Edited Transcript of AA.L earnings conference call or presentation 7-May-20 8:00am GMT

From all the above points, we view FY ’20 as a year of strong business performance. I now want to discuss the COVID impact. I have 4 slides that highlight the company’s response in some detail, after which, Kevin will discuss financials.

Next slide. From the very start of the COVID crisis, we established 3 very clear overriding priorities for our company. Firstly, to maintain our duty of care to protect our members, customers and colleagues. Secondly, to maintain service across all of our lines of business. And thirdly, clear and totally transparent communication with the company as we move through this crisis. We immediately instituted our pre-existing emergency protocols. We have a well-understood Gold/Silver/Bronze command and control decision-making structure for emergencies, which met daily to drive decision-making up and down the organization with clear accountability. Remarkably, and in no small part due to our recent technical investments, excellent IT group, in 2.5 weeks, we moved from having 150 homeworkers to 3,500 colleagues working from home. All call center — or also call centers and offices are now closed, apart from a small critical group of 50-or-so employees working in a safe fashion in Oldbury. And we were, within 2.5 weeks, operating a solid and predictable service plan, with safe working protocols established and PPE procured. And you might be interested to know that in the last 6 weeks, we’ve got through a year’s worth of PPE.

Company comms are also critical. I communicated daily to the company, ensuring that any decision my executives said was communicated often on the same day to the company. We’re now operating at a 3 times a week pace for company comms. Our response was one of the greatest examples of teamwork and of the company putting together for each other that I’ve ever seen in my professional life.

Initially, and for a short period, we will be participating in the government’s furloughing scheme. We participate responsibly and sparingly, being highly cognizant of the spirit and the intent of the scheme, to protect the employments and to offer it to colleagues who have either no work or who cannot perform their work at home. The company is also topping up furlough payments to ensure, as far as possible, colleagues are not out of pocket. I would also note that, overall, the numbers of colleagues impacted are small compared to the overall workforce size and that the financial savings associated with the furlough scheme are small compared when — compared to the considerable company cost mitigations, which I will cover shortly.

So within 3 weeks, we were fully operating in new business as normal. Service was always maintained indoor and outdoor. Operations were stable. Communications were excellent, and we are now calmly and thoughtfully working our way through the next phase, which I will come on to discuss.

But before doing so, I wanted to highlight our national support efforts. At times of great pressure and dislocation, any organization’s true culture is positively or negatively exposed. And I am pleased to say that at the AA, we’re proud of our old-fashioned virtues of courtesy and care, and they were very much at the front of how we are treating this challenge, both internally and externally.

We move on to the next slide. Externally as a company, we’ve been working flat out to help the national efforts to fight coronavirus. At the end of March, only a few weeks after lockdown, we received a call from the London Ambulance Service as they needed help urgently to get more ambulances on the road to save lives. We now have over 200 patrols assisting 600 ambulances in London, 24 hours a day, effectively doubling ambulance capacity. And we are also supporting ambulances around in different parts of the country. On April 2, we were the first to launch a free breakdown service for any of the 1.5 million NHS employees. Around 20,000 key workers have already registered, and we’ve rescued over 3,500 key NHS staff. We’ve also erected signs and have been supporting Nightingale Hospital in Bristol, and patrols have been helping ambulances — ambulance maintenance at the London Nightingale Hospital. And as a company, we’re immensely proud to keep Britain moving.

Moving on to the next slide. Now moving on to COVID mitigations and COVID business impact. I said the organization had taken mitigating actions. As a business, we have taken swift and decisive mitigating actions to flex our costs, preserve cash and maintain EBITDA resilience. We have suspended the dividend. We have instituted a pay and hire freeze. We have suspended the normal bonus program, and executive directors and Board members have taken a pay reduction as well as a myriad of other cost controls. As I hope you can infer, and as Kevin will detail in a slide’s time, the business is stable, resilient and operating smoothly. And it is because of all of the actions we have taken that remarkably, in this current business climate, we are expecting performance to be robust and only slightly below FY ’20 levels. Again, I must stress, that is based on our current assumptions.

Now moving on to business impact, next slide. Firstly, turning to Roadside. Service is stable, indoor and outdoor. Breakdowns at the start of lockdown dropped to 40% of budget. They are now at approximately 80% on a rolling 7-day basis and somewhat higher in recent days. Lower breakdown volumes have been offset by relative resilience in PFU income and ancillary income, where we have seen record-level battery sales.

On membership, as you would expect with less cars on the road and concerns over cash, we have seen some fluctuations in membership, both new and existing. We expect membership to be down in H1, followed by improvements in H2. I would stress, it is hard to extrapolate from 6 weeks of data, and today, we will not be offering any additional guidance on membership.

We now have our teams working on mitigating marketing and other actions and plans, plus there are strong indications that as Britain’s drivers are slowly moving back onto the roads, all of the above are yielding positive results. We are also, as you would expect, seeing some softness in Driving Schools and AA finance, too.

Moving on to Insurance. Though new business is marginally down, retention and renewal rates are good. The obvious drop in claims, given less drivers on the road, has more than offset any drop in expected accident management revenues. Overall, the Insurance business is performing strongly.

A few weeks ago, we started moving to the next phase of managing the COVID impact. As already mentioned, we have in place an ever-deepening program of mitigation work on sales and marketing. We are also now, with the same calm, diligence and thoughtfulness, planning for a phase lift of restrictions.

Finally, we are focusing more attention on further improving operating efficiency and lowering our cost to serve. Once those plans are finalized, we will be returning to this audience to outline them in some detail.

I will now pass across to Kevin to discuss financial performance.

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Kevin Jeremy Dangerfield, AA plc – CFO & Director [2]

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Thanks, Simon, and good morning, everybody. I’ll take you through a summary of the financial performance of the business for last year.

If we can go to Slide 14, please. The headlines. A very good performance from the group across all key performance indicators. Overall, the group revenue was up 2% to GBP 995 million, reflecting the positive performance of both the Roadside and Insurance businesses.

EBITDA at GBP 350 million was just above expectations and margins of 35% were stable year-on-year. Operating profit and PBT was significantly improved by 17% and 102%, respectively, reflecting much lower one-off costs incurred and a reduced finance cost year-on-year.

Free cash flow was materially improved at GBP 83 million. Again, a target that we had been clear was very important for us to achieve and demonstrates the quality of the business to generate positive cash flows with an improving EBITDA.

Net debt also reduced by GBP 70 million year-on-year and again, reflecting our cash generation, but also our target to continue to reduce our debt every year. From a refinancing perspective, we undertook a GBP 325 million exchange offer for our A5 notes in February into the new 7-year A8 notes, extending our expected maturity profile from 3.3 years to 3.9 years. And we’ve recently completed the early drawdown of our GBP 200 million STF, which will replace the maturing A3 notes in July this year. This early drawdown derisks our short-term financing needs, and our next maturity — maturating of debt is the remaining A5 and B2 notes in 2022.

Next slide, Slide 15. Slide 15 is the full income statement and just a few points of detail here. Including in the trading EBITDA is a benefit of GBP 3 million in relation to the adoption of IFRS 16. And then I just have 3 points to note on the increase in operating profit. First, there’s an GBP 11 million gain within the contingent consideration line for the early settlement of deferred consideration relating to the AA Cars acquisition. Second, you can see a substantial reduction in net one-off costs to just GBP 4 million that relate to a number of strategic initiatives and cost optimization programs, offset by some gains on disposals. And just to note here that we are now describing these net costs as adjusting operating items rather than exceptional items from now on.

And then third here, offsetting these, an increase in depreciation and amortization, in line with the investments made in the group. And then finally, on this slide, finance costs were lower by GBP 16 million, the main reason being a GBP 15 million early repayment penalty that was paid in the prior year.

Next slide, 16. Turning to each of our businesses to give some color. Roadside first. Roadside revenue was flat year-on-year, reflecting the benefit of higher B2C business, the acquisition of Prestige, but that was offset by lower revenue from B2B where we decided not to renew the contract with PSA last year. In line with our expectations, we’ve returned B2C membership to grow for the second half of the year, with membership up 0.2% year-on-year. Retention rates remained flat at 80%, and our average income per paid member was up 2%, in line with inflation. All the main KPIs for our membership business have tracked in line with our expectations and thus, is testament to the outstanding service delivery, the sustained quality of our marketing and the ever-increasing operational efficiency and effectiveness of the business.

Our B2B customer holdings were in line with expectations with all key contracts retained last year and with the addition of 207,000 Admiral customers since last September, which is going very well. Average income per business customer also increased by 5% year-on-year.

Next slide, 17. Turning to Insurance. A very successful year in tracking both our EBITDA and policy growth to the targets we’ve set ourselves for full year ’23. Revenue was up 12% to GBP 154 million, driven by the growth of both the broker and the in-house underwriter. We achieved 19% growth in motor policies and 2% in home policies. The strong growth of our nonmember motor book, improvements in our customer journey and the introduction of real-time pricing through our Insurer Hosted Pricing have all contributed to this growth. We’ve also had very good conversion of Insurance customers taking Roadside membership this — with this year, up 36% from 25% the previous year.

In terms of average income per policy, we have 2 measures here. Our traditional measure of an average of GBP 68 that excludes income from the in-house insurer and Accident Assistance business and which is slightly below the previous year. That reflects the investment in marketing to grow the new business. And then a new measure at GBP 83, which now includes the income from the house insurer and Accident Assist business. This increased by 4% year-on-year and reflects our focus on driving income per policy across the breadth of our offering.

Trading EBITDA was in line with expectations, 3% up on the previous year, but included the higher investment in marketing as we continue to grow our policies and the continued growth in the profitability of the underwriter.

Next slide, 18. Turning to the cash flow. A very important point to the successful performance last year was a strong free cash flow. We guided to circa GBP 80 million and achieved GBP 83 million, an important proof point that we can deliver both EBITDA and significant cash flow at the same time. A few other comments. Our operating cash conversion was close to 100%. Capital expenditure at GBP 69 million was in line with our guidance. Interest payments were flat year-on-year, and one-off costs, now described as adjusting operating items, materially down year-on-year.

Moving across to Slide 19. This next slide just gives you an overview of our debt profile and the proactive and disciplined approach we’ve taken to refinancing, including the bond buyback, the A5 exchange offer in February and the early drawdown of our STF to replace the A3 maturity in July. That early drawdown, as I said earlier, fully derisked in our July 2020 maturity of A3 notes and as part of the A5 exchange and the STF drawdown, S&P has reconfirmed our BBB minus rating on both occasions. We continue to be very active in pursuing our refinancing options despite COVID-19, assessing where the market is and the available and affordable options opened to us. And just to remind you, the next maturities of our debt are in January and July ’22 of the remaining A5 notes and B2 notes, respectively.

Now going across to Slide 20. This just summarizes the adjustments required to meet — to the net debt from a covenants perspective. Our debt documents require covenants to be reported on a pre-IFRS 16 basis. The message here is that we have significant headroom against our covenants. We also have a healthy level of cash and cash equivalents at year-end of GBP 159 million with undrawn facilities, including GBP 50 million working capital facility.

Going across to Slide 21. The 3 — there are 3 significant points relating to our pension position here. Firstly, our IFRS accounting deficit reduced significantly to GBP 162 million. The triennial review of the AA pension scheme was completed with a very significant reduction in deficit to GBP 131 million. As part of the discussions and agreement with the pension trustees, there is a circa GBP 6 million per annum cash saving to us going forward, with annual cash contributions of GBP 25 million, rising by about GBP 1 million per annum over the next 3 years.

We also went through a consultation process earlier in the year with our remaining DB CARE scheme employees to close this scheme, which will save us circa GBP 4 million in cash annually. As part of that negotiation and the transfer to a DC scheme, we’ve agreed to enhance the employers’ contributions for 3 years, which in total will be circa GBP 11 million.

And then going to Slide 22 and my final slide is summary. A strong performance in full year ’20, continued proactive debt management throughout last year and into this year. Clearly, we’ve entered a very different period this year with the COVID-19 crisis, but we continue to be very active in looking at all refinancing options as we proceed through the year.

As Simon has pointed out earlier, the group has very successfully made the transition to operating in this lockdown period and continuing to service our members and customers well. Combined with quick and significant changes to our cost base for this year and our ability to continue to flex our business going forward, we’re confident in the overall resilience of our business through these difficult times.

We recognize that there is considerable uncertainty in forecasting this year, and we’ve set out in our statements some broad assumptions in our look forward. These are that lockdown is in place through to early mid-summer and from there, there is continued easing of restrictions and a more normalized environment. In assuming this, it is our current expectation for this year’s performance to be slightly below that of last year.

So with that, thank you very much, and I’ll hand you back to Simon.

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

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Thank you, Kevin. I now want to review our business strategy and our perform — business performance in more detail.

Next slide, Slide 24. Our ambition and the AA’s vision is to make driving better every day, removing the hassles and giving drivers back the freedom of driving. We will build a suite of simpler and smarter digital products that increasingly cover every stage of the driving journey. We will increasingly target the 30-million-plus drivers in the U.K., of which we currently only have 30% or thereabout.

Next slide. It’s our ambition to serve everybody who drives or wants to drive in the U.K.; to build a marketplace of products for every driver from breakdown and insurance, where in breakdown, we should also be preventing you from breaking down via Smart Breakdown; through to servicing and emoting your vehicle; to car finance; to learning to drive; and much more. All woven together in a rich digital experience, underpinned by the same courtesy, service and care values that are the hallmarks of the AA. And increasingly, we are putting in place the building blocks to make this a reality.

Next slide. Now that we’re 2.5 years into this strategy, I wanted to pause to reflect on the last 2.5 years. We now have real traction and growing momentum. We’ve invested in the foundations of our business, our team, our operational strength, our IT development and building a positive culture. We are driving real growth in our core membership and Insurance businesses, and we have rolled out innovative new products that go to the heart of improving and broadening our service offering to our members and customers. We will continue to innovate and accelerate, supported by a focus on ever-improving efficient and effective cost to serve. And all of my team are focused on the delivery of long-term sustainable trading EBITDA growth and cash generation through solid and meticulous business execution.

Next slide. So now moving on to a review of the business. Next slide, please. I always start to review the Roadside business by looking at operations and service. The AA is first and foremost a service business. Predictable, excellent service is not only critical for customers and members, but it also gives us predictability over the largest cost item in the P&L. On the left-hand side of this slide, you can see some of the extensive improvements we planned when I became CEO: installing new leadership through to lowering garaging costs, driving digital usage and much more. In the center column, you can see just some of the actions we have taken. And on the right-hand column, you can see that across all metrics, we have improved considerably, a remarkable achievement. From lower call to arrive, lowering fixed times to improving repair rates, at the AA, we have service and operation metrics that are the industry gold standard, demonstrated by the company’s continued success in winning leading awards.

Next slide. Now moving on to membership. Driving membership effectively is a function of great service, great marketing and pricing as well as optimizing all the distribution opportunities we have across the organization. This slide outlines some of that activity for the last year and what we have planned for next year. In marketing, our market-leading TV campaigns and integrated sales and marketing activity are delivering great results. And in FY ’21, we’ll have renewed focus on helping customers enjoy the freedom of driving when the COVID-19 restrictions are lifted.

In sales, day in, day out, we continue to optimize our pricing models and ensure good customer value and commercial return. And in FY ’21, for example, we’ll continue to roll out our breakdown standby proposition to our driving school customers as we seek to engage the typically younger driver into the AA brand.

Cross-sales are critical. And in cross-sales, we had a very strong year across the business, with 36% of our sales coming through Insurance business. In FY ’21, we will be building more of these successful results and continue to roll out more offers across the AA group.

And finally, in retention, our members are remaining loyal to the AA, which is reflected in a continued strong retention rate of 80%, a function of great pricing, great service and great products. And in FY ’21, we’ll be focusing on initiatives that drive down retention costs, while sustaining the quality of service our customers expect and deserve from the AA.

Next slide, Slide 30. Our B2B business continues to improve. Uber integration has demonstrated our digital capabilities by integrating our breakdown service and SMR capabilities into the Uber app. Our partnership with Admiral is fully implemented and now with over 200,000 policies added to date. And all of our contracts were renewed and extended during the year.

In this COVID crisis, you might be interested also to know that we have been supporting our OEM customers who have been utilizing our Roadside schemes to repair warranty defects and issues whilst many of their dealerships are closed. And in B2B, we continue to invest in our digital capability. We fully launched agile, which transforms Roadside mobility experience, allowing a patrol to directly book car hire from their phone. You can now scan a member’s license to create a slick digital experience and both reducing time at the Roadside and also time at the car hire office. We have also launched our new B2B online sales journey in February. And we are now integrated into the SPARX European platform that creates a common European platform for breakdown management reporting that is currently being used by our partner, Ford.

Next slide. We have also made great strides in digital reporting. As I said at the last presentation, we will be adding 2 services this year, making it easier for members to report a breakdown. But first, allowing the same breakdown reporting flow via the website as you get on the app. Plus, if members would prefer, we can now push a web link to their phones, linking them to that digital reporting service. You can see from the graph, these have significantly improved our reporting capabilities, and now over 60% of our B2C customers interact with us digitally when reporting a breakdown. For B2B, this year will be a big year. We’ll be rolling out the same technology to our key partners, starting with Lloyds. You can see the app implementation at the bottom right-hand side of this slide. Once we have Lloyds on the app, we’ll be increasing the reporting potential of our digital breakdown service to over 5 million customers. Broadly speaking, that’s a 40% increase in the addressable market that we have.

Next slide, Slide 32, please. Finally, before coming on to talk about Insurance, we’ve launched Smart Breakdown, a truly unique product which can detect 80% of breakdowns with full integration from the members’ vehicles into our call centers and patrol vans. Smart Breakdown had a full above-the-line launch in March, featuring a new iteration of our Red Dwarf ad and will be approaching 5,000 sales by the end of this month. However, following the COVID lockdown, we’ve now paused for a moment, and we are keeping this under constant review.

Next slide, please. Turning now to Insurance. Overall, we said we would target policy growth, if you recall, over the period of this program from 600,000 or thereabouts to 2 million policies. We said we would grow EBITDA from the mid-50s to close to GBP 100 million EBITDA. Some of that growth will happen this year, but the majority of that growth will come in the last 2 years of our 5-year plan. Our strategy, just to reiterate, is simple, and it has 3 elements. Firstly, leveraging our in-house underwriters’ capabilities to use our unique data insights as a breakdown business, coupled to our skills of selling insurance to AA members to identify non-AA members who have the same risk characteristics as existing AA members and Insurance customers. Secondly, to improve premiums through enhanced pricing sophistication and broaden our panel — and broadening our panel footprint. We added Aviva, as you can see, this year. And lastly, to use technology and data to build new products and services. One of those new product capabilities is accident management.

Next slide. We have now spun up a new accident management function. We have a new organization, fully integrated into the new claims management platform that we shipped last year. So we have accident management and we have our claims management organizations all on one new platform. There are obvious accident management synergies at the AA, not just with our own Insurance business, but also with our breakdown business and Smart Breakdown, so we can detect breakdowns and accidents. This is a really interesting opportunity for us and a great example of thoughtful and well-planned execution on the part of the Insurance team.

Next slide. So as you can see, motor and home insurance policies have grown nicely. We’ve seen a growth of 36% and 31% CAGR growth rates in motor and home, respectively, over the period of this program. Retention rates are on plan. Income per policy is strong. And as you heard from Kevin, and incredibly, we are now selling Roadside Memberships of 36% of new Insurance customers. So our Insurance business is performing well. Both policy growth via the broker and insurer are strong and ahead of plan. We have good revenue per policy growth with some great opportunities around new lines of business such as Accident Management and new digital products and services continue to roll out.

On to my final slide, please, Slide 37. Before summarizing, I’d like to say that this — that these results, whilst presented by Kevin and myself, represent the work of our entire company. And the last 6 weeks have demonstrated to me more than ever what a truly remarkable company the AA is. So FY ’20 has been an excellent year, with strong delivery across all metrics. The company’s swift and decisive response has meant that business is solid, stable and currently demonstrating strong resilience around EBITDA and cash. We now have a company operating well, growing nicely with a highly competent management team executing and delivering on our plans, and that same team will now add renewed focus on operating efficiency and lowering our cost to serve.

Thank you for listening. And with that, Kevin and I will take questions.

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Questions and Answers

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Operator [1]

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Thanks, Simon. (Operator Instructions) Our first question today comes from Joe Brent of Liberum.

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Joe Brent, Liberum Capital Limited, Research Division – Head of Research and Equity Analyst [2]

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Clearly, some very good statistics on the conversion into Roadside from Insurance. Could you elaborate a little bit more how you’re achieving that?

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

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Sure. It’s clean old-fashioned, good execution, Joe. As with all these things, the hard bit isn’t knowing what you’ve got to do. It’s having a great team to crack on and get it done. So we’ve been looking at everything from, how we message customers through e-mail. But in particular, how we message customers, Insurance customers who already got insurance and contacting them on renewal around Roadside. And also, as I said in my presentation, really making an effort to drive Roadside Membership for new insurance customers when they call up through the call center, primarily.

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Operator [4]

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Our next question today comes from Daniel Hobden of Crédit Suisse.

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Daniel James Hobden, Crédit Suisse AG, Research Division – Research Analyst [5]

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Just a couple from me. I was wondering if there’s anything you can say around the cost to achieve the working from home solutions and the cost of the additional PPE that you referenced having used. Question number two, I was — you said there was some softness in the Driving Schools. I suppose, just for my understanding, I suppose, during lockdown, are the driving schools not operating? And how does your model work through that? Because, if I understand, it’s a franchise model. And then question number three, I think you said that circa 50% of breakdowns are now reported or were tracked digitally. I was wondering, how has your footprint at your call centers changed over time to reflect that. I suppose my understanding would be that if you’re tracking more and more through the digital methods, then maybe the numbers of call handlers required would be coming down.

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

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Okay. No problem, Daniel. Let me answer those questions. First of all, on our cost to achieve homeworking, there were some marginal cost associated with that, but it was very, very small, sort of single-digit million numbers from my recollection. The vast majority of everything that we’ve done around homeworking, we were able to accommodate within our existing IT estate. And you’ll recall that over the last couple of years, we’ve been making a whole raft of upgrades to that work. So for the purposes of your model, I would assume that for all intents and purposes, we absorb those costs ourselves. The cost of PPE, that was also borne in our normal operating budget. We stocked up on PPE just before the crisis hit, and we continue to procure PPE in line with our expected demand. On Driving Schools, you’re right, we do have a franchise model. We have given payment holidays to those small business operators that are typically are driving school instructors. Driving Schools, however, are open, but only open in 2 specific cases. Open, if we have to teach new key workers how to drive, and there, sort of we offer sort of driving lessons in a very, very sort of safe environment, and there’s only a small number of those.

And moving on to your comment around digital and call center size. So 60% of our B2C — and remember it’s only our B2C customers report and track through the app. Around just north of 30% or thereabouts use the app totally without touching call centers. So that’s an important thing to bear in mind. We have seen a reduction in call center size and capability, and that has all been priced into our operating forecast going forward. One of the biggest opportunities we’ve got, which is why I stressed it in the presentation, is the opportunity to bring on 2 or 3 of our very big B2B customers and have them using our breakdown app as well. And then we expect to see additional efficiencies. And lastly, I mentioned it on a couple of times in my presentation that we will, as a management team, increasingly now, start to look at prioritizing efficiency and cost-to-serve improvements, now that we have the stable operation that we have. And once we have all of that planned out, we’ll be coming back to you and this audience in some detail to outline those plans.

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Operator [7]

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Our next question today comes from Andrew Nussey of Peel Hunt.

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Andrew Nussey, Peel Hunt LLP, Research Division – Analyst [8]

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Just — so the first question, really, sort of followed on from your last point there, Simon, in terms of where the big levers might be in terms of future cost-to-serve reductions. And if you can give us any little bit of insight as to the stage, rather than perhaps having to wait a little, would be helpful. And the second question was sort of around Roadside. As you sort of noted, volumes have started — or breakdown volumes have started to increase with the level of increased traffic. Given that we’re probably like to see some form of lockdown easing on Monday, can you give us any insight from what you’ve experienced over the last week or so in terms of new sales, renewals trends and the ability to get inflation cost passed through in terms of customer premium?

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Simon J. Breakwell, AA plc – CEO & Executive Director [9]

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Sure. So let me answer the big levers question and broadly speaking what we’re seeing on Roadside, and then Kevin can come and talk about what we’re seeing in membership. So firstly, Andrew, in terms of the big levers, again, they’re fairly predictable. There are 3, we think, in our company. The first is back-office functions: Finance, HR, legal and IT, predominantly; the second is call center operations, indoor operations; and the third is outdoor operations. And we started back in January to really begin on our current plans and look at our capacity for bringing forward those investments and also what we could do if we really pushed on those 3 levers. Unfortunately, COVID hit and that work was postponed for a couple of months or thereabouts, and we’re now picking that work up. We don’t have anything to say about the quantum of savings associated with that work. But as I said earlier, we will come back to this group, once we have identified what savings we can go after.

And I guess one other point, that’s not to say that we don’t get operational efficiencies every year. We absolutely do, as you know. And as a company, we now absorb the cost of inflation into our operations, but we want to sort of step on the gas, is how I would put it. Secondly, on Roadside trends. Just after lockdown, we saw workload fall to about 40% of budget on a rolling 7-day basis. As of 10 days or thereabouts ago, we were back to 75% of budget. And late last week, we were down to about 11% of budget. So we have seen some pickup. Now that doesn’t correlate, of course, to cars on the road because some of these breakdowns are us attending cars on the drive, if you like, that haven’t been sort of like started up in a while, and that comes through in big battery sales. But we do expect, as lockdown is lifted, more cars to come on to the road. And one of the things that we’re cognizant of is planning for either a steady improvement or a surge of cars coming back onto the road. So that’s some of the scenario planning that we’re doing.

Kevin, do you want to comment on just — talk about membership?

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Kevin Jeremy Dangerfield, AA plc – CFO & Director [10]

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Yes. And Andrew, we’ve — I think we say in the statement that, from a membership point of view, we’ve seen some variability in this lockdown period. New business sales have been down somewhat. You’ve also seen some slight reduction in retention during that period as well. What we’ve seen — that variability, I mean, what we’ve seen in the last few days is actually new business sales improving and improving quite well. So the overall view from us is it’s difficult in this 7-week period to talk about membership per se, where it’s actually going, because we’ve not hit a new normal yet. It has been improving in the last week or so, so that’s good news. But it goes to the heart of the comments that we’ve made in the statement about the fact that we think membership will be down during this first half. But actually, there are still some variability in that, and it’s certainly going in a positive direction at the moment. So these are the basic comments really at the moment on membership.

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Simon J. Breakwell, AA plc – CEO & Executive Director [11]

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Andrew, just hot off the press, breakdown workload yesterday was only 6% of budget.

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Operator [12]

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Our next question today comes from Natasha Brilliant of Citi.

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Natasha Brilliant, Citigroup Inc, Research Division – VP [13]

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I just wanted to follow-up from Kevin’s last comment on membership and retention. And if we think about where those rates might trend to post the sort of disruption from corona at the moment, so if we take the 80% retention rate as a sort of starting point, where over time you think that could get to? That’s my first question. The second question is around your debt management, and you’ve been pretty proactive on that over the last few months. Clearly, the market conditions are not particularly favorable, and you talk about considering all options to address some of your debt. I just wondered if you could give us a bit more color on what those options might be. Anything that you’re considering? And then my final question is just whether you have an update on the timing of the FCA review on the insurance market, please.

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

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Yes. Okay. So let me handle retention and FCA, and then Kevin can handle refinancing. So on retention, we — as Kevin said, we’re not breaking out what we expect retention to be going forward, but we’ve seen those strong performance by our retention teams in recent days. I would suspect over the medium term, we would get retention pretty much back to where it was. On the FCA, as you know, the FCA were looking to report round about now actually. They’ve pushed that back by about 12 months or so. We’ve been in contact with the FCA on a daily basis, more or less, through this crisis. They’ve been wanting to understand how we’re running the operation. And I feel good about where we are with our remediation around Insurance and pricing, until we’ve done a great deal of great work around pricing transparency, around the handling and treating of vulnerable customers, which we have ongoing work around, as you would expect. And also, as I think I’ve mentioned before, over the last 3 years under Janet Connor’s leadership, who’s the lady who runs our Insurance business, we have methodically been mindful of bringing down our commissions, too, and we’ve done a great deal of work around that as well.

Kevin, do you want to come on and talk about the refinancing?

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Kevin Jeremy Dangerfield, AA plc – CFO & Director [15]

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Yes. I mean, Natasha, we’ve obviously been very active in — proactive in our debt refinancing with the A5s earlier in the year, the STF drawdown that we’ve done early, and that’s obviously dealt with the short-term refinancing need of the maturing A3 notes. With respect to the next set of debt, the A5 notes maturing in January 2022, we do think there will be a windows open to us to refinance those during this year. I think you know and I know that the B notes, at the moment, those, they don’t look like that we can refinance those at an acceptable level, but there’s plenty of time for us to refinance those as we go through this year. And we’re quite explicit in the statement, as you said, about all options. We will look at the plain vanilla refinancing options as well as any other financing options available to us as we go through these next 6 to 12 months. I’m not going to be specific about what those may or may not be, but we’re clearly being active in terms of making sure we understand what those options are, when they’re going to be available, when they are in a place where they’re affordable to us, and ultimately, be able to do and press the button on any of those refinancing option as appropriate.

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

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Just one other comment, Natasha, and to anyone who’s listening. Again, hot off the press, nub stats and gives you a feel for how the business is sort of coming back. Yesterday, our new business sales were actually above budget. So as Kevin said, there are indications that the business is sort of coming back relatively strongly.

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Operator [17]

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Our next question today comes from James Rose of Barclays.

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James Steven Rosenthal, Barclays Bank PLC, Research Division – Research Analyst [18]

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Three from me, if I may. The first is on, can you give us a sense of the degree for which the cost savings you’re taking in this year may have sort of somewhat hindered progress you’re making in regards to — are there delays to some of the new products you were rolling out or perhaps still custom marketing? And secondly is on the cross-sales from AA Insurance into B2C. Are you seeing there, don’t have the same prices as you would normally do for a direct B2C customer? And then lastly, on Smart Breakdown. How are those numbers evolving [relative what you] — what expected in your plan? And perhaps could you touch upon your sort of longer-term expectations for penetration is happening? Do you see it becoming a very significant channel in the future?

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Simon J. Breakwell, AA plc – CEO & Executive Director [19]

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Yes, absolutely. So cost savings and to what extent has that hindered our ability to get new products out, I think, was the first question. The answer is, on the one hand, very little because we — as I said I think I’ve mentioned before, at any one point in time, the way we now run the business is we have a rolling 3-year plan that has all of the CapEx and OpEx associated with that plan baked into it. So at one level, it hasn’t made any impact at all because the plan’s the plan and we execute the plan. On the other hand, do I have — yes, Gareth, who runs Roadside; and Janet, who runs Insurance, a little bit frustrated that they can’t get more new products out faster? Yes, sure, I do. But that’s kind of how you run the business. And we have to make those trade-offs, and I think over the last sort of couple of years, we’ve made the correct trade-offs. So that will be the answer to that question.

As far as the cross-selling and how we price, the prices that we offer to our Insurance customers are more or less exactly in line with the new business pricing that we offer new business customers on the B2C line. And on Smart Breakdown, we don’t break out the Smart Breakdown numbers or our expectations, but I’d say 2 things. Firstly, before lockdown, Smart Breakdown was performing online and on budget. That’s the first point. Second point is it’s difficult to make a forecast for the Smart Breakdown product. And I’ve said this before, our forecast model a very modest sell-through of Smart Breakdown and that’s only because it’s such a new product, frankly, we’re not sure on the take up. Early indications are that it’s a fantastic product, customers love it, and it was selling through nicely. But as I think I’ve said before, we’re a fairly prudent sort of organization. So that’s how we think about it.

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Operator [20]

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(Operator Instructions) We have no further questions coming through. So I’ll hand back for any other remarks.

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Simon J. Breakwell, AA plc – CEO & Executive Director [21]

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Well, just briefly, Thanks, Megan. Thanks very much, everyone, for listening in. I’d say 2 things in summary. Firstly, FY ’20 was a great year for us as a company on all the metrics that we set out. And secondly, that as a business, we are working through COVID and its impacts, I think, as well as anybody. And that’s in no small part due to a great team. So with that, I’ll close, say thank you to everyone for listening in, and stay safe and take care. Thank you.