Cppgroup Regulatory News (CPP)

24 SEPTEMBER 2020

CPPGROUP PLC

HALF-YEAR REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2020

· Group records good financial performance and retains solid cash position

· Effective response to coronavirus pandemic helps to achieve overall increases in revenues, profits and customer numbers

· Company focused on evolving products and services to reflect changing needs of partner businesses and consumers

CPPGroup Plc (CPP or the Group) today announces a healthy financial performance in the first half of 2020.

A quick and effective response from the outset of the coronavirus outbreak has helped the multinational product and services company continue supporting business partners as well as maintaining a robust financial position.

Key financial indicators:

· Group revenue increased by 3% to £61.8 million (H1 2019: £60.2 million) with a strong Q1 being tempered by a COVID-19 constrained Q2, particularly in India

· Solid cash balance of £18.2 million (H1 2019: £22.4 million; 31 December 2019: £22.0 million)

· Adjusted EBITDA increased by 10% to £4.0 million (H1 2019: £3.6 million)

· EBITDA increased by 4% to £2.4 million (H1 2019: £2.3 million)

· Profit before tax increased by 19% to £1.0 million (H1 2019: £0.9 million)

· Excluding currency movements across our international markets:

· Revenue increased by 5%

· Adjusted EBITDA increased by 15%

· EBITDA increased by 11%

· Profit before tax increased by 29%

· Customer numbers increased to 10.9 million (H1 2019: 9.0 million; 31 December 2019: 10.6 million)

Operational highlights:

· Increased the partner base by retaining existing partnerships as well as securing new deals with major brands including Vakifbank in Turkey and RAC and Gallagher in the UK

· Maintained service to all customers throughout lockdown with transfer of customer service colleagues to home working

· Reaffirmed our financial contingency measures with renewal of £5 million borrowing facility for a further 3 year term to August 2023

· Progressed product innovation in light of changing customer expectations, such as an increased focus on the healthcare sector and digital solutions

· Opened up a global conversation with colleagues to understand the wider impact of coronavirus, giving us a platform to define new adaptable and productive working practices

· Further strengthened governance and assurance frameworks, ensuring compliance with business and regulatory requirements are maintained

Financial and non-financial highlights

1. Financial highlights are presented in £ millions to one decimal place throughout this report. The detailed numbers can be referred to in the condensed consolidated interim financial statements.

2. EBITDA represents earnings before interest, taxation, depreciation, amortisation and exceptional items.

3. Adjusted EBITDA excludes costs associated with investments in business growth projects.

4. Investment in business growth projects of £1.6 million (H1 2019: £1.3 million) comprises start-up costs relating to the UK £0.5 million (H1 2019: £0.4 million), Blink £0.7 million (H1 2019: £0.5 million), Bangladesh £0.1 million (H1 2019: £0.1 million), Southeast Asia £0.2 million (H1 2019: £0.1 million) and our share of losses in KYND £0.1 million (H1 2019: £0.2 million).

5. H1 2019 basic loss per share has been restated to reflect the impact of the share consolidation completed on 29 May 2020. Further details provided in note 2 of the condensed consolidated interim financial statements.

6. Net funds comprise cash and cash equivalents of £18.2 million (H1 2019: £22.4 million), a borrowing asset of £nil (H1 2019: £nil) and net investment lease assets of £0.1 million (H1 2019: £0.2 million) less lease liabilities of £6.8 million (H1 2019; £6.8 million).

7. H1 2019 has been restated for the transfer of an Italian renewal book from Restricted Operations to Ongoing Operations. Refer to note 2 of the condensed consolidated interim financial statements.

Statement from CPP Group Chief Executive, Jason Walsh:

"I am very pleased with our performance so far in 2020. Our response to COVID-19 has underlined the resilience of our people, our quality relationships with partners and ultimately our strong financial position.

"In-keeping with our efforts to improve efficiency over recent years, we have reduced costs while delivering excellent services for customers, winning new business and building a healthy sales pipeline for the future.

"Our strategic ambition, to create tangible value for partners through self-sustaining operations around the world, remains undiminished but the way we achieve it will naturally evolve as a result of COVID-19. The sectors we target for growth and the products and services we offer will change in emphasis - they will reflect the new needs of the businesses with which we partner and their customers.

"Our ability to adapt and remain flexible, coupled with the continued close attention we give to the impact of coronavirus, makes me confident we are well placed to maintain our robust financial performance over the long term."

About CPP Group:

CPP Group makes millions of lives easier and better protected. We partner with large scale companies across the globe to understand their customers' needs and meet them through a range of popular ancillary products and services which add value to their core business. Specialising in the financial services and insurance sectors, we achieve long-term, sustainable growth through innovation, specialist digital capability and a culture that brings out the best in our people. We are listed on AIM, operated by the London Stock Exchange. You can find out more about us at our website.

For further information:

CPPGroup PlcJohn Brenan, Head of Communications+44 (0)7764 378589

Nominated adviser and brokerInvestec Bank plcSara Hale, Carlton Nelson+44 (0)207 597 5970

REGISTERED OFFICE

CPPGroup Plc

6 East Parade

Leeds

LS1 2AD

Registered number: 07151159

Chief Executive's Statement

Our financial and operational performance in the first half of 2020 has been strong and reflects the ability of our colleagues, management and Board to respond successfully to the wide-ranging challenges posed by the coronavirus pandemic. The pandemic and resulting global economic slowdown has inevitably stalled some of the excellent progress we have been making in many of our markets. However, we remain confident in our strategic growth plan with positive indications already emerging post-lockdown.

Financial performance

Note - all percentage change figures quoted in this report are on a constant currency basis, unless otherwise stated. The constant currency basis retranslates the previous year measures at the average actual exchange rates used in the current financial year. This approach is applied as a means of eliminating the effects of exchange rate movements on the year-on-year reported results.

Group revenue of £61.8 million (H1 2019: £60.2 million) has grown by 5% following a strong first quarter, particularly in India, and careful management in light of the COVID-19 pandemic and respective government lockdown measures which restricted new sales activity in the second quarter across all the markets in which we operate. Revenue growth of 5% although very positive in the current circumstances is lower than the growth historically achieved. The renewal books across all our markets have proved very strong and reliable with renewal rates remaining stable throughout the lockdown periods. The renewal performance continues to demonstrate the value our existing customers place in the products and services that we provide. Our customer numbers continue to increase and have reached 10.9 million (H1 2019: 9.0 million; 31 December 2019: 10.6 million) although the rate of increase has reduced as a result of the constrained Q2 2020 new business activities. New sales activity in Q3 has already markedly improved from the reduced levels experienced during the height of the pandemic in Q2.

We are pleased that in the face of ongoing economic uncertainty and difficult trading conditions that EBITDA has improved by 11% to £2.4 million (H1 2019: £2.3 million). The improvement reflects growth in India, an increasingly streamlined operation in our EU Hub as well as a carefully managed and reducing central cost base offset by the ongoing decline in our UK and European renewal books. Our adjusted EBITDA, which excludes the losses associated with business growth projects, has increased by 15% to £4.0 million (H1 2019: £3.6 million).

The Group's gross profit margin has remained broadly in line with 2019 at 28% (H1 2019: 32%; 12 months ended 31 December 2019: 29%). The cost of acquiring new policies, particularly in India, is comparatively higher than those costs associated with renewing customers. As a result, we expect the gross profit margin to reduce as new sales activity lifts in the second half of the year and the current position is partly a result of the reduced sales activity in Q2 2020. The strength of our new sales activity in developing markets combined with a reduction in our UK and EU Hub renewal books is expected to lead to gross profit margins settling at a lower level in the medium-term.

Tax

The Group's tax charge is £1.8 million (H1 2019: £1.0 million; 12 months ended 31 December 2019: £2.1 million) which results in an effective tax rate of 173% (H1 2019: 118%; 12 months ended 31 December 2019: 183%). Our effective tax rate continues to be significantly higher than the standard UK corporation tax rate of 19%. The high rate reflects that losses in our developing markets currently reduce the overall Group profit before tax to a level that is lower than the tax we pay in our profitable markets, most notably India and the EU Hub. We do not recognise deferred tax assets against our developing market losses due to forecasts indicating they will not be utilised in the short-term. By their very nature our developing markets are investing for growth and profit expectations in the short-term result in not recognising deferred tax assets in these areas.

The Group's effective tax rate is expected to progressively reduce in future periods, however it will remain higher than the UK statutory tax rate as we continue to make profits in territories with higher than UK tax rates, provide for withholding taxes on overseas distributions and invest in developing markets which will not indicate sufficient short-term certainty of profitability to recognise deferred tax assets.

Segmental performance

1. Restated for the transfer of an Italian renewal book from Restricted Operations to the EU Hub in Ongoing Operations. See note 2 in the condensed consolidated interim financial statements.

2. Rest of World comprises China, Malaysia, Mexico, UK, Blink, Bangladesh and Southeast Asia.

1. Restated for the transfer of an Italian renewal book from Restricted Operations to the EU Hub in Ongoing Operations. See note 2 in the condensed consolidated interim financial statements.

2. Rest of World comprises China, Malaysia, Mexico, UK, Blink, Bangladesh and Southeast Asia.

Ongoing Operations

Revenue has increased 10% to £56.6 million (H1 2019 restated: £52.9 million) largely due to growth in India through the expansion of LivPlus, a lifestyle insurance and wellness product which launched in May 2019, and continued growth in Globiva following its rapid expansion throughout 2019 from a start-up position. This growth has been partly offset by continued revenue decline in the EU Hub where new sales activity is not yet exceeding the reduction in the mature renewal books.

EBITDA has increased 44% to £3.4 million (H1 2019 restated: £2.6 million) resulting from the growth in India and a significantly lower cost base in our EU Hub as the full benefit of restructuring activities in the prior period are realised.

Restricted Operations

As expected, revenue has decreased by 29% to £5.2 million (H1 2019 restated: £7.3 million) reflecting the natural decline in the UK legacy renewal books. In line with the operational plan, the rate of decline in these books has increased marginally in 2020 following proactive action taken in the renewal process for certain customers and contractual changes resulting in increased revenue deferral. The declining UK renewal book has led to a reduction in EBITDA to £1.4 million (H1 2019 restated: £2.7 million).

Central Functions

The central cost base has reduced 16% to £2.3 million (H1 2019: £2.8 million) as we continue to benefit from contract reviews, streamlining of our UK-based IT function and cost control measures implemented in immediate response to the pandemic.

Adjusted EBITDA

1. Restated for the transfer of an Italian renewal book from Restricted Operations to the EU Hub in Ongoing Operations. See note 2 in the condensed consolidated interim financial statements.

2. The business growth projects in Ongoing Operations are UK £0.5 million (H1 2019: £0.4 million), Blink £0.7 million (H1 2019: £0.5 million), Bangladesh £0.1 million (H1 2019: £0.1 million) and Southeast Asia £0.2 million (H1 2019: £0.1 million). These projects are disclosed within Rest of World.

3. Adjusted margin is defined as adjusted EBITDA divided by revenue.

The Group's adjusted EBITDA has increased to £4.0 million (H1 2019: £3.6 million) following the progress being made in the more mature markets in our Ongoing Operations. Adjusted EBITDA excludes investments in business growth projects which represent start-up losses in markets that will contribute to growth in the future. The Group's adjusted EBITDA margin has increased by 0.5 percentage points to 6.5% (H1 2019: 6.0%).

Operational review

The Group has maintained its full range of ancillary products and services that enhance partners' core businesses and their customers' lives, despite the obvious operational challenges posed by COVID-19.

India remains the biggest revenue generator within the Group. Sales across all products delivered good growth in Q1. However, the severe lockdown conditions introduced by the Indian government in response to the pandemic significantly reduced Q2 new sales activity, particularly where the sales process is conducted in stores. At the height of the lockdown in April new sales fell to less than 10% of normal levels. We are already seeing positive indications of partner and consumer confidence returning in Q3 with sales levels increasing, especially in relation to Mobile which is already back to pre-pandemic levels. In addition, H2 2020 will see us add to our product set with the launch of Credit Protekt, a new repayment safety net giving customers greater peace of mind during uncertain times.

We were very proud to win the Best Risk Management Framework and Systems - Emerging Companies category at the prestigious India Risk Management Awards. This is acknowledgment of the substantial investment into building robust risk management we have made.

The performance of Globiva, the Indian business process management company in which we own a majority stake, dipped significantly during the lockdown in India. But we have already seen an upward trend in activity levels with billable seats currently at 1,200 compared to a low of 975 during the local lockdown. Globiva was operating at 2,300 billable seats at its peak in Q1 2020 prior to the pandemic. In August 2020, the Globiva founders exercised their option to repurchase 10% of the company's share capital, reducing CPP's controlling interest to 51%. This investment by the founders serves as an important validation of the positive long-term prospects for the business and the value it will provide to the Group.

Our activity in the Turkish market has also withstood the impact of the coronavirus outbreak a clear demonstration of the value of the multi-partner, multi-product model developed in this market. Product renewal rates have been stable and we have worked jointly with existing business partners to explore new product and service offerings which have digital capability at their core. This is in addition to establishing new relationships to further build our customer and revenue base over the coming months and years.

We have seen significant growth in our cyber security product in Turkey in particular, with Axa Sigorta and Ray Sigorta.

We have made considerable strides in re-establishing our presence in the UK. Although we are a multinational operation, being successful in our home market is an important demonstration of our ability and ambition to grow. As well as continuing to embed our connections with the insurance broker market, we have secured a number of high profile deals with household names, such as the RAC and Gallagher, which reflects the trust our business has built.

Blink Parametric continues to lead our insurtech offering. It sits at the cutting edge of parametric technology which offers consumers and partners access to quicker and simpler payouts. Although coronavirus is currently heavily impacting the travel market, in which Blink's existing service is focused, greater activity in the sector will return with Blink at the forefront of parametric solutions. We are confident that parametric innovation will be an important component of the future insurance industry as customers increasingly demand digital simplicity. The current slowdown in travel has enabled Blink to accelerate its parametric development into other sectors such as energy and climate. This demonstrates the value in Blink's nimble proprietary parametric platform.

In August 2020, Blink was confirmed as a participant in the fifth cohort of the renowned Lloyds Lab innovation accelerator programme following a competitive selection process involving over 140 applicants from around the world. This is a terrific endorsement of Blink's capabilities and will see it work with other insurtech leaders to use data and technology in identifying and building better ways to protect consumers. The scheme will help Blink expand its offering on a commercial insurance basis and push into sectors beyond travel where it has already demonstrated the potential value of its platform.

Colleagues in China have built and launched F-Lite, a new travel disruption parametric product. Their achievements have been recognised externally: F-Lite won the best technology innovation prize at the Asian Digital Insurance Forum and we have also achieved ISO 27001 certification relating to our information security management. This further reinforces our reputation in China as a business that can be relied upon to protect customers.

Regrettably, we closed our small Southeast Asia office in May. This step reflected the additional challenges COVID-19 would inevitably create for an operation in the early stages of creating regional relationships, along with the need to carefully balance investment costs across the Group in these unprecedented times. Although disappointing, once the full extent of the coronavirus outbreak is understood, our ambition to pursue new growth opportunities internationally will remain unchanged - along with our willingness to take difficult but necessary decisions to protect our long-term financial strength.

This approach allows us to uphold our commitment to business partners and continually look for different ways of improving how we create value through our expertise, innovation and excellent customer service. This involves building our progressive and positive culture where we allow colleagues to achieve everything they can. The strength of our culture has shone through in the past few months enabling our colleagues to quickly adapt to the rapidly changing COVID-19 environment which has ensured constantly good customer outcomes. In addition, our flexibility in quickly establishing working from home for our call centre colleagues is already leading to higher engagement, lower attrition and improved sales conversion in markets such as Turkey. We continue to support our workforce throughout this challenging period and have carried out an extensive company-wide conversation to understand how they have been impacted and their hopes for the way we work in future. This gives us a strong platform to be an organisation which finds new ways of balancing work-life interests of colleagues and the needs of partners.

We will monitor the scale of further growth closely and protect as much as possible against the challenges posed by the external environment. This includes all parts of the business seeking new routes to creating value and address consumers' changing needs, especially their increasing desire to operate digitally. During the latter part of the half-year, product development has become more of a priority as we seek to adjust to an external landscape that looks radically different to the one we expected at the beginning of 2020. This includes our Indian business where work is underway to expand the product suite to offer increased protection for consumers with monthly repayment commitments. We also expect further developments in the increasingly important healthcare and cyber security sectors.

Financial position

The net funds position at 30 June 2020 is £11.5 million (31 December 2019: £14.9 million), which includes a cash balance of £18.2 million (31 December 2019: £22.0 million). The Group's cash cycle is weighted to the second half of the year which combined with the slowdown in sales activity in Q2 and ongoing capital expenditure has led to a reduction in cash balances of £3.8 million in the period. A material amount of cash is generated and held in India which now has sufficient profits available to enable repatriation to the UK which has already been undertaken in H2 2020. The Group's policy is to repatriate surplus overseas funds to the UK.

At the end of August, the Group renewed its £5 million revolving credit facility (RCF) for a further three year term. This provides a strong endorsement of our financial stability. Further detail is provided in note 13. The RCF is not currently being utilised.

In these times of unprecedented global uncertainty our available cash balances and renewed bank facility are a significant strength which ideally place us to weather any further headwinds from COVID-19 and capitalise on opportunities with existing or new partners as they arise.

Outlook

We are very encouraged by the improving sales levels we are already observing across the Group, most notably in India and Turkey, following the significant restrictions the coronavirus pandemic placed on new sales activity in the second quarter of the year. However, a return to pre-pandemic customer acquisition levels across all our product categories is expected to take time.

The relationships we have with our business partners remain strong. We are managing the risks generated by COVID-19 through maintaining open communication with our partners and evolving our products and services to reflect the changing consumer landscape. It remains too soon to understand the full extent and possible prolonged nature of the economic downturn that will result from COVID-19. The most likely material risk to the business being a sustained reduction in demand for consumer durables or new credit cards and the associated protection products sold alongside them.

While global uncertainty is likely to remain for some time, we are reassured by being able to rely on our excellent people and culture to adapt and innovate, as well as our solid financial foundation and cash position to manage any short term shocks. We remain confident that the business is in a strong position to respond operationally and financially.

Jason Walsh

Chief Executive Officer

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 CONSOLIDATED INCOME STATEMENT

* Restated for the share consolidation completed on 29 May 2020. See note 2.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1 General information

The condensed consolidated interim financial statements for the six months ended 30 June 2020 do not constitute statutory accounts as defined under Section 434 of the Companies Act 2006. The Annual Report and Financial Statements (the 'Financial Statements') for the year ended 31 December 2019 were approved by the Board on 15 April 2020 and have been delivered to the Registrar of Companies. The Auditor, Deloitte LLP, reported on these financial statements; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

2 Accounting policies

Basis of preparation

The unaudited condensed consolidated interim financial statements for the six months ended 30 June 2020 have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union.

The condensed consolidated interim financial statements should be read in conjunction with the Financial Statements for the year ended 31 December 2019, which have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The condensed consolidated interim financial statements were approved for release on 23 September 2020.

New and amended standards and interpretations need to be adopted in the interim financial statements issued after their effective date (or date of early adoption). The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2020:

The new or amended standards and interpretations applied for the first time in the period commencing 1 January 2020 have not had a material impact on the Group.

In December 2019, the Card Protection policy book in the Italian branch of Card Protection Plan Limited (CPPL) was transferred to CPP Italia Srl, an Italian legal entity in the Ongoing Operations segment. The Italian branch of CPPL has subsequently been closed in H1 2020. The revenue and EBITDA associated with the policy book is material and in 2020 has been recognised in Ongoing Operations. As a result, in accordance with IFRS 8 Operating Segments, the Group has restated the comparative information to transfer the relevant Italian results from Restricted Operations to Ongoing Operations. The transfer recognised between segments for revenue was £1,507,000 for the six months ended 30 June 2019 and £2,913,000 for the year ended 31 December 2019 and to EBITDA was £483,000 for the six months ended 30 June 2019 and £1,035,000 for the year ended 31 December 2019. See note 3.

On 29 May 2020, a share consolidation was undertaken on the basis of one new ordinary share of £1 issued for every 100 former ordinary shares of 1 penny. Refer to note 9 for further details. In accordance with IAS 33 Earnings per share, the share consolidation and change in nominal value of ordinary shares has resulted in a restatement of the comparative information. See note 7.

Going concern

In reaching their view on the preparation of the condensed consolidated interim financial statements on a going concern basis, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

The Group has a formalised process of budgeting, reporting and review along with procedures to forecast its profitability and cash flows. The plans provide information to the Directors which are used to ensure the adequacy of resources available for the Group to meet its business objectives, both in the short-term and in relation to its strategic priorities. The Group's revenue, profit and cash flow forecasts are subject to robust downside stress testing which involves modelling the impact of a combination of plausible adverse scenarios. This was focused on the impact of the Group's key operational risks crystallising and considered the impact of COVID-19 on operations across the Group.

Taking the analysis into consideration, the Directors are satisfied that the Group has the necessary resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

3 Segmental analysis

IFRS 8 Operating segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board of Directors to allocate resources to the segments and to assess their performance. The Group's operating segments are:

· Ongoing Operations; India, China, Turkey, Spain, Germany, Portugal, Italy, Mexico, Malaysia, UK, Bangladesh, Blink and Southeast Asia. We continue to invest and drive new business opportunities in these markets.

· Restricted Operations: historic renewal books of our UK regulated entities; CPPL, including its overseas branches; and HIL.

· Central Functions: central cost base required to provide expertise and operate a listed Group. Central Functions is stated after the recharge of certain central costs that are appropriate to transfer to both Ongoing Operations and Restricted Operations for statutory purposes.

In December 2019, the Card Protection policy book in the Italian branch of CPPL was transferred to CPP Italia Srl, an Italian legal entity in the Ongoing Operations segment. As a result, the performance of the transferred Italian policy book is now reported in Ongoing Operations rather than Restricted Operations, The comparative information has been restated to reflect the change. See note 2. The adjustments relating to the restatement have not been audited.

Segment revenue and performance for the current and comparative periods are presented below:

* Restated for a change in the composition of operating segments. See note 2.

* Restated for a change in the composition of operating segments. See note 2.

Segmental assets

* Restated for a change in the composition of operating segments. See note 2.

Goodwill, deferred tax assets and investment in joint venture are not allocated to segments.

Capital expenditure

Timing of revenue recognition 

The Group derives revenue from the transfer of goods and services over time and at a point in time as follows:

Revenue from major products

Major product streams are disclosed on the basis monitored by the Board of Directors. For the purpose of this product analysis, "retail assistance policies" are those which may be insurance backed but contain a bundle of assistance and other benefits; "retail insurance policies" are those which protect against a single insurance risk; "wholesale policies" are those which are provided by business partners to their customers in relation to an ongoing product or service which is provided for a specified period of time; "non-policy revenue" is that which is not in connection with providing an ongoing service to policyholders for a specified period of time.

Geographical information

The Group operates across a wide number of territories, of which India, the UK and Spain are considered individually material. Revenue from external customers and non-current assets (excluding investment in joint venture and deferred tax assets) by geographical location is detailed below:

Information about major customers

Revenue from customers of one business partner in our Ongoing Operations segment represented approximately £30,222,000 (H1 2019: £27,708,000; year ended 31 December 2019: £69,832,000) of the Group's total revenue.

 Exceptional items