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

Overview of financial year 2018/19 and outlook of METRO AG

As the management holding company of the METRO group, 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 key 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. The METRO AG 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) are outlined below.

Earnings position of METRO AG and profit appropriation

Income statement for the financial year from 1 October 2018 to 30 September 2019 in accordance with the German Commercial Code

€ million

2017/18

2018/19

Sales revenues

434

393

Other operating income

315

387

Cost of services purchased

−53

−51

Personnel expenses

−126

−139

Depreciation/amortisation/impairment losses on intangible and tangible assets

−55

−66

Other operating expenses

−427

−571

Investment result

202

293

Net financial result

−51

−5

Income taxes

−6

−2

Earnings after taxes

233

239

Other taxes

3

−2

Net profit or loss

236

237

Retained earnings from the previous year

47

29

Income from capital reduction

0

0

Balance sheet profit

283

266

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

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 costs for services purchased, other operating expenses and depreciation/amortisation. METRO AG acts as a centralised licensor for its subsidiaries with respect to its METRO and MAKRO brands as well as its products.

Services are billed at arm’s-length prices. Under the transfer pricing model, the national and international companies of METRO Wholesale were billed approximately €550 million in licensing and service fees in financial year 2018/19.

€393 million in settlement amounts received by METRO AG were recognised as sales in the reporting period. They are broken down into €299 million concerning settlement amounts received in the form of licensing fees for the METRO and MAKRO brands as well as €94 million relating to IT and business services rendered to the wholesale subsidiaries. The reason for the decline in sales revenues of approx. €40 million is the earnings development in Russia as well as Eastern Europe, since the licensing fees for the use of the METRO and MAKRO brands are based on earnings. These effects could not be fully offset by the positive earnings development in Western Europe.

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

This item also includes exchange rate gains of €60 million. The offsetting expenses resulting from exchange rate losses incurred as part of natural hedging at group level were incurred by one subsidiary and are thus included in the profit transfers at METRO AG. To perform its function as a central management holding company, METRO AG has subcontracted service performances which predominantly relate 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 item sales revenues, the corresponding amounts have been recognised in the item cost of services purchased.

On average during the 4 quarters of financial year 2018/19, METRO AG employed 855 people. Part-time employees and temporary workers were converted into full-time equivalents. Despite a lower number of employees, personnel expenses were higher than in the due to higher performance-based remuneration components.

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

Other operating expenses consist of expenses incurred by METRO AG in exercising its function as a management holding and concern costs for services subcontracted to companies both within and outside of the group.

For financial year 2018/19, METRO AG posted an investment income of €293 million. Profit and loss transfer agreements with other group companies accounted for revenues in the amount of €1,160 million. It includes the release of reserves received from an indirectly held subsidiary. Losses were absorbed in the amount of €472 million. These losses predominantly result from the segment Real. The income from investments without profit and loss transfer agreements amounted to €89 million in financial year 2018/19 and was predominantly attributable to the group’s real estate companies and the foreign subsidiaries.

In the reporting period impairment losses of €484 million were made on investments in affiliated companies.

The net financial result amounted to €−5 million.

The net profit or loss for the year comes in at €237 million. Including retained earnings from the previous year in the amount of €29 million, the company’s balance sheet profit amounted to €266 million.

Regarding the appropriation of the balance sheet profit for 2018/19, the Management Board of METRO AG will propose to the Annual General Meeting to distribute from the reported balance sheet profit of €266 million a dividend in the amount of €0.70 per ordinary share and €0.70 per preference share – that is, a total of €254 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 €44 million. This item essentially includes bank deposits through cash pool income from the towards the end of the reporting period.

Capital structure

Equity and liabilities

€ million

30/9/2018

30/9/2019

Equity

 

 

Share capital

363

363

Capital reserve

6,118

6,118

Balance sheet profit

283

266

 

6,764

6,747

Provisions

371

451

Liabilities

 

 

Bonds

2,898

2,288

Liabilities to banks

259

262

Liabilities to affiliated companies

7,007

8,380

Miscellaneous liabilities

71

81

 

10,235

11,011

Deferred income

19

12

 

17,389

18,221

Liabilities consist of equity in the amount of €6,747 million and provisions, liabilities and deferred income in the amount of €11,474 million. The equity ratio as of the closing date was 37.0%. Provisions as of the closing date totalled €451 million. Liabilities consist of €2,288 million in bonds and €262 million in liabilities to banks. The balance sheet also reports liabilities to affiliated companies in the amount of €8,380 million. In addition to short-term financial investments made by METRO companies, they predominantly concerned liabilities from structuring measures under corporate law.

Asset position of METRO AG

Assets

€ million

30/9/2018

30/9/2019

Non-current assets

 

 

Intangible assets

1,001

939

Tangible assets

2

3

Financial assets

9.157

9,005

 

10.160

9,947

Current assets

 

 

Receivables and other assets

6,882

8,218

Cash on hand, bank deposits and cheques

335

44

 

7,217

8,262

Deferred income

12

12

 

17,389

18,221

As of the closing date, METRO had total assets of €18,221 million, which are predominantly comprised of financial assets in the amount of €9,005 million, receivables from affiliated companies at €8,214 million and the usufructuary rights to the METRO and MAKRO brands which were recognised as an intangible asset (€883 million). Cash on hand, bank deposits and cheques amounted to €44 million. The financial assets predominantly consist of shares held in affiliated companies in the amount of €8,964 million which are essentially comprised of shares in the holding for wholesale companies (€6,693 million), in real estate companies (€1,278 million), in service providers (€470 million) and in other companies (€523 million). The financial assets account for 49.4% of the total assets. Receivables from affiliated companies amount to €8,214 million. This corresponds to 45.1% of the total assets. This position contains €6,117 million in receivables from a group-internal transfer of shares in affiliated companies at their carrying values and predominantly reflects the short-term financing requirements of the group companies as of the closing date.

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 the METRO group. This is why the summary of the risk situation of METRO AG issued by the company’s management also reflects the risk situation of the METRO group.

Outlook 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. We assume that possible one-off charges from the announced efficiency program can be offset by ongoing cost savings as well as changes in investment results. Accordingly, we expect that net profit or loss for the coming financial year 2019/20 will return to a level comparable to that of 2018/19 (€237 million).

Planned investments of METRO AG

In the context of 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, summarised in the corporate report, pursuant to § 289f of the German Commercial Code (HGB) and § 315d of the German Commercial Code (HGB) is permanently and publicly available on the company’s website (www.metroag.de/en) in the section Company – Corporate Governance.

Wholesale, METRO Wholesale
The METRO Wholesale segment comprises the METRO Wholesale sales line of METRO AG with 678 wholesale stores across 34 countries worldwide. This also includes the delivery business (Food Service Distribution) with the METRO delivery service and companies like the delivery specialists Classic Fine Foods, Pro à Pro and Rungis Express.
Glossary
Own brands
Trademark-protected brand-name products developed by a retail company with an attractive best price/performance ratio.
Glossary
Previous year
Period of 12 months, usually cited as reference for statements in an annual report.
Glossary
Wholesale, METRO Wholesale
The METRO Wholesale segment comprises the METRO Wholesale sales line of METRO AG with 678 wholesale stores across 34 countries worldwide. This also includes the delivery business (Food Service Distribution) with the METRO delivery service and companies like the delivery specialists Classic Fine Foods, Pro à Pro and Rungis Express.
Glossary
Sales line
Part of a retail company that operates outlets or stores with a specific merchandising concept.
Glossary
Governance
Statutory and factual regulatory framework for the management and supervision of a company.
Glossary