ITALTILE

Italtile Limited is a franchisor, retailer and manufacturer of tiles, sanitaryware, bathware, laminated and vinyl flooring and other related home-finishing products. The Group's retail brands are CTM, Italtile Retail and TopT, represented through a total network of 176 stores, including four online webstores. The brand offering targets homeowners across the LSM 4 to 10 categories.

The retail operation is strategically supported by a vertically integrated supply chain (comprising key manufacturing and import operations) and an extensive property portfolio.

The Group's dream is to become the best retailer of tiles, sanitaryware and ancillary products in the world, by offering an unrivalled shopping experience through the strategy of ensuring the right product, at the right time, place and price.

2018 marks the 30th anniversary of the Group's listing on the JSE Limited, and the commencement of the Company's 50th year of trading.

Comparable disclosure and analysis of the Group's results for the year ended 30 June 2018 ("review period") with the prior corresponding period have been impacted by the acquisition ("Acquisition") of Ceramic Industries Limited ("Ceramic") and the partially underwritten renounceable rights offer ("Rights Offer") as detailed below:

Following the Acquisition becoming effective on 2 October 2017, the Group now holds a 95,47% stake in Ceramic and an effective 71,54% in Ezee Tile Adhesive Manufacturing Proprietary Limited ("Ezee Tile"). Accordingly, the results for the review period include the consolidated results of both businesses from 2 October 2017.

Sales related to Ceramic and Ezee Tile are referred to as "manufacturing" sales to distinguish them from "retail" sales reported by Italtile's retail brands (CTM, Italtile Retail and TopT).

In terms of the Acquisition, 150 936 170 Italtile shares were issued to shareholders of Ceramic. Further, in terms of the Rights Offer, as published on SENS on 23 October 2017 and 2 November 2017, 135 985 156 Italtile shares were subscribed for by the close of the Rights Offer on 24 November 2017 (this equated to a 99% take-up). In addition, in terms of a specific repurchase of shares ("Repurchase") as published on SENS on 8 March 2018, 25 000 000 Italtile shares were purchased by Italtile from Four Arrows Investments 256 Proprietary Limited.

As a result of the above, the Group's current issued share capital is 1 295 254 148 shares, reflecting an increase of 25,35% (pre-Rights Offer, Acquisition and Repurchase: 1 033 332 822 shares). Consequently, the current review period weighted average number of shares is higher than that of the prior period. Furthermore, the weighted average number of shares for the review period and prior corresponding period has been adjusted in accordance with IAS 33 Earnings Per Share, in order to account for the deemed bonus element inherent in the rights issue as a result of the Rights Offer being priced at a discount to the market share price.

Despite the improved outlook for South Africa and an initial gain in business and consumer confidence following recent leadership changes in government, the macro-economic environment remained subdued during the review period.

In the context of sustained economic pressure on disposable income, consumers remained restrained in their spend on non-essential items, and discerning in their selection of retailer – with the price/value proposition being a key driver of purchasing decisions.

The Group's solid performance for the period is therefore largely a reflection of the impact of enhancements made in the business during the year which started to gain momentum, particularly in the second six months, as opposed to improved sentiment or spend by consumers.

Over the past 30 years since listing on the JSE and almost 50 years since the Group was founded, Italtile has laid down a strong track record of continued improvement, consistency and resilience. Central to this achievement is our unique business model which has served as a major differentiator in the industry and a strong investment proposition for franchisees and shareholders. The key components are:

• Strategic portfolio of strong retail brands, which appeal to consumers across the income spectrum;
• Integrated supply chain which underpins our policy of "right product at the right time, place and price";
• Flat, low-cost organisational structure comprising strong teams and unique individuals intimately involved in the operations;
• Recognition that our people are key to our competitive advantage and hence continued investment in them is paramount;
• Strong partnerships with employees, equity partners and entrepreneurial franchisees;
• Reward and empowerment ethos which incentivises personnel to participate in the profitability of the business;
• Extensive property portfolio which comprises high-profile, accessible and aspirational stores, state-of-the-art factories and productive quarries;
• A customer-centric philosophy which ensures all our activities are centred on keeping them top of mind;
• Longstanding reputation as the industry trend setter and fashion authority, retailing highly fashionable products in all the markets we serve;
• Sustained investment in improving and innovating the shopping experience and ensuring the offering remains attractive to traditional customers and new, emerging homeowners; and
• Concerted focus on developing and employing industry-leading technology in both our retail offering and manufacturing operations.

A range of trends is evident, or emerging in our industry and market, which impact on our business. Accordingly, we have developed strategic responses to mitigate any negative effects and capitalise on the opportunities they present. These include:

• Constrained consumer discretionary spend, which led to a weaker sales environment and intensified value scrutiny. Our response is to ensure our brands are aspirational and offer customers consistent year-round value; our price offering is supported by strong brand equity, product quality and customer-centric service.
• Highly competitive trading landscape, which featured intense competitor activity with margins sacrificed by peer operators striving to survive. Our response is to focus on achieving an optimal product-price-margin matrix which holds appeal for customers but supports profits for store operators. Our robust cost leadership ethos is key to preserving margins.
• Consumer demand for convenience (including accessibility to brick and mortar stores; demand for faster, more efficient in-store service; and access to omnichannel shopping experience – seamless transition between online and physical stores). Our response is to continue to roll out stores to underserviced markets; explore flexible store-size formats relevant to specific markets for our brands; invest in technology to improve the customer shopping experience; and expand our online retail and mobile commerce model.
• Industry-wide shortage of skilled retail-specialist personnel. Our response is to continue to invest significantly in training and development; while our partnership and reward initiatives are designed to incentivise our people and position the Group as an employer of choice.
• Innovative in-store shopping experiences are increasingly important. Our response is to continue to focus on up-weighting the "delight and disrupt" factors in our stores through innovative layouts, lifestyles, products and use of technology.

In line with management's expectations, improvements made to the business in the first half of the review period gained momentum, resulting in a stronger performance in the second half. In summary, while turnover growth reported for the period failed to meet management's expectations, pleasing progress was made in improving profitability and stabilising margins, achieved through robust cost leadership.

The Group's system-wide turnover for the review period was R8,7 billion, 39,8% higher than the prior corresponding period (2017: R6,2 billion). System-wide turnover is defined as the aggregate of the Group's consolidated turnover (total sales by Group-owned entities and corporate stores, excluding sales from owned supply chain businesses to corporate stores) and the retail turnover of franchisees of the Group.

System-wide retail store turnover grew 2% for the review period compared to the prior corresponding period.

Like-on-like retail store turnover decreased by 1,4% compared to the prior corresponding period. Retail store turnover is defined as the aggregate turnover of all stores, either corporate or franchised, in the Group's retail network.

Manufacturing sales for the period from 2 October 2017 to 30 June 2018 rose by 15,2% compared to the prior corresponding period, with manufacturing sales for the review period growing by 10,6% compared to the prior corresponding period.

Trading profit increased by 43% to R1 518 million (2017: R1 063 million). Average selling price inflation is estimated at 1% in the retail operation (2017: 4,3%) and at 3% in the manufacturing operation.

The Group's basic earnings per share grew by 6% to 95,0 cents (2017 adjusted: 89,7 cents), while headline earnings per share improved by 12% to 95,0 cents (2017 adjusted: 85,1 cents).

The disparity between basic earnings and headline earnings growth is attributable to a gain of R37 million realised on the disposal of the Italtile Australia property holding business and a gain of R15 million realised on the disposal of South African properties during the prior review period.

Retail margins were higher due to intensified cost containment, judicious price promotions which served to support margins, and an improved mix of higher margin products in the average basket.

Inventory value, including the consolidated inventory balances of Ceramic and Ezee Tile, increased to R806 million (2017: R548 million). Management is satisfied that good progress has been made in the retail operation to destock, rationalise and improve the quality and mix of stock across the business. Excluding the inventory balances of Ceramic and Ezee Tile, total inventory value decreased from the prior period.

Capital expenditure of R669 million was incurred during the period (2017: R334 million). This includes investments made across the Group's retail properties and manufacturing plants.

The Group's cash balance rose to R679 million (2017: R511 million), including the consolidated cash balances of Ceramic and Ezee Tile. Material cash flows for the review period include:

• Capital expenditure of R669 million;
• Tax payments of R435 million;
• Cash consideration for the Acquisition of R1,8 billion;
• Cash proceeds of the Rights Offer of R1,6 billion; and
• Dividend payments of R360 million.

The Group's net asset value per share was 486 cents (2017 adjusted: 402 cents).

In response to the prevailing adverse operating environment, management's primary focus has been to leverage opportunities for growth within the business. The following narrative outlines our key priorities and imperatives during the review period and our progress in delivering against them:

In addition, Ezee Tile has advanced its expansion drive into sub-Saharan Africa and plans to commission three new factories in the 2018/19 financial year. Ceramic has also investigated opportunities to build new factories in Rwanda and Kenya, and an investment decision in this regard is expected in the new financial year provided adequate raw materials are identified, gas supply secured and a local partnership established.

Improvements made across the business in the first six months gained momentum over the year, and better execution of basic retail excellence principles and increased focus on key targets resulted in an improved second half performance across all the brands. Italtile Retail and TopT built on their solid first half results, delivering double-digit growth. While CTM recorded lower year-on-year sales as middle-income consumers continued to show stronger symptoms of economic hardship, low single-digit growth was reported in the second six months.

During the review period, we gauge that Italtile Retail and TopT grew market share, while CTM succeeded in gaining back share lost in the first half of the year.

CTM

Sales declined in a weak-demand environment; however, good progress was achieved in growing profits and margins. Stock turn improved and, although average store inventory increased in the second half, management is satisfied that the range, product mix and ratio of business-critical items has been enhanced.

Good results were recorded in attaining key priorities identified, including driving customer service excellence, enhancing the human capital structure and skills development, and building stronger relationships with suppliers.

During the review period, one new Millennial-format store was opened in Capricorn, Limpopo (2017: two opened) and two stores revamped, in Hermanus, Western Cape, and Tzaneen, Limpopo (2017: three revamped).

Italtile Retail

In the year under review, the brand achieved improved sales and profitability and reduced general operating costs across the business. Margins declined nominally due to the strategy to support price-sensitive consumers. Stock turn was improved and average store inventory reduced.

Italtile recorded good progress against its key imperatives, including improving the range overall, aligned to new technologies in printing, multiple surface finishes, and a variety of sizes in large format porcelain tile slabs. A rewarding growth in market share in this high fashion segment was recorded. In addition, the brand's Commercial Projects division delivered a strong performance and has become an important contributor to the business.

One new store was opened during the year, in Polokwane (2017: none opened), and four stores were revamped to the new-look new-generation store format.

TopT

The business reported improvements across all key metrics including sales, profits and margins, and grew its contribution to total Group retail sales. Stock turn increased, while stock management resulted in lower average store inventory and improved product mix.

During the review period, TopT achieved its key priorities, being to enhance its franchise partner and operator training programmes; build on collaboration with suppliers to ensure that growing demand was met; grow the brand's profile internally and externally; and enhance logistics and distribution to the stores.

Thirteen stores were opened (2017: 14), four of them corporate stores and the balance franchised.

Ceramic Industries

Over the past nine months since acquisition of this operation, our focus has been on improving business-to-business communication, including enhanced production and logistics planning between the stores and the factories.

Tiles

During the review period, improvements were made to the tile matrix, including developing innovative new products and rationalising the ranges.

The key challenge facing Ceramic is constrained market demand which is prevalent in the sector at present. During the second half of the year, destocking took place across the Group's stores and industry-wide, as operators sought to correct overstock positions evident in the first six months. While customer demand increased, volumes are not yet at notable levels. This weak market is anticipated to result in underutilisation of capacity in the factories, which will impact on profitability.

Ceramic's state-of-the-art Gryphon plant has commenced producing extra-large format tiles in various sizes to improve the business's import-replacement advantage. Initial consumer response has been very positive; however, to grow this market to projected scale will require education of consumers and installers, and consistency of quality on new innovative product lines.

It is anticipated that in the year ahead, Ceramic will benefit from the reduction of Chinese government export subsidies and decrease in production of smaller format tiles, which will result in inconsistent supply to our local market. Furthermore, Ceramic plans to actively expand its local customer base to counter the weakened demand from existing customers.

Bathroomware and baths

Disappointingly, Betta Sanitaryware under-performed management's targets. Operational inefficiencies, exacerbated by warehouse space constraints, hampered the division's performance. A new management team has been appointed and a comprehensive review and restructuring of the operation is under way to enable the business to meet the strong demand for its products.

After a difficult first six months, in which Betta Baths experienced various manufacturing challenges, remedial measures implemented served to address shortcomings, and the division reported an improved performance in the second half. Enhancing profitability of the business will be prioritised in the year ahead.

Ezee Tile

During the review period, Ezee Tile made good progress in its local market, with the implementation of improvements at several of its production facilities; expansion of product lines; and increased penetration of the open market.

The business also furthered its goal to expand into Africa, concluding joint venture partnerships with resident partners to build manufacturing plants.

During the year under review, both International Tap Distributors ("ITD") and Cedar Point made good progress in rationalising ranges, although stockholding targets were not achieved. This will remain a key imperative in the year ahead.

Severe supply disruptions out of China in the first half of the year impacted on the Group's in-stock position, however better anticipation and prudent inventory management eased the situation in the second half, which proved less challenging. Due to the supply uncertainty, both ITD and Cedar Point have reviewed their suppliers, and succeeded in finding alternative suppliers, both in China and in new markets.

The Group's property portfolio affords strategic advantage to the retail brand operations by ensuring stores are easily accessible, well presented and maintained, and contribute to an aspirational shopping experience. The Group's manufacturing operations comprise well-maintained state-of-the-art factories which are supplied with raw materials sourced from productive quarries in close proximity to the plants.

As at 30 June 2018, the portfolio's estimated market value was R3,7 billion, comprising a retail portfolio valued at R2,9 billion (2017: R2,6 billion) and a manufacturing portfolio valued at R0,8 billion. During the review period, capital expenditure of R355 million was incurred on the property portfolio on an ongoing store upgrade programme and the acquisition of five retail properties, while R277 million was invested across the manufacturing operations on plant and equipment upgrades.

The Group's equity-settled Staff Share Scheme is designed to incentivise employees to participate in the growth and profitability of the business. In this regard, the second allotment of shares, granted in 2014, vested on 31 August 2017. A total of 134 employees qualified, of which four employees opted to receive shares and the balance received the net value of the awards in cash. Cash payments after tax averaged R143 000 per individual (aggregate payments including income tax totalled R19 million), funded by the sale of the related shares to the market. Employees who elected to receive shares, received an average of 10 600 Italtile Limited shares each (dependent on the individual's effective income tax rate).

During the review period, a fifth allotment of shares was made, comprising 3,5 million shares allocated to 181 eligible employees of the Group and franchisees. As at 30 June 2018, there were 363 participants in the scheme, holding 6,9 million Italtile shares.

During the review period, several changes were made to the composition of the Board.

Resignation of independent non-executive director

With effect from 29 January 2018, Mr Siyabonga Gama tendered his resignation as an independent non-executive director, given time constraints in light of his other professional commitments. The Board wishes to record its gratitude to Siyabonga for his long-standing and valuable contribution to the Group since his appointment as a director in 2004.

Appointment of executive directors

With effect from 11 May 2018, Ms Tsundzukani Mhlanga, formerly Financial Director of certain of the Group's subsidiary companies, was appointed to the Board as Executive Director: Group Finance and Administration. Tsundzukani replaces Brandon Wood, who has been appointed Executive Director: Commercial and Supply Chain.

Appointment of independent non-executive director

With effect from 11 May 2018, Ms Nkateko Khoza was appointed as an independent non-executive director to the Board. The Board welcomes Nkateko and looks forward to her contribution.

Appointment of deputy chairman

The Nominations Committee ("the Committee") has commenced the process of identifying suitable potential candidates to fill the position of non-executive Chairman upon the retirement of our current Chairman, in time.

The Committee's mandate is to identify candidates who have the appropriate expertise and experience to meet the requirements of this business, and who satisfy the criteria of key stakeholders, including our shareholders.

In this regard, Ms Luciana Ravazzotti Langenhoven has been appointed to the Board as deputy chairman with effect from 21 August 2018. The Board welcomes Luciana and looks forward to her contribution.

Further, over the course of the next year, the Committee will identify and appoint an additional independent non-executive Board member with relevant businesses experience, strong leadership qualities and a proven track record.

Boosting the economy sustainably, improving household prosperity and rebuilding consumer confidence to translate into positive investment sentiment are key to the growth of our industry. In the foreseeable future, the following socio-economic issues need to be addressed urgently: high unemployment and indebtedness, prevailing evidence of corruption, and policy uncertainty regarding key issues including prospective wealth taxes and land redistribution without compensation. Failure to do so will see consumers remaining under pressure and negatively disposed, and homeowners will continue to defer discretionary spend on their properties.

We anticipate that our first half results for the new financial year will be better than the comparable first half of the prior year, due to the low base effect. Results in the second half of the year are expected to be less robust than the second half of the year under review, unless country-specific risk factors reduce materially.

Our goal for the new financial year will be to continue to deliver improved headline earnings growth.

While the short to medium-term socio-economic forecast is pessimistic, we remain confident that our resilient business model will stand us in good stead, as it has done over the past 50 years. We are optimistic that there are opportunities within the business which we can capitalise on and we have a competent team with clarity of purpose and strategy to achieve our growth targets.

We have identified our future focus areas. They include the following imperatives:

• Grow sales across the brands, which will have a positive knock-on effect in the supply chain;
• Continue to improve working capital and manage margins through robust cost leadership;
• Build on our reputation for retail innovation and disruptive technology, including continuing to enhance our leading-edge online offering;
• Accelerate the Group's growth in selected markets in Africa;
• Advance the store roll-out programme, targeting 10 to 15 new stores;
• Progress improvements made in building a pipeline of talent and enhance depth of management;
• Make better use of analytics to inform targeted customer marketing and reward campaigns;
• Leverage opportunities in the integrated supply chain; and
• Upweight our marketing and brand building initiatives.

No events have occurred subsequent to the reporting period that require any additional disclosures or adjustments.

Following the reduction of the Group's dividend cover to two and a half times (2017: three times) the Board has declared a final gross ordinary cash dividend of 21 cents per share (2017: 14,0 cents per share), which together with the interim gross ordinary cash dividend of 17,0 cents per share (2017: 16,0 cents per share), produces a total gross ordinary cash dividend declared for the year ended 30 June 2018 of 38 cents per share (2017: 30,0 cents per share), an increase of 27%.

In light of the Group's cash reserves being in excess of operational requirements, the Board has declared a special cash dividend of 30 cents per share (2017: nil).

Italtile has obtained the relevant South African Reserve Bank approval in respect of the special dividend, and the Board has reasonably concluded that the Company will satisfy the solvency and liquidity test immediately after distribution thereof and for the next 12 months.

The Board has declared a final gross ordinary cash dividend (number 104) and a special cash dividend (number 5) for the year ended 30 June 2018 of 21 cents per ordinary share and 30 cents per ordinary share to all shareholders, respectively, recorded in the books of Italtile as at the record date of Friday, 7 September 2018.

In accordance with paragraphs 11.17(a)(i) to (x) and 11.17(c) of the Listings Requirements of the JSE ("JSE Listings Requirements") the following additional information is provided:

• The dividends have been declared out of income reserves.
• The local dividend withholding tax rate is 20% (twenty percent).
• The gross local ordinary dividend amount is 21 cents per share for shareholders exempt from the dividends tax.
• The net local ordinary dividend amount is 16,8 cents per share for shareholders liable to pay the dividends tax.
• The local ordinary dividend withholding tax amount is 4,2 cents per share for shareholders liable to pay the dividends tax.
• The gross local special dividend amount is 30 cents per share for shareholders exempt from the dividends tax.
• The net local special dividend amount is 24 cents per share for shareholders liable to pay the dividends tax.
• The local special dividend withholding tax amount is 6 cents per share for shareholders liable to pay the dividends tax.
• Italtile's income tax reference number is 9050182717.
• The Group has 1 295 254 148 shares in issue including 12 301 238 shares held by the Italtile Share Incentive Trust and 61 851 217 shares held as BEE treasury shares.

The cash dividend timetable is structured as follows: the last day to trade cum dividend in order to participate in the dividends will be Tuesday, 4 September 2018. The shares will commence trading ex dividend from the commencement of business on Wednesday, 5 September 2018 and the record date will be Friday, 7 September 2018. The dividends will be paid on Monday, 10 September 2018. Share certificates may not be rematerialised or dematerialised between Wednesday, 5 September 2018 and Friday, 7 September 2018, both days inclusive.

The full reviewed Group results announcement has been released on SENS and is available for viewing on the Company's website
(www.italtile.com); furthermore, it is available for inspection at the registered offices of Italtile and the Company's sponsor, Merchantec Capital, during business hours. Copies of the full announcement are available at no cost on request and may be obtained from the Company Secretary who is contactable on: +27 11 882 8200 or: lizw@rootginger.co.za.

For and on behalf of the Board

J N Potgieter

Chief Executive Officer

No forward looking statements in this announcement have been reviewed or reported on by the Group's auditors.

The condensed Group results announcement for the year ended 30 June 2018 has been reviewed by Ernst & Young Inc. ("EY"). EY's unmodified review conclusion does not necessarily report on all of the information contained in this condensed Group results announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditors' engagement, they should obtain a copy of EY's unmodified review opinion together with the accompanying financial information from the Company Secretary at the Company's registered office.

Johannesburg

21 August 2018