2024INTEGRATED ANNUAL REPORT

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Strategic management of material risks

Framework and model

The Group has in place an Enterprise Risk Management framework which is based on a combined assurance model comprising: management, external audit and internal audit. This model and its related activities are structured to ensure that the Group's risks are adequately managed by formulating the Group's strategic responses on such.

On this page is a summary of the Group's top risks and/or material issues based on their residual risk ratings. A summary of the strategic responses related to each risk is provided.

Identification of risks

Identification of risks is based on:

  • the Group's risk-bearing capacity (the capacity to absorb losses arising from risks without an immediate threat to the Group's continued existence based on its current business model);
  • risk appetite (the amount and type of risk the Group is willing to accept in pursuit of its business objectives); and
  • risk tolerance (the acceptable levels of variation relative to the achievement of the Group's objectives).

Quantification of risks

Certain financial measures form the basis on which these risks are quantified.

Categorisation of risks

Identified risks are categorised according to:

  • inherent risk (a function of their potential impact and probability); and
  • residual risk (based on the effectiveness of mitigating controls or responses to address the inherent risk).

The identified risks are encompassed in the following risk categories:

  • supply chain disruptions;
  • IT infrastructure and network vulnerability;
  • loss of quality earnings/revenue/profitability/future growth;
  • talent attraction/development/retention;
  • brand identity and corporate image;
  • regulatory compliance;
  • manufacturing related; and
  • occupational health and safety.

Risk category

Manufacturing related Loss of quality earnings/revenue/profitability/
future growth		 IT infrastructure and network vulnerability Talent attraction/
development/retention
Interruption of energy supply due to unstable electricity supply and gas shortages Increased competitor activity due to new factories in Africa and increased capacity at local manufacturers, resulting in loss of market share, decreases in volume and capacity utilisation, and reduced margins and profitability Social unrest impacting operations Loss of revenue, quality earnings and growth due to deteriorating political, social and macro-economic factors Loss of earnings and future growth due to external market forces Loss of profitability and/or market share if products do not remain fashionable Loss of
profitability and revenue due to increased input costs (gas price increases and inflation)		 Network
penetration		 Staff
inadequately trained

Residual risk combined

Interruption of energy supply due to unstable electricity supply and gas shortages
Risk description Mitigating controls Strategic responses
  • The supply of gas for the Group's factories (tiles and sanitaryware) is at risk as the current Mozambique pipeline gas reserves may be depleted by 2029 and supply could end as early as 2027. There are currently few other economically viable alternatives.
  • Ongoing load shedding and disruption of electricity supply adversely impacts manufacturing operations.
  • The Group is an active participant in the Industrial Gas Users Group ("IGUA-SA") which is advocating for alternative gas supply solutions for the industry.
  • Continuous manufacturing improvements are made to reduce gas and electricity consumption.
  • Contracted a small portion of gas supply from Renergen, an alternative gas supplier.
  • Load shedding schedules are monitored and production is planned accordingly.
  • Solar panels and back-up generators are used for alternative energy.
  • Load shedding curtailment agreements in place with Eskom and municipalities to mitigate impact on tile and sanitaryware factories up to stage 3 load shedding.
  • Explore alternative gas supply.
  • A project has been approved to invest in and convert a production line to use a coal-based synthetic gas solution and to test this technology in our process.
  • A combined heat and power plant project is being explored.
  • A project to install 2 MW solar power at the Centaurus tile factory is underway.

RISK OF NEW ENTRANTS
Risk description Mitigating controls Strategic responses
  • Increased competitor activity due to new factories in Africa and increased capacity at local manufacturers resulting in loss of market share, decreases in volume and capacity utilisation, and reduced margins and profitability.
  • Availability of tiles at wholesale increasing number of retail competitors.
  • Constant monitoring of the basket of products purchased by each customer group.
  • Diversification within the customer base to ensure no significant exposure to a single external customer group.
  • Undertake actions to stimulate growth in tile volumes in South Africa.
  • Enhance shopping experience.
  • Continuously introduce new products into the offering and retain position as a fashion leader.
  • Continuous improvement in manu­facturing efficiencies and technologies to lower waste, improve yields and reduce production costs.

SOCIAL UNREST IMPACTING OPERATIONS
Risk description Mitigating controls Strategic responses
  • Social unrest in the areas in which the Group operates impacts retail and manufacturing activities.
  • The risk is particularly relevant for Ceramic Industries' factories and the TopT retail stores. Most recently, instability in Kenya affected the trading of our CTM stores.
  • Impacts safety of Group employees and customers.
  • Risk of social unrest is elevated given the current social, political and economic conditions.
  • Business interruption insurance cover is in place.
  • The portfolio and marketplace are analysed on an ongoing basis to ensure risk is mitigated and targeted property returns are achieved.
  • The Group has a Social Unrest policy in place primarily focused on the safety of Group employees and customers.
  • Ongoing community engagement and social economic development activities are conducted in communities in which we operate.
  • Continuous investment in and management of relationships with communities in which we operate.

NETWORK PENETRATION
Risk description Mitigating controls Strategic responses
  • External penetration of our networks (including hacking, phishing, etc.). Probability intensified due to increased web traffic to webstores which are integrated into SAP, ongoing high-profile hacking incidents internationally and increased remote access of our networks by employees.
  • Website cloning and rerouting of online payments gateway via webstores and handheld scanners with integrated payment pebble.
  • External penetration of Android-based handheld scanners used in the stores.
  • Increased usage and access points with roll-out of new local stores, East Africa stores and webstores.
  • Prevented with use of firewalls, segmentation of network landscape, implementation of secure socket layer certificates to encrypt end-to-end data and antivirus solution with additional patch management controls.
  • Quarterly penetration testing performed by external service providers.
  • Handheld scanners hosted on hidden network with secure sockets layer ("SSL") encryption enabled.
  • Cyber insurance in place through reputable provider.
  • Regular updates of passwords with complexity.
  • Multi-factor authentication and mail filtering measures in place.
  • Central patch management for end-user computers.
  • Data loss protection enabled on cashier desktops.
  • Quarterly review of all network policies and procedures and network and router configurations to assess and mitigate risks.
  • Heat mapping of internal and external networks, reviewed on a monthly basis with senior management.
  • Cyber security and penetration testing outsourced to third-party service provider.
  • IT servers operate from secure cloud environment with redundancies.
  • Upgrade firewall and related security hardware.

LOSS OF REVENUE, QUALITY OF EARNINGS AND GROWTH DUE TO DETERIORATING MACRO-ECONOMIC FACTORS
Risk description Mitigating controls Strategic responses
  • The deteriorating macro-economic conditions in South Africa may have an adverse impact on the ability of the Group to generate revenue growth and impacts the quality of earnings.
  • Continuous close monitoring of circumstances with particular focus on further investments in South Africa.
  • Adjustment of costing and pricing to support weak/price-sensitive consumer demand (enabled by integrated supply chain and continuous focus on cost reduction, which provides flexibility on gross margin and pricing).
  • Integrated supply chain allows for consistent stock supply, with approximately 74% of product procured locally.
  • Comprehensive e-commerce offering expands retail reach.
  • Continuous monitoring of socio-economic developments and their impact on business sustainability and operations.
  • The Group's high standing among customers will be maintained by continuing to deliver an offering in line with customer demand. In this regard, continuous improvements in range, pricing, and customer experience are crucial.
  • Expand local TopT retail footprint.

LOSS OF EARNINGS AND FUTURE GROWTH DUE TO EXTERNAL MARKET FORCES
Risk description Mitigating controls Strategic responses
Loss of earnings and future growth due to:
  • external market forces such as worldwide trends (e.g. product substitution) and economic conditions (e.g. exchange rates);
  • competitor activity and/or an increase in competitors in the retail market;
  • convenience of alternate retail channels such as e-commerce and boutique offerings;
  • challenges in obtaining SABS or similar approval; and
  • inability to keep pace with rapidly changing customer expectations.
  • Regular regional meetings are held to source insight into markets, receive product feedback and communicate fashion trends, product innovation, merchandise and store improvements, market analysis and opportunities for growth.
  • There are experienced brand/divisional/supply chain managers in the business, who focus on key products and areas.
  • Ongoing cost/pricing adjustments (enabled by integrated supply chain and continuous focus on cost reduction, enabling flexibility on gross margin and pricing) and expansion of distribution channels (e.g. e-commerce).
  • Store displays and trading space are continually refreshed, and ideas shared across the Group via various mediums.
  • Ongoing 'competitor shopping' is undertaken and necessary responses implemented.
  • Inventory provisioning process in stores ensures improved product lifecycles.
  • Business optimisation programme ("BOP") utilised to improve in-stock levels of business-critical items, and management/exit of slow-moving inventory.
  • Expansion of product categories and foreign operations (rest of Africa).
  • The Group's stated intent is to be a world-class, low-cost retailer through alignment of customer satisfaction and profitability. By providing an unparalleled shopping experience and implementing best practice business principles across its operations the Group will continue to advance its achievements of this goal.
  • Work with suppliers and leading experts to ensure 'wow' factor maintained for products and merchandising.
  • Reduce operating costs and improve productivity across the business.
  • Maintain investment in our strong brands and new product develop­ment.
  • Grow turnover contribution of the webstores.

LOSS OF PROFITABILITY AND/OR MARKET SHARE IF PRODUCTS DO NOT REMAIN FASHIONABLE
Risk description Mitigating controls Strategic responses
  • Not remaining fashionable is a major risk and has significant influence on the market share enjoyed by the business.
  • The risk is especially pertinent for the age group of 35 and below.
  • Customer expectations not satisfied with product offering.
  • Regular regional meetings are held to source insight into markets, receive product feedback and communicate fashion trends, product innovation, merchandise and store improvements, market analysis and opportunities for growth.
  • There are experienced brand/divisional/supply chain managers in the business, who focus on key products and areas.
  • Attendance at international trade fairs.
  • Ongoing cost/pricing adjustments and expansion of distribution channels (e.g. e-commerce).
  • Store displays and trading space are continually refreshed, and ideas shared across the Group via various mediums (e.g. operations newsletter).
  • Ongoing 'competitor shopping' is undertaken and necessary responses implemented.
  • Inventory provisioning process in stores ensures improved product lifecycles.
  • BOP utilised to improve in-stock levels of business-critical items, and management/exit of slow-moving inventory.
  • Work with suppliers and leading experts to ensure 'wow' factor of products and merchandising.
  • Optimal range/pricing structures will remain a priority.
  • The Group's high standing among customers will be maintained by continuing to deliver an offering in line with customer demand. In this regard, continuous improvement in the approach to product research and development is crucial.

LOSS OF PROFITABILITY AND/OR REVENUE DUE TO SIGNIFICANTLY INCREASED INPUT COSTS
Risk description Mitigating controls Strategic responses
  • Increased input costs (including local inflationary pressures or a significant gas price increase) will negatively affect gross margins.
  • Margins could be managed through sales price adjustments, but this will impact product affordability, and sales volumes may decline as consumers with constrained discretionary spend defer or reduce home improvement spend.
  • Ongoing cost/pricing adjustment through continuous focus on cost reduction.
  • Consistent focus on ensuring our brands remain top of mind and are the first choice in the market will drive sales.
  • Local integrated supply provides a high-quality affordable import substitute offering.
  • Effective management of internal costs.
  • Optimise price laddering, product mix and promotional activity.
  • Long-standing industry experience and cutting-edge technology position the business as a high-fashion low-cost producer.

STAFF INADEQUATELY TRAINED
Risk description Mitigating controls Strategic responses
  • Individuals are not adequately trained/developed, and succession planning may be inadequate.
  • Shrinking talent pool in South Africa.
  • The Group conducts various training courses and operates an established Tiling and Plumbing Academy. Training spend is significant.
  • Divisional management and the executive directors of the Group are closely involved in the operations of the business and regular regional meetings are held, as well as other regular interactions.
  • Shrinking talent pool in South Africa.
  • The business implements career advancement training which comprises its Future Leaders Programme ("FLP") and other university-affiliated courses.
  • Senior management and executive directors partake in executive development programmes run by reputable institutions with relevant expertise.
  • The Group has a culture of developing and promoting from within, and various initiatives and programmes are in place to foster this.
  • Employee engagement surveys are conducted and reviewed by Group management.
  • E-learning platforms are in place with Group and retail-specific content.
  • International expertise is sought for manufacturing where necessary, with key focus being transfer of skills.
  • Instil greater retail-specific focus in training and development programmes; attract and retain key talent through promoting business partnerships; and encourage commitment to business success through development programmes and remuneration and reward strategies.
  • FLP will continue to serve as an important mechanism to build leadership capacity in the Group.
  • Instil high-performance culture.