Letter to the shareholders

Dear shareholders, (handwriting)

Financial year 2013/14 was a challenging one for METRO GROUP, particularly in light of the current geopolitical situation. Nonetheless, we can look back on a satisfying year in this report – and not just because of the 50th anniversary of METRO Cash & Carry that we celebrated during the reporting period. We successfully moved forward with our transformation process and continued to fill our new corporate culture with life. As part of this process, our around 250,000 employees have had to face many challenges. On behalf of the Management Board, I would like to express my sincere gratitude for their hard work and dedication.

Olaf Koch (Foto)

Following our short financial year 2013, our annual report once again covers a period of twelve months and for the first time from October to September. Our financial year will thus always begin with the important Christmas quarter. This change has already paid off for us: our Christmas business no longer falls at the end of our financial year, and we have more planning security following the first quarter than we did before.

The focus of our work continues to be the creation of added value for our customers. This is the reason why we constantly work to improve the range of products and services offered by each sales line and to make them more attractive – and we have succeeded in doing so. During financial year 2013/14, we boosted the contribution that our own brands make to total sales to 11.5 per cent, raised delivery sales by 9.5 per cent to €2.8 billion and increased online sales by about 30 per cent to €1.5 billion. This third metric demonstrates the importance and success of our work to expand our multichannel presence.

During the reporting period, the unexpected political developments in Ukraine and Russia posed a major challenge for the group. Due to the unstable situation and violent conflicts in the eastern part of Ukraine, our business there developed very poorly. Here, we made the safety of our workforce the highest priority. Our business activities in Russia remained stable in spite of the import ban ordered during the summer. But we put off our planned capital market transaction as a result of the political situation.

We made further progress in our effort to streamline the portfolio of METRO GROUP. We successfully brought the divestment process of Real Eastern Europe to a close. This significantly reduced our net debt. We also sold our Real business in Turkey and closed both of our MAKRO Cash & Carry stores in Egypt because of a lack of prospects. In August, we also reached an agreement to sell METRO Cash & Carry Vietnam. The primary reasons for this decision included a very attractive offer as well as good prospects under the new owner. We are awaiting approval of the deal by antitrust authorities. Should the agreement be approved, we expect to see a one-time positive effect on EBIT in financial year 2014/15 amounting to a mid-range nine-digit euro sum. We also took advantage of attractive real estate prices to dispose of a portion of our company headquarters in Düsseldorf as part of a sale-and-lease-back transaction.

We also reached an agreement on other portfolio changes at the beginning of financial year 2014/15: the partial sale of METRO Cash & Carry Denmark and the closure of the remaining three stores there.

On the other hand, we were unable to carry out our plans for a partial IPO in our successful METRO Cash & Carry business in Russia as a result of the aforementioned political situation between Russia and Ukraine. With the revenue produced by this transaction, we could continue to expand in growth markets such as Russia, Turkey, China and India, and further reduce our net debt. At present, it is impossible to say when we will be able to resume our effort to carry out this partial IPO. But we are well-prepared to do so.

And how were our results in financial year 2013/14? Overall, we performed well in the reporting period and hit our most important financial targets. In spite of negative currency effects of 2.3 per cent, we generated sales of €63.0 billion and produced a slight gain of 0.1 per cent in like-for-like sales. Before special items, we produced EBIT of €1,727 million, although this figure was impacted by negative currency effects totalling €82 million. Once again, we significantly cut our net debt, lowering it by €0.7 billion to €4.7 billion. Since 2012, we have lowered our net debt by a total of €3.1 billion.

METRO Cash & Carry is the heart of METRO GROUP and is our most important pillar. In 2014, we celebrated our sales line’s 50th anniversary in all 28 countries – with a broad array of campaigns and events for customers, employees and suppliers. We are also beginning to see the initial results of the steps we have taken in recent years: at the end of financial year 2013/14, we recorded our fifth consecutive quarter of like-for-like sales growth. The foundation of this positive performance is our focus on our main customer groups and a product mix that is tailored to their needs. This is a clear indication that we have taken the right approach in our drive to become the best possible partner for independent entrepreneurs. Our clear focus on our customers and our close relationship with them are reflected in our new brand positioning. This positioning is brought to life by the global communications campaign YOU & METRO that we launched in financial year 2013/14.

Our delivery service is a central strategic issue at METRO Cash & Carry. In this area, we are continuing to improve our offering and our infrastructure. Our objective is to gradually move away from deliveries made from the wholesale store and to introduce a professional food distribution concept, including the use of delivery depots that house products which cater to the specific needs of local Horeca customers. We already opened our first depots in China and Germany during the reporting period. We are also continuing to refine the product range in METRO Cash & Carry’s wholesale stores.

At Media-Saturn, we took a great leap forward in our online retailing business. Now, in the first quarter 2014/15, we offer more than 80,000 products at Media Markt and around 64,000 at Saturn online. As a result, we are well prepared for the 2014 Christmas business. But the competition in this segment remains intense. For this reason, our work to further link all sales channels has taken on even more importance. This has already proven to be a real competitive advantage: more than 40 per cent of our customers now pick up the products they ordered online at their local Media Markt or Saturn consumer electronics stores. Our suppliers are taking notice of this, since a close cooperation with the market leader in continental Europe is quite attractive to them. Furthermore, we continued to work on increasing the attractiveness of our stores by taking such steps as offering interesting innovations, the latest technology and an expanded range of services. Customers are increasingly taking notice of this – a trend that is reflected in the very positive development of like-for-like sales.

At Real, we are exclusively focusing on the German market following the disposal of our activities in Eastern Europe and Turkey. In light of the strong competition faced by our sales line, the right concepts play a critical role in our success. We made further strides during the reporting period: we now have refurbished 50 hypermarkets using our new Real store in Essen as a model. This store represents the hypermarket of the future and offers a completely new shopping experience. As a result of the extremely strong performance of the remodelled hypermarkets, we are planning to refurbish at least 60 additional stores next year. In addition, we are gradually introducing new concepts in a number of departments. These changes have already had a positive effect on customer totals, average transaction size and therefore sales. We also turned many heads with the introduction of our new own brand, “Marke ohne Namen” (no-name brand). We now have more than 100 products that cost less than the discounter price level. By taking these and other steps, Real will push forward with its strategic transformation to further increase its profitability.

Our sales line Galeria Kaufhof, which celebrated its 135th anniversary in 2014, is a true success story. We continue to work against the trend in this segment and generate growth. The primary reason for this growth is our intense focus on our customers, who find an attractive product range in our department stores – and enjoy an incomparable shopping experience. In order to respond to the tremendous competitive pressure and to remain successful in the marketplace, we have to continuously reinvent the department store and adapt it to the latest trends. This is the reason that our sales line is sharpening its profile as a multichannel retailer and is focusing on more closely dovetailing stationary business and online retail. Moreover, employees in our German department stores are now equipped with tablet computers. This means they can give their customers an opportunity to order goods from the online assortment directly in the store and have them delivered to their homes.

Unfortunately, METRO GROUP’s satisfying performance was not reflected in its share price during the financial year. The METRO share produced very strong gains in financial year 2013. This trend initially continued in financial year 2013/14. In particular, the plans for a partial IPO in METRO Cash & Carry Russia received a very positive reception from the capital market. But as the political situation became more volatile, our share price suffered – just like the stocks of other companies that have extensive business operations in Russia. Between 1 October 2013 and 30 September 2014, the price of the ordinary share fell by 11 per cent to €26.08.

After METRO AG decided not to pay a dividend for the short financial year 2013 due to the lack of Christmas business, the Management Board and Supervisory Board are recommending that you, our shareholders, receive a dividend of €0.90 per ordinary share. This recommendation is based on our dividend policy, which calls for a dividend amounting to 40 to 50 per cent of earnings per share before special items. The actual payout ratio for this recommendation is 48.9 per cent. You will have an opportunity to vote on this proposal on 20 February 2015 at our Annual General Meeting, to which I would like to cordially invite you.

And what do we expect in the new financial year? In 2014/15, we will press ahead with our transformation process in order to build on our successes. The start to financial year 2014/15 was marked by the 50th anniversary of METRO Cash & Carry on 27 October. The anniversary served as an occasion to celebrate with our customers, suppliers and employees. With the events and campaigns we held during the year, we also generated new momentum for a collaborative working relationship with our customers – very much in the spirit of our brand message YOU & METRO. We believe that this momentum and the enthusiasm that could very often be felt among our employees and customers will live on during the financial year and inspire us to perform at the highest level.

We also expect to see continued gains in other sales lines. At Media-Saturn, we have demonstrated that the multichannel strategy is the key to the future. We intend to use this strategy to significantly expand our market share. At Real, we are now directing our full attention to the German market after disposing of our business in Eastern Europe. And at Galeria Kaufhof, we are focusing on systematically dovetailing our department store and online business.

This means one thing: we expect to generate a slight gain in like-for-like sales and to produce a small increase in EBIT before special items and currency effects in spite of the economic and political challenges that we continue to face in many of our countries. In addition, we are determined to further reduce our net debt – in part by disposing of our METRO Cash & Carry activities in Vietnam. By taking this step, we can provide long-term strength to our balance sheet and improve our rating. All in all, METRO GROUP is well positioned for the future. My Management Board colleagues and I are looking forward to working together with our employees to further increase the value of your company.

Best regards,

Signature Olaf Koch (handwriting)

Olaf Koch
Chairman of the Management Board of METRO AG

Düsseldorf, 16 December 2014