REG - CPPGroup Plc - Strategy and Change Management Programme

CPPGroupAnnouncement

19/10/2022 07:00

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RNS Number : 3274D  CPPGroup Plc  19 October 2022

19 October 2022

 

CPPGroup Plc

("CPP"; "CPP Group"; "the Group"; or "the Company")

Strategy and Change Management Programme

 

CPP Group (AIM: CPP), a provider of real-time assistance products and
resolution services which reduce disruptions to everyday life for millions of
customers across the world, provided an undertaking in its Half Year Report,
published on the 26 September 2022, that the Board would share with the market
the key outputs from the Group's strategy review. We are today formally
launching the strategy and Change Management Programme and detailed below are
the key outputs from the review along with our plans on how to take the
business forward and improve outcomes for all our shareholders.

 

BACKGROUND

Since 2016, funded by the cash generated from the Legacy Business comprising
the back book of European and UK Card Protection policies, the strategy
pursued was principally one of geographic expansion. In addition, the Group
made a number of acquisitions and investments in the expectation that one or
more would become a platform for growth and generate profitable returns.

 

The strategy, as implemented, failed to meet its objectives. This is best
illustrated by two facts: firstly, that for the financial year 2021, despite
continued double digit revenue growth, the Group's EBITDA from continuing
operations was lower in absolute and percentage terms than that reported in
2017; and secondly, the substantial reduction in shareholder value (market
capitalisation of the Group) over the same period.  Fundamentally the
strategy failed because the business did not appreciate where it operated
within its Industry Value Chain and, as importantly, how and on what basis it
would compete in the markets it was or wanted to operate in.

 

Stay Put or Change Course?

CPP operates within the product and claims management segments of the
Insurance Industry Chain, two segments in which CPP's Legacy Business
successfully operated in the past. Save for Blink, which is the Group's sole
global product opportunity, CPP designs at a local market level products and
services which augment the offering of third-party Distributors (businesses
which own the end customer relationship). CPP does not underwrite or price
consumer products or have direct access to end customers. Consequently, to
compete successfully, we need to provide products and services which increase
the real or perceived value for Distributors. In truth the Group does not as
yet have either the scale, skills or capacity to compete elsewhere in the
chain.

 

Strategic Purists or Strategic Pragmatists?

With CPP India, CPP Turkey and Globiva we have three successful businesses,
each with unique challenges, issues and opportunities, and none of which
require a strategy which fundamentally changes the nature of their business.
The Legacy Business is in terminal decline and will soon become unprofitable,
whilst Blink is not yet a fully scalable proposition. The Group could look to
acquire growth, but acquisition multiples in India and for InsurTech
businesses are excessive. So, what to do……...?

 

STRATEGY

A Simple Strategy We Can Execute: Group

The over-arching strategy is to exit the Legacy Business and to migrate CPP to
an InsurTech business led by Blink and supported by CPP India and CPP Turkey.
InsurTech businesses generally have attractive economics, they generate high
levels of repeat business, they operate with high margins and are commonly
valued more highly than their traditional insurance counterparts. The
strategy, if executed correctly, will simplify the business and its operations
and, moreover, will set out a clear purpose for the Group, one that leverages
the global nature of Blink's parametric propositions.

 

·      Where we will compete: The Group will focus on designing
innovative assistance products and services which augment and create value
(customer satisfaction, customer loyalty and new business) for its growing
distribution partner base.

 

·      Base of competitive advantage: Differentiation, with a focus on
new product development, product innovation, and quality of service to our
current and future business partners.

·      Strategic direction: Market penetration and development for
Blink, CPP India and CPP Turkey.

 

·      Method of Implementation: Internal development with product
acquisitions which enrich or enhance our proposition. We will, at the same
time, withdraw from our Legacy Business and dispose of non-core business
investments.

 

·      Constraints: Management bandwidth as we are going through a
period of substantial change. Finding suitable acquisitions at an appropriate
price. Moving from an informal approach to a formal approach and structure,
with a set of processes for continuous production, innovation, and
development.

 

Whilst this is a relatively simple strategy, simple does not equate to easy.
The strategy will take three years to fully implement, and, once completed,
the Group will still need to address that on or around December 2024, the
contract with our largest Distributor based in India will be subject to
renewal. This is not of immediate concern but is, at the appropriate time, a
matter to be aware of and attend to.

 

A SIMPLE STRATEGY WE CAN EXECUTE: BY BUSINESS UNIT

 

Blink

A differentiated suite of products with a focus on technology and innovation
providing the basis for competitive advantage, particularly in the Travel
Disruption (flight delay and lost luggage) market over the near to medium
term. With regard to Blink's strategic direction, there are opportunities to
introduce the suite of Travel Disruption products to new geographies including
North and South America, India, and Asia. Product development, either organic
or through small "bolt on" acquisitions, will focus on identifying innovative
digital solutions for our Distributors and end customers.

 

The business today is not fully scalable and the ability to execute the
strategy is somewhat constrained as there has, since acquisition in 2017,
been insufficient investment in people, processes, and structures to
facilitate growth. This lack of investment is being addressed as part of the
Change Management Programme.

 

We have set out what we believe to be an achievable strategy; one which, post
the Change Management Programme, we can execute at pace.

 

CPP India

The business will continue with its successful local market strategy, which is
focused on providing low-cost innovative product and service solutions to a
growing Distributor base. The strategic direction for CPP India is one of
increasing its Distributor footprint and, where appropriate, developing a
broader range of online and mobile app products and services, particularly
within the Lifestyle and Healthcare markets. Acquisition multiples in India
remain beyond our reach, consequently both market and new product development
will have to be internally led.

 

The strategy as set is an achievable one, though it is highly dependent upon
the retention and incentivisation of the CPP India management team and the
implementation of the new Indian IT platform scheduled for 2023.

 

From a risk perspective the majority of CPP India's revenues are currently
generated from two long-standing Distributor relationships, one of which is
due for renewal around the end of 2024. Whilst we are confident that these
arrangements will be renewed, our strategy, even if successfully implemented,
will not materially rebalance this "concentration risk" in the foreseeable
future.

 

CPP Turkey

Similar to CPP India, the business will continue with its successful local
market strategy, which is focused on providing innovative products and
services to a broad and diversified Distributor base. CPP Turkey has an
enviable track record of developing products which increase both the perceived
and real value of those products offered by its Distributors to the end
consumer.

 

New product development is a critical part of the strategic process for CPP
Turkey and this will continue, albeit via a more formalised process which
focuses on shared-learning and best practice.

 

The strategy is in many respects "more of the same" though, similar to CPP
India, it is highly dependent upon the retention and incentivisation of the
local management team.

 

From an execution and delivery perspective, the strategy is an achievable one.
The key risk, in terms of outcomes, is continued economic turbulence in
Turkey, which may either reduce demand for our products or services, or
further weaken exchange rates, or both.

 

The Centre

Where the business units develop their own strategies (CPP India and CPP
Turkey) and control many of the resources to execute those plans,  the Centre
will pressure-test the businesses' targets and strategies, will actively
promote the sharing of best practices, and will, where appropriate, provide
select expertise or shared services. In general, the business unit heads own
their profit and loss and make appropriate investment trade-offs. The Centre
provides services only where it has better expertise or a lower cost than the
businesses can provide on their own.

 

Legacy Business

The legacy UK and European Card Protection business has, since 2012, been in
decline and will, if not addressed, become both unprofitable and a significant
drain on the Group's resources. Our intention is through the Change Management
Programme to withdraw from these products and markets.

 

Withdrawal from the Legacy Business will be a long and complex process, one
with many regulatory and operational inter-dependencies and is very much
dependent upon the goodwill of both our partners and employees.  As we
progress, each decision we make and each action we implement will have due
regard to the best interests and well-being of our partners and employees.

 

CHANGE MANAGEMENT PROGRAMME ("CMP")

The business has not prepared itself for the inevitable. The terminal decline
of the Legacy Business is an established fact and one well understood, though
never addressed. Consequently, the Group is now, belatedly, implementing a
Change Management Programme ("CMP"), one which should have been implemented
several years ago, to efficiently manage the exit from our Legacy Business.
The CMP is a complex, inter-dependent set of seven projects which will take
until 2026 to conclude.

 

The CMP projects are summarised as:

 

1.     Legacy IT Platform and new Indian IT Platform Development

The development of a new customer service platform for CPP India, which will
be delivered in two phases (Phase 1 - non-Card products; and Phase 2 - Card
products). The new platform will ensure all customer data resides fully in
India and that India has an independently managed customer IT infrastructure
(which enables the decommissioning of the Group's legacy IT platform and
improved efficiency to India's operational model).

 

2.     Cessation of UK & European Legacy Books

A complex multi workstream programme which will accelerate the natural
cessation of the UK & European back books enabling the decommissioning of
the Group's expensive legacy IT platform, removal of management focus on
legacy/run off books and will remove the drag of the Legacy Business on the
Group's valuation.

 

3.     Blink Scalability

Currently a sub-scale business which is at an early stage of development,
Blink requires a programme of activity to ensure that its operational
processes are adequately robust to manage a substantially larger volume of
transactions and to become the Groups third business of strategic growth
alongside CPP India and CPP Turkey.

 

Each project is supervised by the Executive Management Committee and
implemented by the Operational Board but, due to size and complexity, there
will be some execution risks, namely:

 

Key Risks associated with the CMP:

 

1.     People Risk

Work is ongoing in respect of key person dependencies with supporting plans
developed in the event key team members leave the business before the CMP is
concluded. Capacity risk is also considerable in many areas, with several
colleagues or team members involved in multiple projects. People risk is
likely to remain high for the duration of the CMP.

 

2.     Financial Risk

The complexity and duration of the CMP may lead to cost over runs particularly
if key team members exit ahead of programme delivery.

 

3.     Complex Interdependencies

There are many interdependencies between the projects, with the risk of
financial and people impacts disrupting multiple projects. Additionally, the
interdependencies have the potential to delay the decommissioning of the
legacy IT platform.

 

4.     Third Party Dependencies

Legacy contracts often involve multiple parties and the agreements with them
cannot be dissolved unilaterally by the Group. The pace of change is often
adversely impacted by third parties not operating to CPP's timelines.

 

Financial implications of the CMP:

 

1.     Dual Running Costs

As we build out the IT Platform for CPP India and migrate from the legacy
systems, the Group will have a period of dual running costs for both
platforms. We expect to suffer these dual running costs until the first
quarter of 2025, after which we should be able to realise material cost
savings.

 

2.     Restructure and Retention Costs

Costs associated with the CMP will be substantial, as will the redundancy and
retention packages which we will need to introduce. We will provide guidance
on these costs as we progress.

 

3.     Impact on Group's cash resources

The dual running costs and costs associated with the restructure are material,
however we expect to be able to service these costs from existing and forecast
resources.

 

4.     Dividend

Due to the costs and uncertainties associated with the CMP, as previously
announced in the Half Year Report in September 2022, the Board has taken the
decision to suspend dividend payments until further notice. If circumstances
change the Board will review and update shareholders when appropriate to do
so.

PEOPLE

We are going through a period of substantial change which can only be
implemented by the continued goodwill and hard work of our colleagues. From a
people perspective the next three years will be the most challenging - my
promise to all colleagues is that we will keep their interests and wellbeing
front and centre of every decision made as we look to build a Group with a
more ambitious, exciting and profitable future.

 

OUTLOOK

We are confident about the Group's outlook and growth prospects for the
remainder of this financial year. The overall results of future periods will
be increasingly influenced by how well we execute upon our strategy and how
efficiently we implement the Change Management Programme.

 

There is much to do but I am confident we have set ourselves an appropriate
course and speed of travel.

 

 

 

Simon Pyper

Chief Executive Officer

 

 

Enquiries:

 

 CPPGroup Plc
 Simon Pyper, Chief Executive Officer    Tel: via Alma PR
 David Bowling, Chief Financial Officer

 Liberum Capital Limited
 (Nominated Adviser and Sole Broker)     Tel: +44 (0)20 3100 2000
 Richard Lindley
 Lauren Kettle

 Alma PR
 (Financial PR Adviser)                  Tel: +44 (0)20 3405 0205
 Josh Royston
 David Ison
 Kieran Breheny

 

About CPP Group:

CPP Group is a technology-driven assistance company that creates embedded and
ancillary real-time assistance products and resolution services that reduce
disruption to everyday life for millions of people across the world, at the
time and place they are needed, CPP Group is listed on AIM, operated by
the London Stock Exchange.

 

For more information on CPP visit https://international.cppgroup.com/
(https://international.cppgroup.com/)

 

 

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit)
Regulations 2019. Upon the publication of this announcement via the Regulatory
Information Service, this inside information is now considered to be in the
public domain.

 

 

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