Financial results

Commentary

Overview for the six months ended 31 December 2015

Italtile Limited is a franchisor and retailer of local and imported tiles, sanitaryware, bathware, laminated flooring and other related home-finishing products. The Group’s retail brands are CTM, Italtile Retail and TopT, represented through a total network of 133 stores, 16 of which are located in the rest of Africa. The Group’s offering targets homeowners in the LSM 4 to 10 categories.

The Group’s Retail brand operation is strategically supported by a vertically integrated Supply Chain, investments in key suppliers, and an extensive property portfolio.

The performance reported by the Group for the six months under review is primarily attributable to:

• - management’s commitment to instilling retail excellence across the key customer-facing components of the Group’s offering, which resulted in improved levels of customer satisfaction and increased sales for the period;
• - the benefits realised from implementation of the Business Optimisation Programme (“BOP”) in the Group’s Supply Chain and Support Services divisions and expansion of the programme into the Retail brand operations; and
• - the Group’s strategic investments in its principal local suppliers, Ceramic Industries Proprietary Limited (“Ceramic”) and Ezeetile, which delivered pleasing returns and continued to support the business’s growth agenda.

Trading environment

The trading environment in the six months under review remained consistent with recent years, featuring moderate demand in the renovation and commercial projects markets, with little improvement experienced in the new build segment as public and private sector spend continued to stall.

The reporting period was characterised by general economic uncertainty, currency volatility and constrained disposable income, all factors which served to subdue consumer confidence. Price competition among industry participants intensified.

In this context, consumers gravitated to value for money offerings (consistent availability of high-quality products, good service and reputable brands). The Group’s high profile offering, sound balance sheet and integrated Supply Chain provided a competitive advantage in retaining and gaining market share.

Results

Financial highlights

• - System-wide turnover increased 13% to R3,08 billion (2014: R2,72 billion), while same store revenue improved 11%. Average selling price inflation was 4,7%. During the period, six new TopT stores and one CTM store were opened bringing the total network to 133 stores from 126 stores as at 30 June 2015 (2014: 119).
• - Reported trading profit rose 16% to R531 million (2014: R459 million), while profit from associates grew 63% to R44 million (2014: R27 million), translating into a 21% increase in profit after tax to R430 million (2014: R355 million).
• - Basic earnings per share (“EPS”) increased 21% to 44,3 cents (2014: 36,7 cents per share), while headline earnings per share (“HEPS”) grew 22% to 43,4 cents (2014: 35,7 cents per share).
• - Inventories increased 8% to R532 million (2014: R494 million), to support stronger sales growth. Continued prioritisation of good stock management was reflected by the notable improvement in availability of high-demand items, enhanced range matrix and increased stock turn. Optimum stock management across the business remains a key strategic discipline aimed at promoting customer satisfaction.
• - Capital expenditure of R242 million (2014: R109 million) was incurred primarily on enhancing the quality of the property portfolio through an ongoing store upgrade programme and property acquisitions. Investments were also made in IT requirements related to the BOP.
• - Cash and cash equivalent reserves at the end of the period were R351 million (2014: R209 million) after capital expenditure (discussed above), increased stock holding and provisional tax payments totalling R109 million.
• - The Group’s net asset value was 332 cents per share (2014: 271 cents per share).

Operational review

The Group’s BOP and management’s parallel focus on inculcating attention to retail detail across the offering delivered good results. These initiatives are centred on creating an exceptional customer experience across all key customer contact points. During the period sound progress was made in:

• - enhancing insight into and understanding of customer expectations, and establishing defined benchmarks and measurements to gauge and improve the retail experience. Regular and frequent surveys demonstrate consistently improving levels of customer satisfaction;
• - investment in increasing operational capacity and improving competencies and capability of personnel at all levels, which has resulted in higher levels of staff morale and motivation, and impacted positively on the quality of customer engagement;
• - upgrading IT systems, in-store devices and the online retail offering to support the drive for improved customer service and a seamless shopping experience across sales platforms; and
• - improved use of business information to facilitate better stock management and logistics to ensure consistent levels of the right product, at the right time, place and price.

Retail brands

All three of the Group’s brands, Italtile Retail, CTM and TopT, grew turnover and profit, and gained market share across most of their merchandise categories. Stores in the coastal markets and Limpopo province outperformed their counterparts: the coastal stores, well stocked with local product, enjoyed a competitive advantage over importers who had to contend with the deteriorating currency, while in the Limpopo region the improved performance was achieved through better execution of all key disciplines in-store.

Once again stronger growth was reported in the lower LSM segment of the business than the top end.

• - Italtile Retail: homeowners in the high-end LSM categories adopted a measured approach to investment in their properties based on their concerns about economic stability in this country. In contrast, the brand’s Commercial Projects division continued to deliver growth, gaining further market share in its non-residential market segment.
• - Standardisation and improved execution of best practice disciplines in-store underpinned continued growth in the CTM business. Enhanced marketing of the brand’s value for money proposition and tailored promotional activity, centred on private-label brands, served to entrench CTM’s top-of-mind awareness as the sector market leader.
• - TopT continued to gain traction in its market, opening six (2014: four) new stores in the review period, bringing the total network to 41 stores. Given consumers’ positive response to this offering, management is optimistic that the brand’s goal of opening five to ten new stores per year is achievable.

Supply Chain

The Group’s Retail brand operation is underpinned by its vertically integrated Supply Chain businesses: International Tap Distributors, Distribution Centre and Cedar Point.

Each of these businesses recorded improved sales, although margin pressure was experienced as a result of the deliberate strategy to contain price increases to the stores to support their value offering to customers. This impact was offset by efficiencies achieved through substantially improved stock management and cost containment derived from the BOP.

Investment in associates

The total contribution from associates to Group profits for the period rose 63% to R44 million (2014: R27 million).

Ceramic, a manufacturer of tiles, sanitaryware and baths, reported double-digit growth in both its South African and Australian operations, contributing R36 million (2014: R21 million) to Group profit for the six months. This improved performance is attributable to higher production volumes (buoyed in the local operation by Rand weakness), which resulted in enhanced capacity utilisation and consequent efficiencies.

Ceramic’s new tile plant, Gryphon, was commissioned in December 2015 and is expected to provide a significant alternative offering in the local market to imported large format glazed porcelain tiles.

Ezeetile, a manufacturer of grout, adhesive, paint and related products, grew sales to Italtile’s store network as well as independent customers, contributing R8 million (2014: R6 million) to Group profit for the period.

Global property investment

The Retail brand operation gains strategic benefit from the Group’s property investment portfolio which comprises high visibility, easily accessible sites and well-maintained, aesthetically pleasing stores designed to enhance the customer shopping experience.

The market value of this portfolio is in excess of R2,20 billion (2014: R1,90 billion), with a carrying value of R1,50 billion (2014: R1,20 billion). Investments of R200 million (2014: R74 million) were incurred on store refurbishments, new build and acquisition of properties during the six months.

Staff share scheme

The Group’s equity-settled Staff share scheme is structured to foster partnership with its employees and incentivise them to participate in the growth and profitability of the business. In the period under review, an allotment of 3,1 million shares (2014: 3,6 million) was made to 161 eligible local and foreign employees and franchisees.

Prospects

Historically, the Group has delivered a stronger performance in the first six months of the financial year than the latter half. This is a function of robust trading in the second quarter, based on consumers having access to additional funds from bonuses and stokvel pay-outs and capitalising on in-store festive season promotional activity. In the context of continued socio-economic uncertainty and further constraints on discretionary spend anticipated in the forthcoming period, it is highly likely that this trend will persist, with the second half proving increasingly challenging for all participants in the sector.

Notwithstanding this subdued trading environment, management is satisfied that there is clarity of strategy and structure across the company, which will enable the Group to capitalise on growth opportunities both within the business and in the marketplace. In the forthcoming period, the BOP will be further embedded in the Retail brand operations and should deliver improvements in line with management’s expectations. In addition, subject to availability of suitable sites and operators, the store roll-out programme will continue apace.

Further investment will be made in expanding the business to achieve the Group’s strategic growth goals, including expenditure on systems, technology and human resources. Italtile’s cash reserves will support this strategy.

Subsequent events

No events have occurred subsequent to the reporting period that require any additional disclosures or adjustments.

Cautionary announcement

Italtile shareholders are advised that the Company has entered into discussions regarding potential corporate actions, which, if successful, may have a material effect on the price of the Company’s securities.

Accordingly, shareholders are advised to exercise caution when dealing in Italtile’s securities until a further announcement in this regard is made.

Cash dividend

The Group has maintained its dividend cover of three times. The Board has declared an interim gross cash dividend of 14,0 cents per share (2014: 12,0 cents), an increase of 17%.

Dividend announcement

The Board has declared an interim gross cash dividend (number 99) for the six months ended 31 December 2015 of 14,0 cents per ordinary share to all shareholders recorded in the shareholder register of the Company.

In accordance with paragraphs 11.17(a)(i) to (x) and 11.17(c) of the JSE Listings Requirements, the following additional information is provided:

• The dividend has been declared out of income reserves.
• The local dividend withholding tax rate is 15% (fifteen percent).
• The gross local dividend amount is 14,00000 cents per share for shareholders exempt from the dividends tax.
• The net local dividend amount is 11,90000 cents per share for shareholders liable to pay the dividends tax.
• The local dividend withholding tax amount is 2,10000 cents per share for shareholders liable to pay the dividend tax.
• Italtile’s income tax reference number is 9050182717.
• Italtile has 1 033 332 822 shares in issue including 19 533 492 shares held by the Share Incentive Trust and 88 000 000 shares held as BEE treasury shares.

The cash dividend timetable is structured as follows: the last day to trade cum dividend in order to participate in the dividend will be Friday, 26 February 2016. The shares will commence trading ex dividend from the commencement of business on Monday, 29 February 2016 and the record date will be Friday, 4 March 2016. The dividend will be paid on Monday, 7 March 2016. Share certificates may not be dematerialised or rematerialised between Monday, 29 February 2016 and Friday, 4 March 2016, both days inclusive.

This Reviewed Condensed Group Results Announcement has been released on SENS and is available for viewing on the Company’s website (www.italtile.com); furthermore, it is available for inspection at the registered offices of Italtile and its sponsors, Merchantec Capital, during business hours. Copies of the full announcement are available at no cost on request and may be obtained from the Company Secretary who is contactable on: +27 11 882 8200 or: [email protected]

For and on behalf of the Board

N Booth Chief Executive Officer

B Wood Chief Financial Officer

The Reviewed Condensed Group Results Announcement for the six months ended 31 December 2015 has been reviewed by Ernst & Young Inc. (“EY”). EY’s unmodified review conclusion does not necessarily report on all of the information contained in this Condensed Group Results Announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of auditors’ engagement, they should obtain a copy of EY’s unmodfiied review opinion together with the accompanying financial information from the Company Secretary at the Company’s registered office.

Johannesburg

10 February 2016