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Earnings Transcript for ITVPF - Q4 Fiscal Year 2014

Executives: Archie Norman – Chairman Adam Crozier – Chief Executive Ian Griffiths – Group Finance Director
Analysts: Will Mairs – Nomura Ian Whittaker – Liberum Lisa Yang – Goldman Sachs Alex DeGroote – Peel Hunt John Karidis – Stifel Financial Julien Roch – Barclays William Packer – Exane BNP Paribas
Archie Norman: Right, good morning everybody, it’s great to see you. I am Chairman of ITV, trying to take as a fairly miserable view of the results, but it’s quite difficult to take a miserable view of this slot. So the real point about today to me is that we’re now five years into the transformation program that was set out when Adam arrived. And this set of results is a very good illustration of the progress that we have made not just in operating performance, but also the shape of the group, the clarity of the strategy going forward and of course the strength of the balance sheet and cash flows. So it’s in a way of sort of end of one era and entering a new era. Adam is going to introduce the results and he is going to take us through the exciting detail and then Adam will say a few words about the strategy going forward. And this is very important film that Adam will introduce to, entertain you all. And at the end of the meeting, we will take questions and then there is a number of – the executive team here and we all are very happy to chat and have another cup of coffee or whatever you want. Okay, Adam?
Adam Crozier: Thanks, Archie. Good morning everyone. It’s great to see you all here and thanks for taking the time to joint us. As Archie said we’ve got a short presentation this morning, plenty of time for questions at the end. But just as always to get everyone the mood because no ITV presentation would ever be complete without one. We’re just going to run a short video just to remind you of all the terrific programs that drove our performance last year and give you a little bit of a look ahead to what’s coming over the next few months, so we could run the video please. Thank you. [Video Presentation] Hi guys top question on the press call this morning was what did I think of Martin Clunes his Scottish accent and Arthur and George. Got them, getting all they got the priorities right, it’s better than mine by the way. And anyway to the results, as you know it’s been another year strong growth for us and we’ve made significant progress right across ITV as Archie said. We continue to rebalance the business, drive in your revenue streams and invest in future growth. And if we take a look at the highlights, external revenue up 8% within that advertising revenue up 6% versus a market we estimate that was up 4.5%. First half was up 7.2%, second half up 4.1%, obviously we had the Football World Cup in the first half. Non-NAR revenue up £116 million or 10% now 45% of our total revenue, that was driven by ITV Studios revenues being up 9% and our online pay and interactive revenues up 30%. Strong revenue growth and delivering volume from our investments in high quality content, plus cost reductions of around £15 million have let earning growth at every level across ITV and broadcast profits up 17%, ITV Studios up 22%, for the Group up 18%. Adjusted PVT and adjusted EPS, both up 23%. As you can see from the announcement this morning we got confidence in the ongoing trends of the business and we really do see clear opportunities for growth and further investment in the business, whilst increasing shareholder returns. And as you know we have a commitment to at lease the 20% per annum growth in the ordinary dividend for three years. Actually the Board just proposed a final dividend for 2014 of 3.3p which equates to full year ordinary dividend of 4.7p which is up 34% year-on-year and we’re proposing a special dividend of £250 million or 6.25p per share. And Ian will take through a little bit latter in the presentation of how that fits into capital allocation framework. And by focusing on delivering consistently against a very, very clear strategy, I think, we’ve delivered very strong results over each of the last five years. And as we are lined at a half year results in July, as we enter the next stage of our growth plan, we believe the original vision we had for ITV remains as relevant as it were. And there is no changes, you know, in our strategy going forward. However, as you also know, and just to remind we have evolved a corporate priorities to focus on the three key areas of growth as we see them. First of all, to maximize audience and revenue share from both our free-to-air broadcast and our video on demand business, because video on demand viewing will in the long-term become part of consolidated viewing. And we will take the view that is screen is a screen and a view is a view irrespective of what we’ve seen on. Secondly, to keep growing our international content business, to meet the increasing demand from all these new and multiple platforms and these new and multiple platforms. And thirdly, to use our increasing scale of IP ownership and program assets to build a global pay and distribution business overtime. And as we continue to rebalance the business and grow new revenue streams both organically and through acquisition, that will obviously be an increasing emphasis on the international content creation and distribution. But as always, it’s all about execution for us. So how did we do in terms of that last year? So firstly, maximize all these share and revenue share from free-to-air broadcasting board. Broadcast and online business continues to perform very strongly. We look at first of all, TV more generally, linear viewing was on average around three hours 41 minutes a day, last year, still very strong. Actually it’s at the same level it was at in 2005. And it’s quite interesting this slight dip last year, when you really look underneath the skin of the numbers is coming from those people who watch more than four hours a day. In other words, this is the very heaviest viewers watching list and that would tend to fit with more people getting into employment. So this is coming back to viewing levels around the same as pre the recession. Was interesting there is that if you look at that viewing 98.4% of viewing is done on a television set and around 88% of it live. So it’s still in reasonable health and if you look at those other devices as the growth is very strong as worth reminding ourselves that only around three minutes thirty seconds of viewing on average a days on another device. So still relatively small but growing reasonably quickly. And our ability as you see on the top right chart there to deliver unrivaled mass audiences is strong as ever and absolutely it is our key commercial proposition we delivered 99.4% of all the commercial programs with an audience over 5 million 95% of all the programs over 3 million and that has remained consistently strong throughout the last few years. And that’s what drives our advertising proposition. And economic recovery is driving advertising growth across most categories as even we’ll show you later and our ability to deliver those mass audiences is driving our growth in share, NAR was up 6% giving us a share broadcast of 45.9% and which is our strongest outperformance of the market in five years and we absolutely do expect to outperform the market again this year. This year, we also launched ITVBe and repositioned ITV2 and if you look at the combined share of those two channels in the forty weeks before the launch and then subsequently the combined share is up 13% for individuals and 12% for 16 to 34-year old, so the combination of the two channels going forward it seems to be working for us. And clearly one of the focus is for us is on improving the ITV Family share viewing on screen which fell last year by 5%. In other words, we effectively gave up the 4% gain that we had from the previous year. Despite investing around £35 million more in the schedule last year which of course does remind us, as it is not just about the amounts of money spent. And we’re making progress in turning that around the digital channels, if you look at the digital channels performance last year in the first half of the digital channels were 10% down, in the second half of the year they were 2% down and year-to-date this year they’re 4% up. So we have gradually turn those around we’re very focusing on trying to do same for the main channel it take slightly longer there because of the type of programs they take longer to come through the system but as we look forward to what we’ve got coming in terms of high quality drama and sport, I think we can do so with some confidence. But we remain very focused on that. Online viewing continues to grow strongly as I said earlier, our online viewing was up 26% year-on-year driven by number of different things, ITV Player app downloads were up 41% to 16.5 million improved distribution were now on 20 platforms and we very much support the key connected TV platforms that really make our content prominent. We got free view connected to come later this year, but if you look at the performance, if you view for example its now in around 1.8 million homes versus 1 million at the end of last year and our viewing request on eViewer up 88% year-on-year. So again a very fast growing platform for us. All of which by the way is helping us to build a database which will be a great use to both in future we now have a 8 million registered users and that’s up about 129% year-on-year. So in summary Broadcast and Online business continues to perform well profits up five fold as you can see bottom right there over the last five years and up 17% year-on-year and we believe very much set for future growth. The Studios business growing our international content business it’s a second key priority and ITV Studios have delivered another strong year of revenue and profit growth driven primarily last year by acquisitions and with margins improving from 16% to 17%. If you look at the UK first of all ITV Studios last year had around 60% of network commissions versus 59% pervious year and versus 50% in 2009, healthy pipeline last year of new commission is 149 new commissions versus 121 in the previous year. And 13% growth in what we call off-ITV, 13% growth for programs we produced for other broadcasters in the UK. But total revenue in the UK only up 1% due to the network spend on the World Cup and therefore reduced spends on original programming. On the international side, we’re investing there three further acquisitions in Le4field, DiGa, and United, which is based in Denmark. The U.S. business is now the largest unscripted in the U.S. and we’re working with 45 networks in America and we have 141 programs on air in the states. And through its strong growth over the last five years, ITV Studios I think is becoming a well-established global business of scale almost half of its revenue generated was outside the UK, now for a 47% of the total and we have 24% growth in international revenue in 2014 alone. And I think we are now fit to compete in a global market that’s worth around $50 billion and growing at a rate of around 5% to 6% per annum.
, : The second key area of focus for ITV Studios is in creating more formats that travel internationally. We currently have 36 formats ITV S that were sold internationally, 12 of them in three or more countries, once that continues to do well like Come Dine With Me, Hell’s Kitchen and The Chase and big new commissions which includes Saturday Night Takeaway in the U.S. for NBC, which we're also now doing in France. And I’m celebrity for Australian TV which naturally enough we're filming in South Africa. So Studios business is in good shape and as you can see has done extremely well over the last five years. To meet that global demand, I thought that was worth just highlighting where we are in ITV Studios to meet that global demand for high quality content and to continue to deliver growth. We use what we described as a mixed economy model and it’s very much focused on the key creative markets. We have acquisitions, as you know like Leftfield’s in the U.S. and The Garden, and Big Talk in the UK. We have associate companies such as Tomorrow Studios, which is a JV with Marty Adelstein in the U.S. which has produced Aquarius for us. And Mammoth Screen in the UK where – for the network they are doing two dramas
Ian Griffiths: Thanks, good morning, everyone. I’d like to leave the previous slide a bit longer, but we need to get through this. As Adam said against all the key financial measures, we’ve had a strong year, good revenue growth across our business, 18% EBITDA growth, a 2% margin improvement, EPS of 23% and strong cash flows underpinning the strategy. The progress we’ve made and the confidence we have any outlook, being more propose to increase ordinary dividend like 34% to 4.7p. And in addition, return £250 million to shareholders by way of a special dividend, more or less later. Looking at revenue, with total revenues of just under £3 billion, up 7% with both businesses delivering good growth. 7% is just over £200 million of new revenue. £87 million of this is NAR, spot advertising, which continue to deliver good growth even after the football world cup. Studios, delivered £98 million of revenue growth, before currency. This is mainly from new acquired businesses. And we had £35 million of growth, Online, Pay & Interactive, which is now making a material contribution to revenue and profits. The group continues to rebalance away from UK spot advertising and 45% of our revenues are now non-NAR. In profit terms, we delivered over £100 million of year-on-year growth, up 18% to £730 million. On the back of the good revenue performance, both businesses delivered strong profit growth, Broadcast up 17% and Studios up 22%. Margins in both businesses increased and the group margin is up 2% to 28%. Studios benefited from a change in revenue mix, cost savings and six months at the high margin Leftfield business. In Broadcast advertising has always been operationally good. Every £1 pound increase in revenue is a pound of extra profit and cash. For the new revenue streams in Online and Pay are also high margin. £35 million of new revenue has lead to £33 million of incremental profit before additional accounting cost. We’ve remained focus on overheads and the £15 million of savings is again funded on our investment in the creative pipeline, a new channel launches. Financially, Broadcast has really strong gear. For the first time the business delivered over £2 billion of revenue, up £127 million year-on-year. And as these are high margin of revenues profits have increased by £81 million, up 17%, with margins increasing 2% to 28%. ITV family NAR is up 6%, ahead of our estimate of the TV ad market, which we think is up around 4.5%. This means, our share of Broadcast spot revenues 45.9%, a gain a 0.5 percentage points, our largest gain over the last five years. And as you can see Online and Pay revenues grew strongly up 30% or £35 million. We continue to invest in the business, the schedule costs have increased to include the World Cup and content for our new channels and one of the costs include the launch of marketing investment to be an Encore. The £1 billion investment we make in Broadcast content is increasingly driving value to other parts of the business. Over half of this budget is original commissions to the main channel, many drama and entertainment. It’s this content that’s watched across the various broad platforms through ITV player and it’s also this content that’s on our HD channels at Encore for which we get paid by the platform operators. Board requests driven by mobile and connected TVs are up 26% and this created the advertising capacity for us to grow our own line revenues by £11 million. Pay revenues were up £20 million on the back of improved deals for Sky and Virgin, plus six months of ITV Encore. Our investment in content will increase by around £20 million in 2015 to support a full year of the new channels. There will also be more drama in the budget which not only helps season new revenues, but creates opportunities for ITV studios. Looking at advertising, and as we said at the half year we’ve seen strong growth from retail, food, finance, entertainment and leisure, the largest advertising categories. And as expected, male orientated spend, particularly gaming, financials and autos, performed strongly around the football. Other than a brief pause over the summer, the growth was consistent over the second half. And we saw 4% growth in both Q3 and Q4. 2015 has started strongly and it’s reassuring that the growth continues to come from the key categories. However, we do expect the shape of this year to be very different, with peaks in spend happening now and around the Rugby in September. The post Easter and summer months could be relatively quiet. Having said that, the fact that all key categories are continuing to spend is encouraging for our full year outlook. ITV Studio has delivered 9% growth in total revenue, £98 million of constant currency. As the business becomes more global we become less reliance from the UK market and more exposed to faster growing international and distribution businesses. This also means more exposure to currency translation movements. And these results would have shown £22 million more revenue and £5 million more profit, if rates have remained unchanged the prior year. Organic revenues grew 1%, mainly the international business, with the UK largely flat, our results of lower ITV spend, however, as Adam said, we did secure an increased share of the slightly reduced commission budget. The headline growth is from acquisitions coming through as planned, primarily with Leftfield, the margins have increased as a result of the acquired businesses, cost savings and some changes in our revenue mix. We’ve had a good year in finished tape sales as could be seen in the GE numbers. So it’s remaking the chase takeaway and on the celebrity and more territories as all helped the margin. As Adam said one of our key priorities is building a scale to scripted business. This year we invested around £50 million in funding dramas, such the Jekyll and Hyde in the UK, and Texas Rising, The Good Witch, and Aquarius in U.S. All sold straight to series and all the good international distribution potential. This slide is illustrative only. And what would find to do, is show the economics on an example project. The deficit is a different between our cash invested to produce a new series, and what the host commission we will pay to Broadcast. The deficit gets covered by sales to other international broadcast or platforms. We know we make more money from a successful returning series that we own such as the Selfridge, Lewis, Vera, than we do from dram such as Broadchurch. The history shows as some of these projects may not work, which means the returns are increasingly recognized over time as dramas prove their success. This means that we will need a portfolio of series to balance the risk. So we’ll continue to invest in these dramas, so the strong cash flows and margins of returning series will support the investment needed to fund the pipeline and new projects. In 2015, we’ll to start see the revenues coming through from our initial scripted investments plus we have the launch of Thunderbirds on a full year of Leftfield. All of which means that we expected a revenue growth of around £100 similar to 2014 with a better mix between organic and acquired. Back to the numbers and these results are strong all the way down to P&L, 18% growth in EBITDA, 23% growth in pre-tax profit, 23% growth in adjusted EPS. Financing costs are down following the redemption of the convertible and the buyback of the remaining 2019 debt. The effective tax rate is in line with our original guidance of 21% and should stay at around this level for the next couple of years. In the future, cash tax will be more in line with the P&L charge. Our statutory EPS is up 40% versus prior year included to one off costs of various bond buybacks. And the number of shares used for these calculations has increased by 2% following the redemption of the convertible. On our usual planning guide for 2015 modeling is included in the additional information in the back of the pack. One of our key financial strength is an area of focus remains our cash generation. Profit to cash conversion is 91% lower than last year because of the £47 million invested in scripted projects. This is evidence in the working capital build-up and as discussed it represents a good use of cash and we’re planning for further investment in 2015. Adjusted free cash flow before M&A and dividends is up 10% to £478 million. The strong cash flow has funded £330 million of dividends we pay to shareholders and £240 million of acquisitions, primarily Leftfield. This tight working capital management and strong underlying cash flow means that even after over £500 million of dividends in acquisitions. We’ve ended the year with a positive net cash position. And it’s our confidence in ongoing cash generation of the business and potential for future growth has enabled us to give more clarity on our capital structure and dividends. At the interims, we said the ordinary dividend would rise by at least 20% a year from 2014 to 2016 with a view to achieving a level of cover between two and two and half times. In line with this policy, the strong growth in our EPS remains as appropriate to increase the full year dividend ahead of our previous guidance. Therefore, we’re proposing the final dividend of 3.3p, giving a full year of 4.7p, up 34%. We also recognize the importance of capital discipline and we’re running an efficient balance sheet. However, because we continue to see plenty of opportunities for growth, we need flexibility to invest. With strong cash flows, our positive growth outlook and a more balanced business, now it’s the time for us to gradually increase our leverage. Hope around 1.5 times net debt to EBITDA will optimize our cost of capital, allow us to maintain our progressive dividend policy and retain the flexibility to continue to invest. A special dividend returning £250 million to shareholders reflects as confidence in our cash flow and is in line with its policy. Putting everything together, we’ve had another strong year and the outlook into 2015 is positive across all parts of the business. Our approach to balance sheet and shareholder returns reflects the progress we’ve made whilst at the same time we still see plenty opportunities for further growth. Thank you.
Adam Crozier: Thanks, Ian. Just a couple minutes more and then we’ll move to Q&A. I just want to very quickly remind you of the key strategic opportunities for growth that we have and where our focus will be this year and then give you a bit of a view on the outlook for this year at the same time. First of all on the opportunities for growth and we outlined these at the half year, they haven’t changed, but I just want to handpick out one or two. In the first column, clearly as we’ve said, economic recovery is driving growth in the ad market. We will be very focused on maintaining our unique scale and ability to deliver those audiences and growing our share of the total TV and VOD advertising market, a lot of focus going into that. In the content side, we continue to work on developing and creating high quality IP, absolute emphasis on formats, international formats that travel and also using our strong cash flows to produce high quality, high profile dramas straight to series and over time to build that portfolio. And if you remember we said we were looking to do around 6 to 10 scripted projects per annum, this year we will have 12, so we’re performing a bit ahead where we expect it to be. And obviously within that as with any creative company, we’ve got to continue to attract and retain great creative talent to generate those more hits and to continue to look at acquisitions in line with that strategy and in line with that focus that we’ve outlined. Third area develop – the key things for us there are to develop new pay services and channels using the increased IP that we have and we’re looking how we can take those forward not just in the UK but internationally as well. Of course, we’ve that mentioned that before secure retransmission fees in the medium-term. I think everyone is aware there are reviews now up and running by both the government and Ofcom looking at [indiscernible] post the election and we want to continue to scale our international distribution business, so that’s where we’re going to be concentrating our efforts this year. Final slide just looking to the outlook for the year, in summary, as Ian said, a very strong set of 2014 results means we’re entering 2015 in good shape and with really positive momentum. The ad market recovering now we expect to be up 11% in quarter one and 4% to 7% in April. For those of you who likely detail that means January was up around 14%, February 13%, March looks like being around 8% up, quarter one last year was up 2%, so clearly much stronger growth there. As Ian said, the growth continues to be across most sectors. If you look at the start of this year, as opposed to the numbers as Ian showed retail is up 19%, finance up 13%, food up 10%, telecom is up 32%, which probably reflects where a lot of activities, cars up 15%, but it will be a different shape. Easter although it falls in April, it’s right to the beginning and really the advertising spends by and large is in March. And actually that’s quite interesting, Easter last – April last year was up 19% with Easter and it is still up 4% to 7% without Easter, so I think that’s the sign that the market is reasonably positive, but it will be a different market. I think if you look to last year, there was a bit of a pause when the devolution bill was going through in Scotland, a very short pause, I suspect there might be something similar in May with the General Election and then you’ve got the absolute shift from the Football World Cup not being there in June versus the Rugby World Cup being there in September and October. So note a slightly different shape, but generally a positive market and we do expect to outperform that market. Online pay and interactive revenue I think we can see we will continue to grow strongly and as Ian said, I think in studios we again expect to deliver around £100 million of revenue growth on a constant currency basis with a return to good organic growth. Within that keep and maintain a robust efficient and flexible balance sheet and we can see clear opportunities as I think we’ve outlined to invest in front of the growth whilst increasing shareholder returns at the same time. And overall I think as you can probably see, we expect another good performance in 2015. So thank you very much for taking the time to listen and we’re very happy to answer any questions that you have. Thank you very much indeed.
Archie Norman: Well done. All right, we will take some questions. There are microphones available, so please wait for the mic, introduce yourself and I am afraid of speaking myself, I can only cope with one question at a time, so we will come back to you for the follow on. So we start off on a front row here.
Q - Will Mairs: Great, thank you. So Will Mairs from Nomura. Three questions. First one just on [Multiple Speakers] I am sorry. First one just on your leverage target, how quickly do you think we can expect to get up 1.5 times? So should we expect to use to pay maybe special dividend at the year-end subsequently you get up to the even one of the half. So that’s one.
Archie Norman: [Indiscernible]
Ian Griffiths: The answer to that is, no; you shouldn't expect us to pay special dividends to get to 1.5 times. The purpose of setting a 1.5 times, the way we’re looking at it is more of a ceiling and as I try to explain as I was talking through it, we need to keep the balance on our balance sheets in terms of doing the right thing for shareholders, but also keeping the flexibility to continue to invest. And, as both of us said, we still see plenty of opportunities to invest to grow the business. So we got to keep that flexibility below 1.5 times or around 1.5 times, our cost of capital is optimized and that’s very important as we’re looking to invest. So running the balance sheet at around that level is good, its got the flexible to support strategy. And we will get there overtime, I think, the key takeaway is what prepared to take more risk onto our balance sheet than we have done historically. And I think that should be a positive statement around the confidence we have in the future growth and cash flows in the business.
Will Mairs: Thanks. Just the second question then. I mean in terms of Studios would you agree that perhaps now that you’re investing more in international scripted shows that perhaps the dynamics this year is becoming temporarily more risky because obviously you need that portfolio to grow if hit shows and I guess over the two to three years as you invest in that there should be more volatility in the margins perhaps.
Adam Crozier: Well, that the margin mix will constantly change depending on the kind of shows we produced because whether its an international format, a drama, a factual program, some travel, some don’t, some later stages whether on third, four series their rates are very different. So the mix is a constantly changing one. And therefore the margin may move around a little bit but actually the important thing for us to focus on, is growing the top line we spend much more time worrying about that and then running the business as efficiently as we possibly can. I think it’s also we’re saying whilst growth last year was primarily driven by the acquisitions, I wouldn’t want people to think that that means there is an issue with organic growth. I mean first of all we’ve said very clearly that we expect ITV Studios show good organic growth next year. But obviously if you look even at last year the organic growth in the U.S. was around 5%, in the rest of the world it was around 7% for GE the organic growth was around 10%. So there’s plenty of good organic growth within Studios the area where there wasn’t good organic growth was in the UK which had very specific reason which is a lot of this spend was going on Football World Cup. So we do expect organic growth we already have it most parts of the Studios business and we expect to have overall next year. The scripted business is very important for us because that’s a $5 billion market on so in the global scripted business. And a lot of big new customers there like Netflix, like Amazon all the big broadcasters are looking for great scripted ideas. We concentrate on the less risky side, which is we do straight to series. We don't get involved in the piloting system in the U.S. where it is powerfully possible to burn through as I’m sure a lots of money very quickly. So we de-risk it by going for that straight to see this return. I think that’s a very sensible way for us to go and that’s partly why we outline the six to 10 series a year because as you say you need to build that portfolio and I think we’ve made a good start but the 12 dramas we’ve got coming through this year.
Will Mairs: Okay. Great and just last question I don’t expect you talk on deal negotiation specifically so I guess talking in general, do you think…
Adam Crozier: Looking forward.
Will Mairs: Do you think it’s perhaps risky is looking to invest in acquisitions within production companies where they have over 50% of their revenues in one type of format.
Adam Crozier: Yes, hypothetically speaking.
Will Mairs: Hypothetical.
Adam Crozier: If you, first of all that the way you should look at any acquisition that we do is on strategy. And I think you can see from this morning we’re very clear about the two main areas of focus for Studios going forward. One, building a global scripted business, two, creating a business that has more international formats that can travel. So if we do an acquisition you should jump against those two things. The second thing and we’ve been upfront about to say that we’re in exclusive talks with telco and those may or may not come to fruition. But the reality to build to your question is that all production companies have a smaller number of titles that are more important than the rest, and the big hits that drive a lot of the revenues. That is not unusual for a content company. That's perfectly normal. And part of the reason for our mixed economy approach that I took you through is what that allows us to do is to ensure that we're not over reliant on one thing. We're spreading the risk there and not everything's absolutely exactly the same time, but taken in the round that allows us to move the business on. So we think that's a very sensible de-risked way of doing it. And what we get is all the economies of scale of pulling not together and running it very tightly, but by running them as individual labels. We don’t lose that creativity and drive and entrepreneurial spirit. Now, we pull it all together with the international distribution. So that's sort of the strategy, if you like, is, answering your question, trying to get round that fact, that anyone thing and its own rights can have an element of risk.
Adam Crozier: Okay. Thank you. Why don't you just pass the mic' behind you.
Ian Whittaker: Thanks. It’s Ian Whittaker from Liberum. First of three. So you talks about the fact that the screen will become irrelevant overtime whether it’s a top lift or indeed a TV screen. Can you just talk about what are the latest developments in terms of TV measurement? Because obviously the UK is slightly different to some other markets and obviously we're seeing markets such as Norway, for example, they seem to be more advanced in terms of looking at tablet audiences.
Adam Crozier: Yes, look, as I said, I think I mentioned that viewing through other devices around three minutes thirty seconds a day. So it's like all of these things; we have to watch when we're talking about great growth levels that we don't lose sight of where it sits. What's interesting so far is that, BARB, like Nielsen in the States, are looking at over in the medium term, I suspect two to four years, finding a way to measure viewing on these devices, just as we do for consolidated ratings, over night seven-day, three days all those kind of things. So I think that is coming in the medium term. There's a There's a lot of what going on in the background to help BARB get up to speed to do that, as there is in America. Norway is a bit out on a limb, to be honest. I've looked at what they do there and they are the only ones doing it right now. But, in any event, I think we'll get there in the medium term. And so what we try to focus on is making sure that we get to a position where our sort of share of viewing online is effectively around about the same as it is on linear TV. That's where we're trying to move it. And obviously that partly depends on how much distribution you have and how many programs you put online, because we don't put everything there. One of the more interesting aspects of our online viewing is I think about 20% of it. It’s actually of the channel live. And actually it's one of things we changed in our ITV player, was you sort of land on the live, because people increasingly just want to watch it like they watch TV. They don't want it to look at feel any different. So I think we're - in some ways the UK is head of what others are doing, in some ways in measurement we're slightly behind, but I think we're heading in a reasonably clear direction. And we take the view, because I think it's a good way for us to think that a screen is a screen, a view is a view, and people just want that flexibility. And of course although we say that viewing has gone down that little bit, remember that doesn't include all the viewing on these devices, so into in time that will get added back in. And it shouldn't be a surprise I think that if you can watch TV in more places like on trains or buses or whatever, you probably will watch more TV. So I think there's a commonsense element to that too.
Ian Whittaker: Thanks. Second question, just in terms of the share of the advertising market, obviously 2014 you benefited from ITV1 in 2013 picking up what in share for the first time I think over 20 years. Obviously you don't necessarily have that benefit this year. So would you expect that your out performance and share gains in the market would be as great as last year or less so?
Adam Crozier: And what we certainly - it's always hard to be exact on that because of the way one or two of the deals are done. What's really important to us, and I think most people do understand is right at the heart of our commercial proposition is this ability to deliver those big audiences that we keep talking about it. So we’re incredibly focused on those, that is what drives our performance. And that has been remarkably consistent over the last five years. Of course, we want to get share viewing right, but remember we don’t do annual deals per se now they used to be that thing and again mentioned before where very unusual way you redo all your deals at the same time over a few week period. We now have rolling deals with mostly never put the same time. So constantly sort of changing set of arrangements. So we can see from the deals that we’ve done, that we would expect to outperform the market. And we’ve got to make sure. We keep delivering those big audiences. And of course, as we’ve done with the digital channels and turning those back last year was the only year I think in history that they were done and thankfully at being the other back up now. We’ve got to make sure, we concentrate on getting that right, but the key thing people are buying with us is those big audiences is that’s where our focus lies.
Ian Whittaker: Okay, thank you. And just a final question for Ian, just on the working capital performance for 2015, how should we expect in comparisons what happened in 2014?
IanGriffiths: We would expect to see continued build for the working capital as we invest in the scripted side. The normal working capital, we will continue to run tightly but our profit-to-cash conversion, which is our KPI, which is usually being around 95% - you can see it came down to 91% this year we will probably be 85% to 90% in 2015 as we continue to invest in the scripted content.
Ian Whittaker: Thanks you.
Adam Crozier: Thank you.
Lisa Yang: Good morning, it’s Lisa from the Goldman Sachs. My first question is on program cost. I think if you workout the underlying increase in 2015 about mid-single digit. I was just wondering if we should we think the kind of operational leverage or is it just a kind of one of to reinvesting improve the ratings.
Adam Crozier: The program cost side.
Lisa Yang: Yes.
Adam Crozier: Yes, I think last year we spend around £35 million more on the schedule, but that of course included the launch of the funding and investing in the new channels. This year that we’ll go up by further £20 million, I think Ian said, which again means a full year of those new channels. We of course had a big sporting event last year in the World Cup and we’ve got a exclusive big sporting event in the Rugby World Cup this year, which should be very important, very big for us. And we look at that constantly, but in a way as I said the reminder last year was that we spend more money in the share viewing right then as we consistently said through period it is not just about how much money you spend its clearly about what you spend on and indeed what's are those do around that. So we think we’re roughly at the right place, although, we have the European Championships next year which obviously big and very important for us in the some of the Football European Championships. We only have the Europe and Champions League highlights rather than live as some of that money, we will obviously take and reinvest in dramas. So what you could expect to see is the genres remix changing in the schedule rather than the cost going up.
Lisa Yang: My second is on Studio I mean you mentioned you expect to return to good organic growth can you be bit more specific I think in the past you mentioned about 5%, are you still happy with that number.
Adam Crozier: Yes, gentlemen.
Adam Crozier: Not sure we did mention that nice try.
Adam Crozier: I think always said is good organic growth and I think we’ve been pretty clear saying £100 million, you go six months of left field and you go organic revenue coming through. So I’m not going to give you an exact percentage, but I think you could probably have a good start from what we’ve given you’re ready to look out, but good growth this we will contribute to the performance next year.
Lisa Yang: And the last one about,
Adam Crozier: Everyone seems that very interest in today’s about what good means, what significant means, what strong means, I’ve no idea.
Lisa Yang: And the last one is I’m just wondering, as most of your competitors wants to increase their exposure to high quality scripted dramas. And looks like to big acquisitions you are making a more in scripted. So I understand [indiscernible] I’m just wondering if there is any kind of misperception of the maybe the economics of unscripted. Is that more appealing to you?
Adam Crozier: No, and I think what is when you look at broadcasters across the world. Of course, there is a tremendous demand for high quality arguably as good as film, drama and not as more expensive, but broadcasters all over the world having also suddenly started spending a lot more on their schedules. So if this spending a lot more high quality drama something has to give somewhere and therefore what they’re also spending a lot more money on is really hardworking on the scripted shows, where they can order 70, 80, 90, 100 episodes or something. So we’re very comfortable that we’re in that business with the largest in that business in the U.S. and that’s doing extremely well and we do plenty of it here in the UK too. We want to make sure, we’re in the dramas sphere too and then floating in between those. You have these big formats; big successful formats that people really use and rely on. So those are the three segments for us. And we think it’s important to be in all of them and have the right mix of all of them.
Archie Norman: Okay. Can we go to your left down the line and then we will go back. Thank you.
Alex DeGroote: Good morning all. Alex DeGroote, Peel Hunt. One strong question retransmission fees you will sense, Adam, of the mood music in Westminster right now. And any recap on the quantification of the possible benefits of retransmission fees?
Adam Crozier: Well, I think the best sign of the mood music is the fact that that both government and Ofcom have announced they will review and I think that’s all we could have asked for actually initially was to get only agenda, get people thinking about, get them examining it, and Ofcom also have done there – become their review into the TSBs and what’s pretty clear of that is actually one of the points we were making which is that the UK production industry is really dependent on the PSBs creating and ordering original work. If you look at their studies and they took all their figures direct from all the various broadcasters, I think the digital channels as a whole outside of the PSBs invested I think it was about $350 million on original programming. And if you assume as part of that ITV Digital Channels might have been around 50 channels – four digital channels about the same UK TV maybe the same, what that says is that Sky and all the other digital channel adding together are investing around £200 million pounds per annum and original programming in the UK. So the industry is still very reliant on the PSBs, it’s our investment in that great drama that drives the television market here and we believe that we should be properly compensated for that. I think our view of that has changed at all. We haven’t quantified it as you know yet. I mean there is a lot of various sums out there. I guess it also partly depends on how it was done. But that is something that as the various studies that are going on ramp up post the election, I’m sure that’s the conservation that we will be had.
Archie Norman: All right, thank you with that. We like that question.
John Karidis: Thank you. John Karidis from Stifel Financial. I’ve got two questions please. The first one is on the champions league just to use the Americanism can you sort of reminds us of the – that the puts and takes in terms of revenue and costs of you’re not having those rights from next year please?
Adam Crozier: We’ve not given any numbers on that, but what we have said is the Champions League and Europa less the highlights us about 30 million to 40 million difference in our NPVs. And so that – back to Adam's earlier point that that gives us flexibility to allocate that into different genre of this drama or entertainment.
John Karidis: Okay. And you still have to view that you shouldn’t really see an impact on your TV advertising business because of that?
Adam Crozier : Yes.
John Karidis: Okay, great thank you. And then secondly, talking about mass audience is it possible first of all to trigger out what’s being happening to total number of programs that result in mass audiences over time. And secondly for a particular program that would have attracted let’s say 10 million or 5 million viewers how has that absolute number changed over time?
Adam Crozier: It is possible to that I don’t have the numbers at the top of my head by the way but it is absolute as possible I think another way of answer is when we look at the last year’s number we should just being analyzed by Thinkbox what was interesting was the televisions reach is 94% of people every week. That hasn’t changed at all. So in terms of television, I’m not talking about ITV and our television’s ability to get the people back has not shifted one iota. So it maybe is split slightly definitely and as I mentioned earlier being fragmented in different ways, but it’s still getting to the same sort of very large scale high penetration audience.
John Karidis: We can may be pick that up later.
Archie Norman: Thank you, that – under just – we take several questions further back. This is the true definition of a roving mic.
Julien Roch: Good morning.
Archie Norman: Good morning.
Julien Roch: Julien Roch of Barclays, first question is for you Adam. How long do you see yourself at the ITV, because it seems to be that one of the markets, news games is – Adam is, living still on the [indiscernible] understand the rules, but wanted to know, how long you are seeing yourself at ITV?
Adam Crozier: Well unless you know something, I don’t. No I mean, I’m enjoying what I’m doing I think as you can see we’re in good shape and I’m not, particularly thinking about anything else so happy.
Julien Roch: Thank you. Second question for Ian you gave us some point to us on what you saw with the optimal gearing on the balance sheet of around 1.5 and that’s where you wanted to go. What would be the maximum gearing you’d be prepared to go at here at a significant opportunity in terms of M&A?
Adam Crozier: We haven’t set target for that Julien, but whatever we do if we were going even close to 1.5 we’ve been looking to use a strong cash flow to brings back down to continue to create headwind to invest.
Julien Roch: Okay and the last question is in 2014, you had about £15 million of cost savings, could we have some indication for 2015?
Adam Crozier: Yes, the cost savings of 2015, we’ve not set a target, because we are now in a sort of business as usual face, we’ve done below heavy lifting over the last four or five years to take a lot of cost down to business. I think that’s the part of £140 million I think in total. What we would expect to do as any good business would do would be to keep challenging the cost base looking it line by line and at least cover the inflationary pressure that all businesses have to face. But the net impact should be to cover inflation next year. So that, for us, that's somewhere between £5 million and £10 million.
Archie Norman: Okay, good. But I think we’ll take one last question. Shall we quickly do… Yes.
Julien Roch: Hi, I’m - it’s…
Archie Norman: [Indiscernible]
Unidentified Analyst: JP Morgan. I just have two questions. So first of all on your leverage, do you have any target credit rating that you're looking to keep? What about one and half times leverage, because I know on an adjusted basis, it will be slightly higher?
Adam Crozier: We do, but the key thing for us is to make sure we have a target we work so that we control. We didn’t want to set a target that was driven by external factors, ratings or the factoring things like the pensions were swings in discount rates because actually we move things. So having a measure if we could talk about cleanly and look at in a very transparent way which is net debt to EBITDA, we thought that was a right way to go.
Archie Norman: All right, last [indiscernible].
William Packer: Hi it’s William Packer from Exane BNP Paribas. Couple of questions back on the kind of regulatory outlook, so we’ve heard from the Culture, Media, Sport Committee last week where they published report in the future to BBC it seemed that, I think it’s fair to say broad by part to answer Paul for the current license fee structure. In that context, how should we think about your goal of introducing retransmission fees? Could you kind of walk us through what kind of some institutional setting could drive that, bit more detail there and how you think they could be introduced? And then…
Archie Norman: Okay Adam will just take that.
Adam Crozier: Yes. Well, I think what they said was that in the short-term, which is not defined that they can’t see a better alternative. But of course that doesn’t discount someone dealing part of the funding is being potentially coming from returns machine fees. I think as a base, there is a – it’s difficult to see beyond the license fee. This is debate about how big or small that should be and how that’s made up, whether it's all license fee or part license fee, part retransmission fee. So I think that’s all up for debate as part of the BBC schedule. I think what they have you on the few of the other things is BBC put forward was sort of them to decide in some ways whether they want to close BBC-3. We would simply make the point that that is one of the few very distinctive things they do. And their charter is about being distinctive. That’s doing something that commercial broadcasters often find difficult. And what they are planning to do is to close that and effectively reinvest that in a plus one which is exactly the kind of thing in commercial broadcaster would do, so, in other words, becoming an overall sense less distinctive and it was good to see the Select Committee come out very clearly and say that BBC really haven’t made the case a BBC one plus one service at all actually. So, we’ll see what happens there but I don’t think the debate around their funding has frankly even begun and I don’t think it well in any earnest the total really until after election, once they know who they're dealing with.
William Packer: Okay, last and final. And then there's been a lot of discussion about the potential benefits of your regulatory relates around the retransmission fees, et cetera it sounds that the potential downside of the deregulation, you had independent bodies such as COBA comment on the implicit subsidy around the spectrum and the sports rise with the [indiscernible] et cetera. Can you talk about how you see things would look for you in the content but there was a deregulation around those side of things, is that something you’ve considered – do you see big downside there or you relatively confident?
Adam Crozier: Well, about this is journalist and I take issue with COBA being independent which is correct. But, leaving nice on it and I think – I think that the work half.com variety done in PSBs as I mentioned earlier. I think that kind of starts the real debate which is – it is the investment. I don’t just mean ITV by the way but all other PSBs make in original content already drives the market in the UK has driven the performance of televisions in the UK into a very successful industry for us but also for the country. By 6% of GDP it’s a god part of our exports as well, so it’s a good thing for the country. So, big part of this success is the creative industries and I think clearly and around of that - I think what tends again get the - gotten in that whole debate I know COBA different times that [indiscernible] you get advantages as a PSB. But of course we pay for those advantages, we’ve already paid for those. One of the costs of our license is that we invest around £100 million in news every year. That’s the cost of the license and we do also some other things around that to as do in fairness the BBC and Channel4. So, when we got our renewed license for 10 years, there was a basic set of sales of cost and benefits. And those came out as neutral. And that’s it should be so I think that parts of the conversation has already taken place. I think there is a very interesting debate on sports rights and you can go from extreme like Australia where all other main sports are protected to some where that’s completely open and then as in the UK, somewhere in the middle. But, if you look at more sports what’s the best fascinating to me is that cricket is gradually trying to come back free-to-air, darts is gradually come back free-to-air, boxing is trying to come back free-to-air. One of the good things about going pure pay as you probably get a lot more money, one of the most good things if you exposure growth down pretty sharply in terms of awareness. And if you look at something like the Champion’s League, I think we attract more from our one game and it’s guided for the 17 and as a sports right holder and I use to be one that is something in the long-term, you have to think quite a long and hard about because that interest and exposure that drives participation, it drives sponsorship, that drives merchandising, it drives interest in the game, it drives the people who buy pay-per view subscription. So, you’ve got the balance to.
William Packer: Alright, thanks.
Archie Norman: Thank you, that’s all the questions. That these are very good set results, and I think we’ll cut short that, we’re happy to say around and our team is to answer any questions or follow-up obviously a discussion stated. Thank you.
Adam Crozier: Thanks everyone, thanks very much.