Operating Results - Group

Group revenue improved 16% to $182 million, with EBIT from the two operating divisions increasing 13.6% to $17.798 million. This result was pleasing, considering the changes to the group management structures in both countries and the many challenges undertaken by the group over the financial year. These included the opening of three new Superstores in New Zealand, the construction of a new Australian head office facility in Brisbane and the extensive compliance issues involved in the introduction of GST in Australia.

The Group's net profit after tax increased 13% to $9.94 million, with net operating cashflow up 411% from $2.7 million to $14.2 million.

Operating Results - Australia (in NZ$)

Australia had a successful year, with revenue improving 18.5% from $100.3 million to $118.8 million. EBIT increased 23% from $8.663 million to $10.678 million. As a percentage of revenue, EBIT increased for the fourth consecutive year from 8.6% last year to 9% this year. Same store sales increased by 5.4%, with same store EBIT lifting 7.9% for the year. Considering the Australian Company opened a net total of two stores, this result is very pleasing and reflects the Group's commitment to lifting the performance of the existing store base.

The EBIT return on average assets employed improved from 21% to 21.9%.

Operating Results - New Zealand

The New Zealand Company had a difficult year. Revenue improved 11.5% to $63.1 million, with EBIT up 1.7% on the previous period to $7.120 million. Overall sales did not meet expectation in the all-important month of November due to lower consumer confidence in the lead up to the general election. January sales were also disappointing.

Same store sales increased 1.5% for the full year.

The New Zealand Company also incurred additional one off costs during the year with the transition period of Kevin Phillips, the new General Manager, the establishment of the new Superstore model and the opening of the three new Superstores throughout the year.

The EBIT return on average assets employed reduced from 27.3% to 24.5%

Store Openings

Four new stores were opened during the financial year in Australia. These were at Macarthur Square, which was opened in Sydney on 30 September 1999; Dubbo, NSW, on 6 December 1999; Warriewood, Sydney, on 2 December 1999, and Glen Waveley, Melbourne, on 30 October 1999.

Two stores were closed during the year - Capalaba, Brisbane and Carlingford, Sydney. This brought the total number of stores in Australia to 66 as at 30th June 2000. Locating stores that meet our strict investment criteria this financial year in Australia was challenging. However, we are confident of the opportunities that lie ahead in the coming financial year and beyond.

In New Zealand, the Company opened three new Superstores in Auckland. Albany was opened in July 1999, Mt. Wellington in December 1999 and in April 2000 a conventional store in Westgate Centre in West Auckland was converted to a Superstore. The results from these Superstores have been encouraging to date, with additional contributions expected in the year ending 30 June 2001, when all Superstores will have contributed for a full year.

The total number of stores operating in New Zealand including Superstores increased from 38 to 40 at June 30.

Store Refurbishments

Investing in the refurbishment of our existing store base is a significant contributor to the overall brand image, and ensures our existing customers experience the very latest environment in jewellery retailing.

This financial year, eleven stores in Australia were refurbished, including full refits in Penrith, Castle Towers, Macquarie, Roselands and Warringah Mall in Sydney. In Canberra, the Canberra Centre was fully refurbished, as was Indooroopilly, Ipswich, Chermside, Cavill Avenue and Toombul in Queensland. In New Zealand, our Nelson store was relocated to an improved site and we completed minor refurbishments on a number of stores.

Most of these stores which had major refits, were closed for two weeks and although this was detrimental to trading in the short term, experience has shown the long term effect is very beneficial.

Michael Hill Manufacturing

The manufacturing operations based in Whangarei and Brisbane continue to be major contributors to the Company's success. This is due to the vertical integration we enjoy in the diamond ring segment of our business. This not only allows us to lower costs, but enables us to respond to the latest trends, control our quality and to introduce new designs, which gives us a tremendous competitive advantage.

During the later part of the financial year, a major upgrade of our facility in New Zealand was undertaken to position the division at the leading edge of jewellery design and manufacturing in the coming years. A highly qualified team of twenty-six are employed in this operation.

In Australia, much of the year was spent designing a completely new facility which will be incorporated in our new building in Brisbane. This factory will allow for future expansion and incorporate many new features not previously available to the Group.

At this stage, I would also like to acknowledge and congratulate Meg Biack, Ben Flood and Grant Caldwell for winning the Australian Gemmological 2000 Design Awards in June, with a stunning diamond wrap necklace comprised of 18ct gold movable tubes threaded onto black silicon with Cognac diamonds (total weight 5.48ct) on white gold and white diamonds (total weight 1.84ct) on yellow gold. This necklace, valued at $19,750 is the first major design award won by our manufacturing division and was created by our design team who are responsible for designing individual custom made pieces for many of our customers.

Staff Development

We have continued to place a major emphasis on staff development this year across the Group. With our first store opening shortly in Perth, Western Australia, we will soon be at the geographical limits of retailing in Australia and New Zealand. The task of successfully recruiting training and developing our team as we grow becomes more challenging every year. This is where our highly developed Michael Hill Professional Selling and Management Systems assist us greatly and provide the foundation of our ongoing success. A number of new initiatives were introduced last year including a new diamond grading course in New Zealand which resulted in specialist knowledge in diamonds being disseminated throughout the stores. This has resulted in more diamond ring sales and more satisfied customers.

In Australia, the Company has introduced new recruitment systems to assist in the selection process of new employees as well as upgrades to our management training programmes. A new Trainer was also employed during the year who is completely dedicated to the development of our future Store Management.

In New Zealand, we operate a number of model stores where much of our training is carried out. These stores have been chosen for their high operating standards, and are a major factor in attaining consistent standards of presentation and service throughout the Company.

New Australian Headquarters

Over the past financial year a new head office building incorporating administration, training facilities, merchandising, manufacturing and a warehouse was negotiated and constructed in Murarrie, Brisbane. The premises are located on just over one acre of land, and comprise a single floor building of 2,200 square metres. The site also allows for future expansion of a further 1,000 sq. metres and incorporates car parking for over 100 cars.

The building was occupied in August 2000 and completed on time and on budget. The building and fitout is purpose built for our use and we envisage many operational benefits through the improved layout and design.

The Future

The future of the Michael Hill Group both in Australia and New Zealand continues to look exciting over the coming years.

The last financial year in New Zealand was a challenging one for the Company. However, taking into account all the circumstances, the Company still achieved a solid result. This coming year should see the results of the substantial investments made last year in Superstores flowing through to the bottom line. As the Superstores prove that a sufficient return on capital invested is achievable, other opportunities in New Zealand will be carefully evaluated. We will target those areas where we believe we can gain market share or grow the jewellery spend per capita.

In Australia, despite the Company's success, we have only six percent of the $1.5 billion jewellery industry. Our focus will be to continue our store expansion programme at a manageable rate to ensure the best possible return on our investment until we reach our target of 120 stores.

This year will see our entry into Perth in Western Australia, where we can expect to open ten stores. Six to eight new stores are planned for the current financial year in Australia. This will include the opening of our first Australian Superstore in Dandenong Plaza in Melbourne in November. This store will be located in a large regional shopping centre. The Superstore format has been refined and upgraded for a shopping centre application, and if successful, will provide the Group with an additional growth opportunity to our expansion strategy.

As always, the growth and future success of Michael Hill Jeweller is highly dependent on the ongoing commitment and enthusiasm of our people. We have a very professional team of people across the Group and I would like to take this opportunity to thank and acknowledge each and every member for their support, effort and commitment they have put into achieving another record result for 1999/2000.

M.R. Parsell
Chief Executive Officer