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Our FD's financial review
FOR THE YEAR ENDED 30 JUNE 2019
Group Finance and
The Group results for the comparative year (year ended 30 June 2018) include the consolidated results of Ceramic Industries ("Ceramic") and Ezee Tile for nine months of the financial year. Following the acquisition of Ceramic, the Group now holds a 95,47% stake in Ceramic and an effective 71,54% in Ezee Tile. As such, it is to be noted that some commentary below relates only to the Italtile Group prior to consolidation of these two entities ("Old Group") – where relevant, this has been noted.
The Group's system-wide turnover for the year ended 30 June 2019 increased 15% from the prior year to R10,0 billion. Consolidated turnover increased by 15% from the prior year to R7,0 billion.
- Retail revenue (all stores) was 6% higher than the prior year at R6,2 billion, deteriorating from the 7% increase from the prior year recorded for the half year ended 31 December 2018. On a like-on-like basis, retail sales increased by 4,2% versus the prior year;
- Supply chain businesses (ITD, Cedar Point and DC) sales were flat when compared to the prior year, with Cedar Point showing an increase of 3%. Cedar Point was in a better in-stock position compared to the prior year. ITD and DC recorded a decrease in sales of 1% mainly due to poor sales out of CTM; and
- Manufacturing sales (aggregation of Ceramic, Ezee Tile and PiViCal Panels sales) for the year grew by 37% compared to the prior year. Sales for the period 1 July 2018 to 30 June 2019 improved by 1,4% compared to the same period in the prior year.
Consolidated turnover has exhibited compound growth of 21% over the past seven years (refer to
seven-year review). It has been, and will continue to be, the Group's preference to grow organically rather than through acquisitions.
Achieved gross margin
Achieved gross margin remained at a flat 37,0% for the review period when compared to the prior period. CTM enjoyed favourable margins as a result of promotional stock that was purchased at reduced prices during the review period, which assisted us in trading more aggressively in the marketplace. Margins improved marginally at the retail level by 0,5% versus the prior year (36,6% to 36,1%). The manufacturing businesses gave up some margin (1,1%) during this period. Other contributors to the improvement in margin were decreases in stock provisions.
Operating expenses of the Old Group remained flat from the prior year at R858 million, with decreases being noted in stock control costs (decreased 32% from prior year to R19 million) and manpower costs (excluding share incentive costs, remained flat compared to the prior year at R246 million). Both manpower and stock control costs categories continue to receive increased focus from management. On a like-on-like basis (stripping out the new stores), operating cost declines were as follows:
- total operating costs declined by 1%; and
- manpower costs declined by 2%.
Trading profit for the year increased by 18% from the prior year to R1,8 billion and profit after tax increased by 15% from the prior year to R1,3 billion. The increase in net profit before tax is attributable to the following:
- the consolidation of Ceramic and Ezee Tile (ie includes the consolidated results for the full 12 months from 1 July 2018 to 30 June 2019 versus the nine-month period from 2 October 2017 to 30 June 2018 in the prior corresponding period);
- an increase in finance income to R31 million earned on excess cash being invested in dividend-yielding funds; and
- a saving on finance costs in the current year due to not incurring finance costs related to the acquisition of Ceramic. This is, however, offset by finance costs being incurred on the loan from RMB.
Trading profit as a percentage of turnover increased to 25,8% from 25,0% in the prior year. The trading profit margin initially decreased following the acquisition of Ceramic and Ezee Tile due to the two businesses historically having lower margins as expected from manufacturing businesses. The increase in margin is further evidence of the cost leadership that the Group has undertaken in the current financial year.
Earnings per share
Earnings per share ("EPS") increased by 8% to 102,6c and headline earnings per share ("HEPS") increased by 7% to 101,8c. An 8% increase in the weighted number of shares from 1,1 billion to 1,2 billion shares following the Rights Offer, Ceramic Acquisition and Four Arrows transaction in the prior year resulted in the lower increase in earnings per share compared to the increased profits after tax. The disparity between basic earnings and headline earnings growth is attributable to a gain of R12 million realised during the year on the disposal of properties in the Western Cape region of South Africa. Over the past seven years, EPS has exhibited compound growth of 14%.
Inventory balances and provisions
The inventory balance of the Group net of provisions and including goods on the water (DC goods in transit) has increased marginally to R841 million from R806 million at 30 June 2018. Excluding goods on the water, stock levels have reduced due to active management of stock levels, adjustments in BMO safety stock levels and improved financial stock turns in most business units.
The provision for obsolete inventory increased to R89 million from R85 million in the prior year, with CTM being the largest contributor to the increase of the provision. The provision for obsolete inventory is based on age, seasonality and targeted stock turns. Being a fashion retailer, management closely monitors the stock turns within the different business units. Slow-moving stock is either managed or exited to ensure that we are then able to bring in the latest fashionable product to our customers.
The Group's cash balance increased to R1,2 billion in the current year from R679 million, significant cash flows for the period being:
- capex of R605 million;
- tax payments of R539 million;
- dividend payments of R949 million; and
- term funding inflow of R500 million.
The Group raised funding of R500 million for one of our property holding companies. This loan resulted in the Group's gearing increasing to 9,0%. Management is comfortable with this level of gearing and believes that it does not expose the Group to undue liquidity risk.
New accounting standards
The Group applied IFRS 9 Financial Instruments and IFRS 15 Revenue for the first time during the year. The Group opted to early adopt IFRS 16 Leases from 1 July 2018. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.
IFRS 9 Financial Instruments
IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.
The Group elected to apply the modified retrospective approach which requires the recognition of the cumulative effect of initially applying IFRS 9 as of 1 July 2018 to the retained earnings.
The standard has the result of changing the classification of financial assets on the statement of financial position. However, there is no change to the measurement of these assets. There has also been no change in the carrying amounts of financial assets on the basis of their measurement categories as a result of the transition from IAS 39 to IFRS 9.
There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities.
The new impairment model requires the recognition of impairment provisions based on expected credit losses ("ECL") rather than only incurred credit losses as is the case under IAS 39. The Group assessed the nature of financial assets held and the potential impact of a move to an ECL model. To calculate the ECL, the simplified approach was applied to our credit book. The Group has sufficiently provided for the ECL.
IFRS 15 Revenue
IFRS 15 describes the principles an entity must apply to measure and recognise revenue and related cash flows. The core principle is that an entity recognises revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
The Group elected to apply the modified retrospective approach, which requires the recognition of the cumulative effect of initially applying IFRS 15 as of 1 July 2018 to the retained earnings. There was no such adjustment to the financial statements of the Group.
The standard confirms the treatment of Goods Paid Not Taken ("GPNT") by the Group. The view of the Group was that the revenue can be recognised as a sale that has taken place and control has transferred to the customer.
The standard introduces the concept of 'right of return' whereby it states that revenue should only be recognised for those goods that are not expected to be returned. The Group assessed the value of goods returned to stores over the last three years in order to determine the materiality of the amount. The amount of returned goods was considered to be immaterial and a right-of-return asset and corresponding liability were therefore not recognised in the financial statements.
The Group has made the following changes in presentation:
- in the notes to the statement of comprehensive income, the manner in which revenue is disaggregated.
IFRS 16 Leases
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.
The Group elected to apply the modified retrospective approach which requires the recognition of the cumulative effect of initially applying IFRS 16 as of 1 July 2018 to the retained earnings. The Group has also elected not to recognise right-of-use assets and lease liabilities for short-term leases and leases of low-value assets – a practical expedient contained in IFRS 16.
As at 1 July 2018, the Group recognised right-of-use assets and lease liabilities and the impact on the statement of financial position was as follows:
|Net impact on equity||(29)|
The impact on the statement of comprehensive income for the year ended 30 June 2019 was a decrease in net profit before tax of R11 million. The adoption of the standard did not have an impact on the statement of cash flows.
Additionally, the Group made the following changes in presentation:
- in the notes to the consolidated statement of comprehensive income, one additional line related to the depreciation of the right-of-use assets;
- in the consolidated statement of financial position, additional line items to reflect the right-of-use assets, the non-current and current portion of the lease liabilities; and
- in the notes to the consolidated statement of cash flows, additional line items related to the depreciation of the right-of-use assets, repayment of lease liabilities and the lease interest paid.
To the finance teams across the Group – what a year! We made it through new accounting standards and tight deadlines. I wish to thank and commend the teams for their hard work and resilience during this year. As we begin the new financial year, I look forward to us raising the standard and supporting the business to continue managing costs, thereby creating sustainable shareholder value.
T T A Mhlanga
Executive Director: Group Finance and Administration