It is traditional for my report to commence with an overview of the business and conclude with an expression of my appreciation to our people and other stakeholders. In these unprecedented times, I am going to depart from tradition and begin by thanking our entire team for their invaluable contribution over the past year and, in particular, their extraordinary efforts since the outbreak of the COVID-19 pandemic.
At every level of the business across our operations, from the support centre to our stores and our factories, our executives, management, franchisees and staff, have demonstrated exceptional courage, agility and discipline to help curb the spread of the pandemic and ensure we have created a safer, better working environment for our customers and each member of our team.
Despite the personal sacrifices and suffering many endured, it is testament to their hard work and commitment that we quickly turned around the business from total lockdown and remote working to steady, safe start-up of our factories and stores.
The courage, agility and discipline of every member of the team made a huge difference to the business surviving, reopening – and staying open. The strong double-digit growth reported in June, July and August is a reflection of their efforts.
Further to the theme of our exceptional people, we profile four individuals who exemplify the spirit of Italtile and the uniqueness of our culture. They are a good representation of the component parts of our business, namely our franchisees, retail, supply chain and manufacturing operations. Collectively they have 89 years of experience with the Group, the longest serving of them joined the Company 27 years ago and the most recent, 16 years ago. It is with pride that I acknowledge the calibre of this next generation of our leaders. Each one of them has proved that hard work, perseverance and clearly focused goals will lead to success. They serve the business with distinction and are a tribute to the Group and an inspiration to their colleagues.
Given the adverse external environment, management's focus continued to be on the internal growth factors within our control, namely, sales, cost leadership, productivity improvements and performance culture. The lockdown provided a vital opportunity to critically and objectively appraise our progress in these key focus areas and to hone our operations to endure and flourish in the demanding new environment.
Significantly, we have recognised that with renewed vigour and enhanced productivity, we can do more with less, while retaining the best of our offering. By focusing on consistent investment in the shopping experience, entrenching retail excellence principles, and winning over customers, we will continue to recover and build on the foundation for sustainable growth.
The reports of the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") respectively of this document provide a detailed account of the Group's operations and results for the review period. My commentary is therefore a summary of the key information pertaining to the general financial wellbeing of the business.
Prior to the onset of the pandemic in late March, operating conditions in the country were already challenging, with consumers facing severe financial hardship and demonstrating low levels of investor confidence. Unfortunately, with the advent of the pandemic, economic and social conditions worsened materially, impacting adversely on employment levels and household disposable income.
In this context, I am satisfied that despite the setbacks experienced, the decline in trading profit was contained to 16%. I am also pleased to report that ongoing efforts to entrench cost leadership and improve working capital management paid off, reflected by limited cost growth and closing cash reserves of R860 million. The strong balance sheet has enabled the reinstatement of our roughly R800 million capital expenditure programme and ensured that we had no need to utilise the short-term contingency facility that was negotiated prior to the lockdown. It is also noteworthy that the debtors' book remains healthy.
BOARD FOCUS: ENVIRONMENTAL, SOCIAL AND GOVERNANCE SUSTAINABILITY
With the benefit of 51 years of trading, sustainability is not a new concept to us; it is a key operating procedure which underpins the solid foundations on which this Group is built.
Proudly South African
As a Proudly South African franchisor, retailer and manufacturer, our strategies are designed to focus on the sustainability of the business and the environment in which we operate.
This focus is twofold:
- by selling local products manufactured by local people, we will create jobs and contribute to the economy. Key to this philosophy is our investment in training, skills development, and cutting-edge technology to ensure our people and products are globally competitive; and
- by ensuring we conduct our operations in an ethical and responsible manner, we strive to continue to reduce our carbon footprint and enhance the natural environment of our local communities.
- Commitment to the planet
Global warming and the negative impact of climate change are immense cause for concern. Having been involved in conservation for numerous years, I am extremely aware of the deteriorating condition of our natural environment and the responsibility we have to restoring and nurturing the planet for the generations which follow us.
The products we sell and the non-renewable resources we consume
Across our retail brands, our range of eco-friendly, water-saving products continues to expand and includes taps, shower heads and toilets. Italtile Retail, specifically, has deservedly earned the reputation as the industry front-runner in environmentally sensitive products. With the launch of our EcoTec range of tiles, discussed below, we have enhanced the Group's offering substantially.
As a manufacturing business, we recognise that our operations have an impact on the environment and accordingly, we implement an extensive range of initiatives devoted to reducing our carbon footprint. Our sustainability agenda is promoted through the use of cost-effective, energy efficient practices in the construction of new buildings and the renovation of older stores and factories. Optimal use of natural light, solar technology, new-generation lighting, water-saving taps, rain water harvesting and environmentally sensitive building materials is prioritised. Our factories use the latest technology in their operations and rank among the most energy efficient in the world. Gas consumption is reduced through the use of state-of-the-art burner technology and heat recovery systems. Process water is recovered and reused, ensuring that no effluent leaves the factories. Large solar generation systems have been installed in our Australian factory and at the Betta sanitaryware site in South Africa. At our raw material quarries, rehabilitation is conducted concurrently during use and when end-of-productive-life is reached.
Innovation strategy dovetails with sustainability strategy
Ceramic has a long-standing reputation for global standard, industry-leading technology. Over the past year, significant investment has been made in linking our innovation strategy with our sustainability strategy. I am delighted to announce our latest innovations:
- the launch of our EcoTec tile range;
- the substantial upgrade of the Samca Floor tile factory; and
- the further roll-out of solar power installations.
EcoTec tile range
Our continued focus on environmental sustainability will be furthered with our newly launched EcoTec tiles, which are designed specifically to reduce carbon footprint. Made to be thinner, the tiles are 24% stronger than the minimum SABS requirement and meet global standards. Significantly, they are produced from locally sourced materials and require 10% fewer natural resources. When compared to imported tiles, the EcoTec manufacturing process emits 30% less CO2, while the product requires 25% less packaging and costs 25% less per m2 to transport from source, contributing to a significant carbon reduction.
Samca Floor tile factory upgrade
This factory has been temporarily decommissioned and will be upgraded with a revolutionary technology that will enable production of new format floor tiles. The innovative new equipment will also include the latest burner technology and advanced heat recovery systems and will facilitate a reduction of up to 25% in gas and electricity consumption, together with the corresponding reduction in CO2 emissions. This product will also consume 15% fewer natural resources to manufacture.
Roll-out of solar power installations
A 3 MW solar installation is planned for our Vereeniging site by the end of 2021, which will reduce reliance on non-renewable energy and generate up to 25% of energy requirements (at peak generation in the day) on the site. We will also continue to roll out solar installations to a number of our stores.
The Group's environmental sustainability initiatives are discussed in more detail in the Environmental report.
During the review period, we continued the journey of transformation in the business with the conclusion of a Broad-Based Black Economic Empowerment ("BBBEE") deal in September 2019. The substantive deal with Yard Holdings improves the Group's black ownership credentials, while establishing a good relationship with a BBBEE partner with international commercial experience relevant to the Group's business.
I am pleased to report that following this transaction and based on sustained management focus on transforming the business through a range of meaningful interventions, the Group's BBBEE rating has improved from non-compliant in 2016, to level 4 in the review period, exceeding our target of level 5.
Our longer-term goal is to achieve level 3 status by 2022.
Community support: Italtile and Ceramic Foundation
Our Foundation is a Broad-Based Black Ownership Scheme which conducts public benefit activities on behalf of the Group in the spheres of education, sport and conservation, with the goal of contributing to the transformation and upliftment of previously disadvantaged communities.
During the review period, the Foundation sponsored various projects and charities in the education sector. These ranged from bursary programmes for high school and tertiary students with extreme financial need and high academic potential; construction and renovation of residences and facilities for needy schools; extra tuition for matric pupils and support for childhood development programmes; and sponsorship of recreational activities including a musical band which combines teaching music, movement and dance with core life skills. Institutions which received assistance include the Hope School for the Disabled; Salvazione Christian School; One School at a Time; PEN – Kagiso project; Setlabotjha Primary School and the Field Band Foundation.
The Foundation maintains the sports fields built by the Group over the past six years in Meadowlands in Soweto, Thohoyandou in Limpopo and Acornhoek in Mpumalanga. It also sponsors Dreamfields, an organisation that establishes soccer and netball leagues in schools and hosts referee and umpire workshops for school coaches for the benefit of the local children. The schools are supplied with soccer and netball equipment as well as training kits. With the Foundation's support, Dreamfields has a footprint in the following areas: 40 schools in Acornhoek; 16 in Thohoyandou; 10 in Sebokeng; eight in Hammanskraal; and eight in Kagiso. A total of 20 915 children participate in the Dreamfields programme.
The Foundation will be funding the construction of a new sports field in Steelpark, Vereeniging, commencing in September 2020.
The Group continued to support the Birdlife Important Biodiversity Area Programme, the Lapalala Wilderness School, the Stop Rhino Poaching organisation and the World Wide Fund for Nature.
COVID-19 relief projects
In addition to the donation made to the Solidarity Fund, support was provided for needy charities in the form of personal protective equipment, sanitisers, food parcels and operating funds, as well as electronic equipment for our bursary students to enable them to continue studying online during the lockdown.
The organisations that we support achieve transformative results in the communities and environments which they serve and they are to be applauded for their steadfast dedication and vision of a better future for all. Our Trustees and staff volunteer their services to make a meaningful and measurable impact on the communities in which we operate and I would like to thank them for their generosity and commitment.
The Foundation's report in Supporting our communities outlines in more detail the projects undertaken during the review period.
COMMITMENT TO CORPORATE GOVERNANCE
We have committed to enhancing our reporting over time and this 2020 IAR is further demonstration of our efforts to improve our disclosure aligned with King IV. The sustainability section in particular has been expanded and includes key information relating to our material issues, risks and opportunities; stakeholder engagements; transformation and environment reports; and our community support initiatives. The letter from the CEO that introduces the section will be useful for readers seeking detailed information regarding the Group's ESG journey.
DEVELOPMENT AND IMPLEMENTATION OF STRATEGY
The Board is responsible for setting clear strategic direction, while management is held accountable for delivering measurable results. The Group's five-year strategic plans are formulated and implemented through an effective decision-making framework and the plans are reviewed annually, in terms of relevance in evolving external and internal conditions.
In the year under review, pleasing progress was achieved across all our key performance indicators ("KPIs"): strategic plan; financial performance; human capital; BBBEE; customer satisfaction; and cultural fit and values. The CEO's report provides a detailed scorecard of management's execution of these key imperatives.
Following the Board's annual review, we have formally added the following KPIs to the executive scorecard: productivity; stakeholder relations; and ESG matters. While all three of these imperatives have historically formed part of the strategic plan, we have decided to upweight their relevance to reflect their increasing significance in light of changes in our business and the economy and in recognition of evolving stakeholder expectations.
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 2019. A total of 94 employees qualified, of which 89 employees opted to receive cash and the balance received the net value of the awards in shares. Cash payments after tax averaged R128 170 per individual (aggregate cash payments including income tax totalled R15,1 million), funded by the sale of the related shares to the market. Employees who elected to receive shares, received an average of 8 500 Italtile shares each (dependent on the individual's effective income tax rate).
During the review period, a seventh allotment of shares was made, comprising 5,2 million shares allocated to 231 eligible employees of the Group and franchisees. As at 30 June 2020, there were 437 participants in the scheme, holding 9,4 million Italtile shares.
DIVIDEND POLICY, ORDINARY DIVIDEND AND SPECIAL DIVIDEND
The Group's dividend cover was retained at two-and-a-half times. We believe this is a prudent level, which affords good returns for shareholders and simultaneously makes provision for an ongoing capital investment programme across the retail and manufacturing operations.
A final gross ordinary cash dividend of 10,0 cents per share (2019: 19,0 cents) was declared, which, together with the interim gross ordinary cash dividend of 23,0 cents per share (2019: 22,0 cents per share), produces a total gross ordinary cash dividend of 33,0 cents per share, a decrease of 20% on the prior year.
In light of the BBBEE transaction with Yard Holdings and the Group's cash reserves being in excess of operational requirements, a special cash dividend of 23,0 cents was declared in October 2019. The special dividend, the third paid in three consecutive years, was declared out of income reserves, reflecting the Group's strong cash generating ability. Further special dividends will be determined by cash reserves in excess of the Group's operational requirements and other unforeseen events.
CHANGES IN BOARD COMPOSITION
Resignation and appointment of executive directors
With effect from 30 June 2020, Tsundzukani Mhlanga resigned as Executive Director: Finance and Administration. She has been succeeded by Brandon Wood as CFO with effect from 3 August 2020. The Board would like to thank Tsundzukani for her valuable contribution and wishes her well in her future endeavours.
Brandon's appointment follows an extensive recruitment process conducted by the Group's Nominations Committee. He is extremely well qualified for the position, having previously served as CFO from 2013 to 2018, whereafter he held the positions of Executive Director: Commercial and Supply Chain and subsequently Executive Director: Retail. The Board is delighted with Brandon's appointment and confident that he will continue to add tremendous value to the Company in this expanded role.
In light of the Board's stated goal to streamline the Group's overhead cost structure, accelerated by the current COVID-19 era, the position of Executive Director: Retail will fall away.
Resignation and appointment of independent non-executive directors
With effect from 25 March 2020, Zizipho Nyanga resigned as an independent non-executive director and a member of the Audit and Risk Committee. The Board would like to thank Zizipho for her service and wishes her well for the future.
Isaac Malevu, CA(SA), was appointed as an independent non-executive director and member of the Audit and Risk Committee with effect from 25 March 2020. Isaac is currently the Chief Financial Officer for Client Coverage in the Corporate Investment Banking division within the Standard Bank Group Limited. Prior to that he was audit partner at Ernst & Young Inc. Isaac has in excess of 20 years of international experience and thought leadership in a range of specialist areas including finance, treasury, corporate strategy, risk management and corporate governance. His appointment reflects the Group's continuing commitment to enhancing the diversity of the Board and the expertise available to the business.
The Board welcomes Isaac and looks forward to his contribution.
MANDATORY ROTATION AND APPOINTMENT OF AUDITOR
In respect of the Independent Regulatory Board for Auditors' 2017 ruling on mandatory audit firm rotation, the Group's former auditor, Ernst & Young Inc., concluded its tenure on 1 November 2019, and was succeeded by PricewaterhouseCoopers Inc. The designated auditor is Mr Thomas Howatt.
It is unlikely that macro-economic and social conditions will improve materially in the foreseeable future. Consumer confidence and spend are expected to remain subdued and the retail sector will continue to experience extreme pressure.
In this challenging external context, our strategy remains steadfast: to optimise on opportunities and improvements within our business to extract growth and gain market share.
Having come through the worst of the pandemic well, I am satisfied that the business is in good shape to face the challenges that lie ahead. I am confident that the team and the strategies we have in place will enable us to continue to grow and to meet our stakeholders' expectations.
The year under review has tested us all. It has presented unbelievable difficulties for most and demanded extraordinary effort from many. In this light, my appreciation to our various stakeholders is heartfelt. Your support throughout this period has been inspirational and encouraging:
- to our customers, who waited patiently for lockdown to end and then returned with enthusiasm, I would like to thank you for your cheerful compliance with our rigorous safety protocols and for your continued loyalty to our offering. We are in business to serve you and will strive to ensure that your shopping experience is a memorable one;
- to my valued Board colleagues, thank you for your commitment and constructive input as we navigated uncharted waters over the past months;
- to our business partners and advisers, I extend our appreciation for your continued support despite the obstacles you faced in delivering uninterrupted service; and to our long-standing private and institutional shareholders,
- please accept our gratitude for your steadfast endorsement of our business through your shareholding. We will endeavour to continue to reward your investment.
In my opening comments I paid tribute to the people of Italtile. I know with conviction that their contribution is what gives our business the edge and keeps our offering top of consumers' minds in a very competitive trading landscape.
G A M Ravazzotti