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 2017, the store network comprised 162 stores (including four webstores) (2016: 146 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.
INVESTMENT IN ASSOCIATES
Ceramic Industries (Pty) Ltd (“Ceramic”)
The 21% strategic investment in its largest supplier of tiles, sanitaryware and baths once again delivered tactical advantages in supporting the Group’s growth programme serving to enable consistent supply of local high quality, affordable products. This business contributed R81 million (2016: R83 million) to Group profit for the full year.
Offer to acquire shares in Ceramic
Italtile submitted a binding offer on 16 July 2016 to Ceramic, to acquire up to a further 74,5% of the company’s issued share capital (“the Acquisition”). The balance of Ceramic shares comprises treasury shares held by National Ceramic Industries South Africa and a subsidiary of Italtile.
On 6 September 2017, the Group announced that all conditions for the Acquisition had been met and the effective date of the Acquisition will be Monday, 2 October 2017 (“the effective date”), being the first business day of the month following the month in which all conditions were approved, as stipulated by the Implementation Agreement between the Group and Ceramic.
Italtile’s rationale for acquiring Ceramic is based on management’s positive view of opportunities for growth in Southern Africa, and the benefits of this transaction for both Italtile and Ceramic, which are far-ranging:
- The long-term success and sustainability of both businesses are inextricably intertwined and have been for the past two decades.
- The combination and integration of the two management teams will add depth in terms of experience and skill in the business, and enhance the management structure to facilitate improved succession planning at the combined group level.
- Both businesses will benefit from improved efficiencies and reduced costs, enhanced allocation of capital, and alignment of long-term growth strategies, thereby fostering sustainable returns for shareholders.
Based on Ceramic’s shareholding on the effective date, Italtile will acquire 14 464 769 ordinary shares of Ceramic for a total consideration of R241,46 per share, totalling R3 492 663 123, payable by way of total cash payments of R1 746 331 636 over a 17-month period and the issue of 150 936 170 Italtile shares at R11,57 per Italtile share on the effective date. As a result of the Acquisition, Italtile will hold 95,47% of the issued share capital of Ceramic and an effective 71,54% of the issued share capital of Ezee Tile.
Further detail pertaining to the Acquisition is included in note 37.
The Group holds an effective 46% strategic stake in this business (prior to 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 R13,5 million (2016: R12 million) to Group profit for the full year.
STATEMENTS OF RESPONSIBILITY
The responsibilities of the Group’s directors are detailed in this report.
AUDIT AND RISK COMMITTEE
System-wide turnover across the Group from continuing operations increased 4% to R6,21 billion (2016: R5,96 billion). Growth was recorded by all three retail brands.
Reported trading profit grew 2% to R1 063 million (2016: R1 047 million). Retail gross margins were marginally lower despite both destocking activities and the retail brands continuing to offer competitive value to price-conscious customers.
Property, plant and equipment
The estimated current market value of the property portfolio increased to R2,6 billion (2016: R2,4 billion). Capital expenditure of R232 million (2016: R284 million) was incurred on new and refurbished properties.
Cash and cash equivalents
Capital expenditure of R334 million (2016: R375 million) was incurred primarily to enhance the Group’s Property Investment portfolio through the acquisition of new properties and an ongoing store upgrade programme across the network. This investment, together with the net dividend of R305 million (2016: R279 million) paid during the period, coupled with the reduction in stock holdings, resulted in net cash reserves of R511 million (2016: R347 million) at the end of the period.
Interest-bearing loans and borrowings
As at 30 June 2017, the Group had no interest-bearing loans and borrowings (2016: R34 million loan finance utilised in the acquisition of fixed property in Australia in prior periods).
All indications are that current sociopolitical and economic conditions will prevail for at least the next six months.
Real disposable income is likely to decline further in the context of poor economic growth, limited job creation and significant increases in personal income taxes for middle and high-income earners. Country-specific risk will also remain a factor for the forthcoming period and management anticipates a weakening trend of the local currency.
Sustained high levels of stock in the market and lower consumer demand will drive intensified competition as operators vie for a share of wallet. Further rationalisation of marginal industry participants is also probable.
Despite this contextual outlook, the Group remains confident that its strong brands as well as robust and resilient business model can capitalise on growth opportunities in this market, particularly given the relatively low per capita consumption of tiles in this country compared to peer economies.
Furthermore, management is satisfied that its competent leadership team, clearly defined strategies and clarity of purpose positions the business well for continued growth. The Group’s competitive advantage will continue to be furthered by its tactical brand portfolio, integrated supply chain, strong entrepreneurial partnerships and long-standing reputation.
While advancement of the store roll-out programme will be determined by market demand and availability of suitable sites and operators, the Group’s goal is to open a total of 20 new stores over the next financial year, including at least one Italtile Retail store and three CTM stores. Furthermore, capacity in the Supply Chain will also continue to be developed to support anticipated growth over the long term.
In addition to expanding the capacity of the business, opportunities for growth also exist within the business itself, through improved competencies, efficiencies, and conceptualisation of retail innovations and market-disruptive strategies.
Management’s key focus areas in the forthcoming period will include:
- further improvement of the working capital position through intensified control of inventory and all overhead costs;
- better productivity through enhanced performance management and training initiatives;
- attracting, retaining and developing an appropriately skilled personnel complement, capable of enabling the Group’s growth strategy;
- continued development of sector leading technology; and
- driving the strategy to offer a customer-centric shopping experience which constantly delights our customers.
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 2017 (2016: 15 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 R17 million (2016: R13 million) to the Group’s income; R10 million (2016: R9 million) of this charge is an accelerated expense for franchise staff.
CEDAR POINT TRADING 326 (PTY) LTD
The Group acquired the remaining 10% non-controlling stake in Cedar Point Trading 326 (Pty) Ltd at the beginning of the period under review, held by the previous business partner at a cost of R14 million. At the same time the Group sold a 10% stake in Cedar Point Trading 326 (Pty) Ltd at the beginning of the period under review to a new business partner. This stake was sold at a cost of R16 million, and kept the Group’s interest in this entity at 90%.
DISPOSAL OF AUSTRALIAN BUSINESS
Management elected to sell the operations of Italtile Australia (Pty) Ltd, a subsidiary of Italtile Limited. The business of Italtile Australia (Pty) Ltd represented the Group’s Australian property portfolio. A buyer was identified before the 2016 year end, the assets of the operations were therefore treated as a disposal group at 30 June 2016. The sale was concluded on 13 December 2016, at a total profit of R37 million which included a release of foreign currency in the foreign currency translation reserve.
Further detail pertaining to this disposal is included in note 36.
INTERNATIONAL TAP DISTRIBUTORS (PTY) LTD
The Group acquired a 19% non-controlling stake in International Tap Distributors (Pty) Ltd at the end of March 2017, held by the previous business partners at a cost of R76 million, increasing the Group’s interest in this entity to 98%.
The authorised share capital remains unchanged at 3 300 000 000 shares of no par value. Issued share capital is 1 033 332 822 (2016: 1 033 332 822) shares of no par value.
As noted above, 150 936 170 Italtile shares will be issued as part consideration for the Ceramic acquisition. Further, the Group intends to undertake a rights offer in order to ensure equitable treatment of all shareholders and afford minority shareholders the opportunity to avoid dilution of their shareholding as a result of the acquisition. In terms of the rights offer, which Italtile intends to undertake subsequent to the effective date, a total of 22 shares will be offered for every 100 shares held in Italtile at R11,57 per rights offer share. Management anticipates that the rights offer will be completed by mid-November 2017.
The Board declared a final gross cash dividend (number 102) for the year ended 30 June 2017 of 14,0 cents per ordinary share to all shareholders recorded in the books of Italtile as at the record date of Friday, 8 September 2017. The Group has maintained its dividend cover of 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:
- Ms Alessia Zannoni retired as a non-executive director on 25 November 2016;
- Mr Nick Booth, formerly Chief Executive Officer, announced his decision to take early retirement with effect from 28 February 2017. He stepped down from executive duties on 1 December 2016, and was succeeded by Mr Jan Potgieter, formerly the Group’s Chief Operating Officer; and
- Ms Gugu Mtetwa was appointed as a non-executive director with effect from 28 January 2017.
In accordance with the Company’s Memorandum of Incorporation, Mr G A M Ravazzotti, Mr S G Pretorius and Mr S I Gama 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 N V Mtetwa as a 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 33, 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 the table below. Refer to the SENS announcement on 6 September 2017 for details of change of interests between 30 June 2017 and the date of this Integrated Annual Report.
|#||Beneficial interest in BEE Special Purpose Entity.|
|*||Retired on 28 February 2017.|
DIRECTORS’ PARTICIPATION IN SHARE INCENTIVE SCHEMES
Directors’ holdings under the Long-Term Incentive Plan and Share Appreciation Rights Scheme are set out in the table below:
|Director||Awards held at
1 July 2016
during the year
|Awards held at
30 June 2017
|N Booth*||3 000 000||1 200 000||(750 000)||(3 450 000)||—|
|J N Potgieter||3 000 000||1 000 000||—||—||4 000 000|
|B G Wood||2 712 500||800 000||(925 000)||—||2 587 500|
Directors’ holdings under the Executive Retention Plan are set out in the table below:
|Director||Awards held at
1 July 2016
during the year
during the year
during the year
|Awards held at
30 June 2017
|N Booth*||1 000 000||3 000 000||(1 300 000)||(2 700 000)||—|
|J N Potgieter||1 000 000||3 000 000||—||—||4 000 000|
|B G Wood||500 000||1 000 000||—||—||1 500 000|
Refer to note 6 for further details pertaining to these schemes.
* Retired on 28 February 2017.
The emoluments paid to each director during the year ended 30 June 2017 by a subsidiary company are set out in the table below.
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.
|All figures in R000’s||Salary||Short-term
|N Booth*||1 718||910||282||6 944||1 192||11 046||3 200|
|J N Potgieter||2 477||772||409||11 573||260||15 491||3 091|
|B G Wood||2 113||647||337||7 366||163||10 626||13 644|
|2017||6 308||2 329||1 028||25 883||1 615||37 163|
|2016||6 662||372||1 090||11 133||678||19 935|
|All figures in R000’s||Board
|G A M Ravazzotti||1 359||—||1 359||1 215|
|S I Gama||236||—||236||145|
|S M du Toit||752||—||752||492|
|S G Pretorius||479||—||479||316|
|M V Mtetwa#||94||—||94||—|
|2017||3 309||—||3 309||—|
|2016||2 562||—||2 562|
|Aggregate emoluments of directors who served during the year||40 472||22 497|
|*||Retired on 25 November 2016.|
|#||Appointed 28 January 2017.|
Details of the Company’s interest in its subsidiaries are set out in note 38.
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 1 344 employees (2016: 1 248).
At the annual general meeting of shareholders held on Friday, 25 November 2016, 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.
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||22 687 500||17 687 500|
|Awarded during the year||5 600 000||6 100 000|
|Vested and exercised during the year||(8 175 000)||(1 100 000)|
|Forfeited/cancelled during the year||(4 825 000)||—|
|At 30 June||15 287 500||22 687 500|
Executive Retention Plan
The Executive Retention Plan is an additional mechanism, over and above the Long-Term Incentive Plan and Share Appreciation Rights Scheme, 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||3 000 000||3 200 000|
|Awarded during the year#||7 000 000||1 000 000|
|Vested and exercised during the year||(1 300 000)||(1 200 000)|
|Forfeited/cancelled during the year||(3 200 000)||—|
|At 30 June||5 500 000||3 000 000|
Refer to note 6 for further details pertaining 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 annual general meeting of 17 November 2017, shareholders will be requested to appoint Ernst & Young Inc. as auditors for the 2018 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
Cnr William Nicol Drive and
|Postal address:||PO Box 1689
|Telephone number:||+27 (0) 11 510 9050|
|Fax number:||+27 (0) 11 510 9060|