AA : Pre-close trading update

8 August 2019

AA plc

Pre-close trading update

Building positive operational momentum; paid membership base stabilising,

on-track to deliver Trading EBITDA growth and strong cash flow generation in FY20

AA plc today publishes a trading update for the six-month period ended 31 July 2019. We expect to see Trading EBITDA at the half year to be ahead of last year. As with previous years, we expect performance to be weighted to the second half. Our paid membership base is stabilising, we remain on-track to deliver Trading EBITDA growth this year (FY20) in line with current market expectations and we expect to generate strong free cash flow growth in line with our guidance.

Simon Breakwell, Chief Executive Officer, commented: 'We are building positive operational momentum across the business as we continue to make significant progress on our strategic plan and on the exciting development of Smart Breakdown, which will further differentiate the AA. Our award-winning Roadside Assistance business continues to deliver outstanding customer service and we are pleased to report we are stabilising roadside membership. We reiterate our confidence that the roadside membership base will be broadly flat this year and will return to growth in the year to 31 January 2021. Our Insurance business is also performing strongly supported by the growth of our in-house underwriter.

'We are confident we will deliver Trading EBITDA growth and strong free cash flow generation this year and remain on course to meet our medium-term growth targets for FY23. Our focus continues to be on delivering long-term sustainable value for our shareholders.'

Roadside

B2B

Average income per business customer was up 5% in the period at £22and B2B customers were c.9.0m, in line with our expectations, principally due to our decision to not renew our contract with Groupe PSA. Our focus within B2B is on forming partnerships with OEMs which are aligned from both a strategic and commercial perspective.

Earlier this year, we announced a three-year contract with Admiral to offer AA Roadside Assistance to Admiral's 4.3 million UK motor insurance customers. The contract, which will commence in September 2019 is our first significant contract in the fast-growing insurance market and will see Admiral and the AA work together across a number of strategic initiatives aimed at enhancing the automotive ecosystem for all UK motorists.

B2C

As expected, paid personal memberships are stabilising, having fallen marginally during the period to c.3.19m and retention was broadly flat at c.80%. The rate of decline in the paid personal membership base of c.0.5% in the period compares favourably to the 1.1% rate of decline this time last year. Underpinned by outstanding customer service delivery, our confidence in the outlook for the paid personal membership base reflects: the benefit of additional and sustained marketing spend, including the recently-launched 'Red Dwarf' advertising campaign, increased cross-sell rates from our Insurance, Driving Schools and AA Cars platform, as well as targeted investment in our differentiated proposition. We continue to expect a broadly flat membership base this financial year (FY20) and a return to growth next year.

Average income per paid member rose to £165, up c.2%, since year end and is tracking broadly in line with inflation.

In June 2019, we were awarded top Which? Recommended Provider status for breakdown cover, achieving a top-scoring five stars within the 'fix at a roadside' category. Our service also won the top seven places in the Which? research for best manufacturer breakdown cover provider, a strong validation of our outstanding customer service delivery.

Insurance

Our Insurance business, comprising the broker, in-house underwriter and our financial services business, continues to perform in line with our expectations. During the period, the motor book grew by 10% to c.803,000 policies and the home book grew by 1.3% to c.841,000 policies, reflecting the continued strong growth of our in-house underwriter and the benefit of ongoing investment in systems including Insurer Hosted Pricing for the broker.

The on going investment in new business volumes, which have a lower average commission compared to the rest of the book led to a reduction in the average income per motor and home policy to £67 compared to £69 at year end.

Our in-house underwriter continues to deliver strong levels of profitable growth utilising our proprietary member data. During the period, our underwritten motor book increased by 18% to c.401,000 policies, driven principally by our non-member channel which is currently at c.138,000 policies. The underwritten home book increased by 17% to c.304,000 policies.

On-track to deliver growth in FY20, in line with guidance

We remain on-track to deliver Trading EBITDA growth this financial year (FY20) in line with current market expectations. As with prior years, we expect the Trading EBITDA split between H1 and H2 to be similar to last year, reflecting the inherent seasonality of our business.

Our business continues to deliver strong and predictable cash flow and we remain on track to generate free cash flow of c.£80m(pre-dividends and bond buy-back of £20m in February 2019) this year. As at 31 July 2019, we generated c.£40m of free cash flow, excluding the final dividend from last year of c.£8m and bond buy-back of £20m in February 2019.

We expect total capex (excluding finance leases net of disposals) spend this year to be in line with our guidance and is not expected to exceed £70m.

In June 2019, S&P Global Ratings reaffirmed the investment grade (BBB-) credit rating of our class A notes and non-investment grade (B+) credit rating of our class B2 note. Following the refinancing in July 2018, our next repayment of borrowings (other than the A3 note which can be fully funded by a committed forward starting senior facility of £200m) is not due until January 2022.

AA plc will publish its interim results on 24 September 2019.

Enquiries

Investors
Zeeshan Maqbool	[phone]
Media: FTI Consulting
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