Chief Financial Officer
Our goal throughout this period was to come through the crisis well and, in certain respects, better than before. The double-digit growth delivered in June to August, with a leaner team, less stock and healthy brands, is rewarding evidence of this.
The analysis below for the year ended 30 June 2020 focuses on the key elements of the Group's financial performance and statement of financial position, which management believes to be important for the understanding of the Group's performance. The review should be read together with the annual financial statements and the summarised financial information.
System-wide turnover for the year declined 7% against a back-drop of an already difficult economic environment, which was further exacerbated by the onset of the coronavirus pandemic and the resultant national lockdown of the economy. Consolidated turnover was 4% lower when compared to the prior year (R6,7 billion versus R7 billion).
Retail store turnover decreased 4% versus the prior year, with the like-on-like decrease amounting to 6%. Encouragingly, strong growth was recorded by all brands in June and July 2020 as the Group enjoys a larger share of wallet with consumers shifting their focus to spend on their homes (with spend in other discretionary sectors being severely curtailed as a result of the lockdown).
The retail store turnover decreases were largely driven by CTM, which recorded declines in gross and like-on-like sales. Encouragingly, webstore sales growth remained robust for the year as more customers migrated to the online offering as a result of the lockdown (a trend which is expected to continue). Notably, the East Africa region registered strong growth for the year, although aided by Rand weakness (i.e. translation gains) and relatively less restrictive lockdown requirements. Overall, prior to lockdown, positive signs were evident as a result of work done on range, presentation, productivity and store expansion.
Italtile Retail sales declined from the prior year, with its Projects division declining materially as commercial developments were hard hit by the economic conditions and lockdown in South Africa. Further, consumer sentiment of higher LSM customers was depressed during the year, impacting negatively on sales even prior to lockdown.
TopT recorded growth for the year. Regions acquired back from franchisees (Limpopo, North West, Free State and Northern Cape) have shown significant improvement, demonstrating the importance of adequate stock investment in stores.
U-Light showed sales growth for the year a result of a very low base and opening of five new stores (including a webstore) during the year. Overall, the sales performance of the business was disappointing, with momentum gained up to the end of March 2020 impacted significantly by the lockdown.
Supply chain business (Cedar Point, ITD and DC) sales were 6% lower than the prior year. All businesses were adversely impacted by closure of the retail stores in April as well as significant delays with import of inventory due to port delays (the business critical in-stock positions of ITD and Cedar Point in particular being negatively impacted).
Excluding the impact of the lockdown, ITD generally was in a better in-stock position when compared to the prior year, despite lower stock holdings. This, together with improved range offering, aided sales by the business.
In addition to the impact of the lockdown, Cedar Point sales were also negatively impacted by the removal of certain products from its offering as a result of the range rationalisation at this business (PVC panels, entry level cabinetry and tools among others were discontinued).
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Manufacturing sales (aggregation of Ceramic Industries, Ezee Tile and PiViCal Panels) for the review period decreased by 9% compared to the prior year. Lockdown regulations for manufacturing businesses during Level 4 and 3 were more stringent, resulting in a slow start-up and consequential slower uptick in sales compared to the retail businesses.
Prior to lockdown, Ezee Tile recorded significantly improved trading results as a result of improved production efficiencies and growth in third-party business. Ceramic recorded improved yields and benefited from range rationalisation. The Australian factory has recorded robust growth as it grows its customer base in that country.
On a consolidated level, gross margin improved to 38% from 37,5%. Favourable margin growth was enjoyed by supply chain segments due to range rationalisation, while margins in the retail and manufacturing segments declined to an average of 35,1% (2019: 36,3%) and 24,6% (2019: 25,6%) respectively as sales prices were kept relatively consistent despite cost increases to support demand (both segments recorded average price inflation of less than 2%).
Operating expenses increased by 9% from the prior year. The largest increases were noted on the following expense items:
- JV profit share: 36% increase to R38 million as result of the increase in JV partners in the retail stores.
- Doubtful debt provision charge: increased to R12 million as the doubtful debt provision (based on expected credit loss basis) was increased to cater for potential losses attributable to the economic impact of the lockdown.
- Property costs (excluding IFRS 16): 10% increase as a result of new store openings and increase in municipal rates (in excess of inflation).
The continued focus on stock control costs by the stores with the assistance of internal audit has continued to pay dividends with these costs continuing their downward trend. Manpower costs continue to be well managed and productivity will remain a key focus area of management.
Like-on-like operating cost growth was contained at 6,4%.
Trading profits for the year decreased by 16% from the prior year as the decrease in turnover was exacerbated by the above inflationary increase in operating expenses noted above as well as an impairment of R16 million recorded on plant and equipment by Ceramic Industries (detail provided overleaf) and a profit on disposal of property in the prior year of R14 million (R1 million recorded in current year).
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Finance costs increased by 56% from the prior year. The figure includes finance costs of R26 million relating to the IFRS 16 accounting of leases (2019: R21 million). Further, the increase in finance costs can be attributed to the following:
- A full 12 months' worth of finance costs on the term loan of R500 million versus only seven months in the prior corresponding period.
- Additional finance costs on R130 million drawn from a short-term revolving facility.
The effective tax rate for the year has increased as a result of prior period adjustments, a large increase in dividend withholding taxes paid by consolidated trusts as a result of the special dividends paid during the year, and an increase in deferred tax liabilities as a result of capital expenditure (compounded by a decrease in net profit before tax for the year).
Earnings per share
Earnings per share ("EPS") and headline earnings per share ("HEPS") decreased to 78,3 cents and 79,2 cents respectively. Adjusted EPS and adjusted HEPS decreased to 81,5 cents and 82,3 cents respectively, both adjusted for the once-off charge of R39 million related to the BBBEE transaction with Yard Holdings as detailed below.
A 1% increase in the weighted number of shares from 1 226 million to 1 231 million shares following the BBBEE transaction resulted in the lower increase in earnings per share compared to the increase in attributable profits after tax.
The disparity between basic earnings and headline earnings growth is attributable to a gain of R14 million realised during the prior year on disposal of properties (R1 million in the current year) and the R16 million impairment on property and equipment recorded in the current year by Ceramic Industries.
Dividend per share
The Group maintained a dividend cover of 2,5 times for the year, resulting in the declaration of a final dividend of 10 cents per share, which, together with the interim dividend, totals a full year dividend of 33 cents per share, a decrease of 20% from the prior year (2019: 41 cents).
Investments in associates
Effective 1 February 2020, the Group acquired a 25,1% stake in Easylife Kitchens Management Proprietary Limited ("ELK") for a consideration of R18 million. This investment is accounted for as an associate investment from the effective date of acquisition. The Company has one representative on the ELK board and we have started exploring various opportunities including:
- Relocation of existing ELK stores to Group sites.
- Supply of product to ELK franchisees as a preferred supplier.
- Manufacture of bathroom furniture by ELK for supply to the Group.
- Cross-merchandising of offerings in stores.
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Property, plant and equipment
Capital expenditure of R614 million was spent during the year predominantly on the retail property portfolio and the plant and equipment upgrades across the manufacturing operations. Further, foreign exchange translation gains of R43 million were recorded on closing book values of foreign operations' property, plant and equipment (with R40 million increase being recorded on Australian assets alone, given the weakening of the Rand).
During the year, a decision was made to perform a significant upgrade of the SAMCA Floor tile factory, which would result in the replacement of a significant portion of the equipment and machinery at the factory. Efforts have been made to identify possible repurposing or to move affected components to other factories, as well as dispose of those components which could not be used elsewhere.
In anticipation of the upgrade, all operations at the factory were ceased towards the end of the period under review. Equipment and machinery with a carrying amount of R16 million as at 30 June 2020 has been impaired as a result, as these components have been deemed to have negligible recoverable amounts as they cannot be reused elsewhere or sold to third parties.
IFRS 16, which the Group adopted in the 2019 financial year, 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.
The book value of right-of-use assets recognised at year end is R349 million (2019: R303 million) with the related lease liability at year end being R348 million (2019: R301 million). The net income impact during the current year is R9 million (2019: R11 million), being the net result of the following adjustments:
- Lease expense reduction: R79 million.
- Right-of-use asset depreciation: R62 million.
- Lease liability finance cost: R26 million.
The inventory balance of the Group net of provisions and including goods on the water (DC goods in transit) has increased to R896 million from R857 million at 30 June 2019 (an increase of 5%). On a gross basis (prior to provisions) and excluding new stores (i.e. like-on-like basis) and the goods in transit balance (which increased to R80 million from the prior year balance of R48 million given the various delays experienced on imports), total inventory decreased by 3%.
The total inventory provision decreased by 8% from the prior year to R82 million (2019: R89 million). This decrease is largely attributable to the decrease in the provision at Ceramic Industries, given the significant decrease in the finished goods inventory held by Ceramic at year end. The provision for other divisions collectively remained fairly consistent from the prior year.
The 12-month average financial stock turn of most retail and manufacturing businesses remained consistent or improved on prior year when adjusted for the month of April when no trade occurred.
Cash and cash equivalents
The Group's cash balance decreased to R860 million from R1,2 billion at 30 June 2019, with significant cash flows for the year being:
- Capital expenditure of R614 million.
- Dividend payments of R1,5 billion.
- Tax payments of R416 million.
- Own share purchases by the Group and the Foundation Trust totalling R243 million (18 038 049 shares).
Trade and other receivables
The decrease in net trade and other receivables from the prior period is largely attributable to an increase in the expected credit loss allowance to cater for potential bad debts as a consequence of the COVID-19 pandemic and its impact on the economy, as well as the conversion of franchise stores to corporate stores (receivable balances previously recorded as third-party debt to the Group are now eliminated for consolidation purposes). Despite the increase in the expected credit loss allowance, the Group to date has not experienced a notable deterioration in the collectability of its debtors' book.
Stated capital and share option reserve
Yard SPV deal
On 10 September 2019, the Company concluded its empowerment transaction with a wholly owned subsidiary of Yard Investment Holdings Proprietary Limited ("Yard SPV") in terms of which Yard SPV subscribed for 26 400 000 ordinary shares in Italtile for an aggregate cash subscription amount of R313 million. The transaction was concluded to improve the black ownership credentials of the Company, thus avoiding discounting on the ownership element in future verifications. The proceeds from the share issue were immediately distributed to shareholders as a special dividend, equating to 23 cents per share.
The transaction results in an IFRS 2 once-off expense and the related equity-settled share-based payment reserve of R39 million, which was recognised immediately on the transaction date.
Staff share scheme
The fourth allotment of shares in the scheme, granted in 2016, vested on 31 August 2019. A total of 94 employees qualified for the vesting, of which five employees opted to retain the shares and the balance received the net value of the awards in cash. This resulted in a decrease in treasury shares of 909 106 (2019: 1 044 139) 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 R25 million (2019: R18 million) to the Group's income; R13 million (2019: R9 million) of this charge is a once-off accelerated expense for franchise staff.
INTERNAL CONTROL ENVIRONMENT
The general control environment remains robust and I have no knowledge of any fraud or suspected fraud which could have a material effect on the results of the Group.
Value delivery is an integral part of our IT journey to ensure a memorable customer experience from a technology point of view and to ensure operational efficiencies throughout our business. Key operational areas of focus, outside of cybersecurity which is core to all IT-related processes, are as follows:
- Analytics: Real-time actionable insights for management and business stakeholders.
- Automation and integration of systems and processes to streamline operations.
- Mobility: Back office and sales processes to increase productivity.
Over the next financial year, we will place increased focus on the general control environment of our information technology systems and processes and will continue with our innovation journey, which provides us with competitive advantage in various operational areas.
Following what has certainly been the most challenging and interesting year during my tenure at Italtile, I would like to extend my sincere appreciation and gratitude to:
- Our shareholders for the engagements and support over the year;
- Our customers for their continued support of our business and brands;
- Our management and staff for determination and commitment to ultimately deliver a world-class shopping experience and manufacturing process;
- Our finance teams for delivery of sound financial information and reports; and
- Our Chairman and CEO for their inspirational leadership and consistent drive to improve.
B G Wood
Chief Financial Officer