Interim report 1-9/2003 profit before extraordinary items was EUR 116 million

The Group’s net sales in January-September 2003 were EUR 5,192 million, which is 8.8% more than in the corresponding period of the previous year (EUR 4,771 million). The Group’s profit before extraordinary items was EUR 116.1 million (EUR 84.8 million), an increase of 36.8%. Earnings per share were EUR 0.74 (EUR 0.64). Equity per share was EUR 14.76 (EUR 14.92). The figures are unaudited.

Market review
According to advance information from Statistics Finland, the volume of Finnish retail sales, adjusted for the number of trading days, increased by 4.1% during January-August, while the volume of wholesale sales increased by 2.7%. The whole year forecast for the increase in wholesale sales is rather low, at about 2%, while for retail sales it is 2-3% (Research Institute of the Finnish Economy).

Slow economic growth will continue in Finland for the rest of 2003. This year, consumer prices are expected to rise by about 1.2%, private consumption to increase by about 2.7% and private investments to drop by about 2%. The real purchasing power of households is expected to rise in 2003 by about 2.2%, and in 2004 by about 2.6% thanks to the prevailing low inflation and lighter taxation (Research Institute of the Finnish Economy).

Statistic Finland’s consumer survey of October 2003 shows that Finnish consumers’ confidence in their own financial situation has strengthened. However, Finnish consumers’ expectations of the future of the Finnish economy and employment are pessimistic.

In Estonia, Latvia and Lithuania, economic growth depends largely on private consumption. Economic growth in these countries is expected to remain at around 5-6% in 2003, while private consumer demand is estimated to grow by 4-6% (Research Institute of the Finnish Economy). In 2004, relatively brisk growth will continue in retailing, structural change will proceed in the trading sector, and retail stores operating in chains will continue to increase their share of total sales.

In Sweden, private consumption is expected to increase by about 2% in 2003, while consumer prices are also expected to rise at about 2% (Research Institute of the Finnish Economy). Building investments are forecast to experience a small decline this and next year. In 2005, construction markets should begin to grow (Sveriges Byggindustrier).

Net sales and profit

Net sales in January-September
The Group’s net sales in January-September 2003 were EUR 5,192 million, which is 8.8% up on the corresponding period of the previous year (EUR 4,771 million). The increase was attributable mostly to foreign operations and Rautakesko’s and VV-Auto’s domestic operations. The Group’s net sales increased by 5.0% in Finland and by 51.4% abroad.

*Exports and net sales abroad

During the period under review, exports and foreign operations accounted for 11.4% (8.2%) of net sales. Rautakesko’s subsidiary, UAB Senuku Prekybos centras (Senukai), acquired from Lithuania is included in the figures starting from 13 March 2003 and its impact on Rautakesko’s growth was 19.5 percentage points.

Profit in January-September
During the period under review, the Group’s profit before extraordinary items and taxes was EUR 116.1 million (EUR 84.8 million), representing 2.2% of net sales (1.8%). Operating profit was EUR 112.1 million (EUR 75.0 million). Kesko Food’s profit dropped because of major investments in marketing, information systems and store sites made during the first half of the year. Non-recurring costs totalled about EUR 9.1 million, and will no longer increase during the rest of the year. The other divisions, except for Kaukomarkkinat, increased their profits.

The operating profit includes profits and losses from sales of fixed assets and business operations and value adjustments to a total net value of EUR 20.4 million (EUR 4.0 million).

The Group’s net financial income and expenses was EUR 4.0 million (EUR 9.8 million).

Earnings per share were EUR 0.74 (EUR 0.64). Equity per share was EUR 14.76 (EUR 14.92).

The operating profit from real estate is included in the operating profit of common operations. It also includes 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. Senukai’s contribution to Rautakesko’s operating profit was EUR 10.6 million for about six and a half months.

Net sales and profit in July-September

During the third quarter, the Group’s net sales were EUR 1,816 million, which is 11.3% more than in the corresponding period of the previous year (EUR 1,632 million). In July-September, the Group’s profit before extraordinary items was EUR 45.7 million (EUR 31.0 million). The Group’s operating profit was EUR 48.0 million (EUR 28.4 million). During the third quarter, earnings per share were EUR 0.27 (EUR 0.25). Other indicators by quarter are given in the attached table.

Investments
During the period under review, the Group’s investments totalled EUR 184.2 million (EUR 122.4 million), which is 3.6% (2.6%) of net sales. Investments in retail stores and acquisitions amounted to EUR 145.1 million. The Group’s other investments were EUR 39.1 million. Investments in foreign business operations represented about 31% of total investments.

Finance
Cash flow from operating activities was EUR 88.8 million (EUR 60.1 million), while cash flow from investing activities was EUR -97.1 million (EUR -66.8 million). At the end of the period, the equity ratio was 49.8% (53.4%). Interest-bearing net debt was EUR 322.0 million (EUR 251.0 million). Liquid funds totalled EUR 105.6 million (EUR 116.4 million).

Personnel
The Group’s average number of employees in 1-9/2003 was 14,872 (12,133) (converted into full-time employees), distributed by business division as follows:

*total number of personnel including part-time employees

The expansion of Kesko Food’s, Rautakesko’s and Kesko Agro’s operations in the Baltic countries increased the number of Kesko’s personnel in these countries. The biggest increase took place in Lithuania, where Rautakesko acquired a majority in the hardware and building supplies company, Senukai, which employs 2,568 persons. The impact on the average figures for nine months is 1,853 persons. The establishment of new K-citymarkets and the conversion of two Anttila department stores into K-citymarkets increased the number of Kesko Food’s employees in Finland. At the end of September, the Group employed 6,391 persons abroad (2,906).

A co-operation procedure was carried out in Citymarket Oy in the autumn, as a result of which the personnel was reduced by 143 employees, 78 of whom had to be made redundant. The negotiations were necessitated by the introduction of a new operating system. The home and speciality goods business was re-organised into three categories instead of the former five.

Divisions

Kesko Food
Kesko Food’s net sales amounted to EUR 2,749 million, an increase of 3.7%. The net sales from Baltic operations totalled EUR 173.8 million and accounted for 6.3% of net sales. Kesko Food’s operating profit was EUR 35.3 million (EUR 48.2 million). The main factors contributing to the decrease in operating profit were an increase in marketing investments in domestic business operations, the costs of building new systems for operations control and investments in store sites effected in the first half of the year. Kesko Food’s total investments were EUR 51.1 million, of which investments in K-food stores accounted for EUR 37.7 million. About 36% of all investments were made in Baltic operations.

Growth has slowed down in the Finnish grocery trade this year. The retail sales of the member companies of the Finnish Food Marketing Association did not increase by more than 0.9% in January-September. As a whole, the Finnish grocery market is estimated to have grown by 2.5%. The slowdown was mainly attributable to the overall weakening of economic growth, lower prices in certain product categories and growth in the sales share of retail operators’ own brands. According to Statistics Finland, product prices in food store selections rose by about 0.3% in January-September. During the review period, the retail sales of the K-food stores in Finland grew by 2.6%, amounting to EUR 3,348 million. Owing to the differing local and regional markets and competitive situation, there were great differences in the retail sales growth of the chains and individual K-food stores. The sales of the K-citymarket chain recorded the biggest growth, 10.1%, of which 9.1% was generated by growth in grocery sales.

Kesko Food continued to invest in the K-food store network. During January-September, a K-citymarket was opened at Leppävaara, Espoo, and K-supermarkets were opened at Vuoksenniska (Imatra), Kurikka, Laitila, Hirvensalo (Turku) and Nikkilä (Sipoo). After the review period, in October, the first new concept K-citymarket was opened at Malmi (Helsinki). Store type changes were implemented in 126 outlets. The biggest building projects underway include the K-citymarkets at Kaakkuri (Oulu) and Seppälä (Jyväskylä). 1,108 K-food stores were operating at the end of the review period.

Pikoil Oy, a joint venture of Kesko Food Ltd and Neste Marketing Ltd (a Fortum Corporation subsidiary operating in the service station store market), started operations according to plan at the beginning of July. After the review period, in October, the first K-pikkolo service station store in Finland was opened at the Neste service station in Raastuvankatu (Vaasa). Currently there are 32 K-pikkolo stores operating in urban centres.

Kesko Food’s grocery trade grew much more in the Baltic countries than in Finland. Net sales grew by 35.3% in Estonia, with the Citymarket chain growing by 106.5%. Since the end of the review period, another two new Citymarkets have been opened in Tallinn.

Net sales increased by 73.4% in Latvia. Citymarkets were opened in Liepaja and Ventspils in June. There are currently four Citymarkets and eight Supernetto discounters in Latvia.

The net sales of Kespro Ltd, which provides services for the catering, kiosk, service station and restaurant trade, were EUR 571 million (EUR 569 million). The total market did not grow in this sector. Due to the economic situation and increased competition, the sales of service stations, kiosks and other similar retailing customers have decreased.

Rautakesko
In January-September Rautakesko’s net sales amounted to EUR 742 million, an increase of 29.5%. This is mostly attributable to the acquisition of a majority in UAB Senuku Prekybos sentras (Senukai) in Lithuania. In Finland, January-September net sales were EUR 519 million, an increase of 9.4%. The net sales of foreign subsidiaries in January-September were EUR 222.7 million, an increase of 126.7%. More than one third of Rautakesko’s net sales come from foreign countries.

Rautakesko’s operating profit was EUR 23.5 million (EUR 11.9 million). In Finland, the operating profit increased due to sales growth and more efficient chain operations. The operating profit of foreign subsidiaries was boosted by Senukai’s operating profit of EUR 10.6 million for a six and a half months’ period. The previous year’s operating profit included EUR 2.9 million in profits from store real estate sales in Sweden and Estonia. Rautakesko’s investments totalled EUR 32.5 million, of which about 89% were abroad.

In Finland, growth in private consumption maintained sales growth. According to a consumer survey (10/2003), a high proportion of household consumers continue to have plans for home renovations and repairs. Economic growth continues strong in the Baltic countries.

At the end of September, the K-rauta hardware and builders’ supplies chain included 46 stores, while the Rautia chain included 102 outlets in Finland. The domestic sales of the K-rauta stores grew by 5.9% and the sales of the Rautia stores by 11.0% in January-September. Building supplies categories and house sales recorded the biggest sales growth. The sales of Rautakesko’s Industrial and Constructor Sales unit were EUR 136 million in January-September, an increase of 16.1%. Growth in the whole sector was 5.5% in January-September (Finnish Hardware Association).

Since 13 March, 2003, Rautakesko has held the majority of voting rights in the Lithuanian company UAB Senuku prekybos centras. During the review period, Rautakesko also gained the majority of the share capital when the parent company's shares held by Senukai's wholly-owned subsidiary were annulled in accordance with the acquisition agreement. The acquisition of Senukai made Rautakesko the market leader in the Baltic countries. The company has reached the set targets. Its net sales are included in Rautakesko's figures as of 13 March 2003.

Kesko Agro
In January-September, Kesko Agro’s net sales were EUR 585 million, an increase of 9.2%. The net sales of foreign subsidiaries totalled EUR 86.9 million, which was 14.8% of total net sales. Kesko Agro’s operating profit was EUR 11.1 million (EUR 10.9 million) despite the costs arising from information systems development, the expansion of operations in Lithuania and the opening of new or refurbished stores. Investments totalled EUR 7.6 million, about 22% of which were in foreign projects.

Kesko Agro Ltd’s net sales were EUR 351.5 million. The supply of grain is about the same as last year, but export deliveries are expected to start later than last year. Kesko Agro’s market share in the Finnish tractor trade increased in the first part of the year by 5.3 percentage points compared with the corresponding period in 2002 and is now 17.0%. Prolonged negotiations on agricultural subsidies have influenced the investment decisions of Finnish farmers. It is planned to merge K-Maatalousyhtiöt Oy with its parent company, Kesko Agro Ltd, on 1 July 2004.

Kesko Machinery Ltd’s net sales were EUR 129.4 million, an increase of 5.7% over the previous year. The Yamaha business operations of Oy Arwidson Ab were transferred to Kesko Machinery on 1 July 2003. Kesko Machinery’s garden machine trade was transferred to Rautakesko on 1 September 2003.

Agricultural and machinery sales in the Baltic countries have progressed as planned.

Keswell
Keswell’s net sales totalled EUR 484 million, an increase of 4.2%. The net sales of foreign operations amounted to EUR 17.5 million, representing 3.6% of total net sales. Keswell’s operating loss was EUR -13.0 million, which was EUR 2.3 million less than in the previous year. Owing to the nature of department store trading, Keswell’s profit is mainly generated towards the end of the year. Investments totalled EUR 4.6 million.

The net sales of the Anttila Group totalled EUR 299.4 million, an increase of 3.3%. The sales of the Kodin Ykkönen department stores for home goods and interior decoration increased by 5.2%, while the sales of the Anttila department stores grew by 1.8%. During July-September the sales of the Anttila department stores increased by 6.5%.

During the period under review, the net sales of Kesko Sports amounted to EUR 82.1 million, an increase of 3.5%. The retail sales of the Intersport store chain grew by 4.1% thanks to a successful winter season. The sales of the Kesport stores rose by 7.3% owing to an increase in the number of stores.

The net sales of Kesko Musta Pörssi amounted to EUR 79.9 million, up by 21.8%. The retail sales of the Musta Pörssi chain increased by 17.8%. The increase was partly due to the higher number of stores and partly to the high level of sales in wide screen televisions, DVD players and information technology products.

The net sales of Kesko Shoes decreased by 11.5%, totalling EUR 19.0 million. The retail sales of the Andiamo chain increased by 1.2%, while the retail sales of the K-kenkä chain dropped by 3.0%. The sales of the Kenkäexpertti stores increased by 3.1%.

VV-Auto
In January-September, the net sales of the VV-Auto Group totalled EUR 445 million, representing an increase of 22.2%. The operating profit was EUR 17.4 million (EUR 13.2 million). Investments totalled EUR 7.9 million.

The trade in new cars was brisk during January-September. Registrations of new cars increased by 24.1% over the corresponding period of the previous year, but registrations of new vans remain at the same level.

The market share of the cars imported by VV-Auto Group was 15.7%, an increase of 1.3% percentage points over the corresponding period of the previous year, mainly due to the success of Volkswagen. Volkswagen’s market share in the van trade was 14.4%.

At the end of September, a soon-to-be-established subsidiary of VV-Auto acquired the business operations of the Volkswagen-Audi dealer in Turku. The new company started operations at the beginning of November.

The general positive mood in the Finnish car trade is expected to continue during the remainder of 2003. VV-Auto Group’s net sales are estimated to perform just as well in the rest of the year as they did in the first half of the year.

Kaukomarkkinat
The Kaukomarkkinat Group’s net sales amounted to EUR 209 million (EUR 207 million). The operating profit was EUR 4.3 million (EUR 6.5 million). The drop in operating profit was due to tighter price competition and the timing of project deliveries more towards the end of the year. Investments totalled EUR 2.8 million.

Consumer Electronics and Telko’s raw materials trade recorded the biggest increases in net sales. The export of telecommunications products has met with difficulties.

In June, Kaukomarkkinat acquired ASM AB of Sweden. The deal expands the sales of Telko’s packaging technology and tapes to cover all the Nordic countries.

Decisions by the Annual General Meeting
Kesko Corporation’s Annual General Meeting held on 31 March 2003 adopted the financial statements for 2002, discharged those accountable for their responsibilities, decided to pay a dividend of EUR 1.00 per share and approved the Board of Directors’ proposal of a stock option programme for the management. Pentti Kalliala, Eero Kasanen, Matti Kavetvuo, Maarit Näkyvä, Keijo Suila, Heikki Takamäki, Jukka Toivakka and Matti Honkala were elected as members of the Board of Directors.

In its first meeting, the Board of Directors elected Heikki Takamäki as the Chairman and Matti Kavetvuo as the Deputy Chairman of the Board. According to the Articles of Association, the term of each Board member is three years, with the term starting at the close of the General Meeting electing the member and expiring at the close of the third Annual General Meeting after the election (2006).

Shares and equities market
Kesko Corporation’s share capital is EUR 182,240,800, with 34.8% of the share capital consisting of A shares and 65.2% of B shares.

The price of the company’s A share was EUR 16.40 at the end of 2002 and EUR 17.00 at the end of September 2003, an increase of 3.7%. The price of the company’s B share was EUR 12.10 at the end of 2002 and EUR 12.47 at the end of September 2003, an increase of 3.1%.

During the period under review, the HEX general index dropped by 2.9% and the HEX portfolio index increased by 5.0%, while the trading sector price index increased by 9.4%.

At the end of the period under review, the market capitalisation of A shares was EUR 540 million and that of B shares EUR 740 million; i.e. the total market capitalisation for all shares was EUR 1,280 million.

In January-September 2003, 0.9 million A shares with a total value of EUR 16.6 million and 23.6 million B shares with a total value of EUR 252.1 million were traded on the Helsinki Exchanges.

At the end of September 2003, Jättipörssi Oy, a Kesko Corporation subsidiary, held 33,400 Kesko Corporation’s A shares with a total counter value of EUR 66,800 representing less than 0.04% of all shares and 0.1% of all voting rights.

Flagging notifications in July-September
Kesko Corporation did not receive any flagging notifications in July-September 2003.

Adoption of the IAS/IFRS system
Preparations for the IAS accounting system started at Kesko in 2002 with a project that studied the differences between the IAS accounting principles and Kesko’s consolidated accounting principles, and outlined new principles complying with IAS.

During 2003, the impacts of the changes in the accounting practices will be surveyed, and the Group’s accounting and reporting instructions and reporting systems will be revised. Training of the organisation and other preparations for accounting will be implemented in such a way that all comparative data for the 2005 Group reporting can be produced by each quarter of 2004.

Main events in July-September
By its decision of 12 September 2003, the Tax Office for Major Corporations imposed income taxes, tax increases and additional taxes on Kesko Corporation totalling EUR 11.1 million. These tax reassessments relate to the fiscal years 1997-2000 and will be included in the income statement for the 2003 fiscal year with an impact on profit. Kesko will appeal these decisions.

K-Alliance’s Plussa customer loyalty programme transferred all of its customer service operations to Elisa as of 19 September 2003. K-Plus Oy and ElisaCom Ltd signed a service agreement to this effect, as a result of which 20 K-Plus Oy employees were transferred under their previous conditions to Elisa.

It has been revealed that unauthorised external transfers of assets to the value of about EUR 2.9 million were made from a bank account operated by SIA Kesko Agro Latvia, Kesko Agro Ltd’s fully owned agricultural and machinery trading company. The account is in a/s Latvijas Unibanka, a subsidiary of Skandinaviska Enskilda Banken AB. Of the assets transferred without authorisation, a sum of approximately EUR 1.3 million that remained in the possession of the bank has been returned to the company. The Latvian police are investigating the matter. The company has also started its own investigations into the matter.

On 31 October 2003, Kesko Corporation, its subsidiary K-Plus Oy and Nordea Rahoitus Suomi Oy signed an agreement aimed at long-term co-operation in the production and development of payment and credit card services related to the K-Alliance’s Plussa customer loyalty programme. Related to this co-operation, Kesko Corporation sold its subsidiary K-Luotto Oy to Nordea Rahoitus Suomi Oy.

Kesko Corporation’s C warrants included in the year 2000 stock option scheme were included in the main list of the Helsinki Exchanges on 3 November 2003. The total number of C warrants is 2,015,000. Each C warrant entitles its holder to subscribe for one B share of Kesko Corporation during the period 1.11.2003-31.3.2006 at a subscription price corresponding to the trade-volume-weighted average price of Kesko’s B share on the Helsinki Exchanges during March 2001 supplemented by fifteen (15) per cent and, conversely, reduced by the amount of the dividend per share distributed and distributable after 31 March 2001. At present, the share subscription price with a C warrant is EUR 10.11 per share.

Future outlook
International competition has strengthened in Finland in all product lines. The development of Kesko’s and the K-retailers’ chain operations will continue, particularly in purchasing, information management and marketing.

The net sales growth of the Group’s divisions in Finland is anticipated to at least match the market growth. Thanks to business acquisitions and the expansion of operations, international sales are expected to grow, above all in the Baltic countries, by about 40-50%. Kesko Group’s net sales are anticipated to reach EUR 7 billion this year.

Kesko Group’s profit before extraordinary items clearly exceeds the level of the previous year. Steady profit performance will continue at the beginning of next year although strained by heavy investments in information systems and the retail store network.

Helsinki, 5 November 2003
Kesko Corporation
Board of Directors

For further information, please contact Juhani Järvi, Corporate Executive Vice President and CFO, telephone +358 1053 22209. He will also answer questions today between 14.30-15.30 hours (Finnish time) at www.kesko.fi (interim report-discussion forum).

KESKO CORPORATION
Corporate Communications

Erkki Heikkinen
Senior Vice President

ATTACHMENTS
Group’s net sales by division
Consolidated income statement and balance sheet
Group’s key indicators
Group’s cash flow
Group’s contingent liabilities
Group’s key indicators by quarter
Divisions’ net sales and operating profits by quarter
K-Alliance’s retail sales in Finland 1-9/2003

Kesko Corporation’s financial statements for 2003 will be published on 4 February 2004. In addition, Kesko Group’s sales figures are published each month. News releases and other company information are available on Kesko’s Internet pages at www.kesko.fi.

DISTRIBUTION
HEX Helsinki Exchanges
Main news media

ATTACHMENTS:

K-Alliance’s retail sales in Finland 1-9/2003