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

FY18 RESULTS

17 APRIL 2018

DEFINITIONS

1

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.

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

AGENDA

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FY18 HEADLINES

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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

FINANCIAL REVIEW

FY18 FINANCIAL HEADLINES

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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: £87m1) 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.

NEW SEGMENTAL REPORTING

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FY18 FY17 £m £m Roadside Assistance 747 742 Driving Services 67 67 Roadside Revenue 814 809 Insurance Services 133 131 Insurance Underwriting 12

• Insurance Revenue

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

Trading Revenue Trading EBITDA

INCOME STATEMENT

Share-based payments fell due to MVP A shares reaching first test date in June 2017 and departure of former Executive Chairman in August 2017 Pension service charge increase following pensions review Exceptional operating items lower principally due to past pension service credit of £34m

• Pension service credit: one-off gains from

switch to CPI from RPI (£22m) and closure of the Final Salary section (£12m)

Finance cost: £10m of early repayment penalties Tax expense: effective rate of 19.1% 7

£m FY18 FY17 YoY Trading Revenue 959 940 2%

Trading EBITDA 391 403 (3%) Share-based payments (7) (12) (42%) IAS 19 non-cash pension service charge adjustment (10) (8) 25% Depreciation & amortisation (70) (67) 4% Exceptional operating items 3 (32) (109)% Operating profit 307 284 8% Net finance cost (166) (184) (10%) Profit before tax 141 100 41% Tax expense (30) (26) 15% Profit for the period from continuing

• perations

111 74 50% Basic EPS – continuing operations (p) 18.2 12.2 49% Adj Basic EPS1 – continuing operations (p) 21.8 21.3 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

ROADSIDE

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FY18 FY17 YoY Trading Revenue (£m) 814 809 1% Trading EBITDA (£m) 320 337 (5%) Trading EBITDA margin (%) 39.3 41.7 (6%) Personal paid Members (‘000s) 3,289 3,335 (1%) Average income per paid Member (£) 157 158 (1%) Business customers (‘000s) 9,928 9,976 (1%) Average income per business customer (£) 20 20

• Breakdowns attended (‘000s)

3,679 3,635 1% Driving instructors 2,742 2,607 5%

Trading Revenue up 1% Paid membership down 1% due to discontinuation of insurance free-to-paid

• Retention broadly flat at 82% (FY17: 82%)
• 7% growth in new paid members
• Average income per paid member down £1 – higher proportion
• f new sales with introductory discounts and monthly payments

B2B customers down 0.5% – AVAs; new vehicle sales

• Average income per business customer flat
• Increased revenue from pay-for-use

Driving instructor franchises up 5% Trading EBITDA down 5%

• Increased costs with higher workload; inflexible resourcing
• Unabsorbed wage inflation

INSURANCE

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FY18 FY17 YoY Trading Revenue (£m) 145 131 11% Trading EBITDA (£m) 71 66 8% Trading EBITDA margin (%) 49.0 50.4 (3%) Total insurance policies (‘000s) 1,447 1,451

• Total Motor policies (‘000s)

629 594 6% Motor policies underwritten (‘000s) 223 115 94% Total Home insurance policies (‘000s) 818 857 (5%) Home policies underwritten (‘000s) 184 25 636% Average income per policy1 (£) 74 70 6% Financial Services products (‘000s) 142 100 42%

1 Includes motor and home only.

Trading Revenue up 11% Strong growth in motor book driven largely by underwriter

• Insurer Hosted Pricing (IHP) installed across five motor panel

members has significantly improved pricing agility

• Stable retention despite regulatory and competitive challenges

Average income per policy up due to growth in motor policies Home Emergency Services consumer book sold (Jan 2018) Financial Services performing well Trading EBITDA up 8% Focus on higher-profitability motor and home books Disciplined cost management Underwriter now profitable but consolidation lowers overall divisional margins

FREE CASH FLOW TO EQUITY IMPACTED BY HIGHER CAPEX AND REPAYMENT OF DEBT FOLLOWING REFINANCING

£m FY18 FY17 Trading EBITDA 391 403 Working capital excluding provisions and pensions (11) (22) Pension deficit reduction contributions (21) (20) Other items 9 10 Cash flow from continuing activities before exceptional items and taxation 368 371 Exceptional items and tax paid (52) (36) Capex (86) (96)

• f which transformation capex

(34) (41)

• f which maintenance capex1

(53) (55)

• f which capex accruals

1

• Acquisitions and disposals

1 99 Net interest paid2 (140) (149) Free cash flow to equity (pre-refinancing and dividends) 91 189 Refinancing adjustments (96) (102) Free cash flow to equity (pre-dividends)3 (5) 87

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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. 3 Excluding discontinued operations.

Cash conversion remains robust at 94% Cash flow from continuing activities before exceptional items and taxation in line with the prior year

• Lower trading EBITDA offset by reduced working

capital adjustments

Maintenance capex broadly in line with the prior year Transformation capex entering final phase, expected to complete in FY20 Net interest lowered as a result of refinancing in July 2017 Acquisitions and disposals in FY17 included sale of the Ireland business

PENSIONS UPDATE

11 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

Dividend policy announced 21 February 2018 Changed to reflect operation of WBS gating covenant and investment plans Proposal of 2p per share per year from FY19 until profit and cash flow enables a policy change Dividend proposal FY18: Announced 1.4p final giving total of 5p per share, subject to approval at AGM FY19: Expected split 0.6p interim and 1.4p per share final

DIVIDEND POLICY CHANGE

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COST OF DEBT REDUCED, SIGNIFICANT HEADROOM ABOVE FINANCIAL COVENANTS

13 Net Debt (FY18)

Key metrics FY18 FY19E Net debt/EBITDA1 6.9x 7.8x Run rate cash interest cover2 2.8x 2.5x Financial covenants FY18 FY19E Class A FCF to DSCR3 (covenant > 1.35x) 3.3x 2.8x Class B FCF to DSCR3 (covenant > 1.0x) 2.4x 2.0x

Notes:

1 Total Net debt to AA plc Trading EBITDA for the last 12 months 2 Run rate cash interest: Trading EBITDA 3 Free cash flow: debt service cover ratio 4 Fixed interest rates with LIBOR hedged for Senior Term Facility: to 31/7/18 fixed at 5.71%; 31/7/18 to 31/1/19 fixed at

8.42%; 1/2/19 to 31/7/21 fixed at 2.75%

S&P ratings reaffirmed: A notes: BBB-; B2 notes B+ Blended cost of debt significantly reduced to 4.52% following pay down of £98m of STF in July 2017 No immediate refinancing requirements

• Weighted average maturity just over 5 years
• First maturity in July 2020 is a Class A Note (A3)

Working Capital Facility (undrawn) of £75m in place Dividend gating ratio: Class A notes only permit the release of cash providing the senior leverage ratio after payment is less than 5.5x

Facility Amount

• utstanding

Effective maturity Effective interest rate Class A3 notes £500m Jul-20 4.25% Senior Term Facility £250m Jul-21 5.71%4 Class A5 notes £700m Jan-22 2.88% Class A6 notes £250m Jul-23 2.75% Class A2 notes £500m Jul-25 6.27% Cash in WBS (£50m)

• Class A Net Debt

£2,150m

• 4.27%

Class B2 notes £570m Jul-22 5.50% Finance lease £64m NA NA WBS Net Debt £2,784m

• 4.48%

AA plc cash (£100m)

• Total Net Debt

£2,684m

• 4.52%

SUMMARY

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Robust performance demonstrating fundamental strengths but illuminating challenges FY19 guidance as per strategy update in February

• The low point in Trading EBITDA: £335m - £345m
• Cash positive despite the reset: £20m free cash to equity

Medium term targets

• Group Trading EBITDA CAGR of 5% to 8% from FY19 to FY23
• Free cash flow to equity in excess of c80m in FY20 and over c£100m pa from FY21

Reduction in leverage over time through Trading EBITDA growth and cash generation: targeting 3x - 4x in medium to long term Dividend policy demonstrates loyalty to long-standing shareholders and belief in long- term strength of the business

KEY OPERATIONAL MILESTONES AND OUTLOOK

VISION FOR THE AA

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RANKING IN TRAVEL

13th

APP STORE RATING

4.8

NUMBER OF RATINGS

10,000

THE APP - BEST IN THE INDUSTRY APRIL 2018

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RANKING IN TRAVEL

142nd

APP STORE RATING

2.6

NUMBER OF RATINGS

34

RANKING IN TRAVEL

137th

APP STORE RATING

4.6

NUMBER OF RATINGS

147

Source: Apple App store as at 13 April 2018.

KEY OPERATIONAL MILESTONES BY FY20

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Roadside membership growth through system and product enhancement

• Membership system, Cathie, installed
• Connected Car trial providing greater understanding of opportunity
• Key B2B renewals achieved
• Increased app usage in breakdowns

Operational resilience

• Absorb cost inflation
• Service resourcing in place
• IT resilience deepened

Insurance

• Continued strong growth on motor policies
• Home policies decline arrested

Employee engagement

• Second survey
• Meaningful improvements in metrics

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FOCUS ON GROWTH

REVENUE CAGR from FY19 to FY23 TRADING EBITDA CAGR from FY19 to FY23 Roadside Assistance 2 - 5% 3 - 6% Insurance 6 - 9% 9 - 14% Group 3 - 5% 5 - 8%

Excludes additional upside from Connected Car

Q&A

APPENDIX

RETURNING MEMBERSHIP TO GROWTH

5

4 3 2 1

Transform our breakdown service to be fully connected Market to grow our base with younger segments Ongoing innovation to resolve breakdowns Drive digital adoption and broader member engagement Membership systems investment to drive retention

Returning membership to growth by FY21 50% members registered

• n App

20% reduction in breakdown calls into the contact centres TARGETS

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2m+ motor and home polices by end FY23 9-14% EBITDA CAGR FY19-23

STEP-CHANGED GROWTH IN INSURANCE

3 2 1 Broaden underwriting footprint Drive more competitive premiums New Insurance innovation

Short-term EBITDA hit from investment to fund growth

TARGETS

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BUILDING OPERATIONAL RESILIENCE AND DELIVERING SERVICE EXCELLENCE

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Road Operations

Enhance proposition on ancillary sales Improve drive times - dispatch and traffic based routing technology Improve roadside repair rate - more granular task-based performance measurement and training Reduce garaging - targeted patrol recruitment and utilisation improvements Improve flexibility and utilisation - new roster for Recovery Patrols

Contact Centres

Drive app usage in breakdown Deflect routine admin calls online Implement ‘end to end’ case management and ‘next best action’ techniques Cross-skill teams to improve resilience during high demand

Aim to absorb inflation in FY20 and FY21 Investment in 65 patrols Investment in +200 contact centre staff Maintain improvement in roadside repair rate 10% pa increase in ancillary sales Improve consistency of call to arrive time at 45 mins Improve consistency of call handling at 80% in 20 seconds

TARGETS

(7)

(5)

9 (26) 6 (9) (5) (12)

FY18 TO FY19 TRADING EBITDA BRIDGE

Trading EBITDA guidance for FY19 £335-345m, adjusted EPS c15p

390-395 335-345

£m

FY18

Revenue holdings decline in B2C and B2B Increase in IPT Insurance upside Opex initiatives for growth Strategic projects inc. AA cars One-off adjustments & releases Non-recurring tax benefits Central costs including additional pension charge

FY19

Opex initiatives for growth Roadside £8m Insurance £10m Operational and service excellence £7m High-performance culture £1m 25

CAPEX GUIDANCE

£m FY19 FY20 FY21 COMMENTS IT transformation 31 4

• IT transformation capex in relation to CRM

implementation for existing members Additional IT and new initiatives 12 18 22

• App and digital development, connected car

integration and investment in insurance business Connected car 7 7 7

• Roll-out of connected car product including

additional product and systems development Growth capex 19 25 29 IT maintenance 20 20 20

• Higher than FY18 due to additional IT

maintenance and improvement investment Finance lease capital repayments net of proceeds from sale of fixed assets 25 25 25

• In line with FY18

Property & equipment 10 10 10

• In line with FY18

Maintenance capex 55 55 55 Total capex 105* 84 84

Original IT transformation programme extension complete in FY20 Total growth capex of £73m from FY19 to FY21 Maintenance capex spend run-rate of £55m

Notes: *Excludes capex accrual of £5m **Solvency capital for growth of underwriter of c£20-25m to be funded by AA plc and is excluded from the breakdown above.

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(24) (23) (17) (110) (128) (8) (10) 12 10 10 55

FY19 A LOW POINT IN FCF DUE TO INVESTMENTS – SIGNIFICANT NORMALISED CASH GENERATION

335-345 c107 c276

Normalised level of capex spend expected to deliver free cash flow to equity in excess of £80m in FY20 and over £100m pa from FY21

Higher capex funded through internal funds Debt cash interest costs projected to decrease to c£115m (current punitive swap arrangements terminate in FY19) No additional financing requirements assumed in FY19

c20

Underlying adjustments

FY19 Trading EBITDA Cash tax Pension contributions Working capital & exceptionals Net cash flow from

• perating

activities Capital expenditure Debt interest Other finance interest Acquisitions & disposals FY19 Free Cash flow Transformation & capex add back Swap costs eliminated in FY19 Acquisitions & disposals Working capital & exceptionals FY19 Normalised Free Cash Flow

£m 27

GROUP REVENUE

28

£m FY18 FY17 Change % of Group Roadside Assistance 747 742 1% 78%

• Flat membership base: retention stable at

82%, new memberships up 7% Driving Services 67 67 Flat 7%

• Growing instructor base

Roadside Revenue 814 809 1% 85% Insurance Services 133 131 2% 14%

• Investments in IHP and growth of

underwriter increasing competitiveness and pricing capabilities Insurance Underwriting 12

• 100%

1%

• In-house underwriter growing strongly

across motor and home book Insurance Revenue 145 131 11% 15% Trading Revenue 959 940 2% 100% Exceptional revenue 1 (7) (114%) Negligible Group Revenue 960 933 3% 100%

TRADING EBITDA

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£m FY18 FY17 Change % of Group Roadside Assistance 345 365 (6%) 88%

• Higher cost of attending breakdowns
• Inflationary pressures

Driving Services 22 20 10% 6%

• Cost efficiencies

Head Office costs (47) (48) (2%) (12%) Roadside Trading EBITDA 320 337 (5%) 82% Insurance Services 79 76 4% 20%

• Improved performance and growth of

motor book Insurance Underwriting 1 (1) (200%) Negligible

• In-house underwriter profitable

Head Office costs (9) (9)

• (2%)

Insurance Trading EBITDA 71 66 8% 18% Trading EBITDA 391 403 (3%)

INCOME STATEMENT

£m FY18 FY17 Group Revenue 960 933 Cost of sales (360) (341) Gross profit 600 592 Admin & marketing (292) (309) Share of profits of joint-venture and associates, net of tax (1) 1 Operating profit 307 284 Trading EBITDA 391 403 Share based payments (7) (12) Pension service charge adjustment (10) (8) Depreciation & amortisation (70) (67) Operating profit before exceptional items 304 316 Exceptional operating items 3 (32) Operating profit 307 284 Finance costs (167) (185) Finance income 1 1 Profit before tax 141 100 Tax expense (30) (26) Profit for the year from continuing operations 111 74 Basic EPS – continuing operations (p/share) 18.2 12.2 Adj Basic EPS – continuing operations (p/share) 21.8 21.3

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION

£m FY18 FY17 Goodwill and other intangible assets 1,300 1,283 Property, plant and equipment 127 131 Investments in joint ventures and associates 8 10 Other receivables 3

• Deferred tax assets

31 62 Non-current assets 1,469 1,486 Inventories 7 6 Trade and other receivables 201 195 Cash and cash equivalents 150 211 Current assets 358 412 Total assets 1,827 1,898 Trade and other payables (528) (520) Current tax payable (10) (11) Provisions (13) (19) Current liabilities (551) (550) Borrowings and loans (2,736) (2,819) Finance lease obligations (16) (20) Defined benefit pension scheme liabilities (240) (395) Provisions (4) (11) Deferred consideration (11)

• Insurance technical provisions

(24) (16) Non-current liabilities (3,031) (3,261) Total liabilities (3,582) (3,811) Net liabilities (1,755) (1,913)

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CONSOLIDATED STATEMENT OF CASH FLOWS

£m FY18 FY17 Profit before tax including discontinued operations 141 184 Depreciation and amortisation 70 68 Net finance costs 166 184 Other adjustments to profit before tax 23 (62) Change in working capital (17) 2 Difference between pension charge and cash contributions (44) (10) Net cash flows from operating activities before tax 339 366 Tax paid (23) (21) Net cash flows from operating activities 316 345 Investing activities Capital expenditure net of finance leases capital and proceeds from sale of fixed assets (86) (96) Other investing activities 1 99 Net cash flows use in investing activities (85) 3 Financing activities Refinancing transactions (96) (102) Net interest paid on borrowings (135) (142) Payment of finance lease interest (5) (7) Dividends paid (56) (55) Net cash flows from financing activities (292) (306) Net (decrease)/increase in cash and cash equivalents (61) 42

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IR TEAM CONTACTS

Jill Sherratt Head of Investor Relations +44 207 395 7301 +44 779 113 7738 Jill.Sherratt@theaa.com Zeeshan Maqbool Investor Relations and Corporate Finance Manager +44 773 879 0402 Zeeshan.Maqbool@theaa.com Lisa Shailer IR Assistant +44 207 395 7442 Lisa.Shailer@theaa.com 33

DISCLAIMER

This presentation contains “forward-looking statements” which are prospective in nature and are not based on historical facts, but rather on current expectations and projections about future events. Such statements are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of forward-looking words such as “plans”, “expects” or “does not expect”, “is expected”, “is subject to”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “should”, “would”, “might” or “will” be taken, occur or be achieved. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements, including business, economic and regulatory changes as well as the risks set out in the Company’s annual report and accounts, which can be found on its website (www.theaaplc.com/investors). Such forward-looking statements should therefore be construed in the light of such factors. Neither the Company, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee that the events expressed or implied in any forward- looking statements in this announcement will actually occur. You are cautioned not to place undue reliance on these forward-looking

• statements. Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation, the Listing Rules

and the Disclosure Guidance and Transparency Rules), the Company is not under any obligation to update, revise or correct any forward- looking statements, whether as a result of new information, future events or otherwise. No statement in this presentation should be construed as a profit forecast or relied upon as a guide to future performance.

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