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

Overview of financial year 2019/20 and outlook of METRO AG

METRO AG, in its function as the management holding company of the METRO group, 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 of its subsidiaries and the intra-group dividend policies. In financial year 2019/20, it is particularly noteworthy that the losses from the hypermarket business up to its disposal and the results of the disposal itself have been taken into account in the Annual Financial Statements of METRO AG, while the capital gains from the sale of METRO China were essentially incurred at the level of an intermediate holding company based abroad. No decision has yet been made on the appropriation of the profits of this intermediate holding company and of other operating companies. In this respect, the Annual Financial Statements of METRO AG technically show a high and unanticipated net loss for the year, although the liquid funds from the disposal of the majority stake in METRO China have already accrued to METRO’s cash pool. Since the Annual Financial Statements of METRO AG prepared under German commercial law serve as the basis for dividend distribution, a withdrawal was made from the capital reserves in order to generate the balance sheet profit required for the proposed dividend payment. While the proposed dividend is generally based on the earnings per share reported in the consolidated financial statements, the income statement and balance sheet from the Annual Financial Statements of METRO AG are prepared in accordance with the regulations stipulated by the German Commercial Code (HGB) as outlined below.

Earnings position of METRO AG and profit appropriation

METRO AG essentially serves as a licensor and service provider for the operational METRO national subsidiaries and settles them using the transfer pricing system.

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 current and, temporarily, also for its former subsidiaries with respect to its METRO and MAKRO brands as well as its own-brand products.

Revenue €358 million in settlement amounts received by METRO AG were recognised as sales in the reporting period. They are broken down into €250 million for settlement amounts received in the form of licensing fees for the METRO and MAKRO brands as well as €108 million relating to IT and business services. The reason for the decline in sales is the earnings development in Western Europe, which was impacted by Covid-19, since the licensing fees for the use of the METRO and MAKRO brands are mainly based on earnings. Increased licence fees in Eastern Europe (excluding Russia) and Asia could only partially offset this effect.

The item other operating income consists mainly of settlement amounts from subsidiaries that are not classified as sales. The increase compared to the previous year mainly relates to risk provisions that are no longer required for the settlement of licensing fees in certain countries (reversal of provisions) and one-off income in connection with the disposal of METRO China and the hypermarket business (miscellaneous other operating income).

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 2019/20, METRO AG employed 796 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 previous year due to higher restructuring expenses.

Impairment losses in the amount of €40 million are attributable to amortisation of the usage rights to the METRO and MAKRO brands and the remainder to scheduled depreciation of other assets.

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. The increase compared to the previous year is mainly due to higher currency losses and higher risk provisions for the settlement of licensing fees in various countries.

For financial year 2019/20, METRO AG posted an investment result of €−527 million. Profit and loss transfer agreements with other group companies accounted for revenues in the amount of €219 million. Losses were absorbed in the amount of €252 million. These losses predominantly result from the hypermarket business (Real). The income from investments without profit and loss transfer agreements amounted to €352 million in financial year 2019/20 and was attributable to the group’s real estate companies. In the reporting year, depreciation in shares in affiliated companies in the real estate sector amounted to €624 million, mainly as a result of impairment losses following dividend distributions. In addition, the sale of the hypermarket business resulted in a disposal loss of €222 million.

The net financial result amounted to €−34 million, mainly due to a reduced net interest result.

The net loss for the year comes in at €−815 million. Including retained earnings from the previous year in the amount of €11 million and the withdrawal of €1,070 million from the capital reserve, the company’s balance sheet profit amounted to €267 million.

Regarding the appropriation of the balance sheet profit for 2019/20, the Management Board of METRO AG will propose to the Annual General Meeting to distribute from the reported balance sheet profit of €267 million a dividend in the amount of €0.70 per ordinary share and in the amount of €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 €1,083 million. This item essentially includes bank deposits through cash pool income from the subsidiaries towards the end of the reporting period.

Capital structure

Liabilities consist of equity in the amount of €5,678 million and provisions, liabilities and deferred income in the amount of €5,702 million. The equity ratio as of the closing date was 49.9%. Provisions as of the closing date totalled €702 million. Liabilities consist of €2,071 million in bonds and €60 million in liabilities to banks. The balance sheet also reports liabilities to affiliated companies in the amount of €2,663 million. They mainly relate to short-term financial investments of subsidiaries. The balance was significantly reduced due to a reconciliation of receivables and liabilities within the group.

Asset position of METRO AG

As of the closing date, METRO had total assets of €11,380 million, which are predominantly comprised of financial assets in the amount of €8,147 million, receivables from affiliated companies at €1,231 million and the usufructuary rights to the METRO and MAKRO brands which were recognised as an intangible asset (€840 million). The financial assets predominantly consist of shares held in affiliated companies in the amount of €8,141 million which are essentially comprised of shares in the holding for wholesale companies (€6,731 million), in real estate companies (€670 million), in service providers (€519 million) and in other companies (€221 million). The reduction resulted from the divestment of the hypermarket business as well as through the disposal of shares and through dividend distribution-related impairments. The financial assets account for 71.6% of the total assets. Receivables from affiliated companies amount to €1,231 million. This corresponds to 10.8% of the total assets. This item mainly reflects the short-term financing requirements of group companies as of the closing date. Cash on hand, bank deposits and cheques amounted to €1,083 million, the increase being largely due to the payments received from corporate transactions.

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. In light of the ongoing Covid-19 pandemic, we anticipate that lower licence income from subsidiaries will be offset by ongoing cost savings as a result of the implemented efficiency programme as well as changes in investment results. Accordingly, we expect that a positive net profit will be reported again in the coming financial year 2020/21.

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 governance 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.