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CRM - Ceramic Industries Limited - Reviewed Preliminary Financial Results for

Release Date: 08/09/2011 07:05
Code(s): CRM
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CRM - Ceramic Industries Limited - Reviewed Preliminary Financial Results for the year ended 31 July 2011 Ceramic Industries Limited Registration number 1982/008520/06 (Incorporated in the Republic of South Africa) ("Ceramic" or "the Group") Share code: CRM ISIN: ZAE000008538 Reviewed Preliminary Financial Results for the year ended 31 July 2011 Commentary Operating environment Weak demand, exacerbated by the influx of cheap imported product made possible by the strong local currency, led to an under-utilisation of the Group`s factories and put pressure on unit costs. In addition, above-CPI increases in energy and glaze expenses were not able to be recovered through price increases, which had a negative impact on sales and margins. Financial results Group revenue decreased 3,4% to R1 547,2 million from R1 601,2 million in the year under review. Revenue from tiles declined 5,7% to R1 299,6 million from R1 378,0 million, with sales volumes across the Group decreasing 4,3% to 34,59 million mSquared from 36,17 million mSquared. Tile production fell 5,1% to 35,05 million mSquared from 36,93 million mSquared. The Group`s sanitaryware division reported an improved performance. While neither Betta nor Aquarius delivered results in line with their full potential, the improvement is reward for on-going management attention. Revenue from the sanitaryware division grew 11,0% to R247,6 from R223,2 million in the prior year. Production volumes of sanitaryware increased 13,1% to 1 343 347 pieces from 1 187 239 pieces, matched by the same percentage growth in sales volumes to 1 301 722 pieces from 1 150 890 pieces. Group operating profit decreased 23,3% to R191,8 million from R250,1 million. Profit from tiles declined 30,3% to R174,2 million from R250,1 million, while the sanitaryware division increased its profit to R17,6 million from R68 000 in the prior year. The effective tax rate increased to 39,5% from 27,9% in the comparable period as a result of the STC charge on the R304 million special dividend declared during the year. Of the R87,1 million tax payable, R30,4 million comprised the STC component on the special dividend. Finance income increased to R22,5 million from R20,8 million due to increased interest earned in the current year. Finance expenses rose to R1,5 million from R311 000 as a result of foreign exchange losses. Headline earnings per share declined 30,6% to 785,3 cents from 1 131,3 cents per share, while basic earnings per share decreased 30,3% to 788,0 cents from 1 130,1 cents per share. Inventories increased to R118,2 million from R110,8 million. Inventory was managed through the temporary shut-down of at least one kiln in each of the Group`s tile factories other than Pegasus. During the review period, capital expenditure of R130 million was incurred on equipment upgrades and new technology in the factories. The primary expenditure related to the high definition inkjet printer technology that was introduced in the Samca Wall factory and is scheduled for commissioning in the Pegasus and Vitro factories in the near future. Cash reserves decreased to R217,7 million from R435,7 million and Ceramic`s net asset value per share declined 10,5% to 7 081 cents (2010: 7 912 cents) as a result of the R304 million special dividend paid in the reporting period. The Group`s balance sheet remains strong. Manufacturing operations The board believes that, notwithstanding the Group`s disappointing results, the fundamentals underpinning the business remain sound: the Group is cash generative, has cash reserves, and each of its factories is in a good state of repair with the newer factories, Pegasus and Centaurus, employing state of the art technology. Ongoing efforts were made during the review period to improve efficiencies given the reduced capacity utilisation, and attention was paid to improving the Group`s product range and striving to match production planning with market demand. A significant development in the reporting period was the re-organisation of the management structure. The Group`s two most experienced managers were deployed to head up the tile and sanitaryware divisions respectively, affording the Chief Executive Officer greater opportunity to manage enterprise-wide strategy and business development. In addition, this change will strengthen management capacity and create new opportunities for the Group`s other managers. Tile division Pegasus The low cost glazed pressed tiles which this factory produces have widespread appeal for the DIY and contract market. Pegasus` ranges compete successfully against Chinese imports. During the review period Pegasus operated at 95% of capacity, and was the only tile factory in the Group which succeeded in increasing production and sales volumes and growing turnover. The operation improved year-on-year production volumes to 14,95 million mSquared from 14,91 million mSquared, while sales volumes grew 3,9% to 14,90 million mSquared from 14,34 million mSquared; both of these achievements are new records for the factory. Whilst sales revenue rose by R21 million against the prior year, increased input costs eroded margins. Vitro This factory manufactures full bodied unglazed and glazed extruded punched tiles for the up-market domestic and contract sectors. Vitro delivered a consistently solid production performance. However, failure to respond expeditiously to intensified competition from Chinese imports impacted negatively on sales volumes. While year-on-year production increased to 5,40 million mSquared from 5,26 million mSquared, sales volumes dropped to 5,09 million mSquared from 5,27 million mSquared, reducing sales revenue by R4 million. In order to reduce stock levels, production volumes were reduced by 40% in the last two months of the financial year putting pressure on unit costs and margins. Samca Floor Tiles The reporting period was a turbulent one for the Samca Floor Tile factory, which produces pressed glazed floor tiles. Staff changes resulted in short-term inefficiencies whilst staff were re-trained and up-skilled. In addition, the product range failed to provide a distinctive value proposition, resulting in a loss of sales. Average selling prices were reduced to regain market share which, together with substantially increased input costs, resulted in a decline in margins. Production levels remained consistent with the prior year at 5,3 million mSquared, while sales volumes declined to 5,21 million mSquared from 5,44 million mSquared. This factory is currently producing a range of high quality thinner tiles which, in addition to being stronger, easier to install and environmentally friendly, will reduce costs and improve price competitiveness in the forthcoming period. Samca Wall Tiles This operation is the only wall tile factory in the country, and manufactures pressed, glazed tiles for the commodity and fashion markets. The period under review proved very challenging for this factory. The introduction of new technology and equipment, and severe difficulties experienced with the quality of raw materials resulted in a substantial amount of down-time. Production volumes declined 10,4% to 5,33 million mSquared from 5,95 million mSquared while sales volumes decreased 6% to 5,45 million mSquared from 5,81 million mSquared. The lower production levels increased unit costs and eroded margins. Management is satisfied that action undertaken during the reporting period will enhance operating efficiencies. The installation of inkjet printers and automated selection equipment together with measures taken to control the quality of clay inputs should improve product quality. Centaurus - Australia This factory produces glazed porcelain floor tiles in a range of size formats and is the only volume tile manufacturer in Australia. Trading conditions remained difficult, with the Australian tile market contracting by 17% year-on-year. Centaurus failed to meet management`s expectations, delivering a disappointing performance featuring poor production and sales volumes and a significantly lower margin. Production decreased by 26,5% to 4,02 million mSquared from 5,47 million mSquared, while sales volumes declined 25,6% to 3,95 million mSquared from 5,31 million mSquared. The factory operated at break-even, at only 65% of its capacity in the review period. Failure to resolve product development issues and adequately match production planning and product mix with market demand were central to these results. Bedding-down of the inkjet technology has been substantially more difficult than anticipated and expectations created in the marketplace have not been met, resulting in a loss of sales. The inability of the factory to deliver a consistent supply of high quality product resulted in a loss of market share to opportunistic importers of low-priced Asian product. Management is confident that the investment in inkjet technology is sound and will afford the factory a strategic advantage in the long term, reinforced by customers seeking to support Australian manufactured products. In this regard significant time has been dedicated to ensuring customers remain committed to the factory through the implementation phase of the inkjet technology. Sanitaryware division Despite the reduction in market size and the proliferation of imported product, the Group`s sanitaryware factories succeeded in improving profitability for the year. Betta This factory is a high volume, low cost manufacturer of glazed porcelain sanitaryware. Production volumes increased by 13,8% to 1 244 695 pieces from 1 093 604 pieces, while sales volumes improved 13,4% to 1 199 289 pieces from 1 057 281 pieces. Both revenue and profitability improved, while margins doubled. This achievement was derived from better product mix (including greater volumes of higher margin box suites) and improved logistics, inventory management and customer service. Approximately 20% of this factory`s production is exported to African countries, which offers good growth potential for Betta`s products. Aquarius This factory manufactures drop-in and free standing acrylic baths for the local and export market. Efficiencies implemented at Aquarius had a positive impact on turnover and served to reduce losses in the reporting period. Production costs and scrap levels declined, while production yields improved. A change in product sales mix enabled the factory to realise a modest increase in average selling prices. Production volumes increased 5,4% to 98 652 pieces from 93 635 pieces. Sales volumes grew 9,4% to 102 433 pieces from 93 609 pieces. Aquarius reduced its loss of R8 million in 2010 to R3 million in the review period and, despite this loss, is cash generative. InvestmentDuring the year under review the Group increased its shareholding in Ezee Tile, a manufacturer of adhesives, grout and related products. The R10 million additional investment gives the Group significant influence over the Ezee Tile group of companies. Prospects There are no indications that the economy in general or the building and construction industry in particular will experience any material recovery in the next 12 months. Prevailing global economic uncertainty continues to weigh on public and private sector investment decisions. In South Africa, there is no immediate evidence of the roll out of government programmes that will stimulate the new build segment. In Australia, the Group`s trading environment will also remain difficult due to high interest rates and the impact of environmental policies, including a proposed carbon tax, on the cost of utilities. The local currencies in both South Africa and Australia are expected to remain strong and this will see the continuation of the existing highly competitive environment. The Group is undertaking a feasibility study to determine the viability of commissioning another volume based tile plant specialising in large format floor tiles with broad market appeal. It was noted that key factors determining the decision to proceed were qualification for the Government`s tax incentive for Industrial Policy Projects and the Group`s ability to acquire mining licenses to secure new clay deposits to support Ceramic`s investment. Whilst the Department of Trade and Industry has approved the tax incentives for the proposed project, no progress has been made regarding either prospecting licences or mining licences and as a result the project has been put on hold. Management`s priorities in the period ahead will remain on leveraging efficiencies in an environment of reduced demand and retaining and growing market share by ensuring the Group`s product range continues to compete successfully against imported products. Special dividend On 17 May 2011, the Board declared a special dividend of 1 500 cents per Ceramic ordinary share to all shareholders of the Group. The reason for the special dividend, which should be treated by shareholders as a payment out of profit, was to return surplus cash to shareholders. Black Economic Empowerment Treasury shares During the review period the Group`s Black Economic Empowerment ("BEE") shareholders, namely, Aka Ceramic Holdings (Proprietary) Limited, Peotona Ceramics (Proprietary) Limited, the Ceramic BEE Staff Empowerment Trust No. 2 and the Ceramic Foundation agreed to utilise a fixed percentage of the special dividend (referred to above) to acquire treasury shares from Ceramic`s wholly owned subsidiary company, National Ceramic Industries South Africa (Proprietary) Limited. Approximately 60% of the Group`s treasury shares were acquired by the BEE shareholders through this transaction. This transaction enhanced Ceramic`s BEE credentials. Empowerment transaction The remaining component of the BEE equity ownership transaction approved at a General Meeting on 11 December 2008, comprising the empowerment of Ceramic`s clay quarries with majority ownership passing to the Group`s employees, has received shareholder approval, but still requires final approval from the Department of Mineral Resources. The impact of this transaction on operating profit will be a once-off non-cash IFRS 2 charge of approximately R8 million. Shareholders will be advised once this suspensive condition has been fulfilled. Ordinary dividend The Board has declared a final dividend (number 43) of 160 cents, which together with the interim dividend of 140 cents, maintains the total dividend at 300 cents per share. On behalf of the Board G A M Ravazzotti Chairman N Booth Chief Executive Officer 6 September 2011 Dividend announcement The Board has declared a final dividend (number 43) of 160 cents per share to all shareholders recorded in the books of Ceramic Industries Limited at the close of business on Friday, 7 October 2011. The last day to trade cum dividend in order to participate in the dividend will be Friday, 30 September 2011. The shares will commence trading ex dividend from the commencement of business on Monday, 3 October 2011 and the record date will be Friday, 7 October 2011. The dividend will be paid on Monday, 10 October 2011. Share certificates may not be rematerialised or dematerialised between Monday, 3 October 2011 and Friday, 7 October 2011, both days inclusive. On behalf of the Board E J Willis Secretary 6 September 2011 Statement of compliance The reviewed preliminary condensed consolidated results for the year have been prepared in accordance with the framework concepts and the measurement requirements of International Financial Reporting Standards, the AC500 Series as issued by the Accounting Practices Board and the presentation and disclosure requirements of IAS 34: Interim Financial Reporting, the JSE Listings Requirements and in the manner required by the South African Companies Act, 2008, as amended. The accounting policies applied in preparation of the reviewed preliminary condensed consolidated financial statements are consistent with those applied in the Group`s annual financial statements for the year ended 31 July 2010, which comply with International Financial Reporting Standards. Auditor`s independent review These preliminary condensed consolidated financial results for the year have been reviewed by the Group`s auditors, KPMG Inc., in terms of International Standards on Review Engagements 2410. The scope of the review was to enable the auditors to report that nothing had come to their attention that caused them to believe that the accompanying condensed consolidated interim financial statements are not presented, in all material respects, in accordance with IAS 34: Interim Financial Reporting and the South African Companies Act. Their unmodified review report on the condensed consolidated interim financial statements is available for inspection at the registered office of the company. Condensed consolidated statement of comprehensive income year ended 31 July 2011 2010 % Reviewed Audited Change R000`s R000`s
Revenue (3,4) 1 547 249 1 601 187 Tiles (5,7) 1 299 617 1 378 013 Sanitaryware 11,0 247 632 223 174 Operating profit before (12,7) 327 221 375 021 depreciation Depreciation 8,4 (135 374) (124 874) Operating profit (23,3) 191 847 250 147 Tiles (30,3) 174 248 250 079 Sanitaryware 17 599 68 Finance income 8,3 22 535 20 803 Finance expenses 387,5 (1 516) (311) Income from associated - 7 500 - companies Profit before taxation (18,6) 220 366 270 639 Taxation 15,5 (87 139) (75 456) Profit for the year (31,7) 133 227 195 183 Other comprehensive income Foreign currency translation 28 694 12 316 differences for foreign operations Total comprehensive income for 161 921 207 499 the year Profit attributable to: Ordinary shareholders of the (31,2) 133 204 193 657 Group Non-controlling interest 23 1 526 Total comprehensive income attributable to: Ordinary shareholders of the 162 936 205 356 Group Non-controlling interest (1 015) 2 143 Earnings per share Basic earnings per share (30,3) 788,0 1 130,1 (cents) Diluted earnings per share (29,9) 761,3 1 085,4 (cents) Dividend per share (cents) - 1 800,0 300,0 Reconciliation of headline earnings Profit attributable to ordinary 133 204 193 657 shareholders of the Group (Profit)/loss on disposal of (461) 205 plant and equipment Headline earnings (31,5) 132 743 193 862 Headline earnings per share (30,6) 785,3 1 131,3 (cents) Diluted headline earnings per (30,2) 758,6 1 086,5 share (cents) Condensed consolidated statement of financial position at 31 July 2011 2010 Reviewed Audited
R000`s R000`s ASSETS Non-current assets 887 577 855 584 Property, plant and equipment 861 418 845 560 Goodwill 4 520 4 520 Investment in associated company 21 399 5 504 Deferred taxation assets 240 - Current assets 560 487 767 433 Inventories 118 248 110 800 Trade and other receivables 224 089 218 011 Income taxation receivable 438 2 874 Cash and cash equivalents 217 712 435 748 Total assets 1 448 064 1 623 017 EQUITY AND LIABILITIES Equity 1 198 085 1 355 799 Share capital 64 816 64 816 Treasury shares (122 861) (145 316) Share-based payment reserve 47 212 47 212 Share awards reserve 12 451 8 483 Reserves 111 153 83 425 Retained earnings 1 077 697 1 288 547 Ordinary shareholders` interest 1 190 468 1 347 167 Non-controlling interest 7 617 8 632 Non-current liabilities 76 242 78 787 Shareholders` loans 9 231 9 561 Deferred taxation liabilities 67 011 69 226 Current liabilities 173 737 188 431 Trade and other payables and provisions 173 402 188 218 Shareholders for dividends 335 213 Total equity and liabilities 1 448 064 1 623 017 Condensed consolidated statement of changes in equity year ended 31 July 2011 2010 Reviewed Audited R000`s R000`s Balance at beginning of year 1 355 799 1 227 149 Costs incurred in respect of BEE - (23) transaction Premium on acquisition of non- (3 580) - controlling interest Share buy back (1 897) (33 206) Treasury shares sold to BEE partners 24 352 - Share awards reserve 3 968 524 Profit attributable to ordinary 133 204 193 657 shareholders of the Group Movement in foreign currency translation 27 751 11 699 reserve Movement in non-controlling interest (1 015) 2 143 Transfer to dividend reserve (340 473) (56 777) Dividend reserve 340 473 56 777 Net dividend paid (340 497) (46 144) Balance at end of year 1 198 085 1 355 799 Condensed consolidated statement of cash flows year ended 31 July 2011 2010 Reviewed Audited
R000`s R000`s Operating activities Operating profit adjusted for non-cash 344 569 382 849 items Changes in working capital (28 342) 87 333 Cash generated from operations 316 227 470 182 Finance income 22 535 20 803 Finance expenses (1 516) (311) Dividends paid (340 375) (47 467) Taxation paid (92 922) (74 064) (96 051) 369 143 Investing activities (138 549) (53 069) (Increase)/decrease of share in (10 832) 178 investment in associated company Property, plant and equipment (net) (127 717) (53 247) Financing activities 16 564 (35 336) Costs incurred in respect of BEE - (23) transaction Additional shareholding acquired in NCI (5 561) - Australia Share buy back (1 897) (33 206) Treasury shares sold to BEE partners 24 352 - Borrowings repaid - (1 932) Shareholders` loans repaid ( 330) ( 175) Net movement in cash and cash (218 036) 280 738 equivalents Cash and cash equivalents at beginning 435 748 155 010 of year Cash and cash equivalents at end of year 217 712 435 748 Directors: G A M Ravazzotti (Chairman), N Booth (Chief Executive Officer), D R Alston (Chief Financial Officer), S D Jagoe, E M Mafuna, N S Nematswerani, N D Orleyn, L E V Ravazzotti, K M Schultz, G Zannoni Company secretary: E J Willis Registered office: Farm 2, Old Potchefstroom Road, Vereeniging. PO Box 2247, Vereeniging, 1930 Transfer secretaries: Computershare Investor Services (Proprietary) Limited, 70 Marshall Street, Johannesburg, 2001 PO Box 61051, Marshalltown, 2107 Sponsor: One Capital Date: 08/09/2011 07:05:01 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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