BDTV: Italtile posts 19% revenue growth as it implements business optimisation plan
Italtile chief financial officer Brandon Wood speaks about benefiting from new optimisation plan and whether resilience in home improvements markets is likely to continue‚ in this interview conducted on February 16.
BUSINESS DAY TV: Italtile has again defied a tough economy to pose headline earnings growth of 28% in the six months to end December‚ on a revenue increase of 19%. It’s also kept the dividend cover at three times‚ although it has spent more on capex. Joining me now on News Leader is chief financial officer Brandon Wood.
Brandon…is it fair to say that in contrast to a couple of years back the weak rand has flushed out some of the smaller players that had sprung up and posed a bit of competition to Italtile? Is it one of the factors in this set of results because it is quite extraordinary to push out 28% earnings growth in what is a very difficult climate.
BRANDON WOOD: Absolutely and it’s very evident. If you look at the coastal regions where we performed the best in the group‚ that being KZN and Eastern Cape and the Western Cape‚ a lot of the smaller players coming under quite a lot of working capital strain…so we’ve seen stock outages‚ gaps in ranges‚ etcetera that I guess has been to our benefit.
BDTV: But you’ve also obviously invested quite a lot in your own stock because you do refer to it in your commentary. Was that a deliberate decision over the period and something different to what Italtile has done previously?
BW: No‚ the Italtile stock levels are in support of increased turnover‚ yes‚ but what we have also done in the six-month period is this business optimisation programme we speak about in our results.
That initially focused on our International Tap Distributors business and our Cedar Point businesses. Now what that really called for was an increase in investment in business-critical line items. So our in-stocks there have improved significantly‚ which means that items like brassware have grown quite nicely during the six months. There is a bit of a hangover though of other items that we still need to exit so there is a bit of surplus stock in those businesses which we will move out as we get to grips with this business optimisation programme.
BDTV: Okay‚ and as far as your international suppliers are concerned and the impact the weak rand has had on you‚ has it been fairly dramatic‚ did you have to make some very quick and calculated decisions to use different suppliers who maybe had a slightly more competitive price range‚ or have you been able to supply what you normally would have done and did okay‚ even though the rand collapsed as it did?
BW: What we are able to do is capture costs … exchange rate fluctuations in our supply chain … Distribution Centre and the two businesses I mentioned earlier‚ Tap Distributors and Cedar Point. So they’ve had a little bit of margin squeeze really to the benefit of stores to pricing of main competitors. From the supply perspective‚ we have some well-established relationships overseas so our suppliers have worked with us. We haven’t had to make any switches between suppliers of any real notice‚ so I guess for us it’s just been business as usual and we will always capture as much as we can in the supply chain.
BDTV: You’re also lucky that you have your own suppliers‚ Ceramic Industries being one of them and it’s interesting to see the contribution from Ceramic essentially double over the year. So they’ve obviously benefited strongly and perhaps you can talk us through that performance.
BW: Absolutely…with the weak rand they’ve had an increase in demand locally‚ as you can imagine‚ some of our competitors are looking to them for supply and they’ve also been able to pass price increases on as a result. So they’ve had an increase in demand and some price benefits came through in their results and since there’s been a dramatic improvement.
BDTV: Would you anticipate that to continue?
BW: Absolutely yes.
BDTV: So you talked about price increases overall‚ your selling price increases were 8% for the group…that’s not bad in an environment where inflation is officially just under 6%. Are those price increases that you’ve achieved over this half likely to continue‚ or is it going to normalise?
BW: It’s probably normalised at this point. We’ve taken on a few price increases during the second half of last year‚ and then into this first six months. We don’t envisage anything over the next six months.
BDTV: You talk about an HR optimisation programme in the results and it’s not often that one sees that specifically mentioned in commentary‚ but it sounds like you are battling to find the appropriate skills for your business. Tell us what Italtile is doing and if you weren’t to do this‚ what the impact on the business would be?
BW: As you know‚ people are critical and what we have done in the past is really try to develop our people as best we can. We have a tiling‚ plumbing and laminate flooring academy. We’ve had a couple of courses developed together with the University of Stellenbosch to train our operators. But with our new CEO and chief operating officer coming on board‚ we’ve identified some gaps and what’s clear to us now is that we don’t have an adequate pipeline to support future growth at a particular point in time with regards to operators in particular…so the people that run our stores. So we’ve rehashed some of our training programmes…had a good look at the results out of previous programmes and we are now investing significantly in that space‚ and people are key.
BDTV: So how many people at any one given time do you have on these courses?
BW: For this particular year‚ we have 20 individuals that we’re training that we hope to come through as operators in the future.
BDTV: So this is key to the future essentially of the business?
BW: Absolutely.
BDTV: What about expansion…you’ve got 119 stores‚ 16 of them in Africa. Maybe first before we get to expansion‚ how are those African stores trading?
BW: The African stores are doing quite well. The neighbouring countries of Namibia‚ Botswana‚ Lesotho and Swaziland have produced a good set of results. Kenya is a mixed bag.
We saw very good results coming out of Nairobi but not so much out of Mombasa because of the political issues there with terrorists‚ etcetera. Still there is a lot of potential. Tanzania is a franchised model and the franchisee there has struggled a bit with cash flow‚ again talking to working capital constraints and also challenges faced at the ports. It’s a reality that we face in East Africa. But we are pleased with what we have out of East Africa.
BDTV: Do you have anything in the oil-dependent countries in Africa…Nigeria‚ Angola…?
BW: No‚ not at all.
BDTV: Do have any intention‚ and did you have any intention to go in there and then thought no‚ it’s not looking so good?
BW: No our focus will be on SA and East Africa‚ if anything Kenya‚ Nairobi maybe a store or more. But our focus is squarely here at the moment.
BDTV: So in the next half which traditionally is a better performance for Italtile‚ are they going to…
BW: …our first half is traditionally better‚ I think last year…
BDTV: Sorry I’m getting a bit confused…the second half of the year. Are you going to be opening more stores‚ is it going to be more expansion for the group at all?
BW: On the TopT space yes‚ that’s a franchise model. So we’ll be opening at least another six franchised stores in the next six months which will bring the total to 10 that we would have opened during the year‚ which is in line with what we’d stated and we see that going forward. We probably will have an Italtile or CTM opened locally in the next financial year.
BDTV: And as far as your dividend is concerned‚ the dividend cover is steady at three times so that equated to 33% increase in the dividend. Any plans to change that or is it all okay…?
BW: No that’s going to remain as is and we will be using the funds to invest in the business.