Financial results

Reviewed Group Results
For the year ended 30 June 2010

Commentary

Results

Trading conditions remained difficult in the year under review, and whilst the latter months of the period indicated that the country was slowly emerging from recession, economic recovery was restrained and consumers’ response measured.

The Group has reported a 7% growth in system-wide turnover to R2,75 billion (2009: R2,57 billion). Since no new mainstream stores were opened in the reporting period and price inflation was restricted to 1%, this growth is attributable to improvements in the quality of the business resulting from efficiencies implemented at store level and in the supply chain.

Reported trading profit increased by 8% to R389 million (2009: R361 million). Group operating margin remained constant.

Inventory management at store level and in the supply chain remained a key priority. Stock-turn across the brands continued to improve in line with the trend of the past two years. Management is satisfied that current inventories of R232 million will support the Group’s trading activities in the forthcoming period.

Cash reserves increased from R667 million to R711 million in the review period, and will be used to fund future expansion.

The tangible net asset value per share has decreased by 5% to 161 cents (2009: 169 cents).

Trading environment

The aggressively competitive environment featured further rationalisation of industry peers, a reduction in the number of contractors in the lower end of the market, and continued stagnation in construction activity in the niche premium end segment.

In this context, the Group benefited from its resilient business model and diverse customer base which enables it to take advantage of both the renovation and new build markets as those sectors enter alternate cycles. Whilst the new build sector declined during the review period, the Group capitalised on the small improvement experienced in the renovations market.

Italtile’s 40 year legacy and high profile brands served it well in the uncertain economic climate where customers sought reliable, trustworthy suppliers.

Operational review

The three fundamentals underpinning the Group’s strategy to own its customers are: an unwavering focus on customer service, an unrivalled in-store shopping experience and dynamism in enhancing in-house efficiencies. Accordingly, improvements were aimed at the calibre of staff and store operators, the quality of merchandise and range and the Group’s overall value offering.

Italtile

Trading conditions in this brand’s market segment remained challenging. While the renovations sector started to show modest signs of recovery in the second half of the year, new build projects in the previously buoyant affluent end of the market stagnated. In this environment, no new stores were added to the existing network of seven, however, Italtile succeeded in growing market share as a result of inroads made into the projects sector and upper end of the middle income market. The rationalisation of competitors also assisted the brand in extending its lead in its niche segment.

In the year under review, management’s focus was on enhancing store layouts and product range, particularly in the bath shop component of the business.

In a first-to-market coup, Italtile has introduced the ‘Earth’ range, internationally accredited environmentally-friendly tiles, which are set to revolutionise the industry. Manufactured using cutting edge digital ink jet printer technology, the product is indistinguishable from natural stone, affording manufacturers greater flexibility in terms of product and volumes and providing the end user with an aesthetically superior, ecologically sustainable product.

Italtile’s Cape Town store will be relocated in the last quarter of 2010, and two new stores are planned for 2011 in Boksburg and Windhoek.

CTM

Retail trends demonstrate that faced with reduced discretionary spend, consumers gravitate to well known, respected brands that offer value. CTM’s reputable, high profile value proposition was perfectly positioned to capitalise on that trend. In-house brand building campaigns communicating style and value also afforded CTM strategic advantage over its competitors.

The onerous economic environment continued to restrict growth in the new build sector, favouring the renovations market. CTM’s appeal for small builders and the DIY market benefited strongly from this trend.

Robust growth continued to be experienced in the entry level and rural markets, with steady growth achieved in the middle income segments. The inland regions outpaced the coastal areas. Despite extremely competitive trading conditions, the brand succeeded in growing market share.

Top T

Top T is the Group’s embryonic no frills value brand, offering “tiles, taps, toilets and tubs at factory prices,” as well as a limited hardware range. The network comprises eleven stores situated in small outlying markets and under-serviced rural areas. While three new stores were opened during the year, they did not contribute to the Group’s operating profit. Management is of the opinion that the brand offers growth potential over the long term but until the business model has been optimally developed, expansion will be conservative.

Supply Chain

Pivotal to the Group’s vertically integrated supply chain model are the International Tap Distributors (“ITD”) and Cedar Point businesses. The former supplies taps and accessories, whilst the latter distributes laminated boards, cabinets, tools and décor.

Improvements in internal efficiencies, service and enhanced range management enabled these divisions to grow revenue and gain market share in the reporting period.

Additional growth opportunities for ITD and Cedar Point will be leveraged off CTM’s brand building campaigns and promotions which are scheduled throughout the year.

Africa

The Group has 14 CTM stores in the sub-equatorial region. Trading conditions in neighbouring Namibia and Botswana were difficult given the recessionary environment linked to the South African economy. The Group’s strategy in terms of expansion into Africa is conservative, based on building existing relationships to entrench the brand’s presence and extend the network. Opportunities to establish New Master Franchise licenses are being evaluated in Zambia and Malawi. A new store is currently under construction in Nairobi, Kenya and should commence trading in mid 2011.

Australia

Notwithstanding difficult trading conditions, the Group’s CTM Australia operation grew revenue, making a sound contribution to Group profits. It is anticipated that this performance is sustainable, and consequently, the planned strategy is to expand the existing nine store network to 15 stores by the end of June 2013, pending availability of suitable properties.

Property portfolio

The strategic advantage of supporting the Group’s brands with high profile destination sites ensures that this portfolio contains high quality investments that deliver a rate of return in line with the Group’s trading operations. The property portfolio has an estimated market value of R1,3 billion (2009: R1,1 billion).

At present, construction costs favour the development of new sites, and the Group is currently erecting new properties in Cape Town, Mossel Bay, Newcastle, Secunda and Gabarone.

Directorate

Mr Gary Morolo resigned his position as non-executive director of Italtile with effect from 12 May 2010. The Board thanks him for his valued contribution.

Prospects

Difficult trading conditions are expected to remain a challenge in the year ahead. Intensified competition is anticipated and greater innovation will be required to continue growing the Group’s market share. Management’s priorities will be to leverage further efficiencies, and continue to improve the Group’s service offering and in-store shopping experience.

The Group’s business is healthy and its brands are well positioned to capitalise on growth opportunities as the economy improves.

Basis of preparation of accounting policies

The Preliminary Profit Announcement has been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards and the AC 500 standards, and contains the information required by International Accounting Standard 34, Interim Financial Reporting. The results have been prepared on the historical cost basis, adjusted for the fair value of certain assets and liabilities. Intra-group transaction analysis has been introduced in the segmental report in order to improve disclosure and make the report more meaningful.

Ordinary dividend

The Group has maintained its cover of three times. The Board has declared a final dividend of 5 cents per share (2009: 5 cents), which together with the ordinary dividend of 6 cents, produces a total ordinary dividend declared for the year of 11 cents (2009: 11 cents).

Ordinary dividend announcement

The Board has declared a final dividend (number 88) of 5 cents per share to all shareholders recorded in the books of Italtile Limited. The last day to trade cum the dividend will be Friday, 3 September 2010. The shares of Italtile will commence trading ex dividend from the commencement of business on Monday, 6 September 2010 and the record date will be Friday, 10 September 2010. Payments will be made on Monday, 13 September 2010. Share certificates may not be rematerialised or dematerialised between Monday, 6 September 2010 and Friday, 10 September 2010, both days inclusive.

Special cash dividend

A special cash dividend of 60 cents per ordinary share was declared in the interim announcement of 18 February 2010.

For and on behalf of the Board

G P E Ravazzotti
Chief Executive Officer

P D Swatton
Chief Financial Officer

The results have been reviewed by Ernst & Young and their unqualified review opinion is available on request from the company secretary at the company’s registered office.

Johannesburg
16 August 2010

Share code: ITE ISIN: ZAE000099123

Reg Number: 1955/000558/06 Incorporated in the Republic of South Africa ("Italtile" or "the Group")

Registered office: The Italtile Building, cnr William Nicol Drive and Peter Place, Bryanston
(PO Box 1689, Randburg 2125)

Transfer secretaries: Computershare Investor Services (Pty) Limited
70 Marshall Street, Johannesburg 2001 (PO Box 61051, Marshalltown 2107)

Executive directors: G A M Ravazzotti (Chairman), G P E Ravazzotti (Chief Executive Officer), P D Swatton* (Chief Financial Officer).

Non-executive directors: S M Du Toit, S I Gama, A Zannoni** (*British **Italian)

Company secretary: E J Willis Sponsor: BJM Corporate Finance (Pty) Limited