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Edited Transcript of MHJ.AX earnings conference call or presentation 25-Feb-20 11:30pm GMT

Half Year 2020 Michael Hill International Ltd Earnings Call

Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Michael Hill International Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Lowe

Michael Hill International Limited - CFO & Company Secretary

* Daniel Bracken

Michael Hill International Limited - CEO

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Conference Call Participants

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* Andrew Steele

Jarden Limited, Research Division - VP of Equity Research

* Guy Edward Harding Hooper

Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities

* Sam Teeger

Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Michael Hill Analyst and Investor Briefing for the First Half 2020 Results. (Operator Instructions).

I'd now like to hand the conference over to your speaker today, CEO, Daniel Bracken. Thank you. Please go ahead.

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Daniel Bracken, Michael Hill International Limited - CEO [2]

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Good morning, and thank you for joining us for the Michael Hill International Limited FY '20 Half Year Results Call. It's my pleasure to be speaking to you today. I am here this morning with Chief Financial Officer, Andrew Lowe, and together, as set out on Slide 3, we will be taking you through a review of the results for the first half of FY '20. We will also provide you with an update on our key strategies and initiatives. As usual, we will end the session with Q&A.

Turning to Slide 4. Overall, I'm pleased with our first half results, a 6.3% increase in same-store sales and even higher underlying EBIT growth at 6.9%, delivering a number of milestones as we adapt and transform in a changing and challenging retail market. Given the current retail conditions, we are pleased to deliver positive same-store sales growth across all markets for 2 consecutive quarters, along with growth in group EBIT. The results reflects the momentum we have built and is an early validation of both the strategy and the new management team. We remain convinced that the best way to insulate the business from external factors is a vigilant focus on retail fundamentals, alignment of retail execution, product newness and an unwavering focus on CODB.

The company is committed to a disciplined cost management approach, along with an increased focus on margin recovery. The initial cost-out program delivered in FY '19 of $5 million is annualizing across FY '20. The second tranche of cost out associated with repairs, credit arrangements and supply chain efficiencies are also starting to be realized in FY '20. Further opportunities for FY '21 are now being pursued. We are creating a cost-conscious culture, which is being embraced at all levels of the company.

As noted, trading conditions continue to be challenging. Many retailers are being hindered by unexpected and uncontrollable environmental factors, such as the devastating Australian bushfires and now coronavirus. So far, the effect on our business has been limited, and we have managed to mitigate the impact. At this stage, our supply chain has not been materially affected and nor do we think it will be. However, for these uncontrollable environmental factors, it is difficult to predict their duration, how widespread they will become, and their impact on the broader economy.

Furthermore, we are still experiencing a highly competitive jewelry segment, particularly in Australia, as our competitors continue with deep discounting strategies in order to achieve sales. Given the backdrop of challenging trading conditions in retail, and in particular, jewelry, we feel proud of the results that we have achieved and they are a credit to the initiatives we have put in place to improve the core fundamentals of our business.

People are key to any business, but even more so in retail. We are very proud of the invigorated senior leadership team we have assembled at Michael Hill. We now have tremendous depth and considerable experience across all functions of the business. There is a strong sense of comradery, alignment and passion that is essential to deliver the right outcomes.

In the first half of the financial year, our brand celebrated 40 years of success, as we reaffirmed its deep and rich heritage centered around innovation, quality and value. The company rolled out a campaign, taking our customer on the journey of the brand's evolution over the 4 decades. It reaffirmed the incredible passion, creativity and enthusiasm of the founding family that the company has been built on. This campaign really resonated with our customers, but it has also reminded our team of the exciting journey over the last 40 years as a disruptor to the jewelry segment. As we enter a new decade for the brand, we will deliver a relevant, modernized and differentiated customer-led approach to drive greater customer advocacy, engagement and conversion.

As previously mentioned, we believe that focusing on business and retail fundamentals is the key to navigating through the current changing retail landscape. Along with the successful digital launch of our loyalty program, Brilliance, we have been actively rolling out a number of productivity initiatives and ramping up our online business, and have taken a methodical and well-considered approach to exiting underperforming stores.

During the half, we also heightened our focus on retail execution, our new incentive scheme trial, early learnings from our Sparkle customer feedback program and a heightened focus on product and visual merchandising execution in our stores will provide confidence for the future. In order to ensure that the company stays relevant in a changing retail environment, we continue to refine our strategy as we reflect on our position in the market, our brand proposition and our customer demographic.

As we implement initiatives outlined in previous updates, we will adjust and refine the execution. The changes we have made to the business in the first half underpin today's results and demonstrate that Michael Hill is taking market share in a challenged category. These initiatives are becoming ingrained in our way of doing business as we adapt to the changing retail environment. The company has finished the half in a strong financial position and engaged an invigorated senior team ready to continue the implementation of the key strategies. And embedded cost management discipline and improved retail fundamentals prepared to take all the challenges that face us in the remainder of the year.

I will now pass to Andrew to provide more color on the first half results. And after that, I will return to provide an update on key strategic focuses for the business.

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [3]

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Thank you, Daniel. Turning now to Slide 5, FY '20 half 1 financial snapshot. As mentioned by Daniel, we are pleased with our half year results and are encouraged by 2 consecutive quarters of positive same-store sales growth across all segments. Quarter 1 saw group same-store sales of 10.9%, and quarter 2 group same-store sales of 3.7%, as we cycled a much stronger performance from last year. We today announced the group reported a net profit after tax of $21.4 million for the half compared to a restated net profit after tax of $17.9 million for FY '19, half 1 with group revenue increasing by 4.4% to $329.5 million.

In addition, underlying EBIT grew by 6.9% to $31.6 million, driven by an increase in revenue and a reduction in costs. Disappointingly, EBIT for each retail segment was down due to an erosion of gross margin. However, the now entrenched stronger fiscal discipline underpinning the way we do business is offsetting this margin erosion. The cost-out program undertaken over the last year is realizing benefits for FY '20. I will cover financial results for the individual segments later in the presentation, but the other key points to call out include: the Board has declared an interim dividend of AUD 0.015 per share, in line with the most recent half, though, down on last year's interim dividend of AUD 0.025 per share. This is a reflection of the continuing cash flow commitments for the previously announced wage remediation. The dividend will be unfranked and fully imputed with conduit foreign income. Due to our active inventory management program, the company has succeeded in reducing inventory levels to $200 million at half year-end, down from $220 million at the close of FY '19 half 1.

The reduction in inventory levels, along with the renegotiated vendor payment terms and cost-out initiatives led to an improved working capital position and a net debt position of $20.7 million at close of FY '19 H1, moving to a net cash position of $0.4 million at half year-end. It should be noted there are 2 accounting changes influencing our comparative figures. Firstly, the prior year comparable figures include an extra 2 days of trading due to our initial adoption of a 52-week retail calendar for reporting purposes, except the same-store and also comparators, which use the same trading day basis. Secondly, AASB 16 Leases was adopted on 1 July 2019 using a modified retrospective method, and therefore, the comparative figures have not been restated for AASB 16. Please see Appendix A for more detail on the impact of the leasing standard.

As a result of targeted online marketing and promotions, the company increased sales on the Michael Hill websites, excluding the Emma & Roe products, by 44.3% to $9.7 million for the half compared to $6.7 million in FY '19 half 1. These online sales now represent 3% of our total sales. The momentum in the sales of our branded collections has been maintained with branded collections now representing 35.4% of total product sales compared to 20% in FY '19 half 1.

The group gross margin declined to 61.7% from 64.2%, attributable to rising gold prices and foreign exchange headwinds as the company strives for growth in sales. During the half year, the company opened 1 Michael Hill store in Canada and closed 3 underperforming Michael Hill stores in Australia, as part of our decisive store portfolio management. Pleasingly, the company achieved overall same-store sales growth of 6.3%, with each market, delivering an increase in same-store sales, 3.3% for Australia, 6.6% for New Zealand and 5.1% for Canada. The company is in a strong financial position at the end of the half, with disciplined cost management, new net debt, lower inventory levels and improving stock turn.

Moving now to our group results on Slide 7. Pleasingly, group revenue increased by 4.4% to $329.5 million, with same-store sales growth of 6.3%. As previously stated, underlying EBIT, pre-AASB 16 Leases, was up by 6.9% to $31.6 million. Statutory EBIT was also up to $35.3 million for the half year compared to a restated $26.2 million for FY '19 half 1. Since the end of FY '19 half 1, there's been a net decrease of 7 stores, resulting in 304 stores operating across the 3 segments at half year-end, including 1 remaining Emma & Roe store. As previously stated, the Board has decided to declare an interim dividend of $0.015 per share.

Moving now on to our segment results and first off, looking at the Australian market. Australian retail revenue declined slightly by 0.7% for the half. This result can be partly attributed to the closure of a number of underperforming stores as we finished with 165 stores trading at half year-end, compared to 173 stores at the close of FY '19 half 1. It is anticipated there will be further targeted store closures occurring in the coming year as part of the group's active management of its store portfolio. Despite a slight decline in total Australian revenues, pleasingly, same-store sales increased by 3.3%. Gross margin remains compressed at 59.9%, down from 63%, due to the competitive retail environment as we continue to strive for market share and deal with foreign currency and gold headwinds.

We expect the Australian retail environment will continue to be challenging throughout the remainder of FY '20 as we see competitors continuing to aggressively discount as many rationalize their store portfolios. Recent data suggests that we are taking market share as we focus on differentiating our products from our competitors, improving retail in-store execution and delivering product newness with improved margins.

Turning now to New Zealand. In New Zealand, revenue increased by 6.4% to $69.9 million, with same-store sales up 6.6% for the half. New Zealand did experience the largest decline in gross margin of 390 basis points to 58.8% for the half year. However, it is still our best-performing segment with the highest EBIT as a percent of revenue. EBIT for the half was down 4% to $14.5 million. New Zealand has undertaken some cost efficiency initiatives, which we expect to see the benefit of throughout the balance of FY '20 and beyond, with a view to bolstering EBIT.

Turning now to Canada. In Canada, the business saw revenue growth of 7.5% to $79.9 million, with same-store sales up by 5.1%. Canada has the lowest gross margin of the 3 segments of 58.2% and its EBIT was down by 7.5% to $7.9 million. However, Canada remains a core profit growth opportunity with early signs of our key productivity initiatives gaining traction as annualized sales per square meter increased by 7.7%. One store was opened during the half resulting in 87 stores trading at the close of the half.

I will now hand back to Daniel to provide an update on the key initiatives.

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Daniel Bracken, Michael Hill International Limited - CEO [4]

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Thank you, Andrew, for your commentary on the half year financial results. As mentioned earlier, across slides 11 to 13, I'm going to provide you with a strategic update. Andrew and I have already touched on some key milestones that have been achieved during the half. Management remain focused on these strategic initiatives as we navigate through a changing and dynamic retail environment. They are the drivers of Michael Hill's improved performance as we continue to strengthen the fundamentals of our business.

Firstly, an unwavering focus on costs. The second tranche of $5 million savings associated with repairs, credit arrangements and supply chain efficiencies are starting to be realized in FY '20 and will fully annualize across FY '21. Furthermore, we are pursuing additional noncustomer-facing CODB reductions. The management team is committed to maintaining a disciplined fiscal approach to all investments across the business. The second initiative, our new retail operating model, delivering a coherent and aligned merchandise, marketing and retail experience is a key fundamental to securing the future success of Michael Hill.

This, as you know, is a topic that I'm extremely passionate about, and I'm pleased that a more sophisticated and customer-focused retail operating model is becoming an integral part of the business. In the first half, this was demonstrated by the successful rollout of the Michael Hill's 40th birthday campaign, which saw significant customer engagement in the brand and converted to positive sales and margin.

The way we approach the Black Friday and Christmas campaigns, were another great example of our new model being brought to life. We anticipated the change in consumer behavior and aligned our messaging and activities accordingly.

As our new model evolves, we will continue to take learnings forward into FY '21 and, in turn, improve these important sales events, allowing us to shift to a more contemporary customer-led retail business. The next initiative, retail fundamentals or retail 101, as I like to call it, still presents significant opportunity for the business, an intense focus on retail execution and visual merchandising, enhancing our brand, inventory management and cost control. We have previously talked about our new and exciting incentive scheme trial, and I'm happy to report that it continues to provide confidence to management. The cultural and behavioral changes as well as the margin focus it brings provide us with genuine optimism. We are a sales-led business and harnessing this for improved results is a key focus for the retail leadership team.

We plan to roll out the new scheme to all stores across the second half in a measured and disciplined manner. Our Sparkle customer feedback program is now embedding itself in the business, and we are gaining insights we've never had before. Couple this with our new loyalty program, and we become a very data-rich business that really understands its customer. Recovering market share and maintaining sales momentum have been a priority, and the results have reflected this. Over the coming months, we will gradually increase our focus on margin to deliver the right balance across sales, costs and margin recovery.

Turning to Slide 12 and moving to our fourth update. Product evolution is fundamental for any retail business. Ultimately, what we sell is why we exist. We reaffirm our intention for 50% of sales to come from unique branded collections that are proprietary to Michael Hill, another key differentiator for our brand and a mechanism to mitigate the price gain with our competitors. The continual introduction of product newness, as part of our new merchandise rhythm, is also a key pillar of our product strategy. Newness is the ultimate antidote for discounting.

Our laboratory-grown diamonds continue to show promise from both the sales and a margin perspective, and we will be ramping up the store rollout over the coming 6 to 12 months. And finally, on product, we have made further investments in capability that will deliver upside across sourcing, inventory optimization, margin and range.

Moving on to Canadian productivity. As previously outlined by Andrew, Canada remains a significant opportunity from a productivity perspective. Initiatives have been implemented in the first half, resulting in improved sales per square meter. We will continue to focus on these opportunities in the second half and beyond. And of course, we continue to invest in the team capability and skills to support this initiative. We need to embrace a mindset of digital-first. We have made really positive changes to our online business in the last few weeks with further changes literally going live yesterday. We are focused on improving the customer experience, checkout and navigation, and we are getting positive early feedback in both reviews and sales.

We have also started to range additional product extensions exclusively to this channel, and this has proven successful. As we move forward through the second half, our appetite for omnichannel features becomes available as we deploy our new integrated ERP platform. Click and collect, ship from store, click and reserve, all become opportunities for us across FY '21. The initial launch of loyalty was focused in digital, while we tested customer engagement, systems and proposition. Early results have been very pleasing as we now ramp up the exciting proposition of launching across all of our physical stores in the second half. Particularly pleasing was the penetration of new customers to Michael Hill, with greater than 50% of the early sign-ups being new customers to the brand. Brilliance now provides a key growth platform for Michael Hill.

And finally, the Michael Hill brand. When I joined Michael Hill at the end of 2018, the company had just commenced the journey of moving from a traditional retailer to a relevant, modern, differentiated jewelry brand. We are progressing along this journey, while still leveraging our core Michael Hill brand proposition of a deep and rich heritage centered around innovation, quality and value. As we enter a new decade for the brand, we will deliver a modernized approach to drive greater customer advocacy, engagement and conversion.

This brings us to the end of the strategic update. Just before we move on to Q&A, I would like to say that even though the retail segment is currently facing many external challenges, we believe, we have put in place the right strategies and initiatives and are extremely focused on cost reduction, improving productivity across all retail segments, exploring growth opportunities and continually strengthening our brand proposition.

Moving forward, we will be delivering a more balanced approach between sales momentum and margin realization. Along with the right initiatives, we have built a strong, determined and capable management team, who are enthusiastically delivering these strategies in a measured manner. I could not be prouder of the comradery, alignment and passion that can be seen in so many teams across the business.

That brings us to the end of our presentation. I would like to thank you, again, for your continued interest in Michael Hill. And we are now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Guy Hooper from Forsyth Barr.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [2]

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So as first question from me, just on the incentive scheme that you've launched across a few stores, can you give us a sense on, I suppose, what the performance difference is between those stores you've launched it and those without?

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Daniel Bracken, Michael Hill International Limited - CEO [3]

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I mean, I'll let Andrew comment, Guy, if I get this wrong, but our data basically told us we saw about 100 basis points improvement in gross margin in the stores with the new incentive scheme versus the stores that didn't have it. So is that accurate?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [4]

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That's right. That's right, Daniel.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [5]

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I suppose just along a similar vein, with the loyalty program, have there been any early indications around customer spend? And if those that have signed up spend on average more than those who don't or haven't?

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Daniel Bracken, Michael Hill International Limited - CEO [6]

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Well, the measure that we -- the 2 measures we've been tracking is when you sign up, you get a $20 voucher. And on average, we're getting between an 8 and 10 multiple when that is getting redeemed in the first transaction. So we've been really pleased with our industry benchmarks, sit more around 4 or 5. So we're really, really pleased to see that. And that's pretty consistent across all 3 countries. The other thing that we're tracking is the average transaction value of a member versus a nonmember. And again, we're seeing very pleasing results.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [7]

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All right. And look, I suppose, just lastly from me on gross margin. Obviously, heavy discounting in Australia, but I suppose in New Zealand and Canada, probably a little bit weaker-than-expected as well. Is it similar drivers behind those gross margins coming down? And I guess, as a follow-on, can you give us a sense of what the impact was on gross margin just from FX and gold headwinds?

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Daniel Bracken, Michael Hill International Limited - CEO [8]

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So Andrew, do you want to comment on FX and gold? Because we do have a pretty accurate number on that, which does account for, Guy, the majority of our margin erosion.

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [9]

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Yes, absolutely. So gold has been at all-time highs and again this week. A combination of gold and FX guide circa 250 to 300 basis point impact across the group.

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Daniel Bracken, Michael Hill International Limited - CEO [10]

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And then in terms of -- so it's flat for majority, Guy. In terms of the relative performance of the 3 segments, I guess, I'd comment, both Canada and New Zealand had our strongest sales growth. And you could argue there is a intangible link between the sales growth and the softer margin. Secondly, I'd say that back in Q1 FY '19, if you remember where we had a bit of a misfire on our strategy to reduce discounting, New Zealand was the market that did actually cope best in that period. And therefore, it is cycling a higher margin as a result of that. And then I guess the third thing I'd say specifically about New Zealand, we do have a bit of a business within a business within New Zealand. It is the one market where we have got some extraordinary customers that spend extraordinary large sums of money on individual pieces that we develop for them. These are transactions north of $50,000, and on those items, they do generally incur a tighter margin. So I think it's those 3 things added together, particularly for the New Zealand result.

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Operator [11]

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Our next question comes from Andrew Steele from Jarden.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [12]

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I guess, the first one for me is just a follow-on, on gross margin and, I guess, the comments you're making about optimizing the mix of sales and gross margin. Reflecting what you've said, and I guess, there are a number of moving parts as well between FX, commodity prices and price pressure, how should we be thinking about those dynamics going into the second half of the year? Will you be looking to be, at least, I guess, more aggressive on price to maintain margin in say Australia -- sorry, New Zealand and Canada and sacrifice the sales volume?

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Daniel Bracken, Michael Hill International Limited - CEO [13]

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Yes. I mean, I think, we've been really clear, Andrew, over the last sort of 12 to 18 months that our focus would be on sales momentum, recovering market share and, in fact, taking market share, which we absolutely clearly have, and a lot of third-party data supports that. We also said that we would have a compressed margin story, and we would have a big focus on costs to mitigate that. And I think this result absolutely reflects that. But I also think we're now at that point where we need to increase our attention on margin and we plan to in the second half. So I think your analogy was a good one that you should expect to see some improvement in gross margin and potentially a slightly softer view on the sales line as a result.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [14]

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That's great. And just a follow-on from that. Obviously, the second half of last year was impacted by a range of inventory clearing -- clearance activity. Should we be thinking about the year-on-year gross margin for the second half as being up modestly or flat? Or what's the way to think about it?

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Daniel Bracken, Michael Hill International Limited - CEO [15]

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Well, the major clearance focus, correct me if I'm wrong, Andrew, was really Q4?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [16]

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Yes.

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Daniel Bracken, Michael Hill International Limited - CEO [17]

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So we really kicked it off sort of at the Easter sale and then carried on running a clearance program through to the end of the year. So it wasn't the whole of the second half, Andrew. But we are anticipating an improvement in gross margin in the second half. Yes.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [18]

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That's great. And then just on inventory and working capital. We've obviously seen reasonable improvement in the inventory balance. I mean how should we be thinking about this going forward? Is there -- are there more actions that you can take to improve stock turn? Or are we getting close to a level where this should be -- given more reduced working capital benefit coming through?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [19]

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I think 2 comments there, Andrew. Overall inventory levels, we still have an ongoing program of work to optimize that, and I expect we'll still see some further modest reductions in the inventory balance. I think on stock turn, we've provided commentary previously. We have a notoriously slow stock turn. And it is an absolute area of focus for us. Loyalty presents an opportunity there for us, for example, then inviting the customer back into store more regularly. So I don't think we're at the end of the journey on the stock turn. And certainly, we've seen improvement over the last half, but we would anticipate that there would be more to come.

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Daniel Bracken, Michael Hill International Limited - CEO [20]

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I'm not going to give you my big hairy internal goal on the stock turn, Andrew. But we -- this is the first step in improving it. We think there's a fair amount still to go there. I would highlight that we are cycling first half on first half, a particularly high inventory position last year. Because if you remember, we had the misfire on strategy in the first quarter that did result in us having a higher inventory level going into the half. So the reduction in inventory you're seeing at the half is probably not going to hold that level for the full year, but we will have an improved closing inventory on last year, but probably not to the same degree as we have for the half.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [21]

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That's clear. And just one on the Aussie store network, I mean, you've closed a number of stores in the period. Would you say that there's more work to be done on rightsizing that store base? And how should we think about sort of a full year number of stores in the Australian market? And I guess related to that, if there are going to be some openings to offset some of the closing, how should we be thinking about the CapEx spend through the remainder of the year?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [22]

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I'll take that one, Andrew. From a Canadian point of view, we have 1 store opened in the second half as planned. So 87 move to 88. New Zealand, we anticipate holding flat. We are looking at a couple of opportunities there, but they won't be delivered in the half. In Australia, we have closed a couple since the half year-end, and we'll continue to monitor, I guess, the -- for rest of the performing stores. And look, there is a possibility there may be 3 or 5 closures across the whole half. And so from a CapEx point of view, we are looking to invest within budget into some of our top New Zealand stores. But outside of that, not much in the way of capital investment in terms of new stores.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [23]

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Okay, that's great. And then just a final 1 for me. You briefly mentioned in the release, the further actions for cost out, which you're starting to look at. I appreciate it may be early days. Could you give a sense as to where you see these -- those further opportunities? And if possible, potentially quantify how much they may be?

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Daniel Bracken, Michael Hill International Limited - CEO [24]

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I mean we deliberately haven't quantified because we're obviously focused on, Andrew, delivering the second tranche of $5 million that we committed to last year. We are confident there is more to come. Supply chain probably provides the biggest further opportunity. And I should reiterate, we are really committed as a leadership team that we're not going to touch customer-facing investments. So all of our investments in the digital channel, online business, loyalty program, et cetera, is going to continue at pace. We're not ripping the guts out of our store labor line at all. If anything, we're continuing to overinvest in store labor because we know how important it is to our model. Supply chain and some of the other noncustomer-facing areas are where we see the biggest prizes. It's not another $5 million. But it's a substantial enough number for us to have called it out, and we'll work it up, and probably at year-end, we'll have much more clarity on what that tranche of savings will be, and it will start to deliver across FY '21.

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Operator [25]

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(Operator Instructions) Our next question comes from Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [26]

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Daniel and Andrew, good job on the turnaround. I have connected a bit late here as I have just come from another result call. So apologies if you mentioned it already, but the New Zealand margin is a bit weaker than we expected. Can you just provide us some more detail as to what exactly happened on the cost line in the first half? And I think you mentioned it's going to improve. But just keen to understand what happened in a bit more detail.

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Daniel Bracken, Michael Hill International Limited - CEO [27]

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So there is about -- and Andrew said this on an earlier question, Sam, but we do have about somewhere between 250 and 300 basis point impact of FX and gold in our margin. So that is impacting all of our markets. Why is New Zealand a little worse? Well, it's also our strongest growth market. So there's some trade-off in driving sales momentum and margin. And I think the other factor I'd add, specific to New Zealand is, it is the market where we do have this extraordinary group of niche customers that come in and purchase product in excess of $50,000 to $100,000 at a time. And those items generally aren't the same sort of margin levels that our core ranges are and do impact the overall margin. And we have had a pretty good first half in those types of transactions in New Zealand. So I'd say, to all of those things together, we have got some exciting activities rolling out in the second half to -- in the New Zealand cost line that will help improve their EBIT for the year.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [28]

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Got it. And I've seen some pretty weak foot traffic in Australia, over February, how is that impacting your sales here?

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Daniel Bracken, Michael Hill International Limited - CEO [29]

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I'm not going to get into month-by-month forecasting, Sam. It was a little clever code for trying to get that question, but I'm not going to respond specifically. In terms of traffic, we've actually had -- this year has been a better year for traffic than the previous 2. So again, what we're seeing, the focus we've got on elevating our brand, particularly the focus on in-store execution of visual merchandising, are really starting to help buffer an overall traffic challenge for the retail sector. So we've had -- actually had a better half than we have in the previous couple of years. In terms of February traffic, I don't actually have those numbers to hand. And -- but we're doing better than we were a year ago in terms of getting traffic into our stores.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [30]

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Got it. And the 9 stores you closed in Australia, how many were loss-making and how many other stores in Australia are loss-making?

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Daniel Bracken, Michael Hill International Limited - CEO [31]

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Andrew, I hope we wouldn't have closed a profitable store.

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [32]

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That's right, Daniel. They're -- all the stores that were closed were not profitable. There is a short list of stores that we constantly monitor, many of them we might be having in holdover and are evaluating month-to-month. And we'll continue to sort of monitor that bottom end of the late table of stores.

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Daniel Bracken, Michael Hill International Limited - CEO [33]

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But even -- Sam, even a loss-making store does help bear the burden of the corporate costs. So there is this fine balance between -- even if it's marginal, if it bears a proportion of the corporate costs, and we think there's an opportunity for turnaround, whether that be from the brand or a new store manager or a change in the mall itself, we are prepared to maintain some marginal stores. And there's probably, as Andrew said on the last question, probably 2 or 3 more stores we're looking to close in Australia over the coming 6 to 12 months.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [34]

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Right. And just in terms of your comment before when you said to Andrew, I hope we haven't closed a profitable store, to what extent would you close a profitable store, if the landlord is being ridiculous in terms of what they want when you have to renegotiate the rent, making a point to the landlord, "Hi, we're Michael Hill. This is the rents we're paying. And if you don't get us -- give us what we want, we're happy to walk." And then you might get more leverage for future negotiations.

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Daniel Bracken, Michael Hill International Limited - CEO [35]

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I can't see if there's any landlords on this call, so I have -- but there might be. So I have to be careful Sam, how I answer that. But the reality is we do have portfolio discussions all the time. That's how we prefer to negotiate store relationships. And so when we're talking about a portfolio, there could be a bad store in the portfolio, there could be good stores in the portfolio. We are generally getting the right results on stores that are up for lease negotiation. And we do work in partnership with our landlords. But we're making good progress and although as a tongue-in-cheek comment about not closing a profitable store, we would do everything we can to protect profitable stores as part of a broader lease negotiation. But you're right, we have been in situations where we would threaten to close the portfolio of stores, if we didn't get the right result overall. And thus far, that hasn't been the case.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [36]

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Got it. And last question. How long do you expect it is going to take for sales per square meter in Canada to reach the levels you're getting here in Australia or New Zealand?

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Daniel Bracken, Michael Hill International Limited - CEO [37]

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So I think when we first talked about this strategy, we gave data points of Australia and New Zealand, roughly $21,000 a square meter, Canada, roughly $15,000. So they're the averages. I think what we said was we'd be happy if we could get that $15,000 to $18,000 to $19,000. Canadian stores are generally a little bigger than our Australia and New Zealand stores. And we have a lower average transaction value in the Canadian market. So our view is that look, if we could get it to $19,000 to $20,000, we'd be very happy with that, Sam. We're making steps towards that. I think we've got to about $16,000 on an annualized basis from the first half results. But there's still another $2,000 to $4,000 a square meter that those stores owe us.

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Sam Teeger, Citigroup Inc, Research Division - Head of the Australian Small Caps Team & Director [38]

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Do you think you could close that gap in the next 1 to 2 years? Or it's longer than that?

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Daniel Bracken, Michael Hill International Limited - CEO [39]

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Well, I think, in the next 2 years, yes, but definitely, I wouldn't necessarily say in the next 1, but in the next 2 years, definitely.

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Operator [40]

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(Operator Instructions)

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Daniel Bracken, Michael Hill International Limited - CEO [41]

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I think we've had the call questions from those we expected to get the questions from. So I think if there are no further questions, we're happy to end the call. And thank you, once again, for joining us this morning, and thank you, once again, for your ongoing interest in the Michael Hill business. Goodbye.

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Operator [42]

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Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.