2.2 Management system
METRO’s strategic focus on creating additional customer value for the wholesale business and the objective of sustainably increasing the value of our company are also reflected in our internal management system. We use the key performance indicators described in the following for the planning, management and control of our business activities. Selected key performance indicators of our management system (like-for-like sales growth, EBITDA and Return on Capital Employed) form the basis for the Management Board’s variable remuneration component.
The focus of the group’s operational management is on those value drivers that have a direct effect on the medium- and long-term corporate objectives and are directly related to the strategy.
The first important key performance indicators for METRO are exchange rate-adjusted sales growth (as a total figure and a like-for-like figure) and the EBITDA excluding earnings contributions from real estate transactions. Our management system also makes use of other significant performance indicators, which are explained in the following.
Key performance indicators describing the earnings position
The first of our most important key performance indicators for our operational business is the exchange rate-adjusted sales growth (respectively as a total figure and a like-for-like figure). The like-for-like sales growth represents the sales growth measured in local currency generated on a comparable selling space or in relation to a comparable panel of locations or merchandising concepts, such as online shopping and delivery. The figure only includes sales of locations with a comparable history of at least 1 year. It follows that revenues generated by locations that were affected by openings, closures, significant redevelopment works or other conceptual changes in the reporting year or the comparison year are excluded from the analysis.
The second of our most important key performance indicators, in addition to sales growth was introduced in financial year 2017/18 and is the EBITDA excluding earnings contributions from real estate transactions. This key performance indicator gives transparent account of METRO’s operational performance. The development of real estate assets and the proceeds from divestments nevertheless remain core components of the group’s real estate strategy.
In light of the strategic portfolio streamlining and the corresponding focus on the wholesale business, METRO is implementing the following changes: starting with financial year 2019/20, METRO will present the business result and the situation of the group without accounting for transformation costs that will result from certain one-time expenses in connection with the efficiency measures.
Other important key performance indicators of METRO are the profit or loss for the period and the earnings per share. These key performance indicators ensure that the tax and net financial result are given consideration in addition to the operational result and thereby allow for a holistic assessment of METRO’s earnings position from the perspective of the shareholders.
Key performance indicators relating to the financial and asset position
The management of METRO’s financial and asset position aims at sustainably assuring liquidity and arranging cost-effective sources for the financing requirements of our subsidiaries.
The key performance indicators used in this area also include the investments, which are planned, reported and audited both in aggregate for the group as well as separately for the segments. Investments are defined as additions to non-current assets (excluding financial instruments and deferred tax assets).
Another focal point in the area of the financial and asset position are regular analyses of the net working capital, which are carried out for the purpose of managing the operational business and capital deployment. Developments in net working capital over time result from changes in stock inventories, trade receivables and trade liabilities. Receivables due from suppliers are recognised in the items other miscellaneous financial assets and non-financial assets.
The net debt and the cash flow before financing activities are also used as key performance indicators to manage METRO’s liquidity and capital structure. The net debt results from the balance of financial liabilities (including finance leases), cash or cash equivalents and short-term financial investments.
METRO also analyses the free cash flow conversion to measure the group’s success in transforming the generated income into cash inflows. The free cash flow conversion results from the ratio between the simplified free cash flow and the reported EBITDA. To determine the free cash flow conversion, the free cash flow results from the reported EBITDA less cash-effective investments (excluding finance leases and mergers and acquisitions) +/- changes in net working capital.
Value-oriented key performance indicators
The key performance indicator Return on Capital Employed (RoCE) is still used to assess the operational business. This key figure measures the Return on Capital Employed (RoCE = EBIT / average capital employed) in a certain period under review and also allows for an assessment of the performance of the group’s individual segments.
The resulting RoCE is then benchmarked against the respective segment-specific cost of capital before taxes, which represents a minimum yield on the employed capital at market rates and is based on capital market models.
METRO also frequently uses value-oriented key performance indicators to assess both prospective and past investments. METRO uses the discounted cash flow method, the key figure economic value added (EVA) and other liquidity-oriented key performance indicators such as the amortisation period to form its investment-related decisions.
As of financial year 2019/20, METRO AG will apply the accounting standard IFRS 16 (Leases), which will be introduced retrospective in its entirety.
In the future, this accounting standard will affect various key performance indicators, such as ‘earnings before deduction of interest, taxes, depreciation and amortisation (EBITDA)’, ‘net debt’, ‘cash flow before financing activities’ and ‘Return on Capital Employed (RoCE)’. A complete overview of the adaptation of the earnings in financial year 2018/19 in accordance with IFRS 16 will be provided in January 2020.