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ITALTILE REPORTS SOUND RETAIL PERFORMANCE, IMPROVED MANUFACTURING RESULTS, STRONG CASH AND A ROBUST SPECIAL DIVIDEND

Johannesburg; Monday, 26 August 2024: "Significant change in the structure of the competitive landscape – in both the tile retail and manufacturing industries – has resulted in the emergence of numerous new competitors. In this context, aggravated by weak consumer demand, our primary focus is on improving the Group's competitive position to retain our industry leadership through our robust retail and manufacturing assets and teams. This translates to being more competitive and efficient at every customer satisfaction touchpoint: fashion, range, price, service and quality. In our goal to remain industry leaders, we will continue to unlock and extract value from within our business through our unrelenting drive for efficiencies and cost leadership," says Lance Foxcroft, Chief Executive Officer.

OVERVIEW: Founded in 1969, Italtile Limited is a proudly South African manufacturer, franchisor and retailer of tiles, bathroomware and other complementary home-finishing products. The Group's retail brands are CTM, Italtile Retail and TopT, represented through a total network of 208 stores, including six online webstores. The retail operation is supported by a vertically integrated supply chain comprising key manufacturers and import operations and an extensive property portfolio.

TRADING ENVIRONMENT: Foxcroft notes, "In the year under review, the cost of living crisis weighed heavily on consumers and demand was at low levels across the industry. Significantly, the structure of the competitive landscape changed, and now, Southern African tile manufacturing production capacity far exceeds demand. As a result, SADC manufacturers are resorting to predatory pricing in South Africa, in a bid to penetrate the market. This has intensified rivalry among retailers competing for market share in a sector where prices have persistently declined over the year. This deflationary pricing has had a severe impact on margins across the industry and it is likely this margin pressure will result in consolidation among players and rationalisation of capacity in the market."

GROUP PERFORMANCE: Foxcroft comments, "While our retail operation's full-year results were slightly lower than the prior comparable year, the division recovered market share and performed better in the second half of the period, extracting benefits through an uncompromising focus on operational excellence and reducing costs."   

"In the manufacturing division, Ceramic achieved improvements in manpower, systems, quality and product range, however, the business failed to grow tile volumes and improve capacity utilisation required to reduce the cost base and improve profitability," says Foxcroft.
He elaborates, "Due to the remedial measures implemented at Ceramic, the decline in Group profits reported in December, primarily caused by Ceramic's poor performance, was slowed – although not reversed. Trading profit for the full year decreased by 11% to R2,1 billion (2023: R2,3 billion), an improvement from the 17% decline reported at half-year. Trading profit in the second half was only slightly lower than the prior comparable period."

"Notably," says Foxcroft, "The Group's cash balance grew to R1 844 million (2023: R1 049 million). In light of strong cash generation and cash reserves being in excess of operational requirements, a special dividend of 78,0 cents per share has been declared, bringing the total dividend for the full year to 127.0 cents."

Foxcroft states, "During the year, our intense focus was on our ‘fighting‑fit' mantra, centred on executing operational excellence across our retail and manufacturing assets to drive growth in the business."

"It is pleasing to report that our regular customer sentiment surveys confirmed our customers' loyalty to our brands and their satisfaction with our offering and service." Foxcroft adds, "In the retail division our focus was on growing TopT sales; turning around CTM's performance; and growing the contribution to total sales of our online platform. Good success was achieved, with a pleasing performance reported by TopT, which gained market share and grew sales and margins. Key metrics also improved for our online webstores. Similarly, Italtile Retail did well, retaining market share and delivering results in line with the prior year. Unfortunately, CTM's mass-middle market customers continued to experience severe financial pressure and sales did not meet our expectations, although solid progress was made on ensuring the business is agile and competitive. We are confident that if the basic retail excellence disciplines continue to be actively implemented, sales and profits will grow when consumer discretionary spend and sentiment improve."

Foxcroft notes, "In the manufacturing division we focused on improving efficiencies at Ezee Tile; turning around Ceramic's performance and ensuring resource security by resolving the threat to natural gas supply. The completed   commissioning of Ezee Tile's new flagship facility at Vulcania is a stand-out highlight of the period. The operation is now realising cost and efficiency benefits that resulted in pleasing double-digit increases in sales value and profits. Remedial measures implemented at Ceramic also produced a better operational performance: the new senior management team is functioning well; additional fashionable products have been launched; quality systems have been enhanced; and costs have been reduced. Despite these operational improvements, sales declined in the reporting period due to intensified competition. Under our fighting-fit mantra, our overriding goal is to regain market share that has been lost in the current price war, reduce costs further and improve efficiencies to ensure Ceramic remains competitive and relevant."

Foxcroft comments, "At the half-year, we flagged the uncertainty of natural gas supply as a key risk to the business, following Sasol's announcement that, as the primary supplier of imported piped natural gas (PNG), they will no longer be in a position to supply the market as of June 2026. Sasol subsequently announced on 20 August 2024, that supply would be extended to at least June 2027. While this extension is welcomed, approximately 70% of Ceramic's total energy requirements are supplied by PNG, and hence, securing sustainable supply of viably priced energy remains a key management priority."

He notes, "Future gas supply is an industry-wide dilemma, affecting many leading local companies. In this regard, industry continues to explore opportunities with Sasol to extend gas supply."

Foxcroft clarifies, "In the interim, with the clear mandate from our Board to ensure business continuity, we have conducted exhaustive research and investigations into an array of alternatives to replace Sasol's supply. While gas is our preferred choice of fuel, in the event viably priced natural gas is not available, as a last resort, a project has been approved to invest in and convert one production line to use coal-based synthetic gas for heating and firing and to test this established technology in our process, using our raw materials. This coal syngas trial is entirely based on a pre-emptive abundance-of-caution approach to responsible energy management, and we remain hopeful that a natural gas solution will be found."

KEY FOCUS AREAS:  Foxcroft comments, "Continued execution of operational excellence will enable us to capitalise on opportunities in the business. We believe modest growth in the retail division is attainable and in our manufacturing operation, Ezee Tile will continue to improve turnover and profitability. We expect the highly competitive environment to continue to be a challenge to Ceramic's performance."

Foxcroft states, "In the retail division, we aim to open five new TopT stores as we continue to expand the brand's national footprint and grow sales volumes. Our goal is also to turn around CTM's performance by leveraging the brand's long-standing iconic status and continue to differentiate the value proposition in the highly competitive mass-middle market. We will also strive to further improve our digital experience and grow our webstores' sales."

He says, "In the manufacturing division, Ezee Tile will target increased market share in the specifications and projects segment and further improve efficiencies and reduce costs. Ceramic's management will aggressively target cost reduction and improved efficiencies in the operation to recover margins and offset some of the significant price deflation in the market. We will also continue to strive to reclaim market share by optimising the value proposition of our ranges and differentiating on high-fashion items. Resolving the threat to natural gas supply will remain a key priority to ensure Ceramic's business continuity."

PROSPECTS AND OUTLOOK: Foxcroft comments, "The trading environment will remain extremely challenging in the short term. Competition in both the manufacturing and retail segments will likely intensify until the vast imbalance between excess manufacturing supply and weak demand levels out. Despite this concern, we are mildly optimistic about prospects for growth in the market. South Africa is underhoused and the dynamics of the housing market are favourable: a young, growing, upwardly mobile demographic with a strong culture of owning a home."

He adds, "Key to conditions improving will be the sustained downward trend of inflation. An interest rate cut in the current calendar year should further boost disposable income and confidence, while implementation of the two-pot retirement system in September may provide an injection of cash into the economy. If load-shedding remains manageable and support for the GNU holds firm, it is likely that the currency will stabilise and investors and customers will adopt a more positive stance."

Foxcroft concludes, "We are determined to improve our competitiveness across all our operations, and we are confident we have the assets to achieve that: competent, engaged and motivated teams, robust iconic brands, industry-leading technology and products, and the competitive advantage of a vertically integrated supply chain."

For further information:
CEO, Lance Foxcroft: 011 510 9054                                         Del-Maree English:  083 395 8608  

CONTACT DETAILS

DEL-MAREE ENGLISH

Investor Relations

[email protected]

+27 (83) 395 8608