FY 17 RESULTS 28 March 2017
DEFINITIONS The following definitions apply throughout • Trading Revenue: Revenue excluding discontinued operations, business disposed of and exceptional revenue items • Trading EBITDA (earnings before interest, tax, depreciation and amortisation): excludes exceptional items, items not allocated to a segment and the Ireland discontinued business • Cash conversion: net cash flow from continuing operating activities before tax and exceptional items divided by Trading EBITDA • Continuing adjusted basic 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, and exceptional finance costs • Personal Members and Business Customers: measured as the number at the period end • IPT: Insurance Premium Tax 1
Headlines Bob Mackenzie AGENDA Financials Martin Clarke Strategy Bob Mackenzie 2
HEADLINES
GOOD PROGRESS TO DATE IN YEAR 2 OF THE TRANSFORMATION Transformation gaining momentum Results in Strong Growth in paid personal Members line with cash App used in 22% of personal breakdowns expectations generation Call outs up 5% but costs partially offset Productivity improved Cost of Total dividends First motor insurance policy growth since 2008 borrowings of 9.3p Cost savings on target reduced recommended Normalised capex levels in sight A platform for sustainable growth The UK’s pre -eminent Membership services organisation 4
FINANCIALS
FINANCIAL HEADLINES Trading Revenue up 1.6% at £940m despite IPT increase • Roadside up 2.5% to £742m Trading EBITDA up 0.2% at £403m • Roadside up 1.1% to £365m Trading EBITDA margin 42.9% (FY 16: 43.5%) Adjusted EPS 21.3p (FY 16: 21.8p) Cash conversion 92% (FY 16: 101%) Net debt of £2,704m (6.7x Trading EBITDA) post refinancing in December Total dividends of 9.3p per share recommended In line with market expectations 6
P&L Items not allocated to segment reflect £m FY17 FY16 YoY pension and share based payments Trading Revenue 940 925 +2% Exceptional items mainly restructuring activities and provision for potential refund Trading EBITDA 403 402 - of customers with duplicate breakdown cover Items not allocated to a segment (20) (18) +11% Increase in depreciation and amortisation Depreciation & amortisation (67) (51) +31% due to elevated capex and roll out of first Exceptional operating items including impairment (32) (36) -11% phase of IT transformation spend Operating profit 284 297 -4% Increase in PBT primarily reflects the Net finance cost (184) (288) -36% decline in net finance cost due to the absence of one-off costs from the prior Profit before tax 100 9 +91 year refinancing Tax expense (26) (10) +160% Tax expense reflects current tax charge of Profit/(loss) for the period from continuing 74 (1) +75 £20m; effective tax rate of 22% operations Adjusted basic EPS of 21.3p, marginally Basic EPS – continuing operations 12.2 (0.2) +12.4 down on prior year due to increased Adj Basic EPS – continuing operations 21.3 21.8 -2% share capital 7
ROADSIDE ASSISTANCE FY17 FY16 H117 YoY FY on Trading Revenue +2.5% to £742m H1 Personal paid Members + 0.1% Personal Members (‘000s) 3,540 3,673 -4% 3,599 -2% • Retention 82% (FY 16: 81%) Average income per Member (£) 148 141 +5% 145 +2% • Average income +1.3% to £158 (net of Personal paid¹ Members (‘000s) 3,335 3,331 - 3,321 - 3.5% uplift in IPT) • Ancillary revenue +17% Average income per paid¹ Member (£) 158 156 +1% 157 +1% B2B customers down 2% due to Business customers (‘000s) 9,976 10,216 -2% 10,179 -2% decline in bank holdings Average income per business customer (£) 20 18 +11% 19 +5% • Average income +11% Breakdowns attended (‘000s)² 3,635 3,459 +5% 1,759 n/a Trading EBITDA +1.1% to £365m • Revenue growth partially offset by 5% increase in number of breakdowns attended 8
INSURANCE SERVICES Insurance Insurance Broking FY on Broking FY17 FY16 H117 YoY H1 Trading Revenue flat at £131m - lower core insurance and Total insurance 1,879 2,074 -9% 1,962 -4% Home Services offset by increased Financial Services policies (‘000s) Trading EBITDA down £2m to £76m Motor policies 594 592 - 572 +4% • Increased aggregator spend (‘000s) • Managed decline in Home Services policies Home insurance 857 899 -5% 891 -4% Growth in motor policies – first since 2008 policies (‘000s) • Successful retention and direct sales initiatives 70 63 +11% 67 +4% • Incremental policies through in-house underwriter Average income per policy (£) Financial Services Financial Credit cards, loans, savings and mortgages Services Performance to plan: 100k products sold Products (‘000s) 100 33 +203% 82 +22% In-house Underwriter Underwriter Motor launched January 2016 – progressing well Motor policies 115 na 25 +360% na (‘000s) Home launched August 2016 – on track 9
DRIVING SERVICES FY on Trading Revenue down 2% to £67m FY17 FY16 YoY H117 H1 Stabilisation of driving school franchisees reflects Driving 2,607 2,574 +1% 2,516 +4% Instructors improvements to product portfolio DriveTech police speed awareness courses down Trading EBITDA up £1m to £20m Cost savings support EBITDA 10
STRONG OPERATIONAL CASHFLOW £m FY17 FY16 Net cash flows before tax and exceptional items¹ 371 406 Tax, exceptional items and discontinued operations (26) (25) Net operating cash flows 345 381 Transformation capex (41) (54) Underlying IT capex (17) (18) Non-IT capex (13) (13) Capex accruals - 10 Capital repayment of finance lease net of disposal proceeds (25) (23) Proceeds from the sale of Ireland (net of cash disposed of) 99 - Other (6) (15) Net cash flows before refinancing, purchase of own shares, interest and dividends 342 268 Refinancing transactions (102) (183) Purchase of own shares 0 (22) Interest paid (143) (178) Dividend paid (55) (21) Net increase/(decrease) in cash and cash equivalents 42 (136) 11 ¹Continuing Operations
DEBT STRUCTURE Gross debt: £2,848m Leverage net debt/EBITDA 6.7x £700m Blended cost of debt 4.63% £570m following pay down of £106m of £500m £500m STF in August and refinance in £348m December £211m £175m Weighted average maturity just £55m under 5 years Senior Class A1 Class A4 Class A3 Class A5 Class A2 Class B2 Cash Run rate cash interest cover* Term notes notes notes notes notes notes above 3x Facility Class A FCF to DSCR** 3.3x Interest 5.00% 4.72% 3.78% 4.25% 2.88% 6.27% 5.50% rate (covenant > 1.35x) Effective 2019 2018 2019 2020 2022 2025 2022 Class B FCF to DSCR** 2.3X maturity (covenant > 1.0x) Note: Fixed interest rates with LIBOR hedged for Senior Term Facility Senior debt all investment grade *Run rate cash interest: Trading EBITDA 12 **Free cash flow: debt service cover ratio
PENSIONS IAS 19 Group pension deficit of £395m (31 Jan 16: £296m) • Driven by decline in corporate bond yields Anticipate significant increase in triennial review valuation of UK scheme deficit from £202m (31 March 2013) due to reduction in long term gilt yields Proposed move from final salary to modified career average (CARE) defined benefit • Mitigate the high cost to the business • Reduce our exposure to pension risks • Remain competitive within our industry • Create a more consistent pension offering across our employees Commenced 60 day consultation on 20 March and engaged with the IDU (the AA’s recognised union) If implemented, these changes would be taken into account in agreeing the deficit cash funding plan with the pension trustees Deficit reduction plan expected to be finalised by end of June 2017 13
FINANCIAL IMPLICATIONS OF THE TRANSFORMATION Investment in marketing and brand - £10m plus additional spend on the product proposition Post-transformation capex run rate £45m - IT c.£10m; property and equipment c.£10m; net vehicle costs c.£25m Restructuring costs - £45m over three years Cost savings - at least £40m in respect of the FY15 cost base from FY19 Progressive dividend A platform for growth Driving growth in revenue, earnings and free cash flow 14
STRATEGY
BUILDING MOMENTUM IN YEAR 2 OF TRANSFORMATION The Strategic Priorities The Time Line Strengthen the AA’s foundations Year 1 FY16 Stronger foundations delivered Revolutionise customer experience Year 2 FY17 Momentum for change created Reduce Group borrowings and the Year 3 FY18 Realise the transformation associated interest costs Year 4 FY19 Delivering growth Transforming the AA into the UK’s pre -eminent Membership organisation 16
IT SYSTEMS TRANSFORMATION (1) AA Help Support systems AA Help2 Installed new IT infrastructure and applications Throughout back office functions and call centres Service delivery and AA Help 2 New version of AA Help rolled out All patrols have new communications devices Insurer hosted pricing Implementation in next few months Will transform our pricing agility 17
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