RONA's (RONAF) CEO Robert Sawyer on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: RONA Inc. (RONAF)

RONA, Inc. (OTC:RONAF) Q2 2014 Results Earnings Conference Call August 12, 2014 3:00 PM ET

Executives

Stephane Milot - Vice President Finance and IR

Robert Sawyer - President and CEO

Dominique Boies - EVP and Chief Financial Officer

Analysts

Anthony Zicha - Scotiabank

Irene Nattel - RBC Capital Markets

Jim Durran - Barclays

Derek Dley - Canaccord Genuity

Vishal Shreedhar - National Bank Financial

Mark Petrie - CIBC

Peter Sklar - BMO Capital Markets

Keith Howlett - Desjardins Securities

Operator

[Foreign Language]

Good afternoon, ladies and gentlemen and welcome to the RONA 2014 Second Quarter Results Conference Call.

[Foreign Language]

During the presentation, all participants will be in a listen-only-mode. Afterwards, we'll conduct the question-and-answer session and instructions will be provided at that time. As a reminder, this conference is being recorded.

[Foreign Language]

I would now like to turn the conference over to Stephane Milot, Vice President, Finance and Investor Relations. Mr. Milot, please go ahead.

Stephane Milot

Well, thank you, operator and good afternoon everyone. So, welcome to our 2014 second quarter results conference call. With me are Robert Sawyer, President and CEO and Dominique Boies, Executive Vice President and CFO. So the agenda for today is as follows. Robert will provide a business update and Dominique will follow with specific comments on financial results. We will then be available to answer all your questions.

So before we begin, I would like to remind you that the information provided during this conference call may contain forward-looking statements reflecting RONA's objectives, estimates and expectations. As you know, such statements involve risks and uncertainties. For information on the nature of these risks, please see our MD&A. And moreover, RONA undertakes no obligation to publically update the forward-looking information discussed during this conference call, unless otherwise required by the Securities Authorities.

So I will now turn the call over to Robert Sawyer. Please go ahead, Robert.

Robert Sawyer

Thank you, Stephane, and good afternoon, everyone. Today, I am pleased to report the RONA 2014 second quarter results increased significantly. EBITDA reached 89.1 million in the quarter, a 16% increase compared to $76.6 million posted in the same quarter of last year. Our same-store sale trend in the retail sector continued to improve with a 0.7% decrease in second compared to 3.4% decrease in the first quarter and this in spite of a very slow start for the first six weeks of Q2, June may lead to weather condition in the spring and the continued decrease in single unit housing starts in Quebec.

For the first time since 2010, we reported positive same-store sale for our corporate store across the country. This performance was driven by the strength of the Western Canadian market as well as favorable impact from the repositioning of the TOTEM banner in Alberta and the positive result of Réno-Dépôt transformation plan in Quebec. As we said on previous call, we are now in a position to export discounts outside Quebec next year.

During the second quarter, we realized saving of $10.5 million related to our recovery plan resulting from a reduction in SG&A expense and the net effect from closing on the performing store. These savings directly led into significant improvement in adjusted EBITDA margin and 25% increase in adjusted net income.

Another positive development for RONA was the announcement on July 29 of a long-term master license agreement with Ace Hardware International for the Ace brand in Canada. This agreement will enable us to improve our offerings to small dealers across the country to leverage our distribution infrastructure and to strengthen our portfolio of banners. It is a clear indication of our commitment to continue to develop and improve our network of affiliated dealers across Canada.

Looking ahead after six weeks in Q3, sales trend is positive but we remain very disciplined in order to deliver our 2014 objective in this fragile economy. RONA core business sits on a much stronger ‘14 with regard to marketing, merchandising and supply chain. We are now in a better position to grow sales with our leaner cost structure and dedicated team for business unit.

We will do so by improving our offering in core categories and by introducing and developing new categories. In addition, we will make an important push in the fall to accelerate the development of our installed sale program. It is already a core category of RONA, but we can definitively own this market.

These services are core to our offering that should be a natural expansion to the sale of hardware and building materials to complete the project of customer shopping at our store. We will also continue to increase our investment in digital marketing versus traditional marketing. Recent tests are showing the high return for this type of investment to reach customers in our industry.

In conclusion, we are pleased with our progress after two quarters and remain confident for the rest of the year. This completes my part of presentation. Now I will ask Dominique to go over financial highlights.

Dominique Boies

Thank you, Robert. Good afternoon everyone. Second quarter revenues stood at $1.19 billion in 2014 versus $1.25 billion in 2013. The 55.5 million or 4.4% decline is a result of a 37.4 million or 4.2% decrease in retail segment and an 18 million decrease or 5.2% in the distribution segment.

As Robert mentioned, same store sales in the retail segment are down 0.7% compared to minus 3.4% in the first quarter and minus 0.7% in Q2 2013. Despite a difficult economic environment in Quebec, consolidated same store sales of corporate stores were positive in the current period which is a first sign since Q1 2010. The network development activities had a negative 1.4 million impact on revenue, the decrease as a result of a 3 million contribution from acquisitions and new store openings, which was more than offset by lots of revenues from dispositions of 4.4 million. The 17 underperforming stores closed under our cost reduction plan, lowered revenues by 38.3 million. Recruitment, net of dealer, owner, closures and departures represented a 9.1 million decline in revenue.

Finally organic revenues decreased by 6.7 million in 2014, this reduction stands mainly from a 9.6 million decrease in organic sales in the distribution segment partially offset by an increase of 2.9 million in organic sales in the retail segment. Please note that this represents corporate stores sales only. As stressed by Robert the decline in housing starts and delayed spring had a stronger impact on the decrease in same store sales for our stores in Quebec and Ontario. This trend was also observed in affiliated and franchise stores which is why distribution sales were down.

However the return of good weather in the back half of the quarter led to a positive trend in same store sales for all regions. Adjusted gross margin was stable at 26.1% during the second quarter. This is a significant improvement from previous quarter which reflects a more favorable product mix and better procurement.

Gross margin contribution in dollars is down by 15.3 million, mostly as a result of store closures for 10.6 million. Rate had a negative impact of 1.2 million and volume of 1.8 million. The stability also shows that despite reinvesting SG&A savings into initiatives to stimulate sales, we are reaping benefits from our marketing and merchandising and procurement initiatives.

Adjusted EBITDA totaled 89.1 million or 7.5% of revenue, up from 76.6 million or 6.1% of revenue last year. The positive year-over-year EBITDA margin spread of 140 basis points continues the positive trend started last year and also marks an improvement over 111 basis points positive spread registered in Q1. In the retail segment, the adjusted EBITDA margin improved by 170 basis points from 7.3 last year to 9% this year, while in the distribution segment it rose 40 basis points to 3.6%. Adjusted net income stood at 42 million or $0.35 per share in the quarter up 25% from 33.6 million or $0.28 per share last year.

Turning over to the balance sheet, RONA’s financial position keeps improving and is very healthy. We concluded the second quarter with cash on hands of $26.5 million and only $87.1 million used on our $700 million revolver. For which we just closed the amendment and expansion yesterday.

As of June 29, 2014, RONA's net debt adjusted EBITDA ratio were 0.9 times versus 2.5 times at the end of June 2013. At the same time net debt to total cap ratio was down to 10% from 23% a year ago. In the past 12 months, total net debt cash has been reduced by 307 million reflecting the sale assets, noble and better working capital management and higher capital spending. With regard to working capital, inventories stood at 856 million on June 29, 2014, approximately 25 million less than at the same time last year and 43 million less than at the end of the first quarter of 2014.

Working capital provided liquidity of 64.9 million in the second quarter of 2014 versus using 55.5 million last year. Considering that maintenance CapEx were leave in a year ago, RONA concluded the second quarter of 2014 with free cash flow of 135.7 million versus negative free cash flow of 21.1 million last year. This solid free cash flow generation allows us to continue to repurchase shares under our NCIB. During the second quarter, we repurchased nearly 1.7 million shares for a consideration of $18.3 million.

As at the end of the second quarter we have repurchased close to 3.5 million shares for a consideration of 41.5 million. The program allows us to repurchase maximum of 8.6 million shares until November 17, 2014 and our solid financial position enables us to remain active on this front.

In conclusion, we're pleased with the progress accomplished as cost savings are increasingly translating into better profitability. Our financial position remained strong which provides us with a flexibility to repurchase share, reduce debt and focus on capital investment that will generate per year return on capital to the benefit of our shareholders. We still see a lot of opportunities to squeeze capital out of this system. Retail store inventory is an example.

This wraps up the financial section. So operator we're ready to answer question.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Foreign Language] (Operator Instructions). The first question is from Anthony Zicha from Scotiabank. Please go ahead.

Anthony Zicha - Scotiabank

Hi. Good afternoon. Robert, with reference to the same-store sales growth in distribution segment, I saw 4.5% decline. So could you give us some more color what happened during the quarter and how much of that decline relates to the Quebec and Ontario economies?

Robert Sawyer

It's a question of, because when we look the third quarter, we're up, so honestly it's more of Quebec due to the economy, due to the bad weather. But we've been recovered in the third quarter.

Anthony Zicha - Scotiabank

Okay. And what about the Western Canada, how's that tracking?

Robert Sawyer

Western Canada, either distribution or either rebuild, we're very happy with the result overall in every segment of our businesses.

Anthony Zicha - Scotiabank

Excellent. And then with reference to the master licensing due to ACE, what are your plans to leverage it with other banners? And is the key, the combination of purchasing power?

Robert Sawyer

There is few answer to your question. The first thing we do have a business, a wholesale business that we call TruServ based in Winnipeg that serve around 125 true banner across Canada mostly outside of Quebec. So which was an opportunity for us to say the true banner that we own through that TruServ businesses I know they made the ACE independent that we are right now into discussion with them, because we have agreed on being the master licensee agreement with ACE US, but we need to go on a one on one and to make sure that these ACE independent dealers pair with the ACE brand. So this is the challenge. Going forward I think it's going to be an opportunity for us to consolidate the true banner under the ACE banner and some of small grown up that would like to join ACE, they are going to be capable to do it.

And at the end in terms of supply agreement for us first of all, in terms of distribution, it will leverage all of our existing DC, so no DC to add into the system. Secondly, we have the Ace brand that will introducing into the market of the Ace dealer. And thirdly there is some I would say not the Ace brand but the control brand that we might have an opportunity for the RONA dealer to introducing into our network. We’re in discussion right now with Ace U.S. And finally that’s a lot of answer to your question. A finally yes, it will enable us to improve our, probably our power of buying.

Anthony Zicha - Scotiabank

Okay. And what about recruiting?

Robert Sawyer

We have a dedicated team under the control of -- to serve businesses. We’ve put up a team in Quebec to respond and to visit all of the Ace dealers, we did the same thing out west, but most of these Ace dealers are based in Quebec.

Anthony Zicha - Scotiabank

Okay. That is a bit over a 100 I believe, right?

Robert Sawyer

Yes.

Anthony Zicha - Scotiabank

Okay. My last question Mr. Dominique, like you mentioned you’re squeezing up more capital out of inventory. Can you give us an update was -- that related to of course to SKU reduction but can you remind us what percentage is the brand names versus private label and how the evolution has changed I guess the fact that Réno-Dépôt is going more in terms of the brand name, can you just give us a bit more color on the numbers now they’ve changed?

Dominique Boies

Yes. I don’t have specific numbers Tony, one thing for sure is that the penetration of the private label and control brand has reduced in our network and this has been done intentionally by Alain Brisebois as we have many issues to fix on our private label. So, our focus is not necessarily looking -- there is a huge opportunity there to improve and improve profitability but then the key focus is really at the store level improving inventory turn by category, by store format to be really able to be performing where we should performing when we compare ourselves to our peers.

So that’s the model, we look at it rather than looking at control brand private label versus national brand but obviously you can also achieve that by reducing the number of SKUs which is what Alain’s team is working on as well.

Anthony Zicha - Scotiabank

Okay. And could you remind us how much assets do you have for disposal pending and…

Robert Sawyer

Were roughly 68.

Anthony Zicha - Scotiabank

68 and that I presume is pretty much real estate?

Dominique Boies

Yes, it’s somewhere between 68 and 75 and it’s land and it’s some buildings, but it’s mostly land.

Anthony Zicha - Scotiabank

Okay. And do you anticipate we could sell it off in the next 12 months or is taking a bit longer?

Dominique Boies

I wish I could answer; it takes time. Real estate is slower pace. And we don’t want to -- we are not in a rush. So, the last thing we want to do is take any losses in there. So I think we are in very good position and whenever there is a good opportunity to dispose that’s what we are doing.

Robert Sawyer

We sold and you’ll see that in our financials that we sold for $22 million in Q2. So as Dominique said, we still have some in the pipeline and it’s looking good.

Anthony Zicha - Scotiabank

Excellent. Thank you very much.

Robert Sawyer

Thanks Tony.

Operator

[Foreign Language]

Thank you. The next question is from Irene Nattel from RBC Capital Markets. Please go ahead.

Irene Nattel - RBC Capital Markets

Thanks and good afternoon everyone. On the -- sticking with the subject of cash flow and allocation. Certainly, if we look at where you stand at quarter end on the balance sheet and the free cash flow profile, should we be assuming an acceleration of the share buyback from now until November?

Dominique Boies

Definitely from a cash flow perspective, it’s not an issue, then it’s just a question of liquidity in the market and finding the right sellers. Then right now there is more people on the buy side than on the sale side. So, it’s a good problem to have. So as in the past, we’re trying to execute very diligently, but it’s being able to find sellers for this.

Irene Nattel - RBC Capital Markets

I think as you go through the buyback process, are you sensitive to the price at what you’re buying back or evaluation or really it's just a matter of getting the shares?

Dominique Boies

It's an interesting question. We can answer it in many different ways. But again, when you look at it from a financial profile and you look at it from a return perspective, the model is not very sensitive to the price; it's more sensitive to how much volume you’re buying back. So I guess the biggest issue is finding the enough share.

Robert Sawyer

But like any investors, I would say that we're trying to buy at the cheapest price possible.

Irene Nattel - RBC Capital Markets

Thank you for that. And just on same-store sales in the quarter, you did mention in the release that it builds a favorable mix shift that contributed to the same-store sales into the gross margin. Just wondering if you could give us a little bit more color on what you're seeing out there in terms of demand and the stronger category?

Robert Sawyer

So, during this season lumber building that’s our yield usually have lower margins as you know. So this impacted our overall sales but it was a positive deposit impact on the mix. So, now this is turning around and since the beginning of Q3 we’ve really turned corner in terms of lumber building material sales so we see this peaking up. So, it's quite a change.

Early in the quarter as well in Q2 our seasonal sales with regard to patio set barbeques we had a relatively successful program and our strategy to -- the merchandising strategy which is more towards close to with the goal of full sales through is also helping our margin as we have a lot left to discount in Q3. So, those are all of positive things that impacted Q2 and which are going to impact Q3 as well positively.

Irene Nattel - RBC Capital Markets

That's great. Thank you. That's very helpful. And then just one more question if I may. In Robert's opening comments he mentioned an anticipated push on the install program in Q4 and I was just wondering again if you could give us a little bit more color and whether we should be thinking about any sort of pick up in marketing spend associated with that?

Robert Sawyer

You know what Irene, the installed program was in place, we're looking the results since the beginning of the year, where double-digit growth right now from the beginning of the year. I think the socio-demographic trend of people, allow the people like to have a program installed with the, I would say the opportunity that is there, I think it could complete for our customer an offering that in some area that we are not there and we could be better than what we're doing right now.

So definitively that is going to be important in terms of marketing. And at the same time, we're going to be able to push our RONA credit.

Irene Nattel - RBC Capital Markets

Got it. Thank you very much.

Robert Sawyer

Thanks Irene.

Operator

Thank you. The following question is from Jim Durran from Barclays. Please go ahead.

Jim Durran - Barclays

Good afternoon. So on the corporate comps, they were positive and it hadn’t been for weather disruption, obviously you would’ve had a stronger comp store sales outcome. You talked about some of the categories that are doing better, but you also obviously had a lot of initiatives in terms of pricing promotion strategies et cetera.

If you were to sort of identify the three things that you feel are moving the comp store sales number in the right direction, what are they? And I assume that many of them are going to be sustainable?

Robert Sawyer

I would say the first one is the (inaudible) and I know the full action plan that we’ve put together in different markets, definitively help the comp numbers. Last year, these two business units were very big negative same store sales. The introduction of starting new category as an example consumable goods, we can feel that we're increasing of the transaction in our basket and we are trying to increase the frequency of visit of our customer with these type of initiatives.

So, these are two that I would say that definitely have led into getting in a positive same-store sale environment. This under pressure, adding under pressure the price of lumber that is not increasing.

Dominique Boies

If I may add Jim, Western Canada was very strong, so you see the housing starts into west, so that’s [denting] us also or pushing the overall results up.

Jim Durran - Barclays

And in Quebec starts trends ease in terms of their negativity, do you see that commensurate easing of any declines that you might see on the renovation related or starts related businesses?

Robert Sawyer

I think is not improving. When we look at the stocks and when we compare ourselves Q2 against Q2 of last year we are negative, recent numbers this morning said that the plats for July but last year July was a very bad month because of the construction strike that we had last year. So where I was looking the number with Dominique this morning. Last year the month of July was a minus 38% and we’ve reported this morning single unit housing start has a plus 5 on a minus 38 we’re far away. And year-to-date I would say we’re not as bad as last year but my number says minus 13 on a minus 28 of last year so we’re not improving too much.

Jim Durran - Barclays

Okay. Any positive indications from the renovation tax credit that’s in place?

Robert Sawyer

It’s a program that’s been putting in place that it’s the early numbers are not encouraging much because the program is a little bit complicated for the consumer the end demand do not have access at that program, you need to hire a subcontractor or a contractor in order to be eligible for the tax reduction.

Jim Durran - Barclays

Okay, that’s great, thank you.

Operator

Thank you. The following question is from Derek Dley from Canaccord Genuity. Please go ahead.

Derek Dley - Canaccord Genuity

Hi, good afternoon. Can you guys give us some more color just on the initial sales boost you guys have gotten from the repositioning of the Réno-Dépôt stores?

Robert Sawyer

We don’t want to excite our competitor on the line, so I would that we were in a negative environment, now we are in a positive environment and both banners that have been talking. So the repositioning of Réno-Dépôt was a while, we were talking almost 8% to 9% year-end and now we are in positive so it’s a very good turnaround and it’s the same thing for [them]. So very happy.

Derek Dley - Canaccord Genuity

Okay. And then you mentioned moving the Réno-Dépôt banners across the rest of Canada or outside of Quebec at lease, will those be through banner conversions or new stores or a combination of the two?

Robert Sawyer

At this point in time it will be into new store.

Derek Dley - Canaccord Genuity

Okay, thank you very much.

Operator

Thank you. The next question is from Vishal Shreedhar from National Bank Financial. Please go ahead.

Vishal Shreedhar - National Bank Financial

Thanks very much. Just given some of the momentum that you are seeing with some of your initiatives like the banner repositioning, looking out let’s say over the next two years or so, do you foresee RONA increasing CapEx or increasing SG&A in order to capitalize some more growth initiatives?

Dominique Boies

Definitely, we're there to grow the top-line, we're not only there to cut down the expenses. So 2015 definitely we want to expanding existing store, reallocating existing stores or enlarging sort of use as a world. And if there is any opportunity to open Greenfield we will do, but we'll spend more money into relocate store that is existing or expand a store it's a less, I would say -- no it's a more productive, more that should be using. And definitely, we spend money in our existing stores to introduce new category, so when you introduce a new category in a store you need to change layout so you need to spend CapEx of them.

Vishal Shreedhar - National Bank Financial

Got it. So in terms of the CapEx that we're looking at. Can you give us some indication on how we should thinking about CapEx evolving over the next maybe couple of years possible?

Dominique Boies

I think were last year we finished close to 80 million or so, we gave, we said about 85 million for 2014. So I think you should use depreciation as probably you rollout some Vishal going forward. So close to 100 million would be kind of a good rollout some. But like Robert mentioned, if we have opportunities, we have all the financial flexibilities and again it is a question of I returned project. So if the returns are there and we have project and in the teams I'll be very happy to invest and to free up more capital for investments.

Vishal Shreedhar - National Bank Financial

Great, makes sense. In terms of the cash taxes Dominique, how long do you think you're going to benefit from these low cash access?

Dominique Boies

In fact as a result of the sale of noble, disposition of noble which drive new effective tax cashes down, so until mid 2015 I think.

Vishal Shreedhar - National Bank Financial

Okay, great. That's it from me. Thanks a lot.

Operator

Thank you. The following question is from Mark Petrie from CIBC. Please go ahead.

Mark Petrie - CIBC

Hi. Good afternoon. Just a couple of follow up questions. Could you just go back to the opportunity that you see on regional inventory and just be a bit more specific in terms of what that opportunity is dollar wise and what is driving that less use and what the improved efficiency will be coming from?

Robert Sawyer

Yes. So, when you look at our turns, retail turns we're reading at where we should be and where we want to be. If you compare our Big-Boxes to -- if you take just the Big-Boxes and compare them to our peers let’s say home depot or low, so there is a huge improvement. We can brig there in terms of inventory turns at a retail level. So the goal is now that we stabilize the environment. We stabilize the product categories, for example Réno-Dépôt now we're finishing the transformation so we'll set this big target for merchandisers and at the store level and there is also another factor.

As you know many of our stores, the smaller formats are in the pool, inventory pool format, so that the manager, the store manager decide on which inventory be full and how much from the DP. So, again we're going to measure them and provide them with target on what should be the adequate term because most of the time or sometimes they don't know. They don't have guidance on this, so we'll help them, improve. So, if you just take the Big-Boxes, let me give you an example, you just take A number, let's pick one, $1 million for store for big-box, already there is more than $70 million of inventory that you can reduce by decreasing $1 million by buyback.

So even this doesn't take us where we want to be. So there is a huge opportunity there and it will make ourselves more efficient, it will help with obsolescence as well. So, all of those benefits will go through, will provide us with long-term win. But it will take time, it's not something we can achieve over night. We don't want to do stupid things. And you can reduce inventory very quickly by not buying back what you are selling the most and that would be kind of a huge mistake. So, it's really an organized approach that we're taking Mar in doing this, making sure we don't disrupt the stores for the sake of decreasing inventory.

Mark Petrie - CIBC

Okay, thanks. That's helpful. And in terms of weakness in lumber and building materials turning around, what would be the driver of that? I mean is it macro driven or is it something that you guys are doing at the store level? What do you view as the drivers for that and what’s your outlook?

Dominique Boies

It’s housing starts.

Mark Petrie - CIBC

It’s really starts?

Dominique Boies

Yes, housing starts and in the spring, it was weather if someone wanted to complete their past due and expenses and things like that. So, there are some projects related, for example in treated wood and cedar and things like that. But the main driver is really housing starts for us. You look out where our lumber sales are just very positive, you take in our business and you take very positive, because the environment is positive for that type of sales.

Mark Petrie - CIBC

Okay. And then could you just give us a bit of a sense of the performance by stores type, be it big-box or satellite proximity?

Dominique Boies

If you look across the country, I would say it’s pretty even, if you look across the country. So, there is no -- I guess the biggest aspect was not the type of store format, was more the region that really differentiated the performance Mark.

Mark Petrie - CIBC

Okay, thanks. And then just lastly, could you just comment on your strategy or your strategy towards investing in the seasonal category? And because I know it’s one that’s kind of gone up and down and lately it seems to be more of a push. Is that going to continue for the next year or so?

Dominique Boies

When you look at seasonal, we were solely out of seasonal in Réno-Dépôt a year ago. So it’s just a question of going back and going to seasonal in a very organized and structured way. You can eat more than your profit if you don’t do it right. And if you get into very fashion type of products, for example (inaudible), so the merchandising strategy that Alain has put in place is really with I would say a low risk approach, bring the products with the high sell-through with rather run out of (inaudible) in June than carrying out (inaudible) in August that you need to give up basically almost give them away to get rid of them and eating all of your margin. So we’re very cautious on the approach we’re taking but those are key categories for us, but you need to do them smartly in order to really contribute to the bottom-line.

Mark Petrie - CIBC

And that would be your attitude across banners?

Dominique Boies

Yes.

Mark Petrie - CIBC

Okay, thanks very much.

Operator

Thank you. (Operator Instructions). The following question is from Peter Sklar from BMO Capital Markets. Please go ahead.

Peter Sklar - BMO Capital Markets

Thank you. Just a couple of questions. Like you have got a lot of benefit from the actions you have taken the store closures and the G&A restructuring, could you just give us a sense of the timing of how the store closures played out and how the SG&A restructuring played out and when you start to lap those positive benefits?

Robert Sawyer

The store closure was mainly due in Q3 of last year; I cannot have the exact number. Q3 was the startup. I think we have announced that late June 2013. So, it was Q3 and probably mostly Q4.

Dominique Boies

11 out of 17 were done in Q4.

Robert Sawyer

We have the number here, 11 out of 17, yes. The effect in Q4 was start really to decrease.

Peter Sklar - BMO Capital Markets

Okay. And then you also had the G&A restructuring where you took a lot of G&A out of the company when did that become effective?

Dominique Boies

Yes, similar; slowly in Q3 of last year then it increased over time. So if you look at the program, there is roughly under 77 million remaining, we are probably at close [60 million] on the 77 million net remaining. So yes, we are at 48, sorry we’re at 48 on 77 Peter.

Peter Sklar - BMO Capital Markets

48 on 77, and the 77 is the 110 less what your investing back in price otherwise?

Dominique Boies

I mean 110 is roughly 30%.

Peter Sklar - BMO Capital Markets

Right, okay. And then just a last thing, can you just talk a little bit about your recruitment efforts? When I look at the reconciliations that you provide in the disclosure, it looks like in terms of your net recruitment versus what’s leaving the system that you’re slightly down, it just seems to be a slight leakage. And I'm just wondering if that’s planned or you're letting go weaker franchisees or just what's going on there?

Robert Sawyer

We don't like to people to leave us. I would say the effort in 2013 was not necessarily the priority to chase out new customer. ‘14, I think after putting into place all of the plan that we’ve been talking for a month. Now we're moving to a regular mode of business and we will be recruiting, but not I would say -- we want recruit for the purpose of recruiting, we will recruit in the area that where we think we should be recruiting and the quality of merchant, we think should be there into our banner. So Ace is perfect timing to start with the team to recruit.

Peter Sklar - BMO Capital Markets

Okay. Thanks for your comment.

Robert Sawyer

Okay. Thank you, Peter.

Operator

Thank you. The following question is from Keith Howlett from Desjardins Securities. Please go ahead.

Keith Howlett - Desjardins Securities

Yes, I had a question about the TOTEM stores in Western Canada; you are referring to them as the TOTEM, I think the flyer sort of shows RONA still as a total logo. What sort of your branding strategy going forward on those stores I guess?

Robert Sawyer

The branding is to use RONA name because it's a national brand and we don’t intend to take the RONA out but we have a signature of TOTEM. Signature of TOTEM it's not the most important thing. The most important thing is we gave back to region the ability to offer to consumer a merchandising program that we used to have before RONA went to play. So, is the big difference.

Keith Howlett - Desjardins Securities

And in one speech the TOTEM sort of revised TOTEM stores, I guess they've been retailed it again, what were look to as being a prototype for the proximity stores across Canada just wondering how you view the TOTEM stores in that way now?

Robert Sawyer

We haven't spent money this year in the TOTEM but there is a store in that environment (Technical Difficulty) two years ago…

Dominique Boies

In Stony Plain.

Robert Sawyer

Stony Plain. From Stony Plain ex type of TOTEM we have opened one in Toronto which is (inaudible) and we opened a similar one here in [Valerie] and right now after two years we're just starting to see good results, probably at the level of the pro forma that was made when we decided to open the store.

So, TOTEM is a nice formula. I think we should use them as an example not only in Alberta but in many regions in our businesses so working on it right now.

Keith Howlett - Desjardins Securities

And then in terms of the marketing budget is would it be the overall company marketing budget is it about where you want it to be at this point?

Robert Sawyer

There is never enough money to spend in marketing, if you listen to the marketing people.

Keith Howlett - Desjardins Securities

Okay.

Robert Sawyer

But we’ve decided to restrict ourselves in 2014, because of the condition of the company. So far we're looking the result, we think that we will spend more money into, I would think web, we have more than 1 million email address of our customers visiting our store, when say a weekly basis on a regular basis. And with the AIR MILES that, with the team at Google, right now we are capable to put in line our regular flier, our weekly flier, we could put in line our seasonal catalog or offering and we could and we did test that put some exclusive promotion on web for specific product, let's say as an example this weekend we announced very warm weather and we decided at last minute to give a 10% rebate on air conditioning, we do that and so far with these type of email blast that we're getting very good results. So, we say if we do have money to spend, our money will be going into the web, we will improve our website. So I think this is the direction that we're going to be taking in the future.

Keith Howlett - Desjardins Securities

And then just on your new, I think you have re-signed with AIR MILES. I'm wondering if would, I don't know if the true stores offer AIR MILES, so whether east would offer AIR MILES, is that an option if you wanted to?

Robert Sawyer

No, we haven't discussed that yet, I don't know, because it's not put on the table as a discussion in priority. Right now the AIR MILES program is available in all of the RONA in our country, we've decided when we did reposition Réno-Dépôt because of the strategy of Réno-Dépôt, it’s more -- there is more pressure on margin that we’ve pulled out AIR MILes offering at Réno-Dépôt.

Keith Howlett - Desjardins Securities

And then just finally on the supply chain and obviously that’s tied to inventory levels at the store. But how are you feeling as to where you are on the supply chain infrastructure?

Robert Sawyer

Infrastructure, talking of inventory or talking…

Keith Howlett - Desjardins Securities

Yes, inventory how quickly your inventory turns out at the wholesale or at the DC level and that sort of thing?

Robert Sawyer

I think at the DC level it’s better than the retail level. I think like Dominique said the big box are the ones that we should be focusing on because these are the place we have very high inventory, certain area or in commodities we need to relook the way that we ship the merchandise come in to our store. But we short time are working on the plan to reduce inventory in our big box all over country.

We have a system here in place but we thought a push or a pull we did some tests of adding to start pull instead of pushing and we are analyzing all of these results, hoping that at the end we’re going to reduce our inventory and we have more money available to do other stuff.

Keith Howlett - Desjardins Securities

And as the Calgary distribution center was getting sort of tight, where would that be?

Robert Sawyer

If you talk to operator they all say that DCs are tight, but we need to increase our frequency of purchasing, for me Calgary it’s a very big [city], we’re looking into opportunity right now out west to maybe eliminate completely satellite warehouses that we used to store our important chain up. So it might end up that we extend a building but always in the intention to reduce our cost.

So right now there is no problem of capacity in all of our DC.

Keith Howlett - Desjardins Securities

Great, thanks very much.

Robert Sawyer

Pleasure.

Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Milot.

Stephane Milot

Alright thank you, operator. And for your information our next conference call for third quarter results will be held on Tuesday, November 11 at 3 PM. We look forward to updating you on our progress at that time. So as always, we are always available to answer your questions. You can call myself or Robson to get additional information on set up a call. So thank you all for your participation on this call. Have a good day. See you next quarter.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

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