Chief Executive Officer's report

OPERATING ENVIRONMENT

As anticipated in my report at the end of the prior year, weak economic growth at a macro-level and difficult sector trading conditions persisted, while consumer confidence remained subdued in light of sustained high interest rates and inflation, deterring investment in construction and home improvement.

Geo-political tensions threatened shipping capacity and rates increased. As cautioned, softer global and local demand increased competition and intensified margin pressure on internationally sourced products. Regrettably, for most of the period, the cost of living crisis weighed heavily on consumers, and with low GDP growth and negative consumer sentiment, the building cycle downturn has yet to recover.

Adding to the pressure on the industry, the competitive landscape underwent a significant change. Manufacturing production capacity now exceeds demand, by a large margin. This over-supply has resulted from an increase in production by existing manufacturers in the South African market and the establishment or expansion of capacity by factories in Zambia, Zimbabwe, Mozambique and Tanzania. Weak demand over several years had already resulted in high levels of inventory in the local market and the additional new supply has compounded that situation. As a result, SADC manufacturers are resorting to predatory pricing in this country in a bid to penetrate the market. In turn, this has intensified rivalry among retailers in a sector where prices have persistently declined over the year, as operators compete to retain their market share.

Inevitably, this deflationary pricing has had a significant impact on margins across the industry. It is our view that these margins will result in consolidation among players and rationalisation of capacity in the market in due course.

Tellingly, the establishment of major new manufacturing businesses immediately over our borders is indicative of the investor-friendly environments offered by our neighbouring countries, whereas South Africa is seen as an increasingly difficult and unsupportive investment location for manufacturers.

In the last few months of the reporting period, there were encouraging developments – including the cessation of load shedding, substantial cuts in fuel prices, a notable decline in food inflation and improved consumer confidence levels. Subsequent to the election, the configuration of the GNU, which is broadly recognised as investor-friendly, also had a positive impact on the financial markets and local currency.

These constructive developments, while welcome, will take time to filter through to disposable income and investment sentiment. A sustained downward trajectory in inflation and interest rates will be required to afford significant stimulus to our industry.

CONSUMER TRENDS AND OUR RESPONSE

Affordability was the key watchword for consumers during the period. Our customer surveys confirm that next to quality, budget is the key consideration in the purchase of tiles and bathroomware. This price sensitivity is evidenced by customers seeking out deals and buying down within our product categories. The goal in our stores is to ensure every customer – each deserving of a beautiful home – has a great shopping experience. In offering quality products that our customers can afford, we hope to inspire them with fashion that elevates their home or business to a place that delights them at every opportunity. We aim to provide an unrivalled shopping experience, together with the support they require in the process of undertaking their project – from the initial stages until after the construction is complete. We strive to add value through various points of differentiation, low prices, trusted quality, meaningful warranties and product service experts.

Consumers in the sector have become more knowledgeable and proactive; they do research on products and price comparisons before purchasing, and increasingly, use digital platforms as a starting point in their projects. The widespread influence of social media in a tech-savvy market has also encouraged informed shoppers to expect a better online and in-store experience. Our online webstore offering is key to our seamless omnichannel experience. Our aim is to ensure that shoppers have a range of convenient options – from conducting their entire transaction online, to a blend of online and in-store interactions. The improvement in our unique visitor and transaction statistics is a pleasing endorsement of our investment in this trading platform. As industry leaders, our online content continues to inspire purchasing decisions and support DIY customers through our guidance, insights and advice.

A lasting effect of the Covid-19 pandemic is consumers' preference for conveniently located, smaller standalone stores – a departure from the big-box retail format that previously dominated. There is growing evidence of this in South Africa, with a move away from major shopping centres, in favour of convenience purchases from smaller strip malls and independent outlets. In our TopT market this is particularly relevant for customers seeking a convenient, affordable shopping experience in their local community, negating unnecessary transport costs.

RESULTS AND PERFORMANCE

The Group's results are reviewed in detail in the CFO's report.

In my commentary, I have extracted the key numbers that provide context for my discussion on performance and our strategic response.

In summary, our retail operations recovered market share and performed better in the second half of the period than the first, largely resolving management capacity constraints and extracting benefits through an aggressive focus on efficiencies and cost leadership. The decline in profits reported in our interim results in December, primarily caused by Ceramic's poor performance, was slowed – although not reversed. While Ceramic gained market share in the bath and sanitaryware segments and achieved efficiency improvements in manpower, systems, quality and products, the business failed to grow tile sales volumes and improve capacity utilisation to reduce the cost base and drive up profitability. Unfortunately, this inability to fully load the tile factories continued to impact negatively on Ceramic's contribution to the Group's results.

Outside of South Africa, our Australian operation delivered another solid performance. However, results from our East African retail node failed to meet management's expectations, negatively impacted by socio-political unrest and difficult trading conditions in the region.

In the period under review, total system-wide turnover increased slightly to R11,54 billion from R11,50 billion in the prior year.

The retail division reported a creditable result given softer consumer demand. Like-for-like sales volumes were slightly down and sales value reduced by 2%. Average selling price inflation was 2,1%. Retail profits for the period declined by 6,9%.

In the manufacturing division, Ceramic and Ezee Tile's combined sales value decreased by 6%. While Ceramic reported lower volumes and profits, Ezee Tile grew both metrics. Combined average selling price inflation was 1%.

In the integrated supply chain, our import businesses, Cedar Point, ITD and Distribution Centre reported mixed results. ITD and Distribution Centre grew sales and profits, while Cedar Point's metrics were flat. Collectively, sales value rose by 2%, while average selling price inflation across the division was 3,7%.

In light of the competitive landscape and generally weak demand, margins were deliberately sacrificed across the Group to support affordability for customers and compete for market share.

Operating costs were flat year on year – a pleasing achievement considering the current high levels of inflation. Cost leadership is a core discipline, driven hard by management in all our operations. In the reporting period, the priority focus was on containing logistics and property costs and improving productivity.

Group trading profit for the full year decreased by 11% on the prior comparable period, a less steep decline than the previous year. Trading profit in the second half was only slightly lower than the prior comparable period, reflecting an improved performance in the second six months compared to the first.

A 76% increase in cash reserves demonstrates the Group's strong cash-generating ability. In light of robust cash reserves of R1,8 billion, which are in excess of operational requirements, the Board has declared a special dividend of 78 cents, which together with the interim and final ordinary dividends brings the total dividend for the year to 127 cents (2023: 53 cents).

PERFORMANCE SCORECARD AND STRATEGIC RESPONSES

At the end of the prior year, strategic objectives were identified that required the execution of operational excellence across our retail and manufacturing assets to drive improvement in the business. These objectives are linked to the Executive Directors' performance and remuneration targets, as discussed in the Remuneration report. The commentary that follows outlines progress against these objectives.

• Grow TopT tile sales volumes by improving execution in-store, enhancing and simplifying the range and expanding the geographic footprint

  Despite difficult trading conditions experienced during the review period, the TopT team delivered another rewarding performance, underpinned by growth in tile volumes sold, an enhanced product range, increased productivity and better operating efficiencies due to cost leadership and systemic improvements. The brand also grew sales value and gained market share in a segment that has witnessed the proliferation of independent, opportunistic traders. The store roll out programme, which was temporarily slowed in the period, will resume in the new financial year. Management is confident that the brand's market segment, while becoming increasingly competitive, will remain relatively buoyant, affording opportunities for growth in under-serviced areas.

• Turn CTM's performance around and grow tile sales volumes

  CTM is recognised as the leading brand in its market, despite a significant increase in general hardware and ceramic product retailers, facilitated by the substantially lower barriers to entry in the sector. Customer confidence and investment sentiment in CTM's mass middle-market segment remained negative as sustained elevated interest rates and high inflation eroded discretionary spend available for home improvement. We are disappointed that sales at CTM decreased for the year, reflecting constrained consumer disposable income and price-sensitive customers shopping down.

  During the period, CTM continued to drive a differentiated curated offering to bring customers a wide range of fashionable quality products, with appeal for existing and new customers in a crowded market. Our priority focus areas were product (purchasing, presentation and availability); value proposition (quality and price); and customer satisfaction (service). The range continued to evolve as the trend to larger format and rectified product gained momentum. To reinforce our value proposition, CTM continued to source new products from manufacturers in commoditised segments that Ceramic Industries does not compete in. The brand's purchasing power enabled an improvement in price ladders and ensured we remained competitive as selling prices reduced in the industry. Due to increased competition, margins will remain under pressure as price deflation persists.

  CTM regards customer satisfaction as the most important KPI and continues to innovate in achieving customer satisfaction and an inspirational customer experience through excellent service. To this end, CTM is deliberate in its planned interventions to improve the quality of engagement with our employees. We believe better engaged employees will further enhance customer satisfaction, promote customer retention and win new customers, ultimately improving profitability.

  In the latter half of the financial year, the customer shopping experience was further enhanced due to operational improvements made between CTM and the integrated supply, distribution and manufacturing businesses, which enabled consistent availability of in-demand products. Management of optimal stock levels is a key brand discipline in the current volatile market.

  It is management's conviction that if the basic retail excellence disciplines continue to be actively implemented, sales and profit will grow when consumer discretionary spend and sentiment improve.

• Improve efficiencies at Ezee Tile

  The full commissioning of our new flagship facility at Vulcania is a stand-out highlight of the period. The management and operations teams have been capacitated and the facility is now realising cost and efficiency benefits that have resulted in pleasing double-digit increases in sales value and profits. Opportunities to improve performance in the regional factories will be actioned in the upcoming year. With core high-volume production bedded down, Ezee Tile will extend its range of higher margin value-add products.

  Integration into the Group's transport management system has delivered vast improvements in the delivery accuracy and fill rates at Ezee Tile's customers. Opportunities to achieve synergies between the various business units should enable the Group to continue to improve efficiencies in delivery.

  While well priced, Ezee Tile's products are recognised in the market for their superior performance and consistent quality, and in the year ahead, the business will target increased market share in the specifications and projects segment, which will enhance growth prospects.

• Turn Ceramic's performance around

  - Grow volumes and optimise capacity utilisation to reduce the cost base and drive up profitability

  At the half-year, we noted that opportunities exist in the operation to unlock internal efficiencies, optimise our human capital resource and leverage our investments in cutting-edge technology and equipment to recover market share. I am pleased to report that many of the remedial operational measures have been achieved. The new senior management team is performing well; additional fashionable products have been launched and quality systems have been enhanced. There has also been an improvement in productivity, while costs have been reduced.

  Our disappointment, however, is that despite these improvements, sales declined in the reporting period. During the year, trading conditions in Ceramic's market space continued to deteriorate and the excess capacity in the industry worsened substantially with the full commissioning of a large new producer in Mozambique. Total production capacity in Southern Africa is now roughly double that of demand. Regrettably, this has resulted in distressed manufacturers deflating prices in the fight for market share, which has severely reduced margins. This pressure on margins is of particular concern given that input cost inflation remains high.

  Under our 'fighting fit' mantra, our overriding goal at Ceramic is to regain market share that has been lost in the current price war. Our plans for the next year include further reducing costs and improving efficiencies to ensure the operation remains competitive and relevant. Prices will continue to be revised as the current projects achieve cost improvements. Ceramic will also continue to launch innovative new products that differentiate the range and provide customers with a wide range of quality product.

  In the rapidly changing market conditions, increased capacity utilisation is a key focus in the business. The appropriate level of production will be adjusted to enable optimal factory loading in our respective factories.

  - Leverage investments in technology and equipment to recover market share and attract new customers

  Significant progress has been made in bedding down the Samca+ factory. Production, at close to full capacity, is stable and the product has been well accepted in the market. Importantly, the Continua technology employed in the factory affords the flexibility to effect quick changeovers in terms of product size and thickness. While the Group enjoyed some first-mover advantage when we launched our environmentally friendly thinner Ecotec tiles, segments of the market have been slow to respond. In this regard, Samca+ affords us agility in manufacturing capability. Notwithstanding the progress made in this operation, a priority is to grow sales to match the increased volumes now produced by the factory to optimise capacity utilisation and improve margins.

  Vitro's new production line project is in progress and has entered the commissioning phase. Vitro currently produces our popular, rugged Kilimanjaro tiles and the new production line will improve yields and efficiencies and enable the production of new larger formats and rectified tiles with technical porcelain properties that offer a unique point of differentiation in the market. We anticipate that production will commence by the end of the calendar year.

  We will continue to design and launch new products across all our factories aimed at both substituting imports and distinguishing our offering from other manufacturers.

• Commission the Betta warehouse

  Following delays emanating from a dispute with the original hardware and software supplier of the warehouse, the project has resumed with a new technology partner. We anticipate concluding the project in the 2025 financial year. While the delay in commissioning has not impacted on existing operations, the warehouse will, once complete, make a significant contribution to reducing delivery lead times and improving warehousing efficiencies, while releasing the old warehouse space for factory improvements and future expansions.

• Ensure resource security – mitigate the risk to availability of supply of natural gas and safeguard business continuity

  At the half-year, we flagged the uncertainty of energy supply, and specifically natural gas, as a key risk to the business. We noted that Sasol, the primary supplier of imported piped natural gas ("PNG") had announced that as of June 2026, they will no longer be in a position to supply the market. Subsequently, on 20 August 2024, Sasol announced that supply would be extended to at least June 2027.

  While this extension is welcomed, approximately 70% of Ceramic's total energy requirements are supplied by PNG, and hence securing a sustainable supply of viably priced energy remains a key management priority.

  With the Board's clear mandate to ensure business continuity, we have conducted thorough research and investigations into an array of alternatives to replace Sasol's supply. While gas is our preferred choice of fuel, in the event viably priced natural gas is not available, a project has been approved to invest in and convert one production line at our Gryphon factory to use a coal‑based synthetic gas solution for heating and firing, and to test this established technology in our process, using our raw materials. This coal syngas trial is entirely based on a pre-emptive cautious approach to responsible energy management, and we remain hopeful that a natural gas solution will be found.

  Future gas supply is an industry-wide dilemma, affecting many leading local companies. In this regard, we, together with other major businesses, continue to explore opportunities with Sasol to extend gas supply further.

• Mitigate against risks associated with power and water supply. Set consumption reduction targets and transition to renewables.

  Our evolving energy programme pursues projects that will facilitate sustainability of energy supply, reduce reliance on the national grid and decrease our carbon emissions. The Group has successfully installed off-grid PV battery-backed solutions at selected CTM stores. Roll out of this solution to more stores will continue over the next year.

  Water consumption is monitored and measured through smart meters at some sites, and we implement rainwater harvesting and boreholes where practical. We sell a wide range of water-saving taps and sanitaryware in our stores; use these water-saving devices in our facilities; and plant indigenous gardens on our properties.

• Develop teams

  At the end of the prior year, I noted that while training and development are key drivers in our business, the persistent lack of specialist skills and the limited human capital pool in our market segment are major challenges. In this regard, developing our teams remained a priority focus, with the goal of building competencies and talent in the business and strengthening the leadership pipeline. It is rewarding to report that good progress has been made over the last year.

  Retail

  Collectively across the Group, our depth of retail expertise is vast. Our Board includes several brand-building experts and other members with many decades of hands-on tactical retail experience. We are grateful to have the founder of the business contributing to the continued success of the Group. Seasoned retail experts with extensive experience lead each retail brand. Our store operator programmes for each brand continue to evolve to improve their effectiveness in developing the leaders of tomorrow. Retail excellence and sales training are core disciplines. Our sales staff are comprehensively coached and provide a succession pipeline for store operators.

  During the period, we improved the effectiveness of our brands' human capital resources. We restructured TopT's regional management capability, which will add further retail expertise depth and improve efficiencies in that business. CTM's senior retail management structure was bolstered with the appointment of an external retail expert and an internal promotion from the operations team. Both individuals are highly experienced retailers.

  Manufacturing

  We capacitated the management and operations teams at Ezee Tile to align with technology changes implemented in the new facility. The solid performance delivered by the business reflects the improvements made. We will continue to upskill and build competencies to enhance productivity and efficiencies in the business.

  Appointing and bedding down a new management team has been a high priority at Ceramic, and it is pleasing to report that we have filled key positions over the past few months. The new Ceramic CEO has made good progress since his appointment and we are starting to see sustained improvements in factory performance.

  However, in the difficult trading conditions, sales volumes from the tile division continued to decrease and Ceramic's financial results declined further during the year. This performance is largely due to the greatly increased tile production capacity in Southern Africa that has resulted in manufacturers being unable to sell their full capacity or run all plants at optimal loading, causing significant price deflation in most tile categories. With an additional manufacturer having started production in April 2024, the price war and fight for market share will intensify further over the coming months.

  In light of these challenges, I have been mandated by the Board to assist the team to continue building on the improvements made over the past year and help develop the leadership capability within manufacturing.

  Group

  We have strengthened our management structure with the creation of a new Group COO position that has been filled by the former CFO, Brandon Wood. Brandon's successor, Lamar Booysen, has worked closely with him over the past year and his transition to CFO has been seamless.

  HR and training

  Our Human Capital department is key to supporting our growth objectives in the business by recruiting, training and developing teams that are fit for purpose. We are in the process of restructuring the human capital team to strengthen the function in assisting the business to achieve our goals and ambitions. As part of the restructuring process, we will review the effectiveness of all the learning and development programmes currently in place to improve effectiveness and efficiency of training, while continuing to encourage our learning culture.

• East Africa node structure

  The results delivered by our East Africa node were disappointing. During the period, trading conditions deteriorated significantly in Kenya, featuring political volatility manifesting as social unrest, socio-economic stress following significant tax increases, and adverse weather conditions including severe flooding. During some of the periods of protest action that lasted several weeks, our eight stores were closed out of safety concerns for our customers and staff. The local currency exchange rate, discretionary spend and consumer sentiment remain fragile in the country.

  While we are optimistic about the prospects for the Kenyan operation, given general instability, the Group will adopt a cautious approach to further expansion in the East Africa region. Our priority focus will be on extracting value from the existing footprint of 14 stores, including two webstores.

• Continue to invest in the digital experience and grow our webstores' sales contribution to total sales

  Our webstores serve as an integral component of our omnichannel platform and underpin our goal to provide customers with an unrivalled shopping experience that is seamless between our online and brick-and-mortar stores. We operate six webstores, one each for Italtile Retail and TopT and four for CTM's markets in South Africa, Botswana, Kenya and Tanzania. We continued to invest in developing, enhancing and marketing the capability of this offering. Innovations such as our tile visualiser afford the Group an advantage in this increasingly competitive market space.

OPERATIONAL REVIEW – OVERVIEW

The detailed performance of our business units is discussed in the Review of operations report.

ASSOCIATE INVESTMENT: Easylife Kitchens ("ELK")

ELK is a leading manufacturer of kitchen, bathroom, vanity, built-in cupboards, bar and storage design. The Group holds a 30% stake in this business, which aligns with our goal to provide customers with complete specialist home-finishing solutions. ELK reported improved sales and profits for the year and continued to grow its footprint, including on some of our multi-node retail sites, which affords synergies for both parties.

PROSPECTS

Continued execution of operational excellence will enable us to capitalise on opportunities in the business. We believe modest growth in the retail division is attainable and in our manufacturing operation, Ezee Tile will continue to improve turnover and profitability through enhanced efficiencies and increased market share. We expect the highly competitive environment to continue to be a challenge to Ceramic's performance.

In the year ahead, we will focus on the following internal growth prospects to unlock value inherent in the business.

Retail

• Five new stores are targeted in convenient locations as we continue to increase TopT's national footprint. TopT will aim to grow sales volumes through improved in-store execution, curated range management and an improved focus on complementary home-finishing products.
• Turn CTM's performance around by leveraging the brand's long-standing iconic status in the industry and continue to differentiate the value proposition through our "Big Savings. More Style." positioning in the highly competitive mass middle market. We will also focus on building lasting customer relationships through improving our offering in terms of fashion, range, price, quality and service, measured and managed through our customer satisfaction feedback and metrics.
• Continue to improve our digital experience and grow our webstores' sales contribution to total sales. Investment in technology will be ongoing, aimed at improving the customer experience. Online continues to be the first point of contact for many of our customers as they research their home improvement projects, and we will continue to improve lifestyle display solutions to inspire them.

Manufacturing

• An inability to fully load the tile factories is a major hurdle to driving down Ceramic's cost base and improving profitability. In the absence of volume growth, our unrelenting mission is to continue to aggressively reduce costs and improve efficiencies to recover margins and offset some of the significant price deflation. Equally, we will continue to strive to grow sales and reclaim market share by optimising the value proposition of our ranges and launching differentiated product to substitute competing imports.
• Resolving the threat to natural gas supply will remain a key priority to ensure Ceramic's business continuity. Extensive research and pre-emptive preparation have been conducted, and we are confident that we will achieve this goal as firm options for alternative supply become available. Work on an industrial scale project to trial a syngas solution will be started in this financial year.
• We have forecast substantially less capital expenditure for the year ahead. While provision has been made for completion of our Betta warehouse and funding for the prospective gas supply solution, no further major investment is required in the business at present, and focus will be on unlocking value from existing assets.

OUTLOOK

We expect the trading environment to remain extremely challenging in the next few years. Competition in both the manufacturing and retail segments will likely intensify until the vast imbalance between excess manufacturing capacity supply and weak demand levels out.

Despite this concern, we are cautiously optimistic about prospects for growth in the market. South Africa is under-housed and the dynamics of the housing market are favourable – evidenced by a young, growing, upwardly-mobile population with a strong culture of owning a home. Key to conditions improving will be the sustained downward trend of inflationary pressure and an improvement in consumer investment sentiment. The possibility of an interest rate reduction cycle, which started with a rate cut in September 2024, will further boost disposable income and confidence, while implementation of the two-pot retirement system in September may provide an injection of cash into the economy. If load shedding remains manageable and support for the GNU holds firm, it is also likely that the currency will stabilise and investors and customers will adopt a more positive stance.

Irrespective of the external challenges, our growth focus will always be on the internal levers within our control. Our goal is to ensure that the business is fighting fit, and I am confident that we have the assets to do this: the right people, robust iconic brands, industry-leading technology and products, and the competitive advantage of a vertically integrated supply chain. We also have the determination to improve our competitiveness across all our operations. Despite the difficult circumstances, I am optimistic that we have competent, engaged and motivated teams to succeed in this challenge.

APPRECIATION

Our team has delivered a resilient performance in another tough year, and I would like to thank them for their commendable dedication to achieving an unparalleled shopping experience for our customers. Their enthusiasm and spirited approach to ensuring our business remains fighting fit, competitive and relevant is very rewarding.

Our new Chairperson, Luciana Ravazzotti Langenhoven, has been a great support this year. Luciana has extensive knowledge of all our operations and brings a strong retail flair to the business. Her passion for our people and products is inspiring.

We continue to benefit from the wise counsel of our founder and former Chairman, Giovanni Ravazzotti, and are privileged to gain from his experience earned over 50 years in the industry.

I would like to mention Brandon Wood, previously CFO, and recently appointed COO. Brandon has been an exemplary CFO and more recently has also been responsible for effecting the turnaround at Ezee Tile. I look forward to working with Brandon in his new role.

Finally, I would like to thank our Board members for their encouragement and guidance during the year. I appreciate their input and endorsement of our sustainable growth strategies.

L A Foxcroft

Chief Executive Officer