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Edited Transcript of HFD.L earnings conference call or presentation 7-Nov-19 9:30am GMT

Half Year 2020 Halfords Group PLC Earnings Presentation

London Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Halfords Group PLC earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graham Stapleton

Halfords Group plc - CEO & Executive Director

* Loraine Woodhouse

Halfords Group plc - CFO & Director

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Conference Call Participants

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* Adam Stuart Tomlinson

Liberum Capital Limited, Research Division - Analyst

* Erik Salz

JP Morgan Chase & Co, Research Division - Analyst

* Kate Calvert

Investec Bank plc, Research Division - Retail Analyst

* Lucy Sharma

Liberum Capital Limited - Executive

* Matthew Neil McEachran

Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail

* Tony Shiret

Whitman Howard Limited, Research Division - UK General Retail Analyst

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Presentation

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [1]

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Good morning, everyone, and welcome to the Halfords Group Interim Results Presentation for FY '20. It's good to see some familiar faces here today. We have a lot to update you on.

We're going to do things slightly differently. Loraine will start with a review of the first half, take you through our financial results. I'm pleased to say that half 1 profits are in line with expectations, which is good. I will then provide an update on the progress we have made against the strategy we outlined at the Capital Markets Day last October. There are some good news here in that we have delivered some great early results across a variety of areas. I will then move on to how we plan to develop our strategy. A combination of the progress we have made on our existing plans, together with an even better understanding of where we currently create shareholder value, gives us real confidence to accelerate our strategy. I'm really excited to be able to share our thoughts here with you today. Finally, Loraine will conclude with a summary of our financial guidance. We will then take any questions that you may have.

So I'll now hand you over to Loraine to start with our half 1 performance.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [2]

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Thank you, Graham. Good morning, everybody. So we saw progress in a number of important areas in the first half despite what has been a very challenging retail sector. After our 20-week statement, trading improved, and a strong end to the half, particularly in our Cycling business, saw us return to growth over the last 6 weeks.

Motoring products, as you know, was much more challenging. The last 6 weeks of the half were better but still down year-on-year. This is disappointing, but we're encouraged by our relative performance, where we took share in a number of key categories.

Our services business, online and B2B all experienced growth and continue to represent a real opportunity for us going forward. I will come on to talk about the Autocentre performance in more detail, but our transformation program is on track, and we're on target to improve profitability for the third year running.

You will have seen today that we announced the acquisition of McConechy's Tyre Services Limited, giving us an additional 60 sites in Scotland and the north, a region in which we previously had little representation. Also within Autocentres, we are particularly pleased with the rollout of Halfords Mobile Expert, a mobile proposition that our customers love. This will be bolstered going forward by our recent acquisition of the Tyres on the Drive business.

And last but not least, our cost and efficiency program has netted tangible gains with the cost savings we've made offsetting both inflation and our strategic investments in the period. Graham will cover some of these areas in more detail as he talks through our strategic progress over the last 6 months.

Moving to our financial summary. I will, of course, cover these points in more detail, but this slide represents our overall financial performance in the period. Lower sales, as we know, drove down profitability on a pre-IFRS 16 basis. We were, however, pleased with our gross margin improvement, our cost control and our cash management.

It's worth mentioning IFRS 16 upfront as you will have noticed that the accounting adjustments added GBP 4.3 million to our PBT in the first half. I should point out that I expect the impact of this to lessen as we go through the year and as we renew outstanding leases as new leases will increase both the P&L charge and the lease liability.

Any numbers I quote today, unless stated otherwise, are pre-IFRS 16.

If I turn to our Retail business first, you can see the summary performance on the left-hand side. Our like-for-like Retail sales were down 3.1%. It is worth highlighting, however, that we saw an improved performance in the last 6 weeks of the half. Sales after 20 weeks were down 3.9%. But from week 21, the next 6 weeks improved, with like-for-like performance returning to small growth.

Cycling saw particularly strong growth at 5.1% on the back of a very successful promotion. Motoring remains tough primarily in big-ticket nondiscretionary areas, but as you can see, also improved versus the previous 20 weeks.

Our Retail sales were down year-on-year by nearly GBP 20 million. However, we were able to mitigate some of the impact of this through a gross margin improvement of 40 basis points and tight cost control.

Turning first to Retail gross margin. The growth in margin reflects several factors. The most significant of these is the work that we've been doing with suppliers to lower our cost of sales, whether through range reviews or through working together to identify joint efficiencies. At the same time, we've seen margin improvement, particularly in Cycling, through more targeted promotions.

Graham will talk more about our right-range, right-store program in Cycling that we nicknamed "Project Peloton." Getting the right range of bikes in store and facilitating the sales of electric bikes has both improved margin and reduced stock levels. Offsetting these positive dynamics are a small adverse movement in FX and of course, the mixed effect of lower Motoring sales.

Moving to costs. We flagged at the start of the year an overall cost increase of around 3.5%. However, given our weaker sales in the first half, we worked hard to minimize costs where we could. As you can see from the chart, we've achieved efficiency savings of over 2%, more than sufficient to offset inflation and the incremental operating costs of some of our strategic initiatives.

We have targeted a number of cost reductions over the first half, and examples include rent savings of GBP 1.5 million in Retail, with rent renewals settling, on average, 6% lower; savings in distribution costs as we move from 3 to 2 store deliveries per week; and the reduction in utility costs from better buying practices and the implementation of LED bulbs right across our estate. The one-off saving you see here is primarily from a release of our claims provision, whereby a new provider has helped us bring the cost of claims down.

I should flag that you shouldn't expect to see similar savings over the course of the second half. Many of the initiatives we've been working on started in the second half of last year, whereby, if you recall, we were successful in bringing down the level of cost growth quite materially.

Moving now to our Autocentre business, a really positive story in every regard. The ongoing transformation of the business, underpinned by new technology, is materially improving the business model, with operating margins now at around 4%, the third straight year of improvement.

Like-for-like sales growth was 2.1%. And like Retail, the sales growth in the 6-week period at the end of the half was also stronger at 5.6%. It's notable that the garage market is much more resilient than retail as much of the work is generally not discretionary.

Gross margin, through a combination of better buying and lower tire mix, was ahead by 110 basis points. Costs grew by 3.3% as we continue to invest in colleague numbers. We know that we have additional demand that we can fulfill if we're able to fully resource each center. The net result over the half was an EBIT uplift of GBP 0.9 million or 39%. We're confident we will end the year with strong profit growth.

I'll move on now to cash flow. Before I go through the numbers, I'd just like to set this section up by explaining a couple of key points. Our half year ended on the 27th of September, which is unusually early. And as a result, we had around GBP 30 million of supplier payments and payroll that have not cleared the bank. In these numbers, we have adjusted for this payment run as though the payments had been made because otherwise, I believe, we would be misleading you. Even with this adjustment, the creditor's figure is likely to be slightly flattered by timing, and I will therefore come on to talk about what I believe is a more useful way of measuring underlying cash.

Notwithstanding creditor timing, we have improved our underlying working capital position in the first half, and this has contributed to a healthy free cash flow of GBP 44.2 million. Our cash flow, despite lower PBT, is GBP 10 million up on the previous half year. However, whilst the balance sheet position at the reporting date is important, far more important to me is our average stock and creditor's position over the course of the half. Half year and year-end stock and creditor balances can be impacted by the timing of the reporting date. The average position, however, is much less likely to be distorted.

Our average stock is down GBP 15 million year-on-year, and our average creditor days are ahead by around 2 days as we work with suppliers to ensure that our days' credits are reflective of the stock turn of a specialist retailer. To flag, we have a 53rd week this year, and it's likely that this will distort our year-end working capital position, hence, the importance of sharing the average position with you today.

Again, for our net debt position, I have also adjusted for the uncleared payment run as without this adjustment, our net debt would be artificially low. At 0.7x, our net debt-to-EBITDA ratio pre-IFRS 16 is consistent with last year, with the improved working capital compensating for lower EBIT.

Moving now to the interim dividend. I will come back to the full year dividend later in this presentation. But for the interim dividend, the Board has approved a payment of 6.18p, consistent with the dividend paid out last half year.

So to summarize briefly, sales were lower this half driven primarily by big-ticket discretionary spend in Motoring products. But outside of Motoring products, where we did grow share, we saw growth in all areas of our business. We improved gross margins across the group, and our cost control was strong, mitigating the profit shortfall.

Autocentres delivered another good profit performance and is on track to grow profit for a third year. Our cash generation was good, with strong working capital management.

Given their strategic nature, I will leave Graham to talk in a little bit more detail. But after the balance sheet date, we purchased the trade and assets of Tyres on the Drive and also acquired McConechy's Tyre Service Limited, one of the largest independent garage chains in the U.K.

Speaking of Graham, I will now hand back to him to provide you with a strategic update. Thank you.

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [3]

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Thanks very much, Loraine. Before I go into the strategy update, I wanted to start with contextualizing where our business is today. I'll spend a little bit of time reminding us all of the shape of the Halfords business, both how we serve our customers and also how we currently create value for our shareholders.

We are the U.K. and Ireland's leading retailer of Motoring and Cycling products and services. We're a trusted brand, with over 125 years of heritage. We have market-leading brand awareness in our Retail business. Over 20 million customers visit us each year. And today, despite a rapidly growing services business, we are largely recognized as a product retailer.

We have nationwide coverage across the U.K. and Ireland delivered through 317 garages trading as Halfords Autocentres, 448 Halfords retail stores, 8 Halfords Mobile Expert vans and 26 performance cycling stores trading as Cycle Republic and Tredz. This gives us a unique mix of physical assets for both Motoring and Cycling and therefore, a combination of mobile, store and garage locations.

Alongside a description of our business, from a trading asset point of view, we also thought it would be useful to share with you how we create value for our shareholders today. As you'll see on the slide behind me, we have divided our business into its key component parts: Retail Motoring and Cycling, products and services, Autocentres and B2B.

On the bottom axis, we show return on invested capital. And on the side axis, we have the market opportunity or our growth opportunity. The size of the bubble reflects the relative size of the component parts of our business today. I should say at this point that the graph is indicative and that the bubbles are relative, not absolute, or if anybody intends to get a ruler out and just check the lines. Even indicatively, however, you can see how the different parts of our business perform.

Motoring products, for example, have a high return on invested capital but a relatively low market opportunity. As we know, we already have a high market share in a number of Motoring categories.

Autocentres, on the other hand, has a good return on invested capital through low capital intensity and an improving profit margin. We only have 2% market share of a highly fragmented market, where there is no clear market leader in the U.K. and Ireland. This presents an interesting and very real opportunity.

For Cycling, whilst we know we can grow our business, we also know that it is a lower returning category than Motoring simply through lower gross margins. Finally, we can see that Motoring services represents the vast majority of total service-related sales and delivers good return on invested capital. This gives us a significant market opportunity, especially when sold with our Motoring products. This analysis tells us a lot about where we have value-creating opportunities.

That's our business today. Now moving to our strategy.

At the Capital Markets Day 12 months ago, we set out our mission for Halfords: to inspire and support a lifetime of motoring and cycling. Our mission has not changed. It was developed with the benefit of significant customer insight and research, and we are therefore confident that it will stand the test of time.

To deliver against our mission, we set out these 3 strategic goals. Firstly, we will inspire our customers through a differentiated, super specialty shopping experience. Secondly, we will support our customers through an integrated, unique and more convenient services offer. And finally, we will build relationships with customers aimed at enabling them to get the most from a lifetime of motoring and cycling. These goals also remain unchanged.

A year on from our Capital Markets Day, we have made great progress against our objectives. Let's start with how we are inspiring our customers. We remain on track to launch our fully integrated group website. This will deliver a best-in-class digital customer experience, enabling customers to access services from both Retail, Autocentres and Mobile Expert vans through one website for the very first time.

On the left-hand side, you can see how the current experience looks. So in simple terms, to take advantage of the full Halford branded offer, customers have to visit 3 separate sites that might well be laid out in 3 separate ways for the same product. Later this year, you can see on the right-hand side of the slide where we move into one single website for our Retail, Autocentre and Mobile Expert business. This will give a greater level of consistency and convenience to customers who, in turn, will become more aware of all that Halfords has to offer. You can see here on the left-hand side the options of a retail store and Autocentre and if there was a Mobile Expert van in this instance, will be there as buying options for one product. So it all comes together.

Now turning to how we are inspiring customers in our stores. We have also optimized our Cycling space, delivering a better shopping experience through a right-range, right-store approach. As well as improved sales and margin, we have also reduced working capital. Post transformation, we have seen a 20% reduction in Cycling stockholding.

You can see in the photographs behind me that a new approach to visual merchandising has simplified and improved our in-store customer experience. There's the before, and there's the after. This has resulted in an increase of 2.5 points in Cycling Net Promoter Score.

Finally, under inspire, our strategic focus on creating a more unique product offer has also delivered a 30% increase in sales of the exclusive Motoring and Cycling ranges. Here, you can see around the room just a few examples of exclusive products. I'll take you through this slide very quickly.

On the left-hand side, you can see a Gtech electric bike. We have exclusive rights to the Gtech range in the U.K. Moving to the right-hand side, I think a really good piece of customer-led product development is the new Trunki folding kids' bike we have designed with Trunki together from scratch using customer insights and is exclusive again to us. And then last, but not least, a favorite of mine anyway, is the McLaren range of car polishing and finishing products, which, again, we have worked solely in partnership with them. And we have that exclusively in the U.K., too. So some good examples of innovation and unique products coming through.

Turning now to where our main focus has been over the last 12 months, how we are supporting our customers through a more integrated and unique services offer. Let's begin with our investment in Halfords Mobile Expert. As a reminder, this provides customers with a mobile solution to access our services in a way that is convenient for them. Halfords Mobile Expert is exceeding our targets and delivering very strong customer satisfaction as you can see here.

What is also really exciting is that it's attracting a more younger and female customer base than our traditional automotive services business. This means little kind of both cannibalization of our existing business and more new customers to the Halfords Group. Clearly, this is commercially sensitive, but we want to give you a sense of why we are confident that we can drive profitable growth through a mobile business.

Firstly, as you can see here again on the slide, we have acquired best-in-class proprietary software, which allows us to maximize the number of jobs per day and deliver a healthy mix of tire replacement and other services. This enables us to achieve a higher margin per job than a business offering a single service, for example, just tire-fitting.

Secondly, we also expect the cost of running the Halfords Mobile Expert business to continue to fall as we gain economies of scale and fully utilize the Halfords Group assets and skills. An example of this would be leveraging all the customers that shop on the new Halfords Group website, you think all of those going through the Group website seeing a mobile option. We think that will be a big acquisition tool.

Now moving to how we are supporting customers in our retail stores. We've launched 2 new Motoring services, weCheck free and weCheck premium. These are now delivering in excess of 30,000 car checks per week every week. The weCheck services are important because they help us increase awareness of our services business, build our relevance and give us an opportunity to create value. Additional sales and margin comes from either identifying work that needs to be done in store or Autocentre or by trading customers up to the weCheck premium offer.

And we're also trialing our Retail weFit Motoring services on demand in our Autocentres' garages. This continues to deliver promising results. This offer not only broadens the range of services that we provide customers but has helped enable us to extend Autocentre trading hours.

The final pillar of our strategy is focused on building stronger relationships with more customers over their lifetime. This year, we have accelerated the investment in our financial services offer. We now have a much improved proposition online and in-store across Retail and in trial and about to launch in our Autocentres business. This new proposition is delivering substantial double-digit growth year-on-year, but also importantly, gives us access to a new customer demographic, which is an exciting development for us.

Whilst I focused on the customer initiatives here, it is also worth reminding you at this point that much of the investment we have made in our strategy over the last half year has been funded from cost and efficiency savings, whether in lower cost of goods for resale or in reducing selling and administrative costs. Loraine talked about this earlier, so I won't repeat the detail, but that's an important point.

Finally, to summarize all that I've just talked you through and where we currently stand with the business today, we have a market-leading trusted brand with good customer awareness. We have a unique and differentiated omnichannel portfolio through our combination of stores, garages and vans. We have made great progress in delivering the strategy we shared with you at the CMD across all 3 of our strategic goals. And we've shown you where we currently create value and where the potential market growth opportunity is.

In addition to leveraging these Halfords opportunities, there are also a number of growing macro tailwinds which further support our service-led strategy. Cars and bikes are becoming increasingly complex driven in part by the growth in electric mobility. Maintenance, servicing and repair of both cars and bikes therefore requires even more specialist skills. Customers are demanding greater levels of convenience from businesses and brands, be that on-demand services and delivery, or the growth in mobile options. And there is a continued shift towards "do it for me," exasperated by the combination of increasing product complexity and consumers' everyday time pressures. The unique and growing parts of our business today, together with the opportunities and strengthening tailwinds in the market, give us a clear rationale to further accelerate our service-led strategy.

I'm now going to talk you through our updated plan. I will only focus on the elements of the strategy that we intend to accelerate in this part of the presentation. It is important to note that we will still be delivering the majority of the existing CMD plan. For example, innovation and the development of our Cycling and Motoring product business still remains key. This is an emphasis shift, not a whole scale change in direction.

Put simply, if I was to summarize the shift over the medium term, this is it. We will evolve into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating higher and more substantial financial returns. So that is the heart of where we're going.

So where will we be accelerating investment to deliver this shift? Firstly, we plan to significantly grow our Autocentre business. Our Autocentres remain on track to deliver a third consecutive year of profit growth, and our operating margin has doubled in the last 2 years to circa 4%. Even though we are seeing growth, we know that our Autocentres are not conveniently located for many customers to use. Our insight shows that customers require a drive time of less than 20 minutes if they are to access Autocentre services.

This makes sense when you think of the customer journey. A customer has to drop a car off, sometimes go back home, then get back to the Autocentre and drive back home again. It's a lot of travel.

In many parts of the country, the Halfords Autocentre drive times are well over 30 minutes. We therefore feel it's the right time to expand our Autocentre network to give more people better access to our Motoring services.

So what will this look like? In the first chart, you can see our current footprint. This is represented by the orange dots. The good news is we have already made progress. I'm delighted to share with you that as part of this acceleration, we have acquired McConechy's Tyre Services Limited, one of the largest independent garage chains in the U.K. The business employs over 330 skilled staff and operates 60 sites in Scotland and the north of England as well as having close to 100 vans providing 24-hour breakdown services for commercial customers. This is a highly complementary acquisition and will increase the size of our site footprint by around 20%.

The McConechy's business is illustrated on the second chart by the blue dots. Looking into the future, we believe there is potential for 550 Autocentres across the U.K. and Ireland, which will bring our drive time in line with customers' expectations. You can now see the blue from just under 380 Autocentres to the 550 on the third chart -- on the next chart there. These are the bright green dots. You'll see Ireland there being a big part of the opportunity.

Moving to our mobile services business, we also plan to continue the development of our Halfords Mobile Expert proposition, aiming to increase this from 8 to 200 vans over the next 3 to 5 years. The recent acquisition of Tyres on the Drive, a mobile tire-fitting business with best-in-class software, will significantly accelerate this rollout, taking the number of our mobile vans from 8 to 68 by the end of this financial year.

The first chart shows where our customers can currently access our Mobile Expert services. Building on this, you can see on the second chart in the gray how our coverage increases with the acquisition of the 60 Tyres on the Drive vans.

Finally, the last chart shows how we move from 68 vans to national coverage, giving most customers access to a Halfords Mobile Expert service. This is shown in yellow on the chart.

Finally, in Motoring services, we will increase investment in the provision of weFit services in our retail stores, for example, the fitting of wiper blades and headlight bulbs. This will be enabled by a best-in-class customer contact strategy and the redeployment of labor in-store to provide more weFit-trained colleagues to better service customer needs.

So that completes the acceleration in our Motoring services plan. I'm now going to talk about our physical portfolio. You've already heard me talk about the launch of our new website later this year and how that integrates our garage, retail store and mobile offer for the first time. Once this is complete, we want to take the same principles and apply them to our physical portfolio in a town. This will mean creating a more seamless customer journey wherever a customer shops, be that in a retail store, an Autocentre or mobile within that tail.

Alongside this, we will also create a more inspirational and digitally enabled physical shopping experience for our customers. Let me walk you through where we are currently and where we are planning to be in the future.

As shown on the left is a typical large town or city today. Our customers have access to multiple retail stores. These are shown in the orange and may be an Autocentre garage depending on where you are. Most of our retail stores are on expensive and busy retail parts, which have limited benefit from the associated footfall of other retailers. Customers expect easy access, parking and exit to come to Halfords from these very busy locations and typically come to us for a very specific purpose, very destination mission.

Our research and insight suggests that there is an opportunity to deliver customer needs in a different and better way and potentially at lower cost. We are therefore trialing a new customer experience in 2 locations next year, which you can see now on the right-hand side of this slide. It will encompass a more inspirational destination retail store shown in orange in the center, an updated Autocentres garage design, again in the green in the right -- left -- bottom-right corner. A new format that will combine an Autocentres garage with a small store for Motoring products, that's represented in the blue. And then obviously, a Halfords Mobile Export offer shown here by the vans.

We believe this will enhance our customer offer and over time, reduce our fixed costs by changing the mix of physical, digital and mobile assets in a single geographical location. It will also allow us to test whether we can deliver a greater level of sales from a reduced and less expensive footprint.

So in order to achieve our plan and that acceleration, we will need to invest, firstly, in infrastructure. In order to build a bigger and more successful Motoring services business, we will need to ensure we are able to communicate with our customers better than we do today. We know that we will need to invest in technology to enable customers to seamlessly book our services and consistently receive the specialism and advice that we can offer. This will include a new customer contact center and some digital investment.

We are also developing a unique services -- a unique digital services customer and colleague management system for scheduling workflow and further improving customer experience. This is already in test in our Autocentres business, and we are now looking at how we take the same principles and apply them to both our Retail wefit operation and our Mobile Expert business.

Similarly, for our B2B business, we will continue to invest in systems and infrastructure to help maximize our growth potential and increase our market share.

Secondly, people. We know that the growth in services will require greater investment in colleagues, both in terms of training to underpin our services offering and also to ensure that we retain the right skills in the right locations.

Thirdly, we will also continue to look at how we accelerate the growth in Autocentres, supplement the strong organic growth with acquisition opportunities. Our immediate focus will be on successfully integrating the McConechy's and Tyres on the Drive acquisitions into our existing business.

And finally, we will invest in marketing, looking specifically at the ways in which we drive awareness of our group services offer, with an increased focus on social and digital marketing. We will aim to fund a significant proportion of the incremental investment through an ongoing focus on cost and efficiency. We will continue to lower costs across all areas of our business, but with particular emphasis on our supply chain, our property portfolio and our infrastructure costs through better procurement processes.

To further improve our product costs, I am pleased, very pleased to announce that we have entered into a strategic buying alliance with Mobivia, a market leader in the European motoring products and services space. Our first focus will be on collaborative buying opportunities, but this partnership will also enable us to share best practice across a number of areas.

Finally, as a reminder, earlier, I talked about return on investment and market growth. We will also continue, therefore, to work on improving the profitability of our Cycling business across both Halfords Retail and performance cycling. By implementing this accelerated plan effectively and evolving into a consumer and B2B services-focused business, what does that mean we will deliver for our 3 key stakeholders?

Well, let's look at our customers first. Customers will benefit from a significantly more convenient services proposition, with services delivered consistently and offered when and where they want them. They will have better access to technical advice and expertise, together with a market-leading digital customer experience, both online and in-stores, garages and mobile.

For colleagues, the plan will deliver even greater clarity and focus across the group, excitement around the accelerated investment and growth, further investment in colleague expertise and specialism and a business which provides even more cross-group career opportunity.

Finally, for our shareholders, the change in emphasis towards services offers sustainable profit growth and improved return on invested capital over the medium term. It delivers a business which is focused on areas of significant opportunity and is less exposed to the volatility of FX, weather and customer sentiment. And finally, it creates even higher barriers to entry for our competitors.

So in summary, we are confident that this is the right path for long-term growth. It's an acceleration of the existing plan, built up with significant customer insight and research, a plan which exploits market share opportunities and build on existing growth. It will mean that the shape of our business will change significantly over time.

Over the medium term, as our business evolves, service-related sales will double as a percentage of total group sales. Autocentres will represent a larger proportion of our group profit. We expect to see a reduction in fixed costs, with an opportunity to go further if our property trials are successful. And we will lower our exposure to recent headwinds.

As we initiate the plan, our focus for FY '21 will be to specifically accelerate investment in optimizing our new group website; integrating our McConechy's acquisition and increasing our estate to 400 garages; integrating our Tyres on the Drive acquisition and growing our Halfords Mobile Expert offer to 100 vans; scaling our weFit services in retail stores through investment in our customer contact strategy and increasing the number of weFit-trained colleagues; and finally, trialing a more inspirational, convenient, integrated and digitally enabled shopping experience in 2 locations.

To fund some of the investment required to deliver our plan, we will remain very, very focused on cost and efficiency, specifically improving profitability in our Cycling products business and the continued delivery of significant cost efficiencies across the group.

Thank you. I appreciate there's a lot to take in. Please save your questions for a few more minutes whilst Loraine updates you on our financial guidance. Thank you.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [4]

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Thank you, Graham. I have 2 final things to cover: our dividends going forward; and our financial outlook.

To take the dividend first, the Board has looked forward to the future level of dividend payout. In taking its decision, we have considered the current market outlook; the need for investment in the business, as Graham has just described; the balance sheet position; and of course, the importance of our dividend payout to investors.

In a challenging retail market, group profitability has been lower. And as a result, against our expectations set out a year ago, operating cash flows have also been lower. At the same time, there is a need to invest in the business and particularly to take advantage of some of the opportunities in front of us today. Whilst the group remains very cash-generative, the Board believes it is prudent to preserve cash. We need to fund investment in the growth of the business whilst, at the same time, maintaining a healthy balance sheet. As a result, the Board is expecting to recommend a final dividend of 8p per share, a reduction of around 35% on the prior year final dividend.

On this basis, the proposed full year dividend this year would be 14.18p against 18.57p last year. The reduction in the final dividend would also have the effect of reducing future dividend payouts, with the FY '21 dividend expected to be reset to circa 12p per share.

The accelerated strategy set out by Graham this morning will deliver an improved return on invested capital over the medium term. The targeted growth in less capital-intensive businesses enables us to sustain the reset dividend going forward.

Moving finally to our financial outlook, there are a few points worth highlighting. We are today reaffirming our underlying PBT guidance for FY '20, which, prior to any IFRS 16 impact and for the 52-week period, remains between GBP 50 million and GBP 55 million. Naturally, our cash flow in the second half will be impacted by the acquisition and integration of Tyres on the Drive and McConechy's business. We expect additional capital, including the acquisition cost, of around GBP 11 million and associated exceptional restructuring costs of GBP 2 million to GBP 3 million.

For FY '21, as I think you would expect me to say, in the current economic environment, it is too soon to provide specific financial guidance. 2 things are worth flagging, however.

Firstly, our capital expenditure guidance, excluding any cost of future acquisition, remains unchanged at between GBP 40 million and GBP 60 million. In operating costs, however, in FY '21, we will be seeking to increase our relative investment in the infrastructure necessary to support and enhance the services business, for example, our new customer contact center.

We will also be aiming to invest in colleagues to ensure that we have the right number of trained colleagues in-stores and garages at any given time. Some, but not all, of the increased costs will be mitigated by ongoing cost savings.

Thank you. I appreciate it's been a really long session today. We had a lot to share. I'll leave you with one final reminder of what we are setting out to achieve. We are evolving into a consumer and B2B services-focused business, with a greater emphasis on motoring, generating higher and more sustainable financial returns. Thank you.

I believe we have some handheld microphones floating around for those that wish to ask questions. Please, can you remember to state your name and your institution? Thank you.

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Questions and Answers

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [1]

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Kate Calvert from Investec. Assuming your 2 trials, these property trials are successful, how many of these inspirational Halford stores do you think you ultimately would need to cover the country? And how many of your existing stores are in the right location for them?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [2]

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I mean I suppose that's part of why we're doing the trial, to try and assess what that might look like. I think we have quite a number of large towns and cities with more than one Halfords store, which gives us the opportunity to reduce potentially some of our Retail portfolio and move into the new format that we've talked about of Motoring products and Autocentres together. There will, however, though, be some parts of the country where there is only one Halfords store in that location. And we would probably wish to retain it because it makes sense from a customer and a profit perspective.

In that location, we may still decide to put in a new, more inspirational shopping experience estate, albeit there's only still one store left.

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [3]

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And second sort of follow-up to that. In terms of your Autocentres portfolio, you've got at the moment the McConechy's stores coming in as well, do you need to do much restructuring to the actual Autocentres, do you think, to achieve your ambitions?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [4]

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In terms of numbers of Autocentres that we were...

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Kate Calvert, Investec Bank plc, Research Division - Retail Analyst [5]

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Are always going to go up, but the existing portfolios, are much restructuring needed within that or are well located?

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Loraine Woodhouse, Halfords Group plc - CFO & Director [6]

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So I think they are generally well-located. There are opportunities. We know from our analysis that a bigger Autocentre performs better. So we have a number of towns where we would like larger premises. And if the right opportunity came up, we would move those Autocentres. But we don't have a whole scale restructuring to do of the estate. If anything, we've probably been doing that over time.

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [7]

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Maybe one of the advantages that we have got is there are 208 leases coming up over the next 4 years. So we've got -- we have the opportunity to reshape where some others may not. There's a lot more flexibility.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [8]

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It's Matthew from Singer's. Just some more questions on Autocentres, if that's okay, please? The first one is just regarding your target for next year, the 400 sites. Am I wrong in thinking that you're already at 417 post the acquisition? Or have I missed something there?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [9]

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We're at 380. Yes. So we're around about 380, just under 380 actually with the acquisition, or just 377 to be absolutely precise before Loraine corrects me. So yes, so we've got the opportunity. And really a focus next year, as I think I mentioned, was integration, making sure we integrate the business, get the model working across the McConechy's estate and then potentially add a few more centers at the end of next year.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [10]

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So you've obviously done some work around McConechy's, and I understand that it's running roughly around breakeven. You're delivering a 4% margin internally. What are the major shortcomings, if you like, in that business, that are the obvious? What's the kind of 3 top things you're going to go and hit when you integrate the business?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [11]

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Yes. I mean I'd look at them -- I mean it's opportunities. So there's an opportunity to bring some of the scale of Halfords to that group. Obviously, leveraging our brand, our brand awareness will be, I think, a big positive. We've got a very -- a sort of very much better operating model now in all the sense of business that you know we've worked on as part of the transformation program for the last 2 years. That digital platform that I mentioned is an opportunity there, I think, for them. And we will also do our best to leverage all the good bits that McConechy's already have. They have 330 highly skilled technicians. Their quality operations in Scotland are well known. They have a commercial operation, as I mentioned, with the vans that I think we may be able to learn from.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [12]

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I think there's also an opportunity, Matthew, to, in the same way that we will do with Tyres on the Drive, is move the mix of business away from being predominantly tires into more profitable, higher-margin service and repair jobs. That model makes significantly higher gross margins, and it's advantageous for both Tyres on the Drive and for the McConechy's model, which isn't entirely tires, but is much more tire-based than we would be today.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [13]

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Yes. And then, sorry, the last question, is you talked about a 4% margin. Obviously, the business is coming from a very low base, but has historically driven a much higher margin than 4%. Could you give us a sense as to what the margin would need to be for the enlarged, including McConechy's and Tyres on the Drive, business to actually make or meet, in terms of your return on capital employed, your weighted average cost of capital?

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Loraine Woodhouse, Halfords Group plc - CFO & Director [14]

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Yes. Sure.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [15]

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Are you actually already beyond that level?

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Loraine Woodhouse, Halfords Group plc - CFO & Director [16]

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So the operating margin, as you say, is around about 4%. The operating margin of Retail for the first half is 4.5%. But if you look at our overall stock numbers, GBP 1 million of it is tied up in Autocentres and the other GBP 170 million is tied up in Retail. So we're already at a point, because it consumes relatively limited capital, where the return on investment is reasonably strong. There is more to go. And if we look at the market, I would say operating at around a 6% operating margin seems to be broadly where the market is at.

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Matthew Neil McEachran, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst of Retail [17]

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Sorry. Can you just clarify that? I'm talking about the return on capital employed for the -- I mean you -- the business acquired the Autocentres group. So you have already got an established capital base in Autocentres. So I'm just looking at it in terms of delivering a return over and above your weighted average cost of capital in Autocentres in its entirety. What level of margin you would need to achieve because I'm wondering whether or not you're yet at that level.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [18]

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No. I don't think we would be quite yet at that level if you were looking at the historical goodwill associated with Autocentres. I'm looking at where we are today investing going forward.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [19]

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Tony Shiret from Whitman Howard. Just looking at or trying to remember one of the charts from earlier in the presentation with no scales, et cetera. Cycling, I just wondered if you could give us some sort of sense of the relative in terms of profit margin dynamics of Cycling versus the rest. And I've just been sort of increasingly thinking as we're going through, does it actually fit with what you're trying to do going forward? And is there a -- in 5 years' time, we're all sitting here, obviously not me, but whether we'll still be talking about Cycling?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [20]

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Yes. It's a good question, Tony. Thanks for that. The Cycling business is still very, very important to Halfords. We've established a brand relevance there over many years. We have a big market share. It delivers a lot of sales and margin to the group. And we -- as I said in the presentation, it's still a big part of the CMD plan, and that still carries on. We just talked about the acceleration today. There's still opportunities, I think, in Cycling structurally, the health benefits, the investment infrastructure, climate change. There's an enormous number of positive tailwinds for this business.

We're also seeing, as you've seen here, we're still seeing growth. The growth of electric, I think, is still at a very early stage of development. It might be 15% of our business, but I think there's a lot more to go for. If you look at the penetration of electric bikes in the U.K., it's about 0.6%. In Germany, it's 1.5% -- sorry, France is 1.5%. In Germany, it's 5.5%. So there's a long way to go.

The reason I say about electric is I think electric hybrid cars and electric bikes almost bring these 2 categories together from an electric mobility point of view for the first time more closely. And they also mean more servicing of both bikes and cars because they're more complex. The bike becomes more complex, too. So I think, yes, it's relatively lower profit, but there are opportunities to make more profit still, I think, in Cycling, and there are a lot of tailwinds to ensure that carries on growing.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [21]

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To your question on the other point, Tony, I'm sure you're not expecting me to read off relative gross margins. But there's...

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [22]

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I was thinking more of the operating margin...

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Loraine Woodhouse, Halfords Group plc - CFO & Director [23]

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There's plenty of data out there around other businesses that give you a good sense of where Cycling businesses tend to sit. The challenge with the Cycling business is the lower gross margins as a starting point, the high cube that you have to move through your system, typically greater FX volatility because it's directly sourced often in dollars and the lead time of some of the product, which means that you're perpetually trying to balance fluctuating demand with much less flexible supply chain. Now we've made really good progress on all of those areas. And much of the improvement in stock and gross margin that we talked about this morning is driven by our Cycling business, and we know we've got a lot more opportunity to go. But the fundamentals of it just mean that it's structurally more challenging. We tried to show you the differential on the chart as best we can without telling you what you really want to know.

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Adam Stuart Tomlinson, Liberum Capital Limited, Research Division - Analyst [24]

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Adam Tomlinson from Liberum. Just in terms of the more recent trading, so that 6-week period, it feels like, I guess, to summarize, it's been driven more by your own self-help, your own initiatives as opposed to any improvement in underlying customer or consumer activity. So just whether that's a fair summary and the balance of those 2 parts. And then other strategic components you've talked about in the past, improving the cross-shop between Retail and Autocentres. So I think you've mentioned that was sort of 2% in the past. Are there any improvements there? And also, on the services side, improving that penetration in terms of the -- adding those services and those fitting services to product sales, just any comments you can give on that as well, please?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [25]

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Yes. So I mean I think the trading in the last 6 weeks is definitely some of the initiatives that we've talked about impacting the business and meaning that we are growing our performance from the first 20 weeks. So there's definitely some of that, that we're driving. Obviously, the weather comparatives year-on-year do ease a little bit. If you remember, we had the hottest summer for 100 years. That started to peter out in September last year. So there's definitely, in some of our weather-related categories, some improvement there, too. So I think it's probably a combination of those 2 things, I would say. But some good progress on the strategy is definitely helping us move things forward there.

In terms of -- let's take penetration first before we do cross-group. Penetration actually of services is -- has increased significantly in the first half. It's an area we're really pleased with. So our number of service jobs are -- has gone up 12% year-on-year. So that's the real -- that's what I look at as the real measure of activity, if you like, the number of customers that are enjoying the services that we offer. And that 12% growth is largely down to the increase in penetration that we've seen, not just in Motoring, but Cycling also with our cycle care plan.

In terms of cross-group, cross-group percentage has grown from the 2%. We are seeing, for example, tens of thousands of the MOT customers that I referenced last year coming back a second time now, which is good. And we are continuing to look at initiatives and ways of increasing that cross-group relative -- the website will obviously help when we launch that. The trial next year, which is trying to bring all the other parts of Halfords in a town together, will also help. And next year, we'll also be just talking about some Motoring services membership schemes or programs that we're going to be introducing to support the plan we talked about today. Any more questions? Yes.

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Lucy Sharma, Liberum Capital Limited - Executive [26]

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Lucy Sharma from Liberum. Just 2 questions, is first of all, you talked about increasing your marketing. So I wondered if you can sort of maybe quantify that, what you spend at the moment, as a percentage of sales to where that can go. And then also, excuse how I say it, but quantify the benefits of Mobivia, the buying alliance. Hope I said that right.

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [27]

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Yes.

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Lucy Sharma, Liberum Capital Limited - Executive [28]

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If you could sort of say what that could potentially deliver, please?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [29]

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Yes. In terms of Mobivia, it is difficult to pronounce that one. I have to agree. The buying alliance will focus initially on Far East-sourced products, so where we both source products from China. For example, they have a very big own-brand motoring products business, so do we. We are sometimes going to exactly the same factories with similar specs. So we're going to start by testing how much opportunity there -- could be there to collaboratively source, not just motoring actually, we're also looking at some cycling. They sell electric bikes, too. So that's where we'll start. We haven't quantified what that might look like because we're still in very early stages of this partnership. But we're obviously hoping there will be value there and that, that will grow over time outside of just own-brand.

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Lucy Sharma, Liberum Capital Limited - Executive [30]

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(inaudible) source from an area (inaudible)

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [31]

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I don't think we publicly stated that. I mean what I would say is that we have publicly stated that 50% of our sales are own-brand. And we are moving that to 60% as part of the CMD strategy. So you can gather that that's quite a big number.

So that is the -- so the first question was around marketing spend. How can I forget on that one? So marketing spend, I don't think we're talking about materially big increases here. We're probably looking at repositioning some of our existing marketing spend into services. So a big emphasis in our marketing spend for all services as we obviously accelerate into that part. But we do accept that if we want customers to become more aware of our services business, and it has little awareness today, particularly Autocentres and Halfords Mobile Expert, there has to be some incremental investment on top of that. But we're not talking tens of millions.

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Unidentified Analyst, [32]

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Just a quick one on the 550 target for nationwide rollout forces. Is your preference to do that through putting in more capacity? Or would you prefer to do an acquisition of independents?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [33]

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I -- honestly, we're looking equally at both. They both have their merits. There's no doubt, sometimes, you'll be able to find better quality sites in the right locations doing it organically rather than buying our business and then having to reorganize what you bought. But equally, sometimes, by buying a business means you're buying skills, and skills in this particular market are difficult to find sometimes. So there are pros and cons, hence why we're looking at it equally.

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Erik Salz, JP Morgan Chase & Co, Research Division - Analyst [34]

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Erik Salz from JPMorgan. You mentioned an initiative you're taking with Klarna, I think, for customers. Can you talk about that, what the benefits are for you in that respect?

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [35]

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Yes. The financial services offer, we're very excited about. We've seen double-digit growth in that part of our business. We're excited about it because it's bringing a new customer demographic, so more younger customers into the business. It's helping customers afford more, so wherever we're seeing that financial service take place, customers tend to spend more because they can afford it over a long period of time.

But actually, the area I'm most excited about is the financial services business and what it will do to our Autocentres. That is in trial. It's just about to launch, I think, this week across our Autocentre business. In the Autocentres world, the garages world, there is little financial services on offer, and yet, it's a world where customers get big bill shock after an MOT sometimes or a service. I think us being then able to help them spread the cost of that over time and being the only person potentially in a town that can do that could give us a very significant competitive advantage. So -- and it sort of underpins part of why we want to accelerate our Autocentres business. Any more? Okay. Well, thank you very much indeed.

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Loraine Woodhouse, Halfords Group plc - CFO & Director [36]

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Thank you very much.

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Graham Stapleton, Halfords Group plc - CEO & Executive Director [37]

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Thanks a lot.