RESULTS 28 SEPTEMBER 2016 DEFINITIONS The following definitions - - PowerPoint PPT Presentation

H1 17 INTERIM RESULTS

28 SEPTEMBER 2016

DEFINITIONS

1 The following definitions apply throughout

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

allocated to a segment and discontinued operations

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

EBITDA.

• Adjusted basic continuing 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, the amortisation of debt issue fees, penalties on early repayment of debt and double-running interest costs on Class B/B2 notes

• Personal Members and Business Customers: measured as the number at the period end.

Headlines Bob Mackenzie Financials Martin Clarke Strategy and outlook Bob Mackenzie

AGENDA

2

HIGHLIGHTS

GOOD PROGRESS TO DATE IN YEAR 2 OF THE TRANSFORMATION

Results in line with expectations Transformation firmly on track Ireland sold; £106m for debt pay down Recommend interim dividend of 3.6p per share

TRANSFORMATION GAINING MOMENTUM Growth in paid personal Members since April Roadside retention up to 81% App usage increased to 14% of personal breakdowns Productivity improved Cost savings on target IT investment on plan Transformation capex – c. £10m saving Normalised capex levels in sight 4

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

FINANCIALS

In line with market expectations

FINANCIAL HEADLINES

6

Trading Revenue¹ up 2.2% at £467m despite IPT increase

• Roadside Trading revenue up 3.1% to £370m due to improved mix

Trading EBITDA¹ flat at £192m

• Roadside Trading EBITDA up 4.1% to £179m

Trading EBITDA margin¹ 41.1% (H1 16: 42.0%) Adjusted EPS 10.3p (H1 16: 10.1p) Cash conversion 99% (H1 16: 114%); Net debt of £2,677m³ (6.7x Trading EBITDA²) post Ireland disposal in August Interim dividend of 3.6p per share declared

¹ Excluding the Glass and Ireland businesses and exceptional revenue item ² Trading EBITDA for the last 12 months ³ Net debt at 31 July 2016 plus the net proceeds from the sale of Ireland

P&L

Items not allocated to segment reflect pension and share based payments impact Exceptional items comprise mainly restructuring activities and provision for potential refund of customers with duplicate cover Decline in net finance cost reflects reduced interest on external borrowings and the absence of one-off costs from the prior year refinancing Tax expense reflects current tax charge of £10m, in line with current statutory rate Adjusted basic EPS of 10.3p reflects the capital structure in place since July 15 7

£m H117 H116 YoY Trading Revenue 467 457 +2% Trading EBITDA 192 192

• Items not allocated to a segment

(10) (9) +11% Depreciation & amortisation (28) (25) +12% Exceptional items (22) (26)

• 15%

Operating profit 132 132

• Net finance cost

(84) (201)

• 58%

Profit/(loss) before tax 48 (69) +170% Tax (expense)/credit (10) 13 +177% Profit/(loss) for the period from continuing

• perations

38 (56) +168% Basic EPS – continuing operations (p/share) 6.2 (9.6) +165% Adj Basic EPS –continuing operations (p/share) 10.3 10.1 +2%

ROADSIDE ASSISTANCE

8

H117 H116 YoY FY16 H1 on FY Personal Members (‘000s) 3,599 3,726

• 3%

3,673

• 2%

Average income per Member (£) 145 138 +5% 141 +3% Personal paid² Members (‘000s) 3,321 3,340

• 1%

3,331 flat Average income per paid² Member (£) 157 154 +2% 156 +1% Business customers (‘000s) 10,179 9,981 +2% 10,216 flat Average income per business customer (£) 19 18 +6% 18 +6% Breakdowns attended (‘000s)³ 1,759 1,662 +6% 3,459 n/a

Trading Revenue¹ up 3.1% to £370m

• Retention 81% (H1 16: 80%)
• Paid personal Members -0.6% YoY;
• 0.3% on FY 16
• Average income per personal paid

Member +1.9% to £157 (net of 3.5% uplift in IPT)

• Ancillary revenue up 14%

Trading EBITDA¹ up 4.1% to £179m

• Growth in income per personal Member

and B2B revenue; lower H1 advertising spend (£5m vs £7.5m in H1 16)

• Partially offset by increased workload

from higher level of breakdowns attended

¹ Excluding items held for sale and exceptional revenue item ² Paid Members: Personal Members excluding free Memberships ³ Relevant period basis

INSURANCE SERVICES

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(000s) H117 H116 YoY FY16 H1 on FY Total insurance policies 1,962 2,131

• 8%

2,074

• 5%

Motor policies 572 618

• 7%

592

• 3%

Home insurance policies 891 913

• 2%

899

• 1%

Average income per policy (£) 67 63 +6% 63 +6% Financial Services Products 82 na na 33 +148%

Trading Revenue flat at £64m - lower core insurance offset by increased FS Trading EBITDA down £2m to £35m – managed decline of total insurance policies

• Motor policies down - lower renewal volumes in

high rate increase market environment

• Decline in Home Services policies as we cease

free policies

Motor responding positively in last two months

• Successful retention initiatives; direct sales initiatives
• Additional motor policies through in-house

Underwriter

Financial Services

• Performance to plan: matched book of £160m

assets, £160m liabilities

• Revenue up £3m due to marketing and product

development services provided to BoI

IN-HOUSE UNDERWRITER DRIVING SERVICES

10

Underwriter

• Progressing well
• Motor launched 30 January – 54k policies to date
• Home insurance underwriting launched in August

Driving Services

• Trading Revenue down 3% but EBITDA flat at £9m

– Fewer driving school franchisees reflecting market conditions – DriveTech police speed awareness courses stable – Cost savings support EBITDA – Short term initiatives to improve driving school performance

H117 H116 YoY FY16 H1 on FY Policies underwritten (‘000s) 25 na na na na H117 H116 YoY FY16 H1 on FY Driving instructors 2,516 2,602

• 3%

2,574

• 2%

STRONG OPERATIONAL CASHFLOW

£m H117 H116 Net cash flows before tax and exceptional items¹ 190 218 Tax, exceptional items and discontinued operations (6) (14) Net operating cash flows 184 204 Transformation capex (20) (21) Underlying IT capex (8) (10) Non-IT capex (7) (9) Capex accruals (2) (1) Capital repayment of Finance Lease net of disposal proceeds (14) (6) Other (2) (3) Net cash flows before refinancing, purchase of own shares, interest and dividends 131 154 Refinancing transactions

• (186)

Purchase of own shares (2) (7) Interest paid (76) (107) Dividend paid (33)

• Net increase/(decrease) in cash and cash equivalents

20 (146)

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Note: Capex includes finance lease capital spend net of vehicle proceeds

FY 15 FY 16 FY 17e FY 18e FY 19e

Capex

Transformation capex Maintenance capex

¹Continuing Operations

£454m £475m £500m £500m £250m £735m £158m

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

DEBT STRUCTURE

Leverage 6.7x net debt/EBITDA¹ Blended cost of debt 4.97%; increased to 5.07% following pay down of £106m of STF in August Weighted average maturity 5 years Run rate cash interest cover* close to 3x Class A FCF to DSCR** 3.4x (covenant > 1.35x) Class B FCF to DSCR** 2.3X (covenant > 1.0x) Senior debt all investment grade Next bond refinancing due by July 2018 (Class A1 notes)

Fixed interest rates

with LIBOR hedged for Senior Term Facility Interest rate 4.36% 4.72% 6.27% 4.25% 3.78% 5.50% Effective

maturity 2019 2018 2025 2020 2019 2022 Final maturity 2019 2043 2043 2043 2043 2043

£2,914m 12

*Run rate cash interest: Trading EBITDA **Free cash flow: debt service cover ratio ¹Trailing 12 month trading EBITDA

PENSIONS

13

IAS 19 pension deficit of £622m (31 July 15: £329m)

• Increase in deficit driven by decline in corporate bond yields, particularly since UK referendum

vote to leave the EU

Triennial review of AA UK pension scheme commenced

• Anticipate a significant increase from previous valuation of £202m (31 March 2013) due to

reduction in long term gilt yields

• Deficit likely to be materially below IAS 19 valuation
• Review completion due by June 2017

Review of options to mitigate current and future liabilities Decline in bond yields provides refinancing opportunity

FINANCIAL IMPLICATIONS OF THE TRANSFORMATION

14

Transformation capex: c.£10m saving allowing investment in other areas Investment in marketing and brand: £10m plus additional spend on the product proposition IT opex: c£8m pa Post-transformation capex run rate: IT c£10m; property & equipment c£10m; net vehicle costs c£20m Restructuring costs: £45m over three years Cost savings: at least £40m in respect of the FY15 cost base in FY19

• Cost savings on target; phase 2 to commence once IT is in place

Driving revenue and earnings growth

STRATEGY

THE STRATEGIC PRIORITIES

BUILDING MOMENTUM IN YEAR 2 OF TRANSFORMATION

1. Strengthen the AA to become the pre- eminent membership services

• rganisation in the UK

2. Revolutionise customer experience through investing in the brand and embracing new technologies 3. Reduce Group borrowings and the associated interest costs THE TIME LINE

Year 1 FY16 Stronger foundations delivered Year 2 FY17 Building momentum for change Year 3 FY18 Realise the transformation Year 4 FY19 Delivering growth

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

ROADSIDE PERSONAL MEMBERSHIP – REVERSING THE DECLINE

Growth in paid personal membership numbers since April and continuing since July Retention improved to 81% (80% last year) Stay AA since inception

• Calls to Stay AA down 9%
• Save rate up 7 percentage points
• Discount rate down 7 percentage points

Double-digit growth in new business volumes

• Re-invigorated marketing approach
• Improved digital capabilities
• Lower price increases to drive retention
• Advertising gaining traction

17 MONTHLY PAID NEW BUSINESS VOLUMES YoY growth (%)

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

PRODUCTIVITY IMPROVEMENTS

18

Productivity improved since the full implementation of new practices Which? Recommended provider for 11th successive year Investments in productivity

• New technology (Bosch diagnostics, Battery

testers, universal spare wheel)

• New communications devices (tablets, i-phones)
• Updated deployment system (AA Help) currently

being implemented

However 6% increase in breakdowns attended in H1 compared with H1 16

• £6m increase in total roadside operations costs

partially offset by £2m of cost savings ROLLING 12 MONTH VARIABLE COST PER CASE*

Roadside training

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

Roadside training

FIX TIME PER JOB (MINUTES)

*Inflation adjusted

IT SYSTEMS TRANSFORMATION

19

Progress made across all key elements of the IT transformation programme

Installed new IT infrastructure throughout back office functions

INFRASTRUCTURE

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

SERVICE

Reduces manual reconciliations Reduces in house maintenance Leads to efficiencies throughout the business Improves efficiency of patrols Improved information flows with call centres Provides for superior customer service

IT SYSTEMS TRANSFORMATION

20

Marketing element live since March Full CRM now being rolled out and uploaded Expected be finalised in Autumn 2017 Improved on-boarding journey

CRM

Enables 360-degree view of customer, integrating customer data Real-time, automated reporting and insight Allows for relevant, personal and iterative conversations with customers Enables next best action to drive sales Will facilitate easier cross sell

IT SYSTEMS TRANSFORMATION

21

New commercial website launched in May My AA launched in January App refresh with improved functionality in September

• App personal breakdown usage 14%
• App registration 23% of the Membership base

DIGITAL

Improves online customer journey Enables customer self service Reduces call centre contact points Gives us insights into customer behaviour Opportunities to test product changes

CONSUMER ROADSIDE ONLINE SALES

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16

Start of activity

YoY change 2013 – 2016

Launch

• f site

ADVERTISING ACHIEVING GREATER IMPACT

22

Investment of £5m in H1 with balance of £10m expected in H2 Greater reach and frequency Additional “outdoor” has added visibility TV ads delivering branded cut-through well ahead of norms

20161 20151 Norm² ABC1 adults reached 94% 90% na Average no of times reached 60 22 na Execution Cut-through (i.e. remembered the ad) 52% 42% 39% Brand Link (i.e. remembered that it was the AA) 79% 77% 62% Branded Cut-through (i.e. remembered it and who it was) 41% 32% 24%

¹Based on equivalent spend ²Ipsos Norm @ 500 Gross Rating Points (GPRs) i.e. for the same spend

FINANCIAL SERVICES AND IN HOUSE UNDERWRITER

23 Launched cards, loans, savings, and mortgages (in August) in partnership with the Bank of Ireland £160m matched book value AA positioned in top 1-5 savings; top 10 for cards and loans FINANCIAL SERVICES INSURANCE UNDERWRITER Insurance Underwriter launched in January to participate on the AA’s motor insurance panel 25k policies written by end of July; 54k by end

• f September

Home insurance launched in August Too early for material financial contribution but early signs are promising

*For cards, this analysis does not show the fee based long dated balance transfer (BT) card segment.

As at 12th September 2016

AA UNDERWRITER POLICIES BY ORIGIN

52% 32% 16% Has never been an AA insurance customer Was once previously an AA insurance customer An existing AA insurance customer

Strengthened foundations and revolutionising customer experience

SUMMARY

24

Transformation well on track

• Continue to invest in brand marketing and product proposition
• Targeting cost savings from FY19 of at least £40m pa off the FY15 base
• Saving of c.£10m transformation capex allowing investment in other areas

Growth in Membership numbers - continued improvement into August and September Free cash flow generation to be enhanced following transformation Trading in line with market expectations for FY17; building momentum for FY18

The UK’s pre-eminent Membership services organisation

APPENDIX

£m H117 H116 Change % of Group Roadside Assistance 370 359 +3.1% 79% Increase in average revenue per customer and B2B revenue Insurance Services 64 64

• 14%

Lower policy numbers offset by higher income per policy Driving Services 32 33

• 3.0%

7% Lower driving school franchises Insurance Underwriting 1 1

• Trading revenue

467 457 +2.2% Business held for sales¹

• 9

Exceptional revenue provision (10)

• Total revenue

457 466

• 1.9%

REVENUE

27

1 In September 2015, AA plc group completed the sale of its subsidiary Autowindshields (UK) Limited. As a result, this business was presented as held for sale in

the prior period.

TRADING EBITDA

£m H117 H116 Change % of Group¹ Roadside Assistance 179 172 +4.1% 81% Revenue up 3.1% Advertising and Bosch investment timing difference offset by higher workload Insurance Services 35 37

• 5.4%

16% Lower policies numbers FS and Home Services business re-set under way Driving Services 9 9

• 4%

Lower driving school franchisees Insurance Underwriting (1)

• (1%)

Head office costs (30) (26) +15.4% Incremental IT licensing costs Total Trading EBITDA 192 192

• 28

1 % of Group pre head office costs

SEGMENTAL ANALYSIS

Insurance Services H117 YoY Change Trading Revenue (£m) 64 Flat Trading EBITDA (£m) 35

• 5.4%

Policy numbers (‘000s) 1,962

• 7.9%

Average income per policy (£) 67 +6.3% Driving Services H117 YoY Change Trading Revenue (£m) 32

• 3.0%

Trading EBITDA (£m) 9 Flat Driving school instructors 2,516

• 3.3%

Roadside Assistance H117 YoY Change Trading Revenue¹ (£m) 370 +3.1% Trading EBITDA¹ (£m) 179 +4.1% Paid Personal Members (‘000s) 3,321

• 0.6%

Business Customers (‘000s) 10,179 +2.0% Average income per Paid Personal Member (£) 157 +1.9% Breakdowns attended (‘000s) 1,759 +5.8%

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1 Excluding glass business and exceptional revenue items

PROFIT AND LOSS¹

£m H117 H116 Revenue 457 466 Cost of sales (168) (167) Gross profit 289 299 Admin & marketing (157) (167) Operating profit 132 132 Trading EBITDA 192 192 Items not allocated to a segment (10) (9) Depreciation & amortisation (28) (25) Exceptional items (22) (26) Operating profit 132 132 Net finance cost (84) (201) Profit/(loss) before tax 48 (69) Tax (expense)/credit (10) 13 Profit/(loss) for the period from continuing

• perations

38 (56) Basic EPS – continuing operations (p/share) 6.2 (9.6) Adj Basic EPS –continuing operations (p/share) 10.3 10.1

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¹ Continuing operations

BALANCE SHEET

£m H117 H116 Goodwill and other intangible assets 1,276 1,271 Property, plant and equipment 117 106 Investments in joint ventures and associates 11 8 Deferred tax assets 107 57 Non-current assets 1,511 1,442 Inventories 6 5 Trade and other receivables 169 185 Cash and cash equivalents 158 155 Current assets 333 345 Assets held for sale 93 3 Total assets 1,937 1,790 Trade and other payables (502) (523) Current tax payable (11)

• Provisions

(21) (7) Current liabilities (534) (530) Borrowings and loans (2,922) (2,911) Finance lease obligations (21) (20) Defined benefit pension scheme liabilities (622) (329) Provisions (7) (11) Insurance technical provisions (4) (4) Non-current liabilities (3,576) (3,275) Liabilities held for sale (40) (4) Total liabilities (4,150) (3,809) Net liabilities (2,213) (2,019)

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CASH FLOW

£m H117 H116 Operating profit including discontinued operations 139 138 Depreciation and amortisation 29 26 Other items 7 2 Cash exceptional items 9 21 Change in working capital 16 39 Operating cash flow before tax and exceptional items 200 226 Cash exceptional items (9) (21) Tax paid (7) (1) Net cash flows from operating activities 184 204 Investing activities Capital expenditure (37) (41) Other investing activities 4 (1) Net cash flows use in investing activities (33) (42) Financing activities Refinancing transactions

• (186)

Purchase of own shares (2) (7) Interest paid on borrowings (73) (104) Payment of finance lease capital (20) (8) Payment of finance lease interest (3) (3) Dividends paid (33)

• Net cash flows from financing activities

(131) (308) Net increase/(decrease) in cash and cash equivalents 20 (146)

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¹Excludes available and restricted cash balances available for sale

DEBT PACKAGE

Expected maturity date Interest rate Run rate cash interest (£m) Principal at 31 July 16 (£m) Principal at 31 July 15 (£m) Senior Term Facility 31 January 2019 4.36% 19.8 454 454 Class A1 notes 31 July 2018 4.72% 22.4 475 475 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% 9.5 250 250 Class B2 notes 31 July 2022 5.50% 40.4 735 735 4.97% 144.8 2,914 2,914 Ring fenced cash and cash equivalents 122 114 Non ring fenced cash and cash equivalents 36 41 Total cash and cash equivalents¹ 158 155 Class A Net Debt: Trading EBITDA (STF & Class A notes less ring fenced cash) 4.9x 4.9x Class B Net Debt: LTM EBITDA (WBS debt less ring fenced cash) 6.8x 6.8x Total Net Debt : LTM EBITDA (total debt less total cash) 6.7x 6.7x Class A FCF DSCR 3.4x 3.8x Class B FCF DSCR 2.3x 2.2x

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