Supplementary notes for METRO AG (pursuant to the German Commercial Code)

Overview of financial year 2013/14 and outlook of METRO AG

As the management holding company of METRO GROUP, METRO AG is highly dependent on the development of METRO GROUP in terms of its own business development, position and potential development with its key opportunities and risks.

In light of the holding structure, the most important performance indicator for METRO AG in terms of GAS 20 is commercial net profit or loss – contrary to the case for the group as a whole.

Business development of METRO AG

The business development of METRO AG is primarily characterised by the development and dividend distributions of its investments. METRO AG’s annual financial statements prepared under German commercial law serve as the basis for dividend distribution. The income statement and balance sheet of METRO AG prepared in accordance with the German Commercial Code (HGB) are outlined below. The results as of the closing date of 30 September 2014 are compared with the previous year’s annual financial statements for the short financial year from 1 January 2013 to 30 September 2013.

Earnings position of METRO AG and profit appropriation

Income statement for the financial year from 1 October 2013 to 30 September 2014 in accordance with the German Commercial Code (HGB)

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€ million

9M 2013

12M 2013/14

Investment result

347

811

Financial result

−101

−95

Other operating income

389

475

Personnel expenses

−89

−148

Depreciation/amortisation/impairment losses on intangible and tangible assets

−26

−15

Other operating expenses

−296

−433

Result from ordinary operations

224

595

Income taxes

0

−7

Other taxes

1

−2

Net profit or loss

225

586

Retained earnings from the previous year

22

0

Additions to reserves retained from earnings

−110

−267

Balance sheet profit

137

319

For financial year 2013/14, METRO AG posted investment income of €811 million, compared with €347 million in the previous year. In this regard, it should be noted that the reporting year represents a period of twelve months, while the comparative period of the previous year comprised a nine-month period.

Income from investments with profit and loss transfer agreements totalling €410 million (9M 2013: €478 million) primarily includes income from the Media-Saturn and Galeria Kaufhof sales lines, losses incurred by METRO Cash & Carry Germany and Real Germany as well as income from the intra-group transfer of shares to METRO Cash & Carry Russia.

Income from investments without profit and loss transfer agreements totalling €485 million (9M 2013: €147 million) essentially stems from disbursements of group real estate companies. It includes income from intra-group transfers of shares to real estate companies.

In light of the high amount of income from intra-group real estate transactions (€764 million), the possible collection of earnings from the operational business activities of foreign cash-and-carry companies was waived in financial year 2013/14.

In financial year 2013/14, losses of €16 million were assumed on the basis of profit and loss transfer agreements (9M 2013: €138 million). These losses were incurred in the group real estate service businesses.

Of impairments for investments in affiliates in the financial year, €29 million can be attributed to international cash-and-carry activities and €6 million to the real estate area.

Expenses arising from the disposal of financial assets in the amount of €33 million stem from the sale of the Real sales line’s Turkish business.

The financial result amounted to €–95 million (9M 2013: €–101 million).

Under the transfer pricing system, METRO AG acts as a franchisor to the METRO Cash & Carry sales line. Services provided essentially include the provision and continued development of business concepts, software applications and holding services. In order to be able to render these services, the company acquires IT services and software in particular from METRO SYSTEMS GmbH, which leads to higher other expenses and write-downs. Services are billed at arm’s-length prices. In financial year 2013/14 METRO AG billed the national and international operating companies of the METRO Cash & Carry sales line a franchise fee totalling €289 million (9M 2013: €222 million). The franchise fee itself represents a portion of the sales and earnings of the operating company calculated on the basis of the degree of service utilisation. During financial year 2013/14, these franchise fees billed to subsidiaries increased compared with the previous year due to the longer billing period.

Income from administrative services rendered for subsidiaries increased due to the longer billing period compared with the previous year.

Other operating income, other operating expenses and depreciation/amortisation on intangible and tangible assets of METRO AG resulted in an overall decrease in earnings from €67 million in the previous year to €27 million as of the closing date.

On average during the four quarters of financial year 2013/14, METRO AG employed 1,072 people (9M 2013: 940). Part-time employees and temporary workers were converted into full-time equivalents. Personnel expenses amounted to €148 million (9M 2013: €89 million). Apart from the effects of the longer reporting period in comparison to the short financial year as well as the increase in employees from the acquisition of group real estate companies, higher performance-based remuneration components led to an increase in personnel expenses.

Net profit amounted to €586 million (9M 2013: €225 million), slightly above the forecast for financial year 2013/14 provided at the beginning of the reporting period.

With €267 million having been transferred to reserves retained from earnings, the balance sheet profit of the company amounted to €319 million, compared with €137 million in the short financial year 2013.

Regarding the appropriation of the balance sheet profit for 2013/14, the Management Board of METRO AG will propose to the Annual General Meeting to distribute dividends in the amount of €0.90 per ordinary share and €1.13 per preference share from the reported balance sheet profit of €319 million – that is, a total of €295 million – and to carry forward the remaining amount to the new account. The dividend proposal contains a preference dividend of €0.17 per preference share to cover the dividend that was not paid in the short financial year 2013 and that must be subsequently paid in accordance with § 140 Section 2 of the German Stock Corporation Act and § 21 Section 2 of the Articles of Association of METRO AG.

Financial position of METRO AG

Cash flows

During the reporting period, cash flows primarily resulted from financial transactions with METRO GROUP companies. Short-term financial investments provided by the sales lines at the end of the financial year amounted to €381 million as of the closing date (9M 2013: €739 million). The decrease compared with the previous year primarily results from the fact that existing liquidity has increasingly been used to reduce financial liabilities.

Capital structure

Equity and liabilities

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€ million

30/9/2013

30/9/2014

Equity

 

 

Share capital

835

835

Ordinary shares

828

828

Preference shares

7

7

(Contingent capital)

(128)

(128)

Capital reserve

2,558

2,558

Reserves retained from earnings

2,256

2,660

Balance sheet profit

137

319

 

5,786

6,372

Provisions

326

384

Liabilities

4,948

4,352

Deferred income

6

5

 

11,066

11,113

Liabilities consisted of equity of €6,372 million (9M 2013: €5,786 million) and provisions, liabilities and deferred income of €4,741 million (9M 2013: €5,280 million). As of the closing date, the equity ratio amounted to 57.3 per cent compared with 52.3 per cent in the previous year. Provisions as of the closing date totalled €384 million (9M 2013: €326 million). Liabilities from bonds decreased slightly by €47 million to €2,834 million. Liabilities to banks increased slightly to €470 million (9M 2013: €465 million). Liabilities to associates declined to €956 million (9M 2013: €1,491 million). This decline was primarily due to the fact that the sales lines provided fewer short-term funds. As of the closing date, other liabilities stood at €81 million, which is €16 million below the previous year’s level of €97 million.

Asset position of METRO AG

Assets

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€ million

30/9/2013

30/9/2014

Fixed assets

 

 

Intangible assets

18

8

Tangible assets

2

2

Financial assets

8,375

7,886

 

8,395

7,896

Current assets

 

 

Receivables and other assets

1,919

2,819

Cash on hand, bank deposits and cheques

739

381

 

2,658

3,200

Prepaid expenses and deferred charges

13

17

 

11,066

11,113

As of the closing date, assets totalled €11,113 million and were mostly comprised of financial assets in the amount of €7,886 million, receivables from affiliated companies at €2,552 million and bank deposits at €381 million. Financial assets declined by €489 million compared with the previous year and now account for 71.0 per cent of total assets. This overall decline stemmed from the €976 million reduction and a simultaneous new issue of a loan in the amount of €422 million from the area of long-term intra-group loans. Impairment losses for investments in affiliated companies were incurred in the amount of €35 million. Receivables from affiliated companies rose by €975 million compared with the previous year – this item reflects the group companies’ short-term financing requirements as of the closing date and represents 23.0 per cent of total assets.

Cash on hand, bank deposits and cheques fell by €358 million to €381 million compared with the previous year. This decline in comparison with the previous year’s closing date of 30 September 2013 primarily results from the fact that existing liquidity was increasingly used to reduce financial liabilities.

Risk situation of METRO AG

As METRO AG is closely engaged with the companies of METRO GROUP through financing and guarantee commitments as well as direct and indirect investments, among other things, the risk situation of METRO AG is highly dependent on the risk situation of METRO GROUP. As a result, the summary of the risk situation of METRO AG issued by the company’s management also reflects the risk situation of METRO AG.

Forecast of METRO AG

The business development of METRO AG as the holding company essentially depends on the development and dividend distributions of its investments. Assuming a positive development of the participating sales lines, the company expects an increase in franchise fees from its function as franchisor. Assuming a stable financial result and a largely unchanged cost structure, we expect the net profit for financial year 2014/15 will remain at the level of the current financial year.

Planned investments of METRO AG

In the context of METRO GROUP’s investment activities, METRO AG will support group companies with increases in shareholdings or loans, where necessary. In addition, investments in shareholdings in affiliated companies may result from intra-group share transfers.

Declaration on corporate management

The declaration on corporate management pursuant to § 289 a of the German Commercial Code (HGB) is available on the company’s website in the section Company – Corporate Governance.

Declaration of compliance pursuant to § 312 of the German Stock Corporation Act (AktG)

Pursuant to § 312 of the German Stock Corporation Act (AktG), the Management Board of METRO AG prepared a report about relations with affiliated companies for financial year 2013/14. At the end of the report, the Management Board made the following statement:

“The Management Board of METRO AG declares that the company, in accordance with all known circumstances at the time at which legal transactions were made or measures taken, received an adequate quid pro quo for each legal transaction and was not put at a disadvantage through the implementation of such measures. No other actions requiring reporting applied during the financial year.”