Chief Executive Officer's letter to stakeholders

Over the past four years, new factories have been established in Zambia, Zimbabwe, Tanzania and Mozambique (in addition to local capacity coming on-stream). Two of the new Southern African competitors, (both headquartered in Foshan, China), are among the largest global producers, each with numerous operations.

Unlike South Africa, many of our neighbouring countries offer attractive investor-friendly environments and incentives for manufacturers, which has encouraged foreign investors. As global market demand has slowed, dumping of product in South Africa has increased and Africa is perceived as a good growth prospect. While these manufacturers are producing in SADC countries, they are exempt from duties when they export to South Africa. Conversely, South African companies producing tiles are subject to tariffs when exporting to Zambia and Zimbabwe. Management will continue to engage the South African authorities to gain the government’s support for a level playing field in our market.

Currently, production capacity in Southern Africa is roughly 155 million m² per annum after Johnson Tiles ceased production of 5 million m² per annum. In contrast, demand is approximately 80 million m² per annum. The average market capacity utilisation is estimated to be just above 50%. Our response has involved rationalisation of capacity through the medium-term closure of some kilns until market conditions and demand improve, and short temporary stoppages at some kilns to manage inventory. For the past financial year, Ceramic’s factories utilised 66% of installed capacity.

Predatory and deflationary pricing has resulted from the regional excess capacity and large stockholdings, with competitors sacrificing margin to gain market share. We expect further consolidation in the market and rationalisation of production capacity.

Our strategic objective is to ensure that our operations are lean, efficient, innovative, cost-competitive and flexible. This requires a strong focus on optimising our operational processes and ensuring that we have strong leadership and expertise in the business to be able to remain a low-cost producer.

Ceramics has invested in rectification capabilities at Vitro, Samca Plus and NCIA to be able to convert opportunities as trends in sales of rectified product continues. We continue to introduce new and fashionable product ranges. Continual updating of our technology ensures that we remain relevant and have quality products to compete.

We have invested in restructuring and improving the capacity of our HC division aimed at enhancing our ability to attract, recruit, develop and retain high-performing employees.

We will continue to ensure that we excel on our points of differentiation which include leading fashion, wide-range, guaranteed quality, exceptional customer experience, stock availability, expert advice, omnichannel sales and leading systems through our vertically integrated operating model. We anticipate introducing AI projects to enhance our competitive ability in customer service, logistics and inventory management.

Sasol is South Africa’s key supplier of piped natural gas and has announced that it will no longer supply the market due to the diminishing volume of its source in Mozambique. Since the initial announcement in August 2023, Sasol has extended the deadline to June 2028. 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. We are in discussions with Sasol to supply methane rich gas (“MRG”) until June 2030. MRG is similar to natural gas and we will need minimal equipment adjustment for this transition.

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. We will review the trial project using a coal-fired HAG in 2026. We have planned one pilot project for the next financial year to convert spray driers with the aim of bedding down the technology.

We continue to engage with key industry players and remain hopeful that a sustainable natural gas solution will be found that is suitable for the country, the industry and Italtile.

Targets have been set throughout the business to reduce intensity of resource use. This includes reducing the consumption of electricity, gas, fuel, water, packaging and paper. We continue to invest in new technology where appropriate to improve efficiencies as well as raise awareness in our operations and communities of the need to preserve our resources.

We continue to invest directly or through power purchase agreements in renewable energy to displace some of our use of electricity produced through consumption of fossil fuels.

Our retail stores pride themselves on selling products produced in a responsible manner with three quarters of our products being locally produced in highly efficient factories which negates the need for international transport and shipping. Further, our stores constantly look for product with a lower carbon footprint in the production process. Our innovative market-leading products, such as cold start taps, reduced flush capacity toilets, superior insulated baths and low VOC adhesives, enable our customers to use less resources.

Fostering a strong ethical culture is fundamental to building trust and supporting sustainable value creation for our stakeholders. Our unwavering commitment to integrity and accountability is rooted in our ethical framework, driven from the Board Social and Ethics Committee throughout all our business units. Our Code of Ethics provides guidance to our Board, management, employees and franchisees in all interactions, but particularly with customers, investors and our communities.

It is our intention for this culture to permeate every aspect of our operations, including ensuring that we provide an exceptional service experience for our customers, promote a diverse and inclusive workforce, deliver regular and meaningful investor disclosure, and engage proactively with local communities.

We have focused on being more efficient at every customer satisfaction touchpoint: fashion, presentation, range, value, service and quality, ensuring that our customers have an unrivalled experience every time they visit our stores.

Our human capital strategy prioritises leadership and skills development as well as mentorship of franchisees. An internal communication platform will be launched in the new financial year to ensure transparent and effective employee communication. We have regular meetings with our investor community to ensure clear understanding of our strategy, operational environment and ongoing performance.

We are committed to making a positive impact in the communities close to our operations, not only through our corporate social investment programmes but also through our Foundation.

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. In summary, the Code indicates that independence involves the “exercise of objective, unfettered judgement”, and “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”. The Italtile Nominations Committee believes that our independent directors satisfy these criteria. Any directors who have been in office for longer than nine years, resign and stand for re-election annually.

The Code also states that the Board should annually assess non-executive directors serving for longer than nine years. If the Board concludes that these directors exercise objective judgement and there is nothing likely to influence or cause biased decision making, they may continue to hold Board positions.

When the Nominations Committee annually reviews the composition of the Board in preparation for the AGM, the independence of those directors who have served for more than nine years is assessed. At the meeting, the decision on the independence is considered without their involvement. The confirmation of the independence is reported to the Board.

Following the most recent annual assessment, the Nominations Committee is satisfied that the two directors exercise objective, unfettered judgement and that they are independent. The Board believes that our non-executive directors with a long tenure have a deep understanding of the business and continually make valued contributions to Board deliberations. Neither of the two directors with more than nine years of service chair any of the Board committees.

While the Board is led by a non-executive Chairperson, Ms S M du Toit continues to serve as lead independent non-executive director. The Board evaluates its composition each year to ensure an appropriate mix of skills, experience, and professional and industry knowledge to meet the Company’s strategic objectives. Demographic representation is also a consideration.

The Board is confident that there is an appropriate balance of power and authority on the Board to ensure that no one director has unfettered powers of decision making and that the division of responsibilities maintains this balance. No director has an automatic right to a position on the Board and all directors are required to be elected by the shareholders at an annual general meeting on a rotational basis. The basis on which directors have been classified in terms of their independence is set out in our Board of directors.