Chief Executive Officer's letter to stakeholders

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The Group’s sustainability agenda is promoted through the use of cost-effective, energy efficient practices in the construction of new buildings and the renovation of older buildings. Optimal use of natural light, solar technology, new-generation efficient lighting, water-saving taps, rain water harvesting, and environmentally sensitive building materials is prioritised. Our factories at Ceramic Industries use latest technology in their operations and rank among the most energy efficient in the world. The majority of Ceramic Industries' clay requirements are supplied by its own quarries. The quarries have adequate reserves to meet Ceramic's medium to long-term clay requirements. Raw material quarries are rehabilitated concurrently and once end-of-productive-life is reached. The environmental report provides more detail in terms of our plan to reduce the Group’s carbon footprint, including reducing consumption of water and energy and improving waste management.

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Ceramic Industries, in which we have a 95% stake, consistently re-invests in the latest technology, which is more efficient, reduces waste and minimises consumption. Our Betta sanitaryware plant in SA and our Centaurus plant in Australia both utilise 1MW solar power plants to offset consumption currently supplied by electricity generated from gas or coal consumption. A 3MW solar installation is planned for our Vereeniging site by the end of 2021, which will reduce reliance on non-renewable energy and generate up to 25% of energy requirements (at peak generation in the day) on the site. We will also continue to roll out solar installations to a number of our stores. The environmental and property portfolio reports provide further in-depth detail in this regard.

A Ceramic Industries uses natural gas to evaporate water from ceramic slips and pressed tiles as well as to fire ceramic tiles and sanitaryware. Greenhouse gases are indirectly emitted through consumption of electricity in the production process and diesel in transportation to deliver product. Through sustained investment in innovative technology and processes, our factories are amongst the most energy efficient in the world. The carbon footprint report provides further in-depth detail regarding the Group’s activities, emissions, impacts and interventions in this regard.

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Ceramic Industries’ operations consume natural gas (4,1 million GJ per annum). We extract clays, feldspars and granites which are beneficiated to form inert ceramic tiles and sanitaryware (720 000 tons per annum). We consume 27 000 tons of glaze per year in the production of ceramic tiles and sanitaryware. We also form PMMA and ABS sheets into bathtubs which we reinforce with fibreglass and resins (2 550 tons).

Ceramic conducts mining activities in open cast quarries which supply clay for the manufacturing process. Concurrent rehabilitation is practiced to ensure minimum disturbed environment at any time. When the quarries reach the end of their useful life, the Company completes rehabilitation measures to restore the site to a safe and natural state.

Ezee Tile’s production processes consume 185 000 MT of silica sand per annum; 2 800 MTs of dolomite/calcium carbonate per annum and 1 800 000 Lt of water per annum. The business does not create any harmful toxins.

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At present, 70% of Ceramic’s energy requirements are supplied by gas and 30% by electricity. Our goal for Ceramic is to be self-sufficient in terms of our energy requirements. If we attain this ‘island mode’, the business will be independent of the grid and benefit from power and pricing security.

Over the next 48 months:

• solar photovoltaic energy will reduce CO₂ emissions by +-2% and save +-4 500 tons of CO₂ per annum; and
• combined heat and power generation, through re-using the heat from our spray dryers, will reduce emissions.

In addition, we continue to roll out solar installations to our stores. At present, 36 stores are powered by solar energy.

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Investment in training and development as a percentage of costs to the business is significant. In the past year we invested R52 million on training and skills development and conducted 336 learnerships and internships.

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The Group pays well above the prescribed minimum wage and our salary scale complies with all relevant legislation. Our remuneration philosophy is governed by the principles of equity, fairness and affordability, ensuring alignment between management and shareholder requirements.

In addition, the Group’s Share Schemes (including a broad-based scheme for all levels of staff) is designed to incentivise employees to participate in the growth and profitability of the business. Our policy is to attract the best calibre of people by being the employer of choice in our industry through ensuring our employees are appropriately remunerated, incentivised through profit share and partnerships, and equipped through training and skills development to perform their jobs.

Refer to our remuneration report for further details in this regard.

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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".

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Yes, employee turnover is measured on an annual basis. The three-year trend is: 2019: 9,3%, 2020: 13,1% and 2021: 10,5%.

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We practise zero-tolerance of discrimination and harassment in the workplace. In 2018, we introduced Diversity, Equity and Inclusion workshops to the business, the purpose of which is to entrench the culture of inclusion by acknowledging differences and equipping diverse employees to build better relationships.

Our working conditions comply with the Occupational Health and Safety Act No 85 of 1993 and other relevant legislation, regulations and codes of practice in South Africa and other jurisdictions in which we operate. We conduct regular health and safety audits across all retail stores and supply chain businesses. 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.

In terms of fair wages, we pay well above the prescribed minimum wage and our salary scale complies with all relevant legislation. Our remuneration philosophy is governed by the principles of equity, fairness and affordability, ensuring alignment between management and shareholder requirements.

In terms of Ceramic Industries, most of the South African factories undergo the Sedex Member Ethical Trade Audit – a global accreditation. The SMETA audit process comprises four pillars: labour standards; health and safety; business ethics and the environment.

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The Group’s CSI programme is conducted by the Italtile and Ceramic Foundation, as well as through our retail brands and manufacturing businesses. Our franchisees also participate in local community initiatives at their own discretion. The Italtile and Ceramic Foundation Trust report outlines the Group’s support for our communities through charitable activities conducted during the review period.

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Management is extremely mindful of retaining the loyalty and goodwill of our customers. The Group operates call-in and online support and conducts a range of measures to evaluate customer satisfaction sentiment, including Mystery Shoppers, in-store surveys, Net Promoter Score, and an independent brand health monitor.

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The management team engages with franchisees on a regular and frequent basis through franchisee forums; personal contact; call-in and online support; regular store visits and annual brand conferences. We regard our franchisees as valued partners, and the low franchisee churn is a clear reflection of the good relationship with them. We have a strong demand for our brands from existing and prospective franchise partners.

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Remuneration is linked to company performance and based on a specific formula, including operational performance metrics. Compensation includes a cash bonus element and shares. The Remuneration report provides extensive detail in this regard.

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Yes. All managers in the business are assessed and compensated according to pre-determined KPIs, which are aligned to Group goals. Across the management team, including the CEO, performance against KPIs is rated on a scale: superior achieve (exceeded target), achieve (achieved target) and under achieve (failed to meet target).

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The Group’s remuneration policy subscribes to the King IV recommendations and principles, including:

• incentive-based results are linked to achieving demanding performance conditions consistent with shareholder interest over the short and long term; and
• performance measures and targets for incentive plans are structured to operate efficiently throughout the business cycle and support the business strategy.

The Group’s incentive schemes are designed to encourage and reward delivery of its strategic priorities over the short and long term. The short-term incentive focuses on achieving business targets in that financial year, while the long term incentive closely aligns the interests of executives with shareholders over the longer term. The long-term incentive encourages directors and prescribed officers to build a shareholding in the Company, which sustains ongoing performance and the creation of shareholder value. Given the Group’s philosophy of partnership, greater weighting is applied to long-term incentives. Refer to the Remuneration committee report for detailed information regarding management compensation.

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ESG-related criteria were added to the performance scorecard of the CEO and all executive management with effect from FY2021.

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Sustainable, responsible growth in the interests of all stakeholders. Continued growth in headline earnings per share.

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RISK MANAGEMENT

There is a detailed succession plan in place for the Chairman, CEO and key individuals within the organisation.

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The Group makes use of a whistle blowing line managed by independent third parties. Details of matters reported are forwarded directly to the Chairman of the Audit and Risk Committee, executive directors and internal audit in the case of Italtile and to the CEO in the case of Ceramic. All reports are attended to management.

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The Group makes use of a whistle blowing line managed by independent third parties. Details of matters reported are forwarded directly to the Chairman of the Audit and Risk Committee, executive directors and internal audit in the case of Italtile and to the CEO in the case of Ceramic. All reports are attended to management.

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A submission may be made in writing to the Board at any time.

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The third wave of the pandemic impacted on the business more severely than the prior two waves. Sadly, three of our valued and dear colleagues succumbed to the virus, while many others were infected, but thankfully have recovered. The logistical challenges of ensuring operational continuity tested our resolve and agility and it is due to the stellar teamwork of our people that we were able to deliver safe, reliable services to our customers.

Despite the significant uncertainty created by the pandemic, our business weathered the challenges well and emerged a more resilient and self-reliant entity. This can be attributed to 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 Group’s integrated supply chain and local manufacturing capacity mitigated endemic global supply chain disruptions and pricing volatility, while our high-profile brands were regarded by customers as trusted, safe shopping environments. During the review period we experienced robust demand for our products and recorded increased turnover and profitability. Given strong cash reserves, we were well positioned to resume our roughly R800 million capital expenditure programme.

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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.