FLLYR: MHI: Full Year Results to 30 June 2010

20 Aug 2010 8:30 am

MHI 20/08/2010 FLLYR

REL: 0830 HRS Michael Hill International Limited

FLLYR: MHI: Full Year Results to 30 June 2010

Michael Hill International Limited Results for announcement to the market

Reporting Period: 12 months to 30 June 2010

Previous Reporting Period: 12 months to 30 June 2009

Revenue from ordinary activities: 443,710 Percentage Change: 7.5%

Profit from ordinary activities after tax attributable to members: 26,509 Percentage Change: -60.3%

Net profit for the period attributable to members: 26,509 Percentage Change: -60.3%

Final dividend for year ended 30 June 2010: 2.5c

Imputed Amount amount per security: Nil

Record date: 1 October 2010

Dividend payment date: 11 October 2010

Michael Hill International Limited's accounts have been audited and an unqualified audit opinion was given.

Profit Announcement

Michael Hill International today announced an after tax profit of $26.509m for the twelve months ended 30 June 2010.

Summary of Key Points (all values stated in NZD unless stated otherwise)

- Operating revenue of $443.331m up 7.6% on same period last year - Same store sales 5.2% up on same period last year - EBIT of $36.240m up 38.4% on same period last year - EBIT of $38.579m (excluding US lease surrender costs of $2.339m expensed during period) - Net profit before tax of $30.914m up 53.4% on last year - Net profit after tax of $26.509m. Last year's net profit of $66.788m included a deferred tax credit of $50.197m. - Net debt of $45.437m at 30 June 2010 - Operating cash flow of $12.751m for period - 5 new stores opened during the twelve months and 12 closed including 8 in the US - Total of 232 stores open at 30 June 2010 - Final dividend of 2.5 cents per share up 66.7% - Total dividend for the year of 4.0 cents up 60% from 2.5 cents in 2009

New Zealand Retail Operations

The New Zealand retail segment revenue increased by 6.0% to $95.811m for the twelve months with an operating surplus of $16.204m, an increase of 8.4% on the corresponding period last year.

Same store sales during the twelve months increased by 6.1% (8.2% decrease last year). The operating surplus as a percentage of revenue increased to 16.9% (16.5% increase last year).

There were 53 stores operating in New Zealand as at 30 June 2010.

Australian Retail Operations

The Australian retail segment increased its revenue by 6.9% to A$236.314m for the twelve months with an operating surplus of A$38.454m compared to A$33.831m for the previous corresponding period, an increase of 13.7%. Same store sales in local currency increased 4.9% for the twelve months (0.3% increase last year).

The operating surplus as a percentage of revenue increased to 16.3%.

Two new stores were opened in Australia during the period, as follows:

- Top Ryde, NSW - Northland, Victoria

Four stores were closed during the period giving a total of 141 stores operating in Australia at 30 June 2010.

Canadian Retail Operations

The Canadian retail segment increased its revenue 17% for the twelve months to C$29.998m and there was an operating loss of C$1.151m compared to a loss of C$0.239m for the previous corresponding period. Same stores sales in local currency decreased 3.2% for the twelve months (9.8% decrease last year).

Trading conditions in Canada have been difficult for much of the year but there were signs of recovery in the last trading quarter.

Three new stores were opened during the period:

- CrossIron Mills, Alberta - Bower Place, Alberta - Park Royal, British Colombia

There were 29 stores open as at 30 June 2010.

U.S. Retail Operations

The U.S. retail segment achieved revenue of US$10.574m for the 12 months and there was an operating loss of US$6.247m for the same period (US$3.094m last year).

The company announced in June of this year that after performing a full review of the US business, including results achieved to date, as well as operational and real estate issues, the company had made the decision to consolidate to a smaller platform of 9 stores, all of which are within the greater Chicago area. As a result 8 stores were closed at the end of June 2010. All 9 stores retained will be refurbished to the company's latest global concept prior to Christmas 2010.

The board remains positive about the US market and is aiming to position the brand to take full advantage of the financial recovery over the coming years.

There were 9 stores open as at 30 June 2010.

Group Restructure

In December 2008, the company reported the transfer of the intellectual property comprising the Michael Hill Jeweller System from Michael & Co Ltd in New Zealand to its Australian subsidiary, Michael Hill Franchise Pty Ltd, for $294m. As a result of the transaction a deferred tax asset of $52.942m was recognised in the company's 2008-09 financial results representing future Australian taxation deductions available for certain intellectual property rights acquired. We also reported that further tax benefits relating to the inter company funding arrangements implemented for the transfer of the intellectual property.

However following a query from the Australian Taxation Office (ATO) in relation to the value at which the transfer of the Michael Hill System occurred, the company referred the issues raised by the ATO back to UK based valuer's, BNP Paribas Business Assets Valuation Limited (BAV), for their comment and assessment. As a result of the query raised by the ATO the company received a revised report from BAV Limited, reducing the original valuation down by $20 million from $294 million to $274 million.

The amendment has had the following accounting consequences:

- Reduction of deferred tax asset recorded in 2008-09 of $2.8m (from $52.9m to $50.1m).

- Increased tax expense in 2008-09 of $2.8m resulting from the corresponding change in sale price.

- Increased tax expense in 2009-10 of $0.8m (18 months impact). Dividend

The Directors are pleased to announce a final dividend of 2.5 per share (2009 - 1.5), with no imputation credits attached for New Zealand shareholders and full franking credits for Australian shareholders. The dividend will be paid on Monday, 11 October 2010 with the record date being Friday 1 October 2010.

Including the 1.5 cent per share interim dividend paid on 1 April 2010, the total dividend for the year will be 4.0 cents, an increase of 60% on the previous corresponding period ( 2009 - 2.5 cents).

Due to the internal restructuring of the Group in December 2008, the company is unlikely to be in a position to impute dividends for the foreseeable future. Naturally this will depend on the performance of each segment in the coming years and also on the level of dividend to be paid in future periods.

Cash Flows / Balance Sheets The Group has reported net operating cash flows of $12.751m for the twelve months, compared to $47.643m for the previous year. The decreased surplus from operations, compared to last year, is a direct result of returning our inventory levels to more normal levels after the reduction in 2008-09, in response to the global financial crisis.

The Group's balance sheet continues to be sound with an equity ratio of 61.8% as at 30 June 2010 (59.7% in 2009) and a working capital ratio of 3.6:1 (4.1:1 in 2009).

Summary

Achieving sales targets proved difficult during the year with margins under pressure from heavy promotional activity within the industry and retail sector generally. However, we were able to achieve sales growth and manage margins through improved buying and sourcing of our products and by continued improvement in our overall supply chain. Our diamond category continued to grow in importance for the group with strong growth in sales and margins. Other stand out categories were the Michael Hill watch collection and our collection of bead charms which also achieved strong sales and margins over the year.

The US operation continued to drag on earnings this year and in light of little positive news on the horizon, for the US retail sector, we made the decision in June 2010 to close eight of the seventeen stores. This decision will allow us to focus on a smaller platform of stores while attempting to prove up our model in the US and to reduce the risk and ongoing operating losses from this segment. There were one-off closure costs of US$1.7m in exiting the eight leases.

Canada continued to be difficult and earnings slipped further in the wake of a depressed retail sector. However in the last quarter we noticed a strong improvement in sales and these have continued in July.

I am pleased to report the New Zealand and Australian segments performed admirably this year. Both businesses grew revenues, margins and their bottom lines, even though the retail environment in both countries has remained patchy. This is testament to the strength of the Michael Hill brand in these markets, the maturity of our teams, and the strategies employed within the business over the past few years.

During the year the company commenced the roll out of our 5th generation store design. In the development of this design we carefully considered many elements including the evolution of our brand, the international retail environment in which we now operate, and the latest developments in technology along with customer feedback. Nearly forty stores have been opened in the new design and we have seen strong sales improvements from existing stores which have been refitted into the new look. The store design also gives the Michael Hill brand a strong point of difference to our competitors in appearance and customer experience.

Overall, trading conditions remained challenging over the past year, however, a strong focus on growing same store sales, managing margins and controlling costs, the company has achieved a strong improvement in underlying earnings.

The Directors remain confident in the continued growth and profitability of the Group.

R.M. Hill 19/08/2010 Chairman Internet Home Page - www.michaelhill.com All inquiries should be made to Mike Parsell CEO phone +61 403 246655 End CA:00198565 For:MHI Type:FLLYR Time:2010-08-20:08:30:50

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