Financial results

Interim Results
For the six months ended 31 December 2005

Commentary

RESULTS

Trading in a competitive industry, Italtile Limited has delivered acceptable results for the six months ended 31 December 2005.

The group is represented by high profile brands, CTM and Italtile, and trades through a network of 99 stores in Southern Africa and Australia. Having accomplished its strategic evolution from niche tile merchant to specialist home enhancement fashion retailer, the group can lay claim to being the major multi-faceted retailer of both tile and bathware in South Africa. The brands cater for consumer aspirations across the spectrum, with CTM specialising in affordable, value for money and volume business requirements, whilst Italtile offers an exclusive, niche range of predominantly high value imported product to the premium end patron.

System wide turnover for the group improved 20% to R1,19 billion (2004: R997 million). Group-owned stores (including joint-ventured franchises) contributed R657 million (2004: R522 million), while franchised stores delivered income of R535 million (2004: R475 million) on which the group earns royalty income. This increase in turnover is particularly significant insofar as only one new store was opened during the review period, and average price increases were sub-inflationary.

Trading profit rose 27% to R153 million (2004: R120 million). Headline earnings per share improved 20% to 558,5 cents (2004: 466,8 cents), adversely affected by the reduction in the group’s Treasury Shares by means of Share Incentive Scheme participants exercising a significant number of options during the reporting period, and the increased effective tax rate of 33,8%, resulting from the Secondary Taxation on Companies applied in the review period on the special dividend declared in August 2005.

Buoyant consumer spending experienced over the period benefited the group. Contributing strongly to the group’s improved performance was the evident trend by consumers to buy-up as the range of available products is enhanced and becomes more accessible. Noteworthy growth in the group’s bathware business also positively impacted results.

Ongoing investment in brands and responsiveness to increasingly cost conscious and discerning consumer needs remained a key focus during the review period. The group’s programme of rolling store upgrades aimed at satisfying consumer expectations continues to be implemented across the network in response to the global trend which identifies aspirational suppliers as destination retailers offering an enhanced consumer experience.

Competition experienced in the industry at present is anticipated to continue, and management will be investing in further enhancing the group’s offering. Continued attention will be paid to promoting the group’s ethos of mentorship and entrepreneurship. Key to the group’s philosophy is empowerment of individuals throughout the organisation, and this will be manifested through intensified training and recruitment of premium calibre staff and franchisees.

TRADING ENVIRONMENT

The new residential and renovation markets remained vigorous, the former driven by the massive growth in firsttime property owners. Management is satisfied that the group is also well positioned to capitalise on a price deflationary market, when consumers renovate in favour of buying properties. The current surge in first-time homes will in due course also provide a renovation market.

Entrenched globally and locally as the wall and floor covering of choice, the ceramic tile industry continues to enjoy sustained growth. This trend, aided by low barriers to entry in South Africa, witnessed a significant increase in the number of new entrants, creating a highly competitive trading environment. Symptomatic of a buoyant industry was the evolution and proliferation of individual operators into small multi-branch businesses.

Shipping capacity improved over the period, although local suppliers have done well to meet demand created by import shortages. The strong local currency continues to favour imports, with China remaining the primary international supplier in this arena.

AFRICAN OPERATIONS

Italtile and CTM
The group is represented by eight Italtile stores in South Africa, 66 CTM stores in South Africa and a further 16 CTM stores situated in Botswana, Namibia, Swaziland, Lesotho, Malawi, Uganda, Tanzania and Zambia.

Several key developments contributed to the solid performance of both divisions. Significant inroads were made into markets with the continued extension of the group’s offering in bathware and related products, following the groups integration back into its supply chain.

Complementing this development was the implementation in October 2005 of a R25 million logistics system aimed at enhancing just-in-time deliveries and restricting costs.

Management is of the opinion that the group’s competitive edge will be sharpened by improving logistics and accessibility of the right product at the right price.

Results to date have been rewarding. The system will be extended to other suppliers in the group’s chain, spearheading the group’s ambition to achieve and exceed cost- and best-practice benchmarks.

Its long-standing reputation as a major global purchaser enables the group to leverage its position to secure price competitive advantages for consumers.

The CTM brand enjoys widespread appeal amongst its target audience, including the emerging middle class. Furthering the group’s strategy to improve access to the product a store will be opened in an exclusively black residential area in February 2006. The franchise will be a joint venture with a local businessman, and early indications regarding prospects are positive. It is anticipated that a further six stores will be opened by the end of the current calendar year in other predominantly black markets.

The group has introduced a range of laminated flooring in a select number of CTM stores based in Gauteng, which will be rolled out nationwide in due course. Response to this value-added offering has been positive, and supports the logic to complement the group’s existing home enhancement solutions.The product line may in time become a significant contributor to turnover.

Whilst demand for the group’s product in sub-Saharan Africa is robust, expansion has traditionally been impeded by logistical and infrastructural deficiencies. In response to this, the group will be opening a central bulk storage and distribution warehouse in east Africa, similar to the group’s existing facility in Durban. The rationale is based on reducing inland transport costs and improving availability of product in order to support trading platforms of local franchises. It is anticipated that the centre will be opened in conjunction with a new franchised store, scheduled for June 2006.

INTERNATIONAL OPERATIONS

The group’s Australian operation currently comprises nine stores across three states. During the review period three stores were closed in line with the group’s ongoing strategy to adapt the trading formula to comprise only new generation stores offering an extended product range and customer-friendly showroom facilities. The positive response to these stores has vindicated this strategy and an additional new generation store will be opened in the forthcoming period.

Whilst the operation made a nominal contribution to profit, it is anticipated that the prevailing trading environment will continue to restrict growth of this business.

PROPERTY PORTFOLIO

Pursuant to the group’s strategic policy, a further R52 million was invested in the combined South African and Australian property portfolio during the review period, bringing the carrying value to R463 million. Continued investment will be made based on the dual validation of the strong returns achieved, which are in line with the group’s trading operations, and the competitive advantage derived by franchises located on prime sites, aligned to the group’s positioning as a destination retailer.

BLACK ECONOMIC EMPOWERMENT

The group has made sound progress with regard to its Black Economic Empowerment initiatives and should be in a position to provide further detail on the structure of the planned empowerment partnership before the end of the current financial year.

PROSPECTS

Stable interest rates, fiscal stimulation of the economy and positive retail sentiment will continue to drive growth of the industry, whilst simultaneously promoting intense competition between suppliers.

Cognisant of this, and of increasingly sophisticated consumer demand, management is mindful of the need to add value to the retail experience. Entrenching and growing market share will be dependent on aggressive pursuit of that goal. Enhancements in logistics, product range, service and price will remain focus areas in the forthcoming period. In line with the group’s ethos of mentorship to promote entrepreneurship, significant investment will be made in attracting, nurturing and retaining high calibre personnel.

The Board is satisfied that the current earnings growth trend will be maintained over the forthcoming six months.

DIVIDEND

An interim dividend of 140 cents per share has been declared, an improvement of 27,3% (2004: 110 cents).

DIVIDEND ANNOUNCEMENT

The Board has declared an interim dividend (number 79) of 140 cents per share to all shareholders recorded in the books of Italtile Limited. The last day to trade cum the dividend will be Thursday, 23 February 2006. The shares of Italtile Limited will commence trading ex dividend from the commencement of business on Friday, 24 February 2006 and the record date will be Friday, 3 March 2006. Payment will be made on Monday, 6 March 2006. Share certificates may not be rematerialised or dematerialised between Friday, 24 February 2006 and Friday, 3 March 2006, both days inclusive.

BASIS OF PREPARATION

In terms of the listing requirements of the JSE Limited, the Group is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as from 1 July 2005.

The interim results have been prepared in accordance with IFRS and IAS34 – Interim Financial Reporting. Previously the Group reported in terms of South African Statements of Generally Accepted Accounting Practice. The opening balance sheets at 1 July 2004 and 1 July 2005 have been restated accordingly. The comparative income statement for the six months to December 2004 and the balance sheet at that date have also been restated. The effect of the transition from South African Statements of Generally Accepted Accounting Practice to IFRS on the group’s financial position, financial performance and cash flows are summarised below.

As IFRS are implemented internationally, evolving practices with regard to the interpretation and application of standards under IFRS could impact future reported results and disclosure.

IFRS2 – SHARE BASED PAYMENTS

The group has elected not to apply the provisions of IFRS 2 to share options granted before 7th November 2002. The fair value of share options granted after that date has been charged against income over the relevant option vesting periods adjusted for expected levels of vesting.

IAS16 – PROPERTY, PLANT AND EQUIPMENT

The useful lives and residual values of the group's major assets have been reassessed and where applicable the depreciation charge has been adjusted.

For and on behalf of the Board

G A M Ravazzotti
Chief Executive Officer

P D Swatton
Chief Financial Officer

8 February 2006

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

Transfer Secretaries: Computershare Investor Services 2004 (Pty) Limited, 70 Marshall Street, Johannesburg 2001 (PO Box 61051, Marshalltown 2107)

Directors: D H Rabin (Chairman), G A M Ravazzotti (Chief Executive Officer), P D Swatton** (Chief Financial Officer), J Couzis*, S I Gama, C Trumpelmann, G P Ravazzotti (*Greek ** British)