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STV Group plc Interim Results for six months to 30 June 2019

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STV reports operating profit up 10% as strategic plan accelerates growth

Strong financial performance ahead of expectations
  • Adjusted operating profit1 up 10% to £11.0 million (2018: £10.0 million) with adjusted earnings per share (EPS) up 9% to 21.8p (2018: 20.0p)
  • Operating profit of £11.0 million significantly up on the 2018 profit of £1.4 million with no exceptional items this year
  • Broadcast operating profit up 7% to £9.7 million (2018: £9.1 million)
  • Digital operating profit up 43% to £3.0 million (2018: £2.1 million)
  • STV Productions operating loss of £1.7m (2018: loss of £1.2m) due to the phasing of programme deliveries being strongly weighted to the second half
  • Total advertising revenue down a marginal 0.6% to £48.8 million (2018: £49.1 million), outperforming the wider TV market, with lower national advertising income offset by continued growth in digital (+19%) and regional advertising (+19%)
  • Digital and regional revenues now account for 27% of total advertising revenue, up from 21% in 2017, reducing reliance on the national market
  • Total revenue down 5% to £54.9 million (2018: £57.7 million), primarily due to phasing in STV Productions and closure of the loss-making STV2
  • Further increase in returns to shareholders with interim dividend of 6.3p per share (+5%)
1 definitions of adjusted metrics are shown in the footnotes to the Financial Highlights table
 
Continued excellent viewing performance on screen and online
  • Best STV all time viewing share since 2009 at 18.7%
  • Most popular peak time channel in Scotland
  • 99.7% of all commercial audiences over 500,000 in Scotland delivered by STV
  • Biggest TV channel in Scotland for young viewers, reaching 91% of all 16-34s
  • Online streams on STV Player up 17% and online viewing up 13% even without the FIFA World Cup
  • Strong viewing performance driven by entertainment hits including Britain’s Got Talent and The Chase, dramas Manhunt, Cheat and The Bay, which broke all STV streaming records, and local favourites Sean’s Scotland and the revamped STV News at Six
Delivery of strategic plan progressing at pace
  • STV Growth Fund continues to underpin regional advertising growth, attracting over 100 new advertisers to STV since launch
  • Virgin partnership delivering digital value to STV as expected and Sky launch of STV Player on track for Q4 2019
  • Significant enhancements to the STV Player user experience and content offer already driving increased consumption
  • Eleven third party content deals now in place (500+ hours) boosting STV Player content catalogue by a third across entertainment, drama, factual and sport
  • STV Productions drama The Victim delivered the highest drama catch up ratings since records began, more than doubling its BBC1 overnight audience to 6.5m, and has now been sold to over 30 countries. Second drama for the BBC, Elizabeth is Missing, currently in production
  • Primal Media, acquired on 1 July, has secured three commissions so far; £0.5 million of full year synergies identified and in delivery
  • First pilot format developed by STV Productions, The Cash Machine, started strongly on STV on 1 September
Financial Highlights
  Six months ended 30 June  
2019 2018 Change
Revenue £54.9m £57.7m (4.9%)
Adjusted EBITDA* £13.4m £11.4m 17.5%
Adjusted operating profit* £11.0m £10.0m 10.0%
Adjusted operating margin* 20.0% 17.3% 270 bps
Operating profit £11.0m £1.4m +686%
Adjusted profit before tax** £10.1m £9.4m 7.4%
Profit/(loss) before tax £9.1m (£4.3m) +312%
Adjusted basic EPS** 21.8p 20.0p 9.0%
Basic EPS 19.7p (10.9p) +281%
Net debt £42.0m £37.8m (11.1%)
Interim dividend per share 6.3p 6.0p +5%
*Pre-exceptional items, see note 21 to the financial statements for more detail
**Pre-exceptional items and IAS19 finance costs, see note 21 to the financial statements for more detail
  
Outlook - good momentum into H2 despite Brexit uncertainty
  • National advertising will continue to be impacted by Brexit, with the 9 months until the end of September expected to be 6% to 7% down
  • Regional advertising expected to be 10% to 15% up until the end of September
  • Digital advertising is expected to be 20% to 25% up for the same period
  • Overall, that would see total STV advertising broadly flat for the first 9 months to the end of September
  • Productions will have a stronger H2, with current secured revenues of £13m similar to this time last year
  • Whilst Brexit will result in market turbulence in H2 that will affect the wider UK media market, the impact on STV’s profitability will be mitigated by our advertising trading arrangements, on-going tight management of the cost base and a continued focus on progressing the growth plan
Simon Pitts, Chief Executive Officer, said:An operating profit increase of 10% when national advertising revenues are down supports the decisions we took to reposition the Group for profitable growth, focusing on STV’s regional strengths and the exciting growth potential offered by our digital and production businesses.  In the first half of 2019 we have enjoyed the best all time viewing share on STV since 2009 and our total advertising revenue has outperformed the wider TV market, driven by continued growth in digital and regional advertising and by the increasing success of the STV Growth Fund which has attracted over 100 new Scottish advertisers to television since launch.  These factors have contributed to a strong first half performance, with a significant improvement in operating margin.

“We continue to make good progress with our strategic growth plan and have laid solid foundations for the future. Although current political uncertainty around Brexit will continue to impact total national advertising revenue in the second half, we expect further growth in digital and regional revenue and an improved performance from STV Productions, including a new quiz format, The Cash Machine, the first commissions from newly acquired Primal Media, and a new drama for BBC1, Elizabeth is Missing.

"We also have an exciting programming line-up to look forward to on STV in the second half of the year, with exclusive coverage of the 2019 Rugby World Cup, new dramas like A Confession and Sanditon, and entertainment juggernauts like Britain’s Got Talent The Champions and I’m a Celebrity helping to drive viewing on screen and online.”
 
Enquiries:
STV Group plc:                                                                                             
Katie Martin, PR & Communications Executive                                                                                                    
Tel: 0141 300 3109                          

Camarco
Geoffrey Pelham-Lane, Partner
Ben Woodword, Partner
Tel:  0203 757 4985

Financial performance review
 
Reflecting the phasing of revenue in Productions and the closure of loss-making STV2, total revenue was down 5% to £54.9m (2018: £57.7m).

However, total advertising revenue was down a marginal 0.6%, ahead of the wider television advertising market and supported by a continued strong performance in digital and regional advertising.

Adjusted operating profit increased significantly by 10% to £11.0m (2018: £10.0m).  The growth in the regional advertising market more than offset the decline in national advertising, which was in part due to the absence of the FIFA World Cup.  Digital revenue growth at improving margins, and the realisation of benefits from the structural changes made in 2018 (closure of STV2 and restructure of STV News) also contributed to that strong profit growth.  The adjusted operating margin for the Group was 20.0% (2018: 17.3%).

Broadcast division revenues were down 3% at £45.0m (2018: £46.5m) with half of this due to the closure of STV2, and the balance a result of the expected weaker national advertising market.  Regional advertising revenues were up 19% to £7.3m (2018: £6.1m).
Broadcast division operating profit increased to £9.7m (2018: £9.1m), up 7%, driven by regional advertising and the positive impact of measures taken in 2018 to deliver efficiencies and cost savings.  Combined with the impact of profit protection in the face of a decline in the national advertising market secured through the trading arrangements with ITV, these elements all contributed to an operating margin growth of 2 percentage points year on year, up to 21.6%.

The digital division delivered a 19% increase in revenue to £5.6m (2018: £4.7m) and a 43% increase in operating profit to £3.0m (2018: £2.1m).  The division’s operating margin increased to 53.6% (2018: 44.7%). This strong performance was driven by the launch of the STV Player on Virgin Media, an overall improved user experience and an enhanced content offer. 

Due largely to the phasing of programme deliveries, STV Productions’ revenues were £2.0m (2018: £3.7m) with an operating loss of £1.7m (2018: loss of £1.2m). This is expected to substantially reverse in the second half with the delivery of already commissioned series. Following the appointment of David Mortimer as managing director in late 2018, the focus in H1 has been on recruitment of key creative talent and the formation of new creative and commercial partnerships to deliver the growth strategy.

The STV External Lottery Manager (ELM) invoiced £2.3m of costs to the Scottish Children’s Lottery (SCL) in the period (2018: £2.8m) and the ELM continues to operate on a P&L breakeven basis.  The performance of the SCL has, however, fallen below expectations in H1 due to slower than planned retail roll-out and platform issues which have impacted subscriber retention.  Having briefly operated on a cash flow breakeven basis at the start of this year, the cash flows generated since January have therefore not been sufficient to meet all of the costs invoiced to the SCL and, as a result the net debtor balance has increased to £7.0m (2018: £6.4m).  This is after a provision of £4.7m which is considered appropriate at 30 June 2019 but will be kept under review.  A number of initiatives have been identified to improve performance and are in various stages of implementation.

Net finance costs incurred were £1.9m (2018: £1.5m before exceptionals), of which cash costs relating to the Group’s borrowings totalled £0.7m (2018: £0.6m).  The balance of net finance costs related to the non-cash items of IAS19 pension interest (2019: £1.0m; 2018: £0.9m) and an interest charge of £0.2m on lease liabilities under IFRS16, which the Group adopted on 1 January 2019.

The statutory result for the period after tax was a profit of £7.5m (2018: loss of £4.2m).  The Group’s effective tax rate for the period was 18%, consistent with the same period last year.

Adjusted earnings per share was up 1.8p to 21.8p, an increase of 9% (2018: 20.0p). On a statutory basis, basic EPS was 19.7p compared to a loss per share of 10.9p in 2018.

The net debt: EBITDA ratio at the half year was 1.49x (2018: 1.46x), within the Group’s target range of 1.0x to 1.5x (covenant maximum is 3.0x), despite an increase in net debt to £42.0m (2018: £37.8m).  Net debt is expected to reduce by the year end reflecting the second half weighting of deliveries in Productions, and normal seasonal trends. 
 
The main non-operating cash outflows were pension deficit payments of £5.9m, as per the recently agreed triennial valuation and including a contingent payment based on cash generation in 2018, dividend payments of £5.3m, £0.9m of share purchases through the buyback programme and into the Employee Benefit Trust, and reorganisation costs of £0.8m arising from the restructure implemented in 2018.
 
The Group’s preferred measure of operating profit converted to free cash flow, defined as operating profit plus depreciation, amortisation and share based payments, less working capital movements (excluding STV ELM) and capital expenditure, was 74% in the first half of the year (2018: 109%).  The lower conversion compared to the same period in the prior year is due to increased capital investment, alongside higher working capital requirements of STV Productions driven by the previously mentioned H2 weighting of deliveries.  The expectation is that this cash conversion will increase by the year end.
 
At 30 June 2019, the balance sheet included £12.8m of right-of-use assets following adoption of IFRS16, Leases, with a corresponding lease liability of £13.0m.  The IAS19 pre-tax pension deficit decreased by £4.1m over the first half of the year to £74.4m (June 2018: £59.3m) with the decrease due to key assumptions being updated for current market conditions.
 
The Group’s £60m revolving credit and overdraft facility matures in June 2022 and provides good medium term funding certainty.

Shareholder returns
STV continues to balance the requirement to invest in the strategic growth plan with the need for financial flexibility to enable continued delivery of returns to shareholders.  As a result an interim dividend of 6.3 pence per share will be paid, an increase of 5% on the 2018 interim dividend of 6.0 pence per share, and in line with recent guidance.
 
Operational review

Broadcast

The aim of the Broadcast division is the delivery of high quality, cost-effective news and entertainment to maximise the value of this stable and profitable business. The excellent viewing performance achieved during 2018 has been maintained throughout H1 2019 with STV achieving its highest all time share since 2009, at 18.7%.  This is despite tough year on year comparatives (the absence of the FIFA World Cup), and an even more competitive market, including the launch of a new BBC channel in Scotland.

The impact of a weaker national advertising market, with revenues down 6% year on year, was minimised through the protection secured in the trading arrangements with ITV, under which STV’s programme costs decline in line with any revenue reduction.  Continued growth in the regional advertising market, up 19% year on year to £7.3m, has been supported by the successful STV Growth Fund.
 
So far this year, the STV Growth Fund has allocated £3.2m of value across 135 advertising deals, more than half of which are with clients new to television advertising.  Since launch there have been over 200 deals with over 100 new advertisers attracted and over £5m allocated by the fund.  The STV Growth Fund Incubator has also launched offering revenue share deals to advertisers, with the first deals already in place.  
 
Operating profit grew by 7% year on year to £9.7m (2018: £9.1m).  The positive impact of cost saving measures implemented in 2018, including the closure of STV2 and a change programme implemented across STV News, contributed to an increased margin of 21.6% (2018: 19.6%).
 
The performance of STV News has continued to strengthen following changes announced in 2018.  In Ofcom’s report: News Consumption in the UK: 2019, STV News is now identified as the number one source of news for Scotland.  Our flagship programme, STV News at Six, continued to increase its viewing share year on year and to date in 2019 has secured an average share of 30%, increasing by nearly 4 share points in the last 18 months (2017: 26.4%).  The success of the programme was recognised by the Royal Television Society as Best News Programme in its annual awards in June 2019.
 
Digital
 
Our ambition to transform the STV Player into Scotland’s digital destination is gaining momentum with confirmation that the Player is now the most popular commercial VoD player in Scotland.  This is being achieved through increased digital distribution, more choice through a broader content offer, as well as an enhanced user experience through improved product reliability and the introduction of additional features.

Total time spent watching the STV Player increased 13%, even with the tough comparatives of a FIFA World Cup year.  Catch up streams are up 36% to 16.4m, driving a 19% increase in revenues to £5.6m (2018: £4.7m). 

Following the successful launch of the STV Player on Virgin Media in December 2018, to date 77% of the Virgin Media user base has been active on STV Player, accounting for 15% to 20% of all VoD views.  STV Player will be carried on Sky from Q4, further boosting availability and digital advertising revenues. The Sky partnership has also secured STV’s position as the first UK PSB to broadcast all of its regional variants in HD on satellite.

In preparation for the launch on Sky, a partnership was announced with FreeWheel to enable STV to undertake its own ad integration onto the Sky platform, avoiding the need for commission payments on advertising revenue.

Whilst the majority of STV Player content is original and exclusive to STV through the Channel 3 network schedule, new content deals are broadening the appeal of the STV Player with over 500 hours of additional content now available from a range of new content partnerships announced to date, including Endemol Shine International, TCB Media Rights, TVF Media,  Hopster, Flame, and Jukin’.

STV’s new subscription service, STV Player+, is performing as expected following its successful launch on iOS devices at the end of February and will now be rolled out to all major platforms by the year end.

An ambitious programme of product development has been delivered during H1 providing a range of new features to enhance the customer experience, deliver an increasingly personalised viewing environment and extend viewing times.  ‘End of play’ recommendations, introduced in Q2, have so far resulted in c30% of all content starts pursuing the recommended follow up viewing option.  ‘Watch live restart’ was also launched and where available is being used on 15% to 20% of all live streams.  ‘Picture in picture’ is the latest new feature to be introduced and has already increased content time per stream by 33% on the iOS platform.

STV Productions

The vision for STV Productions is to build a world class production business, based in Scotland, which takes full advantage of the growing local and global demand for high quality content. During H1, implementation of the growth strategy has progressed well with key appointments now in post and a repositioning of the business well underway.

In June, the acquisition of a majority stake in award winning producer Primal Media was announced. 

Commissions secured in H1 included 50 episodes of long running popular daytime antiques show, Antiques Road Trip, 20 episodes of its sister version, Celebrity Antiques Road Trip and two further series (total of 15 episodes) of Celebrity Catchphrase.  A second series commission of ratings success, Inside Central Station, for new channel BBC Scotland, was announced in late June with delivery scheduled for this year.

A key element of the growth strategy is to leverage STV’s producer/broadcaster status and pilot high potential formats developed by the production division on STV. The first of these formats, quiz show The Cash Machine, began its run on STV on Sunday 1 September with a 19% share of viewing, 3 share points ahead of the network and 30% up on the slot average.

Securing drama commissions is a priority.  The Victim, a four-part high end network commission for BBC One, achieved the highest catch up ratings for a drama since records began, with a 73% increase on the overnight ratings.  It has been sold to over 30 countries including deals with Britbox US, France 2 and BBC Worldwide Australia.  Following this success, production of a second drama commission, also for BBC One, is underway.  Elizabeth Is Missing, starring academy award winning Glenda Jackson in the lead role, will be delivered to the BBC in late Autumn.  

Newly acquired Primal Media has secured three commissions so far this year including two factual entertainment shows for Channel 4, as well as a further yet-to-be-announced series.

Finally, in Q1 the appointment of William Morris Endeavour - WME - as international sales agent was announced to support the increased focus on developing dramas and formats for UK and international audiences.  WME are working with STV Productions to develop IP for international markets and broker co-development and co-production deals.

Principal risks and uncertainties
The Board considers the principal risks and uncertainties affecting the business activities of the Group are:
  • Regulatory environment
  • Dependence on advertising
  • Performance of the ITV network
  • Brexit
  • Cyber security
  • Pension scheme shortfalls
  • Reputational and financial risk of lottery operation
  • Financial risks, primarily currency, credit, liquidity and cash flow interest rate risk
Further details of the Group’s policies on principal risks and uncertainties are contained within the Group’s 2018 Annual Report, a copy of which is available at www.stvplc.tv.
 
Simon Pitts
Chief Executive Officer
STV Group plc

STV Group plc - condensed interim income statement, six months ended 30 June 2019