Italtile gives brutally honest view of South African business environment

Italtile told shareholders this morning that it failed to achieve its goals to gain market share and improve profits in its South African businesses due to load-shedding, rampant crime, increased competition, and high inflation and interest rates.

The company released its results for the year ended 30 June 2023, which showed marginal improvement in some areas of its business and significant decreases in others.

“Notwithstanding the weak economy, our goal was to gain market share and improve profits,” the company said.

“Disappointingly, we failed to achieve our goals in the South African businesses, although our East African and Australian operations reported better results.”

Italtile’s total system-wide turnover grew by 1% to R11.5 billion (2022: R11.3 billion), compared to R11.3 billion the year before. 

Revenue from Italtile-owned stores and entities rose 2% to R9.2 billion (2022: R9.0 billion). However, like-for-like retail store turnover decreased by 0.3%. Price inflation of 6.7% softened the effect of declining volumes. 

Italtile’s retail store profits declined slightly as its margins and turnover decreased. 

In the manufacturing division, Ceramic and Ezee Tile’s combined manufacturing sales rose by 4.1%, although margins and profits declined. 

The integrated supply chain import businesses, comprising Cedar Point, ITD and DC, reported a decline in sales of 4.6% compared to the prior period, primarily due to weak consumer demand based on reduced disposable income. 

Italtile said sales from these supply chain businesses were further constrained as inventory – increased to mitigate against uncertain supply during the pandemic – was reduced to usual cover levels in retail. 

The company said it had experienced severe margin pressure caused by manufacturing inefficiencies, the adverse impact of load-shedding, and Italtile’s strategic margin-management response to subdued demand and increased competition.

The consolidated gross margin across the company reduced by 2.4%. 

“Margins in the individual business units reflect margin absorption in the integrated supply chain – both manufacturers and importers – to support our price-sensitive customers,” it said.

“In the first half of the year, significant cost pressure was experienced in logistics and property costs due to increases in fuel prices and utility costs.” 

In its South African businesses, Italtile said increased manufacturing competition and the influx of imported products continued to squeeze margins.

At the same time, delays in routine shutdowns and maintenance projects resulted in unplanned costs and poor capacity utilisation.

Italtile also pointed to increased competition as weighing on its operations.

“In the retail segment, big-box retailers and wholesalers continued to roll out stores while opportunistic independent operators proliferated in the informal market,” the company said. 

“Soft global demand and a significant reduction in shipping costs made imports more affordable despite the local currency weakening during the period.”

“With low barriers to entry and little regulation, several new competitors in the tile adhesive segment also started production.”

Concerns regarding crime in its operating environment continued to grow, and the general costs of securing the safety of customers, employees, and properties increased ahead of inflation. 

Although tile sales value grew in its South African segment – supported by an increase in average selling prices – sales volumes, profits, and margins declined in FY2023. 

Italtile also pointed to rising living costs and interest rates, which put further pressure on homeowners experiencing high unemployment levels and real wage decreases. 

“In addition, the depreciation of the currency and inflation-driven input cost increases drove up product and building costs, reducing affordability for consumers in the new build and renovation markets,” Italtile said.

“Consumer and investor sentiment declined further in light of record power cuts, deteriorating infrastructure and service delivery failure, endemic crime and corruption, and uncertain foreign policy.” 

However, the company has made strides in reducing its reliance on the national energy grid, having commissioned an additional 2.2 MW solar power purchasing agreement at its Gryphon factory.

Italtile’s trading profit decreased by 15% to R2.3 billion (2022: R2.7 billion) and was heavily impacted by the poor performance of the manufacturing entities, which contributed 33.9% (2022: 40%) to the company’s profits. 

The company’s earnings per share (EPS) decreased by 13% to 132.6 cents (2022: 152 cents), while headline earnings per share (HEPS) declined by 13% to 132.3 cents (2022: 152.1 cents). 

“The small disparity between EPS and HEPS is attributable to profits of R5.4 million realised on disposal of property, plant and equipment during the Review Period,” Italtile explained.

During the 2023 financial year, Italtile’s inventory volumes declined, although the value remained flat due to currency weakness. 

“This is a reflection of our objective to improve stock turn and reduce high stock levels built up as cover during pandemic-related supply chain delays and pricing volatility,” the company said.

Italtile declared a final dividend of 21.0 cents per share – a decrease from the 27.0 cents it paid shareholders in 2022.