Kesko's interim report for the period 1 Jan. to 31 March 2019

FINANCIAL PERFORMANCE IN BRIEF, CONTINUING OPERATIONS:                                    

• The Group's net sales in January-March totalled €2,400.8 million (€2,413.2 million), a decrease of 0.6% in comparable terms
• Comparable operating profit was €57.5 million (€63.8 million)
• Comparable operating profit was impacted by acquisitions that increased seasonal profit fluctuations, which had a €-3.6 million impact, and by a decline in car trade sales and operating profit, mainly related to the implementation of WLTP testing, which meant that the division recorded an operating profit of €7.7 million, €3.4 million less than in the comparison period
• Operating profit was €51.6 million (€60.4 million)
• Comparable return on capital employed was 9.5% (9.8% in 1-12/2018) (rolling 12 months)
• Comparable profit before tax was €34.6 million (€38.3 million)
• Comparable earnings per share were €0.33 (€0.34)
• In comparable terms, the net sales for continuing operations for the next 12 months are expected to exceed the level of the previous 12 months. The comparable operating profit for continuing operations for the next 12-month period is expected to exceed the level of the preceding 12 months.

KEY PERFORMANCE INDICATORS

Adoption of IFRS 16 Leases

At the start of the financial year, the Group adopted the new standard IFRS 16 Leases, which took effect on 1 January 2019. The Group adopted the standard using a retrospective method, and reporting for the 2018 comparison period has been adjusted to be comparable. The change increases the comparable operating profit and capital employed for the first quarter, and decreases the return on capital employed. At Group level, the change increases the Group’s net finance costs and interest-bearing liabilities. The change has a significant impact on the presentation of the Group’s cash flows, as cash flow-based lease expenditure is partly presented under cash flow from operating activities and partly under cash flow from financing activities. The change does not have an impact on the Group’s cash flows overall.

Kesko Corporation has provided information on the implementation of IFRS 16 Leases in a 19 December 2018 release containing comparison figures for January-September 2018, in the 2018 financial statements release published on 6 February 2019, in the 2018 financial statements published on 8 March 2019, and in a 25 March 2019 release containing comparison figures for the full financial year 2018. Detailed information regarding the impacts of IFRS 16 Leases is provided in the Tables section of this release: information on impacts on the consolidated financial statements on page 31, and on operating profit and EBITDA by segment on page 26 and onwards.

PRESIDENT AND CEO MIKKO HELANDER:

Kesko’s good performance continued in the first quarter. In the grocery trade division, sales grew, market share strengthened and profitability improved further. In the building and technical trade division, sales grew markedly and profit was good considering the fact that due to seasonal fluctuation, operating profit tends to be lower in the first quarter than in other quarters. Operating profit for the car trade division was at a good level even though the implementation of the WLTP emissions testing has caused significant disturbances in car trade in Europe.    

Changes were made to our financial reporting at the start of the year in line with the new accounting standard IFRS 16 Leases. Our comparable operating profit for the quarter calculated in accordance with the new standard totalled €57.5 million, while under the previous accounting practice, the figure would have been €34.9 million. The adoption of the standard does not, however, have a material impact on our profit before tax, which amounted to €34.6 million for the period.

Our reported operating profit of €57.5 million was down on the comparison period (€63.8 million). This was impacted, in particular, by the acquisitions carried out, which have increased profit seasonality, and by the decline in car trade sales due to the implementation of the WLTP emissions testing.

Net sales performance was good and operating profit grew in the grocery trade division despite the fact that Easter season this year fell on April. Customer numbers continued to grow in all our chains and K Group’s retail sales increased by 1.5%. This clearly exceeded the market growth of 0.4%. Online sales growth continued strong and totalled 110%. Operating profit improved thanks to the good sales performance and improved operational efficiency.

In the building and technical trade, net sales grew markedly. Development was particularly good in the Baltics, Finland and Poland. In Norway, growth was boosted by the acquisitions made to strengthen the Byggmakker chain. Operating profit development for the division was good, but as expected, did not reach the level of the comparison period due to the acquisitions in Norway and the Baltics, which have increased seasonality. Their impact on the comparable operating profit was a negative €3.6 million. We continued actions to improve profitability and strengthen market position in Sweden. The acquisition of the Fresks store chain will make Kesko one of the leading building and home improvement trade operators in the country. During the first quarter, we also announced we will divest Onninen’s loss-making contractor business in Sweden.

In the car trade division, operating profit was good despite the temporary decline in net sales caused by the implementation of the WLTP emissions testing. Uncertainties regarding car taxation and public debate ahead of the Finnish parliamentary elections over the choice of motive power also dampened consumer demand. At the start of the year, we expanded our dealer network by acquiring businesses from Huittisten Laatuauto and LänsiAuto. We expect the market disturbances to decrease and sales to normalise in the latter half of this year.

As a result of the successful execution of our growth strategy, we have significantly improved our profitability and have been able to meet the 14% target level set for return on capital employed in 2015. Following the adoption of the new standard IFRS 16 Leases, the Board of Directors of Kesko Corporation has approved new medium-term financial targets for the Group. For profitability, the new targets are a comparable operating margin of 5.0% and a comparable return on capital employed of 11.0%. As for financial position, the Group now targets a maximum interest-bearing net debt/EBITDA of 2.5, excluding the impact of IFRS 16.

The outlook for 2019 is good. Economic development in all our eight operating countries continues to be stable. Our growth strategy is working and we will continue its determined execution in an effort to become an even stronger and more customer-oriented company.

FINANCIAL PERFORMANCE OF CONTINUING OPERATIONS

Net sales and profit for January-March 2019

The net sales for the Group’s continuing operations in January-March 2019 totalled €2,400.8 million, which is 0.5% down on the corresponding period of the previous year (€2,413.2 million). In comparable terms, net sales decreased by 0.6% in local currencies, excluding the impact of acquisitions and divestments. The Group’s net sales were impacted by the decrease in the net sales for the car trade division and the timing of Easter, which this year fell on April while in 2018 Easter was in March-April. The Group’s net sales in Finland decreased by 3.0%, or 2.0% in comparable terms. In other countries, net sales increased by 10.8%, or 5.9% in comparable terms. International operations accounted for 19.9% (17.8%) of the Group's net sales.

Net sales for the grocery trade decreased by 1.0% due to the timing of Easter. In comparable terms, net sales increased by 0.4%. The comparable change has been calculated by including in the net sales those stores acquired from Suomen Lähikauppa which have been in the store network during both this reporting period as well as the comparison period, and by deducting the impact of Reinin Liha and Kalatukku E. Eriksson, both acquired in 2018.

In the building and technical trade, net sales grew by 6.9%. In comparable terms, net sales increased by 4.5%. Net sales grew in Finland, the Baltics, Belarus and Poland. In Norway, net sales increased due the acquisitions completed. The comparable change % has been calculated in local currencies and by excluding the impact of the acquisitions of Skattum Handel AS, Gipling AS and 1A Group in 2018 and the DIY business of Sørbø on 31 January 2019. The net sales for the building and technical trade excluding the speciality goods trade increased by 8.1%, or 5.6% in comparable terms. Net sales for the speciality goods trade decreased by 6.6%.

In the car trade, net sales decreased by 22.5%, or 21.9% in comparable terms. The performance was impacted by delays in deliveries caused by the implementation of the WLTP emissions testing and by weakened market demand among consumer customers. The comparable change % has been calculated by excluding the impact of the acquisitions of car trade businesses from Huittisten Laatuauto and LänsiAuto on 1 March 2019.

Reinin Liha became part of Kesko Group’s foodservice wholesale company Kespro following an acquisition completed on 1 June 2018, and Kalatukku E. Eriksson on 2 July 2018. Kesko Corporation’s subsidiary Byggmakker Handel AS took over the Norwegian building and home improvement trade companies Skattum Handel AS and Gipling AS, which previously operated Byggmakker stores under the retailer business model, on 2 July 2018 and 23 July 2018, respectively. Kesko Senukai assumed ownership of 1A Group, an online retail company operating in the Baltic States, on 1 October 2018. On 31 January 2019, Kesko Corporation subsidiaries Skattum Handel AS and Rake Eiendom AS assumed ownership of the DIY retail business and properties of the Sørbø retailer group in Norway, which had been operating Byggmakker stores under the retailer business model. K-Caara assumed ownership over the car trade businesses acquired from Huittisten Laatuauto and LänsiAuto on 1 March 2019.

(...) Change over 100%

The Group's comparable operating profit for continuing operations for January-March was €57.5 million (€63.8 million). Profitability improved in the grocery trade due to good sales performance and improved operational efficiency especially in the K-Market chain. Comparable operating profit for the building and technical trade grew in Finland, the Baltics and Poland. The acquisitions carried out in Norway have increased seasonal profit fluctuations. The acquisitions carried out in 2018 and 2019 had a €-3.6 million impact on the comparable operating profit. In the car trade, profitability was good despite the decrease in net sales. The comparable operating profit for January-March was €7.7 million (€11.1 million), down by €3.4 million.

Operating profit was €51.6 million (€60.4 million). Items affecting comparability totalled €-5.8 million (€-3.4 million). The most significant items affecting comparability in the building and technical trade were the €5.5 million costs related to the divestment of Onninen’s HEPAC contractor business in Sweden. The most significant items affecting comparability the year before were the €3.5 million costs related to the restructuring of Onninen’s operations in Sweden and the €2.0 million gains on the disposal of real estate.

The comparable profit before tax for the Group’s continuing operations in January-March was €34.6 million (€38.3 million). The profit before tax for the Group’s continuing operations in January-March was €28.8 million (€34.9 million). The earnings per share for the Group’s continuing operations were €0.28 (€0.31), and the comparable earnings per share €0.33 (€0.34). In July 2018, Kesko agreed to sell its remaining stake in its Baltic machinery trade subsidiaries and Konekesko Finland’s agricultural machinery trade operations to Danish Agro Group. The divestment has not been completed according to the estimated timetable due to competition review by authorities. The minority holding in the machinery trade companies had a combined €0.03 (€0.01) impact on earnings per share, divided between the minority holding of January-March 2019 of €0.01 and the €0.02 impact of the previous financial year. The Group's equity per share was €19.79 (€19.81).

K Group's (Kesko and chain stores) retail and B2B sales (VAT 0%) for January-March totalled €2,934.9 million, representing a growth of 0.3 % compared to the previous year (pro forma). The K-Plussa customer loyalty programme added 16,481 new households in January-March 2019. The number of K-Plussa households stood at 2.4 million at the end of March and there were 3.5 million K-Plussa cardholders in total.

FINANCE

In January-March, the Group’s cash flow from operating activities in continuing operations totalled €157.0 million (€116.0 million). The cash flow from operating activities excluding the impact of IFRS 16 was €77.9 million (€39.3 million). Cash flow was strengthened by improved capital efficiency and the €48.3 million (€57.8 million) return of surplus assets paid by Kesko Pension Fund in March 2019. The cash flow from operating activities in discontinued operations was €4.8 million (€33.5 million). The Group’s cash flow from operating activities was €161.7 million (€149.4 million).

The Group’s cash flow from investing activities totalled €-82.7 million (€125.3 million). Cash flow from investing activities for the comparison year includes the €170.8 million transaction price obtained from the divestment of properties in Russia.

The Group had liquid assets of €237.6 million at the end of the reporting period (€599.2 million). Interest-bearing liabilities at the end of March totalled €2,699.3 million (€2,773.9 million), and interest-bearing net debt €2,461.7 million (€2,174.8 million), of which lease liabilities accounted for €2,287.1 million (€2,233.9 million). Interest-bearing net debt excluding lease liabilities totalled €174.6 million (€-59.1 million). Equity ratio was 31.8% (31.4%) at the end of the period.

The net finance costs for the Group’s continuing operations in January-March totalled €23.7 million (€25.3 million), including interests for lease liabilities of €24.6 million (€25.4 million). The share of result of associates and joint ventures was €0.8 million (€-0.1 million). Kesko and Oriola's joint venture, the Hehku wellbeing chain, had an impact of €-1.3 million of the share of result of the previous year.

TAXES

Taxes for the Group's continuing operations totalled €6.1 million (€7.0 million) in January-March. The effective tax rate was 21.2% (20.1%).

CAPITAL EXPENDITURE

The capital expenditure for the Group's continuing operations in January-March totalled €97.3 million (€54.5 million), or 4.1% (2.3%) of net sales. Capital expenditure in store sites was €32.2 million (€27.4 million), in acquisitions €37.7 million, and in IT €6.6 million (€12.6 million) and other capital expenditure totalled €20.7 million (€14.5 million).

PERSONNEL

In January-March, the average number of personnel in the Group’s continuing operations was 19,878 (18,773) converted into full-time employees.

At the end of March 2019, the number of personnel was 23,526 (22,349), of whom 11,845 (11,802) worked in Finland and 11,681 (10,547) outside Finland.

DISCONTINUED OPERATIONS

The Russian building and home improvement trade operations discontinued in 2018 are reported as discontinued operations in the consolidated financial statements, and are not included in the figures for the Group’s continuing operations or the figures for the building and technical trade for the financial year or the comparison period in this interim report.

SEGMENTS

SEASONAL NATURE OF OPERATIONS

The Group's operating activities are affected by seasonal fluctuations. The net sales and the operating profits of the reportable segments are not earned evenly throughout the year. Instead, they vary by quarter depending on the characteristics of each segment. In terms of the level of operating profit, the second and third quarter are the strongest, whereas the impact of the first quarter on the full year profit is the smallest. The acquisitions of Suomen Lähikauppa, Onninen and the Norwegian Skattum Handel AS, Gipling AS and the DIY retail business of Sørbø have increased seasonal fluctuations between quarters. The operating profit levels of these companies are at their lowest in the first quarter.

GROCERY TRADE

*The return on capital employed, comparable, %, rolling 12 months for the comparison year has been calculated for 1-12/2018.

   * The comparable change in net sales attributable to K-Market was +2.1% in January-March.

January-March 2019

Net sales for the grocery trade in January-March amounted to €1,263.9 million (€1,276.2 million), a decrease of 1.0% due to the timing of Easter. Net sales development in the K-Market chain was affected by changes in Suomen Lähikauppa’s store site network and the transfer of stores to retailers in the first half of 2018. In comparable terms, net sales increased by 0.4%. The comparable change has been calculated by including in the net sales those stores acquired from Suomen Lähikauppa which have been in the store network during both this reporting period as well as the comparison period, and by deducting the impact of Reinin Liha and Kalatukku E. Eriksson, both acquired in 2018.

The total grocery market in Finland (incl. VAT) is estimated to have grown by approximately 0.4% in January-March (Kesko’s own estimate) and retail prices are estimated to have risen by some 2% (incl. VAT, Kesko’s own estimate based on the price development estimate of the Finnish Grocery Trade Association). K Group's grocery sales grew by 1.5% (incl. VAT), thus exceeding the market growth. K Group’s sales grew in all chains.

The comparable operating profit for the grocery trade in January-March was €56.8 million (€55.2 million), up by €1.6 million. Profitability improved in the grocery trade due to good sales performance and improved operational efficiency, especially in the K-Market chain.

Operating profit for the grocery trade totalled €56.8 million (€54.1 million). Items affecting comparability totalled €-0.0 million (€-1.2 million). Items affecting comparability in the comparison period were mainly related to the restructuring of Suomen Lähikauppa, €-1.1 million.

Capital expenditure for the grocery trade in January-March totalled €28.6 million (€28.7 million), of which €25.9 million (€24.9 million) was in store sites.

Three new K-Markets were opened in January-March (two replacement new buildings) and K-Citymarket Pori Puuvilla was expanded. Remodelling and extensions were made in a total of 23 stores.

The most significant store sites under construction are a K-Citymarket in Seinäjoki (a replacement new building), and K-Supermarkets in Pasila in Helsinki and in Kauklahti in Espoo. K-Citymarket Oulu Rusko is being expanded.

In addition, several K-food stores offer e-commerce services to their customers.

Building and technical trade

* The return on capital employed, comparable, %, rolling 12 months for the comparison year has been calculated for 1-12/2018.

January-March 2019

Net sales for the building and technical trade in January-March totalled €937.6 million (€877.3 million), up by 6.9%. In comparable terms, net sales increased by 4.5%. Net sales grew in Finland, the Baltics, Belarus and Poland. In Norway, net sales increased due to the acquisitions completed. The comparable change % has been calculated in local currencies and by excluding the impact of the acquisitions of Skattum Handel AS, Gipling AS and 1A Group, completed in 2018, and the DIY business of Sørbø in 2019. On 31 January 2019, Kesko Corporation subsidiaries Skattum Handel AS and Rake Eiendom AS assumed ownership of the DIY retail business and related properties of the Sørbø retailer group in Norway, which had been operating Byggmakker stores under the retailer business model.

In Finland, net sales for the building and technical trade in January-March totalled €460.6 million (€446.8 million), up by 3.1%. In comparable terms, net sales increased by 3.2% in Finland. Net sales from foreign operations totalled €477.0 million in January-March (€430.5 million), up by 10.8%. In comparable terms, net sales from foreign operations grew by 5.9%. Foreign operations accounted for 50.9% (49.1%) of the net sales for the building and technical trade.

Net sales for the building and technical trade excluding the speciality goods trade operations totalled €867.5 million (€802.3 million) in January-March, an increase of 8.1%. In comparable terms, net sales increased by 5.6%.

Net sales for the building and home improvement trade in January-March were €507.3 million (€452.5 million), an increase of 12.1%. In comparable terms, net sales increased by 6.7% Net sales in Finland grew by 3.6% and in the Baltics by 30.0%. Net sales increased in local currencies in Belarus by 14.8%, in Norway by 17.6% and in Sweden by 0.4%. In comparable terms, net sales decreased by 2.0% in Norway.

Onninen’s net sales in January-March totalled €370.2 million (€356.6 million), up by 3.8%. Net sales in Finland grew by 6.2% and in the Baltics by 9.9%. In Poland, net sales grew by 8.3% and in Norway by 0.8% in local currency. Net sales decreased in local currency in Sweden by 1.5%. The decrease in net sales in Sweden was impacted by the divestment of the HEPAC contractor business, announced during the review period, and by changes in the store site network during the previous financial year.

The market share of K Group's building and technical trade is estimated to have strengthened in Finland. K Group's building and technical trade sales in Finland increased by 4.1% and the total market (VAT 0%) is estimated to have increased by about 4.0% (Kesko's own estimate).

Net sales for the speciality goods trade in January-March totalled €70.1 million (€75.1 million), down by 6.6%. Net sales for the leisure trade were €49.2 million (€49.8 million), down by 1.2%. Net sales for the machinery trade in January-March amounted to €20.9 million (€25.2 million), a decrease of 17.3% from the previous year. Net sales for the machinery trade in Finland totalled €2.2 million (€4.7 million), down by 52.4%. The net sales from foreign operations totalled €18.6 million (€20.5 million), down by 9.3%.

The comparable operating profit for the building and technical trade in January-March was €3.2 million (€4.7 million), down by €1.4 million compared to the previous year. The comparable operating profit for the building and technical trade excluding the speciality goods trade operations totalled €3.9 million (€5.0 million), down by €1.0 million. Comparable operating profit for the building and home improvement trade in January-March was
€-1.3 million (€-0.4 million), down by €0.9 million. Comparable operating profit grew in the building and home improvement trade in Finland and the Baltics. The acquisitions carried out in Norway have increased seasonal profit fluctuations. The acquisitions carried out in 2018 and 2019 had a €-3.6 million impact on the comparable operating profit. Onninen’s comparable operating profit in January-March totalled €5.1 million (€5.3 million). Onninen’s comparable operating profit grew in Finland and Poland. In Sweden, Onninen’s comparable operating profit decreased due to the announced divestment of the contractor business. The comparable operating profit for the speciality goods trade totalled €-0.7 million (€-0.3 million), down by €0.4 million.

Operating profit for the building and technical trade totalled €-2.1 million (€2.7 million). Items affecting comparability totalled €-5.4 million (€-2.0 million). The most significant items affecting comparability were the €5.5 million costs related to the divestment of Onninen’s HEPAC contractor business in Sweden. The most significant items affecting comparability the year before were the €3.5 million costs related to the restructuring of Onninen’s operations in Sweden and the €2.0 million gains on the disposal of real estate.

In January-March, capital expenditure for the building and technical trade totalled €35.5 million (€6.2 million), of which €5.2 million (€2.3 million) was in store sites and €25.5 million in acquisitions.

In January-March, one K-Bygg & Grund store was opened in Stockholm, Sweden, and one K-Senukai store in Cēsis, Latvia.

The most significant store sites under construction are a Byggmakker store in Norway, a K-Senukai store in Latvia, a K-Senukai store in Lithuania and a building and home improvement store in Belarus. Onninen’s most significant store sites under construction are three Onninen Express stores in Finland, two in Estonia, one in Lithuania and three in Poland.

In addition, building and technical trade stores offer e-commerce services to their customers.
Two Onninen stores in Finland and one Onninen store in Sweden operate in the same store premises with K-Rauta.

Car trade

* The return on capital employed, comparable, %, rolling 12 months for the comparison year has been calculated for 1-12/2018.

January-March 2019

Net sales for the car trade in January-March totalled €200.5 million (€258.9 million), a decrease of 22.5%. In comparable terms, net sales were down by 21.9%. The performance was impacted by delays in deliveries caused by the implementation of the WLTP emissions testing and by weakened market demand among consumer customers. The combined market performance of first registrations of passenger cars and vans was -14.6% (3.3%) in January-March. The combined market share of the Volkswagen, Audi, SEAT and Porsche passenger cars and Volkswagen and MAN vans imported by the car trade division was 16.5% (19.0%) in January-March.

K-Caara assumed ownership of the car trade businesses acquired from Huittisten Laatuauto and LänsiAuto on 1 March 2019.

Profitability in the car trade was good despite the decrease in net sales. The comparable operating profit for January-March was €7.7 million (€11.1 million), down by €3.4 million. The comparable operating profit for AutoCarrera was €-0.4 million (€1.4 million). Operating profit for the car trade in January-March totalled €7.6 million (€11.1 million).

Capital expenditure for the car trade in January-March totalled €26.7 million (€8.7 million). Acquisitions amounted to €12.3 million. Capital expenditure includes cars obtained for the leasing fleet and rental cars sold with repurchase commitments.

CHANGES IN GROUP COMPOSITION

Kesko Corporation's subsidiary Byggmakker completed the acquisition of the DIY retail business of Sørbø Trelast AS and Tau & Jørpeland Bygg AS. The acquisition comprises two Byggmakker stores and a B2B logistics centre in Norway. (31.1.2019)

Kesko Group company K Caara Oy completed the acquisition of the Volkswagen and SEAT businesses of Huittisten Laatuauto Oy in Forssa and Huittinen, and the Volkswagen, Audi and SEAT businesses of LänsiAuto Oy in Kotka, Kouvola and Lappeenranta. (1.3.2019)

SHARES, SECURITIES MARKET AND BOARD AUTHORISATIONS

At the end of March 2019, the total number of Kesko Corporation shares was 100,019,752, of which 31,737,007, or 31.7%, were A shares and 68,282,745, or 68.3%, were B shares. On 31 March 2019, Kesko Corporation held 930,342 of its own B shares as treasury shares. These treasury shares accounted for 1.36% of the total number of B shares, 0.93% of the total number of shares, and 0.24% of votes attached to all shares in the Company. The total number of votes attached to all shares was 385,652,815. Each A share carries ten (10) votes and each B share one (1) vote. The Company cannot vote with own shares held by it as treasury shares and no dividend is paid on them. At the end of March 2019, Kesko Corporation's share capital was €197,282,584.

The price of a Kesko A share quoted on Nasdaq Helsinki was €43.60 at the end of 2018, and €49.30 at the end of March 2019, representing an increase of 13.1%. Correspondingly, the price of a B share was €47.10 at the end of 2018, and €54.24 at the end of March 2019, representing an increase of 15.2%. In January-March 2019, the highest A share price was €50.20 and the lowest €43.60. The highest B share price was €55.08 and the lowest €47.06. The Nasdaq Helsinki All-Share index (OMX Helsinki) was up by 8.5% and the weighted OMX Helsinki Cap index by 9.2% in January-March 2019. The Retail Sector Index was up by 14.3%.

The market capitalisation of the A shares was €1,564.6 million at the end of March 2019. The market capitalisation of the B shares was €3,653.2 million, excluding the shares held by the parent company. The combined market capitalisation of the A and B shares was €5,217.8 million, an increase of €665.1 million from the end of 2018.

In January-March 2019, a total of 0.5 million A shares were traded on Nasdaq Helsinki. The exchange value of the A shares was €22.1 million. Meanwhile, 10.6 million B shares were traded, with an exchange value of €552.1 million. Nasdaq Helsinki accounted for approximately 39.9% of the trading of Kesko’s A and B shares in January-March 2019. Kesko shares were also traded on multilateral trading facilities, the most significant of which was Cboe (source: Fidessa). 

The Board holds a valid authorisation to decide on the transfer of a maximum of 1,000,000 own B shares held by the Company as treasury shares (2016 Share issue authorisation). On 5 February 2019, the Board decided, based on this authorisation and the fulfilment of the performance criteria for the 2017-2018 performance period of Kesko’s share-based commitment and incentive plan (PSP), to transfer own B shares held by the Company as treasury shares to persons included in the target group for the plan. This transfer of a total of 71,432 own B shares was communicated in stock exchange releases on 6 February 2019 and 20 March 2019.

Kesko Corporation’s Annual General Meeting on 8 April 2019 resolved that approximately 30% of the annual fees to the members of Kesko’s Board of Directors be paid in B series shares in the Company (Stock exchange release 8 April 2019). According to the resolution by the Annual General Meeting, the shares will be acquired or transferred to the Board members on the first working day to follow the publication of the interim report for the first quarter of 2019. A Board member cannot transfer shares obtained in this manner until either three years have passed from the day the member has received the shares or their membership on the Board has ended, whichever comes first.

On 1 February 2017, Kesko Corporation's Board of Directors made a decision to establish a new share-based long-term incentive scheme for Kesko's top management and key persons selected separately. The scheme consists of a performance share plan (PSP) as the main structure, and of a restricted share pool (RSP), which is a complementary share plan for special situations. Besides the PSP, the Board made a decision to establish a share-based Bridge Plan to cover the transitional phase during which Kesko transfers from a one-year performance period to a longer performance period in its long-term incentive scheme structure. The new share-based compensation scheme was communicated in a stock exchange release on 2 February 2017, and the realisation of the Bridge Plan in a stock exchange release on 1 February 2018.

The Board of Directors of Kesko Corporation decided on 20 March 2018 to initiate a performance share plan (PSP) for 2018-2021. The Board of Directors also decided that the target group for the plan will comprise some 130 members of Kesko’s management and other specified key persons. The Board of Directors decided to set the development of Kesko Group's comparable tax free sales (%), Kesko Group's comparable return on capital employed (ROCE, %) and the absolute total shareholder return (TSR, %) of a Kesko B share as the performance criteria for the 2018 calendar year. A maximum total of 340,000 Kesko B shares may be granted in relation to the PSP 2018-2021. This number of shares represents gross earnings, from which the applicable withholding tax is deducted and the remaining net amount is paid to the participants in shares. Kesko Corporation's Board of Directors also decided on initiating an RSP (Restricted Share Pool) plan for 2018–2020. The plan includes a three-year commitment period, after which the potentially granted share awards for an individual plan will be paid to the participants in Kesko B shares, provided that their employment or service relationships with Kesko Group continue until the payment of the awards. The purpose of the restricted share plan is to serve as a complementary long-term share plan to be used as a commitment instrument for selected key persons in special situations. In addition to the above employment precondition, Kesko may set participant-specific or company-specific criteria, the fulfilment of which is a precondition for the payment of restricted share awards. The total maximum amount of share awards payable under the RSP 2018–2020 is 20,000 Kesko B shares. This number of shares represents gross earnings, from which the applicable withholding tax is deducted and the remaining net amount is paid to the participants in shares. Any potential share awards from the RSP initiated in 2018 will be paid out in the spring of 2021. The PSP 2018-2021 and RSP 2018-2020 share plans were communicated in a stock exchange release on 21 March 2018.

The Board of Directors of Kesko Corporation decided on 19 March 2019 to initiate a performance share plan (PSP) for 2019-2022. The Board of Directors also decided that the target group for the plan will comprise some 130 members of Kesko’s management and other specified key persons. The Board decided to set the development of Kesko Group's comparable tax free sales (%), Kesko Group's comparable return on capital employed (ROCE, %) and the absolute total shareholder return (TSR, %) of a Kesko B share as the performance criteria for the 2019 calendar year, matching the 2018 criteria. The performance criteria concern the performance year 2019 of the PSP 2018-2021 and PSP 2019-2022. A maximum total of 310,000 Kesko B shares may be granted in relation to the PSP 2019-2022. This number of shares represents gross earnings, from which the applicable withholding tax is deducted and the remaining net amount is paid to the participants in shares. Kesko Corporation's Board of Directors also decided on initiating an RSP (Restricted Share Pool) plan for 2019–2021. The plan includes a three-year commitment period, after which the potentially granted share awards for an individual plan will be paid to the participants in Kesko B shares, provided that their employment or service relationships with Kesko Group continue until the payment of the awards. The purpose of the RSP plan is to serve as a complementary long-term share plan to be used as a commitment instrument for selected key persons in special situations. In addition to the above employment precondition, Kesko may set participant-specific or company-specific criteria, the fulfilment of which is a precondition for the payment of restricted share awards. The total maximum amount of share awards payable under the RSP 2019–2021 is 20,000 Kesko B shares. This number of shares represents gross earnings, from which the applicable withholding tax is deducted and the remaining net amount is paid to the participants in shares. Any potential share awards from the RSP beginning in 2019 will be paid out in the spring of 2022. The new PSP 2019-2022 and RSP 2019-2021 share plans were communicated in a stock exchange release on 20 March 2019.

In January-March, a total of 375 shares granted based on the transitional Bridge Plan 2017-2020 were returned to the Company in accordance with the terms and conditions of the plan. The returns during the reporting period were communicated in a stock exchange release on 8 March 2019. The Bridge Plan was announced in a stock exchange release on 2 February 2017.

Kesko's Board of Directors holds a valid authorisation granted by the Annual General Meeting held on 4 April 2016 to transfer of a total maximum of 1,000,000 own B shares held by the Company as treasury shares (2016 Share issue authorisation). Based on the authorisation, own B shares held by the Company as treasury shares can be issued for subscription by shareholders in a directed issue in proportion to their existing holdings of the Company’s shares, regardless of whether they own A or B shares. Shares can also be issued in a directed issue, departing from the shareholder's pre-emptive right, for a weighty financial reason of the Company, such as using the shares to develop the Company's capital structure, to finance possible acquisitions, capital expenditure or other arrangements within the scope of the Company's business operations, and to implement the Company's commitment and incentive scheme. Own B shares held by the Company as treasury shares can be issued either against or without payment. A share issue can only be without payment if the Company, taking into account the best interests of all of its shareholders, has a particularly weighty financial reason for it. The authorisation also includes the Board's authority to make decisions concerning any other matters related to the share issues. The amount possibly paid for the Company's own shares is recorded in the reserve of unrestricted equity. The authorisation is valid until 30 June 2020.

The Annual General Meeting of 11 April 2018 approved the Board's proposal for its authorisation to decide on the acquisition of a maximum of 1,000,000 of the Company’s own B shares (2018 Authorisation to acquire own shares). The B shares will be acquired with the Company's distributable unrestricted equity, not in proportion to the shareholdings of shareholders, at the market price quoted in public trading organised by Nasdaq Helsinki Ltd ("the exchange") at the time of acquisition. The shares will be acquired and paid for in accordance with the rules of the exchange. The acquisition of own shares reduces the amount of the Company's distributable unrestricted equity. The B shares will be acquired for use in the development of the Company's capital structure, to finance possible acquisitions, capital expenditure and/or other arrangements within the scope of the Company's business operations, and to implement the Company's commitment and incentive scheme for management and other personnel. The Board will make decisions concerning any other issues related to the acquisition of B shares. The authorisation is valid until 30 September 2019.

The Board of Directors of Kesko Corporation decided in its meeting on 24 April 2018 to use the authorisation granted by the General Meeting of 11 April 2018 to acquire B shares in the Company, and established a temporary share buy-back programme for the purpose. The shares were acquired to fulfil obligations related to the Company’s share-based commitment and incentive schemes. The acquisitions of the shares began on 26 April 2018 and ended on 18 May 2018. During that time, Kesko acquired 500,000 of its own B series shares for an average price per share of €48.83. Following the acquisitions, Kesko held a total of 996,325 of its own B shares, which represents approximately 1.00 per cent of all shares in Kesko Corporation and 1.46 per cent of Kesko Corporation’s B series shares. (Stock exchange releases 25.4.2018 and 21.5.2018)

Kesko’s Annual General Meeting of 11 April 2018 also approved the Board's proposal for its authorisation to decide on the issuance of a maximum of 10,000,000 new B shares (2018 Share issue authorisation). The new shares can only be issued against payment. The new shares can be issued for subscription by shareholders in a directed issue in proportion to their existing holdings of the Company’s shares regardless of whether they hold A or B shares, or, departing from the shareholder's pre-emptive right, in a directed issue if there is a weighty financial reason for the Company, such as using the shares to develop the Company's capital structure and financing possible acquisitions, capital expenditure or other arrangements within the scope of the Company's business operations. The Board of Directors will decide the subscription price for the issued shares. The Board will also have the right to issue shares for a non-cash consideration. The subscription price is recognised in the reserve of invested non-restricted equity. The Board will make decisions regarding any other matters related to the share issues. The authorisation will be valid until 30 June 2021, and it cancelled the authorisation given to the Board by the General Meeting of 13 April 2015 to issue a total maximum of 20,000,000 new B shares, which the Board did not use.

At the end of March 2019, the number of shareholders was 40,855, which is 110 more than at the end of 2018. At the end of March, foreign ownership of all shares was 35.3%, and foreign ownership of B shares 50.6%. 

FLAGGING NOTIFICATIONS

There were no flagging notifications during the reporting period.

KEY EVENTS DURING THE REPORTING PERIOD

Kesko Corporation's subsidiary Byggmakker completed the acquisition of the DIY retail business of Sørbø Trelast AS and Tau & Jørpeland Bygg AS. The acquisition comprises two Byggmakker stores and a B2B logistics centre in Norway. (31.1.2019)

Kesko Group company K Caara Oy completed the acquisition of the Volkswagen and SEAT businesses of Huittisten Laatuauto Oy in Forssa and Huittinen, and the Volkswagen, Audi and SEAT businesses of LänsiAuto Oy in Kotka, Kouvola and Lappeenranta. (1.3.2019)

Kesko Corporation has signed an agreement to sell Onninen AB’s HEPAC business segment to Solar A/S. (Press release 12.3.2019)

Kesko Group company K-rauta AB has signed an agreement to acquire Fresks Group, one of the leading building material retailers in Sweden. (Press release 29.3.2019)

KEY EVENTS AFTER THE REPORTING PERIOD

The new medium-term financial targets for profitability, as approved by the Board of Directors of Kesko Corporation, are a comparable operating margin of 5.0% and a comparable return on capital employed of 11.0%. The profitability targets take into account the impacts of IFRS 16 Leases. In terms of financial position, as before the Group uses interest-bearing net debt/EBITDA and targets a maximum level of 2.5, excluding the impact of IFRS 16. (Stock exchange release 25.4.2019)

Kesko Group company K Caara Oy has agreed to acquire the Volkswagen, Audi and SEAT businesses of Laakkonen Group. The combined pro forma net sales of the businesses to be acquired totalled some €259 million in 2018 and operating profit €5.4 million. The 470 employees of the businesses to be acquired will transfer to Kesko. (25.4.2019)

RESOLUTIONS OF THE 2019 ANNUAL GENERAL MEETING AND DECISIONS OF THE BOARD'S ORGANISATIONAL MEETING

Kesko Corporation's Annual General Meeting was held on 8 April 2019. The meeting adopted the financial statements and consolidated financial statements for 2018 and discharged the Board members and the Managing Director from liability. The Annual General Meeting resolved to distribute a dividend of €2.34 per share on shares held outside the Company. The dividend will be paid in two instalments of €1.17. The first dividend instalment record date is 10 April 2019 and pay date 17 April 2019. The second dividend instalment record date is 10 October 2019 and pay date 17 October 2019.  

The General Meeting resolved that the number of Board members be seven (7). Retailer Esa Kiiskinen (Chairman), Peter Fagernäs, Master of Laws (Deputy Chairman), Jannica Fagerholm, Master of Science (Economics), Piia Karhu, Doctor of Science (Economics and Business Administration), Matti Kyytsönen, Master of Science (Economics), retailer Matti Naumanen, and retailer Toni Pokela, eMBA continue as Board members. The Board members were elected by the 2018 Annual General Meeting to serve the three-year terms provided in the Company’s Articles of Association, ending at the close of the 2021 Annual General Meeting. The Annual General Meeting resolved to keep the Board members' fees unchanged.

The Annual General Meeting elected Authorised Public Accountants PricewaterhouseCoopers Oy as the Company’s Auditor, with Mikko Nieminen, APA, as the auditor with principal responsibility.

The Annual General Meeting resolved to amend section 6 “Auditor”, section 9 “Notice of the General Meeting”, and section 10 “Annual General Meeting” of the Company’s Articles of Association in accordance with the Board’s proposal.

The General Meeting also approved the Board’s proposal to authorise the Board to decide on the donations in a total maximum of €300,000 for charitable or corresponding purposes until the Annual General Meeting to be held in 2020, and to decide on the donation recipients, purposes of use and other terms of the donations.

The Board of Kesko Corporation elects its Chairman and Deputy Chairman for the Board’s whole three-year term of office, and the Chairmen, Deputy Chairmen and members of the Committees for one year at a time. In the organisational meeting held by the Board after the Annual General Meeting of 11 April 2018, the Board elected Esa Kiiskinen as Chairman of the Board and Peter Fagernäs as Deputy Chairman. The Board of did not make changes to the compositions of its Audit Committee or Remuneration Committee in its organisational meeting held after the Annual General Meeting on 8 April 2019. Jannica Fagerholm was elected as Chairman of the Board’s Audit Committee, Matti Kyytsönen as Deputy Chairman, and Piia Karhu as a Committee member. Esa Kiiskinen was elected as Chairman of the Board’s Remuneration Committee, Peter Fagernäs as Deputy Chairman, and Matti Kyytsönen as a Committee member.

The resolutions of the Annual General Meeting and the decisions of the Board's organisational meeting were communicated in more detail in stock exchange releases on 8 April 2019.

SUSTAINABILITY

Kesko ranked 88th overall and, for the fifth year in a row, the most sustainable trading sector company in the world on the Global 100 list, published in January.

K Group’s ‘Thank the Producer' operating model expanded in February to include selected branded products by five Finnish companies. In total, the operating model has resulted in additional support of nearly €1.7 million for Finnish food producers.

In February, K Group joined the food sector commitment to material efficiency, and committed to promoting its own material efficiency with various actions and targets.

The K-Ostokset service, launched in March, allows customers to view all their purchases from K-food stores and the impact of those purchases. During the first stage, the service tells the customers how much Finnish products they are buying.

One action in line with K Group’s plastics policy is to remove plastic from Pirkka cotton buds, which will save 30 tonnes of plastic a year.

Kesko’s Annual Report 2018, published in March, describes the progress made in Kesko’s strategy execution and sustainability work, with comprehensive performance indicators.

Pirkka’s organic range will grow from nearly 120 products to nearly 200 products before the end of 2019.

RISK MANAGEMENT

Risk management in Kesko Group is guided by the risk management policy approved by Kesko's Board of Directors. The policy defines the goals and principles, organisation, responsibilities and practices of risk management in Kesko Group. In the management of financial risks, the Group's treasury policy, confirmed by Kesko's Board of Directors, is observed. The management of business operations and common functions are responsible for the execution of risk management. Kesko Group applies a business-oriented and comprehensive approach to risk assessment and management. This means that key risks are systematically identified, assessed, managed, monitored and reported as part of business operations at Group, division, company and function levels throughout the Group.

The Group's risk map, the most significant risks and uncertainties, as well as material changes in and responses to them are reported to the Kesko Board's Audit Committee quarterly in connection with the review of interim reports, half year financial report and financial statements. The Audit Committee Chairman reports on risk management to the Board as part of the Audit Committee report. The most significant risks and uncertainties are reported to the market by the Board in the Report by the Board of Directors and any material changes in them in the interim reports and the half year financial report.

OUTLOOK

Estimates for the outlook for the net sales and comparable operating profit for Kesko Group's continuing operations are given for the 12-month period following the reporting period (4/2019-3/2020) in comparison with the 12 months preceding the end of the reporting period (4/2018-3/2019). The outlook is based on the IFRS standards that took effect on 1 January 2019, and includes the impact of IFRS 16 Leases on the Group’s comparable operating profit for both the 12-month period following the reporting period as well as the 12-month period preceding the reporting period.

The general economic situation and the expected trend in consumer demand vary in Kesko's different operating countries. In Finland, the trading sector is expected to grow. In the Finnish grocery trade, intense competition is expected to continue, although, as purchasing power increases, the importance of quality will be emphasised more than previously. In the building and technical trade, the growth in B2B sales is expected to continue stronger than the growth in the retail market. The market is expected to grow in the Nordic and Baltic countries, but at a somewhat slower rate.

In comparable terms, the net sales for continuing operations for the next 12 months are expected to exceed the level of the previous 12 months. The comparable operating profit for continuing operations for the next 12-month period is expected to exceed the level of the preceding 12 months.

Helsinki, 24 April 2019
Kesko Corporation
Board of Directors

The information in this interim report is unaudited.

Further information is available from Jukka Erlund, Executive Vice President, Chief Financial Officer, telephone +358 105 322 113, Kia Aejmelaeus, Vice President, Investor Relations, telephone +358 105 322 533, and Eva Kaukinen, Vice President, Group Controller, telephone +358 105 322 338. A Finnish-language webcast of the results briefing can be viewed at 11.00 at www.kesko.fi. An English-language audio conference on the results briefing will be held today at 14.00 (Finnish time). The audio conference login is available on Kesko's website at www.kesko.fi.

Kesko Corporation's half year financial report for January-June 2019 will be published on 24 July 2019. In addition, Kesko Group's sales figures are published each month. News releases and other Company information are available on Kesko's website at www.kesko.fi.

KESKO CORPORATION

ATTACHMENTS: TABLES SECTION

Accounting policies
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Cash flow from operating activities in continuing operations excluding the impact of IFRS 16
Cash flow from financing activities in continuing operations excluding the impact of IFRS 16
Group's performance indicators
Net sales by segment
Operating profit by segment
Operating profit by segment, comparable

Operating margin by segment, comparable

Operating profit by segment excluding the impact of IFRS 16, comparable

Operating margin by segment excluding the impact of IFRS 16, comparable

EBITDA by segment, comparable

EBITDA by segment excluding the impact of IFRS 16, comparable

Capital employed by segment
Return on capital employed by segment, comparable
Capital expenditure by segment
Segment information by quarter

Acquisitions
Discontinued operations
Impact of new and amended standards, IFRS 16 Leases

Change in tangible and intangible assets

Right-of-use assets
Related party transactions
Fair value hierarchy of financial assets and liabilities
Personnel average and at the end of the reporting period
Group's commitments
Calculation of performance indicators
Reconciliation of performance indicators to IFRS financial statements
K Group's retail and B2B sales

DISTRIBUTION
Nasdaq Helsinki Oy
Main news media
www.kesko.fi