CHIEF EXECUTIVE OFFICER’S
REPORT

 
 
Jan Potgieter

Chief Executive Officer

The Group’s ongoing productivity campaign was accelerated with the onset of the pandemic. Significantly, we have recognised that by driving up the output and returns on all our resources and assets, we can do more with less, while retaining the best of our offering.

By focusing on consistent investment in the shopping experience, entrenching retail excellence principles and winning over customers, we will continue to recover and build on the foundation for sustainable growth.

'Unprecedented' is the word most frequently used when referring to the COVID-19 global pandemic. In these extraordinary times, our people have demonstrated energy, determination and resilience beyond our expectations. While we pride ourselves on a high-performance culture, the phenomenal response of our team has been unmatched. Their enthusiasm to revive the business after lockdown and their continued commitment to curbing the spread of the virus to ensure uninterrupted service to our customers has been key to this solid set of results and the long-term sustainability of our business. Special mention should also be made of our customers, whose support for our offering and endorsement of our rigorous safety protocols has been inspiring.

The COVID-19 pandemic

The safety of our customers and our people is of paramount importance and we implement rigorous COVID-19 risk mitigating protocols across our business to ensure we play our role in curbing the spread of the virus. Our internal audit department is tasked with ensuring compliance and accountability and we practice zero tolerance on non-compliance.

In terms of the progression of the pandemic and its impact on our operations, the third quarter of the review period marked the commencement of the COVID-19 era with the imposition of the hard lockdown on 27 March 2020. The fourth quarter was a tumultuous period, featuring cessation of trading for five weeks in line with restrictions, followed by a limited, phased reopening and then a massive drive across our operations to ramp up as safely and quickly as possible to serve our customers, to save jobs, and secure the sustainability of the business.

Our goal throughout this period was to come through the crisis well and, in certain respects, better than before. The double-digit growth delivered in June to August, with a leaner team, less stock and healthy brands, is rewarding evidence of this. It must be noted though, that while the pandemic accelerated our efforts to continue to strengthen our business, the achievement of this goal was facilitated by the extensive groundwork undertaken over the past eighteen months.

I am also pleased to report that the pandemic has had no material impact on our debtors' book, which remains healthy, and furthermore that there has been no need to utilise the short-term contingency facility which we negotiated prior to the lockdown period.

The response from our customers since reopening has been resoundingly encouraging. I would like to extend my heartfelt thanks to them for their support and their endorsement of our stringent COVID-19-related health and safety protocols. We recognise that these vital measures add a degree of inconvenience to the shopping experience and have therefore been pleasantly surprised by their willing and cheerful compliance.

Tragically, the pandemic has taken the lives of fellow citizens in our trading markets. On behalf of all of us at Italtile, I would like to extend my sincerest condolences to those of you who have lost loved ones during this time.

OVERVIEW

Trading environment

Prior to the onset of the pandemic in late March, operating conditions in the country were already very challenging. Consumer and business confidence levels were alarmingly low, reflecting disillusionment with non-delivery of transformational structural reforms, ongoing policy uncertainty, and unstable power supply. Country specific risks were exacerbated by the marked deterioration of the economy, evidenced by growing unemployment, ongoing retrenchments, low wage inflation and sovereign credit downgrades, with South Africa finally tipping into recession in the second half of the review period. Inevitably in this unfavourable environment, negatively disposed homeowners with limited discretionary income deferred investments in their homes. With negligible public and private sector investment, the building and construction industry deteriorated further, manifested by the consolidation or failure of both large, listed construction companies and smaller independent building-related businesses.

Regrettably, with the advent of the pandemic, economic and social conditions worsened materially. The lockdown and subsequent restrictions, albeit successful at slowing the trajectory of the virus initially, had a severely negative impact on employment levels and household disposable income.

Notably, in our industry, enforced stay-at-home orders served to change consumers' lifestyles, as well as their priorities. With more time spent in the home, increased work-from-home opportunities, and restrictions imposed on travel and leisure activities, some of the funds previously allocated to transport costs and recreational pastimes were reallocated to home improvements, particularly in our middle and lower Living Standards Measure ("LSM") markets. This bears out our long-standing experience that South Africans are proud homeowners and when finances permit, will continue to invest in their primary assets.

Trading through this period of 'new normal' has revealed important trends:

Customer behaviour has changed (possibly temporarily, but likely in the long term too). Customers have become more risk averse and more decisive in their purchasing behaviour. They choose to shop in safe, familiar environments, where they can fill their order in one visit. They are also less inclined to spend time browsing or to travel between competitors researching comparable value offerings, preferring rather to conduct their research online. Having converted to this format, it is likely customers will adopt this as permanent behaviour.

Customer behaviour has changed (possibly temporarily, but likely in the long term too). Customers have become more risk averse and more decisive in their purchasing behaviour. They choose to shop in safe, familiar environments, where they can fill their order in one visit. They are also less inclined to spend time browsing or to travel between competitors researching comparable value offerings, preferring rather to conduct their research online. Having converted to this format, it is likely customers will adopt this as permanent behaviour.

In this regard our business model has numerous advantages:

  • the integrated supply chain provides a complete specialist one-stop solution to our customers;
  • over the Group's 51-year trading history we have built a portfolio of trusted, market-leading retail brands that are strategically positioned to appeal across the demographic and income spectrum, uniquely targeting each segment; and
  • our offering is supported by multi-channel platforms (in-store, webstores and social and digital). This enables customers the convenience of accessing our offering on the platform of their choice.

The businesses that have thrived through this difficult time have been adaptable, agile and underpinned by balance sheet flexibility.

Our values and basic disciplines stood us in good stead:

  • the culture of partnership with our franchisees and store operators has ensured that we all worked together to achieve the common goal of revitalising and growing our business; and
  • the strong cash generative nature of the business and engrained disciplines of cash management and cost leadership ensured robust reserves at a potentially testing time. Our ability to pay a final dividend and to reinstate our roughly R800 million capital expenditure programme exemplify this.

Businesses need to be self-reliant to control their destiny.

A further consequence of the pandemic for the industry is the continuing interruption in supply of imported product. Initially when factories in international markets closed during lockdowns, supply was constrained. However, following the lockdown in this country which resulted in considerable delays at the national ports, imported products arrived infrequently, irregularly and at higher cost due to unplanned demurrage, other incremental charges and the depreciation of the local currency over the last quarter. To date the port delays have not been resolved.

The Group benefited from its local integrated supply chain and manufacturing capability, which negated the challenges regarding stock availability and pricing volatility which other operators experienced across the industry.

Our business
Consistent strategies and goals in a new mode

I concluded my 2019 report with the following comment, "I am satisfied that we have the appropriate team and strategies in place to deliver on our key imperatives and we will endeavour to meet the expectations of our broad range of stakeholders."

Inevitably, the events which arose in the year under review have served as a thorough test of our team's mettle and the relevance of our strategies.

In line with our long-standing philosophy that growth will be derived from the internal levers within our control, the key focus areas for our executives continued to be sales, cost leadership, productivity improvements and performance culture. The lockdown, however, provided a pivotal opportunity to critically and impartially evaluate our achievements in terms of these key focus areas and to reorientate our operations to survive and thrive in the demanding new environment.

  • We learnt the lesson that with renewed energy and improved productivity, we can do more with less – without compromising the essence of our offering.
  • We recognised that our ability to recover quickly is based on our narrow focus and consistent investment in the shopping experience and unwavering efforts to better execute retail excellence principles.

Having robustly interrogated our business 'basics' over the past four months, I am now even more convinced that we have the appropriate levers in place to deliver on our key imperatives, as the commentary in this report will illustrate.

SCORECARD: ACHIEVEMENT OF KEY PERFORMANCE INDICATORS AND STRATEGIC IMPERATIVES

Within the business, management's performance is rated according to a scorecard across the following key performance indicators (KPIs):

  • strategic plan;
  • financial performance;
  • human capital;
  • BBBEE;
  • customer satisfaction; and
  • cultural fit and values.

At the end of 2019, I identified our areas of focus for 2020 aligned to these KPIs and outlined the strategic imperatives that we would employ to attain our targets and goals. The commentary which follows serves as a scorecard of the progress achieved.

Focus on sales growth, particularly in the tile category

It is pleasing to report that sales volume growth in the tile category was achieved in every month for the first nine months of the review period, across all three brands. This is a significant accomplishment given that this merchandise category contributes approximately half of our total retail turnover.

In the last quarter, however, with the onset of the pandemic and the implementation of the lockdown, the business generated practically no sales in South Africa and only negligible sales in some of our rest of Africa markets from 27 March to 30 April. From 2 May, with the easing of restrictions, tile sales were flat for the month compared to the prior year.

Rewardingly, with further easing of restrictions, sales resumed strongly in June with tile volume growth once again reported across all three brands. This trend has continued post-year end, into July and August.

The growth in tile sales has been underpinned by notable improvements in the range, with a keener focus on aligning latest fashion with specific customer profiles, as well as better presentation in-store. We are confident that further growth opportunities exist in terms of pre-retailing and execution in store.

Continue to prioritise the shopping experience through retail excellence principles

We intensified our drive on retail excellence and I am satisfied that we have achieved a noteworthy step-change across our customer touchpoints. Key improvements were made in range and presentation, as well as the look-and-feel of both our in-store and webstore offerings. Our efforts were rewarded with a gain in market share across our retail brands.

Furthermore, we recorded improved satisfaction scores across the measures we employ to analyse customer sentiment, including Mystery Shoppers, in-store surveys, Net Promoter Score and an independent brand health monitor.

While gratified with this performance, we believe there are further opportunities to meet and exceed the needs of our customers in terms of price, service and fashion.

Advance the store roll-out and revamp programme

Management met its target of 10 to 15 new stores for the review period, which includes one Italtile Retail store, three CTMs, five TopTs and four U-Light stores. Four additional stores were scheduled to open in the last quarter, but were postponed due to the logistical challenges posed by the pandemic. Two marginal TopT stores were closed. Five properties were acquired and the portfolio also comprises a strong pipeline of other sites, which will be developed strategically. Management is targeting a further 10 to 15 new stores in the year ahead.

The revamp programme is an ongoing business imperative designed to enhance the shopping experience for customers and improve returns on the property portfolio. A total of 15 stores were revamped during the review period, somewhat constrained by lockdown restrictions on construction. Significantly, in the revamped CTM stores, pleasing sales growth in the bathroomware category was experienced, justifying the investment incurred.

Continue to develop disruptive marketing campaigns

On an individual brand basis, good use was made of strategic marketing campaigns across both traditional and new social media platforms. This intervention played a key role in growing sales in the constrained disposable income environment. By way of example, CTM ran a Leap Year promotion over the last four days of February, which was particularly successful. The campaign centred on offering a range of products at prices dating back four years. The tactical campaign served to reward loyal customers, while driving double-digit sales growth and supporting margins for store operators.

Our Proudly South African positioning, demonstrated in our campaigns, continues to find favour with customers who support our goal of 'making local and buying local', aimed at creating jobs and growing the economy. This endorsement has been very evident during the pandemic which has fostered a strong 'we're in this together' sentiment in this country.

In the current limited-spend climate, the brands will continue to capitalise on opportunities to leverage the strong equity they enjoy.

Roll out the U-Light offering, contingent on the success of the pilot venture

While launching a new brand in the context of adverse market dynamics is challenging, management is satisfied with the progress made in establishing a footprint for the Group's new lighting offering. Four additional U-Light stores were opened in the review period, bringing the network to five stores (excluding the webstore), each comprising a slightly different format and targeting a different market segment. Momentum was gained in the first half of the review period, with the business on track to break even for the full year. Unfortunately, the onset of the pandemic interrupted imported supply, which had a major impact on stock availability, resulting in weaker than anticipated lighting sales in TopT as well as in the five bespoke U-Light stores.

Management's goal in the year ahead is to ramp up the contribution of the lighting category in TopT stores and, depending on market conditions, to pilot U-Light franchise stores to complement the company-owned network. Opportunities to develop a direct import capability will also be executed, with the aim of ensuring exclusivity and differentiation of product for our customers.

Leverage improvements made in the HR function to develop and optimise a people pipeline

Building depth of talent and developing and upskilling our people are key management priorities. In the current testing environment, it is imperative that we have the right people and the right size team to optimise productivity returns and improve our competitive posture.

Management

At executive level, the Financial Director resigned at the end of the review period, and the position has been filled by the former CFO. Our senior management team is well structured and has a good balance of experience and expertise. Business unit leaders are equity shareholders in their business, which is a reflection of our confidence in them. We also achieved good progress with improving the calibre of our store operators across the brands. This is an ongoing intervention and is critical to achieving the Group's growth goals.

People development

The HR and Training report outlines our wide-ranging human capital development programmes. These include internships and learnerships for both qualified students and inexperienced jobseekers, and partnerships with the Universities of Pretoria and Stellenbosch, and the Henley Business Schools to further our employees' education. We also manage accredited training academies across the brands and provide e-learning tuition for our employees, our franchise partners and their employees. I am pleased to report that during the review period, the Group's Tiling and Plumbing Academy was accredited by the Construction CETA for NQF Level 3 qualification.

Gender balance

We are committed to empowerment and transformation in the business and strive to ensure that our human resource complement is representative of the demographics in this country. A growing trend in our industry is the increase in women homeowners and decision makers in the home finishing arena and as the business evolves away from the perception of building materials supplier to fashion retailer, we will continue to enhance our pool of female store operators.

Employee sentiment

An independent evaluation is conducted annually to assess the quality of engagement with our employees. The engagement score has consistently improved over the past three years, from 73% and 74% in the two prior years, to 77% in the current year, our best score to date. The rating applies to the following categories: communication effectiveness, ethics, leadership, management, performance, respect, reward and recognition, and working environment. According to the survey scorecard, our result of 77% equates the business to a 'Top company, with a motivational level which will facilitate growth and change'. The organisation is defined as 'striving to be world class'.

A key management priority over this very difficult time has been to convey support and motivation to our team on an ongoing basis across a range of mediums including one-on-one interactions, emails, videos and WhatsApps. I am satisfied that this engagement score is a good indicator of the team's recognition of our efforts.

People pipeline – our challenge

During the review period we made good progress with strengthening our existing human capital resource. However, despite our commitment and the high level of investment and effort dedicated to building a people pipeline, I am disappointed with the results. I acknowledge that retail is a very demanding sector. However, the major obstacles appear to be an education system that is failing the youth of this country and a culture of disillusionment that has developed in a society deficient in sound values and strong leadership role models.

In the year ahead, we will revisit our people development capability and enhance our recruitment methodologies.

Entrench working capital and cash management as core disciplines

Expense control and cost leadership are engrained in the business and in the COVID-19 era these disciplines are particularly vital to ensure flexibility.

Despite substantial cash outflows, cash reserves at the close of the period were R860 million. Major cash outflows include capital expenditure of R614 million; total dividend payments of R1 481 million; own share repurchases totalling R243 million; and tax payments of R416 million. It is also pleasing to note that the additional short-term contingency facility raised in the review period was not utilised.

Prioritise better stock turn and product mix

Managing stock levels to facilitate balance sheet flexibility was a major focus during the review period. It is rewarding to report that total inventory levels, net of provisions, were only 4% higher year-on-year. This is a significant achievement, given that the Group converted 19 TopT and nine CTM franchised stores to Group-owned; we launched the U-Light business (five stores) which added new inventory; no material sales were made for almost six weeks during the lockdown; and massive supply chain disruptions were experienced due to the pandemic, which resulted in stock landing out of sequence with our planned schedules.

Importantly, the mix and quality of our stock on hand is good, with a high ratio of business-critical items.

Bed down supply chain integration, reduce inefficiencies and leverage opportunities in the logistics and distribution functions

In my 2019 report I noted that we were in the first phase of implementing a five-year supply chain programme designed to achieve improved costs and load planning and in the medium-term importing and shipping efficiencies.

Last year we established three Distribution Centres ("DCs"), in Durban, Cape Town and Vereeniging, as combined hubs for both imported stock and the Cedar Point operations. It is pleasing to report that across all three DCs, system enhancements have been made and have achieved the targeted improvements.

At year end, Cedar Point brought in-house the previously outsourced Vereeniging warehouse function. This development has resulted in challenges, but equally provides strong upside, which should be realised in time.

Another important development has been the introduction of a combined transport management system ("TMS"), which, through effective logistics and distribution planning, provides a crucial link between the manufacturing and retail operations. The introduction of this model will improve efficiencies and service levels to the stores and result in savings for the Group.

As we continue to implement the next phases of the programme, our goal is to leverage the power of the integrated supply chain through better collaboration between the operating divisions.

Drive overall productivity to become more competitive

The Group's ongoing productivity drive was accelerated with the onset of the pandemic. In the low sales environment, we recognised that to ensure long-term sustainability we needed to immediately shift the mindset in the business to 'do more with less', by driving up the output and returns on all our resources and assets.

Aligned with rigorous productivity measures, we have developed a blueprint for our operations which optimises stockholding and headcount relative to key performance indicators. I am confident this streamlined operating model will achieve the desired goal of improving productivity and profitability without compromising the essence of the business.

We will also continue to advance the productivity drive through building the joint venture partnership model which affords the Group better visibility of performance and higher return on investment.

Improve the Group’s BBBEE status from level 6 to level 5

The Group has continued to improve its BBBEE rating over the past four years based on sustained management focus to transform the business through a range of meaningful interventions. The rating has improved from non-compliant in 2016, to level 4 in the review period, exceeding our target of level 5. This improvement was advanced with the conclusion of an empowerment deal with Yard Holdings, significantly improved scoring on procurement criteria and generally enhanced administration and management of BBBEE credentials. The Group's new level 4 rating is among the highest in the listed retail sector.

Focus on improving manufacturing efficiencies and reducing waste

Both of our manufacturing businesses, Ceramic Industries and Ezee Tile, delivered stellar performances under very difficult circumstances based on enhanced production efficiencies and improved cost management in their operations.

Despite higher input costs across the board, Ceramic managed to withhold price increases to support price sensitive customers. The business was also successful in improving yields and reducing waste, which is particularly creditable given reduced volumes attributable to trading restrictions over the last quarter. Notably, Ceramic suffered a direct loss of R34 million as a consequence of load-shedding during the period.

The remedial measures implemented at Ezee Tile enabled the business to turn around the disappointing performance recorded in the previous year. Prior to the lockdown, Ezee Tile was on track to report higher volumes and sales and improved profits and margins. With the resumption of trading in June, the business did well to ramp up production and finish the quarter strongly.

In response to the pandemic, Ezee Tile created capability in its operations to produce hand and surface sanitiser, compliant with the WHO specifications, for use in our stores and other operations. This achievement is to be applauded and is testament to operational agility.

The remedial measures implemented at Ezee Tile enabled the business to turn around the disappointing performance recorded in the previous year. Prior to the lockdown, Ezee Tile was on track to report higher volumes and sales and improved profits and margins. With the resumption of trading in June, the business did well to ramp up production and finish the quarter strongly.

In response to the pandemic, Ezee Tile created capability in its operations to produce hand and surface sanitiser, compliant with the WHO specifications, for use in our stores and other operations. This achievement is to be applauded and is testament to operational agility.

No targets were failed to achieve

RESULTS OVERVIEW

The commentary below provides a brief overview of the Group's results for the review period from a trading perspective. A detailed analysis of the results is contained in the CFO's report.

Notwithstanding the impact of the lockdown, the Group reported a solid set of results for the review period.

Total system-wide turnover of R9,3 billion (2019: R10,0 billion) was 7% lower than the prior comparable period.

Retail store turnover declined 3,9% compared to the previous corresponding period, with average selling price inflation estimated at 1,4% (2019: 2,7%). Like-for-like retail store turnover (excluding sales of stores opened and closed during the period) decreased by 6,2%. Prior to the lockdown, up to 27 March, retail store sales were up 5,4% year on year. During the lockdown only marginal sales were recorded in April. In May and June, store sales grew 3% and 11% respectively. Encouragingly, sales growth of 14% and 17% were recorded in July and August 2020 respectively.

Supply chain sales decreased by 6,1% compared to the previous corresponding period. Prior to the lockdown, sales had increased 1,4% year on year.

Manufacturing sales for the review period declined by 8,8% compared to the previous corresponding period, with average selling price inflation estimated at 1,0%. Prior to the lockdown, sales were flat year on year.

Adjusted basic earnings per share ("EPS") decreased by 21% to 81,5 cents (2019: 102,6 cents), while adjusted headline earnings per share ("HEPS") declined by 19% to 82,3 cents (2019: 101,8 cents). EPS and HEPS were adjusted for the once-off charge of R39 million related to the BBBEE transaction concluded with Yard SPV as announced on SENS on 10 September 2019. The disparity between EPS and HEPS is attributable to net profits of R14 million, versus R1 million in the current year, realised on the disposal of local properties during the prior year.

In light of the BBBEE transaction with Yard Holdings and the Group´s cash reserves being in excess of operational requirements, a special cash dividend of 23,0 cents per ordinary share was declared in October 2019. This special dividend, the third for three consecutive years, was declared out of income reserves, reflecting the Group's strong cash generating ability.

A final ordinary gross dividend of 10,0 cents per share was declared (2019: 19,0 cents), which, together with the interim ordinary dividend of 23,0 cents per share (2019: 22,0 cents), brings the total dividend declared for the year to 33,0 cents (2019: 41,0 cents).

GROUP PERFORMANCE

The following commentary provides an overview of our operational performance during the reporting period. The detailed individual business unit reviews follow in review of operations.

Retail brands and webstore

Our three major retail brands, CTM, Italtile Retail and TopT, all gained market share, while our fledgling U-Light brand established a solid footprint in its first year of operation. The health and equity of our major brands improved, reflected by the good scores achieved across all customer satisfaction measures which we conduct to assess the appeal of the shopping experience in our stores.

In terms of key metrics, as a consequence of the lockdown and subsequent trading restrictions, Italtile Retail and CTM's year-on-year sales and profits declined. In contrast, and in line with the annual December holiday trend, TopT's sales were buoyed by the migration of a big portion of its customer base from urban areas back to primary rural family homes. Much of this customer base comprises civil servants who continued to receive full remuneration during the period, or are beneficiaries of income and relief grants. Once lockdown restrictions eased, sales in these rural areas made a material contribution to TopT's higher year-on-year growth.

The Group's webstores have been established for several years and sales have grown consistently since their launch. The operating experience gained and general improvements made over time stood the business in good stead during the lockdown and subsequent restrictions, as online traffic escalated strongly during the last quarter, a trend which has continued post-year end. Particularly noteworthy was the increase in online activity in rural areas, illustrating the improved access of new customers to non-traditional shopping platforms.

Through the Group's bespoke online CRM Sales Force platform, an extensive, credible customer database has been developed, which will afford the brands unique ability to capitalise on personalised customer marketing opportunities.

Through the Group's bespoke online CRM Sales Force platform, an extensive, credible customer database has been developed, which will afford the brands unique ability to capitalise on personalised customer marketing opportunities.

Supply chain: Importers
Cedar Point

During the review period, the business concluded the successful commissioning and bedding down of the new Durban DC warehouse facility which services the KwaZulu-Natal and Eastern Cape regions. Good progress was also achieved in improving the range and replacing some import supply with local product.

At year end, Cedar Point insourced the Vereeniging DC which had previously been managed by an external third party. Bedding down management of the facility has been a challenging project and is work in progress.

In the prior year, profits were inflated by import duties which were clawed back; without this benefit in the current financial year, profits were flat.

International Tap Distributors ("ITD")

This business delivered a very pleasing performance for the year, reporting double-digit profit growth. Improved working capital management and cost controls, reduced stock and an enhanced range were key achievements recorded. Management continues to explore opportunities to identify new local suppliers to integrate into the division's supply chain.

Durban DC

A good performance was reported by this division, which exceeded sales budgets despite the weak sales environment. During the review period, the business switched to buying certain imported products from local wholesalers, a tactical strategy which has reduced costs and inefficiencies associated with importing. Relocation to the new Durban facility has also delivered the envisaged efficiencies and benefits.

Supply chain: Manufacturers
Ceramic Industries

Despite reduced volumes produced due to lockdown restrictions, the tile factories made significant headway in enhancing yields and reducing waste. Improved efficiencies, intensified cost management and range rationalisation were key drivers during the period.

The Betta Sanitaryware and Baths operations delivered an improved performance. The restructured management team has enhanced the quality of processes and planning, which augurs well for continued growth in the business. Construction of the warehouse facility was temporarily deferred in light of the pandemic and will continue once favourable conditions resume.

Notably, Ceramic suffered a direct loss of R34 million as a result of load-shedding during the review period; consequently, the resumption of load-shedding in July 2020 is cause for concern regarding future profitability.

The Australian operation delivered solid results for the year and, despite the pandemic, reported improved sales and profits in the final quarter. As the only local manufacturer of tiles in Australia, it is likely the business benefited from growing anti-China sentiment in the country.

The Samca Floor tile factory will be upgraded in the forthcoming period. This investment is anticipated to deliver a step change in the quality of the range and afford manufacturing flexibility.

The technology will also reduce consumption of energy and other natural resources.

Ceramic has a long-standing reputation for international standard, industry-leading technology, with operations that rank among the most energy efficient in the world. The continued focus on environmental sustainability will be furthered with the launch of EcoTec tiles – designed specifically to reduce carbon footprint. The tiles are made from locally sourced materials and require 10% fewer natural resources. Both heat and water are recycled in the manufacturing process. When compared to imported tiles, the EcoTec manufacturing process emits 30% less CO2' requires 25% less packaging and costs 25% less per m2 to transport from source, contributing to a significant carbon reduction.

We are confident this affordable, global standard range will appeal to customers seeking stylish, locally made, environmentally sensitive tiles.

Continued supply chain integration

The integration of Ceramic's transport management solution with Cedar Point, PiViCal Panels and Durban DC was postponed from April to June due to the pandemic. We are confident that once this integration takes place, it will effect a step change in route and fleet optimisation, resulting in improved efficiencies and service to customers and cost savings across the component businesses.

Ezee Tile

While year-on-year sales were lower due to trading restrictions, the improved production efficiencies and enhanced cost management achieved during the review period resulted in higher margins and profits for the year. Good progress was also attained in bedding down the new factories in Zambia and Zimbabwe.

Acquisition of a minority shareholding in Easylife Kitchens ("ELK")

The Group acquired a 25,1% stake in ELK, effective 1 February 2020, and may consider increasing this shareholding in time. The acquisition consideration was R18 million. The rationale for the transaction is in line with the Group's goal to provide customers with complete specialist solutions in home finishing. The relationship with ELK affords a range of strategic synergies: in the short term, the Group enjoys good opportunity to showcase its product through cross-merchandising in existing ELK stores. Over the medium term, the business may manufacture furniture for the Group and, in the longer term, consideration will be given to locating ELK stores on existing Group sites, with the intention of establishing one-stop specialist destinations for customers seeking a total solution to their home finishing requirements.

GROUP OUTLOOK

The consequences of the pandemic will be evident for the foreseeable future. Given the weak underlying structural fundamentals, the economy is likely to struggle to recover, even after all risk-adjusted restrictions have been lifted. Unemployment and personal indebtedness will continue to rise and disposable income will remain severely constrained. In light of the economic uncertainty and possible health risks, consumer confidence and spend will be fragile. We anticipate that semblances of traditional consumer behaviour will only resume once the pandemic subsides substantially.

Our clear challenge will be to continue to optimise on improvements made in our business to extract growth and gain market share.

In terms of the forthcoming financial year and the external environment, we anticipate the first six months will be very difficult while lockdowns persist. We are optimistic that the second six months, commencing 1 January 2021, will be more robust, particularly since the comparison will be against five months of trading in FY2020. Our expectation is that the Group will deliver positive sales and profit growth in the first half and comparatively stronger sales and profits in the second half.

The following focus areas have been identified for the year ahead, aligned with management's KPIs:

Strategic plan
Productivity
Financial performance
Human capital
BBBEE
Customer satisfaction and operational excellence
Cultural fit and values
Stakeholder relations
ESG priorities

Progress the journey to improve the Group's current ESG credentials as well as the disclosure of developments in this regard.

Environment Social impact Governance

APPRECIATION

I am inspired by the energy and enthusiasm shown by our team to revitalise our business after the lockdown and their commitment to building a stronger, more competitive operation for the future. I am confident that with this passion and motivation we are fighting fit to take on the challenges which lie ahead. I would like to thank each and every one for their ongoing contribution.

I have valued the collaboration of my Board colleagues over this past year and extend my gratitude to them for their support and endorsement of our strategies to grow the business sustainably. I would like to make special mention of the close involvement and support of the Chairman throughout this difficult COVID-19 era – his extensive experience and wisdom are greatly appreciated.

J N Potgieter

Chief Executive Officer