KESKO’S INTERIM REPORT 1.1.-30.6.2001

TheGroup’s net sales in January-June 2001 totalled EUR 3,017 million, which is3.0% less than during the corresponding period in the previous year (EUR 3,110 million). The Group’s profit before extraordinary items was EUR 35.6 million (EUR 55.0 million). Earnings per share were EUR 0.28 (EUR 0.43). Equity per share was EUR 14.59 (EUR 14.72). The figures are unaudited.

Market review
According to advance information, the volume of the Finnish wholesale trade increased by 3.7% in January-May compared with the previous year. The increase in the retail trade was 4.4%.

According to the survey of the Federation of Finnish Commerce and Trade, the wholesale trade (car trade excluded) is expected to grow this year by 4.5% and the retail trade by 4.0%.

Consumer prices are expected to rise by about 2.5% in 2001. In June, the annual change in consumer prices was 3.0%. Private consumption is expected to grow by 3.5% and private investments by 6.7% this year.

Favourable economic development has continued in the Baltic countries. The gross domestic product is forecast to grow this year by about 4%. Retail stores operating in chains will increase their share of total sales. In Estonia, chains already account for over 25% of grocery sales. The value of the total grocery market is forecast to increase to nearly EUR 4.5 billion this year.

The Swedish construction market is estimated to expand by about 5% in 2001. Private consumption is expected to grow by about 2.5%. The volume of housing production is expected to grow at the same rate as private consumption.

Net sales and performance

Net sales in January-June
The Group’s net sales during 1.1.-30.6.2001 totalled EUR 3,017 million, which is 3.0% less than in the previous year (EUR 3,110 million). The decline resulted partly from a change in pricing practice. As part of the chain reform, Kesko decreased, from the beginning of 2001, its wholesale prices to the K-retailers. The new pricing system is estimated to have a decreasing effect of about two percentage points on net sales at an annual level in the whole Group and about four percentage points in Kesko Food. However, the change does not weaken the performance of business operations, because the services previously included in wholesale prices are now separately charged to retailers.

Result in January-June
The Group’s profit before extraordinary items and taxes was EUR 35.6 million (EUR 55.0 million), which is 1.2% of net sales (1.8%). The operating profit was EUR 28.6 million (EUR 45.8 million). The operating profit includes profits and losses from sales of fixed assets and value adjustments to a total value of EUR 8.3 million (EUR 1.5 million). The drop in the Group’s operating profit was attributable to the decline in sales and to the additional costs of about EUR 5 million relating to the chain reform. Pension costs were EUR 12.0 million higher than during the comparison period in 2000, at which time the investment income of the Kesko Pension Fund had decreased pension costs. Due to a change in the pricing and charging structure, the Group’s other operating income increased. The expense structure also changed along with structural change and the outsourcing of services. As a result, other operating expenses increased.

The Group’s net financial income was EUR 7.0 million (EUR 9.2 million). The change resulted from an increase in interest-bearing net debt.

Earnings per share were EUR 0.28 (EUR 0.43). Equity per share was EUR 14.59 (EUR 14.72).

The accounting practice used to disclose the operating profit of the divisions has been changed. The rents charged by the real estate function for premises used by the Group have been disclosed as rent expenses of the divisions. The operating profit from real estate is included in the operating profit of ‘common operations’. Common operations also include the net expenses or income of other common operations, as well as Group items such as corporate management expenses and amortisation of goodwill on consolidation that has not been allocated to the divisions.

*) The figures for 2000 have been converted to comparable ones to correspond to the changed practice.

Net sales and result for April-June
The Group’s net sales for the second quarter were EUR 1,585 million, which is 4.2% less than in the previous year (EUR 1,655 million). The Group’s profit before extraordinary items in April-June was EUR 34.9 million (EUR 40.2 million). The Group’s operating profit was EUR 29.0 million (EUR 33.9 million). Earnings per share were EUR 0.27 (EUR 0.31). Other key figures by quarter are presented in an attached table.

Capital expenditure
The Group’s capital expenditure totalled EUR 119.0 million (EUR 166.6 million), which is 3.9% (5.4%) of net sales. Investments in the buildings, fixtures and information technology of retail stores amounted to EUR 95.4 million, while the investments in the real estate, fixtures and information technology of Kesko and its subsidiaries were EUR 23.5 million.

Finance
Cash flow from operating activities was EUR 57.2 million and from investing activities EUR -65.7 million. At the end of the period, the equity ratio was 50.7% (53.1%). The interest-bearing net debt was EUR 280.9 million (EUR 234.6 million). The liquid assets were EUR 122.3 million (EUR 81.3 million).

Group administration and structure
The new Articles of Association decided by Kesko’s Extraordinary General Meeting on 30 October 2000 were entered in the Trade Register on 1 January 2001. The term of the Board of Directors elected by the General Meeting also started on that day and will expire at the close of the Annual General Meeting in 2003.

Kesko Corporation’s foods operations were transferred to Kesko Food Ltd and home and speciality goods operations to Keswell Ltd on 1 April 2001, as part of the incorporation of Kesko’s businesses. Kesko Food Ltd and Keswell Ltd are wholly-owned subsidiaries of Kesko Corporation. Kesko subsidiaries responsible for the hardware trade and the agricultural and machinery trade will start, according to plan, on 1 October 2001.

Mr. Jouko Tuunainen, Executive Vice President, retired on 1 June 2001, at which time the Information and Logistics Management and Real Estate Operations became the responsibility of Mr. Juhani Järvi, Executive Vice President and CFO.

Personnel
The Group’s average number of employees was 11,208 (10,865), divided by division as follows:

(The comparable figures have been adjusted to correspond with the new organisation. In calculating the average number of employees, part-time employees have been converted to full-time employees in relation to their working hours.)

The total number of Kesko Group employees has increased slightly. The number was increased by the expansion of Kesko Food in Estonia and of Rautakesko in Estonia and Sweden. On the other hand, the number was decreased by the outsourcing of service and support activities in line with strategy. The majority shareholding (80%) of the Group’s IT company, Tietokesko Oy, was sold to TietoEnator Corporation in the spring. This decreased the Group’s number of employees by 171. The Group employed 1,257 persons (741) abroad.

Goals of chain reform
Due to the changed competitive situation in Finland, Kesko and the K-retailers adopted a new chain operating system at the beginning of 2001. Each retail chain has a uniform customer commitment and similar operating practices. About 1,450 retailers are included in this system.

The main goals of the change are strong store concepts, high and uniform operational quality, and efficient information, purchasing and logistical management.

Kesko is responsible for the continuous development of the operating system and store concepts, for the control of operations and the purchasing of the products included in the selections. The retailer is responsible, as an entrepreneur, for his store’s financial results, for staff management and for the implementation of the chain concept in his store.

Kesko provides the chains with store sites, information systems, marketing channels and training. The chain businesses pay Kesko compensation for the right to use the concept and for the other services provided by Kesko.

The reform clarifies the division of responsibilities between Kesko and the retailers. The estimated growth of profits and cost savings at Kesko will be over EUR 35 million at an annual level after the reform has been fully implemented.

Goals in the neighbouring countries
Kesko seeks growth from Finland’s neighbouring regions. In particular, the Baltic food and hardware trade and the Swedish hardware trade are strategically important growth areas.

In Sweden, the goal is to build a chain of about 25 K-rauta stores. At present there are 10 K-rauta stores operating in this country. The K-rauta hardware store concept, which has proved so successful in Finland, has filled a vacuum in Sweden. The target is to capture a 10% share of the EUR 2.5 billion Swedish hardware and builders’ supplies market.

In the Baltic countries, Kesko is involved in the foods trade, the hardware and builders’ supplies trade and the agricultural and machinery trade. In the food trade, the target is a 25% share of the growing Baltic market, which currently amounts to about EUR 4.5 billion.

In the hardware and builders’ supplies trade, the target is a 30% share of the current EUR 1 billion Estonian and Latvian market, while, in the agricultural and machinery trade, 30% of the EUR 200 million market has been targeted.

Kesko has built the first nationwide, efficient logistical chain for the food trade in Estonia that provides services to both Kesko’s expanding retail chains and other customers. At present, Kesko has 3 SuperNetto stores and 20 Säästumarket stores in Estonia. It also owns Ehitusmaailm, Estonia’s largest hardware and builders’ supplies chain, and is expanding its operations in Latvia. In addition, Kesko is building a comprehensive agricultural and machinery chain with local sales outlets in the Baltic countries.

The Divisions

Kesko Food
Kesko Food’s net sales for January-June amounted to EUR 1,625 million, a decrease of 3.7%. The operating profit was EUR 8.1 million (EUR 9.5 million). The main factors contributing to the decreased profit were the costs of starting the new chain operations, and investments in the store network and in expansion of business operations in the Baltic countries. Capital expenditure totalled EUR 60.2 million.

The transfer to a pricing system and payment structure based on the new chain operating system decreases Kesko Food’s net sales by about four percentage points annually. The chain operations have started almost as budgeted. The increase in sales has not met expectations, but has however improved during the summer. There are great differences of Kesko Food’s sales to various chains and stores. In retail trade, sales progressed best in the Neighbourhood Chain Unit's stores. The Sunday openings of stores with a floor area of below 400 square metres have significantly increased the sales of the stores located in population centres and changed the sales structure. In Finland, total food sales increased by about 4-5% during the first half of the year.

The operating loss of Citymarket Oy, that carries on non-food trade in the Citymarket hypermarkets, was EUR 5.4 million (EUR -2.2 million). Due to the nature of hypermarket sales, most of the operating profit is received from the sales during the latter half of the year.

During the period under review, nine new K-food stores were opened. There are five new Pikkolo urban convenience stores operating now and the target is to have a chain of about 100 stores. The major projects under construction and due to be opened this year are Citymarket hypermarkets in Espoo and Forssa. Next year the Citymarkets in Helsinki, Lohja and Vaasa will be opened, and the extension of the Citymarket in Lahti will be completed.

The Estonian units recorded the best sales increase among Kesko Food’s units. Kesko Food’s Baltic operations are being expanded according to plan. In May, Kesko Food purchased the whole share capital of Kinnisvaravalduse AS that owns Estonia’s largest discounter chain, Säästumarket. The chain has 20 retail stores in Estonia, and the number is expected to increase this year to over 30 stores. The chain’s net sales are forecast to amount to over EEK 1 billion (over EUR 64 million). In 2000, the net sales were EEK 323 million (about EUR 21 million).

The net sales of Kespro, which provides services to catering customers, decreased by 5.0%. Kesko Food’s wholesale delivery operations were transferred to Kespro Ltd on 1 October 2000. In spring, Kespro Ltd opened a new type of wholesale outlet, based on a new concept, at Tammisto in Vantaa, and in Lahti. They differ from conventional wholesale and cash & carry outlets with respect to opening hours, range of goods, Internet services and fast deliveries. Internet operations will be strongly emphasised during the whole of the year.

The new chain operating system is expected to improve Kesko Food’s sales towards the end of the year. Due to the costs of initiating the chain operating system and expanding in the Baltic countries, the operating profit for the whole year is forecast to fall short of that achieved in 2000.

Rautakesko
Rautakesko’s net sales for January-June amounted to EUR 392 million, a decline of 0.6%. In Finland, sales to the K-rauta and Rautia stores remained at the level of the previous year, while the decline in housing construction reduced the sales of the Industrial and Constructor Sales unit in particular. Foreign subsidiaries’ share of net sales grew to 12.0%. The operating profit was EUR 0.7 million (EUR 3.7 million). The operating profit was decreased by the initiation of the chain operating system in Finland and by increased investments in foreign markets. K-rauta AB’s result continued to show a loss. The investments were EUR 5.4 million.

The new chain operating system was adopted at the beginning of the year. By the end of the period under review, 46 stores were included in the K-rauta chain and 103 stores in the Rautia chain. The sales volumes of these chains were at almost the same level.

The net sales of K-rauta AB in Sweden were EUR 23.4 million, a growth of 22.0%. A new K-rauta store was opened in Helsingborg last May, and a new K-rauta store will be opened in Göteborg at the beginning of 2002. Fanaal AS in Estonia and Fanaal A/S in Latvia, two companies purchased last year, increased their net sales. There are now four stores operating in Estonia and one in Latvia. A new store was opened in Tartu, Estonia, while the construction of the first K-rauta store in Riga, Latvia will be started in late summer

For the near future, Rautakesko will focus on developing the purchasing and logistics functions that serve the chains, and the information systems. Internationalisation and development of e-commerce will also be strategic focal areas in business-to-business trading.

Rautakesko’s net sales for the whole year are expected to remain at the 2000 level in spite of the slowdown in construction activity. The operating profit is also forecast to remain at the level of the previous year.

Keswell
Keswell’s net sales for January-June were EUR 300 million, a drop of 7.3%. The change in comparable figures was -4.6%, when the speciality clothing trade included in the figures of the comparison year is taken into account. The operating loss was EUR 16.8 million (EUR -12.9 million). The investments were EUR 9.8 million.

The net sales of the Anttila Group were EUR 196.4 million, an increase of 1.2%. The NetAnttila sales increased strongly. The mail order business grew by 20.2%. Sales in Latvia, in particular, progressed favourably. The sales of Kodin Ykkönen department stores for interior decoration and home goods increased by 29.9%, partly due to the two new department stores opened in the previous year. The sales of the Anttila department stores decreased by 5.9%. The Anttila Group’s operating loss was greater than in the comparison period and was EUR 14.9 million. The result was affected by the initiation costs of the three department stores opened at the end of the previous year. The result for the whole year is expected to be better than in 2000.

In the sports trade, retail sales have developed clearly better than in the previous year. The net sales of Kesko Sports also progressed well, increasing by 7.0%.

The net sales of Kesko Musta Pörssi were 18.3% lower than in the comparison period, mainly due to the drop in sales of television sets. This drop is believed to have resulted mainly from consumers postponing their purchases until digital TV transmissions start. The demand for mobile phones has also decreased from the previous year.

The net sales of Kesko Shoes went down by 17.0%. Some of the K-kenkä chain’s stores were reorganised into a new Kenkäexpertti group. At the end of the period, there were 32 stores operating in the K-kenkä chain, 27 stores in the Andiamo chain and 46 stores in the Kenkäexpertti group.

An Intersport megastore in Tampere and a Musta Pörssi Maailma store in Oulu were opened after the period under review. Towards the end of the year, Musta Pörssi Maailma stores will be opened in Lahti and Lappeenranta and an Intersport megastore in Turku. An Intersport store and a Musta Pörssi store will be established in the shopping centre that will be completed in Forssa towards the end of the year. In addition, the premises for an Intersport store and an Andiamo store will be built in the Mylly shopping centre at Raisio to be opened in late 2001. An Andiamo store will be opened in the Iso Omena shopping centre in Espoo in September.

Keswell’s result for the whole year is forecast to exceed the previous year’s level.

Kesko Agriculture and Machinery
The net sales of Kesko Agriculture and Machinery were EUR 371 million, an increase of 13.1%, which was slightly better than expected. The operating profit was EUR 7.8 million (EUR 7.6 million). Investments totalled EUR 0.7 million.

Kesko Agriculture’s sales increased in line with expectations by 6.2%. The good harvest in 2000 was reflected in the sales volumes of grain. Kesko Agriculture started the import and marketing of German Deutz-Fahr tractors in May. Kesko Agriculture’s sales are expected to continue at the level of the first half of the year, provided the harvest is normal.

The net sales of Kesko Machinery were slightly better than expected and grew by 8.7%. However, the market for Kesko Machinery’s products started to contract, so that sales are expected to slow down towards the end of the year.

The agricultural and machinery business in Estonia and Latvia has progressed according to plan. A full-service agricultural and machinery store was opened in Riga, Latvia in May. A centre built in line with the same concept will be opened in Tallinn, Estonia in the autumn. The goal is to become the market leader in this sector in the Baltic markets.

The operating profit of Kesko Agriculture and Machinery for the whole year is forecast to increase from the previous year.

VV-Auto
The VV-Auto Group’s net sales for January-June were EUR 222 million, a drop of 21.7%. The operating profit was EUR 9.0 million (EUR 12.8 million). Investments totalled EUR 4.7 million.

The overall car trade in Finland dropped sharply. The number of new cars registered was 22.7% lower and the number of commercial vehicles 4.9% lower than in the corresponding period in 2000.

The cars imported by the VV-Auto Group had a 13.7% market share. The market shares of Volkswagen and Seat contracted slightly, whereas Audi’s market share increased, thanks to the new A4 model. Concerning commercial vehicles, Volkswagen’s market share was 20.2%, making it the market leader.

The VV-Auto Group’s net sales and operating profit are estimated to decrease from the previous year, due to the diminished overall car market, but to remain at a good level.

Kaukomarkkinat
The Kaukomarkkinat Group’s net sales for January-June were EUR 140 million, which was 7.9% more than during the corresponding period in 2000. The Group’s operating profit was EUR 2.3 million (EUR 0.0 million). Investments were EUR 1.2 million.

The increase in net sales was mostly attributable to the Telko business operations that were purchased in autumn 2000. Other units that increased their net sales were Leipurien Tukku and Optics. The Tähti Optikko chain continued to strengthen its market share with a 14.0% sales increase. The slowdown in the global sales of telecommunications products and the timing of contracts in China were reflected in the net sales of the Kauko East-West Division.

The poor demand for consumer electronics decreased the net sales of the Branded Goods and Kauko Electronics units. Digital TV transmissions are expected to stimulate the trade in TV sets.

In June, Kaukomarkkinat signed a preliminary agreement to purchase all shares of Intotel Oy. Intotel Oy’s business lines are electronic components, megatronics and measuring devices. The company’s net sales for 2000 amounted to EUR 5.8 million.

The Kaukomarkkinat Group’s operating profit for the whole year is expected to exceed the level of the previous year.

Shares and equities markets
Kesko Corporation’s share capital is EUR 180,426,800, with 35.2% of the share capital consisting of A shares and 64.8% of B shares.

The price of the company’s A share was EUR 16.95 at the end of 2000 and EUR 13.90 on 30 June 2001, a drop of 18.0%. The price of the B share was EUR 10.75 at the end of 2000 and EUR 8.45 on 30 June 2001, a decrease of 21.3%. The HEX general index dropped during the period by 35.6% and the HEX portfolio index by 20.8%. The trading sector price index dropped by 4.0%.

The market capitalisation of A shares was EUR 441 million and that of B shares EUR 494 million, i.e. the total market capitalisation for all shares was EUR 935 million.

During the period under review, 0.9 million of Kesko’s A shares with a total value of EUR 16.0 million and 9.4 million B shares with a total value of EUR 95.2 million were traded on the Helsinki Exchanges.

Kesko and the euro
According to its transition plan, Kesko will prepare its financial statements for 2001 in markkas and they will then be converted into euros by using a conversion rate. During the transition period, the majority of Kesko’s purchases and sales will be made in markkas. The prices of stock items will remain in markkas until 31 December 2001. Based on the agreements made with customers, some invoicing has been carried out in euros right from the beginning of the transition period.

Events during the period under review

A new chain operating system was adopted between Kesko and about 1,450 K-retailers, starting at the beginning of 2001. The new chain or customer agreement was approved by over 98% of all K-retailers. Co-operation will be intensified in the control of the whole operating chain.

On 10 April 2001, Kesko Corporation was served a summons by nine Citymarket retailers to whom Kesko had given notice. The Citymarket retailers primarily demanded that Kesko pay damages amounting to approx. EUR 15.3 million for serving notice, which they claim to be contrary to contract. Kesko contests all the claims presented against it on the grounds that they are unjustified and considers that it has sufficient legal grounds to serve notice to terminate the agreements.

Kesko Corporation sold the majority shareholding (80%) of its IT subsidiary, Tietokesko Oy, to TietoEnator Corporation. The company has continued to produce information technology services to the Group as an associated company, starting from 1 June 2001.

On 9 April 2001, Kesko Corporation´s Annual General Meeting adopted the financial statements for 2000, discharged those accountable from liability, and decided to pay a dividend of EUR 1.00 per share. The second paragraph of article 11 of the Articles of Association was amended to read as follows: To have the right to attend a General Meeting, shareholders shall register with the company not later than on the date stated in the announcement of the meeting, which date may not be earlier than (10) days prior to the meeting.

On 4 May 2001, Kesko published its first report on corporate responsibility. It is based on the recommendations of the international Global Reporting Initiative organisation.

Outlook for the remainder of the year
Kesko Group’s net sales are forecast to develop in the remainder of the year better than in the corresponding period in 2000, in which case the net sales for the whole year will almost reach the level of the previous year. The Group’s operating profit, excluding one-off items, is expected to fall short of the previous year’s level, and one-off incomes are expected to be lower than in 2000.

Helsinki, 8 August 2001
Kesko
Board of Directors

Further information: Juhani Järvi, Executive Vice President and CFO, telephone +358 1053 22209, and Paavo Rönkkö, Vice President, telephone +358 1053 22569.

KESKO CORPORATION
Corporate Communications

Erkki Heikkinen
Senior Vice President

ATTACHMENTS
Group net sales by division
Consolidated income statement and balance sheet
Group key indicators
Group contingent liabilities
Group key indicators by quarter
Net sales and operating profit of divisions by quarter

Kesko Corporation’s interim report for the first nine months of 2001 will be published on 14 November at 8.00. In addition, Kesko Group’s sales figures are published each month. News releases and other company information are available at Kesko’s Internet pages at Investor information, www.kesko.fi/Investor

DISTRIBUTION
HEX Helsinki Exchanges
Main news media

ATTACHMENTS:

The figures are unaudited. The figures for 2000 have been converted to comparable ones. The figures in this report are based on markka-denominated 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.