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Italtile Preliminary Financial Results for year ended 30 June 2012
Italtile Limited
Share code: ITE
ISIN: ZAE000099123
Registration number: 1955/000558/06
Incorporated in the Republic of South Africa
(“Italtile” or “the Group”)
Preliminary profit announcement and reviewed Group results for
the year ended 30 June 2012
OVERVIEW FOR THE YEAR ENDED 30 JUNE 2012
Italtile Limited is South Africa’s leading franchisor and
retailer of imported and local ceramic tiles, sanitaryware,
bathware, laminate flooring and other related products. The
Group is represented via a national network of high profile
branded retail outlets comprising Italtile, CTM and TopT, each
focused on a specific market segment catering to homeowners
across the income spectrum. The retail operation is supported by
a vertically integrated supply chain.
Italtile’s satisfying results for the year under review are a
reflection of the Group’s success in leveraging growth
opportunities in the business and in the market.
KEY TO THE GROUP’S GROWTH
– Renewed emphasis on basic retail principles aimed at
delivering an unsurpassed shopping experience to customers.
Focus areas included:
* Greater sensitivity to evolving customer tastes and purchasing
trends, and responding with:
* A policy of the right stock at the right time featuring better
ranges and improved stock management;
* Beautified stores, and improved layouts, displays and pricing;
* Innovative technology and interactive web-based capability to
increase accessibility to customers and appeal to younger
markets;
* Refined warehouse and logistics systems; and
* Intensified mentorship, management and leadership programmes
aimed at improving service levels and developing depth of
talent.
Other factors central to the Group’s business model and
responsible for the solid performance are:
– The strong equity which the Group’s brands enjoy amongst
consumers;
– The robust balance sheet which facilitated higher levels of
inventory to support increased turnover; and
– Long-standing stable relationships with local and
international suppliers which mitigated the effects of currency
fluctuations and supply volatility.
FINANCIAL HIGHLIGHTS
– System-wide turnover increased 16% to R3,52 billion (2011:
R3,02 billion).
– Revenue from Group-owned stores grew 21% to R1,85 billion
(2011: R1,52 billion).
– Trading profit grew 17% to R523 million (2011: R448 million).
Margins reduced slightly, reflecting the Group’s deliberate
strategy to absorb the impact of currency volatility and
increased energy costs in the current competitive trading
environment. Average selling prices were sub-inflationary and
contained to certain product lines, in a continued effort to
entrench the Group’s everyday value proposition.
– Basic earnings per share and headline earnings per share both
increased 18% to 41,1 cents per share and 41,0 cents per share
respectively.
– Inventory levels rose to R339 million (2011: R241 million) in
line with the tactic to ensure optimum stock levels and
consistent availability of merchandise – a factor which played a
significant role in the Group’s improved results. Whilst stock
volumes increased, stock turn improved proportionately as a
function of the enhanced range matrix.
– Capital expenditure of R120 million (2011: R135 million) was
incurred, predominantly related to improving the quality of the
Group’s property portfolio.
– Notwithstanding this outlay, cash and cash equivalents
improved 9% to R917 million (2011: R839 million).
– Net asset value per share increased by 17% to 218 cents (2011:
186 cents).
TRADING ENVIRONMENT
Reflecting similar trading conditions to those experienced in
recent years, the building industry remained subdued with
limited investment in the sector; typical of a downturn in the
economy, some activity was evident in the renovations market
while the new build segment remained largely stagnant.
The industry continued to experience an influx of product from
Chinese and European suppliers targeting new markets for growth
opportunities. Volatility in the market was exacerbated by
aggressive price positioning and margin pressure. Further
fragmentation of the sector was witnessed as industry
participants down-sized and consolidated as unsustainable
margins impacted their businesses.
Competition remained extremely intense in the polished porcelain
and entry-level tile market, and in the laminate board segment
the price war continued unabated.
OPERATIONAL REVIEW
South Africa
With a net increase of only three new stores, the Group’s
improved results were derived predominantly from organic growth
in the business. Increased revenue and profitability and a gain
in market share were achieved across the retail brands, Italtile
Retail, CTM and TopT, as well as by the supply chain businesses,
comprising International Tap Distributors, Cedar Point and the
Group’s Distribution Centre.
The middle class market continued to provide robust growth
opportunities, largely a function of the brands’ better
understanding and response to customer demands, and to attaining
access to previously under-serviced rural and outlying areas. In
terms of regional performance, strong growth was reported in
Limpopo, Mpumalanga and Gauteng, with improved performances in
Botswana, Namibia, North West and Free State provinces. The
coastal regions continue to underperform compared to their
inland counterparts.
Italtile Retail
This brand is the leading fashion retailer of exclusive ranges
of tiles, bathware and related products catering to upper-middle
and premium-end consumers and the professional projects market.
Key achievements for the period include:
– Sales growth of 26% and improved profitability;
– A gain in market share across the brand’s offering, with
particularly strong growth experienced in the bathware segment,
including a range of water-wise products. In addition, new
technology environmentally-conscious tiles now comprise almost
50% of the brand’s offering and have firmly established Italtile
as the foremost supplier in this niche category; and
– Advancement of management’s stated goal to grow Italtile’s
Commercial Projects base with the successful completion of a
prestigious Bank office block in Menlyn, Pretoria. A range of
Italtile products including tiles, sanitaryware and brassware is
showcased in this project. The building has a 4-star Green
rating and serves as an excellent reference for architects and
other professional contractors.
CTM
This brand is a leading specialist retailer of tiles, laminate
boards, taps, sanitaryware, bathroom furniture and accessories,
targeting middle income DIY customers and small builders.
Key achievements for the period include:
– Solid growth across the merchandise categories and a further
gain in market share in the emerging middle class segment.
Overall sales grew by 16%, with tile sales volumes increasing by
8%, and bathware delivering 27% growth;
– Success in cementing CTM’s ‘Big savings. More style.’
positioning with a range of activities including store and
signage revamps, improved layouts and clearer pricing in-store;
– Re-design of the tile range with greater focus on quality and
flair. The introduction of ink-jet technology in tile
manufacturing has significantly improved the stylishness of
products;
– Development of intuitive ‘solutions’ of suites of products to
simplify purchasing decisions;
– Strong competitive advantage was gained from the
implementation of an automated replenishment system which
increased stock availability in the stores and facilitated the
policy of ‘the right stock at the right time’; and
– In light of increased inventory volumes, warehouse and stock
movement efficiencies were implemented, which combined with
improved barcode scanning technology resulted in improved
inventory management, and in turn a better customer shopping
experience.
Top T
This brand is the Group’s entry-level value offering
strategically situated in close proximity to under-serviced
rural and outlying markets, retailing tiles, laminate boards,
taps, sanitaryware, hardware and accessories.
Key achievements for the period include:
– System-wide and like-on-like sales growth of 41% and 25%
respectively;
– Improved penetration of existing markets and a gain in market
share achieved through TopT’s strategies to facilitate access to
affordable products and build strong community relationships;
– Enhanced market presence with the closure of three under-
performing stores and opening of five new stores in more
suitable locations, namely Zeerust, Pretoria West, Thembisa,
Nelspruit and Witbank; and
– Greater attention was paid to improving the shopping
experience through an enhanced product range, an intensified
focus on innovation and retail flair in-store, and increased
skills and product training amongst staff. As a result of these
initiatives, TopT’s market appeal was extended from its
traditional entry-level consumers to include cost-conscious
middle class bargain hunters.
Support services
The Group’s vertically integrated supply chain comprises: Cedar
Point, an importer and distributor of tiling tools, laminate
boards, cabinets and accessories; International Tap Distributors
(‘ITD’), an importer and distributor of taps and accessories;
and Italtile’s Distribution Centre, which sources imported tiles
for the retail brands and provides warehousing and distribution
facilities to the Group.
Cedar Point’s results improved across its merchandise
categories. Sales increased by 27%, although margins were
impacted by the unfavourable exchange rate and intensified
competition in the laminate board market.
Notwithstanding the aggressively competitive trading
environment, ITD succeeded in gaining market share across its
offering and improved on the solid performance reported in the
prior year to deliver record sales and profits. Sales increased
by 31%. These results are attributable to improved stock
management and range, and warehouse efficiencies.
The Group’s Distribution Centre delivered a pleasing
performance, growing revenue across its customer base by 46%.
The rand value of tile sales to the CTM store network improved
by 40%, equating to an increase in square metre sales of 42%.
Margins were slightly lower than forecast as a function of
absorbing some of the impact of rand weakness and the sharp
increase in diesel prices to ensure that the Group retained its
price leadership in the keenly contested imported tile segment.
Rest of Africa
Opportunities to expand into the region, particularly East
Africa, are reviewed on a regular basis since there is strong
demand for the Group’s products in those territories. Expansion
is however hampered by logistical and infrastructural
constraints and the lack of suitable partners.
Australia
The Group’s operation which comprises eight stores in Queensland
and New South Wales, delivered a disappointing performance, with
the business reporting a marginal loss for the period.
Widespread flooding in Queensland badly impacted the local
economy; additionally Government funding and reconstruction work
has to date failed to provide the anticipated stimulus needed by
the industry.
Intensified market competition and an oversupply of cheap
Chinese tiles served to squeeze margins in the price-driven
lower end of the market. In response, management has elected to
reposition its focus and increase its range of European products
which should restore margins and add flair to the offering.
Management’s priority in the forthcoming period will be to
contain overheads, and a strategic plan to restore profitability
is being finalised at present.
Global Property investment
This portfolio comprises strategically located high profile
destination sites which underpin the market presence of the
Group’s retail brands. The portfolio has an estimated current
market value of R1,5 billion. Investment of R124 million was
made in properties in South Africa and Australia.
The property division reported returns in line with the Group’s
retail trading operations.
EVENTS SUBSEQUENT TO THE STATEMENT OF FINANCIAL POSITION DATE
Black Economic Empowerment (‘BEE’)
On 2 July 2012, shareholders were advised that Italtile’s BEE
structure had been revised, with the exit of BEE shareholder,
Arrow Creek, and the subsequent acquisition of that entity’s
24,6 million shares by the Foundation Trust, a registered public
benefit organisation, in accordance with the Group’s policy that
the former Arrow Creek shareholding continue to be held by a BEE
entity. The general meeting approving the transaction was held
on 14 August 2012. Eighty five per cent of all distributions
made by the Trust will be for the benefit of black people.
Offer to Ceramic Industries Limited (‘Ceramic’)
Italtile and Ceramic shareholders were advised on 28 May 2012
that Italtile had expressed an interest in making an offer to
Ceramic shareholders other than Rallen (Pty) Limited (“Rallen”),
the majority shareholder of both Italtile and Ceramic, to
acquire between 15% and 20% of the issued share capital of
Ceramic for a cash consideration of R130 per Ceramic share.
Ceramic shareholders were advised that, should Italtile succeed,
this would lead to a proposal to delist Ceramic from the JSE.
Shareholders were subsequently advised on 29 June 2012 that
Italtile had completed a due diligence exercise on Ceramic to
its satisfaction and confirmed that the price per Ceramic share
at which the Offer would be extended would remain at R130 per
Ceramic share.
Shareholders were further advised on 31 July 2012 that the
Italtile Board of directors and a committee of Ceramic directors
(independent of Italtile and Rallen) were in the process of
finalising the documents and amendments to trust deeds and
agreements that are required to satisfy Italtile’s pre-
conditions to making the Proposed Offer.
PROSPECTS
Competition in the Group’s Southern African and Australian
markets will remain intense.
In the short term, instability in European markets presents
opportunities to source high quality fashionable product at
affordable prices, and Italtile will leverage this potential.
The Group will continue to invest in technology, embracing
greater use of web-based interaction and social media to ensure
that its offering remains top of mind and within easy access of
consumers.
Management’s focus in the year ahead will be on capitalising on
growth opportunities within the existing supply chain and store
network. This will require intensified emphasis on containing
overheads and enhancing innovation, training and service.
Italtile’s South African business should continue to grow at
current rates in the forthcoming period. Management is satisfied
that there is capacity in the local market to increase
consumption of the Group’s merchandise, and accordingly, robust
growth targets have been set for the year ahead. In contrast,
expectations for the Australian market are more restrained.
Basis of preparation of accounting
The Preliminary Profit Announcement has been prepared in
accordance with the framework concepts and the measurement and
recognition requirements of International Financial Reporting
Standards and the AC 500 standards as issued by the Financial
Reporting Standards Council and contains the information
required by International Accounting Standard 34, Interim
Financial Reporting. These results have been prepared under the
supervision of Chief Financial Officer, Mr PD Swatton CA(SA).
Dividend
The Group has maintained its dividend cover of three times. The
Board has declared a final dividend of 7 cents per share (2011:
6 cents), which together with the interim dividend of 7 cents,
produces a total dividend declared for the year of 14 cents
(2011: 12 cents) an increase of 17%.
Dividend announcement
The Board has declared a final dividend (no 92) of 7 cents per
ordinary share to all shareholders recorded in the books of
Italtile Limited at the close of business on Friday, 31 August
2012. The last day to trade CUM dividend in order to participate
in the dividend will be Friday, 24 August 2012. The shares will
commence trading EX dividend from the commencement of business
on Monday, 27 August 2012 and the record date will be Friday, 31
August 2012. The dividend will be paid on Monday, 3 September
2012. Share certificates may not be rematerialised or
dematerialised between Monday, 27 August 2012 and Friday,
31 August 2012, both days inclusive.
For and on behalf of the Board
G A M Ravazzotti P D Swatton Johannesburg
Executive Chairman Chief Financial Officer 15 August 2012
The results have been reviewed by Ernst & Young Inc. and their
review opinion is available on request from the company
secretary at the company’s registered office.
System-wide turnover analysis
For the year ended 30 June 2012
(Rand millions unless otherwise Audited
stated) year to
% 30 June
increase 2011
Group and franchised turnover
– By Group-owned stores and
entities 1 845 1 521
– By franchise-owned stores
(unaudited) 1 673 1 500
Total 16 3 518 3 021
Abridged Group statements of comprehensive income
For the year ended 30 June 2012
(Rand millions unless otherwise Reviewed Audited
stated) year to year to
% 30 June 30 June
increase 2012 2011
Revenue 2 113 1 755
Turnover 1 845 1 521
Cost of sales (1 113) (895)
Gross profit 17 732 626
Other operating income 228 206
Operating expenses (438) (386)
Profit on sale of property, plant
and equipment 1 2
Trading profit 17 523 448
Financial revenue 46 37
Financial cost (24) (24)
Income from associates 5 8
Profit before taxation 17 550 469
Taxation (155) (130)
Profit for the year 17 395 339
Other comprehensive income:
Currency translation difference 31 7
Aircraft revaluation — (6)
Total comprehensive income for the
year 25 426 340
Profit attributable to:
– Equity shareholders 378 321
– Non-controlling interests 17 18
17 395 339
Total comprehensive income
attributable to:
– Equity shareholders 409 322
– Non-controlling interests 17 18
25 426 340
Earnings per share: (all figures
in cents)
– Earnings per share 18 41,1 34,9
– Headline earnings per share 18 41,0 34,6
– Diluted earnings per share 18 41,0 34,8
– Diluted headline earnings per
share 18 40,8 34,5
– Dividends per share 17 14,0 12,0
Abridged Group statements of financial position
As at 30 June 2012 Reviewed Audited
year to year to
30 June 30 June
(Rand millions unless otherwise stated) 2012 2011
ASSETS
Non-current assets 1 223 1 070
Property, plant and equipment 1 154 1 006
Investments 4 4
Investments in associates 24 22
Long-term assets 24 24
Goodwill 6 6
Deferred taxation 11 8
Current assets 1 400 1 226
Inventories 339 241
Trade and other receivables 126 135
Cash and cash equivalents 917 839
Taxation receivable 18 11
TOTAL ASSETS 2 623 2 296
EQUITY AND LIABILITIES
Share capital and reserves 2 008 1 707
Stated capital 818 818
Non-distributable reserves 82 51
Treasury shares (478) (478)
Share option reserve 9 5
Retained earnings 1 500 1 241
Non-controlling interests 77 70
Non-current liabilities 323 327
Interest bearing loans 315 321
Deferred taxation 8 6
Current liabilities 292 262
Trade and other payables 224 217
Provisions 39 31
Interest bearing loans 26 10
Taxation payable 3 4
TOTAL EQUITY AND LIABILITIES 2 623 2 296
Net asset value per share (cents) 218 186
Group statement of changes in equity
Non-
distri- Share
(Rand millions unless Stated butable Treasury option
otherwise stated) capital reserves shares reserve
Balance at 30 June 2010 818 50 (470) 3
Total comprehensive
income for the year 1
Dividends paid
Purchase of shares by
Share Trust (8)
Transactions with non-
controlling interests
Share incentive costs 11
Settlement of share
incentive costs (9)
Balance at 30 June 2011 818 51 (478) 5
Total comprehensive
income for the year 31
Dividends paid
Transactions with non-
controlling interests
Share incentive costs 4
Balance at 30 June 2012 818 82 (478) 9
Group statement of changes in equity (continued)
Non-
con-
(Rand millions unless Retained trolling Total
otherwise stated) earnings Total interest equity
Balance at 30 June 2010 1 021 1 422 61 1 483
Total comprehensive
income for the year 321 322 18 340
Dividends paid (101) (101) (8) (109)
Purchase of shares by
Share Trust (8) (8)
Transactions with non-
controlling interests — (1) (1)
Share incentive costs 11 11
Settlement of share
incentive costs (9) (9)
Balance at 30 June 2011 1 241 1 422 70 1 707
Total comprehensive
income for the year 378 409 17 426
Dividends paid (119) (119) (12) (131)
Transactions with non-
controlling interests — 2 2
Share incentive costs 4 4
Balance at 30 June 2012 1 500 1 931 77 2 008
Segmental report
For the year ended 30 June 2012
(Rand millions unless otherwise Fran- Proper-
stated) Retail chising ties
Reviewed year to June 2012
Turnover 1 451 — —
Gross margin 535 — —
Other income* 20 207 192
Overheads (467) (94) (44)
Trading profit 88 113 148
Audited year to June 2011
Turnover 1 190 — —
Gross margin 452 — —
Other income* 15 174 160
Overheads (390) (87) (33)
Trading profit 77 87 127
*Other income includes franchise fees, rentals, royalties and
rebates received, as well as profit or loss on disposal of
property, plant and equipment.
Segmental report (continued)
For the year ended 30 June 2012 Supply Inter-
and group
(Rand millions unless otherwise support elimi-
stated) services nations Group
Reviewed year to June 2012
Turnover 939 (545) 1 845
Gross margin 105 — 640
Other income* 111 (210) 320
Overheads (42) 210 (437)
Trading profit 174 — 523
Audited year to June 2011
Turnover 684 (353) 1 521
Gross margin 88 — 540
Other income* 108 (171) 286
Overheads (39) 171 (378)
Trading profit 157 — 448
*Other income includes franchise fees, rentals, royalties and
rebates received, as well as profit or loss on disposal of
property, plant and equipment.
Abridged Group statement of cash flows
For the year ended 30 June 2012 Reviewed Audited
year to year to
30 June 30 June
(Rand millions unless otherwise stated) 2012 2011
Cash flow from operating activities 226 254
Cash flow from investing activities (148) (107)
Cash flow from financing activities — (19)
Net movement in cash and cash equivalents
for the year 78 128
Cash and cash equivalents at beginning of
the year 839 711
Cash and cash equivalents at the end of the
year 917 839
Notes
1. Commitments and contingencies
Legal proceedings have been instituted against Majuba Aviation
(Proprietary) Limited, a subsidiary company of the Group
providing aircraft charter services, by the family of one of the
passengers who passed away on board when the aircraft chartered
by the Group from Majuba Aviation crashed on 08 February 2011.
Majuba Aviation has in place adequate passenger liability
insurance; accordingly no material effect on the financial
position of the Group is anticipated.
There are no material contingent assets or liabilities at 30
June 2012 in addition to the above.
Capital commitments at 30 June 2012: Rm
– Contracted 62
– Authorised, not contracted 64
Total 126
2. Changes in accounting policy
The accounting policies adopted and methods of computation are
consistent with those of the previous financial year except for
the adoption of new and amended IFRS and IFRIC interpretations
which became effective during the current financial year. The
application of these standards and interpretations did not have
a significant impact on the Group’s reported results and cash
flows for the year ended 30 June 2012 and the financial position
at 30 June 2012.
3. Business combination
In March 2012 the Group elected to convert interest bearing
amounts advanced to the Australian property holding company to
equity. The decision to capitalise the loans is consistent with
the Group’s policy on property investment.
The fair value of net assets acquired and accounted for from the
effective date comprise the following:
Land and buildings 50
Sundry receivables 1
Sundry payables (1)
Commercial bills (6)
Cash and bank 3
Cost of business acquired 47
Less amounts previously advanced and cash acquired (11)
Net cash outflow in 2012 36
From the effective date of the business combination, the company
has made a negligible contribution to Group earnings.
Reviewed Audited
year to year to
30 June 30 June
2012 2011
4. Earnings per share
Reconciliation of shares in issue: (all
figures in millions)
– Total number of shares issued 1 033 1 033
– Shares held by Share Incentive Trust 26 26
– BEE treasury shares 88 88
Shares in issue to external parties 919 919
Reconciliation of headline earnings: (Rand
millions)
– Profit attributable to equity shareholders 378 321
– Profit on sale of property, plant and
equipment (1) (2)
Headline earnings 377 319
Share numbers used for earnings per share
calculations:
(all figures in millions)
– Weighted average number of shares 919 920
– Diluted weighted average number of shares 923 922
Store network
As at 30 June 2012 2012
Region Franchise Other Total
South Africa
– Italtile — 8 8
– CTM 42 22 64
– TopT 7 8 15
Rest of Africa 13 4 17
Australia — 8 8
62 50 112
Store network (continued)
As at 30 June 2012 2011
Region Franchise Other Total
South Africa
– Italtile 1 6 7
– CTM 41 23 64
– TopT 6 7 13
Rest of Africa 13 3 16
Australia — 8 8
61 47 108
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)
Executive directors:
G A M Ravazzotti (Executive Chairman), ?P D Swatton*
(Chief Financial Officer), P Langenhoven#
Non-executive directors: S M Du Toit, S I Gama, S G Pretorius,
A Zannoni**
(*British **Italian #Australian)
Company secretary:
E J Willis
Sponsor: KPMG Services (Pty) Limited.
Refer to Italtile’s corporate website: www.italtile.com
Date: 15/08/2012 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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