RONA INC.
TSX : RON

RONA INC.

November 06, 2007 08:29 ET

RONA Continues to Grow in Third Quarter 2007

BOUCHERVILLE, QUEBEC--(Marketwire - Nov. 6, 2007) - RONA (TSX:RON)

Highlights

- Sales total $1.35 billion, up 6.7% over third quarter 2006.

- 11.0% increase in operating income.

- 36-basis-point improvement in EBITDA margin, thanks to additional measures taken to stimulate sales and improve efficiency, as well as acquisitions over the last 12 months.

- Net earnings of $59.4 million, up 5.9% over 2006.

- Continuation of market consolidation with announcement of an agreement to acquire Dick's Lumber in British Columbia.

- Openings of four new-concept stores in Ontario: two in the third quarter and two others in recent weeks.

RONA (TSX:RON), the largest Canadian distributor and retailer of hardware, home renovation and gardening products, has announced that its financial results are up in the third quarter of 2007. Sales for the quarter totalled $1.35 billion, up 6.7% over the third quarter of 2006. RONA also improved its operating income by 11.0% during the quarter, and its EBITDA margin climbed 36 basis points, from 8.65% in the third quarter of 2006 to 9.01% in 2007. This increase can be attributed to efficiency gains in the current network of 673 stores and 8 distribution centres, and to contributions from recent acquisitions, including synergies related to these transactions. Net earnings for the third quarter stood at $59.4 million, an increase of 5.9% over 2006.

"Given the current pressure on sales in the retail industry, I'm satisfied with these third-quarter results," said RONA president and CEO Robert Dutton. "Our various initiatives to stimulate sales and improve efficiency, along with recent strategic acquisitions, have helped to strengthen our results. We'll continue to pursue our development in the same way over the next few quarters. We will also continue to invest in employee training and education, and to roll out new services, such as our very popular Project Guides, a unique service of in-store expert advisors to help our customers succeed with their renovation projects. RONA plans to keep innovating and surprising Canadian consumers with new concepts and services in the renovation industry."

FINANCIAL HIGHLIGHTS FOR THE THIRD QUARTER 2007

Sales up $84.7 million, or 6.7%

RONA's consolidated sales include the wholesale sales of the distribution centres, retail sales of the corporate stores and RONA's share of sales from franchise stores. Consolidated sales for the third quarter of 2007 stood at $1,350.5 million, or 6.7% more than the $1,265.8 million posted in 2006. This growth can be largely attributed to acquisitions and store openings. Excluding contributions from major acquisitions, such as Noble Trade, Curtis Lumber, and Mountain Building Centres, consolidated sales increased 2.5% . This organic growth comes from sales generated by new stores opened over the last 12 months and the acquisition of affiliate stores. Excluding the 0.7% decline due to the drop in forest product prices, same-store sales increased by 0.1% this quarter. Significant efforts were also made to stimulate sales and traffic, with promotional activities throughout the RONA network during this period. These efforts resulted in an increase in the average shopping basket over the course of the quarter. But with consumer confidence down in the eastern part of the country for the last few quarters, customers seem to be deferring some renovation projects, resulting in a slight reduction in the number of transactions over the quarter.

Operating income up $12.1 million or 11.0%

Operating income was $121.6 million in the third quarter of 2007, up $12.1 million or 11.0% over 2006. The increase in operating income can be mainly attributed to the primary effects of additional measures taken to support earnings growth, to the contributions of acquisitions in the corporate and franchise store segment, including synergies related to these acquisitions, and to continued robust performance in the distribution segment. A gain of $0.7 million, representing the impact of exchange rate changes in the quarter including the application of a new accounting standard for financial instruments also added to the increase in operating income this quarter (for more information on this new standard, please see page 17 of the Management Discussion and Analysis of the third quarter 2007).

The EBITDA margin rose from 8.65% in 2006 to 9.01% in 2007, an increase of 36 basis points. Most of this increase reflects efficiency gains made across the organization during the quarter. Acquisitions, especially the acquisition of Noble Trade, also contributed to the improvement.

Net earnings up 5.9%

Net earnings for the third quarter of 2007 totalled $59.4 million, or $0.51 per share, diluted, compared to $56.1 million or $0.48 per share, diluted, in 2006. This is an increase of 5.9% in net earnings and 6.3% in diluted earnings per share. The factors that contributed to the increase in operating income also apply to the change in net earnings, but the gain in operating income was reduced by an increase in financial expenses and depreciation related to the expansion of the network. This is due to the fact that some recent investments have not yet reached their full potential contribution to the Company's consolidated results. Despite slower growth in the renovation industry, RONA is pursuing investments in several development projects that will ensure a stronger position in the years ahead.

RECENT DEVELOPMENTS

Since the beginning of the third quarter, we opened six new stores, three proximity stores and three big-boxes. Three of these stores were opened in July. The first, which opened in Pierrefonds, Quebec on July 4, is an 80,000-square-foot new concept of mid-size big-box store with a selection of over 40,000 products. The second, which opened in Edmundston, New Brunswick on July 11, introduces a whole new concept for a 35,000-square-foot proximity store with a selection of 20,000 products. The third, measuring 52,000 square feet and offering over 22,000 products, is located in Leamington, Ontario. In September, a new proximity store opened in Collingwood, Ontario. This store measures 52,000 square feet and offers some 22,000 products. It also has an 89,000-square-foot outdoor lumberyard, a 12,000-square-foot garden centre, and an 8,000-square-foot covered warehouse. Since the end of the third quarter, RONA opened two big-box stores, the first one, on October 24, in Whitby, Ontario, and the other one, on October 31, in Waterdown, Ontario. These two 100,000-square-foot stores introduced the latest RONA innovations in signage and specialized boutiques, as well as the all-new Project Guide and installation services.

On September 18, RONA announced the conclusion of an agreement to acquire 100% of the operating assets and real estate of the specialist Dick's Lumber. The company generated more than $100 million in sales in the last 12 months, as well as solid profit margins. This transaction follows the 2006 Curtis Lumber and Mountain Building Centres acquisitions and the addition of 14 stores in British Columbia in the past two years through store openings and the recruitment of independent dealers. With the addition of Dick's Lumber's three specialized stores in the Vancouver Area, RONA will have 54 retail locations in BC and will continue to open new big-box and proximity stores with innovative concepts, as well as recruiting independent dealers in the years to come. The transaction is expected to close in the fourth quarter of 2007. Dick's Lumber is a good fit with our existing operations in the region. It further diversifies our customer base and doubles our presence in the commercial and professional specialist segment.

FINANCIAL HIGHLIGHTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

Sales up $287.5 million or 8.4%

Consolidated sales for the nine-month period ended September 30, 2007 stand at $3,698.1 million, or 8.4% more than the $3,410.6 million posted in 2006. This growth can be mainly attributed to acquisitions and store openings. Excluding the contributions of major acquisitions such as Noble Trade, Chester Dawe, Curtis Lumber, Materiaux Coupal and Mountain Building Centres, consolidated sales increased 4.1% . This organic growth stems from sales generated by new stores opened in the last 12 months, affiliate stores acquired by RONA, and increased sales in the distribution network.

Same-store sales increased by 0.9% over the 39-week period ended September 30, 2007, excluding a 1.0% decline due to the drop in the average price of forest products.

Operating income up $27.1 million or 9.1%

RONA's operating income was $324.3 million in the nine-month period ended September 30, 2007, up $27.1 million or 9.1% over 2006. The increase in operating income can be mainly attributed to the primary effects of additional measures taken to support earnings growth, to the contributions of acquisitions in the corporate and franchise store segment and to continued robust performance in the distribution segment. A gain of $6.4 million, representing the impact of exchange rate changes including the application of a new accounting standard for financial instruments for this nine-month period, also added to the increase in operating income (for more information about this new standard, please see page 17 of the current Management Discussion and Analysis).

The EBITDA margin rose from 8.71% in 2006 to 8.77% in 2007, an increase of 6 basis points. The increase can be attributed to the effect of the exchange rate changes, without which the EBITDA margin would have declined to 8.60% or 11 basis points below 2006. The EBITDA margin was under pressure at the beginning of the year because of lower results in the first quarter due, amongst others, to unfavourable weather conditions and greater seasonal variations than in 2006. Acquisitions in the last 12 months in the construction materials segment, which generate margins lower than our consolidated margin, have also been putting downward pressure on our EBITDA margin since the beginning of the year. These acquisitions generate a very good return on investment, however. Significant efforts were also made to stimulate sales and traffic during the first nine months of 2007, with promotional activities throughout the RONA network. These factors were partly counterbalanced by efficiency improvement measures in the second quarter and by improved margins from acquisitions in the third quarter, after the acquisition of plumbing specialist Noble Trade.

Net earnings

Net earnings for the nine-month period ended September 30, 2007, stood at $154.6 million or $1.32 per share, diluted, compared to $152.5 million in 2006, or $1.31 per share, diluted. This represents an increase of 1.4% in net earnings or 0.8% in diluted earnings per share. Growth in the second and third quarters has completely compensated for the first-quarter drop caused, amongst others, by stronger seasonal variations and unfavourable weather conditions. In addition, certain investments made to expand the RONA network are not yet fully contributing to the Company's results despite having generated significant depreciation and interest expenses. In spite of slower growth in the renovation industry, RONA is pursuing investments in several development projects that will ensure a stronger position in the next few years.

CASH FLOWS AND FINANCIAL POSITION

Operations generated $89.9 million in the third quarter of 2007, compared to $79.0 million in the same quarter of 2006. Including working capital items, operations generated $110.5 million, compared to $156.2 million in 2006. This reduction is primarily due to the increase in inventory related to the expansion of the network and the distribution centres.

In the third quarter of 2007, we invested $52.3 million in fixed assets. These investments related mainly to the expansion of our retail network, namely construction of new stores as well as repairs, renovations and upgrades for existing stores to reflect our new concepts. Significant investments were also approved for the continuous improvement of the information systems in order to increase our operational efficiency and for the acquisition of land for future development. Funds generated through operations were also used this quarter to reduce bank loans and revolving credit by $105.9 million.

RONA's balance sheet remains strong. As of September 30, 2007, the total debt-to-capital utilized ratio was 33.0%, compared with 24.5% at the close of the third quarter in 2006. The increase in the ratio over 2006 is related to the debt financing of our most recent acquisitions. This ratio is down from 37.9%, posted at the end of the second quarter of 2007.

RONA's equity/asset ratio stood at 52.1% at the end of the third quarter of 2007, compared to 53.8% at the same time last year.

The Company's operations produce significant cash flows. With relatively low debt and rates fixed for the long term on debentures, we have significant liquidity and can access some $300 million of additional credit at competitive rates. Last July, we extended the maturity date of our revolving credit by one year, from October 6, 2011 to October 6, 2012. Our resources are sufficient to continue our development along our four vectors of growth: sales growth in our existing network, construction of new corporate and franchise stores, recruitment of new affiliate stores, and acquisitions. At the beginning of the year, our capital plan projected investments of around $240 million, including $175 million for the construction, upgrade or renovation of big-box, proximity and specialized stores, about $25 million for the expansion of our distribution network and $40 million for ongoing improvements to our information systems. After nine months, we have invested more than $160 million.

OUTLOOK

As described in the 2006 Management's Discussion and Analysis, RONA's long-term growth benefits from favourable structural factors. Canada's working population (age 25 to 55) is devoting more and more time to home renovations and gardening projects. In addition, the all-important baby boomers, who account for at least 25% of the population, are reaching their anticipated retirement in better physical and financial shape than any preceding generation. In Canada, the existing housing stock is also aging: over 80% of homes are more than 15 years old and will require major maintenance work in the near future. Moreover, new housing starts, housing resales and the average selling price of homes have all seen big increases in the past three years. The Canadian market is, therefore, seeing many new owners with greater borrowing power, representing a highly favourable environment for the home improvement business.

The American economy has been experiencing a major correction in the real estate market over the last few quarters. Housing starts and resales have dropped significantly, and the average price of homes has stopped increasing. The situation is very different in Canada, where all of RONA's sales are based. The drop in housing starts is much less pronounced than in the United States, and resales are still climbing despite CMHC predictions of a drop. The number of housing starts remains at historically high levels, and resales have reached new records, boosting average housing prices.

Nevertheless, the reduction in starts of single-family homes, combined with a slowdown in the growth of housing resales and the negative effect of the stronger Canadian dollar relative to its American counterpart, is influencing the behaviour of Canadian consumers in relation to renovation projects. In some regions, people are being more prudent in general since the beginning of the year. The rise of the Canadian dollar also seems to have encouraged some consumers to use their disposable income to travel, mainly abroad, deferring renovation projects until later. It is important to note, however, that historically, high volumes of housing resales and residential construction lead to significant renovation expenditures in the following years.

In the short term, the issues mentioned above explain why growth in same-store sales was weaker at the beginning of the year for major players in the industry. Management believes that sales contributions from existing stores may be weaker than expected this year. Given the effect of this situation on same-store earnings since the beginning of the year, the Company took additional measures to stimulate sales and improve operational efficiency at the beginning of the second quarter. These include a more dynamic approach to private brand product sales, the introduction of new customer loyalty measures, and new operational efficiency measures. These activities have already improved results in the second and third quarters, and we are confident that they will continue to prove their worth in the coming quarters.

Sales growth in these quarters is expected to come from market consolidation and the recruitment of more dealer-owners, from the addition of new stores and from acquisitions. Although recruitment is down somewhat from this date last year, management remains confident of achieving its recruitment goal of about $200 million. Our recruitment team is currently studying a number of opportunities across the country, especially in Ontario and in Western Canada. The fourth quarter has historically been the best time to recruit independent dealer-owners. As planned, we will reach our goal of having built 15 new stores in 2007 and having opened 10 of these stores this year. Seven stores have already opened since January. Three stores will open by year-end and five stores under construction will open in early 2008. In terms of acquisitions, we are currently studying 15 opportunities, and management is confident that a number of these opportunities will materialize.

RONA management intends to vigorously pursue the consolidation of the Canadian renovation market and continue to grow the company's market share, maximizing earnings growth as well as return on invested capital. During the third quarter of 2007, management continued its strategic planning review and expects to finalize the new 2008-2011 strategic plan during the next few weeks and communicate it in early 2008.

ADDITIONAL INFORMATION

The Management Discussion and Analysis and the quarterly financial statements for third quarter 2007 can be found in the Investor Relations section of the Company's website at www.rona.ca, and at www.sedar.com. The Company's Annual Report can also be found on the RONA website, along with other information about RONA, including its Annual Information Form, which can also be found on the SEDAR website.

TELEPHONE CONFERENCE WITH THE FINANCIAL COMMUNITY

On Tuesday, November 6, 2007 at 11:00 AM (EST), RONA will hold a telephone conference for the financial community. To join the conference, please dial 514-861-0443 or 1 866 542-4146. To listen to the call online, please go to http://events.startcast.com/events/153/B0018.

NON-GAAP PERFORMANCE MEASURE

In this press release, as in our internal management, we use the concept of earnings before interest, taxes, depreciation and amortization (EBITDA), which we also refer to as operating income. This corresponds to "Earnings before the following items" in our consolidated financial statements.

While the meaning of EBITDA is not standardized by GAAP, it is widely used in our industry and financial circles to measure the profitability of operations, excluding tax considerations and the cost and use of capital. As it is not standardized, EBITDA cannot be compared from one company to another, but we calculate it internally in the same way for every identified segment, and, unless expressly mentioned, our method does not change over time. EBITDA should not be regarded in isolation or as a substitute for other measurements of performance calculated according to GAAP, but rather as additional information.

FORWARD-LOOKING STATEMENTS

This press release includes "forward-looking statements" that involve risks and uncertainties. All statements other than statements of historical facts included in this press release, including statements regarding the prospects of the industry and prospects, plans, financial position and business strategy of the Company, may constitute forward-looking statements within the meaning of Canadian securities legislation and regulations. Investors and others are cautioned that undue reliance should not be placed on any forward-looking statements.

For more information on the risks, uncertainties and assumptions that would cause the Company's actual results to differ from current expectations, please also refer to the Company's public filings available at www.sedar.com and www.rona.ca. In particular, further details and descriptions of these and other factors are disclosed in the Management Discussion and Analysis under the "Risks and Uncertainties" section and in the "Risk Factors" section of the Company's current Annual Information Form.

The forward-looking statements in this press release reflect the Company's expectations as of November 5, 2007, and are subject to change after this date. The Company expressly disclaims any obligation or intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by the applicable securities laws.

ABOUT RONA

RONA inc. is the largest Canadian distributor and retailer of hardware, home renovation and gardening products. RONA operates a network of 673 franchise, affiliate and corporate stores of various sizes and formats. With over 26,000 employees working under its family of banners in every region of Canada and more than 14 million square feet of retail space, the RONA store network generates over $6 billion in annual retail sales.



RONA

Consolidated Financial Statements
September 30, 2007 and September 24, 2006


RONA inc.
Consolidated Earnings
For the thirteen-week and thirty-nine-week periods ended September 30, 2007
and September 24, 2006
(Unaudited, in thousands of dollars, except earnings per share)

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Third Quarter Year-to-date
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2007 2006 2007 2006
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Sales $1,350,475 $1,265,803 $3,698,071 $3,410,598
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Earnings before the
following items 121,639 109,539 324,267 297,135
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Interest on long-term debt 7,261 4,399 21,671 14,021
Interest on bank loans 793 1,040 2,435 2,778
Depreciation and
amortization 23,487 19,183 67,504 52,252
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31,541 24,622 91,610 69,051
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Earnings before income taxes
and non-controlling interest 90,098 84,917 232,657 228,084
Income taxes 28,730 27,225 74,205 73,000
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Earnings before
non-controlling interest 61,368 57,692 158,452 155,084
Non-controlling interest 1,958 1,613 3,852 2,613
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Net earnings $59,410 $56,079 $154,600 $152,471
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Net earnings per share (Note 10)
Basic $0.52 $0.49 $1.34 $1.33
Diluted $0.51 $0.48 $1.32 $1.31
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Retained Earnings
Consolidated Contributed Surplus
For the thirty-nine-week periods ended September 30, 2007 and September 24,
2006
(Unaudited, in thousands of dollars)

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2007 2006
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Consolidated Retained Earnings
Balance, beginning of period, as previously reported $709,467 $518,883
Financial instruments - recognition and
measurement (Note 2) (1,589) -
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Restated balance, beginning of period 707,878 518,883
Net earnings 154,600 152,471
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Balance, end of period $862,478 $671,354
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Consolidated Contributed Surplus
Balance, beginning of period $9,182 $6,618
Compensation cost relating to stock-based
compensation plans 1,545 1,768
Exercise of stock options (219) (168)
Gain on disposal of the Company's common shares
by a joint venture, net of income taxes of $59 - 251
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Balance, end of period $10,508 $8,469
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Cash Flows
For the thirteen-week and thirty-nine-week periods ended September 30, 2007
and September 24, 2006 (Unaudited, in thousands of dollars)

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Third Quarter Year-to-date
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2007 2006 2007 2006
--------------------------------------------------------------------------
Operating activities
Net earnings $59,410 $56,079 $154,600 $152,471
Non-cash items
Depreciation and amortization 23,487 19,183 67,504 52,252
Derivative financial
instruments 328 - (3,302) -
Future income taxes 2,341 290 (138) (285)
Net loss (gain) on disposal
of assets 1,070 (74) 889 (1,415)
Compensation cost relating
to stock-based compensation
plans 537 670 1,545 1,768
Non-controlling interest 1,958 1,613 3,852 2,613
Other items 772 1,239 2,427 2,575
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89,903 79,000 227,377 209,979
Changes in working capital
items 20,582 77,221 (78,655) 60,968
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Cash flows from operating
activities 110,485 156,221 148,722 270,947
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Investing activities

Business acquisitions (Note 3) (4,679) (39,763) (175,340) (152,927)
Advances to joint ventures
and other advances 231 (270) 4,871 (667)
Other investments - (1,310) (588) (1,310)
Fixed assets (52,343) (65,915) (160,487) (152,402)
Other assets (2,694) (4,372) (5,925) (9,191)
Disposal of assets 4,213 1,496 7,133 6,336

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Cash flows from investing
activities (55,272) (110,134) (330,336) (310,161)
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Financing activities
Bank loans and revolving
credit (105,932) (57,317) 139,640 51,915
Other long-term debt - 1,954 933 3,617
Repayment of other long-term
debt and redemption of
preferred shares (4,318) (3,469) (18,871) (11,816)
Issue of common shares 846 827 4,158 3,904
Issue of equity securities
to non-controlling interest - - 750 735
Redemption of equity
securities from
non-controlling interest - (1,000) - (1,000)
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Cash flows from financing
activities (109,404) (59,005) 126,610 47,355
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Net increase (decrease)
in cash (54,191) (12,918) (55,004) 8,141
Cash, beginning of period 57,673 25,179 58,486 4,120
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Cash, end of period $3,482 $12,261 $3,482 $12,261
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Supplementary information
Interest paid $14,299 $5,043 $25,622 $14,696
Income taxes paid (received) $14,490 $(1,754) $77,170 $56,980
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The accompanying notes are an integral part of the interim consolidated
financial statements.



RONA inc.
Consolidated Balance Sheets
September 30, 2007, September 24, 2006 and December 31, 2006
(In thousands of dollars)

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2007 2006 2006
September 30 September 24 December 31
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(unaudited) (unaudited)
Assets
Current assets
Cash $3,482 $12,261 $58,486
Accounts receivable 304,710 275,262 205,808
Inventory 871,954 771,207 790,496
Prepaid expenses 39,890 26,985 23,454
Derivative financial
instruments (Note 2) 2,360 - -
Future income taxes 14,230 10,571 10,859
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1,236,626 1,096,286 1,089,103
Investments 12,852 18,678 17,642
Fixed assets 743,544 560,554 634,131
Goodwill 437,878 316,573 316,558
Trademarks 3,539 - 1,380
Other assets 26,393 21,432 30,314
Future income taxes 19,889 21,087 19,254
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$2,480,721 $2,034,610 $2,108,382
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Liabilities
Current liabilities
Bank loans $20,096 $35,618 $21,221
Accounts payable and
accrued liabilities 468,130 501,299 394,103
Income taxes payable 4,173 20,994 7,242
Derivative financial
instruments (Note 2) 1,441 - -
Future income taxes 2,827 1,420 3,314
Instalments on long-term debt 31,032 32,599 29,511
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527,699 591,930 455,391
Long-term debt 586,639 287,348 455,310
Other long-term liabilities 23,319 18,819 20,386
Future income taxes 22,239 14,273 19,402
Non-controlling interest 27,745 27,505 23,527
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1,187,641 939,875 974,016
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Shareholders' equity
Capital stock (Note 4) 420,094 414,912 415,717
Retained earnings 862,478 671,354 709,467
Contributed surplus 10,508 8,469 9,182
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1,293,080 1,094,735 1,134,366
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$2,480,721 $2,034,610 $2,108,382
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The accompanying notes are an integral part of the interim consolidated
financial statements.


RONA inc.
Notes to Interim Consolidated Financial Statements
September 30, 2007 and September 24, 2006
(Unaudited, in thousands of dollars, except amounts per share)


1. Basis of presentation

The accompanying unaudited interim consolidated financial statements are in accordance with Canadian generally accepted accounting principles for interim financial statements and do not include all the information required for complete financial statements. They are also consistent with the policies outlined in the Company's audited financial statements for the years ended December 31, 2006. The interim financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2006. The interim operating results do not necessarily reflect the results for the full fiscal year. Accordingly, the comparative balance sheet as at September 24, 2006 is also included to reflect seasonal fluctuations that characterize the hardware, renovation and home garden industry. When necessary, the financial statements include amounts based on estimated information and management's best judgments. Certain comparative figures have been reclassified to conform with the presentation adopted in the current period.

2. Changes in accounting policies

On January 1, 2007, in accordance with applicable transitional provisions, the Company retroactively adopted without restatement of prior period financial statements the following new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook:

Financial instruments

Section 3855, Financial Instruments -- Recognition and Measurement and Section 3861, Financial Instruments --Disclosure and Presentation describe standards for the classification, recognition, measurement, disclosure and presentation of financial instruments (including derivatives) and non-financial derivatives in the financial statements.

The adoption of these new standards resulted in the following changes in the classification and measurement of the Company's financial instruments, previously recorded at cost:

- Cash is classified as a "financial asset held for trading" and is measured at fair value. All changes in fair value are recognized in earnings. This change had no impact on the Company's consolidated financial statements.

- Accounts receivable, long-term loans and advances and redeemable preferred shares (included in investments) are classified as "loans and receivables" and are recorded at cost which at initial measurement corresponds to fair value. Subsequent revaluations of accounts receivable are recorded at amortized cost which generally corresponds to initial measurement less all allowances for doubtful accounts. Subsequent revaluations of long-term loans and advances and redeemable preferred shares are recorded at amortized cost using the effective interest method less any amortization. This change had no impact on the Company's consolidated financial statements.

- Bank loans and accounts payable and accrued liabilities are classified as "other financial liabilities". They are initially measured at fair value and subsequent revaluations are recorded at amortized cost using the effective interest method. This change had no impact on the Company's consolidated financial statements.

- Long-term debt is classified as "other financial liabilities". It is measured at amortized cost which corresponds to initial measurement plus accumulated amortization of financing costs. Initial measurement corresponds to the principal amount of the debt less applicable financing costs. This change resulted in a decrease of $4,824 in deferred financing costs previously included in other assets, a decrease of $4,870 in long-term debt and an increase of $46 ($31, net of future income taxes) in opening retained earnings.

The Company also adopted the following accounting policies:

- Transaction costs related to other financial liabilities are recorded as a reduction in the book value of the related financial liability.

- The Company records as a separate asset or liability only those derivatives embedded in hybrid financial instruments issued, acquired or substantially modified by the Company as at December 29, 2002 when these hybrid instruments are not recorded as held for trading and remain outstanding at January 1, 2007. Embedded derivatives that are not closely related to the host contracts must be separated from the host contract, classified as a financial instrument held for trading and measured at fair value with changes in fair value recorded in earnings. The Company has not identified any embedded derivatives to be separated other than derivatives embedded in purchase contracts concluded in foreign countries and settled in a foreign currency that is not the conventional currency of either of the two principal parties to the contract. Although the payments are made in a foreign currency that is routinely used in the economic environment where the transaction occurred, the Company has opted to separate the embedded derivatives. This policy change resulted in an increase in current liabilities of $2,382 and a decrease in retained earnings of $2,382 ($1,620 net of future income taxes) at January 1, 2007. For the thirteen and thirty-nine- week periods ended September 30, 2007 this policy change resulted in an increase (decrease) in earnings before interest, depreciation and amortization, income taxes and non-controlling interest of $(448) and $5,643, consisting of the change in the fair value of derivatives embedded in the purchase contracts and the change in inventory.

The Company uses derivative financial instruments to manage foreign exchange risk. The Company does not use derivative financial instruments for speculative or trading purposes. The derivatives are classified as "liabilities held for trading" and are measured at fair value with the changes in fair value recorded in earnings. For the thirteen and thirty-nine-week periods ended September 30, 2007, this resulted in a decrease in earnings before interest, depreciation and amortization, income taxes and non-controlling interest of $880 and $1,441.

Comprehensive income

Section 1530, Comprehensive Income describes standards for the presentation of comprehensive income and its components. Comprehensive income is the change in shareholders' equity, which results from transactions and events from sources other than the Company's shareholders. The adoption of the new recommendation had no impact on the Company's consolidated financial statements.

Equity

Section 3251, Equity describes standards for the presentation of equity and changes in equity in the period. The adoption of the new recommendation had no impact on the Company's consolidated financial statements.


Accounting changes (Note 11)

On January 1, 2007, in accordance with applicable transitional provisions, the Company adopted the new recommendations of CICA Handbook, Section 1506, Accounting Changes. This section establishes the criteria for changing accounting policies together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors.

Accounting by a vendor for consideration given to a customer (volume rebates)

At the beginning of fiscal year 2006, the Company adopted EIC-156 Accounting by a Vendor for Consideration Given to a Customer (Including a Reseller of the Vendor's Products), which provides guidance as to the circumstances under which a consideration is an adjustment of the selling price of the vendor's products or services and under which it is a cost incurred by the vendor to sell his products. EIC-156 was applied retroactively, with restatement of prior years. Volume rebates to customers, previously presented as a reduction of earnings before interest, depreciation and amortization, income taxes and non-controlling interest are now presented as a reduction of sales.

3. Business acquisitions

The Company acquired four companies, operating in the corporate and franchised stores segment, by way of share or asset purchase. These acquisitions were for a total consideration of $183,929. The Company financed these acquisitions from its existing credit facilities. The results of operations of these companies are consolidated from their date of acquisition.

The preliminary allocation of the purchase price of the acquisitions was established as follows:



Current assets $62,104
Fixed assets 10,507
Goodwill 121,812
Trademarks 2,321
Future income taxes 755
Current liabilities (10,046)
Long-term debt (3,524)
---------------------------------------------------------
183,929
Less: Accrued direct acquisition costs (258)
Balance of purchase price (8,331)
---------------------------------------------------------
Cash consideration paid $175,340
---------------------------------------------------------
---------------------------------------------------------


4. Capital stock

Issued and fully paid:

The following tables present changes in the number of outstanding common shares and their aggregate stated value from December 25, 2005 to September 30, 2007:



September 30, 2007
--------------------------------------------------------------------------
Number of shares Amount
--------------------------------------------------------------------------
Balance, beginning of period 114,935,569 $413,542
Issuance in exchange for common share
subscription deposits 120,715 2,513
Issuance under stock-based compensation plans 339,327 1,876
Issuance in exchange for cash 4,127 95
--------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 115,399,738 418,026
Elimination of reciprocal shareholdings (56,841) (341)
--------------------------------------------------------------------------
Balance, end of period 115,342,897 417,685
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 2,409
--------------------------------------------------------------------------
$420,094
--------------------------------------------------------------------------
--------------------------------------------------------------------------

September 24, 2006
--------------------------------------------------------------------------
Number of shares Amount
--------------------------------------------------------------------------
Balance, beginning of period 114,412,744 $408,943
Issuance in exchange for common share
subscription deposits 101,696 2,192
Issuance under stock-based compensation plans 399,300 1,918
Issuance in exchange for cash 15,171 340
--------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 114,928,911 413,393
Elimination of reciprocal shareholdings (54,828) (299)
--------------------------------------------------------------------------
Balance, end of period 114,874,083 413,094
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 1,818
--------------------------------------------------------------------------
$414,912
--------------------------------------------------------------------------
--------------------------------------------------------------------------


December 31, 2006
--------------------------------------------------------------------------
Number of shares Amount
--------------------------------------------------------------------------
Balance, beginning of year 114,412,744 $408,943
Issuance in exchange for common share
subscription deposits 101,696 2,192
Issuance under stock-based compensation plans 400,550 1,952
Issuance in exchange for cash 20,579 455
--------------------------------------------------------------------------
Balance before elimination of reciprocal
shareholdings 114,935,569 413,542
Elimination of reciprocal shareholdings (54,920) (301)
--------------------------------------------------------------------------
Balance, end of year 114,880,649 413,241
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Deposits on common share subscriptions, net
of eliminations of joint ventures (a) 2,476
--------------------------------------------------------------------------
$ 415,717
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(a) Deposits on common share subscriptions represent amounts received
during the year from affiliated and franchised merchants in accordance
with commercial agreements. These deposits are exchanged for common
shares on an annual basis.


Stock-based compensation plan of May 1, 2002

The Company adopted a stock option purchase plan for designated senior executives which was approved by the shareholders on May 1, 2002. A total of 2,920,000 options were granted at that date. Options granted under the plan may be exercised since the Company made a public share offering on November 5, 2002. The Company can grant options for a maximum of 3,740,000 common shares. At September 30, 2007 the 2,920,000 options granted have an exercise price of $3.47 and of this number, 1,449,500 options (1,149,723 options at September 24, 2006) were exercised.

The fair value of each option granted was estimated at the grant date using the Black-Scholes option-pricing model. Calculations were based upon a market price of $3.47, an expected volatility of 30%, a risk-free interest rate of 4.92%, an expected life of four years and 0% expected dividend. The fair value of options granted is $1.10 per option according to this method.

No compensation cost was expensed with respect to this plan for the thirty-nine-week periods ended September 30, 2007 and September 24, 2006.

Stock-based compensation plan of October 24, 2002

On October 24, 2002, the Board of Directors approved another stock-based compensation plan for designated senior executives of the Company and for certain designated directors. The total number of common shares which may be issued pursuant to the plan will not exceed 10% of the common shares issued and outstanding less the number of shares subject to options granted under a previous stock option plan. These options become vested at 25% per year, if the market price of the common share has traded, for at least 20 consecutive trading days during the twelve-month period preceding the grant anniversary date, at a price equal to or higher than the grant price plus a premium of 8% compounded annually.

On March 8, 2007, the Board of Directors approved certain modifications to the plan. These modifications were also approved by the shareholders at the annual shareholders' meeting on May 8, 2007. These modifications establish that this plan is no longer applicable to the designated directors of the Company and also provide for the replacement of the terms and conditions for granting options under the plan by a more flexible mechanism for setting the terms and conditions for granting options. The Board of Directors will adopt the most appropriate terms and conditions relative to each type of option. For the options granted on March 8, 2007 the Board approved the option grant with vesting over a four-year period following the anniversary date of the grant at 25 % per year.

At September 30, 2007, the 1,700,852 options (1,504,852 options at September 24, 2006) granted have exercise prices ranging from $14.29 to $26.87 and of this number, 85,100 options (44,300 options at September 24, 2006) have been exercised and 149,050 options (67,100 options at September 24, 2006) have been cancelled.

The fair value of stock options granted was estimated at the grant date using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions for the stock options granted during the period:



September 30, September 24,
2007 2006
--------------------------------------------------------------------------
Weighted average fair value per option
granted $8.50 $7.71
Risk-free interest rate 3.90% 4.06%
Expected volatility in stock price 26% 28%
Expected annual dividend 0% 0%
Expected life (years) 6 6


Compensation cost expensed with respect to this plan was $1,545 for the thirty-nine-week period ended September 30, 2007 ($1,768 at September 24, 2006).

A summary of the situation from December 25, 2005 to September 30, 2007 of the Company's stock option plans and the changes that occurred during the periods then ended is presented below:



September 30, 2007
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of period 3,162,479 $10.16
Granted 196,000 23.58
Exercised (339,327) 4.88
Cancelled (81,950) 20.85
--------------------------------------------------------------------------
Balance, end of period 2,937,202 11.36
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of period 1,895,994 $ 6.24
--------------------------------------------------------------------------
--------------------------------------------------------------------------


September 24, 2006
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of period 3,131,327 $ 7.84
Granted 463,652 21.45
Exercised (399,300) 4.38
Cancelled (31,950) 18.34
--------------------------------------------------------------------------
Balance, end of period 3,163,729 10.16
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of period 2,109,527 $ 5.53
--------------------------------------------------------------------------
--------------------------------------------------------------------------


December 31, 2006
--------------------------------------------------------------------------
Weighted average
Options exercise price
--------------------------------------------------------------------------
Balance, beginning of year 3,131,327 $ 7.84
Granted 463,652 21.45
Exercised (400,550) 4.43
Cancelled (31,950) 18.34
--------------------------------------------------------------------------
Balance, end of year 3,162,479 10.16
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable, end of year 2,230,927 $ 6.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------


The following table summarizes information relating to stock options outstanding at September 30, 2007:



Options Options
Exercise price Expiration date outstanding exercisable
--------------------------------------------------------------------------
$3.47 December 31, 2012 1,470,500 1,470,500
$14.29 December 16, 2013 432,550 317,350
$20.27 December 22, 2014 421,000 103,750
$21.21 February 24, 2016 388,000 -
$21.78 September 1, 2016 17,576 4,394
$23.58 March 8, 2017 179,000 -
$23.73 April 5, 2015 11,000 -
$26.87 February 24, 2016 17,576 -
--------------------------------------------------------------------------
2,937,202 1,895,994
--------------------------------------------------------------------------
--------------------------------------------------------------------------


5. Guarantees

In the normal course of business, the Company reaches agreements that could meet the definition of "guarantees" in AcG-14.

The Company guarantees mortgages for an amount of $2,480. The terms of these loans extend until 2012 and the net carrying amount of the assets held as security, which mainly include land and buildings, is $6,055.

Pursuant to the terms of inventory repurchase agreements, the Company is committed towards financial institutions to buy back the inventory of certain customers at an average of 62% of the cost of the inventories to a maximum of $58,029. In the event of recourse, this inventory would be sold in the normal course of the Company's operations. These agreements have undetermined periods but may be cancelled by the Company with a 30-day advance notice. In the opinion of management, the likelihood that significant payments would be incurred as a result of these commitments is low.

6. Vendor rebates

In accordance with EIC-144 Accounting by a customer (including a reseller) for certain consideration received from a vendor, the Company must disclose the amount recognized for which the full requirements for vendor rebate entitlement have not yet been met. For the thirty-nine-week period ended September 30, 2007, the Company recorded an amount of $8,085 ($7,205 at September 24, 2006) which was estimated based on the attainment of specified requirements to receive the rebates.

7. Employee future benefits

At September 30, 2007, the Company had eight defined contribution pension plans and four defined benefit pension plans. The net pension expense for the benefit plans is as follows:



Third Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Costs recognized for defined
contribution pension plans $2,074 $1,841 $6,346 $5,515
Costs recognized for defined
benefit pension plans 329 362 983 1,048
--------------------------------------------------------------------------
Net employee future benefit costs $2,403 $2,203 $7,329 $6,563
--------------------------------------------------------------------------
--------------------------------------------------------------------------


8. Contingencies

Various claims and litigation arise in the course of the Company's activities and its insurers have taken up the Company's defense in some of these cases. In addition, upon the acquisition of Reno-Depot Inc., the vendor committed to indemnify the Company for litigation which the Company assumed in the course of this acquisition.

Management does not expect that the outcome of these claims and litigation will have a material and adverse effect on the Company's results and deemed its allowances adequate in this regard.

9. Segmented information

The Company has two reportable segments: distribution and corporate and franchised stores. The distribution segment relates to the supply activities to affiliated, franchised and corporate stores. The corporate and franchised stores segment relates to the retail operations of the corporate stores and the Company's share of the retail operations of the franchised stores in which the Company has an interest.

The accounting policies that apply to the reportable segments are the same as those described in accounting policies. The Company evaluates performance according to earnings before interest, depreciation and amortization, rent, income taxes and non-controlling interest, i.e. sales less chargeable expenses. The Company accounts for intersegment operations at fair value.



Third Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Segment sales
Corporate and
franchised stores $1,066,138 $977,668 $2,849,646 $2,569,331
Distribution 611,144 593,034 1,806,343 1,708,168
--------------------------------------------------------------------------
Total 1,677,282 1,570,702 4,655,989 4,277,499
--------------------------------------------------------------------------
Intersegment sales and
royalties
Corporate and
franchised stores (3,589) (3,108) (9,869) (8,898)
Distribution (323,218) (301,791) (948,049) (858,003)
--------------------------------------------------------------------------
Total (326,807) (304,899) (957,918) (866,901)
--------------------------------------------------------------------------
Sales
Corporate and
franchised stores 1,062,549 974,560 2,839,777 2,560,433
Distribution 287,926 291,243 858,294 850,165
--------------------------------------------------------------------------
Total 1,350,475 1,265,803 3,698,071 3,410,598
--------------------------------------------------------------------------
Earnings before interest,
depreciation and
amortization, rent,
income taxes and
non-controlling
interest(a)
Corporate and
franchised stores 130,666 117,114 348,627 314,393
Distribution 23,419 22,588 72,470 70,601
--------------------------------------------------------------------------
Total 154,085 139,702 421,097 384,994
--------------------------------------------------------------------------
Earnings before interest,
depreciation and
amortization, income
taxes and
non-controlling
interest
Corporate and
franchised stores 103,789 91,945 268,271 244,077
Distribution 17,850 17,594 55,996 53,058
--------------------------------------------------------------------------
Total 121,639 109,539 324,267 297,135
--------------------------------------------------------------------------
Acquisition of fixed
assets
Corporate and
franchised stores 48,905 71,747 154,615 144,574
Distribution 3,575 2,698 15,225 22,879
--------------------------------------------------------------------------
Total 52,480 74,445 169,840 167,453
--------------------------------------------------------------------------
Goodwill
Corporate and
franchised stores (239) 15,284 121,812 64,236
Distribution - - - -
--------------------------------------------------------------------------
Total $(239) $15,284 $121,812 $64,236
--------------------------------------------------------------------------
Total assets
Corporate and
franchised stores 2,054,373 1,665,599
Distribution 426,348 369,011
--------------------------------------------------------------------------
Total $2,480,721 $2,034,610
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(a) Earnings before interest, depreciation and amortization, rent, income
taxes and non-controlling interest for 2006 were restated, as mentioned
at December 31, 2006, to reflect the reclassification of certain rent
expenses.


10. Earnings per share

The table below shows the calculation of basic and diluted net earnings per share:



Third Quarter Year-to-date
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------

Net earnings $59,410 $56,079 $154,600 $152,471
--------------------------------------------------------------------------
Number of shares (in
thousands)
Weighted average number
of shares used to compute
basic net earnings
per share 115,342.4 114,838.1 115,270.2 114,683.8
Effect of dilutive stock
options (a) 1,397.5 1,648.0 1,497.7 1,780.8
--------------------------------------------------------------------------
Weighted average number
of shares used to
compute diluted net
earnings per share 116,739.9 116,486.1 116,767.9 116,464.6
--------------------------------------------------------------------------

Net earnings per
share - basic $0.52 $0.49 $1.34 $1.33

Net earnings per
share - diluted $0.51 $0.48 $1.32 $1.31
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(a) At September 30, 2007, 613,152 common share stock options (922,402
options at September 24, 2006) were excluded from the calculation of
diluted net earnings per share since the unrecognized future
compensation cost of these options has an antidilutive effect.


11. Effect of new accounting standards not yet implemented

In December 2006, the CICA issued the following new recommendations which apply to fiscal years beginning on or after October 1, 2007. The Company is currently evaluating the impact of the adoption of these new sections on its consolidated financial statements.

Financial instruments -- disclosures

Section 3862, Financial Instruments - Disclosures describes the required disclosures related to the significance of financial instruments on the entity's financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. This Section complements the principles of recognition, measurement and presentation of financial instruments of Section 3855, Financial Instruments -- Recognition and Measurement.

Financial instruments -- presentation

Section 3863, Financial Instruments -- Presentation establishes standards for presentation of financial instruments and non-financial derivatives. It complements standards of Section 3861, Financial Instruments -- Disclosure and Presentation.

Capital disclosures

Section 1535, Capital Disclosures establishes standards for disclosing information about the entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital.

Contact Information