TIDMAA.
RNS Number : 7732R
AA PLC
26 September 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 GBP390m and GBP395m.
-- IT transformation delayed and a more measured approach to
migration leading to additional capex of cGBP35m into FY 19.
-- Further information on business review in first half of next year.
Six months
ended
July July Change
17 16
Trading revenue (GBPm)(1,2) 471 467 1%
Trading EBITDA(1,3) (GBPm) 193 192 1%
Trading EBITDA(1,4) margin
(%) 41.0 41.1 <0%
Operating profit(1) (GBPm) 178 132 35%
Group PBT(1) (GBPm) 80 48 67%
Basic EPS(1) (p) 10.5 6.2 69%
Adjusted basic EPS(1,5)
(p) 10.2 10.3 -1%
Cash conversion(1,6) (%) 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.
o Trading revenue rose 1% to GBP471m 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.
o Trading EBITDA up 1% to GBP193m 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.
o Robust cash conversion at 101% (H1 17: 99%).
-- Key operational achievements.
o Membership base rose to 3,325,000 (H1 17: 3,321,000) driven by
a 13% increase in new members and stable retention.
o 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.
o 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.
o The new advertising campaign has been well received and driven
a significant increase in awareness amongst our target segment.
o 38% of members are registered for the App and it is used in
28% of breakdowns (FY17: 22%).
o 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 GBP98m 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 GBP90m 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 GBP34m.
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 cGBP35m. 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 GBP390m and GBP395m 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 +44 20 7395 7301
Media (Headland)
Howard Lee
Francesca Tuckett
Emma Ruttle +44 20 3805 4822
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: +44 20
3059 8125, Password: The AA
-- Replay except from the US: +44 121 260 4861; 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 July Jan 17
17 16
Trading revenue(1,2) (GBPm) 471 467 940
Trading EBITDA(1,3) (GBPm) 193 192 403
Trading EBITDA(1,4) margin
(%) 41.0 41.1 42.9
Net cash inflows from continuing
operating activities before
tax and exceptional items(5)
(GBPm) 194 190 371
Cash conversion(6) (%) 101 99 92
Adjusted basic earnings per
share(7) (pence) 10.2 10.3 21.3
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. Net cash inflows from continuing operating activities before
tax and excluding cash flows from exceptional items.
6. Net cash inflows from continuing operating activities before
tax and exceptional items divided by Trading EBITDA.
7. 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.
Group Trading Revenue was GBP471m, up 1% on last year (H1 17:
GBP467m) 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 GBP370m (H1 17: GBP370m). This led to a
1% fall in the average income per member to GBP156. 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 GBP20, up 5% year
on year (H1 17: GBP19).
Insurance Services Trading Revenue rose 3% to GBP66m (H1 17:
GBP64m) as a result of strong growth in the motor book.
Underwriting Revenue rose significantly to GBP3m (H1 17: GBP1m)
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
GBP32m.
Group Trading EBITDA rose 1% to GBP193m 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 GBP2m (H1 17: GBPnil) 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 GBP28m (H1 17:
GBP30m). 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 GBP178m (H1 17:
GBP132m) as a result of the pension past service credit and reduced
exceptional costs. Amortisation and depreciation amounted to GBP33m
(H1 17: GBP28m) with the increase related to the continuing IT
investment.
Exceptional items incurred in the six months ended 31 July 2017
were GBP4m (H1 17: GBP22m) relating to the continued business and
IT transformation. Last year's exceptional charges included a
provision of GBP10m 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 GBP12m (H1 17: GBP10m)
made up of share based payment charges of GBP5m and a pensions
service cost of GBP7m.
The restructuring of the UK pension scheme resulted in a 'past
service credit' of GBP34m which is a one-off benefit recognised in
the period. This comprised a GBP12m gain from closure of the Final
Salary sections of the AA UK scheme and a GBP22m gain from the
change in inflation indexation from RPI to CPI for the career
average salary scheme. Additional detail is provided below.
Profit before tax rose significantly to GBP80m (H1 17: GBP48m),
mainly as a result of the one off pension benefit and despite an
increase in finance costs to GBP98m (H1 17: GBP84m) as a result of
the refinancing in July which incurred GBP10m early repayment
penalties. The refinancing extended the maturity of our debt and
reduced our future interest costs. This is covered in more detail
below.
Profit after tax was up significantly to GBP64m (H1 17: GBP38m).
The tax charge was higher in the period at GBP16m (H1 17: GBP10m)
calculated on an effective rate of 20.0% (H1 17: 20.8%) and
included a transfer between current and deferred tax of GBP5m on
the one-off pension credit in respect of changes to the AA UK
pension scheme. We do not expect to be materially affected by the
new legislation restricting the deductibility of interest by
reference to UK EBITDA because the Group is almost entirely UK
based.
Basic earnings per share from continuing operations rose 69.4%
to 10.5p (H1 17: 6.2p).
Adjusted underlying profit after tax was GBP62m (H1 17: GBP63m)
and adjusted basic and diluted earnings per share were 10.2p (H1
17: 10.3p). The adjustments were for exceptional items of GBP4m;
items not allocated to a segment of GBP12m; penalties on early
repayment of debt of GBP10m; transfer from cash flow hedge reserve
of GBP5m; and refinancing debt issue fees write-off of GBP1m. These
were offset by a pension past service credit of GBP34m.
The AA has continued to generate high levels of operating cash
of GBP194m (H1 17: GBP190m), representing cash conversion of 101%
(H1 17: 99%), slightly higher than the prior period due to the
relative timing of working capital movements.
Business performance
Roadside Assistance
Six months
ended Year ended
July July
17 16 Jan 17
Trading revenue (GBPm) 370 370 742
Trading EBITDA (GBPm) 174 179 365
Trading EBITDA margin (%) 47.0 48.4 49.2
Paid personal Members(1) (000s) 3,325 3,321 3,335
Average income per paid personal
Members(1) (GBP) 156 157 158
Business customers(1) (000s) 10,016 10,179 9,976
Average income per business customer(1)
(GBP) 20 19 20
Number of breakdowns (000s) 1,761 1,759 3,635
1. Last 12 months
Roadside Assistance Trading Revenue was flat during the period
at GBP370m (H1 17: GBP370m). Whilst the membership base and gross
subscriptions were up, the benefit of these were offset by the
anticipated increase in IPT and a one-off payment to an
underwriting partner for our underwritten products such as
Breakdown Repair Cover.
We have done well to maintain our retention rate at 82%.
Retention is facing significant challenges including IPT rises; our
redress programme for customers affected by duplicate cover; the
introduction in April of renewal price transparency; and an
increase in newer members whom we initially tend to retain at lower
rates. We have however offset these impacts through continued
improvements to our proposition and retention activity. The
programme to resolve duplicate cover is well progressed but we
anticipate this will result in a majority of the 17,000 customers
we originally identified as affected giving up their membership. In
view of all these challenges, and the fact that we are yet to
benefit from the transition of renewal customers to the new IT
systems, we are encouraged by our resilience and the effectiveness
of the membership proposition.
We grew new members (as measured on a paid only basis) by 13%, a
strong performance against last year's high base and strong growth.
A wide-ranging programme of activity is improving our new
membership performance across many channels. In particular, our
digital sales channel is showing strong growth. We are also
benefiting from expanding into new marketing and sales channels to
drive further growth in new memberships. In this regard, our recent
advertising campaign has been well-received.
Paid personal memberships were 3,325,000 (H1 17: 3,321,000) up
slightly although just down on the FY17 figure of 3,335,000. Last
year's membership number included an additional 70,000 who paid for
membership, having received free membership in the previous year.
We are no longer benefiting from these free-to-paid renewals since
reducing free membership from December 2015. However, the growth in
new members has offset this.
Average income per member was 1% lower at GBP156 (H1 17:
GBP157). The fall in the period reflects our restraint in passing
through price increases much above IPT over the last two years; the
impact of one-off payments to our third-party underwriter; and the
impact of increasing new memberships in the overall paid membership
base. IPT increased by 3.5% in November 2015, by an additional 0.5%
in October 2016, and by a further 2.0% in June 2017. As revenue is
recognised over the 12 months of the life of the policy it takes
two years for IPT increases to fully flow through the year on year
comparison. Our success in growing new memberships in the past two
years has meant a larger proportion of the base is receiving
introductory discounts. While we have reduced the level of these
discounts, our success in growing the number of new memberships has
the effect of diluting income per member in the short term. These
effects were partly offset by ancillary sales which grew by 9% in
the period.
Business customer numbers were down 2% year-on-year at
10,016,000 (H1 17: 10,179,000) but up slightly on the FY17 figure
of 9,976,000. This was anticipated due to the continuing decline in
Added Value Accounts which have reduced substantially in recent
years across the banking sector. This was partially offset by an
increase in manufacturers' new vehicle numbers. We have retained or
extended a number of key contracts. Average income per customer at
GBP20 rose 5% in the period (H1 17: GBP19). We anticipate the
number of Added Value Accounts in the market will continue to
decline. The investments we have made in the last two years give us
a strong platform for expanding our services for business customers
in all markets and we are pursuing new opportunities.
Approximately 38% of our membership have registered for the App
and it is currently used in 28% of breakdowns (H1 17: 14%).
We continue to invest in advertising. Our most recent campaign,
launched in June, focuses on the customer segment which we believe
has the greatest potential of engaging with the benefits of
membership. These are the time-stretched, young families who join
the AA for the peace of mind it offers.
We launched our connected car product, Car Genie, in August
2017, following the successful trial which indicated that we should
be able to pre-empt up to one third of breakdowns. Our email
marketing campaign has had higher-than-expected take-up by members
and we anticipate this take-up to increase following the TV
advertising campaign launched in August. We are encouraged that the
opportunity to pre-empt breakdowns seen since the launch is in line
with what we saw in the trial. We believe increased engagement and
connectivity with members is positive and feedback indicates that
they value the additional benefits this offers, including locating
lost cars, reducing fuel consumption and helping members with
general car maintenance. We are investigating many options for the
future development of connectivity for personal members and
business customers.
While the overall number of breakdowns was flat and the key
metrics of repair rate (vehicles repaired at the roadside) and
single-task-completion (percentage of repairs done using only a
single resource) are at an 11-year high, costs have risen as
workload patterns have been erratic. Our own resource is
insufficiently flexible in varying workload patterns and, in order
to maintain service levels, we resort to third party garages which
adds costs and lowers profitability. We are reviewing options to
increase the flexibility of the patrol force with improvements to
our planning and forecasting to mitigate these costs in the
future.
Trading EBITDA fell by 3% to GBP174m (H1 17: GBP179m). This was
mainly the result of the increased costs of third-party garaging.
In addition, we incurred a one-off accumulated charge with a third
party underwriter for such products as Breakdown Repair Cover.
Insurance Services
Year
Six months ended ended
July July
17 16 Jan 17
Trading revenue (GBPm) 66 64 131
Trading EBITDA 38 35 76
Trading EBITDA margin (%) 57.6 54.7 58.0
Policy numbers in force(1)
(000s) 1,845 1,962 1,879
Motor policies in force (000s) 616 572 594
Home policies in force (000s) 844 891 857
Average income per policy(2)
(GBP) 72 67 70
Financial Services products(3)
(000s) 131 82 100
1 Rolling sales for the last 12 months including Home Services
but not Financial Services
2 Average income per policy includes Financial Services
revenue
3 Financial Services products includes the number of credit
cards activated, loans drawn down and savings accounts opened
This segment includes our insurance broker, financial services
and home emergency services businesses.
Trading Revenue for Insurance Services was up 3% to GBP66m
largely as a result of the 8% growth in motor book to 616,000
policies (H1 17: 572,000). We did well to achieve stable retention
despite the challenges of renewal pricing transparency from April,
the impact of Ogden on cost of premiums and therefore churn, and
IPT increases. In addition, we benefited from the success of our
in-house underwriter bringing in new business to the AA, and our
ability to price with more agility following the installation of
Insurer Hosted Pricing with two of our panel members (two more to
follow shortly) as well as our own underwriter. Home policies fell
5%, but we expect this trend to reverse during the second half of
the year as we are now following strategy we applied to motor
insurance which successfully reversed a decline in motor policies
that had been running for six years. Other insurance categories and
Home Services are also down as we continue to pull away from less
profitable business. As a result of this focus on greater
profitability, average income per policy was up 7% to GBP72 (H1 17:
GBP67).
At the end of July 2017, we on-boarded c131,000 Financial
Services customers across our credit cards, personal loans and
savings portfolio since the inception of our new financial services
partnership with Bank of Ireland in 2015. This represents a balance
sheet size of cGBP250m, match funded by AA originated deposits. The
revenue from these is included in total average revenue per policy
for the division mentioned above. Our partnership with Bank of
Ireland is working well with the inherent strength of the AA brand
and our marketing expertise continuing to support the business. We
are encouraged by the value that the AA membership base and brand
are bringing to the business with over 50% of the non-ISA savings
book held by members and 40% of our personal loans being written
for cars.
Trading EBITDA for Insurance Services rose 9% to GBP38m (H1 17:
GBP35m) as a result of the growth of our motor book, the focus on
growing more profitable business lines and disciplined cost
management. The Trading EBTIDA margin at 57.6% was up substantially
(H1 17: 54.7%).
Insurance Underwriting
Six months
ended Year ended
July July
17 16 Jan 17
Trading revenue (GBPm) 3 1 -
Trading EBITDA (GBPm) - (1) (1)
Motor policies(1) (000s) 200 25 115
Home policies(1) (000s) 121 - 25
1 Underwritten by our Insurance Underwriter
In the second year of its operation, the in-house insurance
underwriter has continued to make excellent progress with growth
well ahead of our target in both motor policies and home policies,
which were launched in August 2016. The combination of our brand
and our proprietary data gives us a marked advantage in both
markets. A substantial proportion of new policies are incremental
to the AA's insurance business as a whole and we are achieving
higher retention than our broker experiences with other panel
members due to our more competitive pricing. Trading Revenue (net
of the 80% reinsured element) of GBP3m to date understates the
strength of the performance as it is recognised over the life of
the policies.
As stated at the year end, the vertical integration of our
broker and underwriter gives rise to an accounting treatment where
the broker commission received and associated acquisition costs
will be recognised over the life of the policy along with the
underwriter premium. This does not affect overall profitability or
cash flows of the business but, rather, defers the benefit of the
strong growth of our Underwriter.
Trading EBITDA broke even, reversing last year's loss and we are
confident of the value this business is bringing into the
Group.
On 7 September 2017, the UK Ministry of Justice announced a
draft change to the law used to set the discount rate used in
calculating upfront personal injury payments (Ogden discount rate
reforms). The proposal could result in a rate change from the
current rate of -0.75% to a rate between 0% and 1%. It will not be
applied retrospectively. The proposal, which is currently in draft
form, is expected to take a few months to finalise prior to the
legislation being enacted. As a result of the uncertainty, the
Insurance Underwriter reserves as at 31 July 2017 have been
calculated based on the current Ogden rate of -0.75%.
This segment also includes the result of our historic
reinsurance business which remains flat year-on-year.
Driving Services
Six months
ended Year ended
July July
17 16 Jan 17
Trading revenue (GBPm) 32 32 67
Trading EBITDA (GBPm) 9 9 20
Trading EBITDA margin (%) 28.1 28.1 29.9
Number of driving instructors 2,669 2,516 2,607
Driving Services Trading Revenue was flat at GBP32m. The number
of instructors increased 6% due to improvements in our sales and
marketing approach. In addition, we are pleased with the progress
of our driver instructor training product which is a key source of
new instructors.
We are also encouraged by L Drive, our market-leading
telematics-based app for learners which we recently launched. This
enables us to continue to improve the learning-to-drive experience
for our pupils as well as building a platform for connected car.
Our longer term plans include offering more online self-serve
options for pupils, and building on the success of L Drive to
deepen the relationship our pupils have with the AA brand and
increase their engagement with our broader service offering.
DriveTech trading revenue was flat with police speed awareness
course volumes stable.
We are pleased that Driving Services Trading EBITDA was
maintained at GBP9m (H1 17: GBP9m).
Refinancing
In July 2017 we completed a further refinancing package,
allowing the use of some of our free cash flow to partially pay
down debt, which resulted in the extension of the maturity of debt
and further savings in annual interest costs.
AA Bond Co Limited, a subsidiary of the AA plc, issued a single
class of Sub-Class A6 Fixed Rate Notes under its multicurrency note
programme listed on the Irish Stock Exchange and used the proceeds
to redeem the remaining Sub-Class A1 and Sub-Class A4 Fixed Rate
Notes. At the same time, the AA group used available cash resources
to reduce by GBP98m its senior term debt and extended that facility
through the replacement of its existing Senior Term Facility with a
new Senior Term Facility. The new facility extends the maturity of
the senior term debt from 31 January 2019 to 31 July 2021.
We issued GBP250m of new Sub-Class A6 Fixed Rate Notes on 13
July 2017. The coupon of 2.75% is payable semi-annually in arrears
and their maturity is at 31 July 2023.
The proceeds were used to redeem all of the remaining GBP175m
4.72% Sub-Class A1 Fixed Rate Notes and GBP55m 3.78% Sub-Class A4
Fixed Rate Notes plus make-whole payments that were paid on the 31
July 2017.
A new Working Capital Facility of GBP75m, reduced from the
previous GBP150m facility, was put in place to
31 July 2021 on a reduced margin. This remains undrawn.
The extension in maturity of debt means that the next repayment
of borrowings is due in July 2020. The initial annual interest
saving is expected to be cGBP3m for the years ending 31 January
2018 and 31 January 2019, then will increase to an annual interest
saving of cGBP14m from the year ending 31 January 2020 as a result
of the expiry of the existing hedging arrangements allowing the use
of more of our free cash flow to pay down debt. In addition, there
will be a saving of fees amounting to GBP0.6m following the
reduction of the Working Capital Facility.
This refinancing was in line with our strategy to reduce overall
Group borrowings as well as the associated interest cost. Since the
IPO in June 2014 we will have reduced the annual debt interest cost
on our borrowings by GBP90m excluding the hedging costs.
Pensions
On 8 June 2017, we announced that the triennial review of the
AA's UK defined benefit pension scheme had been concluded and the
Trustee and the AA had come to agreement on the deficit funding
plan. This plan was based on the triennial valuation of the UK's
pension scheme deficit as at 31 March 2016 of GBP366m and compared
with the previous 2013 triennial deficit valuation of GBP202m. The
increase in the deficit is largely caused by the reduction in long
term gilt yields.
We have agreed a nine-year deficit recovery additional funding
plan with the Trustee, taking into account the continued funding of
the previous deficit. We will make additional contributions of:
-- GBP8m per annum for the next two years.
-- GBP11m from April 2019 for one year.
-- GBP11m plus inflation per annum from April 2020.
-- GBP13m from April 2021 for one year.
-- GBP13m plus inflation per annum from April 2022 to June 2026.
These will be incremental to the existing deficit reduction
contributions to the UK pension scheme of
GBP13m increasing with inflation through to 2038. The total
deficit reduction payment to the UK pension scheme in the 2018
financial year will be approximately GBP20m. The next triennial
actuarial review is scheduled for 31 March 2019.
The UK pension deficit under the defined benefit scheme was
GBP295m (H1 17: GBP547m), as reported under IAS 19.
The AA has also put into action the changes to the defined
benefit pension scheme which has Final Salary sections and a CARE
(career average revalued earnings) section. All employees that were
in the Final Salary section of the scheme were moved to the
existing CARE section to build up future defined benefit pension
benefits. Changes are also being made to the CARE section with the
inflation measure for pension indexation moved to CPI from RPI and
additional employee contributions of 1.5% of salary or a change to
accrual rates.
This approach has mitigated some of the recent increases in
pension service costs. Overall, the changes have reduced our
exposure to pension risks, increased our competitiveness within our
industry and provided for more consistent pension offering across
our existing defined benefit scheme members.
Board and senior management changes
On 1 August 2017, we announced that Bob Mackenzie had been
removed by the Board from his role as Executive Chairman, from his
other roles as a Director, and as an employee of the Company, for
gross misconduct, with immediate effect.
Simon Breakwell was then appointed Acting CEO and today we
announce his appointment as permanent CEO, expediting the split in
the roles of CEO and Chairman. Simon joined the AA in September
2014 as a Non-Executive Director. He has now stepped down from his
previous Committee roles.
The roles now held by the Board are as follows:
-- John Leach is Chairman. John joined the AA in June 2014 as a
Non-Executive Director and was appointed as Senior Independent
Director on 13 November 2014. John is also Chair of the Nomination
Committee and a member of the Risk and Audit Committees.
-- Andrew Blowers was appointed Senior Independent Director,
replacing John Leach in that role. Andrew joined the AA in
September 2014 as a Non-Executive Director and is Chair of the Risk
Committee and a member of the Audit and Nomination Committees. He
was co-opted to the Remuneration Committee whilst Simon Breakwell
was Acting CEO.
-- Suzi Williams joined the AA in October 2015. She has taken
over from Simon Breakwell as Chair of the Remuneration Committee
and is also on the Nomimation and Risk Committees.
-- Andrew Miller, who joined in June 2014, continues as Chair of
the Audit Committee and member of the Risk and Remuneration
Committees.
-- Martin Clarke continues as Chief Financial Officer.
Transformation
We have made substantial progress against the strategic
priorities set out at the time of our IPO just over three years
ago. These were to:
-- Strengthen the AA's foundations to modernise the platform to
become the pre-eminent Membership services organisation in the
UK.
-- Revolutionise customer experience through investment in the
Membership proposition and new technologies.
-- Reduce Group borrowings and the associated interest costs.
The IT investment which is in its final phase has strengthened
and modernised the AA's foundations and integrated technology
offering in many critical areas as detailed below:
-- AA Help 2, our service deployment platform, is improving the
interface for our call centres and patrols, reducing average call
handling time, training time and call-backs. It results in better
member experience through improved geolocation of the
breakdown.
-- Our digital platform is improving the attractiveness and
efficiency of the AA's products and processes by making them more
immediate, intuitive and relevant. The commercial website has
driven an increase in digital sales; the App is improving
efficiency and, MyAA will allow self-help to provide both improved
customer service and cost reductions.
-- Improved in-vehicle technology for patrols has enhanced their
efficiency, providing information ahead of and during a job,
reducing time spent on administration, improving record keeping and
sales processes for ancillary products.
-- Our new Policy Administration system is live and is being
used at scale for new Roadside membership sales in our call centres
and online.
-- The outbound marketing element of our new CRM system is live,
and allows us to segment and market to customers in a more
sophisticated, personalised and automated way, reaping rewards in
retaining our Roadside members.
-- Insurer Hosted Pricing allows our in-house Underwriter and
two other panel members to tailor prices using enhanced data and to
enable more dynamic and frequent price changes.
-- Back office systems have also been modernised.
Our marketing strategy and brand investment have clarified and
communicated the improved customer proposition, and are helping to
create a more sustainable approach to pricing:
-- The AA brand is as strong as ever. We remain the most
well-known breakdown assistance provider with 94% unprompted
awareness, compared with 85% and 71% for our peers, and we are
achieving a 13 percentage point lead over our nearest peer in
responses to the statement "is the best breakdown service in the
UK".
-- The new advertising campaign has been very well received with
a 34% increase in the number of people that are aware of our
advertising four weeks into the campaign. The focus on the segment
that is most responsive to the value of roadside assistance (the
busy, young family which is seeking the reliability and freedom
from anxiety which the AA can offer) is proving successful. As
planned, the campaign awareness reflects this younger (under 45),
female segment.
Car Genie, our connected car technology, has been launched with
the support of TV advertising. It will further enhance customer
experience by, among other features, notifying members of faults
and pre-empting breakdowns in line with our successful trial. It
will enable us to continually deepen our relationship with members
and customers and enhance our market leadership.
Our key roadside repair rates have remained compelling
throughout the transformation period; roadside service repair rates
are at an 11-year high.
The launch of our in-house Insurance Underwriter has supported
our insurance positioning with growth in motor policies in broking
business. The broker is also benefiting from the increased pricing
agility the new Insurer Hosted Pricing systems are enabling.
Business review
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. We expect to invest in the
in-house underwriter to begin 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
mean additional capitalised labour costs will be incurred into FY
19. This is expected to lead to additional capex of cGBP35m. 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 GBP390m and GBP395m 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.
Dividend
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.
Cash flow, net debt and liquidity
Net debt and covenants As at As at
31 July 31 July
2017 2016
GBPm GBPm
Senior Term Facility 250 454
Class A notes 1,950 1,725
Less: AA Intermediate Co Limited
group cash and cash equivalents (80) (122)
---------- ----------
Net Senior Secured Debt(1) 2,120 2,057
Class B2 notes 570 735
Finance lease obligations 56 51
---------- ----------
Net WBS Debt(2) 2,746 2,843
Less: AA plc Group cash and cash
equivalents(3) (58) (36)
---------- ----------
Net debt at period end 2,688 2,807
AA plc Trading EBITDA for the
last 12 months 404 416
---------- ----------
AA Intermediate Trading EBITDA
for the last 12 months(4) 406 419
---------- ----------
Net debt ratio(5) 6.7x 6.7x
Class B2 Leverage ratio(6) 6.8x 6.8x
Senior leverage ratio(7) 5.2x 4.9x
Class A Free Cash Flow: Debt
Service(8) 3.1x 3.4x
Class B Free Cash Flow: Debt
Service(9) 2.2x 2.3x
1 Principal amounts of the Senior Term Facility and Class A
notes less AA Intermediate Co Limited group cash and cash
equivalents
2 WBS debt represents the borrowings and cash balances within
the WBS structure headed by AA Intermediate Co Limited. This
includes the principal amounts of the Senior Term Facility, Class A
notes, Class B2 notes and finance leases less AA Intermediate Co
Limited group cash and cash equivalents
3 Total cash and cash equivalents for the Group excluding the
value reported as the AA Intermediate Co Limited group cash and
cash equivalents
4 AA Intermediate Co Limited group trading EBITDA including
discontinued operations as required by the debt documents
5 Ratio of Total Net Debt to AA plc Trading EBITDA for the last
12 months
6 Ratio of Net WBS Debt(2) to AA Intermediate Co Limited group
Trading EBITDA for the last 12 months
7 Ratio of Net Senior Secured Debt(1) to AA Intermediate Co
Limited group Trading EBITDA for the last 12 months
8 Ratio of last 12 months free cash flow to proforma debt
service relating to the Senior Term Facility and Class A notes.
9 Ratio of last 12 months free cash flow to proforma debt
service.
The above net debt as at 31 July 2016 did not include the
available and restricted cash balances in AA Ireland that were
classified as held for sale at the period end. Adjusting for the
net proceeds received for the sale of Ireland, net debt would have
been:
GBPm
Net debt at period end 2,807
Net proceeds from the sale of AA Ireland (130)
-------
Adjusted net debt 2,677
-------
Cash generation for the Group has remained strong with net cash
inflows from continuing operating activities before exceptional
items and tax of GBP194m (H1 17: GBP190m) and cash conversion of
101% (H1 17: 99%) in the six months ended 31 July 2017. Net debt to
Trading EBITDA for the last 12 months remained at 6.7 times and net
senior secured debt to Trading EBITDA stood at 5.2 times as at 31
July 2017.
Class A free cash flow to debt service was 3.1 times as at 31
July 2017 and Class B free cash flow to debt service was 2.2 times,
showing substantial headroom over the covenants which are set out
below.
The cash within the ring-fenced group headed by AA Mid Co
Limited is part of the whole business securitisation (WBS). A
dividend cannot be paid from the ring-fenced group until a number
of criteria have been met. These include:
-- Class A Free Cash Flow: Debt Service is above 1.35x.
-- Class B Free Cash Flow: Debt Service is above 1.00x.
-- The Senior Leverage ratio is less than 5.5x.
-- Finance charges: Trading EBITDA is above 2x where finance
charges relate to the ring-fenced group and are on a proforma basis
based on the Group's borrowings at the time of the test and exclude
the amortisation of debt issue fees and net finance expense on
defined benefit schemes.
-- The Group is also subject to a maximum cumulative dividend
payout related to the cumulative cash generation and cumulative net
income since the WBS was established, which are significantly
higher than the proposed dividends. These calculations are adjusted
for items required by the financing documents.
The Group has a cash balance of GBP138m, invested in AAA money
market funds, giving overnight access and high liquidity. The Group
has not drawn its Working Capital Facility and does not currently
envisage needing to do so.
The Group is required to hold segregated funds as 'restricted
cash' in order to satisfy regulatory requirements governing our
insurance regulated business. These restricted cash balances were
GBP25m at 31 July 2017 (H1 17: GBP21m excluding any restricted cash
balances shown as held for sale).
Principal risks and uncertainties
The Company's Principal Risks were detailed in the Annual Report
2017 and are summarised below:
1. Outstanding service
We are unable to maintain an outstanding service at a fair
price.
The AA's brand and its continued success rely on delivering
outstanding service that is superior to the rest of the market.
2. Roadside market share and margin
We are unable to maintain our market share and an ability to
command a price premium on our roadside services.
Competitors that provide roadside services at a lower price or a
different business model together with changes in car technology,
threaten our roadside revenues.
3. Growing the business
We are unable to grow the business in a manner that complements
and sustains the brand.
We may be unable to develop and grow new profitable business
products and lines that complement the customer experience and
which demonstrate standards and values that underlie our core
brand.
4. Insurance Broking business
Aggregators and price comparison sites will further damage the
insurance broker model.
The further growth of price comparison sites may continue to
transfer value from our insurance broking business.
5. Insurance Underwriting
Higher than anticipated claims costs.
There are risks of higher than expected claims frequency, higher
average cost per claim and catastrophic claims.
6. Regulatory environment
A changing regulatory environment may adversely affect our
activities.
The changing regulatory environment could cause currently
compliant services to become non-compliant with material
implications to customer offerings, pricing and profitability.
Failure to comply with regulatory obligations could result in
substantial fines. Changes in Government legislation or taxation
could impact the business model.
7. Business transformation
We are unable to successfully complete the essential business
transformation.
We must continue to transform the AA to achieve the required
efficient customer-centric services and to develop the business.
There is still much to do and the required acceleration of
improvements to process, embedded ways of working and culture,
inherently involve risks in a customer-facing service
environment.
8. IT transformation
We are unable to successfully deliver the essential IT
transformation.
An essential programme of renewal and enhancement of our IT
estate is in progress to address the risks to our brand and our
competitive capability. The continuing work is extensive and
complex. Given the scale and complexity, the programme involves
inherent risks to the timely delivery of this implementation.
9. Debt
The AA is a highly leveraged company with a substantial pension
fund, currently in deficit.
The Company is unable to repay or refinance its debt at an
acceptable price. The Company has a large pension scheme, currently
in deficit, whose assets and obligations are subject to future
variation from investment returns, longevity and other similar
factors.
10. Information security/cyber-crime
There is an increasing threat of cyber-attacks on
organisations.
Critical information is not available where and when it is
needed. The integrity of critical information is corrupted or the
confidentiality of commercially sensitive, private or customer
information is compromised by inappropriate disclosure. A serious
data breach occurs.
The Board has reviewed these principal risks for material
developments since the publication of the Annual Report 2017 and
the significant changes, including those that may impact the second
half performance, are detailed below:
-- Outstanding Service: While our repair rate and
single-task-completion are at an 11-year high and under-bonnet
times an 9-year low, our own resource this year has been
insufficiently flexible for varying workload patterns and, in order
to maintain service levels, we use third party garages. Our service
levels have not been compromised but drawing on third-party
garages, which are most expensive in busy periods, adds cost and,
as a result, profitability was lower. We are working to increase
the flexibility of the patrol force and to improve our planning and
forecasting to mitigate these costs in the future.
-- Roadside market share and margin: Personal paid Membership numbers have remained stable.
-- Regulatory environment:
o Regulatory changes that impact on this risk include
implementation of the FCA's Insurance Distribution Directive and
preparing for the Senior Managers and Certification Regime in
2018.
We have updated our renewal processes to comply with the new
requirements on price transparency.
o The new GDPR (General Data Protection Regulation) requirements
come into force in May 2018. A major multi-disciplinary project has
been put in place to prepare the AA for the changes to data
protection that will come into effect next year.
o Duplicate cover:We previously reported an issue we found
relating to duplicate breakdown cover. The remediation plan we
agreed with the FCA is on track to conclude this matter.
-- Business transformation: We will reinvest in people,
capabilities and culture. The focus will be on strengthening our
call centres, improving our analytical skill base, and achieving a
more flexible patrol force.
-- IT transformation: The business is reviewing the timelines
and priorities for the transformation of our systems as part of the
review of our strategy and its execution.
-- Debt:
o Debt refinancing: The A1 (4.7%) and A4 (3.8%) loan notes have
been repaid in full and replaced with A6 notes (2.75%). We incurred
GBP10m of penalty interest due to the refinancing. GBP98m of the
STF has been repaid out of free cash including the GBP24m held back
following the sale of AA Ireland. The repayment period of the STF
has been extended to July 2021. No debt is due to be repaid until
31 July 2020 (the A3 notes). In order for the Group to be able to
refinance its borrowings, it is a key assumption of the directors
that the Capital Markets remain open to the Group. The directors
continue to be confident that they will be able to refinance these
borrowings at an acceptable price. We will continue to make
additional repayments to reduce the debt burden as opportunities
for this arise although it is assumed there will be no further
refinancing for at least 18 months, the Group will continue to
delever through cash generated by the business.
o Pension scheme changes: A pension consultation process with
employees has been successfully completed and changes to the
pension schemes implemented, including closure of the final salary
pension scheme and move of all participants to the Career Average
Section, to mitigate future exposure on the pension liability risk.
The Group is still exposed to future variation from investment
returns, longevity and other similar factors. We have agreed a
nine-year deficit recovery additional funding plan with the
Trustee, taking into account the continued funding of the previous
deficit.
-- Information security/cyber-crime: While we have made further
progress enhancing our IT security and defences against
cyber-crime, the external environment continues to be increasingly
hostile to all businesses. A third party provider of services to
the AA had an incorrectly configured server and this exposed data
for 91,590 customers. The vulnerability in the third party's
systems was closed promptly when it was identified. An exercise was
undertaken to communicate with the affected customers and the
matter was reported to the ICO and the FCA, although it did not
arise in our regulated business..
The risks listed above do not comprise all those associated with
the AA, and are not set out in any order of priority. Additional
risks and uncertainties, not presently known to management or
currently deemed to be less material, may also have an adverse
effect on the business. The Group risk profile will evolve as
mitigating activities succeed in reducing the net risks over time,
or as new risks emerge.
Consolidated income statement
Six months ended Six
July 2017 months ended
GBPm July 2016
GBPm
Note
----------------------------------------------------- -------- ------------------ -------------------
Continuing operations
Revenue 2 471 457
Cost of sales (173) (168)
----------------------------------------------------- -------- ------------------ -------------------
Gross profit 298 289
Administrative & marketing expenses (120) (157)
Operating profit 178 132
----------------------------------------------------- -------- ------------------ -------------------
Trading EBITDA 2 193 192
Pension past service credit 4 34 -
Items not allocated to a segment 4 (12) (10)
Amortisation and depreciation (33) (28)
Exceptional items 4 (4) (22)
----------------------------------------------------- -------- ------------------ -------------------
Operating profit 178 132
Finance costs 5 (98) (84)
Profit before tax 80 48
Tax expense 6 (16) (10)
----------------------------------------------------- -------- ------------------ -------------------
Profit for the period from continuing operations 64 38
Discontinued operations
Profit for the period from discontinued operations 3 - 6
----------------------------------------------------- -------- ------------------ -------------------
Profit for the period 64 44
----------------------------------------------------- -------- ------------------ -------------------
Earnings per share from the profit for the period:
Six months ended Six
July 2017 months ended
pence July 2016
pence
Note
----------------------------------- -------- ------------------ ---------------
Basic from total operations 7 10.5 7.2
Basic from continuing operations 7 10.5 6.2
----------------------------------- -------- ------------------ ---------------
Diluted from total operations 7 10.5 7.2
Diluted from continuing operations 7 10.5 6.2
----------------------------------- -------- ------------------ ---------------
The accompanying notes are an integral part of these financial
statements.
Consolidated statement of comprehensive income
Six months ended Six
July 2017 months ended
GBPm July 2016
GBPm
Note
Profit for the period 64 44
----------------------------------------------------------------------- -------- ------------------ ---------------
Other comprehensive income on items that are or may be reclassified
to profit and loss in
subsequent years
Exchange differences on translation of foreign operations (1) 1
Effective portion of changes in fair value of cash flow hedges 8 (1)
Tax effect (1) -
----------------------------------------------------------------------- -------- ---------------
6 -
----------------------------------------------------------------------- -------- ------------------ ---------------
Other comprehensive income on items that are not to be reclassified
to profit and loss in
subsequent years
Remeasurement differences on defined benefit schemes 16 2 (330)
Tax effect - 56
----------------------------------------------------------------------- -------- ------------------ ---------------
2 (274)
----------------------------------------------------------------------- -------- ------------------ ---------------
Total other comprehensive income 8 (274)
----------------------------------------------------------------------- -------- ------------------ ---------------
Total comprehensive income for the period 72 (230)
----------------------------------------------------------------------- -------- ------------------ ---------------
The accompanying notes are an integral part of these financial
statements.
Consolidated statement of financial position
Note July July January 2017
2017 2016 GBPm
GBPm GBPm
Non-current assets
Goodwill and other intangible assets 8 1,291 1,276 1,283
Property, plant and equipment 9 113 117 131
Investments in joint ventures and associates 10 11 10
Deferred tax assets 56 107 62
1,470 1,511 1,486
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Current assets
Inventories 7 6 6
Trade and other receivables 10 200 169 195
Cash and cash equivalents 11 138 158 211
345 333 412
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Assets held for sale 3 - 93 -
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Total assets 1,815 1,937 1,898
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Current liabilities
Trade and other payables 12 (516) (502) (520)
Current tax payable (12) (11) (11)
Provisions 13 (10) (21) (19)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
(538) (534) (550)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Non-current liabilities
Borrowings and loans 14 (2,739) (2,922) (2,819)
Finance lease obligations (17) (21) (20)
Defined benefit pension scheme liabilities 16 (364) (622) (395)
Provisions (9) (7) (11)
Insurance technical provisions (19) (4) (16)
(3,148) (3,576) (3,261)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Liabilities held for sale 3 - (40) -
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Total liabilities (3,686) (4,150) (3,811)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Net liabilities (1,871) (2,213) (1,913)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Equity
Share capital 1 1 1
Share premium 17 404 401 403
Own shares (27) (24) (26)
Currency translation reserve - - 1
Cash flow hedge reserve 9 (11) 2
Retained earnings (2,258) (2,580) (2,294)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
Total equity attributable to equity holders of the
parent (1,871) (2,213) (1,913)
-------------------------------------------------------- ------ ----------------- --------------- ----------------
The accompanying notes are an integral part of these financial
statements.
Consolidated statement of changes in equity
Attributable to the equity holders of the parent
Currency Cash flow
Share Share translation hedge Retained
capital premium Own Shares reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------------ ------------ ------------ ------------- ----------- ------------ ----------
At 1 February
2016 1 399 (22) (1) (10) (2,323) (1,956)
---------------- ------------ ------------ ------------ ------------- ----------- ------------ ----------
Profit for the
period - - - - - 44 44
Other
comprehensive
income - - - 1 (1) (274) (274)
---------------- ------------ ------------ ------------ ------------- ----------- ------------ ------------
Total
comprehensive
income - - - 1 (1) (230) (230)
Dividends - - - - - (33) (33)
Issue of share
capital - 2 - - - - 2
Purchase of
own shares - - (2) - - - (2)
Share-based
payments - - - - - 6 6
At 31 July
2016 1 401 (24) - (11) (2,580) (2,213)
---------------- ------------ ------------ ------------ ------------- ----------- ------------ ------------
At 1 February
2017 1 403 (26) 1 2 (2,294) (1,913)
---------------- --- ---------------- ------ -------------------- ------------------ --------- -------------------
Profit for the
period - - - - - 64 64
Other
comprehensive
income - - - (1) 7 2 8
---------------- --- ---------------- ------ -------------------- ------------------ --------- -------------------
Total
comprehensive
income - - - (1) 7 66 72
Dividends - - - - - (35) (35)
Issue of share
capital - 1 - - - - 1
Purchase of
own shares - - (1) - - - (1)
Share-based
payments - - - - - 5 5
At 31 July
2017 1 404 (27) - 9 (2,258) (1,871)
---------------- --- ---------------- ------ -------------------- ------------------ --------- -------------------
The accompanying notes are an integral part of these financial
statements.
Consolidated statement of cash flows
Six Six
months ended months ended
July 2017 July 2016
Note GBPm GBPm
---------------------------------------------------------------- -------- --------------- ----------------------
Profit before tax from continuing and discontinued operations 80 55
Amortisation and depreciation 33 29
Net finance costs 98 84
Other adjustments to profit before tax 5 7
Working capital:
Increase in trade receivables (5) (20)
Increase in trade and other payables 9 33
(Decrease)/increase in provisions (8) 13
Difference between pension charge and cash contributions (34) (10)
---------------------------------------------------------------- -------- --------------- ----------------------
Total working capital adjustments (38) 16
---------------------------------------------------------------- -------- --------------- ----------------------
Net cash flows from operating activities before tax 178 191
Tax paid (11) (7)
---------------------------------------------------------------- -------- --------------- ----------------------
Net cash flows from operating activities 167 184
---------------------------------------------------------------- -------- --------------- ----------------------
Investing activities
Capital expenditure (26) (37)
Proceeds from sale of fixed assets 10 6
Acquisition and disposals, net of cash acquired or disposed of - (2)
Net cash flows used in investing activities (16) (33)
---------------------------------------------------------------- -------- --------------- ----------------------
Financing activities
Proceeds from borrowings 250 -
Issue costs on borrowings (6) -
Debt repayment premium and penalties (11) -
Repayment of borrowings (328) -
Refinancing transactions (95) -
Purchase of own shares - (2)
Interest paid on borrowings (72) (73)
Payment of finance lease capital (19) (20)
Payment of finance lease interest (3) (3)
Dividends paid (35) (33)
Net cash flows from financing activities (224) (131)
---------------------------------------------------------------- -------- --------------- ----------------------
Net (decrease)/increase in cash and cash equivalents (73) 20
Net foreign exchange differences - 2
Cash and cash equivalents at the beginning of the period 211 166
---------------------------------------------------------------- -------- --------------- ----------------------
Cash and cash equivalents 138 188
Cash transferred to asset held for sale 3 - (30)
---------------------------------------------------------------- -------- --------------- ----------------------
Cash and cash equivalents from continuing operations 11 138 158
---------------------------------------------------------------- -------- --------------- ----------------------
The cash flows from operating activities are stated net of cash
outflows relating to exceptional items of GBP16m (2016: GBP9m).
This relates to the cost of business transformation of GBP8m (2016:
GBP7m), non-recurring costs of IT system implementation and other
restructuring activities of GBP1m (2016: GBP1m), duplicate cover
reimbursements of GBP6m (2016: GBPnil) and onerous property
provision lease costs in respect of vacant properties of GBP1m
(2016: GBP1m).
Other adjustments to profit before tax relate to share based
payments of GBP5m (2016: GBP6m) and impairment of software GBPnil
(2016: GBP1m).
Operating cash flows from discontinued operations were GBPnil
(2016: GBP10m) (see note 3).
The accompanying notes are an integral part of these financial
statements.
Notes to the financial statements
1 Basis of preparation
a) Accounting policies
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
International Accounting Standard 34 'Interim Financial Reporting'
(IAS 34). Accordingly, they do not include all the information and
disclosures required in the annual financial statements and should
be read in conjunction with the Group's annual financial statements
as at 31 January 2017.
The accounting policies adopted in the preparation of the
interim condensed consolidated financial statements are consistent
with those followed in the preparation of the Group's annual
consolidated financial statements for the year ended 31 January
2017 which were prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union and
have been applied consistently across all periods.
These financial statements do not constitute statutory accounts
within the meaning of Section 435 of the Companies Act 2006.
Statutory accounts for the year to 31 January 2017 were approved by
the board of directors on 27 March 2017 and delivered to the
Registrar of Companies. The report of the auditors on those
accounts was unqualified and did not contain any statement under
Section 498 of the Companies Act 2006.
b) Going concern
The Group has long term contracts with a number of suppliers
across different industries and is strongly cash generative. The
Group's borrowings are long term in nature and in addition to the
cash balances at the reporting date the Group has agreed undrawn
credit facilities in place. The directors have considered this
along with the projected future cash flows and have concluded that
the Group has sufficient funds to continue trading for the
foreseeable future. Therefore, the interim condensed consolidated
financial statements have been prepared using the going concern
basis.
c) Segmental analysis
The nature of the Group's operations means that for management's
decision making and internal performance management the key
performance metric is earnings before interest, tax, depreciation
and amortisation (EBITDA) by trading segment which excludes certain
unallocated items (referred to as Trading EBITDA). Items not
allocated to a segment relate to transactions that do not form part
of the ongoing segment performance and include transactions which
are one-off in nature. Trading EBITDA is further analysed as part
of the segmental analysis in note 2. The segmental results for the
prior period exclude Ireland which is a discontinued operation, see
note 3.
d) Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries). Control is achieved where the Company has
rights to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over
the investee.
The results of subsidiaries acquired or disposed of during the
year are included in the consolidated income statement from the
effective date of acquisition or up to the effective date of
disposal, as appropriate. Where necessary, adjustments are made to
the financial statements of subsidiaries to bring the accounting
policies into line with those used by the Group. All intra-group
transactions, balances, income and expenses are eliminated on
consolidation.
e) Critical accounting estimates and judgements
The principal estimates and assumptions that have a risk of
causing an adjustment to the carrying value amounts of assets and
liabilities within the next financial period are consistent with
those disclosed in the financial statements for the year ended 31
January 2017.
2 Segmental information
Six Six
months ended months
July 2017 ended
GBPm July 2016
GBPm
--------------------------------------------- --------------- ------------
Revenue
Roadside Assistance 370 370
Insurance Services 66 64
Driving Services 32 32
Insurance Underwriting 3 1
--------------------------------------------- --------------- ------------
Trading Revenue 471 467
Exceptional revenue provision (see note 13) - (10)
--------------------------------------------- --------------- ------------
Total Revenue 471 457
--------------------------------------------- --------------- ------------
Trading EBITDA
Roadside Assistance 174 179
Insurance Services 38 35
Driving Services 9 9
Insurance Underwriting - (1)
Head Office costs (28) (30)
Total Trading EBITDA 193 192
Items not allocated to a segment (12) (10)
Pension past service credit 34 -
Amortisation and depreciation (33) (28)
Exceptional items (4) (22)
Operating profit 178 132
Net finance costs (98) (84)
--------------------------------------------- --------------- ------------
Profit before tax from continuing operations 80 48
--------------------------------------------- --------------- ------------
For management purposes, the Group is organised into business
units based on their products and services. The Group has five
reportable operating segments as follows:
-- Roadside Assistance: This segment is the largest part of the
AA business. The AA provides a nationwide service, sending patrols
out to members stranded at the side of the road, repairing their
vehicles where possible and getting them back on their way quickly
and safely.
-- Insurance Services: This segment includes the insurance
brokerage activities of the AA, primarily in arranging motor and
home insurance for customers, its home emergency activities and its
intermediary financial services business.
-- Driving Services: This segment contains the AA Driving School
and the British School of Motoring, which are the two largest
driving schools in the UK, as well as AA DriveTech, which provides
driver training and educative programmes.
-- Insurance Underwriting: This segment consists of the
insurance underwriting and reinsurance activities of the AA.
-- Head Office costs: This segment includes IT, property,
finance and other back office system support functions.
Segment performance is primarily evaluated using the Group's key
performance measures of Trading revenue and Trading EBITDA.
Trading revenue is revenue on a continuing basis adjusted for
exceptional items and business disposed of. Trading EBITDA is
profit after tax on a continuing basis as reported, adjusted for
depreciation, amortisation, exceptional operating items, items not
allocated to a segment, net finance costs, tax expense and business
disposed of. This better reflects the Group's underlying
performance.
Depreciation, amortisation, exceptional items, net finance
costs, past service credit, and tax expense are not allocated to
individual segments as they are managed on a group basis.
Segmental information is not presented for items in the
Statement of Financial Position as management do not view this
information on a segmental basis.
3 Assets and liabilities held for sale and discontinued operations
At the prior period end, the Ireland business segment was held
for sale and has been reported as a discontinued operation as it
represents a separate geographical area and there was a plan to
dispose of the whole of the Irish operation. The entities being
sold were AA Ireland Limited and its subsidiary undertakings. The
sale was completed on the 11 August 2016.
a) Assets of disposal group classified as held for sale
July 2017 July 2016
GBPm GBPm
------------------------------ ------------ -----------
Goodwill - 26
Other intangible assets - 9
Property, plant and equipment - 3
Trade and other receivables - 25
Cash and cash equivalents - 30
------------------------------ ------------ -----------
Total - 93
------------------------------ ------------ -----------
b) Liabilities of disposal group classified as held for sale
July 2017 July 2016
GBPm GBPm
------------------------- ------------ -----------
Trade and other payables - 40
------------------------- ------------ -----------
Total - 40
------------------------- ------------ -----------
c) Results of discontinued operations
Six Six
months ended months ended
July 2017 July 2016
GBPm GBPm
---------------------------------------------------- ---------------- ---------------
Revenue - 23
Expenses - (15)
---------------------------------------------------- ---------------- ---------------
Trading EBITDA - 8
Depreciation - (1)
---------------------------------------------------- ---------------- ---------------
Operating profit - 7
Tax - (1)
---------------------------------------------------- ---------------- ---------------
Profit for the period from discontinued operations - 6
---------------------------------------------------- ---------------- ---------------
d) Net cash flows of discontinued operations
Six Six
months ended months ended
July 2017 July 2016
GBPm GBPm
--------------------- ---------------- ---------------
Operating cash flow - 10
Investing cash flow - (3)
Total cash flows - 7
--------------------- ---------------- ---------------
4 Items not allocated to a segment and exceptional items
Six Six
months months
ended ended
July 2017 July 2016
GBPm GBPm
----------------------------------------- ------------ ------------
Share-based payments 5 6
Difference between cash contributions
to the pension scheme for ongoing
service and the calculated annual
service costs 7 4
----------------------------------------- ------------ ------------
Total items not allocated to a segment 12 10
----------------------------------------- ------------ ------------
Pension past service credit (34) -
Exceptional items 4 22
----------------------------------------- ------------ ------------
Exceptional items incurred in the six months ended 31 July 2017
of GBP4m included GBP6m relating to business transformation and
GBP1m relating to IT systems transformation, being partially offset
by GBP2m income from an onerous property and GBP1m profit on
disposal of fixed assets.
In the prior period, exceptional items of GBP22m included an
estimated GBP10m provision for revenue refunds to customers who may
have duplicate breakdown cover, GBP9m relating to business
transformation, GBP1m impairment of intangible assets and the
remainder of GBP2m relating to IT transformation, loss on disposal
of fixed assets and other restructuring activities.
The pension past service credit of GBP34m is a one-off gain from
the pension scheme restructuring (see note 16).
5 Finance costs
Six Six
months ended months ended
July 2017 July 2016
GBPm GBPm
------------------------------------------------------------------------------ --------------- ---------------
Interest on external borrowings 68 74
Early repayment penalty 10 -
Finance charges payable under finance leases 4 3
------------------------------------------------------------------------------ --------------- ---------------
Total cash finance costs 82 77
------------------------------------------------------------------------------ --------------- ---------------
Amortisation of debt issue fees 6 2
Transfer from cash flow hedge reserve for extinguishment of cash flow hedge 5 -
Net finance expense on defined benefit pension schemes 5 5
Total non-cash finance costs 16 7
------------------------------------------------------------------------------ --------------- ---------------
Total finance costs 98 84
------------------------------------------------------------------------------ --------------- ---------------
During the period, the Group repaid Class A1 notes of GBP175m
(2016: GBPnil) and Class A4 notes of GBP55m (2016: GBPnil). As a
result, the Group incurred an early repayment penalty of GBP10m
(2016: GBPnil).
During the period, there were GBP1m (2016: GBPnil) of amortised
debt issue fees immediately written off following the
refinancing.
During the period, the Group also repaid GBP98m (2016: GBPnil)
of the Senior Term Facility, and transferred the GBP5m (2016:
GBPnil) fair value of the cash flow hedges related to the repayment
to the income statement.
6 Tax
The major components of the income tax expense are:
Six Six
months ended months ended
July 2017 July 2016
GBPm GBPm
------------------------------------------------------------------------------------ --------------- ---------------
Consolidated income statement
Current income tax
Current income tax charge 11 10
11 10
------------------------------------------------------------------------------------ --------------- ---------------
Deferred tax
Relating to origination and reversal of temporary differences - current year 5 -
5 -
------------------------------------------------------------------------------------ --------------- ---------------
Tax charge in the income statement at an effective rate of 20.0% (July 2016: 20.8%) 16 10
------------------------------------------------------------------------------------ --------------- ---------------
Tax for the period has been calculated by applying the forecast
effective tax rate for the full year, excluding some exceptional
items, to the profit before tax result for the period.
UK deferred tax has been recognised at the enacted rates of 17%
and 19% depending on the expected reversal profile (2016: enacted
rates 18% and 19%). The UK corporation tax rate will be reducing to
17% (2016: 18%) in April 2020.
The government has announced that legislation restricting the
deductibility of interest by reference to UK EBITDA will be
introduced with effect from 1 April 2017. This legislation has not
been enacted as at the balance sheet date.
As the AA plc group is largely UK based, the Group is expected
to utilise the "group ratio" in determining the impact of any
interest disallowance. This is not expected to result in a material
disallowance of interest.
7 Earnings per share
Basic earnings per share amounts are calculated by dividing net
profit for the period attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the
period.
Six Six
months ended months ended
July 2017 July 2016
--------------------------------------------------------- --------------- ---------------
Basic earnings per share:
Profit after tax from total operations (GBPm) 64 44
Weighted average number of shares outstanding (millions) 610 609
---------------------------------------------------------
Basic earnings per share from total operations (pence) 10.5 7.2
--------------------------------------------------------- --------------- ---------------
Six Six
months ended months ended
July 2017 July 2016
------------------------------------------------------------ --------------- ---------------
Basic earnings per share:
Profit after tax from continuing operations (GBPm) 64 38
Weighted average number of shares outstanding (millions) 610 609
------------------------------------------------------------
Basic earnings per share from continuing operations (pence) 10.5 6.2
------------------------------------------------------------ --------------- ---------------
For diluted earnings per share, the weighted average number of
ordinary shares is adjusted to assume conversion of all dilutive
potential ordinary shares.
As at 31 July 2017 and 31 July 2016, based on average market
value of ordinary shares for the period, the MVP shares were not
dilutive. Under the current SIP, shares are purchased monthly at
market value and are therefore not dilutive.
There are no further classes of share that are dilutive as at 31
July 2017.
Six Six
months ended months ended
July 2017 July 2016
--------------------------------------------------------------- --------------- ---------------
Weighted average number of ordinary shares in issue (millions) 610 609
Potentially dilutive shares (millions) - -
--------------------------------------------------------------- --------------- ---------------
Weighted average number of diluted ordinary shares (millions) 610 609
---------------------------------------------------------------- --------------- ---------------
Diluted earnings per share from total operations (pence) 10.5 7.2
---------------------------------------------------------------- --------------- ---------------
Diluted earnings per share from continuing operations (pence) 10.5 6.2
---------------------------------------------------------------- --------------- ---------------
Reconciliation of reported earnings per share to adjusted
earnings per share:
Six Six
months ended months ended
July 2017 July 2016
GBPm GBPm
------------------------------------------------------------------------------------ --------------- ---------------
Profit after tax from continuing operations as reported 64 38
Adjusted for:
Exceptional items (see note 4) 4 22
Items not allocated to a segment (see note 4) 12 10
Pension past service credit (see note 4) (34) -
Penalties on early repayment of debt (see note 5) 10 -
Transfer from cash flow hedge reserve for extinguishment of cash flow hedge (see 5
note 5) -
Write off of debt issue fees following refinancing 1 -
Tax expense (see note 6) 16 10
Underlying profit before tax 78 80
Tax at the effective rate of 20.0% (July 2016: 20.8%) (16) (17)
Underlying profit from continuing operations 62 63
------------------------------------------------------------------------------------ --------------- ---------------
Adjusted basic earnings per share from continuing operations (pence) 10.2 10.3
Adjusted diluted earnings per share from continuing operations (pence) 10.2 10.3
------------------------------------------------------------------------------------ --------------- ---------------
8 Goodwill and other intangible assets
Goodwill Software Total
GBPm GBPm GBPm
----------------------------------- ---------- ---------- -------
Cost
At 1 February 2016 1,199 191 1,390
Additions - 26 26
Transfer to assets held for sale (26) (14) (40)
Exchange adjustment - 1 1
At 31 July 2016 1,173 204 1,377
----------------------------------- ---------- ---------- -------
At 1 February 2017 1,173 203 1,376
Additions - 23 23
At 31 July 2017 1,173 226 1,399
----------------------------------- ---------- ---------- -------
Amortisation and impairment
At 1 February 2016 - 92 92
Amortisation - 12 12
Impairment - 1 1
Transfer to assets held for sale - (5) (5)
Exchange adjustment - 1 1
At 31 July 2016 - 101 101
----------------------------------- ---------- ---------- -------
At 1 February 2017 - 93 93
Amortisation - 15 15
At 31 July 2017 - 108 108
----------------------------------- ---------- ---------- -------
Net book value
At 31 July 2017 1,173 118 1,291
At 31 July 2016 1,173 103 1,276
At 31 January 2017 1,173 110 1,283
----------------------------------- ---------- ---------- -------
9 Property, plant and equipment
Freehold Land & Long Leasehold
Buildings Land & Buildings Vehicles Plant & equipment Total
GBPm GBPm GBPm GBPm GBPm
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
Cost or valuation
At 1 February 2016 24 10 89 125 248
Additions - - 11 9 20
Disposals - - (12) - (12)
Transfer to assets held for sale - (3) (6) (8) (17)
Exchange adjustments - - 1 - 1
----------------- ------------------- ---------- ------------------- -------
At 31 July 2016 24 7 83 126 240
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
At 1 February 2017 24 7 98 90 219
Additions - - 6 3 9
Disposal - - (12) - (12)
At 31 July 2017 24 7 92 93 216
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
Depreciation and impairment
At 1 February 2016 7 4 22 93 126
Charge for the period - 1 11 4 16
Disposals - - (6) - (6)
Transfer to assets held for sale - (2) (4) (8) (14)
Exchange adjustments - - 1 - 1
----------------- ------------------- ---------- ------------------- -------
At 31 July 2016 7 3 24 89 123
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
At 1 February 2017 7 3 26 52 88
Charge for the period 1 - 11 6 18
Disposals - - (3) - (3)
At 31 July 2017 8 3 34 58 103
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
Net book value
At 31 July 2017 16 4 58 35 113
At 31 July 2016 17 4 59 37 117
At 31 January 2017 17 4 72 38 131
--------------------------------- ----------------- ------------------- ---------- ------------------- -------
10 Trade and other receivables
July July January 2017
2017 2016 GBPm
GBPm GBPm
---------------------------------------- ------- ------- --------------
Current
Trade receivables 140 136 141
Prepayments and accrued income 28 25 22
Reinsurers share of insurance liability 28 4 28
Other receivables 4 4 4
---------------------------------------- ------- ------- --------------
200 169 195
---------------------------------------- ------- ------- --------------
11 Cash and cash equivalents
July July January 2017
2017 2016 GBPm
GBPm GBPm
------------------------------------------------------ ------- ------- --------------
Ring-fenced cash at bank and in hand - available 73 114 128
Ring-fenced cash at bank and in hand - restricted 7 8 8
Non ring-fenced cash at bank and in hand - available 40 23 60
Non ring-fenced cash at bank and in hand - restricted 18 13 15
------------------------------------------------------ ------- ------- --------------
Cash and cash equivalents 138 158 211
------------------------------------------------------ ------- ------- --------------
Ring-fenced cash and cash equivalents relate to cash held by AA
Intermediate Co Limited and its subsidiaries. There are
restrictions on dividends that can be paid to AA plc until certain
debt to EBITDA and cash flow criteria are met.
Cash at bank and in hand - restricted includes GBP25m (July
2016: GBP21m, January 2017: GBP23m) held by and on behalf of the
Group's insurance businesses which are subject to contractual or
regulatory restrictions. These amounts are not readily available to
be used for other purposes within the Group.
12 Trade and other payables
July July January 2017
2017 2016 GBPm
GBPm GBPm
----------------------------------------------------------- ------- ------- --------------
Current
Trade payables 105 105 97
Other taxes and social security costs 10 25 27
Accruals 63 68 57
Deferred income 247 241 241
Provision for unearned premiums in insurance underwriting 22 5 18
Other payables 29 27 33
Interest payable 1 1 -
Obligations under finance lease agreements 39 30 47
----------------------------------------------------------- ------- ------- --------------
516 502 520
----------------------------------------------------------- ------- ------- --------------
13 Provisions (current)
July July January 2017
2017 2016 GBPm
GBPm GBPm
-------------------------- ------- ------- --------------
Duplicate breakdown cover 4 10 10
Property leases 6 6 6
Restructuring - 5 3
10 21 19
-------------------------- ------- ------- --------------
During the period, GBP6m of the duplicate breakdown cover
provision was utilised (July 2016: nil) and no additional provision
was made (July 2016: GBP10m).
14 Borrowings and loans
July July January 2017
2017 2016 GBPm
GBPm GBPm
------------------------------- ------- ------- --------------
Borrowings (see note 15) 2,722 2,895 2,799
Interest rate swap derivatives 17 27 20
------------------------------- ------- ------- --------------
2,739 2,922 2,819
------------------------------- ------- ------- --------------
15 Borrowings
Total as Total as Total as
Amortised at 31 at 31 July at 31
Expected Issue issue July 2016 January
maturity Interest Principal costs costs 2017 GBPm 2017
date rate GBPm GBPm GBPm GBPm GBPm
------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------ -----------
Senior
Term 31 July
Facility 2021 5.71% 250 (4) 3 249 453 347
Class A1 31 July
notes 2018 - - - - - 474 175
Class A2 31 July
notes 2025 6.27% 500 (1) - 499 499 499
Class A3 31 July
notes 2020 4.25% 500 (3) 2 499 498 499
Class A4 31 July
notes 2019 - - - - - 249 55
Class A5 31 January
notes 2022 2.88% 700 (37) 4 667 - 664
Class A6 31 July
notes 2023 2.75% 250 (4) - 246 - -
Class B2 31 July
notes 2022 5.50% 570 (16) 8 562 722 560
4.52% 2,770 (65) 17 2,722 2,895 2,799
------------------------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
At 31 July 2017, the Senior Term Facility carried interest at a
rate of LIBOR plus a margin of 1.75%. The variable element has been
fully hedged using matching interest rate swap arrangements which
fix LIBOR at 3.96% until 31 July 2018 and 6.67% until 31 January
2019. All other borrowings have fixed interest rates. The weighted
average interest rate for all borrowings of 4.52% has been
calculated using the effective interest rate and carrying values on
31 July 2017.
Senior Class
term Class Class Class Class Class A6 Class
facility A1 A2 A3 A4 A5 GBPm B2 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- ------- ------- ------- -------- ------- ------- ------- -------
As at 1
February
2017 348 175 500 500 55 700 - 570 2,848
Issue/ repayment
date:
13 July
2017 (98) (175) - - (55) - 250 - (78)
Total 250 - 500 500 - 700 250 570 2,770
--------------------- ----------- ------- ------- ------- -------- ------- ------- ------- -------
In order to show the Group's net borrowings, the notes and the
issue costs have been offset. Issue costs are shown net of any
premium on the issue of borrowings. Interest rate swaps are
recognised in the Balance Sheet at fair value at the period end
(see note 14).
All of the Class A notes and Senior Term Facility are secured by
first ranking security in respect of the undertakings and assets of
AA Intermediate Co Limited and its subsidiaries. The Class A
facility security over the AA Intermediate Co Limited group's
assets ranks ahead of the Class B2 notes. The Class B2 notes have
first ranking security over the assets of the immediate parent
undertaking of the AA Intermediate Co Limited group, AA Mid Co
Limited. AA Mid Co Limited group can only pay a dividend when
certain net debt to EBITDA and cash flow criteria are met.
The Class B2 notes have an initial period to 31 July 2018 when
any voluntary repayment would incur a make-whole payment and incur
all remaining interest due to 31 July 2018. After this period,
there is a further two year period when any voluntary repayment
would be made at a fixed premium based on the date of redemption.
Any voluntary early repayments of the Class A notes would incur a
make-whole payment of all interest due to expected maturity date,
except the Class A5 and Class A6 notes which can be settled without
penalty within 3 months and 2 months respectively of the expected
maturity date.
On 13 July 2017, the Group issued GBP250m of Class A6 notes at
an interest rate of 2.75%. GBP4m of costs associated with the issue
of the A6 notes were capitalised. This consisted of GBP1m of
premium and GBP3m of new issue fees.
From the proceeds of the A6 notes, the Group repaid the
remaining GBP175m of A1 notes incurring an interest penalty of
GBP7m and GBP55m of A4 notes incurring an interest penalty of
GBP3m. In line with the Group accounting policy, this was accounted
for as an extinguishment of debt and therefore issue costs
associated with the A1 and A4 notes have been written off but
totalled under GBP1m.
Following the sale of the Irish business during the prior year
(see note 3), we held back GBP24m from the net proceeds in
ring-fenced available cash to be used for potential future
acquisitions or repayment of debt. On 13 July 2017 the GBP24m was
used as part of a repayment of GBP98m of the Senior Term Facility.
This was treated as an extinguishment of debt and therefore the
issue costs of just under GBP1m associated with the repayment were
written off. The balance of the STF was renegotiated and its
maturity extended to 31 July 2021. This was treated as a
modification and therefore the fees associated with this, which
were under GBP1m, were capitalised.
On the 13 July 2017 the working capital facility was reduced
from GBP150m to GBP75m. The fees associated with this were under
GBP1m and were written off.
In order to comply with the requirements of the Class A notes,
we are required to maintain the Class A free cash flow to debt
service ratio in excess of 1.35x and the senior leverage ratio
below 5.5x (see cash flow, net debt and liquidity section). The
Class B2 notes require us to maintain the Class B2 free cash flow
to debt service ratio in excess of 1x (see cash flow, net debt and
liquidity section).
The Class A and Class B2 notes therefore place restrictions on
the Group's ability to upstream cash from the key trading companies
to pay external dividends and finance activities unconstrained by
the restrictions embedded in the debts.
The Class A notes only permit the release of cash providing the
senior leverage ratio after payment is less than 5.5x and providing
there is sufficient excess cash flow to cover the payment. The
Class B2 notes restrictions only permit the release of cash
providing the fixed charge cover ratio after payment is more than
2:1 and providing that the aggregate payments do not exceed 50% of
the accumulated consolidated net income.
16 Defined benefit pension scheme liabilities
The Group operates two funded defined benefit pension schemes:
the AA UK Pension Scheme (AAUK) and the AA Ireland Pension Scheme
(AAI). The assets of the schemes are held separately from those of
the Group in independently administered funds. The AAUK scheme has
final salary sections and a Career Average Revalued Earnings (CARE)
section. The CARE section provides for benefits to accrue on an
average salary basis. Since 2004, new entrants to the AAUK scheme
accrue benefits in the CARE section but the Scheme was closed to
new entrants from 1 October 2016, although employees retain an
eligibility to join provided they are within the first year of
their employment with the Group and had started employment before 1
October 2016. On 1 July 2017 accrual ceased under the final salary
sections and members were moved to the CARE section for future
accrual of benefits. This preserved defined benefits for current
scheme members. In addition, pension indexation in the CARE section
will now be based on CPI inflation, rather than RPI inflation, from
April 2018 onwards. The AAI scheme is closed to new entrants and
future accrual of benefits. The Group also operates an unfunded
post-retirement Private Medical Plan (AAPMP), which is treated as a
defined benefit scheme and it is not open to new entrants. During
the prior year, following the sale of the Irish business by the
Group (see note 3), AA Corporation Limited, a UK subsidiary of the
Group, became the sponsor of the AAI scheme.
In June 2017 the Group completed the AAUK scheme triennial
valuation as at 31 March 2016 agreeing a deficit of GBP366m with
the pension trustees. The Group has committed to paying an
additional GBP8m per annum from July 2017 to March 2019, GBP11m per
annum from April 2019 to March 2021 uplifted in line with RPI from
1 April 2020 and GBP13m per annum from April 2021 to June 2026
uplifted in line with RPI from 1 April 2022 annually. Following the
November 2013 triennial valuation the Group implemented an asset
backed funding scheme which remains in place. The asset backed
funding scheme provides a long-term deficit reduction plan where
the Group makes an annual deficit reduction contribution of GBP13m
increasing annually with inflation, until November 2038, secured on
the Group's brands.
Using an inflation assumption of 3.0% and a discount rate
assumption of 2.4%, the present value of the future deficit
reduction contributions has been calculated. Based on these
assumptions, the Group expects the present value of deficit
reduction contributions to exceed the IAS 19 deficit. The Group
notes that, in the event that a surplus emerges, it would have an
unconditional right to a refund of the surplus assuming the gradual
settlement of AAUK scheme liabilities over time until all members
have left the plan.
The Group has recognised a one-off past service credit of GBP34m
as a result of the benefit changes described above. This comprised
a GBP12m gain from closure of the Final Salary sections of the AAUK
scheme, due to the assumed deferred pension revaluation being lower
than the assumed pensionable earnings increases, and a GBP22m gain
from the change in indexation in the CARE section from RPI-based to
CPI-based, which is expected to be lower in the long term.
The remeasurement gain of GBP2m shown in the consolidated
statement of comprehensive income for the six months to 31 July
2017 is primarily a result of actual inflationary increases applied
to benefits being lower than assumed, a reduction in future
inflation expectations and higher asset returns than expected over
the period mostly offset by the decrease in the discount rate.
The amounts recognised in the balance sheet are as follows:
As at 31 July 2017
------------------------------------------------------------------------------
AAUK AAI AAPMP Total
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ --------- ------- ------- ---------
Present value of the defined benefit obligation in respect of pension and
healthcare plans (2,515) (53) (60) (2,628)
Fair value of plan assets 2,220 44 - 2,264
------------------------------------------------------------------------------ --------- ------- ------- ---------
Deficit (295) (9) (60) (364)
------------------------------------------------------------------------------ --------- ------- ------- ---------
As at 31 July 2016
------------------------------------------------------------------------------
AAUK AAI AAPMP Total
GBPm GBPm GBPm GBPm
------------------------------------------------------------------------------ --------- ------- ------- ---------
Present value of the defined benefit obligation in respect of pension and
healthcare plans (2,577) (61) (55) (2,693)
Fair value of plan assets 2,030 41 - 2,071
------------------------------------------------------------------------------ --------- ------- ------- ---------
Deficit (547) (20) (55) (622)
------------------------------------------------------------------------------ --------- ------- ------- ---------
As at 31 January 2017
-----------------------------------------------------------------------------
AAUK AAI AAPMP Total
GBPm GBPm GBPm GBPm
----------------------------------------------------------------------------- --------- ------- ------- ---------
Present value of the defined benefit obligation in respect of pension plans (2,515) (53) (59) (2,627)
Fair value of plan assets 2,190 42 - 2,232
----------------------------------------------------------------------------- --------- ------- ------- ---------
Deficit (325) (11) (59) (395)
----------------------------------------------------------------------------- --------- ------- ------- ---------
Fair value of plan assets
The table below shows the AAUK plan assets split between those
that have a quoted market price and those that are unquoted. Of the
AAI scheme, 33.5% (July 2016: 26.0%) of assets do not have a quoted
market price.
The fair value of the AAUK plan assets and the return on those
assets were as follows:
As at 31 July 2017 As at 31 July 2016
Assets without a Assets without a
Assets with a quoted market price Assets with a quoted market price
quoted market GBPm quoted market price GBPm
price GBPm
GBPm
--------------------- --------------------- --------------------- ---------------------- ---------------------
Equities 180 300 150 322
Bonds 825 200 790 142
Property 84 179 76 175
Hedge funds - 426 - 344
Cash/current assets 24 2 29 2
--------------------- --------------------- --------------------- ---------------------- ---------------------
Total plan assets 1,113 1,107 1,045 985
--------------------- --------------------- --------------------- ---------------------- ---------------------
Pension plan assumptions
The principal actuarial assumptions were as follows:
AAUK AAI AAPMP
% July July July July July July
2017 2016 2017 2016 2017 2016
% % % % % %
------------------------------------------ ------- ---- ------- ------- ---- ------- ------- ---- -------
Pensioner discount rate 2.4 2.3 1.6 0.9 2.4 2.3
Non pensioner discount rate 2.6 2.5 2.5 1.6 2.3 2.3
Pensioner RPI 3.2 2.7 - - 3.2 2.7
Non pensioner RPI 3.2 2.9 - - 3.2 2.7
Rate of increase of pensions in payment -
pensioner 3.0 2.6 - - - -
Rate of increase of pensions in payment -
non pensioner 3.0 2.7 - - - -
Pensioner increase for deferred benefits 2.1 1.9 1.5 1.3 - -
Medical premium inflation rate - - - - 7.2 6.7
------------------------------------------ ------- ---- ------- ------- ---- ------- ------- ---- -------
CPI inflation is assumed to run 1.1% below RPI inflation in
future, with consequent impacts on assumed pension increases for
the CARE section. Mortality assumptions for the AAUK scheme are set
using standard tables based on scheme specific experience where
available and an allowance for future improvements. For 2017, the
assumptions used were in line with the SAPS (S2) series mortality
tables (31 July 2016 - SAPS (S1) series) with future improvements
in line with the CMI_2015 model with a 1.5% long-term rate of
improvement (31 July 2016 - CMI_2012 model with a 1.5% long-term
rate of improvement). The AAI scheme mortality assumptions are set
using standard tables with scheme specific adjustments.
The AA schemes' overall assumptions are that an active male
retiring in normal health currently aged 60 will live on average
for a further 27 years and an active female retiring in normal
health currently aged 60 will live on average for a further 30
years.
17 Share premium
GBPm
At 31 January 2016 399
Issue of shares 2
At 31 July 2016 401
-------------------- ------
At 31 January 2017 403
Issue of shares 1
At 31 July 2017 404
-------------------- ------
18 Fair values
Financial instruments held at fair value are valued using quoted
market prices or other valuation techniques.
The fair values are periodically reviewed by the Group Treasury
function. The following tables provide the quantitative fair value
hierarchy of the Group's interest rate swaps and loan notes. The
carrying values of all other financial assets and liabilities
(including the Senior Term Facility) approximate to their fair
values:
At 31 July 2017:
Fair value measurement
using
Quoted Significant Significant
prices observable unobservable
in active inputs inputs
markets
Carrying (Level (Level (Level
value 1) 2) 3)
GBPm GBPm GBPm GBPm
---------------------------- ---------- ------------ ------------- ---------------
Financial liabilities
measured at fair value
Interest rate swaps
(note 14) 17 - 17 -
Liabilities for which
fair values are disclosed
Loan notes (note 15) 2,473 2,714 - -
---------------------------- ---------- ------------ ------------- ---------------
At 31 July 2016:
Fair value measurement
using
Quoted Significant Significant
prices observable unobservable
in active inputs inputs
markets
Carrying (Level (Level (Level
value 1) 2) 3)
GBPm GBPm GBPm GBPm
---------------------------- ---------- ------------ ------------- ---------------
Financial liabilities
measured at fair value
Interest rate swaps
(note 14) 27 - 27 -
Liabilities for which
fair values are disclosed
Loan notes (note 15) 2,442 2,616 - -
---------------------------- ---------- ------------ ------------- ---------------
Valuation techniques include net present value and discounted
cash flow models, and comparison to similar instruments for which
market observable prices exist. Assumptions and market observable
inputs used in valuation techniques include interest rates.
The objective of using valuation techniques is to arrive at a
fair value that reflects the price of the financial instrument at
each period end at which the asset or liability would have been
exchanged by market participants acting at arm's length.
Observable inputs are those that have been seen either from
counterparties or from market pricing sources and are publicly
available. The use of these depends upon the liquidity of the
relevant market. When measuring the fair value of an asset or a
liability, the Group uses observable inputs as much as possible.
Fair values are categorised into different levels in a fair value
hierarchy based on the inputs used in the valuation as follows:
Level 1 - Quoted market prices in an actively traded market for
identical assets or liabilities. These are the most reliable.
Level 2 - Inputs other than quoted prices included in Level 1
that are observable for the assets or liabilities. These include
valuation models used to calculate the present value of expected
future cash flows and may be employed either when no active market
exists or when there are quoted prices available for similar
instruments in active markets. The models incorporate various
inputs including interest rate curves and forward rate curves of
the underlying instrument.
Level 3 - Inputs for assets or liabilities that are not based on
observable market data.
If the inputs used to measure the fair values of an asset or a
liability might be categorised in different levels of the fair
value hierarchy, then the fair value measurement is categorised in
its entirety in the same level as the lowest input that is
significant to the entire measurement.
19 Related parties
The following table provides the total value of transactions
that have been entered into with associates during each financial
year.
Transactions with associates:
July July January
2017 2016 2017
---------------- ---------------------------
Associate Nature of transaction GBPm GBPm GBPm
---------------- --------------------------- -------- -------- -----------
Call handling
ACTA SA fees paid - 1 2
ARC Europe Registration
SA fees paid 1 - 1
The Group's interest in ACTA SA was sold on 6 October 2016.
20 Post Balance Sheet Events
On 7 September 2017, the UK Ministry of Justice announced a
draft change to the law used to set the discount rate used in
calculating upfront personal injury payments (Ogden discount rate
reforms). The proposal could result in a rate change from the
current rate of -0.75% to a rate between 0% and 1%. It will not be
applied retrospectively. The proposal, which is currently in draft
form, is expected to take a few months to finalise prior to the
legislation being enacted. As a result of the uncertainty, the
Insurance Underwriter reserves as at 31 July 2017 have been
calculated based on the current Ogden rate of -0.75%.
On 21 September 2017 the AA Ireland Pension Scheme triennial
valuation as at 31 December 2016 was completed with an agreed
deficit on a going concern funding basis of EUR9.0m. The previous
valuation as at 31 December 2013 valued the deficit at EUR6.5m. No
changes were made to the schedule of contributions as a result of
the updated valuation.
On 25 September 2017 Simon Breakwell was appointed permanent
CEO. For the year ended 31 January 2019, Simon's salary as CEO will
be GBP700,000. Under the standard three-year renewal cycle, the
Directors' Remuneration Policy is subject for renewal at the 2018
AGM, and the Remuneration Committee will be engaging with major
shareholders regarding the terms of the new policy. The
remuneration package will follow typical FTSE practices. The
Company does not intend to grant any awards to Simon under the
legacy Management Value Participation Share structure.
Directors' responsibility statement
The directors confirm that to the best of their knowledge:
-- The consolidated interim financial information contained in
this report has been prepared in accordance with International
Accounting Standard 34 'Interim Financial Reporting' (IAS 34);
-- The Chairman's statement and the financial report together
include a fair review of the information required by the Financial
Conduct Authority's Disclosure and Transparency Rules ('DTR')
4.2.7R (indication of important events during the first six months
and description of principal risks and uncertainties for the
remaining six months of the year); and
-- The interim report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related party transactions
and changes therein).
By order of the Board
Simon Breakwell
Chief Executive
25 September 2017
Forward-looking statements
This document contains various forward-looking statements that
reflect management's current views with respect to future events
and anticipated financial and operational performance. By their
nature, forward-looking statements involve known and unknown risks,
uncertainties and other factors because they relate to events and
depend on circumstances that may or may not occur in the future.
Forward-looking statements are not guarantees of future performance
and the Group's actual financial condition, results of operations
and cash flows, and the development of the industry in which it
operates, may differ materially from (and be more negative than)
those made in, or suggested by, the forward-looking statements
contained in this document. In addition, even if its financial
condition, results of operations and cash flows and the development
of the industry in which it operates are consistent with the
forward-looking statements contained in this document, those
results or developments may not be indicative of results or
developments in subsequent periods. Although the Group believes
that the expectations reflected in these forward-looking statements
are reasonable, it can give no assurance that they will materialise
or prove to be correct. Because these forward-looking statements
are based on assumptions or estimates and are subject to risks and
uncertainties, the actual results or outcome could differ
materially from those set out in the forward-looking
statements.
Independent review report to AA plc
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 31 July 2017 which comprises the consolidated
income statement, the consolidated statement of comprehensive
income, the consolidated statement of financial position, the
consolidated statement of changes in equity, the consolidated
statement of cash flows and the related explanatory notes. We have
read the other information contained in the half yearly financial
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK and Ireland) and consequently does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
July 2017 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
25 September 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR OKPDNBBKBKCB
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