STV Group plc Full Year Results 2018

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Strong financial performance
  • Total revenue up 8% reflecting good growth across all divisions - Broadcast, Digital and Productions
  • Operating profit pre-exceptionals up 6%
  • Total advertising revenue up 4% across national, regional and digital
  • Broadcast revenue up 3%, including regional advertising up 24%
  • Digital revenue up 17%, including VOD revenue up 39%, with digital operating margin increasing to 49%
  • STV Productions revenue up 60% reflecting increased high value commissions
  • Overall, non-broadcast profit up 30%, with one quarter of earnings now derived from non-linear spot advertising
  • Increased returns to shareholders with final ordinary dividend of 14 pence per share confirmed and full year dividend payment of 20 pence per share, up 18% year on year
Exceptional viewing performance on screen and online
  • Strongest STV share of viewing since 2009, up 13% year on year, with STV 4x bigger than C4 and 5x bigger than C5
  • STV achieved the highest growth in share of any of the UK’s 500+ channels and delivered 99% of all commercial audiences over 500k in Scotland in 2018
  • STV viewing volume up 8%, with all age groups watching more STV in 2018, including 16-34s
  • STV News modernisation programme driving increased viewing share, with STV News at Six now the most watched news programme in Scotland
  • Online streams on STV Player up 24%, with live simulcast viewing up 81%
Strong foundations to deliver profitable growth
  • A year of significant change and progress with a new team and divisional structure fully in place and focused on the key growth areas
  • Key strategic partnerships secured with Sky and Virgin Media increasing digital distribution
  • Significant improvement in user experience and content of STV Player, and launch of new ad-free SVOD service, STV Player+, to target pay TV market for first time
  • Delivered peak time drama, entertainment and factual series for BBC, ITV and C4 for the first time, as well as new creative partnerships to expand IP pipeline
  • Successful launch of STV Growth Fund to drive incremental growth in regional advertising market, with the fund now doubled to £10m of airtime
  • The Scottish Children's Lottery continued to grow with cashflow breakeven now reached as of 1 January 2019
Financial Highlights 2018 2017 Year on year
Revenue £125.9m £117.0m  +8%
EBITDA*  £22.8m  £21.5m  +6%
Operating profit*  £20.1m  £19.0m  +6%
Pre-tax profit**  £19.0m  £18.0m  +6%
Statutory pre tax profit   £1.9m  £13.9m -86%
Adjusted EPS** 41.1 pence 39.6 pence   +4%
Statutory EPS  4.2 pence 30.1 pence -86%
Net debt  £36.3m  £35.5m  +2%
Dividends per share 20.0 pence 17.0 pence +18%
*Pre exceptional items
**Pre exceptional items and IAS19
Simon Pitts, Chief Executive Officer, said: “The results announced today show encouraging underlying growth across all of our key business areas in 2018. Total advertising revenue is up 4% on the back of STV’s strongest viewing performance in a decade. All age groups watched more STV in 2018, including the younger 16-34 audience, and online viewing via STV Player also gave us a significant boost fuelled by the football World Cup, the soaps, big entertainment shows like I’m a Celebrity and drama boxsets.

“2018 was a year of significant change and progress at STV with a new team and organisation now fully in place and excellent early progress made with the implementation of our strategic growth plan.

“We have signed valuable, long-term partnerships with Virgin Media and Sky, improved the user experience and content of the STV Player, and now launched a new subscription service, STV Player+, to enter the fast-growing pay TV market for the first time.

“In programming, we are producing popular, peak-time series for the UK’s biggest broadcasters, have invested in our news operation and agreed new talent partnerships to strengthen our creative pipeline. Our exciting new Scottish drama series, The Victim, will hit screens shortly on BBC1.

“In advertising, our STV Growth Fund has got off to the best possible start with over 100 Scottish businesses already signed up, driving a 24% increase in regional ad revenues, and I’m delighted to be announcing a doubling of the fund to £10m of airtime.

“2019 has also started well, with strong digital and regional growth off-setting the more cautious national advertising market.”
Margaret Ford, Chairman, said:In a year of significant change for STV, the Board is delighted with the delivery of a strong set of financial results and the extent of the progress that has been made in implementing the new strategic growth plan. We continue to increase returns to shareholders and are confident that the growth opportunities identified will be progressed in 2019 and beyond.” 

There will be a presentation for analysts at the offices of Peel Hunt, Moor House, 120 London Wall, London EC2Y 5ET today, 28 February 2019, at 1.00 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
Total revenue increased by 8% to £125.9m (2017: £117.0m) reflecting particularly strong growth in regional advertising revenue, digital revenue and production revenue. Operating profit, before exceptional items principally relating to the refocusing and restructuring of the business, increased by 6% to £20.1m (2017: £19.0m).  Operating profit after exceptional items decreased to £9.0m (2017: £17.4m).

Broadcast division revenues were up 3% at £94.5m (2017: £92.0m) due to regional airtime growing by 24% as a result of the success of the STV Growth Fund. National airtime revenues were down slightly, as a weak December market offset the positive impact of the World Cup earlier in the year.

Broadcast division operating profit at £15.3m (2017: £15.3m) was flat with the growth in revenue offset by higher costs including the one-off impact of increased transmission costs.  The operating margin of the Broadcast division fell slightly to 16.1% (2017: 16.6%).

The newly established Digital division grew revenues by 17% to £9.6m (2017: £8.2m) reflecting a very strong STV Player performance as VOD advertising revenues grew by 39%. Digital division operating profit grew by 27% to £4.7m (2017: £3.7m) with margins also expanding to 48.5% (2017: 45.1%) caused by high margin incremental STV Player revenue. 

STV Productions revenue grew strongly, up 60% to £16.3m (2017: £10.2m) as higher value productions, particularly new drama, The Victim, were delivered. STV Productions operating profit amounted to £0.1m (2017: nil). Increasing the number of higher margin productions will be a key area of focus going forward, in line with the strategy.

The STV External Lottery Manager (The STV ELM) invoiced £5.5m of costs to the Scottish Children’s Lottery (SCL) (2017: £6.6m) and the division continues to operate on a breakeven basis.   The STV ELM incurred a loss after exceptional items of £4.2m (2017: £1.6m) primarily due to provisions made for the risk of not achieving a full recovery of the debtor due from the SCL.

A total of £11.1m cash and non-cash exceptional charges have been made in 2018 related to the closure of STV2, GMP equalisation and the organisational restructure which has taken place.  These include £3.3m of cash exceptional costs which principally related to redundancy costs (£2.3m) arising from the closure of STV2 and restructuring of the business. 
There are non-cash exceptional costs of £7.8m, with the two largest items being a writedown to the value of STV Productions’ stock following the closure of STV2 (£4.6m) and the impact of GMP (guaranteed minimum pension) equalisation (£1.6m).
Net finance costs increased to £7.1m (2017: £4.3m) due largely to an increase in impairment losses against the SCL debtor to the ELM to £4.2m (2017: £nil) offset by the non-cash IAS19 finance charge decreasing to £1.8m (2017: £2.5m).  Cash interest costs increased to £1.1m (2017: £1.0m) due to slightly higher average interest rates.

The statutory result for the year after tax, exceptional items and IAS19 interest was a profit of £1.6m (2017: £11.7m).  The Group’s effective tax rate increased to 17% (2017: 14%) due to a reduced level of prior year losses utilisation.

Earnings per share before exceptional items and IAS19 interest was up 4% at 41.1p (2017: 39.6p) reflecting the growth in operating profit partly offset by a higher effective tax rate of 17% (2017: 14%). On a statutory basis, EPS amounted to 4.2 pence (2017: 30.1p).

Net debt increased by £0.8m to £36.3m (2017: £35.5m) with the net debt:EBITDA ratio at 1.36x, within the target range of 1.0x-1.5x on a covenant basis.  There was a significant working capital inflow as sums due from ITV under the Network Affiliate Agreement (NAA) and Advertising Sales Agreement (ASA) related to 2017, amounting to £3.6m, were received in Q3. The Scottish Children’s Lottery (SCL) had a need for further working capital of £2.7m, however, following changes to the cost base from 1 January 2019, the SCL has reached cashflow breakeven and the Group will see a cash inflow in 2019 as the ELM’s debtor balance of £6.6m begins to be repaid.

Other major outflows in 2019 included pension deficit funding cash payments of £8.8m, dividends of £6.9m, £3.4m of capital expenditure, £2.4m of reorganisation costs and £3.9m of share purchases through the buyback programme and into the Employee Benefit Trust.

The Group’s preferred measure of operating profit converted to free cashflow, defined as operating profit plus depreciation, amortisation and share based payments, less working capital movements (excluding STV ELM) and capital expenditure, increased to 125% (2017: 64%) due to the NAA and ASA timing impact and other working capital movements.

The Group’s £60m revolving credit and overdraft facility matures in June 2022 and provides good medium term funding certainty.

The balance sheet remains robust providing the Group with financial flexibility. The principal movements were the movement in the IAS19 pension deficit and the debtor and creditor movements in working capital following the exceptional charges taken in 2018.

The IAS19 deficit, net of tax, increased to £65.3m (2017: £58.6m) and the 2018 triennial valuation process is underway. We expect this to be concluded by end of Q1 2019.

Shareholder returns
The Group’s strategic plan, announced in 2018, has been fully costed and is self-financing.  This has enabled the Board to continue to fulfil its commitment to pursue a progressive dividend policy. This targets 60% to 80% of cash generation for shareholders after pension funding arrangements.

As a result, it is proposed that a final dividend of 14 pence per share, in line with recent guidance, will be paid (2017: 12 pence), resulting in a total dividend for 2018 of 20 pence, up 18% on 2017.

Future increases in shareholder returns will continue to be aligned with earnings growth. A further increase of 5%, to 21 pence per share, is proposed for the total dividend for 2019.

Despite the unprecedented macroeconomic uncertainty, total advertising revenue is expected to be flat to +1% over the first four months of 2019.

STV national airtime revenue is expected to be down 5%, with anticipated stronger trading in April helping to offset the forecast decline in March.

The regional airtime market continues to perform strongly and is expected to be up 20% to 25% to end of April.

Strong growth in digital revenue is continuing and is expected to be up 15% to 20% to end April, driven by boxset consumption and the increased distribution of the STV Player.

STV Productions has achieved a positive start to the year with approximately 50% of 2018 revenues already secured.

Operational review

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 underlying strength and resilience of the business was evident during 2018 as STV delivered its highest viewing share in a decade and the highest viewing share growth of any UK channel. An increase of 13% in share year-on-year was achieved and share increased across every age group. Significantly – and bucking the trend across many other broadcasters - the highest year-on-year growth in share was across 16-34 year olds, with an increase of 10% in this key audience.

This strong performance on screen supported an increase in revenues, up 3% at £94.5m (2017: £92.0m). This was achieved against the backdrop of extensive organisational change as STV2 was closed on 30 June 2018 and a major change programme and restructure was implemented across STV News with target cost savings realised.

National advertising revenues were broadly flat due to a weak performance in December; however, conversely regional revenues continued their strong growth, up 24% across the year at £13.6m (2017: £11.0m).  The growth in regional revenue was supported by the success of the STV Growth Fund. Launched in May 2018, this has resulted in £3m being invested in growing Scottish businesses, and extending STV’s advertiser base of the future.

Solid early progress has been made in implementing the strategy to achieve the aim of driving digital growth through the STV Player by creating an STV for Everyone.  Underpinning this growth plan are three strategic priorities: increasing digital distribution; enhancing the consumer experience through improved product reliability; and expanding the range of content available on STV Player.

On distribution, key strategic partnerships with Virgin Media and Sky were secured in the second half of 2018.  Due to the penetration of both Virgin Media and Sky in Scotland, these deals will have the effect of doubling the distribution of STV Player across Scotland and enabling STV to become the first UK PSB to broadcast all of its regional variants in HD.

STV Player was launched on the Virgin Media platform, ahead of schedule, in December 2018, and in February 2019 the fully regionalised HD version of the service was introduced.  The Sky launch is on track to be delivered in the second half of 2019.

A programme of activities to enhance the consumer experience through improved product reliability combined with the introduction of new features, including HD streaming, has been introduced and will continue in 2019.  This includes, earlier this month, the launch of STV Player+, a new ad-free subscription service, extending the range of products available to consumers and allowing STV to enter the fast-growing pay TV market for the first time.

Three new content partnerships were announced in 2018 (Hopster, Little Dot Studios, Eleven Sports), all designed expand the range of content on the platform and, over time, drive incremental viewing and revenue to STV Player.

As the foundations of the digital growth strategy are being set, the highly profitable digital business continued to enjoy strong growth, with revenue up 17% at £9.6m (2017: £8.2m).  Online streams were up 24%, generating an increase in ad impressions of 29%.

STV Productions
The strategic growth plan for STV Productions is developing momentum against the positive backdrop of stronger deliveries in 2018.  Importantly, the 2018 deliveries included a return to high end drama, leading to growth in revenues, up 60% at £16.3m (2017: £10.2m). Additionally, new commissions were secured across all genres with eleven shows, including seven series, being delivered throughout the year.

This growth trend has continued into 2019 with a re-commission by BBC One of long-running ratings success, Antiques Road Trip (series 19 and 20), and by BBC Two of Celebrity Antiques Road Trip (series 9), all of which will be delivered in 2019.

The strategic growth plan has a straightforward aim: to build a world class production business based out of ScotlandDavid Mortimer was appointed Managing Director of the business in November and has made early progress in implementing the growth plan, forming new creative partnerships and sowing the seeds to develop valuable IP.

This includes a co-production deal with Primal Media, announced in January 2019. Primal Media, the creators of hit entertainment shows including Release the Hounds for ITV2, Carnage for Sky and Bigheads for ITV, will work in partnership with STV’s talented entertainment team to pitch to UK and international networks with the aim that commissions are co-produced in Scotland. 
It has also been announced that William Morris Endeavour - WME – has been appointed as international sales agent to support the increased focus on developing dramas and formats for UK and international audiences. WME are one of the world’s leading entertainment and media companies and have an unparalleled list of artists and content creators on their books. WME will work with STV Productions to develop IP for international markets and broker co-development and co-production deals.
STV External Lottery Manager
The STV ELM, established in late 2016, provides operational services, including ticket sales and marketing to the Scottish Children’s Lottery, in addition to providing wider benefits to the Group including access to consumer data, transactional service capabilities and data analysis capabilities.

The strategically significant target of cashflow breakeven for the Scottish Children’s Lottery was achieved on 1 January 2019. The debtor balance of £6.6m net is expected to be repaid over the next 6 years.

Online lottery ticket sales and new customer sign-ups continue to grow, and the launch, in early 2019, of a retail sales opportunity will further support increased ticket sales.
Simon Pitts
Chief Executive Officer, STV Group plc
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. There were no significant changes to the 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
The Group continues to be fully engaged with ongoing regulatory and public policy consultations and reviews.
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 market conditions, 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.
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.
To the extent that this involves a decline in national advertising revenues, then the Group receives a partial offset to this impact through its arrangements with ITV plc in the Network Affiliate Agreement and Advertising Sales Agreement.

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.

Cyber Security
Cyber risk commonly refers to any risk of financial loss, disruption or damage to a company’s reputation resulting from the failure of its information technology systems.  STV is dependent on technology for the smooth running of its business and a cyber-security incident could lead to a loss of commercially sensitive data, a loss of data integrity within our systems or loss of financial assets through fraud.
Vulnerability to an external attack is a growing worldwide issue and cyber risk has been subject to increased focus by the Audit Committee.  An initial review of cyber risk was undertaken by the internal auditors, Deloitte LLP, in 2017, and a cyber risk register was established which is reviewed and updated regularly.  A further wider review was carried out in the second half of 2018, the results of which were reported to the Audit Committee in November. 

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 £11.6m gross, £6.6m net, at 31 December 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 £6.6m (£11.6m less £5.0m provision) 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.

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.

Appendix - STV Group plc - Full year results 2018