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A message from our Chairman

Giovanni Ravazzotti
Chairman
OVERVIEW
Founded in 1969, this year marks the 50th anniversary of our Group. As a proudly South African business, it is rewarding to have overseen the growth of the Company from a small start-up to the enterprise it is today, consisting of the three retail brands, CTM, Italtile Retail and TopT, represented by 189 stores including five webstores, an integrated supply chain, substantial manufacturing assets, and an employer of 2 545 people across our operations.
Over the past five decades, this industry has also changed enormously. Not only has our competitive set and the profile of our customers changed, but so too has the technology, fashion and product quality. In my view, our industry is today one of the most innovative and competitive in the world.
Despite the significant and continuing evolution in the sector, one factor remains at the centre of what we, and our peers, focus on — customer satisfaction. Throughout the years we have strived to ensure that our shopping experience delivers the right product, at the right time, place and price. Our brands' consistent gain in market share is a solid endorsement of our endeavours.
Our people
Retail is an extremely demanding industry, and in my opinion, if you don't have a passion for the product and the customer, then you are in the wrong business. I know with conviction that the people of Italtile make this Company what it is, and I am energised and motivated on a daily basis by their commitment to investing their discretionary effort into their work.
As leaders, our challenge is to build competence, encourage enthusiasm and inspire dedication. In this light, we place significant emphasis on our core values of partnership and empowerment, reflected by our profit share incentives for every employee in the business, our focus on skills transfer, and the opportunities for career development at all levels across the operations.
I am pleased that our people balance sheet is in good standing:
- our leadership team is well structured, and together with our clear succession plans, gives me confidence and certainty over the long term;
- the health of our franchise network is good, and we continue to monitor and support our partners during difficult times. It is pleasing to note that our churn rate is extremely low, and there is strong demand from existing and prospective franchisees for our brands; and
- our most recent employee engagement survey produced our best score yet, which included an improvement in participation. Furthermore, productivity indicators have risen across the business. These results are particularly encouraging given the prevailing negativity in the external environment.
Our performance
Despite the difficulties which corporates in South Africa faced this year, I am satisfied that our business is in good shape and continues to offer a rewarding investment proposition to all our stakeholders. At the JSE Top 100 Companies event in November 2018, the Group was rated 14th in terms of best returns to shareholders over five years, an improvement from 37th position in the prior year. This acknowledgement is gratifying recognition of our efforts to meet and exceed the expectations of our stakeholders.
During the year under review, management focused on the following key operational priorities:
- stockholding and stock management;
- range and fashion;
- expense control and cost leadership;
- brand health and customer satisfaction;
- supply chain and integration;
- people competence and commitment; and
- leadership effectiveness and efficiency.
The good performance delivered by the business is a reflection of solid progress achieved across all these imperatives. The CEO's report provides further insight into the specific activities undertaken in this regard.
RESULTS
My commentary provides a macro-overview of the health of the business, while the Financial Director's report contains a detailed analysis of the Group's results for the year under review.
Given the current negative operating climate, it is encouraging to report on a performance that has been warmly received by shareholders.
While top-line turnover growth largely reflected the impact of the weak trading environment and constrained discretionary spend, I am satisfied that the management team is keenly focused on leveraging the opportunities within the business to capture disposable income and prepare for an upturn when that occurs. In this regard, there has been an improvement across all of the key metrics and sales levers, all aimed at ensuring an unparalleled customer experience.
Cost leadership is an ongoing management imperative, and it is notable that operating costs were held below inflation for the second consecutive year. Significantly, costs in the year under review were lower than the prior year, which is an impressive achievement and particularly important in an environment of constrained top-line growth.
The Group's net cash balance for the year rose by 77%, reflecting good cash management and consistently strong cash generation by the business. In recent years, companies have faced criticism for 'lazy' balance sheets; however, in the current testing environment our shareholders have expressed their support for low gearing and a conservative approach to cash management. The Board is satisfied that the balance sheet is well structured to fund continued investment in our store roll out programme and in building capacity in the manufacturing operations and supply chain.
DIVIDEND POLICY, ORDINARY DIVIDEND AND SPECIAL DIVIDEND
The Group’s dividend cover was reduced from three times to two-and-a-half times at the prior year end and has been retained at that level. We believe this policy simultaneously provides for good returns for shareholders and is prudent, given the current operating environment and recent incorporation of Ceramic’s significant manufacturing component, which in future may require higher ongoing capital expenditure than the business had pre-acquisition.
The Board has declared a final gross ordinary cash dividend of 41,0 cents per share for the year (2018: 38,0 cents per share), an increase of 8%.
Furthermore, in light of consistently strong cash generation and cash reserves being in excess of current operational requirements, the Board declared a special cash dividend of 50,0 cents per share (2018: 30.0 cents per share), in celebration of the Group's 50th anniversary.
Future special dividends will be considered contingent on operational and other capital expenditure requirements.
COMMITMENT TO CORPORATE GOVERNANCE AND SUSTAINABILITY
This Integrated Annual Report ("IAR") is a further step in improving our disclosure aligned with King IV*, and we will continue to strive to enhance our reporting over time.
The Board and management are committed to ensuring the Group achieves responsible growth and sustainable profitability. The material issues and key stakeholder reports respectively, outline our preparedness to manage the major risks which impact on the business and our responsiveness and accountability to our stakeholders.
For the first time, we have included a separate report on transformation in the IAR; the commentary on transformation details our agenda and achievements with regard to this fundamental imperative. I am pleased to report that following extensive interventions over the past three years, we have improved our BBBEE status level from non-compliant to level 6. We are committed to achieving our goal of level 5 in the year ahead and level 3 by 2022.
DEVELOPMENT AND IMPLEMENTATION OF STRATEGY
The Group's five-year strategic plans are developed and implemented through an effective decision-making framework. The Board is responsible for setting clear strategic direction, while management is held accountable for delivering measurable results. The Chief Executive Officer's report provides an evaluation of management's scorecard in terms of advancing and attaining these strategies. I am satisfied that good progress was achieved across our key strategic areas: the growth agenda (short and longer term); business model and operational benchmarks; human capital structure; and customer experience. The Group's high-performance culture will ensure that we continue to raise our game and strive for improved excellence in the year ahead.
STAFF SHARE SCHEME VESTING
The Group's equity-settled Staff Share Scheme is designed to incentivise employees to participate in the growth and profitability of the business. In this regard, the third allotment of shares, granted in 2015, vested on 31 August 2018. A total of 101 employees qualified, of which four employees opted to receive shares and the balance received the net value of the awards in cash. Cash payments after tax averaged R137 000 per individual (aggregate payments including income tax totalled R16,8 million), funded by the sale of the related shares to the market. Employees who elected to receive shares, received an average of 9 500 Italtile shares each (dependent on the individual's effective income tax rate).
During the review period, a sixth allotment of shares was made, comprising 3,3 million shares allocated to 150 eligible employees of the Group and franchisees. As at 30 June 2019, there were 373 participants in the scheme, holding 7,5 million Italtile shares.
Since implementation of the scheme in 2014, a total of 16,4 million shares have been allocated to eligible employees. Over the five-year period to date, share awards of 569 staff members have vested; the related aggregate payments, including tax, totalled R96 million.
ITALTILE AND CERAMIC FOUNDATION
The goal of our Foundation is to work towards the transformation and upliftment of previously disadvantaged communities by providing assistance to needy organisations and charities in the fields of education, sport and conservation.
In the education sector, the Foundation sponsored various childhood development initiatives, upgraded facilities, and provided bursaries for tertiary students. Institutions which received assistance included the Hope School for the Disabled, Mahareng Secondary School, Salvazione Christian School, Forte High School (through One School at a Time), and Setlabotjha Primary School.
Over the past five years, the Foundation has built and maintained three sports fields, in Meadowlands, Soweto; Thohoyandou in Limpopo; and Acornhoek in Mpumalanga. In the reporting period, in conjunction with the Dreamfields organisation, soccer and netball leagues were set up at schools neighbouring the sports fields. Through the Foundation's sponsorship, Dreamfields has been introduced to 40 schools in Acornhoek, 16 in Thohoyandou, 10 in Sebokeng, eight in Hammanskraal and another eight in Kagiso.
During the year under review, our support for conservation was advanced through continued sponsorships of the WWF, the Lapalala Wilderness School, and the Birdlife Important Biodiversity Area Programme.
I would like to pay tribute to all of the abovementioned organisations for the transformative work they do in their local communities and environments. I would also like to thank the Foundation's Trustees and our staff who volunteer their services to ensure the Group makes a meaningful difference in the communities in which we operate.
The report herein outlines the work of the Foundation in more detail.
CHANGES IN BOARD COMPOSITION
During the review period, the following changes were made to the composition of the Board:
- Ms Zizipho Nyanga CA(SA) was appointed as an independent non-executive director and member of the Audit and Risk Committee, with effect from 1 June 2019. The Board welcomes Zizipho and looks forward to working with her.
- Ms Nomagugu ("Gugu") Mtetwa tendered her resignation as a non-executive director and a member of the Audit and Risk Committee with effect from 31 August 2019, due to other professional commitments; and
- Ms Ndumi Medupe tendered her resignation as a non-executive director and Chairman of the Audit and Risk Committee due to a potential conflict of interest as a result of having joined the employ of the Group's bankers, Nedbank Group. Ndumi's resignation is effective from the conclusion of the Group's annual general meeting ("AGM"), which will be held on or about 14 November 2019.
On behalf of the Board I would like to thank Gugu and Ndumi for their valuable contribution and wish them well in their future endeavours.
Looking ahead, we have a comprehensive succession plan in place that is designed to ensure continuity and stability in the constitution of the Board and in the business.
MANDATORY ROTATION OF AUDITORS
In respect of the Independent Regulatory Board for Auditors' 2017 ruling on mandatory audit firm rotation, the Group's incumbent auditors, Ernst & Young Inc. ("EY"), will conclude their tenure with effect from 1 November 2019. On behalf of the Board, I would like to extend our appreciation to EY for their long-standing service to the Group.
The Board will recommend the appointment of PricewaterhouseCoopers Inc. as the Group's auditors with effect from 1 November 2019.
SUBSEQUENT EVENT
Black economic empowerment transaction and dividend declaration
Subsequent to year end, we concluded a BBBEE ownership transaction with Yard Investment Holdings, in order to improve the Group's black ownership credentials, and to establish a medium to long-term relationship with a BBBEE partner with international commercial experience relevant to the Group's business. The transaction has been implemented by way of a general issue of shares for cash, issued at a price of R11,82 per subscription share and equating to approximately 2% of the total ordinary shares in issue following implementation of the transaction.
In light of the BEE transaction and the Group's cash reserves being in excess of operational requirements, a gross special cash dividend of 23,0 cents per ordinary share was declared.
Shareholders are referred to the announcement published on SENS on 10 September 2019 for further details in this regard.
On behalf of the Board, I would like to welcome our new partners, Leslie Maasdorp, Yogesh Narsing, Badian Maasdorp and Mikhail Maasdorp. We look forward to building a long and rewarding relationship with them.
OUTLOOK
It is likely that the prevailing socio-economic challenges will persist for the foreseeable future and, in that light, we anticipate that consumer confidence and spend will remain weak. Despite this negative external environment, we remain optimistic that there are opportunities within the business to continue to grow responsibly and sustainably. The experience gained over 50 years of operating provides good learnings, and our clear strategies and the resourcefulness and determination of our people will afford us an important strategic advantage.
APPRECIATION
The accomplishments achieved this year, in testing circumstances, are attributable to our dynamic management team and dedicated employees and franchise partners. Their commitment to the Group's growth agenda and long-term ambitions is recognised and commended. As I noted at the outset of this report, the quality and values of our people are what sets this business apart in a very competitive landscape and I would like to pay tribute to them for their enormous contribution.
We enjoy long-standing relationships with our private and institutional shareholders and we value their ongoing support as we strive to consistently reward their investment in our business.
I appreciate the participation of my colleagues on the Board and the constructive counsel received from them during the year.
I would also like to thank our business partners and advisers for their continued contribution.
Our customers are our reason for being and our focus every single day is to improve the experience we offer them. We recognise that in times of financial hardship, their allocation of discretionary spend is particularly carefully considered, and thus our challenge and goal is to ensure that our offering is their first choice.
G A M Ravazzotti
Chairman