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

Good morning, and thank you for joining Michael Hill International's FY '23 first half year results update. I'm Daniel Bracken, CEO, and I'm here today with Andrew Lowe, our CFO. Today, we will be taking you through a review of our FY '23 H1 results, provide you with an outlook on performance and a strategy update and close, as usual, with a Q&A session. I'm absolutely delighted by our outstanding results, delivering record sales, gross profit and comparable EBIT for the first half. This is a testament to all facets of the business aligning to produce these results, demonstrating the traction of our strategic growth initiatives and reaffirming the success of our brand elevation journey. I'm particularly pleased that we have managed to maintain elevated gross margins considering the external pressures on product costs, coupled with market-wide increases in promotional activity in the second quarter. This performance has been underpinned by the high standards of in-store execution, enhanced product offering, further evolution of our loyalty program and yet another busily executed Christmas campaign that truly resonated with our customers. With the impacts from COVID behind us, significant productivity gains on the pre-pandemic trade have been delivered across an optimized store network in all markets. And this is best evidenced by the 19% increase in productivity over the last 3 years. At the heart of this transition to growth has been the success of Brilliance by Michael Hill, a loyalty program with membership increasing 70% to over 1.7 million members and members driving higher average transaction value and frequency of visits. In August, we successfully relocated to a new global headquarters, which houses our upgraded artisanal manufacturing workshop and support functions. These new premises further enhanced employee engagement and our ability to attract and retain high-caliber talent. The head office is also home to a new state-of-the-art distribution technology, which delivers greater supply chain accuracy and efficiency for our Australian and New Zealand operations. Across the key Christmas trade period, this facility supported flawless store and e-commerce fulfillment. Execution of new growth initiatives continues to gather pace, particularly across our digital ecosystem with a number of new revenue streams, and I will elaborate on these in the strategy section of this presentation. I'm particularly proud of our people and the culture that we continue to build at Michael Hill, a highly engaged and resilient team with an energy and passion that's driving our strategic growth initiatives through to successful execution. And now I will hand over to our CFO, Andrew Lowe to update you on our financial results.

Thank you, Daniel. Turning now to Slide 5, FY '23 half 1 group results. The group reported a record comparable EBIT of $54.5 million for the half year ended January 2023 against $51.6 million, an increase of $3 million or 6% year-on-year, driven by a combination of strong sales growth and continued elevated margin. For the half, the company delivered record revenue of $363 million, up $30 million on the previous best first half in FY '20 with 22 fewer stores. The group year-on-year FY '23 H1 revenue growth of 11% was off the back of particularly strong performances from Australia and New Zealand. Strategic initiatives supported elevated group gross margins in line with prior year despite higher input costs. This resulted in a record half 1 gross profit of $237 million, up $24 million on last year. In order to support the continued evolution of the brand, further strategically in ATV and record sales for the half, the company made considered investments in inventory. This investment strategy followed supply chain disruption in the prior year and was focused on core ongoing product ranges. Stockholdings closed for the half at $198 million. Having invested in floor inventory and deployed cash to support capital management activities, including higher dividends and the share buyback program, the company delivered a healthy closing cash position of $79 million and nil debt. Taking into consideration the company's performance and strength of the balance sheet, the Board has decided to declare an increased interim dividend of AUD 0.04 per share against AUD 0.035 per share for the prior interim dividend. This AUD 0.04 per share dividend will be unfranked, fully included with conduit foreign income. The record date for the dividend will be Friday March 2023, which came in on Friday, 24 March 2023. During the half, the company opened 3 new stores to an Australian one in Canada and closed 1 underperforming store in Australia, resulting in 282 stores at half year-end. In terms of key performance insights, I note that both revenue and gross margin have lifted significantly through and beyond the cover disrupted trading period. It's pleasing for the business to have delivered not only sales but also margin growth through this period. This also sees that H1 comparable EBIT at record levels. As shown on the bottom of the slide, pleasingly, the strong lift in both revenue and EBIT has been underpinned by increased store productivity, which is borne out by the lifted average revenue per store and gross profit per store. Moving on now to our segment results from Slide 7. In Australia, retail segment revenue increased by 18% to $191 million for the half, delivering record half 1 sales and comparable EBIT. For a more meaningful comparison due to store closures in the prior year, revenue was up 9% on FY '21 half line. as well as a strong sales performance, the segment maintained an elevated gross margin for the half of 64.4%, a 450 basis point growth on pre pandemic levels. ATV continues to lift further validating the success of the aspirational brand journey in the Australian market and supporting a 21% lift in productivity. During the half, 2 new stores opened, 1 underperforming store closed, resulting in 14 148 stores at the end of the half. In New Zealand, retail segment revenue increased by 14% to New Zealand at $76 million for the half. For a more meaningful comparison due to store closures in the prior year, revenue was up 10% on FY '21 at -- gross margin for the half was 62.6% with 380 basis point growth on pre pandemic levels and again with the highest ATV out of all the segments, supporting a productivity lift of 18%. Given the uplift in the security incidents experienced across our Auckland store network through the half, additional investment, both OpEx and CapEx, in security was required to protect our team and stores. These investments had a direct impact on earnings. At half year-end, there were 48 New Zealand stores. In Canada, at the half, retail segment revenue was CAD 92 million, flat on last year and up 22% on FY '21 half 1. This result is a credit to the segment, considering last year was a record performance, driven by significant pent-up demand following 7 months of store closures across Western Canada. In addition to sales performance, segment maintained an elevated gross margin for the half of 64.3%, with an impressive 610 basis point growth from premade levels, validating the strategic changes made are driving the results. During the half, 1 new store was opened, resulting in 86 stores at the end of the half. Moving on to Slide 10, outlook. Before addressing outlook, we wish to take a moment to recognize those impacted by the sustained and severe weather events across North Island of New Zealand over the past few weeks. Our thoughts are with the impacted people and communities. Our teams are deeply connected into the communities in which we operate. And as we did in Australia last year, we have provided a financial contribution to the New Zealanders most impacted by these events. Now turning to outlook and putting aside New Zealand's significant and sustained weather events over the last few weeks. FY '23, half 2 sales to date are in line with our expectations. On the basis that retail trading conditions do not materially deteriorate the company anticipates full year comparable EBIT will be ahead of the prior year. I will now hand back to Daniel to provide an update on our strategic growth initiatives and new revenue streams.

Thank you, Andrew, for your insights on the first half financial results and FY '23 outlook. The company's strategic transformation and further elevation of the brand have continued 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 and adapting to meet consumer demands. The strategic framework encompasses a number of new growth initiatives covering both short- and long-term horizons. The strategy to elevate and modernize the Michael Hill brand underpins the overarching vision for the business as we strive to build emotional long-term customer relationships with an emphasis on craftsmanship, quality and sustainability. Our focus is on marking the moments that create the story of our lives and helping our customers recognize these recurring and significant moments that matter through elevated, modern and accessible product with diamonds at our core. The success of our aspirational brand journey is best demonstrated by the continued expansion of average transaction value, up 28% over the last 4 years. I'm particularly proud of our motive brand-led campaigns, best evidenced by Christmas 2022. After the success of Christmas '21, we decided to create a sequel. It's been tingles all over every time I watch it. The Brilliance by Michael Hill loyalty program is proving to be a key lever of growth and customer engagement with new programs and events or members launched in the half. As a reminder, loyalty members are significantly more valuable with ATV for members a staggering 122% higher than for nonmembers. The loyalty program has increased by 70% to over 1.7 million members with brilliance members now representing 82% of company sales. Our focus has shifted from an initial period of membership acquisition now to activation with the deployment of advanced data insights and tailored communications together with an increased focus on customer segmentation and personalization. Retail productivity and performance metrics remain a key focus. Productivity for the group has lifted 19% since FY '20 and is up in all markets, elevated visual merchandising excellence has resulted in increased shop front conversion, while a focus on in-store experience has delivered heightened customer engagement and an increase in ATV across all segments. Advances in dynamic rostering have also driven more productive labor outcomes. And the store network is benefiting from significant investment with more than 40 stores refreshed across all 3 countries with more to follow, ensuring alignment of the store experience with the brand journey. Throughout COVID, we saw an increase in customers embracing our digital channels and delivering significant growth. The company has taken the opportunity to expand its core direct-to-consumer channels. Our omnichannel offerings are now embedded into stores with customers embracing the aspirational brand journey. This is best demonstrated by omni sales contributing a growing proportion of total digital sales and online ATV lifting significantly. Further progress was made on international digital strategy, including the launch of international shipping and further leveraging of our third-party marketplace partnerships in all 3 countries. Early insights from THE BAY marketplace in Canada validates Quebec as a genuine growth opportunity, given that almost 30% of all Canadian retail sales are in this currently untapped territory. We are now also exploring marketplaces in new geographies as well as international shipping supported by SEM in select markets. Separately, our new digital pure-play brand, Medley delivered 53% growth as it continues to progress through its start-up phase. As part of our broader ESG strategy, I'm so excited to announce that the company is launching a new circular economy offering, re:new. At this stage, re:new encompasses the launching of a digitally enabled gold recycling platform that will drive incremental sales in store, launching of a diamond upgrade program, providing customers the ability to bring back product and trade up to something bigger or better and a complete reimagination and expansion of our jewelry repair business. In addition, we have commenced development of and will soon be launching to market a new digitally led bespoke diamond jewelry brand that sits at the top of our brand pyramid and engages us with a whole new customer segment. Further, we have commenced a trial introducing third-party jewelry insurance and replacement solutions for our customers. These are new and exciting organic revenue opportunities that will develop over time and support continued growth of the core Michael Hill brand. The company's recently refreshed capital management framework is progressing well. The declaration of an increased interim dividend of AUD 0.04 per share is an increase of 14% on the last interim dividend. Beyond market share buyback, which commenced during the half, saw the company acquire 8.6 million shares at a cost of a little over $10 million, representing 2.2% of share capital. And the Board retains the discretion to resume the buyback. In addition, the company retains sufficient balance sheet strength and cash reserves for deployment into new earnings accretive growth initiatives. These cash reserves and an undrawn debt facility reaffirm the company's ability to pursue acquisition opportunities in the fine jewelry sector in our existing markets, which meet our strategic and investment criteria. I'm also excited by the pipeline of brand and growth initiatives that will be progressively delivered to market in the coming months. So that brings us to the end of our presentation. But before we move into Q&A, I'd like to acknowledge the amazing team we have at Michael Hill. Without the people and the belief these results would not be possible. I would now like to thank you again for your continued interest in Michael Hill, and we are happy to now take any questions.

Our first question is from Sam Teeger from Citi.

In terms of the guidance that EBIT will be ahead of prior year, what are you assuming for sales for the rest of this half, noting they've been flat in the half to date?

Sorry, say the second half of the question, you couldn't quite hear you, Sam.

Yes. So the guidance, right? You're assuming to have comparable EBIT to be ahead of prior year, right? So I'm just wondering, within that guidance, what's the assumption around sales for the remainder of this half given for the first 8 weeks, they're in line with your expectations.

Well, I think we want to get into on a group call details around our sales forecast, Sam. I mean I think what we're indicating with the announcement is we're comfortable with where sales are for the first 8 weeks of the half. And should those -- that performance continue without some major disruption due to an external factor. We're confident that the sales number will be at a level that will deliver -- deliver a comparable EBIT above last year.

Got it. And when you say in line with expectations, we can take that to be positive, right?

Well, we never expect our business to go backwards, that's for sure.

Sure. Excellent. Okay. And just to clarify the outlook comments about the New Zealand weather events look, first, we hope all your team members in the stores are okay there. But can you help us understand the magnitude of the disruption today?

Well, yes, and I will talk about this because it's something I feel passionately about because it's gone in my opinion, relatively unreported or poorly reported in Australia. When Brisbane got flooded last year, my mom knew within 3 hours as she lives in the U.K., whereas these have been quite catastrophic impacts to the New Zealand community. 3 particular stores in Napier, Hastings and Gisborne. -- those towns of those communities have been absolutely decimated by the weather events. So we have had those stores and a couple of others in outlined areas of Auckland closed for best part of a week. We are now reopened in all of them, but the towns themselves are going to be slow to recover. Now they are what we would call 3 regional stores. So they're not the mega stores of Auckland that are impacted. But the whole of Auckland had severe flooding. -- even on Friday, they had another 150 millimeters of rain and communities were put off on the outskirts -- so it has been quite significant, but the amazingly resilient business we have there that sort of 3 weeks on from when it really started, we're already sort of back to relatively what I'd say annual normalized trading performance.

Okay. And throughout the last month, there's been a bunch of retailers that have kind of suggested in Australia February has been a bit softer than January. Others have said no real change, things remain very strong, which campus Michael Hill sit in at this point?

I think each market is different. And I think if it wasn't for the New Zealand number, we probably have given more clarity on that performance. But it's misleading. So that's why we've said what we've said. Look, February is important for us because it's got a key one of our key 3 campaigns of the year with Valentine's stay in it. So again, reemphasizing our focus is celebrating the moments that matter in Valentine's Day is one of those. So I would say January is very quite similar if you put New Zealand to one side.

Our next question is from Kieran Carling from Craigs Investment Partners.

Daniel and Andrew, congratulations on your first strong half result. First question from me, just looking at the comparable EBIT margins across the group. Australia held up reasonably well, but New Zealand and Canada saw quite significant declines. Would you mind just stepping us through the key drivers of those declines? And perhaps just for New Zealand, in particular, give a bit of an indication of what the incremental security cost was during the half and we should be thinking about that as a one-off cost or something that will be ongoing?

Let's start with the latter question first. Andrew, do you want to comment on the deal and security costs -- at this moment in time, Kieran, I don't think we can categorically say the CapEx -- either the CapEx or the OpEx are necessarily onetime events. Andrew?

Yes. So I think, Kieran, just for context, we've been working very closely with New Zealand Police in relation to the, I guess, the security events across retail in New Zealand for Michael Hill in particular, because we have been directly impacted -- so we'll be a little bit guarded on exactly what we say publicly. That's the police is strong preference. But I guess what we would say is there has been a significant investment for the half. From an OpEx point of view, probably circa $2 million to date. And then from a CapEx point of view, so we have invested heavily in securing the infrastructure of our stores, so bulk amens which received some public and the like. That capital investment has been [indiscernible], call it $1 million. So I guess, from an OpEx point of view, that investment to protect stores and heats in protecting them, that has flowed to the bottom line and has directly impacted EBIT. With all that investment that we've made, I think it is pleasing to suggest that it would seem those incidents are now broadly under control. We've got for some period now without any incidents. So we would like to think we've addressed well as best we can at the moment, that profile. So I think that's probably the New Zealand situation. It is that. Now there will be some ongoing expenditure there. But again, as we signaled in our outlook, we'd like to think that we can still deliver a comparable EBIT above last year.

But I think Kieran and I'd just add to that. But as Andrew says, it has got better, but we're still very much on high alert over further instance, occurring crime rec continue to be -- as you all know, our very high profile is regular in New Zealand, particularly Auckland. So while our particular situation has improved, I think it's fair to say we're remaining or higher. We're still continuing to invest in security measures to protect our teams across Auckland and particularly across our core and an Hamilton actually our team. So it's not a one-off that's behind us in the first half continue those investments continue across the second half. And the Board has not yet made a decision as to what the long-term strategy will be. The short term is protect our people and our stores. On the first question around lower, I think you were asking lower EBIT percent to sales in Canada and New Zealand. New Zealand is principally, as we've outlined, the cost of security that's incremental. In Canada, it's been a journey. If we had FY '19 on the chart in the pack, it would look like we're trying to go back too many years in my view, you'd have seen an even greater improvement over the 4-year period than we have over 3. I think it's fair to say in FY '21, we had every single wind that you could ask for in our sales. We came out of 7 months of closures of our entire Eastern Canada network, more than half the network have been closed for 7 months. So we had this period in the first half last year enormous pent-up demand. We were also still at that time operating on shorter hours post COVID. centers were not demanding full operational hours. We had incentives flowing through the occupancy line. So it's a very different market that we were facing this year, and that's why we're really happy with that performance. I compare the 20% EBIT to sales back what it was 3 years ago at less than 10, and it shows that we've actually got this business completely back on track and we're thrilled with how it's perform.

Great. That was a very comprehensive answer. Just on the commentary around deploying cash to support higher dividends. Can you provide me insight on how the Board may be looking to approach dividend payments going forward, particularly if we do come into a situation where consumer sentiment starts to pull back and perhaps earnings follow? Do you anticipate that the Board would support a dividend at the current level that we're seeing now?

Look, we reissued our dividend policy, I'm going to say 12 months ago. And I think that was considered a policy that was suitable or the good times and tougher times. So Andrew, do you want to just outline your perspective?

Yes. I think the new dividend policy that Daniel referenced have target range to payout ratio of 50% to 75%. Last year, we hit 67%. -- coat the upper end of that range, and the Board has suggested its preference to stay at the upper end of that range. Now of course, the Board can and will be mindful of the economic conditions and the like. Also, that policy reflected on the seasonality of our business. So last year, we paid an interim dividend of $3.5 million and a final of $4 million. This year, we have paid an interim of AUD 0.04. That leaves the board the flexibility to sit back and reflect on full year performance to understand what that right balance would be between managing cash and hitting that target dividend policy ratio. So I think it's just a watching brief here on the second half, but with an intent if we can, to sit at that upper end and have that regular reliable patent dividends.

I guess just getting into some of the expansion and growth strategy. Are you able to provide a little bit a bit more insight on maybe your expectations around the diamond upgrade program and bespoke jewelry offering? I guess if we think about the proportion of Michael Hill sales and assume that sort of bridal and gift-related sales make up about 70% -- 65%, 70% of sales. How strong do you expect that diamond upgrade program to be given a lot of your sales are gift driven?

So I'll give you an example, and this does have such the diamond upgrade program is actually something that exists in our business today, but in a completely customer-driven one-off some bespoke type conversation where a customer will come back in and say, when my husband proposed to me, we didn't have funds that we have today. We weren't earning what we're earning today despite 5 years, 10 years on from when they originally proposed. And we'd like to upgrade to a bigger diamond. Now that's a very manual one-off discussion between someone in our store then comes back to our manufacturing division. We need to understand where the previous diamond came from, what its value is today and what they're looking to purchase. We get a lot of these requests, and we don't even advertise that we potentially can offer that service and that service proposition in that program. So as a result of that, and city under our ESG drive to create greater circular economy, we see this as a really exciting opportunity both for our customers and for us from a revenue perspective. Too early for us to say what it's worth here and -- but let it be said that we wouldn't be going down this path if we didn't see some level of exciting growth opportunity coming from it. You then jump to our bespoke new bespoke brand before you do that, I am going to just take you back to our gold recycling platform because that's actually the first cab off the rank. That's going to be going live in some test markets here in Australia within about 4 to 6 weeks, and we're really, really excited by this. Again, this has been driven by customers asking us do you offer this service. We've seen in other parts of the world, brands offering this type of service, but again, in a pretty funky way. We've built a very cool sophisticated digital platform where customers can engage with us on whether it's old jewelry that they inherited from their grandmother and they never were, whether it's jewelry, they are themselves and they decide it's out of fashion, but it's broken jewelry or damaged jewelry. We're creating this opportunity for you to effectively send us your product will give you a valuation based on current spot rates, it will be that exact. We've got an x-ray machine, believe it or not that measures the product comes in tells us what grade of gold it is, what, firstly, that's definitely gold because people could believe later product isn't gold-orris gold, and we can validate that. And we will then go back to them with the valuation of that product within 24 hours of receipt -- if the customer says, yes, and this is really simple steps to do this through an online digital dialogue, they will then be receding that same day, a digital gift card to 90% of the value of the gold, but they will then be able to redeem in a Michael Hill store. So again, this is something we get regular. Our stores often tell me. We have 2 to 3 people every day coming and saying, can we recycle our goal with you. So again, we're not going to quantify it, but until we've got something up and running, but we're really excited. Again, we've invested in a digital platform because we believe this is another great growth opportunity for us. And then thirdly, your question about our bespoke diamond jewelry brand, that is, I'm going to say, the third cab off the rank. So that's slightly further down the track, but we'll launch later this year. And it's about creating a really usably augmented premium experience through a digital platform of different goals and platinum options and then through a choice of somewhere between initially 25,000 and 30,000 diamonds that we're going to populate an offset on that website. So something very, very sophisticated. They'll be able to build the ring as they go. They'll be able to pop the diamond and see what it looks like. They'll be able to access the GIA report for that diamond. We'll be able to see 360 views of that diamond and they'll get instantaneous costings and pricing on that product. So again, we've done a lot of customer research on this, and we think this is a game changer for us at the top of the pyramid of jewelry in this market. It's all pretty exciting. You can tell by my hopefully, my enthusiasm for us here.

Absolutely, absolutely. Just on that spoke offering, are there competitors that you know of that are offering something similar? And do you think this sort of opens up increased competition? Or is it quite unique?

Yes. Locally, we don't think there's anyone that's got any significant business in this space internationally. There are some big players, particularly in the U.S., there's big players in the U.K. as well. But those brands don't offer a particularly good proposition in our markets. Customers actually want to be able to work with a local operator, and we see that as a great opportunity. Plus, I'm going to call it out here that what we're building will be a much better customer experience than the other products that are already in the market internationally.

Great. And then just final question from me. In the trading update that you issued in January, you commented that gross margins are holding up despite a more promotionally driven sales environment. Can you just talk a little bit more about that? And just highlight is promotional activity up compared to pre-COVID levels or what's driving that?

So firstly, the promotional activity, as we've talked to it, is in the wider market. It's not within Michael Hill just -- that's what you were considering. Look, we don't monitor every retailer every week of the year, but we certainly have a good sense of activity in the market. We've also noted that a number of other retailers have had margin pressure in the first half results, which is often generally generated for incremental promotional activity. I think the point we're making is, a year ago, a lot of retailers did not have to use promotional levers to drive sales because there was this pent-up demand post COVID. I think it's probably returned when you say, Andrew, is more pre-pandemic normal levels, I think, would be a fair thing not to say it's worse than pre-pandemic probably returning more to sort of pre-pandemic levels of promotion. And yet at Michael Hill because we've been on this elevated brand journey and a much more intimate emotional relationship with our customers, we have not had to players hard and deep as we may have historically, I think would be probably the best way to think about it.

Our next question is from Andrew Ott from Ott Family Office.

I was going to ask about the re:new program, but you've just expanded that very nicely previously. And I'd like to congratulate you on that. That sounds like a very good development. Just a couple of questions, if I may. First of all, you talked about the productivity, and I was just wondering how do you actually manage the productivity that you're talking about?

So productivity is a measure of -- well, 2 ways retailers measure productivity, typically. In this case, we're talking about sales per square meter or, in Canada, sales per square foot, actually, it is feet and inches, for their retail space. So it's the dollars of sales effectively divided by your real estate commitment. -- some other retailers, but most retailers use sales per square meter. The other productivity metric is sales per hour. So it's a metric of your labor investment, but this is retail productivity per square meter.

And my other question is about with interest rates having risen and mortgages becoming more expensive people. Are you able to provide any sort of sense as to how that might be impacting on your customer base? And obviously, that would probably vary according to different types of customers, whether they're highly mortgage or debt free. But I'm just wondering whether you are able to offer any insights as to what you're seeing.

I might have Andrew comment on that. I'll start. That's my, Andrew, but I'll start, Andrew, by saying that I think 2 things that we've said when previously asked similar questions. One is our journey to elevate the brand has us talking to more aspirational customers than we might have been doing 4 or 5 years ago. And arguably, a customer segment or a cohort that discretionary spend might not as impacted as the lower end of the market. So I think our aspirational brand journey is allowing us to talk to customers that may still choose to trade down, but they may now trade down from a luxury brand to a premium brand, that's Michael Hill. And so we see that as an opportunity for us in tougher times. I think secondly, the notion that significant portions of what we sell. In fact, the majority of what we sell is really to what we say, mark the moments that matter in people's lives. So this is celebrating engagements, weddings, anniversaries having children, 16th, 18th, 21st birthdays, everyone's Christmas and Valentine's Day, Mother's Day, it's a very immersive category that we operate in. And while we are ultimately within the discretionary spend sector, I've always argued our category is probably less discretionary than others. If you have an intention to get married, you're still going to want to propose its engagement ring even if it's a recession. So we think those 2 things combined, certainly at its highest level have given us insulation and opportunity through COVID and the results demonstrate that, and we believe they will continue to give us some level of insurance in a more challenging retail environment. I'm not saying it guarantees sales, but it certainly gives us more protection than maybe other retailers operating in other categories and other segments. Andrew, do you want to specifically comment on the mortgage side of things.

Yes. I think -- thanks, Daniel. I think there's a couple of aspects there. I mean, quite simplistically, we look at the market in terms of mortgages. 1/3 of people may have paid off their mortgage. So lifting in interest rates is actually not a problem. It's actually an advantage for deriving interest revenue. 1/3 of the market might be rented, so they're not exposed directly to the mortgage market. And then there's the people who have a mortgage. And I guess the way we look at that is, to what extent are people rolling off their fixed term mortgages into variable -- and just remembering that so many people had their household savings boosted through COVID, whether it was a government support or not traveling and substituting one of spend for another. So I think it's easy to fall into the traffic expected that everybody is impacted by interest rate rises when is. And looking forward, our forecast has already talked that interest rates may start coming off at the end of the year, which will provide some release to households. We've also taken the opportunity to look back on how as a business, we've been around for over 40 years, how has our business traversed to previous economic downturns. And certainly, during the most recent downturn of the GFC, we saw sales held up quite well. Jury is a thing that has seemed to hold value and retain its worth. Now there was probably some margin pressure there as people perhaps discounted to try and stand out against their competitors. But I think, as Daniel alluded to, we have a confidence that while a consumer discretionary business, there's an element of returning trade and returning events at a recognized -- and hence, the importance of our loyalty program all now than -- thank you for that question, then.

And if I can just throw back at your comment that my father gave me some years ago told me that during the Great Depression here in New Zealand [indiscernible] in business.

That's very reassuring. Thank you for that.

Our next question is from [ Alexander Mist ] from Morgan.

Just on gross margins held up really well. I suppose if we look at diamond prices, they do appear to be moderating, although perhaps there's a divergence between the price and natural and lab grown happening at the moment. I just wonder what your outlook for COGS is in the months ahead and structuration of gross margin?

I mean I think... Well, -- our COGS are principally driven by 2 commodity prices because of what we sell gold and diamonds, both of which have experienced certainly in the last 12 months, I am not going to say gold has experienced unusual peak because it's been there or thereabouts for the last 3 years. It certainly peaked. At the start of COVID [indiscernible] Mr. Putin went into the Ukraine and it peaked again in early January. But it's been, let's say, an unpleasantly high price for gold for the last 3 years, and that has flowed through our business during that time. We have expanded margin through that period. So I guess we've shown our ability to be resolved on one of the raw materials that we use, principally due to diamonds then come off in price at the beginning of COVID, but then absolutely recovered and went to his I've certainly not experienced in a 4 years here at Michael Hill in the last 12 months. There was massive demand out of the U.S., which is the part of buying market. And we are hearing -- and we manage that through the last 12 months to deliver sustained margin. We were always clear in previous updates. We weren't looking to deliver margin expansion. We were going to focus on hanging on to what we had because of those input costs, and we're thrilled that we've been able to do that.

And I think the other thing I'll comment on, mark, is that we have also made a deliberate play to, if you like, track some of that margin in our corporate cost center in the last 6 months, which is why you can see the group number actually looks better than some of the segment numbers because we made that deliberate decision as there was some volatility in pricing. And then the final comment I'd make is we are hearing, it's not facts the great line of retail globally that demand in the U.S. was a little softer at Christmas and a lot of the big diamond buying organizations over there may well be sitting on a bit more inventory than they had imagined. That could, through the course of this year, translate to a dimming demand and potentially supply staying where it is, potentially some repricing back down of diamonds, so -- which we will easily accept and not necessarily pass on in our retail pricing, right? We've reestablished pricing item, we would not necessarily see a need to drop from us, particularly with the elevated brand. And so we see that potentially as some margin insulation over the next, say, 12 to 18 months.

That really speaks to my next question. This is around the ATV, which has since strongly over the past few years. And I suppose, as you say, you have rebased pricing. I -- first my question is, can you see a situation in which you take further ATV in the years to come? Or do you think the or thereabouts at these...

We definitely see ATB continuing to expand in the businesses. Absolutely, as we continue to move, if you like, up the pyramid of brand positioning, there's absolutely more opportunity to grow into.

That's really positive. And then just finally, with regard to marketplaces, it looks like you're getting good traction so far. I'm just wondering, you talked about looking for more partners. How many more pounds do you think you might want to attain? And I guess what are you looking for in a marketplace partner?

Yes. So I think the one thing we've said all along about Marketplace, our marketplace strategy, it was never about one particular one. It was about a portfolio of partners that collectively add up a few still represent a few stores of sales for the business. As we select partners, we are quite careful about their positioning in their relevant market. We certainly don't anticipate having multiple partners in any given one market. It could be that we have a couple of partners like we do in Australia. We're actually on iconic and Westfield Direct in Australia. So we do see the opportunities to have one, maybe 2 partners or country that we want to operate in. Our focus right now is we're not looking for incremental partners within Australia and New Zealand and Canada. We're happy with the arrangements we've got. Our focus now is are the new markets internationally, and we're already on in Slide 1, we're in a hall to go into a new market and introduce our brand high their platform, talking to their customers, where we don't have to then go and invest heavily in digital marketing to create brand awareness, we can sit on that platform with the traffic that's already there to generate brand awareness. So that's, I think, the next phase of this is how many countries and how many different markets could we identify marketplace partnering to deploy our brand. And that's the journey we're on. So could we have a... In 3 years from now absolutely.

Our next question is from Chris Steptoe from DMX.

I had a quick question. The other income of $4.9 million on the P&L.

I wonder what was it? I'm going to hand to Andrew for that.

Thank you. A few things in there. Chris, Daniel did just reference that we book tactical or strategic steps to capture some more of the margin centrally in the group rather than pushing it out to the individual segment. So part of that is that tactical move. We also have our warehousing and manufacturing business that sits here centrally. The on profits about profit centers, that's right in their own right. There's refining of gold and income in there that centrally- we have some FX outcomes as well that centrally and there's other general sort of revenue streams in there. Last year, there were so…

You mean, recurring...

Yes. So if we look back over time, we have other income sitting in there each year. And certainly, with the reemphasis and the refocus on manufacturing and DC in our new building, those revenue streams are recurring item.

Okay. Is there any operational EBIT? When you do your comparable EBIT, is it included in that?

Yes, there. So we have a headline corporate costs that sit here for the office with our labor and external costs and the like, and those revenue streams sit in there centrally as part of that as well. So I give you a simple example to think about. We -- when we moved into our new building, relocated our offices but also our manufacturing division, what I call referred to as our artisanal workshop into a new facility and in moving that to a new facility here, we've invested in better equipment, a large team. We've launched an apprenticeship program, and that facility is now producing a higher level of product than it was in our old building. We make a margin on that product. And in fact, that's one of the places where we've tracked more margin as we've allowed our manufacturing division to make more profit margin. And that's a group profit contribution that then flows through to the group results and the comparable EBIT. So that's just one example, but I think that helps make it easier to understand.

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