Earnings Transcript for ITVPY - Q2 Fiscal Year 2018

Executives: Dame McCall - Chief Executive & Director Ian Griffiths - COO

Analysts: Laurence Davison - Deutsche Bank William Packer - Exane BNP Paribas Ian Whittaker - Liberum Capital Limited Joseph Barnet-Lamb - Crédit Suisse Lisa Yang - Goldman Sachs Group Julien Roch - Barclays Bank Richard Eary - UBS Investment Bank Patrick Wellington - Morgan Stanley

Dame McCall: People, shall I start? Good. Hello, everyone. Good morning. Hopefully, it's cool enough in this room. Thank you for joining us for ITV's 2018 Interim Results. In terms of the format of this morning, I just want to say a few words upfront before Ian presents our operational and financial performance for the first half of the year. I'm going to then take you through ITV's refreshed strategy, obviously, a key focus of today. We'll then have time for questions, and Ian and I are joined here today by, I think, virtually all of our senior management teams, so Kelly Williams from commercial; Kevin, of course, Lygo; David Osborn; Julian Bellamy; Rufus Radcliffe. Virtually all. So I hope I haven't missed anyone out. As you know, we've been undertaking a strategic refresh over the last few months to help us highlight the opportunities for ITV and also the challenges we need to address. This is very much a refresh, not a reboot, as ITV is a strong business, no longer solely reliant on U.K. advertising. The Broadcast business remains robust despite the current market uncertainty, and ITV Studios is a strong and scaled international production business. The linkage between the 2, the integrated producer broadcaster, or IPB, by which I mean our Broadcast business, having access to the best talent and owning its key content; and Studios having access to our broadcast shop window is a significant competitive advantage. However, the market is clearly changing, as you all know. And to reflect this, we've developed a clear vision and initiatives to drive growth to ensure ITV remains a structurally sound business. We have a solid balance sheet, which underpins our foundations. We believe that with our refreshed strategy, we will continue to generate significant cash with a strengthened, high-margin IPB, a growing Studios business with a stable market-leading margin and we will create a new scaled and profitable direct-to-consumer business, which will give us further growth. As these highlights show, we've continued to deliver a strong operating performance in the first half, and we are executing the refreshed strategy from a position of strength. I'm going to now hand you over to Ian, who will go through this in much more detail.

Ian Griffiths: Thanks, Carolyn. Good morning, everyone. As you just heard, the important part of this session is strategy update, so I'll quickly run through the review of the last 6 months, which should be quite straightforward as we're very much on track to deliver what we committed to at the start of the year, which was a strong viewing performance, double-digit revenue growth in VOD, a return to organic growth in Studios and continued strong cash generation. You've already seen the financial headlines, so let's look at Broadcast in more detail. The first thing to say is we're now reporting performance differently, aligned to our refreshed strategy. Our reports will now focus on total advertising, which includes NAR, VOD and sponsorship. We've also split out our direct-to-consumer revenue, where we get paid by our viewers, and Carolyn will cover the rationale for this later. On the cost side, we're providing a bit more detail, and this is mainly being done to highlight the variable areas of our cost base, especially as we build our new revenue streams. I know everyone hates having to change their models, but in the appendix, we've restated the last 3 years along the new reporting lines. Looking at performance and focusing on the revenues first. We delivered 2% growth in total advertising as expected. Within this, spot revenues were broadly flat, and with strong growth in VOD, which is up 48%. This is not just Love Island and the football. Our VOD revenues have been growing at over 40% all year, and strong growth is continuing into the second half. Our direct-to-consumer revenues are relatively small, but this is a real growth opportunity. In here today, we have voting, competitions, live events, Hub+ subscriptions and revenue from our pay-per-view boxing trial, all of which are up in the first half. Other revenues now include payment from platforms, such as Sky and Virgin; and third-party commissions for services we provide to other broadcasters. In total, Broadcast & Online revenues were up 3% in the first half to £1,045 million. On the cost side, our spend on screen was weighted to the first half as planned, with the World Cup cost being mainly in June. This has meant a bit less drama and entertainment, but that's not impacted our viewing, which has been strong all year. And our guidance for the full year schedule spend remains unchanged at £1,055 million to £1,060 million. Marketing, competition prices and online rights were included within the variable cost, as are the increasing bandwidth costs of our online business. Add to this the investments we've made in pay-per-view and in rights for the Hub, you can see why these costs have increased. Our infrastructure and overhead costs have also increased, partly driven by currency on our euro-denominated transmission contracts and partly increase in property cost for our new London buildings, as we've previously flagged. There's also some phasing here, which will unwind in H2, so for the full year, other than for the currency and property, these costs will be back in line with prior years. In the round, Broadcast has delivered £257 million in profits at a 25% margin. Profits are down 12% in the first half due to the phasing of schedule and overhead cost. However, the operational highlights of our first half has been our viewing, both on-screen and online. Our objective is to deliver the audiences demanded by advertisers, both in terms of scale and targeted demographics. The first chart shows that all of our channels have had a strong 6 months. We continue to be the home of scale of mass audiences. We've delivered 99% of all shows to the 5 million audience, driven by sports, drama, entertainment and the soaps. And once again, with over 400 shows, we've delivered more 5 million audiences than the previous year. But just as importantly, we're delivering a targeted demographic, whether that's SOV on the main channel, which was up 11%; 16-34s on ITV2, which was up 19%; or our male audience in ITV4, which was up 5%. All of these channels have increased share and SOCI for their key demographics. And at a family level, our overall share of viewing at 23.5% is now back to levels we last saw in 2005, with the main channel share of 17.2%, higher than any time since 2009. The main channels also delivered a high viewing share than BBC across peak. And this will be the third year in a row we've grown share, and the 9% increase is the biggest gain we've ever delivered. And we're not just growing share, we're also growing hours watched, which across the ITV family are up 5%, with 7% growth on the main channel. This strong performance comes right across the schedule, our daytime shows from Good Morning Britain through to The Chase. Our new and returning dramas, such as Trauma, Innocent, Vera and Endeavour; the big entertainment shows; and of course, the phenomenal viewing on the football, where we averaged 7.3 million across all our games, higher than the BBC and any recent World Cup. And it's this same great content that's driven the viewing on the Hub, where our consumption is up 33%. Most of this viewing is catch-up, but increasingly, especially for younger viewers, it's simulcast, and our simulcast requests are up 40%. We're averaging nearly 300,000 simulcast views for every episode of Love Island, and the England-Croatia game had just under 1 million viewers, which is nearly 3x higher than our previous peak. Across any device or screen, our viewing performance in the last 6 months has been strong. However, the advertising environment has remained pretty lackluster. The shape of the year has followed every other year where there's a big sporting event. And with June revenues up 22%, that's helped us deliver 2% growth in total advertising, compared to an overall market which we think is pretty flat. Against this context, we've gained share in spots and are growing VOD faster than any of our competitors. By category, we're seeing a continuation of the trends we discussed before. The highest three food and FMCG companies remain under pressure and are spending less. The tech-driven businesses and digital brands are spending more. And we estimate that online brand advertising was up 15% in the 6 months. Our outlook across Q3 is for these trends to continue, and that may remain the case until confidence returns to U.K. business. However, if we keep delivering great audiences, we'll keep gaining share and the business will remain in robust health. Moving on to Studios. We said that this year, Studios will return to good organic revenue growth and we're well on track to deliver that. We have 16% growth in total revenues, 11% organic, with growth across all of our production areas in the U.K., U.S. and rest of the world. There's been some helpful phasing in the first half, which is why we should not carry this level of growth forward. But we're confident we'll deliver good revenue growth for the full year. We delivered 6% growth in internal supply, [indiscernible] Broadcast business, helped by the return of Dancing on Ice and an extra episode of Coronation Street. Off ITV in the U.K., we grew 22%, helped by drama sales, which is Bodyguard and Age Before Beauty to the BBC. The U.S. grew 2%, 11% at constant currency, driven by the production of FOX's new entertainment show, The Four; the launch of a U.S. version of This Time Next Year; plus the return of Alone and Queer Eye, which we made for Netflix. The full year outturn to the U.S. will depend on the timings of Hell's Kitchen deliveries in the second half. The rest of the world continues to grow as we get better at monetizing our formats. We now produce 6 versions of The Voice, having added France and Australia, and 7 Love Islands. We sold 34 other formats to the overseas markets, 9 of which we'll be producing in our international businesses. GE was down 2% year-on-year, however, it's flat if you exclude currency. But there are some healthy good dramas to comes, such as Snowpiercer and Vanity Fair, so we do expect growth over the full year. All of this adds up to £803 million of revenue, which are at 15% margin, comes through to £118 million of profit, up 7%. Looking at revenues in more detail. The first chart tracks the movement in revenue from last year to this. This 16% growth in revenue comes from over 4,000 hours of content, up 10% across drama, entertainment and factual. Within these hours, the business has to manage churn, and to do this, you need scale and healthy pipeline of new shows. In the last six months, we had to replace nonreturning or phasing differences of £138 million or around 700 hours of content. The growth we delivered is then on top of that. The prior year acquisitions have helped, but it's the healthy -- but it's healthy to see the organic growth split equally between returning and new shows. This business may not fit neatly into quarterly reporting timetable, but with good visibility on our revenues. And we do not invest capital in any production until we have a firm commission or a confirmed buyer, regardless of genre or whether we're selling to a broadcaster or an OTT platform. We have nearly 90% of our 2018 target revenue secured and that represents just under £100 million more revenue. Within this, we have 263 new or recommissioned shows, 36 more than we had this time last year; all of which gives us comfort that the pipeline's in good shape and we'll deliver the good revenue growth we committed to for 2018. When we do the Capital Markets Day, we'll give more detail on the Studios business. As part of that, we'll go through our revenues, explain the geographic mix, which is important now that 50% of the revenue is outside the U.K. And we'll talk a bit more about the returns we expect from different genre. This chart is a bit of a teaser. As you can see, the business is predominantly unscripted in terms of scale. But the scripted area, especially driven by demand from OTT platforms, is likely to be the area of high growth over the medium term. We'll go into more detail on this in September. Adding Broadcast's and Studios' EBITA together gets us to £370 million -- £375 million, which is down 7%. Our financing costs were broadly flat, and the tax rate has remained at 19%. So this profit performance flows all the way down the results to adjusted EPS, which is down 8% at 7.1p. On a statutory basis, our EPS is actually up 4% year-on-year. This is because our exceptional cost and amortization charges are lower, primarily less P&L impact from earnouts, so our expectations of future cash payments have not changed. As Carolyn will outline, even though headline EPS is down and we plan to invest, the board is confident in strengthening the underlying business and, as a result, is committing to a full year dividend of at least 8p for both this year and next. And to follow the theme of strong underlying operating performance, our cash generation continues to be a real strength. Profit-to-cash conversion after CapEx was 94%, with operating cash generated actually up year-on-year. And free cash flow after tax and interest was £184 million, which is £33 million more cash generated in the period. Our net debt is just over £1 billion at £1,034 million, with net debt-to-EBITDA of 1.2x. This still provides good flexibility against our investment-grade credit rating. The balance sheet remains healthy with good access to liquidity through our facilities, of which £770 million were undrawn. And finally, our pension schemes are reporting an accounting surplus of £86 million, though we're still in deficit on a funding basis, so actual cash contributions this year will be consistent with prior year's £80 million, reducing to around £75 million next year. Taking pensions and leases into account, our adjusted net debt-to-EBITDA is 1.7x compared to 2.4x this time last year. So overall, our balance sheet's in good shape with a fair degree of flexibility, underpinned by continued strong cash generation. And finally, the outlook and planning assumptions, which for the rest of the year are in the appendix. And the reason I'm not running through them in detail is that there's no change from the guidance we provided at the start of the year. Even our £15 million to £20 million investment is not changing, as we believe we can get real momentum behind our new plans by reprioritizing our investment around data, technology and our advertising proposition. As far as trading is concerned, we're well set to deliver good organic revenue growth from Studios. We see continued strong growth in VOD, which will mean Q3 total advertising is likely to be broadly flat. That means for the 9 months year-to-date, total advertising will be up around 1%. And our viewing performance on-screen and online has continued to be very strong which, as this may be my last set of results for ITV, is not a bad note to end on. Thank you. Now back to Carolyn.

Dame McCall: And of course, it may not be his last set of results. And of course, we're very, very -- we're very sorry to see Ian go, but of course, he's going to be with us as long as we need him. Aren't you? So thanks, Ian. This slide outlines what I'm going to talk you through today. I'm going to just spend a few minutes talking about what I found when I joined ITV and the market context. I'll then take you through our refreshed strategy in response to that and how we will measure our success. Before I joined ITV, I heard an awful lot about the state of TV, that no one watches live TV anymore, that young people aren't watching TV, that advertisers are moving all their spend to the tech giants, that TV can't compete with the huge budgets of Netflix and Amazon. There is, of course, no doubt that the media market is changing and how people choose to watch is changing. Viewing is evolving, and the pace of change is rapid. But what I have found very striking is just how resilient ITV is. Viewers in the U.K. watch 203 minutes of TV per day. And while it's down on the previous year, it's a significant number. And this is despite all the new and disruptive launches over a 5- to 10-year period. Live TV remains the preferred way of watching content even for younger audiences. In fact, over 70% of all TV is still watched live. And whilst 16 to 34s are watching less TV, our performance clearly demonstrates that if you deliver great content, programs, and it's not just Love Island, but of course Love Island, I'm a Celebrity, Survival of the Fittest, Saturday Night Takeaway, young audiences watch it and they watch it in droves, and there are millions across linear and online. Around 2 million 16 to 34s are currently watching Love Island 6 nights a week. That's 1 in 2 16 to 34s. And TV is a bigger platform for 16 to 34s as Youtube is. I bet most of you in this room didn't know that. Those are amazing stats. No one talks about them, and the media certainly doesn't. We have to more than ever keep delivering the great content that really engages them, and this is a key element of our refreshed strategy. Advertising on the tech giants continues to grow, but it is slowing, and brand owners are challenging what some online advertising actually delivers, and we are now starting to see many more questions being asked about unacceptable content, measurability and there has been a breakdown in trust. Having met with over 50 advertisers and media buyers since I started 6 months ago, TV is, and I believe will continue to be, a key part of their marketing campaigns. And later in the presentation, I will demonstrate why. We should also not forget that ITV is taking more than its share from the growth in online advertising with the ITV Hub delivering a high-quality, trusted and very transparent environment. Now on to Netflix and Amazon. They are global players, and their budgets reflect this. ITV broadcasts only in the U.K., as you all know. And our £1.1 billion program budget does an amazing job at delivering mass quality audiences with a reach well in excess of what anyone else can deliver. I know Kevin would always like more money, but we do not believe that we need to increase this to support the Broadcast business over the next 3 years. We are competing with these OTT players, but our integrated producer broadcaster model is, as I said, a strategic advantage backed by our strong creative pipeline of content, which we own and we control. In the U.K., the demand remains overwhelmingly for British content, as that is what continues to drive very significant audiences which are so valued by advertisers. In fact, 92 of the top 100 program titles broadcast here all originated from the U.K. And globally, the demand for great content has never been higher, both from established broadcasters and increasingly from OTT platforms. We expect this to continue with the global content market growing at around 5% per year over the medium term. So there's no doubt in my mind that ITV has the resources and foundations to succeed and win in this changing environment. We have developed our new vision, More than TV, in response to these changes and to build upon ITV's unique and winning combination of creativity and commercial strength. This video, I hope, brings that to life. So ITV will be More than TV. It will be a structurally sound, integrated producer broadcaster, where our ambition is to maintain total viewing and increase total advertising revenue. It will be a growing and profitable content business, which drives returns and it will create value by developing and nurturing strong direct-to-consumer relationships where people want to spend money on a range of content and experiences with a really trusted brand. We will continue to be a cash-generative and growing business, delivering value for our shareholders. This is all about writing the next exciting chapter in ITV's story. We will compete where we can win

Q - Laurence Davison: It's Laurie here from Deutsche. The first question is just over, is £60 million enough? We've seen peers like Time Warner spend $200 million on data analytics, short-form content. And we've seen RTL spend €700 million on MTNs and programmatic. We've seen ProSieben spend somewhere in the region of €200 million to €300 million on their ad tech stack. And so you've talked about perpetual change. Is this going to be a perpetual investment is the first question?

Dame McCall: No, I don't think that's right, Laurie. I think the £60 million, as I said, is kind of operational -- it's investment that we are putting into the business. It doesn't include acquisitions. I'm not saying we're going to go on any kind of acquisition spree as ProSieben, I think, did in their time. And they focused on technology businesses. We're not doing that. But it doesn't, of course, exclude acquisitions. You will know that we bid for Videology, for instance. That's not included in the £60 million. And that was about addressable advertising and about Hub. So we believe the £60 million the next 3 years is the right level of investment for where we are today, for what we need to do today. Comparing us to AT&T, another massive conglomerate global company is we are global in our Studios business. We are U.K. provider of content to U.K. viewers. So we're a domestic company when it comes to our channels. So it is comparing 2 quite different organizations when you talk about AT&T and us. And I'm not sure everyone actually thinks what ProSieben and RTL have done is absolutely the right thing. I don't know because, I mean, I don't know, you would be in a better position to judge that. What I would say is we know that we will get returns on that £60 million. And that's the way we prefer to view it.

Laurence Davison: Okay. And the second question is just over the cost save -- the offset in cost savings. Where are those coming from? And to what extent can you continue to sort of grind out cost savings? Because you've been doing an awful lot for an awfully long time now.

Dame McCall: Yes, that's obviously right. So ITV has taken over £200 million out of the business in terms of costs. And Ian has driven that and has been very effective at doing that. And I think the really important thing is the engagement, is I've never seen engagement scores as high as ITV. They're at 90%, right, or thereabouts, between 80%, 90%. So I actually think that every company today has to have a continuous cost program. I don't think it kind of stops. I think everybody is dealing with cyclical, tougher environments. So any company that I talk to, if you talk to any CEO, they're all looking at cost. And that's about efficiency. It can be about -- it's a whole range of different things. So we are realigning our priorities around what you've heard today. And as a result of that, we are going to really have to look at where we put our resources and where we just do things well. But there are some things we want to be best-in-class in, in the U.K. and content is one of them. Data and analytics is one of them. And the how we do that, we've tried to explain, but we'll go into much more detail on in the future. And kind of communication is one of them. We are an entertainment and communication business. So it will be realigning around those priorities, but it will include process and efficiency and kind of reorganizing ourselves, redesigning ourselves to be future-facing.

William Packer: It's Will Packer from Exane BNP Paribas. Three questions for me, please. Firstly, in terms of cooperation with some of your PSB peers, speculation in the press and trade press around, I suppose, more aggressive cooperation compared to what we heard about today. Is it right to think of the Hub is going to be standalone and maybe a bit of cooperation in SVODs, but beyond that, pretty limited based on today's presentation? Secondly, one thing we didn't hear about today was around your work with your pay TV stakeholders. Could you update us as to where you stand there? Retransmission fees has been a long-term discussion. And then finally, on capital allocation, I think I'm right understanding that you've ruled out U.S. scripted acquisitions. You said you only buy things where the ROIC is ahead of the WACC. Could you help us understand what kind of things you're looking at?

Dame McCall: Okay. So just on the PSB cooperation point that you've mentioned, can I just be clear? Hub is being totally integrated into what we do. It's just part of what we do now. It's not a standalone. It's not completely separate. The direct-to-consumer business of that will be business, but that's a commercial business. But the programming, the marketing, everything else is totally integrated into the whole. That's one of the big differences of this strategy. And on the PSB cooperation, I can't really be drawn on that. What we've just said is we are talking to a number of different partners. And we are not going to kind of disclose who we're talking to because it's premature basically.

William Packer: Just to clarify, is that SVOD only? Or could that be a wider cooperation?

Dame McCall: Yes, it's a good question actually. I mean, I think the focus in the media has definitely been on SVOD. But I think actually broadcasters will be cooperating more on many different levels. The PSB broadcasters will definitely be cooperating more. And Kelly has some quite a lot of work in the advertising space, for instance, on that. So I think data, for instance, there's a whole range of things. Just actually making sure people realize the myths that abound around TV are kind of dispelled. I think we'll work together on that, so yes. Capital allocation, do you want to take that, Ian?

Ian Griffiths: Yes, I think we were very clear both in mine and in Carolyn's presentation that we'll continue to look at ways of investing to strengthen, in particular the Studios business, through the balance sheet. But we'll continue to do that, whether it's talent deals or M&A in a very disciplined, very focused way that we see creating value and delivering a good return on our capital.

William Packer: And sorry, just on pay TV?

Dame McCall: Sorry?

William Packer: Pay TV?

Dame McCall: Oh, pay TV. We are working well with Virgin. And we have a good relationship. And we are -- there's nothing more really to say about that. But actually, it's a very constructive, good relationship with Virgin.

Ian Whittaker: It's Ian Whittaker from Liberum. Three questions, please. First of all, just in terms of VOD, just going back there. Sort of previously what you had was revenue growth lagged audience growth. Now it's the complete opposite. In fact, revenue growth there actually sort of significantly ahead of viewing growth. Could you just talk about what exactly is driving that in terms of the -- is it pricing? Is there something else that's particularly happening? And I guess sort of longer term, you've probably got around 6% share of the VOD market in the U.K. at the moment. Sort of do you have a sort of view of where you'd like to be in a couple of years' time? Second thing is just in terms of addressable TV. Can you just talk about where you are in addressable TV at the moment? Sort of any plans that you can share with us over the next -- what you plan to do there over the next 12 months? Third thing is just in terms of when we have is we're a steady-state company when we've got the investment out of the way and so forth. Sort of what do you think the earnings growth could be sort of on a company that has flat TV now? If you even have a view on that?

Dame McCall: He's not going to answer that, but he can try. I think the thing to say about the viewing and the revenue growth. So just remember, we don't put as many ads on the Hub as we do on the channels. So therefore, it does sell at a premium because there's less inventory on Hub. I think the other thing is that increasingly, the agencies are seeing Hub as a real growth medium and a more targeted medium because of the demographic profile of Hub. And that has actually fueled some of the growth in VOD. And we have an internal target on share. But it's not one that we are disclosing at the moment. But I think increasingly, we will start talking to you more about that. And I think on addressable, it's probably best that we can do some addressable on Hub today. We want to accelerate that. That's what this is all about. So we've run some campaigns, addressable campaigns on Hub already. But we want to do that at a more sophisticated level and at a much more -- just a much more kind of augmented level. And I think perhaps the Capital Markets Day will be a better place to go into some detail on that to give you some more information on that there.

Ian Griffiths: Yes. And I think as we went through today, addressable on VOD is the immediate priority. That's very clearly where we're putting some capital behind. In terms of the steady-state earnings growth, as he runs the spreadsheet through his head, I think we've been very clear how you can look at our Studios business going forward. We've given 5% compound revenue growth on average over the next 3 years. And we think the margin on that is going to be in the range of 14% to 16%. I don't think we could be clearer on how that business is going to perform. Your assumption of a flat advertising or spot market or whatever you said, Ian, yes, we've committed to double-digit growth in our Online, Pay & Interactive business. We've committed to growing our direct-to-consumer revenues from £65 million last year to at least £100 million. And Carolyn has just pushed that one a bit more. And when you look at the cost side, yes, there's going to be an increase in variable costs because some of these things directly have cost going through it. So the Hub, as it grows, we have more bandwidth cost. But a lot of our broadcast cost, including transmission infrastructure, remain incredibly fixed. And we said we don't need to spend more onscreen than the £1.1 billion we guided to the last time we were here. So a large part of our cost base would stay incredibly fixed. And if you run all that through, you can look at the bottom line earnings.

Joseph Barnet-Lamb: Joe Barnet-Lamb from Crédit Suisse. I'm going to go for two questions instead of three, a break from tradition. So firstly, on direct-to-consumer, obviously that grew fairly substantially in H1 year-on-year. Can you talk a bit about what drove that in that period? I think you said there's the pay-per-view boxing. So will all of that recur going forward? And then also with regards to incremental revenues there going forward, how should we think about margins for the growth that you are providing there? Then the second question, Studios -- I suppose it is three in a veiled way, isn't it? Then on Studios, obviously a substantial growth in H1 and 11% underlying. You sort of touched on phasing but didn't really go into the detail of anything specific of what was causing the phasing there. So could you give us a little bit more detail, please?

Ian Griffiths: Yes. DTC growth in H1, the two key drivers of that are competition entries. For those of you who are here this time last year, we had a relatively tough first half around our competitions last year, largely because there's a lot of live news that interrupted our calls to action. And those onscreen moments really do drive engagement into our competitions. We've had a much more stable level of calls to action this year. And as a result of, our competition has grown. Also helped by the fact that we've launched a competitions portal, which is also driving more traffic. So all of those, that's really good. The pay-per-view boxing is very much at this stage seen as a trial. We invested the last 12 months in building this platform for ITV Box Office, which allows us to engage directly with viewers to pay to watch exclusive content. We have the rights to the World Boxing Series. We've been through that. And one of things we'll be looking at is evaluating whether that's something else we explore or can we use that platform for other ways of driving engagement directly with our viewers to bring in more revenues. So whether that recurs or not, I can't answer that question today. But it's certainly an area we'll be focusing on and looking at growth. The margins on these revenues, the margins on events and competitions and interactive, will vary. And some of these, like the boxing, there's virtually no margin on the boxing at this stage because we deliberately took that as a decision to invest in this to see whether we could deliver something like it because it's very new to ITV. We've never had that direct to viewer engagement, so the margin on there is very low. As we talked before, the margin on our competitions is high. So it will depend on exactly how the revenues evolve. But our objective is to create a fast-growth, profitable and profit-enhancing direct-to-consumer business. On the Studios' phasing, as we've talked before, we recognize Studios' revenue when we deliver content to the customer, the broadcast to all the OTT platform. They are notorious, as is our in-house team, Kevin, change their minds when they want that content. And that does impact when we recognize revenues. And in the second half of this year, we've got some big shows, in particular in the U.S. Snowpiercer is the biggest drama we've ever done. But as I said, we know we'll make money on that because TNT are buying the U.S. rights and Netflix are buying the global rights. But whether we get that delivered in the second half of the year, today, we don't know. Hell's Kitchen, we don't know when FOX will want those shows. So there are some big things that in the second half of the year may impact the ultimate delivery of our results. In the round, we've got 90% of our target revenue secured. It's up £100 million on what we had this time last year. So we're very confident by the time we get to the end of the year, we will have delivered good organic growth in our Studios business for 2018. Behind you, Joe.

Lisa Yang: It's Lisa Yang from Goldman. My first question is regarding your relationship with Amazon and Netflix. Just wondering how you see that evolving going forward, given on one hand, they are a customer for Studios. But on the other hand, they compete for potentially your viewers but also for your SVOD, [indiscernible] SVOD service. Secondly, it's regarding BritBox. I'm just wondering when is the right time to roll that internationally? And what could be the magnitude of additional investments related to that? And the final question is regarding all the new KPIs that you laid out today and how is management going to be incentivized based on those KPIs and new targets.

Dame McCall: Okay. I mean, I just -- Ian and I will both answer these because they're fairly generic in a way, except the KPI question. On the Amazon, Netflix relationship, I think the first thing to say is that we look at it in 2 completely different ways. One is if you're in the Studios business, they are a client. They're big customers. And they will sell to them regardless of ITV. So they will sell content or they will be commissioned for content by them, which they will be very happy to do. So that's fantastic. That's a really good thing for our Studios business. And when it comes to ITV -- the IPB, the broadcaster and the integrated producer, I think we are having one conversation with them now in a way we haven't had before. So we have a clear kind of strategic view of what we want to do with Netflix, what we want to sell to them out of the IPB and also with Amazon. So we're on the Amazon platform, we have very good relationship with them as we do with Netflix. We just have to be clear about the rights that we might sell to them when they are big programs for ITV in the U.K., right? So it's about the U.K. rights and how we would negotiate those going forward. I think that's quite a big shift for us. And all I would say is it's just a strategic approach to dealing with all the platforms, whether that's Netflix, Amazon, Sky, Virgin. We just have a much more strategic look at it and have one conversation with them. Because we have multilevel touch points with them because we do lots of different things with them. We sell to them, we buy from them, et cetera. So that's Amazon and Netflix. BritBox, do want to take BritBox?

Ian Griffiths: Yes, BritBox in the U.S. has gone exceptionally well. We've got over 250,000 paying subscribers in the U.S. in less than a year after launch. And we've achieved that with an investment of low single-digit millions. And the momentum behind it, not least following the rollout into Canada, is really, really positive. So one of the things we'll be looking at in due course is what are the next steps for developing that outside of the U.S. and Canada. And as you can tell from the investment in the U.S., which is the biggest market we like to go into, it's not a massive use of our capital. So we can do that in low-risk way. And it's really interesting to Carolyn's point, not just in the U.K., the demand for British content is incredibly strong globally. And that puts us in a really good position. And on the KPIs, the final question, the share awards have been put in place already for the team to incentivize the team over the medium term. At this stage, don't have any targets. And we've consulted with shareholders saying we're going to do this. And the Remco have been waiting for the announcement of the strategy and the refresh to then put a target around that. So there's no doubt that our incentives will be aligned to what we are talking about today. I don't know exactly what that will look like. But we will work that through the...

Dame McCall: They will be aligned around the KPIs, which are the key drivers of the businesses. Julien?

Julien Roch: Julien Roch for Barclays. The first question is on Studios. Would it be possible to have an idea of how much the SVOD platforms, so Netflix and Amazon, are as a percentage of revenue? I think you're now saying that Netflix is your largest client. But overall SVOD, are they 5%, 10% or 15% of TV revenue? That's my first question. The second is going back on the relationship with the other PSBs. So you unveiled that you're going to launch an SVOD service in the U.K. So it seems you've decided to go alone and that the marsupial from Australia hasn't been resurrected. So why have you decided to go alone and not with the other PSB is my second question. And then the third one is can we have some more color on sponsorship kind of growth in the first half? Is it a steady business? What's going on there?

Dame McCall: Okay. So we've never actually disclosed who our largest customer is in Studios. And we've always said Netflix will be in the top 5. And we don't actually go down into that detail of what percentage of our revenue would be, the FANGs as we call them.

Ian Griffiths: No, I mean, if you look at what we've got coming up, we've got Snowpiercer, Bodyguard, Somewhere Between, who Netflix are working with us on. We've got Vanity Fair, which is going to be coming up in the second half of the year, which we're really excited about. We will broadcast that in the U.K. In the U.S., Amazon will have. And we've done Harlots with Hulu. So we will work with the OTT platforms, and as Carolyn said, in particular outside of the U.K. And they are driving the demand for that type of content, which is good for us as a producer of it.

Dame McCall: Yes. And I think on SVOD, what we said is we have that strategic intention because actually we know there is a gap in the market and there's demand for British content and that people are willing to pay. And Kangaroo was a long time ago and the world has changed. That's not to say that we're not talking to PSBs as well as other players. So we've just said we're talking to a range of players. I think what is encouraging is that the thing that stopped Kangaroo becoming a reality was regulation because we are highly regulated. And what's encouraging, I think, is Sharon White from Ofcom's comments recently that positively encouraged the PSBs to collaborate, cooperate and get together on certain aspects of their businesses. And I think that's really encouraging. I think that's a real step forward actually from a regulator, very enlightened. Do you want to do sponsorship growth?

Ian Griffiths: I will do sponsorship growth. If you look at June revenues, which [indiscernible] going through, we're up 22%. Spot revenues were strong. VOD revenue is strong. But also in there was World Cup sponsorship, which has helped push that up to the 22% number. Sponsorship is a big commitment for advertisers. But actually, we've got some very unique property. So things like Coronation Street, not purely sponsorship, but we've done deals with Costa and Co-op, which are probably the biggest product placement deals in the U.K. because they want to be in Coronation Street. We've got the big entertainment shows, which we can do things around. And Carolyn talked about Love Island, which is a combination of sponsorship and merchandise and licensing. To be honest, Julian, we don't really mind which line of our P&L account it comes in. It comes into our advertising line. And that's the number we're going to focus on going forward.

Dame McCall: There's a question there.

Richard Eary: It's Richard Eary from UBS. Just two questions. Just firstly, you've obviously given a bit more color in terms of scripted and non-scripted within the Studios business. Can you just talk about profitability between those 2 lines and how you think that's going to evolve going forward, given that obviously it seems a decision still to invest heavily in that scripted line? The second thing is just on the cost savings and the investment that you've given, just whether you can give us some split across the 3 units. You've given the investment. But obviously, on the cost savings, it would be helpful.

Ian Griffiths: Just in terms of the genre mix, this is something, as I said, we will come back to in terms of talking about the returns we expect from the different genre at the Capital Markets Day because it is relatively complex. And we haven't got time to go through the detail here. Scripted is -- it's interesting to use a phrase in investment -- and maybe I didn't get the point across when I was going through it. We do put capital behind scripted projects, but only when we've got someone to buy it. So it impacts our working capital because we make the show before we deliver it to the customer who then pays us for it. But we only start using our capital when we've got the risk taken away. So TNT and Netflix signed up for Snowpiercer, which is the biggest thing we've ever done, then we started producing it. So we don't actually invest massively our capital without knowing what risk we're taking in Studios. And yes, the numbers on scripted can be big. You hear these stories of $25 million pilots. But no one spends that amount of money unless they've got a view of the risk they're taking. And we do this, as Carolyn said in her script, in a very low-risk way. You make your money in scripted when you have a returning series. So we will make money in year 1 on Snowpiercer because of the deal we've done with Netflix. If Snowpiercer is a success with TNT and it comes back for 5 series, we'll make a significant return.

Dame McCall: Yes, unfortunately more.

Ian Griffiths: The returns step up as the show becomes more successful. On non-scripted -- and you can't get into micro detail here. But very often, we will not make much of a margin in year 1 of a non-scripted show, on a new show because we will invest as much as the budget as possible to make the show as strong as possible to give it every chance of returning. Because when it returns, as we've seen with Love Island, you've then got a format. That format can travel. You can sell the finished tapes to different countries or you can sell a format and get it made locally. And both of those bring in incremental profit and returns. And that's -- that model, that process, how we manage the risk is something we want to go through in much more detail at Capital Markets Day in September. Patrick at the front?

Patrick Wellington: It's Patrick Wellington of Morgan Stanley. A couple of things. Firstly, on Studios acquisitions, you were very careful about how you described what you weren't going to buy. I think it was U.S.-scale scripted acquisitions. So is Endemol Shine still on the cards then for you...

Dame McCall: We never comment on specific opportunities. Our focus really is on returns. Anything we might do in M&A will always be returns-focused and value-enhancing.

Patrick Wellington: I suppose my question was more about the scale. Would you consider something of that sort of size? I mean, one of the targets the previous management was moving to 50% non-NAR revenues, which was achieved. But arguably, 75% of the profits are still NAR. So do you at all in your strategy feel the need for a big step forward to sort of move away from NAR-based profitability?

Dame McCall: And I think it depends entirely on the acquisition and if it's on the strategy and whether it is going to be at the right value for us, the right price, the right value. It really will depend on the acquisition, whether it's small, medium or large. I think that's the key thing for us. It's not -- diversifying is important, I think. It remains important. And you can see that the direct-to-consumer business is a further way of putting in a pillar, which has nothing to do with advertising revenues. It's entirely to do with the different profit pool. And that's an important step. But I think you wouldn't be going for an acquisition just simply to diversify. It would be about creating value.

Patrick Wellington: I mean, many of us have come from the [indiscernible], which was £3 billion business a few years ago. Throw in a lot of equity at it, it's now it's an £11 billion market cap business. I mean, is there any -- and so you'd at least say of that management, that they had sort of -- they're not afraid of scale and big acquisitions. Would you put yourself in that category? You don't need to do it. But you're not afraid of scaling up the whole of ITV...

Dame McCall: Look, honestly, I think for the right thing, we wouldn't fear it for the right thing. But I would have to emphasize that we will be incredibly disciplined. And it will be for the right value. And it would have to create value for ITV. It's not just about scale for scale's sake.

Patrick Wellington: And then just quickly on retransmission. I know this is an old one. But I think people have got the view that you've kind of given up on getting any money out of Virgin. And it's all going to be a nice sort of...

Dame McCall: Who said that then?

Patrick Wellington: Well, that's what we'd like to hear [indiscernible] in this relationship. I mean, in the context of what's happening with UKTV this week, does that tell us anything about Virgin's willingness to actually hand over the money and your future negotiations...

Dame McCall: So no, look, I think the thing with Virgin and ITV is that again, we -- it is important to both parties, I think, to have a commercial agreement. We believe utterly that we need to be paid fairly for our content, right? That is a fundamental principle for ITV. And we believe also that having that commercial agreement should remain confidential. And as long as both parties are happy, no one should really worry about the commercial agreement because I actually wouldn't do something that wasn't going to be good for ITV. And they're not going to do something that they think is bad for Virgin. So my approach to this is very much do this behind closed doors. It's a commercial agreement, it is sensitive. But actually, we believe utterly in value for our content. They have varying principles. We need to come to an agreement because actually it doesn't benefit anybody -- it doesn't benefit the viewer to have with what's happened with UKTV. There's been a huge amount of noise. But actually, the [indiscernible] for us is the viewer. And I don't want that. I hope Virgin wouldn't want that. So we're not -- we are at the moment in constructive talks. We remain completely open. And I hope that will be that.

Patrick Wellington: So we shouldn't rule out surge in those -- unexplained surge in those other broadcast revenues?

Dame McCall: Really don't count your chickens, remain calm about that, I would.

Ian Griffiths: Okay, still one more? I think we're done.

Dame McCall: Any other questions? No? Thank you all very much. Thanks for coming.