FY 17 RESULTS 28 March 2017 DEFINITIONS The following definitions - - PowerPoint PPT Presentation

FY 17 RESULTS

28 March 2017

DEFINITIONS

The following definitions apply throughout

• Trading Revenue: Revenue excluding discontinued operations, business disposed of and exceptional revenue items
• Trading EBITDA (earnings before interest, tax, depreciation and amortisation): excludes exceptional items, items not

allocated to a segment and the Ireland discontinued business

• Cash conversion: net cash flow from continuing operating activities before tax and exceptional items divided by Trading

EBITDA

• Continuing adjusted basic EPS: Earnings per share excluding discontinued operations adjusts for a number of one-offs of

which the largest are exceptional items, items not allocated to a segment, and exceptional finance costs

• Personal Members and Business Customers: measured as the number at the period end
• IPT: Insurance Premium Tax

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Headlines Bob Mackenzie Financials Martin Clarke Strategy Bob Mackenzie

AGENDA

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HEADLINES

GOOD PROGRESS TO DATE IN YEAR 2 OF THE TRANSFORMATION

A platform for sustainable growth The UK’s pre-eminent Membership services organisation

Results in line with expectations Strong cash generation Cost of borrowings reduced Total dividends

• f 9.3p

recommended Transformation gaining momentum Growth in paid personal Members App used in 22% of personal breakdowns Call outs up 5% but costs partially offset Productivity improved First motor insurance policy growth since 2008 Cost savings on target Normalised capex levels in sight

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FINANCIALS

In line with market expectations

FINANCIAL HEADLINES

Trading Revenue up 1.6% at £940m despite IPT increase

• Roadside up 2.5% to £742m

Trading EBITDA up 0.2% at £403m

• Roadside up 1.1% to £365m

Trading EBITDA margin 42.9% (FY 16: 43.5%) Adjusted EPS 21.3p (FY 16: 21.8p) Cash conversion 92% (FY 16: 101%) Net debt of £2,704m (6.7x Trading EBITDA) post refinancing in December Total dividends of 9.3p per share recommended

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P&L

Items not allocated to segment reflect pension and share based payments Exceptional items mainly restructuring activities and provision for potential refund

• f customers with duplicate breakdown

cover Increase in depreciation and amortisation due to elevated capex and roll out of first phase of IT transformation spend Increase in PBT primarily reflects the decline in net finance cost due to the absence of one-off costs from the prior year refinancing Tax expense reflects current tax charge of £20m; effective tax rate of 22% Adjusted basic EPS of 21.3p, marginally down on prior year due to increased share capital

£m FY17 FY16 YoY Trading Revenue 940 925 +2% Trading EBITDA 403 402

• Items not allocated to a segment

(20) (18) +11% Depreciation & amortisation (67) (51) +31% Exceptional operating items including impairment (32) (36)

• 11%

Operating profit 284 297

• 4%

Net finance cost (184) (288)

• 36%

Profit before tax 100 9 +91 Tax expense (26) (10) +160% Profit/(loss) for the period from continuing

• perations

74 (1) +75 Basic EPS – continuing operations 12.2 (0.2) +12.4 Adj Basic EPS –continuing operations 21.3 21.8

• 2%

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ROADSIDE ASSISTANCE

FY17 FY16 YoY H117 FY on H1 Personal Members (‘000s) 3,540 3,673

• 4%

3,599

• 2%

Average income per Member (£) 148 141 +5% 145 +2% Personal paid¹ Members (‘000s) 3,335 3,331

• 3,321
• Average income per paid¹ Member (£)

158 156 +1% 157 +1% Business customers (‘000s) 9,976 10,216

• 2% 10,179
• 2%

Average income per business customer (£) 20 18 +11% 19 +5% Breakdowns attended (‘000s)² 3,635 3,459 +5% 1,759 n/a

Trading Revenue +2.5% to £742m Personal paid Members + 0.1%

• Retention 82% (FY 16: 81%)
• Average income +1.3% to £158 (net of

3.5% uplift in IPT)

• Ancillary revenue +17%

B2B customers down 2% due to decline in bank holdings

• Average income +11%

Trading EBITDA +1.1% to £365m

• Revenue growth partially offset by 5%

increase in number of breakdowns attended 8

INSURANCE SERVICES

Insurance Broking FY17 FY16 YoY H117

FY on H1

Total insurance policies (‘000s) 1,879 2,074

• 9%

1,962

• 4%

Motor policies (‘000s) 594 592

• 572

+4% Home insurance policies (‘000s) 857 899

• 5%

891

• 4%

Average income per policy (£) 70 63 +11% 67 +4% Financial Services Products (‘000s) 100 33 +203% 82 +22% Underwriter Motor policies (‘000s) 115 na na 25

+360%

Insurance Broking

Trading Revenue flat at £131m - lower core insurance and Home Services offset by increased Financial Services Trading EBITDA down £2m to £76m

• Increased aggregator spend
• Managed decline in Home Services policies

Growth in motor policies – first since 2008

• Successful retention and direct sales initiatives
• Incremental policies through in-house underwriter

Financial Services

Credit cards, loans, savings and mortgages Performance to plan: 100k products sold

In-house Underwriter

Motor launched January 2016 – progressing well Home launched August 2016 – on track 9

DRIVING SERVICES

Trading Revenue down 2% to £67m Stabilisation of driving school franchisees reflects improvements to product portfolio DriveTech police speed awareness courses down Trading EBITDA up £1m to £20m Cost savings support EBITDA

FY17 FY16 YoY H117

FY on H1

Driving Instructors 2,607 2,574 +1% 2,516 +4%

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STRONG OPERATIONAL CASHFLOW

£m FY17 FY16 Net cash flows before tax and exceptional items¹ 371 406 Tax, exceptional items and discontinued operations (26) (25) Net operating cash flows 345 381 Transformation capex (41) (54) Underlying IT capex (17) (18) Non-IT capex (13) (13) Capex accruals

• 10

Capital repayment of finance lease net of disposal proceeds (25) (23) Proceeds from the sale of Ireland (net of cash disposed of) 99

• Other

(6) (15) Net cash flows before refinancing, purchase of own shares, interest and dividends 342 268 Refinancing transactions (102) (183) Purchase of own shares (22) Interest paid (143) (178) Dividend paid (55) (21) Net increase/(decrease) in cash and cash equivalents 42 (136)

¹Continuing Operations

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*Run rate cash interest: Trading EBITDA **Free cash flow: debt service cover ratio

£348m £175m £55m £500m £700m £500m £570m £211m

Senior Term Facility Class A1 notes Class A4 notes Class A3 notes Class A5 notes Class A2 notes Class B2 notes Cash

Gross debt: £2,848m

Interest rate

5.00% 4.72% 3.78% 4.25% 2.88% 6.27% 5.50%

Effective maturity 2019 2018 2019 2020 2022 2025 2022

DEBT STRUCTURE

Leverage net debt/EBITDA 6.7x Blended cost of debt 4.63% following pay down of £106m of STF in August and refinance in December Weighted average maturity just under 5 years Run rate cash interest cover* above 3x Class A FCF to DSCR** 3.3x (covenant > 1.35x) Class B FCF to DSCR** 2.3X (covenant > 1.0x) Senior debt all investment grade

Note: Fixed interest rates with LIBOR hedged for Senior Term Facility

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PENSIONS

IAS 19 Group pension deficit of £395m (31 Jan 16: £296m)

• Driven by decline in corporate bond yields

Anticipate significant increase in triennial review valuation of UK scheme deficit from £202m (31 March 2013) due to reduction in long term gilt yields Proposed move from final salary to modified career average (CARE) defined benefit

• Mitigate the high cost to the business
• Reduce our exposure to pension risks
• Remain competitive within our industry
• Create a more consistent pension offering across our employees

Commenced 60 day consultation on 20 March and engaged with the IDU (the AA’s recognised union) If implemented, these changes would be taken into account in agreeing the deficit cash funding plan with the pension trustees Deficit reduction plan expected to be finalised by end of June 2017

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FINANCIAL IMPLICATIONS OF THE TRANSFORMATION

Investment in marketing and brand - £10m plus additional spend on the product proposition Post-transformation capex run rate £45m - IT c.£10m; property and equipment c.£10m; net vehicle costs c.£25m Restructuring costs - £45m over three years Cost savings - at least £40m in respect of the FY15 cost base from FY19 Progressive dividend A platform for growth

Driving growth in revenue, earnings and free cash flow

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STRATEGY

BUILDING MOMENTUM IN YEAR 2 OF TRANSFORMATION

The Strategic Priorities Strengthen the AA’s foundations Revolutionise customer experience Reduce Group borrowings and the associated interest costs The Time Line Year 1 FY16 Stronger foundations delivered Year 2 FY17 Momentum for change created Year 3 FY18 Realise the transformation Year 4 FY19 Delivering growth

Transforming the AA into the UK’s pre-eminent Membership organisation

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IT SYSTEMS TRANSFORMATION (1)

Support systems

Installed new IT infrastructure and applications Throughout back office functions and call centres

Service delivery and AA Help 2

New version of AA Help rolled out All patrols have new communications devices

Insurer hosted pricing

Implementation in next few months Will transform our pricing agility AA Help AA Help2 17

IT SYSTEMS TRANSFORMATION (2)

CRM

Integrating system specifications for duplicate cover Roadside rollout under way but marketing element brought forward Receptiveness to tailored rewards communication Pulling forward main insurance system

Mitchells & Butlers membership benefit redemptions

Digital

New commercial website launched in May My AA launched in January Roadside app continuing to grow Breakdowns using the app (%)

Christmas peak

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

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ROADSIDE - GROWTH IN PERSONAL MEMBERSHIP VOLUMES

Monthly paid new business volumes Average revenue per member

138 150 156 158 0% 5% 10% FY 14 FY 15 FY 16 FY 17 Average revenue per Member (£) IPT (%)*

Growth in paid personal membership numbers since April with acceleration in H2 Retention improved to 82% (81%)

• Number of calls to Stay AA continued to drop

14% growth in new business volumes - 19% in second half

• Reinvigorated marketing approach
• Improved digital capabilities
• Smaller price increases (net of IPT)
• Advertising gaining traction
• Membership benefits clearer

Average revenue per member up 1.3% to £158 driven by ancillary revenue increase

• Price rises held back by significant IPT increase

YoY growth (%)

* Standard rate of IPT at calendar year end

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ROADSIDE – ANCILLARY SALES INCREASE

Battery sales rolling trend Battery sales conversion Ancillary revenue up 17%

• Battery sales up
• Fuel Assist and Key Assist sales up
• Tyre replacements and parts a future focus

Battery sales volumes up 27%, driven by

• Improved product range
• Investment in battery testing equipment
• Price guarantee for customers

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ROADSIDE - PRODUCTIVITY IMPROVEMENTS

Rolling 12 month variable cost per case* Fix time per job (minutes) Which? Recommended provider for 11th successive year Auto Express best breakdown cover winner 2016

1st 4th 5th

Improved productivity from investment

• Roadside technology
• Communications
• Deployment system

5% increase in breakdowns attended

• £11m increase in total roadside operations costs
• Partially offset by £5m of cost savings

*Inflation adjusted

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MOTOR INSURANCE – REVERSING THE DECLINE

Motor insurance policies in force AA underwritten policies by origin

55% 17% 28% Has never been an AA insurance customer Was once previously an AA insurance customer An existing AA insurance customer

First growth in motor insurance policies since 2008

• Stabilised retention
• Growth in new business volumes

In-house underwriter is a key driver of new business

• 115k policies written by end of January 17
• Vast majority of policies for non-existing AA

insurance customers

Home insurance launched in August; 25k policies underwritten by end of January 2017 Early signs are promising but too early for material financial contribution

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CONNECTED CAR - TRIAL LEADS TO LAUNCH OF CAR GENIE

AA Connect 10k car trial: 1/3 of problems could be identified before a breakdown Pre-registration for next generation device ‘Car Genie’ is now open Proven capability to improve service and reduce costs

• Better prognostics and diagnostics
• More accurate deployment and faster repair

Also using data for targeted motor insurance sales Benefits for Members such as accident assist, vehicle location, driving monitoring

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IN SUMMARY – OUR ACHIEVEMENTS

Results in line with expectations despite increased IPT and callouts Transformation entering its final phase Upside from full benefits still to come Free cash flow generation to accelerate Platform to realise the potential of our brand, technologies and market leadership

Strengthened and modernised

Reversing long standing decline in Membership Improving Roadside service levels and efficiency Modernising back office and customer interface Re-engaging with customers through marketing Enriching the Membership proposition Retaining B2B contracts Developing our connected car positioning

Built on our Brand beyond Roadside

Reversing long standing decline in motor insurance Growing Underwriter and FS business Refreshing Driving Services and Home Services First step in international markets in India

Reduced the cost of borrowing

Cost of debt reduced to 4.6% from 6.1% at IPO Maturities extended

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The UK’s pre-eminent Membership services organisation

APPENDIX

£m FY17 FY16 Change % of Group Roadside Assistance 742 724 +2.5% 79% Increase in average revenue per customer and B2B revenue Insurance Services 131 131

• 14%

Lower policy numbers offset by higher income per policy Driving Services 67 68

• 1.5%

7% Lower speed awareness courses Insurance Underwriting 2

• Launch of in-house Underwriter offset by

impact of deferred broker commission Trading revenue 940 925 +1.6% Revenue from business disposed of

• 10

Exceptional revenue provision (7)

• Total revenue

933 935

• 0.2%

REVENUE

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TRADING EBITDA

£m FY17 FY16 Change % of Group¹ Roadside Assistance 365 361 +1.1% 79% EBITDA up 1.1% Revenue growth partly offset by increased breakdown incidents Insurance Services 76 78

• 2.6%

17% Increased aggregator spend Lower contributions from Home Services Driving Services 20 19 +5.3% 4% Increase driven by efficiency savings Insurance Underwriting (1)

• Head office costs

(57) (56)

• 1.8%

Incremental IT licensing costs partially offset by cost savings Total Trading EBITDA 403 402 +1.6%

1 % of Group pre head office costs

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SEGMENTAL ANALYSIS

Insurance Services FY17 YoY Change Trading Revenue (£m) 131

• Trading EBITDA (£m)

76

• 2.6%

Policy numbers (‘000s) 1,879

• 9.4%

Average income per policy (£) 70 +11.1% Driving Services FY17 YoY Change Trading Revenue (£m) 67

• 1.5%

Trading EBITDA (£m) 20 +5.3% Driving school instructors 2,607 +1.3% Roadside Assistance FY17 YoY Change Trading Revenue (£m) 742 +2.5% Trading EBITDA (£m) 365 +1.1% Paid personal Members (‘000s) 3,335 +0.1% Business customers (‘000s) 9,976

• 2.3%

Average income per paid personal Member (£) 158 +1.3% Breakdowns attended (‘000s) 3,635 +5.1%

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PROFIT AND LOSS¹

£m FY17 FY16 Revenue 933 935 Cost of sales (341) (337) Gross profit 592 598 Admin and marketing including JVs and associates (308) (301) Operating profit 284 297 Trading EBITDA 403 402 Items not allocated to a segment (20) (18) Depreciation & amortisation (67) (51) Impairment of investment in joint venture (1)

• Exceptional operating items

(31) (36) Operating profit 284 297 Net finance costs (184) (288) Profit before tax 100 9 Tax expense (26) (10) Profit/(loss) for the period from continuing

• perations

74 (1) Basic EPS – continuing operations (p/share) 12.2 (0.2) Adj Basic EPS –continuing operations (p/share) 21.3 21.8

¹ Continuing operations

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BALANCE SHEET

£m FY17 FY16 Goodwill and other intangible assets 1,283 1,298 Property, plant and equipment 131 122 Investments in joint ventures and associates 10 10 Deferred tax assets 62 52 Non-current assets 1,486 1,482 Inventories 6 5 Trade and other receivables 195 172 Cash and cash equivalents 211 166 Current assets 412 343 Total assets 1,898 1,825 Trade and other payables (520) (518) Current tax payable (11) (7) Provisions (19) (8) Current liabilities (550) (533) Borrowings and loans (2,819) (2,920) Finance lease obligations (20) (21) Defined benefit pension scheme liabilities (395) (296) Provisions (11) (7) Insurance technical provisions (16) (4) Non-current liabilities (3,261) (3,248) Total liabilities (3,811) (3,781) Net liabilities (1,913) (1,956)

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CASH FLOW

£m FY17 FY16 Operating profit including discontinued operations 368 305 Depreciation and amortisation 68 54 Profit on sale of Ireland (77)

• Other items

15 12 Cash exceptional items 15 37 Change in working capital (8) 12 Operating cash flow before tax and exceptional items 381 420 Cash exceptional items (15) (37) Tax paid (21) (2) Net cash flows from operating activities 345 381 Investing activities Capital expenditure (71) (75) Proceeds from the sale of Ireland 99

• Other investing activities

19 4 Net cash flows use in investing activities 47 (71) Financing activities Refinancing transactions (102) (183) Purchase of own shares

• (22)

Interest paid on borrowings (143) (178) Payment of finance lease capital (43) (34) Payment of finance lease interest (7) (8) Dividends paid (55) (21) Net cash flows from financing activities (350) (446) Net increase/(decrease) in cash and cash equivalents 42 (136)

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DEBT PACKAGE

Expected maturity date Interest rate Run rate cash interest (£m) Principal at 31 Jan 17 (£m) Principal at 31 Jan 16 (£m) Senior Term Facility 31 January 2019 5.00% 17.4 348 454 Class A1 notes 31 July 2018 4.72% 8.3 175 475 Class A2 notes 31 July 2025 6.27% 31.4 500 500 Class A3 notes 31 July 2020 4.25% 21.3 500 500 Class A4 notes 31 July 2019 3.78% 2.1 55 250 Class A5 notes 31 January 2022 2.88% 20.1 700

• Class B2 notes

31 July 2022 5.50% 31.4 570 735 4.63% 131.8 2,848 2,914 Ring fenced cash and cash equivalents 136 94 Non ring fenced cash and cash equivalents 75 72 Total cash and cash equivalents¹ 211 166 Class A Net Debt: Trading EBITDA2 (STF & Class A notes less ring fenced cash) 5.2x 5.0x Class B2 Net Debt: Trading EBITDA2 (WBS debt less ring fenced cash) 6.7x 6.9x Total Net Debt : Trading EBITDA3 (total debt less total cash) 6.7x 7.0x Class A FCF DSCR 3.3x 3.6x Class B FCF DSCR 2.3x 2.4x

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