Interim report 1.1.-30.6.2004: Profit before extraordinary items EUR 80.4 million

The Group’s net sales in January-June 2004 were EUR 3,688 million, which is 9.2% more than in the corresponding period of the previous year (EUR 3,376 million). The Group’s profit before extraordinary items and taxes was EUR 80.4 million (EUR 70.4 million). Non-recurring items excluded, the profit grew by EUR 24.4 million. Earnings per share were EUR 0.64 (EUR 0.47). Equity per share was EUR 13.70 (EUR 14.49).

Market review
According to advance information, the volume of the Finnish wholesale trade in January-May 2004 increased by 6.6% over the corresponding period of the previous year. The increase in retail trade was 5.4% (Statistics Finland).

The Research Institute of the Finnish Economy (ETLA) forecasts that the volume of retail trade will increase in Finland this year by about 4% and the volume of wholesale trade by about 3%.

Strong domestic consumption will maintain the growth of the Finnish economy throughout 2004. The Finnish GDP is estimated to grow this year by 2.9% and private consumption by some 3%. Investments are estimated to accelerate to a growth rate of 2.2%. According to forecasts, the annual increase in consumer prices will remain below 1% (Research Institute of the Finnish Economy ETLA). Price development in the food trade may be slightly negative owing to decreased alcohol prices, the Baltic states’ admission to the EU and price competition.

Statistics Finland’s consumer survey of July shows that Finnish consumers are confident about their own financial situation and the future of the Finnish economy. However, consumers’ views on households’ saving opportunities and unemployment in Finland were gloomier than at the beginning of 2004.

The Estonian economy is forecast to grow in 2004 by about 5%, and the Latvian and Lithuanian economies by about 6-7%. Private consumption is estimated to grow by about 5% in all of the Baltic states. In Estonia and Latvia, consumer prices are forecast to increase by about 3%, while in Lithuania, prices are forecast to more or less remain at the level of the previous year (Nordea). Retail trade is forecast to experience good growth in the Baltic countries.

The Swedish economy is forecast to increase by 2.9% in 2004. Private consumption is estimated to grow by 2.5%. The growth of consumer prices is anticipated to remain below 1% (Konjunkturinstitutet). Building investments are forecast to experience an overall decline of about 4% this year. However, house building is forecast to increase by about 1% this year and by about 2% in 2005 (Byggindustrier).

The market and future outlook of each of Kesko’s business divisions are reviewed in the respective sections of this interim report.

Net sales and profit

Net sales in January-June

The Group’s net sales in January-June 2004 were EUR 3,688 million, which is 9.2% up on the corresponding period of the previous year (EUR 3,376 million). The increase was attributable mostly to domestic hardware and builders’ supplies, home and speciality goods and car trade operations and to the Baltic trade. The Group’s net sales increased by 5.1% in Finland and by 44.1% abroad.

*Exports and net sales abroad

During the period under review, exports and foreign operations accounted for 13.9% (10.6%) 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 10.0 percentage points.

Profit in January-June
During the period under review, the Group’s profit before extraordinary items and taxes was EUR 80.4 million (EUR 70.4 million), representing 2.2% of net sales (2.1%). Operating profit was EUR 78.4 million (EUR 64.1 million). The biggest increases in profits were registered by Keswell and Rautakesko due to the prevailing good market situation and their efficient operations.

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 3.5 million (EUR 17.9 million). Consequently the operating profit excluding non-recurring items was EUR 28.7 million bigger than in the corresponding period of the previous year.

The Group’s financial income and expenses were EUR 1.9 million (EUR 6.2 million). The decrease is mainly attributable to reduced dividend yield after Kesko sold listed shares during the latter half of 2003.

The Finnish corporation tax rate will drop to 26% at the beginning of 2005. Deferred tax liabilities and assets have been calculated on the basis of the 26% rate to the extent they will be realised in 2005 and thereafter. The tax rate change decreases the amount of deferred tax liabilities by EUR 6.1 million. The effect of the change has been recognised in the income statement and balance sheet of the second quarter.

Earnings per share (adjusted for the dilution effect of stock options) were EUR 0.64 (EUR 0.47). Equity per share was EUR 13.70 (EUR 14.49).

The operating profit of common operations includes an operating profit of EUR 28.2 million (EUR 34.1 million) from real estate operations, which are organised in an intra-Group service unit. This figure includes non-recurring sales profits and losses to the amount of EUR 2.2 million (EUR 13.1 million). The operating profit of common operations 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.

Net sales and profit in April-June

The Group’s net sales in the second quarter of the year were EUR 1,937 million, which is 6.0% up on the corresponding period of the previous year (EUR 1,827 million). The decline in the net sales increase in Finland was attributable to the slackening of car and agricultural trade in particular. The Group’s profit before extraordinary items and taxes in April-June was EUR 59.8 million (EUR 50.4 million). The Group’s operating profit was EUR 56.8 million (EUR 44.1 million). Kesko Food in particular improved its profits markedly over the corresponding period of the previous year. The operating profit included profits and losses from sales of fixed assets and business operations and value adjustments to a total net value of EUR 2.4 million (EUR 6.0 million). Consequently the operating profit excluding non-recurring items was EUR 16.3 million bigger than in the corresponding period of the previous year. Earnings per share during the second quarter were EUR 0.50 (EUR 0.34). Other indicators by quarter are given in the attached table.

Investments
The Group’s investments totalled EUR 80.4 million (EUR 130.3 million), which is 2.2% (3.9%) of net sales. Investments in retail stores and company acquisitions amounted to EUR 58.7 million. The Group’s other investments were EUR 21.7 million. Investments in foreign business operations represented about 26.0% of total investments.

Finance
Cash flow from operating activities was EUR 53.7 million (EUR 47.2 million), while cash flow from investing activities was EUR -62.0 million (EUR -88.8 million). At the end of the period, the equity ratio was 45.0% (48.6%). Interest-bearing net debt was EUR 414.9 million (EUR 407.6 million). Liquid funds totalled EUR 131.4 million (EUR 77.2 million).

On 10 June, Kesko Corporation issued a U.S. private placement of USD 120 million. The arrangement consists of three bullet loans: a 10-year loan (USD 60 million), a 12-year loan (USD 36 million) and a 15-year loan (USD 24 million). Kesko has hedged the loan by currency and interest rate swap agreements, as a result of which the loan capital totals EUR 100.4 million and the fixed capital-weighted average interest rate is 5.4%. The proceeds of the loan offering will be used for general corporate purposes, including repayment of short-term loans.

Personnel
During the period under review, the Kesko Group’s average personnel was 16,679 (14,389) converted into full-time employees. There was an increase of 2,290 persons over the corresponding period in the previous year. In Finland, the increase was 181 persons on average and 2,109 outside Finland.

At the end of June 2004, the total personnel was 20,710 (18,937), of whom 13,077 (12,827) worked in Finland and 7,633 (6,110) worked outside Finland. Compared with the figure for the end of June 2003, there was an increase of 250 persons in the figure for Finland and 1,523 outside Finland, distributed by business division as follows:

* Total number of employees, including part-time employees

The biggest increases were registered in the Baltic countries where Kesko Food, Rautakesko and Kesko Agro increased their operations. The biggest increase took place in Lithuania, where Rautakesko acquired in March 2003 a majority in the hardware and building supplies company, Senukai, which employs a total of 3,053 persons. The impact on the average figures for six months is 1,211 persons.

Kesko Food’s personnel increased in Finland mainly as a result of testing the Cassa discounter concept. The increase in Keswell Ltd’s personnel was mainly attributable to the growth in the number of stores operated by Interwell and Jättipörssi. The number of VV-Auto employees increased as a result of the acquisition of Airiston Auto in Turku in the autumn of 2003.

Divisions

Kesko Food
In January-June, Kesko Food’s net sales amounted to EUR 1,852 million, an increase of 3.5%. Net sales from Baltic operations totalled EUR 154.0 million and accounted for 8.3% of total net sales. Kesko Food’s operating profit was EUR 16.2 million. In the previous year, the operating profit for the corresponding period was EUR 17.0 million, which included the profit from the divestiture of Viking Coffee Ltd’s business operations. The main factors contributing to the decrease in profit for the period under review were the costs of building and implementing new systems for operations control and costs effected in expanding the K-pikkolo chain and in testing the Cassa discounter concept. Kesko Food’s total investments were EUR 18.9 million, of which investments in retail stores accounted for EUR 15.0 million. About 27% of all investments were made in Baltic operations.

According to the Finnish Food Marketing Association, the retail sales of its member companies increased in January-May by 0.9%. The total Finnish grocery market is estimated to have grown by about 3%. During the first part of the year, grocery prices decreased by 0.4% owing to intensive price competition, decreased alcohol prices and growth in the sales share of retail operators’ own brands (Statistics Finland). The cold and rainy weather in May-June reduced the sales of seasonal and home and speciality goods. During the first half of the year, the retail sales of the K-food stores in Finland grew by 1.5%, amounting to EUR 2,216 million (incl. VAT). Owing to the differing local and regional markets and competitive situations, there are great differences between the retail sales growth of the chains and individual K-food stores. In terms of euros, the sales of the K-citymarket chain recorded the biggest growth, about EUR 47 million, or an increase of 6.7%. Grocery sales accounted for 9.2% of this. The sales figures of the neighbourhood store chains are affected by chain modifications among other things. There were 1,115 K-food stores operating at the end of the review period. The sales of Kesko Food’s house brands (Pirkka, Euro Shopper) increased by 20.8%.

The network of Pikoil Oy, a joint venture of Kesko Food Ltd and a Fortum subsidiary, Neste Marketing Ltd operating in the neighbourhood and service station store markets, has developed as planned. At the end of the period under review, there were a total of 68 K-pikkolo neighbourhood stores and K-pikkolo service station stores, and the company had a total of 139 store sites. In the future, all of the chain’s food stores will operate under the K-pikkolo sign, whereas the service station stores will continue selling oil products under the Neste sign.

In February, Kesko Food started testing discounters in Finland. There are currently 11 Cassa stores in operation. The objective is to improve the competitive base of the K-Alliance by testing the new concept in various parts of the country.

Kesko Food’s grocery trade grew much more in the Baltic countries than in Finland, by a total of 37.8%. Net sales grew by 18.7% in Estonia and by 201.5% in Latvia. The growth in these countries was boosted by the opening of new Citymarket stores at the end of the year 2003 and by the expansion of the SuperNetto discounter chain by 7 new outlets during six months. At the end of the review period, the Säästumarket chain in Estonia included a total of 45 discount stores and there were 18 SuperNetto stores in Latvia.

On 8 June 2004, Kesko Food Ltd and ICA Baltic AB, a company belonging to the Swedish ICA Group, signed an agreement to set up a 50/50 joint venture for the Baltic food market. According to the agreement, the companies’ current operations in Estonia, Latvia and Lithuania will be combined. The plan is for the joint venture to start operating by the end of 2004, subject to the approval of the competition authorities and the completion of other conditions precedent. The aim is to reach market leadership in the area.

The net sales of Kespro Ltd, which provides services for the catering, kiosk, service station and restaurant trade, were EUR 369 million, an increase of 1.8%. The total market in Finland in this sector has decreased this year due to the decrease of alcohol prices among other things.

In 2004, the total food trade market in Finland is estimated to grow more slowly than in the previous year. The total Baltic market is anticipated to increase by about 5%. Kesko Food’s net sales are expected to match the market growth in Finland and to exceed market growth in the Baltic countries. The operating profit of 2004 is expected to remain at the level of the previous year.

Rautakesko
In January-June, Rautakesko’s net sales amounted to EUR 564.4 million, an increase of 22.4%. In Finland, the net sales were EUR 378.3 million, an increase of 11.7%. The net sales of foreign subsidiaries were EUR 185.3 million, an increase of 52.7%. About 33% of Rautakesko’s net sales came from foreign countries.In January-June, Rautakesko’s operating profit was EUR 16.8 million (EUR 11.3 million). Rautakesko’s investments totalled EUR 4.0 million. 58% of investments were abroad.

In Finland, the number of house starts increased by 30.6% during the first quarter of the year and new construction as a whole grew by 10.7% (Statistics Finland). A high proportion of households continue to have plans for home renovations and repairs.

In April, a new K-rauta hardware and builders’ supplies store was opened in Vantaa. At the end of June, the K-rauta chain included 43 stores, while the Rautia chain included 102 stores in Finland. The sales of the K-rauta stores grew by 11.2% and the sales of the Rautia stores by 9.0%. Building supplies categories, house sales and interior decoration items recorded the biggest sales growth. The sales of Rautakesko’s Industrial and Constructor Sales unit increased by 10.4%. Rautakesko’s sales growth in Finland exceeded that of the competition (Finnish Hardware Association).

In Sweden, Rautakesko currently operates 11 K-rauta stores. A new K-rauta was opened in Sundsvall in March. There are 4 K-rauta stores in Estonia and 1 in Latvia. In Lithuania, UAB Senuku Prekybos centras, in which Rautakesko holds a majority, operates 12 Senukai stores and 66 partner stores. Its net sales are included in Rautakesko's figures as of 13 March 2003.

The construction trends survey group set up by the Ministry of Finance forecasts that housing construction will increase in Finland this year by 3.5%. The total hardware and builders’ supplies market is estimated to grow by equal proportions in Finland and Sweden and by some 6-8% in the Baltic countries. In 2004, Rautakesko’s net sales are expected to exceed market growth and its operating profit to improve on the previous year.

Kesko Agro
In January-June, Kesko Agro’s net sales were EUR 438 million, an increase of 7.9%. Net sales of foreign subsidiaries totalled EUR 87.7 million, which was 20.0% of total net sales. The Kesko Agro Group’s operating profit was EUR 11.0 million (EUR 9.9 million). Profit performance was affected by costs arising from information systems development. Investments totalled EUR 4.3 million, about 44% of which were in foreign projects.

Kesko Agro Ltd’s net sales were EUR 236.0 million. Delayed agricultural EU subsidies have slowed down the investments of Finnish farmers in production buildings. More expensive outward freight charges and low export prices weakened the profitability of the grain trade at the beginning of the year. K-Maatalousyhtiöt Oy merged with its parent company, Kesko Agro Ltd, on 1 July 2004. The first stage of Kesko Agro Ltd’s enterprise resource planning system was put into service at the beginning of July and the second stage will be implemented at the beginning of September as planned.

Kesko Machinery Ltd’s net sales were EUR 98.0 million, an increase of 1.3% over the corresponding period in the previous year. The company’s profitability is still good. Poor industry investment has affected the sales of heavy machinery. A new MAN truck centre opened in Espoo in June.

Agricultural and machinery sales in the Baltic countries have progressed better than expected. Business operations in Lithuania, in particular, have clearly increased. The biggest net sales growth has been registered in the grain trade. The profit performance of the Baltic operations has also exceeded expectations.

The Baltic countries were admitted to the EU in May 2004. Delayed EU subsidies have postponed agricultural investment decisions to the last quarter of the year. In July, a new agricultural and machinery trade centre opened in Kaunas, Lithuania.

In 2004, the total agricultural trade market is estimated to remain at the level of 2003 in Finland. The Baltic market is anticipated to grow by 5-10%. In 2004, Kesko Agro’s net sales in Finland are expected to remain at the level of the previous year and to exceed market growth in the Baltic countries. The 2004 operating profit is expected to improve on the previous year.

Keswell
In January-June,Keswell’s net sales totalled EUR 340.7 million, an increase of 12.2%. The net sales of foreign operations amounted to EUR 11.5 million, representing 3.4% of total net sales. Keswell’s operating loss was EUR 3.6 million. The profit was EUR 9.5 million bigger than during the corresponding period of the previous year. Owing to the nature of home and speciality goods trading, Keswell’s profit is mainly generated during the last quarter. Investments totalled EUR 1.9 million.

The net sales of the Anttila Group totalled EUR 211.5 million, an increase of 11.3%. The sales of the Anttila department stores grew by 11.4% and the sales of Kodin Ykkönen department stores for home goods and interior decoration increased by 9.7%. Sales increased in all product lines. The biggest growth was recorded by entertainment products sales. Anttila’s distance sales (mail order sales and NetAnttila) grew by 11.2%, which was particularly attributable to NetAnttila. The operating loss of the Anttila Group was EUR 3.3 million, which is EUR 9.0 million smaller than in the corresponding period in the previous year.

The net sales of Kesko Sports amounted to EUR 59.0 million, an increase of 16.2%. The retail sales of the Intersport store chain grew by 13.6% thanks to a successful winter season. During the first part of the year, the chain’s retail sales are estimated to have exceeded the average growth in the sports goods trade. The sales of the Kesport stores rose by 19.9%.

The net sales of Kesko Musta Pörssi amounted to EUR 55.8 million, up by 13.7%. The retail sales of the Musta Pörssi chain increased by 13.3%. The increase was partly due to the higher number of stores and partly to the increase of sales in digital and information technology products and household appliances. During the first part of the year, the Musta Pörssi chain’s retail sales are estimated to have exceeded the average growth in the sector.

The net sales of Kesko Shoes decreased by 2.4%, totalling EUR 11.6 million. The retail sales of the K-kenkä chain increased by 1.5%, while those of the Andiamo chain decreased by 4.2%. The sales of the Kenkäexpertti stores increased by 1.0%. During the first part of the year, the retail sales in the whole shoe trade are estimated to have remained at the level of the previous year.

In 2004, the total home and speciality goods trade market in Finland is estimated to grow by about 3-4%. Keswell’s net sales are estimated to exceed market growth in 2004. The 2004 operating profit is expected to clearly improve on the previous year.

VV-Auto
In January-June, the net sales of the VV-Auto Group totalled EUR 346.8 million, representing an increase of 13.5%. The operating profit was EUR 16.1 million (EUR 12.1 million). Investments totalled EUR 9.0 million.

The growth of the total new car market in Finland continued in January-June. During the six months, registrations of new cars totalled 83,610, representing an increase of 5.1% over the corresponding period of the previous year. Registrations of new vans were up by 25.8%, totalling 8,322.

In 2004, the total car market is estimated to more or less remain at the level of the previous year, whereas van sales are anticipated to grow. The VV-Auto Group’s net sales are estimated to increase partly thanks to its own dealer network. The 2004 operating profit is expected to improve on the previous year.

Kaukomarkkinat
In January-June, the Kaukomarkkinat Group’s total sales, which include the value of commission-based trade in addition to net sales, amounted to EUR 209.7 million, an increase of 20.9%. Net sales were EUR 150.6 million, representing an increase of 14.4%. The Group’s operating profit was EUR 4.6 million (EUR 0.6 million). Investments totalled EUR 0.9 million.

The biggest net sales growth was registered in trading with China. The sales of Telko, a Kaukomarkkinat subsidiary, increased both in Finland and the other Nordic countries. The net sales of other technical trade increased, too, in line with the general recovery in the sector. The sales of consumer electronics grew regardless of the overall decline in the sector.

Operating profit grew in several profit units owing to increased sales revenue and efficient cost control. The biggest increase was registered in trading with China and Russia and in the operations of Kauko Electronics and Leipurien Tukku.

In 2004, Kaukomarkkinat is expected to increase its whole year’s net sales and operating profit markedly over the previous year.

Annual General Meeting
Kesko Corporation’s Annual General Meeting was held on 29 March 2004. The decisions made by the Annual General Meeting were published in a stock exchange release on the same day and in the interim report for the first quarter.

The Group’s corporate governance system
The parent companies of the major sub-groups fully owned by the Kesko Group elected the members of their Boards of Directors at their Annual General Meetings held on 26 March 2004. The compositions of the respective Boards were published in a stock exchange release on 26 March 2004.

On 29 April 2004, Kesko Corporation’s Board of Directors established an audit committee, selecting Matti Kavetvuo as its Chairman and Eero Kasanen and Maarit Näkyvä as its members. The audit committee prepares matters for the Board of Directors relating to the monitoring of the financial position, the supervision and control of reporting, and the risk management of the Kesko Group.

Through the establishment of the audit committee Kesko’s Board of Directors enhances the preparation of the matters under the Board’s responsibility. In compliance with the Corporate Governance Recommendation of HEX Helsinki Exchanges, the Central Chamber of Commerce and the Confederation of Finnish Industry and Employers, which entered into force on 1 July 2004, Kesko’s Board of Directors has evaluated the independence of the Board members. The evaluation showed that all members of the audit committee are independent of the company.

Kesko Corporation complies with the Corporate Governance Recommendation for listed companies which entered into force on 1 July 2004. In accordance with the Recommendation’s provision for implementation, those matters that require a decision by a General Meeting can be settled at the 2005 Annual General Meeting. Such decisions include amendment of the term of office of Board members stipulated in the Articles of Association, or the election of Board members. Kesko’s corporate governance statement can be read at www.kesko.fi/investorinformation.

Shares and the stock market
A total of 24,300 new Kesko Corporation B shares were subscribed for with the C warrants issued under Kesko Corporation’s year 2000 stock option scheme during 11-31 December 2003. The corresponding increase in share capital, EUR 48,600, was entered in the Trade Register on 6 February 2004. The new B shares were included in the main list of the Helsinki Exchanges for public trading with the old B shares on 9 February 2004.

In addition, during 1-20 April 2004, a total of 536,190 new Kesko Corporation B shares were subscribed for with the B and C warrants issued under Kesko Corporation’s year 2000 stock option scheme. The corresponding increase in share capital, EUR 1,072,380, was entered in the Trade Register on 4 May 2004 and the new B shares were included in the main list of the Helsinki Exchanges for public trading as new B shares on 5 May 2004. These shares were listed as a new series (Kesko B uudet) in order to comply with the provision of the year 2000 option scheme stipulating that shares subscribed for with options during each year give the right to dividends for that financial year during which they were subscribed for and paid. The terms and conditions of the year 2000 stock option scheme were published as a stock exchange release on 10 April 2000.

At the end of the period under review, Kesko Corporation’s share capital totalled EUR 183,501,980. The number of A shares is 31,737,007, i.e. 34.6% of all shares, and the number of B shares is 60,013,983, i.e. 65.4% of all shares.

The price of a Kesko A share was EUR 18.20 at the end of 2003, and EUR 18.40 at the end of the review period, an increase of 1.1%. The price of a B share was EUR 13.88 at the end of 2003 and EUR 16.30 at the end of the review period, a rise of 17.4%. During the period under review, the HEX general index dropped by 2.9% and the HEX portfolio index rose by 4.0%. The trading sector index rose by 8.3% during the review period.

At the end of the review period, the market capitalisation of A shares and B shares was EUR 584 million and EUR 969 million respectively, with the total market capitalisation of the company being EUR 1,553 million. During the review period, 0.8 million A shares were traded on the Helsinki Exchanges at a total value of EUR 15.2 million, while 44.1 million B shares were traded at a total value of EUR 689.0 million.

Flagging notifications
On 16 February 2004, Kesko Corporation was notified that, on 13 February 2004, the share of Kesko Corporation’s voting rights held jointly by the K-Retailers' Association, its branch clubs and the Foundation for Vocational Training in the Retail Trade had increased to 10.08%. At the end of 2003 they held a total of 9.76% of Kesko Corporation's voting rights.

Adoption of the IAS/IFRS standards
Kesko will prepare its first complete IFRS financial statements for 2005. The opening IFRS balance sheet prepared for the transition day of 1 January 2004 has been prepared in accordance with standards in force in April 2004. The effects of IFRS standards on Kesko’s balance sheet and shareholders’ equity at 1.1.2004 were discussed in the interim report for the first quarter of the year.

Before the first interim report for 2005, Kesko will publish a separate stock exchange release including the IFRS accounting policies, comparison figures and reconciliation calculations for 2004 with respect to the Finnish Accounting Standards.

Main events in April-June
On 26 March 2004, the Helsinki District Court decided to totally dismiss the actions of eight former K-citymarket retailers against Kesko Corporation. In their actions pending since 2001 and now dismissed they primarily claimed compensation totalling EUR 13.8 million from Kesko for notices claimed to have been contrary to agreements. The District Court ordered the claimants to pay Kesko’s legal costs. The decision of the District Court is not legally binding. The former retailers have lodged an appeal against the decision with the Helsinki Court of Appeal, where the proceedings will continue.

On 16 April 2004, the Finnish Competition Authority granted an exemption to Kesko Corporation’s subsidiary Kesko Food Ltd, on the basis of which it can decide the highest retail prices for Pirkka products and some other products sold at K-food store chains. The exemption is valid until the end of 2004. Maximum prices can be determined for those products included in the chain selection of each K-food store chain which do not account for more than 35 percent of the average sales of the stores in each size category of the chain, calculated annually afterwards, and for all Pirkka products. The exemption now granted is an extension to the exemptions concerning K-food store chains which were granted by the Finnish Competition Authority in 2001 and whose validity it extended in December 2003 until 30 April 2004. The exemptions granted by the Finnish Competition Authority in 2001 concerning Rautakesko Ltd’s, Kesko Agro Ltd’s and Keswell Ltd’s chains remain valid until 31 December 2005.

The number of K-Alliance’s Plussa cards exceeded three million. There are Plussa card holders in some 1.6 million households.

On 6 May 2004, Kesko published its fourth corporate responsibility report. The scope of reporting has been widened and deepened further. The report now contains more information about foreign subsidiaries, for example. Concerning Finland, economic responsibility indicators are presented by region. As in the previous year, the report has been subjected to an independent assurance process.

In June, VV-Auto Oy acquired Stockmann’s Volkswagen and Audi retail operations at Herttoniemi, Helsinki. VV-Auto’s subsidiary, Helsingin VV-Auto Oy, started operations on 1 July 2004. The Volkswagen and Audi premises at Herttoniemi are the biggest sales outlet of these makes in Finland. Future sales are estimated to exceed EUR 100 million annually. The plan is to develop the outlet and its services further so that it will sell close to 3,000 new cars each year.

On 8 June 2004, Kesko Food Ltd and ICA Baltic AB, a company belonging to the Swedish ICA Group, signed an agreement to set up a 50/50 joint venture for the Baltic food market. According to the agreement, the companies’ current operations in Estonia, Latvia and Lithuania will be combined. The plan is for the joint venture to start operating by the end of 2004, subject to the approval of the competition authorities and the completion of other preconditions.

In the arrangement Kesko Food and ICA Baltic AB will transfer their Baltic grocery operations, in accordance with the agreed valuation principles, to a Swedish limited liability company, which will operate as an independent joint venture. In the Kesko Group, the book value of the assets to be transferred to the joint venture was about EUR 110 million at the end of 2003. Kesko Food’s additional investments in the joint venture will be specified as the arrangement becomes effective. Both companies have 50% ownership and 50% of the voting rights in the joint venture. The arrangement is estimated to have no immediate significant effect on the result of the Kesko Group.

Future outlook
International competition in trading continues in Finland in most product lines. The chain operations of Kesko and the K-retailers will be developed further, particularly in purchasing, information management and marketing.

Among the Group’s divisions, hardware and builders’ supplies trade and home and speciality goods trade are expected to exceed market growth in Finland during the latter part of the year and the other divisions to at least match the market growth, specified in the market review. Thanks to the expansion of operations, sales continue to grow vigorously in the Baltic countries. The Group’s net sales are expected to exceed EUR 7.5 billion in 2004.

The Group’s steady profit performance will continue. Kesko Group’s operating profit excluding non-recurring items is estimated to be clearly in excess of the level of the previous year (EUR 137 million).

Helsinki, 30 July 2004
Kesko Corporation
Board of Directors

The figures of this interim report are unaudited.

For further information, please contact Juhani Järvi, Executive Vice President, CFO, telephone +358 1053 22209, or Arja Talma, Vice President, Corporate Controller, telephone +358 1053 22113. A web conference about the interim report will be held in English at 14.30 hrs (Finnish time). Link to the web conference is available at: www.kesko.fi.

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

Kesko Corporation’s interim report for the first 9 months of the year will be published on 29 October 2004. In addition, Kesko Group’s sales figures and the 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
HEX Helsinki Exchanges
Main news media

ATTACHMENTS: Group’s net sales by division

·         Change over 100%, ** Comparable change (1.1.-30.6.2004) 33.4%

*Change over 100%

K-Alliance’s retail sales in euros (incl. VAT) in January-June 2004

(advance information):

* Change over 100%

2 K-rauta stores and 43 Rautia stores also operate as K-agricultural stores. Their sales are partly included in the sales of the hardware and builders’ supplies stores and partly in the sales of agricultural stores.