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Results of AGM/EGM

AA trading in line with expectations, resolutions passed at AGM

08 June 2017 13:03

AA has confirmed that all resolutions, with exception of the resolution regarding the further disapplication of pre-emption rights, were passed by shareholders at today's Annual General Meeting.

The Company also confirmed that it is currently trading in line with market expectations.

AA's Executive Chairman made the following statement at the AGM:

Today's AGM gives us the opportunity to highlight some of our achievements since the management buy-in and simultaneous IPO of the AA almost exactly three years ago.

We acquired the business with the intention of modernising the AA and transforming it into the UK's pre-eminent Membership services organisation. We are well on track. There is a great deal to excite Members, employees and stakeholders.

I shall start with a reminder of what the AA was at the outset and what we planned to do.

Three years ago:

- The AA had been deprived of investment in brand and technology.

- Annual price rises were excessive and retention was falling.

- New business was nowhere near offsetting the decline in renewals and Membership numbers were declining at about 4% per year.

- Investment not being made to manage costs or improve productivity.

- There was little sense of what the AA did do or could do for Members beyond roadside assistance.

But against all that:

- Service levels had remained high because of the tenacity and talent of the patrol force.

- Our brand still earned great loyalty and trust.

- This was one of the most resilient, robust and cash generative businesses anywhere.

In the original prospectus we set out our plan to transform the AA: strengthening its foundations, revolutionising the customer experience; and, creating the UK's pre-eminent services organisation. Simply, our intentions were to:

1. Revolutionise and expand our IT and technical capability.

2. Grow our market leading position in Roadside Assistance, the core of our business.

3. Build on our strong brand.

4. Reduce the cost of borrowings which were too high as a result of the debt burden the previous owners had put on the AA.

This was always planned as a five-year project including an initial three years of much needed new investment, which will be substantially completed in the current financial year. We are delighted with the progress we have made and believe that we are approaching an inflection point when the sum total of all that labour will begin to bear fruit.

Let me summarise what has already been achieved:

We have hugely improved and expanded our technical capability with a total investment that will eventually amount to close on £130m.

- In the 2017 financial year we delivered the bulk of our digital transformation, replacing our website and developing capability for customers to start self-serving online. Since the launch of our new website we have delivered double digit year on year growth in new business sales. In addition, our breakdown app is now used in 25% of breakdowns - providing a differentiating benefit to Members.

- We also completed our new version of AA Help (our bespoke operational system), which is supporting further efficiency gains.

- We have delivered a sophisticated, user-driven pricing engine which speeds up pricing changes from weeks to hours and facilitates "flexible" pricing. However, full usage and benefits depend on migrating all our legacy customers to our new PEGA customer relationship management (CRM) system.

- Within our IT infrastructure we have upgraded 8,000 desktop machines, upgraded 700 servers (hardware and software) to the latest release, and have upgraded our networks, creating a platform to deploy our new systems. We upgraded from Windows XP to Windows 10 some 18 months ago.

- We are currently building our solution to renew customers in our new policy administration and CRM system. The build remains on track, and we have begun early stage system.

- The solution integrates policy administration with our already delivered investments in our new CRM system and pricing infrastructure. This combination will give us far greater flexibility and a step-change in the sophistication of how we target customers at renewal with the right offer, at the right time and at the optimum price. We believe that this new capability will deliver further improvements in our Roadside Assistance retention rates and average income per Member.

- Full end-to-end testing of our new Roadside Assistance renewal capability is scheduled to start in September 2017. We will then commence two waves of live testing with small cohorts of customers to validate the operational processes and commercial benefit with subsequent roll out to all renewing customers.

Turning now to the correction of a decade's under-investment in the brand. We have improved marketing, established meaningful rewards for Membership and advertised our Roadside Assistance services on TV for the first time in nearly a decade.

Our latest advertisement was aired for the first time last Friday and it is too early to measure its impact. However, one very telling measure of our success to date - and effective management of resource - is that our first campaign was seen or heard by an individual on average 22 times in the first year but 60 times when it was refreshed a year later.

Overall spontaneous brand awareness has risen remarkably. At the time of the IPO it was 91% and it has risen to 94% which means that an extra 1.8 million people are aware of us.

This increased awareness, combined with the much improved marketing communications and the highly attractive Membership rewards has led to:

- Growth in new Members - we reported growth of 14% at the year end.

- A significant drop in the number of calls from people wanting to cancel their Membership.

- Increased retention rates - up from 79% at the IPO to 82% last financial year.

Turning around the decline in Membership to a position from which we can now begin to grow is a very significant achievement in just three years, especially in light of the increase in IPT and increased regulatory scrutiny.

Membership - what we are doing to make it more attractive. Our aim is to become the UK's pre-eminent Membership organisation. We do this by developing a suite of services and products that are part of Membership and by improving how we communicate with our Members. We are only at the beginning of this journey but I will give you a few examples of our progress to date.

We launched our partnership with Mitchells & Butlers in late 2015 which offers 20% off food and beverage at more than a thousand of their pubs and restaurants. We are nearing a run rate of one million redemptions per annum. We are also developing the technology which enables us to track individual usage so we can tell Members exactly how much that and other benefits are worth to them personally.

This is important because we know it drives retention. Members who engage with our benefits programme have renewal rates over 2% higher than the average. This increases as the level of engagement rises and is strongest among our younger Members. We already have ambitious plans to offer a much wider range of exclusive Membership benefits and rewards which will further enhance the offering.

The app is an important part of this journey. 35% of our Members are now registered to use it (up 15 percentage points on last year) and the Member benefits section is already the third most visited section.

We also offer much more relevant and personalised communication. In the past, a quarter of Members received more than five pieces of communication (usually mail) in the first 40 days of Membership. We now offer something much more succinct, targeted and personal. The welcome pack also arrives within eight days compared with 20 days a year ago.

All this is as a result of our new PEGA marketing system which will become even more powerful when properly integrated into our new CRM system

We have also done much to take full advantage of the power of our brand beyond Roadside Assistance. Our insurance broking business was started in the 1970s and has grown to become a very profitable operation in its own right, selling motor and home insurance policies to nearly 1.5m customers. Our brand consideration for people buying insurance is one of the highest in the industry.

However, over the last six years, our insurance business has suffered, like its peers, through the growth of price comparison websites which have been largely responsible for a reduction in the number of motor policies sold by the AA of almost 50%. Our investment in systems, technology and our underwriter has now stemmed the decline and we have seen the first growth in the size of our motor portfolio in eight years.

We recognised that if we could use our data on Members, we should be able give many of them the benefit of more competitive pricing. Our underwriter, which was launched in January 2016, takes advantage of that data. The book now comprises 270,000 insurance policies, sold mostly to Roadside Members many of whom are coming into our insurance fold for the first time. This has also helped to reverse the decline in motor insurance policies sold by our broker.

We have rebuilt our financial services positioning. In the past, we made a lot of money from selling financial services and there is no reason we should not do so again. We launched our partnership with the Bank of Ireland in August 2015 and are very pleased with our progress.

There are many other opportunities for the AA brand, in driving schools, home emergency, used car sales, vehicle inspections among other opportunities. All of these will play a growing part in the future of the AA.

Touching on Car Genie, our connected car product which we launched in April.

We are excited about the potential this brings as a tool for Members to manage their own vehicles but also for us as a means of anticipating potential problems. Our trial has shown that we can remotely predict about a third of breakdowns, enabling us to offer Members appointments to resolve problems before they cause a breakdown. This could dramatically change the nature of our business for the good of Members and our own cost management.

Which brings me onto costs. We have done much to improve productivity and cut costs throughout the business. We have already set out our plans to reduce costs off the 2015 cost base of at least £40m from the 2019 financial year, and we are half way through that plan. As anticipated, we have reinvested some of those savings as part of the transformation, most notably in the brand and people.

One of the most material benefits for shareholders has been the reduction in the cost of servicing our debt. The cost of new investment and our transformation programme has meant that we have not yet focused on deleveraging, except through the application of the £106m of proceeds from the sale of our Irish business. However, we have substantially reduced our interest costs.

The two refinancings since the IPO have reduced the blended cost of debt from 5.9% to 4.6% which equates to a cash reduction of £78m per annum on interest paid. A great achievement.

Finally, we have are making progress on pensions. This will be the subject of a separate announcement.

These achievements have only been possible through the very deep change we have made to the culture of the AA. We have transformed the way people think about the business and the potential for improving it, expanding it and growing it, without losing the quality of service and the values which lie at its core.

In summary, we have created the strong foundations for the UK's pre-eminent Membership services organisation which is now poised for growth. We expect revenue growth to lead to higher cash generation giving us the potential to return more cash to shareholders, directly or indirectly through debt repayment.

Trading in line. We are trading in line with market expectations and will announce half year results on 26th September.

At 1:01pm: (LON:AA.) AA Plc share price was +2p at 229.4p

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