Management system
Our company’s rigorous focus on creating added value for customers is also reflected in our internal management system. The primary objective is to create sustained value for the company by focusing on added value for customers. For this reason, METRO has been using value-oriented performance metrics to plan, manage and monitor business activities. The corresponding value drivers that have a direct impact on value creation form the core of our operational management system. Our focus in this process is on growth (sales), operational earning power (EBIT or EBITDA) and optimised capital deployment. The key metrics for METRO in financial year 2016/17 are sales growth and EBIT before special items.
Business transactions or a number of uniform business transactions that do not recur regularly, that are reflected in the income statement and that have a significant impact on business activities are classified as special items.
Starting in financial year 2017/18, our focus will increasingly be on EBITDA instead of EBIT. In addition, the reporting on special items will be discontinued.
As the restructuring measures associated with the transformation of the group have been completed to the greatest extent, our future reporting will no longer include special items.
The calculation of key performance indicators generally follows the approach for calculating the key figures of the consolidated financial statements prepared in accordance with the International Financial Reporting Standards (IFRS). Specifically, these are sales growth, earnings per share, profit or loss for the period as well as cash flow before financing activities.
In addition, METRO is managed on the basis of alternative performance indicators such as like-for-like sales growth in local currency, EBIT before special items, EBITDA before special items (as of 2017/18 due to reporting discontinuation of special items: EBIT reported and EBITDA reported), investments, net working capital, net debt, free cash flow and free cash flow conversion and return on capital employed (RoCE). We believe that these alternative performance indicators offer our stakeholders additional useful information about fundamental business developments and METRO’s current situation, providing a better foundation for an analysis of METRO’s performance strength. These alternative performance indicators are calculated regularly based on a uniform approach, which ensures that metrics from different financial years can be compared. However, as they have not been defined on the basis of IFRS, direct comparisons with the key figures of other companies are not possible. As such, they cannot replace key figures calculated in accordance with IFRS.
Formally, it should be noted that the EBIT key figure in financial year 2017/18 is no longer part of the forecast report, but is still a key performance indicator. It is replaced by EBITDA. This is based on specifications of German Accounting Standard No. 20 (GAS 20), which stipulates that only the most meaningful key performance indicators are part of the outlook and the comparison with actual business developments in the following year that is based on this outlook. The outlook regularly applies to the current group structure on the date the forecast is issued.
Key performance indicators: earnings position
As a key operational performance indicator, sales growth is reported both as total sales in euros and in local currency as well as like-for-like sales in local currency. Adjustments to group structures are called portfolio measures and are explained separately.
The like-for-like sales development reflects sales growth in local currency on a comparable area or with respect to a comparable group of locations or merchandising concepts such as delivery and online business. The figure only includes sales of locations with a comparable history of at least one year. Accordingly, sales from locations that were opened or closed in the reporting year or in the comparison year must be excluded from consideration. In addition, sales locations are excluded if their business operations have been materially affected by, for example, a change in selling space as a result of transformation or other changes in concept or if the sales are subject to other material external distortions. Delivery sales are included in like-for-like sales growth, provided that the location is part of the panel in question or the warehouse does not primarily serve new customers. Online sales are generally included in like-for-like sales growth. Sales from acquired companies are recognised in like-for-like sales growth after the business operated under our direction for a full financial year.
To enhance its assessments of operational developments, the Management Board also regularly informs itself about the key drivers of sales development, such as the delivery or online business.
- For more information about these special items see chapter 3 economic report – 3.2 asset, financial and earnings position – earnings position.
From financial year 2017/18, the second key performance indicator, in addition to like-for-like sales, will be EBITDA excluding earnings contributions from real estate transactions. This decision has been made in an effort to further improve the transparency of the operative performance of METRO. The development of real estate and the realisation of divestment income will continue to be a central component of our company’s real estate strategy.
Earnings per share and profit or loss for the period are also included in our key performance indicators. They integrate the tax and net financial result into management of the earnings position and enable shareholders to better assess the group’s earnings position.
- For more information about these performance metrics, see chapter 3 economic report – 3.2 asset, financial and earnings position – earnings position.
Performance metrics: financial and asset position
METRO manages its financial and asset position to ensure the long-term liquidity of group companies and cover their funding requirements in a cost-efficient manner.
- For more information about the financial and asset position, see chapter 3 economic report – 3.2 asset, financial and earnings position – financial and asset position.
Key performance indicators include investments which are planned and reported on aggregate group level as well as separately for the sales lines. In addition, the Management Board conducts differentiated assessments of various investments (for example, expansion, delivery, IT/digitisation, modernisations and refurbishments) with a view to enhancing customer value and METRO’s company value. Investments are defined as additions to non-current assets and finance leases based on the consolidated financial statements pursuant to IFRS with the exception of financial instruments and deferred tax assets.
Aside from the focus on investments, regular net working capital analyses are carried out to maintain a focus on operations and optimised capital deployment. Changes in net working capital result from changes in inventories, trade receivables and receivables due from suppliers included in the item other financial and non-financial assets. Furthermore, it includes changes in trade liabilities.
- For more information about the composition of net working capital, see the notes to the consolidated financial statements in no. 41 – notes to the cash flow statement.
Investments and net working capital not only impact customer benefits and the company’s value creation, but also have an effect on the company’s indebtedness and financial position. Moreover, net debt and cash flow before financing activities are used as key performance indicators to guarantee liquidity and optimise the capital structure.
Net debt is calculated by offsetting financial liabilities including finance leases against cash and cash equivalents according to the balance sheet as well as financial investments. Financial investments comprise bank deposits with residual terms of more than 3 to 12 months as well as near money market investments that are not classified as cash and cash equivalents, such as short-term, liquid debt instruments and shares in money market funds.
In addition, free cash flow conversion is analysed as a measure of the group’s ability to translate generated earnings into cash inflows. Free cash flow conversion reflects the relationship between free cash flow and EBITDA. Free cash flow in turn is defined as EBITDA less investments (excluding acquisition of subsidiaries and extension of finance leases) plus the change in net working capital.
- For more information about these performance metrics, see chapter 3 economic report – 3.2 asset, financial and earnings position – financial and asset position.
Value-oriented performance metrics
Since METRO’s management system is strongly focused on value creation for the company, it also comprises value-oriented performance metrics such as return on capital employed (RoCE), which is based on the above-mentioned operational key performance indicators.
- For more information about these key performance indicators, see chapter 3 the economic report – 3.2 asset, financial and earnings position – earnings position.