Metro AG Q2 2010 Earnings Call Transcript

| About: Metro AG (MTAGF)

Metro AG (MEO) Q2 2010 Earnings Call August 2, 2010 2:30 AM ET


Dr. Eckhard Cordes - Chairman, CEO and CHRO of Metro Ag

Olaf Koch - CFO


John Kershaw - Merrill Lynch

Jaime Vazquez - Santander

Fabienne Caron - Bryan, Garnier & Co

James Collins - Deutsche Bank

Sreedhar Mahamkali - Macquarie

Volker Bosse - UniCredit

Matthias Eifert - MainFirst



Ladies and gentlemen, good morning and welcome to the Metro Group's Q2 Conference Call. A recording and podcast of this conference call, including the Q&A session, are available on our website shortly after the call ends.

Now, I will hand you over to your host today, Dr. Eckhard Cordes. Please go ahead, sir.

Dr. Eckhard Cordes

Good morning and welcome to the presentation of Metro Group's second quarter results. Joining me today are Olaf Koch and Henning Gieseke as usual. I would take you through the results from the Group and divisional perspective. Afterwards, Olaf will talk about the financial and we will finish up with the Q&A session.

Ladies and gentlemen, in light of the still very challenging training conditions across many different European countries, we have seen an all-in-all satisfactory performance; one, that is on the whole in line with our expectations.

The Group once again reported profitable growth. The sales in the first six months are growing by nearly 2.5% and earnings by more than €60 million which equals an increase of nearly 17%.

As we have told you already, our sales in the first trimester drove the first really comparable period after the Easter business, was stable in local currency. Beginning of the quarter, sales suffered due to the unseasonably cold weather. However, May and June showed moderate growth again but trading in June was supported by the World Cup. So all together, the monthly underlying sales trend seems to be gradually improving.

Germany, second quarter sales in our food businesses were affected by both, the easy shift and the still fractious absence of food price inflation. They continued to see price cuts dictated by harshest comments in many categories, which did not lead to notable volume increases for the discounters. Against this backdrop, our food divisions held up well.

With regards to the German non-food business, Media Markt and Saturn sales profited as expected from extensive marketing campaign centers around the World Cup.

In Western Europe, sales trends continue to stabilize and we saw an overall good performance. Especially the high revenue countries, Italy and Spain, which account for around 35% of regional sales showed resilient numbers in the second quarter regardless of the whole PIGS discussion.

As expected, trading in Eastern Europe continues to remain tough also in the second quarter and once again non-food sales, they were under pressure the most. Sales in Poland were impacted by the week of national mourning and by the flood.

In Romania, consumers were already holding back in light of austerity measures. However, one highlight in the second quarter is definitely the development team in Russia. Here our divisions reported very encouraging numbers, hinting to a gradual improvement.

The Metro Cash & Carry, the like-for-like sales trends improved remarkably. Principally, the countries in this region can be clustered into three rough groups. First resource-rich, second, manufacturing-heavy and third, deficit-burdened.

The resource-rich group include Russia, Turkey and the Ukraine and is, let's say well underpinned with natural resources. And here we saw an improved trend in the second quarter.

Manufacturing-heavy group has a sound industrial base. It's structurally solid and includes Poland, the Czech Republic and Slovakia. Here recovery is just a question of time.

The deficit-burdened group comprises Greece, Hungary and Romania which have weak fiscal positions and initiative austerity measures on the back of political turbulence and overall international funding requirement. Here we must carefully observe the development and recovery may take longer here.

Asia continues to run to our satisfaction and recorded double digit sales growth. China is growing quarter-by-quarter from strength-to-strength.

So basically our economic assumptions in March still hold true. The recovery is on its way, but it will take some time.

Our Shape program on the other hand is gaining further traction. It continues to enlarge our entrepreneurial flexibility and lessens the need for macro support for our businesses going forward. Our Shape program remains fully on check and contributed more than €100 million to our second quarter earnings.

We have already achieved a lot in fundamentally changing Metro, a year ago, with the soft most infrastructures predominantly in procurement. Today, our divisions are fully in charge of their whole supply chain and this without any loss of significant buying power.

Our largest division Metro Cash & Carry is now run with a more customer-centric approach in two separate business units. Backorders in Dusseldorf have been integrated, streamlined and made more efficient in the shortest possible time and to streamline our organization further in the coming months including IT.

All-in-all, we've initiated a significant chunk of our targeted Shape cost-saving measures in the fields of store operations, headquarters and supply chain. But ladies and gentlemen, it's not all about cost saving, we are making progress, also towards meeting our productivity gains target.

Restructuring programs are well underway in particular at Metro Cash & Carry and Real in Germany and promised substantial earnings report in the future.

Our revised private label strategy across all divisions is very well received by customers. Sales are up in nearly all divisions. Also, Media Markt and Saturn is launching their first product ranges in the run-up to Christmas. Our new business models are developing well, especially the fast growing delivery services at Metro Cash & Carry. And also the piloted multi-channel approach at Media Markt and Saturn is receiving good customer response. Real too has a non-food webshop in Germany up and running today.

Our assortments and our services are more attractive and much more customer orientated than ever before. These are the first results coming from Shape which clearly put Metro on track to becoming a more efficient and more profitable retailer. Based upon the sound progress our Shape program is making and an unchanged cautious set of macroeconomic assumptions, we have decided to increase our investment budget for this year. We are now expecting a CapEx of around €2.1 billion, which would almost equal our pre-crisis CapEx level. Both Asia and Eastern Europe will profit from the increase in investment budget and see additional new store openings this year.

We have seen a good development in July and we remain fully on track to meet our sales and earnings target in 2010. Assuming Shape continues to progress according to schedule, we are confident that EBIT will come in on the pre-crisis level of 2008 of around €2.2 billion. This presumes that the macroeconomic environment in the second half will not significantly deteriorate and with regards to our H2 and despite some bearish macroeconomic comments we remain cautiously optimistic.

Let's now dive into the division. At Metro Cash & Carry in Germany, the turnaround program is well underway. At our Munich fieldtrip, we already highlighted the way going forward.

Various pillars to the turnaround include a store network optimization with three mall links and a number of store disposals and as well integrating the Schaper business. On top we've also made significant progress with regards to our operational lessons learned in particular from the concept stores.

We are currently strengthening our futures. I ask something which has been long overdue. We are extending our private label ranges and delivery services and we are building up the necessary competent in non-food.

One of the main lessons learned from the concept stores, was improving our destination category sales nationwide. Here, our business picked up significantly. Sales in categories key for our HoReCa customers, such as food and veg, meat, fish and dairy have in some cases shown double-digit growth.

A further lesson learned from the concept stores was that the non-food assortment cut were too radical, we need to improve the offering and thus make it attractive to all customer groups including SCOs.

Nevertheless, second quarter trading does not by far reflect all our turnaround measure. Once these are in place and up and running, we should see serious growth in steadily like-for-like.

If you take also look at the two year trading like-for-likes for Germany, you see that the second quarter already saw a distinct improvement against the first quarter. We are moving in the right direction.

Western Europe continued to report stable sales trends when you take Easter into consideration. In many countries the improvement in the like-for-like sales development and especially in Italy, showed good progress. By the way, on the whole, our PIGS countries, but only with 'I' because we are not in Ireland, showed no sudden or drastic sales decline in the second quarter.

In Eastern Europe, trading remains tough, especially in non-food sales. Nevertheless, there were a number of countries which are showing very encouraging quarter-on-quarter improvements, especially when you smooth out the Easter effect. Our high revenue countries, Russia, Poland and the Ukraine have all seen like-for-likes recover further, which paints a very encouraging picture.

Asia is running very smoothly with double-digit sales growth in our country. In the second quarter we opened our first store in Cairo, which paves the way for a network of around 10-stores across Egypt. EBIT at Metro Cash & Carry improved again thanks to Shape and predominantly cost savings thereof. Our new business unit structure is fully aligned to our two top strategic priorities at Cash & Carry. On the one hand, we must drive sales in our developed markets, as you see here on the left, with numerous Concept adaptations. I mentioned a number of these when I talked about Germany, such as private labels and field force and non-food. But also innovation is very important and we continue to drive new customer-orientated solutions and services.

In France for example, we now operate the 13 Metro Drives, a hybrid business model which increases both, our custom proximity and their convenience. On the other hand, we must accelerate our expansion and safeguard our future growth opportunities today. As you can see on the right, we intend to significantly ramp up the number of new store openings and ensure Metro Cash & Carry strengthens its leading market position worldwide. Real in the first half shows the highest EBIT improvement group wise.

Thanks to better growth margins and the double-digit sales development in Eastern Europe. In the second quarter, Real faced its toughest comps and sales reflected this year's shift of the Easter business. In Germany, our hypermarket business once again outperformed the market, and still without any noticeable support from inflation. I would say, this is clear proof that the restructuring program is well on track and having a positive impact. Nonetheless, there is still a lot to do. In the second quarter we shut four stores earmarked for disposal. That means that we have successfully disposed off 15 under performing stores in the last 12 months. And we are on track to dispose off the remaining stores by the end of the year.

Private label constitutes currently 16% of sales. What is important to know is that the mix in private label sales has shifted notably from TiP, our price-entry range to Real Quality where margins are substantially higher. Abroad, they are reported again double-digit sales growth in the second quarter. Russia was just under 20% like-for-like sales growth is clearly the star in the Easter European hypermarket portfolio. Sales in Romania and Poland remained subdued but Turkey showed a very decent development.

One final word on Real Germany, there we have already implemented more than 180 counted modules this year to make our hypermarkets more attractive and efficient which will ultimately drive customer frequency. In addition the web shop was successfully launched and is progressing well with the market channel approach being well received by customer.

Media Markt in the total second quarter sales developed well. Germany although not actually winning the World Cup definitely profited from the very successful marketing campaigns we drove. Nearly, 3% like-for-like sales growth speaks for itself.

In Western Europe, like-for-like sales growth also came in very well and remained broadly on the high first quarter level which is basically the pre-crisis level, especially Italy, Austria, and the Netherlands showed significantly better like-for-like sales compared with the previous quarter.

Allow me to brief you on the effect of the World Cup. Across most European countries, we saw flat-panel and set-top boxes sales up, also thanks to the HD broadcasting in many countries. The marketing campaigns we ran were highly successful.

Our online sales channel in the Netherlands and Austria are progressing well. Our learning curve there is steep and we are positive on the further developments. Our [constant] pricing policy coupled with our repetitive store base is a good combination to service customers in the best possible way.

In Eastern Europe, the like-for-like service sales improved in the second quarter compared to the third. Nevertheless, we saw a mixed picture country by country. Hungary and Poland are still difficult while the Russian like-for-like exceeded the 20% mark with sales entities of numerous stores being many times higher than certain competitors.

And finally in China, the store [hit] out for the third largest Media Markt in the world is progressing well and further progress has been secured. Media Markt in terms of EBIT declined due to higher marketing expenses and startup costs. Here on slide nine, you can see quite clearly that Media Markt and Saturn continues to be a market share in many relevant markets, quite reassuring I must say in these difficult times.

At Galeria Kaufhof sales in the second quarter were marked by both the shift in this year's Easter business and the cold weather continuing into April and May. This delayed the stock for the summer collection sales. As previously announced, we closed some there stores and remaining store is too for disposal in the coming quarters. The EBIT development in the second quarter improved, further thanks to strict cost management.

As an interim let me now hand over to Olaf who will now present to you our key financials, thank you.

Olaf Koch

Well, thank you Eckhard and good morning and a warm welcome from my side as well. As Eckhard said, the operating environment for all our businesses remained challenging in Q2s, with a gradual improvement during the quarter. Nonetheless, we continue to see earnings improvement in our divisions thanks to Shape. Before we dive into the divisional EBITs allow me one technical remark as in the first quarter the retrospective application of the revised IAS 38 led to an adjustment of prior year's EBIT.

Group EBIT for Q2 2009 increased by $9 million to $360 million due to the revised standards. The increase is mainly related to marketing expenditure. These costs are now to be recognized at a different point in time. This led to a shift of some costs between the products and affects the prior year's EBIT base. However, total Group EBIT for 2009 does not change as there will be corresponding reversal of the increase in the second half of the year.

Let's now have a look into EBIT by divisions. Please note that all my remarks refer to earnings before special items as not otherwise stated. Our Cash & Carry the EBIT in Q2 improved by $20 million. This was again a marked improvement for the division and the improvement was mainly driven by Shape measures across all countries.

In Germany, our implemented measures continue to gain traction. Our new approach in customer management started bearing fruits and we saw a good sales uplift in destination categories. We are reducing sales in the low margin of tobacco and telephone cards, while delivery of sales from our net resource was very good momentum.

Furthermore, our ongoing efforts showed good progress leading to an increase to 12% share compared to 11% share in the previous year for total division. In Germany the progress was even stronger, reaching 17% after 15% in previous year. We also made some progress on our assets to revitalize our field force.

In various countries including Spain, Germany and Austria we defined a clear approach to improve our account management. We reviewed and adopted our incentive schemes and we extended our training efforts as well as selectively higher. All in all earnings in Germany improved in the second quarter.

Turning to Cash & Carry, Germany is moving into the right direction. In Q2, we accounted the lion's share of special items in our Cash & Carry division. Most of there costs are related to the optimization of the German [store] base and the integration of the Schaper headquarter.

In Western Europe, we saw again a good development and further improvement in earnings in the second quarter. Especially in France, Italy and Spain is so good, unexplored in spite of the Easter shift. In Eastern Europe, overall market conditions were very challenging for Cash & Carry. In Poland, Poland's earnings were impacted by the state mourning and the flooding catastrophe. The decline in Poland however could almost be compensated by good performance in Turkey and Russia

Overall, despite the top sales development, Cash & Carry's EBIT in this region come in only a notch below prior year's level, thanks to Share.

Cash & Carry's EBIT in Asia were stable in Q2. Start-up losses for unused stock including Egypt were compensated by a better performance and in our like-for-like installed base.

All in all Cash & Carry has continued its positive earnings strength also in Q2; it showed good progress month-by-month. That's continued, Real again delivered a strong improvement; Germany's earnings in Q2 were slightly above prior year's quarter, despite running against the quarter the included the Easter business. The underlying improvement was driven by further cost savings and also by better gross profit.

In Eastern Europe, our hypermarket business has now reached an inflection point. In Q2, we saw considerable earnings growth in Eastern Europe. Despite the challenging market condition, progress was made in all areas, both on the margin and on the cost side. In Poland, Real's earnings suffered from the already mentioned reasons but this was more than compensated by a strong improvement in Romania.

At Real, we are now planning our Shape measures in a holistic manner across the whole group. This includes you already mentioned own-brand effort but also other areas such as customer driven concept, supply chain, or operations. We have further strengthened our Shape organization to ensure successful implementation.

Moving on to Media Markt, Saturn; Media Markt finished Q2 with earnings below prior year levels. The main reason for the decline were higher marketing expenses and start-up costs for all market entry into China, online business in the Netherlands and Austria and the progression of private label roll out, up to this decline in Q1 in Germany EBIT came in flat, higher cost in particular on the marketing side absorbed higher gross profit.

Going forward Media Markt, Saturn's cost base in Germany will be under strict review. Our Q2 earnings at Media Markt, Saturn are not an indication for the full-year results. In Western Europe, we saw decline in earnings due to higher marketing expenses and start-up costs for our online business.

This decline was partly offset by better gross margins, my country level Italy once again showed strongest earnings improvement. EBIT in Eastern Europe was slightly up in spite of a very tough environment. Here our initiative cost saving measures bore further fruits but also a very strong development in Russia's supported earnings.

Moving on to Galeria Kaufhof, Galeria Kaufhof is clearly the leader of the German department score. The division once again improved its earnings, improvement results from inventory and cost management. Shape measures continues to deliver positive contributions during the course of the quarter. Coming to Real Estate, our real estate earnings were slightly up in Q2, the main driver here was of course our higher rental income from new store openings.

Let's move on to the segment others. For many of you the segment others probably the most difficult model, strongly their efforts remind you what is included in other. Other comprises mainly Metro AG as the strategic holding of the Metro Group. Some service companies such as IT and logistics and our restaurant business drive hunt. The main cost drivers is basically Metro AG and the services company, the declining EBIT in Q2 due to further build-up of corporate governance relevant sanctions, such as internal audits and compliances.

Furthermore, we had to pay higher mandatory contributions to the Pensionssicherungsverein German Pension Insurance Association. Therefore all-in-all EBIT declined by € 12 million in the second quarter. In future, however, costs in this segment clearly must come down, the integration of our headquarters ongoing reorganization of our IT and logistics structures among other measures could help us to achieve a significant reduction going forward. These changes while discussed and decided in Q1 and Q2 will only gradually become effective during the second half of the year. Furthermore the board of management started to develop share service center structure for accounting purposes. After a successful feasibility study we concluded that the sales service center would not only significantly reduce cost but also enhance quality and effectiveness in our accounts.

We expect to finalize this plan by the end of the year. Therefore for medium term targets for segment others would be significantly low EUR 200 million across the year. Other group EBIT came in at 334 million, an increase of more than 5% against prior year. Special items amounted to 8 million thus the reported EBIT was 252 million.

Let's have a quick look into the regions and see how the divisional performance played out on a regional level. We will first look into Germany; in Germany we have flat sales when adjusted for store disposal and other divestment. Our EBIT in Germany declined due to higher cost in segment other which was partly compensated by better earnings of Metro cash and carry, Kaufhof and Real.

In Western Europe we could have seen further sales growth driven by Media Markt and Saturn. EBIT for this region was clearly up with Metro Cash and Carry being the main driver. In Eastern Europe our sales went up by 6.1% with more currencies poured than in Q1. Like-for-Like continues to remain under pressure especially on the non-food side. So the region overall showed some kind of improvement. EBITDA improved to 180 million EUR thanks to our Shape measures in all division.

In Asia-Africa, sales growth accelerated even when adjusted for currency. EBIT in the region was down due to start-up cost for new openings including Egypt and the preparation of Media Markt's entry into China.

Let's now move onto Shape. Units further progressed in the second quarter. All in all, Shape contributed EUR 103 million to our EBIT. Again, cost savings were the main driver behind this improvement. Implementation levels four and five now stand 49%, which is a slight increase against the previous quarter. You might also notice that some implementation levels actually declined at the end of Q2. Also the total percentage of target achievement, came down slightly.

Overall this is not unusual for such a project and we gave such indication before. Shape is not just a simple linear process, but a complex and dynamic one, with ups and downs before reached targets. We are permanently revealing and controlling our measures in order to ensure our realistic view on our numbers. In some cases, this can lead to a [dimensional personification] level. Furthermore, we do recognize the additional costs for new activities as well so that we do show net numbers only.

Prior to this, important to keep up the pressure where necessary, even increased pressure on the company to create and implement additional measures to reach our target. Therefore, the one-off expenses in 2010 will exceed the original plan of EUR 170 million. However, this is only a pull-forward of restructuring measures from 2011.

Total number of Shape one-offs of EUR 650 million for the whole period of the project will remain unchanged since. In Q2 we accounted for 82 million one-offs, they were mainly used to enable cost hidden measures.

As mentioned earlier, the majority of these one-offs were absorbed by Cash and Carry for German restructuring. Let's move on to some key financials. We recorded a slight improvement in gross margin, the check for a higher share of private labor.

In our margin mix, and good inventory management we will see a mark note. The development of the net interest results is in line with the previous quarters. There is slightly lower interest income, the second lowest short-term interest rates and higher interest expenses.

The higher interest expense is due to our longer maturities but also due to higher amortization of actuary loses related to pensions, future decline in interest rates. The other financial results came in slightly below prior year's quarter. First glance, you might find this surprising as we had an overall positive currency intake for the group of 30 million in Q2 for our EBIT compared to 8 million in Q1.

However, if you look at the individual currencies, you see that in particular the Polish Zloty and the Romania, Lei actually weakened because of second quarter thus closing date Q1. Both countries, did a substantial lease exposure denominated in foreign currency and the revaluation of these liabilities was included in the other financial result.

Excess came in, in line with our projected tax-rates totaling an EPS before special items of $0.30. Let's move onto cash-flow and net debt, our net debt improved slightly year-over-year sequentially net debt increased mainly due to seasonal effect. Our long-term maturity profile is very comfortable with tenures up to 2017. Whether our latest [bond transaction] in February, we concluded our long-term financing of May 2011. But of course, as usual we are consistently monitoring the markets. Cash flow development reflects the typical seasonal pattern with the marked cash outflow from working capital. Year-on-year, however, net working capital was relatively stable.

Ladies and gentlemen, thank you for your attention. The floor is yours for any questions.

Question-and-Answer Session


Our first question today comes from John Kershaw of Merrill Lynch. Your line is now open.

John Kershaw - Merrill Lynch

First of all on Media Markt, thank you much for the cover in terms of the regional profit. But it makes it seem more the more extreme in terms of the profit paying that must have been felt in Western Europe. So, can you perhaps breakdown in terms of the online and the marketing cost and the own-label cost. What weighed on the P&L, given you actually had the strong sales in Western Europe for Media Markt and Saturn.

And then, in terms of Cash & Carry, can you perhaps help, you sound very positive on the German momentum but the like-for-like was quite negative. I appreciate it was flat once you strip out tobacco in telephone cards, but to the extent you've talked about positive like-for-like, so we're talking as soon as Q3 in that much conviction or is it a sort of a slower burn than that?

Olaf Koch

All right. Thank you for questions. Going to Media Markt, actually we saw underlying improvement of our earnings also in Western Europe and most of our countries. If you look into the development which we have seen compared to the previous year quarter, one of the main deviations really was created by the start-up costs and that clearly was driven by our expansion or our market entrance into China.

So therefore, the underlying earnings development which we have seen there in Western Europe, and we highlighted Italy as one of the, probably most prominent examples was pretty positive. So all-in-all, the main deviation in the quarter was driven by expansion, and we had a slight impact as well with the ramp-up of our online business.

John Kershaw - Merrill Lynch

Sorry, Olaf, if I understood correctly, you said in your prepared remarks that you have flat profits in Germany, you had profit improvements in Eastern Europe and Western Europe was down. Now in fairness, I missed Asia, so I'm sure the start-up losses have some impact, but you're saying there's virtually no profit decline in Western Europe?

Olaf Koch

This was only a slight decrease and as I mentioned before, the online business which was brought out into Austria and Netherlands was part of it with some marketing in effect as well in Western Europe, but nothing that was there sustainably.

John Kershaw - Merrill Lynch

I suppose, just give us some reassurance, because you said that profit will grow in the full year, but what I'm driving at is clearly people can be concerned that online erodes margins and that you just do not get as rich a sales mix. So perhaps help us understand more what you mean by the online. Is it just physical start-up costs or is it lower profitability of sales online?

Olaf Koch

It's a very good question. Actually, it's the physical start-up cost. We had ramp-up cost in Q2 of both countries and almost no earnings, as we've been ramping up the business pretty slowly. So we are collecting our experiences, we are seeing that we can earn good margins, but we are not yet pushing that business. So therefore, you should not be worried about the earnings level or the margin level of that business. But you need to recognize we had a start-up cost in Q2.

John Kershaw - Merrill Lynch

Okay. That's clear.

Dr. Eckhard Cordes

John, on Cash & Carry, Germany, you mentioned correctly that after taking tobacco and telephone cards out, like-for-like sales, stay flat, plus 0.1%. And looking or comparing the quarters, what one has to do to get the clear picture is to look at it month-by-month. And the sales trends in the quarter and also including July makes us feel positive and cautiously optimistic that we are on a very good track here. I think we mentioned and that is important to note that especially our destination categories like meat, fish, fruit and veg showed double-digit growth.

The issue we are still referring was Cash & Carry, Germany is the non-food business but also here, we are optimistic that we have now the right matters in place and we see a rosier picture in non-food Cash & Carry, Germany in the month and years to come.

John Kershaw - Merrill Lynch

Okay. Just one final clarification then I'll get off the line. When you say double-digit growth in meat, fish, diary, veg are you effectively saying that most of your food categories are growing 10% and therefore non-food is down like say 15%, 20% to compensate to come to a flat like-for-like sales, because that sounds too extreme?

Dr. Eckhard Cordes

John, I wouldn't say the majority of the food business, I would say the most relevant, as the most visible for differentiation of our concept are growing double-digit. I mean whether or not we are able to attract clients pretty much depends on these categories like fish, meat, I don't to repeat it. They are sort of, what should I say, cookies, every days cookies is a not a differentiation, unless it's a known brand with higher margin.

Now, a key word on brand, let me reiterate what Olaf said on brand share, food business, Cash & Carry Germany increased from 15% sales share to 17%. And that is also something which continues to be the case, good development in the future.


Our next question today comes from Jaime Vazquez of Santander. Your line is open.

Jaime Vazquez - Santander

Just going back to Media Markt and start-up expenses, will we see more of those in the second quarter in the Netherlands and Austria? And then I think you are planning to launch it in Germany before the end of the year, should we expect a similar magnitude in proportion in Germany? The second question is on Real traffic. Can you give us a traffic number in Germany in the first quarter and the second quarter of this year? And a third question is on the Other line. I think Olaf said that he expects a cost, a charge well below € 200 in the medium term. I was just wondering by which year you would expect that number to fall below € 200 million. Thank you.

Olaf Koch

Well, let's start with the question on e-Commerce. The cost you have seen for Austria and Netherlands should be sort of one-off cost for the start-up in those countries. We also have discussed internally on how we are going to move on with the roll-out. The conditions for the roll-out are now set from a systems infrastructure. So we have the underlying model working right now, but on the other hand we also do understand that pushing that out into the market needs a lot of commercial understanding. So, we are therefore in both countries accelerating our presence in the markets and also accelerating our marketing in that effort.

Therefore, those two will be the main priorities for the remainder of the year. And your question regarding the starting point in Germany will be probably 2011, not at the year-end 2010. So therefore you should not be worried with substantial one-off costs coming into play for e-Commerce business during the second-half of the year while we will still continue to develop our model in our infrastructure. That's on your first question.

On your third question on the second others; the changes which we are now introducing will require much more adoption of structures. It is, for example, in the IT field where we have a new model being developed. We are in the middle of our negotiation with our unions and works councils, and we are very positive that by the end of Q3, we will be able to implement those measures. That roll-out and that re-organization should be accomplished latest by Q1 2011.

Other projects like the shared service center and accounting you might be well aware, we will require more adoption in various countries. As we are not present in modern city countries, we are all in the lions share of countries will take at least two years. However, the most cost dominant countries which are in Western Europe has been the first operations to come into the shared service center i.e. in 2011 and 2012.

So, therefore, once we would conclude through all other shared service center and once we would have to find that model also an agreement with the Works Council and the Unions we are pretty positive that the majority of savings should be there in 2011 and 2012.

Dr. Eckhard Cordes

And now on your question in respect of Real, comparing Q1, Q2, traffic i.e. frequency in Q2 was slightly down. But it is broadly in line with the Easter shift, Q1, Q2 we mentioned several times. So there is no in that respect no significant underlying negative trend. And then the transition to that one must see that the average ticket was up.

So all in all I would say an okay development.


Our next question there comes from Fabienne Caron of Bryan, Garnier your line is now open.

Fabienne Caron - Bryan, Garnier & Co

Two general questions really. The first one is the fact that you are pushing forward the one-off cost for Shape. Will that have an impact on the timing of the savings? And the second question is regarding the outlook. Dr Cordes, you said so in 2010, you believe you can reach the EBIT of 2008, if the macro does not deteriorate. I think if I remember correctly, in the past you used to say the same but the macro needed to improve so I just wanted to make sure that I got the difference rightly.

Dr. Eckhard Cordes

Let me start on the second part of your question, yes we said well this time today that we said that we think we would be able to reach the pre-crisis EBIT level of € 2.2 billion, unless there is a significant slowdown in the macroeconomic development which we do no see. Those are markers we are in, we have an okay development. So that is correct, we need no macroeconomic support for reaching the € 2.2 billion level EBIT that is our current view.

Olaf Koch

On your question regarding the restructuring one-offs. The observation is correct that if we are able to come to the conclusions earlier, we also should be able then to see the savings coming in at an earlier point of time. We have now concluded most of the restructuring efforts at Cash & Carry Germany we've seen that there was a lion's share of the one-off. We are now moving on with the restructuring on administration levels, which will take now some negotiations as I mentioned before.

But all in all we are positive that we can pull forward some of the restructuring measures from Q1 or Q2 2011 into the decision period of Q3, Q4 2010. So at best that would lead to an acceleration of savings of three to six months. So it's not of a high magnitude but we want to do is, we want to conclude with restructuring by the end of 2010 because we also do understand that at some moment in time we need to have a stabilization and consolidation of the structure and therefore we are putting all emphasis to conclude those efforts in 2010.


And next question today comes from James Collins of Deutsche Bank. Your line is now open.

James Collins - Deutsche Bank

Two questions please, first one on Eastern Europe with Real, you talked about it being at an inflection point for profitability. Can you just describe why that is and what that means we should be thinking about for Real Eastern Europe profitability, I guess this year and ongoing?

And then the second question is just about some other costs and when you talked about pension insurance costs, I wanted to understand is that one-off issues, is that a one-off payment you have to make or is that going to be an ongoing drag and you obviously talked about the medium term guidance which you've again clarified a bit but in terms of this year, second half on second half should we be looking for a similar level and cost for H2 2010 voice H2 2009?

Dr. Eckhard Cordes

On Real Eastern Europe, first of all the quality of our store network, James on the Real in Eastern Europe the average quality of our stores, in Eastern Europe is excellent. Just last week we visited again stores in Turkey and this is absolutely state-of-the-art or maybe even better number one. Number-two, I think we mentioned this morning also that in Russia, another example, we saw over 20% like-for-like sales up, which gives also a clear indication that the positioning of our stores in the market is excellent. Against this background we are pretty comfortable or feel pretty comfortable that we will be able to reach breakeven this year.

Olaf Koch

On your question regarding the pension insurance cost this is not-a one-off, due to the insolvency of (inaudible) we have a situation that all members of this association of this verein have to have a higher fee and this is a result which we are now carrying forward. So for the current environment and to the actual moment of time we need to accept and allow for those costs. On your question for the second half of the year, clearly our first aim must be that we reduce the pace of cost acceleration which we have seen, we have seen a cost increase during the first two quarters.

Now with restructuring coming into play in the second half we should now see a like-for-like cost sale reduction in a lot of areas while we still have some cost increase which we've seen, which will not go away for some of the governance functions. So all in all Q3 and Q4 second half of the year should show trend change but we would clearly see that now with Q3 and Q4 measures come into play and therefore we should be at the turning paint.


Our next question comes from Sreedhar Mahamkali - Macquarie. Your line is now open.

Sreedhar Mahamkali - Macquarie

A few quick questions from me, firstly the store closures in Real and Cash & Carry if you wouldn't mind refreshing us on the schedule, and when do you actually see these same closures contributing positively to operating profits? That's the first one. And secondly, you talked about traffic trends in Real in Germany, can you please elaborate on traffic trends in Germany. And while we are on Cash & Carry, in Russia, can you confirm the positive trend you've seen in Q2 is continuing in Q3? That's the second question. And thirdly, other financial result, please help us here? Where do you expect this to land for the year or is it just too difficult to predict? Those are three questions. Thank you

Olaf Koch

Well on the other financial results, let me take to conclusion I think the one that is pretty, pretty clear is anything that moves out of the interest result I think is pretty stable. Now the situation that our long-term interest expense is pretty clear, and if we just follow what's happening on the market on the short-term financing you just need to put that into the model. I think there will not be any surprises. The one that is difficult to read from the outside, I understand, the deviations of the volatility of the other financial result, which we have based on currency changes.

I think the way to find out how this whole thing develops is to just monitor the status of currency and exchange rate at what times ends i.e. ending the quarter. And if you don't watch the most relevant currencies which are the Russian ruble, the Romanian lieu and Polish zloty you have the lion's share of the volatility to understand what happens. And we have seen just that Q2 came in weaker because we had those two currencies I mentioned before, leading to some deviation and therefore again for some volatility.

On the stock closures, first of all, Cash & Carry Germany, [short] orders were materialized in 2010 this year. Real Germany, the original plan was to get rid of 33 stores. They have revised that plan, the current number of the actual number is a disposal of 27 i.e. we will keep six stores that were originally the amount for closure, the reason is simple, their EBIT development is better than we originally anticipated. So from an economic point of view, it makes sense much to the disposal of those six but to keep them i.e. 27 were being closed off or disposed off, realized until now are 19 out of those 27, five or six more to come this year and then two or three next year.

Dr. Eckhard Cordes

Investment stock orders are what you could see or obviously those that have been closed already, have a positive impact. Obviously the rest, not yet, but it is, as [Olaf] said is going to come in the next month. And other question on traffic Cash & Carry in Russia in the second quarter and then we check in (inaudible) what is the number? Hang on just a second.

If you compare Q2 to Q1, then Q2 is better than Q1 but Q2 this year as compared to Q2 last year, it is slightly down, but the trend this year is positive.

Sreedhar Mahamkali - Macquarie

Sir, can you just confirm I think the store closures that we saw looking at € 30 million to € 35 million contribution from the store closures in Real when that's fully implemented? So that's full year 2011, that's roughly what we should see as a contribution, just from the store closures? Am I correct on that?

Dr. Eckhard Cordes

Our communication has been that those 33 stores had a negative EBIT contribution of some € 35 million in 2008. So, in other words, if we had closed down all 33 then this would be an EBIT impact but the fact now that we closed less a lesser amount, i.e. 27 rather than 33 obviously means that the EBIT impact isn't better than or that's at least on the same level, otherwise we would close them down.

Sreedhar Mahamkali - Macquarie

Okay and…

Dr. Eckhard Cordes

If we get the same, just to be clear, we feel the same EBIT improvement without progress is preferable because you just take on-off costs.

Sreedhar Mahamkali - Macquarie

Understood. Sorry. My question was on Cash & Carry traffic trends in Germany, also if you could just address that?

Dr. Eckhard Cordes

Cash & Carry in Germany is basically the same, I mentioned when we were talking about Real, in Germany also in Cash & Carry we have a strong Easter impact. So that if you take Easter into account, then it's basically the same development that we saw in Real, so in line the traffic developed in line with the Easter shift.


Our next question comes from Volker Bosse of UniCredit. Your line is now open.

Volker Bosse - UniCredit

It's Volker Bosse from Unicredit. Some questions starting with the Shape program. You said Shape is gaining traction. You highlighted the further streamlining of the operations, and mentioned IT and shared service center here. And so were these measures already included in the original plannings of this € 1.5 billion or is there something which comes as additional savings potential?

And second question also related to that is what's the status quo about the merger of Shape, Schaper and Cash & Carry headquarters, and when should that be finalized? Could you remind me that please? And second question is regarding your CapEx guidance uplift. Is it all related to Cash & Carry in Eastern Europe and Asia? And what does it mean in terms of number of store openings plannings going forward? Thank you. That's it.

Dr. Eckhard Cordes

Regarding your question on Shape, whether those measures we took about, are come in addition to our € 1.5 billion charges, the answer is no. Those were measures which we were looking at already in terms of our revenue in Shape and has now become sort of a concrete plan, and to [lift].

Volker Bosse - UniCredit

Thanks for that clarification. And the Schaper and Cash & Carry headquarters are the same?

Olaf Koch

On the integration of the two headquarters, we are in the middle of implementing that. I think all the preconditions are now set. By the year end, operations should be integrated, so any cost effects should then come into play in 2011.

Volker Bosse - UniCredit

Okay, great, thank you.

Olaf Koch

And your last question on CapEx, did we look into the current landscape of projects? We have a surplus of opportunities in almost all of our sales lines. The current split which we have gives quite a high emphasis on Cash & Carry, but we also have some expansion at Media, Saturn as well.

Dr. Eckhard Cordes

Ladies and gentlemen we have time for one last question please.


Our last question today will come from Matthias Eifert of MainFirst. Your line is now open.

Matthias Eifert - MainFirst

Yes, hi, Matthias Eifert from MainFirst. Some quick questions. First of all, what was the currency impact on EBIT in the second quarter? Secondly, Cash & Carry in Germany, how much longer will we see the impact from your planned decrease of the business in telephone cards, tobacco and so on, i.e. when will we start to see the positive like-for-like development to come through the underlying positive like-for-like development you were mentioning?

And thirdly, maybe on the Shape benefits, thank you very much for the € 103 million net benefit. Can you give us an idea how much the gross benefits were and an idea how much you maybe reinvested into things like, yes, improved customer service and are there any early experiences here you might want to share with us?

Olaf Koch

First of all on the currency, we have € 30 million of positive EBIT effect in Q2 against € 8 million in Q1, that was the net contribution which we had and out of currency changes. And your question what is the gross benefit, we consciously decided not to show gross numbers but to show net numbers. I mean we could show whatever number we want as high as we wanted to be. We will include all investments in there.

I think what matters at the end of the day is what comes to the bottom-line and what is the net contribution. So we therefore, we consciously decided not to show any sort of gross [amount], I beg your pardon for that, the net contribution has been as you said.

Dr. Eckhard Cordes

Again on Cash & Carry Germany, let me reiterate, we said this morning that after telephone card and after tobacco business, like-for-like were plus 0.1% up. So as we actively manage to back on telephone card down, you would have this sort of bias or impact for a couple while, obviously until the point in time we have managed it down to zero. Right? Tobacco, in order to get a clear picture of what's going on there, you have to take tobacco and telephone card business out. We are confident that sales will develop positively in the second half 2010.

All right. Ladies and gentlemen, thanks for joining Metro Group's second quarter 2010 conference call. For any further questions as usual please contact our investor relations team. Thanks for your interest in Metro and have a good day. Bye-bye.

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