Chief Executive Officer's report

Over the past year, our Group's mindset evolved from single-minded survival mode to a profound sense of gratitude for our numerous blessings amid the challenges we face in South Africa. Our business performed extraordinarily well under very tough conditions and I am humbled to have led a team of people who demonstrated the best of humanity through their commitment, courage and resilience. Our frontline staff, in particular, have ensured service continuity despite daily personal risk posed by the Covid-19 pandemic. Subsequent to year-end, as civil unrest upturned our country, our team once again showed their mettle to keep going. In our business we say that our unique culture is the glue that binds us together - this tumultuous period has tested the glue and found it unyielding.

OVERVIEW

The Covid-19 pandemic

Our country

Tens of thousands of South African lives have been lost during this pandemic. Sadly, behind this cold statistic is the human tragedy - the passing of family, friends, colleagues and customers. On behalf of all of us at Italtile, I would like to extend our heartfelt condolences to those whose loved ones have passed on during this time.

We would also like to pay tribute to the healthcare workers in this country who strive tirelessly and selflessly to save lives under excruciating conditions. There are very few of us whose lives have not been touched by their extraordinary compassion and the sacrifices they make. We owe them a debt of gratitude.

Our business

Ensuring the safety of our customers and our people remained a core discipline every single day, in every business unit across our operation. We implemented a zero-tolerance policy in terms of non-compliance with protocols, and in doing so, continued to strive to curb the spread of the virus.

Aligned with the national experience, the third wave of the pandemic proved far more severe on our business than the first two waves, with the logistical challenges of ensuring operational continuity testing our resolve and agility. While we have deliberately not monetised the cost of the pandemic's impact on our business, we are very mindful of the toll it has taken on the physical and mental health of our people.

Tragically, three of our dear and valued colleagues succumbed to the virus during this past year. They were all long-standing members of the Italtile family: Queen Ramafikeng was a Sales Co-ordinator at Ceramic Industries, Erik Pieterse was a Joint Venture partner at Italtile Retail, and Simon Khanye was a Dispatch Checker at Cedar Point. They were all much-loved parents and spouses, and their loss to their families, friends and our team is immeasurable. May they rest in peace and may their loved ones find comfort in the memories they cherish of them.

I would like to thank our customers who have continued to support us throughout. They have endorsed and complied with our stringent health and safety protocols despite the inconvenience that these vital measures add to the shopping experience. They have tolerated with good grace unscheduled store closures and unexpected stock shortages, and we are extremely grateful for their understanding. They remain the reason for our existence and we will continue to strive to provide them with an optimal shopping experience.

Despite the significant uncertainty created by the pandemic leading up to and during the financial year, our business has weathered the challenges well and emerged a more resilient and self-reliant entity. This can be attributed to the extensive improvements made across the Group over the past three years, and our ability to respond with agility within the parameters of our proven, consistent strategies.

The gratifying results which we are able to report for the period are testament to:

the resilience of our team and robust business model;
our continued investment and focus on innovating for the future;
our unwavering focus on improving the customer shopping experience; and
and our ethos of profit-sharing and partnership with our people.

Trading environment

Trading conditions during the review period were more difficult than I have ever experienced at any time in my career. While the pandemic presented a new and unique set of challenges for retailers in South Africa, the weak local economy and unstable socio-political context continued to worsen as government's long overdue promises of policy certainty and structural reforms failed to materialise.

Unemployment and poverty accelerated to record levels as the pandemic compounded the severe inequalities experienced by citizens of this country. Constrained energy supply remained a major concern, and state infrastructure continued to deteriorate across water, sanitation and road services, resulting in ongoing protests. These factors together with our sub-investment sovereign credit rating all weighed heavily on local business and consumer confidence, and blighted prospects of foreign direct investment.

The impact of the pandemic on international manufacturing and shipping capacity in our industry was also dire. Erratic product supply due to global operating restrictions was dramatically worsened by shipping constraints and the dysfunctionality of our local ports. Additionally, shipping companies exploited the unrelenting demand and increased their freight rates by over 200% in the reporting period. As at year-end, supply and pricing volatility related to imports remained the norm and is expected to persist for at least the first half of the current financial year.

In this environment, the Group derived significant strategic advantage from its integrated supply chain and local manufacturing capacity which mitigated the challenges of stock availability and pricing instability.

Industry and consumer trends

Home improvement boom

Enforced work-and-study-from-home pandemic orders changed consumers' lifestyles and spending priorities and fuelled a major home-improvement boom. This trend emerged internationally, and our country has followed suit. With consumers spending more time in the home and having more time on their hands, they were more disposed to undertake previously neglected DIY projects or adapt their properties to accommodate multi-functional spaces. Although discretionary income remained constrained in the low wage inflation environment, homeowners took advantage of several conducive factors to invest in their primary assets, including favourable interest rates at record lows; the availability of some funds previously incurred on transport, travel and other recreational pursuits; debt payment holidays and short-term pandemic support funding.

While this boom is unlikely to be sustained at current levels once the vaccine rollout has been fully executed, it has entrenched the value of the home for many homeowners, and created a cautious 'be-prepared for the unexpected' mindset among consumers.

Change in shopping behaviour

Consumers have become more risk averse and more decisive in their spending behaviour. Previously, in advance of making purchases, prospective customers would spend significant time browsing in-store or researching comparable offerings in retail outlets across the competitor spectrum. They now spend more time online doing research, and should they decide to transact in-store, they gravitate to trusted brands that provide safe, comforting environments, with one-stop-solutions to all their requirements.

Our business model is well suited to this new trend, since our offering is supported by multi-channel trading platforms; our strategically positioned market-leading brands are trusted household names; and our integrated supply chain provides a complete specialist one-stop solution to our customers.

PERFORMANCE REVIEW

Achievement of key performance indicators and strategic imperatives

Management's annual performance is rated according to the level of achievement of a range of key performance indicators (KPIs), namely:

strategic plan;
productivity;
financial performance;
human capital;
BBBEE;
customer satisfaction and operational excellence;
cultural fit and values; and
stakeholder relations and ESG priorities.

SCORECARD

The level of achievement is measured against the following scorecard:

Superior achieve		Exceeded target
Achieve		Achieved target
Under achieve		Failed to meet target
Work in progress

The commentary that follows provides an overview of our performance in FY2021 aligned to these KPIs, as well as to the specific core focus areas which I identified in my FY2020 report.

Strategic plan

Achieve

Open 10 to 15 new stores and advance the revamp programme

During the review period, we opened 13 new stores and closed four non-performing Top T stores, bringing the total retail network to 206 stores. The new stores comprised 11 TopT stores and two franchised U-Light stores. In August and September 2021 we opened a further five stores which had been delayed due to local municipal inefficiencies and the impact of the pandemic. The new stores include CTM and U-Light in Ballito, KwaZulu-Natal ("KZN"), Italtile Retail in George, Western Cape, CTM in Diani, Kenya, and U-Light in Gaborone, Botswana. Management is satisfied that a strong pipeline of new stores exists for the next three years.

Our ongoing revamp programme is key to improving the customer shopping experience and enhancing returns on the property portfolio. During the period, our focus was on rolling out Millennial-format Bathroom Boulevards to 23 CTM stores. The increased bathroomware sales from these revamped stores validate this investment programme. Management is confident that the bathroomware category will continue to provide an important growth opportunity to the Group.

The second area of focus during the year was the installation of enhanced lighting in our retail stores, which showcases the products better, while simultaneously aligning with our green environment philosophy to reduce energy consumption. To date, 99% of TopT stores, 76% of CTM stores and 77% of Italtile Retail stores have been converted to the new lighting solutions. The improved standard of lighting provides an instant in-store transformation and has been favourably received by customers.

Improve stock turn and product mix

Achieve

Stockholding and stock management

Strong demand and good stock management served to improve stock turn substantially across the business units, particularly in the first nine months of the review period. The Group derived significant benefit from our integrated supply chain, with some 76% of total procurement sourced from local manufacturers and suppliers, which assisted us to mitigate erratic global supply and shipping constraints.

Stockholding levels at the end of the prior year were uncomfortably low due to unexpected pent-up demand, constraints in international manufacturing capacity and severe shipping inefficiencies. The higher stockholding at the end of this review period reflects improved levels of investment in stock in stores converted from franchise to Group-owned; the introduction of inventory for the new U-Light business; and the three-month cover provided while our Samca Plus factory is closed and undergoing an extensive upgrade. In this regard, same-store and warehouse stockholding was up 28%.

Although we closed FY2021 with higher stockholding than the previous corresponding period, management is satisfied that current levels are prudent given the good composition of the stock, sustained customer demand, and continued uncertainties regarding manufacturing and shipping capacity.

Product mix

Improved implementation of the business optimisation programme and enhanced use of analytics were key focus areas during the period, and investment in business-critical products and better price ladders resulted in a markedly improved product mix and better margins.

Range

The brands made good progress in improving their ranges to align latest fashion with specific customer profiles. Continued close collaboration between the stores and the factories will ensure we progress our goal of providing a shopping experience which exceeds the expectations of our customers.

Superior achieve

Employ tactical disruptive marketing campaigns

Notable spikes in sales over promotions and paydays confirm that the vast majority of our customers are price sensitive, with many experiencing constrained discretionary income. Accordingly, our brands have tailored their bespoke marketing initiatives across the spectrum of advertising platforms to convey our price-value-service offering through disruptive campaigns which differentiate us from our competitors and drive gains in market share and share of wallet.

Specific mention must be made of TopT's Woza Ekhaya ("Come Home") competition. This interactive community-driven campaign involved customers contributing their ideas and suggestions to the building of a dream home. On completion of the project, one lucky shopper won the house. The enormously positive response to this life-changing competition - and the brand's related sales growth - has ensured this competition will be a regular feature on TopT's promotional calendar.

Refer to the TopT report.

Under achieve

Grow the contribution of U-Light to the business

Launching a start-up brand in a struggling economy is not easy, however our rationale remains sound insofar as our investment risk is limited by having in place existing locations, an existing customer base and business partners, an effective back-office, and complementary products to complete the basket.

We advised at the half year that work continued to be done on optimising U-Light's business model and management team. We also noted that the pandemic's extremely severe impact on availability of imported stock sourced by external suppliers had suppressed sales.

It is pleasing therefore to report that a new equity partner, with long-standing experience in retail, has been appointed to manage the business. Opportunities are also currently being explored to expand the integrated import supply capability to reduce reliance on external suppliers.

U-Light's performance in the review period can be assessed as follows:

Under achieve

Supplied product for the total revamp of lighting requirements in our own stores. The R16 million project delivered a substantially more efficient, cost-effective solution than had it been outsourced.

Achieve

Built on the existing lighting offering in TopT and grew lighting sales.

Achieve

Expanded the Company-owned model with two pilot franchised stores.

Under Achieve

Grew the contribution to the Group's total retail sales.

U-Light remains a work-in-progress and our goal in the year ahead is to build scalability of the business. Management is optimistic that the offering has a role to play in completing the total basket solution for customers.

Superior achieve

Leverage the use of cutting-edge technology across all trading platforms

Our IT business unit makes an invaluable strategic contribution to our Group, and in recognition of this, we have created an executive management position for the incumbent divisional leader.

Tasked with responsibility for the risk and control environment, this department also develops our market leading technological innovations across our multi-channel offering and operations.

Key projects that were successfully completed in the year under review include:

a warehouse project which implemented automated, paperless systems and introduced processes to measure productivity of warehouse staff;
ongoing development of the CRM database;
integration of the Transport Management System ("TMS") into the integrated supply chain; and
introduction and evolution of industry-leading technology in our omnichannel offering, including online visualisers and in-store scanners.

Work in progress

Cautiously expand the Group's retail and manufacturing footprint in the rest of Africa

Regrettably, with international borders closed and restrictions imposed on non-essential travel during the pandemic, we have been unable to materially advance our store roll-out programme or the investigation of potential manufacturing opportunities. We opened one new CTM store in Diani shortly after year-end and have postponed the opening of other stores in Nakuru and Thika, Kenya; Lusaka, Zambia; and Maputo, Mozambique until conditions are more favourable in the new financial year.

Achieve

Progress to the second phase of the five-year logistics and distribution programme

Optimum functioning of the integrated end-to-end supply chain is critical to the business's growth, and phase two of the logistics and distribution programme is designed to leverage efficiencies and reduce costs in the supply chain through the TMS, which provides a crucial distribution link between our manufacturing and retail operations.

In the period under review, we successfully integrated Ceramic Industries' TMS with the Cedar Point and Distribution Centre warehouses, resulting in increased efficiencies and pleasing cost savings, some of which we were able to pass on to our customers.

The latter part of phase two will involve integrating the Ezee Tile business into the TMS and in due course, the Betta Sanitaryware warehouse, once construction of
the warehouse has been completed in the third quarter of FY2021.

Productivity

Superior achieve

Instill productivity as a core discipline

Our philosophy throughout the pandemic has been to do more with less, without compromising the essence of the business, by driving up the output and returns on all our resources and assets. It is pleasing therefore to report that all benchmarks across our operations confirm an increase in productivity for the reporting period. In the stores, all of the brands reported increased sales per person, while in the manufacturing division, Ceramic Industries recorded an increase in square metres produced per person (tile factories) and units per person (bath and sanitaryware factories). Ezee Tile also reported an increase in bags (adhesive) produced per person. Achievement of these benchmarks is noteworthy, given current trading conditions, and particularly so in Ceramic's case, where improved productivity yielded lower unit costs, which enabled the business to compete strongly against imported product.

Our partnership and profit-sharing ethos incentivises and rewards our people to participate in the growth and success of our business, and it is extremely satisfying that through our widespread profit share scheme, we were able to appropriately reward our team for their improved productivity and exceptional contribution to our results. In excess of R290 million in profit share was booked for employees across the business during the review period. Given the increase in productivity (sales and production per person), the individual profit share payments have increased significantly from prior years.

Financial performance

Superior achieve

Drive cost leadership across all business units to manage margin pressure

Extremely good margins were achieved across most of the business units due to a number of complementary factors, both in the business and externally.

The manufacturing operations experienced very strong demand, underpinned by the home improvement boom, the shortage of imported product, and the unfavourable exchange rate. This high-volume demand facilitated full capacity utilisation in Ceramic's factories, enhancing efficiencies and profitability, making a substantial contribution to higher Group margins.
In the supply chain import divisions, a leaner, more productive workforce and unrelenting focus on cost containment contributed to improved margins.
In the retail stores, well maintained manpower costs (excluding profit share payments and accruals) and enhanced recovery of transport costs boosted margins.
As discussed earlier, improvements in the TMS also contributed to notable cost savings and margin growth.

It is important to note that astute margin management enabled the Group to contain price inflation to support cost-conscious customers.

Margins at the current levels are viewed as being close to optimal, and while every effort will be made to maintain them, it is unlikely that all of the abovementioned factors will align simultaneously in future.

Achieve

Maintain efficient working capital management

Cost leadership and expense control are core disciplines throughout the business. While the investment in stock is slightly higher than preferred, we are satisfied that in light of the uncertainties posed by the pandemic, these levels provide judicious cover. We expect the supply situation to normalise over the next six months and our detailed plan to reduce inventory levels will boost cash reserves by at least R100 million.

The Group ended the period with cash reserves of R1 081 million, despite substantial cash outflows including capital expenditure of R1 025 million; total dividend payments of R559 million; own share repurchases totalling R184 million; and tax payments of R738 million.

This healthy cash position is testament to intense focus on working capital management and the cash generative nature of the business.

Achieve

Plan and commence execution of the roughly R800 million capital expenditure programme over the next 12 to 18 months

The Group has four major capital expenditure projects underway at present, which are all running on schedule and within budget. Of the R800 million allocated for the projects, R398 million was incurred in the review period. The projects are:

Upgrade of the Samca Plus Floor tile factory with leading-edge equipment and technology. The revolutionary technology will deliver a step-change in the quality of the range, afford manufacturing flexibility and reduce emissions and consumption of energy. The factory will be commissioned in September 2021 and will attain full production by the end of that month.
Development of a unique retail node in Boksburg, Gauteng. The site will house the Group's retail brands, Italtile Retail, CTM, and U-Light, and include an Easylife Kitchens' offering. The multi-brand node is a first for the Group and will achieve our goal of delivering a convenient, one-stop solution to customers.
Relocation of Ezee Tile from rented premises to an owned site in Brakpan, Gauteng early in the second half of the new financial year. The site will house the business's support centre and flagship factory, which manufactures adhesive, grout and paint.
Construction of a fully automated warehouse for Betta Sanitaryware. This 15 000m² facility will have capacity to store 17 000 pallets of toilets and baths and is scheduled for completion in the third quarter of FY2021.

Human capital

Achieve

Continue to invest in leadership development to build a pipeline of talent

Management

As advised on SENS on 3 May 2021 and discussed in the Chairman's statement in this IAR, I will be retiring with effect from 31 December 2021 and will be succeeded by my accomplished colleague, Lance Foxcroft, formerly CEO of Ceramic Industries. Tshepo Molefakgotla, previously COO of Ceramic, has replaced Lance as CEO of Ceramic. Both of these appointments are part of a longstanding succession plan programme.

Additionally, during the period we made a range of other strategic senior management appointments and effected changes to roles and responsibilities to enhance the succession pipeline, build capacity, and prepare the business for the challenges we face in the current uncertain market.

We support our senior executives with ongoing coaching and mentoring initiatives, both in-house and provided by an external specialist. The positive results of this investment are evident in the maturation of our youthful team and the exceptional performance they delivered during this unprecedented time. I am satisfied that they are well-aligned with the Group's high-performance culture, and have the required energy, experience and expertise to continue to deliver on our key imperatives.

Each of our divisions is headed up by an equity shareholder, which is a reflection of our confidence in them.

Refer to our Executive leadership.

People development

The Group's bold growth agenda and stretch targets demand that we have the right people and the right size team in place to improve our competitive posture and leverage returns on productivity. In this regard, we invest significant resources in building depth of talent and developing and upskilling our human capital resources. In order to accelerate our efforts to build people capacity and become the preferred employer of choice, we have created a Human Capital Executive position in the business. The position has been filled by a highly qualified and accomplished HR executive with extensive experience of the Group.

The Human Resources and Training report details our human capital development programmes which include internships and learnerships for both qualified students and inexperienced jobseekers; partnerships with leading universities to further our employees' education; and in-house training through our accredited academies and e-learning tuition.

Gender balance

As a business imperative we strive to ensure that our human resources complement is representative of the demographics of this country, and there is an ongoing awareness drive to appoint, develop and retain female employees at all levels in the Group. At the close of the review period, women comprised 37% of CTM's store operator complement, 50% of Italtile Retail's and 21% of TopT's complement. Improved targets have been set for the new financial year.

Employee sentiment

During this difficult time management prioritised communication with our team to offer continued support and motivation. Where face-to-face meetings were not possible, we engaged via videos, emails, online interactions and WhatsApp correspondence.

In the independent evaluation survey conducted annually to assess the quality of engagement with employees, we scored 76%, slightly lower than the 77% achieved last year, but with a better response rate, and higher than the two years prior to that (73% and 74%). This rating applies to the following metrics: communication effectiveness; ethics; leadership; management; performance; respect; reward and recognition; and working environment. As defined by the evaluation scorecard, the rating of 76% classifies the Group as "Striving to be world class" and a "Top company, with a motivational level which will facilitate growth and change".

While this score is formal recognition of our efforts to manage our people empathetically during this time, their enthusiastic teamwork and stellar contribution to the Group's results also speak volumes.

People pipeline

Retail is recognised as an extremely demanding sector due to its long hours, target-driven mindset and intensive competitivity, and our industry has historically faced a significant shortage of skilled retail-specialist personnel. Similar skills shortages exist in the manufacturing sector. Contributing to this situation are the country-specific factors that impede the youth and prospective workforce, including an education system that fails to produce adequate employable skills; a context of deprivation and despair; and a societal culture that lacks moral leadership, appearing to reward corruption rather than integrity.

In this context, it is challenging to source prospective employees who will align with our high performance and value-driven culture. Our Group is underpinned by a partnership and reward ethic, which incentivises employees to participate in the growth and profitability of the business, however, despite this, the people pipeline remains one of management's major concerns.

Achieve

Where opportunities exist, convert non-performing franchise stores to Joint Ventures ("JV") to facilitate a recalibration of team composition and performance culture

We concluded our plan to convert non-performing CTM and TopT franchised stores to JVs, with pleasing success. The programme was designed to afford better visibility of store performance and improve the Group's return on investment. The success of this conversion is confirmed by the enhanced productivity and increased sales and profitability reported by the stores, which are a good reflection of a better customer shopping experience.

BBBEE

Superior achieve

Strive to maintain the current rating of level 4

It is pleasing to report that we improved our BBBEE rating to level 2 (96,84 points), exceeding our target of maintaining a rating of level 4 (81,07 points), attained in the prior year.

This rating is based on improvements in the Skills Development, Preferential Procurement, and Supplier Development and Enterprise Development elements of the scorecard, as well as enhanced administration and reporting of our BBBEE credentials. Our qualifying and recognised spend on BBBEE initiatives totalled R131 million, allocated primarily to:

skills development including bursary spend: R52 million
supplier and enterprise development grants and preferential funding: R58 million
donations to the Italtile and Ceramic Foundation Trust: R21 million

Customer satisfaction and operational excellence

Achieve

Entrench retail excellence disciplines

Delivering an unparalleled shopping experience is our overriding priority. We strive to achieve this through instilling retail excellence disciplines at every touchpoint of the customer experience.

It is satisfying to report that our efforts were rewarded with a gain in market share across our retail brands. In addition, we achieved improved scores across all our customer sentiment measurements including mystery shoppers, in-store surveys, Net Promoter Score, and an independent brand health assessment, reflecting customer endorsement of our ongoing endeavour to improve the shopping experience. While this achievement is pleasing, we are mindful that there are further opportunities to improve our execution of all retail excellence disciplines, with specific focus on enhancing the range, presentation and price ladders.

During the period, investment in pre-retailing, "the silent salesperson", in several pilot stores delivered significant benefits for both customers and stores. Effectively the pre-retailing merchandise displayed with each product serves to educate the customer about the specific product, reducing the need to interact with a sales person, thereby saving time and limiting unnecessary personal contact. By achieving the same level of service with a lower headcount, productivity indices have been boosted in the stores. We will continue to expand this initiative to all of our other stores.

Cultural fit and values

Achieve

Embed the Group’s core values and performance culture across the business

As noted in my introduction, we regard our culture as the glue that binds us together. This adage proved particularly apt during the past year, as we strove to manage our business as 'normally' as possible by evaluating ourselves against the same demanding high-performance benchmarks as prior years, and not making concessions or using the pandemic as an excuse for poor delivery.

It is therefore pleasing to report that across all our operational metrics, including scorecards, KPIs, employee engagement and customer satisfaction surveys, we achieved, and in some instances, exceeded, our targets. This is particularly noteworthy in light of our deliberate efforts to streamline the business - with fewer people doing more - to extract optimum productivity and value from our resources and assets.

Stakeholder relations

Achieve

Maintain a comprehensive and engaged shareholder and stakeholder management programme

Shareholders

In line with longstanding established practice, we continued to engage frequently and transparently with shareholders and investors through our formal financial calendar interactions and ad hoc meetings on request. Our open-door policy and good levels of disclosure have enabled us to establish constructive and cordial relationships with our valued shareholders.

Community stakeholders

Ceramic Industries operates factories in some of the country's most socio-economically deprived and volatile areas, where financial hardship and poor service delivery are unrelenting concerns, often culminating in public protests. Localised civil unrest has an impact on our business operations and we make concerted, ongoing efforts to monitor and build relationships with our communities. As a business we strive to provide employment, skills development and sustainable growth opportunities for residents of these local communities and make further significant contributions to corporate social investment upliftment initiatives centred on education, sport and conservation.

It is anticipated that with local elections scheduled for the end of 2021 and continued non-delivery of basic services, incidents of civil unrest will increase. We have contingency plans in place to mitigate interruptions to operations where possible.

ESG priorities

Achieve

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

Environment

Our goal for the year was to reduce the Group's carbon footprint and consumption of non-renewable resources through initiatives including wider use of solar energy and rainwater harvesting in the stores and factories, and water recycling in the factories. The carbon footprint report completed in July 2021 confirms that although a slight increase in carbon emissions was recorded during the year due to significantly increased activity in both manufacturing and retail operations, carbon emissions per unit produced and sold have decreased. To date solar energy installations have been fitted at 36 of our stores, two of Ceramic's factories, as well as the Group's support centre and training academy.

Social impact

Our Proudly South African ethic is a key theme in our stores and communications campaigns, and we continued to further our support for the economy by selling high quality local products manufactured by local people. The overwhelming majority, approximately 76%, of all merchandise sold by our retail brands is locally produced.

Together with our Italtile and Ceramic Foundation, R121 million was invested in skills development, learnerships, schooling and sporting infrastructure, bursaries, conservation and enterprise and supplier development for previously disadvantaged and disabled recipients. In addition, our retail brands and factories conducted outreach programmes in disadvantaged communities. A key component of these programmes is to ensure they are meaningful, sustainable and measurable.

Refer to our Foundation report and Supporting our Communities report.

Governance

As a Group we believe that the application of effective governance is essential to establishing an ethical and successful organisation which creates sustainable value for its stakeholders, and we embrace the principles set out in the King IV Report.

Our core values are fairness, integrity, honesty, empowerment, human dignity, excellence, servant leadership and partnership.

These are not simply words on walls. We drive our business with these values; they inform our policies, practices and decisions. By focusing narrowly on these guiding principles, we have entrenched a Group-wide value system, and through this, will continue to implement good corporate governance disciplines across all of our business units.

During the review period we made good progress with enhancing the controls in key areas of the business including cyber security and health and safety. The independent safety, health and environment audit which was conducted in the year under review confirmed that improvement was noted across the retail brands, with vast improvement on the supply chain audit results. Furthermore, overall, the scores achieved by the stores in our internal audits also improved.

Refer to Material issues, risks and opportunities report.

RESULTS OVERVIEW

The following commentary provides a synopsis of our results for the review period from a trading perspective. These results need to be viewed in the context of the prior comparable period, which included varying levels of restrictions on consumer activity and the consequential impact on consumer sentiment and spend.

A detailed analysis of the Group's results is contained in the CFO's report.

Unchanged from prior years, the consistent key focus areas for management were:

sales growth;
cost leadership;
productivity improvements; and
leveraging our high-performance culture.

It is gratifying to report that the business delivered double-digit sales and profit growth across all our business units, all merchandise categories and all trading geographies in the year under review.

These creditable results are attributable to the agile response of our team, our robust business model and integrated supply chain, our unwavering focus on continuous enhancement of the customer shopping experience, our continued investment and focus on innovating for the future, and our ethos of profit-sharing and partnership with our people.

Total system-wide turnover of R11.6 billion (2020: R9,3 billion) was 25% higher than the prior comparable period and 16% higher when compared to FY2019. Retail store turnover increased by 26% compared to the previous corresponding period and by 22% compared to FY2019, with average selling price inflation estimated at 7% (2020: 1,4%) and 2,7% in FY2019. Like-for-like retail store turnover, (excluding sales of stores opened and closed during the period), rose by 23%, and by 16% compared to FY2019.

In the supply chain, the import businesses, Cedar Point, International Tap Distributors and Durban Distribution Centre, grew sales by 42% compared to the previous corresponding period and by 38% compared to FY2019. Average selling price inflation was 12%. Manufacturing sales for the period rose by 35% compared to the previous corresponding period and by 23% compared to FY2019, with average selling price inflation across the division estimated at 7% (2020: 1,0%).

Trading profit increased by 70% to R2 556 million (2020: R1 502 million) and by 42% compared to FY2019.

Adjusted basic earnings per share increased by 73% to 140,7 cents (2020: 81,5 cents) and by 37% compared to FY2019, while adjusted headline earnings per share grew by 70% to 140,1 cents (2020: 82,3 cents) and by 38% compared to FY2019.

The total gross ordinary cash dividend declared for the year was 56,0 cents per share (2020: 33,0 cents per share), an increase of 70%. In light of cash reserves exceeding operational requirements, a special dividend of 50,0 cents per share (2020: 23,0 cents per share) was declared out of income reserves, reflecting the Group's strong cash generating ability. This is the fourth special dividend paid in four consecutive financial years.

GROUP PERFORMANCE

The report below provides an overview of our operational performance and is followed by the detailed reviews of the individual business units.

Retail brands and webstores

The Group's three major retail brands, Italtile Retail, CTM and TopT all delivered pleasing results, reporting improvements in all key metrics: total sales and sales per person, profits, average basket value and stock turn. They also recorded improved customer sentiment scores, reflected by a gain in market share in their respective segments.

Over recent years, the Group has invested substantial resources in developing and implementing innovative technology to enhance our competitive offering across all digital trading platforms. With the onset of lockdowns and changing customer shopping behaviour, which favours online research and transacting, this investment was accelerated. The agility of our e-commerce team to adapt technological innovations to evolving trading conditions and customer demands was very successful, and our webstores reported record unique visitor traffic and significantly increased online sales.

Italtile Retail

After several years of subdued results attributable to a shrinking, negatively disposed target market, Italtile Retail recorded a stellar performance for the year. This turnaround was underpinned by enforced stay-at-home orders and restrictions on international travel and other luxury pursuits which resulted in premium-end consumers reallocating funds to substantial home improvements to accommodate at-home activities such as home offices, gyms, playrooms and spa facilities. Other key factors that contributed to the satisfying performance were the brand's meticulous execution of retail excellence disciplines and outstanding marketing campaigns across a range of platforms.

In contrast to this strong performance by the residential/retail component, the Commercial Projects division delivered weaker results, primarily a function of the dearth of building activity in the professional projects sector at present. This segment contributes only 10% to Italtile Retail's total turnover and hence must be viewed in perspective.

Subsequent to year-end, the brand opened a pilot small-format store in George, Western Cape. Should this format prove successful, the potential exists to explore new, untapped smaller markets which have previously not been considered.

CTM

CTM built on the momentum gained through our Sithi Wena ("You deserve a beautiful home") repositioning campaign and roll out of Millennial-look store formats to deliver pleasing results for the period. Good progress was also achieved with entrenching retail excellence disciplines and optimising sales levers.

CTM's consistent challenge is to improve the calibre and productivity of the sales force and store operators, and we continued to build systems and processes to facilitate this improvement. During the last quarter, we piloted our pre-retailing initiatives, which made a notable contribution to improved productivity and an enhanced shopping experience for customers. We will be rolling out the programme to all stores in the first half of the new financial year. We also advanced the development of our people pipeline through our Operator Training Programme, in partnership with leading universities.

The contribution of the sanitaryware category grew strongly, primarily due to revamps implemented in the Bathroom Boulevard areas of our stores and improved ranges. Pre-retailing in these departments also made a substantial contribution to the improved shopping experience. We will continue to roll out these initiatives and upgrades across the store network.

We strengthened the operations management team with the introduction of a dedicated warehouse specialist, which will ensure the required level of resources for this vital business function.

Management's focus in the new financial year will be on improving the range and presentation in more stores with the assistance of an enhanced merchandise team.

The goal is to open six new stores in the new financial year, three in South Africa and three in the rest of Africa. This roll-out programme will however be determined by the status of the pandemic, regulatory efficiency and general trading conditions.

TopT

TopT reported strong results for the period, boosted by the conversion of all remaining non-performing regions from franchised to Group-owned, which afforded improved oversight and profitability. Further work is underway to reduce the size of individual regions, which will also improve management controls.

Much of TopT's customer equity lies in its positioning as a community-centred offering, and this was leveraged during the review period with the launch of the Woza Ekhaya campaign, which culminated in a customer winning a new home, as well as other community-focused CSI projects and brand awareness initiatives.

Notwithstanding the brand's consistently good results, there are significant opportunities to execute better on retail excellence disciplines through improved standardisation of the offering and implementation of the business optimisation programme.

The roll out of stores was deliberately contained to 11 new stores, and as a result, there is a good pipeline for the next three years.

Supply chain: Importers

The improved sales and profits reported by our three import businesses, Cedar Point, ITD and DC are particularly creditable given ongoing disruptions to global supply chains and volatile pricing of imported products and shipping rates experienced during the period.

Aligned with our long-term strategic shift to support the South African economy, the Group will continue to replace imported product with local supply where available and viable.

Cedar Point

This business reported a good performance for the period, successfully bedding down the in-house management of its three warehouse distribution centres and extracting value through integration into the TMS. There are opportunities to reduce stock levels and hone the range, but this will take time while global supply chains normalise. The division's margin declined slightly due to unfavourable exchange rates and shipping costs and the deliberate strategy to support price sensitive customers.

International Tap Distributors (ITD)

This division delivered another strong performance, building on the momentum gained in the prior year. In-stock levels of business-critical products improved despite supply chain interruptions, while investment in inventory was contained notwithstanding the business successfully curating a highly fashionable range. Good cost containment and better buying achieved pleasing profit growth and higher margins.

Distribution Centre

Despite erratic import product supply, this business unit maintained in-stock levels for CTM and TopT. Solid progress was made with the implementation of a control tower solution and visibility within the import process. Implementing opportunities to replace and source more competitively priced product from new markets is an ongoing initiative and continues to deliver strategic advantage for the retail brands.

Supply chain: Manufacturers

Ceramic Industries

South Africa: Ceramic is a volume-driven operation that thrives at full capacity utilisation, which results in lower production costs, reduced inefficiencies and a concomitant positive impact on profits.

During the review period, the business benefitted from a range of conducive factors which drove volumes. These included robust demand caused by enforced stay-at-home pandemic-related orders; severe import supply chain disruptions; a weak currency; high shipping costs and a 'buy-local' consumer philosophy. In terms of the latter trend, Ceramic grew its market share of the import substitute segment and is likely to continue to build on those gains.

In the sanitaryware market, a key local manufacturer ceased production during the year and will henceforth import stock, which will afford Ceramic a competitive advantage.

Technology: Ceramic has a longstanding tradition of investing in industry-leading innovative technology. During the period and in response to strong demand, the business successfully expanded its range of EcoTec eco-sensitive thinner tiles, which require less energy and fewer materials to manufacture, thereby contributing to improved profits and a lower carbon footprint. Furthermore, the Samca Plus Floor tile factory which is currently undergoing a major upgrade including the introduction of revolutionary technology, will deliver a step-change in the quality of the range and afford manufacturing flexibility, advancing Ceramic's strategic market leadership.

Energy: Ceramic has in place a range of contingency plans at its various sites to mitigate the impact of load shedding up to stage 3, however from stage 4 these fall away and the impact on the factories becomes extremely serious. While constrained energy supply is an ongoing problem, other major concerns are high energy costs and the continued failure of infrastructure which has caused noteworthy downtime and damage to equipment in the review period. As a consequence, the business is investing in technology that will reduce its reliance on the grid, and in time, enable the Company to be energy self-sufficient in the long term. The alternative energy supply programme will also be environmentally sensitive.

The environmental report provides detailed information in this regard.

Australia: Ceramic's Australian operation recorded an excellent performance for the period due to the robust demand for local product underpinned by a pro-local sentiment, high import costs and severe supply chain disruptions of imported products. The sustained demand experienced has provided management with incentive to investigate the feasibility of expanding the plant.

Ezee Tile

This business unit delivered another pleasing result, achieved through improved production efficiencies and intensified cost management. Double-digit sales and profit growth were recorded for the period, derived from full capacity utilisation and operational improvements in all the factories.

ASSOCIATE INVESTMENT

Easylife Kitchens

Easylife Kitchens ("ELK") is a leading installer and manufacturer of kitchen, bathroom, vanity, built-in-cupboards, bar and storage design. The Group acquired a 25.1% stake in ELK effective 1 February 2020 and we subsequently increased our stake to 30% during the year. The investment in ELK is in line with our goal to provide customers with complete specialist solutions in home finishing. During the review period, we opened ELK stores on two of our existing sites and are pleased to report that initial trading performance is positive. In addition, ELK commenced manufacturing bathroom cabinets for Cedar Point; this import substitute option offers strategic advantage given ongoing global supply chain disruptions. We are optimistic about the potential that our investment in ELK affords.

Group outlook

On a daily basis, the realities faced by South Africans are high levels of unemployment, poverty, crime, corruption, service and infrastructure failure, and general policy uncertainty. As a nation, we are world-renowned for our resilience and optimism, but these ongoing hardships, exacerbated by the pandemic, have battered our national psyche and created a sense of fatigue and a mood of despondency.

The widespread destructive civil unrest which occurred in KZN and Gauteng in July 2021 was further evidence of the serious underlying social, political and economic disquiet in the country.

While acts of criminality and lawlessness were brought under control and prosecuted, the damage to the local economy and business and investor confidence was severe, and there remains a deep concern that until the underlying causes of this disquiet are addressed with meaningful reforms, it is very likely that we will experience further unrest in future. It is obvious too that the economy will not weather well further shockwaves of this nature.

In the period ahead, the sluggish vaccine roll out and ongoing impact of the virus and related restrictions on consumer confidence and spend will remain a major concern, while local government elections scheduled for late this year are also worryingly expected to be associated with further instability.

In our industry, there are also several factors that are cause for uncertainty, including continued global supply chain and shipping disruptions, the possibility of interest rate hikes in the local market, and the sustainability or otherwise of the home improvement trend at current levels.

In our business, the primary challenges we face will be people capacity and skills, and general psychological fatigue among consumers.

In this concerning and adverse environment, our priority is to focus on those factors which we can control and influence.

While global trends indicate a slowing of the home improvement boom, we infer that is primarily due to easing of stay-at-home orders due to comprehensive vaccine campaigns. Our roll-out programme is substantially behind international markets, so we expect any tailing-off locally to lag behind those markets.
Notably, Google trends regarding online floor tile research indicate that although the search demand in March to June 2021 was lower than in the period 1 May to end November 2020, current search levels remain significantly higher than prior to the lockdown, which is a positive sign. It has always been the Group's contention that consumption of tiles in the local market is substantially lower than comparable emerging markets and therefore offers a very strong growth opportunity.
We are confident that if we execute retail excellence disciplines better at every customer touchpoint and reduce existing inefficiencies in our business, we will build further momentum in the business to deliver sales and profit growth and gain market share.
We will continue to invest in the future of our business and the local economy through our store roll out and upgrade programme and our capital expenditure projects, and are optimistic this investment will deliver growth for the Group. As a Proudly South African company we are committed to contributing to responsible, sustainable growth, job creation, skills development and meaningful community upliftment.
We will also continue to invest in ensuring our innovative online offering provides consumers with a seamless, personal digital experience to differentiate us from our peers.
After years of low price inflation and margin sacrifice, average selling prices will be increased in line with inflation and appropriate margins will be maintained to support our business units and store operators.
We are mindful that for the foreseeable future, the pandemic will continue to impact on the local economy and our business. We are satisfied that our clear-cut strategies, responsive systems, hands-on management team, and resilient business model will enable the Group to continue to respond nimbly and timeously to future challenges.

In terms of our growth programme, we have identified the following focus areas for the year ahead, aligned with management's KPIs.

Strategic plan

Open ten to fifteen new stores in the forthcoming financial year and advance the revamp programme.
Execute better by optimising opportunities at all touch points of the customer experience (people, fashion, service, price, and presentation).
Improve stock turn and product mix.
Grow the contribution of U-Light to the business and expand the integrated import supply chain capability.
Leverage cutting-edge technology to improve the Group's competitive advantage across all trading platforms and migrate our SAP infrastructure to the cloud.
Subject to Covid restrictions, cautiously expand the Group's existing retail and manufacturing footprint in the rest of Africa and continue to investigate opportunities to enter new markets in the region.
Progress to the next phase of the five-year logistics and distribution programme designed to extract optimum efficiencies and reduce costs.

Productivity

Instill productivity as a core discipline to improve the competitive posture of the business.

Financial performance

Drive cost leadership across the business.
Maintain efficient working capital management.
Complete execution of the roughly R800 million capex programme during the next financial year.

Human capital

Continue to invest in leadership development to build a pipeline of talent.

BBBEE

Strive to maintain the current rating of level 2 in the year ahead.

Customer satisfaction and operational excellence

Entrench retail excellence disciplines aimed at enhancing the customer shopping experience and continue to improve on customer sentiment scores.

Cultural fit and values

Continue to entrench the Group's core values and performance culture across the Group.

Stakeholder relations

Maintain a comprehensive and engaged shareholder and stakeholder management programme.

ESG priorities

In order to achieve our goal to be a responsible, safe and sustainable business, we have started to develop policies and entrench an ethic of zero-harm. This will be implemented throughout the business as a wholistic approach to managing risks, including physical safety, mental well-being and physical health. Our key focus areas will be to develop effective, caring leaders at all levels, effective critical controls to manage our most significant risks in the workplace and environment, and to encourage a strong culture of engagement. In this regard we will undertake the following activities:

Environment

continue to strive to reduce the Group's carbon footprint and consumption of non-renewable resources.

Social impact

ensure the safety and well-being of our employees;
ensure that our community social initiatives are meaningful and sustainable, and measure their impact on an ongoing basis; and
advance our Proudly South African campaign which prioritises selling local products manufactured by local people.

Governance

continue to entrench the implementation of good corporate governance principles across all of the Group's business units.

EVENTS SUBSEQUENT TO THE REPORTING PERIOD

Impact of civil unrest and the ongoing pandemic

At the height of the public unrest in July 2021, in the interests of ensuring the safety of our staff and customers, we closed all of our 18 stores in KZN for
10 days, as well as 16 stores in other hotspots for shorter periods of time. Thankfully no injuries were sustained. Two TopT stores in Orange Farm and Spruitview in Gauteng were looted and destroyed. There is no doubt this small number of damaged stores would have been substantially higher without the outstanding support received from our local communities, taxi associations, the SAPS and SANDF, who were pivotal in protecting businesses in various neighbourhoods.

In addition to the abovementioned closures, numerous stores were also temporarily closed throughout July 2021 due to positive Covid cases which occurred in the third wave of the pandemic.

Subsequent to year-end, up to 10 July 2021 (and the onset of the unrest), the business had recorded 14% growth in sales. Thereafter, sales trended down for most of July, only recovering slightly in the last week, and finally ending on 5% growth for the month.

In terms of the widespread damage caused to most of the major retailers in the building industry, we expect Ceramic to see some upside in sales over the next few months and possibly up to one year, as customers rebuild and re-stock in the aftermath of the unrest.

Retirement of Ezee Tile founder and acquisition of shareholding

Founder and manager of Ezee Tile, Mike du Plessis, retired at the end of the period after 27 years in the business. The Group acquired his 26% stake for a consideration of R120 million and now holds 97,54% of Ezee Tile.

We would like to pay tribute to Mike for his invaluable contribution to assisting with the integration of Ezee Tile into the Group after we acquired a stake in the business in 2008 and subsequently a majority stake in 2017. His hands-on involvement and commitment have been key to the success of the business since it was founded in 1994.

Mike has been succeeded by his longstanding COO, who has extensive experience in the industry and company.

PROSPECTS

We anticipate that the first half of the new financial year will deliver results in line with the prior corresponding period. This conservative forecast is in view of the high base we reported in H1 2020 which was driven by strong pent-up demand, as well as the adverse impact of the unrest and ongoing pandemic since year-end. Given prevailing uncertainty, it is difficult to predict with accuracy the performance in the second half of the year, however, assuming trading conditions do not deteriorate even further, we anticipate delivering sales and profit growth for the full year.

FAREWELL TRIBUTE

I will be retiring with effect from 31 December 2021, after eight tremendous years with the Group.

I am leaving a position and a company I will always hold very dear. I work with an incredibly supportive, innovative, competent and resilient senior management team. I am also inspired daily by the commitment of our frontline staff who constantly strive for excellence, to fight for the right of our customers to have beautiful homes. I have been extremely fortunate to work very closely with the founder of this business, Gianni Ravazzotti, who is a true entrepreneur and custodian of our values and culture.

As discussed earlier, the appointment of Lance and Tshepo formalises the Group's succession plan, which we have developed over the past five years. I am confident that together with our CFO, Brandon Wood, this dynamic executive team will take the business to new heights. In terms of my future role with the Group, I will remain on the Board as a non-executive director, and I look forward to serving the Group in my new capacity.

Looking back on my time with the Group, I'm pleased with the achievements we have accomplished as a team. Among the highlights are:

the development of a strong Group Executive Committee and senior management team;
doubling the store network and entrenching our fashion status through the look and feel of our stores and our product ranges across all our brands;
instilled retail science and optimised key levers to improve the customer experience;
expanded TopT to a national brand and repositioned CTM;
prioritised continued investment in cutting-edge technology, BMO, CRM, and e-commerce;
created diversity in our offering with the introduction of U-light and Easylife Kitchens;
improved the Group's BBBEE status from non-compliant to level 2;
acquired and integrated Ceramic Industries and Ezee Tile;
improved trading profit from R600m to R2,6 billion a year; and
paid special dividends for four consecutive years to our shareholders and R290 million in profit share this year to our people out of cash reserves.

While I am proud of these accomplishments, they are a tribute to our team which has trusted, supported and partnered with me as we have taken bold leaps and achieved some audacious goals. It has been a privilege to lead them.

Finally, I would like to thank my Board colleagues for their counsel and endorsement of our strategies over the years. I am confident that their support for the executive team will ensure that the business will continue to grow sustainability and deliver rewards for all our stakeholders.

J N Potgieter
Chief Executive Officer