Halfords Group plc

and welcome to the Halfords Group Interim Results, a presentation for FY19. It's good to see some familiar faces from our Capital Markets Day and the various investor meetings we've held over the 10 months since I joined. I remain very positive about Halfords' future and the significant opportunities to further differentiate our business for customers. Let's begin by having a look at the agenda. I will start by covering the highlights of the first half, I will then give a brief recap of our new strategy and share some of the early progress we've already made. Adam will then take you through the financial results for half one and the outlook for the full year before I summarise. I'm also delighted to introduce Lorraine Woodhouse who started last week as our new CFO. Lorraine will say a few words later on and there will be an opportunity for you to meet her over coffee at the end. Let's start by looking at the financial highlights from the first half. Group revenue was up 2.5% on a light for light basis, with retail plus 2.3% and auto centres plus 3.3%. This is a robust performance in light of what we all know is a challenging UK retail environment. In half one, we saw the first increase in gross margin for several years at 90 basis points in retail. Underlying profit before tax was broadly in line with our expectations and reflected planned operating cost growth, primarily driven by phasing, one-off items and investments. Adam will take you through the detail of this later. Cash generation continued to be strong in the first half. Free cash flow, one of our new medium-term financial targets, was up 10% for the period compared to last year. Net debt reduced to 0.7 times underlying EBITDA and the Board has approved an increase of 3% in the interim dividend, reflecting the cash generative nature of the business and confidence in the long-term prospects. Our four-year guidance remains unchanged. Moving on to the operational and strategic highlights. Items that we sell within our business that are less discretionary for customers perform well with good growth in sales of motoring products and services across retail and auto centres. We also saw good performance in overall kids cycling and accessories and we gained market share in a number of our core motoring categories. Service related sales growth continue to be faster than total sales. In retail our 3B fitting job numbers increased and in auto centres we generated good growth in sales of MOTs, servicing and tyres. Group online sales were up 10.9% in the period, reflecting better traffic and conversion, particularly through our mobile channel. Around 85% of Haufa's retail online orders were picked up in store, highlighting the service-led nature of our business and the importance of our physical estate. The transformation of the Auto Centre's business centred around improving productivity and utilisation continues to make good progress and is delivering tangible benefits. In September we launched our new strategy externally and have also now engaged all of our colleagues and supply partners. We've moved into implementation and momentum is building. I'll take you through some of the early progress in a moment. But first let me provide a very brief recap of the new plan. We play a clear and simple role for customers and that is that we will inspire and support a lifetime of motoring and cycling. We're also clear that to deliver this we will concentrate on three key areas. Firstly, we will inspire our customers through a differentiated super specialist shopping experience. This means we will be a business even more focused on what it is really known for, its core motoring and cycling offer. We will be a company where customers will also be able to buy many more products and services with features and benefits that are only available at Halfords. Customers will be able to purchase this new offer from a more innovative and personalised online site together with a complimentary and inspiring store environment. One of many key points of difference will be a unique in-store tablet, digital screen and mobile experience which helps link the online and offline journey for both colleagues and customers. Secondly, we will support our customers through an integrated, unique and more convenient services offer. Looking ahead, customers will be able to access a broader range of services more easily from one single integrated website. Customers will spend less time driving to get their car or bike serviced, with the added convenience of a choice of mobile stores or garages across a thousand service locations. We will be the nationwide go-to provider for electric bike and car servicing and we will raise our awareness of our services proposition. Thirdly, we will enable a lifetime of motoring and cycling. Customers will enjoy building relationships with Halfords for the long term as they are encouraged to explore and benefit from all that we do in both motoring and cycling over their lifetime. Enabling all of this customer strategy is a more unified and customer-focused Helfers group, fully utilising data, our single customer view and insights at our disposal. So the three areas I've just set out form our customer strategy. The customer strategy will be supported by investments in infrastructure, principally IT, digital and property. We will develop a more dynamic physical estate with a focus on services and spanning stores, garages and mobile vans. We will place equal focus on ensuring we have an efficient, cost effective and cash generative business. An ambitious operational efficiency programme is already underway. This will concentrate on reducing costs and improving working capital through product, supply chain and property savings, together with back office synergies and efficiencies. We expect CAPEX to increase from the prevailing guidance of circa 40 million to between 40 million and 60 million. The increased CAPEX will be self-funded over the life of the plan through the operational efficiency programme. We will continue to have a test and learn approach to our investments and we will also have a robust gating process in place to monitor investments and to adjust, evolve or stop them accordingly. We firmly believe this is the right strategy for Halfords and will deliver a very relevant, growing and sustainable business for the long term. I'll now highlight some of the early progress we have made implementing this plan, taking each key focus area in turn. Let's start with our move towards greater specialism and a more inspiring shopping experience. If you look to the right of the slide, we have just completed the first phase of space optimisation in our Halfords retail stores, that's every store. In certain product categories that are either over-ranged or less relevant to motor and cycling space has been reduced. Conversely, more space has been allocated to ranges like scooters and high growth product categories like e-bikes and car security. We're also making good progress in developing new and enhanced own label ranges that you'll see in the centre of the slide. The first of these to launch was car bulbs two weeks ago. The own label portion of the range has been rebranded and increased and now has a clearer range and price hierarchy. As well as improving the customer proposition, the bulbs range review was an opportunity to drive out operational inefficiencies. We have reduced the amount of overall space given to bulbs from an average of 7 bays to 4, cutting out a third of the SKU count, delivering a stock reduction and efficiency. On the right hand side of the slide, you will see the very successful and aspirational Brompton brand name. Four weeks ago, we agreed a new partnership with Brompton to sell their bikes across the whole of Halfords Group. The rollout started this week with Cycle Republic and will follow with Treads in December. We will then sell Brompton bikes in the initial 75 Halfords retail stores in April. If you've not tried one of these bikes and you commute to work on the train, I highly recommend you do so. and obviously buy it from us. We're really pleased with this partnership because it highlights how far the group has progressed in becoming a true cycling specialist and that we're able to attract the leading premium brands. We're confident there will be more brands to come in the future. Moving into our second area of focus, services. Work is already underway to start unifying our services proposition across retail and auto centres. We've started a trial of on-demand retail motoring service in garages in two regions already. We've also been developing an enhanced financial services proposition. Last week we launched a trial in 30 garages whereby customers can pay on credit for a basket of purchases above £99. There are a range of customer-friendly payment options available ranging from 30 days to 12 months. Our first transaction using this new offer was for a basket value of over £800. Later this year we launched credit from £99 in stores with online functionality following in the new calendar year. And finally for this slide we explained in September how customers had high overall awareness of Halfords but low awareness of some of the services we sell. We've already taken a step to address this with the sponsorship of ITV's weather. This started last month and we have a series of adverts highlighting services which are relevant to the weather on that day. Finally, as we set out in September, we currently have very limited cross-shop of retail customers into auto centres, 2% in fact. In September, we ran a promotion enabling customers in our retail business to get a free MOT. This ran for five weeks, in which time we signed up over 150,000 customers, of which 70% were brand new to auto centres. a further early sign that our strategy is starting to deliver. I'll now hand you over to Adam, who will talk you through the financial performance in the first half and the outlook for the rest of the year. Adam.

Thank you, Graham, and good morning, everybody. So you've got me off the subs bench for one more time, and Lorraine will have the pleasure of presenting our financial results going forward. So I'm going to spend the next few minutes talking through the financial results of the first half before moving on to the outlook. So let's start with the group financial highlights, and group revenue was up 1.9% year on year, which was plus 2.5% on a like-for-like basis. Gross profit was up 3.5%, reflecting the sales growth and an improvement in the group gross margin by 80 basis points. Profit before tax and EPS were down 17% and 16% respectively, reflecting planned operating cost growth in retail, primarily driven by phasing, one-off items and investments. And more on that in a moment. And free cash flow increased by 10% year-on-year to £34 million, and the Board has approved an increase of 3% in the interim dividend, taking it to 6.18 pence. So looking in more detail at retail and revenue increased by 2.3% like for like with 3.3% growth in motoring sales and 1% in cycling. Gross margin was up by 90 basis points, principally reflecting the mixed benefit of faster sales of motoring products and services, lower stock loss and an FX benefit towards the end of the period in respect of goods imported in US dollars. EBIT and EBITDA were down 7.1 and 6.3 million respectively, reflecting sales and gross margin growth offset by an 8% increase in operating costs, which I will now walk you through. So firstly, circa 2% was due to inflationary impacts, including wages, business rates and utilities, as well as increased depreciation and amortization charges. And secondly, circa 1% was principally due to the weak start to the cycling season through extreme weather conditions, which meant that we had to put more bikes into external storage. And we also incurred some additional planned marketing costs to help stimulate demand. Thirdly, circa 3% was one-offs or phasing, and this totaled around £6 million of costs and included, for example, share option charges, the phasing of marketing costs between half one and half two, and the annualisation of next day fulfilment, which launched at the end of the first half last year. And finally, circa 2% of planned investments, and these included the operating costs of new Cycle Republic stores, marketing investment, additional resource in IT and digital, and the enhancement and utilization of the single customer view database. Moving on to auto centres and revenues for the first half increased by 3.3% like-for-like. This reflected growth in tyres, air conditioning services, MOT and servicing sales. Gross profit increased by 2.9% with a small decline in gross margin percent of 20 basis points reflecting a higher tyre mix. and EBIT increased from 1.5 million to 2.3 million, an increase of more than 50%, and reflected the good progress to date on the Auto Centre's transformation plan, as explained by Graham earlier. On to cash flow, and we ended the half with net debt at 0.7 times underlying EBITDA, and the chart on this slide shows the cash flow movements, which I'll walk you through. Firstly, we had a 7.2 million cash inflow from working capital movements. And as is usual for this time of year, our stock and creditor balances are higher than at the year end. However, our stock levels increased by less than our creditors and the amount of stock held at the end of the period was lower year on year. Slightly higher cycling stock was more than offset by lower motoring stock, partly reflecting early benefits from space optimisation. For example, as Graham set out earlier, we've refreshed the range of car bulbs and cut out a third of the SKUs and reduced the amount of space allocated to it from seven to four bays per store. CapEx was 13.9 million, and after tax, interest, and other costs, our free cash flow was 34.2 million, and this was up 10% year-on-year. So dividend payments and other movements totaled 23.8 million, resulting in a net cash inflow of 10.6 million for the period. And we continue to target net debt of one times EBITDA, which we'll arrive at over time by continuing to consistently apply our capital allocation priorities. Moving on to outlook, and we reconfirm our full year guidance. And in doing so, there are a number of important factors to take into account, and I will take you through these now. So firstly, whilst we do expect the short-term conditions for discretionary spend to remain challenging, it is important to note that in the second half, our sales mix shifts towards less discretionary categories compared to half one, with a higher participation of motoring and kids cycling. And these areas performed well in the first half. Secondly, a greater FX benefit in half two of circa three million, resulting from the US dollar rates already locked in through hedging. And on this slide, we've set out the impact of the US dollar exchange rate on our cost of sales prior to any price or supply mitigation. And you can see the headwind over the last two years, which moved to a small benefit in half one this year and increases to about three million pounds in half two. Thirdly, lower growth in retail operating costs of circa 3% in the second half compared to 8% in the first half. And this lower growth reflects, firstly, the non-repeat of the one-offs and phasing impacts from half one, which accounted for 3% of the 8% growth in that period. Secondly, lower impact from planned investments due to the way these are phased this year. And thirdly, we anticipate cost savings in half two. For example, savings in store payroll from reduced administrative workload, partly reflecting investments in store systems. the extension of our successful process efficiency programme from stores into our administrative functions, and through savings upon renewal of non-goods supply contracts. So to summarise the outlook, there's no change to financial guidance. We continue to anticipate FY19 underlying profit before tax to be broadly unchanged from FY18, with profit growth in half two reflecting a helpful sales mix, £3 million of FX benefit that's already in the bag, and lower cost growth that is within our control to deliver. And this guidance is subject to trading performance over the peak Christmas period, and also assumes average winter weather conditions. Thanks for listening, and I'll now hand you back to Graham.

Thanks Adam. Before I wrap up, I'd like to introduce you to Lorraine Woodhouse. Lorraine, would you like to say just a few words please?

Good morning, everybody. And thank you, Graham. And thank you, Adam, particularly, for covering my shift today. It's fantastic to be here. I think I've joined Halfords at a really exciting time, and I'm very much looking forward to working with Graham and the team. There are one or two familiar faces in the room, but for those of you that I don't know, I also look forward to getting to know you over the next few months as I settle in. Thank you.

Thanks Lorraine, great to have you on board. In summary then, the half one trading performance was robust in challenging conditions and we delivered revenue growth in all areas of the group. In auto centres we continued to make good progress in transforming the operational model resulting in strong profit growth for the first half with the business on track to deliver a second consecutive year of four year profit growth. We are a cash generative business with a strong balance sheet and a growing dividend. Free cash flow was up 10% in half one. Underlying profit before tax for the first half was broadly in line with our expectations and our full year profit guidance is reconfirmed. We continue to anticipate FY19 underlying profit before tax to be broadly unchanged on FY18. Finally, our focus is now to deliver a strong second half performance to execute our strategy and ensure we deliver and stay relevant for our cycling and motoring customers. Thank you for listening and I look forward to speaking to you all again at the trading update on the 22nd of January. Adam and I will now be delighted to take your questions. Thank you. If there are any. Any questions?

Jeff. So if your first half profits are down 17%, you're guiding to a full year flat, so therefore mathematically you've got to be up 18% in the second half. That sounds like a big number. Can you walk us through why profits should be up 18% year on year in the second half?

Yeah, sure. I think there's this break into three sections. We can definitely bank 3 million because we know that's coming with the FX change because we've already hedged that and it's in. So 3 million of it is pretty much guaranteed. The second piece is costs. Now, as we explained in that presentation, we see a much smaller cost growth in the second half of the year. And that, again, is in our control. So we've got something that's banked, something that's completely in our control to deliver, and we're confident we will do. The third piece is sales. And I think in the sales side, we have more confidence perhaps than some other retailers because of the shift that we have to less discretionary items of spend. So people have to still buy motoring products and services when batteries and... tyres and everything else fail and obviously the kids part of our offer, kids cycling part of our offer has performed well in the first half and that becomes much bigger in the second half and again it's less discretionary, kids need their first bike. So it's a combination of those three things.

And can you remind us what impact Easter has this year? Because I always get confused as to where we are. Because I don't think there is an Easter this year in your calendar year.

No, not this financial year. So this year that we're in now, we lost a tiny bit of Easter, which fell into the previous financial year. This year, in our Q4 this year, we have no Q4 in this year. It's all in next year. And so does that hurt you this year? No, there's not much impact, to be honest, because we only had a tiny bit of Easter fell into last year. Okay, thank you.

Thanks, Geoff.

Hi, it's Caroline Gulliver from Jefferies. You picked up on how pleased you were that Brompton had come on board, and you said that there may be further brands to come on board. What were you sort of thinking, really, if you can share anything at this stage?

Yeah, I mean, we've already seen a couple more premium brands actually sign up and come on board with Cycle Republic over the last few months. as Cycle Republic's business becomes bigger. It's not going to be that much smaller than Evans after the restructuring that Mike has already suggested he's going to do. So I think that, coupled with the nationwide servicing network we have for bikes, which is unique in the UK, there's no one else with over 400 sites that can service bikes, and our particularly strength in electric bike servicing, means that I think these brands are keener to work with us than they have perhaps been before. The other thing to say is that we do look at the independence part of the market, which is quite dispersed, and we think that probably in the last 12 months or so there's been several hundred independents go out of the market. So as the market consolidates, it puts us in a more favourable position to work with these brands. Any more questions? Okay. Great. Well, look, thank you very much indeed for coming along. Appreciate it.