STV Group plc (STVG) Earnings Call Transcript & Summary

Of course. Thank you for the questions, everyone. Lots of good ones in there. So the first one is what does the pipeline look like for STV Studios? And what capacity do you have here? Well, the exciting thing is that our pipeline looked really good. And that is precisely what we've been focused on in the last 3 or 4 years, expanding the number of shows and the number of projects that are in development. We have upwards of 200 different projects in development across all of the genres. And it's not the number actually. It's more the quality of them and the range of them across 9 different creative labels. And that was what we were really missing 3 or 4 years ago. We had too many eggs in the one basket, and you as investors would never do that. You never invest in just one company, and we shouldn't, as a creative business, invest in one set of ideas or one created brain. And that's what's been behind our strategy to invest in our organic genre themes, but also to acquire stakes in upwards of 6 different other production companies and labels, whether they're minority stakes or majority stakes in order to spread the range of ideas that we have. So we have dozens of drama ideas in development that are at an advanced stage, and we know they are advanced because often they are in funded development from commissioning broadcasters, which means they like the idea so much that they're paying for the scripts to be developed. And across our 5 different entertainment groups. We have lots of factual entertainment, factual and then shiny floor entertainment shows in development. We have, as I mentioned in the presentation, another 2 commissioning announcements ready to go out with exciting new shows that we've won that you should watch out for, if you're following us, and there's plenty more to come. So we're excited about it. And the capacity we have is quite scalable there to the second point -- part of your question because although we have a fixed number -- a relatively small number of full-time staffing studios, really, this is a freelancer model, so when we win a new show, we scale up in order to staff that show largely with freelancers and then we scale back down when the show has been delivered. So we do have a number of permanent exec producers and development execs. But really, the cost is variable and kicks in only when we secure a commission. Okay. The next question is, given the market share you have with the STV, how can you further accelerate the advertising revenue given the viewing you achieved from the first-class content? Thank you for that question. Our market share is the key to the strength of our advertising performance on STV. And that is why we are the market leader in Scotland for TV advertising, but not just TV for advertising all around. I mean we get upwards of 50% of the market around TV advertising in Scotland. And one example of that would have been during the COVID crisis, where obviously, government was spending a lot on marketing messages in order to reassure the public and inform the public around the COVID steps to take. And we secured more of that spend from government than any other media owner in Scotland, in fact, twice as much as any other single media owner in Scotland. And that's because TV advertising works. It's the best way of building brands. It's the most cost-effective way of building brands. And what we intend to do, first of all, is use our really strong TV channel to keep the mass market advertising on our core broadcast business working well. But we are not under any illusions that linear broadcasting is in slow run decline. More people are watching by streaming services these days on different devices. We have to be absolutely everywhere, and we shouldn't care where people are watching our content, hence, all the focus on our digital strategy. What we are doing in order to compensate and then grow our business and compensate for any declines on the broadcast side is really accelerating in digital, where we're able to achieve higher advertising yields and where we're able to tap into a fast-growing video-on-demand advertising market that, as I say, over the last 5 years has grown at a CAGR of nearly 40%, and we expect to continue to grow over the next decade or so. So we're in a good position to use that. The strength of our content, the exclusivity of our content to drive strong positions in the advertising market and continue to grow, particularly our digital advertising business. The next question is, can you expand on the strategy of acquiring stakes in production companies? How does it benefit STV? Why stakes and not buy out fully how does being a minority holder help? That's a really good question. The answer to it is that we have a range of different deals in place. They're not just minority stakes. So one of our companies that we've invested in a company called Primal Media, we went straight to majority of 52% stake, which means we consolidate their success. And the reason we did that right off the bat is that they were very, very close to being profitable. And we felt that the risk of us taking majority control was minimal, therefore. But we also -- when we -- and we have other deals in place. So the company that is making the Apple drama that we've commissioned a company called Todd Productions, there isn't an acquisition or a stake at all in that business. It's a long-term profit share arrangement, where we pay for the overhead of that business and the running cost of it, and we share in the revenue and profit of any commissions that they win including a fantastic commission from Apple that will be in 100 different markets next year. When we take a minority stake, it's generally to ensure we have a lower risk approach to acquisitions because typically, these businesses are not yet making a profit. And our judgment is that they have a strong pipeline, strong creative leaders and have the potential to move into profit in a medium-term time frame, which is why as a component part of each of these minority investments, we have a clear path to controlling the business first to 51%, then to 75% and beyond that is linked to the business moving into profitability. So we pay minimal considerations upfront for these minority stakes, but we secure a path to controlling the business in success that will see us pay money to the founders, often 1, 2, 3 people who have founded these businesses, but only in success rather than paying out immediately on day 1 and taking the risk that they don't deliver that success. So -- the trigger for going to majority control is often that the company goes into profit over a 1- or 2-year period. We then pay an agreed multiple of that profit in a range that ratchets up, should the profit be higher and ratchet down should the profit be lower than we'd anticipated in the plan. And that's the same for the second moment we have to go from 51% to 75%, typically, in the case of the companies we've invested in. So that's why we choose the strategy we do. Because on day 1, we don't necessarily want to consolidate a loss-making business or indeed spend too much money taking a risk on a business that may or may not work. Our judgment is that they should and that they are on the cusp of success, and that is proving to be the case with the investments that we have made so far, but it also is a more measured approach to M&A in our view. Do we have -- the next question, do we have any plans to enhance the STV Player, i.e., features and functions? Absolutely all the time, in fact, and that is a must for any streaming service that you are constantly innovating and improving what you do. So certainly, when we first set out our new plan for STV and for the growth of our streaming service, we needed to make sure that, first of all, the streaming service works on time every time just as normal TV works when you press the button in the corner of -- of your front room and turn on TV it never fails and nor should a streaming service. So we are up to being very high quality now. Then we upgraded SD to HD, high-definition. We are constantly on a journey of increasing personalization of the user experience. So we ask our users to register with us now in order to see content. They give us post code, name, sex. Sometimes they opt in to our marketing and communications, which allows us to optimize their experience further. And by that, I mean, if you are a big Emmerdale fan, for example. And there may well be an Emmerdale fan on the line right now, there may not be. But if you're a Emmerdale fan and you always come to our players to catch up on Emmerdale then we should make that really easy for you. The moment you come on to our site, we should recognize you and put the latest episode of Emmerdale right up in front of you and make it easy for you to watch it. If you hate soaps and let's face it, some people do. If you come to our site, you should never see Emmerdale or Coronation Street or anything of that ilk. Instead, our home page should be personalized to you, what you last watched, what we think you might like to watch, what's coming up and down the track. And it works the same for personalizing the editorial experience as it does for personalizing the advertising experience. We know a bit more about you and what you like, we're able to dynamically serve different ads in order to attract you more than a generic advertising campaign might. So yes, we are constantly enhancing the player. We've put picture-in-picture ahead of the Euro football last year. We have a number of new enhancements in the pipeline over the next few months and years to improve, in particular, the personalization of it. But that is an ongoing challenge for us to keep up with the [indiscernible] but also excite and interest our user base. Would you consider amending your distribution policy to a mixture of buybacks and dividends, given how cheap your stock is? Well, I agree that our stock is cheap, and we are always considering our distribution strategy as a PLC Board. You'd expect us to keep that under close review. When I joined STV in 2018, I inherited a GBP 10 million share buyback program, actually, which I understood the logical, but I cut short because I thought we had a better use of the funds, to be honest. And our job as a Board and my job is to try and balance the various needs of our stakeholders and make sure we are still investing properly for growth alongside paying a progressive dividend. We have a GBP 30 million investment plan that we have identified to invest in Digital, to invest in Studios, to invest in the core broadcasting business as well and in M&A and growth. And we are on track with it. I'd never say never on share buybacks, but we'd have to convince ourselves that, that was a better use of money than putting it into the growth strategy behind the business. Next question, are all of your studios brands entirely stand-alone businesses? Or are you able to provide common back-office functions across them to reduce cost? Well, I answered part of that on the previous question in that we own different levels of equity in each of these businesses. We have stand-alone complete ownership of our in-house creative teams of another of our labels called Barefaced TV, who are making an exciting reality show for us at the moment, they're 100% owned label. We have a majority stake in Primal Media, and then we have a series of 3 minority investments in other companies. Now of course, you will know under corporate rules that you cannot just assume a company, if it's a minority investment should be served by the core business unless you have a larger stake in that business. But we -- in keeping with those rules and respecting them, we do provide common back-office functions across our studios businesses. And that is often what partner organizations and creative investments are looking for from us. They want a home -- a supportive home for the people that understand their business and the wins of operating in a creative market. They want the hassle of running a TV production company taken away so that they can focus on making shows and winning and creating ideas, developing relationships with broadcasters and streamers. So we often provide finance support. We provide business affairs support. We provide legal support. We co-locate a number of our labels in London or in Scotland to provide accommodation. We provide cash flowing facilities in the event that, that's required for certain shows because some commissioners want you to pay for a show upfront rather than cash flowing it themselves. All of the benefits have been part of a larger, more liquid parent company with a strong balance sheet and taking away the hassle of running a company separately because it is a hassle and these people our creative partners really want to focus on making the shows, and we want to release them to do that and do their best work. The next question is, how are you finding recruiting and retaining talented staff into the business? Well, this is -- as you would expect, the most important thing that we do, make sure we've got the right people, the right team in place. And on the one hand, we have found it increasingly easy for us to recruit good talent as we've improved our business and our reputation and our performance. And Studios and our Digital services, our cases in point there. People want to join companies that are doing well and that they can see doing well and they can see other good people joining us and that's a statement of the obvious. And that has been the case for us in the last few years. We've recruited really strong managing directors of our studios and digital businesses. They, in turn, have recruited brilliant executives to work with them. We've managed to attract partnerships and M&A opportunities precisely because we've got good people working with us and they can see that we're growing and doing the right things. So on the one hand, it's been really successful and a strong story over the last few years. But I would be lying if I didn't say that it is particularly tough at the moment in this strangest of recessions, if it is that, where the labor market is incredibly hot to retain and attract the best people into our business. Hybrid working has allowed people to work very differently as everyone knows. And if you're software engineer and a developer and you want to stay in Glasgow or Scotland, STV was a very good bet for you pre-COVID. Now that you can work for any company around the U.K. and possibly around the world, from Glasgow because of everyone embracing hybrid working is a bit more challenging for us. But it means that we have to work harder. We have to make sure what we're paying is competitive, which is what we've been doing and always do. And it also means that we have to do an even better selling job on coming to work for a TV company because I firmly believe that if you're working in TV, it should be because you're excited to buy TV and the creative industries. It's not like working in the frozen cake factory here, and no offense to anyone who did working on it when I was a student, very enjoyable days. But -- some people are motivated and should be motivated by working in a creative environment. We need to make that environment as compelling as exciting as can do as we possibly can, so that we are competing with often banks and other financial institutions that, to be honest, are not as exciting. They must be paying and they are paying good wages. But often young people, in particular, aren't just looking for money, they're looking for a different environment and exciting supportive environment that gets the best out of them, and we need to be brilliant at that. So there are many ways to skin the cat, but it is tough right now with recruitment, it's fair to say. Next question is, can you please comment on your medium-term plans for closing off the pension deficit? Well, you're right to say medium-term plans. We're not at the point we don't think where we can buy out that liability. And we would like to get to that point over time. It's a mature scheme. You can assume that we were doing everything we can and looking at all options around pensions. But the pension deficit is reasonably large for a company of our size. What is encouraging now is that we have a very good constructive relationship with the pension trustees. We agreed our latest valuation in record time, which kept the contributions flat on the previous 2 triennials. Our contributions are well within what we can afford as a company. There's a contingent payments that is only payable when in success and has only recently become payable because we have been successful over the last couple of years. And our job is to work hard with the pension trustees and proactively with the pension trustees to minimize the deficit through our investment strategies over time. You can see that the accounting deficit at least came down significantly due to bond yields in the last 6-month period or so. There is no silver bullet, no single thing that we or companies like ours can do to solve the pension conundrum apart from continuing to be a brilliant business that grows. So our pension becomes a smaller part of the business and the contributions become relatively smaller and work proactively to -- on an investment strategy that succeeds in raising proper funds for the business. But we are comfortable with the relationship and with the contributions that we make and that we can continue to afford that whilst investing in the business and paying important things like a progressive dividend. And then the next question is, would you consider buying other TV channels given the growing studios catalog? Interesting question. I think it's unlikely we would want to invest in other linear TV channels right now. I think we are more focused on digital streaming services and growing STV player, in particular and growing our Studios business than we are in linear TV channels per se. That isn't to say that I don't think there's a long-term future for those channels, including our channel, I really do. And I think the death of traditional TV is much overblown. As I said in the presentation earlier, 75% of all viewing inside the home, and that is not just the TV sets but also to mobiles, tablets to PCs in the first half of this year was to broadcast TV channels or their related video-on-demand services not for the streaming services. So those -- we are still highly relevant, but viewing is changing. People are watching differently. And I think our focus should be on the areas of the business that are really growing. Our Digital service, our Studios business that will set us up to grow for the future. And in particular, that target that we set ourselves for the end of next year, which is that more than 50% of our earnings or our operating profit should come from outside traditional linear spot advertising for the first time by the end of next year. We are currently at 36%, having grown from around 15% when we first set out our new strategy 3 years ago or so. So we're making really good progress. But that's the point, the 50% point, I think, that many people will -- who haven't seen us already or acknowledge this already, will acknowledge that we have changed into a very different business and one that is much more focused on IP that can be sold around the world and on digital streaming and it is on traditional broadcasting. However, resilient, we think that traditional market is. Okay. I think that brings to an end the list of questions you had and a jolly good list of questions they were too.

Simon, absolutely. And thank you very much, indeed, for being so generous of your time and addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions submitted today, we'll make these available to you immediately after the presentation has ended. For you to review and then add any additional responses where it's appropriate to do so. Simon, I know investor feedback is particularly important to you, and I will shortly redirect those on the call to provide you their thoughts and expectations. But perhaps before doing so, if I may, Simon, just ask you for a few closing comments to wrap up with.

Indeed. Well, look, just to finish up with the key messages and assuming you're also awake, that is -- we continue to deliver record revenue and profit growth, propelling us to levels way beyond our pre-COVID highs. We have an unrivaled position in Scotland's largest TV channel and marketing platform in what is a very fast-growing video market. Those 3 key strategic areas of growth that I focused on in the presentation around Studios, around Digital and around Regional advertising are all growing strongly and profitably as we've shown in the first half of this year again. And that means that we are on track to hit our diversification targets and ensure that taken together, as I say, our Digital and Studios businesses are generating over 50% of our operating profit by 2023. That will mean that we are becoming a much more balanced, much more diversified, more future-proofed media business. And that, combined with our strong balance sheet, gives us the reassurance that we can whether any economic shocks with confidence as they periodically arise, as we did with COVID while continuing to invest in growth and pay a progressive dividend to our shareholders. So thank you very much for listening, and enjoy the rest of your day.

Simon, that's great, and thank you once again for updating investors today. Could I please ask investors not to close this session which will now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it will be greatly valued by the company. On part of the management team of STV Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.