Review of operations

Overview

Structured best practice

Italtile’s performance in the year under review is a reflection of management’s unwavering commitment to continuous and consistent improvement in the business and the dedication of our people.

Across the Group a range of best practice benchmarks were refined, which delivered encouraging results. Amongst them, The 9 Key Disciplines programme was introduced in the CTM network as a guideline to grow the business through implementation of best practice across all core areas: range matrix, display and merchandising; inventory management; cash management; and HR and staff relations. An important component of this model is financial education and incentivisation.

During the period, each of the Group’s brands focused greater attention on in-store efficiency improvements and training; revisited and refreshed their ranges; and strived to maximise the average basket and sales of complete solutions. Cost containment and profitability were instilled as key performance indicators, assisting operators to build more efficient businesses.

Across the retail brands there is greater awareness and accommodation of the price-sensitivity of consumers in the current economic environment, particularly those in the middle-income segment. In this regard, Italtile Retail has broadened its range to include appeal to the top end of the middle market while CTM has moved to increase its commodity-priced range for the cost-conscious and contract markets. TopT, which operates in the entry-level sector has developed its offering extensively for lower income earners, a segment that proved reasonably resilient.

Throughout the supply chain, improvements were evident in inventory and range management and each business unit played an important role in underpinning the retail brands by enhancing their fashion/value offering.

Innovations in technology were a focus during the period, including improvements in the Group’s online web-shopping capabilities, streamlined automated ordering systems, and in-store point-of-sales functionality, including mobile units, which are now approaching a mature state of development.

Training and development is a core Group activity, and was implemented through initiatives such as Italtile Retail’s ‘Italtile Way’, CTM’s Operator Training Programme in conjunction with Stellenbosch University, and other mentorship and leadership coaching programmes aimed at empowering staff, promoting entrepreneurship and delivering best-in-industry customer service.

Towards, and after period-end, there was a transition of franchised stores to Group-owned stores as franchise agreements ended. This development has provided an opportunity to re-invigorate underperforming regions by affording greater cohesion and co-operation between stores, which should have a positive impact on regional performance.

Financial review

Trading conditions

General economic uncertainty continued to constrain public and private sector investment in the new-build segment of the industry, although some improvement in the renovations market was experienced.

In the context of subdued global trading conditions, a sustained influx of imported product remained a feature of the local industry as international suppliers sought new markets for their merchandise. Particularly evident in the port cities, independent opportunistic traders entered the market, many of them with minimal investment and unsustainable offerings. The instability created by these players impacted negatively on more established businesses, contributing to further downsizing and closures in the industry.

Currency volatility experienced during the period served to strain working capital of smaller businesses with the result that orders were only placed upon payment. The Group’s policy of ensuring consistent levels of stock on hand, supported by its strong statement of financial position, proved to be an important competitive advantage.

The Group’s improved sales volumes were achieved primarily in the DIY/renovations and Commercial projects market. Central to this growth were more fashionable ranges, a deliberate strategy to upsell complete solutions of products, and ensuring that the brands remained leaders in offering best value (defined by consumers as fashion, quality, price and service).

Results

Continuing operations

Like-on-like system-wide turnover grew 11% to R3,82 billion (2012: R3,43 billion); revenue in the second half of the year increased at a higher rate year-on-year than the first half, and operating margins in the latter six months were firmer due to improved average selling prices and prudent cost management. Trading profit rose 18% to R611 million (2012: R520 million), while gross margins for the full year declined slightly, a function of the Group’s decision to absorb increased costs and currency fluctuations to support franchisees and customers and demonstrate Italtile’s everyday value positioning.

After a number of years of limited price inflation, average selling prices were increased in certain of the Group’s operations, including CTM, TopT and ITD, to offset significantly higher input cost pressures in the supply chain, while Italtile Retail’s average selling prices were deflationary.

Inventory levels remained stable at R335 million (2012: R339 million), part of the deliberate strategy to promote the Group’s competitive advantage of consistent availability of a large range of merchandise and a function of adding new ranges, while continuing to sell out older ranges. Average stock turn improved across most operations.

Capital expenditure of R168 million (2012: R120 million) was incurred, primarily related to enhancing the Group’s property investment portfolio, including an extensive store renovation programme in the CTM network. Notwithstanding this capital expenditure, repayment of a R300 million long-term loan, and the acquisition of a 20% stake in Ceramic Industries, cash reserves were R303 million, reflecting Italtile’s strong cash generative nature.

The Group’s net asset value improved to 250 cents (2012: 218 cents).

Investment in associates

Ceramic Industries Ltd (Ceramic)

As previously disclosed, during the period the Group acquired a 20% stake in its most significant supplier, Ceramic, a local manufacturer of tiles, sanitaryware and baths. This tactical investment to support Italtile’s growth strategy has proved useful, particularly given the volatility of the currency related to imported product and the Group’s stated intent to consistently carry optimum stock levels for customer convenience. Certain of Ceramic’s factories experienced production shortcomings in the reporting period, and whilst these have subsequently been addressed, the company’s results for the seven months under-performed management’s expectations, contributing R9 million to Group profit.

Ezeetile

The Group has an effective 46% shareholding in Ezeetile, a national supplier of grout, adhesive and other products. During the year the business implemented SAP, facilitating alignment amongst Ezeetile’s six factories, as well as with the Group. This development will ensure improved logistics and inventory management, and accordingly improved profitability is expected. Ezeetile contributed R3 million (2012: R5 million) to Group profitability for the reporting period. This decrease is attributable to the impact of commissioning new factory equipment, updating manufacturing processes, as well as the initial bedding-down of SAP; this trend should be reversed in the forthcoming period.

Italtile Australia

The Group has elected to discontinue its operation in Australia, which currently comprises seven stores, trading out of predominantly Company-owned properties. Accordingly, a buyer for the retail brand component is currently being sought and the Group’s future focus will be concentrated on management of the properties. The details of this sale transaction are disclosed on page 111 of the Integrated annual report 2013 report.