OVERVIEW of the financial year We are very pleased to be able to report a record profit this year. The result is a fantastic achievement and I thank our entire team, who have contributed. The highlights of the year include a very strong performance from our Australian retail division, and our Canadian operation reaching a level of performance which gives us confidence to push forward with the opening of another four stores in the current financial year. This year we opened nine new stores across the group and refurbished a further 14 stores at a total cost of NZ$2,301,000. Our focus, as always, was to increase the performance of our existing stores. This strategy has paid off with strong improvements in earnings from our existing store base and all new stores performing to, or exceeding expectations.

Behind the scenes, a great deal of change has occurred as we continue to reorganise the group in preparation for further expansion overseas.

With the company clearly focused on our vision for international growth some very difficult decisions were made during the year. In order to provide the most effective support structure to assist the company in achieving our international growth plans, we consolidated our Australasian support teams together in our Brisbane office. This has resulted in the downsizing of our office in Whangarei and 28 employees were made redundant. All those affected were offered alternative positions in other areas of the business or redundancy packages including career transition assistance, and external training programs. A provision of $705,000 before tax was made for this and other associated costs in our result.

This move will have a very positive effect by allowing us to share our vision more effectively within our support teams and by ensuring all our energy is focused on the future and on achieving our goals.

We made very good progress during the year in the logistics area of the business. The company is now able to service all its Australasian stores from one central distribution centre in Brisbane. This will mean the company will be able to reduce the amount of inventory previously held in two separate warehouses and better manage out of range stocks and the replenishment of fast selling lines. This was a complicated model to establish and involved substantial systems development. However we are confident that the long term benefits will more than compensate for the effort involved in establishing these systems.

We also conducted a complete review of our advertising during the year and our brand communication was updated. This included new imagery, music, and logo device. This was done to improve the recall of our advertising and to further strengthen our brand equity. Our aim over time is to continue to lift our brand awareness which in turn will help us to improve sales,and improve margins by building a stronger emotional bond with our customers.

Overall a 47% lift in operating profit,and a 28% return on shareholders funds is a solid result and reflects many of the initiatives put in place by the team over the past two years.

AUSTRALIA performs beyond expectations

Our Australian operation has enjoyed an exceptional year. In Australian dollars, sales increased 19.2% to $147,141,000 and same store sales increased by 9.8%. Earnings before interest and tax (EBIT) in Australian dollars improved 45% to A$15,980,000 and reached 10.9 % of sales (2003-8.9%). The result reflected a combination of several strategies that were implemented during the year and buoyant trading conditions in the Australian market. Last year we reported on the additional costs of adjusting our sales professionals bonus schemes. This impacted negatively on the 2002/03 result but was implemented to reward top performers, to encourage higher levels of productivity and to help reduce staff turnover. This was identified as being strategically important to our future performance, because the retention of high performing staff underpins our ability to continue to deliver same store sales growth. I am pleased to report staff turnover in Australia reduced significantly over the year and we attribute much of the same store sales growth to this strategy.

• LISMORE in Northern New South Wales opened in July 2003.
• NORTH LAKES in Brisbane opened in August 2003.
• KARRINYUP in Perth opened October 2003.
• WHITFORD CITY in Perth opened in October 2003.
• WARWICK GROVE in Perth opened in November 2003.
• BROADMEADOWS in Melbourne opened in November 2003.
• HOBART CBD in Tasmania opened in December 2003.
• BEENLEIGH MARKET PLACE in Brisbane opened in April 2004.
• GEELONG CENTRAL in Geelong opened in May 2004.

In total there were 93 stores open in Australia as at 30 June, 2004.

Even with our expansion,we have still to reach full scales of economy and market penetration in Victoria, Western Australia, and Tasmania. As these markets grow we will be able to increase our levels of advertising and therefore increase our brand awareness, which will result in increased sales. We have still to enter the South Australian market and feel comfortable that at least another 50 stores can be opened across the country in the next five years. This provides the group with solid growth prospects from the Australian operation in the years to come.

NEW ZEALAND bounces back

New Zealand traded well through a period of substantial change. After a very difficult first quarter, where sales finished well down on the previous period, the company bounced back and finished the year with a positive result. Sales for the year increased 3.4% to $86,711,000 and EBIT improved 3.4% to $11,009,000. No new stores were added during the year, as our focus was on improving the existing store business. We made a number of senior management changes during the year and this combined with the streamlining of the support office has meant the retail operation has had to cope with a significant amount of change. Going forward, we have renewed our focus on the basics within our stores and this year we are concentrating all efforts on our people through improved training and development, better utilisation of our sales management systems and improving customer service to increase same store sales and productivity levels.

While increasing same store sales is our priority in New Zealand, there is an opportunity to open another two stores this financial year and these sites are currently under investigation.

There were 46 stores open as at 30 June 2004.

CANADA lifts sales

Revenue in our four stores continued to grow throughout the year. In Canadian dollars sales increased 166% to C$4,922,400, up from $1,846,400 last year. This represents an average sales volume of $1,230,600.00 per store.

The EBIT loss in Canadian dollars improved 20% from a loss of C$1,442,000 in 2002/03 to a loss of C$1,147,000 in 2003/04. This loss is reasonable when you consider the difficulty of establishing a business in the North American market. Canada will provide us with substantial growth prospects in the future and we feel we are making good progress to date.

The sales volume, margins, wage expenditure, and other important key performance indicators being achieved this year indicate our store model will be successful in the Canadian market. We will gain momentum with further store expansion and increased brand awareness as scales of economy in advertising and buying are improved. This year we invested one million dollars in advertising to help establish the brand and to build a higher level of awareness. As we grow this level of advertising expenditure will begin to amortise across a wider store base.

With this in mind we have decided to open a further four stores in Canada. Two of these are due to open in Vancouver in late October. A further two are expected to open next calendar year.

We believe that Canada has an exciting future. As we open more stores,we will monitor their progress carefully. At current levels of performance we believe it will take approximately twelve stores to break even.

International Financial Reporting Standards

Michael Hill International will report in accordance with the new International Financial Reporting Standards (IFRS) for the 05/06 financial year with the opening balance sheet as at 1 July 2005 and the comparatives for the 04/05 year adjusted to reflect IFRS.

The company is managing the transition to IFRS as follows :

• Key accounting staff are attending professional body education seminars.
  
  
• Professional advice has been sought and will continue to be sought from our external advisors up to the time of conversion.

Our priorities

Our main priorities for the next financial year are as follows.

• To open another fifteen new stores across all markets.
  
  
• To continue to grow the Canadian business towards a breakeven position by June 2006.
  
  
• To achieve further same store sales and EBIT growth through a strong focus on our customers, our people, and our brand.
  
  
• To finalise the reorganisation of our supply chain and merchandising systems to support international growth.
  
  
• To deliver an average return on shareholders funds in excess of 25%.

Thanks to an amazing team

Finally, I would again like to acknowledge our entire team. This year they have delivered an exceptional result which is a credit to each and every one of them. Congratulations and thank you.

M.R. Parsell
Chief Executive Officer