Michael Hill International Limited
Annual Report 2023

Plain-text annual report

Annual Report 2023 MICHAEL HILL | 2023 ANNUAL REPORT 1 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”, “projects”, “assumes”, “forecast”, “likely”, “outlook”, “would”, “could”, “should”, “continues”, “estimates” or similar expressions or the negatives thereof, generally identify 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, sustainability targets, 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, they are not guarantees or predictions of future performance or statements of fact. 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 report.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, as there can be no assurance the actual outcomes will not differ materially from the forward-looking statements in this report. Except as required by applicable laws or regulations (including the ASX Listing Rules), the Group does not intend, and does not assume any obligation, to update any forward- looking statements contained herein. 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 report. 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 | 2023 ANNUAL REPORT CONTENTS 5 6 8 Company Profile Letter from the Chair CEO’s Message 10 Performance Highlights 11 12 14 16 Key Facts Performance Trend Statement Sustainability 42 Executive Leadership Team 45 Directors’ Report 56 Remuneration Report 71 Auditor’s Independence Declaration 73 Financial Statements 126 Directors’ Declaration 127 Independent Auditor’s Report 133 Additional Information 135 Corporate Directory The Directors are pleased to present the annual report of Michael Hill International Limited and its subsidiaries for the year ended 2 July 2023. MICHAEL HILL | 2023 ANNUAL REPORT 3 4 MICHAEL HILL | 2023 ANNUAL REPORT COMPANY PROFILE The Michael Hill Group is a market leading jewellery retailer, with a portfolio of brands, operating a network of over 300 stores across Australia, New Zealand and Canada, with multiple international digital platforms. The first Michael Hill store opened in 1979 when Sir On 1 June 2023, the Group strategically acquired a Michael Hill and his wife, Lady Christine Hill launched complementary and scalable Australian value-led their unique retail jewellery formula in Whangarei, on jewellery retailer, Bevilles. the North Island of New Zealand. Around the world, the Group employs over 2,800 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 2 July 2023, the Group operates of high impact advertising, Michael Hill rapidly gained 172 stores in Australia (including 26 Bevilles stores), popularity and rose to national prominence. 46 in New Zealand and 86 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 jewellery for our customers to celebrate the key Stock Exchange (ASX/NZX: MHJ). moments in their lives. Over the last four years, the Company has been on At Michael Hill, we are committed to becoming a a transformative journey reshaping many aspects of more sustainable and ethically responsible business, the business, underpinned by a clearly defined protecting our eco-system and contributing to strategic agenda to elevate the brand and drive the communities we serve in meaningful ways, for growth. The strategic framework is customer-led and generations to come. continually 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 Retail Fundamentals, continual Product Evolution, exploring New Territories & Services, maintaining a Cost Conscious Culture and with a focus on Sustainability. 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 | 2023 ANNUAL REPORT 5 LETTER FROM THE CHAIR Dear shareholders, NAVIGATING CHALLENGING MARKET CONDITIONS FY23 has been a challenging year for Michael Hill. We have successfully transitioned from FY22; when we continued to benefit from Covid economic stimulus, reduced operating costs and travel restrictions in all our markets, which boosted domestic retail spend, to FY23 which has seen inflation in wages, gold, diamonds and other input costs, along with rising interest rates eating into disposable consumer spending and an increased portion of that remaining spend being redirected to domestic and international leisure travel. We have also experienced a particularly challenging security environment in New Zealand, with record levels of retail crime necessitating a significant increase in spend on security counter-measures, resulting in increased stock losses. Despite these challenges we have maintained an unwavering commitment to our strategy; with an increased investment in elevating the Michael Hill brand and product offering, a strong commitment to executing on the retail fundamentals, strong cost and inventory management and investment in a series of new brand offerings to expand our addressable market. Against this backdrop the business has delivered a solid performance for FY23, with record revenue, elevated margins and strong earnings. I’m both proud and grateful for the agility, resilience, perseverance and focus that Daniel and the entire Michael Hill team have displayed in delivering these results. STRENGHTHENING THE HERITAGE OF THE BRAND The heritage of our brand and creative inspiration from our founders continues to underpin the foundations of the Company. This year saw the launch of ‘The Jewellers’ brand campaign, which focused on our origins as a fine jeweller, the vision of our founders, and showcasing our craftmanship, creativity and commitment to quality. As the Michael Hill brand 6 MICHAEL HILL | 2023 ANNUAL REPORT continues on its aspirational brand journey, we will maintain a strong connection to our rich heritage and our founders’ vision. COMMITMENT TO OUR PEOPLE AND OUR VALUES I have taken great pride in the way in which our leadership team in New Zealand and our Group Executive team have responded to and supported our New Zealand team members and customers impacted by the spate of retail crime events and ram raids we have experienced in New Zealand along with a series of extreme weather events. It’s during these times of adversity that our values, who we are and what we stand for get truly tested. I’m proud to be part of a team who have clearly demonstrated and lived the Company’s values as we have responded to these challenges: We care, We create outstanding experiences, We are professional and We are inclusive and diverse. Pleasingly, our engagement survey was completed by 84% of our workforce and resulted in an engagement score of 82%, which is 10% higher than the global retail industry average. Our consistently high engagement score demonstrates how hard we continue to work to ensure that Michael Hill remains an employer of choice and is a great place to work. SUSTAINABILITY MANIFESTO In August 2022, we released our 2030 sustainability manifesto centered around three key pillars: People, Product and Planet. During the year, we have made great progress with our goals: reduced our scope 1 emissions by 39%, reduced our head office waste by 65% and made significant donations towards empowering women with Dress for Success and Women’s Refuge. In addition, we have launched our Re:cycle initiative in Australia – a digitally enabled gold recycling program, that encourages customers to recycle gold jewellery pieces in exchange for a Michael Hill e-gift card. The opportunity in the coming year to extend this offering to New Zealand and Canada is exciting. CAPITAL MANAGEMENT Last year, the Company articulated a capital management framework for the business which included pursuing acquisition opportunities in the jewellery sector. Pleasingly, the business successfully acquired an earnings accretive, scalable and complementary Australian value-led jewellery brand, Bevilles. With the Bevilles team having successfully transitioned, the In August this year, the Board appointed Dave Whittle as a Non-Executive Director. Dave’s experience and expertise will bring a fresh perspective, with a wealth of knowledge across data, technology and brand which will be invaluable to the Company. His extensive experience in marketing, omni- channel retail and digital transformation complements the existing Board composition. key focus is now on expanding the store network nationally. IN CONCLUSION During the year, the Company commenced its on-market share I am immensely proud of Daniel, our highly capable executives buy-back with 8.63m shares bought back, representing 2.2% working alongside him and the broader Michael Hill team. of issued capital for a total cash cost of A$10.2m. The directors Even though FY23 was a particularly challenging year, the have decided to discontinue the on-market share buy-back. team remained focused, executed on our strategy, delivered Furthermore, we were pleased to declare a final dividend of AU3.5 cents per share, bringing our total dividend for the year to AU7.5 cents per share, representing ~70% of adjusted annual NPAT, and at the higher end of the Company’s Dividend Distribution Policy target range of 50% to 75%. OUR BOARD a plethora of initiatives, and successfully acquired a new brand, Bevilles, which represents a fabulous opportunity to expand our addressable market and support our growth ambitions for FY24. Regards, It continues to be a privilege to serve on the Michael Hill Board alongside such a talented group of directors, including our founder, Sir Michael Hill, a true entrepreneur and creative spirit who continues to inspire and challenge us all. Robert Fyfe Chair MICHAEL HILL | 2023 ANNUAL REPORT 7 CEO’S MESSAGE It has been a very busy year at Michael Hill and I’d like to both We also continued to focus on digital to modernise customer acknowledge and thank the team for their unwavering focus experience, and reach new markets. The creation of a dual and energy throughout the year. RECORD REVENUE WITH STRONG MARGIN While we finished FY23 with comparable EBIT slightly below prior year due to a more challenging second half, we still delivered record revenue, strong elevated margin and the language Canadian website allows us to attract a new French speaking customer base in Quebec and across Canada. Additionally, we have continued to expand our marketplace strategy by opening into new markets for the brand. In May, we partnered with Zalora to enter both Singapore and Malaysia markets. second highest comparable EBIT in the Company’s history. In October 2023, the business will launch its new bespoke These results were underpinned by our clearly articulated brand TenSevenSeven, focused on servicing the high-end strategic initiatives, and most notably during the year: of the market with its unique personalised diamond ring • elevating ATV supported by Michael Hill’s aspirational brand journey, • leveraging our loyalty program, which now has over two million members, proposition. With these additional brands and channels, the Michael Hill Group now services all significant customer segments of the fine jewellery category, and delivers multiple new growth pipelines. • continuing to evolve our product – during the year we CULTURE AND TEAM introduced some amazing new ranges, • and most importantly, a relentless focus on retail fundamentals driving continued improvement in productivity across all markets. INVESTING FOR GROWTH In August 2022, the Company executed a seamless relocation of its global headquarters to new purpose-built premises housing the global support functions, with a reimagined artisanal jewellery workshop and state-of-the-art Australasian distribution centre. Our new offices provide a contemporary, dynamic and productive environment, strategically aligned to Michael Hill’s aspirational brand journey. In June 2023, the Company completed the Bevilles acquisition, successfully transitioning all team members, And most importantly, the Michael Hill business is built on the foundations of a great culture and a fantastic team as evidenced by our most recent engagement survey result, with our global engagement score above 80%. As we approach the key trading period of Christmas, our teams are excited and energised by the new product ranges we will be launching, and our new emotive Christmas campaign. While inflation and rising interest rates have impacted consumer spending, I am confident that the Group strategy has us well-placed to continue to take market share. Regards, stores and inventory to the Group. As the Michael Hill brand elevates its position in the market, the Bevilles business gives Regards, us the opportunity to capture market share at the value end of the fine jewellery category. Currently a 26 store business, it is Daniel Bracken Managing Director and CEO primed for a significant real estate expansion strategy. 8 MICHAEL HILL | 2023 ANNUAL REPORT MICHAEL HILL | 2023 ANNUAL REPORT 9 PERFORMANCE HIGHLIGHTS KEY FINANCIAL RESULTS Group operating revenue increased by 5.8% to $629.6M Strong group gross margin Net cash position 64.2% $8.4M Second highest comparable earnings before interest and tax (EBIT) $58.9M OPERATIONAL PERFORMANCE Total dividends for the year AU 7.5 cps Healthy inventory position including Bevilles $203.3M Digital sales were largely flat to LY $41.3M Three new stores opened and five under- performing stores were closed Brilliance by Michael Hill membership now over 2.0M+ New digital markets entered: Quebec, Singapore & Malaysia Pure play brand Medley delivered sales growth of 31% on last year Executed acquisition strategy with purchase of Bevilles Successful transition to new global headquarters 10 MICHAEL HILL | 2023 ANNUAL REPORT KEY FACTS TRADING RESULTS DIVIDENDS (including final dividend) % Change 2023 $000’s 2022 $000’s Group revenue 5.8% 629,562 595,210 Gross profit 5.1% 404,440 384,826 Earnings before interest & tax (EBIT)* (19.6%) 58,883 73,236 Comparable EBIT* (6.3%) 58,889 62,870 2023 2022 Per ordinary share AU7.5c AU7.5c Times covered by net profit after tax 1.24 1.60 SHARE PRICE AT YEAR END (24.3%) 49,747 65,703 2023 2022 (24.7%) 35,182 46,712 Share price (ASX) AUD 0.90 AU$0.93 (28.2%) 80,072 111,574 Net profit before tax (NPBT) Net profit after tax (NPAT) Net cash inflow from operating activities FINANCIAL POSITION Contributed equity 379,688,884 ordinary shares Total equity Total assets % Change 2023 $000’s 2022 $000’s (2.4%) 11,112 11,388 (3.3%) 188,615 195,095 KEY INVESTOR RATIOS Basic earnings per share Diluted earnings per share EBIT to sales Return on average total assets 2023 9.20c 9.00c 9.4% 2022 12.03c 11.86c 12.3% 6.7% 9.3% 6.9% 546,488 511,179 SEGMENT REVENUE GROWTH (local currency) Net cash (91.3%) 8,367 95,844 Capital expenditure 52.5% 34,271 22,471 Australia New Zealand Canada Group 2023 9.1% 5.8% (0.5%) 5.8% 2022 (2.8%) (1.6%) 34.8% 7.0% KEY RATIOS Return on average shareholders funds 18.3% 25.3% STORE NUMBERS 2023 2022 Gross margin 64.2% 64.7% 2023 2022 Interest expense cover (times) Equity ratio Working capital ratio Current ratio 5.9 34.5% 3.4 : 1 1.6 : 1 9.7 Australia1 38.2% 3.7 : 1 1.8 : 1 New Zealand Canada Total stores1 172 46 86 304 147 48 85 280 * EBIT and Comparable EBIT are Non-IFRS information and are unaudited. Please refer to page 52 for an explanation of Non-IFRS information and a reconciliation of EBIT and Comparable EBIT. 1 Includes 26 Bevilles stores in 2023 MICHAEL HILL | 2023 ANNUAL REPORT 11 PERFORMANCE Group revenue AU$ MILLIONS 629.6 569.5 595.2 556.5 492.1 Gross margin Comparable EBIT % 62.7 64.7 64.2 AU$ MILLIONS 62.9 58.9 56.6 62.0 60.6 34.6 -5.2 F Y19 F Y20 FY 21 FY2 2 FY2 3 FY19 FY20 FY 21 FY 22 FY23 FY19 FY20 FY21 FY 22 FY23 Revenue by country YEAR ENDED 2 JULY 2023 CANADA 28% NEW ZEALAND 19% AUSTRALIA 53% 12 MICHAEL HILL | 2023 ANNUAL REPORT EBITDA AU$ MI LLIONS 125.2 114.7 116.6 69.7 40.5 Net profit from operating activities after tax Inventory AU$ MILLIONS * Includes Bevilles inventory 35.2 179.5 178.7 181.5 171.2 203.3 AU$ MILLIONS 46.7 41.0 16.5 3.1 F Y19 F Y20 F Y21 FY2 2 FY2 3 FY19 FY20 FY21 FY 22 FY23 FY19 FY20 FY 21 FY 22 FY23* Ordinary dividend AU CENT S PER SHARE 7.5 7.5 4.5 4.0 1.5 Return on average assets Return on average shareholders’ funds % 8.2 9.3 % 25.0 25.3 6.7 18.3 4.3 9.4 0.7 1.9 F Y19 F Y20 F Y 21 FY2 2 FY2 3 FY19 FY20 FY21 FY 22 FY23 FY19 FY20 FY21 FY 22 FY23 MICHAEL HILL | 2023 ANNUAL REPORT 13 TREND STATEMENT TREND STATEMENT Financial performance 2023 $’000 2022 $’000 2021 $’000 2020 $’000 2019 $’000 Group revenue 629,562 595,210 556,486 492,060 569,500 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 Other Intangible assets Goodwill Total assets Total current liabilities Non-current borrowings Lease liabilities Other long term liabilities Total liabilities Net assets Reserves and retained profits Paid up capital 116,607 125,180 114,733 69,690 40,481 19,366 21,115 2,304 18,811 2,313 16,498 38,969 19,365 2019 $’000 7,923 57,724 58,883 9,136 49,747 14,565 35,182 80,072 30,719 2023 $’000 20,867 203,260 20,735 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 11,204 11,636 2021 $’000 72,361 171,246 27,463 178,742 179,503 31,007 35,878 244,862 292,132 271,070 220,953 223,304 59,546 49,118 42,121 58,552 37,729 68,329 57,857 74,468 72,742 67,708 353,526 392,805 377,128 353,278 363,754 139,052 107,385 105,882 36,215 17,695 10,989 6,013 - - 123,911 24,429 - – 15,439 - 546,488 511,179 489,023 501,618 379,193 155,001 158,596 151,522 159,405 105,130 12,500 117,518 72,854 – 91,386 66,102 – 10,681 32,704 99,382 63,806 115,848 – 61,878 64,607 357,873 316,084 314,710 347,812 202,441 188,615 177,503 11,112 195,095 174,313 153,806 176,752 183,707 163,028 142,790 165,768 11,388 11,285 11,016 10,984 Total shareholder equity 188,615 195,095 174,313 153,806 176,752 Basic earnings per share Diluted earnings per share Dividends declared per share (interim) Dividends declared per share (final) Net tangible asset backing 9.20c 9.00c AU4.0c AU3.5c $0.35 12.03c 11.86c 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 14 MICHAEL HILL | 2023 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 2023 18.5% 9.4% 5.6% 10.8% 18.3% 6.7% 3.4 : 1 1.6 : 1 5.9 29.3% (4.4%) 34.5% 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 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% Shares issued at year end excl Treasury 379,688,884 388,285,374 388,142,149 387,769,105 387,750,000 Exchange rate for translating: - New Zealand results - Canadian results Store numbers Australia New Zealand Canada Total stores1 ¹ Includes 26 Bevilles stores in 2023. 1.09 0.90 2023 1721 46 86 304 1.06 0.92 2022 147 48 85 280 1.07 0.95 2021 150 49 86 285 1.04 0.90 2020 155 49 86 290 1.06 0.95 2019 167 52 86 305 “Pleasingly, FY23 delivered record revenue with the second highest comparable EBIT in the company’s history, together with continued elevated gross margin.” DANIEL BRACKEN, MANAGING DIRECTOR & CEO MICHAEL HILL | 2023 ANNUAL REPORT 15 SUSTAINABILITY MICHAEL HILL - THE JEWELLER THAT CARES In August 2022, we announced our Sustainability Strategy for 2030 centered around three key pillars – People, Product and Planet. Since then, we have made significant progress in our sustainability journey towards our goals with a rigor and discipline that align to our Executive Management and Board Cadence. 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 to support and drive our journey. With our new strategic focus, combined with strong governance and direction, we look forward to providing regular updates on our progress. 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. 16 MICHAEL HILL | 2023 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 Michael Hill is working to achieve by 2030. These goals are being progressed through a structured framework of cross functional team members with a clear governance program, linking back to the Board. An internal ESG Steering Committee has been created and meets regularly with the CEO and is accountable for deciding on strategic orientations and accountability for progress. This Committee feeds into the Board quarterly 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% 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 2027] MICHAEL HILL | 2023 ANNUAL REPORT 17 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 recertification to 2025 being a major milestone in our sustainability journey achieved this financial year. This demonstrates 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 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 for certification by the RJC across the house of brands in support of our sustainability strategy regarding responsible sourcing, chain of custody, sustainability certified and provenance for Michael Hill products in the coming years. A KEY PARTICIPANT IN INDUSTRY CHANGE 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. The jewellery industry supply chain remains long and complex. The materials we use to craft our jewellery – namely precious metals and gemstones – come from a variety of sources, all with varying locations, risks, and production methods. Multiple stakeholders are engaged throughout Michael Hill’s supply chain to gain confidence and assurance over sourcing practices for materials and to ensure sourcing practices comply with Michael Hill’s sustainability strategy. Some suppliers have the capability and capacity to meet these demands and may even be further ahead on their journey than Michael Hill, however others have limited capability and capacity, and require drastic industry change to make this happen. For the latter, we work closely to share knowledge, information and guidance on how those suppliers can improve their practices and align with our high expectations. We have become a more active member of the jewellery community this year, through championing innovative, sustainable products and introducing new circular services for our customers, whilst working with partners, suppliers and other participants in the jewellery industry. Our challenge is still to use our voice to advocate for industry change relating to sustainability through industry relationships, memberships, and products we sell to our customers, however we are working hard to advocate for change and have set this expectation for delivery throughout our entire supply chain. 18 MICHAEL HILL | 2023 ANNUAL REPORT “We are becoming a part of the solution, advocating for change within our industry and introducing innovative, new sustainable products and services.” DANIEL BRACKEN, MANAGING DIRECTOR & CEO MICHAEL HILL | 2023 ANNUAL REPORT 19 FY23 SUSTAINABILITY HIGHLIGHTS PEOPLE $150,000+ towards empowering women with Dress for Success (AU & CA) and Women’s Refuge (NZ) of all employees identify as female 85% PRODUCT Retail industry high global engagement score at 82% 23,839 products crafted in our Brisbane manufacturing facility Launched Re:cycle, our gold recycling program – an innovative circularity program for customers Repaired over 401,641 pieces of our customers’ jewellery, extending product lifespan and preventing waste Certified Sustainable and Carbon Neutral Laboratory-grown diamonds make up 7.7% of our total diamond mix PLANET Reduced our Scope 1 emissions by 39% Reduced head office waste by 65% 100% 20 MICHAEL HILL | 2023 ANNUAL REPORT of our Scope 1 Emissions calculated PEOPLE Everything at Michael Hill originates with our people. We bring and utilise fresh new imagery to capture attention and the customer experience to life by hiring the brightest talent. showcase life at Michael Hill. Part of our EVP process was to Our values of ‘We Care’, ‘We Are Inclusive and Diverse’, ‘We capture a uniquely Michael Hill experience through our EVP are Professional’, and ‘We Create Outstanding Experiences’ video, which highlighted our employment brand, and we also pervade all of our people choices and practices, beginning launched an updated website designed to capture candidate’s with the attraction of a new team member and continuing interest by targeting what candidates are looking for today. throughout our people lifecycle. We welcome change or Diversity, equity and inclusion, wellbeing, our sustainability innovation where needed. 2023 saw the introduction of journey, and career development were key focuses. new improved people practices that continue to support and enable our greatest attribute, our people. GREAT PLACE TO WORK A HIGHLY ENGAGED CULTURE At Michael Hill we strive to ensure our culture consistently drives the behaviours needed to deliver a remarkable experience to our customers. Our leaders are focused on 2023 was dominated by a challenging talent market and in an effort to make Michael Hill’s offer stand out we also created a premium pre-commencement onboarding process where candidates receive a Digital Introduction Booklet, a new and engaging contract of employment and a Digital Welcome To Michael Hill Booklet. Supporting flexibility that works for all is core to our offer. We continue to utilise leading edge recruitment techniques to ensure we meet the needs of the business and can quickly value-adding activities to support the execution of the business modify our approach based on the needs of the business and strategy and objectives. Our internal communication platforms the candidate market. We utilise psychometric testing, video provide a comprehensive array of need-to-know information and insights that enhance collaboration, productivity, and engagement. They build trust in our workplace, improve knowledge sharing and empower and align our team. Our positive and rewarding environment is enhanced by coaching and development activities that allow our team members to be confident and comfortable in delivering a interviewing and online reference checking to ensure we can support the business to fill roles quickly with quality talent. This year we introduced our Enterprise Agreement in Australia which showcases care for our team through the introduction of paid parental leave for primary and secondary carers and extended definitions to allow for greater utilisation, paid domestic violence Leave, flexible public holiday leave, and premium service to customers, colleagues and all stakeholders. offering our team members rates of pay greater than the We are focused on delivering exceptional experiences through relevant Modern Award. strong and consistent processes across the organisation as we elevate our brand. We also launched our exclusive rewards platform across the organisation offering percentage off discounts, cashback, Our people are our priority, and we are focused on responding weekly recipe inspiration, wellbeing tips and much more. to feedback, taking actions, and making the changes necessary In Canada we commenced a registered retirement savings to ensure our engagement levels remain best in class and push plan that our managers can contribute to that includes a our performance to new heights. The voices of our team are company matching component to support our team members important to us. The FY23 We’re Listening process included comfortable retirement. both an Engagement Survey and a Pulse Survey. We are proud to have scored 82% engagement for the 2022 Engagement Survey and 81% engagement for the 2023 Pulse Survey. We continue to have industry leading engagement scores and participation rates of over 80%. These results showcase that Michael Hill is an exceptional employer of choice in the retail environment with a culture that is unparalleled. ATTRACTING AND RETAINING THE BEST In 2023 we completely reinvigorated our Employee Value Proposition (EVP) in the external market to ensure we consistently attract the best talent, the People Behind The Moments That Matter. We launched refreshed recruitment campaigns with a renewed focus on benefits and delivering the ‘what’s in it for me’ message to candidates. We now also offer a seamless experience on desktop and mobile devices Our commitment to our culture is reinforced further in renewed people practices throughout our People Cycle including performance management, 360-degree reviews and talent mapping. Our talent mapping strategies allow us to recognise our top talent for advancement and create development plans to retain and grow our teams and our leadership bench strength. In 2023 we introduced a new systemised talent mapping process to further streamline and simplify our processes allowing greater visibility and transparency and more meaningful conversations to support decision making. We know that one of the key success factors of high performing organisations is putting their people first. We are committed to investing in our people to develop their skills, expertise and careers and to create business value through the execution of business strategy. MICHAEL HILL | 2023 ANNUAL REPORT 21 CRAFTSMANSHIP At Michael Hill, the art of craftsmanship lies at the heart of our rich heritage, defining the essence of who we are. Our unwavering commitment to preserving and enhancing this tradition has driven us to continually evolve and refine our capabilities. Nestled in Brisbane, our home to 35 masterful artisans serves as the crucible where creativity meets skill. In 2023, our dedication to craftsmanship led us to forge a significant partnership with TAFE Queensland. Together, we have embarked on a transformative apprenticeship program, meticulously designed to nurture emerging talents in alignment with our values and honouring our heritage. This collaboration symbolises our deep-rooted belief in passing on the torch of artisanal excellence to the next generation. In our relentless pursuit of excellence, we embrace not only the time-honoured techniques but also cutting-edge innovations in our craft. We recognise that true preservation lies in the fusion of tradition and technology. To this end, we have integrated state- of-the-art technologies and harnessed the power of modern expertise. Through strategic innovation, and nurturing the talents of tomorrow, we embark on a journey to safeguard our legacy while propelling it into new dimensions. We remain steadfast in our commitment to championing craftsmanship – not merely as a part of our history, but as the very soul that guides us into a future imbued with the brilliance of human ingenuity. OUR TEAM STATISTICS As at 2 July 2023 employee numbers across our markets out of a total 2459 1496 AUS TRA LIA 647 316 CANADA NEW ZEAL AN D Gender Split Age Distribution 1088 AGED 30-50 704 AGED >50 667 AGED <30 49 4 CASUAL 707 PART TIME 8 86 FU L L TI ME Female 85% 2087 FEMALE EMPLOYEES 3 6 CAS- UAL 39 PART T IME 29 4 FU L L TI ME Male 15% 369 MALE EMPLOYEES 3 EM PLOYEES HAVE NOT PROVIDED GEN D ER INFORMATION 22 MICHAEL HILL | 2023 ANNUAL REPORT EMPLOYEE ENGAGEMENT We pride ourselves on having a highly engaged and enabled workforce who love what they do and where they work. Our Engagement Survey in August 2022 was completed by 84% of our workforce and resulted in an engagement score of 82%. 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. EN GAGEMENT SURVEY 2022 AUSTRALIA - 81% Engagement Participation AU Support Centre AU Retail 82% 84% 85% 80% CAN ADA - 8 4% NEW ZEALAND - 78% CA Support Centre CA Retail New Zealand 100% 83% 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 85 % 79% 81 % 81 % 79% 82% 88% 0% 20% 40% 60% 80% 100% SE ASON AL CAS UAL 2023 SURVEY Engagement Participation 85% 37% 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 85%. MICHAEL HILL | 2023 ANNUAL REPORT 23 INVESTING IN OUR TEAM At Michael Hill, our steadfast commitment to cultivating skills and enhancing capabilities is a cornerstone of our strategic vision to future-proof our workforce. In the realm of retail, we have diligently ingrained a culture of learning, ensuring that our team members receive continuous training that encompasses vital aspects such as product knowledge, sales techniques, and exceptional service. Our resolute focus on learning extends further into leadership development, with comprehensive programs centered on retail operational leadership as well as holistic business leadership. These programs offer a comprehensive guide to navigating the intricacies of people practices across the employee life cycle, equipping our leaders with the necessary tools to inspire and empower their teams. In tandem with these initiatives, LinkedIn Learning stands as a pivotal resource, fostering an environment where every team member can proactively create personalised development plans and actively engage in a wealth of learning opportunities. As we look to the horizon, our commitment to skill enrichment extends beyond the confines of our retail sphere. Our manufacturing apprenticeship program and corporate internship initiatives, in partnership with esteemed Australian institutions such as TAFE Queensland, The Queensland University of Technology, and Griffith University, lay the foundation for nurturing young talent. These dynamic pathways not only infuse fresh perspectives Our unwavering commitment to fostering diversity and inclusion at Michael Hill is a cornerstone of our organisational ethos. In October 2022, a pivotal milestone was reached as we conducted our inaugural Diversity and Inclusion Pulse Check, an integral component of the Michael Hill ‘We’re Listening’ strategy. This initiative garnered a remarkable 834 responses from across the globe, representing 37% of our workforce, and yielded an impressive overall DEI score of 82%. These invaluable insights serve as a compass guiding our endeavors to create an environment where every team member feels a profound sense of belonging, experiences psychological safety, and perceives their voice as impactful. It is with great pride that we note the resounding success of our inclusion efforts, as evidenced by scores exceeding 83% in key areas such as open discussions of social and cultural backgrounds, fair treatment for all, the ability to advocate for diversity and inclusion without personal risk, and the commitment demonstrated by our managers in handling diversity matters adeptly. The commendable themes that have emerged from our assessment accentuate our strengths in inclusive hiring practices, the harmonious integration of diverse cultures and backgrounds, and the steadfast cultivation of a welcoming and accepting workplace for all. As we reflect on these achievements, we remain resolute in our dedication to furthering diversity and inclusion across every facet of Michael Hill, ensuring a rich tapestry of perspectives and experiences but also ensure that our teams remain fortified and adaptable that fuel our collective success. for the challenges and opportunities that lie ahead. At Michael Hill, our resolute dedication to building a skilled GENDER EQUALITY and empowered workforce is a testament to our enduring 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. 85% of our global workforce is female, 43% of our Executive Leadership Team is female, and 65% 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 ‘Embrace Equity’ for females in the workforce. We shared learnings and experiences in a panel discussion with our key senior leaders and encouraged team members to continue to learn how to challenge their own biases which make an impact in their lives. commitment to excellence and innovation. DIVERSITY, EQUITY & INCLUSION Michael Hill recognises its talented and diverse workforce as a key competitive advantage. Our business performance reflects the quality and skill of our people and behaviours that are aligned to our Group Values. We are firmly committed to developing policies, practices and ways of working that support diversity. Michael Hill’s Diversity, Equity and Inclusion (DEI) 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 elevating our diversity and inclusion strategy in a variety of ways, including a calendar of cultural, world and religious days to celebrate the diversity within our organisation and communities, through awareness raising and educational initiatives. The 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. 24 MICHAEL HILL | 2023 ANNUAL REPORT DIVERSITY & INCLUSION INITIATIVES The DEI Committee has played a pivotal role in orchestrating a series of impactful initiatives that reflect our unwavering commitment to diversity, equity, and inclusion. With a keen focus on education, awareness, and community engagement, the Committee has successfully orchestrated a range of global diversity calendar events throughout the year. These events, such as International Women’s Day with the empowering theme #EmbraceEquity, International Pride month in June, World Mental Health Day in October, and the International Day of People with Disability in December, serve as powerful platforms to foster understanding and advocate for an inclusive Michael Hill community. In addition to these calendar events, the DEI Committee’s influence extends through thought-provoking blog posts. These blogs, including topics such as “Brilliance in our Furthermore, the DEI Committee has brought forth the enlightening “Room for All” podcast episodes, which serve as powerful conversations on diverse subjects. Episodes celebrating PRIDE, acknowledging Canada Day, raising awareness about neurodiversity, commemorating Diwali: The Festival of Lights, and initiating dialogue about mental health exemplify the Committee’s dedication to fostering open discussions that enrich understanding and create an inclusive dialogue. Collectively, these endeavours represent the remarkable impact and significance of the DEI Committee’s efforts in driving forward our commitment to diversity and inclusion at Michael Hill. The next year will see the continuation of the Diversity and Inclusion program of work. The following initiatives will be implemented in the next financial year: • Inclusion of diversity training in leadership differences: Embracing Neurodiversity at Michael Hill,” “A guide development programs to gender pronouns for #PRIDEMonth,” “Ramadan blessings to • Ongoing reporting and review of diversity metrics our Islamic community", “Lunar New Year”, “Today is Waitangi Day, NZ’s National Celebration” embody the spirit of inclusivity by addressing pertinent issues and showcasing the vibrant tapestry of perspectives within our organisation. • Development of ‘employee resource groups’ strategy • Increase accessibility requirements in line with health and wellbeing strategy. MICHAEL HILL | 2023 ANNUAL REPORT 25 26 MICHAEL HILL | 2023 ANNUAL REPORT HEALTH, SAFETY AND SECURITY At Michael Hill, safeguarding the health, safety, wellbeing and security of our team members, customers and visitors remains our utmost priority. The past few years have presented numerous challenges, including the pandemic, rising youth crime rates, and mounting cost of living pressures. Against this backdrop, Michael Hill continues to pave the way by embracing flexible work options, collaborating proactively with external stakeholders to establish industry-leading security measures, fortifying our infrastructure to deter criminal activity, and implementing assistance programs and benefit schemes that underscore the value we place on our team members at Michael Hill. As we forge ahead, fuelled by our ongoing growth, Michael Hill remains dedicated to expanding our knowledge, presence and approach to health, safety, wellbeing, and security. Key achievements across the health, safety and security portfolio in FY23 include: • Continued downward trends of lost time and significant incident rates. Lost Time Injury Frequency Rate down to 5.43 compared to 9.50 in FY 2018, and Significant Incident Frequency Rate down to 1.90 compared to 6.04 in FY 2018 • 11% of our workforce participated in our 6 week – 15 Minute Exercise Challenge • Obtained an annual utilisation rate of 4.0% regarding our Employee Assistance Program (EAP) compared to an industry rate of 1.7% • Ongoing upgrades of CCTV and / or intrusion alarm systems across our stores • Installed fog cannons, dual pendant alarms, guarding and improved store fortification requirements across a number of our store in New Zealand in response to the increased levels of crime and incidents in our stores • Rolled out Mental Health First Aid Training to 32 of our retail leaders. EMPOWERING WOMEN 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 recent 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 challenges remain. 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 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 and have strong roadmaps and partnerships in development to deliver this goal in the coming years. 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. This year Michael Hill introduced a new partner to our Empowering Women program, The Women’s Refuge in Auckland. Through the sales of our charity earring product, we supported their Safe Nights program, designed to provide girls and women a safe night to escape family violence including safe clean bed, hot meal, secure transport, and helpful advice. Coinciding with International Women’s Day in March 2023, Michael Hill launched our annual campaign to raise funds for Dress for Success and The Women’s Refuge with various activations: DRESS FOR SUCCESS SUPPORT OFFICE VOLUNTEERING PROGRAM: Last year we commenced our first ever paid volunteering program with Dress for Success in Brisbane. Feedback from all teams who participated was positive, and the program was made a permanent offering for all head office team members. The volunteering program continued in FY23, with 117 of our team participating as a “working bee” this year. The volunteering team members unpacked donated items, cleaned displays, and sorted clothes racks to assist Dress for Success in their daily operations. This year: • 117 team members took up the opportunity, resulting in Michael Hill successfully donating over 468 hours, worth $23,399 of paid volunteering hours to assist Dress for Success Brisbane • Though an evolution of our enterprise agreement, one day of paid community service leave per calendar year has been made available to eligible Australian retail store-based team members. MICHAEL HILL | 2023 ANNUAL REPORT 27 EMPOWERING WOMEN EARRINGS SALES: Between March and June this year, we asked customers to help us support our mission to empower women, by purchasing a pair of beautiful 6mm button cultured freshwater pearl earrings in sterling silver for $25. For every purchase, Michael Hill donated $15 to Dress for Success in AU and CA, and The Women’s Refuge in NZ, raising over $150,000 to be split across our charity partners. We supported this initiative across our entire store network as well as online, and received great engagement from our teams and customers, connecting with the cause, and the elected charities. AUCTION FOR ACTION: At times through our business operations, products can become impaired or damaged, and are unable to be sold to customers. We saw this as an opportunity to raise further funds for Dress for Success with these impaired products being repaired by our manufacturing team and auctioned to head office team members, with all funds over the reserve price donated to Dress for Success. This initiative saw over $4,300 donated this financial year. ASSISTING OUR LOCAL COMMUNITY WITH RECOVERY February 2023 saw some of the worst floods in New Zealand across the North Island, with Auckland being the most significantly affected. In addition to ensuring our Michael Hill team were safe and supported, we wanted to support the local communities in which we live and operate to get back on their feet. To assist in community recovery Michael Hill donated $50,000 to Auckland City Mission, to support their front-line flood response efforts for those most in need. About Auckland City Mission: Every day, the Mission responds to poverty and great need in our Auckland. People come to The Mission when they need access to permanent and sustained housing, enough nutritious food to eat, and when their physical and mental health is compromised. “ We are grateful to partner with Michael Hill Jeweller to help Women’s Refuge provide safe nights for women and children experiencing family violence across Aotearoa. Without the support of generous partners and community, we would struggle to be there for the thousands of women and children who need our help each year.” DR ANG JURY, ONZM, CHIEF EXECUTIVE, NATIONAL COLLECTIVE OF INDEPENDENT WOMEN’S REFUGES 28 MICHAEL HILL | 2023 ANNUAL REPORT  “Volunteering has given our head office team the opportunity to do deeply impactful work in the community.” JO MATTHEWS, CHIEF PEOPLE OFFICER MICHAEL HILL | 2023 ANNUAL REPORT 29 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, however we are confident our jewellery suppliers will achieve this goal sooner. 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. FOUNDATION 02. ENHANCE 03. OPTIMISE FY20 – FY21 FY22 – FY24 FY25+ • Established Supplier  Transparency 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  • Reviewed and updated 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 standards •  Issued our first Modern Slavery Statement • Uplifting Michael Hill’s Modern Slavery Program for new legislation to come into effect in our markets of operation • Complete Modern Slavery effectiveness review (Australia). • Developing a Modern Slavery Risk Scorecard for measuring effectiveness of Michael Hill’s actions in assessing modern slavery risk* • 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 • Embedding ongoing cycle of audits with our third-party independent verification and audit partner on high- risk suppliers. • Undertake due diligence for all suppliers • Consideration of corporate structure  and alignment to business strategy (e.g. B Corp certification) • Ongoing RJC compliance monitored through management attestation confirming compliance with relevant COPs. • Establish a process for undertaking due  diligence for Tier 2 and 3 suppliers • Reviewed new supplier onboarding  process and supplier scorecards, including implementation of quarterly business review processes with suppliers conforming to adherence to modern slavery, ESG and responsible sourcing requirements. • Established an Ethical Supply Chain  Assessment tailored to non-jewellery industry suppliers • Onboarding more suppliers  onto the supplier transparency program. The focus was on categories that involved human services or higher risk industries (e.g. property, security, maintenance, facilities management, packaging, offshore vendors) and marketing and digital/IT vendors. This is representative of 30% of Michael Hill’s supplier base and 85% of total supplier spend. • Recommenced the regularity  of supplier visits to high risk production facilities. • Developed remediation plans with  high risk supplier audits or cease supplier engagement • RJC certification to 2025– includes  improving compliance with COP 6 Human Rights in line with UN Guiding Principles on Business and Human Rights and COP 7 Due Diligence for responsible sourcing from Conflict Affected and High Risk Areas • Established formal committee for ongoing responsible sourcing practices • Modern Slavery Training for Michael  Hill staff in key sourcing and contract management roles, an acceleration of FY25+ target* • Reviewed of current  grievance mechanisms  • Sustainability – core pillar of our strategy and brand proposition • All jewellery suppliers meet  ‘responsibly sourced’ standards. Target revised from: 80% of key jewellery suppliers being RJC certified in 2022 and 100% in 2026. • Validating supplier certifications and membership to confirm commitment to social and environmental performance.* • Revised anti-slavery contract terms  and conditions. Legend: Achieved  | Partially Achieved  | Continual Improvement* 30 MICHAEL HILL | 2023 ANNUAL REPORT Supporting this is our responsible supplier platform, providing us greater visibility and understanding of our supply chain across both jewellery and non-jewellery suppliers. This platform gathers information including: • Supplier RJC membership status and products included in their certification CREATING OUR PRODUCT IN BRISBANE Craftsmanship is one of the founding pillars, and deep in the heritage of our business. Michael Hill first established an 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 • Other certifications and memberships held to specialists and quality control professionals. 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 • Further transparency over the suppliers modern slavery practices (e.g. training, protocols, resources responsible for sustainable procurement) • Details of our suppliers’ primary supply chain, where applicable. The platform has the capability to capture sustainability information for gaining transparency into suppliers’ sustainability commitments as part of delivering our sustainability strategy. Any non-conformances from suppliers are taken seriously and we will work with these suppliers to remediate in the first instance and terminate relationships should they not uplift their practices in line with our expectations. 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 jobs and protect our supply chain from disruption. Having 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 32 people, working locally in Brisbane, Australia who hand make and bring our quality Made in Australia pieces to life. We have proudly partnered with TAFE Queensland to provide employment opportunities for talented apprentices in the jewellery trade. Our team is committed to keeping the jewellery trade alive and have provided three apprentice positions into our unique artisanal jewellery manufacturing operations, with a further intake in the coming year. • 81% of all solitaire engagement rings were Made in Australia • Made in Australia product made up 13% of Michael Hill’s international sales • 26,839 individual products were made in our Australian manufacturing facility • 32 full time team members in our Australian manufacturing team MICHAEL HILL | 2023 ANNUAL REPORT 31 PRODUCT In the past year, we have made solid progress towards more sustainable product offerings and business operations through actively evolving our product ranges and we will see these changes come to fruition in FY24 due to production timelines. Our suppliers are clear on our sustainable product goals and are actively working with us to develop and supply more sustainable product jewellery options. It is widely known proving product origin is a complex challenge across all industries, with the jewellery category no different. With varied layers to our supply chain, from mine, refiner, producer, retailer then end-consumer – we are working to deepen our understanding of our complete supply chain and ensure we can create as much transparency as possible. We have previously mentioned that rapid and comprehensive industry change is required for us to achieve some of the product goals outlined in our 2030 strategic direction; however, we have seen a sizeable shift in our industry over the past year, collectively working to provide more responsible and sustainable solutions. We have been advocating for and requesting more responsible product options from all our suppliers and have made key supplier and product decisions around what is being offered in our future product ranges. 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, Metal Stewardship, and Innovation, and we are confident this will be achieved within the ambitious timeframes we have committed to. 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 significant industry change, particularly within the coloured gemstones and pearls industry, including responsible sourcing practices. We have been working with our suppliers to develop a deeper understanding of our raw material supply chain, with product supply chain mapping being developed across all ranges We are reliant on prevailing standards of due diligence, such as the RJC’s Code of Practices standard, to help us carry out the necessary due diligence on our supply chain and we seek ESG-related accreditation certificates from our suppliers wherever possible. 32 MICHAEL HILL | 2023 ANNUAL REPORT NATURAL DIAMONDS Conflict Free Diamonds: Michael Hill remains committed to offering only conflict-free diamonds in our jewellery. We will continue to 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, and supply evidence, that the diamonds supplied to us are conflict-free. Path to Provenance: We are continually keeping up to date with any provenance improvements to purchasing a large volume of natural diamonds in the market, noting the global standards for sustainable natural/mined diamonds that have been developed by SCS Standards and other natural diamonds with clear provenance are becoming more readily available. Challenges of proving provenance for bulk diamonds parcels however are still relevant. Origin program reflects their deep commitment to social and environmental 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 education, and helping protect the environment through 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: 1. Is a natural diamond, discovered by De Beers 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 Whist we are exploring other options to expand our path to 3. Is conflict-free and meets De Beers Code of Origin’s provenance range for our customers, we continue to provide our customers the De Beers Code of Origin range, our natural diamond range with provenance for our customers. industry-leading ethical standards 4. Has helped protect the planet through wildlife conservation and De Beers’ commitment to be carbon • De Beers Code of Origin: Partnering with De Beers, neutral by 2030. 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 world-leader in diamond production, and the Code of As part of our approved RJC recertification, Michael Hill has made a certified provenance claim relating to the De Beers Code of Origin range. MICHAEL HILL | 2023 ANNUAL REPORT 33 “ We are committed to providing new and innovative services for our customers whilst building a more circular economy.” KERRIE HOCKLESS,HEAD OF SUSTAINABILITY 34 MICHAEL HILL | 2023 ANNUAL REPORT COLOURED GEMSTONES & PEARLS RECYCLED GOLD & SILVER There is limited guidance and inherent risk over sourcing Throughout the year, several of our existing suppliers have practices in the coloured gemstones and pearl industries in started to offer certified recycled silver or gold which we comparison to the diamond and precious metal industry. can use to craft our products. We have been performing due In response to limited available guidance, Michael Hill has taken the initiative to develop a risk matrix which assesses all coloured stones and pearls based on country of origin in accordance with the Global Slavery Index, providing intelligence to our sourcing teams about product and diligence into these metal sources whilst considering how we can bring these to market in our upcoming ranges. 96% of our international sales are products made from gold and silver, therefore these metal types remain our key focus to originate from more sustainable sources. sourcing locations to avoid, and the team has acted upon this We will introduce both certified recycled gold and silver matrix when sourcing and developing coloured stone ranges. into our FY24 product mix to reduce our reliance on mined The RJC provides standards of due diligence, such as the Code of Practices, to help us carry out the necessary due diligence on our supply chain, which we are heavily reliant on. We recognise that the challenges relating to the sourcing of coloured gemstones and pearls cannot be solved overnight. However, using a risk-based approach, together with the inclusion of specific questions relating to labour standards on the supplier transparency platform, we hope to better metals. To introduce these certified recycled metals to our product mix, we have required full transparency from our suppliers through formal certifications as well as in depth detail around their supply chains and sourcing practices. This is to ensure any product claims satisfy our high internal legal and compliance standards as well as RJC provenance claim requirements. For recycled gold or silver suppliers, this includes ensuring suppliers: understand at a supplier level the type of products supplied, • Meet the RJC Chain of Custody certification or are on the and their countries of origin. With this information we will be in a better position to assess which suppliers might be considered higher-risk. METAL STEWARDSHIP Michael Hill is committed to jewellery manufacturing using conflict-free and responsibly sourced metals. Currently 71% of our jewellery suppliers are RJC certified or are on the journey to becoming 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 by 2025, however we will also be working to develop journey to Chain of Custody certification; or • 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. We have several gold suppliers who are on the journey of RJC Chain of Custody certification for precious metals (including recycled gold and silver), 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 a deeper understanding of all our precious metal types. At Michael Hill, we are taking the lead in innovative CONFLICT FREE GOLD & SILVER Michael Hill does not support activities which cause, support jewellery product and services in the countries we operate. The more we challenge the industry and our suppliers for more sustainable products to sell to our customers, the more or benefit armed conflict, contribute to human rights abuses or dramatic the industry shift. breaches of international humanitarian law, money laundering and terrorist financing. In order to comply with our commitments, we source through suppliers who provide assurances that the precious metals We have launched an internal Innovation Hub, involving a group of passionate individuals who are abreast of global movement in the category and are tasked with developing new and innovative services and products for the future of in their products are responsibly sourced and conflict free in Michael Hill. accordance with recognised responsible sourcing frameworks maintained by leading industry bodies for precious metals, such as the London Bullion Market Association, the Dubai Multi Commodities Centre or the Responsible Minerals Initiative. The standards protect the integrity of the global supply chain for the precious metal markets. We have established internal management systems and due diligence processes to validate our suppliers’ responsible sourcing practices, and we are confident we will source 100% conflict free all gold and silver in accordance with our outlined goal. Meeting quarterly, the Innovation Hub has already brought many future thinking ideas around product sourcing and circularity to the Group Executive team for future consideration and rollout. MICHAEL HILL | 2023 ANNUAL REPORT 35 RE:CYLE - OUR NEW CIRCULARITY PROGRAM The definition for circular economy defined by the European Parliament is “a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing, and recycling existing materials and products for as long as possible. That requires a transition from the traditional linear economy where natural resources are extracted, used and ultimately discarded to an economic system that does not rely on virgin resources and reshapes how products are made, used and recovered”. Michael Hill sees the circular economy playing a big part in the jewellery industry in the future and are committed to introducing circularity wherever possible. Due to the inherent fungible and circular nature of fine jewellery materials, precious metals used to craft jewellery can be refined and recycled repeatedly, without losing their value or purity. We are fortunate to work with materials which allow us to provide innovative services whilst building a more circular economy. We passionately believe this is something our industry should be tapping into, to protect our planet’s precious natural resources, leading to a more sustainable and ethically responsible future. Providing circularity services to our customers provides a dual opportunity – to reduce our environmental impact and the reliance on virgin materials, as well as provide more service opportunities for our customers over the lifetime relationship with our brand, and their product. Our new exciting gold recycling program, “Re:cycle”, is the first phase of our new sustainable jewellery ecosystem which focuses on the renewal and circularity of existing gold products. Through this program, we are encouraging all Australians to give “new life to their old loves”, by recycling any broken, old, or no longer worn gold jewellery pieces in exchange for a Michael Hill gift card, to purchase a new piece online or instore. With no clear competitor offering a premium gold recycling service, we chose to lead the industry and create an innovative and market-first national program that provides genuine value to customers for their gold products. Through reputable global research, we know that recycling 1g of pure gold can reduce an estimated 3 tonnes of ore extraction and avoid up to 16kg of carbon emissions. This program allows us and our customers to contribute towards reducing the need for virgin-mined gold while reducing mining ore and carbon emissions. After a customer’s gold is recycled, we send a personalised email which includes the individual amount of mining ore and carbon emissions they have helped avoid thorough recycling their gold pieces. From early April until the end of July 2023, the Re:cycle program has delivered: • Pure gold recycled: 1,192 grams • 2734.18 grams of gold alloy received • Mining ore avoided: 3,575 tonnes • Carbon emissions saved: 19,068 kilograms EXTENDING PRODUCT LIFE THROUGH REPAIRS 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 in New Zealand we offer repairs on any jewellery products, working with global partners to repair and restore even the most precious jewellery back to life. This year Michael Hill has repaired over 401,641 pieces of jewellery for our customers, preventing waste and extending each product’s lifespan. THE HIGHEST STANDARD IN LABORATORY GROWN DIAMONDS Michael Hill is still one of the few global retailers to become an Accredited Retailer for SCS-007 Certified Sustainability Rated Laboratory Created Diamonds, and in the past year have received a raft of positive global press acknowledging the innovative and sustainable nature of this new product we offer our customers. Sales of this product have increased to 7.7% of our overall diamond mix while attracting a new sustainability-conscious customer to our brand. We see our certified sustainability rated laboratory-grown diamonds providing our customer the 5th C when purchasing a diamond – Choice. We will be expanding this range of laboratory-grown diamonds in FY24. 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 are certified on their journey toward achieving full Climate Neutrality – produced in a manner that mitigates both current annual and past (“legacy”) greenhouse gas emissions still affecting the climate 36 MICHAEL HILL | 2023 ANNUAL REPORT • 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 • Sustainability investments: Sustainability Rated Diamond producers engage in sustainability investments that help uplift artisanal and small-scale miners 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 | 2023 ANNUAL REPORT 37 PLANET Our 2030 strategic vision 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. Since announcing these goals in August 2022, we have made great traction measuring our carbon and waste and have crafted a clear roadmap on how we aim to achieve our goals. The 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 baselines, and reduction targets. 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 reduce natural resource consumption in our operations and find innovative ways to reduce the amount of residual waste. ZERO CARBON OPERATIONS We are committed to consistently searching for better ways to operate, and to benefit and reduce our impact on the environment. We have acted in the past year towards our ambition for our Scope 1 and 2 operations to be Net Zero Carbon by 2025. Issues around the climate crisis are well comprehended across business, political and social agendas around the world. Our customers, suppliers and team expect us to act and address the risk of climate change to our business and reduce the impact of operating our business on the climate. We note the release of Treasury’s consultation on climate-reporting disclosure standards in Australia, which will be based on the International Sustainability Standards Board’s IFRS S2 Climate-related Disclosures standard. Guidance from the Australian Accounting Standards Board, to be released later in 2023, will provide clear direction on what Michael Hill needs to report, and by when. As we await the final standards, we are following the Green House Gas (GHG) Protocol, with guidance from our local regulatory agencies. 38 MICHAEL HILL | 2023 ANNUAL REPORT SCOPE 1, 2 AND 3 PROGRESS: Scope 1 and 2: • A team has been tasked to identify and calculate the Group’s Scope 1 and 2 emissions. Work continues to capture and calculate all of the Group’s emissions in these categories with significant progress achieved in the past year. • Scope 2 emissions are being calculated across our entire store network in the markets we operate (AU, NZ, and CA). We are confident that by the next annual report period we will have all Scope 2 emissions calculated. • August 2022 saw the Michael Hill Brisbane Head Office move to a state-of-the-art facility which has environmental considerations throughout many design elements. The building features a 99KW solar panel system to reduce energy consumption, water tanks to capture rainwater to be used in the building’s facilities systems for all landscaping, insulated glass to reduce heat loss and gain, as well as efficient LED lighting all aimed at reducing environmental impact. Through this move to a more environmentally conscious building, we have reduced our Head Office energy consumption by 39% from the first full month of moving in. • To support our existing solar energy generation, our Brisbane Head Office Energy supply will become 100% renewable energy in 2024. • We also aim to make our Head Office a Net Zero operation in 2024, supported by fully accredited net-zero emission energy supply and offsetting residual unavoidable emissions. • Michael Hill has entered renewable energy supply arrangements in New Zealand to ensure all NZ stores’ energy consumption is from 100% certified renewable energy sources in 2024. • We are currently addressing solutions with key stakeholders including landlords around the use of renewable energy for our store electricity consumption. Landlords such as LendLease, Scentre Group, GPT and Vicinity provide various renewable energy plans for retailers to use. These opportunities will continue to be assessed over the coming financial year. Scope 3: • Our focus since announcing our Net Zero goal has been on calculating and reducing our Scope 1 and 2 emissions, however we are seeking to engage our supply chain partners about their plans to reduce their emissions in the coming year. We are pleased with our progress towards our ambition of Net Zero carbon operations for Scope 1 and 2 by 2025. AUSTRALIA HEAD OFFICE ELECTRICITY CONSUMPTION SE PT EMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY J UN E FY22 FY23 NATURE POSITIVE The 2022 WWF Living Planet report states that land-use change is still the biggest current threat to nature, destroying or fragmenting the natural habitats of many plant and animal species on land, in freshwater and in the sea. Its most comprehensive finding to date shows an average 69% decline in the relative abundance of monitored wildlife populations around the world between 1970 and 2018. We accept that our business operations, along with many others, 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 recognises the impact that 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 manifesto, we are committed to contributing to the restoration and conservation of the natural environment in our key markets and plans are underway to launch a program around this in FY24. MICHAEL HILL | 2023 ANNUAL REPORT 39 40 MICHAEL HILL | 2023 ANNUAL REPORT 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. Eliminating waste across our entire business has required extensive auditing across all our touchpoints to collate and measure our current baseline waste data. We are confident of the type and quantities of waste we are producing across our entire business and are using a structured waste hierarchy to minimise and divert all waste possible. We are consistently training and educating our internal departments on waste management and making changes wherever possible to reduce our waste and, in turn, our impact on the environment. HEAD OFFICE WASTE VOLUME SE PTEMBER OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY J UN E FY22 FY23 REDUCING OUR HEAD OFFICE WASTE REDUCING OUR WASTE IN STORES In moving to our new Head Office at Cannon Hill, we have Store waste can come from several areas including, general made significant changes in our approach to waste resulting in waste, packaging / transportation waste and store de-fit a reduction of 65%. This reduction is due to several initiatives waste. We are actively conversing with our landlords to being implemented across our daily operations including: ensure we are adhering to their waste policies across our • Purchasing a metal crusher in our Brisbane Distribution Centre, to flatten and recycle all aluminum containers our network and educating our team members on the importance of their adoption. overseas suppliers transport our product in, rather than Our landlords are also actively involved in developing send to landfill. • Reducing printing stations across the office, while introducing hot desk working environments with limited storage. innovative de-fit strategies for closed stores adopting the waste hierarchy, however further adoption and innovation is required in this space. We are currently in the final stages of designing our “Store of • Introducing a new segregated waste management the Future” – a new store design for future Michael Hill stores system including general recycling, organic waste, paper and are implementing our waste hierarchy into these designs cardboard recycling and general waste sections with clear from inception through contemplating the end of life for each labelling in all waste areas. of the materials used. PRODUCT WASTE We aim to use materials in this design from as much recycled, sustainable, or eco-friendly materials as possible. We are fortunate to work with precious metals that can readily contribute to the circular economy and be reused A MEMBER OF APCO many times over without losing their value. Our product waste from manufacturing processes, including aged stock, is well managed to ensure minimal waste. Michael Hill is also proud to offer services for our customers to manage the end-of-life journey for their preloved products, including repairs or gold recycling under our Re:cycle program, to reduce waste to landfill. We are exploring other innovative services for our customers to trade up their preloved items and reduce the need for more virgin materials in the industry. TECHNOLOGY WASTE Through upgrading some of our store technology, we worked with our partner Truis to donate and repurpose 90 iPads in November 2022. The iPads were wiped, upgraded and donated to 3 Brisbane schools (Richland, Darra and Carol Park State Schools) to use for primary school students’ education. Michael Hill is an Australian Packaging Covenant (APCO) Brand Owner Member, ensuring we meet regulatory obligations under the National Environment Protection Measure 2001 (NEPM) and as a commitment towards reducing the environmental impact of our packaging. As a member we have access to the Sustainable Packaging Guidelines (SPGs), a government-supported, national resource for packaging best practice, and have started to implement recommendations across our business. MICHAEL HILL | 2023 ANNUAL REPORT 41 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 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 background in retailing, fashion, and brand development in & Operations Director (Menswear). 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. ANDREW LOWE CHIEF FINANCIAL OFFICER & COMPANY SECRETARY Andrew joined Michael Hill in 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 During his time at Specialty Fashion Group, Daniel led of Australia. 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. 42 MICHAEL HILL | 2023 ANNUAL REPORT Andrew has extensive experience in corporate governance, mergers and acquisitions, finance and leadership roles across a range of listed corporate groups with Australian and offshore operations, including roles with Aurizon, Cleanaway Waste Management and 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. Joanne has also worked as the Executive General Manager, Human Resources for MAX Solutions Pty Ltd, a national organisation that delivers health, training and humanitarian solutions for Federal and State Governments, and prior to this she worked in retail operations with Woolworths. With a large 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 over 25 years’ leadership experience, across retail and beauty industries, having worked with prominent retail brands such as Witchery, GAP, Bras n Things, Guess Jeans and Aldo. She has led the roll out of over 200 new retail stores in Australia, New Zealand and Singapore and was named 2006 Australian Young Business Woman of the Year at the Telstra Business Women’s Awards. Amy’s extensive career in specialty fashion retailing has built a broad skill set that goes beyond store operations. She has worked as an Executive Leader in privately owned, private- equity controlled, and listed organisations. 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 Matt joined Michael Hill in June 2015, bringing with him extensive international IT experience in the retail space. Prior to joining the company, Matt led the global IT strategy for Forever New as their General Manager Information Technology, and prior to that worked as Chief Information Officer for Super Amart where his final project was successfully leading a full-scale disaster recovery process after the Queensland floods in 2011. He also worked for leading national footwear and apparel company, Colorado Group after enjoying his long retail apprenticeship with 11 years at Country Road, where he worked initially as a Finance Accountant, and also gained solid shop floor experience during his tenure. Matt has strong technical skills and a track record of developing an effective team focused on business alignment. Matt’s career has seen him lead significant technology and 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 across the business. KEITH LOUIE CHIEF DIGITAL OFFICER 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. More recently, Keith has advised various listed, private and Government entities on eCommerce and digital transformation, building on his earlier experience as a Director 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 global organisations (including Woolworths, Telstra, Foxtel and McDonald’s), specialising in strategic brand building, end to end marketing communications and driving key customer growth strategies across channels. In her most recent role as Director of Marketing at McDonald’s Australia, she was responsible for marketing, brand and media strategies and driving commercial growth through innovation and re- imagination of the brand. Jo is also a recognised leader in creativity – winning multiple awards both locally and internationally. She brings a fresh approach to driving the future growth of the brand through a lens of commercial creativity. MICHAEL HILL | 2023 ANNUAL REPORT 43 “ Even though FY23 was a particularly challenging year, the team remained focused, executed on our strategy, delivered a plethora of initiatives, and successfully acquired a new brand, Bevilles” ROB FYFE, CHAIR 44 MICHAEL HILL | 2023 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 2 July 2023. FY23 is a 53-week period (27 June 2022 to 2 July 2023) compared to FY22 a 52-week period (28 June 2021 to 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 26 June 2022 of 4.0 cents (2021: 3.0 cents) per fully paid share paid on 23 September 2022 (2021: 24 September 2021) Interim dividend for the year ended 2 July 2023 of 4.0 cents (2022: 3.5 cents) per fully paid share paid on 24 March 2023 (2022: 25 March 2022) The directors have declared the payment of a final dividend of 3.5 cents per fully paid ordinary share (2022: 4.0 cents). The final dividend will be unfranked for Australian purposes, with nil 2023 $’000 2022 $’000 15,531 11,649 15,188 13,590 New Zealand imputation credits and with conduit foreign income. The aggregate amount of the 13,289 15,531 proposed dividend expected to be paid on 22 September 2023 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 | 2023 ANNUAL REPORT 45 REVIEW OF OPERATIONS The Group achieved the following key outcomes for the 2023 FY23 - GROUP BUSINESS PERFORMANCE financial year: KEY FINANCIAL RESULTS • Group operating revenue increased by 5.8% to $629.6m (2022: $595.2m, 2021: $556.5m). The Group has reported operating revenue of $629.6m (2022: $595.2m) for the 2023 financial year (53-week retail financial year ended 2 July 2023). Comparable EBIT* for the Group was reduced to $58.9m for the year (2022: $62.9m), a decline of 6.3% year on year, due to higher COGS pressure, wage inflation • Comparable EBIT* decreased by 6.3% to $58.9m and elevated New Zealand security costs. (2022: $62.9m), given inflationary cost pressures and substantial investments in New Zealand security measures. This compares favourably to FY21 by 4% (2021: $56.6m). • Group gross margin decreased by 50 bps to 64.2% (2022: 64.7%), yet 150 bps ahead of FY21 (62.7%). • Statutory net profit after tax decreased to $35.2m (2022: $46.7m), with the variance to comparable EBIT performance largely driven by AASB 16 Leases and IFRIC SaaS. • Healthy inventory position to support elevated sales While the Company delivered record revenue for the year, this was driven by a particularly strong first half performance, followed by a more challenging second half as macroeconomic conditions deteriorated and consumer confidence declined. Notwithstanding the impact of sustained elevated raw material input costs (diamonds and gold), and while slightly down on prior year, the Company still delivered strong gross margins. This performance was underpinned by the aspirational brand strategy and the ability to elevate ATV even in a challenging at $203.3m (2022: $181.5m), with the increase mainly retail environment. attributable to the Bevilles acquisition. • Deployment of cash on share buy-back, dividends, the Bevilles acquisition and reinvestment in the business, resulted in a net cash position of $8.4m (2022: $95.8m). Whilst the Company’s digital channels declined in the first half as it cycled the pandemic digital surge, there was a strong return to growth in the second half driven by improved customer experience, traffic and conversion. Throughout the • A three year $90m banking facility was finalised on year, the Company has continued to make good progress in its favourable terms in June, providing access to an additional various omni-channel offerings, with 50% of digital sales now $20m, to support strategic growth initiatives. being fulfilled via a store. • Final dividend of 3.5 cents per share declared, delivering In August 2022, the Company executed a seamless total dividends for the year of 7.5 cents per share (2022: 7.5 relocation of its global headquarters to new purpose-built cents per share). OPERATIONAL PERFORMANCE leased premises housing the global support functions, reimagined artisanal jewellery workshop and a state-of-the-art Australasian distribution centre. These new premises provide • Group revenue was up 5.8% for the year, with Australia +9.1%, a contemporary, dynamic and productive environment, New Zealand +5.8% and Canada flat. strategically aligned to Michael Hill’s aspirational brand journey. • Digital sales were largely flat at $41.3m (2022: $41.9m, 2021: $34.0m) for the year, demonstrating a strong second half recovery from -9% at the end of the first half. On 1 June 2023, the Company completed the Bevilles acquisition, successfully transitioning all team members, stores and inventory to the Group. Accordingly, four weeks of Bevilles • Brilliance by Michael Hill membership now over 2 million trade are reflected in the Group and Australian segment results. (2022: ~1.4 million members), driving repeat customers and higher ATV. • Key initial focus for Bevilles is on integration and store roll Inventory year-end holdings were $203.3m (2022: $181.5m), with Michael Hill on target and broadly in line with prior year. The lift in stock holdings was largely driven by the inventory acquired outs, with three sites secured and another three sites close in the Bevilles transaction. to finalisation for pre-Christmas opening, with a further tranche of sites already identified for the second half. The newly acquired Bevilles business contributed four weeks of sales to the FY23 Group result. • For Michael Hill, three new stores opened (AU: 2, CA: 1) and five under-performing stores permanently closed (AU: 3, NZ: 2) during the year. With the inclusion of 26 acquired Bevilles stores, the store network totals 304 across all markets at the end of the year (2022: 280). During the year, the Company benefited from strong operating cashflows, successfully acquired Bevilles, returned capital to shareholders through a buy-back and dividends, continued investment in both the core business and growth initiatives, which resulted in a year end net cash position of $8.4m (2022: $95.8m). Furthermore, the Company refinanced a three year $90m bank facility on favourable terms, which will support future strategic growth initiatives. Michael Hill opened three new stores (AU: 2, CA: 1) and closed five under-performing stores across the network (AU: 3, NZ: 2) during the year. With the inclusion of 26 acquired Bevilles stores, the store network totals 304 across all markets at the end of the year (2022: 280). *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. 46 MICHAEL HILL | 2023 ANNUAL REPORT SEGMENT RESULTS FY23 delivered strong results in all markets, despite cycling record results in FY22 and facing challenging economic market conditions during FY23H2. The results below are expressed in local currency. AUSTRALIAN RETAIL PERFORMANCE Operating Results (AU $’000) 2023 2022 2021 2020 2019 Revenue Gross profit Gross margin Comparable EBIT Comparable EBIT as a % of revenue Number of stores 331,007 303,409 312,264 266,610 313,587 211,823 196,936 194,148 161,030 194,052 64.0% 53,549 16.2% 172* 64.9% 51,750 17.1% 147 62.2% 54,347 17.4% 150 60.4% 27,641 10.4% 61.9% 32,626 10.6% 155 167 Retail segment revenue increased by 9.1% to $331.0m for the year. In addition to a record sales performance, the segment also delivered a strong gross margin for the year of 64.0%, slightly down on prior year (FY22: 64.9%), yet up 210 bps on pre-pandemic levels (FY19: 61.9%). *During the year, two stores opened, and three under-performing stores closed, resulting in 172 stores (including 26 Bevilles stores) at year end (FY22: 147). NEW ZEALAND RETAIL PERFORMANCE Operating Results (NZ $’000) 2023 2022 2021 2020 2019 Revenue Gross profit Gross margin Comparable EBIT Comparable EBIT as a % of revenue Number of stores 132,359 125,090 127,067 106,696 120,064 81,961 79,288 78,771 63,641 73,011 61.9% 25,622 19.4% 46 63.4% 30,130 24.1% 62.0% 35,119 27.6% 59.6% 21,067 19.7% 60.8% 24,125 20.1% 48 49 49 52 Retail segment revenue increased by 5.8% to NZ$132.4m for the year. Gross margin for the year was 61.9% (FY22: 63.4%), largely attributable to the higher penetration of diamond sales in this market. This result was still 110 bps above pre-pandemic levels (FY19: 60.8%). New Zealand earnings were directly and adversely impacted by a ~$5m investment required to be made for uplifted and ongoing security measures to protect our team, customers and stores. Additionally, impacted stores experienced softer sales in the period immediately following an incident. During the year, two under-performing stores closed, resulting in 46 stores at year end (FY22: 48). MICHAEL HILL | 2023 ANNUAL REPORT 47 CANADIAN RETAIL PERFORMANCE Operating Results (CA $’000) 2023 2022 2021 2020 2019 Revenue Gross profit Gross margin Comparable EBIT Comparable EBIT as a % of revenue Number of stores 158,894 159,661 118,445 110,799 133,146 100,531 103,623 72,643 63,991 80,726 63.3% 64.9% 61.3% 57.8% 60.6% 27,110 17.1% 86 28,785 12,320 (2,412) 18.0% 10.4% (2.2%) 85 86 86 9,797 7.4% 86 Retail segment revenue was CA$158.9m for the year, largely flat to prior year. Gross margin declined to 63.3% for the year, as the segment cycled a record gross margin in FY22 (64.9%). This result was still 270 bps ahead of pre-pandemic levels (FY19: 60.6%). The overall performance of this segment is a credit to the strategic focus placed on Canada in recent years. With strong and refreshed leadership, brand awareness continues to increase, and productivity metrics have lifted significantly. During the year, one store opened, resulting in 86 stores at year end (FY22: 85). CAPITAL MANAGEMENT DIVIDENDS AND SHARE BUY-BACK Taking into consideration the Group's performance and strength of balance sheet, the Board has decided to declare a final dividend of 3.5 cents per share, unfranked for Australian purposes, with nil New Zealand imputation credits and with conduit foreign income. This delivers a total dividend for the year of 7.5 cents per share, representing ~70% of adjusted annual NPAT, and at the higher end of the Group's Dividend Distribution Policy target range of 50% to 75%. Subject to the Company’s ongoing trading performance and growth plans, the Board’s intention is for dividends to remain at the higher end of the target range. The Company commenced its on-market share buy-back on 19 September 2022, which was paused on 21 November 2022. The directors have decided to discontinue the buy-back. Under the buy-back, the Company acquired 8,631,237 shares (ASX 4,350,875; NZX 4,280,362), being 2.2% of Company's shares on issue at the commencement of the buy-back, at a total cash cost of A$10,206,543. The total number of shares on issue following the completion of the on-market share buy-back was 379,688,884. GROUP STRATEGY EMPHASIS ON GROWTH As the Michael Hill brand continues its aspirational brand journey to a more premium position, the acquisition of the Bevilles business in late FY23 provides a vehicle to take market share at the value end of the fine jewellery category. Additionally, in the first half of FY24, the Company will launch its new bespoke brand TenSevenSeven, focused on servicing the high-end of the market with its unique personalised diamond ring proposition. With these additional brands, the Michael Hill Group now services all significant customer segments of the fine jewellery category, and delivers multiple new growth pipelines. The Bevilles brand will deliver both sales and profit growth through a significant real estate expansion strategy, coupled with digital growth and an optimised business model. For FY24, three sites have been secured and another three sites are close to finalisation for pre-Christmas opening, with a further tranche of sites already identified for the second half. Leveraging group capabilities and partnerships, Bevilles will benefit from optimisation of both supply chain and vendor relationships delivering margin and cost benefits to the business. With system integration planned for the second half of FY24, this will drive further opportunities in both productivity and efficiencies by leveraging a common technology platform. TenSevenSeven is a new start-up brand designed to test a completely unique and elevated proposition, capturing an entirely new high-end customer. The brand will be brought to life through an immersive digital experience supported by the gradual roll-out of a limited number of showrooms in key capital cities. Customers will be invited to select from thousands of unique diamonds, paired with a ring design of their choice and ultimate handcrafting in our artisanal Australian workshop. The Michael Hill brand continues to deliver growth through its elevated brand strategy driving higher productivity and strong margins across all channels. 48 MICHAEL HILL | 2023 ANNUAL REPORT 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 focusing on key life moments, with an emphasis on product, quality and craft, are leading the transition away from price and promotion, towards emotional long-term customer relationships. The Brilliance by Michael Hill loyalty program underpins customer engagement and has now grown to over two million members. 2. Digital & Omni-channel Michael Hill’s digital transformation continues with a shift to a new headless website architecture, providing greater flexibility, productivity and improved customer experience. The role of our digital platforms is not only to serve as a transactional channel but also to provide product education, and brand messaging to drive traffic to our physical stores. More than half of our online transactions are now fulfilled from stores, and with data insights show a large proportion of our instore sales originate from online and digital marketing, demonstrating the success of the Michael Hill's omni-channel strategy. 3. Retail Fundamentals Bricks and mortar retail is at the core of the Michael Hill business, driving more than 90% of sales. The retail fundamentals strategy has delivered a 21% lift in productivity per store over the last four years. During FY23, the business invested in refreshing a significant portion of our store network as we elevate the instore experience to align with the brand strategy. The retail team continues to focus on productivity as the key performance metric for stores, in conjunction with a deliberate emphasis on lifting average transaction value. 4. Product Evolution Product evolution is at the centre of a customer-led retail strategy, and is critical to achieve sales growth and support elevated margin. The laboratory grown diamond category continues to expand, with higher sales growth and margins, helping to offset high input costs for both mined diamonds and gold. During the course of the year, the business invested in new talent and capability across product, buying, sourcing and procurement, as well as technology investments in merchandise planning. The Michael Hill artisanal Australian manufacturing facility was upgraded as part of the move to new global headquarters, optimising both production and costs. 5. New Territories & Services As the business shifts from transformation to growth, the opportunity to stretch the brand into new territories and services is a key focus. The Michael Hill marketplace strategy has continued, building on partnerships in all three core markets, and now available in both Singapore and Malaysia through a new partnership with Zalora. Following strong early insights from The Bay in Canada, michaelhill.ca now has a dual language offering to engage with French speaking customers in both Quebec and across the country, and early signs are very promising. The pure-play Medley business, while still relatively small, delivered sales growth of 31% on last year, and continues to test and trial new products in the demi-fine jewellery category. During the year, the Group developed a number of new digitally-led services offerings: the new bespoke brand, TenSevenSeven; the new gold recycling platform, Re:cycle; and the ability to introduce jewellery insurance to customers in Australia. Furthermore, the Company is in the process of reinventing its repair service offering, initially with the creation of an app to modernise and improve customer experience, with the end goal of creating a seamless repair business to drive incremental revenue. 6. Cost Conscious Culture During the year, the Michael Hill business successfully relocated its global headquarters including its Australasian distribution centre. This new state-of-the-art distribution centre is technology enabled and has generated significant efficiencies in processing stock, fulfilment to stores and delivery to customers. The embedded cost conscious culture continues, with an absolute focus on cost discipline, inventory and working capital management. In particular, the business has invested in technology to support labour optimisation and rostering to ensure targeted productivity levels can be achieved. 7. Sustainability In August 2022, Michael Hill announced its ESG manifesto for 2030, centered around three key pillars – People, Product and Planet, with more detail in the Annual Report. An integral part of this strategy is the launch of a circular jewellery ecosystem, Re:new. During the year, the first phase was launched via Re:cycle – a digitally enabled gold recycling program, that encourages customers to give “new life to their old loves”, by recycling gold jewellery pieces in exchange for a Michael Hill gift card. The second phase, Re:store, will focus on jewellery repairs, and the third phase, Re:imagine, a diamond upgrade program. MICHAEL HILL | 2023 ANNUAL REPORT 49 50 MICHAEL HILL | 2023 ANNUAL REPORT RISK MANAGEMENT The Board believes that a strong risk management framework supports the Group’s growth and success. The Group regularly reviews its risk environment and has identified the following at risk areas and mitigating strategies: RISK STRATEGIES AND MITIGATION Global uncertainty due to changing political landscapes and increased sanctions of raw materials creates volatility for the Group’s operating environments Increase in cyber-attacks disrupting operations and increased reliance on third-party platform providers to have robust cyber controls Theft appeal of our product increases during periods of financial hardship and uncertainty The Group has a growth strategy that embraces omni-channel expansion and strategic acquisitions in markets that limit cannibalisation of sales and focusses on improving the customer experience. Furthermore, there is executive oversight of all drivers, both internal and external, and prudent policy execution to adjust accordingly. There are several sourcing options that are employed, including forward planning and securing core ranges to curb the impact of rising prices of raw materials and to ensure financial exposures are well managed. The Group has tasked the Technology Governance Committee to oversee its response to cyber risk 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. The safety and security of our staff and customers is our most important priority. We are investing in initiatives and processes which improve the overall security of our stores and contribute to the safety of our staff and customers. We are working with both local and national law enforcement bodies and other external parties to better the overall retail environment for our staff and customers. With the ongoing escalation of theft and violence in New Zealand, the Group continues to have a dedicated executive led taskforce responding to these challenges and continue to implement appropriate actions. 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. There are dedicated workstreams supporting each of our pillars of people, planet and product. Sustainability goals and supply In the product and people pillars, the Group is working closely with our key suppliers across chain transparency 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 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 Talent acquisition and retention in business. These include succession planning, reviewing pipeline of external recruits and mentoring increasing regulated markets and higher and coaching of staff to promote internally. competition for resources 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 in one of our jurisdictions in an increasingly complex compliance environment The Group has in-house legal and compliance teams who are focused on compliance in our three markets and utilise external firms for specialised advice when required. Any new legislative requirements or rectification initiatives have dedicated teams focused on ensuring our compliance and training our teams appropriately. MICHAEL HILL | 2023 ANNUAL REPORT 51 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: • 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: Impact of IFRIC SaaS-related guidance Employee restructure costs Bevilles acquisition transaction costs Less items relating to: Impact of AASB 16 Leases Government grants received (AU, NZ, CA) Comparable EBIT 2023 $’000 58,883 7,356 734 1,960 (10,044) - 58,889 2022 $’000 73,236 5,986 - - (13,489) (2,864) 62,869 ENVIRONMENTAL REGULATIONS The Group has determined that no particular or significant environmental regulations apply to it. 52 MICHAEL HILL | 2023 ANNUAL REPORT From left: Jacqueline Naylor, Robert Fyfe, Daniel Bracken, Emma Hill, David Whittle, Sir Michael Hill and Gary Smith 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 and board experience in various retail businesses operating in New Zealand, Australia and Great Britain, across sectors including retail banking, telecommunications, pay television, sport, manufacturing and outdoor apparel. In 2015 Rob was awarded an Honorary Doctor of Commerce from University of Canterbury and 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Chair • Non-Executive and Independent Director 1,953,578 Ordinary Shares • Member of ARMC • Member of PDRC SIR RICHARD (MICHAEL) HILL K.N.Z.M. Sir Michael is the founder of Michael Hill, and his visionary leadership has been the foundation for the Company’s successful international expansion. 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 led the Group as Chairman from 1987 until 2015 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 on the New Zealand Stock Exchange. 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive Director 148,330,600 Ordinary Shares MICHAEL HILL | 2023 ANNUAL REPORT 53 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive Director • Chair of PDRC GARY SMITH B.Com, F.C.A., F.A.I.C.D. 167,487,526 Ordinary Shares 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 across a range of boards and tourism related industry bodies. 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-committees. 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive and Independent Director 80,000 Ordinary Shares • Chair of ARMC • Member of PDRC 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive and Independent Director 160,000 Ordinary Shares • Member of ARMC DAVID WHITTLE B.A., B.Com Dave has considerable brand, data, technology, omni-channel retail and digital transformation experience. He is a Founder of Lexer, a global software company helping brands and retailers genuinely understand and engage their customers. In 2015, Dave became the youngest ASX 200 Non-Executive Director when he joined the board of Myer. Previously, Dave spent 10 years with global advertising group M&C Saatchi in a number of local and international leadership roles, culminating in three years as Managing Director in Australia. Prior to joining M&C Saatchi, Dave was the first employee of a marketing services group that built four digital service and software businesses. SPECIAL RESPONSIBILITIES DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Non-Executive and Independent Director Nil 54 MICHAEL HILL | 2023 ANNUAL REPORT DANIEL BRACKEN Daniel joined the Company as the CEO in November 2018 and was appointed to the Board in June 2021. 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 DIRECTORS’ INTERESTS IN SHARES AND OPTIONS • Managing Director • Chief Executive Officer 201,869 Ordinary Shares 4,331,046 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. MEETINGS OF DIRECTORS The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 2 July 2023, 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 A 15 12 15 13 15 - 15 B 15 15 15 15 15 - 15 A 5 - - 5 5 - - B 5 - - 5 5 - - A 7 - 7 7 - - - B 7 - 7 7 - - - R I Fyfe Sir R M Hill E J Hill G W Smith J E Naylor D Whittle* D Bracken 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 *D Whittle was appointed as director subsequent to balance sheet date. COMMITTEE MEMBERSHIP As at the date of this report, Michael Hill International Limited has an Audit and Risk Management Committee and a People Development and Remuneration Committee. AUDIT AND RISK MANAGEMENT COMMITTEE Gary Smith (Chair) Robert Fyfe Jacqueline Naylor PEOPLE DEVELOPMENT AND REMUNERATION COMMITTEE Emma Hill (Chair) Robert Fyfe Gary Smith MICHAEL HILL | 2023 ANNUAL REPORT 55 AUDITED REMUNERATION REPORT The directors present the 2023 Michael Hill International Limited remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded during FY23. 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, As a result of the benchmarking the CEO’s base salary increased by 4.50%, STI potential as a percentage of total fixed remuneration reduced by 13% and LTI potential increased by 42%. The CFO’s base salary increased by 4.96%, STI potential as a percentage of total fixed remuneration increased by 1% On behalf of Michael Hill Group, I am pleased to present the and LTI potential increased by 7.5%. FY23 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 several years Michael Hill Group has achieved significant growth and transformation on the journey to become a high performing, modern, differentiated, omni- channel jewellery group. In FY23 however, the Group experienced a decline on FY22 in Comparable EBIT. This decline can be attributed to higher COGS pressure, wage inflation and elevated New Zealand security costs. In addition, we experienced a more challenging second half as macroeconomic conditions deteriorated and consumer confidence declined. Key results from FY23 include: FY23 Remuneration The STI awarded for the year was 35% of potential and 70% of on target for both the CEO and CFO. The KPI for on target EBIT was not achieved, however, in consideration of the significant costs related to New Zealand security which materially impacted profit in New Zealand, the Committee applied discretion to award 50% of the on target STI for the Financial KPI. The deliverables related to the non financial KPIs of Strategy, Customer and People were achieved and 100% of STI applicable to these KPIs was awarded. LTI awarded over the year was 95% of fixed remuneration for CEO and 40% for CFO. 570,674 awards vested to the CEO and 187,776 awards vested to the CFO in the year. Non-Executive Director (NED) fees were increased by the Wage Price Index (WPI) of 2.6%. There were no other changes to the structure of NED fees. • Total Group revenue of $629.6m (2022: $595.2m) – an In conclusion, the Board believes the remuneration changes and outcomes for FY23 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. Whilst experiencing challenging trading, security and economic conditions that contributed to a decline in comparable EBIT, the Company did have a record year in revenue results. 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 and Remuneration Committee increase of 5.8% • Statutory EBIT* of $58.9m (2022: $73.2m) – a decrease of 19.6% • Comparable EBIT* of $58.9m (2022: $62.9m) – a decrease of 6.3% • EPS of 9.20 cents (2022: 12.03 cents) – a decrease of 23.5% *Statutory 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. It is the Company’s policy to conduct Executive remuneration benchmarking every three years and to consider outcomes in line with Company policy including market trends. Late last 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. The insights from this review resulted in changes to KMP and executive packages to ensure continued retention of our high performing Executive Team while more closely aligning compensation mix with long term value creation. 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. 56 MICHAEL HILL | 2023 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 Managing Director and CEO 2016 2016 2016 2016 2020 Daniel Bracken Managing Director and Chief Executive Officer 2019 Executive Andrew Lowe Chief Financial Officer and Company Secretary 2017 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 2023 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. This advice was gained in FY22 and considered in FY23 remuneration decisions. No advice was sought in FY23. Advice will next be gained in FY25 to assist in informing remuneration outcomes in FY26. MICHAEL HILL | 2023 ANNUAL REPORT 57 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 for in the Group’s STI program How is it set? similar positions, adjusted which is directed to achieving to account for the experience, Board approved on target and ability and effectiveness of the outperformance targets. individual Executive. How is it delivered? Base salary plus any fixed elements including superannuation and leave entitlements. Cash for on target performance and for outperformance. What is the objective? Attract and retain key Executive reward with achievement Executive talent. of performance targets that Drive annual profit growth and align underpin strategy. The Company has established an LTI plan as deferred compensation. An issue of share rights is made to Executive KMP. The rights vest at the end of the performance period if certain performance hurdles and vesting conditions are met. Reward Executive KMP for sustainable long term growth aligned to shareholders' interests. 58 MICHAEL HILL | 2023 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 2023 2022 2021 2020 2019 Revenue ($'000) 629,562 595,210 556,486 492,060 569,500 Comparable EBIT* ($'000) 58,889 62,870 56,594 25,686 34,608 Profit for the year attributable to owners of the Company ($'000) 35,182 46,712 41,015 3,059 16,498 Earnings per share (cents) 9.20c 12.03c 10.57c 0.79c 4.26c Dividends paid during the financial year1 ($'000) 30,719 25,239 11,636 5,817 19,365 Market capitalisation ($'000) 339,822 361,105 322,158 131,841 209,385 Share price at year end ($) Return on average total assets 0.90 6.7% 0.93 9.3% 0.83 9.0% 0.34 0.7% 0.54 4.3% *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. ¹The dividends paid in FY21 are the postponed interim dividend for FY20 and the interim dividend for FY21. No final dividend was declared for FY20. 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 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 e r a h s r e p s t n e c 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Jul 19 Jan 20 Jul 20 Jan 21 Jul 21 Jan 22 Jul 22 Jan 23 FY20 FY21 FY22 FY23 Share Price ASX 300 (RHS) Dividend Yield (RHS) MICHAEL HILL | 2023 ANNUAL REPORT 59 The graphs below show the relationship of KMP remuneration to revenue and Adjusted Earnings Per Share2 for the last four financial years. KMP Remuneration and Revenue KMP Remuneration and Adjusted Earnings Per Share $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 $700m $4,000,000 $600m $550m $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $500m $0 14 12 10 8 6 4 2 0 c e n t s p e r s h a r e (2) (4) FY20 FY21 FY22 FY23 FY20 FY21 FY22 FY23 KMP Fixed KMP STI KMP LTI Revenue (RHS) KMP Fixed KMP STI KMP LTI Adjusted EPS (RHS) 2Adjusted 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. FY23 EXECUTIVE KMP REMUNERATION In the lead up to FY23, PricewaterhouseCoopers were engaged to conduct benchmarking on KMP remuneration. As per our policy, this formal benchmarking activity is conducted every three years. The findings from this activity contributed to the remuneration outcomes for FY23 KMP remuneration. Any changes to remuneration mix are outlined in this section. 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 equivalent on target STI value in cash. KMP FIXED REMUNERATION MAXIMUM STI Daniel Bracken – CEO Andrew Lowe – CFO 35.0% 49.0% 32.0% 32.0% LTI 33.0% 19.0% 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), Executive performance and retention, 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, the base salary of the CEO increased by 4.50% and the base salary of the CFO increased by 4.96%. Superannuation was maintained at the concessional contributions cap of $27,500 for both KMP. 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. 60 MICHAEL HILL | 2023 ANNUAL REPORT The STI program in FY23 for KMP was structured as follows: Performance period Annual award for Financial KPI Six monthly award for Strategy, Customer and People KPIs Opportunity CEO – 92% of fixed remuneration comprised of 46% for on target performance, and 46% for outperformance (this represents a reduction of 13% on FY22) CFO – 66% of fixed remuneration comprised of 33% for on target performance, and 33% for outperformance (this represents an increase of 1% on FY22) How the STI is paid? In cash for on target performance and in cash for outperformance On target performance measures Financial KPI 60% weighting Strategy, Customer and People KPIs 40% weighting Performance measure for outperformance component How is STI assessed? Starting at $2.0m above FY23 budgeted 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 FY23 STI scorecard KPIs and assessment applied to the CEO. KPI 2023 PERFORMANCE ASSESSMENT Financial (60% weighting) EBIT The Committee used discretion to award 50% of the on target EBIT STI due to the significant costs related to New Zealand security which materially impacted profit in New Zealand Strategy (15% weighting) Growth, Cyber security, Store of the future, Brand ambassador On target performance achieved for all objectives Customer (15% weighting) Store refresh program, Insurance, Brilliance by Michael Hill loyalty On target performance achieved for all objectives program, data and insights People (10% weighting) Culture and engagement, ESG On target performance achieved for all objectives MICHAEL HILL | 2023 ANNUAL REPORT 61  ANALYSIS OF BONUSES INCLUDED IN REMUNERATION INCENTIVE REMUNERATION KMP’s short-term incentive cash bonuses Daniel Bracken Andrew Lowe On target achieved % 70 70 Out- performance achieved % 0 0 Total potential available Cash STI component Total STI included Amount forfeited $ $ $ $ 979,570 342,850 342,850 636,721 359,700 125,895 125,895 233,805 The CEO and CFO earned 70% of their on target STI. This STI was awarded due to the achievement of 100% of the strategy, customer and people performance measures, and 50% of on target EBIT performance due to the discretion the Committee applied. LONG TERM INCENTIVE SCHEME The FY23 LTI program for KMP was structured as follows: Performance period 3 years Opportunity CEO – 95% of fixed remuneration (this represents an increase of 42% on FY22) CFO – 40% of fixed remuneration (this represents an increase of 7.5% on FY22) Instrument Share rights Performance metric Total Shareholder Return (TSR) compound annual growth rate (CAGR) over 3 years Earnings per Share (EPS) 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 FY25 results), and satisfaction of the TSR and EPS target metrics, 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 The EPS sliding vesting schedule is as follows: • No rights vest if EPS is equal to or less than 5% CAGR • • 10% of share rights vest for each 1% increase in CAGR between 5% CAGR to 10% CAGR 100% of share rights vest if EPS is equal to or above 10% 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 performance The absolute TSR and EPS metrics have been deemed by the PDRC to be a suitable market based metric and condition measure to create alignment between the interests of Executive KMP and the interests of shareholders What happens when a KMP If the KMP’s employment is terminated for cause, or due to resignation, all unvested share rights will ceases employment? 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 62 MICHAEL HILL | 2023 ANNUAL REPORT FY23 LTI OUTCOMES SERVICE CONTRACTS Both Executive KMP were eligible to participate in the FY23 LTI It is the Group’s policy that service contracts for KMP are in accordance with the LTI program detailed in the preceding unlimited in term but capable of termination on three months’ table. For the CEO, the grant of share rights under the FY23 LTI notice (six months in the case of the CEO) and that the Group plan was approved by shareholders at the FY22 Annual General retains the right to terminate the contract immediately, by Meeting. Further details of the number of share rights granted making payment equal to three months’ pay in lieu of notice to the CEO and CFO in relation to the FY23 LTI can be found (or six months in the case of the CEO). KMP are also entitled later in this report under the heading ‘Reconciliation of Options to receive on termination of employment their statutory and Share Rights held by KMP’. entitlements of accrued annual and long service leave, OTHER BENEFITS Executive KMP do not receive additional benefits, such as non- cash benefits, other than superannuation, as part of the terms and conditions of their appointment. Loans are not provided. together with any superannuation benefits. FY23 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 FY23 were $106,945 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 $ 22,095 33,143 It is the Company’s policy to consider CPI and the WPI in determining any increase to Directors’ fees annually. In FY23, CPI was 6.1% and WPI was 2.6%. It was decided that that the appropriate measure to apply was WPI and the Non-Executive Director fees increased by the WPI percentage of 2.6%. All Non-Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarizes 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 | 2023 ANNUAL REPORT 63 DIRECTOR AND EXECUTIVE REMUNERATION OUTCOMES FOR FY23 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-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 $ Non-Executive Directors Emma Jane Hill 2023 128,748 2022 121,907 Sir Richard Michael Hill 2023 106,702 2022 101,034 Gary Warwick Smith 2023 126,634 2022 124,125 Robert Ian Fyfe 2023 213,405 2022 202,068 Jacqueline Elizabeth Naylor 2023 96,674 2022 94,759 - - - - - - - - - - - - - - - - - - - - 128,748 121,907 106,702 101,034 126,634 124,125 213,405 202,068 96,674 94,759 Total Non-Executive Director Remuneration 2023 672,163 2022 643,893 - - - - 672,163 643,893 - - - - - - - - - - - - - - - - 13,454 12,413 - - 10,390 9,476 23,844 21,889 - - - - - - - - - - - - - - - - - - - - - - - - 128,748 121,907 106,702 101,034 140,088 136,538 213,405 202,068 107,064 104,235 696,007 665,782 - - - - - - - - - - - - - - - - - - - - - - - - 64 MICHAEL HILL | 2023 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 2023 1,062,937 342,850 - 1,405,787 21,252 27,500 2022 1,050,052 535,544 535,543 2,121,139 35,231 27,500 Andrew Lowe, CFO 2023 523,568 125,895 - 649,463 11,117 27,500 2022 502,689 169,179 169,179 841,047 15,673 27,500 Total KMP Remuneration 2023 1,586,505 468,745 - 2,055,250 32,369 55,000 2022 1,552,741 704,723 704,722 2,962,186 50,904 55,000 Total Director and KMP Remuneration 2023 2,258,668 468,745 - 2,727,413 32,369 78,844 2022 2,196,634 704,723 704,722 3,606,079 50,904 76,889 - - - - - - - - 290,033 1,744,572 19.65% 16.62% 156,176 2,340,046 45.77% 6.67% 78,139 766,219 16.43% 10.20% 47,161 931,381 36.33% 5.06% 368,172 2,510,791 18.67% 14.66% 203,337 3,271,427 43.08% 6.22% 368,172 3,206,798 14.62% 11.48% 203,337 3,937,209 35.80% 5.16% *Salary and fees include the net leave entitlement accrual, calculated as leave accrued less leave taken. MICHAEL HILL | 2023 ANNUAL REPORT 65 ADDITIONAL STATUTORY INFORMATION EQUITY INSTRUMENTS All options or rights refer to options or rights over ordinary shares of Michael Hill International Limited, which are exercisable on a one-for-one basis under the executive incentive plan. MODIFICATION OF TERMS OF EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS 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 FY23 was 4,001,391 share rights. Of these, No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to share rights issued to KMP are set out below. Refer to note D3 of the accompanying financial report for further details. 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 Australia 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'). SHARE RIGHTS KMP Daniel Bracken Andrew Lowe Issued during the year Number Fair value per share right $ 1,386,750 347,060 0.85 0.85 66 MICHAEL HILL | 2023 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 KMP share rights movements Vested and exercisable Unvested Issued Forfeited Vested Exercised BALANCE AT END OF THE YEAR Vested and exercisable Unvested Daniel Bracken* FY19 LTI Plan Tranche One - 27,504 - - 27,504 - 27,504 Tranche Two Tranche Three FY20 LTI Plan Tranche One Tranche Two Tranche Three FY21 LTI Plan Single Issue FY22 LTI Plan Single Issue FY22 STI Plan Single Issue FY23 LTI Plan Single Issue - - - - - - - - - 27,504 55,010 35,615 35,615 71,229 2,057,738 634,081 - - - - - - - - - 480,051 906,699 - - - - - - - - - 27,504 - 35,615 - - - - 480,051 - - - - - - - - - - - - 27,504 - 55,010 35,615 - - - - - 35,615 71,229 2,057,738 634,081 480,051 - - 906,699 MICHAEL HILL | 2023 ANNUAL REPORT 67 BALANCE AT START OF THE YEAR Vested and exercisable Unvested Issued Forfeited Vested Exercised BALANCE AT END OF THE YEAR Vested and exercisable Unvested Andrew Lowe FY18 LTI Plan Tranche Two Tranche Three FY19 LTI Plan Tranche One Tranche Two Tranche Three FY20 LTI Plan Tranche One Tranche Two Tranche Three FY21 LTI Plan Single Issue FY22 LTI Plan Single Issue FY22 STI Plan Single Issue FY23 LTI Plan Single Issue Total - - - - - - - - - - - - - 4,325 8,648 8,365 8,365 16,733 6,424 6,424 12,847 603,119 200,307 - - - - - - - - - - - - 151,649 195,411 3,819,853 1,733,810 - - - - - - - - - - - 4,325 (4,325) - 8,648 - 8,648 8,365 (8,365) - - - - - 8,365 - 16,733 6,424 - - - - - 6,424 12,847 603,119 200,307 151,649 - - 195,411 8,365 - 6,424 - - - - 151,649 - - - - - - - - - - 758,450 (12,690) 745,760 4,795,213 *Share rights granted to Daniel Bracken during the reporting period were approved by shareholders at the Company's 2022 AGM as required by ASX Listing Rule 10.14. 68 MICHAEL HILL | 2023 ANNUAL REPORT 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 Daniel Bracken Andrew Lowe 80,000 2,293,640 160,000 201,869 4,325 *Includes common shareholding due to a related party. - - - - - - 12,690 - - - 167,487,526 148,330,600 80,000 (340,062) 1,953,578 - - - 160,000 201,869 17,015 MICHAEL HILL | 2023 ANNUAL REPORT 69 VOTING OF SHAREHOLDERS AT LAST YEAR’S ANNUAL GENERAL MEETING 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 The Company received 94.7% of “For” votes on its premium paid. remuneration report for FY22. The Company did not receive any specific feedback at the AGM or throughout the year on its remuneration practices. INSURANCE OF OFFICERS AND INDEMNITIES To the extent permitted by law, the Company has agreed to indemnify its auditor, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. The Company’s Constitution provides that it may indemnify any person who is, or has been, an officer of the Group, NON-AUDIT SERVICES including the directors, the Secretaries and other officers, The following non-audit services were provided by the entity's against liabilities incurred whilst acting as such officers to auditor, Ernst & Young (Australia). The directors are satisfied the extent permitted by law. The Company has entered into that the provision of non-audit services is compatible with the a Deed of Indemnity, Insurance and Access with each of the general standard of independence for auditors imposed by the Company’s directors, Company Secretaries and certain other Corporations Act 2001. The nature and scope of each type of officers. No director or officer of the Company has received non-audit service provided means that auditor independence benefits under an indemnity from the Company during or was not compromised. since the end of the year. The Company has paid a premium for insurance for officers 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 2023 $ - - 2022 $ 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 25 August 2023 in accordance with a resolution of directors as required by section 298 of the Corporations Act 2001. R I Fyfe Chair Brisbane 25 August 2023 70 MICHAEL HILL | 2023 ANNUAL REPORT 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 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 2 July 2023, 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; 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. This declaration is in respect of Michael Hill International Limited and the entities it controlled during the financial year. Ernst & Young Kellie McKenzie Partner 25 August 2023 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation MICHAEL HILL | 2023 ANNUAL REPORT 71 “ It has been a very busy year at Michael Hill and I’d like to both acknowledge and thank the team for their unwavering focus and energy throughout the year.” DANIEL BRACKEN, MANAGING DIRECTOR & CEO 72 MICHAEL HILL | 2023 ANNUAL REPORT FINANCIAL STATEMENTS 74 Consolidated Statement of Profit or Loss and Other Comprehensive Income 79 Notes to the Financial Statements 75 76 Consolidated Statement of Financial Position Consolidated Statement of Changes In Equity 77 Consolidated Statement of Cash Flow 126 Directors’ Declaration 127 Independent Auditor’s Report 133 ASX Listing – Additional Information The Directors present the consolidated financial statements of Michael Hill International Limited for the year ended 2 July 2023 MICHAEL HILL | 2023 ANNUAL REPORT 73 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME PROFIT OR LOSS Revenue from contracts with customers Other income Cost of goods sold Employee benefits expense Occupancy costs Marketing expenses Selling expenses Reversal/(impairment) of property, plant and equipment and other assets Depreciation and amortisation expense Loss on disposal of property, plant and equipment Administrative expenses 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: 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 Notes A2 A3 D1 B1 F1 F1 F8 Notes 2023 $’000 629,562 2,256 (225,122) (168,357) (9,928) (44,152) (20,871) 2,244 (57,724) (116) (25,533) (22,581) (9,931) 49,747 (14,565) 35,182 2023 $’000 (2,554) (2,554) 32,628 32,628 2022 $’000 595,210 8,913 (210,384) (155,332) (9,446) (41,174) (17,674) (3,774) (51,944) (231) (24,157) (16,755) (7,549) 65,703 (18,991) 46,712 2022 $’000 (977) (977) 45,735 45,735 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 2023 cents 9.20 9.00 2022 cents 12.03 11.86 The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 74 MICHAEL HILL | 2023 ANNUAL REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories 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 Goodwill Other 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 Current tax liabilities Deferred revenue Deferred consideration Total current liabilities Non-current liabilities Lease liabilities Contract liabilities Borrowings Provisions Deferred consideration Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Notes 2023 $’000 2022 $’000 B1 F3 A4 A2 F3 A5 F4 G1 F5 F8 A2 F6 A5 A2 F7 G1 A5 A2 B2 F7 G1 F10 20,867 14,533 203,260 689 452 5,061 244,862 995 139,052 57,806 17,695 36,215 49,118 371 374 301,626 546,488 71,202 41,075 20,685 13,245 6,768 212 1,814 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 - 155,001 158,596 117,518 59,418 12,500 10,879 2,557 202,872 357,873 188,615 11,112 2,609 174,894 188,615 91,386 58,605 - 7,497 - 157,488 316,084 195,095 11,388 3,369 180,338 195,095 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. MICHAEL HILL | 2023 ANNUAL REPORT 75 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to owners of Michael Hill International Limited Balance at 27 June 2021 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 Profit for the year Currency translation differences Total comprehensive income for the year Transactions with members in their capacity as owners: Dividends paid/provided Issue of share capital on exercise of share rights Share-based payments expense Share buy-back Balance at 2 July 2023 Notes Contributed Equity Share-Based Payments Reserve $’000 11,285 $’000 637 - - - - - - - - 103 (103) - - 103 11,388 - - - - 24 - (300) (276) 11,112 (53) 286 130 767 - - - - (24) 1,818 - 1,794 2,561 B3 F11 D3 D3 B3 F10 D3 F10 Retained Profits Total Equity Foreign Currency Translation Reserve $’000 $’000 3,579 158,812 - 46,712 (977) - $’000 174,313 46,712 (977) (977) 46,712 45,735 - - - - (25,239) (25,239) - 53 - - - 286 (25,186) (24,953) 2,602 180,338 195,095 - 35,182 35,182 (2,554) - (2,554) (2,554) 35,182 32,628 - - - - - (30,719) (30,719) - - - 1,818 (9,907) (10,207) (40,626) (39,108) 48 174,894 188,615 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 76 MICHAEL HILL | 2023 ANNUAL REPORT CONSOLIDATED STATEMENT OF CASH FLOWS Notes A5 B1 F4 F5 G1 B2 B2 A5 B3 F10 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 Acquisition of Bevilles, net of cash acquired 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 Share buyback / share options exercised 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 2023 $’000 693,744 (571,361) 122,383 - 792 1,460 (919) (8,791) (6,728) (28,125) 80,072 61 (26,479) (7,792) (48,113) (82,323) 21,500 (9,000) (45,098) (30,719) (10,207) (73,524) (75,773) 95,844 796 20,867 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 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. MICHAEL HILL | 2023 ANNUAL REPORT 77 78 MICHAEL HILL | 2023 ANNUAL REPORT NOTES TO THE NOTES TO THE FINANCIAL STATEMENTS FINANCIAL STATEMENTS 104 105 105 106 109 109 110 111 111 113 113 114 117 Corporate Information A Financial Overview A1 Segment Information A2 Revenue A3 Other Income A4 Inventories A5 Leases B Cash Management B1 Cash And Cash Equivalents B2 Borrowings B3 Dividends 80 80 80 82 84 85 85 88 88 89 89 F3 Trade And Other Receivables 100 F4 Property, Plant And Equipment 102 F5 Intangible Assets F6 Trade And Other Payables F7 Provisions F8 Tax F9 Auditors’ Remuneration F10 Contributed Equity F11 Reserves G Business Combination G1 Acquisition Of Bevilles H Group Structure C Financial Risk Management 90 H1 Interests In Other Entities C1 Financial Risk Management 90 H2 Deed Of Cross Guarantee C2 Derivative Financial H3 Parent Entity Financial Instruments C3 Capital Management 94 94 Information D Reward And Recognition 95 I1 Contingencies I Unrecognised Items 118 D1 Employee Benefits D2 Key Management Personnel D3 Share-Based Payments E Related Parties F Other Information F1 Expenses F2 Earnings Per Share 95 95 95 98 99 99 99 I2 J J1 And Commitments Events Occurring After The End Of The Reporting Period 118 118 Summary of Accounting Policies & Significant Estimates & Judgements Summary Of Significant Accounting Policies J2 Significant Estimates And Judgements 119 119 125 MICHAEL HILL | 2023 ANNUAL REPORT 79 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 2 July 2023 were authorised for issue in accordance with a resolution of the directors on 25 August 2023. 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 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 AASB 16 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 the financial statements. These reports do not allocate Michael Hill International Limited and its controlled entities total assets or total liabilities based on the operations sell goods and provide services to a number of customers of each segment or by geographical location. from which revenue is derived. There is no single customer The Group's operations are in three geographical segments: Australia, New Zealand and Canada. The Corporate and other segment includes revenue and expenses that do not relate directly to the relevant Michael Hill retail segments. These predominately relate from which the Group derives more than 10% of total consolidated revenue. 80 MICHAEL HILL | 2023 ANNUAL REPORT SEGMENT RESULTS YEAR ENDED 2 JULY 2023 Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 Group pre- adjustments $’000 Adjustments Group $’000 $’000 Operating revenue 331,007 121,470 176,442 643 629,562 Gross profit 211,823 75,193 111,629 5,795 404,440 Gross margin 64.0% 61.9% 63.3% 64.2% - - 629,562 404,440 64.2% EBITDA* 63,774 26,842 36,753 (48,701) 78,668 37,939 116,607 Depreciation and amortisation (10,242) (3,292) (6,742) (2,197) (22,473) (35,251) (57,724) Segment EBIT* 53,532 23,550 30,011 (50,898) 56,195 2,688 58,883 EBIT as a % of revenue 16.2% 19.4% 17.0% Interest income Finance costs 3 (155) - (3) - - 792 (982) 8.9% 795 9.4% 795 - (1,140) (8,791) (9,931) Net profit before tax 53,380 23,547 30,011 (51,089) 55,850 (6,103) 49,747 Income tax expense Net profit after tax YEAR ENDED 26 JUNE 2022 (14,565) 35,182 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 (18,991) 46,712 *EBIT and EBITDA are non-IFRS information. Please refer to non-IFRS information in the Directors' Report for an explanation of non-IFRS information and a reconciliation of EBIT to statutory results. MICHAEL HILL | 2023 ANNUAL REPORT 81 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) 2023 $’000 2022 $’000 595,105 561,293 32,905 30,742 590 962 2,437 738 Total revenue from contracts with customers 629,562 595,210 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: 2023 Timing of revenue recognition Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 At a point in time 311,884 114,588 168,248 Over time 19,123 6,882 8,194 331,007 121,470 176,442 385 258 643 2022 Timing of revenue recognition Australia $’000 New Zealand $’000 Canada $’000 Corporate & other $’000 At a point in time 286,687 111,886 162,665 Over time 16,722 5,708 11,365 303,409 117,594 174,030 55 122 177 Total $’000 595,105 34,457 629,562 Total $’000 561,293 33,917 595,210 82 MICHAEL HILL | 2023 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 2023 $’000 257 566 823 73,860 5,664 579 2022 $’000 577 756 1,333 77,148 4,808 1,467 80,103 83,423 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 2023 $’000 2022 $’000 22,075 24,896 2,319 - Revenue recognition patterns are regularly reassessed based on new and historical trends resulting in remeasurement of revenue recognised in previous years. MICHAEL HILL | 2023 ANNUAL REPORT 83 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 AASB 15 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 Rights of return recognises the estimated returned sales under the Group's return policy, being 30 days for all countries. Sales of services for repair work performed is recognised in the Management estimates the returned sales based on historical accounting period in which the services are performed. sale return information and any recent trends that may suggest (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 cleaning, repairs and resizing, to customers based on the type of plan purchased. The Group subsequently recognises the future claims could differ from historical amounts. For sales that are expected to be returned, the Group recognises a right of return liability. The associated inventory value for sales that are expected to be returned is recognised as a right of return asset. (vi) Lifetime Diamond Warranty income in revenue in the Consolidated Statement of Profit LTDW is a warranty provided to customers with the purchase or Loss and Other Comprehensive Income once these services of jewellery items set with a diamond (excluding watches). are performed. An estimate based on the timing and quantum This has been deemed a service-type warranty and is of expected services under the plans is used as a basis to calculated with reference to the estimated value of service establish the amount of service revenue to recognise in provided to customers and the stand-alone value of customers the Consolidated Statement of Profit or Loss and obtaining the service independently. Income in relation to Comprehensive Income. Direct and incremental sales staff bonuses associated with the sale of PCPs are capitalised in contract assets and amortised in proportion to the PCP revenue recognised. the LTDW is recognised in line with the estimated pattern of customers utilising this service-type warranty. A3 OTHER INCOME Net foreign exchange gains Government grants Interest received Other items 2023 $’000 - - 792 1,464 2,256 2022 $’000 169 2,864 16 5,864 8,913 Net foreign exchange losses of $1,570,000 have been presented in Other expenses (2022: net foreign exchange gains of $169,000). 84 MICHAEL HILL | 2023 ANNUAL REPORT A4 INVENTORIES Raw materials Finished goods Packaging and other consumables 2023 $’000 9,547 2022 $’000 13,033 185,602 162,138 8,111 6,368 203,260 181,539 Finished goods are held at the lower of cost and net realisable value (NRV). During the year, finished goods incurred a write-down of $805,000 (2022: $2,565,000) 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 Opening carrying value Additional right-of-use assets relating to leases entered into during the year Lease modifications agreed during the year Depreciation expense Reduction in right-of-use assets as a consequence of COVID-19 on rent concessions Impairment of right-of-use assets Foreign currency translation Closing carrying value Notes G1 F1 2023 $’000 2022 $’000 296,237 221,894 (156,575) (113,863) (610) (646) 139,052 107,385 2023 $’000 2022 $’000 107,385 105,882 59,341 34,395 14,486 6,514 (42,211) (39,257) (658) (1,106) (54) 763 - 957 139,052 107,385 MICHAEL HILL | 2023 ANNUAL REPORT 85 NOTES TO THE FINANCIAL STATEMENTS CONT. LEASE LIABILITIES Current Non-current RECONCILIATION OF LEASE LIABILITIES 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 Notes G1 F1 2023 $’000 41,075 117,518 2022 $’000 38,183 91,386 158,593 129,569 2023 $’000 2022 $’000 129,569 133,686 59,355 14,446 (658) 8,791 35,173 1,108 (1,106) 6,682 (53,889) (47,146) 979 1,172 158,593 129,569 The incremental borrowing rate used in determining the lease liability ranged between 1.44% and 10.06% (2022: 1.44% and 9.30%). 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. The right-of-use assets are also subject to impairment. Refer to the accounting policies in note J1(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. 86 MICHAEL HILL | 2023 ANNUAL REPORT 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 J2). 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 2023 Total $’000 Within five years $’000 More than five years $’000 2022 Total $’000 Extension options expected not to be exercised 1,058 144 1,202 163 202 365 Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are expensed on a straight-line basis over the lease term. MICHAEL HILL | 2023 ANNUAL REPORT 87 NOTES TO THE FINANCIAL STATEMENTS CONT. B CASH MANAGEMENT B1 CASH AND CASH EQUIVALENTS Cash at bank and on hand 2023 $’000 20,867 2022 $’000 95,844 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES Notes F4 A5 F5 F4 D3 2023 $’000 35,182 12,632 42,211 2,881 (2,293) 49 1,818 220 116 (2,508) 2022 $’000 46,712 10,954 39,257 1,733 521 3,253 286 109 231 335 - (5,338) (8,446) (2,772) 9,433 137 1,249 (15,839) 4,931 5,080 (4,009) 80,072 14,037 (10,812) 9,778 393 (904) 187 (6) 855 (7) 111,574 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 Net cash inflow from operating activities 88 MICHAEL HILL | 2023 ANNUAL REPORT B2 BORROWINGS 2023 Current $’000 Non- Current $’000 Total Current $’000 $’000 Non- Current $’000 Bank Loans Total secured borrowings - - 12,500 12,500 12,500 12,500 - - - - 2022 Total $’000 - - On 30 June 2023, the Group extended its financing agreement with ANZ Banking Group and HSBC Australia for an availability period of three years. The financial arrangement includes a $92 million multi-option borrowing facility and ancillary working capital facilities in line with the business requirements of the Group. At balance date, $12.5m was drawn on these facilities. Refer to note C3 for details of covenants relating to the financing facilities. B3 DIVIDENDS ORDINARY SHARES Final dividend for the year ended 26 June 2022 of 4.0 cents (2021: 3.0 cents) per fully paid share paid on 23 September 2022 (2021: 24 September 2021) Interim dividend for the year ended 2 July 2023 of 4.0 cents (2022: 3.5 cents) per fully paid share paid on 24 March 2023 (2022: 25 March 2022) DIVIDENDS NOT RECOGNISED AT THE END OF THE REPORTING PERIOD Since year-end, the Directors have recommended a 3.5 cents (2022: 4.0 cents) per fully paid share final dividend. FRANKING AND IMPUTATION CREDITS Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2022: 30.0%) Imputation credits (NZ$) available for subsequent reporting periods based on New Zealand tax rate of 28.0% (2022: 28.0%) 2023 $’000 2022 $’000 15,531 11,649 15,188 13,590 30,719 25,239 2023 $’000 13,289 2022 $’000 - 2023 $’000 2022 $’000 2,812 2,679 2,196 12,116 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 final dividend, which was unpaid at balance sheet date, will be unfranked for Australian purposes, with nil New Zealand imputation credits and with conduit foreign income. MICHAEL HILL | 2023 ANNUAL REPORT 89 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 by its treasury policy. 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 Recognised financial assets and Future commercial transactions liabilities not denominated in AUD Interest rate Long-term borrowings at variable rates Cash flow forecasting and Forward exchange sensitivity analysis contracts (FEC) 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 Liquidity risk Borrowings and other liabilities Rolling cash flow forecasts Diversification of bank deposits, credit limits and letters of credit Availability of committed credit lines and borrowing facilities The Group’s overall risk management program includes a focus on financial risk including the unpredictability of financial markets and foreign exchange risk. The policies are implemented by the central finance function that undertakes regular reviews to enable prompt identification of financial risks so that appropriate actions may be taken. 90 MICHAEL HILL | 2023 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, including the purchase of inventory. 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: 2 JULY 2023 26 JUNE 2022 Cash and cash equivalents Trade receivables 344 (36) Trade payables (8,484) Forward exchange contracts: Buy foreign currency 5,400 Net foreign currency exposure (2,776) - 4 - - 4 USD $’000 NZD $’000 CAD $’000 EUR $’000 USD $’000 10,348 318 NZD $’000 CAD $’000 EUR $’000 - 3 - 9 117 15 1 59 12 54 (29) (784) (11,302) (108) (59) (793) - 31 - - - - - (718) (636) (105) (50) (661) Sensitivity 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. AUD increases 10% AUD decreases 10% IMPACT ON PRE-TAX PROFIT IMPACT ON OTHER COMPONENTS OF EQUITY 2023 $’000 485 (593) 2022 $’000 190 (232) 2023 $’000 - - 2022 $’000 - - MICHAEL HILL | 2023 ANNUAL REPORT 91 NOTES TO THE FINANCIAL STATEMENTS CONT. INTEREST RATE RISK The Group's main interest rate risk arises from long-term borrowings and cash. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain fixed interest cover of core debt in line with the Group's treasury policy. As the Group has a working capital facility, no core debt was identified. To manage variable interest rate borrowings risk, the Group may enter into interest rate swaps in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. At 2 July 2023, the Group had no core debt and there were no swaps in place (2022: no swaps in place). The interest rate derivatives require settlement of net interest receivable or payable each 30 days and are settled on a net basis. The exposure of the Group’s borrowings to interest rate changes at the end of the reporting year are as follows: 2023 $’000 % of total loans 2022 $’000 % of total loans Variable rate borrowings 12,500 100.0% 12,500 100.0% - - 0.0% 0.0% An analysis by maturities is provided below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowing. The details of the variable rate borrowings outstanding are outlined below. 2 JULY 2023 26 JUNE 2022 Weighted average interest rate % Balance $’000 Weighted average interest rate % Bank overdrafts and bank loans 6.01% 12,500 0.00% Net exposure to cash flow interest rate risk 12,500 Balance $’000 - - Sensitivity Profit or loss is sensitive to higher/lower interest income from cash and cash equivalents as a result of changes in interest rates. Other components of equity change as a result of an increase/decrease in the fair value of the cash flow hedges of borrowings. All other non-derivative financial liabilities have a contractual maturity of less than 6 months. Interest rates – increase by 100 basis points Interest rates – decrease by 100 basis points IMPACT ON PRE-TAX PROFIT IMPACT ON OTHER COMPONENTS OF EQUITY 2023 $’000 84 (84) 2022 $’000 958 (958) 2023 $’000 2022 $’000 - - - - 92 MICHAEL HILL | 2023 ANNUAL REPORT 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. The Group provides interest-free consumer credit in Canada as a secondary product and the credit risk exposure which exists against this financial instrument is detailed in note F3. 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. The Group had access to an overdraft facility, as well as a $90m working capital facility. The following were undrawn from these facilities at the end of the reporting year: FLOATING RATE Expiring beyond one year (bank overdrafts) 2023 $’000 1,914 2022 $’000 1,909 Expiring beyond one year (bank loans) 77,500 70,000 79,414 71,909 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 31 August 2026. 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 2 July 2023 Less than 6 months 6-12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flow $’000 $’000 $’000 $’000 $’000 $’000 Non-derivatives Lease liabilities 25,699 20,069 33,274 48,336 15,766 143,144 Trade payables Borrowings 71,202 - - - - - - 12,500 - - 71,202 12,500 Total non-derivatives 96,901 20,069 33,274 60,836 15,766 226,846 MICHAEL HILL | 2023 ANNUAL REPORT 93 NOTES TO THE FINANCIAL STATEMENTS CONT. CONTRACTUAL MATURITIES OF FINANCIAL LIABILITIES At 2 July 2023 Less than 6 months 6-12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flow $’000 $’000 $’000 $’000 $’000 $’000 Derivatives Outward payments FECs Inward receipts FECs Net FECs At June 26 2022 Non-derivatives 8,011 (8,163) (152) - - - - - - - - 8,011 (8,163) (152) 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 C2 DERIVATIVE FINANCIAL INSTRUMENTS The Group is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative instruments are foreign currency risk and interest rate risk. The Group does not apply hedge accounting. 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-AASB 16 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. 94 MICHAEL HILL | 2023 ANNUAL REPORT D REWARD AND RECOGNITION D1 EMPLOYEE BENEFITS EMPLOYEE BENEFITS Employee wages Employee wages on-costs and post-retirement benefits Employee share-based payments expense D2 KEY MANAGEMENT PERSONNEL Short-term employee benefits Long-term benefits Post-employment benefits Share-based payments 2023 $’000 147,781 18,758 1,818 2022 $’000 139,155 15,891 286 168,357 155,332 2023 $ 2022 $ 2,727,413 3,606,080 32,369 78,844 50,904 76,889 368,172 203,337 3,206,798 3,937,210 D3 SHARE-BASED PAYMENTS OPTIONS 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. MICHAEL HILL | 2023 ANNUAL REPORT 95 NOTES TO THE FINANCIAL STATEMENTS CONT. Set out below are summaries of options granted under the plan: Average exercise price per option Number of options Average exercise price per option 2023 2022 Opening balance NZD options Vested options forfeited during the year Closing balance NZD options Opening balance AUD options Closing balance AUD options 1.70 - 1.70 1.56 1.56 700,000 - 700,000 300,000 300,000 1.63 1.46 1.70 1.56 1.56 Number of options 1,000,000 (300,000) 700,000 300,000 300,000 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 2023 2022 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 1,000,000 The weighted average remaining contractual life of share options outstanding at the end of the period was 1.7 years (2022: 2.8 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. 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. 96 MICHAEL HILL | 2023 ANNUAL REPORT 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 4,001,391 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 2023 2022 Average fair value per share right Number of share rights Average fair value per share right Number of share rights 0.21 0.85 0.74 0.29 0.37 6,112,332 4,001,391 (34,747) (24,095) 10,054,881 0.20 0.29 0.86 0.30 0.21 4,577,518 2,106,647 (143,225) (428,608) 6,112,332 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 Expenses arising from share-based payment transactions 2023 2022 4,001,391 2,106,647 $1.15 45% 6.8% 3.42% $0.85 2023 $’000 1,818 $0.85 40% 7.0% 0.18% $0.29 2022 $’000 286 MICHAEL HILL | 2023 ANNUAL REPORT 97 NOTES TO THE FINANCIAL STATEMENTS CONT. 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 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 The fair value of options granted is recognised as an employee in equity. 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) 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 • excluding the impact of any service and non-market are to be satisfied. At the end of each year, the entity revises performance vesting conditions (e.g. profitability, sales its estimates of the number of share rights that are expected to growth targets and remaining an employee of the entity vest based on the non-market vesting and service conditions. It over a specified period), and recognises the impact of the revision to original estimates, if any, • including the impact of any non-vesting conditions (e.g. the in profit or loss, with a corresponding adjustment to equity. requirement for employees to save or holdings shares for a specific period of time). 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 A contribution to the Michael Hill Violin Charitable Trust was paid by the Group during the year 2023 $ 37,624 2022 $ - Graphic design services rendered by a related party of board members - 16,621 All transactions with related parties were in the normal course of business and on normal terms and conditions. 98 MICHAEL HILL | 2023 ANNUAL REPORT 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 F4 A5 F5 2023 $’000 12,632 42,211 54,843 2,881 2,881 2022 $’000 10,954 39,257 50,211 1,733 1,733 Total depreciation and amortisation 57,724 51,944 Notes A5 FINANCE COSTS Interest on lease liabilities Bank and interest charges Interest on make good provision FOREIGN EXCHANGE Net foreign exchange loss F2 EARNINGS PER SHARE 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 2023 $’000 8,791 920 220 9,931 2023 $’000 1,570 2022 $’000 6,682 758 109 7,549 2022 $’000 - 2023 $’000 35,182 2022 $’000 46,712 Profit from continuing operations attributable to the ordinary equity holders of the Company 35,182 46,712 MICHAEL HILL | 2023 ANNUAL REPORT 99 NOTES TO THE FINANCIAL STATEMENTS CONT. 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 2023 Number 2022 Number 382,252,063 388,268,845 8,446,083 5,668,197 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 390,698,146 393,937,042 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 2023 2022 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 Total $’000 3,795 (657) 3,138 764 (215) 549 - - - 240 (13) 227 Trade receivables Provision for expected credit loss Canadian in-house customer finance Provision for expected credit loss Sundry debtors 3,494 (225) 3,269 5,041 (152) 4,889 6,375 - - - 3,494 3,795 (225) (657) 3,269 3,138 1,027 6,068 524 (184) (202) 5,884 322 (32) 995 - 6,375 4,081 - 4,081 14,533 995 15,528 7,541 227 7,768 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 100 MICHAEL HILL | 2023 ANNUAL REPORT 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 prior 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. 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 AASB15 The Group does not hold collateral as security. The Group 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 2023 $’000 3,197 91 64 142 2022 $’000 2,829 254 84 628 3,494 3,795 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 2023 $’000 657 225 (657) - 225 2023 $’000 5,171 409 488 6,068 2022 $’000 373 614 (329) (1) 657 2022 $’000 600 40 124 764 MICHAEL HILL | 2023 ANNUAL REPORT 101 NOTES TO THE FINANCIAL STATEMENTS CONT. 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 2023 $’000 215 531 (565) 3 184 2022 $’000 - 1,382 (1,149) (18) 215 F4 PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT At 27 June 2021 Cost Plant and equipment $’000 Fixtures and fittings $’000 Leasehold improvements $’000 Display materials $’000 Total $’000 33,906 34,291 78,996 2,184 149,377 Accumulated depreciation and impairment (27,294) (28,152) (56,563) (915) (112,924) Net book amount 6,612 6,139 22,433 1,269 36,453 Year ended 26 June 2022 Opening net book amount Exchange difference Additions Disposals 6,612 (36) 2,835 (77) 6,139 22,433 1,269 36,453 12 2,192 (97) 325 27 328 6,648 4,297 15,972 (69) (23) (633) (128) (266) (10,954) (521) Depreciation charge (2,569) (2,254) (5,498) Impairment loss (23) (151) (219) Closing net book amount 6,742 5,841 23,620 4,809 41,012 At 26 June 2022 Cost Accumulated depreciation and impairment 36,315 35,733 86,673 6,489 165,210 (29,573) (29,892) (63,053) (1,680) (124,198) Net book amount 6,742 5,841 23,620 4,809 41,012 102 MICHAEL HILL | 2023 ANNUAL REPORT PROPERTY, PLANT AND EQUIPMENT Year ended 2 July 2023 Opening net book amount Exchange difference Additions Acquisition of Bevilles Disposals Plant and equipment $’000 Fixtures and fittings $’000 Leasehold improvements $’000 Display materials $’000 Total $’000 6,742 (62) 5,875 270 (62) 5,841 43 3,515 - (13) 23,620 4,809 41,012 192 31 204 12,455 2,945 24,790 1,725 (58) 321 (44) 2,316 (177) Depreciation charge (2,478) (2,132) (5,603) (2,419) (12,632) Impairment write-back/(loss) Closing net book amount 242 10,527 223 7,477 1,893 34,224 (65) 5,578 2,293 57,806 At 2 July 2023 Cost 41,122 38,353 98,342 9,743 187,560 Accumulated depreciation and impairment (30,595) (30,876) (64,118) (4,165) (129,754) Net book amount 10,527 7,477 34,224 5,578 57,806 IMPAIRMENT LOSS As per the Group's accounting policies, the Group impairs assets where the recoverable amount is less than the carrying amount and reverses the impairment if no longer applicable. 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. The accounting policy for this is disclosed in note J1. 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 | 2 – 5 years MICHAEL HILL | 2023 ANNUAL REPORT 103 NOTES TO THE FINANCIAL STATEMENTS CONT. F5 INTANGIBLE ASSETS INTANGIBLE ASSETS At 27 June 2021 Cost Accumulated amortisation and impairment Net book amount Year ended 26 June 2022 Opening net book amount Additions Disposals Amortisation charge Closing net book amount At 26 June 2022 Cost Accumulated amortisation Net book amount Year ended 2 July 2023 Opening net book amount Exchange difference Additions Acquisition of Bevilles Amortisation charge Closing net book amount At 2 July 2023 Cost Accumulated amortisation and impairment Net book amount IMPAIRMENT LOSS Brand, Loyalty Programs & Trademarks $’000 79 - 79 79 - - - 79 79 - 79 79 - - 20,421 - 20,500 20,500 - 20,500 Computer software $’000 18,928 (12,994) 5,934 5,934 (151) 6,860 (1,733) 10,910 25,715 (14,805) 10,910 10,910 (106) 7,792 - (2,881) 15,715 33,509 (17,794) 15,715 Total $’000 19,007 (12,994) 6,013 6,013 (151) 6,860 (1,733) 10,989 25,794 (14,805) 10,989 10,989 (106) 7,792 20,421 (2,881) 36,215 54,009 (17,794) 36,215 A review of intangibles impairment indicators was performed during the period, with no indicators identified. 104 MICHAEL HILL | 2023 ANNUAL REPORT F6 TRADE AND OTHER PAYABLES Trade payables Annual leave liability Accrued expenses Consumption taxes payable Other payables F7 PROVISIONS 2023 $’000 39,422 10,376 4,006 2,803 2022 $’000 44,558 10,211 4,620 3,376 14,595 15,632 71,202 78,397 2023 2022 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 Total $’000 Employee benefits 9,986 2,090 12,076 10,617 1,667 12,284 Assurance-type warranties 1,927 - 1,927 1,613 120 1,733 Make good provision Restructuring costs Diamond warranty 594 738 - 8,789 9,383 1,876 5,710 7,586 - - 738 - 80 120 - - 80 120 13,245 10,879 24,124 14,306 7,497 21,803 MOVEMENTS IN PROVISIONS Employee benefits Assurance-type warranties Make good provision Restructuring costs Diamond warranty Total $’000 $’000 $’000 $’000 $’000 $’000 Opening carrying amount 12,284 Changes in provisions recognised Recognised on Bevilles acquisition Amounts incurred and charged Exchange differences 390 724 (1,348) 26 1,733 194 - - - 7,586 921 - (109) 985 Closing carrying amount 12,076 1,927 9,383 80 733 - (80) 5 738 120 21,803 - - 2,238 724 (120) (1,657) - - 1,016 24,124 MICHAEL HILL | 2023 ANNUAL REPORT 105 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 watches sold before 30 June 2018 included a lifetime battery replacement guarantee. Management estimates the provision based on historical sale return information and any recent trends that may suggest future claims could differ from historical amounts. Make good provision The Group has an obligation to restore certain leasehold sites to their original condition upon store closure or relocation. This provision represents the present value of the expected future make good commitment. Amounts charged to the provision represent both the cost of make good costs incurred and the costs incurred which mitigate the final liability prior to the closure or relocation. Restructuring as new information becomes available and/or when the A provision has been raised for the estimated staffing exit costs remediation program is completed and approved by the regulator. from business structure changes. Restructuring provisions are recognised only when the Group has a constructive obligation, The liability for long service leave is measured as the present which is when: value of expected future payments to be made in respect of • there is a detailed formal plan that identifies the business or services provided by employees up to the reporting date using part of the business concerned, the location and number of 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 and the 3 year watch guarantee. In addition, all Michael Hill 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. F8 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 deferred tax expense/(benefit) 2023 $’000 11,043 (964) 10,079 3,517 969 4,486 2022 $’000 7,329 1,618 8,947 11,833 (1,789) 10,044 Income tax expense 14,565 18,991 106 MICHAEL HILL | 2023 ANNUAL REPORT 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%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: 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 Tax losses not recognised Change in tax rate on deferred tax balance 2023 $’000 49,744 14,923 50 - 2022 $’000 65,703 19,711 83 (11) 14,973 19,783 (542) (964) 969 - 172 (43) (787) 1,618 (1,789) (1) - 167 Income tax expense 14,565 18,991 TAX LOSSES 2023 $’000 2022 $’000 Unused United States tax losses for which no deferred tax asset has been recognised 35,497 35,512 Potential tax benefit @ 25.0% Unused New Zealand tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 28.0% 8,874 2,597 727 8,878 2,575 721 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 | 2023 ANNUAL REPORT 107 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 2023 $’000 114 1,552 21,825 (162) (89) 399 2022 $’000 246 10,558 23,468 (213) (12) 1,002 (40,149) (30,485) 48,513 17,267 (124) (25) (3) 37,349 16,486 43 47 63 Net deferred tax assets 49,118 58,552 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 27 June 2022 Credited/(charged) to the income statement Acquisition of Bevilles Prior year adjustment Foreign exchange differences Closing balance at 2 July 2023 108 MICHAEL HILL | 2023 ANNUAL REPORT 21,377 27,741 49,118 58,552 (3,517) (5,105) (969) 157 21,082 37,470 58,552 68,329 (11,833) - 1,790 266 49,118 58,552 F9 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 528,563 502,903 2023 $ 2022 $ Fees for other services Advisory fees F10 CONTRIBUTED EQUITY SHARE CAPITAL Ordinary shares – fully paid 379,688,884 388,285,374 Total share capital 379,688,884 388,285,374 2023 Shares 2022 Shares MOVEMENTS IN ORDINARY SHARES Opening balance at 28 June 2021 Rights converted Balance at 26 June 2022 Rights converted Shares buy-back Balance at 2 July 2023 - 3,682 528,563 506,585 2023 $’000 11,112 11,112 Number of shares 388,142,149 143,225 2022 $’000 11,388 11,388 Total $’000 11,285 103 388,285,374 11,388 34,747 (8,631,237) 379,688,884 24 (300) 11,112 MICHAEL HILL | 2023 ANNUAL REPORT 109 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. During the year the Group engaged in an on-market share buy-back program, purchasing 8,631,237 shares at an average price of AUD1.18 per share. The buyback was apportioned against Share Capital and Retained Earnings on a par-value basis. As a result, the Contributed Equity of the Company reflected a reduction in Share Capital of $300,000 with the remainder shown as a reduction in Retained Earnings. 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 Information relating to share rights issued under the Company's deferred compensation plan, including details of rights issued, exercised and lapsed during the financial year and rights outstanding at the end of the financial year, is set out in note D3. F11 RESERVES NATURE AND PURPOSES OF OTHER RESERVES 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 these plans. Foreign currency translation Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note J1(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. 110 MICHAEL HILL | 2023 ANNUAL REPORT G BUSINESS COMBINATION G1 ACQUISITIONS OF BEVILLES ACQUISITION OF BEVILLES On 1 June 2023, the Group acquired the business and selected assets of Bevilles, with consideration consisting of cash upfront (after adjustments) and earn-out payments over two years. Bevilles is a fast growing and profitable Australian jewellery and watch retailer that centres its brand and products on the 'value' customer segment. As such, this provides a strong strategic fit and complements the strategy to elevate the Michael Hill brand to a 'premium' market positioning. The Group measures the assets and liabilities assumed in the acquisition at fair value. ASSETS ACQUIRED AND LIABILITIES ASSUMED The fair values of the identifiable assets and liabilities of Bevilles as at the date of acquisition were: ASSETS ACQUIRED AND LIABILITIES ASSUMED Fair value recognised on acquisition $’000 Assets Cash Trade receivables Inventories Property, plant and equipment Intangibles Right-of-use assets Other current assets Total assets Liabilities Trade payables Contract liabilities Employee entitlements Lease liabilities Provisions Deferred tax liabilities Total liabilities Total identifiable net assets at fair value Goodwill arising on acquisition Purchase consideration transferred 22 49 18,909 2,316 20,421 10,812 172 52,700 1,098 1,162 2,212 10,812 1,001 5,105 21,390 31,310 17,695 49,006 MICHAEL HILL | 2023 ANNUAL REPORT 111 NOTES TO THE FINANCIAL STATEMENTS CONT. The Group has assessed the value of the net assets brought on at acquisition date and has consolidated the above on a provisional basis. From the date of acquisition, Bevilles contributed $3,759,000 in revenue and a loss of $319,000 to profit before tax of the Group. The Group measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The deferred tax liability mainly comprises the tax effect of acquisition of intangible assets. Intangible assets identified on acquisition include the Bevilles brand and the loyalty program run by the business. The brand has an indefinite useful life and the loyalty program will be provisionally amortised over a three year period. Goodwill comprises the value of expected synergies arising from the acquisition as well as the assembled workforce. PURCHASE CONSIDERATION Cash consideration paid to the vendor Deferred contingent consideration paid in escrow Deferred consideration payable Total consideration CONTINGENT CONSIDERATION $’000 44,635 3,500 871 49,006 As part of the purchase agreement with the previous owners of Bevilles, a contingent consideration has been agreed. There will be additional cash payments to the previous owners of Bevilles of: a. A minimum of $1,000,000; and b. An earnings based on the Michael Hill International Limited share price with the first gate at $1.50 increasing to over $1.80. At $1.50 the consideration will be $450,000 multiplied by the share price at the time. At over $1.80 the earn out will be equivalent to $1,080,000 multiplied by the share price. An independent valuation has not ascribed a material value to this component of consideration. As at the acquisition date, the fair value of the deferred consideration discounted to balance sheet date was estimated to be $871,000. 112 MICHAEL HILL | 2023 ANNUAL REPORT H GROUP STRUCTURE H1 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 noteJ1(B): COUNTRY OF INCORPORATION OWNERSHIP INTEREST HELD BY THE GROUP 2023 2022 Michael Hill Jeweller (Australia) Pty Limited Michael Hill Wholesale Pty Limited Michael Hill Manufacturing Pty Limited Michael Hill Franchise Pty Limited Michael Hill Franchise Services Pty Limited Michael Hill Finance (A Limited Partnership) Michael Hill Group Services Pty Limited Michael Hill Charms Pty Limited MH Bespoke Diamonds AU Pty Ltd (previously Michael Hill Online Pty Ltd) Fine Jewellery Retail AU Pty Ltd (previously Emma & Roe Pty Limited) Medley Jewellery Pty Limited Durante Holdings Pty Limited Michael Hill New Zealand Limited Michael Hill Jeweller Limited Michael Hill Finance (NZ) Limited Michael Hill Franchise Holdings Limited MHJ (US) Limited Emma & Roe NZ Limited Michael Hill Online Holdings Limited Michael Hill Jeweller (Canada) Limited Michael Hill LLC Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Canada United States % 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 | 2023 ANNUAL REPORT 113 NOTES TO THE FINANCIAL STATEMENTS CONT. H2 DEED OF CROSS GUARANTEE Pursuant to ASIC Class Order 2016/785, the Australian wholly- full. The subsidiaries have also given similar guarantees in the owned subsidiaries listed below are relieved from the event that the Company is wound up. Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and directors' report in Australia. The above companies represent a Closed Group for the purposes of the Class Order and, as there are no other parties The subsidiaries subject to the deed are: Durante Holdings Pty to the Deed of Cross Guarantee that are controlled by Michael Ltd, Michael Hill Group Services Pty Ltd, Michael Hill Jeweller Hill International Limited, they also represent the Extended (Australia) Pty Ltd, Michael Hill Manufacturing Pty Ltd, Michael Closed Group. 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, MH Bespoke Diamonds AU Pty Ltd, Michael Hill Charms Pty Ltd, Fine Jewellery Retail AU Pty CONSOLIDATED STATEMENT OF PROFIT OR LOSS, STATEMENT OF COMPREHENSIVE INCOME AND SUMMARY OF MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS Ltd, Medley Jewellery Pty Ltd, Michael Hill Online Holdings Ltd Set out below is a consolidated statement of profit or loss, a consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for the year ended 2 July 2023 of the closed group consisting of Michael Hill International Limited and the entities noted above. and Emma & Roe NZ Ltd. The Class Order requires the Parent Company and each of the subsidiaries to enter into a Deed of Cross Guarantee. The effect of the deed is that the Company guarantees each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Corporations Act 2001, the Company will only be liable in the event that after six months any creditor has not been paid in 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 114 MICHAEL HILL | 2023 ANNUAL REPORT 2023 $’000 435,796 17,121 (236) (160,161) (129,675) (4,812) (31,594) (12,845) (44,960) (114) (22,885) (6,583) 39,052 (12,964) 26,088 2022 $’000 421,019 39,354 6,063 (186,589) (117,851) (6,711) (29,329) (11,971) (38,850) (231) (15,211) (5,371) 54,322 (15,019) 39,303 OTHER COMPREHENSIVE INCOME Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations Other comprehensive income for the period, net of tax Total comprehensive income for the year STATEMENT OF CHANGES IN EQUITY Equity at the beginning of the financial year Share buy-back Total comprehensive income/(loss) Share rights through share-based payments reserve Issue of share capital on exercise of share rights Dividends paid Total equity at the end of the financial year 2023 $’000 1,379 1,379 27,467 2023 $’000 472,985 10,207 27,467 1,794 - (30,719) 481,734 2022 $’000 4,977 4,977 44,281 2022 $’000 453,554 - 44,281 286 103 (25,239) 472,985 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Set out below is a consolidated statement of financial position as at 2 July 2023 of the Closed Group consisting of Michael Hill International Limited and the entities noted above. CONSOLIDATED STATEMENT OF FINANCIAL POSITION CURRENT ASSETS Cash and cash equivalents Trade receivables Inventories Loans to related parties Other current assets Total current assets 2023 $’000 9,971 5,950 151,266 246,710 4,714 418,611 2022 $’000 55,499 7,010 137,374 251,706 5,102 456,691 MICHAEL HILL | 2023 ANNUAL REPORT 115 NOTES TO THE FINANCIAL STATEMENTS CONT. 41,756 108,121 83,346 18,341 36,215 40,767 328,546 747,157 54,035 31,074 9,450 14,616 12,310 121,485 88,947 44,113 10,878 143,938 265,423 481,734 320,585 (16,352) 177,501 481,734 27,032 73,601 87,834 767 10,989 48,971 249,194 705,885 58,671 28,351 2,093 18,812 14,219 122,146 58,295 45,081 7,378 110,754 232,900 472,985 310,378 (19,525) 182,132 472,985 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 116 MICHAEL HILL | 2023 ANNUAL REPORT H3 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 Loss for the year Total comprehensive loss 2023 $’000 286 387,715 388,001 11,664 11,664 376,337 291,255 33,504 51,578 376,337 2023 $’000 (39,437) (39,437) 2022 $’000 198 425,363 425,561 1,398 1,398 424,163 291,531 41,617 91,015 424,163 2022 $’000 (28,024) (28,024) GUARANTEES ENTERED INTO BY THE PARENT ENTITY The Parent has issued the following guarantees in relation to the debts of its subsidiaries: (i) Pursuant to Class Order 2016/785, Michael Hill International Limited and the subsidiaries listed below entered into a deed of cross guarantee on 30 June 2016. The effect of the deed is that Michael Hill International Limited has guaranteed to pay any deficiency in the event of winding up of any controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Michael Hill International Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. (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 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. CONTINGENT LIABILITIES OF THE PARENT ENTITY The Parent entity had no material contingent liabilities as at balance date. MICHAEL HILL | 2023 ANNUAL REPORT 117 NOTES TO THE FINANCIAL STATEMENTS CONT. I UNRECOGNISED ITEMS I1 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 2 July 2023. Future lease payments for these non-cancellable lease contracts Within one year $’000 One to five years $’000 Greater than five years $’000 413 3,812 2,981 Total $’000 7,206 I2 EVENTS OCCURRING AFTER THE END OF THE REPORTING PERIOD On 2 August 2023, David Whittle was appointed as a non-executive director of Michael Hill International Limited. 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. 118 MICHAEL HILL | 2023 ANNUAL REPORT J SUMMARY OF ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES AND JUDGEMENTS J1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 (A) BASIS OF PREPARATION The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements provide comparative information in respect of the previous period. For reporting purposes, the Group adopts a weekly 'retail calendar' closing each Sunday. The current 53 week reporting period ended on 02 July 2023. The consolidated financial statements of the Group comply with International Financial Reporting Standards (IFRS) as to part of the net investment in a foreign operation. Group companies The results and financial position of all the Group entities (none of which have the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the statement of financial position; • income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates, unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions; and issued by the International Accounting Standards Board (IASB). • all resulting exchange differences are recognised (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. 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 Intercompany transactions, balances and unrealised gains on to temporary differences and to unused tax losses. transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the transferred asset. (C) FOREIGN CURRENCY TRANSLATION Functional currency translation Items included in the financial statements of each of the Group entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The Group financial statements are presented in Australian dollars, which is the Group's presentation currency. Transactions 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 The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting year in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Current tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets and liabilities are classified as non-current assets and liabilities. MICHAEL HILL | 2023 ANNUAL REPORT 119 NOTES TO THE FINANCIAL STATEMENTS CONT. Deferred tax assets are recognised for deductible • When receivables and payables are stated temporary differences and unused tax losses only if it is with the amount of GST included. probable that future taxable amounts will be available to utilise those temporary differences and losses. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables Deferred tax liabilities and assets are not recognised for or payables in the statement of financial position. temporary differences between the carrying amount and Commitments and contingencies are disclosed tax bases of investments in controlled entities where the net of the amount of GST recoverable from, or Parent Entity is able to control the timing of the reversal payable to, the taxation authority. of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Cash flows are included in the statement of cash flows on a gross basis and the GST components of cash flows Deferred tax is recognised in profit or loss, except to arising from investing or financing activities which are the extent that it relates to items recognised in other recoverable from, or payable to, the taxation authority, are comprehensive income or directly in equity. In this presented as operating cash flows. 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: (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 • When the GST incurred on a sale or purchase of assets cost and net realisable value. Cost comprises direct materials, or services is not payable to or recoverable from the direct labour and an appropriate proportion of variable and taxation authority, in which case the GST is recognised fixed overhead expenditure, the latter being allocated on the as part of the revenue or the expense item or as part of basis of normal operating capacity. Costs are assigned to the cost of acquisition of the asset, as applicable; or 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. Management review stock holdings based on recoverability at a product level and write-down as appropriate. 120 MICHAEL HILL | 2023 ANNUAL REPORT (I) FINANCIAL INSTRUMENTS - INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT The Group’s financial assets at amortised cost include trade receivables included under current and non-current financial assets. (i) Financial assets FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT 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. 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.. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to DERECOGNITION generate cash flows. The business model determines A financial asset (or, where applicable, a part of a financial whether cash flows will result from collecting contractual asset or part of a group of similar financial assets) is cash flows, selling the financial assets, or both. primarily derecognised (i.e. removed from the Group’s SUBSEQUENT MEASUREMENT Whilst there are four categories, two are relevant in the current reporting period for the Group, being: • • Financial assets at amortised cost (debt instruments) Financial assets at fair value through profit or loss FINANCIAL ASSETS AT AMORTISED COST (DEBT INSTRUMENTS) This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met: • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. consolidated statement of financial position) when: • The rights to receive cash flows from the asset have expired; or • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also Financial assets at amortised cost are subsequently measured recognises an associated liability. The transferred asset and using the Effective Interest Rate (EIR) method and are subject the associated liability are measured on a basis that reflects to impairment. Gains and losses are recognised in profit or the rights and obligations that the Group has retained. loss when the asset is derecognised, modified or impaired. 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 | 2023 ANNUAL REPORT 121 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 value through profit or loss. ECLs are based on the difference between the contractual cash flows due in Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in AASB9 Financial Instruments are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. accordance with the contract and all the cash flows LOANS AND BORROWINGS AT AMORTISED COST that the Group expects to receive, discounted at an approximation of the original effective interest rate. This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are For trade receivables and contract assets, the Group subsequently measured at amortised cost using the Effective applies a simplified approach in calculating ECLs. Interest Rate (EIR) method. Gains and losses are recognised Therefore, the Group does not track changes in credit risk, in profit or loss when the liabilities are derecognised but instead recognises a loss allowance based on lifetime as well as through the EIR amortisation process. ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group considers a financial asset in default when contractual payments are past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings. For more information, refer to note C1. DERECOGNITION that the Group is unlikely to receive the outstanding A financial liability is derecognised when the obligation contractual amounts in full before taking into account under the liability is discharged or cancelled or expires. any credit enhancements held by the Group. A financial When an existing financial liability is replaced by another asset is written off when there is no reasonable from the same lender on substantially different terms, or expectation of recovering the contractual cash flows. the terms of an existing liability are substantially modified, (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. 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 Financial liabilities are classified as held for trading if they are associated with the item will flow to the Group and the incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by AASB9 Financial Instruments. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. 122 MICHAEL HILL | 2023 ANNUAL REPORT cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting year in which they are incurred. Depreciation on other assets is calculated using the straight Development costs that are directly attributable to the line method to allocate their cost or revalued amounts, net of design and testing of identifiable and unique software their residual values, over their estimated useful lives (note F4). products controlled by the Group are recognised as The assets' residual values and useful lives are reviewed, and intangible assets when the following criteria are met: adjusted if appropriate, at the end of each reporting year. • it is technically feasible to complete the software so that 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 J1(F)). Gains and losses on disposals are determined by comparing it will be available for use; • Management intends to complete the software and use or sell it; • there is an ability to use or sell the software; proceeds with carrying amount. These are included in profit • adequate technical, financial and other resources to or loss. (K) INTANGIBLE ASSETS Goodwill complete the development and to use or sell the software are available; • it can be demonstrated how the software will generate probable future economic benefits; and Goodwill is initially measured at cost (being the excess of the • the expenditure attributable to the software during its aggregate of the consideration transferred and the amount development can be reliably measured. recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired In respect to cloud computing arrangements, the Group 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. Directly attributable costs that are capitalised as part of the software include employee costs and an appropriate portion of over the aggregate consideration transferred, then the gain is relevant overheads. recognised in profit or loss. After initial recognition, goodwill is measured at cost less any Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready accumulated impairment losses. For the purpose of impairment for use. testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Brand Bevilles has an established brand operating for 89 years in the specialty retail industry. The Bevilles brand name has been valued using the relief-from-royalty method assuming an indefinite useful life. Loyalty Program Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding ten years). Useful life The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life i.e. three years for customer loyalty program and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset Bevilles operate a customer loyalty program which attributes with a finite useful life are reviewed at least at the end of value to the business by offering a returning customer base. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify Following initial recognition, intangible assets are carried at the amortisation period or method, as appropriate, and are cost less any accumulated amortisation and accumulated treated as changes in accounting estimates. The amortisation impairment losses. Internally generated intangibles, excluding expense on intangible assets with finite lives is recognised in capitalised development costs, are not capitalised and the the statement of profit or loss in the expense category that is related expenditure is reflected in profit or loss in the period in consistent with the function of the intangible assets. which the expenditure is incurred. 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. MICHAEL HILL | 2023 ANNUAL REPORT 123 NOTES TO THE FINANCIAL STATEMENTS CONT. (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 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 obligation and the amount can be reliably estimated. The Group recognises a liability and an expense for 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 bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. in the same class of obligations may be small. Retirement benefit obligations Present obligations arising from onerous contracts are The Group provides retirement benefits to required to be recognised and measured as a provision. employees through a defined contribution An onerous contract is considered to exist where the superannuation fund. Contributions are recognised unavoidable cost of meeting the obligations under the as expenses as they become payable. 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 Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and accumulating sick leave that are expected to be settled wholly within 12 months after the end of the year in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting year and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for employee benefits are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. Other long-term employee benefit obligations The liabilities for long service leave and annual leave that are not expected to be settled wholly within 12 months after the end of the year in which the employees render the related service are measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting year using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using the Milliman G100 discount rates at the end of the reporting period. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. The obligations are presented as current liabilities in the statement of financial position if the entity does not have an 124 MICHAEL HILL | 2023 ANNUAL REPORT (N) BUSINESS COMBINATIONS Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. At the acquisition date, identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values, except deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements which are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 Employee Benefits respectively. The Group determines that it has acquired a business when the acquired set of activities and assets include an input and a substantive process that together significantly contribute to the ability to create outputs. The acquired process is considered substantive if it is critical to the ability to continue producing outputs, and the inputs acquired include an organised workforce with the necessary skills, knowledge, or experience to perform that process or it significantly contributes to the ability to continue producing outputs and is considered unique or scarce or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for Some comparative amounts included within these financial within equity. Contingent consideration classified as an asset statements have been reclassified, to allow greater or liability that is a financial instrument and within the scope transparency when comparing current period to prior period. of AASB 9 Financial Instruments, is measured at fair value The reclassification adjustments have had no impact on the with the changes in fair value recognised in the statement of prior period Profit Before Tax, Profit After Tax, or Net Assets. profit or loss in accordance with AASB 9. Other contingent consideration that is not within the scope of AASB 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss. (O) CONTRIBUTED EQUITY (S) CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES Several other amendments and interpretations apply for the first time in 2023, but do not have an impact on the consolidated financial statements of the Group. The Group Ordinary shares are classified as equity. has not early adopted any standards, interpretations or Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the Company's equity instruments, for example as the result of a share buy-back or a share-based payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Michael Hill International Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of Michael Hill International Limited. (P) DIVIDENDS Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion amendments that have been issued but are not yet effective J2 SIGNIFICANT ESTIMATES AND JUDGEMENTS SIGNIFICANT ESTIMATES AND JUDGEMENTS The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are incorporated within the relevant note. of the entity, on or before the end of the reporting year The significant accounting judgements relate to the pattern of PCP revenue recognition (note A2), and employee remediation (note F7). Accounting for the acquisition of Bevilles is prepared on a provisional basis (note G1). but not distributed at the end of the reporting year. (Q ) EARNINGS PER SHARE Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares (note F2). Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares (note F2). (R) ROUNDING OF AMOUNTS The Company is of a kind referred to in ASIC Legislative Instrument 2016/191, relating to the 'rounding off' of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. MICHAEL HILL | 2023 ANNUAL REPORT 125 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 2 July 2023, 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 2 July 2023 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 H1 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 H2. Note J1(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 25 August 2023 126 MICHAEL HILL | 2023 ANNUAL REPORT 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 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF MICHAEL HILL INTERNATIONAL LIMITED REPORT ON THE AUDIT OF THE FINANCIAL REPORT OPINION We have audited the financial report of Michael Hill International Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 2 July 2023 , the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (a) Giving a true and fair view of the consolidated financial position of the Group as at 2 July 2023 and of its consolidated financial performance for the year ended on that date; and (b) Complying with Australian Accounting Standards and the Corporations Regulations 2001. BASIS FOR OPINION We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. MICHAEL HILL | 2023 ANNUAL REPORT 127 EXISTENCE OF INVENTORIES Why significant How our audit addressed the key audit matter As at 2 July 2023 the Group’s inventories balance is $203 million Our audit procedures included the following: or 38% of the Group’s total assets. • Attended stocktakes conducted at 15 Michael Hill branded Inventories are primarily kept in the Group’s 304 retail stores and 5 Bevilles branded retail stores across Australia, New located in Australia, New Zealand and Canada, and the Zealand and Canada. distribution and manufacturing centres. Inventories comprise a • In addition to the retail stores, we attended the stocktakes large number of physically small but high value items which are completed at each of the distribution and manufacturing subject to misappropriation and other loss. centres in June 2023 prior to year end. The Group accounts for inventories in accordance with the • Testing the operating effectiveness of key controls relevant policy disclosed in Note J1(H) and further disclosure is included to the conduct of physical stocktakes, the review and in Note A4 of the financial report. investigation of stocktake variances, and the approval of Inventory is considered a key audit matter due to the nature, adjustments made to stock quantities. size and geographic spread of locations where items are held. • At these stocktakes at the retail stores, distribution and manufacturing centres, we observed compliance with the 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 the 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 year end 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 balances were 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 procedures to address the risk of incorrect cut-off of inventory quantities at year end. 128 MICHAEL HILL | 2023 ANNUAL REPORT PROFESSIONAL CARE PLAN (PCP) REVENUE RECOGNITION Why significant How our audit addressed the key audit matter The balance of the deferred PCP revenue liability at 2 July 2023 was Our audit procedures included the following: $73.9 million, and PCP revenue recognised in the income statement for the year ended 2 July 2023 was $32.9 million as disclosed in • Assessed the Group’s PCP revenue recognition accounting policies and compliance with the requirements of Australian Note A2 of the financial report. Accounting Standards. The recognition of Professional Care Plan (PCP) revenue is a key • Assessed the accuracy of the data used in the PCP revenue audit matter due to the significant degree of estimation involved estimation calculation and challenged the reasonableness of in determining the appropriate revenue recognition pattern for the key judgements including: lifetime, 10 year and 3 year plans offered to the Group’s customers. Under these plans, revenue is deferred on receipt of the payment from the customer and recognised over 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. 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 applied to take account of emerging trends in customer behaviour, industry data and exceptional circumstances such as COVID related store closures. The result of the 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 (or reversal) in the current year results. – 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 during the year and tested a sample of transactions to understand if repairs are accurately tagged to the associated PCP plan date. – Performed analysis over the historic repairs data, to 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 in recent years, 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. • Re-performed management’s sensitivity analysis over the assumptions using reasonable alternative scenarios to determine whether there would be a material impact on revenue recognised in the year. • Assessed the adequacy of disclosures included in the Notes to the financial statements of PCP revenue recorded and deferred at year-end and the associated estimation uncertainty. MICHAEL HILL | 2023 ANNUAL REPORT 129 ACQUISITION OF BEVILLES Why significant How our audit addressed the key audit matter On 1 June 2023 the Group acquired the business and selected Our audit procedures included: assets of Bevilles, with consideration consisting of cash upfront of $44.6m, deferred consideration of $0.9m and contingent consideration of $3.5m relating to earn out payments over the next two years. The details of the provisional business combination accounting for the acquisition are disclosed in Note G1 of the financial report. The acquisition has been accounted for as a business combination in accordance with Australian Accounting Standards, and due to the proximity of the acquisition to year end, the business combination is accounted on a provisional basis. In undertaking the provisional acquisition accounting, the Group is required to measure the fair value of consideration transferred, the fair values of identifiable assets, assumed liabilities and contingent liabilities acquired at the acquisition date, and determine the amount of goodwill to be recognised. The fair value measurements require significant judgement and complex estimation, including the: • Assessing the accuracy of treating the acquisition as a business combination in accordance with Australian Accounting Standards. • Assessing the Group’s determination of the acquisition date of the business combination. • Evaluating the Group’s determination of the purchase consideration and the fair value of future payments. • Evaluating the qualifications, competence and objectivity of the Group’s external experts used to determine the provisional values recorded particularly for intangible assets recorded. • Using our valuation experts to independently assess the reasonability of provisional fair value estimates determined by the Group’s external experts, particularly for intangible assets. • Performing valuation cross checks on the acquired intangible assets with reference to market and • identification and measurement of all assets, liabilities and transaction multiples. contingencies of the business; • valuation of intangible assets acquired including brand names utilised by the Bevilles business; and • The valuation of contingent and deferred consideration, a portion of which is linked to the Group’s share price at • Testing the working capital balances, including cash, inventory, trade receivable and payables, contract liabilities and provisions at the acquisition date. Our procedures on inventory included attendance at 5 retail store stocktakes and the stocktake of the head office location at the date future dates. of acquisition. As a result, we considered the Group’s provisional business combination accounting and the related disclosures in the financial report to be a key audit matter. • Testing the provisional right of use assets and lease liabilities recorded in accordance with Australian Accounting Standards and underlying lease documentation. • Involving our taxation specialists in assessing the deferred tax balances associated with the provisional accounting for the acquisition. • Assessed the adequacy of the financial report disclosures included in the Notes to the financial report setting out the nature and basis of the provisional business combination accounting. 130 MICHAEL HILL | 2023 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 2023 annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. RESPONSIBILITIES OF THE DIRECTORS FOR THE FINANCIAL REPORT The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL REPORT Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. MICHAEL HILL | 2023 ANNUAL REPORT 131 REPORT ON THE AUDIT OF THE REMUNERATION REPORT OPINION ON THE REMUNERATION REPORT We have audited the Remuneration Report included in the directors’ report for the year ended 2 July 2023. In our opinion, the Remuneration Report of Michael Hill International Limited for the year ended 2 July 2023, complies with section 300A of the Corporations Act 2001. RESPONSIBILITIES The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Kellie McKenzie Partner Brisbane 25 August 2023 132 MICHAEL HILL | 2023 ANNUAL REPORT ADDITIONAL INFORMATION AS AT 25 SEPTEMBER 2023 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. PETER KARL CHRISTOPHER HULJICH + JOHN HAMISH BONSHAW IRVING 12,464,116 Issued Capital Number of shareholders Minimum Parcel price Holders with less than a marketable parcel TWENTY LARGEST SHAREHOLDERS Rank Name HOGLETT HAMLETT LIMITED* CITICORP NOMINEES PTY LIMITED SQUEAKIDIN LIMITED* J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 CUSTODIAL SERVICES LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMS PTY LTD NEW ZEALAND CENTRAL SECURITIES DEPOSITORY LTD NATIONAL NOMINEES LIMITED MOLE HILL LIMITED* CHRISTOPHER PETER HULJICH + CONSTANCE MARIA F HULJICH + PETER KARL CHRISTOPHER HULJICH NEW ZEALAND DEPOSITORY NOMINEE LIMITED FNZ CUSTODIANS LIMITED HWM (NZ) HOLDINGS LIMITED BNP PARIBAS NOMINEES PTY LTD FORSYTH BARR CUSTODIANS LIMITED HULJICH FAMILY TRUST NOMINEES LIMITED VANWARD INVESTMENTS LIMITED 20 HOBSON WEALTH CUSTODIAN LTD Total Total Remaining Holders Balance *Denotes entities in which a member or members of the Hill family have an interest. Number 384,623,963 4,181 $0.870 368 Fully Paid Ordinary Shares % of Fully Paid Ordinary Shares 148,330,600 38.57 31,854,919 19,156,926 13,271,446 9,637,959 9,478,140 8,164,435 7,970,707 7,267,965 5,000,000 3,488,861 3,432,272 3,125,715 2,458,570 2,348,734 2,264,363 2,062,443 2,036,974 1,964,928 295,780,073 88,843,890 8.28 4.98 3.44 3.24 2.51 2.46 2.12 2.07 1.89 1.30 0.91 0.89 0.81 0.64 0.61 0.59 0.54 0.53 0.51 76.89 23.11 MICHAEL HILL | 2023 ANNUAL REPORT 133 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 726 1,306 772 1,230 147 4,181 UNMARKETABLE PARCELS Minimum $500.00 parcel at $0.87 per unit Minimum Parcel Size 575 Holders 368 As at 25 September 2023, there are four substantial shareholders that Michael Hill is aware of: 421,082 3,978,343 6,320,269 39,352,955 334,551,314 384,623,963 Units 102,302 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 2 May 2023 167,487,526 44,034,477 * 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 25 September 2023 there were 41 holders of options and rights. 134 MICHAEL HILL | 2023 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 D Whittle BA, B.Com 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 AUDITOR Ernst & Young Level 51 111 Eagle Street Brisbane QLD 4000 BANKERS ANZ Australia ANZ New Zealand HSBC Australia HSBC Canada Bank of Montreal Bank of America EMAIL online@michaelhill.com.au 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) SOLICITOR Allens Linklaters Level 26 480 Queen Street Brisbane QLD 4000 WEBSITES www.michaelhill.com.au www.michaelhill.co.nz www.michaelhill.ca www.michaelhill.com www.medleyjewellery.com.au www.bevilles.com.au www.watchesgalore.com.au/ http://investor.michaelhill.com MICHAEL HILL | 2023 ANNUAL REPORT 135 136 MICHAEL HILL | 2023 ANNUAL REPORT 

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