annual report 2006 what’s inside 1 COMPANY PROFILE AND OUR CORPORATE GOALS An introduction to the company, our goals and our corporate values. 4 PERFORMANCE SUMMARY FOR THE YEAR ENDED 30/6/06 A snapshot of all the key results and data for the year. 7 CHAIRMAN’S REVIEW Michael Hill reviews the group’s overall perform- THE DIRECTORS ARE PLEASED TO PRES- ance for the year. ENT THE ANNUAL REPORT OF MICHAEL 8 CHIEF EXECUTIVE OFFICER’S REPORT Mike Parsell reviews the years operations and HILL INTERNATIONAL LIMITED FOR THE discusses the plans and priorities for the future. 12 FINANCIAL REVIEW YEAR ENDED 30 JUNE 2006 A review of the key financial data. 13 TREND STATEMENT A table of our historical performance over the past seven years. Michael Hill Mike Parsell 14 PEOPLE DEVELOPMENT Chairman of Directors Chief Executive Officer/Director A look at our staff development achievements 23 August 2006 23 August 2006 and plans. 17 WE GIVE BACK TO THE COMMUNITY Our Company’s involvement in the communities we do business in. 18 CORPORATE GOVERNANCE The policies and procedures applied by the Di- rectors and management to provide for ethical and prudent management of the company. 23 RISK MANAGEMENT The risk management practices of Michael Hill International. 24 CORPORATE CODE OF ETHICS The guidelines under which the company deals with its employees, customers, suppliers and out- side agencies. 27 BOARD MEMBER PROFILES 28 STATUTORY REPORT BY DIRECTORS 30 AUDITORS REPORT 31 FINANCIAL STATEMENTS 72 SHARE PRICE PERFORMANCE 72 SHAREHOLDER INFORMATION AND SHARE- HOLDERS’ CALENDAR Information relevant to shareholders’ adminis- tration of their shares and details of key report- ing and dividend dates for 2006/07. 73 ANALYSIS OF SHAREHOLDING 74 STORE OUTLETS AND STORE MANAGERS 78 NOTICE OF ANNUAL MEETING 78 INDEX INSIDE BACK COVER - CORPORATE DIRECTORY 1 COMPANY PROFILE Michael Hill International operates Michael Hill Jeweller - a retail jewellery chain catering principally for the middle section of the jewellery market, with 177 stores between Australia, New Zealand and Canada as at 30 June 2006. The Company also specialises in higher priced diamond jewellery. The Company had its origins in 1979 when Michael Hill opened the first store in the New Zealand town of Whangarei, some 160 kilometres north of Auckland. A unique retail jewellery formula that included dramatically different store designs, a product range devoted exclusively to jewellery and almost saturation levels of high impact advertising elevated the Company to national prominence and record sales. The Company grew rapidly, expanding to 10 stores by 1987 - the same year it was listed on the New Zealand stock exchange. 1987 also saw expansion into Australia, opening the first store in August, in the Brisbane suburb of Indooroopilly. In 2002, the Company started expansion in Canada, opening its first 4 stores in Vancouver. Today the group employs over 1,800 full and part time staff in retailing, manufacturing and administration. It has approximately 2,900 shareholders and remains the most profitable publicly listed retail jeweller in Australia/New Zealand. our overall strategic goal TO GROW SHAREHOLDER WEALTH OVER TIME THROUGH OUR PHILOSOPHY OF CONTROLLED PROFITABLE GROWTH 3 OUR VALUES & GUIDING PRINCIPLES CUSTOMER SATISFACTION IS OUR PASSION, OUR LOVE AND OUR LIFE • Care for every customer, as you would like to be cared for yourself. • Exceed their expectations - whatever it takes! • Remember it’s not a sale. It’s a celebration! • We are all living advertisements for our brand. We create the magic. • Create lifetime customers through the highest standards in customer service. • Customer complaints are an opportunity to win a customer for life. OUR PEOPLE MAKE OUR COMPANY • Employ exceptional people for the gifts they bring us - energy, passion, willingness, intelligence and enthusiasm. • Develop, coach and empower them to achieve their full potential. • Create an environment that encourages excitement, fun, and open communication. • Celebrate and reward success. • Endeavour to promote from within. • Our team’s success ensures the company’s success. ENCOURAGE INNOVATION AND USE COMMON SENSE • Push the limits - if there is a better way, find it! • Keep our systems relevant and simple. • Challenge bureaucracy and red tape. • Innovation is often born from our mistakes and the lessons learned - have a go! • Embrace change - it brings opportunities. • Speak up! Constructive questioning of our methods, policies, and thinking is healthy. TAKE OWNERSHIP OF YOUR BUSINESS • Act and think as if this was your own business. • Make decisions in the best interests of your customers and your team. • Be responsible for the company’s profitability and growth. • Search for great ideas and share them across the company. • Our systems provide the platform for successful growth so follow them strictly. BE HONEST AND ETHICAL • Always act honestly and ethically displaying the upmost integrity. • Protect and enhance our brands integrity. • Show mutual respect in all dealings with people in and outside the company. • Compete fairly and professionally at all times. OUR MISSION Our mission is to be the most people focused jeweller in the world. 4 320 35 18 24 23 23 $NZm $NZm $NZm cents per share 21 280 30 15 20 240 17 25 17 12 16 15 200 20 160 9 12 15 120 6 8 10 80 3 4 5 40 0 0 0 0 01 02 03 04 05 06 01 02 03 04 05 06 01 02 03 04 05 06 01 02 03 04 05 06 YEAR ENDED 30 JUNE YEAR ENDED 30 JUNE YEAR ENDED 30 JUNE YEAR ENDED 30 JUNE GROUP REVENUE UP 12.2% PROFIT BEFORE DEPRECIATION, NET PROFIT AFTER TAX ORDINARY DIVIDEND 23¢ AMORTISATION AND INTEREST DOWN 4.2% (BEFORE (EBITDA) DOWN 2.1% ABNORMALS) 28 90 14 13.6 % % % 13.0 12.8 80.3 80 77.6 24 12 11.3 11.0 70 SHAREHOLDERS’ 10.3 FUNDS 43% 20 10 60 54.7 53.9 51.5 50 16 50 8 12 40 6 30 8 4 20 CURRENT TERM 4 2 LIABILITIES 21% LIABILITIES 36% 10 SOURCE OF FUNDING 0 0 0 30 JUNE 2005 01 02 03 04 05 06 01 02 03 04 05 06 01 02 03 04 05 06 YEAR ENDED 30 JUNE YEAR ENDED 30 JUNE YEAR ENDED 30 JUNE RETURN ON AVERAGE GEARING RATIO 77.6% RETURN ON AVERAGE SHAREHOLDERS’ FUNDS 23.2% ASSETS 10.3% 2005 and 2006 figures are presented under NZIFRS and are not directly comparable to prior periods as these are under previous NZGAAP. $8 $7.60 $7.62 30 $7 thousands $6.00 25 $6 $5.00 20 $5 $4.60 $3.80 $4 15 $3 10 $2.85 $2 5 $1 0 0 99 00 01 02 03 04 05 88 90 92 9496 98 0002 04 06 SHARE PRICE PERFORMANCE - LAST 7 YEARS VALUE OF $1000 ON LISTING AS AT 30 JUNE ASSUMES ALL DIVIDENDS REINVESTED. COMPOUND ANNUAL GROWTH RATE OF 19.2%. NZ$1000 INVESTED IN JULY 1987 NOW WORTH $28,282 AS AT 30 AUGUST 2006. 5 PERFORMANCE HIGHLIGHTS Group revenue up 12.2% to $306,374,000 Group Profit after tax of $15,774,000 (down 4.1% on previous year) Difficult trading conditions in all 3 markets especially in final three quarters of year with a rising world gold price 23.2 % return on average Shareholders’ funds for the year (2005 - 28.8%) Dividend for year maintained at 23 cents per share 23 new stores opened groupwide (14 in previous year) Canada continues good progress with expansion into Alberta Province KEY FACTS YEAR ENDED 30 JUNE, NZ$000’s UNLESS STATED 2006 2005 % change TRADING RESULTS Group Revenue 306,374 273,151 +12.2% Earnings before interest and tax 24,345 25,898 -6.0% Group profit after tax 15,774 16,442 -4.1% - First half 11,701 12,353 -5.3% - Second half 4,073 4,089 -0.4% Net cash from operating activities -2,360 10,221 -123.1% FINANCIAL POSITION AT YEAR END Contributed equity 39,232,946 ordinary shares 13,858 11,575 +19.7% Total equity 74,759 61,080 +22.4% Total assets 174,338 131,146 +32.9% Net debt 58,046 32,929 +76.3% Capital expenditure - cash 10,193 8,173 +24.7% NUMBER OF STORES 30 JUNE New Zealand 49 47 Australia 116 102 Canada 12 7 Total 177 156 DISTRIBUTION TO SHAREHOLDERS Dividends - including final dividend - Per ordinary share 23.0¢ 23.0¢ - Times covered by surplus after tax 1.75 1.86 SHARE PRICE 30 June $7.62 $7.60 KEY DATA PER SHARE Basic earnings per share 40.8¢ 42.7¢ Diluted earnings per share 40.5¢ 41.7¢ KEY MEASURES Same store sales up - New Zealand +2.4% -1.0% - Australia A$ -1.3% +1.6% - Canada C$ +6.9% +5.1% Return on average shareholders’ funds 23.2% 28.8% Interest expense cover (times) 7.4 9.7 Gearing ratio - net borrowings to equity 77.6% 53.9% Equity ratio 42.9% 46.6% Current ratio 3.8:1 3.5:1 7 CHAIRMAN’S REVIEW Dear Shareholders, Operating cash outflows in 2005/06 of $2,360,000 (2004/05 inflow of $10,221,000) were impacted by increases in working capital Michael Hill International delivered a net after tax requirements explained previously. profit of $15,774,000 for the 2005/06 financial For shareholders, we have maintained our dividend at 23 cents for year, which was 4.1% down on the previous year. the year (fully imputed), with the final dividend of 14 cents being paid The Group’s revenues of $306,374,000 were on the 16th October, 2006. 12.2% up on the previous year.