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

Overview of financial year 2015/16 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.

Earnings position of METRO AG and profit appropriation

Income statement for the financial year from 1 October 2015 to 30 September 2016 in accordance with the German Commercial Code (HGB)

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€ million

2014/15

2015/16

Investment result

592

124

Net financial result

−21

−42

Other operating income

469

746

Personnel expenses

−194

−226

Depreciation/amortisation/impairment losses on intangible and tangible assets

−3

−4

Other operating expenses

−481

−570

Result from ordinary operations

362

28

Income taxes

0

−15

Other taxes

−2

−1

Net profit or loss

360

12

Profit carried forward from the previous year

24

57

Withdrawals from reserves retained from earnings

0

272

Balance sheet profit

384

341

For financial year 2015/16, METRO AG posted investment income of €124 million compared with €592 million in the previous year. The key factors behind this distinct decline were, in particular, lower income from investments as well as lower income from profit and loss transfer agreements which together account for a decline of more than €330 million.

In the previous year, income from investments included dividends paid by an interim holding company in connection with the sale of Galeria Kaufhof.

In financial year 2015/16, income from investments essentially concerns the dividend in kind of a loan receivable from an interim holding company which in turn results from the distribution of capital reserves of an indirect subsidiary.

In the previous year, income from profit and loss transfer agreements primarily resulted from a final profit transfer from Galeria Kaufhof.Impairment losses on financial investments and higher expenses from loss absorption due to impairment losses on indirect subsidiaries as well as expenditure grants of subsidiaries to other group companies had a negative impact on the investment result.

The net financial result amounted to €−42 million (2014/15: €−21 million). The lower net financial result is primarily due to lower income from intra-group income allocation, which is shown in the item Other financial income.

In financial year 2015/16, the transfer pricing system of METRO GROUP’s METRO Cash & Carry sales line was reviewed and amended.

Under the new transfer pricing system, METRO AG essentially serves as a service provider and licensor for the operational national subsidiaries of the METRO Cash & Carry sales line. The key services provided in this context include various operational services (consulting services), holding company services as well as services related to the development and operation of various in-house IT solutions. In order to be able to render these services, the company purchases IT services from subcontractors within the group as well as from third-party providers, in particular, which leads to higher other expenses and write-downs. METRO AG acts as a centralised licensor for its subsidiaries with respect to its METRO and MAKRO brands as well as its own-brand products.

Services are billed at arm’s-length prices. Under the newly structured transfer pricing model of METRO GROUP’s METRO Cash & Carry sales line, the national and international operational subsidiaries of the METRO Cash & Carry sales line were not billed a franchise fee in financial year 2015/16 (2014/15: €255 million), but licence and services fees amounting to about €500 million.

As of the closing date, other operating income, other operating expenses and depreciation/amortisation/impairment losses on intangible and tangible assets of METRO AG resulted in income of €172 million after expenses of €15 million in the previous year. The change in other operating expenses compared with the previous year results from the first-time application of a new transfer pricing model in particular. These expenses are partially offset by revenues from the invoicing of IT and business services as well as licence fees for the use of the METRO and MAKRO brands in the item other operating income. Appropriate provisions have been created for risks related to the possible partial non-recognition of the new transfer pricing model by foreign fiscal authorities and any resulting obligations to repay revenues from foreign group companies that have already been booked.

On average during the four quarters of financial year 2015/16, METRO AG employed 1,082 people (2014/15: 1,133). Part-time employees and temporary workers were converted into full-time equivalents. Personnel expenses amounted to €226 million (2014/15: €194 million). The increase was essentially due to expenses for restructuring measures.

Net profit amounted to €12 million (2014/15: €360 million) and thus fell distinctly short of the forecast for financial year 2015/16 that the company had issued at the start of the reporting period, as higher income from the new transfer pricing model was more than offset by a lower investment result.

Including retained earnings from the previous year of €57 million and transfers from reserves retained from earnings in the amount of €272 million, the company’s balance sheet profit amounted to €341 million compared with €384 million in financial year 2014/15.

Regarding the appropriation of the balance sheet profit for 2015/16, the Management Board of METRO AG will propose to the Annual General Meeting to distribute from the reported balance sheet profit of €341 million a dividend in the amount of €1.00 per ordinary share and €1.06 per preference share – that is, a total of €327 million – and to carry forward the remaining amount to the new account.

Financial position of METRO AG

Cash flows

Cash flows during the reporting period were primarily impacted by cash inflows from the sale of the Galeria Kaufhof group in the previous year. These cash inflows were offset by strong cash outflows for the redemption of bonds and promissory note loans as well as the repayment of the major share of short-term loans. As of the closing date, cash on hand amounted to €618 million (30/9/2015: €35 million). This item essentially includes bank deposits through cash pool income from the sales lines towards the end of the reporting period.

Capital structure

Equity and liabilities

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€ million

30/9/2015

30/9/2016

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

2,660

2,388

Balance sheet profit

384

341

 

6,437

6,122

Provisions

393

447

Liabilities

5,328

3,230

Deferred income

5

5

 

12,163

9,804

Liabilities consisted of equity of €6,122 million (30/9/2015: €6,437 million) and provisions, liabilities and deferred income of €3,682 million (30/9/2015: €5,726 million). As of the closing date, the equity ratio amounted to 62.4 per cent compared with 52.9 per cent in the previous year. Provisions as of the reporting date totalled €447 million (30/9/2015: €393 million). Liabilities from bonds declined by €1,188 million to €1,751 million. In the previous year, liabilities to banks had been strongly impacted by short-term interim financing transactions in connection with the sale of the Galeria Kaufhof group. This item therefore declined markedly to €94 million as of the closing date (30/9/2015: €982 million). Liabilities to affiliated companies increased slightly to €1,320 million (30/9/2015: €1,317 million). As of the closing date, other liabilities stood at €45 million, which is €20 million below the previous year’s level of €65 million.

Asset position of METRO AG

Assets

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€ million

30/9/2015

30/9/2016

Non-current assets

 

 

Intangible assets

14

32

Tangible assets

2

2

Financial assets

7,782

7,705

 

7,798

7,739

Current assets

 

 

Receivables and other assets

4,312

1,433

Cash on hand, bank deposits and cheques

35

618

 

4,347

2,051

Prepaid expenses and deferred charges

18

14

 

12,163

9,804

As of the closing date, assets totalled €9,804 million and were mostly comprised of financial assets in the amount of €7,705 million, receivables from affiliated companies at €1,359 million and cash on hand, bank deposits and cheques at €618 million. Due mostly to a decline in investments in affiliated companies, financial assets decreased by €77 million compared with the previous year and now account for 78.6 per cent of total assets. Receivables from affiliated companies were €113 million lower than in the previous year. This item reflects the group companies’ short-term financing requirements as of the closing date and, at €1,359 million (30/9/2015: €1,472 million), accounts for 13.9 per cent of total assets. At €74 million, other assets substantially declined from €2,840 million in the previous year. At €2,353 million, this decline was due to the receipt of the claim for payment of the purchase price from the sale of the Galeria Kaufhof group that was recognised in the previous year. Cash on hand, bank deposits and cheques increased by €583 million to €618 million compared with the previous year.

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 management holding company essentially depends on the development and dividend distributions of its investments. Assuming a normalised cost structure at the holding company level without additional expenses from the planned repositioning of METRO AG, we expect the company’s net profit to markedly exceed the level of the past financial year in the next financial year 2016/17.

The outlook will be adjusted if the planned demerger of the group into two independent companies with a clear focus on the wholesale and food retail business on the one hand, and consumer electronics retailing on the other, is approved by the Annual General Meeting on 6 February 2017, as expected, and implemented, as scheduled, during financial year 2016/17.

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 (www.metrogroup.de) in the section Company – Corporate Governance.