News

STV Group plc Full Year Results 2017

Tagged in: RNS Announcements
Resilient performance; increased returns to shareholders

Highlights
  • Resilient consumer division delivering increased margin of 18.7% despite a 7% decline in national advertising revenues
  • Continuing to deliver profitable digital growth with revenue up 14% at £8.4million and digital margin at target level of 55%
  • Data and insights strategy has secured 2.5m insights, with more than 60% of the Scottish population now registered users of STV services, significantly ahead of all other UK broadcasters
  • STV Productions back in the high end drama business with the commission of BBC1 drama series The Victim. Strong start to 2018, with secured revenue already 25% ahead of full year 2017
Strategic Developments
  • Progressive dividend policy delivering further increase in returns to shareholders with final ordinary dividend of 12 pence per share proposed and full year dividend payment of 17 pence per share, up 13% year on year
  • Additional return of £10 million of capital to shareholders commenced
  • Strategic review of the business underway under leadership of new Chief Executive, Simon Pitts, with a further update planned in Q2
 
Financial Highlights 2017 2016 Year on year
Revenue £117.0m
 
£120.4m -3%
EBITDA £21.5m £22.4m -4%
Operating profit* £19.0m £19.7m -4%
Pre-tax profit** £18.0m £18.5m -3%
Statutory pre tax profit £13.9m £15.7m -11%
Adjusted EPS**
 
39.6 pence 39.7 pence flat
Statutory EPS 30.1 pence 32.5 pence -7%
Net debt £35.5m £26.4m n/a
Dividends per share 17.0 pence 15.0 pence +13%
*Pre exceptional items
**Pre exceptional items and IAS19 – see note 17
 
Simon Pitts, Chief Executive Officer, said: “The results announced today are broadly in line with expectations, reflecting a weak 2017 advertising market and ongoing UK macro-economic uncertainty.  Despite this, the resilience of our broadcast business has ensured a solid performance and a higher margin.  In addition our digital business has continued to deliver profitable growth, at a margin of 55%.
 
“2018 has started strongly across all parts of the business, with both national and regional advertising expected to be up in the first quarter. We’re also delivering good growth in digital driven by increased viewing on the STV Player, and STV Productions has already secured 10 new commissions in 2018, including a number of returning and returnable series.
 
“Since joining in January I have begun to work with colleagues across the business to assess performance and develop plans for growth. A further update will be confirmed during Q2.”
 
Margaret Ford, Chairman, said:When I was appointed Chairman, I stated my intention to deliver value to our shareholders through the introduction of a progressive dividend policy. This decision reflected the Board’s confidence in the underlying financial strength of the company and the resilience of the core business, despite macro-economic uncertainty placing downward pressure on the advertising revenue market during this period.
 
We have delivered on this commitment since 2013, and I am pleased to propose a final ordinary dividend of 12 pence per share, resulting in a total dividend of 17 pence per share, an increase of 13% year on year. 
 
“In line with this commitment to the long-term delivery of increased shareholder returns, in August we announced the Board’s intention to return an additional sum of £10 million capital to shareholders over a period of up to 18 months and the share buyback process is continuing.”
  
There will be a presentation for analysts at the offices of Peel Hunt, Moor House, 120 London Wall, London EC2Y 5ET today, 1 March 2018, at 1.00 pm.  Should you wish to attend the presentation, please contact Katie Martin, STV: katie.martin@stv.tv  or telephone: 0141 300 3000.
 
Enquiries:
STV Group plc
George Watt, Chief Financial Officer                            
Tel: 07710 763713

Ellen Drummond, PR & Communications Manager          
Tel: 07803 970143
 
Charlotte Street Partners
Harriett Moll                                                            
Tel: 07717 501626
 
Financial performance review
As forecast, largely as a result of a weaker national advertising revenue market during the first three quarters of 2017, total revenues were down 3% at £117.0m (2016: £120.4m).
 
Consumer division revenues were down 5% at £100.2m (2016: £105.9m).  In line with previous guidance and the ITV Network, national airtime revenues were down 7% at £74.3m (2016: £79.9m).  Regional airtime revenues were £11.0m, down 2% (2016: £11.2m) due to phasing of campaigns at the end of the year.
 
Revenues from digital activities and sponsorship packages increased as did revenues generated by recently launched channel, STV2. Digital revenues were up 14% at £8.4m (2016: £7.4m) continuing their strong growth trajectory.  Sponsorship revenue increased by 6% at £5.7m (2016: £5.4m).  Established from the former City TV services, STV2 was launched in April and delivered revenues of £1.7m (2016: City TV £1.2m) with a loss on the channel of £0.8m incurred as the service becomes established (2016: £0.8m loss). 
 
STV Productions’ revenues were down 20% at £10.4m (2016: £12.7m), as a result of lower commissions. 
 
As the Scottish Children’s Lottery completed its first full year of operation, revenues generated by STV External Lottery Manager (ELM) increased to £6.4m (2016: £1.8m) in line with expectations.
 
Operating profit before exceptional items was £19.0m, down only 4% as a result of the resilience of the operating model underpinned by the agreements in place with ITV on programme supply and advertising sales (2016: £19.7m).  Operating profit after exceptional items increased by 3%, to £17.4m (2016: £16.9m). 
 
Margins in the consumer division increased, at 18.7% (2016: 18.5%), despite a decline in operating profit year on year. The margin achieved through digital activities was 55%, also up year on year (2016: 52%).  Overall consumer division operating profit reduced to £18.7m (2016: £19.6m). STV Productions delivered a slight increase in operating profit before exceptional items to £0.3m (2016: £0.1m).
 
There were two exceptional items in 2017, both related to the ELM. These totalled £1.6m and comprised a £0.9m IAS39 non-cash charge on the outstanding debtor from the SCL and a £0.7m write off of post-launch non-billable costs.  In the previous year the remaining balance of goodwill related to STV Productions, amounting to £2.8m was written off.
 
Profit before tax, exceptional items and IAS19 interest was £18.0m, down 3% on the prior year (2016: £18.5m).  Despite these reductions, earnings per share was flat on a similar basis at 39.6 pence per share (2016: 39.7 pence per share).
 
EPS before exceptional items and IAS 19 interest was flat at 39.6 pence per share,  reflecting the fall in operating profit and profit before tax  being offset by the lower effective tax rate. On a statutory basis, EPS was 30.1 pence (2016: 32.5 pence).
 
The statutory result for the year after tax, exceptional items and IAS19 interest was a profit of £11.7m (2016: £12.6m). The effective tax rate decreased to 15% (2016: 17%) due to the utilisation of prior year losses and capital allowances.
 
The balance sheet remains robust enabling increased returns to shareholders to be delivered and investment in new activities including the launch of STV2 in April and the growth of the Scottish Children’s Lottery (SCL).  The investment of £9.0m in the SCL will be recouped in future years with current growth trends in ticket sales indicating cash breakeven is expected to be achieved in autumn 2018, with repayment commencing at that time.
 
The IAS19 deficit decreased to £70.6m (2016: £88.8m) pre tax. The next triennial valuation process (at 31 December 2017) has commenced.  It is expected this will be concluded in Q1 2019.
 
Net debt increased to £35.5m (2016: £26.4m) reflecting increased returns to shareholders through the dividend policy and the share buy-back process which commenced in Q3 of 2017, the timing of £3.7m of payments due to be received in Q2 of 2018 arising through the trading agreements with ITV and £3.9m of funding for the SCL.
 
The net debt:EBITDA ratio target of 1.0x to 1.5x on a covenant basis was achieved at 1.41x despite net debt increasing. The major cash outflows were share purchases and dividends of £8.2m; pension deficit funding payments of £7.9m; £3.9m of funding for the Scottish Children’s Lottery from the STV ELM which will be recouped in future years; capital expenditure investment of £3.4m; and working capital funding of £2.2m principally in STV Productions.
 
As a result of the phasing of payments which will be received in Q2 of 2018 from the various trading agreements with ITV and other working capital movements mainly relating to STV Productions, the Group’s measure of operating profit converted to free cashflow (defined as operating profit plus depreciation, amortisation and share based payments, less working capital movements excluding ELM investment and capital expenditure), was below the target level of 90% at 64%.  The target for 2018 will continue to be 90% or above.
 
Shareholder returns
In line with the progressive dividend policy structured to achieve a distribution of 60% to 80% of cash generation after pension deficit funding payments, an increase in the full year dividend payment is proposed.
 
The proposed total dividend for 2017 is 17.0 pence per share, an increase of 13%, (2016: 15.0 pence per share).  During 2017 the final 2016 dividend of 11.0 pence per share was paid together with the interim dividend for 2017 of 5.0 pence per share. A final dividend of 12.0 pence per share has been declared which, subject to approval at the AGM in April 2018, will be paid on 31 May 2018 to shareholders on the register at 13 April 2018.
 
In line with the Board’s commitment to the long-term delivery of increased and sustainable shareholder returns, and reflecting the underlying financial strength and stability of the business, it was announced in August 2017 that an additional return of capital of £10m would be delivered to shareholders over a period of 18 months. The Board announced a share buyback programme on 22 September 2017. As at 27 February 2018, the buyback of 198,177 ordinary shares of 50 pence each, has been completed for an aggregate consideration of £0.7m.  
 
Outlook
STV national airtime revenue is expected to be up 1% in Q1 of 2018 with a positive Q2 anticipated reflecting a strong on air schedule and the impact of the FIFA World Cup.
 
Regional airtime revenue is expected to be up 20% to 25% in the same period following a strong start in 2018.
 
Digital revenues are expected to continue their growth trajectory, up an expected 20-25% in Q1.
 
With an increased volume of new commissions secured so far in 2018, STV Productions’ revenues committed to date are 25% up on full year 2017.
 
Operational review
Despite the challenging market conditions experienced during 2017, it has been another successful year for the Group as the consumer division has been further de-risked through efficient trading arrangements with ITV Network and continued strict capital discipline. As a result, even with the backdrop of macro-economic uncertainty impacting advertising markets, the Group is well placed with debt levels within the target range.
 
Twenty eight percent of earnings have been derived from non-broadcast activities. This level represents significant progress as this has increased over the past seven years when these activities represented only 11% of earnings. This rebalancing of the business is on track to meet the target level of 30% at the end of 2018.
 
The growth of the non-broadcast business has been driven principally by the continued development of profitable digital services.
 
There are KPI targets in place until the end of 2018 (see Appendix 1) and the Group KPIs are now under review by the new Chief Executive, Simon Pitts.
 
STV Consumer
STV continues to hold the position as Scotland’s most watched commercial channel and, for the eighth consecutive year, achieved a peak-time audience share in excess of the Network, tracking 0.6 share points ahead, an increase on the previous year, underscoring the unparalleled reach and resilient performance of the core channel.  STV reached 3.5m viewers each month and showed 46 of the top 50 most watched programmes on commercial television. STV’s reach was further extended in 2017 by the launch of second channel, STV2.
 
Digital activities have continued to deliver increased revenues and high margin growth, driven by the strong performance of the STV Player.  Streams increased by 37% year on year.
 
The data strategy aims to develop new connections with consumers whilst bringing innovative opportunities for advertisers and commercial partners to reach their target markets.  Consumer insights increased by 19% to 2.5 million, meaning that over 60% of the Scottish population are now registered users of STV services like STV Player, STV News or the Scottish Children’s Lottery.
 
STV Productions
Commissions and re-commissions were secured in entertainment, documentaries and popular factual and daytime. Significantly, a new drama series commission for BBC1 was secured.  Four part legal thriller, The Victim, is scheduled for delivery in 2018.
 
Other new commissions included twenty episodes of a game show for ITV Daytime (Babushka); a six-part series for BBC1, And They’re Off....For Sport Relief; a one-off documentary for BBC Scotland, The Paper Thistle: 200 Years of The Scotsman; an hour-long documentary sponsored by VisitScotland, Alan Cumming’s Edge of Scotland; a new commission for More4, Richard Wilson’s Highland Fling; a documentary for ITV’s Crime and Punishment series, Ross Kemp Behind Bars – Inside Barlinnie; and for BBC Scotland, a three-part documentary series, The Force: The Story of Scotland’s Police.
 
Recommissions delivered in the year included a sixth series of popular family entertainment show, Catchphrase, for ITV; four further series of Antiques Road Trip (series 15-18) for BBC and a seventh series of twenty episodes of the celebrity version, Celebrity Antiques Road Trip for the BBC; and a third series of Stopping Scotland’s Scammers, for STV and sponsored by
Royal Bank of Scotland.
 
The strategic partnership established with GroupM Entertainment has resulted in international format deals being secured for The Dressing Room to be remade in The Netherlands and Norway, and for SafeWord to be remade for MTV in the US. 
 
In late 2017, a new distribution deal was confirmed with Sky Vision covering international distribution rights to STV Productions’ unscripted catalogue; and the new drama commission secured for the BBC, The Victim; and the sales rights for the format of new entertainment commission, And They’re Off.
 
With an increased volume of new commissions secured so far in 2018, STV Productions’ revenues committed to date are 25% up on full year 2017.
 
STV External Lottery Manager
Established in late 2016, the STV External Lottery Manager (ELM) was formed to provide operational services, such as ticket sales and marketing, to charitable society lottery, Scottish Children’s Lottery.
 
STV ELM operates on a breakeven basis, invoicing operating costs to the Scottish Children’s Lottery.  The Group recoups costs incurred from operating both the STV ELM and the STV Children’s Appeal. STV ELM purchases regional airtime from the consumer division and any profit generated by the Group from the sale of regional airtime, after recouping costs, is donated to the Group’s main social investment activity, the STV Children’s Appeal.
 
Regulatory
The Group continues to be fully engaged with ongoing regulatory and public policy consultations and reviews.
 
Principal Risks and Uncertainties
Like most businesses, STV Group plc is exposed to a number of risks which could have an impact on our operating results, financial condition and prospects and there are rigorous internal systems to identify, monitor and manage any risks to the business.
 
STV’s risk register sets out the key risks that have been identified throughout the business, allocating an owner to each. The impact and likelihood of each risk is considered and risks are scored both on a gross and, after the current mitigating controls have been taken into account, a net basis. The effectiveness of the current mitigating controls is graded as strong, adequate or weak and any additional controls required are also noted. The register is reviewed and updated on an ongoing basis both at an operational level and on a biannual basis by the Board, with the Audit Committee conducting an in-depth annual review. The Directors confirm they have carried out a robust assessment of the principal risks facing the Company and during 2017 one additional risk was added to the register which related to the Lobbying (Scotland) Act, coming into force March 2018. There were no significant changes to the other principal risks. All of the risks identified have been fully evaluated and taken into account in preparing the budgets and forecasts which support going concern, viability statement and impairment assessments. The risks have also been reviewed and agreed with the internal auditors.
 
Regulatory environment
STV’s television business is operated under licences which are regulated by Ofcom and the key Channel 3 licences have a term that runs to the end of 2024. These Channel 3 licences contain conditions around contribution to public service broadcasting, programme production and compliance with Ofcom’s codes. As licensees, it is STV’s responsibility to ensure that the terms of these licences are adhered to and measures have been put in place internally to ensure that this occurs. In the event of any serious or repeated breaches, Ofcom has powers to impose sanctions on licensees including, in the most extreme circumstances, financial penalties or revocation of licences.
 
Dependence on advertising
STV’s sales, expenses and operating results could vary from period to period as a result of a variety of factors, some of which are outside STV’s control. These factors include general economic conditions; conditions specific to general advertising markets including the commercial television market; trends in sales, capital expenditure and other costs, and the introduction of new services and products by us or our competitors. In response to an ever-changing operating and competitive environment, STV may elect from time to time to make certain pricing, service or marketing decisions that could have a material adverse effect on sales, results of operations and financial conditions.
 
Performance of the ITV Network
The majority of STV’s programming content is provided by the ITV Network. Therefore, its ability to attract and retain audiences and the advertising airtime sales performance of ITV’s sales house – which is responsible for the sale of STV’s UK national airtime and sponsorship to advertisers – are factors that affect performance. This relationship is managed closely, with regular updates on programme and schedule developments being provided and through STV’s
Commercial Director who manages the sales relationship with ITV. The terms of the Airtime Sales Agreement with ITV were amended and simplified in December 2016 to provide improved efficiency, transparency and stability.
 
Pension scheme shortfalls
The STV pension schemes’ investment strategy is calculated to reduce any market movement impacts. However, it is possible that the Group may be required to increase its contributions to cover an increase in the cost of funding future pension benefits or to cover funding shortfalls which could have an adverse impact on results and cashflow. This position is kept under regular review by the Board. In 2016 the trustees selected PSolve as investment manager for the schemes’ assets and this is intended to increase returns and meet the schemes’ long term funding objectives.
 
Reputational and financial risk of lottery operation
The Scottish Children’s Lottery was launched in October 2016. The Lottery engages the services of an External Lottery Manager, STV ELM Limited, which is a subsidiary of STV Group plc, to deliver the lottery product to consumers. The Lottery was awarded licences by the UK Gambling Commission and while operated independently of STV, in accordance with the requirements of these licences, it is provided with financial support by STV, which amounted to a debtor of £9.0m gross at 31 December 2017. This debtor is expected to be recovered by 2022 and requires weekly ticket sales to increase by 33% from their 2017 year end run rate to achieve the cashflow breakeven point of 176k ticket sales per week.  
 
Although responsibility for operating the Lottery and ensuring that the terms of the licence are adhered to lies with STV ELM Limited, there is a reputational risk to STV, as the holding company, from any issues related to the operation of the Lottery. Internal controls have been put in place to ensure that the terms of the operating licence are adhered to as the Gambling Commission has powers to impose sanctions on licensees in the event of any serious or repeated breaches, including financial penalties or revocation of licence. In the event that the Lottery was unsuccessful then the recoverability of the Scottish Children’s Lottery debtor would be at risk.
 
Financial
The overall financial position of STV may be constrained by the Group’s leverage and other debt arrangements. An increase in LIBOR interest rates could have an adverse impact on the financial position and business results. STV is exposed to a variety of financial risks that arise from and apply to its activities: currency risk, credit risk, liquidity risk and cashflow interest rate risk. The Group’s borrowings are denominated in Sterling which is also the Group’s intra-UK net currency flow. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on financial performance. STV uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out under policies approved by the Board with financial risks being identified, evaluated and hedged in close co-operation with the operating divisions. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of financial instruments and investing excess liquidity.
 
a) Currency risk
STV operates almost wholly within the UK and is exposed to minimal currency risk. The Group’s borrowings are denominated in Sterling which is also the Group’s intra-UK net currency flow. Currency risk arises primarily with respect to the Euro and US dollar and from future commercial transactions and trade assets and liabilities in foreign currencies.

b) Credit risk
STV has no significant concentration of credit risk apart from the debtor of £9.0m from the SCL as noted above. It has policies in place to ensure that sales are made to customers with an appropriate credit history. Derivative transaction counterparties are limited to high credit quality financial institutions.
 
c) Liquidity risk
Prudent liquidity management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the nature of the underlying business, the aim is to maintain flexibility in funding by keeping committed credit lines available.
 
d) Cashflow interest rate risk
STV has no significant interest bearing assets and its income and operating cash flows are substantially independent of changes in market interest rates. Interest rate hedges are maintained to reduce the impact of changes in market interest rates on the Group’s borrowings.
 
Brexit
While there is no immediate or specific risk to STV, the general macroeconomic risk of the UK’s departure from the European Union (“Brexit”) could affect the UK’s economic performance which in turn would affect advertising and would have an adverse impact upon the Group’s revenue due to STV’s dependence on advertising as set out above.
 
This announcement contains certain statements that are or may be forward-looking with respect to the financial condition, results or operations and business of STV Group plc. By their nature forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.
 
Simon Pitts
Chief Executive Officer, STV Group plc

Appendix - STV Group plc - Full year results 2017