Directors' report

PRINCIPAL ACTIVITIES OF THE COMPANY

Retail

Italtile Limited ("Italtile" or "the Company" or "the Group"), headquartered in Bryanston, Johannesburg, is a leading retailer and manufacturer of tiles, bathroomware and related products in South Africa.

Franchising

The Group operates as a franchisor, featuring a streamlined parent operation focused on growing market share and fostering entrepreneurial opportunities through its franchise and joint venture programmes.

The Group is represented via its high-profile branded retail outlets, Italtile Retail, CTM, TopT and U-Light, 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 all retail brands and across multiple territories. 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, lighting, décor and tools.

As at 30 June 2021, the store network comprised 206 stores, including six webstores (2020: 198 stores and six webstores), situated in Southern and East Africa.

Property investment

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 manufacturing operations comprise well-maintained state-of-the-art factories which are supplied with high-quality raw materials sourced from productive quarries in close proximity to the plants.

Supply chain

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, bathroom furniture 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.

Manufacturing

Ceramic Industries (Pty) Ltd ("Ceramic")

The Group holds a 95,47% stake in Ceramic, its largest supplier of tiles, sanitaryware and baths. Ceramic delivers tactical advantages by supporting the Group's growth programme through supply of local high-quality, affordable products. This business contributed R747 million (2020: R325 million) to Group profit after tax for the full year.

Ezee Tile

The Group holds an effective 71,54% strategic stake in this business, a national manufacturer of grout, paint, adhesive and related products. The business reported growth for the period, contributing R88 million (2020: R48 million) to Group profit after tax for the full year. Subsequent to year-end, the Group acquired an additional 26% interest in Ezee Tile for a consideration of R120 million increasing its holding to 97,54% of Ezee Tile.

STATEMENTS OF RESPONSIBILITY

The responsibilities of the Group's directors are detailed here.

AUDIT AND RISK COMMITTEE

The Audit and Risk Committee report which discusses the responsibilities of this Committee and how these were discharged during the year appears in Independent auditor’s report.

FINANCIAL REVIEW

The financial results as detailed below, were adversely affected in the prior year by the global coronavirus pandemic and the related lockdowns in various territories related to such. The lockdowns commenced in the fourth quarter of the prior year under review and during this quarter, the Group incurred losses as it was unable to trade and profits remained suppressed thereafter as activities resumed incrementally with the phased relaxation of regulated restrictions. This does impact comparability of current year results against the prior year. The pandemic has not had a materially adverse effect on collection of receivable balances due to the Group, no material impairments directly attributable to the pandemic have been recorded.

System-wide turnover

System-wide turnover across the Group increased by 25% to R11,6 billion (2020: R9,3 billion). Retail store turnover increased by 26%, and manufacturing sales for the year under review increased by 35% compared to the previous corresponding period.

Trading profit

Reported trading profit increased by 70% to R2,6 billion (2020: R1,5 billion). Like-for-like operating cost growth (excluding profit share and BEE-related costs) was contained at 9%, with the largest contributors to cost growth being stock control costs, property costs and net IFRS 16 costs.

Earnings per share

The Group's basic earnings per share increased by 80% to 140,7 cents (2020: 78,3 cents), while headline earnings per share increased by 77% to 140,1 cents (2020: 79,2 cents).

Property, plant and equipment

The estimated current market value of the property portfolio increased to R4,5 billion (2020: R4,3 billion). During the year under review, capital expenditure of R420 million was incurred across the retail portfolio on an ongoing store upgrade programme and the acquisition of eight retail properties, while R462 million was invested across the manufacturing operations on plant, warehouse and equipment upgrades.

Cash and cash equivalents

The Group's cash balance increased to R1 081 million (2020: R860 million), with material cash flows for the year under review including:

• capital expenditure of R1 025 million (2020: R614 million);
• tax payments of R738 million (2020: R416 million);
• own share purchases totalling R184 million (2020: R243 million); and
• total dividend payments of R559 million (2020: R1 481 million).

PROSPECTS

In the current challenging trading conditions, our priority is to focus on those factors within our control and influence.

• We expect the home improvement trend to remain relatively strong until there is a comprehensive roll out of vaccines, and stay-at-home orders are eased. In addition, it has always been the Group's contention that consumption of tiles in the local market is substantially lower than comparable emerging markets and therefore offers a very strong growth opportunity.
• By executing retail excellence disciplines better at every customer touchpoint and reducing inefficiencies in our business, there are opportunities to achieve sales and profit growth and gain market share.
• As a Proudly South African company, we will continue to invest in the future of our business and the local economy through our store roll-out and upgrade programme and our capital expenditure projects.
• We will also continue to invest in ensuring our innovative online offering provides consumers with a seamless, personal digital experience to differentiate us from our peers.
• After a year of low-price inflation and margin sacrifice, average selling prices will be increased in line with inflation and appropriate margins will be maintained to support our business units and store operators.
• We are mindful that for the foreseeable future, the pandemic will continue to impact on the local economy and our business. We are satisfied that our clear-cut strategies, responsive systems, hands-on management team, and resilient business model will enable the Group to continue to respond nimbly and timeously to future challenges.

We anticipate that our results for the first half of the new financial year will be in line with the prior corresponding period. This conservative forecast is in view of the high base we reported in H1 2020, which was driven by pent-up demand, as well as the adverse impact of the unrest and ongoing pandemic since year-end. Given prevailing uncertainty, it is difficult to predict with accuracy the performance in the second half of the year. However, assuming trading conditions do not deteriorate even further, we anticipate delivering sales and profit growth for the full year.

The above forecast financial information has not been reviewed and reported on by the Group's auditors.

STATED CAPITAL

The authorised share capital remains unchanged at 3 300 000 000 shares of no par value. Issued share capital remains unchanged at 1 321 654 148 shares of no par value (2020: 1 321 654 148).

DIVIDEND ANNOUNCEMENT

The Board declared a final gross cash dividend (number 110) for the year ended 30 June 2021 of 25,0 cents per ordinary share to all shareholders recorded in the share register of Italtile as at the record date of Friday, 17 September 2021. The dividend cover remains at two and a half times.

SPECIAL CASH DIVIDEND

In light of the Group's strong cash generative nature and cash reserves being in excess of operational requirements, the Board has declared a gross special cash dividend of 50,0 cents per share (2020: 23,0 cents per share). This is the fourth special dividend paid in four consecutive financial years.

The special dividend will be subject to Dividend Withholding Tax at a rate of 20%, which will result in a net special dividend of 40,0 cents per share for those shareholders who are not exempt.

Italtile has obtained the relevant South African Reserve Bank approval in respect of the special dividend, and the Board has reasonably concluded that the Company will satisfy the solvency and liquidity test immediately after distribution thereof and for the next 12 months.

DIRECTORATE

The details of the directors of the Company are set out in Our board of directors.

Retirement of Chief Executive Officer and appointment of successor

As announced on SENS on 3 May 2021, Group CEO, Mr Jan Potgieter, will be retiring with effect from 31 December 2021. He will remain on the Board as a non‑executive director.

Mr Lance Foxcroft, formerly CEO of Ceramic will succeed Mr Potgieter with effect from 1 January 2022. He assumed the position of CEO-designate on 1 July 2021. Mr Tshepo Molefakgotla succeeded Mr Foxcroft as CEO of Ceramic on 1 July 2021. Prior to this appointment, Mr Molefakgotla served as Chief Operating Officer of Ceramic from 2016.

These appointments formalise the Group's succession plan which has been developed over five years and will ensure a seamless transition to a new era for the business.

Appointment of an independent non-executive director

As advised on SENS on 27 May 2021, Ms Lushane Prezens was appointed as an independent non-executive director with effect from 1 June 2021. Ms Prezens was also appointed to the board of Italtile's subsidiary, Ceramic.

In accordance with the Company's MOI, Mr GAM Ravazzotti, Ms S M du Toit, Mr S G Pretorius and Ms L Ravazzotti Langenhoven retire by rotation, and being eligible, offer themselves for re-election at the forthcoming AGM. Further, in accordance with the Company's MOI, the appointment of Ms L C Prezens as 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 35, 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 note 35. Refer to the SENS announcement on 9 September 2021 for details of change of interests between 30 June 2021 and the date of this IAR.

DIRECTORS' PARTICIPATION IN SHARE INCENTIVE SCHEMES

Directors' holdings under the Share Appreciation Rights Scheme, Executive Retention Plan and Italtile Retention Scheme as at 30 June 2021 are set out in note 35. Refer to the SENS announcement on 9 September 2021 for details of change of interests between 30 June 2021 and the date of this IAR.

DIRECTORS' EMOLUMENTS

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. Refer to note 35 for detailed disclosure relating to directors' remuneration.

SUBSIDIARY COMPANIES

Details of the Company's interest in its subsidiaries are set out in note 37.

The Company's interest in the profits or losses after taxation and the non-controlling shareholders' interest of its subsidiaries (direct and indirect) is:

	2021 Rm			2020 Rm
Profits	1 728			1 012

CORPORATE GOVERNANCE

The Corporate governance report is set out here.

SHAREHOLDERS

An analysis of the shareholdings of the Company appears here.

EMPLOYEES

As at 30 June 2021, the Group employed 2 613 employees (2020: 2 609).

SPECIAL RESOLUTIONS

At the AGM of shareholders held on Friday, 13 November 2020, three special resolutions were approved by the requisite majority of votes, namely: authorising the Company to purchase 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.

SHARE SCHEMES

Details related to share schemes operated by the Group are disclosed in note 6. The schemes include:

• Staff Share Scheme for all employees of the Group and its franchisees that meet certain qualifying criteria;
• Share Appreciation Rights Scheme 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;
• The Italtile Retention Scheme, which replaces the Executive Retention Plan, is an additional mechanism, over and above the SARS, to retain and reward selected employees and directors of the Group; and
• Ceramic Industries Escrow Retention Scheme, which replaces the Ceramic Industries Equity Incentive Scheme and Ceramic Industries Escrow Scheme, is a mechanism to retain and reward selected high-performing Ceramic Industries executives and senior management.

BORROWING POWERS

In terms of the MOI, the Company has unlimited borrowing powers.

AUDITOR

At the AGM of 13 November 2020, shareholders approved the re-appointment of PricewaterhouseCoopers Inc. as auditor for the 2021 financial year with Mr T Howatt being the individual registered auditor undertaking the audit.

SECRETARY

The Company Secretary is Ms E J Willis, whose business and postal address is:

Registered office:		The Italtile Building Corner William Nicol Drive and Peter Place Bryanston 2021
Postal address:		PO Box 1689 Randburg 2125
Telephone number:		+27 (0) 11 510 9050
Fax number:		+27 (0) 11 510 9060