STV Group plc Full Year Results 2016

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STV Group plc Full Year Results 2016                                
Commercially focused
Creatively led
Financial Highlights 2016 2015 Year on year
Revenue £120.4m
£116.5m +3%
EBITDA (see note 17) £22.1m   £22.8m -3%
Operating profit* £19.7m   £20.3m -3%
Pre-tax profit* £18.5m   £19.1m -3%
Statutory pre tax profit £15.7m £9.8m +60%
Adjusted EPS (see note 19)
39.7 pence 39.9 pence -1%
Statutory EPS 32.5 pence 29.8 pence +9%
Net debt £26.4m   £25.7m +3%
Dividends per share 15.0 pence  10.0 pence +50%
*Pre exceptional items and IAS19 interest
Strategic Developments
  • Acceleration of progressive dividend policy reflecting the Board’s confidence in the underlying financial strength of the Company, resilience of the core business and clarity of growth objectives
·         Confirmation of a dividend policy which aims to pay out between 60% to 80% of cash generation after pension deficit funding.  This results in a full year dividend payment of 15.0 pence per share, up 50% year on year
  • De-risking of business through agreement of long term Airtime Sales Agreement with ITV plc covering sale of national airtime and sponsorship. Additionally, settlement of 2015 triennial pension valuation delivers certainty and long term visibility of cashflow requirements
  • Innovative second TV network service to launch in spring 2017; STV2 will increase the reach of the STV Family of consumer services
  • Continuing to deliver profitable digital growth with digital revenues up 20% at £7.9 million and digital margin continuing to grow above target level at 52%
  • Data and insights strategy progressing with over 2m insights building consumer engagement and creating new opportunities for advertisers and commercial partners
  • Consumer Division margin at 11 year high at 18.5%, despite a 4% decline in national revenues, as resilient core business builds reach and engagement through the STV Family of consumer services
  • STV Productions returns to revenue growth, up 53% to £12.7m
  • Launch of a new operating division, STV External Lottery Management Limited, to supply services to newly launched charitable society lottery, the Scottish Children’s Lottery
Rob Woodward, Chief Executive Officer, said: “Today’s strong results demonstrate robust and resilient performance in our core business and growth in STV Productions and our highly profitable digital activities.
“The Consumer division has delivered its highest margin for 11 years, despite a weak airtime market in the second half of 2016.  We are continuing to de-risk the core business placing the company in a strong position to deal with any weakness in the advertising market in the short to mid-term whilst relentlessly pursuing our growth objectives.
“Our digital activities are performing strongly with a margin of 52%.  These products enable us to extend our reach and impact through our family of consumer services.
“Finally, I would like to thank David Shearer, senior independent director, for his service to the board over the past 10 years.”
There will be a presentation for analysts at the offices of Peel Hunt, Moor House, 120 London Wall, London EC2Y 5ET today, 3 March 2017, at 12.30 pm.  Should you wish to attend the presentation, please contact Katie Martin, STV:  or telephone: 0141 300 3000.
STV Group plc
George Watt, Chief Financial Officer                             Tel: 0141 300 3049
Eleanor Marshall, PR & Communications Manager           Tel: 0141 300 3670
Operational Review
2016 has been another successful year for the Group as the business has been further de-risked and the strategy to deliver sustainable growth and increase returns to shareholders progressed.  As a result, with the backdrop of uncertainty post-Brexit, the Group is well placed with a de-risked P&L and low levels of net debt.
During 2016, new KPI targets providing a mid-term outlook to the end of 2018 were announced.  This new set of growth targets are stretching and ambitious and build on the progress and achievements delivered to date.
Twenty three percent of earnings have been derived from non-broadcast activities. This level represents significant progress over the past six years when these activities represented only 11% of earnings; however, largely due to the resilience of the core business this is behind the KPI target.  The rebalancing of the business remains a key strategic priority and a new KPI target to achieve 30% of earnings from non-broadcast activities by end of 2018 was announced during 2016. 
The growth of the non-broadcast business has been driven by the continued development of the digital services and a return to revenue growth in STV Productions.  However, despite an increase in revenues in STV Productions, the underperformance against targets and growth projections for this business have resulted in an exceptional writedown of £2.8m of the remaining goodwill related to STV Productions.
A new operating division of the Group has been established during 2016, the STV External Lottery Manager (STV ELM).  This division has been created to supply services to support the operation of a newly launched charitable society lottery, the Scottish Children’s Lottery.
STV Consumer
The Consumer division continued to perform well in 2016 and despite a weakening national airtime market, margins continued to increase year on year at 18.5% (2015: 18.4%).
The STV Family of consumer services has enabled the Group’s unrivalled reach across the Scottish market to continue to expand, with 60% of the Scottish population using at least 3 of STV’s services each month.
In line with previous guidance, the airtime revenue market has been challenging in the second half of 2016, impacted by wider macro-economic factors. As a result, national revenues were down 4% at £76.2m (2015: £79.3m).  This was almost fully offset by growth in the regional airtime market and sponsorship revenues.  The regional airtime market performed strongly, up 19%, at £14.9m (2015: £12.5m) and revenues from sponsorship were up 4% at £5.4m (2015: £5.2m).  
The digital business has successfully evolved into a core area of activity, delivering significant growth in revenues, up 20% year on year to £7.9m (2015: £6.6m), and operating margin ahead of target levels with 52% delivered (2015: 48%).
Targeted investment continues to be made particularly in product enhancement, the data and insights strategy and extending the reach of the STV Family through investment in City TV, which in spring 2017 will be extended to a network service and rebranded as STV2.
STV continues to hold the position as Scotland’s most watched commercial channel and, for the seventh consecutive year, achieved a peak-time audience share in excess of the Network, tracking 0.2 share points ahead.  STV reached 3.5m viewers each month and showed 47 of the top 50 most watched programmes on commercial television.
The City TV services, STV Glasgow and STV Edinburgh, have delivered an audience with an average reach of 759,000 viewers per month, 30% of the available audience within their transmission area.  Additionally, City TV content is driving traffic on the STV Player with an increase of 59% year on year in the volume of streams viewed.
This service will be extended in spring 2017 to incorporate three additional licence areas.  These will be integrated to the established STV Glasgow and STV Edinburgh services, creating a new, innovative, networked service for Scotland.  The service will be available to 85% of the population on air and 100% of the Scottish population via the watch live facility on the STV Player.
The services continue to be met with a positive response from advertisers with 42 new to television advertising and a number of these progressing to increase spend and advertise across other platforms in the STV Family, including STV. 
As three additional licences are brought to air in spring of 2017, City TV will be rebranded as STV2. This new service is forecast to achieve a breakeven run rate by end of 2018.
The enhanced STV Player has continued to deliver strong growth during 2016.  During the year the service launched on Freeview Play and Freesat taking to fourteen the number of platforms through which access is available. Investment  in the ‘watch live’ functionality of the service is continuing to drive engagement and reach with the number of live streams up 68% year on year and catch-up streams up 33%. 
The data and insights strategy will create opportunities to develop new relationships with consumers whilst developing innovative opportunities for advertisers and commercial partners to reach their target markets.  Consumer insights increased by 31% to 2.1 million insights held.
STV Productions
During 2016, STV Productions returned to revenue growth as commissions were successfully secured with new customers and returning series were recommissioned.
The business achieved revenues of £12.7m (2015: £8.3m), up 53% year on year, with a pre-exceptionals margin of £0.1m (2015: £0.4m), equivalent to 1% (2015: 5%), behind the target of 7%. However, the underperformance against targets and the growth projections for this business have resulted in an exceptional writedown of £2.8m of the remaining goodwill.
Commissions and recommissions were secured across a range of genres, with entertainment, documentaries and popular factual and daytime performing well.
New commissions included a four-part series for Channel 5, Tour de Celeb; a one off documentary for Channel 4, Tree of the Year, delivered in conjunction with the Woodland Trust; a two-part documentary for BBC Two, Scotland and the Battle for Britain; and a Bafta-winning one-off documentary for BBC Two and BBC Scotland, Dunblane: Our Story, commemorating the 20th anniversary of the Dunblane Primary School tragedy.
Recommissions delivered in the year included a second series of documentary, Prison: First & Last 24 Hours for Sky 1; a further series of popular entertainment series Catchphrase for ITV; and a further series of Antiques Road Trip and Celebrity Antiques Road Trip for the BBC.
The strategic partnership established with GroupM Entertainment has resulted in co-productions being commissioned, including The Dressing Room for UKTV’s entertainment channel, W. This six part series will debut in 2017.  GroupM Entertainment also co-produced a data-based countdown show, Ultimate Celebrity Power Couples ’16, for Channel 5.
STV External Lottery Manager
A new trading division of the Group was established during 2016.  STV ELM has been formed to provide operational services, such as ticket sales and marketing, to charitable society lottery, the Scottish Children’s Lottery.
STV ELM will operate on a breakeven basis, invoicing operating costs to the Scottish Children’s Lottery.  The Group will recoup costs incurred from operating both the STV ELM and the STV Children’s Appeal. STV ELM purchases regional airtime from the Consumer business within the Group, and any profit generated by the Group from the sale of regional airtime, after recouping all costs noted above, will be donated to the Group’s main social investment activity, the STV Children’s Appeal.
STV national airtime revenue is expected to be down 7% in the first four months of the year. Regional airtime revenue is expected to be down 9% in the same period, following 15% growth in the same period of 2016.
Digital revenues are expected to continue their strong growth trajectory, up 11% in Q1 with VoD up 23%.
Financial Performance Review
Overall, the Group delivered an increase in revenues, up 3%, at £120.4m (2015: £116.5m). 
Consumer business revenues were down 2% at £105.9m (2015: £108.2m) as a result of the impact of the anticipated decline in national airtime revenues, particularly in H2 of 2016, which were 4% down, reflecting the broader television market.  The regional airtime market performed strongly, up 19%, at £14.9m (2015: £12.5m), following a very strong first half performance, up 24%. Excluding the impact of STV ELM, regional airtime revenues were up 14%.
Digital revenues grew for the seventh consecutive year, up 20%, at £7.9m (2015: £6.6m), principally driven by VoD growth on the STV Player.  Despite this strong growth, the KPI target of £10.0m was not met. There were also reduced premium rate telephony income from competitions and lower volumes of in-house commercial production function, STV Creative, during 2016.
STV Productions’ revenues increased to £12.7m, an increase of 53% on the previous year (2015: £8.3m).
Group operating profit, before exceptional items, was down 3% to £19.7m (2015: £20.3m).
Consumer business operating profit was down marginally at £19.6m (2015: £19.9m), reflecting the anticipated reduction in national airtime, although the impact of this was almost fully offset by reduced programme costs, strong revenue performance in the regional airtime market and further growth in the margin in the digital business.
Start up losses for City TV continued to reduce year on year at £0.8m (2015: £1.0m) and this trend is forecast to continue as this service is developed into an extended and rebranded network service, STV2, in spring 2017. STV2 is forecast to achieve a breakeven run rate by end of 2018.
The operating margin of the Consumer division increased slightly to 18.5% (2015: 18.4%) supported by continued growth of the digital margin, up to 52%, (2015: 48%) reflecting strong performance of the STV Player.
STV Productions operating profit, before exceptional items, reduced to £0.1m (2015: £0.4m), reflecting continued targeted investment in development activities. After exceptional items, STV Productions operating loss reduced from £4.7m to £2.7m.
As a result of the impact of the decline in national airtime revenues, EBITDA before exceptional items was down 3% at £22.1m (2015: £22.8m).
Profit before tax before exceptional items and IAS 19 interest decreased by 3% to £18.5m (2015: £19.1m).
Net finance costs reduced by £0.5m year on year to £1.2m as the IAS 19 interest non cash finance charge fell to nil (2015: £0.5m).
The remaining balance of goodwill of £2.8m relating to STV Productions has been written down as an exceptional item in 2016.  This follows a goodwill writedown of £5.1m on STV Productions in 2015 reflecting weaker profitability against internal targets over recent years, and increased risk of uncertainty against future targets.
EPS before exceptional items and IAS 19 interest decreased by 1% to 39.7 pence (2015: 39.9 pence), reflecting the reduction in profit before tax, offset by the effective tax rate reducing to 17% (2015: 20%).  On a statutory basis, EPS was 32.5 pence (2015: 29.8 pence)
The key net debt:EBITDA ratio target of at or below 1x on a covenant basis has been met despite net debt increasing by £0.7m to £26.4m (2015: £25.7m).  The major cash outflows were the pension deficit funding payment of £7.8m; investment of £5.4m in the establishment of STV ELM, which will be recouped in future years; working capital outflows of £1.3m reflecting the timing of deliveries by STV Productions; capital investment of £3.2m; and an increase of 26% in cash dividend payments to £4.3m.
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, improved as anticipated in 2016 to 92% (2015: 86%), above the 90% target.
The statutory result for the year after tax, exceptional items and IAS 19 interest was a profit of £12.6m (2015: £11.4m).  The Group’s effective tax rate decreased due to the utilisation of prior year losses. The tax rate for 2017 is expected to be 17% and cash tax payments will resume.
The proposed total dividend for 2016 is 15.0 pence per share, an increase of 50% on 2015 (10.0 pence per share), reflecting an acceleration of the progressive dividend policy that the Board has committed to pursue.  The policy aims to pay out between 60% to 80% of cash generation after pension deficit funding payments.
A final dividend of 11.0 pence per share has been declared which, subject to approval at the AGM in April, will be paid on 19 May 2017 to shareholders on the register at 18 April 2017.
In late 2016, a deficit funding plan was agreed with the trustees of the two defined benefits pension schemes following the 2015 triennial valuation.  This 11-year recovery plan will fund a triennial valuation pre tax deficit of £129.9m as at 30 November 2016. 
The deficit funding payment for 2017 is £8.6m which will be paid in monthly instalments which will have the effect of reducing the Group’s peak funding requirement by approximately
£4m per annum.  Additionally, there is potential for additional contingent funding in the event of outperformance against the Group’s sensitised forecast net cash flow.  These potential payments would be equivalent to 20% of any outperformance against this benchmark.
Through the 2015 triennial valuation process, a health study involving approximately 40% of the pensioner members across both defined benefits schemes was conducted by an independent third party insurer.  The findings from this study have been reflected in an updating of the Group’s IAS 19 mortality assumptions.  These have resulted in an average increase in male pensioner longevity, the category which accounts for the largest elements of the schemes’ liabilities, of approximately 3.6 years and a deficit increase of £55.9m.
The investment management of the schemes’ assets was also transferred to fiduciary manager PSolve during 2016.  This has resulted in a significant reduction in the schemes’ risk profile with the 20-year Value at Risk measure halved to approximately £60m.
The IAS 19 deficit increased to a pre tax level of £88.8m (2015: £7.8m).  The main reasons for the increase have been the increase in longevity and a lower discount rate reflecting reduced corporate bond yields. 
Board change
It is announced today that David Shearer, Senior Independent Director, will retire from the Board at the forthcoming Annual General Meeting after ten years valued service and wise counsel to the Group.
The Group continues to be fully engaged with ongoing regulatory and public policy consultations and reviews.
Principal Risks and Uncertainties
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.
The Group set out in its 2015 Annual Report and Financial Statements the principal risks and uncertainties that could impact its performance.  These remain largely unchanged since the Annual Report was published with the exception of the reduction in trading risk resulting from the renewed Airtime Sales Agreement, agreed with ITV plc, the terms of which will apply for an 8-year term commencing January 2017, and the launch of the STV ELM.  The 2016 Annual Report is scheduled to be circulated to shareholders on 23 March 2017.
The Group has rigorous internal systems to identify, monitor and manage any risks to the business.
The main areas of potential risk and uncertainty are as follows:-
Regulatory environment
Our broadcast business is operated under licences, regulated by Ofcom, which contain conditions that must be adhered to and although measures have been put in place internally to ensure that this occurs, it is possible that these terms may inadvertently be breached and sanctions imposed by Ofcom, the most serious of which could be the withdrawal of the licences.
Dependence on advertising
STV’s results could vary from period to period as a result of a variety of factors, some of which are outside STV’s control, including general economic conditions. In response to the operating and competitive environment, STV may elect to make certain decisions that could have a material adverse effect on sales, results of operations and financial conditions.
Performance of the ITV Network
A significant amount 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 the performance of STV Consumer and, therefore, the Group as a whole.  The terms of the Airtime Sales Agreement with ITV were amended in December 2016 to provide improved efficiency, simplicity and transparency.
Pension scheme shortfalls
The STV pension schemes’ investment strategy is calculated to reduce any material market movement impacts, however, it is possible that the Group may be required to increase its contributions at the next triennial valuation which could have an adverse impact on results and cash flow.
Possible second independence referendum
STV Group plc is both headquartered and incorporated in Scotland.  Following the result of the EU referendum, it is uncertain whether there will be a further referendum on Scottish independence and , if there is to be one, the timing and the outcome are also unknown.  The Group has in place a number of measures as mitigation against increased volatility in the advertising and financial markets.  These include the Network Affiliate Agreement with ITV in relation to volatile advertising markets and the Group’s bank facilities maturing in the medium term (2019) together with half of the core net debt (£15m) being subject to interest rate hedges to July 2018 to reduce exposure to financial market movements.  In addition, the Scottish Government has agreed that our Public Service Broadcast licences will be respected through their full duration (to 2024).
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 External Lottery Management Limited, a subsidiary of the Group, 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 financial support by the Group.  Internal controls have been put in place to ensure that the terms of the operating licence are adhered to.  In the event that the lottery was unsuccessful then the recoverability of the SCL debtor would be at risk.
Financial risk
STV may be constrained by the Group’s leverage and other debt arrangements. An increase in LIBOR interest rates would have an adverse impact on the financial position and business results.  STV is exposed to currency risk, credit risk, liquidity risk and cash flow interest rate risk. 
Rob Woodward
CEO, STV Group plc

Appendix - STV Group plc Full Year Results 2016