FY18 RESULTS 17 APRIL 2018 DEFINITIONS The following definitions - PowerPoint PPT Presentation

FY18 RESULTS 17 APRIL 2018

DEFINITIONS The following definitions apply throughout • Trading Revenue: Revenue excluding discontinued operations and exceptional revenue items. • Trading EBITDA (earnings before interest, tax, depreciation and amortisation): excludes share-based payments, pension service charge adjustment, exceptional operating items and discontinued operations. • Cash conversion: net cash flow from continuing operating activities before tax and exceptional items divided by Trading EBITDA. • Adjusted EPS: Earnings per share excluding discontinued operations adjusted for a number of one-offs of which the largest are exceptional operating items, share-based payments, pension service charge adjustment, the write-off of debt issue fees, penalties on early repayment of debt and transfer from cash flow hedge reserve. • Personal members and business customers: measured as the number at the year end. 1

FY18 headlines Simon Breakwell AGENDA Financial review Martin Clarke Key operational milestones and outlook Simon Breakwell 2

FY18 HEADLINES Results in line with guidance, despite the adverse weather conditions Good operational progress in Roadside and Insurance Strong operational cash conversion Cost of borrowings reduced further and average maturity of debt extended UK Pension Scheme review brought certainty on deficit and mitigated ongoing service costs Strategic review announced 21 February 2018 • Additional investments for growth lower EBITDA guidance of £335m to £345m for FY19 • Targeting annual Trading EBITDA growth of 5% - 8% from FY19 to FY23 • Dividend policy changed Putting service, innovation and data at the heart of the AA 3

FINANCIAL REVIEW

FY18 FINANCIAL HEADLINES Trading Revenue up 2% at £959m • Roadside up 1% – new memberships up; retention broadly flat • Insurance up 11% – strong performance from underwriter, motor policies up 6% Trading EBITDA down 3% at £391m • Roadside down 5% – additional breakdown costs • Insurance up 8% – focus on profitable motor and home segments Trading EBITDA margin 40.8% (FY17: 42.9%) Adjusted EPS 21.8p (FY17: 21.3p) Cash conversion 94% (FY17: 92%); free cash flow to equity £(5m) (FY17: £87m 1 ) reflecting continued investment and July 17 refinancing Net debt of £2,684m (6.9x Trading EBITDA) post refinancing in July 2017 Total dividends of 5.0p per share recommended S&P ratings for A and B2 notes reaffirmed (As: BBB-: B2: B+) 1 Continuing operations. 5

NEW SEGMENTAL REPORTING Trading Revenue Trading EBITDA Trading EBITDA Margin FY18 FY17 FY18 FY17 FY18 FY17 £m £m £m £m Margin % Margin % Roadside Assistance 345 365 46.2 49.2 Roadside Assistance 747 742 Driving Services 22 20 32.8 29.9 Driving Services 67 67 Head Office costs (47) (48) na na Roadside Revenue 814 809 Roadside Trading EBITDA 320 337 39.3 41.7 Insurance Services 79 76 59.4 58.0 Insurance Services 133 131 Insurance Underwriting 1 (1) 8.3 na Insurance Underwriting 12 - Head Office costs (9) (9) na na Insurance Revenue 145 131 Insurance Trading EBITDA 71 66 49.0 50.4 Trading Revenue 959 940 Trading EBITDA 391 403 40.8 42.9 6

INCOME STATEMENT Share-based payments fell due to MVP £m FY18 FY17 YoY A shares reaching first test date in June Trading Revenue 959 940 2% 2017 and departure of former Executive Chairman in August 2017 % 403 Trading EBITDA 391 (3%) Share-based payments (7) (12) (42%) Pension service charge increase following pensions review IAS 19 non-cash pension service charge adjustment (10) (8) 25% Exceptional operating items lower (67) Depreciation & amortisation (70) 4% principally due to past pension service (32) Exceptional operating items 3 (109)% credit of £34m 284 Operating profit 307 8% • Pension service credit: one-off gains from (184) Net finance cost (166) (10%) switch to CPI from RPI (£22m) and closure of 100 Profit before tax 141 41% the Final Salary section (£12m) (26) Tax expense (30) 15% Finance cost: £10m of early repayment Profit for the period from continuing penalties 74 operations 111 50% 12.2 Basic EPS – continuing operations (p) 18.2 49% Tax expense: effective rate of 19.1% Adj Basic EPS 1 – continuing operations (p) 21.3 21.8 2% 1 Adjusted for exceptional operating items, share-based payments, pension service charge adjustment, penalties on early repayment of debt, transfer from cash flow hedge reserve for extinguishment of cash flow hedge and the write-off of debt issue fees following refinancing 7

ROADSIDE FY18 FY17 YoY Trading Revenue up 1% Trading Revenue (£m) 814 809 1% Paid membership down 1% due to discontinuation of insurance free-to-paid Trading EBITDA (£m) 320 337 (5%) • Retention broadly flat at 82% (FY17: 82%) Trading EBITDA margin (%) 39.3 41.7 (6%) • 7% growth in new paid members • Average income per paid member down £1 – higher proportion Personal paid Members (‘000s) 3,289 3,335 (1%) of new sales with introductory discounts and monthly payments Average income per paid Member (£) 157 158 (1%) B2B customers down 0.5% – AVAs; new vehicle sales Business customers (‘000s) 9,928 9,976 (1%) • Average income per business customer flat Average income per business customer (£) 20 20 - • Increased revenue from pay-for-use Breakdowns attended (‘000s) 3,679 3,635 1% Driving instructor franchises up 5% Driving instructors 2,742 2,607 5% Trading EBITDA down 5% • Increased costs with higher workload; inflexible resourcing • Unabsorbed wage inflation 8

INSURANCE Trading Revenue up 11% FY18 FY17 YoY Trading Revenue (£m) 145 131 11% Strong growth in motor book driven largely by underwriter Trading EBITDA (£m) 71 66 8% • Insurer Hosted Pricing (IHP) installed across five motor panel members has significantly improved pricing agility Trading EBITDA margin (%) 49.0 50.4 (3%) • Stable retention despite regulatory and competitive challenges Average income per policy up due to growth in Total insurance policies (‘000s) 1,447 1,451 - motor policies Total Motor policies (‘000s) 629 594 6% Home Emergency Services consumer book sold (Jan 2018) Motor policies underwritten (‘000s) 223 115 94% Financial Services performing well Total Home insurance policies (‘000s) 818 857 (5%) Home policies underwritten (‘000s) 184 25 636% Trading EBITDA up 8% Average income per policy 1 (£) 74 70 6% Focus on higher-profitability motor and home books 142 100 42% Financial Services products (‘000s) Disciplined cost management Underwriter now profitable but consolidation lowers overall divisional margins 1 Includes motor and home only. 9

FREE CASH FLOW TO EQUITY IMPACTED BY HIGHER CAPEX AND REPAYMENT OF DEBT FOLLOWING REFINANCING £m FY18 FY17 Cash conversion remains robust at 94% Trading EBITDA 391 403 Cash flow from continuing activities before Working capital excluding provisions and pensions (11) (22) exceptional items and taxation in line with Pension deficit reduction contributions (21) (20) the prior year Other items 9 10 • Lower trading EBITDA offset by reduced working Cash flow from continuing activities before exceptional capital adjustments 368 371 items and taxation Exceptional items and tax paid (52) (36) Maintenance capex broadly in line with the prior year Capex (86) (96) of which transformation capex (34) (41) Transformation capex entering final phase, expected to complete in FY20 of which maintenance capex 1 (53) (55) of which capex accruals 1 - Net interest lowered as a result of Acquisitions and disposals 1 99 refinancing in July 2017 Net interest paid 2 (140) (149) Acquisitions and disposals in FY17 included 91 Free cash flow to equity (pre-refinancing and dividends) 189 sale of the Ireland business Refinancing adjustments (96) (102) Free cash flow to equity (pre-dividends) 3 (5) 87 1 Includes IT maintenance, finance lease capital net of proceeds from sale of vehicles, property and equipment. 2 Includes net interest paid on debt and finance lease interest less interest receivable. 10 3 Excluding discontinued operations.

PENSIONS UPDATE AA UK Pension Scheme deficit of £188m (FY17: £325m) under IAS 19 Triennial review of AA UK pension scheme • Deficit increased to £366m as of 31 March 2016 (from £202m as at 31 March 2013) - lower long term gilt yields • Nine-year additional deficit recovery funding plan – Existing contributions of £13m pa increasing with inflation until November 2038 – Additional contributions of £8m pa to March 2019 – Total payment in FY18 approximately £19m (UK) – Estimated increases to employer pension contributions of c£3m in FY19 (EBITDA and cash) – Next review as at 31 March 2019 Changes to defined benefit pension scheme help stabilise service charges and enhances competitiveness • Closure of Final Salary section and transfer of all employees to the existing CARE section • Switch from RPI to CPI in the CARE section • One-off credit £34m: £12m from closure of Final Salary section and £22m from change to CPI Increase to employer service charge £2m in current year; followed by c£4m reduction in FY19 onwards 11