Interim report 1.1.-30.6.2005: Pre-tax profit EUR 135.4 million (EUR 93.2 million)

The Group's net sales in January-June 2005 were EUR 3,913 million, up 6.2% on the corresponding period of the previous year (EUR 3,684 million). The operating profit was EUR 141.9 million (EUR 94.5 million). Non-recurring items excluded, the operating profit was EUR 89.3 million (EUR 88.4 million). The Group's profit before taxes was EUR 135.4 million (EUR 93.2 million). Non-recurring items excluded, the profit before taxes was EUR 82.9 million (EUR 87.1 million). Earnings per share were EUR 1.12 (EUR 0.78). Equity per share was EUR 14.64 (EUR 14.60).

Net sales and profit

Net sales in January-June
The Group’s net sales in January-June 2005 were EUR 3,913 million, which is 6.2% up on the corresponding period of the previous year (EUR 3,684 million). The Group’s net sales increased by 3.7% in Finland and by 21.7% in other countries.

*Exports and net sales in other countries than Finland.

Exports and operations outside Finland accounted for 15.9% (13.9%) of net sales. The net sales of Indoor Group Ltd, acquired by Keswell Ltd, are included in the figures starting from 22 January 2005 and its impact on Keswell’s growth was 21.6 percentage points.

Profit in January-June
The Group’s profit before extraordinary items and taxes for the review period was EUR 135.4 million (EUR 93.2 million), representing 3.5% of net sales (2.5%). Operating profit was EUR 141.9 million (EUR 94.5 million).

The operating profit has been increased by a net total of EUR 52.5 million (EUR 6.1 million) in profits and losses from disposal of fixed assets and business operations, and impairment charges. The profits from disposal of fixed assets include EUR 45.5 million from the disposal of real estate by Kesko to Nordisk Renting Oy. Consequently, the operating profit excluding non-recurring items was EUR 1.0 million higher than during the corresponding period of the previous year. VV-Auto, Keswell and Kesko Agro improved their profits excluding non-recurring items, whereas the profit of Kesko Food in particular was smaller than during the corresponding period of the previous year. During the period under review Kesko Food's profit was negatively affected by a cost of EUR 4.7 million arising from pension arrangements made at rationalisation negotiations completed in May.

The Group’s net financial expenses were EUR 7.3 million (EUR 2.9 million). They include net interest from finance leasing amounting to EUR -4.0 million (EUR -4.4 million). The increase in financial expenses is due to an increase in fixed-interest debt and changes in the value of interest rate derivatives. The reference period figures are not in compliance with IAS 39 (International Accounting Standard 39), but this has no material impact on the figures.

Earnings per share (adjusted for the dilution effect of stock options) were EUR 1.12 (EUR 0.78). Equity per share was EUR 14.64 (EUR 14.60).

The primary segments presented in the IFRS financial statements are the Kesko Group divisions, namely Kesko Food, Rautakesko, Kesko Agro, Keswell, VV-Auto and Kaukomarkkinat. In deviation from the figures reported during 2004, the operating profit from real estate operations, organised as an intra-Group service unit, has been allocated to those divisions to which it is directly attributable. This change in reporting practice is part of the transfer of profit responsibility for real estate to the division parent companies throughout the lifecycle of the real estate. After this change, common operations include the costs of the corporate management and centralised support functions.

Net sales and profit in April-June
The Group's net sales in the second quarter of the year were EUR 2,118 million, which is 9.4% up on the corresponding period of the previous year (EUR 1,936 million). The net sales of units outside Finland continued to grow fast, and the domestic sales of VV-Auto, Rautakesko and Kesko Agro, in particular, developed well.

The Group's profit before extraordinary items and taxes in April-June was EUR 66.5 million (EUR 65.3 million). The Group's operating profit was EUR 69.9 million (EUR 64.4 million). The operating profit included non-recurring profits and losses from sales of fixed assets and business operations, and impairment charges to a total net value of EUR 2.8 million (EUR 3.0 million). Consequently the operating profit excluding non-recurring items was EUR 5.7 million higher than in the corresponding period of the previous year. Earnings per share during the second quarter were EUR 0.53 (EUR 0.60). Other indicators by quarter are given in the attached table.

Capital expenditure
The Group’s capital expenditure totalled EUR 211.5 million (EUR 90.8 million), which is 5.4% (2.5%) of net sales. Investments in retail stores amounted to EUR 74.2 million. Investments in acquisitions were EUR 113.1 million, of which EUR 70.0 was used to acquire Rimi Baltic AB shares and EUR 41.8 million to acquire Indoor Group Ltd shares. The Group’s other capital expenditure was EUR 24.2 million. Investments in business operations outside Finland represented 45.9% of total capital expenditure.

Finance
Cash flow from operating activities was EUR 58.6 million (EUR 53.4 million), while cash flow from investing activities was EUR -37.3 million (EUR -63.7 million). The positive change is attributable to the real estate deal completed in January in which Kesko sold properties to Nordisk Renting Oy for EUR 95.7 million.

At the end of the period, the equity ratio was 41.9% (42.7%). Interest-bearing net debt was EUR 669.7 million (EUR 566.6 million). Liquid funds totalled EUR 90.2 million (EUR 135.9 million).

Personnel
During the period under review, the average number of personnel in the Kesko Group, including joint ventures, was 20,881 (16,684) converted into full-time employees. There was an increase of 4,197 employees over the corresponding period of the previous year. In Finland, the average increase was 1,236 employees, while outside Finland it was 2,961. Kesko Food Ltd’s joint ventures, Pikoil Oy and Rimi Baltic AB, accounted for 4,655 employees.

At the end of June 2005, the total number of personnel was 25,608 (20,739), of whom 14,923 (13,106) worked in Finland and 10,685 (7,633) worked outside Finland. Compared with the end of June 2004, there was an increase of 1,817 employees in Finland, and 3,052 outside Finland, distributed by business division as follows:

* Total number of employees, including part-time employees

Rimi Baltic AB, a joint venture of Kesko Food and Sweden's ICA AB, started operations at the beginning of 2005. 50% of the personnel of Rimi Baltic AB and Pikoil Oy, or 4,655 persons on average, are included in the Kesko Group figures. Rautakesko and Kesko Agro further expanded their operations in the Baltic countries. The biggest increase in the number of Kesko personnel was registered in Lithuania where the average number of employees of Rautakesko's Senukai chain increased by 937 compared with the previous year.

In Finland, Keswell's personnel increased mainly as a result of the acquisition of Indoor Group Ltd. Its impact is 667 persons on average. The number of VV-Auto employees increased by more than 100 due to the acquisition of Helsingin VV-Auto Oy.

On 12 April 2005, rationalisation negotiations aimed at improving operational efficiency were started in Kesko Food. As a result, the personnel was reduced by nearly 80 employees through pension solutions and other arrangements. Notice had to be served to an additional 73 employees. Kesko Food and K-Plus are supporting the dismissed persons by providing training for relocation and by continuing an active search for re-employment opportunities within the Kesko Group.

Market review
The long labour conflict in the paper industry will be reflected in Finland’s economic growth this year. The Finnish economy is expected to grow by approximately 2% in 2005. It is forecast that private consumption expenditure will increase by 2.8% and investments by 3.8%. The annual increase in consumer prices is forecast to reach 1.1% in 2005 (ETLA: The Research Institute of the Finnish Economy).

According to the preliminary data of Statistics Finland, in January-May 2005 the volume of Finnish retail trade increased by 4.4% over the corresponding period of the previous year. The increase in wholesale trade was 4.7%.

ETLA forecasts that the volume of Finnish retail and wholesale trade will grow by about 3-4% in 2005.

Statistics Finland’s consumer survey of July shows that Finnish consumers' views of Finnish economic growth and lower unemployment are pessimistic. Consumers still maintain strong confidence in their own financial situations, however.

The strong growth of the Baltic economies will continue in 2005. The Estonian economy is forecast to grow this year by 5.8%, the Latvian economy by 7.4% and the Lithuanian economy by 6.2%. Private consumption is estimated to grow by about 6% in Estonia, by about 9% in Latvia and by about 7% in Lithuania. Consumer prices are forecast to increase by 3.2% in Estonia, by 5.3% in Latvia and by 2.3% in Lithuania (Nordea).

This year the Swedish economy is forecast to grow by 3.2% and private consumption by 2.8%. The increase in consumer prices is anticipated to remain below 0.5% (Nordea). Total building investments are forecast to continue increasing at a rate of about 3% this year (Sveriges Byggindustrier).

The Norwegian economy is forecast to grow by 3.6% and private consumption by 4.0% in 2005. Consumer price inflation is anticipated to be 1.4% in Norway. Housing construction is expected to be lively in 2005, maintaining good growth in the market for building supplies (Nordea).

In Russia, the stabilisation of economic growth, consumer price inflation and the political situation is providing a good basis for brisk growth and structural change in the country’s retail trade, especially in St. Petersburg and Moscow.

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

Divisions

Kesko Food
In January-June, Kesko Food Group's net sales amounted to EUR 1,861 million, an increase of 0.5%. Kesko's share of the net sales of the joint venture, Rimi Baltic AB, was EUR 191 million, representing 10.3% of Kesko Food's net sales.

Kesko Food’s operating profit was EUR 79.7 million (EUR 47.3 million). The operating profit was increased by the net result of profits and losses on the disposal of fixed assets and business operations (mainly relating to the disposal of the central warehouse and some retail store premises in January) amounting to EUR 41.7 million (EUR 1.2 million). Thus, the operating profit excluding non-recurring items was EUR 8.1 million less than in the corresponding period of the previous year. The result of the period under review was negatively affected by the costs of pension solutions agreed at the rationalisation negotiations completed in May and the revised valuation practices applied to inventories in Citymarket Oy's home and speciality goods trade. On the other hand, the result was improved by savings in information management costs achieved by renewing the enterprise resource planning system. Kesko Food's capital expenditure totalled EUR 115.6 million, of which investments in store sites and acquisitions accounted for EUR 113.0 million. Investments outside Finland accounted for 64.6% of all capital expenditure.

The rationalisation negotiations conducted on the basis of the operations improvement plan and aimed at increasing competitiveness were completed in Kesko Food in May. Annual savings of approximately EUR 20 million are sought through increased operational efficiency and other saving activities. As a result of the negotiations, the personnel has been reduced by nearly 80 employees through pension solutions and other arrangements. In addition, notice had to be served to 73 employees.

According to the Finnish Food Marketing Association, the retail sales of its member companies decreased by 0.8% in January-May. The total Finnish grocery market is estimated to have grown by about 1.4% during the first months of the year. In March-May, for which period the decrease in excise duty on alcohol is included in comparison figures, the growth of grocery prices was moderate, reaching +0.6% on average (Statistics Finland).

During the period under review, the total retail sales of the K-food stores in Finland dropped by 2.0%, totalling EUR 2,141 million (incl. VAT). The retail sales of the K-citymarket chain declined by 1.0% to EUR 755 million (incl. VAT) and those of the K-supermarket chain by 0.8% to EUR 657 million (incl. VAT). The retail sales of other K-food stores declined by 4.1% to EUR 729 million (incl. VAT). Owing to the differing local and regional markets and competitive situations, there are big differences between the retail sales trends of the chains and individual K-food stores. There were 1,062 K-food stores at the end of the period under review.

Pikoil Oy, a joint venture of Kesko Food Ltd and Neste Marketing Ltd (a Neste Oil Corporation subsidiary), which operates in the neighbourhood and service station store markets, had 135 store sites under chain control. 67 of these were K-pikkolo neighbourhood and K-pikkolo service station stores. At the beginning of 2005, the number of Pikoil Oy's own store sites grew by 21 when Neste Marketing Ltd transferred the operation of the service stations it had acquired from Eurostrada Oy to Pikoil Oy.

Kesko Food continued the testing of discounters in Finland that had started in February 2004. The first Cassa discounter managed by a retailer was opened at the beginning of June. At the end of the review period, there were 26 Cassa stores in operation.

At the beginning of 2005, Rimi Baltic AB, a joint venture owned 50/50 by Kesko Food Ltd and ICA Baltic AB, a company belonging to the Swedish ICA Group, started operating. Operations have proceeded according to plan. The owner parties transferred their grocery operations in Estonia, Latvia and Lithuania to the joint venture. Rimi Baltic operates hypermarket, supermarket and discounter concepts. The company currently runs 165 stores and intends to develop and expand the store network in all operating countries. The objective is to achieve leadership in the Baltic food market.

The net sales of Kespro Ltd, which provides services for the catering, kiosk, service station and restaurant trade, were EUR 347 million (EUR 369 million), a decrease of
6.1%. The total market in Finland in this sector is estimated to have remained unchanged during the first half of the year.

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

Rautakesko
In January-June, Rautakesko Group’s net sales amounted to EUR 629 million, an increase of 11.5%. In Finland, the net sales were EUR 404.8 million, an increase of 7.0%. The net sales of subsidiaries operating outside Finland were EUR 223.2 million, an increase of 20.4%. About 35.6% of Rautakesko Group’s net sales came from outside Finland. Rautakesko Group’s net sales in the second quarter were EUR 360 million, an increase of 13.6%.

Rautakesko Group’s operating profit for January-June was EUR 20.2 million (EUR 24.3 million). The result was weakened by the initiation costs of store sites outside Finland. Rautakesko’s capital expenditure totalled EUR 26.1 million, of which 80.8% was outside Finland.

At the end of June, the K-rauta chain in Finland comprised 40 stores and the Rautia chain 105 stores. The sales of the K-rauta stores increased by 5.9% to EUR 262 million (incl. VAT) and those of Rautia stores by 9.3% to EUR 210 million (incl. VAT). The biggest increase was registered in the sales of small machinery, timber and interior decoration supplies. The sales growth of the K-rauta and Rautia chains in Finland is estimated to have exceeded that of competitors (Finnish Hardware Association, Statistics Finland). The sales of the Rautakesko B-to-B Service increased by 5.0%.

During the second quarter, 2 new K-rauta stores were opened in Sweden (Malmö and Gävle), and 2 new K-rauta stores in Riga, Latvia. Rautakesko operates 14 K-rauta stores in Sweden, 4 in Estonia and 3 in Latvia. In Lithuania, UAB Senuku Prekybos centras (Senukai), in which Rautakesko is the majority owner, operates 13 Senukai stores and 82 Partnershops.

On 17 March 2005, Kesko Corporation's Board of Directors approved an agreement by which Rautakesko Ltd will acquire the total share capital of the company that owns Stroymaster, a St. Petersburg DIY store chain. Before the deal can enter into force, the conditions of the transaction must be fulfilled. Stock exchange releases on the deal were published on 30 July 2004 and 17 March 2005.

After the review period, on 7 July 2005, Rautakesko Ltd received the approval of the Norwegian competition authorities for the acquisition of Norgros AS, the owner of the Norwegian Byggmakker chain of hardware and building materials stores. The other conditions of the transaction have also been fulfilled. In accordance with the bid, Rautakesko now owns 98% of the company. On 15 June 2005, Rautakesko signed an agreement to acquire a controlling interest in Norgros AS ("Norgros"), the owner of Norway's Byggmakker chain, and also offered to purchase the shares not included in the deal at the agreed price. The acquisition price is NOK 952 million (EUR 120 million) at the maximum, of which the part depending on the success of Norgros' business operations in 2005-2008 is NOK 236 million (EUR 30 million) at the maximum.

The total market for construction is estimated to grow by about 3% in Finland and Sweden, and by about 6-8% in the Baltic countries in 2005. During the latter half of the year, the growth in the hardware and builders' supplies trade will be 5-6% in Finland and Sweden, 3% in Norway, and will vary between 5-15% in the Baltic market, depending on the country. It is expected that Rautakesko's net sales and operating profit excluding non-recurring items will be higher than in 2004.

Kesko Agro
Kesko Agro Group’s net sales in January-June were EUR 468 million, an increase of 6.6%. The net sales of subsidiaries operating outside Finland totalled EUR 102.4 million, which was 22.1% of total net sales. The Kesko Agro Group’s operating profit was EUR 14.3 million (EUR 13.0 million). The profitability of Finnish business operations has developed positively. The operating profit of the Baltic operations was less than that of the comparison period due to the exceptionally good gross profits gained from grain sales in 2004. Capital expenditure totalled EUR 3.4 million, about 36% of which was in projects outside Finland.

Kesko Agro Ltd’s net sales were EUR 252 million, i.e. at the level of 2004, despite the lower price level of grain and animal feed. The volume of grain trading is smaller than in 2004. Tractor sales have developed favourably and the market share has strengthened. The retail sales of K-maatalous stores increased by 0.8% to EUR 292 million (incl. VAT).

The net sales of Konekesko Ltd, part of the Kesko Agro Group, were EUR 111.0 million, an increase of 12.5% over the corresponding period in the previous year. The total market has developed positively. Konekesko started marketing New Holland construction machinery in Finland and the Baltic countries. The company’s profitability has remained good.

Agricultural and machinery sales in the Baltic countries exceeded the level of the previous year by about 16%. The accession of the Baltic countries to the EU has expanded the markets for the agricultural and machinery trade. The delay in the payment of EU investment support is slowing down sales growth in Lithuania.

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

Keswell

The Keswell Group’s net sales for January-June totalled EUR 418.9 million, an increase of 23.0%. The net sales of operations outside Finland amounted to EUR 20.0 million, representing 4.8% of total net sales. The main reason for net sales growth was the acquisition of Indoor Group Ltd on 21 January 2005. Its impact on the growth in Keswell's net sales was 21.6 percentage points. Keswell’s operating profit was EUR 7.8 million (EUR 0.7 million), which included EUR 5.6 million in profits from the disposal of fixed assets. The operating profit excluding non-recurring items increased by EUR 2.0 million over the comparison period. Due to the nature of the department store trade, the great majority of Keswell's profits accumulate in the latter half of the year. Capital expenditure totalled EUR 47.5 million.

The net sales of the Anttila Group totalled EUR 217 million, an increase of 2.4%. The sales of the Kodin Ykkönen department stores for home goods and interior decoration increased by 6.1%, and those of the Anttila department stores increased by 0.3%. The biggest sales growths were recorded by interior decoration and entertainment products. Anttila’s distance sales were up by 5.3%, due to the good performance of NetAnttila.

Indoor Group Ltd's net sales, starting from 22 January 2005, were EUR 74 million. The sales of the Asko furniture store chain in Finland totalled EUR 40 million (incl. VAT), while those of the Sotka furniture store chain totalled EUR 44.8 million (incl. VAT). The net sales of the furniture trade in the Baltic countries and Sweden totalled EUR 11.4 million.

The net sales of Kesko Sports amounted to EUR 57 million, a decrease of 3.5%. The retail sales of the Intersport store chain were EUR 111 million (incl. VAT), a decrease of 0.7% owing to the weaker winter season than in the previous year. The sales of Kesport stores rose by 2.2% to EUR 13 million (incl. VAT).

The net sales of Kesko Musta Pörssi amounted to EUR 56 million, up 0.6%. The retail sales of the Musta Pörssi chain increased by 5.0% to EUR 75 million (incl. VAT).

The net sales of Kesko Shoes increased by 3.5%, totalling EUR 12.0 million. The retail sales of the Andiamo and K-kenkä chains increased by 2.0% to EUR 23 million (incl. VAT). The sales of Kenkäexpertti stores dropped by 2.5% to EUR 7 million (incl. VAT).

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

VV-Auto
The VV-Auto Group's net sales for January-June totalled EUR 391.7 million, up by 13.0%. The operating profit was EUR 25.2 million (EUR 16.0 million), an increase of EUR 9.2 million over the comparison period, which is mainly attributable to improved gross profit and an increase in the group’s own retailing. Capital expenditure totalled EUR 13.1 million.

Registrations of new passenger cars totalled 86,286 in January-June, an increase of 3.2% from the comparison period. Registrations of new vans were down by 6.9%, totalling 7,749. The drop in the registrations of new vans was partly due to the fact that in 2004 some passenger cars were registered as vans (as so-called dual-use cars) because of a significant tax benefit gained.

In January-June, there were 8,229 registrations of Volkswagen cars, equivalent to a market share of 9.5%. The new models that will be introduced towards the end of the year are expected to increase the market share. The number of Volkswagen vans registered was 1,257 and the market share was 16.2%. Registrations of Audis increased to 2,958, which was 25.3% more than in the comparison period, and the market share rose to 3.4%. The registrations of new Seat passenger cars totalled 776 and the market share was 0.9%.

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

Kaukomarkkinat
The Kaukomarkkinat Group’s total sales, including the value of commission-based trade plus net sales, amounted to EUR 219.6 million (EUR 209.7 million). Net sales were EUR 150.0 million (EUR 142.6 million). The biggest increase was recorded in the sales of plastic raw materials in the Nordic countries. Net sales in the Russia-China trading business declined.

The Group’s operating profit was EUR 5.9 million (EUR 5.0 million). The growth is attributable to the EUR 4.2 million profit from the disposal of the company's main office property in Espoo in January. Operating profit excluding non-recurring items was EUR 1.5 million (EUR 4.8 million). The decline was mainly due to losses from trading operations in China, a lower level of profit in electronics and the costs incurred in winding up the Pioneer representation.

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

Changes in Group structure
Rimi Baltic AB, a joint venture of Kesko Food Ltd and ICA Baltic AB, started operating at the beginning of 2005. More information about this was given in the interim report for the first 3 months. The arrangement has no material impact on the Group's profit for the review period.

On 21 January 2005, Keswell Ltd acquired the whole stock of Indoor Group Ltd. Indoor Group engages in the furniture trade in Finland, Sweden, Estonia and Latvia. During the period under review, Indoor Group's share of Kesko Group's net sales was EUR 73.6 million. During the review period, Indoor Group did not yet materially generate profit for the Kesko subgroup, owing to the allocation of business combination costs partly to the order portfolio and partly to inventories (IFRS 3).

Annual General Meeting
Kesko Corporation’s Annual General Meeting held on 30 March 2005 adopted the financial statements for 2004, discharged those accountable from liability, decided to distribute a dividend of EUR 1.00 per share and to approve the Board's proposal on amendment of the terms and conditions of the year 2000 stock option scheme. The meeting also elected Kari Salminen as a new Board member to replace Matti Honkala and Jukka Toivakka who had resigned from the Board. More information about the decisions of the Annual General Meeting was published in a stock exchange release on the same day and in the interim report for the first 3 months. A total of EUR 95,168,792.00 was paid to shareholders as dividends on 11 April 2005.

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

The Boards of Directors of the parent companies of the major sub-groups fully owned by the Kesko Group were elected at their Annual General Meetings held on 24 March 2005. The companies had previously appointed Matti Halmesmäki, Kesko Corporation's Managing Director and the Kesko Group's President and CEO, as the Chairman of their Boards as of 1 March 2005. The changes in the compositions of the Boards of Directors were announced in stock exchange releases on 28 February 2005 and 24 March 2005.

On 17 March 2005, Kesko Corporation’s Board of Directors established a Compensation Committee, in addition to the Audit Committee, which had been established on 29 April 2004. This was announced in a stock exchange release on 17 March 2005. Matti Kavetvuo acts as the Chairman of the Audit Committee with Eero Kasanen and Maarit Näkyvä as its members. Heikki Takamäki acts as the Chairman of the Compensation Committee with Pentti Kalliala and Keijo Suila as its members. These appointments of the Committee members, made by the Board of Directors at its organisational meeting after the Annual General Meeting, were announced in a stock exchange release on 30 March 2005.

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

Shares and the stock market
At the end of the review period, Kesko Corporation's share capital totalled EUR 191,786,574. The number of A shares was 31,737,007, i.e. 33.1% of all shares, and the number of B shares was 64,156,280, i.e. 66.9% of all shares.

During the review period, the share capital was raised three times: corresponding to share subscriptions with the B and C stock options, based on the year 2000 stock option scheme, and corresponding to share subscriptions with stock options marked with symbol 2003D, based on the year 2003 stock option scheme. Increases were made on 15 February 2005 (EUR 2,656,500), on 4 May 2005 (EUR 912,390) and on 8 June 2005 (EUR 536,600) and announced in stock exchange releases published on the same days. The subscribed shares were included in the main list of the Helsinki Stock Exchange for public trading with the old B shares on 16 February 2005, 6 May 2005, and 9 June 2005.

The price of a Kesko A share was EUR 18.90 at the end of 2004 and EUR 21.18 at the end of the review period, an increase of 12.1%. The price of a Kesko B share was EUR 17.95 at the end of 2004 and EUR 20.74 at the end of the review period, an increase of 15.5%. During the period under review, the Helsinki Stock Exchange all-share index rose by 16.3%, the portfolio index by 14.6%, and the trading sector price index by 23.1%.

At the end of the review period, the market capitalisation of A shares was EUR 672.2 million, while that of B shares was EUR 1,330.6 million. Their combined market capitalisation was EUR 2,002.8 million, an increase of EUR 288.2 million during the review period. During the same time, 0.7 million A shares were traded on the Helsinki Stock Exchange at a total value of EUR 13.9 million, while 34.8 million B shares were traded at a total value of EUR 676.2 million.

During the period, 0.6 million listed year 2000 B stock options were traded at a total value of EUR 7.0 million, while 0.3 million year 2000 C stock options were traded at a total value of EUR 3.9 million and 87,000 symbol 2003D options of the year 2003 stock option scheme at a total value of EUR 1.2 million. The 2003D stock options were included on the main list of the Helsinki Stock Exchange on 1 April 2005.

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

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

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

Kesko Corporation's financial targets and dividend policy

As a result of the adoption of IFRS, Kesko Corporation revised its financial targets and dividend policy to take account of the changes in financial indicators due to the new reporting standards. The targets were published in a stock exchange release on 6 April 2005.

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

On 21 January 2005, Keswell Ltd acquired Indoor Group Ltd. A stock exchange release concerning the matter was published on 21 January 2005.

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

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

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

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

Kesko Food Ltd decided to improve its operational efficiency with the aim of increasing the competitiveness of the K-food stores. Due to these arrangements, rationalisation negotiations were carried out. More information about them is available under the heading 'Personnel'. These activities aim at annual savings of over EUR 20 million. As part of the change process Kesko Food will this year offer retailers new agreements to enhance chain co-operation. The joint selection of the chains will expand and joint pricing will increase. The criteria used in determining the fees to be charged from retailers will change from net sales to gross profit.

On 7 July 2005, Kesko's subsidiary Rautakesko Ltd received the approval of the Norwegian competition authorities for the acquisition of Norgros AS, the owner of the Norwegian Byggmakker chain of hardware and building materials stores. The other conditions of the transaction have also been fulfilled. The acquisition was implemented on 7 July 2005. In accordance with the bid, Rautakesko now owns 98% of the company. The acquisition price is NOK 952 million (EUR 120 million) at the maximum, of which the part depending on the success of Norgros' business operations in 2005-2008 is NOK 236 million (EUR 30 million) at the maximum. Norgros manages the Byggmakker chain of hardware and building materials stores, which is the best-known chain in its sector in Norway and the market leader with a market share of about 18%. The Byggmakker chain comprises 133 stores, 20 of which are owned by Norgros. In 2004, the net sales of the company were NOK 3.9 billion (about EUR 496 million) and its operating profit before goodwill amortisation was NOK 106 million (EUR 13.5 million). At the end of 2004, Norgros had 585 employees.

On 20 July 2005, Kesko received a notification that Kiinteistö Oy Lahden Lyhytkatu 1 in the City of Lahti has requested arbitration on its demand that Kesko Corporation should adjust the annual interest rate of 13% in the loan agreement signed between the real estate company and Kesko in 1991 to correspond with the average 3-month Euribor interest rate. The adjustment is demanded retroactively for the previous 10 years and also for the remaining loan period. Kesko contests the real estate company’s demand as totally groundless. A stock exchange release was published about the matter on 20 July 2005.

Outlook for the future

Kesko's outlook for 2005 remains unchanged from the first quarter.

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

The Group’s profitability will remain good. It is expected that Kesko Group's operating profit for 2005 excluding non-recurring items will attain the level of the previous year.

Helsinki, 28 July 2005
Kesko Corporation
Board of Directors

The interim report figures are unaudited.

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

KESKO CORPORATION

Jarkko Karjalainen
Corporate Counsel

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

Kesko Corporation’s interim report for the first 9 months will be published on 27 October 2005. 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
Helsinki Stock Exchange

Main news media

ATTACHMENTS:

Group net sales by division

* Change over 100%

* Change over 100%

Changes in Group equity

* Change over 100%

* Net sales of comparison year 2003 according to FAS

K-Alliance's retail sales in euros (incl. VAT) in June 2005 (advance information):

*Change over 100%
**Rimi Baltic AB is a 50/50 joint venture of Kesko Food Ltd and ICA Baltic AB.
***Incl. sales for the period 22.1.-30.6.2005.

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