STV Group plc (STVG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the STV Group plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Simon Pitts. Good afternoon to you.

Good afternoon, and hello, everyone. Many thanks for joining us as we share details of an important deal for STV Studios, the acquisition of unscripted production network, Greenbird Media. Lindsay Dixon and I, our CFO, are going to take you through a presentation, and then there will be time to take any questions you may have. As you'd expect, we'll cover the key messages of the deal and the headline commercial terms. We'll tell you a little bit about the Greenbird Group, an impressive network of production companies that has been built over the last decade. And we'll talk you through the strategic benefits of the deal and the growth potential of the combined businesses, as well as setting out the financial impact on STV at both a studios and an overall group level and why it adds to our equity story as a business focused on both profit and dividend growth. We'll then finish with a few words on how we're intending to integrate this acquisition over the coming weeks and months as we know just how important that is to get right. So in short, this is a transformative deal for us. It is right on strategy. It will accelerate our revenue and earnings diversification away from linear advertising and towards the growth area of global content and IP ownership. We will become one of the U.K.'s leading production groups and take a big step towards our goal of becoming the U.K.'s most successful nations and regions producer in an era of leveling up, as everyone knows, where the center of gravity in U.K. television production continues to shift away from London and the Southeast. We were already on track to double the size of our Studios business this year in terms of revenue and profit, and this deal means that we'll take an even bigger stride forward in terms of production scale and creative firepower with our in-house labels at a stroke growing from 9 to 24. Our number of returning TV series, the foundation for any successful production business more than trebling from 12 to nearly 40. And our STV Studios senior management team strengthening significantly through the addition of highly respected creative and commercial leaders from Greenbird. The financial rationale for the deal is also compelling. It is materially earnings enhancing and EPS accretive for STV Group from day 1, as well as margin accretive for STV Studios. And we funded it from our existing resources and will remain well within our financial covenants. Our progressive dividend policy will also remain unchanged. Crucially, we also see significant future growth potential for the combined group in a range of areas both in the U.K. and internationally, and more on that in a moment. Overall, we can now say with confidence that we will exceed our 2023 diversification target of at least 50% of our total earnings coming from outside traditional broadcasting, a key milestone on the way to STV becoming a more balanced, more resilient media company focused on growth.

The total cash consideration payable for Greenbird is expected to be around GBP 24 million, split between the GBP 21.4 million we paid on completion and the balance due over the next couple of years. Of that money paid on completion, GBP 11.5 million has gone to repay the loan notes due to Cachet International, the previous 60% majority shareholder. GBP 9.6 million has been paid for 86% of the equity of the business, and there was a small cash adjustment of GBP 300,000. The deferred consideration estimated to be around GBP 2.6 million is split into 2 amounts. The first is approximately GBP 1.6 million expected to be payable to the founders of the business in relation to the balance of the equity and will be based on profit performance in 2023 and 2024, incentivizing the team to deliver continued growth. The second element of around GBP 1 million is for surplus cash in the subsidiary companies on completion which will be paid to the current shareholders at the future point when it's either dividended to Greenbird or when Greenbird owns 100% of the equity in those companies. We funded the acquisition from existing bank facilities, allocating the proceeds from the placing completed in July 2020, which we haven't used yet. Net debt of the enlarged group was around GBP 32 million on completion and against a covenant maximum of 3x, we expect the ratio of net debt to EBITDA to be around 1x at the end of the year at the lower end of our self-imposed target range of 1x to 1.5x. We expect Greenbird to materially enhance the earnings of both the Studios division and the broader group immediately with their revenue contribution in the second half of this year expected to be GBP 20 million to GBP 25 million, and operating profit GBP 3 million to GBP 3.5 million. This enables us to take a significant step towards achieving our target divisional operating margin of 10% in 2025.

Some background then on the Greenbird business. Founded in 2012 by experienced television production execs, Jamie Munro and Stuart Mullin, Greenbird owned stakes in 15 production companies, all but one of them unscripted companies focused on making factual shows, entertainment formats, reality shows, documentaries and youth-focused programming. And Greenbird has been focused on helping those businesses to grow, in particular, by offering them a bespoke back-office solution for things like commercial affairs, funding advice, legal, IT, property and so on. That has freed up the creative leaders to concentrate on program production and idea development rather than managing the overhead of their businesses. The production businesses are at different stages, and the ownership positions Greenbird and now STV Studios has in them is reflective of this. There are majority stakes in 2 established successful unscripted producers, Tuesday's Child and Crackit run by highly respected creative entrepreneurs, Karen Smith and Elaine Hackett. Tuesday's Child then, in turn, has a majority position in another producer into Stella, which is also consolidated to our results from day one. Before Tuesday's Child, Karen Smith was Managing Director of celebrated production company, Schein TV, and she also co-created Strictly Come Dancing while at the BBC. Prior to founding Crackit, Elaine was on the Board of Endemol U.K. and oversaw hits like Big Brother. So really, first-class creative pedigrees in both cases. Then there are a series of large minority positions that Greenbird holds 25% to 40% stakes in, in companies like award meaning documentary maker Flicker Productions, Glasgow-based Hello Halo and Rumpus Media who make shows with a number of famous faces. Finally, there are a series of small 5% stakes in businesses with exciting potential like Goat films, Stacey Dooley's production company Little Dooley and Our Power, which was founded by comics Paul Whitehouse and Bob Mortimer. In aggregate then, an exciting, a wide-ranging mix of talent and IP under one roof. As always, with these companies, it's about the shows, and the Greenbird portfolio contains a huge range of hits some of which are onscreen now. That includes breakout international success LEGO Masters which runs on Channel 4, but also in U.S. prime time on the FOX Network, with different versions of the show being made in over 20 other markets, including China, South America and 10 European countries. The portfolio also includes Saturday night entertainment shows, Queens for the Night and The Hit List and star-led shows like the Misadventures of Romesh Ranganathan, Late Night Lycett and Gone Fishing with Mortimer and Whitehouse. In all, over 25 returning series across the Greenbird Group, an impressive back catalog of over 2,000 hours, offering significant secondary sales and IP format potential and a very healthy range of new shows, constantly refreshing the creative pipeline with over 350 hours of new programming expected to be produced by Greenbird companies in 2023 alone. When combined then with the current STV Studios portfolio, the impact is significant across all our production KPIs, bringing instant creative and commercial scale. Now 24 creative labels, returning series more than trebling to nearly 40, production hours doubling this year to over 600, and a combined catalog of over 5,000 hours strengthening our hand and creating revenue synergies in secondary sales, in format sales and in distribution deals in the U.K. and around the world. This is how the combined Studios group looks in terms of ownership and creative labels, a mix of established successful majority owned businesses, and a series of minority position offering scope for further consolidated growth in the future. In the majority-owned box on the left, the 6 existing STV Studios consolidated labels combined with 3 new joiners from Greenbird to create a materially profitable GBP 70 million revenue production business in 2023. If you factor in the 9 large minority stakes in the middle box, 3 existing STV Studios investments of 2 cities, Hello Mary and Mighty Productions, plus a further 6% coming from Greenbird, revenues across the combined STV Studios are north of GBP 100 million. These are the companies we would most likely look to consolidate in future, although that won't be the case with all of them, obviously, and any decision will depend on their performance and profitability over time. And it will also come down negotiation. While there are clear routes to control in the case of the previous STV Studios investments, that's not the strategy Greenbird pursued, and there are no prescribed routes to control for the minority investments. However, what is in place are very strong relationships, Board representation and a series of back office and advisory arrangements that will endure post deal and put us in pole position to increase these investments if or when the time is right. For the smaller 5% stakes in exciting earlier-stage businesses, it really is a matter of keeping a watching brief to see which take off over the coming years. And we will have a ringside seat there by virtue of our existing relationships and service agreements. Overall, this makes STV Studios one of the few multi-genre production groups of scale in the U.K. with the capability to produce high-quality programming across both scripted and unscripted. And while this acquisition primarily adds unscripted firepower, as you know, STV drama companies are busy delivering 3 high-profile new series in 2023, the acclaimed Blue Lights for BBC1 already recommissioned for a second series, Series 2 of prison drama Screw for Channel 4, and thriller Criminal Record for Apple TV Plus starring Peter Capaldi and Cush Jumbo which will be delivered later this year. As for where this acquisition sits within the wider STV Studios growth strategy, while it completely aligns with our vision here and the objectives that underpin it. As you know, we set out our store a few years ago to become a world-class producer for the biggest networks and global streamers and the U.K.'s #1 nations and regions production company by turnover, by profit and by reputation. And we've been making excellent progress with that vision. We've been pursuing clear strategic objectives to grow our returning series, to continue to expand our customer base and to invest in our existing labels, as well as in new creative talent. And this acquisition ticks all those boxes and undoubtedly accelerates the vision for STV Studios. So much so that on day 1, we are a big step closer to our goal of becoming the U.K.'s most successful nations and regions producer. We're already #3 here according to the latest indie survey published by Broadcast Magazine in March this year. And the Greenbird acquisition will see us leapfrog Cardiff-based Bad Wolf Studios into a clear second place with only Hollyoaks producer Lime Pictures left to topple who are currently turning over nearly GBP 110 million. After that, we'll need to set ourselves another target, of course. And of course, although turnover is a good measure of growth, we are crystal clear that success is also about returning series, about the long-term health of your creative pipeline and, of course, about profitability and cash generation. That is one of the reasons we're so excited about Greenbird. To be honest, it is certainly better to be bigger in the TV production market because increased scale enables you to better withstand the inevitable ups and downs that come with winning and losing program commissions. But what the Greenbird acquisition also does for us is bring the sort of strategic benefits that will allow the combined group to compete much more effectively in the global content market. Firstly, we've talked a little about the creative benefits, a significantly strengthened creative pipeline across 24 different labels. What that means in practice is well over 50 respected creative leaders, all pitching, selling and delivering new shows, which will be a formidable operation. As you'd expect, we've seen the Greenbird pipeline and the range of new series that have already been greenlit for 2024 and not announced yet, and we are very excited by it. Secondly, that increased scale also brings significant commercial benefits. We'll have an enlarged presence across the U.K. with expanded operations in both Glasgow and London as well as offices in Belfast, Cardiff, Manchester and Brighton allowing us to take full advantage of the ongoing shift to production in the nations and regions. It will also bring advantages in contractual negotiations with networks in secondary sales and in distribution. Greenbird and STV Studios currently work with many different distribution and cofinancing partners, but neither of us has the scale to engineer the best possible deals in the marketplace. However, the enlarged group, will be better placed to realize value from the 5,000-plus hours of distribution, IP and format rights we now hold. Thirdly, we have the opportunity to develop a compelling international growth strategy. Both Greenbird and STV Studios are making progress here with shows lik LEGO Masters and Bridge of Lies being remade for international markets. Together, the merged group will design an international strategy to generate maximum value from our shows outside the U.K., including potentially having the ability to produce or co-produce shows in key territories like the U.S. and Europe. And finally, on this chart, this deal also significantly strengthens the senior management of STV Studios. The Greenbird founders aren't just selling us their company. They're joining the STV Studios board in new important roles with a brief to drive the growth of the whole studios business in the U.K. and internationally. Stuart Mullin will become STV Studio's Finance Director and brings huge experience from managing all corporate and financial matters at Greenbird, but also previously as FD of major production businesses, Arganon and Walk To Wall. Jamie Munro will become Chief Commercial Officer at STV Studios. Jamie focuses in particular on IP exploitation, sales and talent management. And has spent over 20 years in commercial roles in the TV production sector running Schein TV, as Commercial Director at Tiger Aspect, and with over a decade in a range of roles at the BBC's commercial arm, BBC Worldwide, now BBC Studios. And Jamie and Stuart will work alongside Paul Shin, STV Studios COO; and under the leadership of David Mortimer, our Studios MD, to create a formidable senior team focused squarely on growth.

I'll now move on to the financials of Greenbird and the impact we expect them to have on our group. But first, let me just give you a few pointers in relation to their historic results and accounting policies that will hopefully help when it comes to interpreting these slides and then updating your models for the enlarged STV Group. The first thing to say is that Greenbird don't currently produce consolidated financial information. So all of the Greenbird group numbers that you see on these slides are on a pro forma basis. They include 100% of the trading results of Greenbird and its majority owned subsidiaries, and so reflect the Greenbird numbers that will be consolidated into the STV Group results going forward. However, as Greenbird subsidiaries are wholly owned, not all of the consolidated profits will be to the account of STV's shareholders. A proportion will be attributable to the minority shareholders of these newly acquired businesses, and this will need to be reflected in your STV Group EPS forecast going forward. The other point to highlight is that the product companies in the Greenbird Group recognize production revenue on a percentage of completion basis. The historic financials presented for Greenbird reflect their flat basis of preparation. However, STV adopts an episodic delivery revenue recognition policy in line with IFRS. And so the forecast financial information for Greenbird has been restated to align to the STV approach. There are a series of footnotes on the next few slides, which cover off some of those points, put some numbers to those and will hopefully provide you with the points of detail that you'll need. So with all that said, let's move on to the key messages. In short, the Greenbird Group is profitable. It's cash gen, it's cash positive, and it's on its own good growth trajectory. Under Greenbird's existing revenue recognition policy, the business has consistently grown revenues with an operating margin of 11% in each of the last 2 financial years and is focused on growing all key metrics going forward. The discipline is between Greenbird's results under its accounting policy compared to that of STV is relatively small at around GBP 400,000 at the profit level in 2022. In terms of managing working capital, Greenbird is funded through a combination of existing cash balances and stage payments from commissioners, the latter being the main reason why working capital has been negative at the last 2 year ends. We expect Greenbird to continue to fund its working capital needs in this way going forward, and therefore, the enlarged group will have sufficient facility headroom to manage any timing differences that arise. This slide presents estimated forecast financials for the Greenbird Group under STV's accounting policies for the second half and full year 2023, with a view to highlighting the seasonality of the business and the estimated post completion results that we'll be consolidating into the STV Group numbers this year. As these numbers show, there is a similar second half leading to the results of Greenbird as it is with our existing studios business. With the strong pipeline of delivery set for the second half of the year, Greenbird expects to generate revenue of GBP 20 million to GBP 25 million and profit of GBP 3 million to GBP 3.5 million in the 6 months, which will be consolidated into our 2023 financial results. Combining that with guidance for STV Studios shared previously, our revised outlook for the enlarged division for the full year is revenue of GBP 70 million to GBP 75 million and adjusted operating profit of GBP 6 million to GBP 6.5 million, implying an operating margin of around 8% or so compared to just under 6% reported in 2022 and taking us a significant step closer to our target margin for the division of 10% by 2025. These pie charts help to put the transformation and diversification of STV over the last 5 years into some context. The charts show the proportion of group revenue generated by each of STV's divisions in 2018 and 2023, during which period, the group's overall revenues have grown by some 50%. The inclusion of Greenbird through 2023 drives STV Studios revenue to just over 40% of the total from only 14% in 2018 and is similar in scale now to STV's broadcast business. We set ourselves an earnings diversification target to generate at least 50% of the group's operating profit from outside traditional linear broadcasting by the end of this year. We've been on track to hit this target after successive years of digital and production growth, and the acquisition of Greenbird will now see us comfortably exceed it, but our current expectation that we will hit at least 60% this year giving us a far more balanced earnings base for the future. In March, we flagged that the group's results in 2023 would be more weighted towards the second half than previously due to a combination of factors. Firstly, the traditional second half delivery schedule of programs for commissioners. Secondly, the weak advertising market in Q1, which has continued into Q2. And lastly, the impact of cost pressures that STV is facing, like all other businesses at the minute. The timing of our acquisition of Greenbird put at the halfway point in the year will further accentuate the second half weighting of the group's results this year. The net debt of the enlarged group was around GBP 32 million on day 1 being the combination of net debt in the existing STV Group of around GBP 38 million and cash balances in the Greenbird Group of around GBP 6 million. And we expect this net debt position to reduce towards the year-end. As mentioned already, we funded the acquisition through our existing revolving credit facility, and we've taken the opportunity to access GBP 10 million of our GBP 20 million accordion to ensure we have continued to have sufficient headroom whilst operating in a well-documented broader macro environment that remains challenging. This gives us total facilities of GBP 70 million to March 2026. However, it's worth noting that at this point, we don't anticipate using this incremental funding capacity. Our key financial covenant is the ratio of net debt to EBITDA, which we expect to remain within our target range of 1x to 1.5x from completion and finished the year at around 1x. I've already touched on working capital, but just to reiterate that we expect to continue to manage working capital within our cash and facility headroom across the enlarged business.

Moving on to integration, and we're putting a comprehensive plan in place across a number of work streams focused on growth, integration and synergies. As a priority, we're looking at our joint distribution strategy and international growth plans. There are potential synergies across property, systems and infrastructure, and we need to roll out key STV Group policies to the enlarged business as well as align accounting policies and controls. We will focus on all these things over the coming weeks, and we expect overall to realize at least GBP 750,000 per annum of combined revenue and cost synergies across STV Studios from 2024. But this integration exercise isn't just about costs and processes, or processes even. More than anything, it's about building the right culture across the whole of STV Studios to give the newly enlarged business the best possible chance of success, and that started already a week ago with a communications exercise that covered not just external stakeholders like many of you, but crucially also our internal teams across STV and Greenbird who will be leading the charge for growth over the next few years. The integration plan, governance and overall strategy for growing the enlarged studios business will be overseen by a clear management structure at STV as set out on this chart. An integration committee has been formed, chaired by STV Studio's new FD and Greenbird Founder, Stuart Mullin, with representatives from across STV and Greenbird. Our progress will be overseen by the newly strengthened STV Studio's Board, which meets monthly and which Lindsay and I both sit on. Both structures are then ultimately accountable to the STV Group plc Board, as you would expect. Looking at the production landscape overall, we do think that as a result of this transaction, we're even better placed to take advantage of the opportunities the U.K. and global content market has to offer. Global content spend is forecast to continue to grow in 2023, albeit at a slower rate than in previous years due to the economic slowdown. And it's a similar picture in the U.K. Meanwhile, production spend in the U.K.'s nations continues to rise, with Scotland's share of ex London production revenue growing from 13% to 21% over the last 4 years as the positive effects of leveling up in the TV sector start to come through. Our job at STV Studios is to make the very best of these market tailwinds by continuing to win market share as we've been doing consistently over the last 4 years. So that concludes the presentation. In summary, these are the key messages on screen that I'll leave you with, and we should now open up for any questions.

[Operator Instructions]

Thank you very much. So our first question, and thank you very much for the questions already submitted. Do you have plans to buy out the minority holdings of CrackIt and Tuesday's Child? Yes, we do is the answer to that. And indeed, there are put and call options and indeed some obligations in relation to the remaining minority holdings for CrackIt and Tuesday's Child, which we are comfortable with and which we factored into our overall valuation business. That is a separate thing to the founders of those businesses still being incentivized to remain with their businesses and to continue to grow them brilliantly as they've done over the last decade or more. That is the case for both of those founders. Lindsay, anything to add to that, that I haven't covered?