ALEC HOGG: Earlier today I spoke to Italtile's Chief Financial Officer, Brandon Wood. The results were released today for the year to end June and the big news there is a special dividend of 50c per share. This, in addition to an 8c final dividend kind of puts it into perspective. The Company did well – double figure growth in earnings, but that special dividend was what I wanted to find out about and that's the first question..BRANDON WOOD: Well, over the last couple of financial years as you know, we've built up a cash balance. We always had the prospect of an acquisition on the cards. We weren't really sure of the extent of the acquisition. That filtered through in the last financial year with our Ceramics Industries' investment. I think to some extent we've always been accused of having a lazy balance sheet, so we've taken heed. We've looked to really work off our capital structure. The business is highly cash-generative as you've seen. After our close of R1.3bn in the year, we still ended the year on a pretty solid cash balance. That balance continues to grow. So to some extent, to not only improve the return for investors, we've also looked to remove some of the complacency that comes with a high balance. There's been a big drive to improve our efficiencies in the business and our cost containments and the like. This is just another mechanism where we can make sure we're kept on our toes..ALEC HOGG: Well, in the context of the business, it's a lot of money that you're giving back to shareholders. You have a final dividend of 8c and here's a special dividend of 50c. The share prices reacted accordingly – up at 8% today. I'd guess that was not unexpected..BRANDON WOOD: No. The special dividend is not unknown in our particular organisation. I think this is the 3rd or 4th that we've actually paid. By no means are we setting a trend going forward, but I think a lot of value has come from the shareholder investment. We've built up quite a sturdy property portfolio with very little leverage as you guys would know, so it's probably time to give back something to the shareholders..ALEC HOGG: You mentioned the ceramic industry's investment – 20%. Is that first of many?.BRANDON WOOD: So we'll see as time progresses. It was important for us to get that strategic investment in there. Ceramic Industries is important for our long-term growth strategies in terms of supply of product. At this point in time, there seems to be no intention to acquire more, but we'll see as time goes on..ALEC HOGG: A vertically-integrated model is becoming a lot more popular. We've seen many companies in the Johannesburg Stock Exchange flourishing as a result of it. Is that part of what's driving you here, given that ceramic is your biggest supplier?.BRANDON WOOD: Absolutely. Our Supply Chain was really critical in making sure basic retail principles are on; right stock, right price, right place – were in place. It's been really an important part of our success story – our integrated Supply Chain – for sure..ALEC HOGG: We'll be watching that with a lot of interest. Something else we'll be looking for are your moves into other parts of Africa – 17 stores, but you didn't add to them in the past financial year..BRANDON WOOD: No. So we recently opened the Nairobi store. When I say recently – within the financial year – and they've done pretty well. Like all other retailers we face a bit of challenges around logistics. Moving of stock is difficult, especially with our particular type of stock. We still believe there to be potential in Africa – yes. We have pieces of land in Zambia and Uganda for instance that would potentially be developed in future, but our focus remains on South Africa. We think there's still lots of opportunity in South Africa and the immediate neighbouring countries..ALEC HOGG: Before we come back to South Africa, you do also make mention of congestion in the East African ports being a challenge..BRANDON WOOD: Absolutely. As I said, the logistics are proving to be a big challenge for us..ALEC HOGG: How long does it take you to get product there?.BRANDON WOOD: Generally the lead time is about six weeks on product but it ends up at a port. We've been faced with scenarios where stock sits at port for 1/2/3 months. Obviously that impacts the retail operations. You might have a situation where a store is out of stock for an extended period and then all of a sudden there's a huge glut of stock that comes in and that, in itself, has its own challenges in terms of managing the movement of that stock..ALEC HOGG: So the practical realities are very real..BRANDON WOOD: Yeah..ALEC HOGG: Back in South Africa your turnovers are up 11% in this past financial year. Is that a reflection of the home improvement industry or of construction generally?.BRANDON WOOD: Alright, so that 11% is broken up. It's our system-wide turnover so it's broken up between our corporate environments: the Company-owned stores and entities are actually up 16% and the franchise network is up 7% although that's really a function of the geographical location of our franchise stores..ALEC HOGG: Underlying market? It sounds brilliant if you look at your Company stores..BRANDON WOOD: So definitely; there's been pressure on new build. The growth is coming out of the renovations market still and we're seeing good growth on merchant categories outside of Italtile – like our brassware, our sand-ware and the likes..ALEC HOGG: Also another trend – and perhaps it's a bit early to call it a trend in this period, your Company-owned stores expansion. You added five there but not franchises..BRANDON WOOD: Ja, and that's where it's a once-off so it's a bit of a two-page story. We've got the Top T Network we'll be expanding. That will be predominantly franchised. The franchised model is still very important for our business given our flat structure, our value of entrepreneurial spirit and partnerships. But what we've seen in terms of the move between franchised stores and corporate stores, predominantly in the CTM space, is the function of franchises coming to an end and us looking to take back stores and perhaps improving the environment before we look to re-franchise again..ALEC HOGG: A bit like what Woolworths did?.BRANDON WOOD: Well I say Woolworths actually did a reacquisition of most of their franchised stores..ALEC HOGG: Is it similar ?.BRANDON WOOD: No. Our intention is always just to maintain that franchise network but we'll do a bit of panel-beating and look to re-franchise..ALEC HOGG: And that was Brandon Wood, Chief Financial Officer of Italtile Tiles.
