Financial review

for the year ended 30 June 2018

The Group results for the 2018 financial year include the consolidated results of Ceramic Industries ("Ceramic") and Ezee Tile from 2 October 2017. Following the acquisition of Ceramic, the Group now holds a 95,47% stake in Ceramic and an effective 71,54% in Ezee Tile. As such, it is to be noted that some commentary below relates only to the Italtile Group prior to the consolidation of these two entities ("old Group").

Financial performance

Sales

Italtile's system-wide turnover for the year ended 30 June 2017 increased by 40% from the prior year to R8,7 billion. Consolidated turnover increased by 65% from the prior year to R6,1 billion.

• Retail revenue was 2% higher than the prior year at R5,8 billion. On a like-on-like basis, retail sales decreased by 1% versus the prior year;
• The supply chain businesses (ITD, Cedar Point and DC) recorded a decrease in sales of 5% from the prior year. During the first half of the financial year, sales were impacted by stores reducing their stock holdings, poor in-stock positions and the decrease in retail sales. Conversely, improved in-stock positions, improvement in retail sales and normalisation of stock holdings in stores, resulted in sales growth of 25% for these businesses during the second half; and
• Manufacturing sales (aggregation of Ceramic and Ezee Tile sales) for the period from 2 October 2017 to 30 June 2018 grew by 15% compared to the prior year, and by 11% for the financial year ended 30 June 2018 (reflecting an improvement in sales during the second and third quarters).

Achieved gross margin

The Group's achieved gross margin decreased to 38% from 40,5%. The decrease is as a result of the consolidation of Ceramic and Ezee Tile, as both businesses have lower margins than that of the old Group. Margins at the retail stores improved by 1,5% versus the prior year (34,6% to 36,1%) as a more measured approach was adopted towards aggressive clearance pricing. Contributors to the improvement in margin were decreases in stock provisions, an improvement in transport recoveries (transport costs net of charges to customers) and improved price laddering at stores.

Expenses

Expenses were tightly controlled, increasing by only 3% over the prior year. Decreases were noted in manpower costs (excluding share incentive costs, decreased by 7% from the prior year to R245,6 million), and stock control costs (decreased 20% from prior year to R28,2 million). Both manpower and stock control costs continue to receive focus from retail management.

Trading profits

Trading profits for the financial year increased by 43% from the prior year to R1,5 billion and profit after tax increased by 30% from the prior year to R1,1 billion. The disparity between growth in trading profit and net profit after tax is attributable to the following:

• A decrease in income from associates from R96 million in the prior year to R31 million in the current year as a result of the consolidation of Ceramic and Ezee Tile (ie a full year of associate earnings in the prior year versus three months in the current year);
• A decrease in net finance income, as the finance costs of R32 million relate to the acquisition of Ceramic in the current year, offset by the increase in interest and dividend income attributable to the consolidation of Ceramic and Ezee Tile and improved cash balances; and
• The decreases above were offset by a decrease in the effective tax rate (excluding associate earnings) year on year due to the lower effective tax rate for Ceramic-linked manufacturing tax incentives.

Financial position

Working capital management

The inventory balance of the Group net of provisions and including goods on the water (DC goods in transit) has increased to R799 million from R548 million as at 30 June 2017. This increase is attributable to the consolidation of Ceramic and Ezee Tile with a combined balance of R274 million. The inventory balance of the old Group decreased to R523 million, the lowest level it has been in three years. This is despite 15 new store openings across all three retail brands.

The financial stock turn of all the businesses (retail and supply chain) has improved over the past financial year.

Cash flow

The Group's cash balance increased to R679 million from R511 million at the 2017 financial year end, significant cash flows for the year being:

• capital expenditure of R669 million;
• tax payments of R435 million;
• cash consideration for the Acquisition of R1,8 billion;
• cash proceeds of Rights Issue of R1,6 billion; and
• dividend payments of R360 million.

Dividend

Earnings and headline earnings per share increased by 5,9% and 11,6% respectively over the prior year.

The Group's long-standing dividend policy of three times cover was recently amended to two and a half times. A gross final cash dividend of 21,0 cents per share (2017: 14,0 cents per share) and a special dividend of 30,0 cents per share (2017: nil) was declared by the Board. The dividends were declared out of income reserves and were paid to shareholders recorded in the books of Italtile as at Friday, 7 September 2018.

Appreciation

I would like to express my sincere gratitude to the finance teams across the Group. The hard work, dedication and energy exhibited by all during a challenging year is what makes it a joy to be a part of these teams. I wish to also thank our Chairperson and the Board for their leadership and support. Italtile has an exciting future ahead of it.

T T A Mhlanga

Executive Director: Finance and Administration

(All amounts in Rm's)		Seven-year compound growth %		2018			2017	2016	2015	2014	2013	2012
Operations
Turnover		22		6 064			3 670	3 539	3 115	2 745	2 141	1 845
Trading profit		19		1 518			1 063	1 047	905	740	612	523
Profit before taxation		19		1 575			1 190	1 166	978	760	632	550
Profit attributable to equity holders of the parent		19		1 080			845	813	700	509	444	378
Headline earnings		16		1 080			803	804	661	530	436	377
Ordinary dividends paid		19		339			292	252	204	157	141	119
Financial position
Non-current assets				3 872			2 775	2 309	2 023	1 856	1 858	1 223
Current assets				2 455			1 388	1 365	1 079	857	793	1 400
Equity attributable to equity holders of the parent				5 279			3 713	3 292	2 672	2 179	2 247	1 931
Non-current liabilities				132			24	18	44	12	53	323
Current liabilities				670			366	384	324	471	293	292
Cash flow
Cash flows from/(utilised by) operating activities				979			609	306	443	(127)	376	226
Cash flows utilised in investing activities				(2 200)			(379)	(358)	(175)	(50)	(694)	(148)
Cash flows from/(utilised by) financing activities				1 389			(66)	7	(125)	123	(296)	—
Cash and cash equivalents at end of year				679			511	347	392	249	303	917
Financial ratios
Returns
Trading profit to turnover (%)				25,0			29,0	29,6	29,1	27,0	28,6	28,3
Return on shareholders' interest (%)1				24,0			24,1	27,3	28,9	23,4	21,2	21,2
Average consumer price index (%)†				4,6			6,1	5,6	5,1	6,0	5,5	5,5
Earnings per share (cents)		15		95,0			89,7*	87,8	75,9	55,3	48,3	41,1
Headline earnings per share (cents)		15		95,0			85,1*	86,9	71,6	57,6	47,4	41,0
Ordinary dividends declared per share (cents)		18		38,0			30,0	29,0	25,0	19,0	16,0	14,0
Special dividend declared per share (cents)				30,0			—	—	—	—	50,0	—
Productivity
Turnover per employee (R000's)º				2 753			2 731	2 836	3 258	2 977	2 799	2 701
Total assets per employee (R000's)º				2 872			3 097	3 037	3 245	2 943	3 465	3 840
Trading profit per employee (R000's)º				689			791	839	947	803	800	766
Turnover growth (%)				65,2			3,7	13,6	13,8	28,2	16,0	21,3
Number of employees				2 530			1 344	1 248	956	922	765	683
Number of stores				176			162	146	126	115	116	112
– Owned#				78			81	72	55	55	54	50
– Franchised#				98			81	74	71	60	62	62
Solvency and liquidity
Interest cover (times)2				43,4			1 063,0	523,5	150,8	37,0	36,0	21,8
Dividend cover (times)3				2,5			3	3	3	3	3	3
Gearing ratio (%)4				0,0			0,0	0,1	1,1	7,6	2,0	17,7
Current ratio (times)5				3,7			3,8	3,6	3,3	1,8	2,7	4,8
Acid test ratio (times)6				2,5			2,3	1,8	1,9	1,0	1,6	3,6
Stock exchange performance
Market capitalisation+ (Rm's)		22		16 117			11 700	12 673	10 707	7 875	5 514	5 147
Closing share price at year end (cents)		17		1 320			1 250	1 370	1 160	855	600	560
Market value per share
– High (cents)				1 545			1 500	1 370	1 325	860	665	570
– Low (cents)				1 170			1 243	1 035	835	590	550	410
Closing share price to net asset value per share				2,72			3,11*	3,78	3,92	3,53	2,40	2,57
Price-earnings ratio (times)				13,89			13,94*	15,62	15,28	15,46	12,42	13,63
Dividend yield (%)				2,9			2,4	2,2	2,2	2,2	2,7	2,5
Earnings yield (%)				7,2			7,2	6,4	6,5	6,5	8,1	7,3
Number of shares in issue (millions)+				1 295			940	926	924	921	921	919
Volume of shares traded (millions)				82			84	70	70	20	50	25
Value of shares traded (R000's)				1 124 989			1 154 746	843 529	763 680	147 964	304 481	115 085
Volume of shares traded as a % of total issued shares+				6,3			8,9	7,6	7,6	2,2	5,4	2,4

†	As per Statistics South Africa.
*	Adjusted to account for Rights Offer bonus element.
º	Ratios annualised as Ceramic and Ezee Tile consolidated from 2 October 2017.
#	Includes webstores.
+	Excluding treasury shares.
^	Number of employees has increased from prior year as Ceramic and Ezee Tile consolidated from 2 October 2017.
1	Return on shareholders’ interest: Profit attributable to equity holders of the parent as a percentage of average equity attributable to equity holders of the parent.
2	Interest cover: Trading profit divided by finance cost.
3	Dividend cover: Headline earnings per share divided by dividends declared per share (excluding special dividends).
4	Gearing ratio: Interest-bearing loans and borrowings as a percentage of equity attributable to equity holders of the parent.
5	Current ratio: Current assets divided by current liabilities.
6	Acid test ratio: Current assets, less inventory, divided by current liabilities.