Michael Hill International Limited
Annual Report 2022

Plain-text annual report

ANNUAL REPORT 2022 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 are made. Forward-looking statements include, among other things, statements addressing matters such as the Group’s future results of operations; financial condition; working capital, cash flows and capital expenditures; and business strategy, plans and objectives for future operations and events, including those relating to ongoing operational and strategic reviews, expansion into new markets, future product launches, points of sale and production facilities. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the Group’s actual results, performance, operations or achievements or industry results, to differ materially from any future results, performance, operations or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other 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). 2 MICHAEL HILL | 2022 ANNUAL REPORT CONTENTS 5 6 Company Profile Letter from the Chair 9 10 Key Facts Performance 7 CEO’s Message 12 Trend Statement 38 Our Executive Team 41 Directors’ Report 54 Remuneration Report 8 Performance Highlights 14 Sustainability 67 Auditor’s Independence Declaration 69 Financial Statements 131 Corporate Directory 124 Directors’ Declaration 125 Independent Auditor’s Report 129 Additional Information The Directors are pleased to present the annual report of Michael Hill International Limited and its subsidiaries for the year ended 26 June 2022. MICHAEL HILL | 2022 ANNUAL REPORT 3 4 MICHAEL HILL | 2022 ANNUAL REPORT COMPANY PROFILE Michael Hill is a market leading, premium jewellery brand, operating a network of 280 stores across Australia, New Zealand and Canada, with multiple international digital platforms. The first Michael Hill store opened in 1979 when Sir Retail Fundamentals, continual Product Evolution, Michael Hill and his wife, Lady Christine Hill launched exploring New Territories & Services, maintaining a Cost their unique retail jewellery formula in Whangarei, on Conscious Culture and with a focus on Sustainability. the North Island of New Zealand. Around the world, the Group employs over 2,500 With engaging store designs, a product range devoted employees across retail sales, manufacturing and exclusively to accessible jewellery and the clever use corporate roles. As of 26 June 2022, the Group of high impact advertising, Michael Hill rapidly gained operates 147 stores in Australia, 48 in New Zealand and popularity and rose to national prominence. 85 stores in Canada. In 2016, Michael Hill moved its primary stock exchange From 1979 to the present day, and as we look to the listing to the Australian Securities Exchange and future, Michael Hill is dedicated to creating quality maintains a secondary listing on the New Zealand Stock jewellery for our customers to celebrate the key Exchange (ASX/NZX: MHJ). moments in their lives. Over the last three years, the Company has been on a At Michael Hill, we are committed to becoming a transformative journey reshaping many aspects of the more sustainable and ethically responsible business, business, underpinned by a clearly defined strategic protecting our eco-system and contributing to agenda to elevate the brand and drive growth. The the communities we serve in meaningful ways, for strategic framework is customer-led and continually generations to come. evolving as we adapt to the ever-changing landscape of retail – with a focus on elevating our Brand, growing our Loyalty membership, enhancing and innovating our Digital & Omni-channel capabilities, refining our Information on our corporate governance policies and practices, including our Corporate Governance Statement, is available on our Investor Centre website at investor.michaelhill.com Our purpose: The people behind the moments that matter MICHAEL HILL | 2022 ANNUAL REPORT 5 LETTER FROM THE CHAIR ANOTHER RECORD PERFORMANCE DESPITE DISRUPTIONS TO TRADE FY22 has been another remarkable year at Michael Hill as we delivered record results. I am extremely proud of the commitment, resilience and creativity of Daniel and the entire team as they continued to drive business performance, strategically transform operations, and progressively elevate the brand to expand our addressable market. All this has been achieved whilst navigating through the evolving Covid pandemic and complex economic conditions. Our Environmental, Social and Governance (ESG) vision centered around three key pillars: People, Product and Planet. We are committed to bringing about change in how we operate in order to drive more sustainable practices that benefit our customers, our planet and future generations. We also want to demonstrate and share these practices with the wider jewellery industry to help all participants move toward a more sustainable, innovative and responsible future. CAPITAL MANAGEMENT results over the last two years, despite these challenges, Reflecting the strength of the balance sheet and strong demonstrate the resilience of our business, strength of our underlying operating results, the business undertook a brand, loyalty of our customers and determination of our team. We continue to have confidence in the momentum of detailed capital management review during the year. One of the outputs was the release of a new Dividend Distribution the business and our ability to adapt and thrive in the face of Policy which sets a target dividend payout range of 50% to ongoing uncertainties. 75% of adjusted NPAT. HERITAGE BRAND UNDERPINNED BY CREATIVE FOUNDERS We were pleased to declare a final dividend of AU4.0 cents per share, bringing our total dividend for the year to AU7.5 cents per share, representing ~67% of adjusted annual NPAT, at As the business continues its journey to evolve and elevate our the higher end of the target range. Subject to the Company’s brand, the legacy of our creative founders remains extremely relevant as we showcase our artisanal craftsmanship, quality ongoing trading performance and growth plans, the Board’s intention is for dividends to remain at the higher end of the products and innovative designs. These core elements target range. along with Sir Michael Hill and Lady Christine Hill’s values, insightful vision and infectious passion continue to be infused throughout every facet of the business and are fundamental to the continued success of our business. COMMITMENT TO OUR PEOPLE AND OUR VALUES At Michael Hill, we recognise that our business is our people. Furthermore, we announced the launch of an on-market share buy-back of up to 5% of the Company’s issued capital, funded from existing cash reserves. The buy-back is expected to commence in mid-September 2022. In addition to the above, the Company still retains sufficient balance sheet strength and cash reserves for deployment into new earnings accretive organic growth initiatives and to also pursue acquisition opportunities in the jewellery sector, which We continually strive to be a workplace where all team members meet our strict strategic and investment criteria. feel valued, appreciated, and encouraged to be their brilliant self. Our values: We care, We create outstanding experiences, We are professional, and We are inclusive and diverse – are truly embraced by all areas of the business and are key to attracting and retaining our high-performance team. Our employee engagement survey is a key source of insights into our cultural wellbeing and employees’ connection with our purpose and ambition at Michael Hill. Impressively, once again, Michael Hill recorded another exceptionally high global engagement score of 83%, which is a credit to the strong leadership that has inspired a collaborative and energetic culture. FOCUS ON SUSTAINABILITY We are passionate about identifying opportunities to make Michael Hill more sustainable and I am proud of the progress we are making. We recently published our new 2030 6 MICHAEL HILL | 2022 ANNUAL REPORT IN CONCLUSION As I reflect on FY22 and my first full year as Chair, I am honoured to be surrounded by a very high calibre, stable Board of Directors and Executive Team that are all aligned on the strategic direction for Michael Hill. We look forward to continuing the positive momentum of the business, and focusing on growth initiatives that will strengthen our market position and financial performance. Regards, Robert Fyfe Chair CEO’S MESSAGE PIVOTING FROM TRANSFORMATION TO GROWTH I am absolutely delighted by our outstanding results for FY22, delivering record sales, gross margin, and profit, especially considering the disruptions we faced across Australia and and customer engagement has delivered considerable increases in gross margin, conversion rates and ATV. An unwavering focus on people and performance, operational excellence, and effective labour management underpin our retail productivity which has seen significant lifts in all markets. New Zealand in the first half. A key highlight was our ability to Product Evolution: Product evolution is at the centre of a grow profit faster than sales, underpinned by continued gross customer-led retail strategy, and is critical to achieve sales margin expansion. All facets of the business came together to and margin growth. Elevated quality and craftmanship are drive this result, but I would particularly like to highlight the essential to our aspirational brand journey, and this will be evolution of our product, the outstanding performance from delivered through the evolution of our supply chain, and our stores, the continued acceleration of our digital channels further investment in the artisanal capabilities of our Australian and the key role that our loyalty program now plays in driving manufacturing facility. sales and margin growth. These results demonstrate that we have successfully shifted the emphasis from transformation to growth, as we continue to elevate and modernise the Michael Hill brand. I am particularly proud of our people and the culture that we continue to build at Michael Hill – a high performance team across all levels, with an energy and passion that underpins our growth agenda. This culture is best evidenced by the sensational performance this year from our Canadian team delivering huge lifts in productivity, sales and margin. STRATEGIC UPDATE New Territories & Services: As the Company pivots from transformation to growth, the opportunity to stretch the brand into new territories and services is a key focus. Through the course of the year, the Company has executed its marketplace strategy across its three core segments, partnering with The Iconic in Australia and New Zealand, and The Bay in Canada. Sustainability: Michael Hill is elevating its strategic focus on Environmental, Social and Governance, with the launch of our 2030 vision centred around three key pillars: People, Product and Planet. In addition, laboratory created diamonds are gaining momentum in the business, delivering increased quality and choice while providing customers with a certified Much of the Company’s strong performance can be attributed Sustainable and Climate Neutral choice. For more information to the strategic transformation and elevation of the brand, on our 2030 vision, please refer to our sustainability update in along with overarching emphasis on sales and margin growth. this report. The strategic framework underpins the future growth of the business, is customer-led and continually evolving. EXECUTIVE LEADERSHIP TEAM Brand & Loyalty: The elevation of the Michael Hill brand has been led by highly engaging and emotive marketing campaigns with an emphasis on product, quality and craft, which is leading the transition away from price and promotion, towards emotional long-term customer relationships. Simultaneously, the Brilliance by Michael Hill loyalty program is proving to be a key lever for growth and customer engagement and now has close to 1.5 million members. Digital & Omni-Channel: Michael Hill’s digital transformation continues to gather pace delivering another record year in FY22. Strong performances on the Company’s direct to consumer websites were driven by improved customer experience, higher traffic and increased conversion rates. The successful deployment of “click and collect” and “ship-from- store”, now available in all stores globally, enhanced our omni- channel capabilities as the Company continues its customer- Our strategic roadmap has been carefully planned, articulated and led by our highly cohesive and collaborative Executive Leadership Team. I’m particularly proud of my entire team, the breadth and depth of their knowledge spreads across a wide range of retail, digital and technology capabilities, brand and loyalty expertise, along with an elevated focus on performance and culture, and of course financial acumen. Importantly, the business will continue its growth agenda, elevating our core business and at the same time, deploying organic growth initiatives, and pursuing acquisition opportunities in the jewellery sector. Regards, led digital transformation journey. Regards, Retail Fundamentals: Bricks and mortar retail is at the core of the Michael Hill business, driving the majority of sales. Elevating the in-store experience across visual presentation Daniel Bracken Managing Director and CEO MICHAEL HILL | 2022 ANNUAL REPORT 7 PERFORMANCE HIGHLIGHTS KEY FINANCIAL RESULTS Statutory net profit after tax increased by 13.9% to $46.7M Group gross margin increased by 200 bps to 64.7% Healthy inventory levels supporting elevated sales at $181.5M Earnings before interest & tax (EBIT) increased by 9.8% to $73.2M OPERATIONAL PERFORMANCE Group operating revenue increased 7.0% to $595.2M Strong balance sheet, with a closing cash position of $95.8M Digital sales increased by to a record 23% $42M One new store opened and six under-performing stores were closed 1.4M+ Brilliance by Michael Hill members Extensive H1 temporary store closures culminated in 10,020 lost trading days Group same store sales were up 8.0% for the year New pure play brand Medley delivered over $1M in sales for its first full year of trade 8 MICHAEL HILL | 2022 ANNUAL REPORT KEY FACTS TRADING RESULTS DIVIDENDS (including final dividend) % Change 2022 $000’s 2021 $000’s Restated1 Group revenue 7.0% 595,210 556,486 Gross profit 10.3% 384,826 348,916 Earnings before interest & tax (EBIT)* 9.8% 73,236 66,672 2022 2021 Restated1 Per ordinary share AU7.5c AU4.5c Times covered by net profit after tax 1.60 2.35 Comparable EBIT* 11.1% 62,870 56,594 SHARE PRICE AT YEAR END 11.2% 65,703 59,081 13.9% 46,712 41,015 Share price (ASX) AU$0.93 AU$0.83 2022 2021 (17.0%) 111,574 134,497 KEY INVESTOR RATIOS Net profit before tax (NPBT) Net profit after tax (NPAT) Net cash inflow from operating activities FINANCIAL POSITION % Change 2022 $000’s 2021 $000’s Restated1 0.9% 11,388 11,285 Contributed equity 388,285,374 ordinary shares Total equity Total assets 11.9% 195,095 174,313 4.5% 511,179 489,023 Net (debt)/cash 32.5% 95,844 72,361 Capital expenditure 123.1% 22,471 10,072 Australia KEY RATIOS New Zealand Canada Group 2022 2021 Restated1 Basic earnings per share Diluted earnings per share EBIT to sales Return on average total assets 2022 12.03c 11.86c 12.3% 2021 Restated1 10.57c 10.53c 12.0% 9.3% 8.2% SAME STORE SALES* (in local currency) 2022 4.2% 8.9% 11.3% 8.0% 2021 13.0% 7.1% 6.8% 8.6% Return on average shareholders funds 25.3% 25.0% STORE NUMBERS Gross margin 64.7% 62.7% 2022 2021 Interest expense cover (times) 9.7 8.8 Australia Equity ratio 38.2% 35.6% New Zealand Working capital ratio Current ratio 3.7 : 1 1.8 : 1 3.7 : 1 1.8 : 1 Canada Total stores 147 48 85 280 150 49 86 285 * EBIT, Comparable EBIT and Same Store Sales are Non-IFRS information and are unaudited. Please refer to page 48 for an explanation of Non-IFRS information and a reconciliation of EBIT and Comparable EBIT. 1 Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. MICHAEL HILL | 2022 ANNUAL REPORT 9 PERFORMANCE Return on average assets 9.3% Net profit from operating activities after tax up 13.9% Ordinary dividend % AU$ MILLIONS AU CENTS PER SHARE 9.3 8.2 8.2 46.7 41.0 7.5 4.3 31.8 16.5 0.7 3.1 5.0 4.0 4.5 1.5 F Y18 F Y19 FY 20 FY2 1 FY2 2 FY18 FY19 FY20 FY 21 FY 22 FY18 FY19 FY20 FY 21 FY22 Inventory AU$ MILLIONS EBITDA up 9.1% Group revenue up 7.0% AU$ MILLIONS AU$ MILLIONS 192.1 179.5 178.7 181.5 171.2 64.5 69.7 40.5 125.2 114.7 575.5 569.5 595.2 556.5 492.1 20K 10K 10K F Y18 F Y19 FY 20 FY2 1 FY2 2 FY18 FY19 FY20 FY 21 FY 22 FY18 FY19 FY20 FY 21 FY22 Lost trading days 10 MICHAEL HILL | 2022 ANNUAL REPORT Return on average shareholders’ funds 25.3% Digital sales up 23.4% Gross margin % AU$ MILLIONS % 25.0% 25.3% 42.0 34.0 64.7 24.7 16.0 11.1 62.7 62.0 60.6 60.0 17.4% 9.4% 1.9% F Y18 F Y19 F Y 20 FY2 1 FY2 2 FY18 FY19 FY20 FY 21 FY 22 FY18 FY19 FY20 FY 21 F Y22 Revenue by country YEAR ENDED 26 JUNE 2022 CANADA 29% NEW ZEALAND 20% AUSTRALIA 51% MICHAEL HILL | 2022 ANNUAL REPORT 11 TREND STATEMENT TREND STATEMENT Financial performance 2022 $’000 2021 $’000 RESTATED 2020 $’000 2019 $’000 2018 $’000 Group revenue 595,210 556,486 492,060 569,500 575,539 125,180 114,733 69,690 40,481 64,481 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 during the year Financial position Cash Inventories Other current assets Total current assets Other non-current assets Deferred tax assets Total tangible assets Right-of-use assets Intangible assets Total assets 51,944 73,236 7,533 65,703 18,991 46,712 111,574 25,239 2022 $’000 95,844 181,539 14,749 48,061 66,672 7,591 59,081 18,066 41,015 55,611 14,079 9,594 4,485 1,426 3,059 134,497 83,699 5,817 2020 $’000 11,636 2021 $’000 RESTATED 72,361 171,246 27,463 19,366 21,115 2,304 18,811 2,313 16,498 38,969 19,365 2019 $’000 18,694 45,787 2,680 43,107 11,342 31,765 54,893 19,371 2018 $’000 11,204 7,923 7,220 178,742 179,503 192,074 31,007 35,878 29,314 292,132 271,070 220,953 223,304 228,608 42,121 58,552 37,729 68,329 57,857 74,468 72,742 67,708 72,219 68,022 392,805 377,128 353,278 363,754 368,849 107,385 105,882 10,989 6,013 123,911 24,429 – – 15,439 12,626 511,179 489,023 501,618 379,193 381,475 Total current liabilities 158,596 151,522 159,405 105,130 108,710 Non-current borrowings Lease liabilities Other long term liabilities Total liabilities Net assets – 91,386 66,102 – 10,681 32,704 35,213 99,382 63,806 115,848 – – 61,878 64,607 62,627 316,084 314,710 347,812 202,441 206,550 195,095 174,313 153,806 176,752 174,925 Reserves and retained profits 183,707 163,028 142,790 165,768 164,659 Paid up capital 11,388 11,285 11,016 10,984 10,266 Total shareholder equity 195,095 174,313 153,806 176,752 174,925 Basic earnings per share Diluted earnings per share Dividends declared per share (interim) Dividends declared per share (final) Net tangible asset backing 12.11c 11.93c AU3.5c AU4.0c $0.20 10.57c 10.53c AU1.5c AU3.0c $0.16 0.79c 0.79c AU1.5c – $0.01 4.26c 4.25c AU2.5c AU1.5c $0.42 8.20c 8.19c AU2.5c AU2.5c $0.42 12 MICHAEL HILL | 2022 ANNUAL REPORT 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 Net borrowings to equity Equity ratio 2022 21.0% 12.3% 7.8% 14.3% 25.3% 9.3% 3.7 : 1 1.8 : 1 9.7 28.9% (49.1%) 38.2% 2021 RESTATED 20.6% 12.0% 7.4% 13.6% 25.0% 8.2% 3.7 : 1 1.8 : 1 8.8 30.6% (41.5%) 35.6% 2020 14.2% 2.9% 0.6% 2.8% 1.9% 0.7% 3.4 : 1 1.4 : 1 1.5 31.8% (0.3%) 30.7% 2019 7.1% 3.7% 2.9% 5.6% 9.4% 4.3% 5.0 : 1 2.1 : 1 8.6 12.3% 23.5% 46.6% 2018 11.2% 8.0% 5.5% 12.0% 17.4% 8.2% 4.6 : 1 2.1 : 1 17.0 26.3% 27.7% 45.9% Shares issued at year end excl Treasury 388,285,374 388,142,149 387,769,105 387,750,000 387,438,513 Exchange rate for translating: - New Zealand results - Canadian results Store numbers Australia New Zealand Canada Number of Michael Hill stores 1.06 0.92 2022 147 48 85 280 1.07 0.95 1.04 0.90 2021 2020 150 49 86 285 155 49 86 290 1.06 0.95 2019 167 52 86 305 1.09 0.98 2018 171 52 83 306 “I’m absolutely delighted by our outstanding FY22 results, delivering record sales, gross margin, and profit.” DANIEL BRACKEN, MANAGING DIRECTOR & CEO MICHAEL HILL | 2022 ANNUAL REPORT 13 SUSTAINABILITY MICHAEL HILL - THE JEWELLER THAT CARES At Michael Hill, we are evolving our strategic sustainability direction by mapping out a 2030 vision for our three key pillars – People, Product and Planet. We have made significant progress on our sustainability journey in previous years, however with a new structure and rigor around roadmaps for delivery, we have established a comprehensive set of goals to align with global sustainability efforts. Our new 2030 vision for environmental, social and governance “ESG” relevant issues is to transform how we source and manufacture our products, impact our planet and improve people’s lives, and we have mapped out a new strategic architecture, with supporting pillars and goals we are striving to achieve by 2030. Through these goals, we are committed to bringing change in how we operate to drive sustainable practices that benefit our customers, our planet and future generations. Through our internal operations, we aim to move our business and the broader jewellery industry toward a more sustainable, innovative and responsible future. We plan to have an active voice in key industry sectors, while educating our customers on the choices they can make as consumers to support and drive our journey. With our new strategic focus, combined with great governance and direction we look forward to providing updates on our progress regularly. We recognise these goals require consistent and long-term focus and efforts – by us, by others in the retail and jewellery industry, by customers, and by governments – however our commitment to striving for our goals is unwavering. 14 MICHAEL HILL | 2022 ANNUAL REPORT THE MICHAEL HILL SUSTAINABILITY VISION & STRATEGIC DIRECTION Our ESG vision is to: transform how we source and manufacture our products, impact our planet and improve people’s lives. We aim to move our business and the broader jewellery industry towards a more sustainable, innovative, and responsible future. This strategic framework outlines the goals Michaell Hill is working to achieve by 2030. These goals will be delivered through a structured framework of cross functional team members with a clear governance program, linking back to our Board. An internal ESG committee has been created, which includes the CEO and is accountable for deciding on strategic orientations and accountability for progress. This committee will feed into the Board to update on progress and strategic information and decisions and gain strategic endorsement where required. Responsible Suppliers 100% of all suppliers meet our expectations on their social and environmental impacts [by 2030] PEOPLE We will improve the lives of people across our value chain Empowering Women Deliver initiatives and develop partnerships focused on empowering and supporting over 100,000 women [by 2030] Great Place to Work Michael Hill will maintain a leading workforce engagement score of greater than 80% [by 2030] Transparency 100% use of certified sustainable or responsibly sourced natural diamonds, coloured gemstones and cultured pearls [by 2030] PRODUCT 100% of our products will be sustainable, responsible or circular Metal Stewardship 100% of Michael Hill’s products will be made from certified recycled, local, artisanal or responsibly sourced metals [by 2025] Innovation We will pioneer an innovation hub to champion and integrate jewellery circularity, product innovation and laboratory created diamonds [by 2024] Zero Carbon Operations Acheive net zero carbon operations (scopes 1 & 2) [by 2025] PLANET We will nurture nature and reduce our negative impacts to net zero Nature Positive Contributing to the restoration and conservation of the natural environment in our key markets [by 2025] Eliminate Waste We will send zero waste to landfill and eliminate single use plastic from our packaging [by 2025] MICHAEL HILL | 2022 ANNUAL REPORT 15 DRIVING INDUSTRY CHANGE The jewellery industry supply chain is long and complex. The materials used – namely precious metals and gemstones – come from a variety of sources, all with varying locations, risks, and production methods. Multiple stakeholders are engaged throughout the Michael Hill supply chain to gain confidence and assurance over sourcing practices for materials and to ensure sourcing practices are in accordance with Michael Hill’s sustainability strategy. Some suppliers have the knowledge and capacity to meet these demands and may even be further ahead on their journey than Michael Hill, however others will have limited knowledge and little to no capacity and require drastic industry change to make this happen. At Michael Hill, we want to be a part of the solution, advocating for change within our industry, setting high standards and expectations of our suppliers. We will become a more active member of the jewellery community, working with partners, suppliers and other participants in the jewellery industry generally. Our challenge will be to use our voice to advocate for industry change relating to sustainability through industry relationships, memberships, and products we sell to our customers. We will work throughout our entire supply chain to advocate for industry change. RESPONSIBLE JEWELLERY COUNCIL The Responsible Jewellery Council (RJC) is the jewellery and watch industry’s leading standard setting organisation. Membership requires companies to demonstrate compliance with rigorous codes of practices covering all aspects of the business from sourcing and procurement to manufacturing and selling of jewellery, with a key focus on human rights. Michael Hill is proud to continue our long standing RJC membership, with our pending re-certification to 2025 being a major milestone in our sustainability journey, demonstrating our commitment to responsible jewellery and promoting trust and transparency in our supply chains. Whilst we closely monitor ongoing developments with the RJC and the broader global impacts on the jewellery industry supply chains, Michael Hill continues to endorse the RJC’s Code of Practices as the benchmark for our business. As part of our pending recertification, Michael Hill made a provenance claim relating to the De Beers Code of Origin range. The range includes diamonds ethically sourced from the De Beers Code of Origin Trusted Source Program, reflecting a dedication to social and environmental responsibility. Michael Hill plans to make further provenance claims in support of our sustainability strategy regarding responsible sourcing of Michael Hill products. 16 MICHAEL HILL | 2022 ANNUAL REPORT “We want to be a part of the solution, advocating for change within our industry, setting high standards and expectations of our suppliers.” MICHAEL HILL | 2022 ANNUAL REPORT 17 FY22 SUSTAINABILITY HIGHLIGHTS PEOPLE $162,000+ Raised for Dress for Success in AU, NZ and CA Team members participated in our volunteering trial (420 team volunteering hours, equalling $19,131 volunteering salary hours donated) 140 PRODUCT Exceptionally high global engagement score at 83% 17% of our international product sold was made in Australia PLANET Laboratory created diamonds are Certified Sustainability Rated and Climate Neutral Launched DeBeers Code of Origin Trusted Source program – our first traceable diamond range Environmentally considerate head office – a new 99kw solar panel system installed at Head office 100% recyclable e-commerce packaging launched 340,000+ 18 MICHAEL HILL | 2022 ANNUAL REPORT Products repaired, preventing waste and extending product lifespan PEOPLE People are the heart of Michael Hill and are the reason we work is front of mind in all we do. The company’s values, exist. Across our entire value chain – our customers, our purpose, leadership promise, sustainability and aspirational suppliers, our team and our communities, people are vital to brand journeys are key enablers to attract and retain a new bringing our brand to life. At Michael Hill, we continually strive to be a workplace where all team members feel consistently valued, appreciated, and encouraged to be their brilliant selves. We recognise generation of team members. Our revitalised Employee Value Proposition, linked to our core theme of ‘The People Behind The Moments That Matter’ aims to showcase our strengths as an employer. that a company’s purpose, behaviour and its values is a key Michael Hill has a goal to maintain a leading workforce component of attracting talent into the organisation and to engagement score of greater than 80%. Our consistent focus keeping our talent engaged. Further to this, we see it as a privilege to be able to help others where global challenges exist. We have a focus on empowering women in need who live in our communities and are committed to ensuring anyone who is connected to our supply chain is responsible and meet our expectations on social impact. Our 2030 strategic direction shows our focus in our People pillar area, with the aim that we will improve the lives of people across our value chain. To achieve this goal, three key areas of focus are crucial – Responsible Suppliers, Empowering Women and being a Great Place to Work. GREAT PLACE TO WORK on our team member experience through their journey with us, our leadership behaviours and our culture are key drivers of engagement. We seek feedback from our team members, and we listen to the feedback. Taking action to do and to improve is paramount to building trust. We want our team members to speak positively about us, to stay and grow with us and to strive to deliver for our customers and each other. This cultural leading focus is pivotal to feelings of belonging and enthusiasm for who we are, what we do and why we do it. Our leading-edge recruitment processes are key to providing potential candidates with a positive experience and a human touch to enhance their journey into Michael Hill. We also utilise cutting edge recruitment tools to ensure we can secure quality talent quickly. Tools such as video interviewing, psychometric testing, online reference checking all help build our capability and enable the company to look for candidates Our high levels of workforce engagement, together with how who demonstrate qualities that will make them successful in positive our team feel about Michael Hill as their employer, their roles and fit with our culture. showcase that we are a great place to work. Even so, 2022 has been dominated worldwide by a tight talent market which poses challenges to retention and attraction. To combat the challenging labour market, Michael Hill has continued to focus on internal career progression and providing rewarding development and recognition opportunities to our people. Our team’s health, safety, security and wellbeing whilst at Our people practices will ensure we continue to remain competitive, defend against skill shortages and decrease team turnover. We desire to be known internally and externally for providing a workplace environment and culture that consistently delivers on maintaining our leading engagement goal of greater than 80%. MICHAEL HILL | 2022 ANNUAL REPORT 19 EMPLOYEE VALUE PROPOSITION Our team are the people behind the moments that matter. They mark the moments that create the story of our customers’ lives. Our collaborative and supportive environment creates high performance outcomes. We are a company full of the brightest, most passionate and engaged people. We desire for our people to love the culture, embrace our purpose and see it as unique and special to work at Michael Hill. We’re a supportive, inclusive, collaborative, fun company committed to supporting career progression and long-term development, by providing the tools to help our team progress and celebrating their success when they do. We have best in class people practices including robust training that teach our team how to achieve their goals and unique incentive programs. We attract, retain and develop high performing people because of our collaborative and supportive processes and structures: training protocols, incentive programs, loyalty programs, reward and recognition. We value everyone’s point of view, and our people can be sure that their voice will be heard. OUR TEAM STATISTICS As at 26th June 2022 employee numbers across our markets out of a total 2554 1522 AUSTRALIA 679 353 CANADA NEW ZEA LAN D Gender Split Age Distribution 736 PART TIME 515 CAS UA L 9 27 FU LL TIME Female 85% 2178 FEMALE EMPLOYEES 3 6 CAS- UAL 36 PART T IME 30 0 FU L L TI ME Male 15% 372 MALE EMPLOYEES 4 EMPLOYEES HAVE NOT PROVIDED GEN D ER INFORMATION 20 MICHAEL HILL | 2022 ANNUAL REPORT 1185 AGED 30-50 732 AGED >50 634 AGED <30 3 UNSPECIFIED AGE EMPLOYEE ENGAGEMENT We pride ourselves on having a highly engaged and enabled workforce who love what they do and where they work. Our Pulse Engagement Survey in 2022 was completed by 66% of our workforce and resulted in an engagement score of 83%. This positive result sets us apart from the global retail industry average of 72% and confirms that Michael Hill remains an employer of choice and is a great place to work. Engagement Participation Key N EGATIVE N EUTRAL P OSI T IVE 83% 66% Australia Canada New Zealand 83% 86% 78% Our results also show that across all length of service demographics we continue to outperform against the global retail average. Engagement Scores by Length of Service < 1 YEA RS 1-2 YEARS 3 -5 YEARS 6 -1 0 YEARS 11 -1 5 YEARS 1 6-20 YEA RS >20 YEARS 0% 20% 40% 60% 86% 84% 80% 78% 76% 75% 80% 93% 100% In 2022, as a further way to listen to our team members, we introduced an engagement survey for our seasonal casuals. This enabled us to measure the experience of our seasonal team members who are a key enabler of quarter two performance. The survey asked our seasonal casuals to consider our recruitment process, engagement, and onboarding experience. We were pleased to see that these seasonal team members were also highly engaged, with a score of 84%. MICHAEL HILL | 2022 ANNUAL REPORT 21 INVESTING IN OUR TEAM DIVERSITY & INCLUSION Our team at Michael Hill are here to create exceptional Michael Hill recognises its talented and diverse workforce experiences – and we don’t do that with mediocrity. We as a key competitive advantage. Our business performance continually evolve, we keep learning and we grow, and reflects the quality and skill of our people and behaviours that none of that can happen without our people. At Michael Hill, are aligned to our Group Values. We are firmly committed we have team members across three countries, and they to developing policies, practices and ways of working that are at the heart of everything we do. We encourage each support diversity. member of our team to bring their own individual talents and perspectives to work every day. We are aligned in our business purpose to be the People Behind the Moments That Matter and live with our values at our core: we care, we create exceptional experiences, we are inclusive and diverse and we are professional. We believe Michael Hill isn’t just a great place to work, it’s a place to do great things. Central to achieving this goal is an inclusive work environment and culture that allows team members to contribute to their full potential, through recognising and supporting their diverse strengths, experiences and needs. We achieve this by educating our teams, sharing experiences and analysing metrics of diversity across the business. We’ve continued to work on building a comprehensive comparative analysis We invest in our team’s learning and focus on development framework to enable deeper understanding of quantitative through experiences and empowerment, as we know our and qualitative diversity and inclusion metrics across the future leaders are among us. This focus on development company. This includes measuring, tracking, and reporting unlocks great potential in our workforce which is ready and annually on markers such as gender distribution, gender able to respond to our customers’ needs. We create bespoke wage gap, generational spread and employee engagement. learning experiences for our teams, including our 12-week This data is used to inform our strategy and areas of focus onboarding Stepping Stones program to provide all the for the future. Together, we will continue to build an inclusive detail retail team members need to know regarding product, culture that encourages, supports, and celebrates the systems, and sales in an interactive and human-centred diverse voices of our team members; a culture which fuels approach. We work with our vendors to ensure our product innovation, and creates closer connections with our customers training is aligned with industry excellence and our teams are and our communities. equipped with the knowledge they need to have the most meaningful and informed connections with our customers. We encourage our people to own their development and take charge of their careers. Michael Hill’s Diversity and Inclusion Committee has continued its work through the year and is formed with a diverse representation of team members from our global workforce. The Committee is dedicated to and is passionate about Our leaders at Michael Hill are trained and empowered to lead elevating our Diversity and Inclusion strategy in a variety of and coach their teams through an in house built coaching ways, including a calendar of cultural, world and religious platform and are taught to have valuable skills based coaching days to celebrate the diversity within our organisation and conversations through our leadership workshops. communities, through awareness raising and educational To develop our people in all areas of life, we have invested in LinkedIn Learning for many roles in the business in FY22, with the view to include all team members in the next financial year. This allows our team to continue growing our learning culture, initiatives. The Diversity and Inclusion Committee promotes educational content and works with LinkedIn Learning to promote and elevate our team’s perspective and understanding of our teams and communities we live in. where, when and how they like and to develop the way they In 2022, Michael Hill continued to make good progress in our want, while building an ongoing skillset with flexibility in this holistic Diversity and Inclusion agenda, with a key focus on approach for all. calendar events including International Women’s Day, Pride Month, World Mental Health Day and International Day of People with Disabilities. “ Michael Hill isn’t just a great place to work, it’s a place to do great things.” 22 MICHAEL HILL | 2022 ANNUAL REPORT GENDER EQUALITY At Michael Hill we are committed to fostering a gender equal workplace and providing opportunities for women to thrive at all levels of the business. 84% of our global workforce is female, 43% of Executive Leadership Team is female, and 64% of our global leadership positions are held by females. For this reason, it was important that International Women’s Day was celebrated across all three countries Michael Hill operates in. Teams worked together to pledge ways to increase our allyship and continue to ‘Break the Bias’ against females in the workforce. We shared learnings and experiences in a fireside chat with our CEO and key senior leaders and encouraged team members to continue to learn how to challenge their own biases which make an impact in their lives. In June 2022, Michael Hill embraced and celebrated Pride members, and trained our team on the importance of using inclusive language and gender pronouns in the workplace. We also used the gravity of PRIDE Month to launch ‘Room For All’, Michael Hill’s Diversity and Inclusion podcast. The podcast takes a closer look into the lives and experiences of our team members at Michael Hill. Each month, we celebrate our commonalities that bring us together as a global team, but aim to learn more about our cultural backgrounds, religions, sexuality, mental health, abilities and all of the differences that make us uniquely us. The next year will see the continuation of Diversity and Inclusion program of work. The following initiatives will be implemented in the next financial year: • Inclusion of diversity training in leadership development programs Month with all team members. It’s important that we create a • Ongoing reporting and review of diversity metrics space where our team and customers feel safe and accepted • Development of employee resource groups’ strategy as their true and authentic selves. As such we reaffirmed our solidarity with the Pride community, hosted lunchtime social events, challenged our teams to continue their learning about the history of pride and how to support LGBTQI+ team • Increase accessibility requirements in line with health and wellbeing strategy • Expand our Diversity and Inclusion strategy on external platforms and the Michael Hill careers website MICHAEL HILL | 2022 ANNUAL REPORT 23 24 MICHAEL HILL | 2022 ANNUAL REPORT HEALTH, SAFETY AND SECURITY At Michael Hill, we are accountable for creating and maintaining healthy, safe and secure work environments for our team members, customers and visitors who interact with our business. We know that our success depends on our people, and we are committed to ensuring the physical and mental health, safety and security of everyone who comes to work, or visits our stores. We continue to support our team members through flexible work arrangements as we journey out of COVID-19 and we also dealt with impacts of natural disasters collaboratively as a team. Key achievements across health, safety and security in FY22 include: • No non-conformances from the Responsible Jewellery Council audit • Continued downward trends of lost time and significant incident rates. LTIFR down to 3.22 compared to 9.50 in FY2018, and SIFR down to 1.34 compared to 6.04 in FY2018 – Lost Time Injury Frequency Rate - Total number of W/Comp Claimable Incidents where > 1 Day lost from work / Total # of Hours Worked x 1,000,000. LTIFR Industry rate 3.7 – Significant Incident Frequency Rate - W/Comp Claimable incident where > 5 days lost from work / Total # of Hours Worked x 1,000,000. SIFR Industry Rate 6.4 • Achieved a 22% participation rate for flu vaccinations across AUS & NZ • 16% of our workforce participated in our 6 week – 15 Minute Exercise Challenge • Obtained an annual 3.4% utilisation rate of our Employee Assistance Program (EAP) compared to an industry rate of 1.3% • Upgraded CCTV and / or intrusion systems across 30 stores in AUS, 15 stores in NZ and 6 stores in Canada • Rolled out Mental Health First Aid Training to 34 of our retail leaders • Responded to increased criminal activity across the North Island of New Zealand by improving pack down procedures at end of trade, installing fog cannons and pendant alarms into nine ‘hot spot’ stores, and improved training on requirements and expectations regarding safety and security EMPOWERING WOMEN WITH DRESS FOR SUCCESS Gender equality is not only a fundamental human right, but a necessary foundation for a peaceful, prosperous, and sustainable world. There has been progress over the last decades: more girls are going to school, fewer girls are forced into early marriage, more women are serving in parliament and positions of leadership, and laws are being reformed to advance gender equality. Despite these gains, many global aimed at improving the lives of women, through enabling opportunities. By 2030 we aim to deliver initiatives and programs focused on empowering and supporting over 100,000 women. This year, Michael Hill was again proud to support Dress for Success in empowering women. Dress for Success is a global not-for-profit organisation that empowers women to achieve economic independence and improve their lives; by providing a network of support, professional attire, and the development tools to thrive in work and in life, and operate in our three markets, Australia, New Zealand and Canada. Coinciding with International Women’s Day in March, Michael Hill launched a new campaign to raise funds for Dress for Success with various activations: “ Michael Hill’s philanthropic efforts are aimed at improving the lives of women, through enabling opportunities.” DRESS FOR SUCCESS SUPPORT OFFICE VOLUNTEERING PROGRAM: Michael Hill launched its first ever paid volunteering program with Dress for Success where head office team members were given the opportunity to volunteer at a “working bee” at Dress for Success in Brisbane. This trial volunteering program saw team members unpack donated items, clean displays, and sort clothes racks to assist Dress for Success in their daily operations. • With over 140 team members taking up the trial opportunity, Michael Hill successfully donated over 420 hours, worth $19,131 of paid volunteering hours to assist Dress for Success Brisbane • Due to the success of our volunteering trial in FY22, we are looking to permanently introduce volunteering for our head challenges remain. office team members With over 85% of the people working at Michael Hill identifying as female, and the majority of our customer base identifying as women, Michael Hill’s philanthropic efforts are • One day of paid community service leave per calendar year is planned to be available to eligible Australian retail store-based team members. MICHAEL HILL | 2022 ANNUAL REPORT 25 DRESS FOR SUCCESS EARRINGS SALES: AUCTION FOR ACTION: In March – June we asked customers to help us support At times through our business operations, products can Dress for Success in their mission to empower women, by become impaired or damaged, unable to be sold to purchasing a pair of beautiful 6mm button cultured freshwater customers. We saw this as an opportunity to raise further pearl earrings in sterling silver for $25. For every purchase funds for Dress for Success with these impaired products Michael Hill donated $15 to Dress for Success raising over being repaired by our manufacturing team and auctioned to $155,000 to be split across Australian, New Zealand and head office team members, with all funds over the reserve Canadian Dress for Success sites. We supported this initiative price donated to Dress for Success. This initiative saw over across our entire store network, as well as promoting $7,000 donated this financial year. Dress for Success and earrings sales at Business Chicks events across Australia. VIDEO CONTENT FOR THE DRESS FOR SUCCESS LEARNING PORTAL: ASSISTING OUR LOCAL COMMUNITY WITH RECOVERY March 2022 saw some of the worst floods in Australia across South East Queensland and Northern New South Wales. Whilst The importance of empowering women in their continued supporting our team who reside and work in the impacted education to re-enter the workforce is vital in growing areas, Michael Hill wanted to support the local communities in their confidence and competence to support their career which we live and operate to get back on their feet. To assist pathways. Michael Hill has worked with Dress for Success to in community recovery Michael Hill donated $100,000 across create instructional videos for job seekers on the following four local charities, based on the groundwork each were topics, which support women to gain confidence and completing to support their local communities to recover. knowledge in forging their next career move: Charities who received a portion of the total donation • Searching for Jobs on the Internet amount include: • • • • • How to Shine When Applying for Casual Work in Retail Preparing for Your Job Interview Understanding Your Contract of Employment Getting Ready for Your New Job Tips for Networking. • • • • St Vincent de Paul’s QLD Flood appeal St Vincent de Paul’s NSW Flood appeal Salvation Army NSW & QLD Flood Crisis appeal Lifeline – Lismore / Northern Rivers Flood Appeal. “ At Dress for Success, we economically empower women across the globe. The past two years have been immensely challenging for our organisation, and the women we serve. But by standing together with partners like Michael Hill, we are continuing to help women break the cycle of poverty and obtain safer and better futures. Our vision is a world where women do not live in poverty; are treated with dignity and respect; and are strengthening their families and shaping their communities. Thank you Michael Hill, for your commitment to making this vision a reality. Your support is helping to change the lives of women throughout Australia, New Zealand, and Canada – and we could not be more grateful” - WENDY LONGWOOD, COO, DRESS FOR SUCCESS WORLDWIDE 26 MICHAEL HILL | 2022 ANNUAL REPORT MICHAEL HILL | 2022 ANNUAL REPORT 27 RESPONSIBLE SUPPLIERS Michael Hill is working closely with our key suppliers across our sourcing and procurement ecosystems to ensure our suppliers’ manufacturing and operations comply with our responsible sourcing practices. Our vision is by 2030, 100% of our suppliers will meet our expectations on their social and environmental impacts. To achieve this, several initiatives have commenced to enhance awareness on product sourcing and expectations of doing business with Michael Hill. Our roadmap from our Modern Slavery Statement outlines the timeframes and detail. 01. 02. 03. FOUNDATION ENHANCE OPTIMISE FY20 – FY21 FY22 – FY24 FY25+ • Established Supplier Transparency • Establish a process for undertaking • Complete Modern Slavery effectiveness review • Annual Modern Slavery awareness training for all staff • Extend Ethical Supply Chain Assessment to all suppliers • Revise the process for selection of new suppliers to include completion of a tailored questionnaire per industry type, visits to the facilities to understand working conditions and appropriate revisions to the supplier code of conduct if required • Working with our third-party independent verification and audit partner on high risk suppliers • Undertake due diligence for Tier 2 and 3 suppliers • Consideration of corporate structure and alignment to business strategy (e.g. B Corp certification) • Sustainability – core pillar of our brand proposition • 100% of key jewellery suppliers being RJC accredited Platform • Identified key suppliers to engage on supplier transparency platform • Developed Ethical Supply Chain Assessment • All Tier 1 jewellery and packaging suppliers onboarded onto Supplier Transparency Platform and completed the Ethical Supply Chain Assessment (accounts for 60% of total supplier spend) • Updated Code of Ethics and Code of Conduct for Suppliers • Review and update of key supplier contracts and supply terms and conditions • Covid-19 response plan and crisis management • 2021 Group team engagement survey • Updated team member Code of Conduct • Health, safety and wellbeing focus • Appointment of senior leader responsible for sustainability • Alignment of modern slavery questionnaire to RJC • Issued our first Modern Slavery Statement due diligence for Tier 2 and 3 suppliers • Review of new supplier onboarding process, including simplifying the assessment process to include pre- screening questions • Establish an Ethical Supply Chain Assessment tailored to non-jewellery industry suppliers • Onboarding more suppliers onto the supplier transparency program. The focus will be on cleaning, security, and repair suppliers initially with an aim for all suppliers to be monitored through the supplier transparency platform • Restarting, when possible, the regularity of supplier visits to high risk production facilities • Assess high risk suppliers for audits to be completed and developing remediation plans with supplier or cease supplier engagement • RJC recertification – includes improving compliance with COP 6 Human Rights in line with UN Guiding Principles on Business and Human RIghts • Establish formal committee for ongoing responsible sourcing practices • Modern Slavery Training for Michael Hill Board and Executive Team and relevant senior leaders • Review of current grievance mechanisms • Sustainability objectives and achievements being publicly shared – holding us to account • Issuing our second Modern Slavery Statement • Sustainability – core pillar of our strategy • 80% of all key jewellery suppliers being RJC accredited 28 MICHAEL HILL | 2022 ANNUAL REPORT Supporting this is our responsible supplier platform, providing MADE IN AUSTRALIA us greater visibility and understanding of our supply chain across both jewellery and non-jewellery suppliers, including: • Details of our suppliers’ top suppliers Where possible, we believe it is important for our business model and local communities to keep manufacturing industries alive in the markets we operate, to support local • Supplier RJC membership status and products included in jobs and protect our supply chain from disruption. Having their certification • Other certifications and memberships held to confirm supplier commitment to social and environmental performance • Type of jewellery product supplied with tailored questionnaires based on product risk • Site operations, including understanding product or material supplied by site our in-house workshop located alongside our head office and Australian distribution centre ensures our manufacturing team are a central, focal point of our organisation as we continue to increase our focus on, and delivery of, quality product from this area. Michael Hill has a team of over 25 jewellery craftspeople, working locally in Brisbane, Australia who hand make and bring our beautiful Made in Australia pieces to life. • Further transparency over internal modern slavery practices • 73% of all solitaire engagement rings were Made in Australia (e.g. training, protocols, resources responsible for • Made in Australia product made up 17% of Michael Hill’s sustainable procurement). international sales Any non-conformances from suppliers are taken seriously and • 45,425 individual products were made in our Australian we will work with these suppliers to remediate in the first manufacturing facility instance and terminate relationships should they not mature • 27 full time team members in our Australian their practices in line with our expectations. manufacturing team The platform has the capability to capture ESG information and is intended to be utilised for gaining transparency into suppliers’ ESG commitments as part of delivering our ESG strategy. CRAFTING AT HOME MADE IN NEW ZEALAND Several of our chain necklaces and bracelets, as well as our most-loved round and oval solid bangles, are crafted for quality and beauty by our New Zealand supplier, Morris and Watson. Morris and Watson are a fourth-generation family business, dedicated to providing beautiful jewellery with Craftsmanship is one of the founding pillars, and deep in quality and finesse. Morris and Watson are also in the process the heritage of our business. Michael Hill first established an of becoming a certified member of the RJC. in-house workshop in the 1980s, and we are one of the only Australian jewellers to maintain a retail-led workshop to this day, with a dedicated team of master craftsmen, diamond specialists and quality control professionals. MICHAEL HILL | 2022 ANNUAL REPORT 29 PRODUCT Progress towards more sustainable product offerings and business operations is evident globally, with many aspirational retailers leading the way. Michael Hill is also actively evolving the product ranges we create and provide our customers. Our 2030 strategic direction outlines a clear focus in our Product pillar, with the aim that 100% of our products will be sustainable, responsible, or circular. To achieve this goal, three key areas of focus are pivotal – Product Transparency, Traceability and transparency and proving product origin is a known and complex systemic challenge across the jewellery industry, due to the varying layers of the supply chain, from mine, to refiner, to producer, retailer and end consumer. For businesses to create transparency and trust, organisations are seeking to adopt a higher level of certification and due diligence over their suppliers, to provide customers and suppliers assurance around how their products and materials Metal Stewardship, and Innovation. PRODUCT TRANSPARENCY Our aim is to have 100% use of certified sustainable or responsibly sourced natural diamonds, coloured gemstones and cultured pearls by 2030. Underpinning the rollout of this pillar includes some form of industry change particularly have been sourced, traced, and processed through the within the coloured gemstones and pearls industry, including supply chain. To create such a level of transparency is a time responsible sourcing practices. consuming process and requires buy in across the supplier network in the supply chain. NATURAL DIAMONDS Rapid and comprehensive industry change is required for us to achieve some of the product goals outlined in our 2030 strategic direction; however, we will advocate for this through all of our supplier channels, setting the expectation high for the quality product we wish to provide to our customers. We also have confidence in the RJC, SCS Global and other industry bodies to provide assurance systems so our products Michael Hill is committed to offering only conflict-free diamonds in our jewellery. We purchase our natural diamonds from legitimate sources in accordance with the Kimberley Process Certification Scheme (KPCS) as supported by the World Diamond Council System of Warranties. As part of our business practices and supply agreements, we require diamond suppliers to warrant that the diamonds are are responsibly sourced and meet best practice standards. conflict-free. 30 MICHAEL HILL | 2022 ANNUAL REPORT We are keeping up to date with any path of provenance 3. Is conflict-free and meets De Beers Code of Origin’s improvements to purchasing mass natural diamonds in the industry-leading ethical standards market, noting the SCS global standards for sustainable natural/mined diamonds has been developed. Challenges of proving provenance for bulk diamonds parcels are still relevant. In response to providing greater assurances to our customers on diamond provenance we are proud of our ongoing partnership with De Beers on their Code of Origin range, our first foray into natural diamond provenance for our customers. • De Beers Code of Origin: Partnering with De Beers, Michael Hill was proud to be one of the first global retailers to carry a range of diamonds from the De Beers Code of Origin Trusted Source Program. De Beers is a renowned 4. Has helped protect the planet through wildlife conservation and De Beers’ commitment to be carbon neutral by 2030. This program of diamonds was rolled out to all Michael Hill stores in June 2022, and contributes to 3% of solitaire engagement ring sales, with a view to expand and grow this figure in FY23. As part of our pending RJC recertification, Michael Hill has made a provenance claim relating to the De Beers Code of Origin range. COLOURED GEMSTONES & PEARLS world-leader in diamonds, and the Code of Origin program There is limited guidance and inherent risk over sourcing reflects their deep commitment to social and environmental practices in the coloured gemstones and pearl industries responsibility. Diamonds with the Code of Origin make a significant contribution to the people and places where they are found, helping provide jobs, healthcare and comparative to the diamond and precious metal industry. In response to limited available guidance, Michael Hill has taken the initiative to develop a risk matrix which risk assesses education, and helping protect the environment through all coloured stones and pearls based on country of origin wildlife conservation and De Beers’ commitment to be carbon neutral by 2030. At Michael Hill, responsibility and ethical sourcing are an important focus. We are dedicated to offering our customers the best range of diamonds and jewellery, to reflect their preferences and personal values. Diamonds with the Code of Origin offer customers extra peace of mind, knowing that their diamond has had a positive impact on people and the planet. The De Beers Code of Origin program provides assurance that the diamond: in accordance with the Global Slavery Index, providing intelligence to our sourcing teams about product and sourcing locations to avoid. We are reliant on prevailing standards of due diligence, such as the RJC’s Code of Practices to help us carry out the necessary due diligence on our supply chain. We recognise that the systemic challenges cannot be solved overnight. However using the risk-based approach, together with the inclusion of specific questions relating to labour standards on the supplier transparency platform, we hope to better- understand at a supplier level the type of products supplied, and their countries of origin. With this information we will be a 1. Is a natural diamond, discovered by De Beers better position to assess which suppliers might be considered 2. Was discovered in Botswana, Canada, Namibia or South Africa, where it has helped provide jobs, healthcare and education, with a particular focus on programs supporting women and girls higher-risk if they disclose countries which are high-risk based on our risk matrix. MICHAEL HILL | 2022 ANNUAL REPORT 31 “ We recognise there is opportunity to lead the jewellery industry through offering innovative product and service solutions aligning to a sustainable future.” 32 MICHAEL HILL | 2022 ANNUAL REPORT METAL STEWARDSHIP Michael Hill is committed to jewellery manufacturing using conflict-free and responsibly sourced metals. Currently 87% of our jewellery suppliers are RJC certified, meaning our suppliers comply with the RJC standards for responsible ethical, human rights, social and environmental practices throughout the diamond, gold and platinum group metals jewellery supply chain. We plan to have 100% of Michael Hill’s silver and gold products made from certified recycled, responsibly sourced, local or artisanal sources, however, will also be working to develop a deeper understanding of all our precious metal types. RESPONSIBLE GOLD & SILVER We are currently working with our suppliers to understand more sustainable gold and silver options available and aim to shift our product mix in the coming years. 95% of our international sales are products made from gold and sterling silver, therefore are our main metals of focus. The introduction of new product and changes in product mix sourced (e.g., recycled or locally sourced), creates additional complexity and the need for further transparency of our SUSTAINABLE & CLIMATE NEUTRAL LABORATORY CREATED DIAMONDS Michael Hill this year was proud to be the first major jewellery retailer in Australia and New Zealand to become an Accredited Retailer for Certified Sustainability Rated Laboratory Created Diamonds. Setting a new standard of excellence, a Certified Sustainability Rated Diamond has been independently evaluated in accordance with the SCS-007 Sustainability Rated Diamonds Standard and certified against five pillars of sustainability achievement provided by SCS global. Our entire range of laboratory created diamonds are certified sustainable, meaning they have achieved: • Verified origin traceability: Sustainability Rated Diamonds are tracked through a verified origin traceability process that provides 99.9% accuracy of the origin of each diamond through its entire chain of custody, from producer to point of sale • Ethical stewardship: each diamond is certified to adhere to twelve core ethical principles aligned to the strictest internationally recognized norms of business integrity • Verified climate neutral: Sustainability Rated Diamonds suppliers supply chains and sourcing practices. As a result, are certified on their journey toward achieving full Climate we will continue to uphold our standards and expectations Neutrality – produced in a manner that mitigates both of our suppliers regarding understanding the scope of our current annual and past (“legacy”) greenhouse gas suppliers’ product certifications and ensuring appropriate emissions still affecting the climate evidence exists to satisfy the RJC provenance claim requirements we endeavour to make. For recycled gold or silver suppliers, this includes ensuring suppliers: • Meet the RJC Chain of Custody certification or are on • Sustainable production practices: Sustainability Rated Diamond producers are committed to the principle of doing no harm to humans or environment, and are actively working to avoid, eliminate or offset any impacts that might be associated with the production process the journey to Chain of Custody certification; or • Sustainability investments: Sustainability Rated Diamond • Hold an alternative certification including SCS recycled content certification. Noting this is a member voluntary standard and the standard includes Chain of Custody requirements of its suppliers. Similarly, locally mined or refined sourced product follows a similar path regarding chain of custody requirements. We have several gold suppliers who are on the journey of RJC Chain of Custody certification for these metal types, and we are committed to working with these suppliers to bring certified options into our supply chain, and in turn provide our customers with more sustainable gold and silver product options, CHAMPIONING PRODUCT INNOVATION At Michael Hill, we recognise there is opportunity to lead the jewellery industry through offering innovative product and service solutions aligning to a sustainable future. By 2024 Michael Hill will pioneer an innovation hub to champion and integrate jewellery circularity, product innovation and laboratory created diamonds. We already work closely with our suppliers on the innovation pipeline and are proud be the first major retailer in the southern hemisphere to launch the DeBeers Code of Origin program as well SCS Certified Sustainable and Climate Neutral laboratory created diamonds. producers engage in sustainability investments that help uplift artisanal and small-scale miners (ASM) and other vulnerable communities, clean the air, protect the climate and protect endangered watersheds and ecosystems. Each certified diamond is accompanied by a detailed certificate which is provided to the customer at the point of purchase. The certificate explains their diamond’s sustainability rating was earned, including origin traceability, conformance with rigorous ethical and environmental requirements, progress in reaching climate neutrality and zeroing out other production-related impacts, and sustainability investments. MICHAEL HILL | 2022 ANNUAL REPORT 33 PLANET Currently at Michael Hill we do not measure, offset, or strategically approach our carbon, waste or energy approaches from a sustainability perspective, however as set out in our 2030 strategic direction we aim to drastically change this. United Nations Net Zero Coalition outlines emissions need to be reduced by 45% by 2030 and reach net zero by 2050 for the planet to stay below a 1.5°C increase in global warming. At Michael Hill, we recognise we need to move beyond the finite energy buried in the Earth towards the infinite energy that surrounds us – with our first step to get our own house in order and establish greenhouse gas emission reduction targets in line with climate science to decouple any energy use from our growth. Alongside global warming companies are being challenged more and more with reducing waste, managing resources, and diverting them from landfill. We are committed to the well-known principles of the waste hierarchy and searching for better ways to operate so that we minimise natural resource consumption in our operations and find innovative ways to reduce the amount of residual waste. Our 2030 strategic direction shows our focus in our planet pillar with the aim that we will nurture nature and reduce our negative impacts to net zero. To achieve this goal, three key areas of focus are pivotal – Zero Carbon Operations, Nature Positive and Eliminate Waste. ZERO CARBON OPERATIONS We are committed to consistently searching for better ways to operate, to benefit and reduce our impact on the environment. Having just relocated to a new head office in Brisbane, we now occupy a building that is more efficient and considerate of the environment. The building features solar panels and water tanks to capture rainwater to be used in the buildings facilities systems for all landscaping, and as the specifying tenant of the new building, we have driven the systems and technologies used on site to reduce energy use. Our landlord is seeking official accreditation for its green operating status in due course. Across our store real estate, in the past year 50 stores switched over to using LED lighting, and with an emphasis on store refresh next year, this programme of change will continue at a wider scale. Another aim is that our corporate headoffice and any sites where we are in control of the electricity tariff will switch to a certified renewable energy tariff. A key aspect of our zero-carbon operations commitment is that we are yet to have started measuring our direct and indirect carbon emissions. Without this data we are not in a position to make short-term or longer-term plans or targets to reduce our emissions towards zero. An immediate priority is therefore to map our Scope 1 and 2 carbon emissions. Once we have collected the data on our Scope 1 and 2 emissions, we will also then map out our Scope 3 value chain emissions 34 MICHAEL HILL | 2022 ANNUAL REPORT MICHAEL HILL | 2022 ANNUAL REPORT 35 36 MICHAEL HILL | 2022 ANNUAL REPORT and seek to engage our supply chain partners about their Michael Hill will prioritise the development of a waste plans to reduce their emissions. Net Zero emissions road maps and resource management system as part of a broader will provide a time-based programme of work, including the environmental management system (EMS) to assist in possibility of offsetting residual emissions. Our aim regarding achieving our goals. Our retail operations have a diverse range Net Zero target-setting is to collate the data and then set of waste management solutions depending on their location science-based targets that ultimately align this to the Science- and who is responsible for managing the building or facilities. Based Targets Initiative. Key initiatives aimed at reducing consumption we have rolled out this financial year include: • Michael Hill is moving its Head office location to a new office in Brisbane. A part of the brief for this development was to be environmentally considerate and have installed a 99KW solar panel system in accordance with Australian Standard AS5033 by Clean Energy Council to assist in our journey to offset our energy usage This will present a challenge in terms of collating and then managing daily waste streams, so a first part of this journey is to carry out a waste audit to help us understand our store operations more clearly. As previously reported, we have started on the journey of resource efficiency by reducing our catalogue printing, shifting to FSC recycled paper and introducing bio- degradable plastic bags for the transportation of our jewellery pieces, however we are committed to consistently searching for better ways to operate, to benefit and reduce our impact • Installed four EVlink smart wallbox charging stations for the on the environment. charging of electric cars with 22KW configuration • LED lights introduced to 50 existing stores (over 1,000 light fittings) reducing electricity consumption of halogen lights; and a commitment to deliver LED lights to our entire store network by 2025 NATURE POSITIVE It is widely recognised; the quality and quantity of the world’s natural habitats are in decline. We accept that our business operations, along with many other organisations are indirectly connected to the deterioration of the natural environment through the extraction and processing of raw materials upstream, the use of other finite resources and consumption of goods and services. Michael Hill recognizes the impact mining in particular (the core source of the majority of our product) has on the planet and ecosystems around it. As a wider part of our ESG strategy we wish to proactively contribute towards protecting and restoring a part of our vulnerable environment by partnering with organisations that help to protect and restore nature. As outlined in our 2030 strategic direction, we are committed to contributing to the restoration and conservation of the natural environment in our key markets. As a new area of focus for Michael Hill, we will investigate partners in ocean conservation – a vital part of resisting global climate change, and one of the most pressing modern environmental concerns. ELIMINATE WASTE Our aim is to send zero waste to landfill by first minimising, then diverting waste from our operations and educating our colleagues on reusing and recycling. We will also eliminate single use plastics from our packaging by 2027. We will develop an internal mindset for reducing waste using the waste hierarchy – waste prevention, as the preferred option, followed by reuse, recycling, recovery including energy recovery and as a last option, safe disposal for all our manufacturing and store operations. “ We are committed to contributing to the restoration and conservation of the natural environment in our key markets.” PRODUCT END OF LIFE Unlike many other consumers goods, jewellery product at the end of life can be recycled and repurposed due to its inherent nature and value. At Michael Hill we hold rigorous process around product waste with any returned product, faulty items, scrap metal or manufacturing waste scrapped and refined with roughly 75% of the product value recovered. This financial year saw Michael Hill scrap and refine 34kg of gold and 160kg of sterling silver. We take pride in the quality product we sell, as well as the relationship we have with our customers, however over time jewellery wear and tear is inevitable. We provide a quality jewellery repair offering in store for all Michael Hill product and work with global repair partners to repair and restore jewellery back to life. This financial year Michael Hill repaired over 340,000 pieces of jewellery for our customers, preventing waste and extending each product’s lifespan. MICHAEL HILL | 2022 ANNUAL REPORT 37 EXECUTIVE LEADERSHIP TEAM L-R Andrew Lowe, Amy Sznicer, Daniel Bracken, Matt Keays, Joanne Matthews, Jo Feeney, Keith Louie DANIEL BRACKEN MANAGING DIRECTOR & 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. 38 MICHAEL HILL | 2022 ANNUAL REPORT 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 & 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 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. JOANNE MATTHEWS CHIEF PEOPLE OFFICER 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. 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 infrastructure programs, covering Microsoft Dynamics, Infor, Oracle and JDE. He has helped 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 Joanne has also worked as the Executive General Manager, across the business. 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 KEITH LOUIE she worked in retail operations with Woolworths. With a large CHIEF DIGITAL OFFICER workforce across Australia, New Zealand and Canada, Joanne’s experience is well aligned to deliver on the Company’s core talent priorities of team engagement and attracting, developing, rewarding and retaining top quality people at Michael Hill. Joanne holds an MBA and Bachelor of Business in Human Resources and Marketing. AMY SZNICER CHIEF RETAIL OFFICER Amy has 24 years’ leadership experience, across retail and beauty industries, having worked with prominent retail brands such as Witchery, GAP, Bras n Things, Guess Jeans and Keith joined Michael Hill in August 2021, as our first Chief Digital Officer. He brings more than 30 years’ experience in consumer goods production, wholesale, retail and advisory across Europe and Australasia, and deep experience of eCommerce leadership and digital transformation over the last 15 years. Keith led online shopping for Coles Supermarkets for six years during its transformation under the Wesfarmers group, rebuilding the customer experience and operating model. Subsequently, he led online retail for Target and advised other Wesfarmers brands on eCommerce, before becoming CEO of the national Aussie Farmers Group, a privately-owned fresh food production, wholesale, online retail, and logistics group. Aldo. She has led the roll out of over 200 new retail stores in More recently, Keith has advised various listed, private Australia, New Zealand and Singapore and was named 2006 and Government entities on eCommerce and digital Australian Young Business Woman of the Year at the Telstra transformation, building on his earlier experience as a Director Business Women’s Awards. Prior to joining Michael Hill as Chief Retail Officer in January 2021, Amy owned and operated a New Zealand blow dry bar/ tea house salon business ‘Dry & Tea’ since 2014. During Amy’s leadership the business expanded to Australia and continued its status as a multi-award winning category leader. Amy’s extensive career in specialty fashion retailing along with her experience as a business owner has built a broad skill set that goes beyond store operations. Amy is extremely passionate about dynamic leadership, a strong company culture, deep retail foundations and driving high performance in an ever-changing retail landscape. These qualities enable her to consistently deliver the highest standard of customer service and ultimately, strong business performance. MATT KEAYS CHIEF INFORMATION OFFICER and Associate Partner of management consulting firm PwC, and with IBM’s Global Business Solutions team. Keith is known for innovative ideas, thinking strategically, applying a rigorous commercial lens, and taking action to transform businesses digitally. In doing so, he inspires the teams he leads to deliver change and improve customer experiences. JO FEENEY CHIEF MARKETING OFFICER Jo joined Michael Hill in March 2021 as Chief Marketing Officer to lead the revitalisation and growth of the Company’s brand, delivering end to end marketing strategies in an omni-channel environment. Jo is responsible for shaping the Company’s messaging, delivering an outstanding experience to the Michael Hill customer across both digital and traditional marketing channels and leading the vision for a world class loyalty program. Jo brings with her over 20 years’ experience in both local and Matt joined Michael Hill in June 2015, bringing with him global organisations (including Woolworths, Telstra, Foxtel extensive international IT experience in the retail space. Prior and McDonald’s), specialising in strategic brand building, end to joining the company, Matt led the global IT strategy for to end marketing communications and driving key customer Forever New as their General Manager Information Technology, growth strategies across channels. In her most recent role and prior to that worked as Chief Information Officer for Super Amart where his final project was successfully leading as Director of Marketing at McDonald’s Australia, she was responsible for marketing, brand and media strategies a full-scale disaster recovery process after the Queensland and driving commercial growth through innovation and floods in 2011. He also worked for leading national footwear re- imagination of the brand. Jo is also a recognised leader and apparel company, Colorado Group after enjoying his long in creativity – winning multiple awards both locally and retail apprenticeship with 11 years at Country Road, where he internationally. She brings a fresh approach to driving the future worked initially as a Finance Accountant, and also gained solid growth of the brand through a lens of commercial creativity. shop floor experience during his tenure. MICHAEL HILL | 2022 ANNUAL REPORT 39 “ A key highlight was our ability to grow profit faster than sales, underpinned by continued gross margin expansion.” 40 MICHAEL HILL | 2022 ANNUAL REPORT DIRECTORS’ REPORT The Directors present their report on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Michael Hill International Limited ACN 610 937 598 (‘Michael Hill International’ or the ‘Company’) and all controlled subsidiaries for the year ended 26 June 2022. 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: DIVIDENDS Final dividend for the year ended 27 June 2021 of 3.0 cents per fully paid share paid on 24 September 2021 (2020: no final dividend) 2022 $’000 11,649 2021 $’000 – Interim dividend for the year ended 26 June 2022 of 3.5 cents (2021: 1.5 cents) per fully paid share paid on 25 March 2022 (2021: 26 March 2021) 13,590 5,820 The Directors have declared the payment of a final dividend of 4.0 cents per fully paid ordinary share (2021: 3.0 cents). The final dividend will be unfranked for Australian shareholders and fully imputed for New Zealand shareholders. The aggregate amount 15,531 11,649 of the proposed dividend expected to be paid on 23 September 2022 out of retained earnings, but not recognised as a liability at year end, is: 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 Review of Operations and Strategic Update sections of this report. MICHAEL HILL | 2022 ANNUAL REPORT 41 REVIEW OF OPERATIONS 26 June 2022 (2021: $56.6m) an increase of $6.3m year on year, driven by a combination of strong sales growth and The Group achieved the following key outcomes for the 2022 margin expansion. financial year: KEY FINANCIAL RESULTS • Group operating revenue increased by 7.0% to $595.2m (2021: $556.5m), with ~10,000 lost store trading days in each of FY22 and FY21 • Comparable EBIT* increased by 11.1% to $62.9m (2021: $56.6m) • Statutory net profit after tax increased by 13.9% to $46.7m (2021: $41.0m (Restated¹)) • Group gross margin increased by 200 bps to 64.7% (2021: 62.7%), underpinned by our strategic initiatives • Healthy inventory levels to support elevated sales at $181.5m (2021: $171.2m) • Balance sheet benefited from strong operating cashflows and sale of the Canadian credit book, resulting in a closing cash position of $95.8m (2021: $72.4m) • Final dividend of 4.0 cents per share declared, delivering total dividends for the year of 7.5 cents per share For the year, the Group delivered same store sales growth of 8.0% and gross margin increased by 200 bps to 64.7%. Since FY19Q3, the Group has achieved twelve quarters of same store sales growth. These continued strong results demonstrate the success of the Group’s strategic transformation and the increasing strength of the brand during more than two years of significant global disruption. During the year, the Michael Hill global store network suffered 10,020 lost store trading days (2021: 10,447) due to a combination of government mandated lockdowns and COVID impacting store teams. Despite these disruptions to trading conditions and the global store network, total revenue grew by 7.0% to $595.2m (2021: $556.5m) as the Group continues to elevate and modernise the brand, and transform the customer journey. The Group’s digital businesses delivered another record year with sales of $42.0m, now representing 7.1% of total sales. During the year, the Group successfully launched “click & collect” in all three markets, and rolled out “ship from store” across our global network, further enhancing the Group’s • Board announces that it will implement an on-market share omni-channel ecosystem. The Group’s marketplace strategy has buy-back of up to 5% of the Company’s issued capital. progressed in all its existing markets, with activation in Australia (The Iconic, Westfield Direct), New Zealand (The Iconic) and OPERATIONAL PERFORMANCE Canada (The Bay). • Group same store sales were up 8.0% for the year, with Prior to the key Christmas trading period, the business opened Canada +11.3%, New Zealand +8.9%, and Australia +4.2% its Canadian 3PL distribution centre in Ontario, creating a cost- • Digital sales increased by 23.4% to a record $42.0m, representing 7.1% of total sales, up from 6.3% last year efficient flow of inventory from vendors, improving speed of delivery to customers and ensuring reliable continuity of supply • New pure play brand Medley delivered over $1m in sales and optimal stock levels. for its first full year of trade During the year, the product range continued to evolve in • Loyalty strategy continues to deliver with 76% of sales from line with the elevated brand journey including the successful members – Brilliance by Michael Hill now over 1.4 million relaunch of the Group’s premium bridal offering – Sir Michael members (2021: ~800,000 members) • Extensive H1 temporary store closures in NSW, VIC and Auckland, culminated in 10,020 lost trading days for the year (2021: 10,447) • One new store opened and six under-performing stores were closed during the year, giving a network total of 280 stores at year-end (2021: 285 stores). ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. *EBIT and Comparable EBIT are non-IFRS information and are unaudited. Please refer to non-IFRS information section in this report for an explanation of non-IFRS information and a reconciliation of EBIT and Comparable EBIT. FY22 - GROUP BUSINESS PERFORMANCE Hill Designer Bridal collection. Demonstrating the increased focus on ESG, the Group expanded its distribution of laboratory created diamonds to all stores globally, providing customers with a certified Sustainable and Climate Neutral choice. Additionally, the Group also launched its De Beers Code of Origin Diamonds collection to all stores, demonstrating a deep commitment to social and environmental responsibility. Supporting the Group’s ongoing growth agenda, our strategic increase in ATV and elevated product offerings, the Group made considered investments in core inventory, which saw year-end stock holdings of $181.5m (2021: $172.2m). The Group’s balance sheet has benefited from strong operating cashflows, delivering a year-end cash position of $95.8m (2021: $72.4m) and nil debt. During the year, the Group successfully sold its in-house Canadian credit book delivering cash proceeds of $14.2m, while also launching a long-term partnership with Flexiti Financial Inc, to provide a new enhanced consumer credit proposition. The Group has reported operating revenue of $595.2m (2021: $556.5m) for the 2022 financial year, producing a net profit after tax (NPAT) of $46.7m (2021: $41.0m (Restated¹)). The Group reported Comparable EBIT* of $62.9m for the year ended During the year, the Group opened one new store in Australia and closed six under-performing stores across the network (AU: 4, NZ: 1, CA: 1), resulting 280 stores at year-end (2021: 285 stores). 42 MICHAEL HILL | 2022 ANNUAL REPORT SEGMENT RESULTS FY22 was another year of COVID disruption for our retail network, with significant first half store closures in both Australia and New Zealand, and the impacts of Omicron across all countries in the second half. Despite these disruptions, all markets delivered strong results. The results below are expressed in local currency and for comparative purposes exclude the Emma & Roe discontinued operations in all years. AUSTRALIAN RETAIL PERFORMANCE Operating Results (AU $’000) 2022 2021 2020 2019 2018 Revenue Gross profit Gross margin 303,358 312,206 265,915 309,066 325,707 196,609 193,908 160,579 191,895 206,301 64.8% 62.1% 60.4% 62.1% 63.3% Comparable EBIT 51,750 54,347 Comparable EBIT as a % of revenue Number of stores 17.1% 147 17.4% 150 27,641 10.4% 32,626 48,621 10.6% 14.9% 155 167 171 Same store sales increased by 4.2%, however significant temporary store closures and the closure of four under-performing stores led to a decline in retail segment revenue by 2.8% to $303.4m for the year. This result is a testament to the resilience of the Australian team, new leadership and the Group’s strategic initiatives. The government mandated store closures across Victoria, South Australia, Australian Capital Territory and New South Wales, resulted in 7,551 lost store trading days (2021: 3,458 days) during the year. As well as a strong sales performance, the segment also delivered expanded gross margin for the year to 64.8% (2021: 62.1%), the country’s highest margin in the last five years. During the year, one new store opened, and four under-performing stores closed, resulting in 147 stores at year-end (2021: 150 stores). NEW ZEALAND RETAIL PERFORMANCE Operating Results (NZ $’000) 2022 2021 2020 2019 2018 Revenue Gross profit Gross margin Comparable EBIT Comparable EBIT as a % of revenue 125,090 127,067 106,696 120,064 125,239 79,288 78,771 63,641 73,011 77,673 63.4% 62.0% 59.6% 60.8% 62.0% 30,130 24.1% 35,119 27.6% 21,067 24,125 27,800 19.7% 20.1% 22.2% Number of stores 48 49 49 52 52 Same store sales increased by 8.9%, which was a particularly strong result, but temporary store closures through the year did see a decline in retail segment revenue of 1.6% to NZ$125.1m for the year. This result was underpinned by strong retail metrics, omni-channel initiatives, and the Group’s strategic agenda. The government mandated store closures, predominantly in the Auckland region, resulted in 2,241 lost store trading days (2021: 464 days) during the year. Gross margin for the year was 63.4% (2021: 62.0%), a strong year on year performance, and significant improvement on both FY19 and FY20. During the year one store closed, resulting in 48 stores at year-end (2021: 49 stores). MICHAEL HILL | 2022 ANNUAL REPORT 43 CANADIAN RETAIL PERFORMANCE Operating Results (CA $’000) 2022 2021 2020 2019 2018 Revenue Gross profit Gross margin 159,661 118,445 110,799 133,146 130,762 103,623 72,643 63,991 80,726 81,576 64.9% 61.3% 57.8% 60.6% 62.4% Comparable EBIT 28,785 12,320 (2,412) Comparable EBIT as a % of revenue 18.0% 10.4% (2.2)% 9,797 7.4% 14,605 11.2% Number of stores 85 86 86 86 83 Same store sales increased by 11.3%, and retail segment revenue increased by an impressive 34.8% to CA$159.7m for the year. This is a record result for Canada, supported by a number of strategic initiatives, along with a reinvigorated leadership driving a significant lift in productivity and team engagement. There was minimal temporary store disruption during the year with only 228 lost store trading days (2021: 6,525 days). In addition to a record sales result, the segment also achieved a record gross margin for the year of 64.9% (2021: 61.3%), underpinned by an absolute focus on retail fundamentals and productivity metrics. During the year, one under-performing store was closed, resulting in 85 stores at year end (2021: 86 stores). CASH FLOW Net operating cash inflow was $111.6m (2021: $134.5m (Restated¹)). Excluding the sale of the in-house Canadian credit program ($14.2m), this was the result of the Group’s solid trading and cost initiatives implemented in the last three years coming to fruition. Through further disciplined inventory and working capital management, the Group remains in a resilient financial position with $95.8m in net cash (2021: $72.4m) available to continue to invest in improvements to its systems, infrastructure, and capabilities. ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. CAPITAL MANAGEMENT DIVIDENDS, SHARE BUY-BACK AND INVESTMENT UPDATE Taking into consideration the Group’s performance and strength of balance sheet, the Board has decided to declare a final dividend of 4.0 cents per share unfranked, fully imputed with conduit foreign income. This delivers a total dividend for the year of 7.5 cents per share, representing ~67% of adjusted annual NPAT, and at the higher end of the Group’s recently revised Dividend Distribution Policy target range of 50% to 75%. Subject to the Group’s ongoing trading performance and growth plans, the Board’s intention is for dividends to remain at the higher end of the target range. Furthermore, the Board is also pleased to announce that it will implement an on-market share buy-back of up to 5% of the Company’s issued capital, funded from existing cash reserves. The buy-back is expected to commence in September 2022. The total number of shares to be purchased under the pipeline will be dependent on business and market conditions. In addition to the above, the Group still retains sufficient balance sheet strength and cash reserves for deployment into new earnings accretive organic growth initiatives and to also pursue acquisition opportunities in the jewellery sector, which meet our strict strategic and investment criteria. 44 MICHAEL HILL | 2022 ANNUAL REPORT MICHAEL HILL | 2022 ANNUAL REPORT 45 STRATEGIC UPDATE WITH AN INCREASED FOCUS ON SUSTAINABILITY Much of the Group’s strong performance can be attributed to the strategic transformation and elevation of the brand, along with overarching emphasis on sales and margin growth. The strategic framework underpins the future growth of the business, is customer-led and continually evolving, which is best demonstrated with the introduction of a new pillar dedicated to “Sustainability”.  1. Brand & Loyalty The strategy to elevate and modernise the Michael Hill brand underpins the overarching vision for the business. Highly engaging and emotive marketing campaigns with an emphasis on product, quality and craft, are leading the transition away from price and promotion, towards emotional long-term customer relationships.  Simultaneously, the Brilliance by Michael Hill loyalty program is proving to be a key lever for growth and customer engagement. The program has increased by more than 600,000 members in the year, and provides the business with essential data to drive more frequent and more profitable customers. Both brand and loyalty are key to driving Australian manufacturing facility. During the year, the business commenced a phased deployment of a new comprehensive merchandise planning platform to improve buying processes, margin optimisation, product ranging and inventory management.  The Group’s ongoing focus on product mix continues to be a key enabler for sustained margin expansion.  Product newness is critical to achieve higher inventory turn and frequency of purchase. 5. New Territories & Services As the Group pivots from transformation to growth, the opportunity to stretch the brand into new territories and services is a key focus. Through the course of the year, the Group has executed its marketplace strategy across its three core segments, partnering with The Iconic in Australia and New Zealand, and The Bay in Canada. Additionally, the Group is now focused on extending its Canadian website to the currently untapped Quebec market, and in the near future launching international shipping to all countries from our websites. The business is also well underway in developing a digital eco- system with a number of new revenue driving service offerings across bespoke design, sustainability, and financial services. 6. Cost Conscious Culture medium to long term sustainable growth in both sales and The Group made great progress with its global supply chain strategy, with the successful delivery of a new Canadian 3PL distribution centre – lowering input costs and duties while significantly the improving customer experience and delivery times.  Additionally, in-market New Zealand warehouse capability was activated during the second half.  The Group’s credit strategy was further enhanced with the sale of the in- house Canadian credit book and partnering with a specialist third party consumer credit provider across all Canadian stores, and in a first for the Group, an online long-term credit offering. Importantly, the Group’s embedded cost conscious culture maintains an absolute focus on cost discipline, inventory and working capital management. 7. Sustainability Michael Hill is elevating its strategic focus on ESG, launching our 2030 vision centred around People, Product and Planet. Underpinned with detailed goals and milestones, the Michael Hill 2030 ESG vision aims to transform; how we source and manufacture our products; how we impact our planet; and how we improve peoples’ lives across our entire value chain. We are committed to bringing change in how we operate in order to drive forward sustainable practices that benefit our customers, our planet and future generations and aim to move our business and influence the broader jewellery industry toward a more sustainable, innovative and responsible future. margin for the Group. 2. Digital & Omni-channel Michael Hill’s digital transformation continues to gather pace delivering another record year in FY22. Strong performances on the Group’s direct to consumer websites were driven by improved customer experience, higher traffic and increased conversion rates, and now represent over 7% of total Group sales. The successful deployment of “click & collect” and “ship-from-store”, now available in all stores globally, enhanced our omni-channel capabilities as the Group continues its customer-led digital transformation journey. 3. Retail Fundamentals Bricks and mortar retail is at the core of the Michael Hill business, driving more than 90% of the Group’s sales.  Elevating the in-store experience across visual presentation and customer engagement have delivered considerable increases in gross margins, conversion rates and ATV. An unwavering focus on people and performance, operational excellence, and effective labour management underpin our retail productivity which has seen significant lifts in all markets. A new senior leadership structure is now firmly in place across all markets and delivering strong results. 4. Product Evolution Product evolution is at the centre of a customer-led retail strategy, and is critical to achieve sales and margin growth.  Laboratory created diamonds are gaining momentum in the business, delivering increased quality and higher margins while providing customers with a certified Sustainable and Climate Neutral choice.  Elevated quality and craftmanship are essential to our aspirational brand journey, and this will be delivered through the evolution of our supply chain, and further investment in the artisanal capabilities of our 46 MICHAEL HILL | 2022 ANNUAL REPORT RISK MANAGEMENT The Board believes that a strong Corporate Governance framework will underpin the Group’s growth and success. The Group regularly reviews its risk management framework and has identified the following at risk areas and mitigating strategies: DIVIDENDS Ongoing challenges from COVID continue longer than expected impacting customers, suppliers and staff The Group has a COVID Crisis Management Team focused on monitoring the status in key countries where it operates and has supply chain impacts. Where possible, we seek to leverage government financial assistance for our staff, and the Group has implemented processes to manage outbreaks to reduce the impact to customers and staff. Furthermore, we work closely with suppliers to manage impacts to our supply chain, including the establishment of a Canadian warehouse to reduce delivery times within Canada but also offer alternative sourcing strategies. Costs of raw materials impacted raw materials for our production facilities and finished products. There are several by global sanctions and scarcity sourcing options that are employed, including forward planning and securing core of material ranges to curb the impact of rising prices of raw materials and to ensure financial The Group has a dedicated team focused on ensuring the continued supply of exposures are well managed. Increase in cyber attacks disrupting operations The Group has tasked the IT Steering Committee to oversee its response to cyber and the maturing of our cyber resilience. The Group continues to invest in new technologies and remove vulnerable points of attack throughout its digital network. External partners have been engaged to uplift our capabilities, including both proactive and reactive responses to cyber attacks. Penetration testing and disaster recovery planning are built into our operating rhythm to further prepare and respond to attacks. Our focus is on the safety and security of our staff and we are investing in initiatives and processes that improve the overall security of our stores, and contribute to the Theft appeal of our product safety of our staff. We work with local law enforcement bodies and other external increases during periods of parties to better the overall retail environment for our staff and customers. With financial hardship and uncertainty the ongoing escalation of violence in New Zealand, the Group has established an executive led taskforce responding to these challenges and implementing appropriate actions. Supply chain transparency and modern slavery Talent acquisition and retention The Group is working closely with our key suppliers across our sourcing and procurement ecosystems to ensure our suppliers’ manufacturing and operations comply with our responsible sourcing practices. Further, the Group has developed a modern slavery roadmap to minimise the risk of modern slavery occurring in our business and supply chains. The Group has also outlined its goals in the Sustainability Strategy of having all suppliers meeting our expectations on their social and environmental impacts by 2030. The Group has talent management strategies and processes to ensure the business is well equipped to manage peak trading periods and fulfilment of specialised roles critical to our business. These include succession planning, reviewing pipeline of external recruits and mentoring and coaching of staff to promote internally. Emphasis has been focused on ensuring our workforce engagement scores are above industry benchmarks, and also ongoing commitment to diversity and inclusion through educating our teams, sharing experiences and reporting on key metrics. Breach of regulation or law The Group has an in-house legal team who are focused on compliance in our three in one of our jurisdictions in markets and utilise external legal firms for specialised legal advice when required. an increasingly complex legal Any new legislative requirements or rectification initiatives have dedicated teams compliance environment focused on ensuring our compliance. MICHAEL HILL | 2022 ANNUAL REPORT 47 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: • 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) • Comparable EBIT • Significant items. COMPARABLE EBIT COMPARABLE EBIT HAS BEEN CALCULATED AS FOLLOWS: Statutory EBIT Add back costs relating to: 2022 $’000 73,236 2021 $’000 RESTATED1 66,672 In-house Canadian credit book revaluation - 2,986 Less items relating to: Government grants received (AU, NZ, CA) Impact of AASB16 Leases Impact of IFRIC SaaS-related guidance Comparable EBIT (2,864) (13,489) 5,986 62,869 (14,593) (4,197) 5,724 56,592 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. ENVIRONMENTAL REGULATIONS The Group has determined that no particular or significant environmental regulations apply to it. 48 MICHAEL HILL | 2022 ANNUAL REPORT From left: Gary Smith, Jacqueline Naylor, Sir Michael Hill, Robert Fyfe, Emma Hill and Daniel Bracken INFORMATION ON DIRECTORS ROBERT FYFE B.Eng, F.E.N.Z. C.N.Z.M. Rob was appointed a Director of the Company on 9 June 2016 and has served as Director of Michael Hill’s listed entity since 6 January 2014. He was appointed Chair of the Board in June 2021. 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 and subsequent to his time at Air New Zealand, Rob has gained extensive general management experience in various retail businesses operating in New Zealand, Australia and Great Britain, across sectors including retail banking, telecommunications, pay television and outdoor apparel. On New Year’s Eve 2020, Rob was appointed as a Companion of the New Zealand Order of Merit for services to business and tourism. Rob is also a Director of Air Canada and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Chair DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive and Independent Director 2,293,640 Ordinary Shares • Member of ARMC • Member of PDRC MICHAEL HILL | 2022 ANNUAL REPORT 49 SIR RICHARD (MICHAEL) HILL K.N.Z.M. Sir Michael is the founder of Michael Hill and was appointed a Director of the Company on 9 June 2016, having served as Director of Michael Hill’s listed entity since its initial listing in 1990. He led the Group as Chairman from 1987 until 2015. Sir Michael 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 is not a Director of any other listed entities and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Non-Executive Director DIRECTORS’ INTERESTS IN SHARES AND OPTIONS 148,330,600 Ordinary Shares EMMA HILL B.Com, M.B.A Emma was appointed a Director of the Company on 9 June 2016 and has served as Director of Michael Hill’s listed entity since 22 February 2007. She served as Deputy Chair of the Group from 2011 until 2015 when she was appointed Chair. Emma stepped down from the Chair role in June 2021. 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. Emma holds a Bachelor of Commerce degree and an MBA from Bond University. Emma is not a Director of any other listed entities and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Non-Executive Director • Chair of PDRC DIRECTORS’ INTERESTS IN SHARES AND OPTIONS 167,487,526 Ordinary Shares GARY SMITH B.Com, F.C.A., F.A.I.C.D. Gary was appointed a Director of the Company upon incorporation on 24 February 2016 and has served as Director of Michael Hill’s listed entity since 2 November 2012. Gary has had extensive Director experience. He is Chairman of Flight Centre Travel Group Ltd, one of Australia’s top 100 public companies and is a member of their Audit and Remuneration sub-committee. He is a Chartered Accountant and a Fellow of the Australian Institute of Company Directors. Gary is a Director of Flight Centre Travel Group Limited and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Non-Executive and Independent Director DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Chair of ARMC • Member of PDRC 80,000 Ordinary Shares 50 MICHAEL HILL | 2022 ANNUAL REPORT JACQUELINE NAYLOR M.A.I.C.D. 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 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. Jacqueline is a Director of Myer Holdings Limited and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Non-Executive and Independent Director DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Member of ARMC 160,000 Ordinary Shares DANIEL BRACKEN Daniel joined Michael Hill International as the CEO in November 2018. He has more than 25 years’ experience managing some of the world’s most iconic brands. He has an extensive background in corporate strategy, brand development, product design, customer engagement, digital expansion and has been instrumental in executing turnaround initiatives across many retail businesses. Daniel is not a Director of any other listed entities and has not had any former directorships of listed entities in the last three years. SPECIAL RESPONSIBILITIES • Managing Director • Chief Executive Officer DIRECTORS’ INTERESTS IN SHARES AND OPTIONS 201,869 Ordinary Shares 2,944,296 Share Rights 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, Graduate Diploma in Applied Corporate Governance and Risk, and has completed the Company Directors Course at the Australian Institute of Company Directors. 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. MICHAEL HILL | 2022 ANNUAL REPORT 51 MEETINGS OF DIRECTORS The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 26 June 2022, and the numbers of meetings attended by each Director were: FULL MEETINGS OF DIRECTORS MEETING OF COMMITTEES AUDIT AND RISK MANAGEMENT PEOPLE DEVELOPMENT AND REMUNERATION R I Fyfe Sir R M Hill E J Hill G W Smith J E Naylor D Bracken A 12 12 12 11 12 12 B 12 12 12 12 12 12 A 3 - - 3 3 - B 3 - - 3 3 - A 5 - 5 5 - - B 5 - 5 5 - - A = Number of meetings attended B = 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 PEOPLE DEVELOPMENT AND REMUNERATION COMMITTEE Gary Smith (Chair) Robert Fyfe Jacqueline Naylor Emma Hill (Chair) Robert Fyfe Gary Smith 52 MICHAEL HILL | 2022 ANNUAL REPORT “The results the Company has achieved in the last 12 months are outstanding.” MICHAEL HILL | 2022 ANNUAL REPORT 53 AUDITED REMUNERATION REPORT The Directors present the 2022 Michael Hill International Limited remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded during FY22. The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. LETTER FROM THE CHAIR OF THE PEOPLE DEVELOPMENT AND REMUNERATION COMMITTEE Dear Shareholders, On behalf of Michael Hill Group, I am pleased to present the FY22 remuneration report. The report outlines the Group’s remuneration strategy and framework and details how the Board has approached remuneration to retain and incentivise key management personal (KMP) while aligning reward with shareholder value creation. Over the past three years Michael Hill Group has achieved significant growth and transformation on the journey to become a high performing, modern, differentiated, omni- channel jewellery group. The success of the transformation agenda has seen growth in sales, margin and profit, translating into earnings per share (EPS) and dividends per share (DPS) of 12.0 cents and 7.5 cents respectively. Highlights from FY22 include: value for outstanding performance and the award is self-funded through profit generation in excess of target. LTI awarded over the year was 52.5% of fixed remuneration for CEO and 32.5% for CFO. No awards to the CEO or CFO vested in the year. Non-Executive Director (NED) fees were increased by the CPI of 3.8%. There were no other changes to the structure of NED fees. Continuous Improvement in our Remuneration Practices is Important to us It is the Company’s policy to conduct Executive remuneration benchmarking every three years and to consider outcomes in line with Company policy. During the year we reviewed our remuneration practices to ensure the structure and level of award was reflective of modern compensation packages. PricewaterhouseCoopers conducted benchmarking of KMP and the broader Executive Team using a consumer discretionary peer group of companies 50% to 200% of our market cap as reference data (no remuneration recommendations were made). • Total Group revenue of $595.2m (2021: $556.5m) – an This exercise commenced in FY22 and continued early into increase of 7.0% • EBIT* of $73.2m (2021: $66.7m (Restated¹)) – an increase of 9.8% • Comparable EBIT of $62.9m (2021: $56.6m) – an increase of 11.1% • EPS of 12.03 cents (2021: 10.57 cents (Restated¹)) – an increase of 13.8% *EBIT and Comparable EBIT are non-IFRS information and are unaudited. Please refer to non-IFRS information section in the Directors’ Report for an explanation of non-IFRS information and a reconciliation of EBIT and Comparable EBIT ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. FY22 Remuneration The structure of compensation is designed with a mix of market competitive fixed remuneration, short term incentives (STI) to reward annual performance and long term incentives (LTI) to align long term financial performance and shareholder value creation. Compensation awarded over the year reflected results delivered. In accordance with our policy Executive KMP salaries were adjusted by the Consumer Price Index (CPI) of 3.8%. STI awarded was 100% of on target STI and 100% of outperformance STI. The outperformance component of our STI is awarded in share rights, deferred for 12 months. The move to outperformance being awarded in share rights is a change from FY21 and is intended to enhance Management’s focus on long term performance. The outperformance FY23. The insights from this review are being finalised to ensure continued retention of our high performing Executive while more closely aligning compensation mix with long term value creation. Our remuneration report this year provides increased detail and transparency on the link of reward to performance through detailing STI targets and outcomes. Our aim is to demonstrate the effectiveness of our incentive program in driving performance outcomes and to give shareholders increased confidence in our remuneration practices. In conclusion, the Board believes the remuneration changes and outcomes for FY22 reflect an appropriate alignment between pay and performance during the year and are also fair in terms of the operating environment in which decisions have been made. We are confident that shareholders will recognise this as a continuation of our long held approach to prior years. The results the Company has achieved in the last 12 months are outstanding and the Executive remuneration set out in this report is considered by the Board to be reflective of this performance. Regards, Emma Hill Chair of the People Development component allows Executives to earn double the target STI and Remuneration Committee 54 MICHAEL HILL | 2022 ANNUAL REPORT REMUNERATION OVERVIEW This report sets out the remuneration arrangements for Michael Hill International’s key management personnel (KMP). KMP have the authority and responsibility for planning, directing and controlling the activities of the entity. All KMP listed below have held their positions for the entire reporting period unless indicated otherwise. NAME POSITION COMMENCEMENT AS KMP Non-Executive Directors Robert Fyfe Chair and Non-Executive Director Sir Richard Michael Hill Founder and Non-Executive Director Emma Hill Gary Smith Non-Executive Director Non-Executive Director Jacqueline Naylor Non-Executive Director Former Non-Executive Director 2016 2016 2016 2016 2020 Janine Allis Non-Executive Director 9 June 2016 until 27 October 2020 Managing Director and CEO Daniel Bracken Managing Director and Chief Executive Officer 2019 Executive Andrew Lowe Former Executives Chief Financial Officer and Company Secretary 2017 Vanessa Brennan Chief Brand and Strategy Officer 11 August 2020 until 13 December 2020 Andrea Slingsby Chief Operating Officer 9 January 2019 until 22 January 2021 PEOPLE DEVELOPMENT AND REMUNERATION COMMITTEE The primary objective of the People Development and Remuneration Committee (PDRC) is to assist the Board fulfil its corporate governance and oversight responsibilities in relation to the Company’s people strategy including remuneration components, performance measurements and accountability frameworks, recruitment, engagement, retention, talent management and succession planning. The following Non-Executive Directors are members of the PDRC for the 2022 reporting period: • Emma Hill – Chair of the PDRC • Robert Fyfe – Chair of the Board of Directors • Gary Smith – Independent Non-Executive Director USE OF REMUNERATION CONSULTANTS The PDRC obtains independent advice every three years on the appropriateness of remuneration practices of the Group given trends in comparative companies and the objectives of the Group’s remuneration strategy. In FY22, the PDRC engaged Pricewaterhouse Coopers to perform Executive remuneration benchmarking on our KMP and the broader Michael Hill Executive Team. In selecting a suitable consultant, the committee considered conflicts of interest and independence from KMP. The work performed does not amount to a remuneration recommendation. Its purpose was to inform the PDRC on the remuneration position of each Executive compared with industry peers and comparable roles. MICHAEL HILL | 2022 ANNUAL REPORT 55 REMUNERATION FRAMEWORK Our remuneration philosophy is guided by our vision to be a modern, differentiated, omni-channel jewellery group. The structure of compensation is designed with a mix of market competitive fixed remuneration, short term incentives to reward annual performance and long term incentives to align financial performance and shareholder value creation. OUR VALUES We Care We are professional We are inclusive and diverse We create outstanding experiences OUR REMUNERATION PHILOSOPHY 01. 02. 03. Attract, motivate & retain talent Reward the achievement of strategic objectives Align to shareholder value creation OUR REMUNERATION FRAMEWORK FIXED REMUNERATION SHORT TERM INCENTIVE LONG TERM INCENTIVE Fixed remuneration is set with reference to market competitive Executive KMP participate rates in comparative companies in the Group’s STI program The Company has How is it set? for similar positions, adjusted which is directed to achieving established an LTI plan as to account for the experience, Board approved on target and deferred compensation. ability and effectiveness of the outperformance targets. individual Executive. Base salary plus any Cash for on target performance made to Executive KMP. How is it delivered? fixed elements including and for outperformance, The rights vest at the end of superannuation and leave in share rights, deferred for the performance period if entitlements. 12 months. certain performance hurdles and vesting conditions are met. An issue of share rights is What is the objective? Attract and retain key align Executive reward with for sustainable long term Executive talent. achievement of performance growth aligned to Drive annual profit growth and Reward Executive KMP targets that underpin strategy. shareholders' interests. 56 MICHAEL HILL | 2022 ANNUAL REPORT RELATIONSHIP OF REMUNERATION TO GROUP PERFORMANCE The remuneration framework operates to create a clear link between Executive remuneration and the Group’s performance. Increased incentive remuneration outcomes for KMP reflect increased revenue, NPAT and dividends. The overall level of remuneration takes into consideration the performance of the Group over several years. The performance of the Group over the past five years is summarised below: GROUP PERFORMANCE 2022 2021 RESTATED1 2020 2019 2018 Revenue ($'000) 595,210 556,486 492,060 569,500 604,319 EBIT* ($'000) 73,236 66,672 14,079 21,115 8,854 Profit for the year attributable to owners of the Company^ ($'000) 46,712 41,015 3,059 16,498 1,557 Earnings per share (cents) 12.03c 10.57c 0.79c 4.26c 0.40c Dividends paid during the financial year² ($'000) 25,239 11,636 5,817 19,365 19,371 Market capitalisation ($'000) 361,105 322,158 131,841 209,385 375,815 Share price at year end ($) Return on average total assets³ 0.93 9.3% 0.83 9.0% 0.34 0.7% 0.54 4.3% 0.97 8.2% *EBIT and Comparable EBIT are Non-IFRS Information and are unaudited. Please refer to Non-IFRS Information in the Directors Report for an explanation of Non-IFRS information and a reconciliation of EBIT and Comparable EBIT. ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. ²The dividends paid in FY21 are the postponed interim dividend for FY20 and the interim dividend for FY21. No final dividend was declared for FY20. ³For 2021 - Return on average total assets is not restated as the required adjustment to total assets for 2020 has not been calculated. ^Profit amounts for 2018 to 2022 years 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 first graph below shows the share price growth and movement compared to the ASX300 whilst the second graph shows the dividend paid and yield per financial year. Share Price and ASX 300 Dividend and Yield $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 e r a h s r e p s t n e c Nov 18 May 19 Nov 19 May 20 Nov 20 May 21 Nov 21 May 22 FY19 FY20 FY21 FY22 Share Price ASX 300 (RHS) Dividend Yield (RHS) 8% 7% 6% 5% 4% 3% 2% 1% 0% MICHAEL HILL | 2022 ANNUAL REPORT 57 The graphs below show the relationship of KMP remuneration⁴ to revenue and Adjusted Earnings Per Share⁵ for the last four financial years. KMP Remuneration and Revenue KMP Remuneration and Adjusted Earnings Per Share $3,200,000 $2,800,000 $2,400,000 $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $0 $600m $3,200,000 $550m $500m $2,800,000 $2,400,000 $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $450m $0 14 12 10 8 6 4 2 0 c e n t s p e r s h a r e (2) (4) FY19 FY20 FY21 FY22 FY19 FY20 FY21 FY22 KMP Fixed KMP STI KMP LTI Revenue (RHS) KMP Fixed KMP STI KMP LTI Adjusted EPS (RHS) ⁴Note that KMP remuneration is based on constant KMPs (Daniel Bracken and Andrew Lowe) and where Daniel Bracken started mid-way through the year, this has been extrapolated on a straight line basis. KMP STI for FY22 includes share rights deferred for 12 months for outperformance. ⁵Adjusted Earnings Per Share is calculated similarly to statutory Earnings Per Share except EBIT is adjusted to Comparable EBIT as set out in the Directors’ Report. FY22 EXECUTIVE KMP REMUNERATION REMUNERATION MIX The total remuneration for Executive KMPs comprises both fixed remuneration and at risk components in the form of on target STI, outperformance STI and LTI. The remuneration mix is designed to compensate KMP in a way that strongly correlates to Group performance. The outperformance STI gives the Executive KMPs the ability to earn the on target STI value in the form of share rights, deferred for 12 months. KMP FIXED REMUNERATION MAXIMUM STI Daniel Bracken – CEO Andrew Lowe – CFO 39.0% 51.0% 41.0% 33.0% LTI 20.0% 16.0% TOTAL 100.0% 100.0% FIXED REMUNERATION Fixed remuneration is reviewed annually, and our policy in this review is to consider the consumer price index (CPI) and increases to any applicable superannuation concessional contributions cap. Remuneration is set with reference to market competitive rates in comparable companies for similar positions adjusted for the experience, ability and effectiveness of the individual Executive KMP. Fixed remuneration includes base salary and superannuation contributions at the rate of the concessional contributions cap. At the commencement of the reporting period, base salaries were increased by CPI, 3.8%, and superannuation was increased by the value in the increased concessional contributions cap. 58 MICHAEL HILL | 2022 ANNUAL REPORT SHORT TERM INCENTIVE SCHEME The Group’s STI program is designed to reward delivery of annual profit targets and ensure achievement of strategic and operational objectives. The STI is detailed in performance scorecards that are set by the PDRC. The scorecards detail the performance goals, targets and weightings for each Executive across the key performance areas of financial, strategy, customer and people. The CEO’s scorecard is comprised of core objectives from each Executive’s scorecard. The program is supported by a performance management system giving visibility and transparency of progress by each Executive. Performance against key performance indicators (KPIs) is formally measured on a biannual basis and informally in regular meetings. The STI program in FY22 for KMP was structured as follows: Performance period Annual award for Financial KPIs Six monthly award for Strategy, Customer and People KPIs Opportunity CEO – 105% of fixed remuneration comprised of 52.5% for on target performance, and 52.5% for outperformance CFO – 65% of fixed remuneration comprised of 32.5% for on target performance, and 32.5% for outperformance How the STI is paid? In cash for on target performance In share rights for outperformance, deferred for 12 months On target performance measures Financial KPIs 60% weighting Strategy, Customer and People KPIs 40% weighting Performance measure for outperformance component How is STI assessed? Starting at $1.5m above FY21 EBIT and increasing progressively The PDRC reviews the CEO’s performance against the performance targets and objectives set for that year. The CEO assesses the performance of the CFO, with the CEO having oversight of his direct reports and the day-to-day functions of the Company. The PDRC reviews the assessed performance for Board endorsement. STI OUTCOMES The following tables detail the FY22 STI scorecard KPIs and assessment applied to the CEO. KPI 2022 PERFORMANCE ASSESSMENT Financial (60% weighting) EBIT Sales, Margin, Costs Strategy (15% weighting) Click and collect, Canadian credit, Marketplace model, New channel growth strategy, ESG strategy , New support office, Capital allocation Customer (15% weighting) Store refresh program, Canadian performance and productivity, Brand health tracking, Customer segmentation strategy, Brilliance by Michael Hill loyalty program Outperformance target achieved for EBIT On target performance achieved for Sales, Margin and Costs On target performance achieved for all objectives On target performance achieved for all objectives People (10% weighting) Culture and engagement, Talent and retention On target performance achieved for all objectives MICHAEL HILL | 2022 ANNUAL REPORT 59 The CEO and CFO earned 100% of their on target STI. This STI was awarded due to the achievement in full of the KPIs related to the financial, strategy, customer and people performance measures. An outperformance STI in the form of deferred share rights was awarded to both KMP due to the achievement of the EBIT outperformance measure. An overall payment of 100% of total maximum STI potential was achieved. ANALYSIS OF BONUSES INCLUDED IN REMUNERATION INCENTIVE REMUNERATION KMP’s short-term incentive cash bonuses On target achieved % Out- performance achieved % Total potential available $ Cash STI component $ Deferred share rights component $ Total STI included Amount forfeited $ $ Daniel Bracken Andrew Lowe 100 100 100 1,071,088 535,544 535,544 1,071,088 100 338,357 169,178 169,179 338,357 – – LONG TERM INCENTIVE SCHEME The FY22 LTI program for KMP was structured as follows: Performance period 3 years Opportunity CEO – 52.5% of fixed remuneration CFO – 32.5% of fixed remuneration Instrument Share rights Performance metric Total Shareholder Return (TSR) compound annual growth rate (CAGR) over 3 years Subject to remaining an employee of the Group at the performance hurdle assessment date (10 days following the release of the FY24 results), and satisfaction of the TSR target metric, share rights will vest in accordance with a sliding vesting schedule. The absolute TSR sliding vesting schedule is as follows: • No rights vest if TSR is equal to or less than 10% CAGR Vesting condition • 10% of share rights vest for each 1% increase in CAGR performance between 10% CAGR to 20% CAGR • 100% of share rights vest if TSR is equal to or above 20% CAGR Awards are subject to a service condition requiring the Executive KMP to remain employed by the Group until the performance hurdle assessment date Rationale for the The absolute TSR metric has been deemed by the PDRC to be a suitable market based performance metric and measure to create alignment between the interests of Executive KMP and the interests condition of shareholders What happens when a KMP If the KMP’s employment is terminated for cause, or due to resignation, all unvested share ceases employment? rights will lapse, unless the Board determines otherwise Dividends and voting rights Share rights do not confer on the holder any entitlement to any dividends or other distributions by the Group or any right to attend or vote at any general meeting of the Group 60 MICHAEL HILL | 2022 ANNUAL REPORT FY22 LTI OUTCOMES OTHER BENEFITS Both Executive KMP were eligible to participate in the FY22 LTI Executive KMP do not receive additional benefits, such as in accordance with the LTI program detailed in the preceding non-cash benefits, other than superannuation, as part of table. For the CEO, the grant of share rights under the FY22 LTI the terms and conditions of their appointment. Loans are plan was approved by shareholders at the FY22 Annual General not provided. Meeting. Further details of the number of share rights granted to the CEO and CFO in relation to the FY22 LTI can be found later in this report under the heading ‘Share Rights’. Daniel Bracken, CEO, commenced with the Company in FY19 and participated in that year’s LTI, which has three vesting dates over consecutive years, commencing in FY23. No share rights vested for the CEO in FY22. Andrew Lowe, CFO, commenced with the Company in FY18 and participated in that year’s LTI, which has three vesting dates over consecutive years. Andrew’s first tranche of that scheme, 4,325 share rights vested and were exercised in August 2021. No other share rights vested for the CFO in FY22. 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. FY22 NON-EXECUTIVE DIRECTOR REMUNERATION Total compensation for all Non-Executive Directors, last voted upon by shareholders on 29 June 2016, is not to exceed $840,000 per annum. Directors’ base fees for FY22 were $104,235 per annum. The Board Chair receives twice the base fee. Additional fees are paid where a Director is Chair of a committee. Committee Chair fees People Development and Remuneration Audit and Risk $ 21,535 32,303 It is the Company’s policy to consider CPI in determining any increase to Directors’ fees annually. In FY22, CPI was 3.8% and Non-Executive Director fees increased by this percentage. All Non-Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter sumarises the Board policies and terms, including remuneration, relevant to the office of Director. 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. MICHAEL HILL | 2022 ANNUAL REPORT 61 DIRECTOR AND EXECUTIVE REMUNERATION OUTCOMES FOR FY22 Details of the nature and amount of each major element of remuneration of each Director of the Company and other KMP of the consolidated entity are: SHORT-TERM LONG- TERM POST-EMPLOYMENT SHARE- BASED PAYMENTS Name Salary & fees* STI cash bonus $ $ Non-Executive Directors Non-monetary benefits (deferred share rights) $ Total Long service leave Super- annuation benefits Termination benefits Share rights Total $ $ $ $ $ $ Proportion remuneration performance related $ Value of rights as proportion of remuneration $ Emma Jane Hill 2022 121,907 2021 194,736 Sir Richard Michael Hill 2022 101,034 2021 97,368 Gary Warwick Smith 2022 124,125 2021 120,127 Robert Ian Fyfe 2022 202,068 2021 117,485 - - - - - - - - Jacqueline Elizabeth Naylor 2022 94,759 2021 88,180 - - - - - - - - - - - - 121,907 194,736 101,034 97,368 124,125 120,127 202,068 117,485 94,759 88,180 Janine Suzanne Allis (retired 27 October 2020) 2022 - 2021 30,485 - - Total Director Remuneration 2022 643,893 2021 648,381 - - - - - - - 30,485 643,893 648,381 - - - - - - - - - - - - - - - - - - 12,413 11,412 - - 9,476 8,377 - 2,896 21,889 22,685 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 121,907 194,736 101,034 97,368 136,538 131,539 202,068 117,485 104,235 96,557 - 33,381 665,782 671,066 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 62 MICHAEL HILL | 2022 ANNUAL REPORT SHORT-TERM LONG- TERM POST-EMPLOYMENT SHARE- BASED PAYMENTS Name Salary & fees* STI cash bonus $ $ Non-monetary benefits (deferred share rights) $ Total Long service leave Super- annuation benefits Termination benefits Share rights Total $ $ $ $ $ $ Proportion remuneration performance related $ Value of rights as proportion of remuneration $ KMP Daniel Bracken, CEO 2022 1,050,052 535,544 535,543 2,121,139 35,231 27,500 2021 1,025,532 620,487 – 1,646,019 16,962 25,000 Andrew Lowe, CFO 2022 502,689 169,179 169,179 841,047 15,673 27,500 2021 483,848 184,526 – 668,374 12,930 25,000 Andrea Slingsby, COO (ceased 22 January 2021) 2022 - – – – 2021 293,388 70,000 – 363,388 – – – 14,904 - – – – – – Vanessa Brennan, CBSO (commenced 11 August 2020 and ceased 13 December 2020) 2022 - 2021 136,657 – – – – – 136,657 – – – 8,654 Total KMP Remuneration 2022 1,552,741 704,723 704,722 2,962,186 50,904 55,000 2021 1,939,425 875,013 – 2,814,438 29,892 73,558 Total Director and KMP Remuneration 2022 2,196,634 704,723 704,722 3,606,079 50,904 76,889 2021 2,587,806 875,013 – 3,462,819 29,892 96,243 – – – – – – 156,176 2,340,046 45.77% 6.67% 33,716 1,721,697 36.04% 1.96% 47,161 931,381 36.33% 5.06% 19,684 725,988 25.42% 2.71% – – - - 19,909 398,201 17.58% 5.00% – – 13,489 158,800 - - - 8.49% 203,337 3,271,427 43.08% 6.22% 86,798 3,004,686 29.12% 2.89% 203,337 3,937,209 35.80% 5.16% 86,798 3,675,752 23.80% 2.36% MICHAEL HILL | 2022 ANNUAL REPORT 63 ADDITIONAL STATUTORY INFORMATION EQUITY INSTRUMENTS UNISSUED SHARES All options or rights refer to options or rights over ordinary As at the date of this report, there were 1,000,000 unissued shares of Michael Hill International Limited, which are ordinary shares under options. Option holders do not have any exercisable on a one-for-one basis under the Executive right, by virtue of the option, to participate in any share issue incentive plan. of the Company or any related body corporate. 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 KMP) have been altered or modified by the issuing entity during the reporting period or the prior period. 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. The exercise price of any future option grants will be set by using the same method, with reference to the Australian Securities Exchange (‘ASX’). ANALYSIS OF OPTIONS AND RIGHTS OVER EQUITY INSTRUMENTS GRANTED AS COMPENSATION No options were granted to KMP as compensation for the financial year. SHARE RIGHTS The number of share rights issued to KMP and senior management during FY22 was 2,106,647 share rights. Of these, share rights issued to KMP are set out below. Refer to note D3 of the accompanying financial report for further details. SHARE RIGHTS KMP Daniel Bracken Andrew Lowe Issued during the year Number Fair value per share right $ 634,081 200,307 0.29 0.29 64 MICHAEL HILL | 2022 ANNUAL REPORT RECONCILIATION OF OPTIONS AND SHARE RIGHTS HELD BY KMP No options are held by KMP. The number of rights over ordinary shares held during the financial year by KMP, including the number issued, vested, exercised and forfeited is set out below: BALANCE AT START OF THE YEAR BALANCE AT END OF THE YEAR KMP’s short- term incentive cash bonuses Vested and exercisable Unvested Issued Forfeited Vested Exercised Vested and exercisable Unvested Value of rights issued during the year Daniel Bracken* - 2,310,215 634,081 Andrew Lowe - 679,575 200,307 Total - 2,989,790 834,388 - - - - - - - - 2,944,296 183,883 (4,325) - 875,557 58,089 (4,325) - 3,819,853 241,973 *Share rights granted to Daniel Bracken during the reporting period were approved by shareholders at the Company’s 2021 AGM as required by ASX Listing Rule 10.14. Share rights relating to FY23 LTI plan are anticipated to be granted in late 2022. SHAREHOLDINGS The number of ordinary shares held during the financial year by KMP is set out below: NAME BALANCE AT START OF THE YEAR RECEIVED ON EXERCISE OF RIGHTS OTHER CHANGES BALANCE AT END OF THE YEAR Non-Executive Directors Emma Hill* 167,487,526 Sir Richard (Michael) Hill* 148,330,600 Gary Smith Robert Fyfe Jacqueline Naylor KMP 80,000 2,693,640 160,000 Daniel Bracken 201,869 - - - - - - Andrew Lowe - 4,325 *Includes common shareholding due to a related party. - - - 167,487,526 148,330,600 80,000 (400,000) 2,293,640 - - - 160,000 201,869 4,325 MICHAEL HILL | 2022 ANNUAL REPORT 65 VOTING OF SHAREHOLDERS AT LAST YEAR’S ANNUAL GENERAL MEETING The Company received 99.3% of “For” votes on its remuneration report for FY21. The Company did not receive any specific feedback at the AGM or throughout the year on its remuneration practices. 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. INSURANCE OF OFFICERS AND INDEMNITIES NON-AUDIT SERVICES 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 Secretaries and certain other officers. No Director or officer of the Company has received 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 (AUSTRALIA) Advisory fees Total remuneration for non-audit services 2022 $ 3,682 3,682 2021 $ 3,682 3,682 AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 (Cth) is included in this report. 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 26 August 2022 in accordance with a resolution of Directors as required by section 298 of the Corporations Act 2001. R I Fyfe Chair Brisbane 26 August 2022 66 MICHAEL HILL | 2022 ANNUAL REPORT Ernst & Young 111 Eagle Street Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au Ernst & Young 111 Eagle Street Ernst & Young 111 Eagle Street Brisbane QLD 4000 Australia Ernst & Young Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 111 Eagle Street Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au ey.com/au GPO Box 7878 Brisbane QLD 4001 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 26 June 2022, I declare to the best of my knowledge and belief, there have been: Auditor’s independence declaration to the directors of Michael Hill International Limited AUDITOR’S INDEPENDENCE DECLARATION Auditor’s independence declaration to the directors of Michael Hill International Limited TO THE DIRECTORS OF MICHAEL HILL As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, I declare to the best of my knowledge and belief, there have been: INTERNATIONAL LIMITED As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, 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; relation to the audit; relation to the audit. b. No contraventions of any applicable code of professional conduct in relation to the audit; and c. No non-audit services provided that contravene any applicable code of professional conduct in a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in b. No contraventions of any applicable code of professional conduct in relation to the audit; and As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, I declare to the best of my knowledge and belief, there have been: c. No non-audit services provided that contravene any applicable code of professional conduct in b. No contraventions of any applicable code of professional conduct in relation to the audit; and (a) No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. relation to the audit. relation to the audit. (b) No contraventions of any applicable code of professional conduct in relation to the audit; and c. No non-audit services provided that contravene any applicable code of professional conduct in This declaration is in respect of Michael Hill International Limited and the entities it controlled during (c) No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit. the financial year. This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. Ernst & Young Ernst & Young Ernst & Young Ernst & Young Kellie McKenzie Partner 26 August 2022 Kellie McKenzie Partner 26 August 2022 Kellie McKenzie Kellie McKenzie Partner Partner 26 August 2022 26 August 2022 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation MICHAEL HILL | 2022 ANNUAL REPORT 67 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 68 MICHAEL HILL | 2022 ANNUAL REPORT FINANCIAL STATEMENTS 70 Consolidated Statement of Comprehensive Income 76 Notes to the Financial Statements 71 72 Consolidated Statement Of Financial Position Consolidated Statement Of Changes In Equity 73 Consolidated Cash Flow Statement 124 Directors’ Declaration 125 Independent Auditor’s Report 129 ASX Listing – Additional Information The Directors present the consolidated financial statements of Michael Hill International Limited for the year ended 26 June 2022 MICHAEL HILL | 2022 ANNUAL REPORT 69 CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME Notes A2 A3 D1 F5 F1 F1 F9 Notes PROFIT OR LOSS 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 expenses Profit before income tax Income tax expense Profit for the year OTHER COMPREHENSIVE INCOME Item that may be reclassified subsequently to profit or loss: Gains/(losses) on cash flow hedges Currency translation differences arising during the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Owners of Michael Hill International Limited 2022 $’000 595,210 8,913 (210,384) (155,332) (9,446) (41,174) (17,674) (521) (3,253) (51,944) (231) (40,912) (7,549) 65,703 (18,991) 46,712 2022 $’000 - (977) (977) 45,735 45,735 2021 $’000 RESTATED1 556,486 17,969 (207,570) (149,653) (15,135) (28,325) (17,959) (1,883) (3,513) (48,061) (448) (35,232) (7,595) 59,081 (18,066) 41,015 2021 $’000 RESTATED1 34 (177) (143) 40,872 40,872 EARNINGS PER SHARE FOR PROFIT ATTRIBUTABLE TO THE ORDINARY EQUITY HOLDERS OF THE COMPANY Basic earnings per share Diluted earnings per share Notes F2 F2 2022 cents 12.03 11.86 2021 cents RESTATED1 10.57 10.53 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 70 MICHAEL HILL | 2022 ANNUAL REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Assets held for sale Current tax receivables Contract assets Other current assets Total current assets Non-current assets Trade and other receivables Right-of-use assets Property, plant and equipment Intangible assets Deferred tax assets Contract assets Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Lease liabilities Contract liabilities Provisions Liabilities directly associated with assets held for sale Current tax liabilities Deferred revenue Total current liabilities Non-current liabilities Lease liabilities Contract liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Notes B1 F3 A4 F4 A2 F3 A5 F5 F6 F9 A2 F7 A5 A2 F8 F4 A5 A2 F8 F11 2022 $’000 95,844 7,541 181,539 - 944 845 5,419 292,132 227 107,385 41,012 10,989 58,552 488 394 219,047 511,179 78,397 38,183 24,818 14,306 - 2,093 799 2021 $’000 RESTATED1 72,361 8,352 171,246 14,397 732 406 3,576 271,070 - 105,882 36,453 6,013 68,329 739 537 217,953 489,023 73,961 34,304 24,157 14,854 1,607 1,886 753 158,596 151,522 91,386 58,605 7,497 157,488 316,084 195,095 11,388 3,369 180,338 195,095 99,382 56,393 7,413 163,188 314,710 174,313 11,285 4,216 158,812 174,313 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. MICHAEL HILL | 2022 ANNUAL REPORT 71 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to owners of Michael Hill International Limited Balance at 29 June 2020 Accounting policy change – SaaS implementation costs Restated total equity at the beginning of the financial year Profit for the year¹ Currency translation differences Derivative fair value changes Total comprehensive income for the year¹ Transactions with members in their capacity as owners: Dividends paid Issue of share capital on exercise of share rights Transfer option reserve on forfeiture of vested options Share-based payments expense Balance at 27 June 2021¹ Profit for the year Currency translation differences Total comprehensive income for the year Transactions with members in their capacity as owners: Dividends paid Issue of share capital on exercise of share rights Transfer option reserve on forfeiture of vested options Share-based payments expense Balance at 26 June 2022 Notes Contributed Equity Share Based Payments Reserve $’000 11,016 $’000 697 Foreign Currency Translation Reserve $’000 Cash Flow Hedge Reserve Retained Profits Total Equity $’000 $’000 $’000 3,757 (34) 138,370 153,806 I1(R) - - (1) - (14,770) (14,771) 11,016 697 3,756 (34) 123,600 139,035 - - - - - - - - - - 269 (269) - - 11,285 - - - - (17) 226 637 - - - - 103 (103) - - 103 11,388 (53) 286 130 767 - (177) - (177) - - - - 3,579 - (977) (977) - - - - - 2,602 - - 34 34 41,015 41,015 - - (177) 34 41,015 40,872 - - - - - - - - - - - - - - (5,820) (5,820) - 17 - - - 226 158,812 174,313 46,712 46,712 - (977) 46,712 45,735 (25,239) (25,239) - 53 - - - 286 (25,186) (24,953) 180,338 195,095 B2 F11 D3 D3 B2 F11 D3 D3 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 72 MICHAEL HILL | 2022 ANNUAL REPORT CONSOLIDATED STATEMENT OF CASH FLOWS Notes F4 A5 B1 F5 F6 A5 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) Proceeds from sale of in-house Canadian customer finance debtors Interest received Other revenue received Interest paid Leasing 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 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 B1 2022 $’000 686,575 (541,509) 145,066 14,209 16 4,477 (795) (6,682) (8,280) (36,437) 111,574 36 (15,611) (6,860) (22,435) - - (40,464) (25,239) (65,703) 23,435 72,361 48 95,844 2021 $’000 RESTATED1 657,320 (492,976) 164,344 - 4 14,442 (1,036) (6,653) (4,082) (32,522) 134,497 73 (6,430) (3,642) (9,999) 2,000 (12,682) (40,997) (11,636) (63,315) 61,183 11,204 (26) 72,361 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. MICHAEL HILL | 2022 ANNUAL REPORT 73 “ I am particularly proud of our people and the culture that we continue to build at Michael Hill - a high performance team across all levels, with an energy and passion that underpins our growth agenda.” DANIEL BRACKEN, MANAGING DIRECTOR & CEO 74 MICHAEL HILL | 2022 ANNUAL REPORT NOTES TO THE NOTES TO THE FINANCIAL STATEMENTS FINANCIAL STATEMENTS A Financial Overview A1 Segment Information A2 Revenue A3 Other Income A4 Inventories A5 Leases B Cash Management B1 Cash And Cash Equivalents B2 Dividends 76 76 78 80 81 81 84 84 85 C Financial Risk Management 86 C1 Financial Risk Management 86 C2 Derivative Financial Instruments C3 Capital Management 90 91 D Reward And Recognition 92 D1 Employee Benefits D2 Key Management Personnel D3 Share-Based Payments 92 92 92 F4 Assets Held For Sale And Directly Associated Liabilities 99 F5 Property, Plant And Equipment 100 F6 Intangible Assets F7 Trade And Other Payables F8 Provisions F9 Tax F10 Auditors’ Remuneration F11 Contributed Equity F12 Reserves G Group Structure G1 Interests In Other Entities G2 Deed Of Cross Guarantee G3 Parent Entity Financial Information H Unrecognised Items H1 Contingencies And Commitments 102 103 103 104 107 107 108 109 109 110 113 114 114 H2 Events Occuring After The End Of The Reporting Period 114 E Related Parties 95 I F Other Information F1 Expenses F2 Earnings Per Share F3 Trade And Other Receivables 96 96 96 97 Summary of Accounting Policies & Significant Estimates & Judgements I1 I2 Summary Of Significant Accounting Policies Significant Estimates And Judgements 115 115 123 MICHAEL HILL | 2022 ANNUAL REPORT 75 NOTES TO THE FINANCIAL STATEMENTS CORPORATE INFORMATION The consolidated financial statements of Michael Hill International Limited and its subsidiaries (collectively, the Group) for the year ended 26 June 2022 were authorised for issue in accordance with a resolution of the Directors on 26 August 2022. 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’). A FINANCIAL OVERVIEW A1 SEGMENT INFORMATION Management have determined the operating segments based on the reports reviewed by the Board and Executive Management team (chief operating decision makers (CODM)) 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 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 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. The segment disclosures are prepared excluding the impact of AASB16 Leases and IFRIC SaaS guidance. An adjustment column representing these entries has been included for the purposes of reconciliation to statutory results. TYPES OF PRODUCTS AND SERVICES Michael Hill International Limited and its controlled entities operate predominately in the sale of jewellery and related services. MAJOR CUSTOMERS total assets or total liabilities based on the operations Michael Hill International Limited and its controlled entities 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 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. 76 MICHAEL HILL | 2022 ANNUAL REPORT SEGMENT RESULTS YEAR ENDED 26 JUNE 2022 Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 Group pre- adjustments $’000 Adjustments Group $’000 $’000 Operating revenue 303,409 117,594 174,030 177 595,210 Gross profit 196,936 74,716 112,947 227 384,826 Gross margin 64.9% 63.5% 64.9% 64.7% - - 595,210 384,826 64.7% EBITDA 58,826 30,765 39,648 (46,114) 83,125 42,055 125,180 Depreciation and amortisation (7,021) (2,356) (5,455) (2,560) (17,392) (34,552) (51,944) Segment EBIT 51,805 28,409 34,193 (48,674) 65,733 7,503 73,236 EBIT as a % of revenue 17.1% 24.2% 19.6% 11.0% 12.3% Interest income Finance costs - (50) - (2) - - 16 16 - 16 (815) (867) (6,682) (7,549) Net profit before tax 51,755 28,407 34,193 (49,473) 64,882 821 65,703 Income tax expense Net profit after tax YEAR ENDED 27 JUNE 2021 (18,991) 46,712 Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 Group pre- adjustments $’000 Adjustments Group $’000 Restated1 $’000 Restated1 Operating revenue 312,264 118,663 123,930 1,629 556,486 Gross profit 194,148 73,554 76,017 5,197 348,916 Gross margin 62.2% 62.0% 61.3% 62.7% - - 556,486 348,916 62.7% EBITDA 69,250 35,117 20,935 (40,411) 84,891 29,842 114,733 Depreciation and amortisation (6,361) (1,996) (5,100) (3,233) (16,690) (31,371) (48,061) Segment EBIT 62,889 33,121 15,835 (43,644) 68,201 (1,529) 66,672 EBIT as a % of revenue 20.1% 27.9% 12.8% 12.3% 12.0% Interest income Finance costs - (68) - (7) - - 4 4 - 4 (867) (942) (6,653) (7,595) Net profit before tax 62,821 33,114 15,835 (44,507) 67,263 (8,182) 59,081 Income tax expense Net profit after tax (18,066) 41,015 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. MICHAEL HILL | 2022 ANNUAL REPORT 77 NOTES TO THE FINANCIAL STATEMENTS CONT. A2 REVENUE Revenue from sale of goods and repair services Revenue from Professional Care Plans (PCP) Interest and other revenue from in-house customer finance program Revenue from Lifetime Diamond Warranty (LTDW) 2022 $’000 2021 $’000 561,293 525,781 30,742 27,310 2,437 738 2,792 603 Total revenue from contracts with customers 595,210 556,486 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 geographical regions: 2022 Timing of revenue recognition Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 At a point in time 286,687 111,885 162,665 Over time 16,722 5,708 11,365 303,409 117,593 174,030 56 122 178 2021 Timing of revenue recognition Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 At a point in time 296,723 113,547 114,099 Over time 15,541 5,116 9,831 1,412 217 Total $’000 561,293 33,917 595,210 Total $’000 525,781 30,705 312,264 118,663 123,930 1,629 556,486 78 MICHAEL HILL | 2022 ANNUAL REPORT ASSETS AND LIABILITIES RELATED TO CONTRACTS WITH CUSTOMERS Right of return assets Deferred PCP bonuses Total contract assets Deferred service revenue – PCP Deferred service revenue – Lifetime Diamond Warranty Right of return liabilities Total contract liabilities 2022 $’000 577 756 1,333 77,148 4,808 1,467 2021 $’000 58 1,087 1,145 76,581 3,821 148 83,423 80,550 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 or partially satisfied in a prior year: Revenue recognised that was included in the contract liability balance at the beginning of the year Impact on revenue recognised relating to performance obligations satisfied in previous years 2022 $’000 2021 $’000 24,896 22,243 - (1,305) Revenue recognition patterns are regularly reassessed based on new and historical trends resulting in remeasurement of revenue recognised in previous years. MICHAEL HILL | 2022 ANNUAL REPORT 79 NOTES TO THE FINANCIAL STATEMENTS CONT. ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES (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 and instalment plans or debit and credit cards. The recorded revenue is the gross amount of sale (excluding taxes), including any fees payable for the transaction and net amounts deferred under AASB15 Revenue from Contracts with (iv) Deferred interest revenue Interest revenue is deferred on the in-house customer finance program when the sale of the good or service occurs. 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. Customers such as significant financing components (v) Right of return assets and liabilities and potential customer returns. (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 and expenses 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, such as Rights of return recognises the estimated returned sales under the Group’s return policy, being 30 days for all countries. 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. cleaning, repairs and resizing, to customers based on the type (vi) Lifetime Diamond Warranty 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 the timing and quantum of expected services under the plans is used as a basis to establish the amount of service revenue to recognise in the Consolidated Statement of Profit or Loss and Comprehensive Income. 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 Direct and incremental sales staff bonuses associated with the utilising this service-type warranty. sale of PCPs are capitalised in contract assets and amortised in proportion to the PCP revenue recognised. A3 OTHER INCOME Net foreign exchange gains Government grants Other items 2022 $’000 169 2,864 5,880 8,913 2021 $’000 2,367 14,593 1,009 17,969 The Group received grants in relation to COVID-19 wage subsidies in all three markets. These grants were accounted for as income upon recognition of the corresponding employee benefit expense as satisfactory pre-requisites of the grant were met. Further information regarding wage subsidies is disclosed in note I2. 80 MICHAEL HILL | 2022 ANNUAL REPORT A4 INVENTORIES Raw materials Finished goods Packaging and other consumables 2022 $’000 13,033 2021 $’000 12,435 162,138 156,199 6,368 2,612 181,539 171,246 Finished goods are held at the lower of cost or net realisable value (NRV). During the year, finished goods incurred a write-down of $2,565,000 (2021: $2,327,000) to be carried at NRV. This is recognised in cost of goods sold. A5 LEASES RIGHT-OF-USE ASSETS Right-of-use assets Less: Accumulated depreciation Less: Accumulated impairment RECONCILIATION OF RIGHT-OF-USE ASSETS Notes Opening carrying value Additional right-of-use assets relating to leases entered into during the year Lease modifications agreed during the year 2022 $’000 2021 $’000 221,894 179,524 (113,863) (72,925) (646) (717) 107,385 105,882 2022 $’000 105,882 34,395 6,514 2021 $’000 123,911 13,311 7,581 Depreciation expense F1 (39,257) (35,357) Reduction in right-of-use assets as a consequence of COVID-19 on rent concessions Foreign currency translation Closing carrying value (1,106) (3,902) 957 338 107,385 105,882 MICHAEL HILL | 2022 ANNUAL REPORT 81 NOTES TO THE FINANCIAL STATEMENTS CONT. LEASE LIABILITIES Current Non-current RECONCILIATION OF LEASE LIABILITIES Notes Opening carrying value Additional lease liabilities entered into during the year Lease modifications agreed during the year Net reduction in future lease payments as a consequence of COVID-19 on rent concessions Interest expense Lease repayments Foreign currency translation Closing carrying value 2022 $’000 38,183 91,386 2021 $’000 34,304 99,382 129,569 133,686 2022 $’000 2021 $’000 133,686 158,012 35,173 1,108 13,177 7,517 (1,106) (3,902) F1 6,682 6,653 (47,146) (47,650) 1,172 (121) 129,569 133,686 The incremental borrowing rate used in determining the lease liability ranged between 1.44% and 9.30% (2021: 1.47% and 7.12%). Expenses relating to short-term leases during the period of $1,478,000 (2021: $6,444,000) were included in occupancy costs. ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS 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. 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. 82 MICHAEL HILL | 2022 ANNUAL REPORT On 28 May 2020, the IASB issued COVID-19-Related Rent Concessions – amendment to AASB16 Leases. The amendments provide relief to lessees from applying AASB16 Leases guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related rent concession the same way it would account for the change under AASB16 Leases, if the change were not a lease modification. The Group has applied this practical expedient in the consolidated financial statements for all COVID-19 impacted leases. Where the practical expedient has been applied, the Group has remeasured its lease liabilities, using the remeasured consideration (e.g., reflecting the lease payment reduction or lease payment deferral provided by the lessor), with a corresponding adjustment to the right-of-use asset. The right-of-use assets are also subject to impairment. Refer to the accounting policies in note I1(F). 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. 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 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 has several lease contracts that include extension options. These options are negotiated by Management to provide flexibility in managing the leased-asset portfolio and align with the Group’s business needs. Management exercises significant judgement in determining whether these extension options are reasonably certain to be exercised (refer to note I2). Set out below are the undiscounted potential future rental payments relating to the period following the exercise date of extension options that are not included in the lease term: Within five years $’000 More than five years $’000 2022 Total $’000 Within five years $’000 More than five years $’000 2021 Total $’000 Extension options expected not to be exercised 163 202 365 277 55 332 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 expensed on a straight-line basis over the lease term. MICHAEL HILL | 2022 ANNUAL REPORT 83 NOTES TO THE FINANCIAL STATEMENTS CONT. B CASH MANAGEMENT B1 CASH AND CASH EQUIVALENTS Cash at bank and on hand 2022 $’000 95,844 2021 $’000 72,361 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES Notes F5 A5 F6 F5 D3 Profit for the year Adjustment for: Depreciation of property, plant and equipment Depreciation of right-of-use assets Amortisation of intangible assets Impairment of property, plant and equipment Impairment of other assets Non-cash employee benefits expense – share-based payments Make good interest Net loss on sale of non-current assets Net exchange differences Other non-cash movements 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 contract liabilities 2022 $’000 2021 $’000 Restated1 46,712 41,015 10,954 39,257 1,733 521 3,253 286 109 231 335 (5,338) 14,037 (10,812) 9,778 393 (904) 187 (6) 855 (7) 11,746 35,357 958 1,883 3,513 226 (57) 448 2,999 - 13,163 7,663 14,708 451 (1,192) 6,637 2,896 (11,114) 3,197 Net cash inflow from operating activities 111,574 134,497 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. 84 MICHAEL HILL | 2022 ANNUAL REPORT B2 DIVIDENDS ORDINARY SHARES Final dividend for the year ended 27 June 2021 of 3.0 cents per fully paid share paid on 24 September 2021 (2020: no final dividend) Interim dividend for the year ended 26 June 2022 of 3.5 cents (2021: 1.5 cents) per fully paid share paid on 25 March 2022 (2021: 26 March 2021) DIVIDENDS NOT RECOGNISED AT THE END OF THE REPORTING PERIOD Since year-end, the Directors have recommended a 4.0 cents (2021: 3.0 cents) per fully paid share final dividend FRANKING AND IMPUTATION CREDITS Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2021: 30.0%) 2022 $’000 11,649 2021 $’000 - 13,590 5,820 25,239 5,820 2022 $’000 2021 $’000 15,531 11,644 2022 $’000 2021 $’000 2,679 2,552 Imputation credits (NZ$) available for subsequent reporting periods based on New Zealand tax rate of 28.0% (2021: 28.0%) 12,116 18,072 The dividends paid during the current financial period and corresponding previous financial period were fully imputed and not franked. The franking credit amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment and refund of income tax payable. The above imputation credit amounts represent the balance of the imputation account as at the end of the financial year, adjusted for imputation credits that will arise from the payment and refund of income tax payable. As the dividend recommended by the Directors since year end, but not recognised as a liability at year end, will be unfranked there will be no reduction in the franking account. The impact on the imputation credit account of the dividend recommended by the Directors since year end, but not recognised as a liability at year end, is estimated to be a reduction in the imputation credit account of NZ$6,734,292 (2021: NZ$4,736,175). The amount of imputation credits is dependent on the NZD exchange rate at the time of the dividend. MICHAEL HILL | 2022 ANNUAL REPORT 85 NOTES TO THE FINANCIAL STATEMENTS CONT. C FINANCIAL RISK MANAGEMENT C1 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group seeks to use derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures as required. 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 ageing analysis for credit risk. RISK EXPOSURE ARISING FROM MEASUREMENT MANAGEMENT Market risk Foreign exchange Future commercial transactions Recognised financial assets Cash flow forecasting and Forward exchange and liabilities not denominated sensitivity analysis contracts (FEC) in AUD Interest rate Long-term borrowings at variable rates Sensitivity analysis Interest rate swaps Input prices Components of finished goods Sensitivity analysis End product pricing flexibility Credit risk Cash and cash equivalents and trade receivables Ageing analysis Diversification of bank deposits, credit limits and letters of credit Availability of committed Liquidity risk Borrowings and other liabilities Rolling cash flow forecasts 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. 86 MICHAEL HILL | 2022 ANNUAL REPORT MARKET 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 is considered 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: 26 JUNE 2022 27 JUNE 2021 USD $’000 NZD $’000 CAD $’000 EUR $’000 USD $’000 NZD $’000 CAD $’000 EUR $’000 Cash and cash equivalents 10,348 Trade receivables 318 - 3 - 9 117 1,633 15 839 7 - 4 8 Trade payables (11,302) (108) (59) (793) (15,723) (36) (42) Forward exchange contracts: Buy foreign currency Sell foreign currency Net foreign currency exposure Sensitivity - - - - - - - - 7,780 - - - (5,000) (5,000) (636) (105) (50) (661) (5,471) (5,029) (5,030) - - - - - - The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to foreign currency risk. The foreign exchange sensitivities are based on the Group’s exposure existing at balance date. Sensitivity figures are pre-tax. IMPACT ON PRE-TAX PROFIT IMPACT ON OTHER COMPONENTS OF EQUITY AUD increases 10% 2022 $’000 190 2021 $’000 1,574 AUD decreases 10% (232) (1,924) 2022 $’000 2021 $’000 - - - - MICHAEL HILL | 2022 ANNUAL REPORT 87 NOTES TO THE FINANCIAL STATEMENTS CONT. INTEREST RATE RISK The Group had no borrowings and a cash surplus at the end of the reporting period. The Group is exposed to interest rate risk on its cash holdings. Sensitivity As the Group has a cash surplus with no borrowings, profit or loss is sensitive to higher/lower interest revenue from cash and cash equivalents as a result of changes in interest rates. All other non-derivative and non-lease financial liabilities have a contractual maturity of less than six months. IMPACT ON PRE-TAX PROFIT IMPACT ON OTHER COMPONENTS OF EQUITY Interest rates – increase by 100 basis points 2022 $’000 958 Interest rates – decrease by 100 basis points* (958) 2021 $’000 724 - 2022 $’000 2021 $’000 - - - - *Deposit rates in prior period were close to nil. Negative interest rates were not modelled due to the low probability of this occurring within the geographical segments in which the Group trades. 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. At the reporting date, no material credit risk exposure existed in relation to potential counterparty failure on financial instruments. Other than the loss allowance recognised in trade and other receivables in note F3, no financial assets were impaired or past due. The maximum exposure to credit risk at the end of the reporting year is the carrying amount of each class of financial assets disclosed in note F3. LIQUIDITY RISK The Group maintains prudent liquidity risk management with sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Financing arrangements The Group’s objectives when managing capital are to ensure sufficient liquidity to support its financial obligations and execute the Group’s operational and strategic plans. The Group continually assesses its capital structure and makes adjustments to it with reference to changes in economic conditions and risk characteristics associated with its underlying assets. 88 MICHAEL HILL | 2022 ANNUAL REPORT 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) 2022 $’000 1,909 2021 $’000 1,932 Expiring beyond one year (bank loans) 70,000 70,000 71,909 71,932 The termination date of the financing facilities provided to the Group by both Australia and New Zealand Banking Group Limited and The Hongkong and Shanghai Banking Corporation Limited, Sydney Branch is 29 February 2024. 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. CONTRACTUAL MATURITIES OF FINANCIAL LIABILITIES At 26 June 2022 Less than 6 months 6-12 months Between 1 and 2 years Between 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 $’000 Total contractual cash flow $’000 Non-derivatives Lease liabilities 21,730 19,806 32,499 51,798 20,146 145,979 Trade payables 78,397 - - - - 78,397 Total non-derivatives 100,127 19,806 32,499 51,798 20,146 224,376 The Group did not hold any derivatives at financial year end. At 27 June 2021 Less than 6 months 6-12 months Between 1 and 2 years Between 2 and 5 years Over 5 years $’000 $’000 $’000 $’000 $’000 Total contractual cash flow $’000 Non-derivatives Lease liabilities 19,831 18,300 30,378 51,179 34,661 154,349 Trade payables 73,961 - - - - 73,961 Total non-derivatives 93,792 18,300 30,378 51,179 34,661 228,310 Derivatives Gross settled (FECs) 232 - - - - 232 MICHAEL HILL | 2022 ANNUAL REPORT 89 NOTES TO THE FINANCIAL STATEMENTS CONT. C2 DERIVATIVE FINANCIAL INSTRUMENTS The Group is exposed to certain risks relating to its ongoing business operations. The primary risks managed using • 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. derivative instruments are foreign currency risk and interest Hedges that meet all the qualifying criteria for hedge rate risk. accounting are accounted for, as described below. The Group’s risk management strategy and how it is applied Fair value hedge to manage risk are explained below. ACCOUNTING POLICY 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: 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. When an unrecognised firm commitment is 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. • Fair value hedges when hedging the exposure to changes Cash flow hedge 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: The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income (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. 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 • There is ‘an economic relationship’ between the hedged reserve within equity. The change in the forward element item and the hedging instrument. • The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. 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 90 MICHAEL HILL | 2022 ANNUAL REPORT (including forward points) as the hedging instrument. In such accumulated OCI must be accounted for depending on the cases, the gains or losses relating to the effective portion nature of the underlying transaction as described above. of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. Classification of derivatives 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 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 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. Derivatives not designated as hedging instruments asset or non-financial liability subsequently becomes a firm The Group uses foreign currency-denominated borrowings commitment for which fair value hedge accounting is applied. and foreign exchange forward contracts to manage some of its 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. 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. If cash flow hedge accounting is discontinued, the amount Hedging reserves that has been accumulated in OCI must remain in accumulated In the current period the Group did not have any hedging OCI if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit in place that impacted the hedging reserves disclosed in the statement of changes in equity (2021: $34,000 loss was or loss as a reclassification adjustment. After discontinuation, once the hedged cash flow occurs, any amount remaining in reclassified from the cashflow hedge reserve to profit or loss). 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 included in other income Hedge ineffectiveness 2022 $’000 - 2021 $’000 232 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. C3 CAPITAL 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 banks quarterly on a pre-AASB16 Leases basis. 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. MICHAEL HILL | 2022 ANNUAL REPORT 91 NOTES TO THE FINANCIAL STATEMENTS CONT. D REWARD AND RECOGNITION D1 EMPLOYEE BENEFITS EMPLOYEE BENEFITS Employee wages 2022 $’000 2021 $’000 RESTATED1 139,155 135,181 Employee wages on-costs and post-retirement benefits 15,891 14,246 Employee share-based payments expense 286 226 155,332 149,653 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. D2 KEY MANAGEMENT PERSONNEL Short-term employee benefits Long-term benefits Post-employment benefits Share-based payments D3 SHARE-BASED PAYMENTS OPTIONS 2022 $ 2021 $ 2,962,186 2,814,438 50,904 55,000 203,337 29,892 73,558 86,798 3,271,427 3,004,686 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 expire ten years after granted, vest over five years, are exercisable at any time during the final five years and vesting is subject to remaining employed by the Group. Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. 92 MICHAEL HILL | 2022 ANNUAL REPORT Set out below are summaries of options granted under the plan: Average exercise price per option Number of options Average exercise price per option 2022 2021 Opening balance NZD options 1.63 1,000,000 Expired during the year Vested options forfeited during the year Closing balance NZD options Opening balance AUD options Closing balance AUD options - 1.46 1.70 1.56 1.56 Number of options 1,100,000 (100,000) - 1.56 0.88 - - (300,000) 700,000 1.63 1,000,000 300,000 300,000 1.56 1.56 300,000 300,000 Options outstanding at the end of the year have the following expiry dates and exercise prices: OPTIONS OUTSTANDING AT THE END OF THE YEAR Grant date Expiry date Exercise price 2022 16 November 2011 30 September 2021 NZ$1.16 19 September 2012 30 September 2022 NZ$1.41 18 September 2013 30 September 2023 NZ$1.82 - - - 2021 100,000 100,000 100,000 29 November 2013 30 September 2023 NZ$1.82 500,000 500,000 10 November 2014 30 September 2024 NZ$1.63 22 January 2016 30 September 2025 NZ$1.14 22 September 2016 30 September 2026 AU$2.12 5 October 2017 30 September 2027 AU$1.44 22 September 2018 30 September 2028 AU$1.11 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 1,000,000 1,300,000 The weighted average remaining contractual life of share options outstanding at the end of the period was 2.8 years (2021: 3.2 years). The exercise price will be converted to Australian dollars using the Reserve Bank of Australia exchange rate on the day the option is exercised. MICHAEL HILL | 2022 ANNUAL REPORT 93 NOTES TO THE FINANCIAL STATEMENTS CONT. 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 plan. An allocation of share rights is made to each eligible participant on an annual basis to a value of 65% of their target opportunity. The performance metric used is Total Shareholder Return (TSR) compound annual growth rate (CAGR) over 3 years. Subject to remaining an employee of the Group for a period of 3 years and satisfaction of TSR target metric, the share rights issued during the year will vest in accordance with the sliding vesting schedule: • no share rights vest if TSR is equal to or less than 10% CAGR; • 10% share rights vest for each 1% increase in CAGR performance between 10% CAGR to 20% CAGR; • 100% share rights vest if TSR is equal to or above 20% CAGR. During the year, the Board agreed to grant 2,106,647 share rights to eligible participants of the deferred compensation plan, subject to continual employment for a period of three years and an absolute Total Shareholder Return condition for vesting in three years. Opening balance Granted Exercised Forfeited Closing balance 2022 2021 Average fair value per share right Number of share rights Average fair value per share right Number of share rights 0.20 0.29 0.86 0.30 0.21 4,577,518 2,106,647 (143,225) (428,608) 0.81 0.15 0.72 1.41 788,798 4,189,622 (373,044) (27,858) 6,112,332 0.20 4,577,518 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 Limited shares over ten trading days following the shares trading subsequent to the final Annual results announcement. Share rights issued during the current financial year used the Monte Carlo model to determine the fair value of share rights using the following inputs: Number of rights* Share price Annualised volatility Expected dividend yield Risk free rate Fair value of share right 2022 2021 2,106,647 3,878,533 $0.85 $0.39 40% 7.0% 0.18% $0.29 45% 10.0% 0.27% $0.13 *Further to the share rights issued above, in 2021 there were an additional 311,089 share rights issued on 6 October 2020 with a fair value of $0.35 per right. 94 MICHAEL HILL | 2022 ANNUAL REPORT Expenses arising from share-based payment transactions 2022 $’000 286 2021 $’000 226 ACCOUNTING POLICY Options 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, market performance conditions, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. It also assumes the options will be exercised at the mid-point of the exercise period. The fair value of options granted is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted: • including any market performance conditions (e.g. the entity’s share price) • excluding the impact of any service and non-market performance vesting conditions (e.g. profitability, sales growth targets and remaining an employee of the entity over a specified period), and • including the impact of any non-vesting conditions (e.g. 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 using the Monte Carlo method and is recognised over the period during which the employees become unconditionally entitled to the rights. 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. E RELATED PARTIES RELATED PARTY TRANSACTIONS Graphic design services rendered by a related party of board members 2022 $ 16,621 2021 $ 13,559 All transactions with related parties were in the normal course of business and on normal terms and conditions. MICHAEL HILL | 2022 ANNUAL REPORT 95 NOTES TO THE FINANCIAL STATEMENTS CONT. F OTHER INFORMATION F1 EXPENSES DEPRECIATION AND AMORTISATION Depreciation on property, plant and equipment Depreciation on right-of-use assets Total depreciation Amortisation on software Total amortisation Notes F5 A5 F6 2022 $’000 10,954 39,257 50,211 1,733 1,733 2021 $’000 RESTATED1 11,746 35,357 47,103 958 958 Total depreciation and amortisation 51,944 48,061 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. FINANCE COSTS Interest on lease liabilities Bank and interest charges Interest on make good provision F2 EARNINGS PER SHARE Notes A5 2022 $’000 6,682 758 109 2021 $’000 6,653 999 (57) 7,549 7,595 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 2022 $’000 2021 $’000 RESTATED1 46,712 41,015 Profit from continuing operations attributable to the ordinary equity holders of the Company 46,712 41,015 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. 96 MICHAEL HILL | 2022 ANNUAL REPORT 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 2022 Number 2021 Number 388,268,845 387,924,289 5,668,197 1,771,137 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 393,937,042 389,695,426 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. All options outstanding at financial year end were considered to be non-dilutive. The options and share rights have not been included in the determination of basic earnings per share. Details are set out in note D3. F3 TRADE AND OTHER RECEIVABLES Trade receivables Provision for expected credit loss Canadian in-house customer finance Provision for expected credit loss Sundry debtors 2022 2021 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 3,795 (657) 3,138 524 (202) 322 4,081 - - - 240 (13) 227 3,795 6,555 (657) (373) 3,138 6,182 764 (215) 549 - - - - 4,081 2,170 7,541 227 7,768 8,352 - - - - - - - - Total $’000 6,555 (373) 6,182 - - - 2,170 8,352 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. CANADIAN IN-HOUSE CUSTOMER FINANCE In October 2012, the Group 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 expected credit losses (ECL). The Canadian in-house customer finance loan book was previously determined to be an asset held for sale, refer to note F4. The sale was finalised during the period. The balance remaining consists of the unsold loan accounts, and any customer sales made under the program after the completion date of the loan book sale. SUNDRY DEBTORS Sundry debtors relates to supplier credits, security deposits and other sundry receivables. Based on the credit history of these debtors, it is expected that these amounts will be received when due and no impairment is recognised. MICHAEL HILL | 2022 ANNUAL REPORT 97 NOTES TO THE FINANCIAL STATEMENTS CONT. EFFECTIVE INTEREST RATES ECL AND RISK EXPOSURE All receivables are non-interest bearing except for a small An ECL analysis is performed at each reporting date. portion of in-house customer finance receivables. In-house The maximum exposure to credit risk is the carrying value of customer finance receivables are recognised net of significant in-house customer finance program and trade receivables. financing components determined in accordance with The Group does not hold collateral as security. The Group AASB15 Revenue from Contracts with Customers. evaluates the concentration of risk with respect to these receivables as low. For further details refer to note C1. AGEING OF TRADE RECEIVABLES Current < 30 days past due 30 – 60 days past due 60+ days past due 2022 $’000 2,829 254 84 628 2021 $’000 5,961 298 - 296 3,795 6,555 MOVEMENTS IN THE PROVISION FOR ECL OF TRADE RECEIVABLES ARE AS FOLLOWS: Opening balance Additional provisions recognised Net amounts written back/(written off) Exchange differences Closing balance AGEING OF CANADIAN IN-HOUSE CUSTOMER DEBTOR FINANCE Current, aged 0 – 30 days Past due, aged 31 – 90 days Past due, aged more than 90 days 98 MICHAEL HILL | 2022 ANNUAL REPORT 2022 $’000 373 614 (329) (1) 657 2021 $’000 340 16 17 - 373 2022 $’000 2021 $’000 600 40 124 764 - - - - MOVEMENTS IN THE PROVISION FOR ECL OF CANADIAN IN-HOUSE CUSTOMER DEBTOR FINANCE ARE AS FOLLOWS: Opening balance Additional provisions recognised Net amounts written off Exchange differences Closing balance 2022 $’000 - 1,382 (1,149) (18) 215 2021 $’000 1,436 - (1,488) 52 - F4 ASSETS HELD FOR SALE AND DIRECTLY ASSOCIATED LIABILITIES Canadian in-house customer finance debtors Total assets held for sale Deferred interest revenue Total liabilities directly associated with assets held for sale 2022 $’000 - - 2022 $’000 - - 2021 $’000 14,397 14,397 2021 $’000 1,607 1,607 During the year, the Group finalised the sale of the Canadian in-house customer finance debtors, alongside the associated liabilities. In the previous financial year these were classified as assets held for sale, and written down to Management’s best estimate of net proceeds of the sale and estimated costs of disposal. The sale finalisation resulted in cash inflows of $14,209,000, derecognition of the sold assets and directly associated liabilities, and recognition of accruals for ongoing service fees. An overall expense of $1,080,000 in the period (2021: $2,986,000) was recognised as impairment of other assets. Residual unsold accounts and subsequent customer sales under the program are recorded under trade receivables, refer note F3. The loss recognised on this asset sale is included in the Canada segment in note A1. MICHAEL HILL | 2022 ANNUAL REPORT 99 NOTES TO THE FINANCIAL STATEMENTS CONT. F5 PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT At 29 June 2020 Cost Accumulated depreciation and impairment Plant and equipment $’000 Fixtures and fittings $’000 Motor vehicles $’000 Leasehold improvements $’000 Display materials $’000 Total $’000 32,831 34,431 47 78,164 15,197 160,670 (24,576) (26,325) (31) (51,279) (13,054) (115,265) Net book amount 8,255 8,106 16 26,885 2,143 45,405 Year ended 27 June 2021 Opening net book amount 8,255 8,106 Exchange difference Additions Disposals (52) 2,109 (413) 9 792 (38) Depreciation charge (2,938) (2,604) Impairment loss (349) (126) Closing net book amount 6,612 6,139 At 27 June 2021 Cost Accumulated depreciation and impairment 33,906 34,291 (27,294) (28,152) Net book amount 6,612 6,139 Year ended 26 June 2022 Opening net book amount 6,612 6,139 Exchange difference (36) 12 Additions Disposals 2,835 2,192 (77) (97) Depreciation charge (2,569) (2,254) Impairment loss (23) (151) Closing net book amount 6,742 5,841 At 26 June 2022 Cost Accumulated depreciation and impairment 36,315 35,733 (29,573) (29,892) Net book amount 6,742 5,841 100 MICHAEL HILL | 2022 ANNUAL REPORT 16 (1) - (12) (3) - - - - - - - - - - - - - - - 26,885 2,143 45,405 47 3,279 (1,092) (5,329) (1,357) 43 250 (244) (872) 46 6,430 (1,799) (11,746) (51) (1,883) 22,433 1,269 36,453 78,996 2,184 149,377 (56,563) (915) (112,924) 22,433 1,269 36,453 22,433 1,269 36,453 325 27 328 6,648 4,297 15,972 (69) (23) (266) (5,498) (633) (10,954) (219) (128) (521) 23,620 4,809 41,012 86,673 6,489 165,210 (63,053) (1,680) (124,198) 23,620 4,809 41,012 IMPAIRMENT LOSS 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 be redeployed throughout the Group are not impaired. A review of impairment indicators was performed due to the potential impact of COVID-19, which resulted in periodic temporary store closures and reduction in sales, as disclosed in note I2. There were no indicators of impairment identified. The Group treats each store as a separate cash-generating unit for impairment testing of property, plant and equipment and right of use assets. 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: • Plant and equipment | 4 – 7 years • Motor vehicles | 3 – 5 years • Fixtures and fittings | 6 – 10 years • Leasehold improvements | 6 – 10 years • Display materials | 6 – 10 years MICHAEL HILL | 2022 ANNUAL REPORT 101 NOTES TO THE FINANCIAL STATEMENTS CONT. F6 INTANGIBLE ASSETS INTANGIBLE ASSETS At 29 June 2020 Cost Accumulated amortisation and impairment Net book amount Year ended 27 June 2021 Opening net book amount Additions Disposals Amortisation charge Closing net book amount At 27 June 2021 Cost Accumulated amortisation Net book amount Year ended 26 June 2022 Opening net book amount Exchange difference Additions Amortisation charge Closing net book amount At 26 June 2022 Cost Accumulated amortisation and impairment Net book amount Patents, trademarks & other rights $’000 Computer software $’000 RESTATED1 Total $’000 RESTATED1 79 - 79 79 - - - 79 79 - 79 79 - - - 79 79 - 79 15,320 (12,078) 3,242 3,242 3,642 8 (958) 5,934 18,928 (12,994) 5,934 5,934 (151) 6,860 (1,733) 10,910 25,715 (14,805) 10,910 15,399 (12,078) 3,321 3,321 3,642 8 (958) 6,013 19,007 (12,994) 6,013 6,013 (151) 6,860 (1,733) 10,989 25,794 (14,805) 10,989 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. IMPAIRMENT LOSS A review of intangibles impairment indicators was performed during the period, with no indicators identified. 102 MICHAEL HILL | 2022 ANNUAL REPORT F7 TRADE AND OTHER PAYABLES Trade payables Annual leave liability Accrued expenses Other payables F8 PROVISIONS 2022 $’000 44,558 10,211 4,620 19,008 78,397 2021 $’000 44,499 9,390 3,453 16,619 73,961 2022 2021 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 Total $’000 Employee benefits 10,617 1,667 12,284 13,074 1,732 14,806 Assurance-type warranties 1,613 120 1,733 1,082 280 1,362 Make good provision 1,876 5,710 7,586 Restructuring costs Diamond warranty 80 120 - - 80 120 306 152 240 5,401 5,707 - - 152 240 14,306 7,497 21,803 14,854 7,413 22,267 MOVEMENTS IN PROVISIONS Employee benefits $’000 Assurance- type warranties $’000 Opening carrying amount 14,806 1,362 $’000 5,707 Changes in provisions recognised 2,678 1,845 2,065 Amounts incurred and charged (5,169) (1,474) Exchange differences (31) - (124) (62) Closing carrying amount 12,284 1,733 7,586 Make good provision Restructuring costs Diamond warranty Total $’000 $’000 $’000 152 80 240 22,267 - 6,668 (152) (120) (7,039) - 80 - (93) 120 21,803 MICHAEL HILL | 2022 ANNUAL REPORT 103 NOTES TO THE FINANCIAL STATEMENTS CONT. ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES 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. In determining the employee remediation provision, Management has applied certain assumptions and judgements including interpretation of relevant legal requirements and expectations regarding final settlement of obligations with the regulator. Any such estimates and assumptions may change 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. as new information becomes available and/or when the Restructuring remediation program is completed and approved by the regulator. The liability for long service leave is measured as the present 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, value of expected future payments to be made in respect of which is when: services provided by employees up to the reporting date using the projected unit credit method. Assurance-type warranties Provision is made for the Group’s assurance-type warranties, being 12 month guarantee on the quality of workmanship • 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. F9 TAX INCOME TAX EXPENSE Current tax Current tax on profits for the year Adjustments for current tax of prior periods Total current tax expense Deferred income tax (Increase)/Decrease in deferred tax assets Adjustments for deferred tax of prior periods Total deferrred tax expense/(benefit) Income tax expense 104 MICHAEL HILL | 2022 ANNUAL REPORT 2022 $’000 7,329 1,618 8,947 2021 $’000 RESTATED1 4,067 40 4,107 11,833 14,003 (1,789) (44) 10,044 13,959 18,991 18,066 NUMERICAL RECONCILIATION OF INCOME TAX EXPENSE TO PRIMA FACIE TAX PAYABLE Profit before income tax expense Tax at the Australian tax rate of 30.0% (2021: 30.0%) Non-deductible expenditure Sundry items Total current tax expense 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 Change in tax rate on deferred tax balance 2022 $’000 65,703 19,711 83 (11) 2021 $’000 RESTATED1 59,081 17,724 355 (13) 19,783 18,066 (787) 1,618 (1,789) (1) 167 31 40 (44) (27) - Income tax expense 18,991 18,066 TAX LOSSES 2022 $’000 2021 $’000 Unused United States tax losses for which no deferred tax asset has been recognised 35,512 32,369 Potential tax benefit @ 25.0% Unused New Zealand tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 28.0% 8,878 2,575 721 8,092 2,639 739 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 | 2022 ANNUAL REPORT 105 NOTES TO THE FINANCIAL STATEMENTS CONT. DEFERRED TAX BALANCES The balance comprises temporary differences attributable to: Expected credit loss provision Fixed assets and intangibles Intangible assets from intellectual property transfer Deferred expenditure Prepayments Deferred service revenue Right-of-use assets Lease liabilities Provisions Unrealised foreign exchange losses Sundry items Inventories 2022 $’000 2021 $’000 RESTATED1 246 10,558 23,468 (213) (12) 1,002 377 16,280 19,705 (310) (7) 1,379 (30,485) (31,798) 37,349 16,486 43 47 63 40,064 20,190 885 (780) 2,344 Net deferred tax assets 58,552 68,329 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 28 June 2021 Credited/(charged) to the income statement Prior year adjustment Foreign exchange differences 21,082 37,470 26,612 41,717 58,552 68,329 68,329 82,212 (11,833) (14,003) 1,790 266 44 76 Closing balance at 26 June 2022 58,552 68,329 106 MICHAEL HILL | 2022 ANNUAL REPORT F10 AUDITORS’ REMUNERATION 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 (AUSTRALIA) Fees for auditing the statutory financial report of the Company and its subsidiaries 502,903 554,541 2022 $ 2021 $ Fees for other services Advisory fees F11 CONTRIBUTED EQUITY SHARE CAPITAL 2022 Shares 2021 Shares Ordinary shares – fully paid 388,285,374 388,142,149 Total share capital 388,285,374 388,142,149 MOVEMENTS IN ORDINARY SHARES Opening balance at 29 June 2020 Rights converted Balance at 27 June 2021 Rights converted Balance at 26 June 2022 3,682 3,682 506,585 554,541 2022 $’000 11,388 11,388 Number of shares 387,769,105 373,044 388,142,149 143,225 2021 $’000 11,285 11,285 Total $’000 11,016 269 11,285 103 388,285,374 11,388 MICHAEL HILL | 2022 ANNUAL REPORT 107 NOTES TO THE FINANCIAL STATEMENTS CONT. 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. 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 D3. Rights issue F12 RESERVES NATURE AND PURPOSES 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 I1(I). 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 D3 for further details of Information relating to share rights issued under the these plans. 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 D3. Foreign currency translation Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note I1(C) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 108 MICHAEL HILL | 2022 ANNUAL REPORT G FINANCIAL RISK MANAGEMENT G1 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: COUNTRY OF INCORPORATION OWNERSHIP INTEREST HELD BY THE GROUP 2022 % 2021 % Michael Hill Jeweller (Australia) Pty Limited Australia Michael Hill Wholesale Pty Limited Australia Michael Hill Manufacturing Pty Limited Australia Michael Hill Franchise Pty Limited Australia Michael Hill Franchise Services Pty Limited Australia Michael Hill Finance (Limited Partnership) Australia Michael Hill Group Services Pty Limited Australia Michael Hill Charms Pty Limited Michael Hill Online Pty Limited Emma & Roe Pty Limited Medley Jewellery Pty Limited Durante Holdings Pty Limited Australia Australia Australia Australia Australia Michael Hill New Zealand Limited New Zealand Michael Hill Jeweller Limited New Zealand Michael Hill Finance (NZ) Limited New Zealand Michael Hill Franchise Holdings Limited New Zealand MHJ (US) Limited Emma & Roe NZ Limited New Zealand New Zealand Michael Hill Online Holdings Limited New Zealand Michael Hill Jeweller (Canada) Pty Limited Canada Michael Hill LLC United States 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 MICHAEL HILL | 2022 ANNUAL REPORT 109 NOTES TO THE FINANCIAL STATEMENTS CONT. G2 DEED OF CROSS GUARANTEE Pursuant to ASIC Class Order 2016/785, the Australian wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and Directors’ report in Australia. The subsidiaries subject to the deed are: Durante Holdings Pty Ltd, Michael Hill Group Services Pty Ltd, Michael Hill Jeweller (Australia) Pty Ltd, Michael Hill Manufacturing Pty Ltd, Michael Hill Wholesale Pty Ltd, Michael Hill Franchise Services Pty Ltd, Michael Hill Franchise Pty Ltd, Michael Hill New Zealand Ltd, Michael Hill Jeweller Ltd, Michael Hill Franchise Holdings Ltd, Michael Hill Finance (NZ) Ltd, Michael Hill Online Pty Ltd, Michael Hill Charms Pty Ltd, Emma & Roe Pty Ltd, Medley Jewellery Pty Ltd, Michael Hill Online Holdings Ltd and Emma & Roe NZ Ltd. 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. CONSOLIDATED STATEMENT OF PROFIT OR LOSS, STATEMENT OF COMPREHENSIVE INCOME AND SUMMARY OF MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS The Class Order requires the Parent Company and each of the Set out below is a consolidated statement of profit or loss, subsidiaries to enter into a Deed of Cross Guarantee. The effect of the deed is that the Company guarantees each creditor a consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for payment in full of any debt in the event of winding up of any of the year ended 26 June 2022 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 2022 $’000 2021 $’000 RESTATED1 421,019 431,904 39,354 6,063 47,254 15,212 (186,589) (206,747) (117,851) (125,329) (6,711) (10,758) (29,329) (20,569) (11,971) (14,480) (38,850) (35,008) (231) (15,211) (5,371) 54,322 (384) (14,285) (5,363) 61,447 (15,019) (13,521) 39,303 47,926 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. 110 MICHAEL HILL | 2022 ANNUAL REPORT 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 2022 $’000 4,977 4,977 2021 $’000 RESTATED1 104 104 Total comprehensive income for the year 44,281 48,030 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. STATEMENT OF CHANGES IN EQUITY Equity at the beginning of the financial year 2022 $’000 2021 $’000 RESTATED1 453,554 426,106 Change in accounting policy – SaaS implementation costs - (14,771) Total comprehensive income/(loss) 44,281 48,030 Share rights through share-based payments reserve Issue of share captial on exercise of share rights Dividends paid Total equity at the end of the financial year 286 103 9 - (25,239) (5,820) 472,985 453,554 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. MICHAEL HILL | 2022 ANNUAL REPORT 111 NOTES TO THE FINANCIAL STATEMENTS CONT. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Set out below is a consolidated statement of financial position as at 26 June 2022 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 Deferred revenue Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2022 $’000 2021 $’000 RESTATED1 55,499 7,010 137,374 - 251,706 5,102 456,691 27,032 73,601 87,834 767 10,989 48,971 249,194 705,885 58,671 28,351 2,093 18,812 14,219 17,190 7,822 133,096 580 279,769 3,455 441,912 21,219 71,900 87,834 1,117 8,605 60,552 251,227 693,139 64,922 23,921 - 18,925 15,172 122,146 122,940 58,295 45,081 7,378 110,754 232,900 472,985 310,378 (19,525) 182,132 472,985 65,176 44,336 7,133 116,645 239,585 453,554 310,275 (24,789) 168,068 453,554 ¹ Restated as required for changes introduced by IFRIC Agenda Decision - Configuration or Customisation Costs in Cloud Computing Arrangements. Refer to note I1(R) for details. 112 MICHAEL HILL | 2022 ANNUAL REPORT G3 PARENT ENTITY FINANCIAL INFORMATION SUMMARY FINANCIAL INFORMATION The individual financial statements for Michael Hill International Limited (the Parent) show the following aggregate amounts. STATEMENT OF FINANCIAL POSITION Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Issued capital Reserves Retained earnings Total equity STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Profit or loss for the year Total comprehensive income 2022 $’000 198 2021 $’000 344 425,363 452,206 425,561 452,550 1,398 1,398 522 522 424,163 452,028 291,531 291,445 41,617 91,015 41,544 119,039 424,163 452,028 2022 $’000 (28,024) (28,024) 2021 $’000 (8,268) (8,268) GUARANTEES ENTERED INTO BY THE PARENT ENTITY The Parent has issued the following guarantees in relation to the debts of its subsidiaries: (ii) 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 (i) Pursuant to Class Order 2016/785, Michael Hill International Limited and the subsidiaries listed below entered into a deed Ltd, Michael Hill Jeweller Ltd, Michael Hill Franchise Holdings Ltd, Michael Hill Finance (NZ) Ltd, Michael Hill Online Pty Ltd, of cross guarantee on 30 June 2016. The effect of the deed is Michael Hill Charms Pty Ltd, Emma & Roe Pty Ltd, Medley that Michael Hill International Limited has guaranteed to pay Jewellery Pty Ltd, Michael Hill Online Holdings Ltd and Emma & any deficiency in the event of winding up of any controlled Roe NZ Ltd. 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. CONTINGENT LIABILITIES OF THE PARENT ENTITY The Parent entity had no material contingent liabilities as at balance date. MICHAEL HILL | 2022 ANNUAL REPORT 113 NOTES TO THE FINANCIAL STATEMENTS CONT. H UNRECOGNISED ITEMS H1 CONTINGENCIES AND COMMITMENTS CONTINGENT LIABILITIES 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. The Group had no material contingent liabilities as at balance date. CONTINGENT ASSETS The Group has no material contingent assets existing as at balance date. COMMITMENTS The following sets out the various lease contracts that the Group has entered into and have yet to commence as at 26 June 2022. Future lease payments for these non-cancellable lease contracts Within one year $’000 One to five years $’000 Greater than five years $’000 Total $’000 2,838 12,186 34,342 49,366 H2 EVENTS OCCURRING AFTER THE END OF 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. 114 MICHAEL HILL | 2022 ANNUAL REPORT I SUMMARY OF ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES AND JUDGEMENTS I1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PREPARATION Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Net 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 as other income or other expenses, 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. The financial report is a general purpose financial report, which has been prepared in accordance with the requirements Group companies of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. 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 The financial statements have been prepared on a historical cost basis, except for derivative financial instruments that from the presentation currency are translated into the presentation currency as follows: have been measured at fair value. The consolidated financial • assets and liabilities for each balance sheet statements provide comparative information in respect of presented are translated at the closing rate at the the previous period. For reporting purposes, the Group adopts a weekly ‘retail calendar’ closing each Sunday. The current 52 week reporting period ended on 26 June 2022. The consolidated financial statements of the Group comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (B) PRINCIPLES OF CONSOLIDATION 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. Investments in subsidiaries are accounted for at cost in the individual financial statements of Michael Hill International Limited. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated 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. (D) 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 on consolidation. Unrealised losses are also eliminated unless to temporary differences and to unused tax losses. the transaction provides evidence of the impairment of the transferred asset. (C) FOREIGN CURRENCY TRANSLATION Functional currency translation The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting year in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Items included in the financial statements of each of the It establishes provisions where appropriate on the basis of Group entities are measured using the currency of the amounts expected to be paid to the tax authorities. 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. 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 | 2022 ANNUAL REPORT 115 NOTES TO THE FINANCIAL STATEMENTS CONT. Deferred income tax Deferred income tax is provided in full, using the liability • When receivables and payables are stated with the amount of GST included. method, on temporary differences between the tax bases The net amount of GST recoverable from, or payable to, of assets and liabilities and their carrying amounts in the the taxation authority is included as part of receivables or consolidated financial statements. Deferred tax assets and payables in the statement of financial position. Commitments liabilities are classified as non-current assets and liabilities. and contingencies are disclosed net of the amount of GST Deferred tax assets are recognised for deductible temporary recoverable from, or payable to, the taxation authority. differences and unused tax losses only if it is probable Cash flows are included in the statement of cash flows that future taxable amounts will be available to utilise on a gross basis and the GST components of cash flows those temporary differences and losses. arising from investing or financing activities which are 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. (E) GOODS AND SERVICES TAX (GST) Revenues, expenses, assets and liabilities are recognised net of the amount of GST, except: • When the GST incurred on a sale or purchase of assets recoverable from, or payable to, the taxation authority, are presented as operating cash flows. (F) 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. 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 impairment occurring, if the recoverable amount from assets exceeds the carrying value, the impairment loss is reversed to the extent that it has been recognised. (G) 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. (H) INVENTORIES Raw materials and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs are assigned to individual items of inventory on the basis of weighted average costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. or services is not payable to or recoverable from the Management review stock holdings based on recoverability taxation authority, in which case the GST is recognised at a product level and write-down as appropriate. as part of the revenue or the expense item or as part of the cost of acquisition of the asset, as applicable; or 116 MICHAEL HILL | 2022 ANNUAL REPORT (I) FINANCIAL INSTRUMENTS - INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT (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 AASB15 Revenue from Contracts with Customers. Refer to the accounting policies in note A2. 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 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 Whilst there are four categories, two are relevant in the current reporting period for the Group, being: • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the Financial assets at amortised cost (debt instruments) received cash flows in full without material delay to a third • • 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: 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. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, • The financial asset is held within a business model it evaluates if, and to what extent, it has retained the risks with the objective to hold financial assets in order and rewards of ownership. When it has neither transferred 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. 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. MICHAEL HILL | 2022 ANNUAL REPORT 117 NOTES TO THE FINANCIAL STATEMENTS CONT. IMPAIRMENT OF FINANCIAL ASSETS Further disclosures relating to impairment of financial assets are also provided in note F3. The Group recognises an allowance for Expected Credit Losses (ECLs) for all debt instruments not held at fair by AASB9 Financial Instruments. 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. value through profit or loss. ECLs are based on the Financial liabilities designated upon initial recognition at difference between the contractual cash flows due in fair value through profit or loss are designated at the initial accordance with the contract and all the cash flows date of recognition, and only if the criteria in AASB9 Financial that the Group expects to receive, discounted at an Instruments are satisfied. The Group has not designated approximation of the original effective interest rate. any financial liability as at fair value through profit or loss. For trade receivables and contract assets, the Group LOANS AND BORROWINGS AT AMORTISED COST 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 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. indicates that the Group is unlikely to receive the This category generally applies to interest-bearing loans outstanding contractual amounts in full before taking into and borrowings. For more information, refer to note C1. 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. 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 118 MICHAEL HILL | 2022 ANNUAL REPORT 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. 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. (J) 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 Computer software development costs recognised as asset is derecognised when replaced. All other repairs assets are amortised over their estimated useful lives and maintenance are charged to profit or loss during the (not exceeding ten years). 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 (note F5). 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 I1(F)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. (K) 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 (L) 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. 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. (M) EMPLOYEE ENTITLEMENTS it will be available for use; Short-term obligations • Management intends to complete the software and use or sell it; Liabilities for wages and salaries, including non-monetary benefits and accumulating sick leave that are expected • there is an ability to use or sell the software; to be settled wholly within 12 months after the end of the • adequate technical, financial and other resources to complete the development and to use or sell the software are available; • it can be demonstrated how the software will generate 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. probable future economic benefits; and Liabilities for employee benefits are measured at the present • the expenditure attributable to the software during its development can be reliably measured. value of Management’s best estimate of the expenditure required to settle the present obligation at the reporting date. In respect to cloud computing arrangements, the Group Other long-term employee benefit obligations assesses whether the arrangement contains a lease and if not, whether the arrangement provides the Group with a resource that it can control. Costs associated with implementation are then assessed as to whether they can be capitalised in accordance with relevant accounting standards. 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 Directly attributable costs that are capitalised as part of the by employees up to the end of the reporting year using software include employee costs and an appropriate portion of relevant overheads. the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use. employee departures and periods of service. Expected future payments are discounted using the Milliman G100 discount rates at the end of the reporting period. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. MICHAEL HILL | 2022 ANNUAL REPORT 119 NOTES TO THE FINANCIAL STATEMENTS CONT. The obligations are presented as current liabilities in Diluted earnings per share 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. 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 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 (note F2). shareholders after certain adjustments. The Group recognises (Q ) ROUNDING OF AMOUNTS a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Retirement benefit obligations The Group provides retirement benefits to employees through a defined contribution superannuation fund. Contributions are recognised as expenses as they become payable. 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. (N) 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. (R) CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES IFRIC agenda decision - Net Realisable Values of Inventory In June 2021, the IFRS Interpretations Committee (IFRIC) published an agenda decision in relation to the accounting treatment when determining net realisable value (NRV) Where any group company purchases the Company’s equity of inventories, in particular what costs are necessary instruments, for example as the result of a share buy-back or a to sell inventories under AASB 102 Inventories. 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. (O) DIVIDENDS During the year, the Group finalised the analysis of the impact of this agenda decision. The impact was not material and has been incorporated into the Group’s net realisable value accounting policy. IFRIC agenda decision - Configuration or Customisation Costs in a Cloud Computing Arrangement In April 2021, IFRIC published an agenda decision for configuration and customisation costs incurred related to implementing Software as a Service (SaaS) arrangements. The Group has changed its accounting policy in relation Provision is made for the amount of any dividend declared, to configuration and customisation costs incurred in being appropriately authorised and no longer at the discretion implementing SaaS arrangements. The nature and effect of the of the entity, on or before the end of the reporting year changes as a result of changing this policy is described below. but not distributed at the end of the reporting year. (P) EARNINGS PER SHARE Basic earnings per share Accounting Policy - Software-as-a Service (SaaS) arrangements SaaS arrangements are arrangements in which the Group does not currently control the underlying software used Basic earnings per share is calculated by dividing: in the arrangement. • the profit attributable to owners of the Company, excluding Where costs incurred to configure or customise SaaS 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 F2). arrangements result in the creation of a resource which is identifiable, and where the Group has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits, such costs are recognised as a separate intangible software asset 120 MICHAEL HILL | 2022 ANNUAL REPORT and amortised over the useful life of the software on a straight-line basis. The amortisation is reviewed at least at the end of each reporting period and any changes are treated as changes in accounting estimates. Where costs incurred to configure or customise SaaS arrangements do not result in the recognition of an intangible software asset, then those costs that provide the Group with a distinct service (in addition to the SaaS access) are now recognised as expenses when the supplier provides the services. When such costs incurred do not provide a distinct service, the costs are now recognised as expenses over the duration of the SaaS contract. Previously some costs had been capitalised and amortised over its useful life. The following tables show the adjustments recognised for each individual line item. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the amounts provided. CONSOLIDATED STATEMENT OF FINANCIAL POSITION 27 June 2021 As originally presented $’000 Impact of accounting policy $’000 27 June 2021 Restated $’000 Assets Intangible assets Deferred tax assets Total assets Equity Reserves Retained profits Total equity 32,845 60,585 508,111 4,221 177,895 193,401 (26,832) 7,744 (19,088) (5) (19,083) (19,088) 6,013 68,329 489,023 4,216 158,812 174,313 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Other expenses Employee benefits expense Depreciation and amortisation expense Profit before income tax Income tax expense Profit for the year 27 June 2021 As originally presented $’000 Impact of accounting policy $’000 27 June 2021 Restated $’000 (28,308) (147,619) (51,293) 64,807 (19,479) 45,328 (6,924) (2,034) 3,232 (5,726) 1,413 (4,313) (35,232) (149,653) (48,061) 59,081 (18,066) 41,015 Total comprehensive income for the year attributable to: Owners of Michael Hill International Limited 45,189 (4,317) 40,872 MICHAEL HILL | 2022 ANNUAL REPORT 121 NOTES TO THE FINANCIAL STATEMENTS CONT. CONSOLIDATED STATEMENT OF CASH FLOWS 27 June 2021 As originally presented $’000 Impact of accounting policy $’000 27 June 2021 Restated $’000 Payments to suppliers and employees Net cash inflow from operating activities Payments for intangible assets Net cash outflow from investing activities (484,021) 143,452 (12,597) (18,954) (8,955) (8,955) 8,955 8,955 (492,976) 134,497 (3,642) (9,999) EARNINGS PER SHARE FOR PROFIT ATTRIBUTABLE TO THE ORDINARY EQUITY HOLDERS OF THE COMPANY 27 June 2021 As originally presented cents Impact of accounting policy cents 27 June 2021 Restated cents Basic earnings per share Diluted earnings per share 11.68 11.63 (1.11) (1.10) 10.57 10.53 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Opening retained profits as originally presented Impact on: Intangible assets Deferred tax assets Opening retained profits - restated 27 June 2021 Restated $’000 27 June 2020 Restated $’000 177,895 (26,828) 7,745 158,812 138,370 (21,100) 6,330 123,600 122 MICHAEL HILL | 2022 ANNUAL REPORT CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS In the process of applying the above policy, Management has made the following judgements which have the most significant effect on the amounts recognised in the consolidated financial statements: I2 SIGNIFICANT ESTIMATES AND JUDGEMENTS SIGNIFICANT ESTIMATES AND JUDGEMENTS The preparation of financial statements requires the use • Determining whether cloud computing arrangements of accounting estimates which, by definition, will seldom contain a software licence intangible asset equal the actual results. Management also needs to The Group evaluates a cloud computing arrangement exercise judgement in applying the Group’s accounting to determine if it provides a resource that the Group policies. Estimates and judgements are continually can control. evaluated and are based on historical experience and The Group determines that a software licence other factors, including expectations of future events that intangible asset exists in a cloud computing arrangement are believed to be reasonable under the circumstances. when both of the following are met at the inception The estimates and assumptions that have a significant of the arrangement: – The Group has the contractual right to take possession of the software during the hosting period without significant penalty. – It is feasible for the Group to run the software on its own hardware or contract with another party unrelated to the supplier to host the software. • Determining whether configuration and customisation costs provide a distinct service to access to the SaaS The Group applies judgement in determining whether costs incurred provide a distinct service, aside from access to the SaaS. Where it is determined that no distinct service is identifiable, the related costs are recognised as expenses over the duration of the service contract. Several other amendments and interpretations apply for the first time in 2022, 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. risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are incorporated within the relevant note. The significant accounting judgements relate to the accounting for COVID-19 related lease concessions (note A5) and the significant accounting estimates were in relation to the consideration recevied for assets held for sale (note F4), the pattern of PCP revenue recognition (note A2), and employee remediation (note F8). IMPACT OF COVID-19 The uncertainty surrounding the trading environment for the Group has impacted Management’s approach to forecasting, modelling cash flows and other accounting estimates. The Group continues to monitor the situation throughout the geographies in which it operates. Uncertainty remains as to the future impact of COVID-19 and the ability to operate bricks- and-mortar stores during this period. The Group continues to adhere to local and national government guidance in relation to any future impacts which would temporarily close stores. During the period, the Group received financial support and assistance from its suppliers, landlords, and local governments. A number of landlords and suppliers provided extended payment terms. These agreements have concluded with no material amounts outstanding. Additionally, landlords have provided support in the form of rental abatements. These amounts have been disclosed in note A5. Government grants were received during the period and further information can be found in note A3. MICHAEL HILL | 2022 ANNUAL REPORT 123 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 26 June 2022, 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 26 June 2022 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 group identified in note G1 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 G2. Note I1(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. Robert Fyfe Chair Brisbane 26 August 2022 124 MICHAEL HILL | 2022 ANNUAL REPORT Ernst & Young Ernst & Young 111 Eagle Street Brisbane QLD 4000 Australia Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 111 Eagle Street Tel: +61 7 3011 3333 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au Fax: +61 7 3011 3100 ey.com/au GPO Box 7878 Brisbane QLD 4001 Auditor’s independence declaration to the directors of Michael Hill International Limited INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF MICHAEL HILL INTERNATIONAL LIMITED a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, I declare to the best of my knowledge and belief, there have been: relation to the audit; b. No contraventions of any applicable code of professional conduct in relation to the audit; and REPORT ON THE AUDIT OF THE c. No non-audit services provided that contravene any applicable code of professional conduct in FINANCIAL REPORT relation to the audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KEY AUDIT MATTERS OPINION This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. We have audited the financial report of Michael Hill Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial International Limited (the Company) and its subsidiaries report of the current year. These matters were addressed in (collectively the Group), which comprises the consolidated the context of our audit of the financial report as a whole, statement of financial position as at 26 June 2022, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated Ernst & Young 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. 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 In our opinion, the accompanying financial report of the Group section of our report, including in relation to these matters. is in accordance with the Corporations Act 2001, including: Accordingly, our audit included the performance of procedures (a) Giving a true and fair view of the consolidated financial Kellie McKenzie position of the Group as at 26 June 2022 and of its Partner 26 August 2022 that date; and consolidated financial performance for the year ended on (b) Complying with Australian Accounting Standards and the 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. Corporations Regulations 2001. EXISTENCE OF INVENTORIES BASIS FOR OPINION Why significant 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 The existence of inventories is a key audit matter due to the size of the recorded asset being $181,539,000 or 34% of the Group’s total assets at 26 June 2022, the nature of the inventory and the geographic spread of locations where items are held. Inventories are primarily kept in the Group’s 280 retail stores located in Australia, New Zealand and Canada, and the distribution and manufacturing centres. Inventories comprise a large number of physically small but high value items which are Professional Accountants (including Independence Standards) subject to misappropriation and other loss. (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. As a result, evidencing the existence of the Group’s inventory at 26 June 2022 is a key audit matter. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation MICHAEL HILL | 2022 ANNUAL REPORT 125 The Group accounts for inventories in accordance with the recognised in the income statement for the year ended 26 June policy disclosed in Note I1(H) and further disclosure is included 2022 was $30,742,000 (2021: $27,310,000). in Note A4 of the financial report. How our audit addressed the key audit matter Our audit procedures included the following: The estimation process for PCP revenue is based on an analysis of actual services (through historical cleaning, repairs and re-sizing service data) performed under these plans since inception in October 2010, with management judgement • Testing the effectiveness of key controls relevant to the applied to take account of emerging trends in customer conduct of physical stocktakes, the review and investigation behaviour, industry data and exceptional circumstances such as of stocktake variances, and the approval of adjustments COVID related store closures. made to stock quantities. • In performing our testing, we attended 12 year end stocktakes conducted at retail stores across Australia, New Zealand and Canada. The result of estimation process is reviewed by the Group on at least an annual basis. As circumstances change over time, the Group updates its measure of progress, and any adjustments are recognised as a cumulative catch up in revenue recognition • In addition to the retail stores, we attended the stocktakes (or reversal) in the current year results. completed at each of the distribution and manufacturing centres in June 2022. • At these stocktakes at the retail stores, distribution and The accounting policy for PCP revenue and description of the estimation uncertainty is disclosed in Note A2 of the financial report. manufacturing centres, we observed compliance with the How our audit addressed the key audit matter stocktake instructions (including the suspension of inventory movements during the stocktake process) and selected a sample of items to recount to establish the accuracy of the counts performed by the Group. • For each of these locations attended, and for a further representative sample of retail stores, we inspected evidence that stocktakes had been conducted in accordance with Group policies, stock variances identified had been reviewed and approved, and that the adjustments were accurately recorded. • Where stocktakes were completed prior to the balance sheet date, we performed inventory movement analysis and, on a sample basis, evidenced changes in inventory quantities to evaluate the movement of inventories between the stocktake date and year end date. For retail locations not attended at stocktake, we performed movements analysis on a store-by-store basis and further analysis where the year end balance was outside our set expectations. • We obtained details of stock-in-transit at year end, as well as movements either side of the year end date and performed 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. • Tested the operating effectiveness of controls related to PCP customer transactions to ensure these sales are captured accurately, and the related cash receipts are deferred on receipt. • Assessed the accuracy of the data used in the PCP revenue estimation calculation and challenged the reasonableness of the key judgements including: – Obtained details of the sales of PCP products to customers during the year and tested the cash receipts were appropriately deferred. – Obtained details of the actual cleaning, repairs and resizing services in the year and tested a sample of transaction to understand if repairs are accurately tagged to the associated PCP plan date. procedures to address the risk of incorrect cut-off of – Performed analysis over the historic repairs data, to inventory quantities at year end. PROFESSIONAL CARE PLAN (PCP) REVENUE RECOGNITION Why significant The recognition of Professional Care Plan (PCP) revenue is a key audit matter due to the significant degree of estimation involved in determining the appropriate revenue recognition determine whether the assumptions made by the Group were supportable, including the length of the lookback period, any adjustments made for the impact of COVID related store closures, and the weighting of recent trends compared to older data. • Tested the mathematical accuracy of the PCP revenue estimation model and reperformed the Group’s calculation supporting the change in estimate relating to PCP revenue recognition. pattern for lifetime, 10 year and 3 year plans offered to the • Performed sensitivity analysis over the assumptions using Group’s customers. Under these plans, revenue is deferred on reasonable alternative scenarios to determine whether there receipt of the payment from the customer and recognised over would be a material impact on revenue recognised in the year. time in a manner that reflects the proportion of actual services used by customers relative to the total amount of expected services to be provided under the PCPs. • Evaluated the adequacy of disclosures in financial statements of PCP revenue recorded and deferred at year-end and the associated estimation uncertainty. The balance of the deferred PCP revenue liability at 26 June 2022 was $77,148,000 (2021: $76,581,000), and PCP revenue 126 MICHAEL HILL | 2022 ANNUAL 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 Company’s 2022 annual report, but does not include the financial report and our auditor’s report thereon. 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, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design Our opinion on the financial report does not cover the other audit procedures that are appropriate in the circumstances, information and accordingly we do not express any form but not for the purpose of expressing an opinion on the of assurance conclusion thereon, with the exception of the effectiveness of the Group’s internal control. Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, 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 • 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 The Directors of the Company are responsible for the going concern. preparation of the financial report that gives a true and fair • Evaluate the overall presentation, structure and content of view in accordance with Australian Accounting Standards and the financial report, including the disclosures, and whether the Corporations Act 2001 and for such internal control as the the financial report represents the underlying transactions Directors determine is necessary to enable the preparation of and events in a manner that achieves fair presentation. 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 • 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 Our objectives are to obtain reasonable assurance about have complied with relevant ethical requirements regarding whether the financial report as a whole is free from material independence, and to communicate with them all relationships misstatement, whether due to fraud or error, and to issue and other matters that may reasonably be thought to bear on an auditor’s report that includes our opinion. Reasonable our independence, and where applicable, actions taken to assurance is a high level of assurance, but is not a guarantee eliminate threats or safeguards applied. 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 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 Standards, we exercise professional judgment and maintain not be communicated in our report because the adverse professional scepticism throughout the audit. We also: consequences of doing so would reasonably be expected to • Identify and assess the risks of material misstatement of the outweigh the public interest benefits of such communication. financial report, whether due to fraud or error, design and MICHAEL HILL | 2022 ANNUAL REPORT 127 Ernst & Young 111 Eagle Street Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 Brisbane QLD 4000 Australia ey.com/au GPO Box 7878 Brisbane QLD 4001 Ernst & Young 111 Eagle Street Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 Brisbane QLD 4000 Australia ey.com/au Auditor’s independence declaration to the directors of Michael Hill GPO Box 7878 Brisbane QLD 4001 International Limited As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, I declare to the best of my knowledge and belief, there have been: Auditor’s independence declaration to the directors of Michael Hill International Limited relation to the audit; a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in REPORT ON THE AUDIT OF THE REMUNERATION REPORT As lead auditor for the audit of the financial report of Michael Hill International Limited for the financial year ended 26 June 2022, I declare to the best of my knowledge and belief, there have been: OPINION ON THE REMUNERATION REPORT a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in We have audited the Remuneration Report included in the Directors’ report for the year ended 26 June 2022. relation to the audit. b. No contraventions of any applicable code of professional conduct in relation to the audit; and c. No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit; In our opinion, the Remuneration Report of Michael Hill International Limited for the year ended 26 June 2022, complies with section 300A of the Corporations Act 2001. b. No contraventions of any applicable code of professional conduct in relation to the audit; and This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. RESPONSIBILITIES c. No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit. 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 This declaration is in respect of Michael Hill International Limited and the entities it controlled during audit conducted in accordance with Australian Auditing Standards. the financial year. Ernst & Young Kellie McKenzie Kellie McKenzie Partner Partner 26 August 2022 Brisbane 26 August 2022 Ernst & Young Ernst & Young Kellie McKenzie Partner 26 August 2022 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 128 MICHAEL HILL | 2022 ANNUAL REPORT ADDITIONAL INFORMATION AS AT 31 AUGUST 2022 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 Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 HOGLETT HAMLETT LIMITED* CITICORP NOMINEES PTY LIMITED SQUEAKIDIN LIMITED* HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CUSTODIAL SERVICES LIMITED BNP PARIBAS NOMS PTY LTD NEW ZEALAND CENTRAL SECURITIES DEPOSITORY LTD NATIONAL NOMINEES LIMITED MOLE HILL LIMITED* FORSYTH BARR CUSTODIANS LIMITED PETER KARL CHRISTOPHER HULJICH + JOHN HAMISH BONSHAW IRVING CHRISTOPHER PETER HULJICH + CONSTANCE MARIA F HULJICH + PETER KARL CHRISTOPHER HULJICH BNP PARIBAS NOMS (NZ) LTD NEW ZEALAND DEPOSITORY NOMINEE LIMITED HWM (NZ) HOLDINGS LIMITED FNZ CUSTODIANS LIMITED VANWARD INVESTMENTS LIMITED HOBSON WEALTH CUSTODIAN LTD 20 BNP PARIBAS NOMINEES PTY LTD Total Total Remaining Holders Balance *Denotes entities in which a member or members of the Hill family have an interest. Number 388, 285, 374 4,222 $1.140 224 Fully Paid Ordinary Shares % of Fully Paid Ordinary Shares 148,330,600 38.20 26,794,291 19,156,926 15,951,910 14,239,499 10,110,361 9,230,919 9,086,943 7,877,050 5,000,000 4,805,402 3,881,540 3,488,861 2,876,425 2,783,902 2,458,570 2,345,755 2,036,974 2,029,508 1,890,450 294,375,886 93,909,488 6.90 4.93 4.11 3.67 2.60 2.38 2.34 2.03 1.29 1.24 1.00 0.90 0.74 0.72 0.63 0.60 0.52 0.52 0.49 75.81 24.19 MICHAEL HILL | 2022 ANNUAL REPORT 129 DISTRIBUTION OF SECURITY HOLDERS Number of holders of fully paid ordinary shares Number of fully paid ordinary shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 Over 100,001 Total 703 1,321 787 1,248 163 4,222 UNMARKETABLE PARCELS Minimum $ 500.00 parcel at $ 1.14 per unit Minimum Parcel Size 439 Holder 224 As at 31 August 2022, there are four substantial shareholders that Michael Hill is aware of: 413,708 4,049,508 6,447,345 39,606,336 337,768,477 388,285,374 Units 35,048 SUBSTANTIAL HOLDERS Name Latest Notice Date Shares Hoglett Hamlett Limited and others* 13 October 2016 148,330,600 Mark Simon Hill Emma Jane Hill Spheria Asset Management Pty Ltd 3 September 2021 163,487,902 13 October 2016 15 April 2021 167,487,526 50,814,123 * 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 31 August 2022 there were 21 holders of options and rights. 130 MICHAEL HILL | 2022 ANNUAL REPORT CORPORATE DIRECTORY DIRECTORS COMPANY SECRETARIES R I Fyfe B.Eng, F.E.N.Z., C.N.Z.M. Chair Sir R M Hill K.N.Z.M. E J Hill B.Com., M.B.A. G W Smith B.Com., F.C.A., F.A.I.C.D. J E Naylor M.A.I.C.D. D Bracken (appointed 28 June 2021) A Lowe BCom, LLB (Hons), MAppFin, CA, CTA E Bird LLB (Hons), BA (Psych), GradDipLegalPrac, GradDipAppCorpGov, G.A.I.C.D. PRINCIPAL REGISTERED OFFICE IN AUSTRALIA SHARE REGISTER 34 Southgate Avenue Cannon Hill QLD 4170 +61 7 3114 3500 Computershare Investor Services Pty Ltd Level 1 200 Mary Street Brisbane QLD 4000 1300 552 270 (within Australia) +61 3 9415 4000 (outside of Australia) AUDITOR SOLICITOR Ernst & Young Level 51 111 Eagle Street Brisbane QLD 4000 BANKERS Allens Linklaters Level 26 480 Queen Street Brisbane QLD 4000 WEBSITES Australia and New Zealand Banking Group Limited ANZ Banking Group (New Zealand) Limited HSBC Australia Limited Bank of Montreal Bank of America www.michaelhill.com.au www.michaelhill.co.nz www.michaelhill.ca www.michaelhill.com www.medleyjewellery.com.au http://investor.michaelhill.com EMAIL online@michaelhill.com.au MICHAEL HILL | 2022 ANNUAL REPORT 131 

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