Earnings Transcript for ITVPF - Q2 Fiscal Year 2017

Executives: Peter Bazalgette - Executive Chairman Ian Griffiths - COO, Group Finance Director & Executive Director

Analysts: Ian Whittaker - Liberum Capital Limited Laurie Davison - Deutsche Bank AG Lisa Yang - Goldman Sachs Group William Packer - Exane BNP Paribas Tamsin Garrity - Jefferies LLC Adam Berlin - UBS Ruchi Malaiya - Bank of America Merrill Lynch

Peter Bazalgette: Good morning everybody. Welcome to ITV's half year results. I'm Peter Bazalgette, the Executive Chair at the moment and I'll be taking you through a few highlights that my colleague Ian Griffiths, Group Financial Director and COO who is going to take us through the half year financial operating review. Of course one of the things we're delighted that we were able to announce 10 days ago, actually nine days ago to be absolutely precise was our new Chief Executive, Carolyn McCall who is joining us on January 8th, next year and also a bit more about that in a minute. So here are some highlights of the half year. So the first half performance was very much in-line with our expectations so ITV is on track to deliver our full year guidance. We're confident in the underlying strength of the business and the broadcast business which we deal with first remains robust even with an uncertain economic environment. There's no getting away from the fact we had a challenging and tough half year but we think we've met it pretty confidently. Strong viewing [ph] performance on-screen and online, will give you some statistics on that in a minute. I just wanted to say a word or two about Monday Night at 9 o'clock because I know since which channel you're watching though because actually Monday Night at 9 o'clock was an example of the real power of the of the ITV family because at 9 o'clock we had the Princess Diana documentary on ITV which got around 7 million viewers on the overnight and that was the highest rating for a factual program since 2009 and absolutely at the same time on ITV2 was the final of Love Island. I know you're all watching that weather on Catch Up or Live we will see as both those statistics are very strong and it got 2.6 million viewers which was a record for ITV2 on the overnight. And it got an amazing pick up throughout the series on the ITV Hub and that just shows you if you take the whole ITV family together the real power in that hour on Monday Night. So I just wanted to pick up on that and Ian will say more about Love Island in a minute because he's a very big fan. ITV Studios has got a healthy pipeline of new and returning programs and we will give you some color on that later. We continue to execute the strategy to create an even stronger and more resilient business. So that means investing in ITV Hub, Hub+ which as you know is our service which you can subscribe to, to watch our programs without advertisements and BritBox U.S. which is our joint venture with the BBC and indeed our SVOD service Cirkus in Scandinavia which is just launched in Germany as well and we're therefore growing our digital capabilities month by month, year by year. We're strengthening our international drama and formats business with the acquisition of World Productions who as you may know make Line of Duty, a big hit for the BBC. Tetra Media, the drama company in France and Elk Productions' format entertainment business in Sweden and we continue to see opportunities to invest in the U.K. and internationally, we have a pipeline of opportunities. So a strong balance sheet and healthy liquidity that gives us the flexibility in the capacity to invest across the business and deliver increasing returns to our shareholders. Now of course a retransmission fees Section 73 will be repealed, in fact it becomes a law on July 31, so after July 31, we look forward to negotiating with platforms for the full value of our channels and we do believe they have a lot of value. So totally external revenues for the half year down 3%, good growth in non-NAR up 6% partly offsetting the 8% decline in NAR. Non-NAR is now 55% of total revenues when you look at the rebalancing of ITV, double digit growth across online and pay. ITV Studios, our production business delivered 7% total revenue growth that does include the benefit of foreign exchange. Got more international business so over half of ITV Studios business itself now has revenues coming from outside the U.K. So a rebounced total business and rebounced revenues within ITV Studios. Adjusted EBITDA is down 8% at £403 million, the ordinary dividend will be up 5% to £0.0252 which reflects the Board's confidence in the underlying strength of the business. We are continuing to execute our strategy and as I said we see further opportunities to invest. So when -- we are not [indiscernible] we said to investors that we wanted a new Chief Executive with a strong track record in media, somebody who has an experience of running an international operation, somebody who's demonstrated clear strategic acumen and somebody who has a strong reputation for delivering value to shareholders and I'm pleased to say we found that person because that person is carried in Carolyn McCall who ticks all the boxes for us we're really delighted she is joining us. We think she's going to be a very strong leader for our business and Ian and I greatly look forward to working with her. So before I hand over to Ian, I think it would be nice if this was your water utility you wouldn't get a very interesting video but it's a TV company we'd like to show you some of our great shows what we're going to show you is a video which shows you some of the great shows we have had in the first half of the year, gives you a sneak preview of some of the treats to come in the second half of the year and gives you a flavour of really what the strength of our shows is across the world. So can we see the video please. Thank you. [Video Playing]

Ian Griffiths : Good morning everyone. It's a real shame actually the people who were dialing in and watching this stream don’t get to see that because I think if you ever wanted a tape to encapsulate the great stuff we've been broadcasting and the quality and the strength of the pipeline we've got going forward in second half of the year that's probably the best tape we've done, brilliant. Slightly different format today as I'll be covering the numbers and the operating performance together. The first half has come through very much as expected and it's been a tough six months, the uncertainty around advertising and corporate confidence has led to our NAR revenues being down 8% and studios has difficult comps because of last year's reporting of The Voice of China and these two things have really impacted the headline numbers and whilst its not a great reporting a 9% decline in the EPS the business has performed well and the results continue to show the benefit of diversifying away from the U.K. and reliance on U.K. advertising. Today over 55% of our revenues are from non-spot advertising as a result we're confident in the strength in the underlying business and that will deliver what we said at the start of the year and that's reflected in the 5% increase in interim dividend to £0.0252. Now let's go into the divisions. Broadcast continues to deliver high margins strong cash flows and growth in non-NAR revenues. At the same time our audience remains robust, and our advertising proposition compelling. Having said that in an uncertain macro environment total advertising was down 7% with an 8% decline for pure-NAR which is tough to mitigate. However broadcast profits are only £24 million down despite £69 million less NAR. This profit mitigations has come from the continued growth in OPI and sponsorship where with new deals for the voice and horseracing plus tight cost management both of the schedule and overheads. Online and pay continues to deliver double digit revenue growth, online primarily VOD advertising remained strong and we have seen growth in all VOD advertising categories with the exception of food. Pay also continues to grow especially where the platforms are paying us for a highly demanding catch up and our discussions with both Sky and Virgin on new pay deals will begin in the coming months. Total OPI revenues been held back by our interactive competition revenues which are down around 5%, the competition have not had as much promotional airtime as in prior years and that sort of big impact on the number of entries. On screen we refaced some of our spend to ensure there's a strong autumn and this is meant in the first half spend is slightly lower than expected but there's no change for full year guidance of a $1.25 billion and as far as other costs are concerned there are savings coming through in overheads and transmission plus the phasing benefits of some of our marketing and investment spend especially on online and pay is more second half weighted. The business is now stronger and more resilient with healthy margins and cash flows and with a £1 billion of revenue and just under £300 million of profit we're making 50% more profit than the whole group made over a full year the last time the ad market dropped in 2009. However the ad market remains uncertain and has been since the day the Brexit vote was announced last year. This uncertainty is clearly impacted corporate willingness to invest and although there's been no major change in behavior as a [indiscernible] analysis shows most corporates are spending a bit less than previous years. We were 9% down in Q1, 7% in Q2 and we expect Q3 to be down around 4% which compares to a similar decline last year. Within this we expect September to be flat to down five and it's worth noting that the comps do get easier as we enter the bigger commercial months of the autumn. There's been a bit of a recovery from supermarkets and cars and telcos have been robust but most of the categories are down. With food and FMCG the most cautious as they manage their margins in the face of inflation and currency pressure. Having said all of that TV advertising has real strengths, it's relatively cheap, in real terms it's still 40% cheaper than 10 years ago, it's transparent, audited and there's a trusted measurement system and audiences continue to be robust and in that context what we offer in terms of immediacy scale and reach across all key demographics continues to be our USP. If you want to effectively build your brand TV should be a core part of the campaign and online brands certainly believe that and according to ThinkBox 70% of their marketing is spent on TV and brands such as Amazon and Google have both spent heavily in the first half of 2017. [Indiscernible] a good indicator of the overall health of our audience and the fact they flatten the first half is a good result. We started the year with good growth in viewing across the schedule from daytime through peak but in June there was no spot compared to the U.S. last year and that pulls us back to flat. However it's also important to remember that we don't sell [indiscernible], what we sell is simultaneous mass audience across all key demographics. Housewives, [indiscernible] therefore being the only broadcaster to deliver commercial audiences with over 5 million viewers and having 98% of all commercial audience of over 3 million is key to our success. We deliver just under 400 shows with audiences over 5 million which is actually up year in year and within this there's a good mix of genre with more viewing hours from drama and entertainment than delivered by the sites. This year we have the biggest drama broad show which is great for ABC 1 viewers .We have the two biggest types we have the biggest entertainment shows at BGT and Take Away for the family and female viewers. The second biggest factual at first half the Real Full Monty, and the Princess Diana show as Peter mentioned was the biggest of it's genre this year. And the Six Nations and horseracing help deliver strong male audience. We've made ITV2 a more focused channel and shows such as Family Guy and Love Island have driven our 16-34 viewer up 15% delivering a bigger share of young viewers in E4. The horseracing and sport has increased full male impact by 5% and again that's how we sell these channels. Having said all of that there's no doubt that viewing habits are changing. We estimate that just under 80% of all viewing remains live, around 12% is PVR which has been quite stable over recent years and there's growth in OTT viewing both SVOD and catch up. This means we need to make sure our content available in as many different devices and platforms as possible. But it also means we need to be paid for that content whether that's by the advertisers, the platforms or the viewers direct. We continue to invest in the hope and are proud of our award winning online service which is available on 28 platforms. We will continue to expand with request of 31%, viewing of 34% and with now around 20 million registered users including 75% of the U.K. 16-24. The biggest increase in online viewing is actually on the connected TV screen with viewing up 60%, this reflects the quality of the service and our concept and there's more investment to come in this area including personalization and we've been test marketing demand for ad free subscription service the Hub+. These developments plus our SVOD plans for BritBox and Cirkus two best of British content services outside the U.K. open up new ways for us to deliver more value from our content. And before leaving broadcast it's worth reflecting on the phenomenon that's Love Island. This is a great example of ITV as an integrative use of broadcaster. We brought this show back three years ago and Season One was just about okay, but we gave it a second chance. Season two took off and I might regret saying this but Season three has exploded. Its huge life with over 2 million viewers per episode and over 600,000 watching simulcast on the Hub and a further 1.5 million watching online catch up, it's the most talked about show on social media and we've sold out the branded t-shirt and water bottles. We shouldn't forget that this is a show we own and by the end of the year we hope to have a version of Love Island commissioned in most territories where we've a production business. Our studio strategy has been focused on returning formats and IP with the potential to travel and this is a great example of exactly that and it also demonstrates that younger viewers will-engage with unique TV. So moving on studios, and the business continues to deliver and expand internationally. Over half our revenues are from outside the U.K. and whilst the clarity are distorted by The Voice of China there's good growth across all other parts of the business and the U.S. in particular is having a much stronger year. At our headline with 7% revenue growth, 6% excluding this year acquisitions currency added £42 million excluding this revenues are flat. However for the full year we remain firmly on track to deliver good organic revenue growth excluding currency and acquisitions and our portfolio of acquisitions continues to deliver a double digit return in excess of our cost of capital. Looking at each part of the business U.K. production grew by 5%, £40 million, this good performance is driven by entertainment like The Voice, The Voice Kids, and The Nightly Show and a healthy supply of new dramas such as the The Lock, Phillis, and Little Boy Blue, our off-revenues were down as less can dine with me and the timing of various drama projects which will be delivered in H2. This also means that over the full year we're confident we'll deliver growth in our ITV revenues. The U.S. business having a much stronger year with revenues up 30% excluding currency. Shows such as Alone, Killing Fields, The First 48 and Fixer Upper were all delivered. I'm getting real traction with U.S. interest in our U.K. formats. In the first half we saw big star little start to the USA Network. Our U.S. drama business is also in better shape with the delivery of season three of the Good Witch and the [indiscernible] records. And the improved pipeline of new U.S. dramas has encouraging as we look into H2 and ahead to 2018. We delivered a few episodes of Hell's Kitchen in the first half but this is mainly in H2 and we also benefited from some episodes of Pawn Stars and Duke Dynasty slipping into this year. The rest of the world business is distorted by the China contract. But excluding this [indiscernible] continues to perform well, has produced several new formats this year, including Cannonball and 5 Gold Rings. We've seen good growth in Australia, not least from U.K. and telco formats and we've strengthened our French and Nordic through the acquisitions of Elk and Tetra bringing highly regarded new creative and commercial talent. GE is benefiting from our improved scripted pipeline in Harlet's Paul Dark, Victoria [ph] contributed to the 4% revenue growth. In the round, we remain confident over the full year and we've delivered good organic revenue growth excluding currency and acquisitions. We have over 85% of our target revenues secured and that represents over £100 million more revenue than was contracted this time last year. In the second half, the U.K. had a strong pipeline of returning drama led by Cold Feet and Victoria and there's new dramas next of kin, The City and The City and the new entertainment show, Cannonball. The U.S. has over 90% of its target of revenue secured and we'll deliver more Hell's Kitchen, Pawn Stars and as rumours were scripted Somewhere Between, a straight to series drama for ABC which was launched on Monday and pilot for TNT. And the quality of these shows, the real focus on returnable content with international appeal is also improving. So looking at this next chart, successful shows return. And as you can see, there's real growth in returning entertainment and drama, which demonstrates improved quality of our created talents and pipeline. Our business is to take risk and we don't expect every new project to work. But as we increase the volume of hours coming from turning shows, we build a stronger platform. The entertainment hour stepped up when we acquired Talpa but it's not just The Voice, whether 63 versions around the world, plus 35 versions of The Voice Kids, but it's also I am a Celebrity, Big Star, Little Star, the Chase, This Time Next Year it, Take Away, Pawn Stars and Love Island. In time, we hope that Five Gold Rings or Cannonball or any of our new shows will add to these hours and become global formats. On the scripted side, the improved quality of returning drama of the past few years, includes Paul Dark [ph] Victoria and [indiscernible] Forgotten, Cold Feet and again, we'd like the new dramas to match these hours but we'll also invest in one of our projects like Warship Down and Vanity Fair, if we believe there's an international market for that content. We now have 15 dramas and 5 entertainment formats sold to over 100 countries. And dramas such as Harlots, Fearless and The Lock, only this year, are already in over 80 countries, with 96 formats being produced internationally, often in countries we're also the local producer. And we talked before about how lumpy the revenues of these creative businesses can be and there's always churn in the portfolio. There's probably around £300 million of revenue that we had in 2016 that we'll not have this year. The returning new shows will offset this to the tune of around £200 million. Therefore, any growth comes from original new formats and content produced this year. Which is why having access to the best creative talent is key to the health of our pipeline and why continuing to invest in our business and our teams is crucial to our success. And of course, part of that investment is acquisitions. And in the first half, we completed Elk and Tetra, as mentioned above and Worldwide Production is the creator of Line of Duty which adds to our U.K. scripted scene. Alongside this, we've taken minority stakes in 2 startup studios in the U.S, Bloomhouse TV and Circle of Confusion, both aimed at strengthening our access to talents in the U.S. scripted market. And it's encouraging that we continue to have a healthy pipeline, a similar opportunities to further strengthen the business. The first half numbers are broadly what we expected for Studios. And because of good visibility of the secured revenue, the business is well set to deliver our targets, helped by the fact the pipeline of new shows and talent is probably stronger than it's ever been. Pulling all our numbers together to explain the profit movement. The NAR impact of £69 million which go straight to the bottom line. It is offset by savings in the schedule, profit growth from the other broadcast revenues and some cost phasing as discussed earlier. Studio is profit growth in all areas. But this is being offset by the impact of The Voice China. We've delivered £40 million of cost savings, well on track for £25 million of savings for the full year. And these savings are helping for investments in U.S. scripted and Online and Pay. Currency has added £8 million to business profit and the net of all assets EBITDA of £403 million, down 8%. Moving from EBITA down to EPS. Interest costs are higher reflecting the cost of our last bond issue which we used to finance our January bond repayment and the first payment to Talpa. The JV line includes our investment in BritBox U.S., the marketing for the new products is very much weighted to the second half and our shared of that will be reflected in this line. The tax rate is 19%, slightly lower than last year and a rate we expect to maintain over the next couple of years. Flowing all this through with EPS of 7.7p, down 9%. The main difference between these numbers and statutory numbers are exceptional items and amortization, which increased because we've reduced the carrying values of some of our small digital investments and Digo [ph] one of our U.S. production assets. In exceptionals, with the usual acquisition related costs, mainly accruing the burnouts plus the start of our spend on the London property development. Total exceptional costs for the half of £53 million. Cash flow and working capital management were main areas of focus, property cash conversion on a running basis is a strong 91%. There's been an increase in working capital of £114 million in the first half. £96 million of this relates to U.K. and U.S. scripted projects. We produced a lot of content in the first half, which will be delivered and paid for in H2. It's a reflection of the strong drama pipeline and just like last year, we expect most of this working capital impact to unwind in the second half. Our profit to cash conversion for the full year should be around 85% as previously guided. Net debt is just under £1.1 billion, given 1.2x net debt to EBITDA. The increase in both measures is primarily a result of the special dividend paid in June this year. At this level of net debt, there's still headroom against our debt ceilings and credit ratings which allows us to continue investing in the business both organically and through acquisitions. We have good access to liquidity with just under £700 million of undrawn facilities, and these facilities have long maturity profiles. Having repaid the 2007 bond in January, we have no bonds due until 2022. Pension deficit is relatively stable. On an accounted basis, the net deficit is £343 million, a slight increase due to bond yields and inflation changes. We are in the middle of our funding discussions with the trustees and expect to finalize these in Q1 next year. But I don't expect the material change to the funding deficit. We set out a new long-term sustainable dividend policy last year, aiming to pay around half of our earnings as dividend over the medium-term. In light of that, proposed dividend of 5% to 2.52p, demonstrates our confidence and the strength of the business in these uncertain times. And as far as our other guidance is concerned, the key message is no material change from what we said at the start of the year. We expect advertising to be down around 7% at the end of September with Q3 down around 4%. We still expect outperformance in the TV ad market for the full year. Online and Pay will continue to deliver strong revenue growth helped by continued investment in both these areas. The full year schedule costs remain unchanged at £1.25 billion and we'll be more evenly faced than we thought at the start of the year. And as discussed, Studio remains very much on track to deliver good organic revenue growth with profits expected to be broadly flat year-on-year. We'll be incurring additional CapEx of £30 million on new offices and studios space for the teams that are currently based in the London Tower. And if things go to plan, we'll vacate the tower by the end of Q2 next year. To deliver this, we will also have one-off planning move and asset write-offs to deal with and we expect these to add around £20 million to this year's exceptionals. So in total, exceptionals could be around £110 million. Our cash spend on the exceptionals should remain at around £150 million. Next year, we'll have increased property costs mainly rents and rates for the new space we're moving into and we'll give more details on the overall finance and accounting for the property project as it progresses through planning. So in summary, we believe the business is in good shape, performing strongly and well set for the future. Recognizing that we continue to operate in uncertain times. Thank you all for listening. I'll hand you back to Peter for Q&A.

Peter Bazalgette: Thank you. So we've got some time for some questions. And as usual, if you could tell us where you're from and the microphone here, please, Mr. Ian, and then if you pass it to your left afterwards. Thank you.

Operator:

Q - Ian Whittaker: Ian Whittake from Liberum. Three questions. First of all, just in terms of retransmission. So the sort of general view is Section 73, only really apply to cable in terms of direct impact. But your comments would prefer that you're looking to negotiate with both Sky and Virgin in terms of retransmission fees for ITV1. Will that be correct?

Ian Griffiths: Section 73 only applies to cable. But we have our general pay deals with both Sky and Virgin are coming up for renewal. So we'll be talking to about that the new deals going forward.

Ian Whittaker: And you would expect to include some discussion of ITV1 within that?

Ian Griffiths: We can't have a conversation with them as the rules currently stand about retrans [indiscernible] the main channel.

Ian Whittaker: Second of all just in terms of the sort of online advertising and pay TV would you expect sort of second-half growth to be similar to the first half? Or you would expect some form of pick up in the second half?

Ian Griffiths: We are confident in the Online and Pay side of it delivering growth but it's going to be hard to mitigate some of the shortfall we've seen on the Interactive side. So in the round, OPI will still deliver good growth across the full year and that will be driven by the Online and Pay side. We should have a better second half in terms of the compositions but it's been a tough first half.

Ian Whittaker: And then the third question just in terms...

Peter Bazalgette: That's the third and last question?

Ian Whittaker: Yes, yes.

Peter Bazalgette: Great discipline. My math is always greener model, Ian.

Ian Whittaker: We'll discuss that later. Just in terms of food. Food obviously very weak in the first half of the year. So you have the comments from Unilever suggesting that the second half of the year we'll see a pick up in their advertising spending. It's fairly early months, obviously you don't want to talk about monthly trends too much. Are you seeing any indication of that coming through? Or it is still early days?

Peter Bazalgette: I would describe it's still early days. It's interesting when you look at the categories as we mentioned going through it, the supermarkets who been spending less for the last 18 months or so and now are spending a bit more on the high street banks are spending a bit more than they have having been cautious for the last 18 months or so. But in the round, I think the best way to summarize it is corporates are being cautious and continues to be cautious and have been since the Brexit vote was announced. So there's no major change in trends or behavior since then.

Laurie Davison: It's Laurie here from Deutsche Bank. The first question is what is your ability to retain those savings that you made in the first half in programming and non programming? So is there any flexibility to keep those cost savings if the autumn advertising turns out to be weaker than expected?

Peter Bazalgette: We always have the flexibility in our cost base to manage within boundaries, certain things like marketing actually and what we spend on the screen. And it's always an interesting debate. If the ad market in the last quarter doesn't quite come through as you expect. Because I think part of the debate is how strong do you want the business to be going forward for when the market does improve? And yes, we can pull that marketing. Yes, we can pull back investment in projects. Yes, we can delay a few dramas out of '17 to '18 if we wanted to. But we may choose not to because it may be the right thing to do for the health of the business to spend £1.25 billion on screen, to commit to the investments we're making in the Hub and U.S., scripted and just deliver our plans in that sense and let the ad market be what the ad market is. Our job is to make sure we build a stronger resilient business in the medium term, not just to hit a number at specific points. So we have got options. We're delivering our cost savings, we are taken £25 million out of the schedule, which we said at the start of the year, driven primarily by sport. There's always things we can do. I would not like to say we'll do them because we take those decisions at that point in time.

Ian Griffiths: You had a second question?

Laurie Davison: Yes. Are you happy with 5% of revenues coming from digital -- or sorry, from online?

Peter Bazalgette: Are we happy? We'd always like more revenue. I think we're doing a really good job on the Hub. I think the take up of 20 million registered users, 34% growth in viewing, I think the Hub is delivering something that viewers want. And our job is to make sure we maximize the value of that. And I think how we sell that, how we monetize big events like Love Island, they're all things that we are learning and I think we can do more with in the future. But I don't think we're being out shouted or under performing in that area. I think we're building a really good business.

Laurie Davison: Do you need to invest at all into additional areas that we've seen peers invest into in terms of short form content, in terms of data and analytics? And in terms of your actual programmatic side?

Peter Bazalgette: There's lots of different areas that people have invested in. I think when you invest, you need to be investing with the view of getting a return because that's our job is to invest capital to deliver a return to our shareholders. Short form, we remain to be convinced whether this economic model does deliver value to shareholders over the medium to long-term. But we are investing a lot in this area in terms of both the Hub, improving the quality of the Hub, we're looking at the Hub+ and how that market rolled out. We're looking at SVOD and BritBox in the U.S. We've got Cirkus in the Nordics launched in Germany this year, what our plan to that, how do we make that an international proposition, they're all things that are firmly in our card. Technology itself is an interesting, investing in the infrastructure behind some of these areas. I'm not today totally convinced there's value in that because I think actually where the value is having something unique that you offer advertisers and viewers and that's about the quality, the contact, the quality of your inventory and the data and analytics that underpins that and we're doing a lot of work in that area building upon knowledge and standing of who's watching, what, where, when and how. But in terms of revenue, at the moment, there isn't much. And there isn't much for anybody.

Peter Bazalgette: As time goes on, advertising will be very data rich. we'll be competitive in that way.

Laurie Davison: Okay, and last question. Visibility on '18 is on advertising is going to be very limited. But at the moment, we've got consensus expecting growth for the next two years flat to plus 1%. Is there any prospect that you could actually see it flat or positive market over the next 2 years?

Peter Bazalgette: There's always a prospect. And yes, as for our forecast, everybody knows that we don't guide on NAR -- views on advertising or far and wide further consensus for next year might be I think it's flat in the round but actually is quite broad spread and I think that's just an indication of the uncertainty that exists as people looking at that market could do and the state of the U.K. economy. As is always the case, we plan conservatively. We stay very focused on cost and cash and we manage the business that way and we'll start putting together our plans for 2018 in due course. But sitting here today and Kelly's in the front row, he's going to need to find September nevermind for 2018 and that market hasn't changed. So corporate behavior hasn't changed, booking patterns haven't changed. The comps are getting easier so you can see how the momentum might improve but we'll see.

Laurie Davison: Are you -- is your planning budget based on a similar assumption and consensus?

Peter Bazalgette: Our planning budget is cautious as it normally is. Okay. Can you bring the mic right at the end here. We'll take an action date and we'll take you off there. Controversially switching the mics from side to side because the mic is being commandeered in the middle.

Lisa Yang: Lisa Yang from Goldman Sachs. A quick follow up on Laurie's question. So on the £23 million decrease in other broadcast and online cost in H1. How much of that was exactly phasing?

Ian Griffiths: How much is phasing? I'm not going to split it out. But what we have shown very clearly on the profit tracker is we're on track to deliver our cost saves. We said we'll deliver £25 million of savings out of our overhead. We delivered £14 million in the first half and that's very clear. You can see some of the savings on the schedule side which is purely phasing, that's just moving program spend and commitment from the first half to the second half so the overall program doesn't change. And then we've got the marketing investment which is going to take place more in the second half of the year and I think that just gives us the question, a bit of flexibility. But if we had a choice, we would be investing that right behind the business because that's the right thing to do.

Lisa Yang: On the studio side, you are still maintaining good organic growth for the full year. I mean, clearly, when you look at the first half, it looks like internal revenues has been driving all that growth of about 14%. So how do you see internal versus external revenue on a full year basis?

Ian Griffiths: That's only in the U.K., the internal revenue. Outside of the U.K., we're delivering good revenue growth across all parts of the business and the rest of the world is suffering from the comps of the The Voice China. But the U.S., the revenues are up 31%. So we have got growth across the business. So we're not just the U.K. Studios business. And I think you couldn't have been clearer that we expect our off [indiscernible] revenues in the second half of the year driven primarily by the pipeline of dramas we've got coming through. So on a full year basis, we expect off [indiscernible] revenues to grow as well.

Lisa Yang: And the last question is more on the health of TV advertising. Clearly we are seeing a big disconnect between advertising macro not just in the U.K. but also elsewhere in Europe. So what makes you confident the slowdown or deterioration we've seen so far is more related to Brexit and cyclical issues? As you mentioned, food company seeing more pressure from rising input cost and FX rather than just advertising really start to shift away from TV into online?

Ian Griffiths: Well, television advertising is cyclical. And it remains cyclical and that is the main influence on our revenues and that's what you see in the economic uncertainty. Of course there are structural changes to our business. In particular, viewing habits of the younger viewers, which of course we meet with some of our online video services. But the main influence in our belief is cyclical.

Peter Bazalgette: There's plenty of research that shows TV remains very cost-effective as I mentioned. Plenty of research shows in terms of return in terms of driving revenue, driving market share, driving brand awareness, TV is really, really effective, the most effective way of advertising. So our job is to make sure that when the ad market comes back and confidence returns, that businesses are healthy and strong as it could possibly be. So keeping the schedule strong, the mix of shows on the schedule strong, delivering that diverse audience on scale quickly, that's our USB and as long as we do that, when confidence comes back, I think TV and ITV in particular will be well-placed.

Peter Bazalgette: You can almost refer to the fondness of digital online companies for brands, for television advertising is the meerkat syndrome. And the truth is, and Ian alluded to earlier in the presentation, the fact that Amazon and Google and indeed compare the market dot com as such, big spenders.

Peter Bazalgette: On television advertising shows that there is an ongoing some biases between mass simultaneous advertising and one-to-one advertising online.

William Packer: It's William Packer from Exane BNP Paribas. A couple of questions. Firstly, in terms of the retransmission fees outlook, could you kind of hold a handle a bit and take us to the path towards achieving those fees, perhaps your timeframe and then what kind of bargaining chips are you having on your side to be able to achieve them? Do you have for example the legal right to turn off ITV from Virgin if that was something you wanted to do, what to get permission to do that, what kind of bargaining chips could you use on that path. And yes, just that one question for now.

Peter Bazalgette: Okay. Do we have the legal rights to spend on ITV? Yes, we do. We believe we do. I'm sure it will be subject to a lot of too and fro but I think the whole discussion will be subject to a lot of too and fro it will be a proper commercial conversation where both sides will be negotiating. And Virgin will start from a position that they don't want to pay and we'll start from a position that one of the things that's most valued and probably the most valued thing on not just the Virgin platform but all of the pay platforms is paid SBS content. If that content is not available on those channels, would you subscribe to it? And I think that's a really important point that they need to accept which I'm sure they do. At the moment, we have deals with Sky and Virgin for all of our content. The only bit they don't pay for is the thing that's most valued by the viewers which is the main channel. And the functionality around that main channel, the fact that they're allowed to record it and skip the ads, all of that stuff, they don't pay for. But they do pay for catchup, they do pay for the HD versions of our channels, they are used to paying the stuff that is valued by their subscribers and this is no different and that's the debate we'll have. So we've got lots of levers in our debate with them because there's lots of things we do with them and for them. And sell to them. And as I say, it will just be a normal commercial debate. It might take a bit of time but it's great that we can do have that conversation which historically we've not been able to.

William Packer: Just a follow up to Lisa's question in terms of the structural versus cyclical dynamics. Your digital peers have delivered some very, very strong revenue growth in the last 18 months. What have you struggled should imply market share loss to TV did you accept that? Or do you still argue it as primary cyclical?

Peter Bazalgette: The shares move around in time. But I think where we are today is cyclical. I think when confidence comes back, TV will be incredibly well-placed. Because what we do and we offer advertisers is unique and our job is to sell that better to the advertised brand owners. So they realize following the herd and spend the money over here on cheap impacts on digital isn't as effective usage of marketing budget as spending it with us and our job is to sell our story better because the research is there. The evidence there. We just need to land them. So that's our gift because what we do is great.

Tamsin Garrity: Tamsin Garrity from Jefferies. The dividend was a nice surprise in terms of increase could you talk about what you're looking at for the full year both in terms of potential growth in that ordinary dividend? Could we be looking at the same level of growth which will be an uplift to consensus forecast and what you might be thinking in terms of a special? And then secondly, just looking at the Love Island numbers are obviously very impressive. Could we talk about the economics behind this, please?

Ian Griffiths: Should we deal with the dividend first?

Ian Griffiths: Yes, I think the key thing about dividends is as we think both Peter and I both said is a measure of the confidence in the board in the operating performance of the business are stronger than our cash flows. When you look at the final dividend, we analyze where we finished the year and we are very clear our policy is to have a sustainable dividend that moves with our earnings. But over the medium term, we are paying out around half of our earnings and we will set the final dividend in that context. But I think the interim should just be seen as, at this point in time, the board is confident will deliver what we said we'll do. And the special -- we will -- again, it's the same thing. We look at where we are when we get to the end of the year. We'll look at the strength of the balance sheet, our levels of net debt, the investment pipeline of opportunity we've got coming through and also in that context because Caroline would be here at the time, what her plans are. So all of things will form our view of what we do at year-end, both probably in the ordinary and on the special. But I think in the ordinary, we'll be much clearer in terms of what our commitment is to the board in terms of what where we're looking to achieve.

Peter Bazalgette: On Love Island. You say very impressive performance. There's long-term value in that for us because it's both popularizing ITV2 as a destination for young viewers and in fact, it's made ITV2 now the top digital channel for 16 to 24 years old. There's long-term value in its success for us in getting more registered users on the Hub. Again with a very high level of 16 to 24 -year-olds. And getting the Hub used better and better as the service improves and becomes more targeted on people's preferences. But the thing is that Love Island has doubled its audience this year. It's average audience last year is 1.3 million, it's 2.6 million this year, for the final show and is pretty well there was audience across the series, yes?

Ian Griffiths: Yes.

Peter Bazalgette: And that means we have an opportunity to monetize it much better next summer because you don't know in advance when a show is going to get a very high rating. But next summer, when Love Island has its Series 4, we'll be able to do better deals and we'll be able to leverage the advertising possibilities and sponsorship possibilities even better than we have up to now. So the next question? Thank you. Can you pass the mic along there?

Adam Berlin: It's Adam Berlin from UBS. The question, Ian, about -- you spoke about the healthy balance sheet. What do you think the upper limit is on the adjusted net debt-to-EBITDA ratio, I think it was a 2.4x at the moment, do you think that can still go up?

Ian Griffiths: Yes, I mean, the important thing for us on the balance sheet, and we've said this a few times before, what we've got with the 1.5x net debt to EBITDA as a ceiling is really a proxy for our commitment to maintain our credit rating. It's very important that ITV keeps an investment grade credit rating. Because having access to capital is important for any business that's looking to invest. So the net debt to EBITDA is easy one for people to sort of see because that's public. Is what we report. On an adjusted basis, we put the other commitments which is how the rating agencies look at it. And somewhere between 2.5 and 3 that's sort of the range that we're comfortable with. So the over arching point is maintaining that investment grade rating.

Peter Bazalgette: We've got time for one more question. Yes, thank you very much.

Ruchi Malaiya: It's Ruchi Malaiya from Bank of America. Within the Q3 guidance of minus 4, I think within September you talked about flat to minus 5%. So, I'm I right in saying that the range around that Q3 guidance then could come out anywhere between minus 3% to minus 5%? And just remind us how much visibility as you have at this point in the September and how much you factor in terms of like money [ph]?

Peter Bazalgette: This is NAR to be clear.

Ian Griffiths: Yes.

Peter Bazalgette: You're pretty much right on the range in terms of what the outcomes could be. We are early days in finalizing on them for September. We've had some of our booking deadlines but we haven't had all of them. But do you think September is such an important month in terms of having people understand momentum that we are forecast like we always have done. And we have the approached that forecast in the same as we would normally do. What's happened since in the past 18 months is the amount of late money in the market that comes in post the booking deadline has initially disappeared commence, it's come back at a smaller level and we factor that into our forecast. So we haven't got a huge bump expected in September for late money coming into the market. It's our normal expectation and normal planning. As you see from the guidance we've given so far this year where we've given a range of given a number we've actually hit it. If you take June for example I think we said that it will be down 15% to 20% going this year as last year we came in at 18%. So I think we are planning on uncertain times and our forecast reflect that uncertainty.

Peter Bazalgette: Okay, thank you all very much for coming. Ian and I are very grateful to you. We also let's say we have our senior colleagues sitting in the factor over here. We want to thank them for their part in our results for the half year. Challenging half year but a lot of extremely hard work to produce the results and the great shows that we have. So thank you to you. And see you next time. Thank you very much.