ANNUAL REPORT 2018
in
“will,”
“may,”
“plans,”
“seeks,”
DISCLAI M E R: Certain statements
this
announcement constitute forward-looking statements.
Forward-looking statements are statements (other
than statements of historical fact) relating to future
events and the anticipated or planned financial and
operational performance of Michael Hill International
Limited and its related bodies corporate (the Group).
The words “targets,” “believes,” “expects,” “aims,”
“intends,”
“might,”
“anticipates,” “would,” “could,” “should,” “continues,”
“estimates” or similar expressions or the negatives
thereof, identify certain of these forward-looking
statements. Other forward-looking statements can
be identified in the context in which the statements
are made. Forward-looking statements
include,
among other things, statements addressing matters
such as the Group’s future results of operations;
financial condition; working capital, cash flows and
capital expenditures; and business strategy, plans and
objectives for future operations and events, including
those relating to ongoing operational and strategic
reviews, expansion into new markets, future product
launches, points of sale and production facilities.
that
the
expectations reflected in these forward-looking
statements are reasonable, such forward-looking
statements
involve known and unknown risks,
uncertainties and other important factors that could
cause the Group’s actual results, performance,
operations or achievements or industry results, to
differ materially from any future results, performance,
operations or achievements expressed or implied by
such forward-looking statements.
the Group believes
Although
in market
include, among others: global and
Such risks, uncertainties and other important
local
factors
economic conditions; changes
trends
and end-consumer preferences; fluctuations in the
prices of raw materials, currency exchange rates,
and interest rates; the Group’s plans or objectives for
future operations or products, including the ability to
introduce new jewellery and non-jewellery products; the
ability to expand in existing and new markets and risks
associated with doing business globally and, in particular,
in emerging markets; competition from local, national
and international companies in the markets in which
the Group operates; the protection and strengthening
of the Group’s intellectual property rights, including
patents and trademarks; the future adequacy of the
Group’s current warehousing, logistics and information
technology operations; changes in laws and regulations
or any interpretation thereof, applicable to the Group’s
business; increases to the Group’s effective tax rate
or other harm to the Group’s business as a result of
governmental review of the Group’s transfer pricing
policies, conflicting taxation claims or changes in
tax laws; and other factors referenced to in this
presentation.
Should one or more of these risks or
uncertainties materialise, or should any underlying
assumptions prove to be incorrect, the Group’s actual
financial condition, cash flows or results of operations
could differ materially from that described herein as
anticipated, believed, estimated or expected.
The Group does not intend, and do not
assume any obligation, to update any forward-looking
statements contained herein, except as may be required
by law. All subsequent written and oral forward-looking
statements attributable to us or to persons acting on
the Group’s behalf are expressly qualified in their
entirety by the cautionary statements referred to above
and contained elsewhere in this announcement.
TE R M I NOLOGY: In this report, unless otherwise
specified or appropriate in the context, the term
"Company"
International
Limited, and the terms "Group" or "Michael Hill" refer
to the Company and its subsidiaries (as appropriate).
b
to Michael Hill
refers
The Directors are pleased to present the annual report
of Michael Hill International Limited and its subsidiaries
for the year ended 30 June 2018
WHAT’S INSIDE
3
5
7
COM PANY PROFI LE &
COR PORATE GOALS
An introduction to the Company
and our goals
CHAI R'S R EVI EW
Emma Hill reviews the Group’s
overall performance for the year
KEY FACTS
Key results and data for the year
12 TR E N D STATE M E NT
A table of our historical performance
over the past five years
14 OU R COM M U N ITY SPI R IT
34
I N FOR MATION ON DI R ECTORS
The Group’s involvement in the
communities we do business in
16 CE LE B RATI NG OU R SUCCESS
A look at how we pay tribute to
our managers and high achievers
19 SUSTAI NAB I LITY
37 R E M U N E RATION R E PORT
Remuneration of Directors
and key executives
48 AU DITOR’S DECLARATION
49 FI NANCIAL STATE M E NTS
20 OU R LEADE RSH I P PR I NCI PLES
94 AU DITOR’S R E PORT
98 ADDITIONAL I N FOR MATION
100 I N DEX
100 COR PORATE DI R ECTORY
20 OU R KEY STRATEG IC GOALS
21 EXECUTIVE AN D MANAG E M E NT
Our key people across Australia,
New Zealand and Canada
23 DI R ECTORS' R E PORT
A review of the year’s operations
and the plans and priorities for
the future
1
Our vision: To resurrect jewellery
as a way of commemorating and
honouring all love.
2
2
COMPANY PROFILE
Michael Hill is a specialist retail
jewellery chain. As at 30 June 2018, it
operates 312 stores in Australia, New
Zealand and Canada.
The first Michael Hill store opened in 1979 when Sir Michael
Hill and his wife, Lady Christine Hill launched their unique
retail jewellery formula in the New Zealand town of Whangarei,
some 160 kilometres north of Auckland.
With dramatically different store designs, a product
range devoted exclusively to accessible jewellery and the
clever use of high impact advertising, Michael Hill rapidly
gained popularity and rose to national prominence.
Through the successful listing on the New Zealand
Stock Exchange in 1987, the Group expanded into Australia.
The next 15 years saw sustained growth and in 2002,
Michael Hill expanded into North America, opening its first
stores in Vancouver, Canada. The Group's Canadian store
presence continues to grow as does the Group's online
presence in all markets in which it operates.
In June 2016 shareholders voted overwhelmingly in
favour of moving the primary stock exchange listing of
Michael Hill from the New Zealand Stock Exchange to the
Australian Securities Exchange. On 7 July 2016 the Company
was admitted to the official list of the Australian Securities
Exchange as its primary listing with a secondary listing on the
New Zealand Stock Exchange (ASX/NZX: MHJ).
As at 30 June 2018, the Group has 177 stores in
Australia, 52 in New Zealand and 83 stores in Canada.
Around the world, the Group employs approximately 2,600
permanent employees across retail sales, manufacturing
and administration roles.
Michael Hill's vision is to resurrect jewellery as a way
of commemorating and honouring all love.
Information on our corporate governance policies and
practices, including our Corporate Governance Statement,
is available in the corporate governance section of our
website at investor.michaelhill.com
SIR MICHAEL HILL DESIGNER BRIDAL COLLECTION
3
MICHAEL HILL INTERNATIONAL LIMITED 2018 CHAIR REVIEW 3
CHAIR'S REVIEW
...this year we made significant progress towards delivering
our strategy of creating a true point of difference for the
Michael Hill brand, products and customer experience...
4
4
Dear Shareholders,
I am pleased to present the Michael Hill
International Limited annual report to
shareholders for FY18.
The year was one of recalibration and
repositioning for the Group as we made significant
progress towards delivering our strategy of creating a true point
of difference for the Michael Hill brand, products and customer
experience. We also decided to exit the loss-making US and
Emma & Roe businesses, which puts us in a stronger position to
deliver sustainable and long-term growth.
The exit of these businesses had a material impact on the
financial result, with statutory net profit after tax of $4.6m after
$25.5m of one-off closure costs. Normalised earnings before
interest and tax was $40.1m, while operating revenues from
continuing operations increased by 4.4% to $575.5m.
STRATEG IC R EVI EW
The Board completed a wide-ranging review which identified
an opportunity to increase market share and profitability of
the Michael Hill brand by accelerating our evolution into a
design led, customer-centric jewellery brand. Our ambition is
to be a global leader in the premium jewellery category with a
deep engagement and commitment to our customers and the
communities we serve.
To give our customers a more engaging experience, we
are placing increased emphasis on integrating our digital and
in-store experience, and personalising our communications
across all channels. Jewellery is an omni channel business; with
customers investing significant time understanding our brand
and offer through digital channels before visiting our stores.
To be a successful jewellery retailer in today’s rapidly changing
environment our customers must be able to shift seamlessly
between channels.
Underpinning customer experience will be the continued
evolution of our brand and product. Our brand will be refreshed in
the coming year with a more inclusive customer proposition. We
will accelerate growth in our proprietary collections by enhancing
our in-house design capabilities.
We are confident that these strategies, combined with
our best in class sales force, will drive sustainable long
term growth.
Delivering this strategy requires focus and
investment. We have already strengthened the
leadership team in the areas most relevant to our
strategy and we will complement this in the year
ahead with further infrastructure investment in both
people and technology, and in expanding and
refurbishing our store network.
We approach 2019 with a clearly defined
set of priorities to execute over the coming
years, and a strong balance sheet positioning us
to deliver our ambition of being a global leader in
the fine jewellery category.
B USI N ESS PE R FOR MANCE
Exiting the US and Emma & Roe businesses allows us to focus
on increasing profitability of the Michael Hill brand in our three
established markets.
Our Canadian business grew strongly in terms of revenue and
earnings, and we continue to achieve scale and increase market
share. The Australian and New Zealand businesses largely held
their positions in challenging markets and we anticipate that our
differentiated omni-channel offering will help to deliver growth in
these regions and improve overall quality of earnings.
To support this, we decided to divide management responsibili-
ties of the Australian segment, with two Retail General Managers
overseeing separate regional teams. This is designed to allow
for greater focus on team capability and execution and help to
strengthen our position in a competitive Australian market.
LEADE RSH I P
The progression made on our strategy is recognition of the
outstanding contribution made to Michael Hill by CEO Phil
Taylor, who has advised the Board of his decision to resign due
to health reasons. The Board would like to acknowledge the
tremendous service Phil has given to Michael Hill for more than
three decades, and as CEO since August 2016.
In September 2018, the Board confirmed the appointment
of Daniel Bracken as its new CEO. Daniel brings more than 25
years of retail experience having worked with some of the world’s
most iconic brands. He has a deep understanding of the retail
environment with valued experience in e-commerce, in designing
integrated digital and in-store experiences, and in leading
merchandising, product design and customer engagement
strategies. We welcome Daniel to Michael Hill and look forward
to him continuing to build on our strategy in the years ahead.
On behalf of the Board, we thank you for your ongoing
support and investment in Michael Hill.
Emma Hill
Chair
26 September 2018
PENDANT FROM WILLOW BY CHRISTINE HILL COLLECTION
5
KEY FACTS
6
6
YEAR ENDED 30 JUNE / AU$000 UNLESS STATED
2018
2017 % CHANGE
TRADI NG R ESU LTS
From continuing operations
575,549
Group revenue
366,893
Gross profit
50,147
Earnings before interest and tax*
Normalised earnings before interest and tax* 40,106
47,467
Net profit before tax
34,818
Net profit after tax
551,099
351,007
62,332
48,117
59,183
44,132
4.4%
4.5%
(19.5%)
(16.6%)
(19.8%)
(21.1%)
Group trading results
(30,208)
Loss from discontinued operations
4,610
Profit for the year
Net cash inflow from operating activities 58,893
(11,485) (163.0%)
32,647 (85.9%)
38.1%
39,752
FI NANCIAL P OSITION AT YEAR E N D
Contributed equity
387,438,513 ordinary shares
Total equity
Total assets
Net debt
Capital expenditure
10,266
10,015
189,221 202,183
375,348 389,122
27,993
39,358
24,555
33,145
2.5%
(6.4%)
(3.5%)
(28.9%)
(25.9%)
KEY RATIOS
Return on average shareholders’ funds
Gross profit
Interest expense cover (times)
Equity ratio (total equity/total assets)
Gearing Ratio (net debt/total equity)
Current ratio
17.8%
63.7%
18.6
50.4%
14.8%
22.7%
63.7%
19.7
52.0%
19.5%
(current assets/current liabilities)
2.6:1
3.0:1
EAR N I NGS PE R SHAR E
Basic earnings per share
Diluted earnings per share
8.99¢
8.98¢
11.43¢
11.42¢
DISTR I B UTION TO SHAR E HOLDE RS
Dividends - including final dividend
Per ordinary share
Times covered by net profit after tax
au5 .0¢
1.80
au5.0¢
2.29
* EBIT and Normalised EBIT are Non-IFRS Information and are
unaudited. Please refer to Non-IFRS Information in the Directors’
Report on page 33 of this annual report for an explanation of
Non-IFRS information and a reconciliation of EBIT from continuing
operations and Normalised EBIT.
SHAR E PR ICE
30 June
2018
2017
au$0.97
au$1.11
SAM E STOR E SALES
Michael Hill same store sales
movement (in local currency)
Australia
New Zealand
Canada
Group same store sales
movement
N U M B E R OF STOR ES
Australia
New Zealand
Canada
United States
Michael Hill stores
Australia
New Zealand
Emma & Roe stores
-0.9%
2.3%
3.8%
1.2%
-0.8%
8.8%
0.4%
1.6%
171
52
83
-
306
6
-
6
166
52
76
9
303
28
1
29
Total stores
312
332
MICHAEL HILL INTERNATIONAL LIMITED 2018 KEY FACTS 7
SIR MICHAEL HILL
DESIGNER BRIDAL
COLLECTION
.
1
1
5
2 5
2
2
5
.
7
.
4
8
4
4
.
4
7
4
5
.
5
7
5
8
.
9
7
.
2
1
7
8
.
8
6
2
.
3
6
.
8
7
5
Total Michael Hill and Emma & Roe jewellery stores 312
1987 - 2018, YEAR ENDED 30 JUNE
■ MH STORES ■ E&R STORES
Group revenue up 4.4%
AU$ MILLIONS /
YEAR ENDED 30 JUNE
Earnings before interest, taxation,
depreciation and amortisation
(EBITDA) down 13.8%
AU$ MILLIONS /
YEAR ENDED 30 JUNE
14
15
16
17
18
14
15
16
17
18
8 MICHAEL HILL INTERNATIONAL LIMITED 2018 KEY FACTS
PERFORMANCE HIGHLIGHTS
FOR THE 12 MONTHS TO 30 JUNE 2018
Revenue from continuing operations of $575.5m up
4.4 % on same period last year
Same store sales were 0.4% up on same period last year
Online sales grew 57.4% to $10.3m
Branded collection sales increased to 18.0% of total
product sales
EBIT from continuing operations of $50.1m
Normalised EBIT of $40.1m
Statutory net profit after tax for the Group of $4.6m
Continuing operations net profit after tax of $34.8m
Final dividend of au2.5¢ per share making the total
dividend au5.0¢ for the year
Equity ratio of 50.4% at 30 June 2018
Net operating cash inflow was $54.9m, up 38.1% on
prior year
17 Michael Hill stores opened and five closed
during the period
Total of 306 Michael Hill stores open at
30 June 2018
Total of six Emma & Roe stores open at
30 June 2018
Total of 312 stores in the Group open at
30 June 2018
(all values stated in $AU unless stated otherwise)
SIR MICHAEL HILL
DESIGNER BRIDAL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED 2018 KEY FACTS 9
5
.
6
z
n
0
.
5
0
.
5
5
7
.
4
z
n
0
.
5
z
n
4
2
1
.
z
n
1
1
1
.
7
9
.
0
4
1
1
.
z
n
6
0
1
.
z
n
14
15
16
17
18
14
15
16
17
18
Ordinary dividend
AU CENTS PER SHARE /
YEAR ENDED 30 JUNE
Share price performance
AU$ / YEAR ENDED 30 JUNE
1
.
4
4
8
.
4
3
2
.
3
3
2
.
8
2
3
.
6
2
14
15
16
17
18
Net profit after tax
from continuing operations
down 21%
AU$ MILLIONS /
YEAR ENDED 30 JUNE
SIR MICHAEL HILL DESIGNER BRIDAL COLLECTION
10 MICHAEL HILL INTERNATIONAL LIMITED 2018 KEY FACTS
7
.
2
2
0
.
8
1
.
8
7
1
9
.
5
1
1
.
4
1
.
4
1
1
4
.
6
2
6
.
9
9
.
8
1
.
9
2
7
.
4
.
0
2
5
.
9
1
.
2
7
1
8
.
4
1
EQUITY 50%
CURRENT
LIABILITIES 15%
NON-CURRENT
LIABILITIES 35%
Source of funding
30 JUNE 2018
14
15
16
17
18
Return on average shareholders’
funds 17.8%
% / YEAR ENDED 30 JUNE
14
15
16
17
18
14
15
16
17
18
Return on average
assets 9.1%
% / YEAR ENDED 30 JUNE
Gearing ratio 14.8%
% / YEAR ENDED 30 JUNE
MICHAEL HILL INTERNATIONAL LIMITED 2018 KEY FACTS 11
TREND STATEMENT
FI NANCIAL PE R FOR MANCE
FROM CONTI N U I NG OPE RATIONS
2018
$000
2017
$000
2016
$000
2015
$000
2014
$000
Group revenue
575,549
551,099
522,214
484,667
474,353
Earnings before interest, tax, depreciation
and amortisation (EBITDA)^
Depreciation and amortisation
Earnings before interest and tax (EBIT)^
Net interest paid
Net profit before tax (NPBT)
Income tax*
Net profit after tax (NPAT)*
Net operating cash flow
Ordinary dividends paid
FI NANCIAL P OSITION
Cash
Inventories
Other current assets
Total current assets
Other non-current assets
Deferred tax assets
Total tangible assets
Intangible assets
Total assets
Total current liabilities*
Non-current borrowings
Other long term liabilities
Total liabilities*
68,841
18,694
50,147
2,680
47,467
12,649
34,818
54,893
19,371
79,759
17,427
62,332
3,149
59,183
15,051
44,132
39,752
19,264
71,220
16,796
54,424
5,508
48,916
22,586
26,330
47,794
17,490
63,203
14,645
48,558
4,665
43,893
10,674
33,219
54,566
23,176
57,752
12,540
45,212
5,370
39,842
11,671
28,171
14,689
22,336
2018
$000
2017
$000
2016
$000
2015
$000
2014
$000
7,220
5,676
8,853
6,797
8,109
192,074
29,314
228,608
72,219
61,895
362,722
12,626
375,348
88,287
35,213
62,627
186,127
203,853
199,961
182,232
179,280
29,052
31,298
39,378
25,204
238,581
240,112
228,407
212,593
83,864
57,893
74,450
64,074
67,734
48,381
58,488
62,324
380,338
378,636
344,522
333,405
8,784
5,561
6,491
6,413
389,122
384,197
351,013
339,818
79,653
45,034
62,252
100,986
40,887
55,923
69,879
45,116
48,397
71,005
56,000
31,528
186,939
197,796
163,392
158,533
Net assets*
189,221
202,183
186,401
187,621
181,285
Reserves and retained profits*
Paid up capital
Treasury stock
178,956
10,266
192,168
182,634
183,861
177,634
10,015
3,767
-
-
-
3,767
(7)
3,702
(51)
Total shareholder equity
189,221
202,183
186,401
187,621
181,285
Per ordinary share
Basic earnings per share*
Diluted earnings per share*
Dividends declared per share - Interim
- Final
8.99¢
8.98¢
au2.5¢
au2.5¢
11.43¢
11.42¢
au2.5¢
au2.5¢
6.87¢
6.84¢
nz2.5¢
au2.5¢
8.67¢
8.64¢
nz2.5¢
nz2.5¢
7.36¢
7.24¢
nz2.5¢
nz4.0¢
Net tangible asset backing*
$0.46
$0.50
$0.47
$0.47
$0.46
* Please note that several key measures in the 2015-16 financial year were materially affected by the separate booking of the IR tax
settlement and the income tax consolidation cost base adjustments as a consequence of the ASX listing.
^ EBITDA and EBIT are Non-IFRS Information and are unaudited. Please refer to Non-IFRS Information in the Directors’ Report on page 33
of this annual report for an explanation of Non-IFRS information.
12
ANALYTICAL I N FOR MATION
EBITDA to sales
EBIT to sales
Profit after tax to sales
EBIT to total assets
Return on average shareholders funds*
Return on average total assets*
Current ratio*
EBIT interest expense cover
Effective tax rate*
Gearing
Net borrowings to equity
Equity ratio
Other
2018
$000
12.0%
8.7%
6.0%
13.4%
17.8%
9.1%
2.6
18.6
26.6%
14.8%
50.4%
2017
$000
14.5%
11.3%
8.0%
16.0%
22.7%
11.4%
3.0
19.7
2016
$000
13.6%
10.4%
5.0%
14.2%
14.1%
7.2%
2.4
8.9
2015
$000
13.0%
10.0%
6.9%
13.8%
18.0%
9.6%
3.3
10.3
2014
$000
12.2%
9.5%
5.9%
13.3%
15.9%
8.9%
3.0
8.3
25.4%
46.2%
24.3%
29.3%
19.5%
52.0%
17.2%
48.5%
20.4%
53.5%
26.4%
53.3%
Shares issued at year end excl Treasury
387,438,513
387,438,513
383,138,513
383,138,513
383,041,606
Treasury stock at year end
Exchange rate for translating
New Zealand results
Canadian results
United States results
Number of Michael Hill stores
Australia
New Zealand
Canada
USA
Total Michael Hill stores
Number of Emma & Roe stores
Australia
New Zealand
Number of Emma & Roe stores
-
-
-
14,677
111,584
1.09
0.98
0.78
171
52
83
-
306
6
-
6
1.06
1.00
0.75
166
52
76
9
303
28
1
29
1.09
0.97
0.73
168
52
67
10
297
15
1
16
1.07
0.97
0.83
167
52
60
9
288
7
1
8
1.10
0.98
0.92
164
52
54
8
278
6
-
6
Total stores
312
332
313
296
284
* Please note that several key measures in the 2015-16 financial year were materially affected by the separate booking of the IR tax
settlement and the income tax consolidation cost base adjustments as a consequence of the ASX listing.
BRACELET FROM KNOTS
BY CHRISTINE HILL COLLECTION
13
MICHAEL HILL
INTERNATIONAL
VIOLIN
COMPETITION
The Michael Hill International Violin
Competition is the launch-pad for violin
virtuosos, the foundation stone of brilliant
musical careers; which the Group supports
by providing an annual donation.
With a prize package valued at over
NZ$100,000, the Michael Hill International
Violin Competition shapes the artistry of
16 of the world’s finest young violinists.
It delivers violinists and audiences alike a
sublime, unique experience.
From concert stages in sub-tropical
Auckland and alpine Queenstown, New
Zealand, the globe’s best young violinists
deliver platinum-plated performances over
eight magnificent days.
TH E WOR LD’S B EST E M E RG I NG
VIOLI N TALE NT I N TH E WOR LD’S
MOST U N IQU E LOCATION
Established two decades ago by
entrepreneur and passionate violinist, New
Zealander Sir Michael Hill, the Michael Hill
International Violin competition is seated
at the top table of global, classical music
competitions. It is New Zealand’s most
prestigious classical music competition
and arguably one of its key iconic events
of the calendar.
Closely nurtured by a board of ardent
arts lovers, the biennial competition, the
“Michael Hill”, carefully selects international
and leading local luminaries to guide
brilliant young talent through competition,
intensive master classes and career
development.
You can keep up-to-date with all
upcoming competition news at:
michaelhillviolincompetition.co.nz
COMMUNITY SPIRIT
Michael Hill International takes great
pride in giving back to the communities
surrounding our stores
14
HUNDERTWASSER
ART CENTRE
Whangarei's Hundertwasser Art Centre with Wairau M-aori Art
Gallery is under construction and due to open in 2020. Conceived
by the renowned Austrian/Kiwi artist, the unique building - a work
of art itself - will feature the only permanent gallery of original
Hundertwasser works outside Vienna and Aotearoa's first exhibition
space dedicated to contemporary M-aori fine art. Interactive and
immersive, the centre includes a substantial education facility
and will be crowned by the southern hemisphere's largest living
afforested roof.
The Hundertwasser Art Centre will be a world-class visitor
destination and a jewel in the crown for Northland. Recognised as
a catalyst for growth, investment and creativity in Northland, the
project is the culmination of a 25-year dream for a more thriving and
vibrant Northland.
The Group has provided a generous funding contribution,
boosting the Hundertwasser Art Centre's capital fundraising which
has been led by an entirely volunteer community-based team.
PLAID FOR DAD
Supporting prostate cancer
research in Canada
Plaid for Dad was launched in 2015
to help raise awareness and vital
research funds for prostate cancer.
It has quickly become a fun and
easy way for Canadians to celebrate
dad and help the one in seven men
who will be diagnosed with prostate
cancer in their lifetime.
This year, North American
president Brett Halliday and his
entire team showed their support by
wearing plaid in store in the run up
to 16 June 2018, the Friday before
Father’s Day, officially designated
as the day to wear Plaid for Dad.
Brett and his team actively
supported Plaid for Dad initiatives
by raising over ca$10,000 and
they were recognised
with an ‘Outstanding
Achievement in the
Retail Services
Sector’.
SIR MICHAEL HILL
DESIGNER BRIDAL COLLECTION
15
CELEBRATING OUR SUCCESS
It’s our people who make our Company!
International Managers’ Conference, Las Vegas, United States of America: Each year, our Retail and Support
Centre Management Teams come together to celebrate their phenomenal achievements. We recognise their contributions and
share with them the Group’s strategic direction for the coming year.
This year over 400 delegates from four nations journeyed to one of the most exciting cities in the world - Las Vegas, in the
heart of the Nevada desert. Our culture, values and leadership principles were re-energised and focused, to drive our teams to
continue to produce outstanding results and most importantly – incredible customer experiences.
16
Gold Club: Every year we celebrate the personal achievements of our highest performing Sales Professionals. This year
the 245 incredible individuals who achieved gold club status, accounting for over au$158m in sales, were invited to celebrate
their success in the amazing cities of Miami, Florida and the Gold Coast, Australia. Our top performers were joined by our General
Managers and Chair of the Board, Emma Hill, to personally congratulate and thank them for their contributions to the success of
Michael Hill and Emma & Roe for 2017.
17
Our purpose: We celebrate
love in all its forms.
18
18
SUSTAINABILITY
It's as important to us as it is to you.
The story behind your jewellery begins long before you see
it sparkle. The Group is committed to operating its business
sustainably and responsibly, to protect the long-term value
of the Group, and to enhance its relationship with its stakeholders.
Responsible Jewellery Council
The Company is a member of the Responsible Jewellery Council (RJC).
The RJC is an international, not-for-profit standards and certification
organisation. Its 1,100+ members span the jewellery supply chain from mine
to retail and commit to being independently audited against the RJC Code
of Practices – an international standard on responsible business practices
for the diamond, gold and platinum jewellery supply chain addressing human
rights, labour rights, health and safety, environmental impact, conflict free
diamonds, product disclosure and many more important topics for the industry.
The Company is working towards achieving formal RJC certification,
which is a requirement for the Company to maintain its RJC membership.
Sustainability reporting
Although certain aspects of our business strategy and performance are
reported through our annual report, the Group is committed to aligning
its reporting with issues of key importance to the Group and to its
stakeholders, in order to meet the growing community expectations of
transparency, disclosure and corporate social responsibility. The Company
continues to work towards building a foundation upon which a formal
sustainability report, that is compliant with the Global Reporting Initiative
Standards or other independent standard, can be prepared.
JEWELLERY FROM WILLOW
BY CHRISTINE HILL COLLECTION
19
Our leadership principles
Our key strategic goals
CUSTOM E R FOCUS
We brighten, impress and
delight our customers
We consider our customers in
everything we do
M I N DSET FOR G ROWTH
We show perseverance and
determination to grow
We are competitive and take
the lead in the marketplace
We innovate and challenge the
status quo
We display a positive attitude
and confidence towards our
future
We are visible, accessible and
clearly communicate the vision
B IAS FOR ACTION
We deliberately choose our
priorities to achieve our vision
We engage in thoughtful
decision making and intelligent
risk-taking
We act with speed and a
sense of urgency in executing
initiatives and strategy
B U I LDI NG TALE NT
AN D TEAMS
We personally invest in the
development and success of
our teams
We identify and develop talent
to achieve the Michael Hill
vision
We commit to being part of,
and engendering an aligned
and cohesive team
We believe in having a diverse
team and placing the best
people in the right positions
ACCOU NTAB I LITY AN D
R ESPONSI B I LITY
We lead by example, hold
ourselves to the highest
standards and deliver on our
personal KPIs
We hold our teams accountable
by setting clear expectations
and providing continuous
feedback
We personally drive positive
change
1 OM N I-CHAN N E L:
Building capability to deliver a
seamless customer experience.
4 B RAN D POSITION:
Strengthen and grow brand
loyalty.
Based on recent brand review,
we will reposition our brand in
market to meet the changing
consumer landscape.
5 OPE RATIONAL
EXCE LLE NCE: Enhance
execution capability and agility.
Build capability and agility
throughout the organisation to
adapt quickly to a fast changing
retail environment.
Evolving our online experience,
including integration of digital
and social channels with
our store network, to enable
a seamless experience for
customers where and when
they engage with us.
2 CUSTOM E R LOYALTY:
Building data capability to
better service customers.
Using data driven customer
insights to deliver tailored
customer experiences to drive
brand loyalty and advocacy.
3 U N IQU E B RAN DE D
COLLECTIONS: Escalate
our growth of branded
collections.
Through enhanced designer
capability, create unique
branded collections to meet
growing customer demand for
differentiated products.
20
20 MICHAEL HILL INTERNATIONAL LIMITED SENIOR EXECUTIVES
Our Executive Team
AT 30 JUNE 2018
Our General Managers
AT 30 JUNE 2018
PHIL TAYLOR
CHIEF EXECUTIVE OFFICER
VANESSA BRENNAN
CHIEF BRAND & CUSTOMER
OFFICER
BRETT HALLIDAY
PRESIDENT,
NORTH AMERICA
GREG NEL
RETAIL GENERAL MANAGER,
NEW ZEALAND
ANDREW LOWE
CHIEF FINANCIAL OFFICER
MATT KEAYS
CHIEF INFORMATION OFFICER
KEVIN STOCK
RETAIL GENERAL MANAGER,
AUSTRALIA
TISHARA MINA
RETAIL GENERAL MANAGER,
EMMA & ROE
GALINA HIRTZEL
GROUP EXECUTIVE SUPPLY
CHAIN
STEWART SILK
GROUP EXECUTIVE HUMAN
RESOURCES
KATHERINE HAMMOND
Company Secretary
21
...the Group remains in a strong
financial position to continue to invest in
improvements to its systems, infrastructure
and capabilities, and position the business
for future growth opportunities...
22
DIRECTORS' REPORT
The Directors present their report on the consolidated entity
(referred to hereafter as the ‘Group’) consisting of Michael
Hill International Limited ACN 610 937 598 (‘Michael Hill
International’ or the ‘Company’) and all controlled subsidiaries
for the year ended 30 June 2018.
Principal activities
The Group operates predominately in the retail sale of
jewellery and related services sector in Australia, New Zealand
and Canada.
During the year, the Group exited its US operations
and is in the process of exiting the Emma & Roe brand.
These segments have been reclassified as discontinued
operations for the 2017 and 2018 financial year. There
have been no other significant changes in the nature of the
Group's activities during the year.
Dividends
Dividends paid to members during the financial year were
as follows:
Final ordinary dividend for the year
ended 30 June 2017 of au2.5¢ (2016
- au2.5¢) per fully paid share paid
on 29 September 2017 (2016 - 6
October 2016)
Interim ordinary dividend for the year
ended 30 June 2018 of au2.5¢ (2017
- au2.5¢) per fully paid share paid on 29
March 2018 (2017 - 31 March 2017)
The Directors have declared the
payment of a final dividend of au2.5¢
per fully paid ordinary share* (2017
- au2.5¢). The final dividend will be
unfranked for Australian shareholders
and fully imputed for New Zealand
shareholders. The aggregate amount
of the proposed dividend expected to
be paid on 28 September 2018 out of
retained earnings, but not recognised
as a liability at year end, is
2018
$000
2017
$000
9,685
9,578
9,686
9,686
9,686 9,686
Significant changes
in the state of affairs
During the year the Group exited its
loss making retail operations in the US
and is in the process of exiting the Emma
& Roe brand. Assets in both segments
were impaired as appropriate. As at 30 June
2018, all US stores have been closed. Of the 30 Emma
and Roe stores, 24 stores were closed as at 30 June
2018. The closure programme for the final six Emma &
Roe stores is still in progress. Impaired assets on hand
relating to the Emma & Roe closures will be disposed of
when it is determined they will not be redeployed.
Likely developments and expected
results of operations
Information on likely developments in the Group’s operations
and the expected results of operations have been included in
the Operational Review and Outlook sections of this report.
Review of operations
In Australian dollars, the Group has reported operating
revenue from continuing operations of $575.5m, producing
earnings before interest and tax ('EBIT') for continuing
operations of $50.1m. The Group reported a net profit after
tax ('NPAT') from continuing operations of $34.8m for the
2018 financial year, and a statutory net profit after tax of
$4.6m. Normalised EBIT for the Group was $40.1m for the
year. Normalised EBIT excludes one off costs, including
Emma & Roe and US closure costs and significant items
per the Non-IFRS Information note on page 33.
* EBIT and Normalised EBIT are Non-IFRS Information
and are unaudited. Please refer to Non-IFRS Information
on page 33 of the Directors Report for an explanation of
Non-IFRS information and a reconciliation of EBIT from
continuing operations and Normalised EBIT.
* This will not be declared as conduit foreign income,
therefore Australian withholding tax will be deducted
from the dividend payment for foreign (non-Australian tax
resident) shareholders.
JEWELLERY FROM KNOTS
BY CHRISTINE HILL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 23
CASH, CASH FLOW AN D DIVI DE N DS
The Group has an equity ratio of 50.4% at 30 June 2018
(52.0% in 2017), and a working capital ratio of 2.6:1 (3.0:1
in 2017). Net operating cash flows were $54.9m compared
to $39.8m the previous year. Net debt at 30 June 2018
was $28.0m compared to $39.4m at 30 June 2017.
The Group remains in a strong financial position to
continue to invest in improvements to its systems, infra-
structure and capabilities, and position the business for
future growth opportunities.
Despite the one off costs and operating losses
associated with the discontinued Emma & Roe and US
operations, which impacted statutory profit after tax, the
Group's debt levels reduced with higher operational cash
flows. Accordingly, for shareholders, the dividend for
the year was maintained at au5.0¢ (2017 - au5.0¢) per
share. There will be a final dividend of au2.5¢ per share
payable on 28 September 2018. The final dividend will be
unfranked for Australian shareholders and fully imputed for
New Zealand shareholders.
OPE RATIONAL R EVI EW
The Group achieved the following key outcomes for the
2018 financial year:
• Revenue from continuing operations increased 4.4%
to $575.5m
• Statutory net profit after tax for the Group of $4.6m
($34.8m profit after tax from continuing operations)
• Same store sales from continuing operations were up 0.4%
• Online sales grew by 57.4% to $10.3m
• Canadian segment continues to gain market share with
same store sales increase of 3.8% and a record EBIT for
the year of ca$14.6m
• EBIT from continuing retail segments (Australia, New
Zealand, Canada) of $89.1m, down 1.6% from prior year
of $90.5m
• Branded collection sales increased to 18.0% of total
product sales, up from 14.2% on the prior year
• Sale of Professional Care Plans ('PCP') amounted to
$35.7m for continuing operations, increasing deferred
revenue on the balance sheet from PCP sales to $80.0m
• Gross margin increased in all continuing retail segments
(Australia +0.7%, New Zealand +0.3%, Canada +1.1%),
offset by stock provisions, including for Emma & Roe, leaving
gross margin for the Group flat on prior year at 63.7%
• Dividend of 5.0 cents in line with prior year
• Net operating cash inflow was $54.9m, up on $39.8m
in prior year
• Net debt of $28.0m down from $39.4m
• EBIT before one-off items of $40.1m, down from $48.1m
• One off costs including write-down and disposal of
assets and lease settlement costs relating to US and
Emma & Roe exits amounting to $25.5m. Significant
items include a $1.4m employee benefits revaluation.
24 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
• 17 Michael Hill stores were opened and five were closed
within our three core markets during the year.
• 24 Emma & Roe stores and nine stores in the US were
closed. There was a total of 312 stores trading as at 30
June 2018, including six Emma & Roe stores.
2017-18 was a year of recalibration and repositioning
which saw the Group undertake a strategic review.
Despite significant investment into the US business, the
Group's lack of scale combined with the competitor dynamic
and sector outlook in that market led to the conclusion that we
would not generate an adequate return on further investment
in the business, and the decision was made in January 2018 to
close all US stores.
The decision was also made to close the Emma & Roe
brand, which had failed to meet performance projections.
This followed an in-depth review and analysis of the global
jewellery market and emerging trends which identified an
opportunity to reposition the Emma and Roe brand, however
it was determined that this was not an immediate strategic
priority. The Emma & Roe proposition remains a compelling
opportunity to be explored at the appropriate time.
The Group’s operational results were impacted materially
due to a combination of closure costs for the US and Emma
& Roe businesses and performance deterioration in these
segments once closure was announced.
Revenue from continuing operations grew 4.4%, with same
store sales up 0.4%. Canada produced pleasing same store
sales growth of 3.8% and a record EBIT result. New Zealand
had solid same store sales growth of 2.3% and EBIT slightly
down on last year, while Australia did not meet performance
projections with flat sales and a decline in EBIT contribution.
Gross margin grew across all continuing retail
segments (Australia +0.7%, New Zealand +0.3%, Canada
+1.1%) as a result of our proprietary collection strategy
commanding a premium.
During the 2017-18 year the Group implemented a new
Point of Sale system, with all 171 Australian stores changed
over during the 12 months, with New Zealand and Canadian
stores to be completed in the first quarter of 2018-19.
This was a major investment for the business and is a key
enabler as part of a larger strategic roadmap for the Group’s
information systems. The Group is undertaking a staged
program of investment in its finance, human resourcing,
customer experience and inventory management systems and
supporting cloud based infrastructure.
PCP revenue has again provided strong cash flow
for the Group. The PCP program is designed to provide a
comprehensive suite of care services to our customers so they
can maintain their jewellery in pristine condition. Total sales from
these plans for continuing operations amounted to $35.7m,
and at 30 June 2018 there was $80.0m of deferred PCP
revenue held on the statement of financial position. $31.9m in
PCP revenue was recognised for continuing operations in the
2017-18 year, down 0.6% on the previous year.
In-house credit now represents 28.0% of Canadian sales.
The North American loan book was $20.5m at 30 June 2018
compared to $17.7m at 30 June 2017, with bad debts running at
4.7% of in-house credit sales for the year, which is in alignment
with expectations for credit default rates. The US book is being
closely monitored as the US book winds down following US
store closures. While US default rates have lifted, this was
anticipated, it is being managed and an uptick in default rates
has been provided for.
The Group's e-commerce platform continues to support the
retail segments well with revenue increasing by 57.4%, driven by
increased visitation and higher online conversion. e-commerce
sales now represent over 1.8% of the Group's total revenue.
As at 30 June 2018, the
Group operated Michael Hill
e-commerce sites in all of
the countries we operate
in and an Emma & Roe
e-commerce site in the
Australian market which
is expected to operate for at
least part of the coming financial
year, to facilitate stock clearance for
that brand.
There were 306 Michael Hill stores and six
Emma & Roe stores trading as at 30 June 2018.
Review of 2017-18 Priorities
PR IOR ITI ES
R ESU LTS
Same stores sales growth in all markets and for both brands
of above 2%
Open at least 10 new Michael Hill stores across all markets
Same stores sale growth of 0.4% occurred within the
Michael Hill segments of Australia, New Zealand and
Canada. Below target Australian performance prevented
attainment of our 2% goal.
17 new Michael Hill stores were opened during the year,
well ahead of our original goal.
Continue to review the Emma & Roe brand and adjust the
brand and offering.
A review of the Emma and Roe business in early 2018 lead
to the decision to close the brand.
To reduce the US operating losses and develop a viable model
A decision to exit the US market was announced during the
year and all stores have now been closed.
Branded collection sales to reach 18%
Improved inventory management delivering increase in
GMROI (gross margin return on investment) and stock turn
Continue to develop the e-commerce
business and grow to 2% of Group revenue
Continued information systems investment
to migrate the organisation onto a highly
integrated ERP environment
Michael Hill branded collections sales reached 18.0% of
total sales.
GMROI was 1.48, up on prior year of 1.42. This was a
pleasing improvement achieved through a combination
of inventory range refinement and improved margin
management. Stock turn was 1.11 for the year, in line
with prior year.
e-commerce sales grew 57.4% to $10.3m, amounting to
1.8% of total sales for the financial year. The business
continued to plan and invest in better online capabilities,
which will reap benefits in the years ahead when fully evolved.
There was a continued investment in technology and key
systems during the period consistent with the approved
roadmap for our IT systems. New IT systems and investment
in the development of future systems amounted to $6.5m
during the year.
JEWELLERY FROM INFINITAS BY MICHAEL HILL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 25
Segment Results
The operational segments reported below reflect the performance of the Michael Hill and Emma & Roe retail operations
in each geographic segment, including the discontinued operations of Emma & Roe and Michael Hill United States. The
operational segments include trading activity from our online presence and our North American in-house credit function.
The segments exclude revenue and expenses that do not relate directly to the relevant Michael Hill or Emma & Roe retail
segments, and are treated as unallocated. These predominately relate to corporate costs and Australian based support costs,
but also include the manufacturing activities, warehouse and distribution, interest and company tax.
The Michael Hill United States and Emma & Roe segments were classified as Discontinued Operations during the year
following the announcement of their planned closure. As a result, the Michael Hill United States and Emma & Roe segments
were removed from the Group’s total segment result reported in the consolidated financial statements. The results below are
expressed in local currency.
Michael Hill Australia
OPERATING RESULTS (AU $000)
Revenue
Gross profit
Gross profit as a % of revenue
EBIT
As a % of revenue
Number of stores
2018
325,709
206,303
63.3%
48,621
14.9%
171
2017
2016
2015
321,981
201,707
62.6%
51,688
16.1%
166
309,457
194,152
62.7%
49,975
16.1%
168
294,442
183,582
62.3%
45,933
15.6%
167
2014
298,474
187,381
62.8%
47,493
15.9%
164
The Australian retail segment revenue increased by 1.2% to $325.7m, with same store sales 0.9% down on prior year. A
focus by management on margin management helped gross profit grow from 62.6% to 63.3% during the year. However,
rising costs combined with a challenging retail environment resulted in EBIT reducing to $48.6m. A decision was made during
the year to split the management of the large Australian segment into two businesses each led by a Retail General Manager
with their own regional management teams.
Seven stores were opened in Australia during the period as follows:
• Belmont Forum, Western Australia
• DFO Essendon, Victoria
• DFO Moorabbin, Victoria
• George Street Sydney CBD, New South Wales
• Mandurah, Western Australia
• Mildura, Victoria
• Palmerston, Northern Territory
Two stores closed during the period. There were 171 stores trading at 30 June 2018. The Group plans to expand its store
footprint by four new stores during the 2018-19 year. It is anticipated there will be store closures occurring in the coming year
as part of the Group’s active management of its store portfolio.
Michael Hill New Zealand
OPERATING RESULTS (NZ $000)
Revenue
Gross profit
Gross profit as a % of revenue
EBIT
As a % of revenue
Number of stores
FX rate for profit translation
2018
125,239
77,673
62.0%
27,800
22.2%
52
1.09
2017
2016
2015
121,970
75,204
61.7%
27,836
22.8%
52
1.06
122,903
75,895
61.8%
27,136
22.1%
52
1.09
113,983
70,488
61.8%
23,545
20.7%
52
1.07
2014
109,693
67,799
61.8%
22,102
20.1%
52
1.10
The New Zealand retail segment revenue increased 2.7% to NZ$125.2m for the 12 months, and the segment achieved a
solid EBIT result of NZ$27.8m, in line with the prior year. The focus on this mature market has been to improve store locations
26 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
where possible, build average store sales through a broadening of our product offer and improving our online sales channel.
Two stores were opened in New Zealand as follows:
• Silverdale, Auckland
• Victoria Street, Wellington
Two stores closed during the period. There were 52 stores trading at 30 June 2018. There are currently plans to open one
new store during 2018-19.
Michael Hill Canada
OPERATING RESULTS (CA $000)
Revenue
Gross profit
Gross profit as a % of revenue
EBIT
As a % of revenue
Number of stores
FX rate for profit translation
2018
130,762
81,576
62.4%
14,605
11.2%
83
0.98
2017
2016
112,721
69,078
61.3%
12,386
11.0%
76
1.00
95,423
59,252
62.1%
8,929
9.4%
67
0.97
2015
79,097
48,689
61.6%
6,041
7.6%
60
0.97
2014
69,025
42,466
61.5%
3,923
5.7%
54
0.98
The Canadian retail segment revenue increased by 16.0% for the twelve months to CA$130.8m, with same store sales
increasing 3.8% and gross margin lifting to 62.4%. The Canadian segment continues to show good growth as we achieve
scale and increase market share with EBIT increasing to a record CA$14.6m, 11.2% of revenue. While sales did slow during
the 2017-18 year, in the second half in particular, the Company is confident that continued growth can be achieved in the
coming year.
Eight stores were opened in Canada during the period, as follows:
• Conestoga Mall, Ontario
• Edmonton Outlet, Alberta
• Fairview Mall, Ontario
• McAllister Place, Ontario
One store closed during the period. There were 83 stores trading at 30 June 2018. There is potential for up to 100 stores
in Canada, and the Group plans to open at least five stores during the 2018-19 year, subject to availability of suitable sites.
• Orchard Park Mall, British Colombia
• Park Place, Alberta
• Regent Mall, New Brunswick
• Vaughan Mills, Ontario
Michael Hill USA
OPERATING RESULTS (US $000)
Revenue
Gross profit
Gross profit as a % of revenue
EBIT
As a % of revenue
Number of stores
FX rate for profit translation
Included in EBIT figures above:
Impairment and disposal of assets
Lease settlement and onerous lease provision
2018
9,320
5,420
58.2%
(9,840)
(105.6%)
-
0.78
2017
12,498
7,564
60.5%
(3,821)
(30.6%)
9
0.75
2,775
3,958
595
71
2016
14,203
8,363
58.9%
(2,599)
(18.3%)
10
0.73
2015
11,290
6,535
57.9%
(1,916)
(17.0%)
9
0.83
2014
9,994
5,971
59.7%
(2,283)
(22.8%)
8
0.92
The Group exited the US operations during the year and closed all stores. No stores were trading as at 30 June 2018.
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 27
...The Group's e-commerce platform continues
to support the retail segments well with revenue
increasing by 57.4%...
28 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
Emma & Roe
OPERATING RESULTS (AU $000)
Revenue
Gross profit
Gross profit as a % of revenue
EBIT
As a % of revenue
Number of stores
Included in EBIT figures above:
Impairment and disposal of assets
Lease settlement and onerous lease provision
2017
15,448
10,201
66.0%
(7,051)
(45.6%)
29
2016
9,539
6,663
69.8%
(2,418)
(25.3%)
16
2015
4,879
3,374
69.2%
(2,884)
(59.1%)
8
2018
16,934
11,216
66.2%
(21,790)
(128.7%)
6
7,412
6,037
Emma & Roe reported sales of $16.9m for the year. Emma & Roe results during the second half of the year were impacted
by the announcement to reduce the brand’s store footprint by 24 stores, with five closing in April and 19 closing in June. The
closure programme for the final six Emma & Roe stores is still in progress.
Strategic Update
In the latter half of the year, a detailed strategic review was conducted. The purpose of the review was to identity performance
improvement opportunities for the Group within the context of the rapidly changing retail environment and changes in how
customers shop.
Five strategic shifts have been identified, designed to reposition Michael Hill from a traditional retailer to a differentiated
omni-channel brand.
Implementation of these changes is intended to increase market share through improved customer engagement across
all channels and increased frequency of visit. The five key strategic shifts are:
1 OM N I-CHAN N E L: Building capability to deliver a seamless customer experience.
Evolving our online experience, including integration of digital and social channels with our store network, to enable a
seamless experience for customers where and when they engage with us.
2 CUSTOM E R LOYALTY: Building data capability to better service customers.
Using data driven customer insights to deliver tailored customer experiences to drive brand loyalty and advocacy.
3 U N IQU E B RAN DE D COLLECTIONS: Escalate our growth of branded collections.
Through enhanced designer capability, create unique branded collections to meet growing customer demand for differenti-
ated products.
4 B RAN D POSITION: Strengthen and grow brand loyalty.
Based on recent brand review, we will reposition our brand in market to meet the changing consumer landscape.
5 OPE RATIONAL EXCE LLE NCE: Enhance execution capability and agility.
Build capability and agility throughout the organisation to adapt quickly to a fast changing retail environment.
To deliver against this ambition, investment will be made in capability and infrastructure. We will add capability to the Group
through the addition of a Chief Operating Officer and Chief People Officer at the executive level. A dedicated project
management team has been established to execute and manage initiatives in support of the five strategic shifts identified
above. Significant investment is being made in additional roles in data and digital, together with capital investment in enabling
systems and infrastructure. This will require the investment of additional unallocated corporate costs of ~$3m in the coming
2018-19 year, with total planned capex across new and refurbished stores, IT systems, tools and infrastructure of ~$25m
(2017-18: $24.6m).
2018-19 is a foundational year with benefits from these investments to be progressively realised. A differentiated offer
in brand, product and experience would provide a platform to establish new channels and markets if considered appropriate
in the coming years.
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 29
30 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
Outlook
We are committed to expanding the Michael Hill brand in
all three markets of Australia, New Zealand and Canada
with plans to open a minimum of 10 new stores in 2018-19
across these three markets, subject to site availability.
With this store growth, underpinned by the five identified
strategic shifts, it is planned that our differentiated offer
will deliver growth in all markets and take market share.
The business will be focused on quality of earnings and
continued strong gross margin performance.
In the 2018-19 year we will work to deliver a better quality
in-store customer experience. Proprietary branded collections
revenue is planned to continue to grow as we increase
investment in these ranges. Branded collections provide a
unique product offering to our customers and in doing so,
builds strong brand equity in the markets we operate in.
While the Australian segment has reached maturity
in terms of overall store numbers, it still offers potential
for improved EBIT performance through a combination
of increased productivity from the retail teams, improved
margins, property portfolio refinements, online revenue
growth, new product collections and an enhanced
customer experience.
The New Zealand business is expected to continue to
perform well and will benefit from increased online revenue,
extended product offering, improved margins, a continued
refinement of the property portfolio and improved cost
efficiencies, together with exploring opportunities to tap
into the growing Asian consumer market.
Canada still has opportunities for further store growth
and we will continue to work to build its profitability
through its maturing store portfolio, online revenue growth,
optimisation of its in-house credit program, and increased
productivity of its retail teams.
e-commerce revenue is planned to continue to grow
steadily in coming years as we refine our offer and optimise
the online channels. Further planned investment in our
e-commerce capability will take full advantage of this
growth opportunity.
Continued strong operational cash flows enable
further debt reduction and capital investment levels to be
maintained, while also leaving the Group well placed to
explore opportunities aligned with the five strategic shifts.
Priorities for 2018-19
• Open at least 10 new Michael Hill stores across
all markets.
• Reposition Michael Hill from a traditional retailer to a
unique omni-channel retailer.
• Branded collection sales to grow as a percentage of
total revenue.
• Continued improvement in inventory management to
deliver further improvement in GMROI (gross margin
return on investment).
• Continue to invest in and develop the e-commerce
business.
Environmental regulation
The Group has determined that no particular or significant
environmental regulations apply to it.
JEWELLERY FROM SPIRITS BAY, CHRISTINE HILL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 31
...Continued strong operational cash flows enable
further debt reduction and capital investment levels
to be maintained, while also leaving the Group well
placed to explore opportunities aligned with the five
strategic shifts...
32 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
RISK MANAGEMENT
R ISK
STRATEG I ES AN D M ITIGATION
Inadequate business
continuity program and/or
disaster recovery strategies
Insufficient leadership talent
to meet growth plans
Systems capability does not
meet demands of business
Risk of a disruptor
or new competition
entering our markets
Breach of regulation or law
in one of our jurisdictions
in an ever increasingly
complex legal compliance
environment
Inability to adjust to the
rapidly changing consumer
segment and retail
environment
The process of updating the Group’s
business continuity plan and disaster
recovery processes will continue into
the coming year. Additional internal
resource has been put in place and
external consultants continue to
be used to help with penetration
testing and to provide other
technical assessments.
The decision was made recently
to appoint a Chief People Officer
to the executive team in an effort
to strengthen our focus on people
planning, talent acquisition and
development of this vital resource.
We are confident our people and
talent strategies will continue to
deliver sufficient quality resource to
the business.
A structured plan of system review
involving significant investment has
begun to facilitate the upgrade of
our key business systems.
We are committed to improving and
differentiating the brand from our
existing competitors to create a point
of difference and acquire market
share. This in itself helps mitigate the
risk of other competitors entering
our key markets and taking material
market share.
The Company invests via an
in-house legal team who are
focused on compliance in our three
markets and by utilising external
legal firms for specialised legal
advice when required.
As mentioned in the strategic
update, the Group is in the
process of investing in improved
infrastructure and capabilities
with a goal to meet the rapidly
changing retail environment and the
consumer of tomorrow.
Non-IFRS Financial Information
This report contains certain non-IFRS financial measures of historical
financial performance. Non-IFRS financial measures are financial
measures other than those defined or specified under all relevant
accounting standards. The measures therefore may not be directly
comparable with other companies' measures. Many of the measures
used are common practice in the industry in which MHI operates.
Non-IFRS financial information should be considered in addition to,
and is not intended to be a substitute for, or more important than,
IFRS measures. The presentation of non-IFRS measures is in line
with Regulatory Guide 230 issued by Australian Securities and
Investments Commission (ASIC) to promote full and clear disclosure
for investors and other uses of financial information, and minimise
the possibility of those users being misled by such information.
The measures are used by management and Directors for the
purpose of assessing the financial performance of the Group and
individual segments. The Directors also believe that these non-IFRS
measures assist in providing additional meaningful information on
the drivers of the business, performance and trends, as well as the
position of the Group. Non-IFRS financial measures are also used
to enhance the comparability of information between reporting periods
by adjusting for non-recurring or controllable factors which affect IFRS
measures, to aid the user in understanding the Group's performance.
Consequently, non-IFRS measures are used by the Directors and
management for performance analysis, planning, reporting and
incentive setting. These measures are not subject to audit.
The non-IFRS measures used in describing the business
performance include:
• Same store sales
• Earnings before Interest, tax, depreciation and
amortisation (EBITDA)
• Earnings before Interest and tax (EBIT)
• Normalised EBIT
• Significant item
CALCU LATION OF NOR MALISE D E B IT
Normalised EBIT has been calculated as follows:
EBIT from continuing operations
EBIT from discontinuing operations
Group EBIT
Add back E&R and US closure costs:
Lease settlements
Impairment and asset disposals
Make good expenses
Employee redundancies
Provision for stock obsolescence
Other expenses (Including consulting, legal fees,
packaging, stationery, travel)
Add back significant item:
Revaluation of employee benefits
Normalised EBIT
$000's
50,147
(36,937)
13,210
9,833
11,188
177
1,743
1,600
964
1,391
40,106
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 33
INFORMATION ON DIRECTORS
From left: Gary Smith, Emma Hill, Sir Michael Hill, Janine Allis and Robert Fyfe. Information on Directors of
Michael Hill International Limited in office during the financial year and until the date of this report are set out below.
Emma Jane Hill B.Com, M.B.A.
Sir Richard Michael Hill K.N.Z.M.
Gary Warwick Smith B.Com, F.C.A., F.A.I.C.D.
Emma was appointed a Director of the
Company on 9 June 2016.
Sir Michael was appointed a Director of the
Company on 9 June 2016.
Emma has over 30 years’ experience with
Sir Michael is the founder of Michael Hill
subsidiaries of the Company commencing
on the shop floor in Whangarei, New
Zealand. She held a number of management
positions in the Australian company before
successfully leading the expansion of
the Group into Canada as Retail General
Manager in 2002.
In 2011 Emma was appointed as Deputy
Chair of the listed New Zealand entity and
was appointed by the Board as Executive
Chair of that company in December 2015.
Emma holds a Bachelor of Commerce
degree and an MBA from Bond University.
OTHER CURRENT DIRECTORSHIPS
none
FORMER DIRECTORSHIPS IN LAST THREE YEARS
none
RESPONSIBILITIES
Chair
Non-Executive Director
Member People Development and
Remuneration Committee
INTERESTS IN SHARES AND OPTIONS
167,487,526 Ordinary Shares
Jeweller and was appointed as a Director
of Michael Hill New Zealand Limited on 30
March 1990. He had 23 years of jewellery
retailing experience before establishing
Michael Hill in 1979, which then listed on
the New Zealand Stock Exchange in 1987.
Sir Michael’s visionary leadership has been
the foundation for the Company’s successful
international expansion. In 2008 he was
recognised as Ernst & Young’s ‘Entrepreneur
of the Year’ and in 2011 was appointed a
Knight Companion of the New Zealand Order
of Merit for services to business and the arts.
Sir Michael was appointed Founder
President of the New Zealand listed entity in
2015 in recognition of his special connection
with Michael Hill for over 35 years.
Sir Michael led the Group as Chairman
from 1987 until December 2015.
OTHER CURRENT DIRECTORSHIPS
none
FORMER DIRECTORSHIPS IN LAST THREE YEARS
none
RESPONSIBILITIES
Non-Executive Director
INTERESTS IN SHARES AND OPTIONS
148,330,600 Ordinary Shares
Gary was appointed a Director of the Company
upon incorporation on 24 February 2016.
Gary has had extensive Director
experience. He is Chairman of Flight Centre
Travel Group, one of Australia’s top 100
public companies and is a member of their
Audit and Remuneration sub-committee.
He is a Chartered Accountant and a Fellow
of the Australian Institute of Company
Directors.
He is also a Director of Tourism Events
Queensland and Chair of its Audit and Risk
Committee.
OTHER CURRENT DIRECTORSHIPS
Flight Centre Travel Group Limited
Tourism Events Queensland
FORMER DIRECTORSHIPS IN LAST THREE YEARS
none
RESPONSIBILITIES
Non-Executive and Independent Director
Chair Audit and Risk Management Committee
Member People Development and
Remuneration Committee
INTERESTS IN SHARES AND OPTIONS
30,000 Ordinary Shares
34 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT
Meetings of Directors
The numbers of meetings of the Company's Board of Directors and of each
Board committee held during the year ended 30 June 2018, and the numbers of
meetings attended by each Director were:
Full meetings
of Directors
Meetings Meetings
held
attended
13
13
10
13
10
13
11
13
13
13
Audit and Risk People Development
and Remuneration
Meetings Meetings
held
attended
4
4
-
-
3
4
4
4
-
-
Management
Meetings Meetings
held
attended
-
-
-
-
2
2
2
2
2
2
E J Hill
Sir R M Hill
G W Smith
R I Fyfe
J S Allis
Committee membership
As at the date of this report, Michael Hill
International Limited has an Audit and Risk
Management Committee and a People
Development and Remuneration Committee.
Audit and Risk
Management
Committee
Gary Smith c
Janine Allis
Rob Fyfe
People Development
and Remuneration
Committee
Rob Fyfe c
Emma Hill
Gary Smith
c designates chair of the committee
Robert Ian Fyfe B.Eng, F.E.N.Z
Janine Suzanne Allis
Company Secretary
Rob was appointed a Director of the
Company on 9 June 2016.
Rob served as CEO of Air New Zealand
between 2005 and 2012, a period that saw
a resurgence in Air New Zealand to become
one of the most recognised and awarded
airlines in the world and one of the best
performers in a tough industry.
Prior to Air New Zealand, Rob had gained
extensive general management experience
in various retail businesses operating in New
Zealand, Australia and Great Britain.
OTHER CURRENT DIRECTORSHIPS
Antarctica New Zealand
Air Canada
FORMER DIRECTORSHIPS IN LAST THREE YEARS
Icebreaker Limited
RESPONSIBILITIES
Non-Executive and Independent Director
Chair People Development and
Remuneration Committee
Member Audit and Risk Management
Committee
INTERESTS IN SHARES AND OPTIONS
63,640 Ordinary Shares
The Company Secretary is Katherine
A. Hammond LLB (Hons), BA, GradDipLegPrac.
Katherine was appointed to the position of
Company Secretary on 22 January 2018, the
same day she joined the Group.
Katherine holds a Bachelor of Laws with
Honours and a Bachelor of Arts from the
University of Queensland and is admitted to
practice as a Solicitor of the Supreme Court
of Queensland. Prior to her appointment as
Company Secretary, Katherine practiced
law for 8 years in the areas of mergers &
acquisitions, capital markets and corporate
advisory, which included advising listed and
unlisted entities on governance, compliance
and transactional matters.
Mary-Anne Greaves was appointed
as Company Secretary on 11 July 2016
and resigned on 15 December 2017.
Andrew Lowe, Chief Financial Officer, was
appointed as Company Secretary on 15
December 2017 and resigned as Company
Secretary on 22 January 2018, upon the
appointment of Katherine Hammond.
Janine was appointed a Director of the
Company on 9 June 2016.
Janine is the Founder and Executive
Director of Retail Zoo Pty Ltd which currently
owns three brands - Boost Juice, Salsa’s
Fresh Mex Grill and Cibo. The Retail Zoo
network has over 500 stores in 13 countries.
Janine’s strong retail experience was
obtained by creating Boost Juice Bars and
turning it into an iconic Australian brand with
over 95% awareness rate in the Australian
market. Drive and passion have translated
into over $2 billion in global sales from
inception and has earned Janine many
accolades, including Telstra Businesswoman
of the Year, Amex Franchisor of the Year and
ARA Retailer of the Year. She was inducted
into the Australian Business Women Hall of
Fame as well as BRW listing Janine in the
top 15 people who have changed the way we
do business in the last 20 years. Janine now
shares her knowledge with others, including
through her role as a ‘Shark’, investor and
mentor on Channel Ten’s Shark Tank.
OTHER CURRENT DIRECTORSHIPS
Retail Zoo Pty Ltd
FORMER DIRECTORSHIPS IN LAST THREE YEARS
none
RESPONSIBILITIES
Non-Executive and Independent Director
Member Audit and Risk Management
Committee
INTERESTS IN SHARES AND OPTIONS
150,000 Ordinary Shares
MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 35
...Compensation levels for key management
personnel of the Group are competitively set to
attract and retain appropriately qualified and
experienced directors and executives...
36
36 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
AUDITED REMUNERATION REPORT
The Directors present the 2018 Michael Hill International
Limited remuneration report, outlining key aspects of our
remuneration policy and framework, and remuneration
awarded during the 2018 financial year.
Remuneration framework
The information provided in this remuneration report has
been audited as required by section 308(3C) of the
Corporations Act 2001.
PR I NCI PLES OF COM PE NSATION
Remuneration is referred to as compensation throughout
this report.
Key management personnel ('KMP'), including
Directors of the Company and other executives, have
authority and responsibility for planning, directing and
controlling the activities of the Group.
For the 2018 financial year, it was determined that the
KMP of Michael Hill International were:
• Chief Executive Officer (CEO) - Phil Taylor
• Chief Financial Officer (CFO) - Andrew Lowe
(appointed 4 December 2017)
• Chief Information Officer (CIO) - Matt Keays
• Group Executive Supply Chain (GESC) - Galina Hirtzel
• Chief Customer Officer (CB&CO) - Vanessa Brennan
(appointed 15 January 2018)
• Group Executive Human Resources (GEHR) -
Stewart Silk
Compensation levels for key management personnel
of the Group are competitively set to attract and retain
appropriately qualified and experienced directors and
executives. The People Development and Remuneration
Committee obtains independent advice every three years
on the appropriateness of compensation packages of the
Group given trends in comparative companies both locally
and internationally, and the objectives of the Group’s
compensation strategy.
The compensation structures explained
below are designed to attract suitably
qualified candidates, reward the
achievement of strategic objectives,
and achieve the broader outcome of
creation of value for shareholders.
The compensation structures take into
account the capability and experience of
the KMP, and the KMP's ability to control the
relevant segment's performance.
The Executive Remuneration framework consists of:
1 Total Fixed Remuneration ('TFR') - includes fixed cash
remuneration and superannuation component.
2 Short term incentive ('STI') - on target performance is
determined as a percentage of TFR, 70% of the STI is
directly aligned to achieving the Group EBIT return on
average total assets ('ROA') hurdle (15% ROA) and 30%
based on achievement of individual performance plans.
3 Long term incentive ('LTI') - alignment of executive
incentives with the long term performance is achieved
by way of a deferred remuneration component. An issue
of share rights is made to participants of the scheme,
the quantum being a % of the STI earned.
The current remuneration policy settings for the KMP
are as follows:
CEO
CFO
TFR set at 90% of market median
On target STI set at 75% of TFR
LTI set at 30% of STI achieved
TFR set at 90% of market median
On target STI set at 50% of TFR
LTI set at 30% of STI achieved
CB&CO TFR set at 90% of market median
CIO
GESC
GEHR
On target STI set at 35% of TFR
LTI set at 30% of STI achieved
TFR set at 90% of market median
On target STI set at 35% of TFR
LTI set at 30% of STI achieved
TFR set at 90% of market median
On target STI set at 35% of TFR
LTI set at 30% of STI achieved
TFR set at 70% of market median
On target STI set at 35% of TFR
LTI set at 30% of STI achieved
TOTAL FIXE D COM PE NSATION
Fixed compensation consists of base compensation as
well as leave entitlements and employer
contributions to superannuation funds.
Compensation levels are reviewed
annually by the People Development and
Remuneration Committee through a process
that considers individual, segment and
overall performance of the Group. In addition,
external consultants provide analysis and advice
every three years to ensure the Directors’ and
senior executives’ compensation is competitive
in the market place. A senior executive’s
compensation is also reviewed on promotion.
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 37
PE R FOR MANCE LI N KE D COM PE NSATION
Performance linked compensation includes both short-term
and long-term elements, and is designed to reward senior
executives for meeting or exceeding their financial and
personal objectives. The STI is an ‘at risk’ annual cash
payment, while the LTI is a deferred compensation plan
providing rights over ordinary shares of the Company under
the rules of the executive incentive plan.
SHORT-TE R M I NCE NTIVE
The short term incentive scheme is comprised of two
components; 70% of the STI for key management personnel
is linked to achievement of the Group's EBIT return on
average total assets hurdle (15% ROA) for the year and
30% is linked to the achievement of key performance
indicators ('KPI's') that are agreed in personal performance
plans ('PPP's'), at the start of the reporting period.
The process and scheme provides an ongoing
performance management system, along with integrated
reporting for visibility and transparency of progress by
each senior executive. The framework aligns the senior
executive KPIs to delivery of the strategic plan, divisional
business plans along with critical operational measures
and leadership measures of each role. The following points
outline the framework:
• The policy and framework cascades from the CEO
to Group Executives with the intention in 2018-19 to
cascade relevant KPIs further down through the levels
of management. This aims to ensure key aspects of
the Group’s strategic plan, divisional business plans,
along with critical drivers of business outcomes are
clearly identified at each level of leadership. This
includes personal development plans, and leadership
performance.
• The metrics are assessed monthly (on a YTD basis)
and along with normal operational metrics, provides the
basis for monthly work in progress ('WIP') reviews.
LONG-TE R M I NCE NTIVE
Options were issued under the Executive Incentive Plan
(made in accordance with thresholds set in plans approved
by shareholders). The ability to exercise the options is
conditional on continuing employment with the Group. The
options issued during the year relates to the entitlements
set in the prior years. Options previously issued are detailed
in this report and most recent Appendix 3B.
The Company introduced a deferred compensation
plan ('LTI') involving the granting of share rights to
eligible participants in the 2015-16 financial year and
was approved by shareholders at the Company’s Annual
General Meeting held on 31 October 2016.
Under the plan, an executive may be granted share
rights by the Company. Each share right represents a right
to receive one ordinary share in the Company, subject to the
terms and conditions of the rules of the plan. An allocation
of share rights is made to each eligible participant on an
annual basis to a value of 30% of the STI payment earned1.
38 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
The share rights progressively vest2 over a 3, 4 and 5
year period from the date of issue and are only retained
on exiting the business in the event that the participant is
deemed a 'Good Leaver' pursuant to the LTI plan rules.
Feature
Opportunity/ 30% of respective STI which is issued to the
Allocation
Executive by way of share rights which are
granted and vest in 3 tranches. Each right
represents a right to acquire one ordinary
share in the Company.
Tranches
Exercise
Year 3 - provided participant remains
employed with the Company, 25% will vest
Year 4 - provided participant remains
employed with the Company, 25% will vest
Year 5 - provided participant remains
employed with the Company, 50% will vest
Once the rights have vested, Participants
can exercise them. They can be exercised
by completing and returning to the Company
an Exercise Notice.
Expiry
Rights will expire on the date 15 years from
the grant date.
In addition to the share rights issued to the CEO and other
eligible senior executives of the Group under the incentive
plan, the CEO was granted share rights as part of the CEO
package, which were granted to Mr Taylor during his tenure
as interim CEO between 8 August 2016 and 6 March 2017.
An allocation of share rights equal to 75% of 2016 TFR
($325,500) per annum for 3 years from 1 September 2016
were made to the CEO. Each tranche of share rights will
vest at a date which is 3 years from the date of issue and
are only retained provided Mr Taylor is employed by the
Group at the commencement of the financial year in which
the share right vesting is scheduled to occur. Termination of
employment prior to each corresponding 3 year period will
result in all unvested share rights being forfeited3.
1 The number of share rights in each tranche is based on
the prescribed dollar value for each tranche divided by
the volume weighted average share price of Michael
Hill International shares over 5 trading days following
the Michael Hill International shares trading on an
ex-dividend basis.
2 On vesting each share right represents a right to receive
one (1) ordinary share in the Company. No exercise price
is payable upon the exercise of any share rights.
3 The additional share rights component of Mr Taylor's
remuneration package is a continuation of the existing
plan agreed to upon Mr Taylor's appointment as interim
CEO. As a consequence, the deemed issue date for the
second tranche of share rights was 18 October 2017 and
the corresponding vesting date is 1 July 2020. The third
tranche of share rights is anticipated to be issued later
this year and the corresponding vesting date will be
1 July 2021.
SHORT-TE R M AN D LONG-TE R M I NCE NTIVE STR UCTU R E
The People Development and Remuneration Committee considers that the above performance-linked compensation
structure is generating the desired outcome.
The scheme is already demonstrating a close correlation between executive remuneration, achievement of budget
targets and share price performance as desired.
In 2017-18, the performance linked component of compensation comprises approximately 13% of total payments to
senior executives (2016-17: 7%).
In the current year the Group didn't meet its overall Board targets, and as a consequence bonuses earned by KMP's
in the current financial year were between 50 and 70% lower than the targeted STI% of TFR.
R E M U N E RATION POLICY AN D LI N K TO PE R FOR MANCE
Our People Development and Remuneration Committee is made up of two independent, non-executive Directors and the
Chair of the Board of Directors. The committee reviews and determines our remuneration policy and structure annually to
ensure it remains aligned to business needs, and meets the Group's remuneration principles. The Committee also engages
external remuneration consultants every three years to assist with this review.
The People Development and Remuneration Committee is a committee of the Board. It is primarily responsible for
making recommendations to the Board on:
• the over-arching executive remuneration framework
• operation of the incentive plans which apply to the senior executives (the executive team), including key performance
indicators and performance hurdles
• remuneration levels of executives, and
• non-executive Director fees.
Their objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the
long-term interests of the Company
The Corporate Governance Statement provides further information on the role of this committee. The ASX Corporate
Governance Principles and Recommendations rules and principles may materially differ from NZX's Corporate Governance
rules and NZX Code. In particular, the Board aims to ensure that remuneration practices are:
• competitive and reasonable, enabling the Company to attract and retain key talent
• aligned to the Company's strategic and business objectives and the creation of shareholder value
• transparent and easily understood, and
• acceptable to shareholders.
Figure 1: Remuneration framework
Element
Purpose
Performance metrics
Potential value
Changes for FY 2019
Total fixed
remuneration (TFR)
Provide competitive
market salary including
superannuation and
non-monetary benefits
All executives are
reviewed in line with
personal performance
plans
Positioned at a
percentage of median
market rate
Reviewed in line with
market
STI
LTI
Reward for in-year
performance
CEO: 75% of TFR
CFO: 50% of TFR
Execs: 35% of TFR
70% of the target
STI is calculated on a
return on total assets
basis. 30% of the
target STI is based on
a range of KPI's
Alignment to
long-term shareholder
value
Nil
CEO: 30% of STI
CFO: 30% of STI
Execs: 30% of STI
Nil
Nil
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 39
BALANCI NG SHORT-TE R M AN D LONG-TE R M PE R FOR MANCE
Annual incentives are set between 35% and 75% of TFR, in order to drive performance without encouraging undue risk-taking.
Long-term incentives are assessed over a 3 to 5 year period and are designed to promote long-term stability in
shareholder returns and talent retention.
The actual remuneration mix for FY 2018 is shown in figure 2 below and target remuneration mix for 2019 is in figure 3
below. It reflects the STI opportunity for the 2018-19 year that will be available if the performance conditions are satisfied at
target, and the value of the LTI rights and options granted for the year, as determined at the grant date.
Figure 2: Actual remuneration mix for FY 2018
Figure 3: Target remuneration mix for FY 2019
CEO
KMP
64%
13% 3%
22%
CEO
41%
31%
9%
19%
83%
11% 6%
KMP
62%
29%
9%
■ TFR ■ STI ■ LTI ■ ENGAGEMENT PACKAGE
■ TFR ■ STI ■ LTI ■ ENGAGEMENT PACKAGE
ASSESSI NG PE R FOR MANCE AN D CLAW-BACK OF R E M U N E RATION
The People Development and Remuneration Committee is responsible for assessing performance against KPIs and
determining the STI and LTI to be paid.
In the event of serious misconduct or a material misstatement in the Company’s financial statements, the People
Development and Remuneration Committee can cancel or defer performance-based remuneration.
CONSEQU E NCES OF PE R FOR MANCE ON SHAR E HOLDE R WEALTH
In considering the Group’s performance and benefits for shareholder wealth, the People Development and Remuneration
Committee have regard to the following indices in respect of the current financial year and the previous four financial years.
NPAT
NPAT from continuing operations
EBIT*
EBIT from continuing operations*
Normalised EBIT*
Dividends payments ($000)
Share price as at 30 June (NZ$ 2016 to 2014)
Return on shareholders equity
Return on average total assets
2018
$000
4,610
34,818
13,210
50,147
40,106
19,371
$.97
17.8%
9.1%
2017
$000
32,648
44,132
48,117
62,332
48,117
19,264
$1.11
22.7%
11.4%
2016
$000
19,577
26,330
47,058
54,424
47,058
17,490
$1.14
14.1%
7.2%
2015
$000
27,754
33,219
42,061
48,558
42,061
23,176
$1.06
18.0%
9.6%
2014
$000
25,041
28,171
42,151
45,212
42,151
22,336
$1.24
15.9%
8.9%
* EBIT and Normalised EBIT are Non-IFRS Information and are unaudited. Please refer to Non-IFRS Information on page 33
of the Directors Report for an explanation of Non-IFRS information and a reconciliation of EBIT from continuing operations
and Normalised EBIT.
EBIT and ROA hurdles are considered the primary financial performance targets in setting the STI. Profit amounts for 2014
to 2018 have been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting
Standards and other authoritative pronouncements of the Australian Accounting Standards Board. This also complies with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
The overall level of compensation takes into account the performance of the Group over a number of years.
OTH E R B E N E FITS
Key management personnel do not receive additional benefits, such as non-cash benefits, other than statutory superannua-
tion, as part of the terms and conditions of their appointment.
LOANS TO KEY MANAG E M E NT PE RSON N E L
The Company does not provide loans to KMPs or other senior executives.
40 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
SE RVICE CONTRACTS
It is the Group’s policy that service contracts for KMPs,
excluding the chief executive officer, are unlimited in term
but capable of termination on three months’ notice and
that the Group retains the right to terminate the contract
immediately, by making payment equal to three months’
pay in lieu of notice.
The Group has entered into a service contract with
four KMPs that are capable of termination on three
months’ notice. The Group retains the right to terminate a
contract immediately by making payment equal to three
months’ pay in lieu of notice. The KMPs are also entitled
to receive on termination of employment their statutory
entitlements of accrued annual and long service leave,
together with any superannuation benefits.
The Group has entered into a service contract with
two KMPs that are capable of termination on six month's
notice. The Group retains the right to terminate a contract
immediately by making payment equal to six months' pay
in lieu of notice. The KMP is also entitled to receive on
termination of employment their statutory entitlements of
accrued annual and long service leave, together with any
superannuation benefits.
CEO CONTRACT
The Group has entered into a service contract with the CEO,
Phil Taylor who was appointed CEO on 6 March 2017 after a
period as Interim CEO following the resignation of the former
CEO, Mike Parsell on 8 August 2016. The service contract
does not contain any probationary period or fixed term.
The remuneration payable to Mr Taylor is as follows:
a Annual base salary - $707,594 (inclusive of the
statutory superannuation contributions but excluding
leave provisions).
b Short terms incentives (STI) - 75% of base salary
payable in cash on performance of agreed Group profit
targets based on a return on asset formula (70% of STI)
and other agreed annual key indicators (30% of STI).
c Deferred compensation plan (LTI) - an allocation of
share rights on an annual basis to a value of 30% of
the STI payment earned in the preceding year1. The
share rights progressively vest2 over a 3 to 5 year period
from the date of issue and are retained on exiting the
business in the event that Mr Taylor is deemed a 'Good
Leaver' pursuant to the LTI plan rules.
d Interim CEO engagement package - an
allocation of share rights equal to 75% of
2016 TFR ($325,500) per annum for 3
years from 1 September 2016. Each tranche
of share rights will vest at a date which is 3
years from the date of issue and are retained
provided Mr Taylor is employed by the Group
at the commencement of the financial year
in which the share right vesting is scheduled
to occur. Termination of employment prior to
each corresponding 3 year period will result in all
unvested share rights being forfeited3.
Either party may terminate the engagement on six months'
notice. Otherwise, the Group may terminate Mr Taylor's
position for serious misconduct or professional negligence.
Mr Taylor will be restrained for up to 18 months
following the cessation of his engagement with the Group
from soliciting business, customers, suppliers or employees
of the Group.
The service contract outlines the components of
compensation but does not prescribe how compensation
levels are modified year to year. The People Development
and Remuneration Committee reviews compensation levels
each year to take into account cost-of-living changes, any
change in the scope of the role performed by the senior
executive and any changes required to meet the principles
of compensation policy.
1 The number of share rights in each tranche is based on
the prescribed dollar value for each tranche divided by
the volume weighted average share price of Michael
Hill International shares over 5 trading days following
the Michael Hill International shares trading on an
ex-dividend basis.
2 On vesting, each share right represents a right to
receive one (1) ordinary share in the capital of the
Company. No exercise price is payable upon the
exercise of any share right.
3 The additional share rights component of Mr Taylor's
remuneration package is a continuation of the existing
plan agreed to upon Mr Taylor's appointment as interim
CEO. As a consequence, the deemed issue date for the
second tranche of share rights is 18 October 2017 and
the corresponding vesting date is 1 September 2020.
DI R ECTOR CONSU LTI NG AG R E E M E NT
Michael Hill Group Services Pty Limited ACN 134 562
440, a subsidiary of Michael Hill International Limited
(MHIL), has entered into a consultancy agreement
(Consultancy Agreement) with Robert Ian Fyfe. Mr Fyfe is a
non-executive Director of MHIL. Details of the Consultancy
Agreement were disclosed to the ASX and NZX on 31
August 2017. The Board (with Rob abstaining) formed the
view that the Consultancy Agreement is on arm’s length
commercial terms.
Under the Consultancy Agreement, Mr Fyfe provides
mentoring support to the CEO, Phil Taylor.
Mr Taylor was appointed to the role of CEO
following a long and successful career with
Michael Hill, as CFO leading the global finance
team. The Board identified an opportunity
to expand Mr Taylor’s leadership capability
to ensure that Mr Taylor is well equipped for
the significant leadership responsibilities and
challenges as CEO.
Mr Fyfe is a very well regarded business
leader, with deep CEO and leadership experience
including having successfully led Air New Zealand
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 41
with over 11,000 employees. Over many years during Mr Fyfe’s
tenure, Air New Zealand was recognised globally for, its brand,
marketing, service culture and overall business performance.
Combined with Mr Fyfe’s understanding of the Michael Hill
business, the Board recognised that he is well positioned to
provide Mr Taylor with tailored leadership mentoring.
Mr Fyfe typically spends one to two days with Mr Taylor every
six weeks where he observes Mr Taylor’s management practices
and provides Mr Taylor with feedback and suggested techniques
and styles that Mr Taylor may adopt to enhance the effectiveness
of his management and leadership.
The mentoring also enables the Board to gain greater insight
into the leadership culture, strengths and challenges.
Mr Fyfe’s mentoring is non-prescriptive and Mr Fyfe does
not participate in management decisions. Mr Fyfe and the Board
consider that Mr Fyfe maintains an ability to bring independent and
critical assessment of Mr Taylor’s performance as CEO.
The income derived by Mr Fyfe (or entities Mr Fyfe controls)
under the Consultancy Agreement accounts for less than 10%
of Mr Fyfe’s aggregate annual income for FY18. For FY18, a
total amount of $84,000 was paid pursuant to the Consultancy
Agreement; this comprised an amount of $64,000 paid to Rob
Fyfe and an amount of $20,000 paid to The People Shop Ltd. The
Board anticipates that less than $100,000 will be paid pursuant
to the Consultancy Agreement for FY19 and will be paid to The
People Shop Ltd.
SE RVICES FROM R E M U N E RATION CONSU LTANTS
The People Development and Remuneration Committee
engaged a remuneration consultant during the 2016 financial
year to review the amount and elements of the key management
personnel remuneration and provide recommendations in relation
thereto. It is the committee's intention to engage consultants
every 3 years to review and advise on executive remuneration.
NON-EXECUTIVE DI R ECTORS
Total compensation for all non-executive Directors, last voted upon
by shareholders on 29 June 2016, is not to exceed $840,000
per annum and is set based on advice from external advisors
with reference to fees paid to other non-executive Directors
of comparable companies. Directors’ base fees are presently
$96,805 per annum. Where a Director serves as Chair on the
People Development and Remuneration Committee they are
entitled to an additional payment of $20,000 per annum. Where
a Director serves as Chair on the Audit and Risk Committee they
are entitled to an additional payment of $30,000 per annum.
All non-executive Directors enter into a service agreement with
the Company in the form of a letter of appointment. The letter
summarises the board policies and terms, including remuneration,
relevant to the office of Director.
The Board Chair receives up to twice the base fee.
Non-executive Directors do not receive performance-related
compensation. Directors’ fees cover all main board activities and
membership of committees.
Non-executive directors are not provided with retirement
benefits apart from statutory superannuation.
DI R ECTORS' AN D KM Ps' R E M U N E RATION
Details of the nature and amount of each major element of remuneration of each Director of the Company, and other key management
personnel of the consolidated entity are:
Short-term
Long-term
Salary & STI cash
bonus
fees
Other
TOTAL Long service Superannuation Termination
leave
benefits
Post-
Share-
based
employment payments
Options
benefits and rights
TOTAL
Value of
Proportion
options as
remuneration
performance proportion of
remuneration
related
Non-executive Directors
$
$
$
$
$
$
$
$
$
%
%
Emma Jane Hill
Sir Richard Michael Hill
Gary Warwick Smith
Robert Ian Fyfe
Janine Suzanne Allis
Total Directors'
remuneration
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
193,610
190,000
96,805
95,000
115,804
104,072
116,805
115,000
96,805
95,000
-
-
-
-
-
-
-
-
-
-
-
-
- 84,000
-
-
-
-
-
-
193,610
190,000
96,805
95,000
115,804
104,072
200,805
115,000
96,805
95,000
-
-
-
-
-
-
-
-
- 11,001
- 10,928
-
-
-
-
-
-
-
-
2018
2017
619,829
599,072
- 84,000
-
-
703,829
599,072
- 11,001
- 10,928
-
-
-
-
-
-
-
-
-
-
-
-
- 193,610
- 190,000
96,805
-
-
95,000
- 126,805
- 115,000
- 200,805
- 115,000
96,805
-
95,000
-
- 714,830
- 610,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
42 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
Short-term
Long-term
Salary &
fees
STI cash
bonus
Other
TOTAL
Long service Superannuation
benefits
leave
employment
Post- Share-based
payments
Options
and rights
Termination
benefits
TOTAL
$
$
$
$
$
$
$
$
$
Proportion
Value of
options as
remuneration
performance proportion of
remuneration
%
related
%
KMPs
Phil Taylor, CEO
(Formerly Interim
CEO and CFO)
Andrew Lowe, CFO
(Appointed
4 December 2017)
2018
2017
720,306 119,407
691,733 167,267
-
-
839,713
20,625
19,427
- 313,940 1,193,705 10.00% 26.30%
859,000 112,205
30,627
- 227,332 1,229,164 13.61% 18.49%
2018
180,200
47,320
-
227,520
2,890
15,981
-
2,979
249,370 18.98% 1.19%
Vanessa Brennan, CB&CO
(Appointed
15 January 2018)
2018
192,980
70,000
Matt Keays, CIO
2018
2017
324,316
30,802
311,000
39,150
Galina Hirtzel, GESC
2018
281,606
24,609
2017
274,083
29,321
Stewart Silk, GEHR
2018
2017
216,018
6,830
216,847
24,023
Mike Parsell, CEO
(Resigned 8 August 2016) 2017
61,037
-
Anna Shaw, CMO
(Resigned 22 March 2017) 2017
304,022
68,000
-
-
-
-
-
-
-
-
-
262,980
2,976
17,018
355,118
5,596
25,000
350,150
5,764
29,760
306,215
6,243
23,355
303,404
7,818
28,235
222,848
5,462
22,443
240,870
4,114
27,640
-
-
-
-
-
-
-
4,113
287,087 24.38% 1.43%
14,461
400,175
7.70% 3.61%
12,122
397,796
9.84% 3.05%
34,682
370,495
6.64% 9.36%
37,956
377,413
7.77% 10.06%
32,689
283,442
2.41% 11.53%
36,281
308,905
7.78% 11.75%
61,037
(3,984) 38,623 1,603,742
- 1,699,418
-%
-%
372,022
-
29,498
-
-
401,520 16.94%
-%
Total KMPs'
remuneration
Total Directors'
and KMPs'
remuneration
2018 1,915,426 298,968
- 2,214,394
43,792 123,224
- 402,864 2,784,274 10.74% 14.47%
2017 1,858,722 327,761
- 2,186,483 125,917 184,383 1,603,742 313,691 4,414,216
7.43% 7.11%
2018 2,535,255 298,968 84,000 2,918,223
43,792 134,225
- 402,864 3,499,104
8.75% 11.80%
2017 2,457,794 327,761
- 2,785,555 125,917 195,311 1,603,742 313,691 5,024,216
6.52% 6.24%
Notes in relation to the table of Directors' and KMPs' remuneration:
a) The amount of $200,805 in respect of Robert Ian Fyfe’s salary & fees comprises an amount of $116,805 in respect of director fees and an amount
of $84,000 in respect of services provided pursuant to a consultancy agreement (Consultancy Fees); the Consultancy Fees comprised an amount of
$64,000 paid to Rob Fyfe and an amount of $20,000 paid to The People Shop Ltd. Further details regarding the consulting agreement are set out
in the Service contracts section above on page 41.
b) The short-term incentive bonus is for performance during the respective financial year using the criteria set out on page 38 of the Remuneration
report. The amount was determined on 24 August 2018 after performance reviews were completed and approved by the People Development and
Remuneration Committee.
c) The fair value of options is calculated at the date of grant using the Binomial option-pricing model and allocated to each reporting period evenly
over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised as an expense in each
reporting period.
d) Mike Parsell's termination benefits were approved by shareholders and the Board on 31 October 2016.
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 43
ANALYSIS OF BON USES I NCLU DE D I N R E M U N E RATION
Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each Director of the
Company, and other key management personnel are detailed below.
Short-term incentive bonus
KMPs
Phil Taylor
Andrew Lowe
Vanessa Brennan
Matt Keays
Galina Hirtzel
Stewart Silk
Target bonus
available $
Included in
remuneration $ (a)
Amounts
forfeited $ (b)
Vested in year
%
530,595
169,000
150,500
118,470
106,995
85,371
159,209
50,700
70,000
35,541
32,099
25,611
371,386
118,300
80,500
82,929
74,896
59,760
100%
100%
100%
100%
100%
100%
a) Amounts included in remuneration for the financial year represent the amount related to the financial year based on
achievement of personal goals and satisfaction of specified performance criteria. The People Development and
Remuneration Committee approved these amounts on 23 August 2018.
b) The amounts forfeited due to the performance or service criteria not being met in relation to the current financial year.
Additional statutory information
EQU ITY I NSTR U M E NTS
All options refer to options over ordinary shares of Michael Hill International Limited, which are exercisable on a one-for-one
basis under the Executive Incentive Plan.
OPTIONS AN D R IG HTS OVE R EQU ITY I NSTR U M E NTS ISSU E D AS COM PE NSATION
Details of tranches issued over ordinary shares in the Company that were issued as compensation to each key management
person during the reporting period under previously granted options and details on options that vested during the reporting
period are as follows:
Number of
options issued
during 2018
Option
issue date
Fair value Exercise price
per option
at grant date
per option
Expiry date
Number of
options vested
during 2018
KMPs
Galina Hirtzel
Stewart Silk
100,000 05/10/2017
100,000 05/10/2017
nz$0.148
nz$0.148
au$1.44 30/09/2027
au$1.44 30/09/2027
-
-
All options expire on their expiry date or within 3 months of termination of the individual's employment. The options are
exercisable 5 years from release date. The options are conditional on continuing service. For options issued in the current
year, the earliest exercise date is 30/09/2022.
MODI FICATION OF TE R MS OF EQU ITY-SETTLE D SHAR E-BASE D PAYM E NT TRANSACTIONS
No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to a key
management person) have been altered or modified by the issuing entity during the reporting period or the prior period. The
exercise price of any future option grants will be set by using the same method, with reference to the Australian Securities
Exchange ('ASX'). Upon exercise of any option previously granted with a NZ$ exercise price, the $ exercise price will be
converted to AU$ with reference to the Reserve Bank of Australian foreign exchange rate on that date.
U N ISSU E D SHAR ES
As at the date of this report, there were 3,800,000 unissued ordinary shares under options. Option holders do not have any
right, by virtue of the option, to participate in any share issue of the Company or any related body corporate.
44 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
ANALYSIS OF OPTIONS AN D R IG HTS OVE R EQU ITY I NSTR U M E NTS G RANTE D AS COM PE NSATION
Details of vesting profiles of the options issued as remuneration to each key management person of the Group are detailed
below. When exercisable, each option is convertible into one ordinary share of Michael Hill International Limited. The vesting
conditions are set out in note 20(a).
Options granted
KMPs
Phil Taylor
Total
Galina Hirtzel
Total
Stewart Silk
Total
Number
Issue date*
Exercise
price $
%
%
forfeited exercisable
in year
in year**
Financial years
in which option
vests
Financial years
in which option
exercisable
750,000
150,000
150,000
150,000
150,000
150,000
750,000
2,250,000
500,000
100,000
100,000
100,000
100,000
900,000
500,000
100,000
100,000
100,000
100,000
900,000
Nov 2007
Nov 2009
Sep 2010
Sep 2011
Sep 2012
Sep 2013
Dec 2013
Dec 2013
Sep 2014
Sep 2015
Sep 2016
Oct 2017
Dec 2013
Sep 2014
Sep 2015
Sep 2016
Oct 2017
nz$1.25 100%
-
nz$0.94
-
nz$0.88
-
nz$1.16
-
nz$1.41
-
nz$1.82
-
nz$1.82
100% 2008-2012 2013-2018
100% 2010-2014 2015-2020
100% 2011-2015 2016-2021
100% 2012-2016 2017-2022
100% 2013-2017 2018-2023
- 2014-2018 2019-2024
- 2014-2018 2019-2024
nz$1.82
nz$1.63
nz$1.14
au$2.12
au$1.44
nz$1.82
nz$1.63
nz$1.14
au$2.12
au$1.44
-
-
-
-
-
-
-
-
-
- 2014-2018 2019-2024
- 2015-2019 2020-2025
- 2016-2020 2021-2026
- 2017-2021 2022-2027
2018-2022 2023-2028
- 2014-2018 2019-2024
- 2015-2019 2020-2025
- 2016-2020 2021-2026
- 2017-2021 2022-2027
- 2018-2022 2023-2028
* The issue date refers to the date of the tranches prescribed in the options agreement.
** The percentage forfeited in the year represents the reduction from the maximum number of options available to vest due
to performance criteria not being achieved.
ANALYSIS OF MOVE M E NTS I N OPTIONS
The movement during the reporting period, by value, of options over ordinary shares in the Company held by each key
management person is detailed below.
Value of options
issued in the year
Value of options
exercised in year
Phil Taylor
Andrew Lowe
Vanessa Brennan
Matt Keays
Galina Hirtzel
Stewart Silk
-
-
-
-
nz$14,790
nz$14,790
-
-
-
-
-
-
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 45
SHAR E R IG HTS
The number of share rights issued to KMPs and senior executives during the last financial year (including the interim CEO
engagement package) was 536,551 share rights. Of these, share rights issued to KMPs are set out below (including the CEO
engagement package).
Number of
share rights issued
Fair value
per share right $
Phil Taylor
Andrew Lowe
Vanessa Brennan
Matt Keays
Galina Hirtzel
Stewart Silk
358,570
-
-
11,210
8,395
6,878
1.05
-
-
1.05
1.05
1.05
R ECONCI LIATION OF OPTIONS AN D SHAR E R IG HTS H E LD BY KM P
The table below shows a reconciliation of options held by each KMP during the 2018 financial year. All vested options
were exercisable.
Balance at the start
of the year
Balance at the end
of the year
Vested
Unvested
Issued as Vested
Exercised
Forfeited Vested and Un-vested
compensation
exercisable
Phil Taylor
Galina Hirtzel
Stewart Silk
Total
2,250,000
-
-
-
800,000
800,000
2,250,000 1,600,000
-
100,000
100,000
200,000
-
-
-
-
-
-
-
-
No options were exercised during the period.
No amounts are unpaid on any shares issued on the exercise of options.
(750,000) 1,500,000
-
-
-
900,000
900,000
(750,000) 1,500,000 1,600,000
-
-
This table below details share rights that were issued, vested and forfeited during the year for each KMP.
P Taylor
M Keays
G Hirtzel
S Silk
Total
Balance
at start of
the year
Number
263,593
24,051
21,824
18,484
327,952
Granted
during
the year
Vested Forfeited Balance at
end of year
(unvested)
Number Number Number
-
-
-
-
-
358,570
11,210
8,395
6,878
385,053
-
-
-
-
-
Number
622,163
35,261
30,219
25,362
713,005
Share rights relating to the current reporting period are anticipated to be granted in late 2018. The number of shares will
depend on the Michael Hill International Limited’s share price over the five days prior to the grant date.
VOTI NG OF SHAR E HOLDE RS AT LAST YEAR'S AN N UAL G E N E RAL M E ETI NG
Michael Hill International Limited received more than 99.92% of “yes” votes on its remuneration report for the 2017 financial
year. The Company did not receive any specific feedback at the AGM or throughout the year on its remuneration practices.
46 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT
I NSU RANCE OF OFFICE RS
The Company’s Constitution provides that it may indemnify any person who is, or has been, an officer of the Group, including
the Directors, the Secretaries and other officers, against liabilities incurred whilst acting as such officers to the extent
permitted by law. The Company has entered into a Deed of Indemnity, Insurance and Access with each of the Company’s
Directors, Company Secretary and certain other officers. No Director or officer of the Company has received benefits under
an indemnity from the Company during or since the end of the year.
The Company has paid a premium for insurance for officers of the Group. This insurance is against a liability for costs and
expenses incurred by officers in defending civil or criminal proceedings involving them as such officers, with some exceptions.
The contract of insurance prohibits disclosure of the nature of the liability insured against and the amount of the premium paid.
I N DE M N ITY OF AU DITORS
To the extent permitted by law, the Company has agreed to indemnify its auditor, Ernst & Young, as part of the terms of its
audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment
has been made to indemnify Ernst & Young during or since the financial year.
NON-AU DIT SE RVICES
The following non-audit services were provided by the entity's auditor, Ernst & Young Australia. The Directors are satisfied
that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the
Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence
was not compromised.
Ernst & Young Australia received or are due to receive the following amounts for the provision of non-audit services:
Ernst & Young firm advisory fees
Total remuneration for non-audit services
2018
$
170,231
170,231
2017
$
7,416
7,416
AU DITOR'S I N DE PE N DE NCE DECLARATION
A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out
on page 48.
ROU N DI NG OF AMOU NTS
The Company is of a kind referred to in ASIC Legislative Instrument 2016/191, relating to the 'rounding off' of amounts in the
Directors' report. Amounts in the Directors' report have been rounded off in accordance with the instrument to the nearest
thousand dollars, or in certain cases, to the nearest dollar.
This report is made on 24 August 2018 in accordance with a resolution of
Directors as required by section 298 of the Corporations Act 2001.
E. J. Hill, Chair
Brisbane
24 August 2018
JEWELLERY FROM INFINITAS
BY MICHAEL HILL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 47
Ernst & Young
111 Eagle Street
Brisbane QLD 4000 Australia
GPO Box 7878 Brisbane QLD 4001
T +61 7 3011 3333
F +61 7 3011 3100
ey.com/au
AUDITOR’S INDEPENDENCE DECLARATION
to the Directors of Michael Hill International Limited
As lead auditor for the audit of Michael Hill International Limited for the financial year
ended 30 June 2018, I declare to the best of my knowledge and belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations
Act 2001 in relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Michael Hill International Limited and the entities it
controlled during the financial year.
Ernst & Young
Alison de Groot
Partner
24 August 2018
48
JEWELLERY: SPIRITS BAY, CHRISTINE HILL COLLECTION
FINANCIAL STATEMENTS
The Directors present the consolidated financial
statements of Michael Hill International Limited and
its subsidiaries for the year ended 30 June 2018
50 CONSOLI DATE D STATE M E NT OF COM PR E H E NSIVE I NCOM E
51 CONSOLI DATE D STATE M E NT OF FI NANCIAL POSITION
52 CONSOLI DATE D STATE M E NT OF CHANG ES I N EQU ITY
53 CONSOLI DATE D CASH FLOW STATE M E NT
54 NOTES TO TH E CONSOLI DATE D FI NANCIAL STATE M E NTS
93 DI R ECTORS' DECLARATION
94 AU DITOR'S R E PORT
49
Consolidated statement of comprehensive income
FOR THE YEAR ENDED 30 JUNE 2018
Revenue from continuing operations
Other income
Cost of goods sold
Employee benefits expense
Occupancy costs
Marketing expenses
Selling expenses
Impairment of property, plant and equipment
Impairment of other assets
Onerous lease provision
Depreciation and amortisation expense
Loss on disposal of property, plant and equipment
Other expenses
Finance costs
Profit before income tax
Income tax expense
Profit from continuing operations
Profit/(loss) from discontinued operations
Profit for the year
Other comprehensive income
Item that may be reclassified subsequently to profit or loss:
Cash flow hedges
Currency translation differences arising during the year
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
Owners of Michael Hill International Limited
Total comprehensive income for the year attributable
to owners of Michael Hill International Limited arises from:
Continuing operations
Discontinuing operations
NOTES
4
5(a)
8(c)
5(b)
5(b)
6
14
9(b)
9(b)
2018
$000
575,549
1,064
(208,657)
(151,939)
(58,074)
(31,433)
(26,708)
(348)
(134)
(6)
(18,694)
(522)
(29,941)
(2,690)
47,467
(12,649)
34,818
(30,208)
4,610
2017
$000
551,099
1,640
(200,093)
(141,755)
(53,900)
(26,081)
(24,647)
(36)
-
-
(17,427)
(557)
(25,896)
(3,164)
59,183
(15,051)
44,132
(11,485)
32,647
996
320
1,316
5,926
(256)
(2,542)
(2,798)
29,849
5,926
29,849
36,134
(30,208)
5,926
41,334
(11,485)
29,849
Earnings per share for profit attributable to the ordinary equity
holders of the Company, attributable to continuing operations:
Basic earnings per share
Diluted earnings per share
Earnings per share for profit attributable to
the ordinary equity holders of the Company:
Basic earnings per share
Diluted earnings per share
22
22
22
22
8.99¢
8.98¢
11.43¢
11.42¢
1.19¢
1.19¢
8.46¢
8.45¢
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
50 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
Consolidated statement of financial position AS AT 30 JUNE 2018
NOTES
2018
$000
2017
$000
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Derivative financial instruments
Current tax receivables
Other current assets
Total current assets
Non-current assets
Trade and other receivables
Property, plant and equipment
Deferred tax assets
Intangible assets
Other non-current assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Provisions
Deferred revenue
Total current liabilities
Non-current liabilities
Borrowings
Provisions
Deferred revenue
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Contributed equity
Reserves
Retained profits
Total equity
7(a)
7(b)
8(a)
11(a)
8(e)
8(f)
7(b)
8(b)
8(d)
8(c)
8(f)
7(c)
11(a)
8(g)
8(h)
8(i)
7(d)
8(h)
8(i)
7,220
25,381
192,074
245
-
3,688
228,608
2,665
66,666
61,895
12,626
2,888
146,740
5,676
24,219
203,853
-
888
3,945
238,581
2,371
79,436
57,893
8,784
2,057
150,541
375,348
389,122
49,339
390
2,696
9,386
26,476
88,287
35,213
4,907
57,720
97,840
47,918
1,141
-
4,670
25,924
79,653
45,034
6,235
56,017
107,286
186,127
186,939
189,221
202,183
9(a)
9(b)
9(b)
10,266
1,829
177,126
189,221
10,015
281
191,887
202,183
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 51
Consolidated statement of changes in equity FOR THE YEAR ENDED 30 JUNE 2018
Attributable to owners of
Michael Hill International Limited
Notes Contributed
equity
$000
Share
based
payments
reserve
$000
Foreign Cash flow
hedge
currency
translation
reserve
reserve
$000
$000
Retained
profits
Total
equity
$000
$000
Balance at 1 July 2016
3,767
2,188
2,827
(884) 178,503 186,401
Profit for the year
Currency translation differences
Currency forward contracts
Interest rate swaps
Total comprehensive income for the year
Transactions with members
in their capacity as owners:
Dividends paid
Option expense through share based
payments reserve
Issue of shares to employees
on exercise of options
Transfer option reserve to contributed
equity on exercise of options
Transfer option reserve to contributed
equity on forfeiture of options
Share rights expense through
share based payments reserve
13(b)(i)
9(b)
-
-
-
-
-
-
-
4,825
-
-
-
-
-
-
55
-
712
(712)
711
(711)
-
6,248
316
(1,052)
-
(2,542)
-
-
(2,542)
-
-
(834)
578
(256)
32,648
-
-
-
32,648
32,648
(2,542)
(834)
578
29,850
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(19,264)
(19,264)
-
-
-
-
55
4,825
-
-
-
(19,264)
316
(14,068)
Balance at 30 June 2017
10,015
1,136
285
(1,140) 191,887 202,183
Profit for the year
Currency translation differences
Currency forward contracts
Interest rate swaps
Total comprehensive income for the year
Transactions with members
in their capacity as owners:
Dividends paid
Option expense through share based
payments reserve
Share rights expense through
share based payments reserve
Transfer option reserve to contributed
equity on expiration of options
13(b)(i)
9(b)
-
-
-
-
-
-
-
251
251
-
-
-
-
-
-
42
442
(251)
233
-
320
-
-
320
-
-
336
659
995
4,610
-
-
-
4,610
4,610
320
336
659
5,925
-
-
-
-
-
-
-
-
-
-
(19,371)
(19,371)
-
-
42
442
-
(19,371)
-
(18,887)
Balance at 30 June 2018
10,266
1,369
605
(145) 177,126 189,221
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
52 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
Consolidated cash flow statement FOR THE YEAR ENDED 30 JUNE 2018
NOTES
2018
$000
2017
$000
Cash flows from operating activities
Receipts from customers (inclusive of GST and sales taxes)
Payments to suppliers and employees
(inclusive of GST and sales taxes)
Interest received
Other revenue
Interest paid
Income tax paid
Inland revenue tax settlement
Net GST and sales taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Payments for property, plant and equipment
Payments for intangible assets
Net cash (outflow) from investing activities
Cash flows from financing activities
Proceeds from issues of shares on exercise of options
Proceeds from borrowings
Repayment of borrowings
Dividends paid to Company's shareholders
Net cash (outflow) from financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the financial year
10(a)
8(b)
8(c)
9(a)
13(b)
7(a)
671,165
649,041
(570,280)
100,885
10
1,078
(2,794)
(6,448)
-
(37,838)
54,893
(534,444)
114,597
16
791
(3,106)
(9,179)
(21,842)
(41,525)
39,752
549
(17,890)
(6,665)
(24,006)
289
(27,294)
(5,851)
(32,856)
-
116,500
(126,500)
(19,371)
(29,371)
1,516
5,676
28
7,220
4,825
136,750
(132,250)
(19,264)
(9,939)
(3,043)
8,853
(134)
5,676
The above consolidated cash flow statement should be read in conjunction with the accompanying notes.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 53
Notes to the consolidated financial statements FOR THE YEAR ENDED 30 JUNE 2018
NOTE 1 Corporate information
The consolidated financial statements of Michael Hill
International Limited and its subsidiaries (collectively, the
Group) for the year ended 30 June 2018 were authorised for
issue in accordance with a resolution of the directors on 24
August 2018. Michael Hill International Limited (the Company
or Parent) is a for profit company limited by shares incorporated
in Australia. The Company listed on the Australian Securities
Exchange ('ASX') on 7 July 2016 as its primary listing, and
maintains a secondary listing on the New Zealand Stock
Exchange ('NZX').
NOTE 2 Summary of significant
accounting policies
(a) BASIS OF PREPARATION
The financial report is a general purpose financial
report, which has been prepared in accordance with the
requirements of the Corporations Act 2001, Australian
Accounting Standards and other authoritative pronounce-
ments of the Australian Accounting Standards Board.
The financial report is presented in Australian dollars
and all values are rounded to the nearest thousand
($'000), except when otherwise indicated.
The financial statements have been prepared on
a historical cost basis, except for derivative financial
instruments that have been measured at fair value. The
consolidated financial statements provide comparative
information in respect of the previous period.
Compliance with IFRS
The consolidated financial statements of the Group comply
with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board
(IASB
(b) PRINCIPLES OF CONSOLIDATION
AND EQUITY ACCOUNTING
Subsidiaries
Subsidiaries are all entities (including special purpose)
over which the Group has control. Control is achieved
when the Group is exposed, or has rights, to variable
returns from its involvement with the investee and has
the ability to affect those returns through its power to
direct the activities of the investee. Subsidiaries are fully
consolidated from the date on which control is transferred
to the Group. They are deconsolidated from the date that
control ceases.
The acquisition method of accounting is used to
account for the acquisition of subsidiaries by the Group.
The cost of an acquisition is measured as the fair value of
the assets given, equity instruments issued and liabilities
incurred or assumed at the date of exchange. Identifiable
assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially
at their fair values at the acquisition date, irrespective of
the extent of any non-controlling interest. The excess of
the cost of acquisition over the fair value of the Group's
share of the identifiable net assets acquired is recorded as
goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference
is recognised directly in the statement of comprehensive
income. Investments in subsidiaries are accounted for at
cost in the individual financial statements of Michael Hill
International Limited. Refer to note 15(a).
Intercompany transactions, balances and unrealised
gains on transactions between Group companies are
eliminated on consolidation. Unrealised losses are also
eliminated unless the transaction provides evidence of the
impairment of the transferred asset. Accounting policies
of subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the Group.
(c) SEGMENT REPORTING
Operating segments are reported in a manner consistent
with the internal reporting provided to the chief operating
decision makers. The chief operating decision makers, who
are responsible for allocating resources and assessing
performance of the operating segments, have been
identified as the Executive Management team.
(d) FOREIGN CURRENCY TRANSLATION
(i) Functional and presentation currency
Items included in the financial statements of each of
the Group's entities are measured using the currency of
the primary economic environment in which the entity
operates ('the functional currency'). The Group financial
statements are presented in Australian dollars, which is the
Group's presentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into the
functional currency using the exchange rates prevailing at
the dates of the transactions. Foreign exchange gains and
losses resulting from the settlement of such transactions
and from the translation at year-end of monetary assets
and liabilities denominated in foreign currencies are
recognised in the income statement, except when deferred
in equity as qualifying cash flow hedges and qualifying net
investment hedges or are attributable to part of the net
investment in a foreign operation.
(iii) Group companies
The results and financial position of all the Group entities
(none of which have the currency of a hyperinflation-
ary economy) that have a functional currency different
from the presentation currency are translated into the
presentation currency as follows:
• assets and liabilities for each balance sheet presented
are translated at the closing rate at the date of the
statement of financial position;
• income and expenses for each statement of profit
or loss and statement of comprehensive income are
translated at average exchange rates, unless this is not
a reasonable approximation of the cumulative effect of
the rates prevailing on the transaction dates, in which
54 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
case income and expenses are translated at the dates
of the transactions; and
• all resulting exchange differences are recognised in
other comprehensive income.
On consolidation, exchange differences arising from
the translation of any net investment in foreign entities, and
of borrowings and other financial instruments designated
as hedges of such investments, are recognised in other
comprehensive income.
(e) REVENUE RECOGNITION
(i) Sales of goods - retail
Sales of goods are recognised when a Group entity
delivers a product to the customer. Retail sales are
usually by cash, payment plan or credit card. The recorded
revenue is the gross amount of sale (excluding taxes),
including any fees payable for the transaction
It is the Group's policy to sell its products to the end
customer with a right of return. Accumulated experience is
used to estimate and provide for such returns at the time
of sale, recognising a Returns provision and corresponding
Returns Inventory.
(ii) Rendering of services -
deferred service revenue
The Group offers a professional care plan ('PCP') product
which is considered deferred revenue until such time that
service has been provided. A PCP is a plan under which
the Group offers future services to customers based
on the type of plan purchased. The Group subsequently
recognises the income in revenue in the statement of
comprehensive income once these services are performed.
An estimate is used as a basis to establish the amount
of service revenue to recognise in the consolidated
statement of comprehensive income.
(iii) Rendering of services - repairs
Sales of services for repair work performed is recognised
in the accounting period in which the services are rendered.
(iv) Interest revenue from in-house
customer finance program
Interest revenue is recognised on the in-house customer
finance program when consideration is deferred. It is
calculated as the difference between the nominal cash
and cash equivalents received from customers and the
discounted cashflows, on both interest and non-interest
bearing products. Interest revenue is brought to account
over the term of the finance agreement, and the rate used
for non-interest bearing products is in line with current,
comparable market rates.
Interest income
(v)
Interest income is recognised using the effective interest
method.
(f) TAXES
Current income tax
The income tax expense or credit for the year is the tax
payable on the current year's taxable income based on the
applicable income tax rate for each jurisdiction adjusted by
changes in deferred tax assets and liabilities attributable to
temporary differences and to unused tax losses.
The current income tax charge is calculated on the
basis of the tax laws enacted or substantively enacted
at the end of the reporting year in the countries where
the Group operates and generates taxable income.
Management periodically evaluates positions taken in
tax returns with respect to situations in which applicable
tax regulation is subject to interpretation. It establishes
provisions where appropriate on the basis of amounts
expected to be paid to the tax authorities.
Current tax is recognised in profit or loss, except
to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case,
the tax is also recognised in other comprehensive income
or directly in equity, respectively.
Deferred income tax
Deferred income tax is provided in full, using the liability
method, on temporary differences between the tax bases
of assets and liabilities and their carrying amounts in the
consolidated financial statements.
Deferred tax assets are recognised for deductible
temporary differences and unused tax losses only if it is
probable that future taxable amounts will be available to
utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised
for temporary differences between the carrying amount
and tax bases of investments in controlled entities where
the Parent Entity is able to control the timing of the
reversal of the temporary differences and it is probable
that the differences will not reverse in the foreseeable
future.
Deferred tax is recognised in profit or loss, except
to the extent that it relates to items recognised in other
comprehensive income or directly in equity. In this case,
the tax is also recognised in other comprehensive income
or directly in equity, respectively.
Deferred tax assets and liabilities are offset when
there is a legally enforceable right to offset current tax
assets and liabilities and when the deferred tax balances
relate to the same taxation authority. Current tax assets
and tax liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on
a net basis, or to realise the asset and settle the liability
simultaneously.
Tax consolidation group
Michael Hill International Limited and its wholly-owned
Australian controlled entities formed a tax consolidation
group on 29 June 2016. As a consequence, one income
tax return is completed for the Australian tax group and is
treated for income tax purposes as one taxpayer.
Formerly, Michael Hill Jeweller (Australia) Pty Ltd
and all wholly-owned Australian controlled entities formed
the Australian tax consolidation group which completed
one income tax return and was treated for income tax
purposes as one taxpayer.
The tax balances have been attributed for reporting
purposes to each of the entities on the basis of their
individual results. Amounts of tax due to and receivable
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 55
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
from the Australian Taxation Office are made by Michael
Hill International Limited as nominated member of the
Australian tax consolidated group. The current tax balance
for the Australian tax group has been allocated between
the members based on each entity’s current tax movement
for the period. Where tax losses are incurred by Australian
tax group members, these are offset within the group.
(g) GOODS AND SERVICES TAX (GST)
Revenues, expenses and assets are recognised net of the
amount of GST, except:
• When the GST incurred on a sale or purchase of assets
or services is not payable to or recoverable from the
taxation authority, in which case the GST is recognised
as part of the revenue or the expense item or as part of
the cost of acquisition of the asset, as applicable; or
• When receivables and payables are stated with the
amount of GST included.
The net amount of GST recoverable from, or payable to,
the taxation authority is included as part of receivables
or payables in the statement of financial position.
Commitments and contingencies are disclosed net of
the amount of GST recoverable from, or payable to, the
taxation authority.
Cash flows are included in the statement of cash
flows on a gross basis and the GST components of cash
flows arising from investing or financing activities which
are recoverable from, or payable to, the taxation authority,
are presented as operating cash flows.
(h) LEASES
Leases of property, plant and equipment where the Group,
as lessee, has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases
are capitalised at the lease's inception at the fair value
of the leased property or, if lower, the present value of
the minimum lease payments. The corresponding rental
obligations, net of finance charges, are included in other
short-term and long-term payables. Each lease payment
is allocated between the liability and finance cost. The
finance cost is charged to the consolidated statement
of comprehensive income over the lease period so as
to produce a constant periodic rate of interest on the
remaining balance of the liability for each year. The
property, plant and equipment acquired under finance
leases is depreciated over the asset's useful life or over
the shorter of the asset's useful life and the lease term.
Leases in which a significant portion of the risks
and rewards of ownership are not transferred to the
Group as lessee are classified as operating leases (note
17). Payments made under operating leases (net of any
incentives received from the lessor) are charged to profit
or loss on a straight-line basis over the year of the lease..
(i) IMPAIRMENT OF ASSETS
At each annual reporting date (or more frequently if
events or changes in circumstances indicate that they
might be impaired), the Group assesses whether there
is any indication that an asset may be impaired. Where
such an indication is identified, the Group estimates
the recoverable amount of the asset and recognises an
56 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
impairment loss where the recoverable amount is less than
the carrying amount. The recoverable amount is the higher
of an asset's fair value less costs to sell and value-in-use..
In addition, at least annually, goodwill and intangible
assets with indefinite useful lives are tested for impairment
by comparing their estimated recoverable amounts with
their carrying amounts. Where the recoverable amount
exceeds the carrying amount of an asset, an impairment
loss is recognised.
The pre-tax discount rates used in determining the
recoverable amount ranged between 10.5% and 11.5%
(2017: 11.1% and 14.6%), depending on the geographical
segment of the assets.
(j) CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, deposits
held at call with financial institutions, other short-term,
highly liquid investments with original maturities of three
months or less that are readily convertible to known
amounts of cash and which are subject to an insignificant
risk of changes in value, and bank overdrafts. Bank
overdrafts are shown within borrowings in current liabilities
in the statement of financial position when utilised.
(k) TRADE AND OTHER RECEIVABLES
Trade receivables are amounts due from customers for
goods sold or services rendered in the ordinary course of
business. If collection is expected in one year or less (or in
the normal operating cycle of the business if longer), they
are classified as current assets. If not, they are presented
as non-current assets.
Collectibility of trade receivables is reviewed on an
ongoing basis. Trade receivables which are known to
be uncollectible are written off. A provision for impaired
receivables is established when there is objective evidence
that the Group will not be able to collect all amounts due
according to the original terms of receivables. The amount
of the provision is the difference between the asset’s
carrying amount and the present value of estimated future
cash flows, discounted at the original effective interest
rate. Cash flows relating to short-term receivables are not
discounted if the effect of discounting is immaterial. The
amount of the provision is recognised in the statement of
comprehensive income.
(l) DEFERRED EXPENDITURE
Direct and incremental bonuses associated with the sale
of PCPs are deferred and amortised in proportion to the
PCP revenue recognised. Management reviews trends in
current and estimated future services provided under the
plan to assess whether changes are required to the cost
recognition rates used.
(m) INVENTORIES
Raw materials and finished goods are stated at the lower
of cost and net realisable value. Cost comprises direct
materials, direct labour and an appropriate proportion of
variable and fixed overhead expenditure, the latter being
allocated on the basis of normal operating capacity. Costs
are assigned to individual items of inventory on the basis
of weighted average costs. Net realisable value is the
estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated
costs necessary to make the sale.
(n) DISCONTINUED OPERATIONS
A discontinued operation is a component of the entity
that has been disposed of or is classified as held for sale
and that represents a separate major line of business
or geographical area of operations, is part of a single
co-ordinated plan to dispose of such a line of business or
area of operations, or is a subsidiary acquired exclusively
with a view to resale. The results of discontinued operations
are presented separately in the statement of profit or loss.
(o) INVESTMENTS AND OTHER FINANCIAL ASSETS
Classification
The Group classifies its financial assets in the following
categories:
• financial assets at fair value through profit or loss,
• loans and receivables,
• held-to-maturity investments, and
• available-for-sale financial assets.
The classification depends on the purpose for which the
investments were acquired. Management determines the
classification of its investments at initial recognition and, in
the case of assets classified as held-to-maturity, re-evaluates
this designation at the end of each reporting year. See note 7
for details about each type of financial asset.
(i) Financial assets at fair value through
profit or loss
Financial assets at fair value through profit or loss are
financial assets held for trading. A financial asset is
classified in this category if acquired principally for the
purpose of selling in the short term. Derivatives are
classified as held for trading unless they are designated
as hedges. Assets in this category are classified as current
assets if they are expected to be settled within 12 months;
otherwise they are classified as non-current.
(ii) Loans and receivables
Loans and receivables are non-derivative financial
assets with fixed or determinable payments that are not
quoted in an active market. They are included in current
assets, except for those with maturities greater than 12
months after the reporting period which are classified as
non-current assets. Loans and receivables are included in
trade and other receivables in the statement of financial
position (note 7(b)).
Held-to-maturity investments
Held-to-maturity investments are non-derivative financial
assets with fixed or determinable payments and fixed
maturities that the Group's management has the positive
intention and ability to hold to maturity. If the Group were to
sell other than an insignificant amount of held-to-maturity
financial assets, the whole category would be tainted and
reclassified as available-for-sale. Held-to-maturity financial
assets are included in non-current assets, except for those
with maturities less than 12 months from the end of the
reporting period, which are classified as current assets.
Available-for-sale financial assets
Available-for-sale financial assets, comprising principally
marketable equity securities, are non-derivatives that
are either designated in this category or not classified
in any of the other categories. They are included in
non-current assets unless the investment matures or
management intends to dispose of the investment within
12 months of the end of the reporting period. Investments
are designated as available-for-sale if they do not have
fixed maturities and fixed or determinable payments and
management intends to hold them for the medium to
long-term.
Impairment
The Group assesses at the end of each reporting period
whether there is objective evidence that a financial asset
or a Group of financial assets is impaired. A financial asset
or a Group of financial assets is impaired and impairment
losses are incurred only if there is objective evidence
of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a 'loss
event') and that loss event (or events) has an impact on
the estimated future cash flows of the financial asset or
Group of financial assets that can be reliably estimated. In
the case of equity investments classified as available-for-
sale, a significant or prolonged decline in the fair value of
the security below its cost is considered an indicator that
the assets are impaired.
(p) DERIVATIVES AND HEDGING ACTIVITIES
Derivatives are initially recognised at fair value on the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting
year. The accounting for subsequent changes in fair
value depends on whether the derivative is designated
as a hedging instrument, and if so, the nature of the item
being hedged. The Group designates certain derivatives
as either:
• hedges of the fair value of recognised assets or
liabilities or a firm commitment (fair value hedges)
• hedges of a particular risk associated with the cash
flows of recognised assets and liabilities and highly
probable forecast transactions (cash flow hedges), or
• hedges of a net investment in a foreign operation (net
investment hedges).
The Group documents at the inception of the hedging
transaction the relationship between hedging instruments
and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions.
The Group also documents its assessment, both at
hedge inception and on an ongoing basis, of whether the
derivatives that are used in hedging transactions have
been and will continue to be highly effective in offsetting
changes in fair values or cash flows of hedged items.
The fair values of various derivative financial
instruments used for hedging purposes are disclosed
in note 7(e). Movements in the hedging reserve in
shareholder's equity are shown in note 9(b). The full fair
value of a hedging derivative is classified as a non-current
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 57
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
asset or liability when the remaining maturity of the
hedged item is more than 12 months; it is classified as a
current asset or liability when the remaining maturity of the
hedged item is less than 12 months. Trading derivatives
are classified as a current asset or liability.
(i) Fair value hedge
Changes in the fair value of derivatives that are designated
and qualify as fair value hedges are recorded in the income
statement, together with any changes in the fair value of
the hedged asset or liability that are attributable to the
hedged risk. The gain or loss relating to the effective portion
of interest rate swaps hedging fixed rate borrowings is
recognised in profit or loss within finance costs, together
with changes in the fair value of the hedged fixed rate
borrowings attributable to interest rate risk. The gain or loss
relating to the ineffective portion is recognised in profit or
loss within other income or other expenses.
If the hedge no longer meets the criteria for hedge
accounting, the adjustment to the carrying amount of
a hedged item for which the effective interest method
is used is amortised to profit or loss over the period to
maturity using a recalculated effective interest rate.
(ii) Cash flow hedge
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income and
accumulated in reserves in equity. The gain or loss relating
to the ineffective portion is recognised immediately in
profit or loss within other income or other expense.
Amounts accumulated in equity are reclassified to
profit or loss in the years when the hedged item affects
profit or loss (for instance when the forecast sale that
is hedged takes place). The gain or loss relating to the
effective portion of interest rate swaps hedging variable
rate borrowings is recognised in profit or loss within
'finance costs'. The gain or loss relating to the effective
portion of forward foreign exchange contracts hedging
export sales is recognised in profit or loss within 'sales'.
However, when the forecast transaction that is hedged
results in the recognition of a non-financial asset (for
example, inventory or fixed assets) the gains and losses
previously deferred in equity are reclassified from equity
and included in the initial measurement of the cost of the
asset. The deferred amounts are ultimately recognised in
profit or loss as cost of goods sold in the case of inventory,
or as depreciation or impairment in the case of fixed assets.
When a hedging instrument expires or is sold or
terminated, or when a hedge no longer meets the criteria
for hedge accounting, any cumulative gain or loss existing in
equity at that time remains in equity and is recognised when
the forecast transaction is ultimately recognised in profit
or loss. When a forecast transaction is no longer expected
to occur, the cumulative gain or loss that was reported in
equity is immediately reclassified to profit or loss.
(iii) Net investment hedges
Hedges of net investments in foreign operations are
accounted for similarly to cash flow hedges.
Any gain or loss on the hedging instrument relating
to the effective portion of the hedge is recognised in other
comprehensive income and accumulated in reserves in
equity. The gain or loss relating to the ineffective portion
is recognised immediately in profit or loss within other
income or other expenses.
Gains and
in equity are
losses accumulated
reclassified to profit or loss when the foreign operation is
partially disposed of or sold.
(iv) Derivatives that do not qualify for hedge
accounting
Certain derivative instruments do not qualify for hedge
accounting. Changes in the fair value of any derivative
instrument that does not qualify for hedge accounting are
recognised immediately in profit or loss and are included
in other income or other expenses.
(q) PROPERTY, PLANT AND EQUIPMENT
All property, plant and equipment is stated at historical cost
less depreciation. Historical cost includes expenditure that
is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset's
carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Group
and the cost of the item can be measured reliably. The
carrying amount of any component accounted for as a
separate asset is derecognised when replaced. All other
repairs and maintenance are charged to profit or loss
during the reporting year in which they are incurred.
Depreciation on other assets is calculated using
the straight line method to allocate their cost or revalued
amounts, net of their residual values, over their estimated
useful lives (see Note 8(b)).
The assets' residual values and useful lives are
reviewed, and adjusted if appropriate, at the end of each
reporting year.
An asset's carrying amount is written down
immediately to its recoverable amount if the asset's
carrying amount is greater than its estimated recoverable
amount (note 2(i)).
Gains and losses on disposals are determined
by comparing proceeds with carrying amount. These are
included in profit or loss. When revalued assets are sold, it
is Group policy to transfer any amounts included in other
reserves in respect of those assets to retained earnings.
(r) INTANGIBLE ASSETS
Software
Acquired computer software licences are capitalised on
the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortised over their
estimated useful lives (three to five years).
Costs associated with developing or maintaining
software programmes are recognised as an expense as
58 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
incurred. Development costs that are directly attributable
to the design and testing of identifiable and unique
software products controlled by the Group are recognised
as intangible assets when the following criteria are met:
• it is technically feasible to complete the software so that
it will be available for use
• management intends to complete the software and use
or sell it
• there is an ability to use or sell the software
• it can be demonstrated how the software will generate
probable future economic benefits
• adequate technical, financial and other resources to
complete the development and to use or sell the
software are available, and
• the expenditure attributable to the software during its
development can be reliably measured.
Directly attributable costs that are capitalised as part of
the software include employee costs and an appropriate
portion of relevant overheads.
Capitalised development costs are recorded as
intangible assets and amortised from the point at which
the asset is ready for use.
Computer software development costs recognised as
assets are amortised over their estimated useful lives (not
exceeding ten years).
(s) TRADE AND OTHER PAYABLES
These amounts represent liabilities for goods and services
provided to the Group prior to the end of financial year
which are unpaid. The amounts are unsecured and are
usually paid within 30 days of recognition. Trade and
other payables are presented as current liabilities unless
payment is not due within 12 months after the reporting
year. They are recognised initially at their fair value and
subsequently measured at amortised cost using the
effective interest method.
Deferred revenue represents lease incentives for
entering new lease agreements and revenue from PCPs.
The accounting policy used to recognise the revenue is
detailed in note 2(e)(ii).
(t) BORROWINGS
Borrowings are initially recognised at fair value, net of
transaction costs incurred. Borrowings are subsequently
measured at amortised cost. Any difference between the
proceeds (net of transaction costs) and the redemption
amount is recognised in profit or loss over the year of the
borrowings using the effective interest method.
Borrowings are removed from the balance sheet
when the obligation specified in the contract is discharged,
cancelled or expired. The difference between the carrying
amount of a financial liability that has been extinguished
or transferred to another party and the consideration paid,
including any non-cash assets transferred or liabilities
assumed, is recognised in profit or loss as other income
or finance costs.
Borrowings are classified as current liabilities unless
the Group has an unconditional right to defer settlement of
the liability for at least 12 months after the reporting year.
(u) PROVISIONS
Provisions for are recognised when the Group has a
present legal or constructive obligation as a result of past
events, it is probable that an outflow of resources will be
required to settle the obligation and the amount can be
reliably estimated. Provisions are not recognised for future
operating losses.
Where there are a number of similar obligations, the
likelihood that an outflow will be required in settlement is
determined by considering the class of obligations as a
whole. A provision is recognised even if the likelihood of an
outflow with respect to any one item included in the same
class of obligations may be small.
Present obligations arising from onerous contracts
are required to be recognised and measured as a provision.
An onerous contract is considered to exist where the
unavoidable cost of meeting the obligations under the
contract exceed the economic benefits expected to be
received from the contract. The Group has recognised a
provision in relation to one contract at our Maryborough
location in Australia that was identified as onerous during
the reporting period.
Provisions are measured at the present value of
management's best estimate of the expenditure required
to settle the present obligation at the end of the reporting
year. The discount rate used to determine the present
value is a pre-tax rate that reflects current market
assessments of the time value of money and the risks
specific to the liability. The increase in the provision due
to the passage of time is recognised as interest expense.
(v) EMPLOYEE BENEFITS
(i) Short-term obligations
Liabilities for wages and salaries, including non-monetary
benefits and accumulating sick leave that are expected
to be settled wholly within 12 months after the end of the
year in which the employees render the related service are
recognised in respect of employees’ services up to the end
of the reporting year and are measured at the amounts
expected to be paid when the liabilities are settled.
Provisions for employee benefits are measured at
the present value of management’s best estimate of the
expenditure required to settle the present obligation at the
reporting date.
(ii) Other long-term employee benefit obligations
The liabilities for long service leave and annual leave that
are not expected to be settled wholly within 12 months
after the end of the year in which the employees render
the related service are measured as the present value
of expected future payments to be made in respect of
services provided by employees up to the end of the
reporting year using the projected unit credit method.
Consideration is given to expected future wage and salary
levels, experience of employee departures and periods
of service. Expected future payments are discounted
using the Milliman G100 discount rates at the end
of the reporting period. Remeasurements as a result
of experience adjustments and changes in actuarial
assumptions are recognised in profit or loss.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 59
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
The obligations are presented as current liabilities in
the statement of financial position if the entity does not
have an unconditional right to defer settlement for at least
twelve months after the reporting year, regardless of when
the actual settlement is expected to occur.
(iii) Share-based payments – Employee options
Options are
issued to Executives of Michael Hill
International Limited in accordance with the Company's
constitution. The Board of Directors pass a resolution
approving the issue of the options. The fair value of options
granted is recognised as an employee benefit expense
with a corresponding increase in equity.
The fair value is measured at grant date and
recognised over the period during which the employees
become unconditionally entitled to the options. The fair
value at grant date for options issued during 2018 were
independently determined using a Binomial option pricing
model, which is an iterative model for options that can
be exercised at times prior to expiry. The model takes
into account the grant date, exercise price, the vesting
and performance criteria, the impact of dilution, the
non-tradeable nature of the option, the share price at grant
date and expected price volatility of the underlying share,
the expected dividend yield and the risk-free interest rate
for the term of the option. It also assumes the options will
be exercised at the mid-point of the exercise period.
The fair value of options granted is recognised as an
employee benefits expense with a corresponding increase
in equity. The total amount to be expensed is determined
by reference to the fair value of the options granted:
including any market performance conditions (eg the
•
entity’s share price)
• excluding the impact of any service and non-market
performance vesting conditions (eg profitability, sales
growth targets and remaining an employee of the entity
over a specified time year), and
including the impact of any non-vesting conditions
•
(eg the requirement for employees to save or holdings
shares for a specific year of time).
The total expense is recognised over the vesting period,
which is the period over which all of the specified vesting
conditions are to be satisfied. At the end of each year, the
entity revises its estimates of the number of options that
are expected to vest based on the non-marketing vesting
and service conditions. It recognises the impact of the
revision to original estimates, if any, in profit or loss, with a
corresponding adjustment to equity.
Upon the exercise of options, the balance of the
share-based payments reserve relating to those options is
transferred to share capital.
(iv) Profit-sharing and bonus plans
The Group recognises a liability and an expense for
bonuses and profit-sharing based on a formula that
takes into consideration the profit attributable to the
Company's shareholders after certain adjustments. The
Group recognises a provision where contractually obliged
or where there is a past practice that has created a
constructive obligation.
(v) Retirement benefit obligations
All Australian and Canadian employees of the Group are
entitled to benefits from the Group's superannuation plan
on retirement, disability or death or can direct the group to
make contributions to a defined contribution plan of their
choice. The Group’s superannuation plan has a defined
benefit section which receives fixed contributions from
Group companies and the Group's legal or constructive
obligation is limited to these contributions.
(w) CONTRIBUTED EQUITY
Ordinary shares are classified as equity
Incremental costs directly attributable to the issue of
new shares or options are shown in equity as a deduction,
net of tax, from the proceeds.
Where any Group company purchases the Company's
equity instruments, for example as the result of a share
buy-back or a share-based payment plan, the consideration
paid, including any directly attributable incremental costs
(net of income taxes) is deducted from equity attributable
to the owners of Michael Hill International Limited as
treasury shares until the shares are cancelled or reissued.
Where such ordinary shares are subsequently reissued,
any consideration received, net of any directly attributable
incremental transaction costs and the related income tax
effects, is included in equity attributable to the owners of
Michael Hill International Limited.
(x) DIVIDENDS
Provision is made for the amount of any dividend declared,
being appropriately authorised and no longer at the
discretion of the entity, on or before the end of the reporting
year but not distributed at the end of the reporting year.
(y) EARNINGS PER SHARE
(i) Basic earnings per share
Basic earnings per share is calculated by dividing:
• the profit attributable to owners of the Company, excluding
any costs of servicing equity other than ordinary shares
• by the weighted average number of ordinary shares
outstanding during the financial year, adjusted for bonus
elements in ordinary shares issued during the year and
excluding treasury shares.
(ii) Diluted earnings per share
Diluted earnings per share adjusts the figures used in the
determination of basic earnings per share to take into
account:
• the after income tax effect of interest and other financing
costs associated with dilutive potential ordinary shares,
and
• the weighted average number of additional ordinary
shares that would have been outstanding assuming the
conversion of all dilutive potential ordinary shares.
(z) ROUNDING OF AMOUNTS
The Company is of a kind referred to in ASIC Legislative
Instrument 2016/191, relating to the 'rounding off' of
amounts in the financial statements. Amounts in the
financial statements have been rounded off in accordance
with the instrument to the nearest thousand dollars, or in
certain cases, the nearest dollar.
60 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
(aa) NEW ACCOUNTING STANDARDS AND
INTERPRETATIONS
Certain new accounting standards and interpretations
have been published that are not mandatory for 30 June
2018 reporting periods and have not been early adopted
by the group. The Group's assessment of the financial
impact of these new standards and interpretations is set
out below.
(i) AASB 9 Financial Instruments:
Classification and measurement
AASB 9 Financial Instruments addresses the classifica-
tion, measurement and derecognition of financial assets
and financial liabilities. The standard is applicable to
financial years commencing on or after 1 January 2018,
and the Group will be adopting the new standard from 1
July 2018. The impairment model under the new Standard
is based on expected credit losses rather than incurred
losses under AASB 139. The expected credit loss model
results in early recognition of impairment allowances
and likely larger amount of the allowances. The level of
allowances will also be more volatile in the future, as
forecasts change. Adopting the expected credit loss model
requires changes in current systems and processes and
the use of judgement. Preliminary assessments indicate
that the impact of the standard is not expected to be
significant on the consolidated financial position, cash
flow and results of operations. This standard will require
additional assessment and disclosure of financial assets
and liabilities held by the Group. The Group will continue
to apply the provisions of AASB 139 in relation to open
hedges until they are settled.
(ii) AASB 15 Revenue from Contracts with Customers
AASB 15 Revenue deals with revenue recognition and
establishes principles for reporting useful information to
users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising
from an entity’s contracts with customers. Revenue is
recognised when a customer obtains control of a good
or service and thus has the ability to direct the use and
obtain the benefits from the good or service. AASB 15
supersedes:
(a) AASB 111 Construction Contracts;
(b) AASB 118 Revenue;
(c)
(d)
Interpretation 13 Customer Loyalty Programmes;
Interpretation 15 Agreements for the Construction of
Real Estate;
Interpretation 18 Transfers of Assets from Customers;
Interpretation 131 Revenue - Barter Transactions
Involving Advertising Services; and
Interpretation 1042 Subscriber acquisition costs in
the Telecommunications Industry.
(e)
(f)
(g)
The standard
is applicable for financial years
commencing on or after 1 January 2018, and the Group
will be adopting the new standard from 1 July 2018.
Substantial work has been completed reviewing the
Group's different revenue streams. The revenue from the
sale of goods will be recognised at a point in time while
the revenue from sale of PCP will be recognised over time
consistent with the current accounting treatment. The
impact of the new revenue standard is not expected to be
significant. The new standard will require certain disclosure
related changes to the 2019 financial statements.
(iii) AASB 16 Leases
AASB 16 Leases addresses
the recognition and
measurement of assets and liabilities for all leases with a
term of more than 12 months, unless they are of low value.
It also contains the disclosure requirements for lessees
and lessors. AASB 16 supersedes:
(a) AASB 117 Leases;
(b)
Interpretation 4 Determining whether an Arrangement
contains a Lease;
(c) SIC-15 Operating Leases - Incentives; and
(d) SEC - 27 Evaluating the Substance of Transactions
involving the Legal Form of a Lease.
The standard is not applicable until financial years
commencing on or after 1 January 2019 but is available
for early adoption provided the new revenue standard,
AASB 15 Revenue from Contracts with Customers, has
been applied or is applied at the same date as AASB 16.
The Group has not yet determined the timing of adopting
AASB 16 Leases.
The Group will use a modified retrospective adoption
approach and expect to elect the package of practical
expedients, including the use of hindsight to determine
the lease term. As the Group continues to evaluate this
standard and the effect on related disclosures, the primary
effect of adoption will be to record right-of-use assets
and corresponding lease obligations for current operating
leases. The adoption is expected to have a material impact
on the Group's consolidated balance sheet, consolidated
cash flow statement and statement of comprehensive
income.
Management is currently evaluating the anticipated
impact on the Group’s consolidated financial position
and results of operations, the quantitative and qualitative
factors that will impact the Group as part of the adoption of
this standard, as well as any changes to its leasing strategy
that may occur because of the changes to the accounting
and recognition of leases.
The ultimate impact of adopting the new standard will
depend on the Group's lease portfolio as of the adoption
date and the final discount rates used.
The core principle of AASB 15 is that an entity recognises
revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those
goods or services. This is largely in line with the current
accounting policies adopted for recognition of revenue, as
described in note 2(e).
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 61
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
Additional information
This section provides additional information about those
individual line items in the financial statements that the Directors
consider most relevant in the context of the operations of the
entity, including:
(a) accounting policies that are relevant for an understanding
of the items recognised in the financial statements,
(b) analysis and sub-totals, including segment information,
(c)
information about estimates and judgements made in
relation to particular items.
page 62
Note 3 Segment information
page 63
Note 4 Revenue
page 64
Note 5 Other income and expense items
Note 6
page 64
Note 7 Financial assets and financial liabilities page 66
page 69
Note 8 Non-financial assets and liabilities
page 73
Note 9 Equity
page 74
Note 10 Cash flow information
Income tax expense
NOTE 3 Segment information
(a) DESCRIPTION OF SEGMENTS AND
PRINCIPAL ACTIVITIES
Management have determined the operating segments
based on the reports reviewed by the Board and Executive
team that are used to make strategic decisions. The Board
and executive team consider, organise and manage the
business primarily from a brand perspective. For the Michael
Hill brand, they also consider, organise and manage the
business from a geographic perspective, being the country of
origin where the sale and service was performed.
During the year, the Company announced the
closure of the Emma & Roe brand and the Michael Hill
United States segment. These segments have been
substantially closed and consequently these segments
have been classified as a discontinued operation and are
therefore not presented in the segment disclosures for
2018 and 2017.
The amounts provided to the Board and executive
team in respect of total assets and liabilities are
measured in a manner consistent with the financial
statements. These reports do not allocate total assets or
total liabilities based on the operations of each segment
or by geographical location.
The Group's continuing operations operate in three
geographical segments: Australia, New Zealand and
Canada.
The corporate and other segment includes revenue
and expenses that do not relate directly to the relevant
Michael Hill retail segments. These predominately relate
to corporate costs and Australian based support costs,
but also include manufacturing activities, warehouse and
distribution, interest and company tax. Inter-segment
pricing is at arm's length or market value.
Types of products and services
Michael Hill International Limited and its controlled entities
operate predominately in the sale of jewellery and related
services. As indicated above, the Group is organised and
managed globally by brand and geographic areas.
Major customers
Michael Hill International Limited and its controlled entities
sell goods and provide services to a number of customers
from which revenue is derived. There is no single customer
from which the Group derives more than 10% of total
consolidated revenue.
Accounting policies and inter-segment transactions
The accounting policies used by the Group in reporting
segments internally are the same as those contained in
note 2 to the accounts and in the prior period.
62 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
(b) SEGMENT RESULTS
Segment information 2018
Operating revenue
Gross profit
Gross profit %
EBITDA*
Depreciation and amortisation
EBIT*
EBIT as a % of revenue
Interest income
Finance costs
Net profit before tax
Income tax expense
Net profit after tax
Segment information 2017
Operating revenue
Gross profit
Gross profit %
EBITDA*
Depreciation and amortisation
EBIT*
EBIT as a % of revenue
Interest income
Finance costs
Net profit before tax
Income tax expense
Net profit after tax
MH
Australia
MH
New Zealand
$000
$000
MH
Canada
$000
Corporate
and other
$000
325,709
206,303
63.3%
56,935
(8,314)
48,621
14.9%
2
59
48,682
-
48,682
321,981
201,707
62.6%
59,454
(7,766)
51,688
16.1%
-
(17)
51,671
-
51,671
115,376
71,560
62.0%
28,063
(2,464)
25,599
22.2%
1
10
25,609
-
25,609
115,518
71,237
61.7%
29,048
(2,651)
26,397
22.9%
1
(41)
26,356
-
26,356
133,000
82,967
62.0%
19,986
(5,077)
14,909
11.0%
-
-
14,909
-
14,909
112,930
69,210
61.0%
16,643
(4,195)
12,448
11.0%
-
-
12,448
-
12,448
1,464
6,063
-
(36,143)
(2,839)
(38,982)
-
7
(2,759)
(41,733)
-
(41,733)
670
8,853
-
(25,386)
(2,815)
(28,201)
-
15
(3,106)
(31,292)
-
(31,292)
Group
$000
575,549
366,893
63.7%
68,841
(18,694)
50,147
8.7%
10
(2,690)
47,467
(12,649)
34,818
551,099
351,007
63.7%
79,759
(17,427)
62,332
11.3%
16
(3,164)
59,183
(15,051)
44,132
* EBIT and EBITDA are Non-IFRS Information and are unaudited. Please refer to Non-IFRS Information on page
33 of the Directors Report for an explanation of Non-IFRS information and a reconciliation of EBIT from continuing
operations and Normalised EBIT.
NOTE 4 Revenue
From continuing operations:
Sales revenue
Revenue from sale of goods and repair services
Revenue from professional care plans
Interest and other revenue from in-house customer finance program
Other revenue
Interest income
Total revenue from continuing operations
2018
$000
2017
$000
541,349
31,929
2,261
575,539
10
575,549
517,222
32,131
1,730
551,083
16
551,099
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 63
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 63
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 5 Other income and expense items
(a) OTHER INCOME
2018
$000
2017
$000
NOTES
Insurance recoveries
Net foreign exchange gains
Other income
(b) BREAKDOWN OF EXPENSES BY NATURE
Depreciation
Plant and equipment
Furniture and fittings
Motor vehicles
Leasehold improvements
Display materials
Total depreciation
Amortisation – software
Total depreciation and amortisation
Finance costs
Bank and interest charges
Interest expense - make good provision
Total finance costs
Net foreign exchange losses included in other expenses
11(b)
8(b)
8(h)
-
-
1,064
1,064
4,153
3,619
145
6,668
1,681
16,266
2,428
18,694
2,762
(72)
2,690
1,029
2
863
775
1,640
3,386
69
166
9,677
1,724
15,022
2,405
17,427
3,105
59
3,164
-
NOTE 6 Income tax expense
NOTES
2018
$000
2017
$000
(a) INCOME TAX EXPENSE
Current tax
Current tax on profits for the year
Derecognised tax losses
Adjustments for current tax of prior periods
Foreign income tax offsets not recognised
Total current tax expense
Deferred income tax
(Increase) / Decrease in deferred tax assets
Tax consolidation cost base adjustments
Derecognised tax losses
Adjustments for deferred tax of prior periods
Total deferred tax expense/(benefit)
Income tax expense
64 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
8(d)
5,723
3,651
3,908
(1,055)
12,227
(2,659)
-
66
(3,708)
(6,301)
5,926
6,402
461
947
1,055
8,865
8,125
(4,389)
-
(291)
3,445
12,310
(b) NUMERICAL RECONCILIATION OF INCOME TAX
EXPENSE TO PRIMA FACIE TAX PAYABLE
Profit from continuing operations before income tax expense
Profit from discontinuing operations before income tax expense
Tax at the Australian tax rate of 30.0% (2017 - 30.0%)
Tax effect of amounts which are not deductible (taxable)
in calculating taxable income:
Non deductible expenditure
Non-assessable intragroup markups
Sundry items
Tax consolidation cost base adjustments
Difference in overseas tax rates
Adjustments for current tax of prior periods
Adjustments for deferred tax of prior periods
Tax losses not recognised
Foreign income tax offset not recognised
Change in tax rate on deferred tax balance
Income tax expense
Income tax expense is attributable to:
Profit from continuing operations
Profit from discontinuing operations
(c) TAX LOSSES
Unused United States tax losses for which
no deferred tax asset has been recognised
Potential tax benefit @ 25.0% (2017 @ 40.0%)
Unused New Zealand tax losses for which
no deferred tax asset has been recognised
Potential tax benefit @ 28.0%
2018
$000
47,467
(36,934)
10,533
2017
$000
59,183
(14,226)
44,957
3,160
13,487
163
(551)
10
-
2,782
288
3,908
(3,644)
3,651
(1,055)
(4)
5,926
12,649
(6,723)
5,926
32,203
8,051
2,623
735
178
(653)
89
(4,389)
8,712
(321)
947
(291)
2,208
1,055
-
12,310
15,051
(2,741)
12,310
19,524
7,810
1,645
461
The unused tax losses incurred in the United States and New Zealand are available indefinitely for offsetting
against future taxable profits of the countries in which the losses arose. Deferred tax assets have not been
recognised in respect of these losses as it is unknown when the New Zealand losses may be used to offset
taxable profits and the United States losses are not expected to be used.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 65
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 7 Financial assets and financial liabilities
Financial assets 2018
Cash and cash equivalents
Trade and other receivables
Derivative financial instruments
Financial assets 2017
Cash and cash equivalents
Trade and other receivables
Financial liabilities 2018
Trade and other payables
Borrowings
Derivative financial instruments
Financial liabilities 2017
Trade and other payables
Borrowings
Derivative financial instruments
Notes Derivatives
Financial
used for
assets at
hedging amortised
cost
Total
$000
$000
$000
7(a)
7(b)
11(a)
7(a)
7(b)
7(c)
7(d)
11(a)
7(c)
7(d)
11(a)
-
-
245
245
7,220
28,046
-
35,266
7,220
28,046
245
35,511
-
-
-
5,676
26,590
32,266
5,676
26,590
32,266
-
-
390
390
-
-
1,141
1,141
49,339
35,213
-
84,552
47,918
45,034
-
92,952
49,339
35,213
390
84,942
47,918
45,034
1,141
94,093
The Group’s exposure to various risks associated with the financial instruments is discussed in note 11. The maximum exposure
to credit risk at the end of the reporting year is the carrying amount of each class of financial assets mentioned above.
(a) CASH AND CASH EQUIVALENTS
Current assets
Cash at bank and on hand
2018
$000
7,220
2017
$000
5,676
Interest rates for the bank accounts have been between 0.00% and 1.15% during the year (2017: between 0.00%
and 1.15%).
(b) TRADE & OTHER RECEIVABLES
Notes
Trade receivables
Provision for impairment of receivables
In-house customer finance
Provision for impairment of receivables
11(c)(i)
11(c)(ii)
Sundry debtors
Current Non-current
$000
-
-
-
$000
4,912
(819)
4,093
2018
Total
$000
4,912
(819)
4,093
Current Non-current
$000
-
-
-
$000
4,752
(502)
4,250
2017
Total
$000
4,752
(502)
4,250
17,681
(1,231)
16,450
2,864
(199)
2,665
20,545
(1,430)
19,115
15,157
(956)
14,201
2,533
(162)
2,371
17,690
(1,118)
16,572
4,838
25,381
-
2,665
4,838
28,046
5,768
24,219
-
2,371
5,768
26,590
Further information relating to loans to related parties and key management personnel is set out in note 19.
66 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
(i) Trade receivables
Trade receivables from sales made to customers through third party credit providers are non-interest bearing and
are generally on a 0-30 day terms.
(ii) In-house customer finance
In October 2012, Michael Hill launched an in-house customer finance program in the Canadian and United States
markets. The terms available to customers range from an interest bearing revolving line of credit through to
interest free terms of between 6 and 24 months, although 12 to 18 months is the typical financing period.
The receivables from the in-house customer finance program are comprised of a large number of transactions
with no one customer representing a significant balance. The finance portfolio consists of contracts of similar
characteristics that are evaluated collectively for impairment. The allowance is an estimate of the losses as of the
balance date, and is calculated using such factors as delinquency and recovery rates.
Sundry debtors
Sundry debtors relates to supplier credits, security deposits and other sundry receivables.
Effective interest rates
Other than in-house customer finance, all receivables are non-interest bearing. The majority of in-house customer
finance receivables are also non-interest bearing.
Impairment and risk exposure
Information about the impairment of trade and other receivables, their credit quality and the Group’s exposure to
credit risk, foreign currency risk and interest rate risk can be found in note 11(b) and 11(c).
Only trade receivables and in-house customer finance contain impaired assets. The remaining classes within
trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of
these other classes, it is expected that these amounts will be received when due.
(c) TRADE AND OTHER PAYABLES
Current liabilities
Trade payables
Annual leave liability
Accrued expenses
Other payables
2018
$000
24,686
8,938
7,154
8,561
49,339
2017
$000
27,649
8,571
6,442
5,256
47,918
Trade payables are unsecured and are usually paid within 30 days of recognition. The carrying amounts of trade
and other payables are considered to be the same as their fair values, due to their short-term nature.
(d) BORROWINGS
Bank loans
Total secured borrowings
Current Non-current
$000
35,213
35,213
$000
-
-
2018
Total
$000
35,213
35,213
Current Non-current
$000
45,034
45,034
$000
-
-
2017
Total
$000
45,034
45,034
The Group’s objectives when managing capital are to ensure sufficient liquidity to support its financial obligations
and execute the Group's operational and strategic plans. The Group continually assesses its capital structure and
makes adjustments to it with reference to changes in economic conditions and risk characteristics associated with its
underlying assets. Accordingly, the Group entered into a three year agreement with ANZ on 26 June 2018 that provides
for a $110,000,000 multi option borrowing facility, the availability of which is adjusted throughout the year in line with
business requirements. At balance date, $70,000,000 was available, and of that, $35,213,000 was utilised.
The Group also has access to various uncommitted credit facility lines serving working capital needs that, at
balance date, totalled $1,924,000. No amounts were drawn under these credit facility lines as at balance date.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 67
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 7 Financial assets and financial liabilities cont.
(e) RECOGNISED FAIR VALUE MEASUREMENTS
Fair value hierarchy
This section explains the judgements and estimates made in determining the fair values of the financial instruments
that are recognised and measured at fair value in the financial statements. To provide an indication about the
reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three
levels prescribed under the accounting standards. An explanation of each level follows underneath the table.
Recurring fair value measurements
at 30 June 2018
Financial assets
Derivatives used for hedging foreign exchange contracts
Total financial assets
Financial Liabilities
Derivatives used for hedging interest rate swaps
Total financial liabilities
Recurring fair value measurements
at 30 June 2017
Financial Liabilities
Derivatives used for hedging
- Foreign exchange contracts
- Interest rate swaps
Total financial liabilities
Notes
Level 1
$000
Level 2
$000
Level 3
$000
Total
$000
11(a)
11(a)
11(a)
11(a)
-
-
-
-
-
-
-
245
245
390
390
414
727
1,141
-
-
-
-
-
-
-
245
245
390
390
414
727
1,141
There were no transfers between levels during the year.
The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of
the reporting period.
Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and
trading and available-for-sale securities) is based on quoted market prices at the end of the reporting
period. The quoted market price used for financial assets held by the Group is the current bid price.
These instruments are included in level 1.
Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-
counter derivatives) is determined using valuation techniques which maximise the use of observable
market data and rely as little as possible on entity-specific estimates. If all significant inputs required to
fair value an instrument are observable, the instrument is included in level 2.
Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included
in level 3. This is the case for unlisted equity securities.
(f) CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
Movements
Carrying amount at start of year
Inwards cash flows
Outwards cash flows
Foreign exchange movements
Carrying amount at end of year
68 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
Non-current interest-bearing
loans and liabilities
$000
45,034
116,500
(126,500)
179
35,213
Total
$000
45,034
116,500
(126,500)
179
35,213
NOTE 8 Non-financial assets and liabilities
This note provides information about the Group's non-financial assets and liabilities, including:
(a) INVENTORIES
Raw materials
Finished goods
Packaging and other consumables
2018
$000
10,243
178,944
2,887
192,074
2017
$000
7,870
191,768
4,215
203,853
All inventories are held at the lower of cost or net realisable value.
(b) PROPERTY, PLANT & EQUIPMENT
Plant and Fixtures and
fittings
equipment
Motor
Leasehold
vehicles improvements
Display
materials
Total
$000
$000
$000
$000
$000
$000
At 1 July 2016
Cost or fair value
Accumulated depreciation
Net book amount
Year ended 30 June 2017
Opening net book amount
Exchange differences
Additions
Additions - make good
Disposals
Depreciation charge
Impairment loss (iii)
Closing net book amount
At 30 June 2017
Cost or fair value
Accumulated depreciation
Net book amount
Year ended 30 June 2018
Opening net book amount
Exchange differences
Additions
Additions - make good
Disposals
Depreciation charge
Impairment loss (iii)
Closing net book amount
At 30 June 2018
Cost
Accumulated depreciation
and impairment
Net book amount
33,203
(20,331)
12,872
30,206
(15,443)
14,763
12,872
(124)
6,868
-
(427)
(4,229)
(26)
14,934
14,763
(119)
5,034
-
(118)
(3,956)
(5)
15,599
930
(396)
534
534
(6)
153
-
(55)
(194)
-
432
72,926
(36,933)
35,993
12,767
(4,996)
7,771
150,032
(78,099)
71,933
35,993
(525)
13,193
773
(791)
(7,089)
(796)
40,758
7,771
(93)
2,046
-
(64)
(1,947)
-
7,713
71,933
(867)
27,294
773
(1,455)
(17,415)
(827)
79,436
37,944
(23,010)
14,934
34,169
(18,570)
15,599
796
(364)
432
82,602
(41,844)
40,758
13,816
(6,103)
7,713
169,327
(89,891)
79,436
14,934
(70)
4,339
-
(391)
(4,429)
(1,490)
12,893
15,599
(27)
3,146
-
(216)
(3,925)
(3,010)
11,567
432
(4)
45
-
(72)
(148)
-
253
40,758
84
8,196
(1,154)
(392)
(7,257)
(5,016)
35,219
7,713
17
2,164
-
(71)
(1,806)
(1,283)
6,734
79,436
-
17,890
(1,154)
(1,142)
(17,565)
(10,799)
66,666
38,744
34,667
569
81,642
13,958
169,580
(25,851)
12,893
(23,100)
11,567
(316)
253
(46,423)
35,219
(7,224)
6,734
(102,914)
66,666
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 69
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 8 Non-financial assets and liabilities cont.
Impairment loss
(i)
As per the Group's accounting policies, the Group impairs assets where the recoverable amount is less than the
carrying amount. The Group has impaired the assets of all Emma & Roe assets, four Michael Hill Australia stores
and two Michael Hill Canada stores. Any assets held at an impaired Emma & Roe store that are able to redeployed
throughout the Group are not impaired. This cost has reported in Other expenses in the statement of comprehensive
income. The segment breakdown of impairment losses recognised during the year is reported at note 3.
(ii) Revaluation, depreciation methods and useful lives
Depreciation is calculated using the straight-line method to allocate their cost or revalued amounts, net of their
residual values, over their estimated useful lives or, in the case of leasehold improvements and certain leased plant
and equipment, the shorter lease term as follows:
• Plant and equipment
5 - 6 years
• Motor vehicles
3 - 5 years
6 - 10 years
• Fixtures and fittings
• Leasehold improvements 6 - 10 years
6 - 10 years
• Display material
Patents, Computer
software
Total
trademarks and
other rights
$000
(c) INTANGIBLE ASSETS
At 1 July 2016
Cost
Accumulation amortisation
Net book amount
Year ended 30 June 2017
Opening net book amount
Exchange differences
Additions
Amortisation charge*
Closing net book amount
At 30 June 2017
Cost
Accumulation amortisation
Net book amount
Year ended 30 June 2018
Opening net book amount
Exchange differences
Additions
Impairment charge
Amortisation charge *
Closing net book amount
At 30 June 2018
Cost
Accumulated amortisation
Net book amount
$000
$000
16,675
(11,193)
5,482
16,754
(11,193)
5,561
5,482
(27)
5,851
(2,601)
8,705
5,561
(27)
5,851
(2,601)
8,784
22,472
(13,767)
8,705
22,551
(13,767)
8,784
8,705
2
6,665
(228)
(2,597)
12,547
8,784
2
6,665
(228)
(2,597)
12,626
28,941
(16,394)
12,547
29,020
(16,394)
12,626
79
-
79
79
-
-
-
79
79
-
79
79
-
-
-
-
79
79
-
79
* Amortisation of $2,428,000 (2017: $2,405,000) is included in depreciation and amortisation expense in the
statement of comprehensive income. The amount above also includes amortisation for discontinued operations
(see note Discontinued operations).
70 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
2018
$000
555
10,508
26,438
(697)
(6)
3,850
1,653
8,628
117
1,481
9,368
-
61,895
23,758
38,137
61,895
57,893
2,660
(2,342)
3,707
(23)
61,895
2017
$000
397
14,855
28,101
(764)
(55)
4,322
1,201
7,309
(15)
200
-
2,342
57,893
11,846
46,047
57,893
64,074
(8,125)
2,342
(291)
(107)
57,893
(d) DEFERRED TAX ASSETS
The balance comprises temporary differences attributable to:
Doubtful debts
Fixed assets and intangibles
Intangible assets from intellectual property transfer
Deferred expenditure
Prepayments
Deferred service revenue
Unearned income
Provisions
Unrealised foreign exchange losses
Sundry items
Inventories
Tax losses recognised
Net deferred tax assets
Expected settlement:
Deferred tax assets expected to be recovered within 12 months
Deferred tax assets expected to be recovered after more than 12 months
Movements:
Opening balance at 1 July
Credited / (charged) to the income statement
Tax losses recognised
Prior year adjustment
Foreign exchange differences
Closing balance at 30 June
(e) CURRENT TAX RECEIVABLES
Current tax receivables
(f) OTHER ASSETS
Prepayments
Deferred expenditure
(g) CURRENT TAX LIABILITIES
Current tax liabilities
-
888
Current Non-current
$000
1,193
1,695
2,888
$000
2,889
799
3,688
2018
Total
$000
4,082
2,494
6,576
Current Non-current
$000
178
1,879
2,057
$000
3,089
856
3,945
2018
$000
2,696
2017
Total
$000
3,267
2,735
6,002
2017
$000
-
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 71
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 8 Non-financial assets and liabilities cont.
(h) PROVISIONS
Employee benefits (i)
Returns provision (i)
Make good provision (i)
Restructuring costs (i)
Diamond warranty (i)
Other provisions (i)
Current Non-current
$000
2,063
-
2,844
-
-
-
4,907
$000
3,555
2,972
356
1,897
600
6
9,386
2018
Total
$000
5,618
2,972
3,200
1,897
600
6
14,293
Current Non-current
$000
1,931
-
4,246
-
-
58
6,235
$000
1,894
2,518
223
-
-
35
4,670
2017
Total
$000
3,825
2,518
4,469
-
-
93
10,905
Information about individual provisions and significant estimates:
(i)
Employee benefits
The liability for long service leave is measured as the present value of expected future payments to be made
in respect of services provided by employees up to the reporting date using the projected unit credit method.
Consideration is given to expected future wage and salary levels, experience of employee departures and periods
of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds
with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
Provisions are measured at the present value of management's best estimate of the expenditure required to settle
the present obligation at the end of the reporting year.
Returns Provision
Provision is made for the estimated sale returns for the Group's return policies, being 30 day change of mind, 12 month
guarantee on the quality of workmanship and the 3 year watch guarantee. In addition, all Michael Hill watches sold before
30 June 2018 included a lifetime battery replacement guarantee. Management estimates the provision based on historical
sale return information and any recent trends that may suggest future claims could differ from historical amounts.
Make good provision
The Group has an obligation to restore certain leasehold sites to their original condition upon store closure or
relocation. This provision represents the present value of the expected future make good commitment. Amounts
charged to the provision represent both the cost of make good costs incurred and the costs incurred which
mitigate the final liability prior to the closure or relocation.
Restructuring
A provision has been raised for the estimated lease surrender and staffing exit costs associated with the six Emma
& Roe stores trading at the end of the year.
Diamond warranty
Provision is made for the estimated costs for the Group's diamond warranty offered with the purchase of selected
diamond jewellery lines. Management estimates the provision based on costs incurred in recent years and will
review the adequacy of the provision each reporting date as more data becomes available.
Other provisions
Other provisions relate to a provision for an onerous lease.
(ii) Movements in provisions
Movements in each class of provision during the financial year are set out below:
Employee Restructuring
benefits obligations
$000
$000
Returns Make good Diamond
Other
provision provisions warranty provisions
$000
$000
$000
$000
Total
$000
Carrying amount
at the start of the year
Additional provisions recognised
Amounts incurred and charged
Exchange differences
Carrying amount at end of year
3,825
2,142
(346)
(3)
5,618
-
1,897
-
-
1,897
2,518
2,971
(2,517)
-
2,972
4,469
(857)
(378)
(34)
3,200
-
600
-
-
600
93
6
(93)
-
6
10,905
6,759
(3,334)
(37)
14,293
72 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
(i) DEFERRED REVENUE
Deferred service revenue
Lease incentive income
Deferred interest free revenue
Current Non-current
$000
55,276
2,230
214
57,720
$000
24,686
782
1,008
26,476
2018
Total
$000
79,962
3,012
1,222
84,196
Current Non-current
$000
52,989
2,827
201
56,017
$000
24,121
1,211
592
25,924
2017
Total
$000
77,110
4,038
793
81,941
NOTE 9 Contributed equity
(a) SHARE CAPITAL
Ordinary shares - fully paid
Total share capital
2018
Shares
2017
Shares
387,438,513 387,438,513
387,438,513 387,438,513
2018
$000
10,266
10,266
(i) Movements in ordinary shares:
Opening balance 1 July 2016
Exercise of options - proceeds received
Transfer option reserve to contributed equity
Balance 30 June 2017
Options expired
Balance 30 June 2018
Notes
9(a)(iii)
9(a)(ii)
No. of shares
383,138,513
4,300,000
-
387,438,513
-
387,438,513
2017
$000
10,015
10,015
$000
3,767
4,825
1,423
10,015
251
10,266
(ii) Ordinary shares
Ordinary shares entitle the holder to participate in dividends, and to share in the proceeds of winding up the
Company in proportion to the number of and amounts paid on the shares held.
On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to
one vote, and upon a poll each share is entitled to one vote.
(iii) Options
Information relating to the Michael Hill International Employee Option Plan, including details of options issued,
exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out
in note 20(a).
(b) RESERVES AND RETAINED PROFITS
Nature and purpose of other reserves
Cash flow hedges
The hedging reserve is used to record gains or losses on derivatives that are designated and qualify as cash
flow hedges and that are recognised in other comprehensive income, as described in note 2(p). Amounts are
reclassified to profit or loss when the associated hedged transaction affects profit or loss.
Share-based payments
The share-based payments reserve is used to recognise:
• the grant date fair value of options issued to employees but not exercised
• the grant date fair value of shares issued to employees
• the grant date fair value of deferred shares granted to employees but not yet vested
Foreign currency translation
Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive
income as described in note 2(d) and accumulated in a separate reserve within equity. The cumulative amount is
reclassified to profit or loss when the net investment is disposed of.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 73
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 10 Cash flow information
Reconciliation of profit after income tax to
net cash inflow from operating activities
Profit for the year
Adjustment for
Depreciation
Amortisation
Impairment - property, plant and equipment
Impairment - other assets
Non-cash employee benefits expense - share-based payments
Other non-cash expenses
Net loss on sale of non-current assets
Net exchange differences
Change in operating assets and liabilities:
(Increase) / decrease in trade and other receivables
(Increase) / decrease in inventories
(Increase) / decrease in deferred tax assets
(Increase) / decrease in other current assets
(Increase) / decrease in other non current assets
(Decrease) / increase in trade and other payables
(Decrease) / increase in current tax liabilities
(Decrease) / increase in provisions
(Decrease) / increase in deferred revenue
Net cash inflow from operating activities
NOTES
2018
$000
2017
$000
4,610
32,647
5(b)
5(b)
17,565
2,597
11,029
563
484
(78)
450
966
(1,348)
12,169
(3,968)
273
(826)
2,258
3,665
2,030
2,454
54,893
17,415
2,601
-
-
371
897
1,166
(908)
(579)
(6,073)
6,043
1,085
118
3,050
(26,110)
830
7,199
39,752
RISK
This section of the notes discusses the Group’s exposure to various risks and shows how these could affect
the Group’s financial position and performance.
Note 11 Financial risk management
Note 12 Significant estimates, judgements and errors
Note 13 Capital management
page 75
page 80
page 81
74 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
NOTE 11 Financial risk management
The Group's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and
price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability
of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The
Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge
certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative
instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods
include sensitivity analysis in the case of interest rate and foreign exchange risks and aging analysis for credit risk.
Risk
Exposure arising from
Measurement
Management
Market risk - foreign
exchange
Future commercial transactions
Recognised financial assets and liabilities
not denominated in AUD
Cash flow forecasting
Sensitivity analysis
Forward foreign
exchange contracts
Market risk - interest rate
Long-term borrowings at variable rates
Sensitivity analysis
Interest rate swaps
Credit risk
Cash and cash equivalents and
trade receivables
Aging analysis
Liquidity risk
Borrowings and other liabilities
Rolling cash flow
forecasts
Diversification of bank
deposits, credit limits
and letters of credit
Availability of
committed credit lines
and borrowing facilities
The Group's overall risk management program includes a focus on financial risk including the unpredictability of
financial markets and foreign exchange risk.
The policies are implemented by the central finance function that undertakes regular reviews to enable prompt
identification of financial risks so that appropriate actions may be taken.
(a) DERIVATIVES
Derivatives are only used for economic hedging purposes and not as speculative investments. However, where
derivatives do not meet the hedging criteria, they are classified as ‘held for trading’ for accounting purposes. The
Group has the following derivative financial instruments:
Current assets
Forward foreign exchange contracts - cash flow hedges (Note 11(b)(i))
Total current derivative financial instrument assets
Current liabilities
Interest rate swap contracts - cash flow hedges (Note 11(b)(ii))
Forward foreign exchange contracts - cash flow hedges (Note 11(b)(i))
Total current derivative financial instrument liabilities
2018
$000
245
245
390
-
390
2017
$000
-
-
727
414
1,141
(i) Classification of derivatives
Derivatives are classified as held for trading and accounted for at fair value through profit or loss unless they are
designated as hedges. They are presented as current assets or liabilities if they are expected to be settled within
12 months after the end of the reporting year.
The Group’s accounting policy for its cash flow hedges is set out in note 2(p). For hedged forecast transactions
that result in the recognition of a non-financial asset, the Group has elected to include related hedging gains and
losses in the initial measurement of the cost of the asset.
(ii) Fair value measurements
For information about the methods and assumptions used in determining the fair value of derivatives please refer
to note 7(e).
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 75
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 11 Financial risk management cont.
(b) MARKET RISK
(i) Foreign exchange risk
Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities that are
denominated in a currency that is not the entity’s functional currency and net investments in foreign operations.
The Group operates internationally and is exposed to foreign exchange risk arising from various currency
exposures. Where it considers appropriate, the Group enters into forward foreign exchange contracts to buy
specified amounts of various foreign currencies in the future at a pre-determined exchange rate.
Foreign exchange forward contracts measured through Other comprehensive income are designated as hedging
instruments in cash flow hedges of forecast purchases in USD. These forecast transactions are highly probable.
The cash flow hedges of the expected future purchases were assessed to be highly effective and a net
unrealised gain of $337,000 (2017: $834,000 loss) is included in Other comprehensive income. Fair value
adjustments are included in Derivative financial instruments.
Exposure
The Group's exposure to foreign currency risk at the end of the reporting year, expressed in transactional currency,
was as follows:
Cash and cash equivalents
Trade receivables
Trade payables
Forward exchange contracts
USD
$000
6
266
5,811
30 June 2018
NZD
$000
52
-
53
CAD
$000
48
-
101
USD
$000
25
882
3,696
30 June 2017
NZD
$000
40
-
228
CAD
$000
45
-
57
Buy foreign currency (cash flow hedges)
7,000
-
-
17,000
-
-
Sensitivity
The Group's principal foreign currency exposures arise from trade payables and receivables outstanding at year end.
Most trade payables are repaid within 30 days so there is minimal equity impact arising from foreign currency
exposures.
US$ Trade payables
us$ exchange rate - increase 10%*
us$ exchange rate - decrease 10%*
Impact on pre-tax profit
Impact on other
components of equity
2018
$000
2017
$000
2018
$000
2017
$000
-
-
-
-
372
(1,542)
2,011
(2,458)
* Holding all other variables constant, this represents the impact of the forward exchange contracts held at the
end of the reporting period if the USD exchange rate was to increase or decrease by 10%
(ii) Cash flow and fair value interest rate risk
The Group's main interest rate risk arises from long-term borrowings and cash. Borrowings issued at variable
rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair
value interest rate risk. Group policy is to maintain fixed interest cover of between 50% and 100% of core debt
up to 12 months, between 50% and 75% of core debt between 1 and 3 years, and between 25% and 50% of
core debt between 3 and 5 years.
To manage variable interest rate borrowings risk, the Group enters into interest rate swaps in which the Group
agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts
calculated by reference to an agreed-upon notional principal amount.
The interest rate derivatives require settlement of net interest receivable or payable each 30 days and are
settled on a net basis.
76 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
The exposure of the Group’s borrowing to interest rate changes and the contractual re-pricing dates of the fixed
interest rate borrowings at the end of the reporting year are as follows:
Variable rate borrowings
2018
$000
35,213
2017
$000
45,034
Instruments used by the group
The cash flow hedges were assessed to be highly effective and a net realised gain of $659,000 (2017: $578,000 gain)
is included in Other comprehensive income. Fair value adjustments are included in Derivative financial instruments.
The interest rate swaps are designated as cash flow hedging instruments. Changes in the interest paid on the
variable rate fully drawn down advance facility are measured at fair value through Other comprehensive income.
Swaps in place cover approximately 71.0% (2017: 77.7%) of the variable rate principal outstanding.
As at the end of the reporting year, the Group had the following variable rate borrowings and interest rate
swap contracts outstanding:
Bank overdrafts and bank loans
Interest rate swaps (notional principal amount)
Net exposure to cash flow interest rate risk
Weighted
average
interest rate
%
2.97%
3.91%
2018
Balance
$000
35,213
25,000
10,213
Weighted
average
interest rate
%
2.50%
3.85%
2017
Balance
$000
45,034
35,000
10,034
An analysis by maturities is provided in note 11(d) below. The percentage of total loans shows the proportion of
loans that are currently at variable rates in relation to the total amount of borrowings.
Amounts recognised in profit or loss and other comprehensive income
The cash flow hedges were assessed to be highly effective. Fair value adjustments are included in Derivative
financial instruments.
Sensitivity
Profit or loss is sensitive to higher/lower interest income from cash and cash equivalents as a result of changes
in interest rates. Other components of equity change as a result of an increase/decrease in the fair value of the
cash flow hedges of borrowings. All other non-derivative financial liabilities have a contractual maturity of less than
6 months.
Interest rates - increase by 100 basis points (100 bps)*
Interest rates - decrease by 100 basis points (100 bps)*
Impact on post-tax profit
Impact on other
components of equity
2018
$000
(102)
102
2017
$000
(100)
100
2018
$000
(9)
8
2017
$000
(16)
16
* Holding all other variables constant, this represents the impact of the interest rate swaps held at the end of the
reporting period and variable borrowings if the interest rate was to increase or decrease by 10%.
(c) CR EDIT RISK
Credit risk is managed on a Group basis and refers to the risk of a counterparty failing to discharge an obligation.
In the normal course of business, the Group incurs credit risk from trade receivables and transactions with
financial institutions. The Group places its cash and short term deposits with only high credit quality financial
institutions. Sales to retail customers are required to be settled via cash, major credit cards or passed onto various
credit providers in each country.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 77
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 11 Financial risk management cont.
Impaired trade receivables
(i)
A provision for impairment loss is recognised when there is objective evidence that an individual trade receivable
is impaired. An impairment loss of $415,000 (2017: $313,000) has been recognised by the Group. All trade
receivables related to third party credit providers past 90 days have been impaired. Receivables past due but not
impaired were $343,000 (2017: $273,000).
The ageing of these receivables is as follows:
Movements in the provision for impairment of trade receivables that are assessed for impairment collectively are
as follows:
0 - 30 days
31 - 60 days
61 - 90 days
91 + days
At 1 July
Amounts written off
Additional provisions recognised
Exchange differences
At 30 June
2018
$000
3,749
375
201
586
4,911
2018
$000
502
(415)
733
(1)
819
2017
$000
3,977
295
73
407
4,752
2017
$000
675
(313)
141
(1)
502
(ii) Credit quality and impaired in-house customer finance
In-house customer finance was established in Canada and the United States in October 2012. Customer credit
risk is managed subject to the Group's established policy, procedures and control relating to customer credit risk
management. Credit quality of a customer is assessed based on an extensive credit rating scorecard and individual
credit limits are defined in accordance with this assessment.
An impairment analysis is performed at each reporting date. The maximum exposure to credit risk is the
carrying value of in-house customer finance program as disclosed in note 7(b)(ii). The Group does not hold
collateral as security. The Group evaluates the concentration of risk with respect to trade receivables as low.
The credit quality and ageing of these receivables is as follows:
Performing:
Current, aged 0 - 30 days
Past due, aged 31 - 90 days
Non performing:
Past due, aged more than 90 days
Movements in the provision for in-house customer
finance receivables impairment loss were as follows:
Opening balance
Amounts written off
Additional provisions recognised
Exchange differences
78 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
2018
$000
19,566
460
519
20,545
2018
$000
1,118
(2,162)
2,451
23
1,430
2017
$000
16,786
402
502
17,690
2017
$000
901
(2,051)
2,299
(31)
1,118
(d) LIQUIDITY RISK
The Group maintains prudent liquidity risk management with sufficient cash and marketable securities and the
availability of funding through an adequate amount of committed credit facilities.
(i) Financing arrangements
The Group’s objectives when managing capital are to ensure sufficient liquidity to support its financial obligations
and execute the Group's operational and strategic plans. The Group continually assesses its capital structure and
makes adjustments to it with reference to changes in economic conditions and risk characteristics associated with
its underlying assets. Accordingly, the Group entered into an agreement with ANZ on 26 June 2018 that provides
for a $110,000,000 multi option borrowing facility, the availability of which is adjusted throughout the year in line
with business requirements. At balance date, $70,000,000 was available. The Group had access to the following
undrawn borrowing facilities at the end of the reporting year:
Floating rate
Expiring beyond one year (bank overdrafts)
Expiring beyond one year (bank loans)
2018
$000
1,924
34,787
36,711
2017
$000
1,957
24,966
26,923
(ii) Maturities of financial liabilities
The tables below analyse the Group's financial liabilities into relevant maturity groupings based on their contractual
maturities for:
• all non-derivative financial liabilities, and
• net and gross settled derivative financial instruments for which the contractual maturities are essential for an
understanding of the timing of the cash flows.
The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months
equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows
have been estimated using forward interest rates applicable at the end of the reporting year.
Net settled (interest rate swaps)
-
Contractual maturities
of financial liabilities
At 30 June 2018
Non-derivatives
Trade payables
Borrowings
Total non-derivatives
Derivatives
At 30 June 2017
Non-derivatives
Trade payables
Borrowings
Total non-derivatives
Derivatives
Gross settled (forward foreign
exchange contracts)
Net settled (interest rate swaps)
Less than
6 months
6 - 12
months
Between
1 and 2
years
Between
2 and 5
years
Over
Total
5 years contractual
cash flows
$000
$000
$000
$000
$000
$000
49,339
-
49,339
47,918
-
47,918
-
-
-
-
-
-
-
-
35,213
35,213
-
-
-
302
88
-
45,034
45,034
-
-
-
-
22
22
414
-
414
-
190
190
-
515
515
-
-
-
-
-
-
-
-
-
-
49,339
35,213
84,552
390
47,918
45,034
92,952
414
727
1,141
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 79
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 12 Significant estimates, judgements and errors
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom
equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies.
Estimates and judgements are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. The estimates
and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are addressed below.
Share-based payment transactions
The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity
instruments at the date at which they are granted. The fair value is determined with the assistance of an external
valuer using the Binomial model. The related assumptions are detailed in note Share-based payments. The accounting
estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying
amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.
Make good provisions
A provision has been made for the present value of anticipated costs of future restoration of leased store premises.
The provision includes future cost estimates associated with dismantling and closure of stores. The calculation of
this provision requires assumptions such as discount rates, store closure dates and lease terms. These uncertainties
may result in future actual expenditure differing from the amounts currently provided. The provision recognised is
periodically reviewed and updated based on the facts and circumstances available at the time. Changes for the
estimated future costs for sites are recognised in the statement of financial position by adjusting both the expense or
asset (if applicable) and provision. The related carrying amounts are disclosed in note 8(h) Provisions.
Estimation of useful lives of assets
The estimation of the useful lives of assets has been based on historical experience, lease terms (for display assets)
and policies (for motor vehicles). In addition, the condition of the assets is assessed at least once per year and
considered against the remaining useful life. Adjustments to useful lives are made when considered necessary.
Revenue recognition
Professional care plan revenue is recognised as sales revenue in the statement of comprehensive income.
Management judgement is required to determine the amount of service revenue that can be recognised based on the
usage pattern of PCPs and general information obtained on the operation of service plans in other markets. Those
direct and incremental bonuses associated with the sale of these plans are deferred and amortised in proportion to
the revenue recognised. Management reviews trends in current and estimated future services provided under the plan
to assess whether changes are required to the revenue and cost recognition rates used.
Due to management reviews conducted during the year, an adjustment to the revenue recognition pattern has
been deemed necessary. As a result of this, an additional $532,000 has been recognised as revenue in the current
financial year. Of this, $59,000 relates to the current financial year, and $473,000 relates to prior financial years. The
change in estimate will result in lower revenue in future periods by the corresponding amount.
Taxation and recovery of deferred tax assets
The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant
judgement is required in determining the worldwide provision for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain during the ordinary course of business.
Deferred tax assets are recognised for deductible temporary differences as management considers that it is
probable that future taxable profits will be available to utilise those temporary differences. Management judgement is
required to determine the amount of deferred tax assets that can be recognised.
Impairment of non-financial assets other than goodwill and indefinite life intangibles
The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group
and to the particular asset that may lead to impairment. These include store performance, product and manufacturing
performance, technology and economic environments and future product expectations. If an impairment trigger exists
the recoverable amount of the asset is determined.
Employee benefits
Provisions for employee benefits are measured at the present value of management’s best estimate of the expenditure
required to settle the present obligation at the reporting date.
80 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
NOTE 13 Capital management
(a) RISK MANAGEMENT
The Group's objectives when managing capital are to:
• safeguard their ability to continue as a going concern, so that they can continue to provide returns for
shareholders and benefits for other stakeholders, and
• maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to
shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
There are a number of external bank covenants in place relating to debt facilities. These covenants are
calculated and reported to the bank quarterly. The principal covenants relating to capital management are the
earnings before interest and taxation (EBIT) fixed cover charge ratio, the consolidated debt to earnings before
interest, taxation, depreciation and amortisation (EBITDA) and consolidated debt to capitalisation. There have been
no breaches of these covenants or events of review for the current or prior period.
(b) DIVIDENDS
(i) Ordinary shares
Final dividend for the year ended 30 June 2017 of 2.5¢ (2016 - 2.5¢) per
fully paid share paid on 29 September 2017 (2016 - 6 October 2016)
Interim dividend for the year ended 30 June 2018 of 2.5¢ (2017 - 2.5¢)
per fully paid share paid on 29 March 2018 (2017 - 31 March 2017)
(ii) Dividends not recognised at the end of the reporting period
Since year end the Directors have declared the payment of a final
dividend of au2.5¢ per fully paid ordinary share* (2017 - au2.5¢).
The final dividend will be unfranked and fully imputed. The aggregate
amount of the dividend expected to be paid on 28 September 2018
out of retained earnings, but not recognised as a liability at year end, is
2018
$000
9,685
9,686
19,371
2017
$000
9,578
9,686
19,264
9,686
9,686
* This will not be declared as conduit foreign income, therefore Australian withholding tax will be deducted from
the dividend payment for foreign (non-Australian tax resident) shareholders.
(iii) Franking and imputation credits
Franking credits available for subsequent reporting periods
based on a tax rate of 30.0% (2017 - 30.0%)
Imputation credits available for subsequent reporting periods based
on the New Zealand tax rate of 28.0% (2017 - 28.0%)
2018
$000
1,822
2017
$000
(2,148)
23,893
28,424
The dividends paid during the current financial period and corresponding previous financial period were partly
franked or imputed.
The above franking credit amounts represent the balance of the franking account as at the end of the
financial year, adjusted for franking credits that will arise from the payment and refund of income tax payable.
The above imputation credit amounts represent the balance of the imputation account as at the end of the
financial year, adjusted for imputation credits that will arise from the payment and refund of income tax payable.
As the dividend recommended by the Directors since year end, but not recognised as a liability at year end,
will be unfranked, there will be no reduction in the franking account.
The impact on the imputation credit account of the dividend recommended by the Directors since year end,
but not recognised as a liability at year end, is estimated to be a reduction in the imputation credit account of
NZ$4,075,000 (2017: NZ$4,051,000). The amount of imputation credits is dependant on the NZD exchange rate
at the time of the dividend.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 81
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 14 Discontinued operations
FINANCIAL PERFORMANCE AND CASH FLOW INFORMATION
2018
$000
2017
$000
Emma & Roe
Revenue
Expenses
Impairment of other assets
Impairment of property, plant and equipment
Store exit costs
(Loss) before income tax
Income tax expense
(Loss) after income tax of discontinued operation
(Loss) from discontinued operation
Net cash (outflow) from operating activities
Net cash (outflow) from investing activities
Net cash inflow from financing activities
Net increase in cash generated by the subsidiary
Michael Hill United States
Revenue
Expenses
Impairment of property, plant and equipment
Store exit costs
Other income
(Loss) before income tax
Income tax expense
(Loss) from discontinued operation
16,935
(26,939)
(429)
(7,038)
(6,038)
(23,509)
6,737
(16,772)
(16,772)
(12,656)
(3)
12,675
16
11,845
(16,309)
(3,641)
(5,333)
13
(13,425)
(11)
(13,436)
15,448
(23,859)
-
-
-
(8,411)
2,758
(5,653)
(5,653)
(12,092)
(318)
12,411
1
16,427
(21,467)
(790)
-
14
(5,816)
(17)
(5,833)
Total profit/(loss) from discontinued operations
(30,208)
(11,485)
Net cash (outflow) from operating activities
Net cash (outflow) from investing activities
Net cash inflow / (outflow) from financing activities
Net decrease in cash generated by the subsidiary
(1,521)
(65)
987
(599)
(858)
(318)
(470)
(1,646)
82 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
NOTE 15 Interests in other entities
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in
accordance with the accounting policy described in note 2(b):
Subsidiaries
Michael Hill Jeweller (Australia) Pty Limited
Michael Hill Wholesale Pty Limited
Michael Hill Manufacturing Pty Limited
Michael Hill Franchise Pty Limited
Michael Hill Franchise Services Pty Limited
Michael Hill Finance (Limited Partnership)
Michael Hill Group Services Pty Limited
Michael Hill Charms Pty Limited
Michael Hill Online Pty Limited
Emma & Roe Pty Limited
Emma & Roe Online Pty Ltd
Durante Holdings Pty Limited
Michael Hill New Zealand Limited
(formerly known as Michael Hill International Limited)
Michael Hill Jeweller Limited
Michael Hill Finance (NZ) Limited
Michael Hill Franchise Holdings Limited
MHJ (US) Limited
Emma & Roe NZ Limited
Michael Hill Online Holdings Limited
Michael Hill Jeweller (Canada) Limited
Michael Hill LLC
Country of
Incorporation
Ownership interest
held by the group
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
Canada
United States
2018 %
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
2017 %
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 83
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 16 Contingent liabilities and contingent assets
(a) CONTINGENT LIABILITIES
The Group had contingent liabilities in respect of guarantees to bankers and other financial institutions in respect
of store occupancy agreements and the New Zealand stock exchange at 30 June 2018 of $472,000 (30 June
2017 - $461,000).
From time to time, Companies within the Group are party to various legal actions as well as inquiries from
regulators and government bodies that have arisen in the normal course of business. The Directors have given
consideration to such matters which are or may be subject to claims or litigation at year end and are of the
opinion that that any liabilities arising from such action would not have a material effect on the Group's financial
performance.
The Group is not aware of any significant events occurring subsequent to balance date that have not been
disclosed.
(b) CONTINGENT ASSETS
The Group has no material contingent assets existing as at balance date.
NOTE 17 Commitments
OPERATING LEASES
The Group leases all shops and in addition, various offices and warehouses under non-cancellable operating leases
expiring within various periods of up to fifteen years. The leases have varying terms, escalation clauses and renewal
rights. On renewal, the terms of the leases are renegotiated.
The Group also leases various plant and machinery under cancellable operating leases. The Group is required to
give six months notice for termination of these leases.
Commitments for minimum lease payments in relation to
non-cancellable operating leases are payable as follows:*
Within one year
Later than one year but not later than five years
Later than five years
2018
$000
2017
$000
40,752
88,701
24,407
153,860
42,784
95,788
20,195
158,767
* Includes lease commitments for Emma & Roe stores where store closure is still in progress via negotiated outcomes
with the respective landlords.
NOTE 18 Events occurring after the reporting period
DIVIDENDS
On 24 August 2018, the Directors have declared the payment of a final dividend for the year ended 30 June 2018.
Refer to note 13(b)(ii) for details.
No other matters or circumstances have occurred subsequent to year end that has significantly affected, or may
significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group or
economic entity in subsequent financial years.
84 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
NOTE 19 Related party transactions
(a) SUBSIDIARIES
The ultimate parent and controlling entity of the Group is Michael Hill International Limited. Interests in subsidiaries
are set out in note 15(a).
(b) KEY MANAGEMENT PERSONNEL COMPENSATION
Short-term employee benefits
Long-term benefits
Post-employment benefits
Termination benefits
Share-based payments
2018
$
2,214,394
43,792
123,224
-
402,864
2,784,274
2017
$
2,186,483
125,917
184,383
1,603,742
313,691
4,414,216
Detailed remuneration disclosures are provided in the remuneration report on pages 37 to 47.
(c) TRANSACTIONS WITH OTHER RELATED PARTIES
The following transactions occurred with related parties:
Sales and purchases of goods and services
Services rendered for graphic design of the annual
and half year reports by a related party of board members
Consulting Agreement with a Director (Robert Ian Fyfe)
2018
$
2017
$
12,447
84,000
12,676
-
All transactions with related parties were in the normal course of business and provided on commercial terms.
Further details regarding the Consulting Agreement with a Director is included within the Director's Report
Service contracts.
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 85
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 20 Share-based payments
(a) EMPLOYEE OPTION PLAN
Options are granted from time to time at the discretion of Directors to senior executives within the Group. Motions
to issue options to related parties of Michael Hill International Limited are subject to the approval of shareholders
at the Annual General Meeting in accordance with the Company's constitution.
Options are granted under the plan for no consideration. Options are granted for a ten year period and are
exercisable at any time during the final five years.
Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible
into one ordinary share.
The exercise price of the options previously granted was set at 30% above the weighted average price at
which the Company's shares were traded on the New Zealand Stock Exchange for the calendar month following
the announcement by the Group to the New Zealand Stock Exchange of its annual results.
The exercise price of any future option grants will be set using the same method, with reference to the
Australian Securities Exchange. Set out below are summaries of options granted under the plan:
As at 1 July NZD options
Exercised during the year
Forfeited during the year
Expired during the year
As at 30 June NZD options
As at 1 July AUD options
Granted during the year
As at 30 June AUD options
2018
Average
exercise price
per share
1.47
-
-
1.25
1.56
2.12
1.44
1.78
2018
Number of
options
2017
Average
exercise price
per share option
2017
Number of
options
4,650,000
-
-
(1,250,000)
3,400,000
200,000
200,000
400,000
1.47 12,550,000
(4,300,000)
1.19
(3,600,000)
1.81
-
-
4,650,000
1.47
-
2.12
2.12
-
200,000
20,000
A total of 1,250,000 options expired during the year ended 30 June 2018.
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Grant date
9 November 2007
22 September 2009
5 November 2009
17 September 2010
16 November 2011
19 September 2012
18 September 2013
29 November 2013
10 November 2014
22 January 2016
22 September 2016
5 October 2017
Total
Expiry date Exercise price
Share options Share options
30 June 2017
30 June 2018
30 September 2017
30 September 2019
30 September 2019
30 September 2020
30 September 2021
30 September 2022
30 September 2023
30 September 2023
30 September 2024
30 September 2025
30 September 2026
30 September 2027
NZ$1.25
NZ$0.94
NZ$0.94
NZ$0.88
NZ$1.16
NZ$1.41
NZ$1.82
NZ$1.82
NZ$1.63
NZ$1.14
AU$2.12
AU$1.44
-
100,000
150,000
250,000
250,000
250,000
250,000
1,750,000
200,000
200,000
200,000
200,000
3,800,000
1,250,000
100,000
150,000
250,000
250,000
250,000
250,000
1,750,000
200,000
200,000
200,000
-
4,850,000
The weighted average remaining contractual life of share options outstanding at the end of the period was 5.1 years
(2017: 4.4 years).
86 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
The range of exercise prices for options outstanding at the end of the year was NZ$0.88 - NZ$1.82 and
AU$1.44 - AU$2.12. Refer to the table above for detailed information on each issue.
The exercise price will be converted to Australian dollars using the Reserve Bank of Australia exchange rate
on the day the option is exercised.
Fair value of options granted
The fair value at grant date for the options issued during the 2018 financial year were independently determined
using a Binomial option pricing model, which is an iterative model for options that can be exercised at times prior
to expiry. The model takes into account the grant date, exercise price, the expected life, the expiry date, the share
price at grant date, expected price volatility of the underlying share, the expected dividend yield and the risk-free
interest rate for the term of the option. The expected life assumes the option is exercised at the mid-point of the
exercise period, and reflects the ability to exercise early and the non-transferability of the option.
The expected price volatility is based on the historic volatility (based on the remaining life of the options),
adjusted for any expected changes to future volatility due to publicly available information.
The model inputs for options granted during the year ended 30 June 2018 and 30 June 2017 included:
Number of options
Dividend yield
Expected volatility
Risk-free interest rate
Expected life of options (years)
Option exercise price
Share price at grant date
Weighted average fair value per option
(b) SHARE RIGHTS
June 2018
5 October 2017
June 2017
22 September 2016
200,000
5.00%
25%
4.78%
7.5
au$1.44
au$1.09
nz14.8¢
200,000
5.00%
25%
4.78%
7.5
au$2.12
au$1.74
nz15.6¢
The Company introduced a deferred compensation plan ("LTI") involving the granting of share rights to eligible participants
in 2016 and was approved by shareholders at the Company’s Annual General Meeting held on 31 October 2016.
Under the plan, a senior executive may be granted share rights by the Company. Each share right represents
a right to receive one ordinary share in the Company, subject to the terms and conditions of the rules of the plan.
An allocation of share rights is made to each eligible participant on an annual basis to a value of 30% of the STI
payment earned in the preceding year. The share rights progressively vest over a 3, 4 and 5 year period from the
date of issue and are only retained on exiting the business in the event that the participant is deemed a 'Good
Leaver' pursuant to the LTI plan rules.
During the year, the Board agreed to grant 536,551 share rights to eligible participants of the deferred
compensation plan.
225,875 of the share rights were issued on the basis that they are divided into three tranches and vest over
3, 4 and 5 years, respectively. 310,676 of the share rights were issued on the basis that 100% will vest if the
participant has been continuously engaged under an engagement arrangement with the Company at grant date,
which is in three years time.
The number of share rights in each tranche is based on the prescribed dollar value for each tranche divided
by the volume weighted average share price ('VWAP') of Michael Hill International shares over 5 trading days
following the Michael Hill International shares trading on an ex-dividend basis.
2018 average
exercise price per
share right $
2018
2017 average
Number of exercise price per
share right $
options
Outstanding as at 1 July
Granted
Exercised
Forfeited
Outstanding at 30 June
1.66
1.05
-
-
1.30
382,551
536,551
-
-
919,102
1.66
-
-
1.66
2017
Number of
options
-
382,551
-
-
382,551
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 87
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 20 Share-based payments cont.
(c) EXPENSES ARISING FROM SHARE-BASED PAYMENT TRANSACTIONS
Total expenses arising from share-based payment transactions recognised during the year as part of employee
benefit expense were as follows:
Options issued under employee option plan
Share rights issued under CEO and LTI plan
2018
$000
42
442
484
2017
$000
55
316
371
NOTE 21 Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its
related practices and non-related audit firms:
ERNST & YOUNG
(i) Audit and other assurance services:
Audit and review of financial statements
(ii) Other services:
Advisory fees
Total remuneration for other services
Total remuneration of Ernst & Young Australia
NOTE 22 Earnings per share
(a) BASIC EARNINGS PER SHARE
From continuing operations
From discontinued operation
Total basic earnings per share attributable to
the ordinary equity holders of the Company
(b) DILUTED EARNINGS PER SHARE
From continuing operations
From discontinued operation
Total diluted earnings per share attributable to
the ordinary equity holders of the Company
88 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
2018
$
2017
$
411,910
342,651
170,231
170,231
7,416
7,416
582,141
350,067
2018
2017
8.99¢
(7.80¢)
11.43¢
(2.97¢)
1.19¢
8.46¢
8.98¢
(7.79¢)
11.42¢
(2.97¢)
1.19¢
8.45¢
(c) RECONCILIATION OF EARNINGS USED
IN CALCULATING EARNINGS PER SHARE
2018
$000
2017
$000
Basic earnings per share
Profit attributable to the ordinary equity holders
of the Company used in calculating basic earnings per share:
From continuing operations
From discontinued operations
Diluted earnings per share
Profit from continuing operations attributable
to the ordinary equity holders of the Company:
From continuing operations
From discontinued operations
Used in calculating diluted earnings per share
34,818
(30,208)
4,610
44,132
(11,485)
32,647
34,818
(30,208)
4,610
44,132
(11,485)
32,647
(d) WEIGHTED AVERAGE NUMBER OF SHARES
USED AS THE DENOMINATOR
Weighted average number of ordinary shares used as
the denominator in calculating basic earnings per share:
Options
2018
Number
2017
Number
387,438,513
500,000
385,963,992
500,000
Weighted average number of ordinary and potential ordinary shares
used as the denominator in calculating diluted earnings per share
387,938,513
386,463,992
(e) INFORMATION CONCERNING THE CLASSIFICATION OF SECURITIES
Options
Options granted to employees under the Michael Hill International Limited Employee Option Plan are considered
to be potential ordinary shares and have been included in the determination of diluted earnings per share to the
extent to which they are dilutive. The options have not been included in the determination of basic earnings per
share. Details relating to the options are set out in note 20(a).
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 89
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 23 Parent entity financial information
(a) SUMMARY FINANCIAL INFORMATION
The individual financial statements for Michael Hill International Limited (the parent) show the following
aggregate amounts:
2018
$000
2017
$000
Balance sheet
Current assets
Non-current assets
Total assets
Current liabilities
Total liabilities
Shareholders' equity
Issued capital
Reserves - Acquisition reserve
- Option reserve
Retained earnings
Profit or loss for the year
Total comprehensive income
39
338,473
338,512
3,517
3,517
290,408
40,907
1,370
2,310
334,995
20,000
20,000
4,605
329,278
333,883
-
-
290,157
40,907
1,136
1,683
333,883
19,275
19,275
(b) GUARANTEES ENTERED INTO BY THE PARENT ENTITY
The Parent has issued the following guarantees in relation to the debts of its subsidiaries:
• Pursuant to Class Order 2016/785, Michael Hill International Limited and the subsidiaries listed below entered
into a deed of cross guarantee on 30 June 2016. The effect of the deed is that Michael Hill International Limited
has guaranteed to pay any deficiency in the event of winding up of any controlled entity or if they do not meet their
obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled
entities have also given a similar guarantee in the event that Michael Hill International Limited is wound up or if it
does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee.
• The subsidiaries subject to the deed are: Durante Holdings Pty Ltd, Michael Hill Group Services Pty Ltd, Michael Hill
Jeweller (Australia) Pty Ltd, Michael Hill Manufacturing Pty Ltd, Michael Hill Wholesale Pty Ltd, Michael Hill Franchise
Services Pty Ltd, Michael Hill Franchise Pty Ltd, Michael Hill New Zealand Ltd, Michael Hill Jeweller Ltd, Michael Hill
Franchise Holdings Ltd, Michael Hill Finance (NZ) Ltd, Michael Hill Online Pty Ltd, Michael Hill Charms Pty Ltd, Emma
& Roe Pty Ltd, Emma & Roe Online Pty Ltd, Michael Hill Online Holdings Ltd and Emma & Roe NZ Ltd.
(c) CONTINGENT LIABILITIES OF THE PARENT ENTITY
The Parent entity had contingent liabilities in respect of guarantees to bankers and other financial institutions in
respect of overdraft facilities and fixed assets at 30 June 2018 of $72,000 (2017: $72,000).
NOTE 24 Deed of cross guarantee
Pursuant to ASIC Class Order 2016/785, the Australian wholly-owned subsidiaries listed below are relieved from the
Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and directors' report in Australia.
The subsidiaries subject to the deed are: Durante Holdings Pty Ltd, Michael Hill Group Services Pty Ltd, Michael
Hill Jeweller (Australia) Pty Ltd, Michael Hill Manufacturing Pty Ltd, Michael Hill Wholesale Pty Ltd, Michael Hill
Franchise Services Pty Ltd, Michael Hill Franchise Pty Ltd, Michael Hill New Zealand Ltd, Michael Hill Jeweller Ltd,
Michael Hill Franchise Holdings Ltd, Michael Hill Finance (NZ) Ltd, Michael Hill Online Pty Ltd, Michael Hill Charms
Pty Ltd, Emma & Roe Pty Ltd, Emma & Roe Online Pty Ltd, Michael Hill Online Holdings Ltd and Emma & Roe NZ Ltd.
90 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
The Class Order requires the Parent Company and each of the subsidiaries to enter into a Deed of Cross Guarantee.
The effect of the deed is that the Company guarantees each creditor payment in full of any debt in the event of winding
up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other
provisions of the Corporations Act 2001, the Company will only be liable in the event that after six months any creditor
has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up.
The above companies represent a Closed Group for the purposes of the Class Order and, as there are no other
parties to the Deed of Cross Guarantee that are controlled by Michael Hill International Limited, they also represent the
Extended Closed Group.
(a) CONSOLIDATED STATEMENT OF PROFIT OR LOSS, STATEMENT OF COMPREHENSIVE INCOME AND
SUMMARY OF MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS
Set out below is a consolidated statement of profit or loss, a consolidated statement of comprehensive income and
a summary of movements in consolidated retained earnings for the year ended 30 June 2018 of the closed group
consisting of Michael Hill International Limited and the entities noted above.
Consolidated statement of profit or loss
Revenue from sales of goods and services
Sales to Group companies not in Closed Group
Other income
Cost of goods sold
Employee benefits expense
Occupancy costs
Marketing expenses
Selling expenses
Impairment of investment
Depreciation and amortisation expense
Loss in disposal of property, plant and equipment
Other expenses
Finance costs
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations
Other comprehensive income for the period, net of tax
Total comprehensive income for the year
Statement of changes in equity
Equity at the beginning of the financial year
Total comprehensive income / (loss)
Issue of share capital - exercise of options
Share rights through share based payments reserve
Option expense through share based payment reserve
Dividends paid
Total equity at the end of the financial year
2018
$000
461,319
34,803
231
(200,608)
(133,899)
(53,293)
(26,647)
(23,788)
(14,361)
(14,535)
(377)
(21,854)
(3,003)
3,988
(4,289)
(301)
(4,412)
(4,412)
(4,713)
501,191
(4,713)
-
440
45
(19,371)
477,592
2017
$000
455,114
43,527
1,164
(205,916)
(126,861)
(45,394)
(22,537)
(22,454)
-
(14,554)
(322)
(11,767)
(3,550)
46,450
(11,022)
35,428
(4)
(4)
35,424
479,835
35,424
4,825
316
55
(19,264)
501,191
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 91
Notes to the consolidated financial statements cont. FOR THE YEAR ENDED 30 JUNE 2018
NOTE 24 Deed of cross guarantee cont.
(b) CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Set out below is a consolidated statement of financial position as at 30 June 2018 of the Closed Group consisting
of Michael Hill International Limited and the entities noted above.
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Current tax receivables
Loans to related parties
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Deferred tax assets
Intangible assets
Investments in subsidiaries
Other non-current assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Provisions
Deferred revenue
Total current liabilities
Non-current liabilities
Provisions
Deferred revenue
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained profits
Total equity
92 MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS
2018
$000
2017
$000
2,977
8,070
153,164
(2,095)
237,783
2,641
402,540
38,214
56,776
12,525
85,727
2,310
195,552
1,600
8,982
152,907
1,008
234,510
2,542
401,549
47,713
53,485
8,613
102,991
1,634
214,436
598,092
615,985
42,557
7,498
19,804
69,859
4,908
45,733
50,641
39,278
4,336
20,135
63,749
6,177
44,868
51,045
120,500
114,794
477,592
501,191
309,256
(3,651)
171,987
477,592
309,004
528
191,659
501,191
Directors' declaration
The Directors declare that:
(a)
in the Directors’ opinion there are reasonable grounds to believe that the
Company will be able to pay its debts as and when they become due and
payable;
(b) note 2(a) confirms that the financial statements also comply with
International Financial Reporting Standards as issued by the International
Accounting Standards Board;
(c)
the financial statements and notes of the Group for the financial year
ended 30 June 2018, are in accordance with the Corporations Act 2001,
including:
(i) complying with Accounting Standards, the Corporations Regulations
2001 and other mandatory professional reporting requirements; and
(ii) giving a true and fair view of the consolidated entity’s financial position
as at 30 June 2018 and of its performance for the financial year
ended on that date;
(d) the Directors have been give the declarations by the chief executive officer
and chief financial officer required by section 295A of the Corporations
Act 2001; and
(e) as at the date of this declaration, there are reasonable grounds to believe
that the members of the extended closed group identified in note 24 will be
able to meet any obligations or liabilities to which they are, or may become,
subject to by virtue of the deed of cross guarantee described in note 24.
This declaration is made on 24 August 2018 in accordance with a resolution of
Directors in accordance with section 295 Corporations Act 2001.
E.J. Hill, Chair
Brisbane, 24 August 2018
MICHAEL HILL INTERNATIONAL LIMITED 2018 FINANCIAL STATEMENTS 93
111 Eagle Street
Brisbane QLD 4000 Australia
GPO Box 7878 Brisbane QLD 4001
T +61 7 3011 3333
F +61 7 3011 3100
ey.com/au
Independent Auditor's Report to the Members of Michael Hill International Limited
R E PORT ON TH E AU DIT OF TH E FI NANCIAL R E PORT
OPI N ION
We have audited the financial report of Michael Hill International Limited (the Company) and its subsidiaries (collectively the Group), which comprises
the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of
changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial report, including a summary of significant
accounting policies, and the directors' declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance
for the year ended on that date; and
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
BASIS FOR OPI N ION
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor
independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards
Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have
also fulfilled our other ethical responsibilities in accordance with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
KEY AU DIT MATTE RS
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year.
These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide
a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including
in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of
material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below,
provide the basis for our audit opinion on the accompanying financial report.
EXISTE NCE OF I NVE NTOR I ES
Why significant
How our audit addressed the key audit matter
The existence of inventories was a key audit matter
due to the size of the recorded asset (30 June 2018:
$192,074,000) which represents more than 50% of
the Group’s total assets, the nature of the inventory
and its location.
Inventories are primarily kept in the Group’s
retail stores situated in three countries and the
dispatch and manufacturing warehouses. Inventories
comprise a significant number of physically small but
high value items.
The Group accounts for inventories in accordance
with the policy disclosed in Note 2(m) and further
disclosure is included in Note 8(a) of the financial
report.
Our audit procedures included the following:
• Assessed the effectiveness of controls relevant to the conduct of physical stocktaking.
• Attended full stock counts at the dispatch and manufacturing warehouse and at a sample
of retail stores across all countries to assess whether inventories had been appropriately
counted at each location and whether movements into and out of each location prior to and
subsequent to the counts had been appropriately recorded.
• Considered the work performed by the Group’s Internal Audit function in relation to stock
counts performed at the retail stores and considered the impact of their findings in our audit
approach. We assessed whether their work could be used for the purpose of our audit
which included an assessment of the competence of the Internal Audit function.
• For the dispatch and manufacturing warehouse stock counts we selected samples or stock
receipts prior to and after the stock count including transfers to stores, to assess whether
these were appropriately recorded in the correct period.
• We performed store-by-store inventory analyses of any unusual fluctuations outside of our
set expectations of the year-end balance compared to prior year.
94 MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT
PROFESSIONAL CAR E PLAN R EVE N U E R ECOG N ITION
Why significant
How our audit addressed the key audit matter
Our audit procedures included the following:
• Considered the Group’s PCP revenue recognition accounting policies and assessed
compliance with the requirements of Australian Accounting Standards.
• Assessed the effectiveness of controls relating to PCP revenue recognition.
• We assessed the appropriateness of the balance of the PCP revenue recognised during the
year and the closing deferred PCP at year end based on the change in usage pattern.
• Assessed the Group’s calculation supporting the change in estimate relating to revenue
recognition, which included agreeing assumptions to samples of the underlying PCP
repairs usage data.
The recognition of professional care plan (PCP)
revenue was considered a key audit matter due
to the significant degree of estimation involved in
determining the appropriate revenue recognition
pattern for both the lifetime and 3 year plans offered
to the Group’s customers.
The estimation is based on a combination of
comparative market data and an analysis of services
(through historical
repairs data) made under
these plans since inception in October 2010. The
estimation is reviewed by the Group at least on an
annual basis.
As disclosed in Note 12(a) of the financial report,
in respect of the lifetime plans, given the infancy of
the PCP product, there is limited customer usage
history to reference and industry information is also
utilised. As such, the determination of the optimal
revenue recognition pattern is judgmental.
The pattern of recognising revenue is disclosed
in Note 2(e)(ii) of the financial report under
rendering of service which is based on percentage
of completion. A change in estimate in the current
year has resulted from new information that meets
the criteria of a revision in an estimate in accordance
with Australian Accounting Standards has been
reflected in the current year results.
This change in estimate has been disclosed in
Note 12(a) to the financial report.
M ICHAE L H I LL US AN D E M MA & ROE B RAN D CLOSU R E
Why significant
How our audit addressed the key audit matter
During the year, the Group made the decision to
completely exit its retail operations in the United
States. As part of the Group’s reprioritising its
resources and strategic focus on the core Michael
Hill brand, a decision was made to close all Emma
& Roe stores and its associated online presence.
These decisions had a significant impact on
the current year operating results of the Group.
The Group has accounted for the discontinued
operations in accordance with the policy disclosed
in Note 2 and further disclosure is included in Note
14 to the financial report.
Our audit procedures included the following:
• Agreed the closure costs incurred such as impairment loss recognised on fixed assets,
employee related costs, lease exit costs and other expenses to appropriate supporting
evidence. Where the costs have been paid during and subsequent to year end, we have
agreed the costs recorded to the cash payments.
• Assessed whether any remaining Michael Hill US and Emma & Roe brand inventory was
carried at the lower of cost and net realisable value.
• Assessed whether the discontinued operations were accounted for and disclosed in
accordance with Australian Accounting Standards.
MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT 95
I N FOR MATION OTH E R THAN TH E FI NANCIAL R E PORT
AN D AU DITOR’S R E PORT
The directors are responsible for the other information. The other
information comprises the information included in the Group’s 2018
Annual Report, other than the financial report and our auditor’s report
thereon. We obtained the Directors’ Report that is to be included in the
Annual Report, prior to the date of this auditor’s report, and we expect
to obtain the remaining sections of the Annual Report after the date of
this auditor’s report.
Our opinion on the financial report does not cover the other
information and accordingly we do not express any form of assurance
conclusion thereon, with the exception of the Remuneration Report and
our related assurance opinion.
In connection with our audit of the financial report, our responsibility
is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial report or our
knowledge obtained in the audit or otherwise appears to be materially
misstated.
If, based on the work we have performed on the other information
obtained prior to the date of this auditor’s report, we conclude that there
is a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
R ESPONSI B I LITI ES OF TH E DI R ECTORS
FOR TH E FI NANCIAL R E PORT
The directors of the Company are responsible for the preparation of
the financial report that gives a true and fair view in accordance with
Australian Accounting Standards and the Corporations Act 2001 and for
such internal control as the directors determine is necessary to enable
the preparation of the financial report that gives a true and fair view and
is free from material misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible
for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters relating to going concern and using
the going concern basis of accounting unless the directors either
intend to liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
AU DITOR’S R ESPONSI B I LITI ES FOR TH E AU DIT
OF TH E FI NANCIAL R E PORT
Our objectives are to obtain reasonable assurance about whether the
financial report as a whole is free from material misstatement, whether
due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with the Australian
Auditing Standards will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the
basis of this financial report.
As part of an audit in accordance with the Australian Auditing
Standards, we exercise professional judgment and maintain professional
scepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial
report, whether due to fraud or error, design and perform audit
96 MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT
procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The
risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures
made by the directors.
• Conclude on the appropriateness of the directors’ use of the going
concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Group’s ability to
continue as a going concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor’s report to the
related disclosures in the financial report or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Group to cease
to continue as a going concern.
• Evaluate the overall presentation, structure and content of the
financial report, including the disclosures, and whether the financial
report represents the underlying transactions and events in a manner
that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group to
express an opinion on the financial report. We are responsible for
the direction, supervision and performance of the Group audit. We
remain solely responsible for our audit opinion.
We communicate with the directors regarding, among other matters,
the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify
during our audit.
We also provide the directors with a statement that we have
complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
From the matters communicated to the directors, we determine those
matters that were of most significance in the audit of the financial report of
the current year and are therefore the key audit matters. We describe these
matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances,
we determine that a matter should not be communicated in our report
because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
R E PORT ON TH E AU DIT OF TH E R E M U N E RATION R E PORT
Opinion on the Remuneration Report
We have audited the Remuneration Report included in the directors'
report for the year ended 30 June 2018.
In our opinion, the Remuneration Report of Michael Hill International
Limited for the year ended 30 June 2018, complies with section 300A of
the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and
presentation of the Remuneration Report in accordance with section
300A of the Corporations Act 2001. Our responsibility is to express an
opinion on the Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
Ernst & Young
Alison de Groot, Partner
Brisbane
24 August 2018
MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT 97
ASX LISTING RULES - ADDITIONAL INFORMATION
Additional information required by the ASX Listing Rules and not shown elsewhere in this annual report is as follows:
Twenty largest shareholders as at 10 September 2018
Fully Paid
Ordinary Shares
% of Fully Paid
Ordinary Shares
Hoglett Hamlett Limited*
New Zealand Central Securities Depository Ltd
JP Morgan Nominees Australia Limited
Mole Hill Limited*
Squeakidin Limited*
Hsbc Custody Nominees (Australia) Limited
National Nominees Limited
Citicorp Nominees Pty Limited
Forsyth Barr Custodians Limited
Bnp Paribas Noms (NZ) Ltd
Custodial Services Limited
Mr Philip Roy Taylor
Wayne Kenneth Butler & Christina Anne Butler
Vanward Investments Limited
FNZ Custodians Limited
Mr Sebastian Mead
BNP Paribas Noms Pty Ltd
Mr Kevin Gerald Stock
BNP Paribas Nominees Pty Ltd
David Ross Sim & Franklin Trustee Services Ltd
Total
Total remaining holders balance
148,330,600
60,370,705
23,669,986
19,156,926
19,156,926
9,973,747
8,721,362
7,272,324
5,989,017
4,953,200
2,108,997
2,000,000
1,760,000
1,466,180
1,415,720
1,200,000
1,133,824
1,010,000
801,222
800,000
321,290,736
66,147,777
38.28
15.58
6.11
4.94
4.94
2.57
2.25
1.88
1.55
1.28
0.54
0.52
0.45
0.38
0.37
0.31
0.29
0.26
0.21
0.21
82.93
17.07
* Denotes entities in which a member or members of the Hill family have an ownership interest.
Holding by range of securities as at 10 September 2018
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,001 - over
Total
Number of No. of holders
of fully paid
ordinary shares ordinary shares
fully paid
Number of No. of holders
of unlisted
options
unlisted
options
Number of No. of holders
of unlisted
share rights
unlisted
share rights
364,802
3,698,578
6,636,459
34,233,269
342,505,405
387,438,513
561
1,165
804
1,158
-
-
-
-
122 4,000,000
3,810 4,000,000
-
-
-
-
4
4
-
-
-
296,939
622,163
919,102
-
-
-
7
1
8
98 MICHAEL HILL INTERNATIONAL LIMITED ADDITIONAL INFORMATION
Unmarketable parcels as at 10 September 2018
Minimum $500.00 parcel at $0.865 per unit
Minimum
parcel size
579
Holders
Units
248
78,480
Substantial holders as defined by the ASX Listing Rules, as at 10 September 2018
Hoglett Hamlett Limited and others*
Mark Simon Hill
Emma Jane Hill
Fisher Funds Management Limited
Latest Notice Date
13 October 2016
13 October 2016
13 October 2016
26 September 2017
Shares
148,330,600
167,487,526
167,487,526
38,514,923
* Includes: Hoglett Hamlett Limited (New Zealand incorporated company with company number 5994887), Sir Richard
Michael Hill, Lady Ann Christine Hill and Veritas Hill Limited (New Zealand incorporated company with company
number 2303840).
MISCELLANEOUS INFORMATION
On 20 September 2018 the Company announced that its existing CEO, Phil Taylor, has resigned and Daniel
Bracken has been appointed as the Group's new CEO with effect from 15 November 2018. As a consequence, the
Consultancy Agreement involving Director Robert Fyfe, referred to in the FY18 Remuneration Report on page 41 of
this annual report, ceases.
RINGS: SIR MICHAEL HILL DESIGNER BRIDAL COLLECTION
MICHAEL HILL INTERNATIONAL LIMITED ADDITIONAL INFORMATION 99
INDEX
CORPORATE DIRECTORY
48 Auditor’s independence
54 Notes to the financial
declaration
statements
53 Cash flow statement
24 Operational review
5 Chair's review
31 Outlook
35 Committee membership
9 Performance highlights
14 Community spirit
3 Company profile
35 Company secretary
100 Corporate directory
34 Director information
23 Principal activities
37 Remuneration report
25 Review of 2017-18 priorities
23 Review of operations
33 Risk management
35 Directors’ meetings
60 Rounding of amounts
23 Directors’ report
26/62 Segment results
23/81 Dividends
98 Additional information
31 Environmental regulation
23 Significant changes in the
13 Exchange rates
21 Executive and
management team
49 Financial statements
81 Franking credit account
81 Imputation credit account
94 Independent Auditor’s
report
state of affairs
12 Statistics
52 Statement of
changes in equity
50 Statement of
comprehensive income
51 Statement of
financial position
98 Substantial security holders
47 Insurance of officers and
19 Sustainability
AU DITOR
Ernst & Young
Level 51
111 Eagle Street
Brisbane, QLD 4000
SOLICITOR
HopgoodGanim Lawyers
Level 8 Waterfront Place
Brisbane Qld 4000
BAN KE RS
Australia and New Zealand
Banking Group Limited
ANZ Banking Group
(New Zealand) Limited
Bank of Montreal
Bank of America N.A.
WE BSITE
michaelhill.com.au
emmaandroe.com.au
investor.michaelhill.com
E MAI L
inquiry@michaelhill.com.au
DI R ECTORS
E.J. Hill BCom, MBA (Chair)
Sir Richard Michael Hill KNZM
G.W. Smith BComm, FCA, FAICD
R.I. Fyfe BEng, FENZ
J.S. Allis
COM PANY SECR ETARY
K.A. Hammond
LLB (Hons), BA, GradDipLegPrac
PR I NCI PAL R EG ISTE R E D
OFFICE I N AUSTRALIA
Metroplex on Gateway
7 Smallwood Place
Murarrie, QLD 4172
GPO Box 2922
Brisbane, QLD 4001
Telephone +61 7 3114 3500
Fax +61 7 3399 0222
SHAR E R EG ISTRY
Computershare Investor
Services Pty Ltd
200 Mary Street
Brisbane QLD 4000
1300 552 270
(within Australia)
+61 3 9415 4000
(outside Australia)
12 Trend statement
indemnities
7 Key facts
20 Key strategic goals
20 Leadership principles
2 Our vision
99 Miscellaneous information
47 Non-audit services
SIR MICHAEL HILL
DESIGNER BRIDAL
COLLECTION
100