Financial results

Interim Results
For the six months ended 31 December 2011

Commentary

Overview for the six months ended 31 December 2011

Italtile Limited has delivered another consecutive set of solid results, attributable to continued improvements made in the business and the strong equity which the Group’s brands enjoy amongst consumers. These results are also a reflection of growth opportunities which exist in the market for discerning retailers. The Group gained market share across its brand portfolio, comprising Italtile Retail, CTM and TopT.

Key to the Group’s growth was:

-	An improved product matrix and rationalised ranges across the brands which proved beneficial in delivering enhanced customer service.
-	A 24% increase in sales in the bathware component of the Group’s business, consistent with management’s stated strategy to grow this segment’s contribution in line with revenue contribution from tiles.
-	The measured tactic to ensure that stores were abundantly stocked to meet customers’ expectations of range and product availability. The Group’s strong balance sheet supported this initiative and achieved a significant competitive advantage for the business in a market place featuring fragmentation and inconsistency of supply.
-	Prudent stock management, which ensured that despite an increase in inventories to R269 million (2010: R228 million), the improved product balance afforded a better stock turn.
-	A deliberate strategy to entrench Italtile’s position as the price and range leader in the market, by absorbing input cost increases, and adopting an aggressive pricing strategy, wherever possible passing savings onto consumers. During the period, domestic demand in China softened resulting in a large supply of well-priced product available for import. The Group increased its stock volumes and range substantially based on strong demand from price-sensitive consumers seeking diversity from local product.
-	Rigorous cost containment and improved in-store and supply chain efficiencies which ensured that margin pressure was restricted, reflecting a nominal decline of 1% in total margins across the Group.
-	Continued success in pioneering new product categories and ranges. Notably, imported tile sales grew by 38% against the prior comparative period whilst local tile sales increased only 3%. This is a function of importing product to meet demand for large format glazed porcelain patterned tiles which are not manufactured in this country.

Financial highlights

-	Like-on-like system-wide turnover increased 16% to R1,84 billion (2010: R1,59 billion)
-	Revenue from Group-owned stores grew 23% to R946 million (2010: R771 million), while franchised stores increased turnover by 10% to R898 million (2010: R814 million)
-	Real organic growth equates to 15% given price inflation of 1% and no net increase in the total store number
-	Reported trading profit grew 17% to R271 million (2010: R231 million)
-	Basic earnings per share and headline earnings per share increased 21% and 22% respectively to 21,7 cents per share and 21,4 cents per share
-	Capital expenditure of R106 million (2010: R63 million) was incurred, predominantly related to the property portfolio
-	The Group’s strong cash generating ability is reflected in the increase in reserves to R904 million (2010: R820 million)
-	Net asset value per share increased by 18% to 205 cents (2010: 174 cents).

Trading environment

Trading conditions remained subdued in the building and construction industry in general and the new build sector in particular. Typical to a downturn in the economy, the renovations market remained relatively stable, as consumers sought to strengthen their assets by investing in existing properties. Financial institutions’ lending criteria remained onerous and consumers’ improved management of limited disposable income was evident in the increase in cash purchases relative to credit card payments.

The Rand lost some 19% of its value in the period, however, Italtile’s large-scale buying power afforded the business an important advantage in securing well-priced product from all of its markets.

Operational review
Italtile Retail

Italtile Retail is represented by eight stores nationwide, all of them Group-owned. This brand services the upper-middle to premium-end of the market and is recognised as the leading fashion retailer of exclusive ranges of porcelain and ceramic tiles, bathware and related products. During the period one new store was opened in Boksburg, Gauteng. This New Generation store, built according to best practice green principles, is the brand’s flagship offering and provides the benchmark for future stores.

This division continued to successfully broaden its retail customer base in line with its ‘exclusive, yet inclusive’ ethos, and also made further inroads into the commercial projects sector.

Strong growth was once again delivered in the bathware segment of the business and the brand further entrenched its niche role as the leading supplier of environmentally conscious new-technology products.

CTM

This brand targets the middle income market and is the country’s biggest specialist tile and bathroom retailer. CTM is represented by 64 stores nationwide, 41 of which are franchised. The balance, which service the larger urban markets are Group-owned.

CTM delivered a pleasing performance in a fiercely competitive environment, growing sales by 14% and containing costs. As forecast by management, the price war continued in the porcelain and ceramic tile arena, and extended into the laminate floor segment. In order to entrench its low price high value offering, the division supported an aggressive price position, absorbing cost increases and reducing average tile prices by 1%.

During the reporting period CTM’s in-house brand building campaign centred on the Tivoli tap range, which contributed to a significant increase in this division’s brassware sales.

The ongoing aim to improve the shopping experience by enhancing in-store efficiencies was advanced with the further roll-out of mobile point-of-sales technology and the implementation of comprehensive automated replenishment systems which assisted in optimising stock levels, reducing administration processes and affording customers improved service.

TopT

This entry-level brand is represented by 13 stores, situated predominantly in previously under-serviced emerging market areas. Demand continued to grow for TopT’s offering which includes a range of floor coverings, sanitary ware, brassware and paint, and the brand succeeded in gaining further market share.

Key to this improved performance was the brand’s enhanced, flexible product range, proximity to and strong association with the communities in which it trades (reinforced by localised advertising campaigns), and favourable supply chain relationships.

TopT’s business model will continue to evolve as opportunities present themselves and roll-out of the network will proceed cautiously in line with demand.

Support services

Central to robust sales growth attained in the Group’s bathware business component was the pivotal role played by supply chain partners, International Tap Distributors (ITD) and Cedar Point, in improving their product ranges and service.

The Group’s Distribution Centre imported aggressively during the review period in order to ensure consistent supply and favourable pricing of new ranges of product not available locally. Total Rand sales to the Group increased by 38%. Imported tile sales volumes through the store network grew to almost 2,3 million m², an improvement of 23%.

Rest of Africa

The Group is represented by 15 CTM stores in seven African countries. A further store is scheduled to open in Nairobi in March 2012.

Strong demand for the Group’s products is evident in East Africa, but opportunities to grow this business continue to be hampered by logistical and infrastructural constraints.

Australia

The Australian operation consists of eight CTM stores located in Queensland and New South Wales, and comprises only a small component of the Group’s total business.

Trading conditions remained challenging in this market. Negligible economic growth, limited government investment in the sector and continued high levels of personal debt prevailed, impacting negatively on the building and construction industry. In addition, the strength of the Australian dollar favoured imports, intensifying competition in the market. In this environment the Group’s operation fell short of management’s expectations. Whilst investment in real estate was made during the reporting period, management is cognisant that the expressed intention to increase the store network to 15 by 2013 will be difficult to achieve in the current economic climate.

Property portfolio

Italtile’s property portfolio has an estimated current market value in excess of R1,3 billion, comprising high profile destination sites strategically selected to underpin the Group’s retail brands. The portfolio delivered returns in line with the trading operations.

During the reporting period, investment of R71 million was made in acquiring properties in both South Africa and Australia, while capital expenditure of R17,6 million was incurred on alterations and extensions of existing properties. Cash reserves remain strong, affording a flexible investment strategy should opportunities arise.

Prospects

Despite indications that the economic environment is likely to remain restrained over the forthcoming six months, the Group is satisfied that growth is sustainable. This outlook is based on management’s conviction that the market continues to afford expansion opportunities to determined retailers.

Key focus will remain on improving the in-store shopping experience through enhanced innovation and service, intensified cost containment and inventory and range management.

Basis of preparation

The reviewed interim financial results have been prepared in accordance with and containing the information required by IAS 34: Interim Financial Reporting as well as the AC 500 Standards, and have been prepared under the supervision of the Chief Financial Officer, Mr P D Swatton CA(SA).

Dividend

The Group has maintained its dividend cover of three times. The Board has declared an interim dividend of 7,0 cents per share (2010: 6,0 cents), a 17% increase.

Dividend announcement

The Board has declared an interim dividend (number 91) of 7,0 cents per ordinary share to all shareholders recorded in the books of Italtile Limited. The implementation of new legislation in respect of dividends tax will be effective from 01 April 2012. In this regard and in order to maximise Secondary Tax on Companies’ (STC) credits prior to the implementation of this legislation, the cash dividend timetable is structured as follows: the last day to trade cum dividend in order to participate in the dividend will be Thursday, 15 March 2012. The shares will commence trading ex dividend from the commencement of business on Friday, 16 March 2012 and the record date will be Friday, 23 March 2012. The dividend will be paid on Monday, 26 March 2012. Share certificates may not be rematerialised or dematerialised between Thursday, 15 March 2012 and Friday, 23 March 2012, both days inclusive.

For and on behalf of the Board

G A M Ravazzotti
Executive Chairman

P D Swatton
Chief Financial Officer

14 February 2011

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.

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)

Directors: G A M Ravazzotti (Executive Chairman), *P D Swatton (Chief Financial Officer)

Non-executive Directors: S M du Toit, S I Gama, **A Zannoni (*British ** Italian)

Company Secretary: E J Willis

Sponsor: BDO Corporate Finance