Kesko’s Journey Towards a More Focused Retailing Company · Net sales growth €1.7bn in...

Kesko’s Journey Towards a More Focused Retailing CompanyInvestor Presentation Q3/2018

1

K Group and Kesko in Brief

2

#1Biggest in Finland,#3 in Northern Europe with retail sales of nearly €13bn

World’s most sustainable trading sector company

Market cap approx. €5bn with 41,000 shareholders

Profitable growth strategy in 3 core divisions

Strong financial position with good dividend capacity

42,000 employees, 1,800 stores and comprehensive digitalservices in 8 countries

KESKO | Investor Relations | Q3/2018

Grocery Trade

• Net sales approx. €5.4bn

• Quality leader in the Finnish grocery market:

#2 in grocery retailing, #1 in foodservice B2B

• Rapidly expanding online food store network

• Market share at its highest in >15 years, ~37%

• 1.2m customer visits per day

• 1,200+ stores in the retailer business model

• One of the most profitable players in Europe

Car Trade

• Market leader with net sales of €0.9bn+

• Operating the Volkswagen Group’s

business in Finland: Audi, Volkswagen,

SEAT, Porsche and MAN

• Value chain includes importing, retailing

and after sales as well as an extensive

dealer and servicing network

• Various service concepts developed

under the K-Caara platform

3

Core Divisions at a Glance

Building and Technical Trade

• Net sales approx. €4bn

• #1 operator in building and technical trade

in Northern Europe

• 430 stores in 8 countries

• 0.3m customer contacts per day

• Comprehensive digital services

• Serves three customer segments –

B2B share approx. 70%


€223.2m

64%

€85.4m

24%

€5.6m

2%

€34.2m

10%

Net sales Comparable operating profit

4

Net Sales and Operating Profit by Division

€5,355m

52%

€3,653m

35%

€372m

4%

€921m

9%

€10,302m €322.0m

Grocery trade Building and technical trade excl. speciality goods trade Speciality goods trade Car trade

Rolling 12 months Q3/18, continued operations


Group Management Board

Mikko HelanderPresident and

CEO

Jukka ErlundEVP,

Chief Financial Officer

Johan FrimanPresident of the

car trade division

Ari AkseliPresident of

the grocery trade division

Matti MettäläEVP, HR,

Corporate Responsibility and Regional

Relations

Jorma RauhalaPresident of the

building and technical trade

division, Deputy to President and

CEO

Anni RonkainenEVP,

Chief Digital Officer

Mika MajoinenGroup General

Counsel


Steady Progress Towards a Strong, More Focused Company Through Successful Portfolio Transformation

6

3/2015Anttila

11/2016Russian grocery trade

6/2017K-maatalous

2/2018Russian building and homeimprovement trade

4/2016SuomenLähikauppa

6/2016Onninen

12/2016AutoCarrera


6/2017Asko and Sotka furniture trade

10/2018Sørbø retailergroup*

6/20181A Group6/2018

Gipling, SkattumHandel

6/2018KalatukkuE. Eriksson, Reinin Liha

7/2018Remaining shares of KonekeskoBaltics*

Acquisitions

Divestments

* Waiting for completion

Investments in core business operations €1.5bn, divestments €1.0bn

Rationale: Faster neighborhood strategy implementation by acquiring the #4 retailer

Purchase price: €60m + €60m store renewals

Integration completed faster than expected

~60% share of the neighborhood market

~400 stores converted to K-Markets

€700m additional net sales, €30m synergies

Rationale: Expand brand portfolio within the VW Group to include Porsche passenger cars

Purchase price: €27m

Integration completed successfully

Net sales €67m with an excellent operating margin of 8.2% (vs. net sales €49m in 2015)

Being part of Kesko enables enhanced growth


Accelerated Growth and Value Creation with TransformationalAcquisitions in All Core Divisions

Rationale: Stronger position in B2B, expansion into technical trade with HEPAC and electrical

Purchase price: €369m

Integration ongoing

Net sales €1,591m and EBITDA €55m (vs. respectively €1,456m and €39m in 2015)

Further improvement of sales and profitability to continue in line with strategy

* Rolling 12 months Q3/18

STRATEGIC FOCUS AREAS

Profitablegrowth

Businessfocus

Quality and customerorientation

Best digitalservices

One unified K

VISION

BUSINESS FOCUS

We Continue With Our Existing Growth Strategy

8

Grocery trade

We are the customers' preferred choice and the quality leader in the European trading sector

Grocery trade Building andtechnical trade

Car trade

VALUE The customer and quality – in everything we do


Our Strategy Responds to the Changing Retail Landscape

Digitalisation and eCommerce

Increasingly individualcustomer behaviour

Sustainability and strong brands

Globalisation Increased consumer knowledge and power

Convenience


Net sales

€m

8,821 8,487

10,00710,492 10,302

2014 2015 2016 2017 R12M Q3/18

Comparable operating profit

€m

221243

274296

322

2.5%

2.9%2.7% 2.8%

3.1%

2014 2015 2016 2017 R12M Q3/18


Our Growth Strategy Is Delivering Improving Results

+6%*+10%*

Net sales growth €1.7bn in 2014-2017 Operating profit growth €76m in 2014-2017

Continued operations *CAGR

Moving Towards Our Financial Targets

11

Kesko’s dividend policy

* Comparable figures, continued operations, ** Comparable figures, Group

Payout ratio (5y average) : 103.4%Dividend yield (5y average B share) : 5.4%

Return on Capital Employed, %*

Return on Equity, %**

Interest-bearing net debt / EBITDA

14.013.8

12.011.6

<2.50.6

At least 50% of comparable earningsper share distributed as dividends

Target level Roll. 12 months Q3/18


Capex*

€m


Strong Financial Position Provides Latitude for Further Growth Initiatives and Continued Good Dividends

194219

282

350

*Additionally, to acquisitions €462m in 2016 and €166m in rolling 12 months Q3/2018

301

• Financial position strong despite €1.3bn investments

in 2015-2017

• M&A firepower for additional acquisitions up to

above €1bn

• Steady growth targeted in dividends

• Cash flow generation to be further enhanced with

higher earnings, organic capex decreasing from the

2017 level and improvement potential in NWC

143167

217256

174

3420

29

33

4917

3136

61

78

2014 2015 2016 2017 R12M Q3/18

Store sites ICT and digital Other

We Select Our Growth Initiatives Carefully

13

M&As considered using the following criteria

Value creation &good strategic fit

Opportunities in all divisions – the greatest potential is in building and technical trade

Justified price tag

Contribution to ourfinancial targets

Focus on Northern Europe – it’s the market we know and where we have the capability to create local competitive edge

Clear integration plan


Grocery Trade

14 KESKO | Investor Relations | Q3/2018

Successful Strategy Execution in Grocery Trade


2015

Net sales

Operating profit

€4,673m €5,355m

€177m €223m

All chain brands redesignedApprox. 90% out of 1,200 stores modernised

Close to 600 stores and over 220 retailers in the multi-store model

Daily customer flow increased from 900,000 to >1.2mImplementation of store-specific business ideasNew customer feedback system: >1m contacts annuallyNew eCommerce and K-Ruoka mobile app with 600,000 users

Growth, profitability and increased efficiency

Brand and store redesigns

Developing the retailer business model

Customer and quality

Roll. 12 months Q3/18

Strategic Direction to Continue Profitable Growth


Most customer-oriented and inspiring food

stores

Developing and modernising the

store network

Offering a seamless omni-

channel customer experience

Developing retailer entrepreneurship as a competitive

advantage

Expanding the foodservice

business

A Seamless Customer Experience in All Channels

Sales €2.1bnComprehensive concept renewal72 out of 81 store redesigns completedCurrent store network optimal and competitive

Sales €1.8bnRebranding, 178 out of 242 stores renewedStore network expansion profitably

Sales €2.0bn Modernisation, nearly all of 784 stores made overStore network expansion profitably

Sales €0.1bnFurther developing the service station concept65 out of 73 stations redesignedFuture network of 85 service stations

*Store numbers from November 2018 **Foodservice B2B, ***Kesko estimate

Share of online sales of the total grocery market is still small, but growing fast

Our online sales growth in Q3/2018

Higher average purchase than in physical stores

Our online net sales target for 2019

0.4%***

+€40m

+74%

5x

K-food stores offering online services146

NPS, high customer satisfaction67

Rebranding and store modernisation progressing well* Extending grocery online network – strong growth expected

People/sq. km, low population density in Finland affecting choice of viable solutions

18

17

Sales €0.8bn with 14 cash & carry outletsBrand redesign, launch of K-RuokaPro online storeExpanding central warehousing, adding new outlets

**


Our Grocery Trade Among the Most Profitable Retailers in Europe

• Market share growth with good profitability

• Exceeding customer expectations with store-specific business ideas

• Retailer model as a competitive advantage

• Growth from eCommerce and mobile services

• Expanding the foodservice business

18

Future value creating actions


Strategy Execution Progressing in Building and Technical Trade


Continued operations, comparable operating profit, building and technical trade excluding speciality goods trade

Financial performance

2015 Roll. 12 months Q3/18

Net sales

Operating profit

€1,989m €3,653m

€62m €85m

Focusing on core business

Operational efficiency

Acquisitions of Onninen, Skattum, Gipling and Sørbø and 1A Group Kesko-Senukai arrangementDivestments in speciality goods and machinery trade Divestment of K-Rauta Russia

Changed management model and country focus Turnaround achieved in Poland, measures continue in SwedenMerging the K-Rauta and Rautia chainsNew digital services and eCommerce

Strategic Direction to Become an Even Stronger Operator in the Northern European Building and Technical Trade


Country focus with specified

strategic actions

Three customer segments served according their

specific customer needs

Synergies – within individual countries

and between the operating countries

Organic growthand profitability

improvement

Selected acquisitions

to win a chosen country and

segment

Technical professionals

Technical contractors• Infrastructure• Industry• Retailers

Consumers

• Renovators• Home and garden builders• Decorators• Gardeners


Value Creation to Three Customer Segments

Professional builders

• Construction companies• Renovation contractors• Decoration contractors

Customer drivers differ in each customer segment:

• 100% availability for key items• Personal sales, always available• Deep assortment

• Competitive prices • Approachable and competent

customer service with advice• Easy to shop, good availability• Showrooms and visual displays

• 100% availability for key items• Reliable next day deliveries• Personal sales, always available

Sharper Country Specific Focus to Bring Results –Good Profit Improvement Potential in All Markets

Jorma Rauhala

Customers

EndreEspeseth

Olli PereMartti Forss

KnutStrand Jacobsen

Arturas RakauskasMartti Forss

EndreEspeseth


Market Offering Ample Opportunities for Organic Growth - As Well As Selected Acquisitions

Building & home improv.

Onninen

Retail market 2017 (€bn)

5.0 2.5

Onninen


Onninen


Onninen



Onninen

4.6

3.1 2.1

2.7 1.2

5.5 4.2

1.1

Marketposition

#3-4 #4

#2

#5-11 #6

#1

#1 #1


Marketposition

Retail market 2017 (€bn)Marketposition


Marketposition


Marketposition


Marketposition

EE #2LAT #3LIT #1

EE #2LAT #4LIT #3

Optimera Mester-gruppenMaxboCoop

ByggmaxBauhausXL ByggWoodyBeijer

Tadmar (Saint Gobain), BIMs (GC)SoneparW.E.G (Würth)

MileMaterikPraktik

BauhofEhitus ABCEspakBauhausDepo DIYKursiErmitazasMoki-Vezi

Key competitors

AhlsellLVI Dahl SLORexel

STARKS GroupBauhaus

Key competitors

FEB (Ahlsell), SLOW.E.G (Würth)SanistalEVA-SATSanistal, Dahlgera (Dahl) Elektrobalt (Würth)

Key competitors

Ahlsell Dahl Elektroskandia

Key competitors

AhlsellElektroskandia Solar

Key competitors

Key competitors


Good Value Creation Potential for Upcoming Years in Building and Technical Trade

0

2

4

6

8

10

25

Kesko

~2%

Best Europeanoperators

6-8%

Operating margin (%)


Car Trade


Strong Strategy Execution in Car Trade


Continued operations, comparable operating profit

Financial performance

2015

Net sales

Operating profit

€748m €921m

€26m €34m

Growing the business in collaboration with the VW Group

Launching new mobility services

Acquisition of Porsche business in Finland SEAT sales started in all own retail outlets – growth in market share

K-Caara platform for used car sales, rental, leasing and repair servicesFirst K Charge electric car charging stations openedPiloting car sharing at selected K-Supermarket and K-Rauta storesNew digital services, e.g. 30% growth in online service booking

Roll. 12 months Q3/18

Car Trade Strategy Targets Faster Than Market Growth


Growing the businessin collaboration with

the VW Group

Expanding the servicebusiness independent

of the VW Group

Best customerexperience –

in all channels

Car Trade Targeting to Grow Faster Thanthe Market

• Close partnership with the VW Group

• Targeting market share growth

• Improving profitability in importing, retailing and after-sales

• Expanding new mobility services

• Omni-channel customer experience

29

Future value creating actions


Kesko Selected Again in the Prestigious Dow Jones Sustainability Indices,

DJSI World and DJSI EuropeKesko received the industry best overall score in the Environmental Dimension


Sustainability at Kesko – Value Creation for All Stakeholders

• Kesko’s responsibility programme contains both short-term and long-term objectives and has six themes:

• Good corporate governance and finance

• Customers

• Society

• Working community

• Responsible purchasing and sustainable selections

• Environment

• Value created through e.g. responsible purchasing with full amfori BSCI audits of suppliers' factories or plantations, supporting customers in making sustainable choices or mitigating climate change by reduced energy consumption


32

Financial Calendar for 2019

6 February 2018 Financial Statement Release

Week 10 2018 Annual Report

8 April AGM (planned date)

25 April Q1/2019 Interim Report

24 July Q2/2019 Half Year Report

24 October Q3/2019 Interim Report

Contact

Kia Aejmelaeus, VP Investor Relations, +358 40 765 4616

Follow

www.kesko.fi/investor, twitter.com/Kesko_IR

Further Information


Appendix: Q3/2018 Highlights and Outlook


Highlights Q3/2018

Net sales growth +3.5%

All-time-best quarterly result,

operating profit €113 million

Continued strong market share and profit

development in grocery trade

Building and technical trade operating profit

up by €7 million *

Cash flow from operating activities €131 million

Comparable figures, continuing operations *Excluding the speciality goods trade


Growth in Net Sales and Operating Profit

Q3/2018 Q3/2017 1-9/2018 1-9/2017

Net sales, €m 2,642 2,596 7,728 7,917

Net sales growth, % +3.5 +1.6 +3.6 +1.5

Operating profit, €m 112.6 100.5 241.7 215.8

Operating margin, % 4.3 3.9 3.1 2.7

Profit before tax, €m 111.8 100.3 237.7 218.7

Earnings per share, € 0.81 0.71 1.77 1.64

Return on capital employed, % * 13.8 12.4

Return on equity, Group, % * 11.6 9.9

Comparable figures, continuing operations* Rolling 12 months


Strong Financial Position

30.9.2018 30.9.2017

Equity ratio, % 48.5 49.1

Liquid assets, €m 319 370

Interest-bearing net debt, €m 229 159

Interest-bearing net debt / EBITDA * 0.6 0.4

Continuing operations Q3:

Cash flow from operating activities, €m 130.5 97.8

Cash flows from investing activities excl. acquisitions, €m -59.5 -52.6

Cash flows from investing activities incl. acquisitions, €m -216.3 -52.6

* Rolling 12 months


Group Net Sales Comparable Q3 growth +3.5%

2,5582,763

2,596 2,5752,413

2,673 2,642

0

500

1000

1500

2000

2500

3000

3500

4000

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

10,492 10,302

0

2000

4000

6000

8000

10000

12000

2017 Q3/18

€m €m

Continuing operations

Rolling 12 months


Group Operating Profit Q3 profit improvement €12 million

31.5

83.8

100.5

80.4

40.0

89.0

112.6

0

20

40

60

80

100

120

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

296.2

322.0

0

40

80

120

160

200

240

280

320

2017 Q3/18

Operating margin

1.2% 3.0% 3.1% 1.7%3.9% 2.8% 3.1%

€m €m

Comparable operating profit, continuing operationsImpact of the divested Asko and Sotka, K-maatalous and Yamarin businesses, Yamaha representation and Baltic real estate on operating profit: €5.8 million in Q2/17, €4.6 million in Q1/17

Rolling 12 months

3.3% 4.3%


Return on Capital Employed 13.8%Comparable, rolling

23.7

10.1

23.5

12.4

24.9

9.9

21.5

13.8

0

10

20

30

Grocery trade Building and technical trade Car trade Group, continuing operations

Q3/17 Q3/18%


Grocery Trade

Q3

• Continued strong growth in customer numbers, sales and market share

• Online food sales grew by +74%

• Kespro continued to perform well in the foodservice market

• We continued investments in store sites, digital services and logistics operations

40

The market

• Grocery trade market growth 4.3%, of which price development +2.4% *

• Good market development, importance of quality and selections increased

• Demand for good online food sales services rising

* The Finnish Grocery Trade Association


Grocery Trade Net SalesComparable Q3 growth +6.2%

1,2431,327 1,313

1,3991,276 1,327 1,352

0

500

1000

1500

2000

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

5,2825,355

4000

4500

5000

5500

2017 Q3/18

€m €m Rolling 12 months


Grocery Trade Operating Profit Operating profit grew by over €5 million

26.4

50.5

59.4

67.0

38.7

52.8

64.7

0

10

20

30

40

50

60

70

80

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

203.4

223.2

0

20

40

60

80

100

120

140

160

180

200

220

240

2017 Q3/18

Operating margin

2.1% 3.8% 4.5% 4.8% 3.9% 4.2%3.0%

€m €m

Comparable operating profit

Rolling 12 months

4.0% 4.8%



Q3

• K-Rauta in Finland performed well

• Onninen’s performance remained good in Finland and Poland in particular

• Acquisitions of Byggmakker chain companies increased operating profit in Norway

• Efforts to improve the profitability of K-Rauta and Onninen in Sweden continued

• Kesko Senukai’s strong sales performance continued in the Baltics

43

The market

• Market situation is expected to remain good, but growth pace is expected to slow down somewhat

• Renovation building is gaining more ground in the construction market


Building and Technical Trade Net Sales Comparable Q3 growth excluding speciality goods trade +2.5%

841

968 953877

802

995 978232

234117

8075

106 111

0

200

400

600

800

1000

1200

1400

1600

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

3,639 3,653

663372

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2017 Q3/18

4,3024,025

1,073

1,202

1,070

957877

€m €m

Continuing operations

Building and technical trade excl. speciality goodsSpeciality goods trade

Rolling 12 months

1,102 1,089


Building and Technical Trade Operating ProfitOperating profit excl. speciality goods +€7m, operating margin from 3.6% to 4.2%

2.8

27.9

34.5

13.7

31.2

41.6

3.0

6.8

6.1

2.2

4.4

-5

0

5

10

15

20

25

30

35

40

45

50

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

78.985.4

16.2 5.6

0

20

40

60

80

100

2017 Q3/18Operating margin 0.5% 2.9% 3.8% 1.5% 3.0% 2.2% 2.3%

€m €m

Comparable operating profit, continuing operations

Building and technical trade excl. speciality goodsSpeciality goods trade

5.8

34.8

40.7

14.0

-2.2

95.291.0

Rolling 12 months

-0.3%

33.4

4.2%

45.9


Car Trade

Q3

• Net sales and operating profit at a good level

• Excellent performance in the Porsche business: sales +35%, profitability strengthened further

• Order book for new cars +12%

46

The market

• Q3 first registrations of passenger cars and vans at last year’s level, up 5% in 1-9/2018

• New WLTP emissions testing causing delays in deliveries on the market

• Measures to prevent rise in car tax expected from the Finnish government


Car Trade Net Sales Q3 sales -5.6% due to implementation of new WLTP emissions testing

245234

212 218

259244

200

0

50

100

150

200

250

300

350

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

909 921

0

100

200

300

400

500

600

700

800

900

1000

2017 Q3/18



Car Trade Operating ProfitQ3 profitability good despite the decrease in net sales

10.0

7.6

8.8

6.7

11.0

8.7

7.8

0

2

4

6

8

10

12

14

16

Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18

33.134.2

0

5

10

15

20

25

30

35

40

2017 Q3/18

Operating margin

4.1% 3.2% 4.2% 3.1% 4.2% 3.6% 3.7%


3.6% 3.9%


OutlookEstimates 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 (10/2018-9/2019) in comparison with the 12 months

preceding the end of the reporting period (10/2017-9/2018).

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. However, investments in the expansion of logistics

operations and in information systems and digital services will burden profitability during the period. Furthermore, in

the car trade, profitability is burdened by the shift to WLTP emissions testing, which postpones car delivery times. KESKO | Investor Relations | Q3/201849

Kesko’s Journey Towards a More Focused Retailing Company · Net sales growth €1.7bn in...

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