STV Group plc (STVG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the STV Group plc Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Simon Pitts. Good afternoon, sir.

Good afternoon. Pleasure to be here. Thank you for joining us. Over the next few minutes, I'm going to give you some perspectives on the future of the television market and in particular, why my business STV offers both profit and dividend growth potential. But first of all, let me just briefly introduce STV because we're not necessarily a household name outside Scotland, nor indeed a global powerhouse at least not yet. So the simplest way to describe us is as the ITV of Scotland, but with go-faster stripes, we like to think. So if you switch to button 3 on your TV set in Scotland, you get STV, not ITV. Lots of familiar programming, the big soaps, Coronation Street and Emmerdale, 9:00 dramas, Saturday night entertainment, but also with comprehensive Scottish news, current affairs and regional programming representing all parts of the country. We are very much Scotland's commercial public service broadcaster. We also operate STV Player, a streaming service, which has over 3/4 of the Scottish population signed up as a registered user and has recently launched right across the U.K. for the first time. And we run Scotland's largest television production company,STV Studios, which has now grown to 9 creative labels, covering the full range of genres, making shows for an increasing number of broadcasters and streaming companies from our bases in Glasgow, in London and in Belfast. But before I go any further, why don't I show you what I mean, rather than just talking about it. So if we could play the tape, that would be great. [Presentation]

So there you have it, some fantastic programming to look forward to, culminating this year in a Rugby World Cup played in the autumn where all the home nations will be present, should be very exciting. So 2022 saw us deliver another strong performance across the business, building again on the record results we posted for 2021. Adjusted operating profit was up 2%, driven by our growth areas of Digital and Studios, which now make up 38% of our total earnings. The advertising market once again showed its resilience, with total advertising down only 2%, despite the economic uncertainty we all experienced in the second half of the year. And strategically, we are in a very strong place. Our TV channel remains by some margin, the most popular in Scotland, and our free-to-air positioning is exactly where you want to be in a cost of living crisis. Our Digital service STV Player continues to grow and has surpassed our 5 million registered user target 1 year early. And our production business, STV Studios, is rapidly building scale and reputation in what is an exciting global content market. The wider economic situation in the U.K. is well known as are the pressures on cost inflation for all businesses, and we're not immune from those at STV going into 2023. As expected, we've seen a weaker advertising market in the first quarter of this year. It's in line with our expectations for the start of the year given the very strong Q1 performance in 2022. And we have seen some encouraging signs in the regional advertising market as well as continued good growth in digital VOD advertising. And of course, we've been here before with TV advertising under pressure as the economy weakens. But each time, including the most recent case study of COVID, the market has bounced back quickly and decisively. And that's because TV remains the best, the most cost-effective way of building advertiser brands, proves itself time and time again. And the proof of that generally is in the numbers with our total advertising revenues last year still comfortably ahead of our pre-COVID year of 2019. So overall, we remain on track to hit our 2023 diversification targets as we become a more balanced, a more resilient business focused on the new growth areas of Digital and Studios. And it's against that backdrop that the Board is recommending a final dividend of 7.4p per share taking the full year dividend to 11.3p, 3% up on last year as we maintain our commitment to a progressive dividend alongside the need to invest for our future growth. So a quick reminder of our diversification strategy and growth targets. We have a clear, well-understood plan that has delivered strong financial results in recent years. That plan is built on maximizing the unrivaled strength of our Broadcast business by maintaining our clear viewing and advertising leadership in Scotland. In Digital, it's also about becoming a leader in streaming by continuously growing our STV user base and driving VOD advertising revenues. And in Studios, we have an exciting opportunity to build a world-class production business headquartered in Scotland, but globally facing and fully focused on building a bank of high-quality returning series. We have clear 2023 targets in place for each of our businesses. We remain on track to hit or exceed them as part of an overarching objective for at least 50% of our earnings to come from outside traditional TV by the end of this year. And moving on to the divisional updates, and I'm going to start with our Studios business, which continues to exceed expectations. This on this chart is STV Studios on a page. We doubled our new commissions last year to 30. We now have 11 returning series versus only 4 in 2018 when we started out on this journey. And last year, we grew our delivered production hours by nearly 50% across our 9 labels. Our stated goal here is to become the U.K.'s #1 nations and regions production company by turnover, by profit and by reputation, and we're making excellent progress towards that goal. 2023 will be a breakthrough year for STV Studios. We've already secured over GBP 50 million in production revenue more than double last year across over 20 series with an encouraging spread across different genres and across our different production labels. More than 1/3 of that revenue will come from returning series as the pie chart on the right of the slide shows. We've always said that this is the foundation of a successful production business, delivering returning series. But of course, you also need new ideas coming through all of the time. And that's why we've placed a number of creative bets on individuals and production businesses. And you can see that this is starting to pay off, with 2/3 of our revenue this year set to come from brand-new original shows that we hope will become the returning series of tomorrow. Every one of our production labels has delivered encouraging commissions, and there isn't a single one-off nonreturnable show in that GBP 50 million of secured revenue. we really are building for the future. This next chart also shows that we're starting to stand out as well in what is, as everyone will know, a very competitive TV marketplace. This is a snapshot of the 6 p.m. family slot on Saturday nights in January this year, where 3 STV Studio shows actually went head-to-head across BBC1, BBC2, and ITV1, the 3 biggest channels in the country, collectively delivering nearly 7 million viewers and accounting for almost 50% of all viewing in the U.K. at that time to TV. Last month, we achieved another first when 4 of our studio shows were aired on the same day. And these encouraging milestones show how far we've come as a production business and certainly don't go unnoticed in the industry. And it's our drama business that's a standout performer in 2023 as this slide shows. This year, we'll produce 3 major drama series for Channel 4, for Apple and for the BBC, collectively worth over GBP 35 million with our 3 drama companies each contributing 1 series. And drama is a vital part of a successful production group because of its sheer scale and potential profitability, particularly if you have a long-running returning drama. So it's really very encouraging that each of our scripted shows on the screen there is either already returning in the case of Screw for Channel 4 or Returnable in the case of Criminal Record and Blue Lights. This is also further evidence of our positioning as a nations and regions production company, really starting to bear fruit with Screw filmed in Glasgow and Blue Lights in Belfast. And filming has actually already finished on each of these shows. Blue Lights launched on BBC1 on Monday just gone, to a huge popular and critical acclaim, 5-star reviews across the board. And if you missed it, all 6 episodes of the series are available on BBC iPlayer right now. And that show Blue Lights is produced by a company called Two Cities Television production company, we took a minority stake in 2020. Hence, its performance isn't yet consolidated into STV Studios financial results. However, under the terms of our deal, we have an automatic route to controlling the business as it moves into profitability, and this provides us with another way of accelerating the growth of STV Studios over the coming years. and we have similar structures for each of our minority investments, as you may already know. Turning now to Digital. And 2022 was another year of good growth for our streaming service STV Player against all the key metrics. Our vision here is to be Scotland's leading advertising-supported streaming service as well as a U.K.-wide free streaming destination featuring thousands of hours of premium drama from Scotland, the U.K. and around the world. And the strategy for achieving that is straightforward. We want more people watching more content for longer because we know that, that is what translates into more financial success. And you can see that we're on track against the stretching 3-year targets we set ourselves back in 2021. We surpassed our goal of 5 million registered users in January this year, nearly a year ahead of target, though our main objective is now evolving into converting not just users but active users and VIP users because it's these loyal audiences who watch more STV content. We're also on track to double our digital viewing by the end of this year compared to our 2020 baseline with streams and overall consumption both up last year and our target of GBP 20 million of Digital revenue is very much within our sights. As you can see, with GBP 19 million last year secured at a very healthy 45% margin. The most significant Digital development in recent weeks has been the new streaming partnership we struck with ITV just before Christmas. And the benefit of our arrangement with ITV has always been that it allowed us exclusive access to a high-quality broadcast schedule of U.K. original programming without having to fund the full cost of that programming ourselves. And in recent years, these content costs have been tied to advertising revenues, ensuring that STV has a very attractive variable cost model to guard against fluctuations in the advertising market. And what we've now managed to do is extend that favorable deal from the broadcasting world into the streaming world. We all know that putting new exclusive content onto our streaming service before it gets a linear transmission on our TV channel is vital if we're going to compete effectively with the global platforms, if we're going to meet changing viewing demands. But we also know that new content is very expensive. And that is why, for us, partnership really makes sense. And our agreement allows us to largely mirror the original shows on ITV's new service, ITVX, providing us with exclusive access in Scotland to over 100 hours a year of additional box sets that will be windowed on STV Player up to 6 months ahead of their linear transmission on STV, the channel. Rather than pay for these shows upfront, our costs will be linked to success, paying ITV a share of the ad revenue generated in these preview windows. It's a model we've successfully introduced for other third-party content in recent years and which will serve us well because it guarantees that we will have access to brilliant new shows on an affordable basis for the long term. And it's early days, obviously, in this new partnership, but we're already seeing the benefits of the new content with regular weekly box set drops generating millions of streams so far and growing STV players user base. This next chart illustrates the step change in our content offer under this extended partnership. Our key differentiator in a very crowded marketplace is new U.K. content, not American shows. That is our USP with audiences and also with advertisers. And last year, we launched 14 new drama box sets on STV Player before they hit linear television. This year, that number will more than double to 34 drama titles, big names, big shows and no waiting around for weeks for your next binge-worthy series. On screen are just some of the new drama titles available this quarter, including the Brilliant Unforgotten, which I really hope you've seen already, a new one, the Dry, an Irish drama, which launched this week from the creators of normal people and a brilliant new drama set in Glasgow called Six Four, which launches tomorrow. The second dimension to our new partnership is digital advertising sales. And digital advertising has been a strong performer for STV in recent years. Revenues more than doubling since we started our transformation in 2018. But advertising is about scale with the largest players attracting the highest yields and that scale allows these players to maximize reach and frequency for advertising brands, while at the same time, delivering targeted addressable advertising at very high volume. Something the market is increasingly demanding as standard. Outsourcing our digital sales to ITV, as we have now done, gives STV that twin capability at a stroke, and we can see the impact in our numbers even after only a few short weeks. We also announced recently that STV Player has now launched on ITV's Planet V, which is the second largest programmatic video ad platform after Google in the U.K., allowing ad agencies to book data-enabled fully addressable advertising at scale on STV Player for the first time. Over 90% of our digital advertising is now targeted by genre, by geography and by sociodemographic. And this compares to less than 40% targeting on STV Player last year. And as well as national advertisers, we're also opening this targeting capability up to Scottish advertisers and Scottish agencies for the first time, providing another dimension to our local advertising sale. We'll continue to sell all the regional advertising ourselves through our in-house sales teams based right across Scotland but adding new targeting capability will create a genuinely one-stop shop for Scottish advertising across linear, VOD and now programmatic advertising. And just a final word in the Digital section on our third-party content strategy because that remains very important to us, even in a world where we've secured access to more original programming. And that's because it's these programs that are available right across the U.K. on the STV Player rather than just exclusively in Scotland. We've built a compelling proposition over the last few years through content partnerships with some of the world's best-known program makers. As a result, we now have over 6,000 hours of content, up another 1,600 hours just last year. 39% of our video on-demand streams on our streaming service came from third-party titles in 2022, some 15 million hours of consumption across an impressive 167 different drama box sets. So there really is something for everyone if you look hard enough on the player. Our latest program acquisition has also caused quite a stir in recent weeks because we've brought back an iconic soap called Brookside. You may have heard of it, to play from the very first episode, exclusively on STV Player. The audience response to this has been amazing. It's already our fastest-growing title ever, racing to over 3 million streams in a little over a month, attracting well over 100,000 new users to STV Player in the process. 2/3 of whom are outside Scotland. In turn, that's propelled our share of VOD streams from across the U.K. from outside Scotland to 25% of our total in Q1 this year versus 15% to 20% last year. And the point here is that success in streaming is obviously about having on the one hand, enough of these big shiny new shows to stand out from the crowd, but it's also about strength and depth and having a strong archive, And our smart acquisitions over the last few years have given us just that. Turning then finally to Broadcasting, our third division. And it's only in recent months that we've been able to track the performance of the whole market, including the viewing figures of the streaming services like Netflix, Amazon Prime and Disney+. As their viewing is now being measured by the industry measurement tool Barb for the first time. And the results here show very clearly that the terrestrial broadcasters and their VOD services continue to dominate these subscription streaming services. On the left are STV's top 3 dramas of 2022 in audience terms, plotted against the top 3 dramas from Netflix, from Disney+ and from Amazon Prime in Scotland in 2022, 2 key takeaways here. Firstly, the STV's top dramas are at least twice as big, twice as popular as all the others. And secondly, that all of the biggest dramas on the global streaming services are U.S. dramas, not U.K. ones. That point I was making earlier, underlining our key and enduring differentiator in the market that we are about new stuff from the U.K. The chart on the right is even more stark I think, because it shows the top 500 program episodes across the whole of the market in 2022. Together STV, BBC One and Channel 4 accounted for 99% of the top 500 episodes last year, including 66% on STV, 329 of the top 500 programs that equates to. Netflix on the other hand, only 1% of the top 500. And the other stream is nowhere to be seen. And of course, in the middle of a cost of living crisis, that competitive advantage of free-to-air television is only going to get stronger. Now I'm not saying that Netflix and Amazon and Disney+ aren't popular and aren't here to stay. I'm just saying that what we are doing is several times larger in audience terms than those competitors. This next chart illustrates our enduring strength in the Broadcast market. I won't labor it, but we were, again, the biggest peak time TV channel in Scotland for the fourth year in a row last year. The combination of I'm a celebrity back in Australia and the Football World Cup took us to a near 20-year high in November. The top right box is worth calling out, too, because the big channels are often criticized for leaving younger audiences behind. And in fact, STV's 16 to 34 audience was bigger last year than that of the younger skewing channels, Channel 4, ITV2 and BBC3 put together. And these big audiences convert directly into commercial success for us, which is an important point for us to make. And that's what this chart demonstrates. STV's ratings peaked at over 500,000 viewers in Scotland on 203 separate days in 2022 compared to only 18 days for our nearest commercial competitor Channel 4. And that translates into an STV share of commercial impact, effectively our advertising market share that was more than 3x bigger than our closest rival last year. Our Scottish advertising performance was also resilient in 2022, despite a tough second half of the year. Total regional advertising ended the year down 4%, but this masked quite an encouraging trend in the underlying SME market in Scotland that is worth briefly highlighting. On the left of the page, you can see that our average regional brand count continues to grow steadily. The number of advertisers that are advertising with us each month. And that 2022 was actually the first year since COVID that brand count was at a consistently healthy level throughout the year. These brands generated an 18% increase in revenue from SMEs across Scotland, with sectors like travel and transport, household equipment, entertainment, all performing particularly strongly. However, that growth was offset by a decline in Scottish Government spend, which ramped down by nearly 50% as expected as the COVID threat receded. The bar chart on the right shows that we're now returning to much more normal ratios of government to SME spend with the trend continuing into Q1 this year, which is for us, very encouraging because it shows that we're starting to get back to something like normality. Clearly, there is caution in the regional market at the start of this year, given the economic picture, just as there is nationally. But again, the decline we've seen in Q1 is largely down to further expected falls in government spend with other regional spend flat to slightly up for the quarter so far. And once again, we're seeing STV's advertising growth fund doing its job in a tough market, making TV advertising more accessible, more affordable and generating a healthy influx of new advertisers, the vast majority of which go on to become repeat clients. Our fund celebrated its 100th deal last month since launch, quite a milestone for us and a big reason why we've been able to consistently grow regional revenues and regional margins in recent years. So our strategic priorities for 2023 are very clear. In Studios, the focus remains on returning series, and we will also consider larger scale investments and partnerships, given our strong financial position and our desire to accelerate production growth even further. In Digital, we'll be pushing our exciting new player box sets as well as continuously improving the user experience, including the imminent launch of a brand new STV Player app for Sky Q customers in the next few days. And in Broadcasting, we're obviously intent on maintaining our leadership here in programming and in advertising. But we've also been looking for certainty on the extension of our public service licenses as well as a favorable new media that guarantees prominence for STV and our fellow public service broadcasters on new digital platforms for the future. And I'm delighted to say that just this morning, the U.K. government published their new Media Bill as well as confirmed that our broadcast licenses will be extended for another 10-year period, offering us very welcome long-term reassurance on the future prospects of our broadcast business. And in terms of the outlook for the year ahead, the main message is that we remain on track to hit our big diversification milestone of 50% of our total profit coming from our new growth areas for the very first time. Total advertising is expected to be down around 15% in Q1, albeit as expected and compared to first quarter last year that was up over 20% by comparison. Within that, though, we expect Digital advertising to be up an encouraging 15% to 20% in Q1 and Scottish advertising down around 20%. But when you net out Scottish Government spend, the underlying regional market is broadly flat to slightly up, as I say. Our first look at April, although it's still a relatively early estimate is that we will be down about 10% to 15%. you'll appreciate it's hard to predict the remainder of the year. But clearly, we hope for a better second half, fueled by a recovering economy and greater consumer confidence. And most importantly, we have been here before, of course, many times, and we know how quickly the TV ad market bounces back after economic shocks. We saw that very clearly post-COVID. What also gives us confidence is that we have another incredibly strong content lineup this year with a record amount of new original content culminating, as I say, in the Rugby World Cup exclusively on our channel, all 48 matches in 51 days in September and October. And our Studios business continues to build encouraging momentum, and our previous guidance is reconfirmed of at least GBP 50 million in revenues and GBP 3 million in profit in 2023, a step change in performance or more than doubling in performance year-on-year. Okay. That's it. I'll leave you with the summary and our key messages on screen. Thank you very much for listening. I'm very happy to take any questions now. Thank you.

Simon, that's great. And thank you very much indeed for your presentation this afternoon. [Operator Instructions] But just while Simon takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed by your invested dashboard. Simon, as you can see then the Q&A tab, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Simon, if I may, just hand back to you to respond to those where it's appropriate to do so, and then I'll pick up from you at the end.