Michael Hill International Limited
Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 in these risks, uncertainties and other DISCLAIMER: Certain statements in this report 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,” “plans,” “seeks,” “will,” “may,” “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 include, are made. Forward-looking statements 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. Although the Group believes that the expectations reflected 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. Such important factors include, among others: global and local economic conditions; changes in market 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 Company’s actual financial condition, cash flows or results of operations could differ materially from that described herein as anticipated, believed, estimated or expected. Accordingly, you are cautioned not to place undue reliance on any forward-looking statements, particularly in light of the current economic climate and the significant volatility, uncertainty and disruption caused by the COVID-19 pandemic. 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. TERMINOLOGY: In this report, unless otherwise specified or appropriate in the context, the term "Company" refers to Michael Hill International Limited, and the terms "Group" or "Michael Hill" refer to the Company and its subsidiaries (as appropriate). b The Directors are pleased to present the annual report of Michael Hill International Limited and its subsidiaries for the year ended 28 June 2020 What’s inside 3 5 COMPANY PROFILE An introduction to the Company and our vision CHAIR & CEO REVIEW Emma Hill & Daniel Bracken review the Group’s overall performance for the year 11 KEY FACTS Key results and data for the year 14 TREND STATEMENT 37 REMUNERATION REPORT A table of our historical performance over the past five years 17 SUSTAINABILITY 22 OUR EXECUTIVE TEAM 25 DIRECTORS' REPORT A review of the year’s operations and the plans and priorities for the future Remuneration of Directors and key executives 46 AUDITOR’S DECLARATION 47 FINANCIAL STATEMENTS 98 AUDITOR’S REPORT 102 ADDITIONAL INFORMATION 104 CORPORATE DIRECTORY FRONT COVER: MODEL WEARS EVERMORE BRIDAL SET OPPOSITE PAGE: MODEL WEARS EVERMORE ENGAGEMENT RING 1 Our vision: to be the most loved jewellery destination 2 Company profile Michael Hill is an international multi-channel retail jewellery chain with a vision to be the most loved jewellery destination by creating fine jewellery accessible to all. As of 28 June 2020, it operates 290 stores and digital platforms across 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. Successful listing on the New Zealand Stock Exchange in 1987 saw the Group expand across the Tasman to Australia. After 15 years of sustained growth in both countries, Michael Hill embraced the opportunity to expand to North America in 2002, opening its first stores in Vancouver, Canada. The Group's Canadian retail presence continues to evolve as does its innovative online presence in all markets in which it operates. In 2016 Michael Hill moved its primary stock exchange to the Australian Securities Exchange and continues to maintain a secondary listing on the New Zealand Stock Exchange (ASX/NZX: MHJ). As of 28 June 2020, the Group proudly operates 155 stores in Australia, 49 in New Zealand and 86 stores in Canada. Around the world, the Group employs approximately 2,300 permanent employees across retail sales, manufacturing and administration roles. From 1979 until now and into the future, one constant underpins all that we do: we’re for love. Michael Hill remains committed to creating quality jewellery for our customers to cherish for a lifetime. Information on our corporate governance policies and practices, including our Corporate Governance Statement, is available on our Investor Relations Centre website at investor.michaelhill.com THIS PAGE AND OPPOSITE PAGE: JEWELLERY FROM OUR MARK HILL COLLECTION 3 We started the year celebrating our 40th birthday and our journey from a traditional retailer to a modern, differentiated omni-channel jewellery brand... 4 Dear Shareholders, VALUES, CULTURE, DIVERSITY AND INCLUSION Strong, values-led leadership in times of uncertainty is paramount. I am proud of the determination, resilience and agility our leadership team demonstrated throughout the year. Our values; We care, We create outstanding experiences, We are professional, and We are inclusive and diverse were reflected and entrenched in the approach taken by the leadership team when dealing with the crisis. These attributes and values are engrained in all levels of our business. As we navigate the rapidly changing environment, our commitment to creating a diverse and inclusive organisation will strengthen our company. We are striving to create a culture where every team member can thrive and feel valued, so they can bring their whole self to work. This year we established the diversity and inclusion council with stakeholders from all levels and geographies of the business meeting monthly to identify barriers to inclusion and opportunity for improvement. While there is much more to do, we are proud of our female representation at 85% throughout the company. The majority of our customers are women, likewise women form the majority of our team. 40% of board, 50% of the executive and 52% of senior leadership are female. Recognising diversity is not just about gender, we will increasingly seek to reflect the communities we serve across all attributes of diversity. As highlighted last year, given culture has always been important to us, we were very disappointed to discover the misapplication in Australia of the General Retail Industry Award. The company has largely remediated existing team member payments. However, during the COVID-19 closure period, the remediation program for former teams was paused, noting that interest will be paid on all amounts owing until this program of work is completed. BUILDING ON OUR STRONG HERITAGE DURING UNCERTAIN TIMES The 2020 financial year has been extraordinary. We started the year celebrating our 40th birthday and our journey from a traditional retailer to a modern, differentiated omni-channel jewellery brand. We shared memories from the early days, the many challenges overcome, and how the brand’s deep heritage remains relevant in our business today. On a personal level, I’m very proud of the company’s evolution, the strength that has been built, and the direction it is headed in. This past year has also been extremely challenging and uncertain. Initially, bushfires, drought and floods affected our Australian communities. This was followed by the COVID-19 pandemic, one of the greatest health threats of a generation, which profoundly impacts the global economy, and continues to have a devastating impact on many people’s lives. COVID-19 resulted in an unprecedented temporary closure of our entire store network severely impacting our operations, sales and profit. While the effect of the pandemic on our business is material, throughout the crisis we are adapting and embracing learnings to remain strong and well positioned to support our colleagues, customers and the communities we serve. Across our network, we have implemented robust protocols to keep our people and customers safe. Managed retail entry, health screens, personal protection, and intensified daily cleaning, along with staged shifts in our support centre, and working from home, were quickly mobilised. While conditions may be unusual, and varied across geographies, we are functioning smoothly. As the crisis unfolded we accelerated a range of digital engagement platforms, such as virtual selling, enabling our customers to connect with our brand and sales professionals even when they can’t visit us in person. Jewellery is a considered purchase; our highly trained sales professionals helping our customers has always been central to our business model. The virtualisation of our one to one selling model is a great example of our continued quest to meet changing customer needs. We are emerging from the crisis a stronger, leaner, more relevant business. 5 We continue to improve the strategic foundations of the business: this year we successfully embedded the new retail operating model, launched our new loyalty program, trialled laboratory-created diamonds, and implemented a raft of digital developments. 6 OUR BOARD Michael Hill has an outstanding and highly engaged board of directors. I would like to personally thank the directors for their commitment, and wise counsel during the year. We normally meet monthly, however in the midst of the crisis the board met up twice weekly to support, govern and offer guidance to the Executive team. As a cycle of board renewal, we are pleased to welcome Jacquie Naylor as a Non-Executive Director. Jacquie has over thirty years’ experience in retail, fashion, and eCommerce. Her deep understanding of driving retail performance, organisational change, and strategy development will be a valuable and complimentary addition to the Board. Janine Allis will step down from the Board at the 2020 Annual General Meeting. Janine’s entrepreneurial flare and commercial acumen has brought valuable insights and judgement to Michael Hill. We are thankful for the contribution and counsel she has provided. DIVIDENDS Given the uncertain economic environment, and our desire to maintain a resilient balance sheet to withstand stress, the Board has decided to not declare an end of year dividend and to defer the payment of the interim dividend. Our goal is to restore a regular pattern of dividend payments as performance improves and earnings stabilise. On behalf of the Board, I would like to thank our people, customers and shareholders for their ongoing support, unwavering loyalty, and commitment to Michael Hill. Furthermore, I would like to make particular mention of our CEO Daniel Bracken and the Executive team, who demonstrated outstanding leadership and dedication throughout these unprecedented times. Stay safe, Emma Hill Chair CEO’s message RHYTHM OF THE BUSINESS GAINING TRACTION As I reflect on the 2020 financial year, it was certainly a year of two halves. Following on from the positive sales momentum achieved across FY19, the business delivered consecutive quarters of sales growth in all markets to finish the first half with +6.3% comparative sales. As we entered the second half, we started to see the benefits from our disciplined “rhythm of the business” approach coupled with our strategies gaining traction, as the business shifted its focus to a balance of both sales and margin. The business has continued to leverage the brand’s deep heritage as we celebrated our 40th birthday in August. The roll-out of various digital capabilities accelerated our journey of evolving into a modern, differentiated, omni-channel jewellery brand. I’m proud of how our teams have embraced and truly cemented the retail fundamentals into the company culture. Prior to the COVID-19 store closures at the end of March, the business was successfully delivering both sales and margin growth, and was tracking to achieve increased year-on-year EBIT. Undoubtedly, the 2020 financial year will always be remembered for the COVID-19 global pandemic. The impact of COVID-19 was beyond anything we have ever experienced. The global economic and health consequences are having a profound and far reaching impact. As the pandemic advanced, given selling jewellery is an intimate close quarter process, we had no choice but to temporarily close all our stores to keep our people and customers safe. The closures lasted between five and thirteen weeks, depending on region and country. Similar to many speciality retailers our business was severely impacted, resulting in an estimated revenue loss of at least $80m for FY20Q4. From May 2020, our store network progressively reopened with the establishment of best-in-class health and safety protocols to protect our people and customers. I am particularly proud of all our people. Never before have we asked so much from them. Despite incredible uncertainly, for themselves and their families, they responded with resilience, determination and professionalism. FY20 STRATEGY EXECUTION Throughout the year, the company has maintained a laser sharp focus on delivering new initiatives to modernise Michael Hill. We successfully embedded the new retail operating model, launched our new loyalty program, trialled laboratory-created diamonds, along with a raft of digital developments as we continued to improve the strategic foundations of the business. 7 The progress we have made during FY20 across costs, loyalty, digital and retail fundamentals has Michael Hill well positioned to navigate both the opportunities, and the potential market disruptions ahead. 8 I’m incredibility proud of the strategic progress we have made during FY20 across costs, loyalty, digital and retail fundamentals, which I believe have Michael Hill well positioned to navigate both the opportunities, and the potential market disruptions ahead. OUTLOOK FOR FY21 - EMPHASIS ON GROWTH AND MARGIN In FY21, the company will continue to strengthen the retail fundamentals of the business, focus on providing a true omni-channel customer experience, and rapidly progress the key initiatives set out in the Directors’ report, with an emphasis on growth in sales and margin. I’m excited that as part of our digital-first initiative, in August 2020, we launched our new pure play digital brand – Medley. This offers us a real opportunity to expand into the high margin demi-fine category, attracting a new customer demographic in an agile and capital light manner. There is no doubt that the economic uncertainty of the global pandemic will continue to have some impact on FY21 performance, given the volatility in consumer confidence, the economic reliance on government stimulus packages, and the ongoing potential of store closures. Having said this, the business has started FY21 positively in all markets, with continued gross margin improvements, as our strategic initiatives steadily gather momentum. We believe Michael Hill is a resilient business with best in-class health and safety protocols and is well positioned for growth and margin opportunities to strengthen our business, across product, digital and omni-channel offerings. After what can only be described as a historic and challenging year, I would like to personally thank our loyal customers, our dedicated team members, the Executive team and Board members for their resilience and unwavering support. Daniel Bracken Chief Executive Officer UNWAVERING FOCUS ON COSTS Our continued focus on costs resonated across the business as the reality of COVID-19 store closures impacted the entire business. As a direct consequence, we implemented a number of measures to preserve cash, negotiated deferred vendor payment terms, tax payment deferrals and rental abatements. The business cancelled all discretionary spend, paused most of our planned capital expenditure and operated with a leaner global support office. A number of initiatives had already been delivered prior to COVID-19, such as a reinvigorated retail structure, consolidation of our repair network in all countries, and improved terms with some of our credit providers. LAUNCH OF OUR LOYALTY PROGRAM – BRILLIANCE BY MICHAEL HILL Pleasingly, our long-awaited loyalty program was soft-launched digitally late last year, and only eight months later it has already more than 200,000 members. This gives us the ability to capture customer data for future engagement. As a result of the successful member pricing aspect of the program, we are experiencing higher transaction values and improved gross margins. DIGITAL EXPLOSION The Company experienced a surge in sales from our digital business, resulting in record digital sales of $24.7m which represented a milestone 5% of total sales, up from 2.8% of total sales in FY19. As our customers turned to online shopping channels due to COVID-19 store closures, we launched several digital initiatives capitalising on the increased website traffic. These involved an enhanced website with improved customer experience, checkout process and navigation functions; direct selling through social media and digital catalogues; and a number of virtual applications added into our ecosystem, including a virtual selling platform, virtual appointments and virtual try ons. RETAIL FUNDAMENTALS We have made great progress in how we are organised and operate our retail business. During the year, we trialled our new store incentive scheme. Those trials demonstrated increased performance across many aspects of our business, most notably higher margins. I’m pleased to say that the new scheme has now been rolled across all stores in the network, and is delivering very strong results. The new Retail Operating Model is firmly embedded in the business, and we have significantly ramped up our focus on in-store execution and visual merchandising standards. THIS PAGE AND OPPOSITE PAGE: PENDANTS FROM OUR INFINITAS COLLECTION 9 The surge in the Company’s online business resulted in record digital sales of $24.7m for the full year (up 54.7% on FY19) 1010 Key Facts Year ended 28 June 2020 au$000 unless stated TRADING RESULTS From continuing operations Group revenue Gross margin Earnings before interest and tax* Underlying trading earnings before interest and tax* Net profit before tax Net profit after tax Group trading results Profit for the year Net cash inflow from operating activities 2020 2019 % Change Year ended 28 June 2020 2020 2019 492,060 569,500 298,204 353,032 21,115 14,079 (13.6%) (15.5%) (33.3%) 25,686 4,485 3,059 34,608 18,811 16,498 (25.8%) (76.2%) (81.5%) KEY RATIOS Return on average shareholders’ funds Gross margin Interest expense cover (times) Equity ratio (total equity / total assets) Gearing Ratio (net debt / total equity) Working capital ratio (current assets / trade payables) Current ratio (current assets / current liabilities)* 1.9% 60.6% 1.5 30.7% -0.3% 9.4% 62.0% 8.6 46.6% 23.5% 3.0 : 1 5.0 : 1 1.4 : 1 2.1 : 1 3,059 16,498 (81.5%) 83,699 38,969 114.8% EARNINGS PER SHARE Basic earnings per share Diluted earnings per share au0.79¢ au4.26¢ au0.79¢ au4.25¢ FINANCIAL POSITION AT YEAR END Contributed equity 387,769,105 ordinary shares Total equity Total assets Net debt/(cash) Capital expenditure 10,984 11,016 153,806 176,752 501,618 379,193 24,781 17,353 16,134 (523) 0.3% (13.0%) 32.3% (102.1%) 7.6% DISTRIBUTION TO SHAREHOLDERS Dividends - including final dividend Per ordinary share Times covered by net profit after tax au1.5¢ 0.53 au4.0¢ 0.85 SHARE PRICE 30 June au$0.32 au$0.54 ADJUSTED SAME STORE SALES* Michael Hill adjusted same store sales* movement (in local currency) Australia New Zealand Canada Group same store sales movement NUMBER OF STORES Australia New Zealand Canada Michael Hill stores Emma & Roe stores Total stores 0.1% 2.4% 2.3% 2.7% -5.7% -4.5% -1.7% -3.3% 155 49 86 290 167 52 86 305 - 1 290 306 * EBIT, Underlying trading EBIT and Adjusted Same Store Sales are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT and Underlying trading EBIT. 11 0 5 . 0 5 . 0 5 . 0 4 . . 5 9 6 5 . 5 5 7 5 1 . 1 5 2 5 2 2 5 . 1 . 2 9 4 5 . 1 16 17 18 19 20 16 17 18 19 20 ORDINARY DIVIDEND AU CENTS PER SHARE / FINANCIAL YEAR GROUP REVENUE DOWN 14% AU$ MILLIONS / FINANCIAL YEAR 1212 3 . 7 3 . 5 2 3 7 . 4 2 . 5 5 7 2 . 7 6 . 5 4 6 7 . 9 6 . 0 8 1 2 . 4 1 . 0 3 1 . 0 6 1 1 . 1 1 9 6 . 1 . 4 . 5 0 4 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 BRANDED COLLECTIONS UP 13% % OF TOTAL SALES / FINANCIAL YEAR DIGITAL SALES UP 55% AU$ MILLIONS / FINANCIAL YEAR EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION AND AMORTISATION (EBITDA) UP 72% AU$ MILLIONS / FINANCIAL YEAR FY2020 RESULT INCLUDES THE ADOPTION OF AASB16 LEASES 7 . 7 2 . 5 3 2 . 6 0 2 . 0 8 1 NEW ZEALAND 21% AUSTRALIA 54% CANADA 25% REVENUE BY COUNTRY FINANCIAL YEAR NEW ZEALAND 17% AUSTRALIA 53% 16 17 18 19 . 3 0 - GEARING RATIO -0.3% % / FINANCIAL YEAR CANADA 30% STORES BY COUNTRY FINANCIAL YEAR Performance Highlights KEY FINANCIAL RESULTS ■ Statutory net profit after tax of $3.1m ■ Statutory earnings before interest and tax of $14.1m ■ Group operating revenues of $492.1m ■ Underlying trading earnings before interest and tax* of $25.7m ■ Group adjusted same store sales* $469.3m, up 2.7% ■ Gross margin 60.6% ■ Inventory reduced to $178.7m ■ Equity ratio 30.7% OPERATIONAL PERFORMANCE ■ Digital sales increased by 54.7% to $24.7m ■ Digital sales represent 5.0% of total sales ■ Branded Collection sales represented 37.3% of total sales ■ Delivery of cloud enabled ERP platform in June 2020 ■ Decisive cash preservation and cost management throughout the year ■ Loyalty program Brilliance by Michael Hill launched with over 200,000 members to date ■ Stores temporarily closed due to COVID-19 for a period of five to thirteen weeks ■ One new store opened and seventeen underperforming stores were closed * EBIT, Underlying trading EBIT and Adjusted Same Store Sales are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT and Underlying trading EBIT. 13 13 Trend Statement FINANCIAL PERFORMANCE FROM CONTINUING OPERATIONS Group revenue 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 FINANCIAL POSITION Cash Inventories Other current assets Total current assets Other non-current assets Deferred tax assets Total tangible assets Right of use asset Intangible assets Total assets Total current liabilities Non-current borrowings Lease liabilities Other long term liabilities Total liabilities 2020 $000 2019 $000 2018 $000 2017 $000 2016^ $000 492,060 569,500 575,539 551,099 522,214 69,690 55,611 14,079 9,594 4,485 1,426 3,059 83,699 5,817 2020 $000 11,204 178,742 31,007 220,953 57,857 74,468 353,278 123,911 24,429 501,618 159,405 10,681 115,848 61,878 347,812 40,481 19,366 21,115 2,304 18,811 2,313 16,498 38,969 19,365 64,481 18,694 45,787 2,680 43,107 11,342 31,765 54,893 19,371 75,482 17,427 58,055 3,149 54,906 13,768 41,138 39,752 19,264 67,212 16,796 50,416 5,508 44,908 21,384 23,524 47,794 17,490 2019 $000 2018 $000 2017 $000 2016^ $000 7,923 7,220 5,676 8,853 179,503 192,074 203,853 199,961 35,878 29,314 29,052 31,298 223,304 228,608 238,581 240,112 72,742 67,708 72,219 68,022 83,864 62,712 74,450 67,610 363,754 368,849 385,157 382,172 - - - 15,439 12,626 8,784 379,193 381,475 393,941 105,130 108,710 32,704 35,213 - - 95,716 45,034 - - 5,561 387,733 112,772 40,887 - 64,607 62,627 62,252 55,923 202,441 206,550 203,002 209,582 Net assets Reserves and retained profits* Paid up capital 153,806 142,790 11,016 176,752 174,925 190,939 178,151 165,768 10,984 164,659 180,924 174,384 10,266 10,015 3,767 Total shareholder equity 153,806 176,752 174,925 190,939 178,151 Per ordinary share Basic earnings per share Diluted earnings per share Dividends declared per share - Interim - Final 0.79¢ 0.79¢ au1.5¢ - 4.26¢ 4.25¢ au2.5¢ au1.5¢ 8.20¢ 8.19¢ au2.5¢ au2.5¢ 10.66¢ 10.66¢ au2.5¢ au2.5¢ 6.14¢ 6.11¢ nz2.5¢ au2.5¢ Net tangible asset backing $0.33 $0.42 $0.42 $0.47 $0.45 ^ 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. * EBIT and EBITDA are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT. 14 ANALYTICAL INFORMATION EBITDA* to sales EBIT* to sales Net profit after tax to sales EBIT* to total assets Return on average shareholders funds Return on average total assets Working capital ratio Current ratio EBIT* interest expense cover Effective tax rate Gearing Net borrowings to equity Equity ratio Other Shares issued at year end excl Treasury 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 number of Michael Hill stores 2020 14.2% 2.9% 0.6% 2.8% 1.9% 0.7% 3.0 : 1 1.4 : 1 1.5 31.8% 2019 7.1% 3.7% 2.9% 5.6% 9.4% 4.3% 5.0 : 1 2.1 : 1 8.6 12.3% 2018 11.2% 8.0% 5.5% 12.0% 17.4% 8.2% 4.6 : 1 2.1 : 1 17.0 26.3% 2017 13.7% 10.5% 7.5% 14.7% 20.9% 10.5% 4.9 : 1 2 .5 : 1 18.3 25.1% 2016^ 12.9% 9.7% 4.5% 13.0% 12.9% 6.3% 5.2 : 1 2.1 : 1 8.3 47.6% -0.3% 30.7% 23.5% 46.6% 27.7% 45.9% 20.6% 48.5% 18.0% 45.9% 387,769,105 387,750,000 387,438,513 387,438,513 14,677 - - - 1.04 0.90 - 155 49 86 - 290 1.06 0.95 - 167 52 86 - 305 1.09 0.98 0.78 171 52 83 - 306 1.07 0.97 0.83 166 52 76 9 303 383,138,513 14,677 1.07 0.97 0.83 168 52 67 10 297 ^ 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. * EBIT and EBITDA are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT. TOTAL MICHAEL HILL STORES 290 1987 - 2020 15 We care. We create outstanding experiences. We are professional. We are inclusive and diverse. 16 Sustainability FY20 has fundamentally tested our notion of sustainability. The incredible challenges that this year has presented have been all encompassing. From the bushfires that devastated so many Australian communities throughout late 2019 and into 2020, to the global COVID-19 pandemic that continues to dictate many of our daily interactions, we have all been impacted. Regardless of size, businesses across the globe have had their very ability to survive called into question as immediate and sweeping events have impacted their communities, customers, teams and supply chains. Michael Hill has been no exception to this, and we have embraced the agility required to adapt to these events while remaining true to the values which serve as the very foundation of our business. At Michael Hill, we want each of our team members to feel they are a valued part of our family. We want our customers to have confidence that their jewellery has been ethically sourced and produced, and that we will continue to strive for innovation in our products and the ways we offer them. We want our investors to know that we are willing and able to adapt to the rising and increasingly complex challenges facing people, communities and the planet. Accordingly, our sustainability strategy is driven by the three areas identified as most material by our key stakeholders during a materiality assessment we conducted based on the Global Reporting Initiative Standards for sustainability reporting. Key stakeholders consulted included: trade partners, customers, internal team members (from Board through to team member), academics and industry bodies. ENGAGEMENT RING FROM OUR SOLITAIRE BY MICHAEL HILL COLLECTION PEOPLE: BUILDING TALENT AND TEAMS Our people and our teams lie at the very heart of our brand. With the challenges that FY20 presented, so too came valuable opportunities and lessons in teamwork and responsive- ness. Our leaders navigated new ways to maintain team connections and culture while working remotely and delivering outcomes in challenging and constantly changing environments. Supporting this, our operational teams were rapidly developing processes and facilities to allow our teams to feel safe at work, ranging from the deployment of respirator masks to vulnerable team members in the Australian bushfires, to implementing safe operating protocols (for both team members and customers) following the COVID-19 pandemic. FY20 saw the launch of several new programs and initiatives to measure and improve team member experiences, strengthen internal capabilities, and attract new talent. Early in the year we conducted our first Great Place to Work (GPTW) survey to measure team member experience across the key areas of: Trust, Engagement and Collaboration. Just over half of our global team responded to the survey and overall, we scored 71% on the GPTW measurement scale. We have developed a clear plan of action to lift this score to 75% and to increase team member participation in the survey. We aim for Michael Hill to provide exceptional experiences for all and to be a loved employer. Our People Promise is ‘Enabling you to realise your potential’. It’s what sets us apart as an employer to ensure we attract, develop and retain the right talent our business needs to succeed. For us, being a loved employer is about making that connection, it’s about living our values, it’s about joining brilliance together. The Michael Hill Leadership Promise is ‘As leaders, we will create a high-performance, high-trust culture that is open, honest and committed to excellence’. We have commenced embedding our Leadership Promise, a statement with corresponding actions that show to our team members how we commit Our Team AS AT 28 JUNE 2020 NZ AU CA TOTAL EMPLOYEES BY REGION TOTAL EMPLOYEES BY GENDER 30–50 <30 >50 TOTAL EMPLOYEES BY AGE ~90% EDUCATION, TRAINING AND PROGRESSION Employees that received regular performance and career development review during the year 17 It's our people who make our company! 18 to interacting with them, into our culture. Respect, understanding, development, feedback, informing and empowering are all key elements of this promise. In September 2019 we formally launched our Values, as outlined in the FY19 Annual Report. These values work cohesively with our People and Leadership Promises to form a clear framework for further building the Michael Hill culture. Our focus this year has been to understand our employer value proposition touchpoints and to reinforce and embed our People and Leadership Promises into our employment lifecycle to further enhance our team member experience. Additionally, we equipped our team leaders with a clearly defined process for reviewing talent and planning succession; a critical step in building a high performing business for the future. Pleasingly, FY20 also saw significant progress in the rectification of the historic underpayment to our retail workers identified in July 2019. While the discovery of this underpayment was deeply disappointing, we are proud of the commitment shown by our leadership team to remediate this. In early 2020, underpayments to impacted current team members were made. Our remediation work to rectify our former team members continues. Diversity also remained a focal point, with the establishment of the Michael Hill Diversity and Inclusion (D&I) Council to support the business to bring the D&I strategy to life. Council members represent all geographic and operational areas of the business and span all levels of seniority. The Council meets monthly to identify barriers to inclusion and opportunities for improvement. Additionally, they support the execution of D&I initiatives throughout the year across all countries. In terms of gender diversity, at the conclusion of FY20 85% of our total team mix was female (FY19: 84%). Women in leadership positions (defined as executive team, regional and store management, and support centre senior leadership) was 52% (FY19: 48%). Female representation on our executive team was 50% (FY19: 50%) and remained steady at 40% of the Michael Hill Board of Directors (FY19: 40%). We continue to communicate the availability of a hotline available for team members to report instances of discrimination or harassment. This supports the Whistleblowing Policy endorsed by the Board. Our health, safety and wellbeing initiatives gained momentum during the year. We launched our strategy roadmap to 2023, with a focus on five priorities: Risk Management, Systems and Compliance, Culture and Capabilities, Innovation and Enhanced Wellbeing. The health, safety and wellbeing of our customers and teams became a critical area of focus during the COVID-19 pandemic. We were the first major Australian retailer to take action in terms of closing stores and while simultaneously increasing our online capabilities, allowing us to redeploy some of our retail team members to supporting those new digital initiatives. As many of our team members across all areas of the business were stood down, we accessed available government wage subsidies in all three countries. Additionally, we rapidly transitioned to flexible working arrangements as many of our working team members took on additional family responsibilities such as home schooling. As our retail business resumed trading, we took (and continue to take) a consultative response to restarting stores and transitioning team members back to our support office, whilst keeping team member and customer safety as the first priority. Finally, in terms of safety performance FY20 saw a Lost Time Injury Frequency Rate (LTIFR) of 3.46 against a target of 7.01 and industry average rate of 6.0. This was a very pleasing improvement on our FY19 LTIFR of 7.65, however, we acknowledge that this improvement may be partially due to the COVID-19 shutdown period. FY21 will see a continued focus on improving the functionality and effectiveness of our Safety Management Systems, reporting processes and analytics. RINGS FROM OUR PRELUDE COLLECTION 19 PRODUCT: ETHICAL SOURCING FY20 saw continued focus on ethical sourcing, a core and non-negotiable principle of our business. Our responsible sourcing program is supported by our Conflict Free Diamonds and Sourcing Policy, as well as our Code of Business Ethics and Code of Conduct for Suppliers, a copy of which is available on our Investor Relations Centre website. As an international multi-channel jewellery retailer, we recognise the inherent supply chain risk exposures that come from operating within the global mining and extractives industry. Notably, in March 2020, we launched our online supply chain transparency platform enabling us to better assess our supply chain for risks of unacceptable practices. This new platform supports our analysis of risks within our supply chain such as unethical sourcing from conflict affected areas, corruption, and modern slavery, and extends on our existing measures to ensure responsible sourcing, including sound supplier due diligence and contractual requirements. The launch of this platform incorporated sixty-five of our finished jewellery, component, raw material and packaging suppliers representing approximately 60% of company spend. The COVID-19 pandemic has impacted the broader implementation of the platform, however, we will continue improving our supply chain risk management framework as we look to further increase supply chain transparency through FY21. The launch of the supply chain platform complemented additional work performed in preparation for our first Modern Slavery Statement. Michael Hill is committed to the ethical use of human resources in the supply chain and while no instances of modern slavery have ever been identified in our business, we continue to strengthen our supply chain controls. Our first Modern Slavery Statement will be publicly available in 2021 on the Australian Government’s Online Register and our Investor Relations Centre at investor.michaelhill.com INNOVATION Product and service innovation is a key element of our sustainable business model. In August 2019, we became the first major Australian jeweller to offer a range of laboratory-created diamonds. Our expansion into this range, which is available throughout our global operations, was designed to offer a quality alternative to mined diamonds with competitive pricing and clear provenance. In October 2019, we launched our new loyalty program, Brilliance by Michael Hill, which offers members access to exclusive promotions, product education insights, VIP sale events and new range product previews. Brilliance by Michael Hill provides another avenue to build meaningful connections with our customers and ensure our business evolves to meet their needs. As at 28 June 2020, there were 144,086 members of the Brilliance family. Since then, membership has grown to over 200,000. Additionally, our Brisbane based manufacturing team continued to design and manufacture unique Branded Collections which continue to be popular with our customers. Our in-house manufacturing capability also enables the creation of bespoke pieces for our customers. The evolution of COVID-19 also provided us with opportunities for innovation in the ways in which we reach and connect with our customers. We launched an online virtual direct selling platform, enabling group or one-on-one product viewing, styling and purchasing. We launched new digital applications to support increased customer engagement and developed the functionality to allow customers to shop directly from digital online catalogues. These developments enabled us to continue to serve our customers without an operational network of physical stores and have proven fundamental in sustaining our business through this challenging period. 20 This year also saw us introduce product packaging made primarily from recycled materials. Additionally, our gift bags are now recyclable. Our manufacturing centre continued their processes to recover and recycle scrap gold and lemel generated from their manufacture and repair operations, while our corporate offices made use of waste separation facilities to maximise recycling and diversion from landfill. We have not identified any non-compliance with environmental laws and regulations in any of our operations. THE FUTURE OF SUSTAINABILITY AT MICHAEL HILL We remain in the early stages of our sustainability journey. FY20 has seen an increased focus on sustainability at a Board level, the development of a broad sustainability strategy and a concerted effort from our entire team to align our operations with this strategy. These efforts were validated in March 2020, when we undertook an interim audit of our Responsible Jewellery Council Code of Practices (RJC COP) certification. The RJC COP covers Human Rights, Labour Rights, Health and Safety, Product Integrity and many other key topics and is aligned with the OECD Due Diligence Guidance and the UN Guiding Principles of Business and Human Rights. Through the implementation of the RJC COP, Michael Hill contributes towards the United Nations 2030 agenda and the 17 Sustainable Development Goals. The interim audit saw all previously identified non conformances closed out, with no additional non-conformances identified. Accordingly, Michael Hill International has retained its RJC certification, with our next comprehensive audit due in 2022. This year has seen us gain momentum in demonstrating our commitment to sustainability and providing a benchmark for future performance, however we recognise that there are opportunities for improvement. Our immediate challenge is to embed and ingrain our sus- tainability values more deeply into the way we do business. This will be our focus over the coming year. PLANET: SUPPORTING THE PLANET AND THE COMMUNITIES IN WHICH WE OPERATE With the challenges that FY20 brought, our business has made every effort to extend its support to the communities in which we operate. At our global conference in September 2019, we partnered with SolarBuddy to donate over three hundred solar lights to children living in energy poverty. This program is designed to enable children to continue their studies after dusk and improve education outcomes. In December 2019, we sponsored the World’s Big Sleep Out event in Brisbane, a global initiative to raise funds for homeless and displaced people. Our Group Executive team joined a number of support centre team members, in sleeping overnight at the ‘Gabba’ (a major sporting stadium) in Brisbane, for the cause. In total, Michael Hill contributed over $40,000 to Mercy Community Services through sponsorship and fundraising efforts, making us one of the top three fundraisers across Australia – achieving second place in the categories ‘Highest Team Fundraisers’ and ‘Individual Fundraiser’ (our CEO Daniel Bracken). By sponsoring the event, Michael Hill made a significant contribution to addressing the issue of homelessness in our local community, with all fundraising going towards food and accommodation for vulnerable individuals and families in need. The Australian bushfires in the summer of 2019 saw eleven stores close at various times, and many of our team members needing to evacuate their homes. Michael Hill contributed $100,000 to the Australian Red Cross Disaster Relief and Recovery Fund, helping support Australians affected by the bushfires to rebuild and recover. Additionally, several individual stores donated funds to their local community organisations and many individual team members made voluntary donations to the NSW Rural Fire Service and The Australian Koala Foundation through our payroll system, in support of the courageous work and much-needed environmental recovery efforts of those organisations. This year our proud partnership with the Michael Hill International Violin Competition continued, celebrating and supporting New Zealand’s cultural offerings and showcasing the artistic talents of the world’s finest young violinists. During the COVID-19 pandemic, we were the first major Australian retailer to take action in terms of closing stores and standing down teams, simultaneously increasing our online capabilities to continue to support our vendors. We also focused efforts on supporting local industry, purchasing all hand sanitiser needed to stock Australian and New Zealand stores from the Brisbane Distillery. 21 Our Executive Team Daniel Bracken Chief Executive Officer Daniel has more than 25 years experience managing some of the world’s most iconic brands. He has an extensive background in retailing, fashion, and brand development in Australia and international markets, as a Chief Executive Officer and in senior executive positions across strategy, marketing, merchandise, product design and digital and customer engagement strategies. Prior to joining Michael Hill as CEO in November 2018, Daniel was CEO at Specialty Fashion Group and previously held positions as the Group Vice President, Strategy for Burberry London, as Deputy CEO and Chief Merchandise & Customer Officer of Myer, and as CEO of The Apparel Group. During his time at Speciality Fashion Group, Daniel led the company’s corporate restructure and the successful divestment of a number of brands, returning the company to profitability. At Myer, he oversaw merchandise buying, design, sourcing, and manufacturing, and led the Myer brand and customer experience strategy. During his tenure, the Apparel Group owned leading fashion brands Sportscraft, Saba, Willow, and JAG. His international experience includes more than 15 years at Burberry London in the United Kingdom, where he was a key member of the leadership team involved in their turnaround into an iconic global brand. He performed a range of roles at Burberry including Vice President – Strategy (Group), Head of Merchandising & Production (Ready to Wear), and Commercial & Operations Director (Menswear). Andrew Lowe Chief Financial Officer and Company Secretary Andrew joined Michael Hill in December 2017 as Chief Financial Officer, and later assumed the role of Company Secretary. He holds a Bachelor of Commerce, a Bachelor of Laws (Hons) and a Masters of Applied Finance, and is a qualified Chartered Accountant and a Chartered Taxation Adviser of the Taxation Institute of Australia. Andrew has extensive experience in finance and leadership roles across a range of listed corporate groups with Australian and offshore operations. This includes as Head of Tax, Shared Services and Finance Partnering at Australia’s largest rail-based freight operator and ASX100 firm, Aurizon. Previously, he was Deputy CFO and Head of Tax at Cleanaway Waste Management, and spent a decade with global mining company, Anglo American. 22 FROM LEFT: MATT KEAYS, VANESSA BRENNAN, DANIEL BRACKEN, ANDREW LOWE, ANDREA SLINGSBY, JOANNE MATTHEWS Andrea Slingsby Chief Operating Officer Vanessa Brennan Chief Brand & Strategy Officer Matt Keays Chief Information Officer Joanne Matthews Chief People Officer Vanessa joined Michael Hill in January 2018 in the newly created position of Chief Brand & Customer Officer, to lead the commercial growth strategy for the business across customer, product, brand marketing and eCommerce. She is a recognised leader in strategic brand, customer and digital strategy, and is renowned as a transformative specialist in building brands with expertise covering the end-to-end spectrum of customer, brand and marketing communications. Vanessa has more than 20 years’ experience gained in Australia, Europe, Latin America and Asia, where she has been a key advisor to a number of global and domestic commercial and government organisations, including as a Partner at PWC and Managing Director of Clemenger BBDO. Andrea has more than 25 years corporate experience working in high-growth service sectors, and has held various Board, Managing Director, Chief Executive Officer, senior management and corporate advisory roles for a broad range of Australian private and public companies. She has outstanding Australian and international experience, and is an Alumni of Harvard Business School. Prior to joining Michael Hill in 2019, Andrea held a number of senior roles across 14 years working for Flight Centre, including President & CEO for North America. She also worked as a corporate advisor to Michael Hill in late 2018 on the company’s HR strategy and operational execution, prior to her appointment to the company’s Executive Management Team. Andrea’s background working for many fast-growing companies, as well as her unique experience in business model improvement and operational excellence, is fundamental to Michael Hill as it realises its strategy to be a globally relevant and modern retailer in the premium jewellery category. Joanne joined Michael Hill in January 2019 with extensive experience in change leadership, and talent management and development. This experience was gained across 14 years in senior human resource leadership roles, including as Divisional Human Resources Manager (Leisure) for Super Retail Group. Joanne has also worked as the Executive General Manager, Human Resources for MAX Solutions Pty Ltd, a national organisation that delivers health, training and humanitarian solutions for Federal and State Governments, and prior to this she worked in retail operations with Woolworths. With a workforce of more than 3000 people in nearly 300 stores across Australia, New Zealand and Canada, Joanne’s experience will help to support the company’s core priority of attracting, developing, rewarding and retaining top quality people at Michael Hill. Joanne holds a MBA and Bachelor of Business in Human Resources and Marketing. Matt joined Michael Hill in June 2015, bringing with him extensive international IT experience in the retail space. Prior to joining the company, Matt led the global IT strategy for Forever New as their General Manager Information Technology, and prior to that worked as Chief Information Officer for Super Amart where his final project was successfully leading a full-scale disaster recovery process after the Queensland floods in 2011. He also worked for leading national footwear and apparel company, Colorado Group after enjoying his long retail apprenticeship with 11 years at Country Road, where he worked initially as a Finance Accountant, and also gained solid shop floor experience during his tenure. Matt has strong technical skills and a track record of developing an effective team focused on business alignment. Matt’s career has seen him lead significant technology and in- frastructure programs, covering Microsoft Dynamics, Infor, Oracle and JDE. He has helped all retail businesses implement and embrace data warehousing with his first Microsoft based implementation as far back as 2004. The Michael Hill advanced data warehouse went live in 2016 and his team continually evolve our data platforms to align with the strategic shifts across the business. RINGS FROM THE FENIX CREATED DIAMONDS FOR MICHAEL HILL COLLECTION 23 Adjusted same store sales* were up 2.7% for the full year to $469.3m, as the Company focused on enhancing the retail fundamentals and implemented the new retail operating model. Directors' Report 5,817 9,679 $469.3m (FY19: $457.1m). 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 28 June 2020. Principal activities The Group operates predominately in the retail sale of jewellery and related services sector in Australia, New Zealand and Canada. There were no 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: 2020 $000 2019 $000 Final ordinary dividend for the year ended 30 June 2019 of au1.5¢ (2019: au2.5 cents) per fully paid share paid on 27 September 2019 (2019: 28 September 2018) Interim ordinary dividend for the year ended 28 June 2020 of au1.5¢ (2019: au2.5¢) per fully paid share deferred for payment (2019: 29 March 2019)^ No final dividend has been declared by the Directors for the year ended 28 June 2020 (2019: au1.5¢). 5,816 9,686 - 5,816 ^ Interim dividend for the year ended 28 June 2020 of au1.5¢ was declared. Subsequent to the shares trading ex-dividend, but prior to payment date, the interim dividend payment was deferred to 30 September 2021. 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 of $492.1m (2019: $569.5m) for the 2020 financial year, producing a net profit after tax (NPAT) of $3.1m (2019: $16.5m). The Group reported an earnings before interest and tax (EBIT) of $14.1m (2019: $21.1m) for the 2020 financial year. Underlying EBIT adjusted for non-cash items and AASB 16 Leases (Underlying Trading EBIT)* for the Group was $25.7m (2019: $34.6m) for the year. OPERATIONAL REVIEW The Group achieved the following key outcomes for the 2020 financial year: Key Financial Results • Statutory net profit after tax of $3.1m (FY19: $16.5m), noting new AASB 16 Leases applies for FY20 only. • Earnings before interest and tax (EBIT)* of $14.1m (FY19: $21.1m). • Underlying trading EBIT* adjusted for non-cash items and AASB 16 Leases of $25.7m (FY19: $34.6m). • Group operating revenues of $492.1m (FY19: $569.5m), largely attributable to COVID-19 store closures. • Group adjusted same store sales* were up 2.7% at • Group gross margin 60.6% (FY19: 62.0%), predominantly impacted by foreign exchange. • Controlled inventory management, resulting in stock holdings of $178.7m (FY19: $179.5m). • Strong working capital management. • No final dividend declared. Interim dividend payment of au1.5¢ per share deferred to 30 September 2021. Operational Performance • Digital sales increased by 54.7% to a record $24.7m (FY19: $16.0m), representing 5.0% of total sales (FY19: 2.8%). • Branded collection sales represented 37.3% of total sales for the full year (FY19: 32.5%). • Delivery of cloud enabled ERP platform in June 2020, to optimise inventory allocation and store profiling. • Decisive cash preservation and cost management throughout the year. • Loyalty program Brilliance by Michael Hill launched online and in-store during the year, with over 200,000 members to date. • Stores were temporarily closed due to COVID-19 for a period of five to thirteen weeks, opening progressively in accordance with Government health guidelines. • One new store opened and seventeen under-performing stores were closed during the year, giving a network total of 290 stores across all markets (FY19: 306). * EBIT, Underlying trading EBIT and Adjusted Same Store Sales are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT and Underlying EBIT. MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 25 The Group reported statutory earnings before interest and tax (EBIT) of $14.1m for the year ended 28 June 2020 (FY19: $21.1m). Underlying EBIT adjusted for non-cash items and AASB 16 Leases for the year decreased to $25.7m (FY19: $34.6m). Prior to COVID-19, the Company had been gaining positive momentum with increasing same store sales growth and margin improvement. Adjusted same store sales* were up 2.7% for the full year to $469.3m (FY19: $457.1m), as the Company focused on enhancing the retail fundamentals and implemented the new retail operating model. This was particularly evident in the first half, when same store sales returned to positive growth with an increase of 6.3%. The second half erosion of EBIT was a result of the temporary closure of all stores for a period between five to thirteen weeks, due to the COVID-19 pandemic. The Company reduced the financial impact by implementing a lean operating model, ceasing all discretionary spend, and seeking rent abatements from landlords. In addition, wage subsidies were received in each market which partially offset the employee benefits paid out during this period. The surge in the Company’s online business resulted in record digital sales of $24.7m for the full year (up 54.7% on FY19). The online business delivered some of the highest weeks in the Company’s history during the COVID-19 period as customers embraced online purchasing whilst stores were closed. Digital sales now represent 5.0% of total sales. During the year, the Company accelerated the delivery of a number of digital first initiatives including enhanced website and user experience, direct selling from social media platforms and digital catalogues, virtual selling, along with the successful launch of our loyalty program (Brilliance by Michael Hill) which has now reached over 200,000 members globally. A continued focus on re-imagining our Branded Collections saw them represent 37.3% of total product sales for the year (FY19: 32.5%). A key milestone was reached with the delivery and go-live of the cloud enabled ERP platform. This platform will optimise inventory management, enhance store profiling and stock allocation, and facilitate multiple initiatives to deliver a true omni-channel customer experience. During the second half of the year (COVID-19 lockdown period), the Company took decisive action to preserve cash, reduce expenditure, and actively monitor inventory. Cash management initiatives included the cancellation or deferral of capital expenditure, renegotiation of vendor payment terms, engaging with landlords to obtain rental assistance packages including deferrals, and a reduction in the cost of doing business through leaner labour models. Furthermore, during the COVID-19 temporary store closure period, the Company worked closely with its long standing lending partner ANZ. Given a nil net debt position at year end, the existing $70m facility limit is considered appropriate to meet the Company’s inventory and working capital requirements. Sales from the Group’s Professional Care Plan (PCP) declined to $24.0m (FY19: $28.5m) with an amount of $27.5m (FY19: $32.9m) recognised as revenue for the full year. At 28 June 2020, a deferred amount of $73.8m remained on the balance sheet (FY19: $77.8m). The Company opened one new store and closed seventeen under-performing stores, resulting in 290 stores at year end. Segment results The operational segments below reflect the performance of the Group's retail operations in each geographic segment. The segments include trading activity from our online channels presence and our Canadian in-house credit function. The segments exclude revenue and expenses that do not relate directly to the relevant 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 results below are expressed in local currency. 26 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT Michael Hill Australia OPERATING RESULTS (AU $000) Revenue from continuing operations Gross margin Gross margin as a % of revenue EBIT As a % of revenue Number of stores 2020 266,610 161,030 60.4% 27,410 10.3% 155 2019 313,587 194,052 61.9% 32,917 10.5% 168 2018 325,709 206,303 63.3% 48,621 14.9% 171 2017 321,981 201,707 62.6% 51,688 16.1% 166 2016 309,457 194,152 62.7% 49,975 16.1% 168 In Australia, adjusted same store sales* marginally improved by 0.1%, and all stores revenue declined by 15.0% to $266.6m (FY19: $313.6m) for the year. Gross margin for the year was 60.4% (FY19: 61.9%), largely due to FX impacts on cost of goods. While the majority of the revenue decline is attributable to the COVID-19 temporary store closure period, a portion is also due to the closure of thirteen underperforming stores during the year. Due to COVID-19 health restrictions, all stores in Australia were closed on 24 March 2020 and progressively reopened from May 2020, and as such, stores were closed for a period of between five and ten weeks. Thirteen underperforming stores permanently closed during the period, resulting in 155 stores trading at 28 June 2020. Michael Hill New Zealand OPERATING RESULTS (NZ $000) Revenue Gross margin Gross margin as a % of revenue EBIT As a % of revenue Number of stores FX rate for profit translation 2020 106,696 63,641 59.6% 21,067 19.7% 49 1.05 2019 120,064 73,011 60.8% 24,125 20.1% 52 1.06 2018 125,239 77,673 62.0% 27,800 22.2% 52 1.09 2017 121,970 75,204 61.7% 27,836 22.8% 52 1.06 2016 122,903 75,895 61.8% 27,136 22.1% 52 1.09 In New Zealand, adjusted same store sales* increased by 2.4% to NZ$103.9m (FY19: NZ$101.4m) and all store revenue declined by 11.1% to NZ$106.7m (FY19: NZ$120.1m) for the year. Gross margin for the year was 59.6% (FY19: 60.8%). The decline in revenue was attributable to the COVID-19 temporary store closure period. The New Zealand Government mandated store closures from 24 March 2020, with stores reopening on either 16 May 2020 or 23 May 2020. Stores were closed for a period of eight to nine weeks. Three underperforming stores permanently closed during the period, resulting in 49 stores trading at 28 June 2020. Michael Hill Canada OPERATING RESULTS (CA $000) Revenue Gross margin Gross margin as a % of revenue EBIT As a % of revenue Number of stores FX rate for profit translation 2020 110,799 63,991 57.8% (2,412) (2.2)% 86 0.90 2019 133,146 80,726 60.6% 9,797 7.4% 86 0.95 2018 130,762 81,576 62.4% 14,605 11.2% 83 0.98 2017 112,721 69,078 61.3% 12,386 11.0% 76 1.00 2016 95,423 59,252 62.1% 8,929 9.4% 67 0.97 In Canada, adjusted same store sales* increased by 2.3% to CA$102.8m (FY19: CA$100.5m) and all store revenue declined by 16.8% to CA$110.8m (FY19: CA$133.1m) for the year. Gross margin declined to 57.8% (FY19: 60.6%), largely due to FX impacts. The decline in revenue was largely attributable to the COVID-19 temporary store closure period. All stores in Canada were temporarily closed on 20 March 2020 and progressively reopened across the provinces from June 2020, and as such stores were closed for a period of between ten and thirteen weeks. One store was opened in Canada at McArthur Glen, British Columbia. One underperforming store permanently closed during the period. There were 70 of the 86 stores trading at 28 June 2020. * Adjusted Same Store Sales is Non-IFRS information and is unaudited. Please refer to Non-IFRS information on page 31 for an explanation of Non-IFRS information. MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 27 Our strong retail fundamentals embedded within a disciplined framework provide a true omni-channel customer experience and maximise growth opportunities... 28 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT Cash, cash flow and dividends Net operating cash inflows were $80.9m compared to $39.0m the previous year. Due to the adoption of AASB 16 Leases, $32.7m was classified as principal portion of lease payments within cash flow from financing activities for FY2020, previously rent payments that were reported in cash flows from operating activities. Despite the impact to profit over FY2020, $13.2m related to non-cash impairments (refer to page 31 of the Directors' Report). Through further disciplined inventory and working capital management, the Group's debt levels reduced. The Group remains in a resilient financial position with $0.5m in net cash (FY19: net debt of $24.8m) to continue to invest in improvements to its systems, infrastructure, and capabilities. At balance date, $13.1m of rental costs were accrued. Dividends On 23 March 2020, the Company announced that its FY20 interim dividend had been deferred until 30 September 2020 and was subject to review again before that date. Given the impact of COVID-19 and the uncertain economic environment, in order to protect the Company's balance sheet and liquidity in the interests of shareholders, the Board has decided to further defer payment of the FY20 interim dividend until 30 September 2021. The Board will continue to monitor economic conditions and the Company's performance and may revisit and change the date for payment of the FY20 interim dividend if considered necessary or desirable in the circumstances. The Board has also decided not to declare a final dividend for FY20. The Company’s objective is to restore a regular pattern of dividend payments as performance improves and earnings stabilise. Decisions on future dividends will continue to be made in line with the Company's financial framework and dividend policy. Key initiatives for FY21 - emphasis on growth and margin Strong retail fundamentals embedded within a disciplined framework providing a robust platform to enable a true omni-channel customer experience and maximise growth opportunities: 1 OMNI-CHANNEL - leveraging the recent investment in our new ERP platform, the business will embark on multiple digital and physical initiatives to meet the demands of a modern-day customer, including "click and collect/reserve", "ship from store", as well as "drop ship" and marketplace opportunities. 2 DIGITAL FIRST - building on the successes of FY20 including positive launches of virtual try-on and virtual selling, further enhancements will be delivered across loyalty, new sales platforms and customer communication channels. August 2020 launch of a pure play digital brand - medleyjewellery.com.au - an aspirational and attainable on-trend jewellery offering. 3 RETAIL FUNDAMENTALS - continue to deliver improved gross profit and sales performance by embedding multiple initiatives and reinvigorating the retail store culture and customer experience. Additionally, an increased focus on space planning to optimise store productivity and efficiencies. 4 CANADIAN OPPORTUNITIES - maintaining focus on increased productivity targets while delivering a new supply chain solution, exploring new growth channels, and maximising commercial opportunities of the in-house credit program including a potential divestment of the credit book. 5 PRODUCT EVOLUTION - undertake range and assortment rationalisation strategy aligned to refreshed product newness calendar and higher inventory turns. A focus on optimising margin through product mix and continuing to enhance higher margin product offerings (eg. laboratory-created diamonds) and branded collections. 6 COST CONSCIOUS CULTURE - embedding an absolute focus on cost disciplines, inventory and capital management across all aspects of the Company. THIS PAGE AND OPPOSITE PAGE: JEWELLERY FROM OUR EVERLIGHT COLLECTION MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 29 Risk management The Board believe that a strong Corporate Governance framework will underpin the Group’s growth and success. The Company regularly reviews its risk management framework and has identified the following at risk areas and mitigating strategies: RISK STRATEGIES AND MITIGATION External factors are not appropriately recognised or responded to appropriately The Group has a crisis management framework and nominated crisis management team in place. Internal resources are designated to identify and coordinate responses to factors affecting the ongoing operations of the Group. This framework was utilised to manage events including bushfires and COVID-19 this year. Disruption to supply chain and inefficiencies in replenishment strategies The Group is exploring and investing in better in-market strategies as well as revamping its ranging and increasing emphasis on sourcing and mix of product. Inadequate business continuity program and/or disaster recovery strategies Risk of a disruptor or new competition entering our markets As part of the COVID-19 pandemic the Group has executed business continuity plans as well as invested in increased IT disaster recovery initiatives. Both business continuity and disaster recovery processes will continue to evolve to meet the needs of the business. External consultants continue to be used to help with penetration testing and to provide other technical assessments. We are committed to improving and differentiating the brand from our existing competitors to create a point of difference and increase market share. This in itself helps mitigate the risk of other competitors entering our key markets and taking material market share. Breach of regulation or law in one of our jurisdictions in an increasingly complex legal compliance environment 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. Inability to adjust to the rapidly changing consumer segment and retail environment The Group continues to have an intense focus on digital channels and initiatives to meet consumer demand. Following the completion of our ERP upgrade, planning is now underway for further omni-channel enhancements. Environmental regulation The Group has determined that no particular or significant environmental regulations apply to it. THIS PAGE AND OPPOSITE PAGE: JEWELLERY FROM OUR SOUTHERN STAR COLLECTION 30 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 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 the Group 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 users 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: • Adjusted same store sales reflect sales through store and online channels on a comparable trading day basis • Earnings before interest, tax, depreciation and amortisation (EBITDA) • Earnings before interest and tax (EBIT) • Underlying EBIT and Underlying Trading EBIT • Significant item CALCULATION OF UNDERLYING EBIT AND UNDERLYING TRADING EBIT Underlying EBIT and Underlying Trading EBIT has been calculated as follows: Statutory EBIT Add back costs relating to: Employee restructure costs Direct, incremental costs relating to COVID-19 Emma & Roe closure costs CEO transition costs Remediation of employee benefits Impairment of aged inventory Underlying EBIT Non-cash items included above in underlying EBIT: Impairment of stores and fixed assets Impairment of inventory Underlying EBIT adjusted for non-cash items Less: Impact of AASB 16 Leases Underlying trading EBIT 2020 $000 14,079 2,170 1,755 - - - - 18,004 6,796 6,437 31,237 (5,551) 25,686 2019 $000 21,115 1,987 - 258 758 4,536 5,954 34,608 - - 34,608 - 34,608 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 31 Information on Directors FROM LEFT: JANINE ALLIS, GARY SMITH, EMMA HILL, SIR MICHAEL HILL AND ROBERT FYFE This section contains information on the Directors of Michael Hill International Limited in office during the financial year and until the date of this report. Emma Jane Hill (Chair) B.COM, M.B.A. Emma was appointed a Director of the Company on 9 June 2016. Emma has over 30 years’ experience with 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 OF LISTED ENTITIES none FORMER DIRECTORSHIPS IN LAST 3 YEARS OF LISTED ENTITIES none RESPONSIBILITIES Chair Non-Executive Director Member People Development and Remuneration Committee INTERESTS IN SHARES AND OPTIONS 167,487,526 Ordinary Shares Sir Richard Michael Hill Gary Warwick Smith K.N.Z.M. B.COM, F.C.A., F.A.I.C.D. Sir Michael was appointed a Director of the Company on 9 June 2016. Sir Michael is the founder of Michael Hill 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. Gary was appointed a director of the Company upon incorporation on 24 February 2016. Gary has had extensive directorship experience. He is currently Chairman and member of the Audit and Remuneration committees of Flight Centre Travel Group Limited, one of Australia’s largest 100 public companies which operates in 23 countries and is one of the world’s largest retail and corporate travel providers. He is also a director of National Roads and Motorists Association Limited (the NRMA), Australia’s largest member-based organisation with over 2.6 million members offering a variety of member services and operating a range of diverse businesses, where he is also a member of the Audit and Risk Management committee as well as the Finance and Investment committee. This follows an extensive executive career in tourism and hospitality development and management. Gary is Fellow of The Institute of Chartered Accountants and a Fellow of the Australian Institute of Company Directors. OTHER CURRENT DIRECTORSHIPS OF LISTED ENTITIES none OTHER CURRENT DIRECTORSHIPS OF LISTED ENTITIES Flight Centre Travel Group Limited FORMER DIRECTORSHIPS IN LAST 3 YEARS OF LISTED ENTITIES none FORMER DIRECTORSHIPS IN LAST 3 YEARS OF LISTED ENTITIES none RESPONSIBILITIES Non-Executive Director INTERESTS IN SHARES AND OPTIONS 148,330,600 Ordinary Shares RESPONSIBILITIES Non-Executive and Independent Director Chair Audit and Risk Management Committee Member People Development and Remuneration Committee INTERESTS IN SHARES AND OPTIONS 80,000 Ordinary Shares 32 MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT Janine Suzanne Allis 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. OTHER CURRENT DIRECTORSHIPS OF LISTED ENTITIES none FORMER DIRECTORSHIPS IN LAST 3 YEARS OF LISTED ENTITIES none RESPONSIBILITIES Non-Executive and Independent Director Member Audit and Risk Management Committee INTERESTS IN SHARES AND OPTIONS 651,745 Ordinary Shares Robert Ian Fyfe B.ENG, F.E.N.Z 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 OF LISTED ENTITIES Air Canada OTHER CURRENT DIRECTORSHIPS OF LISTED ENTITIES none RESPONSIBILITIES Non-Executive and Independent Director Chair People Development and Remuneration Committee Member Audit and Risk Management Committee INTERESTS IN SHARES AND OPTIONS 2,693,640 Ordinary Shares Jacqueline Elizabeth Naylor Jacqueline was appointed a Director of the Company on 15 July 2020. Jacqueline is a highly regarded Australian retail leader with over thirty years’ executive and board experience in retail, fashion and eCommerce. She is currently an independent non-executive director of Myer and Cambridge Clothing and was previously a director of PAS Group, Macpac and the Virgin Australia Melbourne Fashion Festival. This follows an extensive career as a retail executive (and later an Executive Director) at the Just Group, where Jacqueline oversaw merchandising, marketing and brand strategies across a portfolio of 800 stores. OTHER CURRENT DIRECTORSHIPS OF LISTED ENTITIES Myer Holdings Limited FORMER DIRECTORSHIPS IN LAST 3 YEARS OF LISTED ENTITIES none RESPONSIBILITIES Non-Executive and Independent Director INTERESTS IN SHARES AND OPTIONS 160,000 Ordinary Shares PENDANTS AND RING FROM OUR SPIRITS BAY COLLECTION, DESIGNED BY CHRISTINE HILL MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 33 Our purpose: "We're for love" in all its forms... 34 MICHAEL HILL INTERNATIONAL LIMITED 2020 FINANCIAL STATEMENTS CHRISTINE HILL IS THE DESIGN TALENT BEHIND SEVERAL ICONIC MICHAEL HILL COLLECTIONS, INCLUDING 'KNOTS' Company secretaries The Company has appointed two company secretaries, Andrew Lowe and Emily Bird. Andrew Lowe, who is also the Chief Financial Officer of the Group, was appointed to the position of Company Secretary on 1 March 2019, having held that position previously (15 December 2017 to 22 January 2018). Andrew holds a Bachelor of Commerce, a Bachelor of Laws (Hons) and a Masters of Applied Finance, and is a qualified Chartered Accountant and a Chartered Taxation Adviser of the Taxation Institute of Australia. Andrew has extensive experience in finance and leadership roles across a range of listed corporate groups with Australian and offshore operations. Emily Bird, who is also the General Counsel of the Group, was appointed to the position of Company Secretary on 31 July 2020. Emily joined Michael Hill in September 2019 as Senior Legal Counsel, and was appointed General Counsel & Company Secretary in July 2020. She holds a Bachelor of Laws, Bachelor of Arts (Psychology), Graduate Diploma in Legal Practice and Graduate Diploma in Applied Corporate Governance and Risk. Emily has broad legal experience with in-house roles at Lactalis Australia (formerly Parmalat Australia), Virgin Blue (now Virgin Australia) and a secondment at Tarong Energy (now Stanwell Corporation), having started her legal career at top-tier firm Clayton Utz. Prior to Emily’s appointment, Richard Amos was Company Secretary from 25 February 2020 to 31 July 2020. Meetings of Directors The numbers of meetings of the Company's Board of Directors and of each Board committee held during the year ended 28 June 2020, and the numbers of meetings attended by each Director were: Full meetings of Directors E J Hill Sir R M Hill G W Smith R I Fyfe J S Allis Meetings Meetings held* attended 16 16 16 16 16 16 16 15 16 16 Meetings of committees Audit and Risk Management People Development and Remuneration Meetings Meetings held* attended - - - - 4 4 4 4 4 4 Meetings Meetings held* attended 5 5 - - 5 5 5 5 - - * Number of meetings held during the time the Director held office or was a member of the committee during the year. 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 Robert Fyfe c designates chair of the committee. People Development and and Remuneration Committee Robert Fyfe c Emma Hill Gary Smith THIS PAGE AND OPPOSITE PAGE: EARRINGS AND PENDANTS FROM OUR KNOTS COLLECTION, DESIGNED BY CHRISTINE HILL MICHAEL HILL INTERNATIONAL LIMITED DIRECTORS' REPORT 35 Our remuneration objectives are to attract, motivate and retain executive talent; reward the achievement of strategic objectives; and alignment to shareholder value creation. 36 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT Audited Remuneration Report The Directors present the 2020 Michael Hill International Limited remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded during the 2020 financial year. The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. REMUNERATION OBJECTIVES The following objectives inform the determination of remuneration related decisions: • Attract, motivate and retain executive talent • Reward the achievement of strategic objectives • Alignment to shareholder value creation. Remuneration framework REMUNERATION POLICY AND LINK TO PERFORMANCE Our People Development and Remuneration Committee (the Committee) is a Committee of the Board and 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 obtains independent advice every three years on the appropriateness of remuneration practices of the Group given trends in comparative companies both locally and internationally, and the objectives of the Group’s remuneration strategy. 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 senior executives, including key performance indicators and performance hurdles • remuneration levels of executives, and • non-executive Director fees. The Committee is responsible for assessing performance against key performance indicators ('KPIs') and determining the short-term incentive ('STI') and long-term incentive ('LTI') to be paid. In the event of serious misconduct or a material misstatement in the Company’s financial statements, the Committee can cancel or defer performance-based remuneration. The Committee’s objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the long-term interests of the Company. The role of the Committee is set out in more detail in the Corporate Governance Statement, available on the Company's Investor Relations Centre website at investor.michaelhill.com KEY MANAGEMENT PERSONNEL 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 2020 financial year, it was determined that the KMPs of Michael Hill International were: • Chief Executive Officer (CEO) - Daniel Bracken • Chief Financial Officer (CFO) - Andrew Lowe • Chief Operating Officer (COO) - Andrea Slingsby Vanessa Brennan (Chief Brand & Strategy Officer) became a KMP on 11 August 2020. BRIDAL SETS FROM OUR EVERMORE COLLECTION MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 37 EXECUTIVE REMUNERATION FRAMEWORK The executive remuneration structure has three components: Total Fixed Remuneration (TFR), STI and LTI. Compensation levels are reviewed annually by the 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. Further details in relation to the review process including the most recent review, please refer to the Services from remuneration consultants section below. TFR STI LTI Determination Delivery TFR is set based on relevant market relativities, reflecting responsibilities, performance, qualifications, experience and geographic location Base salary plus any fixed elements including superan- nuation and leave entitlements Strategic intent TFR will generally be positioned at the median compared to relevant market based data. Expertise and performance in the role are also considerations The weighting and potential of STI and LTI for KMP is: On target performance is determined as a percentage of TFR and paid as cash An issue of share rights is made to participants of the scheme, the quantum being a % of the STI earned 70% is directly aligned to achieving a Group EBIT target and other related items. 30% is based on achievement of individual performance and development plans Alignment of executive incentives with the long term performance is achieved by way of a deferred remuneration component Performance incentive is directed to achieving Board approved targets, reflective of market circumstances LTI is intended to reward executive KMP for sustainable long-term growth aligned to shareholders' interests Short term incentive potential value Long term incentive potential value CEO CFO COO 70% of TFR 50% of TFR 50% of TFR Other KMP 50% of TFR 50% of STI earned 30% of STI earned 30% of STI earned 30% of TFR Remuneration levels are reviewed annually by the Committee through a process that considers individual, segment and overall performance of the Group. During the 2019-2020 financial year, the performance linked components of compensation for KMP comprised approximately 11.1% of total payments to senior executives (FY19: 10.5%). TEMPORARY SUSPENSION OF STI AND LTI AWARDS FOR SENIOR EXECUTIVES INCLUDING KMP The Company was significantly impacted by the COVID-19 global pandemic, resulting in the closure of the entire store network for a period during March to June 2020, and standing down a large portion of our team members during that time. In response to those market conditions, the STI and LTI incentive programs for all senior executives, including KMP, were suspended from 1 April 2020 for the financial year. Senior executives including KMPs had already been awarded an STI payment in relation to the first half of the financial year in February 2020 prior to the COVID-19 related impacts being experienced by the Company and will receive the resulting LTI award in relation to that first half; however they will not receive any STI or LTI award for the second half of the financial year. The STI and LTI framework described below is expected to recommence for the 2021 financial year but this will remain subject to Committee and Board determination. 38 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT TEMPORARY REDUCTION OF BASE SALARY FOR SENIOR EXECUTIVES INCLUDING KMP In addition to the temporary suspension of STI and LTI awards described above, each senior executive of the Company, including KMPs, voluntarily reduced their salaries by 20% for the period inclusive of April to June 2020. SHORT-TERM INCENTIVE SCHEME The short term incentive scheme is detailed in Performance and Development Plans ('PDPs') that are agreed at the start of the reporting period. The KPIs are in the form of a balanced scorecard, where performance against key deliverables across financial, strategy, business improvement, customer and people areas are measured. The scheme is supported by 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. Performance against KPIs is formally measured on a biannual basis and informally in regular meetings. The 70% STI component is paid on an annual basis if the Group financial performance target and performance hurdle/s are met. The 30% STI for the individual KPI component is paid biannually post the performance review. The Committee review the PDPs of each Senior Executive to determine achievement, entitlement and eligibility for payment. The policy and framework cascades from the CEO to Senior Executives and 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. LONG-TERM INCENTIVE SCHEME The Company introduced a deferred compensation plan ('LTI') involving the grant of share rights to eligible participants in the 2015-16 financial year. This was approved by shareholders at the Company’s Annual General Meeting held on 31 October 2016 and subsequently on 24 October 2019. Prior to that, 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 and share rights is conditional on continuing employment with the Group. No options were issued during the reporting period. Options previously issued are detailed in this report. Under the LTI 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 earned, except for KMPs whose relevant percentage rate of the STI payment earned is greater as detailed earlier in this report. 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. No exercise price is payable upon the exercise of any share right. Feature Opportunity/ 30% of respective STI which is issued Allocation to the executive (or a different percentage rate for KMP as detailed earlier in this report) by way of share rights which are granted. Each share 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. RINGS FROM OUR WHITEFIRE COLLECTION MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 39 We remain committed to creating quality jewellery for our customers to cherish. 40 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT CONSEQUENCES OF PERFORMANCE ON SHAREHOLDER WEALTH In considering the Group’s performance and benefits for shareholder wealth, the 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* Underlying EBIT* Dividends payments^ Share price at year end (2016: nz$) Return on shareholders equity Return on average total assets 2020 $000 3,059 3,059 14,079 14,079 18,004 5,817 $0.32 1.9% 0.7% 2019 $000 16,498 16,498 21,115 21,115 34,608 19,365 $0.54 9.4% 4.3% 2018 $000 1,557 31,765 8,854 45,787 40,106 19,371 $0.97 17.4% 8.2% 2017 $000 29,654 41,138 43,840 58,055 48,117 19,264 $1.11 20.9% 10.5% 2016 $000 16,771 23,524 43,050 50,416 47,058 17,490 $1.14 12.9% 6.3% * EBIT and Underlying EBIT are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT and Underlying EBIT. ^ The 2020 dividend payment relates to the FY19 final dividend. EBIT is considered the primary financial performance target in setting the STI. Profit amounts for 2016 to 2020 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 IFRS as issued by the International Accounting Standards Board. The overall level of remuneration takes into consideration the performance of the Group over a number of years. OTHER BENEFITS Key management personnel do not receive additional benefits, such as non-cash benefits, other than statutory superannuation, as part of the terms and conditions of their appointment. LOANS TO KEY MANAGEMENT PERSONNEL The Company does not provide loans to any KMP or to other senior executives. SERVICE CONTRACTS It is the Group's policy that service contracts for KMP are unlimited in term but capable of termination on three months' notice (six months in the case of the CEO) and that the Group retains the right to terminate the contract immediately, by making payment equal to three months' pay in lieu of notice (or six months’ in the case of the CEO). KMP 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 service contracts with all KMP (including the CEO) outline the components of remuneration but does not prescribe how remuneration levels are modified year to year. The Committee reviews remuneration levels each year to take into consideration 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 the remuneration policy. SERVICES FROM REMUNERATION CONSULTANTS The Committee engaged a remuneration consultant during the 2016 financial year to review the amount and elements of KMP remuneration and provide recommendations in relation thereto. During the 2019 financial year, there was an internal review completed and the Committee were satisfied with the results of this review. The Company did not engage a remuneration consultant during the 2020 financial year. THIS AND OPPOSITE PAGE: JEWELLERY FROM OUR WILLOWS COLLECTION, DESIGNED BY CHRISTINE HILL MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 41 NON-EXECUTIVE DIRECTORS 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 for the 2019-20 year were $100,419 per annum. Where a Director serves as Chair on the People Development and Remuneration Committee they are entitled to an additional payment of $20,747 per annum. Where a Director serves as Chair on the Audit and Risk Committee they are entitled to an additional payment of $31,120 per annum. It is the Company’s policy to increase directors’ fees annually at the commencement of each financial year of the Company, in accordance with the consumer price index. 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. TEMPORARY REDUCTION IN REMUNERATION FOR NON-EXECUTIVE DIRECTORS In response to the COVID-19 global pandemic market conditions impacting the Company in the 2020 financial year, all non-executive director fees were reduced by 50% for the period from 1 April 2020 to 30 June 2020. DIRECTOR AND KMP REMUNERATION 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: Salary & fees STI cash bonus Short-term Non-monetary benefits (relocation) Long-term Post- employment Total Long service leave Superannuation benefits Termination benefits Share- based payments Options and share rights Total Value of Proportion remuneration options as performance proportion of related remuneration Non-executive Directors $ $ $ $ $ Emma Jane Hill 2020 2019 Sir Richard Michael Hill 2020 2019 Gary Warwick Smith 2020 2019 Robert Ian Fyfe 2020 2019 Janine Suzanne Allis 2020 2019 Total Director remuneration 2020 2019 170,849 197,047 97,989 98,523 104,327 117,628 105,545 118,878 78,594 89,799 557,304 621,875 - - - - - - - - - - - - - 170,849 - 197,047 - - 97,989 98,523 - 104,327 - 117,628 - 105,545 - 118,878 - - 78,594 89,799 - 557,304 - 621,875 - - - - - - - - - - - - $ - - - - 9,911 11,175 - - 7,467 8,533 17,378 19,708 $ $ $ % % - - - - - - - - - - - - - 170,849 - 197,047 - - 97,989 98,523 - 114,238 - 128,803 - 105,545 - 118,878 - - 86,061 98,332 - 574,682 - 641,583 - - - - - - - - - - - - - - - - - - - - - - - - 42 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT Salary & fees STI cash bonus Short-term Non-monetary benefits (relocation) Long-term Post- employment Total Long service leave Superannuation benefits Termination benefits Share- based payments Options and share rights Total Value of Proportion remuneration options as performance proportion of related remuneration Non-executive Directors $ $ $ $ $ $ $ $ $ % % Daniel Bracken, CEO 2020 905,142 134,092 - 1,039,234 10,980 25,481 2019 594,726 69,300 19,970 683,996 9,327 15,385 Phil Taylor, CEO (ceased 21 Sept 2018) 2019 Andrew Lowe, CFO 2020 192,680 58,508 - 251,188 8,830 6,731 429,075 40,021 - 469,096 3,790 25,481 2019 403,807 42,273 - 446,080 8,107 24,355 Andrea Slingsby, COO 2020 456,372 32,681 - 489,053 5,862 25,481 2019 217,708 25,900 - 243,608 3,597 11,538 - - - - - - - 15,324 1,091,019 12.29 1.40 - 708,708 9.78 - 71,794 338,543 17.28 21.21 9,728 508,095 5,067 483,609 7.88 8.74 1.91 1.05 2,688 523,084 6.25 0.51 - 258,743 10.01 - 236,298 37,014 - 273,312 3,637 12,981 - 3,963 293,893 12.59 1.35 174,788 13,372 - 188,160 3,128 12,981 - 8,154 212,423 6.30 3.84 30,160 2,982 - 33,142 445 2,885 44,962 - - 44,962 625 4,327 1,790,589 206,794 - 1,997,383 20,632 76,443 1,895,129 249,349 19,970 2,164,448 37,696 91,183 2,347,893 206,794 - 2,554,687 20,632 93,821 - - - - - - 1,908 38,380 7.77 4.97 2,714 52,628 - 5.16 27,740 2,122,198 9.74 93,600 2,386,927 10.45 1.31 3.92 27,740 2,696,880 93,600 3,028,510 7.67 8.23 1.03 3.09 2019 2,517,004 249,349 19,970 2,786,323 37,696 110,891 ANALYSIS OF BONUSES INCLUDED IN REMUNERATION Details of the short-term incentive cash bonuses awarded as remuneration to each KMP are detailed below. KMP Daniel Bracken Andrew Lowe Andrea Slingsby Target bonus available $ 438,984 148,460 164,970 Included in remuneration $ 134,092 40,021 32,681 Amounts forfeited $ 304,892 108,439 132,289 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 43 Vanessa Brennan, CB&CO (ceased 9 Jan 2019) 2019 Matt Keays, CIO (ceased 9 Jan 2019) 2019 Galina Hirtzel, GESC (ceased 6 Aug 2018) 2019 Stewart Silk, GEHR (ceased 3 Sept 2018) 2019 Total KMP remuneration 2020 2019 Total Director and KMP remuneration 2020 Additional statutory information EQUITY INSTRUMENTS All options or rights refer to options or rights over ordinary shares of Michael Hill International Limited, which are exercisable on a one-for-one basis under the Executive Incentive Plan. OPTIONS AND RIGHTS OVER EQUITY INSTRUMENTS ISSUED AS COMPENSATION MODIFICATION OF TERMS OF EQUITY-SETTLED SHARE-BASED PAYMENT 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. UNISSUED SHARES As at the date of this report, there were 1,400,000 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. ANALYSIS OF OPTIONS AND RIGHTS OVER EQUITY INSTRUMENTS GRANTED AS COMPENSATION No options were granted to KMPs as compensation for the financial year. SHARE RIGHTS The number of share rights issued to KMP and senior executives during the last financial year was 286,294 share rights. Of these, share rights issued to KMP are set out below. KMP Daniel Bracken Andrew Lowe Andrea Slingsby Number of share rights issued 110,018 33,463 19,301 Fair value per share right $ 0.57 0.57 0.57 RECONCILIATION OF OPTIONS AND SHARE RIGHTS HELD BY KMP No options are held by KMP. This table below details share rights that were issued, vested and forfeited during the year for each KMP. Daniel Bracken Andrew Lowe Andrea Slingsby Total Balance at start of the year Number - 17,298 - 17,298 Issued during the year Number 110,018 33,463 19,301 162,782 Vested Forfeited Balance at end of year (unvested) Number Number Number - - - - - - - - 110,018 50,761 19,301 180,080 Share rights relating to the current reporting period are anticipated to be granted in late 2020. The number of shares will depend on the Michael Hill International Limited’s share price over the five days prior to the grant date. 44 MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT VOTING OF SHAREHOLDERS AT LAST YEAR'S ANNUAL GENERAL MEETING The Company received 99.2% of “For” votes on its remuneration report for the 2019 financial year. The Company did not receive any specific feedback at the AGM or throughout the year on its remuneration practices. INSURANCE OF OFFICERS AND INDEMNITIES 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. NON-AUDIT SERVICES 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 2020 $ 2019 $ 10,050 127,512 10,050 127,512 AUDITOR'S INDEPENDENCE DECLARATION A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 46. 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 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 18 August 2020 in accordance with a resolution of Directors as required by section 298 of the Corporations Act 2001. E. J. Hill, Chair Brisbane 18 August 2020 BRIDAL SET FROM OUR EVERMORE COLLECTION MICHAEL HILL INTERNATIONAL LIMITED REMUNERATION REPORT 45 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 the financial report of Michael Hill International Limited for the financial year ended 28 June 2020, 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 18 August 2020 THIS PAGE: BRIDAL SETS FROM OUR EVERMORE COLLECTION OPPOSITE PAGE: MODEL WEARS EARRINGS FROM OUR MARK HILL COLLECTION 46 Financial Statements ABN 25 610 937 598 The Directors present the consolidated financial statements of Michael Hill International Limited for the year ended 28 June 2020 48 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 49 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 50 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 51 CONSOLIDATED CASH FLOW STATEMENT 52 NOTES TO THE FINANCIAL STATEMENTS 97 DIRECTORS' DECLARATION 98 AUDITOR'S REPORT 102 ASX LISTING – ADDITIONAL INFORMATION 47 Consolidated statement of comprehensive income Revenue from contracts with customers 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 Depreciation and amortisation expense Loss on disposal of property, plant and equipment Other expenses Finance costs Profit before income tax Income tax expense Profit for the year NOTES 5 6(a) 6(b) 9(b) 6(b) 6(b) 7 2020 $000 492,060 20,574 (193,855) (149,173) (14,390) (28,918) (18,701) (6,473) (1,582) (55,611) (499) (29,349) (9,598) 4,485 (1,426) 3,059 2019 $000 569,500 1,555 (216,468) (163,177) (60,587) (33,732) (24,636) (289) (1,823) (19,366) (619) (29,083) (2,464) 18,811 (2,313) 16,498 Other comprehensive income Items that may be reclassified subsequently to profit or loss: Gains/(losses) on cash flow hedges Currency translation differences arising during the year 11(b) 11(b) Other comprehensive income for the year, net of tax Total comprehensive income for the year 434 (1,716) (1,282) 1,777 (323) 4,911 4,588 21,086 Total comprehensive income for the year is attributable to: Owners of Michael Hill International Limited 1,777 21,086 Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 21 21 0.79¢ 0.79¢ 4.26¢ 4.25¢ The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 48 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Consolidated statement of financial position ASSETS Current assets Cash and cash equivalents Trade and other receivables Contract assets Right of return assets Inventories Current tax receivables Other current assets Total current assets Non-current assets Trade and other receivables Property, plant and equipment Right-of-use assets Deferred tax assets Intangible assets Contract assets Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Contract liabilities Derivative financial instruments Current tax liabilities Provisions Deferred revenue Lease liabilities Total current liabilities Non-current liabilities Contract liabilities Borrowings Provisions Deferred revenue Lease liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity NOTES 2020 $000 2019 $000 8(a) 8(b) 5(b) 5(b) 9(a) 9(e) 8(b) 9(b) 10(a) 9(d) 9(c) 5(b) 8(d) 5(b) 8(f) 9(f) 9(g) 9(h) 10(b) 5(b) 8(e) 9(g) 9(h) 10(b) 11,204 25,006 625 108 178,742 3,165 2,103 220,953 10,727 45,405 123,911 74,468 24,429 1,048 677 280,665 7,923 29,656 701 291 179,503 2,295 2,935 223,304 6,985 63,213 - 67,708 15,439 1,438 1,106 155,889 501,618 379,193 64,472 25,974 34 1,445 24,949 367 42,164 159,405 53,539 10,681 8,339 - 115,848 188,407 44,548 26,054 468 1,367 31,441 1,252 - 105,130 55,813 32,704 6,947 1,847 - 97,311 347,812 202,441 153,806 176,752 11(a) 11(b) 11(b) 11,016 4,420 138,370 153,806 10,984 5,805 159,963 176,752 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 49 Consolidated statement of changes in equity Attributable to owners of Michael Hill International Limited Balance at 1 July 2018 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 share capital on vesting of share rights Transfer option reserve to retained earnings on forfeiture of options Share rights expense through share based payments reserve Balance at 30 June 2019 Adjustment on adoption of AASB 16 (net of tax) Restated total equity at the beginning of the financial year 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/provided Issue of share capital on vesting of share rights Transfer option reserve to retained earnings on forfeiture of options Share rights expense through share based payments reserve Share rights forfeited Notes Contributed equity $000 10,266 Share based payments reserve $000 1,369 Foreign currency translation reserve $000 605 Cash flow hedge reserve Retained profits Total equity $000 $000 $000 (145) 162,830 174,925 - - - - - - - - - - - - - 11 8(f) 8(f) 14(b)(i) 19(c) 490 (490) 11(a) 228 (228) 19(c) - 718 95 (612) - 4,911 - - 4,911 - - (390) 67 16,498 - - - (323) 16,498 16,498 4,911 (390) 67 21,086 - - - - - - - - - - - - (19,365) (19,365) - - - 11 - - - (19,365) 95 (19,259) 10,984 757 5,516 (468) 159,963 176,752 2(x) - - (43) - (13,019) (13,062) 10,984 757 5,473 (468) 146,944 163,690 - - - - - - - - - - - - 8(f) 8(f) 14(b)(i) 11(a) 32 (32) 11(b) 19(c) 11(b) - (166) - - 32 166 (28) (60) - (1,716) - - (1,716) - - 145 289 434 3,059 - - - 3,059 3,059 (1,716) 145 289 1,777 - - - - - - - - - - - - (11,633) (11,633) - - - (166) - - 166 (28) (11,633) (11,661) Balance at 28 June 2020 11,016 697 3,757 (34) 138,370 153,806 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 50 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 50 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Consolidated cash flow statement NOTES 2020 $000 2019 $000 547,258 618,416 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 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 borrowings Repayment of borrowings Principal portion of lease payments Dividends paid to Company's shareholders Net cash (outflow) from financing activities 12(a) 9(b) 9(c) 14(b) Net increase 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 8(a) (451,577) 95,681 4 13,193 (2,261) (3,974) (18,944) 83,699 146 (6,112) (11,241) (17,207) 70,500 (92,300) (35,520) (5,817) (63,137) 3,355 7,923 (74) 11,204 (536,855) 81,561 160 1,303 (2,474) (5,245) (36,336) 38,969 432 (10,753) (5,381) (15,702) 128,800 (132,000) - (19,365) (22,565) 702 7,220 1 7,923 The above consolidated cash flow statement should be read in conjunction with the accompanying notes. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 51 Notes to the financial statements Note 1 Corporate information The consolidated financial statements of Michael Hill International Limited and its subsidiaries (collectively, the Group) for the year ended 28 June 2020 were authorised for issue in accordance with a resolution of the Directors on 18 August 2020. Michael Hill International Limited (the Company or Parent) is a for profit company limited by shares incorporated in Australia. The Company is listed on the Australian Securities Exchange ('ASX') 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 pronouncements 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. For the financial year the Group adopted a weekly 'retail calendar' closing each Sunday. This resulted in a change in reporting dates with a 52 week period ending on 28 June 2020. Compliance with IFRS The consolidated financial statements of the Group International Financial Reporting comply with 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 52 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 in the individual financial statements of Michael Hill International Limited. Refer to Note 15. 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. transactions are (ii) Transactions and balances Foreign currency 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 hyperinflationary 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 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) CURRENT VERSUS NON-CURRENT CLASSIFICATION The Group presents assets and liabilities in the statement of financial position based on current/ non-current classification. An asset is current when it is: • Expected to be realised or intended to be sold or consumed in the normal operating cycle; • Held primarily for the purpose of trading; • Expected to be realised within twelve months after the reporting period; or • Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current. A liability is current when: • It is expected to be settled in the normal operating cycle; • It is held primarily for the purpose of trading; • It is due to be settled within twelve months after the reporting period; or • There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. (f) INTEREST INCOME Interest income is recognised using the effective interest method. (g) 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 inter- pretation. 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. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 53 Notes to the financial statements cont. Note 2 Summary of significant accounting policies continued 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 where there is a legally enforceable right to offset current tax assets and liabilities and where 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 form a tax consolidation group. As a consequence, one income tax return is completed for the Australian tax group and is 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 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. (h) 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 (i) • 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. 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 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, 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. Right-of-use assets are also incorporated into the calculation. Subsequent to an if the recoverable amount from assets exceeds the carrying value, the impairment loss is reversed to the extent that it has been recognised. impairment occurring, The pre-tax discount rates used in determining the recoverable amount ranged between 9.4% and 12.8%, 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) 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 54 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 2 Summary of significant accounting policies continued 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. Management review stock holdings based on recoverability at a product level and impair as appropriate. (l) FINANCIAL INSTRUMENTS - INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (i) Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through Other Comprehensive Income (OCI), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component are measured at the transaction price determined under AASB 15. Refer to the accounting policies in section 5(c). In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘Solely Payments of Principal and Interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Subsequent measurement Whilst there are four categories, two are relevant in the current reporting period for the Group, being: • Financial assets at amortised cost (debt instruments) • Financial assets at fair value through profit or loss Financial assets at amortised cost (debt instruments) This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met: • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the Effective Interest Rate (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Group’s financial assets at amortised cost include trade receivables included under current and non-current financial assets. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss. This category includes derivative instruments which the Group had not irrevocably elected to classify at fair value through OCI. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e. removed from the Group’s consolidated statement of financial position) when: • The rights to receive cash flows from the asset have expired; or • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass- through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 55 Notes to the financial statements cont. Note 2 Summary of significant accounting policies continued When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Impairment of financial assets Further disclosures relating to impairment of financial assets are also provided in the following notes: • Changes in accounting policies and disclosures: Note 2(x) • Trade receivables including contract assets: Note 8 The Group recognises an allowance for Expected Credit Losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group considers a financial asset in default when contractual payments are past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. (ii) Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, and derivative financial instruments. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by AASB 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in AASB 9 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Loans and borrowings at amortised cost This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the Effective Interest Rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bear- ing loans and borrowings. For more information, refer to Note 8. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. 56 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 (iii) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. (m) DERIVATIVES AND HEDGING ACTIVITIES Initial recognition and subsequent measurement The Group uses derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risks and interest rate risks, respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For the purpose of hedge accounting, hedges are classified as: • Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment. • Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment. • Hedges of a net investment in a foreign operation. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: • There is ‘an economic relationship’ between the hedged item and the hedging instrument. • The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. • The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below. Fair value hedge The change in the fair value of a hedging instrument is recognised in the statement of profit or loss as other expense. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the statement of profit or loss as other expense. If the hedged item is derecognised, the unamortised fair value is recognised immediately in profit or loss. is When an unrecognised firm commitment designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit or loss. Cash flow hedge The effective portion of the gain or loss on the hedging instrument is recognised in OCI in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. The Group uses forward currency contracts as hedges of its exposure to foreign currency risk in forecast transactions and firm commitments, as well as interest rate swaps for its exposure to volatility in interest rates. The ineffective portion relating to foreign currency contracts is recognised as other expense and the ineffective portion relating to interest rate swaps is recognised in other operating income or expenses. Refer to Note 13 for more details. When forward contracts are used to hedge forecast transactions, the group designates the change in fair value of the forward contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of the change in the spot component of the forward contracts are recognised in the cash flow hedge reserve within equity. The change in the forward element of the contract that relates to the hedged item (‘aligned forward element’) is recognised within OCI in the cash flow hedge reserve within equity. In some cases, the entity may designate the full change in fair value of the forward contract (including forward points) as the hedging instrument. In such cases, the gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. The amounts accumulated in OCI are accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 57 Notes to the financial statements cont. Note 2 Summary of significant accounting policies continued in the initial cost or other carrying amount of the hedged asset or liability. This is not a reclassification adjustment and will not be recognised in OCI for the period. This also applies where the hedged forecast transaction of a non-financial asset or non-financial liability subsequently becomes a firm commitment for which fair value hedge accounting is applied. For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. If cash flow hedge accounting is discontinued, the amount that has been accumulated in OCI must remain in accumulated OCI if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After dis- continuation, once the hedged cash flow occurs, any amount remaining in accumulated OCI must be accounted for depending on the nature of the underlying transaction as described above. (n) PROPERTY, PLANT AND EQUIPMENT All property, plant and equipment is stated at historical cost less depreciation and impairment. 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 9(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. (o) LEASES The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets which are recognised in the profit or loss. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. (i) Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lease term. The right-of-use assets are also subject to impairment. Refer to the accounting policies in Note 2(i). If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. (ii) Lease liabilities At commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily 58 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payment (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. The Group's lease liabilities are included at Note 10(b). (iii) Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. The Group adopted AASB 16 using the modified retrospective method of adoption from 1 July 2019. As a result, the results for the comparative period have been prepared on the basis of AASB 117 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. 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. (p) 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 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). (q) GOVERNMENT GRANTS Where government grants have been approved or received, the Group releases to 'Other income' as any prerequisite to the grant is met. This includes recognition and timing of expenses as required. During the year, the Group received grants in relation to wage subsidies in all three regions. These grants were recognised as income upon recognition of the corresponding employee benefit expense. (r) PROVISIONS Provisions 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. 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. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 59 Notes to the financial statements cont. Note 2 Summary of significant accounting policies continued 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. (s) EMPLOYEE BENEFITS (i) Short-term obligations including for wages and salaries, Liabilities 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. 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 have previously been issued to Executives of Michael Hill International Limited in accordance with the Company's constitution. The Board of Directors passed resolutions approving the issue of the options. The fair value of options granted was recognised as an employee benefit expense with a corresponding increase in equity. The fair value was measured at grant date and is recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date for options issued during prior financial years was 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. No options were granted during the 2020 financial year. 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 period), and • including the impact of any non-vesting conditions (eg the requirement for employees to save or holdings shares for a specific period 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-market 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. Share rights Share rights are granted to eligible senior executives in accordance with the Company's deferred compensation plan ('LTI'). The fair value of rights granted is recognised as an employee benefit expense with a corresponding increase in equity. The fair value was measured at grant date and is recognised over the period during which the employees become unconditionally entitled to the rights. The valuation methodology to calculate fair value is detailed in Note 19(b). 60 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 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 share rights that are expected to vest based on the non-market 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 the share rights, the balance of the share-based payments reserve relating to those rights 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 superan- nuation 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 super- annuation 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. (t) 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. (u) 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. (v) 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 (Note 21(d)). (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. (w) 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. (x) CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES The Group applied AASB 16 Leases for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards are described below. Several other amendments and interpretations apply for the first time in 2020, but do not have an impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. AASB 16 Leases The Group adopted AASB 16 using the modified retrospective method of adoption with the date of initial application of 1 July 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The Group elected to use the transition practical expedient to not reassess whether a contract is, or contains a lease at 1 July 2019. Instead, the Group applied the standard only to contracts that were previously identified as leases applying AASB 117 and IFRIC 4 at the date of initial application. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 61 Notes to the financial statements cont. Note 2 Summary of significant accounting policies continued 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) SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a Lease. The effect of adoption of AASB 16 on the statement of financial position increase/(decrease) as at 1 July 2019: Assets Right-of-use assets Property, plant and equipment Trade and other receivables Deferred tax assets Total assets Liabilities Trade and other payables Deferred revenue Lease liability Provisions Total liabilities Equity Foreign currency translation Retained earnings Total equity $000 144,326 (3,060) 963 5,375 147,604 25 (2,810) 168,054 (4,603) 160,666 (43) (13,019) (13,062) • Right-of-use assets of $144,326 were recognised and presented separately in the statement of financial position. • Property, plant and equipment reduced by $3,060 in relation to fit out contributions received from landlords previously recognised as deferred revenue and recalculation of the make good asset. • Deferred tax assets increased by $5,375 due to the deferred tax impact of the changes in assets and liabilities. • Lease liabilities of $168,054 were recognised, with $34,017 as a current liability and $134,037 as a non-current liability. • Deferred revenue of $2,810 relating to lease incentive revenue was derecognised. • Provisions of $4,603 related to straight line leasing adjustments for previous operating leases were derecognised. • The net effect of these adjustments had been adjusted to retained earnings ($13,019). Upon adoption of AASB 16, the Group applied a single recognition and measurement approach for all leases except for short-term leases and leases of low-value assets. The standard provided specific transition requirements and practical expedients, which have been applied by the Group. Leases previously classified as finance leases The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified as finance leases (i.e., the right-of-use assets and lease liabilities equal the lease asses and liabilities recognised under AASB 17). The requirements of AASB 16 were applied to these leases from 1 July 2019. Leases previously accounted for as operating leases The Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognised based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. In some leases, the right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. The Group also applied the available practical expedients wherein it: • Used a single discount rate to a portfolio of leases with reasonably similar characteristics • Relied on its assessment of whether leases are onerous immediately before the date of initial application • Applied the short-term leases exemptions to leases with lease term that ends within 12 months of the date of initial application • Excluded the from the measurement of the right-of-use asset at the date of initial application initial direct costs • Used hindsight in determining the lease term where the contract contained options to extend or terminate the lease. 62 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 COVID-19 related rent concessions The Group has adopted the practical expedient for rent concessions negotiated as a consequence of COVID-19. This allows the company to elect not to account for changes in lease payments as a lease modification where a change in lease payments to the revised consideration are substantially the same or less than the consideration for the lease preceding the change, the reductions only affects payments which fall due before 30 June 2021 and there has been no substantive change in terms and conditions. Where the practical expedient has been applied, rent concessions are accounted for as a reduction in the right-of-use asset. The lease liabilities as at 1 July 2019 can be reconciled to the operating lease commitments as of 30 June 2019, as follows: Operating lease commitments disclosed as at 30 June 2019 Discounted using the group’s incremental borrowing rate applicable to leases Add: payments in optional renewal periods not included in lease commitments as at 30 June 2019 Lease liability recognised as at 1 July 2019 $000 155,070 121,642 46,412 168,054 IFRIC Interpretation 23 Uncertainty over Income Tax Treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of AASB 12 Income Taxes. It does not apply to taxes or levies outside the scope of AASB 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately. • The assumptions an entity makes about the examination of tax treatments by taxation authorities. • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. • How an entity considers changes in facts and circumstances. The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. The Group determined, based on its current tax position that it is probable that its tax treatments will be accepted by the taxation authorities. The Interpretation did not have an impact on the consolidated financial statements of the Group. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 63 Notes to the financial statements cont. Note 3 Significant estimates, judgements and errors (a) SIGNIFICANT ESTIMATES AND JUDGEMENTS 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. The uncertainty surrounding Impact of COVID-19 During the second half of the financial year, the Group was impacted by COVID-19. All bricks-and- mortar stores were temporarily closed in order to maintain the safety of our staff and customers or in response to government regulation. The Group also took the opportunity to assess how the stores would reopen. Safety initiatives were subsequently implemented and stores commenced reopening about five weeks after the initial temporary closures. trading environment impacted management's approach of forecasting, modelling cash flows and supporting the recoverability of the Group's assets (see Note 2(i)). Further additional sensitivities were overlayed into provisions, such as Expected Credit Losses (ECL) on the Group's impairment (see Note 2(l)) and receivables assessment property, plant and equipment and right of use assets (see Note 9(b)(i). Partially offsetting the closure of stores and subsequent loss of revenue, the Group received certain government grants (see Note 2(q)) and rental assistance from landlords with further rental negotiations continuing into FY21. the Group has the for The Group continues to monitor the situation throughout the geographies in which it operates. Uncertainty remains as to the future impact of a 'second-wave' and the ability to operate bricks-and- mortar stores during this period. The Group continues to adhere to provincial and federal government guidance in relation to any future impacts which would temporarily close stores. 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 Black Scholes model. The related assumptions are detailed in Note 19. 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 and office premises. The provision includes future cost estimates associated with dismantling and closure of stores and offices. The calculation of this provision requires assumptions such as discount rates, lease exit 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 9(g) Provisions. Lease term of contracts with renewable options The Group determines the lease term to be the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised. In assessing the likelihood of a lease option being exercised, the Group considers the costs of termination, the extent of any leasehold improvements, the strategic importance of the lease location and the current market rent for the stores. Holdover leases At any given point in time, there will be a number of property leases in holdover. These leases are accounted for under AASB 16 Leases when it is reasonably certain that the lease will be renewed or a new lease signed, and the terms and conditions of the lease are mutually agreed with the lessor. 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. 64 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Revenue recognition Professional care plan (PCP) 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. The accounting policies and significant judgements are disclosed in Note 5c(iii) Revenue. 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 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. Provision for expected credit losses of trade receivables The Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by geography and customer rating). The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Group’s trade receivables is disclosed in Note 8(b). 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 information about estimates and judgements made (c) in relation to particular items. Note 4 Segment information Note 5 Revenue Note 6 Other income and expense items Income tax expense Note 7 Note 8 Financial assets and financial liabilities Note 9 Non-financial assets and liabilities Note 11 Equity Note 12 Cash flow information page 66 page 68 page 70 page 70 page 72 page 75 page 80 page 81 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 65 Notes to the financial statements cont. Note 4 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 Management team that are used to make strategic decisions. The Board and Executive Management team consider, organise and manage the business primarily from a geographic perspective, being the country of origin where the sale and service was performed. The operating segments exclude the adjustments required under AASB 16 Leases and therefore operating lease expenses are included at a segment level. The amounts provided to the Board and Executive Management 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 operations are 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 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. The Group report regional segments as set out in the table below. These results are prepared on a pre-AASB 16 Leases basis. An adjustment column representing the Group's entries due to AASB 16 Leases has been included for the purposes of comparability. (b) SEGMENT RESULTS Segment information 2020 Operating revenue Gross profit Gross profit % EBITDA* Depreciation and amortisation Segment EBIT* EBIT as a % of revenue Interest income Finance costs Net profit before tax Income tax expense Net profit after tax Australia New Zealand Canada Corporate and other $000 $000 $000 $000 MH Proforma Adjustment^ $000 $000 Group $000 266,610 161,030 60.4% 35,102 (7,692) 27,410 10.3% - 145 27,555 101,276 60,412 59.7% 22,554 (2,550) 20,004 19.8% - 16 20,020 123,038 71,075 57.8% 3,471 (6,031) (2,560) (2.1)% - - (2,560) (33,971) (2,355) (36,326) 1,136 492,060 5,687 298,204 60.6% 27,156 (18,628) 8,528 1.7% 4 (1,970) 6,562 4 (2,131) (38,453) 27,555 20,020 (2,560) (38,453) 6,562 (36,983) 5,551 - 492,060 - 298,204 60.6% 42,534 69,690 (55,611) 14,079 2.9% 4 (9,598) 4,485 (1,426) 3,059 - (7,628) (2,077) (2,077) 66 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Australia New Zealand Canada Corporate and other $000 $000 $000 $000 Group $000 Segment information 2019 Operating revenue Gross profit Gross profit % EBITDA* Depreciation and Amortisation Segment EBIT* EBIT as a % of revenue Interest income Finance costs Net profit before tax Income tax expense Net profit after tax 313,587 194,052 61.9% 41,421 (8,504) 32,917 10.5% - 42 32,959 112,964 68,655 60.8% 25,159 (2,446) 22,713 20.1% 1 (5) 22,709 140,402 85,131 61.0% 16,001 (5,759) 10,242 7.0% - - 10,242 32,959 22,709 10,242 (42,100) (2,657) (44,757) 2,547 569,500 5,194 353,032 62.0% 40,481 (19,366) 21,115 3.7% 160 (2,464) 18,811 (2,313) 16,498 159 (2,501) (47,099) (47,099) * EBIT and EBITDA are Non-IFRS information and are unaudited. Please refer to page 31 for an explanation of Non-IFRS information and a reconciliation of EBIT from continuing operations and Normalised EBIT. ^ This represents the impact of AASB 16 Leases on the Group. The totals for the year ended 28 June 2020 include the impacts of AASB 16 Leases and cannot be compared directly to the totals for the year ended 30 June 2019. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 67 Notes to the financial statements cont. Note 5 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 Lifetime Diamond Warranty 2020 $000 2019 $000 460,393 27,478 3,958 231 492,060 533,282 32,923 3,293 2 569,500 (a) DISAGGREGATION OF REVENUE FROM CONTRACTS WITH CUSTOMERS The Group derives revenue from the transfer of goods and services over time and at a point in time in the following major product lines and geographical regions: 2020 Timing of revenue recognition At a point in time Over time 2019 Timing of revenue recognition At a point in time Over time Australia New Zealand $000 $000 Canada $000 Corporate and other $000 Total $000 249,852 16,758 266,610 95,770 5,506 101,276 114,145 8,893 123,038 626 510 1,136 460,393 31,667 492,060 295,480 18,107 313,587 107,064 5,900 112,964 130,132 10,270 140,402 606 1,941 2,547 533,282 36,218 569,500 (b) ASSETS AND LIABILITIES RELATED TO CONTRACTS WITH CUSTOMERS Right of return assets Deferred expenditure Total contract assets Deferred service revenue Deferred interest free revenue Rights of return liabilities Lifetime Diamond Warranty Total contract liabilities NOTES 5(b)(i) 5(b)(ii) 5(c)(i) 5(c)(iv) 5(c)(v) 5(c)(vi) 2020 $000 108 1,673 1,781 73,856 2,918 250 2,489 79,513 2019 $000 291 2,139 2,430 77,803 2,247 682 1,135 81,867 (i) Revenue recognised in relation to contract liabilities The following table shows how much of the revenue recognised in the current reporting year relates to carried- forward contract liabilities and how much relates to performance obligations that were satisfied in a prior year: Revenue recognised that was included in the contract liability balance at the beginning of the year Revenue recognised from performance obligations satisfied in previous years 68 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 2020 $000 2019 $000 22,300 26,229 - 1,770 (ii) Right of return assets The following table shows contract assets recorded under our change of mind returns policy. Carrying amount at the start of the year Additional amounts recognised Amounts incurred and charged Exchange differences Closing right of return asset 2020 $000 291 114 (291) (6) 108 2019 $000 424 270 (424) 21 291 (iii) Assets recognised from costs to fulfil a contract 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. This is presented within other assets in the consolidated statement of financial position. For further information on the basis of calculation refer to Note 5c(iii). Carrying amount at the start of the year Additional amounts recognised Amounts incurred and charged Exchange differences Total deferred expenditure 2020 $000 2,139 435 (834) (67) 1,673 2019 $000 2,494 588 (986) 43 2,139 (c) ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS (i) Sale of goods 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. (ii) Repair services Sales of services for repair work performed is recognised in the accounting period in which the services are performed. (iii) Deferred service revenue The Group offers a 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 based on expected services under the plans is used as a basis to establish the amount of service revenue to recognise in the consolidated statement of comprehensive income. During the financial year ended 28 June 2020, the Group did not recognise revenue for PCP services in Canada from 2 March 2020 to 28 June 2020 due to the inability to service customers from closure of stores. An amount of $1.8m would have otherwise been attributed to this period. (iv) Deferred interest free revenue Deferred interest free 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. (v) Rights of return assets and liabilities Rights of return recognises the estimated returned sales under the Group's return policy, being 30 day change of mind in Australia and New Zealand and 60 day change of mind in Canada. Management estimates the returned sales based on historical sale return information and any recent trends that may suggest future claims could differ from historical amounts. For sales that are expected to be returned, the Group recognises a right of return liability. The associated inventory value for sales that are expected to be returned is recognised as a right of return asset. (vi) Lifetime Diamond Warranty LTDW is a warranty provided to customers with the purchase of jewellery items set with a diamond (excluding watches). This has been deemed a service-type warranty and is calculated with reference to the estimated value of service provided to customers and the stand-alone value of customers obtaining the service independently. Income in relation to the LTDW is recognised in line with the estimated pattern of customers utilising this service-type warranty. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 69 Notes to the financial statements cont. Note 6 Other income and expense items NOTES (a) OTHER INCOME Insurance recoveries Net foreign exchange gains Government grants Other items (b) BREAKDOWN OF EXPENSES BY NATURE Depreciation and amortisation Depreciation on property, plant and equipment Depreciation on right-of-use assets Total depreciation Total amortisation Total depreciation and amortisation Finance costs Interest on lease liabilities Bank and interest charges Interest on make good provision Total finance costs Employee benefits expense NOTES 9(b) 9(c) 9(g) 2020 $000 11 2,382 17,678 503 20,574 2020 $000 15,484 37,876 53,360 2,251 55,611 7,628 2,198 (228) 9,598 2019 $000 7 92 - 1,456 1,555 2019 $000 16,932 - 16,932 2,434 19,366 - 2,472 (8) 2,464 Employee wages Employee wage on costs and post-retirement benefits Provision for employee remediation Total employee benefits expense 134,377 14,796 - 149,173 142,463 16,295 4,419 163,177 Note 7 Income tax expense NOTES 2020 $000 2019 $000 (a) INCOME TAX EXPENSE Current tax Current tax on profits for the year Unrecognised tax losses utilised during the year 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 Adjustments for deferred tax of prior periods Total deferred tax expense/(benefit) Income tax expense 2,488 - 650 - 3,138 (957) (755) (1,712) 1,426 5,265 (468) (3,363) 154 1,588 356 369 725 2,313 9(d) 70 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 (b) NUMERICAL RECONCILIATION OF INCOME TAX EXPENSE TO PRIMA FACIE TAX PAYABLE Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30.0% (2019: 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non deductible expenditure Non-assessable intragroup markups Sundry items Difference in overseas tax rates Adjustments for current tax of prior periods Adjustments for deferred tax of prior periods Utilisation of tax losses not recognised Unrecognised tax losses utilised during the year 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 (c) TAX LOSSES Unused United States tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 25.0% Unused New Zealand tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 28.0% 2020 $000 4,486 1,346 279 - (211) 1,414 208 650 (755) (91) - - - 1,426 2019 $000 18,811 5,643 269 4 68 5,984 (338) (3,363) 369 - (468) 154 (25) 2,313 1,426 2,313 2020 $000 35,745 8,936 2,651 742 2019 $000 33,647 10,094 2,708 758 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 FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 71 Notes to the financial statements cont. Note 8 Financial assets and financial liabilities The Group holds the following financial instruments: NOTES Financial assets Cash and cash equivalents Trade receivables Total current financial assets Total non-current financial assets Financial liabilities at amortised cost Trade and other payables Borrowings Lease liabilities Derivative financial instruments used for hedging Total current financial liabilities Total non-current financial liabilities 8(a) 8(b) 8(d) 8(e) 10(b) 13(a) 2020 $000 11,204 35,733 46,937 36,210 10,727 46,937 64,472 10,681 158,012 34 233,199 106,670 126,529 233,199 2019 $000 7,923 36,641 44,564 37,579 6,985 44,564 44,548 32,704 - 468 77,720 45,016 32,704 77,720 The Group’s exposure to various risks associated with the financial instruments is discussed in Note 13. 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. Derivatives not designated as hedging instruments reflect the change in fair value of those foreign exchange forward contracts that are not designated in hedge relationships, but are, nevertheless, intended to reduce the level of foreign currency risk for expected sales and purchases. Derivatives designated as hedging instruments reflect the change in fair value of foreign exchange forward contracts, designated as cash flow hedges to hedge highly probable forecast purchases in US dollars (USD). Debt instruments at amortised cost include trade receivables, trade payables and borrowings. (a) CASH AND CASH EQUIVALENTS Current assets Cash at bank and on hand 2020 $000 11,204 2019 $000 7,923 Interest rates for the bank accounts have been between 0.00% and 0.75% during the year (2019: between 0.00%and 1.15%). (b) TRADE & OTHER RECEIVABLES Notes Current Trade receivables Provision for expected credit loss In-house customer finance Provision for expected credit loss Sundry debtors $000 3,432 (340) 3,092 13(c)(ii) Non- current $000 - - - 2020 Total $000 3,432 (340) 3,092 Current $000 4,822 (409) 4,413 Non- current $000 - - - 2019 Total $000 4,822 (409) 4,413 14,576 11,021 25,597 20,145 (928) 13(c)(i) 13,433 10,727 24,160 19,217 (1,437) (1,143) (294) 8,481 6,026 - 25,006 10,727 35,733 29,656 8,481 7,337 27,482 (1,280) 6,985 26,202 (352) - 6,026 6,985 36,641 Further information relating to loans to related parties and key management personnel is set out in Note 18. 72 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 (i) Trade receivables Trade receivables from sales made to customers through third party credit providers are non-interest bearing and are generally on 0-30 day terms. In-house customer finance (ii) 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 40 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. See Note 2(l)(i) for the accounting policy regarding the provision for expected credit losses. 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. In-house customer finance receivables are recognised net of significant financing components. (iii) Impairment and risk exposure Information about the impairment of trade receivables and the Group’s exposure to credit risk and foreign currency risk can be found in Note 13(b) and 13(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) CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES 2020 $000 2019 $000 Non-current interest-bearing loans and liabilities Carrying amount at start of year Outwards cash flows Inwards cash flows Foreign exchange movements Carrying amount at end of year (d) TRADE AND OTHER PAYABLES Current liabilities Trade payables Annual leave liability Accrued expenses Other payables 32,704 (92,300) 70,500 (223) 10,681 2020 $000 28,982 7,758 1,131 26,601 64,472 35,213 (132,000) 128,800 691 32,704 2019 $000 22,592 8,480 3,102 10,374 44,548 Trade payables and other payables are unsecured and are usually paid within 45 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. (e) BORROWINGS Bank loans Current Non- current 2020 Total Current Non- current 2019 Total $000 $000 $000 $000 $000 $000 - 10,681 10,681 - 32,704 32,704 Total secured borrowings - 10,681 10,681 - 32,704 32,704 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 73 Notes to the financial statements cont. Note 8 Financial assets and financial liabilities continued 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. The agreement with ANZ on 26 June 2018 was updated to provide a $70,000,000 multi option borrowing facility in line with the business requirements of the Group. At balance date, $46,248,000 was available (2019: $70,000,000), and of that, $10,681,000 was utilised (2019: $32,704,000). The Group also has access to various uncommitted credit facility lines serving working capital needs that, at balance date, totalled $1,935,000 (2019: $1,955,000). No amounts were drawn under these credit facility lines as at balance date. (f) 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 28 June 2020 Financial liabilities Derivatives used for hedging - Interest rate swaps Total financial liabilities Recurring fair value measurements at 30 June 2019 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 13(a) 13(a) 13(a) - - - - - 34 34 145 323 468 - - - - - 34 34 145 323 468 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. 74 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 9 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 Provision for impairment 2020 $000 6,313 174,758 3,335 (5,664) 178,742 2019 $000 6,732 176,670 2,033 (5,932) 179,503 All inventories are held at the lower of cost or net realisable value. (b) PROPERTY, PLANT & EQUIPMENT Plant and Fixtures and fittings $000 equipment $000 Motor vehicles $000 Leasehold improvements $000 Display materials $000 Total $000 At 1 July 2018 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2019 Opening net book amount Exchange differences Additions Additions - make good Disposals Transfers Depreciation charge Impairment loss (i) Closing net book amount At 30 June 2019 Cost or fair value Accumulated depreciation Net book amount Year ended 28 June 2020 Opening net book amount Adjustment for change in accounting policy Exchange differences Additions Additions - make good Disposals Transfers Depreciation charge Impairment loss (i) Closing net book amount At 28 June 2020 Cost Accumulated depreciation and impairment Net book amount 38,744 (25,851) 12,893 34,667 (23,100) 11,567 569 (316) 253 81,642 (46,423) 35,219 13,958 169,580 (7,224) (102,914) 66,666 6,734 12,893 284 2,618 - (762) 13 (3,929) (211) 10,906 11,567 256 1,695 - (24) - (3,500) (12) 9,982 253 5 - - (59) - (110) - 89 35,219 1,373 4,952 1,794 (20) (13) (7,429) (64) 35,812 6,734 214 1,488 - (46) - (1,964) (2) 6,424 66,666 2,132 10,753 1,794 (911) - (16,932) (289) 63,213 32,867 (21,961) 10,906 33,153 (23,171) 9,982 366 (277) 89 85,774 (49,962) 35,812 15,449 167,609 (9,025) (104,396) 63,213 6,424 10,906 9,982 89 35,812 6,424 63,213 - (48) 1,852 - (190) 90 (3,617) (738) 8,255 - (52) 1,819 - (119) 253 (3,373) (404) 8,106 - - - - (38) - (35) - 16 (2,653) (265) 1,376 1,757 (240) (346) (6,540) (2,016) 26,885 - 19 1,065 - (131) - (1,919) (3,315) 2,143 (2,653) (346) 6,112 1,757 (718) (3) (15,484) (6,473) 45,405 32,831 34,431 47 78,164 15,197 160,670 (24,576) 8,255 (26,325) 8,106 (31) 16 (51,279) 26,885 (13,054) (115,265) 45,405 2,143 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 75 Notes to the financial statements cont. Note 9 Non-financial assets and liabilities continued Impairment loss (i) As per the Group's accounting policies, the Group impairs assets where the recoverable amount is less than the carrying amount. This also includes assets held at stores facing closure. Any assets held at an impaired store that are able to redeployed throughout the Group are not impaired. Impairment indicators were identified due to the impact of COVID-19 which resulted in temporary store closures and reduction in sales. The Group treats each store as a separate cash-generating unit for impairment testing of property, plant and equipment and right of use assets. Key assumptions used in calculating the Value in Use for impairment assessment purposes factor in any immediately visible impact on store sales and performance from COVID-19 as disclosed in Note 3(a). (ii) Depreciation methods and useful lives Depreciation is calculated using the straight-line method to allocate the cost or revalued amounts of the assets, 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: 5 - 6 years • Plant and equipment 3 - 5 years • Motor vehicles • Fixtures and fittings 6 - 10 years • Leasehold improvements 6 - 10 years 6 - 10 years • Display material (c) INTANGIBLE ASSETS At 1 July 2018 Cost Accumulated amortisation Net book amount Year ended 30 June 2019 Opening net book amount Exchange differences Additions Disposals Amortisation charge Closing net book amount At 30 June 2019 Cost Accumulated amortisation Net book amount Year ended 28 June 2020 Opening net book amount Additions Category transfers Impairment charge Amortisation charge Closing net book amount At 28 June 2020 Cost Accumulated amortisation Net book amount Patents, trademarks and other rights $000 Computer software Total $000 $000 79 - 79 28,941 (16,394) 12,547 29,020 (16,394) 12,626 79 - - - - 79 12,547 6 5,381 (140) (2,434) 15,360 12,626 6 5,381 (140) (2,434) 15,439 79 - 79 30,852 (15,492) 15,360 30,931 (15,492) 15,439 79 - - - - 79 15,360 11,241 3 (3) (2,251) 24,350 15,439 11,241 3 (3) (2,251) 24,429 79 - 79 39,383 (15,033) 24,350 39,462 (15,033) 24,429 76 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 485 8,190 22,723 (478) (19) 235 - 7,487 20,757 (317) (511) 15,916 74,468 39,585 34,883 74,468 67,708 957 5,375 755 (327) 74,468 2020 $000 3,165 450 5,655 24,593 (601) (21) 4,223 1,738 - 16,926 (156) 989 13,912 67,708 31,180 36,528 67,708 68,022 (356) - (369) 411 67,708 2019 $000 2,295 1,445 1,367 (d) DEFERRED TAX BALANCES 2020 $000 2019 $000 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 Leases Provisions Unrealised foreign exchange losses Sundry items Inventories 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 Adjustment on adoption of AASB 16 Prior year adjustment Foreign exchange differences Closing balance at 30 June (e) CURRENT TAX RECEIVABLES Current tax receivables (f) CURRENT TAX LIABILITIES Current tax liabilities (g) PROVISIONS Employee benefits (i) Assurance-type warranties (i) Make good provision (i) Restructuring costs (i) Diamond warranty (i) Current $000 20,599 1,405 260 2,325 360 24,949 2020 Non- current $000 Total Current $000 $000 1,776 22,375 28,140 1,674 1,405 6,823 133 1,014 2,325 480 360 8,339 33,288 31,441 - 6,563 - - 2019 Non- current $000 Total $000 2,069 30,209 1,674 5,011 1,014 480 6,947 38,388 - 4,878 - - MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 77 Notes to the financial statements cont. Note 9 Non-financial assets and liabilities continued Information about individual provisions and significant estimates (i) Employee benefits Employee benefits includes provision for long service leave, revaluation of employee benefits in New Zealand and the provision for remediation. 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 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. Assurance-type warranties Provision is made for the estimated sale returns for the Group's return policies, being 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 staffing exit costs from business structure changes. Restructuring provisions are recognised only when the Group has a constructive obligation, which is when: • there is a detailed formal plan that identifies the business or part of the business concerned, the location and number of employees affected, the detailed estimate of the associated costs, and the timeline; and • the employees affected have been notified of the plan’s main features. 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. (ii) Movements in provisions Movements in each class of provision during the financial year are set out below: Employee Restructuring benefits obligations Returns Make good provision provision Diamond warranty Total Carrying amount at start of year Additional provisions recognised Amounts incurred and charged Exchange differences Carrying amount at end of year $000 30,209 1,940 (9,773) (1) $000 1,014 1,995 (682) (2) $000 1,674 1,405 (1,663) (11) $000 5,011 2,280 (441) (27) 22,375 2,325 1,405 6,823 $000 480 - $000 38,388 7,620 (120) (12,679) (41) 360 33,288 - (h) DEFERRED REVENUE Lease incentive income Sundry deferred revenue Current $000 - 367 367 Non- current $000 - - - 2020 Total $000 - 367 367 Current $000 962 290 1,252 Non- current $000 1,847 - 1,847 2019 Total $000 2,809 290 3,099 78 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 10 Leases This note provides information for leases where the Group is a lessee. (a) RIGHT-OF-USE ASSETS Right-of-use assets Right-of-use assets Less: Accumulated impairment Less: Accumulated depreciation Reconciliation of right-of-use assets Opening right-of-use asset on adoption of AASB 16 on 1 July 2019 Additional right-of-use assets relating to leases entered into during the year Lease modifications agreed during the year Depreciation Reduction in right-of-use assets as a consequence of COVID-19 on rent concessions Impairment of right-of-use assets Foreign currency translation Balance at 28 June 2020 (b) LEASE LIABILITIES Lease liabilities Current Non-current Reconciliation of lease liabilities Opening lease liabilities recognised on adoption of AASB 16 on 1 July 2019 Additional leases entered into during the year Lease modifications during the year Reduction in right-of-use assets as a consequence of COVID-19 on rent concessions Interest accrued Lease repayments Foreign currency translation Balance at 28 June 2020 2020 $000 162,380 (815) (37,654) 123,911 142,833 21,702 (126) (37,876) (2,033) (815) 226 123,911 2020 $000 42,164 115,848 158,012 166,322 21,671 14 (2,033) 7,628 (35,520) (70) 158,012 The incremental borrowing rate used in determining the lease liability ranged between 1.85% and 6.95%. (c) IMPAIRMENT LOSS As per the Group's accounting policies, the Group impairs assets where the recoverable amount is less than the carrying amount. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 79 Notes to the financial statements cont. Note 11 Contributed equity (a) SHARE CAPITAL Ordinary shares - fully paid Total share capital 2020 Shares 2019 Shares 387,769,105 387,750,000 387,769,105 387,750,000 2020 $000 11,016 11,016 (i) Movements in ordinary shares: Opening balance 1 July 2018 Options forfeited Rights converted Balance 30 June 2019 Rights converted Balance 28 June 2020 Notes 11(a)(ii) 11(a)(iii) 11(a)(iii) No. of shares 387,438,513 - 311,487 387,750,000 19,105 387,769,105 2019 $000 10,984 10,984 $000 10,266 228 490 10,984 32 11,016 (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 on 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 19(a). (iv) Rights issue Information relating to share rights issued under the Company's deferred compensation plan, including details of rights issued, exercised and lapsed during the financial year and rights outstanding at the end of the financial year, is set out in Note 19(b). (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(m). 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 value of equity-settled share-based payments provided to employees, including key management personnel, as part of their remunerations. Refer to Note 19 for further details of these plans. 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. 80 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 12 Cash flow information Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Adjustment for: NOTES 2020 $000 2019 $000 3,059 16,498 Depreciation of property, plant and equipment Depreciation of right-of-use asset Amortisation Impairment - property, plant and equipment Impairment - other assets Impairment - intangibles Non-cash employee benefits expense - share-based payments Make good interest Net loss on sale of non-current assets Net exchange differences 6(b) 6(b) 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 non current assets (Increase) / decrease in other 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 15,484 37,876 2,251 6,473 1,579 3 (25) (228) 442 1,143 1,490 (206) (1,430) 2,324 89 12,987 8,509 (6,121) (2,000) 83,699 16,932 - 2,434 289 1,823 - 106 (8) 619 (9) (8,419) 12,102 227 (309) 896 (485) (3,517) (110) (100) 38,969 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 13 Financial risk management Note 14 Capital management page 82 page 87 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 81 Notes to the financial statements cont. Note 13 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 unpre- dictability 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 The Group is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are foreign currency risk and interest rate risk. The Group’s risk management strategy and how it is applied to manage risk are explained below. (i) Classification of derivatives Derivatives are only used for economic hedging purposes and not as speculative investments. However, where derivatives do not meet the hedge accounting criteria, they are classified as ‘held for trading’ for accounting purposes and are accounted for at fair value through profit or loss. They are presented as current assets or liabilities to the extent 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(m). Further information about the derivatives used by the Group is provided in Note 13(b) below. Derivatives not designated as hedging instruments The Group uses foreign currency-denominated borrowings and foreign exchange forward contracts to manage some of its transaction exposures. The foreign exchange forward contracts are not designated as cash flow hedges and are entered into for periods consistent with foreign currency exposure of the underlying transactions, generally from one to six months. (ii) Fair value measurements For information about the methods and assumptions used in determining the fair value of derivatives please refer to Note 8(f). (iii) Hedging reserves The Group’s hedging reserves are disclosed in the statement of changes in equity. There were no reclassifications from the cash flow hedge reserve to profit or loss during the year in relation to the foreign currency forwards and options. 82 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 (iv) Amounts recognised in profit or loss In addition to the amounts disclosed in the reconciliation of hedging reserves above, the following amounts were recognised in profit or loss in relation to derivatives: Net foreign exchange gain/(loss) included in other gains/(losses) 2020 $000 69 2019 $000 92 Hedge ineffectiveness Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. For hedges of interest rate risk, the Group enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item. The Group therefore performs a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness. It may occur due to: • the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan, and • differences in critical terms between the interest rate swaps and loans. There was no recognised ineffectiveness during 2020 or 2019 in relation to the interest rate swaps. (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. 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: Buy foreign currency (cash flow hedges) 28 June 2020 30 June 2019 USD $000 36 500 7,539 NZD $000 64 - - CAD $000 43 - 2 USD $000 16 1,590 1,567 NZD $000 33 2 - CAD $000 28 - 113 - - - 12,000 - - Sensitivity The Group's principal foreign currency exposures arise from trade payables and receivables outstanding at year end. Most trade payables are repaid within 45 days so there is minimal equity impact arising from foreign currency exposures. The below calculations are the impact on the Mark to Market (MTM) for the Foreign Exchange Contracts (FEC) hedged. These are not designated as cash flow hedges, therefore the impact will be on pre-tax profit. US$ Trade payables us$ exchange rate - increase 10%* us$ exchange rate - decrease 10%* Impact on pre-tax profit Impact on other components of equity 2020 $000 2019 $000 2020 $000 2019 $000 1,680 (2,205) - - - - 1,697 (1,752) MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 83 Notes to the financial statements cont. Note 13 Financial risk management continued (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. The exposure of the Group’s borrowings to interest rate changes and the contractual re-pricing dates of the borrowings at the end of the reporting year are as follows: Variable rate borrowings $000 10,681 2020 % of total loans 100.0% 2019 % of total loans 100.0% $000 32,704 An analysis by maturities is provided in Note 13(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. Instruments used by the group Swaps in place cover approximately 46.8% (2019: 76.4%) 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 28 June 2020 Balance 30 June 2019 Balance Weighted average interest rate % 1.88% 4.63% Weighted average interest rate % 2.54% 3.91% $000 10,681 5,000 5,681 $000 32,704 25,000 7,704 An analysis by maturities is provided in note 13(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 2020 $000 (107) 107 2019 $000 (109) 109 2020 $000 (15) (36) 2019 $000 (2) 2 * 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%. 84 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 (c) CREDIT 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. (i) Credit quality and impaired in-house customer finance In-house customer finance was established in Canada 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 8(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 (ii) Impaired trade receivables The ageing of these receivables is as follows: 0 - 30 days 31 - 60 days 61 - 90 days 91 + days 2020 $000 24,651 491 455 25,597 2020 $000 1,280 (2,093) 2,270 (20) 1,437 2020 $000 3,027 199 (2) 208 3,432 The amount written off during the period amounted to $193,000 (2019: $615,000). Movements in the provision for impairment of trade receivables that are assessed for impairment collectively are as follows: At 1 July Amounts written off Additional provisions recognised Exchange differences At 28 June 2020 $000 409 (193) 125 (1) 340 2019 $000 26,511 508 463 27,482 2019 $000 1,430 (2,263) 2,028 85 1,280 2019 $000 3,677 574 171 400 4,822 2019 $000 819 (615) 201 4 409 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 85 Notes to the financial statements cont. (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 characteris- tics associated with its underlying assets. The agreement with ANZ on 26 June 2018 was updated to provide a $70,000,000 multi option borrowing facility in line with the business requirements of the Group and the facility limit available was reduced in line with rents unpaid. At balance date, $46,248,000 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) 2020 $000 1,935 46,248 48,183 2019 $000 1,955 32,704 34,659 (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. Contractual maturities of financial liabilities At 28 June 2020 Non-derivatives Lease liabilities Trade payables Borrowings Total non-derivatives Derivatives Gross settled (forward foreign exchange contracts) Net settled (interest rate swaps) At 30 June 2019 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 10,065 64,964 - 75,029 1,168 - - 1,168 9,954 - 10,681 20,635 59,411 - - 59,411 77,414 158,012 64,964 10,681 77,414 233,657 - - 69 34 103 44,548 - 44,548 - - - - - - - - - - 32,704 32,704 145 52 197 - 158 158 - 113 113 - - - - - - - - - - - - - - - - - - 69 34 103 44,548 32,704 77,252 145 323 468 86 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 14 Capital management (a) RISK MANAGEMENT The Group's objectives when managing capital are to: • safeguard its ability to continue as a going concern, so that it 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 EBIT fixed cover charge ratio, consolidated debt to EBITDA, consolidated debt to capitalisation, and consolidated debt to inventory. There have been no breaches of these covenants and the Group continues to collaborate with the external financing partners as required. (b) DIVIDENDS (i) Ordinary shares Final dividend for the year ended 30 June 2019 of 1.5¢ (2018: 2.5¢) fully paid share paid on 27 September 2019 (2019: 28 September 2018). Interim dividend for the year ended 28 June 2020 of 1.5¢ (2019: 2.5¢) deferred for payment (2019: 27 March 2019)*. 2020 $000 2019 $000 5,817 9,679 5,816 11,633 9,686 19,365 * Interim dividend for the year ended 28 June 2020 of 1.5¢ was declared. Subsequent to the shares trading ex dividend, but prior to payment date, the interim dividend payment was deferred to 30 September 2021. (ii) Dividends not recognised at the end of the reporting period No final dividend has been declared by the Directors for the year ended 28 June 2020 (2019: au1.5¢). - 5,816 * This will be declared as conduit foreign income, therefore Australian withholding tax will not be deducted from the dividend payment for foreign (non-Australian tax resident) shareholders. (iii) Franking and imputation credits Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2019: 30.0%) Imputation credits (NZ$) available for subsequent reporting periods based on the New Zealand tax rate of 28.0% (2019: 28.0%) 2020 $000 2019 $000 2,174 1,487 18,474 17,885 The dividend paid during the current financial period and corresponding previous financial period were fully imputed and not franked. 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. The declared interim dividend, which has been deferred, was unfranked and therefore will not reduce the franking account. The impact on the imputation credit account of the interim dividend declared but deferred is estimated to be a reduction in the imputation credit account of nz$2,418,000 (2019: nz$2,381,000). The amount of imputation credits is dependant on the NZD exchange rate at the time of the dividend. MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 87 Notes to the financial statements cont. 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): Name of entity Country of Incorporation Ownership interest held by the group 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 Medley Jewellery Pty Ltd (formally Emma & Roe Online Pty Ltd) Durante Holdings Pty Limited Michael Hill New Zealand 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 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 2020 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2019 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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 the New Zealand stock exchange at 28 June 2020 of $33,000 (30 June 2019: $137,000). 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 over and above already provided in the financial statements 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. 88 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 17 Events occurring after the reporting period 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. Note 18 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. (b) KEY MANAGEMENT PERSONNEL COMPENSATION Short-term employee benefits Long-term benefits Post-employment benefits Share-based payments 2020 $ 1,997,383 20,632 76,443 27,740 2,122,198 2019 $ 2,164,448 37,696 91,183 93,600 2,386,927 Detailed remuneration disclosures are provided in the remuneration report on pages 37 to 45. (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 report by a related party of board members 2020 $ 2019 $ 13,945 13,225 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 FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 89 Notes to the financial statements cont. Note 19 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 Forfeited during the year As at 28 June NZD options As at 1 July AUD options Granted during the year Forfeited during the year As at 28 June AUD options Average exercise price per share 1.58 1.60 1.56 1.56 - 1.56 1.56 2020 Number of options Average exercise price per share option 2019 Number of options 1,900,000 (800,000) 1,100,000 600,000 - (300,000) 300,000 1.56 3,400,000 1.53 (1,500,000) 1.58 1,900,000 1.78 1.11 - 1.56 400,000 200,000 - 600,000 Share options outstanding at the end of the year have the following expiry dates and exercise prices: Grant date Expiry date Exercise price 22 September 2009 17 September 2010 16 November 2011 19 September 2012 18 September 2013 29 November 2013 10 November 2014 5 October 2017 22 September 2016 22 January 2016 22 September 2018 Total 30 September 2019 30 September 2020 30 September 2021 30 September 2022 30 September 2023 30 September 2023 30 September 2024 30 September 2027 30 September 2026 30 September 2025 30 September 2028 nz$0.94 nz$0.88 nz$1.16 nz$1.41 nz$1.82 nz$1.82 nz$1.63 au$1.44 au$2.12 nz$1.14 au$1.11 Share options Share options 30 June 2019 28 June 2020 100,000 - 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 1,000,000 500,000 200,000 100,000 200,000 100,000 200,000 100,000 200,000 100,000 200,000 100,000 2,500,000 1,400,000 The weighted average remaining contractual life of share options outstanding at the end of the period was 3.9 years (2019: 5.1 years). The range of exercise prices for options outstanding at the end of the year was nz$0.88 - nz$1.82 and au$1.11 - 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. 90 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Fair value of options granted The fair value at grant date for the options issued during the 2020 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. No options were granted during the year ended 28 June 2020 (2019: 200,000). (b) SHARE RIGHTS 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 286,294 share rights to eligible participants of the deferred compensation plan. All share rights were issued on the basis that they are divided into three tranches and vest over 3, 4 and 5 years, respectively. Outstanding as at 1 July Granted Vested Forfeited Outstanding at 28 June 2020 average exercise price per share right $ 0.54 0.57 1.66 - 0.81 2020 2019 average Number of exercise price per share right $ 1.30 0.54 1.57 1.05 0.54 rights 521,609 286,294 (19,105) - 788,798 2019 Number of rights 919,102 224,670 (311,487) (310,676) 521,609 In prior financial years, 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. Share rights issued during the 2020 financial year used the Black-Scholes model to determine the fair value of share rights using the following inputs as at 28 June 2020: Number of rights Share price Annualised volatility Expected dividend yield Risk free rate Fair value of share right (c) EXPENSES ARISING FROM SHARE-BASED PAYMENT TRANSACTIONS Options issued under employee option plan Share rights issued under LTI plan 2020 27 Feb 2020 286,294 $0.68 40% 6.50% 0.75% $0.57 2019 9 May 2019 224,670 $0.67 40% 6.50% 1.50% $0.54 2020 $000 - 166 166 2019 $000 11 95 106 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 91 Notes to the financial statements cont. Note 20 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, Michael Hill International Limited, 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 of Ernst & Young Australia Total auditors' remuneration 2020 $ 2019 $ 535,506 477,223 10,050 545,556 127,512 604,735 545,556 604,735 92 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Note 21 Earnings per share (a) BASIC EARNINGS PER SHARE Earnings per share for profit attributable to the ordinary equity holders of the Company (b) DILUTED EARNINGS PER SHARE Diluted earnings per share for profit attributable to the ordinary equity holders of the Company (c) RECONCILIATION OF EARNINGS USED IN CALCULATING EARNINGS PER SHARE Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Diluted earnings per share Profit from continuing operations attributable to the ordinary equity holders of the Company 2020 2019 0.79¢ 4.26¢ 0.79¢ 4.25¢ 2020 $000 2019 $000 3,059 16,498 3,059 16,498 (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 Adjustments for calculation of diluted earnings per share: Share rights 2020 Number 2019 Number 387,766,481 387,483,743 574,013 854,613 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 388,340,494 388,338,356 (e) INFORMATION CONCERNING THE CLASSIFICATION OF SECURITIES Options and share rights Options and share rights 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 and share rights have not been included in the determination of basic earnings per share. Details are set out in Note 19(a). MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 93 Notes to the financial statements cont. Note 22 Parent entity financial information (a) SUMMARY FINANCIAL INFORMATION The individual financial statements for Michael Hill International Limited (the parent) show the following aggregate amounts: 2020 $000 2019 $000 Balance sheet Current assets Non-current assets Total assets Current liabilities Total liabilities Shareholders' equity Issued capital Reserves - Acquisition reserve - Option and share rights reserve Retained earnings Profit or loss for the year Total comprehensive income 1,495 464,727 466,222 6,153 6,153 291,158 40,907 697 127,307 460,069 92,647 92,647 41,146 338,180 379,326 243 243 291,126 40,907 757 46,293 379,083 43,578 43,578 (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, Medley Jewellery 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 at 28 June 2020 of $33,000 (2019: $72,000). Note 23 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, 94 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Michael Hill Franchise Holdings Ltd, Michael Hill Finance (NZ) Ltd, Michael Hill Online Pty Ltd, Michael Hill Charms Pty Ltd, Emma & Roe Pty Ltd, Medley Jewellery Pty Ltd, Michael Hill Online Holdings Ltd and Emma & Roe NZ Ltd. 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 28 June 2020 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 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 Change in accounting policy – adoption of AASB 16 Total comprehensive income / (loss) 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 2020 $000 370,986 30,941 15,703 (175,412) (117,063) (9,193) (20,684) (15,223) (40,988) (454) (17,588) (6,949) 14,076 (3,801) 10,275 2019 $000 430,052 48,004 988 (206,255) (125,720) (45,645) (24,133) (21,333) (13,714) (498) (15,468) (2,574) 23,704 (4,203) 19,501 (23,808) (23,808) (13,533) 11,336 11,336 30,837 474,874 (23,574) (13,533) - (28) (11,633) 426,106 463,296 - 30,837 95 11 (19,365) 474,874 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 95 Notes to the financial statements cont. Note 23 Deed of cross guarantee continued (b) CONSOLIDATED STATEMENT OF FINANCIAL POSITION Set out below is a consolidated statement of financial position as at 28 June 2020 of the Closed Group consisting of Michael Hill International Limited and the entities noted above. Current assets Cash and cash equivalents Trade receivables Inventories Current tax receivables Loans to related parties Other current assets Total current assets Non-current assets Property, plant and equipment Right-of-use assets Investments in subsidiaries Other non-current assets Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities Current tax liabilities Deferred revenue Provisions Total current liabilities Non-current liabilities Lease liabilities Provisions Deferred revenue Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2020 $000 2019 $000 6,915 8,953 144,719 - 231,628 1,980 394,195 26,004 81,372 87,834 1,465 24,419 64,952 286,046 3,704 9,004 137,750 (358) 244,716 2,904 397,720 34,617 - 87,834 2,062 15,386 55,713 195,612 680,241 593,332 56,575 23,732 8,260 17,456 24,505 130,528 73,776 8,339 41,492 123,607 20,488 - - 19,597 25,824 65,909 - 6,947 45,602 52,549 254,135 118,458 426,106 474,874 310,006 (24,633) 140,733 426,106 309,975 (750) 165,649 474,874 96 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 Directors' declaration In the Directors' opinion: (a) 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) the financial statements and notes of the Group for the financial year ended 28 June 2020, 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 28 June 2020 and of its performance for the financial year ended on that date; (c) 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 23. Note 2(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. E.J. Hill, Chair Brisbane, 18 August 2020 MICHAEL HILL INTERNATIONAL LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 JUNE 2020 97 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 Independent Auditor's Report to the Members of Michael Hill International Limited Report on the Audit of the Financial Report OPINION 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 28 June 2020, 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 statements, 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 28 June 2020 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 OPINION 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 (including Independence Standards) (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 AUDIT MATTERS 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. 98 MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT EXISTENCE OF INVENTORY Why significant The existence of inventories was a key audit matter due to the size of the recorded asset (28 June 2020: $178,472,000) which represents 36% (2019: 47%) 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 distribution centre and manufacturing warehouse. Inventories comprise a significant number of physically small but high value items. Moreover, a significant portion of stock was returned to the distribution centre due to the temporary store closures due to COVID-19 and then returned to stores once they re-opened. The Group accounts for inventories in accordance with the policy disclosed in Note 2(k) and further disclosure is included in Note 9(a) of the financial report. How our audit addressed the key audit matter Our audit procedures included the following: Retail Stores and Manufacturing • Assessed the effectiveness of controls relevant to the conduct of physical stocktaking for a sample of the Group’s retail stores and the manufacturing warehouse to assess whether inventories had been appropriately counted at each location and whether movements in to and out of each location prior to and subsequent to the counts had been appropriately recorded. • We reviewed the summary of stock variances and results prepared by Internal audit across the sample of stores and considered the impact of their findings in our audit approach. • Selected samples of stock receipts prior to and after the stock count including transfers to stores, to assess whether these were appropriately recorded in the correct period. Distribution Centre • We performed sample counts of the Distribution Centre at year-end to assess the existence of stock and corroborate the findings of the Group’s full stock count. • Selected samples of stock receipts prior to and after the stock count including transfers to stores, to assess whether these were appropriately recorded in the correct period. • Tested a sample of transfers back to the stores in Canada as a result of the temporary store closures during the period. We subsequently attended a number of stores in Canada to physically observe transferred product had been received. • We performed inventory analysis for the stores and tested any unusual fluctuations, outside of our set expectations of the year-end balance, compared to the stock take. We also compared the movement in stock balances at a country level from the stock take date to year-end. • We reviewed the implementation of the new Enterprise Resource Planning Inventory system from June 2020 and assessed the proper cut-over of stock balances to the new system. ADOPTION OF AUSTRALIAN ACCOUNTING STANDARD AASB 16 – LEASES Why significant How our audit addressed the key audit matter The 28 June 2020 financial year was the first year of adoption of Australian Accounting Standard AASB 16 – Leases. The Group has entered into a significant volume of leases by number and value through its store network and head office as a lessee. Given the financial significance to the Group of its leasing arrangements, the complexity and judgements involved in the application of AASB 16, the transition requirements of the standard and the subsequent amendment to consider the impact on rent concessions due to COVID-19, this was considered to be a key audit matter. In addition, the complexity in the modelling of the accounting for the leases, including the calculation of the incremental borrowing rate and the judgement involved in the treatment of renewal options is significant. Upon transition, a lease liability of $168.0 million, right of use asset of $144.3 million including the deferred tax effect and a restatement to opening retained earnings of $13.0 million was recorded on the statement of financial position as outlined in Note 2(x). Our audit procedures assessed the existence, completeness and valuation of AASB 16 lease balances and the related financial report disclosures. These procedures included the following: • Assessed the appropriateness of the accounting policies, transition and new disclosures as set out in Notes 2(o) and 2(x) for compliance with the requirements of AASB 16 including the adoption of any practical expedients selected by the Group as part of the transition process. • Assessed the integrity of the Group’s AASB 16 lease calculation model used, including the mathematical accuracy of the underlying calculation formulas of the accounting module utilised by the Group. • For a sample of leases, we agreed the key inputs in the lease accounting module to the relevant terms of the underlying signed lease agreements. • We considered the Group’s assumptions in relation to the treatment of lease renewal options. • Assessed completeness of the leases included in transition including the recon- ciliation of the operating lease commitments disclosure in the prior year financial report to the transition disclosures and new leases entered during the year. • Assessed the internal borrowing rate used to discount future lease payments to present value for reasonableness by performing sensitivities using published interest rates and terms of the Group’s existing debt facilities. • Tested a sample of rent concessions agreed to contracts and other supporting documentation. MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT 99 PROFESSIONAL CARE PLAN (PCP) REVENUE RECOGNITION 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. • Assessed the appropriateness of the balance of the PCP revenue recognised during the year and the closing deferred PCP contract liability at year end based on the 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. • Considered the changes in the PCP revenue recognition as a result of the temporary store closures during the COVID-19 lockdowns. 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 3(a) of the financial report, the Group’s performance obligation for its PCPs are satisfied over time. In measuring the progress toward complete satisfaction of the performance obligation, the Group uses customer usage history and industry information. As such, the determination of the pattern of revenue recognition is judgmental. The pattern of recognising revenue, is disclosed in Note 5(c)(iii) of the financial report and is based on an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by the Group. As circumstances change over time, the Group updates its measure of progress to reflect any changes in the outcome of the performance obligation. In accordance with Australian Accounting Standards such changes are reflected in the current year results. This change in estimate has been disclosed in Note 5(c)(iii) to the financial report. CASHFLOW FORECASTS AND THE IMPACT OF COVID-19 Why significant How our audit addressed the key audit matter During the second half of the financial year, the Group was impacted by COVID-19. All bricks-and-mortar stores were temporarily closed in order to maintain the safety of the Group’s staff and customers and as also required by local Government regulations. The cashflow forecasts are used in the Group’s impairment review of its cash generating units (CGUS) and used to prepare forecast debt covenant calculations to assess associated compliance. The Group’s cash flow forecasts involve a number of assumptions and uncertainty around the short and medium term impact of COVID-19 to the Group. Sensitivity to changes in key assumptions could affect the Group’s assessment of the recoverable amount of its CGUs at balance date or forecast debt covenant compliance. Accordingly, this was considered a key audit matter. The significant judgement and estimates associated with the Group’s measurement of its forecast cash flows are disclosed in Note 3(a) of the financial report. Our audit procedures included the following: • Assessed the cash flow forecasts approved by the Board taking into account our knowledge of the business and relevant external information as at 28 June 2020. • Considered the reasonableness of the assumptions used in the cash flow forecasts based on historical results, growth rates and a range of possible scenarios resulting from the ongoing uncertainty associated with COVID-19. • • Assessed the Group’s sensitivity analysis on its CGUs in three main areas being the cash flows, discount rate and terminal growth rate assumptions. In conjunction with our Valuation Specialists, we assessed the ap- propriateness of the discount rate applied to the cash flows of each CGU to assess whether the rate reflects the risks, including COVID-19 risks, associated with the respective cash flow forecasts for impairment testing. • Assessed the Group’s sensitivity analysis on forecast debt covenant compliance at the future reporting points to the external financier for a period of 12 months from signing the financial statements and the related appropriateness of management’s consideration on the going concern assumption. the appropriateness of the disclosures around significant judgments and estimates as required by the relevant Accounting Standards. • Assessed 100 MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT INFORMATION OTHER THAN THE FINANCIAL REPORT AND AUDITOR’S REPORT THEREON The directors are responsible for the other information. The other information comprises the information included in the Group’s 2020 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 respon- sibility 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. RESPONSIBILITIES OF THE DIRECTORS FOR THE FINANCIAL REPORT 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. AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL REPORT 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 judgment and maintain Standards, we exercise professional 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 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, misrep- resentations, or the override of 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, actions taken to eliminate threats or safeguards applied. 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. REPORT ON THE AUDIT OF THE REMUNERATION REPORT Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors' report for the year ended 28 June 2020. In our opinion, the Remuneration Report of Michael Hill International Limited for the year ended 28 June 2020 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. • 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. Ernst & Young Alison de Groot, Partner Brisbane 18 August 2020 MICHAEL HILL INTERNATIONAL LIMITED AUDITOR'S REPORT 101 Additional Information as at 4 September 2020 Michael Hill has one class of shares on issue (being ordinary shares). The Company’s shares are listed on the Australian Securities Exchange and the New Zealand Stock Exchange. Issued capital Number of shareholders Minimum Parcel Price Holders with less than a marketable parcel Twenty largest shareholders Hoglett Hamlett Limited* J P Morgan Nominees Australia Pty Limited New Zealand Central Securities Depository Ltd HSBC Custody Nominees (Australia) Limited Mole Hill Limited* Squeakidin Limited* Forsyth Barr Custodians Limited Citicorp Nominees Pty Limited New Zealand Depository Nominee Limited FNZ Custodians Limited BNP Paribas Nominees Pty Ltd Vanward Investments Limited BNP Paribas Noms Pty Ltd Custodial Services Limited BNP Paribas Nominees Pty Ltd BNP Paribas Nominees (NZ) Ltd DDS Trustee Services Limited Mr Philip Roy Taylor ASB Nominees Limited Ronoc Holdings Limited Total Total remaining holders balance Number 387,843,007 4,664 $0.360 693 % of Fully Paid Ordinary Shares 38.25 7.15 6.70 5.35 4.94 4.94 1.07 0.79 0.79 0.76 0.62 0.59 0.47 0.45 0.44 0.41 0.40 0.39 0.37 0.26 75.14 24.86 Fully Paid Ordinary Shares 148,330,600 27,738,925 25,999,936 20,759,965 19,156,926 19,156,926 4,135,720 3,064,265 3,053,562 2,942,501 2,407,060 2,298,056 1,835,927 1,746,928 1,719,535 1,578,009 1,570,353 1,500,000 1,418,884 1,000,000 291,414,078 96,428,929 * Denotes entities in which a member or members of the Hill family have an ownership interest. Distribution Of Security Holders 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 Over 100,000 Total 102 Number of fully paid ordinary shares 600 1,483 919 1,488 174 4,664 No. of holders of fully paid ordinary shares 375,846 4,508,062 7,548,131 46,115,242 329,295,726 387,843,007 Unmarketable parcels Minimum $500.00 parcel at $0.360 per unit Minimum parcel size 1,389 Holders Units 693 490,595 Substantial holders As at 4 September 2020, there are five substantial shareholders that Michael Hill is aware of: Hoglett Hamlett Limited and others* Mark Simon Hill Emma Jane Hill Accident Compensation Corporation Spheria Asset Management Pty Ltd Latest notice date 13 October 2016 13 October 2016 13 October 2016 2 April 2020 21 August 2020 Shares 148,330,600 167,487,526 167,487,526 28,717,313 28,915,143 * 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). The above table sets out the number of securities held by substantial shareholders in Michael Hill as disclosed in their last substantial shareholder’s notice. Those shareholders may have acquired or disposed of securities in Michael Hill since the date of that notice. A substantial shareholder is only required to disclose acquisition or disposals where there has been a movement of at least 1% in their shareholding. Share Options and Rights Michael Hill has unlisted share options and rights on issue. As at 4 September 2020, there were 11 holders of share options and rights. 103 Corporate directory DIRECTORS E.J. Hill BCom, MBA (Chair) Sir R.M. Hill KNZM G.W. Smith BComm, FCA, FAICD R.I. Fyfe BEng, FENZ J.S. Allis J.E. Naylor COMPANY SECRETARY A. Lowe BCom, LLB (Hons), MAppFin, CA, CTA E. Bird LLB (Hons), BA (Psych), GradDipLegalPrac, GradDipAppCorpGov PRINCIPAL REGISTERED OFFICE IN AUSTRALIA Metroplex on Gateway 7 Smallwood Place Murarrie, QLD 4172 Telephone +61 7 3114 3500 Fax +61 7 3399 0222 SHARE REGISTRAR Computershare Investor Services Pty Ltd Level 1 , 200 Mary Street Brisbane QLD 4000 1300 552 270 (within Australia) +61 3 9415 4000 (outside Australia) AUDITOR Ernst & Young Level 51 111 Eagle Street Brisbane, QLD 4000 SOLICITOR Allens Level 26 480 Queen Street Brisbane QLD 4000 BANKERS Australia and New Zealand Banking Group Limited ANZ Banking Group (New Zealand) Limited Bank of Montreal Bank of America N.A. WEBSITES michaelhill.com.au michaelhill.co.nz michaelhill.ca michaelhill.com medleyjewellery.com.au investor.michaelhill.com EMAIL inquiry@michaelhill.com.au THIS PAGE AND OPPOSITE PAGE: PENDANTS AND EARRINGS FROM OUR SPIRITS BAY COLLECTION BACK COVER: MODEL WEARS ITEMS FROM OUR KNOTS COLLECTION SPIRITS BAY AND KNOTS COLLECTIONS WERE DESIGNED BY CHRISTINE HILL 104 c 

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