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

Good afternoon, ladies and gentlemen. My name is Javier and on behalf of Wood & Company, I'm pleased very to welcome you to the fourth quarter 2022 conference call with Warsaw Stock Exchange management. Today, the company is represented by Marek Dietl, President of the Management Board; Izabela Olszewska and Adam Mlodkowski, members of the Management Board as well as Piotr Listwon, Vice President of the Management Board of the Polish Power Exchange. Without any further ado, Marek, please, the floor is yours. Thank you.

Thank you very much for the intro and thank you very much to all of you who joined us today. I'm not sure if you see my video. Yes. Okay. Now it's on. Good. So let me briefly summarize the year 2022 as the full quarter results are also the results for the whole year. So it was a year of polycrisis. So rarely in the history, you can sense so many headwinds for the business as such and for the Exchanges business as well. War increase of interest rates and so on and so on. But despite those headwinds, we are quite happy with our revenues. We were just short of our record high 2021 only by 4.5%, what I perceive as quite a nice result. We also kept control over our costs. The increase in costs were actually lower than the inflation rate, taking into account extreme tight labor market in Poland and our constant war on talent is a good result. We also delivered a nice profit. My internal target is to go beyond PLN 150 million, and we missed it just by PLN 5 million, EUR 1.1 million. So we are very close to my internal target and with a decent profit margin of over 37%. We also kept on paying relative attractive dividends. Dividend yield was around 7.5%. And in total numbers, we paid out over PLN 115 million in the dividend, what is one of the highest dividend payout we ever had. We are -- despite this ternois and the geopolitics, we had quite nice trading volumes, especially in the first half of the year. And we are well above the pre-pandemic level. So some of the progress we've made over last year's stay with us. We had also -- we also emphasize in our strategy 2018, 2025 derivatives, and we had the highest futures trading, derivatives tradings since our IPO in 2011. We also have -- and we also had reasonably high ETF trading volume turnover of PLN 1 billion. It might sound not that much compared to the other exchanges, but please take into account that our ETFs are not used compliance, so they are not investable by the global investors. So it's solely based on the Polish retail ecosystem. And we also had the highest SPO value since 2017, another proof that it's worth to be a listed company. You can flexibly structure your capital, and the SPO is a very good proof of that of over EUR 2 billion were raised through this form of financing. We completed -- finally, we completed the acquisition -- formal part of acquisition of Armenia stock exchange. The docs were -- have been signed already earlier. But formally, we achieved a controlling maturity in this -- in Armenia stock exchange. We were also happy to launch GlobalConnect, it's MTF form. We are list global companies. And slowly and steadily, we increased the number of available names on our exchange of CSRD, before, we added 200 names. So we will offer more global companies on our venue for our local ecosystems. We are also pleased with our GPW Logistics as a digital price company, which was very -- working very hard on the revenue side. And they are successful -- they were successful in getting 2 important clients -- 3, sorry, 3 important clients, were translated already this year for revenues and small profit for the company. So actually, 1 year after we started this project, the company is already profitable, what we belief is really short time to market. And we are in the center of the greatest reform of the Polish financial market. It's benchmark and reference rates reform related to replacement of worse LIBOR with a transaction-based reference rate, which is called WIRON. And it's our subsidiary -- fully-owned subsidiary with GPW Benchmark, it's responsible for that. And that allows us to offer great verity of new data products, index product, benchmark product, reference rate products. So it was a great investment for future and also we go forward to develop our data business in the upcoming strategy. So this was the summary in glance what was -- how was the year 2022 at our end. And I would like to ask Izabela, Piotr and Adam to present you with first, our business update and then our financial highlights. Thank you.

Hello. I'm Izabela Olszewska. And with the next few slides, I will take you through the business part of today's presentation, and I will focus on financial market at the beginning. Let's start with the cash market. So as our President has just mentioned, so 2022 was really demanding year for us, and it was the year mark with the war and its effects in the economic midwich. So I mean here, energy crisis, high inflation, increase of interest rates. So looking at just annual basis, trading volume fell by several high percent in relation to the record year 2021. So it was minus 8.9%. And taking into consideration this all circumstances, in my view, it is not a bad result, because we operated in extremely unfavorable conditions, which were around the stock exchange. However, the single fourth quarter of the previous year 2022 was -- were significantly comparing to the fourth quarter of 2021. When we have more favorable conditions like low interest rates and still positive COVID period effect. I mean here, especially the interest of our individual investors. Decreased average fashion trading volume and also average fee mean for us a higher share of liquidity providers. I mean here, HBP, HBS [Audio Gap] and also market [Technical Difficulty]

She will be online shortly.

That would be my suggestion that maybe I take over.

Yes, please, go ahead.

Just to observe the time limit of our guests. So basically, what I already mentioned is the ETF story at the beginning, it's gaining a little bit of traction despite these regulatory constraints. And also what I mentioned was -- last year was the year of SPOs. But when we look in the past, there were some IPOs already happening on our venues. So if you think about European-wide lack of IPOs except of Porsche, what was the huge IPO. We still performed quite well with a few new listings on our main market and a few companies joining our junior market in NewConnect. If I can ask for the next slide, please. So first of all -- and the second thing we also would like to mention is our derivatives business. It was -- it's grown quite substantially year after year, plus 22%. Of course, the extra volatility helped in growing this business, but also we introduced some new derivatives and also we were very active in promoting existing ones. So it looks like it's a paced back. Especially that our futures, our blockbuster products, big 20 future external volume actually decreased. So we see more and more investors accepting our new products and breadth of our offering. We are also very happy with our high-volume providers, high-volume funds programs, and they share in total futures trading increased from 7% to 8%. And the liquidity always helped, and those guys provide us liquidity. So these programs overall, we believe, a major success, and we're going to continue. If I can ask for the next slide. We also invest quite heavily in the ESG strategy in many aspects. So first of all, we implemented our ESG strategy. We want to -- in the space of Scope 1 or according to Scope 1 and Scope 2, we try to reduce our energy consumption and to reduce consumption of commodities as such. But despite our company, we are not -- we do not have major ESG challenges. We also try to help our issuers. So we promote the leaders on -- in the -- the leaders in the ESG field from our issuers, just to give role models for the people. We published ESG guidelines. We attached ourselves to the green bond framework to help our issuers to issuing bonds. We have also a conference like ESG or so, and we are very active in different bodies related to sustainable finance. And we also try to be a role model for other issuers. So we also try to show what we do as a company for others, we, for example, integrate ESG risking to our risk management system, one of the first companies to do this on the Warsaw Stock Exchange. And we have strong partnerships, including sustaining stock exchange initiative and United Nations Global Compact. And we have a product ESG-related product, it's BTSG. So our 60 top names, but weighted by the ESG factors. So if I can ask the next slide, please. Financial performance, I think, Adam, maybe you will -- you are going to step in here to present our investors with the financial performance. Thank you.

Can you hear me?

Yes. We can hear you.

Marek, I do think, I'd like to say that the last year, its uncertainty was a big challenge for us also in terms of profit management. And as a result of lower turnover on both financial and commodity markets in 2022, consolidated sales revenues of the GPW Group amounted to almost PLN 390 million, which means a decrease by 4.5% year-over-year, mainly due to high inflation, operating expenses increased by 11% year-over-year to almost PLN 255 million. And as a result of a decrease in sales and an increase in cost, the C/I ratio reached 65%. And EBITDA fell to the level of PLN 167.4 million. In Q4, we recognized 2 significant one-offs. First was taking control over AMX Group. And the second one, impairment loss on BondSpot goodwill. Net profit decreased only by 10% due to higher interest rate, which supported financial income and the net profit of our sister company, KDPW. And the next slide, please. GPW Group's EBITDA margin decreased from 51.3% in 2021 to 44.6% at the end of last year, but still was partially high. While the net profit margin increased from 38.5% to 41.2%, thanks to one-offs I mentioned before, and higher financial income recorded in Q4 2022. Next slide, please. Revenues on financial markets. Revenue from our core business line decreased 21.5% year-over-year, mainly from shares trading while leasing revenue increased by almost 29%. Revenue from information services remained almost unchanged at the level PLN 14.6 million. And next few slides are located to the currency market. So now it's [indiscernible] the floor is yours.

Yes. Thank you. Thank you very much. [indiscernible] Exchange, and I'd like to give you a presentation of 3 sites about commodity market. In the context of commodity markets, both electricity and gas, it should be recalled that these markets in Poland have been operating since second quarter and third quarter of 2022 with certain restrictions related to the regulations by price cuts on the electricity and gas stright over the wholesale market, including exchange and evolution of obligation to trade of energy and later decreasing the level of obligation to trade on the exchange of the gas market from 55% to 30%. So these are very important 2 regulations that were implemented last year and have impact on the trading volumes till now. And of course, uncertainty members about the continuation of these regulations in 2014. Also, uncertainty about geopolitical situations that have[indiscernible] on the price of coal, CO2 emissions and gas. All these 3-terawatt hours, and that was a decrease of 65% year-on-year and almost 35% quarter-on-quarter. A steep decline of power [indiscernible] instrument was accompanied by the moderate growth in spot market volume, which reached 8.7 terawatt hours and that was almost 3% year-on-year. At the same time, in line with the most common part of the seasonality and it increased by almost 20% quarter-on-quarter. The year-on-year growth was the result of high December turnover, in line with implementation trading for Slovakia border on intraday market, and with higher continuous trading day ahead volumes. From the perspective of the gas, the trading volume in the fourth quarter amounted to 43 terawatt hours. It's increase of over 74% quarter-on-quarter. Natural gas for instruments turnover was still vulnerable to extreme high prices and clearing margins. So the second most important factor was a high risk or reduction of obligation of exchange as mentioned at the beginning that concerns specific companies and this obligation was reduced finally in December from 55% to 30% starting from January this year. However, it has, as mentioned, an impact on how the members behave and already stop trading somewhat as it was before on the market. The volumes in the RES certificate market quarter-on-quarter basis [Technical Difficulty] 2 to 5 terawatt hours, year-on-year slight decrease to almost 30%. A decrease occurred due to lower volume of certificates issued by the Energy Regulatory Office and rising prices in session contracts. And the last one, white certificate, which is -- which are the energy efficiency per rights. Trading volume is about 25-kiloton of equivalent in the fourth quarter, which has decreased year-on-year by 4.6%. And compared to the third quarter, it increased by 37%. The main reason of longer trading volumes year-on-year is the volume of white certificate issued by the previous quarters that had its impact only on trading in October and -- October and November, decreased by 31% year-on-year and 23%, respectively. May I have the next slide, please. The revenues achieved in the fourth quarter directly results from the trading volume just presented on the previous slide. So digital automotive market revenues decreased by 60% -- over 60% year-on-year, however, increased by 6% quarter-on-quarter. That stems from the low trading volumes on the electricity market and significant decline in certificated trading volume due to change of required level of cancellation of certificate by the trading companies from 18.5% to 12% mainly. Also, we see the increase, what is very important to mention that we have increased other fees by 24% year-on-year. So PLN 5.5 million voted mainly due to the higher revenue of IRGiT from the management assets of clearing guarantee system as a result of higher average annual balance of assets posted by members as collateral in the guarantee system in 2022. And next slide, please. Revenue from clearing and revenue from operations of the register. In the fourth quarter, we recorded a decrease in revenues from the clearing to the level of 10 -- almost PLN 11 million. It was driven mainly by the lower volumes of key transactions in the electricity and gas forward market compared to the fourth quarter of 2021, as well as lower turnover volumes of RES property rights as mentioned on the previous slide. We noted the drop of almost 11% quarter-on-quarter in the revenue from the operations of registers, which results in lower volumes of renewable energy certificate issued by the Energy Regulatory Office. And the last one is -- last one information is in the fourth quarter, the trading volume of -- Guarantees of Origin from renewables, energy sources among 11.3 terawatt hours. It's a growth of 26% -- over 26% year-on-year and 19% quarter-on-quarter, as it was also growth compared to second quarter 2022. It became a record-breaking turnover just after this year, it's first quarter, which -- first quarter of 2023. So thank you very much for listening, and I give my voice to my colleague from Warsaw Stock Exchange.

Thank you, Piotr. I'm coming back with operating expenses. So the next slide, please. High-cost margin in Q1 on the chart is the annual fee payable for Polish market regulator in each first quarter of given year. An increase of operating expenses in 2022 was driven mainly by rising external cost of IT infrastructure and advisory services. Operating expenses increased slightly due to lower annual balances and reversal of the provision for social benefits, as you can see on the chart below. And the next slide, please. So profit of entity measured by the equity method. As I mentioned before, in the fourth quarter of 2022, we achieved a higher profit from our share in KDPW. And it was PLN 2.7 million more compared to fourth quarter 2021. And the last slide, please. Thank you. In the consolidated balance sheet at the end of 2022, you can see the asset and liability reduction as a result of redemption of bonds in the amount of PLN 125 million [indiscernible] and acquisition of the AMX Group. Okay. And as I said, it was the last slide in this part of presentation. So thank you for your attention.

Thank you very much for the presentation. [Operator Instructions] We have a couple of questions from Mr. Miguel from Wood.

Can you hear me?

Yes.

Okay. First and foremost, congratulations to the Warsaw Stock Exchange on achieving such strong results despite the very challenging year. So I have a couple of questions. Maybe I'll start with the top line. So I heard that the utilization of the discount schemes has increased in the past couple of months. It is a trend that is expected to continue. And should we expect some level of deterioration of aggregate average fee in the equities trading? And also, if there are some efforts or measures that are being taken to make the top line a bit more resilient to market and investor sentiment volatility. Also, I would like to ask some -- on the OpEx. Did I understood correctly that one of the reasons for the -- maybe at least in my opinion better than expected result was the reversal of provisions for social security, if I understood correctly? And then just on guidance, I understand that you are still to unveil the strategy for 2023 until 2027 in May or June. But is there any color that you can provide at this point? And yes, maybe also on strategy update if there is already a defined date for the presentation. And -- yes.

Can you hear me? Can you see me? Okay, good. Well, maybe I will tackle the strategy and top line questions, and I would like to ask Adam to cover OpEx question. So top line question is there is in detail version of our price, which is also related to increased share of the high-volume providers in our -- we have Izabela back. No, we can't hear Izabela. So I will continue. Okay. So basically, the increased share in the trading volumes for the high-volume providers and high-volume [indiscernible]. In expense, for example, for retail results in a low average fee. Those liquidity providers provide us liquidity, what is great, but also they pay much lower fees. It's a kind of a service they offer increased liquidity. And to this -- and we hope that we're going to recover also some business from our retail and for other investors than market makers and liquidity providers, but we also see some limits to our growth in our core business. That's why we will propose strategy, which is -- and this will come in -- it will come in a few weeks from now, which is mainly driven by our focus on our core business, but it's also shows a slightly different approach. We will focus more on data space and more on the issuer side because in this aspect, we see much greater growth potential than compared to the trading, which is very volatile and unpredictable. And also, there are some limits to the growth in this area. And also the price increase in this area is very difficult. It's a very competitive space. So that's about the strategy. Pretty soon you're going to learn more. Hopefully, you're going to join us for the presentation of the strategy. And adam, over to you for the OpEx question.

Yes. In Q4 2022 and whole 2022 was driven by higher external services mainly related to IT infrastructure and advisory and lower total employee cost. But I would like to ask Piotr to give us more details about this topic.

I will give some more color on this topic, a slight change on the solar lease year-on-year. It was due to 2 factors: First one was on was provision, which we set up in 2021 against the social benefits of employees involved in our project new trading system. And during the 2022, we changed the qualifications of those employees from employees to B2B contract. And we resolved this provision in value of PLN 3.2 million. And we set up to provision in line taxes against VAT regarding those B2B contracts, in value of -- you remember well, PLN 1.5 million. It was about half of the previous provision. Second factor, it was the lower provisions for the annual bonuses due to the lower profit in 2022 comparing to 2021.

Okay. Understood. I think maybe I would just finalize it, giving you the opportunity to maybe talk about any new project that is coming live this year? We already have like the logistic coming live. Is there any other project that is coming live in this year?

Yes, with our dynamic ad insertion, we have recently appointed the Board of this company. And technologically wise, we are more or less ready, and we start the test with the broadcaster of the TV signal,[indiscernible] is a company, which is -- holds 80% of the market share in this area. And the main task of the Board of the separate company, GPW DAI is commercialized to start working with the broadcasters with the marketing teams of large advertising brokers and so on. So we are [indiscernible] commercial first technical [Technical Difficulty]

[Operator Instructions] Okay. It looks like we have no further questions at this point. Perhaps I'll pass the line back to the management team of the Warsaw Stock Exchange to conclude the call.

Can you hear me?

Yes. Go ahead.

So thank you all for your time and listening to our fourth quarter and 2022 results. And -- we hope to see you soon in the strategy presentation and you will learn more on our plans on our dividend policy and all the hot topics looking forward. So thank you for today, and hopefully, a few weeks from now, we are going to have another chance to interact. Thank you, and have a great afternoon. Thank you.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you. Goodbye.