Interim report 1.1.-31.3.2005: Pre-tax profit EUR 68.9 million

 

Net sales in January-March
The Group's net sales in January-March 2005 were EUR 1,795 million, which is 2.7% up on the corresponding period of the previous year (EUR 1,748 million). The increase was attributable mostly to the performance of units outside Finland and the acquisition of Indoor Group Ltd. The Group's net sales increased by 0.5% in Finland and by 17.2% abroad.

*Exports and net sales outside Finland.

 

Exports and operations outside Finland accounted for 14.7% (12.9%) of net sales. The net sales of Indoor Group Ltd, acquired by Keswell Ltd, are included in the figures starting from 21 January 2005 and its impact on Keswell's growth was 18.1 percentage points.

 

 

Profit in January-March
The Group's profit before extraordinary items and taxes for the review period was EUR 68.9 million (EUR 27.9 million), representing 3.8% of net sales (1.6%). Operating profit was EUR 72.0 million (EUR 30.1 million).

 

The operating profit has been increased by a net total of EUR 49.7 million (EUR 3.1 million) in profits and losses from disposal of fixed assets and business operations, and value adjustments. The profits from disposal of fixed assets include EUR 45.5 million from the disposal of real estate by Kesko to Nordisk Renting Oy. Consequently, the operating profit excluding non-recurring items was EUR 4.8 million smaller than during the corresponding period of the previous year. VV-Auto and Keswell improved their profits excluding non-recurring items, whereas the profit of Kesko Agro in particular was smaller than during the corresponding period of the previous year.

 

The Group's net financial expenses were EUR 4.1 million (EUR 3.3 million). They include net interest from finance leasing amounting to EUR 2.0 million (EUR 2.2 million). The reference period figures are not in compliance with IAS 39 (International Accounting Standard 39), but this has no material impact on the figures. The increase in financial expenses is due to the increase in fixed-interest debt.

 

Earnings per share (adjusted for the dilution effect of stock options) was EUR 0.59 (EUR 0.17). Equity per share was EUR 14.08 (EUR 14.02).

 

 

 

The primary segments presented in the IFRS financial statements are the Kesko Group divisions, namely Kesko Food, Rautakesko, Kesko Agro, Keswell, VV-Auto and Kaukomarkkinat. Contrary to the figures previously reported in accordance with Finnish Accounting Standards (FAS), the operating profit from real estate operations, organised in an intra-Group service unit, has been allocated to the divisions as directly attributable. This change in the reporting practice supports the ongoing process of transferring profit responsibility for real estate to the division parent companies throughout the lifecycle of said real estate. After the change, common operations will include the costs of the corporate management and certain support functions.

 

 

 

Capital expenditure
The Group's capital expenditure totalled EUR 150.2 million (EUR 44.5 million), which is 8.4% (2.5%) of net sales. Investments in retail stores and acquisitions amounted to EUR 142.0 million of which EUR 70.0 was used to acquire Rimi Baltic AB shares and EUR 41.8 million to acquire Indoor Group Ltd's shares. The Group's other capital expenditure was EUR 8.2 million. Investments in business operations outside Finland represented 52.9% of total capital expenditure.

 

 

 

Finance
Cash flow from operating activities was EUR -40.5 million (EUR -49.9 million), while cash flow from investing activities was EUR 9.8 million (EUR -21.4 million). The positive change is attributable to the real estate deal completed in January in which Kesko sold real estate properties to Nordisk Renting Oy totalling EUR 95.7 million.

 

At the end of the period, the equity ratio was 40.4% (41.1%). Interest-bearing net debt was EUR 605.1 million (EUR 425.6 million). Liquid funds totalled EUR 124.8 million (EUR 143.3 million).

 

 

 

Personnel
During the period under review, the average number of personnel in the Kesko Group, including joint ventures, was 20,450 (16,096) converted into full-time employees. There was an increase of 4,354 employees over the corresponding period of the previous year. In Finland, the average increase was 1,257 employees, while outside Finland it was 3,097. Kesko Food Ltd's joint ventures, Pikoil Oy and Rimi Baltic AB, accounted for 4,739 employees.

 

At the end of March 2005, the total number of personnel was 23,999 (18,999), of whom 13,767 (11,966) worked in Finland and 10,232 (7,033) worked outside Finland. Compared with the end of March 2004, there was an increase of 1,801 employees in Finland, and 3,199 outside Finland, distributed by business division as follows:

 

 

* Total number of employees, including part-time employees.

 

Rimi Baltic AB, the joint venture of Kesko Food and Sweden's ICA AB, started operations at the beginning of 2005. 50% of the personnel of Rimi Baltic AB and Pikoil Oy, or 5,093 persons, are included in the Kesko Group figures. Rautakesko and Kesko Agro further expanded their operations in the Baltic countries. The biggest increase in the number of Kesko personnel was registered in Lithuania where the average number of employees of Rautakesko's Senukai chain increased by over one thousand compared with the previous year.

 

In Finland, Keswell Ltd's personnel increased mainly as a result of the acquisition of Indoor Group Ltd. Its impact is some 650 persons on average. The number of VV-Auto employees increased by more than 100 due to the acquisition of Helsingin VV-Auto Oy. The number of Kesko Food's employees increased slightly in Finland, mainly as a result of the expansion of Cassa Oy.

 

On 12 April 2005, rationalisation negotiations were started in Kesko Food. The estimated total need for reduction of personnel is about 160 jobs. The negotiations are planned to be completed by the end of May.

 

 

 

Market review
The Finnish economy is estimated to grow by about 3% in 2005. It is forecast that the growth of private consumption expenditure will slow down to about 2.5-3.0%. Investments are estimated to pick up to a growth rate of about 4%. The annual increase in consumer prices is forecast to reach 1.2% in 2005 (ETLA: The Research Institute of the Finnish Economy).

 

According to the preliminary data of Statistics Finland, the volume of Finnish retail trade increased by 4.2% in January-February 2005 over the corresponding period of the previous year. The increase in wholesale trade was 3.7%.

 

ETLA forecasts that the volume of Finnish retail and wholesale trade will grow by about 3% in 2005.

 

Statistics Finland's consumer survey of April shows that Finnish consumers continue to be confident that both their own financial situation and the Finnish economy will develop favourably.

 

The strong growth of the Baltic economies will continue in 2005. The Estonian economy is forecast to grow this year by 5-6%, and the Latvian and Lithuanian economies by about 6-7%. Private consumption is estimated to grow by about 5% in Estonia, by about 7% in Latvia and by about 6.5% in Lithuania. Consumer prices are forecast to increase by 3.4% in Estonia, by 5.4% in Latvia and by 2.4% in Lithuania (Nordea).

 

This year the Swedish economy is forecast to increase by about 3% and private consumption by 2.6%. The increase in consumer prices is anticipated to remain below 1% (Konjunkturinstitutet). Total building investments are forecast to continue increasing at a rate of about 3% this year (Sveriges Byggindustrier).

 

Economic growth, consumer price inflation and the political situation have become more stable in Russia, which provides a good basis for growth and structural change in the country's retail trade.

 

The market and outlook for each of Kesko's business divisions are discussed in the business area reviews of this interim report.

 

 

 

In January-March, Kesko Food Group's net sales amounted to EUR 871 million, an increase of 0.6%. Kesko's share of the net sales of the joint venture, Rimi Baltic AB, was EUR 91 million, or 10.5% of Kesko Food's net sales.

 

Kesko Food's operating profit was EUR 54.3 million (EUR 13.6 million). The operating profit was increased by the net result of profits and losses on the disposal of fixed assets and business operations (mainly relating to the disposal of the central warehouse and some retail store premises in January) amounting to EUR 42.2 million (EUR -0.3 million). Thus, the operating profit excluding non-recurring items was EUR 1.8 million less than in the corresponding period of the previous year. The result of the period under review was affected by the revised valuation practices applied to inventories in Citymarket Oy's home goods trade. On the other hand, the result was improved by savings in information management costs achieved by renewing the enterprise resource planning system. Kesko Food's capital expenditure totalled EUR 87.5 million, of which investments in store sites and acquisitions accounted for EUR 86.3 million. Investments outside Finland accounted for 82.6% of all capital expenditure.

 

According to the Finnish Food Marketing Association, the retail sales of its member companies decreased by 3.4% in January-February. The total Finnish grocery market is estimated to have grown by about 1.5% during the first months of the year. In the same period, grocery prices dropped by 0.4% due to intensive price competition and growth in the sales share of retail operators' own-brand products (Statistics Finland).

 

During the period under review, the total retail sales of the K-food stores in Finland dropped by 1.2%, totalling EUR 1,020 million (incl. VAT). With the exception of the K-pikkolo and Cassa chains, the retail sales of all chains declined. Owing to the differing local and regional markets and competitive situations, there are big differences between the retail sales growth of the chains and individual K-food stores. There were 1,074 K-food stores operating at the end of the period under review.

 

Pikoil Oy, a joint venture of Kesko Food Ltd and Neste Marketing Ltd (a Fortum subsidiary), which operates in the neighbourhood and service station store markets, had 139 store sites under chain control. 71 of these were K-pikkolo neighbourhood and service station stores. At the beginning of 2005, the number of Pikoil Oy's own store sites grew by 21 when Neste Marketing Ltd transferred the operation of the service stations it had acquired from Eurostrada Oy to Pikoil Oy. At the end of the review period, Pikoil Oy's own store sites totalled 99. In the future, all of the chain's food stores (including Quick Shops) will operate under the K-pikkolo sign, whereas the service stations will continue selling oil products under the Neste sign.

 

In February 2004, Kesko Food started testing discounters in Finland. At the end of the period under review, there were already 19 Cassa stores in operation. The objective is to improve the competitiveness of the K-Alliance by testing the new concept in various parts of the country.

 

At the beginning of 2005, Rimi Baltic AB, a joint venture owned 50/50 by Kesko Food Ltd and ICA Baltic AB, a company belonging to the Swedish ICA Group, started operating. Operations have started according to plan. The owner parties transferred their grocery operations in Estonia, Latvia and Lithuania to the joint venture. Rimi Baltic operates hypermarket, supermarket and discounter concepts. The company currently runs 164 stores and intends to develop and expand the store network in all operating countries. The objective is to achieve leadership in the Baltic food market and a 25% market share within three years.

 

The net sales of Kespro Ltd, which provides services for the catering, kiosk, service station and restaurant trade, were EUR 163 million (EUR 174 million), a decrease of
6.1%. The total market in Finland in this sector is estimated to have remained unchanged during the first months of the year.

 

It is estimated that the total food trade market will grow by about 1.5% in Finland in 2005. The total Baltic market is anticipated to increase by about 5%. Kesko Food's net sales are anticipated to grow compared with 2004 mainly as a result of Rimi Baltic's sales growth. The operating profit excluding non-recurring items is expected to decrease slightly.

 

 

Rautakesko
In January-March, Rautakesko Group's net sales amounted to EUR 269 million, an increase of 8.7%. In Finland, the net sales were EUR 179.8 million, an increase of 5.0%. The net sales of subsidiaries operating outside Finland were EUR 88.5 million, an increase of 16.8%. About 33% of Rautakesko's net sales came from outside Finland. Rautakesko's operating profit for January-March was EUR 4.4 million (EUR 6.2 million). The result was weakened by initiation costs of store sites outside Finland. Rautakesko's capital expenditure totalled EUR 10.9 million, of which 63% was outside Finland.

 

In Finland, the statistics for residential building permits and start-ups anticipate a slow-down in the growth of home investment. On the other hand, other building construction is experiencing a revival and renovation construction continues to be popular (ETLA, Statistics Finland).

 

At the end of March, the K-rauta chain in Finland included 40 stores and the Rautia chain included 105 stores. The sales of the K-rauta stores increased by 3.3% and those of Rautia stores by 4.0%. The biggest increase was registered in the sales of building supplies, interior decoration supplies and small machinery. The sales growth of the K-rauta and Rautia chains in Finland is estimated to have exceeded that of competitors (Finnish Hardware Association). The sales of the Rautakesko B-to-B Service dropped by 1.5%.

 

In Sweden, Rautakesko operates 12 K-rauta stores. There are 4 stores in Estonia and 1 in Latvia. In Lithuania, UAB Senuku Prekybos centras (Senukai), in which Rautakesko is the majority owner, operates 13 Senukai stores and 81 Partnershops.

 

On 17 March 2005, Kesko Corporation's Board of Directors approved an agreement by which Rautakesko Ltd will acquire the total share capital of the company that owns Stroymaster, a St. Petersburg DIY store chain. It accounts for about 20% of the total sales of DIY chains in the St. Petersburg area. At present, the Stroymaster chain includes 4 DIY stores in the St. Petersburg city area, while a fifth is under construction. In addition, the chain is planning to establish bigger outlets modelled on the K-rauta concept in St. Petersburg and possibly elsewhere in Russia. Before it can enter into force, the deal requires the approval of the Russian competition authorities and the fulfilment of the other conditions of the transaction.

 

The total market for the Finnish hardware and builders' supplies trade is estimated to grow by about 3% in 2005. The total Baltic market is anticipated to increase by about 6-8%. It is expected that Rautakesko's net sales will be higher than in 2004 and that the operating profit excluding non-recurring items will remain at the level of 2004.

 

 

Kesko Agro
Kesko Agro Group's net sales in January-March were EUR 184 million, a decrease of 4.3%. The net sales of subsidiaries operating outside Finland totalled EUR 36.8 million, which was 20.0% of total net sales. The Kesko Agro Group's operating profit was EUR -0.1 million (EUR 4.1 million). The operating profit was below that of the comparison period due to poor sales performance and the costs of implementing the enterprise resource planning system. The operating profit of the Baltic operations was also less than that of the comparison period due to the exceptionally good gross profits gained from grain sales in 2004. Capital expenditure totalled EUR 1.9 million, 17% of which was in projects outside Finland.

 

Kesko Agro Ltd's net sales were EUR 103 million. Grain prices were 10% lower than in 2004. Export deliveries of grain were also at a lower level than in the previous year. The price level of animal feed has dropped by 7% compared with 2004. Tractor sales developed favourably and the market share strengthened.

 

The net sales of Konekesko Ltd, part of the Kesko Agro Group, were EUR 44.2 million, an increase of 8.6% over the corresponding period in the previous year. The total market has developed positively. The company's profitability has remained good

 

On 15 January 2005, Konekesko Ltd opened a Yamaha Center, designed according to a new concept, at Vantaa in Finland.

 

Agricultural and machinery sales in the Baltic countries exceeded the level of the previous year by 4.5%. The admission of the Baltic countries to the EU has increased the agricultural and machinery trade markets.

 

It is estimated that Finland's total agricultural trade market will decrease somewhat in 2005. The total Baltic market is anticipated to grow by about 5-10%. It is expected that Kesko Agro's net sales will increase compared with 2004 and that the operating profit excluding non-recurring items will be approximately the same as in 2004.

 

 

The Keswell Group's net sales for January-March totalled EUR 207.3 million, an increase of 17.1%. The net sales of operations outside Finland amounted to EUR 10.3 million, representing 5.0% of total net sales. The main reason for net sales growth was the acquisition of Indoor Group Ltd on 21 January 2005. Keswell's operating profit was EUR 3.6 million (EUR -0.6 million), which included EUR 4.2 million in profits from the disposal of fixed assets. The operating profit excluding non-recurring items increased by EUR 0.2 million over the comparison period. Indoor Group did not yet generate operating profit for Keswell, owing to the allocation of business combination costs partly to the order portfolio and partly to inventories (IFRS 3). Due to the nature of the department store trade, the great majority of Keswell's profits accumulate in the latter half of the year. Capital expenditure totalled EUR 43.9 million.

 

The net sales of the Anttila Group totalled EUR 110 million, an increase of 1.9%. The sales of the Kodin Ykkönen department stores for home goods and interior decoration increased by 8.3%, while those of the Anttila department stores dropped by 1.4%. The biggest sales growth was recorded by entertainment and interior decoration products. Anttila's distance sales were up by 4.4%, due to the good performance of NetAnttila.

 

Indoor Group Ltd's net sales, starting from 21 January 2005, were EUR 32 million. The sales of the Asko furniture store chain in Finland totalled EUR 17.4 million, while those of the Sotka furniture store chain totalled EUR 19.5 million. The net sales of the furniture trade in the Baltic countries and Sweden totalled EUR 5.5 million.

 

The net sales of Kesko Sports amounted to EUR 29 million, a decrease of 12.7%. The retail sales of the Intersport store chain dropped by 4.1% owing to January sales that were weaker than in the previous year. The sales of Kesport stores rose by 3.9%.

 

The net sales of Kesko Musta Pörssi amounted to EUR 27 million, up 0.8%. The retail sales of the Musta Pörssi chain increased by 2.7%.

 

The net sales of Kesko Shoes increased by 4.8%, totalling EUR 6.7 million. The retail sales of the Andiamo and K-kenkä chains decreased by 2.1%. The sales of Kenkäexpertti stores dropped by 5.3%.

 

It is estimated that, in 2005, the total home and speciality goods trade market in Finland will grow by 2-3%. The Baltic furniture trade is forecast to increase by about 5%. It is expected that Keswell's net sales will increase significantly and that its operating profit excluding non-recurring items will improve, mainly due to the acquisition of Indoor Group Ltd.

 

 

VV-Auto
The VV-Auto Group's net sales for January-March totalled EUR 195.3 million, up by 1.2%. The operating profit was EUR 11.5 million (EUR 8.6 million), an increase of EUR 2.9 million over the comparison period, which is mainly attributable to improved gross profit and an increase in the group's own retailing. Capital expenditure totalled EUR 2.9 million.

 

In January, exceptionally high seas broke the seawall and flooded the storage area at the Sompasaari harbour in Helsinki, damaging about 800 cars which the insurance company redeemed in accordance with the terms of the insurance policy. The flood damage did not cause any financial losses to the VV-Auto Group.

 

Registrations of new passenger cars totalled 42,266 in January-March, a decrease of 1.8% from the comparison period. Registrations of new vans were down by 3.3%, totalling 3,902.

 

In January-March, there were 3,876 registrations of Volkswagen cars, equivalent to a market share of 9.2%. The new models that will be introduced towards the end of the year are expected to increase the market share. The number of Volkswagen vans registered was 695 and the market share was 17.8%. Registrations of Audis increased to 1,408, which was12.5% more than in the comparison period, and the market share rose to 3.3%. The registrations of new Seat cars totalled 346 and the market share was 0.8%.

 

It is estimated that Finland's total market for cars and vans will contract slightly in 2005. The VV-Auto Group's net sales and operating profit excluding non-recurring items are forecast to increase, mainly due to the structural change in sales and the Group's own Audi and Volkswagen retail dealer network.

 

 

Kaukomarkkinat
The Kaukomarkkinat Group's total sales, which include the value of commission-based trade as well as net sales, amounted to EUR 101.2 million (EUR 101.9 million). Net sales were EUR 70.6 million (EUR 71.0 million). The biggest increase was recorded in the sales of plastic raw materials in the Nordic countries. Net sales in the Russia-China trading business declined.

 

The Group's operating profit was EUR 4.1 million (EUR 2.2 million). The growth is attributable to the EUR 4.2 million profit from the disposal of the company's main office property in Espoo in January. Operating profit excluding non-recurring items was EUR -0.3 million (EUR 2.0 million). The decline was mainly due to losses from trading operations in China, a lower level of profit in consumer electronics and the costs incurred in winding up the Pioneer representation.

 

On 22 March 2005, Kaukomarkkinat acquired NMT Prekyba UAB, a Lithuanian wholesaler specialising in bakery supplies. The company's net sales in 2004 were EUR 7.5 million and it employs 23 persons.

 

During the period under review, the total market increased by 1% in Finland and in the other Nordic countries and by 6% in Russia and China. In 2005 the total market is estimated to grow by 1% in Finland and the other Nordic countries and by 6% in Russia and China. It is expected that Kaukomarkkinat's net sales will be at the 2004 level and that operating profit excluding non-recurring items will decrease.

 

 

 

Changes in Group structure
Rimi Baltic AB, a joint venture of Kesko Food Ltd and ICA Baltic AB, started operating at the beginning of 2005. The owner parties transferred their grocery operations in Estonia, Latvia and Lithuania to the joint venture. At the beginning of 2005, the Kesko Group acquired 50% of Rimi Baltic AB's shares and sold its subsidiaries engaging in the grocery trade in Estonia and Latvia plus the related real estate companies to Rimi Baltic AB. During the period under review, the Kesko Group's share of the joint venture's net sales was EUR 91.1 million. The arrangement has no material impact on the Group's profit for the review period.

 

On 21 January 2005, Keswell Ltd acquired the whole stock of Indoor Group Ltd. Indoor Group engages in the furniture trade in Finland, Sweden, Estonia and Latvia. During the period under review, Indoor Group's share of Kesko Group's net sales was EUR 31.9 million. During the first quarter of the year, the acquisition of Indoor Group did not yet generate profit for the Kesko Group, owing to the allocation of business combination costs partly to order portfolio and partly to inventories (IFRS 3).

 

 

 

Decisions made by Kesko Corporation's Annual General Meeting

Kesko Corporation's Annual General Meeting held on 30 March 2005 adopted the income statement and balance sheet and the consolidated income statement and balance sheet for 2004 and discharged the members of the Board of Directors and the Managing Director from liability. The Annual General Meeting also decided to distribute a dividend of EUR 1.00 per share, as proposed by the Board of Directors, or total dividends of EUR 95,168,792.00. The record date for dividend payment was 4 April 2005 and the dividends were payable on 11 April 2005.

 

The Annual General Meeting confirmed the number of Board members at seven and elected retailer Kari Salminen as a new Board member for the remaining term. Matti Honkala, Kesko's former President and CEO and Board member, had resigned from the Board upon his retirement on 1 March 2005, while Jukka Toivakka resigned from Board membership at the Annual General Meeting.

 

The Annual General Meeting decided to continue the Board members' fees as they are. The fee of the Chairman of the Board is EUR 3,800, that of the Vice Chairman EUR 2,400 and that of a Board member EUR 2,000. In addition, the Annual General Meeting decided that the members of Board committees will be paid the same fee for a committee meeting as is paid for a Board of Directors' meeting, which is EUR 420. The terms of office of all seven of the company's Board members will expire at the close of the 2006 Annual General Meeting, as laid down in the Articles of Association.

 

The Annual General Meeting elected one auditor for the company, namely PricewaterhouseCoopers Oy, a firm of Authorised Public Accountants. Pekka Nikula, APA, will be the auditor with principal responsibility.

 

The Annual General Meeting approved the Board's proposal to amend item 3.5 'Shareholder rights' of the terms and conditions of the year 2000 stock option scheme for Kesko's top and middle management approved by the Annual General Meeting on 10 April 2000, to the effect that the dividend rights and other shareholder rights of shares subscribed for with stock options will commence when the increase in share capital has been entered in the Trade Register.

 

The decisions of the Annual General Meeting were published in a stock exchange release on 30 March 2005. The resignations from the Board of Matti Honkala and Jukka Toivakka were published in a stock exchange release on 9 February 2005.

 

 

 

Corporate governance
Matti Halmesmäki, M.Sc. (Econ.), LL.M., took office as Kesko Corporation's Managing Director and the Kesko Group's President and CEO on 1 March 2005.

 

The Boards of Directors of the parent companies of the major sub-groups fully owned by the Kesko Group were elected at their Annual General Meetings held on 24 March 2005. The compositions of the Division Boards of Directors were published in a stock exchange release on 24 March 2005. Previously on 28 February 2005, the Extraordinary General Meetings of Kesko Food Ltd, Rautakesko Ltd, Keswell Ltd and Kesko Agro Ltd had appointed Matti Halmesmäki, Kesko Corporation's Managing Director and the Kesko Group's President and CEO, as the Chairman of their Boards as of 1 March 2005. This change was announced in a stock exchange release on 28 February 2005.

 

On 17 March 2005, Kesko Corporation's Board of Directors established a Compensation Committee, selecting Heikki Takamäki as its Chairman and Pentti Kalliala and Keijo Suila as its members. This was announced in a stock exchange release on 17 March 2005. The Committee will prepare those matters for the Board that relate to the compensation and appointments of the President and CEO and other top executives of the Group, as well as other employee compensation systems.

 

The organisational meeting of the Board, held after the Annual General Meeting on 30 March 2005, re-elected all members of the Compensation Committee and the Audit Committee established on 29 April 2004. The Chairman of the Audit Committee is Matti Kavetvuo and its members are Eero Kasanen and Maarit Näkyvä. The Audit Committee will prepare those matters for the Board that relate to the monitoring of the Kesko Group's financial position, the supervision and control of reporting, and risk management.

 

In compliance with the recommendation for the corporate governance of listed companies issued jointly by the Helsinki Stock Exchange, the Central Chamber of Commerce and the Confederation of Finnish Industry and Employers, that took effect on 1 July 2004, the Audit Committee members are independent of the company. The decisions of the Board's organisational meeting were announced in a stock exchange release on 30 March 2005.

 

As a result of the changes that took place in the management of the Kesko Group and its major sub-group parent companies, the Corporate Management Board of the Kesko Group comprises Matti Halmesmäki, Managing Director of Kesko Corporation and President and CEO of the Kesko Group (who has served as Chairman of the Corporate Management Board since 17 March 2005), Juhani Järvi, Corporate Executive Vice President, Deputy to the President and CEO, Terho Kalliokoski, President of Kesko Food Ltd (as of 1 May 2005), Matti Laamanen, President of Keswell Ltd, Jari Lind, President of Rautakesko Ltd, Pekka Lahti, President of Kesko Agro Ltd and Managing Director of Konekesko Ltd, Riitta Laitasalo, Senior Vice President, Human Resources, and Arja Talma, Senior Vice President, CFO. The changes in the management were announced in stock exchange releases on 9 February 2005 and 17 March 2005.

 

 

Shares and the stock market
During 10-31 December 2004, a total of 1,328,250 new Kesko Corporation B shares were subscribed for with B and C stock options under Kesko Corporation's year 2000 stock option scheme. The corresponding share capital increase of EUR 2,656,500 was entered in the Trade Register on 15 February 2005. The new B shares were included in the main list of the Helsinki Stock Exchange for public trading with the old B shares on 16 February 2005. As a result, Kesko Corporation's share capital rose to EUR 190,337,584.The number of A shares is 31,737,007, i.e. 33.3% of all shares, and the number of B shares is 63,431,785, i.e. 66.7% of all shares.

 

The price of a Kesko A share was EUR 18.90 at the end of 2004 and EUR 19.91 at the end of the review period, an increase of 5.3%. The price of a Kesko B share was EUR 17.95 at the end of 2004 and EUR 19.82 at the end of the review period, an increase of 10.4%. During the period under review, the Helsinki Stock Exchange all-share index rose by 5.9%, the portfolio index by 7.0% and the trading sector price index by 13.1%.

 

At the end of the review period, the market capitalisation of A shares was EUR 631.9 million, while that of B shares was EUR 1,257.2 million. Their combined market capitalisation was EUR 1,889.1 million, an increase of EUR 177.3 million during the review period. During the same time, 0.4 million A shares were traded on the Helsinki Stock Exchange at a total value of EUR 8.5 million, while 19.5 million B shares were traded at a total value of EUR 383.7 million.

 

During the period, 0.4 million listed year 2000 B stock options were traded at a total value of EUR 4.8 million, while 0.2 million C stock options were traded at a total value of EUR 2.4 million. The 2003 D options of the year 2003 stock option scheme were included on the main list of the Helsinki Stock Exchange on 1 April 2005. This was announced in a stock exchange release on 30 March 2005.

 

 

 

Flagging notifications
Kesko Corporation did not receive any flagging notifications during the review period.

 

 

Adoption of the IAS/IFRS
Kesko Corporation adopted the International Financial Reporting Standards (IFRS) on 1 January 2005. Kesko will prepare its first complete IFRS financial statements for the year 2005. On 6 April 2005, Kesko published a stock exchange release presenting the comparative information for 2004 in compliance with the IFRS. This interim report has been prepared in accordance with the recognition and measurement principles of the IFRS.

 

The transition to IFRS improved Kesko's profit for the 2004 financial year by EUR 58 million compared with that based on Finnish Accounting Standards (FAS). The operating profit increased by EUR 75 million, which includes a non-recurring item of EUR 41 million relating to retirement benefit plans included in the result for the fourth quarter of 2004. Total non-recurring items in 2004 were EUR 44.4 million higher under IFRS than under FAS. The consolidated balance sheet total increased by EUR 342 million following the adoption of IFRS.

 

 

As a result of the adoption of IFRS, Kesko Corporation has revised its financial targets and dividend policy to take account of the changes in financial indicators due to the new reporting standards. The targets have also been diversified.

 

Kesko Corporation measures its long-term performance and balance sheet development by means of several financial indicators, for which the target levels are:

 

 

Kesko Corporation will distribute at least half of its earnings per share as a dividend, provided the company's financial position and operating strategy allow it.

 

 

 

Main events
At the beginning of 2005, Rimi Baltic AB, a joint venture owned 50/50 by Kesko Food Ltd and ICA Baltic AB, started operating. More information under 'Kesko Food'.

 

On 21 January 2005, Keswell Ltd acquired Indoor Group Ltd after the deal had been approved by the Finnish, Swedish, Estonian and Latvian competition authorities. All other conditions of the transaction have also been fulfilled. An appeal is pending in Finland concerning the Competition Authority's approval of the acquisition. Nevertheless, the transaction could be finalised by virtue of the acquisition regulations. A stock exchange release was published concerning the matter on 21 January 2005. As a result of the acquisition, Indoor Group Ltd's chain concepts and their own Asko and Sotka furniture stores in Finland, Sweden, Estonia and Latvia were transferred to Keswell Ltd's ownership.

 

On 25 January 2005, Kesko sold its central food warehouse property at Hakkila, Vantaa, the main office building of Kaukomarkkinat at Kilo, Espoo, and 16 food store properties in different parts of Finland to Nordisk Renting Oy. The total sales price was EUR 95.7 million and Kesko Group's sales profit was EUR 45.5 million. The premises were leased back on long lease terms. The lease liability, totalling EUR 95.8 million, is not classified as a finance lease. 

 

Kesko Food decided to include new outlets in the Cassa discounter chain testing programme. The new store type has been tested in the Cassa outlets opened last year. The lessons learnt have been put to use also in other K-Alliance food store chains.

 

On 9 February 2005, the Finnish Competition Authority petitioned the Market Court for a sanction of EUR 100,000 to be imposed on Kesko Corporation. The proposal by the Finnish Competition Authority is connected to the maximum pricing of groceries in the horizontal K-market and K-neighbourhood store chains in 1997-2000 and in the K-extra chain in 1999-2000. The matter is pending in the Market Court. Until the end of 2000, the operations of the K-Alliance were based on mutual horizontal co-operation by retailers. At the beginning of 2001, the food store chains adopted a vertically managed system between Kesko Food Ltd, a Kesko Corporation subsidiary, and the retailers. A stock exchange release was published concerning the matter on 9 February 2005.

 

On 17 March 2005, Kesko Corporation's Board of Directors approved an agreement by which Rautakesko Ltd, a Kesko Corporation subsidiary, will acquire the total share capital of the company that owns Stroymaster, a St. Petersburg DIY store chain. The seller is the Teks group of St. Petersburg. The price is EUR 19.6 million at the maximum, of which the part tied to the results for the first 12 months is EUR 6.9 million at the maximum. Before it can enter into force, the deal must be approved by the Russian competition authorities and the other conditions of the transaction must be fulfilled. A stock exchange release was published about the matter on 17 March 2005.

 

Kesko Group's real estate operations will be reorganised by transferring the management of real estate investments and the profit responsibility for properties throughout their whole life cycle to the division parent companies. The plan is also to transfer to the division parent companies those real estate operations relating to the store site process that are still centralised. According to the plan, a small corporate-level steering and service unit, the Real Estate Services Department, will be established to manage the real estate function of the Group on a general level by preparing, for the approval of the Group management, the general principles and return requirements, etc. to be applied to real estate activities. In addition, the department will be centrally responsible for construction projects and real estate administration outside Finland. After the plans have been completed, the reorganisation will also be submitted to the Kesko Real Estate personnel for assessment in a formal co-operation procedure. The planned arrangements are not expected to have any significant effect on the number of employees. Kesko Real Estate currently employs about 50 persons.

 

Kesko Food Ltd decided to improve its operational efficiency with the aim of increasing the competitiveness of the K-food stores. At the same time, Kesko Food and K-Plus Oy, which is responsible for the K-Alliance's customer loyalty system, will intensify their co-operation. Due to these arrangements, rationalisation negotiations were started on 12 April 2005.Kesko Food will reorganise its operations in areas such as marketing, logistics and the purchase of home and speciality goods for the K-citymarket chain. The rationalisation procedure related to the organisational reform will concern Kesko Food and K-Plus Oy on a large scale. The impact will be the greatest in Helsinki and Tampere. The estimated total need for reduction is about 160 jobs. During the negotiations, opportunities for training or reassignment of as many persons as possible will be examined. Pension solutions will also be assessed. The negotiations are expected to terminate by the end of May. These activities aim at annual savings of over EUR 20 million. As part of the change process Kesko Food will this year offer retailers new agreements to enhance chain co-operation. The joint selection of the chains will expand and joint pricing will increase. The basis of how the fees charged from retailers are determined will change from net sales to gross profit.

 

 

 

Kesko Group's total net sales are expected to exceed last year's level in 2005, although active price competition will slow down Kesko Food's retail sales in euros in Finland. Due to the expansion of operations and business re-arrangements, the Group's sales will continue to grow more strongly in the other countries than in Finland.

 

The Group's profitability will remain good. It is expected that Kesko Group's operating profit excluding non-recurring items will attain the level of the previous year.

 

 

 

 

 

Further information is available from Arja Talma, Executive Vice President, CFO, telephone +358 1053 22113, or Juhani Järvi, Corporate Executive Vice President, Deputy to the President and CEO, telephone +358 1053 22209. An English-language web conference on the interim report will be held today at 14.30 (Finnish time). A link to the web conference is available at: www.kesko.fi.

 

 

 

Anne Leppälä-Nilsson
General Counsel

 

 

ATTACHMENTS
Group net sales by division
Consolidated income statement and balance sheet
Group indicators
Group cash flow
Changes in Group equity
Group contingent liabilities
Group indicators by quarter
Divisions' net sales and operating profits by quarter
K-Alliance's retail sales

 

Kesko Corporation's interim report for the first 6 months of 2005 will be published on 28 July 2005 and for the first 9 months on 27 October 2005. In addition, Kesko Group's sales figures and K-Alliance's retail sales figures are published each month. News releases and other company information are available on Kesko's Internet pages at www.kesko.fi

 

DISTRIBUTION
Helsinki Stock Exchange

Main news media

 

 

 

 

 

 

 

 

 

Changes in Group equity

 

 

 

* Net sales of year of comparison 2003 according to FAS

 

 

*The change has been calculated using comparable year 2004 sales.

 

**Rimi Baltic AB is a 50/50 joint venture of Kesko Food Ltd and ICA Baltic AB.

 

***Incl. sales for the period 22.1.-31.3.2005.

 

1 K-rauta store and 44 Rautia stores also operate as K-maatalous stores. Their sales are partly included in the sales of the hardware and builders' supplies stores and partly in the sales of agricultural stores.