Strategy report 2015 THIS IS HOW WE OPERATE Our strategy 5 Our operating environment 11 The customer in everything we do 24 Quality as the basis of our work 36 Welfare for society 48 YEAR 2015 Review by the President and CEO 60 Kesko in brief 64 Board of Directors 70 Group Management Board 77 DIVISIONS Divisions in brief 87 Grocery trade 89 Home improvement and speciality goods trade 105 Car trade 120 Store sites 126 GRI report 2015 RESPONSIBILITY MANAGEMENT Management model 138 Responsibility programme 143 Responsibility monitoring and steering 170 Materiality assessment 188 We listen to our stakeholders 193 Contact information 197 GRI INDEX 199 PERFORMANCE INDICATORS Economic impacts 218 Environmental impacts 232 Social impacts 253 GRI REPORT PROFILE 282 ASSURANCE REPORT 283 Financial statements 2015 REPORT BY THE BOARD OF DIRECTORS Note 26. Trade payables and other current non- 387 AND KEY PERFORMANCE INDICATORS interest-bearing liabilities Note 27. Jointly controlled assets 388 Report by the Board of Directors 287 Note 28. Commitments 389 Group's key performance indicators 302 Note 29. Operating leases 390 Calculation of performance indicators 308 Note 30. Share-based payment 391 Analysis of shareholding 310 Note 31. Notes related to the statement of cash flows 394 CONSOLIDATED FINANCIAL Note 32. Financial risk management 396 STATEMENTS (IFRS) Note 33. Related party transactions 410 Consolidated income statement 316 Note 34. Legal disputes and possible legal 414 Consolidated statement of financial position 318 proceedings Consolidated statement of cash flows 320 Note 35. Other notes 415 Consolidated statement of changes in equity 322 Note 36. Group composition 416 Notes to the consolidated financial statements Note 37. Subsidiaries, equity accounted investments 418 and proportionately consolidated mutual real estate Note 1. Accounting policies for the consolidated 324 companies as at 31 Dec. 2015 financial statements PARENT COMPANY'S FINANCIAL Note 2. Segment information 337 STATEMENTS (FAS) Note 3. Business acquisitions and assets disposed of 346 Parent company's income statement 424 Note 4. Other operating income and other operating 347 expenses Parent company's balance sheet 425 Note 5. Non-recurring items 348 Parent company's cash flow statement 428 Note 6. Employee benefit expense, management 349 Notes to the parent company's financial statements compensation and number of personnel Note 1. Principles used for preparing the financial 430 Note 7. Finance income and costs 350 statements Note 8. Income tax 352 Notes 2.-11. 432 Note 9. Components of other comprehensive income353 Notes 12.-14. 436 Note 10. Earnings per share 354 Note 15. 440 Note 11. Property, plant and equipment 355 Note 16. 442 Note 12. Intangible assets 357 Notes 17.-21. 444 Note 13. Equity accounted investments 361 Note 22. 446 Note 14. Non-current receivables 362 Note 23. 448 Note 15. Finance lease receivables 363 SIGNATURES 449 Note 16. Deferred tax 364 AUDITOR'S REPORT 450 Note 17. Pension assets 366 INFORMATION FOR SHAREHOLDERS 452 Note 18. Inventories 374 Note 19. Trade and other current receivables 375 Note 20. Current available-for-sale financial assets 376 Note 21. Non-current assets classified as held orf sale 377 and related liabilities Note 22. Shareholders' equity 378 Note 23. Carrying amounts of financial assets and 381 liabilities by category Note 24. Finance lease liabilities 385 Note 25. Provisions 386 Corporate Governance 2015 CORPORATE GOVERNANCE STATEMENT 2015 Corporate Governance System 456 Governance at Kesko 459 Description of the main features of internal control 467 and risk management systems related to the Group’s financial eportingr process Auditing 473 REMUNERATION STATEMENT 2015 Remuneration schemes 475 Salaries, remuneration and other financial benefits 478 THIS IS HOW WE OPERATE Kesko's Annual Report 2015 4 Strategy report > This is how we operate > Our strategy THE CUSTOMER AND QUALITY – IN EVERYTHING WE DO At the core of Kesko’s strategy is profitable growth in three strategic sectors: the grocery trade, the building and home improvement trade and the car trade. Kesko differentiates itself from the competition with quality and customer orientation. In the future, Kesko will operate more strongly as a increase the building and technical trade, which is unified -GroupK , which will enable us to offer significantly underpinned by the acquisition customers ever better services and to operate announced in January 2016, when Kesko made an efficiently. The strategic objective is to strengthen agreement to acquire Onninen, a company the customer experience for consumers and specialising in the trade of HEPAC and electrical businesses at both stores and on digital channels. products. The key focus areas include the renewal of the The completion of the acquisition of both Suomen chain concepts, building the best digital services in Lähikauppa and Onninen is subject to the approval the sector and revising the K-Plussa customer of the competition authority and the acquisitions loyalty system. are estimated to be completed in the first half of In the grocery trade, Kesko's strategic objective is 2016. growth in the Finnish grocery trade. The key focus In the car trade, Kesko is the market leader in area is the renewal and growth of the K-Group's Finland. In the future, Kesko's objective is to neighbourhood store network, which is further increase its market share in the car trade in underpinned by the acquisition announced in Finland and the Baltic countries. November 2015, when Kesko made an agreement to acquire Suomen Lähikauppa. The K-supermarket Kesko's other businesses, i.e. the furniture trade, chain will be increased by several new store sites the sports trade, the agricultural trade, the and the K-citymarket concept will be revised. In the machinery trade and the shoe trade, will be strategy for Russia, the objective is to increase developed with the objective of increasing their business and improve profitability in the St. value. Petersburg area. Increasing the business of the grocery wholesale company Kespro is also at the The financial objective in line with the strategy is to centre of the strategy. achieve a 14% return on capital employed and a 12% return on equity. In the building and home improvement trade, Kesko's objective is to further strengthen its In order to ensure competitiveness and improve position in Europe. Kesko is now already the fifth profitability, Kesko's strategic objective is to largest operator in Europe and has operations in implement cost savings of at least €50 million in eight countries. Kesko's strategic objective is to fixed assets by the end of 2016. Kesko's Annual Report 2015 5 Strategy report > This is how we operate > Our strategy Kesko estimates that in the strategy period operations will be around €750 million, excluding 2015–2017, its capital expenditure in its business possible acquisitions. STRATEGIC OBJECTIVES • Growth in the Finnish grocery trade • The best omnichannel customer experience • Increasing the building and home of the trading sector improvement trade in Europe • One unified eskK o, seeking synergies • Strengthening market leadership in the Finnish car trade Financial objectives Objectives Target level Realisation in 2015 Realisation in 2014 Return on capital employed* 14% 11.7% 9.9% Return on equity* 12% 8.2% 7.6% Interest-bearing net debt/EBITDA < 2.5 -1.4 -0.3 * Excluding non-recurring items Kesko's dividend policy: Kesko Corporation distributes at least 50% of its earnings per share excluding non-recurring items as dividends, taking into account, however, the Company’s financial position and operating strategy. Kesko's Annual Report 2015 6 Strategy report > This is how we operate > Our strategy CORNERSTONES OF THE STRATEGY Value The customer and quality – in everything we do Vision We are the customer's choice and the quality leader in the European trading sector Mission We create welfare responsibly for all our stakeholders and the whole society PEOPLE PRINCIPLES I operate directly, openly and honestly Honest and open operation is the starting point for everything. Responsibility is a success factor for the K-Group, proof of which is customers’ confidence in the K-Group’s operating principles and products. I’m all in In the K-Group, personnel put themselves into play every day in order to offer their customers a diversified selection, quality products and first-class services that enable daily life to go smoothly. I create trust Trust in other people is, above all, based on our own operations. In the K-Group, people respect each other and listen to customers’ needs. I show the path Through constant development and renewal, the K-Group gains a clear direction in serving customers ever better. In the K-Group, everyone knows his/her role and has the agility to respond to changing conditions. Kesko's Annual Report 2015 7 Strategy report > This is how we operate > Our strategy VIDEO: THE K-GROUP PEOPLE PRINCIPLES On this video, the K-Group employees share how People Principles come to life in their daily work. The K-Group is a great place to work and where things get done. The K-Group provides opportunities for professional and personal growth and allows everyone to do their best, for shopping to be fun. The People Principles are based on the K-Group’s value, the customer and quality – in everything we do. Watch the video ONE UNIFIED 1. Strong brand and identity 2. Efficiency 3. Customer relationships across divisional borders Kesko's net sales by business model Kesko’s principal business model in the Finnish market is the chain business model, in which independent K-retailers run retail stores in Kesko's chains. In Finland, all food stores, building and home improvement stores, and agricultural stores in the K-Group are run by K-retailer entrepreneurs. B2B trade is increasingly important to Kesko.