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

Overview of financial year 2016/17 and outlook of METRO AG

As the management holding company of METRO, METRO AG is highly dependent on the development of METRO 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 regulations stipulated by the German Commercial Code (HGB) in the German Accounting Directive Implementation Act (BilRUG) version are outlined below.

The financial figures of METRO AG for financial year 2016/17 have to a large extent been shaped by the transactions (demerger and spin off) associated with the demerger of the former METRO GROUP (now: CECONOMY AG) into 2 independent listed companies. A comparison of these financial figures with the previous year's figures for the former METRO Wholesale & Food Specialist GmbH, which has transformed into a public limited company in November 2016, as the absorbing entity (now: METRO AG), is therefore of limited meaningfulness. For the sake of facilitating the comparability, benchmarking information on the balance sheet items and income statement items are provided. This information represents the business segment acquired as a result of the demerger and spin off.

Application of the BilRUG commenced with financial year 2016/17 and predominantly affects the annual financial statements of METRO AG by extending the definition of sales revenues. This resulted in a partial reallocation of other operating income to sales revenues, which are now recognised in the income statement for the first time. In the previous year, MWFS GmbH did not generate any sales revenues that would fall under the definition of the German Accounting Directive Implementation Act.

Earnings position of METRO AG and profit appropriation

Under the transfer pricing system, METRO AG essentially serves as a licensor and service provider for the operational national subsidiaries of the METRO Wholesale segment.

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 expenses for service purchased, 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 transfer pricing model, the national and international companies of the METRO Wholesale segment were billed approximately €541 million in licensing and service fees in financial year 2016/17.

The introduction of the German Accounting Directive Implementation Act (BilRUG) resulted in the recognition of €427 million in settlement amounts of METRO AG that fall under the extended definition of sales revenues for the first time in the reporting year. These positions amount to €334 million concerning settlement amounts received in the form of license fees for the METRO and MAKRO brands, as well as €93million relating to IT and business services rendered to the wholesale subsidiaries.

The item other operating income consists mainly of settlement amounts from subsidiaries that are not classified as sales revenues.

To perform its function as a central management holding company, METRO AG has subcontracted service performances, which predominantly related to costs of marketing and IT services, to subsidiaries as well as third-party companies. To the extent such expenses are related to settlement payments recognised in the sales revenues item, the corresponding amounts have been recognised in the item costs of services purchased.

On average during the 4 quarters of financial year 2016/17, METRO AG employed 914 people. Part-time employees and temporary workers were converted into full-time equivalents. The personnel expenses include special payments in the amount of €11 million. The personnel expenditure incurred in the business segments acquired in the context of the demerger have remained on the same level as in the previous year.

Depreciation expenses in the amount of €40 million resulted predominately from scheduled depreciation on the usufructuary rights to the METRO and MAKRO brands.

For financial year 2016/17, METRO AG posted investment income of €254 million. Profit and loss transfer agreements with other group companies accounted for earnings in the amount of €381 million and assumption of losses in the amount of €−159 million. The income from investments without profit and loss transfer agreements amounted to €66 million in financial year 2016/17, which were predominantly attributable to the group’s real estate companies and the foreign subsidiaries of the METRO wholesale segment. The increase was essentially caused by the release of reserves received from an indirectly held subsidiary. Expenses from loss absorption are essentially attributable to the Real sales line. Domestic investments held by the Real sales line were depreciated in the amount of €8 million in the reporting year. Losses from the disposal of a foreign service company were recognised in the amount of €26 million. On the basis of the current post-demerger shareholding structure, the comparable return on investment in the previous year amounted to €68 million.

The net financial result amounted to €−44 million.

The net profit amounts to €130 million.

Including revenue from capital reduction in the amount of €172 million, the company’s balance sheet profit amounted to €302 million.

Concerning the appropriation of the balance sheet profit for 2016/17, the Management Board of METRO AG proposes to the Annual General Meeting to distribute a dividend in the amount of €0.70 per ordinary share and €0.70 per preference share – that is, a total of €254 million – from the reported balance sheet profit of €302 million and to carry forward the remaining amount to the new account.

Financial position of METRO AG

Cash flows

As of the closing date, cash on hand amounted to €305 million. This item essentially includes bank deposits through cash pool income from the sales lines towards the end of the reporting period. No significant liquid funds have been acquired in the context of the demerger.

Capital structure

Liabilities consist of equity of €6,783 million and provisions, liabilities and deferred income of €10,954 million. As of the closing date, the equity ratio amounted to 38.2%. Provisions as of the reporting date totalled €401 million. Liabilities consist of €2,505 million in bonds and €70 million in liabilities to credit institutions. Liabilities to affiliated companies amounted to €7,900 million. These essentially consist of structuring measures under corporate law in the amount of €7,447 million and liabilities from short-term financial investments of METRO group companies.

Asset position of METRO AG

As of the closing date, assets totalled €17,737 million and were mostly comprised of financial assets in the amount of €15,270 million, receivables from affiliated companies at €1,116 million and the usufructuary brand rights to the METRO/MAKRO brand, which was recognised as an intangible asset during the financial year (€963 million). Cash on hand, bank deposits and cheques amounts to €305 million. The financial assets predominantly consist of shares held in affiliated companies in the amount of €15,223 million, which are essentially comprised of shares in the intermediate holding company for companies that come under the segment METRO Wholesale (€6,348 million) and shares in METRO Gross- und Lebensmitteleinzelhandel Holding GmbH (€6,118 million). This item also contains shares in METRO Dienstleistungs-Holding GmbH recognised at a carrying amount of €802 million, in the intermediate holding company for companies that come under the sales line Real (€645 million), as well as the limited partnership interest in METRO PROPERTIES GmbH & Co. KG (€713 million). The demerger has resulted in the addition of financial assets with a carrying amount of €7,869 million. The financial assets now constitute 86.1% of the total assets. Receivables from affiliated companies amount to €1,116 million. This item reflects the group companies’ short-term financing requirements as of the closing date and corresponds to 6.3% of total assets.

Risk situation of METRO AG

As METRO AG is closely engaged with the companies of the 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. 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, we expect that in the next financial year 2017/18, the company’s net profit will reach a level that will be twice as high as in financial year 2016/17.

Planned investments of METRO AG

In the context of the METRO’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) and § 315 Section 5 of the German Commercial Code (HGB) is permanently and publicly available on the company’s website in the section Company – Corporate Governance.

Declaration 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 has issued a report about its relationships to its dependent companies for financial year 2016/17 and issued the following final declaration:

“The Management Board of METRO AG declares that, according to the circumstances known to it at the time the legal transactions were conducted or measures were taken, the company received a compensation at arm’s length for each legal transaction conducted during the reporting period and was not put at a disadvantage as a result of said measures. No other measures subject to mandatory disclosure were taken in the reporting period from 1 October 2016 to 12 July 2017.”