Chief Financial Officer’s report

Significant change in the structure of the competitive landscape and continued weak consumer demand resulted in a decrease in volumes and earnings during the year, with margins and profitability in the manufacturing businesses being the most impacted.

The analysis below for the year ended 30 June 2024 focuses on the key elements of the Group's financial performance and statement of financial position, which management believes to be important for the understanding of the Group's performance. The review should be read together with the Annual financial statements.

FINANCIAL RESULTS

Group financial results summary

	2024			% change  from 2023	2023
Group and franchise results
Turnover (Rm)
– by Group-owned stores and entities	9 064			(1)	9 136
– by franchise-owned stores	2 471			4	2 366
System-wide turnover (Rm)	11 535			–	11 502
Number of stores*	208			(4)	216
Group results
Turnover (Rm)	9 064			(1)	9 136
Trading profit (Rm)	2 056			(11)	2 318
Total assets (Rm)	10 444			7	9 769
Cash and cash equivalents (Rm)	1 844			76	1 049
Number of shares in issue ('000)	1 321 654			–	1 321 654
Headline earnings per share (cents)	123,0			(7)	132,3
Ordinary dividends declared per share (cents)	49			(8)	53,0
Special dividends declared per share (cents)	78			100	–
Net asset value per share (cents)	708			10	642
Number of employees	2 297			(1)	2 477

* Includes webstores.

Turnover

System-wide turnover for the financial year increased by 0,3% versus the prior year as a result of muted sales growth, as detailed in the divisional reports, with key factors being difficult macroeconomic conditions for businesses and consumers, increased competition (retail and manufacturing) and internal inefficiencies.

Consolidated turnover was 1% lower when compared to the prior year (R9 064 million versus R9 136 million) – and an improvement from the 3% decline recorded at the half year.

Retail

Gross retail store turnover decreased 1,5% versus the prior year, and 2,1% on a like-on-like basis. Overall, average selling prices increased 2,1% in the retail businesses, with decreases in volumes on the prior year in all merchandise categories except for showers, which increased by 8,8% versus the prior year. This is down from an average selling price increase of 2,6% at half year, primarily driven by changes to tile selling prices.

Company-owned stores' sales decreased 4,0% for the year to date, while franchise stores' sales increased 4,4%. A contributing factor to this disparity was the conversion of three CTM stores to franchise stores towards the end of the previous financial year. Excluding the impact of this move, Company-owned stores' sales decreased by 1,9%, while franchise stores' sales decreased by 0,7%.

Supply chain - import businesses

Sales by the supply chain businesses, (Cedar Point, ITD and DC), were collectively 1,5% higher than the prior year. Price increases were passed on due to exchange rate fluctuations, higher shipping costs and increased pricing from suppliers. These increases were delayed as long as possible, to support competitive pricing at the retail level. The increases were staggered during the prior financial year, having a mixed impact on margins from a timing perspective in the current year. Average selling price growth was slightly offset by changes in the sales basket mix (for example, the move to lower- priced products as customers shopped down).

Supply chain - manufacturing

Manufacturing sales (aggregation of Ceramic Industries, Ezee Tile and PiViCal Panels) decreased by 6,3% on the prior year to R5 billion, as volumes remain under pressure at Ceramic Industries.

Similar to the impact on the supply chain businesses, the muted sales of the Group's retail brands impacted on the sales of both Ceramic and Ezee Tile. Ceramic Industries faces increased competition in the market as tiles from factories in Southern Africa continue to flood the local market and export markets.

Gross margin

On a consolidated level, achieved gross margin for the year to date decreased significantly to 41,1% from 43,2% in the prior year.

The manufacturing businesses collectively recorded a gross margin percentage decrease of 2,9% from the prior year, which had a significant impact on the Group's overall gross margin. Factors which have impacted on the gross margin include input cost pressures (inflationary increases on raw materials, fuel and electricity, and equipment spare parts), and low factory yields and production volumes. Tile volumes in particular have come under pressure due to the competitive factors detailed above.

The supply chain businesses' gross margin percentages were flat year-on-year. The businesses have done well to maintain margin despite the increased cost of goods purchased (increase in purchase price from suppliers due to their own cost pressures and weakening of the Rand), a change in sales mix (with customers shopping down in retail stores) and increased logistics costs (due to fuel price increases). DC recorded improved margins on imported tiles, as shipping costs decreased significantly from the prior year and purchasing opportunities were realised.

The manufacturing and supply chain businesses continued to limit and delay price increases to our stores and other retailers in order to support competitive retail prices. Retail margins increased only slightly by 0,21% on the prior year.

At a Group level, a decrease in the total inventory provision income statement charges for the year to date from R7 million in the prior year to a net reversal of R21 million in the current year has slightly offset the decrease in achieved gross margin percentages detailed above. In addition, changes in the store mix (movements in sales volumes between Company-owned and franchised stores) resulted in mix changes in the intercompany sales elimination on consolidation, which increased/decreased the margin dependent on the nature of store sales mix change.

Other operating income

Other operating income comprises various income received from franchised stores (rental, royalties, and IT and other service fees). The increase is attributable to:

• an increase in franchise store turnover;
• timing of franchise term renewals (and collection of related franchise fees); and
• an increase in rental rates charged to stores.

Operating expenses

Operating expenses increased by 0,7% on the prior year (the increase is similar on a like-on-like basis). Notable movements for the prior year were recorded on the following expense items:

• manpower costs (including share-based payments and profit share) included in operating expenses decreased by 0,8%, mainly as a result of annual salary increases (near 6%), net of decreases in profit share offsetting the increase. On a like-on-like basis, manpower costs included in operating expenses decreased by 0,3%. The focus on productivity has assisted with maintaining costs, although significant opportunity to improve still exists;
• manpower costs including profit share related to the manufacturing businesses (included in the cost of sales line) increased by 3,7%, excluding profit share and share-based payment expenses, an increase of 8,9% was recorded. The increase is attributable to a deliberate investment in the leadership pipeline (including filling key vacancies), although steps are being taken to address productivity decreases (including reduction in headcount where necessary);
• JV Profit Share was flat year-on-year, reflective of the low-profit growth in JV stores;
• net distribution costs of Ceramic Industries and Ezee Tile (included in operating expenses) increased by 0,2% on the prior year, with fuel price increases being offset by a reduction in distribution volumes. Similarly, net distribution costs in the retail and supply chain businesses decreased by 2,7%. Total net distribution costs for the Group decreased by 0,2% on the prior year;
• property costs included in operating expenses (excluding IFRS 16) increased 10,4% on the prior year on a like-on-like basis;
• depreciation and impairments (excluding IFRS 16) included in operating expenses decreased by 1,7% from the prior year as certain assets (including leasehold improvements and signage) became fully depreciated, while depreciation included in cost of sales (manufacturing businesses) increased by 9,2% from the prior year as a result of capital expenditure in the prior and current year. Return on recent capital spend has thus not been adequate. The total depreciation charge (including IFRS 16) across all business increased by 8,1% versus the prior year. Impairments of R15 million were recognised on properties for which agreements of sale have been concluded but transfer is pending;
• IT costs increased 11,1% year-on-year as various elements of this spend (e.g. IT licensing) are US dollar denominated, thus the weakening of the Rand has increased costs;
• total donations (by the Foundation Trust and Group companies) increased 1,5% on the prior year to R38 million;
• stock control costs decreased by 23,7% from the prior year in retail stores and distribution businesses. Elevated average stock levels continue to put pressure on stock control costs, particularly breakages, which increased by 1,5% compared to the prior year. Encouragingly, count variance costs decreased 24,2% from the prior year, although they remain of concern. Sample and display costs remained flat on prior; and
• travel and related expenses increased 14,0% for the period, predominantly due to increased fuel prices.

Trading profit

Trading profit decreased by 11% on the prior year as the decrease in sales and gross margin percentage was compounded by a R15 million impairment on property assets (cost reduced to realisable market value).

Finance income

Finance income increased by 85% from the prior year, which is largely attributable to an increase in the average cash holdings for the year and escalations in deposit/investment rates (following increases in the repo rate in the current and prior year).

Finance costs

Finance costs remained similar to prior year levels predominantly as a result of fixing of the interest rate on the R500 million properties' debt facility. The figure includes finance costs of R39 million relating to the IFRS 16 accounting of leases (2023: R31 million).

Taxation

The taxation expense decreased by 9% from the prior year as net profit before tax has decreased. Despite the decrease in the corporate income tax rate in the prior year to 27% from 28%, the effective rate remains above 28% as a result of non-deductible expenses, derecognition of certain deferred tax assets and prior year under-provisions.

Non-controlling interest

Earnings attributable to non-controlling interests decreased from the prior year as a result of the decrease in profits of businesses with minority partners.

Earnings per share

Earnings per share ("EPS") and headline earnings per share ("HEPS") decreased to 122,1 cents and 123,0 cents, respectively, from the prior year.

The slight disparity between EPS and HEPS is attributable to after-tax impairments of R11 million made on properties in the process of being disposed of at year-end.

A 1% decrease in the weighted number of shares from 1 210 million to 1 198 million shares (as a result of own share purchases during the previous and current financial years) resulted in a slightly lower decrease in EPS compared to the decrease in attributable profits after tax.

Property, plant and equipment

Capital cash expenditure of R597 million was incurred during the year on property, plant and equipment, with significant capital spend being as follows:

• new Ezee Tile Vulcania factory: R21 million;
• take-on of Silica Quartz property, plant and equipment: R16 million;
• Betta Robotic warehouse: R17 million;
• Betta moulds and heat recovery: R26 million;
• National Ceramic Industries Australia solar installation: R22 million;
• Vitro Poppi Kiln and rectification upgrade (including building): R185 million;
• Pegasus Kiln upgrade: R53 million;
• Pegasus Clay Plant upgrade: R37 million;
• other Ceramic Industries factory upgrades and capex: R89 million;
• retail buildings spend (new builds and land): R29 million;
• retail buildings spend (extensions and renovations): R36 million; and
• retail store revamps: R37 million.

R133 million of property, plant and equipment was reclassified as non-current assets held for sale.

Inventory

The inventory balance of the Group, net of provisions and including goods on the water, has decreased to R1 271 million from R1 315 million at 30 June 2023 (a decrease of 3%). On a gross basis, prior to provisions and the goods in transit balance (R33 million at 30 June 2024 versus R43 million as at 30 June 2023), total inventory holdings decreased by 2,8% versus the prior year-end (R1 530 million versus R1 573 million).

This decrease is predominantly attributable to stock clearances at U-Light, lower stock levels across all retail brands, lower stock levels at DC as imported tile sales increased and lower stock holdings at Ezee Tile as procurement efficiencies improved. These decreases were offset by a large increase in stock holdings at Ceramic Industries, Cedar Point and ITD; although an improvement at the local ports resulted in delayed shipments being received, there has been an excessive investment in stock at Cedar Point, which is being addressed.

Total inventory provisions increased slightly from the prior financial year-end to R259 million (2023 year-end: R258 million).

The 12-month average financial stock turn has shown improvement in some businesses as a result of decreased average inventory holdings. However, the lower stock turn at Ceramic Industries was insufficient to offset the decrease in sales volumes, resulting in a Group stock turn increase of 0,8% to 6,23 times from 6,18 times for the previous financial year.

Cash and cash equivalents

The Group's cash balance increased to R1 844 million from R1 049 million as at 30 June 2023, with cash generated by operations being offset by the following outflows during the year:

• capital expenditure of R609 million;
• dividend payments of R606 million;
• income tax payments of R543 million; and
• treasury share purchases of R212 million.

Trade and other receivables

The 22% decrease in net trade and other receivables from the prior financial year is attributable to a significant decrease in pre-payments for equipment and materials at Ceramic Industries as capital projects near completion and controls on pre-payments are tightened. This decrease was increased further by timing differences on receipt of payments from debtors. Overall, there has not been any noticeable deterioration in the average collection period on trade receivable balances.

The doubtful debt provision decreased to R69 million from the prior financial year (June 2023: R101 million) as excess provisions were partially reversed and the provision utilised to write-off historic debts considered irrecoverable (for which provisions had been raised historically).

Trade and other payables

The 18% decrease in net trade and other payables from the prior financial year is attributable to timing differences on payments and stock purchases, as well as pre-payments for imported stock on the water.

Provisions

The 14% decrease in the provision balance is largely attributable to a 14% decrease in the profit share provision (R104 million versus R121 million at June 2023) following the payment of profit share during the period, including recent payments in February and March 2024 and a decrease in profitability year-on-year.

Further, the rehabilitation provision at Ceramic Industries has decreased by 26% from the prior year, as the provision raised for the sand mine acquired by the Group was reversed during the period as the provision has sufficient capacity to cover the future rehabilitation liability for the mine.

Interest-bearing loans

The decrease in interest-bearing loans to R500 million from the previous financial year-end balance of R552 million is attributable to the settlement of the US$3,5 million facility for East Africa at the end of June 2023. The facility was settled early given increased interest and foreign exchange rate exposures related to the facility.

EVENTS AFTER REPORTING DATE

The directors are not aware of any matters or circumstances arising since the end of the reporting period which will significantly affect the financial position at 30 June 2024 or the results of its operations or cash flow for the year then ended.

INTERNAL CONTROL ENVIRONMENT

The general control environment remains robust and I have no knowledge of any fraud or suspected fraud which could have a material effect on the results of the Group.

INFORMATION TECHNOLOGY

Value delivery is an integral part of our IT journey to ensure a memorable customer experience from a technology point of view, and to ensure operational efficiencies throughout our business. The role of the Group's IT department is to create a vision and roadmap of strategic projects that support the Group's business strategy and operations. Tangible benefits such as data and information security, cost reduction, process improvement, automation, improved data acquisition and overall business efficiency are critical to all projects undertaken by the Group's IT department.

During the 2024 financial year, we continued to invest in strengthening our team, continued with our innovation journey which provides us with a competitive advantage in various operational areas, and improved on the security of our IT systems.

OUTLOOK

We anticipate that the trading environment will remain extremely challenging in the year ahead, with competition in both the manufacturing and retail segments likely to intensify. Notwithstanding the external challenges, we will focus on ensuring the business is fighting fit to retain our leading position in the market. We will continue our drive for customer satisfaction at all key touchpoints, and improve our efficiencies and cost leadership disciplines. Our most valuable asset - the exceptional people in this business - will be key to delivering on these goals and we applaud and value their contribution.

APPRECIATION

I would like to extend my sincere appreciation to:

• our shareholders for the constructive engagements and support over the year;
• our customers for their continued loyalty to our business and brands;
• our management and staff for their determination and commitment to delivering a world-class shopping experience and manufacturing process;
• our finance teams for producing sound financial information and reports;
• our CEO, Lance Foxcroft, for his leadership and guidance;
• our COO, Brandon Wood, for his mentorship and support in the handover process;
• our non-executive directors for their sound counsel;
• Mr Ravazzotti for his inspirational leadership and unrelenting pursuit of excellence; and
• our new Chairman, Luciana Ravazzotti Langenhoven, who shares our commitment to continuing to develop our exceptional company.

L Booysen

Chief Financial Officer