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Chairman's statement

Overview

The first half of the financial year proved challenging, as the business focused on correcting stock levels and inventory mix and intensified cost containment across the operation. These remedial measures gained momentum over the year, and notwithstanding constrained consumer spend, the Group reported improved results for the full year. Key to this achievement was the commitment of our people and control of business processes – the dual components which underpin an ascendant organisation.

Good progress was made in instilling priority disciplines and processes across the operations and in further implementation of the Business Optimisation Programme ("BOP"), reflected by the increased profitability and stable margins reported for the period. In this regard, our capable management team and dedicated staff can take credit for their commitment to capitalising on opportunities for improvement within the business.

At the end of the prior year, we also undertook to continue investing in the retail store network and supply chain to leverage expansion potential. Across our brands, we opened 15 stores, including one Italtile and one CTM store and 13 TopT stores. In the supply chain, following their acquisition in October 2017, the integration of Ceramic Industries and Ezee Tile is progressing well and has led to improved efficiencies between the factories and stores.

The 8th of August 2018 marked Italtile's 30th anniversary of listing on the JSE. Over the past three decades, we have focused on delivering a consistent, reliable and resilient performance, reflected by the Group's strong, steady growth track record. The long-standing relationships we enjoy with our private and institutional shareholders and franchise partners illustrate our solid investment proposition and are recognition of our continued efforts to reward their investment.

I believe that an important contributor to Italtile's longevity and success are the values and beliefs that are core to our culture. Among these are partnership, empowerment, servant leadership, hands-on involvement, a high work ethic and always ensuring the customer comes first.

The market has changed significantly over the past 30 years, and continues to evolve, with the emergence of new operators and rationalisation of others, changing consumer profiles, availability of a vastly wider range of merchandise categories, and the influence of technology on commerce and social media on fashion. However, the demand from customers has remained consistent, namely, the right products at the right price, time and place.

While the business has continued to adapt and constantly innovate over the years in order to maintain our leading market position, our key driving force has always been to deliver an unsurpassed shopping experience to our customers. This is summed up in our dream, "To be the best retailer in the world of tiles and sanitaryware", and our mantra, "We fight for the right of our customers to have a beautiful home." These philosophies underpin our activities and all points of customer contact on a daily basis: in our factories, our supply chain, our stores and support services. From manufacturing latest fashion cost-effective products, to ensuring they are always in stock and presented in an aspirational manner, to providing an unparalleled service. In short, we believe our customers deserve a beautiful home and we will do everything within our ability to ensure they achieve it.

In my previous report, I noted that a major focus for the year would be on building a deep resource of professional, retail-orientated individuals and we would continue to commit significant investment to skills development and intensified training. In our business, mentoring, coaching and knowledge transfer are vital to building a team which can achieve our demanding growth targets.

Our human capital endeavours during the year were aimed at empowering our people to deliver a shopping experience which exceeds our customers' increasingly discerning requirements, however, we recognise that while good progress was made, there are still areas of opportunity we can capitalise on.

Various development initiatives were conducted across our brands:

  • CTM upgraded the Operator Training Programme, Senior Management Development Programme, as well as the induction programme. In addition, the CTM sales consultants' training programme was successfully completed by a number of stores, and an accredited interior design course has also been introduced and is currently being rolled out.
  • In Italtile Retail, the bespoke accredited interior design programme introduced in the prior year has now been conducted for all existing and new staff, and the enhanced service offering has been well received by customers.
  • TopT advanced its franchise partner and operator training programmes, which have yielded improved efficiencies, productivity and generally enhanced the customer shopping experience.

As our industry and consumers continue to become more sophisticated and demanding, placing higher expectations on our people, we need to ensure they are equipped and equal to the challenge. I am also mindful that we need to continue to build the next generation of leaders and the teams to support them. People development will therefore remain a key priority in the year ahead, and one with which I personally will be involved.

G A M Ravazzotti

Chairman

   

Trading conditions

Consumers continued to experience financial hardship and negative sentiment, evidenced by the relative absence of new-build activity and lower levels of investment by homeowners in their properties. However, we remained firm in our belief that we will not allow the external environment to determine the Group's success and every effort was made to continue to grow market share in existing and new markets through improving our own performance and enhancing the business internally.

Results

In line with our stated intention to enhance our reporting standards, we have included for the first time a separate report by the Finance Director. My commentary therefore pertains to a macro-overview of the financial performance of the business for the year.

Top-line turnover growth for the period was below our expectations, largely as a function of the external environment, which featured subdued consumer sentiment and spend. In this challenging context, management committed to leveraging improvements and capitalising on opportunities within the business. Cost leadership was a key driver and creditable results were achieved in this regard during the period.

I am also satisfied with the intensified inventory management campaign which was implemented and resulted in an improvement in quality, mix and availability of stock across the retail business, while simultaneously reducing the total inventory value.

The Group's cash balances at the end of the year rose by 33% (including the cash balances of Ceramic and Ezee Tile). The cash-generative nature of the business and robust cost management ensure that the Group has cash in excess of operational requirements and a balance sheet which will comfortably fund continued investment in our store roll out programme and building capacity in the supply chain. In this regard, we have returned cash to our shareholders as discussed in the dividend commentary below.

The solid organic performance delivered by the business is reflected in the growth of our headline earnings per share, which increased by 14% excluding the acquired businesses of Ceramic and Ezee Tile and by 12% with them included.

Dividend policy, special dividend and ordinary dividend

During the period the Board resolved to amend our long-standing dividend policy from three times cover to two and a half times. This decision was taken in light of the Group's consistent ability to generate strong cash flows, and in the interests of improving returns to our loyal shareholders over the long term. The Board is satisfied that this level is prudent considering proven cash generation on one hand offset by the recent inclusion of a manufacturing component which may require investment on an ongoing basis.

In addition to the change in cover, the Board also resolved to declare a special dividend of 30 cents (2017: nil), given the Group's healthy cash balances at the end of the period.

A final gross ordinary cash dividend of 21,0 cents per share (2017: 14,0 cents per share) was declared, which together with the interim gross ordinary cash dividend of 17,0 cents per share (2017: 16,0 cents per share), produces a total gross ordinary cash dividend declared for the year of 38,0 cents per share (2017: 30,0 cents per share), an increase of 27%. The dividends were paid on 10 September 2018.

Integration of Ceramic Industries and Ezee Tile

With effect from 2 October 2017, the Group acquired a 95,47% stake in Ceramic Industries and an effective 71,54% stake in Ezee Tile. In our view the long-term success and sustainability of Italtile and Ceramic is inextricably intertwined, and the acquisition affords numerous far-ranging benefits for both businesses. The combined entity will enjoy greater depth of management, experience and skill, improved efficiencies and reduced costs, enhanced allocation of capital and opportunity to leverage the consolidated balance sheet to fund expansion, and alignment of our long-term growth strategies.

During the period, management's priority focus was on improving business-to-business communication between the factories and the stores, with the goal of ensuring an enhanced customer shopping experience.

While improved availability of in-demand fashionable products and higher levels of efficiency between the operations was achieved, further opportunities exist which can be capitalised on over the long term. The performance of these businesses is discussed in detail in the Review of Operations.

Commitment to corporate governance and sustainability

We have commenced aligning our disclosure in this document against King IV, which was incorporated as part of the JSE Listings Requirements during the year under review. Our intention is to enhance and improve on this alignment over time.

The Board and management are committed to ensuring the sustainability of the business and entrenching an ethical corporate culture across our operations. The material issues and key risks which have an impact on our business are discussed here of this document, together with the actions identified to mitigate such risks. Our stakeholders are of vital importance to us, and their interests, concerns and how we engage with them are outlined here. Improving our responsiveness and accountability to our stakeholders is key to ensuring we achieve responsible growth and sustainable profitability.

We continue to transform the composition of the Board to enhance the experience and expertise available to the business and better reflect the demographic profile of this country. Our commitment includes support for gender and race diversity. In this regard, the Board currently comprises six female directors (including the lead independent director), constituting 60% of the Board.

Development and implementation of strategy

The Group's decision-making framework and structures are constituted to ensure an effective process through which key strategies are developed and implemented. The Board is responsible for setting clear strategic direction, while management is held accountable for delivering measurable results. The Chief Executive Officer's report of this document outlines the Group's scorecard in terms of attainment of those strategies and imperatives.

Staff Share Incentive Scheme

The Group's equity-settled Staff Share Scheme is designed to incentivise employees to participate in the growth and profitability of the business. In this regard, the second allotment of shares, granted in 2014, vested on 31 August 2017. A total of 134 employees qualified, of which four employees opted to receive shares and the balance received the net value of the awards in cash. Cash payments after tax averaged R143 000 per individual (aggregate payments including income tax totalled R19 million), funded by the sale of the related shares to the market. Employees who elected to receive shares, received an average of 10 600 Italtile shares each (dependent on the individual's effective income tax rate).

During the review period a fifth allotment of shares was made, comprising 3,5 million shares allocated to 181 eligible employees of the Group and franchisees. As at 30 June 2018, there were 363 participants in the scheme, holding 6,9 million Italtile shares.

Changes in Board composition

During the year, several changes were made to the composition of the Board.

Resignation of non-executive director

With effect from 29 January 2018, Mr Siyabonga Gama resigned as an independent non-executive director, given time constraints in light of his other professional commitments. The Board wishes to record its gratitude to Siyabonga for his long-standing and valuable contribution to the Group since his appointment as a director in 2004.

Appointment of executive directors

With effect from 11 May 2018, Ms Tsundzukani Mhlanga, formerly Financial Director of certain of the Group's subsidiary companies, was appointed to the Board as Executive Director: Group Finance and Administration. Tsundzukani joined the Group in July 2017 and replaces Brandon Wood, who has been appointed Executive Director: Commercial and supply chain. I would like to wish Tsundzukani well on her appointment. I would also like to thank Brandon for his contribution as Financial Director and wish him well in his new role.

Appointment of independent non-executive director

With effect from 11 May 2018, Ms Nkateko Khoza was appointed as an independent non-executive director to the Board. The Board welcomes Nkateko and looks forward to her contribution.

Succession planning and appointment of Deputy Chairman

As we commence the 50th year of trading since I founded this business in 1969, I am mindful of the future of the Group, including the next generation of leaders who will, in due course, take this business forward over the decades which lie ahead.

In this regard, the Nominations Committee has commenced the process of identifying suitable potential candidates to strengthen the depth of leadership on the Board, including the position of non-executive Chairman, when I retire in time.

The Committee's mandate is to identify candidates who have the appropriate expertise and experience to meet the requirements of this business, and who satisfy the criteria of key stakeholders, including our shareholders. In this regard, Ms Luciana Ravazzotti Langenhoven has been appointed to the Board as Deputy Chairman with effect from 21 August 2018. The Board welcomes Luciana and looks forward to her contribution.

Over the course of the next year, the Committee will identify and appoint an additional independent non-executive director with the relevant business experience, strong leadership qualities and proven track record.

Prospects

Our considered opinion is that the trading environment will remain testing should prevailing socio-economic conditions persist – and there are currently few indications to suggest otherwise. Over the past year, the business has made good progress in implementing remedial measures and capitalising on improvements internally, however, having done so, continued real growth at current levels will require sustainable improvement in the economy, leading to more positive investor sentiment.

The Group's results for the first half of the new financial year are expected to outperform those of the prior comparable period, however, the second half of the year is anticipated to be particularly challenging, unless disposable income improves materially and consumers who have deferred investment in their homes in recent years return to the market.

Notwithstanding this restrained outlook, we are confident that our resilient business model, which has served us well over the decades, will remain a key strategic advantage. We will continue to optimise on every opportunity to make further improvements in the business and to gain market share. We are enthusiastic about the prospects which we have identified to exceed the expectations of our existing and new customers. By intensifying our focus on key disciplines in order to offer our customers an unrivalled shopping experience, we will get closer to realising our dream of becoming the world's best retailer of tiles and sanitaryware.

Appreciation

I would like to pay tribute to the management team, our employees and franchise partners for their commitment to growing this business and setting it apart from others in our industry. Their dedication to achieving our demanding targets is rewarding and commendable.

The sustained endorsement we receive from our shareholders is evident from their overwhelming support (99%), for the Rights Offer held during the year. We appreciate their recognition of our unique business proposition and our continued efforts to deliver rewarding returns on their investment.

I would like to thank my fellow directors for their input and constructive collaboration during the year.

My appreciation is also extended to our suppliers, business partners and advisers for their continued contribution to the success of our business.

Every day we strive to focus our unwavering attention on our customers. We are cognisant that their discretionary income is hard earned and allocated with deliberation. Our sustained gain in market share is their recognition of our offering and reward for our efforts to ensure they receive the best. In the year ahead, we will intensify our fight for our customers' right to a beautiful home.

G A M Ravazzotti

Chairman


Story of Livingston Simango

“I am living a better life because of this Company. When I joined CTM, I lived in an RDP house, now I stay in town and own my home. The brand lives up to its motto, ‘Everyone deserves a beautiful home’.”

Story of Livingston Simango


Livingston matriculated in 1992, but due to lack of funds, he was unable to further his education at a tertiary institution, and instead, found employment as a queue marshal at a taxi rank. In time, because of his entrepreneurial drive, he left his job to start a spaza shop. Over the years, he held several other occupations, including that of a bakery salesman and a taxi driver.

In 1999, Livingston joined CTM Louis Trichardt, where he worked as an all-rounder, doing sales, building displays and making deliveries. By excelling in his work, management recognised his potential and he started training as a manager at CTM Tzaneen in 2000. The following year he was appointed manager of that store, and shortly afterwards, he became a joint venture franchisee. In 2001, Livingston, together with his partner Werner Schultz, opened CTM Thohoyandou. In 2011, all the franchisees in Limpopo province amalgamated to form one company, which now owns eight stores in the region.

Livingston is a recipient of the prestigious Aquilifer Award, which is awarded to an individual in the Company who has consistently excelled in their work over a period of time.

Livingston says he is proof that Italtile is a Company that cares for its people and genuinely believes in partnering with its employees. Above all else, he appreciates the amount of time the Company has invested in helping him develop his knowledge to run a successful business.