Financial results

Reviewed Group Results
For the year ended 30 June 2011

Commentary

Results

The Group’s trading environment remained sluggish during the year under review, featuring similar subdued market characteristics to those experienced over the previous two years. The new build market continued to be restrained, whilst the renovation segment fared only slightly better with homeowners favouring investment in home improvements over the uncertainty of new property acquisitions.

Despite these conditions, the Group reported a pleasing performance, a reflection of ongoing efforts to improve the quality of the business. Like-on-like system-wide turnover increased 10% to R3.02 billion (2010: R2,75 billion) with growth achieved across each of the Group’s retail brands, Italtile, CTM and TopT. With a net increase of two stores during the review period, growth was largely organic and attributable to enhanced efficiencies in the Group and supply chain, as well as a gain in market share.

Reported trading profit grew 15% to R448 million (2010: R389 million). In the current competitive environment the Group restricted average selling price increases across the offering and passed on cost savings derived from the strong Rand to its consumers. This strategy had the effect of containing margins at previous levels.

With continued intensive inventory management, product balance improved further and stock holding levels at R241 million, remained in line with the prior year.

Notwithstanding capital expenditure of R135 million, cash reserves increased to R839 million, an 18% improvement on the prior year (2010: R711 million) reflecting the Group’s strong cash generating ability. The healthy balance sheet will be used to fund future expansion.

The Group’s net asset value per share increased by 16% to 186 cents (2010: 161 cents).

Trading environment

Competition intensified in the industry, featuring aggressive trading and price-cutting, and further consolidation was experienced amongst industry peers.

Despite this environment, the Group is confident that the industry continues to present growth opportunities for innovative businesses. Research indicates that per capita consumption of tiles and sanitaryware in South Africa is still in its infancy compared to global counterparts. Likewise, the business model affords the Group continued growth potential via expansion of its offering in the established markets in which CTM and Italtile trade, and through providing first-time access to product in previously under-serviced areas in TopT’s market.

Operational review

In order for Italtile to maintain its leadership position in the local market the Group is committed to attaining the status of a world class low-cost retailer recognised by the twin imperatives of profitability and customer satisfaction.

Italtile

Italtile is the leading fashion retailer of exclusive ranges of ceramic tiles, bathware and related products, servicing the premium segment of the market.

The business’s success in gaining market share is reflected by the double digit growth recorded for the year. Important inroads were made in both the upper end of the middle market not serviced by CTM, and the commercial projects sector. Strong growth was reported in the bathroom ware category and the brand also entrenched its niche role as the leading supplier of environmentally conscious new-technology products, including the eco-friendly Earth range and water-wise bathroom ware from Laufen and Cotto. Notwithstanding aggressive competition and fragmentation of the market resulting from the influx of imports, Italtile delivered sustained margins.

During the review period Italtile opened its New Generation store in Northgate Estate in Cape Town. A further store is scheduled for opening in Boksburg in the last quarter of this calendar year.

CTM

CTM is the country’s biggest specialist tile and bathroom retailer, targeting the middle income segment of the market. The brand holds strong appeal for DIY customers and small builders.

Several marked trends developed during the year under review, including increasingly aggressive competition from small and independent industry participants as they fought for survival; a heightened awareness of and demand for fashionable product in the rural areas; and an influx of imported product facilitated by the strong Rand, which created a vigorous market for polished and glazed porcelain tiles across the consumer income spectrum. The Group’s status as one of the leading buyers of tiles globally and its long-standing supplier relationships enabled CTM to take advantage of the opportunities offered by this development.

In the context of limited discretionary spend, CTM’s high profile reputable value proposition stood the business in good stead. The brand benefitted from continued strong growth in rural and outlying markets. On a regional basis, Gauteng delivered robust sales in contrast with the coastal provinces which continued to lag the inland markets.

CTM’s in-house brand campaigns featuring the Tivoli and Amalfi tap ranges, Kilimanjaro extruded tiles and ELF laminate flooring range continued to gain momentum, with ELF in particular making strong inroads into new markets.

A R10,6 million investment was made in hand-held point of sales technology during the year, aimed at increasing the speed and quality of service to customers, thereby enhancing the shopping experience and promoting sales growth. The roll out to the store network should be completed by December 2011.

During the reporting period CTM opened its New Generation store in Northgate Estate in the Western Cape.
New store openings are planned for Nairobi and Northriding in the new financial year.

Top T

Strategically positioned below CTM, TopT is the Group’s fledgling, entry-level brand, targeting the under-serviced rural areas and smaller outlying markets.

Management’s strategy to enter the market cautiously during the brand’s infancy proved correct, with TopT delivering a satisfying performance. Organic growth improved 25% and the business made a nominal contribution to Group profits for the first time since its launch in 2007. Despite being a value-driven offering, margins increased slightly due to improved operating efficiencies. Bedding down reliable relationships with the supply chain has also proved beneficial for the business. An expanded range, opportunistic product offering and localised, highly specific marketing campaigns targeted at price-sensitive customers succeeded in raising awareness of the brand and enabled TopT to gain market share.

Two outlying stores were closed during the year and two new stores were opened in Newcastle and Jane Furse, consolidating the operation on a regional basis, and bringing the total network to 13 stores. TopT’s roll-out strategy will remain conservative in the short term, based on building a solid presence on a region-by-region basis. The long term vision is to utilise this brand as the Group’s vehicle to penetrate the African market on a significant scale.

Support services

A core component of the Group’s business model is its vertically integrated supply chain. Each of these businesses succeeded in growing revenue and gaining market share during the year. This achievement was primarily due to improvements in internal efficiencies, customer service and enhanced range management, complemented by the Group’s in-house brand building promotions.

International Tap Distributors (ITD), an importer and distributor of taps and accessories grew sales and improved net profitability. Enhanced inventory management resulted in a reduction in stockholding by 44%. Cedar Point, an importer and distributor of tiling tools, laminated boards, cabinets and accessories delivered an increase in turnover and concomitant improvement in net profit. Noteworthy growth was achieved in the laminate flooring division, with sales increasing 60% against the prior year.

The Group’s Distribution Centre, the single largest importer of polished and glazed porcelain tiles in South Africa, sources imported tiles for the CTM network. During the review period, product was sourced from China, Spain and Italy. This business grew turnover for the year, reflecting the robust progress made in cornering the polished porcelain market and to a slightly lesser extent, the glazed porcelain segment.

Rest of Africa

The Group is represented by 14 CTM stores in the sub-equatorial region. The 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 expand into the region are reviewed on a regular basis, within the context of logistical and infrastructural constraints and the availability of suitable partners.

Australia

Adverse trading conditions prevailed during the year under review, with consumer confidence at very low levels and construction activity across the sectors constrained. High interest rates, the proposed implementation of the onerous Carbon Tax in 2012, and the increase in utilities costs by some 20% all served to curtail investment by consumers. In response to this environment aggressive price-cutting amongst industry participants was evident, creating further volatility in the market. Average selling prices reduced by more than 30%. In this context, the operation’s sales and margins declined against the prior comparative period.

Economic activity in Queensland was dramatically impacted by the devastation caused by Cyclone Yasi In January 2011, and whilst settlement of claims and funding disbursements have been protracted, a degree of relief is expected once reconstruction work commences in flood damaged areas of the state.

CTM Australia is currently represented by eight stores in New South Wales and Queensland.

Property portfolio

The Group’s Property portfolio underpins the retail operations by ensuring that stores are optimally located on high profile destination sites. Valued at in excess of R1,3 billion, the portfolio delivered returns in line with the Group’s trading operations. Cash reserves are healthy and afford expeditious investment if opportunities are presented. Capex of R88 million was employed on alterations and extensions of existing properties during the reporting period.

All new properties and renovations to existing sites are structured according to low energy consumption prerequisites in keeping with the Group’s Green agenda and comprehensive sustainability programme.

Directorate

With effect from 30 June 2011, the Board announced that it had appointed Mr Brand Gerhardus Pretorius as a Non-Executive Director and member of the Audit and Risk Committee and Mr Pierre Langenhoven as an Executive Director.

Mr Pretorius is a well-known and respected businessman in South Africa with extensive experience. Mr Langenhoven joined the Italtile Group in 1990 in Johannesburg and has been the Managing Director of Italtile’s Australia operation since 2002. The Board welcomes these gentlemen and looks forward to their valuable contribution in the future.

Prospects

The retail environment in South Africa will continue to face challenges presented by subdued trading conditions. The resultant constraints, together with new consumer spending behaviour and the likely advent of international players in the local market will serve to shape the future of the industry in this country. The period ahead will be focused on achieving the Group’s goal to be a world class low-cost retailer. Every effort will be directed to refining the business model to achieve an optimal balance of profitability and customer satisfaction.

Management is satisfied that the Group is well positioned to take advantage of this changing landscape. In addition to its strong cash generating ability, Italtile’s proven business model is underpinned by sound fundamentals including an established supply chain, a strong market reputation, powerful technology and talented people. Equally important, our commitment to innovating and adapting to meet challenges and opportunities will prove vital in achieving the Group’s ambitious growth targets.

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 as issued by the Accounting Practices Board or its successor, and contains the information required by International Accounting Standard 34: Interim Financial Reporting.

Dividend

The Group has maintained its cover of three times. The Board has declared a final dividend of 6 cents
per share (2010: 5 cents), which together with the interim dividend of 6 cents, produces a total dividend declared for the year of 12 cents (2010: 11 cents) an increase of 9%.

Dividend announcement

The Board has declared a final dividend (number 90) of 6 cents per share to all shareholders recorded in the books of Italtile Limited at the close of business on Friday, 23 September 2011. The last day to trade cum the dividend will be Friday, 16 September 2011. The shares of Italtile will commence trading ex dividend from the commencement of business on Monday, 19 September 2011 and the record date will be Friday, 23 September 2011. Payments will be made on Monday, 26 September 2011. Share certificates may not be rematerialised or dematerialised between Monday, 19 September 2011 and Friday, 23 September 2011, both days inclusive.

For and on behalf of the Board
G A M Ravazzotti	P D Swatton
Executive Chairman	Chief Financial Officer

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

Johannesburg	29 August 2011

Share code: ITE   ISIN: ZAE000099123
Registration 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 (Executive Chairman), P D Swatton* (Chief Financial Officer), P Langenhoven
Non-executive directors: S M Du Toit, S I Gama, S G Pretorius, A Zannoni** (*British  **Italian)
Company secretary: E J Willis    Sponsor: BDO Corporate Finance