Notes

1. Basis of preparation and changes in accounting policy

Basis of preparation

These reviewed interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and the requirements of the Companies Act of South Africa. These results have been prepared under the supervision of Executive Director: Group Finance and Administration, Ms T T A Mhlanga.

New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of these interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 30 June 2018, except for the adoption of new standards effective as of 1 January 2018. The Group has elected to early adopt IFRS 16 Leases which has been issued but is not yet effective.

The Group applies, for the first time, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments that require restatement of previous financial statements. As required by IAS 34, the nature and effect of these changes are disclosed below.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The Group has elected to apply the standard retrospectively.

The Group assessed its financial assets and liabilities and based their classification and measurement on the business model of the Group and on the cash flows associated with each asset and liability. This resulted in a change in the classification of financial assets but the measurement thereof remaining the same. Therefore the application of this standard did not have a significant impact on the Group's reported results and cash flows for the six months ended 31 December 2018 and the financial position.

IFRS 15 Revenue from Contracts with Customers

The standard is effective for accounting periods beginning on or after 1 January 2018 and was adopted by the Group on 1 July 2018. A key area of impact has been the clarity provided on the treatment of 'bill and hold' arrangements as well as the recognition of the refund liability and related right of return asset. The return of asset and refund liability were not accounted for in the interim results due to their immateriality.

The application of this standard did not have a significant impact on the Group's reported results and cash flows for the six months ended 31 December 2018 and the financial position.

IFRS 16 Leases

The Group has opted for the early adoption of IFRS 16 Leases using the modified retrospective approach by recognising the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of equity at 1 July 2018. Therefore the comparative information has not been restated and continues to be reported under IAS 17 Leases and related interpretations.

The Group has elected to use the exemptions applicable to the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. The Group has leases of certain office equipment that are considered of low value.

During 2018, the Group performed a detailed impact assessment of IFRS 16. At 1 July 2018, the extraction of leases included 75 real estate and 128 non-real estate leases.

The effect of adopting IFRS 16 is as follows:

Impact on the statement of financial position as at the transition date of 1 July 2018:

    Rm   
Assets       
Right-of-use assets   192   
Liabilities      
Lease liabilities   221   
Net impact on equity     (29)  

The right-of-use assets disclosed above excludes the lease premiums of R40 million which have been reclassified from long-term assets.

Impact on the statement of comprehensive income as at 31 December 2018:

    Rm   
Increase in depreciation expense (included in operating expenses)   22   
Decrease in operating lease expense   (26)  
Increase in trading profit    
Increase finance costs   (4)  
Profit for the period   (#)  

# Less than R1 million.

Due to the adoption of IFRS 16, the Group's trading profit will improve, while its interest expense will increase.

This is due to the change in the accounting for expenses of leases that were classified as operating leases under IAS 17.

2. Commitments and contingencies

There are no material contingent assets or liabilities at 31 December 2018.

Capital commitments (Rm's)   31 December
2018
  31 December
2017
  30 June
2018
 
– Contracted   240   342   491   
– Authorised but not contracted for   118   279   294   
Total   358   621   785   

3. Fair values of financial instruments

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 period.

4. Cedar Point Trading 326 Proprietary Limited

The Group acquired a 10% non-controlling stake in Cedar Point Trading 326 Proprietary Limited at the end of August 2018, held by the previous business partner at a cost of R15,7 million and increases the Group's interest in this entity to 100%.

5. 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 years of each allotment date, being August every year. As a result, eight million of the Group's shares, net of forfeitures, were held by qualifying staff members at 31 December 2018 (2017: eight 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 third allotment of shares in the scheme, granted in 2015, vested on 31 August 2018. A total of 101 employees qualified for the vesting, of which four employees opted to retain the shares and the balance received the net value of the awards in cash. This resulted in a decrease in treasury shares of 1 044 139 (2017: 1 468 409) 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: R14 million) to the Group's income; R14 million (2017: R12 million) of this charge is a once-off accelerated expense for franchise staff.

6. Earnings per share

    Reviewed 
six months to 
31 December 
2018 
  Reviewed 
six months to 
31 December 
2017 
 
Reconciliation of shares in issue (all figures in millions):          
– Total number of share issued   1 295    1 320   
– Shares held by Share Incentive Trust   (10)   (12)  
– BEE treasury shares   (61)   (83)  
– Shares held by Italtile Ceramics   (3)   –   
Shares in issue to external parties   1 221    1 225   
Reconciliation of share numbers used for earnings per share calculations
(all figures in millions):
         
Weighted average number of shares in issue   1 222    1 038   
Weighting of Rights Offer bonus element   –     
Weighted average number of shares*   1 222    1 043   
– Dilution effect of share awards      
Diluted weighted average number of shares   1 227    1 048   
Reconciliation of headline earnings (Rand millions):          
– Profit attributable to equity shareholders   676    507   
– Profit on sale of property, plant and equipment – after taxation   (8)   –   
Headline earnings   668    507   
* The weighted average number of shares has been adjusted in accordance with IAS 33 Earnings Per Share, to account for the deemed bonus element inherent in the Rights Offer.

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

7. Disaggregation of revenue from contracts with customers

Set out below is the disaggregation of the Group's revenue from contracts with customers:

    Reviewed
six months to
31 December
2018
  Reviewed
six months to
31 December
2017
 
Turnover   3 701   2 831  
Royalty income from franchising*   82   73  
Other franchise income*   55   49  
    3 838   2 953  

Turnover represents net revenue from sale of goods, excluding value added tax and inter-company sales.

* Franchise income has been disaggregated from other operating income and comparatives have been reclassified accordingly.

8. Events after reporting date

The directors are not aware of any matters or circumstances arising since the end of the reporting period which significantly affect the financial position at 31 December 2018 or the results of its operations or cash flow for the period then ended.

Investor contacts

Physical and registered address

The Italtile Building
Cnr William Nicol Drive and Peter Place
Bryanston 2021
Gauteng, South Africa

 

Postal address

PO Box 1689
Randburg 2125
South Africa

 

Contact details

Telephone: +27 11 510 9050
Fax: +27 11 510 9060

 

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www.italtile.com