ITV 2016 Interim Results

Wed 27 Jul 2016

Sector

PLC

Rebalanced ITV delivers continued good growth

Interim results for the six months to 30 June 2016

 

Rebalanced business driving another strong performance in H1

·   Total external revenue up 11% to £1,503m (2015: £1,356m)

·   Double-digit growth in total Non-NAR revenue, up 26% to £874m (2015: £693m)

·   ITV Studios total revenue up 31% to £651m (2015: £496m)

·   Online, Pay & Interactive revenue up 26% to £107m (2015: £85m)

·   Net Advertising Revenue flat at £838m (2015: £838m)

 

Double digit growth in adjusted EBITA and EPS

·   Adjusted EBITA up 10% to £438m (2015: £400m)

·   ITV Studios adjusted EBITA up 42% to £121m (2015: £85m)

·   Broadcast & Online adjusted EBITA up 1% to £317m (2015: £315m)

·   Adjusted PBT up 9% to £425m (2015: £391m)

·   Adjusted EPS up 10% to 8.5p (2015: 7.7p)

 

Strong balance sheet, healthy liquidity

·   Flexibility and capacity to continue to invest across the business

·   Reflecting strong cash flows and the Board’s confidence in the business, it has declared a 2.4p interim dividend, up 26%, in line with our policy

 

Outlook for 2016 and beyond

·   ITV Studios on track to deliver double-digit total revenue and adjusted EBITA growth over the full year, primarily driven by acquisitions we have made

·   Confident in delivering continued double-digit revenue growth in Online, Pay & Interactive

·   ITV Family NAR expected to be down around 1% for the 9 months to the end of September and we expect to outperform the market again in 2016

·   Targeting £25m of overhead cost savings for 2017

·   We have a strong balance sheet and continue to see clear opportunities to invest behind the strategy in the UK and internationally

 

Adam Crozier, ITV plc Chief Executive, said:

 

“Our strategy of rebalancing and strengthening ITV and building a global production business of scale continues to deliver with double-digit revenue and adjusted EBITA growth in the first half of the year.

 

Revenue grew by 11% to £1.5bn, driven by non-advertising revenue, with total ITV Studios up 31% to £651m, primarily from our acquisitions. Online, Pay & Interactive also continued to grow strongly up 26% to £107m. Adjusted EBITA in the period rose 10% to £438m.

 

On screen we’ve performed strongly with Share of Viewing on our main channel up 7% while at the same time long form video consumption increased by 50%.

 

Against a backdrop of wider economic uncertainty following the EU referendum we have put in place a robust plan to allow us to meet the opportunities and challenges ahead. As part of this we are targeting a £25 million reduction in overheads for 2017.

 

Looking forward to the full year, we expect to deliver double-digit revenue and EBITA growth in ITV Studios as the acquisitions continue to deliver and double digit revenue growth in Online, Pay & Interactive. We anticipate NAR to be down around 1% in the first nine months of the year and we again expect to outperform the UK television market over 2016 as a whole.

 

Our strategy of strengthening and rebalancing the business is clearly working and remains the right one for ITV. We have a strong balance sheet and the capacity to continue to invest behind our strategy, while at the same time delivering returns to our shareholders.

 

Reflecting ITV’s strong performance the Board has proposed an interim dividend of 2.4p, up 26%, in line with our policy.”

 

Half year results

 

Six months to 30 June – on an adjusted and continuing basis

2016

£m

2015

£m

Change

£m

Change

%

Broadcast & Online revenue

1,061

1,035

26

3

ITV Studios revenue

651

496

155

31

Total revenue

1,712

1,531

181

12

Internal Supply

(209)

(175)

34

19

Group external revenue

1,503

1,356

147

11

 

 

 

 

 

Broadcast & Online EBITA

317

315

2

1

ITV Studios EBITA

121

85

36

42

EBITA

438

400

38

10

 

 

 

 

 

Group EBITA margin

29%

29%

-

-

Profit before tax

425

391

34

9

EPS

8.5p

7.7p

0.8p

10

Ordinary dividend per share

2.4p

1.9p

0.5p

26

 

Management look at adjusted results as they reflect the way the business is managed and measured on a day-to-day basis. Adjusted EBITA is before exceptional items and includes the benefit of production tax credits (‘adjusted EBITA’). Adjusted profit before tax and EPS primarily remove the effect of amortisation of intangible assets acquired through business combinations and acquisition related costs. A full reconciliation between the adjusted and statutory results is provided in the financial review.

 

The statutory profit before tax and EPS from the Consolidated Income Statement are as follows:

 

Six months to 30 June

2016

£m

2015

£m

Change

£m

Change

%

Profit before tax

309

327

(18)

(6)

EPS

6.1p

6.4p

(0.3p)

(5)

Diluted EPS

6.1p

6.4p

(0.3p)

(5)

 

Statutory EPS declined by 5% to 6.1p (2015: 6.4p) primarily as a result of including the Talpa acquisition for a full six months for two reasons. Firstly, Talpa significantly increased employment linked consideration, which is included within reported earnings but as in 2015 this is excluded from adjusted EPS as in our view these costs are part of capital consideration. Secondly due to higher amortisation of the related Talpa acquired intangible assets.

 

Financial performance

We delivered another strong performance in the first half with double-digit revenue and adjusted EPS growth even with flat television advertising. Total external revenue increased 11% to £1,503 million driven by non-NAR revenues with total ITV Studios revenues up 31% at £651 million (2015: £496 million) and Online, Pay & Interactive up 26% to £107 million (2015: £85 million).

 

This revenue growth together with our continued focus on cash and costs, has delivered another period of double-digit profit growth with adjusted EBITA up 10% to £438 million (2015: £400 million) and we maintained our margin at 29%. Adjusted EPS rose 10% to 8.5p (2015: 7.7p).

 

We have a strong balance sheet and the business remains highly cash generative. Profit to cash conversion over the first half was 86% and free cash flow was up 9% to £269 million. We ended the period with net debt of £796 million after acquisitions of £97 million, dividend payments of £566 million (including the 10p special dividend) and pension deficit contributions of £47 million.  At 30 June 2016 our reported net debt to adjusted EBITDA was 0.9x.

 

Reflecting ITV’s fundamental strength the Board has proposed an interim dividend of 2.4p, up 26% (2015: 1.9p), in line with its policy of delivering dividend cover of 2 to 2.5x adjusted EPS.

 

Broadcast & Online

Broadcast & Online delivered 3% revenue growth to £1,061 million (2015: £1,035 million) driven by 26% growth in Online, Pay & Interactive.

 

Against a backdrop of uncertainty driven by the EU referendum, ITV Family NAR in the period was flat at £838 million (including UTV), ahead of the television advertising market. As expected, quarterly advertising growth has fluctuated year on year reflecting the timing of major events. Category performance has been mixed. Retail and Finance have seen declines with supermarkets and traditional banking decreasing spend across the first half of 2016, while many other sectors have seen good growth, including Entertainment and Leisure and Cars.

 

ITV Family SOV increased by 3% in the period. This reflects a 7% increase in ITV main channel SOV which benefited from sporting events such as the Six Nations Rugby and the Euro Football Championships and strong performances from drama including The Durrells, Marcella and Vera along with an improved daytime schedule. ITV again maintained its leading position as the only commercial broadcaster able to consistently deliver both mass audiences and the key demographics. In the first half ITV delivered 98% of all commercial audiences over 5 million and 94% of all audiences over 3 million.

 

Online, Pay & Interactive revenue continued to show strong growth, up 26% to £107 million (2015: £85 million) reflecting further growth in both our online advertising and pay businesses. Audience demand for VOD continues to grow supported by the ITV Hub, which helped drive a 14% increase in long form video requests and a 50% increase in consumption reflecting the fact that people are viewing for longer. Live simulcast viewing online continues to see high demand and in the first half represented 20% of online viewing, compared to 15% in H1 2015.

 

Schedule costs were up 8% in the first half to £547 million (2015: £507 million) due to increased sports costs for the Euro Football Championships and the Six Nations Rugby and higher spend on drama. Other costs in Broadcast were down 8% year on year primarily due to lower transmission costs and we will continue to maintain a tight control on costs.

 

Overall Broadcast & Online adjusted EBITA was up 1% at £317 million with the continued growth in our higher margin revenue helping to offset higher schedule costs due to phasing, even with a broadly flat advertising market.

 

ITV Studios

ITV Studios total revenue grew strongly in the first half, up 31% to £651 million (2015: £496 million) primarily driven by the UK and our acquisitions, as we continue to build scale in creative content markets and strengthen our international portfolio of programmes that return and travel. Total organic revenue, which excludes our current and prior year acquisitions as well as foreign exchange movements, was down 4%, driven predominantly by ITV America which has been impacted by the timing of some key shows. In the first half we benefited from a full six months of Talpa Media, Twofour Group and Mammoth Screen.

 

Reflecting our growth and increasing scale in key production markets in Europe and the US, 50% of ITV Studios total revenue in the first half was generated outside the UK. As our Studios business grows internationally, foreign currency movements have an increasing impact on our results. On a constant currency basis, which assumes exchange rates remained consistent with 2015, ITV Studios revenue for the first six months of 2016 would have been £14 million lower and adjusted EBITA would have been £3 million lower as a result of a stronger US dollar and Euro in the period.

 

Total Studios UK revenue was up 40% in the first six months to £292 million (2015: £208 million) reflecting 19% growth in internal revenue and 152% increase in external revenue driven by organic growth in drama in particular and the acquisition of Twofour Group and Mammoth Screen.

 

Total revenue in ITV America for the first half was down 34% to £96 million (2015: £145 million). This was predominantly a result of the phasing of deliveries for Hell’s Kitchen and Duck Dynasty along with the non-returning scripted commission Texas Rising. Our acquisitions continue to do well with new and returning deliveries Alone, Killing Fields and Pawn Stars.

 

Studios RoW showed strong growth in total revenue, up 156% to £184 million (2015: £72 million) as we have benefited from the acquisition of Talpa Media on 30 April 2015. Talpa continues to perform strongly and in the first half had the full benefit of a four year licensing agreement for The Voice in China.

 

Global Entertainment revenue increased 11% in the period to £79 million (2015: £71 million) as we continued to grow our portfolio of programmes and formats to distribute internationally.

 

Reflecting the strong revenue growth in ITV Studios, adjusted EBITA increased 42% to £121 million (2015: £85 million). The adjusted EBITA margin increased to 19% (2015: 17%) driven by our revenue mix in the first half, but over the full year we expect will be more in line with 2015.

 

Acquisitions

On 29 February 2016 the Group acquired a 100% controlling interest in UTV Limited, which owns the television assets of UTV Media plc, for £100 million. This further strengthens ITV’s free to air business and enables it to run a more efficient network. On 11 July 2016, ITV agreed to sell UTV Ireland, which is not part of the ITV Network, for €10 million subject to regulatory approval.

 

EPS

Adjusted profit before tax was up 9% at £425 million (2015: £391 million). The total adjusted tax charge was £85 million (2015: £81 million), corresponding to an effective tax rate on adjusted PBT of 20% (2015: 21%) which is in line with the standard UK corporation tax rate of 20% (2015: 20.25%). Adjusted basic earnings per share was 8.5p (2015: 7.7p), up 10%.

 

Statutory EPS is adjusted to reflect the underlying performance of the business providing a more meaningful comparison of how the business is managed and measured on a day-to-day basis. Adjustments include: all exceptional items, primarily acquisition- related costs such as employment linked consideration and professional fees for due diligence; impairment of intangible assets; amortisation of intangible assets acquired through business combinations including formats and customer contracts; net financing cost adjustments; and tax adjustments relating to these items. Amortisation of intangible assets that are required to run our business, including software licences, is not adjusted for.

 

Statutory EPS declined by 5% to 6.1p (2015: 6.4p) primarily as a result of including the Talpa acquisition for a full six months for two reasons. Firstly, Talpa significantly increased employment linked consideration, which is included within reported earnings but as in 2015 this is excluded from adjusted EPS as in our view these costs are part of capital consideration. Secondly it declined due to higher amortisation of the related Talpa acquired intangible assets.

 

Balance sheet and cash flow

ITV remains highly cash generative reflecting our continued tight management of working capital balances. In the period we generated £377 million (2015: £388 million) of operational cash from £438 million (2015: £400 million) of adjusted EBITA, which equates to a strong profit to cash ratio of 86%.

 

After payments for interest, cash tax and pension funding, our free cash flow also remained strong in the period, up 9% to £269 million (2015: £246 million).

 

Overall, after £566 million of dividends and £97 million of acquisition related costs as well as pension deficit contributions of £47 million, we ended the first half with net debt of £796 million, compared to net debt of £319 million at 31 December 2015 and net debt of £540 million at 30 June 2015.

 

Our balance sheet strength, together with our strong free cash flow, enables us to continue to invest in opportunities to grow the business and make returns to our shareholders. To preserve our financial flexibility we have put a number of new facilities in place. We have a £525 million Revolving Credit Facility in place until 2019 provided by a number of core relationship banks. We also have two bilateral loans in place until 2017 totalling £250 million. This, along with a five year £300 million bilateral financing facility and a £75 million invoice discounting facility, both of which are free of financial covenants, provides us with sufficient liquidity to meet the requirements of the business in the medium to long-term. Of the total £1,150 million facilities now in place, £315 million was drawn down at 30 June 2016. Our policy is to maintain at least £250 million of available liquidity at any point.

 

Our objective is to run an efficient balance sheet and to balance investment for further growth with attractive returns to shareholders. Over time, we will continue to look to increase our balance sheet leverage and we believe maintaining leverage below 1.5x reported net debt to adjusted EBITDA will optimise our cost of capital, allow us to make returns to our shareholders in line with our policy and enable us to retain flexibility to continue to invest for further growth. As at 30 June 2016, reported net debt to adjusted EBITDA was 0.9x.

 

Dividend per share

The Board’s dividend policy is to deliver at least 20% growth in the full year ordinary to 2016 to achieve a more normal dividend cover of between 2.0 and 2.5x adjusted earnings per share. In line with this policy, the Board has declared an interim dividend for 2016 of 2.4p, up 26%. The interim dividend is expected to be approximately a third of the full year dividend.

 

Pension

The aggregate IAS 19 deficit of the defined benefit schemes at 30 June 2016 was £64 million (31 December 2015: £176 million). The reduction is due to substantial gains in asset values as a result of ITV’s significant holding in long-dated UK gilts and deficit funding contributions of £47 million. These more than offset the increase in pension liabilities as a result of falling discount rates. Pensions continue to be paid from the Scheme based on actual requirements.

 

The last actuarial valuation was undertaken in 2014 and on the basis adopted by the Trustee, the combined deficits as at 1 January 2014 amounted to £540 million and is estimated to be at a similar level today. Following completion of the valuation, the Group has agreed to make deficit funding contributions in order to eliminate the deficits in each section. From 2016 ITV will pay deficit funding contributions of around £80 million per year, a £10 million reduction on 2015.These payments are now made more evenly throughout the year, with £47 million paid in the first half.

 

2016 full year planning assumptions

·    Total network programme budget is expected to be around £1,050 million

·    Adjusted interest is expected to be around £25 million, reflecting a full year of the €600 million Eurobond

·    Adjusted effective tax rate is expected to be 20%, similar to H1 2016 – lower than previous guidance

·    Capex is expected to be £50 to £55 million across the group

·    Profit to cash conversion is expected to be around 85-90%, reflecting our continued strong cash generation and investment in scripted content

·    Total pension deficit funding will be £80 million and will be paid more evenly over the year

·    Ordinary dividend will be in line with our cover policy of 2 to 2.5x adjusted EPS

·    The translation impact of foreign exchange, assuming rates remain at current levels, could be £74 million more revenue and £13 million more profit

·    Exceptional items are expected to be around £115 million in 2016, again as a result of the treatment of employment linked consideration for our acquisitions which is included within statutory EPS, but excluded from adjusted EPS as in our view it is part of capital consideration. This has increased from our previous guidance as it includes our estimate of the impact of foreign exchange rates on employment linked consideration. This guidance excludes one-off costs that may be incurred in relation to delivering our £25 million targeted overhead costs savings for 2017.

 

Outlook

ITV NAR is expected to be down around 1% in the nine months to the end of September and we again expect to outperform the television advertising market over the full year.

 

On screen we are performing well and we remain focused on delivering both mass audiences and the key demographics. However, we expect our viewing performance over the summer to be impacted by the Olympic Games on the BBC. We expect Online, Pay & Interactive to deliver double-digit revenue growth over the full year as it continues to perform strongly. ITV Studios is on track to deliver double-digit revenue and adjusted EBITA growth over the full year, driven by the acquisitions we have made. Over the medium term we are confident in delivering good growth in our global network of content creation and distribution, organically and through acquisitions, although the short term performance will continue to be lumpy.

 

Whilst the economic outlook remains uncertain we continue to see clear opportunities to invest across the business, both in the UK and Internationally. We are targeting £25 million of cost savings in 2017 to ensure we are well positioned to meet the opportunities and challenges ahead.

 

We have a clear strategy in place to rebalance and strengthen the business which remains the right one for ITV. We have a strong balance sheet and the capacity to continue to invest behind our strategy, while at the same time delivering returns to our shareholders.

 

Notes to editors

1.        Unless otherwise stated, all financial figures refer to the 6 months ended 30 June 2016, with growth compared to the same period in 2015.

2.        Total External Revenue

 

Six months to 30 June (£m) on a continuing basis

2016

2015

%

ITV Family NAR

838

838

NON-NAR revenue

874

693

26

Internal supply

(209)

(175)

19

Total external revenue

1,503

1,356

11

 

3.        ITV Family NAR was flat in H1, with May flat and June up 19%. ITV Family NAR is forecast to be up 6% in July, down 7% in August and down 5 to 10% in September. These revenues are pure NAR, excluding the benefit of sponsorship and online revenue. From March 2016, ITV Family NAR includes advertising revenue from the UTV Channel 3 licence (excluding UTV Ireland). Figures for ITV plc and TV market NAR are based on ITV estimates and current forecasts.

 

4.        Broadcast & Online performance indicators

 

Broadcast & Online Performance indicators

2016

2015

%

ITV SOV – weeks 1 to 26

15.7%

14.7%

7

ITV Family SOV – weeks 1 to 26

21.7%

21.1%

3

ITV adult impacts – weeks 1 to 26

108bn

105bn

3

ITV SOCI – weeks 1 to 26

24.4%

23.9%

2

ITV Family SOCI – weeks 1 to 26

34.7%

35.0%

  (1)

Long form video consumption – 6 months to 30 June (hrs)

112m

75m

50

Total long form video requests – 6 months to 30 June

481m

422m

14

 

SOV data based on BARB/AdvantEdge data and Share of Commercial Impacts (SOCI) data based on BARB/DDS data. SOV data is for individuals and SOCI data is for adults. ITV Family includes: ITV, ITV2, ITV3, ITV4, ITV Encore, ITVBe, CITV, ITV Breakfast, CITV Breakfast and associated “HD” and “+1” channels. % change for performance indicators is calculated on unrounded figures. Total long form video requests is measured across all platforms, based on data from ComScore Digital Analytix, Virgin, BT, iTunes, Amazon Prime Instant Video and Sky and include simulcast. Long form video consumption is the total number of hours ITV VOD content is viewed on ad funded platforms, based on data from ComScore Digital Analytix.

 

5.        The 2016 interim dividend will be paid on 28 November 2016. The ex-dividend date is 27 October 2016 and the record date is 28 October 2016.

 

6.        This announcement contains certain statements that are or may be forward looking with respect to the financial condition, results or operations and business of ITV. 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. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements. These factors include, but are not limited to (i) a major deterioration in the current outlook for UK advertising and consumer demand, (ii) significant change in regulation or legislation, (iii) failure to identify and obtain, or significant loss of, optimal programme rights, and (iv) the loss or failure of transmission facilities or core systems and (v) a significant change in demand for global content.

 

Undue reliance should not be placed on forward looking statements which speak only as of the date of this document. The Group accepts no obligation to revise publicly or update these forward looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required

 

For further enquiries please contact:

 

Investor Relations

Pippa Foulds  +44 20 7157 6555 or +44 7778 031097

 

Media Relations

Mary Fagan  +44 20 7157 3965 or +44 7736 786448

Mike Large  +44 20 7157 3021 or +44 7768 261528