Earnings Call: Q2 2021

Sep 16, 2021

Good afternoon, ladies and gentlemen. My name is Pavel Giedrzovsky. On behalf of Wood and Company, I am very pleased to welcome you to the Q2 conference call with Warsaw Stock Exchange Management Board. Today, the company is represented by Mrs. Isabella Olszevszta, Member of the Management Board Piotr Porowski, Member of the Management Board Adam Wutkowski, Vice President of the Management Board of the Polish Power Exchange as well as Piotr Kaitluk, Financial Director at the Warsaw Stock Exchange. Gentlemen, please go ahead. Hello. My name is Isabela Roeszka. So thank you very much Pavel for organizing this conference call from the high rewards of Wood and Company. And thank you very much for your kind introduction. So let's start our today's presentation with Slide number 3. And Generally, we must say to the business part of the financial market presentation. And but let me shortly comment on Slide number 3, where for the best visibility, I have placed some milestones on one 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 Rostock Exchange. As all these I thought it would be discussed and developed in details in part of the presentation. So I would suppose just to go to the Slide number 4. And I think that already, traditionally, I'm starting with an overview of the equity turnover in Europe. And 2020 It 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 a case of worthless So we had a very good Q1, but our trading volume slowed down only in Q2 2021. But all in all, the electronic order book turnover change. These parameters range more for stock exchange in the top among stock exchanges in Europe for the 3rd of this year. And even in the Q2, 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 Yes. Let's go to the Slide number 5, when we present the investor activity on the cash market. And on the main market, we observed the high special trading 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 hour call that we have ultra low interest rates in Poland And currently keeping money on the bank deposits with the inflation on the level 5% is the real loss. So our retail clients, they look for the new investment opportunities. And so we observed the high activity of retail clients on the workforce of exchange. So 24%, it was the share Enter over Olivier clients for the first half of this year. The second factor, it was the inflow of fresh new capital to mutual funds, including equity funds. Also in the first half of the year, We had the views of very interesting companies. Only in Q2, there were 5 views of new companies. And good macroeconomic parameters in Poland. So I think that this all factors, they are still Very, so it is why we hope that the whole 2021 year, it would Really good for the business on the Warsaw Pact Exchange and the financial market. Just to comment also on the time between the end of the Q2 and today. So in July August, it was the holiday period. So they were weaker in terms of turnover, but September It's currently much, much better. So just also to comment On the future, so I just want to underline that there are Those of good companies in verification of the Polish Security Commission. So we do expect the continuation of the good IPO periods in the next month of the year. And I think that, of course, as a consequence of this, we can expect also very good results in trading volumes. On our SMEs market, Nissan Alt, we observed a drop in turnover, and And it was a significant growth by more than 50%. Although, please remember that this is much smaller market and it means that even a small nominal change to translate into large percentage change. But it was underlying that the most As we decided companies from NewConnect, they migrate from this market to the main market of the World 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 the relative A huge interest in NewConnect, but especially in so called COVID winners companies. So it means the companies from gaming sector, Technology and Biotech sector, but now this interest is not lower. But if you look at the graph On the left hand side, in the bottom, so you can see that Q2 2021 It was much, much better than the whole year 2019. Systematically, we have been developing our structured product market. And currently, there are around 2,500 structured product leases delivered by 6 issuers and they are based on various commodities and various underlying. So this is a chance for our specialty clients to have the exposure to various underlying. In the first half of twenty twenty one, we had the views of 3 ETFs, to our base of foreign indices, Transpac 100 and S and P 500. And one is based on our, I would say, local index, big tech. So this is the index That consists of the company from technology sectors. And two perspectives of the new ETF It's in the Polish FSA, including one it is related to fixed income markets. So we hope That is the decision of the approval Of the Polish Security Commission, it's by the end of the year. So we will have 2 new ETFs even this year. We run constantly marketing and sales There were a couple of interesting confidences, especially in some of the most innovative companies, from such sector like Green Tech, Biotech, MedTech, Life Science, Gaming sectors, but also other Companies as well. Started the first edition of our, I would say, flagship program, Which is supporting research coverage for the smaller companies. So currently, this program covers 65 companies and report, which are distributed free of charge to investors because the costs are covered by the working stock exchange. And this report delivered by 10 investment firms from Poland. The liquidity on the equity market is supported by, of course, market makers, but also the participants of our high volume Provider and high volume funds as 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 number 6, which is dedicated to derivatives market. And I have two comments on derivatives. So first of all, Due to the dropping volatility in the Q2 of this year, The trading volume was lower quarter on quarter, but it was similar to to the Q2, very clear. However, and this is the second comment, We observed the change of the structure of the trading. And now 1st, when the index contract and single stock contracts, they were lost less traded and we observed the growth of In FX future, especially the futures based on the currency per U. S. Dollar to Polis. Also in derivative space, we had active Program supporting the liquidity and this is high volume provider and high volume funds program. And also, we have very active market makers on very rapid market. Now I just want to comment on Yes, Jean, 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 number 7. And the management board of the Warsaw Exchange is just preparing the whole capital group to advance ESG reporting. So we are working 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 realized that If the companies are not prepared for reporting, so they will be out of the investment rather of global investors, but we would like We have global capital here rather than somewhere else. So it is why together with EBRD, we prepared the The EUG reporting guidelines, this is the manual for our listed companies. We also prepared the new set of best practices for a listed company, which cover ESG factors. And the company, they should report 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 mutual funds based to our ESG index and also the structures of us based on this big ESG. And our doted company, JCW Benchmark is working on the new set of to ESG indices. And currently, they also they're working on bringing our VIC index Finally. So that's all from my side. And Piotr Brodsky, over to you. Thank you. Isabella? Ladies and gentlemen, we are on the Slide number 9. Financial results. We can say that we have a good second Quarter of the last year, our sales revenue was slightly down by 3%, but it was a mixed bag because the revenue on the financial market Increased 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 For the market regulator that was accounted in our books in the Q1. In the Q2, we 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 and by 17% quarter on quarter. And It was due to mainly decrease of financial expenses in the 2nd 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 very healthy EBITA margin at the level of 58.9% and A high net profit margin at the level of 46.1 percent and these metrics were record high during the last to a couple of quarters. Slide 11. Trading term revenue was It was lower by 5.1% year on year and 21.5 Percent quarter on quarter due to lower market activity, mainly on the equity market in the second quarter and on the Our main market and NewConnect line, there was a sharp increase in the bond trading, In the treasury bond trading on our TBSP platform. Slide number 12. Year on year, we had a big increase of our listing revenue that was 5.5 In the Q2, still we see new issues coming to our market. On the stock market, we had a Few of the listings on the main market and 8 on the NewConnect and also a couple of new issues on the bond market. Also, the secondary market, Secondary issues market is very active, so we are very positive and very optimistic about this business line. Slide number 14. We noted a steady increase of the revenue from the market data and what is important for us. So we are to finding the new clients, not only for our stock exchange, also stock exchange data, but also for the TG and DPW benchmark, which is our index factor and also for our bond market TBSP, Still there is capacity to slightly increase this business line revenues from this. This is all at the time being. Now I'm handing over to Adam Woodkoster, President of our Commodity Exchange. Adam, please. Thank you, Piotr. Hello, everyone. Adam Nordkovski from PolysEnergy Exchange speaking. We are on Slide 14. The best results 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-nineteen. I think the message that operating expenses were flat quarter on quarter because if we deduct the one off fee accounted in the Q1 of this year for Our market regulator, we have a similar picture in the Q2. So depreciation was down by 1.3% quarter on quarter. Employee costs were down by 1.5% quarter on quarter. And external services was slightly higher. It was due to IT costs, promotion and advisory costs connected with our new projects. On the Slide number 20, you can see the share of profit of entities made by the equity method, And it was a record high in the 2nd quarter, the best result mainly due to the very good financial results of our key DPW Capital Group, which is a National Securities Depository and CCP. They had very good quarter in all business lines Like clearing settlement, depository services and services for issuers like corporate Actions, they are very active, and we can say that is a very valuable asset in our portfolio. Slide number 21, consolidated statement. We still have very liquid position. Our assets increased when compared with the end of the last year and it was mainly driven by an increase in the net Liquid financial assets, which grew by €59,000,000 So we had a very comfortable position and situation and we paid in August dividend of PLN 104,900,000 which was PLN2.5 Per share and the dividend yield was around 5.2%. So we think it was a good information to our shareholders. And even though that we paid the dividend, we still have very good Gentlemen, thank you so much for the 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 payment for it? Or is 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 come on a Cielo Borowski? Yes. So our new project, but very prospective, we are testing now This type of change, but then we'll be delivering it to other smaller exchanges and it depends on There are 2 possible ways of treating our So it can be a part of our consulting services to helping other exchange to work on the liquidity, Which is not very common and it can be limited in time process and we can sell it On the service and charge on a monthly basis, we have generated store attitudes to our clients and now we are testing it with COI, but it's very promising because we know that Floor exchanges don't have such tools to measure their liquidity. Perfect. My second question is about the very solid profit from associates that you recorded in the Q2. I believe that was all time high profit from associates you've ever reported. I know that this is basically this stems from the very strong KDPW contribution, roughly EUR 7,000,000 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 Kvidi Pwede because it was a A period of corporate action like payment of dividends and registering new Issues of shares because the regulations change in Poland and all the shares issuers, they have to register shares with the And, Trevor, this is it already. So I'm not sure the next quarters will be such good ones, but I think that the perspective for the KDPW services are very good. And we also started to Clear transactions for our TBSP treasury bond market, which was not okay 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 Q2 EBITDA margin, it was an extremely high level, like close to 60%. What shall we expect going forward? Because this 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 So OpEx can grow, especially in the last quarter, the Q4 of this year because it's a 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 EBITA margin in the next quarters, which is extremely high this quarter. So 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've 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 Q4. 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 Maggie will take this question. So you're right. We are just working I have to prepare the launch of new markets, Global Connect. And it will be organized in the form of NPS, mutual trading facility. And we would like to offer to investors the trading in the large names amongst West European and American companies. I think that we started from West European companies and then we led American companies. And this market, of course, is for all subsidiaries of investors, but mainly will be dedicated to retail clients. As we I think that we have some we'll 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 LotE And we offer also a reputation of the market makers. And Access to this market will be easy because the Global Connect will be operated on the same trading platform as other our equity markets. So the from other our equity markets. So the access to the brokers will be Currently, no additional effort is expected for exchange members. And We are shown that we'll achieve the internal readiness by the end of this year. However, there are 2 important factors. When the market We'll really start because now we are waiting for the green light from the Polish Security Commission. So there is no mandatory approval of the regulation from the FSA Hi. However, we want to be sure that the supervisor has no objections 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 to introducing Market Maker. So it is the investment firm 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 you will manage to open it by the end of this year. There are some markets already similar to our idea and one It's in Ocea, organized by Vienna Stock Exchange, also the Moscow Stock Exchange open such a market. Deutsche Bank has such a market. But when we look at the CLAR market in Vienna, so they opened it in 2017. And now they have around 700 companies offered to their investors. So our goal is during the I would say the first period of running of this market. So I think that 1 year, 1.5 years to reach around 100 companies listed there, but Not least, sorry, Shailesh. But it will depend on the interest of our investors. And what are what you think about the savings volumes when you look at the Vienna Stock Exchange? So So the trading volumes are similar to our NewConnect trading volumes, but in the best periods of the new Connect. So it's around EUR 1,000,000,000 per day per month. And we think that maybe this is Something that can be our benchmark in the beginning of Market Global Connect operation. Perfect. Thank you. 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 don't 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, we have the situation in the Polish market that Our investors, the local investors, they look for some diversification of their portfolio. So they look also for for installs. And we think that we can offer them trading for installs here in Poland rather than And then to the other platforms. So we treat it as a kind of, I'll say, not for an evaluation, 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 trade here on our platform rather than go to other platforms and the other exchanges. Perfect. Do you have any kind of initial estimates What might be the volumes traded 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 the end of the exchange. It's of course, it's very difficult to predict how it in which phase and how it will be Developed here in Poland, but they have around 1,000,000 polyglot per month, Which is not a huge volume, but it's like filler, like, as I mentioned, on the NewConnect But in the best time of the NewConnect. So last quarter, we had around 3,000,000 as well as on the new connect. So this is somehow similar. That's what we expect here, But we'll see, of course. Okay. So essentially, your rough estimate once this 100 stock target is reached is that it can potentially add roughly EUR 1,000,000,000 lots of additional trading volumes to your equities line, correct? Yes. But of course, it's just the when we look at the Vienna Stock Change 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 tolls. We made The search among our investors and there is 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 that at the initial stage, you want to introduce like 2,030 foreign stocks in the Q4, And then you want to reach 100 stocks. So this 100 stocks is a target for which year or for which quarter? Yes. So I think that it very much depends on the introducing to market Which is the external decision to be honest. And there is a special role of broker dealer investment company Just to first of all, how to say, bring these thoughts to the Polish market and then to provide the to 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 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 these talks to this GlobalConnect. And if they decide to start from the, let's say, 1, 2 companies and check what would be the interest or they start from 20 in one 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 world to stock exchange, but rather is very much dependent of the introducing market maker. So I mean the broker dealer from Poland. But this is the broker dealer from Poland, but sorry, one explanation, But this is the broker dealer or investment firm from Poland, but this is the as part of the International Capital Group. This is very important because it's much easier for such an entity to bring the companies here if they are the part of international growth. Okay. Perfect. Thank you. That's clear and very helpful. Operator, do we have any other questions? 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 and Company, I wish you all Good afternoon and great weekend. Let's speak following the Q3 results. To 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, sir, Pavel. Thank you. Bye. Bye bye. Thank you very much. Bye. Thank you very much.