OVERVIEW FOR THE YEAR ENDED 30 JUNE 2014
Italtile Limited is a franchisor and retailer of local and imported tiles, sanitaryware, bathware, laminated flooring and other related home-finishing products in South Africa. The Group’s national branded retail store network comprises 115 CTM, Italtile Retail and TopT stores and has appeal for homeowners in the LSM categories 4 to 10. The brands are strategically supported by a property investment portfolio and vertically integrated supply chain.
At the end of the prior financial year, a range of key focus areas were identified, including investment in people and processes, innovation in products and technology, and enhancement of efficiencies and cost containment, to ensure that the Group improved profitability and retained market share. In this regard, good progress has been achieved. As a result of these initiatives and the commitment to improvement by the people of Italtile, pleasing double digit growth was reported, including in previously under-performing regions. The Group also entrenched its focus on standardising and promoting performance consistency of the offering across the brands to enhance in-store satisfaction for customers.
TRADING ENVIRONMENT
During the review period the ratio of household debt to disposable income continued to rise, serving to constrain consumer discretionary spend further in an economy which has recorded deteriorating growth over several years. In the construction sector the renovations market was slightly more buoyant than the new-build market, which remained subdued in the context of negative sentiment and restrained public and private sector investment.
Whilst the middle income market appeared less resilient than the top and bottom-end earners, consumers across the spectrum were price sensitive and acutely conscious of value-for-money offerings.
The devaluation of the currency over the period had a significant impact on industry participants and trading behaviour, harming independent opportunistic traders and restricting access to the industry to new entrants. Other consequences of this currency volatility and aggressive price competition were stock shortages and range gaps both in price and fashion, as operators attempted to cut costs further.
The strength of Italtile’s well-established business model, underpinned by its integrated supply chain and cash reserves were critical to its continued growth in this testing environment. The Group’s stated policy of ensuring the right stock at the right time, place and price, together with an uncompromising focus on quality, ensured that Italtile entrenched its position as a leading retailer in the sector.
FINANCIAL HIGHLIGHTS – CONTINUING OPERATIONS
Following the disposal of non-core businesses (disclosed in the Notes section), the financial information presented below refers to continuing operations only.- System-wide turnover for the period rose 17% to R4,46 billion (2013: R3,82 billion).
- Due to a deliberate strategy to capture costs in the supply chain, competitive pricing in the stores was maintained.
- Trading profit grew 23% to R751 million (2013: R611 million) and was impacted by an IFRS 2 charge of R17 million, of which
R11 million is a once-off charge, related to an equity-settled staff share incentive scheme implemented during the period, and an impairment of R20 million (2013: R5 million) recorded on the Group’s property portfolio in Australia, a reflection of continued adverse economic conditions in that country. - Earnings per share and headline earnings per share grew 19% and 24% respectively. Headline earnings have been adjusted for the impairment on the Group’s property in Australia as well as after tax profits realised on the sale of Allmuss Zambia (a property holding company in Zambia) and other properties, totalling R8 million.
- Inventory levels increased to R408 million (2013: R335 million), primarily due to stocking up new stores which were added to the Group owned store network and an extension of the Cedar Point range. One of the Group’s key competitive advantages is the consistent availability of an extensive range of fashionable merchandise. Stock control is therefore a priority challenge for management to ensure that stock turn continuously improves to enhance product life-cycles and provides for the addition of new ranges.
- Capital expenditure of R166 million (2013: R168 million) was incurred primarily to enhance the Group’s property investment portfolio through the acquisition of four new properties and an ongoing store upgrade programme across the network. This investment, together with the net special dividend of R467 million paid during the period, resulted in net cash reserves of R249 million at the end of the period.
OPERATIONAL REVIEW
Italtile Retail This business improved sales and profitability and accomplished good progress in a range of key focus areas. Whilst growth was achieved across the merchandise categories, notably strong sales were reported in the Bath Shop. In addition, the Commercial Projects division delivered strong growth in the brand’s non-residential business in Gauteng. Intensive cost containment ensured that margins remained firm in the context of currency devaluation and the brand’s deliberate decision to broaden its range to appeal to the middle-income market; the gain in market share in this segment endorses this strategy.
CTM CTM performed better in the second year of the year than the first year, and most of the brand’s trading regions recorded double digit growth for the full review period. Particularly noteworthy was the improvement reported by the coastal markets, which have lagged growth in the inland regions for several years.
During the period the brand retained its market share across the merchandise categories and made progress in improving tile sales volumes, which had underperformed management’s expectations in the prior year. The average product basket size improved, as did sales of complete product solutions and higher value items.
In the context of rand weakness, the brand derived competitive advantage from the strength of its supply chain which ensured uninterrupted supply of well-priced imported product across the merchandise categories, and also guaranteed consistent availability of good quality local tile products.
Top T TopT continued to gain traction in its markets, reporting strong sales for the year. The brand made progress in building on its growing reputation as a one-stop home-finishing supplier, and its ability to ensure consistent availability of good quality, affordable merchandise gave it a competitive edge in a market characterised by less formalised, independent traders.
During the period the brand fine-tuned its pay-off line to “Every price a LOW price”, reinforcing TopT’s positioning as the low cost leader in the industry. New product categories continued to be added to the mix, in response to consumer demand.
Support Services The supply chain businesses, International Tap Distributors, Distribution Centre and Cedar Point, reported increased turnover for the period reflecting improved sales through the Group’s retail brands. Whilst average price increases rose across their industries in the context of rand weakness, these operations implemented a deliberate strategy to support the Group’s competitive value offering in-store by absorbing higher input costs.
INVESTMENT IN ASSOCIATES
Ceramic Industries Limited (“Ceramic”) The 20% strategic investment in its largest supplier of tiles, sanitaryware and baths once again delivered tactical advantages in supporting the Group’s growth programme. In the context of the weaker rand, this relationship with Ceramic served to enable consistent supply of local high quality, affordable products. The all-round improved performance reported across this business resulted in a 70% growth in profitability and an increase in contribution to Group profit of R24 million for the full year (2013: R9 million).
Ezeetile The Group holds an effective 46% strategic stake in this business, a national manufacturer of grout, adhesive and related products. Wide-ranging enhanced business processes and systems were implemented in the operation over the past year, and whilst improved efficiencies have resulted, the restructuring remains to be completely bedded down before the full benefits of the programme will be realised. The business reported growth for the period, contributing R5 million (2013: R3 million) to Group profits.
GLOBAL PROPERTY INVESTMENT
Significant strategic advantage is afforded to the retail operations by the Group’s property investment portfolio. This division’s mandate is centred on providing an optimal shopping experience for customers, which it achieves through ensuring that branded stores are situated on highly visible, accessible sites and by continuously evaluating and enhancing the quality of its properties to ensure an aesthetically pleasing, well-maintained shopping environment.
This portfolio has a market value of approximately R1,9 billion. During the year capital expenditure of R96 million (2013: R114 million) was incurred on new properties and improvements across the brand footprint.
STAFF SHARE SCHEME
During the reporting period an equity-settled staff share scheme was implemented, consistent with the Group’s ethos of promoting partnership with its employees and incentivising them to participate in the growth and profitability of the business.
DIRECTORATE: BOARD APPOINTMENTS AND CHANGE IN FUNCTION
With effect from 1 July 2014, Mr Nick Booth assumed the position of Chief Executive Officer (“CEO”) of the Group. Mr Giovanni Ravazzotti, who served as interim CEO pending Mr Booth’s appointment, resumed his role as Chairman, while Mr Brand Pretorius, who served as interim Chairman in Mr Ravazzotti’s stead, resumed his position as independent non-executive director. With effect from 1 August 2014, Mr Jan Potgieter was appointed Chief Operating Officer and executive director to the Board. With effect from 20 August 2014, Ms Ndumi Medupe has been appointed to the Board as a non-executive director. Ms Medupe, CA(SA) is a founder and director of Indyebo Consulting (Pty) Limited. The Board welcomes Ms Medupe and looks forward to her contribution. These appointments reflect the Board’s commitment to enhancing management depth and succession planning across the Group.
PROSPECTS
Management anticipates that current trading conditions will persist for the foreseeable future. However, the Group remains optimistic that there are sufficient opportunities to leverage in the business and the industry to enable it to continue to deliver a satisfactory performance in the interests of all stakeholders.
In this regard, a clear strategy is in place for growing each of the three retail brands. In addition, improvements in the supply chain related to procurement and stock management will drive efficiencies and cost containment. Enhanced recruitment and training will be another key focus area in the forthcoming period.
Italtile’s reputation for innovation in the industry will be pursued through continuous research into new markets, cutting edge merchandise, and systems and equipment to improve customer shopping experience.
BASIS OF PREPARATION
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 SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and contains the information required by International Accounting Standard 34, Interim Financial Reporting, the 2008 Companies Act and the JSE Listing Requirements. These results have been prepared under the supervision of Chief Financial Officer, Mr B G Wood CA(SA).
CASH DIVIDEND
The Group has maintained its dividend cover of three times. The Board has declared a final gross cash dividend of 10,0 cents per share (2013: 8,0 cents per share), which together with the interim gross cash dividend of 9,0 cents per share (2013: 8,0 cents per share), produces a total gross cash dividend declared for the year ended 30 June 2014 of 19,0 cents per share (2013: 16,0 cents per share), an increase of 19%.
DIVIDEND ANNOUNCEMENT
The Board has declared a final gross cash dividend (number 96) for the year ended 30 June 2014 of 10,0 cents per ordinary share to all shareholders recorded in the books of Italtile Limited. In accordance with paragraphs 11.17 (a) (i) to (x) and 11.17 (a) (i) to (x) and 11.17 (c) of the JSE Listings Requirements, the following additional information is provided:
- The dividend has been declared out of income reserves.
- The local dividend tax rate is 15% (fifteen percent).
- There are Secondary Tax on Companies (“STC”) credits to be utilised to the amount of R1 million or 0,08026 cents per share.
- The Gross local dividend amount is 10,0 cents per share for shareholders exempt from the Dividends Tax.
- The net local dividend amount is 8,51204 cents per share for shareholders liable to pay the Dividends Tax.
- The local dividend withholding tax amount is 1,48796 cents per share for shareholders liable to pay the Dividends Tax.
- Italtile’s income tax reference number is 9050182717.
- The Group has 1 033 332 822 shares in issue including 24 376 224 shares held by the Share Incentive Trust and 88 000 000 shares held as BEE treasury shares.
TIMETABLE FOR CASH DIVIDEND
The cash dividend timetable is structured as follows: The last day to trade cum dividend in order to participate in the dividend will be Friday, 5 September 2014. The shares will commence trading ex dividend from the commencement of business on Monday, 8 September 2014 and the record date will be Friday, 12 September 2014. The dividend will be paid on Monday, 15 September 2014. Share certificates may not be rematerialised or dematerialised between Monday, 8 September 2014 and Friday, 12 September 2014, both days inclusive.
For and on behalf of the Board
| N Booth | B Wood |
| Chief Executive Officer | Chief Financial Officer |
The preliminary profit announcement has been reviewed by Ernst & Young Inc. (“EY”). EY’s unqualified review opinion does not necessarily report on all of the information contained in this preliminary profit announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of auditors’ engagement, they should obtain a copy of EY’s unqualified review opinion together with the accompanying financial information from the company secretary at the company’s registered office.
Johannesburg
20 August 2014
| Share code: ite ISIN: ZAE000099123 Registration number: 1955/000558/06 Incorporated in the Republic of South Africa (“Italtile” or “the Group” or “the company”) 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: N Booth (Chief Executive Officer), B G Wood (Chief Financial Officer), J Potgieter (Chief Operating Officer), P Langenhoven# Non-executive directors: G A M Ravazzotti (Chairman), S G Pretorius, S M Du Toit, S I Gama, P D Swatton*, A Zannoni**, N Medupe (*British **Italian #Australian) Company secretary: E J Willis Sponsor: Merchantec Capital |