AA : Interim Results - 26 Sep 2017

26 September 2017

AA plc Interim Results for the six months ended 31 July 2017

• Simon Breakwell has been appointed permanent Chief Executive Officer (CEO).

• Interim results in line with market expectations; Roadside robust; Insurance growing. Interim dividend maintained at 3.6 pence per share.

• Building on the transformation to date, we are focusing on the core Roadside and Insurance businesses and investing in them. EBITDA for FY 18 is expected to be between £390m and £395m.

• IT transformation delayed and a more measured approach to migration leading to additional capex of c£35m into FY 19.

• Further information on business review in first half of next year.

  Six months ended
  July 17	July 16	Change
  Trading revenue (£m)1,2	471	467	1%
  Trading EBITDA1,3 (£m)	193	192	1%
  Trading EBITDA1,4 margin (%)	41.0	41.1
  Operating profit1 (£m)	178	132	35%
  Group PBT1 (£m) Basic EPS1 (p)	80 10.5	48 6.2	67% 69%
  Adjusted basic EPS1,5(p)	10.2	10.3	-1%
  Cash conversion1,6 (%)	101	99	2%
  Interim dividend per share (p)	3.6	3.6	No change

  Financial and operational headlines

• Financial performance was robust in Roadside and strong in Insurance.

  • Trading revenue rose 1% to £471m reflecting growth in both insurance broking and underwriting. Roadside demonstrated its resilience, maintaining revenue, and despite the anticipated retention challenges, membership numbers rose slightly year-on-year.

  • Trading EBITDA up 1% to £193m reflecting gains in insurance broking as well as reduced Head Office costs. In Roadside Assistance, the increased costs related to erratic workload patterns and the relatively inflexible resourcing model held back profitability.

  • Robust cash conversion at 101% (H1 17: 99%).

• Key operational achievements.

  • Membership base rose to 3,325,000 (H1 17: 3,321,000) driven by a 13% increase in new members and stable retention.

  • We have retained or extended contracts with five of our major business-to-business (B2B) accounts and increased average income per customer; we continue to expand our service offering in this market.

  • Motor insurance policy numbers grew 8% to 616,000 (H1 17: 572,000). The in-house underwriter now has 321,000 (H1 17: 25,000) motor and home policies in force.

  • The new advertising campaign has been well received and driven a significant increase in awareness amongst our target segment.

  • 38% of members are registered for the App and it is used in 28% of breakdowns (FY17: 22%).

  • Car Genie, our connected car technology, was launched in the summer and has potential to pre- empt breakdowns in up to 30% of cases.

• The refinancing in July 2017, which included the use of cash to repay £98m of the Senior Term Facility, further reduced the cost of borrowings and extended the average maturity of our debt. Since

  the IPO in June 2014 we will have reduced the annual debt interest cost on our borrowings by £90m excluding the hedging costs.

• Changes to the UK defined benefit pension scheme resulted in a mitigation of the current and future liabilities while preserving the benefits of a defined benefit scheme for its members. This resulted in a one-off past service credit of £34m.

  Strategic headlines

  The stabilisation of the membership base and growth in motor insurance are testament to the success of the transformation to date.

  Simon Breakwell is reviewing the business to ensure that we strengthen the platform for sustainable growth, building on our foundations.

  We are sharpening our focus on those businesses within the Group where we see most value and future profit opportunity. We will continue to invest in the core Roadside Assistance business, including connected car, and in our Insurance businesses. We have identified the following immediate priorities:

• We will continue to focus on delivering excellent customer experience and high service levels. This will be achieved through investing in our people and facilities. We will strengthen the leadership team and focus on our call centres and back office systems. We believe this will improve customer experience.

• In addition, we will seek to address the inflexibility of our operations to improve the management of the impact of volatility on our performance thereby reducing costs.

• We are encouraged by the significant opportunities for growth within our Insurance businesses and expect to invest to take advantage of this.

• The final stages of the original IT transformation programme are under way. We expect to begin the transition of our renewing members to the new system from the end of this year. The delay to systems integration and a more measured approach to implementation means additional capitalised labour costs will be incurred into FY 19. This is expected to lead to additional capex of c£35m. We also recognise that in order to deliver an increasingly efficient operation and a distinctive membership proposition, additional IT investment will be required. We will provide further information in the first half of next year.

Outlook

We expect the investment required in the current financial year to result in EBITDA of between £390m and £395m assuming utilisation rates are consistent with recent years.

We remain highly confident in the future of the AA and believe that the transformation since the IPO provides us with a stronger, more resilient platform for future growth.

We believe new leadership; the prioritisation of customer experience; a more measured approach to the IT transformation; a more focused portfolio will enable the business to deliver an efficient operation and distinctive customer proposition. We will provide greater clarity of our plans for growth in the first half of next year.

The highly cash generative nature of the AA is unchanged. Further investment will be funded from operational cash flow. We expect free cash flow generation to drive the return of value to shareholders.

Dividends

The Board has declared that the interim dividend will be maintained at 3.6 pence per share. It will be paid on 10 November 2017 to shareholders on the register on 6 October 2017 with the ex-dividend date set for 5 October 2017.

John Leach, Chairman, said:

"The Board is very pleased that Simon Breakwell has agreed to take the role of CEO on a permanent basis. He has, since his appointment as Acting CEO, invested his full energy and skills into the Company and identified the means of strengthening it, reinvigorating our people, and rebuilding the culture under his leadership."

Simon Breakwell, CEO, said:

"I am delighted to be appointed CEO of this great company. As a member of the Board since September 2014, I have had time enough to recognise that it is indeed a great company with enormous strength at a fundamental level. A huge amount has also been done since the IPO to improve its performance and create a platform upon which to grow.

"I am now reviewing what the business needs to deliver its potential. I am confident that we have the financial strength to build the right team and equip it appropriately to deliver a distinctive business proposition which can generate growth. This will give us the best chance to realise the promise we have all recognised in the AA."

Enquiries
Investors Jill Sherratt Anna Gavrilova Zeeshan Maqbool	[phone]
Media (Headland) Howard Lee Francesca Tuckett Emma Ruttle	[phone]

Presentation

A presentation by Simon Breakwell, CEO, and Martin Clarke, CFO, will be held for analysts, investors and bond holders at 9am today at The LSE, 10 Paternoster Square, London, EC4M 7LS

• Dial-in to the presentation: Webcast audio dial in: [phone], Password: The AA

  • Replay except from the US: [phone]; from the US: 1 844 2308 058; Code: 6893830 #

• Link to the webcast: http://www.investis-live.com/aa/593814a6e8adb21200476673/fcas

Notes

1. Excludes discontinued operations.

2. Trading revenue excludes exceptional revenue item.

3. Earnings before interest, tax, depreciation and amortisation excluding exceptional items, items not allocated to a business segment and pension past service credit.

4. Trading EBITDA divided by trading revenue arising within operating segments.

5. Earnings per share excluding discontinued operations adjusted for a number of one-offs of which the largest are exceptional items, items not allocated to a segment, the write off of debt issue fees, pension past service credit, penalties on early repayment of debt and transfer from cash flow hedge reserve.

6. Net cash inflows from continuing operating activities before tax and exceptional items divided by Trading EBITDA.

   Performance and business review Group performance

   Six months ended		Year ended
   July 17	July 16	Jan 17
   Trading revenue1,2 (£m)	471	467	940
   Trading EBITDA1,3 (£m)	193	192	403
   Trading EBITDA1,4 margin (%)	41.0	41.1	42.9
   Net cash inflows from continuing operating activities before tax and exceptional items5 (£m)	194	190	371
   Cash conversion6 (%)	101	99	92
   Adjusted basic earnings per share7 (pence)	10.2	10.3	21.3

   Notes

7. Excludes discontinued operations.

8. Trading revenue excludes exceptional revenue item.

9. Earnings before interest, tax, depreciation and amortisation excluding exceptional items, items not allocated to a business segment and pension past service credit.

10. Trading EBITDA divided by trading revenue arising within operating segments.

11. Net cash inflows from continuing operating activities before tax and excluding cash flows from exceptional items.

12. Net cash inflows from continuing operating activities before tax and exceptional items divided by Trading EBITDA.

13. Earnings per share excluding discontinued operations adjusted for a number of one-offs of which the largest are exceptional items, items not allocated to a segment, the write off of debt issue fees, pension past service credit, penalties on early repayment of debt and transfer from cash flow hedge reserve.

14. Group Trading Revenue was £471m, up 1% on last year (H1 17: £467m) reflecting a strong performance in Insurance Services and the Underwriter while Roadside Assistance and Driving Services were flat.

    Roadside Assistance Trading Revenue (which is reported net of Insurance Premium Tax (IPT) and payments to third party underwriters) was flat at £370m (H1 17: £370m). This led to a 1% fall in the average income per member to £156. Despite the significant anticipated challenges to retention, we maintained it at 82%. With continued growth in new business, paid personal membership numbers were slightly up year-on-year, although marginally down on the last six-month period. Business customer numbers were down year-on-year, although up on the last six-month period. Average income per business customer was £20, up 5% year on year (H1 17:

    £19).

    Insurance Services Trading Revenue rose 3% to £66m (H1 17: £64m) as a result of strong growth in the motor book. Underwriting Revenue rose significantly to £3m (H1 17: £1m) since launch in January 2016, although this figure significantly understates the progress achieved to date due to the revenue deferral policy. Driving Services Trading Revenue was flat at £32m.

    Group Trading EBITDA rose 1% to £193m also reflecting strong performances in Insurance Services and Underwriting combined with Head Office cost savings which offset the lower Trading EBITDA from Roadside Assistance. The negative impact from increased costs relating to the erratic workload patterns, particularly in June and July, reversed a stable performance in the first four months of the period. As noted in our trading update, performance was negatively affected by a non-recurring charge of £2m (H1 17: £nil) for accumulated adjustments with a third party underwriter. However, we offset some of these negative impacts with improved cost management achieving a 7% reduction in Head Office costs to £28m (H1 17: £30m). As a result, the Trading EBITDA margin at 41.0% was only marginally lower than last year (H1 17: 41.1%).

    Operating profit was up significantly to £178m (H1 17: £132m) as a result of the pension past service credit and reduced exceptional costs. Amortisation and depreciation amounted to £33m (H1 17: £28m) with the increase related to the continuing IT investment.

    Exceptional items incurred in the six months ended 31 July 2017 were £4m (H1 17: £22m) relating to the continued business and IT transformation. Last year's exceptional charges included a provision of £10m to cover refunds and associated costs of those customers with duplicate Roadside cover. We are making good progress in the remediation programme and believe that this sum will prove to be sufficient.

    Items not allocated to a segment were £12m (H1 17: £10m) made up of share based payment charges of £5m and a pensions service cost of £7m.