Gielda Papierow Wartosciowych w Warszawie SA

WSE:GPW

Earnings Call Analysis

Robust Revenue and Profit Growth Despite Challenges

In Q3, the company's revenue surged by 20% year-on-year to over PLN 106 million, driven by strong trading volume growth in both electricity and natural gas, which outperformed a challenging external market environment. Despite a significant rise in operating expenses by nearly 26% to nearly PLN 75 million, EBITDA impressively climbed over 36% to nearly PLN 40 million with net profit matching EBITDA at PLN 39.7 million, marking a 27.5% increase from the previous year. Trading revenue modestly increased by 5% and listing revenue remained quite stable, dipping only 0.2%. The introduction of AMX, a new business line focusing on the depository business, alongside the expansion of the commodity market, helped in achieving better revenue diversification, with new business lines contributing over PLN 10.5 million in revenue.

Robust Revenue Growth Amidst Market Challenges

Despite the uncertainty in the market, the company managed to increase its revenue to over PLN 106 million in Q3, marking a solid 20% year-on-year growth. This feat is particularly impressive given the external circumstances which included regulatory changes in the energy sector and market shifts from forward to spot trading. The modest rise in trading revenue by 5% and the slight drop in listing revenue by 0.2% suggests resilience in core business activities, although Information Services saw a small 0.6% decrease. However, the diversification strategy is starting to pay off, with new business lines contributing more than PLN 10.5 million.

Operating Expenses and Profitability

Operating expenses saw a significant hike of nearly 26%, reaching PLN 75 million, which reflects the company's investment in growth and may include some one-off costs. Despite this increase, EBITDA and net profit both presented a strong upward trend, with EBITDA growing over 36% and net profit up by 27.5% to PLN 39.7 million, signalling a rising efficiency and profitability.

Human Resource Investments and Capital Expenditure

Employee costs rose by more than a third year-on-year, amounting to PLN 38 million, attributed to salary raises, inflation-linked benefits, and headcount growth following strategic initiatives and acquisitions. CapEx in Q3 was over PLN 16 million, a decisive increase from the previous year, with an expectation of a significant further increase in Q4. Such investments indicate the company's dedication to progressing its strategic goals and enhancing infrastructure.

Strong Performance in Equity Method Investments and Improvement in Margins

The company sees an encouraging 23% year-on-year growth in profits from equity method investments, suggesting a strong performance in entities where the company has significant influence but not full control. Furthermore, there was an increase in EBITDA margin to 37.4% and an improvement in net profit margin by 2.2 percentage points year-on-year, illustrating an overall stronger financial standing.

Revenue Streams and Market Dynamics

The commodity market's revenue showed a robust increase of over 26% year-on-year, with a notable contribution from the electricity market despite the decreased demand for green certificates due to regulatory changes. The company also reported a reduction in revenue from the operation of the Register of Guarantees of Origin by 28% to PLN 4.7 million, reflecting shifting market dynamics and changing regulatory frameworks.

Growth and Integration of New Business Ventures

The recent acquisition, AMX, performed well with a net profit of PLN 1.1 million, offering promising returns at an early stage of integration. This performance contributes to the company's intent to build a more diversified and resilient business portfolio.

Forward-Looking Stability and Liquidity Assurance

The company maintains a strong liquidity ratio close to 4, presenting stability and resilience. This financial strength gives confidence in the company's ability to sustainably manage both current operations and future investments.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to this conference summarizing the Q3 Results of the Warsaw Stock Exchange Group. The conference takes place in the traditional formats, starting with slides followed with your questions.

We have CEO, Marek Dietl. Members of Warsaw Stock Exchange Management, Izabela Olszewska, Monica Gorgon and Adam Mlodkowski, Vice President of TGE of [indiscernible] and Warsaw Stock Exchange's CFO.

Over to Mr. Dietl.

[Marek Dietl, executive]

Ladies and gentlemen, it's a great pleasure to start this presentation of our results. This was yet another quarter when our revenue crossed the market of PLN 100 million. The figures at hand suggest that Q4 could once again bring revenue of more than PLN 100 million, which would be a great year.

Below the top line of the P&L, our financials are equally strong. EBITDA grew 30% year-on-year. Net profit, 27.5% up. And we keep you, our shareholders, in mind by sharing with dividend, PLN 2.7 per share, in total, PLN 113 million distributed in dividend.

What is equally important to financial results is our business outlook. In our core business, we continue to look for new sources of revenue. We have launched the first ETCs, Exchange-Traded Commodities on physical gold, which is very popular with investors. We're happy to know that the financial instrument tracking a physical asset is so popular and attractive.

Also, in terms of our plans regarding tokenization. This interest from investors corroborates our assumptions. We have launched new single stock futures and new stocks on GlobalConnect over new stock makes this new market more attractive. We continue to put in efforts together with the market maker to launch new stocks.

And we have an up-and-running index factory, GPW Benchmark continues to produce indices for clients and we can offer a lot of customer benchmarks. So our investment in technology is now starting to pay off. We continue to grow internationally. In the past quarter, we have focused on Ukraine and cooperation with its capital and commodity markets. We work together with the Ukraine's Stock Market Commission and EBRD. And then there's an agreement signed between TGE, IRGiT and UEEX, a cooperation agreement, which is more than just the memorandum of understanding.

And we are happy to announce that the Armenia Securities Exchange AMX, our Armenian branch or franchise has announced a new development strategy. which goes in the direction as intended to continue ensuring that this operator is fully professional.

Our new business lines and technology continued to grow, GPW Private Market is very busy developing technology. We have been piloting a lot of technology concepts on an experimental basis. And we have launched a first business on that platform.

In Q4, we got the approval to operate as a crowdfunding operator. GPW DAI, again, a major investment. We are happy to know that the technological development has at the turn of the quarter launched initial test-based advertising campaigns, and we also generated the first revenue.

We expect that in the coming years, this company will unfold its business at the full scale. And we are also getting ready to implement GPW WATS. We have a program to support migration to the new data center operating with the global. Then the [indiscernible], where our system WATS was will resonate our new trading system.

All these efforts have been appreciated. Looking at the stock performance year-to-date, we are on par with large players, up 19% in the stock price of the Warsaw Stock Exchange in total return basis, including the dividend paid.

Behind only those markets were -- the companies were undervalued and those markets that are growing very dynamically at an early stage of growth.

After this longish introduction, I hand over to Izabela Olszewska and Adam Mlodkowski, who will take us through the details of our financials.

[Izabela Olszewska, executive]

Thank you very much. As usual, I will have the pleasure to present the financial market in Q3. And I will take you through the performance across the 3 quarters with a few comments on the outlook. The Warsaw Stock Exchange is not an isolated entity. We are one of the European markets. We have a combined client base. And so we are included in an interlinked European system. So it's important to look at turnover and financials in a broader context.

The first slide shows the broader context of performance in the European markets in terms of turnover, year-on-year change in electronic order book [indiscernible] turnover in euros. The data are sourced from the Federation of European Stock Exchanges.

And a comment on the velocity ratio. As regards to the year-over-year change in EOB equity turnover, the stock exchanges fall into 2 groups. The biggest operators, so some decline in the 9 months. At the end of Q3, year-on-year, those declines were rather sharp for Nasdaq or the Deutsche Börse or SIX.

My comment is that we are facing a range of challenges in Europe, macroeconomic parameters and the persisting [indiscernible] conflict war in a neighboring country, both generate some concerns and turnover should be considered from the perspective of this very demanding and difficult external environment.

A growth story came from the U.S. and other continents at the same time. So looking at the percentage year-on-year change, we are looking at a high base. 2022 is when war broke out in Ukraine, and that brought a lot of volatility and a lot of investor activity in Europe. There are other factors at stake as well, but that's the overall picture, as you can see, on this slide.

The other group are much, much smaller markets where the turnover base is low. So one-offs may impact the year-over-year change strongly. For instance, in Romania, this year, there was a huge IPO this year of [indiscernible] EUR 2 billion, which obviously drove increase in turnover.

On the Warsaw Stock Exchange, we are looking pretty good. We always compare ourselves to the bigger markets as our future and prospective benchmark. But in euro terms, our turnover grew 5% year-on-year. In zlotys, the growth was more flattish due to the exchange rate. But compared to the big well-developed markets, we performed really well.

On the right-hand side, you can see the velocity ratio. Again, we are reporting a high velocity as compared to the peer group. The big exchanges are ahead, but the distance is small. We are working hard on the velocity ratio by defining and developing a range of liquidity support programs, which are working well, hence, the high velocity.

The next slide shows investor activity on the spot market. As I said, EOB equity turnover on the main market year-on-year grew 5% in euros and remained flat or stable, in zlotys, dropping 4.8% quarter-on-quarter. However, bear in mind that Q3 is specific in that 2 months of the quarter are holiday months, which implies lower turnover. But I think we did pretty well this past quarter.

Average EOB turnover was under PLN 1 billion, which changed actually in Q4. Now 1.5 months into Q4, we can see that the daily turnover is strongly above PLN 1 billion on every day trading session. The average trading fee as compared to the previous quarter, which is our benchmark, remained rather stable, which shows that the activity of liquidity providers is really strong in the performance of the important obligations.

They use promotional fee rates, which impacts the next bullet on this slide. the share of HVP/HVF participants in turnover grew year-on-year, standing at 17.7% in Q3, that's almost PLN 11 billion in nominal terms, HVP/HVF programs.

What we are proud of is NewConnect EOB turnover, which grew very sharply. Although over a long period of time, NewConnect turnover was falling. So we are happy to say that downtrend has now reverted. That's mainly driven by several companies representing more than 20% of overall turnover, the most liquid stocks, the biggest companies. And that is actually the role of NewConnect where companies grow and mature and then the biggest and most liquid stocks migrate to the main market, which is one of the reasons why the last few quarters saw lower turnover on NewConnect.

As for structured products, we report a significant quarter-on-quarter increase by 34%, with a less than 10% decline year-on-year. We have a very broad range of structured products. The most popular are certificates based on DAX, the German index, which shows that investors are looking for some kind of benchmark or reference to the German market.

ETF turnover dropped year-on-year and quarter-on-quarter in Q3. But we are quite happy to report some good news. First of all, looking at the chart, which shows the value of ETF turnover, you will see that in aggregate, Q1 to Q3 were the best ever in ETF history. So now after Q4, we expect to report possibly the best year in history. And ETF assets grew largely year-on-year by more than PLN 500 million -- sorry, PLN 500 million compared to PLN 330 million a year before. So despite some regulatory stumbling blocks, this segment is growing.

Mr. Dietl said, we have launched the first ETC based on gold. So that's -- that's it. As regards the support for investors, we hold a great number of events and initiatives to encourage investors to come to the market and invest the savings, including the Warsaw Stock Products Daily, GPW Innovation Day. These initiatives support turnover and liquidity.

Let me now turn briefly to the primary market. In Q3, there were no IPOs on the main market. There were 3 [indiscernible] NewConnect. But let's look at the broader horizon in Europe. In the European IPO market, we see that the market is still weak and dormant, although there were some IPOs over EUR 500 million, and the number of IPOs grew in Q3 compared to Q1 and Q2, which shows that there is some hope and some reason to remain optimistic.

Looking forward, we will see how the situation unfolds, but the context is important. The lack of IPOs on the main market is not Polish specificity. We are part of European market and the situation is similar across the board. But the secondary market, the SPO market is performing very well. Companies use the main market and NewConnect to raise equity in SPOs.

The next slide shows derivates. Let's first look at a key parameter regarding Derivatives turnover, specifically volatility. Volatility was lower in Q3, much, much lower year-on-year as well as quarter-on-quarter. Hence, the turnover volume dropped both overall and for our flagship product, the WIG20 futures. But looking at the time series in the chart at the bottom of the slide, the turnover volume after the first 3 quarters of 2023 was bigger than the annual turnover from 2014 to 2021. So 2022 was a very strong year due to strong volatility, which drove strong derivatives turnover.

But what is key is that, it looks like we have gone to a new level with turnover, which is now quite robust. We also have the HVP and HVF programs with a share of 5.3 million in Q3 turnover where liquidity providers generating about 38% of turnover on that market.

The next slide shows a comment on our ESG strategy, which we are now implementing to reach the goals we have announced as we published the strategy at the end of 2021. We are running many initiatives to achieve our objectives. And for the first time, our integrated report this year includes KPIs that we are looking at to evaluate our performance under the [indiscernible].

We are monitoring our emissions, we make sure that some of our energy comes from renewable sources. We educate our employees in ESG. We have made changes to our business car fleet, introducing hybrid cars and one electrical car. And importantly, under our strategy, we are focusing on ESG to address the challenges. The shortage of reliable data on ESG in the market, so the ESG Data Hub is currently in focus. We are working to make sure that reporting and data repository are truly effective.

We have some -- a number of activities addressed to the market with the guidebook for our list -- for incumbency listed on the Warsaw Stock Exchange, with the EBRD and a third-party consultant. We have updated our guide for companies listed on the Warsaw Stock Exchange, the ESG reporting guidance, which are publicly available as an important repository of tools, any company needs to implement its ESG strategy and start reporting. And we take part in a number of programs with the Ministry of Finance and other partners.

The second edition of the ESG leaders competition has come to close. And in our education and networking activities and the GPW growth program, we have launched a part of the program is ESG IN PRACTICE. And we are preparing the second addition of this cause.

Thank you very much. That's all from me, and I turn over to Adam Mlodkowski.

[Adam Mlodkowski, executive]

Thank you very much. Ladies and gentlemen, our financial performance of the group in Q3 was very positive, as our CEO, Marek Dietl said in his introduction today.

Revenue in Q3 was over PLN 106 million. We are happy to note that this represents a 20% growth year-on-year in Q3 compared to Q3 2022 of the revenue mix will be discussed later when we turn to another slide. So now let's not dwell on it. More on this later.

As for expenses, our operating expenses, they also increased significantly by nearly 26% in Q3 2023, reaching nearly PLN 75 million. The cost mix, again, will be discussed in a moment.

As a result, our EBITDA grew to nearly PLN 40 million, up year-on-year by over 36%. Importantly, both the expenses we paid in Q3 2023, and in Q3 2022 were burdened by some one-offs. Again, more on that later in this presentation.

The net profit was the same as EBITDA, PLN 39.7 million, up 27.5% year-on-year. That growth was mainly driven by a very good performance of the central securities depositor, both KDPW, our associate impacting our P&L.

Now the next slide shows some details on the revenue mix on the financial market, we used to present the 3 key business lines. We have now added a fourth, AMX Group. As for our core revenue source, trading revenue, it grew modestly by 5% year-on-year, reaching over PLN 40 million in trading revenue.

Now the next business line is listing. Given the market situation, discussed extensively by Izabela Olszewska. Listing revenue dropped modestly, remaining quite stable, down only 0.2%, mainly due to lower revenue from listing fees, which were partly offset by an increase in revenue from fees for introduction of instruments.

The third business line remained stable. Revenue from Information Services, where we reported small drop, 0.6% year-on-year, and a bigger dip quarter-on-quarter because in Q2, the revenue was inflated by some amounts carried over from the previous period. So it's not directly comparable quarter-on-quarter. Year-on-year; however, the revenue remained stable.

AMX, our new business line. This is a very stable, iterative kind of business. As you can see on the slide, the predominant revenue comes from the depository business. We have not consolidated the company before we took control at the end of 2022. So when it comes to revenue and expenses, they have been consolidated only this year. So this is a new [indiscernible].

And the next slide presents the revenue mix in Q3, PLN 106 million, broken down by financial market, which dominates nearly 66 million comes from the financial market, under [indiscernible] including 5.6% from AMX, which now is presented as part of our financial market business.

The second biggest segment is the commodity market, more than one-third of the revenue of the group comes from the commodity market, which is very diversified. The financial market shows a predominance of revenue from trading in equities. But there is also some diversification. And information services is nearly 14% contribution to the revenue.

Finally, the box in orange, other sales revenue, mainly generated by the consolidated subsidy, GPW Logistics, which launched its operating business this year and has been consolidated.

So in total, the new business lines contributed more than PLN 10.5 million in revenue, improving the diversification of our business, specially if you compare pie chart to the previous quarter, our diversification improves. More on revenue from the commodity market.

Over to Piotr Listwon, TGE.

[Piotr Listwon, executive]

Good afternoon. Thank you very much. It's a pleasure to represent the performance, including [indiscernible] and revenue on the commodity market.

As you can see on the slide, at the top, both electricity and natural gas reported an increase in the volume of turnover year-on-year and quarter-on-quarter despite the external circumstances, which were not truly favorable for the market to -- of the markets in electricity and gas to expand.

As for electricity, the obligation to trade on the exchange was lifted. Work still continues regarding the integration of the coal-fired generation sources, which has impacted the contract team and the liquidity in the exchange.

Market participants are still uncertain about devices of energy commodities and uncertain about deregulation, which could be implanted next year, including laws freezing the electricity prices for end consumers. As a result, despite all these circumstances, the market participants actually reacted and traded quite well on TGE.

As for electricity, the strong trading volume was mainly generated by the spot market, which grew 114% year-on-year and more than 8% quarter-over-quarter, and 1.5% over the record high spot trading in electricity in Q1 2023, which shows that uncertainty about prices, shifts contracting from the forward to the spot market.

Regarding the gas market. Turnover was smaller in the spot market and quite strong in the forward market, although the obligation to trading gas on the exchange was reduced from 55% to 30%. Despite all that, turnover on the forward market was quite decent.

At the bottom of the screen, you can see the turnover volume in property rates, the green certificates and the energy efficiency certificates, which dropped unfortunately year-on-year by more than 20% in green certificates, and 5% in energy efficiency certificates. The drop in green certificates results in smaller redemptions down from 18.5% to 12% this year. Next year, we are expecting a reduction of the requirement to 5%, which will impact turnover in property rights and the number of certificates issued in our register. More on that later.

The drop in turnover in property rights in areas and energy efficiency certificates is due to the fact that the concentration of turnover occurs in Q2 as obliged companies have to purchase certificates and have them canceled by the end of June. So obviously, the next 2 quarters, Q3 and Q4 bring less turnover. The next slide, please.

Revenue of the TGE Group is directly proportionate to the volume of turnover in the markets we operate. In Q3, we saw a solid revenue and volumes. The electricity and gas markets revenue grew quarter-on-quarter and year-on-year. Revenue from trading electricity was driven by raised transaction fees for spot and forward transactions, like with a strong turnover in the spot market, as I said before.

As for the gas market. In addition to the additional raised fees, total turnover grew both year-on-year and quarter-on-quarter, despite the drop in spot trading. Overall, overall revenue from the commodity market grew by more than 26% year-on-year and dropped quarter-on-quarter by more than 6% to PLN 20 million. The year-on-year increase was mainly driven by revenue from the electricity market. And the drop was driven by smaller turnover in property rights in Q2.

The next slide, and the other 2 business lines, revenue from clearing, which stood at more than PLN 10 million in Q3, up by nearly 25% year-on-year, and a small drop of revenue from clearing quarter-on-quarter. That dip in revenue from clearing was due to the fact that these certificates were no longer as attractive for customers in Q3 as they had been in Q2. Year-on-year increase in this business line was driven by good volumes in the electricity and gas markets, especially the spot market in electricity.

Revenue from operation of the Register of Guarantees of Origin. In Q3, our revenue dropped by 28% to PLN 4.7 million, which is a natural consequence of the smaller demand for certificates in this period. But if you look at Q3 and Q4 2022, the dip now is much less pronounced, but it is still felt due to what I said before, the lower requirements to redeem green certificates and the phaseout of the support scheme for renewable energy sources, which had been out to the system.

Recently, we said on other questions that after 15 years, installation is without from the system. So as a result, some of the installations are dropping for the system month after month.

The commodity market. Thank you.

[Unknown Executive]

Thank you very much. Now some details on our expenses, especially OpEx, but also some overview of CapEx.

Our operating expenses, as I said in the beginning. [indiscernible] million quarter-on-quarter. The total employee costs grew. And the amount of total employee costs in Q3 was more than PLN 38 million, up by more than 1/3 year-on-year. Why? Well, the employee costs include an increase in salaries, following raises we have offered under our remuneration system based on employee appraisals, the performance of the targets and the market benchmark that we sold through a third party.

Another factor driving this increase in employee cost is one-off inflation benefits that we paid, we did pay it in Q4, but we decided to pay it following a long process of negotiation with the trade union concluded with an agreement signed at the end of Q3, when we set up provisions. So the impact of the one-off inflation-linked payment is included in Q3 financials.

Let me stress that the negotiations were long. We exchanged a number of arguments with the trade union. So this one-off benefit we paid is slightly more than 5% of the employees' annual salaries. So compared to year-on-year inflation, exceeding [indiscernible], this is not a major burden for our results. We believe it's a win-win. So this one-off was added to our costs.

The third driver is an increase in our headcount across the group, mainly related to the implementation of our strategic initiatives, including a number of projects we are running, as the CEO said in the opening. But that is mainly due to the acquisition of AMX. So we consolidated the salary budget of the AMX Group.

As for external services, those charges stood at more than PLN 25 million in Q3, the biggest percentage increase in our cost plans, 36% year-on-year. Now that's driven by 3 factors again. First, the consolidation of the cost of GPW Logistics, our subsidiary, set up to complement the PCOL project, and it will continue to perform the deliverables of that project. That's PLN 4.2 million, as compared to the previous period when the company was launching with very low cost of 33,000, added to the cost of Q3 was the amount PLN 4.2 million in full.

And AMX's external service charges, and it is another company we are consolidating. When I discussed revenue, I said that the consolidated revenue grew, thanks to the new business lines. including GPW Logistics and AMX, but that also reflects on our costs. The profitability of these companies is different. AMX has strong profitability of about [ 20%. ] GPW Logistics shows lower profitability.

The third driver of external service charges are higher IT service costs. These are significant amounts. We are a technology company, so the growing IT costs in the market above inflation impact our expenses.

Turning to CapEx. CapEx in Q3 stood at more than PLN 16 million, with a small up as regards CapEx to total revenue, 15.3%, but the amount of expenses we paid in Q3, as you can see in the chart, grew by almost PLN 2 million year-on-year.

But we are expecting a strong increase in CapEx in Q4, anticipating an amount similar to what we paid in Q4 2022, which is around PLN 35 million. Let's flip the slide.

Now this is the share of profit of entities measured by equity method. As you can see, at the bottom of the slide, the quarter-on-quarter change came from KDPW with the very good results of the central securities depository mainly driven by higher rates and higher capitalization of companies. We added PLN 2 million. Year-on-year, the growth was more than 23%, something we are very proud of.

And the next slide, shows the gist of all the changes I discussed thus far, our margins, as I said in the beginning, EBITDA grew by more than 37% year-on-year, charge -- we charge one-offs; however, especially in cost budget, we had the additional one-off inflation benefit.

On the other hand, in Q3 2022, we had set up provisions against a bond spot. Now, bond spot results or performance is stable. The company is profitable. So there's no need to impair the goodwill, but the one-off was charged to expenses in Q3 2022, when we also had paid donations of support Ukrainian refugees and the GPW foundation.

Looking at the EBITDA margin, it grew to 37.4% year-on-year, the growth was 4.5 percentage points. EBITDA net of the one-offs that I have discussed also shows an increase. The net profit margin also improved to 37.4%, up by 2.2 percentage points year-on-year. As I said, this is mainly driven by record-high financials of KDPW.

At the bottom right-hand corner, you can see our results versus the market consensus. Revenue was very close to the consensus, slightly above. As for the net profit, it was markedly better, more than 4% above the consensus.

And the final slide presents our balance sheet. Here, I'd like to draw your attention to what Mr. Dietl said in the opening. The dividend payment in Q3 in the amount of more than PLN 113 million, which caused a decrease in total assets, but the balance sheet structure is strong. The current liquidity ratio is close to 4. So the stability of the capital group gives us full comfort.

Thank you. That's all for me.

[Unknown Executive]

Now let's open the Q&A. We have some questions that came online from Miguel Dias Wood & Company.

Will this coming of the October parliamentary election have a direct impact on your growth strategy and the composition of the Exchanges Management Board? And could it impact the broader outlook of the Polish Capital Markets?

[Unknown Executive]

Well, I guess you are following the process of signing the coalition agreement. And with time, we will know more about the program and personal decisions. The most of the most likely new government coalition, for what we know now from media speculations regarding the personal decisions, we expect that the most likely incoming government will be friendly for the capital markets.

We are not expecting a rerun of the pension fund reform with regard to PPKs. From media reports, we understand that the PPK program could possibly be only fine-tuned. We are not expecting any resolution to the offer transfers system or maybe the plan has not yet been unveiled. So that's about the market.

As for our company, we continue to pursue the strategy we adopted this year, prepared last year. And we see a wealth of opportunities for our group to grow. We are trying to steer or navigate that wealth of opportunities, focusing in particular on the WATS, and the thorough reengineering of our technology to develop new products.

2023 also marks the end of the time horizon of financing from the National Center for Research and Development. So the technologies we have been developing will be gradually implemented in our companies, our subsidiaries to release the management of the exchange of the responsibility for overseeing these strategic initiatives. That's where we're going with [indiscernible] markets, GPW Logistics, GPW DAI.

Following the conclusion of R&D, the deliverables of the solution will be commercialized by the subsidiaries. GPW Tech has been doing so for a while, taking over some of the technologies we've developed.

So we will continue to make sure that our company continues to develop, that's our top priority, and to strengthen the capital markets by expanding and enlarging our offering.

Regarding HR, I guess, any listed company has 26 days to call a general meeting. We are always at the disposal of our shareholders. And we always remember that a CEO is not a lifetime position. But for a while, we continue to pursue our strategy. And the management is determined to work for your benefit to shareholders until the very last moment. We are not looking back. We are trying to serve the company and Polish capital market best we can.

[Unknown Executive]

What is the status of the key strategic initiatives under the new strategy?

[Unknown Executive]

The new strategy, well, we don't have the time to go through all the initiatives, but the new strategy follows a different philosophy for implementing strategic [indiscernible], the previous strategy initially was focused on distributing a split in our resources between operations and strategic initiatives.

However, now, following the advice from our consultants, we are focusing in implementation on setting up specialized teams which focus 100% on the implementation of this strategic initiatives. So at this time, we are opening space for these new initiatives. We are building those teams. We are rebuilding our project management system as advised by our consultants.

When we have made more decisions regarding HR and planning, we kick off individual projects and those initiatives are being launched one after the other. And we will continue to launch more initiatives in Q1 2024. So at this very early stage of all these strategic initiatives, they are all going according to plan.

We are also willing to take advantage of the open innovation model. We have conceived an acceleration program. We have developed 7 proof of concepts in the previous round. We are now aspiring to do more with third parties. So we are talking to many partners who could provide building blocks of the solutions we need. So we are generating innovation in-house.

And at the same time, starting in January, we want to open a call for open innovations.

Thank you.

[Unknown Executive]

And the final question on strategy, Mikolaj Lemanczyk, mBank.

What is the status of the TEO, Telemetric project? What revenue, are you expecting from GPW Logistics and the Armenia Securities Exchange next year?

[Unknown Executive]

Well, the status -- well, the Armenia Securities Exchange is an active business with a new strategy, and it's developing according to plan as advised by a consultant paid by [indiscernible]. So we are achieving the objectives assumed when structuring the deal, including the adoption of AMX's new strategy, which covers the strategic initiatives, which were planned at the time of closing the deal plus, some additional plans added later as we joined the operations of AMX.

So this business is up and running. GPW Logistics is also the running business. We will try to scale it up. By the end of December, the platform will be up and running. The company can use that platform implemented so it will be easier to scale up the business. And the cost of scaling up the business will be smaller. We will be generating bigger volumes. We think we see that there is a need for that in the market, and the only limitations are imposed by our own capacity because the platform is transitional. So it's a matter of scaling up the business. Telemetry or GPW DAI. Again, the platform is there. It has been tested successfully with ad insertion, some revenue has been generated. Companions have launched. So we know that it is efficient.

And we are in discussions. We have signed contracts with 2 partners, negotiating with more. And there is a lot of goodwill on the part of the National Broadcasting Council for our project. And the technology risk has been addressed. Regulatory risk has also been largely addressed. So next year, it's mainly going to be market risk. So we have to meet the expectations of our potential customers. It's a 2-sided market, in fact, on the one hand -- or 3-sided market, infrastructure providers, broadcasters and advertisers.

So we have to negotiate or navigate that constellation, but we are very positive about the management of GPW DAI with a lot of experience in the media, which suggests that with the mix of demanding conditions, they will perform really well. And GPW Logistics and GPW DAI are both open to work with key market players and teams in capital terms. We want those businesses to be stand-alone operators as much as possible, as members group of our companies, our product portfolio and revenue streams. But we don't want them to consume too much of our management time. And it's going in that direction.

Did you ask about the private market, as well? I think I answered your question, right?

[Unknown Executive]

Three questions about financials. The prospective growth of [ FTS in FTEs ] in the group and CapEx in the coming quarters.

[Unknown Executive]

This concerns the number of FTEs, the growth of the number of FTEs. We are, in general, not planning a significant growth in FTEs in our current operations. Quite the opposite. We will try to optimize FTEs in the strategic initiative to improve the effectiveness of our group. It's part of our strategy published last April. But we have to complete the projects that are now well developed.

And in the interim, the optimization projects require some change in the qualifications of competencies by staff. As the CEO said, as we presented in our strategy, we don't want to mix operations and projects. So we're expecting that next year, we may have a dozen or so new FTEs in the group temporarily to go through that transition and implement our strategic initiatives while making a shift in the competencies of our staff, given the technology leap in the GPW Group, mainly with the implementation of the new training system, the change of the data center, the new approach to the provision of IT services and changes in other areas.

So temporarily, next year, as I said, we expect an increase in 2025 and beyond. However, we will make efforts to decrease, reduce at least. And the long-term prospects under our strategy is to reduce the headcount of the group by at least 10% within the time horizon of the 5 years, unless we acquire any new business.

The other question was about CapEx, yes, CapEx and the outlook for CapEx.

Well, I said before, when I discussed CapEx in Q3 2023 that in Q4, we expect CapEx to grow significantly to around PLN 25 million, which is close to what we reported in Q4 2022. But when it comes to 2024, we are planning additional increase as we are completing the projects, which are now well advanced. So I believe CapEx will be at the level I just mentioned.

[Unknown Executive]

Next question about HR costs. How high was the inflation benefit? Mr. Mlodkowski said that before.

What was the average salary raise this year in addition to the inflation-linked benefit?

[Unknown Executive]

The average salary raise was around 7% in Q3. So we expect HR costs or salary costs to go up by about 7% as a result of that salary range. 7 plus 5, it's a simple mathematics. It's still less than average CPI over the period.

[Unknown Executive]

Final question about financials. What is the level of costs attributable to the AMX?

[Unknown Executive]

AMX, well, the company generated PLN 6 million in Q3, PLN 5 million was the level of operating expenses. So the net profit was PLN 1.1 million, quite decent pay profit when you think about the launch of our mutual corporation.

[Unknown Executive]

Two questions about the commodity market. How much bigger would TGE's revenue be if electricity or the obligation to trade in electricity on the exchange was reestablished?

[Unknown Executive]

Thank you for that question. It's not easy to say. We don't know what level of that obligation would be, who would be exempted, when such obligation would be imposed. Press reports suggest that such an obligation would be introduced. But we don't know how large and subject to what exemptions. The obligation was normally 100%, but in reality, it was 35% to 55%, as some producers, including renewable energy service producers were exempted. So there are so many different variables relating to the potential obligation that it is very difficult to measure the financials.

So I wouldn't like to mislead you. We are all professionals. We don't want to discuss numbers without full understanding of variables. However, we hope and expect that, given the position taken by officials so far, that obligation will definitely improve the turnover and liquidity on forward markets. So we could expect several dozen terawatt hours of additional electricity traded. But when we know more about the potential law, we could say more.

[Unknown Executive]

Another question about the commodity market, the outlook for the green certificate market next year.

[Unknown Executive]

I said that when I discussed Slide 3 or all 3 slides, the drop in revenue from green certificates was -- quarter-on-quarter was due to the fact that Q3 and Q4 are always weaker, and there's less concentration compared to Q2 when certificates are redeemed. But quarter -- sorry, year-on-year that the drop was driven by 2 or 3 factors.

One, electricity consumption is much lower. Traders that supply electricity to end users based on percentage thresholds in the regulation of the Ministry of alignment have to redeem a certain number of certificates. So the less energy is consumed, the fewer certificates are traded issued and canceled.

Another factor, regarding green certificates, the system, phasing out green certificates over [indiscernible] 15 years. So there will be fewer redemptions, cancellations and less turnover.

The third factor, which impacts the volumes and the revenue of the TGE Group, most strongly the level of redemptions or cancellations of green certificates, which has dropped from 18% to 18.5% to 12% this year. Next year, the new regulation suggests that the reduction will be even deeper from [ 12.5% to 5%. ]

Unfortunately, this regulatory uncertainty, well, we used to know 3 years in advance about the level of redemptions, which was good for the exchange and for market participants who could plan the cancellations in advance. Unfortunately, now, we are informed about the redemptions requirement year ahead, which creates more uncertainty.

[Unknown Executive]

One more question to Mr. Dietl before we turn it over to Ms. Olszewska. The military conflict in Nagorno-Karabakh, the war between Israel and Palestine, will that have a direct impact on the AMX business?

[Marek Dietl, executive]

What is the relationship between the war in the promised land and AMX? I cannot see a direct connection. Maybe the person asking those, I don't see a connection. Regarding [indiscernible] the enclave in Nagorno-Karabakh, we look at it from the human dimension. Armenia has a population of 3 million. Armenians started to flee Russia after the full-scale invasion of Russia against Ukraine, about 150,000 people arrived, growing the population by 5%, and then 140,000 arrived from Nagorno-Karabakh.

So real estate prices in Armenia grew twofold, people live in overcrowded homes, 30 people living in a single apartment. So the human dimension is difficult and the symbolic dimension.

[indiscernible] imagine that Poland were to lose the cities of [indiscernible]. The historical traditional sites of rulers of Poland. So it's really -- that symbolic situation is difficult.

Back to business. For us, the territorial integrity of Armenia as a state is key. The reports from global media and Armenian media, we follow them very closely. We have contacts on the ground. We are -- we can see close discussions between Armenia in the U.S. concerning military cooperation, which basically mitigates the risk of -- or the risk to the territorial integrity of Armenia.

We are taking steps; however, to also protect the local infrastructure and business continuity of the Armenia Securities Exchange. But we think that it is very unlikely that the integrity, territorial integrity of Armenia should be breached.

Azerbaijan is now requesting a corridor, which is not to the liking of another local power, Iran. So given this very specific constellation of the U.S. as the global power, Iran, regional power, they are both standing by Armenia. So this mitigates the risk.

But in general, volatility on the market, unfortunately -- well, it does drive turnover. Hopefully, volatility should not result from geopolitical tensions. So we are quite comfortable about the business continuity of AMX.

On the other hand, if I may quote a pop song, we are expecting the world's hoping for the best. So we are anticipating adverse scenarios, but the probability is not high. We are expecting some stabilization and dynamic economic growth in Armenia.

[Unknown Executive]

Finally, to questions to Ms. Olszewska.

One, about the first year of GlobalConnect and its outlook for next year.

[Izabela Olszewska, executive]

Yes. It's been almost a year since GlobalConnect launched. Given its conditions, we now have one introducing market maker, on GlobalConnect, Santander Bank. Of course, we'd like to have more introducing market makers. But for the time being, we have one, and it's mostly up to them how fast new stocks and which stocks will be introduced to GlobalConnect.

They perform other [indiscernible] to introduce and make the market for those stocks. What we can see is that there is some turnover on the market day after day. It may not be satisfactory. We have appetite for more. But still, there is turnover. And I think, it's important to introduce new stocks.

What we look forward to and expect to happen soon is the launch of the first U.S. stocks. I think this will be a breakthrough on NewConnect. This is something we are working on. This was already preannounced by the Warsaw Stock Exchange in Santander.

So this will be a new chapter for GlobalConnect. We look forward to it. We hope it's going to happen sooner rather than later.

[Unknown Executive]

And the last question. The October volumes on the financial market were very promising. What is the expectation for Q4? And what is the IPO pipeline?

[Izabela Olszewska, executive]

Right. We are halfway through the final quarter of the year. When it comes to EOB turnover, as I said, it's very strong, crossing the mark of 1 billion daily.

So if I may highlight several factors. The uptrend on the stock exchange has continued for 12, even 13 months. Indices, WIG, WIG20, the other indices have gained quite well. If you look at the ratios and valuations, Polish stocks are relatively cheap, which should attract more attention from investors due to this significant discount.

If you look at the indices, the MSCI Poland, MSCI emerging markets, all this means that the market looks very promising in Q4.

The other question about IPOs is really hard to address because I am not allowed to disclose any names of potential IPOs until this is made public. So I cannot really make any announcements. But the names; however, that have already been quotas in the media as potential IPO targets. The most important one probably is [indiscernible], but the decision is in the hands of the owners, also the decision about the timing.

However, clearly, the company is considering to be floated. The IPO market is rather quiet across Europe. But we saw some signs of improvement. Q3 across Europe was better than Q1 and Q2. So we hope this will also help our market. And it's very important to have some good stories from companies that could attract investors and grow our turnover.

[Unknown Executive]

Thank you very much. If you have any follow-up questions, please contact our Investor Relations. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]