Halfords Group plc (HDK.MU) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Halfords Group interim results for the 26 weeks ending the 1st of October 2021. I'm Graham Stapleton, CEO of Halfords, and I'm joined this morning by Loraine Woodhouse, our CFO. You will see as we go through today's presentation, it has been a very busy, but successful first half. Despite a challenging trading environment, we are pleased to be upgrading our profit expectations for the full year and excited to share our plans for the second half. In terms of the structure for this morning, Loraine will start by taking you through our financial performance over the first half and the outlook. I will then provide you with a recap of our strategy and an update on our progress against this year's plan. You'll then have the opportunity to ask questions at the end. So to begin today's presentation, I will now hand you over to Loraine to talk you through our first half performance. Loraine?

Good morning, everybody. I'm going to take a few minutes to cover the highlights of our first half performance. Before I start, on Slide 4, I want to flag a couple of points that are relevant to today's presentation. The first is that where we use comparative data, unless stated otherwise, in my commentary, I focus primarily on our performance versus our first half 2 years ago. This is particularly so for sales and profitability as last year was heavily disrupted by COVID, and it makes meaningful comparisons quite difficult. That said, we have included our prior year numbers throughout the presentation where relevant to ensure that we give full transparency. The second point of note is that our results are now post IFRS 16. The standard has a material impact on our balance sheet and cash flow metrics, and I will do my best to explain the movement where it is relevant. Moving now to Slide 5, which summarizes our overall performance. Our new financial year started on the 3rd of April 2021, just before nonessential retail started reopening across the U.K. It's easy to forget how disruptive this period was despite the relaxing of the stricter elements of the lockdown regime. Although our stores and garages were open during the period, it was operationally difficult as sickness-related absences increased, supply chains were disrupted and road traffic, particularly for the first quarter of the year was still very low. It has been a challenging period for everybody, and that makes us particularly proud of our first half performance. Group revenue was up 19.2% on a 2-year basis or 14.2% like-for-like. We have delivered an improvement in gross margin of 167 basis points versus FY '20. Cost as a percentage of revenue have declined by 1.2%, demonstrating how we have leveraged our fixed cost base through strong sales growth. We delivered underlying group profit before tax of GBP 57.9 million, which was GBP 27.7 million ahead of 2 years ago and GBP 2.1 million ahead of last year. Included within profit is GBP 9.2 million of business rates relief, therefore, demonstrating strong underlying profit growth. And finally, we have a closing cash and cash equivalents position of GBP 92 million, an increase of GBP 25 million since the start of the year. Working capital was in outflow of GBP 12.1 million, but this remains low after experiencing a working capital inflow of GBP 49 million in the prior year. Note that net debt on an IFRS 16 basis is GBP 233 million. Moving to Slide 6. I covered most of these metrics in more detail later in the presentation, but I did want to touch briefly on non-underlying items. You will recall that in the last couple of years, we have closed a number of stores and garages including stores within our Cycle Republic chain. At the time, we created provisions for onerous leases and other related costs of closure. The nonunderlying credit of GBP 6.4 million shown here reflects a partial release of the provision, where we've either sublet or assigned leases for better terms than we had originally assumed. Given the number of moving parts in our numbers, on Slide 7, I thought it would be helpful to provide a simple bridge of our profit versus 2 years ago. To give visibility of business rates relief, I have stripped it out of the underlying trading numbers and shown the benefit separately. As you can see, our retail business has performed very strongly throughout the period with the impact of the work that we did last year on improving underlying profitability, for example, in improving Cycling gross margin, continuing to benefit our overall results. Autocentre profit was slightly down, driven primarily by a very significant seasonal shift in the timing of MOTs. Our Performance Cycling business, including the impact of the closure of Cycle Republic, is significantly more profitable. And finally, our financing costs have reduced, reflecting the fact that excluding lease debts, we now have net cash rather than net debt. On Slide 8, you can see a summary of our retail performance. We delivered good sales growth, our gross margin was extremely strong, increasing to above 50% and we managed the cost base well, allowing us to fund investment for the longer term in areas that we deem to be strategically important. On Slide 9, there is a little more insight into our sales performance. Our like-for-like sales growth was 14%, with Motoring grown by 11.9% and Cycling by 15.8%. Total growth was 7.7% as we've closed less productive stores over the last 2 years, boosting the like-for-like performance of the remaining estate. Our Motoring performance was encouraging, especially after a more difficult year last year. We were pleased with market share gains in our core categories and particularly in the areas of workshop, car cleaning and staycation as we refreshed ranges and brought new products to market. Cycling was undoubtedly suppressed by supply issues, particularly in the premium end of our own brand bikes, but demand remained healthy and Cycling sales picked up towards the end of the period. Perhaps not surprisingly, it was a volatile period for sales. And you can see that the first quarter was generally stronger than the second as we flagged at our 20-week statement. Moving to gross margin on Slide 10. You can see the positive movement over the last 6 months. We have been making progress on margins since our financial year 2018, albeit last year was distorted by a very significant mix shift into cycling products, which tend to be lower margin. This year has seen a normalization of Motoring and Cycling mix and the comparison to 2 years ago is relevant. The impact of our Cycling strategy to improve cost prices and promote more effectively has been material. And we believe we can hold on to the majority of these benefits even as demand and supply normalize. The other line here represents commissions we pay including those of Cycle2Work and B2B sales, both of which have grown significantly versus the same period 2 years ago. On Slide 11, I have broken out the key drivers of the movement in operating costs for the Retail business. We have benefited from GBP 7.9 million of business rates relief in the period. But you can see from this chart that we have kept our underlying cost growth low. Where we have chosen to invest is in areas that we believe to be strategically important. So for example, within our transformation cost investment of GBP 10.4 million, we have grown our digital team, set up a centralized customer contact center, invested in technology such as a centralized data platform and increased colleague trading. In some instances, the full benefit of investment will not be felt until subsequent periods, but it will drive future growth and customer experience. This expenditure will continue into the second half of the year. Moving to Slide 12 on Autocentres. Over the course of the last 6 months, our Autocentre business has arguably been more impacted by the effects of COVID than Retail. The story is also complicated by the acquisition of 3 businesses over the last 2 years, the very rapid expansion of our HME business, which is now up to 172 vans, and the launch of our Avayler software service, which already has its first active customer. Revenue growth has been very rapid, with total growth of nearly 90%, a like-for-like growth of 15.5%. The shape of that revenue has changed with a switch into lower gross margin tire volumes on the back of the acquisitions of Universal, McConechy's and Tyres on the Drive. As I've mentioned previously, these businesses typically have a different operating model with lower gross margin but lower associated labor. The reduction in gross margin that we flagged at last year's interims for McConechy's and Tyres on the Drive, is further impacted this half by the purchase of Universal. Profitability for the Autocentre business dipped by GBP 0.3 million on FY '20. The most significant impact on profitability was the government decision to exempt vehicle owners from an MOT test between March '20 and July '20. Any MOT during that time frame was pushed back 6 months. This has had a sustained impact on the timing of MOTs. Whereas typically, our first quarter would be busy with MOT testing, the peak MOT period has moved back to our second and third quarters. The impact is that our garages were less productive in the first quarter of the year, but will be more productive in the third. Productivity drives profitability, and we therefore expect a more profitable second half in our garage business. Less significant, but still important is the impact of investments into our new businesses. We are still in the process of fully integrating and optimizing our Universal and McConechy's acquisitions, although both are profitable in the half and are integrating well. In our HME business, we have focused on rapid expansion to take market share early. And as hubs mature, they tend to be profit dilutive until routes are optimized. We have also suffered from a lack of technicians in this market alongside the disruptive effect of COVID illness. And finally, in July this year, we announced the sale of our new software package to American Tire Distributors in the U.S. This will become a revenue stream for us in the second half, but in the first half of the year, has been a net cost. Looking forward, the dynamics I have just described will all move positively in the second half of the year, and we remain confident that the full year profit of Autocentres will be materially ahead of FY '20. Moving now to Slide 13 and our cash position. We have closed the half at GBP 92 million for cash and cash equivalents, which is an increase of GBP 25 million in the period. It is worth flagging the impact IFRS 16 has had on these numbers as depreciation now includes the amortization of the right-of-use assets, which for the half is GBP 33.4 million. The most notable movement in our cash flow this period is working capital, where the movement is an outflow of GBP 12.1 million. If you recall, through last year, we saw a circa GBP 50 million working capital inflow. I expect the working capital outflow to increase over the second half, albeit the timing of arrival of stock will determine whether our working capital position fully normalizes. Our cash capital expenditure for the 6 months is GBP 27.3 million. We expect full year CapEx to be somewhere between GBP 50 million to GBP 60 million. As a result of our strong cash flow, including IFRS 16 lease debt, our total debt is GBP 232.7 million, GBP 39 million lower than FY '21. Excluding lease debts, we have cash of GBP 92 million, albeit, as I said, this is flattered by an abnormally low working capital position. Our capital allocation priorities shown on the right-hand side of this chart are unchanged. We believe that maintaining a prudent balance sheet particularly in the current economic environment is the right priority, but we continue to invest for growth. Although we will invest to grow the business, we're also aware that our ordinary dividend is important to our investors. We updated our dividend policy at our preliminary results in June '21, reinstating the ordinary dividend from FY '22 at 9p per share, intending this to be progressive. We have, therefore, declared an FY '22 interim dividend of 3p per share, to be paid on the 21st of January 2022. Moving now to Slide 16. I'd like to cover our outlook for the balance of the year. Overall, we are very pleased with our first half performance across the group and how we're delivering against our strategy. We ended the first half with improved sales growth. And to date, in the second half, sales have been in line with our expectations. We have seen growth across the business. And in Cycling, although global supply chain disruption remains, supply constraints have eased somewhat. Inflation, labor shortages and supply disruption will continue to impact the business. However, we believe demand for our products and services will remain healthy. And that we will be able to manage and mitigate the operational challenges throughout the second half. Our strong first half performance gives us the confidence to continue to invest in price in Retail Motoring where early volume uplifts are encouraging and in our group transformation, continuing to invest for the longer term. As we flagged at our prelims, the investment will impact profitability in the second half. Taking the above into account, we are upgrading our full year '22 underlying profit before tax range to GBP 80 million to GBP 90 million. Regarding cash flow, we expect to see a further working capital outflow in the second half, albeit the quantum will largely depend on the timing of stock flowing into the business. Capital expenditure, as I mentioned earlier, we expect to spend GBP 50 million to GBP 60 million this year and Graham will cover some of the key areas of investment. Looking longer term, our strategy was designed to deliver growth and build resilience. Since 2018, we've seen our services and B2B revenues grow considerably. We have improved the profitability of our Cycling business, and we have strengthened the position of our Motoring products business underpinning our Motoring services offer. And finally, we have materially changed our cost base, reducing our retail store footprint, improving efficiency and lowering working capital to safeguard future investments. We do not expect the extreme levels of inflation seen on the freight spot markets to be sustained, and we expect supply and demand of labor markets to stabilize but certain inflationary aspects of FY '23 are already known, including National Insurance, national minimum wage and energy costs. We are confident that our established efficiency work streams and our hedging policies will, in part, mitigate some of these costs. We also see some positive aspects looking forward. Foreign exchange and rental markets are more favorable, Cycling supply should stabilize. And our initiatives from FY '22 will begin to build momentum, contributing further to revenue growth. As a business, we look forward with confidence to another period of transformation and strength. We have developed a stronger and more efficient business, centered around more resilient revenue streams, in markets with opportunities to significantly grow share. On that basis, we look forward to the next period, knowing that we will need to stay agile to navigate through the inevitable challenges as they arise but at the same time, excited to deliver the next phase. I will now hand back to Graham. Thank you.

Thanks, Loraine. So you can see from Loraine's summary that our first half performance was good particularly given the ongoing global supply chain challenges that are affecting many businesses. And this continued delivery is clear evidence that our strategy is working. Our long-term vision, therefore, remains unchanged, and I believe it is as relevant today as it was when we outlined it at the Capital Markets Day back in 2018. That is, for our customers, we will inspire and support a lifetime of Motoring and Cycling. The 3 key strategic goals that we set out to help us deliver against our plan are also entirely unchanged and can be seen here on the slide. In 2019, we said we would change the emphasis of the plan and accelerate our move towards a consumer and B2B services-focused business with a greater emphasis on Motoring, generating higher and more sustainable financial returns. I thought it would be helpful here to set out a quick reminder of exactly why we shifted the emphasis and why we saw the B2B and services market as key to our long-term success. This bubble chart forms part of our investment case and clearly displays the different dynamics of the markets in which we operate, plotting market growth opportunity upwards and financial returns out to the right. The size of each bubble represents the relative size within our group as of 2019. Our main product markets of Cycling and Motoring are still very important, as you can see from the size of the bubble, but either a relatively lower financial returns or a more mature markets with less growth potential. And while we have landed initiatives to improve or maximize the potential of these, we see far greater opportunities with services and B2B. For example, our Autocentres business sits very high up the chart, demonstrating a significant growth opportunity. B2B is in a similar situation, showing higher growth potential compared to Motoring products and better financial returns to Cycling. And it's a very natural fit to our core business. Finally, services and B2B are generally centered around less discretionary aspects of spend, are less impacted by weather and may have much less foreign exchange exposure. Alongside these benefits, our services business also better enables us to build long-term lifetime relationships with customers. Combined, all of this means that our B2B and our services business tends to be far more resilient to economic shocks and the unpredictable demand patterns that are typical of product markets. So now let's have a look at what we have been doing to deliver our long-term plan, both the strategy we set out in 2018 and the change in emphasis announced in 2019. With all the uncertainty that we've had to trade through over the last 18 months, we've had to focus our strategic delivery on ensuring that we have the most cost-efficient and effective operating platform from which to grow alongside prioritizing the support pillar of our strategy to deliver the quickest returns. Let's look at each of the strategic objectives in turn, with a top-level view of the big changes we've delivered over the last 3 years. Starting with inspire. Here, our focus over the last 3 years has been to inspire more of our customers through a significant improvement in our digital customer experience across the group. We brought all of our individual company websites together into one group website in February 2020. And our focus since then has been to further optimize and enhance the way customers shop digitally across every part of our business. This has included innovative and market-leading functionality in areas like ‘email me when back in stock’ for Cycling. As a result, we've seen digital sales more than double as a percentage of group revenue since FY '18. The chart on this slide shows revenue growth, driven primarily by better website functionality, bringing all of our products and services together on one website has also meant the number of customers shopping digitally across the group has increased by more than 50%. And whilst the main focus has been the digital transformation, you can see that we have also significantly increased our own brand ranges and we've also invested heavily in transforming our Cycling visual merchandising via Project Peloton. Moving on now to the support pillar of our strategy, where we will split what we have delivered into services and B2B. So starting with services. As I said earlier, this has been the main area of focus and consequently has seen the most progress to date. We set out to build a market-leading Motoring services business, increasing scale and convenience for our customers. And that's exactly what we have done. Since 2018, we have grown our Halfords Mobile Expert business from just 1 van to a fleet of over 170. We've also acquired 3 garage services businesses, adding significant scale and convenience and invested in a fleet of 192 commercial vans. With these acquisitions, our garage and mobile services business now generate sales of over GBP 330 million. The underlying improvements in the existing Halfords Autocentre business, combined with the acquisitions, have seen total revenue double in this space over 3 years. As you can see here, this has contributed to significant revenue growth in our total group services business since 2018. We have added over GBP 100 million of revenue, resulting in full year '21 sales of GBP 370 million and with sales over the first half of this year already at GBP 232 million. Whilst a large proportion of the growth has been driven by Motoring services, we've also seen Cycling services contribute growing plus 35% over 2 years. In addition to growing our Motoring services business, we've also significantly improved its efficiency through the adoption of our innovative in-house digital operating system PACE. As a reminder, PACE is a tablet-assisted colleague journey. You can see exactly what it looks like here on the slide. This piece of software really does transform the way our garages and vans operate simultaneously increasing utilization, capacity and margin. And you can see on this chart, the significant improvement in sales per worked hour rate and thus the productivity of our business. It is worth noting that Quarter 1 of this year was impacted by the deferment of MOTs due to COVID-19 with a more representative run rate in Q2. Alongside the margin improvements, PACE also enables colleagues to deliver a vastly improved and far more consistent customer experience. Consequently, you can see in the second table on this chart that our Autocentre Net Promoter Scores have increased significantly since 2018, reaching a high of 75 points this year from just 63, 3 years ago. And finally, within the support pillar, we have also grown our B2B business, as you can see from the chart. The key successes here have been expanding our market-leading cycle to work proposition, growing our commercial and fleet businesses and leveraging our acquisitions. This has resulted in B2B sales more than doubling are now accounting for more than 20% of total group revenues. Moving on to our final pillar, lifetime, the least developed area of our strategy to date. Since 2018, our real focus here has been very much on continuing to build the foundations for long-term relationships with our customers. This has meant specifically developing our single customer view and CRM capability. And as you can see on this chart, not only are more customers clicking through, but they are spending significantly more when they do. Moving on, as I said at the beginning, the customer strategy is underpinned by a relentless focus on cost and efficiency, partly because of the major headwinds we have had to face into and partly because we needed to ensure that we build the most efficient and effective platform from which to transform the business. Since 2018, we have made huge progress in this space significantly improving underlying profitability. This has been achieved by a major reshaping of our Retail and garage estate closing just over 10% of our estate. We've lowered working capital requirements by over GBP 30 million in 3 years, while significantly growing revenue. We've also transformed our Cycling gross margin, up 680 basis points in just 2 years. And a focus on group procurement policies has delivered GNFR savings of over GBP 20 million. All of this has enabled us to reinvest, grow and transform. Moving on now to the final piece of our plan, our most valuable asset of all are colleagues. Since 2018, we have transformed the way our colleagues operate in support of our services-led strategy, whilst investing heavily in engagement, well-being and development. In FY '21, we implemented a new labor operating model in our Retail stores. This involved removing over 600 management roles and reinvesting this value into even more customer-facing service roles. This has delivered an increase of 1.4 million customer-facing hours each year improving access to our super specialist colleagues in all stores. Alongside this, we also centralized and digitalized customer contact from our 400 retail stores into one specialist team. The digital focus here has meant that we've managed to reduce contact volumes by nearly half this year. This initiative was good news for our customers, delivering a step change in call answer rates that are now industry leading, and it was also great for our store-based colleagues freeing up their time to focus on face-to-face customer service and the delivery of services in the store or car park. Finally, we have significantly increased our investment in training and development, nearly doubling since FY '18 giving our colleagues the skills and knowledge they need to provide superior levels of customer service. So as you can see, over the last 3 years, we've made huge strides in the way we support our customers, increasing the scale and convenience of our services business alongside the transformation of our group website. We've grown our B2B business and we've enabled a much more cost-efficient way of working. Turning our attention now to this year. And the good news is the value we've created through the delivery of our support and cost efficiency plans has meant that we are now able to reinvest and grow the inspire and lifetime parts of our strategy. These become a much bigger focus as we move into the second half of this year. So again, let's take each of the strategic objectives in turn, looking at what we are delivering in FY '22. Starting with inspire. Here, we will, of course, continue to build on the progress made so far, including making further enhancements to our digital proposition, and transforming the way we visually merchandise our parts, accessories and clothing ranges in Cycling. But the main focus now is Fusion. As we talked about earlier, bringing our separate websites into one platform means customers see and shop our complete group offer on one website. Fusion aims to do exactly that for all of our physical assets in a town, thus completing the Halfords' omnichannel customer journey through the transformation of our physical customer experience. Specifically, Fusion brings together all of the shopping and services locations that we have across a town, leveraging all our customer touch points and creating end-to-end experience that provides a full solution to every customer. On this slide, you can see that Fusion encompasses a new format destination Retail store, an updated Autocentres garage and an extended Halfords Mobile Expert offer, all operating in conjunction with an online and home delivery proposition across a single location. We launched our first Project Fusion trial store in Colchester this summer. And although it's early days with much still to refine, we are seeing very promising early results in terms of sales, cross-shop and Net Promoter Scores. Building on this momentum and taking key learnings forward, our second trial town is now in development and launches later this month. Moving on now to support. And again, splitting this into services and B2B. This year, in services, we said we would further increase the scale of our mobile business setting a new target of 200 Halfords Mobile Expert vans. We now have 172 with more in plan for half 2, moving us closer to our goal of 80% U.K. coverage. In terms of our acquisitions, the integrations are progressing well with all our McConechy's ’s sites now rebranded and refurbished. In Half 2, we plan to continue to scale up the Autocentres business. getting us even closer to our medium-term target of 550 garages. And if we look at our electric credentials, we set ourselves a target of trading 2,000 of our 6,000 colleagues in electric services by the end of this financial year. At the end of half 1, we had over 1,300 trained, and we're on track to achieve our target by year-end. Later this month, we launched an exciting new third-party partnership to install electric vehicle home-charging points for our customers. And this year in B2B, we leveraged the success of our PACE software, announcing our entry into the software-as-a-service market through the launch of a new business of Avayler. Our first client, American Tire Distributors or ATD, are one of the largest independent supplier of tires to the replacement tire market in the U.S., supplying 80,000 garages. Our Avayler software will be used by both ATD and their partners, Tirebuyer and Treadsy. It's an exciting journey for us with multiple growth opportunities ahead. Next, let's look at lifetime. And here, there are some exciting changes ahead. Half 1 has been about getting the planning and infrastructure in place. In half 2, we see a step change and really start to get into some of the more strategic transformation work with the launch of a market-leading multichannel Motoring services club. This will see us put the customer and their car at the center of our club, allowing us to anticipate what they will need in terms of repairs, MOTs and servicing, then offer bespoke advice and savings to help keep customers on the move and save money by shopping across the Halfords Group. It fully leverages our unique market-leading breadth of offer across the lifetime of a vehicle. We aim to get to know more about a customer's car than they do, enabling us to support them in a way no other motoring products and services business could. Finally, within ESG, we will also be taking a leading role in the motoring and cycling industries. We are in a very fortunate position that for us, ESG is not only critical to the way in which we do business but it also represents a significant strategic commercial opportunity. We believe that leading the industry here with our electrification strategy will also enable us to develop valuable long-term relationships with our customers. Each of the strategic pillars of our strategy are, of course, underpinned by a relentless focus on cost and efficiency. And this year, the progress here continues. Alongside a large number of established work streams continuing to target cost and efficiency, we have renegotiated 28 lease renewals in retail, saving an average 25% on their annual rents. We've also purchased our entire energy requirement for FY '23, safeguarding ourselves from further cost increases and mitigating further risk next year. As an aside, all our electricity needs are now from 100% renewable sources. And finally, we come to our colleagues, where this year, the focus is very much centered around 2 specific areas. Firstly, we will implement the new group operating and reward model to ensure the way we work and engage colleagues is aligned with our group strategy and our One Halfords Family values. Secondly, with the new retail operating model in place and as part of building a services-focused business, we are now significantly investing in training and upskilling customer-facing colleagues. Put very simply, in the past, approximately 2/3 of our customer-facing colleagues were required to deliver just one skill or technical service for a customer. The focus on training has meant we have really moved the dial here. So now every single customer-facing colleague can deliver a minimum of 6 skills. As you can see from this chart, this means that for all our core on-demand services we are now better able to respond to customer needs when they need us the most. So we've looked at the progress we've made since 2018 and the further changes we will deliver this year. Before we finish, I want to bring this together and give you a flavor of how all of this strategic change has impacted the overall operation. So let's now look at the change in the scale and shape of the business from 2018 to today. Firstly, in just 3 years, the way customers shop our business has altered considerably. So as you can see on this slide, in 2018, we had a much smaller digital presence across multiple websites. We had many more stores than garages and virtually no mobile presence. Today, you can see that customers have changed the way they shop, and we now have almost equal numbers of customer touch points by channel. The number of customers who shop digitally has doubled. We have a huge garage services business, including our mobile proposition. And we have reduced the number of stores by just over 10%. You can see here on the slide, the bar charts on the left show the change in shape and on the right, the corresponding changes in revenue. And on the next slide, you will see the way our products and services mix has changed. 3 years ago, the largest proportion of our business was product sales with services just 23% and B2B 10%. Today, we have a much bigger services and B2B business, which together now account for approximately half of the group's revenue. So in summary, you can see from the progress I've outlined today that we are making significant strides in changing the shape and scale of our business. Despite the impact of the global pandemic, our ambition to become a consumer and B2B services-focused business is being realized and at pace. We have generated a strong platform from which to further transform this year with a focus now on inspiring more and more customers and building better, stronger and longer-lasting lifetime relationships with them. That concludes today's presentation. Thank you for listening. There will be a short pause now while we move across to the live Q&A where Loraine and I will be happy to take your questions.

[Operator Instructions] Our first question today comes from Jonathan Pritchard of Peel Hunt.

Well done. Great set of figures. The usual, 3 for me. Firstly, on Cycling gross margin, that's a fantastic sort of 2-year build. Is that flattered a bit perhaps over the last 18 months by lack of availability and therefore, everything sort of going through full price? And could we see that perhaps come off a little bit over time? That's the first one. And then, two, not very good questions really. But the first, the loyalty card, it might be commercially sensitive. But is that going to be an app? Is it going to be a card? How is that going to work? And then on Fusion. If I live in Colchester, how do I know about this? Have you marketed it much? Is it just word of mouth? How do I feel the sort of Fusion vibe if I live in one of your towns?

Jonathan, thanks for your 3 very good questions. Starting with Cycling gross margin. We started the work on Cycling gross margin well before the pandemic. So we are confident that a big proportion of that margin will stay. It's obviously very, very difficult to know exactly how much post pandemic will be there. But a big proportion of that growth we expect to retain. In terms of loyalty card, yes, unfortunately, it is a bit too sensitive to explain exactly how that's going to work, whether it's an app, whether it's a card at the moment. We will be in a position in quarter 4 to share more details on that, and we look forward to doing that with everybody, but we're very, very confident about the proposition, which has researched and tested very well with customers. In terms of Fusion, we have done some limited local marketing in Colchester to ensure that customers are aware of the new Fusion offer. We've also done a little bit of PR as well. And we've got some interest through that. But there's no national advertising for that one site that we've done to date.

Our next question today comes from Manjari Dhar of RBC.

Congratulations on the results. I was just wondering, could you give a bit more color on the market for electric, both for vehicles and for bikes? And the sort of growth rates you're seeing there? And perhaps secondly, just on the cross-selling in store, where is that at currently? And where would you hope to get to in [ time ]?

Yes. So let's start -- thank you, Manjari. Let's start with the color for the market on electric. So we are seeing very strong growth on both electric bikes and scooters where we're seeing those 2 categories together, 140% up on 2 years. So a very significant growth. Both categories they're doing well. Scooter slightly stronger growth than bikes. And then in terms of our servicing of electric vehicles over the first half compared to pre-COVID, we're looking at growth of over 120%. So very big growth in both the products that we are selling and then the servicing that we are doing on electric and hybrid vehicles as well. So really pleased with that. What we are doing as a consequence, and we announced this today, is we've got 1,300 technicians trained in the first half of this year on electric, electric hybrid servicing. We're on track to hit 2,000 by the end of this year. And we've announced today, we will double that to 4,000 technicians trained to do electric servicing across bikes, scooters and vehicles next financial year. So we're really starting to see momentum there. In terms of cross shopping, we've made good progress in this space this year. We've seen particularly strong results as we come out of this half. We haven't given any explicit targets for cross-selling, if you like, this year. And we're not intending to set any targets -- new targets for the second half. But we're seeing good growth, double-digit growth in that across the group. We expect after the launch of the Motoring club that, that will go up even further because a big part of that club is to encourage customers to shop across Motoring services everywhere with garage, a van or a store.

The next question comes from Adam Tomlinson of Liberum.

3 questions from me, please. First of all, just on the Fusion -- that trial site there. I appreciate you said it is early days there, but perhaps it'd be helpful if you could just give a bit more color in terms of the results you're seeing from that -- the sales, the cross-shop. And maybe a little bit in terms of the economics of that around the cost base, how that changes? Just to provide a bit more color on that. And I guess, looking forward, if that trial does continue to go well, how quickly perhaps and the opportunity to roll those Fusion sites out across the state, how quickly that could be done? That's the first question, please. The second one is just on freight rates. I know you mentioned that you're not expecting those to continue at the same sort of level as they have done. I imagine you're sort of in discussions now. So can you perhaps give a bit of color on where you see those coming out for next year? Please, that would be helpful. And then thirdly, just following on from the last point you were talking about there, Graham, in terms of that cross-shop metric. I mean it feels to me, certainly when we talk to investors as well, that's a key stats and a key sort of KPI, I guess, for you. So just wondering, if that's something you -- we obviously -- we know directionally where that's going, and you talked about it being at the 2% level in terms of Retail customers shopping in Autocentres previously, but whether you're going to consider actually disclosing that so that the market can -- I understand you might not want to do that sort of quarter-by-quarter, but maybe every half year and full year, just so we can see directionally where that's heading and the progress being made. That's the third question.

Okay. Thanks, Adam. Loraine, do you want to start with freight rates?

Yes, sure. So I think we talked about this a little bit last time out, Adam. We've contracted for this year, obviously, and I think we included in the statement the fact that this year, our freight cost was GBP 5 million above last year. When we say that freight rates, we don't expect them to continue. We mean at current spot levels. Obviously, spot's been very high for a sustained period of time, but we still think there could be increases in freight rates coming through for next year. That's what we're planning for. I'm not going to give you a level because I think we'll have a better understanding of that when we start our own negotiations. It's a little bit early yet. But I can easily imagine another shift from FY '22 into FY '23. But I think from a freight point of view, it will then start to moderate beyond that point. Obviously, there are other inflationary factors, which we've talked about in the statement, but I think freight is probably, as you've identified, the most substantial.

Okay. Just moving on to Fusion. As you said, Adam, it is early days. We literally had just 2 full months of trade in Colchester. In terms of top-top level view results, sales have been strong. We've also been encouraged with the cross shop that we've managed to get across the town. We are -- we've had some very good NPS results in our Retail business, particularly and some great feedback from customers around the new shopping experience. Some really positive feedback, and that's coming in every week. We still got some opportunities, we think, to improve where we are with how we sell solutions within each of those channels of the town. And we -- the next step will be very much looking at how we value engineer the experience to ensure then that we have something that we can roll out to a lot more towns and at pace. We've got a second town going live very shortly, in fact, in the next week in Halifax. And that will give us even better data to give us a sense of where we go with those 2 towns, but also how many towns we can roll this to and in what sort of format and proposition. So it's too early to really give you any more than that, but we are encouraged with some of the results around the customer experience that we've seen so far. In terms of cross-shop metric, it's a good question. I think it's probably a little premature to set the targets now because if you look at cross-shop through the lens of 3 major component parts, the first part is bring all of our websites together so customers can shop digitally across the group in every part of our Halfords world. The second piece is Fusion, which is bringing all the physical assets together. So customers are able to shop that better. And as you know, we're only one town into that with the second one just about to come. And then the third constituent part is the club. We're going to start with Motoring to help customers understand the range of Motoring services they can get across Retail garages and vans. And we also have plans to do a similar thing for Cycling next year. So I think as we go through next financial year, this cross-shop metric will become even more important, and there'll be more reasons, if you like, to look at how we measure and report externally against it. So I'll say, watch this space next year.

[Operator Instructions] Our next question comes from Matthew McEachran from Singer Capital Markets.

Can I just come back to Fusion and just ask the boring question again? I'm sorry because I've asked it probably in each of the last result sessions. But I mean, that's helpful feedback in terms of some of the factors you're seeing. But when we look at the overall revenue take in a catchment, what would you deem success to be in terms of growth as a result of Fusion? I mean, are we talking a small quantum, let's call it, single-digits quantum improvement in takings? Or is your aspiration and the kind of the hope that it's a much more substantial increase in market share and conversion in these local markets?

Yes. I mean, I think we -- at the moment, we're very much focused on the customer experience itself. So that's NPS, solution selling, cross-shopping and just seeing how we can optimize those 3 parts within Fusion. The sales, in effect, becomes almost an outcome of how well we do those 3 things. So the very specific targets are on those 3 areas. The sales growth, I think we would want to see a double-digit growth in sales from a Fusion TAM with the investment that we're making. And to date, we're happy with what we're seeing.

Okay. Yes, that's useful. And if you see success in Halifax, what is the capacity in terms of phasing of a more national rollout of Fusion across the state or across the catchments?

I mean there's certainly an opportunity to roll the Fusion concept that we've put in place into many, many more towns across the U.K. if we can find a proposition that works for customers and us financially. And that's why we started Fusion the way we have and picked Colchester and Halifax because they're representative of the largest sort of proportion of towns and cities we could go into and do this type of customer experience. So we are talking hundreds-plus, not just sort of tens and tens of towns and cities, if we can get the experience and the financial business case right for this particular proposition.

I think the other...

Okay. And then in terms of...

Sorry, Matthew. Just something to add on that. I think the other thing to think about with Fusion is not necessarily just to think about the fusion concept that has gone into Colchester being rolled. But there are elements of it that we may choose to roll out faster, for example, or into more towns because it hangs together in its own right. So there might be something, for example, around the car park that looks really interesting, that we might be able to roll wider and faster. So don't think of it as just a sort of big infrastructure thing that has to be rolled. I think there are elements of it that we might take and move faster because they are successful in their own right and quick and economic to do.

Yes. Yes. Understood, yes. And if we look at Halifax, what is the time line from starting this project to your planned launch time? What's been the work stream there?

Halifax launch is around now, and it takes us about 3 to 6 months from start of identifying a town to actually execute in that town as it stands now. Obviously, that time scale is such partly because we're learning a lot as we go. We've only done 1 town. So there's a lot of bespoke things that need to be done. We'd expect if we did a national rollout to be rolling out something that's more proven and faster to get to market.

Okay. That's really helpful. Second question was on working capital. If you could just -- I don't know if you mentioned the number earlier, apologies if I missed it. Just in terms of the suboptimal working capital position and inventory position, if you normalize, what would be the effective flattery in that H1 cash number?

Yes. So I think I didn't mention the number, Matthew. I'm sort of working internally on a range because the actual working capital number for the second half of the year becomes very dependent on the timing of stock flow in and therefore, the creditor position at the end of the year. But I think if you were looking for a sort of central number to say that it's flattered by, I would use around GBP 30 million.

Yes. Okay. That's helpful. And then the final question was just on your dollar hedge rate. Are you fully hedged yet for FY '23? And could you give us some idea as to the rate that you've been achieving?

Yes. No, we're not fully hedged yet. So I think we're about 40% hedged and we're at just over [ 135 ] at the moment.

Our next question comes from Kate Calvert of Investec.

Three from me. The first one is, can you give some more color around Peloton 2 relays and the results that are coming through there? The second question is on gross margin Autocentres, which has obviously been impacted by the lower margin acquisitions. Where do you think you can get your Autocentres gross margin back to over the medium term? And the third question is on lease renewals. Obviously, you're doing quite well there. Do you have a similar number coming through in FY '23 compared to FY '22?

Do you want to start with lease renewals, Loraine?

Yes. Shall I start with the last 2, Kate. So yes, lease renewals still seeing good results. We've done 28 renewals in the first half and we're getting about a 25% saving on average. That's not to say that will continue forever, but I'm pretty confident that we'll see more coming through for the second half. So there are further savings to come out of rent, which is positive, clearly. The gross margin on Autocentres, this has changed quite fundamentally obviously, with the acquisitions of McConechy's, Tyres on the Drive and now Universal. And it's -- clearly, that does dip the gross margin percent, but the labor as a percent of sales also dips. So the thing that becomes a focus for us is increasing the gross margin per labor hour. Labor is the resource in Autocentres and increasing that gross margin increases the profitability of the overall business. And I'm pleased to say that we've continued to move the dial on that. We've not released the gross margin per labor hour. That's clearly quite competitively sensitive, but it is at its peak at the moment for the Autocentre business. We had a little dip in the first quarter because of the MOT business, which is in and of itself high margin and also attracts high-margin service-related revenue to it. So I'm not sure that we will see the Autocentre margin move forward that sharply. It very much depends, of course, on our acquisition or organic rollout plans. But what I hope we can still see continue is that gross margin per labor hour. That's important. And I think we can continue to still grow that.

Yes. Just a couple of builds on that as well. Obviously, the acquisitions that we are bringing into the group in this space, give us an opportunity over the mid- to longer term to put a different product mix into the business. So less tires, more MOTs, more servicing. So over time, that margin mix improves. The other thing we are doing and even more quickly and successfully than before is we are adding PACE, the digital operating platform, into wherever we acquire much faster. So we're getting Universal, McConechy's onto that digital platform. And what that does is ensure a consistency around how we plan work and how we manage and encourage customers to spend. And that in itself over time, also improves the gross margin in the businesses that we acquire. So short term, as Loraine says, mid- to long term, a lot of reasons to be cheerful there.

And on the Peloton relay?

Moving to Peloton. We're very pleased with the customer and colleague feedback on Peloton 2. Peloton 1 was very much taking the principles of the first Peloton program, which was around bikes so to improve the visual merchandising of the PACs category, parts, accessories, et cetera, in store. We think there's even more potential in Peloton than we've got now, primarily because we'd be -- we're still a little short of the mid- and premium tier bikes. And it's the mid- and premium-tier bikes that we see the biggest attach rate for PACs. So as that stock becomes more plentiful as we go into the second half, I expect Peloton 2 to deliver an even better performance. We haven't given any specific numbers around Peloton 2 at the moment, therefore, I can't give you any more guidance than that. But we're pretty much there in terms of rollout across most of our stores and probably better performance to come as mid and premium tier bikes get into stock.

We have no further questions in the queue, so I'll hand back for closing remarks.

All right. Thank you, everybody. Thanks for joining and look forward to catching up with you shortly.