CERAMIC Industries, a maker of sanitary ware and floor and wall tiles, says trading conditions in the group’s South African and Australian tile markets "remained difficult" in the year ended July.

Operating profit from tiles operations fell 39.4% to R105.6m, although the sanitary ware division grew operating profit by 29.5% to R22.8m. Overall, group headline earnings declined 22% to R103.5m, with headline earnings per share falling to 606.2c, from 785.3c previously.

The group says tile markets were characterised by intense competition from cheap imports, and limited investment in residential housing by both the public and private sectors. The struggling Australian tile unit, contributing 12% of Ceramic’s turnover, reported an operating loss of R44.7m.

"I think we are facing a challenge most manufacturers in the world are facing — how do you compete with imports from China and stay profitable?" CEO Nick Booth said on Thursday.

He said despite record tile sales volumes in South Africa, profitability was hit by margin squeeze across operations. Dollar-based input costs, including piped natural gas and minerals-based glazes, added to the strain of rising electricity costs in the country.

"The local tile operation, comprising Samca Wall & Floor, Vitro and Pegasus factories, regained and retained market share, but at the expense of margins," Mr Booth said.

To this end, Ceramic contained South African tile price increases in the first half of the year, to combat pricing pressure in the domestic market.

But, in keeping average selling prices in line with pricing levels last year, margins were eroded from 12.4% to 7.8%. Mr Booth said operational inefficiencies hampered the ability of the group to meet increased product demand. "The factories operated at an average capacity of 92% for the period," he said. The group has four tile factories in South Africa, as well as a sanitary ware factory and an acrylic bath plant.

It also has a tile factory in Australia. But the factory’s "inability to deliver a consistently high-quality, fashionable product" saw Ceramic lose customers in that market. This resulted in underuse of manufacturing capacity of 50%, which hit production costs.

Capital expenditure of R95.9m in the year had a "significant impact" on improving the quality of tile products and the standard of packaging, the group said.

Group cash reserves rose to R292.7m from R217.7m last year. This was attributed to the cash generative nature of the businesses, and "intensive" cost management. Export sales for tiles increased 10% to R194.9m, with sales growth in Zimbabwe, Namibia and Zambia.

Ceramic’s sanitary ware division saw better production and sales volumes in the year despite subdued markets. Exports to Zimbabwe and Namibia were particularly strong. Stringent cost containment and increased sales of higher-value products resulted in an improved margin for sanitary ware, Mr Booth said.

Last month Italtile notified Ceramic of its firm intention to make an offer to acquire up to 20% of issued shares in the company. Ceramic would subsequently apply to the JSE for the termination of its listing.

Ceramic was one of Italtile’s key suppliers of tiles‚ sanitary ware and baths. Italtile said the proposed deal was aimed at supporting its growth objectives.

Meanwhile, Ceramic said management’s focus would be on improving efficiencies in the group’s factories, and enhancing its product range, to meet demand in terms of both volumes and quality.