exchange, we -- one of the reasons for the discount here may be related to the fact that a big share of our revenues are trading oriented. So we are more volatile, for example, than Deutsche Börse, which has only 7% share of equity trading revenues. And -- but that said, I also think that this is an opportunity, which means that we can continue to outperform other markets so that to reduce this valuation gap.

Thank you so much. We received another question, and I think we already touched upon it -- regarding OKI. Maybe you can say that again to the audience. Could you elaborate on the planned OKI investment account? There have been articles in German media about it. When is it supposed to be introduced, as I understood it will only be available for Polish nationals.

Yes. So yes, we discussed the OKI account. The plan is for the OKI account to be introduced by mid next year. And I believe that because, well, we didn't have such account in Poland, there were schemes with some tax allowance, but they were mainly retirement saving schemes. And there were -- for many years, there was a debate in Poland that the taxation of capital gains is less attractive than the taxation of real estate investments. You pay 90% capital gains tax and 90% tax on your dividends when you invest and you have to pay it regardless of the duration of your investments. When you invest in real estate after 5 years -- when you sell after 5 years, there is no tax and the rental income is taxed at between 8% to 12% dependent on the income. So now we have an account which looks as a simple solution and I think it -- and I'm really convinced that it will attract also future investors. Also, as we understand from what was already presented by the Finance Ministry that each person could have as many OKI accounts as they want. So you can have OKI account at your bank and then have a bank deposit there. You can have OKI account at a mutual fund. And we believe that the most accounts will be held by the brokerage houses -- by the brokers.

[Operator Instructions] We received another question from the chat as the Warsaw Stock Exchange are considering the introduction of semiannual or quarterly dividends. Are you considering that?

Sorry, can you repeat the question?

Are you considering the introduction of semiannual or quarterly dividends?

Yes. That's a very good question. And actually, a year ago, we said that we'll be thinking about that. However, due to some issues related to the Polish corporate code, it's not that simple. However, what -- that's why we wanted to have a product which will -- listed on the exchange, which will pay a quarterly dividend, and we are very happy that it was a few weeks ago. We will have a first ETF, which is paying a quarterly dividend, quarterly payment. And this ETF that you can buy on the Warsaw Exchange is investing in over 50 highest dividend paying companies, including Warsaw Stock Exchange. And the plan is that it will gather dividends in Poland. Almost all companies pay dividends on an annual basis, but then it will pay those dividends on a quarterly basis starting from next year. So you can check the ticker and check with your broker, the ticker of this and have -- and check for some information. And as I said, it is listed on the Warsaw Stock Exchange and actually had its first listing 2 weeks ago and already gathered a remarkable asset under management just in a few days.

Thank you. What measures is the stock exchange taking to improve transparency and corporate governance among listed companies?

Thank you for this question. Yes, it's important that we have high corporate governance standards and good transparency in terms of -- especially in mid and small cap segments. What we have and on a regular basis, we update is the code of good -- of best corporate governance standards. There are a couple of -- dozens of various principles there and the companies, they have to, as we say, comply or explain. So if you don't comply with all those standards listed there, you have to explain why and your investor shareholders, including independent Board members that as a listed company, you have to have in your Board, should make sure that you are complying or in a reasonable way, explaining why you don't comply with the best standards. In terms of transparency, I think that we also -- one of the principles is that, for example, you should have your financial statements also in English. They should be available to foreign investors. You should organize meetings with investors on a regular basis. And as a part of our support to the mid and small caps segment, for example, we are paying for writing analytical reports for brokers and those supports are about small and mid cap size companies. Right now in this program, we have 65 companies. So -- and those reports are freely available and they are in English as well. So you can check them and -- on a regular basis. So we have a professional coverage of many of small cap stocks.

Great. What initiatives are in place to bring small and medium-sized enterprises closer to the capital markets?

Yes. So this -- for us, it's very important, of course, that we have a steady flow of IPOs, both of large and small companies. We have an alternative market NewConnect, on which we list well over 300 companies, and there's at least every year 10 or more companies listed. What we -- due to attract IPOs, this year, for example, we have introduced a new program, GPW IPO Academy, in which we organize special sessions for companies which consider IPO listing sessions with industry experts. It's a 6-month program, in which they can learn about how to prepare for an IPO, how to organize Investor Relations and all what you need to know before you become a public company. And we are very happy because just within a few weeks after announcement of the new program, we have all the seats filled. So there are no more free spaces for the first edition. And other programs are -- we have a program in which we organized meetings between private equity companies and local brokers and institutional investors. So also, we present companies which consider IPO at very early stage to local brokers. In terms of IPOs, we were very happy with this year, companies which had IPO this year. In January, we had IPO of a health care company -- health care diagnostic company, Diagnostyka. It was medium-sized IPO, for us quite big, over EUR 400 million. And what's most important, the company's share price doubled since the IPO. So all the investors should be very, very happy. In June, we had an IPO of a clothing manufacturer, but a specific clothing manufacturer, a company which is producing clothing for the Army. It was around EUR 70 million in the IPO, also very successful and the share price also has a quite positive performance. So we are very happy because investors who invest in Polish IPOs, they should feel satisfied with the investments, especially this year.

What strategies is the stock exchange pursuing to attract international investors? How do you intend to further increase foreign investments in the Polish capital markets?

Yes. Thank you for this question, of course. Today's event is one of the examples of what we do on a regular basis. We meet in conferences, on road shows with investors, having a roadshow in London this month. And next month, we are going to New York and many Polish companies are having such conferences on a regular basis. Right now, we see that participation of international investors is quite high in the Warsaw Stock Exchange in trading. It's -- 70% of trading is done by international investors. So it's also very important for us to attract more retail Polish investors, especially retail. But one of the initiatives that we are working on and here consulting with the regulator is to make Polish ETFs available on other exchanges. And for this, there's a proposal to change the regulation. So Polish ETFs are UCITS because for the time being, they are not -- they don't fill the criteria of being a UCITS compliance. So a retail investor from Germany, it's not easy to invest in such products.

Thank you so much, Tomasz. I think that was the last question. So we're coming now to an end of today's roundtable. Thanks again to our media partners wallstreetONLINE and [indiscernible]. And on behalf of [ Airtime ]. I wish you a beautiful day. I hope to see you in another roundtable. And I hand over to you now, Tomasz, for some final remarks, and I hope to see you in 2 years.

Yes. Thank you much. It was a pleasure. Thank you once again for the invitation. Let me know when there will be a next opportunity. I'll be very much willing to help you. So thank you very much [Foreign Language].