Black Economic Empowerment transactions

Various Black Economic Empowerment transactions in prior years have resulted in the founding of the Italtile and Ceramic Foundation Trust and the Italtile Empowerment Trust.

The objective of the Italtile and Ceramic Foundation Trust is to carry on one or more public benefit activities as determined by its trustees from time to time for the benefit of the Foundation Trust beneficiaries. At least 85% of all distributions made by the Foundation Trust will be for the benefit of black people.

The Italtile Empowerment Trust remained dormant until implementation of the Italtile Staff Share Scheme, which is detailed further below in this note.

On 22 August 2019 the Company entered into a subscription and relationship agreement with Yard Investment Holdings Proprietary Limited ("Yard") and K2019313036 (South Africa) (RF) Proprietary Limited, a wholly owned subsidiary of Yard ("Yard SPV"), in terms of which Yard SPV subscribed for 26,4 million ordinary shares in Italtile for an aggregate cash subscription amount of R313 million. Net of transaction costs, proceeds totalled R304 million. This transaction is expected to enhance Italtile´s BEE ownership credentials for a period of at least three years. This general issue of shares was priced at R11,82 a share.

As Italtile Limited receives BEE credentials as a result of entering into this transaction (in which shares were issued at a discount) and the consideration for the shares was partially funded by a shareholder and related party of the Company, the transaction falls within IFRS 2.

The transaction thus resulted in a once-off IFRS 2 expense in the prior year and a related equity-settled share-based payment reserve of R39 million, which was recognised immediately on grant date in the accounts of the Company. The cost of the transaction was valued using a Monte Carlo option pricing model with the following inputs:

The valuation was performed by an external valuation expert.

Share Appreciation Rights Scheme

During the 2011 financial year, a share appreciation rights scheme was adopted by the Company, in accordance with which selected directors and employees of the Group are entitled to receive notional share awards based on the increase in share price from grant date price. These awards vest as follows:

• 25% after three years; and 75% after five years. The exercise price is determined in accordance with the rules of the scheme; and
• The plan has been classified as an equity-settled share-based payment scheme and is fair valued on each grant date using a modified Black-Schöles model. The following assumptions and inputs were used in valuing the notional awards on grant dates:

The movement in the number of awards during the year is as follows:

The weighted average vesting period of awards outstanding at year end is 2,21 years (2020: 1,61 years).

The fair value of the unvested awards granted on 30 June 2021 was R29 million (2020: R32 million). Included in the expenses in the profit and loss for the year is R11,4 million (2020: R8,4 million) relating to the current year share‑based payment expense for this scheme.

Staff Share Scheme

During the 2014 financial year, the Group implemented a share incentive scheme for all employees of the Group and its franchisees that had been in the employ of the Group and/or franchise network for a period of three uninterrupted years at each allotment date in August every year from the implementation date. As a result, 9,9 million of the Group's shares net of forfeitures were held by qualifying staff members at 30 June 2021 (2020: 9,4 million). Until vesting, the shares will continue to be accounted for as treasury shares and have an impact on the diluted weighted average number of shares.

The allotment is funded by the Group and the shares are restricted instruments which will vest with employees following a further three years of employment. Until vesting, the shares will continue to be accounted for as treasury shares.

The scheme is classified as an equity-settled share-based payment scheme and is fair valued on each grant date using a modified Black-Schöles model. The following assumptions and inputs were used in valuing the awards:

The movement in the number of awards during the year is as follows:

The weighted average vesting period of awards outstanding at year end is 1,32 years (2020: 1,39 years).

The fair value of the awards granted over the year to 30 June 2021 was R7,30 per award (2020: R8,40).

Included in the expenses in the profit and loss for the year is R19 million (2020: R25 million) relating to the current year share-based payment expense for this scheme. In total, R9 million (2020: R13 million) is a once-off charge related to employees of the Group's franchisees.

Executive Retention Plan

The Executive Retention Plan is an additional mechanism, over and above the SARS, to retain and reward selected employees and directors. In terms of this scheme, retention payments are made to selected directors and employees to facilitate the purchase of Italtile Limited shares based on the share price at grant date. The payment of the retention award is subject to the director or employee remaining with the Group for a period of five years. The director or employee shall be the registered and beneficial holder of the shares acquired pursuant to the retention award from the date of transfer of such shares.

The movement in the number of retention awards to eligible participants is as follows:

Italtile Retention Scheme

The Italtile Retention Scheme replaces the Executive Retention Plan.

The Scheme is an additional mechanism, over and above the SARS, to retain and reward selected employees and directors. In terms of this scheme, awards are made to selected directors and employees, which are linked to shares held by the Italtile Retention Trust, with dividend and voting rights on these shares passing to the selected director or employee.

The awards have a five-year retention period and the number of shares which vest and transfer to participants is dependent on the achievement of certain performance targets. These performance targets include headline earnings per share growth, return on invested capital and individual performance targets.

The movement in the number of retention awards to eligible participants is as follows:

The scheme has been classified as an equity-settled share-based payment scheme and is valued on grant date using the market value of the related shares on allocation of awards to participants. Included in expenses in the profit and loss for the year is R10,2 million relating to the current year share-based payment expense for the scheme.

Long-Term Incentive Plan (“LTIP”)

In June 2016, the Ceramic Remuneration Committee made a number of new awards in terms of the Company's LTIP scheme which was approved at the AGM of shareholders held on 30 November 2007.

The following table reflects the number of notional Ceramic shares granted and held by the participants:

The liability raised for the awards outstanding at 30 June 2021 was R4,7 million (2020: R2,0 million). Included as an expense in profit or loss for the year was R2,9 million (2020: R1,3 million) relating to the current year amortisation of the share options granted.

The LTIP award is similar to a forward on Ceramic ordinary shares maturing at tranche measuring date where the strike price is Rnil. A no-arbitrage approach is therefore used to determine the fair value of the awards.

The liability will be measured at the end of each reporting period, until settled in cash, by applying an option pricing model, taking into account the terms and conditions on which the awards were granted and to the extent to which the employees have rendered services to the Company.

In total, 25% of the awards will vest on 1 July 2023 and 75% will vest on 1 July 2025.

Ceramic Industries Escrow Scheme

On 24 March 2016 shareholders of Ceramic approved the issue of 414 139 ordinary shares to the three executive directors of the Company, the CEO (207 069 shares), the Chief Operating Officer (165 656 shares) and the CFO (41 414 shares).

The shares are being held in trust by an escrow agent and will vest to the participants provided they remain in the full-time employment of the Company for the period 1 January 2016 to 31 December 2020. If the participants' full‑time employment with the Company terminates prior to 31 December 2020, the participant shall forfeit all the shares issued to him irrespective of the date on which termination occurs.

The executive share award is similar to simply holding Ceramic ordinary shares from grant date on 1 January 2016.

The CFO retired 30 November 2017 and forfeited all his shares.

A new issue of 30 000 shares was approved on 1 January 2018 and allocated on 1 July 2018 and the same rules apply as above. These awards have a vesting date of 30 June 2023 and are the only awards in place at year end as all other awards vested on 31 December 2020. There were no awards made during the year.

Since the executive shares are an equity-settled award, the cost is fixed at grant date based on the fair value of Ceramic ordinary shares at that date and expensed over the vesting period. At each reporting period, the Company will adjust the cost for the service period by taking into account resignations, deaths and retirements during the vesting period.

Mr R Mothapo (fellow of the Actuarial Society of South Africa) of the Matlotlo Group Proprietary Limited has valued the above issue of shares at R67,8 million. This cost is amortised over the vesting period.

Included as an expense in profit or loss for the year was R11,6 million (2020: R20,2 million) relating to the current year amortisation of the shares issued.

The Ceramic Industries Equity Incentive Scheme

The Ceramic Industries (Pty) Ltd Equity Incentive Scheme ("EIS") was implemented with effect from 1 July 2013. The purpose of the scheme is to incentivise selected employees by giving them the opportunity to acquire shares in Ceramic. The scheme will also ensure that the goals of those employees will be aligned with the goals of the other shareholders.

In terms of the rules of the EIS, grants will be made at the discretion of the Ceramic Remuneration Committee ("Remcom") on 1 July each year. Per the scheme rules, 20% of the grants will be unconditional but the remaining 80% will be conditional on the achievement of performance targets set by the Remcom.

There will be two vesting dates which will be on the second and fourth anniversary dates of the original grant date. Per the scheme rules, 25% of the grants will vest on the first vesting date and 75% will vest on the second vesting date.

The scheme has been classified as an equity-settled share-based payment scheme and is fair valued on each grant date using a modified Black-Schöles model for forward contracts. Details of the valuation assumptions for grants issued and outstanding at 30 June 2021 are as follows:

Included as an expense in profit or loss for the year was R14,1 million (2020: R10,1 million) relating to the current year amortisation of the share awards granted.

Share option reserve

The composition of the share schemes' reserve is as follows: