REVENUE BY COUNTRY EUR 3.6 BILLIONhaniel.unternehmensberichte.net/haniel/annual/2013/gb/...GROUP...

REVENUE BY COUNTRYEUR 3.6 BILLION

27%GERMANY

42%REST OF EUROPE

4%OTHER COUNTRIES

27%USA

GROUP REPORT OF THE MANAGE MENT BOARD

GROUP STRUCTURE AND BUSINESS MODELS

30

SUPPLEMENTARY REPORT52

REPORT ON OPPORTUNITIES AND RISKS

53

REPORT ON BUSINESS SITUATION33

33 Haniel Group33 Revenue and Earnings Performance36 Financial Position38 Assets and Liabilities39 Employees

40 Holding Company Franz Haniel & Cie. 42 CWS-boco44 ELG46 TAKKT48 Celesio50 Metro Group

REPORT ON EXPECTED DEVELOPMENTS

58

GROUP REPORT OF THE MANAGEMENT BOARD / GROUP S TRUC TURE AND BUSINES S MODEL S

30

The Haniel Group combines various divisions. Franz Haniel & Cie. GmbH functions as a strategic management holding company and is responsible for portfolio man-agement. The operating business is in the hands of the divisions, which act independently of one another and which each occupy a leading market position. The Haniel Group comprised five divisions in 2013.

HOLDING COMPANY DESIGNS THE PORTFOLIOFranz Haniel & Cie. GmbH is a tradition-steeped German family- equity company whose objective is to sustainably increase the value of its investment portfolio over the long term. Since the fam-ily shareholders have provided equity for an unlimited term, Haniel pursues a long-term investment strategy aimed towards gener-ating returns greater than the cost of capital. In so doing, Haniel is attempting to harmonise this economic goal with ecological and social goals. The company is pursuing this goal by following the guiding principal of the “honourable businessman”. At Haniel, capital and management are separated as a matter of principle: Although the Company is 100 per cent family owned, no member of the Haniel family works at the company.

When structuring the portfolio, Haniel concentrates on business models that are supported by global megatrends and therefore have a high potential for increases in value over the long term. Promising markets and business models are analysed continually in order to detect growth opportunities. Haniel strives to reach a leading mar-ket position in all divisions. Its strategy also includes the sale of divisions if Haniel has achieved the targets for the increase in value or Haniel is no longer the best owner. For this reason, Haniel decided to sell the Celesio division to McKesson, the leading North American healthcare services company, in 2013. The transaction was suc-cessfully completed in the first quarter of 2014.

In addition to portfolio management, the Haniel Holding Company’s task is to create the range of actions permitted for the operating divisions – in this respect the Holding Company considers itself to be a strategic catalyst. Significant strategic thrusts and initia-tives are agreed on in discussion with the divisions, which are then implemented by the divisions under their own responsibility. The Haniel Management Board regularly discusses the progress with the divisions’ management. The Haniel Holding Company is also responsible for selecting and developing top executives for the divi-sions and offering the divisions tools and selected services. This ensures that all divisions use their respective business models to contribute to the value enhancement of the investment portfolio in the best manner possible.

DIVERSIFIED BUSINESS MODELSHaniel’s divisions – the 100 per cent holdings CWS-boco and ELG, the majority shareholdings TAKKT (50.28%) and Celesio (50.01%) as well as the Metro minority interest (30.01%) – act independently of one another in their respective markets. The business models dif-fer significantly from one another:

CWS-boco offers end-to-end solutions in the fields of washroom hygiene, dust control mats and textile services. The division is one of the international leaders in this field with activities in 18 Euro-pean countries as well as China.

CWS-boco’s core business is in the rental service for work wear, washroom hygiene products and dust control mats. The offerings range from customised corporate fashion collections, to protective and safety clothing, on to modern hygiene systems and products such as towel, soap and fragrance dispensers. The textiles are properly prepared in the division’s own laundries and the dispens-ers are regularly serviced, both under long-term service contracts. The rental business is supplemented by the sale of consumables such as soap, disinfectants and paper as well as washroom hygiene products and work clothes. CWS-boco’s customers – companies of all sizes and industries – benefit from a comprehensive service network as well as sustainable products and processes.

CWS-boco’s strategy is anchored to a considerable extent in the Focus Future repositioning project initiated in 2010. Focus Future is aimed at increasing customer satisfaction and optimising pro-cesses and cost structures with a view to safeguarding the divi-sion’s long-term future. Among the project’s core initiatives are the optimisation of the sales function, customer support, procurement and the laundry network as well as carrying out quality and effi-ciency enhancement programmes in the operating business and logistics. CWS-boco achieves additional growth potential by taking over local companies that supplement the existing service network.

The ELG division is the global leader in the trading and recycling of raw materials, in particular for the stainless steel industry. With more than 40 locations in North America, Europe, Asia and Australia, the division has one of the industry’s largest global networks. The product line essentially comprises stainless steel scrap and superalloys. Superal-loys are high-alloy, nickel-containing scrap and titanium scrap. ELG’s customers, primarily global stainless steel producers, receive the material in exactly the composition that they need for further process-ing – just in time and pursuant to the highest quality standards.

In order to be able to meet customer requirements in the future as well, the company is continually increasing its international pres-ence. For example, additional procurement sources for stainless steel scrap and superalloys are developed, and new customers are gained in growth markets. ELG intends to further expand business in the field of superalloys in particular. To that end, ABS Industrial Resources in the UK as well as Metals Management Aerospace in the USA were acquired in 2013. A key success factor in the superal-loy business is high product quality, which is confirmed by certifi-cation of the company preparing the scrap by its customers.

In addition to trading in stainless steel scrap and superalloys, ELG is active in the nascent business of recycling carbon fibres.

The TAKKT division is a B2B direct marketing specialist for business equipment with a comprehensive service offering and business

GROUP STRUCTURE AND BUSINESS MODELS


31

activities primarily in Europe and North America. The product range comprises operating and warehouse equipment, office furniture and accessories, transport packaging, display products as well as equipment for the retail sales and the restaurant and hotel mar-kets. The offerings of hundreds of suppliers are bundled and clearly presented.

In its sales approach, TAKKT follows a multi-brand strategy that comprises multi-channel and web-focused brands. Multi-channel brands combine the classic catalogue business, which is aimed more at medium-sized and larger companies, with an online offer-ing, telephone sales and field representatives in an integrated approach. TAKKT’s web-focused brands are concentrated on cus-tomers who cannot be reached efficiently using the traditional cat-alogue business and the related online offerings. When a customer has ordered the desired product via one of these channels, TAKKT offers its customers fast delivery using sophisticated logistics systems that are individually tailored to the target countries.

TAKKT intends to increase its profitability by several paths. This includes extending e-commerce, which encompasses the further development of web-focused brands, as well as the expansion of additional multi-channel activities. TAKKT strives for a balanced combination of the catalogue business, e-commerce activities and direct sales using telephone sales and field representatives. Additional initiatives include the continual expansion of the product line and the increased use of own brands in the product portfolio. In addition, international expansion of existing successful business models will be fostered and promising companies will be acquired to supplement current business activities.

The Celesio division is among the leading international trading and service companies in the pharmaceutical market and operates in 13 European countries and Brazil. Celesio provides patients with medicines through its pharmaceutical wholesale with 133 branches worldwide and about 2,200 own retail pharmacies in addition to co-operations with independent, owner-run phar-macies. Celesio also offers additional services and thus covers the entire pharmaceutical value chain – from the pharmaceutical industry to patients.

In addition to the wholesale business, Celesio is increasingly focused on the pharmacy business due to its strategic realign-ment. A concept for a European pharmacy network was developed to expand the pharmacy business. Through this network, Celesio offers patients and consumers new, comprehensive service and consulting services, in particular in the skin and pain categories. In the course of implementing the concept, Celesio’s own pharmacies are also being gradually converted to the Lloyds brand name. As a result of the strategic realignment, the optimisation of the value chain has also become a focal point. The objective is to optimise logistical processes across all stages, from the manufacturer to the pharmacy, in order to increase efficiency. Additionally, central procurement activities are being extended, and Celesio intends to expand within attractive regions.

The growth driver for Celesio’s business is the increasing demand for medicines due to the higher average age of the global population as well as the increasing number of chronically ill patients. These developments also lead to increasing expenditures by governmen-tal healthcare systems. Due to limited financing options, these sys-tems are intervening regulatively in pharmaceutical markets and increasing pressure on market participants. Therefore, size and cov-erage range are decisive factors for companies such as Celesio in order to remain competitive. Accordingly, the wholesale pharmaceu-tical market is currently in a consolidation phase. Against this back-drop, Haniel decided to sell Celesio to McKesson, the leading North American healthcare services company. Having an owner from the pharmaceutical industry gives Celesio the opportunity to increase profitability faster and to a greater degree by leveraging synergies.

Another division of the Haniel Group, the METRO GROUP, is among the most important international retail groups. The METRO GROUP includes the four autonomous sales lines: Metro Cash & Carry, Media-Saturn, Real and Galeria Kaufhof. Metro Cash & Carry is in the self-service wholesale business and focuses on commercial cus-tomers, in particular hotels, restaurants and catering companies. The electronics retailer Media-Saturn sells household devices and consumer electronics under the Media-Markt and Saturn brands. Real offers an extensive and wide-ranging product line in the self-service hypermarkets business. Galeria Kaufhof is a leading

* The Celesio division was sold in the first quarter of 2014 and is reported under discontinued operations.

CWS-BOCO100%

ELG100%

TAKKT50.28%

CELESIODiscontinued operation*

METRO GROUP30.01%

Textile services,washroom hygiene,dust control mats

Trading and processing of raw materials for the stainless steel industry

B2B direct marketing specialist for business equipment

Retail pharmacies, pharmaceutical whole-sale and co-operations with pharmacies

Self-service wholesale,hypermarkets, con-sumer electronics, department stores

FRANZ HANIEL & CIE. GMBH


32

operator of department stores. The METRO GROUP’s sales lines distribute their products and services in sales outlets and online to customers in 32 countries across Europe, Asia and Africa.

The METRO GROUP’s strategic objective is to create added value for the customer. In order to achieve this objective, the METRO GROUP intends to orient its business even more strongly on the needs of the customer and to promote innovation. In addition, growth will be pursued in all sales lines, and expansion will be driven forward selectively. To take into account changing buying hab-its among customers, Metro Cash & Carry’s delivery service and multi-channel sales function are being further expanded. As part of their multi- channel activities, the sales lines are increasingly dove-tailing their retail business with online sales. At Media-Saturn and Galeria Kaufhof, customers can have the merchandise they order online shipped to them, but they can also pick it up at the nearest location or use services there. Real offers the option of ordering food products and drugstore items online and picking them up at select drive-in locations.

VALUE-ORIENTED MANAGEMENT SYSTEMIncreasing shareholder value is at the core of the activities of the divisions and the Haniel Holding Company. In order to ensure that the conduct of all participants is oriented on this goal, financial and non-financial indicators are utilised within the divisions and the Haniel Holding Company. Haniel relies solely on financial indicators to manage the Group. In addition to revenue figures, the Manage-ment Board uses operating profit to assess the operational devel-opment of the divisions. Additionally, the profit before taxes is used as an indicator, which includes the investment result and the results from financing activities in addition to the operating profit.

A benchmark for value contribution at Haniel is the indicator Haniel value added (HVA). This figure indicates whether Haniel is generat-ing results that at least cover the cost of capital. The cost of cap-ital comprise the yield required by debt and equity providers and reflect the risk attributable to the company’s business activities. The return on capital employed (ROCE) is also used as a yield indi-cator in addition to Haniel value added. Recognised investments in non-current assets as well as the Haniel cash flow, in the sense of a cash-earnings indicator, are used to manage liquidity.

The indicators used for Group management are also used in the Haniel Group’s compensation systems.

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HANIEL GROUP / RE VENUE AND E ARNINGS PERFORMANCE

33

Haniel initiated the sale of Celesio in 2013. The division is therefore no longer included in the Haniel Group’s reve-nue and profit before taxes for the 2012 and 2013 finan-cial years.* The business performance at the remaining divisions in 2013 was impacted by the weak economic situation. As a result of this, the Haniel Group’s revenue was lower than in the previous year. Nevertheless, oper-ating profit increased. Profit before taxes even improved significantly from EUR -1,525 million to EUR 117 million, as the previous year’s loss was severely impacted by the impairment loss of the Metro investment. Haniel also attained a considerable increase in profit after taxes, which also includes the net income from Celesio.

DIFFICULT MACROECONOMIC ENVIRONMENT Growth in the global economy was again restrained in 2013: The global gross domestic product rose by 3.0 per cent and thus almost reached the growth of the previous year. Once again, no positive economic stimuli came from the euro zone in 2013. The region remained in recession, although the risk of the European Currency Union falling apart is reduced for the time being. Although the first indications of improvement were seen in the second half of the year, gross domestic product for the year as a whole declined by 0.4 per cent. The German economy developed comparatively well with economic growth of 0.5 per cent.

At 1.9 per cent, the USA posted lower economic growth than in the previous year, which is also attributable to the reductions in gov-ernment spending as a result of the budget dispute. Momentum in the economies of emerging markets, which had recently been growing quickly, slowed as well. The first harbingers of a more restrictive monetary policy by the Federal Reserve Bank had a negative impact on these markets – China’s economy, for example, grew by just 7.7 per cent instead of the expected 8.2 per cent.

DECLINE IN REVENUE DUE TO WEAK ECONOMYThe Haniel Group’s revenue declined by 12 per cent to EUR 3,580 million in the financial year – even though the contributions by com-panies acquired by CWS-boco, ELG and TAKKT in the 2012 and 2013 financial years had a positive influence on revenue development. Adjusted for these business combinations as well as negative cur-rency translation effects – primarily the development of the US dollar – revenue at the Haniel Group declined by 15 per cent. The majority of this decline is attributable to the sharp decline in rev-enue at ELG. The continuing weak economy impaired the demand for stainless steel products, which led to declining output tonnage at ELG. The lower prices for raw materials significant to ELG’s busi-ness – in particular nickel – also had a negative impact on ELG’s rev-enue. The TAKKT division also posted revenue declines because the weak economic situation resulted in lower revenues, in particular at TAKKT EUROPE. In contrast, revenue at TAKKT AMERICA increased slightly even though the reductions in government spending in the

USA had noticeably negative effects. At CWS-boco, the weak econ-omy was apparent only to a relatively low extent. Revenue in the rental business remained stable, though trade sales declined.

IMPROVED OPERATING PROFITThe Haniel Group’s operating profit increased from EUR 154 million in the previous year to EUR 166 million in 2013 despite lower reve-nue. CWS-boco was again able to increase operating profit thanks to increases in efficiency gained from the Focus Future reposition-ing project. The Haniel Holding Company also made a positive con-tribution to the development of the Haniel Group operating profit. By contrast, the poorer revenue development due to the weak economy led to lower results at ELG and TAKKT.

PROFIT BEFORE TA XES SIGNIFICANTLY UP YEAR-ON-YEARProfit before taxes increased even more sharply than operating profit – from EUR -1,525 million to EUR 117 million. In addition to operating profit, profit before taxes also includes the invest-ment result and the result from financing activities. The increase resulted from both a significantly higher investment result and an improved result from financing activities.

The investment result essentially comprises the earnings of the METRO GROUP attributable to Haniel. The METRO GROUP’s business was impacted by the difficult economic climate in 2013, particularly in southern Europe, as well as by portfolio measures that resulted in a decline in revenue. Nevertheless, the METRO GROUP generated higher operating profit, above all due to lower one-off expenses for portfolio and restructuring measures. The 2013 earnings contribu-tion for Haniel from the Metro investment therefore rose to EUR 75 million. In the previous year, the earnings contribution was weighed down massively by the impairment loss of the Metro investment and totalled EUR -1,373 million.

In addition to the investment result from the Metro investment, Haniel generated income from the sale of two investment funds in

4,060 3,580

-12%REVENUE

2012 2013

EUR million

154 166

+8%OPERATING PROFIT

2012 2013

EUR million

HANIEL GROUPREVENUE AND EARNINGS PERFORMANCE

* Prior-year figures have been adjusted in the report of the Management Board in accordance with IFRS.

34

The Haniel Group’s profit after taxes for 2013 totalled EUR 267 mil-lion and was thus a considerable turn-around from the previous year’s loss of EUR -1,728 million.

EXPECTED POSITIVE PROFIT AFTER TA XES ATTAINEDIn last year’s projection, Haniel assumed that an improved eco-nomic climate would have a positive impact on the Haniel Group’s business development for the 2013 financial year. It was also assumed that one-off expenses would not weigh down earnings on a scale comparable to 2012.

Contrary to this projection, the divisions’ business development in 2013 was again negatively impacted by the economic environ-ment, which had been weaker than anticipated. Therefore, ELG and TAKKT in particular developed more poorly than expected, and their operating profit did not increase slightly as expected.

Celesio also generated lower operating profit in 2013 than assumed due to the strong rebate competition in Germany; how-ever, Celesio’s earnings are presented in the Haniel Group’s profit or loss from discontinued operations.

Due to a weaker revenue trend caused by cyclical factors and selec-tive price reductions, the METRO GROUP also generated a lower operating profit before one-off expenses than forecast. Never-theless, as projected, Haniel realised a higher investment result from the Metro investment since no one-off expenses weighed down earnings on a scale comparable to 2012.

Overall, in financial year 2013, the Haniel Group generated positive profit before taxes and positive profit after taxes as expected – in spite of the weaker development of the divisions.

HANIEL VALUE ADDED AND ROCE IMPROVEDThe objective of value-oriented control is to continuously and sus-tainably increase shareholder value. The Haniel Group uses Haniel value added (HVA) and the return on capital employed (ROCE) as performance indicators.* HVA expresses the value contribution generated within a single year. Positive value is added if earnings after taxes and before finance costs, i.e., the return, exceeds the cost of capital. The cost of capital is calculated by multiplying the weighted average cost of capital with the average capital employed. The weighted average cost of capital reflects the return expecta-tions of equity and debt holders, factoring in the risks associated with providing capital. The costs of equity and debt are determined each year, as is their weighting. A weighted average cost of capital of 8.1 per cent was used to calculate HVA in 2012 and 2013.

In 2013, HVA amounted to EUR -217 million, as compared to EUR -2,175 million in the previous year. This increase is attributa-ble to two factors: firstly, at EUR 607 million, the return was signif-icantly higher in 2013 than in 2012 since in the previous year, the investment result was weighed down by the impairment loss of the Metro investment and the fact that one-off expenses for restruc-turing measures and the disposal of business activities at Celesio

2013. The income realised from these investment funds was lower in the prior-year period.

The result from financing activities, which is composed of finance costs and other net financial income, improved from EUR -314 mil-lion in the previous year to EUR -148 million in 2013. This was due to the lower interest expense incurred at the Haniel Holding Com-pany compared to the previous year as a result of reduced financial liabilities. Additionally, high one-off expenses in the previous year impacted the net financial income of Haniel Holding Company neg-atively: For one, there was a one-off interest expense as a result of the lower ratings of the Haniel Holding Company. Secondly, impair-ment losses on non-current receivables were necessary at the Haniel Holding Company in the previous year.

PROFIT AFTER TA XES INCREASED CONSIDERABLYAs was the case for profit before taxes, profit after taxes from con-tinuing operations was above the previous year’s level. Despite the increase in profit before taxes, the tax expense fell from EUR 54 million in the previous year to EUR 35 million. The relatively high tax expense in the previous year was caused by the impairment loss of the Metro investment, which reduced the profit before taxes but did not reduce taxes.

Earnings from the Celesio division, for which Haniel initiated the sales process during the 2013 financial year, are presented in profit or loss from discontinued operations. The profit or loss from discontinued operations rose from EUR -149 million in the previous year to EUR 185 million in 2013. Celesio’s business development in 2013 was impaired by the continuing rebate competition in German wholesale, which resulted in considerable earnings losses. In con-trast, additional cost savings from the Operational Excellence Pro-gram in particular had a positive impact. Overall, Celesio’s earnings were significantly higher than in the previous year because the pre-vious year’s result was burdened especially by one-off expenses for restructuring measures and the sale of business activities.

-1,525 117

>+100%PROFIT BEFORE TA XES

2012 2013

EUR million

-1,728 267

>+100%PROFIT AFTER TA XES

2012 2013

EUR million


* For a detailed calculation of the indicators HVA and ROCE, see the explanations in the explanatory notes on page 97.

35


had a negative impact on profit from discontinued operations. Sec-ondly, the cost of capital fell because the average capital employed was reduced through the disposal of business activities at Celesio and the impairment loss of the Metro investment in 2012.

The performance indicator ROCE reflects the return realised on the average capital employed. The Haniel Group’s ROCE increased from -10.9 per cent in 2012 to 6.0 per cent in 2013. Hence in both years the return on capital employed was below the 8.1 per cent weighted average cost of capital.

EUR million 2012 2013

Return -1,249 607

– Cost of capital 926 824

Haniel value added (HVA) -2,175 -217

Return -1,249 607

/ Average capital employed 11,432 10,173

Return on capital employed (ROCE) -10.9% 6.0%

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HANIEL GROUPFINANCIAL POSITION

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HANIEL GROUP / FINANCIAL POSITION

Haniel was able to reduce debt during the financial year at both the Group and Holding Company level and further ensure solid financing.

FINANCIAL GOVERNANCE BETWEEN THE HOLDING COMPANY AND THE DIVISIONS The ultimate objective of financial management is to cover the financing and liquidity needs at all times while maintaining entre-preneurial independence and limiting financial risks. The Holding Company prescribes principles which establish minimum organ-isational requirements and structure key financial management processes – including financial risk management. These directives are documented in guidelines for the treasury departments of the Holding Company and the fully consolidated divisions. The divi-sions use this basis to identify, analyse and evaluate the financial risks that the operating business is responsible for – in particular liquidity, credit, interest rate and currency risks – and take meas-ures to avoid or limit these risks. In addition, the Holding Company sets the financing and financial risk management strategy and approves the financial counterparties and financial instruments used, as well as limits and reports.

While staying within these guidelines, the divisions manage their own financing based on their own financial and liquidity planning. Cash management is also the responsibility of the divisions. In order to leverage economies of scale, the Holding Company and its finance companies support the divisions and, together with partner banks, offer cash pools in various countries. Combining central directives by the Holding Company with the autonomy of the divisions in terms of their financing takes into account both the different levels of investment by the Holding Company in the divisions as well as the divisions’ individual requirements for financial management.

TRUSTING CO-OPERATION WITH FINANCING PARTNERS As a family business with stable but limited equity financing, access to sources of debt capital are of high importance to Haniel. Accordingly, a good reputation with financial partners is essen-tial. A significant aspect of this is providing rating agencies and business partners with timely and transparent information while maintaining equal treatment with respect to financial information and material contractual components. Only if this is ensured can a company earn a high degree of trust from banks and investors as a long-standing and reliable business partner, such as Haniel has enjoyed for many years.

A stable good rating is evidence of the corresponding creditworthi-ness and creates transparency that is necessary for a trusting rela-tionship with financing partners. For that reason, Haniel voluntarily submits to external ratings. The Holding Company currently has a long-term credit rating of BB+ and Ba1 with Standard & Poor’s and Moody’s, respectively, with a stable outlook. The rating agencies’ classifications are essentially based on the market value gearing, which is the ratio between net financial liabilities at the Holding Company level and the market value of the investment portfolio, as

well as the cash flows at the Holding Company level. The improve-ments in the Standard & Poor’s and Moody’s ratings by one notch each over the course of 2013 are important milestones on the way to reaching the declared goal of a stable investment-grade rating. Haniel will also undertake additional efforts in the coming years to attain this goal step-by-step.

DIVERSIFIED FINANCING Diversification of financing is a significant core element of financial management. The use of various financing instruments with a broad range of business partners not only ensures access to liquidity at all times, it also reduces the dependency on individual financial instru-ments and business partners. In addition, the Group can respond flexibly to developments on the capital markets and in the banking sector. Binding commitments for credit facilities which are, however, utilised to only a limited extent, are an expression of the effort to obtain secure and independent financing. The Haniel Group has used and unused credit facilities in the amount of some EUR 3.9 billion.

Additional financing security is ensured by a balanced maturity structure with appropriate long-term financing. The financial liabil-ities reported in the Haniel Group’s Statement of Financial Position were EUR 2,499 million as at 31 December 2013. Of that amount, EUR 1,773 million has a maturity of more than one year. Celesio’s financial liabilities were classified as liabilities held for sale due to the intention to sell them and amounted to EUR 1,902 million.

With respect to the diversification of financing sources, Haniel endeavours to obtain financing on the capital market in addition to bank loans. To that end, the Haniel Holding Company updates its commercial paper programme at longer intervals and its debt issu-ance programme in the amount of EUR 5 billion annually. Based on information contained therein, bonds can be placed very flexibly in terms of the timing and amount and adjusted to the respective market conditions. As a result of the easing of the debt burden dur-ing the financial year, the Haniel Holding Company repurchased bonds so that the carrying amount of its outstanding bonds at year’s end was reduced from EUR 1.7 billion to EUR 1.3 billion. The Celesio division issued four bonds in recent years with a carrying amount totalling EUR 1.5 billion as at 31 December 2013. The total value of issued bonds in the Haniel Group is thus EUR 2.8 billion as at the reporting date. In addition, the CWS-boco, ELG and TAKKT divisions have increasingly financed themselves on the market for promissory loan notes in recent years, thus broadening their financing base. The value of promissory loan notes, commercial paper and other securitised liabilities totalled EUR 0.3 billion at the end of 2013. Additionally, the CWS-boco, ELG and Celesio divisions maintain programmes for the ongoing sale of trade receivables to third parties.

NET FINANCIAL LIABILITIES REDUCEDThe Haniel Group’s net financial liabilities, that is, financial liabilities less cash and cash equivalents, amounted to EUR 3,843 million as at 31 December 2013. That figure includes the net financial liabil-ities of the Celesio division, which is reported under discontinued

37

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HANIEL GROUP / FINANCIAL POSITION

operations. Net financial liabilities for the previous year amounted to EUR 4,859 million. This significant reduction was primarily attrib-utable to the Haniel Holding Company, which continued to imple-ment its package of debt reduction measures in 2013 and used the proceeds generated through those measures to reduce its net financial liabilities. The divisions also reduced their debt in financial year 2013.

HANIEL CASH FLOW DECLINESHaniel uses the performance indicator Haniel cash flow to assess the strength of its liquidity position in its current business activi-ties. This indicator reveals the extent to which Haniel generates suf-ficient financial resources through its current business activities to enable it to secure funding both for its current net assets* as well as its investing activities. Haniel cash flow fell from EUR 617 million to EUR 540 million in financial year 2013 – despite a significantly higher profit after taxes. This is due to the fact that the impairment loss from the Metro investment and the disposal losses at Celesio, which weighed on the prior-year profit after taxes, were non-cash expenses. The primary reason for the decline in Haniel cash flow was the reduced dividend payment from the Metro investment.

Cash flows from operating activities, which supplement Haniel cash flow in depicting the change in current net assets, amounted to EUR 649 million in 2013, and were thus significantly higher than Haniel cash flow. This is attributable to the fact that financial resources were released as a result of the reduction in current net assets. Inventories were reduced both in terms of value and volume, par-ticularly at ELG. Prior-year cash flows from operating activities

amounted to EUR 519 million and were thus lower than Haniel cash flow due to the fact that the Group had made payments in connec-tion with the expansion of its current net assets.

HIGH CASH FLOW FROM DIVESTMENTSCash flow from investing activities, i.e. the net outlays for capital expenditure and proceeds from divesting activities, amounted to EUR 320 million in 2013. The amount for the previous year had been EUR -341 million. This was due to the fact that outlays for invest-ing activities were lower and greater proceeds were generated from divesting activities: Capital expenditure for property, plant and equipment, intangible assets and other non-current assets, as well as for business combinations, amounted to EUR 292 million in 2013. Payments in the previous year had amounted to EUR 740 million and included major business combinations such as Celesio’s acquisition of the remaining shares in the Brazilian wholesaler Pan-pharma and TAKKT’s acquisition of Ratioform and GPA. Proceeds from divestment activities amounted to EUR 612 million during the financial year. That figure essentially consisted of proceeds from the Haniel Holding Company’s disposals of interests in METRO AG, two investment funds and a loan. Proceeds in the previous year amounted to only EUR 399 million, and consisted in particular of inflows of cash from the sale of business activities at Celesio.

The positive cash flows from operating and investing activities enabled the Group to considerably reduce its financial liabilities during the financial year. This is expressed in a negative cash flow from financing activities amounting to EUR -964 million. That figure includes outflows for dividends to minority shareholders amount-ing to EUR 34 million. Outflows for shareholder dividends in the pre-vious year amounted to EUR 89 million. This decrease is primarily attributable to the fact that no dividends were paid to the share-holders of the Haniel Holding Company for financial year 2012.

617 540

-12%HANIEL CASH FLOW

2012 2013

EUR million

740 292

-61%CAPITAL EXPENDITURE

2012 2013

EUR million

* Current net assets consist essentially of trade receivables and inventories less trade payables.

EUR million 2012 2013

Haniel cash flow 617 540

Cash flow from operating activities 519 649

Cash flow from investing activities -341 320

Cash flow from financing activities -82 -964

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GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HANIEL GROUP / A S SETS AND LIABILITIES

The Haniel Group’s total assets fell as a result of the disposal of business activities. This led to a significant improvement in the equity ratio. The balance sheet struc-ture gained strength in financial year 2013.

TOTAL ASSETS DECREASEDThe Haniel Group’s total assets decreased from EUR 14,469 million as at 31 December 2012 to EUR 13,387 million as at 31 December 2013. Non-current assets fell from EUR 8,178 million to EUR 4,745 million. The primary reason for this was the reclassification of the Celesio division’s non-current assets as current assets, where they are reported as assets held for sale as at the reporting date. In addi-tion, non-current assets were also reduced through the sale of a loan by the Haniel Holding Company and due to negative currency translation effects. By contrast, current assets increased from EUR 6,291 million to EUR 8,642 million – particularly as a result of the reclassification of the Celesio division’s non-current assets as current assets. This was offset by the disposal of assets classified as held for sale as at 31 December 2012, and by negative currency translation effects.

EQUIT Y RATIO IMPROVES SIGNIFICANTLYEquity increased from EUR 4,320 million to EUR 4,556 million. That increase and the reduction in total assets resulted in a significant improvement in the equity ratio, from 30 per cent to 34 per cent. Non-current liabilities decreased from EUR 5,592 million in the pre-vious year to EUR 2,240 million in 2013. This was due on the one hand to the reclassification of the Celesio division’s non-current liabilities as current liabilities, where they are reported as liabili-ties held for sale as at the reporting date. In addition, the reduction of the Holding Company’s and divisions’ debt resulted in a signif-icant reduction in the Haniel Group’s non-current financial liabili-ties. By contrast, current liabilities increased from EUR 4,557 mil-lion in the previous year to EUR 6,591 million, primarily due to the reclassification of the Celesio division’s non-current liabilities as

HANIEL GROUPASSETS AND LIABILITIES

current liabilities. Overall, the Haniel Group’s balance sheet struc-ture was highly sound as at 31 December 2013: not only was there an increase in the equity ratio, but equity and non-current liabilities were also greater overall than non-current assets.

DECREASE IN RECOGNISED INVESTMENTSThe Haniel Group’s recognised investments decreased from EUR 645 million in the previous year to EUR 326 million in financial year 2013. That figure included not only investments in contin-uing operations, but also investments in the Celesio division, which is reported under discontinued operations. The considera-ble decrease in recognised investments was due in particular to the TAKKT division’s acquisitions of Ratioform and GPA, which had been counted among the previous year’s investments. By contrast, there was little activity relating to business combinations in 2013. Celesio’s investments were also lower in 2013 than they had been in the previous year – due to fewer outlays for IT projects. For this reason, recognised investments in property, plant and equipment, intangible and other non-current assets fell year on year, although a slight increase had been assumed in last year’s forecast.

14,469 13,387

2012 2013

43%

57%

Current assets65%

Non-current assets35%

14,469 13,387

2012 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONASSET STRUCTUREEUR million

EQUIT Y AND LIABILIT Y STRUCTUREEUR million

39%

31%

30%

Current liabilities49%Non-current liabilities17%

Equity34%

The changes in headcount in 2013 were characterised by portfolio measures. While the number of employees at Celesio declined due to the sale of business activities, it rose at ELG and TAKKT due to business combinations. The Haniel Group had an average of 50,279 employees in the 2013 financial year, of which 11,525 were in continuing operations.

EMPLOYEE FIGURES DECLINING AT CELESIOAt an average of 50,279 for 2013, the Haniel Group employed sig-nificantly fewer employees than in the previous year; for 2012 the average was 56,480. The decrease is attributable to the Celesio division, which sold Movianto, Pharmexx, and the mail-order phar-macy DocMorris, as well as additional business activities, in 2012 as part of the strategic realignment. Since the employees of this division were still counted among the average number of employ-ees at Celesio in 2012, this figure decreased significantly from 45,166 to 38,754. Due to the disposal of Celesio, the division’s employees are allocated to discontinued operations.

MORE EMPLOYEES AT ELG AND TAKKTThe average headcount in the Haniel Group’s continuing operations increased from 11,314 to 11,525. The ELG and TAKKT divisions posted increases here. At ELG, the inclusion of the acquired compa-nies, ABS Industrial Resources and Metals Management Aerospace, increased the number of employees from 1,098 to 1,224. In the TAKKT division, the average number of employees rose due to the initial full-year consolidation of the companies acquired in 2012, GPA and Ratioform, from 2,340 to 2,551 in the financial year just ended. In contrast, the average headcount fell at CWS-boco from 7,643 to 7,527. While acquisitions had a positive effect on the num-ber of employees, CWS-boco reduced the headcount as planned as part of the Focus Future repositioning project.

11,314 11,525

+2%

EMPLOYEES

2012 2013

Continuing operations

56,480 50,279

-11%

EMPLOYEES

2012 2013

Annual average (headcount) Annual average (headcount)

HANIEL GROUPEMPLOYEES

39

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HANIEL GROUP / EMPLOYEES

HOLDING COMPANY FRANZ HANIEL & CIE.

40

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HOLDING COMPANY FR ANZ HANIEL & CIE.

In 2013, the Haniel Holding Company* completed its debt reduction programme, giving the company greater lee-way going forward. In addition, an important foundation was laid for restructuring the portfolio.

DEBT SIGNIFICANTLY REDUCED The debt reduction programme which Haniel began in the fall of 2012 comprised a volume of EUR 0.9 billion. The goal was to reduce the net financial debt at the Holding Company level to below EUR 2.0 billion. The action plan primarily included the decrease of the equity interest in the Celesio, TAKKT and METRO GROUP divisions to the control thresholds of 50 per cent at Celesio and TAKKT and 30 per cent at the METRO GROUP minority interest. Haniel had already reduced the equity interest in Celesio AG in 2012 and thus lowered the net financial liabilities at the Holding Company level to EUR 2,212 million as at 31 December 2012. During the 2013 finan-cial year, the sale of 4.23 per cent of METRO AG was completed and

20.16 per cent of TAKKT AG was sold. In addition, Haniel withdrew from two investment funds. Haniel earned additional proceeds through the sale of a loan which had been granted to the acquirers of the former Xella division upon the company’s sale in 2008. All of these initiatives contributed to a reduction in Haniel Holding Com-pany’s net financial debt to EUR 1,586 million at the end of 2013.

PORTFOLIO RESTRUCTURING KICKED OFF WITH SALE OF CELESIOAn important step toward restructuring the portfolio is the sale of the Celesio division, announced at the end of October 2013, to McKesson, the leading healthcare services company in North America. Haniel achieved two goals at once by taking this route. Firstly, it granted Celesio the opportunity to venture into a new “weight class” with a strong partner like McKesson and acquire a better position in the highly regulated pharmaceutical market. Secondly, Haniel gained new leeway from the sales proceeds of EUR 2.0 billion. The proceeds will be used to design a more balanced and high-yielding portfolio in the future. The transaction was successfully completed in the first quarter of 2014.

* Incl. the Holding Company’s financing and service companies. The separate financial statements of Franz Haniel & Cie. are published at www.haniel.de under “Creditor Relations”.

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / HOLDING COMPANY FR ANZ HANIEL & CIE.

41

MARKET VALUE OF THE PORTFOLIO INCREASEDThe market value of Haniel’s investment portfolio improved signi ficantly during the financial year. This is the total of the valu-ations of the business divisions plus other assets. The valuation is performed on the basis of three-month average prices for the listed divisions and on the basis of market multipliers for the other divi-sions. The higher market value resulted in particular from the sig-nificant increase in the quoted prices for METRO AG and Celesio AG. As at 31 December 2013, after deducting the net financial liabilities at the Holding Company level, the value was EUR 5,320 million. The market value for the previous year had been EUR 3,153 million.

RATING IMPROVED The higher market value of the investment portfolio and the debt reduction brought the Haniel Holding Company significantly closer to the goal of again reaching an investment-grade rating. Both developments together resulted in a significantly improved market value gearing, i.e., the ratio of the net financial debt to the market value of the investment portfolio. As a result of the improved market value gearing, Standard & Poor’s and Moody’s raised their ratings of Franz Haniel & Cie. GmbH by one notch to BB+ and Ba1, both with a stable outlook. This places Haniel in a position to secure funding on the market at favourable conditions whenever necessary.

SOLID FINANCING SECURED In addition to debt financing through bank loans, the Haniel Hold-ing Company also obtains financing on the capital market. With the proceeds generated from the debt reduction measures, bonds with a principal amount of EUR 324 million were repurchased in 2013. Additionally, Haniel repaid loans, commercial paper, a hybrid bond and expiring promissory loan notes as planned. The Haniel Holding Company’s debt financing is on very solid ground, with the bonds still outstanding amounting to EUR 1.3 billion as well as the available committed credit facilities amounting to more than EUR 1.1 billion.

CWS-BOCO

CWS-boco further advanced the Focus Future reposi-tioning project in 2013. In addition, the division acquired companies that supplement the dust control mats and washroom hygiene products business. CWS-boco’s rev-enue remained virtually the same – despite the diffi-cult economic environment. Operating profit increased again thanks to further improvement in customer loyalty and efficiency increases gained from the repositioning project.

STRATEGIC PROJECTS CONTINUEDIn 2013, CWS-boco continued to implement the Focus Future repositioning project launched in 2010. The goal of this project is to increase customer satisfaction and customer loyalty, optimise processes and cost structures, thus safeguarding the division’s

757 748

-1%REVENUE

2012 2013

EUR millionREVENUE

2013

by division in %

Washroom hygiene/mats 50

Textile services50

42

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / WHOLLY-OWNED INVES TMENT

7,643 7,527

-2%EMPLOYEES

2012 2013

Annual average (headcount)

58 64

+10%OPERATING PROFIT

2012 2013

EUR million

long-term future. The primary focus of these measures was placed on optimising the sales function, customer support, procurement and the laundry network, as well as increasing quality and effi-ciency in the operating business and logistics organisation.

In addition, the division made acquisitions in 2013. By acquiring the Swedish company Mattab, which specialises in renting dust control mats, CWS-boco is now among the three leading suppliers in the Swedish mat business. In Austria, CWS-boco expanded its leading market position in the washroom hygiene products field.

RENTAL BUSINESS STABLE, TRADE BUSINESS DECLINING In addition to the Focus Future project, business development at CWS-boco was influenced by the economy in particular. In its core business, the rental service for work wear, washroom hygiene products and dust control mats, CWS-boco concludes long-term contracts with its customers. For this reason, economic changes affect the division to a comparatively lesser degree. Nevertheless, the continuing difficult economic situation had a negative impact on CWS-boco’s rental business and increased price pressure in some countries. At the same time, CWS-boco succeeded in sustain-ably improving the cancellation rate through targeted customer loyalty measures and a slight increase in new business. Overall, revenue in the rental business was at the previous year’s level. However, development in the individual business units varied. The dust control mats unit increased sales encouragingly, while wash-room hygiene products posted a slight decline. In textile services, which primarily include the rental service for work wear, revenue was at the previous year’s level.

The trade business in consumables such as soap, disinfectant and paper, as well as washroom dispensers and work wear was affected directly by the weak economy in 2013. In addition, trade sales with a key account in the automotive industry in China declined as expected. On balance, revenue in the trade business was 6 per cent below the previous year’s level.

Due to the greater significance of the rental business, CWS-boco generated overall revenue of EUR 748 million, almost at the previ-ous year’s level – also when adjusted for business combinations as well as currency translation effects.

OPERATING PROFIT INCREASED SIGNIFICANTLY In spite of the difficult general economic conditions, the operating profit rose by EUR 6 million to EUR 64 million. However, higher one-off expenses from the Focus Future repositioning project also had an impact. These expenses were incurred primarily for the reor-ganisation of the laundry network in Germany in 2013. Adjusted for these one-off expenses, CWS-boco’s operating profit was up EUR 9 million compared with the previous year. The primary reason for this was increased profitability of the rental business owing to improved customer loyalty as well as increases in efficiency in con-nection with the Focus Future project.

43


ELG

The ELG division successfully expanded its activities in the superalloys market segment through corporate acquisitions in 2013. However, ELG’s business develop-ment was weighed down by the difficult market envi-ronment and declining commodities prices. As a result of this, both ELG’s output tonnage and revenue declined significantly. In light of this, ELG performed well, although it was not able to match the previous year’s operating profit.

CONTINUING DIFFICULT MARKET ENVIRONMENT AND DECLIN-ING COMMODITIES PRICESAs before, the persistently weak economy in 2013 impaired devel-opment in the global steel industry. The stainless steel market seg-ment was therefore characterised by comparatively weak demand for stainless steel products. Above all, this led to declining stain-less steel production in Europe, which in turn negatively affected the demand for stainless steel scrap. Further increases in Chinese stainless steel production did not generate increased demand for stainless steel scrap either because there, instead of using scrap in the production of stainless steel, a substitute product known as nickel pig iron is primarily used. As a result of weak demand, the market was characterised by intense competition in the past year. In particular recycling companies in Europe experience strong com-petition from stainless steel producers for their market shares. At the same time, the availability of scrap on the procurement market was low because many suppliers held back scrap in expectation of rising commodities prices.

In addition to weaker demand, declining commodities prices also negatively impacted the stainless steel market segment. The price for nickel – the most valuable element in the stainless steel scrap processed by ELG – declined further in 2013. After a brief high at the beginning of the year, the price fell continually until mid-year

and thereafter remained at a level around USD 14,000 per tonne. At approximately USD 15,000 per tonne, the average nickel price was 14 per cent lower than the previous year’s average. The prices for chrome and iron, which are the other significant components of stainless steel scrap, also declined during the course of the year.

The superalloys market segment was characterised by weak demand for superalloy scrap as well as lower commodities prices in 2013. The price for titanium, a significant raw material in the super-alloy business, fell significantly below the previous year’s level.

REVENUE AND OPERATING PROFIT DOWN YEAR-ON-YEARAs a result of the difficult market environment, ELG’s output ton-nage for stainless steel scrap fell by 8 per cent year-on-year to 1.2 million tonnes. In contrast, ELG’s output tonnage for superalloys increased by almost 40 per cent, which is attributable in particu-lar to the companies acquired in this market segment in 2013: ABS Industrial Resources and Metals Management Aerospace. Even adjusted for these business combinations, the output tonnage for superalloys rose by 5 per cent compared to the previous year. In this connection, ELG benefited from the 2012 expansion of pro-cessing capacities in the UK.

The declining output tonnage for stainless steel scrap and the lower commodity prices led to a 20 per cent decline in revenue at ELG to EUR 1,880 million. In spite of the high level of ongoing com-petitive pressure, ELG improved margins in the stainless steel scrap business through a selective procurement and sales policy. Weak demand for superalloys led to an oversupply of scrap on the market as well as declining margins at ELG. Overall, the decline in revenue resulted in lower operating profit in the amount of EUR 47 million compared to EUR 53 million in the previous year despite improved margins in the stainless steel scrap business. The oper-ating profit in 2013 was also affected positively by one-off items. Extraordinary income from the sale of a receivable written down in the previous year had a particular impact here. By contrast, an

1,098 1,224

+11%EMPLOYEES

2012 2013


53 47

-11%OPERATING PROFIT

2012 2013

EUR million

2,364 1,880

-20%REVENUE

2012 2013

EUR millionREVENUE

2013

by sales region in %

Europe54

Americas29

Asia17

44


45

impairment loss on goodwill in the carbon fibre business segment had a negative impact on operating profit. With regard to recycling carbon fibres, which ELG has been active in since 2011, the division invested in particular in product development and production pro-cess optimisation in 2013. However, this business developed more slowly than expected.

SUPERALLOYS BUSINESS EXPANDEDIn the superalloys market segment, ELG acquired UK-based ABS Industrial Resources at the beginning of the year. ABS operates recycling plants in particular for superalloys in the UK, the USA and South Africa. At mid-year, ELG also acquired Metals Management Aerospace in the USA, which operates primarily in the field of tita-nium scrap recycling. ELG strengthens its existing superalloy busi-ness with these two acquisitions.


TAKKT

TAKKT’s business performance in 2013 was characterised by the continuing difficult economic situation in Europe and reductions in government spending in the USA. While revenue rose slightly due to the companies acquired in the previous year, operating profit declined due to the weak economy.

SLIGHT GROWTH IN REVENUE THROUGH ACQUISITIONS TAKKT’s revenue increased by 1 per cent to EUR 953 million. This growth is attributable to the companies acquired in 2012: Ratioform, a multi-channel mail-order firm for packaging solutions, and GPA, a B2B direct marketing supplier for display products. Both companies were included for the full financial year for the first time. Negative currency translation effects, in particular from the weaker US dollar, had a nega-tive impact, pushing back on revenue development. Adjusted for busi-ness combinations and currency translation effects, revenue was

3 per cent below the previous year. While TAKKT AMERICA generated a slight increase in revenue, TAKKT EUROPE posted revenue declines.

Due to the strained economic situation in Europe, TAKKT EUROPE’s revenue fell by 5 per cent adjusted for acquisitions and currency translation effects. Both the number of incoming orders and the average order value came in lower. The Business Equipment Group and Office Equipment Group had to accept revenue declines. The Business Equipment Group suffered from restrained capital spend-ing by European companies for operating, warehouse and office equipment. Development at the Office Equipment Group – consist-ing of the Topdeq sales brand – was again disappointing. Due to the ongoing loss situation, TAKKT decided to gradually discontinue the operating business in this segment by mid-2014. By contrast, the packaging solutions business of the Packaging Solutions Group, which is comparatively less dependent on the economy, performed encouragingly and posted slight growth.

46

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / MA JORIT Y INTERES T

Adjusted for acquisitions and currency translation effects, TAKKT AMERICA increased revenue by 1 per cent, with business in the three segments varying. The Specialties Group achieved revenue growth – also adjusted for the acquisition of GPA. In contrast, rev-enues fell significantly at the Plant Equipment Group and Office Equipment Group. As a provider of office equipment, the Office Equipment Group was affected by the reductions in spending by federal institutions as a result of the budget dispute in the USA.

OPERATING PROFIT DECLINES DUE TO THE ECONOMYIn spite of the increase in revenue, TAKKT’s operating profit declined from EUR 112 million in the previous year to EUR 96 million. The additional contributions to earnings by the companies acquired in the previous year were unable to compensate for the declining business development due to the economy, especially in Europe. EUR 12 million one-off expenses further reduced earnings in the financial year; roughly half of these expenses were incurred in con-nection with the initiated discontinuation of the Topdeq business.

EXPANSION OF THE MULTI-CHANNEL SALES FUNCTION CON-TINUEDTAKKT successfully continued the DYNAMIC initiative already launched in 2012 with the goal of orienting business activities even more strongly on the multi-channel sales approach. TAKKT is pur-suing a balanced combination of different sales channels in order to address customers as needed: by catalogue, online, by telephone and through employees in the external sales force. E-commerce is an important component of the multi-channel activities, which again developed very well in 2013. After reaching 26 per cent in the previous year, e-commerce’s share of total revenue expanded to 28 per cent during the financial year.

2,340 2,551

+9%EMPLOYEES

2012 2013


112 96

-14%OPERATING PROFIT

2012 2013

EUR million

940 953

+1%REVENUE

2012 2013

EUR millionREVENUE

2013

by division in %

TAKKT EUROPE55

TAKKT AMERICA45

47

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / MA JORIT Y INTERES T

CELESIODISCONTINUED OPERATION

48

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / DISCONTINUED OPER ATION

Celesio continued its strategic projects in 2013, in par-ticular the establishment of a European pharmacy net-work. The measures initiated under the Operational Excel-lence Program resulted in further cost savings in 2013, particularly in the United Kingdom. However, Celesio was exposed to strong rebate competition in the Ger-man wholesale market at the same time, which resulted in massive earnings losses. Celesio nevertheless gen-erated higher operating profit than in the previous year because higher one-off expenses were incurred in 2012 for portfolio and restructuring measures.

SUCCESSFUL PILOT PROJECT FOR THE EUROPEAN PHARMACY NETWORKIn 2013, Celesio tested the concept for a European pharmacy net-work, which was presented for the first time in December 2012, in some 100 pilot pharmacies. In these pharmacies, which have a modern design, patients receive additional consulting and other services, in particular in the skin and pain categories. As part of the step-by-step implementation of the European pharmacy net-work, some of the pharmacies outside the UK have already been converted to the Lloyds brand name. In Sweden, all pharmacies are already on the market under the Lloyds name.

LOWER REVENUE DUE TO COMPANY DISPOSALS AND CUR-RENCY TRANSL ATION EFFECTSCelesio’s revenue declined during the financial year by 7 per cent to EUR 21,427 million. This was caused by negative currency transla-tion effects – primarily from the British pound and the Brazilian real – as well as the sale of the Movianto and Pharmexx divisions, the DocMorris mail-order pharmacy, the Irish wholesale business and Czech business activities. Adjusted for business combinations, dis-posals and currency translation effects, revenue increased slightly by 1 per cent.

CONSUMER SOLUTIONS: ENCOURAGING INCREASE IN REVENUE Adjusted for business combinations, disposals and currency translation effects, revenue in the Consumer Solutions division increased by 3 per cent to EUR 3,412 million. The pharmacies in the UK, Celesio’s largest pharmacy market, contributed to this increase. These pharmacies generated higher service revenue from hospitals as well as more revenue from providing pharmaceuticals to house-holds. However, additional spending cuts in the British healthcare sector also had a negative effect on business development. But these effects were largely compensated by cost savings, in particu-lar from the Operational Excellence Program. The pharmacies in the other countries posted an increase in revenue from non-prescrip-tion medicines. Following a successful restructuring, the Swedish pharmacies developed well and increased revenue significantly.

As at 31 December 2013, Celesio had a total of 2,175 retail pharma-cies in six countries and thus operated about as many pharmacies as a year ago.

PHARMACY SOLUTIONS: REBATE COMPETITION IN GERMANYIn the Pharmacy Solutions division, which includes wholesale activities, revenue was EUR 17,996 million and, adjusted for business combina-tions, disposals and currency translation effects, was at the previous year’s level. In Germany, Celesio benefited from growth in the pharma-ceutical wholesale market and posted an increase in revenue. However, the German wholesale business was significantly diminished by the rebate competition that has been ongoing for months. This presents major challenges for the entire industry. Although the wholesale sector in Brazil also faced a variety of challenges, revenue there increased – particularly from high-priced specialty pharmaceuticals. By contrast, in France, the substitution of lower-priced generic brands for higher revenue original medications led to declining revenues. Generic brands increased in significance in the United Kingdom as well. Nevertheless, wholesale in the UK developed well. This is attributable in particular to cost savings from measures from the Operational Excellence Program.

45,166 38,754

-14%EMPLOYEES

2012 2013


370 427

+15%OPERATING PROFIT

2012 2013

EUR million

22,934 21,427

-7%REVENUE

2012 2013

EUR millionREVENUE

2013

by division in %

Pharmacy Solutions84

Consumer Solutions16

49

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / DISCONTINUED OPER ATION

HIGHER OPERATING PROFITCelesio’s operating profit rose significantly from EUR 370 million to EUR 427 million. However, the previous year’s income was weighed down by higher one-off expenses, above all by the Operational Excel-lence Program and the sale of business activities. In addition, the fact that under IFRS depreciation and amortisation are suspended once a division is classified as a discontinued operation also had a positive effect. Adjusted for one-off items, the operating profit in 2013 declined by EUR 21 million year-on-year. The decrease is attrib-utable in particular to earnings losses due to the rebate competition in Germany, for which Celesio was unable to compensate fully by lev-eraging cost savings from the Operational Excellence Program.

CELESIO CL ASSIFIED AS DISCONTINUED OPERATIONDue to the sale of Celesio initiated during the 2013 financial year, the division is presented as a discontinued operation in the Haniel Group. The profit after taxes from discontinued operations

amounted to EUR 185 million, and was thus significantly higher than in the previous year. In the previous year, the loss from dis-continued operations amounted to EUR -149 million since it was impacted by high impairment losses that were taken in connection with the sale of Movianto, Pharmexx and the mail-order pharmacy DocMorris.

50

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / MINORIT Y INVES TMENT

The METRO GROUP continued with its strategic realign-ment in 2013, although it also felt the effects of the difficult economic situation, particularly in southern Europe. Nevertheless, the METRO GROUP’s operating profit increased, mainly due to lower one-off expenses. Consequently, Haniel’s investment result from the Metro investment was up year-on-year, particularly since the previous year’s result had been heavily reduced by the impairment loss of the Metro investment.

PROGRESS IN STRATEGIC REALIGNMENT The strategic objective of the METRO GROUP is to increase added value for the customer. Key initiatives launched in order to achieve this objective include the expansion of supply and multi-channel activities, improving product ranges and further strengthening own brands. The METRO GROUP made progress in all of these areas in 2013. In addition, further measures to reduce costs and increase efficiencies were implemented.

METRO GROUP

PORTFOLIO MEASURES WEIGH DOWN REVENUEThe METRO GROUP’s revenue fell by 3 per cent in 2013 to EUR 65,042 million. This decrease was caused primarily by negative currency translation effects and the sale of the Metro Cash & Carry activities in the United Kingdom in the previous year as well as the sale of Real’s eastern European business in 2013. Adjusted for business combinations and disposals and currency translation effects, reve-nue increased by 1 per cent despite the difficult economic situation in southern Europe. This increase in revenue was due to interna-tional expansion. During the year under review, the METRO GROUP opened 70 new locations in ten countries.

Metro Cash & Carry’s revenue, adjusted for business combinations and disposals and currency translation effects, increased by 2 per cent in 2013. Eastern Europe and in particular Asia made positive contributions to this increase. Russia, China, India and Turkey were the key growth countries in those regions. In Germany, by contrast, business in particular in the non-food category was dissatisfactory. In western Europe, which also includes southern European countries, the difficult economic conditions had a negative effect on business.

Media-Saturn further expanded its leading market position in Europe in 2013 and – with the help of targeted price reductions – gained market share in many countries. Media-Saturn’s revenue rose by 1 per cent, adjusted for currency translation effects. This growth was due to international expansion and a positive trend in Germany. Revenue increased there although major sporting events such as the Olympic Games and the European Football Championship had had a positive influence on the previous year. Revenue growth in Ger-many is attributable to the expansion of the multi-channel offering and pure online trading. Both sales methods were well accepted by customers. In western Europe, by contrast, the difficult economic environment in the southern European countries muted demand for consumer electronics. Eastern Europe saw a significant increase in revenue as a result of the opening of new locations.

In 2013, Real completed the sale of business activities in Russia, Romania and Ukraine. Adjusted for these disposals and currency translation effects, Real’s revenue fell by 2 per cent. This decline was due primarily to store closings and fierce competition, particu-larly from discount stores, in Germany.

Galeria Kaufhof’s revenue remained stable despite store closings in the previous year. In Germany, the highly positive trend in the textiles segment continued.

LOWER IMPACT OF ONE-OFF EXPENSES ON OPERATING PROFITDespite declining revenue, the METRO GROUP’s 2013 operating profit amounted to EUR 1,797 million, as compared to the previous year’s EUR 1,394 million. This increase was attributable to a reduc-tion in one-off expenses: during the previous year, there were high one-off expenses in particular for portfolio and restructuring meas-ures. One-off expenses were far lower during the financial year: one-off expenses, caused primarily by the Praktiker insolvency and restructuring measures, were largely offset by extraordinary income from the disposal of Real’s eastern European business. Adjusted for these one-off expenses, the operating profit declined from EUR 1,979 million to EUR 1,801 million. This decline was due to decreasing revenue, as well as to targeted price reductions, par-ticularly at Media-Saturn, and to lower proceeds from the disposal of real property.

HIGHER EARNINGS CONTRIBUTION FOR HANIEL The increase in the METRO GROUP’s operating profit had a propor-tionately positive impact on the investment result the Haniel Group derives from the METRO GROUP. A worsening of the METRO GROUP’s net financial income counteracted this effect. Overall, the earnings contribution Haniel derives from the Metro investment rose to EUR 75 million in 2013. In the previous year, the earnings contribution was weighed down massively by the impairment loss of the Metro investment and totalled EUR -1,373 million.

-1,373 75

>+100%HANIEL INVESTMENT RESULT

2012 2013

EUR million

51

GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON BUSINES S SITUATION / MINORIT Y INVES TMENT

The North American healthcare services company McKesson pub-lished a voluntary takeover offer for Celesio AG in October 2013. Following the failure of the takeover offer in January 2014, Haniel acquired further shares in Celesio AG in order to sell 75.99 per cent of the outstanding shares to McKesson for EUR 23.50 per share. The shares were transferred to McKesson as at 6 February 2014, thus completing the disposal.

As a result, Haniel will generate EUR 2.0 billion in proceeds for the sale of its 50.01 per cent equity interest in Celesio AG in financial year 2014 and realise disposal gains at Group level in the mid-triple-digit millions of euros. A portion of the cash inflows from the sale were used to reduce financial debt. To that end, Franz Haniel & Cie. GmbH issued a public tender offer in February 2014 to repurchase the euro bonds maturing in 2017 and 2018. As a result, bonds with a principal amount of EUR 351 million were repurchased.

No further reportable events took place after the reporting date.

SUPPLEMENTARY REPORT

52

GROUP REPORT OF THE MANAGEMENT BOARD / SUPPLEMENTARY REPORT

REPORT ON OPPORTUNITIES AND RISKS

Sustainability as a competitive factor: The acceptance of corpo-rate responsibility has a long tradition in the Haniel Group. It is expressed in its striving to increase economic value in accordance with ecological and social contributions. In order to live up to this vision, Haniel has identified three action areas in the field of sus-tainability: employees, value chain and innovation. Each of the divi-sions and the Holding Company are responsible for improving on these areas of focus, regardless of their respective business model and in line with the specific features of each of them. You can find detailed information on the subject of sustainability in the Haniel Group in the “Corporate Responsibility” section starting on page 25.

Growing demand for healthcare services: Celesio has a strong market position and years of experience in the pharmaceutical business. Given a global population that is growing and becoming older, growing demand for healthcare services and pharmaceuti-cals can be expected in the future. Celesio wishes to continue to benefit from this trend and supply the market cost-efficiently. In the course of the strategic realignment, the focus will lie on further developing the core businesses wholesale and pharmacies going forward. Celesio plans to generate increased earnings by estab-lishing a European pharmacy network. In addition, further earn-ings contributions will be realised by offering new services and enhanced efficiency throughout the entire value chain for pharma-ceuticals distribution.

Expansion of multi-channel activities: Continuing digitalisation gives rise to growth opportunities through the consistent enhance-ment of METRO GROUP’s retail and wholesale business and of TAKKT’s mail-order business into a multi-channel business. These growth opportunities at the METRO GROUP reside in the dovetail-ing of the stationary business with the e-commerce activities. The METRO GROUP creates a true added value for the customer on this basis. TAKKT, the mail-order specialist, plans first and foremost to strengthen further distribution channels such as telemarket-ing, field service and e-commerce. The expansion of e-commerce activities comprises both web shops and e-procurement systems. In this way, TAKKT offers customers the option of simplifying their procurement processes and thus reducing costs.

Increasing demand for raw materials: ELG’s core business is the trading and processing of raw materials, particularly for the stain-less steel market segment. Growth opportunities for ELG result from increasing global demand for stainless steel products that is anticipated over the medium- and long-terms. In addition, the super-alloys sector will continue to gain in significance. In this sector, ELG prepares very high-grade materials. These include in particular tita-nium scrap and high-alloy, nickel-containing scrap which are used in, e.g., the aerospace industry and energy generation. By acquiring the companies ABS Industrial Resources and Metals Management Aerospace, ELG further strengthened its business with superal-loys, thus considerably expanding the basis for future growth. In addition to trading in stainless steel scrap and superalloys, ELG is active in the nascent business of recycling carbon fibres. ELG is planning to expand this innovative business model further.

Entrepreneurial risks are usually counterbalanced by opportunities, which must be exploited. At the same time, possible risks to business development must be recog-nised early, analysed in detail, and reduced to an eco-nomically reasonable dimension.

EXPLOITING OPPORTUNITIES TO INCREASE VALUEIn the Haniel Group, opportunities are identified by continually observing markets. To that end, both the Holding Company and the operating divisions collect and analyse market, trend and competi-tor information. As a result, Haniel is in a position to identify trends and requirements on often fragmented markets early on.

Opportunity management is closely integrated into the process of strategy development. Entrepreneurial options are systematically evaluated and initiatives are developed for using these options to increase value as part of the strategic planning process. In the next step, strategic initiatives specified in detail in the operational plan-ning process and action plans are derived from those plans.

The strategy and its implementation are discussed in depth by the members of the Haniel Management Board with the management of the divisions in regularly scheduled management meetings. Over and above that, the Holding Company’s portfolio strategy is contin-uously reassessed. To that end, the Management Board engages in regular dialogue with the Supervisory Board.

OPTIONS FOR SUSTAINABLE AND PROFITABLE GROWTHThe Haniel Group enjoys a large number of options for entrepre-neurial action. The Holding Company and divisions continually search for those possibilities that secure sustainable and profita-ble growth. This search starts with trends that are of global signif-icance. The opportunities identified in the Haniel Group in financial year 2013 are listed below.

Optimising the business portfolio: Haniel continually reviews the strategic alignment of its portfolio. As a result of this, Haniel iden-tifies business models that can make a value contribution to the economic success of the Group in the coming decades and that are in harmony with ecological and social values. On the basis of global megatrends, investment opportunities are systematically identi-fied, analysed and evaluated. Based on this, the investment portfo-lio will be further developed by business acquisitions and disposals in order to enhance value creation while always maintaining a solid financing structure.

International expansion: The Haniel Group is widely represented in western Europe and enjoys a strong position there with its vari-ous business models. Haniel sees opportunities for further growth – be it by way of founding or acquiring businesses – including in the dynamically growing economies of the world. The divisions are already active in various ways in eastern Europe, and will further expand their presence there. In Asia and America too, Haniel is driv-ing forward its expansion.

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GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON OPPORTUNITIES AND RISKS

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SYSTEMATIC RISK MANAGEMENTThe objective of the risk management system at the Haniel Group is a forward-looking evaluation of risks with respect to the overrid-ing corporate objectives of value creation, growth and liquidity. The purpose is to anticipate those risks that negatively impact stra-tegic and operating initiatives and hence the realisation of value and growth potentials or that endanger having adequate liquidity available at all times. Haniel’s risk management system is based on an integration concept and accordingly comprises multiple compo-nents. The Holding Company stipulates the scope of activities for the key components and sets central requirements which must be implemented at the discretion of each of the divisions, as suiting the individual business models.

The organisational structure for risk management is defined throughout the Group. At the level of the fully consolidated divisions, the controlling or internal auditing departments coordinate risk iden-tification and are responsible for risk assessment as part of corpo-rate planning. Identified risks throughout the Group are discussed by the Risk Management Committee with the participation of the Man-agement Board, and any need for additional action to manage risk is examined. Furthermore, there is also a Risk Management Committee at the Holding Company level in which the Management Board and the heads of all corporate and staff departments are represented. This body serves above all to foster a cross-disciplinary exchange of information on the risks faced by the Holding Company. The Risk Management Officer at the Holding Company level coordinates the risk identification process across all divisions and is responsible for further developing the early risk identification system.

In connection with the strategic and operational planning process, material risks and risk mitigation measures are identified. In addi-tion, risks are systematically assessed in terms of their probability of occurrence and the amount of damage, taking into consideration countermeasures to mitigate risks. The identified risks are dis-cussed in the planning meetings by the Management Board of the Holding Company and the management of the fully-consolidated divisions. The risks are subsequently discussed in greater detail in the Risk Management Committee. In addition to this risk analysis, a risk inventory is taken at the Holding Company level. The results are discussed by the Risk Management Committee. The Haniel Group risk report is prepared based on the divisions’ risk reports and the Holding Company’s risk inventory. The members of the Management Board discuss the findings and inform the Audit Committee of the Group’s overall risk situation and about significant individual risks.

As part of their interim reporting, the divisions submit not only key financial figures but also company-specific non-financial fig-ures and data to the Holding Company so that undesirable devel-opments are detected in good time. This reporting is expanded to include risks that exceed defined thresholds.

An additional element of risk management is the ongoing collection and analysis of information on markets, trends and competitors.

Investment controlling comprises annual budgeting as well as the regular review of the capital spent. Capital spending projects are assessed using uniform discounted cash flow (DCF) calculations. Minimum risk-equivalent rates of return are specified for each divi-sion and each strategic business unit.

Financial risk reporting and management include liquidity risks, default risks, risks resulting from changes in interest and exchange rates, and price fluctuations in the commodity markets. The objec-tive is to avoid or limit financial risks. To that end, the Holding Com-pany has laid out general principles for financial risk management. These are prescribed in guidelines for the treasury departments of the Holding Company and the fully consolidated divisions. The man-agement of financial risks is explained in detail in the notes to the consolidated financial statements starting on page 110.

The internal control system is designed to ensure that existing regulations for risk reduction are adhered to at all levels within the Group. This is intended to ensure the functionality and cost- effectiveness of business processes and to thwart impairment of assets. The internal control system is implemented in the Holding Company and divisions according to their specific business mod-els, and incorporates both process-integrated and process-inde-pendent control measures. It covers all significant business pro-cesses including the accounting process.

The internal auditing departments in the divisions and the Holding Company are integrated into the risk management system. They monitor the processes within the companies of the Haniel Group, in particular from the perspectives of operating performance, cost- effectiveness and adherence to statutory regulations and internal guidelines. These efforts also include monitoring the implementa-tion and effectiveness of the risk management system, including the internal control system. In its risk-based audit plan, Internal Auditing also takes account of the information from the risk analy-sis and examines significant risk issues where necessary.

The compliance management system is a series of preventative measures designed to ensure compliance with statutory and inter-nal corporate rules and regulations. To that end, compliance risks faced by the Haniel Group are systematically captured, evaluated and discussed between the management of the divisions and the Management Board. Moreover, training sessions and workshops dealing with compliance issues are held. In addition, the divisions and Holding Company each have compliance officers who serve as employee liaisons to help clarify potential issues.

Corporate bylaws and regulations derived from them ensure that the elements of the risk management system are adhered to and applied in the intended manner in the Haniel Group as allowed by law. Codes of conduct for the Holding Company and the divisions supplement these regulations. They set forth the basic principles of conduct for employees, based on practised value concepts.

The effectiveness of the risk management system is monitored regularly and improvements are introduced where necessary.

In 2013 the auditors were again commissioned by the Supervisory Board to subject the Group’s early risk identification system to a voluntary audit analogously to § 317 (4) of the German Commercial Code (Handelsgesetzbuch, “HGB”). The auditor verified the suitabil-ity of this system.

CLEARLY DEFINED RISK FIELDSA prerequisite of systematic risk management is that risks are identified in a timely fashion. Only in this way is it possible to take

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Exchange rates and interest rates: Changes in currency and inter-est rates could have adverse effects on consolidated net profit. In regard to interest rate changes, the Haniel Group differentiates between changes in the market interest rate and the change in the margin that must be paid in addition to the market rate. The Group uses a variety of hedging instruments to limit the risks from fluctu-ations in market interest rates and currency exchange rates. These are explained in detail in the notes to the consolidated financial statements starting on page 110. The Holding Company and divi-sions use long-term credit agreements and bonds in order to limit the volatility of interest margins. The margin for borrowed capital at Haniel also depends on the Holding Company’s rating. This is based primarily on the market value gearing, that is, the ratio between net financial liabilities and the market value of the investment portfolio as well as cash flows at the Holding Company level.

Overall economic development: The demand for the divisions’ ser-vices and products is also influenced by overall economic devel-opments. However, the extent of this dependency varies, and its effects in the fully consolidated divisions may be delayed. While a weakening economy affects Celesio to a relatively small degree, at ELG and TAKKT it is directly reflected in the development of the business. The impact of a negative economic development can also be felt at CWS-boco, although only to a smaller extent due to the long-term nature of contracts in its core rental service busi-ness. The diversification of the Haniel business portfolio and its presence in various regions can mitigate the effects of economic fluctuations. A strong market position, comprehensive product and service offerings, and the heterogeneous customer base also con-tribute to risk mitigation.

Government regulation of the pharmaceutical market: The phar-maceutical market, in which Celesio is involved, has always been subject to government intervention. This affects not only the legal framework of the markets but in particular the remunera-tion systems for service providers. The ageing population and the associated increase in demand for medical and pharmaceutical services as well as drugs are resulting in rising expenditures in the healthcare sector. Many governments are therefore seeking to limit these higher expenditures by regulating prices. Increasing government deficits and lower cash inflows in the governmental healthcare systems create the risk of further intensification of this development. Governmental intervention in the healthcare sector has impaired Celesio’s business development and earning performance in the past and could also have a negative impact in future. Impairments of goodwill could also be necessary. Cele-sio systematically implements strategic projects and operates a permanent cost management system aimed at compensating for burdens from governmental regulation. It also aims to counter the impacts of increasing competitive pressure and to maintain its position as an attractive wholesale partner for pharmacy custom-ers despite the innovative sales and distribution models offered by manufacturers.

Raw materials prices: The ELG division’s performance is considera-bly influenced by the price trend for commodities – particularly for nickel, which is in turn affected by economic developments in the industry. Price hedges using derivative financial instruments stabi-lise business development at ELG, as does the broad geographic dis-tribution of commodity flows in both procurement and distribution.

rapid and effective countermeasures. The following is a list of the material short- and medium-term risks identified in financial year 2013 to which the Haniel Group is exposed.

Corporate strategy: Corporate strategy risks can arise above all from the erroneous assessment of future developments in the market and competitive environment. The Haniel Group counters this risk through intensive observation of the markets and com-petitors and by way of regular strategy discussions between the Management Board and the management teams of the divisions. In addition, the diversified portfolio of business fields helps to miti-gate the effects of adverse developments in individual sectors.

Business acquisitions and disposals: To exclude the risks associ-ated with corporate transactions to the greatest extent possible, investments and divestitures are carefully examined before their conclusion and are evaluated using uniform DCF calculations. An acquired company is subsequently integrated into the Haniel Group on the basis of detailed timetables and action plans as well as clearly defined responsibilities. If, despite all diligence, the objectives envis-aged with an acquisition are not or only partially attained, impair-ment losses on goodwill and other assets may be necessary. In order to counter risks from corporate transactions, the success of previ-ously executed business acquisitions is reviewed on a regular basis.

Human resources: The corporate success of the Haniel Group is dependent largely on the expertise and commitment of its employ-ees. Executives must exhibit the necessary competence, experi-ence and personality in order to make correct decisions in the sense of a value-driven and long-term development of their departments. Well-trained specialist staff are necessary for optimally supporting executive decision-making. That is why the Haniel Group strives to recruit qualified staff and to foster their loyalty to the company. In order to achieve this goal, the Haniel Group invests in the continu-ing education of its employees. Its internal Haniel Academy offers specialists and managers from the Group individual seminars and modular programmes on core entrepreneurial processes and key areas as well as areas of expertise. The programmes in the Haniel Leadership Curriculum prepare emerging management talent, experienced executives and top managers for future challenges and management tasks. Detailed information on training and con-tinuing education at the Haniel Group can be found in the “Corporate Responsibility” section beginning on page 25.

Financing: In addition to equity, financing requirements for the operating business are secured in the Haniel Group primarily through debt capital. When outside financing is used, the company seeks to diversify its financing instruments and its circle of inves-tors in order to be able to respond flexibly to developments on the capital markets and in the banking sector. The Holding Company and divisions have at their disposal committed bilateral lines of credit that have only been drawn upon to a limited extent. These are augmented by regularly updated capital market programmes at the Holding Company, such as the Debt Issuance Programme. When financing with borrowed capital, it is of benefit that the Hold-ing Company and its divisions, both as established and reliable partners, enjoy a high degree of trust from banks and other inves-tors. The Haniel Group is thus able to ensure the continuation of the operating business, even if for example economic conditions cause declines in incoming payments from business activities.


Bad debts: Given the nature of the sector in which it operates, ELG in particular delivers its products to a small number of very large customers. In some instances this can lead to extensive receiv-ables per customer. In order to limit the risks resulting from non- payment, ELG has a comprehensive receivables management sys-tem, as far as possible systematically obtains default insurance to cover this risk and sells accounts receivables within the context of forfaiting programmes.

Information technology: Well-functioning IT systems tailored to strategy represent a necessary precondition for the Haniel Group’s operating activities and administrative departments. Insufficient customisability and speed of IT systems entail significant compet-itive disadvantages when strategic requirements change. Haniel Holding and the divisions therefore review their IT strategy regu-larly. In addition, the ongoing use of IT systems entails the risk of an outage. Professionally organised IT operations prevent such sys-tem problems. This includes Haniel Holding and the divisions having emergency systems available and regular backups of relevant data.

Investments: In particular, Haniel has a major investment in the METRO GROUP, one of the world’s leading retailing companies. Fac-tors that exert an unfavourable influence on the consolidated profit of METRO AG could also have a negative effect on the Haniel Group’s investment result or the carrying amount of the investment. The METRO GROUP faces material risks from changes in consumption patterns and customer expectations of retailers, as well as increas-ing competitive pressure from e-commerce. If the METRO GROUP fails to react in due time to these challenges and fails to success-fully implement the transformation projects it has launched, this may have a detrimental impact on its business development. A deterioration of the macroeconomic environment and an erroneous assessment of markets for international expansion could also have a negative effect on the METRO GROUP’s business. Overall, the risks to which the company is exposed are mitigated by intensive obser-vation of trends and the market and competitive environment as well as by the METRO GROUP’s diversification of its product lines and regional activities.

Compliance: The Haniel Group’s business activities are subject to statutory and internal corporate rules and regulations. A failure to comply with these rules and regulations may damage the Com-pany’s reputation and may jeopardise its economic success. In order to prevent compliance risks effectively, the Haniel Group has established a comprehensive compliance management system.

Litigation: Neither Franz Haniel & Cie. GmbH nor any of its current subsidiaries are involved in ongoing or currently foreseeable litiga-tion that could have a significant impact on the Group’s assets or financial position or performance.

NO RISKS ENDANGERING THE GOING CONCERN ASSUMPTIONEach of the risks presented could adversely impact the Haniel Group. However, given the Group’s diversified business model, many of the risks depend on a variety of influencing factors, thus mitigating Haniel’s risk exposure overall. Nevertheless, certain risks presented are of particular relevance to the Haniel Group, measured against the combination of potential loss and probability of occurrence. Given the size of the individual divisions, the risks to Celesio from governmental regulation of the pharmaceutical

market and from the investment in the METRO GROUP are particu-larly significant. Experience from recent years has led Haniel to classify both the potential amount of damage for Celesio caused by risks arising from government regulation of the pharmaceutical market and the likelihood of such risks occurring as high. Due to the size of Haniel’s investment in the METRO GROUP, the potential damage is high but the probability of occurrence is low. In addition, all divisions are exposed to risks relating to the general economic environment, albeit to varying degrees. Therefore, this risk for Han-iel is in the aggregate assumed to be of medium potential damage amounts with a medium probability of occurrence.

Our overall assessment of the risk situation has not changed mate-rially since the previous year. There are no recognisable individual or aggregate risks which jeopardise the Group as a going concern, nor are there any noteworthy future risks beyond the normal entre-preneurial risk. For Haniel, the risks presented are also offset by numerous opportunities for sustainable, profitable growth.

Subsequent to the sale of Celesio at the beginning of 2014, those risks and opportunities relating to that division as at 31 December 2013 will no longer be relevant to Haniel going forward. This applies in particular to the risks arising from government regulation and the opportunities in relation to a growing demand for healthcare services.

CONTROLLED ACCOUNTING PROCESSESThe Haniel Group applies an internal control and risk management system to its accounting processes. The purpose is to ensure that its financial reporting is reliable and that the risk of misstatements in the external and internal Group Reports is minimised. Misstate-ments are most likely to originate from complex transactions or consolidation procedures, mass transactions, the materiality of individual items of the financial statements, the use of discretion and estimates, unauthorised access to IT systems, and inade-quately trained employees. Regular checks are performed to deter-mine the extent to which these factors can jeopardise the integrity of the consolidated financial statements.

In order to counter potential risks, the Haniel Group installed an internal control system that seeks to ensure the reliability and propriety of the financial reporting processes, compliance with the relevant statutory and internal regulations, and the efficiency and effectiveness of procedures. However, even an appropriate and functional internal control system cannot guarantee that all risks will be identified and avoided. The Haniel Group’s internal control system is based on the COSO publication “Internal Control-Inte-grated Framework”. COSO is the Committee of Sponsoring Organiza-tions of the Treadway Commission.

The existing risk and control structure is systematically recorded and documented. For this purpose, the most important risk fields are regularly updated and checked on the basis of clearly defined qualitative and quantitative materiality criteria. In the event of changed or newly emerged accounting-related risks or identified control weaknesses, it is the divisions’ responsibility, in coordina-tion with Corporate Accounting, to implement appropriate control measures at the earliest possible opportunity. The effectiveness of the defined controls is checked and documented at regular inter-vals by means of self-assessment on the part of the controlling officers or their supervisors. Responsibility for establishing and

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supervising the internal control system lies with the Management Board. In addition, the Audit Committee monitors the system’s effectiveness.

The Haniel Group is distinguished by its transparent and decentral-ised management and corporate structure. The local accounting processes are managed by the divisions, each of which prepares its own subgroup financial statements. The management of the entities included in the subgroups controls and monitors the risks concerning the operational accounting processes. The Group com-panies are responsible for compliance with the guidelines and pro-cedures that apply throughout the Group. They are also answerable for the proper and timely flow of their accounting processes. They are supported in that respect by Corporate Accounting.

Corporate Accounting prepares the consolidated financial state-ments and the Group Report of the Management Board. The rele-vance of ongoing developments of the IFRS standards and other applicable statutory provisions and their impact on the consoli-dated financial statements and/or the Group Report of the Man-agement Board is continuously assessed. The Management Board and Group companies are informed, as necessary, of any conse-quences on consolidated reporting. Financial reporting is governed by accounting guidelines applicable throughout the Group, a uni-form Group chart of accounts, and a financial statements calendar applicable throughout the Group. The accounting guidelines are updated annually, paying due regard to relevant changes in the law. There are binding provisions and uniform instruments for complex issues, such as goodwill impairment testing and the measurement of deferred taxes. Outside experts are brought in if required, for example, to measure pension obligations or to prepare expert opin-ions on the purchase price allocation for acquisitions.

The Haniel Group’s formal analysis and reporting process seeks to ensure that the information contained in the published annual report is reliable and complete. Corporate Accounting performs analytical checks in order to identify potential errors in consoli-dated reporting. The checks are documented and reviewed accord-ing to the principle of dual control. A detailed timetable and fixed responsibilities apply for the preparation of accounts.

Standardised and centrally managed IT systems are used to prepare the consolidated financial statements. This applies to consolidation at all stages of the Haniel Group and to the process of preparing the notes to the financial statements. The closing process is supported by numerous validations. The IT systems used in the accounting department are protected against unauthorised access. Separa-tions of functions and change management systems are installed.

As an important element of internal process monitoring that is independent of the relevant processes, the Internal Auditing departments are responsible for systematically auditing and inde-pendently assessing the internal control systems.

As part of the audit of the consolidated annual financial state-ments, external auditors report on their material audit findings and any weaknesses in the internal control system relating to all of the entities included in the financial statements.

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Haniel expects that the strategic initiatives launched by the divisions will have a positive impact on business per-formance in financial year 2014. Additional momentum is likely to come from the somewhat improved economic situation currently forecast for Europe and the USA.

IMPROVED MACROECONOMIC ENVIRONMENTThe leading economic research institutions expect global economic growth to pick up slightly in 2014. For instance, the International Monetary Fund (IMF) forecasts that global gross domestic product will increase by 3.7 per cent in 2014 – as compared to 3.0 per cent growth in 2013.

According to the IMF, all major economic zones will contribute to the generally positive trend. However, unlike in recent years in the past, the primary momentum is likely to come more from the devel-oped economies than from emerging markets. In all likelihood, the euro zone will climb out of its recession as the European economy begins to grow again by 1.0 per cent – as compared to the 0.4 per cent decline in gross domestic product in 2013. The upturn in the euro zone will not be fuelled by Germany alone – where economic growth of 1.6 per cent is forecast – but rather also by Italy and Spain, economies which had until recently been suffering from con-traction. This development is due in particular to initial successes in reform efforts made in recent years, together with a generally more stable climate for private consumption.

The IMF also expects the US economy to pick up: gross domestic product is expected to grow by 2.8 per cent in 2014, as compared to only 1.9 per cent economic growth in 2013. The fact that the budget dispute, which had led to spending cuts in 2013, has now been resolved is likely to have a positive effect, along with the fact that the climate for private consumption remains favourable. By contrast, it remains to be seen how the potentially more restrictive monetary policy of the US Federal Reserve Bank will affect the economy – par-ticularly with respect to economic activity in emerging markets. The IMF expects growth in China, the most significant emerging market, to be down slightly as compared to the previous year, at 7.5 per cent.

HIGHER OPERATING PROFIT AT CWS-BOCO, ELG AND TAKKT In addition to the continuation of the strategic initiatives launched by the divisions, the improvement in the economic outlook in 2014 will also have a positive effect on the Haniel Group’s business development. However, the divisions will benefit from the antici-pated economic upturn to varying degrees.

Business development at CWS-boco will be determined to a consid-erable extent by the continued success of the key internal projects aimed at efficiency enhancement in addition to the economic devel-opment in Europe. Overall, revenue growth adjusted for currency translation effects is expected to be in the low single-digit percent-age range in 2014. Due to the positive impacts of the already imple-mented and newly initiated measures subsumed under the Focus Future project, CWS-boco expects to generate a more than 10 per

cent increase in operating profit. The measures are focused on the modernisation of the laundry network in Germany, as well as the optimisation of operating and logistics processes. There are also plans to further expand the volume of customer contracts and to keep the termination rate at a low level by expanding and further refining the sales network and by implementing targeted meas-ures designed to enhance customer loyalty.

The ELG division does not expect any significant or lasting recovery in the stainless steel market sector in 2014. While global stainless steel production can be expected to expand by up to 4 per cent, stainless steel production in Europe is likely to decrease slightly. Nevertheless, ELG expects its output tonnage to increase by a high single-digit percentage figure since the division will benefit in particular from increasing demand in the US. In 2014, the price for the raw material nickel is expected to be slightly higher than in the previous year, where it was on average USD 15,000 per tonne per year. Prices for chrome, iron and titanium are expected to recover slightly. Based on these assumptions, ELG expects revenue growth of more than 10 per cent for 2014. Due to the persistently fierce competition on the market, operating profit is expected to increase only slightly. As development on the commodities markets is very volatile, ELG’s revenue and operating profit may also deviate signif-icantly from this forecast, however.

TAKKT also expects to benefit from an improved economic environ-ment in Europe and the USA. However, the termination of business with the Topdeq sales brand will result in negative impact on rev-enue. Nonetheless, TAKKT expects revenue, adjusted for currency translation effects, to increase slightly. Operating profit is expected to increase moderately. The increase in operating profit is attribut-able to an increase in revenue, as well as to lower one-off expenses for the closure of Topdeq; the majority of one-off expenses was already incurred in 2013. TAKKT will continue to consistently pur-sue its growth initiatives in 2014. Due to the DYNAMIC initiative, the various sales and marketing channels will be even better coor-dinated, thus further optimising the sales approach. Furthermore, TAKKT intends to generate growth in its business with existing and new customers through new products and services.

The METRO GROUP’s business situation will also be influenced by economic developments, particularly in Europe. Revenue adjusted for business combinations and disposals as well as currency trans-lation effects is expected to increase slightly in 2014. This growth will be driven not only by international expansion, primarily in the growth regions eastern Europe and Asia, but also by the continu-ing expansion of multi-channel sales. In addition, the METRO GROUP continues to focus on efficient structures and strict cost con-trol. Nonetheless, the operating profit before one-off expenses is expected to be down year-on-year in 2014 – due to lower proceeds from the disposal of real property and lacking earnings contribu-tions from Real’s eastern Europe business, which was sold off. At the same time, Haniel expects to realise a greater investment result from the Metro investment, since it anticipates an improve-ment in the METRO GROUP’s net financial income and tax expense.

REPORT ON EXPECTED DEVELOPMENTS

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GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON E XPEC TED DE VELOPMENTS

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GROUP REPORT OF THE MANAGEMENT BOARD / REPORT ON E XPEC TED DE VELOPMENTS

SIGNIFICANT INCREASE IN GROUP PROFITOverall, Haniel expects the Group to generate revenue growth (adjusted for currency translation effects) in the high single-digit percentage range in financial year 2014. This forecast is based in particular on ELG’s expectation of significantly higher revenue. Operating profit is expected to experience a moderate increase, driven by higher earnings at all divisions. Since current estimates show an increase in net investment income from the Metro invest-ment, Haniel expects that it will generate profit before taxes in 2014 that is significantly higher than in 2013.

In addition, in 2014 Haniel will report high disposal gains from the sale of the Celesio division – likely to be in the mid-triple-digit mil-lions of euros. This will result in a significantly higher profit from discontinued operations in 2014, as this item only consisted of Celesio’s current earnings in financial year 2013.

The Haniel Group’s profit after taxes, which also includes its profit or loss from discontinued operations, will therefore improve even more considerably than will its profit before taxes.

Haniel expects the value-oriented performance indicators Haniel value added and return on capital employed to also increase mark-edly in 2014. This is due to the sale of Celesio. The proceeds from the disposal will significantly increase the return, while the average capital employed and thus the cost of capital are likely to decrease due to the disposal of Celesio’s assets.

Haniel cash flow is expected to be significantly lower in 2014 than in 2013. This is because Celesio’s contribution to cash flow was included in the figure for the entirety of 2013, although it is only included in the 2014 figure until the disposal date. The disposal pro-ceeds from the Celesio sale will not increase Haniel cash flow in 2014 since they represent a cash flow from divestment activities. A fur-ther reason for the expected decrease in Haniel cash flow is that, in contrast to 2013, no dividents will be collected from the Metro investment in 2014 due to the METRO GROUP’s short financial year.

The cash inflow from the sale of Celesio will make it possible for Haniel to invest in attractive equity investments again over the medium term. In the case of an acquisition in financial year 2014, investments in non-current assets would likely increase notably as compared to 2013 – despite the lower investment contributions of Celesio due to its disposal at the beginning of 2014.

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