ITALTILE

Basis of preparation

The preliminary condensed consolidated financial statements for the year ended 30 June 2018 have been prepared in accordance with IAS 34 Interim Financial Reporting, the Companies Act, 2008 (Act 71 of 2008), as amended, the SAICA Financial Reporting Guides, as issued by the Financial Reporting Standards Council and the Listings Requirements of the JSE.The condensed consolidated financial statements do not include all information on disclosures required in the annual financial statements and should be read in conjunction with the Group’s annual financial statements as at 30 June 2018.These results have been prepared under the supervision of Executive Director: Group Finance and Administration, Ms T Mhlanga CA(SA).

New standards,interpretations and amendments adopted

The accounting policies adopted and methods of computation are in terms of International Financial Reporting Standards ("IFRS") and consistent with those of the previous financial year except for the adoption of new and amended IFRS and IFRIC interpretations which became effective during the current financial year. The application of these standards and interpretations did not have a significant impact on the Group's reported results and cash flows for the year ended 30 June 2018 and the financial position at 30 June 2018.

There are no material contingent assets or liabilities at 30 June 2018.

The Group does not fair value its financial assets or liabilities in accordance with quoted prices in active markets or market observables, as there is no difference between their fair value and carrying value due to the short-term nature of these items, and/or existing terms are equivalent to market observables.There were no transfers into or out of Level 3 during the review period.

In the prior year, management elected to sell the operations of Italtile Australia Proprietary Limited, a subsidiary of Italtile Limited. The business of Italtile Australia Proprietary Limited represented the Group’s Australian property portfolio. A buyer was identified before the 2016 year end, the assets of the operations were therefore treated as a disposal group at 30 June 2016. The sale was concluded on 13 December 2016, at a total profit of R37 million via a release of foreign currency gains in the foreign currency translation reserve.

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

On 2 October 2017, the Group acquired an additional 74,5% interest in the voting shares of Ceramic for a consideration of R3,5 billion,increasing its ownership interest to 95,47%.Ceramic is a manufacturer of glazed porcelain floor tiles; ceramic wall and floor tiles; vitreous china sanitaryware and acrylic baths and shower trays. The Group acquired the additional interest in Ceramic because the Acquisition will result in improved efficiencies and reduced costs;enhance the allocation of capital as well as create a depth of management, experience and skill within the Group.

The Group has elected to measure non-controlling interests in Ceramic at proportionate share of the book value.

Assets acquired and liabilities assumed

The book values of the identifiable assets and liabilities of Ceramic as at 2 October 2017 are:

The Group has also obtained a controlling interest in Ezee Tile as a result of the Acquisition.Prior to the Acquisition, Italtile Ceramics and Ceramic each held a 36,6% interest in Ezee Tile. Post the Acquisition, the Group now holds an effective interest of 71,54% in Ezee Tile.

The book values of the identifiable assets and liabilities of Ezee Tile as at 2 October 2017 are:

The Group adopted a pooling of interest accounting policy to account for the Acquisition which is a common control transaction and thus scoped out of IFRS 3 Business Combinations (“IFRS 3”). Under the pooling of interest method,the carrying amounts of the assets and liabilities of Ceramic and Ezee Tile have been included in the statement of financial position of Italtile, with the difference between the purchase consideration and the net assets of Ceramic and Ezee Tile being included directly in equity and netted off against retained income.This amounted to R2.6 billion.

No goodwill was recognised.

Transaction costs amounting to R25 million related to the Acquisition were incurred and capitalised to the cost of investment in Ceramic.

In terms of a partially underwritten renounceable Rights Offer, the Group offered a total of 260 539 178 new ordinary shares of no par value (“Rights Offer Shares”) at a subscription price of R11,57 in the ratio of 22 Rights Offer Shares for every 100 Italtile shares held at the close of business on 10 November 2017. Following the close of the Rights Offer on Friday, 24 November 2017, 135 985 156 Rights Offer Shares were subscribed for, equivalent to 99% of the 137 473 296 Rights Offer Shares that could have been subscribed for (a large portion of Rights was not followed by Rallen Proprietary Limited,as the Rights Offer had taken place in order to allow minority shareholders of Italtile an opportunity to claw back their shareholding positions which were diluted as a result of the Acquisition).

Proceeds of the Rights Offer totalled R1,6 billion, and were utilised to settle the outstanding cash portion (and interest thereon) related to the Acquisition.

The Group sold a 10% non-controlling stake in International Tap Distributors Proprietary Limited at the beginning of January 2018 to a new business partner, at a cost of R14 million, reducing the Group’s interest in this entity to 88%.

On 20 February 2018, Four Arrows Investments 256 Proprietary Limited (“Four Arrows”) submitted a formal written offer to the Group to sell 25 million of the 35,2 million Italtile shares it held, back to the Group.The offer price was set in accordance with the terms of a Preference Share Agreement signed in 2007, in terms of which Four Arrows had raised the funds for the purchase of the 35,2 million shares. According to this agreement, the offer price was set at R11,83 per share (the Italtile 10-day VWAP immediately preceding the date of receipt of the offer), amounting to R295 750 000 in total.

In accordance with specific approval granted by Italtile shareholders in July 2007, the Board approved the repurchase and the shares were subsequently repurchased on 13 March 2018. Following acceptance of the offer and approval by the Board, Italtile called for the redemption of 800 000 redeemable, cumulative preference shares in Four Arrows, the capital and arrear dividends totalling R165 790 840 for such.The redemption payment was made on 20 March 2018.

The transactions resulted in a net cash outflow of R129,7 million and a reduction of 25 million shares in the Group’s issued share capital as the shares which were repurchased by Italtile were cancelled in terms of the Companies Act.

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, seven million of the Group’s shares net of forfeitures were held by qualifying staff members at 30 June 2018 (2017: seven 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 second allotment of shares in the scheme, granted in 2014, vested on 31 August 2017. A total of 134 employees qualified for the vesting, of which four employees opted to receive shares and the balance received the net value of the awards in cash.This resulted in a decrease in treasury shares of 1 468 409 (2017: 4 879 577) shares.

The scheme is classified as an equity-settled scheme in terms of IFRS 2, Share-based Payment, and has resulted in a charge of R16 million (2017: R17 million) to the Group’s income; R9 million (2017: R10 million) of this charge is a once-off accelerated expense for franchise staff.

On 14 June 2018, the Ceramic Foundation Trust transferred 13 670 595 Italtile shares to the Italtile and Ceramic Foundation Trust, which is consolidated for Group reporting purposes.The transfer was done in order to merge the two trusts, which embark on social economic development projects independently from the Group. The transfer has resulted in an increase in treasury shares of 13 670 595 shares and related carrying value of R158 million.

No adjustments to earnings are required for diluted earnings per share calculations, as the share awards do not have an impact on diluted earnings.

A pro forma Group statement of comprehensive income has been prepared in order to demonstrate the financial performance of the Group had the Acquisition not taken place in the current period. In addition, a pro forma statement of comprehensive income has been prepared for the manufacturing businesses (Ceramic and Ezee Tile) to demonstrate the financial performance of these businesses for the current period.This information has not been reviewed by the Group’s auditors and is available on the corporate website (www.italtile.com).