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Executives

Archie Norman - Chairman

Adam Crozier - Chief Executive

Ian Griffiths - Group Finance Director

Analysts

Lisa Yang - Goldman Sachs

Ian Whittaker - Liberum

Filippo Lo Franco - JPMorgan

John Karidis - Oriel

Laurie Davidson - Deutsche Bank

Alex DeGroote - Peel Hunt

Adrien de Saint Hilaire - Exane BNP Paribas

Julien Roch - Barclays

ITV Plc. (OTCPK:ITVPF) Q2 2014 Results Earnings Conference Call July 30, 2014 4:00 AM ET

Archie Norman

Morning, everybody, great to see you all again. We are going to go through the usual process. I will make a very brief introduction. Adam is going to talk about the business. Ian is going to go through the detail of the financial results. And Adam will then talk about the strategy and the future. And not to mention the fact, we have got a very exciting film, as always, that Adam will introduce.

All I wanted to say is that this is another strong set of results and an on-track performance for the business. When you look at the business as Chairman part of the thing obviously is the results every six months. That's important. But more important than that is the future capability of the business. And as we become increasingly a content and international driven business, what is really important is the pipeline of future development.

And all I want to say is I think there's more capability and more creative fizz in ITV than there's ever been in our 10-year history. So we are really excited about the future of this business and this set of results is just yet another illustration of the progress and the transformation that's been made in the last four and half years.

So, Adam.

Adam Crozier

Morning, everyone. Thanks for taking the time, as always, to join us this morning. We have a short agenda, a reasonably short presentation. So plenty of time for questions. I will introduce and just give some financial and operating highlights. Ian will take us through the numbers in some detail. And then I would like to just come back and, of course, give a quick outlook for the second half of 2014, but also just a first look for you at how our strategy will evolve going forward.

But as Archie said, there is always, before we get started and just to get everyone thinking about ITV, I would just like to show you a very short film which shows the programs that help drive our performance this year and also little bit of a look ahead to the autumn. If we could run the film, please. Think you.

[VIDEO PLAYING]

Here we go. Right, first of all then, just coming to the financial headlines. We continue, as you know, its focus on executing our strategy and are very much on track to deliver another set of results in 2014.

Total external revenues up 7%. Advertising revenue also up 7%, with the market in the first half up around 6%. Quarter one, for those who are interested, up 2% and quarter

two up 13%. Non-NAR revenues also up 4%. ITV Studios within that up 2%, which was probably impacted by phasing in the World Cup and among a strong performance from online, pay and interactive up 20%.

Revenue growth and a focus on cost efficiency has led to double digit earnings growth across the business once again. ITV Studios up 14% at £72 million. Broadcast up 10%. Group up 11% and adjusted PBT and EPS up 16% and 15%. And we have declared -- the Board has declared, given its confidence in the strength of the business, an interim ordinary dividend of 1.4p, compared to 1.1p last year, which is an increase of 27%.

Just continuing on the highlights. Delivering a strategy of growing and strengthening all parts of ITV. We have been investing in the development of our international content business. As you know, we acquired Leftfield in May and therefore means a second half year impact. Our acquisitions generally are coming through as expected. And very important progress is being made in the organic growth of our international scripted business, which again will impact on 2015 and 2016. And we are confident of good growth across ITV Studios this year.

There is no doubt that the advertising, the economic rather, recovery is gathering pace and certainly leading to a broad-based advertising recovery and as Ian will show, that's across most of the important sectors. And within that, we are also improving our market share.

Onscreen viewing, which has been down, improved in quarter two, as expected, given the World Cup and Tour de France amongst other things. But at the half year, the main channel, ITV was down 3%, although it's improved again since then and it's currently down around 2.5%. Viewing online continues to grow, up 20% and that's versus a growth rate last year of 16%. So growing well online.

We successfully launched ITV encore in June. So again, it's very early days, but certainly a good performance from the channel to-date. And in Sky homes is outperforming the UK TV drama channel already after just a few weeks and is only slightly behind Sky Atlantic. So a good start from that channel. But again, that's very much a second half impact on our numbers.

We are confident we are on track for a strong performance this year. And we believe that as we enter the next phase of our strategy, we can see clear opportunities for growth right across the business, in content, in online, payment to interactive and indeed in the advertising market itself. And the Board therefore has confidence in the performance of the business and we want to continue to balance capital discipline and the need for flexibility to invest in our future growth at the same time as moving towards a more normal payout ratio for our shareholders. And the Board has therefore committed to the full year ordinary dividend growing by at least 20% per annum over the next three years, starting with this year.

I just want to take a few minutes to highlight a few key operational points before passing on to Ian to go through the numbers. Looking at our first priority, creating a lean, dynamic and fit-for-purpose organization. Just to make the point we do, as always, continue to focus on the efficiency of the organization. We are on track to deliver cost savings this year of around £15 million ahead of the £10 million target that we set at the beginning of the year.

Group margins have again increased from 25% to 26% driven by ITV Studios improving its margin from 16% to 18%. Cash remains a focus for us within the organization. Our profit to cash conversion remains strong at 99%.

Looking at our second objective of maximizing our audience and revenue share from the free-to-air business. I mentioned that the advertising market is up for ITV. Our advertising revenue is up 7% in the first half versus the market up 6%. We expect going forward, July to be around plus 1%, August plus 9% and September plus 2% to 5%, a range there because we are still reasonably early in the process, which would mean quarter three being up 4% to 5% and the nine months being up around 6%. And we do expect to significantly outperform the market over the full year, given the deals that we have struck in the market.

Viewing has improved, as I said earlier, in quarter two but it's still down. ITV4 is up very strong performance from ITV4, including from the Tour de France, which was very strong for us. ITV3 has improved a bit, very much improved during the World Cup as an alternative to watching the football, but 2 and 3 are still down and cleaning we need to improve the performance of those. But we have a very strong schedule to come this autumn and we should recoup some of that.

TV viewing generally remains robust. People are still watching around four hours a day, which is roughly 12 minutes more than 10 years ago. So it's standing up pretty well. Online viewing, just for you to know, is still around 2%.

We continue to be the antidote to fragmentation, 99% of all commercial programs over with an audience of over 5 million are on ITV. We have the biggest comedy in Birds of a Feather, the biggest entertainment show in Britain's Got Talent, biggest soap in Corrie and the biggest sporting event in England, Uruguay, which did over £20 million pounds. It certainly took me back to my FA days. The usual mix of hope followed by despair, followed by redemption, followed by absolute doom, pretty much par for the course for watching England, as I remember it. And we have also got the launch of ITVBe coming up in October, very much in the young female audience, alongside repositioning ITV2, as you know, to younger audience as well as. That really gives us the ability to target very valuable advertising demographic. And therefore in an overall sense, increase advertising market share over time. And that's very much part of the strategy.

In terms of driving new revenues across multiple platforms, I have a couple of things to say, really. Quality of ITV Player continues to improve as we distribute the content across a really wide range of platforms. As you know, we drive revenue, these new revenue streams, by selling advertising around the content online, licensing our channels and content to third party platform owners and indeed through interactive services that we offer there. We are on 20 platforms. Really strong underlying trends, whichever way you look at it, 14 million downloads of the app which is up 52% year-on-year, viewing up 20%, CPMs remain very strong around 25p which is around what we are on linear TV. Number one channel on Twitter, 32 million Facebook likes, unique monthly users of our new site have doubled year-on-year. So all very strong signs of the performance online is really improving very fast.

We are, of course, continuing to develop our pay services and revenue. We have our new Sky and Virgin deals which we have done at the beginning of this year. ITV Encore, of course, is being launching, as I said, really will only impact on the second half the year. And we have also done a deal with YouTube to launch up to 18 short form mutli-channel networks. So, all-in-all, we have had very strong growth and we certainly expect to grow in the second half of the year in this area, at least in line with the first half levels of growth.

On the content side, I think it is absolutely fair to say that demand for great content remains extremely high from both traditional broadcasters and new platforms and we are fast becoming a scaled global content business. Number one in the U.K., as one of the captions said earlier. Not surprisingly, our first half internal revenues were down within ITV by 4% due to spend on the World Cup, but overall U.K. revenue was up 1% driven by, I think very importantly, a 27% growth in revenue in off-ITV activity with things like Rev, Shetland, Bedlam and 24 Hours in A&E.

Our international revenues were up 9% driven very much by 15% increase in our U.S. revenues as we scale up the operations there. And Ian will talk about this in a bit more detail later but we now have 122 shows on air in America, which is a tenfold increase since 2010.

We are making real progress, very importantly for us in developing our global scripted business primarily in the U.S. and the U.K. which will impact, as I said before, our 2015 and 2016 numbers. And our scripted activity that we are developing will flow through into our distribution revenues along slight increase to third party activity, again in 2015 and 2016. So overall, we expect to see good growth from ITV Studios in 2014, driven by our acquisitions and 2015 will see further growth from those acquisitions and a return to really good organic growth helped by our investment in global scripted.

So I would like to pass on to Ian. Now he is going to take us through the results in a bit more detail and then I will come and just talk about how we see the strategy evolving from here. Ian.

Ian Griffiths

Thanks, Adam. Good morning, everyone. As Adam said, against all key financial metrics, we have delivered real progress. Good revenue growth across the business in both NAR and Non-NAR, double digit profit growth, further margin improvement, strong cash flows and in light of the progress we made in rebalancing the business reducing costs and restructuring the balance sheet, we have confirmed our ordinary dividend policy and committed to it growing by at least 20% per annum over the next three years, starting this year.

Looking at revenue, with total revenues of just over of £1.2 billion up 7%, mainly driven by broadcast, we had good advertising growth up 7% and continued strong performance in online, pay and interactive up 20%. Studios revenues were up 2% to just to £400 million, driven by the acquisitions which are coming through as we expected. Studios organic revenues have been impacted by the phasing of some key shows in the U.K. and the U.S., more on this later and for the first time, currency is having a material impact on the results, a reflection that we are becoming a more international business.

Looking at profit, we have again delivered double digit growth from both businesses. Broadcast benefits is from the good growth in NAR and the continued growth in high margin online, pay revenues. As expected this has been partly offset by the costs of the football. Studios saw profit growth and margin improvement helped by production efficiencies, drama credits and a high margin revenue mix, in particular U.S. merchandising sales from Duck Dynasty. We have remained focused on our cost base and have increased our full year cost savings target from £10 million to £15 million and these savings will largely fund the investments we are making in online upgrades and new platform distribution, the creative pipeline, especially scripted talents and the launch our new channels ITV Encore and ITVBe, the cost of which is more weighted to the second half.

For broadcast, this was another strong performance with good revenue growth and strong profit improvement. ITV Family now is up 7% ahead of our estimate of the TV ad market, which we think is up around 6%. This means our share of broadcast spot revenue is 45.5%, a gain of 0.7 percentage points. We may not hold all of that gain over the full year, but we are confident that the deals we have done will see us significantly outperform the market.

Online and pay revenues have gain very strongly, up 20%. VOD audiences continued their healthy growth with our long form views up 20% driven by mobile and our content being available on new platforms. This audience is in high demand by advertisers. So our premium CPMs are being maintained. The demand from platforms for distinctive quality content is also why our pay revenues continued to increase, which is mainly the new deals we have done with Sky and Virgin. The agreement with Sky covered VOD and HD plus we know have out content on Sky Go and Now TV. The schedule costs reflect the cost of the World Cup and the other cost line includes our investment in the new channels.

Analyzing advertising in more detail. There is growth from all key categories, which would suggest that the economic recovery is pretty broad-based. It is encouraging that we are seeing strong growth from retail, food, finance, entertainment and leisure, the largest advertising categories. Telcos are still spending, but not as much as last year due to fewer new product launches. As expected, male orientated spend, particular gaming and autos performed strongly in June around the football. There continues to be volatility across months and within the key categories, but the general sense remains positive, and this is supported by the 4% to 5% growth across Q3, which means that by the end of September we expect be up around 6%.

ITV Studios delivered 2% growth in total revenues. All of this was our recent acquisitions. The organic revenues were down 8% in the first half, 6% excluding currency. In the U.K., organic production revenues were down 4%, and this is all internal supply of content for our own network. Phasing means Vera and Lewis have moved from H1 last year to H2 this and as flagged last time, having more football in the ITV schedule means less spend on original drama or entertainment.

Over the full year, our share of these commissions will increase to 60%, so this will be a higher share of a lower mass. It was always going to be hard delivering organic growth in the U.K. this year, however our off-ITV revenues continued to grow strongly, up 27% helped by Shetland, Rev, The Guess List, Revenge of the Egghead, which I had to get in there, all of which is for the BBC and Youngers and Stand By Your Man for Channels 4 and 5.

In the U.S., the delivery of Hell's Kitchen moved from H1 to H2 and this has offset the growth being delivered in Germany and France. In GE, revenues were impacted by currency and the fact we have no new Marple and Poirot, having completed the series last year. However looking into 2015, the outlook is more positive. We will see a return to good organic growth, help our investment in scripted, both in the U.K. and U.S., and there will be growth from acquisitions, not least a full year of Leftfield.

That acquisition made us the largest non-scripted independent producer in the U.S. It has created a business of real scale, producing over 120 shows and well over 1,000 hours of content in partnership with over 40 networks. Through a combination of strong organic growth and investment, our U.S. business is now four times bigger than when we started in 2010. Today, the content is mainly reality series with shows such as Duck Dynasty, Cake Boss, Hell's Kitchen, Pawn Stars, and Real Housewives of New Jersey. And our plan is to balance this with the quality scripted business, and the early signs are encouraging with project such as Texas Rangers, The Good Witch and Aquarius all sold straight to series and all with good international distribution potential.

That's the numbers and these results are strong all the way down to P&L. The financing costs are down, following the redemption of the convertible and the buyback of the remaining 2019 debt. The effective tax rate is slightly lower than our original guidance at 21%, and it should stay at around this level for the next couple of years. These benefits plus the strong revenue and EBITA growth have seen us deliver 15% growth in adjusted EPS and 44% growth in statutory EPS.

The number of shares used in these calculations has increased by 102 million following the redemption of the convertible. The Board believes it important that we maintain capital discipline and the flexibility to invest in the next phase of strategy, while at the same time moving to a more normal dividend. Therefore we have committed to a cover of 2 to 2.5 times adjusted EPS and for this to be achieved over the next three years. In the meantime, I am reflecting confidence in our future growth and cash flows. We have committed to the full year ordinary dividend growing by at least 20% per annum starting this year. The interim dividend of 1.4p is expected to be a third of the full year dividend.

One of our key financial strengths is our cash generation. Profit to cash conversion is 99%. 97% on a 12-month rolling basis. Our adjusted free cash flow before M&A and dividends is up 12% to £183 million and net debt was £201 million and this is after the $360 million acquisition of Leftfield and £257 million of dividend payments, including the special.

For the full year, our profit to cash conversion will be impacted by our investment in scripted content. This is where we fund the cost of production in advance of receiving the revenue from our broadcast customers. The cash investment on current projects is around £45 million to £50 million pounds which means our full-year profit to cash is likely to be 80% to 85%.

As you know, we look at the balance sheet on an adjusted basis that includes all debt-like items. On this basis, our adjusted net debt is just ever £1 billion or 1.6 times EBITDA. This is a comfortable level of gearing, which provides flexibility to support strategy. In the year, we completed the purchase of the remaining 2019 debt, spending £30 million to save £45 million of interest. We saw the 2014 bond mature. We doubled the size of our bank facilities on improved margins and covenants. And we are now a good investment grade credit with the major rating agencies. All of which means, we now have a balance sheet that's a more normal mix of bank and bond debt with a maturity profile manageable from a future free cash flow.

Finally, a quick update on the full year planning assumptions. The new guidance is, our profit to cash for the full year will be impacted by the investment in scripted and currency is now impacting our results. If exchange rates stay as they are, the revenues effect is around £30 million with profits impacted by up to £8 million. In other areas, the program budget and investments stay the same. We have improved our cost savings target by £5 million to £15 million. Interest cost should improve slightly to be between £8 million and £10 million and the tax rate is slightly lower than our previous guidance.

Pulling it all together, we have had a strong first half and we remain firmly on track to deliver a full year that once again will show good growth across the business. Thank you

Adam Crozier

Okay, before Q&A, as I said, I would just like to take a few minutes to give you a first look at how the strategy will evolve as well as just briefly outlining how we see the second half of this year. As you know, executing our transformation strategy has delivered excellent results since we started in 2010 and performance has improved significantly in every part of the business over the last four years, despite difficult economic conditions, increasing competition and changing technological environment. As we enter the next phase of our growth strategy, ITV is in a much stronger position and it's a more robust business, which is in demonstrably, I think, better shape creatively and financially, both in the U.K. and internationally.

Having improved the performance of the business, we think ITV is increasingly well placed to meet the opportunities and challenges of a rapidly converging global media market, as a scale player in the U.K. and emerging player internationally. Of course, there are changing viewer trends, although linear viewing, as I said earlier, remains robust, indeed, ahead of where it was 10 years ago. Connected TV viewing is starting to influence behavior, as I am sure you know. And video on demand is growing, but on the other hand, PVR viewing is leveling off and DVD viewing is declining and there is a shift going on there.

Of course there is convergence, another trend convergence between telecoms and TV. It is very much becoming a reality now. And not just in the U.K., but internationally. That's certainly bringing real competition for our premium content which, of course, for ITV Studios is also a very positive thing. In the U.K., 14 million homes are connected in 2014, which is around 55% of all households. Global demand for content continues on the back of that convergence to grow very strongly. Global revenues in content are growing around 5% to 6% per annum, actually about 7% in the U.S., fueled by a growing pay market, advertising recovery, and of course new entrants like telcos and over the top players, all looking for must have shows to differentiate their service platform or product.

Global scripted, in other words scripted work moving around the world, is worth about $4 billion. The U.S. actually accounts for about 80% of all this scripted hours airing in other markets. So that's why it is important for us to develop a U.S. scripted business. And the U.K. is the second biggest exporter of scripted.

Global non-scripted is also still growing. That's why it is important for us to be in that sector. And the U.K. and U.S. continue to lead the way in terms of developing formats that travel around the world. There is of course also the growing influence of global media brands, U.S. players are expanding internationally, for example, Viacom buying Channel 5. Consolidation in content, the proposed merger between Fox, Endemol and Shine is a good example. And global over the top players in a real push for growth whether that's Netflix or Amazon Prime. So a changing marketplace offering us challenges but also offering some really great opportunities for ITV.

We strongly believe that our strategic assets and sources of competitive advantage underpin the next phase of our growth. Our producer broadcaster status will increasingly give us a competitive advantage. The ability to create new ideas, showcase them and then use that track record to sell them around the world as broadcasters and platforms look to derisk their choices. The scale and reach we have in the U.K. in an ever fragmenting market will allow us to increase and maximize our advertising share. We have a growing global network and the development, production and distribution of content to meet that huge demand for premium content, particularly in the two key markets of the U.S. and the U.K.

And as we build the breadth, quality and scale of our content offering, we are better able to increase our opportunities to distribute and monetize the IP that we own on VOD platforms and pay platforms in the U.K. and internationally, either our own or the third party ones. All underpins, as Ian has described, and supported by strong cash generation and a balance sheet that enables us to invest in our future growth and reward shareholders.

As we enter the next stage of our growth plan, we are absolutely convinced that our original vision for ITV remains as relevant as ever. We see no need to change that. However, to take advantage of the opportunities I outlined earlier, we do need to evolve some of our corporate priorities to focus on those key areas of growth.

Our strategy will remain a clear and simple one. This is not a complicated business. And as always, it is really about having a very simple plan very well executed. Renewed strategic priorities will be a natural evolution of the current strategy and focus on the areas of largest potential growth. So we start with this thought that ITV is demonstrably a better business, commercially, creatively and financially. Our three key areas for growth was slightly evolve into maximizing audience and revenue share from free to air broadcast and video on demand business. And that's because as video on demand viewing in the medium to longer term will actually, in all probability become part of consolidated viewing ratings. In other words, a screen will be a screen and a view will be a view, irrespective of what screen you see that's on.

Secondly, we obviously want to continue to grow our international content business to meet this increasing demand and we are very well placed to do that. And of course, to build a global pay and distribution business using our increasing scale of IP ownership to do so over time. ITV is in good shape. Of course so, but we do need to continue to focus on efficiency and developing our creative and commercial culture. And over time, as we continue to rebalance the business and grow new revenue streams, both organically and through acquisitions, there will be an increasing emphasis on international content creation and international distribution.

Now if we look at those key opportunities for growth across the business. As I said as always, it's about execution, but in principle, what does that mean? In the first area, maximizing audience and revenue share. Of course, we have growth from economic recovery driving growth in television advertising. We want to, as we are doing, strengthen content, channels and brand to maintain our unique scale, grow our share in the key demographics, maximize total viewing and revenue across all platforms, grow our share of total TV and VOD advertising, exploiting that unique scale, support platforms that make ITV content prominent and that's important.

YouView is growing strongly, now in 1.4 million homes and will be launching free view connect as well. And of course, which we mentioned before, in the medium term, secure retransmission fees. And you can expect to see a major push from us on that from September onwards, not just from ITV, but from an industry point of view. There real benefits to retransmission fees to the U.K. economy, the TV and production industry and indeed to the U.K. citizen. Retransmission fees in the U.S. are worth around $3.3 billion and that's expected to double in the next five years. So actually around 15% of total television revenue today. And again, is expected to grow around 22% in time, 25% rather in five years time.

If you pick one example, completely at random, such as Fox, you will see that their revenue in 2013 was from retransmission fees was $429 million 22% of their total TV revenues. And what is shown in the States is that it drives investment in original content and in many ways has been the driver leading to a golden age of television in the U.S. So you can expect to see more on that from September onwards.

Looking at growing our international content business. We obviously want to exploit the increasing demand for greater content globally, leverage our U.K. producer, broadcaster status, add new scale in the U.S. to develop and own more quality content. As you know, our model is different. We want to develop and own our IP, not produce shows for other people as a producer for hire. We are developing our global scripted business and we expect to have the scale of around 6 to 10 new series per year. We are well on track to do that next year. We continue to attract and retain creative talent to create and secure more hits.

We are doing more and more to develop a commission for the younger age group 16 to 24 year-olds, the way we are targeting ITV2 and ITVBe. The purchase of DiGa, for example, in the U.S., we specifically aim at that market, and the fact that we are signing up to do multichannel networks. Obviously, they are all leading in the same direction of developing more quality content for that younger audience. And of course we want to build content supply partnerships in the U.S. Not necessarily with the bigger groups just doing things on program by program basis, but in partnership too.

Thirdly, using that increased scale and ownership of IP to begin to develop a global pay and distribution business. Of course we want to package and sell our content to maximize their value, very much exploiting the competition that now exists in this converged media landscape, to launch new pay services such as ITV Encore, either on our own or in partnership both in the U.K. and internationally. And take advantage in the growth in VOD by providing content to international pay platforms where there is lot more ground to cover there. And of course develop wider partnership with over-the-top and video player, such as the one we have in Scandinavia with Cirkus. So all in all, a lot of growth to go for, from an ITV point of view.

So in summary, before we move to Q&A, a strong set of results, as Archie said, right at the beginning and on track for another year of growth. We are in good shape, creatively commercially and financially to continue our positive momentum. At half year, strong set of results, revenue growth and double digit profit growth, really starting to see the economic recovery coming through in advertising, further progress and rebalancing, improved balance sheet efficiency and increased shareholder returns, full year clearly on track for another year of growth. We expect to be in advertising terms around 6% up at the nine months and will outperform the market. In online, pay and interactive growth in the second half, at least in line with H1. Also expect Studios to have good growth across this year, driven by the acquisitions and a return to good organic growth next year. And of course, the commitment on balance sheet and dividends going forwards.

And lastly on the strategy, and I think and I hope you can see that we enter the next stage of our growth strategy from a position of real strength. We remain committed to our vision of creating a global content and distribution business. Clear opportunities for growth right across the business and we will continue to rebalance with an increased emphasis on international.

Thanks very much for taking the time to listen and very happy to open up now for questions. Thank you.

Question-and-Answer Session

Archie Norman

Just before we move to questions, I should have mentioned, there a number of other ITV colleagues in the room Mary Fagan, Fru Hazlitt, Simon Pitts, Pippa who most of you know in the front, I can see Tom Betts and Andrew Garard in the middle ranks and I think William Medlicott is lurking in back there. We will all be to stay on afterwards and chat obviously, if there are further points you would like to discuss.

On questions, could we please take one at a time. I know, most of you have more than one, but one at a time, so we can respond to that. And would you be kind enough just introduce yourself before you start. We may know who you are, but then not everybody does. So that will be great. Okay, who want to kick off? Yes? So we have got a lady here.

Lisa Yang - Goldman Sachs

Good morning. It's Lisa from Goldman Sachs. Thank you very much for the clear presentation. I think it's the first time you seem so positive about retransmission fees, because in the past you always said, it could happen longer term, but there are a couple of things to happen before you can get retrans fees. So maybe can you share with us what makes you so confident? Have you been in discussion with the platforms or with the regulators? And also, what needs to really change in the market for you to get retrans fees? Do you need regulatory intervention, because I think at the moment there are some less of an obligations? Or are you more inclined to do bilateral agreements with the platforms?

Adam Crozier

I think we always said pretty clearly that that we see retransmissions as a medium term issue for us. I think what we have been doing is taking the time, as I think we said we would to really prepare our case as to why we think the introduction of retransmission fees is right. We have undertaken a study of how it works in the U.K. and we will be unveiling that in September, which we will talk about what effect retransmission fees have had on the U.S. market, not just from the broadcasters and content owners point to view, but also on the market itself and indeed on the citizen and the viewer. All of which you will not be surprised to hear was pretty positive. And so having got that information, obviously we do need to get some regulatory change in the U.K. That process, behind the scenes, has been going on for some time in terms of lobbying, not just from an ITV point of view, I should add, but from other broadcasters' point of view as well. But clearly it will take some time to progress. But I don't think it is difficult to get people to understand the general principle. I think the easy way to think of it is if you were a drugs company and you spent years developing a fabulous new drug on the point that it was going out and becoming very valuable and useful, you wouldn't just hand it over to someone else and let them make lots of money out of it. And in effect, ours is the same thing. We hand this great, we get paid for most of the other things we do, but the thing that really generates the difference we handle, is worth nothing. And clearly, from our point of view that is not an acceptable situation. And we believe in time that needs to change.

Lisa Yang - Goldman Sachs

And the second question is, I mean you talked a lot about the convergence between TV and telco. How do you view recent Liberty's move into the free-to-air market? And where do you see the potential synergies by combining, let's say, potentially ITV with a telco business theoretically?

Adam Crozier

So only two questions together. That's fine. I think the best to answer that question is, is just to simply say that, as I think you all know, we have a really clear strategy, which we are fully focused on delivering and its delivering excellent results for ITV and real value for our shareholders and we are confident that that will continue to be the case going forward.

Anything else, really is a matter for Liberty and a question for rather than a question for us. I can reassure you that other than a call from Mike Fries to myself the night before out of courtesy to let me know that they were in the process of acquiring the Sky stake, there has been no contact at all and we will of course treat them in exactly the same ways we treat any other shareholder.

Lisa Yang - Goldman Sachs

But would you see scope to develop partnerships with them to the same extent as the relationship you have with Sky?

Adam Crozier

If you separate the two things. Actually we do tons of work for Discovery in the U.S. and we do lots of work with Virgin here in the U.K. and our deal with Virgin is not entirely dissimilar to our deal with Sky. So all of those ongoing relationships go on all of the time. But that is very much separate from the stake which they have taken in the last couple of years.

Lisa Yang - Goldman Sachs

All right. Thanks very much.

Archie Norman

Thank you, Lisa. But in interest of efficiency, I was going to suggest you pass the microphone to your left. And we will come down the line.

Ian Whittaker - Liberum

It's Ian Whittaker from Liberum. First off, three questions. Just following off from Lisa's question on retransmission. One, the arguments that Sky has put forward against retransmission revenues essentially would mean that pay-TV subscribers who pay twice fro the content because of the BBC license fee, just wondering how you get around that argument?

Adam Crozier

You know what, I will do that one first and then we will go to next.

Ian Whittaker - Liberum

I will go.

Adam Crozier

Okay, yes, sure. First of all, clearly from most broadcast point of view retransmission fees would clearly be additional revenue, incremental revenue. From a BBC point of view, may be more complicated. It is obviously not for me to comment on how they will decide to approach this. But it either could be in addition to license fee or it could be substitutional within the license fee and that's clearly a matter for the government and the BBC to sort out rather than for us. But certainly when you look at the U.S., it is very clear that it absolutely did not result in higher fees for the consumer to be paid. Because of course there is great competition across many different platforms and really it's for the platform to bear the cost of this, not the consumer. And that's certainly the lesson from all the other markets. So I think that's a stretch, shall we say.

Ian Whittaker - Liberum

Second question, just on the commitment on the dividend and of the future growth, how much that reflect a greater confidence in the free to air advertising model to maybe a few years back? And how is it more to do with just the strength of your balance sheet?

Adam Crozier

Well, I think it's the general health of the business as a whole. I think it's, you know, ITV has rebalanced somewhat. We still want to go further. So I think it's a better balanced business, it's a more robust balanced business, as Ian said very clearly, I think we have a more normal balance sheet than what we had before. We are clearly at the early stages of an economic recovery that's starting to flow through in advertising and in all the areas of our business, we can genuinely see opportunities for growth. Clearly, we then still have to deliver that. But we can see those opportunities there and I think from that in the round, the rent the Board has confidence in the quality of the state of the business. And I think we have always said that we wanted to have a progressive dividend policy and we wanted to get to a normal level. We didn't start from a particularly normal place, as you know, and we have tried to get there. And clearly we have also had special dividends along the way and we will continue to look at any opportunities for that by balancing up what we need to invest in the business with our overall position. And I think we have shown that flexibility over the last few years. And I think we will continue to do so.

Ian Whittaker - Liberum

And then just the final question. Just in terms of the language that you have used on outperformance of the TV market in 2014. It seems to have strengthened from outperform to significantly outperform. There's been some news reports suggesting that Omnicom, for example, has taken money out of Channel 5, and shifted into to the ITV channels. Just wondered if could talk a bit more about that? Has that been a significant factor? If there are any other factors that were in play?

Adam Crozier

Well, we had a fantastically strong year on-screen last year, and getting back to normal this year. I think I have often said, as fragmentation occurs, we are increasing the place to grow for real impact in advertising. I think a lot of advertisers understand that and reflect that because whilst they are using a lot more online advertising, they still need to get that brand message across to large audiences very quickly. So I think we are in a good position. And I think we are very comfortable about the deals we have done. And whilst I would never comment on any individual deal, clearly with all the agencies, we look to do deals that increase our market share. And we have managed to do that and where that share then comes from is not a matter for us. We don't spend any time worrying about that. What we worry about is, are we increasing our share on the back of the efforts that Fru and the team are putting in. So we are very comfortable about the deals we have struck. And I don't think we would say so clearly that we expect to outperform the market if we didn't on the basis of that.

Archie Newman

Okay, keep going.

Filippo Lo Franco - JPMorgan

Hi, it's Filippo Lo Franco with JPMorgan. So I have two questions. The first one is on the margin on Studios. I have to say that the increase is quite impressive. You gave us some thought about how you have done this, with more efficiencies. But can you give us a little bit more of insight on this and if this is sustainable going forward?

Ian Griffiths

It is certainly sustainable for full year, but as we said, talking about production margin always gets into what our future mix of revenues is. But as I said in my little script, the first half of the year, we benefited from production efficiencies, which is us making our shows more efficiently. We have tax credits which come through. Draw on the credits which came through. Not just in the U.K., but globally which impact our cost base and makes the shows much more efficient. And then the revenue mix in the first half has benefited from higher margin revenues coming through. The most notable one, which I touched on was on Duck Dynasty. Duck Dynasty which has been huge show in the States, as we talked about before, was ranked number one to three in T-shirt sales for three months of last year.

Adam Crozier

That's something you never thought you would hear at an ITV conference.

Ian Griffiths

And this is why owning these types of franchises and shows and formats is really important, because the ancillary revenues that come off them are really high margin. And that has helped in the first half of the year. Second half year, we have got the benefits of six months of Leftfield coming through which when we bought the business, we were very clear that that is a high margin production business rather than ruining at the normal 15%, 17%. It's a 25%-ish business. So for the full year 2014, yes 17%, 18% margin is sustainable. Going forward, the mix of revenues would draw the margin.

Filippo Lo Franco - JPMorgan

You are going to make some other production company very jealous. The second question is, in terms of, again on the content, in the States now you are the number one independent content producer, I think and clearly this will give you scale in the future and in dealing with the U.S. broadcasters. The question is that have you already seen a difference in the way that you interact with a U.S. network or U.S. distributor in general?

Adam Crozier

Well, we have seen really over the last two to three years, a difference in the way we have been working in the U.S. We have always had as a sort of kindred spirit in terms of being broadcasters in the U.K., we have always had very strong relationships with the networks in the U.S. That is one of the attractions of ITV to an independent is the strength of our overall relationships. And over the last couple of years and increasingly we are doing scripted projects in partnership with networks. And that's a very positive thing. And of course we are becoming a much more important partner or supplier to them which means that we are talking to them a lot more, we are much more aware of what they are doing with their schedules, to what they are looking for, the ideas they need and I think of course the more you become a trusted supplier who they know, if they buy an idea from me, you will get it right and on time and on budget. That always improves relationship. And that's an ongoing thing. I wouldn't say it's just in the last couple of months. I think that's been steadily improving over the last the 24 months and clearly that's a good thing, from our point of view. We wanted to be a good partner to those broadcasters out there and to be seen as someone they trust to give them great creative that works on-screen and does the job it's supposed to do.

Filippo Lo Franco - JPMorgan

Thank you.

Archie Norman

Okay. Yes, we will come to here.

John Karidis - Oriel

Thank you. John Karidis from Oriel. I have got two questions, please. One there, a number question. You said something in the statement about CapEx this year. What should we assume going forward? So from next year onwards, please?

Ian Griffiths

So we have CapEx this year is guided to £40 million to £45 million. That's pretty much the normal level of expenditure you should expect to see from us going forward.

John Karidis - Oriel

Great, thank you. Secondly, given the scale of the Leftfield acquisition and the sum of everything you have said today about the dividend, what can you say, please, if anything to help us judge the likelihood of future special dividends? I know in answer to an earlier question, you did mention special dividends, but I am trying to understand the likelihood of these happening in the future?

Adam Crozier

What I can say is precisely nothing. Not in a joking way. But I think we have shown that we are trying to take a balanced view as we get towards the end of each year. I said, given the scale of the Leftfield acquisition, in normal terms, that's not a huge acquisition. It's bigger than we have done to-date. But it's an important one. It's a growing business and it's a high margin business and we think that's a very good fit with ITV and it's helpful in achieving our overall objectives. We will, as always, as the year progresses, the Board will look at the balance we have of where we want to invest for our growth for the future going forward, maintaining capital discipline, still having I think a reasonably conservative balance sheet given the kind of company we are and then we look at what is possible from shareholders point of view. But I think the first step for us was the one we have announced which is clarifying our policy in terms of ordinary dividend and we will continue to keep it watching brief on whether it's right to pay any special dividends going forward.

John Karidis - Oriel

Thank you.

Archie Norman

Okay. Front row.

Laurie Davidson - Deutsche Bank

Hi there. It's Davidson Laurie from Deutsche. The first question is just on the organic growth in Studios for this year and for next. You mentioned that there should be a decent recovery coming from next year, specifically out of scripted. How are you thinking about organic growth for this year and how that improves next year in terms of actual numbers? So that was my first.

Ian Griffiths

For 2014, the organic revenues will be broadly flat. So what's happened in the first half, those phasing things we talked about both in the U.K. and in the U.S. will unwind but the U.K. is going struggle to grow organically, as both Adam and I have said, largely because there are fewer drama and entertainment commissions in the ITV scheduled for our Studios to be pitching for. So the U.K. will be slightly down but there will be growth over the full year from our international business.

Net net, organic revenues will be flat. The Studios business in total again, as we both said, will show good growth driven by the acquisitions coming through. And we have talked about previously that the acquisitions before Leftfield were going to add roughly £40 million to £50 million of revenue into 2014. You add Leftfield into that and you should see roughly £100 million in incremental revenue coming through in 2014 on top of where we were last year. So with flat organic, £100 million coming through from the acquisitions. Factoring the currencies, you will still show good revenue growth from our Studios business.

Looking into 2015, it's all the things we both touched on in terms of the growth in organic is looking good. We have got visibility looking into 2015, type of schedule we will have in the U.K. and we have got the investment coming through in ITV Studios in the U.K. and in the U.S. on scripted and we have also got six months of Leftfield. So net, net 2015 should see another year of good growth as well.

Laurie Davidson - Deutsche Bank

Are we thinking double digit there, to that extent or single-digit range?

Ian Griffiths

Well, when you add it all up, you could be looking at end of the year where we will seen another £100 million, roughly £100 million of growth from organic and acquisitions coming through. That sort of level wouldn't be unrealistic to expect that.

Laurie Davidson - Deutsche Bank

And the second question is a broader one. Just on cross-border consolidation. We are seeing this now both on the content side and the distribution side. You have also indicated that you will be looking at increasing international distribution as a focus. Would you consider acquisitions of actual broadcasters or channels outside the U.K. now?

Adam Crozier

Well, you can see as we can see, there is a lot of convergence going on. There's some huge deals going on in the U.S. and elsewhere. One is that happening, there is a desire and a need for companies to grow and some of them can't quite see how to do that in their home markets There is tax inversion. There is the availability of cheap money or cheap funding. There is fear of missing out on assets. There is a whole series of reasons as to why some of these deals are going on, a lot of which, particularly in the U.S. are actually leverage and increasing leverages as affiliate deals and various things come up. So it's a happenstance of lots of different things, including the changing behavior of the consumer. And we can see real growth for ITV, as I said, ahead of us in each part of the company to really make headway in terms of developing pay services, whether you are licensing out your channels or content to third parties or doing it yourself, you have got to have a certain scale to be able to really to do that properly and clearly we have been building up the scale of the IP that we own and that starts to open up possibilities for us on the pay side. We will look at, a bit like we said originally on the content side, we will look at mixed economy approach where there is the opportunity to do things as a VOD aggregator, a la Cirkus. They are simply selling our great content to other third parties. They are creating channels like ITV Encore, which could exist here or in other countries too and indeed there might be an opportunity to partner with other broadcasters on setting up channels in other countries. So there is a whole host of different ways that we will look at to do that, but it starts with of course having the raw material which is the IP to able to do that. And I think we have said pretty clearly, across the business that we see growth coming organically and through acquisition. Of course, we do that, as you know, in a very disciplined way.

Laurie Davidson - Deutsche Bank

And just a point of clarification on the pay point. You mentioned pay deals, potentially outside the U.K. Would that be simply licensing content for pay channels? Or would it actually be pay platforms?

Adam Crozier

Potentially both.

Laurie Davidson - Deutsche Bank

All right. Okay.

Archie Norman

Okay. So we go, right to the back, just for the sake of democracy. Then we will come down here.

Alex DeGroote - Peel Hunt

Thanks guys. It's Alex DeGroote at Peel Hunt. One question only, you will be pleased to hear.

Adam Crozier

Thanks, Alex.

Alex DeGroote - Peel Hunt

Can you just scale retransmission fees for us, crudely? £20 million, £50 million order magnitude?

Adam Crozier

I will pass that to Ian, I think.

Ian Griffiths

And I will say, no.

Adam Crozier

I think I can (inaudible) to be helpful, I will try to be helpful up there. First of all, it would work slightly differently in the U.K. from the way it would work in the U.S. I think that should be reasonably clear to anyone, given the involvement, I think it was Ian raised, of the BBC. I think in some part, the fees would need to be set by a regulator in order to make sure that was done sensibly.

And then secondly, unlike the way the local market works there, it was very fierce competition between players to get things exclusively. It's unlikely that people would want to grant rights exclusively to one party or another. They might do but likely it is not. So I think therefore you would have to factor that into any estimate of the payments. But of course, just to remind you, we as do Channel 4, as do Channel 5, and we are obviously get paid already by these platforms for all our other channels and all our catch up rights and VOD rights, and everything else. So we are already being paid other than from the most valuable thing that we give them. And of course, that gives us an idea of the kind of maximum money that should be paid on a subscriber basis.

Alex DeGroote - Peel Hunt

Thanks.

Archie Norman

Okay. Thanks. Yes?

Adrien de Saint Hilaire - Exane BNP Paribas

Good morning. It's Adrian from Exane. Thanks for taking those questions. So two of them, please. The first one relates to I think what was the best surprise of the release was online, pay and interactive, which was up 25% in H1. This is a strong acceleration from Q1 and I am not sure you have sized what drove the acceleration in Q2? That's the first part of the question.

Second part of the question. I know you don't really break out the margins, but I know Ian gives afterwards separately.

Adam Crozier

It seem to have stopped that.

Adrien de Saint Hilaire - Exane BNP Paribas

So why don't you talk about the delta in the improvement? I am just wondering, is it still accretive to margin?

Adam Crozier

You might have just dropped him in it there, but we will just that for now. I think we said the growth in the first half was 20%, not 25%.

Adrien de Saint Hilaire - Exane BNP Paribas

Sorry, 20%, not 25%.

Adam Crozier

And we did talk about the given things like ITV Encore. ITV Encore launched on June 9. So there is very little effect in the first half, that's why partly we said that we expect H2 to be at least in line with H1. But Ian, you want to say something?

Ian Griffiths

There are two things that drove the growth are the VOD advertising remaining very highly demanded underpinned by our high CPMs, strong CPMs, not high CPMs. Great value CPMs, strong audience growth which means we are coming through consistently around the 20%. That's an acceleration from the growth we saw last year, which was driven by the content we have content and for the content now more platforms and we mentioned the Sky platforms that we are now on and in Go and Now TV which really helped. And then the fact, we are getting it out onto more platforms, we get paid for that as well. So those two things together drove that growth and as Adam said, we have got in the second half of the year, six months benefit from ITV Encore which is why we can be confident looking ahead at the growth rates for H2 will be at least as much as the 20% growth we did in the first half.

Adrien de Saint Hilaire - Exane BNP Paribas

And can you talk about, if it's accretive to the group margins?

Ian Griffiths

There is strong conversion, as you see in the profit charts. There is a really strong flow through it, from an increase in revenue to increased profits in the broadcast business.

Adrien de Saint Hilaire - Exane BNP Paribas

And second question is, have you made any decision yet on how much you intend to reinvest from the Champions League costs dropping off next year? And can you share that with us?

Adam Crozier

No. We have also got the Rugby World Cup next year. So the Champions League next year we don't have it, of course it would start around October time, September, October time which of course is when the Rugby World Cup will start as well. So we will have to look at the things in round for the schedule next year.

Ian Griffiths

Yes, we only get full year saving for Champions League in 2016.

Adrien de Saint Hilaire - Exane BNP Paribas

Thanks.

Archie Norman

All right, we will just take one or two more. So?

Julien Roch - Barclays

Julien Roch with Barclays. Three questions, if I may. The first one is, on SOCI, which were down 5% after Q1 and the first half. You said it is going to get better in the second half. So let's say you finished your year at minus on SOCI. Five years ago, it was quite easy, minus four was the impact next year. Now things are more complicated. CR is having less of impact. So could you give us an idea of the drag of that SOCI performance next year between 0%, it does not matter anymore and the full 4%, is my first question?

Adam Crozier

It is sort of an open-ended question, really, because we have to deal with it and clearly we want SOCI to improve. We also look not just at the overall SOCI level but the makeup of the demographics of that. I think I mentioned in passing during my part of the presentation that increasingly we are also trying to be segmented the channels, for example, ITV2 that much younger audience as indeed ITVBe will be aimed at young female audience and that's clearly being done deliberately to target that very valuable younger audience that advertisers are really after. So we increasingly will do those kind of things not just look at the overall scale but the individual elements of that. Notwithstanding that, we obviously are very focused on trying to improve our SOCI position over the rest of the year, but as you know we don't now do a lot of our deals on annual basis. So you used to have this very clear drop-off point of every deal finishing. We did them. So most of them are on a rolling basis now and a number of cover a number of years. And with level we wouldn't expect it to cause us much of an issue.

Ian Griffiths

And Adam, sorry, just on the first half, the demos that we have delivered, in particular the younger demos in the male helped our football clearly, mean that the weighted SOCI when you look at it in terms of demos by revenue is actually much better than the 5%.

Julien Roch - Barclays

Okay. The second question is on content. So no organic growth this year, good organic growth next year, is the name of the game. It's quite lumpy. How fully, you said that you thought the global market would growth 5% to 6% on average over the five years. I assume probably expect to gain share. So over, say, five or 10 years, what kind of organic growth rate do you expect for Studio versus that 5% to 6%?

Adam Crozier

Well that sounds like sort of what if question. I should probably avoid like the plaque. Then I think there is great demand there. We clearly want to increase our market share. It is becoming clearer and clearer that the two drivers of this, in terms of markets, are the U.S. primarily and the U.K. That's why from day one, we have been very focused on growing our content company in the U.S. That's why it is important we are in scripted because scripted is one of the fastest growing areas and then if you look at the way that bigger broadcasters, the telcos, the over-the-top players are looking to differentiate themselves is often through drama. And therefore that's s great opportunity for us. We have targeted producing 6 to 10 new dramas, global scripted dramas each year. We are very much on track to do that for next year and that's the sort of rate that we have to keep up. Alongside through GE, we are getting involved in financing and distributing a lot of third-party drama as well. We got some rally good stuff coming up again in 2015 and 2016, Poldark, for example, for the BBC, Rectify from AMC and a great new comedy coming up called Schitt's Creek, no jokes about being up Schitt's Creek, which looks fantastic and is a great offering. So we have got of a lot of work going on behind the scenes and all of that will be hitting 2015 and 2016 as well as things like Thunderbirds. Bu that's a real growth area for us and if you look at the question earlier about convergence, I don't see that drive to use content as a key differentiator coming to an end any time in the medium to long term. In fact you can only see that increasing frankly.

Julien Roch - Barclays

And the last question is, asking this quite similar to between the global content industry and advertising agencies, i.e., you have lots of independent producers. So you could spend all year buying lots of companies and the advertising agencies are quite helpful, but going kind of an indication of M&A spend every year. So could you do that as well? Or not?

Adam Crozier

You are right. I think people, if you look at Martin at WPP, I think there are number of companies who do that. And we actually see that as effectively as business as usual. I don't think we are really quite in that position to be honest. If you look at just the U.K. market, by way of example, there is an incredibly long tail of very good, but pretty small companies, revenue £5 million to £10 million, where they have really got one or two programs up and running and that's great for them. I am certainly not declining that. But that is not going to move the dial, particularly for us on our scale. So I don't think we have ever outlined how much we would specifically spend on an M&A and I don't know we would want to do that going forward. But we are absolutely clear, just so there is no avoidance of doubt, that we will look at M&A opportunities. And we do see our growth coming from a mix of organic and M&A and that I think is very important part of our strategy.

Julien Roch - Barclays

Thank you.

Archie Norman

Okay. I think we will draw a line there. Thank you very much, everybody. I think you know if you detect a progressive change in tone, confidence and ambition about the future of ITV, that's because as the transformation program has succeeded, there is one. And we have never been more confident about the future of this business and its capability to drive growth and produce outstanding creative content. So, thank you very much. We are happy to stay around and chat. So if anybody wants to do that afterwards, otherwise I know you all be following up anyway. And have a great summer.

Adam Crozier

Thanks, folks.

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Source: ITV's (ITVPF) CEO Adam Crozier on Q2 2014 Results - Earnings Call Transcript

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