H1 17 INTERIM RESULTS 28 SEPTEMBER 2016
DEFINITIONS 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. 1
Headlines Bob Mackenzie AGENDA Financials Martin Clarke Strategy and outlook Bob Mackenzie 2
HIGHLIGHTS
GOOD PROGRESS TO DATE IN YEAR 2 OF THE TRANSFORMATION Results in line with expectations TRANSFORMATION GAINING MOMENTUM Transformation firmly on track Growth in paid personal Members since April Ireland sold; £106m for debt pay down Roadside retention up to 81% App usage increased to 14% of personal Recommend interim dividend of 3.6p per share breakdowns Productivity improved Cost savings on target IT investment on plan Transformation capex – c. £10m saving Normalised capex levels in sight Transforming the AA into the UK’s pre -eminent Membership services organisation 4
FINANCIALS
FINANCIAL HEADLINES 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 In line with market expectations ¹ Excluding the Glass and Ireland businesses and exceptional revenue item 6 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 £m H117 H116 YoY pension and share based payments Trading Revenue 467 457 +2% impact Exceptional items comprise mainly Trading EBITDA 192 192 - restructuring activities and provision for Items not allocated to a segment (10) (9) +11% potential refund of customers with Depreciation & amortisation (28) (25) +12% duplicate cover Exceptional items (22) (26) -15% Decline in net finance cost reflects Operating profit 132 132 - reduced interest on external borrowings Net finance cost (84) (201) -58% and the absence of one-off costs from the Profit/(loss) before tax 48 (69) +170% prior year refinancing Tax (expense)/credit (10) 13 +177% Tax expense reflects current tax charge of Profit/(loss) for the period from continuing 38 (56) +168% £10m, in line with current statutory rate operations Basic EPS – continuing operations (p/share) 6.2 (9.6) +165% Adjusted basic EPS of 10.3p reflects the Adj Basic EPS – continuing operations (p/share) 10.3 10.1 +2% capital structure in place since July 15 7
ROADSIDE ASSISTANCE H117 H116 FY16 YoY H1 on Trading Revenue¹ up 3.1% to £370m FY • Retention 81% (H1 16: 80%) Personal Members (‘000s) 3,599 3,726 -3% 3,673 -2% • Paid personal Members -0.6% YoY; Average income per Member (£) 145 138 +5% 141 +3% -0.3% on FY 16 Personal paid² Members (‘000s) 3,321 3,340 -1% 3,331 flat • Average income per personal paid Member +1.9% to £157 (net of 3.5% Average income per paid² Member (£) 157 154 +2% 156 +1% uplift in IPT) Business customers (‘000s) 10,179 9,981 +2% 10,216 flat • Ancillary revenue up 14% Average income per business customer (£) 19 18 +6% 18 +6% Trading EBITDA¹ up 4.1% to £179m Breakdowns attended (‘000s)³ 1,759 1,662 +6% 3,459 n/a • 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 8
INSURANCE SERVICES (000s) H117 H116 FY16 H1 on FY YoY Trading Revenue flat at £64m - lower core Total insurance 1,962 2,131 -8% 2,074 -5% insurance offset by increased FS policies Trading EBITDA down £2m to £35m – Motor policies 572 618 -7% 592 -3% managed decline of total insurance policies Home insurance 891 913 -2% 899 -1% • Motor policies down - lower renewal volumes in policies high rate increase market environment 67 63 +6% 63 +6% Average income per • Decline in Home Services policies as we cease policy (£) free policies Financial Services 82 na na 33 +148% Products 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 9
IN-HOUSE UNDERWRITER DRIVING SERVICES H117 H116 YoY FY16 H1 on FY Underwriter • Progressing well Policies 25 na na na na underwritten • Motor launched 30 January – 54k policies to date (‘000s) • Home insurance underwriting launched in August Driving Services H117 H116 YoY FY16 H1 on FY • Trading Revenue down 3% but EBITDA flat at £9m Driving 2,516 2,602 -3% 2,574 -2% – Fewer driving school franchisees reflecting instructors market conditions – DriveTech police speed awareness courses stable – Cost savings support EBITDA – Short term initiatives to improve driving school performance 10
STRONG OPERATIONAL CASHFLOW £m H117 H116 Capex 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) FY 15 FY 16 FY 17e FY 18e FY 19e Capital repayment of Finance Lease net of disposal (14) (6) Transformation capex proceeds Maintenance capex Other (2) (3) Net cash flows before refinancing, purchase of own 131 154 Note: Capex includes finance lease capital spend net of vehicle proceeds shares, interest and dividends 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) ¹Continuing Operations 11
DEBT STRUCTURE Fixed interest rates Leverage 6.7x net debt/EBITDA¹ with LIBOR hedged for Senior Term Facility Blended cost of debt 4.97%; Interest 4.36% 4.72% 6.27% 4.25% 3.78% 5.50% increased to 5.07% following pay rate down of £106m of STF in August Effective 2019 2018 2025 2020 2019 2022 Weighted average maturity 5 years maturity Run rate cash interest cover* close Final 2019 2043 2043 2043 2043 2043 to 3x maturity Class A FCF to DSCR** 3.4x £2,914m (covenant > 1.35x) Class B FCF to DSCR** 2.3X £735m (covenant > 1.0x) Senior debt all investment grade £500m £500m £475m £454m Next bond refinancing due by July £158m £250m 2018 (Class A1 notes) Senior Term Class A1 Class A2 Class A3 Class A4 New Cash Facility notes notes notes notes Class B2 *Run rate cash interest: Trading EBITDA notes **Free cash flow: debt service cover ratio ¹Trailing 12 month trading EBITDA 12
PENSIONS 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 13
FINANCIAL IMPLICATIONS OF THE TRANSFORMATION 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 14
STRATEGY
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