Executives: Jan Strecker – Investor elations Gregor Pottmeyer – Chief Financial Officer Eric Mueller – GMC

Member
Analysts: Arnaud Giblat – Exane Daniel Garrod – Barclays Martin Price – Credit Suisse Kyle Voigt – KBW Greg Simpson –

Exane
Operator: Good afternoon, ladies and gentlemen, and welcome to the Deutsche Boerse AG conference call regarding the Third Quarter Results 2016. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. Let me now turn the floor over to, Mr. Jan Strecker.

Jan Strecker: Welcome, ladies and gentlemen, and thank you for joining us today to go through our third quarter 2016 results.

With me Gregor Pottmeyer, CFO, and Eric Mueller, GMC member. Gregor will take you through the presentation, and after the presentation, we will be happy to answer your questions. The presentation materials for this call have been sent out via e-mail earlier today, and can also be downloaded from the Investor Relations section of our website. As usual, this conference call will be recorded, and is available for replay. With that, let me now hand over to Gregor.

Gregor Pottmeyer: Welcome, ladies and gentlemen. Let me start today’s presentation with an overview of the developments in the third quarter. After the spike in market volatility, before and immediately after the UK referendum had subsided, weaker capital markets activity in the third quarter affected many areas of our business. On the Group level, this was compensated by continued growth in our commodity business, EEX, and the performance in the international business of Clearstream. Furthermore, the addition of the FX platform, 360T, in the fourth quarter last year contributed to growth.

In total, net revenue in the third quarter increased by 1% to €559 million. At the same time, the adjusted operating costs decreased by 5% despite a higher cost base due to consolidation effects. This was a result of targeted cost containment measures we have been implementing since last year. As a consequence, earnings grew considerably faster than revenues. In the first nine months, net revenue increased by 6%, and the adjusted EBIT by 12%.

With this, we are well on track to achieve our double-digit earnings growth target for the full year. The proceeds from the sale of ISE have been partially used to redeem the outstanding $290 million private placement at the end of July. As a result, the gross debt to EBITDA ratio has improved to 1.4 times for the first nine months. The debt redemption has resulted in additional financial expenses of €28 million in the third quarter. However, as the debt was ISE-related, the additional expenses were booked in discontinued operations, and are thus not included in the main income statement.

As part of our growth strategy, Accelerate, we continue to optimize our portfolio of shareholdings. In this context, we just sold around one-third of our stake in BATS Global Markets for around $86 million. With this, we expect a positive impact on the earnings after tax of around €23 million in the fourth quarter. The stake in BATS resulted from a participation of ISE in Direct Edge Holdings, which later merged with BATS. In August, the exchange offer to Deutsche Boerse shareholders in the context of the merger with LSE Group expired.

The final acceptance ratio amounted to 89%. Most of the trading liquidity is now in the tendered Deutsche Boerse shares, which trade under the new ticker symbol DB11. On 28 September, the European Commission, as expected, announced commencement of phase two proceedings in connection with its review of the merger. The Commission now has time until the first quarter 2017 to take a decision. In order to be able to proactively address antitrust concerns raised by the European Commission in relation to certain businesses, LSE Group and the LCH Group intend to explore a potential sale of LCH SA, LCH Group’s French regulated operating subsidiary.

This would be subject to the review and approval by the European Commission in connection with the merger, and also be contingent on the successful closing of the merger. Let me now take us through the results, starting with the Group financials for the first nine months of 2016 on page two. As a result of the ISE sale in the second quarter, ISE was classified as discontinued operations and eliminated entirely from the income statement in preceding periods. On this basis, net revenue increased by 6% to around €1.8 billion. Adjusted operating costs are up by only 1% despite the consolidation of 360T.

As a result, the EBIT increased by 12%, and the earnings per share amounted to €3.37. This brings me to the results of the third quarter on page three. Net revenue increased by 1% to €559 million. As part of net revenue, the net interest income increased to €22 million because of a significant increase of the NII at Clearstream. Operating costs adjusted for exceptional items decreased by 5% to €276 million due to ongoing implementation of efficiency measures and despite the consolidation of 360T.

exceptional items totaled €28 million, which was mainly driven by the LSE merger process, merger integration like 360T, disposals, and the litigation in the U.S.. The adjusted EBIT increased by 8% to €286 million. As per our guidance, the tax rate increased from 26% to 27%. Apart from the higher contribution from German-based businesses like EEX and 360T, this relates to an increase of the city tax at the headquarters. Adjusted for exceptional items, third quarter EPS grew 5% to €1.02.

I am now turning to the quarterly result of the individual segments, starting with Eurex on page four. The Eurex development was mainly driven by the strong commodity performance at EEX and the inclusion of FX net revenue from 360T. trading activity in equity and index derivatives declined in line with the underlying market activity, while volumes in fixed income derivatives in a prevailing environment of historically low interest rates remains broadly stable. In total, net revenue in the Eurex segment stood at €228 million, and adjusted EBIT amounted to €108 million. In the cash markets, we saw a decline of the order book turnover by 28%.

As a consequence, net revenue in the Xetra segment declined to €40 million, and EBIT on an adjusted basis stood at €21 million. Part of the drop in transaction-related net revenue has been offset by a slight increase of the listing fee. At Clearstream, total assets under custody decreased by 1% year-over-year to €13.1 trillion. This was driven by a decline in the domestic German CSD business, while the international ICSD business in Luxembourg and the IFS business, Investment Fund Services, were growing. Outstandings in the collateral management business, GSF, continued to be negatively affected from Central Bank monetary policies, which reduced the need for the clear transactions.

Due to a more favorable business mix, with growth in the higher margin securities lending business, GSF net revenue increased by 6%. The cash balances at Clearstream adjusted for plupped accounts increased by 16% to €11.3 billion. In addition, the higher rate in the U.S. dollar and a markup on negative rates introduced this year resulted in a substantial increase of the Clearstream NII. In total, net revenue in the Clearstream segment amounted to €196 million, and the adjusted EBIT stood at €101 million.

Net revenue in the market data and services segment decreased by 6% year-over-year. The decline is a result of the divestitures of information things, February and Market News internationally early July. In total, they accounted for a net revenue contribution of €4 million to €5 million per quarter. Furthermore, the weaker Eurex activity and outflows in ETF resulted in a decline of net revenue in the index business. Total net revenue in the MD&S segment amounted to €96 million.

The adjusted EBIT stood at €56 million, only slightly below the second quarter level, as the divested M&I business was incurring losses. This concludes our presentation. We are now looking forward to your questions.

Operator: [Operator instructions] And the first question comes from Arnaud Giblat from Exane.

Arnaud Giblat: Yes.

Good afternoon. Quick question on regulation, please. Recent development in regulation seems to have been slightly unfavorable, particularly in the OTC clearing mandate. It seems as though SML are planning to exempt category three financial participants with less than €8 billion of outstanding in OTC contracts from being mandated to clear. As I understand it, most of your €50 million revenues you’re targeting was come from this category.

Certainly the move of category one in assets due to clearing doesn’t seem to have moved volumes up significantly. So, I’m wondering, if this were to be implemented and category three were to be exempt from clearing, how would that rebase your objective there? Thank you.

Eric Mueller: The regulatory development here in Europe, as you point out, and indeed globally, is in generally favorable for our business. We have seen now there with a delay, but finally the clearing obligation kick in. Category one, as you know, is in particular the large sell-side firms, so the large buy side is a part of category two, and then there is the debate you point out around category three and below €8 billion in terms of the size of the fund.

Now, think the debate is somewhat also triggered by the practice in the U.S. where I think the threshold is even $10 billion for people to be exempted from the clearing obligation, so there’s an element of harmonizing this. ESMA, in their assessment and calculation, think that this will be a low single digit number in terms of the volume that will then not be centrally clear, so they think it’s immaterial. We’re still trying to better understand these numbers, but that’s sort of where the industry debate stands at the moment. So, I don’t think, in summary, that this changes any plan and perspectives, but it would be more a step to be designed to avoid that small participants will have to go through the cost associated with doing that.

Arnaud Giblat: Okay, so to sum up, we shouldn’t think about a very big deviation from your initial target, then?

Jan Strecker: Yes.

Arnaud Giblat: Thank you.

Operator: The next question comes from Daniel Garrod from Barclays.

Daniel Garrod: Just a question on cost base expectations. In the past you’ve said that – well, you were reiterating today your net profit growth forecast for the full year, the 10% to 15%.

In the past you said, if the top line development was weaker than you anticipated, you had some ability to flex the cost base around discretionary spend, spend on investment projects, so I wonder if you’ll provide any color around your thoughts on that as we enter Q4? What is in the budget for project spend for the full year? How much of it has been expensed at the nine-month stage, so sort of what potential firepower do you have at your disposal to flex that if revenues disappoint in Q4? Thank you.

Gregor Pottmeyer: Yes, Daniel, thank you for the question. So, I mentioned our cost savings are structurally cost savings. So, we do a lot to improve our cost position. So, what we, for instance, did is that we reduced our base for external consultants by roughly 200 so that the reduction by €20 million.

Then, in addition, we are in the process to internalize up to 500 external consultants, so that’s roughly another €20 million what we see. In addition, we have our continued improvement process in place where we will benefit from our new group-wide setup. So, just to give you an example, our customer onboarding process we streamlined now across the whole Group, so we will see benefit out of that. And our expectation is that we are able to compensate at least inflationary pressure, so in the range of € 20 million every year out of our process here. In addition, we do strict project management, so projects that do not deliver will be stopped.

So, it’s much more proactive than in the past. And last but not least, what I would like to mention is we divest also loss-making business like we did with this M&A that obviously also hedge on the cost basis. So, these are just some examples I could give you to show you that we do not hop in with investment costs from one quarter to the other. It’s more a structural approach we follow here.

Daniel Garrod: But, you’d still maintain that you’ve got sufficient flexibility if Q4 doesn’t develop well to hit that guidance? That’s the main message, is it?

Gregor Pottmeyer: Yes, sure.

You have seen our ability that we could react in Q3, and the same is true for Q4.

Daniel Garrod: Thank you.

Operator: All right. You have two more questions on hold. But before coming to the next question let me repeat.

[Operator Instructions] And the next question comes from Martin Price from Credit Suisse.

Martin Price: Good afternoon. Just as a quick question on 360T, it looks like revenue’s perhaps tracking a bit below the target of €75 million for 2016, which I think you detailed at the time of the acquisition. I was just wondering if you could share some thoughts on the progress you’re making in that business, and potential initiatives you have in the pipeline to perhaps close the revenue gap. Thank you.

Gregor Pottmeyer: Yes, Martin, you are right, we are behind our plans with regard to 360T. And the main reason for that is that we have currently cave-in from cyclical markets. So, 360T is even able to increase slightly the market share here, so when you compare development of other – there’s even a stronger reduction. So, we were able to keep it flattish or slightly increase here. From a structural perspective, everything is intact.

So, what we currently do is to prepare our synergy case, or where we say that more of the FX rates there today, basically the time majority is OTC traded. So, we will, over middle of next year, a trading platform, so a central limit order book facility and functionality, including a clearing optionality. And so far, we are unchanged convinced that we are able to come back to the grow rate what 360T have seen in the past, so it was in the range of 10% to 15%, and that we will also see our synergies out of that trading and clearing facility what we will offer. So, no change with regard to our mid-term outlook for 360T and the FX business as a whole.

Operator: We have a follow up question from Mu-Shan from Morgan Stanley.

Anil Sharma: Hello, I’m Anil Sharma from Morgan Stanley. Just quick question. Obviously in the last few months, you guys have done quite a lot of disposals and tidy-ups. I’m just wondering what more is there within the group? Gregory, you mentioned earlier there was a loss-making business within the index franchise. I’m just trying to think through potential revenue loss, if you like, from disposals.

Gregor Pottmeyer: Yes, Anil. So, in principle, we are flexible here. Obviously we focus on loss-making business, so we don’t want to see that, and so far it was market new international, but not the index business, where just do the opposite. We acquired last year our stocks by 100%, so index business is great. It’s growing by 10% in the revenue, what we expect also in the mid-term horizon.

But, we go through to our portfolios. We look at our equities and our investments. What we did, the same what we do with our internal project. And when we are not satisfied with the performance of some business units or some projects, and you see that we are ready to close that business down. So far we are flexible here, and when we see – when we do not agree to the performance, then we are able to react.

Anil Sharma: Okay, but can you give us any sense as to what sort of percentage of the profits or within the business, what number is currently loss-making?

Gregor Pottmeyer: So, currently there are no further loss-making business, but still there are some business maybe where the margin is not as we expect. And so, we will see no decisions are made here.

Anil Sharma: Okay. Got it. Thanks.

Operator: And we have follow up question from Arnaud Giblat from Exane.

Arnaud Giblat: Yes. Thanks taking the follow up. Just on NII, I was wondering if you could help us think about what’s driving the growth there. There’s two things - it’s cash collateral going up, and I’m wondering why that is, because it’s clearly growing at a much faster rate than assets under custody at Clearstream.

And secondly, I calculate the net interest margin in Q3 at 62 basis points versus 53 basis points in Q2. And I’m looking at that base rate around the globe. I can’t see what’s happening there. So, I’m wondering, perhaps is it a mix of cash going towards dollars, or something like that. Can you please shed some color? Thanks.

Gregor Pottmeyer: Yes, Arnaud. So, the cash balances are related to our ICSD business, right? So, it’s not the CSD business where we see a reduction, and so far yes, we see a slight cross here, and so that’s so the cash balances increase, as you rightly mentioned, by 16%. So, that’s obviously positive. Then, the increase of the 25 basis points of the U.S. rate at the end of last year, although that still helps us for the whole year.

In addition, we pass through the negative rates to our customers, and even more, we do a mark-up on negative rates, what we introduced in Q2 this year. So, these are the four main drivers why the NII definitely increased quarter-over-quarter and specifically year-over-year.

Arnaud Giblat: Okay, but without a change in base rates, 62 basis points is a good number to go for on a run rate basis from here?

Gregor Pottmeyer: Yes, the €17 million we have seen in Q3 is a good base case for Q4, too.

Arnaud Giblat: Thank you.

Operator: Next is Kyle Voigt from KBW.

Kyle Voigt: Hi. Good morning, thanks for taking my question. Sorry if I missed this earlier, but just on the expenses, it was pretty impressive you were able to hold expenses 5% lower on a continuing basis year-over-year. If you could just talk about if the environment continues to be challenging over the next 12 to 18 months, what exact levers do you have to pull left? If you’re in a revenue environment in that where revenues are only up another 1% next year, what levers can you pull to hold expenses flat or down, looking out 12 to 18 months? And then, secondly, could you help us understand if any of the efficiency measures that you’re enacting so far impact your ability at all to realize the targeted €450 million of merger synergies? Thanks.

Gregor Pottmeyer: So, obviously, all what we do here at Deutsche Boerse is not related to the merger.

So, the €450 million are still unchanged with all our initiatives we do here at Deutsche Boerse. And the main reason for that is that all the synergies come out of the effect that we combine the two businesses and that we harmonize the IT processes, et cetera. So, the €450 million from Deutsche Boerse perspective, that does not change. With regard to the flexibility of our cost measure, so as I said at earlier question, so the majority of our cost saving measures are from – has a structural [indiscernible] and therefore you will see also sustainable benefit in 2017 out of that. And with the reduction in Q3, you see also our flexibility if the revenues are below our guidance of 5% to 10%, so that even we would be capable not to keep just the costs flat, so we could even reduce it.

So, that shows the commitment of the management team to make sure that the earnings are in the double-digit growth rate, and we are capable to do so.

Kyle Voigt: Okay, Thank you.

Operator: And the last question stated is Greg Simpson from Exane.

Greg Simpson: Hi, there. Just a quick follow-up on the MD&S segment.

I think revenues in the data segment open, €43 million in Q2 to €37 million in Q3, and I think this is related to the sale of some businesses. But, are there any other factors behind the sequential decline, and do we think about that €37 million as a run rate from here? Thank you.

Jan Strecker: Yes, indeed, Greg. It’s Jan. So, like we’ve said, M&I have been sold at the beginning of the third quarter, 8th of July, and they contributed around about €1 million of net revenue per month, so around about €3 million per quarter.

And therefore, we have a slightly lower level now. The rest I would say is usual volatility around the baseline, so you probably remember that we talked quite a lot about audit-related revenues in the past, so that can fluctuate per quarter. So, that’s probably then a 10%-plus/minus swing around this new baseline.

Greg Simpson: Thank you for the color.

Jan Strecker: All right.

There are no further questions in the pipeline. Thank you very much for your participation, and have a nice weekend.