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SIMON BROWN: I’m chatting with Lance Foxcroft, CEO at Italtile. Results for six months ending December. Turnover was flat, Heps and dividend both down 14%. Lance, a really, really tough period. Let’s drill into some of it. Consumers have been part of it, although there is some base effect. A year ago consumers were just tapping into their two-pot money. We know they took out tens of billions. But consumers are price-sensitive and being cautious around spending in the home.
LANCE FOXCROFT: Yes, 100%, Simon. I think it is a bit of a base effect on last year’s similar quarter, with a lot of money released through the two-pot system. Retail was a systemwide churn; revenue was flat for six months. So retail is not really where we see the big margins. Manufacturing operations are facing a lot of extra costs and there is a bit of a war for market share, given that tiles are being dumped here.
SIMON BROWN: Yes, you mentioned tiles being dumped. We chatted around that when we spoke about the full year to June result. You’re waiting on the Itac [International Trade Administration Commission of SA] decision that you’re hoping to get in the first half of this year. I imagine you’re hoping for duties to be imposed.
LANCE FOXCROFT: Yes, it was in November that I initiated an investigation into tile dumping, which is the first time. Typically they take about six to eight months to come back with a preliminary finding on any potential relief, and then 18 months to finalise the investigation. So yes, we’re hoping they can move as quickly as they can while we’re going through all their processes.
SIMON BROWN: The challenge there is competitors, as I understand – neighbouring countries. You’ve got excess capacity, excess production and they’re just dumping into our market just because they’ve got it and they need to move their stock.
LANCE FOXCROFT: That’s what we see from the reports. We look at the import statistics from Sars every month, and certainly the prices that are presented there we know no one in the world can manufacture for, so it certainly looks at the moment like there is some dumping, and we’ve raised the concern to Itac on that basis.
Competitors have set up big manufacturing operations around the cities, set up factories that are way in excess of the capacity of the local demand, so they are sort of forced to export to try and fill their capacity – and they are new factories. So they’re willing to try and buy some market share. In the longer term we’re not quite in the same position, but we are fortunate that all the assets are paid for and we can fight them on price.
SIMON BROWN: Yes, absolutely. And if we look at bringing it back to local, you’ve released some new ranges. You picked up the Club Med project in KwaZulu-Natal, which I imagine is a fairly chunky deal as well. There are some bright spots in the numbers.
LANCE FOXCROFT: Yes, I think firstly the interest rate coming down is always a good sign for us in the building industry. As you know, the building is kind of cyclical to interest rates and lower inflation. Lower interest rates certainly bode well for a bit of an improved building cycle. We hope that turns soon.
And then we’re still very under-housed here. The big project for inflation is nice to get, but really the residential houses are what uses a lot of square metres. We continue to focus on what sets us apart from the importers in terms of fashion and style and being vertically integrated, so they can respond quickly with stock, and then give our customers the service and the quality guarantees and everything else that fits, and they can have peace of mind and make sure they’re getting a great deal and a great product.
There are a few things that we can do differently from the guys that are dumping tiles, and that’s where we’re focusing.
SIMON BROWN: I take your point. It’s the ability to respond to market and respond quickly.
In your Ceramic Industries capacity utilisation is 77%. Obviously, an ideal number here is 99%. What is a realistic sort of short-term target for that capacity?
LANCE FOXCROFT: Typically, we’ll be targeting over 90% on a year average. Obviously this was peak trading in the last six months. Typically the next six months are a bit softer, but we have a few plans there. I would have liked to be commissioning a new … line, which is a product we haven’t made so far. So we’ll hopefully make inroads into that part of the market, and that part of the market is growing so we hope to load our factory with that product.
And then in our Pegasus factory we intend making products similar to what was made at the Johnson factory, which is entrenched in the market, and gives customers who were using those tiles before Johnson closed a product to have continuity with.
SIMON BROWN: Gotcha, gotcha. In terms of costs, your like-for-like operating cost – which is one of the things you absolutely can control – up only 3.5%. In tough times managing costs is crucial and you’ve managed to keep a fairly decent lid on those.
LANCE FOXCROFT: Yes. So that’s the like-for-like Australian operation, 3.5%. And in an environment with low growth and where our selling price inflation is almost zero as well, if you can’t get costs of zero then you go backwards on margin. It’s been a focus on squeezing costs lower. In some of them we’ve been successful – obviously on electricity and water and rates and taxes – but it’s more challenging. So that’s the game. And if you can’t …, productivity and efficiency improvements every year, we need top lines. So we’re hoping to do a bit of both this next year.
SIMON BROWN: You mentioned Australia. You had a A$7.6 million accounting inconsistency. You’ve injected A$3 million into the business. Is that, as far as you know, the end of it? Is there more to come or is this a one-off in this set of numbers?
LANCE Foxcroft: As far as we know it seems like the impact at the moment. It is a … on the go, just to understand where it came from and how it happened. But we are not expecting much more of an impact. And yes, like you said, it is a once-off expense through the books.
SIMON BROWN: A last question – gas supplies. We’ve chatted around this. The immediate shut off being pushed out to June 2028 gives you some two years of breathing room. We’ve chatted before. You are not sitting back and waiting; you are looking at other options as well as discussing with current suppliers.
LANCE FOXCROFT: Yes, we have to. It’s a very frustrating environment; pricing sort of for a six-month time is not even certain. So between us and Sasol there a very limited view of the long-term pricing and it’s difficult to find a number of off-takers to aggregate to get enough demand to get one of the long-term projects of the go. So we’re hoping for some sort of foreign funding or sovereign underwriting that will help us get the project off the ground. And in the light of our modelling and what we think the prices might be we have to sort of start to pursue the whole agenda a little more aggressively.
SIMON BROWN: We’ll leave it there. Lance Foxcroft CEO of Italtile, appreciate the time.
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