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

Good morning, everyone, and welcome to the Halfords Group preliminary results for the 52 weeks ending the 1st of April 2022. I'm Graham Stapleton. And joining me today for her last Halfords results presentation is Loraine Woodhouse, our outgoing CFO. I'm also delighted to introduce you to Jo Hartley, our new CFO, for her very first set of Halfords results. In terms of the structure for today's presentation, Loraine will start with a look at our FY '22 financial performance. I will then take you through our strategic update. Jo will then present the plan for FY '23 and the outlook. And I will close today's session with a quick summary. We'll then be happy to take your questions at the end. So to get us started, I'll hand you over to Loraine to talk you through our financial performance, Loraine.

Thank you, Graham, and good morning, everybody. It's nice to see a few people in person here today after such a long gap. Before I start on Slide 4, I just 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, I focused primarily on our performance versus 2 years ago. as our financial year FY '21 was heavily disrupted by COVID, and it makes meaningful comparisons quite difficult. That said, where relevant, we've included our prior year numbers throughout the presentation to ensure that we give full transparency. The second point of note is that our results are post IFRS 16. The standard has a material impact on our balance sheet and cash flow metrics, and I'll explain the movement where relevant. Slide 5 summarizes our overall performance. Our financial year started on the third of April 2021 just before nonessential retail started reopening after the third national lockdown. We were fortunate during COVID that we were able to keep our stores and garages open. That said, this has undoubtedly been one of the most operationally difficult periods that we've experienced as a business. Throughout the whole year, we experienced significant disruption with sickness-related absences, unprecedented supply chain disruption and unpredictable peaks and troughs in demand that made running the operation extremely challenging. Against this backdrop, we are proud of the results we have delivered. Group revenue was up nearly 20% on a 2-year basis or 16.7% like-for-like. We delivered an improvement in gross margin of 157 basis points versus FY '20. Costs as a percent of revenue stayed broadly flat as we cut underlying costs to allow us to invest in our strategy. We delivered group underlying profit before tax of just under GBP 90 million at the top of our guidance range and 57.8% ahead of FY '20. In the year under review, we received GBP 11 million of rates relief, demonstrating strong underlying profit growth versus 2 years ago. Cash ended the year strongly at GBP 46.1 million with our net debt-to-EBITDA ratio at 1.67x, including lease debt. Moving to Slide 6. I cover most of these metrics later in the presentation, but I did want to touch briefly on non-underlying items, which totaled a credit of GBP 6.8 million for the full year. The credit relates primarily to the release of provisions related to prior year store and garage closures, whereby in subletting or signing leases, we've done better deals than we originally assumed. Partially offsetting the provision releases are GBP 2.8 million of fees in relation to recent acquisitions, including National and also a charge of GBP 0.8 million relating to the replacement of our warehouse management system. 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 out of our underlying trading numbers and shown it separately. As you can see, we've seen profitability improvements versus FY '20 across our business. Retail profit for the year, overall, was ahead of FY '20 by 19.4% pre rates relief. A very strong result given the extensive volatility and disruption we experienced. Our Autocentre business, including the impact of acquisitions, had an excellent year. Overall profit of GBP 14.4 million was GBP 3.2 million ahead of FY '20. As a reminder, our Autocentre business made GBP 2.2 million of profit in FY '17. And finally, as we highlighted at the half year, our Performance Cycling business is materially more profitable than it was 2 years ago with the closure of Cycle Republic benefiting the P&L by GBP 3.2 million. On Slide 8, you can see a summary of our retail performance. We delivered solid sales growth of 5.4% versus FY '20, a 2-year like-for-like of over 15%. Total sales were down on FY '21 as cycling sales moderated versus the extreme demand seen in the previous year. And we also saw a revenue impact of closing less productive stores. We delivered very strong gross margin despite investment in motoring pricing in the second half of the year, and we manage the underlying cost base, allowing us to invest for the longer term in areas we believe are strategically important. On Slide 9, there is a little more insight into our sales performance. As I said, our like-for-like sales growth was 15.2%, with motoring growing by 12.5% and cycling by 18%. Our motoring performance was encouraging, especially after a weaker performance in FY '21, where COVID materially impacted miles driven and, therefore, sales overall. Workshop, car cleaning and touring all performed well during the year. And most encouraging was the growth that we have seen in motoring product market share with our volume share in measured categories, increasing by 380 basis points over the last 12 months. This continues to support our strategy of investing in more competitive pricing in key motoring categories. Cycling sales were solid, but more volatile during the period and experienced a weaker second half, especially when compared to FY '21 where demand peaked. Sales were suppressed by supply chain issues, particularly in premium and owned brand bikes. But we did also see some periods of weaker demand. Overall, you can see from this slide that sales were volatile. Quarter 1 was exceptionally strong which will impact the pattern of sales growth seen over the year we are now in. On Slide 10, you can see that retail gross margin moved very positively versus both FY '20 and against last year. Against FY '21, margin strengthened by a return to stronger motoring sales, a dynamic, which was always positive for margin as the category has a higher gross margin than cycling despite the investment we've made in price. However, against 2 years ago, the key driver behind our overall improved margin remains the increase we delivered in our cycling margins, work that began 2 years ago. I should flag that towards the end of the financial year, we did see our cycling margins begin to step back as the ongoing supply chain challenges inevitably started to drive up cost prices once more. And this is a trend that is likely to continue, as Jo will cover later. Retail operating costs have grown by just over 6% in 2 years. A good result given the inflationary environment and the significant investment we have chosen to make. Our focus has been to lower the underlying cost base so that we can reinvest in areas that we believe will drive growth. The store closure program and the renegotiation of 69 leases in the period saved us GBP 10.6 million of property cost versus 2 years ago. We also kept our variable costs tight through carefully managing labor modeling by renegotiating many goods not for resale contracts. Against those savings, we have chosen to invest in a series of key strategic programs that we believe will drive future revenue. For example, we invested in a centralized customer contact center. And as a result, we've seen an increase in our retail NPS scores of over 10%. We have increased our digital and technology spend, resulting in online sales ahead by 77%. We also invested heavily in staff training, improving our ability to provide a greater number of in-store services, key to building a more resilient business. Not all of these investments will pay back in a year, but we believe they are key to building a stronger, more customer-centric business going forward. Note also on this chart that group-wide bonuses and LTIPs have increased versus 2 years ago. As in FY '20, as COVID hit, we removed all central incentive payments. Moving to Slide 12 and our strategically important Autocentre business. The improvement in Autocentre EBIT to GBP 14.4 million is really pleasing in a year that continued to see significant COVID disruption. During the last couple of years, we've step changed the shape of our Autocentre business through acquisitions of Tyres on the Drive, McConechy's, Universal, and more recently, National or Axle Group. Alongside this, we've rapidly expanded our mobile business on the back of the Tyres on the Drive acquisition and created a successful software business in Avayler, reselling a software that has made our own business materially more productive. As expected, in the second half of the year, MOT tests deferred as a result of COVID came through. The net result is an extremely strong performance for the Autocentre business with 2-year like-for-like growth of 23.4%, total revenue nearly doubling and profit up by 47% versus 2 years ago. Looking forward, the Autocentre business is increasingly important to the group. We bought National Tyre Services in December '21, a synergistic acquisition that will deliver good value for the group. We are on track to deliver our planned synergies in the first year of acquisition. We also see planned profit growth from our existing business, and therefore, this needs-based, more resilient part of the business will continue to deliver a greater share of group profitability. A long way from the GBP 2.2 million of profit, you can see here back in FY '17. Moving now to Slide 13. The composition of Autocentre revenue, as we've explained previously, has changed with a switch to lower gross margin tire volumes on the back of our acquisitions. National, particularly, is a heavily tire-based business. Tire businesses have average -- higher average selling prices and hence pounds margin but a lower gross margin percent. These businesses are very productive, and they run with a different labor model to our existing operation, which has a high proportion of service and repair work. The opportunity is to retain the tire business, but to boost the level of service and repairs, which will lead to strong margin growth going forward. On this slide, you can see cash margin growing over time, but a reduction in gross margin percent, purely reflecting our changing model. Across Autocentre Group, we saw a strong gross margin rate improvement of 320 basis points, reflecting the productivity improvements that we've seen through using PACE, one of the core components of our Avayler software. Moving now to Slide 14. We closed the year with cash of GBP 46.1 million, slightly elevated, reflecting the fact that a quarterly VAT payment was made on the first working day of the new financial year. For clarity, under IFRS 16, depreciation now includes the amortization of the right-of-use assets, which for the full year is around GBP 70 million. The most notable movement in our cash flow is working capital, an outflow of GBP 70 million. Last year, we saw a working capital inflow of around GBP 50 million. As I flagged previously, working capital normalized as we rebuilt cycling stocks after a period of heavy disruption. Our retail stock before provisions at the end of the financial year has increased to GBP 195 million from GBP 134 million last year. This is higher than we would typically run with, but with freight rates increasing and supply remaining volatile, we chose to take some stock in early to give us the best possible chance of avoiding supply shortages this year. Included within our cash flow is GBP 47 million of capital investment for the year, excluding the purchase of National. You can also see here the GBP 62 million proceeds of our share placing executed back in December. Moving to Slide 15. As a result of our ongoing strong cash flow, including IFRS 16 lease debt, our total debt is GBP 345 million, GBP 68 million higher than FY '21, a difference that can be explained by the lease debt associated with National. We ended the year with net debt-to-EBITDA of 1.67x, just below the range we said we would typically expect to operate within. Our strong results support the payment of a dividend. We updated our dividend policy at our prelim results a year ago, reinstating the ordinary dividend from FY '22 at 9 pence per share with an intent for this to be progressive. We paid an interim dividend of 3 pence on the 21st of January this year. We are, therefore, proposing a final dividend of 6 pence per share to be paid in September. Regarding capital allocation, whilst we do still have cash on the balance sheet, we flagged during our acquisition of National that we had plans for future investment. This year, we will invest in the integration of National. We will also continue to invest in our underlying business, including in Avayler to allow us to capitalize on the opportunities we believe are open to us in the garage software market. And finally, of course, we remain open to opportunities afforded by appropriate M&A activity in the garage services business. This is my last set of results for Halfords. The last 4 years have not been easy. I did not foresee a global pandemic, a war, record inflation or a consumer confidence crisis. But notwithstanding the environment, I'm proud of what we've achieved in my time here. The reshaping of the Halfords business towards a motoring services-led offer has built much greater resilience, work in progress, but something that is becoming increasingly important. Working alongside Graham has been a privilege, given his amazing vision for the business. whilst we face some challenging times together, we've also had a lot of fun along the way. In handing over, I know in Jo, that we found a rare talent who will excel in her financial management of Halfords. We were fortunate to find someone of Jo's caliber and her integration into the business has been seamless. Jo, I wish you the very best of luck in the role. Positively for Jo, I know she will be well supported by the incredible group of people, the broader Halfords finance and legal team, who have been at my side for the last few years. To the team who I hope are watching, you could not have worked harder or be more supportive. And I'd like to say a huge thank you. And finally, I'd also like to say a big thank you to investors, analysts, bankers and advisers on the call and in the room, many of whom I've known for decades. It's been quite a journey, but you've given me a lot of help and advice over the years, and I have greatly appreciated the support. With luck, I will see some of you when I pop up on the nonexecutive side of the table. Thank you.

Thanks, Loraine, and for your kind words and hope you're feeling a bit better now. You can see from the main summary that despite a very challenging trading environment, still heavily impacted by COVID and against some big macroeconomic headwinds, we delivered a very good set of results. I'm incredibly proud of the resilience our colleagues have shown in the face of significant operational disruption. I'd like to express my gratitude to them for their continued hard work and determination to provide the very best experience for our customers. Executing our strategy and delivering on our purpose to inspire and support a lifetime of motoring and cycling continues to contribute to our improving performance. And therefore, the 3 key strategic goals that we set out to help us deliver against our plan remain entirely unchanged, as you can see here on Slide 19. And this year, you will also notice that our ESG commitments are now present in our group strategy as they form a key part of how we do business going forward. Moving to Slide 20. You'll remember that in 2019, we made a move towards accelerating specific elements of our plan in order that we could evolve into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating sustainable financial returns. And that's exactly what we have done. Slide 21 shows how a very different Halfords is starting to emerge. We've increased our group revenue by just under 20%. We've built a large-scale services business that now represents almost 40% of total group revenue. Our B2B sales have also grown and now represent 20% of turnover. You can also see here the change in shape and scale of our channels and physical assets, specifically the reduction in number of stores, but the increase in the number of garages and vans. The result of all of this change is that our motoring sales are now GBP 1 billion and represent over 70% of total group revenue. Consequently, we are now much less reliant on customers coming into our stores for product-based transactions. And instead, we're able to enjoy the benefits of a much more resilient needs-based services offer. And our customers are responding. By focusing on delivering our vision and strategy, we now have more customers than ever before, recommending Halfords as a place to shop. In fact, we achieved our stretch net promoter score targets for FY '22, ending the year at 68.4 points for the group, a huge 6-point increase versus FY '20. This, in my view, is an extraordinary achievement, particularly given the challenging trading circumstances for both colleagues and customers. And of course, all of this progress creates a very strong platform for which we can further transform the group. So let's now look in more detail at the progress we've made in FY '22, starting with Inspire, and how we're offering our customers a more differentiated and super-specialist experience. On Slide 23, you can see that our main focus here has been in transforming the Halfords customer experience in a town by a program we have called Fusion. Fusion delivers a seamless, convenient and consistent experience to our customers by leveraging all that Halfords has to offer in a single town. It highlights our super-specialist credentials and our unique combination of stores, garages and mobile experts together with product advice and services delivered by fantastic colleagues. FY '22 saw us bring this to life in 2 trial towns, Colchester and Halifax, where we tested how optimal we could make the customer experience. And to show you just how this unique proposition comes together, we have a short video that we will hopefully play. [Presentation]

So as you can see, a huge transformation with the customer experience at the very heart of what has been delivered. And the results speak for themselves. Both towns are now beating the very ambitious business goal we set ourselves. And our Fusion garages are breaking sales records. Our garage in Halifax has moved from being ranked 214th to one of our top 3 garages. What we found through our trials in Halifax and Colchester is that 3 specific elements of Fusion resonated most with customers and equally delivered significant value. Firstly, our investment in the car park giving us the ability to refer customers from a car tech in our retail store directly across to our garages and mobile vans for the work to be completed on their vehicle. Secondly, the new quick-serve bulbs, blades and batteries desk in our retail store. And lastly, the solution selling training our colleagues across the town received and the impact this has had on average transaction value. And it's these key successes that we will use to focus our plans and investment for this financial year. Jo will come back to this later today in the presentation. It's not just about Fusion though. We also made significant progress across the year in terms of inspiring our customers with new products and services. I'll touch on a few examples here on the slide. We've made huge strides in our electric credentials, inspiring our customers with new market-leading e-bike and e-scooter ranges, together with the launch of the biggest electric bike trial scheme in the U.K. We've also launched innovative new ranges, gaining external recognition and some impressive industry awards across the year, including the Boardman SLR 9.4 which won the prestigious Cycling Plus Bike of the Year award. And finally, for Cycling, we launched Bike Exchange, a brand-new proposition putting Halfords into the rapidly growing circular economy for the very first time and leveraging our scale to offer the largest physical network of secondhand bikes in the U.K. For our motoring customers, we've launched a new electric vehicle charging solution in partnership with BOXT. This market-leading proposition makes the complex home charging journey easy for our customers in a one-stop shop approach. We take care of everything from installation to accessories to energy supply, all in one place and all for a fixed price. Moving on now to the progress we have made in supporting our customers through an integrated, unique and more convenient services offer. Here, we've arguably seen the greatest change across the year, transforming the shape and scale of our business through the acquisitions of National, Iverson Tyres and most recently Havebike. The time line on Slide 26 shows you the acquisitions we have made over just the last 2 years, all of which are in line with our strategic goal to evolve into a services-focused business with a greater emphasis on motoring. The result is greater scale and convenience across the U.K. for both our consumer and commercial customers. Our most significant acquisition to date was the purchase of National Tyres last November. The GBP 62 million share placing enabled us to acquire 234 sites, 60 vans and 1,200 highly skilled colleagues. One exciting aspect of the National deal was the acquisition of Viking their tire wholesale business. This nationwide distribution network will not only benefit our new National sites but also the existing Halfords Autocentre business. For the first time, Viking enables us to buy tires directly from manufacturers and therefore, reducing reliance on our existing third-party wholesalers. Just one of the many synergies we have been able to realize. As you can see on Slide 28, we are making significant progress on the integration of this business, with our FY '22 targeted savings already realized across the group. We'll also be further enhancing the business through FY '23 via the launch and integration of our Avayler software to make National garages more efficient and effective. We'll also embark on a rebranding and refurbishing program for these sites. And at the same time, as adding to our group garage portfolio, we've scaled our Halfords Mobile Expert fleet, moving from just 7 vans to over 250 in 2 years. The mobile expert proposition has been particularly successful and resilient through the pandemic, providing customers with an integrated, convenient and unique on the drive or at work offer. We can see this reflected in the revenue growth of plus 44% year-on-year. And our customers have rewarded us with over 220,000 reviews rating as an excellent on Trustpilot, no mean feat. Moving to Slide 30. And as you can see, when you bring together all of these changes in the shape and scale of our business, we're now able to offer our customers unparalleled convenience through our combination of 606 garages, 250 retail vans, 192 commercial vans and 400 stores. 85% of the U.K. population are now within a 20-minute drive time to one of our locations. And of course, there's no minutes if we come to you. And all of this meant that in FY '22, we became the U.K.'s biggest provider of motoring services, a staggering 8 million services were carried out, representing almost 40% of total group revenue. And underpinning both our consumer and commercial garage services businesses is our market-leading digital platform, Avayler. Many of you will have heard me talk about our entry into the Software as a Services market last year, leveraging the success of our own proprietary technology, which was developed using a combination of our PACE software and the Tyres on the Drive platform. For those of you who are new to the proposition, here's a short video, which shows you exactly what Avayler is all about. [Presentation]

So as you can see, Avayler creates a more efficient Halfords business, alongside a better Halfords customer experience, driving productivity and profit. And this is certainly reflected in our Autocentres Net Promoter Score which has increased 3.5 percentage points year-on-year. And as you've seen, we have now also successfully taken Avayler into the B2B market with significant interest internationally from the motoring services sector. It's the start of an exciting journey for us with multiple opportunities ahead. Moving on now to Slide 32 and how we're enabling a lifetime of motor and cycling for our customers. And here, we've made some huge strides forward in FY '22 through a focus on the launch of our brand-new Halfords Motor & Carbon March. As you can see on this slide, despite the breadth of our full motoring offer, which includes products and services delivered through retail stores, garages and vans, currently just 4% of customers shop in more than one of those businesses within the group. And Slide 34 shows just how important it is to focus on optimizing this. Customers that shop across the breadth of our group offer are 3.5x more valuable to us. And equally, if we can engage them over multiple years, they are then 2.5x more valuable. Our club is therefore designed to incentivize customer behaviors that encourage breadth of shopping, cross-shop within the group and multiyear relationships. The Halfords Motoring Club keeps our members moving, keeps them safe and helps them save. It's a digital loyalty club with 2 tiers, a free to join and a subscription membership, which you can see here on the slide. Benefits include MOT discounts and a free 10-point car health check aimed at encouraging retail customers to use our garage services, alongside personalized discounts of products and services to encourage customers to shop across more of our offer. Critically, the club also enables us to capture each customer's vehicle and registration data, together with marketing permissions by an easy multichannel sign-up process. Just 10 weeks since launch, we are encouraged by both the sign-ups and the customer engagement from club members. 27% of all club members are new to the Halfords Group database, and 81% of club members are new to Autocentres. We're also seeing evidence that members are increasing their spend and are more likely to book their MOT with us. The club gives us the opportunity to know more about our customers' vehicles than they do. Our objective is to develop the ability to accurately predict vehicle and customer needs, so we can proactively advise them on how we can help them before any of our competitors have the opportunity to do so. The more we understand a customer's vehicle and the more work we do to service, maintain and accessorize that vehicle, the easier it is to build lifelong, sticky customer relationships. So we talked about the progress we've made across inspire and support a lifetime. But as I said at the beginning, all of that is underpinned by a relentless focus on cost and efficiency, continued investment in our highly skilled colleagues and our ESG commitments. So let's move to Slide 37 and look at cost and efficiency first. Across the year, we have seen substantial savings from our store closure program, where sales transfer rates have been met, and we settled just under 70 retail lease renewals with an average saving of 26% on the existing terms. Our GNFR procurement team have driven savings of GBP 7.6 million across more than 100 initiatives. And as you will see, when we move on to talk about FY '23, it is this focus on removing costs and improving underlying profitability that gives us room to reinvest this year, specifically in those strategic programs where we can see good return on capital. Of course, our colleagues remain our most valuable asset. And throughout FY '22, we placed increased importance on investment across colleague well-being, engagement and development. On Slide 38, you can see that despite a challenging operational backdrop, we also continue to increase our investment in training. We spent GBP 2.5 million this year in both generally improving colleague skills, for example, our on-demand fitting for customers and in training new skills with over 2,000 colleagues now trained to service and repair electric vehicles in our retail stores and garages. And recognizing the ongoing impact of COVID throughout the year, are "Here to Help" fund continue to support colleagues in financial crisis with more GBP 400,000 issued in FY '22. And finally, as I said at the beginning, this year, our ESG commitments are now present in our group strategy, forming a key part of how we do business going forward. We remain committed to lowering our carbon footprint and have made good progress against our science-based targets, Scope 1 and 2 emissions and our use of virgin plastic. Unlike many other businesses, at Halfords, we have the unique opportunity to create a lockstep between our ESG commitments and our customer proposition and commercial strategy. Currently, no U.K. brand is clearly leading the way in helping customers with more sustainable solutions for their car and bike needs, be that more recycled products, electrification or less packaging. We're already the only U.K. business to offer customers a complete servicing solution across all forms of electric mobility. And I believe we are uniquely placed, therefore, to fill this gap. So we talked about the progress we've made against our strategy in FY '22. And I'm circling back to this slide as a final reminder that everything we have achieved this year has contributed to a significant change in the shape and scale of our business. Not only is FY '22 delivered all of this progress against our strategy, but it also gives us a very strong platform and sets us up well for what poses to be a challenging year ahead. And on that note, I'm delighted to introduce you to Jo, who will now take us through our plan to navigate this for FY '23 and the outlook. Jo?

Thank you, Graham. It's a great pleasure to be here today, meeting you for the first time as the incoming CFO. I'd like to start by saying a huge thank you to Loraine, firstly, for giving me time since I joined to complete a full induction, freed from the day-to-day responsibilities of the CFO role, but more so for the fantastic work she's done over the last few years to bring the business to where it is today. I'm very conscious that I have big boots to fill. And I commit to do my very best to pick up where Loraine left off. I joined Halfords because I saw a business with significant opportunity, a clear and compelling strategy, an impressive leadership team to execute it and a strong balance sheet. As I've got to know the business better over the last 2 months, I've learned that the scale of the opportunity is even greater than I first thought, and I'm really excited about what the future may hold. That said, as Graham has already noted, the next year will not be without its challenges. It's clear to me that the work Graham, Loraine and the team have done over the last few years leaves the business much better equipped to face into the current headwinds and underlines the importance of the group's strategy. As you've heard, an increasingly significant proportion of our sales now come from motoring services and business-to-business customers. And as such, we find ourselves a more resilient business. Today, more of our revenue than ever comes from needs-based spend categories, the products and services our customer, including those businesses we service and supply, needs to stay safely on the move, evidenced by over 70% of our revenue coming from motoring, which is, by nature, more needs-based. 20% of our revenue comes from our business customers. As such, it's more predictable and resilient in a downturn. And less than 1/3 of our revenue now comes from cycling, which is more discretionary. All this is a significant shift from where we were 2 years ago and leaves us much better place to face into the current circumstances. That said, our transformation is not yet complete, and we're not immune to the headwinds we're facing. This year, under such extraordinary circumstances and the cost of living crisis, we're sharpening our focus on what matters most to customers, while keeping a careful eye on our cost base. For our customers, we will focus in on the support elements of our plan, targeting the needs-based motoring services opportunities, be that the MOTs customers need in our garages, the bulbs and blades, they need fitted in our retail stores or the tires they need fitted on their drive at work or in our car parks by Halfords Mobile Experts. Our motoring loyalty club and continued price investment will allow us to continue to give customers the very best value across the full breadth of our offer. And as a business, we are optimizing our capital efficiency and controlling our costs while continuing with our transformation to support long-term growth and build even greater resilience looking forward. Let me now move to Slide 44 and take you through the plan in a bit more detail. We will continue to inspire our customers with the rollout of the most capital efficient elements of our Fusion program, developing the customer proposition further and focusing on the most successful elements of the trial, delivering it to more locations across the U.K. This year, we plan to continue to roll out our Click & Collect and batteries, bulbs and blades hubs with separate service desk for customers to collect their products and order and purchase motoring parts. We're committed to increasing training in enhanced customer service and selling skills, enabling us to benefit immediately from the added transaction value we've seen in Halifax and Colchester. Our busiest car parks will be upgraded with the skilled colleagues and technology to connect with our customers as soon as they drive in and deliver fast and seamless referrals for work straight across to our garages and vans. And we're moving towards providing a broader extended range of car parts and tires to maximize customer choice and drive incremental sales. We will also continue to support our customer and business-to-business customers. Our plans here include the continued integration of National to realize the full benefit of the synergies available, alongside further increasing the scale and convenience of our motoring services business. In this financial year, we are committed to concluding the rollout of PACE on the Avayler platform across all National sites, continuing our rebranding program, and at the same time, upgrading a significant amount of equipment across the National estate. We will also continue to grow our Avayler business, our ambition being to expand further across the U.S. and into Europe. And our market-leading motoring club will enable us to focus on unlocking the lifetime value in the relationships we build with our customers, optimizing the platform and accelerating the opportunities to get more customers shopping across the full breadth of our group offer. Here, our ambition is to get between 500,000 and 1 million customers signed up to the motoring club this year, targeting 10% against our premium subscription. All of these members will have given us their vehicle registration number and marketing consent on sign up, giving us a rich customer data from which to build personal and relevant offers, such as reminding them when their MOT is due and helping them book directly into one of our garages. Underpinning all of this, we must continue to make sure we're as cost efficient as we possibly can be, targeting more than GBP 15 million worth of in-year savings. We will continue to work on a structural cost base as we have done in the past and also look at new opportunities. For example, how we use technology and data to operate more effectively across the group. And in a year where it would be easy to pull back on our investments and colleagues, we will do the opposite. The scale of our business, with now more channels to market than ever before, creates huge career opportunities for our colleagues. At the same time, to support our strategy and fully realize our growth ambitions, we need to create capacity across our customer-facing highly skilled technical roles. So this year, we will continue an extensive recruitment and training program, leading the market in skills learning opportunities and creating a pipeline of homegrown talents. We will increase investment in the training and development of our colleagues. Training will enhance technical skills and capability, including electric vehicle servicing and also selling solutions, training, enabling us to realize the full benefit of our Fusion plans. In terms of increasing capacity, in addition to our already enhanced business as usual recruitment program, in this financial year, we plan to take on over 300 learner level roles, giving college leavers, apprentices and tire fitters the opportunity to become our technicians and service colleagues of the future. And our ambition doesn't stop there. Over the next 3 years, our aim is to bring in over 1,000 new trainees right at the start of their career. Train them, develop them and give them the tools and opportunities they need to excel in a career at Halfords. And finally, ESG. Here, our plans center around sustainability and the market-leading role we have to play in enabling our customers to switch to electric mobility alongside supporting them with more sustainable product ranges. This year, we are committed to increasing the percentage of sales from electric services and solutions across the group. We will further develop our ranges and provide enhanced customer communication to support the switch to electric mobility. At the same time, we're committed to making every part of our business more sustainable. This means further reducing the use of virgin plastic, particularly across our own brand products and continuing with our carbon reduction plans across the business and our supply chain. We will target increased data from our suppliers in support of reducing our Scope 3 emissions and working towards our longer-term net-zero target. So in summary, a busy year ahead. And despite some significant macroeconomic headwinds, we're confident that we have a plan in place, which keeps costs firmly under control whilst delivering a value-driven, convenient and super-specialist experience for our customers, development opportunities for our colleagues and in-year returns for our shareholders. Moving on to the outlook. And on Slide 48, you can see a chart which illustrates how we're building a projection for this financial year based of last year's results by bridging between the 2 years. As I've already described, we faced a number of headwinds. Inflation will have a significant impact. The cost of goods sold, people, utility and freight are all increasing at levels not seen for some time. These cost pressures will come as no surprise given that they will be experienced across all businesses. Consumer confidence has declined steeply, and we're seeing the market softening, particularly in discretionary spend areas, and that will impact us in the year ahead. And as expected, the rates relief received in the prior year will reverse. Despite all those challenges, we are choosing to continue our strategic investments in both colleague training and motoring pricing. The latter being critically important to grow market share in our needs-based motoring spend categories particularly in the year we're facing into. By way of mitigation represented by the upward bar, as you would expect, we are passing on price increases to customers where we're able to. And we continue to work on cost transformation to reduce our cost base sustainably for the future, with over GBP 15 million of cost saving included in our forecast. Finally, I'm delighted to report that our expectations on National Tyres, which we acquired in December, are in line with our business case, evidencing the more resilient nature of our garage business and the value of this investment to shareholders. While it would be tempting not to give guidance given the challenges of forecasting and the fact that we're only 10 weeks into our financial year, to be as helpful as possible, we're guiding to a range of profit before tax of GBP 65 million to GBP 75 million based on what we can see today. I would emphasize that there remains uncertainty in the macroeconomic environment looking forward. The impact this will have on the business and the extent to which our newly launched loyalty scheme, planned price investment in motoring and expanded Autocentre business will enable us to offset this through our needs-based propositions. We will continue to keep you updated as the year progresses, but I'll leave you with 2 thoughts. Firstly, the transformation the business has undertaken to focus on needs-based motoring services revenues means it is a much better place to face the current headwinds than it would have been historically. We need to continue on this journey. And secondly, while we don't know how long the current headwinds will persist for, they won't be with us forever. The balance sheet and strategy of the business remained very strong and the opportunity ahead is significant. I'll now hand back to Graham.

Thanks, Jo. So to summarize, FY '22 was a year of significant progress across all parts of our inspire and support a lifetime plan. And it was the year in which we accelerated our move towards becoming a motoring services-focused business. I'm proud to say that we are now the U.K.'s biggest provider of motoring services, and that we're able to offer our customers unparalleled convenience across a unique omnichannel offer. In doing so, we have created a much more resilient business which is far better placed to withstand the challenging macroeconomic headwinds we're facing into this year. That said, our revised profit guidance for FY '23 reminds us just how important the continued transformation of our business is. This will need to be undertaken alongside optimizing near-term returns. Before we close, I would, of course, like to express my sincere thanks to Loraine for her outstanding contribution to the business over the last 4 years. I am immensely grateful for her support and for the expertise and dedication she has shown in her tenure as CFO. Her thoughtful, pragmatic approach and her skilled leadership have been critical in our transformation journey so far. And her legacy is the very solid platform we see today. Loraine, we wish you all the very best in the future. Thank you for listening. We'll now be happy to take your questions.

I think there's a microphone winging its way. I will be [indiscernible]

Tony Shiret from Panmure Gordon. Just to preface my questions with another observation about Loraine because I was a broker. I was a broker at Kingfisher when she emerged from the finance department some years ago. And I can remember, particularly, I laughed when Jo mentioned her big boots because I know there's a couple of other people in the room, Kate and Jonathan, who probably spoke to Loraine about that time. And she used to live in Rotherhithe. And most of the communication that she did was early morning stuff for her. But obviously, we've been in the office a couple of hours. And on the mobile phone and I think I remember was you could always hear her boots as she was walking to the station because she had a very heavy footstep. Anyway, moving on. I think it's fair to characterize Halfords at the moment as Graham being good at all the [ wooshy ] front-end stuff, and Loraine being the enforcer at the back end. So you have got big boots to step into. And I thought it was particularly opposite that Loraine finished her tenure with a Hollywood staff swoon at the stage. So sorry, those were just a few observations. And now to move on to the nasty stuff, the Q&A. Just a couple of questions. I'm interested in Avayler , obviously. I just wondered where it is in the P&L, what the revenue is, that sort of stuff, how it's going to appear? And secondly, on a broader question, how does it fit in with the ERP at Halfords? Is there an ERP that basically goes across both parts of the business? Or is it -- are they operated sort of separately? So if you could give us some sort of idea of that. And I didn't notice you referencing any sort of cloud-based costs and revenue versus capitalization of those. I just wondered what you'd like to say about that. That's it.

Do you want to take that?

Yes. So Tony, Avayler doesn't make much of an impact on FY '22. We have 2 deals, as you know. And for both of those deals, we are spreading the revenue effectively. So what drops into the FY '22 P&L, the cost of the Avayler team, clearly any depreciation associated with it, and a proportion of the revenue that's spread over a 3-year license. So my expectation is that Avayler will continue to make a small loss in the year we're about to enter into, but clearly has very significant potential. I'll come on to the cloud-based piece and then I'll talk about the ERP. So we've done I think it's fair to say a very significant amount of piece of work for this audit to go through the cloud-based costs. And for most of what we do with one exception, because we own the IP and because we are in control of that software and any changes that we make to it, we're able to capitalize the intangible under IAS 38. The one exception to that is our new warehouse management system, which is a cloud-based system. And because in essence, that is almost off the shelf, we will be expensing that. So you'll see [ 0.8 ] associated with that coming through in the non-underlying, which was the WMS that I referred to. I would expect those cloud-based costs to increase going forward, probably because like everybody, we are moving more and more to cloud-based software. In terms of the ERP for Avayler, it is primarily within the Autocentre business at the moment. But there are a number of very attractive aspects to it that I think we would choose to take if we're able to into retail, so particularly around the booking platform that allows you to be particularly productive. So we will seek to use aspects of that across retail, but the bulk of it sits within Autocentres.

Okay. So retail has got its own sort of system. And so it's an integration of that to come sometime in the future.

Yes. I think there's a good chance we'll integrate elements of it. There are elements that really wouldn't be appropriate. So things like the mobile vans, for example. But the booking platform is very solid, and we think we can make better use of that.

And would it be fair to say that we need to have some sort of firmer idea about Fusion. How that's going to work before you integrate the 2 systems? Or is that...

Yes. Yes. No, I think that's fair. I mean certainly for the retail services business, the 2 aspects of Avayler, be it the improvement of operational efficiency or the seamless customer journey, they both apply to retail. So as we build out the Fusion best practice and the Avayler platform, there is no doubt some of that will come into the retail business. and to what extent that Fusion development will help.

Adam Tomlinson from Liberum. Two questions, please. One, just on stock levels, given that increase you've seen this year and in the context of the guidance cut for FY '23. Just how comfortable you are around those current stock levels? And the second question is appreciating the uncertainty for FY '23. Just perhaps a little bit more color in terms of the trading assumptions that are baked into the range of guidance you've given? And within that as well on the Autocentre side with the benefits coming through from the M&A, what's in your underlying assumptions there for that side of the business?

So I take stock. So yes, you're right. Adam clearly stock levels have gone up. The retail business principally drives that. And within the retail business, it is cycling that drives it, as you would expect. The motoring stocks are flattish. The -- we're as comfortable as we can be with the stock level. So we made deliberate decisions to bring the stock in towards the end of the year. With rising freight rates and, of course, the disruption, we felt it was better to have that stock within the business. Because we are a heavily owned brand cycling business, we're pretty comfortable with the levels of stock that we do have in the sense that we're in control of the cycle. So when we upgrade those owned brand bikes to a newer version, the timing of that is clearly driven by us rather than a branded player. So as you probably heard me say before, they're not fashion items per se. We are comfortable that whilst we would be holding the stock for longer and only costs associated with that. They don't depreciate and we don't potentially have a big write-off problem. Clearly, as Jo was clear, as we go into this year, there is a risk that we don't sell through cycling as fast as we originally thought. We, therefore, need to manage the stock levels around that. The only other dynamic I would point to in stock is the new Autocentre businesses come with tire stock. So traditionally, the Autocentre business has held very little stock, probably less than GBP 5 million. It's holding around GDP 25 million now, and that is the acquisitions where things like National come with associated tire stock. So those businesses are very definitely a different model. Jo?

So if I take your other question on the trading assumptions underpinning the forecast. We're forecasting based very much on what we're seeing at the moment. And that splits quite differently between what we're seeing in our retail business and what we're seeing in our Autocentres business. Our Autocentres business is holding up really well in the current environment, predominantly because it's much more needs-based spend, and consumers are continuing to do what they need to for their car. Where we are seeing a much harder trading environment is in the retail business and particularly in discretionary spend categories. We're seeing a considerable softening of the market in cycling and so much lesser extent in motoring product. Our share is holding up pretty well, and that's what we're expecting to continue. But actually, it's that market drop that's driving the reduction in our trading forecast as we look forward.

Jonathan Pritchard at Peel Hunt. Just on that point on cycling. Can we talk about elasticity? And have you brought bike prices up and actually been a bit disappointed with the response to those bike price increases, or have you not, and it is just the market? Secondly, perhaps talk a little bit about NPS. Is that predominantly stores? Or is HME dragging the total up? Or is it a bit of both? And then I don't think you talked much about the supercenters, I think where that's a combined National and Autocentre side. So could you just perhaps tell us a little bit about that?

Yes. So if -- I'll pick up the first -- certainly, first couple. So elasticity of pricing on cycling. I think in the cycling space, because we have got very strong market leadership, we have very big market shares and 80% of our bike range is own brand, we feel confident that we can move pricing up and the market will move with us. And we have seen that take place. In terms of elasticity specifically, because of the customer backdrop, there's a limit to how much elasticity you're going to get. So our view is that we should optimize the price inflation that we can put through. And there is quite significant price inflation in cycling to the extent that the market overall can stand it because we'll pretty much set the market price. So I think we've been happy with where we are with that in terms of putting the cycle inflation through. But I think we've reached the optimum level. The good news is that last 2 years, we spent a lot of time understanding elasticity of pricing. Loraine mentioned it in her presentation. It's a 2-year program. So we've got a really good understanding of where we can move pricing, at what limit we can move it to and a lot of data to help us make those decisions. So we're comfortable we put as much of that inflation through as customers -- the market can take. In terms of NPS, NPS improvements have been everywhere. So yes, we've got a fantastic Trustpilot score on HME, but the HME business until this year hasn't been included within the NPS measure. So that sits as a Trustpilot metric for us. It will be included within NPS during this year. The areas that are included in NPS are Retail and Autocentre, and both have moved forward. In fact, retail has move forward more significantly than our garage business over the last 12 months. And that's a reflection of the strategic investments we've made like the contact center. In terms of the supercenters, can you just repeat that question again? I didn't quite...

[indiscernible] what they are and [indiscernible]

In terms of NTS and Autocentres together?

Yes, those sites I think where it has one [indiscernible]

Oh I see, ones open very close proximity. Yes, we don't see a significant amount of cannibalization there. We've had to take a view on a few sites where there's a very, very close proximity. But the advantage of the garage business is that you are able to run quite a large number of units quite close to each other because customers just do not want to travel long distances to get a car service and MOT, because of the number of journeys they have to make to do that. So we're very confident that the NTS business gives us a very significant increment footprint.

I'm Kate Calvert from Investec. Two questions from me. First of all, what level of price inflation are you putting through on cycling and motoring? And my second question is around the strategic investment. You appear to be stepping it up from, I think, it was Slide 46 or 47. Are you expecting that to incrementally increase more going into future years? Or do you think that step-up in investment will just stay within the cost base going forward?

Let me take the first and you take the second. So in terms of price inflation, there is price inflation across the whole group. So the first thing to say is we are moving prices up in cycling and in motoring. The increase in price in cycling is significantly greater than it is in motoring because we believe there is more elasticity and more demand in motoring, more share opportunities in motoring. And therefore, that's where we want to ensure we're most competitive, but there is inflation in both. We haven't -- it's pretty competitively sensitive that data. So we haven't actually presented that, I don't think externally. But it's significant in cycling, less so in motoring, but there is inflation in both areas.

[indiscernible]

Well, I'll let you -- I'm not going to say yes or no.

And the step up in investment?

Yes. The second question, Kate, yes, you're right. We did step up the investment over the last couple of years. We've obviously had a strong couple of years and given ourselves through the work that we've done on the business, oxygen to invest in a number of areas that, frankly, we didn't have in the preceding years. So we felt it was important to put some of that customer investment in. I wouldn't expect it to keep increasing at the level you've seen. I think some of that investment was a base level investment, things like the customer contact center, as an example. So some of it will sustain. Some of it might even decrease actually. So the contact center would be a good example of that. We put the center in. We did it during COVID where we had a lot of incoming customer interaction. But actually you can already see the customer contacts declining. And as that declines, we've got a flexibility to dial down the cost in the contact center. So it's in -- we have the room to do it, but I wouldn't expect to see it increasing like that going forward. And as Jo was very clear, cost remains high on the agenda. And we can flex some of those costs up and down.

So I don't want you to go to Loraine. Sorry, the question is about Fusion. I just wondered, as you were going through Graham, I noted you saying that there was a new way of setting up the garages in the Fusion stores. When we think a bit more about Fusion, notably I noticed there was nothing about what the actual sales in the Fusion towns were up or down and the return on capital. And then the way you then talked about putting bits of Fusion into across the estate make me wonder whether Fusion as a concept, i.e. all the crunching together at the stores actually work or whether it's just thrown off a few things that are actually meaningful improvements that you can back into the estate but Fusion itself doesn't work?

That's a good question. The Fusion trial was very much around optimizing customer experience, trying to understand what we could do to really optimize customer experience in the town. That was the premise for doing it. And therefore, just taking the return on capital point, because it was just 2 towns, and that was the aim, we weren't looking there at what the return on capital employed would be in those 2 towns, not least of which because they're very bespoke and therefore, quite expensive fit-outs because it's just 2 towns we're doing. In terms of sales, we might not have mentioned it on there, but the sales beat the business case and delivered very significant growth, certainly more significant growth than I've ever seen in any store trial reformat change that I've done in all of my time. So Fusion as a whole definitely worked from a customer experience perspective, which is what it was there to test. What we've decided to do this year primarily, to be frank, on the back of a very difficult trading climate is to pick out the very best bits that resonated to both customers and delivered financial return and roll them to as many towns as we possibly can. So we get a really good balance of near-term return whilst obviously, hopefully, the inflation and confidence gets back to a better level. Once that is there, we can absolutely see a version of that Fusion town being rolled out to more towns across the U.K. It was never our intention to roll out to every town because the capital that we would need to employ would not pay back in every single place. But certainly, 100 towns, 200 towns, you could see a version of that. That's more efficient being put into those towns. And we're really pleased with the trial. We're really pleased with the trial.

Just to add a bit more flavor on that, Tony. So the ROCE on those 2 towns, I think you'd categorize as below what you might like to see for obvious reasons. We put a lot of investment into those towns and there are some things in there that are bespoke. What we've been able to do though is to then normalize that capital to say, okay, what have we seen work, what do we believe will normalize, if you roll this to 100 stores, what would it cost rather than rolling to 2, et cetera. And at the same time, we are able to normalize the cost base because at the same time, we were putting a lot of colleagues into those stores. We wanted to make sure that all worked. So you can strip from that to get to a point where you get something that has an attractive return on capital. And that is because the sales uplift was materially more than you would recognize as a refurb. There's a rule of thumb, isn't there in retail. It was very significantly more than that. So there is an attractive model there. But as Graham said, it wouldn't be appropriate for the entire estate.

Okay. So refurb plus rather than...

Yes.

Great. Well, I think that's it. Thank you. Thanks very much indeed for the questions. Thanks for making the time to attend and to view the call online as well. If you need any further clarification, please reach out to my learned friends in the Investor Relations team, headed by Richard Guest and Andy Lynch. And we look forward to speak to you again for our 20-week results in September. Thank you.