STV Group plc (STVGL.XC) Earnings Call Transcript & Summary

Hello, everybody. Sorry about the delay just to be technical, but we welcome to today's presentation on STV's interim results to the end of June 2025. And importantly, today, we've also announced beyond the results, full details of our response to the challenging market conditions that we're facing at STV. Rufus and Lindsay will share full details of our cost-saving program and the additional measures put in place to protect profitability and provide balance sheet flexibility should it be required. So despite current headwinds, there are many positives to be taken from today's announcement. STV continues to hold share as the most popular peak time TV channel in Scotland and STV Player recorded its highest ever viewing figures for the first half. STV Studios, including its minorities, has secured 30 new commissions in 2025 year-to-date. And most recently, we won the commission for Army of Shadows, a brand-new returnable drama that's been commissioned by Channel 4. So all good news. STV Radio, a new proposal that we announced recently is on track for launch on the coming -- in the coming months. And that's just a few of the very positive things happening across the business. We are an ambitious business, and there's a lot to look forward to as we work towards delivering our FastFwd to 2030 strategy. You may also have seen the news this morning that I will step down as Chairman by the end of the year. I've been with the company for almost 5 years, and this feels like an appropriate time to step down and for a new Chair to lead the company as it drives through on the FastFwd strategy. And I'm delighted that Clive Wiley has been appointed as my successor, and I'm going to work closely with Clive over the coming few months to ensure a proper and comprehensive handover. Clive brings to STV really extensive experience and skills acquired across a broad range of sectors. And I really hope he enjoys his time with the business as much as I have. Having grown up watching STV, I'm really proud to have served as your Chair for the past 5 years. working with a great team to deliver the ambitious and successful diversification strategy, which has built the foundations of the business and will enable us to remain strong. I feel confident I'm leaving STV in due course in very safe hands with Clive, with our strong and experienced Board of Directors and with our exceptional leadership team. Now I'm going to hand over to Rufus and Lindsay to take you through the details of today's announcement. Rufus?

Thank you very much, Paul, and good afternoon, everyone. Before beginning, I wanted to also thank you, Paul, for everything you've done for STV over the past 5 years, overseeing a period of significant progress and diversification of the business. Obviously, this is your last set of results, and we wish you the very best of luck for the future. The -- but today's interim results are the first following our trading update on the 28th of July. The trading environment in both our key markets, advertising and content has been difficult. Today, what we want to do is talk in detail about the actions that we've taken and also to reaffirm our long-term strategy and the progress we continue to make, which will build the foundations for future growth. I'll start with the half year results, which obviously are now a while ago. In H1, we delivered GBP 90 million in revenue and GBP 6.7 million in adjusted operating profit. Q3 total advertising revenue is expected to be down around 8% year-on-year as guided, with October looking similar. Visibility beyond that is still difficult. The Studios order book at the end of August stands at GBP 40 million, reflecting the continued delivery of scripted programming and fewer commissions being secured and added to the order book across scripted and unscripted. This number also excludes brand-new drama Army of Shadows commissioned by Channel 4, which was announced a couple of weeks ago. We've begun implementing a cost savings program and given limited market visibility, we're not proposing an interim dividend. Despite the headwinds, we are holding guidance for the full year for the group and our 2 divisions. We announced in July incremental cost savings of GBP 750,000. And as a result, we are on track to deliver a GBP 2.5 million saving target this year. As we navigate a challenging trading environment, we have taken clear action to protect both profit and cash. Firstly, we've launched a cost savings program that will deliver a GBP 3 million annual reduction in our cost base. This is incremental to the previously announced target of GBP 5 million for full year '26. Of this, GBP 2.5 million will be realized in 2026 with an estimated GBP 1 million cost of change. Additional savings are being targeted in news. These require changes to our license, and we are in discussion with Ofcom. We have also agreed flexibility on pension contributions with trustees. The 2030 recovery plan remains in place, and we now have the ability to adjust payment timings across 2026 and 2027, helping us manage cash more effectively. In addition, we have rephased nonessential CapEx, ensuring that investment is focused only on strategically important areas. And finally, we have secured amendments to our bank facility, providing additional downside headroom and reinforcing our financial resilience. These measures are not just tactical. They are part of a broader plan to ensure STV is focused, resilient and more profitable when market conditions improve. And now to take you through the financial review in more detail, over to Lindsay.

Thanks, Rufus. As I tend to do, I will start with a summary of the key financials for the first half of the year. So the group generated GBP 90 million in revenue in the first half, in line with 2024 as the growth of 13% in Studios offset the decline in audience. The audience decline was driven by total advertising revenue, which was down 10% year-on-year with the 2024 Euros in the comparator, the well-trailed reason for this. The largest component of TAR is national linear advertising, which was down 16% and the regional team delivered a very strong result of 2% growth in the Scottish market. Total digital revenues were just under GBP 11 million and grew by 5%, driven by VOD. Adjusted operating profit of GBP 6.7 million was down 37% on the first half last year, principally due to the reduction in high-margin advertising revenues. And you can see the impact of this on the adjusted operating margin as well. Studios was breakeven in H1, in line with last year. Total net debt was GBP 35.7 million, lower than the start of the year as production financing facilities have been repaid, and we've seen only a marginal increase in our RCF drawings. Moving to the group P&L. There are a few points to highlight. Corporate costs in the first half stands out given it's gone up year-on-year. About half of the increase is noncash and reflects the costs of administering the pension schemes that are reflected in our P&L account. And the other main element is for consultancy in support of our FastFwd strategy. The underlying costs of the business are well controlled, as you'll see in the profit bridge in a few slides' time. Interest on the group's borrowings is in line with last year at GBP 1.8 million. The balance of the finance cost is noncash, and it's a small amount of interest on leases and an unrealized loss on foreign currency forward contracts, which offsets the unrealized gain that we recognized in the second half of last year. In terms of adjusting items, I've included an appendix at the end with the detail. The largest item impacting operating profit is a noncash charge of GBP 2 million relating to the review of our unscripted label portfolio. This is split roughly 50-50 between the write-off of an investment in a minority stake and a separate write-off of development stock following our decision to stop new development in STV Studios Entertainment. Turning to advertising revenue. The table on the left here shows the performance of each main advertising revenue stream in H1 2025 compared to 2024 and 2023, the latter eliminating the effect of the euros last year. National linear advertising was the poorest performing relative to both 2024 and 2023, with regional linear turning in that strong performance of 2% growth that I referred to year-on-year and was up 3% on 2023. This really is a testament to the quality of the relationships that the local sales team have with their clients and is particularly notable given the national performance. VOD continues to grow and was up double digit in H1 2025 compared to 2023. Looking to the Q3 outlook, we are maintaining our previous guidance of an 8% decline in TAR year-on-year, but the components of this have changed a little since the end of July. National linear is looking to improve slightly to around 10% down, regional worsening to 15% down and arguably catching up with the broader market performance in H1 and VOD growth is expected to be 8% up. Visibility remains very low. And while we have a view on October, we're not guiding beyond that. In overall terms, we're expecting the October ad market to perform broadly similar to Q3, which is a bit disappointing as we would normally expect to see a seasonal uptick at this time of year. Shifting division and moving to Studios. The order book trajectory since the start of 2023 is shown on this slide, and you can see that the current position of GBP 40 million reflects the delivery of several large scripted shows over the last 12 to 18 months. At the end of August, the scripted order book was GBP 18 million and so much lower than it has been in the last couple of years as revenue has been recognized. It's a clear focus of the team to secure more commissions to repeat the cycle, and we have a number of ideas in advanced development with commissioners that we expect to hear about in the coming weeks and months. We recently announced a new scripted commission from 2 cities for Channel 4 called Army of Shadows, which is a sizable production, but it will flow through our numbers a bit differently. That's because it's a co-production with StudioCanal and our revenue will be our share of the production fee rather than STV recognizing the full program budget. So where we might have been adding GBP 15 million to GBP 20 million, say, to the order book, we will recognize a much smaller number, but it will be at a near 100% margin. In terms of unscripted, commissions have been quiet in recent months, albeit the current order book of GBP 22 million is not far below the average of the last couple of years. Given this context, our expectations for Studios performance in 2026 is broadly aligned with this year as conditions do remain difficult. Our teams are continuing to engage with commissioners, and we're confident that our relationships will enable us to drive growth when the macro improves. But as with the ad market, it's difficult to see when that might happen. This chart shows the main moving parts in adjusted operating profit year-on-year. The largest bar starting left to right is national linear advertising, which drives more than 70% of the profit decline after taking into account the benefit from the underlying contractual arrangements with ITV that sees our program costs move in line with revenue. This reflects the operating leverage in this part of the business. And so it's the bit that will come back just as quickly when the market improves as it has done many times before now. Production margin generated in Studios is slightly up year-on-year, but profits are impacted because of the consolidation of labels for the first time following increases in stake from minority to majority in the second half of last year. The bars towards the right-hand side of the chart reflect changes in the cost base of the business. We've direct costs, which have increased year-on-year as a result of higher VOD revenues and increased viewing hours. Inflation and increased employers NI are meaningful for the business, but we've offset most of these cost increases through the savings, which is the large green bar towards the right-hand side there. Turning to cash and net debt. The group has net debt in relation to its RCF of just over GBP 30 million at the half year, not dissimilar to the opening position. Production financing loans are being repaid as cash is collected from commissioners and programs delivered. Leverage at the half year was 1.6x, well within the covenant limit. Net debt will increase from here to the year-end. However, our RCF drawings are slightly higher now than at the half year, and we'll need to draw down further in the next few weeks given the quieter Q3 and the true-up payable to ITV under our contracts. From a modeling perspective, I'd suggest you assume GBP 45 million to GBP 50 million for net debt at the end of the year, including production financing. Following our trading update in late July, we've taken a number of measures to provide the business with additional cash management flexibility and incremental headroom. These measures included securing a slightly larger RCF and some covenant amendments during 2026. Now I'll stress here that our central forecast is not predicated on us using these amendments. Rather, this was a proactive measure given the market uncertainty and lack of visibility and allows us to focus on trading performance and delivery of the strategy. On pensions, we remain on track to achieve full funding on a technical provisions basis by October 2030. The accounting deficit has reduced over the first half of the year and is lower than it was 12 months ago. Within our recovery plan, we have agreed contribution payment flexibility with the trustees that allows us to defer payments during 2026 into 2027. So of the GBP 10 million that would have been payable in 2026, we can pay up to GBP 9 million in 2027, along with the contributions for that year. This gives significant flexibility during 2026. It's also worth noting that we'll be in discussion with the trustees throughout 2027 to agree the next triennial valuation, which is due at the end of December '26. The last thing I wanted to talk about was the group's cost base and how we've developed our savings plan. This slide looks to break down the cost base into its key component parts and reflects the current position. It excludes direct program production costs, which are met by the commissioner and vary directly with revenue. 1/3 of the cost base relates to contractual payments to ITV under the long-standing arrangements in place. About 1/4 of these payments are inflation linked, but 3/4 vary with revenue. The variable element is our contribution to the Channel 3 national program budget, where the amount we pay varies from 1 year to the next in line with national advertising revenues. So when national advertising revenues go up, our costs go up. And as is relevant in the current climate, when revenue goes down, our costs go down. The largest single element of our cost base is our people, who comprise around 40% of the total. Taken together with payments to ITV, these 2 categories comprise 75% of our cost base with the remaining 25% across a number of different areas, each no bigger than 5% of the total. These include direct costs, noncash items, PSB and license obligations, property costs, et cetera. The direct costs are predominantly in the digital part of the business and our revenue share payments for player content and ad serving and related costs that vary with activity and volume of viewing. It's also worth noting that in this analysis, the costs of the news team are included under people with the other PSB costs being transmission, Ofcom, et cetera, that's shown separately on the right-hand side. Of the people costs, around 35% are direct sales teams, which is roughly 15% of the total cost base. This means our addressable cost base is around 40% of the total. This assumes that costs to ITV and direct sales teams are not addressable nor are those other costs that are incurred in direct proportion to revenue or activity. We've also assumed that noncash costs, predominantly depreciation are addressed through review of the CapEx plans for the business. Our approach to building our plan has been tailored to each individual part of the business and has sought to answer the questions, what's the primary role of the team? Are there technology advancements that would enable us to be more efficient? Do we expect activity levels to go up or down in the future? Do we need to do this activity at all? We've then made decisions based on the answer to these questions and have identified full year savings of GBP 3 million so far. These are in addition to the existing cost saving target previously published and have been enabled in part by decisions taken earlier in the year to merge broadcast and digital. The full amount is within our control to deliver and actions are being taken immediately to maximize the P&L and cash benefit whilst treating our people properly through what will be an unsettling time. We recognize that our news provision is a key part of being a PSB, but it's also a significant cost to the business. We've identified changes we'd like to make, but these require changes to our licenses and so need Ofcom's agreement. We're in discussion with Ofcom and any savings we can realize here will be incremental to the numbers on the slide. The cost of change associated with the changes identified so far is estimated at around GBP 1 million. I'll now hand back over to Rufus, and he'll take you through the strategy update and outlook.

Thank you very much, Lindsay. So as you've heard, the short-term environment is difficult. And at times like this, it can be understandably hard to focus on the longer term. We've moved really quickly to respond to market conditions. But whilst ensuring that STV is resilient today, we also need to ensure that we are well set for when market conditions improve. That means staying committed to our strategy and adapting where necessary. And since our strategic update in May, there has been good progress. In May, we said that an important part of running the Studios division is active portfolio management. And you will have seen today that we have made the decision to stop development activity in STV Studios Entertainment and make no further investment in Mighty productions. This is a response both to current market conditions, but also our long-term view of where content demand lies. Premium drama remains very much in demand, and we are delighted that Army of Shadows another high-profile commission for 2 cities, the makers of Blue Lights and Amadeus has been secured, another returnable piece of IP with international appeal. We've made good progress bringing our broadcast and digital divisions together. This avoids duplication. It also simplifies and focuses our overall viewer and advertiser proposition. Linear viewing declines have been partially offset by the highest ever STV player viewing in H1, which has continued also throughout the summer months. In a few moments, I'll also talk to you about the launch progress on STV Radio. And we are in discussions with Ofcom about changes to our licenses to support news cost savings. This will enable us also to accelerate our digital ambitions to future-proof news and bring in younger viewers. This is our simplified structure and strategic focus, which we showed you in May. And this organizational design helps us navigate our current environment, but also help unlock future growth. We are creating an STV that will continue to be Scotland's leading platform for audiences and advertisers through our Audience division, and we will be a globally recognized content powerhouse through STV Studios. This gives us huge regional strength in Scotland and international ambition. And our strategy is built around 2 pillars: building and monetizing the audience, delivering a high-reach video and audio proposition across the STV channel, STV Player and our soon-to-be launched STV Radio. We're also expanding our advertising proposition with advanced formats and new targeting capabilities, remaining relevant to both mass market advertisers and those looking for enhanced targeting. And we are driving content growth through STV Studios, delivering high-quality IP with strong returnable potential, and we are making sure we have the best portfolio for now and for the future. This structure is right both for current market conditions, but it will also deliver long-term value creation. We are responding to challenges, but we are also building a business that can thrive when conditions improve. So let's take a look at the Audience division first. So we know there is structural viewing decline, but I will carry on, but STV continues to have scale and reach. In H1, STV reached more than 3/4 of all Scots every month, over half of Scots every week and almost 1/3 of Scots every single day. And on the right-hand side, you can see that we continue to be the destination for scaled audiences. 96% of the top 500 audiences in H1 were on STV. And as we mentioned earlier, STV Player had its biggest ever first half even without the men's football euros from last year, with an increase of 8% in viewing. And if you look at third-party content, we had even stronger growth at 16% through smart content acquisitions from the team across a range of British and U.S. titles. And STV Player continues to be an effective way of capturing younger viewers with over 54% of drama consumption from under 45s now coming through the service. Now you saw this slide in May, but I'm showing it again. It's a clear visual demonstration of how complementary radio is to our existing viewer proposition. Radio listening is strongest in the morning and TV in the evening, but also radio listening remains strong and resilient and is being enhanced rather than disrupted by the digital world, which is offering more ways to listen. And in fact, commercial radio listening is growing across the U.K. and even more in Scotland, and we have a strong marketing platform and the power of the existing STV brand as well. So the ramp-up to launch has started. There is already significant brand awareness. You can see a snippet of some of the coverage we generated when we announced our plans to move into audio in May. The Ofcom license has been granted. We announced Tunnock's this week as our first confirmed advertiser on the service with a 6-month deal. The presenter lineup is taking shape with breakfast morning and drive time talent confirmed. And as you can see from this slide, STV's advertiser proposition continues to develop. We are able to offer brands mass audiences, and there'll be none bigger than in the 2026 Men's World Cup next year. We were able to offer regional targeting, but we're also able to offer micro targeting, delivering for new to TV advertisers in a cost-efficient way. And we've been running pilots recently with low-cost AI-generated creative from STV for local clients in Scotland and early results are very encouraging. And we are launching other additional formats. Pause ads have gone live last week on STV Player on the browser and we will launch on all major platforms in time for the return of I'm A Celebrity. These are ads that are served on screen when the video is paused. And next year, we are planning to launch linear ad replacement, where we can serve different ads to different people within the same 30-second time length to maximize yield and targeting. Even though viewing habits are changing, TV advertising also continues to work and priority #1, as we know, for all marketing departments is effectiveness. TV is the greatest driver of ad-generated profit with a 5.6x return on every pound invested. And TV and radio combined can improve cost effectiveness from brand campaigns by over 20%. Now let's turn to news. News is a vital part of the STV brand, and STV News remains the most watched program at 6:00 p.m. beating the BBC. We want to protect STV News for the future, and that means making sure that it has a big digital as well as broadcast impact, but importantly, that it is also on a sustainable cost footing. To do this, we are in discussions with Ofcom about a simplification of our news license requirements. We are consulting with them about enabling both licenses to co-produce one show for Scotland and remove all regional opt-outs. If we are successful, this will deliver additional savings beyond the GBP 3 million announced. Now to STV Studios. We have talked about the slowdown in U.K. unscripted PSP commissioning, but we have a highly competitive set of creative labels, and we believe we are outperforming the market. We remain focused on returnable IP and long-term value creation. In scripted, there is a lot going on, and it is on plan. Blue Lights series 3 is returning on Monday, and the BBC are doing a huge campaign to support its return. Amadeus, the story of Mozart, is launching by the end of the year on Sky. Criminal Record 2 has now been filmed and scripts for Series 3 are in paid development. The Witness, our first-ever commission for Netflix has been delivered, and we have already talked about Army of Shadows for Channel 4. Unscripted is harder at the moment, but year-to-date, we have had 15 returning series and 12 new and potentially returnable series. And returning series are obviously a key metric of success for studios. We also have a really strong customer base and our secondary sales revenue, which is at a very high margin, is on a par with the first half of 2024. We are confident that the long-term fundamentals for our Studios business are strong. We have extremely strong relationships with broadcasters, streamers and international co-producers. The U.K. is the #1 place in the world in creating big IP formats and global demand for premium drama will remain strong. We are a leading nations and regions producer and PSBs need to actively commission out of London, and there is no better place to do that than Scotland. We have strong returns from our recent investments with momentum in labels like Hello Halo based here in Glasgow, Tuesday's Child and Crackit. And when market demand returns, we can scale up quickly through freelance talent without increasing our permanent headcount. So if that is the long term, we obviously also need to focus on the now. As mentioned, as a response to the unscripted market conditions, we've made the decision to close STV Studios Entertainment for new development, and there will be no further investment in quiz label Mighty Productions. We are laser-focused on rightsizing our development spend. We have very clear priorities over the next 6 months. In terms of the Audience division, we want to continue the strong viewing momentum we've had year-to-date on STV Player. We are expanding our advertising proposition through some of the products I talked about earlier like pause ads and the greater targeting capabilities to unlock incremental revenue. We're going to launch STV Radio, and we're going to start the changes to our news output, delivering a more cost-effective digitally focused service for our viewers. We will continue to actively manage our studios portfolio of labels, rightsizing our development spend to reflect current market conditions, focusing on returnable IP with strong margin potential. And we will be leveraging our nations and region status to remain a preferred partner for PSBs. And all of this will be underpinned by our new cost savings plan that we announced today to ensure that STV emerges stronger and more profitable when market conditions improve. And before we turn to Q&A, I wanted to quickly turn back to the bigger picture. Despite the challenges we faced, we have a short-term and a long-term plan. In the Audience division, we are driving digital revenue growth, expanding into audio and continuing to deliver mass commercial audiences. At the same time, we are managing costs strategically to ensure long-term sustainability and growth. In Studios, we are led by world-class creative talent with brilliant relationships with customers. Our focus, as I've said already, is developing returnable IP with international appeal. We are maintaining a strong development slate with strong cost discipline as well. We are not just reacting to market conditions. This is a business that is adapting, evolving and positioning itself for long-term success...