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Chief Executive Officer's report and review of operations

“While a range of initiatives contributed to enhancing the business, numerous additional opportunities exist to leverage further growth and efficiencies. Management acknowledges that substantial progress needs to continue to be made to attain the Group’s ambitious growth targets.”
J N Potgieter (Chief Executive Officer)

OVERVIEW

Operating environment

Trading conditions and consumer sentiment continued to deteriorate over the year as a result of heightened economic pressure and sociopolitical uncertainty. Furthermore, the paucity of ethical standards and leadership accountability, reflected by the unrelenting evidence of corruption across both public and private sectors, demoralised the citizens of this country and weighed heavily on the national psyche.

The FNB/BER consumer confidence index (July 2017) reports on the longest period during which consumer confidence has been at or below zero on the index since the survey started in 1982 – 12 consecutive quarters. Further findings in the report confirm that most consumers continue to regard the present time as “unsuitable to buy durable goods”. The Momentum Unisa Wealth report (July 2017) reveals that the real value of South African households’ net wealth is lower than a year ago (Q1 2017 vs Q1 2016), and at the same level as three years ago (Q1 2014).

In this adverse environment, homeowners curtailed or deferred discretionary spend on residential improvements and renovations, while the new-build segment declined further, reflected by a marked decrease in building plans passed.

In general, large segments of the market remained overstocked due to the downturn in consumer demand and the high level of imported product in the country, culminating from opportunistic traders capitalising on currency strength. With the industry-wide fall in sales, price competition and margin pressure intensified.

In this context, the Group’s robust business model served it well. The strategic retail brand portfolio ranging across the income continuum, integrated supply chain, strong partnerships with entrepreneurial franchisees, property portfolio and long-standing solid reputation, together with sustained investment in revitalising the offering continued to appeal to traditional customers as well as new, emerging homeowners.

SCORECARD

Priorities

At the end of the previous financial year, management identified a range of priorities aimed at driving further growth in the business and improving returns for stakeholders. The Group’s attainment of those priorities is discussed below:

  • Instil the principles of retail excellence as a standard operating procedure to achieve the Group’s goal of being the first-choice retailer in its segment through offering an unrivalled shopping experience.

    During the review period, the roll-out of the Business Optimisation Programme (“BOP”) across the Group was concluded; the organisational structure was enhanced through improved training and performance management of personnel; better measurement and management of trading intelligence was achieved; and customer service, epitomised by the Group’s ethos “Right product at the right time, place and price”, was prioritised. While all of these initiatives contributed to entrenching key retail excellence principles, numerous additional opportunities still exist to leverage further growth and improvements in the business.

  • Continue to expand the Group’s store network, including opening 15 TopT stores in the year ahead.

    Narrowly missing our target, TopT opened 14 stores – 10 corporate – nine of which are in new territories. The Group also opened two CTM stores. Notwithstanding persistent country-specific risks, management has confidence in the Group’s business model and brands, and expansion of the retail footprint across the portfolio remains a key strategy. Accordingly, the Group will continue to invest in new stores and new territories in the period ahead.

  • Leverage opportunities in the supply chain, specifically in the logistics and distribution operations.

    Management’s rationale is that a direct correlation exists between successful retailers and their greater extent of control of the supply chain from the factory gate to the customer’s home. Accordingly, during the review period, the business continued to identify and resolve inefficiencies in the areas of logistics and distribution and explore opportunities to optimise service to stores. The TopT network, which comprises numerous small stores in outlying and rural areas, provides a unique challenge in this regard and remains the subject of further analysis.

  • Continue to invest in information technology (“IT”) and e-commerce to keep abreast of opportunities in that rapidly changing environment.

    Further material investment was made in both e-commerce and IT. In the local e-commerce sphere, TopT’s website was upgraded and the functionality improved on CTM and Italtile Retail’s online stores, while further afield, new webstores were launched for the CTM operations in Kenya and Tanzania. These CTM webstores will play an important role in building the brand’s profile and expanding the retail footprint in markets where the Group has limited brick and mortar stores.

    Additional investment was also made to improve fibre connectivity for the Group’s stores and e-learning training platform, and leverage further BOP benefits via enhanced data compilation and analysis software. In the forthcoming financial year, new handheld scanners with improved functionality designed to enhance convenience of the customer shopping experience will be rolled out to CTM stores.

  • Capitalise on opportunities to gain market share from imported product through Ceramic Industries’ new Gryphon factory.

    During the period, Gryphon entrenched its position as a first-choice manufacturer of import-quality products. Strong and sustained demand for Gryphon’s range accelerated the installation of the operation’s second production line, which was commissioned in July 2017. The offering should continue to gain market share as the preferred import substitute as the currency weakens.

  • Prioritise improved inventory management and working capital.

    At the half-year, management noted that investment in inventory (and consequently stock provisions) were at a higher than optimal level due to a number of factors, including overly conservative safety stock levels in the stores with the roll-out of BOP; additional stock in the system required to supply new stores; stock landed at higher than anticipated rates due to the decline of the Rand; and an underperforming range matrix. This overstock situation was exacerbated by the marked slowdown in sales in most segments of the market during the year. In this context, management undertook to intensify its focus on improving the Group’s working capital position and investment in inventory through the following remedial actions:

    • Improve warehouse disciplines;
    • Reduce stock control costs;
    • Leverage BOP across the business to optimise stock holding;
    • Improve efficiencies in the overall supply chain; and
    • Deliver better productivity and customer service to enable the business to retain and gain market share.

Management is pleased to report that the business has made progress in building cash reserves and rectifying its overstock position. Resulting from a range of judicious de-stocking initiatives, cash reserves have increased by 47% from the prior year, growth in stock control costs has been arrested, and the quality of the inventory (including the ratio of business critical items) has improved.

While all of the abovementioned initiatives contributed to enhancing the business, numerous additional opportunities exist to leverage further growth and efficiencies. Management acknowledges that substantial progress needs to continue to be made to attain the Group’s ambitious growth targets.

INDUSTRY TRENDS

Historically, traditionally house-proud South Africans have invested relatively freely in upgrading or replacing their homes. However, with intensified pressure on disposable incomes, homeowners increasingly view property spend as a luxury indulgence and are significantly more discerning in their purchases, (which are now less frequent than in prior years), and more selective in their choice of retailers.

During the year, a range of trends emerged in the industry which illustrates this:

  • While price and service remained key sales drivers, consumers are also gravitating to “convenience” offerings – convenient both in terms of accessibility of brick and mortar stores as well as to innovative online and digital technology offerings aimed at expediting and enhancing the ease of the shopping experience. The Group’s continued investment in its national store network and digital and in-store technology are designed to cater to this trend.
  • Rapidly evolving technology and its omnipresence in most areas of modern lifestyles has had a significant influence on driving quicker changes in fashion trends and a growing demand for instant gratification from consumers seeking latest fashion products with limited lead times. Associate, Ceramic Industries’ state of the art inkjet printing technology has been a game changer for the business, enabling its factories to respond timeously to up to the minute design trends.
  • The widespread availability of technology to consumers and their unlimited access to online research information has served to educate them and influence their expectations of the in-store experience. This development has necessitated that retailers improve their offering to meet customers’ increasingly demanding aspirations. Up-weighting the “delight” and “disruptive” factors in the shopping experience has become a major strategy for the Group’s brands.

GROUP PERFORMANCE

Retail brands

Despite the competitive landscape, CTM maintained its share of market, while Italtile Retail and TopT continued to grow their respective customer bases in both existing and new markets.

All three brands grew their sales and total value of the average basket, however Italtile Retail and CTM recorded lower profitability, while TopT improved profits. Each of the brands experienced a degree of margin pressure, reporting a slight decline in margins.

The strongest performing regions across the brand portfolio were Limpopo and the Western Cape (the latter a function of increased property investment resulting from homeowners semi-grating from other regions), while Gauteng, the region which historically delivers the Group’s highest value in sales, reported flat results.

While CTM’s results underperformed management’s targets, under new operational leadership the business made progress on improving basic disciplines. Enhanced efficiencies were achieved in warehouse management, and the brand’s performance rating programmes, Voice of the Customer and Mystery Shopper, recorded better levels of customer service and sentiment in the stores. Management recognises that further substantial improvements need to be made across the business to bring it in line with the Group’s expectations.

Italtile Retail’s premium-end market niche continued to contract as wary consumers postponed their investment decisions in the current climate. Furthermore, the Commercial Projects division which had reported an upturn in recent months experienced another setback, as a number of projects were put on hold following the sovereign credit downgrade by investment rating agencies. During the period, the brand upgraded its bespoke sales consultant training programmes, aimed at raising service benchmarks even higher, and is well positioned for growth when trading conditions improve.

In the period under review, TopT achieved national brand status with the expansion of its store footprint to all nine provinces. The good local geographical distribution of sites was complemented by the opening of a store in Botswana in July 2017. TopT’s solid results for the period illustrate the optimal use of BOP across the store network, with a strong correlation between availability of business critical stock and higher sales.

Supply chain

The Group’s strategically integrated supply chain comprises International Tap Distributors (“ITD”), Cedar Point and Distribution Centre.

During the review period, ITD reported a decrease in sales and stock turn primarily due to the overstock position of many of the Group’s stores; despite this, however, profits and margins improved due to better cost control. ITD’s founder (and former Managing Director) retired at the end of the financial year, selling his 14% shareholding in the business to the Group, which now owns 98% of the company. A new, well-qualified and experienced management team has subsequently been appointed, and in keeping with Italtile’s ethos of profit sharing and empowerment, the Group intends selling a 10% minority stake to a suitable partner from this team during the second half of the new financial year.

Cedar Point recorded higher sales, but profits, margins and stock turn declined, primarily due to a sub-standard range/price matrix and historically poor inventory management. Re-engineering of the operation is a key priority in the period ahead and will include range rationalisation, a change in warehouse management systems, restructuring of the staff complement and reconfiguration of logistics solutions to the stores. Remedial action to improve investment in stockholding will include exploring opportunities to supply the open market.

In the Distribution Centre business, sales, profits and margins deteriorated as a function of the general downturn in demand from the Group’s stores. However, inventory was reduced due to prudent buying decisions made in the volatile Rand environment experienced during the period.

For additional information, read the detailed individual business unit reports.

RESULTS

At the end of the first six months of this period, management cautioned that due to the subdued economic climate and constrained consumer demand, results in the second six months would be weaker than the first six (being typical of the Group’s cyclical long-term retail sales trend), but also weaker than the comparable second six months of 2016.

Disappointingly, this forecast proved to be accurate, with sales and profitability failing to meet management’s targets. Key factors contributing to the inadequate performance include the slowdown in discretionary spending; the volatility of the currency; the Group’s overstock position, which while substantially improved over the past six months, remains a key focus area; and the general country-specific risks which continue to cause both private and public sectors to suspend investment in property.

System-wide turnover for the period increased by 4% to R6,21 billion (2016: R5,96 billion). System-wide turnover is defined as the aggregate of the Group’s consolidated turnover as reported (total sales by Group-owned entities and corporate stores, excluding sales from owned supply chain businesses to corporate stores) and the turnover of franchisees of the Group.

Like-on-like retail store turnover for the period increased by 2,7%. Retail store turnover is defined as the aggregate of turnover of all stores, either corporate or franchised, in the Group’s network.

Trading profit increased 2% to R1 063 million (2016: R1 047 million). While turnover for the period includes the partial or full contribution of the 10 corporate TopT stores opened during the period, profitability was offset by high pre-opening expenses. Average price inflation of 4,3% was lower than the prior comparative period (2016: 6,5%).

Retail margins were only marginally lower despite both de-stocking activities and the retail brands continuing to offer competitive value to price-conscious consumers. This was achieved through improved containment of costs in the second half of the period (specifically in distribution, manpower costs and stock control); prudent marketing activities; improved use of trading intelligence and an enhanced mix of higher margin products in the average basket.

The Group’s basic earnings per share rose by 3% to 90,3 cents (2016: 87,8 cents), while headline earnings per share decreased 1% to 85,7 cents (2016: 86,9 cents).

Basic earnings include the impact of a R37 million once-off gain realised on the sale in December 2016 of the Group’s Australian property holding company, which is excluded from headline earnings.

Good progress was achieved in terms of the Group’s stated goals for the second half of the period, namely to reduce operating costs and to improve its working capital position. In this regard cash and cash equivalent reserves at the end of the period grew to R511 million (2016: R347 million), representing an increase of 47%. Inventory levels reduced to R548 million (2016: R693 million), a decline of 21%, but simultaneously reflected enhanced quality. Stock management is a core discipline across the business and improved stock turn and reduced stock losses are closely monitored key performance indicators.

During the period capital expenditure of R334 million (2016: R375 million) was incurred, primarily on property acquisitions and upgrades in the Property Investment portfolio to underpin the Group’s growth programme.

Total dividends of R305 million (2016: R279 million) were paid in the period.

The Group’s net asset value was 403 cents (2016: 362 cents).

The individual business unit reports follow.



In line with the strategy to continually delight our customers, every Italtile Retail salesperson completed a bespoke internationally accredited interior design course, enabling them to complement their extensive product knowledge with authoritative insight into fashion and design.

italtile office

ITALTILE RETAIL
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Leading fashion retailer of exclusive ranges of tiles, bathware and related products.
Strategic positioning LIVE BEAUTIFULLY.
Target market LSM 8 – 10
Discerning consumers in the upper, middle and premium end segment and Commercial Projects market.
Footprint 11 including webstore (2016: 11 including webstore)
Stores revamped: 2 (Menlyn and Bryanston, Gauteng)
Key performance indicators Trends 2017 Trends 2016
Sales Up Up
Average basket growth Up Up
Average selling price down Up
Margins down
Net profit down Up
Stock turn down Up
Average store inventory Up Up
Key differentiators
  • Trend-setter and leading buyer of exclusive high quality fashionable international and local products.
  • Widely recognised as the industry front-runner in environmentally sensitive products.
  • Well-established specialist expertise and nationwide network.
2016/17 priorities   Scorecard
 
  • Gain market share
Tick
 
  • Reduce stock levels
Tick
 
  • Reduce operating costs
Tick
italtile service
2016/17 major achievements
  • Total revamp of the Menlyn store.
  • Bespoke six-month interior design course completed by all sales consultants, thereby enhancing service and sales skills significantly.
  • Cost containment across the business with greatest improvement in transport cost reduction, particularly in the second half of the financial year.
2017/18 priorities
  • Gain market share across the merchandise categories with a specific focus on large format tiles and sanitaryware.
  • Reduce stockholding by improving inventory management.
  • Reduce general operating costs across the business, with transport costs remaining a key focus.
  • Roll-out new look new-generation store format across the network.
  • Continue to develop and upskill the personnel complement.
2017/18 prospects
  • New store to open in Polokwane in November 2017. This is a new market for the business.
  • Capitalise on growth opportunities for the Commercial Projects division.
  • In continued challenging trading conditions, expansion of the new-generation store format across the network and enhanced specialist sales skills should serve to sharpen the business’s competitive edge.

 
 

While CTM’s performance rating programmes, Voice of the Customer and Mystery Shopper, recorded better levels of customer service and sentiment in the stores, further improvements need to be made across the business to bring it in line with management’s expectations.

ctm banner

CTM  
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Leading specialist retailer of tiles, laminate boards, taps, sanitaryware, shower enclosures, bathroom furniture and accessories.
Strategic positioning BIG SAVINGS. MORE STYLE.
Target market LSM 5 – 8
Middle income DIY customers and small builders.
Footprint 69* in South Africa and 18* in the Rest of Africa (2016: 69* and 16*)
Corporate: 49* (2016: 48*) Franchised: 38 (2016: 37) *includes webstores
2 stores opened (Eldoret, Kenya and Vhembe, Limpopo)
1 store relocated and revamped to new-generation Millennial format
(Somerset West, Western Cape)
2 stores revamped to new-generation Millennial format (Centurion and Menlyn, Gauteng)
1 webstore opened (Tanzania)
Key performance indicators Trends 2017 Trends 2016
Sales Up Up
Average basket growth Down
Average selling price Up Up
Margins Down Down
Net profit Down Up
Stock turn Down Up
Average store inventory Up Up
Key differentiators
  • Local and international buying power.
  • Year-round value offering with strong fashion component.
  • Integrated supply chain ensuring consistent availability of stock.
2016/17 priorities   Scorecard
 
  • Develop human capital structure to assist in attaining the brand’s growth goals.
 
  • Roll-out of the value-add installation and delivery service to all Gauteng stores.
Tick
 
  • Drive customer service excellence.
Tick
Matrix
2016/17 major achievements
  • Launched CTM Customer Service campaign.
  • Rolled out Millennial store format (Somerset West, Menlyn and Centurion).
  • Enhanced the Retail Academy and Operator Training Programmes.
2017/18 priorities
  • Continue to drive customer service excellence.
  • Continue to enhance human capital structure and skills development.
  • Optimise use of integrated supply chain and BOP methodology to gain market share.
  • Build stronger relationships with suppliers.
2017/18 prospects
  • Open three new stores (Hendrik Potgieter in Gauteng, Capricorn in Limpopo and one store in Kenya).
  • Trading conditions will remain difficult but wide-ranging constructive initiatives implemented across the business should result in improved profitability.

 
 

In the period under review, TopT achieved national brand status with the expansion of its store footprint to 64 stores – situated across all nine provinces. The good local geographical distribution of sites was complemented by the opening of a store in Botswana in July 2017.

topT

TopT  
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Retailer of home-finishing products including tiles, paint, ceiling décor, taps, sanitaryware, hardware and accessories.
Strategic positioning EVERY PRICE A LOW PRICE.
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.
Footprint 64 (2016: 50); Corporate: 23 (2016: 13); Franchised: 41 (2016: 37)
14 stores opened (10 Corporate and 4 franchised)
New stores:
– Gauteng: Silverton and Gezina
– Western Cape: Bellville, Maitland, Mitchells Plain, Nyanga and Somerset West
– Free State: Botshabelo, Kroonstad and Welkom
– Mpumalanga: Numbi Gate
– Natal: Isipingo
– Eastern Cape: Motherwell and Butterworth
Key performance indicators Trends 2017 Trends 2016
Sales Up Up
Average basket growth Up Up
Average selling price Up Up
Margins Up Up
Net profit Up Up
Stock turn Up Up
Average store inventory Down Up
Key differentiators
  • Flexible, opportunistic home-finishing product range.
  • Affordability and availability of stock and accessibility to market.
  • Strong community relationships and local marketing.
2016/17 priorities   Scorecard
 
  • Build on TopT’s unique offering incorporating convenience, responsiveness to evolving customer demands and personalised service.
 
  • Attain sales budget.
Tick
topT employee
2016/17 major achievements
  • Conducted a roadshow to stores nationwide, focusing on the brand’s culture.
  • Commissioned TopT’s first-ever TV advertising campaign – achieving good success.
  • Reported double digit sales and profit growth.
  • Introduction of BBBEE partners in franchised regions.
2017/18 priorities
  • Enhance franchise partner- and operator training programmes.
  • Build on collaboration with suppliers to ensure demand continues to be met.
  • Continue to build brand profile, internally and externally.
  • Enhance logistics and distribution to the stores.
2017/18 prospects
  • Open 15 new stores.
  • Following the opening of the brand’s first store outside of South Africa (in Botswana) in July 2017, continue to explore further expansion opportunities.

 
 

basin

International Tap Distributors (“ITD”)
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Importer and distributor of brassware and accessories.
Strategic positioning EXPERIENCE WATER’S INSPIRATION.
Target market Italtile Retail, CTM and TopT store network.
Key performance indicators Trends 2017 Trends 2016
Sales Down Up
Average selling price Up Up
Margins Up Down
Net profit Up Up
Stock turn Down Up
Closing inventory Down Up
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.
  • ITD’s Tivoli range is the only major Italian brassware brand available in South Africa.
2016/17 priorities   Scorecard
 
  • Entrenchment of BOP and improved stock efficiencies.
 
  • Support growth of TopT stores.
Tick
 
  • Gain market share.
2016/17 major achievements
  • Improvement in net profit despite slowdown in sales, facilitated by cost control and gross margin improvement.
  • Introduction of competitively priced entry level product for TopT and CTM.
  • Improved efficiencies of the robotic warehouse which achieved a record for single-day pickings and reduced downtime during the year.
2017/18 priorities
  • Leverage BOP to improve in-stock positions and stock turn while simultaneously reducing overall stock holding.
  • Rationalise ranges and drive product innovation to create differentiation for retail brands.
  • Find an alternative certification for products given the dysfunctionality of the SABS.
  • Explore opportunities to supply product to the open market.
2017/18 prospects
  • Sales are expected to remain under pressure for the next six months as stores continue to reduce stock holdings.
  • Margins, gross and operating, will simultaneously be squeezed, given reduced sales volumes and price sensitivity of end consumers.
  • Despite the above, management is satisfied that performance can be enhanced by improving business efficiencies.

 
 

couches

Cedar Point
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Importer and distributor of tile cutters, laminated and vinyl floor boards, bathroom furniture, shower enclosures, accessories, décor and other home finishing products.
Target market Italtile Retail, CTM and TopT store network.
Key performance indicators Trends 2017 Trends 2016
Sales Up Up
Average selling price Up Up
Margins Down side
Net profit Down Up
Stock turn Down Up
Closing inventory Down Up
Key differentiators
  • Integral component of supply chain across merchandise categories.
  • Strong relationships with international suppliers.
  • Leading buyer and supplier of high quality European laminated and vinyl floor board range in South Africa.
2016/17 priorities   Scorecard
 
  • Reduce stockholding
Tick
 
  • Reduce operating costs
 
  • Improve warehouse efficiencies
Tick
2016/17 major achievements
  • Reduced stockholding in difficult trading environment.
  • Rationalised the range offering to improve ratio of business critical items and terminated non-core categories.
  • Established a warehouse in Crossroads, Western Cape, which improved distribution efficiencies and reduced lead times to stores in the region.
2017/18 priorities
  • Implement a full warehouse management system across all warehouses.
  • Streamline and upskill staff complement.
  • Reduce costs across all warehouses.
  • Establish a warehouse in Durban to reduce costs and improve efficiencies in the KwaZulu-Natal region.
2017/18 prospects
  • Capitalise on opportunities to expand the offering and service to TopT and Italtile Retail stores.
  • Explore opportunities to supply product to the open market.
  • Sales are expected to remain under pressure for the first half of the financial year as stores continue to reduce stock holdings.

 
 

bathroom

Distribution Centre
OVERVIEW AND PERFORMANCE MATRIX
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 and logistics services to the Group.
Target market The Group’s retail store network and integrated suppliers.
Footprint Durban and Cape Town
Key performance indicators Trends 2017 Trends 2016
Sales Down Up
Average selling price Down side
Margins Down Down
Net profit Down Up
Stock turn Up Up
Closing inventory Down Down
Key differentiators
  • Long-standing relationships with international suppliers and transport agents.
  • Extensive (+30 years) import experience.
  • Strong financial position facilitates optimal investment in inventory.
2016/17 priorities   Scorecard
 
  • Ensure right stock at the right time, place and price.
 
  • Achieve turnover and trading profit targets.
 
  • Reduce stock holding.
Tick
2016/17 major achievements
  • Built people pipeline to facilitate succession strategy.
  • Streamlined warehousing and operating costs.
2017/18 priorities
  • Improve product range matrix to facilitate goal of right stock at the right time, place and price.
  • Re-evaluate entire logistics system to ensure improved service and reduction of costs.
  • Achieve all targets set for new financial year.
2017/18 prospects
  • Intensified focus on key priorities will bring the division closer to achieving its demanding goals.

 
 

ctm workplace

e-Commerce
OVERVIEW AND PERFORMANCE MATRIX
Nature of business To provide our customers with a seamless, omni-channel shopping experience, enabling them to easily view and purchase our products and services online and smoothly transition between online shopping and our brick and mortar stores.
Target market The Group’s retail operations and its customers.
Footprint The Group’s online shopping stores are:
CTM South Africa – www.ctm.co.za; Italtile Retail South Africa – www.italtile.co.za;
CTM Kenya – www.ctm.co.ke;
CTM Tanzania – www.ctm.co.tz
Key performance indicators Scorecard % increase
Online sales    
CTM SA Up 23
Italtile Retail Up 61
CTM Kenya Up #
Quotes generated for all stores (Rands)    
CTM SA Up 18
Italtile Retail Up 26
CTM Kenya Up #
Visitor sessions    
CTM SA Up 23
Italtile Retail Up 28
CTM Kenya Up #
# webstore opened in 2017, hence no prior year comparative.    
2016/17 priorities and major achievements   Scorecard
 
  • Launch CTM Tanzania online store in April 2017.
 
  • Improve interactivity of retail websites.
2017/18 priorities
  • Launch 3D visualiser technology.
  • Launch new user interface for CTM and Italtile Retail webstores.
2017/18 prospects
Despite the general downturn in traditional consumer spend, the rapid growth of internet users and online shoppers presents significant opportunity for the online stores.

 
 

information technology

Information technology
OVERVIEW AND PERFORMANCE MATRIX
Nature of business
  • To provide relevant, effective IT solutions to enable a secure and optimal shopping experience in the Group’s retail stores, online and in the supply chain. This is achieved by ensuring simplicity and functionality for the end-user, combined with a personalised customer service which gives the Group a unique edge in the marketplace.
  • Maintenance of data integrity and minimising downtime and risk.
Target market
The Group’s retail operations, their customers, and the Support Services businesses.
Key performance indicators Scorecard
  • Continual enhancement of the SAP ERP environment to achieve its full potential, thereby enabling sustainable growth and functionality relevant to the business’s needs.
  • Management of potential downtime and system failure risk through the use of technology and process management.
  • Consistent adaptation and preparation for events in the changing marketplace/landscape that could threaten or enhance the current state of IT globally.
  • Roll-out of innovative value-added new technology in a cost effective manner.
2016/17 priorities and major achievements Scorecard
  • Cybersecurity. Cybercrime is increasingly more sophisticated and harmful and remains a constant core focus. Significant resources have been and will continue to be committed to security of the Group’s computer networks to provide the business and its customers with peace of mind.
  • Fibre roll-out. Investment was incurred on rolling out fibre connectivity to Group sites where practicable; this resulted in improved network stability and will reduce costs over the long term as bandwidth becomes more affordable.
  • SAP archiving project. A programme is under way to archive the Group’s extensive database more effectively and cost efficiently. Although in its early stages the initiatives implemented have already achieved a reduction in database size and improved performance.
2017/18 priorities
  • Consistent, proactive cybersecurity.
  • Roll-out of a new Microsoft operating platform as an intermediate step prior to moving to the cloud. This will optimise the existing operating environment and assets, and provide a seamless transition when the migration to the cloud takes place.
  • Roll-out of new Smart scanner solution. The stores’ mobile handsets which currently offer SAP and web functionality will be upgraded with a secure integrated payment option, resulting in a more robust application that provides an improved customer shopping experience, enhances the in-store process from door to despatch, is locally manufactured and more cost effective.
2017/18 prospects
  • Benefits will be derived from current projects under way including the roll-out of fibre connectivity, the SAP archive project, the roll-out of the new Microsoft operating platform and the introduction of mobile devices with integrated payment functionality.

 
 

ctm building

Property investment
OVERVIEW AND PERFORMANCE MATRIX
The Group’s property portfolio affords strategic advantage to the retail brand operations by ensuring stores are easily accessible, well-presented and maintained, and contribute to an aspirational shopping experience. The portfolio is continuously evaluated and enhanced to ensure optimal returns.
Environmental sustainability
The Group’s sustainability agenda is promoted through the use of cost-effective, energy efficient practices in the construction of new buildings and the renovation of older buildings. Optimal use of natural light, solar technology, new-generation lighting, water-saving taps and sanitaryware and environmentally sensitive building materials is prioritised.
Nature of business Underpins the Group’s retail operations by ensuring that stores are optimally located on high visibility 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 2017 2016
Portfolio market value R2,6 billion R2,4 billion
Total number of stores 158* 143*
Italtile 10* 10*
CTM 84* 83*
TopT 64* 50*
Capex incurred (new and refurbishments) R232 million R284 million
Portfolio changes    
Properties acquired 8 7
Properties sold 3 3
New stores opened    
Italtile 0 2
CTM 2 3
TopT 14 15
* Excluding webstores    
2016/17 major achievements
  • Fourteen new stores opened and continued upgrade of store network progressed.
  • Concluded sale of Australian property holding company.
  • Continued to support the Group’s Green targets and enhance environmental sustainability of stores.
2017/18 priorities
  • Conversion of land to trading stores.
  • Build capacity and capability in the division to support store roll-out programme.
  • Continue to source suitable new sites to facilitate network expansion programme.
2017/18 prospects
While the Group has a clearly defined strategy in terms of its robust store roll-out programme, progress will be determined by availability of suitable sites and bureaucratic and legislative delays which continue to hamper approval of building plans.

 

baffalo

Environment and sustainability
OVERVIEW AND PERFORMANCE MATRIX
Nature of business Measures, manages and reduces the Group’s impact on the environment and promotes its long-term sustainability.
Agenda Targets a reduction in the Group’s carbon footprint and participation in environmental initiatives designed to contribute to the betterment of communities in which the business operates.
Target audience The Group’s retail operations, Support Services businesses and local communities.
Key performance indicators 2017 2016 Trends
  • Generation of renewable energy
1 057 676 kWh 1 269 915 kWh
  • Reduction of carbon footprint*
A 22% reduction in Scope 1 and 2 tonnes of CO2 emissions per Rand of revenue. A 1.2% reduction in Scope 1 and 2 tonnes of CO2 emissions per Rand of revenue.
  • Quality of sustainability reporting
   
2016/17 priorities
Management and reduction in consumption of:
  Scorecard
Energy
  • Energy management
    A 98,8 kWp grid tied solar plant was connected in the review period. The estimated saving per annum from this new solar plant was 158 080 kWh of energy production per annum which is in line with the annual target of generating 150 kWp of renewable energy per annum. The Group continues to explore energy efficient technologies in an effort to reduce electricity consumption in its stores.
    The theft of solar panels at three stores resulted in reduced generation of renewable energy compared to the previous year despite the installation of new panels in other stores.
Water
  • Water management
    The Group remains a relatively low consumer of water. All three retail brands continue to source, supply and promote their water efficient products.
Waste
  • Waste management
    A waste management programme is in place at the Support Centre in Bryanston. Activities include:
    • reducing the amount of waste sent to landfills by using recycling bins to facilitate the separation of waste.
    • reducing the amount of paper used and recycle/re-use where possible.
2016/17 major achievements
  • The Group marketing department achieved a significant reduction (33 tonnes) in the amount of paper consumed for marketing purposes by reducing the length of its retail promotion tabloids.
  • Further contributions were made to conservation in the country: CTM has pledged a portion of the proceeds made on the Kilimanjaro Umgazi Grey and Lebombo Black Slate tiles to the StopRhinoPoaching Foundation. R1 million was donated in 2015 and a further R1 million in 2016.
  • *The methodology of the carbon footprint study was revised to enable a more detailed analysis of the sources of emissions. Additional Scope 3 emission sources were considered for this report, improving our overall understanding of our largest sources of emissions.
2017/18 priorities and prospects
  • In order to promote sustainability, the Group is aiming to create increased awareness among consumers of the environmentally friendly products stocked by all our retail stores.
  • In line with goals stipulated in the National Waste Management Strategy developed by the Department of Environmental Affairs, the Group plans to roll-out its waste management programme to selected Group stores, with the goal of promoting waste minimisation, re-use, recycling and recovery of waste produced by the Group, with a longer-term vision of developing a comprehensive waste management strategy for the Group.
  • The Group will continue to explore opportunities to reduce energy consumption.
  • Work in line with national climate change strategies to reduce the Group’s carbon footprint. Expand the existing carbon reduction programme to increase the number of carbon offset initiatives by exploring projects that go beyond generating renewable energy.
  • Commission the Group’s eighth carbon footprint study.

In addition to community-linked environmental projects, the Group’s broader corporate social investment programmes focus on education, entrepreneurship, welfare and conservation. The corporate social responsibility narrative of the Corporate Governance report outlines in detail the charitable activities of the Group during the year.

 

topT employees

Human resources and training
OVERVIEW AND PERFORMANCE MATRIX
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 Trends 2017 Trends 2016
  • Recruitment and retention of fit-for-purpose personnel.
Down Up
  • Engagement with employees across the Group.
Up Up
  • Development of appropriate skills training, learnerships and competencies.
side Up
  • Support the Group’s growth objectives and overriding strategy to deliver an incomparable customer experience.
side Up
  • Improve productivity and performance to achieve retail best practice benchmarks.
side Up
  • Develop leadership capability and capacity.
side Up
  • Training programmes
Up Up
2016/17 priorities Scorecard
  • Upgrade existing retail-specific knowledge base.
  • Implement the Learning Management System.
  • Professionalise and upskill sales consultants.
  • Improve BBBEE Skills Development scorecard.
Tick
2016/17 major achievements
  • CTM sales consultants’ training programme was rolled out.
  • Successfully launched the Learning Management System designed to provide unlimited access to learning and promote the learning culture within the organisation.
  • Sourced, launched and conducted an internationally accredited interior design course for Italtile Retail sales consultants.
  • A pilot programme designed for persons with disabilities was rolled out in selected TopT and CTM stores. Eleven learners have been placed in the programme which offers learners an opportunity to obtain a NQF level 2 qualification in Retail and Operations while gaining work experience.
2017/18 priorities
  • Partner with SAQA-aligned training providers to offer NQF level accredited courses.
  • Obtain accreditation for the Training Academy with the Department of Higher Education and Training.
  • Migrate to a new learning management system.
  • Further improve BBBEE skills development scorecard.
2017/18 prospects
  • Pursue the goal of transformation through creating more training and employment opportunities for persons with disabilities.
  • Establish partnerships with higher education institutions to improve opportunities to attract, recruit and retain new talent.

 
 

INVESTMENT IN ASSOCIATES

Ceramic Industries

The Group holds a 21% strategic stake in manufacturer Ceramic, its primary supplier of tiles, sanitaryware and bathware. This tactical investment is key to advancing Italtile’s growth agenda. The business comprises five tile factories, a sanitaryware factory and a bath factory in South Africa, and one tile factory in Australia.

Ceramic’s results in the first half of the period were substantially stronger than the second half. Locally, in the latter six months the business experienced a fall in sales in light of the general economic slowdown and overstocked position of most of its customers, exacerbated by the high level of imported product in the market. The weaker sales resulted in poor capacity utilisation in the factories, causing a decline in profits and margins during the second half of the period. In the Australian operation, sales decreased slightly in subdued trading conditions, while the deliberate strategy to gain market share through keen pricing resulted in a nominal decline in margins.

Ceramic’s after tax profits for the period declined from the prior period as a result of an increase in its effective tax rate, having benefited from tax incentives related to the Gryphon factory in the prior period. Accordingly, Ceramic’s contribution to Group profit for the period decreased 2% to R81 million (2016: R83 million).

Despite prevailing difficult trading conditions, Ceramic remains optimistic about growth opportunities in South Africa and Australia and will continue to invest in upgrading its factories and facilities to ensure it is optimally positioned to capitalise on any increase in market demand.

Ezee Tile

The Group holds an effective 46% stake in Ezee Tile, a national manufacturer of grout, adhesive and related products. In the context of subdued consumer demand across the industry, Ezee Tile’s sales, profits, margins and stock turn for the period, although improved, were less buoyant than the previous period. The business contributed R13,5 million (2016: R12,0 million) to Group profit, an increase of 13%.

EVENTS AFTER REPORTING PERIOD

Conditional approval of acquisition of shares in Ceramic

The Group’s binding offer to Ceramic to acquire up to a further 74,5% of the company’s issued share capital for a consideration of R3,5 billion was conditionally approved by the Competition Tribunal on 21 August 2017. The condition imposed by the Tribunal relates to concerns regarding information exchange; the Boards of both companies are satisfied that this condition will not have a material impact on the successful merger of the two businesses. Following the conclusion of the acquisition, the Group will own 95,5% of Ceramic and 71,54% of Ezee Tile.

Management believes that the long-term success and sustainability of both businesses are inextricably intertwined and is confident that the merger will have far-ranging benefits for Italtile and Ceramic. Among the benefits will be an improvement in the depth of management, experience and skill; enhancement of succession planning; improved efficiencies and reduced costs; enhanced allocation of capital and an alignment of long-term growth strategies.

The acquisition is discussed in greater detail in this report.

GROUP OUTLOOK

All indications are that current sociopolitical and economic conditions will prevail for at least the next six months.

Real disposable income is likely to decline further in the context of poor economic growth, limited job creation and significant increases in personal income taxes for middle- and high-income earners. Country-specific risk will also remain a factor for the forthcoming period and management anticipates a weakening trend of the local currency.

Sustained high levels of stock in the market and lower consumer demand will drive intensified competition as operators vie for a share of wallet. Further rationalisation of marginal industry participants is also probable.

Despite this contextual outlook, the Group remains confident that its strong brands and robust, resilient business model can capitalise on growth opportunities in this market, particularly given the relatively low per capita consumption of tiles in this country compared to peer economies.

Furthermore, management is satisfied that its competent leadership team, clearly defined strategies and clarity of purpose positions the business well for continued growth. The Group’s competitive advantage will continue to be furthered by its tactical brand portfolio, integrated supply chain, strong entrepreneurial partnerships and long-standing reputation.

While advancement of the store roll-out programme will be determined by market demand and availability of suitable sites and operators, the Group’s goal is to open a total of 20 new stores over the next financial year, including at least one Italtile Retail store and three CTM stores. Furthermore, capacity in the supply chain will also continue to be developed to support anticipated growth over the long term.

In addition to expanding the capacity of the business, opportunities for growth also exist within the business itself, through improved competencies, efficiencies, and conceptualisation of retail innovations and market-disruptive strategies.

Management’s key focus areas in the forthcoming period will include:

  • further improvement of the working capital position through intensified control of inventory and all overhead costs;
  • better productivity through enhanced performance management and training initiatives (specifically e-learning programmes);
  • attracting, retaining and developing an appropriately skilled personnel complement, capable of enabling the Group’s growth strategy;
  • continued development of sector leading technology (including rolling out a digital strategy); and
  • driving the strategy to offer a customer-centric shopping experience which constantly delights our customers through improved service, value, convenience, product range and in-store merchandising and display.

Moral leadership

It is our view that leaders across all sectors of our society have a responsibility to conduct themselves with integrity, transparency and accountability and to inculcate those values in their companies, organisations and institutions. With the decline in moral standards in this country over recent years, it is very heartening to see the positive response from South African citizens to recent punitive action taken against corrupt individuals in private and public enterprises. As a Group, we will continue to support and encourage ethical behaviour and practices that restore the country’s pride and uplift the sentiment of its people.

APPRECIATION

I would like to thank the people of Italtile for their enthusiasm and contribution during the year. Continuing to deliver strong results in testing conditions is challenging for even the most successful organisation, and while the results of some of the divisions did not meet our high standards, I am confident that our commitment and continued efforts as a team will remedy this. I look forward to working with the business to accomplish our shared vision to fight for the right of all Africans to have a beautiful home.

I would also like to extend my gratitude to the Board for their constructive counsel and support as we strive to implement and achieve our growth strategies and goals.

J N Potgieter
Chief Executive Officer