Letter to the shareholders

Financial year 2017/18 saw us making significant progress on our way to completely focusing on the wholesale business and we have achieved quite a lot. We have made significant progress in many areas but also had to overcome a number of unexpected challenges. Change and progress are crucial for the future viability of our company. We have come very far in our transformation of METRO AG into a reliable partner for small and medium-sized hospitality and retail businesses. This project will continue, and we look forward to many future achievements with our customers, our partners and our unparalleled team.

During the past financial year, we were able to slightly increase like-for-like sales and EBITDA excluding earnings contributions from real estate transactions adjusted for currency effects also improved a little. We achieved this despite considerable negative macroeconomic volatility in individual markets, such as Russia. The re-evaluation of market conditions in Russia and the inevitable termination of the agreement between Real and Verdi forced us to correct our outlook in April 2018. This was a painful decision that cost us capital market confidence. Thanks to the measures initiated for our Russian business, we were able to prove in the second half of the year that we can tackle and solve concrete problems, which has helped us make progress since.

At the end of the financial year, we decided to sell our hypermarket business. This move constitutes an important step in our project of fully focus ourselves to wholesale. We have put in place the best conditions to give Real a successful, independent future on its own. Besides the Food Lover concept and the strong online presence, securing competitive cost structures was an important, groundbreaking step.

We will propose a dividend of €0.70 per share at the Annual General Meeting of METRO AG. This proposed dividend corresponds to 74% of the earnings per share (€0.95) and thus exceeds the payout ratio of 45% to 55% provided for in METRO’s dividend policy. We believe that this is an appropriate deviation that will provide you, dear shareholders, with an attractive dividend yield and dividend continuity following a business year in which we had to adjust our outlook, which has resulted in a negative development of our share price. We want to demonstrate our trust in the future of METRO to you. At the same time, with regard to free cash flow from operating and investing activities as well as net debt in financial year 2017/18 we are in good condition in order to afford such payout. This is also due to the tangible effect of the non-cash-effective goodwill impairment loss at Real on earnings per share. I cordially invite you to our Annual General Meeting on 15 February 2019 in Düsseldorf.

METRO Wholesale

In the wholesale segment, we were able to boost our relevance to independent businesses despite challenging economic conditions. We are continuing our highly pleasing development of the recent past and recording the fifth consecutive year of like-for-like sales growth. Eastern Europe (excluding Russia) and Asia recorded particularly positive developments. We are pleased with the fact that, like-for-like, our core business in Germany grew again in financial year 2017/18. Negative currency effects impair our reported total sales, however.

In financial year 2017/18, we enhanced our profile even further and focused more consistently on the customer groups hotels, restaurants and catering companies (HoReCa) as well as independent traders. By intensifying customer relationships, we were able to significantly increase sales to our recurring customers, especially in the HoReCa sector. This clear focus is paying off. In financial year 2017/18, we achieved like-for-like growth of 3.6% with HoReCa customers, and 4.6% with independent traders¹. Our food sales increased by 1.9%, which emphasises our clear focus on our primary target groups and reduces our dependency on complementary offers. Our focus on the hospitality sector will continue in the years to come. In this area we see a trend, because the hospitality sector is growing and will offer further potential for our customers and us in the future. Favourable economic conditions and higher incomes are changing consumer behaviour in many countries. Both the importance of nutrition and the willingness and necessity to consume food outside the home are growing steadily. In order to take advantage of this positive trend together with our customers, we provide them with a wide product range and needs-based services as a reliable partner, regardless of whether they purchase the products at our stores, through our delivery service, through our customer management or online. The clear focus on our HoReCa customers is also reflected in the modernisation of our store-based business, as can be seen in the reconstruction of the METRO wholesale store at our home base in Düsseldorf. In order to save hospitality operators time for their purchases, the delivery routes were optimised and the product mix was tailored to meet their needs more efficiently.

As mentioned at the beginning, we faced some challenges with METRO Russia last year. In the meantime, we have instituted a largely new management team of long-standing, highly experienced METRO colleagues in Russia who are correcting these developments. With a new, attractive pricing model, we are once again recording volume gains and a slow improvement in the sales trend. The Russian market strongly features independent traders and we are pushing ahead with the expansion of the Fasol franchise concept, which supports them. As a direct result of that strategy, we were recently able to achieve a significant increase in contracts concluded and shops opened at Fasol. Our goal is to have more than 3,000 franchise stores in Russia by 2020. By bundling administrative processes, we can also save costs. With this wide variety of measures, we feel that we are well positioned to secure additional share in the Traders and HoReCa markets in Russia in the future.

The delivery sales of METRO Wholesale continue to expand very dynamically, showing double-digit growth and accounting for 18% of total sales. Among others, this trend is being invigorated by the delivery specialists Classic Fine Foods in Asia, Pro à Pro in France and Rungis Express in Germany and Switzerland. The expansion of the depot networks and out-of-store delivery in the METRO countries also contributed to this delightful development. Our digitalisation initiatives also have a positive effect. With our M-Shop we offer our customers a platform to quickly and easily order goods from us 24 hours a day, 7 days a week. At this stage, we receive 17% of orders online. The driver app used by drivers in our delivery depots improves processes and increases service levels.

The year 2018 was also marked by the realignment of our own-brand product range. The launch of the new own brands METRO Chef, METRO Premium and METRO Professional has aligned our product range even more closely with the requirements of our customers.

In addition, we have rolled out the Net Promoter Score (NPS), which we use to measure customer satisfaction across all stores. The tool allows us to capture customers’ precise points of criticism and suggestions for improvement, remove inefficiencies and thus provide the best possible customer value. Ultimately a higher level of customer loyalty also means a higher percentage of recurring customers with increased purchase of goods.

Digitalisation is opening up whole new possibilities for our customers. During the past few years, we have been working tirelessly on identifying new solutions and validating their added value. We have even dedicated an entire business segment to this endeavour: Hospitality Digital. Here, we develop new concepts with our customers, develop our own applications, pilot them in 5 major cities and collaborate with other technology companies to improve our sustainability and economic efficiency by means of digital solutions. Based on the overwhelmingly positive feedback from our customers and the substantial benefits we are creating for them, we have developed a new platform, dish.co. We use this online platform to market our own solutions, such as digital table bookings and tools for creating a website, alongside applications by other companies. It also allows us to convey information and advertise events that help our customers find their bearings in, and take advantage of the digital world. During the past financial year, we were able to retain more than 100,000 customers digitally. We will continue on this path over the coming years and intensely expand our strategy. This will generate significant benefits for our customers, increase our relevance and customer retention, and help us to acquire new customers. Whole new business opportunities are opening up thanks to digitalisation, and we are working hard to use them to our benefit.

Besides the modernisation of our business models, we are designing future product ranges. In March 2018, we successfully launched our innovation hub NX-FOOD, which we use to promote the development and distribution of new food solutions and concepts in the retail and hospitality sector. We are thereby actively shaping the future of the food industry.

Last but certainly not least, we have intensified our sustainability approach. In the course of the financial year METRO SUSTAINABLE enabled us to demonstrate how we operate as a corporation in order to generate added value for our customers without losing track of our objective of managing resources sustainably and exerting a positive impact on society. As a strong, reliable partner for independent companies along the entire value chain, we want to take responsible steps to do more for the people who are passionately committed to their business on a daily basis. Our actions are guided by the Sustainable Development Goals (SDGs) postulated by the United Nations. We are firmly committed to contributing to their achievement through our corporate activities and our corporation as a value-adding part of the society.

The fact that METRO, as a supporter of small and medium-sized companies, understands the needs of its customers is clearly demonstrated by the new international brand campaign. The slogan ‘Your Success is our Business’ highlights our conception of METRO as always being focused on the success of our customers. The claim can be distilled to a single, essential idea: We don’t work for METRO! We work for our many customers to make them successful. In doing so, we support METRO customers from over 20 countries who serve as brand ambassadors of our campaign.

Real

Real has undergone an intense transformation in recent years. With the Markthalle concept, we have introduced a model that our customers enthusiastically welcome. It combines the staging of fresh produce with integrated themed food experiences, targeting all of the customers’ senses. In our Krefeld store, we are recording an increase of around 30% in sustainable repeat business. With around 80,000 items, we not only offer an outstanding selection of products that is second to none in the German food retail sector, but we also drive innovation and offer our customers new trendy products. In October 2018, we opened another store in Braunschweig that was based on the same design. A third store in Bielefeld will follow in 2019. In addition, we will install modules from the hybrid concept of the Markthalle in about 12 stores.

The development of the online business at Real has also been gratifying. Together with more than 5,000 partners, Real offers more than 12 million items: the largest assortment in the history of our company. Correspondingly, we enjoy great economic dynamism. The gross merchandise value, for example the gross amount of merchandise ordered via the platform, grew by more than 90% to €380 million in financial year 2017/18. This makes us one of the fastest-growing online marketplaces in Germany. We also want to link our e-commerce activities even more closely with store-based retail. Customers can use the platform Real.de to order items to be sent to their nearest Real store and pick them up at that location. In addition, we are testing the delivery of food ordered online in 15 cities, which would enable us to reach around 13 million households.

We have also begun to rectify the significant competitive disadvantages caused by the high personnel expenses of Real compared to other food retailers. Meanwhile, Real has already hired more than 3,000 new employees under a new, competitive wage structure. Our existing employees will enjoy a grandfather clause and not suffer any wage reduction.

The concept of the Markthalle, the growing online business and competitive cost structures create the prerequisites for an increase in the value of Real. My Management Board colleagues and I decided on 13 September 2018 to initiate a sales process for Real. METRO will focus entirely on the wholesale business. We see great opportunities for economic development in that sector for both Real and METRO Wholesale.

Outlook

Financial year 2017/18 was overall successful. METRO increased like-for-like sales by 0.7% in financial year 2017/18. At €36.5 billion, reported sales were 1.7% lower than in the previous year due to negative currency exchange rate developments. The EBITDA excluding earnings contributions from real estate transactions totalled €1,396 million. Adjusted for currency effects, the EBITDA excluding earnings contributions from real estate transactions was €16 million higher than in the previous year. METRO has achieved its adjusted targets for financial year 2017/18.

The hypermarket business for sale is reported as a discontinued operation as of 30 September 2018 due to the ongoing sales process. The outlook for financial year 2018/19 will refer to continuing operations only.

In financial year 2018/19, we are expecting a total sales growth and increase in like-for-like sales by 1–3%, assuming stable exchange rates and no portfolio adjustments. This growth will be particularly driven by Eastern Europe (excluding Russia) and Asia. For Russia, a measurable trend improvement is expected.

For its earnings, METRO expects the EBITDA excluding earnings contributions from real estate transactions to decrease by 2–6% on the figures of reporting year 2017/18 (€1,242 million). This is due to higher investments in the fields of IT and Digital and an anticipated further decrease in earnings in Russia due to the macroeconomic challenges. For all other segments, METRO expects an EBITDA on the previous year’s level.

After financial year 2017/18, which has been full of excitement and changes, I would especially like to extend my heartfelt thanks to my colleagues. Through their commitment, METRO has evolved into a modern enterprise, allowing it to focus on its core business, tackle new challenges and think beyond the boundaries of the business model. Through personal customer service, our dedicated employees ensure that our customers are also more satisfied. Our annual employee survey shows that we have made great progress in this area. At 78%, this year marked the highest employee engagement index ever recorded in the history of METRO. The average in the retail and wholesale sector is 63%.

Dear shareholders, after a year filled with challenges I want to express my deepest gratitude for your continued trust and confidence. I can assure you: everything we were able to achieve in financial year 2017/18 is not enough. We will continue to remain inquisitive and work diligently to better serve our customers’ needs and build trusting relationships with them. In other words, we will continue to be on the move.

Yours truly,

Olaf Koch
Chairman of the Management Board of METRO AG

¹ Trader countries: Bulgaria, India, Pakistan, Poland, Romania, Serbia, Slovakia, Czech Republic.