Earnings Transcript for ITVPY - Q4 Fiscal Year 2020

Dame Carolyn McCall: Good morning, everyone. Thank you for watching ITV's 2020 full year results. In a moment, Chris will present our operational and financial performance for the year. I will then update you on our strategy and our priorities for the year ahead. At 9

Chris Kennedy: Thanks, Carolyn. Good morning, everyone. I'm going to start with the performance of Studios. ITV Studios started 2020 with good momentum, expecting a strong slate of deliveries over the full year and year-on-year revenue growth as we continue to focus on diversifying ITV Studios by customer, by genre and by territory. COVID-19 changed this outlook. While productions resumed from summer onwards, the delay and disruptions in productions as a result of COVID restrictions has caused ITV Studios' total revenue to decline by 25% to GBP 1.4 billion, with external revenue down 28%. Revenue was down in all regions, although Studios U.S. mitigated some of the impact through the diversification of their customer base as they have increased revenues from OTT platforms. 1/3 of U.S. scripted revenues now come from OTTs. Global distribution saw good demand for their library content, but this was more than offset by the delay in the delivery of new scripted content. Adjusted EBITA was down 43% year-on-year at GBP 152 million, with the adjusted EBITA margin at 11%. Whilst ITV Studios is a largely variable cost business, the decline in the margin reflects the ongoing fixed cost base, costs associated with COVID-related restrictions and GBP 8 million of investment in line with our strategic priorities. This was partly offset by GBP 63 million of cost savings, of which GBP 13 million are permanent. Around 90% of programs are now back in production. But with the prevalence of the virus and the likelihood of restrictions remaining in place for a significant amount of time, we expect productions to continue to be disrupted. Dramas, large entertainment shows and multi-location filming will be particularly affected. Moving on to broadcast. Total broadcast revenue was down 8%, with 6% growth in non-advertising revenues more than offset by the 11% decline in total advertising revenue. Online advertising revenues were strong, up 17% year-on-year. ITV Hub, together with Planet V, provides a way for advertisers to get the benefits of a targeted TV campaign with low production costs and gives access to the premium product for those with lower marketing budgets. Direct-to-consumer revenue grew 4% to GBP 87 million, with growth driven by competitions revenue. ITV Win, the rebranded competitions portal, has seen a significant uplift in traffic in the year, benefiting from lockdown restrictions. Other revenue increased by 8% to GBP 153 million with the successful launch of BritBox UK. Whilst it was our priority to continue to invest in the broadcast schedule, the program budget was down GBP 156 million due to the postponement or cancellation of a number of shows, including the European Football Championship, the summer series of Love Island, a reduction in weekly episodes of the soaps and the delay in some scripted titles into 2021. The reduction in the NPB was greater than we anticipated due to the extended restrictions and delays in production in the second half. We expect that schedule costs in 2021 will return to previous levels of around GBP 1.1 billion. Variable costs were up 20% at GBP 161 million mainly driven by costs for marketing and content for BritBox UK and higher interactive costs associated with the increase in revenue and prize costs in the year. Broadcast infrastructure and overhead costs decreased by 1% to GBP 373 million. There were additional overhead costs associated with BritBox UK and Planet V and investments in GBP 8 million in data, the ITV Hub, ITV Hub+ and technology. But these will more than offset by GBP 53 million of cost savings, GBP 8 million of which are permanent. For 2020, net investment in BritBox UK was around GBP 49 million with venture losses of GBP 59 million, both of which were in line with expectations. We anticipate that BritBox UK will remain in the net investment phase for several years as we build its subscriber base. In 2021, we expect venture losses to be at a similar level to 2020 and will decline thereafter. Broadcast adjusted EBITA excluding BritBox UK was down 1% at GBP 480 million at a margin of 25%, with the decline in advertising being offset by the reduction in the program budget and significant overhead savings. Total broadcast adjusted EBITA, including BritBox was down 9% at GBP 421 million with a 22% margin. During the pandemic, we have seen people watching more television, and ITV total viewing increased 1% in the year. We had a good schedule despite the disruption, including continued strong performance of the soaps, with Coronation Street increasing its audience year-on-year; Great Drama, including Des, ITV's biggest drama in 2020 and Whitehouse Farm; new entertainment shows including The Masked Singer and Beat the Chasers as well as the huge success of I'm A Celebrity in the Castle in Wales; daytime shows, including Good Morning Britain, This Morning and Loose Women, which all had their best performance in the years; and innovative programming in lockdown such as the virtual Grand National. Total viewing on the main channel was up 5%, and we continue to be the home of scaled mass audiences, delivering 94% of all commercial audiences over 5 million and also delivering targeted demographics. The main channel remains the most watched channel for 16 to 34s as we continue to deliver programs they want to watch such as Saturday Night Takeaway and Gordon, Gino and Fred

Dame Carolyn McCall: Thanks, Chris. As you all know, in 2020, we undertook a review of our strategy in light of the challenges created by COVID. The conclusion was that COVID-19 was accelerating some of the trends already identified. For example, increasing viewership of streaming and increased demand for content. The key change in the strategy is in the pace of execution particularly in transforming the business digitally in order to continue to manage the challenges and take advantage of opportunities. Our goal, as you all know, is to be a digitally led media and entertainment company that creates and brings our brilliant content to audiences wherever, whenever and however they choose. And of course, we have to monetize all of that. Our strategy will continue to evolve, but we remain focused on 3 priorities

Dame Carolyn McCall: Turning now to broadcast. Our priority at the start of pandemic was to keep ITV on air and the ITV Hub and BritBox fully operational. We did that, providing our viewers with accurate and trustworthy information about the pandemic and lockdown and an opportunity to escape from it. As you know, we've restructured broadcast to create the Media and Entertainment division with 2 business units

Dame Carolyn McCall: As you can see, ITV is the home of mass quality reach, which is recognized by the advertising industry. As viewing and advertising becomes more fragmented, the scale and reach of advertising that TV delivers becomes increasingly valuable. We provide a safe, trusted, measured and transparent environment in which to advertise. And TV generates the highest return on investment of any media, as you know. In 2020, we delivered 94% of all commercial audiences over 3 million and 5 million and 92% of commercial audiences over 7 million. Our commercial team continues to deepen its relationship with our advertisers and agencies to create innovative and relevant marketing opportunities, which started before COVID. We use the breadth of our experience, creativity and our unique platform to bring new campaigns and brands to TV. Throughout the pandemic, we provided webinars and teach-ins to over 3,000 advertisers; marketing support and digital content to clients; we gave consumer insight to help advertisers stay close to their customers; and we made booking advertising with ITV even more flexible. We've created a number of initiatives to help and to attract new advertisers and support businesses to recover well. Firstly, ITV Backing Business, which supports British businesses with a number of initiatives including incentives and rewards to help businesses of all sizes support their media investment, for example, NatWest's banking unit, as they launched competition for small businesses; eBay, to show how their services help SMEs; and smaller businesses such as Astonish, a cleaning product company; and Inspirited Gin. Secondly, ITV Adventures, which works alongside digitally native brands that are new to TV, for example, Butternut Box, a subscription dog food brand; and CAFEPOD, a craft coffee company. Both have seen positive results. And finally, ITV Home Planet, a new initiative for sustainable brands to tell their environmental stories and encourage viewers to reduce their carbon footprint. Quorn was the first brand to sign up, and we have many other conversations ongoing. We are also launching a Media for Equity fund where we will take minority stakes within early stage digital and direct-to-consumer businesses in return for advertising inventory. This scheme will serve as an innovative opportunity for entrepreneurial companies to accelerate their growth and establish their brands by accessing ITV's unique reach and scale. We're going to invest up to GBP 15 million a year across 3 to 5 investments depending on their size. So, we're bringing in new advertisers to TV, but we are also, of course, extending our relationships with established brands and working at a deeper, more strategic level with many of them. For example, within weeks of lockdown starting, we used our close and collaborative relationship with BT to launch BT Tech Tips, which saw nearly 6 million people learn new digital skills. With our flexible approach, ScS furniture retailer were able to pause their advertising when their stores closed, choosing instead to sponsor our programs. This saw online sales grow and ensure their brand remained front of mind while also delivering a socially responsible stay-at-home message. P&G is another great example of the benefit of being more collaborative, using our talent to make products more relevant to younger audiences. Now onto On-demand. We have further improved the ITV Hub as we continue to deliver the Hub Acceleration Plan. Our investment has been focused on redesigning the interface on all platforms to continue to improve the overall user experience; increasing personalization and distribution to make it a destination for viewing our content; and strengthening the content available on Hub, including extending the catch-up window, full series drops, exclusive content around our large entertainment shows, short-form content around our daytime, soaps and entertainment shows, live events such as British Touring Cars and curated content such as the reruns of Euro '96. We are continuing to successfully roll out Planet V, our scaled programmatic addressable advertising platform, to the majority of very large agencies to a very positive response. As you know, Planet V enables advertisers to buy Hub premium inventory seamlessly and cost effectively from their own terminals. They can build their own audiences, monitor their own campaigns. And with our recent tech partnership with InfoSum, advertisers are able to add their own first-party data to their campaigns in a secure and compliant way. So this enables more granular targeting and builds new and more powerful audience segments at scale and unique to each advertiser. We have confirmed that Samsung TV Plus will be our first third-party publisher partner, meaning that Planet V buyers can also access its inventory. Turning now to our direct-to-consumer business, where we have seen a positive uplift from COVID. We've seen good growth in our interactive revenue as we have improved the ITV Win platform and extended our competitions. However, as you'd expect, we've had to temporarily close all our live events and tours. We've seen strong growth in our SVOD products with over 2.6 million subscriptions globally; BritBox UK, as I said, is ahead of plan, hitting 500,000 subscriptions in January; conversion and churn rates are tracking in line with our expectations; and we are receiving really positive feedback from consumers. We've strengthened content with the successful launch of the first original, Spitting Image, Film4 content and a number of other partnerships such as the Royal Ballet and Royal Opera. Spitting Image alone drove a tenfold increase in subscribers, who converted from their free trial at a higher rate and had a lower churn than the average subscriber. Unsurprisingly, those who came in for Spitting Image skewed towards other comedies including classic Spitting Image. In addition, we have extended the distribution of BritBox UK with rollout of the EE/BT distribution deal, with the service now available on around 20 million devices. BritBox brand awareness is now over 90%. Subscriptions for BritBox US have continued to grow strongly, and the service is profitable. We successfully launched BritBox in Australia in Q4, which has had a very promising start, achieving all its targets today. Hub+ continues to perform well with around 410,000 subs, slightly up on last year despite it being impacted by the absence of summer Love Island and less demand for portability in the U.K. and EU given travel restrictions. We have clear priorities for this year and the next 3 years. We have achieved our goals in the first phase of our strategy, and we're now into the second stage of implementation. Firstly, in Studios, key in the short term is, of course, to continue to produce safely and at scale. We are very focused on further growing scripted, creating global formats that travel and return and diversifying our customer base. We aim to double our revenues from OTT platforms in 2021, and we will further strengthen our creative talent. While we expect ITV Studios to perform well in 2021, it will continue to be impacted by COVID-19 measures as previously guided. Secondly, across M&E, we will need to achieve the right balance been delivering mass live audiences and growing our digital viewers. Therefore, one of our key priorities is to test and trial our windowing strategy and the appropriate allocation of the NPB going forward between our linear and advertiser-funded VOD. We will continue to invest in content so we can optimize it across all our platforms. Our priorities in commercial, specifically, are to further roll out Planet V in self-serve and to transform our end-to-end processes to deliver efficiencies. In On-demand, our key priority is to drive viewing and increase engagement with light viewers and to further strengthen the Hub to make it a destination and not simply a catch-up service. We will do this by focusing on its continuous redesign with improved functionality across all platforms; increased personalization leveraging our data capabilities; and trialing a new content strategy, as I've described, which includes original content, program spin-offs, shortfall and increased curation of content using relevant archive. Fourthly, in Direct to Consumer, we are obviously prioritizing to continue to grow BritBox UK, and we're doing that by strengthening the content offering with an exciting slate of originals for 2021, which include The Beast Must Die, starring Cush Jumbo and Jared Harris; the Secrets of the Krays, they will both be in H1; series 2 of Spitting Image in September; and Crime, the Irvine Welsh adaptation in Q4. We are also exploring opportunities as a priority to expand distribution further with the confirmed launch on Amazon in 2021, which will make it available in around 90% of VOD homes, up from 65%. We are working through the planning for a phased rollout of BritBox internationally to up to 25 countries, funded by our share of BritBox US cash flows. I'm so pleased to say that Reemah Sakaan has been appointed International CEO for BritBox to lead this. We're seeing good demand for premium British SVOD proposition. And therefore, we will launch in South Africa in 2021. And more markets will follow thereafter. Finally, our fifth area or pillar of focus is our cost and productivity program, which Chris has taken you through. Now digital transformation, as you all know, is key to unlocking the success in all of these areas of our strategy and delivering the majority of our priorities. We've talked a lot about the digital transformation of our products to respond to changing viewing habits, what we call how we watch. What we haven't told you so much about is the progress we are making in how we work digitally as part of this. And what this means is that we are transforming our internal systems, processes and, actually, our behaviors or ways of working to support a digital business. We're being more agile and efficient. We're ensuring our colleagues have the digital tools to drive the most effective ways of working. And we're achieving further cost efficiencies that we have set out, which is being enabled by this transformation. Our culture, of course, is key, having the right focus, mindset and capabilities that will enable us to achieve all of this much more quickly. So we are digitizing how we work at 3 levels

End of Q&A: