italtile limited the strength of our...

2 Italtile Limited | Integrated Annual Report 2015

The strength of our brands

ITALTILEFounded in 1969, this

brand is widely

acknowledged as a style

icon in the premium

home-improvement market.

As a leading fashion retailer of exclusive

international and local ranges of tiles,

bathware and related products, Italtile Retail

offers a luxurious shopping experience for

both residential and commercial clients.

LAUFEN Laufen

Bathrooms

established in 1892, is a traditional Swiss

brand reflecting a symbiosis of design,

quality and functionality. What makes

Laufen products unique is that their Swiss

design unites two major design trends:

emotion and romance, with precision and

clarity. Laufen products including

washbasins, bath tubs, toilets and bidets

are exclusive to Italtile in South Africa.

SANT’AGOSTINO Ceramica Sant’Agostino is an Italian

manufacturer of a wide range of premium

products designed to satisfy evolving

technical and stylistic market requirements

for ceramic and porcelain tiles.

ORGANIC EARTH When it comes

to originality

and integrity, there are tiles – and then there

is Organic Earth.

South Africans love and appreciate terracotta

– the same way Italians do!

AMALFIAmalfi taps and accessories are specially designed

for the customer who seeks quality products at an affordable price. The Amalfi brand is exclusive to CTM and is available at all stores.

TIVOLI Tivoli is a South African registered brand bringing the latest and the best of what Italy has to offer. With a 10-year guarantee these products are quality driven. Tivoli is the largest Italian brand of taps in South Africa.

PROGRIP This specifically

customised range of

tile adhesives is a

brand leader in the industry, based on its

quality, performance and good value.

Pro Grip is manufactured exclusively for

Italtile Retail, CTM and TopT.

CRYSTALTECH “Technology in style” defines

the perfect combination of

form and function.

Crystaltech Showers are manufactured from

specially treated, tempered glass that affords

stylish but safe showering. This range of

framed, frameless and corner showers affords

homeowners a variety of options to match the

perfect cubicle with their specific bathroom

space.

I


COTTO Emerging in

1979 as an

exporter of mosaics; today Cotto is one of the

largest manufacturers of sanitaryware

globally.

Cotto operates with the motto “The Right

Solution” whereby a variety of consumer

needs can be met with one right solution.

This motto is clearly evident in their practical

ranges of washbasins, toilets and bidets

available only from Italtile.

KILIMANJARO Simple. Effective. Capturing the African

landscape in a tile couldn’t be more

incisive. From the anonymity of a

commodity, to one of South Africa’s most

sought after tile brands. Available from

CTM, Kilimanjaro tiles have captured

the homemakers’ imaginations.

CTM Launched in

1983, CTM is

a household name in South Africa, enjoying

strong brand affinity based on its reputation

for a high quality year-round value

offering. Represented by 82 stores in South

and East Africa, CTM is the largest specialist

tile and bathroom retailer in the country.

STONEWALL Stonewall is the modern contemporary

designer expression of timeless natural stone.

Easy to install tile sheets enable homeowners

to replicate their favourite stone-look with

confidence and ease.

ELF More than a trusted

brand, Elf is a special

range of laminate

floors, carefully

selected from

leading German and European factories.

Elf offers a class-leading guarantee, backed

by CTM, nationwide. Nothing beats the

authentic look of natural wood for that

warm, homely feeling!

GALLERIA This extensive

range of

mosaics

enables homeowners to explore their interior

designer dreams. Available in a myriad of

textures, styles and colours, Galleria mosaics

create a decorative playground for personal

expression in complementing tile choices.

CASH & CARRY

TopT This brand is a one-stop

home finishing supplier

of good quality, affordable

merchandise and the

low-cost leader in its entry-level market

segment.

TopT has 35 stores in seven provinces,

situated in under-serviced rural areas and

outlying markets in close proximity to urban

townships.

TUFF The TUFF range

comprises

class-leading adhesives and paints that are

innovatively packaged and specifically

engineered to provide real value for the

entry level market. This brand is exclusive

to the TopT stores.

DIVA The DIVA brand is an

exclusive range of

good quality taps designed and priced

specifically for the TopT stores in South Africa.

Available in both conventional and single

lever styles there is a range to suit all tastes.

of South Africa’s most

ands. Available from

les have captured

magin

and East Africa, CTM is the larges

tile and bathroom retailer in the c

ELFM th t t d

GT

n

LF

ave captured

nations.

aut

war

TopT


Group at a glance

Supply and Support Services Retail

Contribution to Group profit before tax Contribution to Group profit before tax

Company Nature of business

South Africa

Italtile Ceramics (Pty) Ltd

Italtile Retail (Pty) Ltd

TopT Ceramics (Pty) Ltd

Retailers of tiles, laminated boards, brassware, sanitaryware and accessories through CTM storesRetailers of tiles, brassware, sanitaryware and accessoriesRetailers of tiles, laminated boards, brassware, sanitaryware, hardware, accessories and other home-finishing products

Africa (CTM)

CTM Kenya Ltd

Orban Investments 375

(Pty) Ltd

Braintree (Pty) Ltd

Retailers of tiles, brassware, sanitaryware and accessories in KenyaRetailers of tiles, laminated boards, brassware, sanitaryware and accessories in NamibiaRetailers of tiles, laminated boards, brassware, sanitaryware and accessories in Botswana


South Africa

International Tap

Distributors (Pty) Ltd

Cedar Point Trading

326 (Pty) Ltd

Distribution Centre

Distributor of brassware

and accessories

Distributor of tiling tools,

laminated boards,

cabinets, décor and

accessories

Procurement specialist

28%2015 24%

2015


Properties

Contribution to Group profit before tax


South Africa

F.B. Ashman (Pty) Ltd

Allmuss Properties (Pty) Ltd

Emerald Sky Trading 736 (Pty) LtdMagnolia Ridge Properties 291 (Pty) LtdPenates Logistics (Pty) Ltd

Property Investments – Italtile Property HoldingsProperty Investments – CTM Property HoldingsProperty Investments – TopT Property Holdings Property Investments – CTM and Italtile Property Holdings Property Investments – Supply and Support Services

Australia

Norstorm Pty LtdMelkbos Pty Ltd

Property InvestmentsProperty Investments

Africa

Allmuss Botswana (Pty) LtdAllmuss Properties Namibia (Pty) LtdAllmuss Lesotho (Pty) LtdAllmuss Properties Kenya Ltd



Franchising



Italtile Franchising

(Pty) Ltd

Bearer of Group trademarks

19%2015

Associates



South Africa

Ceramic Industries (Pty) Ltd

Ezeetile

Manufacturer and supplier

of tiles, sanitaryware and

baths

Manufacturer and supplier

of grout, adhesive and

related products

Italy

SER-Export s.p.a. Procurement specialist

6%2015

23%2015


We are mindful that our customers choose to shop in our stores rather than at competitor offerings because of the experience they enjoy. Accordingly, we will continue to focus our efforts on constantly enhancing that experience.


Chairman’s statement

OverviewCelebrating the Group’s 45th anniversary last year, I noted in my report

that our challenge would be to build on the foundations of the past

four and a half decades and elevate the business to a new level.

I outlined our immediate goals as being to grow market share in

existing and new markets, develop new store formats to provide

expansion flexibility, and implement best practice benchmarks and

controls across all major disciplines of the business.

I also proposed that the new key management appointments of

CEO Nick Booth and COO Jan Potgieter, combined with existing skills

and experience in the business, would position the Company for

further growth.

I am pleased to report that our scorecard for the review period reveals

that good progress was made.

Both the retail operation and Supply Chain gained traction in

existing and new markets;

We opened 11 new stores (TopT) and secured a pipeline of

properties for our other brands, which are specifically aligned with

unique, flexible trading formats;

We made inroads into standardising an improved customer

experience across our store network; and

The management team has bedded down well and contributed to

advancing the Group’s growth strategies. Performance and energy

levels have improved across the business.

During the year notable achievements were recorded in both the retail

operations and Supply Chain.

In the retail operations, which comprise our three brands, Italtile Retail,

CTM and TopT, intensified focus on retail best practice enabled store

operators to capitalise on important sales levers, thereby increasing

turnover and profitability. Particular attention was paid to the following

key levers: upselling and cross-selling to improve the average basket

size and value; enhancing the customer contact ratio (increasing line

items per quote and invoice, and conversion of quotes to sales);

improving stock management (including improved in-stock levels of

business critical items; stock turn; and stock control discipline,

promoted by improved integrity of data); and increasing online sales

via CTM’s web store. These levers will continue to be prioritised in the

year ahead.

Additionally, during the period, our key strategic imperative, the

Business Optimisation Programme (“BOP”) was implemented in the

back-end of the business, including two of the Group’s vertically

integrated Supply Chain operations, International Tap Distributors and

Cedar Point, as well as the Support Services divisions.

Throughout this Integrated Annual Report we talk at length about the

BOP and the positive impact it has had on the organisation.

In the forthcoming period the programme will be rolled out into the

retail operations and is expected to unlock further value.

Trading conditionsNotwithstanding increased pressure on discretionary spend and lower

levels of confidence in the economy, consumers in the renovations

segment continued to invest in home improvements. In contrast, the

new build segment was subdued, reflecting the impact of infrastructure

constraints on new housing developments and a reluctance by

homeowners to commit to building new homes in the uncertain

environment.

The key features of the period were continued price sensitivity of

consumers and the deterioration of the Rand. Both factors affected

pricing and margin pressure, and threatened the sustainability of

those traders heavily reliant on imported products. The Group’s

international buying power and strategic relationships with local

suppliers largely enabled it to manage these conditions.

ResultsThe solid results reported for the year were achieved through better

execution of retail best practice in the stores, as well as improvements

implemented in the key back-end business functions, including

suppliers, systems, and logistics.

The retail operations recorded a good performance, illustrated by each

brand’s growth and gain in market share across most of our trading

regions and merchandise categories.

The Group’s Supply Chain reported increased turnover and profitability,

reflecting improved sales to the store network across the brands.

System-wide turnover from continuing operations grew 17% to

R5,22 billion (2014: R4,46 billion), while same store revenue

increased 16%.

Trading profit rose 21% to R905 million (2014: R751 million).

Earnings per share increased 32% to 75,9 cents (2014: 57,4 cents),

while headline earnings per share improved 22% to 71,6 cents

(2014: 58,7 cents). This disparity is primarily based on a R19 million

gain and R14 million gain derived respectively from the liquidation

distribution and sale of shares in two subsidiary companies.

These results are discussed in more detail in the Review of operations

on page 14 of this report.


Ordinary dividendThe Board has approved a final gross cash dividend of 13,0 cents per

ordinary share (2014: 10,0 cents per share), which together with the

interim gross cash dividend of 12,0 cents per share (2014: 9,0 cents

per share) produces a total gross cash dividend declared for the year

of 25,0 cents per share (2014: 19,0 cents per share), an increase of

32%. The Group’s dividend cover remains unchanged at three times.

Corporate governance and sustainabilityThe Group continued to improve its application of the business

principles outlined in the King III report. A detailed analysis of the

progress made in terms of compliance is contained in the

Strategic Imperatives and Material Risks report and Corporate

Governance report on pages 38 and 49 respectively. The Board

and management of Italtile are committed to a sustainable business

and an ethical corporate culture, which I believe is illustrated

throughout this document.

Human capital developmentAligned with the Group’s growth programme, development of human

capital across the business has been the subject of intensified

attention during the review period. Our goal is to build a strong

resource of fit-for-purpose personnel aimed at increasing capability

and capacity across the Group. In the retail operation, restructuring

took place at management and operator level in our CTM and TopT

brands, while capacity and competencies were improved in the

Support Services divisions including IT and e-commerce, the Property

portfolio, and Human Resources and Training. It is anticipated that

these changes will position these units to better manage the Group’s

forecast growth.

Mentorship and leadership development are of particular importance

to me and I am pleased to report that our Operator Training Programme

conducted in conjunction with Stellenbosch University continues to

produce candidates who are well qualified for store management

positions. In August we launched a new Retail Academy Programme in

collaboration with the Gordon Institute of Business Science.

The Group has developed a culture of empowerment and

entrepreneurship over many years, and we strive to entrench this

through a range of mechanisms including opportunities for

employees to partner with us through profit sharing arrangements and

co-ownership of stores.

For the first time, we have introduced rural learnerships and workplace

experience for learners in the Group’s various business units and retail

brand operations. This initiative is structured to develop a potential

resource from which to recruit future employees.

Staff Share Incentive SchemeOver the past 20 years, the Group has employed profit-sharing

practices aimed at promoting ownership and partnership in the

business with our employees. Complementing this long-standing

tradition, we have also implemented an equity-settled Staff Share

Scheme designed to further incentivise employees to participate in

the growth and profitability of the business. This scheme is applicable

to every member of staff in the organisation who has achieved three

years of service with the Group.

During the reporting period an allotment of 3,6 million shares

(2014: first allotment of 15,0 million shares) was allocated to

171 eligible local and foreign employees of the Group and franchisees

(2014: 499 eligible local employees). In total, 14,5 million shares are

held by 528 employees, comprising 1,4% of Italtile’s issued share

capital.

ProspectsPrevailing trading conditions are likely to persist, with no significant

improvement in the economy anticipated in the short term. In this

context, management is determined to capitalise on those

opportunities which are within its control, specifically the growth levers

within the business.

In this regard, I am satisfied that we have in place the right management

team and the appropriate strategies to advance attainment of our

robust growth goals.

We are mindful that our customers choose to shop in our stores rather

than at competitor offerings because of the experience they enjoy.

Accordingly, we will continue to focus our efforts on constantly

enhancing that experience. The implementation of the BOP in our

stores will underpin the improvements which we are planning.

In addition to opportunities to leverage growth in the business, I am

pleased with the pipeline of properties that we have secured and the

flexible store format blueprints which have been developed which will

support the roll-out of our retail footprint across the brand offering.

Another important element of the Group’s growth programme will be

the launch of Ceramic Industries’ (“Ceramic’s”) new plant, Gryphon, in

November 2015. Italtile is a 20% shareholder in Ceramic’s and its

major customer. In addition to enhancing Ceramic production

capacity, Gryphon will be the largest manufacturer of large format

glazed porcelain tiles in the country; its products are expected to

facilitate import substitution which will be of benefit in a weak Rand

environment.


Chairman’s statement continued

AppreciationOnce again the people of Italtile have delivered a commendable

performance which is testimony to their dedication to the business

and its goals. In an ever-demanding trading environment they have

relished the testing targets set for them and responded with energy

and commitment. They can be justifiably proud of their efforts.

I wish to extend my gratitude to the management team which has

performed well to advance our growth strategies and identified

opportunities to unlock further value in this business.

My fellow Board members contribute constructive insight and

experience to key strategic matters and I welcome their input.

Our long-standing and new shareholders recognise the Group’s

investment proposition and I appreciate their continued confidence in

the business. We remain committed to improving returns to all

stakeholders.

I would like to thank our suppliers, business partners and advisers for

their support during the year and look forward to their continued

contribution.

The results which the Group has delivered this year are a reflection of

the strong and growing support we received from our customers in

existing and new markets. Our unwavering mission is to strive to

exceed their expectations and continue to reward their loyalty with a

continuously enhanced shopping experience.


Financial highlights

% changefrom 2014 2015 2014

Group and franchise results*Turnover (Rm’s)

– by Group-owned stores and entities 15 3 115 2 714

– by franchised-owned stores (unaudited) 21 2 109 1 747

System-wide turnover (Rm’s) 17 5 224 4 461

Number of stores 126 115

Group results*Turnover (Rm’s) 15 3 115 2 714

Trading profit (Rm’s) 21 905 751

Total assets (Rm’s) 14 3 102 2 713

Cash and cash equivalents (Rm’s) 57 392 249

Number of shares in issue (000’s) — 1 033 332 1 033 332

Headline earnings per share (cents) 22 71,6 58,7

Ordinary dividends declared per share (cents) 32 25,0 19,0

Net asset value per share (cents) 22 296 242

Number of employees 4 956 922

*From continuing operations

% changefrom 2014 2015 2014


The theme underlying our growth strategy is retail excellence – an intensive focus on the retail detail – in all the customer-facing elements of the Group’s offering, including: place, product, price, people and promotions.


Review of operations

OverviewAt the outset of the year, management highlighted a range of

opportunities which would be capitalised on to grow the business and

gain market share through fulfilling the Group’s chief goal: to deliver

an unparalleled shopping experience for its customers.

The theme underlying this growth strategy would be retail excellence

– an intensive focus on the retail detail – in all the customer-facing

elements of the Group’s offering, including: place, product, price,

people and promotions. Improved use of business science and

analysis would be integral to identifying, evaluating and optimising on

the potential in each component of the business.

The growth opportunities would be realised under the auspices of a

company-wide Business Optimisation Programme (“BOP”), which

would be implemented in the key areas across the business in two

phases. The programme would commence in the back-end functions:

two of the Supply Chain businesses, namely International Tap

Distributors (“ITD”) and Cedar Point, and the Support Services

divisions. In the second phase, BOP would be implemented in the

front-end retail brand operations.

Management is pleased to report that the first phase of BOP, which

focused on leveraging the relationship between the Supply Chain

and the retail operations, has been successfully implemented across

the back-end of the business: suppliers, systems, and logistics,

delivering satisfactory results. Enhanced performances were also

reported by the Information Technology (“IT”) and e-commerce

departments and the Human Resources division, core functions which

are critical to the Group’s long-term growth strategy and sustainability.

Detailed divisional reports are presented on pages 16 to 36 of

this document.

Financial reviewTrading conditions

While the renovations segment of the building industry continued to

grow incrementally, no recovery materialised in the new build segment

as infrastructure constraints (water, sanitation and power) hampered

the roll-out of new housing developments. This situation is expected to

persist in the foreseeable future.

Whilst South African homeowners remain very house-proud,

deeming their homes to be their primary asset, there was a notable

deterioration in investment sentiment and property-related spend as

consumer confidence dropped to record low levels in the country.

At the top end of the income spectrum, customers adopted a

selective “wait and see” approach to property investment; in

the middle-income market, the Group’s core target audience,

consumers remained highly price sensitive and value conscious as

they experienced intensifying pressure on disposable income.

Discretionary spend was allocated cautiously, after extensive

research, on tried-and-tested high profile brands. Customers with

finite resources in the entry level segment continued to invest small

amounts in their homes, on an ongoing basis, and as and when

funds were available. In rural and outlying areas consumers’

purchasing decisions demonstrated preference for ease of access to

one-stop shopping offerings which assisted in overcoming transport

and logistical constraints.

Nationally, the trading environment remained competitive. Intensified

promotional activity and price cutting featured throughout the period,

as traders sought to reduce inventory levels and free up cash flow in

the context of the deteriorating economy and local currency. In these

conditions the Group’s sound balance sheet and integrated Supply

Chain, which facilitated consistent availability of competitively priced

quality merchandise, stood the business in good stead.

ResultsDespite the subdued economic environment, the Group recorded

double digit growth across its trading regions. Improved sales were

delivered by each of the retail brands and Support and Supply Chain

businesses, and across most of the merchandise categories.

This performance is largely attributable to better execution of basic

retail principles and best practice in-store, resulting in fewer lost sales

opportunities, as well as improvements in the key back-end functions.

Another notable achievement was the quicker than anticipated roll-out

of TopT stores due to the availability of suitable sites.

The Group’s Staff Share Scheme is designed to incentivise employees

for achieving greater profitability. This mechanism played an important

role in generating buy-in from franchisees and staff for the far-reaching

changes wrought by BOP and served to reward them for the

programme’s contribution to the Group’s good results.

Continuing operationsThe financial information outlined below refers to continuing

operations only.

System-wide turnover grew 17% to R5,22 billion (2014: R4,46 billion),

while same store revenue increased 16%. Average price inflation was

7%. In a year-on-year comparison, the Group reported a stronger

performance in the first half than the second six months.

Margins were forfeited in both the Supply Chain and retail operations

due to the deliberate strategy to absorb increased costs and contain

price inflation to entrench the Group’s position as the price leader in a

number of categories, and offset the effect of Rand weakness which

drove up prices of imported product.


Trading profit increased 21% to R905 million (2014: R751 million).

Overheads were reduced as a result of improved management of

utilities, and containment of delivery and transport costs. Efficiencies

were also gained across the administration function.

Earnings per share increased 32% to 75,9 cents (2014: 57,4 cents),

while headline earnings per share rose 22% to 71,6 cents (2014:

58,7 cents). Earnings reflect the impact of the following:

An IFRS 2 charge of R12 million (2014: R17 million) related to the

Italtile Staff Share Scheme, of which R7 million (2014: R11 million)

is an accelerated charge related to franchise staff;

The increased contribution of R62 million (2014: R29 million) to

Group profit from associates Ceramic Industries (Pty) Ltd and

Ezeetile;

Net finance income of R11 million (2014: net finance cost of

R9 million) attributable to the settlement of long-term debt and

improved net cash holdings of the Group;

A lower effective tax rate resulting from reduced consolidated

dividend withholding tax charges compared with the prior

corresponding period and the income tax benefit of share awards

vesting and payments in the current period;

A gain of R14 million derived from the loss of control of a subsidiary

(SER-Export s.p.a.) to an associate, following the disposal by the

Group of a portion of its shareholding in this company; and

A once-off gain of R19 million resulting from the reclassification to

income of foreign currency translation reserve related to Italtile

Mauritius (Pty) Limited, previous bearer of certain of the Group’s

non-South African trademarks, following the liquidation distribution

of that company’s net assets to South Africa.

Inventories rose to R479 million (2014: R408 million) in line with

increased sales growth, although firm control ensured stock turn was

commensurate, and stock losses were contained. Stock management

across the business has been prioritised as a key strategic initiative.

Capital expenditure of R219 million (2014: R166 million) was incurred

largely on the Group’s Property Investment portfolio related to an

ongoing store upgrade programme and the acquisition of four

properties during the period. Investments were also made in

IT requirements related to the BOP. In the review period dividend

payments totalled R212 million, and loans totalling R136 million

were settled, resulting in net cash reserves of R392 million

(2014: R249 million) at the end of the period.

The Group’s net asset value was 296 cents per share (2014: 242 cents

per share).

Investment in associatesCeramic Industries (Pty) Ltd (“Ceramic”)

Ceramic is Italtile Ltd’s primary supplier of tiles, sanitaryware and

baths. The strategic 20% investment which the Group holds in this

business serves to provide tactical advantage and underpin its growth

programme.

Pleasing performances were reported by both the South African and

Australian tile operations, as well as the local sanitaryware plant. In the

year under review Ceramic increased its contribution to Group profit to

R55 million from R24 million in the prior period. This strong

improvement is attributable to higher production volumes, supported

by Rand weakness, which led to better capacity utilisation and

enhanced efficiencies. In addition, improved margins were achieved

through price recovery and intensified management of input costs.

Ceramic’s newest plant, Gryphon, is scheduled to commence

manufacturing in November 2015. The factory will produce large

format glazed porcelain tiles which will compete favourably with

imported product.

Ezeetile

The Group holds an effective 46% stake in Ezeetile, a national

manufacturer of grout, adhesive and related products. Following an

extensive organisation-wide restructuring programme, the operation

made good progress in achieving enhanced efficiencies in the

factories and gaining market share.

For the year under review, the business contributed R7 million

(2014: R5 million) to Group profits.

In the forthcoming period, two of Ezeetile’s six factories will be

relocated from their existing premises: the plant in Polokwane will be

moved to Mokopane, while the Port Elizabeth facility will be relocated

to new premises elsewhere in the city.

Italtile AustraliaThe Group’s investment in Australia comprises a small portfolio of

retail premises which it manages and leases out. During the period

one of the five owned properties was sold. A net loss of R3 million

(AUD360 000) was made on the sale, reflecting the weak state of the

commercial property market in that country. The carrying value of the

balance of the portfolio is R97 million (2014: R129 million).


Review of operations continued

Italtile Retail’s status as the leading trendsetter in the premium home improvement market is based on management’s unrelenting focus on enhancing its products and people to deliver an exceptional shopping experience for its customers.


Overview and performance matrix

Nature of business Leading fashion retailer of exclusive ranges of tiles, bathware and

related products.

Target market LSM 8 – 10

Discerning consumers in the upper middle and premium end segment

and professional projects market.

Number of stores 9 including web store

Key performance indicators Trends 2015 Trends 2014

Sales

Average price inflation

Margins

Net profit

Stock turn

Key differentiators Trendsetter and leading buyer of exclusive high quality fashionable

international and local products.

Widely recognised as industry front-runner in environmentally sensitive

products.

Well-established specialist expertise and nationwide network.

Strategic positioning Live beautifully.

Italtile Retail report

For further information on the Italtile Retail division please visit the website

www.italtile.co.za



The review period featured generally depressed consumer sentiment,

centred on a range of concerns, including the subdued economy,

currency volatility, uncertainty in the labour market and instability in

the country’s energy supply. In this negative context, many higher LSM

customers, (the brand’s core target market), adopted a “wait and see”

approach with regard to further investment in their properties.

Despite this adverse environment, Italtile Retail succeeded in delivering

pleasing results for the period, primarily based on improved efficiencies

in the business, intensified cost management, and a gain in market

share in new and traditional markets. Turnover and net profit increased,

illustrated by growth across all the merchandise categories. Margins

remained firm, largely attributable to increased sales of high value

ranges, and despite the deterioration of the Rand during the period.

Competitors responded in their efforts to gain back lost market share,

demonstrated by substantial investment in replicating Italtile Retail’s

trading format and range matrix. Represented in Gauteng, Western

Cape, Mpumalanga and KwaZulu-Natal, the brand experienced highly

regionalised competitor activity in each of those four provinces.

During the period, the devalued currency and weaker trading

environment resulted in several industry participants either

downscaling or closing.

Italtile Retail’s status as the leading trendsetter in the premium home

improvement market is based on management’s unrelenting focus on

enhancing its products and people to deliver an exceptional shopping

experience for its customers.

The following events were key to the brand’s good performance:

Noteworthy growth was delivered by the Commercial Projects

division. This business gained market share in its niche segment

and now makes an increasingly meaningful contribution to turnover.

During the period, an extensive portfolio of projects was successfully

completed, ranging from office blocks, shopping centres and

warehouses, to buildings in the education, health and religious

sectors. Amongst the high profile projects undertaken were 11 Alice

in Sandton, Bridge Park Office in Cape Town and Wonderpark

Shopping Centre in Pretoria. The brand supplied all the tiles,

sanitaryware and taps for the latter project, which received the

Sapoa Xcellence Award in Property Development for 2015.

Italtile Retail has a long-standing reputation in South Africa as the

leading supplier of environmentally-sensitive products. This is a

significant advantage in the commercial projects market, which

demands a high degree of water consumption awareness.

Demonstrating this trend is the fact that only environmentally-

friendly Eco taps (Tivoli) and Eco sanitaryware (Laufen) were

specified by clients on all of the projects undertaken by the division

during the year.

Merchandise ranges were expanded to capitalise on strong demand

in the following categories: bathroom furniture, brassware, large

format tiles and stone cladding. The brand’s highly fashionable

offering continued to win support from discerning consumers,

endorsing management’s focus on innovative products. During the

period, contemporary European merchandise was very well received

in the local market. In the tile category, cement-, wood- and steel-

look designs trended strongly, while wall cladding in natural stone,

slate and porcelain proved very popular.

The Italtile Way, the brand’s best practice benchmark programme,

and the backbone of the business, continued to serve well as the

minimum operating standard. In addition, investment in coaching

for the Commercial Projects agents was well rewarded. The

quantifiable results-driven training implemented during the year

has significantly upskilled the team to manage client interactions at

the highest level, and the improved customer service converted into

increased sales.

The translation of marketing communication from media to store

was fine-tuned to create greater synergy between editorial and the

in-store experience for the customer. Promotions contained in the

brand’s Style Book published in premium-end national magazines

continued to drive sales in the stores.

Other achievements recorded in the period include:

The opening of the newly relocated store in Nelspruit. Situated on a

prime site, the store layout features state-of-the-art design and

latest green technology to facilitate substantial water and energy

savings.

The launch of the brand’s new e-commerce web store in February

2015. Whilst this site is still in its infancy, data analysis confirms a

growing number of unique visits and increased use of the web

store’s functionality.

In August 2014, Italtile Retail served as an anchor sponsor of the

25th World Congress of the International Union of Architects held in

Durban. Given the positive spin-off which this summit had for the

brand, management invited one of the event’s luminaries, renowned

Italian tile industry writer and consultant, Professor Graziano Sezzi,

to be the special guest speaker at a series of design lectures hosted

countrywide by Italtile’s Commercial Projects division. Over 200

industry professionals attended these events which were officially

accredited by The South African Institute of the Interior Design

Professions.


Priorities and prospectsThe extensive revamp of the store in Somerset West in the Western

Cape will be concluded by the end of the 2015 calendar year and will

reflect the brand’s new retail design formula and store layout plan,

centred on providing an optimal shopping experience across the

brand network. In addition, new stores will open in Northriding and

Waterfall (Woodmead) in Gauteng in 2016.

The Commercial Projects division has established an excellent

reputation in its niche market and the business is presented with

extensive opportunities to grow its presence and increase its

contribution to the brand’s profitability. Continued investment will be

made in the business aligned to the potential which this division

affords.

It is anticipated that the brand’s new innovative web store will provide

a growing revenue stream for Italtile Retail. To enhance this offering,

the brand plans to trial a bespoke application, I-Spec, designed to

enable users to develop a unique specification for their projects or

homes. With its goal being to provide a convenient, time-saving

resource, it is anticipated that this tool will have important strategic

value for the business.

In line with the Group’s comprehensive organisational strategy, the

Business Optimisation Programme will be implemented in Italtile

Retail in the forthcoming period; given its focus on priority areas such

as training, systems and stock management, the programme is

expected to deliver rewarding results for the brand.



An industry veteran of 32 years, CTM enjoys a long-standing reputation as the price and product leader in the sector. However, management is confident that there are opportunities for further growth within the business, as well as in the marketplace.


For further information on the Italtile Retail division please visit the website

www.ctm.co.za


Nature of business Leading specialist retailer of tiles, laminate boards, taps, sanitaryware,

bathroom furniture and accessories.

Target market LSM 5 – 8

Middle income DIY customers and small builders.

Number of stores 82 (in South and East Africa).

Group-owned: 40*

Franchised: 42

*Includes web store


Sales


Margins

Net profit

Stock turn

Key differentiators Local and international buying power.

Year-round value offering.

Integrated Supply Chain ensuring consistent availability of stock.

Strategic positioning Big savings. More style.

CTM report



In the context of heightened competitor activity (reflected through

aggressive pricing and greater investment in store presentation and

product offerings), CTM reported a solid performance, recording

double digit sales growth across all of its trading regions. Notably, the

coastal markets which have historically under-performed their

counterparts, outpaced the inland regions; the Western Cape stores in

particular reported strong growth.

Good growth was achieved across the range of merchandise

categories, with particularly creditable results reported by the Bathroom

Boulevard and laminate flooring segments. The value of the average

basket also increased, reflecting an improvement in product range,

mix and price, and more effective customer interactions.

While inventories increased to match growing sales, judicious stock

management ensured that stock turn improved during the period. This

area remains a core management imperative and further

improvements will be prioritised.

Overheads were well managed over the year although there are

opportunities to realise further efficiencies. Margins declined as a

function of the brand’s deliberate strategy to contain price increases,

thereby entrenching its value offering perception among cost-

conscious customers.

At the end of the prior year, management undertook to pursue

opportunities which would assist the brand to retain its top-of-mind

leadership among consumers and to gain market share in the highly

competitive trading environment.

Benchmarked against these goals, CTM has reported good progress

for the review period:

In-store efficiencies were improved through better analysis of

trading data and standardisation of best practice disciplines across

the store network. The pursuit of operational excellence and flawless

execution remains a strategic priority.

Advancements were made in recruitment processes and personnel

development, contributing to closer alignment with the brand’s

growth ambitions. In order to augment capacity and capability, staff

changes were effected at senior management and store operator

level, and brand specialist range coordinators were appointed.

The brand’s web store reported a strong performance for the year.

Online sales grew ahead of expectations, with unique sessions

increasing to almost one million (700 000 previously). This web

shopping offering positions CTM as an innovative multi-channel

retailer, and ensures the brand remains contemporary, appealing to

traditional and new target audiences.

Top-of-mind awareness was promoted through increased and

improved marketing and advertising campaigns. During the period

CTM’s communications strategy (content, frequency and media)

was rigorously reviewed resulting in a more flexible, less predictable

approach, which is designed to entrench the brand’s positioning as

an all-year-round value offering. By utilising an innovative range of

new media platforms to complement its traditional media, CTM will

continue to expand its appeal to potential new customers.

In line with the brand’s overriding goal to provide an exceptional

shopping experience in an aesthetically pleasing environment, an

ongoing review of its property portfolio is conducted. During the

period, the Lonehill and Vaal stores in Gauteng underwent major

revamps and the stores in Vredenburg (Western Cape), Nelspruit

(Mpumalanga) and Queenstown (Eastern Cape) were relocated.

Priorities and prospectsAn industry veteran of 32 years, CTM enjoys a long-standing reputation

as the price and product leader in the sector. However, management is

confident that there are opportunities for further growth within the

business per se, as well as in the marketplace.

In pursuit of this goal, a range of initiatives will be advanced:

The dual strategy to focus on improving in-store efficiencies and

execution, combined with a robust store expansion programme;

Retain and gain market share through intensified commitment to

deliver an unparalleled shopping experience in a customer-centric

environment. This will be achieved through improvements in

merchandise range and store presentation; service and sales

techniques; stock management and other efficiencies.

Entrench the Business Optimisation Programme as a standard

operating procedure in pursuit of operational excellence. Improved

use of analytical tools generated by this programme will ensure that

key areas of the business including stock and human capital

management are significantly enhanced.

Build a people pipeline: short and long-term retail capability

aligned with the brand’s requirements (recruitment, development,

performance management and coaching will remain priority

imperatives).

The robust growth of the web store since its launch has exceeded

management’s expectations; the brand’s challenge will be to ensure

that this medium continues to represent a highly innovative,

contemporary extension of the bricks and mortar offering.

Continued enhancement of all merchandise categories will be

prioritised, with particular emphasis on the tile and related products

segment. This will involve ongoing improvements in stock

management; range, price and margin matrix; and merchandising

and sales skills.


Analysis of retail data confirms that high profile exclusive brands

hold substantial appeal for consumers. Recent focus group research

reveals that CTM’s private label brands such as Kilimanjaro, Tivoli

and ProGrip have strong affinity for customers and are of significant

strategic advantage. In this light the business will continue to

develop existing and roll out new private label ranges.

In the year ahead, the Middelburg store in Mpumalanga will be

relocated, and major revamps will take place in the Bloemfontein

(Free State) and Mokopane (Limpopo) stores. New stores will be

opened in Mitchells Plain (Western Cape), Hazyview (Mpumalanga),

Thohoyandou (Limpopo) and Waterfall (Woodmead) in Gauteng.

In addition, a pipeline of properties for new stores has been identified

to support the brand’s network expansion plan in the medium term.

This store roll-out programme will be underpinned by a flexible retail

format model, which will be aligned with market size, thereby affording

opportunities to enter non-traditional markets featuring smaller trading

densities.

East AfricaCTM is represented in the East Africa region by two stores in Kenya and

four stores in Tanzania. During the period, a dedicated operations

manager was appointed to oversee this portfolio.

The Kenyan stores in particular delivered good results based on in-

store improvements, including enhanced training and range and stock

management. The business was integrated into the Group’s SAP

system after the financial year end which will significantly improve

operating efficiencies.

The solid performance delivered by the Kenyan stores and the strong

affinity that exists for the brand in that country has encouraged

management to investigate the opportunity to open additional stores,

and in the longer term, a distribution facility. Any such expansion will

however be subjected to intense scrutiny.



Over the past year TopT performed in line with management’s expectations, whilst simultaneously demonstrating the potential to expand the business. A range of opportunities has been identified to ensure that growth continues at the current pace.


CASH &CARRY

For further information on the TopT division please visit the website

www.topt.co.za


Nature of business Retailer of home-finishing products including tiles, paint, ceiling décor,

taps, sanitaryware, hardware and accessories.

Target market LSM 4 – (lower) 7

Entry-level value offering strategically situated in under-serviced rural

areas and outlying markets in close proximity to urban townships.

Number of stores 35

Group-owned: 6

Franchised: 29


Sales


Margins

Net profit

Stock turn

Key differentiators Flexible, opportunistic home-finishing product range.

Affordability and availability of stock and accessibility to market.

Strong community relationships.

Strategic positioning Every price a LOW price.

TopT report



TopT reported good results for the period, growing turnover and profit

and gaining market share in new and existing markets. In line with the

brand’s strategic positioning – every price a LOW price – average

price inflation was contained; intensified cost management served to

mitigate the decline in margins. Despite increased levels of inventory

to support strong sales growth, stock turn and general stock

management improved.

In the previous report, the priorities outlined for the year ahead were: to

roll out stores, focusing on optimum alignment between store and

market; implement improvements in ranges, systems, processes and

supplier relationships; and promote development of human capital.

In this regard, the business made good progress in attaining its goals:

Store roll-outDuring the year under review, 11 new stores were opened, namely

Pietermaritzburg, Mtubatuba and Ladysmith in KwaZulu-Natal; King

William’s Town and Mthatha in the Eastern Cape; Mafikeng, Northam

and Klerksdorp in North West; Ermelo and Bushbuckridge in

Mpumalanga; and Taung in the Northern Cape.

Subsequent to year end, stores were opened in Queenstown in the

Eastern Cape and Alberton and Germiston in Gauteng. TopT is now

represented in seven provinces.

Operational improvementsManagement’s core focus during the year was on the three main

pillars of the business, namely customers, people (staff) and products.

The following notable improvements were made:

Customers and staff

Stores are deliberately located within close proximity to their

markets, increasing convenience for customers and reducing

transport costs, which continues to be viewed favourably.

Store employees are sourced from the local community and have

particular affinity with their customers, creating invaluable goodwill.

Particular attention was paid to appointing and developing fit-for-

purpose staff; in addition, the management team was restructured

to facilitate the brand’s growth forecasts.

Store and products

TopT is differentiated from its peers (primarily independent, less

formalised traders) by its positioning as a home improvement

specialist, providing affordable complete product solutions to

customers. The merchandise offering is unique in its niche market

given the quality, size of range and continuous availability of core

products.

During the period, improved execution of basic retail principles in-store

was a key driver:

A comprehensive range and price matrix restructuring was

implemented across the merchandise categories to align better

with specific markets;

New ranges and categories continued to be introduced, including a

private label tap range, Diva, adding to the brand’s other exclusive

ranges, including Tuff paints and tile adhesives;

Product ‘combos’ which offer complete merchandise solutions were

promoted and continued to gain popularity; and

The in-store shopping experience and customer service was

improved with the introduction of new format, ease-of-use store

layouts.

Communication

TopT made good inroads into improving communication with

customers by reviewing the mediums and frequency of its

advertising and promotions. Improved analysis of data verified the

strong sell-through ratio between product-specific promotions and

the products on promotion.

Priorities and prospectsOver the past year TopT performed in line with management

expectations, while simultaneously demonstrating the potential to

expand this business. A range of opportunities has been identified to

ensure that growth continues at the current pace:

The Group’s Business Optimisation Programme (“BOP”) will be

implemented in the year ahead. The goal of this strategic

intervention is to further interrogate the business model to facilitate

substantial operational improvements. This will include closer

alignment with the Supply Chain (existing and new suppliers)

aimed at improving stock and logistics management, thereby

enhancing customer service; intensified cost management and

improved execution of basic retail principles in-store.

Improved analysis of data will afford the opportunity to improve the

range and introduce new private label products and merchandise

categories in line with customer desires. Management of product

and price matrices will be a key focus in the forthcoming period.

Across the business, training and human capital development will

be prioritised in the year ahead in order to build a pipeline of fit-for-

purpose personnel to support the brand’s planned growth. Given

that many of TopT’s stores are situated in outlying areas, online

training will be crafted specifically for their requirements. Underlying

all training initiatives is the goal to enhance customer satisfaction,

grow the skills base in the brand and incentivise employees through

career development.

Management’s intention is to continue to grow TopT’s retail footprint

by between five and 10 stores annually. The following provinces will

be targeted for expanding the network in the year ahead: Eastern

Cape, Gauteng, Mpumalanga and Limpopo. Unlike the Group’s other

retail brands, TopT trades out of rental properties; as such, the store

roll-out programme will be constrained by availability of suitable

sites.


The Group’s vertically integrated Supply Chain businesses underpin the retail brand operations and enhance customer service through consistent availability of the right product at the right time and place.




Nature of business Importer and distributor of

tiling tools, laminated floor

boards, bathroom furniture,

accessories, décor and other

home finishing products.

Target market CTM and TopT store network.


Sales


Margins

Net profit

Stock turn

Key differentiators Integral component of Supply

Chain across merchandise

categories.

Strong relationships with

international suppliers.

Leading buyer and supplier

of high quality European

laminated floor board range

in South Africa.

Under new management, appointed in the prior financial year,

and in the context of implementation of the Group’s Business

Optimisation Programme (“BOP”), Cedar Point has undergone

extensive operational restructuring. The resulting enhancements made

over the past 12 months have begun to deliver the anticipated benefits.

The following developments were recorded in the reporting period:

Significant improvement in procurement practices and stock

management resulting in improved product life cycles, stock turn

and increased availability of business critical merchandise;

Greater role clarity of the managing partners – ensuring that the key

components of the business are managed by specialists in their

respective areas; and

Improved training and development of competencies was prioritised

to upskill personnel in terms of product knowledge, processes and

systems.

In the year under review, Cedar Point delivered a 30% growth in

turnover and gained market share across its merchandise categories.

Cedar Point reportAverage selling prices were maintained to support competitive

pricing in the retail operations, despite the increased cost of Euro

and US Dollar-denominated imported products. The negative

impact of Rand volatility on imports was partially offset by duty

free trade relations with the business’s long-standing suppliers in

Euro-denominated markets.

Gross margins declined as a function of absorption of increased input

costs and failing to respond sufficiently timeously to cost-cutting

opportunities in the business.

In addition to the positive impact of the BOP during the period,

increased sales volumes and the gain in market share are a reflection

of:

Good growth reported across laminated flooring, cladding, mosaics

and cabinets attributable to brand-specific product strategies,

including improved ranges and better structured price points;

Intensified promotion of products through roadshows and education

of store operators, and improved merchandising in-store, including

developing blueprints for product-specific displays; and

The introduction of new merchandise categories into the TopT stores

(including curtain rails, PVC panels and household cleaning

products), thereby developing new markets.

Priorities and prospectsHaving completed the first phase in Cedar Point’s restructuring

programme, management is satisfied that a range of opportunities

exists to further enhance the business:

There is potential to integrate small suppliers into the model which

will reduce costs and provide a more competitive offering for the

retail operations;

There are opportunities across the merchandise categories to

refresh ranges, structure an optimal spread of price points, and

investigate new European and local suppliers to provide more cost-

effective, better matched, full solutions;

The implementation of BOP has markedly improved Cedar Point’s

operations. It is anticipated that when this programme is rolled out

to the stores, further benefits will be achieved in streamlining the

stock management process from factory gate to store; and

With the appointment of brand-specific buyers to manage the

product ranges in each of the retail operations, Cedar Point’s

partners will be freed up to focus on their areas of supply chain

expertise, including developing strategic supplier relationships.

Management’s overriding goal is to provide a more competitive and

efficient service to the retail brands. This will be achieved by improving

savings in the business, increasing productivity and competencies of

personnel, and ensuring availability of business critical merchandise.

Focus will also be on enhancing the use of SAP and technology in the

warehouse and reducing costs in the transport segment of the

operation.


Range and stock managementKey to ITD’s improved performance was the implementation of the

Group’s Business Optimisation Programme (“BOP”) during the year.

This programme has had a notable effect on transforming core

areas of the business including procurement, stock management

and logistics. In particular, improved availability of business critical

stock items has benefited the business significantly.

Another important driver was the consolidation of the range

and introduction of new exclusive ranges to CTM and Italtile Retail

(Tivoli and Hansgrohe) and a private label tap range, Diva, into the

TopT stores;

Bathroom-focused brand promotions conducted during the year

centred on carefully selected ranges and products, which enabled

consistent supply of popular, well-priced merchandise, boosting

sales; and

A complimentary training course conducted at ITD’s Warehouse

Training Facility was made available to store staff, and served to

improve product knowledge, translating into increased sales.

OperationsDuring the period and as part of the BOP, ITD’s reporting structure

was reviewed to ensure greater role clarity for the managing

partners as well as the individual employees. This process resulted

in improved allocation of appropriate skills to specialist areas,

increased productivity, and enhanced communication and

accountability;

Improved use of technology and enhanced layout in the warehouse

led to substantial productivity gains in the packing facility,

notwithstanding that the staff complement and floor area remained

unchanged; and

As a result of improvements in the business, ITD’s staff benefited

from meaningful profit incentives which had an important impact

on motivation levels and energised efforts to cut costs further in the

operations.

Priorities and prospectsIn the year ahead the following initiatives will be focused on:

The robotic warehouse layout will be reflowed to address current

limitations and afford more efficient operations which will impact

positively on productivity;

Accreditation of products by the SABS remains a highly regulated

and lengthy process. ITD currently has several ranges awaiting

approval, and management will continue to actively monitor their

progress through the bureaucratic channels;

Brassware and accessories are increasingly viewed as fashion

statements, and management’s challenge is to ensure the business

remains ahead of trends by constantly reviewing and refreshing its

ranges. In the short term, ITD will be introducing new Tivoli tap

ranges to Italtile Retail and CTM, and branded bathroom accessories

exclusive to each brand; and

Just as BOP has transformed the efficiency of service in the factory-

to-store sector, it is anticipated that the implementation of this

programme into the stores will enhance the reverse interaction,

resulting in further improvements in procurement and stock

management for the business.


Nature of business Importer and distributor of

brassware and accessories.

Target market CTM, Italtile Retail and TopT

store network.


Sales


Margins

Net profit

Stock turn

Key differentiators Integral component of the

Group’s Supply Chain.

Long-standing relationships

with international suppliers

and extensive import

experience.

State-of-the-art robotic

warehouse facility.

The Tivoli range is the only

major Italian brassware brand

available in South Africa.

ITD delivered record turnover for another consecutive year and

reported an improvement in profitability, reversing the trend of the past

few years. Average price increases were limited in a deliberate strategy

to support the competitive retail offering in-store. Despite the increased

investment in inventory to keep pace with strong store sales, stock turn

improved materially.

The business gained market share in existing and new markets,

including strong growth in TopT’s emerging market.

During the period, the brassware trading environment was subdued

and intensively price-competitive, featuring aggressive discounting

strategies to clear high levels of obsolete stock and generate cash

flow. Rand weakness proved particularly challenging for importers of

Dollar-denominated products; unlike many of its competitors, ITD

sources a significant portion of its stock from Italy in Euros and thus

also benefited from exemption from exchange duty.

Given continued strong growth in the Group’s brassware sales,

management elected to discontinue its open market footprint and

focus solely on the in-house retail operations. This event will enable

ITD to craft strategies which ensure exclusivity of the positioning, range

and development of new products specific to each brand.

International Tap Distributors (“ITD”) report



As part of the Group’s Business Optimisation Programme (“BOP”),

dedicated range coordinators and buyers were appointed to each of

the three retail brands. This development has enabled Distribution

Centre management to hand over the procurement function and

henceforth focus on the business’s core functions: supply relations,

logistics, distribution, and foreign exchange services.

The BOP has also had a positive impact on enhancing the procurement

process. With access to improved trading information, the coordinators

are able to identify core, high-demand ranges, thereby empowering

Distribution Centre to source and stock consistent, adequate supply of

these products, resulting in improved alignment of the buying function

with customer expectations.

The benefits of implementing this specialist range coordination

resource is expected to gain momentum in the year ahead.

Priorities and prospectsThe Rand is likely to remain under pressure in the short term, pushing

up the price of imported products to new levels. In this context,

management’s challenge will be to ensure that the Group’s retail

operations are supported through continuous availability of

consistently and competitively priced high quality merchandise.

In this testing operating environment, the business will benefit from

the leverage derived from long-standing relationships with suppliers

and the Group’s significant purchasing power.

In order to offset margin pressure, focus will be on containing

overheads and improving procurement processes.

Sales to the TopT business are expected to increase strongly as the

brand expands its network of stores.

Implementation of the BOP in the retail operations is anticipated to

deliver additional business intelligence which will fine-tune the

management of stock in the stores (including range coordination,

inventory levels and stock turn). As a key Supply Chain partner to the

retail operations, Distribution Centre’s own operations will benefit from

this enhancement and enable the business to deliver an improved

service to its customers.


Nature of business Procures stock for the Group,

and is the single largest

importer of polished and

glazed porcelain tiles in

South Africa.

Provides warehousing,

distribution, logistics and

foreign exchange services to

the Group.

Target market The Group’s retail store

network and integrated

suppliers.


Sales

Margins

Net profit

Stock turn

Key differentiators Long-standing relationships

with international suppliers

and transport agents.

Extensive (+30 years) import

experience.

Strong financial position

facilitates optimal investment

in inventory.

Distribution Centre, a pivotal business in the Group’s Supply Chain,

reported an increase in sales, and strong gain in market share for the

period. This improved performance is a reflection of affording the retail

operations constant availability of the right stock at the right time,

thereby enhancing customer service. In the context of Rand weakness

and in order to support a competitive offering in the stores, price

inflation was contained, while margins were deliberately reduced. This

strategy was underpinned by management’s ability to negotiate

keener bid prices and curtail freight rate increases. The business

reported a modest increase in net profit for the period.

Distribution Centre report



Nature of business To provide relevant, effective IT solutions to enable an optimal user and shopping experience in the Group’s retail stores, online and in the Supply Chain, by ensuring simplicity and functionality for the end user, maintenance of data integrity, and minimising downtime and risk.

Target market The Group’s retail operations, its customers, and the Support Services businesses.

Key performance indicators

Continual enhancement of the SAP system to unlock efficiencies, thereby enabling growth.

Management of potential downtime and system failure risk.

Prevention of network penetration.

Roll-out of technology.

Improved interactivity of retail websites.

The Group’s IT and e-commerce functions have historically been managed as a single unit. Given the strong growth of the business and its related IT requirements, together with the increasingly important role of e-commerce to the organisation, management elected to separate the support and sales functions into two departments. Each unit employs dedicated skilled personnel and will be managed and measured independently.

e-commerceIn the context of rapid evolution of the retail environment and a growing trend amongst consumers to engage in multichannel shopping experiences, e-commerce and online offerings provide a vital strategic advantage.

The end goal of the Group’s e-commerce unit is to provide a fully functional online shopping experience enabling customers to transact and receive delivery of listed products from the retail brands anywhere in South Africa. The intention is for Italtile Retail, CTM and TopT to be represented by distinctive brand-specific customer-facing web stores which will serve as additional sales vehicles for the brands.

During the review period:CTM’s web store continued to experience significant and increasing activity from existing and unique users. Statistics reflect the growing importance of this channel – unique total sessions increased substantially during the year.Italtile Retail’s web store was launched in February 2015 and now enables customers full shopping functionality.

Priorities and prospectsA web store for the CTM operation in Kenya is under construction and should be launched in the first quarter of 2016. In general, Kenyan consumers are sophisticated users of technology, and it is anticipated that this online functionality will be well received by the brand’s customers;

e-commerce and Information Technology report

TopT’s website will be upgraded to better reflect the expansion of its offering and growing market presence. Whilst a web store facility is premature at this point, the website will play an increasingly important role in improving service by enabling customers in outlying and remote areas to preview products in advance of making in-store purchases.Web shopping will continue to gain relevance in South Africa, and the Group’s Italtile Retail and CTM brands are cognisant that in addition to providing a seamless shopping experience for customers, this channel will become a significant revenue stream over time. Accordingly, continued investment in the development of these sites will be prioritised.

Information Technology (“IT”)At the end of the prior year the IT department outlined its overriding goal, namely to assist the Group in unlocking efficiencies in the SAP environment to capitalise on growth opportunities in the business. During the review period good progress was made in furthering this aim.

The Group’s Business Optimisation Plan (“BOP”) is underpinned by SAP functionality. Over the past year, BOP was implemented in the Supply Chain with rewarding results. As noted in the Cedar Point, ITD and Distribution Centre reports on pages 28, 29 and 30 of this document, enhanced utilisation of SAP systems led to improved insight and understanding of demand and resulted in better procurement and stock management practices, thereby aligning the Supply Chain with the retail operation more effectively.The mobile Point of Sale (“POS”) device, a unique in-store application which integrates SAP, credit card payments and web shopping functionality was upgraded. These handsets have improved the customer experience by affording more personal, knowledgeable sales service, from the store door to despatch. The data centre and disaster recovery centre were upgraded to ensure continued seamless operation across the retail operations, Supply Chain and Support Services businesses.The CTM operation in Kenya was integrated into the Group’s SAP network on 1 July 2015; this will facilitate improved reporting and oversight between that business and the local Support Centre.

Priorities and prospectsA range of strategic imperatives have been outlined by the IT department for the year ahead:

Continue to underpin the BOP initiative as it is rolled out to the retail operations in the months ahead with the goal of enhancing stock management and improving the shopping experience for customers by ensuring the right products are in stock at the right place and time;Ongoing development of in-store technology with the goal being to double the volume of sales and quotes performed on the mobile POS devices;Maintain the track record of uninterrupted up-time of SAP and the integrated credit card solution during trading hours;Development of security measures to prevent breaches of all critical systems and improved data loss protection; andIntegration of the Tanzania franchise operations into the Group’s SAP network.

Further investment will be required in both the IT and e-commerce

segments of this business to deliver on the underlying opportunities

which this environment offers.



Italtile Retail

The long-standing Nelspruit store in Mpumalanga was relocated to a

new prime site and revamped in line with the brand’s style-icon status.

CTM

During the year, the Lonehill (Gauteng), Bethlehem (Free State) and

Windhoek (Namibia) stores underwent extensions, and the Vaal

(Gauteng) store was revamped. Three stores were relocated to better

sites, in Vredenburg (Western Cape), Nelspruit and Queenstown

(Eastern Cape).

TopT

Eleven new stores were opened in the review period, namely

Pietermaritzburg, Mtubatuba and Ladysmith in KwaZulu-Natal; King

William’s Town and Mthatha in the Eastern Cape; Mafikeng, Northam

and Klerksdorp in North West province; Ermelo and Bushbuckridge in

Mpumalanga; and Taung in the Northern Cape.

Australian investment

The Group owns and manages a small portfolio of retail properties in

Australia, which are leased out. During the period one property was

sold; the portfolio now comprises four remaining properties. The

intention is to dispose of the balance of this portfolio when market

conditions improve in that country.

Environmental sustainabilityManagement strives to ensure that the Group’s sustainability agenda

is promoted by the activities of this division. Accordingly, where

feasible, new and existing stores employ cost-effective, energy-efficient

practices, including solar technology and optimisation of renewable

resources.


Nature of business Underpins the Group’s retail

operations by ensuring that

stores are optimally located

on high profile destination

sites or within easy access of

previously under-serviced

rural and outlying areas.

Target market Italtile Retail, CTM and TopT

store network.

Key statistics 2015 2014

Portfolio market value R2,0 billion R1,9 billion

Total number of stores 124 114

Capex incurred (new and

refurbishments) R164 million R96 million

Portfolio changes

– Properties acquired 4 4

– Properties sold 2 4

New stores opened

– Italtile – 1

– CTM – –

– TopT 11 5

Stores renovated 9 11

This division has significant strategic advantage for the Group’s retail

operations through ensuring that the brands are represented by

aesthetically pleasing, well-maintained stores situated on highly

visible, accessible sites. Management’s goal to deliver an optimal

shopping experience for customers is advanced through this division’s

continuous evaluation and enhancement of its property portfolio.

In this regard, the following improvements were undertaken during the

period:

Italtile Group

The Support Centre (head office) in Bryanston, Gauteng, underwent

extensive renovations to accommodate the growth of the business

over the past few years.

Property Investment report


Priorities and prospectsIn line with the continued growth of the Group’s retail property

footprint and further planned store openings, the division has been

restructured to enhance skills and capacity in-house in order to be

able to direct appropriate resources at key areas to address

opportunities and challenges as they arise.

The Property division will continue to strive to improve its green

credentials with regard to compliance with international

benchmarks related to building practices and resource consumption

in both new and existing properties. In addition, management of

utilities will remain a priority, with particular emphasis on ensuring

the Group is adequately prepared for the deteriorating water

infrastructure in certain provinces.

The Group’s retail footprint will be enhanced as follows:

Italtile Retail

At the end of June 2015 new stores were under construction in

Northriding and Waterfall (Woodmead) in Gauteng. These stores are

scheduled to open in 2016.

At the year end, renovations were underway in the showroom at

Somerset West in the Western Cape and the warehouse at the Pretoria

store. These projects will be completed within the next six months.

Management is satisfied that it has secured a pipeline of suitable

properties required for Italtile Retail’s expansion plans for the next

five years.

CTM

The following new stores are planned for completion in fiscal 2016:

Mitchells Plain (Western Cape), Hazyview (Mpumalanga),

Thohoyandou (Limpopo) and Waterfall (Woodmead) (Gauteng).

The store in Middelburg (Mpumalanga) will be relocated, a

revamp will take place in the Bloemfontein (Free State) store and the

Mokopane (Limpopo) store will be redeveloped.

CTM’s operation in Kenya currently comprises two stores. Should

suitable opportunities arise, the brand’s footprint may be extended by

a further three stores and possibly also include establishment of a

Distribution Centre. Management will continue to cautiously pursue its

investigation in this regard.

The strategy to introduce flexibility to the store size format is underway,

designed to ensure that new stores are optimally aligned with their

specific market size, and affording the brand the opportunity to extend

its presence in new, smaller non-traditional markets where it is

currently under-represented.

A pipeline of sites has been secured which will ensure that CTM’s

three-year expansion plan is on track.

TopT

In line with TopT’s strategy to roll out between five and ten stores per

year, three new stores have already opened since year end:

Queenstown in the Eastern Cape and Alberton and Germiston in

Gauteng.

The following provinces will be targeted for new stores in the year

ahead: Eastern Cape, Gauteng, Mpumalanga and Limpopo. Availability

of suitable sites will impact on the pace of the roll-out programme.


Nature of business Measures, manages and reduces the Group’s impact on the environment and promotes its long-term sustainability.

Target audience The Group’s retail operations and Support Services businesses.

Key performance indicators

Reduction in

consumption of

all resources

Continued savings were achieved across the

organisation.

Reduction of carbon footprint

Fifth carbon footprint study: decrease of 4,8% in direct CO

2 emissions per Rand value of

turnover (previous study: decrease of 30%).

The environment and sustainability agenda is centred on continuing

to reduce the Group’s carbon footprint across its operations and

developing meaningful social investment programmes designed to

contribute to the betterment of communities in which the business

trades. Key goals include reducing consumption of energy and water

resources and advancing sustainability through promotion of

environmentally friendly products, education of employees and

customers, and improving waste management. Social responsibility

initiatives are predominantly based on education and sports

programmes aimed at enhancing the lives of disadvantaged children.

Environment and Sustainability report



Waste management

The Group is currently piloting a recycling programme in all Italtile

Retail Gauteng stores aimed at improving measurement and

management of waste. The programme also incorporates a social

investment component, by creating employment for previously

disadvantaged individuals. Should this programme prove viable, it will

be rolled out across the Group’s other brands.

Social investmentDuring the period, the Group’s Social Investment Programme was

moved under the auspices of the Environment and Sustainability

portfolio.

The Group’s community-based initiatives centre on investment in

education and sport for children in disadvantaged communities. These

initiatives are funded through both the Italtile Group and its Foundation

Trust. The Group’s current major project is the development of a sports

field and related facilities in Thohoyandou, which should be completed

by the end of December 2015. During the reporting period the Group

also worked closely with the One School at a Time Programme to

sponsor extra-curricular tuition and upgrade the facilities at Forte High

School in Dobsonville. In addition, the Group is an anchor sponsor of

the Soweto Sports Field, a Platinum Partner of the National Sea Rescue

Institute and a sponsor of the environmental group Stop Rhino

Poaching.

Priorities and prospectsImprovement in resource consumption and promotion of sustainability

across the Group’s operations will remain key strategic imperatives.

The measures and initiatives outlined above will continue to be

implemented and rolled out across the business to achieve the long-

term sustainability agenda.

The Group’s sixth carbon footprint study has been commissioned.

Over the past consecutive five studies, there has been a marked

downward trend in CO2 emissions; this, together with current initiatives

in place, augurs well for a further reduction in the Group’s footprint in

the year ahead.

EnvironmentThe Group has in place three customised brand-specific policies

which are managed within the Group-wide sustainability agenda.

Energy management

Projects implemented during the period include:

Continued roll out of photovoltaic (“PV”) panels to new stores.

These panels, which supply 40% of each store’s energy

requirements, have been installed in 15 stores thus far. Utilisation of

these panels has resulted in energy savings of 624 608,2kWh

resulting in a substantial reduction in carbon emissions and water

savings;

Implementation of energy efficient technologies and lighting in all

new, upgraded and relocated stores and optimisation of natural

renewable resources;

Retro-fitting energy efficient lighting in older stores;

Installation of independent metering equipment at stores

experiencing inaccurate billing, which improved measurement and

management of energy consumption; and

Collaboration with the Private Sector Energy Efficiency organisation

in order to gain a better understanding of energy consumption and

potential savings. The Group is currently implementing follow-up

programmes to evaluate its status.

Water management

Despite the Group not being a major consumer of water, ongoing

conservation programmes remain a high priority.

During the year existing water-wise product ranges were expanded

and new ranges introduced designed to deliver significant water

savings without compromising efficacy of the products or their SABS

accreditation. These products include a range of three full-flush

toilets which reduce consumption to as little as two and a half litres

per flush, from an average of nine litres. These brands, Mondo,

Atlantis and Coral, are available at CTM. In addition, all Tivoli taps

feature a reduced water flow of six litres per minute, down from an

average of 12 litres per minute. Notably, all Tivoli Murano and Orta

taps are manufactured in a carbon neutral factory.

In-store education for customers and staff is an ongoing initiative,

and Pula aerator devices are available to customers at no charge.

The Group is currently developing a risk management strategy to

ensure stores have contingency plans in place to mitigate the

inevitability of water shortages in certain regions in the country.



Nature of business Add value through recruiting and retaining

fit-for-purpose personnel.

Develop and empower the Group’s human

capital resource through relevant training

and support.

Provide an efficient payroll and administration

function.

Target audience Support Centre, franchisees and employees.

Key performance

indicators

Improved alignment with the needs of the

business.

Improved analysis of the personnel matrix in

the business.

Improved engagement with employees across

the Group.

Developed appropriate skills training,

learnerships and competencies.

Training interventions (2015/16):

– Company programmes: 2 130

– e-learning modules completed: 99

– Rural learnerships: 14

– Workplace experience learners: 12

– Operator Training Programme: 15 candidates

In line with Italtile’s current and anticipated future growth it is

recognised that the HR and Training functions are pivotal to ensuring

that the Group’s fit-for-purpose personnel component is appropriately

recruited, trained, empowered, incentivised and retained to keep

abreast of the business’s staffing needs.

During the period this department commenced a structural overhaul

to ensure it is adequately equipped to align itself with the organisation’s

goals. A more formalised and focused approach was adopted

regarding the human capital portfolio, which included reviewing and

revising a range of HR policies and procedures to increase their

relevance to the business’s current needs, and effecting changes to

ensure the department is optimally staffed.

Human Resources and Training reportWith a view to the longer term, a five year strategy plan has been

developed and is key to ensuring this division’s ongoing evolution

continues to be aligned to the broader growth of the business.

The department recorded the following achievements during the

period:

Progress was made in gaining better insight into the current pipeline

of talent in the business and identifying skills training opportunities

across the organisation. This process required improved evaluation

and measurement of capability as well as implementation of

appropriate coaching where required.

Established closer partnerships with the Operational divisions,

resulting in improved identification of the unique needs of individual

business units and brands. The formation of Skills Development

Committees specific to each brand and business division assisted

in providing improved insight into the Group’s human capital matrix.

Implementation of the first Group-wide employee engagement

survey designed to develop an understanding of employees’ current

sentiment and establish a basis and benchmark against which to

track year-on-year improvements.

The first ever introduction of rural learnerships and workplace

experience for learners in the Group’s various business units and

retail brand operations. This initiative is structured to develop a

potential resource from which to recruit future employees.

Employee communication was improved with the launch of a

monthly electronic newsletter providing information on training

initiatives, HR policies, internal vacancies, and other related matters.

An employee wellness programme was introduced, which together

with the improved communication strategy is aimed at engaging

better with employees.

Online e-learning courses were trialled as an alternative method for

staff training in the Group’s outlying stores, and proved to be a

useful tool.

The Operator Training Programme, in partnership with Stellenbosch

University’s Business School, produced a further nine graduates

for the 2014/15 academic year. This programme is designed to

develop the Group’s pipeline of potential store operators. In the

prior year 11 students graduated from the course and currently hold

store management positions in the Company.

Specific attention was paid to recruitment of specialist retail skills;

this will be an ongoing imperative.



OutlookThe trading environment is likely to remain largely unchanged. In the

context of further Rand weakness, continued rationalisation, especially

amongst smaller independent traders in the wholesale segment, is

anticipated.

If prevailing conditions do not deteriorate further and the Group

succeeds in capitalising on the growth opportunities which exist in the

business and the marketplace, Italtile should deliver results in line with

its current performance in the next reporting period.

Management is satisfied that there is absolute clarity of strategy and

structure across the business for the future.

The opportunities for growth are internal and external:

The Business Optimisation Programme will be rolled out to the retail

brand operations. Focus will be on enhancing the human capital

portfolio, improving retail excellence and in-store execution, and

better analysis of the Group’s value proposition and trading

intelligence. Further investment will be made in systems, technology

and human resources to achieve the programme’s goals; it is

anticipated that full implementation of the programme will take up

to three years.

In light of sustained demand for the Group’s offering and steady

growth in market share in traditional and new markets, the business

will continue to expand its retail footprint across all three brands.

Management’s deliberate strategy is to ensure flexibility of the new

store format to match available markets, which will facilitate the

network’s growth. The pace of this programme will be determined by

availability of suitable sites and franchisees.

AppreciationThe people of Italtile have a strong, entrenched culture of passion for

the business, and the pleasing performance reported for the period is

a reflection of their enthusiastic and energetic character. The positive

response of management and staff to the subdued trading

environment, the ever tougher benchmarks, and the stretch targets set

within the business is to be acknowledged and applauded.

Rather than being daunted by the challenges faced, this unique team

of people is inspired by the opportunities that are presented. Their

commitment will be invaluable to the continued success of the

business in the year ahead.

Priorities and prospectsIn overview, the HR and Training departments’ primary goal in the

forthcoming period will be to ensure their activities support the Group’s

targets in terms of its growth objectives and its overriding strategy to

deliver an incomparable customer experience.

A new Retail Academy Programme was launched in August 2015.

The Group has made application to the Wholesale and Retail Sector

Education and Training Authority to register the Company as an

accredited training provider, in order to achieve formal recognition

for its Academy for Tiling, Plumbing and Laminate Flooring. This

facility was established some 10 years ago and is an invaluable

training resource for the Group’s employees and customers.

The following areas will receive priority attention in the year ahead:

recruitment and retention of fit-for-purpose employees; development

of leadership capability and capacity; upgrade of the existing retail

specific knowledge base; and improvement in productivity and

performance to achieve retail specific best practice benchmarks

through appropriate training and development programmes.


Strategic imperatives and material risks

ENTERPRISE AND ECONOMICStakeholders: shareholders, franchisees, employees, customers, suppliers and business partners

Strategic focus 2015 2016 focus and targets

Enterprise Risk Management

The Group’s Enterprise Risk Management (“ERM”) is overseen by the Board of directors and is centred on managing the activities of the business to minimise the effects of risk on the Group’s capital and earnings. The ERM programme serves to ensure that the risks are adequately addressed through:

specifying the sources of assurance over the Group’s risks;linking risk management and assurance activities, which facilitates review of risk management effectiveness; andproviding a basis for identifying assurance gaps.

The ERM structure is based on a combined assurance model comprising three components:

management (divisional and executive directors);external auditors (EY); and Support Centre oversight (including the internal audit function).The Group’s flat reporting structures continued to facilitate transparent communication and oversight in the business.Throughout the year, management conducted regular regional and divisional meetings. The executive directors paid frequent visits to stores and Supply Chain partners; embraced regular communication with and motivation of staff; and continued to foster a culture of partnership and empowerment.The external audit function focused on addressing perceived audit risk related to presented financial information and internal controls.The Group’s accounting, operational and HR functions are largely centralised at the Support Centre, which facilitates effective oversight of in-store operations and results. The internal audit function continued to focus primarily on the assessed risks of inventory and cash management and identifying possible obstacles to achieving key targets.The Group’s ‘Be Heard’ anonymous tip-off hotline is a useful mechanism to enable staff to report suspected fraud or any other improper workplace practices.

The Group has a consistent track record of unmodified audit reports and by enforcing a robust control environment will maintain that status.Management’s focus on best practice benchmarks and hands-on approach will continue to ensure attention is centred on safeguarding assets and compliance with relevant policies.Support Centre oversight will continue to be enhanced through improvements which ensure consistent business practices in-store. The internal audit function will continue to grow with the business and will play an increasingly important role.

Market risk and financial viability

Despite the difficult trading conditions, the Group increased system-wide turnover by 17% and trading profit by 21% from continuing operations. The Group grew market share across the brand offering and merchandise categories. Key to the Group’s growth in the current adverse economic environment was its well-established business model, underpinned by its integrated Supply Chain and strong balance sheet. Operating in a volatile marketplace, the Group derived competitive advantage from its consistent strategy of ensuring the right stock at the right time, place and price, together with an uncompromising focus on quality.

Continued growth and market share gain will be achieved through implementing ongoing improvements across the business and Supply Chain, and optimising on opportunities in the industry.


ENTERPRISE AND ECONOMIC (continued)Stakeholders: shareholders, franchisees, employees, customers, suppliers and business partners


Reliance on key suppliers

The Group’s requirements were once again efficiently met by its Supply Chain during the review period.The Group has a shareholding in both of its major local suppliers, namely 20% in Ceramics and an effective 46% in Ezeetile. These suppliers are crucial to the Group achieving its growth targets and the strategic investment strengthens its relationships with these businesses.

Relationships with suppliers will continue to be managed intensively to ensure requirements are consistently executed throughout the year. Primary focus areas will include projection planning, ongoing monitoring, and preparation to facilitate increased supply capacity if required.In the unlikely event of inadequate product supply from Ceramics and Ezeetile, the Group could source alternative supply from other local vendors (adhesive and grout) or importers (tiles and sanitaryware).

Supply Chain management

Continued currency and market volatility were experienced in the review period. In this environment, the Supply Chain provided vital support to the retail operations through competitive pricing and consistent availability of quality fashionable merchandise.Improvements made in automated ordering process and model stock matrixes served to increase stock turn across the Group and enhance the efficacy of the Supply Chain.The Group’s recently opened Cape Town Distribution Centre has been bedded down and is advancing the goal to improve distribution and logistics of imported product and enhance performance in the region.

Long-standing, collaborative relationships with local and international suppliers will remain essential to ensuring continuous product supply and mitigating the impact of currency fluctuations. Growth opportunities are afforded by optimising functionality in the Supply Chain. Accordingly, all areas of the stock management discipline will be a core focus in the year ahead.

Supply Chain disruption (Distribution Centres)

The Group’s Distribution Centres provided seamless supply during the year. A disaster management plan is in place to enable the Group to withstand interruption of operations due to difficulties encountered by product suppliers and transporters (road and sea), labour disruptions, and warehouse storage constraints.

By maintaining optimal inventory levels the Group will mitigate any short-term disruption to supply.The Distribution Centres provide optimal warehousing capacity, but additional space could be sourced without difficulty.

Market share and fashion leadership

In the highly competitive, continuously evolving home improvement environment, the Group holds notable market share, and is regarded as an industry leader. This reputation is based on its high quality, fashionable offering which keeps pace with international vogue but is cognisant of local price sensitivity. Management is constantly mindful that to retain this status the Group’s brands must remain contemporary and relevant to consumers, be well presented at all times, and enjoy a positioning which is distinct from competitor brands.

To entrench its reputation as a fashion icon the business employs a range of practices: – conducts continuous, comprehensive consumer

research;– employs experienced, skilled brand and divisional

managers and dedicated buyers who specialise in key products and areas;

– ensures regular attendance at international industry trade shows;

– holds regular regional meetings to obtain insight into markets and product feedback;

– monitors and adjusts costs and pricing as appropriate;– implements opportunities to expand distribution

channels;– constantly refreshes store displays and trading space;

and– shares best practice principles across the Group.

Management’s primary objective will be to ensure that the Group’s high standing among consumers is maintained through continuing to deliver an offering in line with customer demand.

In this regard: a more formal, structured approach to product research will be implemented aimed at improving responsiveness;regular strategy sessions across the Group will continue to be held to communicate fashion trends, product innovation, merchandise and store improvements, market analysis, and opportunities for growth; the Business Optimisation Programme implemented across the Group will improve product lifecycles, thereby ensuring constant fashion sensitivity; and optimal range/pricing structures will remain a priority.


Strategic imperatives and material risks continued



International

competitiveness

In line with global trends, local consumers continue to

demonstrate increasingly sophisticated demands in

terms of fashionable merchandise, in-store service and

technology innovation. The Group is cognisant that

successfully catering for these expectations provides a

significant competitive advantage, and accordingly

strives to deliver a contemporary, aspirational offering

through ongoing range improvements, keen pricing,

technology enhancement and use of new business

channels (e-commerce and social media).

The Group’s stated intent is to be a world-class, low-cost

retailer through alignment of customer satisfaction and

profitability. By providing an unparalleled shopping

experience and implementing best practice business

principles across its operations the Group will continue

to advance its achievement of this goal.

Foreign currency

management

A substantial portion of the Group’s merchandise range

is imported, and consequently, the business is subjected

to fluctuations in the local currency and volatility of

international markets. Management of foreign currency

exposure remained a key priority and wherever possible

risk was mitigated.

Company risk management policy dictates that foreign

currency fluctuations will continue to be managed

judiciously and all foreign liabilities will be matched with

forward exchange contracts on confirmation of order.

Computer-based

business

processes

The IT environment affords meaningful opportunities to

grow the business and improve customer satisfaction. In

this regard a range of projects were completed,

including upgrading SAP functionality to improve

efficiencies, and roll-out of technology across the retail

operations – specifically enhancing the web-shopping

capability for CTM and Italtile Retail.

Security of the Group’s network is paramount to its

operations and during the year ongoing risk

management was conducted through analysis,

monitoring and testing, and upgrades of software and

hardware, policies and procedures.

During the period the business maintained its minimal

downtime track record.

Opportunities to enhance SAP functionality and roll out

technology to the retail operations to improve the

Group’s offering will continue to be explored and

implemented where appropriate.

Uninterrupted operation of the Group’s IT infrastructure

is critical to the business. Therefore the Group’s disaster

recovery plan is constantly reviewed and updated.

Management of potential downtime, network

penetration and system failure risk will remain a key

priority.

Electricity supply Regular load shedding occurred during the period,

impacting negatively on consumers’ confidence. While

generators, inverters and UPS technology have been

installed in the data centres, the stores are equipped to

trade manually and in-store service was largely

unaffected. In addition, most of the store buildings are

designed to optimise on natural daylight which enables

uninterrupted shopping.

The Group’s key local supplier, Ceramics, is a

manufacturer and as such, reliant on electrical supply.

The Company’s management has worked closely with

Eskom to limit supply constraints, and where possible

builds up inventory volumes to satisfy customer

demands.

Whilst the business per se is structured to operate

without interruption, ongoing load shedding will

continue to impact adversely on consumer sentiment.

Power outages will also severely hamper customers’

ability to access stores due to traffic congestion, which

may harm turnover. The situation will continue to be

closely monitored by management.

The Group has a close working relationship with

Ceramic’s management and will continue to ensure that

the appropriate production planning is in place. As

Ceramic’s single largest customer, the company has a

vested interest in guaranteeing the Group’s supply

requirements are met.




Liquidity, cash reserves and treasury

The Group’s cash reserves continued to exceed operational requirements. Intensive cost containment and cash flow management contributed to this position, supported by the strong cash generating nature of the business.The Group has in place an effective treasury policy designed to anticipate and mitigate potential major treasury risks, including:– sub-standard investment returns;– inadequate liquidity of investments to meet

commitments; and– institutional/commercial risk relating to funds into

which investments are made.

Capital management and containment of costs and overheads will remain key priorities in the forthcoming year.The treasury policy serves the Group well and will continue to attenuate risks linked to investments.

Credit management

Exposure to consumer credit risk was negligible due to the retail operations’ cash-centric model.The limited consumer credit facility which the Group does offer is outsourced through RCS, an independent financial services business specialising in credit products. Italtile and CTM also offer a trade credit facility which is managed and insured by an outsourced specialist debtors’ solutions company, Cladding Finance. Credit applications and credit management continued to be intensively monitored and well administered.

In the current economic climate, credit applications and management thereof will remain a priority focus area.

Brand reputation The Group’s long-standing Italtile Retail and CTM brands are respectively 46 and 32 years old, and they, and all other Group brands, are pivotal to the business model and the Company’s profitability. Accordingly, reputation management of all these brands is a major priority, conducted through continuous review and brand-enhancing activities.Potential areas of reputational risk include: poor customer service; lack of clear brand positioning; poor presentation; inferior product quality and unrealistic pricing; inadequate staff management; negative environmental impact; non-compliance with legislation and standards (health and safety/employment equity, etc); and inappropriate behaviour by franchises (non-adherence to values/policies).Each of these risk areas was monitored closely and mitigated through the following mechanisms:– dedicated, hands-on brand managers who have

extensive relevant experience in their market and merchandise segments;

– continuous sharing of best practice principles across the Group;

– ongoing training for staff on service and products;– implementation of an employment equity policy;

environmental sustainability programme; whistle-blowing facility; and involvement of the services of a Health and Safety expert;

– a clearly defined customer care and customer complaints process; and

– ongoing internal audit of all stores.

Customised strategies have been developed specifically for each of the three individual retail brands. These strategies will focus on growth opportunities for the respective brands and maintaining the good reputation they enjoy in the market.





Property Investment portfolio

The Property division manages this portfolio of well-maintained branded stores situated on highly visible, accessible sites. The stores are designed to afford customers an optimal shopping experience in an aesthetically pleasing environment, and contribute significant strategic advantage to the Group’s retail operation.The portfolio has an estimated market value of R2,0 billion (2014: R1,9 billion).

The portfolio and the marketplace are analysed on an ongoing basis to ensure that risk is minimised and potential investment opportunities realised. The Property division’s primary goal is to continuously improve the quality of its investment properties to support the retail operations in delivering the required rate of return.

Preservation of the organisational philosophy and structure

Empowerment, partnership, entrepreneurship and autonomy are central pillars of the Group’s business model and philosophy. Individual business units continued to be managed and operated independently within the broader Group structure, facilitating development of management experience and expertise across the organisation.

The Group’s organisational structure and culture will be maintained through mentorship, empowerment, encouraging transparent communication facilitated by flat reporting lines, and ensuring best practice leadership development.

Succession planning

Over the past 18 months the Group has made significant progress in improving compliance with relevant King III legislation in terms of its Board composition. The appointment of a new CEO and COO and the introduction of additional capacity at senior management level has substantially enhanced the depth of management in the Group.

The Group’s succession plan is based on ensuring that each key management position has cover, which includes a successor in both the short term and long term.Attracting, developing and retaining quality personnel will remain a key focus, with mentorship and leadership programmes prioritised.

Leadership development

The Chairman conducts a management mentorship programme through which the values and ethics of the business are instilled across the organisation. This initiative complements the other formal leadership development programmes discussed under Training in this report.Divisional management and the executive directors are closely involved in the day-to-day operations of the business and regular regional meetings and other interactions are held. This flat reporting structure and management’s open-door policy plays an important role in fostering mentorship.

In order to achieve its growth targets, the Group will continue to commit significant resources to developing leaders with extensive experience and expertise to build the business.


SOCIALStakeholders: franchisees, employees, customers and the community


Recruitment and retention

Number of employees including franchised stores: 1 719 (2014: 1 588).In the review period intensified focus was placed on improving recruitment processes and enhancing the relevance and quality of training. Both initiatives have started to deliver good results.The broader retail industry is characterised by a shortage of experienced, qualified personnel. In this competitive labour market the Group strives to be an employer of choice by promoting opportunities for empowerment and entrepreneurship through ownership models (including franchise and joint venture partnerships) and profit and share schemes.The Group has in place a Staff Share Scheme aimed at promoting partnership in the business. Participants in the scheme benefit directly from the growth in the Group’s sales and profitability, thereby incentivising staff to contribute to the success of the business. At 30 June 2015, 14,5 million shares (2014: 12,6 million shares) were held by eligible staff members.

The Group has a culture of developing and promoting from within; this will be augmented via external recruitment to fast-track the establishment of a talent pool. Improved processes will be introduced to attract and recruit new talent in the drive to build the resources required to achieve the Group’s expansion goals.Enhanced training will improve motivation and empowerment of employees, which will have a positive impact on retention.The planned intention is to formulate personalised career plans, and leadership development will remain a priority focus for key individuals.The Group’s culture of empowerment and entrepreneurship is a significant employee retention mechanism. This culture will continue to be facilitated through a range of means, including ownership opportunities.The Group’s profit and share schemes will remain key staff incentives. In terms of the Staff Share Incentive Scheme, a further allocation of shares will be made to qualifying staff members who achieved three years of service on 31 August 2015.

Training The Group identified two primary goals for the year: to enhance analysis of talent and potential, and measurement of performance; and closer align training interventions with specific requirements within the individual brand businesses. Good progress was achieved in both respects.The Group has in place Career Advancement Training which comprises a range of initiatives and programmes aimed at developing personnel and fostering management and leadership capacity.The total number of people interventions undertaken increased to 2 270 (2014: 1 311).A total of 264 courses (2014: 178) were conducted.363 candidates (2014: 193 candidates) completed the Academy’s Practical Tiling, Plumbing and Laminate course. CTM’s Operator Training Programme (“OTP”), conducted in conjunction with Stellenbosch University’s Business School, produced nine graduates (2013/2014: 11 graduates) suitably qualified for store management positions.

The goals for the year ahead are to instil greater retail-specific focus in training and development programmes; attract and retain key talent through promoting business partnerships; and encourage commitment to business success through development programmes and remuneration and reward strategies.The OTP will continue to serve as an important mechanism to build leadership capacity in the Group. Fifteen candidates are currently enrolled in the programme.The Group’s training spend is significant and will remain a key budget item in the year ahead.

Transformation Employment equity targets were attained at all levels except senior management.

Achievement of employment equity targets will remain a priority.

BEE rating The Group achieved an improved BBBEE contributor status of Level 5 (2014: Level 6) according to the existing scorecard.

Despite management’s best efforts, it is highly likely that the Group will be penalised by priority elements, and accordingly, will be non-compliant with certain criteria of the new scorecard. The Group will strive to put in place measures and initiatives to improve compliance with the new scorecard.



ENVIRONMENTALStakeholders: shareholders, franchisees, employees, suppliers and business partners and the community


Resource consumption and reduction

A customised policy is in place for each of the three retail brands regarding water and energy consumption and reduction, and is managed within the Group-wide sustainability agenda.

The Group will continue to target an annual water and energy consumption saving.

Water In line with growing customer awareness and demand, ranges of water-saving products were enhanced in Italtile Retail and CTM stores.Information and education regarding water-saving products and behaviour continued to be promoted in-store.

Management recognises that water shortages are likely to become a significant problem in this country, and accordingly a risk management strategy is being developed outlining contingency measures to ensure stores have access to water required to operate efficiently.

Energy Energy saving was achieved through installation of photovoltaic (“PV”) solar panels (which produce 40% of each store’s energy requirements) in 15 stores and retro-fitting new efficient lighting in some of the Group’s older stores.Independent metering equipment installed at stores experiencing inaccurate billing continued to improve management of energy consumption.

As part of the energy saving policy, a five year energy management plan is in place aimed at continuously reducing consumption.Where feasible, PV systems will continue to be rolled out across additional stores nationwide in the forthcoming year.Energy efficient technologies and lighting will be implemented in all new, upgraded and relocated stores, and rolled out to the Group’s older stores lacking this technology in due course.

Waste minimisation

The Group has in place a five year plan targeting a reduction in waste for recycling and waste to landfill by all stores. As part of this, a programme is currently being trialled at all Italtile Retail Gauteng stores to minimise waste.

The Group’s long-term goal is to continuously reduce waste to landfill. This will be achieved by re-using and recycling packaging materials where possible within the Group and throughout the Supply Chain.

Carbon footprint The Group’s fifth carbon footprint study confirmed a decrease of 4,8% (2014: 30% decrease) in direct CO

2

emissions per Rand value of turnover.

The Group’s sixth carbon footprint study has been commissioned. Given the consistent downward trend to date combined with recent initiatives implemented, it is anticipated that a further reduction in the Group’s direct CO

2 emissions will be achieved.

GOVERNANCE AND REGULATORY ENVIRONMENTStakeholders: government, regulators, shareholders, franchisees, employees, customers, suppliers and business partners


Compliance with

legislation

Long-term business sustainability is the Group’s primary

strategic imperative and management is mindful that

adherence to good corporate governance practices

across its operations will advance this goal. Accordingly,

the Group strives to comply with the Companies Act, JSE

Listings Requirements, the King III Code, BBBEE,

employment equity and labour legislation, the

Competition Act, the Consumer Protection Act and all

relevant tax legislation.

As appropriate, ongoing consultation with relevant

professionals and advisors will be conducted to ensure

compliance with legislation.

Pertinent seminars and training related to legislative

and other updates will be attended by management.

The external auditors conduct key legislative reviews

and will continue to support management in ensuring

compliance.


Group review *for the year ended 30 June 2015

(All amounts in Rm’s)

Seven-yearcompoundgrowth % 2015 2014 2013 2012 2011 2010 2009

Operations

Turnover 10 3 115 2 745 2 141 1 845 1 521 1 354 1 303

Trading profit 11 905 740 612 523 448 389 361

Profit before taxation 13 978 760 632 550 469 404 369

Profit attributable to equity holders of the parent 14 700 509 444 378 321 273 257

Headline earnings 13 661 530 436 377 319 274 258

Ordinary dividends paid 14 204 157 141 119 101 88 107

Financial position

Non-current assets 2 023 1 856 1 858 1 223 1 070 991 939

Current assets 1 079 857 793 1 400 1 226 1 075 994

Equity attributable to equity holders of the parent 2 672 2 179 2 247 1 931 1 637 1 422 1 306

Non-current liabilities 44 12 53 323 327 344 343

Current liabilities 324 471 293 292 262 239 244

Cash flow

Cash flows from/(utilised by) operating activities 443 (127) 376 226 254 (283) 228

Cash flows utilised in investing activities (175) (50) (694) (148) (107) (72) (71)

Cash flows (utilised by)/from financing activities (125) 123 (296) — (19) 399 229

Cash and cash equivalents at end of year 392 249 303 917 839 711 667

*Including discontinued operations.

(All amounts in Rm’s)




Financial ratios

Returns

Trading profit to turnover (%) 29,1 27,0 28,6 28,3 29,5 28,7 27,7

Return on shareholders’ interest (%)(1) 28,9 23,0 21,2 21,2 21,0 20,0 20,9

Average consumer price index (%)† 5,1 6,0 5,5 5,5 5,0 4,2 6,9

Earnings per share (cents) 12 75,9 55,3 48,3 41,1 34,9 33,0 32,3

Headline earnings per share (cents) 11 71,6 57,6 47,4 41,0 34,7 33,1 32,4

Ordinary dividends declared per share (cents) 11 25,0 19,0 16,0 14,0 12,0 11,0 11,0

Special dividend declared per share (cents) — — 50,0 — — 60,0 —

Productivity

Turnover per employee (R000’s) 3 258 2 977 2 799 2 701 2 498 2 375 2 310

Total assets per employee (R000’s) 3 245 2 943 3 465 3 840 3 770 3 625 3 427

Trading profit per employee (R000’s) 947 803 800 766 736 682 640

Turnover growth (%) 13,8 28,2 16,0 21,3 12,3 3,9 (20,3)

Number of employees 956 922 765 683 609 570 564

Number of stores 126 115 116 112 108 104 101

– Owned# 55 55 54 50 47 47 43

– Franchised 71 60 62 62 61 57 58

Solvency and liquidity

Interest cover (times)(2) 150,8 37,0 36,0 21,8 18,7 14,4 9,0

Dividend cover (times)(3) 3 3 3 3 3 3 3

Gearing ratio (%)(4) 1,1 7,6 2,0 17,7 20,2 24,1 26,1

Current ratio (times)(5) 3,3 1,8 2,7 4,8 4,7 4,5 4,1

Acid test ratio (times)(6) 1,9 1,0 1,6 3,6 3,8 3,6 3,3

* Including discontinued operations. (1) Return on shareholders’ interest: Profit attributable to equity holders of the parent as a percentage of average equity attributable to equity holders of the parent.† As per Statistics South Africa.# Includes CTM and Italtile web stores. (2) Interest cover: Trading profit divided by finance cost.(3) Dividend cover: Headline earnings per share divided by dividends declared per share (excluding special dividends).(4) Gearing ratio: Interest-bearing loans and borrowings as a percentage of equity attributable to equity holders of the parent.(5) Current ratio: Current assets divided by current liabilities.(6) Acid test ratio: Current assets, less inventory, divided by current liabilities.


Group review * continuedfor the year ended 30 June 2015



Financial ratios (continued)

Stock exchange performance

Market capitalisation+ (Rm’s) 23 10 707 7 875 5 514 5 147 4 094 3 316 2 109

Closing share price at year end (cents) 20 1 160 855 600 560 445 360 265

Market value per share

– High (cents) 1 325 860 665 570 465 465 330

– Low (cents) 835 590 550 410 340 260 220

Closing share price to net asset value per share 3,92 3,53 2,40 2,57 2,39 2,88 1,57

Price-earnings ratio (times) 15,28 15,46 12,42 13,63 12,75 10,90 8,20

Dividend yield (%) 2,2 2,2 2,7 2,5 2,7 3,0 4,2

Earnings yield (%) 6,5 6,5 8,1 7,3 7,8 9,2 12,2

Number of shares in issue (millions)+ 924 921 921 919 920 921 796

Volume of shares traded (millions) 70 20 50 25 34 32 38

Value of shares traded (R000’s) 763 680 147 964 304 481 115 085 128 853 111 034 103 082

Volume of shares traded as a % of total issued shares+ 7,6 2,2 5,4 2,4 3,2 3,4 4,8+Excluding treasury shares.


italtile limited the strength of our...

Documents