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Italtile - Reviewed group results for the year ended 30 June 2006
ITALTILE LIMITED
(ITALTILE)
Incorporated in the
Republic of South Africa
Share code: ITE
ISIN: ZAE000003679
Reg. No. 1955/000558/06
Preliminary Profit Announcement
Reviewed Group Results for the year ended 30 June 2006
Commentary
RESULTS
Italtile Limited has delivered its 15th consecutive year of real earnings growth
to exceed the R2 billion system-wide turnover milestone for the year ended 30
June 2006.
The group continues to build on its transition from niche specialist tile
merchant, and is now the leading multifaceted retailer of tiles and bathware in
South Africa. Italtile"s brand portfolio comprises CTM and Italtile, positioned
to appeal across the consumer spectrum from the value-driven volume end to the
exclusive premium-end sector. The group trades through 98 stores across Africa
and Australia.
System-wide turnover improved 15% to R2,253 billion (2005: R1,954 billion), a
noteworthy achievement given deflationary price increases and organic growth
from existing stores in the absence of new store growth. The contribution from
group-owned stores (including joint venture franchises) increased 25% to R1,285
billion (2005: R1,032 billion), whilst revenue generated from franchise stores
grew 5% to R968 million (2005: R922 million). The discrepancy in the relative
segmental contributions is a reflection of migration of stores between
portfolios rather than an accurate reflection of actual performance.
Trading profit for the review period rose 23% to R338 million (2005: R274
million). Earnings per share and headline earnings per share increased 20% and
23% respectively to 1290 cents (2005: 1073 cents) and 1312 cents (2005: 1069
cents).
Illustrative of the group"s strong cash-generating capability and prudent
working capital management, Italtile concluded the year with increased cash
reserves of R343 million (2005: R301 million). Inventory reduced marginally
despite growth across the business.
The group"s improved results are ascribed to the robust trading environment,
favoured by a positive macro-economic climate and an expanded customer base as
greater numbers entered the mainstream residential and renovation markets.
The widespread appeal of the group"s brands and high degree of customer loyalty
served to entrench the group"s leadership status in the market.
Extensive upgrades across the store network, an enhanced, extended tile and
sanitaryware range coupled with stable product prices drove volume growth in the
year under review.
Improved profitability is attributable to prudent pricing and product mix which
caters for the trend displayed by increasingly discerning consumers to purchase
higher value items across the range with improved exposure to the product.
Whilst the group delivered a sound performance in line with its retail sector
peers, management is of the opinion that the business is capable of
significantly enhancing this performance by improving on its own core
competencies and further optimising on positive trading conditions.
In this regard the business model is being critically reviewed and re-engineered
to extract further value from the various component entities: supply chain
management, franchising, trading operations and property portfolio.
TRADING ENVIRONMENT
The proliferation of new entrants in the marketplace has had the effect of
creating a price frontier, promoting lowest prices at all cost, with inevitable
pressure brought to bear on independent participants. Italtile benefited from
its established presence in the marketplace and long-standing relationships with
suppliers.
Equally, this competitive environment promoted consolidation in the supply
chain, with further consolidation likely. It is possible that this trend will
manifest in the retail chain in due course.
Whilst the economy is beginning to feature inflationary trends, the group is
satisfied that the business traditionally trades better in difficult times and
with its core offering aimed at home improvement and enhancements, is well
positioned to take advantage of the renovation market should the property
buyers" market continue its downward trend.
AFRICAN OPERATIONS
Italtile and CTM
The group"s store network comprises 66 CTM stores and 8 Italtile stores
nationwide and a further 16 CTM stores across Africa in Botswana, Namibia,
Swaziland, Lesotho, Malawi, Uganda, Tanzania and Zambia.
Whilst both divisions reported solid growth, the bathware component outperformed
the tile business in terms of rate of growth and market share improvement. The
continued sanitaryware shortage in the market was exacerbated by further
capacity constraint resulting from the destruction by fire of the production
plant of one of the group"s suppliers. The bathware sector has been identified
by Italtile as an important growth market. Selling prices in the sanitaryware
sector continued their four-year deflationary trend. Tile prices grew at
approximately 2%.
An extensive renovation programme was undertaken across a large number of
stores, aimed at enhancing the retail experience and supporting the group"s
positioning as a destination retailer. The favourable response from consumers
supports the roll-out of this initiative across the network.
Advancing the strategy to extend the group"s range of home enhancement
solutions, a laminated flooring offering was introduced to select CTM stores in
the Gauteng area. Response to the product line has been gratifying,
substantiating the decision to extend the offering nationwide.
Facilitating access to the group"s products is critical to expansion plans.
Italtile"s pilot store in an exclusively black residential area opened in
Botshabelo during the review period, and has traded positively since then.
Additional stores are currently under construction in Thembisa and
Phuthaditjhaba.
Whilst improved results were achieved across the group"s businesses, management
intends to dramatically escalate that performance by focusing on a range of
growth and enhancement imperatives:
Attention will be paid to expanding the group"s presence along the country"s
coastal areas. The inland regions have traditionally been recognised as
Italtile"s dominant markets, and will remain so, but with growing urbanisation
in KwaZulu-Natal and the Western Cape, the group recognises the opportunities
presented through enhancing its current profile in those provinces.
A comprehensive campaign is being undertaken to attract a resource of superior
calibre franchisees. The response has been rewarding and will assist management
in its endeavour to promote entrepreneurship and empowerment through mentorship.
Innovation, responsiveness and exceptional service are critical to growing
market share in a competitive environment. Management"s objective will be to up-
skill and optimise talents to achieve and exceed those goals.
Improved logistics and accessibility to the right product at the right price
underpin the group"s trading philosophy. In support of this strategy, two major
initiatives were implemented during the review period: backward integration of
the group"s supply chain and introduction of a world-class logistics system
aimed at reducing costs and inefficiencies and facilitating just-in-time
deliveries. The incorporation of these components has taken longer than
anticipated, and served to reveal areas of underperformance which required re-
engineering. Management is satisfied that the group is now better positioned to
achieve cost and best practice benchmarks, improving its competitive advantage
in the market.
In addition, the group"s brands underwent critical analysis with a view to
ensuring they retain integrity and continue to deliver on their core offerings.
Future sales promotions will be built around optimal alignment of message and
product. In this regard new communications campaigns will be introduced to
reinforce those key messages.
INTERNATIONAL OPERATIONS
The group currently trades out of eight stores across Queensland and New South
Wales, and a new store will be opened on the Gold Coast during the forthcoming
financial year. The majority of the stores are modelled on the company"s new
generation formula, developed specifically for Australian market needs, and
combine an extensive product range and upmarket showroom facilities. The
operation is expected to continue to make a nominal contribution to profits.
PROPERTY PORTFOLIO
Italtile"s combined South African and Australian portfolio was boosted by
further investment of R83 million during the review period, bringing the
carrying value to some R496 million.
In addition to the strong returns achieved from this portfolio, which are in
line with Italtile"s trading operations, the group derives important strategic
advantage by supporting its brands with high-profile prime sites that enhance
Italtile"s positioning as a destination retailer.
The group"s stated intention to aggressively expand its store network has been
substantially hampered by the prevailing onerous regulatory environment. Despite
having identified and acquired a number of sites for expansion, the excessive
lead time before such sites are approved for development has served to restrict
the group"s rollout plans. Further exacerbating this situation is existing price
pressure on land and construction costs, the latter due to the prevailing
shortage of skilled contractors.
Despite these constraints Italtile anticipates opening a further nine stores
within the forthcoming financial year.
BLACK ECONOMIC EMPOWERMENT
Significant progress has been achieved with regard to the group"s planned Black
Economic Empowerment initiative. The leading and support partners (which
includes staff and franchisees) have been identified and funding arrangements
are currently being concluded. Whilst certain structuring formalities still
require being resolved, the Board hopes to be in a position to announce the
substance of the deal before the end of the current calendar year.
DIRECTORATE
In line with the group"s long-term management succession plan, Mr Gianpaolo
Ravazzotti assumed the position of Chief Executive Officer of Italtile on 1 July
2006, replacing Mr Gianni Ravazzotti, who resumed his former role as Group
Executive Chairman. To facilitate the re-entry of Mr Gianni Ravazzotti as
Chairman, the incumbent, Mr Derek Rabin, relinquished his position and resumed
his role as Non-executive Director of the group. Christian Trumpelmann, Chief
Operating Officer of CTM and an Executive Director, elected to take up a
franchising opportunity within the group and resigned his positions on 1 April
2006.
The Board wishes to thank these directors for their contribution and continued
commitment to the group in their new positions.
PROSPECTS
Despite prevailing sentiment regarding a downturn in the economy, management is
confident that significant opportunities exist for innovative retailers in the
home enhancement industry.
Continued stimulation of the economy by government and the sustained growth of
the emerging middle class will remain critical growth drivers.
Proposed raw material price increases will result in a degree of price inflation
after a sustained period of deflation. This environment will certainly pressure
opportunistic entrants in the industry and inevitably result in a degree of
consolidation.
The group will direct its energy at revitalising the business model to
capitalise on opportunities presented. Core competencies will be honed and
particular emphasis will be placed on improving logistics and product offering.
Entrepreneurship, skills upgrade and enhanced service will be paramount in
growing the group"s market leadership.
The current level of growth in earnings will be maintained over the forthcoming
period.
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.
Previously the group reported in terms of South African Statements of Generally
Accepted Accounting Practice. The balance sheet and income statement at June
2005 have been restated accordingly. 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
in the IFRS table. 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 IFRS2 to share options
granted before 7 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.
Dividend
A further reduction in dividend cover from 4 times to 3 times has been
implemented, based on the group"s strong balance sheet, proven cash generating
ability, and the imperative to favourably position the group to effect its
planned black economic empowerment partnership.
Consequently the Board has declared a final ordinary dividend of 290 cents per
share, which together with the interim ordinary dividend of 140 cents produces a
total ordinary dividend declared for the year of 430 cents (2005: 270 cents), an
improvement of 59%.
DIVIDEND ANNOUNCEMENT
The Board has declared a final ordinary dividend (number 80) of 290 cents per
share to all shareholders recorded in the books of Italtile Limited. The last
day to trade cum the dividend will be Friday, 25 August 2006. The shares of
Italtile Limited will commence trading ex dividend from the commencement of
business on Monday, 28 August 2006 and the record date will be Friday, 1
September 2006. Payment will be made on Monday, 4 September 2006. Share
certificates may not be rematerialised or dematerialised between Monday, 28
August 2006 and Friday, 1 September 2006, both days inclusive.
For and on behalf of the Board
G A M Ravazzotti P D Swatton
Chief Executive Officer Chief Financial Officer
7 August 2006
These results have been reviewed by Ernst & Young and their review opinion is
available on request from the company secretary at the company"s registered
office or own address.
System-wide turnover analysis
For the year ended 30 June 2006
(Rand million unless % 30 June 30 June
otherwise stated) increase 2006 2005
Group and franchised turnover
- By group-owned stores 1 285 1 032
- By franchise-owned stores
(Unaudited) 968 922
TOTAL 15 2 253 1 954
Abridged group income statements
For the year ended 30 June 2006
Reviewed Audited
(Rand million unless otherwise stated) year to year to
% 30 June 30 June
increase 2006 2005
Trading profit before
depreciation 363 293
Depreciation (21) (20)
(Loss)/profit on sale of
property, plant and equipment (4) 1
Trading profit 23 338 274
Investment income 16 12
Profit before interest paid 354 286
Interest paid (2) (1)
Profit before taxation 23 352 285
Taxation (111) (88)
Profit for the year 22 241 197
Attributable to:
Equity holders of the parent 233 191
Minority interests 8 6
22 241 197
Number of shares in issue
(000"s) 18 095 17 771
Earnings per share (cents) 20 1 290 1 073
Headline earnings per share
(cents) 23 1 312 1 069
Diluted earnings per share
(cents) 21 1 271 1 047
Dividends per share (cents) 430 270
Special dividend (cents) 330
RECONCILIATION OF HEADLINE EARNINGS
Earnings attributable to
ordinary shareholders 233 191
Loss/(profit) on sale of
fixed assets 4 (1)
Headline earnings 237 190
RECONCILIATION OF SHARES IN ISSUE
Total number of shares
issued (000"s) 18 677 18 677
Share Incentive Trust shares
(000"s) (582) (906)
Shares in issue to external
parties (000"s) 18 095 17 771
Segmental reporting
For the year ended 30 June 2006
(Rand million unless otherwise stated)
Supply and
Re- Fran- Proper- support Inter-
tail chising ties services group Group
Reviewed year
to June 2006
Revenue 1 064 129 99 549 (385) 1 456
Segment results 68 66 80 124 338
Audited year to
June 2005
Revenue 904 111 84 381 (290) 1 190
Segment results 57 57 64 96 274
Abridged group balance sheet
As at 30 June 2006 Reviewed Audited
(Rand million unless otherwise stated) year to year to
30 June 30 June
2006 2005
ASSETS
Non-current assets 549 444
Property, plant and equipment 537 433
Other long-term assets 9 9
Deferred tax 3 2
Current assets 567 520
Inventories 150 154
Trade and other receivables 74 65
Cash and cash equivalents 343 301
Total assets 1 116 964
EQUITY AND LIABILITIES
Capital and reserves 794 663
Stated capital 27 27
Non-distributable reserve 17 13
Treasury shares (48) (55)
Retained earnings 768 649
Outside shareholders" interest 30 29
Long-term liabilities 10 10
Current liabilities 312 291
Trade and other payables 289 264
Taxation 23 27
1 116 964
Net asset value per share (cents) 4 388 3 731
Cash flow statement
For the year ended 30 June 2006 Reviewed Audited
(Rand million unless otherwise stated) year to year to
30 June 30 June
2006 2005
Cash flow from operating activities 167 205
Cash flow from investing activities (121) (137)
Cash flow from financing activities (4) 10
Net movement in cash and cash equivalents 42 78
Cash and cash equivalents at beginning
of period 301 223
Cash and cash equivalents at end of
period 343 301
Notes:
- There are no material contingent
liabilities or assets at 30 June 2006
- Capital commitments at 30 June 2006 Rm
Contracted 78
Authorised, not contracted 72
150
- In terms of the Articles of Association, the company"s borrowing facilities
are unlimited.
Statement of changes in equity
For the year ended 30 June 2006
(Rand million unless otherwise stated)
Non-
Stated distributable Treasury
Group capital reserve shares
Balance at 30 June 2004
restated 27 1 (46)
Net profit for the year
Dividends paid
Currency translation
difference 11
Share option costs 1
Unallocated shares in
share trust (7)
Accumulated surplus in
share trust (2)
Subsidiary share capital
increase
Balance at 30 June 2005 27 13 (55)
Net profit for the year
Dividends paid
Currency translation
difference 3
Share option costs 1
Unallocated shares in
share trust 10
Accumulated surplus in
share trust (3)
Purchase of additional
share in subsidiary
27 17 (48)
Statement of changes in equity (continued)
For the year ended 30 June 2006
(Rand million unless otherwise stated)
Minority Retained
Group interest profit Total
Balance at 30 June 2004
restated 15 518 515
Net profit for the year 6 191 197
Dividends paid (60) (60)
Currency translation
difference 11
Share option costs 1
Unallocated shares in
share trust (7)
Accumulated surplus in
share trust (2)
Subsidiary share capital
increase 8 8
Balance at 30 June 2005 29 649 663
Net profit for the year 8 233 241
Dividends paid (3) (114) (117)
Currency translation
difference 3
Share option costs 1
Unallocated shares in
share trust 10
Accumulated surplus in
share trust (3)
Purchase of additional
share in subsidiary 4 4
30 768 794
IFRS impact on profit attributable to ordinary shareholders
(Rand million unless otherwise stated)
30 June 2005
As previously reported 197
Effect of IAS16 and IFRS2 -
197
IFRS impact on shareholders equity
30 June 2004 30 June 2005
As previously reported 499 633
Effect of IAS16 and IFRS2 1 1
Reallocation of minority interest 15 29
515 663
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, Edura
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,
G P E Ravazzotti (*Greek ** British)
Refer to Italtile"s corporate website: www.italtile.com
Date: 07/08/2006 07:30:14 AM Supplied by www.sharenet.co.za
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