STV Group plc Interim Results for six months to 30 June 2018

Tagged in: Press Releases
STV strategic growth plan gathers momentum

Strong operating performance
  • Total revenue up 6% reflecting good growth across all divisions – Broadcast, Digital and Production
  • Operating profit pre-exceptionals up 9%
  • Total advertising revenue up 6% across national, regional and digital
  • Broadcast revenue up 4%
  • Digital revenue up 24%, including VOD revenue up 61%
  • STV Productions’ revenues up 42%, reflecting increased programme deliveries
  • £2m cost savings target to fund new investments on track; STV2 closed on 30 June as planned and licences sold
  • Interim dividend of 6 pence per share confirmed and full year dividend payment of 20 pence per share proposed, up 18% year on year
Excellent viewing performance on screen and online
  • Strongest STV share of viewing since 2009 at 18.7%, 13% up YOY and 10% higher than ITV
  • Online viewing on STV Player up 73%, with live simulcast up 68%
Good progress with implementation of STV strategic growth plan
  • New divisional structure in place and key leadership appointments confirmed: Bobby Hain as MD of Broadcast (in post); Richard Williams as MD of Digital (starts October) and a new MD of Production will be confirmed later this month and start in November
  • New four-year strategic partnership agreed with Virgin Media, delivering an enhanced viewing experience across STV and STV Player and providing significant incremental value to both parties
  • STV News change programme on track with launch of new 6pm STV Central programme on 10 September
  • STV Growth Fund making excellent progress with £1.5m investment already allocated, generating significant advertising revenue and helping to maximise STV’s share of the Scottish ad-sales market
  • First content partnership deals for STV Player launched with Hopster and Little Dot Studios
  • New Formats Unit created within STV Productions to pilot high potential programming ideas on STV 
  • Linked to the new strategy we have incurred cash exceptional costs of £3.0m which have been entirely funded by a reduction in the share buyback programme, as well as non-cash reorganisation costs of £5.6m. Both of these costs are before tax credits and in line with the guidance given in May
  • In addition, an increase in the provision against the Scottish Children's Lottery debtor of £4.2m has been made to reflect lower than expected ticket sales, making a total provision of £5.0m.
Financial Highlights 2018 2017 Year on year
Revenue £57.7m £54.6m +6%
EBITDA* £11.4m £10.5m +9%
Operating profit* £10.0m £9.2m +9%
Pre-tax profit** £9.4m £8.7m +8%
Statutory pre tax profit/(loss)  (£4.3m) £7.5m n/a
Adjusted EPS** 20.0p 18.8p +6%
Statutory EPS (10.9p) 16.2p n/a
Net debt £37.8m £34.0m +11%
Dividends per share 6.0p 5.0p +20%
*Pre exceptional items
**Pre exceptional items and IAS19 – see note 21
Simon Pitts, Chief Executive Officer, said: “The results announced today show encouraging underlying growth across all of our key business areas so far in 2018, which we expect to continue for the remainder of the year.
“Total advertising revenue is up 6%, on the back of STV’s strongest viewing performance since 2009 and a 73% increase in online viewing via STV Player, fuelled by the World Cup, drama box sets and the soaps. 
“We are also making excellent progress with the implementation of our strategic growth plan announced in May, with a new organisational structure in place and new appointments made to lead the team.
“We have signed a valuable, long-term partnership with Virgin Media and we are delighted to be expanding the range of programming available on STV Player through new, innovative content partnerships.
“Our STV Growth Fund has got off to a terrific start with over fifty Scottish businesses already signed up as partners, and we are also looking forward to STV Productions exciting new Scottish drama, The Victim, hitting screens this winter on BBC1.”
Margaret Ford, Chairman, said:The Board is very pleased with the early progress made in implementing the recently launched strategic plan. Together with strong trading in the first half of the year, we feel confident in recommending an increase in the interim dividend to 6 pence per share.” 
There will be a presentation for analysts at the offices of Peel Hunt, Moor House, 120 London Wall, London EC2Y 5ET today, 4 September 2018, at 12.30 pm.  Should you wish to attend the presentation, please contact Angela Wilson, or telephone: 0141 300 3000.
STV Group plc:                           
George Watt, Chief Financial Officer           Tel: 07710 763713

Charlotte Street Partners:    
Harriet Moll                                                  Tel: 07717 501626

Financial performance review
Principally as a result of a stronger advertising revenue market in the first half of 2018, the Group achieved positive growth with total revenues up 6% at £57.7m (2017: £54.6m). 
Following the new organisational and reporting structure, the broadcast division national revenue was up 2%, which included a very strong end to Q2 due to the FIFA World Cup, with revenues up 23% in June.
The regional advertising market has maintained an improved rate of growth throughout the first half of 2018 with revenues up 15% at £6.1m (2017: £5.3m) and sponsorship up 7% at £3.0m (2017: 2.8m).
Within the broadcast division and as confirmed as part of the strategic plan, STV2 was closed at the end of June 2018 and the licences sold to That’s TV.  Up to that point, performance of the channel was broadly flat year on year, as forecast, with losses of £0.5m.
Performance in the digital division was strong, driven by STV Player which delivered a 53% increase in VOD impressions resulting in revenues up 61% year on year.
STV Productions delivered revenue of £3.7m, up 42% (2017: £2.6m) as a result of an increased schedule of deliveries in early 2018.
Finally, the STV External Lottery Manager (ELM), formed to provide operational services to charitable society lottery, the Scottish Children’s Lottery (SCL), delivered revenue of £2.8m
(2017: £3.3m), reflecting lower costs being incurred by the Scottish Children’s Lottery as it progresses towards cashflow breakeven.
Strong flow through of the increase in revenue to profit was achieved with operating profit before exceptional items up 9% at £10.0m (2017: £9.2m). 
Profit before tax and exceptional and IAS19 was up 8% at £9.4m (2017: £8.7m) and EBITDA was up 9% at £11.4m (2017: £10.5m).
There was a statutory loss of £4.2m for the period (2017: profit £6.3m) following a net exceptional charge of £11.2m (2017: £nil) and an IAS19 pensions non-cash charge of £0.9m (2017: £1.2m).
Margins improved overall at 17.3% (2017: 16.8%). Despite an increase in broadcast revenues, driven by a stronger advertising revenue market, the impact of increased transmissions costs associated with the roll out of D-SAT and HD reduced the margin to 19.6% (2017: 20.5%).
The profitability of digital activities continued to increase with a margin of 45% achieved (2017: 36.8%), driven by almost 80% of the growth in revenue flowing through to profit.
STV Productions delivered an operating loss of £1.2m, a slight reduction on the prior year (2017: (£1.4m).
As expected, the effective tax rate increased to 18% (2017: 16%).  As a result, adjusted EPS increased at a slightly lower rate than the previous year, up 6% at 20.0 pence per share.
Exceptional charges of £12.8m (2017: Nil) gross of a tax credit of £1.6m comprise restructuring related charges of £8.6m including a non-cash writedown of stock and assets of £5.6m due mainly to the closure of STV2 and a £4.2m increase in the provision related to the ELM debtor balance with the SCL which will now take significantly longer to recoup. The one-off cash costs of £3.0m being incurred in the restructure will be funded from scaling back the share buyback programme.
The balance sheet remains robust enabling a continued increase in returns to shareholders through dividend payments and the share buyback activity that has been undertaken in the first half of 2018.
The net debt:EBITDA ratio at the half year was 1.46x, within the target range of 1.0x to 1.5x, despite an increase in net debt to £37.8m (2017: £34.0m).  Operating cashflow conversion at 111% was comfortably above the target level of 90% even with a delay until August of payments due under the Network Affiliate Agreement. 
The main non-operating cash outflows were dividend payments and share purchases through the buyback programme of £6.6m, pension deficit funding payments of £4.4m, £1.1m of funding for the SCL from the STV ELM which will be recouped from 2019, and re-organisation costs of £0.6m.
The IAS19 pre-tax pensions deficit decreased by £11.3m to £59.3m (2017: £70.6m) mainly due to a small increase in the discount rate. The triennial valuation (as at 31 December 2017) is progressing with an outcome expected in early 2019.
Shareholder returns
The Board remains committed to the delivery of increased and sustainable shareholder returns with a distribution to shareholders of 60% to 80% of cash generation after pension deficit funding payments.
With the investment identified in the strategic growth plan being self-financing through redirection of costs, the underlying financial strength of the business and stability of the balance sheet has enabled us to confirm a further year on year increase in the interim dividend payment to 6.0 pence per share (2017: 5.0 pence per share). 
The full year dividend for 2018 of 20.0 pence per share is proposed, an increase of 18% year on year (2017: 17.0 pence per share). 
The capital return programme will continue in the second half as the Board utilise the remaining £3.0m on share buybacks and employee benefit trust purchases.
Momentum in advertising markets continued during H1 2018 with total advertising revenue up 6% and this is expected to be maintained in Q3 with total advertising revenue up 6% to end of September.
STV national airtime revenue is expected to be up 1% to the end of September, with Q3 expected to be flat reflecting the broader market.
The regional airtime market continues to perform strongly and is expected to be up 20% to 25% to end of Q3.
Strong growth in digital revenues achieved in H1 is forecast to continue in Q3, with revenues expected to be up 20% to 25% to end of September.
STV Productions’ revenues are expected to be up over 50% for the full year. This growth is driven primarily by delivery of a new four-part drama, The Victim, for BBC1.
Operational review
Underpinned by an increase in viewing share on STV – at 18.7% in the six months to end June - the strongest performance in the equivalent period since 2009; the broadcast division has delivered a strong performance.  Total viewing hours on STV are up 8% year on year in H1 2018, ahead of the Network, and television viewing in Scotland continues to be around 10% higher than the UK average, demonstrating the resilience of television and the appeal of STV.
During Q2, following the outcome of the strategic review, extensive organisational restructuring was implemented across the broadcast division designed to create a schedule that delivers new and stronger connections with audiences and wider opportunities for advertisers.  This involved closing STV2 on 30 June 2018 with the savings of £1.0m per annum being re-invested in the creation of new content for STV’s core schedule and STV Player. 
Additionally, a comprehensive change programme to deliver a cost-effective news service relevant to changing consumer needs has been undertaken.  The targeted cost savings are on track to be delivered and the implementation of the future news model, placing parity on news content across all consumer platforms, is progressing to schedule.
To support STV’s pre-eminent position as Scotland’s biggest advertising platform, the launch of the STV Growth Fund was announced in May.  Designed to maximise STV’s share of the advertising market whilst driving the Scottish economy through encouraging investment in advertising to deliver business growth, the STV Growth Fund has already invested approximately £1.5m, partnering with over 50 Scottish businesses already and delivering significant revenue to STV.
Digital activities have continued to deliver increased revenues and high margin growth, driven by the strong performance of the STV Player, which continues to be the fastest growing UK public service broadcaster VOD service.
During H1 2018, long-form video streams were up 29% and online viewing was up 73% overall resulting in an increase in VOD revenues of 61%.  The FIFA World Cup was a key driver of this strong performance, however, an enhanced content offer with the addition of box sets also bolstered performance during the period.
At the half year, STV Player had 2.8m registered users representing 62% of the 16+ Scottish population.
The vision to deliver continued growth of STV Player is to create an ‘STV for everyone’, achieved by improved platform reliability, wider distribution, increased functionality and personalisation and an enhanced content proposition. In support of this, STV announced a valuable new long-term partnership with Virgin Media on 3 September which will see STV Player launch to Virgin’s c.400k Scottish homes for the first time in January 2019, opening up significant new VOD advertising revenue which STV will control and sell direct. This innovative deal will also see STV become the first UK public service broadcaster to broadcast exclusively in HD on the Virgin platform, providing an HD variant for each of the three STV regions within Virgin coverage for the first time: STV Central West and East, and STV North Dundee. The agreement also includes an enhanced advertising and marketing commitment from Virgin Media across STV’s services, as well as increased prominence for STV’s brand and programmes on the Virgin platform.
Additionally, two new content partnerships have been launched on STV Player. The first partnership with pre-school kids app Hopster saw hundreds of episodes of high quality children’s content launch on STV Player on 1 August, significantly bolstering STV’s free-to-air children’s category.  The next phase of this partnership will involve bundling the Hopster subscription app with a new ad-free subscription version of STV Player which will be launched in the near future. The second partnership is with youth-focused digital broadcaster, Little Dot Studios, which sees a range of new content, initially from Little Dot’s Real Stories documentaries channel and their Wizz children’s channel accessible via STV Player. The aim of partnerships of this nature is, over time, to drive incremental viewing and revenue to STV Player.
STV Productions
New commissions and re-commissions have been secured across all genres during H1 and an increased schedule of deliveries has resulted in a 42% increase in revenue against the prior year at £3.7m.
New commissions announced included a second drama commission for BBC1, Elizabeth is Missing, which is expected to be delivered in 2019.  A new entertainment series for Channel 4, Sex Tape, will be delivered in 2018.  New commissions delivered in the first half of 2018 were a one-off documentary for BBC Four, Lucy Worseley’s Fireworks for a Tudor Queen; a one-off documentary for BBC2, Britain's Polar Bear Cub; a three-part documentary, Britain’s Biggest Warship, based on unprecedented access to the Royal Navy’s new £3bn aircraft carrier was delivered to BBC2; and an impactful one-off documentary for BBC Scotland, Killed Abroad.
Re-commissions for four further series of Antiques Road Trip and a eighth series (20 episodes) of Celebrity Antiques Road Trip, both for BBC; and fourth series of Stopping Scotland’s Scammers, for STV and sponsored by Royal Bank of Scotland, have been confirmed.
STV External Lottery Manager
Established in late 2016, the STV ELM was formed to provide operational services, such as ticket sales and marketing, to charitable society lottery, Scottish Children’s Lottery. In addition, the STV ELM was designed to provide wider benefits to the Group including rich consumer data, transactional service capabilities and the introduction of new skills to the Group in these areas and in data analysis.
The Scottish Children’s Lottery has continued to grow during H1 although the rate of growth has been slower than projected. This has caused cost management to be a high priority in the first half of 2018 and as a result of this focus, the cash breakeven point has been reduced significantly.  Currently weekly ticket sales of 120,000 to 125,000 are being achieved and we remain on track to achieve the cashflow breakeven point in the second half of this financial year.
The lower rate of growth of ticket sales will result in a significantly slower projected repayment of the debtor balance. As a result, the provision has been increased by £4.2m to £5.0m. 
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.  In early 2018, one additional risk was added to the register which relates to the Lobbying (Scotland) Act, which came into force in March 2018. Cyber risk has also been subject to increased focus by the Audit Committee given the generally heightened risks in this area.  An initial review of cyber risk was undertaken in 2017 and a further wider review will be undertaken in the second half of 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 to STV’s Broadcast division MD 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 River and Mercantile 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 £10.1m gross, £5.1m net, at 30 June 2018.
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.
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 £10.1m 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.
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