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Italtile beats deflationary environment to meet market expectations
Johannesburg, 9 February 2004: For the six months ended 31 December 2003, Italtile Limited, comprising national branded retail chains, CTM, servicing the value-for-money market, and Italtile, catering for the premium-end market, delivered turnover of R775 million, an improvement of 7% (2002: R725 million), on the back of volume growth of 12% in ceramic tiles and 25% in taps, sanitaryware and related products. Chief Financial Officer, Peter Swatton, explains: "In response to the strong local currency which gave rise to increased competition, we employed an aggressive campaign to maintain and grow market share by implementing a meaningful reduction in average selling prices, the benefit of which was passed on to consumers. This tactic was fostered by our leverage to source and buy superior quality product at competitive prices, given that the group is South Africa's leading retailer of ceramic tiles, sanitaryware, bathroom accessories and other related products, and one of the major purchasers of tiles globally." In line with market expectations, trading profit improved 20% to R93,8 million (2002: R78,1 million), while headline earnings per share increased 22% to 355 cents (2002: 291 cents). Swatton notes that this strong performance in the light of the deflation-linked decline in turnover is a reflection of the group's resilience and strategic focus on margins, cash management and inventory. An interim dividend of 70 cents was declared, an improvement of 40% (2002: 50 cents). Trading EnvironmentThe period under review featured volatility in the global ceramic tile market. As a result of US$ weakness, the American market retreated substantially, creating a short term oversupply of product in Europe. Traditional suppliers to that market, including Turkey and Brazil, were pressured to establish new markets and in many cases restricted or froze price increases in the immediate term. Swatton says: "This global trend has had significant ramifications for the South African market, where the strengthening of the local currency to unanticipated levels has promoted the entry of a multitude of new players and significantly reduced selling prices. Given the short term instability of this environment and long term issues of quality and reputation, the group elected to maintain strategic links with its tried-and-tested established suppliers at the expense of opportunistic relationships." He adds: "We are satisfied that growth in tile consumption is sustainable for several reasons, including South Africa's comparatively low per capita consumption, the current mini-boom in the residential market, strong DIY growth potential, and the development of emerging markets based on improved consumer education, and accessibility and affordability of the product." In anticipation of low to flat inflation, the group reduced stock levels dramatically. "This had the benefit of ensuring greater flexibility and responsiveness to consumer demand, improved store control and enhanced cash reserves," Swatton says. The company exited the period with cash and cash equivalents of R159 million and optimal stock levels. Future group expansion will be funded via these cash reserves. Despite the testing trading conditions, the group maintained its leadership in the ceramic tile market and was successful in progressing its strategy of forging inroads into the high growth potential tap and sanitaryware market. In line with efforts to afford consumers an enhanced shopping experience, existing stores were and will continue to be upgraded, and new stores will be designed to include a dedicated bathroom division to enhance the tile offering. Property PortfolioA further R40 million was invested in the company's property portfolio in South Africa and Australia, bringing the value of this asset to some R281 million. Group policy to operate owned- and franchised stores out of purpose built company owned premises situated in prominent, prime locations appropriate to target markets continues to enhance trading performance and will thus remain a core investment strategy. African Operations: Italtile and CTMSwatton notes: "Market conditions proved more challenging than anticipated and the solid performances delivered by both the CTM and Italtile divisions are a reflection of prudent management control and the strength of the brands." The consolidation of Italtile's presence in strategically targeted major urban areas has firmly positioned the division as a destination retailer catering to the niche premium-end market. In addition to entrenching leadership in its traditional DIY value-for-money market, CTM is enjoying increasing dominance in the entry-level market, where there is a dearth of sustainable competition. Notable success is being achieved with the introduction of customised product baskets for the RDP housing sector. The group forecasts solid growth potential in this segment and is currently considering opening customised stores in high density, traditional black markets. Implementation will be determined by success in sourcing suitable franchise partners. CTM extended its footprint into the sub-Saharan region with the opening of a store in Kampala, Uganda. The brand's reach outside of South Africa extends to Botswana, Namibia, Swaziland, Lesotho, Malawi, Tanzania and Zambia. Management is exploring the opportunity of entering Kenya, a market with high growth potential. Notwithstanding logistical constraints, the group is confident that the region affords important expansion opportunities. International OperationsRepresented by nine CTM stores across Queensland, New South Wales and Victoria, the group's Australian operation contributed 10% of turnover. While the business grew in Australian terms, adverse currency conditions negated any gains achieved. Swatton notes: "We are satisfied with this operation's performance and have identified and invested in potential sites for future expansion." The group's Italian operation delivered a solid performance and continues to make a useful contribution to group turnover. ProspectsSwatton summarises: "Sustained rand strength will continue to foster the proliferation of new entrants and short-term oversupply of imported product. This competitive environment, exacerbated by the current deflationary trend will result in consolidation in the industry and impact operating tactics in the medium term. We anticipate conditions to remain testing over the forthcoming six to 12 months and management's focus will be on building on its proven strategy of maintaining optimal stock levels, a strong cash position and leveraging the group's price competitiveness." Swatton concludes: "It is anticipated that these trading conditions may be alleviated to some extent by an improvement in consumer spending as the impact of interest rate cuts filters through. We expect to maintain our current growth level over the forthcoming reporting period." ends Issued by Signatures Investor Relations on behalf of Italtile LimitedFor further information contact:
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