The Group’s 15% improvement in system-wide turnover to
R2,25 billion (2005: R1,95 billion) was achieved by organic growth.
It is a pleasure to report on another sound set of results for Italtile Limited for the year under review. During this time, South Africa experienced interest rates that were lower than have been the case for some years. As a consequence of favourable interest rates and the continued growth within the building sector, the demand for the suite of products offered through the Group’s two brands continued to grow. The broadening of the Group’s product offerings and our ongoing efforts to enhance service levels, resulted in the Group being able to benefit from the country’s growing, emerging market.

The financial year also saw the Rand retain its strong performance against the major foreign currencies, although its strength weakened somewhat during the latter part of the year. In view of the Group’s relationships with its suppliers, its purchasing power and its international sourcing abilities, the Group continued to be in a position to offer quality products across its product range at highly competitive prices. While there has been an increase in the number of competitors as a consequence of few barriers to entry, particularly in the tile market, consumers are becoming increasingly more discerning. Products sold on price without quality, second and commercial grade product being sold as first grade, products from multiple production lots sold as a single batch, with concomitant problems occurring in tonality and calibration, will, in my view, ultimately result in consumers returning to retailers of integrity and substance.

The year also saw the Group continue to streamline its operations through the backward integration into companies with which it has had a close business relationship for many years. This has ensured that we have been able to optimise our supply in a climate in which demand in our industry was keen – not least because of the entrance of many independent operators on the scene. However, with our stable record, sustained growth and an efficient supply chain, I am confident we will build on the progress made.

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 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.
The Group’s 15% improvement in system-wide turnover to R2,25 billion (2005: R1,95 billion) was achieved by organic growth in spite of the absence of new store growth and in a climate of deflationary price increases. Earnings per share and headline earnings per share increased 20% and 23% respectively to 1 290 cents (2005: 1 073 cents) and 1 312 cents (2005: 1 069 cents).
An extensive renovation programme was undertaken across a large
number of stores to enhance the shopping experience of our customers.
Property portfolio
In the previous annual report, I commented on the logistical difficulties facing the Group as it sought to establish property in areas that were under- or undeveloped. Regrettably, this continued to be the case this year, although every effort was made to speed up property acquisitions and registrations. The Group’s commitment to expand its store network, however, was hampered by an onerous regulatory environment. Despite having acquired a number of sites, the excessive lead time that has often been involved before approval is obtained for development has adversely impacted on our expansion time-table. Accompanying this problem are challenges that arise as a result of the high price of land and construction costs, the latter due to the shortage of skilled contractors.

Facilitating access to the Group’s products by the strategic positioning of our stores is critical to our expansion plans. During the year, Italtile opened a pilot store in Botshabelo, an area serving a population predominantly made up of previously disadvantaged individuals. The store has traded positively and we are confident that it will continue to do so. Indeed, we are planning the opening of nine new stores in the CTM stable during the coming year, including one in Tembisa in Gauteng and one in Phuthaditjhaba in the Free State.
International and African operations
The year under review has been one of consolidation of all our operations. In South Africa, both brands under which the Group operates, Italtile and CTM performed well. The Group had identified the bathroomware sector as an increasingly important offering and in fact this aspect of the business performed extremely well, both in terms of growth and market share.

The significant increase in bathroomware sales was achieved in spite of a fire having destroyed the production facility of one of the Group’s main suppliers, further aggravating the short supply of bathroomware during the year under review. Another growth area has been that of laminated wooden flooring, as well as taps and tools for tile installation.

An extensive renovation programme was undertaken across a large number of stores to enhance the shopping experience of our customers, which we believe also served to enhance the Group’s positioning as a destination retailer. The decision to undertake this refurbishment was more than justified given the positive responses from customers, and we are of the view that continued refurbishment of existing stores and the establishment of new stores resulting in a significantly improved shopping experience, augur well for the Group’s future performance.

Operating in Africa through 17 CTM outlets presents its own unique challenges. Not least of these is the poor infrastructure such as transport, roads and supply networks. Nevertheless, we continue to believe that opportunities exist in Africa, and a new store was opened in Kenya during the year. Our operation in Africa takes cognisance of local cultures and customs, and our operations in each country are carefully structured. This has included working with local communities so as to understand the nature of the markets and obtain local business acumen for mutual benefit.

Italtile’s Australian operation continues to show promise. Store layout was refined by introducing a New Generation formula designed specifically for this market. This has resulted in enhancing the brand and projecting a more distinctive Australian bias. The operation is expected to continue to make a nominal, but increasing contribution to the Group’s profit.
A further reduction in dividend cover from four to three times has been implemented. This is possible as a result of the Group’s strong balance sheet, its sound record of cash generation and the imperative to favourably position Italtile Limited to effect its planned black economic empowerment partnership.

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 of 430 cents for the year (2005: 270 cents). This represents an improvement of 59%.
Outlook for the future
At the turn of the century, the founder of the Group, Mr Gianni Ravazzotti, set out an objective: for Italtile to become a leading world-class company with a turnover exceeding R5 billion a year. The Group is on target to attain this milestone.

Prospects for the future remain good. Notwithstanding a possible slowing of the economy in the foreseeable future – due in part to a climate of increasing interest rates and any weakening of the Rand – I am confident that significant opportunities exist for further growth. Demand by homeowners for our product offerings and the growing emerging middle class with its keen aspirational values, all point towards a sustained growth in earnings. Given government’s plans for expansion and the upcoming FIFA World Cup in 2010, it appears that the building industry will be challenged to meet the growing impetus for construction projects of all descriptions in South Africa.

I am confident that Italtile will continue to build on its 15 years of consecutive growth.
It has been my pleasure to serve as Non-executive Chairman of the Board since 8 December 2004. In line, however, with the Group’s long-term management succession plan, Mr Gian-Paolo Ravazzotti, previously Chief Operating Officer of the Italtile brand, assumed the position of Chief Executive Officer of Italtile Limited on 1 July 2006. He replaced Mr Gianni Ravazzotti as CEO, who resumed his former role as Group Executive Chairman. To facilitate these appointments I have therefore relinquished my position as Chairman and have assumed my former role as a Non-executive Director on the Board. Mr Christian Trumpelmann, Chief Operating Officer of CTM and an Executive Director, elected to take up a franchising opportunity and relinquished his position on the Board on 1 April 2006.
A sustained, strong performance such as that of Italtile Limited comes about as a result of a coherent and energetic effort, driven by a passion to serve all our stakeholders: customers, staff, suppliers and shareholders. It is a tribute to everyone associated with Italtile that we are able to look to the future with such optimism. My thanks go to all involved for their contribution, and particularly to the executive management team and members of the Board.
D H Rabin
16 September 2006