KESKO’S INTERIM REPORT 1.1.-31.8.2000

Kesko Group’s net sales for the period from 1 January to 31 August 2000 totalled EUR 4,167 million, which was 3.9% more than during the corresponding period in 1999 (EUR 4,011 million). The Group’s profit before extraordinary items amounted to EUR 88.5 million (EUR 83.0 million), which is 2.1% of net sales (2.1 %). Earnings per share were EUR 0.70 (EUR 0.66). Equity per share was EUR 14.99 (EUR 15.59). The figures are unaudited.

Market review

According to preliminary information by Statistics Finland, the volume of wholesale sales, adjusted for the number of trading days in the period, increased by 4.0% during January-July from the previous year. The volume of retail sales increased by 5.0% and the volume of car sales by 1.7%. The inquiry made by the Federation of Finnish Commerce and Trade showed that, in money terms, wholesale sales grew by 7.8% and retail sales by 5.2%.

The year 2000 is expected to be the seventh successive year of growth for the trading sector. According to the forecasts by the Research Institute of the Finnish Economy, the volume of wholesale production will increase by 5.5% and the volume of retail production by 4.0%. The Institute expects private consumption to grow by 3.9% during the year 2000. The price of oil and the exchange rate of the euro will be significant inflation risks both this and next year.

Statistics Finland’s consumer survey shows that the confidence of consumers in favourable economic growth in Finland clearly weakened in September. The indicator fell to its lowest since spring 1996.

Kesko Group’s net sales for the period from 1 January to 31 August 2000 were EUR 4,167 million, which was 3.9% more than during the corresponding period in 1999 (EUR 4,011 million). Sales of cars, hardware and builders’ supplies, groceries and interior decoration products developed best. Sales of clothing and shoes did not meet expectations. Kesko withdrew from the speciality clothing business carried on by the Vaatehuone, Aleksi 13 and Nicky&Nelly store chains.

At the end of the period, there were over 1.3 million households and about 2.4 million cardholders included in the Plussa customer loyalty programme.

Net sales by profit division

Kesko’s sales of groceries to Anttila department store grocers was transferred from the Home and Speciality Goods Division to the Foodstuffs Division at the turn of the year. In January-August 1999 the corresponding sales totalled EUR 77.8 million.

The comparable growth in net sales in the Foodstuffs Division was 4.7% and in the Home and Speciality Goods Division 1.7%.

The Group’s profit before extraordinary items was EUR 88.5 million (EUR 83.0 million), which was 2.1 % of net sales (2.1%). The Group’s operating profit was EUR 79.3 million (EUR 75.5 million). This includes EUR 2.7 million in profits on the sale of shares and real estate and in revaluations. The corresponding income in 1999 was EUR 22.7 million, of which a provision of EUR 13.5 million was made in the comparison period for restructuring expenses in 1999. Pension and social security expenses decreased by EUR 15.0 million from the previous year due to the income from investments by the Kesko Pension Fund.

The parent company’s profit before extraordinary items and taxes was EUR 82.2 million (EUR 89.7 million).

Citymarket Oy’s operating loss was EUR 1.2 million (operating profit EUR 1.3 million). The heavy investment programme and renovation of retail outlets had a negative effect on performance during the period.

The division of responsibilities between Anttila and Kesko was changed at the beginning of the year. Anttila acts as a chain company in the speciality goods trade and the chains of the Foodstuffs Division are now responsible for the groceries trade. The Anttila Group’s operating loss was EUR 12.7 million which was, insofar as it is comparable, at the level of the previous year. The result was negatively affected by the initiation costs of three new outlets and the development costs of e-commerce.

Due to the vigorous expansion of the chain, Kesko Svenska AB’s operations were loss-making. Two new hardware department stores, in Örebro and in Haninge, were opened in Sweden.

The Kaukomarkkinat Group’s operating profit was EUR 2.9 million (EUR 7.4 million). The result was primarily reduced by the trade of adidas products being transferred to a company owned 50-50 by Kaukomarkkinat and the principal and by the poor overall development in trade.

The VV-Auto Group’s operating profit remained good and was EUR 15.1 million (EUR 17.6 million).

The Kesko Group’s net financial income was EUR 9.2 million (EUR 7.5 million). Dividend income increased by EUR 4.1 million.

Earnings per share were EUR 0.70 (EUR 0.66). Equity per share was EUR 14.99 (EUR 15.59).

Operating profit by profit division

The common divisions include the Resource Management Division and the Finance and Administration Division. Their results, including the profits and losses on the sale of shares and real estate, have not been allocated to the profit divisions engaged in commercial operations. Other expenses resulting from corporate administration have been allocated to the profit divisions in the table.

*) The figures for 1999 have been converted to comparable ones to correspond to the present organisation.

Investments

Investments in the grocery store network continued at home and in Estonia. In Finland, investments were also made in the home and speciality goods trade, and in the hardware and builders’ supplies trade. In Sweden, investments in K-rauta department stores continued. In Estonia, a majority shareholding was acquired in AS Fanaal, the largest company operating in the field of hardware and builders’ supplies.

The Group’s total investments amounted to EUR 190.2 million (EUR 128.2), which is 4.6% (3.3%) of net sales. The investments in shares and in the real estate, information technology and fixtures of Kesko’s wholesale operations and subsidiaries totalled EUR 59.3 million, while investments in the buildings, fixtures and information technology of the retail stores amounted to EUR 130.9 million. Of the total amount, EUR 60.5 million concerns projects which are as yet incomplete. More detailed information on investment projects are given in the reviews of the profit divisions.

Finance

The cash flow from operating activities amounted to EUR 111.5 million and the total cash used in investing activities to EUR 167.9 million. The dividend paid on 20 April 2000 was EUR 1.50 per share, or a total of EUR 135.2 million, which included EUR 90.2 million paid as an additional dividend to change the balance sheet structure. Investments and dividends were mainly paid by funds generated from operations and by liquid assets. Interest-bearing debt increased by EUR 5.4 million. The Group’s financial position remained good. On 31 August 2000, the equity ratio was 54.8% (56.6%). The interest-bearing net debt was EUR 200.8 million (EUR 42.7 million). The liquid assets totalled EUR 104.8 million (EUR 257.4 million).

On 24 August 2000, Kesko’s Supervisory Board decided to summon an Extraordinary General Meeting for 30 October 2000 to make a decision on amendments to Kesko’s Articles of Association. The Board of Directors proposes that Kesko Corporation’s Articles of Association be amended in their entirety to correspond to the new Group structure and corporate governance model in which Kesko is governed by a Board of Directors and a Managing Director, without a Supervisory Board. The Board of Directors will mainly consist of persons other than active company management. The new Group structure consists of incorporated profit divisions which have responsibility for Kesko’s goods trade. According to the plan, the amended Articles of Association will enter into force on 1 January 2001, provided that the General Meeting approves the proposal of the Board of Directors.

At the same time, the Builders’ and Agricultural Supplies Division was divided into the Hardware and Builders’ Supplies Division and the Agriculture and Machinery Division on 1 September 2000. The profit divisions in charge of the goods trade will be incorporated according to their product lines: the foodstuffs trade, the home and speciality goods trade, the hardware and builders’ supplies trade, and the agriculture and machinery trade. Kesko’s foodstuffs trade and home and speciality goods trade will be incorporated from 1 April 2001 and the other product lines by the end of 2001.

Personnel

The average number of personnel in the Group was 11,053 (11,042) persons, divided by profit division as follows:

The total number of Kesko Group personnel has remained at the level of the previous year. The opening of new hypermarkets by Citymarket Oy caused an increase in their personnel. The number of personnel also increased in the following companies and operations - in Kesko Svenska AB due to an expansion of the hardware trade in Sweden, in Kesko Eesti AS due to an expansion of cash & carry operations in Estonia, and in Estonian hardware operations due to the acquisition of AS Fanaal. On the other hand, the number of personnel was reduced by the sale of Aleksi 13 Oy and the conversion of some of Carrols Oy’s outlets into franchise-run businesses. The Group employed 850 persons (454) abroad.

Development by profit division

The Division’s net sales were EUR 2.279 million. The growth of 8.6% in net sales fell slightly short of expectations. At the beginning of the year and at mid-summer, the foodstuffs trade was slower than expected. The operating profit was EUR 40.7 million, compared with EUR 38.9 million during the corresponding period in 1999.

Among the Division’s chain units, the sales of the Superstore Chain Unit developed best. The non-food trade of the Citymarket Chain Unit also progressed favourably as a whole, although month-to-month variations were wide, particularly in the summer months. The sales by the Neighbourhood Chain Unit, in comparable figures, were at the level of the previous year.

The Division invested in the retail store network in Finland and Estonia. Revision of the subsidiaries’ business control systems was started. Kesko acquired a shareholding of 9.99% in Rautakirja Oy. Investments totalled EUR 77.6 million.

During the first eight months of the year, ten new K-grocery stores were opened, with the K-superstores in Lahti, Nokia and Lempäälä being the most significant. New K-supermarkets were opened in Urjala, Aura, Kaustinen and two outlets in Helsinki. Major extensions were made to the Citymarkets in Kouvola, Imatra, Pietarsaari, Tampere, Vantaa and Seinäjoki. The K-superstores in Vantaa, Hanko and Kankaanpää were also expanded. The conversion of the foodstuffs departments in the Anttila department stores into grocery stores operating in chains was continued. During the latter part of this year, new Citymarket hypermarkets will be opened in Lappeenranta and Pirkkala, and new K-superstores in Kokemäki and Jyväskylä.

At the beginning of June, a new Pikkolo urban convenience store was opened on a pilot basis in Helsinki. In this store, take away products have an important role. The next pilot store will be opened in November. The experience gained from these stores will be used in building a new chain. The target is to establish a nationwide chain of around 100 stores within the next few years.

Three new Carrols hamburger restaurants were opened during the period under review, and a further four will be opened by the end of the year. Carrols Oy also opened two Drop Coffee Shops in downtown Helsinki, and will open another by the end of the year. The aim is to use the experience gained to build a nationwide chain of 50-60 coffee shops. Towards the end of the period under review, a franchise agreement between Carrols Oy and a St. Petersburg entrepreneur was terminated, which ended the operations of the five Carrols restaurants in St. Petersburg.

The operations of the Foodstuffs Division have proceeded according to plan in the Baltic countries. A logistical centre of 15,000 square metres near Tallinn, Estonia, is at the topping-out stage. It represents an investment of about EUR 7.5 million, and will start operations in December. A new SuperNetto store of 4,000 square metres was opened in Western Tallinn in May. The next SuperNetto stores will be opened in Tartu next spring and in Pärnu next autumn. Kesko aims to build a network of outlets covering the whole of Estonia to serve local retailers, catering customers and consumers.

Next summer, a grocery store of about 6,000 square metres will be opened in the largest shopping centre of Riga, the capital of Latvia. The objective is to open four hypermarkets in Riga during the next two years. The overall target in the Baltic countries is to gain a share of about 20-25% of their total grocery market which is about EUR 3.4 billion.

In spite of the extensive investments and changes, the operating profit of the Foodstuffs Division for 2000 is forecast to reach the same level as 1999.

Home and Speciality Goods Division

The net sales of the Division totalled EUR 440 million, a decrease of 16.2%. Net sales were adversely affected by the transfer of the sales related to Anttila department store grocers from the Home and Speciality Goods Division to the Foodstuffs Division at the turn of the year, and by the disposal of the speciality clothing business operations. Anttila concentrates on speciality goods trading, with its concepts being the Anttila department store, the Kodin Ykkönen department store, the mail order business and e-commerce.

The Division’s operating loss was EUR 6.6 million. During the corresponding period in 1999 the operating loss was EUR 12.7 million. Investments totalled EUR 5.6 million. The Division’s profit forecast for the year 2000 is considerably higher than the profit recorded the year before.

The net sales of the Anttila Group were EUR 265 million, an increase of 3.1%. Sales progressed favourably at the beginning of the year, but did not reach their targets during the summer season. The Kodin Ykkönen department stores and mail order business recorded the best progress.

The operating loss of the Anttila Group was EUR 12.7 million, which, in terms of comparable figures, was at the same level as in 1999. The results were affected by the initiation costs of three new units and the costs of developing e-commerce. Due to the nature of the department store trade, the latter part of the year will be more important for the total performance. The Anttila Group’s financial result for 2000 is expected to be clearly better than in the previous year.

Sports trade sales did not meet expectations during the first eight months, and clothing sales, in particular, fell short of target. Among the major product groups, footwear recorded the best development. The new division of the sports trade into different store formats has proved successful. The stores are now divided into Intersport and Kesport stores in accordance with their size and selection.

During the period under review, the sales of home technology goods clearly exceeded the level of the previous year. Sales grew strongly during the summer season, in particular. Mobile phones and wide screen television sets recorded the best sales increases.

Targets were not achieved in the shoe business during the period under review, and their sales fell short of the 1999 level. The overall shoe trade has not increased this year either.

In September 1999, Kesko Corporation redefined its strategy for the clothing business and decided to dispose of its speciality clothing chains. In February 2000, Kesko sold the whole of Aleksi 13 Oy’s share capital and the Vaatehuone chain logo to a new company established by L-Fashion Group Oy. The actual withdrawal from the Vaatehuone chain operations took place on 31 July 2000. Kesko also withdrew from the Nicky&Nelly chain co-operation, as of 1 January 2000.

Kesko Corporation signed a preliminary agreement in May on the building of a Kodin Ykkönen store and a Musta Pörssi Maailma store in a business centre due to be opened in Roihupelto, Helsinki in autumn 2002. An agreement was also made in August to establish a Musta Pörssi Maailma store in Länsikeskus, Turku due to be opened in spring 2001.

New Musta Pörssi Maailma stores and new Kodin Ykkönen department stores for interior decoration will be opened this year in Tampere and Jyväskylä. Additionally, a new Anttila department store that will replace the existing downtown store will be opened in Turku at the end of the year. The Anttila department stores located in Iisalmi and Rauma were closed down in February 2000.

Builders’ and Agricultural Supplies Division

The Division’s net sales totalled EUR 958 million, an increase of 11.1%. The operating profit was EUR 20.0 million (EUR 15.5 million), and the investments amounted to EUR 15.7 million.

The net sales of Kesko Hardware and Builders’ Supplies were EUR 367 million, a rise of 5.5%.

In Sweden, the net sales by the eight K-rauta stores of Kesko Svenska AB amounted to EUR 28 million, an increase of 95%. New K-rauta stores were opened in Örebro and in Haninge, Stockholm. The aim is to build a network of around 25 K-rauta stores in Sweden.

In April, Kesko acquired the majority shareholding in AS Fanaal. The company has five stores in Estonia, and a subsidiary and one store in Riga, Latvia. The name used by AS Fanaal in Estonia is Ehitusmaailm, and it is the leading hardware store chain in Estonia with a 20% market share. AS Fanaal’s net sales for May-August amounted to EUR 20 million.

The net sales of Kesko Agriculture and Machinery were EUR 388 million, an increase of 5.1%. During the first part of the period under review, agricultural sales diminished but an increasing trend started during the summer due to improved harvest prospects. After the period under review, Same tractors from Italy were added to Kesko’s sales programme.

New K-rauta stores were opened in Oulu, Seinäjoki, Lappeenranta and Pakkala, Vantaa. The K-rauta stores in Tampere, Espoo and Lahti were refurbished and extended. A new K-agricultural store was opened in Lappeenranta, and new K-stores are under construction in Helsinki and Helsingborg, Sweden.

In the hardware business, demand is expected to continue strong towards the end of the year. The agricultural trade will develop steadily and the good grain harvest may stimulate demand towards the end of the year. The profit division’s operating profit is estimated to exceed the level of 1999.

Kaukomarkkinat

The net sales of the Kaukomarkkinat Group were EUR 178 million, a rise of 2.9% compared with the corresponding period in 1999. The Group’s operating profit was EUR 2.9 million (EUR 7.4 million).

The trade in adidas products was transferred, from 1 January 2000, to Adidas Suomi Oy, a company owned 50-50 together with the principal. Consequently, only 50% of the adidas sales were recorded in the Kaukomarkkinat Group’s net sales. The Group’s sales, excluding the adidas sales, increased by 20.7%. The net sales of the Kauko East-West Trade Division, which is mainly engaged in international trade and export, grew by 35.3%. The areas where trading increased the most strongly were Russia, China and Poland.

In domestic trading, the Tähti Optikko chain continued to substantially strengthen its market position, since the Group’s sales of eye optics grew by 23.7%. The Panasonic Division suffered from delivery difficulties caused by the shortage of components in its manufacturing plants, and the Division’s net sales remained at the level of the previous year. The Leipurien Tukku Division increased its sales by 11.5%.

Under an agreement signed in August, Kaukomarkkinat Oy purchased the business operations of Telko Oy, a technical trading company. Telko Oy started operations as Kaukomarkkinat Oy’s subsidiary on 1 September 2000, after the period under review. As Telko Oy’s net sales for 1999 amounted to EUR 53 million, it will make a substantial addition to Kaukomarkkinat’s operations. The Group’s net sales will increase significantly towards the end of the year, although the operating profit will probably fall considerably short of the level of the previous year. The investments made in the development of business operations and the continuation of problems with the Panasonic deliveries have contributed to this situation.

VV-Auto

The net sales of the VV-Auto Group totalled EUR 363 million, a growth of 13.4%. The operating profit was EUR 15.1 million (EUR 17.6 million). The overall expansion of the car market levelled off after a strong increasing trend that continued for several years. The registration of new cars increased by only 1.5%.

The total market share of the cars imported by the VV-Auto Group was 15.6%, which represented a rise of 1.3 percentage points. All car makes increased their share, with Volkswagen’s share being 11.1%, Audi’s 1.6% and Seat’s 2.9%. Audi recorded the highest sales increase of 62%, and the favourable trend of Seat cars also continued with a sales growth of 26%. The trade in VW commercial vehicles, including vans and mini buses, progressed well and their market share expanded to 21.3%, making it the market leader.

The Volkswagen importing operations of VV-Auto were awarded an ISO 9002 quality certificate in June.

The operating profit for 2000 is expected to remain at a good level.

Shares and equity markets

Kesko Corporation's share capital was EUR 180,426,800 on 31 August 2000, with 35.2% of the share capital consisting of A shares and 64.8% of B shares.

The price of Kesko’s A share was EUR 13.60 at the end of 1999, and EUR 16.50 at the end of the period under review, an increase of 21.3%. The price of Kesko’s B share was EUR 12.60 at the end of 1999 and EUR 10.30 at the end of the period under review, a decrease of 18.3%. During the period, the business sector price index dropped by 3.0% and the HEX general index by 3.1%.

The market value of A shares was EUR 524 million and that of B shares EUR 602 million, i.e. the total market value of all shares amounted to EUR 1,126 million.

During the period under review, 0.7 million of Kesko’s A shares with a total value of EUR 11.7 million and 8.9 million of Kesko’s B shares with a total value of EUR 111.7 million were traded on the Helsinki Exchanges.

Kesko and the euro

When the decisions on Kesko’s euro schedule were made, they were based largely on the premise that the majority of Kesko’s customers operate in Finland. During the transition period, the majority of Kesko’s purchases and sales will be made in markkas. Kesko is preparing its financial statements for 2000 and 2001 in markkas and they will then be converted into euros. The prices of stock items will remain in markkas until 31 December 2001.

Main events during the period under review

On 9 December 1999, Kesko’s Supervisory Board decided that the co-operation between Kesko and the retailers belonging to the K-retailer chains will be further developed by adopting more cohesive chain operations. Co-operation will be increased in the management of the entire operational chain; in the development of chain concepts, and in the area of category management, marketing, purchasing and logistics. The transfer to the new operational system will be carried out gradually over about two years. It is expected to significantly improve the chains’ efficiency and competitiveness. About 1,650 K-retailers are today operating within the current K-retailer chains. On 5 June 2000 Kesko’s Board of Directors made decisions on the contents, agreement structure and implementation of the chain operations reform.

On 5 January 2000, Kesko purchased Rautakirja Oyj’s shares. As a result of this deal, Kesko Corporation holds 9.99% of Rautakirja Oyj’s share capital and 11.87% of its voting rights.

On 5 April 2000, Kesko published ethical principles for its purchasing, based on the fundamental rules agreed by the International Labour Organisation and the United Nations. The tool used is the international SA 8000 standard on Social Accountability.

On 28 April 2000, Kesko acquired 98.4% of AS Fanaal, the owner of Ehitusmaailm, the largest hardware store chain in Estonia. AS Fanaal owns five hardware stores in Estonia and one in Latvia. The net sales of AS Fanaal for 1999 totalled about EUR 50 million. Kesko later purchased most of the remaining shares from smaller shareholders.

On 26 May 2000, Kesko Musta Pörssi joined the international Electronic Partner:International purchasing and service organisation. EP:International promotes the business operations of its members by means of framework agreements, joint purchases and common information management. It has members in 14 European countries and nearly 6,000 member stores.

On 5 June 2000, Kesko’s Board of Directors decided to approve the warrant scheme established for Kesko’s senior and middle management.

On 10 June 2000, the President of Finland awarded Matti Honkala, the Chairman and CEO of Kesko Corporation, with the highly-esteemed Finnish title of Honorary Mining Counsellor.

Kesko was the first Finnish company to join the international WorldWide Retail Exchange marketplace on 14 June 2000. WWRE is a business-to-business marketplace to be opened on the Internet, which already includes over 40 international trading companies. The aim is to start marketplace operations this year.

On 4 August 2000, Kesko signed a preliminary agreement to sell the business operations of Kestra Kiinteistöpalvelut Oy owned by it to ABB Kiinteistöpalvelut Oy, as of 1 January 2001. A co-operation and service agreement has been signed between Kesko and ABB Kiinteistöpalvelut Oy concerning maintenance services for Kesko’s real estate. The agreement will not change Kesko Corporation’s real estate ownership or rent contracts. Kesko continues to be responsible for electricity supply. The effect of the deal on the Kesko Group’s financial result will be about EUR 5 million this year. About 30 people, currently working for Kestra Kiinteistöpalvelut Oy, will be transferred to ABB Kiinteistöpalvelut Oy as previous employees.

On 7 August 2000, Kaukomarkkinat Oy, a Kesko subsidiary, signed a preliminary agreement regarding the purchase of Telko’s business operations from Telko Oy. Telko’s annual sales total about EUR 100 million. Telko Oy, founded in 1908, is one of the leading technical trading companies in Finland. Its business lines include packaging technology, plastics, chemicals, industrial machinery, tapes and markings, safety products, raw materials for the food industry and paper trading. Telko has a total staff of 70.

On 4 September 2000, Kesko announced that, in summer 2001, it will open a grocery store of about 6000 square metres in Riga, the capital of Latvia. The aim is to open four hypermarkets in Riga within two years. Kesko opened a SuperNetto store in Mustamäki, Tallinn in May 2000. The next stores to be established in Estonia will be opened in Tartu next spring and in Pärnu next autumn.

On 2 October 2000, Kesko sold the business operations of MK-mainos, a Kesko subsidiary, to Publicis International Oy. The net sales of MK-mainos for 1999 amounted to about EUR 29 million.

Future outlook

Kesko will continue extensive investments in wholesale and retail operations. In addition to Finland, investments will also be increased in Sweden and the Baltic countries. In Finland, co-operation between stores organised in chains will be strengthened by adopting more cohesive chain operations. The reforms will considerably strengthen Kesko’s competitiveness and improve the basis for increasing sales and performance.

Kesko Group’s net sales are expected to increase by about 3% in 2000 and to be nearly EUR 6.3 billion. The Group’s operating profit excluding profits from the sale of fixed assets are forecast to increase clearly.

Helsinki, 11 October 2000

Kesko

Board of Directors

For further information, please contact Executive Vice President, CFO Juhani Järvi, tel. +358 1053 22209, or Paavo Rönkkö, Director of Accounting, tel. +358 1053 22569.

KESKO CORPORATION

Corporate Communications

Erkki Heikkinen

Director

ENCLOSURES

Kesko Group’s net sales by profit division

Consolidated income statement and balance sheet

Contingent liabilities

Kesko Corporation will publish a stock exchange release containing its financial statements for 2000 on 14 February 2001 at 11.00 hours. Kesko Corporation also publishes its sales figures for each month. Monthly sales releases, other key releases and the list of major shareholders, updated monthly, are also available in Kesko’s web site at Investor Information, www.kesko.fi.

In 2001, Kesko will disclose its interim accounts at intervals of three months.

DISTRIBUTION

HEX Helsinki Exchanges

Main news media

The figures are unaudited. The figures for 1999 have been converted to comparable ones. The figures are based on markka-denominated bookkeeping and accounting, and the euro-denominated figures have been calculated by using the conversion rate 5.94573. The Finnish interim report with markka figures is available from Kesko Corporate Communications.