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Edited Transcript of AA.L earnings conference call or presentation 24-Sep-19 8:00am GMT

Half Year 2020 AA PLC Earnings Call

London Sep 27, 2019 (Thomson StreetEvents) -- Edited Transcript of AA PLC earnings conference call or presentation Tuesday, September 24, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Mark Strickland

AA plc - Interim CFO

* Simon J. Breakwell

AA plc - CEO & Executive Director


Conference Call Participants


* Andrew Nussey

Peel Hunt LLP, Research Division - Analyst

* Calum Battersby

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Joe Brent

Liberum Capital Limited, Research Division - Head of Research and Equity Analyst

* Natasha Brilliant

Citigroup Inc, Research Division - VP

* William Kirkness

Jefferies LLC, Research Division - Equity Analyst




Simon J. Breakwell, AA plc - CEO & Executive Director [1]


Good morning, everybody, to this bright and sunny morning in London, and welcome to the interim results for the AA. On the stage, you've got myself, Simon Breakwell, I'm the CEO of the company; and Mark Strickland, who is the interim CFO. The structure of the presentation will be the same structure we've done previously. I'll give a quick introduction to the results. Mark will talk through the financial results in some detail, and then I'll finish off the presentation with a discussion of about 20 minutes on where we are with executing our turnaround strategy at the company.

It's worth starting with this slide. The AA is a wonderful business. It's got a fantastic brand. It's in a great marketplace, a mature marketplace. We're the company of choice for the vast majority of B2B customers. And it has an inherently high cash flow generating business model and the potential to grow sustainable EBITDA for shareholders. And the strategy that I outlined some 18 months or so ago is relatively simple. It's about returning the Roadside business to growth and arresting the decline of membership. It's about investing in the Insurance business to accelerate that business significantly, all underpinned by best-in-class, gold standard service excellence and operational resilience, a highly engaged workforce because what we want to do at the AA is to build a better company for everybody, including colleagues, and underpinned by great innovation and distinctive digital products.

And everything that myself and the management team are working on is about being laser-focused on 4 critical proof points for this year. Firstly, to arrest the decline of B2C membership. I said this year that it would be broadly flat, and I'm pleased to say that we have arrested the decline, and we look nicely positioned to deliver that this year. And then in successive years, to grow Roadside Membership.

Secondly, I said we would accelerate the Insurance business. And as you'll see from the slides this morning, we're nicely positioned to do that, too. And the reason why those 2 things are so critically important is because we're going to deliver sustainable EBITDA growth for shareholders, and, and this is a critical piece, growing free cash flow. And historically, the company has found it very difficult to deliver both of those things concurrently.

So H1 '20 results are in line with expectations. We're on track to deliver the guided EBITDA. Roadside Membership has broadly stabilized, and we'll be looking to get that broadly flat by the end of this year. The Insurance business is growing very nicely indeed. We're making great progress on launching our new products and digital products. When I took over as CEO, our app downloads were about 800,000 or thereabouts. They're currently at a couple of million. So we've got a nicely engaged sort of digital base to work with. We've got great new brand marketing now in place, and we've also got some great strategic partnerships with Admiral and also our joint venture with the Bank of Ireland.

So with that, I'll pass over to Mark who'll take through -- take you through the financial details.


Mark Strickland, AA plc - Interim CFO [2]


Thank you, Simon. Good morning, ladies and gentlemen. So I'm pleased to report that we have delivered first half results in line with our expectations, with growth in trading EBITDA, operating profit, profit before tax and strong cash -- free cash flow generation.

The headlines. Overall group revenue was up 2% to GBP 491 million, reflecting the solid performance of both our Roadside and Insurance businesses. Looking ahead and consistent with our targets to FY '23, we expect a continued ramp-up in revenue growth.

In line with our expectations, group trading EBITDA was up 2.5% to GBP 165 million, and we remain on track to deliver growth this year in line with current expectations. Group trading EBITDA margin was stable at 33.6%, with improved Roadside trading EBITDA margins offsetting the anticipated reduction in Insurance trading EBITDA margins.

In line with best practice, alongside trading EBITDA, we will increasingly reference operating profit going forwards when reviewing our financial performance. As such, operating profit was up 3% or GBP 4 million to GBP 120 million. Of note, we have net 0 exceptionals in the first half.

PBT rose significantly to GBP 42 million, an increase of 50%, reflecting the higher operating profit and lower net financing costs.

Free cash generation -- free cash flow generation was strong in the period of GBP 44 million. This, of course, is the free cash flow to equity and excludes the final dividend and payment for last year of GBP 8 million and the successful bond buyback in February of GBP 20 million. In line with our guidance, we remain on track to generate free cash flow of approximately GBP 80 million this year.

In June, S&P reaffirmed the ratings of our bonds, which is a positive endorsement of our strategy and its progress to date. Finally, on dividends, we have declared an interim dividend of 0.6p, in line with last year.

Turning to the income statement on Slide 9. Group revenue rose 2%, broadly in line with inflation and reflecting the solid performance across both Roadside and Insurance. Group trading EBITDA was up 2.5% to GBP 165 million, in line with our expectations. The inherent seasonality of our business means that our performance will be second half weighted with the first half to second half split being broadly similar to last year. Included within group trading EBITDA is a benefit of GBP 2 million in relation to the adoption of IFRS 16, which has been apportioned across our Roadside and Insurance business. We expect the full year benefit of IFRS 16 to be approximately GBP 4 million.

Operating profit was 3% higher at GBP 120 million due to lower share-based payments and pension charges as well as significantly lower exceptional costs. These benefits were partially offset by slightly higher depreciation and amortization, which we guided to last year, as our capital investments in the business flow through into the P&L.

Net finance costs were down 11% to GBP 78 million, principally due to an early repayment penalty of GBP 15 million in the prior period relating to last year's refinancing.

Earnings per share grew from 3.8p to 5.5p, whilst the adjusted earnings per share in the period reflects the impact of lower exceptional costs.

Slide 10 and turning to segmental reporting. You should be familiar with this slide, but just to remind you that we've changed the way in which we present our segmental numbers. This aligns completely with our focus on our strategy, which is upon Roadside and Insurance. To cover the changes again briefly, we brought Driving Services under Roadside and our underwriter under Insurance. Insurance still includes Financial Services and the residual Home Emergency Services business.

The other aspect of this reporting change is that we now allocate head office costs across Roadside and Insurance. We've given you the reporting on both the old basis in the statement -- both the old and the new basis in the statement, but we will discuss performance, including margins, where the change is quite pronounced on the new basis.

Roadside trading EBITDA is up 4% to GBP 137 million, reflecting the improved performance for our B2C business as well as the benefit of reduced third-party garaging costs compared to last year. As expected, Insurance trading EBITDA was lower by 3% to GBP 28 million, as we continue to invest in accelerating the growth via our Insurance business.

We will now look at each segment in more detail. So looking at Roadside on Slide 11. Roadside revenue rose 2%, reflecting the benefit of higher B2C income as well as the acquisition of Prestige, which we acquired in February. We successfully integrated Prestige into our technical services business, and we are pleased to report that the business is performing well. More on Prestige and its service maintenance and repair offering from Simon later.

In line with our expectations, paid personal memberships were broadly flat during the first half of the year at 3.2 million. Additionally, retention also remained flat at approximately 80%. This is underpinned by our outstanding service delivery and our confidence in the outlook for paid personal membership base reflects the benefit of additional and sustained marketing spend, including the recently launched Red Dwarf advertising campaign, increased cross-sell rates from our Insurance, Driving Schools and AA Cars platform as well as targeted investment in our increasingly differentiated proposition. We continue to expect a broadly flat membership base this financial year and return to growth next year.

As previously announced, average income per business customer was up 5% in the period to GBP 22, and B2B customer numbers were GBP 9 million. This is principally due to our decision not to renew the contract with Groupe PSA. Our focus within B2B is on forming partnerships which are aligned from both a strategic and commercial perspective.

We retained a number of key contracts during the period, including Toyota, Lex Autolease and Northgate. Overall Roadside trading EBITDA was up 4% to GBP 137 million, with trading EBITDA margins improving from 32.1% to 32.8%. Finally, the performance of the Driving Services business was flat in the period.

Moving on to Insurance. I'm pleased to report that we are on track with our EBITDA and policy growth targets to FY '23. Revenue was up in the period at GBP 73 million, driven by the growth of both the broker and the in-house underwriter. We achieved 22% growth in motor policies, and the home policy book grew 3%. The strong growth of nonmember motor book and improvements in our customer journey are helping to deliver consistent and healthy conversions into our Roadside business, with 32% of Insurance customers taking Roadside Membership. More, again, on this from Simon later.

As expected, average income per policy fell to GBP 67, reflecting the investment in marketing to grow the new business volumes. Financial Services business and partnership with the Bank of Ireland is performing well. Our partnership with the Bank of Ireland now represents a loan book of approximately GBP 586 million, broadly match funded by deposits and both of which are actually held on the balance sheet of Bank of Ireland. Financial Services will be increasingly a key focus of our business going forwards.

As expected, overall Insurance trading EBITDA was slightly down, reflecting the higher investment in marketing and our competitive pricing strategy accelerating the growth in the motor and home books. Our underwriter continues to grow its profits, but it's increasingly -- sorry, but it is inherently lower margin and, therefore, this also impacts on the overall divisional margin on consolidation.

As Simon outlined previously, a critical proof point of our business is generating sustainable free cash and using this to pay down debt. I'm pleased to say that in the first 6 months, we generated GBP 44 million of free cash flow. We remain firmly on track to generate free cash flow of approximately GBP 80 million this year.

Looking at the individual bridging items. Cash flow from operating activities was significantly higher at GBP 168 million due to the higher trading EBITDA and lower exceptional spend in the period. Cash tax was lower due to the -- at GBP 4 million due to the rebates profit of FY '19.

Overall CapEx at GBP 37 million is absolutely in line with our expectations. We expect total CapEx spend this year to be in line with our guidance and will be approximately GBP 70 million. We had a net outlay of GBP 8 million in relation to acquisitions and disposals in the period, mainly related to the acquisition of Prestige.

Net interest was up GBP 3 million and reflects the marginal increase in the blended costs of debt from 4.51% to 4.52% following the refinancing last year.

Slide 14. As previously stated, overall CapEx in the period was GBP 37 million, absolutely in line with our expectations. Our CapEx guidance for this year remains unchanged at approximately GBP 70 million. Looking ahead to FY '21, we are maintaining our previous guidance and expect CapEx to be approximately GBP 60 million.

Turning to debt. We maintain a disciplined and proactive approach to managing our capital structure, and we will continue to assess our debt strategy in the light of prevailing market conditions. In June, S&P Global Ratings reaffirmed our ratings of both the A and the B notes.

Following the refinancing last year, our net repayment of borrowings other than the A3 note, which can be fully funded by our committed forward starting senior term facility of GBP 200 million, is not due until January 2022, giving us a runway to execute on our plans for delivering strong trading EBITDA and free cash flow growth. As I said, our blended cost of debt is stable at 4.52%.

In February, as part of our commitment to proactive debt management, we successfully completed the buyback of GBP 23 million of B2 secured notes for GBP 20 million. This was using cash at the AA plc level. The buyback enables us to generate a healthy return in the form of cash yield and capital profits to maturity.

Net debt in the period was flat at GBP 2.7 billion, with the increase in finance lease obligations of GBP 26 million following the adoption of IFRS 16 offsetting the benefits of additional free cash generation after adjusting for the buyback.

Slide 16 summarizes the adjustments required to net debt from a covenants' perspective. Our debt documents require covenants to be reported on a pre-IFRS 16 basis. Of note, our interest cover remains extremely comfortable at over 2.4x, and we continue to have more than ample headroom in all our financial covenants.

It is also worth remembering that in addition to cash in bank of GBP 132 million, we also have available GBP 421 million worth of additional banking facilities, including the GBP 200 million of forward starting Senior Term Facility, a GBP 165 million working capital facility -- sorry, liquidity facility and a working capital facility of GBP 56 million. Of these facilities, only GBP 4 million is currently drawn, and that is by a way of guarantees.

In summary then. We have delivered a solid financial performance, in line with our expectations. We remain on track to deliver trading EBITDA and operating profit growth and significant cash flow generation this year. Our CapEx guidance for this year is unchanged at approximately GBP 70 million, and we are maintaining our guidance for next year at approximately GBP 60 million.

We continue to maintain our medium-term targets. As you will remember from the strategy update, we expect to grow trading EBITDA at a CAGR of between 5% and 8% from FY '19 through to FY '23, but with the caveat that these are not profit forecasts. They are average numbers over time and will not be delivered in a convenient straight line. That said, they do underpin our belief that our actions will create a business that is capable of sustainable growth.

Deleveraging remains our prime goal, and we will do this through significant cash flow generation. We continue to maintain a disciplined and proactive approach to managing our capital structure. We have declared an interim dividend of 0.6p, in line with last year.

Thank you. And now back to Simon.


Simon J. Breakwell, AA plc - CEO & Executive Director [3]


Thanks very much, Mark. So I'll finish off the presentation now with a quick runthrough, 20 minutes or so, of how we're executing against our turnaround strategy. And I'd like to start with this slide, which was a slide that we showed at the recent innovation day. And it's very much about what we're trying to do at the AA.

We're trying to deliver simpler and smarter products to all of the British driving public, whether you're a member, whether you're an insured customer or whether you just have a motor car, and you're neither of those. We will do that by relentlessly innovating and getting better and better at products and delivering service. And it's only by doing those things and continuously improving that we believe we can give back to the great British motorists the freedom of driving, and I'll come back to this slide later in the presentation.

It's worth remembering also that we're only some 18 months into this turnaround strategy. And as you can see from the slide behind me, last year was very much about investing in the foundations, a new management team, a new strategy, investing in service resilience and also new product developments. And this year is very much about the rolling out of those new products and scaling our innovation capabilities. And as I've said already and as Mark said in his presentation, everything we do at the company is about driving sustainable EBITDA growth and sustainable free cash flow generation growth, too.

I'll now take you through each of the businesses. Roadside first and then Insurance, and then finish off with a summary. And I'd like to start with this slide. One of the questions I frequently get asked by shareholders, by members and by colleagues at the AA, too, is how are we planning on returning Roadside to growth? And in many ways, this is how we think about it. First of all, job one is to deliver outstanding customer service. And I'll talk about that next. Secondly, to couple that service with really fantastic products and innovative products that surprise and delight the British driving public. And that coupled with fantastic marketing would drive member engagement and driver engagement and create this virtuous circle that will grow our Roadside business.

So I'll now talk about each of those in some detail, starting, not surprisingly, with where we are with service. Services, I've said before, is job one at the AA, and it's great that we've been recognized by What Car? and Which? as being the leaders in this space, both on the B2C side but also on the B2C -- on the B2B side, too. And it's worth remembering why service is so critical for us as a company. I mean, obviously, it's the moment of truth for many of our members. And it's, in many ways, the best marketing the company has when you actually see the AA in action.

But the other reason why it's important, for those sort of AA historians amongst you, is you'll know that in the not-too-recent past, this company has found it very difficult to control operational costs and guarantee service excellence and service resilience. So there's a real customer benefit for doing this, but there's also a really important balance sheet and EBITDA benefit in getting service resilience and good stability in the operation. And I'm pleased to say, as you can see from these metrics behind me, from the investments we've made, the actions we've taken, on every metric, our service now is noticeably better than it was when I arrived as the CEO. And I can stand behind ourselves and say it is head and shoulders above any of our competitors out there now. We have NPS of 75%, which is pretty remarkable. Our repair rates, our arrival rates, our call center answering rates are significantly better than they've ever been at the company.

Moving on to stabilizing membership. And in advance of us landing those new products and services, which I'll talk about next, the way we think about stabilizing membership is optimizing every lever that we have at the company, and it's a cross-company effort turning around Roadside Membership. We're very good, and we have great sophistication around pricing and promotion. And remember, we only put prices into the market now that are around about inflation or thereabouts. We've got increasing sophistication at how we think about retention and saving AA members.

Our marketing teams are wonderful marketing team who are excellent above and below the line marketing, and our Red Dwarf campaign, I'll speak about in a moment, got some great partnerships with Admiral and the Bank of Ireland. And across all of our channels now, the AA cars, Driving Schools, Insurance as well as Roadside channels, we're optimizing every channel to sell Roadside. We've still got some ways to go there. There's lots and lots of headroom there to grow that, but we're doing very well at selling Roadside across all of our business.

Coming on to talk about marketing. As previously trialed, we launched our new brand marketing, our Red Dwarf marketing, for those of you that are familiar with that program, was launched just after the summer. Very much about repositioning the company in a sort of light hearted, sort of slightly jokey way, but definitely positioned the company as a smarter business, thinking beyond just breakdown.

I'm pleased to say, I mean it's early days, but the marketing seems to be working very well, and the results are very positive. And System1, which is very much sort of the advertising benchmark for advertising effectiveness, has us at #2 in the automotive category. And it's only because our previous advertising campaign, singing baby, still is #1. And most importantly, social sentiment also is extremely positive, had lots of positive feedback on social media.

I'd now like to come and talk about where we are with our new products, starting with Smart Breakdown. Most of you will be familiar with Car Genie, which was a product that we had operational when I was the CEO. Smart Breakdown is how we've taken that product and woven it deep into our membership offering. So for an extra GBP 50 a year, and that is on the market now for new members, existing members will get it in a month or 2, you'll be able to sign up and get a Roadside Membership with a Smart Breakdown capability.

And Smart Breakdown does 2 things relatively simply. Firstly, if you do break down, we'll know exactly where you are, we'll know exactly what the problem is with your vehicle in a vast majority of circumstances, there's no need to call the call center and the patrol as they pick up the job on their G1, on their tablet, will know exactly what's wrong with the vehicle, and they can arrive and fix customers faster. And that's incredibly important because the most important pain point for customers is when I do break down, can you get me on the road faster? Smart Breakdown researched remarkably well with customers earlier in the year when we trialed and tested it with our base, and we've got great hopes for the product going forward.

The second thing that Smart Breakdown does is actually, we think the vast majority of cases we can actually predict breakdowns before they happen. And that's a remarkable offering to our members. No one else out there is building products and services like this, and we're happy to launch it, and we'll be rolling it out supported with a new marketing campaign next year.

So I spoke about this slide earlier. We want to make the AA simpler and smarter and provide great products and services to all of the great British driving public. And the real question for us at the AA, and I'll talk more about this in April, is what's our ambition for the company? How do we get beyond membership and insurance? As important as they are, how can we start touching every driver in the U.K.? And we are convinced that one of the ways that we'll be doing that is through something called service, maintenance and repair. And our B2B customers are asking us to do this. If you've got a great lease -- a huge lease business such as some of our partners, they're asking us increasingly that if you can't fix the car, can you just take care of it, take it to a garage, I'll agree the price with you and just get it into the fleet as quickly and as smoothly as possible.

And increasingly, the second pain point that U.K. motorists feel on the B2C side is when my car is broken and you can't fix it, where do I take my car? What are the good garages? How do I know that I haven't got a dodgy garage? How much of the job's cost? How do I know I'm getting value for money. It's a fantastic opportunity for us. There's a clear need for an SMR proposition, there's a clear need for pricing transparency for source of truth about where to take your car. There are real significant barriers to entry. You've got to have significant scale on the demand side and on the supply side. You've got to be a trusted brand. You've got to have deep operational and technical integration with key suppliers, and you need to understand the really complicated SMR supply chain.

But for us at the AA, it's a great opportunity. It leverages much of our operating expertise and scale. It's a huge addressable market, some GBP 28 billion by 2022. And really importantly, there are many opportunities to monetize this. We already have a 1,000 garages signed up on our garage guide. And this is a product that we'll be rolling out to our partners, our B2C partners, our B2B partners and also the wider British driving public next year. And it's a great entrée into getting the AA into everyone's home if you have a vehicle.

So finishing off with Roadside. The platform investments, the innovation, the marketing, everything we're doing in the Roadside business is about driving sustainable growth, EBITDA growth, free cash flow growth and a commitment to using that cash to deleverage the business.

I'd now like to come on and talk about Insurance. And just by a way of recap, the Insurance strategy is relatively simple. It's about driving more competitive premiums, it's about leveraging our own in-house underwriter that we started some 3 or 4 years ago. And as in Roadside, it's about driving real insurance innovation.

And I'm pleased to say that the Insurance business is performing very strongly, indeed. Our policy growth has actually accelerated recently to 11%. Our membership cross-sell rates, so if you're a new member, if you are a new Insurance customer and you've never been a member of the AA, our Insurance cross-sell rate is now at a remarkable 32%, and the business is performing on plan.

It's worth remembering we only launched this strategy 18 months ago, and already some 700,000 policies are actually underwritten by us at the AA. We believe that our hypothesis about having a unique data advantage based on all the vehicle data and history of vehicle breakdowns is proving out right. Our retention rates are looking good. Our claims performance is in line with plan. Our cross-sell performance is outstanding. And we're very happy with the growth of the Insurance business.

So the outlook for the business is even stronger. There's lots of things that we're dropping into the Insurance business over the coming months. We've got a new panel member with Aviva, we expect policy growth to maintain its growth rates. We said we would deliver 2 million policies by the end of this plan, and we're well on our way to doing that. We are launching a new claims' handling platform inside the business to cope with the scale and the volume that's associated with our growth. And we're also moving into accident management, which we think could be a really great profit stream for the Insurance business going forward.

So in conclusion, I think we're presenting a strong set of half year results. But I want to be very clear, we're only a small way through the journey. Turning around the company like the AA is a 3- to 5-year project. But more than ever, we think the strategy is working and delivering traction. And the results today represent a huge amount of work from everybody across the company, and it's one of the great privileges of my life to be the CEO of such a wonderful business with so many hard-working folks working so amazingly to deliver these results. And more than ever, I feel confident that we can deliver the EBITDA growth and the free cash flow growth in line with those CAGR expectations that we set over 18 months or so ago and deliver and crystallize long-term value for our great shareholders.

Thanks very much. That's the end of the presentation. And now Mark and I will take whatever questions you've got. Thank you.


Questions and Answers


Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [1]


Andrew Nussey, Peel Hunt. Couple of questions, please. First of all, on the B2B side, can you just give us some insight to what the renewal profile is coming through? And secondly, some insight in terms of what the pipeline might be in terms of new opportunity? And secondly, I appreciate it's quite a crude measure, retention, I just wonder how much noise is there still in that 80% and what should we begin to think and what your aspirations might be to what that should move forward to over the medium term?


Simon J. Breakwell, AA plc - CEO & Executive Director [2]


Sure. Was is it B2B, the question at the start? Yes. Okay. We've renewed all of our B2B contracts that we targeted. The only B2B contract we didn't renew was a PSA. And as Mark said, it's incredibly important that as we go forward, we find partners, and we sign contracts that aren't just strategically important but make commercial sense for us. We've secured the vast majority of all of our B2B contracts that came up for renewal. There was a load last year. The only one that we didn't was PSA. There's many coming up over the medium term. We're very cognizant of some of our competitor contracts that are coming up that we're targeting. I'm sure they're doing the same.

On retention, we don't break out our sort of retention forecast going forward. Interestingly, one of the things that we found out is as we're growing our membership now and as we're attracting more and more sort of new members in, obviously, the retention for those newer cohorts is lower than the existing cohorts, so that has an impact on retention. But I would -- sort of, if you're thinking for your modeling, I would sort of model it broadly flat.


Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [3]


Joe Brent from Liberum. Three questions, if I may. You've talked about retention in Roadside. Could you give us a bit of an indication on what's going with new membership wins? Secondly, wanted to hear your perspective on the Insurance market. What do you think is going on there? And thirdly, I would love to hear a little bit more about enhanced accident management and maybe how that ties into the Prestige business?


Simon J. Breakwell, AA plc - CEO & Executive Director [4]


Okay. Just what do you want to know on retention?


Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [5]


So you've talked to us about retention. I suppose the other part of that equation is new memberships.


Simon J. Breakwell, AA plc - CEO & Executive Director [6]


Yes. Perfect. Absolutely. So we've seen a lift in new membership and that's very much underpinning the turnaround of the Roadside business. And we've done that -- as I said, we've done that through existing partnerships, optimizing all of the new channels that we have across the company. I think we've still got some way to go digitally to really sort of refine and optimize our sort of digital channels. And that's something that we're working very hard on. And I think and I'm hoping that once we launch the new products into the marketplace, coupled with the new marketing, we'll see that sustained, if not accelerate, to turnaround membership next year.

Thoughts on the Insurance market. There ain't no change, to be honest. It's fiercely competitive. We've got some very, very well established and capable customers out there. We're very fortunate in the company to have a fantastic team running that Insurance business and a team that's incredibly smart and capable at using the data insights that we have to identify customers who've never been members that we feel that we can underwrite.

And it's not often that you -- a team presents their plans to you, and they're just executing very, very well. And I'm very happy with that. And your last question was on accident management and integration into Prestige. So it's early days with accident management. We haven't yet launched that product. We will be doing so towards the back end of this year. But there's all sorts of opportunities around how we can integrate accident management not just into our Insurance business but also into our Breakdown business, too.

Our patrols, alas, saw too frequently pickup members who've had sort of large chunks or crushes in their vehicles, and that's clearly a synergy there. That's clearly a synergy with some of our lease partners, too. And so there's some great opportunities with us. But job one is about making sure that we get that capability up and running. It is well-run that we manage it efficiently, and we start executing with the Insurance use case first.


Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [7]


Will that use the Prestige network?


Simon J. Breakwell, AA plc - CEO & Executive Director [8]


Yes, it will do. Yes, it will do in part. Yes, absolutely, you mean the garage network? Yes. Absolutely.


Calum Battersby, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]


Calum Battersby from Berenberg. Three questions, if I may. Firstly, can you give slightly more color on the Roadside B2C pricing growth in the first half? So what are the building blocks in terms of product mix, price and new customers signing up for monthly rather than annual contracts?

Secondly, can you talk about the impact from the low number of breakdowns this year? Would you be able to quantify what the reduction costs have been on the prior year when you were speaking about it then? And then thirdly, what are your latest thoughts on the FCA's Insurance market study and what the potential impact could be on the AA?


Simon J. Breakwell, AA plc - CEO & Executive Director [10]


Sure. So Mark will -- after I've given you my answer, Mark will give you the answer on where we are with monthly renewals versus annual renewals. On our B2C pricing, we've said we stated out there -- was it B2C or B2B?


Calum Battersby, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]




Simon J. Breakwell, AA plc - CEO & Executive Director [12]


B2C. Our B2C pricing, we've stated that we'll keep pricing around about inflation, and our input price for this year is about 2% or thereabouts, and we will be keeping to that. Impact on lower breakdowns and impact on our cost base because there's 2 things to say there. Firstly, by putting in the right amount of resources into plan. We've been able to bring down garage costs pretty significantly. I think from memory on the slide, I think we said from GBP 12 million or thereabouts to GBP 8 million. When I took over this job, I think they were up as high as sort of GBP 17 million or thereabouts. So there's been a significant drawdown of us using garages, which is wonderful, that's what the members expect us to have, a yellow van turn up and attend to them.

In terms of lower breakdown numbers, yes, we've seen lower breakdown numbers this year. We've seen it on the B2B side and on the B2C side. And -- but we were -- the test of the operation is absolutely able to sort of keep our costs in line even with that happening.

And on the FCA, that was the other question, I think, which I'm guessing I would get from somebody else at some point, we don't know for certain. I meet the FCA a couple of times a year. I would say, as a company, we have got an excellent relationship with the FCA. We're seen, I hope, as very proactive. We lean forward if we find anything in the company that we think they should know about.

I feel very good about where we are with our transparency, our pricing transparency, how we communicate to our customers. I think in many areas, we're best in class in that area. I feel very good about how -- the internal governance around our Insurance business and our pricing strategies. Exactly what they're going to say and opine on, we don't know. The last time I met them, met them with Janet a few weeks ago, they said a consultative report was imminent. So I suspect we'll see something in the coming weeks.


Mark Strickland, AA plc - Interim CFO [13]


And in terms of annual to monthly membership, I think if you look at our older membership profile, it's something like 80-20. So 80 annual, 20 monthly. Increasing with the new business, it is more 60-40. And again, over time, we'll trend -- over a long period of time, we'll trend more toward 50-50 we think.


Simon J. Breakwell, AA plc - CEO & Executive Director [14]


Yes. At the back?


Natasha Brilliant, Citigroup Inc, Research Division - VP [15]


It's Natasha Brilliant from Citi. Just a couple of questions. Firstly on Financial Services, you highlighted your partnership with Bank of Ireland. But I wondered if you could just give us a more color on your plans around there and what you might be able to do around that. And secondly, just on the CFA. You haven't made an announcement, so if you could just let us know where you are in the process and when we might hear on that?


Simon J. Breakwell, AA plc - CEO & Executive Director [16]


Sure. Absolutely. So taking the last one first. CFO search is ongoing, and we'll make an announcement in due course. Our Financial Services, you're right and well listened. We did say that it will become an increasing area of focus going forward. We are lucky to have a partner in the Bank of Ireland. They're a great partner to us. And it's very much, both for myself and for Francesca who runs the Bank of Ireland, an area of focus to see whether we can really accelerate that part of the business. We are sort of in talks and discussions now between each other and I'll hope to make announcement in due course.


William Kirkness, Jefferies LLC, Research Division - Equity Analyst [17]


This is Will Kirkness from Jefferies. I've got 3 questions, please. First of all, up on the breakdowns one, so down 14% year-on-year. It seems like quite a big move. I just wondered if you could give a bit more detail on where that drop was coming. Secondly, just on pensions, the deficit was up a little bit, and I just wondered whether there's an implication for slightly higher outflows for covering that. And then lastly, I just wondered time line for the broader motoring app. So if members or nonmembers around SMR, and I think it was going to include all the navigation and parking and various other functionality.


Simon J. Breakwell, AA plc - CEO & Executive Director [18]


Yes. Sure. So on breakdowns, this year, we had a pretty benign summer and a pretty benign winter. And cars simply broke down less. They broke down less on the B2B side, so new vehicles as well as older vehicles in our sort of B2C base. And that was the reasoning behind it, and I think, well, I'm pretty certain, all of our competitors would have seen that as well. On pensions, Mark can pick that one up after I finish. And broadly speaking on the app. So we've continuously updated the app. So let me just talk about that in a little bit of detail as it's a subject close to my heart.

So as I mentioned, when I took over, we had about 800,000 downloads. We're now just pushing to 1 million or thereabouts. The app has got better and better whilst I've been here. Last month, we integrated Smart Breakdown into the app. So if and when and if you get Smart Breakdown, the app will automatically configure itself to expose vehicle information and sort of health information about your vehicle, so that piece has dropped the Smart Breakdown integration. We've got a major of rewrite of the app planned for next year, which you rightly say includes sort of daily utility products. And it will also include SMR, too. So I expect that to happen like throughout next year. There won't be some moments in time when there's some sort of demising moment and a brand-new sparkly app, it will just evolve over time.


Mark Strickland, AA plc - Interim CFO [19]


In terms of the pensions, you're quite right, we're into the period of our triennial valuation, which is 31st of March, 2019. That has to be concluded by June 2020. Obviously, with the trustees, we're talking about a technical provisions basis on IAS 19 basis. Currently, we do not expect our deficit-reduction payments to increase. We have a deficit reduction plan that is currently in place. We do not expect that to increase as a result of the outcome of this triennial evaluation. Obviously, we are still in discussions with the trustees. So there is no definitive outcome, but -- so I do not expect an increase.


Unidentified Analyst, [20]


Andrew from (inaudible) Capital. Just one question. Could you expand a little bit on your debt refinancing strategy on the A and B notes? And if you can speak about your strategy also on the bond buyback?


Mark Strickland, AA plc - Interim CFO [21]


So yes. Obviously, we have quite a considerable runway through to January 2022, which is when the A5 -- GBP 700 million of the A5 is due, and July '22, which is when GBP 570 million of the B2s. So we proactively monitor where the markets are, and I think proved historically that we will react when opportunity arises. We intend to continue to generate cash and have quite a sizable amount of cash in the business. And through EBITDA growth and cash generation, obviously, our metrics will get better. And we expect to proactively refinance as and when the opportunity arises. But we will not leave it until the last moment.


Simon J. Breakwell, AA plc - CEO & Executive Director [22]


Any more from anyone? No? Okay. Well, that's a wrap. Thanks for coming. Thank you.