METRO's (MTTRY) CEO Olaf Koch on Q3 2016 Results - Earnings Call Transcript

| About: Metro AG (MTTRY)

Metro AG (OTCPK:MTTRY) Q3 2016 Earnings Conference Call August 2, 2016 12:00 AM ET

Executives

Olaf Koch – Chairman & Chief Executive Officer

Christian Ziggel – Head of Investor Relation

Mark Frese – Chief Financial Officer

Analysts

Edouard Aubin – Morgan Stanley

Jerome Samuel – HSBC

Volker Bosse – Baader Bank

Kiranjot Grewal – Bank of America Merrill Lynch

Andrew Gwynn – Exane BNP Paribas

Sreedhar Mahamkali – Macquarie

Niamh McSherry – Deutsche Bank

Juergen Elfers – Commerzbank

Olaf Koch

Thank you and good morning ladies and gentlemen, welcome to our Q3 results presentation. First of all, in the name of Mark Frese, the whole management team and our investor relations colleagues, I’d like to take this opportunity to thank Daphne Schomaker for her great work in the IR department. Daphne, who as you know had been appointed Interim Head of IR, was instrumental in achieving a smooth transition of the department during the course of this year.

At the same time, I’m happy to introduce our colleague Christian Ziggel, who recently took over the position as Head of Investor Relations of Metro Group on a permanent basis, in addition to his existing responsibility as Group Director M&A. Christian has been with Metro since 2013 and is part of the project management team for the intended demerger.

With that, let me hand it over to Christian.

Christian Ziggel

Thank you, Olaf, for the kind introduction, and good morning everyone. I’m very much looking forward to discussing Metro Group with all of you over the next several weeks and months. As you know, the IR team is happy to continue assisting wherever possible within the restrictions of the demerger process. Also, please be reminded of the disclaimer in the document.

Now, may I hand it over back to Olaf and Mark to present our Q3 results.

Olaf Koch

Thank you, Christian. Now let’s turn our focus to the highlights of our third quarter results. It has been a quarter with solid performance and like-for-like sales stable on last year’s level. The quarter sales has the smallest impact for the full year results. We made good progress on the transformation process of Metro Group, both in regard of our strategic initiatives as well as our restructuring efforts.

Despite some political and macroeconomic distortion, we continued our positive like-for-like growth trend at Metro Cash & Carry, clearly backed by our localized and more focused strategies. For Media-Saturn, it was another quarter of very positive like-for-like growth resulting in improved market shares and an overall strengthened market position. Similar to the last quarters, the continued rise in online sales but also growing service revenues contributed to this positive development.

While EBIT at Cash & Carry and Real slightly improved, lower real estate gains and additional costs for some successful initiatives at Media-Saturn were the main drivers for decline on the Group’s EBIT by €18 million on year adjusted for FX effects and divestments. Against this background, we remain well on track to meet our full year 2015-2016 EBIT guidance.

You may have noticed that our reported third quarter results were negatively impacted by special items in the magnitude of €190 million. These largely reflect the restructuring charges which help us to successfully advance our ongoing value creation plans at Metro Cash & Carry. I will come back on this in a few minutes.

As you have probably read, we announced the acquisition of French food service distribution specialist Pro a Pro at the beginning of July and expect completion in October. Pro a Pro ranks among the key providers in France, offering direct food delivery services to around 42,000 professional customers. Together with the acquisitions of Rungis Express, Classic Fine Foods and Midban the food service distribution business has become a key pillar for Metra Cash & Carry to expand its offering to the HoReCa group, increase its customer relevance and ultimately spur growth.

These were the key highlights of our third quarter. As usual, let me now hand over to Mark to explain our financials in greater detail.

Mark Frese

Thank you, Olaf, and good morning ladies and gentlemen. Let me start right away with the explanation of our sales and EBIT developments by division. Our like-for-like sales at Cash & Carry were stable overall despite strikes in France and despite attacks in France, Belgium and Turkey. Nonetheless, we were able to defend and even slightly grow our EBIT by €3 million excluding FX effects. The continued improvement in our Russian operations, as Olaf will point out later, was an important contributor to this.

I’m happy to report that Media-Saturn was our like-for-like sales growth engine in the third quarter. This is considerable despite the fact that we discontinued selected unprofitable wholesale businesses at Redcoon, which had a negative impact on our like-for-like sales. Media-Saturn’s EBIT declined by €17 million year-on-year. There are three primary reasons for this.

First, we decided to further invest into the expansion of our CRM platform, Media Markt Club, which has experienced strong membership growth and will deliver valuable customer insights, enabling closer customer relationships, resulting in higher frequency and larger basket sizes.

Secondly, we also intensified our efforts to optimize our very successful multichannel platform. This will enable us to become more efficient and to handle even significantly larger volumes coming from our delivery and pick-up channels. This is another investment into the future.

Thirdly, we experienced some negative product and margin mix effects. From the fourth quarter onwards, however, we expect a stabilization of these effects, helping us to achieve our targets at Media-Saturn. The improvements in our top line will be combined with continued tight cost control, in particular with respect to store costs and more targeted marketing expenses.

In addition, we will face and easier comparison base from the fact that last year’s Q4 was negatively impacted by extraordinary expenses. Also, the expected growth in our high margin services and commission businesses, as well as our smart pricing logic based on the new implemented electronic shelf labels, will support Q4.

We are convinced that all these measures will help us to close the gap and to achieve an improvement in our EBIT at Media-Saturn over the course of the fiscal year.

Turning over to Real, our like-for-like sales were negatively impacted by the tough competition environment and falling non-food sales. Also, deflationary trends played a role. In terms of our comparable EBIT, however, we managed to generate a small uplift of €2 million which reveals the success of the cost measures we initiated over the past several quarters.

On the one hand, improved value creation resulting from the Markant and PHD co-operations continued to support our result. On the other hand, closures of loss-making stores and generally tight cost control helped to improve our EBIT margin. All together, we are very pleased with the direction Real is taking and are looking forward to increasingly benefitting from the repositioning going forward.

One word on the others/consolidation line, which came in below last year’s level as expected. This was primarily caused by around €10 million lower real estate disposal gains. Given our real estate developments and disposal planning, however, we remain confident to achieve the targeted €100 million EBIT contribution for the year as a whole.

Further down, the P&L, we enjoyed a substantial improvement in our net financial result. This was caused by improved interest expenses resulting from our de-leveraging and the lower interest rate environment, as well as better other financial result. The background on other financial result is that we classified certain financial debt in Eastern Europe as net investments, so that currency fluctuations are disclosed in our other comprehensive income and are therefore not mentioned in the P&L.

The tax rate in the third quarter was in line with our unchanged view for the year of 40% to 45%. Due to the significantly better financial result and a better tax rate compared to the third quarter last year, our profit for the period grows to €67 million, which reflects an improvement of €60 million.

In terms of EPS before special items, that translated into an improvement to €0.24 from €0.07 in the previous year for the third quarter. With regard to the nine months, we now stand at an EPS before special items of €1.19, which is close to the €1.23 we recorded last year. Adjusted for currency effects, EPS increased versus the previous year, which means that we more than compensated the disposal effects of Galeria Kaufhof in EPS.

Let me now briefly talk about an upcoming change in our disclosures. As we are getting closer to the finish line of the Metro Group transformation resulting in the planned demerger of the Group into two market-leading companies, we have committed ourselves to stop presenting results adjusted for special items after full year 2016-2017.

The reason why we can commit ourselves to this is very simple. The dedicated reporting of such effects will become unnecessary as smaller adjustments of our strategy and refocus in certain areas are just the ordinary course of doing business.

As a result of the solid operating performance over the last several quarters and the cash inflow from the disposals of Galeria Kaufhof, MCC Vietnam and other smaller assets, we reduced our net financial debt by €2.1 billion to €3.1 billion over the last 12 months. This was also supported by a material improvement over the last quarter in terms of our net working capital in line with our promise from our second quarter conference call.

When in the first half-year, the negative impact from the net working capital movement on the operating cash flow was more than €300 million compared to the previous year figures. This gap has reduced to €167 million at the end of our nine month period. This supported our cash flow from operating activities, which came in at €431 million, or €43 million lower than last year. In comparison, at the end of H1, our operating cash flow was almost €200 million lower than the respective prior year figure.

We therefore see significantly reduced negative effects on our net working capital resulting from the Markant cooperation and inventory built-up aiming to ensure product availability. In fact, we continue to expect a further relief from net working capital movements in the fourth quarter.

The €255 million higher CapEx has been mainly invested into the prolongation of leases, store remodelings, the full rollout of electronic self-labelling at Media-Saturn and some M&A spend.

Overall, for the third quarter, a period of high ambition, we have set up measures well and are prepared to tackle the upcoming challenges.

That was it from my side for now and I hand back to Olaf, thank you.

Olaf Koch

Well. Thank you, Mark. As highlighted earlier, our like-for-like sales at Metro Cash & Carry were supported by healthy growth in our food sales, translating into meanwhile 12 quarters of consecutive growth in like-for-like sales for the whole division.

Region-wise, our HoReCa country cluster experienced a slight reduction in like-for-like sales. This was primarily due to weaker business in Germany and France. But in general, the European HoReCa market experienced a weaker quarter due to UEFA Championship. During this period of the year, restaurants experience a lower number of visits.

On top of this, Germany was impacted by the transformation of the business and the implementation of our value creation plans. France has been impacted by strikes and the ongoing effect from assaults. Turkey, on the contrary, was a positive contributor in the HoReCa country segment, despite assaults and political uncertainty. As far as we can see, our business remains fairly robust here.

All of our multispecialists and our trader clusters enjoyed positive like-for-like growth rates. We were supported by the majority of our country operations, in particular India, China and Romania. In Russia, improvement in the like-for-like sales trends continues. We even generated positive like-for-like sales in June and positive like-for-like food sales over the whole third quarter. Given this strong performance of our Russian team, we can once again confirm margin stability in our positive expectations for the full year.

The recently approved changes in the trade law have also been addressed meanwhile and we are well-prepared to deal with these changes. In fact, we have adjusted all of our supplier contracts meanwhile.

One additional area of our transformation is linked to the digitization of the HoReCa sector. As you know, we have initiated quite a number of activities to support the success of our customers with innovative digital tools. For us, it is quite evident that we can help new companies to access customers in a very effective and meaningful way through our unique reach. The only precondition for our engagement is proven value-add for our customers. If this is the case, we can and we will contribute to the rollout.

In the recent quarters, we reported to you the completion of the first Metro Accelerator powered by Techstars, minority investments including their agents and order book. Today we’re happy to announce that we acquired a stake in Shore.

Shore is a company that provides an integrated system for digital needs of small and medium enterprises. It is another important building block in our digitization strategy which will make us more relevant for our customers, create significant value within the sector, and give us access to even more relevant data.

We’ve also concluded the application phase for our second Metro Accelerator for digital solutions in the HoReCa space and even exceeded last year’s numbers of applications. We also noticed a further improvement in the quality of the applying start-ups and their respective teams. The program is set to kick-off in September and we are excited to accompany the next class.

Another core component of our strategy is food service distribution. Although I already touched on it briefly, let me now underpin once again the importance of the acquisition of Pro a Pro within the context of our food service distribution strategy.

Pro a Pro ranks among the key providers of these services in France. The company generated sales of €670 million in 2015, has access to around 42,000 professional customers and is offering a wide product range of 12,500 articles. Closing is expected to happen during the first quarter of 2016-2017.

The acquisition not only expands our market presence, but most of all, also enhances our customer relevance since a growing number of HoReCa customers in France and other markets like to combine their access to unique assortment and service in our stores with a complementary delivery option for ongoing replenishment. These acquisitions, including Pro a Pro in France but also Rungis Express in Germany, Classic Fine Foods in Asian megacities and Midban in Spain in 2014, have a clear-cut value proposition. The customer is at the core of their individual strategy and unique service levels.

By combining these capabilities, we can create even more value for our customers and expand our market access as well as our share of wallet. In addition, Rungis contributed strong fresh and ultra-fresh logistic backbone with national reach, which Pro a Pro has a highly complementary customer base with a significant share of institutional clients.

All acquisitions together add a further €1 billion sales in our food service delivery business and they offer substantial growth and synergy potential. As these numbers illustrate, our effort to expand our presence in food services distribution makes significant progress.

None of these initiatives has been generated on a standalone basis. All of them are an integrated part of the value creation plans of the respective countries. Since we announced the new operating model mid-last year, each country is developing its own value creation plan that is clearly focused on selected target groups and includes detailed growth trajectories for our existing asset base and complimentary additions.

While the main emphasis of the value creation plan should and must be growth, we also set high priority on cost efficiencies. In this context, we benchmark our cost of operations throughout the whole organization. Therefore, it is not a surprise that we are conducting various right-sizing and restructuring efforts. Some of them have been put forward in Q3 in order to clear the way forward.

The majority of the €190 million special items in Q3 are linked to restructuring in Germany, The Netherlands, Italy and Belgium. They include measures like the simplification of store structures as well as the optimization of supply chain and workflows. Special items also concern the restructuring of local headquarters to make them leaner and more efficient. The expected payback for most of them is less than three years, which strongly supports the rationale of such projects.

You should expect that we will accelerate our restructuring efforts. However, we are convinced that we are getting closer to the situation in which most significant restructuring paths have been completed. Therefore, we have the firm opinion that we should stop reporting special items after the fiscal year of the demerger and integrate upcoming restructuring charges into the normal course of business. This, of course, will be the case for all units.

Now let’s turn to Media-Saturn. We were very pleased with our like-for-like sales development, in particular in Germany, Turkey and Russia. The latter which improved by double-digit percentages in May and June. We recorded the 8th quarter of consecutive like-for-like sales growth, and consequently we were able to again improve our market share as in the previous quarters.

The key driver for this was the unbroken growth trend in our online generated sales, which have risen in the third quarter by around 8% year-on-year, despite declining sales at Redcoon resulting from our de-risking strategy. In our market channel brands, Media Markt and Saturn alone, our online sales have even risen by an impressive 35%. In total, the share of online sales in relation to Media-Saturn total sales has continued to rise and has reached now a level of 9.3%. We believe that there’s plenty of further upside for the coming years.

The pick-up option, which has been selected in more than 40% of all multichannel orders, remains a key differentiating factor of Media-Saturn and a significant contributor to online sales growth, but also store traffic. Besides online-generated sales, including pick-up, service sales are another pillar of our strategy and a key differentiating factor. In services, we were able to post strong double-digit growth rates, which were helped by the acquisition of RTS.

Not only do we want to further grow organically in services, given our expertise, our strong and trusted brand and our widespread network, we are also considering selective bolt-on acquisitions in case of compelling opportunities. The acquisition of a minority stake in Deutsche Technikberatung is a perfect example for this. Despite a small investment volume, the acquisition strengthens our capabilities in the field of home services for private customers and small businesses, and we can certainly build up on this knowledge going forward.

Mark has already explained in detail the drivers behind the decline in our EBIT, which I don’t need to repeat here. Let me just reiterate that for the full year, we are absolutely convinced to achieve a year-on-year improvement of our EBIT in Media-Saturn.

Regarding the governance of the company, we also can report good news from Q3. The court ruling from April this year was very much in our favor, we feel 100% confirmed about our control of the business.

Last week, you heard about the departure of Oliver Seidl, formerly CFO of Media-Saturn. We thank him for his good work and contribution. As of now, Georg Mehring-Schlegel, a member of the extended board, is taking over the financial controlling task in the interim at Media-Saturn. He is a guarantor to ensure continuity in this respect and we are very much looking forward to working with him even closer than we have already done.

Strategy-wise, all our initiatives remain centered around our two core assets, our customer relationships and our innovative, fully multichannel enabled store base. Since we observed a strong demand from our customers for repair services, we have expanded our smartphone repair bars to now more than 90 stores in Germany and launched a pilot for out-of-warranty repair for whitegoods in Berlin.

Also, we are testing new multichannel formats such as the one at Berlin central station, which is much smaller than a traditional Media Markt store and which focuses on the needs of travelers and commuters. At the same time, however, the full product range is available from this store if the traveler has purchased the goods online and choose the pick-up option.

Another example is our digital store in the center of Barcelona, where the entire product range is presented on screens rather than shelves. The focus here is on services and advice of our well-educated staff. The products can then be ordered online or picked up from the adjacent warehouse, where they are picked up by a fully-automated robot.

Finally, just a quick heads-up on our Media Markt loyalty program, which remains a success story with rising frequencies and basket values. In total, we have reached the mark of 1.5 million members. In Germany, for example, we have climbed to almost 800,000 members by the end of June, after just a few months. Growth rates in The Netherlands and Greece remain in the double-digits territory.

Let’s now switch to Real. The third quarter was a bit sluggish in terms of our like-for-like sales development. This was mainly driven by the transformation of the business, the tough competitive environment and deflationary trends in certain key product categories. Very likely these conditions will somewhat prevail in the current fourth quarter.

Our online business continues to improve significantly and has been rising in the mid-double-digits. Despite the decline in our like-for-like sales for the overall division, we have generated a rise in our EBIT as a result of the previously mentioned cost measures.

These cost measures were additionally supported by the success of our ultra-fresh product offering that has an above average gross margin. Furthermore, as mentioned before by Mark, our collaboration with Markant and PHD have clearly helped improve terms and conditions. It’s very obvious that such partnerships will be essential for the future development of Real.

As you’ve also seen during the quarter, we have reached an agreement with labor union Verdi on key parameters of labor conditions and wages. This agreement provides immediate cost savings and, even more important, lays the foundation for future competitiveness regarding labor costs. The agreement has been approved by the union members and has become effective now.

Competitive wages are key for our future strategy, which will be built on much higher service levels. A role model for this change will be the remodeled and upgraded store in Krefeld. It will combine the rational part of purchasing goods which concerns especially product need and price with the emotional part of shopping experience and the discovery of inspiring trends.

Essentially, it is still on the following six pillars. Number one, focus on homemade; second, unmatched key product confidence; third, boutique-style shopping experience; fourth, seasonal emphasis; fifth, syntheses sustainability; and sixth, multichannel ability. With this concept in place, we believe we can create a whole new shopping experience and reach untouched customer groups.

We aim to implement this strategy on a modular basis, including flagship stores like Krefeld, significant upgrades throughout a large part of the network, and a modular interpretation in the rest of the portfolio. Unique assortment, outstanding service and a much more emotional experience will differentiate Real from its competitors in a meaningful and sustainable way.

Let me come to the outlook. For the financial year 2015-2016, we reiterate our outlook for the like-for-like sales growth and EBIT before special items. Our EBIT guidance includes unchanged real estate disposal gains in the magnitude of €100 million. Please bear in mind that in the previous year we recorded a figure of €154 million.

Also, please keep in mind that our guidance is before currency effects, which will estimate to be a negative €70 million to €80 million for the year as a whole. Our expectation with regard to FX effects are based on a stable exchange rate as of today, particularly a level of RUB76 per €1 for the fourth quarter.

In terms of CapEx, after the reduction to €1.7 billion from €2 billion last quarter, we have adjusted our expectation to around €1.5 billion for the full year, which will help our free cash flow accordingly in the current fiscal year. Main reasons include a slight reduction in the number of new store openings to 55 instead of 60, as well as tight CapEx control and the fact that closing of the Pro a Pro acquisition is expected to happen in the next fiscal year. As such, the majority of the reduction of our CapEx is more related to timing effects, rather than a reduction in underlying investment opportunities.

As promised, let me give you a quick update on our demerger project. The evaluation of the spin-off is very well on track and we made substantial progress across all work streams. Within the scope of the demerger project, we have not identified any red flags and we continue to aim for completion by mid-2017.

We are aware that, at this point in time, you are expecting more detailed information on the structure and the transaction and on the strategic direction for the two companies. However, given the size of this project and the fact that we only want to communicate absolutely certain facts, we plan to provide you more detailed information on update events on September 8 and 9.

That is from our side. Now let’s start our Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question comes from Edouard Aubin of Morgan Stanley. Please go ahead.

Edouard Aubin

Yes, good morning, guys. Just two questions for me. The first one is on the €140 million restructuring charge for the Cash & Carry divisions. Olaf, you provided a bit of color, but would you mind giving us a bit more details, maybe in terms of potentially the geographic split between Germany and the rest of the world, and what should we expect, maybe, in the fourth quarter? Because that’s a fairly significant amount.

Question number two is on the guidance. I guess extrapolating your full year guidance, it implies around €450 million, €455 million EBIT underlying for the fourth quarter, versus €435 million last year, so that will be obviously an increase. While your underlying EBIT was down around 8% in the first nine months of the year. So what should drive the increase year-over-year in the fourth quarter in terms of the underlying EBIT?

Olaf Koch

Yes, thank you, Edouard. On the restructuring charges, I mentioned the countries before and I can share a bit more detail. Roughly one third of it is Germany. A larger part essentially is Benelux, Belgium and The Netherlands, and a smaller part of that actually is Italy. The nature of those restructuring programs are mixed. Some of them have impact on back office and headquarter structure, which will become leaner. For that reason, we have started social plans and we are running certain programs to reduce the number of FTEs in those headquarters.

Similarly, we have addressed some efficiency programs in the store base, in the store network. This is true for Germany and part of Benelux. In the case of Italy, it is a remodeling program very much to the question that has been raised before, sometimes on how we are optimizing some of the more traditional stores and how are we able to generate more traffic. Some of those stores are right size, so we have let’s say a cut-off in the lease payment. But also here we are preparing for one of the other restructuring measures when it comes to the team.

All of these things, as I said, in general, as a rule of thumb, have a payback of less than three years. So they are all very attractive in financials. We will continue to do some restructuring work. As of today, we don’t expect the same level for the fourth quarter, of course, because we have put forward quite a bit now in the third quarter. But you should expect, as I said, for the year 2016-2017 that we will move on, we’ll give more color to that. Mostly likely then when we give the guidance for the year 2016-2017, only not now.

When you talk about the guidance for the full year, yes, it’s true the Q4 will be above previous year level from current point of expectation. That is driven by a couple of factors. One, of course, is the one that market has mentioned before, we expect a solid development now at Media-Saturn on the back of good like-for-like growth, a very tight cost control, and some more progress on the margin. We are in a position that we say that for the fourth quarter, we are well on track to meet our target there.

As we mentioned before, we are also in the position to say that we are on good track in regard of our real estate expectations. So that in the fourth quarter, you should see a development which is favorable in that regard as well. There, due to the project maturity which we have, we are on a very solid territory.

Edouard Aubin

Okay, great, thank you.

Operator

The next question comes from Mr. Jerome Samuel from HSBC. Please go ahead.

Jerome Samuel

Yes, good morning all. The follow-up on consumer electronics, can you please help me to understand the evolution of margin in consumer electronics going forward? To get a better sense of what is really a one-off in terms of the impact you mentioned for Q3 product mix, loyalty card and IT? What would be the timeframe to go back to normalized margin in consumer electronics? Another question is regarding the de-merger. I understand that you will share more details on September 8. But can you say whether you come up with an agreement with the authorities on the tax losses carried forward? Thank you.

Olaf Koch

Yes, let me start with the margin development. But first of all, let’s also repeat the explanation Mark has given on the Q3 results, which is also significantly driven by additional costs which we allowed for. That is mainly driven by more expenses for the rollout of the Media Markt Club and the Saturn Club, so our loyalty program, which is something where we are very confident it will give us a very quick payback as it increases visits and baskets and gives us a much more effective marketing toolset.

And the other one, of course, has been an acceleration of our multichannel effort. So, that is the largest part of the EBIT decline, which we have explained in the quarter. We don’t expect a similar cost effect in the fourth quarter. In fact, we expect that some of those measures will have already a payback. And with 800,000 members already in Media Markt, and that number continues to rise while we speak in the month of July, so we are not too far away to hit a seven-digit number in the very near future. That should help us, as well, to drive the business.

Now, on the margin side there is a certain product mix; that is not a question. It is there. Some of the products just have a smaller margin. However, we also had a couple of rebate programs in that quarter that are only now, let’s say, implemented as we have given out coupons. Those coupons are then handed over into the stores in the consequence period of time that is like July, August, and we’ll see two things. One is typically those impacts are material, of course, immediately, because you need to build an accrual for the rebate. You don’t get the impact on the positive side for the additional sales which you generate. And, actually some of those coupons are not handed in at all, so this is one impact.

The other one is we are, of course, now in a position that we have electronic shelf labels almost across the whole network. This is the reason why Pieter becomes more and more in control of optimizing also the margin and current trading. And that should start to materialize in the course of the next coming weeks. And finally, without going into much more detail, our negotiations with the industry here and there are very encouraging, if I may say. And making good progress, which puts us in the position, as well, to already tell you Q4 will be in line with our expectation as we can see it as of today.

On the demerger thing, as I said, we only want to talk about facts and figures. And, therefore, as of today we made the choice to announce this event on September 8 and 9. The one thing I can say is we can announce the date because we are making good progress along our expectations. That would include, of course, the discussion and dialogue we have with the authorities, without going into much more detail. There is nothing we can tell you right now which is in contradiction to that expectation. So, we are confident that by September 8 and 9 we can provide you significant more detail.

Operator

The next question comes from Mr. Volker Bosse from Baader Bank. Please go ahead.

Volker Bosse

Yes. Hello, gentlemen. Volker Bosse, Baader Bank. First question on the consumer-electronics division. So, obviously your strategic approach at Redcoon, are you still committed to the online pure-play retail? And how do you expect Redcoon to perform next year? Do you expect them to return to growth? And the second question on cash and carry. Do you already see first positive in prices for the overall business? Or first indications on synergies from the integration of CFF and Rungis Express, so the acquisitions you made last year?

And finally, on Turkey, you said Turkey business remains fairly stable. But, given the terror and political uncertainties, how does that affect your expansion plans here for that country and the outlook, going forward? And, of course, finally a trading update. Did the trend of third quarter continue in July or what you see what’s worth mentioning here? Thank you.

Olaf Koch

Yes. Let me start with Redcoon. We have announced earlier this year that we have stopped certain sales components which are more linked to high volume or wholesale kind of sales. This has been a very conscious decision, because these businesses typically don’t run a nice margin, create complexity and vulnerability, actually, in one or the other case. Ex-vulnerability is what I mean here.

So, therefore, we have consciously decided to withdraw from this business. In other words, once we are through the cycle of the 12-month period, we should get some support due to the fact that in the other sales target groups, so the other audiences we are servicing, we see better stability. And we should also see a better combination of the business as we have integrated Redcoon into the country units.

So, in other words, Redcoon is now run as a third brand or as a second brand in the countries where we are operating Redcoon, i.e. allowing for much more synergy, much more efficiency. And it is operated as the pure-play online brand. In other words, low service level, no store presence, no multichannel. It’s a pure-play online brand and it’s a straightforward discount approach.

So, for the time being, we see the nature of such a strategy with two brands, high sales level, multichannel and very modern assortment, like Media Markt and Saturn, complimented by a price entry pure-play online brand like Redcoon still as a feasible approach. And we’ll, therefore, continue to work. And you should see on the like-for-like trend, once we have gone through the 12-months’ cycle, that, of course, the numbers will start to heal in that regard.

On the other question in regard of the Classic Fine Foods and Rungis Express what I can say is, first of all, the benefit certainly is more for the companies we are acquiring, so they can get access to terms, which we have been able to achieve. But also they have been able to access certain products which was not accessible for them before.

There is one or the other synergy as well in the core business. The biggest synergy, of course, will be there once we approach customers out of one hand. That is something we always announce will only be done once we are on the same service levels between – in between the two organizations.

But in regard of our expectation, what we wanted to achieve, we are well on track with both acquisitions, Classic Fine Foods and Rungis Express.

And then to your final question on Turkey, Turkey in the month of July, if I may say, is quite resilient. It is, however, of course, a market which is exposed to lots of dynamics and we very closely monitor and watch the situation there. For the time being, neither Media Markt, Saturn nor Metro in Turkey, are in the situation that they need to adjust their plans as of this moment because of the resilient business development which we have right now in the country.

So, there is nothing else I can add to that at this moment in time.

Volker Bosse

Okay. Thank you very much. All the best.

Operator

The next question comes from the line of Kiranjot Grewal from Bank of America Merrill Lynch. Please go ahead.

Kiranjot Grewal

Okay, morning. I just had a couple of questions. Firstly, how much have you moved so far in terms of capital gains? And also if you could give some market-share developments, particularly for Media Saturn and cash and carry, in your core markets. And, thirdly, I think HoReCa was a bit softer than expected and you’re saying it’s driven by Germany and France. Could you just give some color on why those two areas are weak?

Olaf Koch

Just to get your first question right, you refer to the capital gains in regard of the real estate?

Kiranjot Grewal

Yes. Which have you got so far, the last two months – nine months, sorry?

Olaf Koch

Okay. So, let me start with a question you had on HoReCa and then hand over to Mark on the real-estate question. The HoReCa sector, as I said, as a whole in that quarter, has experienced a lower number of visits, specifically in the month of June where we had the Euro Championship, which is a phenomenon which you hear quite often that, actually, people, yes they go for a drink and they watch the match, but actually they don’t dine out as much as they do in, let’s say, the normal course of life.

On the other hand, it is fair to say that the terror attacks have had an impact on the way people have been dining out, of course. It is, on the other side I would say, reassuring news that the habits of people dining out and the habits of consumption in the HoReCa sector are also here quite crisis resilient. So, this is not a long-term change in trend, but it, from our point of view, was an impact which we have seen in that third quarter.

In Germany we had quite significant restructuring program which was released in the quarter. That typically also has an impact on operations and it had an impact here. So, therefore, our development there was essentially a bit weaker than in the other countries.

Mark Frese

Well, regarding your question on real-estate gains, if you look at Q3 this year was round about a little bit over €10 million lower than last year. So, the gains we generated in Q3 only. If we take the nine-months’ period was only for this year half of previous year. Previous year was slightly above €50 million.

So, when we look at Q4 now planning we said at the beginning, and Olaf said, we are planning for €100 million. Projects are in place and running close to be finalized. So, we are quite committed and quite sure that we reach what is in our guidance.

Kiranjot Grewal

Thank you.

Operator

The next question comes from Andrew Gwynn with Exane. Please go ahead.

Andrew Gwynn

Hi. Morning. Just a very big-picture question and moving away maybe a little bit from the quarter. But if you look at the cash and carry division, I think so far the like-for-like momentum is a little bit soft. I mean, obviously you’ve got a lot of things going on. What would you call success in that division? Obviously, 0.3% like-for-like, we’ve got around about 2 percentage-point impact coming through from delivery sales, but the call/collect part of the business is going backwards. Where do you think we should be in, let’s say, two years’ time or a years’ time?

Olaf Koch

Yes, well, I think that is part of the guidance we will give at a later point in time when we also will talk about the demerger and the ambition of the demerger. But I still feel tempted to give you a bit, of course, of background.

Our ambition is, as we are breaking down the business models country by country, not running the standardized cash and carry model any more across the whole Group. The fact that we are tailored will help us to, therefore, then pick up momentum in sales.

If you look into the 12-months’ trajectory, I agree, a zero-point-something like-for-like growth is probably not what we should aim for. But I would ask you to remember that we had a significant decline on like-for-like sales momentum in Russia that started, like, 18 months ago. And, despite that fact, we could keep the momentum almost on the same level throughout the 12-month period. Why is that? Because we were able to gain speed elsewhere.

Now, given the fact that we are seeing a positive trend in Russia, finally, and we have seen, as I told you, quite negative like-for-likes in the first quarter of this fiscal year, they were turning to a single-digit negative like-for-like in the second quarter. We now have still negative but very small negative like-for-like, but we broke even and had a like-for-like positive month of June.

So, that should help us, on the total-Group level, now to get away or get off some pressure which was sitting on the like-for-like performance in the last 18 months. In combination with more significant progress elsewhere, that should help us then to improve. But, again, I would only probably then give a bit more color and detailed guidance once we are out there for the, let’s say, guidance for 2016, 2017, and the guidance for the new division which we are preparing to have in the future.

Andrew Gwynn

And, perhaps to help us, are you able to call out any individual countries that maybe could be a forebear of things to come? Say, for instance, the performance in Germany?

Olaf Koch

Well, I think Germany is certainly one of the upsides which we have. It’s a very attractive food-sales market. We have a very compelling offering. I think the value-creation plan that has been prepared there also is very encouraging. So, on the back of a food-service market which is continuing to grow throughout the next couple of years and on the back of our competence in the core business, plus the addition of Rungis Express, that certainly is another one which can turn to the better, definitely.

Andrew Gwynn

Okay. And just, sorry, one dull technical question just on net debt. You mentioned obviously there’s – you’ve got this change in the financial-expenses line. Have you changed anything about the definition of net debt? By the sound of it, you’ve moved some of the derivative contracts – sorry, the P&L impact of the derivative contracts, away from financial expenses. But has the net-debt impact changed?

Mark Frese

So, concerning any change in definitions, we had no changes here. What we have done in other financial results, we have changed some investment in country into natural hedges. So, therefore, we changed it from the P&L to the equity. That is the only change we have done to secure development in these very volatile countries. Let’s state, for instance, we had the discussion after Q1 in Kazakhstan. Nothing else has been done here.

Andrew Gwynn

Okay. So, you’ve met vehicle requirements for hedge accounting rather than something else, yes?

Mark Frese

Correct.

Andrew Gwynn

Yes. That’s it. Thank you.

Operator

The next question comes from Sreedhar Mahamkali from Macquarie. Please go ahead.

Sreedhar Mahamkali

Hi. Good morning. So, three questions from me then, one on cash and carry. Can you give us an idea when will you draw the line on all the VCP development? When will all that be complete? And, really in terms of impact, when we – when should we start to see operating margins improving? That’s the first question.

Secondly, on MMS, it’s slightly a bigger-picture question I suppose, is do you think you’ve got the right balance between front margin and back margin? Are you kind of drifting more and more into collecting rebates and much more loaded to the Q4, going forward? Or is there a way to rebalance it a bit better? Perhaps you might have addressed it already. If you have, apologies. And, third one, are you able to give us a sense of where you might end up in terms of net debt for the year please?. Thank you.

Olaf Koch

Yes. Let me start with the first two questions and Mark will pick up the third one. The VCP completion will be somewhere at the end of the calendar year. We have a couple of countries where we’ve started a bit later, for good reason, because we wanted to understand how does the whole situation develop? Russia was one of them, for example.

And, of course, we expect that out of this we should see two impacts. One is, based on a higher relevance and a better competitiveness of our offer, we should see a pick-up in our sales momentum. And I can confirm already for those countries who have been early adopters and implementers of the VCP and would name two, one is Italy the other is Turkey, both countries have, alongside this in the, let’s say, period after the decision making on the implementation, seen an up-rise in their current trading.

Can we foresee that and then already give a guidance for the whole Group in that regard? No. We are in the process of consolidating this and making a full picture for the intended new division or the new company. So, beg your pardon; we’ll give more color to this over the course of the next couple of months.

I might also say that this, of course, always will need a macroeconomic and a complete review which, I beg your pardon, has not been done as of today. But, yes, it should show more momentum on the top line and it should give us leeway on the cost side so, therefore, also the bottom-line ambition certainly is there.

Now, on the Media Saturn margin mix, I would say that what we are experiencing there is a bit of, I would say, the new normal right now in the industry that the margin mix has developed as such.

Pieter and the team are addressing this with the industry. And, therefore, I would not give today a takeaway which says it’s going to turn. But electronic shelf labels being available, the sophistication of offers now being much higher than before and the direct access we have to more and more customers should put us in a position to improve that performance which we have right now on the front margins. So, there are many initiatives Pieter and the team have started, to ensure that the trend is going to turn in the future.

Again, here the other one is, and I think that is a reassuring piece of news, the negotiations we have with the industry are very favorable. And I think everybody notices in continental Europe in the markets we are in we are the one to talk to. We are the distribution partner of choice. And that is clearly on the back of a very nice development of market shares over the course of the last couple of quarters. Therefore, right now, I would say it is something we are watching very closely for the overall earnings development. However, it has not an impact as we can say right now. We are confident with the Q4.

Sreedhar Mahamkali

Is that somewhat tied to your payment days, the extended payment terms? Or is that an unconnected issue in the front margin/back margin, and the way it is at the moment?

Olaf Koch

No. It’s a very good question and not – you know that we have very favorable payment terms and one might feel tempted in trading payment terms against margin. We don’t do that. Our payment terms are not touched by any kind of discussion on the margin side.

Sreedhar Mahamkali

Okay. Thank you.

Mark Frese

On the debt question, or net-debt question for the year-end development, we are looking at. So, putting into context the development of last year, so reduction over the last year, 12 months, of over €2 billion, especially due to the operating performance and the portfolio measures we had, we are sure that we are able to secure the very good level we had at last – end of last year, which was €2.5 billion. So, we see that we are able to secure that. Might be slightly below, and that is given in light of CapEx level we see, around about €1.5 billion for this year. So, given these points, last year’s excellent development secure for this year around about €2.5 billion of net debt.

Sreedhar Mahamkali

Thank you.

Operator

The next question come from line of Mr. Niamh McSherry of Deutsche Bank. Please go ahead.

Niamh McSherry

Good morning. I just had two short ones left. On the – actually on that lower CapEx number and lower store openings, can you say which regions you’re actually reducing the store openings for this year? And then the second question was, given that 2017 will be the last year for special charges, can you at this point give an indication of roughly how much we should factor in for 2017 special charges? Thank you.

Olaf Koch

Yes. Let me start with the first one while we are – the second one, looking at the new store-opening thing. First of all, we will give a guidance for the next year only once we are reporting fiscal-year 2015, 2016. That is in general the case. That will include, of course, also the one-time expenses that are linked to the demerger project which we are evaluating. So, we will give full color on this somewhere then at the end of the calendar year.

Niamh McSherry

Okay.

Olaf Koch

On the CapEx side let me make sure that we bring across the message in the right color. It is linked not only to fewer new-store openings but it is also linked to the fact that we are – of course, have the ambition to lower the CapEx by square meter. And that is something which we will put much more emphasis on. We did quite some progress there. We know we can do better. Cost of new-store openings for both divisions at this point in time are still too high. And in light of the cash discipline, as Mark was referring to, we are reducing that significantly.

Now, we have a bit slower expansion if I look into the divisions in India. That does not really move the needle because new-store openings in India are typically a bit lower or significantly lower. And if I look now into the new-store openings, which are right now taken out for the current year, most of them actually are linked to a shift in completion. And at Media Saturn, that I can tell you but it doesn’t have that much of a meaning, it is Italy, Spain, Switzerland and Hungary.

Niamh McSherry

Okay. Thanks.

Operator

We will now take our last question from the line of Juergen Elfers from Commerzbank. Please go ahead.

Juergen Elfers

Yes. Thank you for taking my questions. I would have a few, first on Russia, if we could quickly flag again on the amendment of Russia – of the new Russian retail law and their implications. You said all contracts have been adjusted accordingly with your suppliers. What are the implications on the P&L and the negative working-capital requirements with respect to these amendments?

First, Russian retailers like Lenta and Magnet earlier in July commented on lower kickbacks as a possibility and, obviously, on higher net working-capital requirements leading to negative implications on net working capital overall. But they also mentioned that net profit-wise the amendments would turn neutral because of further improved purchasing conditions. Can you elaborate on the specific situations at Metro, please? That would be very helpful.

Then on the one-offs and the change in disclosure, would it be fair to assume that by full year 2016, 2017, the restructuring needs would have been largely gone? In light of your earlier statements of ongoing requirements of one-offs, could you please clarify what has driven the need or your position to change the disclosure overall? And then return to this statement that one-offs will not be referred to as a separate line. That would be very helpful.

And then, thirdly if I may, on CapEx numbers? In the first quarter the guidance for full-year CapEx was €2 billion, turned to €1.7 billion, after Q2. It has now been trimmed to €1.5 billion. Can you please share with us some of the reasoning why CapEx have come down from full year and beyond 2015, 2016? Does that mean that CapEx will also come down longer term to a level of €1.5 billion? Many thanks for these questions and answers. Thank you.

Olaf Koch

Yes. Thank you, Juergen, for the questions. And I would like to emphasize on the following. In Russia we have been very close to this law and, let’s say, their evolution through the different discussions in the Duma and then the final approval. So, we have assessed the impact quite early on, actually early last year, already. Alongside that we, of course, also started to discuss the implications with the industry. And assuming that the market is functioning and demand meets supply and that leads to a function of price, we also made very clear that’s going to happen here as well. So, we will not allow for margin decrease.

And the team in Russia was spot on. They worked on this for months now so that at the time when this law was passed we were able to approach the industry and, not by surprise, confront them with the situation which is – essentially had been agreed before. So, on the margin side, I can give good news.

On the payment-term side and the working capital it is true that until the end of this year there is no impact. So, payment terms are not impacted right now. So, as of today, there is not going to be any impact also on the business. We are working on a couple of things, probably then something to be reported when we talk about our annual results in December, on how we are dealing with that. But also here we are confident we will deal with the situation as we have done before in Russia. And, I repeat again and again, our business in Russia is very resilient, not due to tailwinds but due to the competence – Russia is very resilient, not due to tailwind but due to the competence of the leaders and executives we have in the Russian organization.

On the one-off side, your question was what has brought us to the point to make such a statement? Well, we are conscious about that over the last years we have created quite some complexity for all of you who are observing the Company. It was necessary and without any alternative, because we had significant restructuring. If I may just recall, Real International, Macro UK and headquarter restructurings, Media Markt China, I can continue with this for quite a long period of time. All of them have been extremely necessary and we were able to fund them because we optimized the portfolio. So, alongside these heavy restructuring, we still could de-lever the Company by more than €5 billion.

But we are also very aware that such complexity in reporting is always a disadvantage for people observing the Company. And on the other hand, with the value-creation plan progress made, which was addressed also in the Q&A, we are now in a position in which we have much more transparency on what is the rest of the necessities we see; what is needed for the coming, let’s say, 15 months ahead, which puts us in a position to say, 2016, 2017, to go and complete the most of that.

And after that point in time restructuring will happen again. It’s clear. We will close stores. We will do one or the other headquarters restructuring here and there. We might exit one or the other country, yes. But that should be in the magnitude of, let’s say, an amount which is digestible and should be just integrated into the reported numbers.

So, we are committed to make numbers and, therefore, the visibility and the transparency of the two groups which we are evaluating right now in the demerger process much simpler and much easier to be read by all audiences, the public, the capital market, the analysts. So, we hope this will be also very favorable for you.

And then the last question which you had in regard of CapEx, well, I think when we announced the €2 billion we also announced that we had a reserve for M&A and one or the other innovation acquisition. Now, we did M&A, we did Rungis Express, and we did also acquire Pro a Pro. Pro a Pro is not going to be in this fiscal year. And Rungis Express and the other acquisitions which we have conducted turned out to be good deals. I think we are now in a position to say we don’t need that reserve. That’s why we released it. And part of the, let’s say, reduction from €2 billion to €1.5 billion is, of course, the release of that reserve.

Juergen Elfers

And, Mr. Koch, may I just add one little final question really on the tremendous success that Metro enjoys in Russia, particularly with cash and carry? Again, the superior EBIT margin was confirmed from this year. But let me just ask one question on how well does management actually know its clients? And how – to what extend does client knowledge come into play?

Lenta repeatedly told the market that their superior position was due to 92% of total sales now being generated by loyalty-card holders. And the card at Metro is not called a loyalty card but the card is requiring the access for the clients. Hence, can you share with us how the customer knowledge of Metro in Metro cash and carry Russia of the clients will lead and place an elementary rule to these superior earnings quality that Metro continues to deliver in Russia year in, year out? Many thanks.

Olaf Koch

Well, we have 100% membership, as you know, and nobody is allowed into the store without a card. We have significantly enhanced our customer-analytics competence throughout the whole Group. That’s one of the initiatives, by the way, which still continues to be rolled out across the 25 countries, because you don’t need to develop that intelligence in every single country.

And it is very true that in Russia we are – we have one of the most advanced programs to support SMEs. So, in Russia, we are training small and medium-sized enterprises in the regions with a very dedicated program. This is true for independent traders, independent grocers. But it is also true for independent HoReCa, small and medium-sized HoReCa customers, where we are providing access to knowledge and expertise. And that puts us into a position to actually earn a much more significant share of wallet and, therefore, we also earn a higher margin.

This is a program which we are accelerating in Russia. We are planning to do much more in the context of our value-creation plans because it is the direct link. It is the strong and intensive relationship, which is the reason why Metro Russia has been able to continue to navigate in a very safe way through quite difficult weather in the recent months.

Juergen Elfers

Many thanks.

Operator

Mr. Koch, you may now proceed with your closing statements.

Olaf Koch

Ladies and gentlemen, thank you for having joined our conference call. Our Investor Relations team, of course, is more than happy to assist if you have any questions. Please bear in mind, however, the restrictions in the current context that, of course, do apply to the IR team as well. Thank you for your attention and have a great day.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining us and have a pleasant day. Goodbye.

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