Kesko's half year financial report for the period 1 January to 30 June 2017: Kesko's profitability improved

"In line with its strategy, Kesko is an increasingly focused company, which concentrates on the further improvement of profitability and growth in the grocery trade, the building and technical trade and the car trade.

The strategy was implemented consistently during the second quarter through the divestment of K-maatalous business, the Asko and Sotka furniture trade, the Yamarin boat business and Kesko's representation of Yamaha as well as several properties in the Baltic countries. The sale price of the divested businesses totalled €171 million and an €80 million gain on the divestments was recorded.

In the grocery trade, we can be satisfied with both sales and profit development. In particular, the K-Citymarket chain and the revamped K-Market stores have increased their sales well. The integration of Suomen Lähikauppa stores, acquired in April 2016, has also progressed well. A total of 409 Siwa and Valintatalo stores had been converted into K-stores by the end of May 2017, of which 99 stores had been transferred to retailers by the end of the reporting period.

The emphasis on growth in the building and technical trade division is increasingly on B2B sales. The acquisition of Onninen has provided us with good preconditions for succeeding in this market shift. Onninen's sales and profit developed according to the targets set in the first half of the year. Due to seasonal variations in construction, the second half of the year will be clearly stronger than the first for Onninen. Furthermore, we also managed well in the challenging retail consumer market, which suffered from exceptionally cold weather in northern Europe in spring and early summer.

In the car trade, sales clearly grew in the second quarter and the development of orders for new cars continued to be strong. The integration of the Porsche business has progressed well and has improved the profitability of the car trade.

In our corporate responsibility we have reached a new level in our work on combatting climate change. K Group is the first Finnish company to set science-based targets to reduce emissions from its properties, logistics and supply chains. The ambitious targets will be achieved by significantly increasing the use of renewable energy and improving energy efficiency.

Kesko's cash flow improved and its financial position clearly strengthened during the reporting period. This provides excellent preconditions for continuing the implementation of our strategy."

FINANCIAL PERFORMANCE

Net sales and profit for January-June 2017

The Group's net sales for January-June 2017 were €5,411 million, which is 17.0% more than in the corresponding period of the previous year (€4,624 million). Net sales increased significantly due to the acquisitions completed during 2016. The net sales growth in comparable terms, excluding acquisitions and divestments in local currencies, was 1.2%.

The 5.0% growth in the grocery trade net sales was affected by the acquisition of Suomen Lähikauppa and the divestment of Russian business operations. Net sales increased by 1.2%, excluding the acquisition of Suomen Lähikauppa, which took place in April 2016, and the divestment of Russian business operations in November 2016. In the building and technical trade, net sales grew by 35.8%. In comparable terms, net sales in local currencies, excluding the divestment of the K-maatalous business (sold on June 1, 2017) and the acquisition of Onninen (on 1 June 2016), increased by 0.6%. Net sales in the car trade increased by 9.3%, and excluding the impact of the acquisition of AutoCarrera in December 2016, by 3.3%. The Group's net sales increased by 13.6% in Finland and by 1.5% in comparable terms. In other countries, net sales grew by 32.1% and in comparable terms net sales were at the previous year's level. International operations accounted for 20.9% (18.5%) of the Group's net sales.

During the reporting period, the Kesko Group divested the K-maatalous business on June 1, 2017 and on 30 June 2017, the Asko and Sotka furniture trade, the Yamarin boat business and Yamaha representation.

The Group's comparable operating profit for January-June was €113.2 million (€111.4 million). In the grocery trade, profitability improved despite the significant costs of revamping Suomen Lähikauppa stores. In the building and technical trade, the operating profit was at the previous year's level. The operating profit increased due to the acquisition of Onninen, but the speciality goods trade and Kesko Senukai's operating profits were lower than in the previous year. In the car trade, operating profit grew. Profitability improved due to good growth in sales and the acquisition of AutoCarrera's Porsche business.

Operating profit was €169.1 million (€101.6 million). Items affecting comparability totalled €55.8 million (€-9.8 million). The most significant items affecting comparability were the €50.2 million gain on the divestment of properties in the Baltics, the €20.3 million expenses related to the conversion of the Suomen Lähikauppa chains, the gain on the divestment of the K-maatalous business of €12.2 million as well as the gain on the divestment of the Asko and Sotka furniture trade amounting to €19.0 million.

The Group's profit before tax for January-June was €172.1 million (€103.8 million). The Group's earnings per share were €1.48 (€0.76). The Group's equity per share was €20.18 (€20.31).

K Group's (Kesko and K-chain stores) retail and B2B sales (VAT 0%) for January-June were €6,325 million, which is a growth of 1.5% compared to the previous year (pro forma). The K-Plussa customer loyalty programme added 34,016 new households between January and June 2017. The number of K-Plussa households stood at 2.3 million at the end of June and there were 3.6 million K-Plussa card-holders in total.

Net sales and profit for April-June 2017

The Group's net sales for April-June 2017 were €2,814 million, which is 7.8% more than in the corresponding period of the previous year (€2,610 million). Net sales increased significantly due to acquisitions made during 2016. In comparable terms growth in net sales, excluding acquisitions and divestments in local currencies, was 0.4%.

In the grocery trade, net sales decreased by 1.9%, and it was affected by the transfer of Suomen Lähikauppa stores to retailers and store closures, as well as the divestment of Russian business operations on 30 November 2016. In comparable terms, net sales in the grocery trade grew by 2.1%. In the building and technical trade, net sales grew by 19.8%, and it was positively impacted by the acquisition of Onninen on 1 June 2016. In comparable terms, net sales in local currencies, excluding Onninen as well as the K-maatalous business divested on 1 June 2017, decreased by 2.8%. The development of net sales was affected by the number of delivery days, which were three fewer than in the previous year, while B2C sales in Northern Europe were negatively affected by cold weather. In the car trade, net sales increased by 9.7%, and without the impact of AutoCarrera, acquired in December 2016, the net sales increase was 3.3%. The Group's net sales grew by 5.5% in Finland and in comparable terms by 1.2%. In other countries, net sales grew by 16.8% but fell by 2.7% in comparable terms. International operations accounted for 22.2% (20.4%) of the Group's net sales.

The Group's comparable operating profit was €84.6 million for April-June (€79.1 million). Profitability in the grocery trade improved and was driven by the synergy benefits gained from the acquisition of Suomen Lähikauppa, good sales performance, especially by K-Citymarket and the renewed K-Markets, as well as the divestment of the loss-making Russian business operations that were sold in the previous year. The renewal of Suomen Lähikauppa stores and the changes in the store site network were completed during the quarter. In the building and technical trade, Onninen's operating profit grew, but the operating profits of both the speciality goods trade and Kesko Senukai were lower than in the previous year. The profit development of the speciality goods trade was partly affected by the sale of the K-maatalous business on 1 June 2017. Comparable operating profit in the car trade remained on a good level. Profitability improved due to good growth in sales and the acquisition of AutoCarrera's Porsche business.

Operating profit was €152.5 million (€68.0 million). Items affecting comparability totalled €67.9 million (€-11.1 million). The most significant items affecting comparability were the €50.2 million gain on the divestment of properties in the Baltics, the €10.9 million expenses related to the conversion of Suomen Lähikauppa chains, the gain from the divestment of the K-maatalous business of €12.2 million as well as as the gain on the divestment of the Asko and Sotka furniture trade amounting to €19.0 million.

The Group's profit before taxes for April-June was €150.5 million (€68.1 million). Group earnings per share were €1.29 (€0.49).

The retail and B2B sales of K Group (Kesko's and the K-chain stores) (VAT 0%) for April-June were €3,373 million, which was down 0.3% compared to the previous year (pro forma).

Finance

Cash flow from operating activities for January-June was €83.8 million (€-17.8 million). Cash flow from investing activities was a positive of €63.2 million (€-529.0 million) due to the proceeds from divestments amounting to €192.4 million. 

Liquid assets amounted to €367 million (€327 million) at the end of the period. Interest-bearing liabilities at the end of June were €561 million (€657 million) and the interest-bearing net debt was €194 million (€330 million). The equity ratio at the end of the period was 47.0% (44.8%).

The Group's net finance income was €2.9 million (€4.3 million) for January-June. The financial items include dividend income and interest income on cooperative capital of €4.5 million, of which €2.3 million is interest income on cooperative capital from Suomen Luotto-osuuskunta.

Cash flow from operating activities for April-June was €141.1 million (€78.5 million). Cash flow from investing activities was a positive of €97.7 million (€-476.0 million) due to the proceeds from divestments amounting to €171.1 million.

The Group's net finance costs for April-June were €1.3 million (net finance income €1.7 million).

Taxes

The Group's taxes for January-June were €22.1 million (€21.4 million). The effective tax rate was 12.8% (20.6%). For April-June, the Group's taxes were €17.8 million (€14.3 million). The effective tax rate was 11.8% (21.1%). The Group's effective tax rate was lowered by the tax-exempt gains on the sale of properties and subsidiaries.

Capital expenditure

The Group's capital expenditure for January-June totalled €170.0 million (€564.1 million), representing 3.1% (12.2%) of net sales. Capital expenditure in store sites amounted to €117.1 million (€100.5 million), in IT €17.4 million (€8.9 million) and other capital expenditure €35.5 million (€23.6 million). In the previous year, acquisitions amounted to €431.0 million.

The Group's capital expenditure for April-June totalled €91.7 million (€512.7 million) or 3.3% (19.6%) of net sales. Capital expenditure in store sites was €63.4 million (€63.6 million), in IT €8.3 million (€6.2 million) and other capital expenditure €20.0 million (€14.7 million). In the previous year, acquisitions amounted to €428.1 million.

Personnel

For January-June, the average number of personnel in Kesko Group was 21,927 (20,595) converted into full time employees. The increase was due to the acquisitions of Suomen Lähikauppa and Onninen.

At the end of June 2017, the number of personnel stood at 27,826 (30,264), of whom 14,878 (16,239) were employed in Finland and 12,948 (14,025) outside Finland. The number of personnel in Suomen Lähikauppa was 2,426, in Onninen 3,106 and in AutoCarrera 40.

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 strongest, whereas the impact of the first quarter on the full year profit is smallest. The acquisitions of Suomen Lähikauppa and Onninen increase the seasonal fluctuations between quarters. The operating profit levels of Onninen and Suomen Lähikauppa are lowest for the first quarter.

Grocery trade

January-June 2017

The net sales of the grocery trade in January-June amounted to €2,570 million (€2,447 million), representing a growth of 5.0%. The development of net sales was affected by the acquisition of Suomen Lähikauppa and the disposal of Russian business operations. In comparable terms the net sales, excluding Suomen Lähikauppa and Russian business operations, increased by 1.2%. K Group's grocery sales grew by 1.8% (incl. VAT) if the impact of the acquisition of Suomen Lähikauppa is excluded. K Group's grocery trade sales pro forma growth was 0.1% (incl. VAT), which was affected by the Suomen Lähikauppa store site network being smaller than the previous year. In the Finnish grocery market, retail prices are estimated to have changed by approximately -0.1% compared to the previous year (incl. VAT, Kesko's own estimate based on Consumer Price Index of Statistics Finland) and the total market (incl. VAT) is estimated to have increased by approximately 1.2% in January-June (Kesko's own estimate).

The acquisition of Suomen Lähikauppa was completed in April of the previous year and the conversion of Siwa and Valintatalot stores to K-Markets began in May 2016. By the end of May 2017, all Siwa and Valintatalo stores that continued operating (at 409 store locations) had been converted into K-stores (408 K-Market and 1 K-Supermarket). Of these, 99 stores had been transferred to retailers by the end of June. The transfer of the stores to retailers will be complete by the end of 2018.

The comparable operating profit for the grocery trade for January-June was €76.9 million. (€74.8 million). The profitability of the division remained on a good level. The effect of Suomen Lähikauppa on the comparable operating profit for January-June was €-3.4 million (April-June 2016 €-1.1 million), which was affected by the major restructuring of the store site network. The Russian business divested in November 2016 made a loss of €9.3 million in the comparison period. The grocery trade's operating profit was €56.6 million (€74.3 million). Items affecting comparability amounted to €-20.3 million (€-0.6 million), and they were mainly related to the €-20.3 million restructuring of Suomen Lähikauppa.

The capital expenditure in the grocery trade totalled €97.6 million for January-June (€139.3 million), of which the capital expenditure in store sites accounted for €87.0 million (€70.2 million).

April-June 2017

The net sales of the grocery trade amounted to €1,327 million for April-June (€1,353 million), a decrease of 1.9%, which was influenced by the changes in the Suomen Lähikauppa store site network and the transfer of stores to retailers. In addition, the development of net sales was affected by the divestment of Russian business operations in November 2016. In comparable terms, grocery trade net sales grew by 2.1%. K Group's grocery trade sales grew by 3.4% (incl. VAT) if the acquisition of Suomen Lähikauppa is excluded. K Group's grocery trade sales pro forma growth was 1.0% (incl. VAT). In the Finnish grocery market, retail prices are estimated to have changed by approximately -0.1% compared to the previous year.

The comparable operating profit of the grocery trade for April-June was €50.5 million (€43.6 million). Profitability remained on a good level and K-Citymarket, in particular, improved its profitability thanks to a good sales performance. The effect of Suomen Lähikauppa on the comparable operating profit for April-June was €+2.2 million (€-1.1 million) while the effect of the Russian business operations divested in November 2016 was €-4.3 million in the comparison period. The grocery trade's operating profit was €39.9 million (€44.1 million). Items affecting comparability were €-10.6 million. (€0.5 million) and they were mainly related to the restructuring of Suomen Lähikauppa, €-10.9 million.

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