Mr. Robert Sawyer reports

RONA ANNOUNCES ITS FIRST QUARTER 2013 RESULTS

Rona Inc. has released its operating results for the 13-week period ending March 31, 2013, along with a follow-up on its main achievements during the quarter. All figures in this release are presented according to IFRS (international financial reporting standards) accounting standards.

First quarter 2013 highlights

• Revenues of $929.4-million, down $4.6-million (or 0.5 per cent) compared with the first quarter of 2012. Revenues were up $18.2-million in the distribution segment, and down $22.8-million in the retail and commercial segment;
• Adjustments of $17.8-million after tax, or 14 cents per share, reflecting restructuring expenses and the cost of implementing strategic priorities;
• The disruption in operations related to the repositioning of the Reno-Depot and TOTEM banners, the more rapid increase in the cost versus the selling price of lumber and certain building materials, difficult market conditions, and the late spring mostly explain the adjusted net loss of 19 cents per share compared with an adjusted net loss of 11 cents per share in the first quarter of 2012;
• Main achievements with respect to strategic priorities:
  • Annualized reduction in administrative expense of $17-million due to the work force reduction plan and renegotiation of major sourcing agreements;
  • Continued repositioning of the Reno-Depot banner in Quebec and integration of TOTEM in Alberta;
  • Decision to keep the big-box store network outside Quebec. A recovery plan will be announced next quarter.

Rona's revenues were down 0.5 per cent, and same-store sales down 0.8 per cent in the first quarter of 2013, compared with the first quarter of 2012. Same-store sales were up 9.5 per cent in the distribution segment, and down 3.0 per cent in the retail and commercial segment. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were down $800,000 in the distribution segment, and $10.4-million in the retail and commercial segment, for a total decrease of $11.2-million. The adjusted net loss applicable to participating shares was $22.7-million (loss of 19 cents per share), a decrease of eight cents per share compared with 2012.

"[Year] 2013 is clearly a transition year for Rona, and further changes will be required to allow us to return to sustained growth in net income. The first quarter results are still under pressure, given the current banner repositioning and the weak Canadian housing market. The challenges are significant, but the focus on our strategic and financial priorities will ensure our success," said Dominique Boies, executive vice-president and chief financial officer.

After just a few weeks at the helm of the corporation, Robert Sawyer, president and chief executive officer, believes that Rona has all the ingredients needed to improve its performance. "We have skilled and motivated employees, dynamic dealer owners and business partners, a brand that is known from coast to coast, and a network of stores in a variety of sizes that permits us to reach Canadians in their communities," he said.

"Rona has a very promising future. Despite the pressure on results, our strong balance sheet and significant operational cash flow give us flexibility in this pivotal period. The actions we are taking will make us the top-performing hardware and renovation materials retailer in Canada. By keeping our dealer owners and customers front and centre in everything we do, we will meet their highest expectations and stand out from our competitors in the market segments where we have chosen to put our focus," said Mr. Sawyer.

Review of progress in each of the three strategic priorities

Rona's strategic priorities were announced at the end of 2012. The goal of these priorities is to enhance the corporation's continuing efforts to target value-creation opportunities over the short and long term.

1. Leveraging the strengths of the company's core competencies

• Distribution to affiliated and franchised dealers, and the operation of small and medium stores were quickly identified as strategic activities, as were the big-box stores in Quebec.
• A major review of big-box stores outside Quebec was also undertaken. After exploring a variety of options, Rona decided to keep this store network and will announce a recovery plan next quarter.
• The commercial and professional market division is still under review. In the next quarter, Rona will be able to announce the path it will take to maximize the value of this division.

2. Growing customer segments through a more compelling value proposition

• This priority has strong mid- and long-term potential, because it will put Rona back on track for profitable sales growth. Over the past several months, Rona has called upon international retail industry experts to accelerate its analysis.
• An in-depth review of the pricing strategy and product categories offered in the Rona store network is in progress.
• The Reno-Depot banner in Quebec has been redefined to better meet the needs of its core customers: professional contractors and skilled DIYers. The new concept puts more emphasis on the very nature of Reno-Depot: a warehouse that offers products in large quantities at better prices.
• Integration of the TOTEM banner in Alberta is continuing. This new proximity store model combines the strong points of both TOTEM and Rona.

3. Unlocking the profit potential of a simplified business model

• To date, savings of $17-million (on an annualized basis) have been achieved through work force reductions and the renegotiation of major agreements. The corporation had identified $35-million to $45-million in potential rationalizations and is confident that it can achieve this objective by the end of 2014.
• Part of the savings will be reinvested to strengthen the company's competitive position in certain key operations.

Financial priorities

The company's actions are always dictated by its three financial priorities. This disciplined approach is focused on achieving a medium-term return on capital greater than 10 per cent. Rona has made steady progress in this area during the first two quarters of 2012. This upward trend was interrupted in the last three quarters, as a more competitive environment and a change in the company's sales mix in favour of lower-margin products affected its operating income. However, the continuation of its capital structure optimization initiatives allowed it to mitigate the impact of the decrease on its return on capital and protect its strong balance sheet. The company's disciplined capital management was impacted in the first quarter by an increase in inventories in preparation for the expected increase in seasonal demand.

The attached table shows quarterly achievements of the corporation's three financial priorities since the first quarter of 2012.

              ACHIEVEMENTS COMPARED WITH FINANCIAL PRIORITIES
                           (excluding adjustments)

                       Q1 2012 Q2 2012 Q3 2012 Q4 2012           Q1 2013
1. Improve efficiency
Same-store sales         yes     yes      no     yes         -0.8%      no
Increase in gross                                                         
margin                   yes     yes      no      no       -$12.7M      no
Decrease in                                                               
comparable SG&A          yes     yes      no      no         $3.5M      no
Increase in EBITDA       yes     yes      no      no       -$11.2M      no

2. Optimize capital
structure
Sale of assets           yes     yes      no     yes         $0.6M     yes
Capex/amortization                                                        
and depreciation         yes     yes     yes     yes          0.6x     yes
Inventory turnover       yes     yes     yes     yes  3.54 vs 3.49     yes
Share repurchase         yes     yes  n/a (i) n/a (i)       n/a (i) n/a (i)

3. Increase return
on capital
After-tax EBIT           yes     yes      no      no        -$8.4M      no
Disciplined capital                                                       
management (1)           yes     yes     yes     yes        $19.3M      no
Return on capital                                                         
(2)                      yes     yes      no      no  3.8% vs 4.2%      no

SG&A: selling, general and administrative
Capex: capital expenditure

(1) Capital equals net working capital, plus property, plant and equipment,
    and intangible assets, plus non-current assets held for sale, plus      
    goodwill, plus current projects, plus other financial and non-current   
    assets, plus deferred income tax assets, minus other non-current        
    liabilities, and minus deferred tax liabilities.                        
(2) Average return on capital equals after-tax EBIT, excluding              
    adjustments/average capital.                                            
(i) The corporation was prohibited from trading in the third and fourth     
    quarters of 2012. The program was not renewed in 2013.

Summary of financial results for the first quarter of 2013

Consolidated revenues were down $4.6-million year over year. An increase of $18.2-million in distribution revenues was not sufficient to offset continued downward pressure on sales in the retail and commercial segment. Same-store sales were down 0.8 per cent due to a 9.5-per-cent increase in comparable sales in the distribution segment, offset by a 3.0-per-cent decrease in same-store sales in the retail and commercial segment. Also note that first quarter 2012 had one extra business day related to the Easter holiday, which had an adverse impact of $5.8-million on sales.

According to a report by the Conference Board of Canada, consumer confidence, measured on a comparable basis, is similar to that of 2012, which means that consumers are still being very cautious. In addition, the latest estimates from the Canada Mortgage and Housing Corporation (CMHC) show housing starts are down 6.5 per cent, and the sale of existing houses is 13.1 per cent below that of the first quarter of 2012. These figures are directly related to renovation and building activities.

Certain non-representative adjustments were excluded in the measurement of the corporation's financial performance in order to better compare operating results from quarter to quarter. Such adjustments to EBITDA amounted to $23.4-million in the first quarter of 2013, that is, $3.9-million in the distribution segment and $19.5-million in the retail and commercial segment. Restructuring costs and other charges amounted to $12.8-million, consisting of $3.6-million for severances, $8.9-million in provisions for onerous contracts and $300,000 for other costs. Other costs of $10.6-million related to implementing the strategic priorities to include transformational plan-related fees, integration of the TOTEM banner cost and costs relating to the liquidation of inventory.

Taking these items into account, Rona's adjusted EBITDA was down $11.2-million. In the distribution segment, the $800,000 decrease in adjusted EBITDA compared with the same quarter in 2012 stems from the altered mix of distributed products and higher shipping costs. Higher sales helped offset these impacts as well as the difficult market conditions.

Adjusted EBITDA in the retail and commercial segment decreased $10.4-million compared with the first quarter of 2012. The decrease stems from stiffer competition, which exerted downward price pressure in several product categories, as well as a more rapid increase in the cost, compared with the selling price, of products such as lumber and building materials. The decrease stems also from sales of lower-margin items such as building materials, to the detriment of higher-margin items such as hardware products. Note also that sales volume was down as a result of consumer caution and difficult market conditions.

The total net after-tax amount of the adjustments mentioned earlier was $17.8-million for the first quarter of 2013 or 14 cents per share. The adjusted net loss applicable to participating shares rose from $13.5-million (loss of 11 cents per share) in the first quarter of 2012 to $22.7-million (loss of 19 cents per share) in the first quarter of 2013. This is a decrease of $9.3-million, or eight cents per share, primarily due to the decrease in adjusted gross margin. Note that the average number of shares outstanding used to calculate the adjusted net loss per share attributable to owners of Rona fell from 126.7 million shares in the first quarter of 2012 to 121.6 million shares in the first quarter 2013. The decrease stems from share repurchases in the normal course of business.

Additional information

The management's discussion and analysis (MD&A), financial statements and notes for the first of quarter 2013 can be found in the investor relations section of the corporation's website and on the SEDAR website. The corporation's annual information form, along with other information about Rona, can also be found on the Rona and SEDAR websites.

Conference call with the financial community

On Tuesday, May 14, 2013, at 3 p.m. (EST), Rona will hold a conference call for the financial community. To join the conference, please call 416-340-2216 or 1-866-226-1792.

We seek Safe Harbor.