Andrew Findlay
Group Finance Director

Halfords Group plc ("the Group" or "Group")

Reportable Segments

Halfords Group operates through two reportable business segments:

• Halfords Retail, operating in both the UK and Republic of Ireland; and
• Halfords Autocentres, operating solely in the UK.

All references to Group represent the consolidation of the Halfords ("Halfords Retail"/"Retail") and Halfords Autocentres ("Halfords Autocentres"/"Autocentres") trading entities.

Financial Results

	FY13 £m	FY12 £m	Change
Group Revenue	871.3	863.1	+1.0%
Gross Profit	477.1	472.8	+0.9%
EBIT	78.1	97.2	-19.7%
Finance Costs	(6.1)	(5.0)	+22.0%
Profit Before Tax and non-recurring items	72.0	92.2	-21.9%
Profit Before Tax after non-recurring items	71.0	94.1	-24.5%
EBITDA	103.4	123.6	-16.3%

All items above are shown before non-recurring items unless otherwise stated.
EBITDA means earnings before non-recurring items, finance costs, tax, depreciation and amortisation.

The "FY13" accounting period represents trading for the 52 weeks to 29 March 2013 ("the year"). The comparative period "FY12" represents trading for the 52 weeks to 30 March 2012 ("the prior year").

Group revenue in FY13, at £871.3m, was up +1.0% and comprised Retail revenue of £745.5m and Autocentres revenue of £125.8m. This compared to FY12 Group revenue of £863.1m, which comprised Retail revenue of £752.3m and Autocentres revenue of £110.8m.

Group gross profit at £477.1m (FY12: £472.8m) represented 54.8% of Group revenue (FY12: 54.8%), reflecting an increase in the Retail business of 12 basis points ("bps") and a gross margin of 63.7% (FY12: 65.9%) in the Autocentres business.

Total Operating costs before non-recurring items increased to £399.0m (FY12: £375.6m), of which Retail represented £323.4m (FY12: £307.0m), Autocentres £73.8m (FY12: £66.4m) and unallocated costs £1.8m (FY12: £2.2m). Unallocated costs represent amortisation charges in respect of intangible assets acquired through business combinations (the acquisition of Nationwide Autocentres Ltd in February 2010), which arose on consolidation of the Group.

Net finance costs for the year were £6.1m (FY12: £5.0m).

Group Profit Before Tax and non-recurring items for the year was down 21.9% at £72.0m (FY12: £92.2m).

Net non-recurring expenses of £1.0m (FY12: income £1.9m) during the year represented costs of £1.2m in respect of two onerous lease contracts, asset impairment costs of £0.8m to support the "Stores Fit to Shop" initiative, and non-recurring income of £1.0m from the partial release of the Focus DIY lease guarantee provision, recognised as a non-recurring cost in FY11, resulting from better than anticipated settlements.

Group Profit Before Tax for the year after non-recurring items was down -21.9% at £72.0m (FY12: £92.2m).

Halfords Retail

	FY13 £m	FY12 £m
Sales	745.5	752.3
Gross Profit	397.0	399.8
Gross Margin	53.3%	53.1%
Operating Costs before non-recurring items	(323.4)	(307.0)
Operating Profit before non-recurring items	73.6	92.8
Non-recurring (expense)/income	(1.0)	1.9
Operating Profit after non-recurring items	72.6	94.7
EBITDA	94.6	114.6

Revenue for the Retail business of £745.5m reflected, on a constant-currency basis, a like-for-like sales decline of -0.7%. Non like-for-like stores contributed £1.6m revenue in the year, with total revenue declining -0.9%.

Cycling revenues were down 0.4% with the benefit of the Olympics offset by poor early-summer and final-quarter weather.

Car Maintenance revenues were up +5.1%, primarily driven by the success of the Bulbs, Blades and Batteries ("3Bs") fitting initiative, and helped by extended cold winter conditions.

Car Enhancement revenues were down -4.2%, a significantly better comparable performance than in recent years, with growth in Audio and a reduced decline in Sat Nav sales.

Travel Solutions revenues were down -6.8%, with camping revenues being impacted by the lack of any conducive summer weather conditions. Child car seats declined due to the continued focus on managing the category for cash.

Revenue for the Retail business is split by category below:

	FY13 (%)	FY12 (%)
Cycling	29.6	29.5
Car Maintenance	32.6	30.8
Car Enhancement	24.9	25.8
Travel Solutions	12.9	13.9
Total	100.0	100.0

Gross profit for the Retail business at £397.0m (FY12: £399.8m) represented 53.3% of sales, 12bps up on the prior year (FY12: 53.1%). This was a result of increased Car Maintenance parts and fitting revenues, with lower levels of shrinkage as a result of the focus on Retail disciplines in the period. Sales of winter chemicals also enhanced gross margin, though there were a number of opposing influences, including the intra-category mix within Car Enhancement and the increased focus on the exit of old inventories. The success of lower-margin premium-cycle sales also had a dilutive impact on margin.

The Retail gross margin is anticipated to decline by 125–175bps in FY14 reflecting the normalisation of mix, more aggressive ongoing clearance, plus increased activity to emphasise our value credentials. This includes increased use of "WIGIGs" ("when it's gone it's gone") and establishing more 'KVI' (key value indicators) products. The decline also includes the impact of the full-scale launch online of third-party-branded, lower-margin Cycling parts, accessories and clothing ("PACs") and the continued influence of premium-bike sales. The adverse pressures will be partly offset by the continued focus on higher-margin Car Maintenance fitting and Cycle Repair.

It is anticipated that Halfords Retail will continue to generate a gross margin of over 50% throughout the medium-term.

Operating costs before non-recurring items were £323.4m (FY12: £307.0m), up 5.3% on the prior year. The breakdown is set out below.

	FY13 £m	FY12 £m	Change
Store Staffing	85.1	80.1	+6.2%
Store Occupancy	140.1	138.1	+1.5%
Warehouse & Distribution	28.5	27.5	+3.6%
Support Costs	69.7	61.3	+13.7%
Total Operating Costs before non-recurring items	323.4	307.0	+5.3%

Note: To align this year's cost breakdown, the above figures reflect a prior year reallocation of carriage costs from Store Occupancy to Warehouse & Distribution upon the launch of the 24-hour Reserve & Collect fulfilment proposition, and a realignment of Warehouse & Distribution management costs from Support Costs to Warehouse & Distribution.

In line with the objective to capture the Car Maintenance parts and fitting market opportunity, payroll hours were invested in 3Bs fitting activity during the year with over 450 additional fitters recruited in time for winter peak trading. This, together with investment in training time in both technical and employee engagement skills, and the underlying uplift in national minimum-wage rates, led to a +6.2% increase in Store Staffing costs.

Store Occupancy costs increased by +1.5% year on year. Business rate increases of +2.2% and continued pressure from upward-only rent reviews were partially mitigated by continued rent negotiations and a reduction in other property-related costs.

Warehouse & Distribution costs increased by +3.6% driven by the anticipated increase in carriage costs associated with the enhanced 24-hour multichannel fulfilment offering launched in March 2012.

Support Costs increased by +13.7% as a result of the investment in improved recruitment and training in stores and enhanced Support Centre capability (Procurement, IT, Human Resources and Multichannel), with particular expertise associated with the launch of the extended range of PACs. The one-off costs associated with the change of Chief Executive, Commercial Director and Retail Director were also included within Support Costs.

To support Halfords' plans the Board anticipates a year-on-year increase in FY14 Retail operating expenses of around +6%, a significant proportion of which is dependent on volumes/performance. Some of the costs associated with these plans are expected to increase further in FY15 with, for example, the annualisation of pay awards linked to the newly-launched 3-Gears training programme.It is anticipated that Halfords Retail will generate low double-digit EBITDA margins throughout the medium term (FY13: EBITDA Retail margin 12.7%).

Halfords Autocentres

	FY13 £m	FY12 £m
Sales	125.8	110.8
Gross Profit	80.1	73.0
Gross Margin	63.7%	65.9%
Underlying Operating Costs	(73.8)	(66.0)
Underlying Operating Profit	6.3	7.0
One-off Support Centre Relocation Costs	—	(0.4)
Statutory Operating Profit	6.3	6.6
EBITDA	8.8	9.0

Autocentres generated total revenues of £125.8m (FY12: £110.8m), an increase of +13.5% on the prior year. Non like-for-like centres generated £8.3m of incremental revenue in the year. Twenty-three new Autocentres opened in the year and took the total number of Autocentre locations to 283 as at 29 March 2013. The increase in revenues from the like-for-like centres reflected the impact of enhanced media support and investment, growth in tyre sales, as well as the success of online bookings which represented 12% of total FY13 Autocentres revenues.

Gross profit at £80.1m (FY12: £73.0m) represented a gross margin of 63.7% against a prior year margin of 65.9%, driven primarily by increased volumes of lower-margin tyre sales, which represented 15.8% of total sales (FY12: 11.2%). Underlying Service, MOT and Repair margins were underpinned by improvements in parts buying.

It is anticipated that Halfords Autocentres will deliver a broadly-flat gross-margin performance throughout the medium-term.

Autocentres' underlying operating profit was down 10.0% at £6.3m (FY12 £7.0m) reflecting the continuing investment in the business in capability and training, the cost associated with the opening of 23 new centres together with the related expansion of the support-centre structure. Halfords is committed to the continued investment in the Autocentres business to secure long-term growth and has targeted the opening of a further 20–30 new centres in FY14. Autocentres' earnings before interest, tax, depreciation, amortisation and non-recurring items in FY14 is expected to be marginally ahead of that in FY13.

It is anticipated that Halfords Autocentres will generate a mid-to-high single-digit EBITDA margin throughout the medium term (FY13: EBITDA Retail margin 7.0%).

Portfolio Management

The store and centre portfolio at the end of the year comprised 466 stores (end of FY12: 467) and 283 Autocentres (end of FY12: 260).

The following table outlines the changes in the Retail store portfolio over the year:

	Number	Stores
Relocation	5	Durham, Chester, Oxford, Blanchardstown, Chingford
Leases re-negotiated	10	Stafford, Coventry, Norwich, Dartford, Weymouth, Plymouth, Evesham, Bognor, Putney, Scarborough
Downsize	5	Ipswich, Guildford, Peterborough, Southampton, Cheltenham
Opened	—	—
Closed	1	Preston

Within Retail, five stores were relocated to smaller/cheaper units, five stores were downsized, and ten leases were re-signed with re-geared lease terms.

In Autocentres, the portfolio was extended by 23 centres to 283 in the year, with four opened after the year end.

With the exception of nine long leasehold and two freehold properties within Autocentres, the Group's operating sites are occupied under operating leases, the majority of which are on standard lease terms, typically with a five to 15-year term at inception and with an average lease length of 7.5 years.

In the year, one store was closed (Preston, Ribbleton Lane) in line with its lease expiry; no Autocentres were closed.

Net Non-Recurring Expenses

The following table outlines the components of the net non-recurring expenses incurred in the year.

	FY13 £m	FY12 £m
Onerous lease charges	(1.2)	—
Asset impairment charges	(0.8)	—
Release of Focus DIY lease guarantee provision	1.0	1.9
Net non-recurring (expenses)/income	(1.0)	1.9

Onerous lease charges of £1.2m in respect of two properties were recognised during the year, reflecting the challenging property market for vacant properties, and the high cost to exit lease agreements.

£0.8m of assets from certain stores were impaired as a result of the investment in laboratory-store development.

At the end of FY11, an exceptional charge of £7.5m was recognised in respect of a provision for property leases to which Halfords was a guarantor, triggered by the demise of the Focus DIY retail chain. At 30 March 2012 the provision was £3.1m, reflecting the settlement of a number of leases and utilisation for ongoing rent, insurance and service charges, and had reduced further at 29 March 2013 to £1.0m as a result of a £1.0m release relating to a lease settlement and £1.1m utilisation.

Finance Expense

The net finance expense was £6.1m (FY12: £5.0m). The expense included a £0.8m accelerated amortisation of facility fees in the current year. This follows the Board's decision to refinance the bank facility, which expires in November 2014. The underlying net finance expense was broadly flat year-on-year and the net financing cost in FY14 is anticipated to be marginally lower compared to FY13.

Taxation

The taxation charge on profit for the financial year was £18.3m (FY12: £25.7m), including a £0.1m charge (FY12: £0.9m) in respect of tax on non-recurring items. The full-year effective tax rate of 25.7% (FY12: 27.3%) is higher than the UK corporation tax rate (24.0%) principally due to the non-deductibility of depreciation charged on capital expenditure and other permanent differences arising in the year.

The FY14 effective tax rate is anticipated to be 23–24%.

Earnings Per Share ("EPS")

Basic EPS before non-recurring items was 27.7 pence (FY12: 33.7 pence), a 17.8% decrease on the comparable year. Basic EPS after non-recurring items was 27.2 pence (FY12: 34.2 pence). Basic weighted-average shares in issue during the year were 194.3m (FY12: 199.9m).

Dividend

The Board has recommended a final dividend of 9.1 pence per share, a reduction of 35.0% on the prior year (FY12: 14.0 pence). If approved, this will be paid on 2 August 2013 to shareholders on the register at the close of business on 5 July 2013. The proposed full-year dividend is 17.1 pence (FY12: 22.0 pence).

The 35.0% reduction of the final dividend would have the effect of similarly rebasing future dividend pay-outs. It is anticipated that the FY14 full-year dividend would be reset to around 14 pence per share and that the full-year dividend would potentially remain around this level as the business approaches nearer 2x dividend/earnings cover over the medium term. This would reflect a more-sustainable level for the business, the requirement to invest and the maintenance of a robust balance sheet

Capital Expenditure

Capital investment in the year totalled £18.8m (FY12: £19.7m) comprising £13.2m in Retail and £5.6m in Autocentres. Consistent with prior years, management has continued to adopt a prudent approach with regard to capital investment and has focused on investments generating material returns.

Within Retail, £5.8m was invested in stores, including the laboratory store concepts, relocations and right-size activity, and general capital spend relating to store roofing/flooring and security. Additional investments in Retail infrastructure included a £5.0m investment in IT systems, with further development in the online proposition, £1.4m in logistics and £1.0m in central facilities.

A further £5.6m (FY12: £4.5m) was invested in Autocentres to drive the centre roll-out plan and upgrade centre equipment, especially in relation to the delivery of the tyre-fitting proposition.

The Retail capital expenditure requirement in FY14 is anticipated to be around £32m, whilst the respective investment in Autocentres is anticipated to be around £6m.

To support the delivery of Getting Into Gear 2016, Retail capital expenditure is expected to total around £100m between FY14 and FY16.

Inventories

Group inventory held at the year-end was £133.2m (FY12: £146.7m), down -9.2% on the prior year. Autocentres inventory was £1.3m, flat on the prior year.

The management of inventory remains a key area of focus for the Retail business; however, management recognises the need to ensure that availability meets customer expectations and supports the business's profitable-sales growth aspirations. During FY14 we anticipate investing £15–20m in extended levels of Retail inventory.

The Autocentres business model is such that only small levels of inventory are held within the centres, with most parts being acquired on an as-needed basis.

Cash Flow and Borrowings

The Group has continued its strong track record of operating cash generation.

Net cash generated from operating activities in the year was £93.5m (FY12: £89.7m). After taxation, capital expenditure and net finance costs, free cash flow of £71.8m (FY12: £70.4m) was generated.

Reported net debt was lower than anticipated due to the expectation of settlement of a number of prior-year outstanding tax computations in FY13. These account for c.£20m and are fully provided for within the balance sheet; it is anticipated that this provision will crystallise in FY14.

Group net debt of £110.6m (FY12: £139.2m) represented a year-on-year decrease of £28.6m. At this level, the ratio of Net Debt to 12-month EBITDA was 1.1:1 (FY12: 1.1:1). It is anticipated that this ratio will reach no more than c.1.5:1 throughout the medium-term.

The current bank loan facility expires in November 2014. The Board has approved refinancing of the Group's debt funding in the current financial year.

Treasury Policy

The Group's treasury department's main responsibilities are to:

• Ensure adequate funding and liquidity for the Group;
• Manage the interest risk of the Group's debt;
• Invest surplus cash;
• Manage the clearing bank operations of the Group; and
• Manage the foreign exchange risk on its non-sterling cash flows.

Treasury activities are delegated by the Board to the Finance Director ("FD"). The FD controls policy and performance through the line management structure to the Group Treasurer and by reference to the Treasury Committee. The Treasury Committee meets quarterly to monitor the performance of the Treasury function.

Policies for managing financial risks are governed by Board approved policies and procedures, which are reviewed on an annual basis.

The Group's debt management policy is to provide an appropriate level of funding to finance the Business Plan over the medium term at a competitive cost and ensure flexibility to meet the changing needs of the Group. Details of the Group's current borrowing facilities are contained in note 15.

The key risks that the Group faces from a treasury perspective are as follows:

Market Risk

The Group's exposure to market risk predominantly relates to interest, currency and commodity risk. These are discussed further below. Commodity risk is due to the Group's products being manufactured from metals and other raw materials, subject to price fluctuation. The Group mitigates this risk through negotiating fixed purchase costs or maintaining flexibility over the specification of finished products produced by its supply chain to meet fluctuations.

Interest Rate Risk

The Group's policy aims to manage the interest cost of the Group within the constraints of the Business Plan and its financial covenants. The Group's borrowings are currently subject to floating rate interest rates and the Group will continue to monitor movements in the swap market.

If interest rates on floating rate borrowings (i.e. cash and cash equivalents and bank borrowings which attract interest at floating rates) were to change by + or – 1% the impact on the results in the Income Statement and equity would be a decrease/increase of £1.0m (FY12: £1.2m).

Interest rate movements on deposits, obligations under finance leases, trade payables, trade receivables, and other financial instruments do not present a material exposure to the Group's balance sheet.

Capital Risk Management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Between April 2011 and April 2012, the Group managed its capital structure partly through a share buy-back scheme.

The Group manages capital by operating within debt ratios. These ratios are lease adjusted net debt to Earnings Before Interest, Tax, Depreciation and Amortisation ("EBITDA") and fixed charge cover. Lease-adjusted net debt is calculated as being net debt and leases capitalised at eight times, as a multiple of EBITDA plus operating lease charges. Fixed charge cover is calculated as being EBITDA plus operating lease charges as a multiple of interest and operating lease charges.

Credit Risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was £32.1m (FY12: £28.6m).

Foreign Currency Risk

The Group has a significant transaction exposure with increasing, direct sourced purchases from its suppliers in the Far East, with most of the trade being in US Dollars. The Group's policy is to manage the foreign exchange transaction exposures of the business to ensure the actual costs do not exceed the budget costs by more than 10% (excluding increases in the base cost of the product).

The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of non-sterling businesses whilst they remain immaterial.

During the 52 weeks to 29 March 2013, the foreign exchange management policy was to hedge via forward contract purchase between 75 and 80% of the material foreign exchange transaction exposures on a rolling 12-month basis. Hedging is performed through the use of foreign currency bank accounts and forward foreign exchange contracts.

Pension Liability Risk

The Group has no association with any defined-benefit pension scheme and therefore carries no deferred, current or future liabilities in respect of such a scheme. The Group operates a number of Group Personal Pension Plans for colleagues.

Liquidity Risk

The Group ensures that it has sufficient cash or loan facilities to meet all its commitments when they fall due by ensuring that there is sufficient cash or working capital facilities to meet the cash requirements of the Group for the current Business Plan. The minimum liquidity level is currently set at £30m, such that under Treasury Policy the maximum drawings would be £270m of the £300m available facility.

The process to manage the risk is to ensure there are contracts in place for key suppliers, detailing the payment terms, and for providers of debt, the Group ensured that such counterparties used for credit transactions held at least an 'A' credit rating at the time of refinancing (November 2010). Ancillary business, in the main, is directed to the five banks within the club banking group. At the year-end four of the banks within this group maintained a credit rating of A– or above, in line with Treasury Policy. The counterparty credit risk is reviewed in the Treasury report, which is forwarded to the Treasury Committee and the Treasurer reviews credit exposure on a daily basis.

The risk is measured through review of forecast liquidity each month by the Treasurer to determine whether there are sufficient credit facilities to meet forecast requirements, and through monitoring covenants on a regular basis to ensure there are no significant breaches, which would lead to an "Event of Default". Calculations are submitted bi-annually to the club bank agent. There have been no breaches of covenants during the reported periods.