Saga plc

Good morning everybody and welcome to Saga's half year results presentation for the period ended 31st of July, 2023. This morning we'll cover the key business highlights and the financial summary for the six months. In addition, we will give you a short update on our work on data and lifetime value modeling, which is the key underpin for our strategy. As such, I'm joined by our Group CFO, James Quinn, and our Chief Data Officer, Mike O'Donoghue. I'll cover the highlights of the first half, James will run through the financials, and I will then update on the performance within our core businesses, and Mike will take you through the progress on data. Then we will open up to take your questions. We've also announced today that after almost five years, James is moving on from Saga to pursue a portfolio career. I'd like to thank James for everything he's done for the business. He's been a brilliant CFO, a strong leader, and a fantastic colleague. Thank you, James, and I wish you well for the future. So moving on to the overview of the first half and to the headline outlook for the full year. Underlying PBT for the first half is broadly flat year on year when looked at with a consistent accounting treatment and as we look to the second half we have confidence that we will deliver significant double digit growth in revenue and underlying profits for the full year and well ahead of market estimates. This is led by strong cruise growth with PBT, cash flow, load factors, per diems and customer net promoter scores all significantly ahead of prior year. River Cruise came back into profit in the first half and travel is on track to follow suit by full year as planned. In travel we are seeing increased demand and improved MPS scores with significant innovation and improved quality driving higher average selling prices. Saga Money has also added new product innovation, launched this month, and is set for exciting growth ahead. Our savings product has benefited from the interest rates hike, while our equity release business has slowed, but not to the extent of the wider market, increasing our market share. Media has also had a strong first half. In insurance, home, travel and PMI are still performing well, but motor performance has dampened earnings, along with many others in the market, resulting in a £68 million write-down of goodwill to reflect future earnings projections. I want to give you a quick update on the sale of Acol, our underwriter. As you know, we run a process and we were very close to agreeing a transaction. We have concluded that, for now at least, it is right to retain that asset. However, we will re-evaluate our options as the landscape evolves and there is the potential for generating greater value for shareholders. In the meantime, we will draw down on the unsecured loan provided by our chairman, which has been increased by £35 million to £85 million, reflecting his support and belief in the business going forward. To further increase the group's financial flexibility, we have and will continue to take actions on costs, which include lowering our central cost base by at least £15 million per annum and the re-phasing of some investments in our newer businesses. This focus on cost is a further step in streamlining our business, making the centre lean and empowering our business units. This lower cost will benefit half two of this financial year as well as ongoing into 24 and 25. Net debt has fallen to £657 million, £54 million lower than at January 2023, and we have £180 million of available cash at half-year. We are also reconfirming our commitments to repay the 2024 bond from available cash in May next year. As we look ahead to the full year, we are confident in delivery of the significant double-digit profit growth that we set out to achieve this year, which is also well above current consensus. in more detail on our core business units. Ocean Cruise continues to go from strength to strength with an 83% load factor for the first half of the year and a per diem of £333, while River Cruise is in a similar position with a load factor of 83% and per diems of £296 and has returned to profitability in the half. This business has also seen revenue grow by more than 40% and the guest numbers increased by 34% in the first half. Travel also continues to show strong growth, led by touring and a revitalized stays program. Revenue in the first half reached 70 million, up from 44 million last year, with passengers increasing to 26,000. Innovation has won customer interest and bookings, demonstrated by the first private jet tour departing from Stansted a couple of weeks ago, alongside the launch of our Titan touring range of products in Australia. Saga Money, building on savings and equity release, has recently launched two new products with two more to launch in the coming months and is achieving sector-leading net promoter scores of 72. Finally, insurance broking remains a core part of the Saga Group with 1.6 million policies and strong performance in home, travel and PMI, offset by declines in motor, meaning that we have seen an overall 6% decline in policies in the half. Motor and home margins have been under pressure at £56 per policy, while retention remains strong at 84%, one percentage point higher than the previous year. We're taking action to mitigate the pressure on earnings by realising a series of efficiencies across insurance, reducing overall operating expenses by £5 to £10 million per year. I'll now hand over to James to cover the financial detail of the first half of the year. James.

Thank you, Ewan, and good morning. Ewan mentioned, we announced this morning that I've decided to move on from Saga. I'd just like to take the opportunity to say it's been a pleasure working with Ewan and the team. And over the last five years, And I've also appreciated all the interactions that I've had with our investors, with analysts, with our banks, some of whom are here today, and all the other stakeholders as well over that time. So thank you. I'm going to spend a few minutes providing an overview of our results and on the outlook for the second half. Group revenues increased by 15% on the prior period due to growth in travel and cruise, with performance here now clearly back to normal after three COVID-impacted years. Underlying profit before tax was largely unchanged under IFRS 4 and was around £6.5 million lower under the new insurance accounting standard IFRS 17. I'll come back to the precise factors leading to lower IFRS 17 profits, but this doesn't change how we view the economics of the business. And over the medium term, we would not expect IFRS 17 to make a material difference to our results. Although we reported an underlying profit, there are certain below the line items of which the most significant is a further insurance goodwill write off of 68 million pounds, which led to us reporting an overall loss of 78 million pounds in the first half. Cash flow, however, is a very clear bright spot, especially for cruise and travel, where we generated a combined £73 million in positive operating cash before interest costs and repayments of the ship debt. While there are some one-off positives in first-half cash, this has enabled us to reduce net debt by £54 million from the position at 31 January 2023, which is ahead of expectations. This illustrates an important point, which is despite the challenges of recent years, the business continues to generate healthy free cash flow. On the next slide, I set out underlying profit before tax by business unit. At the time of our full year results in April, we indicated that we were expecting to see a much stronger performance from cruise and travel, but with pressures on the insurance business. This has very much been the story of the first half. The £11.6 million loss from cruise and travel reversed in the first half of this year to a profit of £11.8 million. Insurance broking has however been under pressure from the effects of very sharp motor claims inflation, with panel pricing moving up more quickly than consumer pricing. These same inflation pressures are also evident in the results of insurance underwriting. Other businesses reported a small loss due to investment in new initiatives and central costs reduced due to a combination of actions to reduce the property footprint and higher income on the group's cash deposits. As Ewan has mentioned, while underlying profit of eight million pounds was below the level of the prior year, we expect the full year outcome to show significantly higher earnings with much higher profits in the second half. And I'll return to the reasons for this shortly, starting with an update on Ocean Cruise. While the first half of last year was a difficult operating environment for the cruise business, we are now fully back in business. Revenues increased by 37% due to a combination of higher per diems and a 17 point increase in the load factor. As I've mentioned before, the cruise business has a lot of inbuilt operating leverage and small changes in load factor have a significant impact on profit and cash flows. This helped the business move from a seven million pound loss to a 13 million pound profit. We're also well on track to exceed our target of £80 million EBITDA before administration costs, with a full year load factor of more than 85%, well above the threshold we set for this year of at least 80%. This points to a second half load factor of more than 87% relative to 83% in the first half, which is part of the seasonal effect in earnings I just referred to. Bookings for next year are also in excellent shape, with revenues 23% ahead of the prior year comparative. On the next slide, I set out the results of River Cruise. Revenue for River Cruise increased by 42%, as this business also returned to normal trading conditions, supported by the significant enhancements we have made to the quality of the service on offer. Despite a step up in marketing costs and support to the business, Rivers returned to profit in the first half. As with Ocean Cruise, the outlook for next year is positive, with book revenues 40% ahead of the prior year comparative. There is a lot of untapped potential here, and we will continue to grow our small but modern fleet of high quality river cruise vessels. On the next slide, I set out the results of the travel business. Travel revenues increased by 58% and gross profit increased by 79%, but the travel business reported a small underlying loss in the first half after allowing for higher marketing costs and overhead expenses. This is in line with indications we provided in the June trading statement. We're very confident we will return to profit for the full year, with around 60% of revenue weighted to the second half. Across rivers and travel combined, we expect to at least achieve pre-pandemic levels of profitability and with significant potential to grow revenues and profits from current year levels. I will now turn to the insurance broking business and I show the year-on-year movement in written profit before tax on the next slide. This has been an exceptionally challenging period for the insurance business, with written profit before tax reducing by 50% from the prior period. While this is slightly below expectations, it is consistent with comments I made in April that we expected to see a material reduction in profit before tax for the broking business in the current year. The issues here are largely concentrated on the motorbook, where we have seen a very significant level of inflation in the net rates charged by panel insurers. Well ahead of the price we can realistically pass on to the consumer in a competitive market. This is also accentuated by the fact that just over 40% of our motorbook is on a fixed price deal, where the price is set for two further renewals. While we have been able to hold motor new business margins, inflation pressures have squeezed renewal margins with the motor renewal contribution reducing by 16 million pounds compared to the first half of last year. The three-year challenge is, however, a relatively short-term one, as while there is a cohort of business that was priced pre the inflation spike that is particularly weighing on margins, roughly a third of these policies will be repriced in 2024, and all of them will have been repriced by the end of 2025. The impact will, however, still become considerably less over this period, as policies priced post-inflation become a greater proportion of the book. So this issue will be addressed within two years. Clearly, when we started writing three-year policies, we were well aware of the inflation risks inherent in the policy. We put some protection against this downside in the form of an inflation stop-loss policy, and this provides a cushion of up to £8 million for retail broking, with 50% of this risk retained by ACOL. We also continue to view three-year as a core product, given that it resonates very well with our customer base, but we are also building greater inflation contingency into pricing, given recent experience. Outside of motor, the profitability of the home book held up well, and although our average home and motor margin per policy of 56 pounds is slightly below the 60 pound target, that is understandable in the context of current market pressures. PMI and travel results were also positive, with written profit across these two products around two million pounds ahead of the prior period. Overall, therefore, it is important to separate out the challenge is in broking. Motor margins need to improve, but we remain positive on the outlook for our other broking products. I'll now turn to the insurance underwriting business, starting with analysis of the impact of IFRS 17 on our first half results. This is the first time we've reported under IFRS 17, and while it does not change how we think about the economics of the business, it does introduce greater complexity and volatility into our reporting. This slide breaks down the impact that IFRS 17 has had on the first half underlying and reported PBT, as well as for the restated prior period. In terms of underlying PBT, the adoption of IFRS 17 reduced the first half results by 5.4 million pounds. There are multiple technical factors behind this, but the most significant is the requirement to discount ACOL's quota share reinsurance recovery, which had a roughly £4 million negative impact in the current period, given the significant increase in that recovery in the first half. Under IFRS 4, the quota share recovery was booked on an undiscounted basis. There are also several items that we've shown outside of underlying PBT because these are volatile items which over time will likely net out to zero. We'll be having a three-hour IFRS 17 masterclass session shortly after this. We expect some of the adverse movements in the first half to partially reverse over the rest of the year and over the medium term we would expect results on IFRS 17 to be very similar to those of IFRS 4. With that background, I will now turn to underwriting results as presented on an IFRS 17 basis. The key influences on equals results were a significantly higher loss ratio in the first half of the current year, which led to the gross combined ratio increasing from 113% to 136%. The 136% booked for this year includes the benefit of discounting claims liabilities at a much higher rate than in the preceding period, which is due to increasing bond yields. This was partially cushioned in the current period by the benefits of quota share and other reinsurance recoveries, compared to a net reinsurance cost in the prior period. On a net basis, the current year combined ratio for the first half was 125%, which is eight points higher than in the first half of last year. The higher net current year combined ratio reduced earnings by around five million pounds. The other main factor reducing acre profitability was lower prior year reserve releases, which under IFRS 17 are reported as a component of changes to liabilities for incurred claims. While this was a benefit in both years, as expected, we've had lower positive prior year emergence in the current period, and this reduced earnings by 10 million pounds relative to the first half of last year. The last factor is then the net finance expense line, which includes the unwind of the discount of opening claims liabilities, which is a cost in the P&L, and changes relating to discount and future inflation assumptions on PPOs. These are the key moving parts of ACOR's underlying PBT under IFRS 17. In terms of future expectations, we expect to see a significant improvement in the current year results in the second half of this year, as rate increases become a more prominent component of insurance revenue. Once we see the full benefit of these rate increases and revenues, likely next year, we should then also be able to report a positive insurance service result, both gross and net. On the next slide, I show more detail on costs. Marketing costs excluding the written to earned accounting adjustment were £4 million higher in the first half, all due to investment in cruise and travel, which was only partially offset by lower insurance marketing costs due to reduction in new business sales. Admin costs increased by around £10 million, in line with indications we provided at the start of the year for a four-year increase of £20 million to £25 million. Some of this is investment in capability in core businesses, particularly as we return to full service in travel. Some relates to the impact of inflation on underlying costs, and an element also relates to new investment in areas such as media and money. We've continued to improve efficiency in relation to central costs and the £4.5 million reduction here in part relates to the rationalisation of the property portfolio and in particular the closure of our Folkestone head office. This line item is net of interest income on cash deposits and higher interest rates provided a benefit of around £2 million in interest income given the group's high cash balance. We've now launched a further initiative to reduce central costs and devolve more responsibility to core business units. This completes a project started last year. We're aiming to reduce admin costs by at least 15 million pounds a year on a run rate basis, including a re-phasing of some of the investment in growth business units. On the next slide, I set out the change in net debt over the course of last year. Operating cash excluding cruise and travel was £12.9 million, reduced from £31.2 million in the prior period due to lower broking results and expected £8 million reduction in acre dividends. Cruise and travel cash was however significantly up on the prior period, with operating cash generation of £73 million in the first half compared to around zero in the first half of last year. This is due to a much improved trading performance, plus also some one-off and seasonal impacts. The main one-off factor is the move from full trust to an escrow-based approach for travel and river cruise, which enabled us to reap more than 20 million pounds of cash from these businesses. This is a one-time effect, and we expect a small cash injection back into travel in the second half. Nonetheless, this is a much improved picture on the last three years, when we've needed to provide significant cash support to the travel business. For cruise, we benefited from a £19 million increase in advanced customer receipts, which reverses the dip that we saw in the second half of last year, which was in part a seasonal effect. The main item within non-trading is the £5.8 million payment of the annual contribution towards closing the group's pension deficit. In aggregate, we reduced net debt by 54 million pounds in the first half, which is well ahead of what we expected at the start of the year. I set out an update of our expected net debt trajectory on the next slide. As you can see from this chart, we expect operating cash generation to enable a continued reduction in net debt in all our core planning scenarios, including in a prudent downside for the travel insurance businesses. This captures a more cautious outlook for insurance cash flows, balanced by reduced expenses relating to both the central cost initiatives, plus also planned efficiency initiatives within insurance broking. This also includes an assumed drawdown of the increased £85 million facility with Roger de Haan. While that does not in itself change net debt, we do include the interest and fees in the chart on the right. Reflecting some of the positive one-off effects in travel and cruise, we expect net debt at 31st of January 2024 to be slightly higher than the 31st of July 2023, but to be still materially lower than the beginning of the year. Overall expectations for net debt are largely unchanged from what we showed you in April. We currently have a very significant level of cash and we now have further liquidity facilities of £135 million, £85 million from Roger de Haan and £50 million from the RCF. This gives us a very high level of confidence that the £150 million of bonds due next May will be repaid from cash, alongside our ongoing payments of the ship debt, which will be £31 million in the second half of this year and £62 million next year. Roger has also agreed to extend his loan facility to the end of 2025, which puts the company in a very secure position. On my last slide, I set out a summary of our view on the outlook for the rest of this year. Overall, we expect four-year underlying PBT to be well ahead of the prior year and to be significantly higher in the second half than in the first. This is the case under both IFRS 4 and IFRS 17 accounting for the assurance business. We're very confident that Ocean and Cruise will achieve the £40 million EBITDA target per ship, and current bookings point to further growth in profits in 2024-25. River Cruise and Travel, added together for comparability with previous reporting, should generate higher underlying PBT than we achieved pre-pandemic. Saga Money is likely to be operating at break-even, but with new products focused on future revenue and earnings growth. Insurance is likely to continue to be challenging, and we expect a similar result in insurance broking in the second half compared to the first. This pressure will, however, be offset by improved central expenses, with the actions we are taking now evident in reduced second half costs ahead of a full run rate improvement of at least £15 million in next year's results. We are recommitting to repaying the £150 million May 2024 bonds from available cash, And while we expect to draw down on the RDH loan, our goal would be to keep the RCF as a sort of backup short-term working capital only. And with that, I will now hand back to you.

Thank you, James. As outlined at the start, I'll now give you more detail on the core business units and then hand over to Mike to give you the latest on data and lifetime value. Firstly, taking Ocean Cruise. The performance continues to be strong across FY23 and 24 and FY24-25. For this year to date, our booked load factor is now 86%, 12 percentage points higher than a year ago, with per diems at £332, meaning we're well on track, as James has said, to exceed the £40 million EBITDA per ship we committed to previously. Guest feedback is also consistently high with MPS now at 82 and the mix of guests is healthy with almost 40% first-time buyers. We're also well ahead of plan for 24-25 with 49% load factor and per diems of £359, 10% ahead year-on-year. For River Cruise, the position is equally positive with the booked load factor at 85% and per diems of £285, while the first-time buyer metric is strong at 55%. Guest satisfaction is rising fast with an MPS of 57% and we've returned to profit. Looking ahead to 24-25, the load factor is tracking well at 30% and revenue is up 40% with guest numbers up 31% on this year. Moving on to travel, this is another growth story with touring leading the way and a resurgent stays business. For FY23-24, booked revenue of 156 million so far is up 46% with passenger numbers up 27%. And still booking as our Lates program has been a particular success post pandemic. For FY24-25, the early signs look strong too, with revenue already up 15% on this year and passenger numbers up too. What is critical here is that the selling price and margins have been completely overhauled, delivering a more robust P&L for the Saga Travel Group. Costs have been streamlined with outsourcing and offshoring having been completed in the first half of this year. Our first private jet touring product departed a couple of weeks ago and each tour is significant in margin terms, with a further three departures planned for 24-25. The team have branched out into Australia with our touring offer and expanded our stays business with new winter 24-25 product having been launched. We're confident this business will return to sustainable profit this year and is then set for more double-digit growth. Insurance Broking continues to represent a significant proportion of our earnings in the group, with a greater proportion coming from home, PMI and travel. Our new partnership with Bupa is significant and opens up digital health and wellbeing opportunities for our customers, as well as growth opportunities in our core product lines. Motor and home retention remains high at 84%, but we've seen margins and policies fall in the first half. To offset this impact, the team have achieved efficiency savings, and as I outlined, we are committed to withdrawing from insurance underwriting when the market conditions support greater value creation. Finally on Saga Money, in savings we have $3.2 billion of assets under management, which is near the maximum under the current ring fence, but we are expecting that to increase in Q1 2024-25. We have secured a new savings partner, Flagstone, and launched fixed-term savings products with them this month, with a planned total balance growth up to $8 billion by 2027-28. Equity release has seen a challenging market this half, and while we've increased our market share significantly, we expect to see continued pressure for the next 12 months in this market. In other new product development, we've teamed up with Co-op to offer our customers a range of legal services, including wills, probates and lasting power of attorney, all wrapped into a new website launching next month. Looking ahead, we have a healthy pipeline of new product development in Saga Money, with investment ISAs launching in October, later life mortgages launching in November and more coming in 2024, including retirement planning, life insurance and intergenerational lending. I'll now hand over to Mike to take you through our customer lifetime value plans. Mike.