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Edited Transcript of MHJ.AX earnings conference call or presentation 16-Aug-19 12:15am GMT

Full Year 2019 Michael Hill International Ltd Earnings Call

Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Michael Hill International Ltd earnings conference call or presentation Friday, August 16, 2019 at 12:15:00am 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 - Analyst

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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 full year results. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. 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, everybody, and thank you for joining us for the Michael Hill International Limited Full Year Results Call for 2019. It's a pleasure to be speaking to you today. I'm joined 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 our 2019 financial year. We will also provide you with some insights into key initiatives for the upcoming FY '20 year. And as usual, at the end of the session, we'll have a period of time for Q&A.

So turning to Slide 4. The FY '19 financial year was and has been a transitional one for the company. While we are disappointed with the final result, we are pleased to have finished the year with positive sales momentum. When I joined Michael Hill in the middle of November 2018, the company had just commenced the journey of moving from a traditional retailer to a relevant modern differentiated jewelry brand. The company, which was founded in 1979, has fantastic brand equity and an incredible heritage, which we will continue to leverage along the journey. Since I joined, we've strengthened the team, and we've aligned with the Board around the right refinements to strategy for the business. I'm particularly pleased of the sense of purpose and urgency in the business, which is visible, both in store and here at our corporate offices.

Even though we are disappointed with the sales results for FY '19, the business demonstrated quarter-on-quarter same-store sales recovery, from down 11% for Q1 to down 2.9% for Q2 to down 1.5% for Q3 and then finishing the final quarter plus 0.7%. These results illustrate that the sudden shift away from a high frequency of deep discounts events during July to October did heavily impact our revenue and financial performance for FY '19. However, we have learned from this experience and are introducing a more integrated retail operating model. Put simply, we know we need to be competitive, and we know we need to be profitable. And to do that, we need world-class retail disciplines, along with a beautiful product that is only available at Michael Hill. This has been our absolute core of my focus in my first half year with the business, and it will remain so in the coming year.

This year, we have seen a considerable strengthening of retail experience in the executive team with my appointment as CEO; Andrea Slingsby joined us as the newly created Chief Operating Officer; and Joanne Matthews as Chief People Officer. I have 100% confidence in the entire executive team. We are completely aligned with each other and the Board, and we are all focused on delivering the strategy. There is a determination to keep the sales momentum building and a healthy impatience and urgency among us to modernize our business.

In my first few months of the business, we conducted an end-to-end business review, which identified many avenues to improve the performance. Some of these improvements were quick, simple and easy to implement, and some were outlined in our first half results as key initiatives, which have been underway with great enthusiasm. I've also updated these key initiatives for FY '20, which I will discuss with you later in the presentation. However, it is important to note that as a team, we have reaffirmed the strategic priorities as essential to our success.

We are committed to the modernization of our business and focusing on retail fundamentals. We have started the journey of improving our online business to assist with increasing customer relevancy in a rapidly changing retail environment. A light and early rollout of the new retail operating model commenced in March, and some of you may recall me talking about that at the first half, with our diamond event, which involved the alignment across merchandise, marketing and retail execution. This encompassed the launch of a number of new branded bridal collections and a refreshed, modernized marketing campaign.

And finally, I'm also really proud of the heightened fiscal discipline we have introduced to the business during the year. There has been an intense focus on supplier relationships, which links into our working capital and extended trade terms, inventory management, including return of a stock to vendors. Our cost of doing business has been closely managed by implementing a stronger internal review and approval process. We have emerged from a transitional year in a tough trading environment as a more resilient business with a strengthened management team that is highly aligned to the strategy.

Prior to speaking to next year's key initiatives that we will be undertaking, I'll pass on to Andrew, who will speak now to you about the FY '19 financial results.

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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 '19 financial snapshot. As mentioned by Daniel, we are disappointed with the FY '19 results. However, despite having a challenging quarter 1, same-store sales performance momentum recovered quarter-on-quarter. And in order to achieve this momentum in the current competitive retail environment, we experienced compressed margin across all segments.

With the introduction of the stronger fiscal discipline to the way we do business, we undertook a corporate cost-out program in FY '19 half 1, which will deliver a $5 million annualized benefit in FY '20. Furthermore, there was a deliberate focus to reduce inventory, which is cleanse aged and off-range stock. This assisted in reducing our net debt and improved our working capital position.

We today announce the group reported -- that the group reported a net profit after-tax of $16.5 million for the full year ended 30th of June 2019, compared to a restated net profit after-tax of $1.6 million for financial year '18. These results for FY '19 also included employee remediation costs of $4.5 million, one-off aged inventory impairment of $6 million and employee restructuring costs of $2 million. The company also reported statutory EBIT of $21.1 million for FY '19 compared to a restated FY '18 EBIT of $8.9 million. Underlying earnings before interest and tax for the period were $34.6 million, which is above consensus for FY '19 and compares to $40.1 million for FY '18.

Turning now to key financial results on Slide 6. I will cover further financials in the presentation, but other key points to call out include: due to the competitive retail environment and the company's shift away from aggressive discounting for the first 4 months of the year, same-store sales were down by 3.3% to $524.7 million. The active inventory management program, along with one-off aged inventory impairment of $6 million, has seen inventory levels reduced to $179.5 million at year-end, down from $192.1 million at FY '18 year close. This focus on working capital, along with the cost-out program and renegotiated vendor payment terms, has contributed to the reduction in net debt to $24.8 million, down from $28 million in FY '18. Our gross margin declined to 62% from 63.7%, and the Board have declared a final dividend of AUD 0.015 per share, unfranked and fully imputed with conduit foreign income, giving a full year dividend of AUD 0.04 per share compared to an FY '18 total dividend of AUD 0.05 per share. This dividend for FY '19 represents approximately 8% based on current share price.

Turning to the next slide on operational performance. The continued investment and development of the company's e-commerce business resulted in record online revenue of $16 million for the full year, up 43.6% on FY '18 and now represents 2.8% of sales. The launch of a number of new branded bridal collections and a concerted marketing focus saw branded collections representing 32.5% of total product sales for the year. Retail segment revenue was up 1.8% in Canada but down across Australia and New Zealand in local currency.

Moving on to our group results on Slide 8. Group revenue declined by 1.1% to $569.5 million. As previously stated, statutory EBIT was up to $21.1 million for the year ended 30th of June 2019, compared to restated $8.9 million for FY '18. We experienced a 13.7% decline in group underlying EBIT from $40.1 million to $34.6 million. As part of our decisive store portfolio management, 10 Michael Hill stores were opened and 11 underperforming stores were closed, along with 5 Emma & Roe stores. 306 stores were trading at 30th of June 2019, including the 1 remaining Emma & Roe store. As previously stated, the Board have decided to declare a final dividend of $0.015 per share, giving a total dividend for the year of $0.04 per share.

Moving on to our segment results and, first off, looking at the Australian market. Australian retail revenue declined by 3.7% over the year as we experienced a tough retail operating environment. Gross margin was compressed as the company moved decisively to defend market share in challenging retail conditions. In FY '20, we expect the Australian retail environment will continue to be challenging. We are focused on building momentum off the back of the last quarter of FY '19. We expect performance to be driven by improved retail in-store execution and product newness, strong property portfolio management and continued online revenue growth. 4 stores were opened and 8 underperforming stores were closed, along with 5 Emma & Roe stores. There were 168 stores trading at 30th of June 2019, including 1 Emma & Roe store. It is anticipated that there will be further targeted store closures occurring in the coming year as part of the group's active management of its store portfolio.

Turning to Slide 12 for New Zealand. In New Zealand, revenue dropped by 4.1% to $120.1 million. Pleasingly, fourth quarter same-store sales were up 0.6%. New Zealand did experience a decline of 120 percentage points in gross margin to 60.8% for the year. EBIT as a percentage of revenue was strong, holding above 20%. For the FY '20 year, we expect the New Zealand business will benefit from continued refinement of the property portfolio and improved cost efficiencies. 2 stores opened and 2 stores closed during the period. There were 52 stores trading at 30th of June 2019.

Turning to Canada on Slide 14. In Canada, the business saw revenue growth of 1.8% to $133.1 million. It also experienced a decline in gross margin to 60.6%. A series of measures to improve productivity and sales were introduced in FY '19 half 2 that are expected to drive further performance improvement for FY '20. 4 stores were opened and 1 store closed during the period. There were 86 stores trading at 30th of June 2019 in Canada.

I will now hand back to Daniel to outline the key initiatives for FY '20.

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

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Thank you, Andrew, for your very clear commentary on the FY '19 results. As mentioned earlier, across Slide 16 to 17, I'd like to now take you through some of the key initiatives for FY '20, which will be the drivers to the success of our business. These initiatives focus on strengthening the retail fundamentals of the business and building on a framework of the strategic priorities previously announced at the FY '18 results.

So firstly, a continued focus on cost of doing business. Building on the initial FY '19 $5 million annualized cost-out program, management has now identified an additional $5 million cost reduction, which will be delivered across FY '20 and FY '21. Furthermore, we have initiated a more rigorous approach to many key drivers of costs in our business, and we continue to be disciplined in our approach to costs.

You will have previously heard me talking about the second initiative, the retail operating model. I'm very passionate about making sure that this is implemented coherently as I believe it is a fundamental -- fundamentals of future success of Michael Hill. It takes time for a smooth retail operating model to develop. Delivering coherent and aligned merchandise, marketing and retail experience are critical to our future. I'm pleased that the implementation of a more sophisticated and integrated customer-led retail operating model is well underway, and this is best demonstrated by the execution of our August 40th birthday campaign.

Following on from the operating model is a focus on retail fundamentals. This is a significant opportunity. We have started to introduce exciting changes in stores for our customers with a real focus on our visual merchandising. We know that foot traffic in store is challenging, so our focus will be on enhancing our brand, driving improved customer transaction frequency and conversion rates. Yes, all of this is retail 101, and we make no apology for that. We have been absolutely consistent, unrelenting and urgent in our focus since I joined, and we will continue to focus on this in the coming year.

Turning to Slide 17 and moving to our fourth initiative, acceleration of the branded collections strategy. As demonstrated in the second half of FY '19, we have a clear pathway to drive exclusive branded collections sales to 50% of the business over the coming years. This represents both the sales growth and margin opportunity with both existing customers but also an avenue to attract new customers to the Michael Hill brand.

Our next initiative is the new merchandise rhythm. Whilst part of our operating model generally, it needs to be called out separately because of its importance and because of the importance of product to our business. New buying and planning processes are absolutely essential to driving product newness in our business and remaining relevant to our customers. Additionally, a focus on margin mix and margin outcomes by deliberate product selection will be delivered across multiple strategies.

Moving on to Canadian productivity. As outlined earlier in the year, Canada presents a significant opportunity from a productivity perspective. We now have a plan to drive increased sales per square meter and increased sales per hour that was developed over the last 6 months, and we will be implementing initiatives to deliver improved results over the course of FY '20.

And our last initiative relates to online as our core focus. In our current retail environment, it's essential to improve our existing online customer experience and expand our digital platform while building capability for the future. Improving our user experience across search, taxonomy, checkout will all deliver sales increases in the digital channel.

And finally, if we move to Slides 18 and 19 and just before we move to our Q&A, I would like to mention that last night, we celebrated 2 momentous occasions, the 40th birthday of the Michael Hill brand and the opening of our new flagship store right here in Brisbane City on Queen Street Mall. If you're in Brisbane, please come and see the new, refreshed, modern, contemporary Michael Hill store. It is significantly improved and quite impressive as it spans over 4 split levels with a dedicated bridal section. We have also used this store as the platform to launch into a new product category called lab-grown diamonds, another exciting opportunity for our business.

Overall, we believe that we have an incredible heritage brand that is capable of being relevant, modern and a differentiated jewelry brand which can adapt to a changing retail environment. Furthermore, we are enthusiastic about the year ahead and are determined to focus on retail fundamentals to build on the positive sales momentum from our last quarter, driving greater operational efficiencies and restoring our gross margin levels through a sustainable model to deliver long-term growth.

So this brings us to the end of the presentation. I would like to thank you for dialing in and listening, and I would like to thank you for your continued interest in the Michael Hill business. 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) Your first question comes from the line of Andrew Steele from Jarden.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [2]

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The first one for me is just trying to get a sense for the underlying gross margin in the period. And I guess just the first point on that, given the inventory impairments of $5.9 million, I'd assume that most of that was to cost of goods sold. But could you please give a split between COGS and OpEx?

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

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Andrew, thanks for the question. I think I'll hand that to our CFO to give you his views on that question.

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

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Yes, Andrew. You are right. The majority of the impairment do go to cost of goods sold, so $5.2 million of the total impairment to COGS relating to jewelry inventory. The balance was for packaging and relating -- related display materials, which went to other assets. So $5.2 million to COGS.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [5]

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Great. That's very clear. And just following on from that, given the impairment and your commentary around inventory clearance activities, was there further gross margin compression from the inventory clearance? Or does the impairment fully capture that? And could you give a sense of the margin impact from clearance?

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

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So I think at the H1 results presentation, Andrew, we clearly outlined our #1 focus would be the recovery of sales momentum in the business. And I think we were very transparent that we would do that at the cost of a compression of our margin, and that's exactly what we did. We also outlined that we wanted to have a program to focus on our aged and suboptimal inventory, which, again, was exactly what we delivered over the last 4 months of the FY '19 year. So absolutely. Was our margin impacted by clearing that stock? Yes, absolutely. I don't think it's probably appropriate energy for us to quantify exactly what that impact was, but it was quite a significant impact on our margin over those last 4 months.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [7]

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In excess of the impairment.

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

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Yes.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [9]

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And in terms of the inventory clearance activity...

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

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I'm sorry, Andrew, let me be clear. If we hadn't had that active program across those 4 months, we may have been facing a much bigger impairment number.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [11]

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Yes. No, that makes sense. And looking ahead into FY '20, are you comfortable that you've now cleared most of that aged stock or there's some further to go?

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Daniel Bracken, Michael Hill International Limited - CEO [12]

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So I think we're comfortable with the impairment now dealing with the significantly aged inventory in our business, but we certainly won't have to have the levels of deep discounting that we've experienced to try and move the really old stock over the last 4 months of FY '19. We will, though, in select stores, have an always-on campaign. It's a clear stock because as we move to more of a regular newness cycle, there will always be things that don't work and there'll be things that do work, and we'll always have some level of clearance in certain store categories to deal with that new stock coming in, having to exit old stock. But in terms of aged inventory, I think, Andrew, we're pretty comfortable of the work we did over the last 4 months of FY '19, and the impairments we've now taken really deals with the majority of our issues.

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [13]

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Yes. Agree, Daniel.

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

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That's very clear. And I guess I'm just taking that one step further. As we look forward into FY '20, I appreciate you don't like to provide guidance, but putting all those elements together, you would expect that the trajectory of gross margin should be higher than has been reported in this year.

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

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I think you nailed it right at the beginning that we're not going to provide guidance on today's call, Andrew, but nice try for hiding it.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [16]

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And then just on your inventory management actions. You've been clear on the -- what you've done on the aged side in terms of, actually, inventory management in store and getting the right product in the right stores and having the right product, I guess, mix more broadly and as you talked to having a focus on newness. How far -- can you give us a sense of how far you've come in your actions for those different elements and how much further to go.

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

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I mean I think it's fair to say the points on Slide 16 around our new merchandise rhythm are absolutely in there to address these issues. We have had a lack of maturity, in my view, of how we buy and sell and distribute our inventory, and it's a work in progress, Andrew. It's better now than it was 6 months ago. It will be better in 6 months from now, and it will be better still in 12 months from now.

So we're at early stages of implementing new processes and new disciplines. We're happy with the progress we're making, but there's a lot of opportunities still for us to really embed a much more rigorous and retail fundamental-based merchandise operating rhythm.

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

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Great. And just on your cost-out program. It's pleasing to see that you've highlighted that you've achieved the $5 million of annualized savings that you targeted. I guess what I struggle with is when I look at the segment disclosure and the level of operating cost this year versus last year in the head office, it seems to have actually gone up by 1.5%, albeit a small amount given you're targeting cost-out. I'm just trying to understand what the sort of the difference between that $5 million cost-out and that overall increase relates to.

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

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So a couple of comments there, Andrew. The cost-out was only initiated with the restructure in February. So there's only a part year impact there in FY '19. It will annualize in full in FY '20. Also, we did have that number one-off cost that pushed through the accounts this year. I would have to confirm to you separately which push of those sat in the corporate cost center, but there was a portion that sat there as well.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [20]

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And so I guess you would be expecting going into next year that, that corporate cost line should be coming down year-on-year.

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [21]

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Yes, that's the expectation, Andrew.

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Daniel Bracken, Michael Hill International Limited - CEO [22]

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And just to be clear, Andrew, the second $5 million that we've identified is in the retail segment, and that will begin to flow. Some of that will begin to flow in FY '20, but that will fully annualize in FY '21.

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

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Great. And then just a last one for me. Given the change in the store rollout profile, which is, I guess, clearly being reflected in your CapEx versus last year as well, looking at last year reported CapEx, should we be thinking of this as sort of a new run rate for the next couple of years until you restart any store rollout program?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [24]

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So I think, Andrew, we, in recent years and the current year, hovered with CapEx, and there's a $20 million to $25 million range mix of both store and investment in IT projects and systems and the like. So we probably see that 20% to 25% range is appropriate.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [25]

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Okay. Great. And I guess given the uncertainty around the final payment for remediation, you've previously provided a quite broad range. Does that range still hold? Or have you refined that further?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [26]

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The range still holds. So we announced on the 11th of July with an expected range of 10% to 25%. Our work is continuing on that, but at this point, we don't have any further detail around, I guess, the final outcome. That work is ongoing.

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

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But I think, Andrew, it is important to reiterate what we said at FY -- at the Q4 trading update, that we increasingly are confident that it will have no significant impact on our outlook.

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Operator [28]

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Your next question comes from the line of Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [29]

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Look, plenty of self-help strategies to pursue in the short term, but I guess if you take a more medium- to longer-term view, Daniel, would you consider entering in any new international market? So would you consider relaunching the Emma & Roe business to drive growth?

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Daniel Bracken, Michael Hill International Limited - CEO [30]

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I think it's fair to say, Sam, that we've still got, as you've highlighted, plenty of opportunity in the short to medium term to improve the, I guess, financial fundamentals of our business, and that's certainly the key focus for the business. But as we are gaining more comfort that those plans are the right plans and are starting to bear fruit, for sure, we will start to open our eyes to growth opportunities. And a great example of that is what I mentioned at the end of my commentary earlier, the launching of lab-grown diamonds in our Queen Street flagship store is absolutely we see as a great strategy. It's effectively a new product category for us. We're the first major ANZ jewelry chain to bring that product to market, and we're bringing it in quite as extensive and significant way. If you could get a chance to come up to Brisbane and see it in our store. And we're looking at and considering other opportunities as well. But it's too early to comment on anything beyond that.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [31]

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Yes. And with the lab-grown diamonds, how do you manage the brand perception with the launch of that range?

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Daniel Bracken, Michael Hill International Limited - CEO [32]

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I mean, ultimately, we're providing choice for our customers. It's a category that's been in the U.S. market now for a couple of -- U.S. and, actually, in Canada, certainly, in the last 12 to 18 months through other retailers. And we -- it's about providing a choice to our customer of do you want something that's mined? Or do you want something that's been effectively grown? And what other retailers that we've spoken to in the U.S. have talked about is there's very different customer segments that follow each of those 2 parts. And we're in the game, and we want to give our customers those choices.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [33]

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Got it. And would that form part of the 50% branded collection target?

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Daniel Bracken, Michael Hill International Limited - CEO [34]

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Not at this -- actually, a good question. It probably will, actually. I mean at the moment, we've got it in 1 store, so it's not going to move the needle much. But if and when the trials and the tests with it are successful and we start to roll it out to more and more stores, yes, it more than likely will.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [35]

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Got it. And can you talk about the margin differential between the branded collections and the nonbranded collections? And I guess that 50% target, is that a 2- or 3-year target? Or is it longer than that? And how do we think about the timing?

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Daniel Bracken, Michael Hill International Limited - CEO [36]

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I'd just say 2 to 3 years. We were happy with the progress we made this year, 50% from where we were 2 years ago. 18% is a pretty lofty goal. But we're confident that the momentum we're starting to get with introducing our own more branded collections will continue. And certainly, when you move out of diamonds into collections like our Knots collection or our Spirits Bay collection, we are able to avoid the discounting discussion that often happens on more generic products. So fundamental to that strategy is the belief that, as we get confidence in collections and we can hold the line, we will deliver better margins.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [37]

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Of what magnitude?

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Daniel Bracken, Michael Hill International Limited - CEO [38]

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I wouldn't, again, like to be pinned down to something specific, Sam. But they are -- we may -- I can just categorically say on our core Knots and Spirits Bay collections, we make better margin than we do on pretty much everything else in our business.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [39]

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Right. And then just last one, maybe for Andrew. Given the introduction of lease accounting, I kind of know you don't want to provide guidance, but can you provide us a bit of a steer or something in terms of D&A, interest and all those relevant line items?

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Andrew Lowe, Michael Hill International Limited - CFO & Company Secretary [40]

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We haven't come out with specific information on that yet because we are still working through the impacts. Our first reporting period for the impacts will be for the December half year, ahead of that as our positions firm up in consultation with our auditors. But we've got to provide further, I guess, [advisory] of that, Sam.

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Operator [41]

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Your next question comes from the line of Guy Hooper from Forsyth Barr.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [42]

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Just first one from me and a bit of a follow-up from an earlier question. Can you give us a bit of a steer on how elevated net discounting volume was through the clearance in the period? Are we sort of talking 10%, 20% above average?

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Daniel Bracken, Michael Hill International Limited - CEO [43]

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I don't think we want to provide that level of detailed guide because we're setting a rule for back in future reporting. But it had a -- it was significant enough to have an impact, the sorts of impacts you saw on our margin.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [44]

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No worries. Just I suppose on some of the productivity improvements you're targeting in Canada. Are you able to provide, I suppose, any time frames or targets around what you'd like to achieve there?

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Daniel Bracken, Michael Hill International Limited - CEO [45]

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I think we gave the first half, which I don't think you were covering us then. I think that was Jeremy's guide. But we gave an example of the average sales per square meter in our Australian and New Zealand stores of $21,000 and $22,000 per square meter. And our average, respectively, across Australia and New Zealand, and Canada's average is 15. So our view is that Canada owes productivity improvements of circa 20% to 30%. That's a long journey, but it is part of the reason why we've put on hold significant further store expansions in Canada because we want the team focused on improving our existing business that we've invested heavily in over the last 10 years and to get that productivity up. And we are confident that both the team we've got in place and the plan we've got in place will start to deliver on that productivity improvement in FY '20.

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Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [46]

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Yes. And just one last one from me. Just around -- you mentioned, I suppose, targeting sales growth, and they're coming at the expense of gross margins. And that was, I suppose, a key feature in FY '19. Is that still going to be the case going forward in the FY '20?

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Daniel Bracken, Michael Hill International Limited - CEO [47]

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Well, look, we are comfortable that we've got sales momentum in our business. It is allowing us to start to find balance, and it is a balance between margin recovery and sales growth. But we are entering or we are in Q1 against last year's Q1 that does present us an opportunity to focus more on margin, certainly, than we were in the back half of last year.

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Operator [48]

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Your next question comes from the line of [Gerard Beattie].

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Unidentified Analyst, [49]

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Do you consider these setbacks from the business recently as just that, only setbacks, and Michael Hill is not losing its relevance in the jewelry retail market?

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Daniel Bracken, Michael Hill International Limited - CEO [50]

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I think Michael Hill is actually regaining its relevance in the jewelry market. All the data points we've got from external sources show that Michael Hill has actually taken market share across the third and fourth quarter of the year. So I do reject that comment, actually.

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Unidentified Analyst, [51]

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No, no, no. That's an excellent answer because I didn't want to sound as if I was asking you a petty question. I don't want you to just say no. I don't think you are losing relevance in the jewelry retail market. And I didn't want to appear as if I was asking petty question. And [it could be] a very good answer.

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Daniel Bracken, Michael Hill International Limited - CEO [52]

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And actually, the foray into lab-grown diamonds, which is the newest thing in the global jewelry world, and us being the first to market and leaders in the market, really, is another demonstration of us making sure that we are completely relevant to the modern-day consumer.

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Unidentified Analyst, [53]

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Keep up the good work.

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Daniel Bracken, Michael Hill International Limited - CEO [54]

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Thank you very much.

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Operator [55]

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There's no more question at this time. (Operator Instructions)

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Daniel Bracken, Michael Hill International Limited - CEO [56]

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I think if we've got no further questions at this time, we've got a lot of one-on-ones lined up across the day with many of the people on this call. So I think we'll draw the call to a conclusion.

So thank you, everyone, for dialing in. Thank you for your continued interest in Michael Hill, and we look forward to talking to you again in the -- well, either today or in the coming months. So thank you.

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Operator [57]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.