Metro Group Q1 2008 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jaime Vazquez - JP Morgan - Analyst : Good morning, gentlemen. A couple of questions. First of all, I'm sorry, I missed the explanation for the fall in profits in Western Europe by EUR50m, if you can mention that again. Secondly, on Real, can you give us an idea of the performance of the Wal-Mart stores? And secondly on Real, if you can give us an idea of the magnitude of the price investments you have just undertaken ahead of the TV launch? And finally, on Cash & Carry in Germany and Western Europe, whether you can give us a sense of the customer frequency trends there? Thank you very much.

Question: Jaime Vazquez - JP Morgan - Analyst : Cash & Carry frequency?

Question: Jaime Vazquez - JP Morgan - Analyst : Sorry, my question was mainly on Western Europe and Germany.

Question: Jaime Vazquez - JP Morgan - Analyst : Thanks.

Question: Volker Bosse - UniCredit - Analyst : Yes, hello. Good morning, gentlemen. I have two quick ones. First is regarding the early Easter effect. So which impact did that have on your sales trends? So did Media Markt Saturn and Cash & Carry more benefit or suffer from that? What's your impression on that? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. And the second question is regarding Real. Could you give us your sales growth figure in real terms? I would assume that food inflation was the driver of sales growth as well, so could you give a bit more light on that? Thanks.

Question: Volker Bosse - UniCredit - Analyst : Okay.

Question: Volker Bosse - UniCredit - Analyst : Okay. Thanks.

Question: John Kershaw - Merrill Lynch - Analyst : Yes. Morning, gentlemen. Just a couple of questions. Just to come back to Jaime's question, first of all, on Western Europe, can you perhaps break out that EUR50m swing in Western European profits, to give us a bit more color? For example, how many stores did you open, what were the start-up losses and just how weak was the U.K.? And perhaps, as a corollary to that, can you tell us when -- how soon you might look to exit the U.K., because clearly it's very painful there? Back in Germany and on the Real conversions, I suppose the first thing is has the story changed now? Are we less focused on the conversions and the uplifts we get from those? And if you could quantify those, if you can. Or is this a story about just now converting the whole estate with a new offer, in terms of the own label in terms of a marketing campaign? So, perhaps just color that out. And then, within that, can you perhaps give us a sense of how much price investment you made through the first quarter, so that has yet to fully annualize or fully impact and we'll get a bigger loss in the second quarter, perhaps? So, if you could just color out the shape of that, in terms of how we expect the performance in P&L terms to come through. And finally, in terms of Q2 you said you had a good start, but if Easter was very early and therefore not so weak in Q1 presumably it is going to be a net negative for Q2, given the absence of it in the second quarter. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: John Kershaw - Merrill Lynch - Analyst : Okay.

Question: John Kershaw - Merrill Lynch - Analyst : Sorry, is that in the conversion uplifts or is that overall?

Question: John Kershaw - Merrill Lynch - Analyst : Okay.

Question: Xavier Le Mene - Credit Suisse - Analyst : Yes. Good morning, gentlemen. Two or three questions, if I may. The first one, just given what you said about Real, can we understand that you had a kind of pause in the refitting program? Do we have to understand that you are maybe not very satisfied with the refitting stores and that you are expecting maybe more coming from the marketing campaign? That's the first question. The second one, you closed five Real stores in Q1 '08. Can you give us a kind of idea of what was the cost to, I don't know, close or sell these stores? And do you expect a kind of leaner process for the 40 stores that you are planning to close in the next two years? And lastly, can you give us an explanation about the EUR126m that you had in your cash flow for the disposal of fixed assets, what it is related for?

Question: Xavier Le Mene - Credit Suisse - Analyst : Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: James Grzinic - Dresdner Bank - Analyst : Yes, good morning. I have a couple of questions. The first one is I just wanted to understand when you reduced the promotional package in Real. Did that come at the end of the gross margin reinvestment? Is it happening now, that reduction in the promotional package? And my second question was on Eastern Europe. Margins seem to have gone from 4.1% to 4.8%, a great result. What was the driver of that? Was it a reduction in the start-up losses in Media Markt expansion in the region, particularly Russia? Was it maybe a mix benefit in terms of sales by country? And I guess I also have a third one, in terms of just to clarify. The guidance presumably for the year excludes the costs of closures, the 40 stores closures for Real? And maybe, can you explain how you will reduce the fixed cost leverage within the division, to match the reduction in top line, and what the cash costs of doing that will be? Thank you.

Question: James Grzinic - Dresdner Bank - Analyst : Good morning.

Question: James Grzinic - Dresdner Bank - Analyst : I know, but you haven't done it yet. Okay. That's great. Thank you.

Question: Christopher Gower - MF Global - Analyst : Good morning, gentlemen. I just want to go back to Dr. Cordes's point earlier on about pricing perception. Are you telling us that within Cash & Carry you're able to pass on the majority of the input costs that the manufacturers are passing on? And can you give us a level of the differential between food and non-food in Cash & Carry on that inflation level? Thank you.

Question: Christopher Gower - MF Global - Analyst : Perfect. Thank you.

Question: Jurgen Elfers - Commerzbank - Analyst : Yes, good morning. This is Jurgen Elfers. Let's just come back to the Real hypermarket repositioning in Germany. You have mentioned that the frequency at your stores was better. This is a bit surprising to me, because the data that I have at hand shows that frequency has been down in food retailing in Germany for all players, except for Aldi and Lidl. And I was just wondering how come Real has actually been able to increase frequency. What was the reason here, then? The second thing which I would like to flag upon is the earnings collapse, if I may say so, in Western Europe, from EUR75m to EUR26m EBIT. You have explained that with the higher number of Media Markt Saturn stores. When you look at the net new number of stores at Media Markt Saturn, there were only six new stores opened in the quarter and that's probably spread across Germany, Eastern Europe and Western Europe. And I was just wondering whether you'd be happy to shed some more light on the significant earnings collapse in Western Europe. How much of that collapse is due to losses in the U.K.? And again, Mr. Cordes, you said you will not be able to accept such losses. When should we expect actions to deal with the issue? Then second, on Germany again, that's on the Cash & Carry division, when you look at the like-for-like development of 0.2%, again, in volume terms, what would that mean? Would that translate into a higher mid-single digit number of volume declines, given the high food price LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. inflation at the moment? I was wondering whether you can shed some light on the development at both Cash & Carry and at Real hypermarket, in terms of volumes. And then, maybe finally, on the existing Wal-Mart stores which have been converted to the Real network, can you provide us with an idea of the increase of sales densities in terms of percentage at the repositioned former Wal-Mart stores? Thank you very much.

Question: Jurgen Elfers - Commerzbank - Analyst : Mr. Unger, may I just interrupt for one second? Has this historically -- has this pattern already been observed in earlier quarterly reportings? I cannot recall such a negative earnings effect stemming from new store openings which appeared in an earlier quarter.

Question: Jurgen Elfers - Commerzbank - Analyst : Okay.

Question: Jurgen Elfers - Commerzbank - Analyst : Would you mind shedding some more light on the developments in the U.K.?

Question: Jurgen Elfers - Commerzbank - Analyst :

Question: Jurgen Elfers - Commerzbank - Analyst : Was that number above or below your expectations?

Question: Jurgen Elfers - Commerzbank - Analyst : Was it below or above your expectations? Okay. Mr. Cordes, maybe I can just come back on this earnings collapse in Western Europe. The reason why I've been asking simply is how much of the collapse is due to Cash & Carry in the U.K.? I just simply want to get a feeling for this, because it may then also trigger the need to alter the assumptions for Media Markt if the period of start-up losses is being extended. This is why I've been asking that question.

Question: Jurgen Elfers - Commerzbank - Analyst : Okay. Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Jurgen Kolb - Cheuvreux - Analyst : Thanks very much. A lot of the questions have already been asked or answered. A quick one on Eastern Europe, obviously a very strong performance again. Maybe, just for curiosity, any market there, any format where you see some red lights coming up here or some yellow lights coming up, in some other markets maybe, specifically on Hungary, how are you doing there? A little bit of color on the Eastern European markets, how you see the trends there going forward.

Question: Jurgen Kolb - Cheuvreux - Analyst : And just for, again, curiosity, you mentioned the Real start-up losses, any indication this time maybe that you would provide us with what magnitude that is?

Question: Jurgen Kolb - Cheuvreux - Analyst : On the Real side, the start-up losses that you had, just moving into some of the new Eastern European countries.

Question: Jurgen Kolb - Cheuvreux - Analyst : Very good. Thank you very much.

Question: John Guy - MF Global - Analyst : Yes. Good morning, gentlemen. A few questions with regard to your Media Markt and Saturn, if you could please quantify the weakness in your two most challenging markets there, first of all. And really, how do you see the French consumer environment and what sort of level of like-for-like growth did you see in the first quarter? And thirdly, by how much do you expect your gross margin to improve, given the less promotional activity that you've seen year on year? Thank you.

Question: John Guy - MF Global - Analyst : Okay. Thank you.

Question: John Guy - MF Global - Analyst : Okay. Thanks for that. And in terms of the last question I was asking, with regard to your comments that there was less promotional activity, I think, going through in the first quarter for Media Markt and Saturn --

Question: John Guy - MF Global - Analyst : Okay. Fine.

Question: John Guy - MF Global - Analyst : Fine. Thanks very much indeed.

Question: Sreedhar Mahamkali - Goldman Sachs - Analyst : Yes. Hi, good morning. Just a couple of brief ones, please. If I look at the gross margins, I know it's a pretty complicated issue because of the divisions and everything else, but at Group level gross margins improved quite substantially. If you could kindly break that into, perhaps, by divisions or geographies is the first question. And secondly, you talked a lot about Real price repositioning. Are you able to share any insight to how you see pricing versus your competitors in Germany? Those will be the two questions. Thanks.

Question: Sreedhar Mahamkali - Goldman Sachs - Analyst : Are you able to say how many SKUs you might have actually cut prices on and how many of these are [AVIs]? Any level of any magnitude are you able to share, in terms of this price repositioning program, please?