Chief Executive Officer′s letter to stakeholders

It is imperative that our manufacturing operation is profitable and earns its place in the vertically integrated business model. In this regard, we will monitor the environment closely, manage capacity and margins vigorously, and ensure that shareholder value is protected. Our goal is always to be fighting fit across the business, which means that our operations need to be lean, efficient, innovative and flexible at all times.

An extensive programme is underway to grow sales, extract efficiencies and unlock value across the business.

Ceramic supplies most of the Group′s tile requirements. The retail operation also currently sources certain products from third-party suppliers in market segments that Ceramic chooses not to compete in. This strategy will continue.

In terms of supplying the open market, Ceramic′s goal is to be optimally structured to manufacture products that offer differentiation in the market and capitalise on that margin opportunity. In the longer term, if demand continues to reduce, it may be necessary to structure a smaller, more efficient manufacturing operation, however it is premature at this point to speculate on whether that will be necessary. At all times, unlocking and protecting shareholder value is a key priority.

The Group is recognised as the market leader in its sector, underpinned by long-standing high-profile trusted brands. Our mission has always been to offer the right product at the right time, place and price. In this regard, we will continue to buy products from a range of suppliers in market segments Ceramic does not compete in, to secure the right price and range to deliver an unsurpassed customer experience. In other segments, our factories manufacture products that compete at the highest level and are differentiated on fashion and quality. This will always afford our retail stores a competitive advantage.

Collectively across the Group, our depth of retail expertise is extensive. From our Board - which includes our founder, several brand-building experts and decades of hands-on experience – down to the shop floor, where retail excellence and sales training are core disciplines. Retail experience permeates across the organisation at every level, namely: senior management and Executive Committee, our seasoned brand leaders, human resource practitioners, product designers, in-house webstore and marketing specialists, franchise partners, regional managers, store operators and sales people.

Specifically, prior to my appointment at Italtile, I was with Ceramic Industries for 17 years. As a leading fashion manufacturer, our client service focus was entirely on exceeding our retail customers′ demands, which meant at all times I was abreast of the latest fashion trends, consumption patterns, consumers′ buying decisions, and customer satisfaction expectations. Similarly, here at Italtile, our CFO and now COO, served as the executive director responsible for the retail operation and subsequently the import supply chain business for several years before resuming the role of CFO. He has vast retail experience across the business. The two Brand Leaders of Italtile Retail collectively have more than 60 years of retail background, the head of CTM has 24 years of experience in this business, and our two TopT senior managers collectively have in excess of 30 years of retail experience. Additionally, our long-standing franchises have decades of experience. Italtile will remain intensely focused on growing our retail business and attaining our goal of being the best tile retailer.

The gas cliff refers to the potential shortage of natural gas in the country due to the announcement by Sasol, South Africa′s key supplier of piped natural gas, that as of June 2026, they will no longer be able to supply the market due to the diminishing volume of their source in Mozambique. On 20 August 2024, Sasol extended this deadline to June 2027. While this extension is welcomed, approximately 70% of Ceramic′s total energy requirements are supplied by piped natural gas, and hence securing sustainable supply of viably priced energy remains a key management priority.

In this regard, Ceramic, together with other key industry players, continues to discuss a further extension to the gas supply from Sasol on the following understanding:

• supply could be extended to mid-2028;
• this extension would be subject to additional costs, currently being investigated; and
• there would also be lower certainty in future resource volumes.

Ceramic also continues to negotiate with various suppliers regarding the possible supply of liquefied natural gas imported via floating storage regasification unit projects.

Our response

Management is hopeful the natural gas option will get across the line, but given the obstacles faced, the Group is taking a responsible, sensible risk mitigation approach to the issue, and will continue to work through the process and all options to ensure business continuity irrespective of the scenario that eventuates.

We are striving to establish a clear way through the crisis to enable the business to use natural gas in the longer term, should it become available at a viable price.

While gas is our preferred choice of fuel, in the event that viably priced natural gas is not available, the Board has approved a cautious phased approach to converting to synthetic coal gas, by commencing with the conversion of one kiln at the Gryphon factory to understand the technology, the costs, the degree of disruption, and the feasibility of converting back to gas in the event that the supply gets resolved. The cost of this conversion is estimated to be in the order of R90 million.

The Group has a long-standing position on environmental consciousness and commitment to reducing our carbon footprint. This serious consideration of coal as an option does not reflect an about-turn on our green goals. Sustaining business continuity, in the interests of stakeholder value, underpins this decision. We will continue to advance our green initiatives wherever possible in the business, as outlined in detail in the Environmental report.

If coal gas proves to be a viable option to ensure business continuity, we envisage a two-year process to convert our operations: in the first year, we will procure and test the equipment, and in the second, we will convert selected operations.

The pilot project to convert one kiln, as outlined, will provide critical insights into this option. Once that insight is available, we will then be in a position to provide detailed studies, models or other information that have informed a possible decision to convert to coal gas.

The Board′s view on director independence is assessed in accordance with the King Code on Corporate Governance as required by the JSE Listings Requirements, which states: "Independence generally means the exercise of objective, unfettered judgement. When used as the measure by which to judge the appearance of independence, or to categorise a non-executive member of the governing body or its Committees as independent, it means the absence of an interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making."

Principle 7 also states that "A non-executive member of the governing body may continue to serve, in an independent capacity, for longer than nine years if, upon an assessment by the governing body conducted every year after nine years, it is concluded that the member exercises objective judgement and there is no interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making."

Each year, when reviewing the composition of the Board in preparation for the AGM, the Nominations Committee reviews the independence of those directors who have served for more than nine years. At the Nominations Committee meeting, the director who is to be assessed, if a member of the Committee, is recused, with the decision on the independence being considered by the remaining members. The confirmation of the independence is reported to the Board.

The Nominations Committee has annually assessed the independence of the two directors and is satisfied that they exercise objective, unfettered judgement and that they are independent. Non-executive directors with a long tenure and deep understanding of the business are considered valuable members of the Board. Neither of the two directors with more than nine years of service chair committees.

The Board is comprised of directors with extensive experience from a range of sectors, including: retail, finance, legal, manufacturing and entrepreneurial. They all have comprehensive knowledge of our business, complemented by a vast array of skills and expertise in the broader economy. Their commitment to our ambitions for the Group and endorsement of our growth strategies is very encouraging and inspirational. I am confident that the Board′s blend of knowledge, experience and wisdom, positions us very favourably to navigate the hurdles in the current environment and continue to guide management in the evolution of the business as we move forward.