Suomeksi       www.kesko.fi

• Report by the Board of Directors

---

• 
    Financial statements

---

• Consolidated financial statements

---

• Consolidated statement of financial position

---

• Consolidated statement of cash flows

---

• Consolidated statement of changes in equity

---

• Notes to the consolidated financial statements

---

• 
    Parent's financial
    statements

---

• Parent's income statement

---

• Parent's balance sheet

---

• Parent's cash flow statement

---

• Notes to the parent's financial statements

---

• Signatures

---

• Auditor's Report

---

Frontpage Financial statements Report by the Board of Directors

Report by the Board of Directors

FINANCIAL PERFORMANCE

The Group’s net sales were €8,777 million, which is 3.9% up on the previous accounting period (€8,447 million). Net sales increased in all divisions. In Finland, net sales increased by 4.3% and in other countries by 2.2%. International operations accounted for 16.7% (17.0%) of the net sales. In the food trade, net sales continued to grow steadily, and K-food stores’ grocery sales performance exceeded the market performance. The net sales growth recorded in the building and home improvement trade in the spring accelerated towards the year end.

1–12/2010	Net sales, M€	Change, %	Operating profit excl. non-recurring items, M€	Change, M€
Food trade	3,896	+2.6	160.1	+27.0
Home and speciality goods trade	1,569	+0.7	66.0	+36.5
Building and home improvement trade	2,519	+9.0	24.0	+12.1
Car and machinery trade	955	+0.8	33.1	+32.7
Common operations and eliminations	-162	-3.5	-15.0	+4.4
Total	8,777	+3.9	268.1	+112.8

The operating profit excluding non-recurring items was €268.1 million (€155.4 million), representing 3.1% (1.8%) of the net sales. The operating profit excluding non-recurring items includes an €8 million amount recognised as revenue in connection with the transfer of the pension insurance portfolio. In the comparative period, the operating profit excluding non-recurring items was negatively impacted by the €9 million amount of impairments and expense provisions recognised on the Baltic agricultural supplies business. Improved management of inventory processes, coupled with cost reductions significantly contributed to the improvement of the Group’s profitability. All divisions recorded higher year-on-year operating profits excluding non-recurring items.

Operating profit was €306.7 million (€232.3 million). The operating profit includes a net total of €38.6 million of non-recurring gains on disposals, and provisions related to the reorganisation of the service station grocery store business of Pikoil Oy, a Kesko Food subsidiary. The non-recurring items for the comparative period included a net total of €77.0 million of gains on the disposal of real estate, and impairments. The Group’s profit before tax was €312.4 million (€216.6 million).

The Group’s earnings per share were €2.06 (€1.27). The Group’s equity per share was €21.81 (€20.39).

The K-Group’s (i.e. Kesko’s and the chain stores’) retail and B2B sales (VAT 0%) were €10,977 million, up 4.2% compared to the previous year. During the same period, K-food stores’ grocery sales grew by 4.2% (VAT 0%). The K-Group chains’ sales entitling to K-Plussa points were €5,456 million excluding tax, up 4.6% compared to the previous year. During the accounting period, the K-Plussa customer loyalty programme gained 92,040 new households. At the end of December, there was 2,098,747 K-Plussa households.

Finance

The cash flow from operating activities was €438.2 million (€378.8 million) and included a €151.6 million amount of pension assets returned by the Kesko Pension Fund. The cash flow from investing activities was €-239.6 million (€31.0 million). It included a €123.6 million (€252.0 million) amount of proceeds from the sale of fixed assets.

The Group’s liquidity and solvency remained at an excellent level. At the end of the accounting period, liquid assets totalled €847 million (€715 million). Interest-bearing liabilities were €477 million (€456 million) and interest-bearing net debt €-370 million (€-259 million) at the end of December. Equity ratio was 53.4% (54.1%) at the end of the accounting period.

The Group’s net finance income was €6.0 million (net finance costs €16.0 million). The costs for hedging currency exposures, which had increased the net finance costs in the previous year, normalised to €1.8 million (€17.9 million).

Taxes

The Group’s taxes were €96.7 million (€82.4 million). The effective tax rate was 31.0% (38.0%), affected by loss-making foreign operations.

Capital expenditure

The Group’s capital expenditure totalled €325.3 million (€198.0 million), or 3.7% (2.3%) of the net sales. Capital expenditure in store sites was €212.2 million (€161.2 million) and other capital expenditure €113.1 million (€36.7 million). Capital expenditure in foreign operations represented 13.1% (35.5%) of total capital expenditure.

The capital expenditure includes a €126 million amount of real estate acquisitions from the Kesko Pension Fund. The acquired real estate comprises store and office properties used by the Group itself.

Personnel

In January-December, the average number of employees in the Kesko Group was 18,215 (19,200) converted into full-time employees. In Finland, the average decrease was 370 people, while outside Finland, it was 616.

At the end of December 2010, the total number of employees was 22,124 (22,207), of whom 12,720 (12,959) worked in Finland and 9,404 (9,248) outside Finland. Compared to the end of December 2009, there was a decrease of 239 people in Finland. Outside Finland, the number of personnel increased by 156 people, compared to the end of December 2009.

The Group’s staff cost decreased by €14.6 million, or by 2.7%, compared to the previous year.

SEGMENTS

Seasonal nature of operations

The Group’s operating activities are affected by seasonal fluctuations. The net sales and 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.

Food trade

	1–12/2010	1–12/2009
Net sales, € million	3,896	3,798
Operating profit excl. non-recurring items, € million	160.1	133.1
Operating profit as % of net sales excl. non-recurring items	4.1	3.5
Capital expenditure, € million	117,2	69,4
Net sales, € million	1–12/2010	Change, %
Sales to K-food stores	2,996	+3,7
Kespro	688	+1,7
Others	212	-8,2
Total	3,896	+2,6

In the food trade, net sales were €3,896 million (€3,798 million), up 2.6%. During the same period, the grocery sales of K-food stores increased by 4.2% (VAT 0%). Good sales performance was achieved especially by K-citymarkets and K-supermarkets. The sales of Pirkka products increased by 11.2% (VAT 0%). In 2010, the growth rate of the total grocery trade market in Finland is estimated at some 2.5% (VAT 0%) compared to the previous year (Kesko’s own estimate). In 2010, prices are estimated to have remained at the previous year’s level, although they increased during the last part of the year. K-food stores strengthened their market share in 2010.

The operating profit excluding non-recurring items of the food trade was €160.1 million (€133.1 million), or €27.0 million up on the previous year. In addition to good retail sales performance, profitability improved due to more efficient purchasing, logistics, store site and chain operations. Operating profit was €158.4 million (€170.6 million). Non-recurring items totalled €-1.7 million, the most significant items of which were gains on the disposal of real estate, and the provisions for the reorganisation of the service station grocery store business of Pikoil Oy, a Kesko Food subsidiary.

Capital expenditure in the food trade was €117.2 million (€69.4 million), of which capital expenditure in store sites was €102.4 million (€56.2 million).

The most significant store sites being built are the new K-citymarkets in Hyvinkää, in Palokka, Jyväskylä, in Kouvola, in Karisto, Lahti, in Päivölä, Seinäjoki and in Äänekoski. K-supermarket Jättijako in Vantaa is being extended into a K-citymarket. New K-supermarkets are being built in Kilo, Espoo, in Jalasjärvi, in Veikkola, Kirkkonummi, in Lappeenranta, Mäntyharju, Pietarsaari, Pori, Savonlinna and Vihti.

Home and speciality goods trade

	1–12/2010	1–12/2009
Net sales, € million	1,569	1,558
Operating profit excl. non-recurring items, € million	66,0	29,5
Operating profit as % of net sales excl. non-recurring items	4,2	1,9
Capital expenditure, € million	45,3	29,6
Net sales, € million	1–12/2010	Change, %
Anttila	505	-1,6
K-citymarket home and speciality goods	620	+4,2
Intersport	173	+5,1
Indoor	155	-0,5
Musta Pörssi	96	-10,6
Kenkäkesko	23	-6,5
Total	1,569	+0,7

In the home and speciality goods trade, net sales were €1,569 million (€1,558 million), up 0.7%. K-citymarket’s net sales performance was good especially in clothing and household goods. The net sales were also increased by the stores opened in the previous year. Intersport’s and especially Budget Sport’s sales were up on the previous year. Sunday opening had a clearly positive impact on the sales performance in January-April and in September-October.

The operating profit excluding non-recurring items of the home and speciality goods trade was €66.0 million, showing a €36.5 million year-on-year increase, which is attributable to improved productivity and more efficient purchasing operations. The operating profit was €103.4 million (€66.5 million). The non-recurring items include gains on real estate disposals, which totalled €37.4 million. The most significant disposal was the sale of Anttila’s logistics centre in Hämeenkylä.

Capital expenditure in the home and speciality goods trade was €45.3 million (€29.6 million).

At the beginning of the year, Kodin Ykkönen in Kaisaniemi, Helsinki was closed down due to the termination of the lease. The K-citymarket in downtown Pori was converted into a K-supermarket early in the year. A new K-citymarket was opened in Kankaanpää in November 2010. The Anttila department store in Jyväskylä was relocated to a new site in March 2010. Indoor disposed of its operating activities in Latvia in March. A new Kodin Ykkönen was opened in Lappeenranta at the end of May.

The construction of Anttila’s new automated logistics centre in Kerava was completed. The centre will start operating in stages during the first months of 2011. The logistics centre will make e-commerce and department store logistics significantly more efficient.

Building and home improvement trade

	1–12/2010	1–12/2009
Net sales, € million	2,519	2,312
Operating profit excl. non-recurring items, € million	24,0	11,9
Operating profit as % of net sales excl. non-recurring items	1,0	0,5
Capital expenditure, € million	78,2	84,7
Net sales, € million	1–12/2010	Change, %
Rautakesko Finland	1,163	+10,2
K-rauta Sweden	208	+11,1
Byggmakker Norway	547	+14,7
Rautakesko Estonia	52	-17,6
Rautakesko Latvia	47	-1,1
Senukai Lithuania	227	-12,8
Rautakesko Russia	204	+20,5
OMA Belarus	74	+38,5
Total	2,519	+9,0

In the building and home improvement trade, net sales were €2,519 million (€2,312 million), up 9.0%. The building and home improvement market in all of Rautakesko’s operating countries was on the increase during the latter half of the year. In 2010, the market grew by some 8% in Finland, some 5% in Norway and some 6% in Sweden. During the first months of the year, the market decreased in the Baltic countries and Russia, but returned to growth during the year also in these countries. The market development in Belarus has been steady.

The net sales in Finland were €1,163 million, an increase of 10.2%. The building and home improvement product lines contributed €842 million to the net sales in Finland, an increase of 13.1%. The agricultural supplies trade contributed €321 million to the net sales, up 3.2%.

The net sales from foreign operations in the building and home improvement trade were €1,357 million (€1,257 million), an increase of 8.0%. The net sales from foreign operations increased by 1.4% in terms of local currencies. In Sweden, net sales decreased by 0.2% in terms of kronas. In Norway, net sales increased by 5.2% in terms of krones. In Russia, net sales increased by 9.9% in terms of rubles, and in Belarus, by 40.6% in terms of rubles. Foreign operations contributed 53.9% to the net sales of the building and home improvement trade.

The operating profit excluding non-recurring items of the building and home improvement trade was €24.0 million (€11.9 million). Operating profit improved in Finland and Lithuania. In Russia, profitability decreased because of new store openings. The operating profit including non-recurring items was €23.9 million (€19.6 million).

Capital expenditure in the building and home improvement trade totalled €78.2 million (€84.7 million), of which 54.4% (82.8%) abroad. During the year, a new uniform enterprise resource planning system was adopted in Russia, Sweden, Estonia and Latvia.

During the accounting period, new K-rauta stores were opened in Palokka, Jyväskylä, in Stockholm, Sweden and in Kaluga and Tula, Russia. In June, the first full-service building and home improvement store was opened in Minsk, Belarus.

The retail sales of the K-rauta and Rautia chains in Finland grew by 6.2% to €1,009 million (VAT 0%). The sales of Rautakesko B2B Service increased by 23.0%, as the building industry rapidly recovered. As a whole, the growth rate of Rautakesko’s building materials sales is estimated to have exceeded that of the market in Finland. The retail sales of the K-maatalous chain were €378 million (VAT 0%), up 0.7%.

Car and machinery trade

	1–12/2010	1–12/2009
Net sales, € million	955	947
Operating profit excl. non-recurring items, € million	33,1	0,3
Operating profit as % of net sales excl. non-recurring items	3,5	0,0
Capital expenditure, € million	17,8	13,4
Net sales, € million	1–12/2010	Change, %
VV-Auto	668	+11,7
Konekesko	287	-17,9
Total	955	+0,8

The net sales of the car and machinery trade were €955 million (€947 million), up 0.8%. The comparable net sales of the car and machinery trade grew by 15.1%. The impact of the car tax change (effective 1 April 2009) and the discontinued Baltic grain and agricultural inputs trade have been eliminated from the comparable net sales.

VV-Auto’s net sales were €668 million (€598 million), an increase of 11.7%. In the first part of the year, the net sales performance was lowered by the car tax change effective 1 April 2009, causing the car tax to be excluded from net sales. VV-Auto’s comparable net sales growth was 19.1%. In Finland, new registrations of passenger cars increased by 23.6% and those of vans by 27.3% compared to the previous year. The combined market share of passenger cars imported by VV-Auto rose to 18.9% (18.5%) and that of vans to 22.3% (20.9%).

Konekesko’s net sales were €287 million (€350 million), down 17.9% compared to the previous year, as a result of the planned discontinuation of the Baltic grain and agricultural inputs trade. Konekesko’s comparable net sales grew by 6.2%. The net sales in Finland were €193 million, up 1.2%. The net sales from Konekesko’s foreign operations were €96 million, down 41.0%. In line with its strategy, Konekesko concentrates on the machinery trade also in the Baltic countries.

The operating profit excluding non-recurring items of the car and machinery trade was €33.1 million, which was €32.7 million higher than in the previous year. The profit performance was affected by VV-Auto’s strong sales growth, cost savings achieved in the division, as well as the €9 million impairment charges and expense provisions recognised by Konekesko on the Baltic agricultural supplies business for the first quarter of 2009. The operating profit was €33.9 million (€-5.1 million).

Capital expenditure in the car and machinery trade was €17.8 million (€13.4 million).

Changes in the Group composition

There were no significant changes in the Group composition during the accounting period.

Resolutions of the Annual General Meeting 2010 and
decisions of the Board’s organisational meeting

Kesko Corporation’s Annual General Meeting held on 29 March 2010 adopted the financial statements for 2009 and discharged the Board of Directors’ members and the Managing Director from liability. The Annual General Meeting also resolved to distribute a dividend of €0.90 per share, or a total amount of €88,547,166.90, as proposed by the Board. The dividend pay date was 12 April 2010. The Annual General Meeting also resolved to leave the number of members of the Board of Directors unchanged at seven, elected PricewaterhouseCoopers Oy as the company’s auditor, with APA Johan Kronberg as the auditor with principal responsibility, and approved the Board’s proposal to amend the Article of Association providing for the convocation period so that the notice of a General Meeting shall be given not later than three weeks before the General Meeting, but in any case at least nine days before the record date of the General Meeting, referred to in Chapter 4, Article 2, Subsection 2 of the Companies Act. The resolutions of the Annual General Meeting were announced in more detail in a stock exchange release on 29 March 2010.

The organisational meeting of Kesko Corporation’s Board of Directors, held after the Annual General Meeting, decided to leave the compositions of the Board’s Audit Committee and Remuneration Committee unchanged. The decisions of the Board’s organisational meeting were announced in a stock exchange release on 29 March 2010.

Shares, securities market and Board authorisations

At the end of December 2010, Kesko Corporation’s share capital totalled €197,282,584. Of all shares 31,737,007, or 32.2%, were A shares and 66,904,285, or 67.8%, were B shares. The aggregate number of shares was 98,641,292. Each A share entitles to ten (10) votes and each B share to one (1) vote. In January-December, the share capital was increased three times as a result of the share subscriptions with the options of the 2003 stock option scheme. The increases were made on 11 February 2010 (€128,424), 3 May 2010 (€422,754) and 3 June 2010 (€88,348) and announced in stock exchange notifications on the same days. The subscribed shares were included on the main list of NASDAQ OMX Helsinki for public trading with the old B shares on 12 February 2010, 4 May 2010 and 4 June 2010.

The price of a Kesko A share quoted on NASDAQ OMX Helsinki (the Helsinki stock exchange) was €23.60 at the end of 2009, and €34.70 at the end of 2010, representing an increase of 47.0%. Correspondingly, the price of a B share was €23.08 at the end of 2009, and €34.93 at the end of 2010, representing an increase of 51.3%. In January-December, the highest A share price was €36.45 and the lowest was €23.16. For B shares, they were €37.49 and €22.40 respectively. In January-December, the Helsinki stock exchange (OMX Helsinki) All-Share index rose by 18.7%, the weighted OMX Helsinki CAP index by 24.8%, while the Consumer Staples Index was up 31.0% during the same period.

At the end of December 2010, the market capitalisation of A shares was €1,101 million, while that of B shares was €2,337 million. Their combined market capitalisation was €3,438 million, an increase of €1,152 million from the end of 2009. In January-December 2010, 4.4 million A shares were traded on the Helsinki stock exchange at a total value of €133 million, while 52.7 million B shares were traded at a total value of €1,575 million.

The number of 2003F stock options of the 2003 scheme traded in 2010 was 273,212 at a total value of about €3.4 million. The 2003 option scheme expired on 30 April 2010.

In addition, the company operates the 2007 stock option scheme for management and key personnel, which comprises 2007A options, whose exercise period began on 1 April 2010, and 2007B and 2007C options, whose exercise periods will begin at the beginning of April in 2011 and 2012 respectively. The 2007A options have also been included on the official list of the Helsinki stock exchange since 1 April 2010, and 15,150 options were traded during the reporting period at a total value of €24,490.

The Board of Directors was authorised by the Annual General Meeting of 30 March 2009 to issue a maximum of 20,000,000 new B shares against payment or other consideration. The authorisation also includes a rights issue. The authorisation has not been used. Further information on Board authorisations is available at www.kesko.fi.

At the end of December 2010, the number of shareholders was 38,258, which was 630 less than at the end of 2009. At the end of December 2010, foreign ownership of all shares was 26%, and foreign ownership of B shares was 38%.

Flagging notifications

On 27 July 2010, the Kesko Pension Fund sold such a number of Kesko A shares owned by it to Kruunuvuoren Satama Oy that its holding of Kesko shares, as a percentage of votes carried by all Kesko shares, fell below 5%, and respectively, the number of votes carried by shares held by Kruunuvuoren Satama Oy exceeded 5% of votes carried by all Kesko shares. The matter was announced in a stock exchange release on 27 July 2010. 

On 29 October 2010, Kesko Corporation received a notice according to which the aggregate holding of Kesko shares by the K-Retailers’ Association, its Branch Clubs and the Foundation for Vocational Training in the Retail Trade exceeded 5 percent on 28 October 2010. The matter was announced in a stock exchange release on 29 October 2010.

Main events during the reporting period

On 1 July 2010, Kesko sold ten properties to Ilmarinen Mutual Pension Insurance Company and Kruunuvuoren Satama Oy, a joint venture established by Ilmarinen, the Kesko Pension Fund and Kesko Corporation. The debt-free selling price of the properties totalled €107.5 million. The gain on the sale of the properties was €47.4 million. In the same connection, the Kesko Pension Fund sold seven retail store properties owned by it to Kruunuvuoren Satama Oy. The Kesko Group companies leased the properties for the Kesko Group companies’ use, mainly on 15-year leases with extension options. In consequence, the Kesko Group’s lease liabilities increased by about €120 million. Kesko Corporation has made a capital contribution of approximately €33 million to the joint venture. Its ownership interest and voting rights in Kruunuvuoren Satama Oy are 49%. The company is included in the Kesko Group’s financial reporting as an associate starting from 1 July 2010 (stock exchange releases on 1 July 2010).

On 1 September 2010, the management of the statutory pension liability and the related insurance portfolio of some 3,100 people employed by the Kesko Group were transferred from the Kesko Pension Fund to Ilmarinen Mutual Pension Insurance Company. The matter was announced in a stock exchange release on 1 September 2010. As a result of the transfer, Kesko recorded an €8 million actuarial gain in the income statement in September, not treated as a non-recurring item. The fair value of the Kesko Pension Fund plan assets exceeded the amount of its pension liabilities. The difference was recognised as pension assets in Kesko’s statement of financial position. Pension assets were returned to the Kesko Group companies in December. In addition, the Kesko Pension Fund returned the contributions it had charged in the first part of the year, which produced a total cash inflow of €152 million.

Responsibility

Kesko continues on the ‘The Global 100 Most Sustainable Corporations in the World’ list, published at the meeting of World Economic Forum in Davos, Switzerland in January.

In the 2010 Sustainability Yearbook, Kesko’s responsibility work qualified in the SAM Silver Class in the Food & Drug Retailers sector. In the yearbook, Kesko was also recognised as the ‘Sector Mover’, a qualification given to the company that has achieved the biggest proportional improvement in its sustainability performance.

In May, as in the previous year, Kesko was included as a member in the FTSE4Good Global and FTSE4Good Europe indexes focusing on responsible investment. The FTSE4Good indexes include a total of over 800 companies. The assessment for the FTSE Group in London is made by the independent Ethical Investment Research Service (EIRIS).

For the eighth year in succession, Kesko was selected for the Dow Jones sustainability indexes DJSI World and DJSI Europe. In the annual review 2010, Kesko gained the subsector’s best scores for its eco-efficiency, environmental reporting, risk management, and anti-corruption and anti-bribery practices.

Kesko’s Board of Directors granted considerable donations to Finnish universities. The donations were granted to Aalto University and the Universities of Helsinki, Tampere, Turku, Eastern Finland, Jyväskylä, Oulu and Vaasa, and to some polytechnics. The total amount donated was €1,115,000.

Kesko was the main partner of the ´Your Move On Tour´ series of events organised by the Young Finland Association and the Finnish Sports Federation. The tour, targeted to the young, ran in May-June and Kesko was present in five localities in Finland.

Kesko Food has, in cooperation with Suominen Flexible Packaging Ltd, developed Pirkka recycled plastic bags made of protective plastic wrappings used in Kesko Food’s central warehouses and terminals. The new Pirkka recycled plastic bags were available in K-food stores in September. In November 2010, the Pirkka recycled plastic bag received the recovery award, granted by the Association of Environmental Enterprises (YYL) and Uusiouutiset, the Finnish Recycling News magazine.

K-supermarket Torpparinmäki, opened in Helsinki in October, is the first store in the world with the energy efficient LED lighting system throughout the premises. The LED lighting of the store consumes over 35 percent less energy than traditional fluorescent lighting.

K-food stores continue adding lids and doors to their existing freezers. The annual energy savings achieved by this amounted to 11.6 million kilowatt hours (kWh), which correspond the annual electricity consumption of nearly 600 one-family houses. The K-Group has signed the trading sector energy efficiency agreement and is committed to saving over 65 million kWh by the end of 2016.

In November, the results of the responsibility survey ordered by the Helsingin Sanomat newspaper showed that consumers perceive Pirkka as Finland’s third most responsible brand after Valio and Fazer.

Information contained in the notes to the financial statements

Information on the Group’s personnel is disclosed in note 8.

Information on option rights, shares under options and voting rights is disclosed in note 35.

Related party transactions are disclosed in note 42.

The Kesko Group is not engaged in significant research and development activities.

In May 2011, Kesko will publish a separate corporate responsibility report, which analyses the Group’s performance in economic, social and environmental responsibility. An assurance statement will be provided by an independent external party.

Risk management

Kesko’s risk management is proactive and an integral part of management and day-to-day activities. The objective of Kesko’s risk management is to ensure the implementation of the Group strategy, the delivery of customer promises, the maintenance of shareholder value, and the continuity of business. The risk management policy approved by the Board of Directors guides risk management in the Kesko Group. The policy defines the objectives, principles, responsibilities and key practices of risk management. The management of financial risks is based on the Group’s treasury policy, confirmed by Kesko’s Board of Directors. The management of business operations and the Group units’ managements are responsible for risk management in practice.

The 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 activities at the Group, division, company and unit levels in all of Kesko’s operating countries.

Kesko has a uniform risk assessment and reporting system. Risks are identified and prioritised by assessing the impact and probability of their materialisation, and the level of management. Risk management responses, schedules and responsibilities are established. The risks classified as critical and their management responses are discussed quarterly by the management boards. The development of a risk situation is assessed on the basis of the progress made through the responses and the changes in external factors. In addition, risk assessments are made concerning significant projects related to capital expenditure or changes in operations.

The divisions make risk assessments and update them in accordance with the strategy process and the rolling planning framework. The division parent companies’ managements and the Group management regularly discuss the division parent companies’ risks and how to manage them. In their respective responsibility areas, the Group units have assessed the risks threatening the Group’s objectives and the management of such risks. On the basis of these risk analyses, the Group’s risk management function prepares quarterly summaries of significant risks and their management.

The Group’s risk map, the most significant risks and uncertainties as well as changes in and responses to them, are reported to the Kesko Board’s Audit Committee in connection with handling the interim reports and the financial statements. The Chair of the Audit Committee reports on risk management to the Board of Directors. Kesko’s Board of Directors discusses the most significant risks and the responses required to control them, and assesses the efficiency of risk management. The following is a description of the risks and uncertainties assessed to be significant.

Significant risks and uncertainties

Kesko’s objective is to expand operations abroad, especially in the food trade, and to further expand the international store network of its building and home improvement trade. Failures in international expansion projects may put growth and profitability at risk. In international operations, uniform operating practices and processes are a prerequisite for efficiency and synergy benefits. In Rautakesko, category management, purchasing and sourcing are managed in a centralised manner, and the adoption of a shared information system supporting these operations is progressing. There is a risk that unless the new selection management and purchasing model or information system work as planned, efficiency benefits will not be achieved.

For the purpose of increasing market share, good store sites are a key competitive factor. The acquisition of store sites can be slowed by scarcity of plots, zoning and permit procedures and trends in plot prices. Considerable amounts of capital or lease liabilities are tied up in store properties for years. As a result of changes in the market situation, there is a risk that a store site becomes unprofitable and that operations end while the long-term liabilities remain.

The attainment of objectives requires efficient store concepts which attract customers. If the concepts are not competitive, sales and market share performance fail to achieve the targets.

The intensive increase in the supply of electronic services, e-commerce growth, internationalisation and social media are significantly changing consumer behaviour and the operating systems of trade. Future success relies on the ability to combine the possibilities of online trading, electronic customer communications and the retailer business model into an efficient system.

Instability in the euro zone financial market continues, although the real economy has returned to growth. Increases in taxes and public charges resulting from public sector indebtedness, coupled with tightened financial markets impact consumers’ purchasing power and can deteriorate consumer confidence and willingness to invest.

Regulations restricting efficient trading operations have increased and continue to increase also at the level of the European Union. Such a development can weaken the trading sector’s possibilities to serve customers and operate efficiently.

The trading sector is characterised by increasingly complicated and long supply chains and a dependency on information systems, telecommunications and external service providers. Failures in the supply chain and payment systems can cause major losses in sales and profit.

Failure in the protection of personal information and card payments can cause losses, claims for damages and endanger reputation.

Expansion and operations in Russia and Belarus involve country risks. The unpredictability of officials and sudden changes in legislation and the interpretation and application of laws, as well as corruption can complicate operating activities or delay expansion.

Crime is becoming more professional and an increasing part of crimes are committed through data networks. There is a risk that controls against such crime are not sufficient.

In business divisions that are strongly dependent on individual principals and suppliers, such as the car and machinery trade, ownership arrangements, changes in a principal’s or supplier’s strategy concerning the product selection, pricing and distribution channel solutions can mean a reduction in competitiveness or sales, or loss of business.

The implementation of strategies and the achievement of goals require competent and motivated people. There is a risk that the trading sector will not attract the most competent people.

A failure in the quality assurance of the supply chain or in product control may result in financial losses, the loss of customer confidence or, in the worst case, a health hazard.

Different aspects of responsibility are increasingly important for customers, and possible responsibility failures would weaken Kesko’s reputation. Kesko’s challenges in responsibility work include communicating its responsibility policies to suppliers, retailers and customers, and ensuring the ethicality of production.

Non-compliance with legislation, agreements and Kesko’s responsibility guidelines can result in fines, compensation for damages and other financial losses, and a loss of confidence or reputation.

The objective of Kesko’s communications is to produce and publish reliable information at the right time. If some information published by Kesko proved to be incorrect or a release failed to meet regulations, it can result in investors and other stakeholders losing confidence, and possible sanctions.

Accidents and damages caused by, for example, natural phenomena cannot always be prevented. The financial consequences of damages are covered with insurance, in accordance with the policy defined by the Kesko Board of Directors.

Further information about the risks, uncertainties and their management responses relating to Kesko’s operating activities, and about Kesko’s risk management system and principles is available on the company’s website at www.kesko.fi/en/Investors/Keskos-Corporate-Governance.

Other risks and uncertainties relating to profit performance are described in the Group’s future outlook.

Future outlook

Estimates of the future outlook for the Kesko Group’s net sales and operating profit excluding non-recurring items are given for the 12 months following the accounting period (1/2011–12/2011) in comparison with the 12 months preceding the accounting period (1/2010–12/2010).

The outlook for trends in consumer demand has remained steady, as a result of high consumer confidence and continuously low interest rate levels. Nevertheless, the trend in economic development continues to involve significant uncertainties relating to the evolution of total production, tightening taxation and possible ramifications of disturbances in the financial market.

The steady development of the grocery trade and the home and speciality goods trade is expected to continue. The building and home improvement market is expected to strengthen as a result of increasing housing construction. In the car and machinery trade, the sales of new cars are expected to grow, and the situation in the machinery market is expected to recover gradually.

The Kesko Group’s net sales are expected to grow during the next twelve months.

Throughout 2010, Kesko’s profitability performance has been excellent, except for the building and home improvement trade. During the next twelve months, the store site network will be significantly expanded, regardless of which, the operating profit excluding non-recurring items is expected to remain at the achieved level.

Proposal for profit distribution

The parent’s distributable profits are €1,152,126,586.65, of which the profit for the financial year is €189,532,714.65.

The Board of Directors proposes to the Annual General Meeting to be held on 4 April 2011 that the distributable profits be used as follows:

• €1.30 per share, or a total of €128,233,679.60, be distributed as dividends.
• €1,023,892,907.05 are carried forward in equity.

Annual General Meeting

The Board of Directors decided to convene the Annual General Meeting at the Helsinki Fair Centre on 4 April 2011 at 13.00. Kesko Corporation will publish a notice of the Annual General Meeting at a later date.

Corporate Governance Statement

Kesko will publish a separate Corporate Governance Statement on week 10 on its website at www.kesko.fi.

The Group’s key performance indicators

Group's performance indicators

Continuing operations		2007	2008	2009	2010
Income statement
Net sales	€ million	9,287	9,591	8,447	8,777
Change in net sales	%	9,4	3,4	-12,7	3,9
Staff cost	€ million	547	578	535	521
Staff cost as percentage of net sales	%	5,9	6,0	6,3	5,9
Depreciation, amortisation and impairment	€ million	116	178	131	121
Operating profit	€ million	322	286	232	307
Operating profit as percentage of net sales	%	3,5	3,0	2,8	3,5
Operating profit excl. non-recurring items	€ million	315	217	155	268
Operating profit excl. non-recurring items as percentage of net sales	%	3,4	2,3	1,8	3,1
Finance income and costs	€ million	36	1	-16	6
Income from associates	€ million	0	2	0	0
Profit before tax	€ million	358	289	217	312
Profit before tax as percentage of net sales	%	3,9	3,0	2,6	3,6
Income tax	€ million	87	89	82	97
Profit for the year from continuing operations	milj. €	248	178	125	205
Profit for the year from discontinued operations	€ million	37	42	0	0
Capital expenditure	milj. €	228	338	198	325
Capital expenditure as percentage of net sales	%	2,5	3,5	2,3	3,7
Personnel, average number for the year		20,520	21,327	19,200	18,215
Personnel at 31 Dec.		25,208	24,668	22,207	22,124
Earnings/share, diluted	€	2.52	1.81	1.27	2.06
Earnings/share, basic	€	2.54	1.82	1.28	2.08
Whole Group		2007	2008	2009	2010
Profit for the year (incl. non-controlling interests)	€ million	307	241	134	216
Profit for the year as percentage of net sales	%	3,2	2,5	1,6	2,5
Attributable to owners of the parent	€ million	285	220	125	205
Attributable to non-controlling interests	€ million	22	21	9	11
Cash flow from operating activities	milj. €	248	131	379	438
Cash flow from investing activities	milj. €	-85	-46	31	-240
Profitability
Return on equity	%	16,4	12,1	6,6	10,1
Return on equity excl. non-recurring items	%	12,7	8,1	3,8	8,7
Return on capital employed	%	16,3	15,2	11,0	15,9
Return on capital employed excl. non-recurring items	%	14,7	10,3	7,3	13,9
Interest-bearing net debt/EBITDA		0,6	0,1	-0,7	-0,9
Funding and financial position
Gearing	%	14,0	2,3	-12,5	-16,8
Equity ratio	%	48,5	52,4	54,1	53,4
Other indicators
Capital expenditure	€ million	228	340	198	325
Capital expenditure as percentage of net sales	%	2,5	3,5	2,3	3,7
Personnel, average number for the year		20,520	21,327	19,200	18,215
Personnel at 31 Dec.		25,890	24,668	22,207	22,124
Share performance indicators
Earnings/share, diluted	€	2.90	2.24	1.27	2.06
Earnings/share, basic	€	2.92	2.25	1.28	2.08
Earnings/share, excl. non-recurring items, basic	€	2.21	1.44	0.71	1.78
Equity/share	€	19.53	20.09	20.39	21.81
Dividend/share	€	1.60	1.00	0.90	1.30*
Payout ratio	%	54,8	44,5	70,5	63.1*
Payout ratio excl. non-recurring items	%	72,4	69,4	126,8	72.7*
Cash flow from operating activities/share, adjusted	€	2.52	1.37	3.86	4.43
Price/earnings ratio, (P/E), A share, adjusted		13.07	9.84	18.54	16.77
Price/earnings ratio, (P/E), B share, adjusted		13.02	7.96	18.13	16.88
Effective dividend yield, A share	%	4,2	4,6	3,8	3.8*
Effective dividend yield, B share	%	4,2	5,6	3,9	3.7*
Share price at 31 Dec.
A share	€	37.85	22.00	23.60	34.70
B share	€	37.72	17.80	23.08	34.93
Average share price
A share	€	43.85	28.30	21.92	30.42
B share	€	43.36	23.51	19.18	29.83
Market capitalisation at 31 Dec., A share	milj. €	1,201	698	749	1,101
Market capitalisation at 31 Dec., B share	milj. €	2,491	1,176	1,537	2,337
Turnover
A share	milj. kpl	4	1	1	4
B share	milj. kpl	122	121	78	53
Relative turnover rate
A share	%	11,5	4,5	3,1	13,8
B share	%	185,3	183,3	117,4	78,8
Diluted number of shares at 31 Dec.	thousand	98,395	98,256	98,382	99,121
Yield of A share for the last five periods	%	26,6	10,9	9,2	12,2
Yield of B share
For the last five periods	%	36,1	12,9	10,3	12,6
For the last ten periods	%	18,7	11,7	14,9	13,8
*proposal to the Annual General Meeting

 

Net sales by segment

€ million	1–12/2010	1–12/2009	Change %
Food trade, Finland	3,896	3,798	2,6
Food trade, other countries*	-	-	-
Food trade total	3,896	3,798	2,6
- of which intersegment trade	162	162	0,1
Home and speciality goods trade, Finland	1,553	1,538	1,0
Home and speciality goods trade, other countries*	15	20	-22,8
Home and speciality goods trade total	1,569	1,558	0,7
- of which intersegment trade	23	26	-10,2
Building and home improvement trade, Finland	1,163	1,055	10,2
Building and home improvement trade, other countries*	1,357	1,257	8,0
Building and home improvement trade total	2,519	2,312	9,0
- of which intersegment trade	0	2	-69,7
Car and machinery trade, Finland	859	787	9,1
Car and machinery trade, other countries*	96	160	-40,3
Car and machinery trade total	955	947	0,8
- of which intersegment trade	0	1	-41,6
Common operations and eliminations	-162	-168	-3,5
Finland total	7,309	7,010	4,3
Other countries total*	1,468	1,437	2,2
Group total	8,777	8,447	3,9
*Net sales in countries other than Finland.

 

Operating profit by segment

€ million	1–12/2010	1–12/2009	Change
Food trade 1	158,4	170,6	-12,2
Home and speciality goods trade 2	103,4	66,5	36,8
Building and home improvement trade	23,9	19,6	4,2
Car and machinery trade	33,9	-5,1	39,0
Common operations and eliminations	-12,8	-19,3	6,5
Group total	306,7	232,3	74,4

 

Operating profit excl. non-recurring items by segment

€ million	1–12/2010	1–12/2009	Change
Food trade	160,1	133,1	27,0
Home and speciality goods trade	66,0	29,5	36,5
Building and home improvement trade	24,0	11,9	12,1
Car and machinery trade	33,1	0,3	32,7
Common operations and eliminations	-15,0	-19,4	4,4
Group total	268,1	155,4	112,8
1) Includes gains on the disposal of real estate and provisions for the restructuring of Pikoil Oy’s service station operations.
2) Includes gains on the disposal of real estate, the most significant of which is the disposal of Anttila’s logistics centre in Hämeenkylä.

 

Group's performance indicators by quarter
	1–3/ 2009	4–6/ 2009	7–9/ 2009	10–12/ 2009	1–3/ 2010	4–6/ 2010	7–9/ 2010	10–12/ 2010
Net sales, € million	2,018	2,143	2,133	2,153	1,958	2,279	2,231	2,310
Change in net sales, %	-11,4	-15,9	-12,4	-7,7	-3,0	6,4	4,6	7,3
Operating profit, € million	23,2	42,7	48,3	118,1	20,9	79,0	123,9	82,8
Operating margin, %	1,1	2,0	2,3	5,5	1,1	3,5	5,6	3,6
Operating profit excl. non-recurring items, € million	3,4	36,4	47,5	68,0	20,9	78,1	88,7	80,5
Operating margin excl. non-recurring items, %	0,2	1,7	2,2	3,2	1,1	3,4	4,0	3,5
Finance income/costs, € million	-5,1	-4,4	-4,7	-1,8	0,8	-0,2	0,8	4,6
Profit before tax, € million	18,2	38,2	43,8	116,3	21,9	78,7	124,5	87,3
Profit before tax, %	0,9	1,8	2,1	5,4	1,1	3,5	5,6	3,8
Return on capital employed, %	4,2	8,0	9,4	22,9	4,4	16,0	26,3	17,4
Return on capital employed excl. non-recurring items, %	0,6	6,8	9,2	13,2	4,3	15,8	18,8	16,9
Return on equity, %	2,4	4,6	5,2	14,7	2,9	10,6	16,1	11,5
Return on equity excl. non-recurring items, %	-0,6	3,7	5,0	7,7	2,9	10,5	11,1	11,2
Equity ratio, %	49,8	51,0	52,3	54,1	51,1	51,2	53,3	53,4
Capital expenditure, € million	51,5	55,8	49,2	41,5	42,0	45,7	35,9	201,6
Earnings/share, diluted, €	0.12	0.19	0.24	0.73	0.15	0.51	0.81	0.59
Equity/share, €	19.16	19.36	19.60	20.39	19.69	20.30	21.10	21.81
Net sales by segment
€ million	1–3/ 2009	4–6/ 2009	7–9/ 2009	10–12/ 2009	1–3/2010	4–6/2010	7–9/2010	10–12/2010
Food trade	888	974	966	970	912	976	986	1,022
Home and speciality goods trade	346	331	381	500	355	334	378	501
Building and home improvement trade	529	643	614	525	495	712	687	625
Car and machinery trade	296	233	213	205	236	298	218	203
Common operations and eliminations	-41	-39	-41	-47	-40	-41	-39	-42
Group total	2,018	2,143	2,133	2,153	1,958	2,279	2,231	2,310
Operating profit by segment
€ million	1–3/ 2009	4–6/ 2009	7–9/ 2009	10–12/ 2009	1–3/2010	4–6/2010	7–9/2010	10–12/2010
Food trade	42,3	33,8	35,8	58,7	31,7	42,2	47,3	37,2
Home and speciality goods trade	-3,3	-3,6	7,0	66,5	0,1	7,0	50,6	45,6
Building and home improvement trade	-5,2	14,8	8,5	1,6	-13,8	17,9	19,9	-0,2
Car and machinery trade	-6,0	1,9	1,7	-2,7	6,4	15,0	8,6	3,9
Common operations and eliminations	-4,6	-4,3	-4,5	-5,9	-3,4	-3,2	-2,5	-3,7
Group total	23,2	42,7	48,3	118,1	20,9	79,0	123,9	82,8
Operating profit excl. non-recurring items by segment
€ million	1–3/ 2009	4–6/ 2009	7–9/ 2009	10–12/ 2009	1–3/2010	4–6/2010	7–9/2010	10–12/2010
Food trade	33,8	30,1	35,5	33,7	31,7	42,1	49,5	36,8
Home and speciality goods trade	-10,7	-6,0	6,5	39,7	0,1	7,0	13,2	45,7
Building and home improvement trade	-9,1	14,8	8,4	-2,1	-13,8	17,9	20,0	-0,2
Car and machinery trade	-6,0	1,9	1,7	2,7	6,4	14,1	8,7	3,9
Common operations and eliminations	-4,6	-4,4	-4,5	-6,0	-3,4	-3,1	-2,8	-5,7
Group total	3,4	36,4	47,5	68,0	20,9	78,1	88,7	80,5

 

Calculation of performance indicators
Profitability
Return on equity, %	=	Profit / loss before tax – income tax	x 100
		Shareholders' equity
Return on equity excl. non-recurring items, %	=	Profit/loss adjusted for non-recurring items before tax – income tax adjusted for the tax effect of non-recurring items	x 100
		Shareholders' equity
Return on capital employed, %	=	Operating profit	x 100
		(Non-current assets + inventories + receivables + other current assets – non-interest- bearing liabilities) for a 12 month average
Return on capital employed excluding non-recurring items, %	=	Operating profit excluding non-recurring items	x 100
		(Non-current assets + inventories + receivables + other current assets – non-interest- bearing liabilities) for a 12 month average
EBITDA	=	Operating profit + depreciation + impairments
Funding and financial position
Equity ratio, %	=	Shareholders' equity	x 100
		Balance sheet total – prepayments received
Gearing, %	=	Interest-bearing net debt	x 100
		Shareholders' equity
Interest-bearing net debt/EBITDA	=	Interest-bearing net debt
		EBITDA
Share performance indicators
Earnings/share, diluted	=	Profit/loss – non-controlling interests
		Average number of shares adjusted for the dilutive effect of options
Earnings/share, basic	=	Profit/loss – non-controlling interests
		Average number of shares
Earnings/share excl. non-recurring items, basic	=	Profit/loss adjusted for non-recurring items – non-controlling interests
		Average number of shares
Equity/share	=	Equity attributable to equity holders of the parent
		Basic number of shares at balance sheet date
Payout ratio, %	=	Dividend/share	x 100
		Earnings/share
Price/earnings ratio, (P/E)	=	Share price at balance sheet date
		Earnings/share
Effective dividend yield, %	=	Dividend/share	x 100
		Share price at balance sheet date
Market capitalisation	=	Share price at balance sheet date × number of shares
Cash flow from operating activities/share	=	Cash flow from operating activities
		Average number of shares
Yields of A share and B share	=	Change in share price + annual dividend yield

 

ANALYSIS OF SHAREHOLDING

Ownership structure at 31. Dec. 2010
All shares	Number of shares	% of all shares
Non-financial corporations and housing corporations	27,638,401	28.02
Financial and insurance corporations	4,458,231	4.52
General government*	7,248,353	7.35
Households	27,579,318	27.96
Non-profit institutions**	6,168,560	6.25
Rest of the world	505,742	0.51
Nominee registered	25,042,687	25.39
Total	98,641,292	100.00

 

10 largest shareholders by number of shares at 31 Dec. 2010
		Number of shares	% of shares	Number of votes	% of votes
1.	Vähittäiskaupan Takaus Oy	3,491,771	3.54	27,148,568	7.06
2.	K-Retailers' Association	3,449,301	3.50	34,125,360	8.88
3.	Kruunuvuoren Satama Oy	2,635,046	2.67	26,350,460	6.86
4.	Ilmarinen Mutual Pension Insurance Company	2,043,050	2.07	4,155,908	1.08
5.	Valluga-sijoitus Oy	1,340,439	1.36	13,404,390	3.49
6.	Kesko Pension Fund	1,303,839	1.32	8,538,390	2.22
7.	Varma Mutual Pension Insurance Company	1,130,986	1.15	1,130,986	0.29
8.	Oy The English Tearoom Ab	1,008,400	1.02	1,008,400	0.26
9.	Foundation for Vocational Training in the Retail Trade	946,027	0.96	8,089,318	2.11
10.	Tapiola Mutual Pension Insurance Company	900,000	0.91	900,000	0.23
10 largest shareholders by number of votes at 31 Dec. 2010
		Number of shares	% of shares	Number of votes	% of votes
1.	K-Retailers' Association	3,449,301	3.50	34,125,360	8.88
2.	Vähittäiskaupan Takaus Oy	3,491,771	3.54	27,148,568	7.06
3.	Kruunuvuoren Satama Oy	2,635,046	2.67	26,350,460	6.86
4.	Valluga-sijoitus Oy	1,340,439	1.36	13,404,390	3.49
5.	Kesko Pension Fund	1,303,839	1.32	8,538,390	2.22
6.	Foundation for Vocational Training in the Retail Trade	946,027	0.96	8,089,318	2.11
7.	Ilmarinen Mutual Pension Insurance Company	2,043,050	2.07	4,155,908	1.08
8.	Food Paradise Oy	389,541	0.39	3,895,410	1.01
9.	K-Food Retailers' Club	366,413	0.37	3,664,130	0.95
10.	Heimo Välinen Oy	320,000	0.32	3,020,000	0.79
* General government = for example, municipalities, the provincial administration of Åland, employment pension institutions and social security funds.
** Non-profit institutions = for example, foundations awarding scholarships, organisations safeguarding certain interests, charitable associations.

Management’s shareholdings

At the end of December 2010, the members of Kesko Corporation’s Board of Directors, the President and CEO and the corporations controlled by them held 224,720 Kesko Corporation A shares and 105,820 Kesko Corporation B shares, i.e. a total of 330,540, which represent 0.34% of the company’s share capital and 0.61% of voting rights.

At 31 December 2010, the President and CEO held 2,000 Kesko Corporation A shares and 7,000 Kesko Corporation B shares, which represent 0.01% of the company’s share capital and 0.01% of its voting rights. In addition, the President and CEO holds 150,000 option rights.

If shares were subscribed for with the President and CEO’s option rights, they would represent 0.15% of all shares and 0.04% of all voting rights.