Introduction to the AA – Investor day presentation

Introduction to the AA
Investor day presentation given on 20 April 2015
Date published on website: 8th June 2015
Important notice
2
This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities of AA plc or its subsidiaries (the
“Company”) nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract commitment or investment decision in relation to any such
matter nor does it constitute a recommendation regarding the securities of the Company. Investors and prospective investors in securities of the Company are required to make their own
independent investigation and appraisal of the business and financial condition of the Company and the nature of the securities. Any decision to purchase securities in the context of a proposed
offering of securities, if any, should be made solely on the basis of information contained in an offering circular or prospectus published in relation to such an offering.
Securities of the Company have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold within the
United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. No public offer of securities of the Company is being
made in the United States. Neither this document nor any copy of it may be taken or transmitted into the United States, its territories or possessions or distributed, directly or indirectly, in the
United States, its territories or possessions. Neither this document nor any copy of it may be taken or transmitted into Australia, Canada, Japan, Switzerland, New Zealand or the Republic of
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Zealand or South African securities law. The distribution of this document in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions. Subject to certain exceptions, securities of the Company may not be offered or sold within the United States, Canada, Australia, Japan,
Switzerland, New Zealand or the Republic of South Africa or to any national, resident or citizen of the United States, Canada, Australia, Japan, Switzerland, New Zealand or the Republic of
South Africa.
This presentation may include certain forward-looking statements, beliefs or opinions, including statements with respect to the Company’s business, financial condition and results of operations.
These statements, which contain the words “anticipate”, “believe”, “intend”, “estimate”, “expect”, “forecast” and words of similar meaning, reflect the Directors’ beliefs and expectations and
involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. No representation is made that any of these statements or forecasts will
come to pass or that any forecast results will be achieved. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by
these statements and forecasts. Past performance of the Company cannot be relied on as a guide to future performance. Forward-looking statements speak only as at the date of this
presentation and are also provided strictly on an estimate and approximate basis, further the Company expressly disclaims any obligations or undertaking to release any update of, or revisions
to, any forward-looking statements in this presentation. No statement in this presentation is intended to be a profit forecast. As a result, you are cautioned not to place any undue reliance on
such forward-looking statements.
Definitions
3
The following definitions apply throughout the presentation:
Trading EBITDA (earnings before interest, tax, depreciation and amortisation): excludes exceptional items,
share-based payments, acquisition earn-out costs and items not allocated to a segment.
Adjusted EPS: adjusts for one-off adjustments from financing transactions, exceptional items, share-based
payments, acquisition earn-out costs and applies tax at the Group’s effective rate.
Cash conversion: net cash flow from operating activities before tax and exceptional items divided by Trading
EBITDA.
Financial Year: the Financial Year ends on 31 January and represents the 12 month period ended 31 January.
Personal Members and Business Customers: measured as the number at the period end.
Introduction
Bob Mackenzie
Executive Chairman
Agenda
Topic
5
Start time
Lunch and Walk of Pride
12:30
Introduction
13:30
Financials
13:45
Roadside Assistance
14:00
Service delivery
14:45
AA Help demonstration
15:15
Coffee
15:45
Membership Services
16:00
Insurance
16:30
Close and Q&A
17:00
Drinks and Walk of Pride
17:45
Today’s Presenters
6
Bob Mackenzie
Executive Chairman
Martin Clarke
Chief Financial Officer
Previously Chairman and CEO of National
Car Parks and its subsidiary Green Flag
Previously Partner and Global Head
of Consumer for Permira
Prior to that CEO of Sea Containers ltd
and Chairman of PHS Group plc
Prior roles at Cinven, Silverfleet and
board member of New Look and Gala Coral
Mike Lloyd
Commercial Director
Janet Connor
Managing Director Insurance
Previously Partner at Oliver Wyman,
focused on Consumer Service businesses
in FS, Energy, Home, TV and Telecoms
Previously Managing Director at More Than
Graduated from Cambridge University
Fellow of the Institute of Directors
Oliver Kunc
Operations Director
Kirsty Ross
Membership Services Director
Previously Managing Director of Central
Heating Installations at British Gas
Previously Strategy and Innovations Director
Prior roles at Barclays, BA and L.E.K.
Graduated from Oxford University
MA Oxford University and MBA from LBS
Prior to that MD at Ageas-owned over-50s
broker RIAS from 2006 to 2011
Prior to that Principal at Oliver Wyman
Over 100 years, the AA has grown and expanded the
services provided to its Members
Founded by
motoring
enthusiasts
1905
Patrols on
bicycles and
uniforms
1907
1st AA
insurance
policy
1909
35% share
of 2m cars on
the road
1912
Launched
AA Routes
and
AA Stars
1939
Patrols
issued with
diagnostics
equipment
Launched
Roadwatch
and Relay
1949
New fleet
to enable
four wheel
patrols
1973
1992
Launched
AA Driving
School
2003
DriveTech
and Auto
Windshields
acquired
2009
2010
BSM
acquired,
launch Home
Services
7
IPO
2014
Today, the AA is a Membership business,
built around leadership in Roadside Assistance
Highlights
FY15 Trading
EBITDA %1
Segment
Presenting today
Roadside
Assistance
Presenting today
Insurance Services
£359m
£84m
Leading provider in
the UK
Leading insurance
broker
3.8m personal
Members and 9.6m
B2B customers
Offers Motor, Home,
Travel and other
specialist insurance
3,000 dedicated
patrols, reaching
10,000 breakdowns
per day
Significant cross-sell
to existing
customers
No 1 market share
(c40%)
Presenting today
Driving Services
£20m
Provides
educational driver
awareness courses,
fleet management
and driver training
Largest driving
school in the UK2
(under AA and BSM
brands)
Also includes Home
Services and
Financial Services
High personal
member retention
rate
1. Segment Trading EBITDA has been expressed as a % of Group Trading EBITDA excluding Head Office Costs
2. By total UK driving pupils.
Membership Services
Ireland
4%
18%
75%
8
Included in Roadside Assistance
1.5%
3%
£15m
Leading branded
breakdown provider
and leading
insurance broker in
Ireland
£7m
Publishing, Hotel
Services, Digital and
Car Essentials
Motoring Services
including BCA Car
Inspections, Signs,
Warranties and AA
Cars
Strong fundamentals, and a sustainable business
model in a market leading position
Market 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
3.8m personal Members, 9.6m B2B customers
#2 motor insurance broker, #1 driving school
Retention and loyalty
High Member retention, long-term B2B contracts
Significant revenues from repeat business
Operational excellence
3.5m breakdowns attended pa
Sophisticated deployment IP and services
Options for growth
Trusted brand lends to relevant extensions
20m marketing contacts, strong cross-sell ability
1. Y&R Brand Asset Valuator Survey (2014).
9
However, a number of challenges are apparent
Broad based under investment; eg in systems, brand and capabilities
Legacy of short-term decision making
Premium position not underpinned by continuous investment in proposition
IT platform, except patrol deployment, dated and constraining growth
Individual business unit optimisation restricts commercial opportunity
Limited and inflexible CRM systems
No investment in brand marketing for many years
Creates opportunity, but significant work to do
10
Strategic objectives and initiatives
Strategic objectives
11
Key initiatives
1
Invest in technology and people
Strengthen the AA as the pre-eminent
motoring services organisation in the UK
Increase roadside membership through
leading service and loyalty
Deliver a step-change in Digital capability
2
Reduce Group borrowings
and the associated interest costs
3
Revolutionise customer experience through
investing in and embracing new technologies
Evolve the Insurance Services and
Financial Services business models to
drive profitable growth
Leverage the brand to capture the
opportunity in the broader Motoring sector
Grow our B2B service offering through
greater integration with our partners
The last nine months have focused on laying the
groundwork for the new AA
Redesigned organisational structure, new executive team
IT roadmap laid out; started investment in core systems
Systematic capabilities and talent review
Property review underway
Investment in patrols and front line staff
Governance and controls in place
Premium listing and FTSE indexation confirmed
Refinancing complete, and plan to pay dividend by end FY16
Solid progress to date
12
Now entering period of investment and consolidation
Core business performance flat
Several years of under-investment by previous owners
Period of investment and consolidation to position AA for renewed growth
To be achieved through
– Investment in brand marketing
– Investment in IT systems and digital capability
– Restructuring and cost initiatives
– Investment in Membership growth and price
– New business initiatives
Refinancing to free up additional cashflow and facilitate dividends
Investment creates longer term opportunities
13
Investment in IT infrastructure will deliver
system upgrades and on-going benefits to the AA
De-risk infrastructure; operational stability and supported systems
More efficient systems; less manual processing; higher productivity
Flexibility and agility in commercial decision making
Stronger CRM capabilities; opportunity for digital propositions and cross-sell
Smoother, hassle-free experience for members
Enhanced deployment and patrol support
Enabler for further opex savings
14
Transformation investments
IT transformation to modernise the business and enhance customer experience
– Transformation capex of £128m over 3 years
– Impact on depreciation and opex
– Thereafter facilitates cost savings and reduced capex
Cost rationalisation expected to deliver £40m of cost savings in medium term
– Phase 1 underway and expected to deliver £8m in FY17
Short term uplift in capex to facilitate transformation
– Thereafter steady state IT capex of £10m pa (versus £30m pa)
£10m investment in brand marketing in FY16 and beyond
15
The new AA
Transform the AA into a modern, technologically led Membership business
Reinforce and develop our unrivalled brand building on our tradition of services
Enhance and broaden the range of products and services available to our Members
A membership club serving a
broader range of UK motorists’ needs in the digital age
16
Financials
Martin Clarke
Chief Financial Officer
FY15 performance headlines
Revenue up 1.0% to £983.5m
Trading EBITDA1 up 1.7% to £430.1m
Trading EBITDA margin up 30 bps to 43.7%
Adjusted EPS2 (before refinancing) of 23.3p (38.0p)
Cash conversion3 100% (102%)
Dividends of c£50m expected to be recommended in respect of FY16
18
Summary financials
(£m)
19
£968m
£974m
£984m
£430m
£423m
£395m
Revenue
Trading EBITDA
Trading
EBITDA margin
FY13A
FY14A
FY15A
40.8%
43.4%
43.7%
Capital expenditure
Change in working capital
£99m
£32m
Impact on cash flow2
£0.4m
£39m
(£3.7m)
FY13A
% of
revenue
FY14A
(£14.9m)
FY15A
FY13A
3.3%
4.0%
FY14A
FY15A
10.1%
Stable growth, high margins and low cash requirements
Working Capital defined as stock, plus amounts due from debtors, less amounts due to creditors, deferred income and provisions for future costs, excluding balances relating to corporate income taxation, pensions, finance
leases, deferred consideration and non-trading intercompany balances. Change in working capital derived from unaudited, non-statutory management information excluding the impact of exceptional items, restricted cash
and pensions
Significant cash flow generation with exceptional cash
conversion rates
20
Cash flow generation (£m)
102.4%
100.1%
£395m
£423m
£430m
FY13A
FY14A
FY15A
£371m
£433m
£431m
93.9%
Net cash flow from operating
activities before tax and
exceptional items3
Trading EBITDA¹
Cash Conversion²
Increasing EBITDA year on year
Favourable working capital dynamics as a function of upfront payments by customers
Historical financial performance has been remarkably
stable through the economic cycle
Trading revenue (£m)1
£979m
£931m
£971m
£974m
£984m
21
+£90m
+1.6% pa
£943m
£893m
FY09
FY10
FY11
FY12
FY13
FY14
FY15
£423m
£430m
Trading EBITDA (£m)
£395m
+£96m
+4.3% pa
£369m
£371m
£368m
FY09
FY10
FY11
FY12
FY13
FY14
FY15
37.4%
39.6%
39.3%
37.6%
40.7%
43.4%
43.7%
£334m
Margin
1. Trading revenue excludes certain transactions not related to ongoing segment performance and includes revenue from Insurance Underwriting activities which prior to FY13 included significant revenue from reinsurance
activity within the Acromas group.
Refinancing objectives
Reduce overall cost of debt
Increase average maturity
Simplify debt structure
Facilitate payment of dividends
Reduce cost of debt and enable dividend
22
Refinancing overview
Raise £200m new equity to efficiently pay off balance of PIK Notes
Issue £735m new high yield bonds to repay existing Class B Notes
Repay £209m of Senior Term Facility from existing cash in WBS
Impact
– Reduced leverage
– Reduced cash interest costs
– Facilitates payment of dividends in respect of FY16 and thereafter
23
FY15 debt structure
24
Fixed interest rates
(with LIBOR hedged for Senior Term Facility)
3.98%1
4.72%
6.27%
4.25%
3.78%
9.5%
9.5%
Effective
maturity
2019
2018
2025
2020
2019
2019
2019
Final
maturity
2019
2043
2043
2043
2043
2043
2019
Interest
rate
Highly leveraged capital structure
7.5 x gross debt / FY15 EBITDA
High interest charges on PIK
and B notes at 9.5%
Blended interest cost of 5.9%
Interest cover2 2.3x
£3,218m
£663m
£655m
£475m
£500m
£500m
£259m
£250m
£175m
Senior
Term
Facility
Class A1 Class A2 Class A3 Class A4
notes
notes
notes
notes
Blended interest rate
5.9% including PIK
5.7% excluding PIK
Class B PIK notes
notes
Cash
Notes
1 Senior Term Facility at LIBOR + 2%. As a result of
certain hedging arrangements LIBOR is effectively fixed
at 1.9797% until July 2018 and 2.9985% for the period
between August 2018 and January 2019, such that if the
Class A notes are rated “BBB-” or above, the maximum
rate of interest payable until 31July 2018 is 3.9797%
2 Trading EBITDA divided by cash finance costs
excluding any early repayment fees
Sources and uses
25
Sources
£m
Uses
£m
New Class B
735
PIK redemption
175
Equity placement
200
Class B redemption
655
Balance sheet cash used
209
STF partial redemption
209
Break costs on PIK
Total sources
1,144
4
Break costs on B notes
60
New issuance fees
25
PLC non-ring fenced cash
16
Total uses
Reduces interest charges and facilitates the paying of dividends
1,144
Resulting debt structure
26
Fixed interest rates
(with LIBOR hedged for Senior Term Facility)
3.98%1
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
Interest
rate
Leverage 6.8x gross debt / FY15
EBITDA
Lower blended cost of debt at
4.9%
Average maturity extended to
6 years
£2,914m
£735m
£454m
£475m
£500m
£500m
£250m
Senior
Term
Facility
Class A1
notes
Class A2
notes
Class A3
notes
Class A4
notes
£50m
New
Class B
notes
Cash
Note: 1 Senior Term Facility at LIBOR + 2%. As a result of
certain hedging arrangements LIBOR is effectively fixed
at 1.9797% until July 2018 and 2.9985% for the period
between August 2018 and January 2019, such that if the
Class A notes are rated “BBB-” or above, the maximum
rate of interest payable until 31 July 2018 is 3.9797%
Benefits of new capital structure
27
Reduced cash interest cost by £46.7m with corresponding EPS enhancement
Since IPO gross debt reduced by £470m
Near term maturities (pre 2020) reduced from 69% to 40% of outstanding debt
WBS dividend gating covenants simplified
– Removal of PIK notes sets gating covenant for dividends at <5.5x EBITDA / net senior debt
(currently within this at 5.1x)
Significant savings in interest charges and enabling meaningful dividend
Summary
The AA’s foundations are strong
FY16 a year of transition, consolidation and investment
Refinancing to create a stable medium-term capital structure
Dividends of c£50m expected to be recommended in respect of FY16
Progressive dividend policy thereafter
Strong cash flow will facilitate further substantial deleveraging in medium term
28
Roadside Assistance
Mike Lloyd
Commercial Director
At the core of the AA sits a robust and profitable
Member Roadside Assistance business…
30
Leader in Roadside Assistance
Large base of 3.8m Members
c40% market share in consumer market
High customer satisfaction
Customer loyalty leads to high renewals
Revenue and Trading EBITDA
728
713
697
FY13A
359
348
323
FY14A
Revenue
FY15A
Trading EBITDA
An additional 9.6 million end customers are supported
through our B2B relationships
Motor manufacturers
1
Fleet and leasing
2
Provides Breakdown cover
with new and used car
warranties sold by dealers
Also provides vehicle fault
and performance data
31
Banking: Added Value Accounts
3
Provides Breakdown cover to
SMEs, commercial fleets and
leasing companies, and
corporate-owned van fleets
Provides Breakdown cover
to Lloyds Banking Group and
TSB Added Value Accounts
(AVAs)
Other services eg risk
management
Together, B2C and B2B cover 13.4 million customers
Roadside Assistance is at the AA’s core, with strong
strategic advantages to build from…
Differentiation, high loyalty, economies of scale, high to replicate IP
Trusted brand
The UK’s most trusted commercial Brand1
Over 50% of households hold an AA product
Customer loyalty
Strong Membership retention
Average tenure 11 years, 800k > 20 years
Market leadership
3.8m personal Members, 9.6m through B2B
Over 3,000 dedicated patrols
Operational
excellence
Source: Y&R Brand Asset Valuator Survey (2014).
3.5m breakdowns attended pa
Unique services and deployment IP
32
Roadside Assistance is at the core of the AA’s brand,
which is trusted and iconic in the UK
UK’s 5 most trusted commercial brands1
1.
33
“Which?” Recommended Provider
75
72
2.
3.
69
4.
5.
The AA is still the mainstream breakdown
provider of choice. Which?, 2014
Source: Y&R Brand Asset Valuator survey in 2014, Which? breakdown service providers review 2014
1 Excludes charities and armed forces.
Roadside Membership levels have been maintained
between 3.5m and 4.5 m since the 1970s
34
AA Membership vs. GDP growth
AA Members (m)
UK GDP growth (%)
5.0
20%
4.0
15%
Membership run-up
and reduction following
demutualisation
3.0
2.0
10%
Oil
crisis
US savings
and loan crisis
Early 1980s
recession
Financial
crisis
5%
0%
1.0
0.0
-5%
1975
Sources: Internal AA data; ONS
1980
1985
1990
1995
2000
2005
2010
2015
The AA has leading consumer and B2B market shares,
and the largest number of breakdowns
Consumer market share
B2B market share
35
Breakdowns attended
3.5m
AA
40%
Others
19%
B2B
Consumer
Motor
Fleets
manufacturers
GF
14%
RAC
27%
Sources: Lake Research “Road market share tracker( Sep-14); Internal AA data; Company Websites (RAC / GF)
AVA
2.3m
0.7m
Operational excellence is delivered by unique
technology, vehicles and highly skilled patrols
Technical assets and expertise…
36
…and high levels of customer service
Unique deployment IP
Modern multi-vehicle service technology
80% of breakdowns repaired at roadside
AA “moment of truth” survey (%)
Skilled and experienced colleagues
Average of 11 years tenure with the AA
26%
57%
Overall experience
with the AA
20%
33%
68%
Service provided by Overall experience
Patrol
over the phone
Excellent
Source: AA Customer Survey
50%
Very Good
The Roadside business is facing two key linked
challenges, driven by historic investment horizons
1
2
Legacy of short-term decision
making – across key marketing
areas:
Broad-based under-investment eg in
systems, brand and capabilities
– Shorter-term pricing focus
– Marketing investment cuts
– Limited product and service
innovation pipeline
– IT platform and CRM systems dated
and constraining growth
– No brand marketing – direct response
focused
– Lack of digital investment
Fantastic underlying assets; brand, loyalty, leadership and operational scale
Past profit growth drivers have been stretched as far as they can
Need to reinvest to restart growth engine
37
The impact of the drivers of profit growth are being
seen in a decline in personal Members
Income per Member
AA share of voice in media
£135
38
Year on year change in
personal Members
0.0%
22%
£126
£119
11%
-2.3%
£113
-2.4%
4%
2%
-4.5%
FY12
FY13
FY14
FY15
2011
2012
2013
2014
FY12
FY13
FY14
FY15
Our priorities for the consumer Roadside business are
centered around three themes as a consequence
39
Trade better
Shorter-term
Drive immediate opportunities
to fund growth investment
Longer-term
More sophisticated value
management to drive strong
marketing returns
Drive growth
Drive growth in Members and
services per Member
Investment in innovation and
the AA brand
Change
New systems to improve speed to market, learning, flexibility
Add to commercial capabilities to deliver change
Supported by investment in CRM systems, service innovation and the brand
We are focused on a number of plans to deliver EBITDA
gains to re-invest in growth
Drive performance and deliver EBITDA
to fund growth investment
Key plans
1. Retention: 24 month retention improvement
plan to step-change renewal performance
2. New Business: Sales channel optimisation
applying strong analytics
3. Discounting: targeted reductions in discounting
4. Costs: reduce costs by shifting communication
from paper and calls into digital channels
40
The focus on retention is already driving improvement
Stay AA
re-launch in
March
41
Save rate up 4 percentage points
Discount rate down 6 percentage points
Feb
Mar
April
May
June
July
Discount rate
Aug
Sept
Oct
Nov
Dec
Save rate
Save rate up 4% points; discount rate down 6% points since re-launch
Jan
To stem the decline and drive growth in Member
42
numbers, we are investing in our proposition for Members
Re-establish growth in the Membership
by redeveloping the Membership proposition
Key plans
1. Brand: Invest in the AA’s brand through re-starting our
above-the-line advertising
2. Products: Innovation in products and services,
developing and implementing a new product pipeline
3. Membership: Differentiate being a Member
beyond breakdown integrating with broader AA
services
4. Digital: New services, self-service and sales
capabilities
5. Connected Car: Lead opportunities – accelerating
trials and developing connected propositions
We will be investing c£10m in the brand to improve
key commercial metrics over the coming years
AA media spend and share of voice
43
Plans
Broaden from only direct response marketing
Invest c£10m in above-the-line marketing
Additional capabilities created internally
Effectiveness analysis used to determine
optimal spend going forward
66%
57%
47%
Benefits
31%
21%
Market share of new business and
improved campaign efficiency
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
Rational and emotional impact on retention
Employee engagement
In parallel, we are investing £22m over three years to
transform our digital capabilities…
1
44
Self-service
2
From: No self-service,
phone and paper based
From: Old platform and
limited capabilities
To: Integrated multichannel service
Lowering contact
cost intelligently
Self-service
To: Best-in-class digital sales
capabilities
Sales
Step-change in digital
sales performance
AA digital
platform
4
Sales
Digital platform
From: Ageing platform
To: Flexible low cost platform
Lower maintenance, rapid
digital development
Connect and
services
3
Content and services
From: Broad, but fragmented content
To: UK’s digital motoring and travel hub
integrating Membership Services
Retention and cross-sell shift
We are ramping up our investment in
the Connected Car…
Membership in the modern world
45
Selected plans
Consumers
Manufacturers
Insurance
Fleet
Across four areas accelerated
proposition development and trials
Developments in each market area
support the others
New partnerships
eCall and bCall
Telematics
Operational R&D
Expanded operational investment in
technology and capabilities
Finally, work is underway to upgrade our commercial
capabilities, the organisation and core systems
46
Upgrade commercial capabilities,
the organisation and core systems
Key plans
1. CRM: new systems to help us talk to the right
Members with the right messages in the best channel
2. Digital platform: new digital platform to enable new
digital services, self-service and sales capabilities
3. Organisation: Investment in our people to strengthen
our capabilities
4. Analytical capabilities: Commercial MI and
improvements to enable us to drive stronger marketing
and growth investment returns
Our aim is to transform the consumer Roadside
business over the next three years…
47
Agile
Quicker to market with more targeted communications, offers and
investment in current and prospective Members
Innovative
Leading the market with stronger product and service innovation
Dedicated to
Members
Re-invigorated membership proposition supported by stronger
CRM and digital services
Strengthened core
assets
Strengthened brand, operation, people, systems and digital
platforms
Supports rebalanced and more sustainable sources of profit growth
Summary
Strong underlying core – key strategic advantages in this market
Past profit drivers not sustainable in the long-term (marketing cuts and pricing)
Key areas of trading being driven to generate profit to re-invest
Investment in brand, product and services, digital and Connected Car in plan
– Progressively landing these investments of the next 3 years
Expectation to halt, then reverse, decline in Membership numbers
– Move to a more balanced and sustainable profit growth engine
Built on unique assets – old and new
48
Service delivery
Oliver Kunc
Operations Director
AA Road operations – the largest in the UK
50
13.4m customers
3.5m breakdowns pa
Over 3,000 AA patrols
Breakdown patrols
Recovery patrols
Garage agents
2,032
452
c350
Motorcycle patrols
20
Fuel Assist
59
Key Assist
15
Dedicated technicians
163
Other
360
(incl. Battery Assist, Glass, Home Emergency and Inspections)
12 separate operations supported, both B2C and B2B
Breakdown
Recovery
51
Motorcycle breakdown
Motorcycle recovery
Fuel Assist
SORT
Key Assist
Accident management
Battery Assist
Glass
Vehicle inspections
Dealer audits
Motor manufacturers branded schemes including
dedicated programmes delivered by silver vans
c30 manufacturers supported - c67% of the
new car market…
…including unbranded vans
for key accounts
52
Strong position in Fleet and major Added Value Accounts
with Lloyds Banking Group and TSB
Added Value Accounts (AVAs)
Long term relationship with Lloyds Banking
Group and TSB
Providing various levels of roadside cover
to around 4m customers
Home emergency cover provided to
selected account holders
Fleets
Pay for use and insured roadside cover
provided to seven of top 10 UK leasing
companies
Direct operational fleets
Additional services include incident
management, accident /
risk management and HGV
53
Operations is driven by four key strengths
54
1
2
3
4
Exceptional
service
Deep
expertise
Constant
innovation
Commercial
focus
Key pillars to our continued success
1. Exceptional service
Centralised operations in Oldbury
55
Call handling
80% in 20 seconds
App usage
460 contact centre advisors
<1%
Average call time
<5 minutes
Call to arrive time
45 minutes
150 teleworkers
320 service advisors
New integrated app
growing in usage in 2015
Prestige brands
Volkswagen Group
Police
2. Deep expertise
Leicester training centre
56
Patrol repair rate
c80%
Dedicated B2B resource
Self-managed recovery fleet
Average patrol tenure
c140k jobs
11 years
Dedicated B2B resource
International network (ARC)
Fuel Assist
Key Assist
Battery Assist
Special operations,
Motorcycles, Glass, …
3. Constant innovation
Compact Recover Trailer (CRT)
57
Bosch diagnostic systems
Significant fleet upgrade
Best diagnostics tool in market
Speed of deployment
Multi-year deal / exclusivity
Safety improvements
Retrofitted
Flexibility eg motorbikes
Bluetooth connected
4. Commercial focus
58
Tight operational and cost control
Scale of business drives density of work,
and cost efficiencies
Proprietary deployment tool (AA Help)
optimises service / efficiency mix
Systems
and
controls
Flexibility to manage peaks in demand –
multi-skilled workforce and garaging
Service expertise drives strong “tail”
management
Expertise improves repair rate, reduces
“second resource” and improves fix time
The result is delighted customers…
Highest overall ratings…
59
… and ahead on key metrics
Which? “Recommended Provider” for 4
years running
75
Highest test score for a major provider
from ‘Which?’ every year since 2007
Highest scores for core performance (eg
call to arrive and Roadside repair rate)…
72
69
…and highest scores for customer
satisfaction across both the 2013 and
2014 surveys
The AA is still the mainstream
breakdown provider of choice.
Which?, 2014
Source: Which? breakdown service providers review 2014
…and ever more efficient delivery
60
Rolling 12 month inflation adjusted variable cost per case
Indexed to 100
102
100
98
96
94
92
90
88
86
84
Feb-11
Source: AA internal Data
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
There are a number of challenges…
CRM systems aging and require significant upgrade
Previously stretched fleet renewal cycles
Reduced investment in training in last 5 years
Strong focus in recent years on improving “as is”; not modernising
Investment to turn challenges into opportunities
61
…which we are turning into strategic opportunities
Investment in
infrastructure
Modernise our systems and fleet for efficiency
and member experience
Patrol 2020
Re-emphasise training and continue to improve service
by the roadside
Embrace digital
Revolutionise the member’s breakdown experience
through digital (mobile first)
Commercial
opportunities
Trial and grow specialist services using
our unique capabilities and infrastructure
Invest in
Connected Car
Invest in Connected Car to future-proof the operation
and continue to innovate
62
These will align with, and deepen, our strengths
63
1
2
3
4
Exceptional
service
Deep
experience
Constant
innovation
Commercial
focus
– Investment in front
end systems
– Upgrade patrol
training
– App development
– Drive growth of
existing commercial
areas
– Refresh patrol
infrastructure;
technology and fleet
– Recruitment and
retention focus to
identify and build
expertise
– Investment in
Connected Car
driven operating
model
– New B2B and B2C
services
Summary
Strong operating model – unique and at significant scale
Challenging market with recent underinvestment
Opportunity to strengthen core assets
Investment focused on further building out existing strengths
Modernisation is starting and will drive continuous evolution
Opportunity to improve service, efficiency and commercial focus
in the medium-term from a strong baseline
64
Membership Services
Kirsty Ross
Membership Services Director
Membership Services is a new team that generates
value for the AA in two distinct ways…
66
1
2
Value generated within own
P&L by selling Membership
products and services
Value generated for AA group
by strengthening the
Roadside Member proposition
Media
Motoring
Services
Member
acquisition
Significant opportunities for growth in both areas
Member
retention
AA Media generates c50% of Membership Services
EBITDA, across 4 key divisions
Publishing
c250 non-fiction titles
across atlases, maps,
driving, travel, leisure
and “AA Inspected”
guides (eg hotels)
UK and International
Hotel Services
Subscription income
from hotels, B&B,
caravan and campsites,
in return for an annual
AA inspector visit and
AA Guide profile
Consultancy and training
events
67
Digital
Commercial
Advertising revenue
from Route Planner
“Car Essentials”
products eg European
breakdown kits
Creation of digital
content eg eBooks
Roadwatch traffic advice
service
Sold through major
retailers, AA webshop
and Eurotunnel shop
AA Motoring Services comprises 5 divisions,
as well as new growth areas eg Tyres
BCA assured
15pt car
inspection
pre-auction
AA technicians
based at BCA
sites
New
Business
Signs
Sign production
and traffic
management for
events and
housing
developments
Warranties
Warranty products
eg Mechanical
Breakdown
Insurance
B2B2C via dealers
AA Cars
Used-car site, with
over 150k cars
and 2.5k dealers
Launched in
September 2013
AA Tyres: New mobile tyres business launched in April ’15
Service and Repair: eg Garage inspection program launched 2014
68
Inspections and
History Checks
154 point vehicle
safety inspection
Car data checks
covering eg
outstanding
finance, write-offs
Membership Services has strengths that are unique in
many of the sectors in which we compete
Stable and profitable portfolio of core Membership Services businesses
Wide ranging experience and capabilities – “right to play” in broader Motoring Services
AA reputation for trust unique in markets characterised by lack of transparency
Proprietary sales channels not available to competitors eg Roadside Members
Powerful historic position in navigation, travel and hotels
Positive halo benefit on AA brand reputation and member proposition
69
There are also historical challenges,
which we are addressing
Limited appetite to make investment with long-term paybacks in the past,
resulting in some businesses lacking in scale
Fragmented markets: need to be selective where and how we choose to operate
Business models not evolved in Digital Age, new competitors in some markets
Operated independently in the past, limiting connection to the broader
AA Membership base
70
The opportunities and priorities are clear and consistent
across Membership Services
1
2
3
Build on the AA’s
investment in digital
Leverage our
products and services
to enhance the
Member proposition
Build on the AA’s
reputation for trust to
grow in adjacent
markets
Modernise the core; strengthen the AA proposition; grow in new markets
71
Investment in digital is key to future growth;
some progress to date – eg Route Planner in AA app
Now integrated with core breakdown app
Simpler and cleaner layout and useability
More frequent engagement with the app
Future opportunity: over 50% of visitors to
AA website come to read Media content
Developments this year focused on Route Planner
traffic and hotels and travel content
72
1
Work is underway to review the role of our unique
assets in the Member proposition
73
2
Publishing
Hotels and Restaurants
Car Essentials
There is potential to expand our reach through the car
ownership lifecycle
74
3
• Inspiration and
research
• Valuation and
inspection
• Sale of previous car
• Finance
• Selection and
purchase
• Warranty
• etc…
• Traffic
• Route planning
and navigation
• Fuel pricing
• Consumables and
car care
• Car wash and clean /
valet
• Regular maintenance
c£60bn
• In-car connectivity
• Infotainment
• En-route activities
•
•
•
•
Service and MOT
Major repair work
Accidents
etc…
• Parking
• Alternative mobility
• etc…
The Motoring Services market is characterised by lack
of trust: an opportunity to leverage our brand
75
3
38% of consumers suspect there was a
problem with the used car they bought
“Have you ever bought a used car that you
later suspected had any of the following?”
Clocked
In an accident
Mechanical/
other fault
Outstanding
finance
83% of consumers are not confident in the
price they get at their garage
“The cost of Service and Repair was
higher than I expected”
59%
38%
23%
17%
No issue
Agree
Source: AA Populus Panel 2013 and 2014
Unsure
Disagree
Put together, attractive opportunities to expand into
adjacent Motoring Services markets
76
3
Key opportunities:
1
c£60bn broader Motoring Services
market – the AA currently focused
on <10% of spend
Used Car Sales
Tyres
Focus for today
Car Inspections
Garages – Services,
Maintenance and Repair
2
Unique strength of the
AA Brand in markets
with low customer trust
Dealer Solutions
…
Significant potential to build on existing assets in new markets
AA Cars is the 3rd largest used car dealer by stock,
with further headroom for growth
77
3
Largest used car dealers, by stock
AA Cars USPs
Selective dealer targeting
Autotrader
404,613
Free comprehensive Car History Check
Motors
255,774
Unique AA content
AA Cars
162,769
Free breakdown cover
Pistonheads
124,999
E&M
120,762
Driving
115,259
Sun Motors
112,600
Improve use of digital
RAC Cars
106,352
Drive vehicle inspections
What Car
Source: Company Websites
50,900
Selected growth plans
Open up new marketing channels
The UK tyre market is worth over £3bn pa,
and offers an attractive growth opportunity for the AA
78
3
Tyres are the 2nd most common
cause of breakdowns…
Battery
AA Tyres: product and business model
innovation
Market-leading proposition
17%
Tyre
– Competitive price; AA quality
– Online / mobile booking process
– Next day service; to home or work
15%
Engine
Alternator
And growing – as
many new cars
do not carry a
spare tyre
Starter motor
Clutch
Cost efficient and lean
– No fixed retail network
– Supply chain management
Lights (interior)
Agile delivery model
Spark plugs
– Collaboration with Mobile Tyre specialist
– Minimises execution risk…
– …whilst leveraging
AA assets
Fuel pump (electrical)
Cylinder head gasket
Other
0
Source: AA internal Data
10
20
30
Summary
Set up in 2014 to bring together the value-added services which the AA offers Members
and strengthen the Membership proposition
Two key business segments: Media and Motoring Services
Pursuing several additional opportunities, in line with broader AA membership strategy
– Implementing digital transformation
– Adding value to the Membership proposition
– Building on recent launches in adjacent markets
Powerful existing assets, strong brand presence, particularly in the motoring market
– A number of opportunities to drive significant growth in future
79
Insurance
Janet Connor
Managing Director Insurance
Formed in 1967, the AA is the 2nd largest home and
motor insurance broker
Core insurance revenue breakdown
Other (6%)
81
The AA’s current business model
Value-added broker model
Motor / Home insurance underwritten by panel
Motor
(55%)
Home
(39%)
Panel actively managed
Insurance strengthens Road Membership base
Scale in distribution
Core insurance policies in force
Product
Policies1
#9 personal lines broker in the UK by premium3
of which
Roadside
Members2
Motor
635k
63%
Home
907k
42%
#2 home insurance broker by policies in force4
#2 motor insurance broker by policies in force4
Sources: 1: AA Internal Data, for the 12 months to 31/01/15 2: % of Insurance Policy holders that are also Roadside Assistance Personal Members 3: Insurance Times 2014 survey 4: GFK February 2015
Insurance policies are underwritten by a broad panel
The AA’s panel model
Strong and diversified set of panel
members
Large and specialist players participate
for different customer segments
Insurer provides net rate, the AA then
creates a customer price
AA manages customer policy
adminstration
Insurer manages the claims process
82
Brand and customers attractive for panel
Strong brand, frequent customer contact
Long history, high awareness and
consideration
Extensive customer data and contact base
Attractive risk-profile of Members
Various commercial models across
c20 products outside motor and home
Outsourced – travel, pet, etc.
Referral – learner drivers
The AA has high brand Consideration
83
Brand Consideration1
Quote to Click conversion2
for switching Motor Insurance
by position on MoneySupermarket
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
AA
Admiral
Aviva
Direct Line
Churchill
Tesco
Morethan
RAC
Post Office
Hastings Direct
Sources: 1: GFK FRS Motor Dec 2014 of top 15 brands 2: eBenchmarkers Autumn 2014
1st
2nd
AA
3rd
Market
Exclusive Member and breakdown data will continue
to be at the heart of the AA insurance model
We understand our customers…
84
… facilitating customer engagement,
sales and retention
Used in relatively basic way today
3.8m
3.5m
personal members
breakdowns a year
Cross-sell from and into Roadside
Rates tailored for AA Members
Efficiency in direct marketing
Data protects profitability for insurer
partners
2.5m
20m
policy records
vehicle records
Opportunity to do more in future
Further integration with Roadside to
strengthen propositions and Membership
Commercial agility driven through more
sophisticated analytical techniques
Source: AA internal Data
However, the AA has been challenged by a number
of developments in the broader market …
Broader market development:
–
–
–
–
Importance of price comparison websites
Margin squeeze
Pace of regulatory change
Direct competition
Customer decisions driven more and more by price, and less by brand
Broker model challenged:
– Limited view of end-to-end profitability
– Adds cost into the value chain (already suffering from low margins)
AA currently lacks pricing agility in an increasingly dynamic marketplace
85
… leading to a decline over the last seven years
86
Motor insurance policies in force (shown since 2010)
c635k
today
c960k
in 2011
2011
2012
2013
2014
2015
Motor insurance stabilised in FY15 through investment in pricing and marketing
Source: AA Internal Data
The rise of Price Comparison Websites (PCWs) has led
to increased market commoditisation in personal lines
Market growth of online and PCWs1
Main factors driving Motor insurance
purchase decision2
% of new policies
100
Cost of policy
80
85%
60
Features of policy
40
15%
20
0
1997
2000
Other online
2003
2006
2009
2012
2015
Price Comparison Website (PCW)
Customers predominately buy through PCWs
Very high elasticity of demand – especially around top ranking positions
3/4 of customers shop around, and 1/3 switch at renewal for cheaper price
Sources: 1: FPK, Datamonitor, eBenchmarkers 2: GFK FRS Motor Dec 2014 – all policies, responses were all that apply
Previous
knowledge /
experience of
company
12%
87
Price is a key driver, however, brand Consideration is
still important
Share of new business vs. brand
Consideration in Motor
88
Opportunity for the AA
Increasing conversion
Brands
outgrowing
Consideration
Hastings
Share of new business (%)
Admiral
Brand strength under-utilised due to
pricing
However, extensive policy and customer
data does give the AA ability to compete
Aviva
Tesco
Future winners – AA well placed
Relationship and niche portfolio owners
Effective end-to-end claims management
Analytics focused
Brands that
underperform
Consideration
Brand Consideration (%)
Source: GFK FRS Motor Dec 2014
Providers not burdened by legacy systems
Insurance is a highly fragmented value chain,
the AA currently only plays as a traditional broker
89
Activities in personal lines insurance value chain
Lead
generation
Price
comparison
&
quotation
Sales
New
business
fulfilment
Policy
admin &
servicing
Pricing
&
underwriting
Claims
handling
Investment
&
solvency
Players:
Google
PCWs
Broker
Insurer
Market fragmentation leads to inefficiency – many providers competing to make a return
Market evolution has reduced the value added of the traditional broker model
PCWs here to stay – model may be constrained
The AA has the opportunity to remain a broker,
and also take on the role of the insurer
90
Activities in personal lines insurance value chain
Lead
generation
Price
comparison
&
quotation
Sales
New
business
fulfilment
Policy
admin &
servicing
Pricing
&
underwriting
Claims
handling
Investment
&
solvency
Players:
Google
PCWs
Broker
Insurer
Make better use of unique data to drive more agile and competitive pricing for Members
Broker will enable panel to price on own systems and make best use of data
Improve customer experience and lower claims costs
Broker PLUS Insurer model builds on the AA’s
experience as a broker, it does not replace it
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
Greenfield systems, new capabilities, combined with strong brand and
proprietary customer data, provides significant medium-term growth opportunity
91
A minority of solvency capital will be provided through
an in-house underwriter
92
Shared capital and risk model
c25% of capital provided in-house
Combining co-insurance/ re-insurance with in-house
capital gives balance of strategic control, cost and risk
Retains strategic benefits of 100% in-house model
Mitigates need to share intellectual property
Investment in solvency capital assures re-insurers,
supporting access to competitive rates
Mitigates risk and limits capital exposure in a cost effective manner
Using proprietary data with sophisticated analysis
93
Agile data, analysis and pricing model
Internal AA data
External Data
Unique breakdown and
Membership data
Consolidating broader data
sources that exist in the AA
New scoring models, also
supporting management
information and decision
making
Advanced
analytics
platform
Enrich analysis through
addition of external public and
government databases
Enhance with additional
vendor data sources to
provide unique blend and
granular insights
Competitive advantage through unique insights, risk-modelling and pricing agility
Insurer and broker separate with new agile systems
94
Broker and insurer systems setup
Broker IT system
Insurer IT system
AA quote and policy
administration system
AA insurer quotes
Customer
Data
enrichment
Broker
pricing
Data
enrichment
+
analytics
Insurer
pricing
Policy and claims
administration system
An experienced and proven team has been
recruited to lead the insurer
95
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
Summary
Significant scale and experience as motor and home insurance broker
Market conditions and model have led to customer decline
AA brand and proprietary customer data provide a competitive advantage that
has not been fully utilised to date
New broker PLUS insurer model designed to capitalise on opportunity through
more agile and competitive pricing
Capital sharing model mitigates risks while retaining strategic control
Experienced team building new capabilities and systems
96
Closing remarks
Bob Mackenzie
Executive Chairman
Closing remarks
A great, robust business, with strong assets at the core
Work on the new AA has begun, after a period of under-investment
Reshaped team and strategy for the future in place
Near term focus on delivering IT and digital transformation
Refinancing reduces interest cost by c£47m and enables payment of dividends
Period of investment now to return the AA to growth in the medium-term
98
Q&A
Appendix
The AA is the market leader in Driving Services
UK’s largest driving school and trainer
Two of the UK’s most recognised brands
c2,700 franchised instructors
c500k police courses delivered pa
Long-term contracts with police forces
Driving Schools
DriveTech
Driver awareness
schemes
Training on fleet
management
101
The clear leader across its markets
No 1
driving
school
with c11%
share
No 1
leader
in driver
awareness
schemes
No1
c40% share
of fleet
management
training
The AA has a small but profitable business in Ireland
as leader in Roadside Assistance and Insurance
102
Business in Ireland
Ireland revenue
Breakdown of total FY15 revenue (£39m)
Other
1%
Present in Ireland
since 1910
Insurance
47%
Resilient despite tough economic conditions
Profitability under pressure from FX rates
Roadside
Assistance
52%
Roadside Assistance delivered by mix of AA
Patrols and 3rd parties in remote areas
Insurance sourced from underwriting panel
Home Emergency launched in 2012 - the AA
‘creating the market’
Segment summary financials1
Roadside Assistance (£m)
Trading EBITDA
margin (%)
800
Insurance Services (£m)
46.3%
48.9%
49.3%
728
713
697
57.4%
60.0%
162
149
150
400
359
348
323
200
93
100
58.9%
142
89
84
50
0
0
FY13A
FY14A
Revenue
FY15A
Trading EBITDA
margin (%)
FY13A
Trading EBITDA
FY14A
Revenue
Driving Services (£m)
FY15A
Trading EBITDA
Ireland (£m)
19.2%
21.5%
27.7%
100
Trading EBITDA
margin (%)
33.9%
37.9%
38.2%
50
74
74
73
40
60
40
38
39
30
40
20
Trading EBITDA
margin (%)
200
600
80
103
20
16
14
20
15
13
15
10
0
0
FY13A
FY14A
Revenue
FY15A
Trading EBITDA
FY13A
FY14A
Revenue
FY15A
Trading EBITDA
1 During the year ended 31 January 2015, our Media Business was transferred from Driving Services to Roadside Assistance. As a result, the results for the year ended 31 January 2014 have been restated to show the
results of Media within the Roadside Assistance segment. The results for the year ended 31 January 2013 have not been restated.