TO THE AA Investor presentation H1 17 Interims CONTENTS, IR - - PowerPoint PPT Presentation

INTRODUCTION TO THE AA

Investor presentation H1 17 Interims

CONTENTS, IR CONTACTS AND DEFINITIONS

1

IR CONTACTS Jill Sherratt Head of Investor Relations Email: jill.sherratt@theaa.com Telephone: +44 (0) 20 7395 7301 Mobile: +44 (0) 7791 137738 James Curran Investor Relations Manager and Analyst Email: James.curran@theaa.com Telephone: +44 (0) 20 7395 4443 Mobile: +44 (0) 77387 71835 Lisa Shailer Investor Relations Assistant Email: lisa.shailer@theaa.com Telephone: +44 (0) 20 7395 7442 Mobile: +44 (0) 7950 868371 www.theaaplc.com

DEFININTIONS THAT 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 CONTENTS

Fundamentals 2 – 16 H1 17 results 17 – 45 Transformation (as at 20.4.15) 47 – 56 FY16 results (in summary) 58 - 63

FUNDAMENTALS

PROVIDING SERVICES TO AA MEMBERS FOR MORE THAN 110 YEARS

Founded by motoring enthusiasts 35% share

• f 2m cars on the

road Launched Roadwatch and Relay Patrols issued with diagnostics equipment Patrols on bicycles and uniforms DriveTech and Auto Windshields acquired IPO 26 June Launched AA Routes and AA Stars 1st AA insurance policy New fleet to enable four wheel patrols BSM acquired, launch Home Services Launched AA Driving School AA members voted to demutualize the AA and join Centrica Group Acquired by private equity groups CVC and Permira Fund Brought under common

• wnership with

Saga in the Acromas Group

3

1905 1907 1909 1912 1939 1949 1973 2003 2009 2010 2014 1992 1999 2004 2007

Segment

Roadside Assistance Insurance Services Driving Services Ireland⁴

FY16 Trading EBITDA %1

£361m3 £78m £19m £13m

Highlights

3.7m personal Members and 10.2m B2B customers c3,000 dedicated patrols; c10,000 breakdowns per day No 1 with market share of c40% 81% personal Member retention rate Leading insurance broker Offers Motor, Home, Travel and other specialist insurance Cross-sell to existing customers Also includes Home Services and Financial Services Provides driver awareness training, fleet management and driver training Largest driving school in the UK² - AA and BSM brands 11% of the highly fragmented market Leading branded breakdown provider and leading insurance broker in Ireland Insurance lead with breakdown usually ad additional benefit

ROADSIDE ASSISTANCE AT THE CORE

• 1. Segment Trading EBITDA has been expressed as a % of Group Trading EBITDA excluding Head Office Costs
• 2. By total UK driving pupils.
• 3. Excluding Glass business disposed of
• 4. Ireland business sold on 11 August 2016 for EUR 156.6m

76% 17% 4% 3%

4

THE LEADERSHIP TEAM

5

Oliver Kunc Operations Director

Previously Managing Director of Central Heating Installations at British Gas; prior roles at Barclays, BA and LEK consulting Responsible for operations including patrols, deployment, call centres and technical development

Bob Mackenzie Executive Chairman

Previously Chairman and CEO of National Car Parks and its subsidiary Green Flag Prior to that CEO of Sea Containers and Chairman of PHS Group

Mike Lloyd Commercial Director

Previously Partner at Oliver Wyman focused on Consumer Service businesses in FS, Energy, Home, TV and Telecoms Responsible for Roadside Assistance and Insurance Services, marketing and digital functions

Kirsty Ross Membership Services Director

Previously Strategy and Innovations Director; Principal at Oliver Wyman Responsible for Motoring Services, Media and Driving School businesses, connected car strategy and Group strategy

Janet Connor Restructuring and Insurance Director

Previously Managing Director at More Than; MD at Ageas-owned over-50s broker RIAS from 2006 to 2011 Accountable for broking operating as CEO of AAISL

Martin Clarke Chief Financial Officer

Previously Partner and Global Head of Consumer for Permira Prior roles at Cinven, Silverfleet and board member of New Look and Gala Coral

THE INVESTMENT CASE

• 1. Y&R Brand Asset Valuator Survey (2014).

Strong fundamentals

Strong, stable margins and cash conversion High barriers to entry, scale cost advantage

Trusted brand

The UK’s most trusted commercial brand1 Over 50% of households hold an AA product

Market leadership

3.7m personal Members, 10.2m B2B customers No 2 motor insurance broker, No 1 driving school

Retention and loyalty

High Member retention, long-term B2B contracts Significant revenues from repeat business

Operational excellence

3.4m breakdowns attended pa Sophisticated deployment IP and services

Options for growth

Trusted brand lends to relevant extensions 20m marketing contacts, strong cross-sell ability

6

RELATIVE RESILIENCE OF MEMBERSHIP SINCE 1975

7 Broad based under investment; eg in systems, brand and capabilities and legacy of short-term decision making Premium position not underpinned by continuous investment in proposition and no investment in brand marketing for many years IT platform, except patrol deployment, dated and constraining growth; limited and inflexible CRM systems Individual business unit

• ptimisation restricts

commercial opportunity

• 5%

0% 5% 10% 15% 20% 0.0 1.0 2.0 3.0 4.0 5.0 1975 1980 1985 1990 1995 2000 2005 2010 2015 UK GDP growth (%) AA Members (m)

AA Membership vs GDP Growth

US savings and loan crisis Financial crisis Membership run-up and reduction following demutalisation Oil Crisis

FINANCIAL RESILIENCE THROUGH THE ECONOMIC CYCLE

8

219 273 292 334 369 371 366 395 423 429 415 755 794 808 893 931 943 979 971 974 967 963 £0 £200 £400 £600 £800 £1,000 £1,200 Year to Dec 2005 Year to Dec 2006 13 months to Jan 2008 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Revenue and Trading EBITDA Trading EBITDA Revenue

Note: 2005, 2006, 2008 and 2009 unaudited; FY15 and FY16 Revenue and Trading EBTIDA excludes the Glass business disposed of

£395m £423m £430m £415m 94% 102% 97% 101% FY13 FY14 FY15 FY16

Cash flow generation (£m)

Trading EBITDA Cash Conversion

EXCEPTIONAL CASH GENERATION

Favourable working capital dynamics as a function of upfront payments by customers Underlying maintenance capital expenditure of c£40m pa

Net cash flow from operating activities before tax and exceptional items

£371m £433m £431m £416m 9

A HIGHLY TRUSTED COMMERCIAL BRAND

10 74% 66% 64%

Widely recognised and trusted brand High level of customer satisfaction 50% of households hold an AA product September 2015: AA ‘Recommended provider’ in “Which?” survey for both consumer and manufacturer cover for 10th consecutive year

Highest test score for a major provider from ‘Which?’ every year since 2007

“Which?” total test score 2015 Major providers

SCALE, LEADING MARKET POSITION AND BARRIERS TO ENTRY

Large and resilient roadside market

Relatively stable market High recurring revenue

Scale and barriers to entry

Economies of scale: c3,000; 10,000 breakdown per day; c3.4m breakdowns pa New entry barriers from investment required in systems – eg deployment B2B relationships: 10.2m B2B customers; partner of choice for major OEMs

Source: Industry sources; Note 1: The number of breakdowns for GreenFlag is last year’s number

40% RAC 27% GF 14% Others 19% B2B Consumer

3.4m 2.5m 0.7m1

Breakdowns attended B2B market share Consumer market share

67% 63% 50% Motor manufacturers Fleets AVA

11

Large personal Membership base 3.7m personal Members Rate of decline slowing

• FY16: -2.6%
• FY15: -4.5%

3.3m paid personal Members

• H117: -0.6%

Stable over medium/longer term Proprietary long-standing database of c21m individuals Competitive advantage for cross-selling Sophisticated customer rating and pricing capability based on proprietary information

Average tenure of c12 years Rising retention rate (81% for FY16)

Strong loyalty

Membership tenure

HIGH MEMBER RETENTION AND LOYALTY

12

1,500,000 800,000 > 10 years >20 years

LONG TERM B2B CONTRACTS

13 Recent contract wins: Volkswagen Group, Porsche, Lex Autolease Recent renewals: Toyota, Northgate, Subaru, Isuzu, MG, Lexus (Bentley, Ford, Honda and Jaguar Land Rover in FY15) Extended contracts: BT and Vauxhall (Lloyds Banking Group and TSB in FY15) Other developments: VW emissions programme and JLR mobile servicing pilot 0–5 5-10 >10

Tenure with AA OEMs Fleet & leasing Added Value Accounts

Selected B2B client base

OPERATIONAL EXCELLENCE

Technical assets and expertise

Unique deployment IP Modern multi-vehicle service technology 80% of breakdowns repaired at roadside Skilled and experienced colleagues Average of 11 years tenure with the AA 14

57% 66% 53% 26% 22% 31% Overall experience with the AA Service provided by Patrol Overall experience over the phone Excellent Very Good

High levels of customer service

Call handling 80% in 20 seconds Repair rate 82% App usage <11% Average call time <5 minutes Call to arrive time 45 minutes

AA “moment of truth” survey (%)

STRONG BRAND IN INSURANCE

No 1 motor insurance broker in the UK private car insurance market No 2 private home insurance broker in the UK 15

Source: GfK FRS Study March 2016

Insurance Services

Core insurance revenue breakdown

Motor 56% Home 38% Other 6%

Brand consideration³ for switching Motor Insurance

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Admiral AA Direct Line Churchill Hastings Direct Axa Tesco Saga

TRANSFORMATION STRATEGY

Core business performance flat Several years of under-investment under previous ownership THE STRATEGY Three years of investment and consolidation to position AA for renewed growth Refinancing to free up additional cashflow and facilitate dividends Strengthening the foundations and revolutionising customer experience

• Investment in brand marketing - £10m pa additional marketing spend
• Investment in IT systems and digital capability - £128m over 3 years
• Restructuring and cost initiatives – Savings of £40m off FY15 cost base in FY19; cost of £45m over 3 years
• Investment in Membership growth and price
• Developing new business models – Financial Services and Insurance Underwriter
• New business initiatives – building on the strength of the brand and opportunities in the wider market

16

THE CHALLENGES

Transformation creates the UK’s pre-eminent Membership services organisation

H117 INTERIM RESULTS

28 SEPTEMBER 2016

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 18

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

In line with market expectations

FINANCIAL HEADLINES

19

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% (H116: 42.0%) Adjusted EPS 10.3p (H116: 10.1p) Cash conversion 99% (H116: 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 20

£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

21

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% (H116: 80%)
• Paid personal Members -0.6% YoY;
• 0.3% on FY16
• 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 H116)

• 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

22

(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

23

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)

24

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 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 25

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

PENSIONS

26

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

Driving revenue and earnings growth

FINANCIAL IMPLICATIONS OF THE TRANSFORMATION

27

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

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

29

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

30 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

31

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 H116

• £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

32

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

33

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

34

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

35

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

36 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

SUMMARY

37

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

Strengthened foundations and revolutionising customer experience

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

39

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

• 40

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 numbers² (‘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%

41

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

42

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)

43

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)

44

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

45

TRANSFORMATION 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

TRANSFORMATION STRATEGY

Strengthening the foundations and revolutionising customer experience

• 1. Investment in brand marketing
• 2. Investment in IT systems and digital capability
• 3. Restructuring and cost initiatives
• 4. Investment in Membership growth and price
• 5. Developing new business models
• 6. New business initiatives

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Transformation creates the UK’s pre-eminent Membership services organisation

• 1. UNDER INVESTMENT IN THE BRAND

Enhance brand awareness and communicate membership proposition Substitute brand marketing for past excessive price discounting Invest £10m in FY16 and beyond Benefits expected to become apparent from FY17

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66% 47% 57% 31% 21% 22% 11% 4% 2% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total media spend AA Share of voice

Sources: Ebiquity Media Tracking (TV, Press, Radio, Cinema, Outdoor), Road Brand Tracker Survey, IPSOS

Underpins product transformation and membership proposition

De-risk infrastructure and connections

• Replace legacy systems
• Staged implementation and double running
• Rationalisation of processes and transform call

centre effectiveness

Enhance commercial agility

• Faster times for price, product and customer

communication changes

Development of digital proposition for customers

• New App
• Connected car developments including telematics

Financial implications

• IT transformation capex spend of £128m
• ver 3 years
• Thereafter steady state IT capex of £10m pa

(versus £30m previously)

• Maintenance spend will increase by £8m in

a full year 50

• 2. INVESTMENT IN IT SYSTEMS AND DIGITAL CAPABILITY

Drives productivity and revenue growth

• 3. RESTRUCTURING AND COST INITIATIVES

People and property strategy to cost £45m over 3 years

• Cost savings £40m pa thereafter

Phase 1 announced

• £4m savings in FY16; £8m in a full year

Investment in people and key skills

• New central London office to attract digital and marketing talent

Continued investment in front line people and equipment

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Productivity gains and energised culture in the medium term

• 4. INVESTMENT IN MEMBERSHIP GROWTH AND PRICE

Investment in price to create sustainable base

• Expect c3% increase in income per Personal

Member in FY16

Investment in product Additional opportunities in ancillary revenue

• Battery sales
• AA tyres

Focus on retention processes

• Stay AA

Communicate existing services

• Fuel Assist: 98% fix rate;

20% member discount on pay-for-use

• Key Assist: dedicated vans; free for gold members

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Investment required to drive retention and Membership

• 5. DEVELOPING NEW BUSINESS MODELS

Financial Services and Insurance Underwriter New partnership model for elements of Financial Services business

• Expected short term cost of £4m but

significant potential Launch of new in-house underwriter in early 2016

• Expected set up costs of £1m
• £7.5m investment
• Experienced team to lead the underwriter

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Craig Staniland CEO

30+ years experience in Insurance Previously MD, AXA Personal Lines Prior to that Founding Underwriting Director, Swiftcover and Head of Motor Underwriting, RBS

Dominic Bird Head of Pricing

10 years experience in Insurance Previously Head of New Business Pricing, Direct Line Group Prior to that Consultant, Towers Watson

Steve Gaywood Head of Counter-Fraud

15 yrs Counter-Fraud experience Previously Head of Counter-Fraud, AXA Personal Lines and Head of Systems and Data Analytics, Innovation Conversant Data

Tony Peppard Head of Claims

30+ years Claims and Vehicle Management experience Previously MD, AXA and Swiftcover Claims and MD, Churchill Claims Services Group

Building on market strengths and brand

OPERATING AS A BROKER AND INSURER

Effective business model that maximises use of capital AND broker value New agile IT systems, integrated with AA and high-value external databases Newly built capabilities drive excellence in data mining and agile pricing Integrated policy and claims management, unencumbered by legacy systems Leveraging robust controls and governance, mitigating conflicts Experienced, proven team that has created and run successful operations 54

Activities in personal lines insurance value chain

Lead generation Price comparison & quotation Sales New business fulfilment Policy admin & servicing Pricing & under- writing Claims handling Investment & solvency

Google PCWs Broker – the AA now Insurer – the new model

• 6. NEW BUSINESS INITIATIVES

Key opportunities:

Tyres Used Car Sales Car Inspections Garages – Services, Maintenance and Repair Dealer Solutions Etc.

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1

C £60bn broader Motoring Services market – the AA currently focused on <10% of spend

2

Unique strength of the AA Brand in markets with low customer trust

Adjacent motoring services markets

Significant potential to build on existing assets in new markets

FINANCIAL IMPLICATIONS OF THE TRANSFORMATION

Cost rationalisation expected to deliver £40m of cost savings in medium term

• Phase 1 underway and expected to deliver £8m in FY17

IT transformation to modernise the business and enhance customer experience

• Incremental spend of £128m over 3 years
• Additional opex
• Leading to facilitates cost savings and reduced capex

Investment in price – increase in income per Member restricted to 3% Continuing incremental PLC costs confirmed as £8m pa Short term uplift in capex to facilitate transformation

• Normalised net capex for IT and vehicles on current assumptions c£40m pa from FY19

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FY16 RESULTS SUMMARY

£m FY16 FY15 Change % of Group Roadside Assistance 724 711 +1.8% 75% Increase in average income per Member

• ffsetting the decline in personal Members

Insurance Services 131 142

• 7.7%

14% Lower policy numbers and income per policy Driving Services 68 74

• 8.1%

7% Lower driving school franchises and Police courses Ireland 38 39

• 2.6%

4% Impact of lower € - revenue up £3m on constant FX Insurance Underwriting 2 1

• Total revenue¹

963 967

• 0.4%

FY16 REVENUE

58

¹ Excluding glass business

FY16 TRADING EBITDA

£m FY16 FY15 Change % of Group Roadside Assistance 361 358 +0.8% 76% Revenue up 1.8% Advertising and Bosch investment Insurance Services 78 84

• 7.1%

17% Efficiency savings FS business re-set under way Driving Services 19 20

• 5.0%

4% Lower driving school franchisees and Police courses Ireland 13 15

• 13.3%

3% EBITDA flat on constant currency Head office costs (56) (48) +16.7% Incremental PLC and IT licensing costs Total Trading EBITDA¹ 415 429

• 3.3%

Trading EBITDA Margin¹ 43.1% 44.4% 59

¹ Excluding glass business

FY16 SEGMENTAL ANALYSIS

Insurance Services FY16 Y-o-Y Change Revenue (£m) 131

• 7.7%

Trading EBITDA (£m) 78

• 7.1%

Policy numbers (‘000s) 2,074

• 4.1%

Average income per policy (£) 63

• 4.5%

Driving Services FY16 Y-o-Y Change Revenue (£m) 68

• 8.1%

Trading EBITDA (£m) 19

• 5.0%

Driving school instructors 2,574

• 3.6%

Ireland FY16 Y-o-Y Change Revenue (£m) 38

• 2.6%

Trading EBITDA (£m) 13

• 13.3%

Personal Members (‘000s) 128 7.6% Insurance policy numbers (‘000s) 185 3.9% Roadside Assistance FY16 Y-o-Y Change Revenue¹ (£m) 724 1.8% Trading EBITDA¹ (£m) 361 0.8% Personal Members (‘000s) 3,673

• 2.6%

Business Customers (‘000s) 10,216 6.0% Average income per Personal Member (£) 141 4.4% Breakdowns attended (‘000s) 3,459

• 2.3%

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¹ Excluding glass business

FY16 BALANCE SHEET

£m FY16 FY15 Goodwill and other intangible assets 1,298 1,257 Property, plant and equipment 122 100 Investments in joint ventures and associates 10 4 Deferred tax assets 52 81 Other receivables

• 21

Non-current assets 1,482 1,463 Inventories 5 5 Trade and other receivables 172 187 Current tax receivables

• 1

Cash and cash equivalents 166 302 Current assets 343 495 Total assets 1,825 1,958 Trade and other payables (525) (498) Provisions (8) (8) Current liabilities (533) (506) Borrowings and loans (2,920) (3,241) Finance lease obligations (21) (16) Defined benefit pension scheme liabilities (296) (434) Provisions (7) (12) Insurance technical provisions (4) (4) Non-current liabilities (3,248) (3,707) Total liabilities (3,781) (4,213) Net liabilities (1,956) (2,255)

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FY16 CASH FLOW

£m FY16 FY15 Operating profit 305 326 Depreciation and amortisation 54 48 Other items 12 Cash exceptional items 37 57 Change in working capital 12 (15) Operating cash flow before tax and exceptional items 420 416 Cash exceptional items (37) (57) Tax paid (2) (2) Net cash flows from operating activities 381 357 Investing activities Capital expenditure (75) (37) Other investing activities 4 21 Net cash flows use in investing activities (71) (16) Financing activities Refinancing transactions (183) 12 Purchase of own shares (22)

• Interest paid on borrowings

(178) (218) Payment of finance lease capital (34) (31) Payment of finance lease interest (8) (4) Dividends paid (21)

• Net cash flows from financing activities

(446) (241) Net increase in cash and cash equivalents (136) 100

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FY16 DEBT PACKAGE

Expected maturity date Interest rate Run rate cash interest (£m) Principal at 31 January 16 (£m) Principal at 31 January 15 (£m) Senior Term Facility 31 January 2019 4.36% 19.8 454 663 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 B notes 31 July 2019

• 655

Class B2 notes 31 July 2022 5.50% 40.4 735

• PIK notes

6 November 2019

• 175

4.97% 144.8 2,914 3,218 Ring fenced cash and cash equivalents 94 262 Non ring fenced cash and cash equivalents 72 40 Total cash and cash equivalents 166 302 Class A Net Debt: Trading EBITDA (STF & Class A notes less ring fenced cash) 5.0x 4.9x Class B Net Debt: LTM EBITDA (debt excluding PIK notes less ring fenced cash) 6.9x 6.6x Total Net Debt : LTM EBITDA (total debt less total cash) 6.8x 6.9x Class A FCF DSCR 3.9x 3.5x Class B FCF DSCR 2.4x 2.2x

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