REG - ITV PLC - Annual Report and Accounts 2014 <Origin Href="QuoteRef">ITV.L</Origin> - Part 2

ITVAnnouncement

26/03/2015 10:30

- Part 2: For the preceding part double click  ID:nRSZ5364Ia 

strong financial position, cash generation and global distribution we are also retaining more
IP by producing drama straight to series in the UK and US. Although more expensive than producing a pilot, this helps
attract high profile talent to a production and raises the profile of the series to support its distribution. The
production cost is partly funded by pre-selling the series to a network, while the remainder, the 'deficit', is covered by
revenue from the international distribution of the finished product. As our portfolio grows, we will have a number of shows
at different stages of the production cycle thereby balancing our financial exposure at any one point in time. 
 
Investing to build an international business 
 
Our acquisitions to date have been focused on factual and scripted reality producers in the US and UK, the two key markets
with a track record for creating and owning IP. We are looking for companies with a solid financial and creative track
record as well as a strong pipeline. By maintaining this strict acquisition criteria, ITV has become a top global player in
non-scripted production. 
 
In 2014 we made three acquisitions as we look to continue to diversify our revenue streams and increase our reach. In
February we acquired a 51% controlling interest in DiGa Vision (DiGa), a US independent producer of reality and scripted
programming, and 100% of United Production (United), a Danish producer of factual and entertainment programmes. 
 
In May we made our largest acquisition to date, purchasing 80% of Leftfield Entertainment, a high margin US producer of
reality programmes, for an initial cash payment of $360 million. Leftfield also owns Sirens Media and has established two
joint ventures, Loud Television and Outpost Entertainment. Together the group produces more than 300 hours of unscripted
programming for over 30 US networks with a portfolio that includes Pawn Stars, American Restoration and The Real Housewives
of New Jersey. 
 
These businesses add to our growing portfolio of production companies acquired over the last three years which have
included Gurney Productions, High Noon Entertainment and Thinkfactory Media in the US, The Garden Productions, Big Talk
Productions and So TV in the UK, as well as Tarinatalo and Mediacircus in the Nordics. 
 
We are also looking to develop joint ventures with key creative talent, such as our scripted drama and comedy partnership
with Marty Adelstein which launched Tomorrow ITV Studios in 2014. More recently, we announced a new entertainment label
within ITV Studios, Possessed Television, in partnership with Glenn Hugill. 
 
Number one commercial producer in the UK 
 
Local content in the UK continues to drive the largest audiences and, as an integrated producer broadcaster, ITV is well
placed to benefit from this demand. 60% of the total spend on original commissions on the ITV main channel is now with ITV
Studios, up from 50% in 2009. 
 
In 2014, ITV Studios total UK revenue was up 1% to £459 million (2013: £456 million) with growth impacted by the proportion
of the ITV Broadcast programme budget allocated to the FIFA World Cup. This reduced the available spend on internal drama
and entertainment shows in the year. However, during the year we continued to grow the number of shows that return and
travel with 2014 recommissions for ITV including Mr Selfridge, Saturday Night Takeaway and Big Star's Little Star. 
 
Off-ITV we delivered new series of The Graham Norton Show and In It To Win It for the BBC, and Come Dine With Me and 24
hours in A&E for Channel 4. 
 
We continue to receive strong recognition for the quality of our programming and calibre of our talent and won five BAFTAs
for our content in 2014. 
 
Top international indie producer 
 
Our international production business is growing strongly, with revenue up 24% to £330 million (2013: £266 million) in
2014. 
 
We are now the largest unscripted independent producer in the US, generating 141 programmes and 884 hours of content in
2014 in partnership with 45 networks. US revenue increased 34% to £235 million in 2014 (2013: £175 million) reflecting the
acquisition of Leftfield and the longevity and international appeal of our successful returning series. In response to
network demand, we have built a strong portfolio of high volume formats and shows that return year after year. Examples
delivered in 2014 included Hell's Kitchen USA, Pawn Stars and Duck Dynasty. 
 
Our other international bases in Germany, France, Australia and the Nordics produce their own original formats alongside UK
formats. International revenue increased 4% in 2014 to £95 million (2013: £91 million) driven by good organic growth in
Germany and France. Germany benefitted from commissions in the year which included Quizduell, series eight of Ich Bin Ein
Star (the German version of I'm a Celebrity... Get Me Out Of Here!), Hell's Kitchen and Mini Beiz, Dini Beiz while France
benefitted from Four Weddings and Party Wars. Other international successes delivered during the year included The Chase in
Norway, Keeping the Nation Alive in Norway and Denmark, and Big Star's Little Star in Finland. 
 
2015 and beyond 
 
We look ahead to 2015 with confidence as the production lead times give us good visibility of our upcoming deliveries. We
expect ITV Studios again to deliver around £100 million revenue growth on a constant currency basis reflecting a return to
good organic growth, helped by our investment in global scripted content and supported by a full year of our 2014
acquisitions. As ever, ITV's revenue growth will not be spread evenly throughout the year because of the phasing of the
delivery schedule required by our network and cable customers. 
 
New commissions to be delivered in 2015 will include dramas Jekyll and Hyde, Home Fires and the relaunch of Thunderbirds
Are Go in the UK, I'm a Celebrity... Get Me Out Of Here! in Australia and Saturday Night Takeaway in the US. While our
drama production has historically been focused on the UK market, we are growing our scripted presence in the US and have
three large scale dramas, Aquarius, Texas Rising and The Good Witch that will go straight to series in 2015. 
 
Longer term, leveraging our network relationships and global scale in production and distribution, our strategy is to have
an ongoing portfolio with six to ten international scripted series in production per annum. We will also look to accelerate
growth through further acquisitions while working to attract and retain key creative talent to ensure our creative pipeline
remains strong. 
 
3 Build a global pay and distribution business 
 
As digital media and consumer viewing behaviour continue to evolve, our ability to create and distribute high value content
in new and efficient ways is of increasing significance. ITV is continually exploring, experimenting and developing our pay
services with broadcasters and platform owners while also seeking new opportunities to extend the reach of our content for
the consumer. 
 
Exploring new models for content creation 
 
As the way in which our viewers consume content changes, especially amongst the younger generation, we are growing our
exposure to new types of content including short form and younger-focused long form programming. In 2014 we agreed a deal
with YouTube to launch a number of short form channels including I'm A Celebrity... Get Me Out Of Here!, The Chase and our
soaps. 
 
We are also building a presence in international digital production. Our acquisition of US producer DiGa in the first half
of 2014 gave ITV exposure to digital formats. 
 
Following this, in 2014 we have made three further investments in the digital arena as we look to develop greater expertise
in monetising online audiences. In September 2014 we made small investments in Indigenous Media, a producer of scripted
digital content, and Believe Entertainment Group, a producer of digital-branded short form entertainment. Most recently, in
December 2014 ITV made an investment in Zealot, a digital content multi-platform network founded by Danny Zappin, former
CEO of YouTube multi-channel network Maker Studios. 
 
Generating new sources of pay revenue 
 
ITV earns revenue from pay television through licensing our channels and content. In 2014 Pay revenue grew by 63% as we
negotiated and renewed a number of deals. 
 
Most significantly, in January 2014 we announced a new four-year deal with Sky, which makes ITV content available through
Sky's range of connected platforms including Sky+HD, Sky Go, Now TV and Sky Store. This deal included our first ever pay
only channel, ITV Encore, which we launched in June. Additionally in 2014, we extended our deal with Virgin for another
year covering HD versions of ITV2, ITV3 and ITV4 as well as our new FTA channel ITVBe, and signed several other deals
including new deals with BT and TalkTalk. 
 
We are also looking to develop wider partnerships with on demand players as consumer demand for VOD continues to grow. For
example, in the year we made an investment in Cirkus, a UK-based subscription VOD service that offers the 'best of British'
television content to pay television platforms and their customers across the Nordic region. 
 
There remains scope to grow our UK pay revenue further through extensions of our existing propositions as we experiment
with new ways of monetising our content. Past initiatives have included: trialling pay opportunities on ITV Player for
episode premieres of programmes; our ad-free subscription ITV Player app on iOS which has been well received; and, most
recently we made the first series of the comedy Cockroaches available exclusively online one week ahead of its broadcast,
intended to enhance viewer awareness and engagement with the show's young audience. We will continue to trial new sources
of pay revenue as we further develop our pay strategy. 
 
A leading European distributor of television content 
 
ITV Studios, through Global Entertainment, has a substantial archive of over 40,000 hours of television and film that we
distribute to broadcasters around the world. This is predominantly ITV produced programming, with 2014 successes including
Hell's Kitchen US, Mr Selfridge and Lewis which have all been sold to over 150 countries. 
 
We are benefitting from the growth in our UK and international production businesses as well as deeper network
relationships as we build scale. In 2014 Global Entertainment increased revenue by 7% to £144 million (2013: £135
million). 
 
In addition to distributing ITV's own content, we are adding to our catalogue through the distribution of third party
content. In 2014 we acquired the third party distribution rights to a number of international dramas including Schitt's
Creek from Canada, Jordskott from Sweden and Poldark from Mammoth in the UK. 
 
Global Entertainment also continues to license ITV and third party formats successfully. The number of UK formats sold
internationally to three or more countries has increased from eight in 2013 to 12 in 2014 including I'm A Celebrity... Get
Me Out Of Here!, Saturday Night Takeaway, The Chase and Tricked. 
 
However, while Global Entertainment has a stable core of long-running series for international distribution, it takes time
for the creative pipeline of production to reach its full value potential. The business's available inventory naturally
expands as we produce and acquire new content and in 2015 we expect to see good growth in our distribution revenue from our
strong creative pipeline, our investment in scripted content, and further third party distribution agreements. 
 
2015 and beyond 
 
Overall, looking ahead we expect continued good growth in pay revenue as we develop further new ways to package and sell
our content to take advantage of demand in the UK and internationally. We will benefit from a full year of ITV Encore and
we will continue to explore new pay services and channels while growing our exposure to new types of content, including
digital. 
 
Global Entertainment remains well positioned for growth as we expand our inventory in 2015. In addition to our existing
programme and format archives, we will have new content available for distribution including our three new US dramas as
well as the benefit of Thunderbirds Are Go which has already sold to countries including the UK, Australia, New Zealand and
Israel. 
 
Lastly, to ensure we maximise the value of our investment in high quality content, we will continue to drive the debate
around the implementation of retransmission fees in the UK. In 2015 we will continue efforts to change the terms of UK and
EU policy debate around the issue and support our argument with strong evidence, such as the Nera report we commissioned on
the USA's retransmission consent scheme. We will build on existing support in both the House of Commons and the House of
Lords in the next Parliament and continue our conversations with the regulator, Ofcom, to make the case that we should be
fairly compensated by the major pay TV platforms in return for access to the content on the ITV main channel. 
 
Key Performance Indicators 
 
We have defined our KPIs to align our performance and accountability to our strategy. 
 
These KPIs are the key measures of success and cover all three strategic priorities. Following the renewal of our strategic
priorities our KPIs remain unchanged. 
 
EBITA before exceptional items 
 
Related Priority 
 
1 2 3 
 
Definition 
 
This is the key profitability measure used across the whole business. Earnings before interest, tax and amortisation before
exceptional items (EBITA) reflects our performance in a consistent manner and in line with how the business is managed and
measured on a day-to-day basis. 
 
Performance 
 
In 2014 EBITA increased by £110 million or 18%. This increase was a result of the 8% increase in Group external revenue
which was driven by a 6% increase in net advertising revenue, a 30% increase in Online, Pay & Interactive revenue and a 34%
increase in US productions within ITV Studios. We continued to retain tight control over our cost base, delivering a
further £15 million of cost savings in 2014. 
 
Group EBITA margin once again increased, up to 28% from 26% in 2013. 
 
Adjusted EPS 
 
Related Priority 
 
1 2 3 
 
Definition 
 
Adjusted EPS represents the adjusted profit for the year attributable to equity shareholders. Adjusted profit is defined as
profit for the year attributable to equity shareholders before exceptional items, impairment of intangible assets,
amortisation of intangible assets acquired through business combinations, net financing cost adjustments and other tax
adjustments. 
 
It reflects the business performance of the Group in a consistent manner and in line with how the business is managed and
measured on a day-to-day basis. 
 
Performance 
 
Adjusted EPS increased by 23% or 2.6p to 13.8p. This reflects the increase in EBITA before exceptionals of 18%, and a
reduction in adjusted financing costs. 
 
Profit to cash conversion 
 
Related Priority 
 
1 2 3 
 
Definition 
 
Profit to cash conversion represents the proportion of EBITA converted into a measure of adjusted cash flow (defined as
cash generated from operations before exceptional items less cash related to the acquisition of operating property, plant
and equipment and intangible assets). 
 
This primarily reflects our working capital management and capital expenditure control. Our aim is to keep profit to cash
conversion as high as possible. 
 
Performance 
 
Profit to cash has been maintained at a strong level in excess of 90%. The ratio was lower than 2013 as a result of the
increased investment in scripted content in 2014 which will continue in 2015. 
 
Employee engagement 
 
Related Priority 
 
1 2 3 
 
Definition 
 
Continuing to develop a creative, commercial and global organisation requires high quality employees who are engaged in the
work that they do, and are committed to the strategy. 
 
Employee engagement measures pride in the work we do, pride in working for ITV and also what we say about our programmes 
and services. 
 
Performance 
 
Employee engagement was once again high at 90%. Although this is slightly below 2013's rate of 91% it is still well above
benchmarks. The participation rate was 80%, also above the benchmark rate. 
 
ITV Family SOV 
 
Related Priority 
 
1 
 
Definition 
 
Strategic Priority 1 aims to maximise audience share from our existing free-to-air broadcast business, and ITV Family SOV
is the clearest indicator of this. ITV Family SOV is ITV's share of the total viewing audience over the year achieved by
ITV's family of channels as a proportion of total television viewing, including the BBC Family. ITV aims at least to
maintain the ITV Family SOV. 
 
Performance 
 
Following a strong 2013, ITV Family SOV declined by 5% in 2014 to 22.0%. Within this, the ITV main channel saw a decline of
4%, impacted by the strong performance of the BBC. The digital channels were also down, with ITV2 contributing most
significantly to the decline as a result of more competition from new UK digital channels in the year, but partly also due
to our repositioning of the channel to provide more targeted demographics for our advertisers through the launch of ITVBe. 
 
ITV Family SOCI 
 
Related Priority 
 
1 
 
Definition 
 
Strategic Priority 1 aims to maximise audience share from our existing free-to-air broadcast business, and ITV Family SOCI
is another key indicator of this. SOCI is the trading currency in the television advertising market, and since it only
covers commercial television it does not include the BBC. This is the share of total UK television commercial impacts which
is delivered by ITV's family of channels. An impact is one viewer watching one 30 second commercial. We aim to maximise our
SOCI. 
 
Performance 
 
After holding SOCI flat in 2013 ITV Family SOCI was down 5% in 2014, with the main channel down 5%. Within the digital
channels a strong performance from ITV4 was offset by a decline for ITV2 as we repositioned the channel to provide more
targeted demographics for our advertisers through the launch of ITVBe. 
 
ITV Family share of broadcast 
 
Related Priority 
 
1 
 
Definition 
 
ITV's share of UK television advertising revenue is known as its share of broadcast. To maximise revenue from our
free-to-air business, which is a key component of Strategic Priority 1, we aim to continue to maximise our share of
broadcast and to outperform the UK television advertising market. 
 
It is getting increasingly difficult to measure the total television advertising market as all broadcasters have different
definiti