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Edited Transcript of B4B.DE earnings conference call or presentation 13-Feb-20 7:45am GMT

Q1 2020 Metro AG Earnings Call

DUESSELDORF Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Metro AG earnings conference call or presentation Thursday, February 13, 2020 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Baier

Metro AG - CFO & Member of the Management Board

* Olaf G. Koch

Metro AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* Andrew Ian Porteous

HSBC, Research Division - Analyst, European Retail

* Andrew Philip Gwynn

Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail

* Cedric Lecasble

MainFirst Bank AG, Research Division - Research Analyst

* Fabienne Caron

Kepler Cheuvreux, Research Division - Head of Food Retail Sector

* Nicolas Champ

Barclays Bank PLC, Research Division - Director

* Vincent Lee

Sanford C. Bernstein & Co., LLC., Research Division - Retail Analyst

* Volker Bosse

Baader-Helvea Equity Research - Co-Head of Equity Research

* Xavier Le Mené

BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q1 2019-2020 results presentation. (Operator Instructions)

I would now like to turn the conference over to Olaf Koch, CEO. Please go ahead.

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [2]

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Yes. Thank you, and good morning, everyone, and welcome to our Q1 results presentation, which also will include an update on the Real transaction. As always, please kindly take note of the disclaimer. And then, let's get started.

So last year we shared with you was the year of intensification. And by many means, it was possible to get our wholesale profile sharpened and strengthened. This current year '19/'20 is all about acceleration, and we want to advance much more with our wholesale agenda. This is how we want to transform the company. This transformation, as you know, started years ago into a fully focused wholesale company, whereby we have been optimizing our portfolio now throughout all the years before. And this year marks kind of the last pages of the chapter of the conglomerate of METRO. We'll share with you where we are in that context. The focus that we have put into the business has led to rising like-for-like momentum, both in HoReCa and Trader. And we can also see that momentum continuing while we're moving into this new fiscal year. On top of that, we want to build a new formula of how to conduct wholesale, we call that Wholesale 360. Also here, we see significant progress in a good way on how to differentiate our model against other competitors, which will lead to further growth. The envisaged sale of Real on top of that, will give us then, finally, the breakthrough on getting the portfolio fully focused and fully sharpened on wholesale.

So on today's agenda, we're going to share with you an update on exactly that transaction. On top, Christian will guide you through the main indicators of Q1 '19/'20. So let's have a look into the envisaged transaction, selling our hypermarket business to the SCP Group.

First of all, let's do a bit of a review where we are coming from. Some of you might know, some of you might not know, but Real has never been an organic model, so to say. It has been aggregated over many years, over many decades actually, and you see many of those banners on the upper right of the chart. It was our vision in 2015, review the model and to seek competitiveness in a quite competitive German food retail market.

At that time, we developed this Food Lover concept, which led to the Markthalle concept in Krefeld, Braunschweig, Balingen and Aschaffenburg, a model which has reached significant attention by customers and a quite substantial and sustainable increase in sales, more than 10% frequency, and sales, actually, in some locations, even above 30%.

We also started to work on a competitive approach in the online market, acquiring Hitmeister in 2016 and integrating that into Real, has led to a 10x bigger GMV in just 5 years. And it is one of the fastest rising marketplaces in the German marketplace.

However, and we addressed that on and on also in update calls with you, we had a significant competitive disadvantage when it comes to cost. Therefore, we initiated a buying association called the Retail Trade Group with other independent retailers. And on top of that, we negotiated a tariff model that should have given competitive labor costs throughout. This one did not work out. And as of April 2018, we had to take the conclusions, one of which was we changed the union that is our partner from ver.di to DHV. And secondly, we were absolutely convinced that with this not having worked out, we had to prepare everything we could to start the exit from our hypermarket business. This process was quite intense. And of course, was quite long, and we are very glad that now today, we can envisage a transaction with the SCP Group. This one will lead to a 100% sale of our business to SCP. We will, therefore, completely step out of the hypermarket segment. We are finishing this transaction, all terms are agreed, signing process has been initiated. But of course, this transaction will be subject to board approval of both parties, which we envisage prior to our shareholder assembly. The implied enterprise value is EUR 1 billion, and we are expecting proceeds of roughly EUR 300 million, whereas the closing should be mid of calendar year 2020.

After closing, SCP will work on the portfolio. That's absolutely clear. And with the real estate expertise of x+bricks will transform that portfolio, while keeping 50 stores for 24 months, at least, in a [decision] period.

This transaction, of course, has impact on the group because we have companies that provide services, and will continue to provide services to Real. However, over a period of time, we will have excess capacity, which, of course, we are already now targeting because we will need to adjust those structures for the full focus on wholesale.

In that context, we estimate approximately EUR 200 million of cumulated one-off costs in the years '19, '20, '21 to '22. The noncash impact, which we had in the Q1 will be explained by Christian later on, and it's basically triggered by depreciation that we had to implement while closing the Q1 and, of course, reflecting the achieved purchase price.

Now let's look into the rationale of this transaction. And first of all, it is absolutely paramount for us that we now finally really get the 100% focus on wholesale. That in itself is a significant value because it will focus all resources that we have, leadership as capital resources, on progressing with our wholesale agenda.

It is a clean exit of the business, which has been under pressure for quite a while, both on like-for-like as on bottom line. And you might remember that we had a quite significant cash loss in '18/'19. And we would not foresee that, that number would improve in the foreseeable future. It will give us proceeds of roughly EUR 300 million, which will help us, of course, as well on the balance sheet. And furthermore, help us to finance the transaction and itself taking care about some of the [reminances]. The transaction certainty in the envisaged structure with SCP is maximized as there is no antitrust risk left, as this will be cleared by the antitrust authorities in Brussels.

And last but not least, it was important and will be important to take care about the interest of the employees, also to ensure steady operations in the business also in the foreseeable future. This means that interest of employees have been taken care of as well. The transaction as a whole will lead to quite a significant improvement on the metrics that we show, both on the EBITDA margin, but also on the net debt risk reduction.

Furthermore, it will help us to put more attention into the acceleration, which I mentioned initially in the presentation. We have seen good signs for good momentum in Q1. We actually see that even more in the year-to-date trading in Q2, which is rather at the upper end of our guidance in regard of like-for-like sales. And that is also, of course, on the back of some good improvement in Russia.

Now let me conclude what the transaction means also in combination with the other transaction that should be closed in a couple of weeks. Transaction of selling our operations in China to Wumei is progressing well. We got antitrust clearance for this one as well. And therefore, we see closing coming closer.

Both transactions in combination will lead to proceeds in excess of EUR 1.5 billion to the company. Having this, we will prioritize the acceleration of growth because we see that there are good preconditions, both in organic growth as much as in complementary business, like the ones we explained on Wholesale 360. And on top, some complementary strategic M&A.

Furthermore, of course, we will use the proceeds to delever the company. We want to make sure that our rating is absolutely secured. And for that, we want to make sure that the FFO against net debt, adjusted net debt will be above 21%.

And then for sure, we will take care about interest of our shareholders and having those proceeds, we have got precondition also to continue with our ambition to secure dividend continuity in the coming year.

This concludes my introduction. Now I would hand over to Christian, who will give you insights into Q1 '19/'20.

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Christian Baier, Metro AG - CFO & Member of the Management Board [3]

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Thank you, Olaf, and good morning, everyone. Following Olaf's update on Real, which is accounted for in discontinued operations, I will now exclusively focus on the financial performance of our continuing operations that also does exclude China, which is also in IFRS 5. Q1 certainly is a very important quarter in terms of the weight. And we are, therefore, satisfied with the in-line expectations. That is despite several countries and regions that were impacted by temporary headwinds. Just to name 2, France with a significant strike activity in Q1, but also the situation in Hong Kong that had an impact on CFF, especially.

When we now look at it one by one, from a sales perspective, 1% like-for-like growth and was solid against political and regulatory headwinds. When we adjust for these key elements, we are well within the guidance range already in Q1.

From an EBITDA perspective, at constant currency, we are at minus 2%, slightly below prior year. That also should be seen against the backdrop of last year onetime low double-digit amount that we talked about from the credit card claims that we had at that very stage.

When we look at EPS, this is at EUR 0.33, and that has been supported by net financial results that improved, but has been impacted by a significant increase in the tax rate to 55%. We talked about that in the full year reporting, and that is certainly driven by the low real estate gain that we are expecting for this year and that we had accelerated into last year.

From a cash flow perspective, at above EUR 500 million free cash flow, we were developing in line with the previous strong operating development. That's also supported by a continuous stock optimization and then leads into a lower net debt than what we have had in the last year.

With respect to the outlook for '19/'20, we confirm our outlook on sales and EBITDA, and certainly, also looking into the first 6 weeks of this very calendar year. The sales performance is very strong at the upper end of that expectation, and also supported by a trend improvement in Russia.

If we then look into the development between sales and EBITDA, certainly, the 1% like-for-like growth has been driven by most regions and our key customer groups in HoReCa and Trader who, again, between 3.5% and 5.5%. This growth rate was impacted, as mentioned before, by macroeconomic headwinds and also some regulatory impacts.

Adjusted for those impacts, Q1, as mentioned, was well within the guidance range. These effects are of a temporary nature, can very much be seen in the first 6 weeks of trading of this calendar year, where we do see across all regions an accelerated growth in HoReCa. We see also the annualization of the e-invoice regulation in Italy that did have detrimental effect still in the last quarter and has now annualized, and also the sales trend improvement in Russia.

EBITDA, excluding real estate transactions in Q1, roughly came in on PY level. But for the first time in a long sequence of quarters, that was supported actually by FX. When you adjust for FX, we came in at minus 2%. And therefore, we are there also in line with the expectations because the low double-digit impact positively of last year, did certainly not reoccur.

For your information, Q1 is not impacted by the transformation costs, while we are fully in line with the execution of our efficiency measures and are progressing well. You should only expect in Q2, a more detail and also be a relevant booking of the share of related one-off costs that we said for the full year would be between EUR 60 million and EUR 80 million.

When we now look into the regional performance, certainly, sales have been driven by Eastern Europe, Asia and Western Europe, and EBITDA was largely flat across most regions and the reported KPIs benefited certainly sometimes from currency support that's in Russia, Asia and also, Eastern Europe.

In more detail, on Germany, we have been in like-for-like sales, slightly impacted by tobacco regulation. Adjusted for that, the slight decrease in like-for-like would have resulted in a positive like-for-like development in Germany. That's also supported by a strong development on the HoReCa growth and where also our regional sales force approach is working well.

EBITDA in Germany is largely flat.

Western Europe, we have a growth of 0.5% like-for-like. That certainly has been impacted negatively by the national strikes in France and also the mentioned e-invoice situation in Italy. Both situations have fortunately been resolved or annualized in this calendar year, and therefore, should not have an impact going forward. We see HoReCa growth in all countries, and that's predominantly from higher sales per visit, but also from an increased frequency. EBITDA in the Western European region is largely flat. On Russia, we see a slight like-for-like trend improvement from Q4. But more importantly, the first 6 weeks of this calendar year, give us confidence of a significant improvement that we would be expecting in Russia.

EBITDA decreased only slightly adjusted for FX. This is only EUR 2 million because we were able to basically compensate some margin losses still with cost savings that have worked against that number.

In Eastern Europe, 5% like-for-like growth was driven by the majority of countries, especially Turkey, Romania and the Ukraine were the key supporting factors there. The EBITDA decreased by EUR 6 million at constant currency, and that is due to cost inflation in many countries of the region.

In Asia, all countries were having like-for-like growth and the EBITDA decreased by EUR 5 million at constant currency. That's mostly due to the geopolitical situation, for example, when we talk about Hong Kong, but also by weather conditions like the typhoon that we have seen in Japan.

Let's now move back to the group view when we bridge from EBITDA to EPS and start with the D&A. D&A came in higher than in the prior year's quarter. That's especially because a higher share of investments into digitization and other assets with a faster depreciation cycle. The net financial result has improved due to lower financing costs, and also the other financial result was positively impacted from FX hedging due to favorable currency developments. It's important to note that due to IFRS 16 accounting, generally, the volatility in the other financial results should be expected to increase. And that's an important factor for possible future quarters that can only hardly be predicted. As indicated in the full year results call, the tax rate has increased quite significantly to 55%, and that's certainly driven to a significant extent by lower real estate gains that we are expecting for this year. But over the medium term, that should normalize as real estate gains are coming back in.

In sum, the higher tax rate and the higher depreciation led to an EPS reduction to EUR 0.33.

Let's also have a look at the free cash flow development, where we see the underlying positive development from previous quarters continue as, for example, in the net working capital, where we continue to work on good stock optimization.

In order to properly reflect IFRS 16, also in our definitions, we have adjusted slightly the components of the free cash flow calculation, especially when it comes to cash investments. That's what you see in the footnote, but the impact of that has only been below EUR 2 million. It is just to make sure that we have full consistency with the IFRS reporting also in that definition.

In total, free cash flow that we have generated came in at EUR 511 million in that simplified definition. But also when we look at the full cash flow perspective, the operating cash flow came in at EUR 450 million versus about EUR 480 million last year, investing cash flow on prior year level with roughly minus EUR 80 million. And also on the financing cash flow, only a slight change from minus EUR 0.5 billion to minus EUR 0.4 billion as a result of lower repayments in debt.

As a result of that, on net debt, we have carried over the improvement in full year also into this quarter and have, therefore, compared to prior year, reduced our net debt by EUR 200 million.

So in summary, overall, we had a solid quarter despite some headwinds from external factors. And this quarter, but also paired with a strong start into Q2, let us confirm our outlook on sales and EBITDA. With this, let me hand over to Olaf for the final remarks.

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [4]

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Yes. Thank you, Christian. And let's briefly summarize today's morning's content. Number one, the transaction that is envisaged for the sale of Real is a landmark step in our trajectory to full focus on wholesale. Would not repeat the numbers I mentioned before, but you can see that it will have a significant positive impact on the profile of the company, both economically and strategically. Q1 has shown robust performance against quite some significant headwinds, which came as a surprise. And as Christian mentioned, while those headwinds slowed down, we could see the momentum rising throughout all regions in the portfolio in the year-to-date sales and markedly, also in Russia.

Few remarks on upcoming events and the financial calendar, so please take note of some of those dates. And with that, let's move into Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Volker Bosse from Baader Bank.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [2]

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Volker Bosse from Baader Bank. Three questions. I would like to start with the Real deal, you announced the cash inflow from -- of EUR 300 million. However, you confirmed the EUR 1.5 billion cash inflow out of the 2 deals, China and Real. So how do you reach the compensation to the EUR 1.5 billion? Is China generating more than expected and so compensating the shortfall in Real? First question.

Second question would be on the one-offs you mentioned, out of the sale of Real, EUR 200 million over the next 3 years, if I've got you right. Could you give us a kind of guidance of the phasing of the one-offs throughout the next 3 years so that we are all on the same page, what to expect here?

And third question, you also mentioned M&A potential and organic growth. So what kind of targets you're looking for? What kind of regions is your interest? Do you -- would you go again into Asia? Would you again invest into Asia? And more general, which parameters have to be fulfilled for a potential target you look at?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [3]

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Yes, thank you. And let me pick question 1 and 3. And Christian will take -- pick the question on the restructuring cost. Number one, straightforward, our transaction in China is expected to deliver cash proceeds north of EUR 1.2 billion. So therefore, in total, we expect cash proceeds as a whole of Real and METRO China above EUR 1.5 billion. In regard of the potential targets, I think while you already also addressed other regions, first message is, it will be in the parameter of our existing country portfolio.

Secondly, it will strongly focus on those 2 target groups, is it either HoReCa or Trader. We typically would look into complementary capability or complementary reach so that could include, for example, food service distribution companies. We envisage this to be rather a number of smaller transactions. And to give you kind of a flavor on how those look like, you might remember the transaction that we conducted a few years ago in France, which was Pro à Pro. This was a quite sizable one, so I would expect the next one to be a bit smaller. But it was very complementary because Pro à Pro is much more in the chain business. And therefore, we could not only acquire a good P&L and a good economics of the business, but complementary capability which ever since we could use with the synergies at METRO to grow actually quite a bit faster than the business was growing before.

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Christian Baier, Metro AG - CFO & Member of the Management Board [4]

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Yes. And on your question with respect to one-offs, I think it's important to say that they will be triggered as the capacity utilization from the Real portfolio, that certainly will be reduced over time, basically develops. It is too early to state exactly how that will pan out. But those cash-outs from it basically will span over the period of the next 3 years. It's also important to say that potentially from a noncash-out and therefore, booking only on the P&L perspective, there could be, from the next quarter onwards, relevant effects to happen. But the cash-out related to it will be in the subsequent years.

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Operator [5]

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Next question is from the line of Cedric Lecasble from MainFirst.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [6]

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I would have sort of 2 sets of questions. The first one's on Russia. Could you maybe further explain the resilience of the margin and the cost efficiency measures, which were at play in this quarter, this year? And coming back on the first 6 weeks, top line trends for Q2, could you tell us a little more what is driving this improvement? Are you in positive territory? We haven't seen much [hard] evidence of the improvement over the last 2 years. So what's happening in Russia? And what could be the potential expectations in terms of the margin going forward? How are you arbitrating between top line and margin in the country? And on tax, which is my second set of questions, could you remind us what are the big dynamics at play? And what would be necessary to push lower sales tax rate, which is quite still quite unusual versus peers in the industry?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [7]

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Yes. On Russia, the momentum that we see now growing on the top line is driven essentially by a revitalization of our B2B approach. We have seen quite a solid improvement in HoReCa for the first 3 months already in Q1, and that is also backed by our food service distribution presence in Russia.

Secondly, and this is also very much proven now in the first weeks of calendar year 2020, our approach on Trader and here primarily also our franchise model, Fasol, is supporting the momentum. So we see that the mix in sales is quite encouraging. And therefore, we see a trend improvement, as Christian mentioned in his explanation. In regard of the cost efficiency, the team over there has worked on a very holistic approach. We initiated a shared service center for admin functions in Samara 2 years ago. The team has been transferring function by function into Samara, and that has led to quite an attractive labor cost arbitrage.

We had a headquarter restructuring in October last year in '19, where we have significantly reduced overhead in Moscow. We, furthermore, continuously work on operational improvement throughout the whole store network and logistics. So the team has worked on that. And at the same time, there has been a quite comprehensive approach on pricing, which is rolled out while we speak, addressing margin opportunities also in fine-tuning of buy more, pay less approach, which we initiated roughly 2 years ago. And this has already helped to improve as well gross margin without losing the competitive edge that we have created on B2B. So both things are the reason why we are now quite encouraged with the trend that we've seen throughout the first 4.5 month of this fiscal year.

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Christian Baier, Metro AG - CFO & Member of the Management Board [8]

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And with respect to your question on tax, I think it's important to state that the tax rate is significantly basically impacted by also the situation of the German tax group, where you do have the headquarter sitting. The efficiency measures that we are applying are certainly also in order to address and to support that German tax group. And on the other hand, as mentioned before, real estate gains play an important role in that overall topic as we do expect from the next year onwards, again, real estate and sustainable real estate gains around EUR 100 million. Over the medium term, we do expect to really see also back that tax rate that we had, for example, in the last year.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [9]

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Okay. So for the next years, it would be comparable, but you had much more -- many more real estate gains last year than you expect in the coming years. So how should we -- where should we put the bar for tax rate midterm versus last year?

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Christian Baier, Metro AG - CFO & Member of the Management Board [10]

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It's -- your point is right on real estate gains. And you will also remember that we did have significantly write-downs of deferred tax assets in the last year. So overall, the balance out of those 2 was positive, but not to the extent of the entire real estate gain of last year. So therefore, it should be comparable in the medium term.

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Operator [11]

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Next question is from the line of Nicolas Champ from Barclays.

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Nicolas Champ, Barclays Bank PLC, Research Division - Director [12]

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First one is regarding your like-for-like sales performance in Q1, which was slightly below your full year guidance. I know you reiterated it, but what -- how are you confident that you will achieve your like-for-like sales guidance, given that you will likely face a slightly more demanding comps in the coming quarters?

The second question is about your -- again, Russia. Could you elaborate or share with us where you are in your price repositioning in Russia? You mentioned that you managed to offset in Q1, price investment by cost reduction. Should we expect further price investment in the coming quarters? Or are you pleased with your current price positioning? And third question is about free cash flow. Your working capital variations slightly deteriorated in Q1, if I am correct. Could you elaborate on the drivers? And where do you see working capital evolving by the end of the year?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [13]

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Yes. On the Q1 sales, Christian already mentioned, we had quite a bit of headwind in various parts of our portfolio. And the general strike in France was one, which is to be mentioned. I think the reason why we are positively looking into the future, and therefore, confirm our guidance is that the year-to-date trend is at the upper end. I think we need to emphasize is at the upper end of the like-for-like sales guidance, which we have given to the market. And this is also supported by one of the significant drains of like-for-like in the recent years with , of course, Russia. Russia now for the last number of years has always pulled our like-for-like sales momentum down. With the improvement we have seen, as we mentioned in Q1, but actually more markedly now in the year-to-date trend. This is certainly a precondition and a good contribution for our confirmation that the like-for-like sales momentum will be in the guidance. And we see that the focus on HoReCa and Trader both continue to be very vital, and we would expect further growth in the upcoming quarters. On Russia, the price repositioning starts to work. I think that is the main message. It starts to work in attracting customers, both on HoReCa and on Trader side. And on the other hand, the fine-tuning is happening while we speak, so to say, in making sure that we do not lose the attractive reposition of buy more, pay less. But on the other hand, also take more care about gross margin optimization. So if you would ask me, is it completed? The honest answer is almost. It will never be completed because we will continue now to work on a much more sophisticated pricing system. If your question was about, do we expect a significant deterioration on gross margin? The answer is no.

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Christian Baier, Metro AG - CFO & Member of the Management Board [14]

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And back to your question on net working capital. I think to [vouch] Q1, it's important to also look into 30th of September 2019, where we did have already significant improvements from a stock perspective, which we continue doing. But we are running against that very strong comp. And in terms of payments that we have seen then in the Q1, there have been a couple of topics of extraordinary nature, including cost of VTO and other things. And I think if you ask for the full year, where do we expect to be out there, we should be roughly at the prior year level with respect to net working capital. So stable on the very good development over the last couple of years.

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Operator [15]

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Next question is from the line of Vincent Lee from Bernstein.

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Vincent Lee, Sanford C. Bernstein & Co., LLC., Research Division - Retail Analyst [16]

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I have 3 questions, please. The first one is on Russia. Is it fair to say that you're well ahead of your EBITDA guidance there? My thinking here is that EBITDA is now only down EUR 2 million in constant currency, and Q1 being the most important quarter for you. And so with this [tight] [question, with the top line down 5% in like-for-like terms, that would imply that your margins are really up in the quarter. So my question really is, is this the bottom for margins in Russia? Or am I getting ahead of myself?

My second question relates to the Real disposal proceeds. Can I just check that the EUR 300 million that you quote is net of the EUR 200 million cumulated one-off costs? Or is it really net proceeds of EUR 100 million? And also, will those EUR 200 million cost sit in discontinued operations?

And my final question is, thinking about the proceeds from the China Real disposals. You talked about using the proceeds for deleveraging and extra growth, but you also mentioned dividend continuity. Does that mean you're rolling out any special dividend?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [17]

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Yes. When it comes to the precise allocation of proceeds, we would come back to that as soon as proceeds are, so to say, in the account. So therefore, we would postpone that precise description to that moment in time, which should be there by middle of the year. So that is what I would say on that one. On Russia, I can confirm that we have a positive view on both like-for-like improvement and EBITDA stability. However, as the Russian market has been volatile, I would not declare that this is the quarter where everything has turned green. I think you hear us, Christian, myself, being much more encouraged with the progress. And right now, there is no reason from our point of view to see a deterioration, but it is a volatile market. This I need to put into a disclaimer. In regard of the Real proceeds, the EUR 300 million are net of all transaction costs that we incur. So therefore, these are the proceeds that will come into the company throughout this transaction. The EUR 200 million roughly on restructuring costs will follow in the 3 years to come. And as Christian mentioned, we will account some of that -- a significant amount of that most likely already in this fiscal year, but it's not netted out of the EUR 300 million.

And that's essentially it, I think, from your questions.

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Operator [18]

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Next question is from the line of Fabienne Caron from Kepler.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [19]

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Just to come back on this EUR 200 million one-off cost. Are they all cash cost, will be my first question. The second question, still on cash. Can you tell us what was the repayment of the lease liabilities in Q1? Because I couldn't find this singled out in the cash flow statement. And I'm wondering if it's taken into account in your free cash flow definition. And my third question would be on Russia. Could you give us some color on the like-for-like development on the 3 customer groups. You made some comment -- positive comment already regarding HoReCa and Trader. Maybe you could tell us a bit more. And regarding as well the third client group, the SCO, please.

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Christian Baier, Metro AG - CFO & Member of the Management Board [20]

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Okay. Well, I think with respect to the EUR 200 million one-off costs, as mentioned before, over time, they do all become cash relevant. There could certainly be a difference between the quarters in which the P&L impact does happen in case there are provisions or not. With respect to the payback of the lease liabilities in the first quarter, that was close to EUR 100 million overall. And with respect to the like-for-like for Russia for [HTF], we do not give further details on that. But certainly, especially in the first 6 weeks of the Q2, the development on Fasol and the strong development on HoReCa, especially FSD, is very encouraging.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [21]

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Okay. For the EUR 100 million lease payment, is it in the free cash flow definition or not? Do you include it in it or not? And do you see...

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Christian Baier, Metro AG - CFO & Member of the Management Board [22]

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If -- I think, again, if you are okay, let's follow-up with IR on this very specific point.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [23]

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Yes. And on SCO, do you see some improvement? Have you started to see some improvement in the SCO like-for-like in Russia as well?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [24]

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As we have focused on Trader and HoReCa, that is where we want to see the improvement in the coming years. What we want to take care of is that the deceleration of SCO is handled with care. This is always our challenge when we turn into full wholesale focus. So taking the 2 groups, it's clear that both HoReCa and Trader are progressing nicely and encouraging. And the SCO decline becomes relatively less painful now because we see the other 2 being much more vital.

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Operator [25]

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Next question is from the line of Andrew Gwynn from Exane.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [26]

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Apologies, if I missed it earlier, but the other line seems to have gone -- well, improved, even though you had this one-off gain in the prior year. So I'm just wondering if you could explain a little bit more, perhaps just elaborate or make clear if there's any one-off charges in there, just having a sort of guidance going forward.

Second one is just on China. I mean China, you announced EUR 1.9 billion of sort of EV for that business. Now there's EUR 400 million of cash, obviously getting to an equity value of EUR 2.3 billion. I know you only disposed of 80% and the 10% are the minorities. But I'm still a little bit confused how we get down. And then the last question -- actually, that will do it for now. I'll park it.

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [27]

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Yes. On China, we can come back to you with a full bridge that we have shown in full. But one thing to remind is, we own 90% of the business. We have a 10% minority shareholder to start with. That is, I think, something you need to bear in mind. And then as you said, it's 80% proceeds. So you need to take 90% of the total amount, then deduct 20%, and then some transaction costs and some tax. So that's how you get that.

And on the other line, I will hand over to Christian.

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Christian Baier, Metro AG - CFO & Member of the Management Board [28]

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Yes, on the other line, I think there are 2 elements in it. One is already incoming savings from the reorganization program despite not having had one-off costs in a relevant manner there. That certainly is mostly related to non-tax expenses, where we are already implementing some good improvements and seeing results coming in, that should be coming also throughout the year. And on the other side, there are a couple of effects from the logistics side in working with Real that will also then turn out continuously through this year in that improvement that we see in other.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [29]

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So I mean, if you look at Q4, that was minus 35, Q3, minus 20. So you've had loosely a EUR 40 million plus swing. So should we pencil in plus EUR 20 million in for the rest of the year per quarter?

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Christian Baier, Metro AG - CFO & Member of the Management Board [30]

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Well, I think, especially the quarters that you're quoting, they have been strongly negatively impacted by special topics especially in Q4, that was the VTO costs that were out there. So the development that we have seen now in the other segment has not been significantly impacted by special situations.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [31]

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Okay. So just to be clear, I mean one of the frustrations that you were reporting is we seem to find out that one-off a year later. But just to be clear, in this quarter, there's no exceptional one-offs in this Q1 period in that other line?

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Christian Baier, Metro AG - CFO & Member of the Management Board [32]

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That is true. And if you're referring to Q4, I think the intense discussions that we did have on VTO costs were very transparent.

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Operator [33]

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Next question is from the line of Xavier Le Mené from Bank of America.

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Xavier Le Mené, BofA Merrill Lynch, Research Division - Head of European Food Retail Equity Research and Director [34]

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Just coming back to Andrew's question actually on the logistics gain that you made in Q1. I just want to make clear, is this something sustainable that we can roll out in the coming quarters? Or was it a one-off? I just want to be clear here. Second one, Eastern Europe, actually, you were talking about increasing costs. But can you elaborate a bit more on what these costs are and what we should expect actually in the coming quarters?

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Christian Baier, Metro AG - CFO & Member of the Management Board [35]

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Yes. I think on your point with respect to logistics, this is for this year, a sustainable development. And then later on, certainly, logistics will be touched upon the Real transaction and the volumes going down. But for this year, it is a sustainable one. And with respect to Eastern Europe, the increase in cost is coming from quite a number of countries that see significant hikes in minimum wages that we do see there. We are certainly in 2 ways working against those. One is significant sales improvement that we are doing. And on the other hand, also in those countries, implementing basically efficiency gains and process improvements that we do see there. So overall, when you look into our guidance for the segment, we are confident to be able to especially fulfill that on Eastern Europe.

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Operator [36]

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Next question is from the line of Andrew Porteous from HSBC.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [37]

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Just one more on Russia, if I may. I'm just thinking about sort of the long term there. And obviously, the business has been in like-for-like decline for a while now, and it feels to me like the arguments you made for selling China, you could equally apply to Russia. I mean how should we think about that business long term? Have you -- is it one that's maybe perhaps smaller but look like a B2B business and you spot profitability? Or is it one where you're just sort of trying to stabilize the business, and as I say, it's quite a competitive environment?

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [38]

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Yes. Thanks for the question. I think it's quite a relevant one. And then there is a significant difference between our Chinese operations and our Russian operations and also the overall market composition. Let me start with the business. In China, we were conducting less than 30% of sales with HoReCa and Trader. And therefore, it was way more dependent on end consumer-like business, which, by the way, has even performed now in this very difficult period of time extremely well because it is regarded as a brand that stands for quality and food safety, and therefore, has a very strong consumer profile. We have assessed whether this would be feasible for us to go into full B2B. And assessing all these options, we have then made the choice to progress with a partnership with Wumei and selling the majority to them. In Russia, the composition is different. We basically are conducting already 50% of sales with HoReCa and Trader, and the market composition is quite attractive. If you look into the addressable market for independent traders, the so-called productive stores, there are various numbers in the market, but you can say roughly EUR 75 billion addressable market. Right now, we are generating EUR 1 billion of sales with this group. If you look into the HoReCa market, that is a total addressable market of EUR 15 billion, and we conduct EUR 500 million. That's why we are really bullish that our wholesale profile in Russia can benefit significantly by increasing market share. However, that required a different approach in go to market, and that is very visible in this new franchise model called Fasol, which is giving us a lot of confidence on how to play with traders in the future and how to serve them, how to work for them. And on HoReCa, the new management team has revitalized the business, which was declining for quite a bit of time and HoReCa expect on growth, predominantly on food service distribution. That's why we feel very much encouraged that the Russian market is attractive. We have a uniqueness that we can apply to both target groups. And therefore, we see that our wholesale play, they're only starting now really, and we will have significant benefit from that.

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Operator [39]

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There are no further questions at this time. And I would like to hand back to Olaf Koch, CEO, for closing comments. Please go ahead.

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Olaf G. Koch, Metro AG - Chairman of the Management Board & CEO [40]

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Yes. Ladies and gentlemen, thank you for joining our Q1 call and our update on the Real transaction. Thanks a lot for your attention. Should you have any further questions, don't hesitate to contact our IR team, who are available for you. Thank you very much, and have a great day. Thank you.

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Operator [41]

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