Half Yearly Report

RNS Number : 6632N
ITV PLC
30 July 2014
 



ITV plc Interim Results

for the half year ended 30 June 2014

 

ITV on track to deliver another year of growth

 

Revenue growth delivered by all parts of the business

·     Total external revenues up 7% to £1,225m

·     ITV Family NAR up 7% ahead of the market, as expected

·     Online, Pay & Interactive up 20% to £67m

·     Total ITV Studios revenues up 2% to £402m

 

Another period of double digit profit growth

·     EBITA before exceptional items up 11% at £322m

·     Broadcast & Online EBITA up 10% to £250m

·     ITV Studios EBITA up 14% to £72m

·     Adjusted PBT up 16% at £312m

·     Adjusted EPS up 15% at 6.1p

 

Further investment in content - ITV Studios and on-screen

·     Completed acquisition of 80% of Leftfield Entertainment

·     Acquisitions coming through as expected

·     Investing in organic growth of our international scripted business

·     Successful launch of ITV Encore - ITVBe on track to launch later this year

·     ITV SOV down 3% in H1, improved from Q1

·     Further strong growth in long form video requests, up 20%

 

Positive outlook for full year and next phase of our strategy

·     Total cost savings of around £15m for the full year - £5m ahead of original target

·     ITV Family NAR expected to be up 4% to 5% in Q3 and up around 6% in the nine months to 30 September. We will significantly outperform the market over the full year

·     Online, Pay & Interactive will deliver strong revenue growth, at least in line with H1

·     Our acquisitions will ensure continued good growth in ITV Studios this year and into next year, and we will see a return to good organic growth in 2015 helped by investment in scripted

·     Looking ahead we are committed to our original vision for ITV

·     We see clear opportunities for investing in growth across the business - in content, online, pay and advertising

·     As our strategy evolves we will continue to rebalance the business and grow new revenue streams and there will be an increasing emphasis on international content creation and distribution

 

Delivering increased shareholder returns

·     The Board has declared an interim dividend of 1.4p which will be roughly a third of the full year dividend

·     The Board has committed to at least 20% annual growth in the ordinary dividend over the next three years

 

Adam Crozier, ITV Chief Executive, said:

 

"We have made further good progress with our strategy of growing and strengthening all parts of ITV. In the first six months of the year we again delivered double digit profit growth in every area of the business and increased revenues by 7%.  ITV Family NAR was up 7%, ahead of the TV advertising market and Online, Pay & Interactive performed strongly, up 20%.  Share of viewing improved during Q2, helped by the FIFA World Cup, and we're confident of our strong Autumn schedule with both new and returning drama and entertainment. Online, Pay & Interactive is on track to deliver strong growth for the year as a whole, at least in line with the first half. The economic recovery is leading to an improved advertising market, with good growth across all key categories and ITV is well placed to take market share.  We expect ITV Family NAR to be up around 6% in the nine months to the end of September and we will significantly outperform the market over the full year.

 

For the first half total Studios revenues were up 2% with the acquisitions coming through as expected while organic growth was impacted by the phasing in the delivery of some programmes and the proportion of ITV's programme budget allocated to the FIFA World Cup. We continue to invest in growing internationally and, following the acquisition of Leftfield Entertainment, ITV is now the biggest unscripted independent production company in the US. 

 

Looking forward we expect good growth in ITV Studios in 2014, driven by our acquisitions.  In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content, such as Texas Rangers and Aquarius in the US and Jekyll & Hyde, Jambusters and Thunderbirds Are Go in the UK.

 

We enter the next phase of ITV's growth strategy as a demonstrably better business than when we launched the Transformation Plan in 2010.  The plan we embarked on four years ago of rebalancing and strengthening ITV creatively and financially, both in the UK and internationally, is clearly the right one for the Company and our vision remains unchanged.

 

We will continue to rebalance the business and grow new revenue streams, both organically and through acquisition. We see clear opportunities for growth across the business - in content, online, pay and advertising and there will be an increasing emphasis on international content creation and distribution.

 

The market environment in which we operate is constantly changing, characterised by converging media and the increasing influence of technology, which brings both challenges and opportunities. ITV's financial strength and its strategic advantages including the scale of our UK channels, our share of the advertising market, and our growing global network in the development, production and distribution of content, put us in a strong position to be able to meet these challenges and exploit opportunities for growth.

 

As ITV enters the next phase of the plan the Board believes it is important that we maintain capital discipline and the flexibility to invest in the business at the same time as delivering a normal payout ratio for shareholders.  Reflecting the Board's confidence in the ongoing growth and cash generation of the business the Board is committed to the full year ordinary dividend growing by at least 20% per annum over the next three years - starting this year."

 

Half year results

 

Six months ended 30 June (£ million)

2014

2013

Change

£m

Change

%

Broadcast & Online revenue

981

914

67

7

ITV Studios revenue

402

395

7

2

Total revenues

1,383

1,309

74

6

Internal supply

(158)

(165)

(7)

(4)

Group External revenues

1,225

1,144

81

7






Broadcast & Online EBITA

250

228

22

10

ITV Studios EBITA

72

63

9

14

EBITA before exceptional items

322

291

31

11

EBITA margin

26%

25%








Adjusted profit before tax

312

270

42

16

Adjusted earning per share (EPS)

6.1p

5.3p

0.8p

15

Dividend

1.4

1.1p

0.3p

27

 

Adjusted profit before tax and adjusted EPS remove the effect of exceptional items which include acquisition related costs (professional fees, primarily due diligence, and contingent payments), impairment of intangible assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments and other tax adjustments.

 

The profit before tax and EPS from the Consolidated Income Statement are as follows:

 

Six months ended 30 June

2014

2013

Change

£m

Change

%

Profit before tax

£250m

£179m

£71m

40

Earnings per share (EPS)

4.9p

3.4p

1.5p

44

Diluted earnings per share

4.8p

3.3p

1.5p

45

 

Financial performance

We have delivered a good performance in the first half of the year with revenue growth across the business and double digit EPS growth.  External revenues were up 7% driven by 7% growth in NAR as expected and continued growth in non-NAR revenues up 4%. This, combined with our continued focus on cash and costs and our higher margin new revenue streams, saw us deliver 11% growth in EBITA to £322m and 15% growth in adjusted EPS to 6.1p, with reported EPS up 44%. Group margins have again improved, up one percentage point to 26%.

 

We have ended the first half with net debt of £201m following the acquisition of Leftfield Entertainment, dividend payments, debt buyback and pension deficit contributions.  Our tight focus on working capital management remains and our profit to cash conversion was 99% on a six month basis and 97% on a rolling 12 month basis.

 

Broadcast & Online

Broadcast & Online delivered a strong performance with a 7% increase in revenues driven by 7% growth in ITV Family NAR and 20% growth in Online, Pay & Interactive. Schedule costs were up as a result of the FIFA World Cup but given the highly geared nature of advertising revenues and the higher margins of Online, Pay & Interactive revenues, EBITA grew 10%.

 

The economic recovery is leading to an improved advertising market with good growth across all key categories. However, as we anticipated the television advertising market again showed significant fluctuations across the period particularly around the timing of Easter and the FIFA World Cup. ITV Family NAR was up 7% in the first half, ahead of our estimate of the television advertising market. We expect ITV Family NAR to be up around 6% in the nine months to the end of September and we will significantly outperform the market over the full year.

 

Our on-screen performance was down in the first half with ITV main channel share of viewing (SOV) down 3% with an improvement in Q2. ITV Family SOV was down 5%, impacted by a disappointing performance from ITV2 and ITV3. However, we have confidence in our strong Autumn schedule with many new and returning programmes and later this year we will also be launching our new free to air lifestyle and reality channel, ITVBe.

 

Online, Pay & Interactive revenues continued to grow strongly, up 20%, as we further improved the quality and distribution of our content and the rapid growth in audiences' appetite for video on demand (VOD) is in turn fuelling demand from new and existing platforms for quality content both free and pay, and from advertisers for VOD inventory. Our content is now available on 20 platforms which has helped drive long form video requests up 20%, with the soaps, The Only Way is Essex and Britain's Got Talent particularly popular. We continue to develop our pay services. In the first half we renewed our agreement with Virgin for a further year and we announced a new four year deal with Sky which sees our content available on more platforms and included the successful launch of ITV Encore, our new pay channel.

 

ITV Studios

ITV Studios delivered 2% growth in total revenues to £402m. Both our UK and International Production businesses showed growth over the half year, particularly International Productions up 9% driven by the acquisitions we have made.  Organic revenues for the first half were down 8%, with UK Productions down 4% and International Productions down 13% (8% at constant currencies). Organic growth was impacted by the phasing in the delivery of some programmes and by the proportion of the ITV programme budget allocated to the FIFA World Cup in H1. At constant currencies organic growth in the first half was down 6%.

 

The production efficiencies we have achieved and the higher margin revenue mix, including US merchandising sales, has helped deliver a 14% increase in EBITA to £72m.

 

As we become an increasingly international business our performance is also impacted by movements in foreign exchange. At constant currencies (using the 2013 exchange rates) ITV Studios revenues would have been £12m higher. If exchange rates stay at current levels for the remainder of the year, the full year impact on revenue will be around £25-30m and around £6-8m on EBITA. 

 

We made three acquisitions in the first half of 2014. In February we acquired a 51% controlling interest in DiGa Vision, the US independent producer of reality and scripted programming and 100% of United Production, a Danish producer of factual and entertainment programmes. 

 

In May we made the significant acquisition of Leftfield Entertainment a fast growing, high margin US producer of reality programmes.  We made an initial cash payment of $360m for 80% of Leftfield, with further potential payments dependent upon Leftfield's continued delivery of significant profit growth.  There are put and call options to buy the remainder of DiGa and Leftfield over three to six years, with the total amount payable linked to the performance of the company over that period.

 

Leftfield also owns Sirens Media and has established two ventures - Loud Television and Outpost Entertainment. Together these businesses produce more than 300 hours of unscripted programming for over 30 US networks.  The portfolio includes Pawn Stars, Counting Cars, American Restoration and Real Housewives of New Jersey.

 

The acquisition of Leftfield makes ITV Studios the largest independent unscripted producer in the US and represents a major step forward in ITV's strategy of building a strong international content business. All three acquisitions are important additions to the Group's growing portfolio of production companies. They follow ITV's acquisition in the last two years of Gurney Productions, High Noon Entertainment and Thinkfactory Media in the US as well as UK producers The Garden Productions, Big Talk Productions and So TV.

 

The growth in our UK and International Production businesses is starting to feed our global distribution business. However, in the first half of the year Global Entertainment was impacted by a reduction in drama, including Marple and Poirot, and currency movements.  In 2015 we expect to see good growth in our distribution revenues from our strong creative pipeline and our investment in scripted content, both from ITV Studios and third parties. 

 

Looking forward we expect good growth from ITV Studios in 2014, driven by our acquisitions.  In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content, such as Texas Rangers and Aquarius in the US and Jekyll and Hyde, Jambusters and Thunderbirds Are Go in the UK.

 

Adjusted EPS

Adjusted EPS was up 15% at 6.1p (2013: 5.3p). Adjusted financing costs of £4m were down £10m as a result of the debt bought back in the second half of 2013 and 2014.  Diluted adjusted EPS was up 20% to 6.1p (2013: 5.1p).

 

The weighted average number of shares increased by more than100m over the comparative period (3%) to 4,003m, largely due to the redemption of the convertible bond in 2013 where 94m shares were issued.

 

The adjusted effective tax rate of 21% in the first half is versus a rate of 23% in 2013 and is now largely in line with the statutory rate of UK corporation tax. The effective tax rate is expected to be approximately 21% for the full year, slightly lower than previous guidance.

 

Basic EPS

EPS is 4.9p (2013: 3.4p), up 44%. The main differences between EPS and adjusted EPS are exceptional items including acquisition related costs, impairment of intangible assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments and other tax adjustments.

 

Balance sheet and net debt

Net debt at the end of June 2014 was £201m (31 December 2013: net cash of £164m).  We also look at an adjusted net debt figure which includes our other financial commitments - expected contingent payments on acquisitions of £117m, IAS 19 pension deficit of £362m and operating leases of £398m. At 30 June 2014 adjusted net debt was £1,078m (31 December 2013: £792m).

 

Over the half year we increased our free cash flow by £19m (12%) to £183m. One of the key strengths of ITV is our strong cash generation which tends to be weighted to the second half of the year as we continue to make a number of significant payments both regular and one-off in the first half of the year, including the acquisition of Leftfield Entertainment, dividends, the annual pension deficit funding contribution and debt buyback.

 

At the beginning of the year we again improved the efficiency of our balance sheet when we repaid the remaining £62m of the 2019 bilateral loan.  The repayment will save around £8m in adjusted financing costs on an annualised basis and was satisfied by a one-off cash payment of £95m. Over the last few years we have bought back over £1.1bn in debt and the rates on our remaining debt better reflect our investment grade status.

 

We have improved our financial flexibility with a number of new financing facilities.  In April we obtained a committed £525m Revolving Credit Facility provided by a number of core relationship banks.  The facility has a five year maturity and contains leverage and interest cover financial covenants as is normal for a facility of this nature.  This replaces the previous £250m facility. At the end of June, £210m of this facility had been drawn down. In addition we have secured £250m of financial covenant free financing which runs for three to seven years.

 

On 30 June 2014 our €50m Eurobond and the related cross currency interest rate swaps matured and were settled.  Our next bond repayment is in October 2015.

 

Pension

The aggregate IAS19 Pension deficit at 30 June 2014 was £362m (31 December 2013: £445m). An increase in the liabilities has been offset by asset outperformance, a slight lowering of market expectations for long-term inflation and £91m of pension funding contributions paid in the first half.

 

The 10 to 15 year funding plan that we have agreed following the actuarial valuations as at 1 January 2011 remains in place. It is a mixture of fixed and performance related contributions. The next actuarial valuation is being undertaken as at 1 January 2014 with the outcome expected in 2015.

 

In March ITV entered into a Pension funding partnership with the Trustees of the main section of the ITV Pension Scheme, backed by the London Television Centre (LTC) property, and, as a consequence, ITV's pension deficit on a funding basis was immediately reduced by £50m.  This agreement does not impact the deficit calculated on an IAS 19 basis. Ownership of LTC remains with ITV.

 

Dividend

In reinstating the dividend in 2011 the Board committed to a progressive dividend that balanced the need to invest in the business with increasing returns to shareholders. As ITV enters the next phase of the plan the Board believes it is just as important that we maintain capital discipline and the flexibility to invest at the same time as delivering a more normal payout ratio for shareholders. To that end the Board expects the ordinary dividend to have a normal level of payout with cover of between 2.0 and 2.5 times adjusted earnings per share and for this to be achieved over the next three years.

 

In this intervening period, and, reflecting the Board's confidence in the ongoing growth and cash generation of the business, the Board is committed to the full year ordinary dividend growing by at least 20% per annum over the next three years, starting this year.

 

In line with this new policy and three-year commitment, the Board has declared an interim dividend of 1.4p (2013: 1.1p), with the interim dividend expected to be roughly a third of the full year dividend.

 

2014 Planning assumptions

·     Total NPB is expected to be around £1,010m excluding the two new channels

·     Total cost savings of £15m for the full year- £5m ahead of the original target

·     Investment of £15-£20m, including the net cost of the launch of two new channels

·     Adjusted interest expected to be £8-10m as a result of the impact of debt buybacks

·     Effective tax rate is expected to be approximately 21%, slightly lower than previous guidance

·     Capex reduces to around £40-£45m after significant investment in MediaCity in previous years

·     Profit to cash conversion for the full year is expected to be 80-85%, as a result of the £45-50m additional investment in scripted content

·     Pension deficit contribution of £91m to reflect 2013 profit and the new LTC asset backed pension partnership

·     If exchange rates stay at current levels for the remainder of the year, the full year impact of foreign exchange on revenues will be around £25-30m and on EBITA will be around £6-8m 

 

Outlook for 2014 and the next phase of the ITV Strategy

We expect all parts of the business to see growth over the full year. We expect to see further strong growth from Online, Pay & Interactive, at least in line with the first half. ITV Family NAR is expected to be up around 6% over the nine months to the end of September and we will significantly outperform our estimate of the television advertising market over the full year. In ITV Studios we anticipate good growth in 2014, driven by the acquisitions we have made. In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content.

 

We enter the next phase of ITV's growth strategy as a demonstrably better business than when we launched the Transformation Plan in 2010.  The plan we embarked on four years ago of rebalancing and strengthening ITV creatively and financially - both in the UK and internationally - is clearly the right one for the Company and our vision remains unchanged.

 

We will continue to rebalance the business and grow new revenue streams, both organically and through acquisition. We see clear opportunities for growth across the business - in content, online, pay and advertising and there will be an increasing emphasis on international content creation and distribution.

 

The market environment in which we operate is constantly changing, characterised by converging media and the increasing influence of technology, which brings both challenges and opportunities. ITV's financial strength and its strategic advantages, including the scale of our UK channels, our share of the advertising market, and our growing global network in the development, production and distribution of content, put us in a strong position to be able to meet these challenges and exploit opportunities for growth.

 

As ITV enters the next phase of the plan the Board believes it is important that we maintain capital discipline and the flexibility to invest in the business at the same time as delivering a normal payout ratio for shareholders.  Reflecting the Board's confidence in the ongoing growth and cash generation of the business the Board is committed to the full year ordinary dividend growing by at least 20% per annum over the next three years - starting this year.

 

Notes to editors

1.   Unless otherwise stated, all financial figures refer to the six month period ended 30 June 2014, with growth compared to the same period in 2013.

 

Six months ended 30 June (£ million)

2014

2013

%

ITV Family NAR

795

741

7

Non-NAR Revenue

588

568

4

Internal Supply

(158)

(165)

(4)

Group External revenues

1,225

1,144

7

 

2.   ITV Family NAR was up 2% in Q1 and 19% in April, 7% in May and 14% in June giving Q2 up 13% and H1 up 7%. We expect ITV Family NAR to be up 1% in July, up 9% in August and up 2% to 5% in September, with Q3 up 4% to 5%. Overall we expect ITV Family NAR for the nine months to the end of September to be up around 6%.

Figures for ITV plc and TV market NAR are based on ITV estimates and current forecasts.

3.   Operational summary

 

Broadcast & Online performance indicators




Six months ended 30 June

2014

2013

%

ITV Family SOV

22.1%

23.2%

(5)

ITV SOV

15.8%

16.3%

(3)

ITV Family SOCI

36.6%

39.2%

(7)

ITV SOCI

25.6%

27.0%

(5)

ITV adult impacts

111bn

122bn

(9)

Total long form video requests (all platforms)

328m

274m

20

Share of Broadcast

45.5%

44.8%

2

 

Share of viewing data based on BARB/AdvantEdge data and share of commercial impact (SOCI) data based on BARB/DDS data. Share of viewing data is for individuals and SOCI data is for adults. ITV Family includes: ITV, ITV2, ITV3, ITV4, Encore, CITV, ITV Breakfast, CITV Breakfast and associated "HD" and "+1" channels.  Total long form video requests across all platforms are based on data from ComScore Digital Analytix, Virgin, BT, iTunes, Lovefilm, Netflix, Sky, 3UK and Hospedia and include simulcast. 

 

4.   Dividend payment date is 1 December and dividend record date is 31 October 2014.

 

5.   This announcement contains certain statements that are or may be forward looking with respect to the financial condition, results or operations and business of ITV. By their nature forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements. These factors include, but are not limited to (i) a major deterioration in the current outlook for UK advertising and consumer demand, (ii) significant change in regulation or legislation, (iii) failure to identify and obtain, or significant loss of, optimal programme rights, and (iv) the loss or failure of transmission facilities or core systems and (v) a significant change in demand for global content.

Undue reliance should not be placed on forward looking statements which speak only as of the date of this document. The Group accepts no obligation to publicly revise or update these forward looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

 

For further enquiries please contact:

 

Investor Relations

Pippa Foulds 020 7157 6555 or 07778 031097

 

Media Relations

Mary Fagan 020 7157 3965 or 07736 786448

Mike Large 020 7157 3021 or 07768 261528

Caroline Cook 020 7157 3709 or 07799 071509

 

Strategy & Operations

We have made further good progress with our strategy of growing and strengthening all parts of ITV. In the first six months of the year we again delivered double digit profit growth in every area of the business and increased revenues by 7%. Broadcast & Online delivered 7% growth in revenue and 10% growth in EBITA, and ITV Studios delivered 2% growth in revenue and 14% growth in EBITA. Adjusted EPS was up 15% at 6.1p.

 

We ended the period with net debt of £201m (31 December 2013: £164m net cash) following the acquisition of Leftfield Entertainment, dividend payments, debt buyback and pension deficit contributions. Our profit to cash conversion remains strong at 99% for the first half and 97% on a rolling 12 month basis.

 

As ITV enters the next phase of the plan the Board believes it is important that we maintain capital discipline and the flexibility to invest in the business at the same time as delivering a normal payout ratio for shareholders.  Reflecting the Board's confidence in the ongoing growth and cash generation of the business the Board is committed to the full year ordinary dividend growing by at least 20% per annum over the next three years, starting this year.  In line with this policy, the Board has declared an interim dividend of 1.4p (2013: 1.1p), with the interim dividend expected to be roughly one third of the full year dividend.

 

Create a lean, creatively dynamic and fit-for-purpose organisation

Making ITV a better business both creatively and commercially remains a priority for ITV and in the first half of the year we have again made good progress.

 

Key to this is continually developing and supporting our people to enable us to attract and retain the best talent. We invest in simplifying the way we operate to help drive value from our integrated producer broadcaster model and to deliver future growth.   

 

Our relentless focus on cash and costs has seen us deliver strong cash conversion through tight working capital management, take further strides to improve balance sheet efficiency and increase our full year cost savings target from £10m to £15m.  These savings will largely fund the investments we are making across the business, specifically in online, technology, the creative pipeline and new channel launches.  

 

We have bought back the remaining £62m tranche of the 2019 bond leading to further interest cost savings and our profit to cash conversion on a rolling 12 month basis remains strong.

 

During the period we have taken further risk out of the pension scheme by entering into a pension partnership with the Trustees of the Pension Scheme backed by the London Television Centre (LTC) property which immediately reduced ITV's pension deficit on a funding basis by £50m.

 

Maximise audience and revenue share from existing free-to-air business

A strong Broadcast business remains central to our strategy.  It generates significant profits and cash and its content can be distributed on other platforms to drive new revenue streams. As an integrated producer broadcaster, our family of broadcast channels provides a platform on which to make ITV Studios content famous so we can sell it globally.

 

Our broadcast performance has helped to drive 7% growth in Broadcast & Online revenues to £981m and 10% growth in EBITA to £250m. The economic recovery is leading to an improved advertising market, with good growth across all key categories. In the first half ITV Family NAR grew 7% based on pure spot advertising. The first quarter was up 2%, while the second quarter was up 13% impacted by the timing of Easter and the broadcast of the FIFA World Cup. ITV Family NAR growth in the first half was ahead of our estimate of the total television advertising market and we will significantly outperform the market over the full year.

 

Our viewing performance was lower in the first half than we expected, although it improved in the second quarter. For the first six months ITV main channel SOV was down 3% and ITV Family SOV was down 5%, impacted by a disappointing performance from ITV2 and ITV3. ITV main channel SOCI was down 5% and ITV Family SOCI was down 7%.

 

ITV had many on-screen successes in the first half as we continued to deliver a high quality and varied schedule that drives the unrivalled reach and mass audiences that advertisers demand. We broadcast the highest rating comedy in Birds of a Feather, the highest rating entertainment series in Britain's Got Talent, the highest rating new drama series in The Widower, Britain's most watched soap in Coronation Street and the overall most watched programme in the England vs Uruguay World Cup match. ITV remains the home of mass audiences, delivering 99% of all commercial audiences over five million. The improved quality of ITV's content was recognised publically when we won eight BAFTAs for content broadcast on ITV.

 

ITV2 and ITV3 remain the two largest digital channels in the UK and new and returning programmes aired on our digital channels during the first half included Celebrity Juice, The Only Way is Essex, Educating Joey Essex, Storage Wars and The French Open. With the launch of ITVBe on track for the Autumn we continue to reposition our digital channels to make them more targeted, particularly focusing ITV2 on a younger audience while ITVBe will be focused on the valuable young female audience.

 

We have confidence in our strong Autumn schedule with new programmes such as Chasing Shadows and Cilla from ITV Studios, Granchester and The Great Fire as well as the return of Downton Abbey, The X Factor and I'm a Celebrity Get Me Out Of Here! We continually work to increase the success rate in launching new programmes through research, viewer panels and pilots as well as keeping returning programmes fresh and appealing.

 

We compete with rival broadcasters and other media for our share of television advertising and advertising revenues in general and we must continue to maximise the value of the 30 second spot and drive related revenues through sponsorship, interactivity and brand extensions. This year we have sold over half a million tickets for live events including the Coronation Street set tour and Saturday Night Takeaway Live, and implemented sponsorship campaigns and off-air endorsements including Morrisons for Britain's Got Talent and Saturday Night Takeaway, McCain for Emmerdale and  Sony, Santander and Carling for the FIFA World Cup.

 

While the media environment is changing rapidly, the traditional broadcast model remains structurally robust, with the economic recovery fuelling advertising growth across all major categories. People continue to watch around four hours of television per day and, in addition to this, on demand viewing remains around 3% of total viewing.

 

While the Broadcast business is strong we must continue to improve the quality and availability of our digital services to enable us to successfully compete in this growing part of the market.

 

Drive new revenue streams by exploiting our content across multiple platforms, free and pay

Online, Pay & Interactive again delivered strong revenue growth, up 20% in the first half of the year. The rapid growth in audiences' appetite for video on demand (VOD) is in turn fuelling demand from new and existing platforms for quality content, both free and pay. 

 

As we distribute our content across a wide range of platforms we are driving these new revenue streams either by selling advertising around content or by receiving pay revenues through licensing our content to third party platform owners. 

 

We continue to invest in improving the quality of our online services and the ITV Player is now fit to compete.  We are also striving to increase the incremental reach of our content which is now available on 20 platforms.  This has led to further good growth in long form video requests which were up 20% in the first half of the year. 

 

As consumer viewing behaviour evolves we continue to explore, experiment and develop our pay services with broadcasters and platform owners to drive the most value from the high quality content we air on our channels.

 

During the first half we renegotiated a number of deals. Most significantly in January we announced a new four year deal with Sky which makes ITV content available through Sky's range of connected platforms including Sky Go, Now TV and Sky Store. This deal also includes our first ever pay only channel, ITV Encore, which we successfully launched in June. We have also extended our deal with Virgin for a further year and agreed a deal with YouTube to launch up to 18 short form channels including I'm A Celebrity Get Me Out Of Here! This Morning and our soaps.

 

We are further deepening our relationship with our viewers and ITV Player now has 5.6 million registered users.  We are increasing our interaction and consumer engagement through competitions, voting, second screens and through social media to drive more value from our brands for ITV and for our advertisers. 

 

Build a strong international content business

A strong international content business lies at the heart of our strategy to create and own more content, make it famous in the UK on our channels and distribute it across multiple platforms in the UK and internationally. As an integrated producer broadcaster we are in a unique position to do this.

 

The high demand globally from broadcasters and platform owners for quality content provides a significant opportunity for us.  We are now becoming a scaled global content business through our investment in a strong and healthy creative pipeline in key creative markets and specifically in genres that return and travel - drama, entertainment and factual entertainment.

 

During the period we have delivered 2% growth in total ITV Studios revenues and 14% growth in EBITA, with both our UK and International Production businesses showing growth over the half year. The acquisitions we have made are coming through as expected, however organic growth was impacted by the phasing in the delivery of some programmes. Organic revenues for the first half were down 8%, with UK Productions down 4% and International Productions down 13% (8% at constant currencies). As we become an increasingly international business our performance is inevitably impacted by movements in foreign exchange. At constant currencies (using the 2013 exchange rates) ITV Studios revenue would have been £12m higher.

 

In the UK we are the number one commercial producer. The UK business delivered 1% revenue growth, driven by our performance off-ITV, up 27%. Internal revenues in the first half were impacted by the allocation of the ITV programme budget as a result of the broadcast of the FIFA World Cup during the period. Programmes delivered in the first half of the year include Mr Selfridge, Amazing Greys, Ant & Dec's Saturday Night Takeaway, Job Lot and The Chase for ITV; Shetland, The Graham Norton Show, The Guess List and Rev for BBC; and Come Dine With Me and Friday Night Dinner for Channel 4.  ITV Studios were awarded five BAFTAs in 2014 for productions including Ant & Dec's Saturday Night Takeaway, Coronation Street and Bedlam.

 

International Production revenues were up 9%, driven by the acquisitions we have made. We are now the largest independent producer of unscripted programmes in the US with a portfolio of programmes which includes Duck Dynasty, Hell's Kitchen, Cake Boss and Kitchen Nightmares. In the US on an annualised basis we now produce 122 progammes and 1,112 hours of content in partnership with 41 networks.

 

We are also now beginning to build a global scripted business, which will benefit our growth in future years. Three US dramas have already been commissioned including Aquarius and Texas Rangers for delivery in 2015, as well as a number of UK dramas with international appeal, including Jekyll and Hyde and Jambusters, and the launch of Thunderbirds Are Go.

 

Our other international production bases in Australia, Germany, France and the Nordics produce their own original content and versions of UK formats, and we have seen good growth from Germany and France. International successes include programmes such as Ich Bin Ein Star, The Chase and Hell's Kitchen in Germany, Keeping the Nation Alive and Night Patrol in Norway, Four Weddings and Party Wars in France and Come Dine with Me in Sweden and Australia.

 

We made three acquisitions in the first half of 2014. In February we acquired a 51% controlling interest in DiGa Vision, the US independent producer of reality and scripted programming, and 100% of United, a Danish producer of factual and entertainment programmes.

 

In May we made the significant acquisition of 80% of Leftfield Entertainment, a high margin US producer of reality programmes. Leftfield also owns Sirens Media and has established two ventures - Loud Television and Outpost Entertainment. Together these businesses produce more than 300 hours of unscripted programming for over 30 US networks with a portfolio that includes Pawn Stars, Counting Cars, American Restoration and Real Housewives of New Jersey.

 

The acquisition of Leftfield represents a major step forward in ITV's strategy of building a strong international content business. These latest acquisitions follow our acquisition in the last two years of Gurney Productions, High Noon Entertainment and Thinkfactory Media in the US as well as UK producers The Garden Productions, Big Talk Productions and So TV.

 

ITV is the third largest European distributor of content.  We distribute our own content including Mr Selfridge, Lewis and Hell's Kitchen US which have now been sold to over 150 countries. We have also acquired third party distribution rights including The Great Fire from Ecosse Films, Rectify from AMC and Poldark from Mammoth, which gives us the right to sell these titles internationally. We continue to sell formats successfully and 11 of our formats are now produced in three or more countries including The Chase, Keeping The Nation Alive, Surprise Surprise, Saturday Night Takeaway and Hell's Kitchen. The growth in our UK and International Production businesses is starting to feed our global distribution business. However, in the first half of the year Global Entertainment was impacted by a reduction in drama, including Marple and Poirot, and currency movements.  In 2015 we expect to see good growth in our distribution revenues from our strong creative pipeline, our investment into scripted content, and from third party distribution agreements.

 

Looking forward we expect good growth in ITV Studios in 2014, driven by our acquisitions. In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content.

 

Outlook for 2014 and the next phase of the ITV Strategy

We expect all parts of the business to see growth over the full year. We expect to see further strong growth from Online, Pay & Interactive, at least in line with the first half. ITV Family NAR is expected to be up around 6% over the nine months to the end of September and we will significantly outperform our estimate of the television advertising market over the full year. In ITV Studios we anticipate good growth in 2014, driven by the acquisitions we have made. In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content.

 

We enter the next phase of ITV's growth strategy as a demonstrably better business than when we launched the Transformation Plan in 2010. From 2009 to 2013 we have grown our external revenues 27%, non-NAR revenues 42%, EBITA before exceptional items 207%, adjusted profit before tax 438%, adjusted EPS by 522% and increased our cash by £1.1bn including distributions to shareholders. Our broadcast business is robust and growing strongly, we have made good progress with revenue diversification as we have built a strong international content business and our Online, Pay & Interactive business is now a material and profitable part of ITV.

 

The plan we embarked on four years ago of rebalancing and strengthening ITV creatively and financially - both in the UK and internationally - is clearly the right one for the Company and our vision remains unchanged.

 

We will continue to rebalance the business and grow new revenue streams, both organically and through acquisition. We see clear opportunities for growth across the business - in content, online, pay and advertising and there will be an increasing emphasis on international content creation and distribution.

 

The market environment in which we operate is constantly changing, characterised by converging media and the increasing influence of technology, which brings both challenges and opportunities. ITV's financial strength and its strategic advantages including the scale of our UK channels, our share of the advertising market, and our growing global network in the development, production and distribution of content, put us in a strong position to be able to meet these challenges and exploit opportunities for growth.

 

To take advantage of these opportunities we need to evolve our corporate priorities to focus on the key areas of growth. 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 distribution. Therefore the next phase of the ITV strategy will be based on the following three key areas, many of which we have already started to invest in and develop:

 

1 maximise audience and revenue share from free-to-air broadcast and VOD business

·     economic recovery driving growth in TV advertising

·     strengthen our content, channels and brand to maintain our unique scale

·     grow our share in key demographics

·     maximise total viewing and revenue across all platforms

·     grow our share of total TV/VOD advertising, exploiting our unique scale in a fragmenting media landscape

·     support platforms that make ITV content prominent

·     secure retransmission fees over the medium term

 

2 grow international content business

·     exploit the increasing demand for quality content globally

·     leverage UK producer broadcaster status and new scale in US to develop and own more quality content

·     develop global scripted business of scale (6 to 10 new series per annum)

·     continue to attract and retain key creative talent to create more new hits

·     develop / commission more 16-24 focused content

·     invest in and develop third party distribution deals

·     build content supply partnerships in US

 

3 build a global pay and distribution business

·     package and sell our content to maximise its value, exploiting competition in a converged media landscape

·     launch new pay services and channels to take advantage of demand in the UK and internationally

·     take advantage of the growth in VOD by providing content to international pay platforms

·     develop wider partnerships with OTT/VOD players

 

We will also continue to run the business efficiently with our tight focus on cash and costs, while developing a creative, commercial and global organisation. 

 

In reinstating the dividend in 2011 the Board committed to a progressive dividend that balanced the need to invest in the business with increasing returns to shareholders. As ITV enters the next phase of the plan the Board believes it is just as important that we maintain capital discipline and the flexibility to invest at the same time as delivering a more normal payout ratio for shareholders. To that end the Board expects the ordinary dividend to have a normal level of payout with cover of between 2.0 and 2.5 times adjusted earnings per share and for this to be achieved over the next three years.

 

In this intervening period, and, reflecting the Board's confidence in the ongoing growth and cash generation of the business, the Board is committed to the full year ordinary dividend growing by at least 20% per annum over the next three years, starting this year. In line with this new policy and three year commitment, the Board has declared an interim dividend of 1.4p (2013 : 1.1p), with the interim dividend expected to be roughly a third of the full year dividend.

 

Adam Crozier

Chief Executive

 

Key Performance Indicators

We have defined our Key Performance Indicators (KPIs) to align performance and accountability to our strategy. These remain appropriate for the next phase of ITV's growth strategy.

 

Further detail on our financial performance and KPIs can be found in the Strategy & Operations section and the Financial and Performance Review. All our KPIs remain under review.

 

Six months to 30 June

 2014

2013

Absolute

Change

EBITA before exceptional items

£322m

£291m

£31m

Adjusted earnings per share

6.1p

5.3p

0.8p

'Profit to cash' ratio 12 months rolling

97%

96% 

1%

ITV Family Share of Viewing ('SOV')

22.1%

23.2%

(1.1)%

ITV Family Share of Commercial Impacts ('SOCI')

36.6%

39.2%

(2.6)%

ITV Family Share of Broadcast ('SOB')

45.5%

44.8%

   0.7%

Total long form video requests

328m

274m

54m  

Non-NAR revenues

£588m

£568m

£20m

 

Three of our KPIs are only reported on a full year basis: percentage of ITV output from ITV Studios, number of new commissions for ITV Studios and employee engagement. The ITV Studios KPIs are not reported externally on a six monthly basis as they are materially impacted by phasing and therefore the full year number gives a more meaningful measurement of performance.  Employee engagement is based on an annual survey undertaken in the autumn but our interim abbreviated surveys suggest that engagement remains strong.

 

Disclaimer on forward-looking statements

This announcement contains certain statements that are or may be forward-looking with respect to the financial condition, results or operations and business of ITV. By their nature forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to: (i) a major deterioration in the current outlook for UK advertising and consumer demand; (ii) significant change in regulation or legislation; (iii) failure to identify and obtain, or significant loss of, optimal programme rights; (iv) the loss or failure of transmission facilities or core systems; and (v) a significant change in demand for global content.

 

Undue reliance should not be placed on forward-looking statements which speak only as of the date of this document. The Group accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

 

Financial and Performance Review

We have delivered a good performance in the first half of the year with revenue growth from across the business and double digit profit growth. External revenues were up 7% driven by 7% growth in NAR and continued growth in non-NAR revenues, up 4%. This, combined with our continued focus on cash and costs and our higher margin new revenue streams, saw us deliver 11% growth in EBITA to £322m and 15% growth in adjusted EPS to 6.1p. Group margins have again improved, up one percentage point to 26%.

 

We have ended the first half with net debt of £201m (31 December 2013: £164m of net cash) following the acquisition of Leftfield, dividend payments, debt buyback and pension deficit contributions. Our tight focus on working capital management has again delivered good profit to cash conversion at 99% for six months and at 97% on a 12 month rolling basis.

 

 

Six months to 30 June

 2014

£m

2013

£m

Change

£m

Change

%

Net Advertising Revenue ('NAR')

795

741

54

7

Total non-NAR revenue

588

568

20

4

Total revenue

1,383

1,309

74

6

Internal supply

(158)

(165)

(7)

(4)

Total external revenue

1,225

1,144

81

7






EBITA before exceptional items

322

291

31

11

Group EBITA Margin

26%

25%



Adjusted earnings per share

6.1p

5.3p

0.8p

15

Adjusted diluted earnings per share

6.1p

5.1p

1.0p

20

1.4

1.1p

0.3p

27

201

52

149

287

 

The profit before tax (PBT) and earnings per share (EPS) from the Consolidated Income Statement are as follows:

 

Six months to 30 June

 2014

£m

2013

£m

Change

£m

Change

%

Profit before tax

250

179

71

40

Earnings per share (EPS)

4.9p

3.4p

1.5p

44

Diluted earnings per share

4.8p

3.3p

1.5p

45

 

The Financial and Performance Review focuses on the adjusted results, which in management's view shows our business performance in a more meaningful and consistent manner and reflects how the business is managed and measured on a daily basis. A reconciliation to the reported results is set out in the earnings per share section that follows.

Adjusted profit before tax and adjusted EPS remove the effect of exceptional items which include acquisition related costs (professional fees, primarily due diligence, and contingent payments), impairment of intangible assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments and other tax adjustments.

 

Broadcast & Online

 

Six months to 30 June

 2014

£m

2013

£m

Change

£m

Change

%

Net Advertising Revenue ('NAR')

795

741

54

7

SDN external revenues

36

35

1

3

Online, Pay & Interactive

67

56

11

20

Other commercial income

83

82

1

1

186

173

13

8

Total Broadcast & Online revenue

981

914

67

7

Total schedule costs

(530)

(490)

40

8

(201)

(196)

5

3

Total Broadcast & Online EBITA before exceptional items

250

228

22

10

Broadcast & Online EBITA margin

25%

25%



 

Broadcast & Online delivered a strong performance with 7% increase in revenues driven by 7% growth in ITV Family NAR and 20% growth in Online, Pay & Interactive. Schedule costs were up year on year as a result of the FIFA World Cup but given the highly geared nature of advertising revenues and the higher margins of Online, Pay & Interactive revenues, EBITA grew 10%.

 

Over the first half as a whole ITV NAR was up 7%, ahead of our estimate of the television advertising market. Our share of broadcast (SOB) increased to 45.5% (2013: 44.8%). We expect ITV Family NAR to be up around 6% over the nine months to the end of September and over the full year we will significantly outperform the television advertising market.  While we are confident in our performance versus the market all broadcasters have slightly differing definitions and include sources of revenue other than pure spot advertising and therefore it is getting harder to compare.

 

The economic recovery is leading to an improved advertising market, with good growth across all key categories.  However,  as we anticipated the television advertising market showed significant fluctuations across the period. In Q1 ITV Family NAR was up 2%, while Q2 was up 13% with the inclusion of Easter and the FIFA World Cup. There continues to be variances by sector and within sectors, with the competitive and online based categories continuing to perform well. Retail has been strong driven by supermarkets, furniture and department stores, Entertainment & Leisure growth is driven by online businesses, Food is up strongly driven by cereals, snacks and ready meals, and Airlines & Holidays have performed well, particularly online travel agents. Telecommunications was down year on year, impacted by a lack of new product launches in 2014. Male orientated sectors, such as Gaming and Cars have performed strongly in June around the football.

 

Our on-screen performance has been lower than we expected in the first half with ITV main channel share of viewing (SOV) down 3% and ITV Family SOV down 5%. However, we have confidence in our strong schedule to come with many new and returning programmes. Later this year we will also be launching our new free to air lifestyle and reality channel, ITVBe.

 

SDN external revenues increased 3% year on year in line with contractual increases.

 

Online, Pay & Interactive revenues continued to grow strongly up 20% as we further improved the quality and distribution of our content and the rapid growth in audiences' appetite for video on demand (VOD) is in turn fuelling demand from new and existing platforms for quality content, both free and pay, and from advertisers for VOD inventory.  Our content is now available on 20 platforms which has helped drive long form video requests up 20%. We continue to develop our pay services and in June we successfully launched ITV Encore, our new pay channel on Sky. 

 

Other commercial income includes sponsorship, minority revenues, media sales and other income. In total these are up 1%, with growth coming from sponsorship and brand extensions as we have broadened our commercial relationship with our advertisers. Examples include the launch of Coronation Street The Tour, and sponsorship campaigns and off-air endorsements including Morrisons with Britain's Got Talent and Ant & Dec's Saturday Night Takeaway and Sony, Santander and Carling with the FIFA World Cup.  This growth in sponsorship revenue has more than offset a small decline in other commercial income.

 

Schedule costs were up £40m reflecting the cost of the World Cup. Other costs were up 3% year on year due to marketing costs around our new channels and content, and online investment. We continue to manage our overheads tightly to largely mitigate inflationary pressures and to fund our investment in the business.

 

ITV Studios

 

Six months to 30 June

 2014

£m

2013

£m

Change

£m

Change

%

UK Productions

205

202

3

1

International Productions

136

125

11

9

60

68

(8)

(12)

Total Studios revenue

402

395

7

2

(330)

(332)

2

1

Total Studios EBITA before exceptional items

72

63

9

14

Studios EBITA margin

18%

16%








Sales from ITV Studios to Broadcast & Online

158

165

(7)

(4)

244

230

14

6

Total Studios revenue

402

395

7

2

 

ITV Studios delivered 2% growth in total revenues to £402m. The production efficiencies we have achieved and the higher margin revenue mix has helped us deliver a 14% increase in EBITA to £72m. Both our UK and International Productions businesses showed growth over the half year, particularly International Productions with revenues up 9%. Organic revenues for the first half were down 8%, with UK Productions down 4% and International Productions down 13% (8% at constant currencies), impacted by the phasing of some programme deliveries and the proportion of the ITV programme budget allocated to the FIFA World Cup. As we become an increasingly international business our performance is also impacted by movements in foreign exchange. At constant currencies (using the 2013 exchange rates) ITV Studios revenues would have been £12m higher. At constant currencies organic growth in the first half was down 6%. If exchange rates stay at current levels for the remainder of the year, the full year impact on revenue will be around £25-30m and on EBITA will be about £6-8m.

 

Our UK Production revenues were up 1%, with internal revenues down 4%. The broadcast of the FIFA World Cup on ITV has impacted the level of drama and entertainment spend from ITV Studios. Off-ITV revenues in the UK grew 27% in the first half. UK revenue was driven by programmes including Mr Selfridge, Amazing Greys, Ant & Dec's Saturday Night Takeaway, Job Lot and The Chase for ITV; Shetland, The Graham Norton Show, The Guess List and Rev for the BBC; and Come Dine With Me, Youngers and Friday Night Dinner for Channel 4.

 

International Production revenues were up 9%, driven by the acquisitions we have made. Following the acquisition of Leftfield Entertainment, which did not have a material impact on the first half results, we are now the largest independent producer of unscripted programmes in the US with a portfolio of programmes which include Duck Dynasty, Hell's Kitchen, Cake Boss and Kitchen Nightmares. We are also beginning to build a global scripted business, which will benefit our growth in future years. Three US dramas have already been commissioned, including Aquarius and Texas Rangers for delivery in 2015, as well as a number of UK dramas with international appeal, including Jekyll and Hyde and Jambusters, as well as the launch of Thunderbirds Are Go. As a result of this £45-50m additional investment in scripted content, where we fund productions in advance of delivery, profit to cash conversion for the full year is expected to be down at 80-85%.

 

From our other international production bases we have seen good growth from Germany and France. Our production bases in Australia, Germany, France and the Nordics have had success with programmes such as Ich Bin Ein Star, The Chase and Hell's Kitchen in Germany, Keeping the Nation Alive and Night Patrol in Norway, Four Weddings and Party Wars in France and Come Dine with Me in Sweden and Australia.

 

The good growth in our UK and international production businesses is starting to feed our Global Distribution business with programmes such as Mr Selfridge, Lewis and Hell's Kitchen US selling to over 150 countries. In addition, 11 of our formats are now produced in three or more countries including The Chase, Keeping the Nation Alive, Surprise Surprise, Saturday Night Takeaway and Hell's Kitchen. In the first half Global Entertainment revenue was down 12%, impacted by reduced drama, including Marple and Poirot, and currency movements. In 2015 we expect to see good growth in our distribution revenues from our strong creative pipeline and our investment in scripted content both from ITV Studios and third parties.

 

Looking forward we expect good growth in ITV Studios in 2014, driven by our acquisitions. In 2015 we will see further growth from these acquisitions and we will return to good organic growth helped by our investment in global scripted content.

 

Acquisitions

In 2014 we acquired three content businesses. These have been made against strict strategic and financial criteria. Financially we look at ownership of intellectual property, return on capital employed and discounted cash flows. Strategically we look at the talent, creative pipeline and type of content to ensure it has the potential to return and travel. We have structured the deals, with earnouts or put and call options, to base a significant part of the consideration, which is capped, on future performance and therefore align incentives and lock in creative talent. We closely monitor the forecast performance for each acquisition and where there has been a change in expectations, we adjust our view of potential future commitments through net financing costs.

 

To date our portfolio of acquisitions has performed as expected.

 

In February we acquired 100% of United Production, a Danish producer of entertainment and reality programmes and a 51% controlling interest in DiGa Vision, a US independent producer of reality and scripted programming. There is a put and call option to buy the remainder of DiGa over three to six years, with the total amount payable linked to the performance of the company over that period. 

 

In May we made the significant acquisition of 80% of Leftfield Entertainment, a fast growing and high margin US production company. We made an initial cash payment of $360m for 80% of Leftfield, with further potential payments dependent upon Leftfield's continued delivery of significant profit growth. There are put and call options in place to buy the remaining 20% of Leftfield over three to five years. The total maximum consideration for 100% of Leftfield is $800m, including the initial payment. This would only be paid if Leftfield delivers average EBITDA of at least $130m per annum between years three and five.

 

The acquisition of Leftfield makes ITV Studios the largest independent unscripted producer in the US and represents a major step forward in ITV's strategy of building a strong international content business. These acquisitions are important additions to the Group's growing portfolio of production companies. They follow ITV's acquisition in the last 18 months of Gurney Productions, High Noon Entertainment and Thinkfactory Media in the US as well as UK producers The Garden and Big Talk.

 

The total initial payment for the acquisitions made in the first half of 2014 is £220m with a further total expected consideration payable of £53m (undiscounted) which is based upon our current view of their future performance.

 

The total maximum consideration across all acquisitions made from 2012 to 2014 is £808m (undiscounted contingent consideration of £480m and initial consideration of £328m) and is only payable on delivery of continued strong growth. The total consideration we expect to pay (including initial consideration) is £445m based upon our current forecasts.

 

Company

Geography

Genre

Initial

consideration

(£m)

Total

expected

consideration*

(£m)

Total

maximum

consideration*

(£m)

Expected

payment

date

2014







United

 

Denmark

 

Factual and entertainment

1

 

4

 

5

 

2018

 

DiGa Vision

US

Reality and scripted

5

9

30

2020

Leftfield

US

Reality

214

260

479

2019

Total for 2014



220

273

514


Total for 2013



66

103

196

2017-2021

Total for 2012



42

69

98

2016-2018

Total



328

445

808


 

* Undiscounted and including the initial cash consideration. All payments are performance related.

 

Net financing costs

Net adjusted financing costs of £4m are £10m lower than last year as a result of the benefit of redeeming the convertible in 2013 and repurchasing the remaining tranche of the 2019 bilateral loan in January 2014.

 

The £30m of losses on buybacks relate to the exceptional loss on the £62m (nominal) of 2019 debt we repurchased in January, saving £44m of future adjusted financing costs.

 

Six months to 30 June

 2014

£m

2013

£m

Financing costs directly attributable to loans and bonds

(4)

(9)

Cash-related net financing income/(costs)

1

(1)

Cash-related financing costs

(3)

(10)

Amortisation of bonds

(1)

(4)

Adjusted financing costs

(4)

(14)

Mark-to-market on swaps and foreign exchange

(4)

(6)

Imputed pension interest

(9)

(10)

Losses on buybacks

(30)

(44)

Other net financing income/(costs)

9

(1)

Net financing costs

(38)

(75)

 

Tax

The effective tax rate on adjusted profit before tax of 21% is largely in line with the standard tax rate of 21.5% (2013: the adjusted tax rate of 23% was largely in line with the standard tax rate of 23.25%). The total reported tax charge is £53m (2013: £44m). Cash tax paid of £35m (2013: £32m) arises as a result of making payments for taxable profits partially offset by losses and the tax treatment of allowable pension contributions.

 

The effective tax rate is lower than previously guided following the tax credits recognised on goodwill arising from US acquired businesses.

 

Six months to 30 June

 2014

£m

2013

£m

Profit before tax

250

179

Exceptional items (net)

4

5

Amortisation and impairment of intangible assets*

24

25

Adjustments to net financing costs

34

61

Adjusted profit before tax

312

270

 

* In respect of intangible assets arising from business combinations.

 

Six months to 30 June

 2014

£m

2013

£m

Tax charge

(53)

(44)

Net (charge)/credit for exceptional items

(1)

1

Charge in respect of amortisation and impairment of intangible assets*

(5)

(6)

Charge in respect of adjustments to net financing costs

(7)

(14)

Other tax adjustments

2

-

Adjusted tax charge

(64)

(63)

Effective tax rate on adjusted profits

21%

23%

 

* In respect of intangible assets arising from business combinations.

 

Dividend

In reinstating the dividend in 2011 the Board committed to a progressive dividend that balanced the need to invest in the business with increasing returns to shareholders. As ITV enters the next phase of the plan the Board believes it is just as important that we maintain capital discipline and the flexibility to invest at the same time as delivering a more normal payout ratio for shareholders. To that end the Board expects the ordinary dividend to have a normal level of payout with cover of between 2.0 and 2.5 times adjusted earnings per share and for this to be achieved over the next three years.

 

In this intervening period, and, reflecting the Board's confidence in the ongoing growth and cash generation of the business, the Board is committed to the full year ordinary dividend growing at least 20% per annum over the next three years, starting this year. In line with this new policy and three-year commitment, the Board has declared an interim dividend of 1.4p (2013: 1.1p), with the interim dividend expected to be roughly a third of the full year dividend.

 

Earnings per share

Adjusted earnings per share is 6.1p (2013: 5.3p). Earnings per share is 4.9p (2013: 3.4p).

 

The main differences between reported and adjusted earnings per share are exceptional items which include acquisition related costs (professional fees, primarily due diligence, and contingent payments), impairment of intangible assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments and other tax adjustments.

 

The adjustments shown below remove the impact of those items that in management's view do not show the performance of the business in a consistent manner and do not reflect how the business is managed and measured on a day-to-day basis.

 

Six months to 30 June 2014

Reported

£m

Adjustments

£m

Adjusted

£m

EBITA before exceptional items

322

-

322

Exceptional items (operating)

(5)

5

-

Amortisation and impairment of intangible assets

(30)

24

(6)

Net financing costs

(38)

34

(4)

Gain on sale and impairment of subsidiaries and investments (non-operating exceptional items)

1

(1)

-

Profit before tax

250

62

312

Tax

(53)

(11)

(64)

Profit after tax

197

51

248

Non-controlling interests

(2)

-

(2)

Earnings

195

51

246

Shares (million), weighted average

4,003


4,003

Earnings per share (pence)

4.9


6.1

 

Amortisation and impairment of intangible assets acquired through business combinations is not included within adjusted earnings. Amortisation of software licences and development is included as management considers these assets to be core to supporting the day-to-day operation of the business.

 

Operational exceptional items are mainly acquisition related expenses, including professional fees, primarily due diligence, and performance based employment linked contingent payments. There are no restructuring costs in the first half of 2014.

 

The weighted average number of shares increased by over 100m or 3% to 4,003m over the comparative period, largely due to the redemption of the convertible bond in 2013 where 94m shares were issued.

 

Cash flow, working capital management and free cash flow

 

Cash flow and working capital management

 

Six months to 30 June

 2014

£m

2013

£m

EBITA before exceptional items ('profit')

322

291

(Increase)/decrease in programme rights and other inventory distribution rights

64

25

(Increase)/decrease in receivables

2

19

Increase/(decrease) in payables

(71)

(47)

Working capital movement

(5)

(3)

Depreciation

13

12

Share-based compensation and pension service costs

8

13

Cash flow generated from operations before exceptional items

338

313

Acquisition of property, plant and equipment and intangible assets*

(19)

(21)

Adjusted cash flow

319

292

'Profit to cash' ratio six months to 30 June

99%

100%

'Profit to cash' ratio 12 months rolling

97%

96%

 

* 2013 numbers exclude the purchase of the head office building.

 

Our focus on cash remains a priority and we generated £319m of cash from EBITA before exceptional items after capital expenditure. This performance is largely due to the continued tight management of working capital. Our six month profit to cash conversion ratio was 99% and our 12 month rolling profit to cash conversion ratio was 97%. Profit to cash conversion for the full year is expected to be 80-85%, as a result of the increased investment in scripted content.

 

Free cash flow

 

Six months to 30 June

 2014

£m

2013

£m

Adjusted cash flow

319

292

Net interest paid

(10)

(16)

Cash tax

(35)

(32)

Pension funding

(91)

(80)

Free cash flow

183

164

 

Except where disclosed, management views the acquisition of operating property, plant and equipment and intangibles as necessary ongoing investment in the business.

 

Free cash flow reflects our underlying cash generation and our strong free cash flow generation gives us flexibility to invest in the business and reward our shareholders. This is a key strength of ITV today.

 

Free cash flow before dividends, acquisitions and debt repayments remains strong and is up over £19m (12%) year on year, in line with the growth in profits.

 

Net debt, liquidity risk and funding

Net debt at 30 June 2014 was £201m, compared to net cash of £164m at the end of 2013 and net debt of £52m at
30 June 2013.

 

Adjusted net debt

 


 June 2014

£m

 Dec 2013

£m

Net (debt)/cash

(201)

164

Expected contingent payments on acquisitions

(117)

(97)

Pension deficit (IAS 19R)

(362)

(445)

Operating leases

(398)

(414)

Adjusted net debt

(1,078)

(792)

Adjusted net debt to EBITDA

1.6

1.2

 

Net debt/net cash is one measure of the strength of our financial position. However, we believe it is appropriate to look at all our financial commitments and have developed an adjusted net debt measure, similar to how credit rating agencies could look at our balance sheet.

 

As can be seen from the table, adjusted net debt includes the undiscounted estimate of the contingent payments in relation to all the acquisitions we have made since 2012, the pension deficit on an IAS 19 basis, and our operating lease commitments (undiscounted) which are mainly for broadcast transmission contracts and property.

 

The ratio of adjusted net debt to EBITDA before exceptional items is 1.6x. This is higher than previous years and reflects the the acquisition of Leftfield.

 

Debt structure and liquidity

In 2014 we have again bought back debt to further improve our balance sheet efficiency. On 16 January 2014 we agreed to repay the remaining £62m (nominal) of the 2019 bilateral loan. This repayment will save around £44m in adjusted financing costs over the remainder of the loan - around £8m on an annualised basis, and has led to an exceptional loss of £30m for 2014. The repayment was satisfied by a one-off cash payment of £95m. Given that we have bought back more than £1.1bn of debt over the last few years we do not expect to be able to make any further material debt buybacks.

 

We have further improved our financial flexibility with a number of new financing facilities. In April we obtained a committed £525m Revolving Credit Facility provided by a number of core relationship banks.  The facility has a five year maturity and contains leverage and interest cover financial covenants as is normal for a facility of this nature.  This replaces the previous £250m facility. At 30 June £210m of this facility had been drawn down.

 

In April we also entered into a new £175m bilateral financing facility. This facility, which is free of financial covenants, is available until 30 June 2021.  

 

We have also agreed a new £75m invoice discounting facility which has a three year maturity to 30 April 2017 and is also free of financial covenants. This replaces the previous £125m facility.

 

Financing

We are financed using debt instruments with a range of maturities. The 2014 Eurobond matured in June and we bought back the 2019 bilateral loan in January. The next bond repayment is in October 2015. Borrowings at 30 June 2014 are repayable as follows:

 

Amount repayable

£m

Repayable in

£525 million Revolving Credit Facility

210

2014*

£78 million Eurobond

78

Oct 2015

£161 million Eurobond

161

Jan 2017

Finance leases

20

Various

Total debt repayable on maturity

469


 

* Drawings under the facility may be for periods of between one and six months and each drawdown may be rolled or repayed at maturity, at our discretion.

 

Ratings

We are rated investment grade by two ratings agencies. The factors that are taken into account in assessing our credit rating include our degree of operational gearing, exposure to the economic cycle, and business and geographical diversity. Continuing to execute our strategy will strengthen our position against all these metrics.

 

Pensions

IAS 19

The aggregate IAS 19 deficit on defined benefit schemes at 30 June 2014 was £362 million (31 December 2013:
£445 million). An increase in the liabilities has been offset by asset outperformance, a slight lowering of market expectations for long-term inflation and £91m of pension funding contributions paid in March and April.

 

Actuarial valuations

The Trustees of the Scheme are currently undertaking full actuarial valuations of all three sections as at 1 January 2014 with the results expected in 2015. The previous valuation was undertaken as at 1 January 2011 and on the bases adopted by the Trustee, the combined deficits amounted to £587m.

 

Deficit funding contributions

As a result of a funding agreement with the Trustee the Group has agreed that the level of contributions to the Section A of the ITV Pension Scheme will be a combination of fixed and performance related payments.

 

The fixed payments to Section A of the scheme will be as follows:

 

2014:

£40 million

2015 to 2019:

£48 million rising by £0.5 million per annum to £50 million in 2019

2020 to 2025:

£50 million per annum but reduced by performance criteria set out below.

 

The performance related payments to the main section of the scheme will be as follows:

 

During the period to 2020 if our reported EBITA before exceptional items exceed £300 million, the Group will contribute an amount representing 10% of EBITA before exceptional items over the threshold level, subject to an annual cap for total contributions which averages to £70 million per annum over the period 2015-2020. If the additional profit-related contributions are paid at the expected rate then the £50 million per annum fixed contributions scheduled to be paid between 2021 and 2025 (inclusive) would not be required.

 

In addition to the agreed deficit funding contributions above, the SDN pension funding partnership (PFP) established in 2010 provides an annual distribution of £11 million to this section of the Scheme to 2022.

 

As a result of the London Television Centre (LTC) pension funding partnership established in March 2014, the Scheme received an initial payment of £2m (paid on 31 March 2014) and will receive a further 24 annual distributions, starting in April 2015 until 2038, which will increase at the rate of 5% per annum. 

 

Section B and C

The Group has agreed with the Trustee to pay deficit funding contributions of £5.5 million per annum in order to eliminate the deficits in these sections by 31 March 2021.

 

During the first half of 2014 we have paid the entire pension deficit contribution to the Scheme which totals £91 million including annual distributions from the SDN PFP (£11m) and the LTC PFP (£2m).

 

Ian Griffiths

Finance Director

 

Risks & Uncertainties

Risks and Uncertainties

ITV continues to apply the risk management framework outlined in the 2013 Annual Report and Accounts (pages 52-55). When preparing the Interim results the three core risk groups, High Impact Low Likelihood (HILL) risks, Strategic risks and Process level risks, were reviewed to ensure they remained appropriate and adequate. No significant new risks were identified but some of the strategic risks have been clarified with revised descriptions as set out below.

 

High Impact, Low Likelihood Risks (HILL)

HILL risks are of low inherent likelihood but there would be major consequence were the risk to materialise.  They are categorised according to risk theme.

 

 Risk Theme

 

 HILL Risks

 

 Mitigating Factors

 

Financial

ITV loses its credit status or lines of funding with existing lenders or there is a collapse of a major bank impacting financial arrangements/availability of credit.

·     The business is cash generative and working capital management remains a key focus.

·     ITV has £250m of undrawn, financial covenant free facilities in addition to a £525m revolving credit facility (RCF) with a number of core relationship banks. As at 30 June 2014 ITV had drawings of £210m under the RCF.

·     The low gross debt levels that ITV now has would enable the Company to obtain debt from the marketplace if needed.

·     We are rated investment grade by two ratings agencies.


There is a major collapse in investment values leading to a material impact on the pension scheme deficit.

·     There is regular communication between ITV and the pension trustees.

·     The pension scheme's assets are invested in a diversified portfolio, with a significant amount of the fund held in bonds.

·     ITV has worked with the pension trustees to limit the potential deficit by a series of asset backed arrangements and taken risk out of the scheme with a longevity swap.

Operational

A significant event removes a number of the key management team from the business on a long-term or permanent basis.

·     There is a business resilience plan in place which includes succession plans or nominated replacements for all key positions within the Company.

Reputation

An event with public interest that causes significant reputational and brand damage.

·     There is a Company-wide Code of Conduct in place which employees should follow.


There is a major health and safety incident that results in a significant loss of human life.

·     ITV has a central Health & Safety team and Health & Safety policies and procedures are in place, with appropriate training for employees where required.

·     Regular inspections are undertaken at all sites, which are run alongside a programme of Health & Safety audits.


A major incident results in ITV being unable to continue with scheduled broadcasting for a sustained period.

·     A risk register of broadcast operations including key outsourced functions is in place and reviewed on a regular basis.

·     An end-to-end review of the broadcast cycle is regularly undertaken.

·     An incident management process has been agreed and disaster recovery plans are in place.


There is a significant or unexpected change in regulation or legislation.

·     ITV regularly communicates with legislative groups, legal panels and Ofcom to monitor potential policy and regulatory developments.

 

1 Maximise audience and revenue share from free-to-air broadcast and VOD business

2 Grow international content business

3 Build a global pay and distribution business

 

Strategic Risks

Strategic risks are those that would impact the successful execution of the strategy. They have been re-mapped to the renewed strategic priorities of the strategy and categorised by risk theme.

 

 Risk Theme

 

 Strategic Risks

 

 Mitigating Factors

 

 Strategic Priorities

 

The Market

There is a major decline in advertising revenues and ITV does not build sufficient non-NAR revenue streams to offset the financial impact of this decline.

·     Growing non-advertising revenues, in areas such as ITV Studios and Online, Pay & Interactive, remains a key part of the strategy.

·     ITV continues to focus on cash and costs, ensuring the Company has an adequate financial liquidity and balance sheet flexibility.

1 2 3

The television market moves significantly towards pay television as a preferred model, negatively impacting ITV's free-to-air revenues.

·     ITV continues to support free platforms, including YouView, to keep free-to-air strong.

·     ITV looks at and evaluates the opportunities for expanding its existing pay services and other pay offerings.

·     ITV explores other platforms to understand viewing habits and what people are prepared to pay for.

1 3

A faster than expected shift to Video on Demand (VOD) or other new technologies causes a sustained loss of advertising revenue.

·     The business continues to develop ITV Player VOD services, maximise the distribution of ITV Player and grow its VOD advertising business.

·     ITV monitors the market for new technology and where appropriate explores how ITV can participate.

1 2 3

People

ITV fails to evolve its organisational structure and culture to ensure that it is capable of delivering continued growth from the new businesses or revenue streams and fails to attract, develop and retain key creative, commercial and management talent with the skills required for the ongoing business.

·     ITV constantly reassesses the business to create a fit-for-purpose organisation.

·     Strategic focus on working across the business to embed and strengthen the culture of 'One ITV' way of working.

·     ITV invests in training and development for all key colleagues in the business.

·     Succession plans are in place for all key positions within the Company.

1 2 3

Technology / Broadcast

A significant high profile incident or series of events such as transmission incidents or a major regulatory breach causes significant reputational damage.

·     ITV has ongoing modernisation projects to ensure transmission and distribution technologies are fit-for-purpose.

·     There are disaster recovery and incident management plans in place in high risk areas of the business to help deliver a rapid and flexible response.

·     ITV proactively manages its broadcast chain partners and suppliers to ensure the risk of incidents and regulatory breach is minimised.

1 2 3

Organisation, Structure and Processes

There is significant loss of programme rights or ITV fails to identify and obtain the optimal rights packages.

·     ITV is focused on both protecting and exploiting existing rights and ensuring that future rights generated accrue
to ITV.

·     ITV has a detailed model to evaluate the value of third party rights to ensure it only buys rights that make economic sense.

1 2 3


ITV fails to create and own a sufficient number of hit programmes/formats.

·     ITV maximises opportunities for ITV Studios to create successful shows by investing in the creative pipeline and focusing on programmes and genres that can return and travel internationally, i.e. drama, entertainment and factual entertainment, as evidenced by our increased investment in scripted content.

·     ITV is focused on hiring and retaining the right key creative talent.

1 2 3


ITV fails to properly resource, financially, creatively and operationally, the new growth businesses, in particular online and international content.

·     Talent management plans have been developed and reviewed to ensure adequate succession planning
across ITV.

·     ITV continues to embed and strengthen the culture of 'One ITV' way of working.

·     Lessons from recent investments are captured through post acquisition reviews.

2 3


ITV loses a significant volume of personal or sensitive data.

·     A management board sponsored Information Security Steering Group is in place to ensure the appropriate management of information security.

·     Mandatory online training modules, awareness campaigns and simplified information security policies for employees.

·     Monitoring of information sharing outside of ITV.

1 2 3

Organisation, Structure and Processes

ITV remains heavily reliant on legacy systems, which could potentially restrict the ability to grow the business. These systems and processes may not be appropriate for non-advertising revenues or international growth.

·     System requirements are kept under review with business growth and system modernisation projects implemented as appropriate.

·     A replacement plan is in place for the legacy systems which remains under constant review and development to ensure technology systems meet the needs of the business.

1 2 3

Technology

ITV fails to ensure appropriate business continuity planning and resilience within its core systems, processes, platforms and technology infrastructure.

·     Disaster recovery plans are in place with tests conducted annually on business critical systems.

·     Internal Audit review the disaster recovery plans and the test results as appropriate.

1 2 3


There is a sustained cyber/viral attack causing prolonged system denial or major reputational damage, for example the ability to broadcast our channels or the availability of ITV Player.

·     We continue to improve our ability to monitor, detect and respond to cyber threats internally and through partnerships with specialist security organisations.

·     Mandatory online training modules, awareness campaigns and simplified information security policies for employees.

·     There are disaster recovery and incident management plans in place for high risk areas of the business to help deliver a rapid and flexible response.

·     A management board sponsored Information Security Steering Group is in place to ensure the appropriate management of information security.

1 3

 

 

Condensed Consolidated Interim Financial Statements

 

In this section . . . 

In preparing these condensed consolidated interim financial statements we continue to adopt the same style as the 2013 year end accounts. Our objective is to make ITV's financial statements less complex, more relevant to shareholders and provide readers with a clearer understanding of what drives financial performance of the Group. We have grouped notes under five key headings: 'Basis of Preparation', 'Results for the Period', 'Operating Assets and Liabilities', 'Capital Structure and Financing Costs' and 'Other Notes'. The aim of the text in boxes is to provide commentary on each section, or note, in plain English.

 

Condensed Consolidated Income Statement

 

For the six month period to 30 June

Note

 2014

£m

2013

£m

Revenue               

2.1

1,225

1,144

Operating costs


(938)

(889)

Operating profit


287

255





Presented as:




Earnings before interest, tax, amortisation (EBITA) and exceptional items

2.1

322

291

Operating exceptional items


(5)

(5)

Amortisation of intangible assets


(30)

(31)

Operating profit


287

255





Financing income


78

62

Financing costs


(116)

(137)

Net financing costs


(38)

(75)

Share of losses of joint ventures and associated undertakings


-

(1)

Gain on sale and impairment of subsidiaries and investments (exceptional items)


1

-

Profit before tax


250

179

Taxation


(53)

(44)

Profit for the period


197

135





Profit attributable to:




Owners of the Company


195

134

Non-controlling interests


2

1

Profit for the period


197

135

Earnings per share




Basic earnings per share

2.2

4.9p

3.4p

Diluted earnings per share

2.2

4.8p

3.3p

 

Condensed Consolidated Statement of Comprehensive Income

 

For the six month period to 30 June

2014

£m

2013

(restated)(a)

£m

Profit for the period

197

135




Other comprehensive income/(cost):



Items that are or may be reclassified to profit or loss



Exchange differences on translation of foreign operations

(7)

1

Items that will never be reclassified to profit or loss



Remeasurement gains on defined benefit pension schemes

-

114

Income tax charge on items that will never be reclassified

(4)

(22)

Other comprehensive (cost)/income for the period, net of income tax

(11)

93

Total comprehensive income for the period

186

228




Total comprehensive income attributable to:



Owners of the Company

184

227

Non-controlling interests

2

1

Total comprehensive income for the period

186

228

 

See Basis of Preparation section for a discussion of the prior period restatement.

 

Condensed Consolidated Statement of Financial Position

 


Note

30 June

2014

£m

31 December

2013

£m

30 June

2013

(restated)

£m

Non-current assets





Property, plant and equipment


253

259

240

Intangible assets

3.1

1,173

954

990

Investments in joint ventures and associated undertakings


6

4

2

Available for sale financial assets


-

-

4

Derivative financial instruments

4.3

29

41

52

Distribution rights


11

10

12

Net deferred tax asset


34

52

45



1,506

1,320

1,345

Current assets





Programme rights and other inventory


266

322

229

Trade and other receivables due within one year


406

388

370

Trade receivables due after more than one year     


12

14

12

Trade and other receivables


418

402

382

Derivative financial instruments

4.3

--

32

39

Cash and cash equivalents

4.1

268

518

401

Assets held for sale


--

-

4



952

1,274

1,055

Current liabilities





Borrowings

4.1

(218)

(62)

(63)

Derivative financial instruments

4.3

(1)

(6)

(10)

Trade and other payables due within one year


(666)

(702)

(612)

Trade payables due after more than one year


(24)

(42)

(23)

Trade and other payables


(690)

(744)

(635)

Current tax liabilities


(40)

(36)

(15)

Provisions

3.2

(18)

(19)

(18)



(967)

(867)

(741)

Net current (liabilities)/assets


(15)

407

314






Non-current liabilities





Borrowings

4.1

(251)

(318)

(409)

Derivative financial instruments

4.3

(19)

(27)

(36)

Defined benefit pension deficit

3.3

(362)

(445)

(371)

Other payables


(64)

(40)

(36)

Provisions

3.2

(5)

(8)

(10)



(701)

(838)

(862)

Net assets


790

889

797






Attributable to equity shareholders of the parent company





Share capital


403

403

393

Share premium


174

174

122

Merger and other reserves


218

248

263

Translation reserve


-

7

14

Available for sale reserve


4

4

7

Retained (losses)/earnings


(67)

22

(30)

Total equity attributable to equity shareholders of the parent company


732

858

769

Non-controlling interests


58

31

28

Total equity


790

889

797

 

Ian Griffiths

Group Finance Director

 

Condensed Consolidated Statement of Changes in Equity

 



Attributable to equity shareholders of the parent company









Items that may be reclassified to profit or loss







Share

capital

£m

Share

premium

£m

Merger

and other

reserves (a)

£m

Translation

reserve

£m

Available

for sale

 reserve

£m

Retained

profits/

(losses)

£m

 

 

Total

£m

Non-

controlling

interests

£m

 

Total

equity

£m

Balance at 1 January 2014


403

174

248

7

4

22

858

31

889

Total comprehensive income for the period











Profit for the period


-

-

-

-

-

195

195

2

197

Other comprehensive income











Exchange differences on translation of foreign operations


-

-

-

(7)

-

-

(7)

-

(7)

Income tax on other comprehensive income


-

-

-

-

-

(4)

(4)

-

(4)

Total other comprehensive income


-

-

-

(7)

-

(4)

(11)

-

(11)

Total comprehensive income for the period


-

-

-

(7)

-

191

184

2

186

Transactions with owners, recorded directly in equity











Equity dividends


-

-

-

-

-

(257)

(257)

(5)

(262)

Movements due to share-based compensation


-

-

-

-

-

7

7

-

 

7

Purchase of own shares via employees' benefit trust


-

-

-

-

-

(30)

(30)

-

 

(30)

Total transactions with owners


-

-

-

-

-

(280)

(280)

(5)

(285)

Changes in non-controlling interests


-

-

(30)

-

-

-

(30)

30

-

Balance at 30 June 2014


403

174

218

-

4

(67)

732

58

790

 

a) Movements reported in merger and other reserves include put options for the acquisition of non-controlling interests.

 


Attributable to equity shareholders of the parent company








Items that may be reclassified to profit or loss






Share

capital

£m

Share

premium

£m

Merger

and other

reserves (a)

£m

Translation

reserve

£m

Available

for sale

 reserve

£m

Retained profits/ (losses)

(restated)

£m

Total

£m

Non-

controlling

interests

£m

Total

equity

£m

Balance at 1 January 2013

391

122

283

13

7

1

817

15

832

Total comprehensive income for the period










Profit for the period

-

-

-

-

-

134

134

1

135

Other comprehensive income










Exchange differences on translation of foreign operations

-

-

-

1

-

-

1

-

1

Remeasurement gains on defined benefit
pension schemes              

-

-

-

-

-

114

114

-

114

Income tax on other comprehensive income

-

-

-

-

-

(22)

(22)

-

(22)

Total other comprehensive cost

-

-

-

1

-

92

93

-

93

Total comprehensive income for the period

-

-

-

1

-

226

227

1

228

Transactions with owners, recorded
directly in equity










Equity dividends

-

-

-

-

-

(227)

(227)

(1)

(228)

Equity portion of the convertible bond

-

-

(7)

-

-

(29)

(36)

-

(36)

Movements due to share-based
compensation

-

-

-

-

-

10

10

-

10

Purchase of own shares via employees'
benefit trust

-

-

-

-

-

(11)

(11)

-

(11)

Issue of new ordinary shares

2

-

-

-

-

-

2

-

2

Total transactions with owners

2

-

(7)

-

-

(257)

(262)

(1)

(263)

Changes in non-controlling interests

-

-

(13)

-

-

-

(13)

13

-

Balance at 30 June 2013

393

122

263

14

7

(30)

769

28

797

 

a) Movements reported in merger and other reserves include put options for the acquisition of non-controlling interests.

 

Condensed Consolidated Statement of Cash Flows

 

For the six month period to 30 June

Note

£m

2014

£m

£m

2013

£m

Cash flows from operating activities






Profit before tax

2.1


250


179

Gain on sale and impairment of subsidiaries

and investments (exceptional items)


(1)


-


Share of losses of joint ventures and associated undertakings


-


1


Net financing costs


38


75


Operating exceptional items


5


5


Depreciation of property, plant and equipment


13


12


Amortisation and impairment of intangible assets


30


31


Share-based compensation and pension service costs


8


13


Adjustments to profit



93


137

Decrease in programme rights and other inventory, and

distribution rights


64


25


Decrease in receivables


2


19


Decrease in payables


(71)


(47)


Movement in working capital



(5)


(3)

Cash generated from operations before exceptional items



338


313

Cash flow relating to operating exceptional items:






Net operating loss


(4)


(5)




Increase in payables and provisions


3


1


Cash outflow from exceptional items



(1)


(4)

Cash generated from operations



337


309

Defined benefit pension deficit funding

3.3

(91)


(80)


Interest received


20


21


Interest paid on bank and other loans


(29)


(35)


Interest paid on finance leases


(1)


(2)


Net taxation paid


(35)


(32)





(136)


(128)

Net cash inflow from operating activities



201


181

Cash flows from investing activities






Redemption of gilts


-


165


Acquisition of subsidiary undertakings

3.1

(220)


(54)


Cash balances of subsidiaries acquired in the period

3.1

6


8


Acquisition of investments


(1)


-


Acquisition of property, plant and equipment


(15)


(76)


Acquisition of intangible assets


(4)


(3)


Loans granted to associates and joint ventures


(2)


(5)


Loans repaid by associates and joint ventures


-


6


Proceeds from sale of subsidiaries,

joint ventures and available for sale investments


1


-


Net cash (outflow)/inflow from investing activities



(235)


41

Cash flows from financing activities






Bank and other loans - amounts repaid

4.1

(170)


(265)


Bank and other loans - amounts raised

4.1

270


-


Capital element of finance lease payments


(18)


(5)


Issue of share capital


-


2


Equity dividends paid


(257)


(227)


Dividends paid to minority interest


(5)


(1)


Purchase of own shares via employees' benefit trust


(32)


(11)


Net cash outflow from financing activities



(212)


(507)

Net decrease in cash and cash equivalents



(246)


(285)

Cash and cash equivalents at 1 January

4.1


518


690

Effects of exchange rate changes and fair value movements



(4)


(4)

Cash and cash equivalents at 30 June

4.1


268


401

 

Section 1: Basis of Preparation

 

In this section . . .

This section lays out the accounting conventions and accounting policies used in preparing these condensed interim financial statements.

These condensed consolidated interim financial statements for the six months ended 30 June 2014 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2013, which were prepared in accordance with IFRS as adopted by the European Union.

 

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, income and expense. Actual results may differ from these estimates. Except as described below, in preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended 31 December 2013.

 

Revenues are impacted by underlying economic conditions, the cyclical demand for advertising, seasonality of programme sales and the timing of delivery of ITV Studios' programmes. Major events, including sporting events, will impact the seasonality of schedule costs and the mix of programme spend between sport and other genres, especially drama and entertainment. Other than this, there is no significant seasonality or cyclicality affecting the interim results of the operations.

 

For the purposes of interim reporting the defined benefit pension schemes' key assumptions and asset values have been reviewed to assess whether material net actuarial gains and losses have occurred during the period (see note 3.3).

 

During the six months ended 30 June 2014, management also reassessed its estimates in respect of provisions (see note 3.2) and considered the recoverable amount of goodwill. No impairment of goodwill was identified.

 

These interim financial statements are not statutory accounts. The statutory accounts for the year ended 31 December 2013 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

The June 2013 condensed consolidated statements of comprehensive income, changes in equity and financial position have been restated for the implementation of IFRS 13 with effect from 1 January 2013. As previously disclosed in the financial statements for the year ended 31 December 2013, IFRS 13 resulted in a change in the approach and assumptions used to value the Group's longevity swaps to remove the risk of increases in pension liabilities that would arise if a significant portion of the defined benefit scheme's pensioner population were to enjoy a longer life than currently expected.

 

As a result, the negative value of the swaps as at 30 June 2013 has reduced by £105 million with the associated gain being recognised as a measurement gain on assets in other comprehensive income within equity. The valuation as at 31 December 2013 and 30 June 2014 has been carried out in accordance with IFRS 13. See note 3.7 of the December 2013 annual report for details on the change in the approach of valuation of these swaps.

 

Going concern

During the six months ended 30 June 2014 the Group made a number of acquisitions (see note 3.1), repurchased debt and issued a special dividend. Consequently, despite continued generation of significant free cash flows, the Group was in a net debt position at the period end. See note 4.1 for capital and financing structure.

 

The Group continues to review forecasts of the television advertising market to determine the impact on ITV's liquidity position and create further cash headroom. The agreement of three new credit facilities in the period has further ensured that the Group has access to sufficient cash for all foreseeable operational requirements. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current funding.

 

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparing its condensed consolidated financial statements.

 

New or amended EU endorsed accounting standards

Details of new or revised accounting standards, interpretations or amendments which are effective for periods beginning on or after 1 January 2014 and which are considered to have an impact on the Group can be found in the annual financial statements for the year ended 31 December 2013.

 

IFRS 10-12 became effective in the period but did not have a material impact on the Group.

 

Section 2: Results for the Year

 

In this section . . .

This section focuses on the results and performance of the Group. On the following pages you will find disclosures explaining the Group's results for the period, segmental information and earnings per share.

 

2.1 Profit before tax

 

Keeping it simple . . .

This section shows a reconciliation from earnings before interest, tax, amortisation and exceptional items to the Group's profit before tax. Earnings before interest, tax, amortisation (EBITA) and exceptional items remains the Group's key profit indicator. This reflects the way the business is managed and how the Directors assess the performance of the Group.  The Group has two divisions, or operating segments, namely 'Broadcast & Online' and 'ITV Studios', the performance of which are managed and assessed separately by management. This section therefore also shows each division's contribution to total revenue and EBITA.

 

Segmental information

Operating segments are reported in a manner that is consistent with the internal reporting provided to the Board of Directors, regarded as the chief operating decision-maker.

 

The Board of Directors considers the business primarily from a product or activity perspective. The reportable segments for the period ended 30 June 2014 and 30 June 2013 are therefore 'Broadcast & Online' and 'ITV Studios', the results of which are outlined below:

 

For the six month period to 30 June

Broadcast

& Online

2014

£m

ITV Studios

2014

£m

Consolidated

2014

£m

Total segment revenue

981

402

1,383

Intersegment revenue

-

(158)

(158)

Revenue from external customers

981

244

1,225

EBITA before exceptional items*

250

72

322

 

For the six month period to 30 June

Broadcast

& Online

2013

£m

ITV Studios

2013

£m

Consolidated

2013

£m

Total segment revenue

914

395

1,309

Intersegment revenue

-

(165)

(165)

Revenue from external customers

914

230

1,144

EBITA before exceptional items*

228

63

291

 

* Segment EBITA before exceptional items is shown after the elimination of intersegment revenue and costs.

 

A reconciliation of EBITA before exceptional items to profit before tax is provided as follows:

 

For the six month period to 30 June

2014

£m

2013

£m

EBITA before exceptional items

322

291

Operating exceptional items

(5)

(5)

Amortisation and impairment of intangible assets

(30)

(31)

Net financing costs

(38)

(75)

Share of losses of joint ventures and associated undertakings

-

(1)

Gain on sale and impairment of subsidiaries and investments (exceptional items)

1

-

Profit before tax

250

179

 

2.2 Earnings per share

 

Keeping it simple . . .

Earnings per share ('EPS') is the amount of post-tax profit attributable to each share.

 

Basic EPS is calculated on the Group profit for the period attributable to equity shareholders of £195 million (2013: £134 million) divided by 4,003 million (2013: 3,901 million) being the weighted average number of shares in issue during the period. The weighted average number of shares increased by 100 million over the comparative period (3%), largely due to the redemption of the convertible bond in 2013 where 94 million shares were issued.

 

Diluted EPS reflects any commitments the Group has to issue shares in the future. In 2014 this comprises share options, and, in order to calculate the impact, it is assumed that all share options are exercised.

 

Basic EPS is adjusted in order to more accurately show the business performance of the Group in a consistent manner and reflect how the business is managed and measured on a day-to-day basis. Reported EPS is adjusted for exceptional items which include acquisition related costs (professional fees, primarily due diligence, and performance based, employment linked contingent payments), impairment of intangible assets, amortisation of intangible assets acquired through business combinations, net financing cost adjustments and prior period and other tax adjustments. We call this Adjusted EPS.

 

The calculation of basic, diluted and adjusted EPS is set out below:

 

Earnings per share 2014

 

For the six month period to 30 June


Basic

£m

 

Diluted

£m

Profit for the period attributable to equity shareholders of ITV plc


195

195

Weighted average number of ordinary shares in issue - million


4,003

4,003

Dilution due to share options


-

41

Total weighted average number of ordinary shares in issue - million


4,003

4,044

Earnings per ordinary share


4.9p

4.8p

 

Adjusted earnings per share 2014

 

For the six month period to 30 June

Ref.

Adjusted

£m

 

Diluted

£m

Profit for the period attributable to equity shareholders of ITV plc


195

195

Exceptional items

A

3

3

Profit for the period before exceptional items


198

198

Amortisation and impairment of acquired intangible assets

B

19

19

Adjustments to net financing costs

C

27

27

Other tax adjustments

D

2

2

Adjusted profit

E

246

246

Total weighted average number of ordinary shares in issue - million


4,003

4,044

Adjusted earnings per ordinary share

6.1p

6.1p

 

Earnings per share 2013

 

For the six month period to 30 June

Ref.

Basic

£m

 

Diluted

£m

Profit for the period attributable to equity shareholders of ITV plc


134

138

Weighted average number of ordinary shares in issue - million


3,901

3,901

Dilution due to share options


-

45

Dilution due to convertible bond


-

191

Total weighted average number of ordinary shares in issue - million


3,901

4,137

Earnings per ordinary share


3.4p

3.3p

 

Adjusted earnings per share 2013

 

For the six month period to 30 June

Ref.

Adjusted

£m

 

Diluted

£m

Profit for the period attributable to equity shareholders of ITV plc


134

138

Exceptional items

A

4

4

Profit for the period before exceptional items


138

142

Amortisation and impairment of acquired intangible assets

B

19

19

Adjustments to net financing costs

C

47

47

Other tax adjustments

D

2

2

Adjusted profit

E

206

210

Total weighted average number of ordinary shares in issue - million


3,901

4,137

Adjusted earnings per ordinary share


5.3p

5.1p

 

The rationale for determining the adjustments to profit is disclosed in the 31 December 2013 Annual Report and has not changed during the period. Details of the adjustments to earnings are as follows:

 

A.   Exceptional items are adjusted to reflect profit for the period before exceptional items. A tax credit of £1 million (2013: £1 million) is recognised on the operating exceptional items of £5 million (2013: £5 million). Operating exceptional items in 2014 and 2013 include professional fees (mainly financial and legal due diligence) incurred on the acquisitions completed during the period and expenses in the period with respect to performance-based, employment-linked contingent costs accrued to former owners. The Group recognised a non-operating exceptional gain of £1 million from a historical disposal. The related tax charge was nil (2013: nil).

B.   Amortisation and impairment of acquired intangible assets of £19 million (2013: £19 million) is calculated as total amortisation and impairment of £30 million (2013: £31 million), less amortisation of software licences and development of £6 million (2013: £6 million). A related tax credit of £5 million (2013: £6 million) is then recognised on the net amount.

C.   Gross adjustments to net financing costs of £34 million (2013: £61 million) relate to mark-to-market movements on swaps and foreign exchange, losses on buybacks and imputed pension interest charges. This is reduced by a tax credit of £7 million (2013: £14 million) to give a net adjustment of £27 million (2013: £47 million).

D.   Other tax adjustments are made to more closely align cash and income statement tax. The adjustments in the current period relate to the deferred tax credit recognised on the goodwill arising on US acquisitions. In 2013 the adjustment primarily reflected the impact of the deferred tax charge following a decrease in the applicable statutory tax rate from 24.5% to 23.25%.

E.   Adjusted profit is defined as profit for the period before exceptional items which include acquisition related fees and performance-based contingent payments, impairment of intangible assets, amortisation of acquired intangible assets acquired through business combinations, net financing cost adjustments and other tax adjustments.

 

Section 3: Operating Assets and Liabilities

 

In this section . . .

This section focuses on the assets used to generate the Group's trading performance, and the liabilities incurred as a result. On the following pages there are notes covering acquisitions, provisions and pensions.

 

3.1 Acquisitions

 

Keeping it simple . . .

The following section describes the businesses which were acquired by the Group in the period.

 

All of the deals are structured so that a large part of the total payment that will be made to the sellers is determined based on future performance ('consideration'). Accounting standards require some of this consideration to be included in the purchase price used in determining goodwill ('contingent consideration'), while the rest is required to be recognised as a liability or expense outside of acquisition accounting (put option liabilities and performance based, employment linked contingent payments known as 'earnout' payments).

 

Acquisitions

During the first six months of 2014 the Group completed three acquisitions, all of which have been included in the results of the Studios operating segment. Each of the businesses fit with the Group's strategy to create world class content for multiple platforms, free and pay, both in the UK and internationally. The following sections provide a summary of each.

 

Leftfield Entertainment Group

On 7 May the Group acquired 80% of the membership interests in New York-based producer Leftfield Entertainment Group ('Leftfield'). Leftfield owns Sirens Media and has established two start-up operations: Loud Television and Outpost Entertainment. Together these businesses produce unscripted programming for over 30 US networks.

 

The acquisition of Leftfield makes ITV the largest unscripted independent producer in the US and represents a significant contribution to the Group's  strategy of building a strong international content business, particularly in the US. It gives ITV Studios a significant presence on both the east and west coasts and strengthens and complements our existing creative capability.

 

Key terms:

Cash consideration of £214 million ($360 million) was paid at acquisition and the maximum total consideration for 100% of the business, including the initial payment, is £472 million ($800 million, undiscounted). The remaining £258 million ($440 million) is payable at two stages in the next five years, and the full amount will only be due should Leftfield deliver exceptional earnings growth.

 

The first staged payment is a top-up due in 2016 for up to £64 million ($107 million, undiscounted maximum) and has been accounted for as contingent consideration.

 

The second staged payment comes in the form of a call and put option that has been granted over the remaining 20% non-controlling interest. The call option is first exercisable in the first half of 2017 and then following expiry of the vendors' put option, which is exercisable in 2019. The maximum amount that the Group could pay for the remaining 20% equity interest is the residual of the £258 million less any amounts paid under the top-up ($440 million in total, undiscounted). Final payment will be entirely dependent on future performance of the business, which would need to be exceptional for the maximum to be achieved.

 

There are also call and put options over the non-controlling interest of Leftfield's two start-up operations that are exercisable in 2019. The final payout is also dependent on future performance over the next five years. The maximum consideration payable by the Group is £7 million ($13 million, undiscounted).

 

Provisional acquisition accounting:

The Group consolidates all of the earnings of the business and the vendors' remaining interest is recognised as a non-controlling interest in equity.

 

Intangibles, being the value placed on brands, customer contracts, non-compete arrangements and libraries, of £65 million ($109 million) were identified and goodwill was valued at £180 million. Other fair value adjustments have been made to the opening balance sheet, though none of them are individually significant.

 

Goodwill represents the value placed on the opportunity to expand the Group's programme offering in the United States and exploiting that offering internationally. It also reflects the value of the assembled workforce of creative talent who will develop that content. It is expected to be deductible for tax purposes.

 

Based on the Group's projections at acquisition, the value of the put option was valued at £28 million ($48 million, discounted). Any changes in the fair value of the put option liability arising from a  reassessment of projections will be reported within financing costs on the income statement, and excluded from adjusted profit.

 

Other acquisitions

The Group made an initial payment of £5 million for two smaller acquisitions in the period with a view that these acquisitions will strengthen and complement ITV's existing position as a producer for major television networks in both the US and the Nordics.

 

On 14 February 2014, the Group acquired 51% of the membership interest in DiGa Vision, a US-based producer that specialises in reality and scripted programming. The Group consolidates all the earnings of this business and the vendors' remaining interest will be recognised as a non-controlling interest in equity. A call and put option has been granted over the 49% non-controlling interest, with the put and call options both being exercisable over three to six years. The maximum additional consideration that the Group could pay for the remaining interest is £25 million ($42 million, undiscounted).

 

On 27 February 2014, the Group then acquired 100% of United Productions, a company based in Denmark specialising in factual, entertainment and reality programmes. Contingent consideration includes a performance-based payment of £1 million (maximum
£3 million, undiscounted) due to be paid in 2018 and an earnout payment capped at £1 million (undiscounted).

 

Key contractual arrangements of £2 million were identified across the two acquisitions and goodwill, which represents the value placed on the opportunity to grow the content produced by the Group, has been provisionally valued at £7 million. The goodwill attributable to DiGa is expected to be deductible for US tax purposes.

 

Acquisitions in 2013

In 2013 the Group made four acquisitions. Two were US producers High Noon and Thinkfactory, where total initial consideration (net of cash acquired) of £27 million was paid for 60% and 65% membership interests respectively. Call and put options were granted over the non-controlling interest and the discounted put option liability at the acquisition date totalled £13 million. The maximum consideration which the Group could pay for the remaining interest across both businesses is £84 million ($144 million, undiscounted). Final payment will be entirely dependent on future performance of the business.

 

A 100% equity interest was acquired in UK-based producers The Garden and Big Talk, for total initial consideration (net of cash acquired) of £25 million. The maximum additional amount payable is £39 million (undiscounted), and is being accounted for as an earnout payment.

 

Intangibles of £26 million were identified, largely reflecting the value placed on brands, customer contracts and contractual arrangements.

 

Effect of acquisition

The acquisitions noted above had the following impact on the Group's assets and liabilities:

 


Recognised values on acquisition


£m

Leftfield

Other

2014

Total

2013

Total*

Consideration transferred:





Initial consideration (net of cash acquired) (Note A)

209

5

214

56

Contingent consideration

-

1

1

6

Total consideration

209

6

215

62






Fair value of net assets acquired (Note B):





Property, plant and equipment

4

-

4

-

Intangible assets

65

2

67

26

Trade and other receivables

30

2

32

32

Trade and other payables

(42)

(3)

(45)

(41)

Fair value of net assets

57

1

58

17

Non-controlling interest measured at fair value (Note B)

28

2

30

13

Goodwill

180

7

187

58






Other information:





Present value of the liability on options

28

2

30

13

Present value of the earnout payment

1

2

3

15






Contributions to the Group's performance:





Revenue - acquisition to date

8

2

10

61

Profit after tax - acquisition to date

1

-

1

3

Revenue - January to June

29

2

31

96

Profit after tax - January to June

4

-

4

6

                                                                                                                                                                            

* Reflects acquisitions and contributions across 12 months.

Note A: Cash of £5 million was acquired with Leftfield and £1 million was acquired with DiGa.

Note B: Non-controlling interest arises where the Group acquires less than 100% of the equity interest in a business, but obtains control.

 

3.2 Provisions

 

Keeping it simple . . .

A provision is recognised by the Group where an obligation exists, relating to events in the past, and it is probable that cash will be paid to settle it.

 

A provision is made where the Group is not certain how much cash will be required to settle a liability, so an estimate is required. The main estimates relate to the cost of holding properties that are no longer in use by the Group, the likelihood of settling legal claims and contracts the Group has entered into that are now unprofitable.

 

Provisions

The movements in provisions during the period are as follows:

 


Contract

provisions

£m

Property

provisions

£m

Other

provisions

£m

Total

£m

At 1 January 2014

7

4

16

27

Release

-

(1)

-

(1)

Utilised

(3)

-

-

(3)

At 30 June 2014

4

3

16

23

 

Provisions of £18 million are classified as current liabilities (2013: £18 million).

 

Contract provisions comprise onerous sports rights commitments that are expected to be utilised over the remaining contract period. Other contract provisions relate to onerous commitments on transmission infrastructure.

 

Property provisions principally relate to onerous lease contracts due to empty space created by the ongoing review and rationalisation of the Group's property portfolio. Utilisation of the provision will be over the anticipated life of the leases or earlier if exited.

 

Other provisions of £16 million primarily relate to potential liabilities that may arise as a result of Boxclever having been placed into administration, most of which relate to pension arrangements. In 2011, the Determinations Panel of The Pensions Regulator determined that Financial Support Directions ('FSD') should be issued against certain companies within the Group in relation to the Boxclever pension scheme. The Group immediately referred this decision to the Upper Tribunal, thereby effectively appealing it. An FSD would require the Company to put in place financial support for the Boxclever scheme; however, it cannot be issued during the period of reference. The reference process is ongoing and aside from procedural issues there were no substantive case developments in the period. The Directors have obtained leading counsel's opinion and extensive legal advice in connection with the proceedings and continue to believe that the provision held is appropriate.

 

3.3 Pensions

 

Keeping it simple . . .

The Group has historically offered its employees the opportunity to participate in the ITV defined benefit pension scheme. However, the Group closed the Scheme to new members and instead offers employees a defined contribution pension scheme. Where taken up, the Group makes payments into this scheme on their behalf.

 

The IAS 19 deficit at 30 June 2014 was £362 million compared with a deficit of £445 million at 31 December 2013, primarily as a result of deficit funding payments of £91 million made in the period. An increase in liabilities arising from a reduction of 0.3% in the implied discount rate has been largely offset by asset outperformance and a slight lowering of market expectations for long-term inflation.

 

Section 4: Capital Structure and Financing Costs

 

In this section . . .

This section outlines how the Group manages its capital. The Directors consider the Group's capital structure and dividend policy at least twice a year ahead of announcing results in the context of its ability to continue as a going concern and to deliver its strategy. The Group focuses on leverage, credit ratings and interest cost, particularly when considering investment.

 

On the following pages there are sections on the Group's net (debt)/cash, borrowings and derivative financial instruments.

 

The Group renewed all credit facilities during the period. Of these, the committed facility has leverage and interest cover financial covenants.

 

4.1 Net (debt)/cash

 

Keeping it simple . . .

Net (debt)/cash is the Group's key measure used to evaluate total outstanding debt net of the current cash resources.

Adjusted net debt is also monitored by the Group and more closely reflects how credit agencies see the Group's gearing. To arrive at the adjusted net debt amount, we add our total expected contingent payments on acquisitions, our IAS 19 pension deficit and operating lease commitments. A full analysis and discussion of adjusted net debt is included in the Financial and Performance Review.

 

In defining total outstanding debt the Directors consider it appropriate to include the currency impact of swaps held against those debt instruments.

 

Analysis of net (debt)/cash

The table below analyses the Group's components of net (debt)/cash and their movements in the period:

 


1 January

2014

£m

Net cash flow

 £m

Currency and

non-cash

movements

£m

30 June

2014

£m

 Cash

438

(228)

(4)

206

 Cash equivalents

80

(18)

-

62

Cash and cash equivalents

518

(246)

(4)

268






 Loans and facilities due within one year

(41)

(169)

-

(210)

 Finance leases due within one year

(21)

18

(5)

(8)

 Loans and loan notes due after one year

(301)

62

-

(239)

 Finance leases due after one year

(17)

-

5

(12)

Total debt

(380)

(89)

-

(469)

 Currency component of swaps held against euro denominated bonds

26

(26)

-

-

Net cash/(debt)

164

(361)

(4)

(201)

 

Cash and cash equivalents

Included within cash equivalents is £19 million (2013: £39 million), the use of which is restricted to meeting finance lease commitments under programme sale and leaseback commitments, and gilts of £36 million in respect of which a charging deed was executed on the unfunded pension commitments of four former Granada executives.

 

Loans and facilities due within one year

In April 2014 the Group signed a new Revolving Credit Facility ('RCF') with a group of relationship banks, replacing the previous RCF disclosed at 31 December 2013. The new RCF is a £525 million committed facility with leverage and interest cover financial covenants, and matures in 2019. The arrangement fee is determined based on prevailing market rates when the facility is signed.

 

As of 30 June the Group had drawings of £210 million under the facility. The interest on drawn amounts is based on a margin over LIBOR. Drawings under the facility may be for periods of between one and six months and each drawdown may be rolled or repaid at maturity, at our discretion.

 

In June 2014 the unsecured £41 million (€50 million) Eurobond matured, resulting in a net payment by the Group of £15 million, after settlement of the Group's outstanding cross-currency interest rate swaps.

 

Loans and loan notes due after one year

In January 2014 the Group repurchased the remaining principal of £62 million on the 2019 bilateral loan for a cash cost of £95 million. The repurchase is expected to result in future cash interest savings of £44 million. The loss arising on settlement of £30 million has been included in net financing costs but excluded from adjusted profit for the period.

 

New facilities

In addition to the new RCF noted above, two further facilities were agreed in April for a total of £250 million. The first is an invoice discounting facility for £75 million maturing in 2017 and replacing the previous facility. The second is a bilateral loan facility worth £175 million which matures in 2021. Both of these facilities are uncommitted and remain undrawn at the half year.

 

4.2 Borrowings

 

Keeping it simple . . .

The Group borrows money from financial institutions in the form of bonds, facilities, and other financial instruments.

 

The Group is required to disclose the fair value of its debt instruments. Here, fair value is the amount the Group would pay to transfer the liability. It is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

 

Fair value versus book value

 

Liabilities

Maturity

Book value

Fair value

30 June

2014

£m

31 Dec

2013

£m

30 June

2014

£m

31 Dec

2013

£m

£525 million Revolving Credit Facility

2019*

210

-

210

-

€50 million Eurobond

June 14

-

41

-

43

£78 million Eurobond

Oct 15

78

78

82

83

£161 million Eurobond

Jan 17

161

161

175

179

£62 million loan (previously £200 million)

Mar 19

-

62

-

95



449

342

467

400

 

* See section 4.1 for a discussion of the terms of borrowing on the RCF.

 

Movements in book values of the 2014 Eurobond and 2019 bilateral loans are the result of buybacks and maturities in the period.

 

4.3 Derivative financial instruments

 

Keeping it simple . . .

A derivative is a financial instrument used to manage risk. Its value changes over time in response to underlying variables such as exchange rates or interest rates and is for a fixed period. In accordance with Board approved policies, the Group uses derivatives to manage its exposure to fluctuations in interest on its borrowings and foreign exchange rates.

 

Derivative financial instruments are initially recognised as either assets or liabilities at fair value and are subsequently remeasured at fair value at each reporting date. Movements in instruments measured at fair value are recorded in the income statement in net financing costs.

 

The Group's policy on the various methods used to calculate their respective fair values is detailed in the 31 December 2013 financial statements.

 

Interest rate risk

Since 2011 the Group's interest rate policy was to have 100% of its borrowings at fixed rates in order to lock in low interest rates. This policy was amended in 2014 to allow fixed rate gross debt to vary between 20% and 100% of total gross debt to accommodate floating rate borrowings under the new revolving credit facility.  At 30 June 2014 the Group's fixed rate debt represented 55% of total debt.

 

The following table shows the fair value of derivative financial instruments analysed by type of contract. Interest rate swap fair values exclude accrued interest.

 

June 2014

Assets

£m

 Liabilities

£m

Current



Interest rate swaps - fair value through profit or loss

-

-

Forward foreign exchange contracts - fair value through profit or loss

-

(1)

Non-current



Interest rate swaps - fair value through profit or loss

29

(18)

Forward foreign exchange contracts - fair value through profit or loss

-

(1)


29

(20)

 

Dec 2013

Assets

£m

 Liabilities

£m

Current



Interest rate swaps - fair value through profit or loss

32

(6)

Non-current



Interest rate swaps - fair value through profit or loss

41

(27)


73

(33)

 

On issuing the 2015 and 2017 Eurobonds, the Group entered into and then subsequently overlaid a portfolio of interest rate swaps with the result that it is now 100% fixed on these borrowings. The timing of entering into these swaps locked in an interest benefit for the Group, resulting in a net mark-to-market gain on the portfolio.

 

Forward foreign exchange contracts are primarily used to hedge the Group's foreign currency firm commitments and highly probable forecast payments and receipts.

 

4.4 Fair value hierarchy

 

Keeping it simple . . .

The financial instruments included on the ITV statement of financial position are measured at either fair value or amortised cost. The measurement of this fair value can in some cases be subjective, and can depend on the inputs used in the calculations. ITV generally uses external valuations using market inputs or market values (e.g. external share prices). The different valuation methods are called 'hierarchies' and are described below.

 

The tables below set out the financial instruments included on the ITV statement of financial position at 'fair value'.

 


Fair value

30 June 2014

£m

Level 1

30 June 2014

£m

Level 2

30 June 2014

£m

Level 3

30 June 2014

£m

Assets measured at fair value





Available for sale financial instruments





 Available for sale gilts

36

36

-

-

Financial assets at fair value through profit or loss





 Interest rate swaps

29

-

29

-


65

36

29

-

 


Fair value

30 June 2014

£m

Level 1

30 June 2014

£m

Level 2

30 June 2014

£m

Level 3

30 June 2014

£m

Liabilities measured at fair value





Financial liabilities at fair value through profit or loss





 Interest rate swaps

(18)

-

(18)

-

 Forward foreign exchange contracts

(2)

-

(2)

-

Contingent consideration

(4)

-

-

(4)


(24)

-

(20)

(4)

 

Level 1

Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2

Fair values measured using inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly.

 

Interest rate swaps and options are accounted for at their fair value based upon termination prices. Forward foreign exchange contracts are accounted for at the difference between the contract exchange rate and the quoted forward exchange rate at the reporting date.

 

Level 3

Fair values measured using inputs for the asset or liability that are not based on observable market data.

 

Contingent consideration is the Group's only financial instrument classified as level 3 in the fair value hierarchy. As noted in the accounting policy disclosed in the December 2013 financial statements, the key assumptions taken into consideration when measuring this acquisition related liability are the performance expectations of the acquisition and a discount rate that reflects the size and nature of the new business. There is no reasonable change in discount rate or performance targets that would give rise to a material change in the liability at the half year.

 

The year end position of £7 million was increased to include the acquisitions in the period, giving rise to an additional
£1 million of contingent consideration (see note 3.1 for details). Future performance expectations for the acquisitions were revisited in the period, resulting in a fair value release of £4 million. The unwind of interest and fair value movements in the liability is recognised in other interest expense in net financing costs (2013: immaterial movement).

 

Section 5: Other Notes

5.1 Related party transactions

 

Keeping it simple . . .

The related parties identified by the Directors include joint ventures, associated undertakings, investments
and key management personnel.

 

Related party transactions

 

For the six month period to 30 June

2014

£m

2013

£m

Sales to joint ventures

3

6

Sales to associated undertakings

4

4

Purchases from joint ventures

13

14

Purchases from associated undertakings

26

28

 

There have been no significant changes to the nature of related parties disclosed in the full consolidated financial statements for the Group as at and for the year ended 31 December 2013.

 

The transactions with joint ventures primarily relate to sales and purchases of digital multiplex services with Digital 3&4 Limited.

 

The purchases from associated undertakings primarily relate to the purchase of news services from ITN. All transactions arose in the normal course of business on an arm's length basis. None of the balances are secured.

 

There have been no other significant related party transactions in the six month period ended 30 June 2014.

 

The amounts owed by and to these related parties at the period end were:

 


2014

£m

2013

£m

Amounts owed by joint ventures

-

-

Amounts owed by associated undertakings

7

4

Amounts owed to joint ventures

2

-

Amounts owed to associated undertakings

1

4

Amounts owed by pension scheme

2

1

 

Transactions with key management personnel

Key management consists of ITV plc Executive and Non-executive Directors and the ITV Management Board. Key management personnel compensation for the period is as follows:

 


2014

£m

2013

£m

Short-term employee benefits

4

4

Share-based compensation

3

3


7

7

 

5.2 Contingent liabilities

 

Keeping it simple . . .

A contingent liability is a liability that is not sufficiently certain to qualify for recognition as a provision where uncertainty may exist regarding the outcome of future events.

 

There has been no material change in the Group's contingent liabilities since 31 December 2013 and the disclosures in those annual financial statements remain appropriate at 30 June 2014.

 

Responsibility Statement of the Directors in Respect of the Half-Yearly Financial Report

We confirm that to the best of our knowledge:

 

·     the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;

·     the interim management report includes a fair review of the information required by:

 

DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

 

There have been no further appointments or resignations in the period and the remaining Directors are listed in the ITV plc 2013 Annual Report. A list of current Directors is maintained on the ITV plc website: www.itvplc.com.

 

For and on behalf of the Board:

 

Andrew Garard

Company Secretary

30 July 2014

 

Independent Review Report to ITV plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014, which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of changes in equity, condensed consolidated statement of cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU.

 

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

 

Mark Summerfield

for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL


30 July 2014


This information is provided by RNS
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