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 29th of September 2023. I'm Graham Stapleton, and joining me today is Jo Hartley, our CFO. In terms of the agenda for this morning Jo will begin today's presentation by taking you through our financial performance. I'll then provide you with an update on the progress against our strategy, and this year's plan, before moving on to the outlook for the remainder of the financial year. You'll then have the opportunity to ask questions at the end. Before I hand you over to Jo, I thought it would be useful to start with a quick overview of the first half of the year. We've made a very strong start to the year with outstanding sales and profit growth. That's despite some poor summer weather and the fact that 2 of our core markets, cycling and tyres, have underperformed. In a year of continued macroeconomic headwinds and significant inflation, negatively impacting gross margin, we have maintained our focus on what we can control, and here we have made good progress. Firstly, we've grown share across all 4 categories and exceeded our own market share targets in 3 of them. Secondly, we've delivered over GBP 16 million of cost and efficiency savings in the first half. That's more than half of our targeted savings for the year, and Jo will come back to talk about that in the detail in a few minutes. And thirdly, I'm really delighted to say that the strategic investments we've made across Motoring services have delivered a significant uplift in both revenue and profit in our Autocentres business. These results are clear evidence that the strategic shift we've made into the more needs-based categories of services and B2B over the last few years is creating a resilient performance in volatile markets. Our services business now accounts for more than 50% of group revenue, and our B2B business has grown over 37% and is now almost 1/3 of revenue. And then finally, outside of our Halfords branded business, a really important highlight for me is that our recently separated Avayler business has secured a commercial agreement with Bridgestone, materially scaling our SaaS operation, and I'll return to this later in the presentation. So that's a quick overview of half 1. I'll now hand you over to Jo to talk you through our first half performance in more detail. Jo?

Thank you, Graham, and good morning, everyone. Before I start, the usual reminder that all results are based of IFRS 16, unless otherwise stated. We've also now reverted to 1-year comparisons only. The first half of FY '24 has continued to be challenging for consumer-facing businesses. Inflation until October remains stubbornly high and interest rates remain at 15-year highs, impacting an increasing number of consumers coming off fixed rate mortgages. Energy bills remain much higher than they were a year ago, and sterling remained significantly weaker than historic averages. We've seen record wage inflation, but consumers continue to be under pressure. Against that backdrop, we continue to focus on what we can control. Our GBP 30 million cost and efficiency program is on track and being delivered earlier than planned. We've increased market share in all of our categories by remaining agile in how we trade and continuing to offer value for money to customers in a cost of living crisis. And we've continued to optimize our garages business, seeing significant sales growth, utilization improvements and profit growth. While the consumer environment remains very challenging, and forecasting isn't getting any easier, I firmly believe that we're doing all that we can. And on that note, I'm pleased to be sharing a strong set of results for half 1. Total revenue growth was 13.9%, supported by the acquisition of Lodge Tyre, which was bought this time a year ago. Like-for-like revenue growth was 8.3%, with particularly strong performance in Autocentres at 18% and Retail Motoring at 8.2% like-for-like, highlighting the more resilient performance of our needs-based spend areas. Underlying profit before tax grew 15.8% following 2 adjustments, which reduced prior year profit, which I'll cover in more detail later. Within those results, grace margin at a group level was down 210 basis points year-on-year, primarily driven by the Retail business, which has seen the most material impact of weaker sterling hedges. We've also continued our emphasis on profitably increasing market share in a challenging consumer environment through competitive pricing and promotions. Operating costs fell 2.1 percentage points as a percent of revenue despite the significant inflation in energy and wage costs anticipated at our prelims, and this is a result of our continued focus on cost and efficiency as well as the benefit that comes from significant sales growth and leveraging of our fixed cost base. The absolute highlight that it has to be our Autocentres performance, which saw EBIT of GBP 10.9 million, an increase of over GBP 14 million versus half 1 '23, showing the considerable progress we've made in this area. I won't dwell on Slide 8, which shows those same results in a tabular format, except to say that the 13.9% revenue growth has contributed over GBP 100 million of additional sales in half 1 alone. This highlights the continuing scale of change in our business. Half 1 revenues of GBP 870 million and now almost the same size as our entire retail business and in line with the total sales of the group in 2013. I'll now explain 2 restatements to last year's reported profit before tax, which have had the combined impact of reducing profits in the first half of last year by GBP 10.6 million. Neither of these adjustments had any cash impact. Firstly, half 1 '23 profit has been restated to correct FX accounting on hedged instruments within our Retail business. Accounting for hedged FX instruments is inherently complex, the significant volatility in sterling around the time of our interims last year exacerbated this. Following a detailed review of FX accounting that was supported by external advisers it's emerged that we had overstated half 1 profit last year by GBP 5.4 million, with a corresponding understatement in the second half of last year. There is no impact on full year '23 PBT from this adjustment. Secondly, in Autocentres, half 1 '23 PBT has been revised downwards by GBP 5.2 million. At the start of FY '23, we entered into a new agreement with a third-party logistics provider of wholesale power and distribution services. This enabled us to benefit from significantly better cost prices through negotiating directly with manufacturers and cutting out wholesale margins. The cash flows associated with this agreement results in the arrangement being disclosed as supplier financing, although this was not the commercial intention. The reconciliation complexity caused by this arrangement, material growth in purchase volumes and stock holding and intercompany transactions between the enlarged group, contributed to an understatement of creditors and cost of goods sold. The impact on the full year numbers for FY '23 was GBP 7.3 million. Appropriate steps have been taken to gain assurance over the half year '24 reported results. A full reviews being conducted, appropriate processes and controls are put in place. And in addition to our own auditors, a big 4 accountancy firm have supported us in ensuring half 1 FY '24 reported results are correct, and therefore, confident this will not recur. Finally, to reassure, neither adjustment has any impact on our midterm CMD targets or guidance for FY '24. We remain confident in our growth ambitions for Autocentres and the strong profit growth in this area of the business, which we're reporting today supports the strategy. Slide 10 bridges profit between half 1 '23 and half 1 '24 showing the drivers of very strong underlying growth. I started by showing the GBP 29 million of profit reported in half 1 last year and then the impacts of the 2 restatements that I've just described, which reduced half 1 '23 profit to GBP 18.4 million. In the first half of this year, we've seen just over GBP 20 million of inflation driven by energy, wage increases and the impact of FX hedges partly offset by lower freight rates. It's worth pausing here to notice that this inflation effectively wipes out all the profit made in the first half of last year. Markets have been mixed, and we've seen a year-on-year headwind of GBP 2 million, driven predominantly by further volume decline in the cycling market. We've invested around GBP 4 million in price in our Retail business to ensure we continue to remain competitive in a challenging market. And that is in part how we've managed to gain share in every single market in which we operate, resulting in GBP 6 million of profit growth through share gains. Autocentres optimization and growth initiatives were also a very key contributor to profit growth in the period, adding a further GBP 7.2 million year-on-year, which I'll cover in more detail later. But the biggest driver by far has been our focus on driving out costs and improving efficiency. In total, savings of over GBP 16 million have been realized through our better buying program and reducing operating costs across the group. At the start of this year, we outlined to you the GBP 30 million of inflationary headwinds we expected to see in FY '24 from FX, energy costs and wage costs, partly offset by reduced freight rates. In the first half, we've seen around GBP 20 million of this inflation, with the remainder expected to be seen in half 2. I'll just comment briefly on the 2 biggest inflationary headwinds, FX and wage costs. Firstly, FX. The average FX rate in cost of goods sold has fallen from 1.33 in half 1 FY '23 to 1.26 in half 1 FY '24. You'll also recall we saw a GBP 4.3 million benefit in half 1 last year from FX gains on derivative instruments that did not qualify for hedge accounting. Whilst this did not impact full year '23, we do see the year-on-year impact during the first half. Overall, FX was a GBP 13 million year-on-year headwind in half 1, and it will continue to be a headwind in half 2, albeit a much smaller one. For FY '25, we're 46% hedged at 123.54, broadly the rates assumed in our Capital Markets Day projections. The other very significant inflationary headwinds has been wage increases, which have driven GBP 8 million of cost inflation in the first half of the year. We expect to see slightly lower wage inflation in the second half. Looking forward -- further forward into FY '25, the recent announcement of minimum wages will bring wage inflation around GBP 5 million higher than that which we had assumed in our Capital Market Day projections. As we described at our prelims, we focused on driving cost and efficiency savings to offset these headwinds. The program in total targets GBP 30 million of savings for FY '24, of which GBP 16.6 million have been delivered in the first half across product cost reduction, organizational design, property and warehousing, and in goods not for resale. Around half of these savings are expected to come in goods for resale, driven by our externally supported better buying program. In half 1, we delivered almost GBP 6 million of better buying savings with benefits realized earlier than anticipated. These have come through database negotiation, tenders for our own label business and supplier rationalization initiatives, which we'll continue to deliver for years to come. Organization design and outsourcing has delivered GBP 4 million of savings as we further streamlined our support center, outsourced some technology engineering roles and driven efficiency savings across stores and garages. In property, 20 retail lease renewals have been completed reflecting an average 20% reduction in lease costs. Savings in this area amounted to GBP 3 million in half 1. This also includes the benefit of lease renewals completed last year. Finally, our goods not for resale program has delivered GBP 2.5 million of savings in the year-to-date. Almost all our spend goes through a competitive tendering process as we seek to reduce costs or mitigate inflation. And in addition, we simply stopped spending money in areas where we do not see significant value. So let's move now to go into a bit more detail on our Retail business. And it's here that we've seen the biggest headwinds in terms of both inflation and the consumer markets in which we operate. Overall, sales were up 4.1% on a like-for-like basis. As we've seen in previous reporting periods, there's been a marked division between performance and needs-based spend areas and performance in more discretionary spend categories. Retail Motoring products saw strong like-for-like sales growth of 8.2%. This was driven by a growing market and a very strong market share performance as a result of the investment in price we made last year and our expansion into car parts. We saw both volume and average selling price growth across half 1, resulting in a very strong sales performance. Retail Cycling being discretionary in nature was much more challenged. The market fell 6% in half 1. And despite our market share growth, this resulted in a 2.8% like-for-like sales decline. Retail margins fell 330 basis points year-on-year to 45.8%. Given the significant decrease in margin rates, I bridged the movements on the right-hand side, and here, you can see the very material impact of FX, which drove 270 basis points of the decline in margin. Operating costs grew only 0.4% year-on-year with our cost and efficiency program, mitigating underlying operating cost inflation. Overall, retail EBIT was GBP 19.6 million, down GBP 9.8 million. We expect to see EBIT in half 2 to be higher than half 1 and up year-on-year as the benefits of our better buying program come through, FX headwinds reduce, price investment annualizes, and year-on-year benefits in freight rates come through. Moving now to the Autocentres business and the standout success story for half 1. Total revenue grew 33.9%, driven by the acquisition of our Commercial Fleet Services business Lodge in October '22. The like-for-like business saw very strong growth at 18% despite a 0.2% decline in the tyre market. This came as a result of increases in the volume of jobs as we grew market share and an increase in average selling prices as dynamic pricing was introduced and prices were optimized more generally. Like-for-like growth was also supported by some MOT volume shifting back into half 1 as new car registrations begin soften the impact of the MOT deferral put in place by the government as a result of COVID. Gross margins declined 60 basis points, driven entirely by the impact of the Lodge acquisition and the fact that Lodge sells a higher mix of lower-margin tyres. Operating cost growth at 21.2% was considerably below sales growth as we leverage the fixed cost base and saw significant improvements in utilization, all of which resulted in operating profit growing to GBP 10.9 million, surpassing the profit delivered in the whole of FY '23. The drivers of profit growth are bridged on the right-hand side of the chart. But in summary, we're doing exactly what we said we'd do at the CMD, leveraging the platform we've built. We're profitably taking market share, driving cost and efficiency through better buying and utilization, optimizing our pricing and seeing the benefits of our most recent acquisition, Lodge Tyre come through. Looking forward, in half 2, we expect year-on-year profit growth, albeit at a rate significantly lower than that which we saw in half 1 as we annualize the Lodge acquisition and see the impact of the shift in MOT volumes from half 2 into half 1. I'll now cover our cash and balance sheet movements in the first half of the year. Net debt at the end of half 1 was GBP 47 million compared to a year-end position of GBP 1.8 million. Operating cash flow of GBP 64.3 million was GBP 10.4 million lower than the same period last year, primarily due to the normalization of supplier payments timing, which flatted the year-end position, as I described at the prelims. You can also see an outflow of GBP 10.3 million relating to the purchase of shares through our EBT to satisfy employee share sales schemes that matured this year. Our tax and interest payments totaled GBP 16 million in the first half, and our lease payments came to GBP 45 million, while we invested GBP 22 million in CapEx and paid out GBP 15 million for the FY '23 final dividend. We expect the cash inflow in the second half of the year and as such, expect to be in a lower net debt position by the end of the year. As a result of the increase in bank debt, net debt, including lease debt, grew versus the FY '23 year-end closing the half year at GBP 372.3 million. Leverage excluding lease debt was 0.3x and including lease debt was 2x within our guided range of 1.8 to 2.3x post M&A. Slide 20 serves as a reminder of our capital allocation policy, which remains unchanged. I'm also pleased to announce that our proposed interim dividend is 3p per share, in line with that declared this time last year. Our dividend policy remains to pay a dividend that's covered 1.5x to 2.5x by underlying profit after tax. So to summarize, we are seeing the benefits of following the strategy we laid out at our Capital Markets Day. We are profitably growing market share. We are combating inflation through our focus on cost and efficiency, and we're optimizing the investments we've made, delivering a much more profitable Autocentres business. And had the markets performed as we expected, we would be delivering even better results today. As we look further forward, we remain confident in the strategy we set out at our CMD in April. When the markets recover, we'll be exceptionally well placed to benefit. And with that, I'll pass you back to Graham to update on our strategic progress in half 1 and our outlook for the balance of the year.

Thanks, Jo. So as you can see from Jo's summary, against some challenging headwinds, we've made good progress in half 1. As I mentioned at the beginning, we have continued to focus on the controllables, delivering cost and efficiency savings, growing market share, and investing in our strategically important Motoring services and B2B businesses. I'm now going to cover in a bit more depth how we progressed against our strategy. And I'll start with a reminder of a slide we shared at the prelims in June, which captures the essence of this year's plan. As you can see, in a year of continued headwinds and economic uncertainty, we've centered on what we can control, and that is how we fully optimize our platform. We said that this year, we would leverage the investment we have already made in our unique digital and data-enabled platform, and that we would ensure customers make the most of our differentiated and highly convenient shopping experience across, our combination of stores, garages and mobile vans. This forms the basis for year 1 of the midterm plan that we set out at the CMD, which you can see here on the slide. We outlined our intent to deliver GBP 1.9 billion of revenue, GBP 90 to GBP 110 million of PBIT and a 5.5% operating margin. As you can see, we said that the majority of our profit growth will be delivered by a combination of market recovery, increased market share and a focus on cost and efficiency, which together more than offset the significant inflation. So how are we doing against the plan? Jo has already covered inflation and cost and efficiency in some detail. So I'm going to move straight on to talk about how our markets are developing and the progress we are making in market share. It's fair to say that whilst both inflation and cost and efficiency have performed as expected, some of our markets have not, particularly towards the latter part of quarter 2 of the first half. At the prelims in June, we showed you this slide, which sets out what we expect in year 1 of the CMD plan. I won't recap the detail now, but broadly, we said we expected retail Motoring, would see market growth the car park continues to age. In cycling, we predicted further contraction in market size this year as customers continue to be cautious around any high-ticket discretionary spend. In consumer tyres, we predicted market recovery as miles traveled continue to increase and customers are no longer able to defer essential maintenance. And finally, Motoring services, we expected the market to remain broadly flat. On the next slide, you can see how this has played out in half 1. It's a mixed performance across our markets with Retail Motoring and Motoring services performing well, but a much softer-than-expected performance in the cycling and consumer tire markets. Briefly taking each in turn. In Retail Motoring, according to GFK data, the market has grown slightly ahead of our expectations for a number of reasons. The very hot weather at the start of Q1 benefited areas such as pressure washers and car cleaning, and the very needs-based areas of spend like oil continue to perform well. In cycling, the market remains depressed from a combination of the cost of living crisis and the poor weather over the peak summer period. These tough trading conditions have resulted in substantial market consolidation. In consumer tyres, we haven't yet seen the expected post-COVID recovery in line with the increase in miles traveled. Drivers continue to delay essential maintenance for longer than anticipated. Market data shows an increase in the number of tyres being replaced, which are either borderline or totally illegal. We estimate that 1 in 4 vehicles on Britain's roads currently have one or more illegal tyres. And last but not least, Motoring servicing, where the DVLA suggests growth in the market ahead of expectations as we see the impact of an aging car park. So as I said, a mixed performance across our 4 core markets. Moving now to market share. This slide sets out the share gains we said we expected to see in FY '24. The good news is that despite the challenging headwinds, we remain confident in our strategy and ability to grow market share. And as you can see on this slide, we are making solid progress with positive share gains across the board ahead of expectations. In Motoring, the GFK data shows that we're delivering strong growth in volume share at plus 3.8 percentage points year-on-year, well ahead of our target. This performance has been driven through a combination of investment in price, extending our Motoring offer to more categories, product innovation and the Motoring Loyalty Club, where we now have just under 3 million members. In cycling, where the market remains soft, we've seen excellent share gains ahead of our expectations at plus 1.8 percentage points year-on-year. This is partially driven by market consolidation, where Tredz, our Performance Cycling business has benefited and by further product innovation, particularly in our own brand ranges. In tyres, as you can see, we grew 0.4 percentage points of share. The improving performance here has been driven by the benefits we're now realizing from the integration of our acquired businesses and the improvements we've made to the customer proposition. And finally, Motoring servicing. Here data from the DVLA detailing growth in the MOT market shows that our share gain is in line with expectations. So positive results across the board and a clear indication that the investments we are making in price and proposition are delivering. I'll now take a few moments to walk you through some examples of how we have grown our share in Retail Motoring, Cycling and Tyres across the first half. Starting with Retail Motoring, where we've grown share through a combination of extending our offer and product innovation. The best example that I can give of where we have extended our Motoring offer is in specialist car parts. Our entry into this GBP 1 billion market earlier this year has driven a fourfold revenue increase. Customers have responded positively to several initiatives, including our never beat on price promise, a step change in convenience with a new Click & Collect in 60 minutes offer and adding the fourth B, breaks, to our 3Bs proposition. At the same time, we've continued to bring new and innovative products to our Retail Motoring customers. These include the market-leading Nextbase iQ Dashcams and a huge range change in our own brand car seats, aimed at providing better choice and innovation with sustainability front and center by the utilization of recycled fabrics. Moving now to Cycling, where we are making the most of consolidation in the market. Over the last 12 months, we have seen 35 large independent bike dealers closed or go into administration, alongside 2 large retail cycling chains, 2 bike brands and 3 big distributors. That gives you a sense of the scale of change we are seeing across the industry. And with household disposable income squeezed, we don't foresee things getting any easier here in the short term. The good news is that, as you can see, our Tredz Performance Cycling business is well placed to take share as this part of the market consolidates. With growing brand awareness and excellent trust pilot rating and market-leading finance options, our Tredz business is going from strength to strength. Tredz is also a key contributor to our B2B revenue through Cycle to Work and in total, is now delivering double-digit like-for-like growth. At the same time, we also continue to innovate across our Halfords Retail Cycling range. For example, here, you can see the new Boardman SLR 8.9 men's road bike, which combines a best-in-class spec with a market-leading price point. Moving on now to consumer tyres, where we focused on 2 key areas to drive share growth. The first is value for money. Here, enhancements to our value credentials have been instrumental in driving our market share in half 1. We've improved our own brand budget tyre range, with sales up 14% in the first half. We've also made our tyres more affordable with initiatives such as never beaten on price promise, combined with our market-leading range of financial services offers, including buy now, pay later. Combined, these initiatives have seen our value for money score improved by 4.6 points in half 1. The second is convenience. With the obvious distressed nature of this category offering, customers' convenience is a key part of our strategy. Here, our focus is on same-day fitting of tyres across our national garages. Over the first half, we have seen sales growth of 66% on same-day fitting, with customers rating this proposition highly. And for the ultimate convenience, our Halfords Mobile experts come to you with an industry-leading 4.8 Trustpilot rating. So as you can see, when you combine value and convenience, it's a winning approach. So to summarize some great progress. However, we are not just growing market share, we are growing it profitably. And the best example of this is our Autocentres business. Here, our focus has been on utilization, specifically reducing labor turnover and ensuring that we drive demand into those areas where we have the capacity available to service it. The good news is that the ongoing focus here means we are seeing a state-wide utilization improve, increasing 7% in half 1 versus our 10% full year target. The introduction of dynamic pricing not only helps customers to see their quickest, nearest and best value options across our garage network, it also helps us significantly improve margin per worked hour. This is a consequence of being able to push demand where we need it most, improving efficiency, driving higher utilization and higher profit. That concludes my update on the very positive progress we have made across the key pillars of growth that we outlined in the CMD and at the prelims in June. I'm now going to spend a few minutes on the mid- to long-term elements of our strategy. And I'll frame this around the progress we are making in our consumer and B2B businesses. Starting with our Consumer business and our Motoring Club. After a very strong first year, I'm pleased to say that the Club continues to grow. The benefits clearly resonating with customers looking for value and a cost of living crisis. Now with just under 3 million members, we anticipate significantly exceeding our sign-up targets for this financial year. We continue to see growth in the number of members new to the Halfords brand, up 40% versus 31% in November last year. The mix of premium members is a critical measure for us driving cross-shop recurring revenue and lifetime value. This has increased in year to more than 10% and growing, supported by the recent launch of premium till sign-up capability in our retail stores. We're delighted that the Club is delivering on its goal to change customer retention behaviors in retail as demonstrated by the significant increases in both frequency and breadth of shop. As we showed at the CMD, the Club is an acquisition tool, which drives customers from our retail stores across to our garages. Year-to-date, the proportion of MOTs in our consumer garages coming from loyalty members is just under 40%. Overall, the Club remains a core part of our strategic plans over the mid to long term, with vehicle and vehicle health data absolutely central to our lifetime strategy. As we have said previously, our goal here is to drive stronger data analytics, predictive modeling, monetization and even more profitable utilization alongside a highly personalized customer experience. You'll remember that at the CMD, we set out our longer-term plans to bring the Fusion town experience to more towns across the U.K. This year, we have seen incredible results across our 2 Fusion towns, Colchester and Halifax, where the biggest shift in performance has been across our garage services. This includes our physical garages and the Motoring service areas of our retail car parts where we fit 3Bs and refer customers across to our garages. To give you a sense of the scale here, our Halifax garage has gone from being ranked 200th on sales to second in our garage estate, and is now running better than both Halfords and industry averages at 17% EBITDA, that's more than double the profitability Fusion investment. These results have given us the confidence to accelerate investment in our Fusion program in half 2. We've identified GBP 10 towns with a similar catchment and demographic footprint to Halifax and Colchester, and sites where we can materially expand physical capacity. We will invest circa GBP 1.8 million of CapEx in half 2, to enable major changes to our operating model in both the garage and retail car park. Moving on now to our B2B business, which now accounts for a very resilient, almost 1/3 of our total group revenue. At a headline level, half 1 saw our biggest ever 6 months in Cycle to Work and the biggest ever 6 months for our Commercial Fleet Services. Just some of the highlights here include the launch of our new Cycle to Work portal for SME businesses, making it even easier to sign up to participate in our Cycle to Work scheme. As a result, we've already surpassed the total volume of Cycle to Work clients that did business with us in the whole of FY '23. And in our Commercial Fleet Services business, we continue to attract new customers with a strong pipeline of contracts. As a reminder, we are already working with the likes of DHL, DPD, Evri and Yodle, alongside some substantial local government contracts. Finally, for today, I'm delighted to be able to report some excellent progress for our Avayler SaaS business. On this slide, you can see a reminder of what our Avayler business is and what it does. For our customers, Avayler delivers a full end-to-end digital solution, which streamlines process and delivers improved efficiencies. And for Halfords, Avayler delivers resilient contracted B2B recurring revenue. Along the bottom of this slide, you can also see the brands we currently work with. Last month, we announced an exciting new partnership with Bridgestone to implement our Avayler technology across the U.S., where Bridgestone has 2,000 consumer garages and a substantial fleet of mobile vans. In addition to show their confidence in our business, Bridgestone have also acquired a 5% stake in Avayler for $3 million. Due to launch in early December, this landmark moment presents an incredible growth opportunity for Avayler with significant scope to develop further over time. Bridgestone operates across 150 countries with more than 9,000 workshop locations. And as you can see here across the breadth of our existing contracted partnerships, there is a substantial global growth opportunity of over 100,000 garage service locations. I'm thrilled by the progress our SaaS business is making and the partnerships we are creating with significant Motoring services companies. So that concludes our update on half 1 performance and the strategic progress that we've made. To close today's presentation, I'll now move on to the outlook for the remainder of this financial year. Our B2B businesses and need-based categories continue to show very strong growth. However, trading in the first half of the year has been volatile, and we've seen some recent softening in high-ticket discretionary spend areas. It therefore remains challenging to predict whether these trends will continue. We continue to expect profit before tax to be weighted towards the second half of the year as inflation annualizes, and we deliver the balance of our planned cost and efficiency savings. As such, assuming trading conditions on average continue to reflect what we have seen across the year-to-date, we believe underlying profit before tax will now fall within a narrower range of GBP 48 million to GBP 53 million. To conclude, half 1 has delivered good strategic progress with a strong financial performance, given the inflationary consumer and macroeconomic headwinds we continue to face. We have delivered outstanding sales and profit growth and market share gains across the board. However, we have seen 2 of the 4 markets in which we operate become more challenging towards the end of the first half of the year. We believe that our strategic investments provide a strong platform for growth, and we're well positioned to take advantage as markets consolidate and improve. Looking beyond FY '24, assuming the markets recover, we expect profit growth in FY '25 as we take a step forward on our mid- to long-term expectations of GBP 90 million to GBP 110 million underlying PBIT, as outlined at our Capital Markets Day in April 2023. Thanks for listening. Jo and I will now be happy to take your questions.

[Operator Instructions] And our first question today comes from Adam Tomlinson of Liberum.

The first question really is a simple one. If you could just give a little bit more color around the trading in more recent weeks. So you've sort of said softer in discretionary categories, but any numbers you can give around that would be helpful, please. Second question is just to talk us through a little bit more the impact of the recent National Living Wage increases and how that flows into numbers. Third question. You've highlighted obviously tougher markets in the discretionary areas, but you're holding -- my understanding is you're holding that medium-term guidance of GBP 90 million to GBP 110 million of PBT. So if the markets do stay soft and don't come through as expected, then what's the delta that's still gives you comfort that you can get to those numbers? And I guess, thinking about that in the context of this year's guidance is now, I think, slightly below where you were pre-COVID at the group pre-PBT level. And then a fourth question, just a quick one. With the narrowing and slight lowering of that guidance range today, does that put any more pressure on the Board to consider some of these -- some of the bids that have been rumored to have come through for Halfords? That's the 4 questions.

Thanks, Adam, for your questions. I don't know, do you want to talk first about the impact of the National Minimum Wage?

Yes, certainly. So the announcement last week on National Minimum Wage clearly has a significant impact on us looking forward into FY '25. The total year-on-year wage inflation, we're anticipating is around GBP 13 million. However, we had assumed around GBP 8 million of that in the Capital Market Day projections. So the additional headwind is GBP 5 million as a result of last week's announcement.

I'll try and pick up some of the other questions for you, Adam, as well. So we don't disclose what the trading numbers are in the most recent weeks. What I would say is that we've had a successful set of Black Friday deals that have gone out. We're pleased with the performance on the Black Friday deals that we've done, albeit we are still -- we're still in the process of finishing that Black Friday promotional campaign. It goes on through the whole of this week. So we'll have to see how that pans across the week. I think what I would say is where we're providing great value for customers, customers are responding, and the needs-based part of our business, which is obviously much bigger than it used to be, is proving very resilient, both in Consumer and in B2B. And we expect that to continue, not just in the run-up towards Christmas, but into next calendar year as well. In terms of, I think, your third question, which is what happens if the tougher markets in discretionary areas sort of carry on? I mean, we will obviously adapt our offer. We'll keep taking more cost and efficiency out, becoming more effective as -- and grow the needs-based part of our business. So we offset as much as we can of any discretionary headwinds that we see. It's very, very difficult to say exactly how this will pan out. We've had a very volatile first half. We've had good months in the first half, where we've actually seen discretionary spend grow. And we've had poorer months. And therefore, it's very difficult to say what that will look like over a number of years. What I am confident is that the strategy that we have got is very much more focused on needs-based spend in Consumer. It's very much focused on B2B. And we think we've got a great position on how we take as much share out of the discretionary parts of the market to ensure when these markets do come back, we will bounce back very strongly and get an even bigger uptick. So that would be my sort of answer on that. In terms of narrowing the guidance range, what's the position of the Board on options? What I would say there, very simply is the Board always looks at its #1 priority, which is to maximize shareholder value. We're confident we can do that through the CMD. But if, of course, there are options that mean we can see even greater value than we will deliver through the CMD. Of course, we'll consider them, and we have advisers around us to help us make those decisions.

And we're now moving on to a question from Jonathan Pritchard of Peel Hunt.

Few for me. Firstly, on Fusion, that sounds quite exciting. But 10 stores in the second half, could we expect to see that really sort of kick on in FY '25? Or is there some sort of -- you did talk about those specific sort of geographical constraint. So how many could that be perhaps in the full year '25 now things have sort of clicked for Halifax? Incoming calls into Avayler since Bridgestone, has that picked up? Is that being a sort of proof of concept to a degree? Has Avayler seen more incoming to the sales team? And just a little bit on the Motoring Club, a bit more detail on the premium doing a bit better. I think you talked about doing it at till, but has there been any sort of bells and whistles on the offer that have helped?

Okay. I'll try and pick those up, Jonathan. Thanks very much for your questions. Firstly, in terms of Fusion, we're not just pleased with Halifax. The garages and Colchester actually have seen an even bigger EBITDA growth. They're at, I think, on average, 19%. So the 3 garages, with obviously the supporting retail stores in those towns, they've all done very, very well. And that's why we're very confident in delivering the additional 10. Of course, there is definitely in an estate of nearly 600 garages, there will be more opportunities than just that. We are probably looking at circa another 40 garages and retail store car parks for FY '25. We're still in the process of scoping that. We obviously want to see how the 10 towns do as well in the second half of this year. But it could be as much as that in FY '25. And obviously, we'll keep you posted on the results. We have -- in terms of Avayler, yes, absolutely. The deal that we've done with Bridgestone has definitely sparked interest. We have had incoming from big brands, not just in the U.S., but around the globe. We have a very strong pipeline of clients in that business. And our focus will be on obviously converting them, but also in making sure that the existing contracts are fully optimized and delivered. That's another big focus for the team. In terms of the last question, which is the Motoring Club detail on premium. We now have over 200,000 premium members in the club. It is now -- I think every week, we are getting a record number of premium members signing up. We haven't materially changed the offer. The most important change is we've made it much easier for colleagues to sign customers up at the till point. And the easier we make things for colleagues, the better results we get. It's as simple as that. But we're -- we think will definitely beat the targets that we've set on sign up for premium subscription going forward. And it's a very, very important part of the club, not just in terms of revenue generation, but the behaviors of premium members are different and better.

[Operator Instructions] And up next, we have Manjari Dhar of RBC.

I just had 2, if I could. The first is on sort of cycling market and pricing impact. Obviously, you talked a lot about consolidation in the market. Has there been a lot of clearance stock coming into the market, which is impacted you guys? And has that changed how you thought about pricing in the period? And my second question is on the fleet services business. Just how much more capacity is there in sort of the Halfords ecosystem for more nationwide contracts? And so how many could you guys take on in the medium term, perhaps?

Thanks, Manjari. Some good questions. I'll try and take those. So in terms of the Cycling market, yes, as we said, we are seeing quite significant consolidation as a combination of overstocks coming into the market post-COVID as deliveries were later at the same time as demand came off. And obviously, a consequence of the cost of living crisis where customers are being more considered on big ticket discretionary spend. It has meant that we've got -- we've had to become a bit sharper on pricing, albeit not much more than we originally forecast. We've seen a little bit of margin dilution, but that is what we expected in this year. And I think we would say that we're pretty much on track in terms of our price investment to that, that we thought we would make. We've taken significant share. I think we've taken pretty much the share growth we said we would take in the entire midterm in the first half at just under 2% more additional share. Our Cycling business as well is -- it is just 2.8% negative like-for-like for the first half. So it's not even a disastrous sales number, I think. If we keep giving customers great value and the innovation that the team are delivering as well through Boardman, electric and premium -- the premium offer, then I think we'll be in a good place. But we are going to have to remain competitive to maintain and grow our share in a consolidated market, but the benefits coming out will be significant because we'll bounce back with a much bigger share. In terms of Fleet services, we have got more capacity, both in our consumer, garages, where we manage some fleet contracts and in the commercial garages that we have to -- we haven't given, I think, a sort of capacity number before, and I don't think we're going to do today. But we -- it's partly why we have acquired the garages that we have over the last few years, both in the commercial space and in the consumer space is to manage these fleet customers more effectively and nationwide. So plenty of capacity to grow and a good pipeline.

And up next, we have Kate Calvert from Investec.

Two questions from me. The first question is really about as you go into next financial year, what is the opportunity to take out further costs in retail? I mean, is there a lot more you can do on rents, for example? And the second question is just on the consumer tyre downturn at the moment. Could you sort of just remind us where we are kind of through the downturn versus history? And how much do you think is being driven by people delaying and extending out time replacement, or how much is still being driven by less miles -- being driven versus pre-COVID levels?

Do you want to pick up the...

Yes. So I pick up the one on removing customer retail. So look, Kate, our cost and efficiency program, continues. And at the CMD, we laid out, I think, GBP 46 million of cost and efficiency savings over the midterm, of which GBP 30 million will deliver within FY '24. The biggest part of cost and efficiency that will continue with strength into next year is our cost of goods for resale reduction program that's been externally supported our better buying program, if you like, where we expect to continue to see very significant savings into FY '25 and beyond. And because of our stock turn it obviously takes a bit of time for all the benefits we're realizing this year to actually materialize into better margins in the year ahead. We do also expect to continue to see further savings within retail from property costs as we've had a very successful program over many years of reducing retail rents when they come up for renewal. And we always have ongoing programs around how we can drive better efficiency through our garages and retail business. So in short, yes, you should expect to continue to see cost savings as we move forward.

Yes. I mean, the build on property cost saves -- I give there, we have 63 leases up for renewal in FY '25. So actually more than this year. And obviously, we have a fairly low average lease length of just around 3 years, yes. So we've got a lot of flexibility there to make changes. We'll be closing 7, 8 retail stores in this financial year as well, which is in line with the circa GBP 50 that we said we would do in the mid- to long term. So we keep looking at every site accordingly. In terms of consumer market -- consumer tyre market and the downturn there, we think it's primarily the delay now to essential maintenance that's causing the challenges, not necessarily as much miles traveled. Miles traveled is a little lower in terms of where it was pre-COVID, but we think it's mostly the delay of essential maintenance because of the cost of living crisis. We've said, I think in the presentation today, and we talked as well about this at length from a PR perspective, there was evidence that some customers are driving with the legal tyres. We've said we think it's probably 1 in 4 cars now has an legal tyre or 2 on them. We're certainly seeing a lot more cars coming in to us for an MOT with tyres that are below the minimum tread depth and would fail the MOT accordingly. We've also seen that the secondhand tyre market, the re-thread market, that is still quite big. And certainly, the interest in that market spiked as customers moved out of COVID into a cost of living crisis, and that's about 10% of the tyre volume in the market at the moment. So customers -- tyres aren't cheap. We're obviously providing customers with the very best options to buy in terms of both never beaten on price on fitted tyres, but also buy now pay later and other value options. But obviously, the market overall is not recovering as quickly as we would have liked to have seen or believe we should have seen yet.

We're now moving to a question from Matthew McEachran from Singer Capital Market.

I think my question on the cycling market and some stress that's been answered. So just one remaining question, just relates to your market share gains. I mean, clearly, some very good performance in Retail Motoring. Within services, it feels like you're tracking in line with plan. But there's a lot of initiatives there, which are still bedding in. So I'm just wondering as we look forward into the second half and particularly into next year, with things like Fusion and your Autocentres utilization rate is improving, is it feasible that the trajectory on market share wins is going to lift you beyond what you've just reported today in those 2 sections of the business? I understand that the other 2 parts of the market are weaker than expected. But the question really relates to where you're really starting to gain extra market share and the trajectory of that?

Yes. Thanks for the question there, Matthew. Absolutely, our intention would be to beat. We are spending a lot of time optimizing the garage services business. And as you say, we're seeing some very good success in the Fusion towns that we're going to try and capitalize on. So as we get better at optimizing and working with our garages, we're also reviewing our tyre supply chain as well at the moment. There could be more value to unlock, and we would certainly be -- we will certainly be internally aiming to beat the market share growth targets for services and tyres.

And when you mentioned the Fusion results, you talked about outstanding performance, and you've cited a couple of examples. Halifax moving to #2 in the in the list from 200. Could you just give us some sort of quantum in terms of sales uplift for that, that has delivered?

I can give you -- I don't know how much...

Or just approximately.

Well, I can give you the profit uplift, which was about 9x from memory, about 8 to 9x an increase in profit, in that garage in terms of sterling quantum. So I come back -- we can come back on the sales side as well, but it is absolutely enormous, the growth that we're seeing in these businesses. So we are -- as Jonathan said, we're very excited. And if you remember, Fusion was very much part of the longer-term plan at the CMD, and we are deciding to accelerate that much more quickly, because of the results that we're seeing. What we found over the last year, the growth has really increased. And I think that's probably the thing to say is we've been surprised at how the growth has increased over the last 12 months. And we think that's partly because the customer experience is significantly better. We're retaining more customers, and equally, colleagues enjoy working in these environments more than the garage that's obviously had a little investment. So that, coupled with the operating model change, it all comes together. And it means that you just get better customer retention and more value per customer from the investments that we're making. So hence, the 10 straight away in half 2, and maybe 40 or more next year.

You mentioned staff retention, which is the other piece of market share sort of trajectory piece, I was going to ask about. So you have flagged it in the RNS today about technician recruitment and technician retention. Can you just elaborate a little bit more as to where you think you can get to by the end of the year? Does it -- because you reduced, I think, your targets, didn't you? Are you going to be able to restore some growth versus that original target?

Yes. I mean, our focus, as we said at CMD really has moved to utilization. And there, the target is 10%. We're at 7% at the moment. So there's a bit of opportunity to improve that further. We are -- we've got the best labor turnover we've had for 19 months. We are seeing better retention in most months of the first half. We've recruited well over 500 technicians already as well in the first half of the year. So -- and we put an enormous amount of investment into recruitment and the support for the field teams. So -- and we've got a lot more initiatives and ideas to build on that and make it even better because obviously, the more optimal our colleagues are in garages, the better for customers and shareholders. So we are fully focused. The #1 priority for this business in the second half is the garage services transformation and further optimization. That's what all of my leadership team are focused on because we do think there's a lot more value there.

And I'd now like to hand the call over to Scott for any questions from the webcast.

A number of questions from the webcast. First question is from Georgia Pettman from Panmure Gordon. Within the B2B environment, what are the opportunities to grow revenues, given it's less discretionary? There are further questions, but I'll go one by one to make it more convenient.

I mean in B2B, there is -- there are some discretionary parts, which actually we're doing very well in. So Cycle to Work is a really good example. We're the market leader in Cycle to Work. We've seen a very significant double-digit growth, I think 15% sales growth in Cycle to Work in the first half despite the fact that we've had a challenging cycling market. So Cycle to Work remains a big opportunity. The SME platform we've put in to enable SME customers to sign up more quickly and effectively will help, of that, there's no doubt. We also have a trade card business that's been doing very, very well as we've been growing our car parts business and our Motor and Retail business overall. And then obviously, the Commercial Fleet Services parts of what we do in B2B still has enormous potential. We've only just really brought McConechy's Universal and Lodge together. The Lodge management team run that as a coordinated consolidated business unit. And because it's now nationwide, there's an opportunity to talk and bring on board a much broader range of businesses, like Yodle, as we announced recently. There's a lot more we can do in that space. We have still got a relatively small market share, albeit the biggest share of Commercial Fleet Services now in the U.K.

And further questions from Georgia. Given performance in cycling versus broader market and previous commentary around the promotional backdrop stroke, not wanting to follow the market down on price. Could you speak more about this segment further? And then a final question is, any plans to add more margin-accretive services in Autocentres?

So in terms of cycling, yes, of course, we absolutely don't want to drive the market down. So I think that's what we were really referring to, Georgia, is -- what we're not about is leading the market down into a price spiral. What, of course, we do have to do is ensure though that we are competitive enough to retain our share and meet the market share targets that we've set at the CMD and take the opportunity where it comes to play an active role in the consolidation of the market. So we get into a very much better place when things recover. So we're playing -- we are paying a very fine balance there between ensuring we invest enough on price to do that, but not too much to lose profit. And that's why, as I've mentioned, I think, a bit earlier, where we position our business for margin investment is important. And in that respect, our margin investment is pretty much on track to where we thought it would be on cycling as we knew there could be some consolidation that we set at the beginning of the financial year. And we'll just keep reviewing that as the opportunities and the market changes. But what we are not about is promoting the market down and leading the market down into a price borrow. That is not -- even though we're a market leader, that's not what we believe is the right thing to do at the moment. In terms of the second question, which is around any additional services that we can add into our Autocentres business. Yes, we're always looking to review that, not just in garages interestingly, but also on the vans that go to customers' houses or work to get work done. There is still opportunity there to extend the range of servicing because the car park continues to change, vehicles continue to change, what they need continues to change. So we'll keep reviewing that, and we'll keep adding services where applicable.

Next question is from Peter Testa from One Investments. He's got 3 questions, I'll do them individually. Where are the accounting changes described one-off? Or did the application of the impact H1 results reported today, for example, the tyre distribution agreement deemed to be a financial arrangement.

So the restatements that we described solely impacted FY '23. We're confident in the robustness of the half 1 '24 reported results. We were supported by a big 4 accountancy firms, in ensuring their accuracy in our own auditors, as you would expect, have taken a very good look at that. The arrangement that we entered into is disclosed as a supplier financing arrangements in half 1's results correctly and accurately. We still have that same arrangement, which was actually entered into because it's very beneficial for Halfords from a margin perspective, enabling us to access better cost prices from our suppliers.

Can you -- also from Peter, can you be more specific on the year-on-year impact on gross margin estimated in H1 from the FX hedging? And what would be the current hedge rates in 2025?

Okay. So we included in the presentation a bridge of retail margin that shows the impact of FX hedging year-on-year, and so that, that had a 2.7 percentage point negative impact on gross margin. That really reflects 2 things. Firstly, the fact that we saw a lower hedged FX rate in cost of goods sold in half 1 '24 than that which we saw in half 1 '23. And secondly, the fact that in the first half of last year, we benefited from a one-off credit on FX instruments that did not qualify for hedge accounting of GBP 4.5 million. So the impact on gross margin was that 2.7 percentage point decline that you saw on the retail gross margin bridge. In terms of FY '25, we expect to see a much lower year-on-year headwind, if any. The hedge rate for FY '25 that we've got at the moment is 123.54, and we bought around 46% of our currency requirement at that rate. So you'll see a sort of similar year-on-year rate.

Again from Peter, would you expect the price investment to be largely covered by purchasing and product costs driven savings that were described as something that would be -- continue to deliver for years to come?

I think it's more than covered by that as we look forward. We've seen the annualization in the first half of some price investment we made into Motoring products last year. As we look forward into the second half, we won't see a year-on-year impact from that price investment going forward, and we will start to see more of those better buying benefits come through.

Superb. Thank you. No further questions at the moment. So Graham, maybe back to you for any closing remarks.

Yes. Well, thanks very much indeed for joining us today and look forward to speaking to you again at the next set of results. Thank you.