STV Group plc Half Year Results 2020

Press Release

0700 hours, 1 September 2020

STV Group plc Half Year Results to 30 June 2020

Strongly positioned to resume successful growth strategy

·    Proactive steps taken to mitigate the impact of Covid-19 and support STV colleagues and partners

·    Continued record viewing growth on TV and online as STV's public service broadcaster role is reinforced

·    Total advertising revenue trends improving materially: June -33%; July -7%; August +1%

·    Digital business accelerating rapidly with online viewing +86%

·    Significant new commissions secured by STV Studios, including new returnable drama series for C4

Proactive steps to mitigate the impact of Covid-19

·    Balance sheet significantly strengthened to enable ongoing investment in STV's successful growth strategy:

o  Completion of share placing in July raising net proceeds of £15.5m

o  Extension of bank facilities from £60m to £80m

·    Swift implementation of full year cost and cash savings of £7m and £11m respectively, as well as postponement of pension contributions from Q2 to December

·    Focus in H1 has been on the safety of our colleagues and supporting our partners: all furloughed colleagues have been topped up to 100% of salary and we have reinforced our social purpose through the STV Children's Appeal, public health messaging, new diversity commitments and support for local advertisers

Financial Performance

·   Total advertising revenue down 20%, with national down 23% and regional impacted to a lesser extent, down 18%

·    Digital revenues up 5%, illustrating the growing strength of STV's digital business, with VOD revenue from STV Player +13%

·   Studios revenue down 17% reflecting the pause in filming in Q2, but profit impact wholly mitigated by strong secondary sales and cost savings

·    Savings and variable broadcast cost model mitigated nearly half of the revenue decline, with operating profit of £5.2m, down 52%

·   Interim dividend declared of 3p per share to be satisfied by way of a bonus issue of new ordinary shares

Record viewing growth on TV and online

·   Highest audience growth ever, +12%, with all time viewing share of 19.2%, and growth continuing post lockdown

·    Lockdown viewing +24%, with daytime +48% and STV News +40%

·    STV still Scotland's most popular peaktime channel, with 22.0% viewing share

o  Gap to BBC1 widening, gap to rest of ITV Network at an 18 year high

·   97% of commercial audiences of over 500k viewers in Scotland delivered by STV

·   Online viewing +86% and VOD stream starts +72%, with STV Player reaching 1 billion minutes viewed in half the time vs 2019

·  Successful digital content strategy sees 1,500 hours of STV Player-exclusive programming account for 30% of viewing in H1, and 5 of top 10 most popular digital shows

Strong strategic momentum with diversification plan accelerating

·    Despite Covid-19 disruption, STV's Growth Fund attracted 55 new advertisers between April and September, with fund doubled to £20m to drive recovery

·    STV's Digital business continues to scale rapidly:

o  STV Player content proposition boosted by a further 10 content deals so far in 2020 including drama, sport and true crime, and 5 new simulcast channels

o  UK-wide launch of STV Player increases its addressable market tenfold. Recent pan-UK launches on Virgin Media and Freeview Play boost distribution by 13 million+ devices

o  STV Player now pre-installed on around half of the UK's 40m+ connected devices, with potential for further growth

·   STV's production business is now starting to realise its growth potential following a creative overhaul:

o  All STV programmes now back in production under new safety protocols

o  7 new commissions and 4 recommissions so far in 2020, with STV currently producing shows for 9 different networks

o  New 6x60 drama series, Screw, commissioned by Channel 4 on back of BAFTA- winning Elizabeth is Missing and The Victim

o  New 8x60 series, Landmark, commissioned by Sky from STV majority-owned Primal Media

o  New wholly-owned creative label, Barefaced TV, added to portfolio with strong track record of creating younger-skewing entertainment formats

o  STV Productions rebranded as STV Studios to better reflect its status as a house of creative brands, with 7 production labels now operating under STV ownership

·   Lottery divestment process ongoing, albeit timing impacted by Covid-19; net debtor now fully provided for as an exceptional finance charge in the first half.

Improving outlook

·    Focus continues on accelerating successful growth strategy to diversify STV

·  Given the continued market uncertainty, it is still not possible to provide guidance for the remainder of the year, however the fundamentals of STV's business are strong and improving:

o Continued excellent viewing performance, even post lockdown, with strong H2 schedule to come

o Advertising trends have improved materially over the summer, with total advertising revenue -7% in July and +1% in August

o  Regional revenue returned to growth in July and August, with VOD also growing again in August

o  STV's digital business is expected to continue to grow strongly

o  Production hiatus caused by Covid-19 will impact revenue rather than profitability in 2020, with £15 to £20m of commissions already secured for 2021 

·    We will continue to manage cash and costs carefully, with our variable broadcast cost base offering ongoing protection

Board update

·    The Board proposes an interim dividend for FY20 payable by way of a bonus issue equivalent to 3p per share and is committed to reintroducing a cash dividend at the earliest opportunity

·    The Company today also announces that Baroness Ford will not seek re-election at next year's AGM. Baroness Ford will have served for eight years as Chairman at that point and, in line with planned succession, will retire from the Board

Simon Pitts, STV Chief Executive, said: 

"I am extremely proud of how everyone at STV has responded to the Covid-19 pandemic. Our record audience growth in the first half, up 12% on TV and 86% online, illustrates the enduring power and relevance of public service broadcasting, particularly STV's local news which has been a vital lifeline for millions of Scots during this crisis. As well as keeping our viewers informed and entertained, our priority has been to protect our colleagues, support local business through our Growth Fund and £1m Local Lifeline campaign, and help our local communities by distributing over £1.5m to over 300 Scottish charities hit hardest by this pandemic.

"While our advertising and production revenues have been significantly impacted by Covid-19, we have been able to mitigate nearly half of the impact thanks to the proactive steps we have taken and our variable cost model. The successful share placing in July has also significantly strengthened the balance sheet and given us the confidence to continue to invest behind our growth strategy.

"The outlook is much more positive in H2, with advertising trends improving materially in July and August, and a strong schedule to look forward to on TV and online including the return of a full complement of weekly soap episodes from later this month, new drama like Des starring David Tennant, and entertainment juggernauts like the rescheduled BGT live finals and I'm a Celebrity.

"We have also successfully accelerated our diversification strategy during lockdown. Our digital business reported continued revenue growth in H1, with the increasing popularity of our digital-only content (now 30% of viewing) and the recent UK-wide launch of STV Player on Virgin Media and Freeview Play illustrating our future growth potential.

"In the production business we are busier than ever and have secured 7 new commissions and 4 recommissions so far this year, including new 6-part returnable drama series Screw for Channel 4 and 8-part Sky series Landmark.  I was delighted that Catchphrase was the first entertainment show in the UK to resume filming, and all of our shows are now back in production under new safety protocols.

"Our new creative partnership with Barefaced TV will target younger-skewing factual entertainment formats and establishes a 7^th creative label within the newly rebranded STV Studios, which aims to become the UK's leading nations and regions producer."

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There will be a presentation for analysts today, Tuesday 1 September 2020, at 12.30 pm, via Zoom, followed by a Q&A session.  Should you wish to join the presentation, please contact Angela Wilson, [email protected] to obtain dial-in details.

Enquiries:

STV Group plc:         Kirstin Stevenson, Head of Communications        Tel: 07803 970106

Camarco:                Geoffrey Pelham-Lane, Partner                           Tel: 020 3757 4985

Ben Woodford, Partner                                    Tel: 020 3781 8333

Financial and operational review

Group overview

The results of the Group for the first half of the year have clearly been significantly impacted by the Covid-19 pandemic, and the consequences of the resultant lockdown restrictions on the economy, specifically advertising markets and programme production.  Against the backdrop of a 19% reduction in revenues (from £54.9m in the first half of 2019 to £44.7m in the current period), the Group mitigated nearly half of the profit impact through decisive actions and its variable cost arrangement with ITV, recording an operating profit of £5.2m for H1 (2019: £11.0m).

From a cash perspective, the Group generated a cash inflow of £4.0m over the period with net debt of £33.5m as at 30 June 2020 (31 December 2019: £37.5m).  Strong working capital cash inflows supported an operating cash conversion of 202% (2019: 76%), and non-operating cash outflows were significantly reduced following cancellation of the final dividend in respect of FY19 and deferral of pension contributions from Q2 to the end of the year.

Total advertising revenues of £39.1m were 20% down on the prior year, driven by national advertising down 23% and regional advertising down 18%. 

Digital revenues were impacted to a lesser extent, and buoyed by a strong performance in Q1 2020, returning 5% growth year on year and H1 revenues of £5.9m.  Within that VOD advertising revenues on the STV Player were up 13%.

Programme deliveries in the Studios division were always expected to be second half weighted, in line with historic norms, and while H1 performance was impacted by the broader environment, the revenue reduction of £0.4m to £1.6m for the first half was less significant in the context of the overall Group.

Operating profit of £5.2m was 52% down on the prior year.  Of the revenue reduction of £10.2m, £4.4m of this was mitigated through a combination of the variable cost arrangement with ITV for Channel 3 programming (benefit of £3.5m) and further cost savings of £1.5m.

Total finance costs (before exceptional items) were £1.4m (2019: £1.9m).  Cash finance costs on the Group's borrowings totalled £0.7m (2019: £0.7m) with the balance being non-cash costs in relation to the Group's defined benefit pension schemes (£0.6m; 2019: £1.0m) and interest on the lease liability of £0.1m (2019: £0.2m).

In light of the ongoing disposal of the STV ELM (the Group's external lottery management company), an exceptional finance cost of £8.7m has been recognised in the period reflecting an increase to full provision for the debtor due from the Scottish Children's Lottery (SCL) at the end of the period.  A corresponding exceptional tax credit of £1.6m has also been recognised.

Before exceptional items, the Group realised a profit before tax of £3.8m (2019: £9.1m).  The statutory result for the year was a loss before tax of £4.9m (2019: profit of £9.1m).  The effective tax rate (ETR) on the profit before exceptional items is 9.3%, lower than the standard rate in the UK of 19% and driven by the impact of restating the opening deferred tax asset from 17% to 19% following the passing of legislation confirming that the rate of UK corporation tax would no longer reduce to the lower rate.  The tax credit on exceptional items represents an ETR of 18.5%, broadly in line with the UK standard rate.

Adjusted earnings per share (before exceptional items and IAS19 interest) was down 50% to 10.8p, as a result of lower profit in the period.  On a statutory basis, the Group returned a loss per share of 9.2p as a result of the exceptional item charged.

The net debt to EBITDA ratio at the end of the period was 1.47 times (December 2019: 1.28 times), helped by cash generation which partly offset profit declines.  In June, the Group increased its bank facilities from £60 million to £80 million, coterminous with the existing facility maturing in June 2022, with a step down of £10 million in March 2022.  The net debt to EBITDA ratio covenant will be replaced with a minimum liquidity threshold test in the event that the Group's leverage ratio were to rise above 3x.  Further details are included in note 2 to the condensed interim financial statements.

Across the Group's two defined benefit pension schemes, the accounting deficit before tax increased to £76.9m at the half year (31 December 2019: £64.0m).  This is a direct result of the lower discount rate, which was driven by falling corporate bond yields as a result of the Covid-19 economic backdrop.  Returns on assets were higher than expected due to the hedging strategies of the schemes which saw the value of liability-driven investments increase over the period.

Broadcast

The strategy to maximise the value of the profitable broadcast business through delivery of high quality, cost-effective news and entertainment on STV has secured record audiences and viewing performances during H1.

STV's sustained increase in audience share growth over the past three years and the decade-high viewing share achieved in 2019 have been exceeded during a period of exceptional viewing growth in 2020. While there has been an inevitable increase in viewing enjoyed by all broadcasters during Q2 during lockdown, STV has out-performed other broadcasters with audience growth of 12%, twice the rate of growth of ITV and four times that of BBC1 in Scotland.  Whilst audience levels on other channels are returning to pre-lockdown levels, STV's audience has continued to grow.  In July, STV's audience grew by 21%, exceeding BBC One in all time, peak time and daytime for the first time ever, and STV News recorded its highest average audience ever, +58% year on year.

Peak time audiences continue to be larger than any other channel in Scotland with STV's viewing share achieving an 18-year high against the ITV Network, with the gap to the next largest channel, BBC1, also continuing to widen.  Daytime audiences grew by 25% in H1 (+48% during lockdown) reflecting changing viewing patterns during lockdown.

STV News has maintained its leading position as Scotland's most watched news programme.  Average audiences for STV News at Six have increased by 25% year on year (+40% during lockdown) and Scotland Tonight, Scotland's leading Scottish current affairs programme, has doubled its average audience since moving into a peak time slot in January.

Demand for digital news has increased significantly with a trebling in user numbers accessing the digital news service following the launch of a refreshed digital news website and app at the end of 2019.

Following a positive start to 2020 with total advertising revenue in Q1 down only 1%, the immediacy of lockdown restrictions caused a significant decline in demand for advertising and total advertising revenues were down 38% in Q2 (April -42%, May -39%, June -33%) with most categories deferring or cancelling their spend both nationally and regionally.  Overall, regional advertising revenue was impacted to a slightly lesser extent than national (down 18% in H1 vs -23% for national), supported by increased spending by the Scottish Government who chose STV as one of their key routes to communicating with mass audiences.  Overall, revenues in the division were down 22%, at £35.0m (2019: £45.0m).  Operating profit was £5.4m, down 50% (2019: £11.0m).

In July the UK Government announced a package of measures to combat obesity including a ban on the advertising of food and drink high in fat, sugar or salt (HFSS) on both TV and online before 9pm, with a consultation on a total ban on this advertising online.  Clearly this could have an impact on STV's advertising revenues but we cannot quantify this at this stage as there is much we do not know about how the Government's plans will work in practice.  We do not expect any new rules to be introduced until 2023 at the earliest.

Digital

The strategy for the digital business is to drive growth by creating an STV for everyone with the STV Player becoming a content destination across the UK rather than simply a catch up and live simulcast service in Scotland.  The growth plan is based on three strategic priorities:  an enhanced content offering; increased distribution; and an improved product, all of which will secure more people on the STV Player, watching more often, and for longer.

The positive growth trajectory of the digital business has continued despite the competition presented by increased levels of broadcast viewing and viewing to streaming services during this period. 

Despite the Covid disruption, digital revenues were up 5% to £5.9m (2019: £5.6m), with strong growth in Q1 more than offsetting the declines of Q2 on the back of very strong digital viewing growth.  The largest revenue stream, VOD revenue, was up 13% on the same period last year.  Operating profit was £2.8m, down 11% on last year as investment in the digital strategy continued throughout the first half.

Across H1, total time spent watching the STV Player increased by 86% to over one billion minutes of viewing.  VOD stream starts were up 72%, significantly higher than the growth achieved by the other UK broadcast VOD services during lockdown, and evidence of the effectiveness of the digital content strategy with Player-exclusive content now accounting for 30% of all viewing on the Player. 

In April, nearly 300 additional hours of content were added through deals with Endemol Shine, Stingray Qello, DUST, Flame and Konnect Digital, taking the total number of Player-exclusive hours to over 1,500.  The expanding content strategy has added five new live channels to the STV Player in H1, taking the portfolio to 8 channels.  New additions include Stingray Qello (music documentaries and concerts) and EDGESport (24/7 free access to live and recorded premium action global sport content). As the popularity of this content increases, in June 2020 streams viewed from this catalogue of acquired and archive content overtook streams of STV content for the first time, with 5 of the top 10 best watched digital shows from January to July being Player-exclusive programmes.

A significant milestone in the distribution strategy was the launch of the STV Player on Sky in Q4 of 2019 providing access to over 800,000 Scottish homes and positioning STV as the first UK PSB to broadcast all of its regional variants in HD on satellite.  Sky is now the most popular platform, accounting for 23% of all streams in H1. 

With universal availability on all platforms in all homes in Scotland, the horizons of the distribution strategy have extended to target new audiences UK-wide and thereby significantly increase the addressable market of the STV Player.  Substantial progress has been achieved in H1 with the UK-wide launch of the STV Player on Virgin Media (+c.3 million devices) and Freeview Play (+10 million devices).  Freeview Play is the UK's fastest-growing TV platform and the STV Player has become the eighth player on its UK-wide line up.  The STV Player is already automatically installed on YouView and Freesat on a UK-wide basis with other platform launches targeted.  

STV Studios

STV Productions was rebranded as STV Studios in August to reflect its evolved status as the home of a diverse range of creative labels across the genres.  Our vision remains the same: to build a world class production business which takes full advantage of the growing local and global demand for high quality content.

Commissioning success heralded a positive start to 2020 with the BBC placing its largest order to date for Antiques Road Trip (100 episodes for BBC One), and 40 episodes of sister version, Celebrity Antiques Road Trip, for delivery in 2020 and 2021.  This was swiftly followed by further success for the factual team with a commission for a new factual entertainment format for Discovery-owned reality channel, Really, and STV, Yorkshire Auction House / Clear Out Cash In (10 episodes).

Undeterred by the almost complete shutdown of the UK production sector in March, the factual and entertainment teams applied innovative approaches to development through use of existing IP and were each commissioned to produce new series, by Channel 5 and ITV respectively (The Royals vs the Tabloids and Catchphrase Catchiest Moments), both of which were delivered during lockdown.  As sector wide guidance to ensure the safe return to production was implemented in early Q3, the entertainment team led the first big entertainment show in the UK to return to studio, safely filming 10 episodes of Catchphrase for ITV's autumn schedule. Additionally, a feature documentary for Channel 4, Is COVID racist?, was announced last month.

With growing credentials and a track record of success in drama, including BAFTA success for Elizabeth is Missing with the award of the BAFTA for Leading Actress to Glenda Jackson, a significant new drama series commission for Channel 4 was confirmed in August.  SCREW, a six-part returnable prison drama will go into pre-production in Q4 with filming beginning in early 2021.

As the creative pipeline in STV Studios continues to strengthen, we now have 68 scripted projects in active development across 3 drama labels, 35 of which are in funded development, with 39 scripts. In unscripted c.75 projects are in active development across STV Entertainment, STV Factual and Primal Media, of which 15 are in advanced discussions with commissioners.  

The organic growth strategy based on investment in key talent and development is being augmented as new creative partnerships are secured.  Following the acquisition in 2019 of a majority stake in unscripted production company, Primal Media, last month Primal announced that it had been commissioned by Sky Arts to produce an ambitious eight-part series, Landmark, for delivery in 2021. A second investment, this time of an initial minority stake in high-end nations drama producer Two Cities Television, was announced in January. Two Cities has a strong pipeline of projects, many of which are at an advanced stage of development.   

The most recent addition to the portfolio is announced today.  Barefaced TV will become a wholly-owned creative label within STV Studios.  The creative partnership behind the label have a strong track record of success in developing factual entertainment formats targeted at a younger skewing audience and will complement our existing factual and entertainment labels.

As a result of the near shutdown of the UK production sector, revenue in H1 was £1.6m, down 17% on the same period last year (2019: £2.0m), although the division has mitigated the impact on the bottom line with an operating loss of £1.5m being slightly ahead of the prior half year loss of £1.6m. 

COVID-19 response to support our people and partners

In addition to the financial measures taken to mitigate the impact of Covid-19, a comprehensive programme of action to support our colleagues, partners and local communities has been co-ordinated in response to the unprecedented challenges presented by the pandemic.

Our people

The health and safety of our people has been the number one priority as we have initiated a wide-ranging response to manage the impact of Covid-19.  As a public service broadcaster, the contribution of many of our colleagues designated as 'key workers' has been crucial in serving our audiences by providing a trusted source of essential news and information, and much needed entertainment, whilst maintaining our services without interruption.  An agile response to the adoption of new working practices, investment in technology and the impact of the recent transformation programme in STV News have all served to secure connectivity and provide operational and editorial resilience over the past 5 months. This has been achieved despite over 95% of colleagues working remotely since lockdown restrictions were introduced. 

In a number of areas of the business where activity had to be scaled back, we accessed the Government's Job Retention Scheme and colleagues were placed on furlough.  All salaries have been topped up to 100% of full pay to ensure no financial detriment and this approach was extended to all of our freelance colleagues impacted by the immediate cessation of production activity and who are vital to the future growth and success of STV Studios.

We have supported colleagues as they adapted to the challenges of lockdown and new ways of working through regular internal communications and engagement activity, combined with an increased focus on our employee wellbeing programme. As lockdown restrictions are gradually eased, Covid-19 safety protocols have been implemented across all areas of the business and the phased return of a limited number colleagues to our offices and studios will commence from early September, in line with Government guidance.

Our advertisers

STV Commercial responded immediately to support advertisers and commercial partners, including the announcement of a doubling of the STV Growth Fund to £20m to make advertising even more affordable and accessible for Scottish SMEs as they responded to the impact of lockdown restrictions on their businesses.

This additional investment in the STV Growth Fund included gifting almost £1m from the Fund to support businesses and charities helping the most vulnerable in our local communities at their most difficult time.  A total of 105 Scottish businesses and charities were celebrated on air during lockdown as part of STV's Local Lifeline campaign. 

Our unrivalled audience reach as Scotland's leading and most trusted advertising platform has been used extensively by the Scottish Government to deliver its public health information campaigns throughout the pandemic. This has been followed in Q2 by a number of high profile Scotland-wide advertising campaigns being bought by national bodies, including VisitScotland and Scotland's Towns Partnership, as part of their Covid-19 recovery marketing strategies. 

Our impact on society

Our firm commitment to create a lasting social impact in our communities by using the power of TV to do good and effect change has taken on heightened importance since lockdown. 

The STV Children's Appeal team has distributed more than £1.5m to over 300 Scottish charities to help children and young people living in poverty who have been hit hardest by the pandemic.

We have also set out a renewed commitment to positive change in response to the Black Lives Matter movement that will see us use our position as an employer, producer and public service broadcaster to address issues of racism and improve the representation of Black, Asian and Minority Ethnic people both on and off screen. STV had already embarked on a comprehensive diversity and inclusion strategy, however, we recognise we can and must go faster. In July we announced new targets to double the number of colleagues from a Black, Asian and Minority Ethnic background by 2023 and also launched the Black Voices on screen diversity campaign.

Principal risks and uncertainties

The Board considers that the principal risks and uncertainties with the most potential to adversely impact the results of the Group are:

·    Covid-19 pandemic (new)

·    Regulatory environment

·    Market volatility and advertising spend

·    Performance of the ITV network

·    Brexit

·    Cyber security

·    Defined benefit pension scheme shortfalls

·    Reputational and financial risk of lottery operation

·    Group funding

With the exception of the risk in relation to the Covid-19 pandemic, full details of these principal risks, their potential impact and the mitigating actions that have been taken, are disclosed in the 2019 Annual Report and Accounts.

It is worth noting under the Regulatory Environment risk above the Government's announcement in July of a ban on HFSS food and drink advertising on TV before 9pm, as well as a potential ban on all HFSS advertising online. This is covered in more detail on page 7.

The 2019 Annual Report and Accounts was filed at Companies House on 10 March 2020, at which time there had been little effect on the business from the Coronavirus pandemic.  Therefore, the risk associated with Covid-19 has been defined subsequently and is set out below, along with a summary of mitigating actions taken:

Simon Pitts

Chief Executive, STV Group plc

Condensed interim income statement

Six months ended 30 June 2020

Condensed interim statement of comprehensive income

Six months ended 30 June 2020

A reconciliation of the statutory results to the adjusted results is included at note 21.  The above condensed interim income statements should be read in conjunction with the accompanying notes.
 

Condensed interim balance sheet

As at 30 June 2020

The above condensed interim balance sheet should be read in conjunction with the accompanying notes.