Michael Hill International Limited
Results for announcement to the market
Reporting Period 6 months to 31 December 2012
Previous Reporting Period 6 months to 31 December 2011
Revenue from ordinary activities 312,866 8.3%
Profit from ordinary activities after tax attributable to members 27,839 5.9%
Net profit for the period attributable to members 27,839 5.9%
per security per security
Interim dividend for half-year ended 31 December 2012 2.5 cents nil
Record date 25 March 2013
Dividend payment date 3 April 2013
Michael Hill International Limited's accounts attached to this report have been reviewed and are not subject
to any qualification.
Michael Hill International Limited today announced an after tax profit of $27.839m for the six months ended 31 December 2012, up 5.9% on the corresponding period last year.
Summary of Key Points (all values stated in NZD unless stated otherwise)
• Operating revenue of $312.866m up 8.3% on same period last year
• Same store sales were 2.3% up on same period last year
• EBIT of $35.970m up 3.4% on same period last year
• Net profit before tax of $34.210m up 5.8% on same period last year
• Net profit after tax of $27.839m up 5.9% on same period last year
• Revenue collected from professional care plans of $18.063m for the period
• Net debt of $20.688m at 31 December 2012
• Operating cash flow of $28.114m
• 12 new stores opened and 1 closed during the period
• Total of 263 stores open at 31 December 2012
• Interim dividend of 2.5 cents per share up 25.0%
New Zealand Retail Operations
The New Zealand retail segment revenue increased by 3.6% to $63.117m for the six months, with an operating surplus of $12.945m, an increase of 6.2% on the corresponding period last year.
Same store sales during the twelve months increased by 3.0% (9.2% last year).
The operating surplus as a percentage of revenue increased to 20.5% (20.0% last year).
One store closed in New Zealand during the period at Fashion Island (Papamoa), giving a total of 52 stores operating in New Zealand as at 31 December 2012.
Australian Retail Operations
The Australian retail segment increased its revenue by 10.6% to AU$162.712m for the six months with an operating surplus of AU$27.986m, compared to AU$24.363m for the previous corresponding period, an increase of 14.9%. Same store sales in local currency increased 3.8% for the six months (1.5% decrease last year).
The operating surplus as a percentage of revenue was 17.2% (16.6% last year).
Seven new stores were opened in Australia during the period, as follows:
• Goulburn, New South Wales
• Melbourne CBD, Victoria
• Mt Gambier, South Australia
• Parramatta, New South Wales
• Queen’s Plaza Brisbane CBD, Queensland
• Shepparton, Victoria
• Singleton, New South Wales
No stores were closed during the period, giving a total of 160 stores operating in Australia as at 31 December 2012.
Canadian Retail Operations
The Canadian retail segment increased its revenue by 21.5% for the six months to CA$29.463m and there was an operating surplus of CA$1.555m, up 31.7% on CA$1.181m for the previous corresponding period. Same stores sales in local currency increased 3.8% for the six months (5.2% last year).
Five new stores were opened during the period, as follows:
• Cambridge, Ontario
• Georgian Mall, Ontario
• Lambton Mall, Ontario
• Markville, Ontario
• St Laurent, Ontario
No stores were closed during the period, giving a total of 42 stores operating in Canada as at 31 December 2012.
US Retail Operations
The US retail segment increased its revenue by 4.2% for the six months to US$5.493m for the six months and there was an operating loss of US$1.266m for the same period (US$1.431m loss last year). Same stores sales in local currency increased 4.2% for the six months.
The board is satisfied with the progress of the US operation over the past six months but acknowledges there is still a long way to go before the business is proven up in the US market. Focus remains on improving both the top line sales and the margins in order to grow the bottom line of the nine stores over the coming twelve months.
There were nine stores open as at 31 December 2012.
Professional Care Plan (PCP)
PCP sales for the half year were $18.063m. An amount of $5.060m has been included as revenue in the segment figures stated above from the current and prior periods.
PCP sales are carried on the balance sheet as deferred revenue and then brought to revenue in the P&L over the life of the plans (3 year and lifetime) in proportion to the expected cost of meeting commitments under the PCP’s. It is assumed that the liability for accounting purposes of the life time plans will expire within 10 years from date of sale. The estimate of expected commitments under the relevant PCP is based on a combination of our own experience and overseas research. These estimates will be updated as the company gathers actual data over the coming years. The costs of meeting the liability under the PCP programs are brought to account in the period incurred.
The following table summarises the revenue treatment of the PCP business.
The following figures are in NZ Dollars Last Year This Year
PCP sales collected for the half year $14,411,408 $18,063,228
PCP revenue brought to income for the half year $1,466,312 $5,059,516
Deferred revenue held on balance sheet $24,337,672 $44,468,278
Outstanding Tax Issues from Group Restructuring in 2008
It will be recalled that the Group currently has two unresolved tax matters relating to the way the Group valued and financed the sale of intellectual property from one of our New Zealand companies to one of our Australian companies.
In New Zealand, the Inland Revenue (IR) has questioned the manner in which the transaction was financed. In Australia, the Australian Taxation Office (ATO) has queried the value at which the intellectual property was transferred. The Group does not agree with the positions advanced by either the IR or ATO and believes the tax treatment and values it has adopted are correct. Discussions continue with both the IR and ATO within their dispute process frameworks, but it remains unclear when final resolution will be achieved in respect of either matter.
In New Zealand, the amount in dispute is $24,636,000, being the tax effect of deductions claimed by the New Zealand Group from the date of the sale through to 30 June 2012. The tax effect of deductions for the December 2012 half year is $3,469,000. In the event any tax liability was payable, the Group would also incur an interest expense.
In respect of Australia, the value at which the intellectual property was transferred was originally determined by reference to an independent valuation carried out by an internationally recognised firm and a deferred tax asset was raised in 2009 based on that valuation. The deferred tax asset balance at 31 December 2012 was $41,591,000 as a result of depreciation of components of the intellectual property and a previously announced adjustment in value. The ATO has signalled that it has issues with aspects of that valuation which, if correct, would reduce the amount of depreciation able to be deducted by the Group. As noted, the Group does not accept the ATO's position and believes the ATO’s views are based on a number of factual, legal and technical valuation errors.
Both matters are capable of being resolved by agreement, but if the Group is unable to find common ground with either the IR or ATO then further formal legal processes may be needed to achieve resolution. As is the case with almost all legal processes there is inherent uncertainty as to the outcome and the Group does not believe that the outcome of either process can be predicted or the range of possible implications quantified. The board does not consider that either of the above ongoing tax matters require a provision in the Group's financial statements for the six months ended 31 December 2012.
The Directors are pleased to announce a final dividend of 2.5� per share (2011 – 2.0�), with no imputation credits attached for New Zealand shareholders and full franking credits for Australian shareholders. The dividend will be paid on Wednesday, 3 April 2013 with the record date being Monday, 25 March 2013.
Due to the internal restructuring of the Group in December 2008, the company is unlikely to be in a position to impute dividends for New Zealand shareholders for some years, however this will depend on the performance of the segment in the coming years and also on the level of dividend to be paid in future periods.
Whilst the 2012-13 interim dividend is fully franked to Australian resident shareholders, it is possible that future dividends will only be partially franked due to the likelihood of future dividend payout exceeding the level of tax liability in Australia. However, this position can change over time depending on a number of variables and the company will keep the market informed each time a dividend is declared.
Cash Flows / Balance Sheets
The Group has reported net operating cash flows of $28.114m for the six months, compared to $46.800m for the previous year.
The surplus from operations is a result of:
• Profit excluding non-cash items $34.935m
• Increase in trade and other receivables ($10.324)m
• Increase in inventory levels ($28.035)m
• Increase in trade and other payables $20.107m
• Increase in deferred revenues from professional care plan $12.902m
• Other miscellaneous items ($1.471)m
Net cash inflow from operations surplus for the half year $28.114m
The Group’s balance sheet continues to be sound with an equity ratio of 55.9% as at 31 December 2012 (56.2% in 2011) and a working capital ratio of 2.6:1 (2.8:1 in 2011).
Trading for the six months was a story of two quarters with a strong first quarter being followed by a slowdown in the second quarter. All countries struggled to make gains on the previous year’s sales numbers during the key December quarter however “same store” growth was achieved in all markets during the six months which is pleasing. As mentioned in our August 2012 Chairman’s Statement, additional resources were placed into our key Australian market in mid-2012 and this has started to have a positive impact on sales in this key market. The directors remain satisfied with the overall performance of the Group and they remain confident in the continued growth and profitability of the Group.
Sir Michael Hill 15/02/2013
Internet Home Page - www.michaelhill.com
All inquiries should be made to Mike Parsell CEO phone +61 403 246655
Michael Hill International Limited