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Principal activities of the Company
Italtile Limited ("Italtile" or "the Company" or "the Group"), headquartered in Bryanston, Johannesburg, is a leading retailer and manufacturer 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 Italtile Retail, CTM and TopT. 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 2019, the store network comprised 189 stores, including five webstores (2018: 176 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 manufacturing operations comprise well-maintained state-of-the-art factories which are supplied with high-quality raw materials sourced from productive quarries in close proximity to the plants.
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")
The Group holds a 95,47% stake in Ceramic, its largest supplier of tiles, sanitaryware and baths. Ceramic delivers tactical advantages by supporting the Group's growth programme through supply of local high-quality, affordable products. This business contributed R418 million (2018: R345 million) to Group profit for the full year.
The Group holds an effective 71,54% strategic stake in this business, a national manufacturer of grout, paint, adhesive and related products. The business reported growth for the period, contributing R39 million (2018: R39 million) to Group profit for the full year.
STATEMENTS OF RESPONSIBILITY
The responsibilities of the Group's directors are set out here.
AUDIT AND RISK COMMITTEE
The Audit and Risk Committee report which discusses the responsibilities of this Committee and how these were discharged during the year.
System-wide turnover across the Group from continuing operations increased 15% to R10,0 billion (2018: R8,7 billion). Retail store turnover grew 6,1%, and manufacturing sales for the year under review grew by 36,5% compared to the previous corresponding period, which included nine months of trading from October 2017.
Reported trading profit grew 18% to R1,8 billion (2018: R1,5 billion). Retail margins improved primarily due to intensified cost containment. Margins at Ceramic were lower mainly due to underutilisation of capacity, while Ezee Tile reported stable margins.
Earnings per share
The Group's basic earnings per share grew by 8% to 102,6 cents (2018: 95,0 cents), while headline earnings per share improved by 7% to 101,8 cents (2018: 95,0 cents).
Property, plant and equipment
The estimated current market value of the property portfolio increased to R3,8 billion (2018: R3,7 billion). Capital expenditure of R312 million (2018: R355 million) was incurred on new and refurbished properties.
Cash and cash equivalents
The Group's cash balance rose to R1,2 billion (2018: R679 million), including the consolidated cash balances of Ceramic and Ezee Tile. Material cash flows for the review period include:
- capital expenditure of R622 million;
- tax payments of R539 million;
- dividend payments of R941 million; and
- term funding loan inflow of R500 million.
The short to medium-term outlook for the country is concerning. While the President's commitment to growing the economy and enhancing governance is commendable, only meaningful actions and evidence of transformational reforms will lead to an improvement in business and consumer confidence and hopefully, in time, increased investment by the public and private sectors.
In the interim, there is little indication that meaningful economic growth is imminent, and in that light, we anticipate discretionary spend to remain constrained. Unresolved socio-political issues and general uncertainty will also continue to impact negatively on consumer sentiment.
At the upper end of the LSM spectrum, where the flight of capital is an incontrovertible trend, there has been a marked decline in investment recently, evidenced by the slowdown in Italtile Retail's sales post-year end. However, a home is an ambition for most South Africans, and as a nation we are proud homeowners who invest significantly in this primary asset. It is our view, therefore, that while middle and lower LSM consumers are worse off than ever before, they will acclimatise to sustained financial hardship as the new norm. The likelihood, though, is that when they do shop, the frequency will be less and the spend lower; it is therefore our challenge and goal to ensure that our offering is their first choice.
Despite the very testing operating environment, we remain optimistic that those factors within our own control provide prospects for growth. We derive significant confidence from the Group's strong 50-year track record and the business model which has proved to be resilient and robust over the past five decades. The Company has weathered difficult times in its history, and we are certain that the experience will stand us in good stead.
We have identified our priorities for the year ahead which include the following imperatives:
- focus on sales growth, particularly in the tile category. Opportunities exist in terms of price, service, presentation and fashion, and we are confident that there is potential to gain market share;
- continue to prioritise the shopping experience through entrenching retail excellence principles with specific focus on sales execution;
- advance the store roll out and revamp programme. Our target is to open another 15 stores across our retail brands in the new financial year;
- continue to develop disruptive marketing campaigns;
- roll out the U-Light offering, contingent on the success of the pilot venture and the brand's potential for scalability;
- leverage improvements made in the HR function to develop and optimise a people pipeline which will support growth in the business;
- improve the Group's BBBEE status to level 5 from level 6;
- entrench working capital and cash management as core disciplines;
- prioritise better stock turn and product mix through better implementation of BOP and use of analytics;
- focus on improving manufacturing efficiencies and leverage opportunities in our logistics and distribution functions; and
- drive overall productivity to become more competitive.
We anticipate that the Group will deliver growth for the full year. Given the high base effect, we expect that growth in the first half is likely to be lower than growth in the second half of the year.
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, eight million of the Group's shares net of forfeitures were held by qualifying staff members at 30 June 2019 (2018: 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 R18 million (2018: R16 million) to the Group's income; R9 million (2018: R9 million) of this charge is an accelerated expense for franchise staff.
The authorised share capital remains unchanged at 3 300 000 000 shares of no par value. Issued share capital remains unchanged at 1 295 254 148 shares of no par value.
The Board declared a final gross cash dividend (number 106) for the year ended 30 June 2019 of 19,0 cents per ordinary share and a special cash dividend (number 6) of 50,0 cents per ordinary share to all shareholders recorded in the books of Italtile as at the record date of Friday, 13 September 2019. The dividend cover remains at two and a half times.
DIRECTORS AND OFFICERS
The details of the directors of the Company are set out in our board of directors.
As announced on SENS during the course of the year, the following changes were made to the Board:
- Ms Nomagugu Mtetwa resigned as an independent non-executive director with effect from 31 August 2019;
- Ms Ndumi Medupe resigned as an independent non-executive director with effect from the conclusion of the Group's annual general meeting (on or about 14 November 2019);
- Ms Zizipho Nyanga was appointed as an independent non-executive director with effect from 1 June 2019.
In accordance with the Company's Memorandum of Incorporation, Mr G A M Ravazzotti, Ms S M du Toit and Mr S G Pretorius 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 appointment of Ms I Z Nyanga as director 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 36, 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 36. Refer to the SENS announcement on 5 September 2019 for details of change of interests between 30 June 2019 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 36.
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. Refer to note 36.
The Company's interest in the profits or losses after taxation and the non-controlling shareholders' interest of its subsidiaries (direct and indirect) is:
|Profits||1 261||1 044|
The Corporate governance report is set out in corporate governance.
An analysis of the shareholdings of the Company appears in analysis of shareholders of this report.
The Group employs 2 545 employees (2018: 2 530).
At the AGM of shareholders held on Friday, 16 November 2018, 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||14 937 500||15 287 500|
|Awarded during the year||2 800 000||1 600 000|
|Vested and exercised|
|during the year||(1 887 500)||(1 375 000)|
|the year||(275 000)||(575 000)|
|At 30 June||15 575 000||14 937 500|
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||5 500 000|
|Awarded during the year#||1 500 000||—|
|Vested during the year||(500 000)||—|
|At 30 June||6 500 000||5 500 000|
Refer to note 7 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 14 November 2019, shareholders will be requested to appoint PricewaterhouseCoopers Inc. as auditors for the 2020 financial year and it will be noted that Mr T Howatt 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
|Postal address:||PO Box 1689
|Telephone number:||+27 (0) 11 510 9050|
|Fax number:||+27 (0) 11 510 9060|