Michael Hill International Limited (MHJ) Earnings Call Transcript & Summary

Good morning, and welcome to the Annual General Meeting of Michael Hill International Limited. At Michael Hill, we place a high value on our heritage and have deep respect for our founders, Sir Michael and Lady Christine, and the role they continue to play in shaping the future of Michael Hill. So it's appropriate that I begin today by acknowledging the traditional custodians of country and First Nations people throughout Australia, New Zealand and Canada and recognize a continuing connection to land, waters and community. I pay my respects to them and their cultures and to elders past, present and future. I'm Rob Fyfe, the Chair of the Board of Directors, and it's my pleasure to chair today's meeting. Our company's secretary has confirmed that a quorum is present, so I formally declare the meeting properly constituted and open for business. I'd like to begin this morning by sharing our new film with you, The Jewellers, a true love story. This is part of our ongoing bridal campaign and a further step in elevating the Michael Hill brand. Sharing the true love story that is the origin of MHJ not only connects customers to the heritage of our brand but reminds customers they are real people in very human stories woven into the fabric of Michael Hill. [Presentation]

I still get goosebumps whenever I see the film. Before I get into the housekeeping matters, I'd like to welcome my fellow Board members who are here virtually at this meeting. Firstly, the company's Founder, President, Sir Michael Hill; Gary Smith, Chair of our Audit and Risk Management Committee; Emma Hill, Chair of our People Development and Remuneration Committee; and Jacquie Naylor. I'd also like to welcome Daniel Bracken, our Managing Director and CEO. Today, we're also joined by our Chief Financial Officer and Company Secretary, Andrew Lowe; and Kellie McKenzie, lead external audit partner from Ernst & Young. Andrew and Kelly are present to address any questions on our financial reports. On to housekeeping. I invite you to take full advantage of the technology that we are using today. The platform allows shareholders and proxies to ask questions and submit votes in real time. To that end, if you do have any questions or comments on any item of business in this year, you are able to do so in either of 2 ways, in writing at any time or verbally during the dedicated question time following the presentations. [Operator Instructions] You can also submit a written question at any time. [Operator Instructions]. A copy of your submitted questions along with any written responses from our meeting team can be viewed by selecting my messages. We will address your questions and comments after Daniel and I have presented. If we do not get to your question for whatever reason during the meeting, we will follow up directly with you. Voting today will be conducted by way of a poll on all items of business. Instructions on how to vote are on the screen. In order to provide you with enough time to vote, I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time by selecting the direction of which you would like to vote. The selected option will change color, and I will give you a warning before I move to close the voting. If we experience technical issues that result in a number of shareholders being unable to reasonably participate, I will adjourn the meeting, and it will be reconvened at a later time. If this occurs, we will lodge an ASX and NZX release after the adjournment that sets out the details and the next steps. Today, I'd like to give you an overview of how we view the year that's closed. And following that, Daniel will give more detail on our 2022 results, our current and future strategic focus and current trading update. Our financial year ending June 26, 2022 has been another remarkable year at Michael Hill as we delivered record results. I'm extremely proud of the commitment, resilience and creativity of Daniel and the entire team as they continue to drive business performance, strategically transform operations and progressively elevate the brand to expand our addressable market. All this has been achieved whilst navigating through the evolving COVID pandemic and complex economic and trading conditions. Our results over the last 2 years, despite these challenges, demonstrate the resilience of our business, strength of our brand, loyalty of our customers and the agility and determination of our team. We continue to have confidence in the momentum of the business and our ability to adapt and thrive in the face of ongoing uncertainties. As the business continues its journey to evolve and elevate our brand, the legacy of our creative founders remains extremely relevant as we showcase our artisanal craftsmanship, quality products and innovative designs. These core elements, along with Sir Michael Hill and Lady Christine Hill's values, insightful vision and infectious passion continue to be infused throughout every facet of the business and are fundamental to the continued success of Michael Hill. At Michael Hill, we recognize that our business is our people. We continually strive to be a workplace where all team members feel valued, appreciated and encouraged to be their brilliant sales. Our values, we care, we create outstanding experiences, we are professional and we are inclusive and diverse are truly embraced by all areas of the business and are key to attracting and retaining our high-performance team. Our employee engagement survey is a key source of insights into our cultural well-being and employees' connection with our purpose and ambition at Michael Hill. Impressively, once again, Michael Hill recorded another exceptionally high global engagement score of 83%, which is a credit to the strong leadership that has inspired a collaborative and energetic culture. We're passionate about identifying opportunities to make Michael Hill more sustainable, and I'm proud of the progress we're making. In August, we published our new 2030 environmental, social and governance vision centered around 3 key pillars of people, product and planet. We are committed to bring about change in how we operate in order to drive more sustainable practices that benefit our customers, our planet in future generations. We also want to demonstrate and share these practices with the wider jewelry industry to help all participants move toward a more sustainable, innovative and responsible future. As part of launching our new 2030 ESG vision, we have created a short video, which I'll now share with you. [Presentation]

Reflecting the strength of the balance sheet and strong underlying operating results, the business undertook a detailed capital management review during financial year 2022. One of the outputs was the release of a new dividend distribution policy, which sets a target dividend payout range of 50% to 75% of adjusted net profit after tax. We were pleased to declare a final dividend of AUD 0.04 per share, bringing our total dividend for financial year 2022 to AUD 0.075 per share, representing approximately 67% of adjusted annual net profit after tax at the higher end of our target range. 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. Furthermore, we announced the launch of an on-market share buyback of up to 5% of the company's issued capital, funded from existing cash reserves. The buyback commenced on the 19th of September 2022, and we are happy with the progress to date. As noted by daily updates on both the ASX and NZX, the company has bought back approximately 6.1 million shares to date, representing approximately 1.5% of issued capital. In addition to the above, the company still retains sufficient balance sheet strength and cash reserves for deployment into new earnings accretive organic growth initiatives and to also pursue acquisition opportunities in the jewelry sector which meet our strict strategic and investment criteria. As I reflect on the last financial year and my first full year as chair, I'm honored to be surrounded by a very high-caliber stable Board of Directors and executive team who are all aligned on the strategic direction for Michael Hill. We look forward to continuing the positive momentum of the business and focusing on growth initiatives that will strengthen our market position and financial performance. I'd like to close my address by acknowledging and thanking all our shareholders for their ongoing support. I now invite Managing Director and CEO, Daniel Bracken, to address the meeting and discuss the 2022 operational performance, provide an update on the company's strategy and an update on current trading performance. Daniel?

Thank you, Rob. Good morning, and thank you for joining us today. I will now take you through a review of the 2022 financial results and strategic and operational achievements. We will also provide you with some insights into key strategic initiatives for the year ahead and an update on our current trading performance. I'm absolutely delighted by our outstanding results, delivering record sales, gross margin and profit, especially with the considerable disruptions we faced across Australia and New Zealand in the first half. For the year, our revenue was up 7%; gross profit, up 10%; and comparable EBIT, up 11%. A key highlight was our ability to grow profit faster than sales, underpinned by continued gross margin expansion. All facets of the business came together to drive this result, but I would particularly like to highlight the evolution of our product, the outstanding performance from our stores, the continued acceleration of our digital channels and the key role that our loyalty program now plays in driving sales and margin growth. These results demonstrate that we have successfully shifted the emphasis from transformation to growth as we continue to elevate and modernize the Michael Hill brand. I'm particularly proud of our people and the culture that we continue to build at Michael Hill, a high-performance team across all levels with an energy and passion that underpins our growth agenda. This culture is best evidenced by the sensational performance from our Canadian team delivering huge lift in productivity, sales and margin. The group reported comparable EBIT of $62.9 million for the year ending 26th June 2022 against $56.6 million for the prior year, an increase of $6.3 million year-on-year, driven by a combination of strong sales growth and margin expansion. For the year, the company delivered same-store sales growth of 8% and gross margin increased by 200 basis points to 64.7% for the group. Since FY '19 Q3, the company has achieved 12 quarters of same-store sales growth. These continued strong results demonstrate the success of the company's strategic transformation and the increasing strength of the brand during more than 2 years of significant global disruption. During the year, the Michael Hill Global store network suffered 10,020 lost store trading days against 10,447 days in the prior year due to a combination of government-mandated lockdowns and COVID impacting our store teams. Despite these disruptions to the trading conditions and to the global store network, total revenues still grew by 7% to $595 million as the company continues to elevate the brand and transform the customer journey. Prior to the key Christmas trading period, the business opened its Canadian 3PL distribution center in Ontario, creating a cost-efficient flow of inventory from vendors, improving speed of delivery to customers and stores and ensuring reliable continuity of supply and optimal stock levels. And supporting the company's ongoing growth agenda, our strategic increase in ATV and elevated product offerings saw the company make considered investments in core inventory which saw year-end stockholdings of $181.5 million. The company's balance sheet has benefited from strong operating cash flows, delivering a year-end cash position of $95.8 million and nil debt. And during the year, the company successfully sold its in-house Canadian credit book, delivering cash proceeds of $14.2 million, while also launching a long-term partnership with Flexiti Financial, Inc. to provide a new enhanced consumer credit proposition in Canada. During the year, the company opened 1 new store in Australia and closed 6 underperforming stores across the network, resulting in 280 stores at year-end. In terms of key performance insights, it is noted that both revenue and gross margin have lifted significantly, following the initial 2020 COVID-disrupted trade. Even with approximately the same lost store trading days in FY '21 and FY '22, comparable EBIT has lifted in FY '22 against FY '21 and is significantly up on pre-COVID FY '19. As shown on the bottom left of the slide, pleasingly, the strong lift in both revenue and EBIT has been underpinned by increased productivity, which is borne out by the lift in average revenue per store. And the company's digital businesses delivered another record year with sales of $42 million, now representing 7.1% of total sales. Much of the company's strong performance can be attributed to the strategic transformation and elevation of the brand, along with an overarching emphasis on sales and margin growth. The strategic framework underpins the future growth of the business is customer-led and continually evolving, which is best demonstrated by the introduction of a new strategy pillar dedicated to sustainability. A strategy to elevate and modernize the Michael Hill brand underpins the overarching vision for the business, highly engaging and emotive marketing campaigns with an emphasis on product quality and craft are leading the transition away from price and promotion towards emotional long-term customer relationships. The success of this strategy is best evidenced by the continued expansion of average transaction value, up 15% over the last 3 years. A great example of a brand-led campaign is our recently launched Christmas campaign, which we will play for you now. [Presentation]

Simultaneously, the Brilliance by Michael Hill loyalty program is proving to be a key lever for growth and customer engagement. The program has increased by more than 600,000 members in the year and provides the business with essential data to drive more frequent and more profitable customer interactions. Pleasingly, 80% of our sales are now made by members of the Brilliance by Michael Hill loyalty program. Both brand and loyalty are key to driving medium to long-term sustainable growth in both sales and margin for the group. Michael Hill's digital transformation continues to gather pace, delivering another record year in FY '22. Strong performances on the company's direct-to-consumer websites were driven by improved customer experience, higher traffic and increased conversion rates. Digital now represents over 7% of company sales and is our highest margin channel. The successful deployment of Click & Collect and ship from store now available in all stores globally enhanced our omnichannel capabilities as the company continues its customer-led digital journey. Bricks and mortar retail is at the core of the Michael Hill business, driving more than 90% of company sales. Elevating the in-store experience across visual presentation and customer engagement have delivered considerable increases in gross margin, conversion rates and ATV. An unwavering focus on people and performance, operational excellence and effective labor management underpin our retail productivity, which has seen significant lifts in all markets. A new senior leadership structure is now firmly in place across all countries and delivering strong results. Additionally, the company has now ramped up its CapEx program across the store network to ensure stores are aligned to the elevated brand journey. Product evolution is at the center of a customer-led retail strategy and is critical to achieve sales and margin growth and maintaining our leading market position as the house of diamonds. Laboratory-ground diamonds are gaining momentum in the business, delivering increased quality and higher margins while providing customers with a certified sustainable and climate-neutral choice. Elevated quality and craftsmanship are essential to our aspirational brand journey, and this will be delivered through the evolution of our supply chain and further investment in the artisanal capabilities of our Australian manufacturing facility. During the year, the business commenced a phased deployment of a new comprehensive merchandise planning platform to improve buying processes, margin optimization, product ranging and inventory management. The company's ongoing focus on product mix continues to be a key enabler for sustained margin expansion. As the company pivots from transformation to growth, the opportunity to stretch the brand into new territories and services is now a key focus. Through the course of the year, the company has executed its marketplace strategy across its -- across all 3 of its core segments, partnering with the Iconic in Australia and New Zealand, Westfield Direct in Australia and the Bay in Canada. Additionally, the company is now focused on extending its Canadian website to the currently untapped Quebec market and in the near future, launching international shipping to all countries globally from our existing websites. The business is also well underway in developing a digital ecosystem with a number of new revenue driving service offerings across bespoke, design, sustainability and financial services. Before moving on to our current trading update, I'd like to share with you our year in review film. [Presentation]

And now moving on to our current trading update. Pleasingly, the business has delivered strong early performance for the first 16 weeks of FY '23, with group all-store sales up 27.5% against FY '22. As this period in FY '22 was impacted by store closures in Australia and New Zealand, a more meaningful reflection of the FY '23 performance is that we have increased sales by 15.8% against the same period in FY '21, even with 8 less stores. In addition, gross margin has also remained strongly in line with FY '22 and significantly up on FY '21. These results demonstrate the continuing momentum in the business, and an improvement on the results previously announced for the first 8 weeks of the financial year. I will now hand back to the Chair to conduct the formal business of the meeting.

Thank you, Daniel. Before we move on to the formal business of the meeting, we will now take questions or comments. [Operator Instructions] The moderator for the question-and-answer session is Emily. Emily, have any written questions or comments been received? Or are there any shareholders waiting to speak via the online platform?

Thank you, Chair. We've received a number of written questions via the online platform. We've received a few questions from Mr. Andrew Ott. His first question is in relation to lab grown diamonds. Do customers worry about synthetic lab grown diamonds? As in do they differentiate between real and manufactured diamonds? Or are they only interested in the look and feel of what they are after?

Thanks, Andrew. I think I'll pass that question to Daniel. He'll have some insights to share.

Yes. It's a great question, Andrew. And I think the first thing I'd say is lab-grown diamonds are not synthetic diamonds. They have exactly the same chemical composition as a mine diamond. They, in fact, are grown from a sliver of a mine diamond. So this mission of real versus manufactured actually isn't in the vocabulary of laboratory-grown or laboratory-created diamonds. The most important thing that we're seeing is attracting a new more, I guess, sustainably aware customer to our business, generally a younger Gen Z or millennial customer, who is well researched on this new emerging category within jewelry, and they want to have a product that has a clear path of providence. They want to have a product that is climate neutral, and that's why we've elected to partner with the grower that we partnered with, and it actually forms part of our key sustainability products, the sustainability strategy. So it's a terrific business for us. We're very proud of the relationship that we've built with the grower, and we absolutely see it as a core part of our offering. And very much what we're referring to is the fifth C, which is choice. So it's really the customer's choice if they want to go mined or laboratory grown, and we're seeing different customers choosing those 2 different parts.

Thanks, Daniel. Emily, further questions?

Yes, so we have another question from Mr. Andrew Ott, who asks staff remuneration and incentive staff scheme, how the online sales impact on the remuneration of sales staff. Do team members have an ongoing relationship with customers across the omnichannel platforms or are they only remunerated in line with in-store sales they complete?

I think, Andrew, this is certainly a challenging area for many businesses as they look to integrate both online and bricks-and-mortar sales. And again, I'll pass to Daniel, who can talk about how we both manage and remunerate performance in this regard.

Thanks, Rob. Getting close to 50% of our digital sales are now actually fulfilled through our store network. I referenced in my update, Click & Collect and ship from store, there's also a virtual selling capability, virtual appointment process. So there are a number of omnichannel initiatives that actually blend physical and digital deliberately because of the nature of the category and the price points that we sell at. Those digital sales that are routed back through the stores, so as I say, half our digital sales follow that path now, actually go into the store's performance and the teams in the stores are remunerated or rewarded for those omnichannel sales that go through their store and that their team are involved with. So it's a key decision we made as we started the omnichannel journey for blends the 2 channels that ensure that the people involved in either the selling or the fulfillment of that sale were incentivized appropriately.

Thanks, Daniel. Emily, back to you.

Thank you, Chair. Mr. Andrew asks, are you able to provide any color on what organic growth and acquisition opportunities might look like?

Thank you again, Andrew. Talking firstly to organic growth opportunities. As you would have seen through Daniel's presentation, we still see significant opportunity within our existing markets as we expand into digital, as we look to elevate the brand and expand our addressable market. As you would have seen from the fabulous performance we're getting from the Brilliance by Michael Hill loyalty scheme where we're seeing our average transaction value increase, which clearly then leads to through the loyalty as well and to increase lifetime value of our customers. So there's a lot going on in the organic growth space. Daniel also referenced looking to move into Quebec with our online offering as well and obviously, going to a multi-language capability. At the -- in terms of acquisition, our focus is very much looking at opportunities within our existing geographic markets. There are opportunities that are interesting to us that would be complementary to our existing position in the market. We won't be making any further comment on that at this stage, but it's an area of active interest for business. Daniel, is there anything you wanted to add?