Currently viewing: Directors' report
Principal activities of the Company
Italtile Limited ("Italtile" or "the Company" or "the Group"), headquartered in Bryanston, Johannesburg, is a leading retailer of tiles, bathroomware and related products in South Africa.
The Group operates as a national franchisor, featuring a streamlined parent operation focused on growing market share and fostering entrepreneurial opportunities through its franchise programme.
The Group is represented via its high profile branded retail outlets, Italtile Retail, CTM and TopT, which cater to homeowners across the income spectrum, holding appeal for market segments ranging from the premium upper end to entry level consumers. These stores are situated on high-visibility sites and/or close to previously underserviced markets, and their comprehensive offerings position them as one-stop solution destinations. The Group also has an online presence, with webstores operating for the Italtile Retail and CTM brands. Ranges include ceramic and porcelain wall and floor tiles, sanitaryware, bathroom furniture, brassware, fittings, accessories, laminated wooden flooring, vinyl flooring, shower enclosures, paint, home-finishing products, décor and tools.
As at 30 June 2018, the store network comprised 176 stores (including four webstores) (2017: 162 stores), situated in Southern and East Africa.
Underpinning the retail network is an extensive property portfolio. 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 vertically integrated supply chain comprises International Tap Distributors ("ITD"), an importer and distributor of brassware and accessories, and Cedar Point, an importer and distributor of sanitaryware, laminated and vinyl boards, shower enclosures, cabinets and décor. The Group holds a controlling interest in both of these businesses. ITD and Cedar Point service the Italtile Retail, CTM and TopT retail network.
The Group's Distribution Centre, which has facilities in KwaZulu-Natal and the Western Cape, sources imported products and provides warehousing and distribution facilities to CTM, Italtile Retail and TopT. It is also responsible for arranging logistics and foreign exchange for the Group's retail brands as well as ITD and Cedar Point.
Ceramic Industries (Pty) Ltd ("Ceramic")
With effect from 2 October 2017, the Group holds a 95,47% stake in Ceramic, its largest supplier of tiles, sanitaryware and baths. Ceramic delivers tactical advantages in supporting the Group's growth programme serving to enable consistent supply of local high quality, affordable products. This business contributed R345 million (2017: R81 million) to Group profit for the full year.
Further detail pertaining to the acquisition of the controlling stake in Ceramic ("the acquisition") is included in note 35.
The Group holds an effective 71,54% strategic stake in this business (following the acquisition noted above), a national manufacturer of grout, adhesive and related products. Wide-ranging enhanced business processes and systems were implemented in the operation over the past year, delivering improved results. The business reported growth for the period, contributing R39 million (2017: R13,5 million) to Group profit for the full year.
Statements of responsibility
The responsibilities of the Group's directors are detailed in the Directors' approval.
Audit and Risk Committee
The Audit and Risk Committee report discusses the responsibilities of this Committee and how these were discharged during the year.
System-wide turnover across the Group from continuing operations increased 40% to R8,7 billion (2017: R6,2 billion). Retail store turnover grew 2%, and manufacturing sales for the period 2 October 2017 to 30 June 2018 rose by 15%.
Reported trading profit grew 43% to R1,5 billion (2017: R1,1 billion). Retail margins were higher due to intensified cost containment, judicious price promotions which served to support margins, and an improved mix of higher margin products in the average basket.
Earnings per share
The Group's basic earnings per share grew by 6% to 95,0 cents (2017 adjusted: 89,7 cents), while headline earnings per share improved by 12% to 95,0 cents (2017 adjusted: 85,1 cents).
Property, plant and equipment
The estimated current market value of the property portfolio increased to R3,7 billion (2017: R2,6 billion). Capital expenditure of R355 million (2017: R232 million) was incurred on new and refurbished properties.
Cash and cash equivalents
The Group's cash balance rose to R679 million (2017: R511 million), including the consolidated cash balances of Ceramic and Ezee Tile. Material cash flows for the review period include:
- capital expenditure of R669 million;
- tax payments of R435 million;
- cash consideration for the Acquisition of R1,8 billion;
- cash proceeds of the Rights Offer of R1,6 billion; and
- dividend payments of R360 million.
Interest-bearing loans and borrowings
As at 30 June 2018, the Group had no interest-bearing loans and borrowings (2017: nil).
Boosting the economy sustainably, improving household prosperity and rebuilding consumer confidence to translate into positive investment sentiment are key to the growth of our industry. In the foreseeable future, the following socio-economic issues need to be addressed urgently: high unemployment and indebtedness, prevailing evidence of corruption, and policy uncertainty regarding key issues including prospective wealth taxes and land redistribution without compensation. Failure to do so will see consumers remaining under pressure and negatively disposed, and homeowners will continue to defer discretionary spend on their properties.
We anticipate that our first half results for the new financial year will be better than the comparable first half of the prior year, due to the low base effect. Results in the second half of the year are expected to be less robust than the second half of the year under review, unless country-specific risk factors reduce materially.
Our goal for the new financial year will be to continue to deliver improved headline earnings growth.
While the short to medium-term socio-economic forecast is pessimistic, we remain confident that our resilient business model will stand us in good stead, as it has done over the past 50 years. We are optimistic that there are opportunities within the business which we can capitalise on and we have a competent team with clarity of purpose and strategy to achieve our growth targets.
We have identified our future focus areas. They include the following imperatives:
Grow sales across the brands, which will have a positive knock-on effect in the supply chain;
Continue to improve working capital and manage margins through robust cost leadership;
Build on our reputation for retail innovation and disruptive technology, including continuing to enhance our leading-edge online offering;
Accelerate the Group's growth in selected markets in Africa;
Advance the store roll out programme, targeting 10 to 15 new stores;
Progress improvements made in building a pipeline of talent and enhance depth of management;
Make better use of analytics to inform targeted customer marketing and reward campaigns;
Leverage opportunities in the integrated supply chain; and
Upweight our marketing and brand building initiatives.
Staff Share Scheme
The Group implemented a Share Incentive Scheme in August 2013 for all employees of the Group and its franchisees that had been in the employ of the Group and/or franchise network for a period of three uninterrupted years at each allotment date in August every year from the implementation date. As a result, seven million of the Group's shares net of forfeitures were held by qualifying staff members at 30 June 2018 (2017: seven million). Until vesting, the shares will continue to be accounted for as treasury shares and have an impact on the diluted weighted average number of shares.
The scheme is classified as an equity-settled scheme in terms of IFRS 2 – Share-Based Payment, and has resulted in a charge of R16 million (2017: R17 million) to the Group's income; R9 million (2017: R10 million) of this charge is an accelerated expense for franchise staff.
International Tap Distributors (Pty) Ltd
The Group sold a 10% non-controlling stake in International Tap Distributors (Pty) Ltd at the beginning of January 2018 to a new business partner, at a cost of R14 million, reducing the Group's interest in this entity to 88%.
In terms of a partially underwritten renounceable Rights Offer, the Group offered a total of 260 539 178 new ordinary shares of no par value ("Rights Offer Shares") at a subscription price of R11,57 in the ratio of 22 Rights Offer Shares for every 100 Italtile shares held at the close of business on 10 November 2017. Following the close of the Rights Offer on Friday, 24 November 2017, 135 985 156 Rights Offer Shares were subscribed for, equivalent to 99% of the 137 473 296 Rights Offer Shares that could have been subscribed for (a large portion of Rights was not followed by Rallen (Pty) Ltd, as the Rights Offer had taken place in order to allow minority shareholders of Italtile an opportunity to claw back their shareholding positions which were diluted as a result of the acquisition).
Four Arrows transactions
On 20 February 2018, Four Arrows Investments 256 (Pty) Ltd ("Four Arrows") submitted a formal written offer to the Group to sell 25 million of the 35,2 million Italtile shares it held, back to the Group. The offer price was set in accordance with the terms of a Preference Share Agreement signed in 2007, in terms of which Four Arrows had raised the funds for the purchase of the 35,2 million shares. According to this agreement, the offer price was set at R11,83 per share (the Italtile 10-day VWAP immediately preceding the date of receipt of the offer), amounting to R295 750 000 in total.
In accordance with specific approval granted by Italtile shareholders in July 2007, the Board approved the repurchase and the shares were subsequently repurchased on 13 March 2018. Following acceptance of the offer and approval by the Board, Italtile called for the redemption of 800 000 redeemable, cumulative preference shares in Four Arrows, the capital and arrear dividends totalling R165 790 840 for such. The redemption payment was made on 20 March 2018.
The transactions resulted in a net cash outflow of R129,7 million and a reduction of 25 million shares in the Group's issued share capital as the shares which were repurchased by Italtile were cancelled in terms of the Companies Act.
Distribution received from Ceramic Foundation
On 14 June 2018, the Ceramic Foundation Trust transferred 13 670 595 Italtile shares to the Italtile and Ceramic Foundation Trust, which is consolidated for Group reporting purposes. The transfer was done in order to merge the two trusts, which conduct public benefit activities in a non-profit manner independently from the Group. The transfer has resulted in an increase in treasury shares of 13 670 595 shares and related carrying value of R158 million.
The authorised share capital remains unchanged at 3 300 000 000 shares of no par value. Issued share capital is 1 295 254 148 (2017: 1 033 332 822) shares of no par value and has increased as a result of the acquisition, Rights Offer, and Four Arrows transactions noted above.
The Board declared a final gross cash dividend (number 104) for the year ended 30 June 2018 of 21,0 cents per ordinary share and a special cash dividend (number 5) of 30 cents per ordinary share to all shareholders recorded in the books of Italtile as at the record date of Friday, 7 September 2018. The Group has lowered its dividend cover to two and a half times (2017: three times).
Directors and officers
The details of the directors of the Company are set out here.
As announced on SENS during the course of the year, the following changes were made to the Board:
Mr Siyabonga Gama resigned as an independent non-executive director on 21 January 2018;
Ms Tsundzukani Mhlanga was appointed as Executive Director: Finance and Administration on 11 May 2018, replacing Mr Brandon Wood who was appointed as Executive Director: Commercial and Supply Chain from this date.
Ms Nkateko Khoza was appointed as an independent non-executive director on 11 May 2018.
Ms Luciana Ravazzotti Langenhoven was appointed as Deputy Chairman on 21 August 2018.
In accordance with the Company's Memorandum of Incorporation, Mr G A M Ravazzotti, Ms S M du Toit and Ms N Medupe retire by rotation, and being eligible, offer themselves for re-election at the forthcoming annual general meeting ("AGM"). Further, in accordance with the Company's Memorandum of Incorporation, the appointments of Ms T T A Mhlanga, Ms N P Khoza and Ms L Ravazzotti Langenhoven as directors of the Company is to be confirmed at the forthcoming AGM.
Directors' shareholding and other interests
Except for the long-term incentive schemes detailed below, the Company was not party to any arrangement during the year or at year end, which would enable the directors or officers, or their families, to acquire benefits by means of acquisition of shares in the Company.
Other than disclosed in note 31, none of the directors or officers of the Company had any interest in any contracts which significantly affected the affairs or business of the Company or its subsidiaries during the year.
It is Company policy that all directors and employees who have access to price-sensitive information may not deal directly or indirectly in the shares of the Company from the end of a reporting period until publication of the interim results or annual profit announcement.
The directors' beneficial and non-beneficial interest in the stated share capital of the Company at the reporting date is set out in note 31. Refer to the SENS announcement on 5 September 2018 for details of change of interests between 30 June 2018 and the date of this Integrated Annual Report.
Directors' participation in share incentive schemes
Directors' holdings under the Share Appreciation Rights Scheme and Executive Retention Plan are set out in note 31.
The emoluments paid to each director for the year ended 30 June 2018 by a subsidiary company are set out in note 31.
All emoluments paid to directors are short term in nature, other than gains on exercise of share options, and contributions to medical aid and provident fund.
The remuneration of both executive and non-executive directors is determined by the Remuneration Committee. Other benefits include once-off benefits paid and the fringe benefit value of Company cars for executive directors, and fees for services rendered by non-executive directors or as otherwise noted.
Details of the Company's interest in its subsidiaries are set out in note 37.
The Company's interest in the profits and losses after taxation and the non-controlling shareholders' interest of its subsidiaries (direct and indirect) is:
The Corporate Governance report is set out here.
An analysis of the shareholdings of the Company appears here.
The Group employs 2 530 employees (2017: 1 344).
At the AGM of shareholders held on Friday, 17 November 2017, three special resolutions were approved by the requisite majority of votes, namely: authorising the Company to repurchase its own shares; authorising the Company to provide financial assistance to related and inter-related entities and approving the Company's non-executive directors' fees.
Full details of the special resolutions passed will be made available to shareholders on request.
The Italtile Share Incentive Trust
In terms of the resolution passed at the shareholders' meeting on 12 January 1993 as amended and approved at the shareholders' meeting on 15 April 2013, the directors are authorised to make available for the purposes of the scheme a maximum aggregate number of 136 470 068 ordinary shares, representing 13% of the issued share capital.
The scheme exists for the directors and senior management of the Company with a limit of 15 400 000 shares which any one participant may acquire.
The Trust holds sufficient shares to meet its commitments. Shares will be bought in the open market by the scheme to meet any future allocations where necessary.
Share Incentive Schemes
Long-Term Incentive Plan and Share Appreciation Rights Scheme
The Company adopted a Long-Term Incentive Plan ("LTIP") and a Share Appreciation Rights Scheme ("SARS") in the 2008 financial year (amended in the 2013 financial year), in accordance with which selected directors and employees of the Group will receive a conditional right to receive a share award as determined by the rules of the plan and scheme. This award is to be applied towards the obligatory subscription and/or purchase of Company ordinary shares.
Directors and employees of the Company, as well as directors and employees of any subsidiary within the Group which is designated by directors of the Company as being a participating company, are eligible to participate in the LTIP and SARS. In addition, the directors of the Company may select certain franchisees of the Group to participate in the LTIP and SARS, in which event directors and employees of such franchisees will also be eligible.
The movement in the number of notional shares available to eligible participants is as follows:
|Number of awards*|
|At 1 July||15 287 500||22 687 500|
|Awarded during the year||1 600 000||5 600 000|
|Vested and exercised during the year||(1 375 000)||(8 175 000)|
|Forfeited/cancelled during the year||(575 000)||(4 825 000)|
|At 30 June||14 937 500||15 287 500|
Executive Retention Plan
The Executive Retention Plan is an additional mechanism, over and above the LTIP and SARS, to retain and reward selected employees and directors. In terms of this scheme, retention payments are made to selected directors and employees to facilitate the purchase of Italtile Limited shares. The payment of the retention award is subject to the director or employee remaining with the Group for a period of at least three years. The director or employee shall be the registered and beneficial holder of the shares acquired pursuant to the retention award from the date of transfer of such shares.
The movement in the number of retention awards to eligible participants is as follows:
|Number of awards|
|At 1 July||5 500 000||3 000 000|
|Awarded during the year#||—||7 000 000|
|Vested and exercised during the year||—||(1 300 000)|
|Forfeited/cancelled during the year||—||(3 200 000)|
|At 30 June||5 500 000||5 500 000|
Refer to note 6 for further disclosure related to these schemes.
In terms of the Memorandum of Incorporation, the Company has unlimited borrowing powers.
Ernst & Young Inc. continued in office as auditors of Italtile Limited. At the AGM of 16 November 2018, shareholders will be requested to appoint Ernst & Young Inc. as auditors for the 2019 financial year and it will be noted that Ms P Wittstock will be the individual registered auditor who will undertake the audit.
The Company Secretary is Ms E J Willis, whose business and postal address is:
|Registered office:||The Italtile Building
Corner William Nicol Drive and Peter Place
|Postal address:||PO Box 1689
|Telephone number:||+27 (0) 11 510 9050|
|Fax number:||+27 (0) 11 510 9060|
“The most important things I have learned from the Group are honesty, integrity, transparency – and that you should not stop growing.”
Story of Ronnie Letebele
Ronnie Letebele joined the Italtile Group in 2003 as a student (his first job at CTM Atterbury was to recycle damaged adhesive bags). Working hard and gaining lots of experience led to his promotion in time to Sales Assistant at CTM Menlyn and subsequently CTM Strydom Park. Following a one-year mentorship programme, he was transferred back to CTM Menlyn as Assistant Manager. He was later offered the opportunity to join CTM Rustenburg as a Store Manager, a promotion he readily accepted. Five years after that and ready for a new challenge, Ronnie joined the rapidly growing TopT brand. He was subsequently offered a partnership opportunity in the Northern Cape region, where he and his partners now own three stores. In July 2018, Ronnie also became a TopT partner in the Free State region. Ronnie feels that working in this exciting environment has been a great experience and although there was some risk involved initially, he believed in himself, and was encouraged and assisted by the strong support he received from his colleagues and managers.